Mr. Chairman, Mr. Ranking Member, and members of the Committee, thank you for inviting me to appear before you today to discuss what VA has done and plans to do to continue improving its oversight of miscellaneous obligations.  Today, I will discuss what we use currently to obligate VA funds, the policies that apply to use of miscellaneous obligations, and the ongoing work to improve accountability of the miscellaneous obligations process.  As the Committee knows, these issues are cross-cutting, corporate issues that affect multiple VA organizations, as reflected in the witnesses invited to appear today.  I am pleased to be accompanied today by Mr. Fred Downs, Chief Procurement and Logistics Officer, and Mr. Paul Kearns, Chief Financial Officer, both of the Veterans Health Administration (VHA); and Mr. Jan Frye, Deputy Assistant Secretary for Acquisition and Logistics.

Overview of Documents Used to Obligate Funds

VA primarily uses two different document types to obligate funding for goods and services:  a VA Form 2237, a standard procurement requisition document; and a VA Form 1358, commonly known as a “miscellaneous obligation.”  However, the word “miscellaneous” can be misleading.   In most cases, we clearly know the source of the actions using these obligation documents.  They are usually for a specific purpose and apply to a specific vendor.  These are not arbitrary obligations being created in the financial system; VA acts based on validated requirements.

I will note, however, that the process to execute a Form 1358 is generally considered less stringent than using Form 2237.  The procedures for using Form 1358 do not apply as rigorous and proactive internal controls as strictly as those used with Form 2237.  Thus, Form 1358 compliance must rely on data to track violations, reports based on those data, and the willingness of managers to review them.  Recent policy changes have strengthened internal controls used with Form 1358.

Status of Corrective Actions

The Government Accountability Office’s September 2008 report (GAO-08-976) identified two key findings about Form 1358.  They were inadequate segregation of duties, and insufficient documentation of approval by contracting officials.  To address these findings VA has strengthened policies and procedures, and provided new tools for management and staff use.

VA has modified its Integrated Funds Distribution Control Point Activity (IFCAP) system to identify whether a given purchasing transaction uses Form 1358 or Form 2237.  As of September 2009, these data are now sent to VA’s Financial Management System (FMS) to distinguish between these two types of transactions.  This new capability identifies transactions originated on a Form 1358 and helps VA monitor the use of this form. 

To assist field activities with monitoring compliance with policy, VA has developed two new IFCAP reports to help facilities accomplish their oversight responsibilities:

• A Segregation of Duties Violations Report is available for management in order to ensure appropriate segregation of duties between the approval functions involved in using a Form 1358, as described below; and
• An additional report identifies fields (vendor, contract number, purpose) that have not been completed as required.

With respect to segregation of duties, in January 2009, VA’s Chief Financial Officer’s Office of Finance reissued policy for use of miscellaneous obligations,[1] including a prohibition of any individual performing more than one of the following key approval functions:

• Requesting the miscellaneous obligation.
• Approving the miscellaneous obligation.
• Recording the obligation of funds.
• Certifying delivery of goods or services and approving payment. 

This policy also requires the originating office obtain contracting approval for a miscellaneous obligation that is outside the narrow list of approved uses for Form 1358, and VHA updated their guidance accordingly.  This policy clearly specifies that a miscellaneous obligation shall not be used unless the Head of Contracting Activity (HCA) has determined that a purchase order or contract is specifically not required, or the obligation is for a specifically defined purpose determined to be acceptable for this type of obligation.  However, because Form 1358 is not generated by a contracting official, the HCAs have no knowledge when such a document is being used.  Currently, they must rely on the offices creating the document to determine if the Form 1358 is to be used for other than predetermined purposes and HCA approval is required.

We have prohibited the use of miscellaneous obligations for other uses, and we are certain the policies are clear.

Policy Adherence and Enforcement

Although we are certain VA’s policies are clear, we must take the needed steps to assure that compliance with the policies is applied consistently throughout VA.  In FY 2009, the Management Quality Assurance Service (MQAS) reviewed 476 individual miscellaneous obligations processed at 39 field stations and found 51 percent of the actions did not comply with the segregation of duties requirement set forth in VA policy.  

In addition, because VA systems are aging, it is difficult to modify them to automate and enforce internal controls on segregation of duties requirements.  VA has already completed the analysis and identified the system requirements necessary to affect needed changes and is aggressively pursuing the modification of IFCAP to eliminate this shortfall.

VA has and will continue to address these through technological changes as well as enforcement practices such as the Secretary of Veterans’ Affairs recent mandate, described further below.

System Changes

These changes include modifying IFCAP to enforce systematically the segregation of duties, verifying that a system user has only one distinct role in each key action required to process a miscellaneous obligation.  Changes will also require data elements such as Purpose, Vendor, and Contract Number to be documented on all miscellaneous obligations.  The IFCAP system will also be modified to route any miscellaneous obligations to the contracting office for determination of proper use if other than those pre-approved.  

We are also considering a programming change that would provide a “drop down” menu of the allowable exceptions for using a miscellaneous obligation, as detailed in VA policies, requiring an entry that would specifically identify the type of miscellaneous obligation.  This change is important as it would essentially remove the “miscellaneous” aspect of these obligations and provide for easier reporting of obligations by category.  

In August 2009, we implemented a change in our systems to clearly flag miscellaneous obligations that are processed for later review or tabulation.  This important change allows us to target our review of these transactions, determine total spend, and enhances oversight by identifying miscellaneous obligation transactions in our core financial system.

Until VA policies on segregation of duties and adequacy of documentation can be fully enforced by computer programming changes, VA has taken other measures to mitigate the risks involved with miscellaneous obligations and to ensure that adequate oversight and reviews are regularly performed.

Risk Mitigation and Oversight

VA has established two review programs to mitigate the risks involved with miscellaneous obligations and to ensure adequate oversight and reviews are regularly performed:

1. MQAS has expanded their site visit reviews to include a review of miscellaneous obligations; and
2. VHA’s Financial Quality Assurance Managers at each network review a percentage of all VHA stations miscellaneous obligations for segregation of duties and documentation of purpose, vendor, and contract number. 

Both of these activities will continue for the indefinite future.

Current Trends

Current FY 2010 Year To Date (YTD) results from MQAS reviews show an overall trend of substantial improvement over the initial GAO findings in FY 2008.  For example:

• In FY 2010 YTD, 4 percent of 1358s did not have the purpose field completed compared to 19 percent in FY 2008. 
• In FY 2010 YTD, 13 percent of 1358s did not have the vendor field completed compared to 48 percent in FY 2008. 
• In FY 2010 YTD, 10 percent of 1358s did not have the contract field completed compared to 38 percent in FY 2008. 

Segregation of Duties violations continue to decrease.  In FY 2008 the percentage was 71 percent; in FY 2009 it dropped to 51 percent; and in FY 2010 YTD, it has continued to decrease to 29 percent. 

For FY 2010 YTD, miscellaneous obligations that require but were not submitted for HCA review show a continued decrease.  For FY 2010, MQAS has reviewed 271 miscellaneous obligation actions.  Of those, 257 were an authorized use of the Form 1358 instrument and did not require HCA review.  The remaining 14 were required to have such review, and of these, 7 forms (50%) were not appropriately reviewed by contracting.  By comparison, in FY 2008 the percentage was 100 percent not properly reviewed; in FY 2009 it dropped to 84%—so these FY 2010 YTD results demonstrate a continued improvement in compliance with policy.

These results demonstrate that VA’s efforts to date have resulted in an overall improvement of the situation from the 2008 GAO review.

Additional Efforts

Recognizing that efforts to date were not improving the situation quickly enough, VA is taking interim action to strengthen oversight of the segregation of duties requirement.   On June 29, 2010, the Secretary of Veterans Affairs mandated that facility directors certify quarterly that their facility meets the four levels for segregating duties (described above) as defined by VA policy.  For the quarter ending September 30, 2010, and every quarter thereafter, each facility director will be required to verify that the four functions have been separated.  

The Information Security Officer is also required to certify the report.  As a result of the Secretary’s certification mandate, VA is currently enhancing its miscellaneous obligations policies[2] to provide facilities with guidance for implementation, to ensure that the quarterly certification requirements are met and reported timely.  We expect this policy will be completed in August, 2010.  Concurrently, VA’s MQAS and VHA’s Financial Quality Assurance Managers will continue to review miscellaneous obligations to measure field facilities’ compliance with policy.  The Secretary of Veterans Affairs also directed that a long-term plan be developed by September 1, 2010, to provide a longer-term IFCAP system solution, requiring the software changes (discussed previously) necessary to enforce the segregation of duties and other findings.  The Office of Information and Technology will lead this effort, collaborating closely with VHA, VA’s Chief Financial Officer, and the Office of Acquisition, Logistics, and Construction.

Mr. Chairman and members of the Committee, VA has made significant policy changes to address the concerns you have raised about our use and oversight of miscellaneous obligations.  VA has tightened requirements to enforce segregation of duties and to ensure proper review of Form 1358.  New reports and data are available to help managers conduct the proper oversight, and the Secretary’s mandate requires them to exercise this oversight quarterly and certify the results for every facility.  VA will continue to pursue technological solutions as well, but I am pleased to report that VA has made significant improvements, as recent data show.

Thank you for the opportunity to share this report of VA’s progress in this area.  This concludes my statement.  I would be pleased to answer any questions you may have.

[1] VA Financial Policies and Procedures, Volume II, Chapter 6, “Miscellaneous Obligations”

[2] VA Financial Policies and Procedures, ibid.