To meet property management requirements and provide data for personal property reporting needs, VA field facilities use an inventory accounting system, the Automated Engineering Management System/Medical Equipment Reporting System. The system was originally designed to schedule preventive maintenance. In 1996, the system was expanded to incorporate the agency’s previously separate property management function, becoming the agency’s official record of inventory for capitalized and noncapitalized equipment. VHA’s Acquisition and Materiel Management (A&MM) service maintains the property management portion of the system while Engineering Services operates the property maintenance portion. The property management system includes a detailed listing of the agency’s personal property, providing information that among other things, is (1) a control for the accuracy of property cost information presented in the agency’s financial report, (2) the basis for physical inventories of agency personal property, and (3) the primary control record for accountability over the agency’s personal property. The system is used to prepare bar code labels that are affixed to nonexpendable property acquired by VHA to identify items as VHA property and to provide for efficient physical inventories using portable bar code readers. The property management software has been updated occasionally to incorporate, for example, the addition of a disposal date capability and changes in the agency’s cost thresholds for property accountability and capitalization. A VHA official told us that once a property item is entered in the system’s database, a system application control retains the record, even after disposal of the item. Pharmaceutical manufacturers allow VA a credit for certain drugs that are returned. Each manufacturer establishes its own criteria for issuing credit, which can change at any time and differ among a single manufacturer’s products. The differing criteria can include such attributes as units of packaging and length of time between the return date and the expiration date. Some drugs are not returnable and must be destroyed if not used before the expiration date. To obtain available credits with minimal agency resources, VA has arranged contracts with pharmaceutical returns vendors that individual VHA medical facilities may utilize. One hundred forty of VHA’s 160 medical centers use the services of Devos, Ltd., doing business as Guaranteed Returns, to assist them in returning drugs for credit or disposing of nonreturnable drugs in accordance with environmental standards and preparing required paperwork to monitor the movement of narcotic drugs. Guaranteed Returns receives a percentage of credits issued for returnable drugs and a fee based on weight for destruction of nonreturnable drugs. VHA also uses the services of part-time physicians where necessary to alleviate recruitment difficulties or when practicality would not indicate full-time employees. While VA policy states a part-time appointment requires a tour of duty scheduled in advance that normally does not significantly change from one pay period to another, it also provides that a part-time physician whose other responsibilities make adherence to the same schedule every pay period impractical may have an adjustable work schedule. Part-time physicians with adjustable tours of duty have a biweekly work requirement consisting of non-core hours that may be adjusted at the request of the employee and core hours that are the days and times when the employee must be present unless granted an appropriate form of leave or excused absence. VA policy requires core hours to be at least 25 percent of total scheduled hours. In April 2003, the OIG reported that part-time physicians were not working the hours established in their VA appointments. A February 2004 follow-up report by the OIG stated that while most part-time physicians were on duty as required, 8 percent of the part-time physicians tested were not on duty or on approved leave or authorized absence as scheduled. To gain an understanding of VHA’s policies and procedures and the related internal controls for the three areas of operation we assessed, to identify key control activities, and to assess the design effectiveness of those controls, we obtained and reviewed VA and VHA directives, handbooks, and other policy guidance and reports issued by VA’s OIG. We also conducted interviews and system walk-throughs with VHA personnel and reviewed our previous reports. To assess the implementation effectiveness of the key control activities for the three areas of operation, we used a case study approach, reviewing transaction documentation at six VA medical centers selected based on size and medical specialization diversity of the location’s part-time physicians and other factors. For personal property management, we discussed requirements and procedures with VHA headquarters and medical center personnel. We performed tests of each medical center’s property records to assess their accuracy. Because our initial review disclosed incomplete and inaccurate information in property database records from each location we visited, we could not design our work to make a statistically based projection on the results of our work. Instead, we tested a nonstatistical selection of 100 items from each location’s property records to verify property existence by locating the item and comparing bar code, serial number, and item description information in the records to the item that we observed. For drugs returned for credit, we discussed requirements and procedures for managing turned-in drugs with personnel at VHA headquarters, the selected medical centers, and a pharmaceutical return contractor. Also, for each of the six medical centers we visited, we obtained and reviewed inventory lists of returned drugs for one contractor pickup of drugs held for return and vendor credit documents. For part-time physician time and attendance, we discussed policy requirements with VHA headquarters personnel and asked medical center staff about the processes for collecting, approving, and recording time and attendance data for part-time physicians. We reviewed time and attendance and corresponding payroll documentation for a judgmental selection of 10 part-time physicians for two biweekly pay periods ending in September 2003 at each of the six medical centers that we visited. We also reviewed medical center procedures for monitoring part-time physician attendance. We reviewed and used as guides, our Standards for Internal Control in the Federal Government and the Internal Control Management and Evaluation Tool. The Comptroller General issued these standards to provide the overall framework for establishing and maintaining internal control. According to these standards, internal control, also referred to as “management control,” comprises the plans, methods, and procedures used to meet the missions, goals, and objectives of an organization. Internal control also serves as the first line of defense in safeguarding assets and preventing and detecting errors and fraud. Our Management and Evaluation Tool provides a systematic, organized, and structured approach to assessing internal control. We performed our work at VA medical centers in Atlanta, Houston, Los Angeles, San Francisco, Tampa, and Washington, D.C.; at VA headquarters; and for drugs returned for credit, at a return contractor’s facility in East Setauket, New York. Our work was performed using a case study approach, and therefore, results of our study cannot be projected beyond the locations and transactions we reviewed. We conducted our review from February 2003 through March 2004 in accordance with U.S. generally accepted government auditing standards. We requested comments on a draft report from the Secretary of Veterans Affairs or his designee. Written comments were received from the Secretary of Veterans Affairs and are reprinted in appendix II. We found that VHA’s property control databases did not provide a complete and accurate record of personal property on hand, compromising effective management and security of agency assets at the six locations we visited. Our tests to determine whether the six medical centers had adequate control over items that were recorded in the property control databases showed that property officials could locate only about one-third of the 600 items we selected. We found that in addition to noncompliance with VA property management requirements, current VA physical inventory and property accountability policies were a major cause of unreliable property records and reduced the opportunity to adequately control personal property at five of the six medical centers we visited. Standards for Internal Control in the Federal Government requires that agencies establish physical control to secure and safeguard vulnerable assets such as equipment, periodically count those assets, and compare the counts to control records. However, through our initial reviews, we found that the property control records for the six locations we visited contained incomplete or incorrect information, such as missing property location or acquisition cost information. The property control records were such that we could not select a statistical sample of test items that would allow our results to be projected to the location’s entire property universe. We proceeded instead with a case study approach, reviewing 100 property items selected from each of the six medical centers’ databases using a nonstatistical selection method. Medical center property officials told us that some of the incorrect or incomplete information in the databases resulted from the incorrect transfer of some information from the previous property control system to the current system in 1996. The lack of accurate property control records hampered medical center property managers’ efforts to effectively safeguard and manage VHA personal property. Property officials located only 201 of 600 items (or about one-third) that we selected from the six medical centers’ property control records to observe and verify. At five locations, VHA officials found from 13 to 39 of the 100 items we tested at each location to determine if they were on hand, while at the sixth medical center, Atlanta, 62 of 100 items were found. The 600 assets we selected to observe were recorded at a total value of $104,220,868 in the property control system. However, because 125 of the 600 test items selected had no acquisition cost entered in the databases, the total cost of our selection could not be determined. Table 1 summarizes the results of our property observation tests at all locations we visited. Each category of items not observed is discussed below. Database errors or omissions represented 156 items that were not observed ostensibly because of insufficient database information. These errors included assets for which the property database did not (1) indicate a disposal date, though property officials told us the item had been disposed of, or (2) did not indicate a location for the property item. One property official said the predecessor property control system had not included a field for a disposal date, and when the program was modified to add that capability, then-existing records were not updated.