Lawrence Berkeley National Laboratory
Further Improvements Needed to Strengthen Controls Over the Purchase Card Program
Gao ID: GAO-04-987R August 5, 2004
The Lawrence Berkeley National Laboratory (Lawrence Berkeley) located in Berkeley, California, is a government-owned, contractor-operated Department of Energy (DOE) national laboratory. The University of California manages the lab under a cost-reimbursable contract with DOE. The university is paid a management fee to operate the lab and is reimbursed for all allowable costs charged to the contract. During the fall of 2002, the Federal Bureau of Investigation began investigating two Los Alamos National Laboratory employees for alleged misuse of lab credit cards. Other allegations of theft and misuse of government funds at Los Alamos soon followed. In light of the problems identified at Los Alamos, Congress asked us to review selected procurement and property management practices at two NNSA and two DOE contractor labs, including Lawrence Berkeley. This report summarizes the information provided during our June 14, 2004 briefing to GAO's staff on these issues as they relate to Lawrence Berkeley. Specifically, we reviewed Lawrence Berkeley's purchase card program and property management practices to determine whether (1) internal controls over the lab's purchase card (Pcard) program provided reasonable assurance that improper purchases would not occur or would be detected in the normal course of business, (2) purchase card expenditures made under the contract properly complied with lab policies and other applicable requirements and were reasonable in nature and amount and thus were allowable costs payable to the contractor under the contract, and (3) property controls over selected asset acquisitions provided reasonable assurance that accountable assets would be properly recorded and tracked. Our review covered selected transactions that occurred during fiscal year 2002 and the first half of fiscal year 2003 (October 1, 2001, through March 31, 2003), which were the most current data available when we requested the data for our review.
Internal control weaknesses in Lawrence Berkeley's Pcard program increased the lab's risk of improper purchases. These included weaknesses in supervisory review and approval of transactions, documentation, and segregation of duties. Specifically, of the nonstatistical selection of 144 transactions obtained through data mining5 for fiscal years 2002 and the first half of fiscal year 2003, we found that cardholder monthly statements for 35 (24 percent) were not signed by approving officials in a timely manner or were not signed at all. We also found that 31 (22 percent) of the 144 nonstatistically selected transactions we reviewed, totaling $38,680, lacked sufficient documentation such as an invoice, credit card receipt, or other sales documentation necessary to validate the dollar amount, quantity, and nature of the items purchased. This was due in part to the fact that monthly approvers were not required to verify purchases listed in the cardholder statement against supporting documents. This weakness in the review and approval function combined with the insufficient documentation of transactions created an environment where improper Pcard purchases could occur with little risk of detection. Further, two key personnel responsible for overseeing the lab's Pcard program were also cardholders, creating a lack of independence between their cardholder role and their Pcard administration role. These control weaknesses likely contributed to the approximately $326,396 in improper, wasteful, and questionable purchases we identified during our review. While relatively small compared to the approximately $24 million in purchase card activity that occurred during the review period, it demonstrates vulnerabilities from weak controls that could be exploited to a greater extent. We also considered 23 transactions totaling $10,911 as wasteful because they were excessive in cost when compared to other alternatives and/or were of questionable need, such as $985 for three Bose noise-canceling headsets and $403 for an air purifier from The Sharper Image. We considered 51 transactions totaling $116,894 as questionable because they had insufficient documentation that would enable us or the lab to determine what was purchased and whether the purchases were proper and reasonable. Because we only tested a small portion of the transactions we identified that appeared to have a higher risk of fraud, waste, or abuse, there may be other improper, wasteful, and questionable purchases in the remaining untested transactions. Lawrence Berkeley did not ensure assets were accounted for and tracked properly and in a timely manner. All of the 100 assets selected for physical observation were either found or the lab provided documentation that the asset had been transferred or retired. However, we found several inaccuracies between the physical assets and the information recorded in the property database, including inaccurate serial numbers, incorrect property custodians, and inaccurate location information. These types of inaccuracies make the assets more susceptible to undetected loss or theft. Subsequent to our review period, the lab made a number of policy and procedural changes that, if properly implemented, should help improve internal controls over its Pcard program and accountability for property. This included the implementation of a new Pcard program that significantly changed the lab's Pcard process. However, additional improvements are needed to further reduce the risk of improper and wasteful purchases.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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GAO-04-987R, Lawrence Berkeley National Laboratory: Further Improvements Needed to Strengthen Controls Over the Purchase Card Program
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August 5, 2004:
Congressional Requesters:
Subject: Lawrence Berkeley National Laboratory: Further Improvements
Needed to Strengthen Controls Over the Purchase Card Program:
The Lawrence Berkeley National Laboratory (Lawrence Berkeley) located
in Berkeley, California, is a government-owned, contractor-operated
Department of Energy (DOE) national laboratory. The University of
California manages the lab under a cost-reimbursable contract with DOE.
The university is paid a management fee to operate the lab and is
reimbursed for all allowable costs charged to the contract.
During the fall of 2002, the Federal Bureau of Investigation began
investigating two Los Alamos National Laboratory employees for alleged
misuse of lab credit cards. Other allegations of theft and misuse of
government funds at Los Alamos soon followed. In light of the problems
identified at Los Alamos, you asked us to review selected procurement
and property management practices at two NNSA[Footnote 1] and two DOE
contractor labs, including Lawrence Berkeley.[Footnote 2]
This report summarizes the information provided during our June 14,
2004 briefing to your staff on these issues as they relate to Lawrence
Berkeley. The enclosed briefing slides highlight the results of our
work and the information provided.[Footnote 3] Specifically, we
reviewed Lawrence Berkeley's purchase card program and property
management practices to determine whether (1) internal controls over
the lab's purchase card (Pcard) program provided reasonable assurance
that improper purchases would not occur or would be detected in the
normal course of business, (2) purchase card expenditures made under
the contract properly complied with lab policies and other applicable
requirements and were reasonable in nature and amount and thus were
allowable costs payable to the contractor under the contract, and (3)
property controls over selected asset acquisitions provided reasonable
assurance that accountable assets would be properly recorded and
tracked.[Footnote 4] Our review covered selected transactions that
occurred during fiscal year 2002 and the first half of fiscal year 2003
(October 1, 2001, through March 31, 2003), which were the most current
data available when we requested the data for our review. This report
also includes seven recommendations for action--six related to actions
needed to be taken by Lawrence Berkeley and one related to action
needed to be taken by the DOE contracting officer for Lawrence
Berkeley.
Results in Brief:
Internal control weaknesses in Lawrence Berkeley's Pcard program
increased the lab's risk of improper purchases. These included
weaknesses in supervisory review and approval of transactions,
documentation, and segregation of duties. Specifically, of the
nonstatistical selection of 144 transactions obtained through data
mining[Footnote 5] for fiscal years 2002 and the first half of fiscal
year 2003, we found that cardholder monthly statements for 35 (24
percent) were not signed by approving officials in a timely manner or
were not signed at all. For example, two statements were signed only
after they were selected for our review--more than 2 years after the
two purchases were made. We also found that 31 (22 percent) of the 144
nonstatistically selected transactions we reviewed, totaling $38,680,
lacked sufficient documentation such as an invoice, credit card
receipt, or other sales documentation necessary to validate the dollar
amount, quantity, and nature of the items purchased. This was due in
part to the fact that monthly approvers were not required to verify
purchases listed in the cardholder statement against supporting
documents. This weakness in the review and approval function combined
with the insufficient documentation of transactions created an
environment where improper Pcard purchases could occur with little risk
of detection. Further, two key personnel responsible for overseeing the
lab's Pcard program were also cardholders, creating a lack of
independence between their cardholder role and their Pcard
administration role.
These control weaknesses likely contributed to the approximately
$326,396 in improper, wasteful, and questionable purchases we
identified during our review.[Footnote 6] While relatively small
compared to the approximately $24 million in purchase card activity
that occurred during the review period, it demonstrates vulnerabilities
from weak controls that could be exploited to a greater extent.
Specifically, we found improper purchases consisting of:
* Twenty-one improper split purchases--that is, groups of two or more
similar transactions that were split to circumvent single purchase
limits--consisting of 60 transactions totaling $160,011.
* Thirty-two restricted items purchased totaling $47,139 that did not
have documented pre-approval as required.
* One purchase charged by a cardholder's monthly approver against the
cardholder's account while the cardholder was out on disability leave.
We also considered 23 transactions totaling $10,911 as wasteful because
they were excessive in cost when compared to other alternatives and/or
were of questionable need, such as $985 for three Bose noise-canceling
headsets and $403 for an air purifier from The Sharper Image. We
considered 51 transactions totaling $116,894 as questionable because
they had insufficient documentation that would enable us or the lab to
determine what was purchased and whether the purchases were proper and
reasonable. Because we only tested a small portion of the transactions
we identified that appeared to have a higher risk of fraud, waste, or
abuse, there may be other improper, wasteful, and questionable
purchases in the remaining untested transactions.
Lawrence Berkeley did not ensure assets were accounted for and tracked
properly and in a timely manner. For example, our data mining tests
showed 303 assets totaling $3.5 million were assigned to persons who no
longer worked at the lab. The majority of these assets were
subsequently reassigned in April 2004, shortly before we conducted a
physical observation of assets. In addition, 28 assets totaling
$363,759 had been transferred from the Lawrence Livermore National
Laboratory to Lawrence Berkeley in August 2003. However, Lawrence
Berkeley did not enter these assets into the property database until we
brought them to their attention in April 2004. All of the 100 assets
selected for physical observation were either found or the lab provided
documentation that the asset had been transferred or retired. However,
we found several inaccuracies between the physical assets and the
information recorded in the property database, including inaccurate
serial numbers, incorrect property custodians, and inaccurate location
information. These types of inaccuracies make the assets more
susceptible to undetected loss or theft.
Subsequent to our review period, the lab made a number of policy and
procedural changes that, if properly implemented, should help improve
internal controls over its Pcard program and accountability for
property. This included the implementation of a new Pcard program that
significantly changed the lab's Pcard process. However, additional
improvements are needed to further reduce the risk of improper and
wasteful purchases.
Recommendations for Executive Action:
In order to address the issues identified in our review, we recommend
that the Secretary of Energy direct the Director of the Lawrence
Berkeley National Laboratory to take the following six actions:
* To strengthen internal controls over the purchase card program and
reduce the lab's vulnerability to improper, wasteful, and questionable
purchases, we recommend the following:
* Cancel purchase card accounts for cardholders who also perform
oversight functions over the purchase card program to help ensure
appropriate independence and separation of duties between these
functions.
* Establish policies and procedures requiring that purchasers maintain a
copy of the detailed sales receipt, invoice, or other independent
support showing the description, quantity, and price of individual
items purchased.
* Require approving officials to review (1) sales receipts, invoices,
or other independent support showing the description, quantity, and
price of individual items purchased and (2) restricted items approvals
before approving purchases to ensure such items were obtained and
documented where applicable.
* Implement tools, such as data mining, for the Pcard program or other
review staff to use in reviewing cardholder purchases for improper
purchases. These tools should be used to systematically monitor for
split purchases, unusual vendors, and other potentially improper or
wasteful purchases, and to monitor timeliness of reconciliations and
supervisory approvals.
* To help improve Lawrence Berkeley's controls over the purchasing,
recording, and safeguarding of assets, we recommend the following:
* Establish a policy requiring property management to provide a report
of all missing assets detected during physical inventories to Lawrence
Berkeley Security.
* Establish a process to test the accuracy of key information recorded
in the property management system, including the serial number,
assigned custodian, location, and bar-code number.
We also recommend that the Secretary of Energy direct the DOE
contracting officer for the lab to review the improper, wasteful, and
questionable items we identified to determine whether any of these
purchases should be repaid to DOE.
Agency Comments:
Lab and local DOE officials agreed with all of the recommendations
except for the recommendations to (1) require sales documentation such
as a receipt or invoice and (2) require approving officials to review
sales documentation and restricted item approvals before approving
purchases. They indicated that the new Pcard program has the data to
support item price, quantity, and description via the requisition,
monthly cardholder statement, and receiving data.
While the new system as described by lab officials may have improved
the segregation of duties which is an important part of a good system
of internal control, it does not substitute for independent, detailed
supporting documentation of the description, quantity, and cost of
items purchased in all cases. Without such detail, a reviewer would not
be able to determine if the original order amounts were correct or
whether additional items were purchased under that order. Consequently,
sufficient, independent evidence for the individual items purchased and
corresponding supervisory review of such evidence is necessary to help
reduce the risk of improper purchases.
The lab also provided technical and clarifying comments, which we
incorporated as appropriate.
Scope and Methodology:
To determine if Lawrence Berkeley's internal controls over its Pcard
program provided reasonable assurance that improper purchases would not
occur or would be detected in the normal course of business, we
reviewed Lawrence Berkeley's contract with DOE and applicable
provisions of the DOE Acquisition Regulation (DEAR) and the Federal
Acquisition Regulation (FAR), performed walkthroughs of key processes,
interviewed lab and DOE management and staff, and compared the results
to the lab's policies and GAO's Standards for Internal Control in the
Federal Government.[Footnote 7] These standards provide the overall
framework for establishing and maintaining internal control and for
identifying and addressing major performance and management challenges
and areas at greatest risk of fraud, waste, abuse, and mismanagement
and are based on internal control guidance for the private
sector.[Footnote 8]
To determine whether Pcard expenditures complied with lab policies and
other applicable requirements and were reasonable in nature and amount,
we performed data mining on fiscal year 2002 and the first half of
fiscal year 2003 Pcard transactions to identify indicators of potential
noncompliance with policies and procedures and to identify purchases
that appeared to be from unusual vendors, purchases made on weekends,
during the holidays, or at fiscal-year end, and purchases of sensitive
assets. Based on the results, we (1) identified 62 potential split
purchases and tested all of them to determine whether they were in fact
split purchases and (2) tested a nonstatistical selection of 144
transactions for evidence of supervisory review and approval, adequacy
of supporting documentation, and reasonableness of the purchases.
To determine if property controls over selected asset acquisitions
provided reasonable assurance that accountable assets would be properly
recorded and tracked, we performed walkthroughs to observe property
controls, reviewed property management policies and procedures, tested
accountable property items selected in the nonstatistical selection to
determine whether these assets had been entered into the lab's property
system prior to our review, performed data mining on the property
database to identify possible database errors or inaccuracies such as
property assigned to terminated employees and multiple property items
with the same serial number, and performed a physical observation of
selected assets to determine whether they could be properly accounted
for.
We requested oral comments on a draft of the enclosed briefing slides
from the Secretary of Energy or his designee and have included any
comments as appropriate in the letter and enclosed slides. While we
identified some improper, wasteful, and questionable purchases, our
work was not designed to determine the full extent of such purchases.
We conducted our work on all four labs from March 2003 through May 2004
in accordance with generally accepted government auditing standards.
This report is available at no charge on our home page at http://
www.gao.gov. If you have any questions about this report, please
contact me at (202) 512-9508 or Doreen Eng, Assistant Director, at
(206) 287-4858. You may also reach us by e-mail at calboml@gao.gov or
engd@gao.gov. Additional contributors to this assignment were Stephanie
Chen, Barbara House, Kelly Lehr, Gail Luna, Lien To, and LaDonna
Towler.
Signed by:
Linda M. Calbom:
Director, Financial Management and Assurance:
Enclosure:
List of Requesters:
The Honorable Sherwood Boehlert, Chairman:
The Honorable Bart Gordon, Ranking Minority Member:
Committee on Science:
House of Representatives:
The Honorable Joe Barton, Chairman:
Committee on Energy and Commerce:
House of Representatives:
The Honorable Jerry Costello:
The Honorable James Greenwood:
The Honorable Billy Tauzin:
House of Representatives:
Enclosure:
[See PDF for images]
[End of slide presentation]
FOOTNOTES
[1] The National Nuclear Security Administration (NNSA) was created in
fiscal year 2000 as a separately organized agency within DOE. As part
of its national security mission, NNSA has responsibility for the
institutional stewardship of three national security laboratories.
[2] The four labs we reviewed were DOE's Lawrence Berkeley National
Laboratory and Pacific Northwest National Laboratory, and NNSA's
Lawrence Livermore National Laboratory and Sandia National
Laboratories.
[3] Separate briefings were provided for each of the labs reviewed,
which we also summarized in separate letters.
[4] Throughout this document, references to purchases and transactions
refer to those made by the contractor employees of the lab that are
charged to the DOE contract. Although the lab's purchase cards are
issued by the contractor, purchases charged to the DOE contract are
ultimately reimbursed and thus paid for by the federal government.
Similarly, property purchased that is charged to DOE becomes government
property.
[5] Data mining applies a search process to a data set, analyzing for
trends, relationships, and interesting associations. For instance, it
can be used to efficiently query transaction data for characteristics
that may indicate potentially improper activity.
[6] This is the net total after adjusting for transactions totaling
$8,559 that were in multiple categories. Five transactions totaling
$7,852 were both improper because the cardholders failed to obtain
required pre-approvals for restricted items, and wasteful because they
were excessive in cost. In addition, $707 in sales tax that we
considered wasteful is included in the transaction amounts of other
transactions we considered improper, wasteful, or questionable.
[7] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999).
[8] Internal Control--Integrated Framework, Committee of Sponsoring
Organizations of the Treadway Commission (COSO).