APRIL 1, 1998
STATEMENT BY
MICHAEL A. FRIEDMAN, M.D.
LEAD DEPUTY COMMISSIONER
FOOD AND DRUG ADMINISTRATION
DEPARTMENT OF HEALTH AND HUMAN SERVICES
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATION
COMMITTEE ON COMMERCE
U.S.HOUSE OF REPRESENTATIVES
APRIL 1, 1998
Mr. Chairman, Members of the Committee, I am Dr. Michael A.
Friedman, Lead Deputy Commissioner for Food and Drugs. With me
today, are Robert J. Byrd, Deputy Commissioner for Management and
Systems (OMS) and Dr. Kathryn C. Zoon, Director, Center for
Biologics Evaluation and Research (CBER). We appreciate the
opportunity to discuss the Food and Drug Administration's (FDA or
the Agency) management and procurement policies and practices in
general, and specifically as they relate to CBER. Effective use
and management of the limited public health resources available
to the Agency always must be one of our priorities. We fully
appreciate the Committee's and the public's interest in knowing
that the funds we are provided are spent prudently, and that our
management, financial and accounting systems incorporate adequate
precautions against waste, fraud and abuse.
Approximately a year ago, the Committee initiated an
investigation of FDA's management practices, focusing
specifically on information and procurement systems at CBER.
During the course of this investigation, the Agency has responded
to ten letters from the Chairman and dozens of follow-up
inquiries from Committee staff requesting documents and
information related to this investigation. The most recent of
these letters was received March 11, 1998. In addition to the
thousands of pages of documents the Agency has produced, a number
of Agency employees have been interviewed, although no Agency
representative has been at those interviews. On Friday, March
20, just over one week ago, Committee staff presented the Agency
a somewhat detailed, 20 page summary of findings and allegations.
These findings and allegations generally related to the Agency's
property management system, and financial and accounting controls
related to the use of Agency credit cards and blanket purchase
agreements. Many of the findings in the staff summary previously
had been presented to the Agency in the course of ongoing
Department-wide oversight or had been identified by the Agency
through its own oversight activities. As such, the staff's
findings as they relate to these reports/items are not new to the
Agency and, in fact, have been or are being addressed. There are
many allegations presented in the summary, however, that go
beyond prior official findings. In most cases these allegations
are accounts of incidents or actions which occurred during the
day-to-day conduct of the Agency's business, and which staff
suggests are evidence that the Agency's management systems are
deficient. It should be noted that during the course of the year
long investigation the Agency never was consulted regarding the
propriety of the actions which the staff thought questionable or
whether improper actions had been identified and addressed
previously by the Agency. Such consultation ordinarily is an
important element of any audit of financial practices and
systems.
We have not had the opportunity to completely analyze these
allegations point-by-point. Our review of the points raised,
however, does confirm that for the most part the Agency's efforts
to identify weaknesses have been effective. We are committed to
ensuring that proper systems of management controls are in place
to safeguard the integrity of our programs. As will be described
in more detail below, while we have not fixed everything, our
efforts are directed to strengthening and improving these
systems. We would welcome the opportunity to work with the
Committee in this regard. My testimony will address generally
the two broad areas identified in the Committee staff summary,
focusing on the systems we have in place and any
changes/improvements that are being made.
OVERVIEW
Before we address our specific policies and practices, let me
describe the scope of what is being managed. With an annual
budget in Fiscal Year (FY) 1997 of just about one billion
dollars, approximately 9,100 employees work to protect, promote
and enhance the health of the American people. Of that one
billion, approximately 64 percent is for salaries and benefits
and 8 percent for rental payments and buildings and facilities,
leaving 28 for other operating expenses. Other operating
expenses include travel and transportation, supplies and
equipment, and contract services. During FY97, the total amount
obligated for capitalized equipment was $6.3 million or .63
percent (less than one percent) of FDA's FY97 budget. In
addition, the Agency manages extensive property and equipment
assets, which had a net book value of $162,722,645 as of
September 30, 1997. Of this amount, $34.9 million is the total
net book value of capitalized equipment.
The Agency is organized into six Centers and a field staff that
is located in six Regions, 21 District Offices, 17 District
Laboratories, and more than 130 Resident Posts. Agency
headquarters and five of the six Centers, with approximately 65
percent of the Agency's employees, are located in approximately
40 buildings at 16 locations in the Washington, D.C. metropolitan
area.
ACCOUNTABILITY SYSTEMS
The Office of Management and Systems (OMS), headed by a Deputy
Commissioner who reports directly to the Commissioner, is
responsible for effectively managing the Agency's resources.
This responsibility encompasses facilities, acquisitions, central
services and supplies, budget and finance, human resources
management services, information resources, and planning and
evaluation. OMS coordinates Agency use of resources, develops
program and planning responsibilities, and ensures implementation
of policy directives set forth by government-wide initiatives,
including: Federal Managers Financial Integrity Act, Chief
Financial Officers Act, Government Performance Results Act,
Government Management Reform Act, Federal Acquisition Reform Act,
Information Technology Management Reform Act, and Executive
Orders. Many of these initiatives incorporate annual reporting
requirements, which serve as mechanisms to improve accounting and
financial management review. In particular, the Federal
Managers' Financial Integrity Act (FMFIA) of 1982 requires
Federal agencies to develop and maintain systems for assessing,
correcting, and reporting on management controls in order to
improve accountability and effectiveness.
While OMS coordinates and ultimately is responsible for the
Agency's fiscal health, the day-to-day budget functions and
operations have been delegated to the Centers to manage. Within
each Center is an Office of Management, headed by an Executive
Officer, who reports directly to the Center Director and who is
responsible for managing all aspects of the Center's budget. In
1995, a "bottom up" approach was initiated that assigned
responsibility to each Center for developing the "Letter of
Assurance" statement and documenting all significant FMFIA
accomplishments for the year. This approach allows the Centers
more flexibility to make management decisions that best fit that
particular Center's mission and provides Centers direct oversight
responsibility for how their resources are managed, within
general Agency guidelines.
The Agency and the Centers continuously strive to assess the
adequacy and to improve the effectiveness of their systems and
procedures to protect against waste, fraud, and abuse. There are
numerous examples, including two of the specific matters
referenced in the staff summary, where instances of procurement
system improprieties have been identified, investigated and acted
upon as a result of the existing management/fiscal controls under
which procurements are made.
In addition to the required annual reporting and management tools
established pursuant to the laws referenced above, there are
additional oversight tools that assist the Agency in assuring our
management systems are healthy. These tools include audits done
by outside entities such as the General Accounting Office (GAO)
or the Office of the Inspector General (OIG). While there have
not been recent GAO investigations specific to the Agency's
financial or property management, there have been three recent
OIG audits of specific interest to the Committee:
1) "Report on the Financial Statement Audit of the Food and Drug
Administration for Fiscal Year 1996," June 1997;
2) "Compliance with the Prompt Payment Act by the Food and Drug
Administration," May 1997; and,
3) "Review of the Food and Drug Administration's Internal
Controls Over Its Purchase Card Activities," March 1998.
"Report on the Financial Statement Audit of the Food and Drug
Administration for Fiscal Year 1996"
The Government Management Reform Act (GMRA) of 1994 requires
executive agencies to have agency-wide audited financial
statements beginning with FY96. This audit by Gardiner, Kamya &
Associates, P.C., on behalf of the OIG, Department of Health and
Human Services (HHS), was conducted to comply with GMRA.
As reported in Section II, Overview of the Report:
The Food and Drug Administration (FDA) had prepared and
submitted audited financial statements covering its
commercial type entities, as required by the CFO Act, for
FYs 1991 to 1994. For FY 1995, FDA prepared its first
entity-wide financial statements, even though it was not
required by law or subject to audit. Included as part of
this annual report are FDA's FY 1996 audited financial
statements. The completion of these statements reflects
FDA's compliance with GMRA and its commitment to instilling
effective and efficient financial management practices
within its program and operations.1
In the review, the OIG specifically looked at FDA's compliance
with FMFIA, which compliance was characterized favorably:
The FDA continues to strive to comply with the effective and
efficient management of all program areas and has made
substantial progress in implementing FMFIA. Proper measures
have been taken to ensure that systems of management control
are in place to help financial managers achieve desired
results and safeguard the integrity of their programs. A
new "bottom's up" reporting mechanism was instituted during
FY 1995 to allow all levels of management throughout FDA to
become involved in the process. As such, the Agency will be
in a better position to identify weaknesses and move
aggressively to correct them. This includes implementation
of safeguards to prevent waste, fraud and mismanagement of
Agency resources. The new approach supports streamlining
efforts, delegates authority and accountability deeper in
the organization and ensures that controls benefit rather
than encumber FDA management.2
The audit identified one "material weakness"3 and two
"reportable conditions"4. The material weakness
identified was a $36.4 million discrepancy between the general
ledger, which documents the orders/payments, and the subsidiary
ledger for property, which documents the property in inventory.
This discrepancy was due to the fact the two ledgers were not
reconciled, not that $36.4 million in property was missing. The
reportable conditions related to the financial accounting for
property, plant, and equipment, which contributed to the material
weakness.
FDA developed a comprehensive Corrective Action Plan specifically
to address the material weakness, the reportable conditions, and
the underlying deficiencies in the Agency's property management
systems and procedures. The objective of this plan is to reduce
and ultimately to eliminate the discrepancy and to put in place
systems to ensure such conditions do not reoccur. As of
March 27, 1998, we believe we have accounted for 95 percent of
our total property inventory, and the process of reconciliation
is continuing.
Due to weaknesses identified in our property inventory system, an
Agency-wide wall-to-wall inventory was initiated in FY97. As a
part of this effort, CBER retrained all CBER Personal Property
Custodial Officers (PCOs) and an inventory review of all CBER
accountable property was conducted by a CBER contractor in
conjunction with CBER's PCOs. This review included scanning all
bar coded property and bar coding property not previously bar
coded. The results of this inventory are being provided to the
Agency's Office of Facilities, Acquisitions, and Contract
Services (OFACS), to enter the data into the Agency's inventory
system.
This review is the first phase of the Agency-wide inventory being
conducted. The Agency is nearing the end of the laborious
process of reconciling the data gathered from each Center with
Agency records. The end result, which should be completed by the
end of this month, will be a wall-to-wall inventory of all Agency
accountable property. This inventory will then be used as the
baseline for future, and routine inventory audits and
reports.
In addition, an Agency-wide working group was established in
June 1997 to consider issues pertaining to personal property
management, specifically: 1) authority, responsibility and
accountability; 2) centralization, decentralization and
integration; 3) revision of the Staff Manual Guide and the
Property Custodial Officer Handbook; 4) identification of "best
practices" to implement; and, 5) follow-up on the corrective
actions taken and planned by the Centers and ORA in response to
an April 1995 Alternative Management Control Review. In
November 1997, the working group released its draft
recommendations, including proposed duties and responsibilities
for designated officials with authority to manage the Agency's
personal property program. Upon completion of the wall-to-wall
inventory, the working group will prepare an action plan to
achieve full implementation by September 30, 1998 of corrections
and improvements to the property management system.
As the Committee and independent auditors have pointed out, our
inventory systems have been less than comprehensive. These are
just two examples of efforts that are underway to complete a
comprehensive inventory of property and to correct previously
ineffective methods for ensuring accountability of our
property.
"Compliance with the Prompt Payment Act by the Food and Drug
Administration"
The objective of this HHS/OIG audit was to determine whether FDA
is in compliance with the Prompt Payment Act. The OIG found the
Agency did not meet OMB's performance standards and made
recommendations for improving our process of making payments, of
reporting on progress and problems, and of assessing the
reliability of our payment process.
Overall, the Agency concurred with the OIG's recommendations and,
to date, we have made changes in our payment structure to ensure
the integrity of the payment process. These changes include
instituting a random audit of documentation prior to payment and
a Quality Control program that will be in place for the third
quarter of this fiscal year.
"Review of the Food and Drug Administration's Internal
Controls Over Its Purchase Card Activities"
Last year the OIG conducted an audit of executive agencies' use
and management of purchase cards (IMPAC or Bankcard). The
objective was to determine if agencies had designed and
implemented adequate controls over purchase card activities.
It might be of interest to the Committee to know that the FDA
IMPAC/Bankcard program started in FY89 on a test basis in the
Center for Devices and Radiological Health with a total of 24
card holders. After a complete review of the program by OFACS
and Office of Financial Management (O.F.M.) to determine the
effectiveness of the program, it was expanded Agency-wide. This
expansion was started in FY95. Since that time, the program has
grown to include 1147 cardholders and 309 approving officials.
In FY97, FDA did 47,161 actions via the IMPAC card and saved
nearly $4 million in administrative costs over doing individual
purchase orders.
The OIG review was not the first review or management assessment
related to Bankcard use. For instance, during FY96 CBER's Office
of Management, in conjunction with OFACS, conducted training
sessions on the Bankcard Manual Policies and Procedures to ensure
center-wide consistency and compliance with procedures and
regulations. In addition, the Agency's OFM. and OFACS conducted
periodic audits of FDA Bankcard Program cardholder's records.
The periodic reviews consisted of randomly selecting one month
out of the period covered. Once the month was chosen, 20 percent
of all active cardholders in Headquarters were selected randomly
for review. Findings were documented, and corrective action was
taken on each discrepancy found. Since FY96, periodic audits
have continued. During FY97, CBER conducted a management
assessment with 25 IMPAC cardholders, including an evaluation of
guidance compliance, security practices, and one-on-one training
of cardholders. Of the 25 cardholders, one cardholder did not
keep his/her card and files in a secure area and one cardholder
did not keep his/her files in a secure area. Training was
provided to both cardholders identified, and both informed their
Policy Coordinators when their locks had been installed.
Training also was provided to any other cardholder who may have
had questions regarding IMPAC procedures and policies.
In addition, OMS/OFACS conducted several evaluations related to
IMPAC cards:
1) Internal audits of the IMPAC Bankcard program at Headquarters.
These audits identified concerns in recordkeeping, and corrective
steps were taken. For example, each cardholder would be
counseled in proper use of the card and documentation and
reporting requirements. In addition, Executive Management Staff
reviewed the specific concerns, reviewed the SOP and internal
processes to improve practices and ensure accountability,
continued to perform internal audits, and used the monthly
Newsletter as a means to disseminate reminders and guidance in
using the bankcard.
2) Evaluation of "Automated IMPAC Management System (AIMS)" pilot
program. The system was intended to allow the Office of
Financial Management to better reconcile credit card purchase
statements and check for abuse. This pilot for a software system
proved to be insufficient to meet the intended need. The pilot,
however, did have value in that it helped us identify the
elements such a program should have.
3) Review of grants and cooperative agreements, as set forth in
the Grants Management System Review Guide. No significant errors
were found.
The March 2, 1998 report from the OIG stated:
Generally, we found that FDA followed general guidelines
provided by the General Services Administration (GSA) for
the use of credit cards and designed and implemented
adequate management controls over their use in its
headquarters operations . . .The Division of Accounting
(DOA) and the Agency Program Coordinator conduct oversight
reviews of the credit card operation. On a monthly basis,
they select a random number of 20 percent of the cardholders
and conduct reviews of the acquisition files of the selected
cardholders. The reviews are focused on assessing the
adequacy of the documentation and compliance with published
procedures, as well as on identifying unauthorized
purchases, and evidence of improper order splitting. In
case of impropriety, FDA starts administrative actions,
including criminal prosecution or disciplinary action, as
appropriate.5
The OIG recommended that the Agency fully evaluate the adequacy
of the controls over the purchase card program as certain basic
controls, such as separation of duties, inherently are missing in
the purchase card system. FDA concurred with the recommendation
and OMS has established a team to review the internal controls
each Center/Office has in place. Specifically, the team will
evaluate the adequacy and effectiveness of compensating controls
over its purchase card activities. They will conduct interviews
and surveys to determine: 1) the compensating controls each
Center/Office has in place; 2) the adequacy of the documentation
kept by approving officials to support their monthly reviews of
the controls; and, 3) the frequency and methods of communication
between card holders and their approving officials. The
evaluating team will begin with CBER and the target date for
completion is early June 1998.
COMPUTER EQUIPMENT PROCUREMENT AND MANAGEMENT
Most of the concerns raised in the staff summary involving
computer equipment purchases relate to the larger issues of
property management and financial controls on purchases. Over
the past 5 years the Agency's information technology needs and
inventory have expanded commensurate with the evolution of such
technology and with the necessity to support the Agency's work
through effective utilization of such technology. Much of this
occurred with implementation of the Prescription Drug User Fee
Act of 1992 (PDUFA). The Agency could meet the performance goals
contemplated with the legislation only through effective
adoption and use of state-of-the-art information technology, and
PDUFA provided the funding through which such technology could be
acquired.
Several years of experience under PDUFA brought the realization
that there was a need to strengthen and focus the Agency's
information technology program. In 1996, the Agency established
the position of Chief Information Officer (CIO) in the OMS. The
CIO is responsible for establishing a comprehensive Agency-level
information technology policy consistent with the Information
Technology Management Reform Act of 1996. One of the first
projects undertaken by the CIO was development and promulgation
of an Agency-wide policy for information technology purchases.
That policy retains sufficient delegation authority to the
Centers to allow for satisfaction of center program needs, while
ensuring that information technology purchases are accomplished
in the most cost effective manner and with sufficient management
controls to minimize waste, fraud, and abuse. Additionally, as
of January 1998, CBER has established a position of CIO for the
Center, to serve as the liaison between the Center and the
Agency's CIO.
CONCLUSION
Mr. Chairman, the Agency has been faced with many difficult
challenges. We have experienced significant budget and personnel
reductions, we are facing the fiscal challenge of implementing
the many requirements of the FDA Modernization Act, and we are
looking toward anticipated costs of meeting the Year 2000
needs.
In the face of a workload growing at the annual rate of
12 percent for the last 4 years, FDA has boosted the efficiency
of its application reviews by 17 percent over the same time
frame. FDA's improved performance has been recognized by such
outside groups as Harvard University's Kennedy School of
Government, the Ford Foundation, and the Council in Excellence in
Government, which gave FDA the prestigious Innovations in
Government Award last Fall.
We have focused our attention on how we maintain our charge of
protecting and promoting the public health while meeting or
preparing for the budgetary challenges ahead. We have not,
however, lost sight of the managerial and fiscal responsibilities
and accountabilites we have to the American public. There is no
question that the property management system needs to be
strengthened. Optimizing that system has been and will continue
to be a substantial undertaking, which must be completed
expeditiously.
I again want to assure the Committee of our willingness to
address managerial and fiscal deficiencies where they exist, and
to assist the Committee in its assessment of the adequacy of our
systems. As you know, we take our public health mission very
seriously. We equally take seriously, our obligation to fiscal
responsibility so as to maintain the public's trust.
Accountability and transparency in the process benefits us
all.
I would be happy to take any questions the Committee might
have.
1"Report on the Financial Statement Audit of the Food
and Drug Administration for Fiscal Year 1996", Department of
Health and Human Services, Office of the Inspector General, June
1997, page II-1.
2 Id., pages II - 4-5.
3"...a condition in which the design or operation of
one or more of the internal control structure elements does not
reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material in relation to
the financial statements being audited, or material to a
performance indicator or aggregation of related performances
indicators, may occur and not be detected within a timely period
by employees in the normal course of performing their assigned
functions.," Id., pages I-5.
4"Reportable conditions involve matters...relating to
significant deficiencies in the design or operation of the
internal control structure over financial reporting that...could
adversely affect [an agency's] ability to ensure that the
objectives of the internal control structure as previously
defined are being achieved.," Id., page. I-5.
5Review of the Food and Drug Administration's Internal
Controls Over Its Purchase Card Activities," Department of Health
and Human Services, Office of the Inspector General, March 1998,
page 1.
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