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December 19, 2005: 

The Honorable Todd R. Platts: 
Chairman, Subcommittee on Government Management, Finance, and 
Accountability: Committee on Government Reform: 
House of Representatives: 

Subject: Managerial Cost Accounting Practices: Departments of 
Education, Transportation, and the Treasury: 

Dear Mr. Chairman: 

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. For example, the Chief Financial Officers (CFO) Act of 
1990,[Footnote 1] 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 and reporting of cost 
information. Statement of Federal 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 for managerial 
cost accounting (MCA) information at federal agencies. The Federal 
Financial Management Improvement Act of 1996[Footnote 3] 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, you 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. 

This report summarizes information provided during our November 8, 
2005, briefing to your staff concerning our review of MCA practices at 
the Department of Education (Education), the Department of 
Transportation (Transportation), and the Department of the Treasury 
(Treasury). This was our second in a series of briefings concerning the 
status of MCA activities at large government agencies. Our first 
briefing covered the status of MCA activities at the Department of 
Veterans Affairs and the Department of Labor.[Footnote 4] The November 
8, 2005, slides are presented in enclosure I. 

Status of Departmental Efforts to Implement Managerial Cost Accounting: 

Similar to issues that surfaced in our earlier assessment at the 
Department of Veterans Affairs and the Department of Labor, we found 
uneven progress in MCA implementation and a need for enhanced controls 
over MCA data at Education, Transportation, and Treasury. 

Department of Education: 

At Education, 1 of 10 program offices had an MCA system in place at the 
time of our review. Education did not take a department-level 
leadership role to promote and monitor MCA implementation, nor did it 
have policies and procedures for implementing MCA departmentwide. 
Rather, according to Education officials, other priorities, such as 
improving controls over financial reporting, were taking precedence. 

Federal Student Aid (FSA), the one Education program office with an 
operational MCA system, independently developed its MCA system after 
being statutorily designated as a performance-based organization in 
1998. FSA managers, however, still did not have direct access to the 
system and had to rely on a team of cost accounting personnel to 
provide system outputs. In addition, FSA had not completed development 
of a training strategy for current and potential users of the data. 
Also, FSA had not documented the design of controls or completion of 
those control procedures when performed to help ensure the reliability 
of nonfinancial data. Adequately designed controls and properly 
implemented procedures are key when determining the cost of work 
outputs. Further, FSA had not performed and documented a comprehensive 
post-implementation review of its MCA system which would have 
determined how well the system met expectations and cost estimates, and 
would have documented lessons learned for current and future 
stakeholders. 

Department of Transportation: 

Transportation has in recent years shown strong leadership in 
developing MCA systems both departmentwide and at the individual 
operating administrations (OA). For example, two staff members from the 
Office of the Secretary provided daily support to the OAs in the area 
of MCA and monitored their progress in implementing MCA. In addition, 
MCA was discussed at CFO Group meetings, and at meetings of the Cost 
Accounting Steering Group. 

According to Transportation officials, the 12 OAs were developing MCA 
systems, tailored to their respective needs, which should be able to 
interface with Delphi --the department's integrated financial 
management system, a component of which could be used by OAs for cost 
accounting. One of the two largest OAs, the Federal Aviation 
Administration (FAA), was mandated to develop a cost accounting system 
in 1996, and had implemented MCA in two business lines covering over 80 
percent of its budget. The other 11 OAs expected to have their MCA 
models in place by early fiscal year 2006. 

While Transportation supported and monitored implementation of MCA, and 
had issued related procedures in 2002, it did not have a written 
departmentwide MCA policy. At FAA, officials cited several controls to 
help ensure the reliability of nonfinancial data, and stated that 
system improvements for assigning labor costs related to the 
maintenance of older National Airspace System equipment were planned. 

Department of the Treasury: 

By policy, Treasury delegated to its bureaus responsibility to 
implement MCA systems and processes to meet federal standards. Treasury 
retained oversight responsibility to ensure consistent implementation 
of MCA departmentwide. Treasury officials, however, had no specific 
procedures in place to ensure that consistent, periodic department- 
level oversight was conducted, and they promoted MCA and monitored MCA 
implementation on an informal and sporadic basis. This contributed to 
widely disparate implementation and use of MCA among Treasury's 
operating bureaus and department-level offices. For example, the Bureau 
of Engraving and Printing and the Financial Management Service (FMS) 
had established MCA systems and practices, and management utilized cost 
information to make key decisions. However, at Treasury's largest 
component, the Internal Revenue Service (IRS), MCA capability was 
limited. IRS's newly implemented MCA module had less than 1 full year 
of data, and could only account for costs by activity, output, or 
program when those activities, outputs, or programs were completely 
housed within a single cost center. 

Controls to ensure the reliability of MCA data needed improvement in 
two of the three Treasury bureaus we reviewed. Specifically, at FMS and 
IRS, formal MCA policies and procedures had not been finalized, 
approved, or disseminated. Further, improved department-level oversight 
of bureaus is needed to ensure appropriate systems that provide 
reliable information are implemented departmentwide. 

Recommendations for Executive Action: 

We are making 17 recommendations to the Secretaries of the Departments 
of Education, Transportation, and the Treasury. 

Recommendations to the Secretary of Education: 

To help ensure that Education components implement and use reliable 
managerial cost accounting methodologies, we recommend that the 
Secretary of Education direct the Chief Financial Officer of the 
Department of Education to develop and issue: 

* a policy for implementing MCA departmentwide and: 

* procedures for monitoring implementation of its departmentwide 
managerial cost accounting policy and for establishing a sound system 
of controls. 

To help ensure cost data reliability, more efficient utilization of the 
agency's cost accounting system, and adequate staff knowledge of that 
system, we also recommend that the Secretary of Education direct the 
Chief Operating Officer of Federal Student Aid to: 

* document the design of controls that are being used to help ensure 
the reliability of the nonfinancial data, 

* document the proper completion of these control procedures, 

* provide all appropriate staff direct access to cost accounting system 
output information, and: 

* develop adequate training plans for all staff who could effectively 
utilize managerial cost accounting information. 

We also recommend that the Secretary of Education direct the Chief 
Operating Officer of Federal Student Aid to perform and document a post-
implementation review to evaluate whether managerial cost information 
meets organizational objectives and users' needs. This review should 
also determine the extent to which managers use or plan to use cost 
data in managing day-to-day operations. 

Recommendations to the Secretary of Transportation: 

To help ensure that Transportation components implement reliable cost 
accounting methodologies for use in managerial decision making in 
accordance with departmental objectives, we recommend that the 
Secretary of Transportation direct appropriate department officials to 
finalize and issue: 

* a policy for implementing MCA departmentwide, and: 

* formal procedures, revised as necessary, to monitor implementation of 
that policy and establish a sound system of controls. 

In order for FAA to develop cost accounting information that is 
sufficiently reliable for ongoing managerial decision making, 
consistent with FAA-identified concerns and ongoing efforts, we also 
recommend that the Secretary of Transportation direct the Administrator 
of FAA to: 

* implement the planned system improvement for assigning labor costs to 
National Airspace System maintenance projects, with appropriate 
internal controls to help ensure data reliability, and: 

* implement managerial cost accounting in its two lines of business 
that have not completed implementation. 

Recommendations to the Secretary of the Treasury: 

To help ensure that Treasury components implement and use reliable 
managerial cost accounting methodologies, we recommend that the 
Secretary of the Treasury direct the Chief Financial Officer of the 
Department of the Treasury to develop and implement written procedures, 
including a sound system of controls, to better carry out Treasury's 
policy to oversee the implementation and continued use of appropriate 
cost accounting methodologies at its bureaus and departmental offices. 

To help ensure that the Internal Revenue Service implements and uses 
reliable cost accounting methodologies in accordance with management 
objectives, we recommend that the Secretary of Treasury require the 
Commissioner of Internal Revenue to direct the Chief Financial Officer 
of IRS to finalize and issue: 

* an Internal Revenue Service policy to carry out Treasury's managerial 
cost accounting policy and: 

* formal procedures, including a sound system of controls to implement 
that policy. 

We also recommend that the Secretary require the Commissioner of 
Internal Revenue to direct the Chief Financial Officer of IRS to 
finalize development and implementation of a cost accounting system 
capable of determining the cost of activities, services, or products at 
levels of detail suitable to assist managerial decision making. 

Similarly, we recommend that the Secretary require the Commissioner of 
Financial Management Service to direct the Chief Financial Officer of 
the Financial Management Service to finalize and issue: 

* a Financial Management Service policy to carry out Treasury's 
managerial cost accounting policy and: 

* formal procedures, including a sound system of controls, to implement 
that policy. 

Agency Comments and Our Evaluation: 

We requested comments on a draft of our briefing presentation from the 
Secretaries of Education, Transportation, and the Treasury or their 
designees. We received written comments from the Chief Financial 
Officer of the Department of Education and from the Acting Deputy Chief 
Financial Officer of the Department of the Treasury. Transportation 
elected not to provide written comments, but did provide technical 
comments. We incorporated the agencies' comments, as appropriate. 
Education and Treasury comments are reprinted as enclosures II and III, 
respectively. 

Comments from the Department of Education: 

Education agreed with six of our seven recommendations. In particular, 
it agreed with our four recommendations pertaining to data reliability 
and MCA utilization and said it would address these issues when 
implementing a new MCA system. Further, Education agreed with our two 
recommendations pertaining to departmentwide MCA policies and 
procedures for implementing that MCA policy, but said other priorities, 
such as improving controls over financial reporting, currently take 
precedence. 

Regarding our seventh recommendation concerning the need to perform and 
document a post-implementation review for the managerial cost 
information system, Education stated that it conducted a post- 
implementation review of its activity-based costing system on an 
ongoing basis, but that the results of the review were not documented. 
While the review process used by Education has benefits, a 
comprehensive post-implementation review undertaken and documented in 
accordance with Office of Management and Budget (OMB) Circular A-130, 
Management of Federal Information Resources, would provide a broader 
range of information about FSA's system and how it is achieving its 
organizational objectives. This information could benefit current and 
future stakeholders. Accordingly, we made no change to our 
recommendation. 

Comments from the Department of Transportation: 

Transportation provided comments concerning MCA implementation at FAA 
and several other technical issues in two e-mails, but neither agreed 
nor disagreed with our four recommendations. We considered its 
technical comments and incorporated them, as appropriate. 

Comments from the Department of the Treasury: 

Treasury agreed with our six recommendations and stated that it 
recognizes the importance of addressing its cost accounting needs. 
However, Treasury stated that resource constraints limit the 
department's ability to oversee MCA activities and that the cost of MCA 
should be weighed against its benefits and other competing priorities. 
We agree that the costs and benefits of an activity are important 
considerations but believe that MCA, conceptually, is what is needed to 
help promote efficiency, productivity, and the best use of limited 
resources. In our view, properly functioning MCA capabilities, as 
envisioned in laws and regulations, could help Treasury meet its 
mission needs in an era of constrained resources. 

Treasury also made several comments regarding specific information in 
the report. Treasury commented that information we presented about 
current MCA efforts at IRS and the status of its MCA system were not 
accurate. It said that the IRS system allocates costs to over 13,000 
IRS-defined cost centers. While IRS may have cost-center-level 
accounting, we remain concerned that according to IRS officials, IRS 
can only account for costs by activity, output, or program when those 
activities, outputs, or programs reside completely within a single cost 
center, thus not allowing IRS an enterprise-wide perspective on costs. 

Treasury also said that once sufficient data are collected, the current 
system along with information from other systems, such as performance 
data, will be used to obtain cost data in greater detail to support 
decision making. However, during our review, IRS officials told us that 
such analysis was not possible with the current system without 
implementing certain system upgrades. We believe that this perceived 
difference in position between Treasury and IRS officials about the 
capabilities of the current IRS system and the agency's MCA 
requirements needs to be resolved. In any event, we continue to believe 
that the ability to generate more detailed cost information could be 
enhanced if an upgraded and integrated cost module or similar system 
was in place. Accordingly, we did not modify our position on this 
topic. 

In addition, Treasury said that the disparate implementation of MCA 
across the department is not solely the result of informal and sporadic 
departmental oversight. We clarified our briefing to instead 
acknowledge that the informal and sporadic oversight was a contributing 
factor to disparate MCA implementation, and also noted that the 
sophistication, extent, and cost of implementing MCA would depend on 
the operations and needs of the organization. 

Scope and Methodology: 

Our methodology was consistent with the one employed in our prior 
review of MCA practices at the Department of Labor and the Department 
of Veterans Affairs.[Footnote 5] To obtain an understanding of how MCA 
systems at Education, Transportation, and Treasury generate cost 
information, we interviewed officials and reviewed documentation on the 
status of MCA system implementation and the related obstacles to 
managerial costing. We also examined departmental guidance and looked 
for evidence of leadership and commitment to the implementation of 
entity-wide cost management practices. Using the Standards for Internal 
Control in the Federal Government[Footnote 6] as a guide, we identified 
internal controls over the reliability of financial and nonfinancial 
information used in MCA. To determine how managers use cost information 
to support managerial decision making and provide accountability, we 
obtained an understanding of how Education, Transportation, and 
Treasury use cost accounting data for budgeting, costing services or 
products, preparation of the Statement of Net Cost, and other 
managerial uses through interviews of agency officials and a review of 
documentation provided by the departments. 

During our review, we visited Education, Transportation, and Treasury 
headquarters in Washington, D.C. We interviewed managers and senior- 
level officials about their MCA activities at the departmental level 
and at selected component agencies. When possible, we corroborated 
information obtained in interviews with agency documents such as 
policies, procedures, system descriptions, and flowcharts. We also 
reviewed prior office of inspector general and GAO reports regarding 
MCA activities, systems, and data. The agencies provided comments on a 
draft of this report, which we considered and incorporated as 
appropriate. We performed this work in accordance with U.S. generally 
accepted government auditing standards from May 2005 through October 
2005. 

We are sending this report to the Secretaries of Education, 
Transportation, and the Treasury; the Director of OMB; and other 
interested parties. Should you or your staff have any questions on the 
matters discussed in this correspondence, please contact me at (202) 
512-6131 or martinr@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs can be found on the last 
page of this report. GAO staff who made major contributions to this 
report are listed in enclosure IV. 

Sincerely yours, 

Signed by: 

Robert E. Martin: 

Director, Financial Management and Assurance: 

Enclosure I: 

[See PDF for images] 

[End of slide presentation] 

[End of section] 

Enclosure II: Comments from the Department of Education: 

UNITED STATES DEPARTMENT OF EDUCATION: OFFICE OF THE CHIEF FINANCIAL 
OFFICER: THE CHIEF FINANCIAL OFFICER: 

November l, 2005: 

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

Dear Mr. Martin: 

We are in receipt of your proposed report entitled Managerial Cost 
Accounting (MCA) Practices: Departments of Education, Transportation, 
and the Treasury. Thank you for the opportunity to review the draft 
report. Written comments to be reflected in the final report follow. 

I. Background: 

The Department of Education manages a loan portfolio of over $90 
billion, makes new loans of $27.5 billion annually, administers a 
budget of $71.5 billion, made grants of over $58 billion last year and 
operates some 150 programs that ensure equal access to education and 
promote educational excellence throughout the nation. Although 
Education has the smallest workforce of the 15 cabinet-level 
departments (4,366 employees), it manages the third highest annual 
appropriation of discretionary funds. Education's student loan 
portfolio is exceeded in total loan volume, education related or 
otherwise, by only two American banks. Administrative overhead 
comprises a mere 2 percent of the Department's appropriated funding. 

The Department of Education has made significant progress in recent 
years. In 1998 the Department faced a number of serious challenges 
including the fact that the Department's independent auditor was unable 
to express an opinion on our financial statements. The Department 
failed three consecutive financial audits receiving qualified opinions 
that featured three material weaknesses and four reportable conditions. 
Management met these challenges and spearheaded initiatives to correct 
the problems. 

One of the critical steps in the Department of Education's 
transformation was the implementation of a new accounting system in FY 
2002. However the implementation of the new system alone did not 
resolve the significant challenges the Department had to overcome to 
get its financial house in order. These challenges included 
implementing effective processes for reconciling fund balances with 
Treasury Department records, reconciling feeder systems and the general 
ledger, and identifying and resolving budget and proprietary account 
relationship issues. The fundamental processes required to address 
these issues were ineffective or non-existent. 

A major step taken by the Department to address the challenges was to 
reengineer many of its business processes. In the past, these 
ineffective processes had created the need for many reconciliations 
that were not effective or not performed. By reducing the number of 
transactions posted to certain accounts, the Department was able to 
significantly reduce the effort required to analyze and reconcile those 
accounts. In addition, the Department assessed the validity of every 
accounting event and modified the accounting where appropriate. 

As part of the reengineering, the Department has performed monthly 
"flux analyses" for all significant account balances to identify and 
correct unnatural balances and abnormal activity, with special 
attention toward correcting systemic problems. In order to ensure that 
the new monthly analysis and reconciliation processes were effective, a 
management review process was put in place to monitor the quality of 
the reconciliations and analysis, and to ensure that issues raised are 
quickly addressed and that actions taken to resolve the issues are 
effective. This is accomplished through monthly validation and 
codification of key statistical and other financial data. These data 
are then published in the Department's monthly Executive Fast Facts 
brief, which gives key executives the ability to make informed 
management decisions using real-time financial information. 

As a result of the processes initiated in FY 2002 and refined in 
succeeding years, the Department is now able, on a monthly basis, to 
produce financial statements, reconcile all control and subsidiary 
accounts and test the budgetary and proprietary account relationships 
for its over 200 appropriations. Monthly, quarterly and daily financial 
information is now readily available from the system. In FY 2002 the 
Department received the first of its three consecutive clean audit 
opinions with no material weaknesses. 

Other major accomplishments include receipt of the President's Quality 
Award for Improved Financial Performance Agency-wide for FY 2004; being 
the first cabinet-level agency and one of only five agencies in FY 2003 
to receive a green status on the President's Management Agenda Score 
Card for Improved Financial Performance; receipt of Treasury and Risk 
Management Magazine's Alexander Hamilton Award for using technology to 
ensure the effective and timely management of cash assets; being one of 
the FY 2004 and FY 2003 recipients of the Certificate of Excellence in 
Accountability Reporting awarded by the Association of Government 
Accountants for a clearly articulated, comprehensive and integrated 
report on the financial and performance status of the agency; and 
submitting FY 2005 financial statements to the independent auditors in 
twelve calendar days. 

II. Management Focus and Leadership Approach: 

The Department of Education, like many entities, faces the challenge of 
maximizing organizational capabilities while minimizing the impact of 
administrative activities on budget resources and ensuring the timely 
delivery of services and satisfactory program performance. This 
challenge requires that Department executives set and implement 
priorities that create the most value to the public. To that end, the 
Department has elected to undertake numerous major initiatives that 
address critical needs to ensure integrity and accountability, and 
enhance the public trust. Several of these initiatives are described 
below: 

- In January 2002, the Department implemented Oracle 11.0.3, which 
significantly improved financial management functions and allowed the 
Department to focus on performance data. The project was the first 
fully integrated, department-wide implementation of Oracle Financials 
for a cabinet level agency, and since its start the Department has 
received three consecutive unqualified audit opinions. 

- The Department is implementing the next version of Oracle Federal 
Financials, also known as Oracle 11 i. The Oracle 11 i implementation 
seeks to consolidate the financial management systems of the Department 
and Federal Student Aid (FSA) by tightening integration between the two 
current systems, improving the efficiency of the Department's financial 
systems and operations, validating assumptions and decisions made 
during the previous implementation, taking advantage of business 
process reengineering opportunities, and continuing the Department's 
track record of successful, effective Oracle Federal Financials 
implementation. 

- The Office of the Chief Financial Officer (OCFO) has developed the 
Executive Fast Facts Information Summary, which is a report designed to 
provide summary information for managers to use in implementing plans 
and measuring performance. Executive Fast Facts provides a monthly 
comprehensive overview of financial and program performance and is used 
as a tool throughout the Department to measure effectiveness and 
efficiency of program operations and assist managers in making 
management decisions. Included in Executive Fast Facts is the monthly 
Statement of Net Cost, by reporting group. 

- The Office of Federal Student Aid created a management report - The 
Federal Student Aid Executive Dashboard - that is specific to its 
operations. The Executive Dashboard provides current data on student 
aid applications, program disbursements, default collections, program 
performance measures, and system performance. It is provided to all 
managers weekly and is used at weekly senior officers meetings to track 
progress and determine if specific actions are required to address 
identified issues. 

- The Department is in the process of a total redesign of our Grants 
and Administrative Payments System. 

- The Department is implementing a new procurement management system. 

- The Department is implementing a new web-based travel management 
system. 

- The Department is currently implementing the requirements of OMB 
Circular A-123. These new requirements involve extensive review, 
documentation and potential modification of internal controls 
throughout the Department. This project will require substantial 
resources and may take several years of effort. Management focus at all 
levels of the Department will be required to ensure that goals are met 
and that resources are employed in the most efficient manner. 

III. Specific Areas of Concern: 

The GAO draft report included comments and recommendations specific to 
the Department in general and to the Federal Student Aid (FSA) 
implementation of MCA. Our responses to these comments and 
recommendations are as follows: 

GAO Comments: 

* "Education Management did not take a leadership role to promote the 
benefit of cost accounting policies or systems departmentwide, and 
presently has a cost accounting system in only one of 10 program 
offices - Federal Student Aid... 

Response: In FY 2005, 61 percent of Education's administrative cost was 
attributable to FSA and hence was subject to analysis using MCA 
methodologies. Additionally, in FY 2004, 62 percent of the Department's 
administrative cost was attributable to FSA and was subject to analysis 
using MCA methodologies. In sum, although only one of our 10 program 
offices uses an MCA system, the great majority of our administrative 
costs were subject to MCA methodologies. The final GAO report should 
reflect that fact. 

* "Education does not have a departmentwide managerial cost accounting 
system, nor does it have managerial cost accounting policies. Education 
has not demonstrated leadership and commitment to cost accounting 
concepts throughout the Department. " 

Response: While the Department does not have a department-wide 
managerial cost accounting system, the Department collects data on 
workload and grants to reflect the full costs of operating our 
programs. These data, including data on personnel and other 
administrative costs, are used in internal and external budget 
documents and in the Department's decision-making. 

GAO Recommendation: "..develop and issue a departmentwide policy that 
focuses on the benefits of MCA.. " 

Response: We concur in principle with the goal of establishing a 
department-wide MCA policy. We intend to further MCA efforts in the 
future. However, at this time we are focusing on competing priorities 
that have moved ahead of MCA (described in Section 11 above). 

GAO Recommendation: "..develop and issue procedures for monitoring 
implementation of its departmentwide MCA policy and for establishing a 
sound system of controls. " 

Response: We concur in principle with the objective of establishing 
procedures for monitoring implementation of a department-wide MCA 
policy and for establishing a sound system of controls. However, at 
this time we are focusing on competing priorities that have moved ahead 
of MCA (described in Section 11 above). 

GAO Recommendation: "To help ensure MCA data reliability, more 
efficient utilization of FSA's MCA system, and adequate staff knowledge 
in using FSA 's MCA system, we also recommend that the Secretary of 
Education direct appropriate FSA officials to: 

* Document the design of controls that are being used to help ensure 
the reliability of the nonfinancial data. 

* Document the proper completion of these control procedures." 

Response: We agree that it is necessary to continue to further refine 
and document FSA controls, where appropriate, around the non-financial 
data used in FSA's ABC (Activity-Based Costing) model. FSA currently 
has controls over some pieces of the non-financial data applied in the 
model. However, these controls need to be reinforced and fully 
documented after the new ABC software system is procured and 
implemented. 

GAO Recommendation: 

* Provide all appropriate staff direct access to MCA system output 
information. 

Response: We agree that managers or end users of the cost accounting 
data should have direct access to the data and that the computer model 
should have reporting capabilities for those users. But implementing 
that access to the current model, which will be replaced in the near 
future, would not be cost effective. The new model will offer that 
access. 

GAO Recommendation: 

* Develop adequate training plans for all staff who could effectively 
utilize information from MCA. 

Response: We concur with GAO's recommendations regarding the 
development of training plans for FSA staff; however, this would not be 
cost beneficial if applied to the current computer model and ABC 
environment. As GAO recognizes in the report, FSA is acquiring a new 
software system to provide end-user reporting and interfaces to other 
FSA systems. As part of that procurement, FSA will develop a training 
strategy for FSA staff that could utilize the ABC data. The new system 
will be end-user friendly, providing managers the direct access to the 
data they need in managing day-to-day operations. 

GAO Recommendation: "We also recommend that the Secretary of Education 
direct appropriate FSA personnel to perform and document a post 
implementation review to evaluate whether managerial cost information 
meets organizational objectives and users' needs. This review should 
also determine the extent to which managers use or plan to use cost 
data in managing day-to-day operations. " 

Response: The Department views the ABC model, current and future, as a 
tool that produces information used to manage, improve delivery and 
reduce costs in targeted aspects of our business operation. Managers 
have used information from the current model to derive specific 
performance measures included in our Five Year Plan. Post- 
implementation review is an ongoing process for ABC, unlike a one-time 
system implementation review. 

IV. Conclusion: 

The Department of Education takes its fiduciary responsibility to the 
public and the children of this nation very seriously. As such, it 
continues to take steps to ensure that its funds are properly managed 
and reported. Metrics that are key to how well the Department is 
executing its mission include the ability to provide assurance of sound 
fiscal practices, adequate internal controls and timely financial 
reporting. 

The Department continues to strive for excellence in financial 
management, which has been an iterative process. For each of the last 
four years, the Department has focused its energies and resources on 
the fundamental building blocks of Financial Reporting, such as data 
cleanup, reconciliations, validations of posting models, sub-ledger 
interface integrity, and accuracy of general ledger data. Now, 
management's key focus is on furthering the institution of internal 
controls and strengthening its commitment to the control environment. 

In FY 2005, we continued to improve financial reporting and 
transparency. As part of this effort, our energies are focused on 
refining and documenting our internal control over financial reporting 
and assessing our overall internal control framework. In FY 2006, 
management will be required to provide its assurance to both the 
external auditors and to OMB that our internal control over financial 
reporting is adequate and operating effectively. This will provide 
additional assurance to the President and the American taxpayer. 

The Department understands the importance of cost accounting policies 
and systems. While there are several existing MCA practices and systems 
in place, further work needs to be done. We intend to further MCA 
efforts in the future. However, we believe that at present we must 
remain focused on competing priorities, as mentioned above, that have 
moved ahead of MCA. We believe that although our current systems need 
strengthening we have made significant strides in the early stages of 
MCA implementation. We will continue to explore methods for moving our 
MCA practices to full implementation in the future. 

Sincerely, 

Signed by: 

Jack Martin: 

cc: Theresa S. Shaw, COO, Federal Student Aid, Victoria Bateman, CFO, 
Federal Student Aid: 

[End of section] 

Enclosure III: Comments from the Department of the Treasury: 

DEPARTMENT OF THE TREASURY: 
WASHINGTON, D.C. 20020: 

October 28, 2005: 

Mr. Jack Warner: 
Assistant Director, Financial Management and Assurance: U.S. Government 
Accountability Office: 441 G Street, N.W.: 
Washington, D.C. 20548: 

Dear Mr. Warner: 

We are writing to provide our comments on Treasury's portion of the 
proposed Government Accountability Office (GAO) report entitled, 
"Managerial Cost Accounting Practices: Departments of Education, 
Transportation, and the Treasury." 

The Department appreciates the need to more fully develop our 
managerial cost accounting capabilities, as described in the proposed 
report; and agrees with its recommendations. To the extent possible, 
however, we would appreciate GAO acknowledging that resource 
constraints at the Departmental level generally restrict the level of 
oversight we can provide to bureau activities. It would likewise be 
beneficial to recognize that significant costs often need to be 
incurred to install managerial cost accounting systems, and that these 
costs must be weighed against the projected benefits and competing 
priorities for shrinking budgetary resources. We do not want the 
audience for GAO's report to get the impression that the Department 
does not recognize the importance of addressing its cost accounting 
needs. 

Our specific comments on the proposed report follow: 

* The Financial Management Service (FMS) agrees with the GAO 
recommendation and has already begun the process of developing the 
necessary FMS Managerial Cost Accounting (MCA) policy and procedures to 
implement Treasury's MCA policy. FMS plans to publish the MCA policy 
and procedures in its Manual of Administration by the end of the first 
quarter of FY 2006. FMS will prepare a corrective action plan with 
targets and milestones in response to the applicable findings and 
recommendations identified by GAO. 

* The third bullet on page 8 regarding MCA-related internal controls 
could be expanded to clarify where the strengthened controls are 
needed. 

* Several of the bullets mention specific software vendors by name. We 
prefer that specific references to vendor names be deleted. 

* The Internal Revenue Service (IRS) only recently implemented a cost 
accounting module as part of its new Integrated Financial System (IFS). 
The integrated MCA system will provide more detailed and accurate cost 
information to all levels of the organization. The ability to have cost 
data down to the group level will provide more robust information to 
facilitate decision-making. 

* The third bullet on page 17 does not accurately reflect IRS' current 
efforts in relation to MCA. The bullet states that IRS' system only 
links costs to upper level cost centers. However, the cost module 
allocates costs to over 13,000 IRS-defined cost centers and includes 
information on hours worked for each cost center. 

* The second bullet on Page 18 that discusses future enhancements to 
IFS does not accurately reflect the IRS situation and should be 
clarified. We agree that an integrated work management module would 
routinely provide a greater level of detail for costing purposes. 
However, the current system allows IRS to implement an MCA program. 
Once sufficient data has been collected, IRS will use cost data from 
IFS with information from other systems, such as performance data, to 
enhance the quality and detail of data to support decision making. 

* IRS expects to issue the final IRS MCA policy by the end of December 
2005. The policy will define the roles and responsibilities of IRS 
business organizations. Once fully implemented, the system, policy, and 
controls will provide tools to assist managers with decision-making. 

* The bullet on page 24 notes that implementation of MCA among 
Treasury's bureaus is widely disparate. We do not think this is solely 
the result of our "informal and sporadic" oversight efforts. Rather, in 
part this is by design, as our policy encourages our bureaus to proceed 
cautiously in this area and recognizes that our bureaus have widely 
disparate MCA needs. Of course, we realize that all the bureaus need 
some level of MCA. 

Thank you for the opportunity to respond to this draft GAO report. We 
appreciate GAO's work in this area and also appreciate the 
professionalism and thoroughness of the GAO audit team. 

If you have any questions or wish to discuss these comments further, 
please contact me at (202) 622-1450. 

Sincerely, 

Signed by: 

James R. Lingebach: 
Acting Deputy Chief Financial Officer: 

Enclosure IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Robert E. Martin (202) 512-6131 or martinr@gao.gov: 

Acknowledgments: 

In addition to the contact named above, key contributors to this 
assignment were Jack Warner, Assistant Director; Paul Begnaud; Lisa 
Crye; Dan Egan; Fred Evans; Barry Grinnell; Barbara House; Jerrica 
Kahle; Paul Kinney; Lisa Knight; James Moses; Lori Ryza; Glenn Slocum; 
and Bill Wright. 

(197011): 

FOOTNOTES 

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

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

[3] Pub. L. 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). 

[5] GAO-05-1013R, 12. 

[6] GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3.1 

(Washington, D.C.: November 1999).