[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
   OVERSIGHT AND MANAGEMENT OF THE GOVERNMENT PURCHASE CARD PROGRAM: 
           REVIEWING ITS WEAKNESSES AND IDENTIFYING SOLUTIONS
=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                              MAY 1, 2002
                               __________

                           Serial No. 107-96
                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
RICHARD BURR, North Carolina         BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
GREG GANSKE, Iowa                    BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING,          GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                  THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                 BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland     LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky

                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

              Subcommittee on Oversight and Investigations

               JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida           PETER DEUTSCH, Florida
CLIFF STEARNS, Florida               BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio                TED STRICKLAND, Ohio
RICHARD BURR, North Carolina         DIANA DeGETTE, Colorado
ED WHITFIELD, Kentucky               CHRISTOPHER JOHN, Louisiana
  Vice Chairman                      BOBBY L. RUSH, Illinois
CHARLES F. BASS, New Hampshire       JOHN D. DINGELL, Michigan,
ERNIE FLETCHER, Kentucky               (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)









                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Calbom, Linda M., Director, Financial Management and 
      Insurance, U.S. General Accounting Office..................    75
    Frazier, Hon. Johnnie E., Inspector General, U.S. Department 
      of Commerce................................................     6
    Friedman, Hon. Gregory H., Inspector General, U.S. Department 
      of Energy..................................................    14
    Mead, Patricia, Acting Assistant Commissioner, Office of 
      Acquisition, U.S. General Services Administration..........    83
    Mournighan, Stephen D., Deputy Director for Procurement and 
      Assistance Management, U.S. Department of Energy...........    55
    Price, Howard G., Procurement Analyst, U.S. Department of 
      Commerce...................................................    52
    Rehnquist, Hon. Janet, Inspector General, U.S. Department of 
      Health and Human Services..................................    18
    Sade, Michael S., Director for Acquisition Management and 
      Procurement Executive, U.S. Department of Commerce.........    46
    Styles, Hon. Angela B., Administrator for Federal Procurement 
      Policy, U.S. Office of Management and Budget...............    88
    Weisman, Marc R., Acting Deputy Assistant Secretary for 
      Grants and Acquisition Management, U.S. Department of 
      Health and Human Services..................................    58

                                 (iii)











   OVERSIGHT AND MANAGEMENT OF THE GOVERNMENT PURCHASE CARD PROGRAM: 
           REVIEWING ITS WEAKNESSES AND IDENTIFYING SOLUTIONS

                              ----------                              


                         WEDNESDAY, MAY 1, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. James C. 
Greenwood (chairman) presiding.
    Members present: Representatives Greenwood, Gillmor, Burr, 
Bass, Fletcher, Deutsch, Stupak, Strickland, and Tauzin (ex 
officio).
    Staff present: Ann Washington, majority counsel; Yong Choe, 
legislative clerk; and Edith Holleman, minority counsel.
    Mr. Greenwood. Good morning. Today the subcommittee is 
holding a hearing to discuss government purchase cards, known 
in conjunction with government travel and fleet cards as the 
Smart Pay Program.
    Specifically, we will review the oversight and management 
of the purchase card program by various agencies. We will also 
identify weaknesses within the program that make it vulnerable 
to fraud and misuse and discuss possible solutions to these 
potentially very costly problems.
    No well informed observer disputes that the Purchase Card 
Program has produced savings. Its objectives are to reduce 
procurement administrative costs, improve management by 
expediting and simplifying small purchases, and improve 
internal controls to eliminate the fraud and abuse present and 
other small purchase methods.
    The first two objectives generally seem to have been met. 
The General Services Administration will testify today that the 
actual governmentwide savings realized since the current 
program's inception in 1998.
    It is the third objective, implementation of controls to 
eliminate fraud and abuse that seems to have escaped serious 
attention. Sadly, fraud and abuse of procurement systems is 
ever present both in the government and in the private sector.
    While the purchase cards are a more efficient and cost 
effective procurement tool compared to previous systems, they 
are, unfortunately, subject to abuse.
    Reports began to surface of purchase card fraud and abuse 
by agency employees last year. Many of us have read the 
embarrassing accounts of the employee who used his government 
purchase card to buy some very personal items for his 
significant other.
    According to experts in the field of fraud detection, most 
such instance of fraud are uncovered either through employee 
notification or anonymous tips.
    This raises a central question. Why aren't the internal 
management controls set up to oversee the purchase card 
programs detecting fraud?
    The General Accounting Office will testify today about 
auditing the Purchase Card Program at a variety of agencies, 
focusing on the identified weaknesses of the program. It will 
also provide suggestions for improvements to the program as a 
whole.
    The GAO audits were the impetus for this committee's 
increasing interest in the Purchase Card Program. In July of 
last year, I wrote to 17 Federal departments, agencies, and 
commissions within this committee's jurisdiction requesting 
various data about their prospective programs and program 
procedures. Information received through that request raised 
still more questions regarding the management of the program at 
the various agencies.
    As an example from just one agency demonstrates the size 
and scope of the program alone is reason enough to warrant 
thorough oversight. Consider that at just this one agency over 
1,200 card holders have monthly purchase limits of $25,000 or 
greater. Eight card holders have $1 million monthly purchase 
limits with $100,000 single purchase limits. Over 240 card 
holders have more than one active account.
    At another agency we found similarly disturbing 
arrangements. In that instance, 81 card holders at six field 
offices have more than one purchase card. Of these, 67 have two 
cards. Eight people have three cards. Three people have four 
cards. One person has five cards. One person has eight cards, 
and one other person is managing to get along with ten.
    Three hundred and one card holders within one office have 
monthly limits of $999,999. At 11 field offices, all card 
holders have a monthly purchase limit of $25,000 or greater.
    At one field office, all 149 card holders have a monthly 
purchase limit of a half a million dollars. These are just a 
handful of examples that prompted this committee to seek a 
closer review of this program. There may be perfectly 
legitimate reasons for some or all of these remarkable 
arrangements.
    I look forward to discussing them with the agency witnesses 
here today. The Offices of Inspectors General are responsible 
for oversight of the government Purchase Card Programs. In 
researching this issue, we met with representatives from the IG 
offices for all agencies within our jurisdiction.
    We discovered that while some Inspectors General perform 
regular audits and inspections of the programs, others just 
recently began reviewing their agency's programs mainly in 
reaction to GAO audit findings last year.
    While very few of the reports turned up the type of 
disturbing purchasing arrangements as those discovered by GAO, 
all found weaknesses in the programs. Today we will discuss 
those weaknesses, as well as the suggestions made for 
improvement in any action taken by the agencies in light of 
those suggestions.
    We will also discuss what follow-up was performed by the 
Inspectors General.
    Additionally, we will hear from Mr. Johnnie Frazier who is 
testifying not only as the IG from the Department of Commerce, 
but also as the designee for the President's Council on 
Integrity and efficiency.
    The council is in the process of composing a guide to 
assist the IG community in its endeavors to oversee the 
Purchase Card Programs properly. Mr. Frazier will be able to 
provide us with some insights into the council's efforts 
regarding these programs and the role that council will play 
going forward.
    To further reduce the risk of fraud and misuse, Congress 
must insist the financial procurement at the agencies 
incorporate best practices as a benchmark for program 
management. I am pleased to have some of these individuals here 
with us today to discuss the elements of their agencies' 
programs, specifically how safe guards are set up and regularly 
maintained to prevent the occurrence of fraud or abuse.
    We will also talk to one agency analyst who has first-hand 
knowledge of a fraud case within his agency. I am very much 
looking forward to the information he has to share with this 
committee, and I would like to thank Mr. Price from the 
Department of Commerce for coming before us today.
    The Office of Management and Budget has also moved the 
issue of government Purchase Card Programs onto its radar 
screen within the past several weeks. We met with OMB in early 
April to discuss the committee's concerns regarding this 
program and to extend an invitation to testify at this hearing.
    I am very please to see the April 18, 2002 memorandum 
issued by OMB's Director, Mitch Daniels directing the agencies 
to review their purchase card programs and to submit reports to 
the Office of Federal Procurement Policy by the beginning of 
June.
    I am very encouraged by this step, and I am eager to learn 
more from OMB today regarding how it plans to pursue this 
review. I am also interested in any suggestions OMB currently 
has to improve the program.
    Our purpose today is not to suggest the Purchase Card 
Program is rife with abuse or that it should be abandoned. On 
the contrary, the general consensus is that it is a relatively 
successful program.
    But some very serious shortcomings have been identified 
that need to be dealt with sooner rather than later to prevent 
more serious episodes of fraud.
    I thank all of the witnesses for attending. I now recognize 
the Ranking Member of the subcommittee, Mr. Deutsch, for his 
opening statement.
    Mr. Deutsch. Thank you, Mr. Chairman, for holding this 
hearing on the government Purchase Card Program.
    Insuring that Federal agencies are spending taxpayers' 
money in an efficient, proper manner is one of the cornerstones 
of a democracy. It is critical to building trust amongst our 
citizens. And even when a program is running was, as the 
Purchase Card Program is, you can always make it better.
    Today I particularly want to thank the agency Inspector 
General, IGs, as well as the General Accounting Office, for the 
unglamorous, good government work they do every day to keep all 
of us honest. Without their efforts, I am sure more fraudulent 
activities would occur.
    The misuse uncovered in this program is small, but if 
proper controls are not put into place, it could be come 
larger. I look forward to hearing the insight and potential 
solutions that we will bring to this hearing.
    Mr. Greenwood. Thank you, Mr. Deutsch.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you Chairman Greenwood, and let me commend you for conducting 
this inquiry into the Federal government's purchase card program.
    One of the essential functions of this Subcommittee is to cast a 
spotlight on areas within the Full Committee's jurisdiction that are 
subject to, or susceptible to, abuse of taxpayer dollars.
    This morning, we'll examine a program that was put in place to save 
time and money. By all accounts it has done so--but it has also opened 
new opportunities for fraud and abuse.
    The use of purchase cards, which are government Visa or MasterCard 
bankcards issued through the SmartPay program, is an excellent and 
efficient way to streamline the procurement process--particularly for 
relatively low-cost, but large-volume purchases. Instead of having to 
fill out sheets of paper for every little purchase by a government 
agency, which then would require several layers of review and approval, 
agency employees now use these bankcards to make quick and efficient 
purchases.
    People should applaud the General Services Administration for 
deploying this program for use by Federal agencies. It has reportedly 
saved taxpayers more than a billion dollars a year in administrative 
costs, freeing up funds that we all know we need for more essential 
government programs and services.
    Yet when these agencies use what essentially is a new technology, 
these agencies are also obligated to tackle the inevitable side effects 
of the technology.
    Unfortunately, as demonstrated by a series of agency Inspector 
General reports, GAO reports, and our own oversight investigation, this 
is not the case. The agencies, so quick to distribute purchase cards to 
employees and contract workers, appear to have been slow to implement 
management procedures to monitor and control abuse and cut down on 
fraud.
    The various investigations into the program have exposed weak 
internal controls, which leave us with no comprehensive way to assess 
how extensive the abuse problem is. All we see are large gaps that 
leave plenty of room for abuse, as you indicated Mr. Chairman. While 
the known fraud and abuse is very small when compared to the $13 
billion worth of purchases through these cards annually, the 
unavoidable fact is that, because of the poor internal controls in 
place at Federal agencies to catch such fraud, we have no idea how big 
the problem actually may be.
    What usually surfaces to our attention are anecdotal examples of 
abuse--the supposed trips for office supplies that turn out to have 
been personal shopping trips for jewelry or personal computers. 
However, we all know that where there's smoke, there's usually fire. 
And so our task is to make sure the proper control procedures will be 
followed to reduce the instances of fraud that may be occurring, out-
of-sight and on the fringes of the Federal government's huge purchasing 
activity. Even a 1% fraud or abuse rate would amount to more than $130 
million every year in wasted taxpayer dollars.
    I look forward to examining what appears to be a failure to 
confront the size of these program control gaps. Most of the IG reports 
concluded that the purchase card programs worked very well, with little 
or no misuse of funds. That may be so, but the reports also identified 
weaknesses within these programs that should raise serious questions 
about how they are managed, as well as the evidentiary basis for the 
IGs' benign conclusions about the extent of the potential fraud.
    Here are some of the weaknesses identified by one IG report, which, 
I should add, were described as ``minor deficiencies'': Bankcard 
activity never reviewed by the contracting office head, unauthorized 
use of the card permitted, purchases of prohibited items, purchases not 
pre-approved when required, receipt of goods purchased not documented, 
competition for purchases of over $25,000 not promoted. Now these 
aren't minor deficiencies; they go to the core of what good internal 
controls should be about.
    There's a lot of ground to cover this morning. I look forward to 
the testimony of our witnesses, the insights into the nature of fraud 
and abuse, and the advice about how to improve the management of these 
programs.
    Thank you Mr. Chairman, and I yield back the remainder of my time.
                                 ______
                                 
 Prepared Statement of Hon. Bart Stupak, a Representative in Congress 
                       from the State of Michigan
    Thank you, Mr. Chairman, for holding this hearing concerning the 
integrity of the government purchase card program.
    Since 1998, over 300 federal department and agencies have issued 
government credit cards to certain employees and assumed liability for 
the bills. The program was designed to streamline the procurement 
process, eliminate complex paperwork, and to decrease fraud and abuse.
    To a great extent, it has done so.
    It saves the government $1.3 billion annually by reducing the 
previous $54 cost of processing each individual purchase.
    To avoid fraud requires effective agency controls and trustworthy 
federal employees.
    The vast majority of federal employees meet this standard, and the 
amount of fraud in almost $14 billion of these purchases is minuscule.
    However, particularly egregious examples of abuse have occurred in 
the Navy and the Education Department because there have been very few 
internal controls in place.
    We want to thank the inspectors-general and the General Accounting 
Office for their continuous work in bringing these abuses to the 
public's attention.
    In its reports, the GAO cited a lack of stringent internal controls 
as a consistent and primary factor in government purchase card abuse.
    As one of our other witnesses will tell us today, one of the most 
essential elements for protecting the program from abuse is a 
``diligent, knowledgeable approving official.'' We want to make sure 
that the agencies under our jurisdiction have these internal controls 
and knowledgeable approving officials in place and working.
    I do also want to bring to the Subcommittee's attention a concern 
that is directly related to the use of purchase credit cards.
    A recent analysis of contracting records showed that the government 
bought more than half of its products and services last year without a 
competitive process.
    Over $120 billion were purchased in this way--and credit cards were 
used for a significant amount. I hope, Mr. Chairman, we are not trading 
the savings of credit cards for the savings of competition, and I would 
suggest that we look into this more fully.
    I look forward to hearing the testimony of these witnesses.

    Mr. Greenwood. I ask unanimous consent to insert into the 
record the OMB directive of April 18 referred to in my opening 
statement.
    And we will now recognize our witnesses. Our first panel 
consist of the Honorable Johnnie E. Frazier, Inspector General, 
U.s. Department of Commerce; the Honorable Gregory H. Friedman, 
Inspector General, U.S. Department of Energy; and the Honorable 
Janet Rehnquist, Inspector General, U.S. Department of Health 
and Human Services.
    Welcome, and thank you for being with us this morning.
    Each of you is aware that this is an oversight 
investigation hearing, and it is our practice to take testimony 
under oath. Are each of you willing to give your testimony 
under oath?
    Participants. I am.
    Mr. Greenwood. Okay. Pursuant to the rules of this 
committee and to the rules of the House, you are each entitled 
to be represented by counsel. Do any of you request to be 
represented by counsel this morning?
    Participants. No.
    Mr. Greenwood. In that case if you will rise and raise your 
right hands, I will give you the oath.
    [Witnesses sworn.]
    Mr. Greenwood. Okay. You are under oath, and I believe we 
will take the testimony of Mr. Frazier first.
    Welcome, sir. Thank you, again, for being with us, and you 
are welcome to give your opening statement for about 5 minutes.

 TESTIMONY OF HON. JOHNNIE E. FRAZIER, INSPECTOR GENERAL, U.S. 
  DEPARTMENT OF COMMERCE; HON. GREGORY H. FRIEDMAN, INSPECTOR 
 GENERAL, U.S. DEPARTMENT OF ENERGY; AND HON. JANET REHNQUIST, 
INSPECTOR GENERAL, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Frazier. Thank you.
    Good morning. Mr. Chairman and members of the subcommittee, 
I am pleased to appear before you today to discuss my office's 
activities to oversee Commerce's Purchase Card Program. I would 
like to share with you some of the good, the bad, and the ugly 
things that we have learned about the program.
    First, the good. The fact that the overwhelming number of 
Commerce and other Federal employees use their government 
purchase cards responsibly. These card holders follow 
appropriate procedures, are careful to avoid making improper 
purchases, and stay alert to the best practices that can help 
the program operate more efficiently.
    As for the bad, I am concerned that the program still has a 
number of systemic weaknesses and problematic practices that 
leave it vulnerable to fraud, waste, and abuse.
    And ugly, simply stated, those dishonest employees who 
fraudulently misuse their cards, reports in the media, from the 
IGs and others have highlighted the illegal use of government 
purchase card, and as a result have given rise to the program 
as a negative image.
    As Commerce and other agencies push for greater 
efficiencies in the acquisition process, purchase cards will 
become an ever more critical procurement option and their use 
will surely increase. Hence, I believe that our collective 
efforts, including today's hearing, can improve the Purchase 
Card Program governmentwide if we are guided by three key 
principles that I've highlighted on the poster.
    Stop any and all personal abuses with aggressive oversight 
and strong disciplinary action. Caution managers to address 
systemic weaknesses and problematic practices. Go forward at 
full speed to implement best practices and other proactive 
efforts that will prevent problems and promote efficiency So 
what should we be doing? Again, we must stop personal abuses 
with aggressive oversight and strong disciplinary actions. Our 
completed investigations at Commerce have found the ugly side 
of the program. For example, a Office of the Secretary contract 
specialist who unfortunately used her government purchase card 
to buy approximately $50,000 worth of clothing, jewelry, 
electronic equipment, furniture, airline tickets, household 
supplies, hotel accommodations, and other things.
    In another case, the former Secretary with the Weather 
Service in Alaska continued to misuse her card for a year 
because she intercepted the monthly statements and kept them 
from her supervisor.
    There are other equally troubling examples in my prepared 
statement, but I hope that you, like me, find some comfort 
knowing that in every case that we have investigated, the 
dishonest employees were promptly fired, forced to resign, and 
all received strict punishments from the court. Not one of the 
individuals found guilty as a result of our investigation is 
still employed at the Department of Commerce.
    But we cannot stop there. We must caution managers to 
address systemic weaknesses and problematic practices. In 1995, 
my office began conducting audits and other reviews of the 
purchase cards. Often we found systemic weaknesses needlessly 
left the program vulnerable. Purchase cards were not properly 
secured. Split purchases were made on multiple occasions to 
avoid purchase card limitations. Required purchase card 
training was not completed.
    And because competitive procurement procedures for 
purchases over $2,500 were not always used, there was no 
assurance that the government obtained the best prices.
    Our reviews have continued, including our ongoing 
department-wide audit of the program. At the same time, we must 
go forward at full speed to implement the best practices and 
other proactive efforts that will prevent problems and promote 
efficiencies.
    Of course, it needs to be said again that everything is not 
gloom and doom with regard to the Purchase Card Program. 
Clearly, the vast majority of Commerce's 6,000 card holders are 
attempting to do a good job.
    However, we believe that we must constantly work with 
Commerce officials, the Congress, and others to look at ways to 
improve the program. For example, we should publicize common 
problems and their solutions; look for problems before problems 
find us; maintain constant oversight; and insure that senior 
managers verify that their own houses are in order. I have done 
this in my own office.
    This completes my testimony as the Commerce IG, but please 
allow me a few moments to speak as a representative of the 
PCIE. As you know, the PCIE is the council of Presidentially 
appointed IGs. And I am pleased to report that the IG community 
is working to strengthen the Purchase Card Program 
governmentwide.
    As evidenced by the presence of my distinguished IG 
colleagues here today, other IGs have also been involved in the 
purchase card program reviews, and it is clear that this is 
truly a cross-cutting issue that has the attention of most, if 
not all, IGs.
    With this in mind, the IGs' PCIE community, the inspection 
and evaluation committee, which I chair, began to explore ways 
that the IG community members could learn from each other's 
experiences, again, the good, the bad, and the ugly.
    Many of us have individually developed audit programs, 
inspection guides, or other review documents. As we began to 
discuss and share our approaches and review guides, my 
committee thought it would be helpful to issue a reference 
guide that could be used by other IGs in conjunction with their 
own evaluation tools.
    This reference guide, entitled ``A Practical Guide to 
Reviewing Government Purchase Card Programs,'' will be issued 
in the next few weeks. The guide was originally prepared by the 
Department of Education's IG, Lorraine Lewis, and her staff. It 
provides common sense advice on conducting the purchase card 
reviews and includes a number of very practical features that 
enhance the review process, such as questionnaires, templates, 
and sample reports.
    Mr. Chairman, I believe that this guide reflects the 
continuing commitment on the part of the IGs throughout 
government to work together in promoting efficiency and 
effectiveness throughout the government.
    I will be glad to answer questions on either front.
    Thank you.
    [The prepared statement of Hon. Johnnie E. Frazier 
follows:]
   Prepared Statement of Johnnie E. Frazier, Inspector General, U.S. 
                         Department of Commerce
    Mr. Chairman and members of the Subcommittee, I am pleased to 
appear before you today to discuss the Office of Inspector General's 
activities to oversee the Department of Commerce's Purchase Card 
Program.
    I'd like to share with you some of ``the good, the bad, and the 
ugly'' things that we have learned about the program. First, the good: 
The overwhelming number of Commerce and other federal employees use 
their government purchase cards responsibly. These cardholders follow 
appropriate procedures, are careful to avoid making improper purchases, 
and stay alert to best practices that can help the program operate 
efficiently.
    As for the bad: The program still has a number of systemic 
weaknesses and problematic practices that needlessly leave it open to 
fraud, waste, and abuse.
    And the ugly: Reports in the media and from OIGs and other 
oversight organizations have highlighted irresponsible and illegal use 
of government purchase cards, and as a result have given the Purchase 
Card Program a negative image.
    For more than 15 years, government employees have relied on 
purchase cards to expedite their ability to make small purchases, 
obtain training, and otherwise streamline unwieldy federal procurement 
procedures. As Commerce and other agencies push for greater efficiency 
in the acquisitions process, purchase cards will become an ever-more 
critical procurement option and their use will inevitably increase. 
Hence, I believe that our collective efforts to improve the purchase 
card program government-wide must be guided by three key principles:

 STOP any and all personal abuses with aggressive oversight and 
        strong disciplinary actions.
 CAUTION managers to address systemic weaknesses and 
        problematic practices.
 GO forward at full speed to implement best practices and other 
        proactive efforts that will prevent problems and promote 
        efficiencies.
Background: The Purchase Card Program Has Been at Commerce for Over 15 
        Years
    There is a long history of the purchase card program at Commerce. 
Over 15 years ago, in 1986, the Commerce Department was selected as one 
of several agencies to participate in the government's pilot purchase 
card program. The current version of the program dates from 1998, when 
the government, through the General Services Administration, awarded 
contracts to five nationwide banks to implement and continue the 
program. These contracts, awarded for five years, also have five one-
year options to renew. Commerce is scheduled to re-compete its existing 
contract next year to determine if it will exercise its options or 
select a new bank.
    In fiscal year 2001, the Commerce Department averaged over 6,000 
purchase cardholders at any particular time, and during this twelve-
month period, these cardholders completed over 330,000 transactions 
valued at about $132--million. In short, the Commerce purchase card 
program represents substantial purchasing power, and as a result B at 
least from the OIG perspective B provides substantial opportunity for 
misuse and fraud.
    So, what then are we doing to monitor the program and what do we 
see as the actions that are essential to improving it?
STOP personal abuses with aggressive oversight and strong disciplinary 
        actions
    With over 6,000 cardholders in the Commerce Department, we also 
receive allegations of purchase card abuse. The allegations, when 
deemed credible, are handled as criminal investigations. Here are some 
examples of several completed investigations:

 An Office of Secretary contract specialist fraudulently used 
        her government purchase card to buy approximately $50,000 worth 
        of clothing, jewelry, electronic equipment, furniture, airline 
        tickets, sporting event tickets, concert tickets, household 
        supplies, and hotel accommodations. These purchase card 
        irregularities were first reported by an approving official. 
        After it was referred to my office, we advised the Department 
        to immediately cancel the card, and thus, minimized the 
        potential loss to the government while we conducted our 
        investigation. This employee resigned during the investigation 
        and was subsequently convicted of theft of government property, 
        sentenced to six months in prison, followed by two months of 
        home detention and three years' probation, as well as ordered 
        to make full restitution.
 In another case, a former secretary with the National Weather 
        Service regional office in Alaska was convicted of theft of 
        government property as a result of our investigation. In this 
        case, our investigators were contacted by the supervising 
        meteorologist after the unauthorized purchases were finally 
        noticed. Since the approving official was the cardholder's 
        direct supervisor and he considered the cardholder to be a 
        trusted employee, this misuse was able to continue for 
        approximately a year because the cardholder intercepted the 
        monthly statements. When the cardholder was involved in an auto 
        accident and on extended leave, another employee opened the 
        mail and the approving official discovered that the fraudulent 
        purchases were taking place. In our criminal investigation of 
        the matter, we found that, over a one-year period, the 
        secretary charged about $7,500 for groceries, books, school 
        supplies, electronics, and bath accessories on her government 
        purchase card. She also used the card to spend New Year's Eve 
        at a premier hotel in Anchorage. She has been sentenced to five 
        years' supervised probation and ordered to make full 
        restitution to the government.
 Over a four month period, a former NOAA fisheries science 
        center secretary used her government purchase card to go on a 
        spending spree for her children, friends, and herself. Her 74 
        fraudulent purchases included clothing, cosmetics, gas, 
        nightclub charges, concert tickets, restaurant meals, and 
        Internet services. After a reviewing official noted several 
        questionable purchases during a routine monthly review of a 
        Citibank report, he spoke with the cardholder who admitted that 
        she misused the card and subsequently reported this to us. A 
        Massachusetts state court sentenced her to repay the $4,300 
        theft within one year and to complete 25 hours of community 
        service or face a sentence of up to two years and a $25,000 
        fine.
 A former National Weather Service automation clerk used a co-
        worker's government purchase card to buy more than $1000 in 
        personal items, including lingerie, clothing, exercise 
        equipment, and toys. As a result of this investigation, which 
        was initiated by a referral from the Commerce Bankcard Center, 
        the clerk was subsequently convicted of theft of government 
        property. The U.S. District Court sentenced her to two years 
        probation, 50 hours of community service, and ordered her to 
        make full restitution to the government.
 Based on a referral from the Census Bureau, we investigated 
        and subsequently obtained a theft conviction for a former 
        administrative assistant's misuse of her government purchase 
        card to buy $800 worth of personal clothing, jewelry, CDs, and 
        electronic equipment. She was convicted of theft of government 
        property and sentenced to serve six months in a community 
        correction facility, given two years' probation, and ordered to 
        make full restitution to the government.
 The final case I will discuss is unusual in that it involved a 
        contract employee working for the U.S. Patent and Trademark 
        Office. A reviewing official discovered a questionable 
        transaction, contacted the Commerce Bankcard Center, and the 
        case was referred to our office. During our criminal 
        investigation we learned that a departing USPTO employee 
        surrendered her government purchase card to the contract 
        employee/receptionist as part of her agency's separation 
        procedure. The receptionist and a companion immediately used 
        the card to go on a shopping spree to purchase $700 of 
        clothing. This individual's sentence included full restitution 
        to the government, a year's probation, a fine of $1,400, and 
        100 hours of community service
    By now, it should be clear that not one of the aforementioned 
individuals is still employed at the Commerce Department and that my 
office has an established history of fully investigating purchase card 
abusers, regardless of the amount involved. And it is equally important 
to point out that the Justice Department and state law enforcement 
agencies have generally been active partners in our cases, even though 
some of the monetary loses were relatively small, because they believe, 
like I believe, that ensuring the integrity of federal operations, and 
the trustworthiness of federal employees, is absolutely essential for 
maintaining the public's confidence in the government.
CAUTION managers to address systemic weaknesses and problematic 
        practices
    Beginning in 1995, my office began conducting audits and other 
reviews of purchase card use and related activities within various 
components of the Department. As a result, we have issued eleven 
reports that dealt specifically with the purchase card program at 
various bureaus. In addition, we have covered this topic in a number of 
our inspection reports as part of an overall review of administrative 
services at the offices inspected. For example, our audits included 
headquarters operations of NOAA, MBDA, NTIA, USPTO, and the Office of 
the Secretary, as well as certain laboratories, science centers, and 
regional offices. In addition, some of our reviews looked at purchase 
card use at our overseas posts. The primary purpose of our reviews was 
to determine if purchase card use was in compliance with the Federal 
Acquisition Regulation, the Commerce Acquisition Manual, and the 
Department's Personal Property Management Manual.
    During these reviews, we examined a sample of purchase card 
transactions; reviewed applicable regulations, policies, procedures, 
management reports, and other records; interviewed cardholders, 
approving officials, and other management officials; and assessed 
administrative and accounting controls, including controls over the 
physical security and authorized use of the purchase card.
    Frequently we found from these proactive reviews that systemic 
weaknesses and problematic practices needlessly leave the purchase card 
program vulnerable to waste, fraud, and abuse. More specifically, we 
found that:

 Bankcards were sometimes used by unauthorized employees. For 
        example, during a review of a NIST laboratory, we found that 
        several cardholders allowed other employees to use their 
        assigned purchase cards. When questioned about this 
        inappropriate practice, the most frequent excuse given by the 
        cardholders was that it allowed them ``to save time.'' Since 
        purchase cards may only be used for purchases that are 
        authorized by law or regulation, assigned cardholders are 
        responsible for complying with this safeguard aimed at ensuring 
        such things as the availability of funds and compliance with 
        all internal controls.
 Bankcards were often not properly secured. In almost all of 
        our reviews, we found that many cardholders kept cards in 
        wallets, handbags, or unlocked desks. According to departmental 
        regulations, cardholders are required to keep their cards in a 
        secure place, such as a locked drawer or cabinet. Failure to do 
        so increases the risk that the card could be stolen.
 Split purchases were made. Some cardholders improperly divided 
        what should have been a single purchase into separate purchases 
        on multiple occasions to avoid purchase card limitations. At a 
        NIST laboratory in Boulder, Colorado, for example, seven 
        different cardholders, over a 10-month period, purchased a 
        security system for a total of $83,000. This system consisted 
        of an entrance/exit keypad and a photo identification component 
        estimated to cost $36,000 from a single vendor. As a result of 
        using the split purchases, there is no assurance that the 
        government received a competitive price or even a reasonable 
        price.
 Purchase order logs not maintained. Many cardholders were not 
        maintaining the required purchase order log, or at least not 
        maintaining it in the proper detail. The log is designed to 
        provide basic financial, administrative, and shipping data for 
        each purchase card transaction. Without recording all 
        transactions in the log, cardholders cannot adequately 
        document, control, and reconcile purchase activity with the 
        purchase card statement. In addition, the approving official 
        cannot adequately determine whether the transactions are 
        appropriate and properly categorized, or reconcile purchase 
        activity with the monthly summary report received from the 
        bankcard contractor. For example, a review of a US&FCS office 
        in Brazil revealed that record keeping was so deficient that 
        purchases could not be easily identified and confirmed.
 Required purchase card training was not completed and 
        documented. All cardholders are required to complete a minimum 
        level of training to understand basic purchasing concepts and 
        the proper use of the card. In almost all of our reviews, we 
        found a need to improve initial and refresher training provided 
        to cardholders, as well as some approving officials. In some 
        instances, there was no documentation that required training 
        was completed, cardholders could not remember receiving 
        training, or cardholders were not familiar with the Commerce 
        Acquisition Manual.
 Competitive procurement procedures for purchases over $2,500 
        were not always used or documented. In some cases, cardholders 
        made purchases over $2,500 without obtaining and/or documenting 
        required competitive quotes or developing a sole source 
        justification. When this happens, there is no assurance that 
        the government obtained the most competitive price or even a 
        reasonable price. As an example, a NOAA Northwest Fisheries 
        Science Center cardholder purchased an environmental monitor 
        for $7,000 without knowing if the government received the best 
        price for the item.
    We have found that these proactive reviews are especially useful at 
identifying systemic weaknesses in the internal controls designed to 
safeguard the program. These reviews are continuing, including our 
ongoing comprehensive Department-wide audit of the purchase card 
program.
GO forward at full speed to implement best practices and other 
        proactive efforts that will prevent problems and promote 
        efficiencies
    Of course it needs to be said again that not everything is ``gloom 
and doom'' related to the purchase card program. In fact, we believe 
that the vast majority of the Department's 6000 cardholders are 
attempting to do a quality job. However, we also believe that we must 
constantly work with Commerce officials, managers, and others to look 
for ways to improve the program and do our best to implement best 
practices to resolve problems, prevent and detect fraud, and encourage 
efficiencies. I am pleased to mention a number of proactive efforts 
that deserve special emphasis:

 Properly train and support the approving officials. After all 
        is said and done--that is, after our recommendations have been 
        addressed, after management has improved internal controls, 
        after the software has been modified to check for certain 
        anomalies--we believe, based on our past experience, that one 
        of the most essential elements for protecting the program from 
        abuse is a diligent, knowledgeable approving official. The 
        approving official is responsible for monitoring cardholder's 
        compliance with established regulations and procedures, 
        reviewing monthly purchase card statements, and ensuring the 
        validity and allowability of transactions. These are also the 
        people who most often bring allegations of abuse to our 
        attention. Thus, we believe that the role of the properly 
        trained approving official is perhaps the main line of defense 
        for guarding against fraud, waste, and abuse in the purchase 
        card program.
 Publicize common problems and their solutions. It is important 
        to share with cardholders and program managers information 
        about what does and does not work. Accordingly, we were pleased 
        to learn that the Controller of NOAA's Finance Office prepared 
        a ``slide show'' for his office's website that--with a dash of 
        humor--highlighted a number of findings and recommendations 
        from our purchase card reviews. His basic admonition to 
        employees is ``. . . if it's happening there, it may be 
        happening in your area as well.'' I believe that this slide 
        show, entitled Internal Controls Over Bankcard Programs Need 
        Improvement, is still posted on the agency's website and sends 
        a powerful reminder to government cardholders.
 Look for problems before the problems find you. We can all 
        learn from the experiences of others in similar situations. 
        This was certainly the thinking of one senior Commerce 
        official. After my office had conducted a number of reviews at 
        National Weather Service offices, the NWS Administrator shared 
        some of the results with more than 100 field offices and 
        advised his managers to address any potentially similar 
        findings at other sites BEFORE additional reviews took place.
 Maintain sufficient and constant oversight. We cannot over 
        emphasize the importance of managers' taking prompt, 
        appropriate corrective action when problems arise. For example, 
        the Commerce Bankcard Center has strengthened procedures and 
        controls related to cancellation of purchase cards for 
        terminated employees. The center requested that the various 
        Commerce finance and payroll offices match Social Security 
        Numbers of employees who have left the Department with the 
        Social Security Numbers of ``current'' purchase cardholders. 
        This procedure provides additional assurance that cards of 
        terminated employees can no longer be used. While this 
        procedure is not yet in effect with all Commerce bureaus, it is 
        working at the bureaus that have implemented the Department's 
        new financial management system, and these bureaus account for 
        86% of the Commerce purchase cards.
 Senior managers need to ensure that their own houses are in 
        order. Let me use my own office as the example here, since I do 
        not consider that we are immune from scrutiny. In order to 
        emphasize to the Department, and to my staff, just how 
        seriously I regard this issue, in October 2001, I initiated a 
        review of purchase cards used within the Office of Inspector 
        General. At the time of the review, my office had 10 
        cardholders; this number has subsequently been reduced to 
        seven. Let me note that our interval review found no evidence 
        of fraud or misuse of funds B and naturally I'm very thankful 
        for those results. But the review did point out to me that, as 
        federal offices try to take advantage of the greater 
        flexibility offered by the purchase card program, supervisors 
        and approving officials need to stringently adhere to the 
        program's regulations and guidelines. In our case, for example, 
        some of my cardholders had not kept their training up to date, 
        and my office initiated steps immediately to correct that 
        situation. So, even if an agency is using the purchase card 
        program efficiently and effectively, I believe that agency 
        officials must still maintain diligence to ensure that 
        administrative indifference does not eventually open the door 
        for problems or abuses.
The IG Community is working to strengthen oversight of the government's 
        purchase card programs
    The President's Council on Integrity and Efficiency (PCIE) is 
primarily composed of the presidentially appointed IGs. Two of the 
PCIE's primary objectives are to (1) address efficiency, economy, and 
effectiveness issues that transcend individual government agencies, and 
(2) increase the professionalism and effectiveness of OIG personnel 
throughout the government.
    As evidenced by the presence of my distinguished IG colleagues here 
today from the Department of Health and Human Services and the Energy 
Department, and my awareness that over the past year many of the other 
Inspectors General have also been involved in purchase card program 
reviews, it is clear that this issue transcends our individual agencies 
and is a true cross-cutting issue that has the attention of most, if 
not all, Inspectors General.
    With this in mind, recently the PCIE's Inspection and Evaluation 
Committee, which I chair, began to explore ways that the IG community 
members could learn from each other's experiences--again, the good, the 
bad and the ugly--in ways that would allow us to improve the purchase 
card programs government-wide. Many of us have individually developed 
audit programs, inspection guides, or other review documents to help 
guide our staffs through reviews of purchase card activities. As we 
began to discuss and share our approaches and review guides, the 
Committee thought that it would be helpful to issue a reference guide 
that could be used by other Inspectors General in conjunction with 
their own evaluation tools and techniques. This reference guide, A 
Practical Guide to Reviewing Government Purchase Card Programs, will be 
issued in the next few weeks.
    The guide was originally prepared for the I&E Committee by the 
Department of Education's IG, Lorraine Lewis, and her staff. It 
provides common sense advice on conducting the purchase card reviews 
and includes a number of practical features to enhance the review 
process, such as questionnaires, templates, and sample reports. It is 
designed to assist the IG Community in its reviews of purchase card 
activities. My hope is that the guide will be used in combination with 
the other valuable assessment tools developed by the IGs to further 
strengthen our oversight of government purchase card programs. Mr. 
Chairman, I believe that this guide reflects a continuing commitment of 
IGs from all agencies to work together in promoting efficiency and 
effectiveness throughout the government.
    This concludes my testimony. Mr. Chairman, I will be happy to 
answer any questions that you or other Members of the Subcommittee may 
have.



[GRAPHIC] [TIFF OMITTED] 79465.001

    Mr. Greenwood. Thank you very much, sir, for your 
testimony.
    Mr. Friedman.

             TESTIMONY OF HON. GREGORY H. FRIEDMAN

    Mr. Friedman. Good morning, Mr. Chairman and members of the 
subcommittee. I am Greg Friedman, Inspector General of the U.S. 
Department of Energy.
    I am pleased to be here today to testify on our current 
efforts in the purchase card arena. As you are aware, our 
February 2002 report entitled ``U.S. Department of Energy's 
Purchase Card Program's Lessons Learned'' identified 
programmatic weaknesses that have left the department 
potentially vulnerable to abusive practices.
    The report also presented a series of solutions or lessons 
learned, which we believe can be used to improve the integrity 
and performance of the department's purchase card program.
    Since 1998, my office has conducted 22 audits, inspections, 
and criminal investigations involving 12 different offices and 
sites in which Federal, contractor, or grantee employees were 
found to have misused purchase cards. Our work in this area 
includes the Smart Pay Program and other similar Purchase Card 
Programs.
    Many of the allegations we investigated were prompted by 
information from the department, contractor and grantee 
officials, and contractor internal auditors. Our reviews have 
resulted in seven convictions, nine disciplinary actions, over 
$325,000 in recovered property, fines, and restitutions, and 
improper purchases that we have identified included computer 
hardware, hunting supplies, electronics, lawn equipment, and 
home improvement items.
    Several schemes were used to facilitate these purchases. 
These include generating fraudulent invoices or purchase 
records to mask the nature of actual purchases; making ghost 
purchases, that is, processing paper work as though a purchase 
had been made when, in fact, no products were actually ordered 
or delivered; providing kickbacks to suppliers who agreed to 
provide false or fictitious invoices; and circumventing 
department policies and procedures by allowing employees to 
approve and/or audit their own purchase card transactions.
    We believe that there are a number of improvements that 
would enhance the integrity of the department's Purchase Card 
Program. First, we need to ensure the separation of 
responsibilities regarding the processing of purchases, 
approval authority, verification of receipts, and 
reconciliation of monthly purchase card statements.
    Second, ensure that contractor and Federal employees have a 
clear understanding of unallowable and nonreimbursable items 
that may not be acquired with purchase cards.
    Third, adhere to prescribed policies and procedures 
designed to prevent abuses.
    And, fourth, develop adequate safeguards with respect to 
the distribution and control of purchase cards.
    The department's management acknowledged the importance of 
the issues identified in our purchase card report, indicating 
its intent to ensure that adequate controls are in place to 
provide reasonable assurance against misuse.
    My office has implemented a proactive initiative to further 
identify potential indicators of fraud and abuse, and we are 
currently auditing the Purchase Card Program at Sandia National 
Laboratories. We believe these efforts will help the department 
in strengthening its internal controls.
    We recognize the benefits of Purchase Card Programs, Mr. 
Chairman. However, we are concerned that abusive practices may 
undermine the viability of such programs. We believe that 
actions recently taken and those proposed by the department are 
a good first step.
    Mr. Chairman, this concludes my prepared remarks, and I 
would be happy to answer any questions that you or members of 
the subcommittee might have.
    [The prepared statement of Hon. Gregory H. Friedman 
follows:]
  Prepared Statement of Gregory H. Friedman, Inspector General, U.S. 
                          Department of Energy
                          i. executive summary
    Good morning, Mr. Chairman and members of the Subcommittee. I am 
Gregory H. Friedman, Inspector General, U.S. Department of Energy. I am 
pleased to be here today to testify on our February 2002 report 
entitled, ``U.S. Department of Energy's Purchase Card Programs--Lessons 
Learned.'' Since 1998, the Office of Inspector General has conducted 
over 20 audits, inspections, and criminal investigations involving 12 
different offices and sites in which Federal, contractor, or grantee 
employees were found to have misused purchase cards. Our work in this 
area includes the SmartPay program and other similar purchase card 
programs. Many of the allegations we investigated were prompted by 
information from the Department, contractor and grantee officials, and 
contractor internal auditors.
    Our recent reviews have resulted in ten investigations being 
accepted for criminal prosecution; seven criminal convictions; nine 
disciplinary actions; and over $325,000 in recovered property, fines, 
and restitutions. Improper purchases have included home improvement 
products, computer equipment, hunting equipment, electronics, lawn 
equipment, and tools.
    Several practices were used to facilitate these fraudulent 
purchases. They included:

 Generating fraudulent invoices or purchase records to mask the 
        nature of the actual purchases;
 Making ``ghost'' purchases--that is, processing paperwork as 
        though a purchase had been made when, in fact, no products were 
        actually ordered or delivered;
 Providing kickbacks to suppliers who agreed to furnish false 
        or fictitious invoices;
 Circumventing Department policies and procedures by allowing 
        employees to approve and/or audit their own purchase card 
        transactions; and,
 Purchasing goods for personal use that were delivered to non-
        Department locations, such as an employee's home.
    During the course of our reviews, we identified several systemic 
improvements that would enhance the integrity of the purchase card 
programs at the Department. For example,

 Ensuring separation of responsibilities regarding the 
        processing of purchases, approval authority, verification of 
        receipts, and reconciliation of monthly statements;
 Ensuring that contractor, grantee, and Federal employees have 
        a clear understanding of unallowable and non-reimbursable items 
        that should not be acquired with purchase cards;
 Adhering to prescribed policies and procedures designed to 
        prevent abuses; and,
 Developing adequate safeguards with respect to the 
        distribution and control of purchase cards.
                 ii. history of purchase card programs
    During the past several years, the Federal Government has promoted 
the use of purchase cards. These cards provide the Government with a 
means to simplify its small purchase procedures and improve its cash 
management.
    In 1998, the General Services Administration (GSA) awarded five 
contracts under its SmartPay program to provide purchase, travel and 
fleet card services for the Federal Government. As of March 2002, the 
SmartPay program spanned all Department Federal activities and was 
utilized at many sites. In addition to SmartPay, several of the 
Department's contractors operate programs with other banks. The most 
recent data available to us indicates that approximately 14,000 Federal 
and contractor cardholders participate in the various purchase 
programs, including approximately 6,100 cardholders who participate 
under the SmartPay program. Approximately 11,700 of the identified 
cardholders are contractor employees. The significant number of 
contractor cardholders is a reflection of the manner in which the 
Department is operated.
    As of fiscal year 2001, purchase card activity at the Department, 
through the SmartPay program, reached approximately one quarter of a 
billion dollars. We believe this dollar amount understates purchase 
card expenditures in general because many of the cards in use are not 
part of the formal SmartPay program.
                          iii. lessons learned
A. Independent Receipt and Acceptance
    During our reviews, we found that some contractors did not provide 
clear guidance on the separation of responsibilities with respect to 
processing, approving, and validating purchases. This resulted in an 
absence of checks and balances. For example, during an audit at the 
Department's Idaho Operations Office, we found that a contractor did 
not generally employ internal control methods of separating key duties 
to reduce the risk of loss or unauthorized use of assets. In 
particular, we found that the contractor did not have independent 
verification of the receipt and acceptance of goods and services. We 
also found that established procedures did not require that approving 
officials review actual purchase receipts when examining reconciled 
statements. In this case, my office recommended, in part, that the 
Department require the contractor to make improvements to its internal 
controls over the purchase card process. Management concurred with the 
recommendations and agreed to take corrective action.
    A separate investigation at Idaho disclosed that a contractor 
project manager was allowed to approve and process his own purchase 
card orders. The investigation focused on an allegation that the 
manager misused a purchase card for personal items in the amount of 
$85,000. The items included generators, clothing, and welding 
equipment. Our investigation revealed that a supply vendor facilitated 
the fraud by altering invoices in exchange for gifts acquired by using 
the project manager's purchase card. The project manager entered 
inaccurate descriptions of the actual property in the purchase card 
tracking system to disguise the transactions. In addition, he allowed a 
co-worker to buy personal items with the card. When the fraudulent 
transactions were discovered, the contractor fired both employees. The 
employees subsequently pled guilty to theft of government property. The 
project manager was sentenced to six months incarceration followed by 
six months home detention. The Government recovered over $30,000 in 
fines and penalties and retrieved the property.
    In another case, we determined that a contractor employee devised a 
scheme to make $113,000 in non-existent ``ghost'' purchases from her 
personal business. The employee described the transactions in the 
purchase card system as awards, presentation supplies, and 
certificates. However, no items were delivered to the contractor and 
payment for the invoices was made to her personal business bank 
account. The employee then funneled the money from her business for 
personal use, including home remodeling and paying personal bills. The 
employee also made purchases for personal household items totaling 
approximately $25,000. The items included food, a television, 
appliances, lawn equipment, and family vacations. The investigation 
revealed that the employee's supervisor was not conducting an 
independent review of the employee's purchases. The employee has pled 
guilty to theft and is awaiting sentencing.
B. Unallowable and Non-Reimbursable Purchases
    Generally, Department contracts and grant agreements contain a 
clause that addresses costs that are unallowable and non-reimbursable. 
However, we noted examples in which some contractors or grantees did 
not comply with this contract clause. In these cases, the contractor or 
grantee utilized purchase cards to acquire the unallowable items. At 
the Department's Ohio Field Office, for instance, a contractor did not 
provide adequate guidance to employees on items considered unallowable 
under the terms of the contract. In fact, our audit questioned $42,000 
in purchase card charges. Purchases included employee morale, 
recognition, and incentive items such as awards and plaques. In 
response to our audit report, the contractor issued more specific 
guidelines on unallowable costs, and subsequently reimbursed the 
Department. The Department also instituted a more thorough review and 
approval process for purchase card transactions.
C. Adherence to Policies and Procedures
    Our reviews also revealed instances in which existing Department 
policies and procedures were circumvented. For example, each cardholder 
has specific single purchase spending limits. Departmental policies 
state that cardholders may not ``split'' purchases in order to avoid 
exceeding these spending limits. An example of this would be a 
cardholder splitting an $11,000 acquisition into two separate $5,500 
purchases to avoid a $10,000 single transaction limit. If a purchase 
exceeds a cardholder's single transaction limit, the acquisition must 
be accomplished using other acquisition procedures. We found that some 
cardholders utilized split purchases to circumvent cardholder single 
transaction limits or to avoid competition requirements. In fact, the 
Office of Inspector General reviews revealed split purchases at various 
offices and sites. One audit within the Office of Environmental 
Management revealed that officials split purchases to avoid Government 
card limits and competition requirements. In this case, web-hosting 
services were acquired via a purchase card. The review revealed that an 
official did not adhere to Government purchase card guidance. 
Management concurred with our recommendation to develop controls for 
card use. In addition, the Department revoked the purchase cards from 
the Federal officials who engaged in this activity.
    In other instances, contractor employees did not comply with 
established policies regarding approval authority. For example, a 
supervisor at the Idaho Engineering and Environmental Laboratory 
provided his password identification to a purchase cardholder. The 
cardholder, in turn, was able to approve her own purchases without 
limits or scrutiny. The employee's supervisor was reprimanded and 
received a 13-day suspension without pay.
D. Inadequate Purchase Card Safeguards
    The Department was unable to provide us with an accurate accounting 
of the number of Federal and contractor purchase cardholders. 
Specifically, we found that Headquarters provides central oversight of 
SmartPay activities and can readily access the number of cardholders 
under that program. However, until recently, the Department had not 
conducted a coordinated effort to account for the total number of 
cardholders in programs other than SmartPay.
    To illustrate the potential magnitude of this problem, Department 
data significantly understated the number of purchase cardholders at 
one national laboratory. Although the Department's centralized records 
identified 14 cardholders at the Lawrence Livermore National 
Laboratory, we found approximately 300 cardholders during our review. 
As a result of our Lessons Learned report, Department management 
recently began a review to determine the total number of purchase 
cardholders in the Department. Approximately 14,000 cardholders have 
been identified among the various purchase card programs.
    During our reviews, we noted at least one example where purchase 
card abuse may have occurred due to inadequate safeguards with respect 
to distribution and control. The investigation at the Bonneville Power 
Administration disclosed that an employee used several purchase cards, 
including one that was inadvertently mailed to her home, to make 
fraudulent purchases. The employee used the purchase cards to acquire 
$11,000 in unauthorized items including electronics. The employee pled 
guilty to making false claims, and was ordered to reimburse the 
Government. The employee was sentenced to four months home detention 
and five years supervised probation.
               iv. proactive initiative and current audit
    Regarding prospective Office of Inspector General activities, my 
office has initiated a proactive evaluation of purchase card records in 
order to identify additional indicators of misuse and fraud by 
examining purchase card transaction databases. The specific objectives 
of the initiative are to:

 Identify potential fraudulent and questionable transactions 
        using purchase cards;
 Assist the Department with promoting effective and economical 
        management of the program, which is vulnerable to fraud, waste 
        and abuse; and,
 Identify potential instances of non-adherence to the 
        Department's prescribed policies, procedures and regulations.
    We are also auditing the purchase card program at Sandia National 
Laboratories. We believe these efforts will help the Department in 
strengthening its internal controls associated with purchase card 
programs.
                             v. conclusion
    In conclusion, although we recognize the potential benefits 
resulting from purchase card programs, we remain concerned that abusive 
practices may undermine the viability of such programs. Department 
management acknowledged the importance of the issues identified in our 
purchase card report, indicating its intent to ensure that adequate 
controls are in place to provide reasonable assurance against abuse and 
misuse. The Department identified several steps to correct internal 
control weaknesses and to help strengthen controls over the purchase 
card programs, one of the most important of which was to complete an 
assessment of contractor policies and procedures for the use and 
control of purchase cards. We believe the actions recently taken and 
proposed by the Department are a good first step in strengthening 
internal controls.
    Mr. Chairman, that concludes my prepared remarks. I would be happy 
to answer any questions that you or members of the Subcommittee may 
have. Thank you.

    Mr. Greenwood. Thank you, Mr. Friedman.
    Ms. Rehnquist.

                TESTIMONY OF HON. JANET REHNQUIST

    Ms. Rehnquist. Good morning, Mr. Chairman and members of 
the subcommittee. I am Janet Rehnquist, Inspector General for 
the Department of Health and Human Services. I appreciate the 
opportunity to be part of today's discussion on the oversight 
and management of the government Purchase Card Program and to 
tell you about the ongoing work the HHS OIG is doing in 
reviewing how these cards are being used by HHS employees.
    Approximately 5 years ago HHS began using the International 
Merchant Purchase Authorization Cards, that is, the IMPAC 
cards, to eliminate the cumbersome and costly use of procuring 
small purchases with purchase orders. Use of these cards 
streamlined government purchases and reduced paper work and 
administrative costs.
    The individual employees procure items for the office, but 
are not personally billed. The credit card companies are paid 
directly from the component's appropriated funds.
    HHS has approximately 7,500 IMPAC cardholders. Based on a 
rough calculation, we estimate that HHS spends about $300 
million a year on IMPAC purchases.
    My Office of Investigations initiated a project in June of 
2001 to determine how the IMPAC system was being used within 
our department. I want this review to be an essential part of 
the OIG's duties and responsibilities to oversee departmental 
spending. And Secretary Thompson has asked me to expedite our 
review and work with the department to improve the management 
of this program.
    Our project is twofold: an ongoing review of the purchases 
made using IMPAC cards, and a review of the systems and 
procedures used by the department to manage these purchases.
    The first part of this review we began by obtaining billing 
information directly from U.S. Bank, the bank that issues and 
processes the IMPAC purchase cards and checks. We have reviewed 
over a year's worth of data thus far.
    Our data base presently consists of 1.5 million individual 
purchases. We now receive monthly data updates from U.S. Bank, 
which enables us to be current in our review of departmental 
purchases and identify improper uses on a real time basis.
    Analysts review these transactions and look for unusual 
purchases made with the cards. Unusual transactions include 
purchases that do not appear to be business related or for 
dollar amounts much higher than the typical office expenditure.
    When these are identified, the analysts go back to the 
components or agent and request documentation to support the 
purchase, and sometimes there is proper documentation, and 
sometimes there is not.
    The unusual transactions which are not justified are then 
referred to our regional offices for case development and 
investigation. To date we have referred 24 of these unjustified 
transactions to our regional offices.
    These cases involve possible misuse of the IMPAC card by 43 
employees. Twenty-one of these cases are under development and 
three have been closed administratively.
    But reviews involving improper use of government purchase 
cards are not new to my office. In two recent investigations we 
had involving this kind of conduct, a former employee was 
sentenced to 10 months in prison and ordered to pay over 
$74,000 in restitution after pleading guilty to theft of 
government property. The employee made unauthorized purchases 
for laptop computers, digital cameras, and other electronic 
equipment using her government IMPAC card. She sold some items 
she purchased for cash and kept others for her personal use.
    In carrying out her scheme, she altered invoices to 
disguise the purchases and forged the certifying official's 
signature on purchase requests and receiving reports.
    In another case, a former employee was sentenced to 5 
years' probation and ordered to pay $6,400 in restitution after 
pleading guilty to embezzling government funds. This employee 
used her IMPAC card to rent a car for personal use.
    After approximately 6 months of review, we found a number 
of procurement irregularities in the use of IMPAC cards within 
the department. Purchases have been made at clothing stores, 
cinemas, florists, food establishments, and other business 
places that are typically not considered authorized vendors. We 
are currently investigating these transactions to determine 
whether there is a legitimate business purpose.
    A troubling result of our ongoing review was the conclusion 
that HHS has no centralized policy or guidelines for the many 
components and agencies within the department regarding the use 
of IMPAC purchases or the use of IMPAC checks. Consequently, 
purchase authorizations and oversight varies from component to 
component within the department, thereby presenting greater 
opportunity for inappropriate use.
    We will be working with the department to determine what 
steps are necessary to insure better oversight of the IMPAC 
program. At a time when there are increased demands on the 
department's finite resources, ensuring integrity in the use of 
these cards is vital. This enables the department and its 
agencies to better serve the populations of our important 
programs for which they are intended, as well as ensuring 
taxpayer dollars are well spent.
    Again, I appreciate the opportunity to appear before you 
today to discuss our work in this important area, and I will be 
happy to answer any questions.
    [The prepared statement of Hon. Janet Rehnquist follows:]
Prepared Statement of Janet Rehnquist, Inspector General, Department of 
                       Health and Human Services
                              introduction
    Good morning, Mr. Chairman and Members of the Subcommittee. I am 
Janet Rehnquist, Inspector General for the Department of Health and 
Human Services (HHS). The mission of the Office of Inspector General 
(OIG) is to identify ways to improve HHS programs and operations and 
protect them against fraud, waste and abuse. We do this by conducting 
independent and objective audits, evaluations and investigations, which 
provide timely, useful and reliable information and advice to 
Department officials, the administration, the Congress and the public. 
In carrying out our mission, we work with the Department and its 
operating divisions, the Department of Justice (DOJ), other federal and 
state agencies, and the Congress to bring about improvements in HHS 
programs and operations and prosecute and/or recover funds from those 
who defraud the government.
    I appreciate the opportunity to be part of today's discussion on 
the oversight and management of the government purchase card program 
and to tell you about the ongoing work of the HHS-OIG in reviewing how 
these cards are being used by HHS employees.
                               background
    Approximately five years ago, HHS began using International 
Merchant Purchase Authorization Cards (IMPAC) to eliminate the 
cumbersome and costly use of procuring small purchases with purchase 
orders. IMPAC use streamlined Government purchases, reduced payment 
lead time, and reduced paperwork and administrative costs. The 
cardholders procure items for their respective components but are not 
personally billed. The credit card company is paid directly with the 
component's appropriated funds. HHS has approximately 7,500 IMPAC 
cardholders. A rough estimate is that $151.7 million was spent using 
IMPAC cards during the six month period from January 2001 to June 2001.
                     oig work involving impac cards
    The day after it became public that the Department of Education 
found fraudulent use of IMPAC cards by its employees, my Office of 
Investigations (OI) initiated a project to ascertain whether the IMPAC 
system was being misused within the Department of Health and Human 
Services. This review began in late June of 2001. I consider this 
review to be an essential part of the OIG's duties and responsibilities 
to oversee Departmental spending, and Secretary Thompson has asked me 
to expedite our review and work with the Department to improve the 
management of this program. The project is twofold: 1) an ongoing 
review of the purchases made by Departmental IMPAC cardholders and 2) a 
review of the IMPAC systems and procedures utilized by the Department.
    The first part of this review is already underway. We began by 
obtaining billing information directly from U.S. Bank, the bank that 
issues and processes the IMPAC purchase cards. In addition to the 
credit card, the bank also processes IMPAC checks that are associated 
with the card. Due to U.S. Banks' electronic storage limitation, only 
two years of transaction data could be obtained initially. Our database 
presently consists of 1.5 million individual purchases, and OI 
continues to expand the material we are reviewing in that database with 
monthly data updates from U.S. Bank.
    The electronic database currently includes all transactions made 
during the period from November 1999 through March 2002 by HHS 
employees with IMPAC cards. We are reviewing these transactions for 
unusual purchases made with the cards. Unusual transactions include 
purchases that do not appear to be business related or are for amounts 
much higher than the typical office expenditure.
    The unusual transactions, along with a complete electronic copy of 
the cardholder's purchase history, are referred to the appropriate 
regional OI office for case development and investigation if 
appropriate. In many instances, the cases are referred back to the 
appropriate component to ask for supporting documentation before a 
further inquiry is made. To date, the OIG has made 24 referrals to its 
regional offices involving possible misuse of the IMPAC card by 43 
employees. Twenty-one of these cases have been opened for further 
inquiry, and three have been closed administratively with no criminal 
activity uncovered.
                           results of review
    After approximately six months of review, we have found a number of 
procurement irregularities in the use of the IMPAC card within the 
Department. Purchases have been made at clothing stores, gas stations, 
transit authorities, cinemas, florists, toy stores, jewelry stores, 
food establishments (primarily grocery stores and restaurants), and 
other business establishments. We are currently investigating these 
transactions for possible misuse.
    The review has also revealed that some cards were misused by HHS 
employees with their supervisors' approval. For example, travel 
expenses were charged to the card when they should be charged to 
official travel cards. Fees for individual memberships in professional 
organizations were charged to the card when employees should have paid 
out-of-pocket for these memberships. The card is also used to purchase 
food items and bottled water for some offices. Misuses of these types 
will be referred to the Secretary of HHS for appropriate administrative 
action.
    A review of the electronic data also included a review of the use 
of IMPAC checks by some components within the department. We found that 
only some of the components within the Department use the IMPAC checks. 
The sole purpose of using these checks is to provide a form of payment 
to vendors who will not accept the IMPAC card. U.S. Bank charges a fee 
of 1.5 percent of the amount of the check for each check written. IMPAC 
checks from November 1999 through March 2002 total over $13 million.
    Our findings also indicate that checks are being written when the 
IMPAC credit card should have been used. Because of the 1.5 percent 
transaction fee, this type of misuse can cause taxpayers additional 
unnecessary expenses. The review identified instances where the checks 
were being used where a credit card would have been accepted.
    We have also identified several instances in which IMPAC checks 
were written out to fellow employees of the cardholder or, in some 
instances, the cardholder themselves. The dollar amount and use of 
these checks raised questions as to the validity of the purchase, i.e., 
whether the purchases were business related or whether they were 
personal purchases.
    In some instances, the checks are written as reimbursement for 
appropriate business purchases made by fellow employees. Purchasing 
items in this manner is an inappropriate use of the card. For example, 
one component allowed its employees to purchase steel-toed shoes for 
wear at work with the card. Each employee bought their own shoes and 
gave the receipt to the cardholder who reimbursed the employee with an 
IMPAC check. Since the purchases were made in this manner, the 
Government paid the additional bank fee of 1.5 percent as well as tax. 
These fees would not have been charged if the credit card would have 
been used. It also negated a possible discount arrangement with the 
vendor for bulk item purchases which could have resulted in additional 
savings for the Government.
    A troubling result of our ongoing review was the realization that 
HHS has no centralized policy or guidelines for the many components 
within the Department regarding the use of IMPAC purchases or the use 
of IMPAC checks. Consequently, purchase authorizations and oversight 
varies from component to component within the Department, thereby 
presenting greater opportunity for inappropriate use. We will be 
working with the Department to determine what steps are necessary to 
ensure better oversight of the IMPAC program.
                    results of prior investigations
    Prior to our current review initiated in June of 2001, our files 
indicated at least two OI investigations involving similar conduct. A 
brief summary of these cases follows:

 A former administrative technician with the National 
        Institutes of Health was sentenced to 10 months in prison 
        followed by 3 years probation, ordered to pay $74,140 in 
        restitution, and fined $100 after pleading guilty to theft of 
        Government property. The employee made unauthorized purchases 
        for laptop computers, digital cameras, and other electronic 
        equipment using her Government IMPAC card. She sold some items 
        she purchased for cash and kept others for her personal use. In 
        carrying out her scheme, the former employee altered invoices 
        to disguise the purchases and forged the certifying official's 
        signature on purchase requests and receiving reports.
 A former procurement clerk with the Indian Health Service was 
        sentenced to 5 years probation, 50 hours of community service, 
        and ordered to pay $6,450 in restitution after pleading guilty 
        to embezzling Government funds. The employee used her IMPAC 
        card to rent a car for personal use.
                               conclusion
    While our reviews are ongoing, we found that the IMPAC purchases we 
have reviewed thus far appear to be appropriate. However, our reviews 
have also shown there is the potential for improper use of IMPAC 
accounts. Some purchases indicate misuse or possible fraudulent 
actions, i.e., personal purchases, while others appear to violate the 
component's policies and guidelines.
    We are pursuing allegations of fraudulent use of these cards for 
possible criminal prosecution. At the same time, we will be referring 
those that appear to be instances of mismanagement to the Secretary of 
HHS for review and appropriate administrative action. In order to 
continue to monitor this issue, we have incorporated these reviews into 
our workplan, and we will continue to obtain data updates from U.S. 
Bank on a monthly basis detailing all IMPAC expenditures.
    Additionally, we found inconsistencies in the use of the IMPAC 
cards among Department components because of the lack of a centralized 
HHS policy with clear guidelines. Once both phases of our review are 
completed, we will be working with the Department to develop ways to 
improve, clarify and correct purchase procedures for the Department, 
and to help ensure these purchase tools are used properly.
    My organization has been part of a broader review of this matter as 
a member of the President's Council on Integrity and Efficiency (PCIE) 
committee. We have had the opportunity to participate in the 
discussions and development of the guide currently under review by 
members of the Inspector General community, an important effort, which 
my colleague, Johnnie Frazier, is addressing today as part of this 
hearing.
    At a time when there are increased demands on the Department's 
finite resources, ensuring precision in this method of Government 
procurement is vital. Resources not lost to waste, fraud and abuse 
enable the Department and its agencies to better serve the populations 
of our important programs for which they are intended as well as 
ensuring taxpayer dollars are well spent.
    Again, I appreciate the opportunity to appear before you today to 
discuss our work in this important area. I look forward to continuing 
to work together with Secretary Thompson and the Congress to ensure the 
department's programs and operations serve the nation with integrity, 
efficiency and effectiveness.
    I welcome your questions.

    Mr. Greenwood. Thank you. Thank you very much, Ms. 
Rehnquist.
    Let me begin questioning. Mr. Frazier, in your testimony 
you said the overwhelming number of Commerce and other Federal 
employees use their government cards responsibly. I think that 
is probably a true statement. I think also, given what we know 
about human nature, given the ease of these purchase cards, the 
use of these purchase cards, given the fact that there are so 
many items that are legitimately purchased by the government 
that are also attractive consumer items for employees, it seems 
to me that in order to insure that we have a very low rate of 
fraud we are going to have to have a very high rate of 
detection of fraud.
    And so it would seem to me logical that if an employee was 
going to try to defraud the system, he probably would not be 
focusing on items that it would be hard to construe as a likely 
government vendor, and so to avoid the sort of unusual 
purchases screen. You do not go to Victoria's Secret unless you 
are really stupid.
    On the other hand, you can buy laptops and cameras and 
rental cards and all kinds of things and not get caught up in 
that screen.
    So my general question is: what do you think the likelihood 
is that if someone purchases some of these items for themselves 
that they will be caught?
    Mr. Frazier. Mr. Chairman, I think you are right on the 
money in your concerns. Clearly, the first line of defense has 
to be the approving official. You have to almost make the 
assumption that people are going to be tempted to use the card 
on occasion, and I think that if you do not have the approving 
officials, which is often not the first line supervisor, aware 
of the kinds of purchases that are being made, routinely 
reviewing every purchase that comes in, it is very possible for 
those abuses to occur.
    Mr. Greenwood. Let's stop there for a second.
    Mr. Frazier. Okay.
    Mr. Greenwood. Let me ask any of the three of you to 
respond to these questions.
    Do you have any sense as to what the frequency of those 
approving officials, in fact, reviewing every invoice is?
    Mr. Frazier. They are supposed to review all of them. There 
is a monthly report that comes out that they are required to 
review and to reconcile the purchases with.
    What we know, unfortunately, one of our big material 
systemic weaknesses is that people do not pay the kind of 
attention to that that they should.
    Mr. Greenwood. So item No. 1 is that no purchase is ever 
supposed to be made on the purchase card that is not reviewed 
by someone other than the purchaser.
    Mr. Frazier. That is right.
    Mr. Greenwood. Okay. And that can fail if the reviewer 
falls down on the job.
    Mr. Frazier. And we know for a fact that they do.
    Mr. Greenwood. Okay. Well, let me ask this question. Can it 
not also fail if the reviewer is doing his or her level best to 
review the invoices, but has a difficult time knowing how 
legitimate the purchase is?
    I think I have learned in this process that very frequently 
the reviewer is far afield, both physically in terms of the 
knowledge of the inner workings of the entity he is reviewing, 
and so if I am reviewing a purchase and I see two laptop 
computers, how do I know that was two for the agency or one for 
the agency and one for the employee's personal use?
    Mr. Frazier. Well, there are a couple of problems that are 
going on there. One of the other big concerns is that if it is 
a laptop computer, for example, that is something that costs in 
the neighborhood of between, say, $1,000 and $2,000, and 
traditionally falls under the $2,500 threshold that most 
agencies use to capitalize equipment and put it on their 
inventory.
    We are very concerned that equipment like that does not 
show up on the inventory. It should, indeed, show up on the 
inventory.
    So that if you do not have a process in place where 
purchases like that are monitored by your property officer or 
your inventory officer, those things can walk out just as easy 
as anything else, buying a package of pencils.
    Mr. Greenwood. Any comments from the other two?
    Mr. Friedman. Well, Mr. Chairman, one of the common threads 
in all of the successful investigations that we have had has 
been the fact that the monthly reconciliation by an independent 
party has not taken place.
    Mr. Greenwood. Have there been any consequences for the 
person who is responsible for the review when fraud is detected 
and the reviewer just said, ``Well, I did not get around to 
reviewing it''?
    Have there been any consequences? Do the reviewers face any 
sanctions for doing a lousy job?
    Mr. Frazier. I can address that very definitely. We have 
several cases where they have.
    There are other cases where we are concerned that they have 
not. Traditionally we have gone after the card holder, but for 
the system to fail, it means that somebody else probably did 
not do their job.
    Now, in all fairness, and I think one of the things you 
said in your opening comments, and I heard Greg and Janet both 
allude to the same point, and that is that most of our cases 
are made or brought to us because approving officials, when 
they discover a problem, they bring them forward.
    You know, unfortunately there can be a delay of 30 days. 
People know how to work the system. In the case that we had at 
the Department of Commerce that you will hear about later on 
today the employee was able to spend $50,000, she was able to 
do that basically in a 30 to 45-day period. She knew how the 
system works. She knew that the next report would not come out 
for 30 days. Then there is another 10-day lag before it gets 
in. And during that period she was able, if you will, to make 
sure that she did her misdeeds.
    In another case, we found that the employee was able to 
hide the report from her supervisor. This was the employee who 
handled all of the monthly reports that came in. She would 
neglect to give her supervisor a copy of her report.
    It was not until she was in an accident and somebody was 
sitting in for her that then they realized that something had 
been going on for some time.
    Mr. Greenwood. Well, let me ask you all this. Do we have 
any way of knowing or having any idea how much fraud goes on?
    I understand that we can use a screen of unusual purchases. 
I understand that if somebody turns somebody else in, we can 
find out. We can go ahead and prosecute, but if the question is 
do we have any way of having any idea how much fraud is 
perpetrated using these cards, what is the answer?
    Mr. Friedman. The answer is I know of no way to give you a 
comprehensive analysis of that.
    Mr. Greenwood. So we have no idea whether we are talking 
about hundreds of thousands or millions or tens of millions of 
dollars. We have no way of knowing that.
    Mr. Friedman. Well, unfortunately, Mr. Chairman, to a large 
extent on the investigative side, as my colleagues have 
identified, we are reactive, and frequently I might add to 
their credit, the cases that have been brought to our attention 
have been brought to our attention by contractor officials and 
officials who are in the reviewing process. So that is a 
positive.
    But there is no way of knowing comprehensively how much is 
out there that has not been brought to our attention.
    Mr. Greenwood. Ms. Rehnquist, Mr. Frazier, would you like 
to answer that question?
    Ms. Rehnquist. I agree. I think that we could expend all of 
our resources, put all of our auditors and all of our 
investigators on this issue and probably give you a closer look 
than we are now, but I think that, you know, that is not 
something that is a cost-benefit analysis.
    Mr. Greenwood. And I would not find fault here with the 
IG's Office. Where I am headed is we have a system in place 
right now in which we have no way of having a clue as to how 
much fraud is going on, and all of the auditors, all of the 
reviewers chasing all of the purchases will never get us there 
until we have a system that is considerably more foolproof than 
the system that we have.
    Ms. Rehnquist. I think that is right.
    Mr. Frazier. I think that is an accurate statement, but 
what I also believe, Mr. Chairman, is that this is where the 
proactive activities will come into play. The fact that we are 
highlighting through hearings like this that people are being 
sent to jail for this.
    Mr. Greenwood. Well, let me ask a question on that while I 
still have a second or two here. One of the things that we 
heard was that even in cases where there is clear fraud that 
has been identified, I mean, broke the law, then you have to go 
to the U.S. Attorney's Office and the Department of Justice and 
ask them to please prosecute this individual. And if the losses 
are in the 2,000, 5,000, $10,000 range, they may, in fact, say 
it is not worth pursuing criminally.
    So now I am an employee out there thinking I can probably 
beat the system if I do not buy something that is really 
outrageous. I probably will not get caught, and even if I do 
get caught, I probably will not get prosecuted.
    That is a pretty thin line of resistance, it seems.
    Mr. Frazier. I can assure you that an employee at the 
Department of Commerce that is investigated and found guilty, 
that that employee, if the U.S. Attorney's Office does not 
prosecute the case, that employee will no longer be a 
Department of Commerce employee. They have a mark against their 
record. It goes in their permanent file.
    We surely would like to make sure that things are in place 
to make sure that they do not leave Commerce and go over to 
work in Energy, for example. And I think those are the kind of 
things that we can do.
    But we have been fairly fortunate so far in that the 
Assistant U.S. Attorneys, I think, like you, like me are 
outraged about these kinds or problems and have taken on cases 
for as little as $700, and often we have a difficult time 
getting them to pick up some of our major cases that involve 
even $25,000.
    But, again, I think that they clearly want to send the 
signal. One of the messages that we have received from the 
Assistant U.S. Attorneys is the question that you alluded to 
earlier, and that is that we think that you should not just go 
after some of the perpetrators, the individual cardholders. 
When you bring these cases to us and you know that someone was 
not doing their job, they are concerned sometimes about taking 
a case like that because they say you need to bring both people 
here. You need to bring the people who fell down on their job 
because if not, it may not have the jury appeal or you may not 
be able to get the conviction.
    Mr. Greenwood. Well, it seems to me the issue is you have 
to separate that issue. There is the reviewer who is corrupt 
and complicit who needs to be prosecuted.
    Mr. Friedman. Well, we will prosecute them.
    Mr. Greenwood. Probably for every one of them there are 100 
who are not corrupt, but they are just lazy, inept, 
overwhelmed, whatever it is and do not do the job, and their 
sanction should have to do with their ability to remain as an 
employee.
    It would seem to me that if we find that someone stole 
$50,000 while a reviewer was asleep at the switch, that 
reviewer should be looking for employment elsewhere as well.
    Mr. Frazier. Well, they surely should be disciplined 
severely. One of the things that we are doing is to work with 
the agency to make sure that that happens.
    You know, the managers traditionally see their primary job 
as the programmatic function. If they have got satellites that 
get launched or if they have Weather Service programs to run, 
they see that as their primary function.
    What we want to encourage them to understand is that they 
have dual responsibilities. Management oversight of the 
government's resources is just as important as all of the other 
things that you have as a responsibility.
    My favorite example, Mr. Chairman, is that of the head of 
the Weather Service. Obviously we can look at La Plata. This 
guy is very busy dealing with tornadoes, hurricanes, and 
others. You know, when we found problems at five of his Weather 
Service offices, he took those reports, sent them out to 
another 110 offices and said, ``If the IG comes and finds these 
problems at your offices, you will not be there.''
    When we subsequently showed up at three other offices, 
there were no problems. And we are continuing our review. But 
you need people to understand that you have got this important 
programmatic responsibility, but you also have the 
responsibility of safeguarding the government's resources.
    Mr. Greenwood. Thank you.
    My time has expired. The gentleman, Mr. Stupak is 
recognized for 10 minutes.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Frazier, it looks like the Department of Commerce has a 
fair amount of internal controls set up, right?
    Mr. Frazier. They should have some more. I mean, they have 
a good number. We want them to have more.
    Mr. Stupak. Right. Is the reviewer, the person who reviews 
the purchases, is there some place higher up in the chain where 
that is reviewed at all?
    Mr. Frazier. Well, one of things that the department has is 
that they have a centralized credit card office out in Kansas 
City, and they oversee the entire program. We have forged a 
working relationship with them. Maybe I should not say this 
publicly, but they have given us many leads.
    Mr. Stupak. But they do spot checking.
    Mr. Frazier. They do spot checks, but at the same time, 
what they are is they are clearly an important control in this 
process.
    Mr. Stupak. The level is $2,500 that you do not have to get 
prior authorization; is that right?
    Mr. Frazier. Oh, no. In my office, you can set it 
differently. In my office, you know, if you are going to spend 
$25, you are going to get prior approval. You know, managers 
have some discretion as to how much they assign to a given 
office to a particular cardholder, and management has that 
discretion.
    Mr. Stupak. Okay. So management can set the level where 
they want it?
    Mr. Frazier. That is right.
    Mr. Stupak. Okay. Well, did you testify that 2,500 was set 
by one?
    Mr. Frazier. Well, the 2,500 was an example. What usually 
happens, the procurement regulations usually require you to go 
out and get competitive bids.
    Mr. Stupak. That is right.
    Mr. Frazier. In other words, if you are going to spend more 
than $2,500 on a computer, you should not just walk down to----
    Mr. Stupak. Well, 2,500 is just an example.
    Mr. Frazier. Well, it is an example, but it is also a 
recognized example throughout the community that 2,500 is when 
you need to have competitive----
    Mr. Stupak. Well, let's just take the Department of 
Commerce. Does every agency or department therein have a 
different level?
    Mr. Frazier. A different? I'm sorry.
    Mr. Stupak. Level of how much you can purchase without 
prior authorization?
    Mr. Frazier. Well, you have to get authorization for 
everything over $2,500, but an individual office can set that 
limit lower in practice.
    Mr. Stupak. Okay.
    Mr. Frazier. They can set that limit lower.
    Mr. Stupak. The general requirement is $2,500. If they need 
more than $2,500, you have to get competitive bids and prior 
authorization.
    Mr. Frazier. Yes.
    Mr. Stupak. Anything under that you can do anything you 
want. It depends on that department, agency, unit, whatever it 
might be.
    Mr. Frazier. In that unit. In certain offices, we find in 
my office, for example, we have a process that whatever you are 
going to spend it has to be approved for whatever the amount. 
You have to have it approved in advance.
    Mr. Stupak. Right. Don't you think you should just have one 
level department-wide so that there is no question about it?
    Mr. Frazier. Well, part of it is that you have to look at 
how the purchase cards are set up, I mean, and the purposes for 
which they are being used.
    Mr. Stupak. Right.
    Mr. Frazier. It varies. I mean, they serve different 
purposes. You have certain offices where you have two people in 
the office. So the question is: do you have the time to run 
back every time you need to buy a box of pencils or do you want 
to go and get approval on that, you know?
    That is probably not worth it. People have to make some 
judgment. It is not worth taking a senior official's time to 
get approval for $25 purchases in certain cases.
    Mr. Stupak. So overall you feel in the Department of 
Commerce with your internal controls it is working fairly well 
in the Department of Commerce?
    Mr. Frazier. What I feel is that they are working well, and 
we have identified a litany of things that we want done, and 
the department is working with us very willingly to implement 
those, to strengthen those controls.
    Part of it has to be just to get the message out that 
people know that you take this seriously, that I take this 
seriously, and that the managers will take it seriously.
    Mr. Stupak. Okay. Mr. Friedman, the Department of Energy 
seems to be very far behind from what the Department of 
Commerce does in internal controls. Why is that?
    Mr. Friedman. Well, I have not evaluated the internal 
controls of the Department of Commerce, but I rely upon 
whatever my friend, Mr. Frazier says.
    There is a system of internal controls at the Department of 
Energy. It is somewhat more complex, and if you are familiar 
with how DOE is organized, Mr, Stupak, the vast majority of 
work at the Department of Energy, including our nuclear weapons 
work, our research laboratories----
    Mr. Stupak. Contractors.
    Mr. Friedman. [continuing] are contractor operated. So of 
the 14,000, we know of 14,000 current cardholders in the 
department.
    Mr. Stupak. Right.
    Mr. Friedman. Of the 14,000, approximately 11,700 are 
contractor employees. The rest, about 2,300, are Federal 
employees. So the situation is somewhat more complex.
    Mr. Stupak. Well, has anyone ever checked the regulations 
to see if it is even appropriate to have private individuals 
have government credit cards who are contractors and not 
government employees?
    Mr. Friedman. Well, these are not part per se of the Smart 
Pay program, but the department has authorized them to create 
their own programs.
    Mr. Stupak. Sure, but has anyone ever checked to see if 
that is legal? I am trying to look at first things first.
    Mr. Friedman. I have not checked.
    Mr. Stupak. So we do not even know if that is proper 
under----
    Mr. Friedman. Well, my assumption is somebody has checked, 
and it is appropriate, but I have not checked personally.
    Mr. Stupak. You know what happens when you sue them.
    Mr. Friedman. What?
    Mr. Stupak. Nothing.
    So we have got 8,000 contractors. How much a year does the 
Department of Energy run up on credit cards?
    Mr. Friedman. Well, this is part of the problem. We do not 
know. On the Smart Pay portion, it is between $200 million and 
a quarter of a billion a year. The contractor portion, we just 
do not know the number. We have never accumulated it and 
collected it. The department has not, and I think that is a 
problem.
    Mr. Stupak. So when we get to the Department of Energy, we 
do not have any kind of idea what is going on there?
    Mr. Friedman. I certainly do not. I know we can convey what 
we have been told with regard to the Smart Pay Program, but 
limit it to the Smart Pay Program.
    Mr. Stupak. Okay. Well, is there going to be a review of 
these 8,000 contract credit cards?
    Mr. Friedman. Well, actually the majority of the cases that 
we have investigated and the audits that we have done have been 
of the contractor purchases under their Purchase Card Programs.
    Mr. Stupak. And what have you found?
    Mr. Friedman. Well, we have found we have had six--I 
indicated in my opening statement the number of convictions, 
fines and recoveries have been fairly significant, but in the 
context of the overall amount of money that is being spent, it 
is not all that large, to be frank with you.
    Mr. Stupak. Pardon?
    Mr. Friedman. In the context of the billions of dollars 
that are being expended annually, it is not a huge number.
    Mr. Stupak. But there has not been an audit.
    Mr. Friedman. I am sorry?
    Mr. Stupak. But there has not been an audit. I mean, you 
have a couple, but you really have not gone through and done a 
complete audit of these 8,000 or you have done some, some that 
have been brought to your attention, right?
    Mr. Friedman. No.
    Mr. Stupak. Go ahead.
    Mr. Friedman. I am sorry. On the investigative side, we are 
primarily reactive, instances that have been brought to our 
attention. Those have been mostly in the contractor arena.
    On the audit side, we have initiated audits on our own. For 
example, as I indicated in my opening statement, we are 
currently auditing the credit card program of Sandia National 
Laboratory.
    Mr. Stupak. Right.
    Mr. Friedman. So that is one example.
    As a stem to stern review, the answer is no.
    Mr. Stupak. And when is Sandia going to be done?
    Mr. Friedman. It should be done shortly.
    Mr. Stupak. Okay. How long have they been giving credit 
cards to private contractors? Do you know that?
    Mr. Friedman. Well, certainly since 1998, but I think it 
goes beyond that as well.
    Mr. Stupak. Before that, right?
    Mr. Friedman. Yes.
    Mr. Stupak. How long back do you have to look at the 
records? I mean, do you have to keep your records from the 
first purchase to 2002?
    Mr. Friedman. Well, generally the contracts are five- year 
contracts. I do not know precisely what the records retention 
responsibilities are in each contract. It may vary by contract, 
but certainly for the term of the contract at the closeout you 
would have to have all of those records.
    Mr. Stupak. And they are turned over to DOE?
    Mr. Friedman. I am sorry?
    Mr. Stupak. They would be turned over to DOE?
    Mr. Friedman. Well, they are DOE's records. We own them.
    Mr. Stupak. All right. And, Ms. Rehnquist, the HHS, just in 
June 2001 they started their review?
    Ms. Rehnquist. That is when we started reviewing every 
transaction that goes through.
    Mr. Stupak. Right. So before 2001 there was no review?
    Ms. Rehnquist. There were the couple of criminal cases and 
the couple of serious fraud cases.
    Mr. Stupak. Do you have an authorization level, Mr. 
Friedman, at DOE that you do not need any authorization? Is 
there a level, $2,500?
    Mr. Friedman. No. Similar to the situation at Commerce, it 
varies. It is all over the place.
    Mr. Stupak. Is that the same at HHS?
    Ms. Rehnquist. Yes.
    Mr. Stupak. Okay. Give me an impression of what type of 
employees in DOE would have a credit card. I am talking about 
employees now.
    You cannot be an entry level person and get a credit card, 
can you?
    Mr. Friedman. Entry level?
    Mr. Stupak. Yes.
    Mr. Friedman. Yes. I mean, I do not know how you define 
entry level, but these are people who are responsible for 
making day to day acquisitions generally at a lower dollar 
threshold. So it could very well be a senior secretary, a 
senior management assistant.
    Mr. Stupak. And then their supervisor is supposed to review 
it.
    Mr. Friedman. Well, there is a supervisory chain that is 
supposed to review the purchase, yes. And you reconcile it to 
the inventory records, which is the most important point, which 
I think is what Mr. Frazier was alluding to in response to Mr. 
Greenwood's question earlier.
    Mr. Stupak. Right, and then after that review in DOE, you 
work with the credit card company like Commerce?
    Mr. Friedman. Well, the problem is the common thread in all 
of the cases that we have reviewed has been that the 
supervisory review did not take place.
    Mr. Stupak. And in the ones that you have reviewed, the 
supervisor has not or the review has not taken place you said.
    Mr. Friedman. That is correct. The investigations that we 
have done, that is correct.
    Mr. Stupak. Right. Just the investigations.
    Mr. Friedman. Yes.
    Mr. Greenwood. The time of the gentleman has expired.
    The Chair recognizes the gentleman from New Hampshire, Mr. 
Bass, for 10 minutes.
    Mr. Bass. Thank you very much, Mr. Chairman.
    What process is in place to follow up with the various 
audited divisions to see if the identified weaknesses have or 
are being corrected that you discussed in your testimony?
    Mr. Frazier. Mr. Bass, we have a process that we issue our 
report in final. We get the agency's comments in in response to 
our findings. Within 30 days, they have to give us a detailed 
report.
    They then are required to report back to us until those 
issues are fully addressed. We then, also in the case of credit 
cards, we send copies of our reports to the Office of the 
Secretary, which has responsibility for monitoring the entire 
program throughout the department. They get copies of that and 
have responsibility to look for, again, the cross-cutting 
issues and the systemic problems.
    We then will go back and periodically follow up in 
situations where we actually think that there was a major 
problem, you know, just to verify and confirm that the people 
are doing exactly what they have reported that they are doing.
    Mr. Bass. Mr. Friedman?
    Mr. Friedman. Mr. Bass, we have a very similar system. As I 
indicated, again, in my opening statement, we currently have a 
proactive investigative review ongoing department-wide which 
will follow up on many of the issues that we have discussed 
today, and we also have an ongoing audit at the Sandia National 
Laboratories.
    Ms. Rehnquist. Mr. Bass, we have the same procedure for 
reports, but I do not have an outstanding audit report to the 
agency on this. What we do is an automatic data dump, if you 
will, from U.S. Bank so that my office actually is responsible 
for reviewing the transactions at this time.
    I would like to transfer that back to the components and 
have them do the initial cut, but what we are going to do is 
work with the department now. We are collecting the different 
policies and procedures within the department--each agency has 
a different set of guidelines that they use--collect those, and 
on the basis of Director Daniels' memorandum, put some unifying 
policies in place for the entire department.
    Mr. Bass. So for the first two, basically you have a 60 to 
90-day. You sort of put the account on probation, and you have 
more stringent reporting requirements. You send the information 
to the top, to the Secretary.
    Mr. Frazier. To the Office of the Secretary, not to the 
Secretary.
    Mr. Bass. I understand that, and then anything else, that 
is it. What happens if you identify miscreants?
    Mr. Frazier. Well, see, that is a whole different set. In 
other words, if we find someone who has misused the card for 
personal use, that is a whole separate process. Those folks are 
going to be disciplined. They're going to be either fired; 
they're going to be forced to resign. They're going to be 
disciplined, and so that's a different one.
    Then what we will do is to try and go in to look at the 
internal controls that allowed that situation to happen. In 
other words, you have to learn from these relatively few cases 
of misuse and abuse. You have to learn how do we fix the 
process. How do we fix the system to preclude those kinds of 
things from happening on a regular basis?
    And I think even more important than what we do is just to 
get managers to understand just how important this is so they 
will take those findings and those reports and those 
recommendations and try and implement them on a larger scale.
    We have 6,000 cardholders in the Department of Commerce. We 
are never going to audit or investigate all 6,000 of those, but 
what can happen is that if we get managers to put in place the 
kinds of safeguards and controls, we can get managers to go out 
and do reviews, the same kind of reviews that we are going to 
do.
    When we issue this guide that the IG community is working 
on, I plan to make that guide available to anybody in the 
department who wants it. They can use, you know. That is not 
something that is rocket science. They can take that document--
--
    Mr. Bass. I just want to understand the process. An audit 
is conducted. Some audits may turn out okay, others perhaps 
not. You discover in the course of an audit that there may be a 
problem with a specific agency.
    So what you do is you notify the agency head that there is 
an issue. There are some issues here. There may be some 
individuals that are going to be disciplined in some form or 
another, and from this point forward, this particular agency is 
going to be subject to more stringent reporting requirements, 
60 to 90-day at least once to report back.
    Mr. Frazier. Let me correct that. Not just once. In other 
words, until we believe that the recommendations have been 
implemented, it is every 6 months until each and every 
recommendation is closed, is the word that we use.
    Mr. Bass. Okay.
    Mr. Frazier. So in other words, it is not a matter of you 
telling us, you know, one time after 60 days and then we go 
away. Quite the contrary, until it is closed and we are 
comfortable that you have implemented that, that recommendation 
stays in an audit control system.
    Mr. Bass. Okay. That is fine.
    You made reference to, ``relatively few.'' I apologize for 
not reading your testimony. When you say ``relatively few,'' 
what are you talking about?
    Mr. Frazier. Relatively few criminal cases that we have 
investigated.
    Mr. Bass. How about relatively few transgressions versus 
investigations? Is there a difference? Do you understand what I 
am saying?
    Mr. Frazier. No, not really.
    Mr. Bass. Are there instances where some problems may pop 
up and an audit does not necessarily lead to a criminal 
disciplinary action?
    Mr. Frazier. Yes. That is the overwhelming number of cases. 
In fact, most of them are audits. We do lots of audits, and we 
find lots of problems in the audit area in terms of internal 
control weaknesses. We seldom find even through those audits 
where people have used those cards for personal gain.
    Mr. Bass. So an internal control weakness, that is 
basically improper reported information even though it was 
perfectly okay. The charge itself, for example, was okay, but 
it did not look right even though it was actually fine versus 
he or she did not get caught, and it is not justifiable to 
prosecute.
    Do you understand the subtle difference here?
    Mr. Frazier. There can be subtle differences. In fact, one 
of the things that we do, we have learned to try and target 
certain things. We will look, and for example, if we see 
purchases at a hotel, if you see something at the Willard Hotel 
which is across the street from the Commerce Department, we 
say, ``We have got you.''
    You know, but then you find out that there is something 
called a Cash in a Flash Program that you can reward people 
with a special purchase, a gift certificate, and you can do 
that as an award. So you can give a $50 gift certificate.
    Mr. Bass. Okay.
    Mr. Frazier. What the sheet would show is somebody would 
use $50 to buy something at the Willard Hotel. We think that 
sends up a flag, as it should, but once we look into it, you 
can sometimes find that there can be legitimate, acceptable 
reasons that those purchases were made.
    Mr. Bass. Fine. One last question. Are any of you in a 
position to comment as to whether or not you think that the 
deterrence factor is strong enough? I.e., a Federal Government 
employee strongly enough educated to the consequences of 
improper use of government issued credit cards, or is it the 
feeling--maybe in your opinion this is too subjective--that 
most people believe it really is not going to make much 
difference? It is going to be very, very hard to prosecute.
    Is that a problem? Is it within the scope of your ability 
to comment on that?
    Mr. Frazier. The disciplinary?
    Mr. Bass. Yes.
    Mr. Frazier. I'll step out of the Commerce IG role for just 
a second and speak from the standpoint of the President's 
Council on Integrity and Efficiency. We have a round table 
group that has been dealing with this issue, comparing lessons 
learned, talking about some of the experiences that our own 
agencies have experienced.
    And one of the things that we have, we have some people who 
will not take a government credit card, a purchase card, do not 
want that responsibility because they are fearful that it is 
going to be something that is going to give them problems even 
if they try and do everything right.
    So I do think in many agencies that the message is getting 
out. Other people, IGs I know are issuing--we are going to 
still this practice--issuing what they call IG alerts where 
every time you convict someone, you circulate that on the 
Internet throughout our department, and when people see that, 
they say, ``Wait a minute. This woman spent $700 and she got 
fired and she is doing 6 months in jail?''
    That gets people's attention. My No. 1 thing, you stop it 
with very strong disciplinary action, and people get the 
message.
    Mr. Bass. Any other comments from either of you?
    Ms. Rehnquist. I agree with that.
    Mr. Bass. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the Ranking Member, Mr. Deutsch, for 10 minutes.
    Mr. Deutsch. Thank you.
    The General Services Administration has stated in its 
testimony that almost $14 billion in purchases are made every 
year through these purchase credit cards, and that the savings 
to the government by using them is $1.3 billion. This is an 
enormous savings.
    How does the amount of fraud and abuse of these cards 
compare to the savings? Can you quantify the amount?
    Mr. Friedman. With regard to the Department of Energy, Mr. 
Deutsch, I do not have such a number and I do not know of a 
number collectively throughout the entire government. I am not 
sure how you would gauge it, frankly.
    Mr. Deutsch. Mr. Frazier?
    Mr. Frazier. Yes, I think that Mr. Friedman is right on the 
money. I think the fact that it has our attention now, and I 
think it is getting the attention of the senior managers and 
hopefully that number, the amount of fraud, will continue to go 
down.
    We know what we know and we do not know what we do not 
know. And that is a concern, you know, but again, I think that 
this is where the deterrence factor has to be beefed up. This 
is where the proactive kinds of measures that we are all 
talking about have to be put in place. This is where strong 
internal controls will make the difference.
    We identified some very positive aspects. Our overseas 
operations department has commercial operations in 60-some 
countries overseas. They are starting to use the credit cards, 
and we know that that makes a difference because when they were 
processing things through their normal chain and through the 
embassy, there were taxes that were put on it. There were fees 
that were paid.
    So we go in and look at those, and so there are some other 
savings that accrue as a result of the program. But to say that 
the level of fraud would be something that anybody will ever 
give you a definite or definitive number, you know----
    Mr. Deutsch. Is that part of the attempt to be more 
moderate and to actually get a cost-benefit analysis in terms 
of the problems? I mean, if with the additional monitoring 
would you come back here in 6 months or 12 months and we ask 
you that question again, would you be able to, you know, create 
a number in terms of the actual down side?
    Mr. Frazier. Not one that I probably would ever be 
comfortable with, you know.
    Mr. Deutsch. Even a ballpark number?
    Mr. Frazier. It would be difficult because, again, you 
know, I would like to think that we are doing a great job in 
catching lots of the abusers, and I feel that we are. But I 
know, again, you know, you cannot ever be sure.
    And as soon as I tell you that we have got most of the 
abusers out of the system, you know, something will happen and 
there will be 25 people at one time, you know, but God forbid 
that happens.
    Mr. Deutsch. Mr. Frazier, in the prepared testimony for 
today's hearing, the Commerce Department has stated that it has 
identified fraud and abuse that has totaled one-hundredth of 1 
percent or one-ten thousandths of all credit card purchases 
made in the last 5 years. That represents just $64,000 over 
half a billion dollars in purchases.
    The Commerce Department appears to have the most thorough 
control programs of all the agencies. Do you think this 
accurately measures the extent of credit card fraud and abuse 
at Commerce?
    Mr. Frazier. Well----
    Mr. Deutsch. And let me just mention that 64,000 number is 
in Mr. Sade's testimony on page 9.
    Mr. Frazier. I will leave that to Mr. Sade to defend that 
number. We can get more than $64,000 ourselves.
    Having said that, that is what we know about. And, again, 
it goes to the same question that you have raised earlier. You 
know, you never know what you do not know. Again, what you do 
is--in other words, that which we catch, that which gets 
reported is what we can report to you, and we feel comfortable 
with those figures.
    One of the things I have asked my auditors and people who 
are now doing this work, if we find that someone took $50,000, 
you can make an assumption that maybe they took more. So you 
try and go back, you know, and find out how long the problem 
has been going on.
    You know, you don't know what you have missed, and again, 
you go on faith to a great extent, but that is why I think that 
the controls are absolutely critical to prevent the problem.
    Mr. Deutsch. Could you compare that number or also your 
process with what is done in private industry?
    Mr. Frazier. No, but what we did do is part of the PCIE 
effort in working with this guide. We have looked at certain 
private organizations to try and get a sense as to what they 
are doing. We have spoken with officials from the Bank of 
America. We have spoken with officials from some CitiCorp and 
other banks and other corporations.
    I met with my brother-in-law recently. He has a major 
credit card with his company, and to talk about the kind of 
things that they do, the one point that he emphasizes, they 
give him a great deal of latitude. They all have American 
Express cards, and they can even charge business things and 
personal things on the same card, and then you differentiate 
when you get ready to make the claim.
    He said if you make one mistake, if you put one personal 
charge on there, you are fired immediately. So I think that, 
you know, this is the message. Again, it is prevention. When 
people know that they are going to be fired for an indiscretion 
like that, they get the message fairly quickly.
    And, again, that is what I am hoping we will be able to 
convey to Commerce employees and, I think, throughout the 
government.
    Mr. Deutsch. Mr. Friedman and Ms. Rehnquist, if you could 
respond, do you think your agencies have comparable numbers 
that I quoted for Commerce just in terms of the actual dollar 
amounts? I mean, would you be able to generate those kinds of 
numbers?
    Mr. Friedman. I could give you the number we have reported 
in our documents, Mr. Deutsch, but I do not believe there is a 
collective number.
    Mr. Deutsch. Ms. Rehnquist?
    Ms. Rehnquist. No, I do not believe there is a collective 
number either at HHS.
    Mr. Deutsch. What would the greatest vulnerabilities in 
your agencies be in terms of the fraud we are talking about? 
And specifically, the vulnerabilities that you have set out, I 
mean, where are you specifically looking at in terms of, you 
know, trying to make some changes?
    Mr. Frazier. The role of the approving officials.
    Mr. Deutsch. So you keep coming back to the approving 
official.
    Mr. Frazier. Oh, yes. I think that that is one of the very 
key things. The fact of securing bank cards, the fact of 
looking for people who split purchases to get around 
procurement limits; the notion of getting somebody else to 
review the report, having somebody to make sure that those 
major purchases get put on inventory records so that when an 
employee walks out of the door, that he or she can take an 
expensive piece of equipment that they have purchased because 
nobody else knew that they had purchased it.
    I mean there are just a litany of areas that we think can 
be addressed.
    Mr. Deutsch. Are those pretty much the same things at both 
of your agencies that you are recommending as well?
    Mr. Friedman. Yes.
    Mr. Deutsch. Or that you are recommending to your agency?
    Mr. Friedman. Well, the common thread, Mr. Deutsch, the 
problems we have found deal with the supervisory review, 
reconciliation, and reconciliation with the inventory as well.
    You know, one of the obvious objectives here, and I do not 
mean to make this sound biblical, is this is a difficult 
balancing act. We want to have a stringent, effective set of 
safeguards or internal controls, but they cannot be so onerous 
and so prescriptive as to undermine the entire program.
    That is the difficult balance that we are shooting for in 
working with our respective departments, and that is the 
difficult balance that we are trying to seek.
    Mr. Deutsch. Ms. Rehnquist, did you want to add anything?
    Ms. Rehnquist. In addition to what Mr. Frazier and Mr. 
Friedman said, I mean, the thing that I would like to see 
probably primarily at HHS is the centralization of the 
controls. Unless there is a really good reason for the Indian 
Health Service to have a different policy than CMS, I would 
really like to see one set of procedures and controls that 
would guide supervisors on how to use these cards.
    Mr. Deutsch. My last question just deals with the response 
of the agencies to the recommendations that you have just 
talked about and what has been the response? You know, if you 
can, give us an update of that.
    Mr. Frazier. Yes, I could not be happier, and I think it 
is, in large measure, because of the attention that the 
Congress is putting on this, the emphasis that OMB is now 
putting on this, and that the Deputy Secretary and the CFO 
realize that this is the kind of thing that will give not only 
the department, but government workers a bad image.
    And as a result, they are being quite responsive. I mean, 
we have action plans in response to every one of our reports 
thus far, and in fact, what we have had now is that we have had 
managers who are asking us to come in and look at specific 
operations. They are concerned, and they want us to go in.
    You cannot go in and look at all of them, but if a manager 
is concerned, we surely will make that one of our priority 
candidates.
    Mr. Deutsch. Would you like to respond in terms of your 
agencies?
    Mr. Friedman. Well, we have had a very, very similar 
reaction. I have spoken both to the Secretary and to the Deputy 
Secretary and to the CFO in this matter, and they are taking it 
very seriously. In fact, appended to our February 2002 lessons 
learned report is the response from the department's Chief 
Financial Officer.
    And I think it is a comprehensive, complete proposal to try 
to address these issues, and I give him a great deal of credit 
for that. The implementation will be the key.
    Ms. Rehnquist. Right. This is something that Secretary 
Thompson takes very, very seriously, too, and has asked me to 
expedite our work so that we can get back to them and proceed 
with better management controls.
    Mr. Stupak. Excuse me for 1 second. Would you yield for 30 
seconds?
    Mr. Greenwood. Very briefly.
    Mr. Stupak. You all had guidelines when you started this 
program, right? And it seems like your controls are under 
development as you are going along here.
    Commerce had a pilot program first, first?
    Mr. Frazier. Back in 1986, I believe, yeah, because they 
have been involved in the program for 15 years.
    Mr. Stupak. Then at the end of that program were other 
agencies given the opportunity then or departments given the 
opportunity to use the credit card after your pilot program?
    Mr. Frazier. I do not----
    Mr. Stupak. Excuse me. Why didn't your--what I am trying to 
get at: why didn't your controls go with the extension of 
credit cards to other departments?
    Mr. Frazier. One of the things that you will find is that 
there is often not a shortage of controls and prescribed good 
practices. It is how those practices and controls are 
implemented because even today, you know, I can identify a 
number of things that can be put in place to strengthen the 
program, to better safeguard it.
    So I think that what we find, and I think you have heard 
Ms. Rehnquist and Mr. Friedman say the same thing; it is a 
matter of getting people to comply. It is getting people's 
attention now.
    So I am hopeful that you will see a decline. You will see a 
decline in the numbers of people who have cards at Commerce and 
at other agencies. You see lots of people who had cards that do 
not need those cards. Those cards are being taken away.
    Mr. Stupak. Thank you, Mr. Chairman.
    Thank you, Mr. Deutsch.
    Mr. Greenwood. The Chair, as always, welcomes the presence 
of the chairman of the full committee, Mr. Tauzin, and 
recognizes him for 10 minutes or so much of that as he chooses 
to consume.
    Chairman Tauzin. Thank you very much, Mr. Chairman.
    Let me thank you all for coming to help us understand both 
the opportunities and problems of using credit cards within the 
Federal system.
    Let me, first of all, focus on some of the abuses, some of 
the fraud your audit work has uncovered. I was going through 
your statements and noted that in some cases people misused the 
card to the tune of $85,000 or $113,000, pretty big numbers, 
which is a lot of personal items.
    And in other cases, Ms. Rehnquist, you were talking about 
the use of credit cards to buy individual memberships in 
professional organizations that clearly should have been out-
of-pocket expenses of the holders of the card, et cetera.
    I am trying to understand how this could happen in a system 
and go so far before it is caught. I understand human nature. 
Some people are going to do things like that and particularly 
when they have the assistance of the vendors, as in one case 
you pointed out. The vendor was covering up the personal 
acquisitions by altering the invoices.
    That is just theft, and that could occur even with any 
other system.
    But recognizing all of that, normally when those of us who 
use credit cards, and most Americans do, make extraordinary 
purchases, we get a call from the credit card company. When 
there is an extraordinary amount or when the charge is at an 
extraordinary place, they do so as part of their security to 
make sure that their card members are not literally being 
charged for charges that they really did not make.
    So somebody has some software equipment somewhere that can 
identify aberrations in card use, spot it early, and at least 
make inquiries about it.
    And so the question I want to ask you is: do your 
departments and your audit functions use software tracking of 
acquisitions made under credit cards which have the capacity to 
identify aberrations in use? Any one of you.
    Ms. Rehnquist. Well, Mr. Tauzin, we do have that software. 
We have that data base up and running now. We have about, I 
think, 1.5 million transactions in the data base, and now we 
review the data directly from U.S. Bank, who issues IMPAC cards 
at HHS on a monthly basis with only about a 30-day lag time.
    So we see the transactions now in real time, and it does 
allow us to identify those transactions that are either of 
really high dollar amount or from a vendor that you would not 
expect as----
    Chairman Tauzin. Well, how did the guy get $85,000 worth of 
charges for televisions and God knows what else for his 
personal use without the software finding that?
    Ms. Rehnquist. Well, we find it.
    Chairman Tauzin. What I am saying is why can't the software 
identify these aberrations when they occur and as they occur 
before it gets to 85,000, before you have got a big criminal 
case on your hands.
    Ms. Rehnquist. I guess if you are really intent on 
committing fraud, you are going to stage it so that you are 
flying under radar for a while, and it would really only be 
after a cumulative effort that an analyst sees, okay, this is 
maybe not an extraordinary amount of money, but it is an 
unauthorized vendor.
    Chairman Tauzin. Well, Mr. Frazier, you pointed out that in 
the Alaska regional office deficiencies that were cited as bank 
card activity were never reviewed by the contracting office 
head.
    Mr. Frazier. Yes.
    Chairman Tauzin. How do you explain that?
    Mr. Frazier. There is no explanation for that.
    Chairman Tauzin. No good one, right?
    Mr. Frazier. it is unacceptable, and again, we keep coming 
back to the same thing. The same software that you are talking 
about is available to all of the approving officials, to the 
agency representatives.
    Chairman Tauzin. Do they use it?
    Mr. Frazier. The department uses it. The people out in 
Kansas City that run the bank card program surely get it, and 
they are sharing that information with us now. But I am certain 
that they must share it with the department because they work 
for the department.
    Chairman Tauzin. Well, Mr. Friedman, let's talk about your 
department, the Department of Energy here. The number of 
contractor employees who hold purchase cards far outnumber the 
number in the Department of Energy as regular Federal 
employees.
    Mr. Friedman. That is correct.
    Chairman Tauzin. Tell me. What is the situation with the 
contractor employee holding a credit card? Are they charging 
directly against the Federal Treasury?
    Mr. Friedman. In most cases they are, yes.
    Chairman Tauzin. How does that happen?
    Mr. Friedman. Through a letter of credit, which is the 
standard Department of Energy management operating----
    Chairman Tauzin. If I am a contractor with the Department 
of Energy, my employees can charge directly against the Federal 
Treasury?
    Mr. Friedman. In essence, that is the case, yes.
    Chairman Tauzin. Well, why do we permit that?
    Mr. Friedman. Well, that is the whole underpinning, Mr. 
Tauzin, of the department's managing and operating contractor 
concept, which frankly goes back to the Manhattan Project days.
    Chairman Tauzin. But wouldn't it be better if the employees 
were answerable to their contractor, their boss, that he then 
makes whatever payment, claims against the government that he 
can legitimize as legitimate payments?
    Aren't you skipping a level of responsibility when you do 
that?
    Mr. Friedman. Let me be clear on this, if I can.
    Chairman Tauzin. Please do.
    Mr. Friedman. Because it is a very complex situation. There 
are multiple programs, and they are handled differently. So I 
am not speaking----
    Chairman Tauzin. About all of them.
    Mr. Friedman. You cannot generalize about all of the 
programs.
    What has happened in the case that we have investigated is 
that the contractors have, in fact, been held accountable for 
the errant purchases of their employees and have, in most 
cases, reimbursed the government for those losses.
    But if I can go back to your earlier question, which I 
think is a very important point, the two biggest cases that we 
have had, the two biggest investigative cases in terms of the 
loss. One was a fraud that took place over 47 months, and the 
other took place over 13 months.
    So as Janet Rehnquist suggested, and she is quite correct, 
these people, many of them are very clever. They spread the 
purchases over a long period of time.
    Chairman Tauzin. Well, but also, 6 out of 7 of the closed 
fraud cases were contract employees.
    Mr. Friedman. That is absolutely correct.
    Chairman Tauzin. You know, I am just looking for where a 
problem exists. Those statistics certainly point me in the 
direction of contract employees.
    Mr. Friedman. I agree with you completely.
    Chairman Tauzin. And credit cards and charging against the 
American taxpayer without the contractor being responsible in 
between, except perhaps afterwards in liability.
    Mr. Friedman. Well, they are responsible.
    Chairman Tauzin. How?
    Mr. Friedman. The Justice Department has made----
    Chairman Tauzin. Is the contractor required to have these 
software programs in to check the activities of their 
employees?
    Mr. Friedman. Again, we are talking about 30 or 40 
different contracts here.
    Chairman Tauzin. I understand.
    Mr. Friedman. You have to look in terms of every contract.
    Chairman Tauzin. We have got 11,700 people holding credit 
cards as contractor employees. That is a lot of people with a 
lot of purchasing power, and all I am asking is: are the 
contractors and their contracts or the department required to 
have some audit control, such as software programs, to track 
the purchases over 47 months?
    Mr. Friedman. Absolutely.
    Chairman Tauzin. They are required?
    Mr. Friedman. Absolutely.
    Chairman Tauzin. Every one.
    Mr. Friedman. Now, I am not here defending the status quo, 
Mr. Tauzin.
    Chairman Tauzin. I do not have you on the docket.
    Mr. Friedman. No, I appreciate that, but what I am saying 
is that the contractors are only allowed to incur and only to 
be reimbursed for allowable costs, and these costs are not 
allowable costs by any stretch of the imagination.
    Chairman Tauzin. But you understand my concern.
    Mr. Friedman. I absolutely do.
    Chairman Tauzin. My concern is that when the number of 
contractor employees far outweighs the number of Federal 
employees who are subject to the ethics law, all kinds of 
different rules that a contract employee might be subject to, I 
think, when the number far exceeds it and six out of seven of 
the completed fraud cases fall into that category, that seems 
to tell me, and I hope it tells you, that it is an area where 
we probably ought to focus on making some reforms and some 
changes in the way these responsibility lines are drawn and how 
these cards are used. It seems to point this committee at least 
in that direction.
    Doesn't it point you in that direction as well?
    Mr. Friedman. Absolutely, but it is not entirely 
inconsistent with the proportion of feds. to the government 
contractors in the Department of Energy. So it is not entirely 
surprising.
    We have about 110,000 committed and management operating 
contractor employees working for the department of energy, 
managing the laboratory systems, the nuclear weapons programs, 
et cetera, and about 14,000 feds.
    Chairman Tauzin. Well, tell us what the difference is in 
terms of the legal responsibilities of the contract employee 
and a Federal employee. Is one subject to more oversight, 
liability, responsibility, ethics laws? Are they both equally 
responsible?
    Mr. Friedman. Well, no. That is a very difficult question 
to answer. I am not a lawyer, in this short period of time.
    Chairman Tauzin. Yes.
    Mr. Friedman. Obviously there are unusual and more 
stringent ethics requirements on Federal employees than on most 
contractor employees.
    Chairman Tauzin. That would be my guess.
    Mr. Friedman. However, it is quite clear that the 
contractors ultimately are responsible for the actions of their 
employees.
    Chairman Tauzin. I am sure that is true, but if the 
responsibilities of the individual employees of the Federal 
Government are much more clearly defined and much more 
stringent when it comes to misusing a Federal credit card, it 
directly involves the Treasury of the United States and the 
taxpayer of this country.
    It seems to me that if contract employees far outnumber the 
Federal employees in the department who are using these cards, 
are not subject to the same or identical or as strict 
obligations, that the structure under which those people use 
those cards ought to be stricter, ought to be more tightly 
controlled, ought to be perhaps more consistently audited, even 
more so than the Federal employee.
    Now, if that is true, does that occur?
    Mr. Friedman. I cannot speak for every one of the 
contracts. I do not know the answer.
    Chairman Tauzin. I know you cannot. That is the problem, 
you see. We can call you up as a Federal employee, as someone 
responsible for the taxpayers of this country, and you can tell 
us everything the department does regarding your employees. But 
you cannot speak for the contractor, and that is our problem, 
you see.
    If the contractor is in control of these employees, and 
these employees, 6 out of 7--that is a huge percentage--are 
responsible for these frauds, do you get my drift?
    It seems to me that the department has a much higher duty, 
responsibility to call these contractors in and set up some new 
procedures for them.
    Mr. Friedman. I absolutely accept that and agree with you.
    Chairman Tauzin. Thank you very much.
    One final thought, Mr. Chairman, that I want to understand. 
How big is the problem? There is credit card fraud obviously in 
every state, every jurisdiction. How big is it within the 
Federal Government?
    Is it so big that we ought to pay an awful lot of attention 
at this committee level in uprooting it and working with you to 
find it and set up better systems?
    Is it normal? Is there such a thing as normal? Is it 
minuscule?
    Characterize it for me.
    Mr. Friedman. I honestly wish I could. I cannot.
    Chairman Tauzin. You cannot?
    Mr. Friedman. No, I cannot.
    Chairman Tauzin. That is frightening.
    Can any one of you? Ms. Rehnquist, Mr. Frazier? Can you 
characterize it for me?
    Mr. Frazier. You know, I would like to think that in the 
scheme of things it is relatively small, but again, as we 
discussed today, it is very difficult to say with----
    Chairman Tauzin. But you are not sure.
    Mr. Frazier. [continuing] certainty as to, you know, the 
magnitude of the problem.
    We know what we know, but what we do not know we should be 
looking very diligently to see how pervasive it is. And I think 
that if there is one message that has been conveyed by the 
subcommittee here today, it is one that I think that the IG 
community surely has embraced, and that is that this is a 
serious issue. It is one that we are going to be looking for.
    I would like to think that in a year or 6 months when we 
come back that we would be in a position to give you some 
greater assurances that in our own individual departments 
things are in better shape. I would like to think that to be 
the case.
    Whether we can ever give you a very definitive number that 
says only 3 percent of the cases or one half of 1 percent, I do 
not think that anybody will ever come up with those numbers.
    Chairman Tauzin. Ms. Rehnquist, obviously coming to our 
committee later on telling us you have got the problem cured 
would be very nice.
    Mr. Frazier. Yes.
    Chairman Tauzin. If you would just come in and tell us how 
big it is would be good for a start. Do you know how big it is?
    Ms. Rehnquist. No. No, I do not.
    Chairman Tauzin. See, that is our concern. We do not even 
know how big and pervasive it is. And that should be a red flag 
for all of you in terms of making sure that we have better 
systems in place at least to identify how big it is.
    If it really is, you know, manageable, that is good news, 
but if it is a big scandal, they have got really huge and 
pervasive misuse of credit cards in our system, as comfortable 
and as useful as they are in Federal purchasing, we might need 
some brand new systems that we may need to think about.
    Thank you very much.
    Mr. Greenwood. The gentleman, for Mr. Tauzin's information, 
early on under questions that I posed each of the witnesses 
testified essentially that we have no way of knowing the 
magnitude of this even to an order of magnitude, no way right 
now of estimating it.
    The Chair thanks the gentleman and recognizes the gentleman 
from Kentucky, Mr. Fletcher, for 10 minutes.
    Mr. Fletcher. Thank you, Mr. Chairman.
    I did not get here quite early enough to hear the 
testimonies, but thank you for appearing here.
    Let me ask some questions probably to all three of you, 
but, Mr. Rehnquist, I will ask you first. You said 1.5 billion 
transactions? You mentioned a number.
    Ms. Rehnquist. 1.5 million we have in our data base.
    Mr. Fletcher. Oh, I thought I heard billion, and I was 
saying how can anyone monitor that. Even 1.5 million is quite a 
number. 1.5 billion kind of seemed insurmountable.
    But let me ask you in light of what the chairman has asked: 
is there any system you have of regular auditing, of sampling? 
Because certainly if sampling randomly a certain number of 
transactions, seeing the percentage of fraud that exists in 
those would give you a very clear picture statistically of the 
degree of fraud and how much money is being wasted or defrauded 
out of the taxpayers, and I wonder if there is any system like 
that.
    Do you plan on putting a system? What system of audits do 
you have? What limits are on certain individuals? Are there any 
limits, say, to contract employees that says there is a certain 
limit on the amount that you can charge over a period of time 
in any single amount?
    How do you follow up those things if there are reports or 
things to insure that they do not occur again and that they are 
thoroughly investigated?
    Ms. Rehnquist. Do you want me to go first?
    Mr. Fletcher. yes, if you do not mind.
    Ms. Rehnquist. I guess in terms of doing a sample the 1.5 
million transactions, I mean, yes, that can be designed, and 
that is probably--I mean that is the next step that we are 
looking at. But what we are trying to do first with those 
transactions is to get ourselves caught up with the U.S. Bank 
data.
    They only keep the data for a couple of years. So we have 
about a year's worth of data. That is where the 1.5 million 
transactions comes in. So from that----
    Mr. Fletcher. I mean, that is an annual transaction count?
    Ms. Rehnquist. That is about a year, from June 2001. So, 
yes, I would say that is probably accurate.
    So from that, I mean, we try to look at the things that you 
look for in the irregular purchases, the vendor or the amount 
of money.
    I think what you are suggesting, as I understand it, would 
be just to do a statistical sample across the entire spectrum 
of transactions and see what you come up with. And I think that 
that would be a way that you might capture some of the data I 
think the chairman was suggesting that, yes, you are not going 
to go to Victoria's Secrets or whatever if you are trying to 
commit fraud, but you are going to be doing something where you 
are under radar. It is over a period of time, and a statistical 
sample might be able to capture that out of all of those 
transactions.
    Another way to look at it, I think, as part of the kind of 
audit and evaluation work we do, is to look at it by component 
and see what practices and procedures are in place for the 
component on the systems control end, on the front end. I think 
that is another way to do it.
    We hope to combine both of those approaches, and I think 
that that is what the IG community is trying to do in addition 
to the investigations, to get kind of the best practices with 
the education and the supervisor accountability up front, and I 
think that that is the best package.
    Because the investigations, the analysis that we do on 
those transactions, that is after the fact. That is not before 
they are approved or anything like that.
    Mr. Fletcher. Anyone else want to comment on that?
    Mr. Frazier. Yes, Mr. Fletcher. Let me make sure that the 
subcommittee understands a number of things. One, whereas the 
IG has a key role here and we surely have beefed that up and we 
are doing a lot, I want to emphasize that the agencies have a 
primary responsibility to be the first lines of defense. The 
first line supervisor should be routinely reviewing these 
things, looking for the same kinds of things.
    They have access to the exact same information that we do, 
and then there are usually regional offices that oversee them, 
that go out and do spot checks. And then there are the people 
who run the program, who get this information.
    So I would like to think that there are numerous people out 
there looking for this fraud. It should not just be the IG. We 
are going to look at a relatively small number of them. We are 
the only ones who can investigate the criminal violation when 
people use these cards for personal use, you know.
    But there are numerous other people in the department who 
have as a requirement to stay on top of this, to review these 
responsibilities. When we do our audit reports and are looking 
for these systemic weaknesses, our criticisms are going to the 
managers of those programs to say why haven't you been 
conducting periodic spot reviews that you suggest. Why haven't 
those been done? Because those are the kinds of things that 
make a big difference.
    So there are numerous people who have responsibilities who 
should be aggressively looking for the kinds of fraud and the 
problems that we have found.
    Mr. Fletcher. But I certainly think if you are going to try 
to quantitate this, you can have the software, and I think it 
is important that you mentioned that you have the software to 
certainly identify the outliers or red flags that would require 
further investigation.
    But I think also because of the fact that there are going 
to be a lot of folks that are very sophisticated operate under 
the radar and under the software deductibility.
    Ms. Rehnquist, I guess I came from the Committee on 
Education, and I was on oversight on there as well. We did a 
lot on the Department of Education, and I think there were, you 
know, Cadillacs and some other things that were purchased, and 
the problem was even when we asked to audit the books and give 
us an auditing, they could not audit.
    Let me say: can the HHS give a thorough audit of their 
books?
    I know that the department mentioned the day after the 
Department of Education news broke that the office role in 
auditing and oversight program, that you were going to make 
some changes, and what has been done since that point? And can 
you really give us a tight audit of those expenditures?
    Ms. Rehnquist. Well, that is when we started reviewing all 
of the transactions, was right after that. And before that 
time, we had prosecuted a couple of cases where we found that 
the behavior was not just as a result of sloppy procedures, but 
people were, you know, buying things for personal use.
    And I think one of them is still in jail. One of them is on 
probation, but that is what kind of kicked it off for us in 
terms of this very aggressive look on a transaction by 
transaction basis. I think that is just a part of it.
    I think that the audit part can be more comprehensive. I 
think that is what the IG community is trying to combine both 
approaches. What we are doing now is very labor intensive I 
will tell you, and it takes a lot of resources from our Office 
of Investigations, and it is something that, you know, we are 
committed to doing because I think that the integrity of this 
program is crucial. But it has got to be, I think, in concert 
with the other kinds of management tools that the department is 
interested in doing. We are trying to centralize the policies 
and even figure out why the policies have become so 
decentralized and pull them back and try and get a unified set 
of guidelines.
    Mr. Fletcher. Thank you.
    Mr. Chairman, I yield back.
    Chairman Tauzin. Would you yield?
    Mr. Fletcher. I would be glad to yield to the Chairman, Mr. 
Tauzin.
    Chairman Tauzin. A question just came up that we did not 
know an answer to. Can an employee or contract employee use one 
of these credit cards and return the products and get a store 
credit?
    Mr. Friedman. We have instances, a slight variation on that 
theme, Mr. Chairman, where employees have turned around and 
sold the items that they have acquired using the government 
credit card.
    Chairman Tauzin. They have acquired thing and sold the 
item.
    Mr. Friedman. Right.
    Chairman Tauzin. I am suggesting can they--we can do that 
today. We can buy something, bring it back, and get a store 
credit. Can they do that and have they done that?
    Mr. Frazier. The answer is yes.
    Chairman Tauzin. And so that has been done.
    Mr. Frazier. Yes.
    Chairman Tauzin. Does the software catch that?
    Mr. Frazier. Not the software that we have been using. It 
would not.
    Chairman Tauzin. Well, thank you.
    Mr. Bass. Would the gentleman from Kentucky yield for one?
    Mr. Fletcher. I would be glad to yield.
    Mr. Bass. Thank you.
    I think Dr. Fletcher asked an interesting question and got 
an interesting and good response from Mr. Frazier. The issue is 
an issue of responsibility here, and ultimately this whole 
this, this whole problem gets down to a very local level.
    Mr. Frazier. It does.
    Mr. Bass. And the people who are in individual offices that 
only have to look at one or two credit card bills or whatever 
they are each month ought to have the same level of 
responsibility for that as do the people making the charges 
because then they do not get anything out of it, and yet they 
have that responsibility.
    I do not expect any comment from you, but it is an 
interesting, systemic answer to the problem we are addressing 
here today, I think.
    I yield back to my friend from Kentucky.
    Mr. Fletcher. Thanks.
    I yield back the remainder of my time.
    Mr. Greenwood. The Chair thanks the gentlemen, and the 
Chair thanks very much the witnesses. This was a very good 
learning session for us, and you are excused.
    The Chair calls forward the second panel, Mr. Mike Sade, 
who is the Director for Acquisition Management and Procurement 
Executive at the Department of Commerce; Mr. Howard Price, 
procurement analyst at the U.S. Department of Commerce; Mr. 
Steven Mournighan, Deputy Director for Procurement and 
Assistance Management at the Department of Energy; and Mr. Marc 
Weisman, Acting Deputy Assistant Secretary for Grants and 
Acquisition Management, the Department of Health and Human 
Services.
    [Pause in proceedings.]
    Mr. Greenwood. The hearing will come to order.
    We thank each of you gentlemen for being with us this 
morning. We look forward to your testimony.
    Before you offer your testimony, the Chair would remind you 
that this is an investigative hearing. We take testimony here 
under oath, and I would ask each of you if you have any 
objections to giving your testimony under oath this morning.
    The Participants. No, sir.
    Mr. Greenwood. The Chair would then advise you pursuant to 
the rules of this committee and the rules of the House of 
Representatives that each of you is entitled to be represented 
by counsel while you testify. Do any of you wish to be 
represented by counsel this morning?
    The Participants. No, sir.
    Mr. Greenwood. Okay. So no such desire. I would ask you to 
each rise and raise your right hand.
    [Witnesses sworn.]
    Mr. Greenwood. Okay. You are under oath, and we will begin 
with you, Mr. Sade. Welcome, and we look forward to your 5 
minutes of testimony.

    TESTIMONY OF MICHAEL S. SADE, DIRECTOR FOR ACQUISITION 
   MANAGEMENT AND PROCUREMENT EXECUTIVE, U.S. DEPARTMENT OF 
COMMERCE; HOWARD G. PRICE, PROCUREMENT ANALYST, U.S. DEPARTMENT 
    OF COMMERCE; STEPHEN D. MOURNIGHAN, DEPUTY DIRECTOR FOR 
   PROCUREMENT AND ASSISTANCE MANAGEMENT, U.S. DEPARTMENT OF 
ENERGY; AND MARC R. WEISMAN, ACTING DEPUTY ASSISTANT SECRETARY 
   FOR GRANTS AND ACQUISITION MANAGEMENT, U.S. DEPARTMENT OF 
                   HEALTH AND HUMAN SERVICES

    Mr. Sade. Thank you, Mr. Chairman, Congressman Deutsch, Mr. 
Tauzin, and members.
    My name is Mike Sade. I am the Procurement Executive at the 
Department of Commerce for which the responsibility of the 
Purchase Card Program falls, along with other acquisition 
reform initiatives.
    Some quick background statistics on purchase card at the 
Commerce Department. Eighty-nine percent of the dollars spent 
at the Department of Commerce through procurement are actually 
spent through the traditional methods, not through the Purchase 
Card Program. Over 91 percent of the transactions, procurement 
transactions, are actually accomplished with the purchase card. 
So it is a very important program to us at the Department of 
Commerce.
    We have over 6,000 purchase cards, as Mr. Frazier 
testified. Our cardholder-to-approving official ratio has 
remained at four to one within the department over the last 2 
years. I think that is something that is critical in terms of 
our oversight.
    Currently Citibank is our purchase card provider through 
the GSA contract. We ordered a 5-year task order back in 1998 
with them.
    In terms of acquisition reform, the purchase card is one of 
the key elements of our overall acquisition reform initiatives 
at the Department of Commerce. Understanding the importance of 
that has been stressed by Johnnie Frazier, our Inspector 
General who has highlighted the implementation of acquisition 
reform at the department as one of the top ten management 
concerns.
    In response to this challenge, we have taken a full risk 
management approach to implementation of all of the reforms, 
including the purchase card.
    Commerce served as one of the pilot agencies back in 1986 
with the Purchase Card Program. We are proud of what was 
accomplished there. The goals of the program remain the same as 
from that pilot. They were to improve mission support, 
streamline the placement of micro purchases and reduce 
administrative costs and paper work, while insuring adherence 
to the rules.
    However, with those flexibilities and cost savings through 
such a program, they also pose great risks. Multiple control 
levers are in place that assist us in the day-to-day management 
of the program within the department and help identify the 
weaknesses.
    Specifically, Commerce has had and continues to evolve its 
department-wide policy for the use of the purchase card. 
Regularly scheduled transaction and management reviews are 
performed at several levels, including at the Commerce Bank 
Card Center, the Bureau Agency Program Coordinators, and the 
approving officials.
    In addition to the ad hoc reporting capabilities through 
the Citibank's electronic card management system, otherwise 
known as Citi Direct, it is now more fully utilized for the 
review since they have added several features to that system.
    The department is moving to an electronic reconciliation 
process through its implementation of the Commerce 
administrative management system. This system is integrated 
with our core financial system. Through that system there are 
several safeguards that have been built in, which are 
improvements over the manual reconciliation process.
    Even with the safeguards, however, Johnnie Frazier, 
Inspector General, spoke to six cases of abuse which occurred 
between 1997 and 2001. However, it is not always as it appears. 
For example, we often track down and look at suspicious 
charges, and they turn out to be legitimate.
    For example, within our National Oceanic and Atmospheric 
Administration, once we uncovered a massage parlor. Having 
looked into it with one of the largest, if not the largest 
contingent of scuba divers in the Federal marketplace, these 
divers after doing dives, et cetera, may require certain 
massage for rehabilitation.
    It is important to note, and I know it was highlighted by 
Mr. Deutsch earlier, that of those cases we know, the six that 
have been closed, the total dollar value of the six cases is 
just in excess of $64,000, compared to the total purchases of 
over half a billion dollars during that same period.
    This is compared to the $22 million in estimated cost 
avoidance or purchasing savings from just 1 year's use of the 
card at the department. The overwhelming majority of the 
cardholders are honest, dedicated public servants doing their 
best to meet mission success.
    In each case of abuse, the impropriety was reported by 
either the supervisor or the approving official. The individual 
was prosecuted to the fullest extent of the law, terminated or 
resigned, and has made full restitution to the government. The 
system did catch them.
    But again, I would highlight as we talked about earlier, it 
is not always clear that we are catching everybody. So what can 
we do about that?
    We have taken actions to strengthen our purchase card 
program at Commerce on several fronts, including improving 
oversight through the department-wide risk management 
initiative, and we are lowering that down to the bureau 
specific oversight plans currently being generated.
    We are improving the cardholder and approving official 
performance by clarifying their roles and responsibilities 
within the department and the program, and requiring training 
and certification from the on-line GSA training system.
    We are also improving the controls over accountable 
property acquired with the purchase card system through several 
systems; reviewing cardholders' limits and their credit limits 
and their monthly limits on an annual basis to determine 
whether they need the credit limits that they do have.
    Finally, we are in the process of revising our contracting 
officer's warrant program, and in conjunction with the reviews 
of the purchase card program, warrants will be required for any 
purchase card holder over $2,500, with a limit over $2,500, and 
those warrants will be linked to the training, the educational 
requirements for the individuals, and experience.
    In conclusion, the Purchase Card Program does streamline 
the procurement process and empowers the front line to fulfill 
program needs in a timely and efficient manner. Key benefits 
from the program include the cost avoided, which I talked about 
earlier, estimated at $22 million in just 1 year.
    The purchase card has been a key contributor to the 
administrator efficiencies within the procurement process. At 
Commerce we measure our cost-to-spend ratio or, that is, the 
cost of procurement operations to spend $1. This metric since 
1997 has gone from 3 cents to spend $1 down to just over 1 cent 
to spend $1. And a lot of that, I believe, has been achieved by 
putting that 91 percent of the transactions onto the purchase 
card.
    That having been said, we do believe that the benefits must 
be balanced by responsible and prudent use of the card. We look 
forward to continuing our work with the Inspector General at 
Commerce and in implementing the recommendations from his 
review and the guidance that the PCIE will be putting out.
    And I cannot close without highlighting the dedication of 
the Commerce Bank Card Center, the agency program coordinators, 
and our policy office within my organization who are 
continually working to improve this system within the 
Department of Commerce.
    I thank you for the opportunity to appear today and look 
forward to your questions.
    [The prepared statement of Michael S. Sade follows:]
   Prepared Statement of Michael S. Sade, Procurement Executive and 
    Director for Acquisition Management, U.S. Department of Commerce
    Good morning Mr. Chairman, Congressman Deutsch, and members of the 
subcommittee. My name is Mike Sade and I serve as the Procurement 
Executive for the Department of Commerce. I appreciate the opportunity 
to appear before you today to discuss the implementation of acquisition 
reform initiatives at Commerce, oversight of and improvements to the 
Purchase Card Program, and the important benefits that result of the 
purchase card program.
    Typically, the Department buys over $1 billion in goods and 
services needed to support its diverse and geographically dispersed 
program operations. The majority of these funds are spent through 
traditional procurement mechanisms rather than purchase cards. Out of 
the $1.2 billion that was spent in FY 2001, $1.1 billion--or 89 percent 
of the total--was awarded through contracts or purchase orders.
Acquisition Reform at Commerce
    The Purchase Card Program is one of many acquisition reforms being 
used to improve the timeliness and quality of the goods and services 
used to help Commerce carry out its mission of promoting job creation 
and improved living standards for all Americans by creating an 
infrastructure that promotes economic growth, technological 
competitiveness, and sustainable development. In addition to the 
Purchase Card Program, reforms being implemented at Commerce include: 
expanded use of task order contracts, enhanced market research prior to 
determining acquisition strategies, improved planning for contract 
administration and monitoring, and expanded use of performance-based 
service contracting.
    While we are actively working to implement the innovative tools 
that are available to simplify and streamline the procurement process, 
we recognize the need for maintaining proper controls and 
accountability in carrying out all aspects of acquisition reform. The 
importance of this effort has been highlighted by our Inspector 
General, who has identified the implementation of acquisition reform 
initiatives as one of the top ten management challenges facing the 
Department.
    To address this challenge, we have adopted a comprehensive approach 
for managing and minimizing the risks involved in carrying out 
acquisition reform.

 We have adopted a balanced scorecard approach to establishing 
        goals for and measuring performance of procurement offices 
        throughout the Department, and incorporated acquisition 
        planning into the budget process.
 We are providing needed tools and training to front line 
        employees to educate them about and equip them to comply with 
        new procedural requirements.
 Additionally, we are conducting focused program reviews on the 
        use of new procurement methods, and developing control levers 
        for large dollar or riskier acquisitions.
    We have completed or are working on focused program reviews in the 
areas of:

 Acquisition Workforce Assessment--Complete
 Government-Wide Acquisition Contract (GWAC) and Other Agency 
        Contract Review--Draft Report Prepared
 Appropriate Delegation of Acquisition Authority--Proposal 
        Under Development
 Interagency Agreements/MOUs--Underway
 Contracting Officers Technical Representative (COTR) Program--
        Targeted for September 2002
 Purchase Card Use and Compliance--Ongoing with Office of 
        Inspector General (OIG)
Purchase Card Program
    Commerce is proud to have served in the government's pilot purchase 
card program initiated in 1986. The goals of the pilot were the same as 
the program that we are currently implementing: (1) improve mission 
support, (2) streamline the placement of micro-purchases, and (3) 
reduce administrative costs and paperwork while ensuring adherence to 
federal acquisition regulations.
    Because of the increased savings and efficiencies achieved during 
the pilot program, use of the purchase card was greatly expanded in 
1988 when the General Services Administration established the first 
government-wide Commercial Purchase Card Program. Five banks provide 
card services to the government under the current master contracts, 
which were awarded by GSA in 1998. Citibank provides card services to 
the Department of Commerce through a five-year task order that was 
issued in November 1998.
    The Department presently has over 6,000 card holders. The 
cardholder-to-approving officials ratio for FY 2001 and FY 2002 is 4:1. 
In FY 2001, the cost avoidance or cost savings through the use of 
Purchase Cards was $22,000,000.
    Recognizing that the flexibilities offered by such a program also 
pose potential risks, the Department has continuously taken steps to: 
identify opportunities to strengthen oversight and management of the 
Purchase Card Program, and implement appropriate corrective action.
    The approach taken in managing this program is a direct outgrowth 
of our risk management strategy. Oversight of the DOC Purchase Card 
Program is a direct result of our overall Risk Management Approach. 
Multiple control levers are in place that assist with the day-to-day 
management of the program and help to identify weaknesses. These 
include Department-wide policies; centralized management and reporting; 
bureau-specific policies, procedures and reviews; regularly scheduled 
transaction reviews; and systematic reconciliation procedures.

 Specifically, the Office of Acquisition Management has, for 
        many years, had an established Department-wide policy for the 
        Purchase Card Program. The Commerce Acquisition Manual clearly 
        establishes the roles and responsibilities of program 
        participants as well as procedures and guidance for program 
        use. This policy document was entirely rewritten in 1999, and 
        was again updated as recently as February of this year. I will 
        discuss the specifics of this update later in my testimony.
 The Commerce Bankcard Center, established in 1987, is 
        primarily responsible for centralized maintenance of 
        Department-wide data and reporting as well as other program 
        support functions.
 The Head of the Contracting Office for each bureau, including 
        the Office of the Secretary, is responsible for management and 
        day-to-day oversight of the Program within their respective 
        unit. They are assisted by individuals who have been designated 
        as the Agency Program Coordinators for their organizations. 
        Responsibilities include developing bureau-specific procedures, 
        managing the program, maintaining proper security, ensuring 
        account reconciliation, conducting scheduled documentation 
        reviews, and establishing accounts with the contractor.
 Regularly scheduled transaction reviews are performed at 
        several levels and include the Commerce Bankcard Center, bureau 
        Agency Program Coordinators, and approving officials.
    At the highest level, the Commerce Bankcard Center performs a daily 
review of questionable Standard Industrial Code transactions. Our 
service provider, Citibank, provides a daily transaction file to the 
Commerce Bankcard Center, which it screens for questionable 
transactions such as those involving airlines, hotels, car rental 
agencies, gas stations, restaurants, jewelry stores, clothing stores, 
catalog merchants, health service providers, and religious and 
political organizations. Any questionable transactions are brought to 
the attention of the Head of Contracting Office for investigation.
    In addition, each bureau has established procedures for scheduled 
transaction reviews by the Agency Program Coordinator, who relies on 
transaction data provided by the Commerce Bankcard Center and reports 
provided by Citibank. The ad hoc reporting capability of Citibank's 
electronic card management system, Citidirect, is also utilized to 
review transactions.
    This brings us to the reconciliation process used by cardholders 
and approving officials to review and certify individual transactions 
on a monthly basis at the grass roots level. The general procedure 
requires that all cardholders maintain a purchase card log (either 
electronic or manual). Upon receipt of the monthly statement, the 
cardholder reviews all information included in the statement for 
accuracy and compares it with the log. Cardholders are required to 
describe each transaction on the statement, indicate the appropriate 
object class and accounting code, dispute any unrecognizable or 
incorrect transactions, and certify the statement for payment.
    The cardholder provides the statement, along with supporting 
documentation, to the approving official for review and approval. Upon 
receipt the approving official reviews the statement, comparing it to 
the Detailed Account Cycle Report that they have received from 
Citibank. It is the approving official's responsibility to resolve any 
outstanding issues, verify the appropriateness of the transactions, and 
certify each statement for payment. All original documentation is 
returned to the cardholder for retention in accordance with the 
Commerce Acquisition Manual, and the approved certified statement is 
forwarded to the payment office for payment. Although the general 
reconciliation procedures are the same across the Department, specific 
methods may vary since some bureaus perform the function manually and 
others electronically.
    Finally, it should be noted that--as part of its system of checks 
and balances--the Department is moving to an all-electronic 
reconciliation process through implementation of the Commerce 
Administrative Management System or CAMS--the Department's core 
financial system. CAMS includes several functional administrative 
systems that provide additional operational capabilities. One of these 
is the Commerce Purchase Card System (CPCS), which provides a 
reconciliation and payment function for purchase cards. Currently, two 
of our bureaus--Census and NOAA--have implemented CPCS. Once CAMS 
implementation is completed, however, CPCS will be used Department-
wide.
    Use of CAMS, and specifically CPCS, adds several safeguards over a 
manual reconciliation process:

--It requires and verifies that all users (cardholders and approving 
        officials) are current active employees within the Department.
--System constraints will not allow a cardholder to be their own 
        approving official.
--Transactions cannot be edited or deleted from CPCS. The transaction 
        data, as received from the bank, remains intact within CPCS.
--CPCS ensures that transactions are entered in and matched to the 
        order log, reconciled by the card holder, and reviewed and 
        approved by the approving official.
--CPCS requires that proper accounting codes are applied to all 
        transactions as part of the reconciliation process.
--Additionally, CPCS generates reports identifying all transactions 
        that have not been reconciled and approved in a timely manner.
    Risk management is a vital component of the DOC Purchase Card 
Program and on-going oversight is a priority. Six cases of abuse, 
during the period of 1997--2001, have been identified. The total dollar 
value of the six cases identified totaled $64,278, or .0116% of the 
total Purchase Card Sales of $555,590,940 from 1997 to 2001. In each 
identified case of abuse, the individual was prosecuted to the full 
extent of the law, terminated or resigned, and full restitution was 
made to the government.
    Continuous program improvement has been the key to success for the 
Purchase Card Program at Commerce. We will continue to work--both with 
the Inspector General and independently--to address areas needing 
improvement, implement corrective actions, and identify opportunities 
to enhance the oversight and management of DOC's Purchase Card Program. 
We are focusing on three major areas: improving cardholder performance, 
updating approving official procedures, and strengthening the control 
of accountable property purchased under the program.
    We have taken action to strengthen the Purchase Card Program on 
several fronts.

 In June 2001, we conducted a conference specifically focused 
        on the use of purchase, travel, and fleet cards. During the 
        conference, several program issues were identified and possible 
        solutions discussed. These include:
    --Improving oversight by implementing a Department-wide risk 
            management initiative,
    --Continuing to improve cardholder and approving official 
            performance by clarifying their roles and responsibilities 
            in the Commerce Acquisition Manual,
    --Improving controls over accountable property acquired with the 
            Purchase Card,
    --Clarifying the responsibilities of approving officials within 
            their designation, and
    --Recommending annual review of cardholders and credit limits
 As mentioned earlier, we revised the Commerce Acquisition 
        Manual this past February to improve cardholder and approving 
        official training standards, requiring all cardholders and 
        approving officials to complete GSA's web-based training prior 
        to participating in the program. In cases where authority will 
        exceed the $2,500 micro-purchase threshold, cardholders and 
        approving officials must also complete a 40-hour course on 
        simplified acquisition procedures. Additionally, refresher 
        training consists of completing a minimum of 24 hours in the 
        area of simplified acquisition once every five years.
 The Department is currently in the process of revising its 
        Contracting Officer Warrant Program to require warrants, based 
        on training, education, and experience, for all purchase card 
        holders with authority over the $2,500 threshold.
 The Risk Management approach to the Purchase Card program has 
        recently been further implemented when two procurement offices 
        within the Department, including NOAA, the Department's largest 
        program participant, realigned to include Purchase Card 
        Oversight Teams that are dedicated to management, oversight, 
        and identifying areas of improvement and solutions.
    We believe that these actions have and will continue to help us in 
maintaining the integrity of this important program. We recognize, 
however, that there are always areas in which improvement is possible. 
These challenges include:

 Replacing multiple financial systems and implementing CPCS 
        Department-wide--The Department is moving forward to implement 
        a single financial system which will play a significant role in 
        reconciliation,
 Ensuring continued compliance with established policy and 
        procedures; and
 Controlling accountable property within the Department.
Conclusion
    The Purchase Card Program has played a key role in the 
implementation of Department of Commerce Acquisition Reform 
Initiatives. It streamlines the procurement process and empowers the 
buyer to fulfill low cost program needs in a timely and efficient 
manner, thereby, supporting the overall mission of the Department. Key 
benefits from this program include the procurement cost avoided. It is 
estimated that--in FY 2001 alone--the use of the purchase card saved 
the Department of Commerce approximately $22 million. Primarily through 
the use of the purchase card, the cost to spend ratio or cost of 
procurement operations cost to spend one dollar for the Department of 
Commerce has gone from $.03 in 1997 to just over $.01 in 2001.
    That having been said, we believe that these benefits must be 
balanced by responsible and prudent use of the purchase card. I hope 
that my description of the oversight mechanisms and management controls 
that are now in place, and the steps that are being taken to strengthen 
our program is helpful in understanding how we are working to achieve 
this balance. We look forward to continuing to work with the Inspector 
General to implement any recommendations that might result from the 
review that is now underway.
    Thank you, Mr. Chairman, for the opportunity to testify before the 
subcommittee. I would be glad to answer any questions at this time.

    Mr. Greenwood. Thank you, Mr. Sade.
    Mr. Price, you are recognized for 5 minutes.

                  TESTIMONY OF HOWARD G. PRICE

    Mr. Price. Thank you.
    Good morning, Mr. Chairman, Ranking Member Deutsch, and 
members of the subcommittee. My name is Howard Price, and I 
currently serve as a procurement analyst at the Department of 
Commerce.
    In August 2000, I was a supervisory contract specialist in 
the Department's Office of Acquisition Management, Office of 
Acquisition Services.
    I appreciate the opportunity to appear before you today as 
my testimony is provided as statements of facts related to a 
case of improper use of the government purchase card.
    In August 2000, my duties included serving as the purchase 
card approving official for my employees. As an approving 
official, I was responsible for insuring the validity and 
allowability of transactions of cardholders for which I was 
responsible.
    I received a written notification from the Department's 
Finance Office stating that they had not received the signed 
monthly purchase card statement of an employee, and at the 
time, this was the procedure that we used.
    This notification concerned me because I had not assigned 
any work to the employee that would require them to use the 
purchase card. I reviewed the statement and observed that all 
charges appeared not to be for official purposes.
    I immediately contacted Mr. Sade, and after consulting with 
him, I took the report to the Department's Inspector General 
for Investigations and discussed how we should handle. I also 
began discussions with our Office of Human Resources about 
their support and guidance related to disciplinary action.
    The next day, OIG investigators interviewed the employee, 
and when interviewed, the employee confessed to having 
knowingly made all of the listed purchases for personal reasons 
and without any legitimate government purpose.
    The same day as the employee's confession to the 
investigators, the employee was placed on administrative leave, 
and because the employee's position of contract specialist 
requires a high level of ethics and integrity, the employee was 
subsequently informed that the government proposed to suspend 
them indefinitely from their position. And in October 2000, the 
employee was suspended, and these actions were deemed 
appropriate in accordance with Federal laws.
    The Office of Inspector General continued with their 
investigation, while the Department continued with the 
administrative process. The Justice Department accepted the 
case for criminal investigation, and during the investigation 
my office provided information about our procedures for using 
the government purchase card and identified the manner that the 
employee deviated from the proper procedure.
    In December 2000, the employee entered a guilty plea in 
U.S. District Court to one count of theft of government 
property, and as part of the plea agreement, the employee 
resigned from Federal service that same day.
    The employee was subsequently sentenced to 6 months 
imprisonment, followed by home detention for 2 further months 
and a 3-year period of supervised probation. Restitution to the 
Department in the amount of over $46,000 was awarded by the 
court.
    This was a troubling and unfortunate situation, and the 
department has implemented additional procedures to detect, 
prevent, and manage government purchase card fraud at the 
department. These procedures are to prevent cardholders from 
circumventing the requirement of approving officials' 
statement, review, and approval, the Office of Secretary's 
purchase card agency program coordinator has instituted a 
tailored reporting procedure. This procedure is supported by 
the purchase card service provider and the Commerce Bank Card 
Center.
    In conjunction with our no activity report, a program was 
implemented for weekly monitoring of the Office of the 
Secretary's cardholder activity through service providers' on-
line system. Suspicious and/or questionable cardholder activity 
is identified by standard industrial classification codes and 
merchant category code identifiers and planners.
    If transactions are identified as suspicious or 
questionable, formal inquiries to the cardholder and approving 
official regarding the transactions are made and resolved 
accordingly.
    Thank you again, Mr. Chairman, for the opportunity to 
testify before this subcommittee, and I am glad to answer any 
questions related to my statement.
    [The prepared statement of Howard G. Price follows:]
   Prepared Statement of Howard G. Price, Procurement Analyst, U.S. 
                         Department of Commerce
    Good morning Mr. Chairman, Ranking Member Deutsch, and members of 
the subcommittee. My name is Howard G. Price and I currently serve as a 
Procurement Analyst with the U. S. Department of Commerce. In August 
2000, I was a Supervisory Contract Specialist in the Department's 
Office of Acquisition Management, Office of Acquisition Services. I 
appreciate the opportunity to appear before you today. My testimony is 
provided as a statement of the facts related to a case of improper use 
of a Government purchase card.
    In August 2000, my duties included serving as a purchase card 
Approving Official for my employees. As an Approving Official, I was 
responsible for ensuring the validity and allowability of transactions 
of cardholders for which I was responsible. I received written 
notification from the Department's finance office stating that they had 
not received the signed monthly purchase card statement of an employee. 
This notification concerned me because I had not assigned any work to 
the employee that would require them to use the purchase card. I 
reviewed the statement and observed that all charges appeared to be not 
for official purchases.
    I immediately contracted Mr. Michael Sade, who at that time was 
acting Director for the Office of Acquisition Management. After 
consultation with Mr. Sade, I took the report to the Department's 
Inspector General for Investigations and discussed how we should 
handle. I also began discussion with our Office of Human Resources 
about their support and guidance related to disciplinary action. The 
next day an OIG investigator interviewed the employee. When 
interviewed, the employee confessed to having knowingly made all the 
listed purchases for personal reasons and without any legitimate 
government purpose. The employee attributed their actions to personal, 
financial and legal problems. The same day as the employee's confession 
to investigators, the employee was placed on administrative leave. 
Because the employee's position of contract specialist requires a high 
level of ethics and integrity, the employee was subsequently informed 
that the Government proposed to suspend them indefinitely from their 
position and in October 2000, the employee was suspended. These actions 
were deemed appropriate in accordance with the provisions of Title 5 of 
the United States Code, Chapter 75, the implementing regulations at 5 
C.F.R. Part 752, and Department Administrative Order 202-751. The 
Department's Offices of General Counsel and Human Resources provided 
advice and counsel throughout this administrative process.
    The Office of Inspector General continued with the investigation 
while the Department continued with the administrative process. The 
Justice Department accepted the case for criminal investigation. During 
the investigation, my office provided information about our procedures 
for using the government purchase card(s) and identified the manner 
that the employee deviated from proper procedure.
    On December 12, 2000, the employee entered a guilty plea in the U. 
S. District Court for the District of Columbia to one count of theft of 
government property. As part of a plea agreement, the employee resigned 
from federal service on December 12, 2000. The employee was 
subsequently sentenced to six months imprisonment, followed by home 
detention for a further two months, and a three-year period of 
supervised probation. Restitution to the Department in the amount of 
$46,939.48 was awarded by the court.
    This was an unfortunate situation and the Department has 
implemented additional procedures to detect, prevent and manage 
Government purchase card fraud at the Department. These procedures are:

1. To prevent cardholders from circumventing the requirement for 
        Approving Official statement review and approval, the Office of 
        the Secretary's (OS) purchase card Agency Program Coordinator 
        (APC) has instituted a tailored reporting procedure. This 
        procedure is supported by the purchase card service provider 
        and the Commerce BankCard Center. All Approving Officials 
        within the OS now receive monthly ``no activity'' reports for 
        each of their cardholders. If Approving Officials do not 
        receive card statements for approval by the 30th of each month, 
        and a ``no activity'' report has not been received, it is the 
        Approving Official's responsibility to investigate further.
2. In conjunction with the ``no activity'' report, a program was 
        implemented for weekly monitoring of OS cardholder activity 
        through service provider's on-line system. Suspicious and/or 
        questionable cardholder activity is identified by Standard 
        Industrial Classification (SIC) and Merchant Category Code 
        (MCC) identifiers and purchasing patterns. If transactions are 
        identified as suspicious or questionable, formal APC inquiries 
        to the cardholder and Approving Official regarding the 
        transactions are made and resolved accordingly.
    Thank you again, Mr. Chairman, for the opportunity to testify 
before the subcommittee. I would be glad to answer any questions you 
may have at this time.

    Mr. Greenwood. We thank you, Mr. Price.
    Mr. Mournighan.

               TESTIMONY OF STEPHEN D. MOURNIGHAN

    Mr. Mournighan. Thank you. Thank you, Mr. Chairman, Ranking 
Member Deutsch, and Mr. Tauzin for inviting me to appear before 
the subcommittee to discuss with you the Purchase Card Program 
of the Department of Energy.
    The department began using the purchase card nearly 14 
years ago, and over that period, we have realized significant 
efficiencies in the way we do business and greater worker 
productivity. In the field, we have been able to reduce our 
procurement staffs by almost one third and at headquarters by 
almost one half.
    During this time, the contractors who manage and operate 
our national laboratories, production facilities, and 
environmental restoration sites have also adopted purchase 
cards as part of their commercial purchasing systems. Some of 
these contractors chose to use Smart Pay Program, but not all.
    The use of purchase cards, like any business system 
involves risk. It is our job to continually seek to minimize 
these risks. We have in the Federal offices central oversight 
of the Purchase Card Program, well trained purchase 
cardholders, detailed policies and procedures with appropriate 
checks and balances in the use of the purchase card, and we 
have strict limitations on cardholders' authorities.
    Contracting officers do review cardholder files, but we 
must be constantly vigilant as to how the program is actually 
operating. Beginning last summer, we initiated an in depth 
assessment of our Purchase Card Program beginning with a 100 
percent review of all purchase cardholder files at 
headquarters. That involves 35 percent of all spending in the 
department's Federal offices.
    I then conducted a survey of all procurement offices to 
ascertain their local policies and procedures vis-a-vis the 
findings of the recently issued General Accounting Office 
report that was issued last summer.
    Further, the Chief Financial Officer has undertaken a 
statistically valid sample of all purchase cardholder files, 
both Federal and contractor, to determine the extent of 
compliance with their purchasing policies and procedures. This 
involves hundreds and hundreds of files with thousands of 
actions being reviewed.
    We have also initiated enhanced training both for approving 
officials, as well as of cardholders. We have changed our 
guidelines to stricter, greater oversight by the contracting 
officers. We have set a strict ratio for approving officials to 
cardholders. Today the average is one to three in the 
Department of Energy.
    We require evidence of receipt of any property purchased be 
provided to the approving official when the bill is submitted 
for approval, and having the local purchase card coordinator--
as I had mentioned there is one at each Federal site--conduct 
monthly what we call a red flag test, of Bank of America report 
looking for suspicious purchases.
    And finally, we require annual reviews of every cardholder 
file with a copy of the review coming to me at headquarters.
    Regarding contractors, we have established criteria for 
evaluating their commercial purchasing systems so that we can 
evaluate those systems to assure that they do have the proper 
checks and balances.
    These are just some of the actions we have taken, but let 
me emphasize that this is a valuable program and that we are 
continually looking for ways to improve the accountability of 
those involved in the program.
    Thank you very much, Mr. Chairman. I would be happy to 
answer any questions.
    [The prepared statement of Stephen D. Mournighan follows:]
Prepared Statement of Stephen D. Mournighan, Deputy Director, Office of 
 Procurement and Assistance Management, Office of Management, Budget, 
   and Evaluation/Chief Financial Officer, U. S. Department of Energy
    My name is Stephen D. Mournighan, and I am the Deputy Director of 
the Office of Procurement and Assistance Management, Office of 
Management, Budget, and Evaluation/Chief Financial Officer, U. S. 
Department of Energy. My organization provides the policies and 
procedures for Department of Energy (DOE) procurement activities, other 
than the National Nuclear Security Administration, and also provides 
the general management framework for this procurement system. I am 
responsible for DOE's purchase card management under the General 
Services Administration's SmartPay program, and for establishing the 
policies and procedures under which purchase cards are used by DOE's 
component organizations.
    The Department of Energy began using purchase cards in 1988 as part 
of an interagency pilot program sponsored by the Office of Management 
and Budget. As a result of that pilot program, which the Department 
deemed successful, a purchase card program, limited to simplified 
acquisitions, was initiated throughout the Federal offices of the 
Department of Energy under a contract with Rocky Mountain Bank. Most 
other Federal agencies did the same. During the mid- 1990's, expanded 
use of purchase cards as a means of improving efficiency, cost 
effectiveness and productivity became a major management initiative of 
the Federal Government. This mirrored what was happening in private 
industry, where the use of purchase cards had become standard 
commercial practice.
    In 1998, the General Services Administration carried out a 
competitive procurement for a Federal Government-wide purchase card 
program, awarding five contracts. The Department of Energy sought 
additional competitive proposals from each of those banks, and, based 
upon the information provided by the offerors, selected the Bank of 
America. In November, 1998, the Department of Energy awarded a task 
order to the Bank of America under the General Services Administration 
(GSA) contract for its purchase card program. Pursuant to applicable 
Federal regulations, the Department of Energy permitted, but did not 
require, its major cost reimbursement contractors to establish a 
purchase card program under the GSA Smart Pay program.
    The Government's use of purchase cards has been deemed a positive 
tool and a boon to productivity. We also believe that the purchase card 
is a useful tool in carrying out the Department's purchasing and 
payment activities. The purchase card is limited, for the most part, to 
simplified acquisitions, which, prior to the advent of the purchase 
card, were paper bound, labor intensive, and, as now, low dollar value 
procurement actions. By using more efficient techniques such as the 
purchase card, the Department of Energy has been able to reduce its 
transactional costs, reduce procurement staffing, and focus its limited 
professional contracting resources on other priorities.
    The Department of Energy has established policies and procedures 
for use of purchase cards, including related management controls, which 
reflect the risks of permitting non-procurement organizations to 
directly acquire low dollar value items to meet their requirements. Our 
guidelines, among other things:

 Define roles and responsibilities of purchase card holders, 
        approving officials, and other officials who take part in the 
        requisition, purchasing and payment activities of the program;
 Place limits concerning what, how, when and where goods and 
        services can be purchased;
 Require that purchase card holders be formally authorized 
        through a special delegation or warrant;
 Require formal, documented training of all card holders and 
        approving officials;
 Require separate approvals for the initiation of a purchase 
        and subsequent approval to confirm receipt;
 Require review and approval of invoices by approving officials 
        prior to forwarding to the payment office, which also reviews 
        the invoices;
 Require each component organization utilizing purchase cards 
        to establish local operating procedures consistent with our 
        guidelines and to have a Purchase Card Program Coordinator to 
        oversee implementation of these local policies and procedures;
 Require periodic reviews of transactions by these Purchase 
        Card Program Coordinators.
    Although applicable procurement regulations do not contain 
requirements for purchase card transactions by Government contractors, 
the Department requires its major cost reimbursement contractors to 
establish formal written policies and procedures for their use, which 
are subject to the review of Federal contracting officers. Contractors 
are also required to ensure the effectiveness of the purchase card 
transactions as well as the allowability of costs incurred under such 
transactions. This is accomplished through audit, as well as initial 
compliance reviews by Federal contracting officers. By terms of these 
contracts, costs incurred by contractors through purchases, including 
those accomplished using purchase cards, are unallowable if the 
acquisitions are not associated with the performance of contract work, 
or are unreasonable in amount or nature.
    The Department takes its fiduciary responsibilities for the proper 
administration of its purchase card program very seriously. It is not 
enough simply to issue policies and procedures. Rather, the Office of 
Management, Budget and Evaluation/Chief Financial Officer has taken a 
proactive approach to addressing potential vulnerabilities in the 
Department's purchase card programs.
    The Department began an assessment of its purchase card program 
last summer coincident with the issuance by the General Accounting 
Office of its review of purchase card activities at the Department of 
Defense and related Congressional hearings. We took seriously the 
concerns raised at the time and have used the program weaknesses 
identified by the General Accounting Office as a foundation for 
assessing our own activities. This subject was identified as a 
potential vulnerability in my office's annual submission under the 
Federal Managers' Financial Integrity Act. At Headquarters, we 
conducted a complete analysis of purchase card holder files to 
determine the extent of compliance with policies and procedures. That 
review found a few purchase card holders splitting orders, which 
involves taking a single order and dividing it into multiple parts in 
order to stay below a single purchase threshold, and their cards were 
canceled and the office's ability to purchase was thus restricted.
    This assessment process has included numerous and varied 
activities. A comprehensive review to encompass all Departmental and 
contractor sites has been initiated under the leadership of the 
Department's Chief Financial Officer.
    In November, 2001, my office undertook a survey of the Department's 
contracting activities to determine the extent of compliance with the 
Department's guidelines. Although the contracting activities reported a 
high degree of compliance, we made changes to the Guidelines to 
specifically state that annual reviews of purchase card holder files 
would be required; rebates should be verified; and training 
requirements for card holders with micro purchase authority clarified. 
We further required that approving officials not be responsible for 
more than five purchase card holders, and that Purchase Card Program 
Coordinators undertake, monthly, a ``red flag'' review of purchases to 
identify seemingly abnormal purchases so that they might be promptly 
reviewed. We also undertook a benchmarking study of other agencies' 
purchase card programs, and where we found areas where we might make 
improvements, we also changed our Guidelines.
    In March, 2002, the Chief Financial Officer initiated a 
comprehensive review of purchase card transactions at both the Federal 
and contractor sites with responsibility for managing and operating our 
facilities. This included the development and deployment of a 
comprehensive review guide that addresses all aspects of the purchase 
card transaction cycle and the development of a statistically valid 
sample of purchase card holder files for Fiscal Year 2001 that will be 
selected for detailed examination. Completion of these reviews will 
provide us the ability to assess the extent of any problems Department-
wide, and to develop appropriate and aggressive corrective action 
plans. To date, reviews at six sites, both Federal and contractor, have 
been completed with reviews at all sites to be completed this summer. 
Based upon the results of these reviews, which are now being prepared, 
the Department will make any further changes to its policies, 
procedures, and program oversight to further minimize risk to the 
taxpayer.
    On April 8, 2002, my office initiated a comprehensive review of all 
purchase card holder delegations to Federal employees, requesting the 
contracting activities to assess usage of each card, and the dollar 
level of purchasing by each card holder, in order to ascertain the 
appropriateness of the delegation, and whether the purchase card holder 
even needs the card.
    We are also moving forward in the area of training by requiring in 
the Guidelines that approving officials be trained in their 
responsibilities, and that refresher training be provided to both 
approving officials and purchase card holders on at least a biannual 
basis. We have identified on line training for approving officials, and 
are working to develop a Department of Energy specific training course 
to be taken by purchase card holders with warrants for purchases 
between $2,500 and $25,000.
    Concerning oversight of the contractors who manage and operate our 
facilities, they are required to have a purchasing system approved by 
the DOE contracting officer. My office is in the process of conducting 
a review of its guides which deal with contractor performance 
measurement and with contract administration in order to make changes 
which will ensure that, in reviewing these purchasing systems, 
appropriate checks and balances are included to preclude losses. We are 
also developing procedural guidelines to require that contractor 
purchase card systems have adequate internal controls and procedures.
    The review conducted by the Office of the Inspector General 
identified seven cases of abuse. These situations, documented in Office 
of Inspector General Letter Report dated February 26, 2002, were 
predominantly associated with contractor employee transactions. Based 
on their assessment of those cases, the Inspector General recommended 
certain ``best practices'' which the Department has adopted for 
inclusion in its policies and procedures. It should be noted that in 
every instance where the individual abused the purchase card, that 
individual has been fired or resigned from his or her job and 
prosecuted under applicable criminal laws. Amounts expended for 
improper purchases have been determined unallowable for reimbursement 
under the contracts and grants in question, and virtually all amounts 
have been recovered. The Department will continue to take this 
aggressive posture. For those cases identified in the Inspector 
General's report, I have asked the contracting activities to provide 
specific information in order that the Department might debar the 
individuals involved.
    Mr. Chairman, I believe that the purchase card program has resulted 
in significant savings to the taxpayer in terms of efficiency of 
operations. I also believe that the Department must be ever vigilant to 
avoid loss of taxpayer money. That is why we have strengthened our 
policies and procedures, why we are conducting a comprehensive review 
of purchase card holder files, why we are enhancing our training, and 
why we are taking appropriate action when misuse is found.

    Mr. Greenwood. Thank you.
    Mr. Weisman, you are recognized for 5 minutes for your 
testimony.

                  TESTIMONY OF MARC R. WEISMAN

    Mr. Weisman. Good morning, Mr. Chairman, members of the 
subcommittee. I appreciate the opportunity----
    Mr. Greenwood. Excuse me. Mr. Mournighan, would you pass 
Mr. Weisman the microphone?
    Mr. Mournighan. Oh, I am sorry.
    Mr. Greenwood. That is fine.
    Mr. Weisman. Good morning, Mr. Chairman and members of the 
subcommittee.
    I appreciate the opportunity to participate in today's 
hearing on usage of the government credit cards for procurement 
purchasing at the Department of Health and Human Services.
    I direct the Office of Grants and Acquisition Management, a 
component of which is the Office of Acquisition Management, 
which office exercises functional management of purchasing 
activities within the department.
    HHS spends about $5.5 billion each fiscal year. In fiscal 
year 2001, HHS obligated approximately $338 million through the 
use of the purchase credit card, a total of 670,449 purchase 
card transactions were accomplished in fiscal 2001. The average 
purchase amount of each transaction was about $500. About 7,500 
purchase cards are currently issued in the department.
    Implementation of the purchase card program at HHS has 
enabled the acquisition work force to absorb a decrease of over 
300 full-time positions since passage of the Acquisition 
Streamlining Act in 1994. Savings from this work force 
reduction and administrative cost savings associated with the 
reduction of paper based transactions is estimated at over $40 
million a year based on current purchase usage volumes.
    In addition, approximately $1 million was rebated to HHS in 
2001.
    In conformance with Secretary Thompson's vision of one 
department, my office and the HHS Inspector General will be 
working together to incorporate common controls over the 
purchase card program throughout HHS. This will be necessary 
because authorization and implementation of the purchase 
program occurred at a time when HHS was undergoing a movement 
toward decentralization of its management controls. The Office 
of Acquisition Management did issue general policy guidance to 
all HHS components when the purchase card program first began 
and also required that each component put its own more detailed 
procedures in place.
    While all of our operating components provide training and 
oversight of the program, their methodologies do differ. The 
Office of Acquisition Management began establishing policies 
for use of the government purchase cards in the late 1980's, 
but from then until the present, our program has focused on six 
key elements: the responsibilities of cardholders; the 
responsibilities of approving officials; training; point of 
sale controls; audits and reviews; and problem notification 
procedures.
    All of our operating divisions require training prior to 
the issuance of a card to a cardholder. Our training was 
developed in house, and our training is delivered by 
procurement personnel in our operating offices. Approving 
officials are also required to take training.
    The transactions of each cardholder are reviewed monthly by 
the approving official. Each operating division conducts a 
manual review of the transactions at a level above the 
approving official, and in some cases this manual review is 
aided by computer software which assists in targeting specific 
reviews by looking at such things as specific vendor names and 
multiple transactions at the same vendor in short timeframes.
    All HHS purchase cards have point of sale electronic 
limitations, such as the blocking of certain merchant 
categories, imposing monthly purchase ceilings, and single 
purchase dollar controls. These controls for merchant 
categories are necessarily broad in many cases. It is also the 
case that while airlines, hotels, and restaurants are generally 
off limits to purchase card transactions, renting a hotel 
conference room for a training class would be a legitimate 
transaction.
    Lifting or changing these controls may only be authorized 
by procurement officials who have cognizance over the cards.
    The Centers for Disease Control, the Indian Health Service, 
the National Institutes of Health, and the Centers for Medicare 
and Medicaid Services manage the Purchase Card Program in these 
operational divisions. Our Program Support Center manages the 
program for all other components of the department.
    At the Centers for Disease Control, the Finance Office, and 
has responsibility for funds of credit cardholders. However, 
the Procurement Office is notified of any problematic findings.
    Procurement officials have the lead at the four other 
components. Most auditing is conducted on a random basis done 
monthly. All components suspend cards when deemed necessary. 
Notification of the Inspector General is not automatic and is a 
judgment call by procurement officials.
    I appreciate the opportunity to participate in efforts to 
bring about improvements to HHS programs and operations. The 
purchase card is an important business tool. Its process 
efficiencies have eliminated millions of transactions 
associated with not only the ordering themselves, but also with 
invoices and payments.
    I concur with our Inspector General and her conclusion that 
HHS currently lacks centralized policy, and I look forward to 
working with the Inspector General and all other appropriate 
parties in continued effort to insure proper productive use of 
this purchasing tool.
    Thank you for the opportunity to appear today. I welcome 
your questions.
    [The prepared statement of Marc R. Weisman follows:]
    Prepared Statement of Marc R. Weisman, Acting Deputy Assistant 
 Secretary, Office of Grants and Acquisition Management, Department of 
                       Health and Human Services
                             introduction:
    Good morning Mr. Chairman and Members of the Subcommittee. I 
appreciate the opportunity to participate in today's hearings on the 
usage of the Government Credit Cards for procurement purchasing at the 
Department of Health and Human Services (HHS). I direct the Office of 
Grants and Acquisition Management a component of which is the Office of 
Acquisition Management, which office exercises functional management of 
purchasing activities within the Department.
                              background:
    HHS procurement spending averages about $5.5 billion dollars each 
fiscal year. In fiscal year 2001, HHS obligated approximately $338 
million dollars or about 8% of our procurement dollars through the use 
of purchase credit cards. A total of 680,449 purchase card transactions 
were accomplished in fiscal 2001. The average dollar amount per 
transaction was $500. About 7,500 purchase cards are currently issued.
    Implementation of the purchase credit card program at HHS has 
enabled the acquisition workforce to absorb a decrease of over 300 full 
time positions since passage of the acquisition streamlining act of 
1994. Saving from this workforce reduction and administrative cost 
saving associated with the reduction of paper-based order transactions, 
invoicing and payments is estimated at over $40 million dollars a year 
based on current purchase usage volumes. In addition, approximately $1 
million dollars was rebated to HHS in fiscal 2001.
                 the hhs purchase credit card program:
    In conformance with Secretary Thompson's vision of ``one 
Department'' my office and the HHS Inspector General will be working 
together to incorporate common controls over the purchase card program 
throughout HHS. This will be necessary because, authorization and 
implementation of the purchase program occurred at a time when HHS was 
undergoing a movement towards de-centralization of its management 
controls. The Office of Acquisition Management did issue general policy 
guidance to all HHS components when the purchase card program first 
began and also required that each component put its own, more detailed 
procedures in place. While all of our operating components provide 
training and oversight of the program, their methodologies differ. It 
is the Office of Acquisition Management which interfaces with the bank 
when our components experience problems and collects management data 
for the whole Department.
    As I mentioned, the Office of Acquisition Management began 
establishing policies for use of government purchase cards and user 
training material in the late 1980s. From then to the present our 
program has focused on six key elements:

 Responsibilities of Card Holders
 Responsibilities of Approving Officials
 Training
 Point-of-Sale Controls
 Audit and Review
 Problem Notification Procedures
    The Office of Acquisition Management has not conducted an 
independent review of the HHS purchase card program since the passage 
of the procurement streamlining legislation in 1994. However, even 
though the 1994 act which created ``micro-purchases'' does not require 
program reviews, the Office of Acquisition Management (OAM) did work 
with the General Accounting Office on its August 1996 report on 
Purchase Card Use. That report established that the purchase program 
has enabled agencies to support missions at reduced costs and time, and 
recommended more effective acquisition government-wide guidance on 
usage of the card. And in1998, OAM assisted the then Inspector General 
in her review of the purchase card program at the Food and Drug 
Administration which report found, ``. . . that FDA followed general 
guideline provided by the General Services Administration for the use 
of credit cards and designated and implemented adequate management 
controls over their use . . .''
                               training:
    All of our operating divisions require training prior to the 
issuance of a card to a card holder. Our training was developed in 
house, but may also include interactive computer training based on a 
CD-ROM developed by a strategic partnership between HHS, the General 
Services Administration, and the Federal Acquisition Institute. 
Instruction is provided by procurement personnel from our operational 
offices. Approving officials are also required to take the training.
                           purchase controls:
    The transactions of each card holder are reviewed monthly by an 
approving official. Each operating division conducts a manual review of 
the transactions at a level above the approving official. In some cases 
this manual review is aided by computer software which assists in 
targeting specific reviews by looking for such things as specific 
vendor names and multiple transactions at the same vendor in short time 
frames.
    All HHS purchase Cards have ``point-of-sale'' electronic 
limitations such as blocking of certain merchant categories; imposing a 
monthly purchase ceiling; and single purchase dollar controls. These 
controls for merchant categories are necessarily broad in many cases. 
It is also the case that, while airlines, hotels and restaurants are 
generally off-limits to purchase card transactions, renting a hotel 
conference room for a training class would be legitimate transaction. 
(While micro-purchase authority is authorized to $2,500 some HHS cards 
have lower single purchase limits.) Lifting or changing these controls 
may only be authorized by the procurement official who has cognizance. 
(US Bank refers to this person as the Agency Program Coordinator or 
APC.)
                    problem notification procedures:
    The Centers for Disease Control, the Indian Health Service, the 
National Institutes of Health, and the Center for Medicare and Medicaid 
Services manage the purchase program in these operational divisions. 
Our program Support Center manages the program for all other components 
of the Department.
    At the CDC the finance office has responsibility for audits of 
cardholder accounts. However, the procurement office is notified of any 
problematic findings. Procurement officials have the lead at the other 
four components. Most auditing is conducted on a random basis and done 
monthly; however, the NIH has a small number of card holders who have 
purchasing authority above the micro-purchase threshold and these cards 
are subject to a 100% monthly review.
    All components suspend cards when deemed necessary. Notification of 
the Inspector General is not now automatic and is a judgement call by 
the procurement official.
                              conclusion:
    In preparing for this testimony, I had occasion to review past 
records on the purchase card program and I would note that the program 
has grown a generation since 1994 when HHS had only 450 cards in use, 
to today's 7,500 card portfolio.
    I appreciate this opportunity to participate in efforts to bring 
about improvements to HHS programs and operations. The purchase card is 
an important business process tool. Its process efficiencies have 
eliminated millions of associated administrative actions which would be 
necessary not only for the issuance of the orders, but also which would 
be needed to process the invoices and payments associated with these 
orders.
    I concur with our Inspector General and her conclusion that HHS 
currently lacks centralized policy, and I look forward to working with 
the Inspector General and all other appropriate parties in continued 
efforts to ensure proper and productive use of this purchasing tool.
    Thank you for the opportunity to appear before you today.
    I welcome your questions.

    Mr. Greenwood. Thank you, Mr. Weisman.
    The Chair recognizes himself for 10 minutes to inquire.
    Let me start with you, Mr. Price, because you are sort of 
the real deal. You are the guy on the front lines there, and 
let's talk about Mr. Nicholas.
    How long did it take from the time that Mr. Nicholas first 
began to defraud the Federal Government until you caught him?
    Mr. Price. If my memory serves me correctly, we first 
received notification about 6 weeks after the first purchase.
    Mr. Greenwood. Okay. So was there a missed opportunity? In 
other words, as I understood, as you told the tale, you were 
notified that he had not filled out some paper work; is that 
right? He had not?
    Mr. Price. The procedure at the time was if there was a 
purchase to be made or at the end of the billing cycle when the 
employee received their statement, the statement and all back-
up documentation was given to in this case myself, the 
approving official. I would verify everything.
    The cardholder statement was sent directly to the employee. 
It was not sent to the approving official concurrently. A month 
later, because the Finance Office reconciles everything, they 
noticed that they had not received the statement from the 
employee, and this is the Commerce procedure.
    And when I saw the report letting me know that the employee 
had not submitted the statement, that is when I knew that we 
had an issue.
    Mr. Greenwood. Details in this case provided by your 
Inspector General indicated that some of--I said Mr. Nicholas. 
It is Ms. Nicholas. I apologize--some of her charges were fees 
for personal services. What personal services?
    Mr. Price. If my memory serves me correctly, on the 
statement there were services related to, I believe, college or 
some sort of graduate classes. Personal services and bear with 
me, sir, I do not understand the term ``personal services'' the 
way you are putting it, but she did purchase different 
services, whether they were from restaurants or from a trip on 
the Odyssey. I mean there were certain services purchased.
    Mr. Greenwood. A trip on the what?
    Mr. Price. The Odyssey. I will explain. The Odyssey is a 
ship that departs down from the DC waterfront, and it is a 
quite an expensive tour that you can sail up and down the 
Potomac River.
    Mr. Greenwood. In your view, where is the breakdown in 
internal controls that allowed her to perpetrate this fraud?
    Mr. Price. I will say that we trusted the employee, but 
from the operational aspect a breakdown was not having, at that 
time, the on-line mechanism that we have now where agency 
purchase card coordinators can monitor the purchases on a 
consistent basis.
    Previously, it was a month or so later before we could find 
out that there was potential for fraud.
    Mr. Greenwood. You indicated in your testimony that one of 
the things that caused the red flag for you was that when you 
were informed that she had not signed or submitted her 
statement, that you had not assigned her to any work where she 
would have needed to make any purchases to begin with.
    Mr. Price. That is correct.
    Mr. Greenwood. So why did she have a purchase card?
    Mr. Price. It was decided as part of the office policy, 
that the purchase card for a procurement professional is just 
one tool. By her being a contract specialist, she may have to 
buy via an actual contract document or she could use the 
purchase card as a tool to acquire these goods and services.
    Moreover, in this particular case, it was the policy based 
on the decision of the Division Director, at that time, to 
provide the cards to the employees.
    Mr. Greenwood. Well, how do you make a determination which 
employees have cards and which do not? I am still a little 
confused because she was not assigned work you said that would 
have required any purchases whatsoever.
    Mr. Price. No, I did not assign her any work that required 
her to use the card. She was assigned work.
    Mr. Greenwood. Right.
    Mr. Price. But in this particular case, she had just 
recently received the card and there was no need for her to use 
the card for any assignment.
    Mr. Greenwood. So the question is why did she need the card 
to begin with.
    Mr. Price. I would defer back to the decision of the 
Division Director at that time.
    Mr. Greenwood. Which is what?
    I am trying to get at was a decision made to just sort of 
carte blanche give cards to a whole group of employees whether 
they had actual immediate need for them or not. Is that what 
happened?
    Mr. Price. I do not remember the actual basis for the 
decision.
    Mr. Greenwood. Well, how does it work now in your shop? Do 
your employees have cards? Are there employees in your shop 
that work for you under your direct supervision who have 
purchase cards and seem to have no need for them?
    Mr. Price. There may be occasions when an employee would 
not have to use the card for a month or longer, but inevitably 
they would use the card.
    Mr. Greenwood. Okay. How quickly were the new procedures 
referenced in your testimony instituted?
    Mr. Price. Based on these new procedures, by going through 
the investigation with the Office of Inspector General, we 
began those procedures, and I believe the IG's case stated 
approximately April of the following year or we notified them 
that these procedures had taken place. I do not remember the 
exact day when the procedures began.
    Mr. Greenwood. Okay. Thank you, Mr. Price.
    Mr. Sade, does each of the DOC field offices have its own 
set of purchase card procedures?
    Mr. Sade. Yes.
    Mr. Greenwood. And who oversees the Purchase Card Program 
at the field offices?
    Mr. Sade. At the field offices what we have is our 
organizational structure, the majority of the field offices are 
overseen by National Oceanic and Atmospheric Administration 
through their Administrative Support Centers. At each of those 
centers we have the head of a Contracting Office, and they are 
responsible through their own purchase card coordinator at that 
location to implement their own internal reviews, et cetera, 
and then that raises up to the bureau level and then to the 
department level.
    And then we have the Bank Card Center that oversees 
everything Mr. Greenwood. Okay. Mr. Mournighan, in your 
testimony you state that no applicable procurement regulations 
contain requirements for purchase card transactions by 
contractors. What exactly does this mean? Do the contractors 
set standards for their employees for card use?
    And if so, on what basis are these standards set?
    Mr. Mournighan. First off, again, as has been pointed out 
by Mr. Tauzin, these are private firms who manage and operate 
our facilities under a contract. They have their own commercial 
systems, Lockheed Martin, Bechtel Corporation, in the way they 
do business.
    We have set standards and criteria for their purchasing 
systems. We review and approve their purchasing systems as they 
are carried out at the department's national laboratories and 
production facilities.
    So there is a review process. We do set standards. We do 
make sure that there are appropriate checks and balances in 
their systems.
    Mr. Greenwood. Well, can you elaborate on what those kinds 
of appropriate checks and balances are?
    Mr. Mournighan. Particularly independence. Okay? That is a 
key factor in any purchasing system. There should be obviously 
more than one person involved in the purchase. If someone wants 
to buy something, it's a requisitioner to buy something. It 
should go through a supervisor. It should go through some type 
of----
    Mr. Greenwood. Let me ask you this question.
    Mr. Mournighan. Yes.
    Mr. Greenwood. In the Department of Energy, looking at all 
of its contractors----
    Mr. Mournighan. Correct.
    Mr. Greenwood. [continuing] is every purchase made with a 
purchase card subject to a review by a second person?
    Mr. Mournighan. That I cannot guarantee. I cannot guarantee 
that, no.
    Mr. Greenwood. Okay. So then I have to back up. Let's go 
back up to the previous question. You said that is an important 
element.
    Mr. Mournighan. That is an important aspect of every 
purchasing system. That is correct, sir.
    Mr. Greenwood. So why does the Department of Energy not 
have in place a requirement for its contractors that says if 
your employees are not employees of the Federal Government are 
going to have a purchase card by which they can directly 
obligate the United States Treasury, that every single purchase 
and every single instance must be checked off by a second 
employee?
    Mr. Mournighan. We certainly can do that, sir. One of the 
things we have to recognize is that we are dealing with private 
companies, and they have certain procedures.
    Mr. Greenwood. Well, wait a minute, wait a minute, wait a 
minute. They are private companies.
    Mr. Mournighan. Right.
    Mr. Greenwood. Who may or may not have the privilege of 
doing business with the United States of America.
    Mr. Mournighan. That's correct.
    Mr. Greenwood. And so we are purchasing their services.
    Mr. Mournighan. Correct.
    Mr. Greenwood. So what is the hard part in saying to them--
--
    Mr. Mournighan. None. No hard part whatsoever.
    Mr. Greenwood. Then I do not understand your previous 
statement in which you said, well, you have to remember these 
are private companies.
    Mr. Mournighan. Well, again, the point I was trying to make 
is that they do not have to follow the Federal Acquisition 
Regulations or the Federal regulations. So they do have certain 
flexibilities.
    My point is in making the statement whereas the Department 
of Energy----
    Mr. Greenwood. Let's make this a little bit more simple.
    Mr. Mournighan. Okay.
    Mr. Greenwood. I want the Department of Energy to have in 
place a policy for its contractors that says, ``We will 
reimburse you for zero purchase card purchases that are not 
approved by a second employee in your firm.''
    Mr. Mournighan. That is fine.
    Mr. Greenwood. Is there any reason why we cannot do that?
    Mr. Mournighan. None whatsoever.
    Mr. Greenwood. But we have not done that.
    Mr. Mournighan. Let's put it this way. We have not made 
that specific requirement. That is correct.
    Mr. Greenwood. Why not?
    Mr. Mournighan. Because we looked at the criteria that we 
have used in the past and continue to use, which is 
appropriateness of the checks and balances at various levels.
    Mr. Greenwood. But you just told me, and I am not trying to 
be difficult with you.
    Mr. Mournighan. Okay.
    Mr. Greenwood. I am just trying to understand this.
    Mr. Mournighan. Yes.
    Mr. Greenwood. You told me that one of the most important 
kinds of standards one could have, which makes plenty of sense 
to me, is two people have to sign off on a procurement.
    Mr. Mournighan. That is correct.
    Mr. Greenwood. And you either have to have two cheaters, 
which is always more difficult to get, than one.
    Mr. Mournighan. Right, right.
    Mr. Greenwood. So I ask you: could you require that of all 
contractors?
    Mr. Mournighan. Yes, sir, yes.
    Mr. Greenwood. And you said you could.
    Mr. Mournighan. Yes.
    Mr. Greenwood. I said do you, and you said no.
    Mr. Mournighan. The answer is no.
    Mr. Greenwood. I asked you why not, and I am having a hard 
time understanding the why not, why it is that the first thing 
you would do would not be the one you have already identified.
    Mr. Mournighan. Mr. Chairman, we certainly can do that, and 
we will do that.
    Mr. Greenwood. We are going to hold you to that.
    Mr. Mournighan. That is fine.
    Mr. Greenwood. We are going to be in touch with you in the 
future.
    Mr. Mournighan. That is fine.
    Mr. Greenwood. And we are going to see the speed at which 
you accomplish that.
    Thank you.
    The Chair recognizes the gentleman from Florida, Mr. 
Deutsch.
    Mr. Deutsch. Thank you.
    Mr. Sade, would you explain the warrant program?
    Mr. Sade. Our warrant program?
    Mr. Deutsch. Yes.
    Mr. Sade. Yes, sir. That is a program that is tied to our 
career management program in which we require certain training 
levels and educational levels for various levels of people 
within the procurement arena that would then get them a certain 
level warrant. That gives them the ability to sign or obligate 
the government.
    Mr. Deutsch. Mr. Mournighan, can you explain why the 
Department of Energy has no idea how many purchase credit cards 
it has issued to its contractors?
    Mr. Mournighan. First off, the Department of Energy does 
not issue the credit cards to the contractors. The contractor 
is authorized to use a purchase card system. He can use either 
the Smart Pay Program or they can use their own commercial 
system. It is a contract between the contractor, for instance 
Lockheed Martin, and a bank.
    The government, the Department of Energy does not issue 
those credit cards.
    Mr. Deutsch. Okay. And so if they are getting them on their 
own through the bank----
    Mr. Mournighan. Correct.
    Mr. Deutsch. [continuing] the Federal Government is still 
ultimately responsible, and in fact, they are getting them on 
the credit of the United States.
    Mr. Mournighan. Well, let's put it this way. Not again to 
be pejorative, but the contractor is required to carry out the 
terms and conditions of the contract and the work at the site. 
If the contractor incurs costs which are appropriate and 
allowable under the contract, he is reimbursed by the 
government, by the Department of Energy.
    If the contractor, and the Inspector General found seven 
cases of misuse, you do not pay. You simply disallow the cost, 
and the money comes out of the pocket of the contractor.
    Mr. Deutsch. So, again, I mean, the bottom line is you do 
not have any idea how many cards it is?
    Mr. Mournighan. I do not have any idea about the number of 
contractor cards issued by other than the Bank of America under 
the Smart Pay Program. That is correct. In other words, under 
the Smart Pay Program, if our contractors have entered into a 
contract with Bank of America under the Smart Pay Program, we 
know from the Bank of America how many cards have been issued, 
but if they are under their own private contracts with another 
bank, no, I do not.
    Mr. Deutsch. I mean, are you happy with that? Do you think 
that needs to change?
    Mr. Mournighan. I think the issue of numbers does not need 
to change. I think that what we have to do is get better 
oversight of the expenditures of the Purchase Card Program. I 
think one of the things that Mr. Friedman sold himself short on 
a little bit is that he does have an audit program. These 
programs are audited by his office, and actually it is called 
the Cooperative Audit Program.
    Mr. Deutsch. Can you be any more specific about how you are 
going to get control over this issue?
    Mr. Mournighan. Again, we look at the contractor who is 
operating a commercial system. He issues his cards based upon 
what he feels are the needs of the work, the site.
    I will give you a couple of examples. We have the Lawrence 
Livermore National Laboratory. It is a site confined to one 
mile square. It is in a suburban area. There are 7,000 
employees. They have issued about 300 cards.
    We have another site, the Nevada Test Site. The Nevada Test 
Site is the size of the State of Rhode Island. That contractor 
has made a judgment that his people operating in very disparate 
or dispersed areas, that it does not make sense for them at all 
times when they need something to come back to the headquarters 
site. So he perhaps has issued more cards than average.
    But right now as far as we would look to, you know, our 
oversight of that contractor's purchasing system, whether he 
has issued cards, in our opinion, which are reasonable and fit 
the needs of his organization in accomplishing the mission of 
that contract.
    Mr. Deutsch. For the last decade DOE has been attempting to 
decentralized and move more and more authority to the field 
offices. Are these cards approved at the field office level?
    Mr. Mournighan. First off, let's differentiate between the 
Federal offices and the contractors. At each Federal office, 
there is a Federal purchase card coordinator. That person 
reviews--if someone wants a purchase card, they make an 
application for the need and the amount and any other 
authority, and that person, by the way, works for the 
procurement office; so the contracting officer is reviewing 
this.
    Mr. Deutsch. Is it done the same at all of the field 
offices?
    Mr. Mournighan. Yes, for the most part. Let's put it this 
way. Yes, we have procedures in place, and the field offices 
have told me that they are following those procedures. So for 
the Federal offices, the answer is yes. That is the process.
    Mr. Deutsch. Do we know how many cards have been approved 
at different field offices?
    Mr. Mournighan. Yes, I do. For the Federal offices, I can 
give you a computer run if you wish. The department has within 
its Federal staff about 2,000 purchase cards, a little over 
2,000 purchase cards.
    Mr. Deutsch. The fraud that the DOE Inspector General has 
found has generally been involved with contractors.
    Mr. Mournighan. Right.
    Mr. Deutsch. What are you going about this or specifically 
with the cards, or is there anything that you are doing about 
this?
    Mr. Mournighan. Well, again, what we do do is we have set 
specific criteria for measuring or analyzing their purchasing 
systems. We go in at least every 3 years and review the 
purchasing systems and see are they following their own 
policies and procedures to have the appropriate checks and 
balances.
    If they are not, then what we do is we demand changes to 
those systems. If any misuse--and I want to emphasize this--if 
there is any misuse, the government does not pay. We disallow 
the cost.
    Mr. Greenwood. Will the gentleman yield?
    Mr. Deutsch. I will.
    Mr. Greenwood. That is an important statement you have 
made.
    Mr. Mournighan. Yes.
    Mr. Greenwood. If there is any misuse that is detected.
    Mr. Mournighan. That is correct.
    Mr. Greenwood. The government does not pay.
    Mr. Mournighan. That is correct.
    Mr. Greenwood. There could be misuse by the gazillions that 
the government would pay if you do not have an adequate system 
to notice it.
    Mr. Mournighan. We believe we have an adequate system of 
oversight, and the Inspector General has an adequate system of 
audit.
    Mr. Deutsch. Ms. Styles of OMB submitted testimony in which 
she says she is going to check the Federal Acquisition 
Regulations to see if the issuing of the cards to contractors 
is legal. Have you checked these regulations to see if these 
cards are appropriately issued through the contractors?
    Mr. Mournighan. I think, and I can just breeze through Ms. 
Styles' testimony, is that it certainly is legal for the 
contractors. We have authorized the contractors to use the 
Smart Pay system. Some chose to; some did not. Issuing the 
cards is a responsibility, and under the terms and conditions 
of the contract between the contractor, Lockheed Martin and 
Bechtel, and the Bank of America.
    Mr. Deutsch. Let me just follow up on that. You said you 
looked at Ms. Styles' testimony?
    Mr. Mournighan. Just briefly.
    Mr. Deutsch. I guess my question was more specific. She 
raises some legal issues. Have your, you know, General Counsel 
looked at this?
    Because, again, apparently at least you are somewhat unique 
in agencies in issuing cards to the contractors.
    Mr. Mournighan. I am sure we are. Right, correct. I can 
have our General Counsel look at it again, but I believe that 
there are standard terms and conditions in our contracts which 
authorize the contractor to use the Federal supply schedule.
    Mr. Deutsch. Again, in terms of the contractors, I think we 
have gotten enough testimony for me to understand that the 
contractors are using their own internal systems.
    Mr. Mournighan. That is correct.
    Mr. Deutsch. Is there any reason that they should have an 
identical policy to that of the department in terms of the use 
of these cards?
    Mr. Mournighan. I think what you would find, sir, is that 
that would involve more inefficiency.
    An identical system to the way that the Federal Government 
does? I think we would really have to study that.
    Mr. Deutsch. Well, what about in sort of just an identical 
procedure, identical policy in terms of who has cards, that 
type of thing, within parameters?
    Mr. Mournighan. Well, again, I think we have the parameters 
in place as to what is the appropriate checks and balances in 
the system.
    Mr. Deutsch. I just want to be clear on this, too, that the 
changes that DOE guidelines that were made in the last 6 
months, they do not apply to the contractor?
    Mr. Mournighan. That is correct. Those are Federal 
employees.
    Mr. Deutsch. Thank you.
    Mr. Greenwood. Let me just ask Mr. Mournighan.
    Mr. Mournighan. Sure.
    Mr. Greenwood. If an employee of a contractor for DOE has a 
credit card and the employee needs a digital camera to do his 
job----
    Mr. Mournighan. Correct.
    Mr. Greenwood. [continuing] an employee takes the credit 
card, and he goes out and he buys two digital cameras, and he 
uses one for work and gives the other one to his wife for 
Christmas. Okay?
    Mr. Mournighan. Okay.
    Mr. Greenwood. Tell me how your system would--and that 
invoice, the bill, the bill comes into DOE and gets paid. How 
do you catch that?
    Mr. Mournighan. Okay. First off, we are talking about a 
contractor employee.
    Mr. Greenwood. Yes.
    Mr. Mournighan. So the bill does not come to DOE. Okay?
    Mr. Greenwood. Right.
    Mr. Mournighan. Now, take the example of one of the 
Inspector General's cases in Idaho. In that particular case, 
they have an approving official. The person who wants to buy 
something goes and gets his supervisor's approval.
    Mr. Greenwood. The supervisor is a contractor employee?
    Mr. Mournighan. These are all contractor employees.
    Okay. Gets the supervisor to approve it. The authorization 
is then given, and the purchase cardholder then goes and buys 
it.
    Mr. Greenwood. So that is the circumstance where, as you 
and I talked about earlier, there is a second person----
    Mr. Mournighan. Two, that is correct. And in Idaho that is 
the case.
    Mr. Greenwood. But in the case where there is no second 
person, what happens?
    Mr. Mournighan. In the case where there would not be a 
second person, the cardholder would be responsible for bringing 
the property to the site and reconciling his bill with a 
receiving report when he sent the bill to his supervisor for 
approval.
    Mr. Greenwood. All right. The Chair recognizes the 
gentleman from North Carolina for 10 minutes to inquire.
    Mr. Burr. Well, I have got to say, Mr. Chairman, that I am 
somewhat amazed. This whole thing just absolutely mystifies me. 
I will try to ask some pertinent questions, but let me just 
tell the four of you the little bit that I have read and the 
little bit that I have heard, and I apologize for my tardiness 
because there is more than one thing going on today, but the 
difficulty at explaining the process that we have might be an 
indication of just how screwed up it is.
    If it that hard to explain, how can we expect somebody to 
live by it, and if you do have people who are trying to 
actually have personal gain out of the access to these cards, 
they must have thought it was Christmas every day when they saw 
how difficult this was because it probably did not take long to 
figure out how to, in fact, produce the right type of 
documentation based upon the scenario they were in.
    Let me ask you, Mr. Mournighan. Some of the data received 
by this committee last year revealed some rather alarming 
numbers from DOE field offices. For instance, at the Kaiser 
Hill facility, all 149 cardholders have a monthly purchase 
limit of $500,000.
    Can you help me to understand this?
    Mr. Mournighan. One, I doubt that is the case. Okay?
    Mr. Burr. I trust that you doubt it is the case, but since 
you do not know and I have reason to believe it is true, I will 
assume that I am correct and you have not checked.
    Mr. Mournighan. Let's put it this way. Kaiser Hill operates 
under the Smart Pay Program. I have reviewed all of the 
purchase cards authorities, and I did not see anyone at Raiser 
Hill--now, of course, I may have missed it--but I did not see 
anyone with a $500,000 authority.
    Mr. Burr. Clearly, there is a track record that some things 
have been missed. That is the purpose of this hearing.
    Mr. Mournighan. Correct.
    Mr. Burr. So we will go back through out data. If I find 
those 149 cardholders, I will certainly make sure that the 
documentation that we have is supplied to the Department of 
Energy so they can look at the Department of Energy's 
contractor, who in fact has these cards.
    Mr. Mournighan. Well, I can assure you that I am going to 
go back right know and look at these.
    Mr. Burr. Let me ask you. There are 301 cardholders at 
headquarters at least at the time of the document request we 
made, July 2001, and they had monthly limits of $999,000. Now, 
those are DOE documents received here July 2001.
    And I guess I would ask you: why is it necessary that this 
many people have a limit this excessive?
    Mr. Mournighan. The $999,000 is the total credit limit that 
the cardholder would have.
    Mr. Burr. Okay.
    Mr. Mournighan. They are authorized to buy--their 
individual credit limits depend upon usually the $2,500 or 
less.
    Mr. Burr. Let me make sure I understand you correctly. 
There are 301 cardholders within the DOE headquarters who have 
a limit that is $1 short of a million dollars, and they cannot 
exceed that on a monthly basis.
    Mr. Mournighan. Okay. The lady in back of me is the 
purchase coordinator at headquarters, and she tells me that 
that is the overall agency limit.
    Mr. Burr. Per card or as a combination of all 301 cards?
    Mr. Mournighan. The answer is that that is the monthly 
credit limit of the cardholder. That is correct.
    Mr. Burr. Of the cardholder.
    Mr. Mournighan. Correct.
    Mr. Burr. Singular.
    Mr. Mournighan. Right.
    Mr. Burr. So there are 301 cardholders at DOE who have the 
capabilities to all charge $1 shy of a million dollars per 
month, and in a year's time that's $12 shy of $12 million per 
cardholder times 301.
    Mr. Mournighan. Well----
    Mr. Burr. Now, explain to me the answer to my question. 
What would necessitate 301 people at the Department of Energy 
to have a card, No. 1, which I think would be my first 
question; and, two, to have a $1 million credit limit per 
month?
    Mr. Mournighan. One, the answer is that they should not. 
Okay?
    Mr. Burr. That they what?
    Mr. Mournighan. They should not.
    Mr. Burr. Okay.
    Mr. Mournighan. And I can tell you that on April 8 I 
started a review of every purchase card in the Department of 
Energy held by Federal employees to look at (a) do they need 
the card; (b) what are their credit limits.
    Now, to pick up on your point, yes, they have authority up 
to $999,000, but no one has the authority--excuse me. I want to 
correct myself. There are certain people at headquarters who do 
have authority over $25,000. Most have authority less than 
that.
    In each----
    Mr. Burr. But authority and credit limit are two different 
things, correct?
    Mr. Mournighan. Excuse me?
    Mr. Burr. Authority and credit limit are two different 
things, correct?
    Mr. Mournighan. Authority, well, they have a single 
purchase limit of no more than $25,000, with certain 
exceptions.
    Mr. Burr. There was nobody that our committee found to have 
used the card fraudulently that had the authority to use it 
fraudulently; is that correct?
    Nobody had the authority to make personal purchases on 
their credit card, correct?
    Mr. Mournighan. Certainly not.
    Mr. Burr. So if somebody does not have the authority to 
exceed $25,000, that does not mean that they cannot exceed 
$25,000. The only thing that would trigger a denial of their 
purchase is, in fact, if they reached their credit limit, which 
is $1 shy of a million dollars per month.
    Mr. Mournighan. Well, no. At headquarters we have very 
strict guidelines on purchasing. As I was talking to the 
Chairman, every time someone wants to buy something, one, they 
have to get their supervisor's approval; two, they have to get 
a budget analyst's approval that the funds are available; 
three, it goes on to the purchase cardholder; four, when the 
good is received, it has to come to one central place in 
headquarters, at the loading dock in the Forestal Building or 
the loading dock out in Germantown. Okay?
    The property people when you make the purchase, the 
property people are notified to expect a delivery. When that 
delivery comes in, the item is logged into the property system. 
It is tagged, and then it is delivered.
    So there are at least five people involved in every 
purchase activity, four or five people. So the answer to the 
question is could someone theoretically create a fraudulent 
case? Yes, but at headquarters we think it is really difficult.
    Mr. Burr. I wish I held your level of confidence. 
Unfortunately I just do not.
    Let me ask all of you. Do you review any of the IG's 
audits, his inspections or investigation reports?
    If you do not, what procurement officials do? Let me start 
at the end of the table.
    Mr. Sade. Sure. I do review them as they come in. As Mr. 
Frazier indicated earlier, he does share those reports, what is 
final with our organization as well as the organization that he 
reviewed.
    Those reports go from me. They also are shared with our 
Bank Card Center. They are shared with the policy people that 
review and establish and revise the policy within our 
department. We are always looking for mechanisms, and those 
that usually point the way to evolve the program to insure that 
we can close some of the holes in the program.
    Mr. Burr. Mr. Price.
    Mr. Price. Yes, I review them, and as Mr. Sade mentioned, 
as an employee of Commerce, we do review everything. Each time 
the IG comes out with a report related to this, we will make 
necessary corrections.
    The incident that triggered this did come from us doing a 
review of the processes and changing our processes to reduce 
the risk of this happening again.
    Mr. Burr. Mr. Mournighan.
    Mr. Mournighan. The answer to the question is, yes, we do 
review those reports. For the most part, if you noted, they are 
dealing with the contractors, and what we have done, I have 
done is told the contracting officers that the dollar amounts 
that are not recovered in restitution by the contractor, the 
costs are disallowed. We do not pay them. We do review them, 
and we do take action on them.
    Mr. Burr. You know, this is the skeptic side of me. I 
cannot imagine a contractor caring about a credit card because 
we are giving them a blank check anyway. So it really is 
difficult for me to understand why they would scam us on a 
credit card when they just go through the normal means and we 
pay whatever, in fact, they put down on the billing.
    I'm going to skip you, Mr. Weisman, real quick because I 
know my time is out, and I want to ask Commerce and Energy: do 
you have individuals who have multiple credit cards? Could any 
of the examples that I have presented to you where I said to 
Mr. Mournighan that within the Department of Energy at 
headquarters, the 301 individuals, they have a credit limit of 
$1 less than a million dollars on a monthly basis.
    Is it remotely possible that any of these individuals could 
have more than one card?
    Mr. Sade. At Commerce there was a practice at one time, 
particularly when our procurement folks were serving other 
bureaus that may have had multiple pain offices and so they 
would have a credit card for the bureaus that were serviced by 
each of those payment offices.
    That has been reduced, and we no longer have that. I cannot 
guarantee today because I have not looked at the records 
whether we have any existing cardholders with multiple cards.
    Mr. Burr. I think it is a vitally important question that I 
ask, and I would urge you to go back.
    Mr. Mournighan. We will go back and look at that 
immediately.
    Mr. Burr. Thank you.
    Mr. Mournighan. I think at the Federal contractor level we 
are very sure that there are no people with two cards; that the 
issuance of cards is a very strict procedure. People have to 
make an application. They have to show that they have been 
trained. They have to have their supervisor's approval that 
there is a need for the card.
    And based upon that, we believe that for the Federal 
offices, we will not be issuing two cards to anyone.
    Mr. Burr. I do not have the documentation here, but if our 
staff has it, I will certainly try to provide it for both 
agencies as it relates to the multiple credit card possession 
that individuals have. I will assure you that we have 
information that suggests not only are there, that it is not 
singular from the standpoint of those that possess it, and in 
some cases they possess up to 12 credit cards, not two, 12.
    And I would tell you that for that to get overlooked as we 
review credit card abuses and purchase abuses it is difficult 
for me to believe. I would share with you, and I would also 
provide for the record, Mr. Chairman, and I would ask unanimous 
consent that this be part of the record if it is not already, 
the report that we have on Kaiser Hill, Rocky Flats, Colorado, 
where I have no counted them, but I feel confident that it 
counts up to 149 that I talked about with every individual's 
name, their possession, their section of employment, the single 
purchase limit of their credit card, and this document would 
show that every card listed in their possession has a cycle 
limit of $500,000.
    Mr. Mournighan. When you say a cycle limit, do you mean a 
monthly expenditure limit?
    Mr. Burr. I would say a monthly limit, yes. I am sorry.
    Mr. Mournighan. Not a single purchase limit.
    Mr. Burr. The single purchase limits are $10,000 with 
several exceptions, one being a $200,000 single purchase limit, 
others in the 25 range.
    Mr. Mournighan. Correct.
    Mr. Burr. But all monthly limits are $500,000 of all 149 
individuals that I would assume are contractors.
    Mr. Mournighan. Yes, contract employees, correct.
    Mr. Greenwood. Without objection, the document will be 
incorporated into the record.
    The time of the gentleman has expired.
    Mr. Burr. And I thank the gentleman for the time and yield 
back.
    Mr. Greenwood. The Chair thanks the gentleman. The Chair 
thanks the panel for your testimony and your assistance today, 
and you are excused with apologies to the next panel. We are 
going to have to take approximately a 30 minute recess prior to 
the testimony from the third panel.
    So the committee will recess until 10 minutes after on.
    [Brief recess.]
    Mr. Greenwood. Good afternoon. I apologize for the delay. 
We had some votes on the floor of the house. So that added to 
the extension. I hope that you have had time to grab a bite to 
eat.
    We welcome the third and final panel, and they are the 
Honorable Linda Calbom, Director of Financial Management and 
Insurance, U.S. General Accounting Office; Ms. Patricia Mead, 
Acting Assistant Commissioner, Office of Acquisition, U.S. 
General Services Administration; and the Honorable Angela B. 
Styles, Administrator for Federal Procurement Policy, U.S. 
Office of Management and Budget.
    Welcome to each of you. As you heard me say to the other 
witnesses, this is an investigative hearing, and it is our 
custom to take testimony under oath. Do any of you object to 
giving your testimony under oath?
    The Participants. No.
    Mr. Greenwood. Under the rules of the committee and the 
House, you are entitled to be represented by counsel. Do any of 
you wish to be represented by counsel as you give your 
testimony?
    The Participants. No.
    Mr. Greenwood. Okay. So if you will stand and raise your 
right hand.
    [Witnesses sworn.]
    Mr. Greenwood. Okay. Thank you. You are under oath.
    And, Ms. Calbom, is that how I pronounce it?
    Ms. Calbom. Yes.
    Mr. Greenwood. Thank you. You are recognized to give your 
testimony.

 TESTIMONY OF LINDA M. CALBOM, DIRECTOR, FINANCIAL MANAGEMENT 
 AND INSURANCE, U.S. GENERAL ACCOUNTING OFFICE; PATRICIA MEAD, 
  ACTING ASSISTANT COMMISSIONER, OFFICE OF ACQUISITION, U.S. 
  GENERAL SERVICES ADMINISTRATION; AND HON. ANGELA B. STYLES, 
 ADMINISTRATOR FOR FEDERAL PROCUREMENT POLICY, U.S. OFFICE OF 
                     MANAGEMENT AND BUDGET

    Ms. Calbom. Thank you.
    Mr. Chairman, I am pleased to be here today to discuss 
GAO's reviews of the government Purchase Card Programs at two 
Federal agencies and how the control witnesses we identified 
made these agencies vulnerable to improper or questionable 
purchases.
    As you have heard today, agencies have successfully used 
purchase cards to save time and money by eliminating much of 
the bureaucracy and paper work long associated with making 
small purchases. However, given the nature, scale, and 
increasing use of purchase cards, it is important that agencies 
have adequate controls in place to insure that the cards are 
not misused.
    We have issued several reports and testimonies on our 
purchase card work at two Navy units and the Department of 
Education that identified internal control weaknesses and 
resulting fraudulent, improper, abusive and questionable 
purchases.
    In addition, a number of Inspectors General, including 
those we heard from in the first panel, have identified and 
reported on control weaknesses and improper purchases in the 
Purchase Card Programs at their agencies.
    Today I will also discuss some of the findings from the 
Departments of Agriculture, Interior, and Transportation IG 
reviews.
    My testimony today provides a summary discussion of the 
control weaknesses we and these IGs found in agency Purchase 
Card Programs, as well as examples of the improper purchases 
and lost assets that resulted from these weaknesses. I would 
now like to just provide a few brief highlights from my written 
statement, and I request that it be entered in its entirety in 
the record.
    Mr. Greenwood. It will be.
    Ms. Calbom. Thank you.
    First, just a few comments on control weaknesses. There are 
three basic weaknesses in the purchase card programs that we 
and the IGs reviewed. First of all, the review and approval 
process, and this is really the single most important control 
for detecting improper purchases and preventing future abuse. 
Yet across the board, we and IGs found that this key function 
was not being properly carried out.
    Second, training, which is really key to insuring 
cardholders and approving officials understand their roles and 
responsibilities under the program. We found that most agencies 
were delinquent in providing the necessary training for their 
employees and did not appear to make this a prerequisite for 
issuing the purchase cards.
    And finally, monitoring is an important part of insuring 
that existing controls are properly functioning. Most of the 
agencies did little or no monitoring of the program. At the two 
Navy units we reviewed, management was performing some 
monitoring, but they were not taking appropriate action in 
response to their findings, which included many of the same 
types of problems that we identified.
    Taken together, these control weaknesses create an 
environment where misuse of the purchase cards can go on with 
little chance of detection. Let me just give you a few examples 
now of the misuse.
    At Education, we found that a cardholder made several 
fraudulent purchases from two Internet sites for pornographic 
services. The name of one of the sites that appeared on the 
monthly statement, slavelaborproductions.com, should have 
caused suspicion had the approving official been paying 
attention.
    In another example, at one of the Navy units, we identified 
over $33,000 in purchases of high cost designer leather goods 
from Franklin Covey and Louis Vuitton. These purchases included 
briefcases, totes, portfolios, palm pilot cases, wallets, and 
purses that were certainly of questionable government need and 
should have been paid for by the individual.
    Transportation's IG reported two cases involving employees' 
fraudulent use of purchase cards. In one case a cardholder used 
the government purchase card to buy over $80,000 in computer 
software for a personal business.
    In another case, the cardholder made more than $58,000 in 
unauthorized charges, including purchases of a home stereo 
system and a new engine for his car.
    Interior's IG identified numerous fraudulent purchases, 
including payments for monthly rent, phone bills, furnishings, 
jewelry, and repairs to personal vehicles.
    Mr. Chairman, most, if not all, of these abusive purchases 
could have been avoided if the agencies just had basic controls 
in place over their Purchase Card Programs. We and IGs have 
made recommendations along these lines.
    Agencies have taken corrective actions in many cases, but 
at least at Education and Navy, we found that more needs to be 
done, particularly in the review and approval area, which, 
again, is so key to the oversight of this purchase card 
activity.
    In closing, Mr. Chairman, I want to again point out that we 
are supportive of the purchase card program, and we believe it 
has been very beneficial in reducing costs associated with 
small purchases. However, the control weaknesses and the 
resulting abusive practices, if not checked, could dilute the 
benefits of the program.
    While the amount of fraud and abuse we and the IGs have 
identified so far is relatively small compared to the total 
purchases each year, they represent major vulnerabilities that 
could be easily exploited to a greater extent. Thus, it is 
important that actions be taken to strengthen controls, reduce 
vulnerability, and maximize benefits of the Purchase Card 
Program.
    That concludes my statement, Mr. Chairman.
    [The prepared statement of Linda M. Calbom follows:]
 Prepared Statement of Linda M. Calbom, Director, Financial Management 
             and Assurance, U.S. General Accounting Office
    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today to provide an overview of our reviews of the government 
purchase card programs at two federal agencies and how the control 
weaknesses we have identified made these agencies vulnerable to 
improper or questionable purchases. At the outset, I want to make clear 
our support in concept for the purchase card program. The use of 
purchase cards has dramatically increased in past years as agencies 
have sought to eliminate the bureaucracy and paperwork long associated 
with making small purchases. The benefits of using purchase cards are 
lower costs and less red tape 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. Our audits to 
date have identified serious internal control weaknesses. In the past 
year, we have found improper and fraudulent use of purchase cards at 
two Navy units reviewed and at the Department of Education.1 
In addition, a number of Inspectors General (IG) have identified and 
reported on control weaknesses in the purchase card programs at their 
agencies, including the Departments of Agriculture, the Interior, and 
Transportation.2
---------------------------------------------------------------------------
    \1\ 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); Purchase Cards: Control 
Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO-02-
32 (Washington, D.C.: November 30, 2001); Purchase Cards: Continued 
Control Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse, 
GAO-02-506T (Washington, D.C.: March 13, 2002); Education Financial 
Management: Weak Internal Controls Led to Instances of Fraud and Other 
Improper Payments, GAO-02-406 (Washington, D.C.: March 28, 2002); and 
Education Financial Management: Weak Internal Controls Led to Instances 
of Fraud and Other Improper Payments, GAO-02-513T (Washington, D.C.: 
April 10, 2002).
    \2\ U.S. Department of Agriculture, Office of Inspector General, 
Financial and IT Operations Audit Report: Some Changes Would Further 
Enhance Purchase Card Management System Internal Controls, 50099-26-FM 
(Washington, D.C.: August 2001); U.S. Department of the Interior, 
Office of Inspector General, Department of the Interior, Integrated 
Charge Card Program, 2002-I-0011 (Washington, D.C.: December 2001); and 
U.S. Department of Transportation, Office of Inspector General, Use of 
Government Credit Cards, Department of Transportation, FI-2001-095 
(Washington, D.C.: September 24, 2001).
---------------------------------------------------------------------------
    Government purchase cards, a type of credit card, are available to 
agencies as part of the Governmentwide Commercial Purchase Card 
Program, which was established to streamline federal agency acquisition 
processes by providing a low-cost, efficient vehicle for obtaining 
goods and services directly from vendors. The Federal Acquisition 
Regulation, Part 13, ``Simplified Acquisition Procedures,'' establishes 
criteria for using purchase cards to place orders and make payments. 
The Department of the Treasury requires agencies to establish approved 
uses of the purchase card and to set spending limits. According to the 
General Services Administration (GSA), which administers the 
governmentwide contract for this program, in fiscal year 2001, over 
400,000 cardholders in about 60 agencies made purchases totaling about 
$13.8 billion. Given this widespread usage, you asked us to provide an 
overview of internal control weaknesses we have found in our reviews of 
purchase card programs at two Navy units and the Department of 
Education and improvements needed to correct these weaknesses.
    In order to respond to your request, we reviewed our previous 
reports and testimonies in this area, as well as reports issued by 
various IGs. In our purchase card program reviews, we assessed the 
internal controls over two Navy units' and the Department of 
Education's purchase card programs 3 and used forensic 
auditing techniques, such as database searches, file comparisons, and 
other detailed analyses to identify unusual transactions and payment 
patterns.
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    \3\ Our initial reviews of purchase card programs covered controls 
in place and purchases made (1) in fiscal year 2000 for the Navy and 
(2) from May 1998 through September 2000 for Education. Because both 
agencies changed their policies and procedures, we performed follow-up 
work to assess the changes. We reviewed controls in place, including 
implemented or planned improvements at the two Navy units for fiscal 
year 2001, and we reviewed a sample of purchase card transactions for 
the fourth quarter of fiscal year 2001. We also performed follow-up 
work at Education to review changes to its policies and procedures, and 
we reviewed purchase card transactions for the fourth quarter of fiscal 
year 2001.
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    As you know, internal controls serve as the first line of defense 
in safeguarding assets and in preventing and detecting fraud, abuse, 
and errors. Heads of agencies are required to establish a system of 
internal control consistent with our Standards for Internal Control in 
the Federal Government.4 My testimony today discusses some 
of the common control weaknesses we and the IGs have identified in 
agency purchase card programs, including weaknesses in the review and 
approval processes, lack of training for cardholders and approving 
officials, and ineffective monitoring. These weaknesses created a lax 
control environment that allowed cardholders to make fraudulent, 
improper, abusive, and questionable purchases. Weak controls also 
resulted or contributed to lost, missing, or misused government 
property. I will now describe some of the problems we found and then 
provide specific examples of improper payments we and various IGs 
identified. I will also lay out some of the key recommendations we and 
the IGs have made to address these problems.
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    \4\ U.S. General Accounting Office, Internal Control: Standards for 
Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 
(Washington, D.C.: November 1999).
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Inadequate Review and Approval Processes
    According to our Standards for Internal Control in the Federal 
Government, transactions and other significant events should be 
authorized and executed only by persons acting within the scope of 
their authority. Although review of transactions by persons in 
authority is the principal means of assuring that transactions are 
valid, we found that the review and approval process for purchase card 
purchases was inadequate in all the agencies reviewed.
    At the Department of Education, we found that 10 of its 14 offices 
did not require cardholders to obtain authorization prior to making 
some or all purchases, although Education's policy required that all 
requests to purchase items over $1,000 be made in writing to the 
applicable department executive officer. We also found that approving 
officials did not use monitoring reports that were available from Bank 
of America 5 to identify unusual or unauthorized purchases.
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    \5\ Bank of America services the purchase card program at 
Education.
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    Additionally, Education's 1990 purchase card policy, which was in 
effect during the time of our review (May 1998 through September 2000), 
stated that an approving official was to ensure that all purchase card 
transactions were for authorized Education purchases and in accordance 
with departmental and other federal regulations. The approving official 
signified that a cardholder's purchases were appropriate by reviewing 
and signing monthly statements. To test the effectiveness of 
Education's approving officials' review, we analyzed 5 months of 
cardholder statements and found that 37 percent of the 903 monthly 
cardholder statements we reviewed were not approved by the appropriate 
official. The unapproved statements totaled about $1.8 million. 
Further, we found that Education employees purchased computers using 
their purchase cards, which was a violation of Education's policy 
prohibiting the use of purchase cards for this purpose. As I will 
discuss later, several of the computers that were purchased with 
purchase cards were not entered in property records, and we could not 
locate them. If approving officials had been conducting a proper review 
of monthly statements, the computer purchases could have been 
identified and the practice halted, perhaps eliminating this computer 
accountability problem. Education implemented a new approval process 
during our review. We assessed this new process and found that while 
approving officials were generally reviewing cardholder statements, 
those officials were not ensuring that adequate supporting 
documentation existed for all purchases.Weaknesses in the approval 
process also existed at the two Navy units we
    reviewed. During our initial review, approving officials in these 
two units told us that they did not review support for transactions 
before certifying monthly statements for payment because (1) they did 
not have time and (2) Navy policy 6 did not specifically 
require that approving officials review support. At one of the Navy 
units, one approving official was responsible for certifying summary 
billing statements covering an average of over 700 monthly statements 
for 1,153 cardholders. Further, Navy's policy allows the approving 
official to presume that all transactions are proper unless notified to 
the contrary by the cardholder. The policy appears to improperly assign 
certifying officer accountability to cardholders and is inconsistent 
with Department of Defense regulations, which state that certifying 
officers are responsible for assuring that payments are proper.
---------------------------------------------------------------------------
    \6\ Navy's purchase card policy is contained in two documents--Navy 
Supply Command (NAVSUP) Instruction 4200.94 issued September 20, 2000, 
and a June 3, 1999, policy memorandum from the Navy Comptroller's 
office.
---------------------------------------------------------------------------
    During our follow-up review, we found that throughout fiscal year 
2001, approving officials in the two units still did not properly 
review and certify the monthly purchase card statements for payment. 
Although the Department of Defense Purchase Card Program Management 
Office issued new guidance in July 2001 that would reduce the number of 
cardholders for which each approving official was responsible, neither 
of the two units met the suggested ratio of five to seven cardholders 
to one approving official until well after the start of fiscal year 
2002.7 Further, the Department of Defense agreed with our 
recommendation that Navy revise its policy to assure that approving 
officials review the monthly statements and the supporting 
documentation prior to certifying the statements for payment. However, 
for the last quarter of fiscal year 2001, one of the Navy units 
continued to inappropriately certify purchase card statements for 
payment. The other unit issued local guidance that partially implements 
our recommendation.
---------------------------------------------------------------------------
    \7\ Although the ratio was met in total by both Navy units, one 
unit still had 23 approving officials who were responsible for more 
than 7 cardholders.
---------------------------------------------------------------------------
    IGs at the Departments of Agriculture, the Interior, and 
Transportation also identified weaknesses in the review and approval 
processes at these agencies. For example, Agriculture's IG reported 
that the department has not effectively implemented an oversight tool 
in its Purchase Card Management System (PCMS), the system that 
processes purchase card transactions. This tool is an alert system that 
monitors the database for pre-established conditions that may indicate 
potential abuse by cardholders. Responsible officials are to 
periodically access their alert messages and review the details for 
questionable transactions. These reviewing officials should contact 
cardholders, if necessary, so that cardholders can verify any 
discrepancies or provide any additional information in order to resolve 
individual alert messages. In order to close out alert messages, 
reviewers must change the message status to ``read'' and explain any 
necessary details to resolve the alerts. According to Agriculture's IG, 
only about 29,600 out of 50,500 alerts in the database during fiscal 
years 1999 and 2000 had been read as of January 9, 2001, and only about 
6,100 of the alerts that were read contained responses. The 
inconsistent use of this oversight tool means that Agriculture 
management has reduced assurance that errors and abuse are promptly 
detected and that cardholders are complying with purchase card and 
procurement regulations.
    Interior's IG reported that it reviewed the work of 53 reviewing 
officials and found that 42 of them performed inadequate reviews. The 
IG defined an adequate review as one in which the reviewing official, 
on a monthly basis, reconciled invoices and receipts to the purchase 
card statements to ensure that all transactions were legitimate and 
necessary. The IG found that several reviewing officials signed off on 
monthly statements indicating completed reviews where supporting 
documentation was not available.
Lack of Training
    Another common internal control weakness we identified was lack of 
or inadequate training related to the use of purchase cards. Our 
Standards for Internal Control in the Federal Government emphasize that 
effective management of an organization's workforce--its human 
capital--is essential to achieving results and is an important part of 
internal control. Training is key to ensuring that the workforce has 
the skills necessary to achieve organizational goals. Lack of or 
inadequate training contributed to the weak control environments at 
several agencies.
    Navy's policies required that all cardholders and approving 
officials must receive initial purchase card training and refresher 
training every 2 years. We determined that the two Navy units lacked 
documentation to demonstrate that all cardholders and approving 
officials had received the required training. We tested $68 million of 
fiscal year 2000 purchase card transactions at the two Navy units and 
estimated that at least $17.7 million of transactions were made by 
cardholders for whom there was no documented evidence they had received 
either the required initial training or refresher training on purchase 
card policies and procedures. Although we found during our follow-up 
work that the two Navy units had taken steps to ensure cardholders 
receive training and to document the training, many cardholders at one 
of the units still had not completed the initial training or the 
required refresher training. Similarly, at Education, we found that 
although the policy required each cardholder and approving officials to 
receive training on their respective responsibilities, several 
cardholders and at least one approving official were not trained.
    Interior's IG also reported a lack of training related to the 
purchase card program. Specifically, the IG reported that although 
Interior provided training to individual cardholders, it did not design 
or provide training to reviewing officials. According to the IG, 
several reviewing officials said that they did not know how to conduct 
a review of purchase card transactions, nor did they understand how and 
why to review supporting documentation. As previously mentioned, the IG 
found that many reviewing officials were not performing adequate 
reviews.
Ineffective Monitoring
    Our Standards for Internal Control in the Federal Government state 
that internal control should generally be designed to assure that 
ongoing monitoring occurs in the course of normal operations. Internal 
control monitoring should assess the quality of performance over time 
and ensure that findings of audits and other reviews are promptly 
resolved. Program and operational managers should monitor the 
effectiveness of control activities as part of their regular duties.
    At the two Navy units we reviewed, we found that management had not 
established an effective monitoring and internal audit function for the 
purchase card program. The policies and procedures did not require that 
the results of internal reviews be documented or that corrective 
actions be monitored to help ensure they are effectively implemented. 
The NAVSUP Instruction calls for semiannual reviews of purchase card 
programs, including adherence to internal operating procedures, 
applicable training requirements, micro-purchase procedures, receipt 
and acceptance procedures, and statement certification and prompt 
payment procedures. These reviews are to serve as a basis for 
initiating appropriate action to improve the program and correct 
problem areas.
    Our analysis of fiscal year 2000 agency program coordinator reviews 
at one of the Navy units showed that the reviews identified problems 
with about 42 percent of the monthly cardholder statements that were 
reviewed. The problems identified were consistent with the control 
weaknesses we found. Unit management considered the findings but 
directed that corrective actions not be implemented because of 
complaints about the administrative burden associated with the 
procedural changes that would be needed to address the review findings. 
These reviews generally resulted in the reviewer counseling the 
cardholders or in some instances, recommending that cardholders attend 
purchase card training. As a result, the agency program coordinator had 
not used the reviews to make systematic improvements in the program. 
During our follow-up work, we noted that this unit had recently made 
some efforts to implement new policies directed at improving internal 
review and oversight activities. However, these efforts are not yet 
complete.
    At the time of our review, Education did not have a monitoring 
system in place for purchase card activity. However, in December 2001, 
the department issued new policies and procedures that, among other 
things, establish a quarterly quality review of a sample of purchase 
card transactions to ensure compliance with key aspects of the 
department's policy.
    Transportation's IG reported that the Federal Aviation 
Administration (FAA) had not performed required internal follow-up 
reviews on purchase card usage since 1998. A follow-up review is to 
consist of an independent official (other than the approving official) 
reviewing a sample of purchase card transactions to determine whether 
purchases were authorized and that cardholders and approving officials 
followed policies and procedures.
    The types of weaknesses that I have just described create an 
environment where improper purchases could be made with little risk of 
detection. I will now provide a few examples of how employees used 
their purchase cards to make fraudulent, improper, abusive, and 
questionable purchases. We also found that property purchased with the 
purchase cards was not always recorded in agencies' property records, 
which could have contributed to missing or stolen property.
Poor Controls Resulted in Fraudulent, Improper, Abusive, and 
        Questionable Purchases
    In a number of cases, the significant control weaknesses that we 
and the IGs identified resulted in or contributed to fraudulent, 
improper, abusive, and questionable purchases. We considered fraudulent 
purchases to be those that were unauthorized and intended for personal 
use. Improper purchases included those for government use that were 
not, or did not appear to be, for a purpose permitted by law or 
regulation. We defined abusive or questionable transactions as those 
that, while authorized, were for items purchased at an excessive cost, 
for a questionable government need, or both. Questionable purchases 
also include those for which there was insufficient documentation to 
determine whether they were valid.
    For example, at Education, we found an instance in which a 
cardholder made several fraudulent purchases from two Internet sites 
for pornographic services. The name of one of the sites--Slave Labor 
Productions.com--should have caused suspicion when it appeared on the 
employee's monthly statement. We obtained the statements containing the 
charges and noted that they contained handwritten notes next to the 
pornography charges indicating that these were charges for 
transparencies and other nondescript items. According to the approving 
official, he was not aware of the cardholder's day-to-day 
responsibilities, and therefore, could not properly review the 
statements. The approving official stated that the primary focus of his 
review was to ensure there was enough money available in that 
particular appropriation to pay the bill. As a result of investigations 
related to these pornography purchases, Education management issued a 
termination letter, prompting the employee to resign.
    We also identified questionable charges by an Education employee 
totaling $35,760 over several years for herself and a coworker to 
attend college. Some of the classes the employees took were apparently 
prerequisites to obtain a liberal arts degree, but were unrelated to 
Education's mission. The classes included biology, music, and theology, 
and represented $11,700 of the $35,760. These classes costing $11,700 
were improper charges. The Government Employees Training Act, 5 U.S.C. 
4103 and 4107, requires that training be related to an employee's job 
and prohibits expenditures to obtain a college degree unless 
necessitated by retention or recruitment needs, which was not the case 
here. We also identified as questionable purchases totaling more than 
$152,000 for which Education could not provide any support and did not 
know specifically what was purchased, why it was purchased, or whether 
these purchases were appropriate.
    The breakdown of controls at the two Navy units we reviewed made it 
difficult to detect and prevent fraudulent purchases made by 
cardholders. We identified over $11,000 of fraudulent purchases 
including gifts, gift certificates, and clothing from Macy's West, 
Nordstrom, Mervins, Lees Men's Wear, and Footlocker, and a computer and 
related equipment from Circuit City.
    During our follow-up work, we also identified a number of improper, 
questionable, and abusive purchases at the Navy units, including food 
for employees costing $8,500; rentals of luxury cars costing $7,028; 
designer and high-cost leather briefcases, totes, portfolios, day 
planners, palm pilot cases, wallets, and purses from Louis Vuitton and 
Franklin Covey costing $33,054; and questionable contractor payments 
totaling $164,143.
    The designer and high-cost leather goods from Franklin Covey 
included leather purses costing up to $195 each and portfolios costing 
up to $135 each. Many of these purchases were of a questionable 
government need and should have been paid for by the individual. To the 
extent the day planners and calendar refills were proper government 
purchases, they were at an excessive cost and should have been 
purchased from certified nonprofit agencies under a program that is 
intended to provide employment opportunities for thousands of people 
with disabilities. Circumventing the requirements to buy from these 
nonprofit agencies and purchasing these items from commercial vendors 
is not only an abuse and waste of taxpayer dollars, but shows 
particularly poor judgment and serious internal control weaknesses.
    The contractor payments in question were 75 purchase card 
transactions with a telecommunications contractor that appeared to be 
advance payments for electrical engineering services. Paying for goods 
and services before the government has received them (with limited 
exceptions) is prohibited by law 8 and Navy purchase card 
procedures. Navy employees told us the purchase card was used to 
expedite the procurement of goods and services from the contractor 
because the preparation, approval, and issuance of a delivery order was 
too time-consuming in certain circumstances. For all 75 transactions, 
we found that the contractor's estimated costs were almost always equal 
or close to the $2,500 micro-purchase threshold. Because we found no 
documentation of independent receipt and acceptance of the services 
provided or any documentation that the work for these charges was 
performed, these charges are potentially fraudulent, and we have 
referred them to our Office of Special Investigations for further 
investigation.
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    \8\ Section 3324 of title 31, United States Code.
---------------------------------------------------------------------------
    IGs also identified fraudulent purchases. The Transportation 
Department's IG reported on two cases involving employees' fraudulent 
use of their purchase cards. In one case, a cardholder used a 
government purchase card to buy computer software and other items 
costing over $80,000 for a personal business. In the other case, a 
cardholder made numerous unauthorized charges totaling more than 
$58,000, including a home stereo system and a new engine for his car. 
Additionally, Interior's IG identified fraudulent purchases such as 
payments for monthly rent and phone bills, household furnishings, 
jewelry, and repairs to personal vehicles.
    One type of improper purchase we identified is the ``split 
purchase,'' which we defined as purchases made on the same day from the 
same vendor that appear to circumvent single purchase limits. The 
Federal Acquisition Regulation prohibits splitting a transaction into 
more than one segment to avoid the requirement to obtain competitive 
bids for purchases over the $2,500 micro-purchase threshold or to avoid 
other established credit limits. For example, one cardholder from 
Education purchased two computers from the same vendor at essentially 
the same time. Because the total cost of these computers exceeded the 
cardholder's $2,500 single purchase limit, the total of $4,184.90 was 
split into two purchases of $2,092.45 each. We found 27 additional 
purchases totaling almost $120,000 where Education employees made 
multiple purchases from a vendor on the same day.
    Similarly, our analysis of purchase card payments at the two Navy 
units identified a number of purchases from the same vendor on the same 
day. To determine whether these were, in fact, split purchases, we 
obtained and analyzed supporting documentation for 40 fiscal year 2000 
purchases at the two Navy units. We found that in many instances, 
cardholders made multiple purchases from the same vendor within a few 
minutes or a few hours for items such as computers, computer-related 
equipment, and software, that involved the same, or sequential or 
nearly sequential purchase order and vendor invoice numbers. Based on 
our analysis, we concluded that 32 of the 40 purchases were split into 
two or more transactions to avoid the micro-purchase threshold. During 
our follow-up work, we found that 23 of 50 fiscal year 2001 purchases 
by the two Navy units were split into two or more transactions to avoid 
the micro-purchase threshold.
    Split purchases were also identified by the IGs at the Departments 
of Agriculture and Transportation. For example, Agriculture's IG 
reported that it investigated two employees who intentionally made 
multiple purchases of computer equipment with the same merchant in 
amounts exceeding their established single purchase limits. During 3 
different months, these employees purchased computer systems totaling 
$121,123 by structuring their individual purchases of components in 
amounts less than the individual single purchase limit of $2,500. In 
September 1999, a computer procurement totaling $47,475 was made using 
20 individual purchase card transactions during a 4-day period. Other 
computer purchases were made in November 1999 involving 15 purchase 
card transactions over a 3-day period totaling $36,418 and in June 2000 
involving 15 individual transactions over a 5-day period totaling 
$37,230. The IG reported that these procurements should have been made 
by a warranted contracting officer. Similarly, Transportation's IG 
reported that it identified 13 transactions totaling about $106,000 
that violated the department's policies against splitting purchases.
Missing Property
    Another problem we and the IGs identified is that some property 
purchased with purchase cards was not entered in agency property 
records. According to our Standards for Internal Control in the Federal 
Government, an agency must establish physical control to secure and 
safeguard vulnerable assets. Such assets should be periodically counted 
and compared to control records. Recording the items purchased in 
property records is an important step to ensure accountability and 
financial control over these assets and, along with periodic inventory 
counts, to prevent theft or improper use of government property. At 
Education and the Navy units, we identified numerous purchases of 
computers and computer-related equipment, cameras, and palm pilots that 
were not recorded in property records and for which the agencies could 
not provide conclusive evidence that the items were in possession of 
the federal government.
    For example, the lack of controls at Education contributed to the 
loss of 179 pieces of computer equipment costing over $200,000. We 
compared serial numbers obtained from a vendor where the computers were 
purchased to those in the department's asset management system and 
found that 384 pieces of computer equipment were not listed in the 
property records. We conducted an unannounced inventory to determine 
whether the equipment was actually missing or inadvertently omitted 
from the property records. We found 205 pieces of equipment. Education 
officials have been unable to locate the remaining 179 pieces of 
missing equipment. They surmised that some of these items may have been 
surplused; however, there is no documentation to determine whether this 
assertion is valid.
    At the Navy units, our initial analysis showed that the Navy did 
not record 46 of 65 sampled items in their property records. When we 
asked to inspect these items, the Navy units could not provide 
conclusive evidence that 31 of them--including laptop computers, palm 
pilots, and digital cameras--were in the possession of the government. 
For example, for 4 items, the serial numbers of the property we were 
shown did not match purchase or manufacturer documentation. In 
addition, we were told that 5 items were at other Navy locations 
throughout the world. Navy officials were unable to conclusively 
demonstrate the existence and location of these 5 items. We were unable 
to conclude whether any of these 31 pieces of government property were 
stolen, lost, or being misused.
    We and the IGs have made recommendations to the various agencies 
that, if fully implemented, will help improve internal controls over 
the purchase card programs so that fraudulent and improper payments can 
be prevented or detected in the future and vulnerable assets can be 
better protected. These recommendations include (1) emphasizing 
policies on appropriate use of the purchase card and cardholder and 
approving official responsibilities, (2) ensuring that approving 
officials are trained on how to perform their responsibilities, and (3) 
ensuring that approving officials review purchases and their supporting 
documentation before certifying the statements for payment. Agencies 
have taken actions to respond to the recommendations made. However, 
during our follow-up work at Education and the Navy units, we found 
that weaknesses remain that continue to leave them vulnerable to 
fraudulent and improper payments and lost assets. Management's ongoing 
commitment to improving internal controls is necessary to minimize this 
vulnerability.
    In closing, Mr. Chairman, the use of government purchase cards has 
succeeded in reducing the bureaucracy and paperwork associated with 
small purchases, and we support the concept. However, control 
weaknesses and the resulting abuse existing in the agencies reviewed so 
far show that controls over the use of purchase cards need to be 
strengthened. While the amount of fraud and abuse that we and the IGs 
have identified is relatively small compared to the total amount of 
purchases made each year, they represent major vulnerabilities that 
could easily be exploited to a greater extent.
    Mr. Chairman, this concludes my statement. I would be happy to 
answer any questions you or other members of the subcommittee may have.

    Mr. Greenwood. Thank you.
    Ms. Mead.

                   TESTIMONY OF PATRICIA MEAD

    Ms. Mead. Good afternoon, Mr. Chairman, and members of the 
subcommittee. I am Patricia Mead, Acting Assistant 
Commissioner, Office of Acquisition of the Federal Supply 
Service, General Services Administration.
    I am please to be here on behalf of GSA to discuss the 
governmentwide charge card program. In the interest of time I 
am not going to read my entire statement, but I would ask that 
it be entered into the record in its entirety.
    Mr. Greenwood. It will be.
    Ms. Mead. GSA has been responsible for contracting for 
charge card services since 1984. GSA serves as a catalyst for 
change in the card program by providing guidance to agencies, 
serving as the central repository for governmentwide data 
available to GSA under the contracts, and execution of contract 
administration functions.
    GSA facilitates dialog between government and industry and 
develops initiatives, educates program participants, and 
improves program performance.
    The most recent purchase travel and fleet charge card 
contracts were awarded in 1998 to five banks as part of the GSA 
Smart Pay Program. The contracts provided charge cards to 
streamline the procurement payment and travel processes and 
provided refunds to the government of $75 million during the 
last fiscal year.
    Refunds are provided directly to agencies and are premised 
upon agency charge volume and payment performance. Management 
and oversight of cardholders may differ depending on the type 
of card issued.
    I will address purchase cards in my testimony. Purchase 
cards replace the paper based, time consuming purchase order 
process for small dollar procurements. With annual expenditures 
of approximately $13.7 billion, the purchase card is the 
primary payment and procurement method for purchases under 
$2,500.
    The purchase card currently saves the government 
approximately $1.3 billion annually in administrative costs. 
The purchase card is the most flexible purchasing tool 
available to the U.S. Government.
    Liability for transactions made by authorized purchase card 
holders rests with the government. If the card is used by an 
authorized purchase cardholder to make an unauthorized 
purchase, the government is liable for payment, and the agency 
is responsible for taking appropriate action against the 
cardholder. Use of the card by a person other than the 
cardholder who does not have authority and for which the 
government does not receive any benefit is not the liability of 
the government.
    The government's liability for transactions involving a 
lost or stolen card is limited to a maximum of $50.
    To assist our agencies with implementing good management 
practices, GSA is sponsoring a series of training opportunities 
in Washington, DC this May, June, and July, which will 
specifically address policy issues, indicators of fraud and 
misuse and preventive measures which may be implemented.
    One of these sessions is targeted to the IG community.
    As part of a continuing effort to improve the card program, 
GSA sponsors both purchase card and travel card work groups for 
agency program coordinators. Using the collective expertise of 
the program managers, two publications were developed and are 
available to agencies. One is for purchase cards, and that is 
called the Blueprint for Success: Purchase Card Oversight, and 
it discusses detection and prevention of purchase card misuse 
and fraud.
    The committee has specifically requested that GSA address 
ways to improve program oversight and management of travel and 
purchase cards. The most successful government charge card 
programs have a common characteristic, strong commitment and 
leadership by senior management. It is no coincidence that 
agencies that clearly communicate their intolerance for payment 
delinquency, misuse, and abuse and hold those who fail to 
perform accountable also have the best run card programs.
    Program risks can further be mitigated through better 
account management. A strong training program, state-of-the-art 
tools and detailed review structure gives Federal agencies all 
of the tools and internal controls necessary to effectively run 
their card programs.
    As stated in the recent GAO report, ``people make internal 
controls work and responsibility for good internal controls 
rests with all managers.''
    GSA will continue to work to minimize risk to the 
government and insure proper use of the cards.
    Mr. Chairman, that concludes my testimony, and I would be 
happy to answer any questions.
    [The prepared statement of Patricia Mead follows:]
  Prepared Statement of Patricia Mead, Acting Assistant Commissioner, 
 Office of Acquisition, Federal Supply Service, U.S. General Services 
                             Administration
    Good morning, Mr. Chairman and members of the Subcommittee. I am 
Patricia Mead, Acting Assistant Commissioner, Office of Acquisition of 
the Federal Supply Service. I am pleased to be here on behalf of the 
General Services Administration to discuss the Government-wide charge 
card program. While much of my discussion will address purchase cards, 
I also would like to speak briefly to a few important issues specific 
to travel cards.
    GSA has been responsible for contracting for charge card services 
since 1984. GSA serves as a catalyst for change in the card program by 
providing guidance to agencies, serving as the central repository for 
Government-wide data with respect to information available to GSA under 
the contracts, and execution of contract administration functions. GSA 
facilitates dialog between Government and industry and develops 
initiatives to educate program participants and improve program 
performance.
    The most recent purchase, travel and fleet charge card contracts 
were awarded in 1998 to five banks as part of the GSA SmartPay 
 program. The contracts provided charge cards to streamline 
the procurement, payment and travel processes and provided refunds to 
the Government of $75M during last fiscal year. Refunds are provided 
directly to agencies and are premised upon agency charge volume and 
payment performance. Management and oversight of cardholders may differ 
depending on the type of card issued; therefore I will address purchase 
cards separately from travel cards.
Purchase Cards
    First I would like to discuss purchase cards. The purchase card 
replaced the paper-based time-consuming purchase order process for 
small dollar procurements. With annual expenditures of approximately 
$13.7B, the purchase card is the primary payment and procurement method 
for purchases under $2,500 (often referred to as micro-purchases). The 
purchase card currently saves the Government approximately $1.3B 
annually in administrative costs. The purchase card is the most 
flexible purchasing tool available to the US government. Agencies use 
the purchase card to acquire mission related goods and services.
    Liability for transactions made by authorized purchase cardholders 
rests with the Government. If the card is used by an authorized 
purchase cardholder to make an unauthorized purchase, the Government is 
liable for payment and the agency is responsible for taking appropriate 
action against the cardholder. Use of the card by a person, other than 
the cardholder, who does not have authority and for which the 
Government does not receive any benefit, is not the liability of the 
Government. The Government's liability for transactions involving a 
lost or stolen card is limited to a maximum of $50.
Travel Cards
    GSA's Office of Government-wide Policy is responsible for Federal 
Travel Management Policy including regulations on the mandatory use of 
travel cards, travel reimbursement, and collection of delinquent 
amounts owed to the travel card contractors. The travel card is 
designed to provide travelers with a payment mechanism that is accepted 
worldwide, eliminate--or greatly reduce the need for--cash advances, 
and facilitate the collection of essential management data. The 
Government and Government employees used the travel card to procure 
transportation, lodging, meals and other travel expenses valued at 
$5.3B during the last fiscal year. While similar in many ways to 
purchase cards, travel cards present a different management challenge. 
Travel cards may be either Government liability (centrally billed) or 
employee liability (individually billed). The contractors providing 
travel cards have expressed concerns with cardholder delinquency and 
write-offs on individually billed accounts. GSA recognizes that high 
delinquency rates are detrimental to the program and is working 
diligently with our customers to develop valuable management and 
training tools.
    Split disbursement is the term used to describe a financial 
management procedure where the agency transmits funds to the agency's 
travel card contractor for expenses of official travel claimed by an 
employee that were charged to the employee's Federal contractor-issued 
travel charge card, with any remainder transmitted to the employee. 
Salary offset refers to a debt collection procedure which, in the 
context of the travel card program, would allow for the collection of 
funds owed by a Federal employee to a Government travel charge 
contractor as a result of delinquencies, by deduction from the amount 
of pay owed to that employee, not to exceed 15 percent of the 
disposable pay of the employee for that pay period.
    As an example of the impact salary offset and split disbursement 
can have on an agency's performance, we point to GSA's recent 
implementation of these processes for GSA travel cardholders. (GSA as 
an agency is a user of the GSA SmartPay program for our employees.) As 
a result of the changes in our processes, GSA experienced a 50% decline 
in 60+ day delinquency and a 47% increase in recoveries of write-offs 
over the last twelve months. Agencies have the option of implementing 
salary offset and split disbursement as program improvements today, and 
a few have done so recently.
Management and Oversight
    Agencies have numerous tools for management and oversight of the 
purchase and travel card program. While all payment mechanisms are 
subject to a certain degree of risk, GSA has built safeguards and 
systematic controls into the program designed to minimize risks. For 
example, when accounts are set up, agencies determine what limits to 
set on each transaction. They are able to set limits by dollar amount 
per transaction, number of transactions per month, spend per month, and 
the types of businesses at which the card may be used.
    The contract provides for agency program coordinators to oversee 
the program. The role of the agency program coordinator includes 
ensuring that cardholders properly use the card and monitoring account 
activity. Under the GSA SmartPay contracts, agency program coordinators 
have access to numerous reports on cardholder activity from the banks. 
Realizing the need for the most current and complete data available, 
GSA mandated that contractors provide electronic reports to agency 
managers. These reports are secure and easy to access via the Internet. 
Agencies should use these reports to assist in the identification of 
questionable transactions, split purchases (improperly splitting a 
single purchase into two or more micro-purchases to avoid otherwise 
applicable competition requirements), improper cardholder limits 
exceeding a cardholder's contract warrant authority, and fraudulent 
activity. Finally, there is a full electronic record of all 
transactions under the GSA SmartPay program. This record is available 
to agencies to analyze spending patterns and to highlight questionable 
transactions. This electronic footprint makes fraud or misuse far 
easier to detect than in a paper-based environment.
    To simplify the oversight process, transactions can be segregated 
by dollar amount, merchant type and frequency of transactions with 
specific merchants. Although reports can be helpful in identifying 
questionable purchases, review and approval of transactions at the 
local level continues to be our most effective control mechanism.
    GSA recognizes that cardholder training is essential to ensure 
proper use of the card. GSA provides on-line training free to both 
purchase and travel cardholders. The training discusses roles and 
responsibilities of cardholders, proper use of the card and ethical 
conduct. Many agencies choose to supplement this training with written, 
oral or on-line training of cardholders on agency procedures.
    To assist our agencies with implementing good management practices, 
GSA is sponsoring a series of training sessions in Washington, DC this 
May, June and July which will specifically address policy issues, 
indicators of fraud and misuse and preventive measures which may be 
implemented.
    GSA requires that all contractors participate in an annual training 
conference for program coordinators. Subjects of the annual training 
conference include electronic reporting tools, industry best practices, 
fraud monitoring and card management controls. To supplement the annual 
training conference, written training materials provided by the 
contractors include cardholder guides and agency program coordinator 
guides. These guides address authorized uses of the card and 
responsibilities of the cardholder and the agency program coordinator.
    All GSA SmartPay  banks maintain a sophisticated fraud 
detection system to identify fraudulent activity and reduce risk. These 
systems are designed to deter or prevent fraudulent activity by outside 
parties, not necessarily Government employees. In those instances where 
fraud is suspected, the contractor will notify the agency and begin the 
account cancellation process, after which a new card will be issued. 
The Government relies on approving officials to review purchase card 
transactions and determine if they are appropriate.
    As part of a continuing effort to improve the card program, GSA 
sponsors both purchase card and travel card workgroups for agency 
program coordinators. This is an opportunity for program coordinators 
across Government to share experiences and learn from each other. Using 
the collective expertise of the program managers, two publications were 
developed and are available to agencies: ``Blueprint for Success: 
Purchase Card Oversight'' discusses detection and prevention of 
purchase card misuse/fraud (available on-line and in hard copy in May 
02) and the ``Agency/Organization Program Coordinator (A/OPC) Survival 
Guide'' for travel card agency program coordinators discusses program 
management and delinquency controls (available on-line and in hard 
copy).
    GSA will continue to work with industry and our customer agencies 
to develop technology to facilitate automated transaction review (e.g. 
data mining) and account management (e.g. on-line certification).
Steps for Improvement
    The Committee has specifically requested that GSA address ways to 
improve program oversight and management of travel and purchase cards. 
The most successful government charge card programs have a common 
characteristic: strong commitment and leadership by senior management. 
It is no coincidence that agencies that clearly communicate their 
intolerance for payment delinquency, misuse, and abuse, and hold those 
who fail to perform accountable, also have the best run card programs. 
Program risk can be further mitigated through better account 
management.
    While card policies can differ among agencies due to their varying 
missions, all agencies need to clearly address the following key areas 
to help ensure effective control over card usage:

 Delegation of contracting authority
 Training requirements for program coordinators, approving 
        officials and cardholders
 Setting of reasonable single purchase and monthly limits and 
        blocking of merchant category codes
 Annual reviews to evaluate the number of cardholders and 
        approving officials, cardholder limits and transactions
 Uses of the card
 Receipt and acceptance of supplies and services
 Reconciling accounts and certification of transactions
 Procedures for appointment of approving officials who can 
        determine proper transactions and act independently
 Span of control for approving officials and A/OPCs (e.g. one 
        approving official for every seven purchase cardholders)
 Criteria for establishing accounts
 Criteria for deactivation/cancellation of cards
 To ensure policies are effectively implemented, agencies must:
 Optimize use of bank internet management tools including 
        reports
 Work closely with their Office of Inspector General, and
 Take disciplinary/legal action as appropriate
    A strong training program, state of the art tools, and a detailed 
review structure gives Federal agencies all the tools and internal 
controls necessary to effectively run their card programs. As stated in 
a recent GAO report on ``Strategies to Manage Improper Payments, 
Learning from Public and Private Sector Organizations,'' ``people make 
internal controls work, and responsibility for good internal controls 
rests with all managers''.1 GSA will continue to work to 
minimize risk to the Government and ensure proper use of the cards.
---------------------------------------------------------------------------
    \1\ Strategies to Manage Improper Payments, Learning from Public 
and Private Sector Organizations, May 2001, page 8.
---------------------------------------------------------------------------
    Mr. Chairman, that concludes my prepared remarks for today. I would 
be happy to answer any questions that you or members of the 
subcommittee may have. Thank you.

    Mr. Greenwood. Thank you very much.
    Ms. Styles.

               TESTIMONY OF HON. ANGELA B. STYLES

    Ms. Styles. Chairman Greenwood and Congressman Deutsch, I 
appreciate the opportunity to appear before you today to 
discuss the problems agencies are experiencing with the 
purchase card program. Reports of mismanagement, fraud, and 
abuse by GAO and a number of IGs are strong indications that 
agencies do not have adequate internal controls to manage the 
risks associated with the Purchase Card Program.
    After a decade of acquisition reform initiatives that 
emphasized operational expediency and efficiency, many of the 
checks and balances critical for effective oversight have been 
marginalized to the point where taxpayer dollars are being put 
at an unacceptable level of risk.
    To put the Purchase Card Program in the proper context, I 
would like to briefly review the growth and strategy behind the 
program. It began as a multi-agency pilot effort in 1986 and 
became a governmentwide program in 1989 when GSA awarded the 
first contract for card services.
    During fiscal year 1990, the first full year of 
governmentwide availability, the cards were used for about 
271,000 purchases worth around $64 million.
    By fiscal year 1995, purchase cards were used for more than 
4 million purchases worth over $1.6 billion. This increase in 
usage, while significant, was just a beginning.
    In 1994, Congress created a legal framework that greatly 
facilitated the use of the purchase card for small dollar 
transactions known as micro purchases. Specifically, the 
Federal Acquisitions Streamlining Act created a micro purchase 
threshold at $2,500 and made purchase up to this amount subject 
only to a minimal number of purchasing requirements.
    Requirements common to most Federal procurements, such as 
competition and small business considerations are not mandated 
for micro purchases.
    Of particular note, this highly simplified framework has 
enabled agencies to issue purchase cards to program personnel, 
allowing program personnel, e.g., end users, Federal employees 
with the actual service or product requirements to conduct 
micro purchases themselves using the purchase card as opposed 
to going through contracting offices as was previously the 
case.
    The statutory micro purchase framework has been reinforced 
in several ways. In 1994, an executive order encouraged 
agencies to take full advantage of the purchase card and the 
micro purchase threshold. In 1994, the FAR was amended, the 
Federal Acquisition Regulation, to designate the purchase card 
as the preferred method for making micro purchases.
    Finally, in 1997, Congress imposed a statutory requirement 
that by October 1, 2000, at least 90 percent of DOD's eligible 
micro purchases were to be made using streamlined micro 
purchase procedures which essentially means the use of the 
purchase card.
    These statutory, regulatory and policy changes had a 
staggering effect on purchase card usage. Government wide 
purchase card expenditures have risen from approximate $1.6 
billion in 1995 to $13.7 billion in 2001.
    Agency interest in the purchase card is not surprising. 
They have reduced both the purchasing burden on contracting 
officers and the administrative burden of the paper based 
process that purchase cards replaced.
    In addition, agencies receive significant rebates on their 
expenditures.
    Unfortunately, numerous reports suggest that management 
practices have not evolved to accommodate the rapid growth of 
the program. These reports point to a variety of management 
breakdowns which I have outlined in my written testimony. The 
inadequacy in management controls is especially troubling given 
the many tools available for agencies to use to manage the 
purchase card risk.
    GSA, for example, issues guidance for agency program 
coordinators, cardholders, offers free on-line training, holds 
conference and work groups and has recently developed 
comprehensive guidance on purchase card oversight.
    With all of these tools and technologies, I am deeply 
concerned by the failure of agencies to implement proper 
controls to protect the government from unnecessary risk. 
Agencies cannot continue to manage their programs as they have 
in the past. They must reevaluate their efforts and take 
meaningful corrective action to restore the integrity of their 
operations.
    On April 18 of this year, the Director of OMB issued a 
memorandum to the heads of all departments and agencies 
requesting a comprehensive review of their internal controls 
for both purchase and travel card expenditures. Each agency is 
required to submit a remedial action plan for both travel and 
purchase card programs to OMB by June 1 of this year. These 
plans will be reviewed by my office, the Office of Federal 
Financial Management, and OMB's resource management offices.
    OMB is specifically concerned with the lack of adequate 
internal controls and have emphasized this concern in the 
memorandum. Agencies are expected to establish better internal 
controls by setting appropriate spending limits, providing 
effective training in order to better manage their programs, 
and generally improving oversight.
    We have asked the agencies to give serious consideration to 
deactivating a large number of accounts and reissuing cards to 
a smaller more appropriate number of employees based on 
demonstrated need.
    Having nearly 2.5 million travel and purchase cards in 
circulation is excessive, and we expect the agency to consider 
reducing the number of cards to a more appropriate level.
    We have also asked agencies to take immediate 
administrative action against employees who have abused their 
charge card privileges.
    Finally, the memorandum makes clear that cases involving 
possible fraud should be referred to the appropriate civil and 
criminal authorities. I thank the committee for its interest in 
improving the government's Purchase Card Program. If operated 
properly, the program is a valuable tool for procurement and 
financial management.
    We are dedicated to improving the effectiveness of the 
program while reducing the incidence of fraud and abuse. Better 
program management begins with a commitment from senior 
managers, and I assure you that OMB places a top priority on 
improving the card program and expects agencies to consider it 
a top priority as well.
    We welcome the opportunity to continue this discussion with 
you as we review the purchase card program, identifying long-
term solutions to improve agency performance.
    This concludes my prepared remarks, and I am pleased to 
answer any questions you may have.
    [The prepared statement of Angela B. Styles follows:]
   Prepared Statement of Angela B. Styles, Administrator for Federal 
          Procurement Policy, Officce of Management and Budget
    Chairman Greenwood, Congressman Deutsch, and Members of the 
Subcommittee, I appreciate the opportunity to appear before you today 
to discuss the problems agencies are experiencing in managing their 
purchase card programs. While the program is a valuable tool, recent 
General Accounting Office (GAO) and Inspector General (IG) reports 
indicate that serious management reforms are needed to reduce 
fraudulent and unauthorized purchases. The integrity of the purchase 
card program has been damaged by irresponsible or fraudulent acts and 
must be restored.
    Reports of mismanagement, fraud, and abuse are strong indications 
that agencies do not have adequate internal controls in place to manage 
the risk associated with the purchase card program. As a result of a 
decade of acquisition reform initiatives that have largely emphasized 
operational expediency, many of the checks and balances critical for 
effective acquisition oversight have been marginalized to the point 
where taxpayer dollars are being put at an unacceptably high level of 
risk. Although the purchase card program operates as a partnership 
between agencies, the banks, and the General Services Administration 
(GSA), agencies, first and foremost, must take responsibility for the 
internal management breakdowns that have led to the types of problems 
we will discuss today.
The Charge Card Program--Travel and Purchase Cards
    I have been asked to focus on the problems with purchase cards, but 
would like to explain briefly the differences in liability and scope of 
the purchase and travel card programs. While both card programs expose 
the government to risk, each is operated differently and presents 
unique management challenges.
    As a general rule, purchase card accounts are centrally billed: 
vendors are paid directly by the government. When the purchase card is 
used, the government assumes direct liability. Travel card accounts are 
generally billed individually, requiring the employee to pay the bill. 
The agency then reimburses the employee. The individual assumes 
liability for travel card purchases, and the banks can refer delinquent 
accounts to collection agencies, much as a bank would with a personal 
credit card.
    In accordance with Public Law 105-264, ``Travel and Transportation 
Reform Act of 1998,'' federal employees are generally required to use 
the travel card for all payments of expenses for official government 
travel, such as hotels and restaurants. As a result, the federal 
government has issued over 2 million travel cards to civilian and 
military personnel. Half of the federal workforce carries a government 
travel card whether they travel once a month or once a year. 
Delinquency rates of 9 percent for civilian agencies and 12 percent for 
the Department of Defense (DOD) suggest that the travel card program 
also needs to be reexamined.
    The programs differ vastly in scope as well. In 2001, agencies 
issued approximately 390,000 purchase cards and spent $13.7 billion in 
purchases. In the same year, agencies issued 2.1 million travel cards 
and spent $5.3 billion. Purchase cards, though fewer in number account 
for more expenditures and expose the government to greater liability. 
My comments today will be targeted at the problems associated with the 
purchase card program.
Micro-Purchases and The Purchase Card Program
    Agencies delegate buying authority to purchase cardholders to buy 
goods and services needed to support mission goals. Each transaction 
averages approximately $570 and is generally made in accordance with 
the micro-purchase provisions set forth in Federal Acquisition 
Regulation (FAR) 13.2. Micro-purchases are defined by statute, 41 USC 
428, as purchases at or below $2,500. These purchases are not subject 
to competition, nor are they reserved for small businesses. As I will 
discuss later, the purchase card is the preferred method for making 
micro-purchases, which helps to explain the volume of purchase card 
transactions and, therefore, the potential for abuse. Agencies often 
tie their delegations of buying authority to the micro-purchase 
threshold and any increase in the threshold increases the government's 
exposure to risk.
    Employees can also use the purchase card to pay for goods and 
services in excess of the micro-purchase limit. FAR 13.301 sets the 
policy for use of the purchase card as a payment tool under any other 
type of contract, including task or delivery orders under existing 
contracts, basic ordering agreements, or blanket purchase agreements. 
While purchases over $2,500 must be made in accordance with the 
governing FAR provisions, including competition requirements, some 
cardholders have been delegated payment authority up to $100,000 or 
more. Cardholders with this authority use these cards as a convenient 
payment method, and this ease of payment increases the government's 
exposure to liability. Determining whether purchases over $2,500 were 
made in accordance with the FAR (to place orders under existing 
contracts or to make payments), or were open market purchases that 
should have been subject to competition and other acquisition 
requirements, can be difficult. Inappropriate transactions may go 
undetected. The high spending limits and the difficulty in ensuring the 
appropriate use of FAR provisions creates an environment ripe for fraud 
and abuse.
History and Growth of the Purchase Card Program
    The purchase card program began as a multi-agency pilot effort in 
1986, and became a government-wide program in 1989 when GSA awarded the 
first contract for card services. During the first 5 years of the 
contract, the volume of purchases increased by nearly 1,500 percent, 
the dollar volume by 2,400 percent. The Federal Acquisition 
Streamlining Act of 1994 (FASA) established the micro-purchase 
threshold discussed earlier, and Executive Order 12931, Federal 
Procurement Reform, was also issued in October 1994 to encourage the 
expansion of the purchase card program and take advantage of the micro-
purchase authority provided for in the statute. As a result, the 
purchase card became the preferred method for making micro-purchases; 
this policy is set forth in FAR 13.201.
    Additionally, Section 848 of the Defense Authorization Act for 
Fiscal Year 1998 required that, by October 1, 2000, at least 90 percent 
of DOD's eligible micro-purchases be made using streamlined micro-
purchase procedures, which essentially means use of the purchase card. 
As a result of these statutory and regulatory preferences for card 
usage, the purchase card expenditures rose from approximately $1.6 
billion in 1995 to $13.7 billion in 2001.
    Agencies receive rebates on their expenditures, generally based on 
transaction volume, payment terms, or both, depending on the conditions 
negotiated in their task orders with the banks. Rebates for expedited 
payment generally increase with the speed of payment, and many agencies 
maximize these rebates by paying within twenty-four to forty-eight 
hours. GSA estimates that agencies were refunded nearly $75,000,000 in 
2001 under the travel and purchase card programs, substantially due to 
expedited payments. Discounted payment terms are a significant benefit 
of the card program, and agencies should optimize rebates by processing 
card payments quickly.
Lack of Adequate Management Controls
    While the purchase card program has benefited agencies in some 
ways, management practices have not evolved to accommodate the rapid 
growth of the program. Because this gap has created opportunities for a 
wide range of fraud and abuse, we have taken and will continue to take 
substantive, affirmative steps to ensure agencies improve their 
internal control systems to monitor expenditures properly.
    I am concerned by reports of inadequate management oversight and 
review, lack of account administration, excessive spending limits, and 
inadequate training. Here are a few examples:

  According to the Department of the Interior (DOI) IG Advisory 
        Report, 2002-I-0011, issued December 2001, an investigation of 
        their integrated card program--travel and purchase--indicated 
        that 1,116 former employees still had active charge cards. 
        Their investigation, based on a statistical sampling process, 
        is disturbing because the termination of accounts for former 
        employees is a basic card administration function.
 According to a DOD IG Report, ``Controls Over the DOD Purchase 
        Card Program, D-2002-075,'' issued March 29, 2002, 6,533 
        cardholders had monthly spending limits of over $100,000 and 40 
        of those cardholders had a limit of $9,999,999. While 
        delegations in excess of the micro-purchase threshold may be 
        justified in some instances, this level of exposure to risk, 
        without proper management controls in place, is unacceptable.
 The same DOD IG report also indicated that 29,120 purchase 
        cards were unused for over 6 months, raising the question of 
        whether the cards should have been issued. The circulation of 
        unnecessary cards exposes the government to liability and is 
        indicative of the poor controls agencies are using to manage 
        their card programs.
 The DOD IG further reported that purchases of over $439,000 
        were processed after card accounts were no longer approved for 
        use. Agency approving officials and program coordinators were 
        not aware that these closed accounts could still be used until 
        they were terminated a separate administrative process.
 According to the DOD IG report, over $4 million in 
        inappropriate transactions by employees appear to have been 
        made with businesses such as pawnshops, jewelry stores, and 
        antique shops. Agencies have the ability to prevent purchases 
        from certain merchants but often do not. This lack of attention 
        to risk management is expensive, unacceptable, and must be 
        corrected.
 A February 2002 letter report from the Department of Energy 
        (DOE) IG, I01OP001, found that contractor employees, who had 
        been issued purchase cards in accordance with the GSA 
        contracts, used federal funds to purchase personal property or 
        property not related to the contract. This report also 
        indicated that some contractors did not require basic 
        separation of duties, which allowed the same person to make 
        purchases, reconcile the invoice, and retain the documentation. 
        No independent review was required.
    Based on the DOE report, I plan to carefully review the provisions 
in FAR 51.1 that currently allow federal agencies to issue purchase 
cards to contractors. This FAR provision establishes the conditions for 
contractor use of government supply sources, and to facilitate these 
transactions, GSA's master purchase card contracts allow for 
conditional use of the card by contractors, when approved by GSA and 
the issuing agency.
    These examples are important because they represent the types of 
problems many agencies are experiencing. These instances of poor 
oversight are not just embarrassing to the government, but demonstrate 
a serious lack of internal controls that creates an environment 
vulnerable to fraud.
Purchase Card Fraud
    Turning to a more serious consequence of poor program management 
let me share a few examples of the abuses documented in GAO and IG 
investigations. These egregious examples of fraud tarnish the image the 
federal workforce, our greatest resource. While these incidents may be 
anomalies, they nevertheless diminish the public's trust in government 
and must be addressed immediately to prevent recurrence.
    As reported by the DOE IG, lack of oversight and review allowed a 
contractor program manager to purchase $85,000 of personal or non-
contract property, and a subordinate to charge $13,000 on his manager's 
card. Both were terminated and pled guilty to theft charges. In another 
example, a Department of Commerce employee, who made personal charges 
on a government purchase card and then confiscated invoices to avoid 
detection, was successfully prosecuted. The employee was sentenced to 
jail and full restitution is being pursued.
    A DOD IG memorandum, dated March 19, 2002, lists examples of fraud 
cases that were successfully prosecuted. DOD secured restitution and 
other fees totaling almost $1.5 million--a significant loss recovery 
effort--in the eleven cases described. Defendants were sentenced to 
prison, probation, home detention, or other appropriate remedy, and 
held responsible for their actions. I expect to see more examples of 
this commitment to accountability as we improve the purchase card 
program. Agencies must be more aggressive in referring potential fraud 
cases to the appropriate civil and criminal authorities. Such action 
deters potential card abusers and demonstrates strong agency commitment 
to improving program integrity.
Management Tools
    These reports are even more troubling given the many management 
tools available for agencies to use. GSA, for example, issues guidance 
for agency program coordinators and cardholders, offers free online 
training, hosts conferences and workgroups, and has recently developed 
comprehensive guidance on purchase card oversight. With all of these 
tools available, I am deeply concerned by the failure of agencies to 
implement proper controls to protect the government from unnecessary 
risk. Agencies cannot continue to manage their programs as they have in 
the past; they must reevaluate their efforts and take meaningful, 
corrective measures to restore the integrity of their operations.
OMB Action
    On April 18, 2002, the Director of the Office of Management and 
Budget (OMB) issued a memorandum to the heads of all departments and 
agencies requesting a comprehensive review of their internal controls 
for both purchase and travel card expenditures. Each agency is required 
to submit remedial action plans for both travel and purchase card 
programs to OMB by June 1, 2002, which will be reviewed by my office, 
the Office of Federal Financial Management, and OMB's Resource 
Management Offices.
    OMB is specifically concerned with the lack of adequate internal 
controls and has emphasized this concern in the memorandum. Agencies 
are expected to establish better internal controls by setting 
appropriate spending limits, providing effective training in order to 
better manage their programs, and generally improving oversight.
    We have asked agencies to seriously consider deactivating a large 
number of accounts, and reactivating the accounts of a smaller, more 
appropriate number of cardholders based on demonstrated need.
    We have also asked agencies to take immediate administrative action 
against employees who have abused their charge card privileges and, in 
cases involving possible fraud, refer them to the appropriate civil and 
criminal authorities. While some agencies have pursued these remedies, 
employees who abuse their card privileges are not always held 
accountable and may continue to work in the federal service. Documented 
cases of travel and purchase card abuse should be included in an 
employee's official personnel file for future reference.
    OMB recently approved an E-government effort to improve the sharing 
of human resources information among agencies, which may reduce the 
incidence of repeated credit card abuse. The Office of Personnel 
Management (OPM) is leading an effort, Enterprise Human Resources 
Integration, to consolidate employment information in a central system. 
My office will work with OPM to determine if proven card abuse can be 
included in this system as part of an employee's permanent record.
Conclusion
    I thank the Subcommittee for its interest in improving the 
government's purchase card program. If operated properly, the program 
is a valuable tool for procurement and financial management. We are 
dedicated to improving the effectiveness of the program, while reducing 
the incidence of fraud and abuse. Better program management begins with 
a commitment from senior managers, and I assure you that OMB places a 
top priority on improving the card programs and expects agencies to 
consider it a top priority as well.
    We welcome the opportunity to continue this discussion with you as 
we review the purchase card program, identifying long-term solutions to 
improve agency performance. This concludes my prepared remarks, and I 
would be pleased to answer any questions you or the Members of the 
Subcommittee might have.

    Mr. Greenwood. Thank you. I appreciate that.
    The Chair recognizes himself for 10 minutes to inquire.
    All of you, I think, have been here diligently since 10 
o'clock this morning. So I believe you heard all of the other 
testimony, and one of the things that has stuck in my mind is 
that I asked a series of questions to Mr. Mournighan, who is 
the Deputy Director of Procurement and Assistance for Energy, 
and we heard about the fact that there were many more 
contractor employees at Energy than there are Federal 
employees; that the fraud that has been found has been found 85 
percent in the contractor employee mix; and I asked him what 
the most important criteria, most important safeguard, I should 
say, to protecting against fraud and abuse was, and he said it 
was to have a second person sign off on purchases.
    And then when asked, ``Well, is that essentially the way 
you do it?'' he said, ``No, we do not have that requirement.''
    Would any of you like to respond to that or comment on what 
you heard in his testimony or anything else that struck you in 
the hearing so far?
    Ms. Styles. I would be glad to. I think one of the key 
questions of the Department of Energy is the liability for the 
card itself and what we haven't been able to determine to date 
is when a contractor has a card in hand, is the bill being sent 
to the Federal Government.
    We think that creates a more significant environment for 
fraud than if the bill is going directly to the contractor. We 
are taking a closer look to see if we can determine of the what 
we believe are 11,000 cards in the hands of contractor 
employees of the Department of Energy where those bills are 
going and what the environment that has been created there 
looks like.
    Mr. Greenwood. Well, I would comment I do not claim to be 
an expert on this, but I have been looking at it with all of 
you and the other witnesses for a little while now. I cannot 
really quite fathom a system in which a contractor employee has 
a credit card and makes purchases which become an obligation of 
the Federal Government without any action necessary by the 
contractor himself.
    It seems to me that the Federal Government should--it seems 
to me that the policy should be that we should never reimburse 
for a purchase made by a contractor employee. We should only 
reimburse for invoices submitted by contractors.
    So a contractor should have the responsibility to say these 
are purchases made in behalf of the contract that I hold in the 
last 30 days. Here they are enumerated. Some kind of an 
indication, and it is not too much to ask to say the reason 
that we bought this car or the reason we bought this truck, the 
reason we bought this camera, this computer was for this 
purpose, and here is where it is and how it is being used, and 
then submit that and at least the contractor is vouching for 
it, which means thousands of contractor employees are going to 
go, ``I cannot just shoot this to Uncle Sam. It has got to go 
through the boss. If the boss catches me trying to get over, he 
is going to get me.'' It just seems that not having that 
firewall in there between the employee and the Treasury is 
really asking.
    Now, as the three of you have looked at this issue, have 
you made determinations yet as to whether you think that 
tightening this system up to the degree that it needs to be 
tightened up because I think we all agree that for the taxpayer 
out there, this just sounds like the worst thing of all.
    I work hard all day long. I pay my Visa bill, and they've 
got some clowns out in the Federal Government who's buying 
themselves jewelry and no safeguards.
    Have you ascertained whether you think all of this can be 
straightened up to the level it should be without any 
additional Federal legislation or whether you think we're going 
to need legislation?
    Ms. Mead. Well, I think the Director of OMB, Mitch Daniels' 
letter to the agencies has focused a good bit of management's 
attention on the things that need to be done in terms of 
controls, and we at GSA will certainly be working closely with 
OMB to review those agencies' plans to make sure that they have 
the right controls in place and how they plan to make sure that 
those are implemented, not just that they are there, but that 
they are being used.
    And we will certainly pay particular attention to 
contractors' use of charges cards. I think that the scrutiny 
that the program is under now is a good thing. The fact that 
Congress is shining a spotlight on it. The media is shining a 
spotlight on it. The administration is doing the same. I think 
that is good.
    We at GSA are very concerned about the integrity of the 
program. There are many benefits to the program, and I think 
that we have put the right infrastructure in place, and we 
would not want to jeopardize the program by improper use and 
misuse of the card.
    So we are very interested in making it work right.
    Mr. Greenwood. Ms. Styles, have you gotten to the point yet 
where you feel like you know whether you need legislation or 
are you waiting for your reports back from the agencies?
    Ms. Styles. Well, we are waiting for our reports back from 
the agencies, but I have to tell you that the presumption when 
the agencies come in with their plans is that unless you have a 
very good plan for oversight, we think the cards should be 
deactivated.
    But that does not mean that there is not a need here for 
legislation, and I think we are perfectly willing to work with 
you on appropriate legislation to emphasize the seriousness of 
the problem. We are going to work on our end. We are going to 
work through regulations. We are going to make appropriate 
changes to the FAR, as I mentioned in my testimony, dealing 
with contractors that have purchase cards in their hand, but 
that does not mean that in this instance legislation would not 
be appropriate, and we are certainly perfectly willing to work 
with you going forward.
    Mr. Greenwood. Thank you.
    Director Calbom, did you want to comment?
    Ms. Calbom. Yes. One of the things that we are seeing is it 
is not for lack of the right policies and procedures 
necessarily that is causing the problem. It is that they are 
not being followed.
    And you know, this whole idea of the approval function, if 
the approval function which everybody requires, if it was 
working properly, we would not see most of these problems 
occurring.
    Mr. Greenwood. I will tell you what my thoughts are on 
that. The approvers, as far as I know, there are not very many 
full-time approvers. They are all managers. And my guess is 
that most of them find themselves on a daily basis having tasks 
that they consider to be more urgent. You have got to get that 
report on the boss' desk. You know, there are things that have 
to be done.
    And I would guess that reviewing all of these vouchers is 
probably one of the last things on their list of priorities 
because nobody calls them with a frantic phone call that it has 
not been done.
    And I do not know how you are going to change that because, 
you know, there are things that are important, but not 
necessarily urgent, and they do not get our attention. And so I 
think that is a weakness of the system that is going to require 
a completely new--we cannot depend on that. I have no 
expectation that you are going to depend upon the notion that 
suddenly all of these reviewers are going to say, ``Yeah, that 
is going to be more important than getting the report that is 
due tomorrow morning done.''
    I just do not see how that is going to happen. So I am 
trying to think out of the box in terms of whether we ought to 
have a contractor whose job it is to do these reviews and 
provide financial incentive to say, ``Look. We are going to let 
some contracts out there or a contract, and your job is to have 
a data processing system that reviews ever one of these 
transactions, and you be very clever about the way that you 
find outliers and so forth. You do checks and balances, and we 
will provide you some kind of financial incentive so that every 
dollar of misused Federal funds you find, you will get some 
percentage of that back.''
    Now, that would become very urgent, and it would not become 
the last thing that they would have done. It would be the only 
thing that would be done. And I suspect you might, you know, 
find some resistance to that, but I think we have to have a 
system in which people have very strong incentives to check 
every penny, and I do not think we have that in place now.
    Let me see what I was going to ask here.
    What about the very high limits? Let me ask you again, 
Director Calbom. Can you explain why it is that we need to have 
people walking around with limits of 100,000 or 500,000? Do 
people actually make--I am trying to think about what kind of 
purchases one would make. I mean, are they buying bulldozers or 
what are they buying for these kinds of six, seven figured 
numbers?
    Ms. Calbom. I really do not see the need in most cases to 
have those kind of high limits on them. There might be one or 
two people in an organization that need the higher limits, but 
by and large, the Purchase Card Program was meant for small 
purchases, and you know, when you are buying higher dollar 
things, you really need to go through the regular procurement 
process.
    Mr. Greenwood. You would think, yes.
    Ms. Calbom. Yes, there are more checks and balances built 
into that process.
    The purchase card program is supposed to be for, just your 
basic day-to-day needs, and it is supposed to be small 
purchases. So I really do not see the need for those high 
limits in most cases.
    Ms. Styles. And if I can clarify something, it is being 
used as a payment vehicle for some contracts and not just a 
purchase vehicle. So you will have gone through the normal 
contracting practices. You have full and open competition or 
otherwise, gotten in your bids, and when you want to pay your 
contractor, you may actually be using the purchase card to make 
the payment, the concern there being from some contractors that 
it is taking a long time through the normal invoicing process 
to actually receive payment, and so it is faster to pay your 
contractors with a purchase card even though you have a 
different contracting vehicle in place.
    Mr. Greenwood. Sure, and it would be very fast if we just 
had a big vault full of cash and told them they could come and 
get what they need.
    It seems to me that the solution to that problem is to 
speed up the invoice process, not to have----
    Ms. Styles. Absolutely because we cannot make a distinction 
now with somebody that has a high limit if they are actually 
appropriately using contracting vehicle when they may have 
actually just gone out and paid $900,000 for something without 
actually having an appropriate contracting vehicle in place.
    Mr. Greenwood. Right. The Chair recognizes--oh, go ahead.
    Ms. Calbom. I was just going to follow up on that. It kind 
of gets back to what you were saying earlier on using the 
purchase cards rather than having, in the DOE case, the 
contractor list every item specifically on an invoice, you use 
a purchase card, and it takes away some of that ability to 
review carefully what exactly you are being charged for.
    So I think it kind of goes hand in hand.
    Mr. Greenwood. The Chair recognizes the gentleman from 
Florida for 10 minutes.
    Mr. Deutsch. Thanks.
    Ms. Calbom, do you think it is cost effective to deactivate 
an entire agency's purchase cards, as Ms. Styles has suggested?
    Ms. Calbom. I do not know that it is cost effective. I 
mean, I have seen reports that the purchase card program really 
does save lots and lots of money. I think it may be appropriate 
if you have segments of an agency that have demonstrated that 
they have very weak controls and cannot properly manage the 
program, as I guess was the case for one of the Navy units we 
reviewed. They actually deactivated all of the cards until they 
could get a better handle on the program. I think that may be 
appropriate.
    But you know, again, it is a cost-benefit thing. You have 
got to weigh the two, but certainly if you find an entity or 
segment that is way out of control, maybe it is a good thing to 
do.
    Mr. Deutsch. Ms. Styles, the Office of Management and 
Budget is somewhat, I guess, behind some of the other agencies 
dealing with credit card fraud. Your directive to the agencies 
is dated April 18, 2002.
    Now that you are here, can you give us an estimate of the 
total amount to defraud in the $13.7 billion in purchases?
    And, again, specifically as we have heard earlier, Commerce 
would say that they would only have one-one hundredth of a 
percent.
    Ms. Styles. The reason that we sent the memo out is because 
I think we saw growing concern internally from the IGs, from 
GAO, from the Hill, that it was not anecdotal instances of 
fraud.
    Commerce has clearly a good program on the books, seems to 
be managing their cards well, but we look at an agency like the 
Department of Interior that has 11,000 cards in the hands of 
former employees. Our only response to that can be: you have to 
start from scratch. You cannot assume when you have lost your 
credit card that it is okay to just go ahead and keep those all 
activated.
    There are some agencies where I think we must take the 
approach of we are going to deactivate them and start from 
scratch unless you have another more appropriate plan in place.
    Mr. Deutsch. Well, let me ask specifically. Has OMB done a 
cost-benefit analysis of the use of the cards?
    Ms. Styles. No, we have not.
    Mr. Deutsch. Okay, and are you planning on doing that?
    Ms. Styles. Certainly there have been studies done. There 
was one in 1996, I believe, that showed savings of about $54 
per transaction. Obviously that is a significant savings, but 
until we know the extent of the fraud, I think it is difficult 
to make that cost comparison.
    And quite frankly, until we have appropriate management 
structures in place to control this issue, I do not think we 
are going to be able to get a handle on that.
    Mr. Deutsch. Ms. Mead, has GSA done a cost-benefit 
analysis?
    Ms. Mead. The study that Ms. Styles just mentioned was a 
study that GSA commissioned, and I think it was in 1996, was 
it, Nancy?
    1994, and yes, that was based on the cost of processing 
paper transactions both through the procurement and the finance 
process, $54 per transaction.
    Mr. Deutsch. So that was the cost of savings?
    Ms. Mead. Yes.
    Mr. Deutsch. Okay. So that did not do any of the negative 
part, just the positive savings.
    Ms. Mead. Yes.
    Mr. Deutsch. Okay. So it was just the positive.
    Ms. Calbom, GAO looks at many types of fraud. Where does 
this fit on your fraud meter?
    Ms. Calbom. Certainly I think the incidences of fraud that 
we have found in the Purchase Card Program are higher than what 
we have seen in some of our other audit areas. I might just 
turn to one of my colleagues and ask him real quick.
    It is a little bit difficult to answer that question 
because the purchase card work we have been doing is designed 
specifically to look for fraud as opposed to in my area we do a 
lot of financial statement audits which are materiality driven, 
and would not necessarily ferret out all of the fraud. But the 
types of audits we do here are really trying to get all the way 
down regardless of materiality and look for the fraud.
    But certainly we have found there are instances everywhere 
we looked.
    Mr. Deutsch. Ms. Styles, what do you mean when you say 
checks and balances for effective acquisition oversight have 
been marginalized to the point where taxpayers' dollars are put 
at any unacceptably high level of risk?
    Ms. Styles. Well, before we started down the path of 
procurement reform, there was a three-part structure of checks 
and balances for purchases, and it was generally paper based, 
but you had your procurement official that did the buying; you 
had your program person that had the requirement; and you had 
your finance person that paid the bill.
    So you essentially had three checks there or at least two 
checks on the person with the need. What you have done or what 
we have done with the purchase card and the micro purchase 
threshold in many instances is collapse the checks and balances 
that you had there into one person.
    So the program person that has the need for the good and 
service is the one that is also the procurement person, who is 
the buyer, and sometimes is the one who also pays the bill.
    Mr. Deutsch. Okay. You have described what used to exist 
and what exists today. I mean, would you want to go back to the 
prior system?
    Ms. Styles. I certainly do not want to go back to a paper 
based system, and I am not questioning the clear benefits and 
the efficiencies that we have achieved, but there has to be a 
question in your mind at some point if that is really 
appropriate or we have the appropriate level of checks and 
balances.
    You cannot have this much tremendous growth in a program 
without a commensurate growth not only of the policies, because 
I think a lot of the agencies have policies on the books to 
deal with this, but the implementation of that management 
structure to make sure that this program is being managed 
properly and that you have an appropriate level of checks and 
balances in place, maybe not the same checks and balances that 
you had pre-1992, but at least some level of checks and 
balances that clearly are not in place right now.
    Mr. Deutsch. Is OMB intending to give the agency's 
Inspector General more resources to focus on credit card and 
travel card abuses?
    Ms. Styles. I am not on the budget side of the shop. I 
would certainly be glad to answer that question for the record 
though.
    Mr. Deutsch. All right. Representative Tom Davis has 
introduced legislation to increase the purchase limit on these 
cards from 2,500 to $25,000. What is your response to this 
proposal? Would it increase problems in areas, such as split 
purchasing to avoid competition?
    We can just maybe go down the line. Ms. Styles.
    Ms. Styles. We have concerns about raising the micro 
purchase threshold to $25,000. Our concerns are in two areas. 
One is the subject of this hearing today, which is the 
management controls on the purchase card program and the 
increased issues that raising the micro purchase threshold 
would raise.
    The second one, and I think it is an important one for this 
administration, is the effect that raising the micro purchase 
threshold could have on small businesses. There is, at least we 
believe, some link between raising the micro purchase threshold 
and purchases made to small businesses. When you raise the 
threshold, generally you are decreasing the number of purchases 
going to small business.
    Mr. Deutsch. Ms. Mead.
    Ms. Mead. Our agency does not have a position that is 
contrary to the position of OMB.
    Mr. Deutsch. Ms. Calbom?
    Ms. Calbom. I do not think we would be in favor of that 
until the agencies get the good controls in place to 
demonstrate they can properly manage the programs.
    You know, the other issue is the $2,500 micro purchase 
limit is being circumvented regularly right now as it is, and 
so I would hate to see what would happen if we went up to 
25,000.
    Mr. Deutsch. Ms. Calbom, do you think that the Commerce 
program is about as good as it is going to get in terms of, you 
know, dealing with the fraud issue?
    Ms. Calbom. We have not really looked at the Commerce 
program yet. So I cannot really comment on that at this point.
    Mr. Deutsch. Commerce has no contractor cards. Is it more 
difficult to control contractor cards than employee cards?
    Ms. Calbom. We have not looked at an agency that has 
contractor cards. So I really cannot comment.
    Mr. Deutsch. Ms. Mead, how do you control your contractor 
cards?
    Ms. Mead. As far as I know, we do not have cost 
reimbursable contractors who have cards.
    Mr. Deutsch. So you have no contractor cards that you are 
aware of.
    Ms. Mead. GSA has no contractor cards?
    Mr. Deutsch. I do not know. Do you have contact----
    Ms. Mead. I am not aware of any. I will ask our contracting 
office.
    Mr. Deutsch. No contractor cards?
    Ms. Mead. No.
    Mr. Deutsch. Ms. Mead a recent survey by the Associated 
Press found out less and less procurement is being done in a 
competitive manner. Mr. Chairman, without objection, I would 
like to put this article dated March 31 into the record.
    Mr. Greenwood. It will be in the record.
    Mr. Deutsch. One of the reasons is the use of credit cards. 
The FAR mandates full and open competition under most 
circumstances. Do you agree with this analysis and what can be 
done to create more competition?
    Ms. Mead. I agree that there needs to be competition above 
the micro purchase threshold level, and I do not think that it 
is necessarily the card that is the problem.
    Mr. Deutsch. Ms. Calbom?
    Ms. Calbom. Again, we have not really reviewed that aspect.
    Mr. Deutsch. Ms. Styles?
    Ms. Styles. We have serious concerns not because of the 
micro purchase threshold necessarily. Above the micro purchase 
threshold, which I think is the subject of that article, that 
we have a significant number of procurements that are not 
subject to full and open competition that are causing some 
significant problems.
    We actually, based on our concerns in that area, have 
undertaken to examine the issue and its effect on small 
businesses specifically, but businesses in general. The 
President on March 19 announced an initiative to review our 
contracting practices, particularly with respect to whether we 
have sufficient, full and open competition so that our 
businesses have access to the Federal marketplace.
    We anticipate reporting back to the President on our 
recommendations for changes to the contracting system this 
fall.
    Mr. Deutsch. Thank you very much.
    Mr. Greenwood. I thank the gentleman.
    Mr. Deutsch. Mr. Chairman, I think we have had a very 
successful hearing.
    Mr. Greenwood. Thank you, sir.
    Before we wrap up, GSA did the study on the savings in 
1994; is that correct?
    Ms. Mead. That is correct.
    Mr. Greenwood. Was that the $1.3 billion figure? Is that 
from that study?
    Ms. Mead. That is a function of the number of transactions 
per year based on the $54 savings per transaction.
    Mr. Greenwood. Okay. No. 1, would you please supply the 
subcommittee with that study?
    Ms. Mead. Certainly.
    Mr. Greenwood. We do not seem to have a copy of it here.
    And when you do, if it does not have one, just give us a 
quick and dirty analysis of how that number was derived because 
as I think about that, when Ms. Styles talked about collapsing 
the three overseers into one, I could imagine how if we by 
going to the purchase card process divested the government or 
ten or 15,000 employees who were doing nothing but doing that. 
You could see how you could get to that kind of a figure.
    My guess is, without seeing the report, my guess is the 
large part of that savings is attributable to time, to person-
hours saved. And yet most of the people doing this work I 
assume have other duties, and I do not know that this program 
has resulted in the laying off of tens of thousands of people 
to get that kind of savings.
    So what I have a sneaking suspicion is that there was a 
calculation made about how much time it took to go through the 
old paper system and do all of the reviews, and those number of 
hours times some dollar figure was construed to be what it cost 
to review the system. And look hurrah, we are saving all of 
that time, but unless the work force was reduced, you did not 
save any money, but you are still paying all of those same 
people. They are just doing something else.
    Ms. Mead. I think there was a reduction in the number of 
clerks, for example, procurement clerks and finance clerks that 
handled the paper. Those resources may well have been 
reprogrammed for more mission oriented needs by agencies.
    Mr. Greenwood. Right.
    Ms. Mead. So in a sense they are doing more with less, if 
you will.
    Mr. Greenwood. Okay. Well, we would like to have that 
report.
    And we thank each of you for your testimony, for your 
patience certainly for being here for over 4 hours, and we 
thank Paul.
    The subcommittee is adjourned.
    [Whereupon, at 2:17 p.m., the hearing was adjourned.]

                                
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