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Hon. Harry E. Mitchell, Chairman, and a Representative in Congress from the State of Arizona

This hearing will come to order.

Thank you all for coming today.  I am pleased that so many folks could attend this oversight hearing on VA Internal Contracting Oversight Deficiencies.  This will not be the last – we all have a lot of work to do.  We are going to begin today by hearing from the Office of the Inspector General concerning the IG’s recently completed audit of contracting practices in the Boston Healthcare System in Veterans Integrated Service Network, or VISN, number 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 2002
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 competed.  We have no way of knowing whether the taxpayers’ interests in obtaining a fair price and good service were protected.  Second, 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 for prioritizing expenditures that
evaded.  The Inspector General found that VISN 1 deferred renovation of a cardiology unit in another VA hospital because of concern 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

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 the assessment of individual responsibility to that process.

What we are here for is to inquire into VA’s internal controls over acquisition, controls that
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
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 VA does not know what it purchases, who it purchases from, who made or approved purchases, whether a purchase was 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 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 VA telling us which of those 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 System, 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’s contracting.

Finally, the Subcommittee cannot help but note that VA’s external auditors have found material weaknesses in VA’s internal controls that are 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 dollars 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 that VA will work closely with the Subcommittee’s staff so that Congress can stay informed about VA’s progress.