Purchase Cards
Control Weaknesses Leave Army Vulnerable to Fraud, Waste, and Abuse Gao ID: GAO-02-844T July 17, 2002A weak overall control environment and breakdowns in key internal controls have left the Army's purchase card program vulnerable to fraudulent, improper, and abusive purchases. At five Army major commands and one installation in each of the commands, GAO found that the Army had not established an effective internal control environment. As the use of purchase cards has expanded, Army management has not emphasized internal controls to ensure that individual transactions were for authorized purposes or that they adhered to legal and regulatory requirements. GAO identified a substantial number of purchases for which cardholder and approving officials had not adhered to important internal controls and were not in accordance with valid requirements, policies, and procedures. The weaknesses identified in the control environment and the breakdown in specific internal control activities resulted in potentially fraudulent and other improper transactions not being prevented or properly identified.
GAO-02-844T, Purchase Cards: Control Weaknesses Leave Army Vulnerable to Fraud, Waste, and Abuse
This is the accessible text file for GAO report number GAO-02-844T
entitled 'Purchase Cards: Control Weaknesses Leave Army Vulnerable to
Fraud, Waste, and Abuse' which was released on July 17, 2002.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Government Efficiency, Financial Management
and Intergovernmental Relations, Committee on Government Reform, House
of Representatives:
For Release on Delivery:
Expected at 2 p.m.
Wednesday, July 17, 2002:
Purchase Cards:
Control Weaknesses Leave Army Vulnerable to Fraud, Waste, and Abuse:
Statement of Gregory D. Kutz:
Director, Financial Management and Assurance:
John Ryan:
Assistant Director, Office of Special Investigations:
GAO-02-844T:
Mr. Chairman, Members of the Subcommittee, and Senator Grassley:
Thank you for the opportunity to discuss the Army‘s purchase card
program. Our related report, [Footnote 1] released today and developed
at the request of this Subcommittee and Senator Grassley, describes the
problems we identified in the Army‘s purchase card program. For a
number of years, the Department of Defense (DOD) has been promoting
departmentwide use of purchase cards, and their use has dramatically
increased. DOD reported that in fiscal year 2001 the purchase card was
used by more than 230,000 civilian and military cardholders to make
about 10.7 million transactions at a cost of over $6.1 billion.
Purchase card transactions include acquisitions at or below the $2,500
micropurchase limit as well as for payments on contracts. The benefits
of using purchase cards versus traditional contracting and payment
processes are lower transaction processing costs and less ’red tape“
for both the government and the vendor community.
We support the use of a well-controlled purchase card program to
streamline the government‘s acquisition processes. However, it is
important that agencies have adequate internal control in place to
protect the government from fraud, waste, and abuse. As a result of our
work at two Navy sites [Footnote 2] that showed significant breakdowns
in internal control and your continuing concern about fraud, waste and
abuse, you requested that we expand our audits of purchase card
controls. Our report to you today is on the Army, which has the largest
purchase card program in DOD with about 109,000 cardholders, 4.4
million transactions, and $2.4 billion in purchases in fiscal year
2001. We plan to report to you separately on the results of our audits
of the Navy and Air Force purchase card programs.
Today, I will summarize our Army work. The purchase card program offers
significant benefits; however, a weak overall control environment and
breakdowns in key internal control activities leave the Army vulnerable
to potentially fraudulent, improper, and abusive purchases. Our work at
five Army major commands and one installation in each of the commands
showed that the Army has not established an effective internal control
environment. As the use of purchase cards has expanded, Army management
has not emphasized internal control activities that can provide
reasonable assurance that the individual transactions are for
authorized purposes or that they adhere to legal and regulatory
requirements. At the individual transaction level, we identified a
substantial number of purchases for which cardholders and approving
officials had not adhered to important internal control activities and
that were not in accordance with valid requirements, policies, and
procedures. The weaknesses we identified in the control environment and
the breakdown in specific internal control activities resulted in
potentially fraudulent and other improper transactions not being
prevented or identified promptly.
During our review, Army officials began to address some of the
deficiencies we identified and to implement applicable actions at their
levels. As discussed in the report released today, DOD concurred with
our recommendations to improve the overall control environment; to
strengthen key internal control activities; and to increase attention to
preventing potentially fraudulent, improper, and abusive and
questionable transactions.
Weaknesses in Overall Control Environment:
Army purchase card management has not taken action to encourage a
strong internal control environment. The importance of the role of
management in establishing a strong control environment cannot be
overstated. GAO‘s Standards for Internal Control discusses management‘s
key role in demonstrating and maintaining an organization‘s integrity
and ethical values, especially in setting and maintaining the
organization‘s ethical tone, providing guidance for proper behavior,
and removing temptations for unethical behavior.
Army purchase card management focused significant attention on
maximizing the use of the purchase card for small purchases and on
paying bills quickly to reduce delinquent payments, and it developed
performance measures for them. However, purchase card management has
not focused equal attention on internal control, and it has not
developed performance measures to assess the adequacy of internal
control activities. As a result, we identified a weak internal control
environment characterized by a lack of (1) adequate operating
procedures specifying needed program management, oversight, and
internal control activities, and (2) oversight by all management levels
over the program‘s implementation at the installation level.
Inadequate Program Operating Procedures:
While existing governmentwide, DOD-wide, and Army-wide procurement
regulations are the foundation for the Army purchase card program, the
Army has not issued a specific servicewide regulation or standard
operating procedure to govern purchase card activities throughout the
agency. Instead, the Army relies on memorandums issued by the DOD and
Army purchase card program offices and procedures issued by major
commands and installations. Our assessment of the existing Army guidance
is that it does not adequately identify and direct the implementation of
needed actions and control activities. The memorandums issued by the
DOD and Army purchase card program offices do not provide a
comprehensive set of policies and operating procedures that identify the
actions and control activities needed to manage the program.
Without agencywide operating procedures, the Army has relied on its
major command and local installation program coordinators to establish
purchase card policies and procedures to guide approving officials,
cardholders, and others involved in the purchase card program as they
implement the program. The standard operating procedures varied widely
among the major commands and installations we audited, and they were
not adequate.
Collectively, the Army policy memorandums and the major command and
installation-level operating procedures do not adequately address key
control environment issues. Among the key control activities meriting
explicit attention are (1) responsibilities and duties of installation-
level program coordinators, (2) controls over the issuance and
assessment of ongoing need for cards, (3) appropriate span of control
for approving officials, and (4) appropriate cardholder spending
limits.
Ineffective Program Oversight:
Ineffective oversight of the purchase card program also contributes to
weaknesses in the overall control environment. In general, effective
oversight activities would include management reviews and evaluations of
how well the purchase card program is operating, including the internal
control activities. We identified little monitoring or oversight
activity directed at assessing program results, evaluating internal
control, or identifying the extent of potentially fraudulent, improper,
and abusive or questionable purchases.
At no management level, Army headquarters, major command, or local
installation, is the infrastructure”guidance and human capital”provided
for monitoring and oversight activities. At Army headquarters, the
purchase card agency program coordinator”the position involving direct
oversight of the Army program”does not conduct internal control
oversight activities. The coordinator‘s activities are mainly directed
at answering program operation questions from and transmitting reports
to major command and installation-level program coordinators. The major
commands have direct authority over the installations that report to
them and have responsibility for the purchase card programs of their
installations. While the major commands that we audited had procedures
to guide the installations‘ activities, we found little evidence of
oversight activities by the commands to monitor the installations‘
implementation of the procedures.
Installation program coordinators are established as the pivotal
officials in managing and overseeing the purchase card program.
However, none of them at the installations we audited had developed a
comprehensive or effective oversight program. They were devoting
significant time and attention to basic activities such as establishing
cardholders and approving officials and providing required training to
these individuals. While devoting time and resources to establishing
cardholders and approving officials, other important activities, such
as monitoring potentially abusive and questionable transactions, were
not receiving attention.
The lack of an infrastructure needed for program monitoring and
oversight is especially critical at the installation level. There,
program coordinators did not have guidance or training on what they
should be doing to monitor and oversee the implementation of internal
control activities, and they had not been trained. Although
installation-level program coordinators are tasked with major program
management responsibilities, applicable DOD, Army, and major command
guidance did not provide a statement of duties, position description,
or other information on the scope, duties, or specific responsibilities
for the position. At each of the five audited installations, the
coordinators told us they had not received any specific program
coordinator training. Program coordinators essentially had been left on
their own to develop and implement program management and oversight
activities.
Further, the Army had not provided sufficient human capital resources at
the installation level to enable the building and maintenance of a
robust oversight program. The two key positions for monitoring
purchases and overseeing the program are the program coordinator and
the approving official. While the program coordinator position is a
specifically designated responsibility, we found that the Army did not
have guidance on the appropriate human capital resources for the
program coordinator‘s office and that program coordinators received
very limited assistance in administering, managing, and overseeing the
program. At the five installations that we audited, the assistance
available to the program coordinator ranged from no staff to one full
time assistant. Considering that the coordinators are responsible for
procurement programs involving thousands of transactions and millions
of dollars, the inadequacy of human capital resources was apparent. The
program coordinators told us, and our observations confirmed, that with
current resources, time was not available to conduct systematic reviews
of approving officials‘ activities, much less undertake other
management analyses and oversight activities.
As opposed to the specifically designated role of the program
coordinator, approving official responsibilities generally fall into
the category of ’other duties as assigned,“ without any specific time
allocated for their performance. We found that approving officials
generally had many other duties that they perceived as a higher
priority than monitoring purchases and reviewing their cardholders‘
purchase card statements. Also, many approving officials were
responsible for a large number of cardholders. A large workload,
especially one in an ’other duties as assigned“ category can inevitably
lead to less attention than expected or desired. We found that a number
of approving officials at the installations we visited had numerous
cardholders reporting to them. For example, at Fort Hood, 29 billing
officials had 10 or more cardholders. Two of the 29 had over 20
cardholders. Such a large span of control for approving officials is not
conducive to thorough review of each cardholder‘s monthly statement.
During our review, DOD established a benchmark of no more than 7
cardholders per approving official, and the installations reported that
they were bringing their approving officials‘ span of control into line
with the criteria.
Another symptom of a weak infrastructure was that program coordinators
at the five installations we audited generally did not have the grade
level or organizational authority”’clout“”to enforce compliance with
purchase card procedures. At the five installations we audited, the
program coordinators were part of the installation‘s contracting
operation and reported to the director of contracting, from whom they
derived their authority. However, we believe that the program
coordinators‘ grade levels were not commensurate with their
responsibilities or sufficient to provide the authority needed to
enforce purchase card program rules. Only one of the five was a GS-12,
two were GS-9s, and two were GS-7s. Program coordinators have the
primary responsibility for purchase card program management and
significant control over procurement activities carried out by a large
number of individuals. For example, the Fort Hood program coordinator
has responsibility for overseeing a program of over 110,000 purchase
card transactions totaling about $58 million and carried out by 321
approving officials and 1,242 cardholders. In addition to the relatively
low grades levels, the Army has not made the program coordinator
position career enhancing by making it part of a contracting career
path.
Internal Control Activities Not Effectively Implemented:
Our work shows that critical internal control activities and techniques
over the purchase card program were ineffective at the five
installations we audited. Based on our tests of statistical samples of
transactions, we determined that the transaction-level control
activities and techniques were not effective, rendering the five
installations‘ purchase card transactions vulnerable to potentially
fraudulent and abusive purchases and theft and misuse of government
property.
Control activities occur at all levels and functions of an agency. They
include a wide range of diverse activities such as approvals,
authorizations, verifications, reconciliations, performance reviews,
and the production of records and documentation. For the Army purchase
card program, we opted to test those control activities that we
considered to be key in creating a system to provide reasonable
assurance that transactions are correct and proper throughout the
procurement process. The key control activities and techniques we
tested are (1) advance approval of purchases, (2) independent receiving
and acceptance of goods and services, (3) independent review by an
approving official of the cardholder‘s monthly statements and
supporting documentation, and (4) cardholders obtaining and providing
invoices that support their purchases and provide the basis for
reconciling cardholder statements. Table 1 summarizes the results of
our statistical testing.
Table 1: Internal Control Activity Statistical Testing Failure Rates:
Installation: Eisenhower Army Medical Center;
Estimated percent[A] of transactions without documentation of: Advance
approval: 6-;
Estimated percent[A] of transactions without documentation of:
Independent receiving: 71;
Estimated percent[A] of transactions without documentation of:
Approving official review: 86;
Estimated percent[A] of transactions without documentation of:
Supporting invoice: 26.
Installation: Fort Benning;
Estimated percent[A] of transactions without documentation of: Advance
approval: 46;
Estimated percent[A] of transactions without documentation of:
Independent receiving: 75;
Estimated percent[A] of transactions without documentation of:
Approving official review: 73;
Estimated percent[A] of transactions without documentation of:
Supporting invoice: 16.
Installation: Fort Hood;
Estimated percent[A] of transactions without documentation of: Advance
approval: 36;
Estimated percent[A] of transactions without documentation of:
Independent receiving: 65;
Estimated percent[A] of transactions without documentation of:
Approving official review: 66;
Estimated percent[A] of transactions without documentation of:
Supporting invoice: 7.
Installation: Soldier, Biological and Chemical Command – Natick;
Estimated percent[A] of transactions without documentation of: Advance
approval: 25;
Estimated percent[A] of transactions without documentation of:
Independent receiving: 55;
Estimated percent[A] of transactions without documentation of:
Approving official review: 40;
Estimated percent[A] of transactions without documentation of:
Supporting invoice: 14.
Installation: Texas Army National Guard;
Estimated percent[A] of transactions without documentation of: Advance
approval: 69;
Estimated percent[A] of transactions without documentation of:
Independent receiving: 87;
Estimated percent[A] of transactions without documentation of:
Approving official review: 41;
Estimated percent[A] of transactions without documentation of:
Supporting invoice: 14.
[A] All estimated percentages have 95 percent confidence intervals of
plus or minus 13 percentage points or less, except three estimates at
Fort Hood. There, the 95 percent confidence intervals for advance
approval, independent receiving, and approving official review ranged
from 23 to 51 percentage points, 51 to 77 percentage points, and 52 to
79 percentage points, respectively.
Source: GAO testing and statistical analysis of Army purchase card
transaction files.
[End of table]
Advance approval. Without Army-wide operating procedures, requirements
for advance approval are not consistent but do exist to varying extent
at each of the five audited installations. Two major commands and three
installations specifically require advance approval. Others required
written descriptions of purchases and appropriate coordination and
review prior to the purchase. We believe that leaving cardholders
solely responsible for a procurement without some type of documented
approval puts the cardholders at risk and makes the government
inappropriately vulnerable. A segregation of duties so that someone
other than the cardholder is involved in the purchase improves the
likelihood that both the cardholders and the government are protected
from fraud, waste, and abuse. Independent receiving. In our sample
transactions, the five installations we audited generally did not have
independent, documented evidence that the items ordered and paid for
with the purchase card had been received.
Independent receiving by someone other than the cardholder provides
additional assurance that purchased items are not acquired for personal
use and that the purchased items come into the possession of the
government. The requirement for documentation of independent receiving
was not generally addressed in the procedures of the commands and
installations we audited. However, we believe that documented
independent receiving is a basic internal control activity that provides
additional assurance to the government that purchased items come into
the possession of the government.
Approving official review. Approving official review is a recognized
control activity at all levels of the purchase card program, and the
approving official review process has been described as the first line
of defense against misuse of the card. However, our testing revealed
that documented evidence of approving official review of cardholder
transactions and reconciled statements did not exist for most of our
sample transactions. The high failure rate”40 to 86 percent”is of
particular concern for this control activity because it is perhaps the
most important to providing reasonable assurance that purchases are
appropriate and for a legitimate government need.
Although the failure rates are of concern, they are not unexpected
because major command and local standard operating procedures, while
recognizing the importance of approving official review, do not specify
the required extent, content, or documentation of approving officials‘
reviews. In addition, the high failure rate may be attributable to
approving official responsibilities falling into the category of ’other
duties as assigned“ and to approving officials being responsible for a
large number of cardholders. A large workload, especially one in an
’other duties as assigned“ category, can inevitably lead to less
attention than expected or desired. We believe that an approving
official‘s review of the cardholders‘ purchases is a vital internal
control activity. Without documentation of such review, neither we,
internal auditors, nor program coordinators can determine the extent
that approving officials are carrying out review responsibilities.
Supporting invoice. Essentially, the Army requires that an invoice
support purchase card transactions. Thus, the invoice is a key document
in purchase card internal control activities. The invoice is the basic
document that is to be attached to the cardholder‘s monthly statement
during a cardholder‘s reconciliation. The estimated failure rates for
evidence of invoice”7 to 26 percent”were lower than those for the other
internal control activities we tested. A valid invoice to show what was
purchased and the price paid is a basic document for the transactions
and a missing invoice is an indicator of potential fraud. Without an
invoice, two key control activities”independent receiving and approving
official review”become ineffective. Independent receiving cannot
confirm that the purchased items were received, and the approving
official cannot review a cardholder statement reconciled with the
supporting invoice. A near zero failure rate is a reasonable goal
considering that invoices are easily obtained or replaced when
inadvertently lost.
Potentially Fraudulent, Improper, and Abusive and Questionable
Transactions:
Buying items with purchase cards without the requisite control
environment creates unnecessary risk of excess spending, which can range
from outright fraudulent purchases to ones that were of questionable
need for the unit‘s mission or were unnecessarily expensive. We
identified purchases at the installations we audited and through our
Army-wide data mining [Footnote 3] activities that were potentially
fraudulent, improper, and abusive or questionable, which can result
from a weak control environment and weak internal control activities.
Although our work was not designed to identify the extent of
potentially fraudulent, improper, and abusive or otherwise questionable
transactions, such transactions are occurring and have not been
detected considering the control weaknesses identified at each
installation.
Potentially Fraudulent Purchases:
We identified instances of potentially fraudulent transactions at three
of the five installations we audited and in our Army-wide data mining.
Some were identified in response to our inquiries and others were
identified or being investigated independent of our audit. We
considered potentially fraudulent purchases to include those made by
cardholders that were unauthorized and intended for personal use.
Potentially fraudulent purchases can also result when a purchase card
or account number is stolen and used by someone other than the
cardholder or when vendors charge purchase cards for items that
cardholders did not buy. The following examples illustrate the cases we
describe in the report that we are issuing today.
* At Eisenhower Army Medical Center, an Army investigation initiated
near the end of our work has revealed an estimated $100,000 of
potentially fraudulent purchases. The investigation began when an
alternate cardholder received an electronic game station that had been
ordered by another cardholder who was away on temporary duty. The
alternate cardholder, noting that the purchase did not appear to be for
government use, notified the program coordinator who notified the local
Army criminal investigations division. The ensuing investigation
revealed that the military cardholder, approving official, and several
other soldiers and civilians colluded to purchase numerous items
including computers, digital cameras, an audio surround system, a 32-
inch television, a stereo system, and other items for personal use.
* A Fort Benning military cardholder charged $30,000 for personal goods
and cash advances before and after retirement. Because these 178
transactions went undetected, it appears that the approving official‘s
certification was only a ’rubber stamp“ and was not based on a review
of the cardholder‘s bill, reconciliations, and supporting documentation.
The approving official not only did not detect these potentially
fraudulent transactions while the cardholder was on active military
duty, but also did not notice that charges were continuing to be made
after the cardholder retired.
As part of our work, we attempted to obtain other examples of
potentially fraudulent activity in the Army purchase card program from
the Army‘s Criminal Investigation Command in Washington, D.C. However,
data on the command‘s investigations were not available. Purchase card
program officials and Army investigation command officials said that
they had no information on the total number of fraud investigation
cases throughout the Army that had been completed or were ongoing.
Based on our identification of a number of potentially fraudulent cases
at the installations that we audited, we believe that the number of
cases involving potentially fraudulent transactions could be
significant.
Improper Purchases and Transactions:
Besides potentially fraudulent activity, our work also identified
transactions that were improper, which are those purchases that,
although approved by Army personnel and intended for government use,
are not permitted by law, regulation, or DOD policy. We identified
three types of improper purchases: (1) purchases that did not serve a
legitimate government purpose, (2) split purchases in which the
cardholder circumvents cardholder single purchase limits, and (3)
purchases from an improper source.
We found several instances of purchases such as clothing in which
cardholders purchased goods that were not authorized by law or
regulations. The improper transactions were identified as part of our
review of fiscal year 2001 transactions and related activity, including
our Army-wide data mining of transactions with questionable vendors. For
example, as part of our data mining of Army-wide purchase card
transactions, we identified a questionable transaction, for which a
subsequent investigation determined that a cardholder had purchased a
Bose radio for $523 for his personal use in his office. The employee was
required to reimburse the U.S. Treasury for the cost of the radio. This
and other purchases indicated that approving officials were not
adequately reviewing cardholder transactions.
The second category of improper purchase occurs when a cardholder splits
a transaction into more than one segment to avoid the requirement to
obtain competitive bids for purchases over the $2,500 micropurchase
limit. Once items exceed the limit, they are to be purchased through a
contract. Our analysis of data on purchases at the five installations
we audited and our data mining efforts identified occurrences of
potential split purchases such as one at Fort Stewart, Georgia. There,
an approving official had two cardholders spend $16,000 over a series
of days to buy numerous pieces of executive office furniture for the
official‘s office that was located on the mezzanine of a warehouse.
These purchases included elegant desks, chairs, and a conference table.
We also identified numerous cases where the Army made repetitive
micropurchases to meet requirements that in total greatly exceed the
micropurchase limit. While some repetitive purchases might not clearly
be split purchases, using a blanket purchase agreement for such
purchases instead of separate micropurchases could result in lower
costs. The Federal Acquisition Regulation provides for blanket purchase
agreements as a ’simplified method of filling anticipated repetitive
needs for supplies or services.“ The following case is an example of
when a blanket purchase agreement could have been used. At Fort
Benning, the Dismounted Battlespace Battle Lab, a combat training unit,
routinely purchased doors that were destroyed during training exercises
to instruct troops how to enter a building that may contain an enemy.
The battle lab spent $111,721 in 84 transactions with one vendor to buy
doors during a 10-month period in fiscal year 2001. In this case,
battle lab officials had refused attempts by the Fort Benning
contracting division and purchase card program coordinator to execute a
blanket purchase agreement. Use of blanket purchase agreement, rather
than repetitive, individual micropurchases, could lower per unit
prices.
Another type of improper purchase occurs when cardholders do not buy
from a mandatory procurement source. Various federal laws and
regulations such as the Javits-Wagner-O'Day Act (JWOD) require
government cardholders to acquire certain products from designated
sources. The JWOD program is a mandatory source of supply for all
federal entities. It generates jobs and training for Americans who are
blind or have severe disabilities by requiring federal agencies to
purchase supplies and services furnished by nonprofit agencies, such as
the National Industries for the Blind and the National Institute for
the Severely Handicapped. Most JWOD program supplies are small value
items such as office supplies, cleaning products, or medical/surgical
supplies that nearly always fall into the micropurchase category. We
noted that cardholders frequently did not purchase from these required
sources when they should have. For example, in our data mining work, we
identified a cardholder at Tooele Army Depot who made 10 purchases for
inserts to day planners, which can be ordered from the JWOD catalog,
from Franklin Covey for about $11,900. In response to our questions, we
were informed that future purchases of such items would be through
JWOD.
Abusive and Questionable Purchases:
We also identified abusive and questionable transactions at
installations we audited. We defined abusive transactions as those that
were authorized, but the items purchased were at an excessive cost
(e.g., ’gold plated“) or for a questionable government need, or both.
When abuse occurs, no law or regulation is violated. Rather, abuse
occurs when the conduct of a government organization, program,
activity, or function falls short of societal expectations of prudent
behavior. Often, improper purchases such as those discussed in the
previous section are also abusive. For example, the executive furniture
purchased at Fort Stewart discussed earlier as improper split purchases
were also abusive purchases.
Questionable transactions are those that appear to be improper or
abusive but for which there is insufficient documentation to conclude
either. For questionable items, we concluded that cardholders purchased
items for which there was not a reasonable and/or documented
justification. Questionable purchases often do not easily fit within
generic governmentwide guidelines on purchases that are acceptable for
the purchase card program. They tend to raise questions about their
reasonableness. Many, such as gym quality exercise equipment, are
common Army”and DOD”purchases because the Army must provide
more than merely a work environment for its soldiers. However, others,
like the fine china purchased for culinary arts team competition
discussed below, clearly raise questions about whether they are
appropriate purchases. Precisely because these types of purchases tend
to raise questions and subject the Army to criticism, they require a
higher level of prepurchase review and documentation than other
purchases.
When we examined these types of purchases, we usually did not find
evidence of prepurchase justification. In attempting to justify whether
purchases were acceptable, improper, or abusive, program coordinators,
approving officials, and cardholders often provided after-the-fact
rationales for the purchases. We believe that these types of
questionable purchases require scrutiny before the purchase, not after.
The following examples illustrate our point.
* Palm Pilots for Pentagon officials. In February 2001, two purchases
for a total of 80 Palm Pilots at a total cost of $30,000 were made for
the Office of the Assistant Secretary of Defense for Acquisition,
Technology, and Logistics. Two questions about this purchase are
whether a valid need had been identified for the purchase and whether
the urgency of the purchase justified the purchase from a vendor that
could deliver immediately but was charging $1,540 more than the lowest
priced competitor. No documentation was available to show how the
office had determined that 80 Palm Pilots were a valid government
requirement. An e-mail related to the purchase suggested that there was
a need ’to get enough goodies for everyone.“ The documentation also
suggested that the items were being ordered for inventory and would be
issued to personnel when requested. This does not indicate a
predetermined requirement and does not appear to support that the
requirement was urgent, as the office determined. Based on a
determination of urgency, the price paid was $1,540 more than the
lowest competitor‘s price so that delivery could be immediate.
* Culinary arts. At Fort Hood and during our Army-wide data mining
effort, we noted several purchases for various culinary arts events.
Among the purchases were fine china and crystal from Royal Doulton
and Lenox. Other purchases were for accessories such as a rotating
lighted ice-carving pedestal. Although participation in culinary arts
team events is an approved Army activity, the transactions we examined
and inquired about did not have documented justifications of the need
for the specific items purchased. We examined transactions that totaled
only about $3,800, but we believe that the total cost of such purchases
Army-wide is far more because we were told that these type purchases
for the culinary arts are common throughout the Army. One reason, we
were told, is because most installations have culinary arts teams that
attend competitions involving the use of expensive accessories and fine
crystal and china.
Concluding Comments:
The use of a well-controlled purchase card program is a valuable tool
for streamlining the government‘s acquisition processes. However, the
Army program is not well controlled. The Army‘s weak control
environment was the root cause of the problems we saw with purchase
card transactions, including the potentially fraudulent, improper, and
abusive or questionable purchases. The Army has not provided the
aggressive leadership needed to build and maintain an internal control
infrastructure that encourages a strong control environment that
provides accountability. Such an environment is an important
counterbalance to the increased risk of potentially fraudulent and
wasteful spending that results from the rapidly expanding use of the
purchase card. The Army needs to ensure that installation-level program
coordinators, the primary program management officials, have the tools
to develop local control systems and oversight activities.
Strengthening the control environment will require a renewed focus of
attention on, and commitment to, building a robust purchase card
infrastructure.
Our report on these issues includes recommendations that address the
need for the Army to strengthen the overall control environment and
improve internal control activities. Key among them are our
recommendations that the Army issue agencywide standard operating
procedures to guide the overall implementation of the program and that
the Army ensure that it supports program coordinators and approving
officials with the infrastructure, authority, and oversight tools they
need to provide reasonable assurance that the program is well
controlled. We also made specific recommendations for improvements in
control activities and for addressing the weaknesses we identified in
preventing and detecting potentially fraudulent, improper, and abusive
and questionable purchases.
In written comments on a draft of our report, DOD concurred with our
recommendations and described actions completed, underway, or planned
to implement them. Although it concurred with our recommendation for
an Army-wide standard operating procedure directing the implementation
of specific internal control activities, DOD said that the broad
application of two of the five recommended activities”advance approval
and independent receiving”would add costs without comparable benefit.
However, it recognized the applicability of these activities in some
circumstances and commented that the Army standard operating
procedure currently being developed will (1) include a list of items
requiring advance approval and (2) require advance approval for a
category of items that fall outside the ’common sense“ rule. We agree
that not all purchases require advance approval and that some small
dollar and other purchases may not lend themselves to independent
receiving. However, we continue to believe these are important control
activities and that the Armywide standard operating procedure should
(1) discuss the criteria for determining when these activities are
applicable and (2) articulate guidelines for implementing them.
Mr. Chairman, Members of the Subcommittee, and Senator Grassley, this
concludes my prepared statement. I would be pleased to answer any
questions that you may have.
Contacts and Acknowledgments:
For future contacts regarding this testimony, please contact Gregory D.
Kutz at (202) 512-9505 or at kutzg@gao.gov. Individuals making key
contributions to this testimony included Ray Bush, David Childress, and
Jamie Haynes. Numerous other individuals made contributions to the audit
of the Army‘s purchase card program.
[End of section]
Footnotes:
[1] U.S. General Accounting Office, Purchase Cards: Control Weaknesses
Leave Army Vulnerable to Fraud, Waste, and Abuse, GAO-02-732
(Washington, D.C.: June 27, 2002).
[2] U.S. General Accounting Office, Purchase Cards: Control Weaknesses
Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO-01-995T
(Washington, D.C.: July 30, 2001) and Purchase Cards: Continued Control
Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO-02-
506T (Washington, D.C.: Mar. 13, 2002).
[3] In our work, data mining involves the manual or electronic sorting
of purchase card data to identify and select for further follow-up and
analysis transactions with unusual or questionable characteristics.
[End of section]
GAO's Mission:
The General Accounting Office, the investigative arm of Congress,
exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO‘s commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO‘s Web site [hyperlink,
http://www.gao.gov] contains abstracts and fulltext files of current
reports and testimony and an expanding archive of older products. The
Web site features a search engine to help you locate documents using
key words and phrases. You can print these documents in their entirety,
including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as ’Today‘s Reports,“ on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
[hyperlink, http://www.gao.gov] and select ’Subscribe to daily E-mail
alert for newly released products“ under the GAO Reports heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. General Accounting Office:
441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone: Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800:
U.S. General Accounting Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
