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
[email protected]. 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 [email protected]

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: [email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional Relations

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Washington,
D.C. 20548

Public Affairs

Paul Anderson, Managing Director, [email protected] (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

*** End of document. ***