    Managerial Cost Accounting Practices at the Department of the
    Interior (24-MAY-07, GAO-07-298R).

    Authoritative bodies have promulgated laws, accounting standards,
    information system requirements, and related guidance emphasizing
    the need for accurate and reliable cost information 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 provides 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 (SFFAS) 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. In addition, the Federal Financial Management
    Improvement Act of 1996 required, among other things, that CFO
    Act agencies' systems comply substantially with federal
    accounting standards and federal financial management systems
    requirements. In light of the provision related to MCA
    information in federal agencies, we were asked to review the
    status of MCA in 10 of the largest civilian agencies. Our
    objectives were to determine how (1) federal agencies generate
    MCA information and (2) agency managers use cost information to
    support managerial decision making and accountability.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-298R
        ACCNO:   A69954
      TITLE:     Managerial Cost Accounting Practices at the Department of
    the Interior
         DATE:   05/24/2007
      SUBJECT:   Accountability
    	     Accounting standards
    	     Cost accounting standards compliance
    	     Data collection
    	     Financial management
    	     Financial management systems
    	     Internal controls
    	     Management information systems
    	     Performance measures
    	     Systems evaluation

    ******************************************************************
    ** This file contains an ASCII representation of the text of a  **
    ** GAO Product.                                                 **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
    **                                                              **
    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************
    GAO-07-298R

         * [1]end of correspond & Test.pdf

              * [2]PDF6-Ordering Information.pdf

                   * [3]Order by Mail or Phone

    May 24, 2007

    The Honorable Brian Bilbray
    Ranking Minority Member
    Subcommittee on Government Management, Organization, and Procurement
    Committee on Oversight and Government Reform
    House of Representatives

    The Honorable Todd Russell Platts
    House of Representatives

    Subject: Managerial Cost Accounting Practices at the Department of the
    Interior

    Authoritative bodies have promulgated laws, accounting standards,
    information system requirements, and related guidance emphasizing the need
    for accurate and reliable cost information in the federal government. For
    example, the Chief Financial Officers (CFO) Act of 1990^1 contains several
    provisions related to managerial cost accounting (MCA), one of which
    provides 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 (SFFAS) 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^2 established accounting standards and system
    requirements for MCA information at federal agencies. In addition, the
    Federal Financial Management Improvement Act of 1996^3 required, among
    other things, that CFO Act agencies' systems comply substantially with
    federal accounting standards and federal financial management systems
    requirements.

    In light of the provision related to MCA information in federal agencies,
    we were asked to review the status of MCA in 10 of the largest civilian
    agencies. Our objectives were to determine how (1) federal agencies
    generate MCA information and

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

    ^2In 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.

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

    (2) agency managers use cost information to support managerial decision
    making and accountability.

    This report on the Department of the Interior (Interior) is our fifth in a
    series of reports concerning the status of MCA activities at large
    government agencies. ^4 In addition to reviewing the department-level
    systems, we selected three component bureaus with larger obligations and
    earned revenue as well as a working capital fund with cost recovery
    activities. These were the Bureau of Land Management (BLM), the Bureau of
    Reclamation (BOR), the Minerals Management Service (MMS), and the National
    Business Center (NBC) of the Departmental Working Capital Fund (WCF).

    Results in Brief

    Interior and the four bureau-level components we reviewed each have
    systems for generating MCA information. The driving force for implementing
    MCA at Interior was strong management commitment. However, there is no
    single or integrated information system from which MCA data are generated.
    Additionally, there are multiple, independent systems at the department
    and bureaus from which financial and nonfinancial data are obtained for
    MCA. Controls over nonfinancial data quality for these systems are
    generally limited to bureau-level reviews for reasonableness. Those
    bureau-level controls may not be adequate to help ensure the accuracy, and
    therefore the usefulness, of MCA data. Further, Interior does not allocate
    cost elements consistently between bureaus. For example, BOR uses the
    number of facilities to determine the cost of building maintenance whereas
    the department uses a square footage calculation. In addition, Interior
    does not have written procedures for monitoring the quality and accuracy
    of the data in its MCA system or a consistent methodology for pricing
    services at one of its components. In this regard, recognizing the need to
    help control risks resulting from multiple financial systems as well as a
    need for better functionality, Interior management is in early stages of
    implementing an integrated financial system, Financial Business Management
    System (FBMS), including developing a MCA module, for the department and
    each of its bureaus.

    Information from its various systems is routinely used by management at
    Interior and its bureaus for managerial decision making. At the department
    level, Interior uses cost information to highlight costs of
    department-wide activities, support recommendations for such things as
    changes to work processes, and to prepare budgets and performance targets.
    The bureaus we reviewed used MCA, among other things, to review and
    evaluate work processes, set prices and fees, identify workload trends,
    reallocate resources, and track performance indicators.

    ^4GAO, Managerial  Cost  Accounting  Practices:  Leadership  and  Internal
    Controls Are Key to  Successful Implementation, GAO-05-1013R  (Washington,
    D.C.: Sept. 2, 2005); Managerial Cost Accounting Practices: Departments of
    Labor and  Veterans Affairs,  GAO-05-1031T  (Washington, D.C.:  Sept.  21,
    2005); Managerial  Cost Accounting  Practices: Departments  of  Education,
    Transportation, and the Treasury, GAO-06-301R (Washington, D.C.: Dec.  19,
    2005); Managerial  Cost Accounting  Practices:  Department of  Health  and
    Human   Services   and   Social   Security   Administration,   GAO-06-599R
    (Washington,  D.C.:  Apr.  18,  2006);  and  Managerial  Cost   Accounting
    Practices: Departments of Agriculture  and Housing and Urban  Development,
    GAO-06-1002R (Washington, D.C.: Sept. 21, 2006).

    In its comments on a draft of this report, Interior concurred with six of
    our eight recommendations. It stated it had already taken actions to
    address the remaining two recommendations and is working diligently to
    address the weaknesses cited in the report.

    Background

    The CFO Act of 1990 was the beginning of a series of management reform
    laws to improve federal financial management and set the stage for other
    key reforms that followed. Among other things, the CFO Act established a
    leadership structure for financial management, required audited financial
    statements, and strengthened accountability reporting. It contains several
    provisions related to 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 of cost information and
    systematic performance measurement. The goal of the CFO Act is to greatly
    enhance the ability of managers to do their jobs by providing the full
    range of financial information needed for day-to-day management.

    There are many potential applications for cost information in the federal
    government. This information can be used by federal executives for
    budgeting and cost control, performance measurement, determining
    reimbursements and setting fees and prices, program evaluations, and
    decisions that involve economic choices, such as whether to do a project
    in-house or contract it out.^5 The Congress can also use MCA information
    to determine how to fund programs and monitor agency performance, as well
    as to analyze the merits of proposals advocated by different parties. The
    public, in turn, can benefit from greater transparency about program
    performance and ready access to information on how its tax dollars are
    spent.

    Managerial Cost Accounting Provisions

    The policies and standards prescribed for executive agencies to follow in
    developing, operating, evaluating, and reporting on financial management
    systems are included in Office of Management and Budget Circular No.
    A-127, Financial Management Systems. The components of an integrated
    financial management system are the core financial system,^6 an MCA
    system, and certain administrative and programmatic systems.
    Administrative systems are those that are common to all federal agency
    operations,^7 and programmatic systems are those needed to fulfill an
    agency's mission.

    ^5See  Statement  of  Federal   Financial  Accounting  Standards  No.   4:
    Managerial  Cost  Accounting  Concepts  and  Standards  for  the   Federal
    Government.

    ^6Core financial systems, as  defined by the  Office of Federal  Financial
    Management,  include   managing   general   ledger,   funding,   payments,
    receivables, and certain basic cost functions.

    ^7Examples of administrative systems include budget, acquisition,  travel,
    property, and human resources and payroll.

    SFFAS No. 4, which became effective in fiscal year 1998, sets forth the
    fundamental elements for MCA in government agencies.^8 The five standards
    in SFFAS No. 4 require government agencies to (1) accumulate and report
    the costs of activities on a regular basis for management information
    purposes; (2) establish responsibility segments, and measure and report
    the costs of each segment's outputs and calculate the unit cost of each
    output; (3) determine and report the full costs of government goods and
    services, including direct^9 and indirect^10 costs; (4) recognize the
    costs of goods and services provided by other federal entities; and (5)
    use and consistently follow costing methodologies or cost finding
    techniques most appropriate to the segment's operating environment to
    accumulate and assign costs to outputs. SFFAS No. 4 states that MCA should
    be a fundamental part of the financial management system and, to the
    extent practical, should be integrated with other parts of the system.

    MCA entails answering a very simple question. How much does it cost to do
    something, be it an extensive overall program effort or the incremental
    and iterative efforts associated with a project activity? As such, it
    involves accumulating and analyzing both financial and non-financial
    data^11 to determine the costs of achieving performance goals, delivering
    programs, and pursuing other activities. The principal purpose is to
    consider how much it costs to do whatever is being measured, thus allowing
    management to analyze whether that cost seems reasonable, or to establish
    a baseline for comparison with others that do similar work. The factors
    analyzed and the level of detail depend on the operations and needs of the
    organization. Reliable financial and nonfinancial data are cornerstones of
    this assessment, because if the data are wrong, the resulting analysis can
    give a distorted view of how well the organization is doing, thereby
    affecting any decision making.

    Interior Operations

    Interior's mission is to protect and manage the nation's natural resources
    and cultural heritage; provide scientific and other information about
    those resources; and honor its trust responsibilities or special
    commitments to American Indians, Alaska Natives, and affiliated island
    communities. For fiscal year 2006 Interior reported gross and net outlays
    of approximately $20.7 billion and $8.6 billion, respectively. Interior
    had approximately 73,000 employees, including 69,000 full-time equivalents
    (FTEs) and 200,000 volunteers (4,600 FTEs). Interior has eight bureaus
    organized in distinct mission areas, in addition to departmental offices
    that support key Interior operations and help carry out Interior's
    mission. It also has four working capital funds and a franchise fund.

    ^8In March 1997, the Federal  Accounting Standards Advisory Board  delayed
    SFFAS No. 4's implementation from fiscal year 1997 to fiscal year 1998.

    ^9Direct costs  are costs  that  can be  specifically identified  with  an
    output, including salaries and benefits for employees working directly  on
    the output, materials,  supplies, and costs  for facilities and  equipment
    used exclusively to produce the output.

    ^10Indirect costs are costs that cannot be specifically identified with an
    output and  may include  costs for  general administration,  research  and
    technical  support,  and  operations  and  maintenance  for  building  and
    equipment.

    ^11Non-financial data  measure  the  occurrences  of  activities  and  can
    include such  things  as hours  worked,  units produced,  grants  managed,
    inspections conducted, or people trained.

    BLM's mission is to sustain the health, diversity, and productivity of the
    public lands for the use and enjoyment of present and future generations.
    For fiscal year 2005, BLM reported gross and net outlays of approximately
    $2.6 billion and $.9 billion, respectively, and had approximately 13,500
    FTEs.

    BOR's mission is to manage, develop, and protect water and related
    resources in an environmentally and economically sound manner in the
    interest of the American public. For fiscal year 2005, BOR reported gross
    outlays and net receipts of approximately $1.75 billion and $1 billion,
    respectively, and had approximately 5,900 FTEs.

    MMS's mission is to manage the ocean energy and mineral resources on the
    Outer Continental Shelf and federal and Indian mineral revenues to enhance
    public and trust benefit, promote responsible use and realize fair value.
    MMS also collects, accounts for, and disburses more that $8 billion per
    year in revenues from mineral leases on federal and Indian lands. For
    fiscal year 2005, MMS reported gross outlays and net receipts of
    approximately $3.5 billion and $.2 billion, respectively, and had
    approximately 1,700 FTEs.

    The WCF was established to provide common administrative services to
    Interior bureaus and other federal agencies on a reimbursable basis. In
    fiscal year 2006, the WCF reported gross and net outlays of approximately
    $1.5 billion and $.2 billion, respectively. NBC had approximately 1,100
    FTEs and is the largest activity center in the department's WCF,
    comprising more that 85 percent of the department's WCF activities. In
    fiscal year 2006, Interior's franchise fund, also known as GovWorks, had a
    budgetary authority of $1.2 billion and was merged with NBC.

    Interior Generates MCA Information through Systems at the Agency and
    Component Levels

    Each bureau we reviewed has its own stand-alone MCA system, which feeds
    information to Interior's department-wide MCA system. Additionally, there
    are multiple, independent systems at the department and bureaus from which
    financial and nonfinancial data are obtained for MCA. Controls over
    nonfinancial data quality for these multiple systems are generally limited
    to bureau-level reviews for reasonableness. Those bureau-level controls
    may not be adequate to help ensure the accuracy, and therefore the
    usefulness, of MCA data. In addition, Interior does not have written
    procedures for monitoring the quality and accuracy of its activity-based
    cost management data. Recognizing the need to help control increased risk
    resulting from multiple financial systems as well as to increase
    functionality, Interior management is in early stages of implementing an
    integrated financial system, including an MCA module, for the department
    and each of its bureaus.

    Interior Has a Department-Level MCA System in Place

    Interior has a department-wide MCA system, called ABC/M, which provides
    information about the cost of work activities. Financial data are
    extracted daily from the bureaus' stand-alone general ledger systems, and
    nonfinancial data are obtained from other bureau source systems. Interior
    has adopted an activity-based costing (ABC) approach to departmental MCA.
    ABC is intended to measure the cost of activities, such as issuing
    permits, maintaining trails, and performing site inspections.

    ABC/M includes approximately 300 work activities that align with the
    department's four strategic mission objectives. Nonfinancial data such as
    hours, miles, or acres are obtained from various bureau source systems
    (entered manually or extracted from bureau systems). For financial data
    the bureaus use either Federal Financial System (FFS) or Advanced
    Budget/Accounting Control and Information System (general ledger systems).
    Interior and its component bureaus use non-integrated FFS, with the
    exception of MMS and Office of Surface Mining, which migrated to FBMS in
    mid-November 2006.

    Interior's Bureaus Have Developed Systems and Processes to Generate MCA
    Data

    Interior leadership, including the Secretary, took an active role in
    promoting MCA implementation and use at its bureaus. Interior actions
    included directing the bureaus to take the lead developing MCA;
    establishing a department-level steering committee to provide overall
    guidance; facilitating issue coordination across the department; enlisting
    additional bureau-level input through several groups, including the
    Performance Management Council and the FBMS Steering Committee; creating a
    team to oversee bureau efforts toward implementing the departmentwide ABC
    vision; and issuing department-wide policy and procedural guidance to
    ensure that bureau cost data are in line with Interior strategic goals.
    The four Interior components we reviewed all had their own stand-alone MCA
    systems.

    BLM

    BLM developed its ABC system in 1999, 2 years prior to the departmentwide
    directive. The bureau established an ABC core team to assist in the
    development of a model. Once the model was developed, the team assisted in
    the implementation of ABC throughout the bureau. Financial data are
    extracted from BLM's general ledger and nonfinancial data are added to the
    bureau's MCA system from a BLM-specific system called the Performance
    Management System.

    Personnel costs are accumulated as a product of time charged to activities
    in BLM's time and attendance system (QuickTime). Direct costs, including
    annual leave plus indirect costs (generally allocated proportionally to
    personnel costs) are accumulated for each program activity. BLM officials
    stated that they reconcile ABC/M data to the Statement of Net Costs (SNC)
    on a quarterly and annual basis. BLM received an unqualified (clean) audit
    opinion for fiscal year 2005, but the auditors identified weaknesses in
    internal controls, which could result in inaccurate cost data throughout
    the year. BLM has a cost policy that contains directives, instructions,
    and internal budget processes; however, it does not have a written policy
    on verification and validation of its performance data.

    BOR

    BOR principally uses an asset and maintenance management system known as
    MAXIMO to identify costs, as its authorization and funding sources are
    generally tied to specific projects. MAXIMO is not a cost accounting
    system, but it does have the capability to track labor and material costs
    throughout the life of an asset or project. MAXIMO interfaces with both
    the general ledger (FFS) and the time and attendance system (TAAS). BOR
    electronically transmits selected budgetary information from FFS to the
    department's ABC/M system. Financial data are extracted from BOR's general
    ledger, FFS, and nonfinancial data are added to the bureau's MCA systems
    from a BOR-specific system. Personnel costs are accumulated as a product
    of time charged to activities in BOR's TAAS. All formal cost accounting is
    accomplished through FFS, which provides valid cost accounts for charging
    work that is planned and scheduled through MAXIMO. MAXIMO is used to track
    material costs and approximate labor costs at a work order level. It uses
    cost accounts that are previously coded as reimbursable or nonreimbursable
    in FFS.

    According to BOR officials, they crosswalk bureau costs from their general
    ledger to the departmental ABC/M system for departmental cost
    accumulation, but do not reconcile BOR's SNC prepared from general ledger
    data to ABC/M data because of the lack of necessary proprietary accounting
    data.^12 BOR received a clean audit opinion for fiscal year 2005, but did
    have one reportable condition concerning financial reporting. BOR
    officials also told us that the project authorization and funding
    structure can make it difficult to roll BOR activities and outputs into
    the four Interior strategic goals.

    Additionally, BOR identified maintenance work activity output measures
    related to recreational sites that are inconsistent with Interior output
    measures. The department's policy is to use square footage as a unit
    measure, whereas BOR uses the number of facilities. A BOR official stated
    this was because of a lack of square footage data on its facilities. A
    department official told us that BOR will determine and provide the square
    footage of the recreation facilities for which it is responsible so the
    department can accurately accumulate and analyze the full costs for this
    activity.

    ^12Proprietary accounting data records financial transactions, whereas the
    cost accounting system contains budgetary accounting data that are used to
    facilitate compliance with  fiscal laws and  reflects estimated costs  and
    financial condition.

    MMS

    MMS implemented an ABC/M system based on an OROS (SAS) platform, and began
    coding employee time and activity records to work elements in 2003. The
    ABC/M system accumulates financial information from its general ledger,
    FBMS and nonfinancial information in its Performance Data Gathering and
    Reporting System. MMS does not reconcile its SNC to its ABC/M data because
    of a lack of proprietary accounting data.

    NBC/WCF

    Officials at NBC have a manual process to identify costs. The WCF does not
    have written policies and procedures regarding recovery of costs by
    products lines to prevent over- and undercharging customers. NBC officials
    also told us that they currently do not uniformly apply costs across NBC's
    directorates. Recognizing the need for better information on which to base
    pricing and other managerial decisions, officials at NBC told us that they
    are developing a new activity-based cost system that is expected to become
    operational in fiscal year 2007.

    Nonfinancial Data Must Be Extracted from Multiple Department-Level and
    Component Systems

    While Interior has done much to develop MCA information, officials
    acknowledged that the integrity of the ABC/M system data depends on the
    effectiveness of the internal controls of the bureaus' systems that
    provide data used in the departmental ABC/M. Weaknesses in internal
    controls can result in inaccurate cost data throughout the year, which may
    impede the department's ability to make well-informed decisions based on
    accurate data. Further, Interior officials told us that it currently does
    not reconcile the SNC and ABC/M data at the corporate level because of
    differences between financial accounting data of the general ledger and
    budgetary data of the cost systems. Such reconciliations provide assurance
    that data from different sources are accurate and complete. According to
    Interior's fiscal year 2006 performance and accountability report (PAR),
    Interior is beginning to validate costs reported in the SNC by
    implementing a reconciliation process.

    Although Interior has received an unqualified audit opinion on its
    financial statements since 1997, it reported in its fiscal year 2006 PAR
    that internal control weaknesses continue to hinder its financial
    management systems. Additionally, Interior reported that it confronts
    challenges as it operates costly and duplicative financial and business
    management systems. Controls over nonfinancial data are generally limited
    to bureau-level review for reasonableness. Interior acknowledged the need
    for independent department-level validation and verification of
    nonfinancial ABC/M data. Further, Interior does not have written
    procedures for monitoring the quality and accuracy of its ABC/M data.
    Interior officials told us that not all bureaus have written procedures
    for performance data validation and verification. The department plans to
    follow up to ensure that all bureaus implement data validation and
    verification standards and procedures in 2007.

    Interior is in the process of implementing a new department-wide
    integrated financial management system, FBMS, in part because Interior
    leadership has recognized that its current environment of nonintegrated
    systems increases its risk and does not provide all needed MCA
    information. While Interior's current system provides only budgetary data,
    Interior officials stated that FBMS plans include provisions for both
    budgetary and proprietary accounting data. Interior officials stated that
    they plan to include an integrated ABC/M system in FBMS. Although a
    working model for ABC/M is being developed, an Interior official told us
    at the time of our review that the user requirements for the model have
    not yet been fully developed. A department official further stated that
    once the requirements for FBMS's ABC/M system are developed, and depending
    on the availability of funding and other scheduling considerations, the
    working model could be implemented approximately 18 months after the
    requirements are finalized. The current FBMS implementation plan for the
    general ledger module calls for a phased implementation with seven
    successful deployments beginning in April 2006 and ending in fiscal year
    2011.

    Interior and Its Bureaus Use MCA to Support a Variety of Managerial
    Decisions

    At the department level, Interior uses cost information to provide
    visibility on the costs of activities. For example, a graphical report to
    senior Interior executives called the Executive Dashboard provides
    department leadership with access to some department-level program cost
    information. MCA is also used for a number of purposes, including
    supporting recommendations to change work processes to improve
    efficiencies and generate cost savings, supporting decisions on
    redirecting or reallocating resources, and preparing budgets and
    performance targets. Interior officials reported that MCA is used to
    provide visibility on the costs of activities and initiatives of interest
    to departmental leadership, and one of its emerging capabilities is the
    use of marginal cost models to identify and understand the extent to which
    activities consume costs.

    BLM officials use information from the Cost Management System for a number
    of purposes, including projecting future resource needs based on estimated
    workloads. Additionally, the BLM MCA system provides cost information by
    organizational code, unit cost, and the number of work outputs. It enables
    BLM to review and evaluate work processes across the bureau to find ways
    to improve effectiveness, to reallocate resources, set fees and prices,
    and monitor progress in achieving performance goals.

    BOR officials use MCA for a number of purposes including identifying
    activities and outputs that could be useful in budget decision making. For
    example, BOR reported in its fiscal year 2007 budget justification that
    ABC/M data are refined and analyzed to support its efforts to produce cost
    information to enhance budget decision making. BOR also uses MCA data to
    review routine MCA reports on an ongoing basis to identify budgetary
    shortages and surpluses associated with projects, to identify and examine
    bureau workload trends, and to assist in the reallocation of resources.

    MMS officials reported that they use ABC/M for a number of purposes
    including reporting management results, preparing cost recovery
    calculation, and tracking and accessing key performance indicators.
    However, MMS official also stated that it is difficult to find the right
    level of detail to capture information to meet Interior, bureau, and
    program needs, and there is a need for more timely access to ABC/M and
    performance information for decision making.

    Officials at NBC use a manual process incorporating prior year financial
    information to determine prices charged to their customers. However, NBC
    does not have written policies and procedures regarding recovery of costs
    by product lines to prevent over- and under-charging of customers.
    Additionally, financial analysis conducted to determine whether reserves
    were established within authorized limits, was not documented.

    Conclusion

    Interior's strong leadership has promoted the benefits of MCA and
    facilitated strong cross-bureau collaboration. However, it continues to
    confront challenges as it moves toward replacing its multiple,
    nonintegrated systems with one that includes a cost accounting module to
    serve the department and all its bureaus. Developing and implementing a
    system to verify and validate nonfinancial data at the department level
    would strengthen Interior's internal controls, both with the current and
    planned systems. Although some of the bureaus have written policies and
    procedures for performance data validation and verification, having these
    policies and procedures at the department level would enhance Interior's
    ability to monitor the quality and accuracy of its nonfinancial data. In
    addition, attention to ongoing MCA system implementation monitoring will
    help ensure that functions of the new system will meet user needs.
    Finally, establishing clear cost accounting methodologies will help ensure
    that data used and provided by the system are reliable, timely, and useful
    in making day-to-day decisions.

    Recommendations for Executive Action

    We are making eight recommendations to the Secretary of the Interior.

    To promote the implementation and use of reliable MCA methodologies to
    support more informed managerial decision making in Interior and its
    bureaus and department offices, we recommend that the Secretary direct
    department officials to:

               o Perform an assessment of the internal controls related to
               nonfinancial data, including key indicators used for executive
               decision making, such as the Executive Dashboard and determine
               whether the current internal controls are adequate and meet the
               department's published guidance.
               o Monitor bureau's development and implementation of written
               procedures for performance data validation and verification at all
               bureaus.
               o Continue to monitor the FBMS implementation plan to determine
               that MCA functionalities that meet user requirements are included.

    To promote the implementation and use of reliable MCA methodologies to
    support more informed managerial decision making in BOR, we recommend that
    the Secretary direct BOR officials to:

               o Identify and address any inconsistent work output measures
               between the bureau and departmental systems that are essential to
               Interior management to help form the basis for consistent cost
               measurement.

    To promote the effective use of proper cost accounting methodologies to
    support pricing and other managerial decision making at NBC, we recommend
    that the Secretary of the Interior direct appropriate NBC officials to:

               o Monitor compliance to existing policies in relation to the
               application of direct costs, including annual leave and holidays.
               o Document all policies and procedures to help ensure the recovery
               of costs by product lines to help prevent over and under charging
               of customers.
               o Complete determination of methodology, and implement a
               consistent methodology for pricing of services at NBC.
               o Document policies and procedures for establishing reserves.

    Agency Comments and Our Evaluation

    In a letter from the Assistant Secretary of Policy, Management, and
    Budget, Interior stated that the draft report provides an accurate
    representation of its MCA implementation efforts and status. Interior
    fully concurred with six out of the eight recommendations and that it will
    work to address the weaknesses cited in the draft report, particularly in
    the areas of process documentation, data validation and verification,
    reconciliation of MCA, financial reporting, and unit costing.

    Interior did not agree with two of our recommendations because it believed
    it had already taken action to address these recommendations. The
    recommendations address performing an assessment of the internal controls
    related to nonfinancial data, including key indicators used for executive
    decision making, and having the department develop written procedures for
    performance data validation and verification at all bureaus.

    Interior stated that it conducted the assessment of internal controls
    related to nonfinancial data in 2006, and that it provided guidance to its
    bureaus on developing data validation and verification standards. We
    revised our recommendation to acknowledge Interior's published guidance to
    its bureaus. However, not all bureaus had written policies on data
    validation and verification at the time of our review. Accordingly, we
    continue to believe our recommendations for assessing internal controls
    over nonfinancial data and the need for departmental-level management to
    monitor bureaus' progress with policy direction have not yet been fully
    addressed. Interior also stated that it intends to follow up with the
    bureaus in 2007 to ensure that they have either implemented or are taking
    action to implement our recommendation for Interior's bureaus to establish
    written data validation and verification standards and procedures for
    nonfinancial data. We agree that this follow-up is necessary and revised
    our recommendation to require department officials to monitor the bureaus'
    development and implementation of written procedures for performance data
    validation and verification. Interior's written comments are reprinted in
    enclosure I.

    Scope and Methodology

    Our methodology was consistent with the one employed in our prior reviews
    of MCA practices.^13 To obtain an understanding of how MCA systems at
    Interior generate cost information, we reviewed documentation and
    interviewed officials at Interior headquarters and at selected bureaus and
    department offices on the status of MCA system implementation,
    departmental guidance and leadership's commitment to the implementation of
    cost management practices entity-wide, departmental internal controls to
    help ensure the reliability of financial and nonfinancial information used
    in MCA, and any obstacles raised by Interior to implementing managerial
    costing. Using the Standards for Internal Control in the Federal
    Government^14 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 Interior uses cost accounting data for budgeting,
    costing services or products, preparing the SNC, managing contractors'
    reimbursable costs, and other managerial uses through a review of
    documentation provided by the agencies and interviews of agency officials.
    We selected for review Interior's larger components in terms of their
    obligations and earned revenue, and those with cost recovery activities,
    such as working capital funds.

    During our review, we visited Interior headquarters in Washington, D.C. We
    visited three component bureaus-BLM, BOR, MMS, and the WCF in Washington,
    D.C. We also visited BOR and MMS offices at the Denver Federal Center and
    held teleconferences with bureau policy and program development officials
    in Washington, D.C. and at the Denver Federal Center.

    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 Interior's MCA
    activities, systems, and data. We requested comments on a draft of our
    letter from the Secretary of the Interior or his designee. We received
    written comment from the Assistant Secretary on January 22, 2007. We
    considered and incorporated Interior's comments as appropriate. We
    performed this work from July 2006 through November 2006 in accordance
    with generally accepted government auditing standards.

    ^13GAO-05-1013R,  p.   12;  GAO-06-3O1R,   p.   7;  GAO-06-599R,   p.   5;
    GAO-06-1002R, p. 7.

    ^14GAO,  Standards  for  Internal  Control  in  the  Federal   Government,
    GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

    We are sending copies of this report to the Secretary of the Interior, 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 report, please contact me at (202) 512-6131 or
    martinr@gao.gov. Contact points for our Offices of Congressional Relations
    and Public Affairs may be found on the last page of this report. GAO staff
    who made major contributions to this report are listed in enclosure II.

    Robert E. Martin
    Director, Financial Management and Assurance

    Enclosures - 2

    Enclosure I

                      Comments from the Department of the Interior

    Enclosure II

                         GAO Contact and Staff Acknowledgments

    GAO Contact

    Robert E. Martin (202) 512-6131 or martinr@gao.gov

    Acknowledgments

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

    Paul Kinney, Assistant Director; Lisa Brownson; Debra Cottrell; Lisa Crye;
    Dan Egan; Tiffany Epperson; Thomas Hackney; Jeff Isaacs; Diane Morris;
    Glenn Slocum; and Jack Warner.

    (197013)

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    GAO's Mission

    The Government Accountability Office, the audit, evaluation and
    investigative arm of Congress, exists to support Congress in meeting its
    constitutional responsibilities and to help improve the performance and
    accountability of the federal government for the American people. GAO
    examines the use of public funds; evaluates federal programs and policies;
    and provides analyses, recommendations, and other assistance to help
    Congress make informed oversight, policy, and funding decisions. GAO's
    commitment to good government is reflected in its core values of
    accountability, integrity, and reliability.

    Obtaining Copies of GAO Reports and Testimony

    The fastest and easiest way to obtain copies of GAO documents at no cost
    is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts
    newly released reports, testimony, and correspondence on its Web site. To
    have GAO e-mail you a list of newly posted products every afternoon, go to
    www.gao.gov and select "Subscribe to Updates."

    Order by Mail or Phone

    The first copy of each printed report is free. Additional copies are $2
    each. A check or money order should be made out to the Superintendent of
    Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
    copies mailed to a single address are discounted 25 percent. Orders should
    be sent to:

    U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
    D.C. 20548

    To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
    512-6061

    To Report Fraud, Waste, and Abuse in Federal Programs

    Contact:

    Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
    Automated answering system: (800) 424-5454 or (202) 512-7470

    Congressional Relations

    Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S.
    Government Accountability Office, 441 G Street NW, Room 7125 Washington,
    D.C. 20548

    Public Affairs

    Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800
    U.S. Government Accountability Office, 441 G Street NW, Room 7149
    Washington, D.C. 20548

    *** End of document. ***