Veterans Health Administration
Inadequate Controls over the Purchase Card Program Resulted in Improper and Questionable Purchases Gao ID: GAO-04-857T June 17, 2004The Department of Veterans Affairs (VA) Office of Inspector General (OIG) has continued to identify significant vulnerabilities in the department's use of government purchase cards. Over the years, the OIG has identified internal control weaknesses that resulted in instances of fraud and numerous improper and questionable uses of purchase cards. The OIG has made a number of recommendations for corrective action. Given that VA is the second largest user of the governmentwide purchase card program, with reported purchases totaling $1.5 billion for fiscal year 2002, and because of the program weaknesses reported by the OIG, GAO was asked to determine whether existing controls at the Veterans Health Administration (VHA) were designed to provide reasonable assurance that improper purchases would be prevented or detected in the normal course of business, purchase card and convenience check expenditures were made in compliance with applicable laws and regulations, and purchases were made for a reasonable cost and a valid government need. GAO's report on this issue, released concurrently with this testimony, makes 36 recommendations to strengthen internal controls and compliance in VHA's purchase card program to reduce its vulnerability to improper, wasteful, and questionable purchases.
Weaknesses in VHA's controls over the use of purchase cards and convenience checks resulted in instances of improper, wasteful, and questionable purchases. These weaknesses included inadequate segregation of duties; lack of key supporting documents; lack of timeliness in recording, reconciling, and reviewing transactions; and insufficient program monitoring activities. Generally, GAO found that internal controls were not operating as intended because cardholders and approving officials were not following VA/VHA operating guidance governing the program and, in the case of documentation and vendor-offered discounts, lacked adequate guidance. The lack of adequate internal controls resulted in numerous violations of applicable laws and regulations and VA/VHA purchase card policies that GAO identified as improper purchases. GAO found violations of applicable laws and regulations that included purchases for personal use such as food or clothing, purchases that were split into two or more transactions to circumvent single purchase limits, purchases over the $2,500 micro-purchase threshold that were either beyond the scope of the cardholder's authority or lacked evidence of competition, and purchases made from an improper source. While the total amount of improper purchases GAO identified is relatively small compared to the more than $1.4 billion in annual purchase card and convenience check transactions, they demonstrate vulnerabilities from weak controls that may have been exploited to a much greater extent. The ineffectiveness of internal controls was also evident in the number of transactions classified as wasteful or questionable. GAO identified over $300,000 in wasteful or questionable purchases, including two purchases for 3,348 movie gift certificates totaling over $30,000 for employee awards for which award letters or justification for the awards could not be provided and a purchase for a digital camera totaling $999 when there were other less costly digital cameras widely available. Also, 250 questionable purchases totaling $209,496 from vendors that would more likely be selling unauthorized or personal use items lacked key purchase documentation. Examples of these types of purchases included a purchase from Radio Shack totaling $3,305, a purchase from Daddy's Junky Music totaling $1,041, a purchase from Gap Kids totaling $788, and a purchase from Harbor Cruises totaling $357. Missing documentation prevented determining the reasonableness and validity of these purchases. Because only a small portion of the transactions that appeared to have a higher risk of fraud, waste, or abuse were tested, there may be other improper, wasteful, and questionable purchases in the remaining untested transactions.
GAO-04-857T, Veterans Health Administration: Inadequate Controls over the Purchase Card Program Resulted in Improper and Questionable Purchases
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Testimony:
Before the Committee on Veterans' Affairs, House of Representatives:
For Release on Delivery Expected at 10:00 a.m. EDT Thursday, June 17,
2004:
Veterans Health Administration:
Inadequate Controls over the Purchase Card Program Resulted in Improper
and Questionable Purchases:
Statement of McCoy Williams, Director, Financial Management and
Assurance:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-857T]:
GAO Highlights:
Highlights of GAO-04-857T, a testimony before the Committee on
Veterans‘ Affairs, House of Representatives
Why GAO Did This Study:
The Department of Veterans Affairs (VA) Office of Inspector General
(OIG) has continued to identify significant vulnerabilities in the
department‘s use of government purchase cards. Over the years, the OIG
has identified internal control weaknesses that resulted in instances
of fraud and numerous improper and questionable uses of purchase cards.
The OIG has made a number of recommendations for corrective action.
Given that VA is the second largest user of the governmentwide
purchase card program, with reported purchases totaling $1.5 billion
for fiscal year 2002, and because of the program weaknesses reported by
the OIG, GAO was asked to determine whether existing controls at the
Veterans Health Administration (VHA) were designed to provide
reasonable assurance that improper purchases would be prevented or
detected in the normal course of business, purchase card and
convenience check expenditures were made in compliance with applicable
laws and regulations, and purchases were made for a reasonable cost and
a valid government need.
GAO‘s report on this issue, released concurrently with this testimony,
makes 36 recommendations to strengthen internal controls and compliance
in VHA‘s purchase card program to reduce its vulnerability to improper,
wasteful, and questionable purchases.
What GAO Found:
Weaknesses in VHA‘s controls over the use of purchase cards and
convenience checks resulted in instances of improper, wasteful, and
questionable purchases. These weaknesses included inadequate
segregation of duties; lack of key supporting documents; lack of
timeliness in recording, reconciling, and reviewing transactions; and
insufficient program monitoring activities. Generally, GAO found that
internal controls were not operating as intended because cardholders
and approving officials were not following VA/VHA operating guidance
governing the program and, in the case of documentation and vendor-
offered discounts, lacked adequate guidance.
The lack of adequate internal controls resulted in numerous violations
of applicable laws and regulations and VA/VHA purchase card policies
that GAO identified as improper purchases. GAO found violations of
applicable laws and regulations that included purchases for personal
use such as food or clothing, purchases that were split into two or
more transactions to circumvent single purchase limits, purchases over
the $2,500 micro-purchase threshold that were either beyond the scope
of the cardholder‘s authority or lacked evidence of competition, and
purchases made from an improper source. While the total amount of
improper purchases GAO identified is relatively small compared to the
more than $1.4 billion in annual purchase card and convenience check
transactions, they demonstrate vulnerabilities from weak controls that
may have been exploited to a much greater extent.
The ineffectiveness of internal controls was also evident in the number
of transactions classified as wasteful or questionable. GAO identified
over $300,000 in wasteful or questionable purchases, including two
purchases for 3,348 movie gift certificates totaling over $30,000 for
employee awards for which award letters or justification for the awards
could not be provided and a purchase for a digital camera totaling $999
when there were other less costly digital cameras widely available.
Also, 250 questionable purchases totaling $209,496 from vendors that
would more likely be selling unauthorized or personal use items lacked
key purchase documentation. Examples of these types of purchases
included a purchase from Radio Shack totaling $3,305, a purchase from
Daddy‘s Junky Music totaling $1,041, a purchase from Gap Kids totaling
$788, and a purchase from Harbor Cruises totaling $357. Missing
documentation prevented determining the reasonableness and validity of
these purchases. Because only a small portion of the transactions that
appeared to have a higher risk of fraud, waste, or abuse were tested,
there may be other improper, wasteful, and questionable purchases in
the remaining untested transactions.
www.gao.gov/cgi-bin/getrpt?GAO-04-857T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact McCoy Williams at (202)
512-6906 or williamsm1@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss internal controls over the use
of purchase cards at the Veterans Health Administration (VHA). At the
outset, I want to make clear that GAO supports the concept of the
purchase card program. The benefits of using purchase cards are lower
costs and less bureaucracy for both the government and the vendor
community. At the same time, given the nature, scale, and increasing
use of purchase cards, it is important that agencies have adequate
internal controls in place to help ensure proper use of purchase cards
and thus to protect the government from waste, fraud, and abuse.
As you know, the Department of Veterans Affairs (VA) Office of
Inspector General (OIG) has continued to identify significant
vulnerabilities in the department's use of government purchase
cards.[Footnote 1] In its most recent report, the OIG identified
internal control weaknesses that resulted in instances of fraud and
numerous improper and questionable uses of purchase cards. The OIG made
a number of recommendations for corrective action.
Given that VA is the second largest user of the governmentwide purchase
card program, with reported purchases totaling $1.5 billion for fiscal
year 2002, and because of the program weaknesses reported by the OIG,
you asked that we review VHA's purchase card program for fiscal year
2002 to determine if control problems still existed. Our report on this
issue is being released today at this hearing.
You also asked that we review internal control activities (1) over
third-party billings and collections at selected VHA medical centers to
assess whether those controls were designed and implemented effectively
and (2) in three areas of operation at selected VHA medical centers--
accountability over personal property, drugs returned for credit, and
part-time physician time and attendance. These two reports will be
issued later this month.
In my testimony today, I will discuss the inadequacy of internal
controls over VHA's purchase card program. The scope of our work, which
was performed from April 2003 through April 2004 in accordance with
generally accepted government auditing standards, is detailed in the
report being released today.
Heads of agencies are required to establish systems of internal control
consistent with our Standards for Internal Control in the Federal
Government.[Footnote 2] Effective internal controls are the first line
of defense in safeguarding assets and in preventing and detecting
fraud. In addition, they help to ensure that actions are taken to
address risks and are an integral part of an entity's accountability
for the stewardship of government resources.
As I will discuss in my testimony, we found that (1) existing controls
at VHA were not designed to provide reasonable assurance that improper
purchases would be prevented or detected in the normal course of
business, (2) lack of compliance with applicable laws and regulations
in VHA's purchase card and convenience check programs led to improper
purchases, and (3) poor controls resulted in some wasteful and
questionable purchases. We focused on the approximately $1.4 billion of
disbursements that VHA made during fiscal year 2002, the most recent
fiscal year for which complete data were available when we began our
review.
I will first address the inadequacy of VHA's internal controls.
Critical Internal Controls Were Ineffective:
Our review found that VHA's internal controls were not designed to
provide reasonable assurance that improper purchase card and
convenience check purchases would not occur or would be detected in the
normal course of business. We found that (1) VHA lacked adequate
segregation of duties between those purchasing and receiving goods; (2)
payments for purchase card and convenience check transactions often did
not have key supporting documents; (3) timeliness standards for
recording, reconciling, and reviewing transactions were not met; and
(4) cardholders did not consistently take advantage of vendor-offered
purchase discounts. Generally, we found that internal controls were not
operating as intended because cardholders and approving officials were
not following operating guidance governing the program, and in the case
of documentation and vendor-offered discounts, they lacked guidance. We
also noted that monitoring activities could be strengthened, for
example, as in instances where (1) accounts remained active long after
the cardholder had left service at VA, (2) credit limits on accounts
were significantly higher than actual usage, and (3) human capital
resources were insufficient to enable adequate monitoring of the
purchase card program.
Our Standards for Internal Control in the Federal Government requires
that (1) key duties and responsibilities be divided or segregated among
different people to reduce the risk of error or fraud; (2) all
transactions and other significant events be clearly documented and
readily available for examination, and other significant events be
authorized and executed only by persons acting within the scope of
their authority; (3) transactions be promptly recorded to maintain
their relevance and value to management in controlling operations and
decisions; and (4) internal control monitoring be performed to assess
the quality of performance over time and ensure that audit findings are
promptly resolved. Similarly, internal control activities help ensure
that management's directives are carried out. They should be effective
and efficient in accomplishing the agency's objectives and should occur
at all levels and functions of the entity.
We found that VHA lacked adequate segregation of duties regarding
independent receiving of goods and separation of responsibilities
within the purchasing process. Independent receiving, which means
someone other than the cardholder receives the goods or services,
provides additional assurance that items are not acquired for personal
use and that they come into the possession of the government. This
reduces the risk of error or fraud. From our purchase card internal
control testing, we estimate that $75 million[Footnote 3] in
transactions did not have evidence that independent receiving of goods
had occurred. In addition, our data mining of the purchase card and
convenience check activity identified 15 agency or organization program
coordinators (A/OPC) who were also cardholders and collectively made
9,411 purchases totaling $5.5 million during fiscal year 2002. Because
A/OPCs are responsible for monitoring cardholders' and approving
officials' activities for indications of fraud, waste, and abuse, these
A/OPCs were essentially monitoring their own activities.
We also found instances where purchase card and convenience check
transactions lacked key supporting documentation. This would include
internal written authorization for convenience check disbursements and
vendor invoices that support the description, quantity, and price of
what was purchased. VHA's purchase card guidance does not address the
types of documentation that cardholders should maintain to support
their purchases. It only addresses documentation requirements in its
audit guide, which is an appendix to the purchase card guidance that
provides instructions to internal reviewers for performing their
monitoring functions. Furthermore, we noted that VA's operating
guidance for convenience checks has no requirement that vendor
documentation be provided before checks are issued. The guidance only
provides that sufficient documentation, such as a VA-created purchase
order, must be evident before checks are issued.
The invoice is a key document in purchase card internal control
activities. Without an invoice, independent evidence of the description
and quantity of what was purchased and the price charged is not
available. In addition, the invoice is the basic document that should
be forwarded to the approving official or supervisor so that he or she
can perform an adequate review of the cardholder's purchases. Of the
283 purchase card sample transactions we tested, 74 transactions
totaling $2.1 million lacked an invoice, credit card slip, or other
adequate vendor documentation to support the purchase. Based on these
results, we estimate that $312.8 million[Footnote 4] of the fiscal year
2002 purchase card transactions lacked key supporting documentation.
For the convenience check sample, we found 35 of 255 transactions
totaling $43,669 lacked the same key documentation. Based on these
results, we estimate that $3.8 million[Footnote 5] of the fiscal year
2002 convenience check transactions lacked key supporting
documentation.
We also noted that VA's operating guidance over convenience checks does
not provide detailed procedures regarding appropriate written
documentation or authorization that must be forwarded to the
authorizing employee before funds are disbursed to a third party. VA's
operating guidance only provides that the required documentation be the
same as that for paying with cash, such as a purchase order. The
guidance makes no mention of independent vendor documentation and that
this type of documentation be required prior to issuing checks to
vendors. In addition, VA's guidance only requires that the authorizing
employees issuing convenience checks retain copies for 1 year. This
documentation requirement is inconsistent with the Federal Acquisition
Regulation (FAR) and VHA's Records, Control Schedule 10-1, dated
February 14, 2002, which requires that such records be retained for 6
years and 3 months after final payment for procurements exceeding the
simplified acquisition threshold and for 3 years after final payment
for procurements below the simplified acquisition threshold.[Footnote
6]
We found that of 255 convenience check transactions, 17, totaling
$8,890, lacked written authorization needed for issuance. Based on
these results, we estimate that $1.7 million[Footnote 7] of the fiscal
year 2002 convenience check transactions lacked written authorization.
In addition, we noted that 19 of the 255 convenience check transactions
lacked a copy of the check or carbon copy. Based on these results, we
estimate that $2.3 million[Footnote 8] of the fiscal year 2002
convenience check transactions lacked this supporting documentation.
Although VA only requires copies of convenience checks to be retained
for 1 year, retaining the copies and the supporting documentation for
the longer retention period mandated by the FAR and incorporated in
VHA's Records, Control Schedule 10-1, would facilitate subsequent
internal and external reviews in assessing whether a transaction was
proper and in compliance with acquisition policies and procedures.
At the time of our work, VHA had also established several timeliness
standards for cardholders and approving officials to ensure prompt
recording, reconciliation, and review of purchases. Specifically,
within 1 workday of making a purchase, cardholders are required to
input or record the purchase information in VA's purchase card order
system. Within 10 calendar days of electronically receiving the
transaction charge information from Citibank,[Footnote 9] the
cardholder must reconcile 75 percent of these Citibank charges to the
purchase information in the system. Within 17 calendar days, 95 percent
of the Citibank charges must be reconciled. As evidence of
reconciliation, the purchase card order system assigns the date the
cardholder reconciled the purchase in the system. For testing the
timeliness of cardholder reconciliations, we used the 17 calendar day
criteria. In addition, VHA requires that within 14 calendar days of
electronically receiving the cardholder's reconciled purchases, the
approving official, through an electronic signature, certify in the
purchase card order system that all procurements are legal and proper
and have been received.[Footnote 10]
Our review found untimely recording, reconciliation, and approving
official review. Table 1 summarizes the statistical results of VHA's
timeliness standards that cardholders and approving officials must meet
to ensure prompt recording, reconciliation, and review of purchases.
Our work shows that the internal controls were not operating as
intended to ensure prompt recording of transactions and events.
Table 1: Summarization of VHA Timeliness Standards Exceptions:
VHA timeliness tests of purchase card order system: Purchase card
orders were entered within 1 day;
Number of sample transactions in error: 36;
Estimated total number of transactions in error: 289,352;
Confidence interval at a 95 percent confidence level: 164,100 -
458,414;
Estimated dollar value of amount in error: (in millions): $152.5;
Confidence interval at a 95 percent confidence level: (in millions):
$99.9 - $205.1.
VHA timeliness tests of purchase card order system: Cardholder
reconciliation within 17 days;
Number of sample transactions in error: 53;
Estimated total number of transactions in error: 351,256;
Confidence interval at a 95 percent confidence level: 216,683 -
522,909;
Estimated dollar value of amount in error: (in millions): $252.7;
Confidence interval at a 95 percent confidence level: (in millions):
$184.4 - $321.0.
VHA timeliness tests of purchase card order system: Approving official
certification within 14 days;
Number of sample transactions in error: 44;
Estimated total number of transactions in error: 308,448;
Confidence interval at a 95 percent confidence level: 181,930 -
475,207;
Estimated dollar value of amount in error: (in millions): $212.4;
Confidence interval at a 95 percent confidence level: (in millions):
$149.2 - $275.7.
Source: GAO.
Note: GAO's estimate of the audit results for 283 sampled transactions
selected to test VHA timeliness standards for fiscal year 2002. The
population total of transactions from which this stratified random
sample was selected was 1,884,695.
[End of table]
The following examples illustrate the extent of untimely recording,
reconciliation, and review of the purchase card transactions. For
instance, one cardholder made a purchase on July 9, 2002, of $994, but
did not record the information in VA's purchase card order system until
August 29, 2002--51 days later and 50 days after VHA policy required
that the information be entered. Another cardholder made a purchase of
$100 on August 24, 2002. Citibank sent charge information for this
purchase to VHA on October 8, 2002. According to VHA policy, the
cardholder should have reconciled this charge within 17 days. Instead,
we found that the account was not reconciled until September 8, 2003,
or 335 days after receiving the charge information. In another
instance, a cardholder reconciled a purchase card transaction totaling
more than $3,000, which should have been reviewed and certified by an
approving official within 14 calendar days. We found no evidence that
the approving official reviewed this cardholder's reconciliation until
227 days later. It is critical that cardholders and approving officials
promptly record, reconcile, and review purchase card transactions so
that erroneous charges can be quickly disputed with the vendor and any
fraudulent, improper, or wasteful purchases can be quickly detected and
acted upon.
We also found instances where cardholders did not consistently take
advantage of vendor-offered purchase discounts. Our review identified
69 invoices containing vendor-offered discounts totaling $15,785 that
were not taken at the time of purchase or subsequently credited for the
discount amount. When purchases are made, vendors may offer purchase
discounts if buyers make early payments of their invoices. Typically,
the vendor specifies a period during which the discount is offered, but
expects the full invoice amount for payments made after that period.
When cardholders use the purchase card, payment to vendors, via
Citibank, generally occurs at the time of purchase. In turn, Citibank
bills VA for the purchases through a daily electronic file. Therefore,
it is critical that cardholders ask about any vendor-offered discounts
at the time of purchase and make efforts to obtain a credit upon
receipt and review of the invoice. Our detailed testing indicated that
VHA did not always take advantage of vendor-offered discounts and that
it lacked purchase card guidance to ensure cardholders ask about vendor
payment terms to determine whether discounts were being offered.
For example, one vendor offered VHA a discount of 2.9 percent, or $896,
for an invoice amount of $30,888 if it was paid within 15 days.
Citibank, on behalf of VA, made payment to the vendor within the 15-day
time frame, yet the vendor charged the cardholder's account for the
full invoice amount. We found no evidence that the cardholder attempted
to obtain a credit for the available discount offered. In another
example, we found that a cardholder had taken advantage of the vendor-
offered discount.
A factor that may contribute to cardholder inconsistencies in taking
advantage of vendor discounts is the lack of established policies and
procedures that address this issue. We found that VHA's purchase card
guidance did not include procedures to ensure that cardholders take
advantage of available vendor discounts before making payments or
require that approving officials identify instances when cardholders
did not take advantage of vendor discounts in order to determine the
frequency of these occurrences. Without such guidance, VHA will not be
able to determine the frequency of these occurrences and actual dollars
lost by the government.
While VHA's purchase card guidance includes prescribed monitoring
procedures to help ensure purchases are legal and proper, we found no
monitoring procedures to identify active accounts of cardholders who
had separated from VA nor any provisions to assess cardholder credit
limits. We also noted insufficient human capital resources at the A/OPC
level for executing the prescribed monitoring activities. For instance,
we identified 18 instances in which purchase card accounts remained
active after the cardholders left VA and all related outstanding
purchase orders had been reconciled. Of the 18 purchase card accounts
that remained active after the cardholders had left VA, we determined
that 14 accounts remained active 6 or more days after the cardholders'
outstanding purchase orders had been reconciled, which we deemed too
long. The remaining 4 purchase cards had been promptly canceled after
all outstanding purchase orders were reconciled.
Of the 14 accounts that were untimely cancelled, 11 accounts remained
open between 6 and 150 days and 3 accounts remained open between 151
and 339 days. For example, one cardholder separated from VA on April 3,
2002, with five outstanding purchase card orders made prior to
separation. The last purchase transaction was reconciled on May 21,
2002, but the account was not canceled until April 25, 2003, or 339
days after reconciliation. Requiring monitoring procedures to identify
active accounts of departed cardholders and to ensure prompt closure
once outstanding purchase orders have been reconciled would assist in
reducing the risk of fraud, waste, and abuse that could occur when
accounts remain open beyond the necessary time frame.
In addition to accounts left open, our analysis of purchases VHA
cardholders made in 2002 showed that cumulatively they bought $112
million of goods and services per month on average, but they had credit
limits of $1.2 billion, or about 11 times their actual spending.
According to VHA's purchase card guidance, the approving official, in
conjunction with the A/OPC, billing officer, and head of contracting
activity, recommends cardholder single purchase and monthly credit
limits. However, we found no guidance on what factors to consider when
recommending the dollar amounts to be assigned to each cardholder.
Further, we found no monitoring procedures that require the A/OPC or
approving official to determine periodically whether cardholder limits
should be changed based on existing and expected future use.
Periodic monitoring and analysis of cardholders' actual monthly and
average charges, in conjunction with existing credit limits would help
VHA management make reasonable determinations of cardholder spending
limits. Without adequate monitoring, the financial exposure in VHA's
purchase card program can become excessive when its management does not
exercise judgment in determining single purchase and monthly credit
limits. During our review, for instance, the difference between the
monlthly cumulative credit limits of $1.2 billion and actual spending
of $112 million represents a $1.1 billion financial exposure. Limiting
credit available to cardholders is a key factor in managing the VHA
purchase card program, minimizing the government's financial exposure,
and enhancing operational efficiency.
Furthermore, VHA has not provided sufficient human capital resources to
enable monitoring of the purchase card program. One key position for
monitoring purchases and overseeing the program is the A/OPC. While the
A/OPC position is a specifically designated responsibility, we found in
many instances that the A/OPC also functioned in another capacity or
performed other assigned duties, for example, as a systems analyst,
budget analyst, and contract specialist. Of the 90 A/OPCs who responded
to a GAO question regarding other duties assigned, 55 A/OPCs, or 61
percent, reported that they spend 50 percent or less of their time
performing A/OPC duties. For example, at the extreme low end of the
scale, one A/OPC responded that he was also the budget analyst and that
he spends 100 percent of his time on budget analyst duties, leaving no
time for A/OPC duties on an ongoing basis. Given that VHA makes
millions of purchase card and convenience check transactions annually,
which in fiscal year 2002 exceeded $1.4 billion, it is essential that
VHA management devote adequate attention to monitoring its purchase
card program to ensure that it is properly managed to reduce the risk
of fraud, waste, and abuse.
Noncompliance with Purchasing Requirements Resulted in Instances of
Improper Purchases:
The lack of adequate internal controls resulted in numerous violations
of applicable laws and regulations and VA/VHA purchase card policies.
We classified purchases made in violation of applicable laws and
regulations or VA/VHA purchase card policies as improper purchases. We
found violations that included purchases for personal use such as food
or clothing, purchases that were split into two or more transactions to
circumvent single purchase limits, purchases over the $2,500 micro-
purchase threshold that were either beyond the scope of the
cardholder's authority or lacked evidence of competition, and purchases
made from an improper source. We also found violations of VA/VHA policy
that included using convenience checks to pay for purchases even though
the vendor accepted the government purchase card, convenience check
payments that exceeded established limits, and purchases for which
procurement procedures were not followed. While the total amount of
improper purchases we identified, based on limited scale audit work, is
relatively small compared to the more than $1.4 billion in annual
purchase card and convenience check transactions, we believe our
results demonstrate vulnerabilities from weak controls that could have
been exploited to a much greater extent.
For instance, from the nonstatistical sample, we identified 17
purchases, totaling $14,054, for clothing, food, and other items that
cardholders purchased for personal use. Items that are classified as
personal expenses may not be purchased with appropriated funds without
specific statutory authority. The FAR emphasizes that the
governmentwide commercial purchase card may be used only for purchases
that are otherwise authorized by law or regulation.[Footnote 11]
We identified eight purchases totaling $7,510, in the nonstatistical
sample that were subject to procurement from a mandatory source of
supply but were obtained from other sources. 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 generates jobs and training for Americans who
are blind or have severe disabilities by requiring that federal
agencies purchase supplies and services furnished by nonprofit
agencies, such as the National Industries for the Blind and the
National Institute for the Severely Handicapped.
We noted that cardholders did not consistently purchase items from JWOD
suppliers when they should have. For example, a cardholder purchased
day planner starter kits and refills for employees, totaling $1,591,
from Franklin Covey, a high-end office supply store. These items
provide essentially the same features as the JWOD items, which would
have cost $1,126, or $465 less. During our data mining, we noted that
VHA made 652 purchases totaling $76,350 from Franklin Covey during
2002. While we did not review all of the individual purchases, based on
our detailed testing of similar transactions, it is likely that many of
them should have been procured from a mandatory source at a much lower
cost.
Using data mining techniques, we identified purchases that appeared to
have been split into two or more transactions by cardholders to
circumvent their single purchase limit. We requested documentation for
a statistically determined sample of 280 potential split transactions
totaling $4 million. Of these 280 transactions, we determined that 49
were actual splits. Based on these results, we estimate that $17.1
million[Footnote 12] of the total fiscal year 2002 purchase card
transactions were split transactions.
For example, a cardholder with a single purchase limit of $2,500
purchased accommodations in 110 hotel rooms totaling $4,950. When
performing follow-up, the cardholder stated that VA provides lodging
accommodations for veterans receiving medical services such as
radiation therapy, chemotherapy, and day surgery who live at least 150
miles from the medical facility. The cardholder created two separate
purchase orders and had the vendor create two separate charges, one for
$2,500 and the other for $2,450, so that the purchase could be made. On
the documentation provided, the cardholder stated the "purchase was
split per the direction of the previous purchase card program
administrator." The cardholder also stated that currently, her purchase
card at that facility is no longer used to pay hotel lodging for
veterans. Hotel payments are now disbursed electronically via VA's
Financial Service Center. The purpose of the single purchase limit is
to require that purchases above established limits be subject to
additional controls to ensure that they are properly reviewed and
approved before the agency obligates funds. By allowing these limits to
be circumvented, VA had less control over the obligation and
expenditure of its resources.
The FAR provides that the purchase card may be used by contracting
officers or individuals who have been delegated micro-purchase
authority in accordance with agency procedures.[Footnote 13] Only
warranted contracting officers, who must promote competition to the
maximum extent practical, may make purchases above the micro-purchase
threshold using the purchase card. Contracting officers must consider
solicitation of quotations from at least three sources,[Footnote 14]
and they must minimally document the use of competition or provide a
written justification for the use of other than competitive
procedures.[Footnote 15] When cardholders circumvent these laws and
regulations, VHA has no assurance that purchases comply with certain
simplified acquisition procedures and that cardholders are making
contractual commitments on behalf of VHA within the limits of their
delegated purchasing authority.
From the statistical sample of purchases over $2,500, we found that for
19 of the 76 transactions, cardholders lacked warrant authority needed
to make these types of purchases. Based on these results, we estimate
that cardholders with only micro-purchase authority, made $111.9
million[Footnote 16] of the total fiscal year 2002 purchases that
exceeded $2,500. In addition, we found that 12 of the 76 transactions
lacked evidence of competition. Based on these results, we estimate
that $60 million[Footnote 17] of the total fiscal year 2002 purchases
totaling more than $2,500 lacked evidence of competition.
We identified 23 purchase card transactions totaling $112,924 in the
nonstatistical sample related to the rental of conference room
facilities used for internal VA meetings, conferences, and training.
For these purchases, the cardholders could not provide documentation to
show that efforts had been made to secure free conference space. VA's
acquisition regulations state that rental conference space may be paid
for only in the event that free space is not available, and require
that complete documentation of efforts to secure free conference space
be maintained in the purchase order file.[Footnote 18] For one
purchase, VHA paid $31,610 for conference room facilities and related
services for 3 days at the Flamingo Hilton Hotel in Las Vegas. The
cardholder provided no evidence that attempts to secure free facilities
had been made. In addition, of the 23 purchase card transactions cited,
12 purchases totaling $103,662 occurred at one VHA facility. This
included one transaction totaling $12,000 for a 3-day training course
on Prevention and Management of Disruptive Behavior at the MGM Grand
Hotel in Las Vegas. Again, we were not provided evidence that efforts
had been made to secure free conference space.
We identified improper use of convenience checks related to purchases
that exceeded VA's established limits of $2,500 and $10,000 and
payments to vendors who accept the purchase card payments. VA's
convenience check guidance requires that a single draft transaction be
limited to $2,500 or in some cases $10,000 unless a waiver has been
obtained from the Department of the Treasury, restricting convenience
check use to instances when vendors do not accept purchase cards. From
the statistical testing of convenience check limits, we found that 91
of 105 convenience check purchases were paid using multiple checks
because the total purchase amount exceeded the established convenience
check limit. Based on these results, we estimate that $13.8
million[Footnote 19] of the total fiscal year 2002 convenience check
transactions were improperly used to pay for purchases exceeding the
established limits. In April 2003, VA issued new purchase card guidance
providing that for micro-purchases, convenience checks may be used in
lieu of purchase cards only when it is advantageous to the government
and it has been documented as the most cost-effective and practical
procurement and disbursement method. However, we found no established
criteria for determining the most cost-effective and practical
procurement and disbursement method.
Poor Controls Resulted in Some Wasteful and Questionable Purchases:
The ineffectiveness of internal controls was also evident in the number
of transactions that we classified as (1) wasteful, that is, excessive
in cost compared to other available alternatives or for questionable
government need, or (2) questionable because there was insufficient
documentation to determine what was purchased. Of the 982
nonstatistical sample transactions we reviewed, 250 transactions,
totaling $209,496, lacked key purchase documentation. As a result, we
could not determine what was actually purchased, how many items were
purchased, the cost of each of the items purchased, and whether there
was a legitimate government need for such items. Because we tested only
a small portion of the transactions 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.
We identified 20 purchases totaling $56,655 that we determined to be
wasteful because they were excessive in cost relative to available
alternatives or were of questionable government need. The limited
number of wasteful purchases found in the nonstatistical sample
demonstrates that cardholders are generally prudent in determining that
prices of goods and services are reasonable before they make credit
card purchases. We considered items wasteful if they were excessive in
cost when compared to available alternatives, and questionable if they
appeared to be items that were a matter of personal preference or
convenience, were not reasonably required as part of the usual and
necessary equipment for the work the employees were engaged in, or did
not appear to be for the principal benefit of the government. We
identified 18 purchases, totaling $55,156, for which we questioned the
government need and 2 purchases, totaling $1,499, that we considered
excessive in cost. A majority of the purchases were related to
officewide and organizational awards.
Many award purchases were for gift certificates and gift cards.
Although VA policy gives managers great latitude in determining the
nature and extent of awards, we identified 10 purchases, totaling
$51,117, for award gifts for which VHA was unable to provide
information on either the recipients of the awards or the purposes for
which the recipients were being recognized. Therefore, we categorized
these purchases as of questionable government need. For example, we
identified two transactions for 3,348 movie gift certificates, totaling
over $30,000. For these purchases, the cardholders and A/OPCs could
provide neither the award letters nor justification for the awards.
Consequently, VHA could provide no evidence that these purchases were
actually used for awards.
We also identified two purchases that we considered wasteful because of
excessive cost. We identified a cardholder who purchased a $999 digital
camera when there were other less costly digital cameras widely
available. For example, during the same 6-month period from February
2002 through July 2002, two other cardholders purchased digital cameras
for $526 and $550. No documentation was available to show why the more
expensive model was necessary. In the second example, we identified a
purchase for a 20-minute magic show, totaling $500, that was performed
during a VA volunteer luncheon. Although VA policies allow for funds
for volunteer events, this expenditure, at roughly $25 per minute,
seemed excessive.
We also found questionable purchases. As I discussed earlier, we
identified numerous transactions from the statistical samples that were
missing adequate supporting documentation on what was actually
purchased, how many items were purchased, and the cost of the items
purchased. We requested supporting documentation for a nonstatistical
sample of 982 transactions, totaling $1.2 million. Of these, we
identified 315 transactions, totaling $246,596, that appeared to be
improper or wasteful, for which VHA either provided insufficient or no
documentation to support the propriety of the transactions.
We classified 250 of these 315 transactions, totaling $209,496, as
missing invoices because the cardholders either provided VHA internal
documentation but no vendor documentation to support the purchase or
provided no documentation at all to support the purchase. VHA internal
documentation includes purchase orders, reconciliation documents, and
receiving reports. Vendor documentation includes invoices, sales
receipts, and packing slips. For 184 of these transactions, totaling
$155,429, internal documentation was available but no vendor
documentation was available. No documentation at all was available for
the remaining 66 transactions, totaling $54,068. These purchases were
from vendors that would more likely be selling unauthorized or personal
use items. Examples of these types of purchases included a purchase
form Radio Shack totaling $3,305, a purchase from Daddy's Junky Music
totaling $1,041, a purchase from Gap Kids totaling $788, and a purchase
from Harbor Cruises totaling $357.
An example of a transaction with internal documentation but no vendor
documentation included a purchase from Circuit City where the
cardholder stated that the purchase was for three $650 television sets
and three $100 television stands, totaling $2,300 (including $50
shipping), that were needed to replace the existing ones in the VA
facility's waiting area. In another transaction, no vendor
documentation was available for a transaction from Black & Gold Beer
where the cardholder stated that the purchase of beer was for a
patient. The purchase order shows that three cases were purchased at
$12.50 each, totaling $37.50. The cardholder stated that the purchase
was at the request of the pharmacy for a specific patient; however, no
documentation was provided to support this claim. We believe that at
least some of the items we identified may have been determined to be
potentially fraudulent, improper, or wasteful had the documentation
been provided or available. In addition, we noted that of the 66
transactions for which VHA cardholders provided no documentation to
support the purchase, 32 transactions (49 percent) represented 2 or
more transactions by the same cardholder. For example, one cardholder
did not provide documentation for 5 transactions, totaling $5,799, from
various types of merchants, including two restaurants, a movie theater,
a country club, and an airport caf�.
For 65 transactions, totaling $37,100, that we characterized as
questionable but appeared to be either improper or wasteful, the
documentation we received either was not correct or was inadequate, and
we were unable to determine the propriety of the transactions. For
example, one transaction was for $1,350 to Hollywood Entertainment;
however, the purchase order and invoice listed Hear, Inc., as the
vendor for closed captioning services. The cardholder stated that she
believed Hollywood Entertainment is an associate company name for Hear,
Inc.; however, the company could not provide any documentation to
support this statement. Additionally, from our Internet searches of
both Hollywood Entertainment and Hear, Inc. we found no information to
indicate that these two companies were associated in any way.
We also identified 68 transactions, totaling $31,772, involving the
purchase of tickets for sporting events, plays, movies, amusement or
theme parks, and other recreation activities for veterans and VA
volunteers. The documentation provided for these transactions was
inadequate or missing vendor invoices; therefore, we could not
determine whether these tickets were used in support of the volunteers
or veterans. As a result, we categorized these purchases as
questionable. Various programs under VHA, such as Recreation Therapy,
Voluntary Services, and Blind Rehabilitation Service, sponsor assorted
activities for veterans and VA volunteers. From our review of these
types of purchases, we found that VHA does not have procedures in place
to ensure that the purchased items were used by the intended recipients
and accounted for properly. In most cases, there was inadequate or no
documentation to account for how the tickets were distributed and who
participated in the events. For example, we found a purchase of 46
tickets, totaling $812, for veterans to attend a Pittsburgh Pirates
baseball game. However, we were provided no documentation that
identified who received the tickets or who attended the baseball game.
Proper accountability over the distribution and receipt of tickets for
such events is needed to help ensure that tickets are not improperly
used for personal use.
In closing, Mr. Chairman, I want to emphasize that without improvements
in its internal controls to strengthen segregation of duties;
documentation of purchase transactions; timely recording, review, and
reconciliation of transactions; and program monitoring, VHA will
continue to be at risk for noncompliance with applicable laws and
regulations and its own policies and remain vulnerable to improper,
wasteful, and questionable purchases. Our report, which is being
released at this hearing, makes 36 recommendations to strengthen
internal controls and compliance in VHA's purchase card program to
reduce its vulnerability to improper, wasteful, and questionable
purchases.
This concludes my statement. I would be happy to answer any questions
you or other members of the committee may have.
Contact and Acknowledgments:
For information about this statement, please contact McCoy Williams,
Director, Financial Management and Assurance, at (202) 512-6906, or
Alana Stanfield, Assistant Director, at (202) 512-3197. You may also
reach them by e-mail at [Hyperlink, williamsm1@gao.gov] or [Hyperlink,
stanfielda@gao.gov]. Individuals who made key contributions to this
testimony include Lisa Crye, Carla Lewis, and Gloria Medina.
(195041):
FOOTNOTES
[1] U.S. Department of Veterans Affairs, Office of Inspector General,
Evaluation of the Department of Veterans Affairs Government Purchase
Card Program, Report Number 02-01481-135 (Washington, D.C.: Apr. 26,
2004).
[2] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999).
[3] We are 95 percent confident that the total dollar value of purchase
card transactions that lacked independent receiving was between $37.4
million and $112.6 million.
[4] We are 95 percent confident that the total dollar value of purchase
card transactions that lacked key supporting documentation was between
$243.2 million and $382.4 million.
[5] We are 95 percent confident that the total dollar value of
convenience check transactions that lacked key supporting documentation
was between $2.4 million and $5.3 million.
[6] 48 C.F.R. � 4.805. See also General Records Schedule 3, Transmittal
No. 8 (December 1998).
[7] We are 95 percent confident that the total dollar value of
convenience check transactions that lacked written authorization was
between $.8 million and $2.7 million.
[8] We are 95 percent confident that the total dollar value of
convenience check transactions that lacked a copy of the check or
carbon copy was between $1.2 million and $3.4 million.
[9] Citibank issues purchase cards to VA operating administrations,
including VHA.
[10] VA revised its timeliness standards in the agencywide government
purchase card procedures issued April 4, 2003. Specifically,
cardholders are now required to reconcile all of their purchases within
5 working days instead of 10 calendar days. VA has removed the
incremental reconciliation goals of 75 percent of the purchases within
10 calendar days and 95 percent within 17 calendar days. Also, VA
converted the 14 calendar days formerly allotted to approving officials
for review and certification to 10 working days.
[11] 48 C.F.R. � 13.301 (a).
[12] We are 95 percent confident that the total dollar value for actual
split purchase card transactions was between $12.4 million and $21.9
million.
[13] 48 C.F.R. � 13.301 (a).
[14] 48 C.F.R. � 13.104.
[15] 48 C.F.R. � 13.106-3(b).
[16] We are 95 percent confident that the total dollar value for
purchases over $2,500 made by nonwarranted cardholders was between
$52.8 million and $170.9 million.
[17] We are 95 percent confident that the total dollar value for
purchases over $2,500 that lacked evidence of competition was between
$26.3 million and $93.7 million.
[18] We are 95 percent confident that the total dollar value for actual
split convenience check transactions was between $13.6 million and
$14.0 million.
[19] The Department of Veterans Affairs Acquisition Regulation, Part
870, subpart 113 (VAAR 870.113).
