Apr112013
Hearing Transcript on Billions Spent on “Miscellaneous” Expenditures: Inadequate Controls at the U.S. Department of Veterans Affairs.
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BILLIONS SPENT ON "MISCELLANEOUS" EXPENDITURES: INADEQUATE CONTROLS AT THE U.S. DEPARTMENT OF VETERANS AFFAIRS
HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON VETERANS' AFFAIRS U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS SECOND SESSION JULY 31, 2008 SERIAL No. 110-100 Printed for the use of the Committee on Veterans' Affairs
U.S. GOVERNMENT PRINTING OFFICE For sale by the Superintendent of Documents, U.S. Government Printing Office
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CORRINE BROWN, Florida |
STEVE BUYER, Indiana, Ranking |
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Malcom A. Shorter, Staff Director SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Veterans' Affairs are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined. |
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C O N T E N T S
July 31, 2008
Billions Spent On "Miscellaneous" Expenditures: Inadequate Controls at the U.S. Department of Veterans Affairs
OPENING STATEMENTS
Chairman Harry E. Mitchell
Prepared statement of Chairman Mitchell
Hon. Brian P. Bilbray
Prepared statement of Congressman Bilbray
Hon. Ciro D. Rodriguez
WITNESSES
U.S. Government Accountability Office, Kay L. Daly, Acting Director, Financial Management and Assurance
Prepared statement of Ms. Daly
U.S. Department of Veterans Affairs, Edward J. Murray, Deputy Assistant Secretary for Finance, Deputy Chief Financial Officer, Office of Management, presenting the statement of Hon. Robert J. Henke, Assistant Secretary for Management, U.S. Department of Veterans Affairs
Prepared statement of Hon. Henke
SUBMISSION FOR THE RECORD
Stearns, Hon. Cliff, a Representative in Congress from the State of Florida, statement
BILLIONS SPENT ON "MISCELLANEOUS" EXPENDITURES: INADEQUATE CONTROLS AT THE U.S. DEPARTMENT OF VETERANS AFFAIRS
Thursday, July 31, 2008
U. S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Veterans' Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:00 a.m., in Room 334, Cannon House Office Building, Hon. Harry E. Mitchell [Chairman of the Subcommittee] presiding.
Present: Representatives Mitchell, Space, Walz, Rodriguez, and Bilbray.
OPENING STATEMENT OF CHAIRMAN MITCHELL
Mr. MITCHELL. Good morning and welcome to the Subcommittee on Oversight and Investigations hearing on "Billions Spent on Miscellaneous Expenditures," also entitled "Inadequate Controls at the U.S. Department of Veterans Affairs" (VA). This is July 31st and this hearing will come to order.
We are here today to examine an issue of great importance. The Department of Veterans Affairs is the second largest in the Federal Government. It is authorized to spend billions of dollars of taxpayers' money every year to care for those who bravely stepped forward to defend our Nation.
We have an obligation to ensure that the VA uses these funds appropriately and they are not lost through waste, fraud, or abuse. We must also be sure that they use adequate internal financial controls and management.
Unfortunately, the VA does not have adequate internal controls. Worse yet, is this problem is not new. VA's auditors yearly have found material weaknesses in VA's financial management systems’ functionality and in financial management oversight.
We will hear from the U.S. General Accountability Office (GAO) that the VA procured billions of dollars of goods and services by ways of "miscellaneous obligations" that should not have been procured this way. Improper use of miscellaneous obligations obscures how taxpayers' money is being spent.
In addition, goods and services that should have been procured competitively can be subverted using this process.
Even when miscellaneous obligations are properly used, GAO's review disclosed significant defects in VA's internal financial controls and reporting.
For example, VA employees often fail to describe the purpose of a miscellaneous obligation or used uncertain descriptions like "third quarter invoice," which would not adequately describe its purpose to an unbiased audit.
GAO's review also disclosed serious failures in a bedrock principle of financial management, the segregation of duties. It is elementary that the person authorized to sign the checks cannot be the same person that approves the expense. In 30 out of 42 transactions that GAO looked at, VA failed to ensure the proper segregation of duties.
Just a few years ago, VA spent $350 million on a failed attempt to create a modern electronic financial system. VA has embarked on redoing that project. But even if successful, it may be many years away from completion. We cannot wait.
Even with the imperfect financial and procurement systems it has, VA must ensure compliance with basic principles of financial control.
We look forward to hearing today from VA about how it is going to do this. But before I recognize the Ranking Republican Member for his remarks, I would like to swear in our witnesses.
[The statement of Chairman Mitchell appears in the Appendix.]
I ask that all witnesses stand from both panels and raise their right hand.
[Witnesses sworn.]
Mr. MITCHELL. Thank you.
Next I ask unanimous consent that the Honorable Robert J. Henke, Assistant Secretary for Management for the Department of Veterans Affairs, may submit a statement for the record. Hearing no objection, so ordered.
[The statement of Hon. Henke appears in the Appendix.]
I now recognize Mr. Brian Bilbray for his opening remarks.
OPENING STATEMENT OF HON. BRIAN P. BILBRAY
Mr. BILBRAY. Thank you, Mr. Chairman.
Mr. Chairman, I am honored to sit in today. The Ranking Member, Ms. Brown-Waite, she has apologized for not being able to be here, but you and she have been working in a way that I think that is commendable to not only this Committee but to the entire Congress and Nation.
A bipartisan effort here I think is something that the American people would like to see more of across all the Committees in Washington, DC. And so I want to commend you for that and with working with her on that.
Let me just say that I have to apologize to the witnesses today. I read this report and I look at the category of miscellaneous obligations and I hate to say it. I guess we are all products of our experience. And all at once, I go back to 1978 when I was a 27-year-old mayor and the auditor came in and told me that there were no checks and balances on miscellaneous expenditures. And I had to follow-up that with a local district attorney.
Now, I do not think anybody today is saying that there is criminal activity going on just because there seems to be some real problems with the accounting process here, but when it comes to accounting, process does matter, reporting does matter, especially when we are talking about the expenditures of the taxpayers' hard-earned money that we have forced from them to send to Washington. And we have not only a right, we have a responsibility to make sure those funds are used appropriately and within the law.
And, frankly, I am really concerned. This is probably one of the oldest issues in accounting, miscellaneous expenditures growing to such a large degree that it may even equal—you know, one account says out of twelve, $9 billion may be under that category. That is absolutely terrifying for anyone who is an accountant to think the potential for abuse is huge when there is not an appropriate accounting process.
So, Mr. Chairman, I would like to introduce into the record my opening statement. I have paraphrased. But let me just say personally I am very honored to serve with you and to fill in for the Ranking Member. And hopefully working together, the American people will be served by your bipartisan leadership.
Thank you.
[The statement of Congressman Bilbray appears in the Appendix.]
Mr. MITCHELL. Thank you.
Mr. Space?
Mr. SPACE. Thank you, Mr. Chairman.
I will enter a written statement for the record.
[No statement was submitted.]
Mr. MITCHELL. Mr. Rodriguez?
OPENING STATEMENT OF HON. CIRO D. RODRIGUEZ
Mr. RODRIGUEZ. Thank you, Mr. Chairman, for conducting this hearing. And there is no doubt that we need to follow-up—especially now that we have allocated some $13 billion additional resources for the VA. As we do that, we have got to make sure we hold ourselves as well as the VA accountable to ensure those resources are expended in the best interest of our veterans out there.
So I look forward to this testimony. Thank you very much.
Mr. MITCHELL. Thank you.
I ask unanimous consent that all Members have five legislative days to submit a statement for the record. Hearing no objection, so ordered.
At this time, I would like to recognize Ms. Kay Daly, Acting Director of Financial Management and Assurance from the U.S. Government Accountability Office.
Ms. Daly is accompanied by Mr. Glenn Slocum, who is the Assistant Director of Financial Management and Assurance for the U.S. Government Accountability Office.
I would like to ask our witness to stay within her five minutes for her opening statements. And your full written statement will be entered into the record.
Thank you.
Ms. Daly, just before you begin, I am interested in your name. I have a recent record that came from Ireland, which one of the title songs is called Katie Daly. So I just thought, and it has become one of my favorites.
STATEMENT OF KAY L. DALY, ACTING DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; ACCOMPANIED BY GLENN SLOCUM, ASSISTANT DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Ms. DALY. Well, Mr. Chairman, this is my married name, but let me assure you my husband and all of his family are very Irish, and have taken many trips back to Ireland. But thank you so much.
I appreciate the opportunity, Chairman Mitchell, Congressman Bilbray, Congressman Space, and Congressman Rodriguez for the opportunity to discuss the Veterans Health Administration's (VHA's) use of miscellaneous obligations.
Today I would like to talk about our preliminary observations on first how VA used miscellaneous obligations during fiscal year 2007 and then, second, whether VA's policies and procedures provide adequate controls over the use of miscellaneous obligations.
Now, on the first topic, VHA recorded over $6.9 billion in miscellaneous obligations during fiscal year 2007. These miscellaneous obligations were used for a variety of mission-related goods and services, things such as fee-based medical services, drugs, medicines, transportation of veterans to and from Medical Centers, and logistical support and supplies.
Now, on the second topic, the results of our audit work over the fiscal year 2007, miscellaneous obligations guidance found that VHA's policies and procedures did not provide adequate controls over the use of these transactions and without effectively designed controls, using miscellaneous obligations exposes VHA to increased risk of fraud, waste, and abuse.
Specifically, although the existing policies require contracting officials to review miscellaneous obligations, there was no guidance as to how such reviews should be carried out and documented.
With regard to segregation of duties, the policies and procedures for miscellaneous obligations did not prevent one individual from being able to perform multiple tasks in authorizing and executing the obligations.
Finally, regarding documentation, VA's guidance did not require that key pieces of information be included on the authorization form.
Now, collectively, these systemic control design flaws were identified in the case studies that we conducted at three different VHA locations.
[Chart shown.]
As shown in the table here, and I believe you have a copy available to you, there was a lack of documented oversight by contracting officials in all of the 42 case studies that we examined. We also found inadequate segregation of duties in 30 of the 42 cases.
Also, supporting documentation was not complete in many of the cases. For example, the purpose field lacked crucial descriptive information and in many cases, the vendor name and contract number were also not provided.
Now, VHA has recently issued new guidance on the use of miscellaneous obligations that does offer some improvements, but it did not fully address the specific control design flaws that we identified.
And without basic controls over the billions of dollars that VHA is spending in miscellaneous obligations, VA is at significant risk of fraud, waste, and abuse. Effectively designed internal controls act as the first line of defense for preventing and detecting fraud and help to ensure that an agency meets its missions and goals, complies with laws and regulations, and provides reliable financial information on its programs and operations.
To help VA improve the design of its controls, we will be issuing a related report in this area with specific recommendations for a number of actions that VA could take to implement effective controls in these areas.
So with that, Chairman Mitchell, Congressman Bilbray, Congressman Space, and Congressman Rodriguez, this will complete my prepared statement.
But I would like to thank you for holding this hearing today because it helps shine a light on the internal control weaknesses at VA and helps spur activity in this area.
So I thank you for doing that. And with that, I would be glad to take any questions you might have.
[The statement of Ms. Daly appears in the Appendix.]
Mr. MITCHELL. Thank you.
I have got a couple questions. The VA's September 29th, 2006, policy required the review of miscellaneous obligations by contracting officials to ensure their proper use. VA's supporting procedures did not detail how such reviews should be carried out.
And the question is, what recommendation do you have for VA that could improve controls in this area?
Ms. DALY. Well, our draft report contains a recommendation that VA implement policies and procedures to improve contracting oversight in this area. And I think this is very important because contracting officials help ensure that the contracts will be in accordance with laws and regulations, important laws that have been passed to help ensure competition in the contracting processes, and that the Economy Act and the Federal Acquisition Regulations are followed.
And with that, I think it is also important to recognize that in their May guidance that VHA issued, they have now required that these reviews be documented. And I think that is an important first step. There will be additional steps needed. And I think the critical one is going to be that there is monitoring to ensure these contracting steps are taken.
Mr. MITCHELL. Thank you.
And regarding the area of segregation of duties, the miscellaneous obligation automated system and associated policies and procedures were not designed to prevent a single official from performing multiple roles in the process of authorizing and executing miscellaneous obligations.
What is the risk of fraud, waste, and abuse in the VA by one person performing multiple roles and approving and obligating funds?
Ms. DALY. Chairman Mitchell, I think this places VA at a significant risk for fraud, waste, and abuse. One of the key tenets of internal controls is that one person should not control all aspects of a transaction. To do so does place unnecessary risk on that transaction, that the funds would be subverted for purposes other than that intended by the Congress and that the taxpayers were hoping when they sent their funds to Washington.
I think it is important that VA continue to develop processes that will address this issue. In particular, we saw that control point officials, which are the key officials in the VA Medical Centers that are doing the transactions, typically have the authority to request a transaction and approve that transaction and also certify payment in the end.
Mr. MITCHELL. And one last question before my time expires. In its review of a limited number of transactions that you did, GAO did not find any clear examples of fraud or waste or abuse. Nonetheless, you are adamant that VA needs to take immediate action to remedy the control deficiencies that you identified.
Why is that your adamant position?
Ms. DALY. Well, again, Congressman Mitchell, I think it is a matter of risk that VA has assumed here that is more than is necessary. I think that these systems have grown up over time, but it is important that VA is now recognizing that things need to change. Taxpayer dollars are at risk by having a lax control environment. And so to implement new controls to address this will protect our taxpayer dollars.
Mr. MITCHELL. Thank you very much.
And, Mr. Bilbray?
Mr. BILBRAY. Ms. Daly, is it not true that without the segregated duties, there are no checks and balances in reality? One person can make the call and either do a great job or do a terrible job?
Ms. DALY. Well, Congressman Bilbray, I agree that it certainly increases the risk that an unscrupulous employee could use the funds for purposes other than that intended.
Mr. BILBRAY. In fact, historically I think that this kind of one person control has shown that it does not happen overnight. It happens to be something that is slipped into a little bit. It does not make any difference. No one is there to call him down on a little mistake or a little transgression. And slowly but surely the problem builds and grows until it becomes a horrendous problem.
My question is, do you have any idea how long this structure has existed?
Ms. DALY. Well, I cannot give you a definitive answer on that, Congressman Bilbray. You know, our focus was really just on the 2007 transactions, but VA officials have provided us information indicating that the system goes back to the 1940s. But it is not clear, so I could try to get back to you with that information.
Mr. BILBRAY. I mean, again, it is all our responsibilities to make sure the system serves the public and that means that sometimes individuals may make mistakes, but we should make sure that the system minimizes that potential.
Out of 42 reviews, 30 of them or only 12 of them had what you felt was segregated oversight.
Ms. DALY. Right.
Mr. BILBRAY. That is a pretty substantial number when you get down there. And I would have to say that even with my less than stellar academic achievement of the past, that is not a passing grade for the process.
Ms. DALY. Exactly.
Mr. BILBRAY. And so I appreciate it.
And, Mr. Chairman, I will yield back. I look forward to hearing more testimony.
Mr. MITCHELL. Thank you.
Mr. Space?
Mr. SPACE. Thank you, Mr. Chairman.
Mrs. Daly, how are you today? Thank you for joining us and providing your testimony and the work that you have prepared in advance.
When was this audit conducted? What were the dates?
Ms. DALY. We started our work in approximately November of 2007 and are continuing to wrap it up now. Our draft report is over at VA for comment and we hope to have it fully issued in September of this year.
Mr. SPACE. What was the impetus or genesis of the audit? Why was it done?
Ms. DALY. Well, the start of the audit was the staff at VA came over and briefed the Committee here and informed them about the use of miscellaneous obligations. Therefore, the Chairman and Ranking Minority Member asked that GAO conduct a study into this area.
Mr. SPACE. Right. And when was the last audit conducted by the GAO of the VHA miscellaneous expenditure system?
Ms. DALY. Congressman, I am not sure that it has ever been done before to tell you the truth. I am not aware of any prior studies in this area.
Mr. SPACE. Okay. And when were your reports or findings delivered to the VHA?
Ms. DALY. We provided a copy of our report July 17th, I believe.
Mr. SPACE. Okay. And your audit was confined to the VHA, not the entire Veterans Administration, other departments; is that correct?
Ms. DALY. That is correct.
Mr. SPACE. Do you have any kind of estimation or idea as to the nature of whether these miscellaneous expenditure auditing deficiencies exist in other departments within the VA?
Ms. DALY. Well, Congressman, I am sorry, but I cannot speak to that simply because our review focused just on what was happening at VHA.
Mr. SPACE. I understand from your testimony and from the report that the VHA has taken steps, but it appears to me that you are not satisfied with them.
Ms. DALY. Well, I think that is close to a fair approximation of our assessment of their steps to date. You know, they have taken important first steps in that they issued new guidance that address some of the issues that we have brought out regarding contracting reviews over these transactions. They now are requiring that a review be—they have always required that a review be performed, but from what we saw, it was not being performed.
Mr. SPACE. And the principal problem would be the failure to fully address the need for segregation and oversight?
Ms. DALY. That is correct. There is still a need for those issues to be addressed and I am looking forward to seeing how VA plans to address those. Their May 2008 guidance did not fully address that issue, so we think that is an important area to still be covered.
Mr. SPACE. I guess I am curious as to where we go from here and your recommendations on what this Subcommittee can do to ensure that those deficiencies are corrected in a timely fashion.
Ms. DALY. Well, as always, the Congress provides an important oversight function to help ensure that agencies do what they promise they are going to do. And we stand ready to help you in that endeavor in any way you would like.
Mr. SPACE. Is there a follow-up audit scheduled? Do you intend to look at this again in six months, nine months, a year?
Ms. DALY. Well, we would leave that to the Committee's discretion. We would be glad to follow-up if you would like us to.
Mr. SPACE. Thank you very much.
Ms. DALY. You are welcome.
Mr. SPACE. I yield back.
Mr. MITCHELL. Thank you.
Mr. Rodriguez?
Mr. RODRIGUEZ. Thank you, Mr. Chairman.
Let me ask you, in follow-up on the questions that have been asked, what do you recommend that we do to make sure we stay on top of it knowing full well that there is a large amount of resources going to the agency.
I also know that sometimes externally it is difficult for them to move because if they have been doing this for some time on their own, you almost need an external group to come in.
What are some of the recommendations that your agency can come up with that would allow those of us who are not accountants to exert our oversight responsibility?
Ms. DALY. Congressman Rodriguez, I think it is important first for VA to implement a monitoring mechanism internally to make sure that the new policy and guidance, that it has come out with on contracting oversight and the documentation requirements to monitor that and ensure that those steps are indeed taken. You know, it is one thing to issue a policy. It is something else entirely to make sure it is implemented.
So a good step will be to ensure that those things are being covered internally. Secondly, I think the oversight by the Congress is an important tool to be used to help ensure that the agency is taking the actions that it has agreed to take. And we stand ready to help you in that area.
Mr. RODRIGUEZ. Okay. Let me ask that question again.
Ms. DALY. Okay.
Mr. RODRIGUEZ. Not being an accountant, not being an economist, you see a situation such as that. You are saying to allow them to come forward with recommendations.
Are there some specific items? Do they allow an opportunity for whistle blowing, for example? Have you had any opportunity to be able to get people there to talk to you about the possibility that fraud has existed or waste has existed as a result of just having one individual overseeing an operation versus being more open?
Ms. DALY. Congressman Rodriguez, we have not had any whistle blower complaints related to this on GAO's hotline. We do have a hotline where anyone can call in and give us tips on issues just like you talked about. I think the Inspector General (IG) of VA also has a similar hotline where people can call in whether they are VA employees or not.
Mr. RODRIGUEZ. And have you had access to those?
Ms. DALY. We have not accessed those ourselves, sir, as part of this study.
Mr. RODRIGUEZ. Okay. And what does it take for you to have to get access to that?
Ms. DALY. I think it would just be a matter of making certain inquiries to the people who do have responsibility over those hotlines.
Mr. RODRIGUEZ. Because a lot of times the best source is the people themselves. They will tell you what is wrong, you know. Sometimes there might be just complaints and gripes, those kind of things. But a lot of times, that might be a way of getting a good handle on it.
What kind of time table are we talking about that, you are allowing the system to have in order to come back and try to correct itself because you are talking about almost two-thirds of the system having some serious problems when you talk about 12 out of 40; is that correct?
Ms. DALY. That is correct, sir, that there are some serious problems with their controls. And I think an organization as large as VA and VHA in particular that we focused on in this review will take some time to be fixed, but I think it is important that VA move quickly in this area to mitigate its risk.
Mr. RODRIGUEZ. What do you mean by quickly?
Ms. DALY. Well, it is going to—
Mr. RODRIGUEZ. What is appropriate?
Ms. DALY. That is a difficult question to answer, sir, because it is going to vary depending upon the circumstances.
I think the policy guidance is something that could be done much more quickly than making sure that it is fully implemented throughout VA, which is the critical step. You know, you can issue guidance, but having it implemented is the challenging part.
Mr. RODRIGUEZ. What kind of report should we ask for from you that would allow us to get a better grip on this issue so that we can make sure we hold the system accountable in being responsive to the constituency?
Ms. DALY. Well, I would be glad to work with you and any other Members of the Committee in crafting such a request for our services and that we could be doing that as soon as the hearing is over.
Mr. RODRIGUEZ. Okay. And, once again, any indication of somewhat of a time table that gives us an opportunity to oversee this situation, that we should expect something by when?
Ms. DALY. Like I said, that is challenging. I would think that certain things could be done more quickly than others. I would probably ask VA what they think might be a reasonable time table and then make an assessment from there.
Mr. RODRIGUEZ. Okay. Thank you.
Ms. DALY. You are welcome. Thank you.
Mr. MITCHELL. Thank you.
Mr. BILBRAY. Mr. Chairman, just a follow-up on Mr. Rodriguez.
Mr. MITCHELL. Yes.
Mr. BILBRAY. I think one of the things we know, though, is so much with this is unlike a lot of other problems we may have with operations going awry. The whistle blower usually does not help on this because no one knows.
It is much like the case I had in my city and that DC just had where money was going in, but nobody was checking, so there was no way for another party to know what was going on because the system was not there.
Now, Ms. Daly, is it not true, though, that when we go to segregating the services, it is not enough just to go to two people checking out, that you really want to go to three so you almost square the check and that the security of three is mega times over what a two-person check-off point?
So is that not one of those things that we should be aiming for in an appropriate system?
Ms. DALY. Well, Congressman Bilbray, I think you made an important point there. Of course, the gold standard in a four-step process that we have here would be all four steps being segregated. But there are certainly mitigating controls that you can put in place to make sure that things are being done to the standards that really provide the safety for these funds that are needed.
Mr. BILBRAY. And getting back to exactly what Mr. Rodriguez was saying, what can we do now, and what can this Administration do, and this Committee do working with the Administration to make sure that in January we have a system that is accountable to the taxpayers?
Ms. DALY. Well, I think continuing to provide oversight in this area is an exceptionally important point. It often takes a series of steps in order to ensure that steps are taken by agencies to move them forward.
I am very impressed that they are planning to do some monitoring activities over this internally, but with the Congress continuing to provide oversight, continuing to ask them to move forward, continuing to provide accountability from these officials will be a critical step too.
Mr. BILBRAY. But we need to have a minimum standard they modify to be able—the procedure that is appropriate in modern day accounting, not 1940 models.
Thank you very much.
Ms. DALY. Thank you.
Mr. MITCHELL. Thank you.
Mr. Walz?
Mr. WALZ. No questions, Mr. Chairman.
Mr. MITCHELL. Well, thank you very much. I appreciate it. And hopefully we will be working together much longer than this short period of time we have had so far. So thank you.
Ms. DALY. Thank you.
Mr. MITCHELL. I would like to welcome panel number two to the witness table.
At this time, I would like to recognize Mr. Edward Murray, Deputy Assistant Secretary for Finance and the Deputy Chief Financial Officer for the Department of Veterans Affairs.
Mr. Murray is accompanied by Mr. Frederick Downs, Jr., Chief Prosthetics and Clinical Logistics Officer for the Veterans Health Administration; Mr. W. Paul Kearns, Chief Financial Officer (CFO) for the Veterans Health Administration; Mr. Jan Frye, Deputy Assistant Secretary for Acquisition and Logistics and Senior Procurement Executive for the Department of Veterans Affairs; and Ms. Phillipa Anderson, Assistant General Counsel for the Department of Veterans Affairs.
And I would like to recognize Mr. Murray for up to five minutes.
STATEMENT OF EDWARD J. MURRAY, DEPUTY ASSISTANT SECRETARY FOR FINANCE, DEPUTY CHIEF FINANCIAL OFFICER, OFFICE OF MANAGEMENT, PRESENTING STATEMENT OF HON. ROBERT J. HENKE, ASSISTANT SECRETARY FOR MANAGEMENT, U.S. DEPARTMENT OF VETERANS AFFAIRS; ACCOMPANIED BY FREDERICK DOWNS JR., CHIEF PROSTHETICS AND CLINICAL LOGISTICS OFFICER, VETERANS HEALTH ADMINISTRATION, U.S. DEPARTMENT OF VETERANS AFFAIRS; W. PAUL KEARNS III, CHIEF FINANCIAL OFFICER, VETERANS HEALTH ADMINISTRATION, U.S. DEPARTMENT OF VETERANS AFFAIRS; JAN R. FRYE, DEPUTY ASSISTANT SECRETARY FOR ACQUISITION AND LOGISTICS, OFFICE OF MANAGEMENT, U.S. DEPARTMENT OF VETERANS AFFAIRS; AND PHILLIPA ANDERSON, ASSISTANT GENERAL COUNSEL, OFFICE OF GENERAL COUNSEL, U.S. DEPARTMENT OF VETERANS AFFAIRS
Mr. MURRAY. Mr. Chairman and Members of this Subcommittee, good morning. Thank you for the opportunity to discuss the draft Government Accountability Office report entitled, "Veterans Health Administration Improvements Needed and Design of Control Over Miscellaneous Obligations."
I am Edward Murray, VA's Deputy Assistant Secretary for Finance. I also serve as VA's Deputy Chief Financial Officer. I am here on behalf of Robert Henke, VA's Assistant Secretary for Management, who was not available to appear today.
I am accompanied by Mr. Frederick Downs, Chief Prosthetic and Clinical Logistics Officer in the Veterans Health Administration; Mr. Paul Kearns, Chief Financial Officer, Veterans Health Administration; Mr. Jan Frye, Deputy Assistant Secretary for Acquisition and Logistics and VA's Senior Procurement Executive; and Ms. Phillipa Anderson, Assistant General Counsel.
I have Mr. Henke's written statement which I would like to submit for the record.
I appreciate the opportunity to discuss the draft GAO report. Although in the draft report GAO found that VA policies and procedures were not adequately designed, it is important to note that GAO identified no incidents of waste, fraud, or abuse.
Our leadership is committed to improving the guidance, oversight, and business processes associated with the use of miscellaneous obligations and the delivery of service to our Nation's veterans.
This week, your staff met with me and VA staff to observe the steps VA is taking to reduce any vulnerability. VA agrees with all four of GAO's recommendations and we are prepared to discuss the various initiatives planned or underway to reduce the use of miscellaneous obligations and associated internal control risks.
We are issuing additional Departmental policy and guidance that will improve accountability of the miscellaneous obligations process. We have reports that enable us to track the improvements.
Interim guidance was issued in January 2008 and was further refined in May 2008 by the Veterans Health Administration because the Veterans Health Administration is the predominant user of this method of financial obligation.
The Office of General Counsel has reviewed the interim guidance and has determined that the new guidelines coupled with existing VA accounting policy meet legal recording requirements.
New requirements for miscellaneous obligations will be routed for review by the appropriate contracting official and this review will be documented and included in the record for the obligation.
The interim process will be used until a system change can be made to accomplish this electronically in the Integrated Funds Distribution Control Point Activity Accounting and Procurement system, referred to as IFCAP.
In addition, we are developing requirements for a patch to IFCAP mandating population of the purpose, vendor, and contract number fields. Until this patch is installed, data must be entered manually.
Miscellaneous obligations forms are used for both procurement and nonprocurement expenditure obligations. If the miscellaneous obligation is for goods or services not required to follow formal procurement procedures, which are nonprocurement items, such as fee-basis medical or dental services, authorizations for individual patients are tracked in the FeeBasis software system.
This process includes the appropriate approval requirements by the requesting service approving official. To ensure appropriate segregation of duties, a fiscal office employee approves payment of invoices. Receipt of medical or dental services is documented by either an industry standard billing abstract document or clinical information from the non-VA provider.
If the miscellaneous obligation is for one of the procurement items approved to be documented by use of a miscellaneous obligation, such as nursing homes, separate software programs in the Veterans Health Information Systems Technology Architecture track individual expenditures and show the appropriate approval by the requesting service approving official and fiscal office employees.
The contracting officers technical representative verifies that goods and services were received for the individual contracts. Contracting officers perform all procurement duties related to award of the contract.
To ensure that policies and procedures are being implemented and monitored, VHA now tracks and trends the number and dollar amounts of funds obligated using miscellaneous obligations by Budget Object Code every month. This process enables VHA to determine whether its facilities are adhering to VA and VHA policy.
In addition, VA established the Office of Business Oversight (OBO) in 2004 to realign and consolidate existing review organizations and functions and to have oversight and compliance responsibilities at the Departmental level. OBO will review miscellaneous obligations during their field reviews with special emphasis on adherence to control policies and procedures.
VA is taking meaningful steps to resolve the current challenges concerning the use of miscellaneous obligations. VA remains committed to improving its processes and we are confident that our challenges can be overcome for the benefit of the veterans we serve as well as the taxpayers. At the end of the day, this is not about systems. It is about veterans.
This concludes my statement, Mr. Chairman. I will be happy to answer any questions that you or the other Members of the Subcommittee may have. Thank you.
[The statement of Hon. Henke appears in the Appendix.]
Mr. MITCHELL. Thank you.
Let me just give you a little story about my background. I was a high school teacher and at the same time, I served as Mayor of our city. And I always found it interesting. Early in the morning as a teacher, I would go into the teacher's lounge and go through the mailbox and find a statement coming from the superintendent, but I was a classroom teacher, or from the school board. And I would say, if the superintendent or the school board would ever come down here and be in the classroom, they would not make these kinds of statements.
And then in the afternoon, I went to the Mayor's Office and I thought I really had a handle on things. And I would say, and I am sure there were many people in the city say, you know, if the Mayor would ever get out of his third floor office and come down here, he would not make those kinds of statements.
What I am asking you is you can make all the statements you want here and you can put in all the reforms you want, but the question is, how do you know that these are going to be implemented where it really counts?
The people that were in these particular stations, Pittsburgh, Cheyenne, Kansas City, this was just three of what the GAO went to do. How are you going to know that it is just not going to be dismissed by the people who say, well, here comes another Directive from Washington? Let us just keep doing what we have always done. They will never come down here. How do we know what we are asking you to do is going to be implemented?
Mr. MURRAY. Starting with fiscal year 2009, the Office of Business Oversight, which works directly for the Chief Financial Officer, is going to review 70 to 80 stations. They are going to visit these field facilities and are going to put a special review emphasis in this particular area to see that we do have segregation of duties and that these miscellaneous obligation transactions are being handled appropriately. So that is going to happen at the beginning of the fiscal year.
Mr. MITCHELL. You know, I looked at the resumes of all of you that are here as a backup for your support. And you all had many years in the financial situations in different departments.
And my question is, did you come into this situation that we find in the VHA, did you not find these and other—what is being recommended are standard financial procedures, checks and balances. And from what I understand, every year Deloitte would come in and they would give an audit and every year, they showed some weaknesses in your accounting and nothing has been done.
With all your experience, do these kinds of things happen in departments you are in? Did this not flag something to you that we should be doing something different than what has been going on?
Mr. MURRAY. I believe that we are doing some things differently. In fact, Grant Thornton also in July 2007 noted some segregation of duty and other deficiencies with the use of 13 miscellaneous documents.
One of the things we have done is strengthen our policy. We are in the process of issuing Departmental level policy that requires evidence of contracting review. One of the areas I am working with the Chief Information Officer (CIO) and VHA on is that we need to make changes in the system I referred to as IFCAP.
We have to make changes such that the system enforces the control that the contracting officer does, in fact, review every 1358 or miscellaneous obligation document. And we will work closely with VHA and our CIO to prioritize changes to the IFCAP system to ensure that there is a contracting officer review.
Mr. MITCHELL. I assume that in all the agencies you have worked for, all of you, and the years of service, this is the first time this type of thing has ever happened. I just cannot believe that. I think that with your experience, somebody should have found this out before a GAO report.
One of the things that is good, and you mentioned this, that there was no fraud, waste, or abuse that has occurred, but that is not because of the system. And we do not know if we checked all of them. And it is a credit to those who are working there.
But the important thing is, as Mr. Bilbray said, this opens up the opportunity for that. And it did not take much. Just read what happened recently in the DC municipal government with the people who, and it is why whistle blowers do not work, all of the stuff that was going on in that particular situation, this can happen. And what we are doing is if there is fraud, abuse, or waste or not, as you have said, this shortchanges the services that we ought to be giving to the people this agency is designed to serve. That is the bad part.
Thank you.
Mr. Bilbray?
Mr. BILBRAY. Thank you, Mr. Chairman.
First of all, I think we need to clarify that this appears to be a situation that has been around a long time. And I guess all of us should sort of approach this, that being notified that the beautiful home you bought that was built in the 1940s that looked so great when you walked in has a foundation that has major problems.
And so if we can all approach this with the fact that this is a common problem, we are not here to point fingers at any individual, but we are willing to say this is a problem that predates all of us technically.
But now the problem seems to be the lack of a definitive approach to solving the problem, of how we are going through and restructuring the foundation of the VA so that it has a sound fiscal structure with some kind of accountable process.
Mr. Murray, you were saying that you are relieved that there was no fraud detected. Do you think 42 reviews out of 131,000 expenditures is a reasonable and confidence building review process?
Mr. MURRAY. No, I do not.
Mr. BILBRAY. Okay.
Mr. MURRAY. I do not know that it was statistically generated, but I would say probably not.
Mr. BILBRAY. Okay. I think we have just got to say let us not say, hey, nothing has been found because in reality, you scratched the surface and found enough evidence to say, wow, you know, the potential for it is so huge.
So let us not even talk about how nothing happened. Let us assume just by the nature of the system that there is so much happening and has happened since 1940 that none of us know about and we will probably never know about it.
So let us just accept there is a horrendous problem that predates our taking the responsibility. This was raised in 2003 and 2004 as a concern. Now we would like to raise it up to a major concern if not a fiscal crisis of confidence that we need to address.
And, you know, Mr. Frye, do you feel that you have adequate information on monitoring the use of these funds?
Mr. FRYE. Well, let me put it in context. With the use of 1358s, the acquisition professionals do not get involved if these are fee-basis transactions. In other words, these do not fall under the Federal Acquisition Regulation headline.
What my concern is—
Mr. BILBRAY. Do you know where miscellaneous is going? Do you know why it was going?
Mr. FRYE. I know where, if it is fee basis, I know where it is going, yes. Do I review the information on a monthly basis as to where fee basis is going, no, I do not.
Mr. BILBRAY. Yes. Who would review it or who reviews it today to see if it is appropriate?
Mr. FRYE. The VHA reviews on a monthly basis reports that they generate on the use of miscellaneous obligations out in Veterans Health Administration.
Mr. BILBRAY. How do they review it when the fact is that you end up with, you know, so much of the reporting left blank or not describing exactly what the expenditure was for?
I mean, the reporting process looks like it has just got gaping holes. You review something and you get how much money was spent, but there are whole sections in here that do not—people did not bother to say, you know, why it was done and for what reason and what the justification.
So how do you review justification if even the auditors are pointing out that the reporting sheets are not being filled out?
Mr. FRYE. Well, I would agree with you. If the forms are not filled out properly, it makes it very difficult to review it on the face of the form.
Mr. BILBRAY. Mr. Murray, my question is, there are appropriate accounting procedures and systems that the 21st Century world has accepted for a long time. This is not rocket science. This is, you know, something that is just like a minimum standard for anybody that handles any funds, let alone public funds.
Are you going to have those processes on line and ready to go so that we can sort of repair this foundation this year, so that three years from now, five years from now, we are not back here doing what we are doing today after being warned about this back in 2003 and 2004? Are we going to have multi review? Are we going to have at least three people being able to review any expenditure so that there is some accountability in here? Are we going to have that online ready for the next fiscal year?
Mr. MURRAY. I will work with the Veterans Health Administration staff to ensure we segregate those duties. And hopefully we will give Mr. Downs an opportunity to talk about some of what he is doing in terms of oversight and what he is proposing to do to ensure that the purpose of contract fields are filled. It is unfortunate that the IFCAP system is very archaic and to actually review the separations of duty, you have to basically touch that field facility or that Medical Center.
We do not get to work with the modern tools that industry has. We have a lot of confidence, Mr. Henke and I, that if we can get FLITE going we will have work flow, separation of duties, and audit tools embedded in our next generation financial management system.
To a great degree, we are hamstrung with the environment we have in terms of system tools. Nonetheless, Mr. Downs has a very ambitious way to do good oversight of miscellaneous obligations if he would have an opportunity to discuss it.
Mr. BILBRAY. Thank you, Mr. Chairman. I look forward to hearing from Mr. Downs whenever appropriate.
Mr. MITCHELL. Thank you.
Mr. Space?
Mr. SPACE. Thank you, Mr. Chairman.
I find myself agreeing with, I think, the implication just registered by my colleague, Mr. Bilbray, that one would have to be a fool to think that a system so full of potential for abuse has not, in fact, been abused and fraud, waste, or abuse has not occurred.
But I also think that the sampling is sufficiently large to make clear that these systemic problems are of a profound nature. And while I still find it somewhat difficult to believe that this situation has never been examined, looked at, or perhaps even considered up until the last couple of years, I am curious, and perhaps you know this and maybe you do not, upwards of $6 billion fell through this miscellaneous expenditure provision.
Do you have any knowledge of what that number would have looked like, say, four years ago?
Mr. MURRAY. I will have to get back to you with that number.
Mr. SPACE. Yeah. While you are at it, I would like to see what that number is for the last 20 years, each and every year.
[The following information was subsequently received from the VA:]
HVAC O&I Colloquy on Miscellaneous Obligations
During the July 31, 2008 House Veterans' Affairs Oversight and Investigations Subcommittee hearing on the topic of miscellaneous obligations, Congressman Space requested detailed historical information on the use of miscellaneous obligations in VA accounting.
Unfortunately, for the reasons stated below, that level of detail would be extraordinarily difficult to produce with any accuracy. As noted, VA is improving its accounting systems in numerous ways, including tracking this category of obligations.
A computer application called Integrated Funds Distribution, Control Point Activity, Accounting and Procurement (IFCAP) is used by over 150 VA facilities to obligate funds. There is a separate IFCAP installation (including a separate database holding source transactions) at each of these sites.
There are two main types of documents created in IFCAP: VA Form 1358 (Estimated Miscellaneous Obligation or Change in Obligation) and VA Form 2237 (Request, Turn-In and Receipt of Property or Services).
Each locally based IFCAP system transmits obligation data through an interface to VA’s core accounting system, the Financial Management System (FMS), on a daily basis. The obligations are then processed and recorded in FMS.
Due to current system design limitations in FMS, the obligation data sent from IFCAP to FMS does not include enough information to distinguish between the two document types (1358 or 2237). Once the data is in FMS, it is impossible to tell the difference between data applicable to a 1358 and data applicable to a 2237. Therefore, it is currently not possible to use FMS to derive the total dollar figure for Miscellaneous Obligation (1358) documents only.
Getting this information directly from the IFCAP system would involve a massive effort. Data in each of the 150 separate systems would need to be extracted and compiled in a meaningful manner. Even more problematic is the fact that much of the data going back over 20 years has already been archived. This would require that VA reload many years worth of data at each of the 150 sites to even begin an attempt to develop the requested numbers. This would be a very labor-intensive effort, and present various other technical and logistical issues. It is not feasible to compile this data from IFCAP without tremendous effort, and any resulting information would be of questionable accuracy.
Going forward, we acknowledge that the affected systems need to be changed so that 1358 data can be easily isolated from the other obligation data. We have plans to implement a system change which will provide this capability in the future. IFCAP will add a notation to 1358 documents that are sent through the interface to FMS. This data will then be recorded in FMS for each 1358, and reports can then be created on 1358 activity only. This change is scheduled for implementation in August 2009.
The future financial accounting system, FLITE, has also addressed these issues during requirements development. Not only will the ability to report on detailed miscellaneous obligations be available in FLITE, but the system will further restrict miscellaneous obligations and increase internal control mechanisms surrounding them.
Prepared by: Department of Veterans Affairs
Office of Finance, Office of Financial Business Operations
POC: Jonathan W. Lambert, (202) 461-6173
January 14, 2009, 12pm
Mr. SPACE. Mr. Murray, what is your official title?
Mr. MURRAY. Deputy Assistant Secretary for Finance and Deputy CFO.
Mr. SPACE. And how would you define in no more than two or three sentences your job description?
Mr. MURRAY. Review the accounts and financials, be the financial steward for VA, review financial processes, prepare the financial statements.
Mr. SPACE. Prior to the GAO audit and prior to the hearings that this Subcommittee held, had it ever crossed your mind that there may be a problem with spending upwards of $6 billion a year in miscellaneous expenditures that lacked basic and fundamental accounting principles?
Mr. MURRAY. To the extent that the separations of duties are adhered to, to the extent that contracts are reviewed, and obligations were appropriate for those procurement items, and there is a contract or other vehicle to support those procurement items. It is a service order. On the face of it, what it becomes in the official accounting system is a service order.
So if the separation of duties are in place, the formal contract or procedures were appropriate, it would be okay to spend billions of dollars if all those things were being done.
Mr. SPACE. They were not, though, were they?
Mr. MURRAY. Well, as we discovered through Grant Thornton's review under A-123 and through the GAO report recently drafted for review, we are finding that there are serious deficiencies in our control structure.
Mr. SPACE. For how long have you been working in your current capacity?
Mr. MURRAY. About six years.
Mr. SPACE. All right. So in the first four years, you had no indication that these basic and fundamental guidelines were not being adhered to?
Mr. MURRAY. We are working a number of various issues and there are a number of control issues throughout the VA that are being tackled. So this has come more to the forefront in the last few years.
Mr. SPACE. And, Mr. Murray, I am not doing this to point fingers. I mean, I am not interested in that. I am not trying to intentionally embarrass anybody. But if we have got a systemic problem that allows something so blatant and so obvious to go ignored for so many years with such huge potential for waste and fraud, then I think we have an obligation to address it.
And I am trying to figure out what is wrong with our system where someone in your position who is knowledgeable, intelligent, works hard, it would not occur to you that there is a significant problem here.
Now, you heard Ms. Daly's testimony. You have read the report. And I know my time is growing short. You understand that the GAO thinks you need to do much more in terms of segregation and oversight than what you have done in terms of your interim findings or action.
Are you committed to doing those additional, taking those additional steps that the report cites?
Mr. MURRAY. Absolutely.
Mr. SPACE. Thank you.
Mr. MITCHELL. Thank you.
Mr. Rodriguez?
Mr. RODRIGUEZ. Thank you, Mr. Chairman.
Mr. Murray, I know I asked GAO what they could do to help us out in the process. I am going to ask you the same question.
You are in a situation where you have this occurring. What can we do to help out or how can the GAO help you make
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