Veterans Health Administration: Improvements Needed in Design of Controls over Miscellaneous Obligations
Published: 2008-09-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Veterans Health Administration (VHA) has been using miscellaneous obligations for over 60 years to record estimates of obligations to be incurred at a later time. The large percentage of procurements recorded as miscellaneous obligations in fiscal year 2007 raised questions about whether proper controls were in place over the authorization and use of billions of dollars. GAO was asked to review (1) how VHA used miscellaneous obligations during fiscal year 2007, and (2) whether Department of Veterans Affairs (VA) policies and procedures were designed to provide adequate controls over their authorization and use. GAO obtained and analyzed available VHA data on miscellaneous obligations, reviewed VA policies and procedures, and reviewed a nongeneralizable sample of 42 miscellaneous obligations at three case study locations.
section_title: What GAO Found
paragraphs: VHA recorded over $6.9 billionof miscellaneous obligationsfor the procurement of mission-related goods and services in fiscal year 2007. According to VHA officials, miscellaneous obligations were used to facilitate payment for goods and services when the quantities and delivery dates are not known. According to VHA data, almost $3.8 billion (55.1 percent) of VHA's miscellaneous obligations was for fee-based medical services for veterans and another $1.4 billion (20.4 percent) was for drugs and medicines. The remainder funded, among other things, state homes for the care of disabled veterans, transportation of veterans to and from medical centers for treatment, and logistical support and facility maintenance for VHA medical centers nationwide. GAO's Standards for Internal Control in the Federal Government states that agency management is responsible for developing detailed policies and procedures for internal control suitable for their agency's operations. However, VA policies and procedures were not designed to provide adequate controls over the authorization and use of miscellaneous obligations with respect to oversight by contracting officials, segregation of duties, and supporting documentation for the obligation of funds. Collectively, these control design flaws increase the risk of fraud, waste, and abuse (including employees converting government assets to their own use without detection). These control design flaws were confirmed in our case studies at VHA Medical centers in Pittsburgh, Pennsylvania; Cheyenne, Wyoming; and Kansas City, Missouri. In May 2008, VHA issued revised guidance on required procedures for authorizing and using miscellaneous obligations. GAO reviewed the revised guidance and found that while it offered some improvement, it did not fully address the specific control design flaws GAO identified. Furthermore, according to VA officials, VA's policies governing miscellaneous obligations have not been subject to legal review by VA's Office of General Counsel. Such a review is essential to ensure that policies and procedures comply with applicable federal appropriations law and internal control standards.

section_title: Letter
paragraphs: The Department of Veterans Affairs (VA) is responsible for providing a  variety of services to veterans, including medical care, disability  compensation, and vocational rehabilitation. The Veterans Health  Administration (VHA), a component of VA, manages one of the largest  health care systems in the United States, providing health care to veterans  throughout the country. VHA officials briefed your Subcommittee staff in  September 2007 about various financial reporting weaknesses in the  agency and initiatives under way to address them. In the briefing, VHA  officials disclosed that $4.8 billion (56 percent) of the reported $8.6 billion  in procurements through the third quarter of fiscal year 2007 had been  done using funds categorized as “miscellaneous obligations.” VHA officials  said that they have been using miscellaneous obligations for over 60 years  to record estimates of obligations to be incurred at a later time.  According to VA policy, miscellaneous obligations can be used to record  estimated obligations to facilitate the procurement of a variety of goods  and services, including fee-based medical and nursing services and  beneficiary travel.  In addition, VA’s Office of Inspector General (OIG)  issued a report in May 2007 on the alleged mismanagement of funds at the  VA Boston Healthcare System. According to OIG officials, they obtained  documents showing that a miscellaneous obligation for $200,000 was  requested, approved, and obligated by the same fiscal official, calling into  question the adequacy of the segregation of duty controls over  miscellaneous obligations. In light of these concerns, you requested that  we review whether the design of VHA’s internal controls over the use of  miscellaneous obligations was adequate for fiscal year 2007.
In response to your request, we initiated a review to determine (1) how  VHA used miscellaneous obligations during fiscal year 2007, and   (2) whether VA’s policies and procedures are designed to provide  adequate controls over the authorization and use of miscellaneous  obligations. Our review focused on the approximately $6.9 billion of  miscellaneous obligations that VHA made during fiscal year 2007, the most  complete fiscal year for which data were available when we began our  review. We discussed our preliminary findings at a hearing before the  Subcommittee on July 31, 2008.
To determine the purposes for which VHA used miscellaneous obligations  during fiscal year 2007, we obtained and analyzed a copy of VHA’s  Integrated Funds Distribution, Control Point Activity, Accounting and  Procurement (IFCAP) database of miscellaneous obligations. VA’s Senior  Procurement Executive stated that the IFCAP database provided the best  available data on VHA miscellaneous obligations created in fiscal year  2007. We determined that the IFCAP data were sufficiently reliable for the  purposes of our report based on (1) testing various required data  elements, (2) performing walkthroughs of the system, and (3) tracing  selected transactions from source documents to the database. We could  not reconcile IFCAP miscellaneous obligations to VA’s Financial  Management System (FMS)—the VA accounting system of record used to  generate VA financial statements and other reports—because FMS does  not identify the method used to obligate funds for transactions (e.g.,  miscellaneous obligations, purchase card, purchase order).
To determine whether VA’s policies and procedures are designed to  provide adequate controls over the use of miscellaneous obligations, we  compared VA policies and procedures governing the use of miscellaneous  obligations with federal appropriations law and internal control standards,  interviewed VHA officials in Denver, Colorado, and Washington, D.C., and  conducted case studies at VHA medical centers in Cheyenne, Wyoming;  Kansas City, Missouri; and Pittsburgh, Pennsylvania. As part of the case  studies, we interviewed VHA financial management and procurement  officials, and reviewed a nongeneralizable sample of miscellaneous  obligations to provide more detailed data on the extent and nature of any  control design deficiencies. We did not review VHA’s procurement or  service authorization processes. Appendix I contains a more detailed  description of our scope and methodology. We conducted our audit work  from November 2007 through July 2008 in accordance with generally  accepted government auditing standards. Those standards require that we  plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on our audit  objectives.
subsections: section_title: Background
paragraphs: VA is responsible for providing federal benefits to veterans. Headed by the  Secretary of Veterans Affairs, VA operates nationwide programs for health  care, financial assistance, and burial benefits. In fiscal year 2007, VA  received appropriations of over $77 billion, including over $35 billion for  health care and approximately $41.4 billion for other benefits. The  Congress appropriated more than $87 billion for VA in fiscal year 2008.
VHA is responsible for implementing the VA medical assistance programs.  In fiscal year 2007, VHA operated more than 1,200 sites of care, including  155 medical centers, 135 nursing homes, 717 ambulatory care and  community-based outpatient clinics, and 209 Readjustment Counseling  Centers. VHA health care centers provide a broad range of primary care,  specialized care, and related medical and social support services. The  number of patients treated increased by 47.4 percent from 3.8 million in  2000 to nearly 5.6 million in 2007 due to an increased number of veterans  eligible to receive care.
As shown in figure 1, VHA has organized its health care centers under 21  Veterans Integrated Service Networks (VISN), which oversee the  operations of the various medical centers and treatment facilities within  their assigned geographic areas.
During fiscal year 2007, these networks provided more medical services to  a greater number of veterans than at any time during VA’s long history.
subsections: section_title: VA Policies and Procedures on the Use of Miscellaneous Obligations
paragraphs: VA has used “Estimated Miscellaneous Obligation or Change in Obligation”  (VA Form 4-1358) to record estimated obligations for goods and services  for over 60 years. According to VA policy, miscellaneous obligations can  be used to record obligations against appropriations for the procurement  of a variety of goods and services, including fee-based medical, dental, and  nursing services; non-VA hospitalization; nursing home care; beneficiary  travel; and rent and utilities. The policy states that miscellaneous  obligations should be used as obligation control documents when a formal  purchase order or authorization is not required, and when necessary to  record estimated obligations to be incurred by the subsequent issue of  purchase orders. The policy also states that the use of miscellaneous  obligations should be kept to an absolute minimum, consistent with sound  financial management policies on the control of funds, and should only be  used in cases where there was a bona fide need for the goods and services  being procured.
In September 2006, VA policy for miscellaneous obligations was revised in  an attempt to minimize the use of miscellaneous obligations as an  obligation control document.  The revision states that miscellaneous  obligations should not be used as obligation control documents unless the  head contracting official for the station has determined that a purchase  order or contract will not be required. However, the policy provides that  fiscal staff can use miscellaneous obligations as a tracking mechanism for  obligations of variable quantity contracts, as well as for public utilities. In  January 2008, VA issued interim guidance on the use of miscellaneous  obligations; however, the guidance did not apply to the fiscal year 2007  miscellaneous obligations we reviewed.
In recent years VHA has attempted to improve its oversight of  miscellaneous obligations. For example, VHA’s Clinical Logistics Group  created the IFCAP system database in April 2006 to analyze the use of  miscellaneous obligations agencywide. The database is updated monthly  and contains information on the miscellaneous obligations created  monthly by the 21 VISN offices and their associated stations. VHA officials  are using the IFCAP database to (1) analyze the number and dollar  amounts of procurements being done using contracts and purchase cards,  and recorded using miscellaneous obligations, and (2) identify the types of  goods and services recorded as miscellaneous obligations.  Prior to the  creation of the IFCAP database, such information on the use of  miscellaneous obligations nationwide was not readily available to VHA  upper-level management.
section_title: VHA’s Current Miscellaneous Obligation Process
paragraphs: The creation and processing of miscellaneous obligations (VA Form   4-1358) is documented in IFCAP—a component of VA’s Veterans Health  Information System and Technology Architecture (VISTA). The  miscellaneous obligation request passes through several stages illustrated  in figure 2.
section_title: Miscellaneous Obligations Used Extensively for Mission-Related Activities in Fiscal Year 2007
paragraphs: The IFCAP database shows that in fiscal year 2007 nearly 132,000  miscellaneous obligations, with a total value of nearly $9.8 billion, were  created (see table 1). While VA’s Central Office had $2.9 billion in  miscellaneous obligations during fiscal year 2007, our review focused on  the $6.9 billion in miscellaneous obligations used by VHA’s 129 stations,  located in every VISN throughout the country, for a variety of mission- related activities. (See app. III for a list of the uses of miscellaneous  obligations by VISN, and app. IV for a list of the uses of miscellaneous  obligations by station).
According to available VHA data, VHA used miscellaneous obligations to  record estimated obligations of over $6.9 billion for mission-related goods  and services. As shown in figure 3, about $3.8 billion (55.1 percent) was for  fee-based medical and dental services for veterans, and another   $1.4 billion (20.4 percent) was for drugs, medicines, and hospital supplies.  The remainder was for, among other things, state veterans homes,  transportation of veterans to and from medical centers for treatment, and  logistical support and facility maintenance for VHA medical centers  nationwide.
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According to VHA contracting and fiscal service officials, using  miscellaneous obligations tends to reduce administrative workload and  facilitates the payment for contracted goods and services, including drugs,  medicines, and transportation, and for goods and services for which no  preexisting contracts exist, such as fee-basis medical and dental services  and utilities.
VHA officials stated that miscellaneous obligations facilitate the payment  for contracted goods and services when the quantities and delivery dates  are not known. A miscellaneous obligation can be created for an estimated  amount and then modified as specific quantities are needed or specific  delivery dates are set. When a purchase order is created, however, the  obligated amount cannot be changed without a modification of the  purchase order. According to VHA officials, the need to prepare numerous  modifications to purchase orders could place an undue burden on the  limited contracting personnel available at individual centers and could  also require additional work on the part of fiscal services personnel.
VHA officials stated that the use of miscellaneous obligations can simplify  the procurement process when no preexisting contract or purchase order  exists. For example, providing medical care on a fee-basis to veterans  outside of VHA medical centers may involve the services of thousands of  private physicians nationwide. Attempting to negotiate a separate  agreement or contract with each of these individuals would be a difficult  task for VHA’s contracting staff. Under the policies and procedures in  place during fiscal year 2007, VHA centers could use miscellaneous  obligations as umbrella authorizations for fee-based medical services  performed by a number of different physicians. In effect, in cases for  which there is no preexisting contract, the miscellaneous obligation form  becomes the record of an obligation. However, use of miscellaneous  obligations may also increase the risk of fraud, waste, and abuse.  Consequently, mitigating controls must be designed to help compensate  for the lack of a negotiated contract.  Absent contractual terms, one risk  area is the authorized fee schedule for the medical services being  provided. In this case, federal regulations call for payments to non-VA  physicians for services associated with outpatient and inpatient care  provided at non-VA facilities to be the lesser of the amount billed or the  amount calculated using the formula developed by the Department of  Health and Human Services under Medicare’s participating physician fee  schedule for the period in which the service is provided.  However, we  did not verify that VHA officials were properly following the fee schedule.
section_title: Deficiencies in Design of Controls over Miscellaneous Obligations Increase the Risk of Fraud, Waste, and Abuse
paragraphs: VA policies and procedures were not designed to provide adequate  controls over the use of miscellaneous obligations. According to our  Standards for Internal Control in the Federal Government, agency  management is responsible for developing detailed policies and  procedures for internal control suitable for their agency’s operations and  ensuring that they provide for adequate monitoring by management,  segregation of duties, and supporting documentation for the need to  acquire specific goods in the quantities purchased. We identified control  design flaws in each of these oversight areas, and we confirmed that these  weaknesses existed at the three locations where we conducted case  studies. Collectively, these control design flaws increase the risk of fraud,  waste, and abuse (including employees converting government assets to  their own use without detection). New guidance for the use of  miscellaneous obligations was released in January 2008 and finalized in  May 2008. We reviewed the new guidance and found that while it offered  some improvement, it did not fully address the specific control design  flaws we identified. Furthermore, VA officials told us that this guidance  was not subject to any legal review. Such an analysis is essential to help  ensure that the design of policies and procedures comply with all  applicable federal appropriations law and internal control standards.
We reviewed 42 miscellaneous obligations at the three case study  locations and developed illustrative, more detailed information on the  extent and nature of these control design flaws. Table 2 summarizes the  locations visited, the miscellaneous obligations reviewed at each location,  and the extent and nature of control design deficiencies found.
To help minimize the use of miscellaneous obligations, VA policy stated  that miscellaneous obligations would not be used as obligation control  documents unless the contracting authority for a station had determined  that purchase orders or contracts would not be required. Furthermore, VA  policy required review of miscellaneous obligations by contracting  officials to help ensure proper use in accordance with federal acquisition  regulations, but did not address the intended extent and nature of these  reviews or how the reviews should be documented. Contracting officials  were unable to electronically document their review of miscellaneous  obligations and no manual documentation procedures had been  developed. Our review of 42 miscellaneous obligations prepared at three  VHA stations showed that contracting officers were at times familiar with  specific miscellaneous obligations at their facilities, but that they had no  documented approvals available for review. Furthermore, none of the  three sites we visited had procedures in place to document review of the  miscellaneous obligations by the appropriate contracting authorities.
Effective oversight and review by trained, qualified officials is a key factor  in identifying a potential risk for fraud, waste, or abuse. Without control  procedures to help ensure that contracting personnel review and approve  miscellaneous obligations prior to their creation, VHA is at risk that  procurements will not have safeguards established through a contract  approach. For example, in our case study at the VA Pittsburgh Medical  Center, we found 12 miscellaneous obligations, totaling about $673,000,  used to pay for laboratory services provided by the University of  Pittsburgh Medical Center (UPMC). The Chief of Acquisition and Materiel  Management for the VA Pittsburgh Medical Center stated that she was not  aware of the UPMC’s laboratory testing service procurements and would  review these testing services to determine whether a contract should be  established for these procurements.  Subsequently, she stated that VISN 4,  which includes the VA Pittsburgh Medical Center, was going to revise  procedures to procure laboratory testing services through purchase orders  backed by reviewed and competitively awarded contracts, instead of  funding them through miscellaneous obligations.
Another Pittsburgh miscellaneous obligation for about $141,000 was used  to fund the procurement of livers for transplant patients. Local officials  said that there was a national contract for the services, and that livers  were provided at a standardized price of $21,800. However, officials could  not provide us with a copy of the contract, nor documentation of the  standardized pricing schedule.  Therefore, we could not confirm that VHA  was properly billed for these services or that the procurement was  properly authorized.
Furthermore, in the absence of review by contracting officials, controls  were not designed to prevent miscellaneous obligations from being used  for unauthorized purposes, or for assets that could be readily converted to  personal use. Our analysis of the IFCAP database for fiscal year 2007  identified 145 miscellaneous obligations for over $30.2 million that  appeared to be used in the procurement of such items as passenger  vehicles; furniture and fixtures; office equipment; and medical, dental, and  scientific equipment. Although VA’s miscellaneous obligation policy did  not address this issue, VA officials stated that acquisition of such assets  should be done by contracting officials and not through miscellaneous  obligations. Without adequate controls to review miscellaneous  obligations and prevent them from being used for the acquisition of such  assets, it is possible that VHA may be exposing the agency to unnecessary  risks by using miscellaneous obligations to fund the acquisitions of goods  or services that should have been obtained under contract with  conventional controls built in.
subsections: section_title: Interim Guidance Does Not Address All Control Weaknesses
paragraphs: In January 2008, VHA issued interim guidance effective for all  miscellaneous obligations created after January 30, 2008, concerning  required procedures for using miscellaneous obligations.  The guidance  provides that prior to creating a miscellaneous obligation, fiscal service  staff are required to check with the contracting activity to ensure that a  valid contract is associated with the miscellaneous obligation, except in  specific, itemized cases. Under this guidance, the using service is to have  the contracting activity determine (1) if a valid procurement authority  exists, (2) if a procurement needs to be initiated, and (3) the appropriate  method of obligation. Also, this guidance requires that a copy of the head  contracting official’s approval be kept with a copy of the miscellaneous  obligation for future audit purposes. In addition, the guidance provides  that the fiscal service may not create a miscellaneous obligation without  appropriate information recorded in the purpose, vendor, and contract  number fields on the document. The guidance specifically cites a number  of invalid uses for miscellaneous obligations, including contract  ambulance, lab tests, blood products, and construction, but did not always  specify a procurement process to be used for these items.
In May 2008, VHA management finalized the interim guidance. This  guidance represents a step in the right direction. It includes a manual  process for documenting contracting approval of miscellaneous  obligations and specifically states that a miscellaneous obligation cannot  be created if the purpose, vendor, and contract number fields are  incomplete. However, the new guidance does not address the segregation  of duties issues we and others have identified and does not establish an  oversight mechanism to ensure that control procedures outlined are  properly implemented.
In our view, VHA has missed an opportunity to obtain an important legal  perspective on this matter. According to VA officials, these policies have  not been subject to any legal review, which is essential in ensuring that the  policies and procedures comply with federal funds control laws and  regulations and any other relevant VA policies or procedures dealing with  budgetary or procurement matters. For example, such a review would  help ensure that the guidance adequately addresses Federal Acquisition  Regulation, requiring that no contract shall be entered into unless the  contracting officer ensures that all requirements of law, executive orders,  regulations, and all other applicable procedures, including clearances and  approvals, have been met. In addition, a legal review could help to ensure  that this guidance (1) provides that all legal obligations of VA are  supported by adequate documentation to meet the requirements of the  recording statute 31 U.S.C. §1501(a) and (2) prevents any individual from  committing the government for purchases of supplies, equipment, or  services without being delegated contracting authority as a contracting  officer, purchase card holder, or a designated representative of a  contracting officer.  The absence of a legal review to determine the  propriety of VA’s miscellaneous obligations policies and procedures places  VA at risk of not complying with important laws and regulations.
section_title: Conclusions
paragraphs: Without basic controls in place over billions of dollars in miscellaneous  obligations, VA is at significant risk of fraud, waste, and abuse. Effectively  designed internal controls serve as the first line of defense for preventing  and detecting fraud, and they help ensure that an agency effectively and  efficiently meets its missions, goals, and objectives; complies with laws  and regulations; and is able to provide reliable financial and other  information concerning its programs, operations, and activities. Although  miscellaneous obligations can facilitate and streamline the procurement  process, they require effectively designed mitigating controls to avoid  impairing full accountability and transparency. In the absence of  effectively designed key funds and acquisition controls, VA has limited  assurance that its use of miscellaneous obligations is kept to a minimum,  for bona fide needs, in the correct amounts, and to the correct vendors.  Improved controls in the form of detailed policies and procedures, along  with a management oversight mechanism, will be critical to reducing the  government’s risks from VA’s use of miscellaneous obligations.
section_title: Recommendations for Executive Action
paragraphs: In order for VA to reduce the risks associated with the use of  miscellaneous obligations, we recommend that the Secretary of Veterans  Affairs, in conjunction with VA’s Office of General Counsel, develop and  implement policies and procedures consistent with federal appropriations  law and internal control standards that     establish a process for the review of miscellaneous obligations by  contracting officials, including requiring appropriate documentation  that the review has occurred;    segregate duties for (1) creating, approving, and recording  miscellaneous obligations; (2) the certification and payment of  invoices; and (3) the receipt of the resulting goods or services;    document the purposes, vendors, and contract numbers of    establish an oversight mechanism to ensure that these control policies  and procedures are fully and effectively implemented.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from the Deputy  Secretary of Veterans Affairs, which are reprinted in appendix II. VA  concurred with our recommendations and identified specific actions it  plans to take to implement these recommendations. For example, VA  commented it plans to include electronic approval requirements of  miscellaneous obligations by contracting officials in the financial  component of its new accounting system. Also, VA commented it plans to  address the segregation of duties issues identified in our report in an  upcoming VA Office of Finance Bulletin, and that VA policy now requires  documentation of the purpose, vendor, and contract number for all  miscellaneous obligations. Finally, VA commented it plans to implement  reporting and auditing processes to help ensure that the internal control  procedures are properly implemented agencywide. If effectively  implemented, these planned actions should enable VHA to substantially  resolve the deficiencies pointed out in our report. VA also provided  technical comments which we considered and incorporated as  appropriate.
We are sending copies of this report to other interested congressional  committees and to affected federal agencies. Copies of this report will also  be made available to others upon request. In addition, this report is  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-9095 or at dalykl@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made major contributions to this  report are listed in appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: In order to determine how VHA used miscellaneous obligations during  fiscal year 2007, we obtained and analyzed a copy of VHA’s Integrated  Funds Distribution, Control Point Activity, Accounting and Procurement  (IFCAP) database of miscellaneous obligations for that year.  IFCAP is  used to create miscellaneous obligations (VA Form 4-1358) at VA, and  serves as a feeder system for VA’s Financial Management System (FMS)— the department’s financial reporting system of record. According to VA  officials, FMS cannot be used to identify the universe of miscellaneous  obligations at VHA in fiscal year 2007 because FMS does not identify the  procurement method used for transactions (i.e., miscellaneous obligation,  purchase card, purchase order). Furthermore, FMS does not capture the  contract number, requester, approving official, and obligating official for  obligations. However, according to senior agency officials, the IFCAP  database is the most complete record of miscellaneous obligations  available at VHA and can be used to provide an assessment of how  miscellaneous obligations were used during fiscal year 2007.
IFCAP’s data included information on the appropriation codes, vendors,  budget object codes (BOC), date and amount of obligations, obligation  numbers, approving officials, and VISN and VHA stations for VHA  miscellaneous obligations. We converted the database to a spreadsheet  format and sorted the data by VISN, station, and BOC to determine where  and how miscellaneous obligations were used in fiscal year 2007 (See app.  III and IV.)
To determine whether VHA’s policies and procedures are designed to  provide adequate controls over the use of miscellaneous obligations, we  first reviewed VHA’s policies and procedures governing the use of  miscellaneous obligations at VA. Specifically, we reviewed the VA  Controller Policy, MP-4, Part V, Chapter 3, Section A, Paragraph 3A.02 –  Estimated Miscellaneous Obligation or Change in Obligation (VA Form  4-1358); the VA Office of Finance Bulletin 06GA1.05, Revision to MP-4,  Part V, Chapter 3, Section A, Paragraph 3A.02 – Estimated  Miscellaneous Obligation or Change in Obligation (VA Form 4-1358),  dated September 29, 2006; VA Interim Guidance on Miscellaneous  Obligations, VA Form 1358, dated January 30, 2008; VHA Revised  Guidance for Processing of Miscellaneous Obligations, VA Form 1358,  dated May 18, 2008; and other VA and VHA directives, policies, and  procedures. We also used relevant sections of the Federal Acquisition  Regulation (FAR); VA’s Acquisition Regulation; appropriations law; and  our Standards for Internal Control in the Federal Government in  assessing the design of VA's policies and procedures. We met with VA and  VHA officials in Washington, D.C., and coordinated with VHA’s Office of  Inspector General staff to identify any previous audit findings relevant to  our audit work. In addition, we interviewed representatives of VA’s  independent public accounting firm and reviewed copies of their reports.
In order to better understand the extent and nature of VA policy and  procedure design deficiencies related to miscellaneous obligations, we  conducted case studies at three VHA stations in Cheyenne, Wyoming;  Kansas City, Missouri; and Pittsburgh, Pennsylvania. The stations in  Kansas City and Pittsburgh were selected because they had a high volume  of miscellaneous obligation activity, and they were located in different  regions of the country. We conducted field work at the Cheyenne,  Wyoming, station during the design phase of our review to better  understand the extent and nature of miscellaneous obligation control  design deficiencies at a small medical center. Inclusion of the Cheyenne  facility in our review increased the geographic diversity of our analysis  and allowed us to compare the extent and nature of miscellaneous  obligation design deficiencies at medical centers in the eastern,  midwestern, and western portions of the United States.
During the case studies, we met with senior medical center administrative,  procurement, and financial management officials to discuss how VA  policies and procedures were designed with regard to specific obligations,  and assess the control environment design for using miscellaneous  obligations at the local level. We discussed how miscellaneous obligations  were used as part of the procurement process and the effect of new VHA  guidance on medical center operations. We also reviewed the design of  local policies and procedures for executing miscellaneous obligations and  conducted walkthroughs of the processes.
To provide more detailed information on the extent and nature of the  control design deficiencies we found at our case study locations, we  identified a nongeneralizable sample of obligations for further review at  each site. Through data mining techniques, we identified a total of 42  miscellaneous obligations for more detailed examination at our case study  sites: 11 from Cheyenne, 17 from Kansas City, and 14 from Pittsburgh. We  based our selection on the nature, dollar amount, date, and other  identifying characteristics of the obligations. For each miscellaneous  obligation selected, we accumulated information on the extent and nature  of control design weaknesses in the areas of  review and documentation by contracting officials;     segregation of duties during the procurement process; and   the purpose, timing, and documentation of obligations.
Concerning the adequacy of control design with respect to contracting  review, we reviewed miscellaneous obligations for evidence of review by  contracting officials and, for selected miscellaneous obligations, followed  up with contracting officials to discuss contracts in place for  miscellaneous obligations, whether review by contracting officials was  needed, and when and how this review could occur and be documented.
Concerning the control design deficiencies with respect to segregation of  duties, we reviewed miscellaneous obligation documents to determine  which officials requested, approved, and obligated funds for the original  miscellaneous obligations and then which officials certified delivery of  goods and services and approved payment. We noted those instances  where control design deficiencies permitted one official to perform  multiple functions.
With respect to control design deficiencies relating to the supporting  documentation for the miscellaneous obligations, we reviewed the  purpose, vendor, and contract number fields for each obligation. For the  purpose field, we assessed whether the required description was adequate  to determine the nature, timing, and extent of the goods or services being  procured and whether controls provided for an adequate explanation for  any estimated miscellaneous obligation amounts. For the vendor and  contract number fields, we assessed whether controls were designed to  ensure entered information was complete, and we identified those  instances where control deficiencies permitted fields to be left blank.
Because of time limitations, we did not review VHA’s procurement or  service authorization processes. In addition, in our case study approach,  we were unable to analyze a sufficient number of obligations to allow us to  generalize our conclusions to the sites visited, nor to the universe of VHA  medical centers. The 42 obligations represented a total of approximately  $36.0 million; however, the results cannot be projected to the overall  population of miscellaneous obligations in fiscal year 2007.  While we  found no examples of fraudulent or otherwise improper purchases made  by VHA, our work was not specifically designed to identify such cases or  estimate their full extent.
subsections: section_title: Data Reliability Assessment
paragraphs: We assessed the reliability of the IFCAP data provided by (1) performing  various tests on required data elements, (2) reviewing related policies and  procedures, (3) performing walkthroughs of the system, (4) interviewing  VA officials knowledgeable about the data, and (5) tracing selected  transactions from source documents to the database. In addition, we  verified that totals from the fiscal year 2007 IFCAP database agreed with a  method of procurement compliance report provided by VA. We did not  reconcile the IFCAP miscellaneous obligations reported to us to FMS—the  VA system of record—and published VA financial statements because FMS  does not identify the procurement method used for transactions (i.e.,  miscellaneous obligations, purchase card, purchase order). We determined  that the data were sufficiently reliable for the purposes of our report and  that the data can be used to provide an assessment of how miscellaneous  obligations were used during fiscal year 2007.
We conducted this audit from November 2007 through July 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.  We requested comments on a draft of this  report from the Secretary of Veterans Affairs or his designee.  We received  written comments from the Deputy Secretary of Veterans Affairs, which  are reprinted in appendix II.
section_title: Appendix II: Comments from the Department of Veterans Affairs
section_title: Appendix III: Miscellaneous Obligations by VISN in Fiscal Year 2007
subsections: section_title: VA Midwest Health Care Network
paragraphs: VISNs 13 and 14 were consolidated and designated as VISN 23.
section_title: Appendix IV: VHA Stations Ranked by Use of Miscellaneous Obligations
subsections: section_title: Central California HCS (Fresno)
paragraphs: Pacific Islands HCS (Honolulu)
James E. Van Zandt VA (Altoona)
section_title: Appendix V: GAO Contact and Staff Acknowledgments
paragraphs: Kay Daly, (202) 512-9095 or dalykl@gao.gov.
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Glenn Slocum (Assistant  Director), Richard Cambosos, Debra Cottrell, Francine DelVecchio, Daniel  Egan, W. Stephen Lowrey, Robert Sharpe, and George Warnock made key  contributions to this report.