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.

Recommendations for Executive Action

  1. 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 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

  2. Status: Closed - Implemented

    Comments: In March 2007, the Department of Labor published the Department of Labor Manual Series (DLMS) 6 Chapter 800, Managerial Cost Accounting. DLMS 6-800 updated the Department's policies, organization, and personnel responsibilities for the recording, reporting, reconciling, and controlling of managerial cost accounting information. The policy reflected the procedures and policies established through the implementation of the Cost Analysis Manager (CAM) - DOL's initiative to develop a Department-wide managerial cost accounting capability.

    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

  3. 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: 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

  4. Status: Closed - Implemented

    Comments: After GAO made the 2005 recommendations, DOL implemented a CAM project which provided a dashboard from information provided by the department's new core financial management system (NCFMS). However, DOL found that the CAM project was not an effective use of its resources at that time. In addition, ESC is now Labor's Federal Shared Services provider for its core financial management system.

    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

  5. Status: Closed - Implemented

    Comments: In 2007, VBA implemented an MCA system.

    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

  6. Status: Closed - Implemented

    Comments: VA has implemented procedures to periodically validate the nonfinancial data used by VHA's DSS team for MCA and assess related internal controls.

    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

  7. Status: Closed - Implemented

    Comments: VA implemented the FY 2007 guidance for allocating indirect costs to cost objects and the FY 2007 Decision Support Office (DSO) audit plan used to test control activities to ensure that costs were properly assigned.

    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

  8. Status: Closed - Implemented

    Comments: In 2007, VA provided GAO with the Decision Support System (DSS) Site Level Staffing document, which recommended a staffing model which would support efforts to assign an adequate number of properly trained DSS personnel at all levels in VHA. In addition, VA provided GAO with the syllabus for the FY 2007 DSS User Conference for the Veterans Benefit Administration (VBA) and the National Cemetery Administration (NCA) as well as documentation of selected bi-weekly teaching calls used to keep DSS staff aware of the latest developments.

    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

  9. Status: Closed - Implemented

    Comments: In FY 2010, VA completely automated the Statement of Net Cost preparation process.

    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

  10. Status: Closed - Implemented

    Comments: In FY 2010, VA automated the process for preparing the Statement of Net Cost. With this new process, the information comprising the Statement of Net Cost is pulled directly, without manual intervention, from its Management Information Exchange reporting system which interfaces with the general ledger. As a result, it is no longer necessary for VA to have a procedure manual.

    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

 

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