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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[Footnote 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[Footnote 2] established accounting standards and system 
requirements for MCA information at federal agencies. In addition, the 
Federal Financial Management Improvement Act of 1996[Footnote 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 (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.[Footnote 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. 

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.[Footnote 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,[Footnote 6] an MCA system, and certain administrative and 
programmatic systems. Administrative systems are those that are common 
to all federal agency operations,[Footnote 7] and programmatic systems 
are those needed to fulfill an agency's mission. 

SFFAS No. 4, which became effective in fiscal year 1998, sets forth the 
fundamental elements for MCA in government agencies.[Footnote 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[Footnote 
9] and indirect[Footnote 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[Footnote 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. 

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.[Footnote 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. 

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: 

 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. 

 Monitor bureau's development and implementation of written procedures 
for performance data validation and verification at all bureaus. 

 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: 

 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: 

 Monitor compliance to existing policies in relation to the 
application of direct costs, including annual leave and holidays. 

 Document all policies and procedures to help ensure the recovery of 
costs by product lines to help prevent over and under charging of 
customers. 

 Complete determination of methodology, and implement a consistent 
methodology for pricing of services at NBC. 

 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.[Footnote 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[Footnote 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. 

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. 

Signed by: 

Robert E. Martin: 
Director, Financial Management and Assurance: 

Enclosures - 2: 

[End of section] 

Enclosure I: Comments from the Department of the Interior: 

United States Department of the Interior: 
Office Of The Assistant Secretary: 
Policy, Management And Budget: 
Washington, DC 20240: 
Take Pride In America: 

Jan 2 2007: 

Mr. Robert E. Martin: 
Director, Financial Management and Assurance: 
Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Martin: 

Thank you for allowing the Department of the Interior to review and 
comment on the Government Accountability Office's (GAO) draft report 
(GAO Job 197013) on our Managerial Cost Accounting (MCA) practices. 
MCA, or Activity Based Cost Management (ABC/M) at the Department of the 
Interior, has been a departmental priority since 2003. We have worked 
very hard to ensure that our managers have accurate, up to date 
information on the cost of their programs and how well their programs 
perform. Departmental and bureau leadership have taken active roles in 
guiding ABC/M implementation, and in developing and promoting the 
benefits and uses of managerial cost accounting information, a finding 
that we are gratified to see highlighted in the GAO draft report. 

Overall, we believe that your draft report provides an accurate 
representation of our MCA implementation efforts and status. We concur 
with most of your recommendations and will work diligently to addresses 
the weaknesses cited in the draft report, particularly in the areas of 
process documentation, data validation and verification, reconciliation 
of MCA and financial reporting, and unit costing. 

There are two recommendations with which we do not concur because the 
suggested actions have already occurred. These 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. The 
assessment of internal controls related to nonfinancial data was 
conducted in 2006. This assessment included providing to each bureau 
recommendations on developing bureau data validation and verification 
standards that would address the Departmental data validation and 
verification standards published in 2003, and republished in 2005. 
These standards also addressed developing written procedures for 
performance data validation and verification. We intend to follow up 
with the bureaus in 2007 to ensure that they have either implemented or 
are taking action to implement data validation and verification 
standards and procedures for nonfinancial data. We have also attached 
our technical response to clarify some statements in your draft report. 

The Department appreciates the opportunity to participate in GAO's 
review of Federal government managerial cost accounting practices. 

Sincerely, 

Signed by: 

R. Thomas Weimer: 
Assistant Secretary: 

Attachment: 

[End of section] 

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): 

FOOTNOTES 

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

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

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

[4] GAO, 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). 

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

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

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

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

[9] Direct 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. 

[10] Indirect 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. 

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

[12] Proprietary 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. 

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

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

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