According to available VHA data, VHA used record estimated obligations of over $6.9 billion for mission-related goods  and services. As shown in figure 1, 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   miscellaneous obligations to  logistical support and facility maintenance for VHA medical centers  nationwide. VHA officials stated that miscellaneous obligations facilitate the payment  for contracted goods and services when the quantities and delivery dates  are not known. Deficiencies in Design of Controls over Miscellaneous Obligations Increase the Risk of Fraud, Waste, and Abuse

Our preliminary observations on VA policies and procedures indicate they  were not designed to provide adequate controls over the use of  miscellaneous obligations. According to GAO’s 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. Collectively, these  control design flaws increase the risk of fraud, waste, and abuse (including  employees converting government assets to their own use without  detection). 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. 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. In May 2008, VHA management finalized the interim guidance. According to VA officials, these policies have  not been subject to any legal review. Appendix I: Scope and Methodology

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. To determine whether VHA’s polices 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. We  recently provided our draft report to the Secretary of Veterans Affairs for  review and comment. Following this testimony, we plan to issue a report,  which will incorporate VA’s comments as appropriate and include  recommendations for improving internal controls over miscellaneous  obligations. Appendix II: Background

The Department of Veterans Affairs (VA) is responsible for providing  federal benefits to veterans. VA Policies and Procedures Concerning the Use of Miscellaneous Obligations

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.
Why GAO Did This Study

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's testimony provides preliminary findings related to (1) how VHA used miscellaneous obligations during fiscal year 2007, and (2) whether the Department of Veterans' Affairs (VA) policies and procedures were designed to provide adequate controls over their authorization and use. GAO recently provided its related draft report to the Secretary of Veterans Affairs for review and comment and plans to issue its final report as a follow-up to this testimony. 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. GAO's related draft report includes four recommendations to strengthen internal controls governing the authorization and use of miscellaneous obligations, in compliance with applicable federal appropriations law and internal control standards.

What GAO Found

VHA recorded over $6.9 billion of miscellaneous obligations for the procurement of mission-related goods and services in fiscal year 2007. According to VHA officials, miscellaneous obligations were used to facilitate the 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, based on GAO's preliminary results, 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 the case studies at Pittsburgh, Cheyenne, and Kansas City. In May 2008, VA issued revised guidance concerning 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 in ensuring that the policies and procedures comply with applicable federal appropriations law and internal control standards.