	Miscellaneous Obligations Used Extensively for Mission-Related Activities in Fiscal Year 2007

In fiscal year 2007, VHA used miscellaneous obligations to record over $6.9  billion against its appropriations for the procurement of mission-related  goods and services at 129 VHA stations throughout the country. As shown  in figure 1, $3.8 billion of this total (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  covered, 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. VHA officials said they used miscellaneous obligations to administratively  reserve estimated funds required to facilitate the payments for goods and  services for which specific quantities and time frames were uncertain. Deficiencies in Design of Controls over Miscellaneous Obligations Increase the Risk of Fraud, Waste, and Abuse

In September 2008, we reported that VA policies and procedures were not  designed to provide adequate controls over the use of miscellaneous  obligations. The use of miscellaneous obligations carries inherent risk due  to a lack of a negotiated contract. VHA did not have effective basic  internal controls nor mitigating controls with respect to oversight by  contracting officials, segregation of duties, and supporting documentation  for recording the obligation of funds. The systems used did not  have a mechanism for contracting officials to electronically document  their review of miscellaneous obligations, and no manual documentation  procedures had been developed. Without proper segregation of duties, risk of errors,  improper transactions, and fraud increases. Our case studies showed inadequate segregation of key duties in 30 of the  42 obligations we reviewed. In these instances, controls were not designed  to prevent one official from performing two or more of the following key  functions:  requesting the miscellaneous obligation,  approving the miscellaneous obligation,  recording the obligation of funds, or  certifying delivery of goods and services and approving payment. Without procedures calling for more definitive descriptions of  the purpose, we could not confirm that these miscellaneous obligations  were for bona fide needs or that the invoices reflected a legitimate use of  federal funds. These recommendations focused on the need to better  ensure adequate oversight of miscellaneous obligations by contracting  officials; segregation of duties from initiation through receipt of the  resulting goods and services; maintaining supporting documentation for  miscellaneous obligations; and establishing an oversight mechanism to  ensure control policies and procedures are fully and effectively  implemented. Specifically, in January 2009, VA issued  volume II, chapter 6 of VA Financial Policies and Procedures— Miscellaneous Obligations which outlines detailed policies and procedures  aimed at addressing the deficiencies we identified in our September 2008  report. We have not yet  fully evaluated the extent to which VA’s new policies and procedures are  in place and operating as intended. However, full and effective implementation of this new  guidance will be critical to reducing the government’s risks associated  with VA’s use of miscellaneous obligations.
Why GAO Did This Study

In September 2008, GAO reported internal control weaknesses over the Veterans Health Administration's (VHA) use of miscellaneous obligations to record estimates of obligations to be incurred at a future date. GAO was asked to testify on its previously reported findings that focused on (1) how VHA used miscellaneous obligations, and (2) the extent to which the Department of Veterans Affairs' (VA) related policies and procedures were adequately designed. GAO also obtained an update on the status of VA's activities to improve controls over its use of miscellaneous obligations. GAO's testimony is primarily a summary of its prior report (GAO-08-976), and also includes follow-up work to obtain information on the status of VA's efforts to implement our prior recommendations.

What GAO Found

In September 2008, GAO reported that VHA recorded over $6.9 billion of miscellaneous obligations for the procurement of mission-related goods and services in fiscal year 2007. VHA officials stated that 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. In 2008, GAO found that 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 increased the risk of fraud, waste, and abuse. These control design flaws were confirmed in GAO's case studies at VHA medical centers in Pittsburgh, Pennsylvania; Cheyenne, Wyoming; and Kansas City, Missouri. For example, in all of the 42 obligations reviewed, GAO found no documented approval by contracting officials. The systems used did not have a mechanism for contracting officials to electronically document their review of miscellaneous obligations and no manual documentation procedures had been developed. Furthermore, in 30 of the 42 obligations reviewed, one official performed two or more of the following functions: requesting, creating, approving or obligating funds for the miscellaneous obligation, or certifying delivery of goods and services and approving payment. Without proper segregation of duties, risk of errors, improper transactions, and fraud increases. Lastly, GAO found a lack of adequate supporting documentation at the three medical centers we visited. In 8 of 42 instances, GAO could not determine the nature, timing, or the extent of the goods or services being procured from the description in the purpose field. As a result, GAO could not confirm that these miscellaneous obligations were for bona fide needs or that the invoices reflected a legitimate use of federal funds. In January 2009, VA issued volume II, chapter 6 of VA Financial Policies and Procedures--Miscellaneous Obligations which outlines detailed policies and procedures aimed at addressing the deficiencies GAO identified in the September 2008 report. Full and effective implementation of this new guidance will be critical to reducing the government's risks associated with VA's use of miscellaneous obligations. GAO has not yet evaluated the extent to which these new policies have been fully and effectively implemented.