Managerial Cost Accounting Practices:

Leadership and Internal Controls Are Key to Successful Implementation

GAO-05-1013R: Published: Sep 2, 2005. Publicly Released: Sep 2, 2005.

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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. In particular, the (1) Chief Financial Officers (CFO) Act of 1990, (2) Statement of Federal Accounting Standards No. 4: Managerial Cost Accounting Concepts and Standards for the Federal Government, and (3) Joint Financial Management Improvement Program's (JFMIP) Framework for Federal Financial Management Systems established requirements and accounting standards for managerial cost accounting (MCA) information at federal agencies. The Federal Financial Management Improvement Act of 1996 (FFMIA) built on this foundation and required, among other things, CFO Act agencies' systems to comply substantially with federal accounting standards and federal financial management systems requirements. 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, grants managed, inspections conducted, people trained, or time needed to perform certain functions. In light of the requirements for federal agencies to prepare MCA information and its interest in financial management and accountability, 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 managerial cost accounting information as well as how governmental managers use cost information to support managerial decision making and provide accountability.

DOL and VA have different strategies to implement MCA information systems. DOL implemented a departmentwide MCA system upon which 15 of its 18 component agencies have built MCA models tailored to their respective needs. At VA, responsibility for MCA implementation rested with individual component agencies. When we conducted our review, an MCA system was in operation at one of VA's two largest agency components. DOL and VA officials cited several existing and planned uses of MCA information by component agencies including budgeting, resource allocation, financial reporting, and other managerial decision-making purposes. At both agencies, we noted that MCA-related controls needed strengthening. Certain control weaknesses, such as not validating nonfinancial data and not documenting policy and MCA procedures, could limit the reliability of data used by management to analyze costs and to make decisions. We made recommendations to DOL and VA to address these weaknesses. Both agencies provided written comments on our briefing. DOL generally agreed with our report and recommendations. VA, however, generally did not agree with our overall conclusions and recommendations. After considering VA's comments, we continue to believe our conclusions and recommendations regarding VA are well-founded and our responses are provided. We have incorporated the comments from both agencies as appropriate.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: In order for DOL to develop MCA information sufficiently reliable for ongoing managerial decision-making, leveraging the substantial efforts already undertaken by the agency, the Secretary of Labor should direct the Chief Financial Officer of the Department of Labor to continue steps to verify the accuracy of nonfinancial data used for MCA and assess related internal controls over nonfinancial data quality to help ensure data reliability.

    Agency Affected: Department of Labor

    Status: Closed - Implemented

    Comments: The Secretary of Labor issued Order No. 14-2006, redefining the Department's internal control program and establishing a departmental Internal Control Board (ICB) to monitor progress of internal control assessments and implementation of corrective actions to audit findings. The ICB is comprised of senior department-level officials responsible for systems, financial management, operations, and other administrative functions. The order also assigned responsibility to an assistant secretary for the regular evaluation of internal controls over non-financial reporting, including an attestation to the validity of internal controls over the Department's performance management information. Management reported improved quality of non-financial data used for Managerial Cost Accounting purposes in fiscal year 2006, which was validated by the inspector general.

    Recommendation: In order for DOL to develop MCA information sufficiently reliable for ongoing managerial decision-making, leveraging the substantial efforts already undertaken by the agency, the Secretary of Labor should direct the Chief Financial Officer of the Department of Labor to complete the planned update of MCA policies and procedures to ensure that department-level guidance is comprehensive and current.

    Agency Affected: Department of Labor

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: In order for DOL to develop MCA information sufficiently reliable for ongoing managerial decision-making, leveraging the substantial efforts already undertaken by the agency, the Secretary of Labor should direct the Chief Financial Officer of the Department of Labor to complete the compilation and dissemination of component-specific Cost Accounting Manager (CAM) reference materials so that the documentation is in a consolidated resource that is readily available to system users, managers, and auditors.

    Agency Affected: Department of Labor

    Status: Closed - Implemented

    Comments: DOL's Office of the Chief Financial Officer completed and issued a nearly 50-page reference manual, including system definitions, model descriptions, uses of model information, and other resource appendices for each of DOL's component agencies.

    Recommendation: The Secretary of Labor should direct appropriate personnel to perform and document a post-implementation review of CAM to evaluate whether managerial cost information meets organizational objectives and users' needs. This review should also determine and document the extent to which managers use CAM-generated data in managing day-to-day operations.

    Agency Affected: Department of Labor

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To help ensure that VA components implement and use reliable MCA methodologies, the Secretary of Veterans Affairs should direct appropriate department-level officials to exercise more effective leadership and oversight in order to develop, implement, and operate an appropriate MCA system at the Veterans Benefits Administration to improve managerial decision-making.

    Agency Affected: Department of Veterans Affairs

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To help ensure that VA components implement and use reliable MCA methodologies, the Secretary of Veterans Affairs should direct appropriate department-level officials to exercise more effective leadership and oversight in order to periodically validate the nonfinancial data used by the Veterans Health Administration's Decision Support Services (DSS) team for MCA and assess related internal controls.

    Agency Affected: Department of Veterans Affairs

    Status: Open

    Comments: According to its 2007 budget submission to Congress, the VHA Decision Support Office (DSO) is providing to all Veterans Affairs Medical Centers (VAMC) and Networks, a standardized and comprehensive audit guide (with worksheets). This document identifies non-financial data audits to be conducted with a goal of ensuring that the workload data in DSS is complete and accurate. These processes include monthly audits of DSS extracts that reconcile to Veterans Health Information System and Technology Architecture (VISTA) feeder systems. The DSO has two FTEE who are exclusively dedicated to assisting the DSS site teams in the proper conduct of the mandatory audit process. VA has not yet provided GAO with a copy of the new audit process documentation or the initial audit results.

    Recommendation: To help ensure that VA components implement and use reliable MCA methodologies, the Secretary of Veterans Affairs should direct appropriate department-level officials to exercise more effective leadership and oversight in order to document the DSS processes and controls for assigning indirect costs to cost objects to help ensure that costs are properly assigned.

    Agency Affected: Department of Veterans Affairs

    Status: Open

    Comments: According to the VA's 2007 budget submission to Congress, the VHA is providing a document which details the process and controls for assigning indirect costs to cost objects. The DSO issues an Annual Fiscal Year Conversion document (a detailed set of processes for assigning direct and indirect costs) to the DSS site teams at every VAMC. Refresher training is provided, telephonically, through a series of bi-weekly Teaching Calls that the DSO provides to those same site teams. DSS provides an automated standard step-down process that is applied uniformly each month for all indirect costs. VA has not yet provided GAO with a copy of the updated documentation for these new processes.

    Recommendation: To help ensure that VA components implement and use reliable MCA methodologies, the Secretary of Veterans Affairs should direct appropriate department-level officials to exercise more effective leadership and oversight in order to provide adequate numbers of properly trained staff at field locations to administer DSS to maximize system availability and utilization.

    Agency Affected: Department of Veterans Affairs

    Status: Open

    Comments: According to the VA's 2007 budget submission to Congress, DSS Site Teams are composed of professionals with financial and clinical backgrounds. Once assigned, these personnel complete written and on-the-job training on the technical portion of the DSS. Currently, DSO is sponsoring a workgroup that will provide staffing criteria to include recommended professional background, training and required staffing level for all VAMCs. VA has not yet provided GAO with a copy of the staffing criteria or training outline.

    Recommendation: In an effort to reduce the risks of errors and delays inherent with manual processes, the Secretary of Veterans Affairs should direct appropriate VA officials to further automate the Statement of Net Cost preparation process.

    Agency Affected: Department of Veterans Affairs

    Status: Open

    Comments: According to the VA's 2007 budget submission to Congress, the Department will implement in FY 2006 an integrated financial reporting system that will enhance the integrity and efficiency of financial statement preparation including the Statement of Net Cost. VA has not yet provided GAO with the details about its new system.

    Recommendation: In an effort to reduce the risks of errors and delays inherent with manual processes, the Secretary of Veterans Affairs should direct appropriate VA officials to update the Statement of Net Cost compilation procedure documentation.

    Agency Affected: Department of Veterans Affairs

    Status: Open

    Comments: According to the VA's 2007 budget submission to Congress, the documentation on the preparation of the Statement of Net Cost has been updated. VA has not yet provided GAO with a copy of the updated documentation.

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