Third Party Payments: Survey on Use and Related Internal Controls by
Government Entities (Correspondence, 12/22/2000, GAO/GAO-01-294R).

Third party payments represent blank-form financial instruments that
government employees use to pay for expenses when traditional payments
are not feasible or possible.  GAO surveyed government entities on their
use of third party payments. Forty of the 86 entities that responded to
GAO's survey reported that they had used third party payment instruments
at some time during fiscal years 1997 through 1999. Although the number
of reported payment transactions declined 3.7 percent for these 40
entities during this period, the reported total dollar amount associated
with these transactions rose 13.4 percent. On the basis of the
transaction data reported, the average dollar value of each payment rose
17.6 percent. Among the 40 entities, the most common reasons cited for
using third party payment instruments were (1) to pay for small
purchases of supplies and services; (2) to pay contractors that either
could not or would not accept government checks, electronic funds
transfers, or credit card payments; (3) to make emergency payments; (4)
to provide immediate reimbursement for out-of-pocket expenses; or (5) as
an alternative to disbursing a cash advance. In response to questions
about whether entities used internal controls, all 40 entities reported
restricting the number of employees authorized to use third party
payments and monitoring third party payment activities; slightly more
than half said that the monitoring occurred at least annually.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-294R
     TITLE:  Third Party Payments: Survey on Use and Related Internal
	     Controls by Government Entities
      DATE:  12/22/2000
   SUBJECT:  Financial instruments
	     Budget obligations
	     Budget outlays
	     Internal controls
	     Surveys

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GAO-01-294R

Survey on Third Party Payment Usage

United States General Accounting Office Washington, DC 20548

December 22, 2000 The Honorable John R. Kasich Chairman, Committee on the
Budget House of Representatives

The Honorable John E. Sununu House of Representatives

Subject: Third Party Payments: Survey on Use and Related Internal Controls
by Government Entities

This letter summarizes the information we provided during a December 12,
2000, briefing to staff from the Budget Committee and from Representative
Sununu's office. In your May 17, 2000, letter to the Comptroller General,
you, as Chairman of the Committee on Budget and Chairman of the Housing and
Infrastructure Task Force 1 respectively, had asked us to conduct a survey
on the use of third party payment instruments by government entities. Third
party payments represent blank- form financial instruments that enable
government employees to directly pay authorized mission- specific, mission-
related, and/ or administrative expenses when other forms of payment, such
as traditional government check, electronic funds transfer, or government
credit card, are not feasible or possible. Your request for the survey
followed a joint hearing before the Committee and the Housing and
Infrastructure Task Force into abuses and mismanagement of a third party
payment system used by the National Transportation Safety Board (NTSB). 2

As agreed with your office, the objectives of the survey were to identify,
for fiscal years 1997, 1998, and 1999:

ï¿½ Which government entities used third party payment instruments.

ï¿½ The number of third party payment instruments issued.

ï¿½ The total dollar value of third party payment instruments issued.

ï¿½ The purposes for which the third party payment instruments were issued. 1
At the time of the joint request for the survey, Representative Sununu was
the Chairman of the Committee on Budget's Housing and Infrastructure Task
Force. On September 13, 2000, the Task Force's term of operation ended.

2 Separately, you requested that GAO conduct a preliminary review of NTSB
internal controls and compliance with applicable laws and regulations to
identify areas that may be vulnerable to fraud, waste, and abuse. Work on
that request is underway.

GAO- 01- 294R Survey on Third Party Payment Usage Page 2

ï¿½ Whether government entities had basic internal controls related to their
entity's use of third payment instruments.

The enclosed briefing slides summarize the work we performed and the survey
responses, which were provided during the briefing. As noted in the briefing
slides, we did not verify either the quantitative data or comment
information provided by the respondents.

Results in Brief

As identified in attachments 1 and 2 to the enclosed briefing slides, a
total of 86 entities responded to our survey. Forty of the 86 reported that
they had used third party payment instruments at some time during fiscal
years 1997 through 1999. For these 40, although the reported number of
payment transactions declined 3.7 percent during this period – from
1.91 million in fiscal year 1997 to 1.84 million in fiscal year 1999 –
the reported total dollar amount associated with these transactions
increased 13.4 percent – from $725.2 million in fiscal year 1997 to
$822.6 million in fiscal year 1999. Based on the transaction data reported,
the average dollar value of each payment increased 17.6 percent, from $380
in fiscal year 1997 to $447 in fiscal year 1999. In addition, for those
entities that reported transactions and dollar data, almost twice as many
reported using third party payment instruments in fiscal year 1999 than
reported using them in fiscal year 1997.

Among the 40 entities, the most common reasons cited by respondents for
using third party payment instruments were (1) to pay for small purchases of
supplies and services, (2) to pay contractors that either could not or would
not accept government checks, electronic funds transfers (EFTs) or credit
card payments, (3) to make emergency payments, (4) to provide immediate
reimbursement for out- of- pocket expenses, or (5) as an alternative to
disbursing a cash advance.

In response to questions concerning whether entities employed certain
internal controls, all 40 entities reported restricting the number of
employees authorized to use third party payments and monitoring, in some
way, third party payment activities, with slightly more than half (23)
responding that the monitoring occurred at least annually. Thirty- nine of
the 40 entities reported monitoring and/ or reviewing employee use of third
party payments, and 33 reported monitoring service providers' payment
process. Thirty- seven of the 40 entities reported requiring authorization
signatures, submission of supporting documentation, and set dollar limits
for individual payment amounts. Thirty- six of the 40 entities reported
requiring that payments be recorded timely in accounting records; 35
entities also reported requiring independent review and inspection of
payment supporting documentation and timely reconciliation of payments
processed by service providers to internal accounting records. Thirty- four
of the 40 entities reported requiring that payments be sequentially
numbered; 32 entities reported establishing written policies or guidance on
the use of third party payments; and 30 entities reported segregating
incompatible duties associated with use and handling third party payments.

GAO- 01- 294R Survey on Third Party Payment Usage Page 3

Scope and Methodology

To address your specific questions about government entities' use of third-
party payment instruments in fiscal years 1997, 1998 and 1999, we reviewed
documents related to NTSB use of the Rapidraft Payment System, General
Services Administration (GSA) Government Purchase Card regulations, and an
informal survey by the department of the Treasury's Financial Management
Service (FMS) on Chief Financial Officer (CFO) agencies' use of imprest
funds and third party payment instruments as replacement for them. We also
reviewed background materials describing third party payment systems offered
by various service providers. We held discussions with Treasury, GSA, and
other agency officials. We developed and pretested a survey questionnaire,
and developed a population of entities to receive the survey using GAO's
fiscal year 2001 Compendium of Budget Accounts 3 to identify those entities
that obligated over $10 million in federal funds in fiscal year 1999. We did
not verify either the quantitative data or comment information provided by
respondents. We conducted our work in compliance with generally accepted
government auditing standards. We performed our work from June through
December 2000.

---- We are sending copies of this letter to Representative John M. Spratt,
Jr., Ranking Minority Member of the Committee on the Budget and
Representative Ken Bentsen, Ranking Minority Member on the Housing and
Infrastructure Task Force. The letter will also be available on GAO's home
page at http:// www. gao. gov.

If you have any questions about this letter or the briefing, please contact
me at (202) 512- 9508 or John Reilly, Assistant Director at (202) 512- 9517.
Key contributors to this assignment were Patt Summers, Don Campbell and Mike
Vu.

Linda Calbom Director, Financial Management and Assurance

Enclosure 3 Compendium of Budget Accounts: Fiscal Year 2001( GAO/ AIMD- 00-
143; April 2000).

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 4

Briefing to the House Committee on the Budget

1 Survey Results on the Use of Third Party Payment

Instruments by Government Entities Briefing to the House Committee on the
Budget

December 12, 2000

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 5

2

Contents

Objectives Background Scope and Methodology Survey Results

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 6

3

Objectives

The Chairman of the House Committee on the Budget and the Chairman of the
Subcommittee on Housing and Infrastructure Task Force asked us to conduct a
survey for fiscal years 1997, 1998 and 1999 to identify:

Which government entities used third party payment instruments.

The number of third party payment instruments issued. The total dollar value
of third party payment instruments

issued. The purposes for which these third party payment

instruments were issued. Whether government entities using third party
payment

instruments have basic internal controls in operation.

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 7

4

Background

Third party payment instruments can take the form of either a draft or a
convenience check. Both forms of payment are blank- form checks provided to
a government employee for use in paying authorized mission- specific,
mission- related, and/ or administrative expenses.

Third party draft checks represent check writing privileges arranged through
agency contracts with financial institutions known as service providers.

Convenience checks represent check writing privileges provided via options
available under the General Services Administration's (GSA) Government
Purchase Card Program.

Pursuant to a Treasury policy directive, these third party payment
instruments may be used when payment by government check, purchase card, or
electronic funds transfer is not feasible or possible.

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 8

5

Scope and Methodology

In order to obtain the requested information, we Reviewed background
materials -- Documents related to

NTSB use of the Rapidraft Payment System, GSA Government Purchase Card
regulations, Treasury/ FMS informal survey on imprest funds usage at CFO
agencies and the use of third party payment instruments to replace imprest
funds.

Held discussions with Treasury, GSA, financial service providers, as well as
other agency officials.

Developed and pre- tested a survey questionnaire to obtain the requested
information on third party payment.

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 9

6

Scope and Methodology (cont.)

In preparing and administering our survey, we developed a population of
entities to receive the survey. We used GAO's FY 2001 Compendium of Budget

Accounts to select those entities that obligated more than $10 million in
federal funds in fiscal year 1999.

For purposes of this survey, we refer to the population as “government
entities” based solely on their receipt of more than $10 million in
funds from the federal government in FY 1999.

We excluded the House, Senate, and Judicial branch entities.

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 10

7

Scope and Methodology (cont.)

We sent the survey to 89 entities and received responses from 86.

Of the 86 respondents, 75 submitted entity- wide responses. 11 submitted a
total of 103 separate responses

covering individual components e. g., departments, bureaus, agencies and/ or
regional offices.

We compiled the component responses for each of the 11 entities into a
single response. Where entity components provided differing responses, we
determined the entity- wide response based on the majority of responses
received.

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 11

8

Scope and Methodology (cont.)

We reviewed and tabulated the 86 entity responses received.

We did not verify either the quantitative data or comment information
provided by respondents.

We conducted our work in compliance with applicable provisions of generally
accepted government auditing standards.

We performed our work between June and December, 2000.

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 12

9

Survey Results

Usage of Third Party Instruments

ï¿½ 40 of the 86 entities reported that they used third party payment
instruments at some time during fiscal years 1997 through 1999. (See
Attachment I for a listing of the 40 entities.)

ï¿½ 46 of the 86 entities reported that they did not use third party
instruments at any time during fiscal years 1997 through 1999. (See
Attachment II for a listing of the 46 entities.)

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 13

10

Survey Results (cont.)

For the 40 entities that reported using third party instruments, the number
of payment transactions declined 3. 7 percent from 1.91 million in FY1997 to
1.84 million in FY1999. Number of transactions

(in millions)

1.909 1.937 1.839

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 14

11

Survey Results (cont.)

For the 40 entities that reported using third party instruments, the total
dollar amounts increased 13. 4 percent from $725.2 million in FY1997 to
$822. 6 million in FY1999.

Dollars reported

(in millions)

$725. 2 $780. 5 $822. 6

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 15

12

Survey Results (cont.)

For those entities who reported transactions and dollar data in their survey
response, the number who reported using third party payments in 1999 (36)
was almost twice the number who reported using third party payments in 1997
(19).

Over the three year period from FY 1997 through FY 1999, the average dollar
amount of each payment increased from $380 to $447, for a total increase of
17.6%

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 16

13

Survey Results (cont.)

The 40 entities cited a variety of reasons -- often more than one -- for
using third party payment instruments. The most common reasons reported
were: To pay for small purchases for supplies and services

(32 entities). To pay contractors that either could not or would not

accept government checks, EFTs, or credit card payments (31 entities).

To make emergency payments (25 entities). To provide immediate reimbursement
for out- of- pocket

expenses (25 entities). As an alternative to disbursing a cash advance

(21 entities).

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 17

14

Survey Results (cont.)

In response to survey questions about whether entities have basic internal
controls over the use of third- party payment instruments, the 40 entities
reported management monitoring and review activities as follows.

Third- party payment activities monitored in some way

At least annually Employee use monitored and/ or reviewed Service provider
payment process monitored

and/ or reviewed Written policies or guidance established

Yes No

40 0 23 - 39 1 33 7 32 8

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 18

15

Survey Results (cont.)

In response to a list of 9 potential internal controls that might be
employed to manage and control third party payments, entities reported those
that applied to their use, as follows.

Number of employees authorized to use third party payments was restricted.

Specific dollar limits set on individual payment amounts.

Required authorization signatures. Required the submission of supporting

documentation.

Yes No

40 0 37 3 37 3 37 3

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 19

16

Survey Results (cont.)

Timely recording of payments in accounting records. Independent review and
inspection of supporting

documentation for each payment. Timely reconciliation of payments processed
by

service provider to internal accounting records. Sequential numbering of
payment instruments. Segregation of incompatible duties associated

with using and handling payment instruments.

Yes No

36 4 35 5 35 5 34 6 30 10

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 20

17

Survey Results (cont.)

4 entities offered other internal controls they employed, that were not
listed in the survey.

As noted in the Scope and Methodology, we did not verify each responding
entity response to these questions.

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 21

Briefing Attachments

Enclosure GAO- 01- 294R Survey on Third Party Payment Usage Page 22 (917618)
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