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entitled 'Managerial Cost Accounting Practices: Implementation and Use 
Vary Widely across 10 Federal Agencies' which was released on July 20, 
2007. 

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Report to Congressional Requesters: 

United States Government Accountability Office: 

GAO: 

July 2007: 

Managerial Cost Accounting Practices: 

Implementation and Use Vary Widely across 10 Federal Agencies: 

GAO-07-679: 

GAO Highlights: 

Highlights of GAO-07-679, a report to congressional requesters 

Why GAO Did This Study: 

In the past 16 years, a number of laws, accounting standards, system 
requirements, and related guidance have emphasized the need for cost 
information in the federal government, establishing requirements and 
accounting standards for managerial cost accounting (MCA) information. 
In light of these requirements, GAO was asked to determine how federal 
agencies generate MCA information and how government managers use that 
information to support their decisions and provide accountability. 
Since 2005, GAO has reviewed and reported on MCA practices at 10 large 
civilian agencies resulting in five reports. 

This report brings the overall observations of these studies together 
in one place. 

What GAO Found: 

Our work identified large disparities in the level of MCA 
implementation among federal agencies as well as the ways in which they 
use cost information. Of the 10 agencies we reviewed, only 3 had 
implemented MCA systems agencywide: the Department of the Interior 
(DOI), the Social Security Administration (SSA), and the Department of 
Labor (DOL). In addition, the Department of Transportation (DOT) had 
made significant progress in implementing MCA departmentwide. Three 
agencies—the Departments of Agriculture (USDA), Health and Human 
Services (HHS), and Housing and Urban Development (HUD)—planned to 
implement MCA systems when upgrading their overall financial management 
systems, but they had not yet adequately considered their MCA needs. 
The 3 remaining agencies—the Departments of Education, the Treasury, 
and Veterans Affairs (VA)—had no plans to implement MCA departmentwide, 
but some of their component agencies had implemented their own MCA 
systems. In addition, many agencies do not yet have the accurate, 
reliable, and timely data needed for MCA systems to ensure the outputs 
are useful and reliable. 

Few of the federal agencies we reviewed were using MCA to make day-to-
day decisions. Only DOI and SSA were using cost information routinely 
to manage operations entitywide. In addition, some component agencies 
of departments that did not have overall MCA systems were using cost 
information more routinely to evaluate programs, formulate budgets, and 
set fees and prices. DOL was developing plans for using its MCA system. 
Other agencies used cost information primarily for external financial 
reporting, and were only able to cite a limited number of examples 
showing how cost information was currently used to help make management 
decisions. 

Strong leadership for MCA was in place at DOI, DOL, SSA, and DOT. Other 
agencies have not yet made concerted efforts to promote the benefits of 
MCA and oversee its implementation and use throughout their respective 
agencies. Although MCA can be implemented without an integrated 
financial management system, in those cases it tends to be used for 
single programs or projects rather than providing day-to-day 
information for managerial decision making agencywide. For MCA 
implementation to be successful, it must be tailored to the needs of 
the organization, be a tool managers can use to make everyday 
decisions, and be based on sound financial and nonfinancial data. Full 
MCA implementation across the federal government will require strong 
executive leadership, improved financial management systems, and a 
continuing transition in government culture to one of managing costs, 
in addition to managing the budget. 

What GAO Recommends: 

Our previous MCA reports included detailed recommendations to the 
agencies we reviewed. This report contains no new recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-679]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Robert E. Martin at (202) 
512-6131 or martinr@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Scope and Methodology: 

Few Agencies Have MCA Systems that Can Provide Managers with Cost 
Information for Daily Use: 

Few Agencies Use Cost Information Routinely to Manage Their Operations: 

Agency Leadership Is Fundamental to Successful MCA Implementation: 

Conclusions: 

Appendix I: Research Resources: 

Appendix II: Gao Contact and Staff Acknowledgments: 

Tables: 

Table 1: Reported Costs and Earned Revenues for 10 Civilian Agencies, 
for the Fiscal Year Ended September 30, 2005: 

Table 2: Auditors' FFMIA Assessments for Fiscal Year 2005: 

Figure: 

Figure 1: Agency Systems Architecture: 

United States Government Accountability Office: 
Washington, DC 20548: 

July 20, 2007: 

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

The Honorable Todd R. Platts: 
House of Representatives: 

A number of laws, accounting standards, information systems 
requirements, and related guidance have emphasized the need for cost 
information and cost management in the federal government. At the 
forefront, the Chief Financial Officers (CFO) Act of 1990[Footnote 1] 
contains several provisions related to managerial cost accounting 
(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 systematic measurement of performance and the 
development and reporting of cost information. The Statement of Federal 
Financial Accounting Standards 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, respectively, for MCA 
information at federal agencies. In addition, the Federal Financial 
Management Improvement Act of 1996 (FFMIA)[Footnote 3] required, among 
other things, that the systems of CFO Act agencies comply substantially 
with federal accounting standards and federal financial management 
systems requirements. 

MCA offers a way for agencies to help maximize efficiency and 
effectiveness in using existing resources by identifying the true costs 
of programs and providing better information for making decisions and 
enhancing accountability. Given this, as well as the requirements for 
CFO Act agencies to prepare MCA information, you asked us to determine 
the extent to which those agencies develop cost information and use it 
for managerial decision making. Accordingly, over the past 2 years, we 
completed reviews of MCA practices in 10 large CFO Act agencies, 
resulting in five reports.[Footnote 4] This report summarizes our 
findings from those reports on (1) the ways federal agencies generate 
managerial cost accounting information, (2) how government managers use 
cost information to support managerial decision making and provide 
accountability, and (3) the need for stronger leadership for 
implementing MCA in many of the agencies we reviewed. This capping 
report was prepared between September 2006 and June 2007 in accordance 
with generally accepted government auditing standards. 

Results in Brief: 

More than 16 years after the passage of the CFO Act, we found that few 
federal agencies have systems that can routinely provide managers with 
reliable cost information to inform decision making. Of the 10 agencies 
we reviewed, only 3 had implemented MCA systems entitywide: the 
Department of the Interior (DOI), the Social Security Administration 
(SSA), and the Department of Labor (DOL). In addition, the Department 
of Transportation (DOT) had made significant progress in implementing 
MCA entitywide. Three agencies--the Departments of Agriculture (USDA), 
Health and Human Services (HHS), and Housing and Urban Development 
(HUD)--planned to implement MCA systems when upgrading their overall 
financial management systems, but they had not yet adequately 
considered their MCA needs. The three remaining agencies we reviewed-- 
the Departments of Education, the Treasury, and Veterans Affairs (VA)-
-had no plans to implement MCA departmentwide, although VA was 
initiating a review to explore opportunities to do so. Further, some 
component agencies at Education, Treasury, and VA had implemented their 
own MCA systems. In addition, some agencies do not yet have the 
accurate, reliable, and timely data needed for MCA systems to ensure 
the outputs are useful and reliable. 

Few of the federal agencies we reviewed were using MCA to make day-to- 
day decisions. Only DOI and SSA used cost information routinely to 
manage operations entitywide. In addition, DOL was developing plans for 
using its recently implemented MCA system. Other agencies used cost 
information primarily for external financial reporting, and they cited 
a limited number of examples showing how cost information was used to 
help make management decisions. Finally, some components of agencies 
that did not have overall MCA systems used cost information more 
routinely to, among other things, evaluate programs, formulate budgets, 
and set fees and prices. 

Strong leadership for MCA was in place at DOI, DOL, SSA and DOT. Other 
agencies have not yet made concerted efforts to promote the benefits of 
MCA and oversee its implementation and use throughout their respective 
components. Because implementing MCA takes time, requires monitoring, 
and inevitably mid-course adjustments, the managers who will use the 
information need to see its value and take ownership of the system. 
Strong leadership can set the tone and the expectations to make this 
happen, and encourage a continuing transition in federal government 
culture to one of identifying and managing costs, in addition to 
managing the budget. 

Background: 

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 
(OMB) Circular No. A-127, Financial Management Systems. The components 
of an integrated financial management system include the core financial 
system,[Footnote 5] a managerial cost accounting system, and certain 
administrative and programmatic systems. Administrative systems are 
those that are common to all federal agency operations,[Footnote 6] and 
programmatic systems are those needed to fulfill an agency's mission. 
Figure 1 illustrates how these systems should interrelate in an 
agency's overall systems architecture. 

Figure 1: Agency Systems Architecture: 

[See PDF for image] 

Source: OMB, Core Financial Systems Requirements, OFFM-NO-0106 
(Washington, D.C.: January 2006). 

[End of figure] 

The Statement of Federal Financial Accounting Standards No. 4 (SFFAS 
4), Managerial Cost Accounting Concepts and Standards for the Federal 
Government, which became effective in fiscal year 1998, sets forth the 
fundamental elements for MCA in government agencies.[Footnote 7] The 
five standards in SFFAS 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 8] and 
indirect[Footnote 9] 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 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. 

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 10] 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 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 nonfinancial data[Footnote 11] to determine the 
costs of achieving performance goals, delivering programs, and pursuing 
other activities. The principal purpose is to assess 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 who 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 decision making. MCA differs from financial 
accounting in that it is primarily intended to provide information for 
internal decision making rather than external reporting. 

Evolution of Managerial Cost Accounting: 

With the growth of continuous improvement initiatives since the 1970s, 
the role of cost accounting has evolved in many organizations from 
measuring and reporting business initiatives to helping organizations 
implement management initiatives.[Footnote 12] Activity-based Costing 
(ABC), which is a type of MCA, is a set of management information and 
accounting methods used to identify, describe, assign costs to, and 
report on an organization's operations.[Footnote 13] Activity-based 
Costing/Management (ABC/M) uses ABC to achieve the broad objective of 
improving management decision making and reducing costs by providing 
accurate cost information and encouraging continuous improvement 
efforts.[Footnote 14] 

The private sector began to use ABC/M in the 1980s to analyze work 
activities and provide information on core business processes to 
promote effectiveness in an era of increased competitiveness.[Footnote 
15] At the same time, the federal government was experiencing growing 
problems in financial management, with frequent disclosures of fraud, 
waste, and abuse in federal programs. In 1985 the Comptroller General 
issued a two-volume report, entitled Managing the Cost of Government: 
Building an Effective Financial Management Structure, which provided 
the framework for the reforms needed to improve federal financial 
management and manage the cost of government.[Footnote 16] 

The Chief Financial Officers Act (CFO Act) of 1990[Footnote 17] 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 managerial cost accounting, 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 end 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. 

The CFO Act was followed by the Government Performance and Results Act 
(GPRA) in 1993.[Footnote 18] GPRA requires agencies to develop 
strategic plans, set performance goals, and report on actual 
performance compared to goals each year. Accurate cost information can 
enhance the utility of selected performance measures. GPRA, in turn, 
was followed by the Government Management and Reform Act (GMRA) of 
1994,[Footnote 19] which made the CFO Act's pilot program for annual 
audited agency financial statements permanent and expanded this 
requirement to all agencies covered by the CFO Act. 

The Federal Financial Management Improvement Act of 1996[Footnote 20] 
(FFMIA) built on this foundation in order to help generate reliable, 
useful, and timely information for management decision making and to 
help ensure ongoing accountability by requiring agencies covered by the 
CFO Act[Footnote 21] to have systems that comply substantially with 
federal accounting standards, such as SFFAS 4, federal financial 
management systems requirements and the U.S. Government Standard 
General Ledger (SGL) [Footnote 22] at the transaction level. In 
addition, FFMIA requires that we report to the Congress on its 
implementation status each year. While the number of CFO Act agencies 
receiving unqualified opinions on their financial statements has 
increased from 11 in fiscal year 1997 to 19 in fiscal year 2005, the 
ability of federal financial management systems to fully address FFMIA 
requirements has not advanced at the same pace. For fiscal year 1997, 
20 agencies were reported as having systems that were not in 
substantial compliance with at least one of the three FFMIA systems 
requirements; for fiscal year 2005, auditors for 18 of the CFO Act 
agencies reported that the agencies' financial management systems did 
not substantially comply with at least one of the three FFMIA 
requirements. 

The federal government is one of the largest, most complex 
organizations in the world, and operating, maintaining, and updating 
its financial management systems is a monumental economic and technical 
challenge. The 10 agencies reviewed through our series of MCA 
engagements over the past 2 years represent a broad diversity of 
mission and purpose, and accounted for over 88 percent of the reported 
total net costs of civilian federal government agencies in fiscal year 
2005 (see table 1). 

Table 1: Reported Costs and Earned Revenues for 10 Civilian Agencies, 
for the Fiscal Year Ended September 30, 2005: 

(dollars in billions). 

Department of Health and Human Services; 
Gross cost[C]: $623.4; 
Earned revenue[D]: $39.6; 
Percentage earned revenue: [Empty]; 
Net cost[E]: $583.8; 
Percentage net cost: [Empty]. 

Social Security Administration; 
Gross cost[C]: 572.1; 
Earned revenue[D]: -2.0; 
Percentage earned revenue: [Empty]; 
Net cost[E]: 574.1; 
Percentage net cost: [Empty]. 

Department of Veterans Affairs; 
Gross cost[C]: 276.6; 
Earned revenue[D]: 3.4; 
Percentage earned revenue: [Empty]; 
Net cost[E]: 273.2; 
Percentage net cost: [Empty]. 

Department of Agriculture; 
Gross cost[C]: 112.6; 
Earned revenue[D]: 19.9; 
Percentage earned revenue: [Empty]; 
Net cost[E]: 92.7; 
Percentage net cost: [Empty]. 

Department of the Treasury[A]; 
Gross cost[C]: 82.3; 
Earned revenue[D]: 3.1; 
Percentage earned revenue: [Empty]; 
Net cost[E]: 79.2; 
Percentage net cost: [Empty]. 

Department of Education; 
Gross cost[C]: 75.6; 
Earned revenue[D]: 4.7; 
Percentage earned revenue: [Empty]; 
Net cost[E]: 70.9; 
Percentage net cost: [Empty]. 

Department of Transportation; 
Gross cost[C]: 62.4; 
Earned revenue[D]: 0.6; 
Percentage earned revenue: [Empty]; 
Net cost[E]: 61.8; 
Percentage net cost: [Empty]. 

Department of Labor; 
Gross cost[C]: 50.0; 
Earned revenue[D]: 0.0; 
Percentage earned revenue: [Empty]; 
Net cost[E]: 50.0; 
Percentage net cost: [Empty]. 

Department of Housing and Urban Development; 
Gross cost[C]: 43.6; 
Earned revenue[D]: 1.3; 
Percentage earned revenue: [Empty]; 
Net cost[E]: 42.3; 
Percentage net cost: [Empty]. 

Department of the Interior; 
Gross cost[C]: 19.5; 
Earned revenue[D]: 3.2; 
Percentage earned revenue: [Empty]; 
Net cost[E]: 16.3; 
Percentage net cost: [Empty]. 

Subtotal; 
Gross cost[C]: $1,918.1; 
Earned revenue[D]: $73.8; 
Percentage earned revenue: 37.3%; 
Net cost[E]: $1,844.3; 
Percentage net cost: 88.2%. 

Other civilian agencies; 
Gross cost[C]: 371.4; 
Earned revenue[D]: 124.1; 
Percentage earned revenue: 62.7%; 
Net cost[E]: 247.3; 
Percentage net cost: 11.8%. 

Total civilian agencies[B]; 
Gross cost[C]: $2,289.5; 
Earned revenue[D]: $197.9; 
Percentage earned revenue: 100.0%; 
Net cost[E]: $2,091.6; 
Percentage net cost: 100.0%. 

Source: Department of the Treasury, Financial Management Service, 
Financial Report of the United States Government, 2005, Washington, 
D.C. 

[A] Interest on Treasury securities held by the public is not included. 

[B] This equals the total costs and revenues for the U.S. government, 
less costs and revenues for the Department of Defense and interest on 
Treasury securities held by the public. 

[C] Gross cost is the full cost of providing agency goods and services. 

[D] Earned revenues arise when a government entity provides goods and 
services to the public or to another government entity for a price. 

[E] Net cost equals the gross cost less earned revenues. 

[End of table] 

Scope and Methodology: 

This report summarizes the results of our series of reviews concerning 
how 10 large federal agencies generate and use MCA information. In 
addition to summarizing our prior reports, we also researched 
literature on MCA implementation to learn whether the MCA practices and 
problems we found were similar to those in other federal agencies, 
state and local government, and private industry. The reports we 
summarized and the literature we reviewed are listed in appendix I. 

We followed a consistent methodology when reviewing MCA at each of the 
10 large civilian agencies. To obtain an understanding of how agencies 
generated managerial cost information, we reviewed documentation and 
interviewed officials on the status of MCA system implementation and 
the related obstacles to managerial costing. We also examined agency 
guidance and looked for evidence of leadership on and commitment to the 
implementation of entitywide cost management practices. Using the 
Standards for Internal Control in the Federal Government [Footnote 23] 
as a guide, we identified internal controls over the reliability of 
financial and nonfinancial information used in MCA. To determine how 
managers used cost information to support decision making and provide 
accountability for government resources, we obtained an understanding 
of how agencies used cost accounting data for budgeting, costing 
services or products, preparing the Statement of Net Cost, managing 
contractors' reimbursable costs, and other managerial uses through a 
review of documentation provided by the agencies and interviews with 
agency officials. 

During our reviews, we visited agency headquarters in Washington, D.C. 
We also visited certain component agencies at each department and held 
teleconferences with other agency officials as necessary. When 
possible, we corroborated information obtained in interviews with 
documents on policies, procedures, system descriptions, and flowcharts. 
We also reviewed prior Office of Inspector General (OIG), independent 
public accountant, and our reports on MCA activities, systems, and 
data. In performing our work, we issued five reports, which are listed 
in footnote 4. The agencies provided comments on each of these five 
report drafts, which we considered and incorporated as appropriate. We 
performed this body of work in accordance with U.S. generally accepted 
government auditing standards between March 2005 and January 2007. We 
did not request comments from affected agencies on a draft of this 
capping report because, in accordance with our Agency Protocols, we do 
not seek comments from agencies when a product largely reflects our 
prior work.[Footnote 24] This capping report was prepared between 
September 2006 and June 2007 in accordance with generally accepted 
government auditing standards. 

Few Agencies Have MCA Systems That Can Provide Managers with Cost 
Information for Daily Use: 

Of the 10 CFO Act agencies we reviewed, only DOI and SSA had MCA 
systems in place that could provide managers entitywide with cost 
information on a routine basis for daily decision making. In addition, 
DOL had recently implemented a departmentwide MCA system and was 
developing plans for using it, and DOT had made significant progress in 
implementing MCA departmentwide. Three departments--USDA, HHS, and HUD-
-planned to implement MCA systems when upgrading their overall 
financial management systems, but they had not yet adequately 
considered their MCA needs. The remaining three departments--Education, 
Treasury, and VA--did not yet have procedures in place to ensure 
implementation of MCA departmentwide, although VA was initiating a 
review to explore opportunities for a departmentwide MCA system. 
Further, some component agencies at Education, Treasury, and VA had 
implemented their own MCA systems. The usefulness of each of the 
systems we reviewed, however, depends on the reliability of the 
financial and nonfinancial data used. Our review found many agencies 
still may not have accurate, reliable, and timely data throughout the 
year. 

Entitywide MCA Implementation: 

DOI, SSA, DOL, and DOT had all chosen to implement MCA entitywide. The 
following paragraphs note the systems each implemented. 

DOI has a departmentwide MCA system known as Activity-based Cost/ 
Management (ABC/M), which provides information about the cost of work 
activities. Financial data are extracted daily from the DOI bureaus' 
stand-alone general ledger systems, and nonfinancial data are obtained 
from other bureau source systems. ABC/M is intended to measure the cost 
of activities, such as issuing permits, maintaining trails, and 
performing site inspections. ABC/M provides information about the cost 
of approximately 300 work activities, which align to DOI's four 
strategic mission objectives. Nonfinancial data such as hours, miles, 
or acres are obtained from various source systems maintained by each of 
the bureaus and may be entered either manually or extracted from these 
systems. As noted later in this report, DOI's noncompliance with FFMIA 
requirements could affect the quality of financial data exported to its 
MCA systems. DOI is in the process of implementing a new integrated 
financial management system, Financial Business Management System 
(FBMS). The current FBMS implementation plan for the general ledger 
module calls for a phased implementation with seven deployments 
beginning in April 2006 and ending in fiscal year 2011. 

SSA's agencywide MCA system, the Cost Analysis System (CAS), was first 
put in use in 1976. CAS collects data on full costs from SSA's 
nationwide network of offices, except for those expenses incurred by 
other agencies for SSA's benefit, such as certain postretirement costs 
paid by OPM. According to SSA officials, CAS integrates data from 
payroll, work measurement accounting, and other management information 
systems, and assigns costs to specific workloads. To better integrate 
data and systems for decision making, management is in the process of 
implementing the Managerial Cost Analysis System (MCAS), a new second- 
generation MCA system. SSA officials expect that MCAS will be 
implemented by September 2008. MCAS is intended to eliminate several 
legacy systems and integrate with a new data warehouse, provide more 
detailed management information, and help address outstanding audit 
findings, which noted a lack of policies, procedures, and documentation 
concerning the collection, review, and reporting of information for 
some individual performance indicators. In addition to annual financial 
statement audits, SSA's system of internal controls includes 
demonstrated tone at the top setting SSA's values, philosophy, and 
operating style; documented MCA policies and procedures; edit checks 
and variance analysis to help ensure data quality; routine monitoring 
and assessment of performance and financial information; and regular 
internal review of financial and feeder systems. 

In its 2004 Financial Data Integration Improvement Plan, DOL identified 
MCA as one way to address its most pressing management challenges. DOL 
assigned responsibility for MCA development to the Office of the Chief 
Financial Officer. According to DOL officials, the resulting MCA tool, 
Cost Analysis Manager (CAM), will be able to identify, accumulate, and 
assign costs to outputs and bring relevant cost information to the 
desktop computers of managers throughout the department. Component- 
specific CAM models were developed in all 10 DOL mission agencies and 5 
of the 8 support offices. Planned systemwide refinements included 
automating the data extraction/import process and adding programs and 
outputs to baseline models. 

In November 2003, DOT implemented a new integrated financial management 
system called Delphi, a component of which may be used by DOT's 12 
operating administrations (OA) for cost accounting. Each of the 12 OAs 
was developing its own MCA system tailored to its respective needs. In 
addition, the Federal Aviation Reauthorization Act of 1996 requires the 
Federal Aviation Administration (FAA), one of the largest OAs, to 
develop a cost accounting system that accurately reflects the asset 
value, operating and overhead cost, and other financial measurement and 
reporting aspects of its operations.[Footnote 25] According to DOT 
officials, FAA has completed implementing its MCA system, the Cost 
Accounting System (CAS), and CAS is already linked to Delphi. The other 
DOT OAs expected to have MCA models in place by the end of fiscal year 
2007. 

Some Agencies Are Planning to Implement MCA When Upgrading Their 
Financial Management Systems: 

USDA, HHS, and HUD planned to implement MCA systems as part of their 
ongoing efforts to upgrade their overall financial management systems, 
but they had not yet adequately considered their MCA needs at the time 
of our reviews. 

USDA's current financial system was not designed to provide in-depth 
MCA information; however, a draft Financial Data Integration 
Improvement Plan (FDIIP) refers in general terms to incorporating MCA 
into the agency's financial management improvement efforts. The FDIIP 
includes the Financial Management Modernization Initiative (FMMI) 
system to replace USDA's current financial system. FMMI is scheduled to 
be fully implemented by the end of fiscal year 2012, and management 
expects it to include a cost accounting module. However, except for the 
date of overall implementation for FMMI and ongoing MCA initiatives at 
the Farm Services Agency, the Forest Service, and Rural Development, 
the FDIIP had not yet set time frames or requirements for the other 
component agencies to improve cost management. 

On its own initiative, one USDA component, the Food and Nutrition 
Service (FNS), implemented a National Data Bank (NDB) system to 
integrate detailed cost and program performance information with its 
state grantee program data reporting system. NDB includes both FNS and 
department-level direct and indirect costs. Officials said that 
internal controls over NDB data include audits by state auditors and 
CPA firms under the OMB Circular No. A-133 single audit process to 
determine whether state program and administrative costs charged to FNS 
are allowable. 

HHS is currently implementing a new financial management system, 
Unified Financial Management System (UFMS), a commercial, off-the-shelf 
(COTS)-based Oracle software package, which is expected to replace 
outdated systems by fiscal year 2008. According to HHS officials, plans 
for UFMS include a module, Oracle Projects, which can be used for cost 
accounting. HHS officials told us that all components will incorporate 
Oracle Projects in their planned UFMS implementation and tailor it to 
meet their needs. However, there were differences between HHS 
expectations and plans for implementing Oracle Projects at the two 
components we reviewed. Specifically, a Center for Medicare and 
Medicaid Services (CMS) official told us CMS was uncertain whether it 
would use the Oracle Projects cost accounting module for MCA. 
Similarly, a Centers for Disease Control (CDC) official said that CDC 
had no current plans to use the module for MCA and had not yet 
completed a full assessment of its MCA needs. In the meantime, the 
Medicare Program Division at CMS developed its own ABC system for 
contractors to report their costs. The system took costs from the 
contractors' accounting systems, distributed the costs among 
activities, and provided CMS managers with fully loaded costs for 
products, services, and activities, which they use to monitor 
contractor performance. 

In order to obtain MCA information, HUD currently must accumulate and 
integrate financial and nonfinancial data elements from a number of 
sources including a workload survey used to allocate costs to programs, 
and a financial Data Mart.[Footnote 26] In response to our review, HUD 
acknowledged that a major core financial management systems 
modernization effort, the HUD Integrated Financial Management 
Improvement Project (HIFMIP), presented an opportunity to reassess the 
application of MCA practices at HUD. HIFMIP is an enterprisewide 
initiative to develop an integrated accounting system that HUD plans to 
have fully implemented in 2013. HUD expected, however, that any 
increased application of MCA would be done through its financial Data 
Mart which, according to HUD, provided the capability to combine 
accounting/cost data with other data sources to produce automated 
management reports. HUD also planned to pilot a full ABC effort in its 
Single Family Housing Mortgage Insurance Programs area and, upon 
assessment of that pilot effort, consider applying ABC in other areas. 

Some Agency Components Developed MCA Systems Independently: 

Education, Treasury, and VA did not have plans in place to implement 
MCA departmentwide and had not taken steps at the department level to 
monitor component-level MCA implementation. However, each of the three 
departments had one or more component agencies that had developed its 
own MCA systems. 

At Education, only 1 of 10 program offices, Federal Student Aid (FSA), 
had a MCA system in place at the time of our review. Education did not 
promote or monitor MCA implementation at the component offices, nor did 
it have policies and procedures for implementing MCA departmentwide. 
FSA's Activity-based Management system was initiated in response to the 
1998 amendments to the Higher Education Act of 1965[Footnote 27] that 
designated FSA a performance-based organization and required it to 
reduce administrative costs.[Footnote 28] FSA used COTS software to 
assign full costs, both direct and indirect, and non-FSA overhead, to 
business processes. 

By policy, Treasury delegated responsibility to implement MCA to its 
bureaus. Treasury retained oversight responsibility to ensure 
consistent implementation of MCA departmentwide, but had no specific 
procedures in place to ensure that consistent, periodic, department- 
level oversight was conducted. Treasury's Bureau of Engraving and 
Printing (BEP) used COTS software to accumulate and assign full costs 
to products, organizational units, and specific operations. In addition 
to annual financial statement audits, various controls over financial 
and nonfinancial data were in place at BEP including periodic review of 
labor, material, and overhead costs, and risk-based inventory cycle 
counts of production units such as ink and paper to measure utilization 
and shrinkage. Similarly, Treasury's Financial Management Service (FMS) 
used COTS software to integrate financial and nonfinancial data from 
payroll, travel, requisition, and property systems. Internal controls 
included data validation rules to help ensure that transmitted data 
were accurate and fell within predetermined ranges, and FMS officials 
said that they reviewed data for reasonableness and researched 
variances. 

By design and policy, VA did not have a departmentwide MCA model at the 
time of our review. Officials told us that VA's financial management 
priority had been the removal of a material weakness related to the 
lack of an integrated financial management system at the department. 
Subsequent to our review, however, VA officials said that they were 
investigating opportunities for a departmentwide MCA system.[Footnote 
29] They said that a centralized MCA system would improve the 
accessibility and availability of cost accounting data and enhance 
managerial decision-making throughout VA. Further, while one VA 
component agency had discontinued use of its MCA system in 2003, VA's 
Veterans Health Administration (VHA) used its Decision Support System 
(DSS) for MCA. DSS enabled cost analyses by VHA location, program, and 
activity, and tracked costs for individual patient care, although the 
extent and nature of DSS use varied from one medical facility to the 
next because of differences in staff training. DSS obtained data from 
49 feeder sources, including VA's general ledger and VHA's Veteran's 
Health Information Systems and Technology Architecture (VistA), a 
nonfinancial workload information system. 

Agencies Need Reliable Financial and Nonfinancial Data throughout the 
Year for MCA Systems to Be Useful: 

The completeness and accuracy of the data in MCA systems depends on the 
quality of the data from feeder systems, both financial and 
nonfinancial. Many agencies still may not have accurate, reliable, and 
timely financial and nonfinancial data available throughout the year. 

Problems with Financial Data: 

Although agencies have made improvements and have other enhancements 
under way, the systems deficiencies that have prompted unfavorable 
FFMIA assessments indicate that the financial management systems of 
many agencies are still not able to produce reliable, useful, and 
timely financial information routinely. As shown in table 2, in fiscal 
year 2005, independent auditors concluded that 8 of the 10 agencies 
reviewed in our series of MCA engagements had systems that were not 
compliant with one or more of the three FFMIA requirements.[Footnote 
30] Only SSA and DOL met all three FFMIA requirements. 

Table 2: Auditors' FFMIA Assessments for Fiscal Year 2005: 

CFO Act departments/agencies. 

Department of Agriculture; 
Auditors' assessment of FFMIA compliance: Yes: [Empty]; 
Auditors' assessment of FFMIA compliance: No: X; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: X; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: X; 
Areas auditors identified as not in substantial compliance: SGL: X. 

Department of Education; 
Auditors' assessment of FFMIA compliance: Yes: [Empty]; 
Auditors' assessment of FFMIA compliance: No: X; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: X; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: [Empty]; 
Areas auditors identified as not in substantial compliance: SGL: 
[Empty]. 

Department of Health and Human Services; 
Auditors' assessment of FFMIA compliance: Yes: [Empty]; 
Auditors' assessment of FFMIA compliance: No: X; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: X; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: [Empty]; 
Areas auditors identified as not in substantial compliance: SGL: X. 

Department of Housing and Urban Development; 
Auditors' assessment of FFMIA compliance: Yes: [Empty]; 
Auditors' assessment of FFMIA compliance: No: X; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: X; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: [Empty]; 
Areas auditors identified as not in substantial compliance: SGL: 
[Empty]. 

Department of the Interior; 
Auditors' assessment of FFMIA compliance: Yes: [Empty]; 
Auditors' assessment of FFMIA compliance: No: X; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: [Empty]; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: X; 
Areas auditors identified as not in substantial compliance: SGL: X. 

Department of Labor; 
Auditors' assessment of FFMIA compliance: Yes: X; 
Auditors' assessment of FFMIA compliance: No: [Empty]; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: [Empty]; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: [Empty]; 
Areas auditors identified as not in substantial compliance: SGL: 
[Empty]. 

Department of Transportation; 
Auditors' assessment of FFMIA compliance: Yes: [Empty]; 
Auditors' assessment of FFMIA compliance: No: X; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: X; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: X; 
Areas auditors identified as not in substantial compliance: SGL: X. 

Department of the Treasury; 
Auditors' assessment of FFMIA compliance: Yes: [Empty]; 
Auditors' assessment of FFMIA compliance: No: X; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: X; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: X; 
Areas auditors identified as not in substantial compliance: SGL: X. 

Department of Veterans Affairs; 
Auditors' assessment of FFMIA compliance: Yes: [Empty]; 
Auditors' assessment of FFMIA compliance: No: X; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: X; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: [Empty]; 
Areas auditors identified as not in substantial compliance: SGL: 
[Empty]. 

Social Security Administration; 
Auditors' assessment of FFMIA compliance: Yes: X; 
Auditors' assessment of FFMIA compliance: No: [Empty]; 
Areas auditors identified as not in substantial compliance: Systems 
requirements: [Empty]; 
Areas auditors identified as not in substantial compliance: Accounting 
standards: [Empty]; 
Areas auditors identified as not in substantial compliance: SGL: 
[Empty]. 

Source: GAO, Financial Management: Improvements Under Way but Serious 
Financial Systems Problems Persist, GAO-06-970 (Washington, D.C.: 
September 2006), p. 68. 

[End of table] 

Noncompliance with federal systems requirements: 

As seen in table 2, 7 of the 10 agencies we reviewed had systems that 
were not in compliance with federal financial management systems 
requirements, as required by FFMIA. These 7 agencies had problems such 
as nonintegrated financial management systems, inadequate 
reconciliation procedures, a lack of accurate and timely recording of 
financial information, and weak security controls over information 
systems. Agencies that lack integrated financial systems typically 
expend major effort and resources to develop information that their 
systems should be able to provide on a daily or recurring basis. In 
addition, opportunities for errors are increased when agency systems 
are not integrated. Improper reconciliation procedures contribute to 
errors in financial reporting. A reconciliation process, whether manual 
or automated, is a necessary and valuable part of a sound financial 
management system. The less integrated the financial management system, 
the greater the need for adequate reconciliations because data are 
being accumulated from a number of different sources. Accurate and 
timely recording of financial information is also essential for 
successful financial management. Agencies that have not accurately 
recorded transactions throughout the fiscal year must often make 
substantial manual efforts at year-end to prepare financial statements. 
These extensive last minute efforts are susceptible to error and 
increase the risk of misstatements. Finally, information security 
weaknesses place vast amounts of government assets at risk of 
inadvertent or deliberate misuse, financial information at risk of 
unauthorized modification or destruction, other sensitive information 
at risk of inappropriate disclosure, and critical operations at risk of 
disruption. Unresolved information security weaknesses can also 
compromise the reliability and availability of data recorded in or 
transmitted by an agency's financial management system. 

Lack of adherence to federal accounting standards: 

According to their independent auditors, 4 of the 10 agencies we 
reviewed had systems that were not in compliance with federal 
accounting standards. Adherence to federal accounting standards 
requires that agencies account for transactions in a way that ensures 
federal financial reports provide users with understandable, relevant, 
and reliable information about the financial position, activities, and 
results of government operations. In their FFMIA reviews, auditors 
reported that three standards were most troublesome for agencies: SFFAS 
No. 1, Accounting for Selected Assets and Liabilities; SFFAS No. 4, 
Managerial Cost Accounting Concepts and Standards; and SFFAS No. 6, 
Accounting for Property, Plant, and Equipment. In particular, SFFAS 4 
continued to be difficult for federal managers to implement. 

Noncompliance with the Standard General Ledger: 

Five of the 10 agencies we reviewed did not have systems that 
implemented the SGL at the transaction level, as required by FFMIA. 
Using the SGL promotes consistency in financial transaction processing 
and reporting by providing a uniform chart of accounts and pro forma 
transactions that give a basis for comparison at the agency and 
governmentwide levels. This standardizes the accumulation of agency 
financial information, enhances financial control, and supports 
financial statement preparation and other external reporting. Failure 
to use the SGL impedes the ability of the federal government to 
complete accurate, governmentwide financial statements. 

During our series of MCA reviews, we noted numerous problems with 
financial data that illustrate the types of issues discussed in our 
FFMIA reviews. For instance, for fiscal year 2005, USDA's OIG reported 
that the agency needed stronger internal controls to improve the 
timeliness and accuracy of financial data available to managers and 
cited material weaknesses related to overall financial management 
across the agency. The agency's independent auditor identified 
"abnormal balances" in more than 90 accounts, totaling over $1 billion, 
which had not been fully researched or corrected before the end of the 
fiscal year. Similarly, the Forest Service, a component of USDA, 
received an unqualified opinion on its fiscal year 2005 financial 
statements after making 177 accounting adjustments with an absolute 
value of $1.9 billion. For fiscal year 2006, the USDA OIG again cited a 
material weakness related to improvements needed in overall financial 
management across the agency. Further, while indicating that the Forest 
Service made significant improvement in its reporting processes during 
fiscal year 2006, the OIG noted areas where further improvements are 
needed before the Forest Service can produce accurate and timely 
financial information. 

Independent auditors also reported serious weaknesses in financial 
systems and processes at HHS, HUD, and DOT. At HHS, system limitations 
led many operating divisions to record numerous entries outside of the 
general ledger system, which required intensive manual procedures to 
prepare the year-end financial statements for fiscal year 2005. 
Similarly, according to the independent auditor's report covering the 
fiscal year 2006 financial statements, HHS continued to have serious 
internal control weaknesses in its financial management systems and 
processes, and still needed intensive manual procedures to prepare the 
year-end financial statements. In November 2005, HUD's OIG reported 
that the department relied on extensive manual procedures that were 
costly, labor intensive, and not always effective to prepare its annual 
financial statements. These problems continued in fiscal year 2006, 
with the HUD OIG reporting that HUD still relied on extensive 
compensating procedures. The DOT OIG reported that DOT had three 
material weaknesses affecting financial reporting for fiscal year 2005. 
In particular, the DOT OIG reported continuing serious weaknesses in 
timely processing of transactions and reconciliation of accounts at 
FAA, and problems with financial statement preparation and analysis and 
resolving reconciliation differences at the Federal Highway 
Administration (FHWA). For fiscal year 2006, the OIG reported that DOT 
still had two material weaknesses: (1) untimely processing of 
transactions and accounting for the FAA construction in progress 
account and (2) financial management, reporting, and oversight problems 
at the Highway Trust Fund agencies, including FHWA. 

Problems with Nonfinancial Data: 

Agencies also need to ensure that nonfinancial data such as data on 
labor distribution, performance and workload, is accurate. Nonfinancial 
data are as important as financial data in determining reliable 
managerial cost information because they provide the basis for 
assigning costs to various programs, activities, or outputs and for 
determining program efficiency. For example, overcounting the number of 
people trained in a job training program in one city would result in an 
understatement of the unit cost of training each program participant in 
that city.[Footnote 31] Due to the inaccurate nonfinancial data, the 
program in this city could appear, falsely, to be more efficient in 
execution in comparison to similar programs in other cities. 

As with financial data, adequately designed controls and properly 
implemented procedures for nonfinancial data are key when determining 
the cost of work outputs. In some of our MCA reviews, we noted that 
procedures to ensure reliability of nonfinancial data were not 
documented. Also, a lack of readily available system documentation 
could inhibit efforts to determine whether costs are properly assigned 
and preclude an opportunity to provide guidance for employees using the 
system. Some agencies rely on controls from the offices providing the 
nonfinancial data. Examples of problems with controls over nonfinancial 
data at Education, DOI, DOL, and VA follow. 

Education's FSA officials relied mainly on controls within the offices 
that are the sources of nonfinancial data. In addition, they reviewed 
the nonfinancial performance data periodically for anomalies by 
comparing data to standard system reports, and performing trend 
analyses and comparing data for consistency. FSA, however, had not 
documented the design of controls that are being used to help ensure 
the reliability of the nonfinancial data, nor had it documented that 
control procedures were properly completed. 

DOI officials stated that DOI does not have written procedures for 
monitoring the quality and accuracy of its ABC/M data and that not all 
bureaus have written procedures for performance data validation and 
verification. In addition, controls over nonfinancial data are 
generally limited to a bureau-level review for reasonableness. DOI has 
acknowledged the need for independent department-level validation and 
verification of nonfinancial ABC/M data, and plans to follow up in 2007 
to ensure that bureaus have implemented data validation and 
verification standards and procedures. 

In its fiscal year 2004 performance plan, DOL identified the validation 
of labor distribution and performance data as one of its challenges. 
Labor cost is often the predominant factor when determining the cost of 
an activity. At DOL's largest component agency, the Employment and 
Training Administration (ETA),[Footnote 32] the OIG noted high error 
rates in performance data reported by grantees. In 2004 the OIG also 
raised concerns about DOL using those data for decision making. DOL 
officials responded that they were implementing additional data 
validation systems to address these issues. In fiscal year 2007, the 
OIG plans to audit the new data validation system developed by ETA to 
improve the reliability of program performance information reported by 
its grantees. 

At VA's Veterans Health Administration (VHA), both independent auditors 
and the OIG have raised concerns about the quality of data for feeder 
systems for its Decision Support System (DSS). DSS has 49 feeder 
sources, including VistA. In August 2004, the OIG reported that most of 
the legacy systems, such as VistA, at Bay Pines Medical Center 
contained inaccurate data. The OIG further stated that this might be a 
systemic problem throughout VHA. In addition, the VA's VHA Decision 
Support Office was unable to readily produce documentation of the 
mechanism used to assign indirect costs to cost objects in DSS. 
Subsequent to our audit, VHA officials said they took steps to address 
these issues, including the development and implementation of a 
standardized audit protocol to confirm the accuracy of the data fed 
into DSS and the uniformity of its processing. 

Few Agencies Use Cost Information Routinely to Manage Their Operations: 

We found that progress implementing MCA practices, and thus the 
development of uses for cost information, while ongoing, is slow. Among 
the 10 agencies we reviewed, only DOI and SSA routinely used cost 
information entitywide to make decisions. In addition, DOL had recently 
implemented its MCA system, and was in the process of developing plans 
for using it. The other agencies used cost information primarily for 
external financial reporting in the Statement of Net Cost, and they 
cited isolated examples of how cost information was used to inform 
management decisions. These agencies did not provide evidence to us 
that cost information was routinely used to inform their decision 
making. Finally, some component agencies of departments that did not 
have overall MCA systems, including BEP and FMS at Treasury, FAA at 
DOT, and FNS at USDA, used cost information more routinely to, among 
other things, evaluate programs, formulate budgets, and set fees and 
prices. 

Entitywide Uses of MCA Information: 

Management at 2 of the 10 agencies we reviewed routinely used MCA to 
make decisions, and a third agency was in the process of developing 
uses. 

DOI used cost information to provide visibility on the costs of 
activities and initiatives of interest to departmental leadership. For 
example, a graphical report to senior Interior executives, called the 
Executive Dashboard, provided department leadership with access to some 
department-level program cost information. MCA was used to support 
recommendations to change work processes, reallocate resources, and 
prepare budgets and performance targets. DOI bureaus used MCA to 
project future resource needs based on estimated workloads, identify 
and examine workload trends, and set fees. 

SSA's uses of MCA information included tracking productivity 
improvement, allocating administrative expenses to various funds, 
determining unit costs and production rates for various time periods, 
tracking workload output, measuring performance, assisting with budget 
formulation and execution, and facilitating recovery of the full cost 
for reimbursable activities such as earning records requests from 
pension funds and individuals. For example, during one of our 
subsequent reviews, an SSA official said SSA used workload information 
from its Unified Measurement System, a component of the MCA system, and 
other financial information to reallocate workloads among two different 
field offices to better match available staff resources.[Footnote 33] 
SSA also used the data to compare the estimated costs of moving staff 
versus moving work. 

At the time of our review, DOL had only recently implemented its MCA 
system. DOL officials identified many potential uses for MCA data they 
expect will lead to better information for managerial decisions, and 
said they plan to use MCA to identify and analyze: 

* program costs across regions; 

* comparative costs of grant management activities, by type of grant; 

* full administrative costs related to the development of policies, 
regulations, and legislative proposals; 

* unit costs of training and employment programs; and: 

* budget justifications and resource allocations. 

For example, in one of our subsequent reviews,[Footnote 34] Labor's ETA 
officials said they used financial information to help manage 
construction contracts for the $1.4 billion Job Corps program. They 
said they used a report with project cost and schedule data to make 
program management decisions during monthly meetings with contractors. 
As another example, officials from Labor's Employee Benefits Security 
Administration (EBSA) told us they used obligation data from the core 
accounting system and unit cost data from the cost accounting system to 
allocate funding resources and manage their business. EBSA managers 
told us that they used the data to (1) determine the effect of funding 
constraints; (2) assess whether extraordinary measures, like a hiring 
freeze, are needed to remain within a given funding level; and (3) 
target resources to achieve the program's objectives. 

Component Agency Uses of MCA Information: 

We also found several agency components that were using cost 
information to make decisions: BEP and FMS at Treasury, FAA at DOT, FNS 
at USDA, and FSA at Education. 

BEP officials cited three ways they used MCA information. They were 
analyzing cost and spoilage information to help implement a new 
automated inspection process which, according to officials, resulted in 
a substantial reduction in cost without jeopardizing quality. They also 
told us they used MCA information to analyze the costs and benefits of 
a proposed robotics currency packaging system which, according to 
officials, could significantly reduce staffing at their manufacturing 
facilities. Finally, BEP officials cited using the information to 
identify decreasing efficiencies in older manufacturing presses as a 
way of targeting machines for overhaul. 

According to FMS officials, examples of MCA information uses include 
formulating budgets, evaluating programs, and setting fees and prices 
for services provided to other government entities. Officials also told 
us FMS analyzes and reports unit costs for federal government payments 
and collections so it can provide services at a lower cost. 

FAA used cost information to decide whether to contract out Air Traffic 
Organization Flight Service Stations. In addition to operating savings, 
FAA identified savings in the Facilities and Equipment appropriation as 
well as a reduction of 400 staff. FAA estimated total savings to be 
about $2.2 billion over 10 years for contracting out service stations. 
FAA also used cost information to cancel a $27 million weather program 
and to modify an airport radar surveillance program, avoiding a cost of 
$7 million. 

FNS used cost data to investigate changes in program participation 
rates and cost. For example, FNS officials told us they used cost data 
to analyze Women, Infants and Children (WIC) program cost increases 
related to the proliferation of WIC-only stores, which often charged 
higher prices than stores that also sell to the general public. 
Subsequent legislation required that average payments to WIC-only 
stores not be higher than average payments to other stores. Officials 
also stated that FNS used cost data to identify declining Food Stamp 
participation rates and costs in one state. 

At FSA, officials said they used unit cost information to renegotiate 
and consolidate several contracts relating to the administration of 
FSA's direct loan program and reduce FSA's unit cost for loan 
consolidations from $115 per unit to $66 per unit, over a period of 18 
months.[Footnote 35] 

Agency Leadership Is Fundamental to Successful MCA Implementation: 

Strong leadership and commitment from senior management may be the 
single most important elements in implementing and sustaining the 
institutional and cultural changes MCA requires. Leadership that 
understands the importance of timely, accurate cost information and can 
communicate its uses to managers is critical to the success of an MCA 
program. Because implementing MCA takes time, requires monitoring, and 
inevitably mid-course adjustments, the managers who will use the 
information need to see its value and take ownership of the system. 
Strong leadership can set the tone and the expectations to make this 
happen, and help change the culture in the federal government to one of 
managing costs, and not just managing the budget. 

Strong Leadership Is Critical to Promoting the Benefits of MCA: 

We found strong leadership for MCA implementation at DOI, DOL, SSA, and 
DOT. Other agencies needed to step up efforts to promote the benefits 
of MCA and oversee its implementation and use throughout their 
respective agencies. At many agencies, stronger leadership was needed 
to ensure that both the larger agency and its components have policies 
requiring MCA implementation, procedures to monitor implementation 
entitywide, and internal controls to help ensure the reliability of 
financial and nonfinancial data used in MCA systems. Examples of how 
leadership at DOI, DOL, SSA, and DOT promoted the benefits of MCA and 
oversaw its implementation follow. 

DOI leadership, including the Secretary, took an active role in 
promoting MCA implementation and use at its bureaus. DOI 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 an FBMS steering committee; and issuing departmentwide policy 
and procedural guidance to ensure that bureau cost data are in line 
with Interior strategic goals. 

In 2004, DOL identified MCA as one way to address its most pressing 
management challenges and assigned responsibility for its development 
to the Office of the Chief Financial Officer. DOL's Secretary discussed 
the MCA system in meetings with department heads, and component- 
specific MCA models were developed and put in place at all 10 mission 
agencies and 5 of the 8 support offices. 

SSA's basic cost allocation policy was established about 1965, and SSA 
has used its existing Cost Analysis System (CAS) for MCA for over 30 
years. In her opening message in the agency's 2004 Performance and 
Accountability Report, SSA's Commissioner at that time committed to 
better integrating financial and budget data for decision making. In 
that regard, SSA was upgrading CAS at the time of our review. In 
addition, the implementation status of SSA's new Managerial Cost 
Analysis System, which will replace CAS, was being tracked as a monthly 
indicator. 

DOT provided strong leadership and support for MCA from the Secretary's 
level by assigning two staff members from the Office of the Secretary 
to provide daily support to component agencies on MCA and to monitor 
their progress. In addition, the Office of Secretary emphasized the 
importance of MCA in several memoranda to the components, and outlined 
steps the components should follow to implement MCA. Also, MCA was 
discussed at monthly CFO meetings as well as at meetings of DOT's Cost 
Accounting Steering Group. 

Focusing on Managing Costs Can Help Agencies Meet Government Reform 
Goals: 

Traditionally, government financial systems and government managers 
have focused on tracking how agencies spend their budgets, but have not 
focused on assessing the costs of activities to achieve efficiencies. 
MCA, on the other hand, begins with an output such as a service and 
traces the costs of activities needed to produce the service. It allows 
management to link services or other outputs directly with the budget 
and allocate resources based on the level of service they desire. 

Under the President's Management Agenda (PMA), agencies must be able to 
measure performance and connect resources with results.[Footnote 36] 
The PMA includes five governmentwide initiatives for improving 
government performance: strategic management of human capital, 
competitive sourcing, improved financial performance, expanded 
electronic government, and budget and performance integration. On a 
quarterly basis, the Office of Management and Budget (OMB) publishes a 
scorecard reporting system using green, yellow, or red to indicate 
agencies' current status and progress in implementing the five 
governmentwide initiatives. 

To "get to yellow" on improved financial performance, agencies need to, 
among other things, receive unqualified opinions on their annual 
financial statements, meet financial statement reporting deadlines, and 
be in compliance with FFMIA requirements.[Footnote 37] To "get to 
green," agencies need to meet all requirements for getting to yellow 
and, in addition, provide evidence that financial information is 
available for managers on demand, that information is actively being 
used to help agencies achieve results in key areas of operations, and 
that the agency is implementing a plan to continuously expand the scope 
of its routine data use to inform management decisionmaking.[Footnote 
38] In other words, agencies need to demonstrate how financial data are 
used routinely by managers to make smarter decisions, and show how the 
data are used to address significant challenges faced by the agency. As 
of March 31, 2007, of the 10 agencies we reviewed, only HUD, Education, 
DOL and SSA had gotten to green on improved financial 
performance.[Footnote 39] 

While there has been substantial progress in federal financial 
management and the way it is carried out since the passage of the CFO 
Act, challenges remain. To the extent programs are funded based on 
performance, agencies will need accurate cost information to justify 
budget requests. This will require a cultural change in traditional 
financial management practices, from managing the budget to identifying 
desired outcomes and the costs of delivering them. Stronger leadership 
will be needed from senior management to effect this change where 
programs are being managed by budgets and appropriations. For example, 
managers at HUD told us it was a budget-driven organization primarily 
focused on oversight of its programs, and that it manages its 
operations principally with required budgetary data. They told us they 
believed they had sufficient information to effectively support budget 
formulation and management of enacted programs. In response to our 
recommendations about promoting the benefits and uses of MCA and 
developing an MCA policy for the agency, however, HUD's CFO stated that 
a new Executive Financial Management Advisory Committee would address 
both of these issues. USDA delegated responsibility for MCA to its 
components, but had not shown strong leadership to promote, guide, and 
monitor MCA implementation. As a result, some USDA managers were 
continuing to focus on budget management rather than improved cost 
management. 

Although the views about how an organization can change its culture 
vary considerably, the organizations we and others have studied 
identified leadership as the most important factor in successfully 
making cultural changes. Departmental leadership throughout government 
must be totally committed in both words and deeds to changing the 
culture in the federal government to one of managing costs, in addition 
to managing the budget. In order to bring about this cultural change, 
top management will need to lead by example. Establishing policies, 
performance measures, and monitoring and reporting procedures are first 
steps, but in themselves are not enough to fundamentally restructure 
how the business of government is conducted. 

Conclusions: 

Given the fundamental financial and accounting issues many federal 
agencies continue to address and the ongoing challenges inherent in 
implementing effective, integrated financial systems, it is not 
surprising that relatively few agencies are using MCA for day-to-day 
management. Our work identified large disparities in the level of MCA 
implementation among the agencies we reviewed as well as the ways in 
which they use cost information. Although MCA can be implemented 
without an integrated financial management system, in those cases it 
tends to be used for single programs or projects rather than providing 
day-to-day information for managerial decision making entitywide. While 
some agencies have made progress toward implementing MCA, full 
implementation will require strong executive leadership and 
participation, improved financial management systems, and a continuing 
transition in agency culture to one of identifying and managing costs, 
in addition to managing the budget. 

Full, effective MCA implementation will require resources and 
commitment up front if agencies are to achieve the long-term rewards of 
those efforts. As a result, it is key for leadership to understand the 
uses and advantages of MCA, communicate them to management, and work 
with the process as it continually evolves to foster better government. 
For MCA implementation to be successful across the federal government, 
it must be tailored to the needs of individual organizations, be a tool 
managers can use to make everyday decisions, and be based on sound 
financial and nonfinancial data. 

We are sending copies of this report to the Director of the Office of 
Management and Budget and other interested parties. This report will be 
available at no charge on GAO's Web site at http://www.gao.gov. 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 appendix II. 

Signed by: 

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

[End of section] 

Appendix I: Research Resources: 

Albright, Tom and Marco Lam. "Managerial Accounting and Continuous 
Improvement Initiatives: A Retrospective and Framework." Journal of 
Managerial Issues. vol. XVIII, no. 2 (Summer 2006): 157-174. 

Behn, Robert D. Performance Leadership: 11 Better Practices That Can 
Ratchet Up Performance. IBM Center for the Business of Government, 
Managing for Performance and Results Series. Washington, D.C.: May 
2004. 

Candreva, Philip J. "Controlling Internal Controls." Public 
Administration Review (May-June 2006): 463-465. 

City of Sunnyvale. An Overview of the City of Sunnyvale's Planning and 
Management System. City of Sunnyvale: 1999. 

Cokins, Gary. Activity-Based Cost Management in Government. Management 
Concepts. Vienna, Virginia: (2006). 

Cooper, Robin. "The Rise of Activity-Based Costing-Part One: What Is An 
Activity-Based Cost System?" Journal of Cost Management (Summer 1988): 
45-54. 

Cooper, Robin. "The Rise of Activity-Based Costing-Part Two: When Do I 
Need an Activity-Based Cost System?" Journal of Cost Management (Fall 
1988): 41-48. 

Cooper, Robin. "The Rise Of Activity-Based Costing-Part Three: How Many 
Cost Drivers Do You Need, And How Do You Select Them?" Journal Of Cost 
Management (Winter 1989): 34-45. 

Cooper, Robin. "The Rise Of Activity-Based Costing-Part Four: What Do 
Activity-Based Cost Systems Look Like?" Journal of Cost Management 
(Spring 1989): 38-49. 

GAO. Managerial Cost Accounting Practices: Leadership and Internal 
Controls Are Key to Successful Implementation. GAO-05-1013R. 
Washington, D.C.: September 2, 2005. 

GAO. Managerial Cost Accounting Practices: Departments of Labor and 
Veterans Affairs. Statement of Robert E. Martin before the Subcommittee 
on Government Management, Finance, and Accountability, Committee on 
Government Reform, House of Representatives. GAO-05-1031T. Washington, 
D.C.: September 21, 2005. 

GAO. CFO Act of 1990: Driving the Transformation of Federal Financial 
Management. Statement of Jeffrey C. Steinhoff before the Subcommittee 
on Government Management, Finance, and Accountability, Committee on 
Government Reform, House of Representatives. GAO-06-242T. Washington, 
D.C.: November 17, 2005. 

GAO. Managerial Cost Accounting Practices: Departments of Education, 
Transportation, and the Treasury. GAO-06-301R. Washington, D.C.: 
December 19, 2005. 

GAO. Managerial Cost Accounting Practices: Department of Health and 
Human Services and Social Security Administration. GAO-06-599R. 
Washington, D.C.: April 18, 2006. 

GAO. Managerial Cost Accounting Practices: Department of Agriculture 
and the Department of Housing and Urban Development. GAO-06-1002R. 
Washington, D.C.: September 21, 2006. 

GAO. Managerial Cost Accounting Practices at the Department of the 
Interior. GAO-07-298R. Washington, D.C.: May 24, 2007. 

GAO. Financial Management: Improvements Under Way but Serious Financial 
Systems Problems Persist. GAO-06-970. Washington, D.C.: September 26, 
2006. 

GAO. Potential Oversight Issues: Suggested Areas for Oversight for the 
110th Congress. GAO-07-235R. Washington, D.C.: November 17, 2006. 

GAO. Federal Financial Management: Critical Accountability and Fiscal 
Stewardship Challenges Facing Our Nation. Statement of David M. Walker 
before the Subcommittee on Federal Financial Management, Government 
Information, Federal Services and International Security, Committee on 
Homeland Security and International Affairs, United States Senate. GAO- 
07-542T. Washington, D.C.: March 1, 2007. 

Geiger, Dale. "Practical Issues in Managerial Cost Accounting." The 
Government Accountants Journal (Summer 1998): 48-53. 

Geiger, Dale. "Practical Issues in Cost Object Selection and 
Measurement." The Government Accountants Journal (Summer 1999): 47-53. 

Geiger, Dale. "Practical Issues in Cost Driver Selection for Managerial 
Costing Systems." The Government Accountants Journal (Fall 1999): 32- 
39. 

Geiger, Dale. "Practical Issues in Level of Precision and System 
Complexity." The Government Accountants Journal (Summer 2000): 28-37. 

Geiger, Dale. "Practical Issues in Avoiding Pitfalls in Managerial 
Costing Implementation." The Journal of Government Financial Management 
(Spring 2001): 26-34. 

Martinson, Otto B. "A Look at Cost Accounting in the Service Industry 
and the Federal Government." The Journal of Government Financial 
Management. (Spring 2002): 18-25. 

Mercer, John. "The Results Act: Has It Met Congressional Expectations?" 
Statement before the Subcommittee on Government Efficiency, Financial 
Management, and Intergovernmental Relations, U.S. House of 
Representatives, June 19, 2001. 

Mok, Samuel T. "Implementing Managerial Cost Accounting: A Labor Case 
Study." The Journal of Government Financial Management (Spring 2006): 
26-29. 

Nuclear Regulatory Commission. Best Practices in Implementing 
Managerial Cost Accounting. OIG/00E-06. Washington, D.C.: April 24, 
2000. 

Peckenpaugh, Jason. "Teaching the ABCs." Government Executive (April 
2002): 41-46. 

Rutgers University. A Brief Guide for Performance Measurement in Local 
Government. Citizen-Driven Government Performance: Hyperlink, 
http://www.andromeda.rutgers.edu/~ncpp/cdgp/teaching/brief-manual.html 
(downloaded Sept. 27, 2006): 

Stone, Lawrence E. "Performance Management: What It Is and How to Get 
There." Cal-Tax Digest (February 2005). 

Williams, Clif and Ward Melhuish. "Is ABC Destined for Success or 
Failure in the Federal Government?" Public Budgeting & Finance (Summer 
1999): 22-36. 

[End of section] 

Appendix 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, Glenn Slocum (Assistant 
Director), Lisa Crye, Barbara House, and Jim Moses made key 
contributions to this report. Other key contributors to the body of 
work covered by this report include Elizabeth Curda, Paul Kinney and 
Jack Warner (Assistant Directors), Paul Begnaud, Lisa Brownson, Debra 
Cottrell, Dan Egan, Fred Evans, Barry Grinnell, Tom Hackney, Jacquelyn 
Hamilton, Jeffrey Isaacs, Diane Morris, John O'Connor, Lori Ryza and 
George Warnock. 

FOOTNOTES 

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

[2] In December 2004, the JFMIP principals voted to modify the roles 
and responsibilities of the JFMIP Program Office, which is now known as 
the Financial Systems Integration Office (FSIO). 

[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 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); Managerial Cost Accounting Practices: Department of Agriculture 
and Department of Housing and Urban Development, GAO-06-1002R 
(Washington, D.C.: Sept. 21, 2006); and Managerial Cost Accounting 
Practices at the Department of the Interior, GAO-07-298R (Washington, 
D.C.: May 24, 2007). 

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

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

[7] In October 1997, the Federal Accounting Standards Advisory Board 
delayed SFFAS 4 implementation from fiscal year 1997 to fiscal year 
1998. 

[8] 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 with facilities and 
equipment used exclusively to produce the output. 

[9] Indirect costs are costs that are not specifically identifiable 
with any output and may include costs for general administration, 
research and technical support, and operations and maintenance for 
building and equipment. 

[10] See Statement of Federal Financial Accounting Standards No. 4, 
Managerial Cost Accounting Concepts and Standards for the Federal 
Government, issued July 31, 1995. 

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

[12] Tom Albright and Marco Lam, "Managerial Accounting and Continuous 
Improvement Initiatives: A Retrospective and Framework," Journal of 
Managerial Issues, vol. XVIII, no. 2 (Summer 2006), 157-174. 

[13] Clif Williams and Ward Melhuish, "Is ABC Destined for Success or 
Failure in the Federal Government?" Public Budgeting & Finance (Summer 
1999), 22-36. 

[14] Albright and Lam, 2006, p. 164. 

[15] Williams and Melhuish, 1999, p. 22. 

[16] GAO, Managing the Cost of Government: Building an Effective 
Financial Management Structure, GAO/AFMD-85-35 and 35A (Washington, 
D.C.: February 1985). 

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

[18] Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993). 

[19] Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994). 

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

[21] As of fiscal year 2005, 24 agencies were covered by the CFO Act. 

[22] The SGL provides a standard chart of accounts and transactions for 
agency financial systems. 

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

[24] GAO, GAO's Agency Protocols, GAO-05-35G (Washington, D.C.: October 
2004). 

[25] Pub. L. No. 104-264, 110 Stat. 3213 (Oct. 9, 1996). 

[26] Data Mart is HUD's repository for selected information extracted 
from its general ledger and other sources of financial and nonfinancial 
data. It has been used primarily as a cash management and financial 
reporting tool. 

[27] Higher Education Amendments of 1998, Pub. L. No. 105-244, 112 
Stat. 1581, 1604-05 (Oct. 7, 1998). 

[28] A performance-based organization is a discrete management unit 
which commits to accountability for results by having clear objectives, 
specific measurable goals, customer service standards, and targets for 
improved performance. In exchange, it can be granted managerial 
flexibilities to achieve these aims and goals in areas such as 
personnel, procurement, financing, and real property. 

[29] Statement of the Honorable Tim S. McClain, General Counsel and 
Chief Management Officer, U.S. Department of Veterans Affairs, before 
the Subcommittee on Government Management, Finance, and Accountability, 
Committee on Government Reform, U.S. House of Representatives, during 
an oversight hearing concerning Implementing Cost Accounting at the 
Department of Veterans Affairs and the Department of Labor, September 
21, 2005. 

[30] GAO, Financial Management: Improvements Under Way but Serious 
Financial Systems Problems Persist, GAO-06-970 (Washington, D.C.: Sept. 
26, 2006). 

[31] If it cost $100,000 to fund a training program, the unit cost of 
training each participant would be $1,000 if 100 people were trained, 
but the unit cost would be $2,000 if only 50 people were trained. 

[32] DOL's Employment Training and Administration contributes to the 
more efficient functioning of the U.S. labor market by providing high- 
quality job training, employment, labor market information, and income 
maintenance services primarily through state and local workforce 
development systems. 

[33] GAO, President's Management Agenda: Review of OMB's Improved 
Financial Performance Scorecard Process, GAO-07-95 (Washington, D.C.: 
Nov. 16, 2006). 

[34] GAO-07-95. 

[35] GAO-07-95. 

[36] Executive Office of the President, Office of Management and 
Budget, The President's Management Agenda (Washington, D.C.: 2002). 

[37] Executive Office of the President, Office of Management and 
Budget, Achieving Green in Financial Performance, the President's 
Management Agenda, Improved Financial Performance Initiative, Version 
1, July 2005. 

[38] GAO recently reviewed OMB's methodology and supporting 
documentation for agency ratings reported on the PMA scorecard. See 
GAO, President's Management Agenda: Review of OMB's Improved Financial 
Performance Scorecard Process, GAO-07-95, (Washington, D.C.: Nov. 16, 
2006). 

[39] While HUD, Education, and DOL had received green ratings in 
improved financial performance, we noted room for improvement in MCA 
implementation at these agencies at the time of our MCA reviews. For 
example, HUD had not issued departmentwide policy guidance on MCA and 
the agency's plans for current and future systems lacked broad MCA 
functionalities. To improve HUD's implementation and use of reliable 
MCA methodologies, we made five recommendations to the Secretary of 
HUD. (See GAO, Managerial Cost Accounting Practices: Department of 
Agriculture and the Department of Housing and Urban Development, GAO-06-
1002R (Washington, D.C.: Sept. 21, 2006). Education officials told us 
that they had not considered cost accounting a key issue because most 
of their appropriations were disbursed as grants and loans and 
administrative costs made up only 2 percent ($1.3 billion) of 
Education's appropriations. Further, according to department officials, 
61 percent of the $1.3 billion was administrative costs attributable to 
FSA and were already subject to MCA methodologies. We recommended that 
Education develop and disseminate a department-wide MCA policy and 
develop procedures for monitoring implementation of its department-wide 
MCA policy. (See GAO, Managerial Cost Accounting Practices: Departments 
of Education, Transportation, and the Treasury, GAO-06-301R 
(Washington, D.C.: Dec. 19, 2005). DOL had recently implemented its 
departmentwide MCA system, and was still in the process of developing 
plans for using it. (See GAO, Managerial Cost Accounting Practices: 
Leadership and Internal Controls Are Key to Successful Implementation, 
GAO-05-1013R (Washington, D.C.: Sept. 2, 2005). 

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