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The U.S. Department of Veterans Affairs Internal Contracting Oversight Deficiencies.

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JUNE 27, 2007

SERIAL No. 110-31

Printed for the use of the Committee on Veterans' Affairs





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BOB FILNER, California, Chairman


VIC SNYDER, Arkansas
JOHN J. HALL, New York
PHIL HARE, Illinois
MICHAEL F. DOYLE, Pennsylvania
TIMOTHY J. WALZ, Minnesota

STEVE BUYER,  Indiana, Ranking
HENRY E. BROWN, JR., South Carolina
BRIAN P. BILBRAY, California




Malcom A. Shorter, Staff Director

HARRY E. MITCHELL, Arizona, Chairman

TIMOTHY J. WALZ, Minnesota
GINNY BROWN-WAITE, Florida, Ranking
BRIAN P. BILBRAY, California

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.



June 27, 2007

U.S. Department of Veterans Affairs Internal Contracting Oversight Deficiencies


Chairman Harry E. Mitchell
    Prepared statement of Chairman Mitchell
Hon. Ginny Brown-Waite, Ranking Republican Member
    Prepared statement of Congresswoman Brown-Waite
Hon. Timothy J. Walz



U.S. Department of Veterans Affairs:
    Belinda J. Finn, Assistant Inspector General for Auditing, Office of Inspector General
        Prepared statement of Ms. Finn
    Hon. Robert J. Henke, Assistant Secretary for Management
        Prepared statement of Hon. Henke


Post Hearing and Responses Questions for the Record:

Hon. Harry E. Mitchell, Chairman, and Hon. Ginny Brown-Waite, Ranking Republican Member, Subcommittee on Oversight and Investigations, Committee on Veterans' Affairs, to Hon. George J. Opfer, Inspector General, U.S. Department of Veterans Affairs, letter dated July 16, 2007, and response letter dated August 14, 2007

Hon. Harry E. Mitchell, Chairman, and Hon. Ginny Brown-Waite, Ranking Republican Member, Subcommittee on Oversight and Investigations, Committee on Veterans' Affairs, to Hon. R. James Nicholson, Secretary, U.S. Department of Veterans Affairs, letter dated July 16, 2007, and VA responses


Wednesday, June 27, 2007
U. S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Veterans' Affairs,
Washington, DC.

The Committee met, pursuant to notice, at 10:12 a.m., in Room 340, Cannon House Office Building, Hon. Harry E. Mitchell [Chairman of the Subcommittee] presiding.

Present:  Representatives Mitchell, Walz, and Brown-Waite.


Mr. MITCHELL.  Good morning and welcome to the Subcommittee on Oversight and Investigations for the June 27th meeting.  The hearing this morning will be on the VA’s internal contracting oversight deficiencies.  This hearing will come to order.  And I want to thank everyone for being here this morning.

I am pleased that so many folks could attend this oversight hearing on the U.S. Department of Veterans Affairs' (VA’s) internal contracting oversight deficiencies.  This will not be the last.  We all have work to do.

We are going to begin today by hearing from the Office of Inspector General (IG) concerning the IG's recently completed audit of contracting practices at the Boston Healthcare System in Veterans Integrated Services Network (VISN) 1.  The IG’s report is extremely disturbing.  Senior contracting and fiscal officers at the Boston Healthcare System executed contract modifications in excess of $5 million that were illegal.

As just one example, in fiscal year 2002, Boston executed a contract for $16,000 to repair asphalt roadways.  In March of 2004, this paving contract was modified to add electrical panel and emergency generator projects totaling $900,000.  These modifications were clearly outside the scope of the original contract and clearly in violation of laws governing the use of expired appropriations.

These were not just technical violations.  Not only did the contract modifications violate some of the most basic precepts of government contracting and appropriations law, they also had the following pernicious effects.  First, the modifications were not completed.  We have no way of knowing whether the taxpayers’ interests in obtaining a fair price and good service were protected.  Secondly, the Boston Healthcare System decided to put its own needs above all other priorities in VISN 1. 

VA does not have unlimited funds and has a process of prioritizing expenditures that Boston evaded.  The Inspector General found that VISN 1 deferred renovation of a cardiology unit in another VA hospital because of concerns about an insufficient budget.  The VISN had no opportunity to decide whether the cardiology unit at the other hospital was of higher priority than the parking lot in Boston.

We are not here to assess individual responsibility.  There are no witnesses from VISN 1 present and we will not be asking the IG or VA about individuals.  VA is conducting an Administrative Board of Investigation and we leave that assessment of individual responsibility to that process.

We are here to inquire about VA’s internal controls over acquisition, controls that Boston certainly suggests are seriously lacking.  For example, VA has a policy that all contract modifications in excess of $100,000 must be submitted for legal review.  This was not done in Boston and the Inspector General indicated in his report that the improper contracting might have been prevented if this policy had been followed.  The obvious question is:  why did VA’s internal controls not require verification of legal review prior to disbursement of funds for contract modifications in excess of $100,000?  Policies are practically worthless if VA has no way of knowing if they are being followed.

In February of this year, the Inspector General told this Subcommittee that the VA does not know what it purchases, who it purchases from, who made or approved purchases, whether a purchase was made by contract or on the open market, what was paid, and whether the prices were fair and reasonable.  And this is not a new problem. 

In May of 2001, the Inspector General issued a report evaluating VA’s purchasing practices.  In July of that year, then-Secretary Principi formed a task force to correct the many problems identified by the IG.  The task force issued its report in February 2002 with 62 recommendations for change.  We look forward to the VA telling us which of these recommendations have been successfully implemented and what VA is currently doing to monitor their completion.

We have little reason to be optimistic about VA’s response.  Since 2002, VA has spent hundreds of millions of dollars on procurement and deployment of the Core Financial and Logistics Systems, or CoreFLS.  CoreFLS has been a complete failure.  Congress mandated that VA develop the Patient Financial Services System.

From 2003 to 2006, VA paid a contractor $30 million for this project, received nothing and terminated the contract with the $30 million of taxpayers’ money wasted.  There is a list of Inspector General reports recounting similar problems with VA contracting.

Finally, the Subcommittee cannot help but note that VA’s external auditors have found material weaknesses in VA’s internal controls that were repeat deficiencies from prior years.  Those material weaknesses include VA’s integrated financial management system and its operational oversight.  As the Inspector General has said, "The risk of materially misstating financial information remains high because of these material weaknesses."

We all share the goal of ensuring that the $10 to $12 billion VA spends on acquisition each year is well spent.  That goal can only be met if VA has reliable internal controls.  It is a truism in business — if you can’t measure it, you can’t manage it.  VA cannot manage its spending without dramatic improvements in its controls.

I can assure you, we will all be back here in a few months to see what progress VA has made.  Between now and then, the Subcommittee expects the VA will work closely with the Subcommittee’s staff so that Congress can stay informed about VA’s progress.

[The statement of Chairman Mitchell appears in the Appendix.]

Mr. MITCHELL.  Before I recognize the Ranking Republican Member for her remarks, I would like to swear in our witnesses.  Would all the witness that are here today please stand and raise their right hand?

[Witnesses were sworn.]

Mr. MITCHELL.  Thank you.  Now I would like to recognize Ms. Brown-Waite for opening remarks.


Ms. BROWN-WAITE.  I thank the Chairman very much, and I thank him for holding this hearing.  It is important that we bring these concerns about procurement forward for discussion.  I have a feeling that it has happened before and we are just repeating history.  I know that the Chairman and I have no intention of just having history be repeated, that we are going to take some action.  Our Nation’s veterans are certainly a valuable asset and caring for them has to be our first priority. 

Procurement is an area in which we can provide services and care to veterans.  But it is also an area where if it is not done properly and within the letter of the law, it is subject to abuse and impropriety.  According to the VA’s own Office of Acquisitions web page updated last on October 14th, 2006, VA states that its annual expenditures are more than $5.1 billion for supplies and services, including construction.  VA is one of the largest procurement and supply agencies in the Federal Government.  Drugs, medical supplies and equipment, information technology (IT) equipment, services and other critical patient care items must be procured and distributed to VA’s health care facilities, mainly because it is the largest health care delivery system in the country.

Supply support is also provided to regional offices, national cemeteries, automation centers and other various VA activities.  Yet today, VA testifies that the $5.1 billion is now over $10 billion, almost double the amount from last October.  VA’s procurement practices are so decentralized with very little oversight.  I wonder if VA really knows how much is being procured and how efficiently resources are being spent.

I also believe that an unknown amount, probably a lot, is listed under that very benign category of miscellaneous obligations.  What a great place to put purchases.  I hope that we see some clarity to these issues during today’s hearing.  I understand that we will hear from the VA’s IG about the egregious procurement improprieties that occurred at the Boston VA Healthcare System. 

VA can have policies and procedures stacked all the way to the ceiling, but if there are no controls in place to ensure compliance or noncompliance, what good are these policies.  With reports dating back as far as April 1997, ten years ago, it appears the IG and the VA have recognized the existence of the systemic procedure problems.  Yet, little has been done to address them.  Oh, yes, we have generated reports and recommendations countless times over the past years.  But when we see the same recommendations over and over again, we have got to wonder why no one took these seriously and why there has been no effort to punish the perpetrators.

I have strong concerns that VA has failed to act on what they have known has been a problem.  These reports speak of professionalizing the VA, optimizing and monitoring the procurement process and making the contracting process fair and accessible.  Yet, cases like those found in the Boston VA Healthcare System provide a glaring example of perpetual lack of accountability.

We owe it to our veterans to address the mismanagement in VA procurement once and for all.  While we know that there are good VA employees working within the current procurement system, we need assurances that VA is working to fix a broken system.  As of today, 19 of the 21 VISNs have taken steps to protect and update their procurement process.  The other two VISNs must follow suit.

With backlogged patients not getting the resources they need and the VA executives asking for more and more money, we need to make sure that funds are going where they need to go and not in the hands of procurement employees who spend more than the allotted and legal procurement amounts and methods.  The first step of all recovery programs is to admit there is a problem. 

So I hope that the facts brought out in today’s hearing and the IG’s report, coupled with the incidents at Boston, are indicative of a long history of very dysfunctional decentralized acquisition and procurement programs with very little oversight.  We hope that these will be a springboard for change within the VA.

Thank you, Mr. Chairman, for yielding.  It is important to bring these concerns about procurement forward for discussion.  Our Nation’s veterans are a valuable asset and caring for them should be our first priority.  Procurement is an area in which we can provide services and care to our veterans.  But it is also an area where if it is not done properly and within the letter of the law can be subject to fraud, abuse and lots of impropriety.

According to the VA’s own Office of Acquisitions web site which was updated, they said $5 billion.  We’re now at $10 billion.  We hope to uncover today exactly what those problems were.  And I appreciate the gentleman for yielding.

[The statement of Congresswoman Brown-Waite appears in the Appendix.]

Mr. MITCHELL.  Thank you.  I would like to now recognize Mr. Walz.


Mr. WALZ.  Thank you, Mr. Chairman, and thank you, Ms. Ranking Member, for your comments.

Thank you, each of you, for coming today and we appreciate your expertise, your experience and your guidance to help us on this.  This hearing is making certain we fulfill our obligation of oversight because we are all partners in this and our ultimate goal is to provide the best care possible for our veterans.  And our second obligation is to make sure we are good stewards of the public trust.

So I look forward to having the opportunity to learn from this experience, making sure, as the Ranking Member said, that we do more than learn, that we act on those to ensure that the precious resources that are allocated for our veterans are having the biggest impact.  So I see this as an absolute piece of what needs to happen in terms of accountability.  I see it as an absolute piece of what needs to happen to make sure that we increase our effectiveness.

So I want to thank each and every one of you for coming and sharing with us what we can do to make this better.  And I yield back, Mr. Chairman.

Mr. MITCHELL.  Thank you.  We will now proceed to panel one.  Ms. Belinda Finn is the Assistant Inspector General for Auditing.  She’s accompanied by Ms. Maureen Regan, the Counselor to the Inspector General and a recognized contracting expert; and Mr. Nick Dahl, the Director of the Bedford Audit Operations Division, which was responsible for the report on the recent abuses in Boston.  We look forward to hearing from Ms. Finn and her views on the VA’s internal contracting and oversight process and procedures.

Would you please come forward?  Ms. Finn, you will have five minutes.

Ms. FINN.  Thank you.

Mr. MITCHELL.  Thank you.


Ms. FINN.  Mr. Chairman and Members of the Subcommittee, thank you for the opportunity to be here today.  I will be testifying about our report on the audit of alleged mismanagement of government funds at the VA Boston Healthcare System.  The issues we reported in our recommendations were specific to VISN 1 and the Boston Healthcare System.  However, we believe that the Veterans Health Administration (VHA) can improve controls to prevent similar incidents elsewhere. 

We began our review in response to an anonymous hotline complaint that alleged contract irregularities and the misuse of government funds on contract modifications.  The original 24 contracts were executed between fiscal years 2000 and 2003 at a value of $1.3 million.  From 2002 to 2006, Boston Healthcare modified the original contracts 40 times to perform nonrecurring maintenance programs with a combined value of $5.5 million.

Our review determined that 37 of the 40 contract modifications were outside the scope of the original contracts and should have been competed as new procurements.  As illustrated in Chairman Mitchell’s opening statement, the work required by the modifications had little bearing in connection to the original contract.  The modifications were worth a total of $5.4 million, all of which was paid with expired funds.  Because the contract modifications were not within the scope of the original contracts, funding the actions with expired funds violated Federal appropriations laws. 

Boston Healthcare also failed to comply with Federal acquisition regulations.  Several of the actions lacked an adequate statement of work to describe the work or services being required, and by modifying existing contracts, they also avoided competition requirements and did not perform the analyses that would have allowed them to determine if the prices were fair and reasonable.

As already stated, policies and procedures were in place to prohibit the out-of-scope contract modifications and the improper use of expired funds.  Controls were not in place to enforce compliance.  Policies require VA approval to use expired funds, legal reviews of the contract modifications over $100,000, and even tracking of the nonrecurring maintenance projects at the VISN level.

Boston Healthcare complied with none of these policies.  But neither network nor VHA personnel were aware of the contract modifications, the use of expired funds, or the various nonrecurring maintenance projects being performed.

In closing, the Office of Inspector General (OIG) is committed to working with VA and VHA to correct these deficiencies and help to prevent similar occurrences in the future.

Mr. Chairman, thank you again for the opportunity to be here.  My colleagues and I will be happy to answer any questions from you or the other Members of the Subcommittee.

[The statement of Ms. Finn in the Appendix.]

Mr. MITCHELL.  Thank you, Ms. Finn.  I have a couple questions.  First of all, what control weaknesses allowed the contracting irregularities and the misuse of funds to occur at the Boston Healthcare System?

Ms. FINN.  The control weaknesses basically were to ensure compliance.  There were no system controls that would have prevented people below the VISN level from charging expired funds.  There was no control in place to assure or ensure that the legal reviews were performed.  There was no control to perform a further supervisory check on the contract modifications to determine if they were out of scope.

Mr. MITCHELL.  Then comes a follow-up.  What corrective actions has the VISN 1 Director taken in response to your recommendations and are you satisfied with their actions?

Ms. FINN.  Mr. Dahl is going to address that.

Mr. MITCHELL.  All right.

Mr. DAHL.  In response to recommendations we made to improve controls over the execution of contract modifications, the use of expired funds, following the "nonrecurring maintenance" (NRM) approval process, and staying in compliance with the Federal Acquisition Regulation (FAR), the VISN has developed and issued a number of standard operating procedures and guidance to the field facilities within the VISN to improve the management controls over those aspects of the process.

For example, they have a policy in place that is designed to better ensure that modifications that are funded with prior year funds are within the scope of the original contract.  They also have a process in place where modifications that are going to be funded with prior year funds are approved at a level above the contracting officer.

We also made recommendations that they take administrative action against the Chief of the Fiscal Service in Boston and the Chief of the Purchasing and Contracting Section in Boston and we also recommended that they conduct an administrative investigation of the facts surrounding the issues we found during our audit. 

In response to that, the VISN Director has charged an administrative board of investigation to conduct an investigation surrounding the facts of the improper modifications and use of expired funds.  The board is comprised of employees from outside of VISN 1.  They have a short deadline.  Their report and conclusions are due to the VISN Director by the end of July and based on their findings and conclusions, the VISN Director has informed us that she plans to take action against any officials for whom it is warranted.

Now, one other recommendation we made was that they make corrective accounting adjustments to properly record the funding of these improper contract modifications.  The VISN Director has informed us that these modifications were made in accordance with instructions provided by headquarters.

I would like to close this answer by saying we feel these are steps in the right direction.  But we have not validated the actions reported, nor assessed their effectiveness.  And I would also like to point out that they are specific to VISN 1.  They are not specific to the entire VHA.

Mr. MITCHELL.  Thank you.  And that brings up the last one I want to ask.  Are there any assurances that these deficiencies and problems that have occurred in VISN 1 are not incurring in other VISNs?

Ms. FINN.  No.  We have no assurance that these actions are not occurring in other locations across the network, or across VHA.

Mr. MITCHELL.  Are you looking into others besides just this one?  I understand you looked at this one because you had a tip.  What about the other VISNs?

Ms. FINN.  At present, we don’t have any work going on in that area.  But in the future we could look at that.

Mr. MITCHELL.  Thank you.  I yield to Ms. Brown-Waite.

Ms. BROWN-WAITE.  I thank the Chairman for yielding.  Ms. Finn, you have got to have the most frustrating job in the whole wide world, second only to Members of Congress.  How many similar reports of lack of controls in this, in the purchasing area?  We know they go back to 1997.  How frequently have they been issued?  Do you know that?

Ms. FINN.  Ms. Brown-Waite, I am fairly new at VA, so I really can’t give you an answer on the number.  But I know it has been extensive.  I did bring help with me and Maureen Regan is the Counselor to the IG.  She has done a lot of work in contracting.

Ms. BROWN-WAITE.  Perhaps Ms. Regan could answer?

Ms. REGAN.  We have done a series of reports primarily on individual contracting actions.  There hasn’t been the broad national type of audit in a number of years on this issue.  But various contracts—even in the past year I think we have put out three or four, maybe even five reports on various large contracts in which there has been problems at all levels in the contracting process.  This is because there are no controls to make sure that the acquisition is properly planned, to make sure that it is properly administered, to be sure that the bills are properly paid.  There are problems in all those various areas.

So there is a series of reports from 2001 with our purchasing report, our evaluation of sole source contracts at the medical centers, to affiliates which came out in 2005 and we put out this year the patient financial services system contract, the central incident report center contract, the contract that had to do with hiring the forensic auditors or investigators to look at the data lost last year.  We have several CAP reports that I know we have worked with health care inspections on contracting actions at various medical centers.  I know Dallas is out.  We have a couple others coming out there.  And all of them show similar lack of controls in planning and administration of contracts.

Ms. BROWN-WAITE.  The reason why I said it has got to be the most frustrating job is because you make recommendations that certainly would improve the systems and it appears as if your recommendations are ignored.  Would that be a fair statement, Ms. Regan?

Ms. REGAN.  A lot of times recommendations end up in policies and whether or not those policies are complied with, there is no oversight to ensure it.  With respect to the purchasing report, former Secretary Principi, I think it was mentioned in Mr. Mitchell’s statement, put out a Procurement Reform Task Force Report with 62 recommendations.  There has been no oversight at all to see if they have been implemented.

In the sole-source to the affiliate, the contract report, VA did put out directive 1663.  We are not seeing that that has been complied with in the work that was ongoing in that area.  So there is no—even if you put out a policy, there is no oversight for compliance.

Ms. BROWN-WAITE.  Ms. Finn, or Mr. Dahl, or Ms. Regan, what would lead the Chief of Fiscal Services to suppose that funds were available from a prior year appropriation?  Is it "I want to spend it, so I do it?"

Mr. DAHL.  We don’t have a—I don’t have a clear answer for you on that.  I assume that is something similar to that.  In the past, I think that these medical centers had more, more control over their own projects before the VISN concept came into place.  If a medical center needed work done, they did their own contracting.  They had their own funding.  That has changed with the whole VISN structure.

They found—


Mr. DAHL.  They found creative ways to basically hide money in Boston so that money would be available to them down the road to complete projects that they wanted to have completed.

Ms. BROWN-WAITE.  But it was not legal what they did.  And Mr. Dahl, you said that actions that are warranted will be taken—that you have been told actions that were warranted would be taken.  Do you feel—do any of the three of you feel as if anybody really is accountable?  Just a simple yes or no.

Ms. REGAN.  In this particular case or in general?

Ms. BROWN-WAITE.  Let’s take the Boston case.

Mr. DAHL.  Yes.

Ms. FINN.  I believe that people are accountable for their actions, yes.

Ms. BROWN-WAITE.  No.  Do you think that people, the people who were involved should be—are accountable and should be held accountable?

Ms. FINN.  Yes.

Mr. DAHL.  Yes.

Ms. BROWN-WAITE.  Do you believe that will take place?

Mr. DAHL.  I have high hopes that that will take place.

Ms. BROWN-WAITE.  Would you define accountable to me?  Maybe that is where I need to go.

Mr. DAHL.  Well, for instance, already—

Ms. BROWN-WAITE.  Should they be demoted?  Should we make sure they, you know—

Mr. DAHL.  The Chief of the Purchasing and Contracting Section, we had also made a recommendation to the Deputy Assistant Secretary for Acquisition and Materiel Management that he determine whether her contract warrant should be revoked.  He has already taken action to pull her warrant.  I don’t know that that is a final action until the Administrative Board has done their work.  But that would seem to me, in my opinion, to be suitable, that she can no longer function as a contracting officer.

Ms. BROWN-WAITE.  Does she have an ugly twin sister who is doing it also?  I mean maybe that is what the problem is.

Mr. Chairman, I appreciate—I have gone over my time and I yield back to you.

Mr. MITCHELL.  Thank you.  Mr. Walz?

Mr. WALZ.  Well, thank you, Mr. Chairman and thank you, Ms. Finn, for your testimony, and each of you.  And on this I may be—because I know we are talking more on a micro level about this Boston incident.  But having you here in the Office of Inspector General, one of the things that I am concerned about is looking at the macro level, if there is anything we can extrapolate from this to see if the scope of this extends.

I know I may be asking you to maybe make a little bit of a reach.  But one of the things we are trying to get a grasp on in this Committee, this Subcommittee and this Committee as a whole and this Congress last week passed some of the most sweeping legislation dealing with the VA in terms of resourcing in the 77-year history of the VA.  There is going to be a massive amount of resourcing and my colleagues on these Committees asked what I think were some very pertinent questions and some very important questions.

Resourcing is one piece of it and we all agree that—at least 409 of us and 2 didn’t agree that that was appropriate use of taxpayer money.  My question is, do you believe that this experience is the tip of an iceberg?  Are there systems in place for us to deal with expanding some of the coverage, opening up some traumatic brain injury centers, making sure we reduce that number of the backlog in cases? 

What this makes me wonder about is, are we setting ourselves up to have more of this happen as we get those resources in?  So I know it is not a pointed or specific question, but the Office of the OIG I see as a very, very important tool in the delivery of quality services at the best, the best use of resources.  So Ms. Finn?

Ms. FINN.  We have reported in our financial statement audit that the financial management systems at VA are a material weakness for the department.  Until we have really an integrated financial system with adequate controls through, that will remain a material weakness.

The lack of a financial management system to truly track and record our obligations and expenditures will prove a problem as we deal with additional resources and requirements.

Mr. WALZ.  And one final question, again, I know I am asking you maybe to help us understand this.  Again, going back to the OIG and it may extend the scope of this or step outside a little bit of this hearing.  I am intrigued, I guess encouraged by, that this came from the use of a hotline, that this system of oversight appears to have worked in this case, at least on a very informal manner. 

My question to you is, I guess, do you feel like—being new to this and you are stepping into it, does the OIG have the resources to be able to follow up on these?  And I think that the Chairman and the Ranking Member’s question was, and Chairman Mitchell’s question was, if we had it in Boston, I think, at least my gut feeling would tell me, perhaps we should look at the other VISNs too.  But I am wondering if you have the resources or the ability or the authority or if you could help me understand that.

Ms. FINN.  We have the ability and the authority.  The resources, we would be balancing this need against all of the competing priorities that we have to deal with and we have many.  Specifically on hotline complaints, we receive a lot and we have to judge each one of those as to whether we can do a review of that complaint with OIG personnel.  Many times we do not have the resources and we would refer it to management to review.

In this case, I think I made the comment and my colleagues all seem to agree with me, that the one control that did work was the OIG hotline.

Mr. WALZ.  Yeah.  Okay.  Well, very good.  I appreciate it and I yield back, Mr. Chairman.

Mr. MITCHELL.  I have one final question.  Do you believe that the VA is in the process of getting an adequate financial management system in place?

Ms. FINN.  I know they are in the process of developing a system, but we have not done a review specifically of that.  So I would like to defer really until we have resources and time to take a look at that system to give you an honest, complete assessment of that.

Mr. MITCHELL.  Thank you.  Do you have any other questions?

Ms. BROWN-WAITE.  First of all, I am glad to know that the hotline is working and whoever reported it has to also feel very good that actions, you know, that this was followed up.  I know sometimes the constituents out there think the hotlines are useful because nobody ever does anything.  And I will be very happy to go home and sing your praises because of the follow-up that took place here.

Any of the three of you can try to answer this question.  For these egregious acts to have taken place, did the individuals involved have multiple opportunities to catch themselves violating procedure and circumventing controls, like the hurdles of using expired contracts, modifying contracts outside their scope, obtaining proper legal concurrence from the VA regional council, and or the VA expired funds manager, you know, where they saw fit to use prior year’s appropriate funds?

I, at one point in my life before I came to Congress, actually was a contracts administrator in a large water management district.  That is one of the reasons why I find this whole process so out of control and, you know, there is a way to stop this.  So if you could just tell me if they had these multiple opportunities to stop themselves?

Ms. FINN.  Yes.  I mean they modified the contracts.  They did 40 modifications over the years.  So obviously, everybody involved had multiple opportunities to stop.

Mr. DAHL.  And I would add that, you know, contracting officers are well trained.  They know their responsibilities.  Also, people that have worked in fiscal service for any amount of time should be well aware of appropriation law and the proper use of funds.  I really don’t think, in my opinion, that these people had an excuse for what they did.

Ms. BROWN-WAITE.  Are we on our way to somebody up there seeing the light that Congress has caught on, that they have ignored all of these other reports?

Ms. FINN.  Are you talking about the larger procurement issues?


Ms. FINN.  Yes, I hope so.  But I think time will tell.

Ms. BROWN-WAITE.  Mr. Chairman, I yield back.

Mr. MITCHELL.  Thank you very much.  We appreciate you being here and answering our questions.  Thank you.

Ms. FINN.  Thank you.

Mr. MITCHELL.  I would like to welcome panel two to the witness table.  Mr. Robert Henke is the Assistant Secretary for Management of the VA and the Department's Chief Financial Officer (CFO).  He is accompanied by Mr. Jan Frye, the Deputy Assistant Secretary of Acquisition and Materiel Management, and Mr. Frederick Downs, Jr., the Chief Prosthetics and Clinical Logistics Officer for the Veterans Health Administration who oversees contracting and procurement for the VHA. 

We look forward to hearing Assistant Secretary Henke’s testimony and if you could please keep it to five minutes, we would appreciate that.


Mr. HENKE.  Yes, sir, Mr. Chairman.  Let me do that and just basically cut right to the chase.  We recognize—I personally recognize that VA’s procurement practices are one of the top five major management challenges that our IG has identified for the Department.  What I want you to know today is that we understand the challenges and we have many efforts underway to improve our systems and our processes.

Our leadership is engaged from the Secretary down and is committed, and is clearly articulating an expectation that VA must work to improve the quality, efficiency and productivity of our acquisition services. 

Mr. Chairman, if I might, I would like to highlight for the Committee some of the things we have accomplished and things we are working to accomplish in the area of acquisition, just to put the problem, the issue in context.

We have reduced from over 200 to 31 the number of heads of contracting activities who oversee contracting, and have implemented 60 of the 62 recommendations in the VA Procurement Reform Task Force.  We have consolidated the contracting function at 19 of our 21 health care networks and the other two will be done by the end of this year.  We established contract review boards and required their use at three critical points in the acquisition process for contracts valued at $5 million and above. 

We recognize the need for much stronger, more deliberate and more rigorous acquisition planning and have launched cross-functional IPT’s or integrated product teams to develop those requirements and assure the contracting process meets the need.  We have deployed nationally an Electronic Contract Management System that automates contract writing, promotes standardization and ensures better accuracy of contracting data.  And what this system will do is give management better oversight and better reporting and analytical tools to track and oversee contracting actions that are underway.

We have hired a new Deputy Assistant Secretary for Acquisition.  He has 30 years of Army experience in logistics and contracting to include senior command positions in Korea, the UK and stateside.  We hired a new executive as VA’s acquisition lead.  He has 20 years of experience in industry, the Department of Justice, Department of Commerce.

We designated VHA’s Prosthetics and Clinical Logistics Officer, that is Mr. Downs seated to my left.  And forgive me, Mr. Frye is my Deputy for Acquisition.  He is the guy with the Army logistics background.

We have completely reorganized my 440-person acquisition office.  We separated in the office the functions of operations and execution from policy development which over time had grown intertwined and, frankly, a bit confused.  I asked for and received two additional executive positions and they were approved by the Deputy Secretary to improve that organization.

We performed the first ever external independent audit of VA's supply fund, the first audit since that fund was established in 1953.  We hired a fantastic young executive to lead our National Acquisition Center in Chicago.  That position had been vacant for almost two years and now it is filled.

I designated a senior executive at VA as my Acquisition Career Manager to reflect the importance of getting this acquisition work force right and giving them the tools they need to succeed.  We have completed a total rewrite of VA’s acquisition regulations, the first complete rewrite of them since 1984 and we are going to publish that final rule here sometime this summer.

We have defined the acquisition work force at VA and are dedicating resources to educate, train and certify that work force.  At the IG’s suggestion, we have established a data mining program to improve compliance and oversight in our purchase card program.  In 2004, we established a Business Oversight Office in Texas and staffed it with 108 auditors, system experts, financial experts and acquisition professionals.

We have directed—I have directed a comprehensive, third-party assessment of VA’s acquisition model and governance.  That solicitation is on the streets and I expect to have an award of a nationally reputable firm here in August and they will come back to us with their assessment of our governance model for acquisition, and whether we are organized properly or not.

We performed 1,632 acquisition reviews last year in my acquisition resources service. 

We have embarked on the government’s version of Sarbanes-Oxley.  We have hired a major national accounting and audit firm to test, to rigorously test our internal controls and to give me the assurance as the CFO that I can sign off on the integrity of our financial statements.

We are in year two of that process and we have identified the 11 key business activities we are looking at and we are testing the controls in every one of them.  This year we are testing controls in, among other things, contracting, purchase cards and equipment inventories.  And I have established a separate Internal Controls Service in Austin and I am staffing it now.

In summary, Mr. Chairman, we recognize the challenges we have.  We know that much work remains.  We brought in new leadership to tackle the problem.  The people at the table and the people behind us are working together to solve the problem.  We believe we are moving forward and making strong progress and we recognize there is more work to do.

That concludes my opening statement and I would be pleased to take your questions, sir.

[The statement of Hon. Henke appears in the Appendix.]

Mr. MITCHELL.  Thank you, Mr. Henke.  The reason we are here today is because of a hotline tip.  And I assume that if that tip hadn’t come in, business would still be going on as usual.  Hopefully that is not the case, but that sure seems to be the case.

Let me ask, could you assure us that the control weaknesses that we found in VISN 1 are not occurring and have not occurred in any of the other VISNs?

Mr. HENKE.  Sir, I can assure you that I view what occurred in Boston as an aberration in the system.  Frankly, it is unfortunate that it had to get to a hotline inquiry to get it, to bring it to resolution.  The hotline is obviously the court of last resort for something.  We have literally dozens of actions underway and increased oversight to ensure that a Boston doesn’t happen again.

When I read the report and talk to the people in Boston who are involved with this, it is clear to me that the contracting office there, the Chief of the Purchasing Section—anyone in contracting 101 knows you don’t do out-of-scope modifications to contracts.  Any fiscal officer knows you don’t move around expired funds without a very good reason and a under very limited circumstances that get to bona fide need in appropriations law. 

I can tell you that we are going to take a number of actions specifically in the VISN 1 area to support them and assist them and assure that they come up to compliance with standards.  Sir, I do want to point out that what occurred in Boston occurred in the time frame of 2000 to 2003, if I recall correctly.  That was before we had centralized or consolidated the contracting function at 19 of 21 of our VISNs. 

Since that time, we have established positions at the network level to take contracting officers out of the chain of command of the facility director and put them in at the network level, meaning there is a network contract manager who is an 1102 contracting professional.  There is a Chief Logistics Officer and a Deputy Network Director at senior levels to oversee the business functions in that network.

Mr. MITCHELL.  I understand what you are saying.  I think this practice went on clear up until about 2006.  But in any case, what I am asking you again is, can you assure us that the things that happened in Boston have not happened in the other VISNs?  Have you checked them as you are doing it?  And Boston is an aberration that has not occurred in the others?

Mr. HENKE.  Can I assure you with a hundred percent certainty that it is not happening anywhere else?

Mr. MITCHELL.  Yes.  Are you looking into the other VISNs or you are just looking into Boston?

Mr. HENKE.  We are looking into other VISNs.  I can’t assure you that it is not happening elsewhere.  But I am taking steps to find out if it is.

Mr. MITCHELL.  Thank you.  Ms. Brown-Waite?

Ms. BROWN-WAITE.  Thank you, Mr. Chairman, for yielding.  Mr. Henke, this is not the first instance of contracting going awry at the VA.  Earlier this year, we learned of a problem with the contract with UNISYS where the VA ended up paying $12 million for software that now sits on a shelf unfinished and unusable. 

Tell me how you are going to prevent this kind of absolute, total complete waste from happening again.

Mr. HENKE.  Yes, ma’am.  I am painfully aware of all the IG reports that point out where we have fallen short.  What we are doing to fix it is—and the core problem in that case was we don’t have a very strong culture of program management, program management expertise partnered with the acquisition community and acquisition work force to develop clear statements of requirements for what the contract is supposed to do, to develop that contracting vehicle in a collaborative way with legal in the room, with finance in the room, with acquisition and program officials in the room.

So too often we write vague requirements that then aren’t executed by a contractor.  We also need to improve post-award of that contract.  We need to improve our ability to manage that contract.  Once the contract is in place, we can’t put it on a shelf and hope that things come to fruition.  We need to actively manage the contractor to ensure they perform and they deliver.

Ms. BROWN-WAITE.  Sir, are you saying you don’t have contract managers?  You have been in—VA has been in existence and doing these multi-million dollar contracts all these years and you don’t have contract managers?

Mr. HENKE.  No, ma’am.  We need to professionalize our program management work force, not the acquisition people, but the people who determine, "I have a need to acquire something."  The program management expertise that frankly DoD is very good at, is lacking in other agencies and the OMB is directing us to make similar improvements in civilian agencies.

Ms. BROWN-WAITE.  Sir, you brought up the term "culture" and I think that is exactly what is wrong with the VA’s whole purchasing debacles, a decade now of debacles.  It is the culture there of anything goes and just spending the taxpayer dollar.  You know, the culture of let’s just go ahead and spend with little or no oversight is absolutely an insult to the taxpayers.  And I hope that you three gentlemen know this and that you take this message back.

It is a complete insult to the taxpayers who want to do right by our veterans.  Their tax dollars are paying your salaries and the salaries of people who are supposed to be watching over the procurement process and it just doesn’t seem to happen.

Now, one of the things that was mentioned was that you now have contract oversight and you have a person actually in charge of this; is this accurate?

Mr. HENKE.  We have, we have staffed up long vacant executive positions in my organization with new leadership.  We have established formal contract development processes with integrated product teams and formal contract review boards at critical stages in the acquisition process to ensure that the contracting officer brings their work forward, lays it out for the most senior experienced contracting professionals.  Mr. Frye would call them the gray beards in the acquisition world.  But those contract officers come in and lay their work out and say here is my plan to accomplish this objective.  And they get guidance and direction and oversight from this contract review board with the most senior people.

Ms. BROWN-WAITE.  Do those people actually have oversight?  Mr. Downs, first of all, thank you very much for your very distinguished military career.  But do you actually have oversight?  I see your title is Chief Prosthetics and Clinical Logistical Officer.  Do you actually have real oversight that ensures tax dollars are spent appropriately?

Mr. DOWNS.  The issues before us in oversight means being able to know what is going on out there.  And what I—we have done a lot of activities within VHA to begin to conduct the kind of oversight that all of us want to do.  So the oversight that we have in VHA is the instruments that we are developing—we have put together in response to the IG for instance, we have put together a crosswalk.  When I came into this job I asked what is happening with all these IG reviews.

So what we did is put together a crosswalk and I think it is important to understand that this office in VHA is new.  I am the first Chief Officer of Logistics in VHA.  There was no office at all.  So there was no one to implement national policy at the field level that was developed at the national level.  So I think it is important to help put this in perspective, because one of the thing that we now need to do is work as a team with now the national policy developers and first of all, what is going wrong.

And so we built this crosswalk and then we put together, there were 26 groups that I put together.  We addressed the OIG cap reviews for 2004 and 2006.  We built a crosswalk of what old things have been found.  It is embarrassing and the Veterans Health Administration wanted to get it fixed.  So I have put this together.  We have presented it to our chain of command in VHA.

And Mr. Feeley is the one who has direct line authority over the field.  So my authority to accomplish things in the field comes from the chain of command.  I provide information to him.  And the key to this are compliance reports.  So as you said earlier, we can pass policy until the cows come home, but if we can’t find out what they are really doing, then it sort of is not productive.

So getting back, we developed these work groups and they are addressing each one of these IG recommendations.  We have addressed—and now follow-up is important.  The key to this also is the development of a data system so that we can electronically, objectively find out what exactly is happening.  And this ties in with lots of other issues that perhaps come forward in this hearing today.  So yes, in compliance I feel confident that we are developing the process to conduct the compliance we need.

Now, another thing that goes along with this compliance is the fact that we have this centralization within the VISN, taking the contracting officers away from the facility directors, centralizing under a network contract manager.  Now, this was a major change that occurred.  It didn’t happen perhaps as fast as we would have liked to have had it happen at first, but it has happened.  And we have two, as you said, two VISNs that yet have to accomplish this, but they will have it done by October.  All 21 VISNs then will have a centralized contracting office.  All contracting officers will answer to that individual who then answers to the Chief Logistics Officer and the Network Director.

That is one of the major accomplishments we have made in assuring that we are going to be able to force compliance on contracting within that VISN, because the network contract manager has responsibilities which we have and are in the process of developing instruments, electronic instruments to verify what is being done.

Ms. BROWN-WAITE.  Mr. Chairman, I know my time has expired, but I do have some additional questions.  And would it be your preference that I yield back or continue?

Mr. MITCHELL.  No, go ahead.

Ms. BROWN-WAITE.  Who actually—so at the VISN level you have network, a network contract manager?

Mr. DOWNS.  Yes, ma’am.

Ms. BROWN-WAITE.  Does that person have staff—

Mr. DOWNS.  Until recently—

Ms. BROWN-WAITE.  —in each of the VISNs?

Mr. DOWNS.  All the VISNs except one have various numbers of staff.  VISN 1 did not have staff, but VISN 1 has rectified that in May.  The Boston leadership in VISN 1 approved a number of changes.  The VA hospital in Brockton will become the primary location in the consolidating contracting activity for all of New England and the CLO, which is the Chief Logistics Officer, the Network Contract Manager and the entire Boston contracting staff which is currently located in Jamaica Plain, will all immediately move to that Brockton facility.

Now, in addition, all positions approve and they have approved 10 new additional staff which will be hired in this consolidation for a total of 16 staff that will be located at Brockton to support that consolidated contracting group and that is —

Ms. BROWN-WAITE.  Okay.  Who looks at the contracts at the 152 hospitals?

Mr. DOWNS.  Excuse me?

Ms. BROWN-WAITE.  Who looks at the contracts for the 152 hospitals?

Mr. DOWNS.  Each one of the NC—each one of the network contract managers is responsible for reviewing the contracts within their VISN that are being written by the contracting officers who now report to them.  And there is something new that has been added too.  The contracts are now required to be entered into the new electronic management writing system that Mr. Frye has brought into our agency and this will allow electronic overview of contracts at the national level into the VISN level.

Now, this is going to enable us to, us being anyone actually, even the IG, to look at specific contracts anytime they wish, to review those contracts.  Now, the contracts that are written over a certain dollar amount of course have to come back to legal and technical review and the business clearance review through Mr. Frye’s shop.

Ms. BROWN-WAITE.  One last question, Mr. Chairman, and Mr. Henke, you may want to answer this.  Have you looked at and found one VISN that has what would you consider best management practices, BMP’s, on procurement and said they are doing it right, let’s clone that process?

Mr. HENKE.  Ma’am, that is what we, that is what we want to find and identify is a collection of practices, if they are not all in one VISN, they are across VISNs, but share those practices and get them all to adopt the same standards.  I would be happy to get back to you on the record for which VISN we think has it most right, or if Mr. Downs could address who has made the most progress in terms of centralizing and improving. 

But I—we have made, we have centralized consolidated 19 of 21.  The next two are going to get onboard by the end of this year.  What we need to do better is find and propagate who does it right in the system to ensure these things don’t happen again. 

But Mr. Downs, do you have—

Mr. DOWNS.  I can recommend that you can go to VISN 6, for instance.  They have a superb supplies contracting facility.  VISN 12, VISN 22, those are some of our VISNs around the area and we have more centralized contracting facility, or systems that have been set up within the VISN.  All of the VISNs are moving in that direction.  But VISN 6 is close by, certainly easier for you to get to and I think you will see a superb operation down there.

Ms. BROWN-WAITE.  I yield back the balance of my time.  Good luck in changing the co