Managerial Cost Accounting Practices: Department of Agriculture  
and the Department of Housing and Urban Development (21-SEP-06,  
GAO-06-1002R).							 
                                                                 
Authoritative bodies have promulgated laws, accounting standards,
information system requirements, and related guidance to	 
emphasize the need for cost information and cost management in	 
the federal government. For example, the Chief Financial Officers
(CFO) Act of 1990 contains several provisions related to	 
managerial cost accounting (MCA), one of which states that an	 
agency's CFO should develop and maintain an integrated accounting
and financial management system that provides for the development
and reporting of cost information. Statement of Federal Financial
Accounting Standards No.4, Managerial Cost Accounting Concepts	 
and Standards for the Federal Government, and the Joint Financial
Management Improvement Program's (JFMIP) Framework for Federal	 
Financial Management Systems established accounting standards and
system requirements for MCA information at federal agencies. The 
Federal Financial Management Improvement Act of 1996 built on	 
this foundation and required, among other things, CFO Act	 
agencies to comply substantially with federal accounting	 
standards and federal financial management systems requirements. 
In light of the requirements for federal agencies to prepare MCA 
information, Congress asked us to determine the extent to which  
federal agencies develop cost information and use it for	 
managerial decision making. The objectives of our review were to 
determine how federal agencies generate MCA information as well  
as how governmental managers use cost information to support	 
managerial decision making and provide accountability. This	 
report summarizes information provided during our briefing to	 
Congressional staff on September 7, 2006, concerning our review  
of MCA practices at the Department of Agriculture (USDA) and the 
Department of Housing and Urban Development (HUD). This was our  
fourth in a series of briefings concerning the status of MCA	 
activities at large government agencies.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1002R					        
    ACCNO:   A61344						        
  TITLE:     Managerial Cost Accounting Practices: Department of      
Agriculture and the Department of Housing and Urban Development  
     DATE:   09/21/2006 
  SUBJECT:   Accountability					 
	     Agency evaluation					 
	     Cost accounting					 
	     Decision making					 
	     Federal agencies					 
	     Federal agency accounting systems			 
	     Financial management systems			 
	     Internal controls					 
	     Reporting requirements				 
	     Accounting standards				 
	     Cost accounting standards compliance		 
	     Data collection					 
	     USDA Foundation Financial Information		 
	     System						 
                                                                 

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GAO-06-1002R

     

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September 21, 2006

The Honorable Todd R. Platts

Chairman, Subcommittee on Government Management,

Finance, and Accountability

Committee on Government Reform

House of Representatives

Subject: Managerial Cost Accounting Practices: Department of Agriculture
and the Department of Housing and Urban Development

Dear Mr. Chairman:

Authoritative bodies have promulgated laws, accounting standards,
information system requirements, and related guidance to emphasize the
need for cost information and cost management in the federal government.
For example, the Chief Financial Officers (CFO) Act of 19901 contains
several provisions related to managerial cost accounting (MCA), one of
which states that an agency's CFO should develop and maintain an
integrated accounting and financial management system that provides for
the development and reporting of cost information. Statement of Federal
Financial Accounting Standards No.4, Managerial Cost Accounting Concepts
and Standards for the Federal Government, and the Joint Financial
Management Improvement Program's (JFMIP) Framework for Federal Financial
Management Systems2 established accounting standards and system
requirements for MCA information at federal agencies. The Federal
Financial Management Improvement Act of 19963 built on this foundation and
required, among other things, CFO Act agencies to comply substantially
with federal accounting standards and federal financial management systems
requirements.

In light of the requirements for federal agencies to prepare MCA
information, you asked us to determine the extent to which federal
agencies develop cost information and use it for managerial decision
making. The objectives of our review were to determine how federal
agencies generate MCA information as well as how governmental managers use
cost information to support managerial decision making and provide
accountability.

1Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).

2 In 2005, JFMIP's responsibilities for financial management and policy
oversight were realigned to the Office of Management and Budget, the
Office of Personnel Management, and the Chief Financial Officers Council.

3 Pub. L. No. 104-208, div. A., S: 101 (f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996).

This report summarizes information provided during our briefing to your
staff on September 7, 2006, concerning our review of MCA practices at the
Department of Agriculture (USDA) and the Department of Housing and Urban
Development (HUD). The slides from that briefing are presented in
enclosure I. This was our fourth in a series of briefings concerning the
status of MCA activities at large government agencies. Our first briefing
covered the status of MCA activities at the Department of Veterans Affairs
and the Department of Labor.4 Our second briefing covered the status of
MCA activities at the Departments of Education, Transportation, and the
Treasury.5 The third briefing covered the status of MCA activities at the
Department of Health and Human Services and the Social Security
Administration.6

MCA involves the accumulation and analysis of financial and nonfinancial
data, resulting in the allocation of costs to organizational pursuits such
as performance goals, programs, activities, and outputs. The data analyzed
depend on the operations and needs of the organization. Nonfinancial data
measure the occurrences of activities and can include, for example, the
number of hours worked, units produced, claims paid, grants managed, or
time needed to perform individual activities.

Status of Efforts to Implement Managerial Cost Accounting at USDA and HUD

Similar to issues that surfaced in our earlier reports, we found that
stronger leadership would be needed to enhance the development and use of
managerial cost information at USDA and HUD. The departments generally had
not developed policies on the development and use of cost information,
were not promoting the benefits of identifying the cost of performance,
and were not monitoring implementation in the components.

Department of Agriculture

USDA has not shown strong leadership to promote, guide, and monitor MCA
implementation. USDA did not have a departmentwide MCA system in place
and, instead, has delegated responsibility for MCA implementation to the
component agencies. USDA, however, did not have procedures in place to
monitor component agency MCA initiatives, and had only limited information
on the status of MCA implementation at its 15 component agencies at the
time of our review.

4 GAO, Managerial Cost Accounting Practices: Leadership and Internal
Controls Are Key to Successful Implementation, GAO-05-1013R (Washington,
D.C.: Sept. 2, 2005).

5 GAO, Managerial Cost Accounting Practices: Departments of Education,
Transportation, and the Treasury, GAO-06-301R (Washington, D.C.: Dec. 19,
2005).

6 GAO, Managerial Cost Accounting Practices: Department of Health and
Human Services and Social Security Administration, GAO-06-599R
(Washington, D.C.: Apr. 18, 2006).

USDA's current financial system, the Foundation Financial Information
System (FFIS), was not designed to provide in-depth MCA information. FFIS
analysis and reporting functions and its related data warehouses allow
users to conduct inquiries and execute ad hoc reports on, for instance,
the status of funds and open obligations. These analyses, however, do not
integrate nonfinancial data with financial data to provide the cost of
activities or outputs on an ongoing basis.

According to USDA officials, the Financial Management Modernization
Initiative (FMMI) system is scheduled to replace FFIS by the end of fiscal
year 2012. FMMI is expected to include a cost accounting module which
officials said will incorporate MCA functionalities required by the Office
of Federal Financial Management at OMB. Except for ongoing initiatives at
the Farm Services Agency, the Forest Service, and Rural Development, USDA
MCA planning initiatives did not set time frames or requirements for other
component agencies to improve cost management.

At USDA, we also selected for review larger component agencies in terms of
number of employees and outlays, and those with cost recovery activities,
such as working capital funds (WCF) and services with user fees. USDA's
WCF has 22 activity centers providing payroll, accounting, and other
administrative and support services to internal and external customers. We
reviewed MCA activities at four USDA component agencies: the Animal and
Plant Health Inspection Service (APHIS), the Farm Service Agency (FSA),
the Food and Nutrition Service (FNS), and the Forest Service (FS).

WCF activity centers are intended to recover the full cost of goods and
services they provide. WCF officials told us that the activity centers use
a range of methodologies, from spreadsheets to more sophisticated
activity-based costing systems, to assign costs to customers. WCF
officials, however, did not have documented procedures to help ensure
appropriate cost accounting methodologies are used by the activity centers
to allocate costs to customers and set prices, and they could not
centrally confirm that all of the activity centers were charging their
customers the full cost of services rendered.

According to APHIS officials, they used ABC costing techniques to manage
around 10 percent of their budget, primarily for administrative purposes.
In addition, APHIS is developing the APHIS Cost Management System (ACMS),
a system to track spending to cost centers that is to be implemented by
fiscal year 2007. APHIS officials told us that ACMS has several data
fields that could be used to include nonfinancial data and thus provide
MCA information. However, an APHIS official said that procedures for using
the ACMS data fields for MCA are not finalized and are still being
documented.

FSA plans to implement its Budget and Performance Management System (BPMS)
by October 2008 to link and integrate FSA's budget, cost, and performance
management information. FSA reported that improvements are needed in
nonfinancial data quality and consistency, including the nonfinancial data
used in its current ABC system. FSA officials said that planned upgrades
to labor and workload systems through BPMS are intended to address these
issues.

FNS officials said that the agency designed its National Data Bank system
to integrate detailed cost and program performance information with its
state grantee program data reporting system, enhancing the usefulness of
cost data for FNS program managers. That information is available by
program at state, regional, and national levels at monthly, quarterly, and
annual reporting intervals.

FS, on the other hand, did not have a system in place with which it could
routinely analyze cost information. The FS can use cost-finding techniques
and FFIS data to prepare ad hoc cost information reports that are
generally at the program or budget line item level. Special job codes
required to track costs for specific projects below the budget line item
level can be established. The FS CFO stated that implementation of MCA
would not be a priority until outstanding financial reporting issues have
been resolved. He said that reliable and timely financial information was
necessary before pushing to develop MCA information. FS management is
focused on completing implementation of a new centralized financial
management system, and building strong internal control systems to address
outstanding material weaknesses in financial management and reporting
processes.

At the department level, USDA uses cost information to prepare the
Statement of Net Cost (SNC). Some component agency officials used cost
information and analyses to make staff hiring decisions, adjust user fees,
allocate administrative costs, investigate anomalies in program
participation rates, and prepare ad hoc cost studies.

Department of Housing and Urban Development

The absence of continual strong leadership to promote and monitor MCA
implementation across HUD programs has contributed to HUD's lack of
reliable, comprehensive MCA information on its activities and outputs that
is widely and routinely used. HUD had not issued departmentwide policy
guidance on MCA, and did not accumulate the full costs of its activities
or outputs for day-to-day managerial decision making. Instead, a HUD
official stated that HUD is a budget-driven organization primarily focused
on oversight of its programs, and manages its operations principally with
required budgetary data.

Although expanding the range of MCA information could help HUD better
manage its programs and operations on a daily basis, HUD's plans for
current and future systems lack broad application of MCA functionalities.
For example, management indicated that its Total Estimation and Allocation
Mechanism-Resource Estimation and Allocation Process (TEAM-REAP) has the
potential for supporting activity based costing, but during our review HUD
management said it had no plans for using the system for MCA purposes
beyond quarterly cost allocation for the SNC, management of staffing
levels, and an ABC pilot project. In response to OMB concerns about the
lack of management information at the Federal Housing Administration
(FHA), HUD recently agreed to start an ABC pilot project to obtain the
costs of activities, including loan origination, monitoring, and
servicing. However, an FHA official commented that ABC and MCA were of
limited benefit to FHA. Finally, in 2002, the department began the HUD
Integrated Financial Management Improvement Project (HIFMIP)--an
enterprisewide initiative to develop and implement an integrated financial
accounting system. According to HUD officials, however, HIFMIP
requirements were based upon current system functionalities and do not
include a more comprehensive MCA system.

Agencies with nonintegrated financial systems expend major effort and
resources to develop information that should be provided on a recurring
basis. HUD's OIG reported in November 2005 that the department relied on
extensive compensating procedures that were costly, labor intensive, and
not always effective to prepare its annual financial statements. Further,
the OIG reported that HUD's financial management systems did not enable it
to generate and report accurate, timely information needed to manage
operations on an ongoing basis. Improvement of internal control over
financial and nonfinancial information will enhance the reliability of
data available for MCA purposes at HUD.

HUD MCA activities included preparation of the SNC, accumulation of
project costs for IT systems financed through a HUD WCF, analysis and
reporting of financial and operational data accumulated in Data Mart (a
repository for selected financial and nonfinancial information that is
primarily used as a cash management and financial reporting tool), and ad
hoc, manual accumulation of costs to respond to external federal oversight
parties, including OMB and the Congress.

Recommendations for Executive Action

We are making eight recommendations to the Secretary of the Department of
Agriculture and five recommendations to the Secretary of the Department of
Housing and Urban Development.

Recommendations to the Secretary of the Department of Agriculture

To promote the implementation and use of reliable MCA methodologies to
better inform managerial decision making in USDA and its components, we
recommend that the Secretary direct appropriate officials to:

           o  take an active leadership role to promote the benefits and uses
           of MCA,

           o  develop procedures to monitor the implementation of its MCA
           policy at its components,

           o  finalize appropriate USDA-specific functional specifications to
           ensure that the cost accounting module of the FMMI will provide
           MCA information to support decision making at USDA and its
           component agencies, and

           o  expand ongoing MCA planning efforts to include time frames and
           requirements for all component agencies to help improve cost
           management.

To promote the use of proper cost accounting methodologies to inform
pricing and other managerial decisions at USDA WCF activity centers, we
recommend that the Secretary of Agriculture direct appropriate WCF
officials to design, document, and implement procedures to periodically
review those methodologies.

To promote the implementation and use of MCA methodologies at APHIS, we
recommend that the Secretary of Agriculture direct appropriate APHIS
officials to finalize and document procedures for using ACMS data fields
for MCA as a step toward better informed managerial decision making.

To enhance the reliability of MCA data at FSA, we recommend that the
Secretary of Agriculture direct appropriate FSA officials to continue
efforts to improve and upgrade workload systems as they implement BPMS.

We agree that the FS should continue to place a high priority on
addressing its remaining financial management and reporting problems. At
the same time, we recommend that the Secretary of Agriculture direct
appropriate FS officials to assess FS MCA needs and require that they are
appropriately addressed in any new systems that are implemented.

Recommendations to the Secretary of the Department of Housing and Urban
Development

To improve HUD's implementation and use of reliable MCA methodologies, we
recommend that the Secretary of HUD direct appropriate officials to:

           o  take an active leadership role to promote the benefits and uses
           of MCA;

           o  establish and document a department-level policy for MCA;

           o  develop potential uses of current systems (e.g. TEAM-REAP) to
           derive MCA functionalities;

           o  develop financial system requirements that will fully address
           MCA capabilities needed for managerial decision making throughout
           the organization using appropriate, integrated financial and
           nonfinancial information systems; and

           o  strengthen internal controls over financial and nonfinancial
           data in MCA systems.

Agency Comments and Our Evaluation

We requested comments on a draft of our briefing presentation from the
Secretary of Agriculture and the Secretary of Housing and Urban
Development or their designees. We considered and incorporated, as
appropriate, the comments in HUD's letter and the technical comments we
received by e-mail from each department's Office of the Chief Financial
Officer. The comment letter from HUD is reprinted in enclosure II.

Comments from the Department of Agriculture

In an e-mail from the Office of the Chief Financial Officer, USDA
generally agreed with our findings and eight recommendations and stated
that subsequent to our audit, its CFO modified the WCF budget review and
approval process to require annual review of activity center costing
methodologies, with the first review to be completed as part of the fiscal
year 2008 budget formulation cycle.

Comments from the Department of Housing and Urban Development

HUD's Chief Financial Officer, in a letter commenting on a draft of this
briefing, generally agreed with our findings. He neither agreed nor
disagreed with our five recommendations but described actions HUD would
take on four of the five.

In response to our recommendations about promoting the benefits and uses
of MCA and developing an MCA policy for the department, the letter
indicated that a new Executive Financial Management Advisory Committee
would address both of these issues.

Concerning our recommendation to develop existing systems to derive MCA
functionalities, the letter indicated the TEAM/REAP system was being
modified to cost staffing data at the activity level and that the benefits
of HUD's pilot ABC project would be assessed to consider applying it more
broadly.

Concerning our recommendation that HUD develop financial system
requirements that will fully address HUD MCA capabilities needed at HUD,
HUD said that Data Mart and TEAM/REAP would be used for any increased MCA
application, but not HIFMIP. We modified our recommendation to focus on
the development of MCA capabilities generally, rather than specifying the
use of HIFMIP.

Finally, concerning our recommendation that HUD strengthen internal
controls over financial and nonfinancial data in MCA systems, HUD stated
that it was not aware of any significant data quality problems in HUD's
existing MCA practices. We were referring to concerns raised by the HUD
OIG and independent auditors about the reliability of financial data due
to control weaknesses in HUD's financial management systems. These
weaknesses could negatively affect data integrity and indicate uncertain
data reliability during the year. Such conditions would affect MCA data
reliability as well as other financial reporting.

Scope and Methodology

Our methodology was consistent with the one employed in our prior reviews
of MCA practices.7 To obtain an understanding of how MCA systems at USDA
and HUD generate cost information, we reviewed documentation and
interviewed officials on the status of MCA system implementation and the
related obstacles to managerial costing. We also examined departmental
guidance and looked for evidence of leadership and commitment to the
implementation of entitywide cost management practices. Using the
Standards for Internal Control in the Federal Government 8 as a guide, we
identified internal controls over the reliability of financial and
nonfinancial information used in MCA. To determine how managers use cost
information to support decision making and provide accountability for
government resources, we obtained an understanding of how USDA and HUD use
cost accounting data for budgeting, costing services or products,
preparing the Statement of Net Cost, managing contractors' reimbursable
costs, and other managerial uses through a review of documentation
provided by the agencies and interviews of agency officials.

7 GAO-05-1013R, p.12; GAO-06-3O1R, p. 7; GAO-06-599R, p. 5.

8 GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

During our review, we visited USDA and HUD headquarters in Washington,
D.C. At USDA, we visited four component agencies - the Animal and Plant
Health Inspection Service (APHIS) in Riverdale, Maryland; the Farm Service
Agency (FSA) and the Food and Nutrition Service (FNS) in Alexandria,
Virginia; and the Forest Service (FS) in Washington, D.C. - and the
Departmental Working Capital Fund (WCF) in Washington, D.C. We also held
teleconferences with APHIS policy and program development officials in
Minneapolis, Minnesota; and FS staff in Custer, South Dakota, and in
Albuquerque, New Mexico. At HUD, we reviewed MCA practices at the Federal
Housing Administration (FHA) and the Office of Federal Enterprise Housing
Oversight (OFHEA), an independent office within HUD, in Washington, D.C.

When possible, we corroborated information obtained in interviews with
agency documents such as policies, procedures, system descriptions, and
flowcharts. We also reviewed prior Office of Inspector General,
independent public accountant, and GAO reports regarding MCA activities,
systems, and data. The agencies provided comments on a draft of this
report, which we considered and incorporated as appropriate. We performed
this work from March 2006 through July 2006 in accordance with U.S.
generally accepted government auditing standards.

We are sending copies of this report to the Secretary of the Department of
Agriculture and the Secretary of the Department of Housing and Urban
Development; the Director of the Office of Management and Budget; and
other interested parties. Should you or your staff have any questions on
the matters discussed in this correspondence, please contact me at (202)
512-6131 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs can be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in enclosure III.

Sincerely yours,

Robert E. Martin

Director, Financial Management and Assurance

Managerial Cost Accounting Practices

Comments from the Department of Housing and Urban Development

GAO Contact and Acknowledgments

GAO Contact

Robert E. Martin (202) 512-6131 or [email protected]

Acknowledgments

In addition to the contact named above, key contributors to this
assignment were

Jack Warner, Assistant Director; Lisa Crye; Dan Egan; Fred Evans; Barry
Grinnell;

Tom Hackney; Barbara House; Jeff Isaacs; Paul Kinney; Lisa Knight; James
Moses; and Glenn Slocum.

(197012)

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