Purchase Cards: Navy is Vulnerable to Fraud and Abuse but Is	 
Taking Action to Resolve Control Weaknesses (27-SEP-02, 	 
GAO-02-1041).							 
                                                                 
The Department of Defense (DOD) is promoting departmentwide use  
of purchase cards for obtaining goods and services. It reported  
that for the year ended September 30, 2001, purchase cards were  
used by 230,000 cardholders to make 10.7 million transactions	 
valued at more than $6.1 billion. The benefits of using purchase 
cards versus traditional contracting and payment processes are	 
lower transaction processing costs and less red tape for both the
government and the vendor community. Although GAO supports the	 
purchase card program concept, it is important that agencies have
adequate internal controls in place to protect the government	 
from fraud, waste, and abuse. A weak overall control environment 
and breakdowns in key internal controls leave the Navy vulnerable
to potentially fraudulent, improper, and abusive purchases. In	 
response to GAO's previous findings, DOD and Navy have begun	 
improving the control environment over the purchase card program.
However, further improvements are needed to achieve an effective 
control environment. GAO determined that the Navy did not provide
cardholders, approving officials, and agency program coordinators
with sufficient human capital resources--time and training--to	 
effectively perform oversight and manage the program. The	 
weaknesses in the Navy's purchase card control environment at the
units audited led to a significant breakdown in key control	 
activities in fiscal year 2001. GAO determined that (1) 	 
cardholders did not screen for the availability of goods from	 
required sources, (2) cardholders did not document that someone  
independent of the cardholder received and accepted the goods and
services, (3) many Navy units did not maintain accountability	 
over pilferable property acquired with the purchase card, and (4)
cardholders did not reconcile monthly purchase card statements to
supporting documentation and approving officials did not review  
the cardholders' reconciled bills prior to payment certification.
The weak control environment and breakdown in key internal	 
controls contributed to potentially fraudulent, improper, and	 
abusive or questionable transactions that went undetected at	 
units in all three Navy commands and the Marine Corps base GAO	 
audited. GAO's site-specific and Navy-wide data mining		 
transactions reviews identified other potentially fraudulent	 
transactions including the purchase of computers, cell phones,	 
food, cameras, power tools, televisions, personal digital	 
assistants, clothing, and stereos. GAO also identified abusive	 
and questionable transactions at all three Navy commands and the 
Marine Corps base audited and in GAO's Navy-wide data mining. The
purchase card transactions that GAO considered to be questionable
generally did not include and explanation or advance		 
authorization that would justify these purchases or permit a	 
determination of whether the purchases were improper or abusive. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-1041					        
    ACCNO:   A05177						        
  TITLE:     Purchase Cards: Navy is Vulnerable to Fraud and Abuse but
Is Taking Action to Resolve Control Weaknesses			 
     DATE:   09/27/2002 
  SUBJECT:   Credit						 
	     Credit sales					 
	     Defense procurement				 
	     Fraud						 
	     Internal controls					 
	     Naval procurement					 
	     Program abuses					 

                                                                 
Purchase Cards: Navy is Vulnerable to Fraud and Abuse but Is	 
Taking Action to Resolve Control Weaknesses (27-SEP-02, 	 
GAO-02-1041).							 
                                                                 
The Department of Defense (DOD) is promoting departmentwide use  
of purchase cards for obtaining goods and services. It reported  
that for the year ended September 30, 2001, purchase cards were  
used by 230,000 cardholders to make 10.7 million transactions	 
valued at more than $6.1 billion. The benefits of using purchase 
cards versus traditional contracting and payment processes are	 
lower transaction processing costs and less red tape for both the
government and the vendor community. Although GAO supports the	 
purchase card program concept, it is important that agencies have
adequate internal controls in place to protect the government	 
from fraud, waste, and abuse. A weak overall control environment 
and breakdowns in key internal controls leave the Navy vulnerable
to potentially fraudulent, improper, and abusive purchases. In	 
response to GAO's previous findings, DOD and Navy have begun	 
improving the control environment over the purchase card program.
However, further improvements are needed to achieve an effective 
control environment. GAO determined that the Navy did not provide
cardholders, approving officials, and agency program coordinators
with sufficient human capital resources--time and training--to	 
effectively perform oversight and manage the program. The	 
weaknesses in the Navy's purchase card control environment at the
units audited led to a significant breakdown in key control	 
activities in fiscal year 2001. GAO determined that (1) 	 
cardholders did not screen for the availability of goods from	 
required sources, (2) cardholders did not document that someone  
independent of the cardholder received and accepted the goods and
services, (3) many Navy units did not maintain accountability	 
over pilferable property acquired with the purchase card, and (4)
cardholders did not reconcile monthly purchase card statements to
supporting documentation and approving officials did not review  
the cardholders' reconciled bills prior to payment certification.
The weak control environment and breakdown in key internal	 
controls contributed to potentially fraudulent, improper, and	 
abusive or questionable transactions that went undetected at	 
units in all three Navy commands and the Marine Corps base GAO	 
audited. GAO's site-specific and Navy-wide data mining		 
transactions reviews identified other potentially fraudulent	 
transactions including the purchase of computers, cell phones,	 
food, cameras, power tools, televisions, personal digital	 
assistants, clothing, and stereos. GAO also identified abusive	 
and questionable transactions at all three Navy commands and the 
Marine Corps base audited and in GAO's Navy-wide data mining. The
purchase card transactions that GAO considered to be questionable
generally did not include and explanation or advance		 
authorization that would justify these purchases or permit a	 
determination of whether the purchases were improper or abusive. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-1041					        
    ACCNO:   A05177						        
  TITLE:     Purchase Cards: Navy is Vulnerable to Fraud and Abuse but
Is Taking Action to Resolve Control Weaknesses			 
     DATE:   09/27/2002 
  SUBJECT:   Credit						 
	     Credit sales					 
	     Defense procurement				 
	     Fraud						 
	     Internal controls					 
	     Naval procurement					 
	     Program abuses					 

******************************************************************
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GAO-02-1041

                                       A

Report to Congressional Requesters

September 2002 PURCHASE CARDS Navy Is Vulnerable to Fraud and Abuse but Is
Taking Action to Resolve Control Weaknesses

GAO- 02- 1041

Letter 1 Results in Brief 4 Background 6 Weak Purchase Card Control
Environment Contributed to Ineffective

Controls, but Management has Taken Positive Steps 9 Critical Internal
Controls Were Ineffective 23 Potentially Fraudulent, Improper, and Abusive
or Questionable

Transactions 33 Conclusions 49 Recommendations for Executive Action 49
Agency Comments and Our Evaluation 52

Appendixes

Appendix I: Background 55

Appendix II: Scope and Methodology 61

Appendix III: Status of GAO Recommendations to Improve Navy Purchase Card
Operations 66

Appendix IV: Status of Previously Identified Fraud Cases 80

Appendix V: Status of the Former Commander, Space and Naval Warfare
Systems Command, Systems Center San Diego 82

Appendix VI: Comments From the Department of Defense Purchase Card Joint
Program Management Office 83

Appendix VII: Comments from the Under Secretary of Defense (Comptroller)
91

Appendix VIII: GAO Contacts and Staff Acknowledgments 93 Tables Table 1:
Ratio of Cardholders to Approving Officials, September 2000

through March 2002 13 Table 2: Historical Purchases vs. Credit Limits for
Selected Navy Commands and Marine Corps 16

Table 3: Lack of Documented Current Training for Cardholders and Approving
Officials 17 Table 4: Reported Results of NAVSUP Mandated Self Assessment

of 12 Months of Purchase Card Transactions 21 Table 5: Program
Coordinators* Span of Control, September 2001 22 Table 6: Estimate of
Fiscal Year 2001 Transactions That Failed

Control Tests 24

Table 7: Purchase Card Transactions with Five Vendors That Sell Products
Also Sold by Required Suppliers 25 Table 8: Accountable Property Items Not
Recorded in Property

Books 31 Table 9: Examples of Fraudulent and Potentially Fraudulent Navy

Purchase Card Transactions 34 Table 10: Examples of Improper Purchases 39
Table 11: Examples of Abusive and Questionable Purchases 45 Table 12:
Number and Value of Transactions in Fiscal Year 2001 55 Table 13: Estimate
of 11 Months of Fiscal Year 2001 Transactions That Failed Control Tests 64

Table 14: Status of Previous GAO Recommendations 67 Figures Figure 1: Navy
Purchase Card Program Management Structure,

September 2001 8 Figure 2: Change in Number of Navy- wide Cardholders,
October 2000 to March 2002 12

Figure 3: Available Credit Limits for the Four Major Commands We Audited
as of September 2000, September 2001, and March 2002 vs. Average FY 2001
Monthly Purchases 14 Figure 4: Computers Purchased by the Atlantic Fleet
in April 2001

That Remained Unused as of June 21, 2002 46 Figure 5: Navy Purchase Card
Process Approving Officials 58

Abbreviations

APC Agency Program Coordinator DOD Department of Defense DON Department of
the Navy GAO General Accounting Office JWOW Javits- Wagner- O'Day Act

NAS Naval Audit Service NAVSEA Naval Sea Systems Command NAVSUP Naval
Supply Systems Command NCIS Naval Criminal Investigative Service PCPMO
Purchase Card Program Management Office PDA Personal Digital Assistant
SECNAV Secretary of the Navy SPAWAR Space and Naval Warfare Systems
Command USMC United States Marine Corps

Letter

September 27, 2002 The Honorable Charles E. Grassley Ranking Minority
Member Committee on Finance United States Senate

The Honorable Stephen Horn Chairman The Honorable Janice D. Schakowsky
Ranking Minority Member Subcommittee on Government Efficiency, Financial
Management

and Intergovernmental Relations Committee on Government Reform House of
Representatives

The Department of Defense (DOD) is promoting departmentwide use of
purchase cards for obtaining goods and services. It reported that for the
year ended September 30, 2001, purchase cards were used by about 230,000
cardholders to make about 10.7 million transactions valued at over $6.1
billion. Purchase card transactions include acquisitions at or below the
$2,500 micropurchase threshold, payment for commercial training requests
valued at or below $25, 000, and for payment on contracts. The use of

purchase cards has dramatically increased in past years as agencies have
sought to eliminate the lengthy process and paperwork long associated with
making small purchases. The benefits of using purchase cards versus
traditional contracting and payment processes are lower transaction
processing costs and less red tape for both the government and the vendor
community. We support the use of a well- controlled purchase card program
to streamline the government*s acquisition processes. While we support the
purchase card program concept, it is important that

agencies have adequate internal controls in place to protect the
government from fraud, waste, and abuse. In July 2001 and March 2002, we
testified on significant breakdowns in internal control over purchase card
transactions at two Navy sites in San Diego, California. 1 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) and

Purchase Cards: Continued Control Weaknesses Leave Two Navy Units
Vulnerable to Fraud and Abuse, GAO- 02- 506T (Washington, D. C.: Mar. 13,
2002).

As a result of our work at the two Navy sites and continuing concern about
fraud, waste, and abuse in DOD*s purchase card program, you requested that
we expand our audits of purchase card controls. On June 27, 2002, we
reported 2 on control weaknesses in the Army*s purchase card program. This
report focuses on purchase card activities at the Navy. The Navy is the

second largest purchase card program in DOD. During fiscal year 2001, the
Navy had about 2.8 million transactions and $1.8 billion in purchases, and
as of September 2001 it had about 28,000 cardholders. We plan to report to
you separately on the results of our audit of the Air Force purchase card
program.

The objective of our audit of the Navy*s purchase card program was to
assess the adequacy of internal control over the authorization, purchase,
and payment of purchase card transactions during fiscal year 2001, and
determine whether the purchase card control weaknesses identified at two
Navy units in San Diego were isolated examples or were indicative of
Navywide weaknesses with the purchase card program. Specifically, we
addressed whether (1) the Navy*s overall control environment and
management of the purchase card program were effective, (2) the Navy*s key
internal control activities operated effectively and provided reasonable

assurance that purchase cards were used appropriately, and (3) indications
existed of potentially fraudulent, improper, and abusive or questionable
transactions. We supplemented our previous fiscal year 2001 audit work at
the Space and Naval Warfare Systems Command Systems Center in San Diego,
and the Naval Facilities Engineering Command*s Navy Public Works Center in
San Diego by auditing the Navy*s internal control policies, procedures,
and key activities at three major warfighting commands (Atlantic Fleet,
Pacific Fleet, and the Marine Corps 3 ), and one other major support
command (Naval Sea Systems Command). These six major commands account for
about 56 percent of the Navy*s total fiscal year 2001 purchases and 56
percent of the Navy*s total fiscal year 2001 transactions. For each major
command audited, we selected a geographic location (e. g., for the Pacific
Fleet we selected cardholders based in or near San Diego)

where we conducted a case study analysis by testing a statistical sample
of purchase card transactions and performing other audit work to evaluate
the design and implementation of key internal control procedures and 2 U.
S. General Accounting Office, Purchase Cards: Control Weaknesses Leave
Army

Vulnerable to Fraud, Waste, and Abuse, GAO- 02- 732 (Washington, D. C.:
June 27, 2002). 3 The Navy treats the entire Marine Corps as a major
command in managing the purchase card program.

activities. The results of our audit for transactions that comprised the
statistical samples can only be projected to the units where we performed
testing and cannot be used for projections to the entire command or to the
Navy as a whole. However, the cumulative results of all our work offer
significant perspective on the adequacy of the design and implementation
of purchase card program internal controls across the Navy. We also looked
for indications of potentially fraudulent, improper, and abusive or
questionable purchases as part of our statistical sampling and

through nonrepresentative selections of transactions using data mining of
Navy- wide fiscal year 2001 transactions. Our data mining 4 included
identifying transactions with certain vendors that were more likely to
sell items that would be unauthorized or that would be personal items (e.
g., department and jewelry stores). Because of the large number of

transactions that met these criteria, we did not look at all potential
abuses of the purchase card. While we identified some potentially
fraudulent, improper, and abusive or questionable purchases, our work was
not designed to identify, and we cannot determine, the extent of these
purchases. See appendix I for background on the purchase card program and
see appendix II for details on our scope and methodology.

Finally, per your request, this report also provides the status of (1) the
Navy*s progress in implementing the November 30, 2001, recommendations 5
to improve purchase card internal controls (see app. III), (2) two
potential fraud cases referred to in our March 13, 2002, testimony (see
app. IV), and (3) the former commanding officer at the Space and Naval
Warfare Systems Command, Systems Center San Diego (see app. V).

We requested comments from the Secretary of Defense or his designee on a
draft of this report. We received comments from the Director, DOD Purchase
Card Joint Program Management Office dated September 16, 2002, and from
the Under Secretary of Defense (Comptroller) dated September 23, 2002. We
reprinted those comments in appendix VI and

appendix VII of this report. We conducted our audit work from November 4
In our work, data mining involved the manual or electronic sorting of
purchase card data to identify and select transactions with unusual or
questionable characteristics for further follow- up and analysis.

5 U. S. General Accounting Office, Purchase Cards: Card Control Weaknesses
Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO- 02- 32
(Washington, D. C.: Nov. 30, 2001).

2001 through July 2002 in accordance with U. S. generally accepted
government auditing standards, and we performed our investigative work in
accordance with standards prescribed by the President*s Council on
Integrity and Efficiency. Results in Brief A weak overall control
environment and breakdowns in key internal

controls leave the Navy vulnerable to potentially fraudulent, improper,
and abusive purchases. Based on our audit work at four Navy major commands
and selected units assigned to those major commands, and our previous
audit work at two San Diego units assigned to two other major commands, we
found that purchase card internal controls were ineffective. The

problems we found across the Navy resulted from a weak overall internal
control environment, inadequate guidance, flawed policies and procedures,
and a lack of adherence to valid policies and procedures. In response to
our previous findings, DOD and the Navy have begun

improving the control environment over the purchase card program. For
example, subsequent to the congressional hearing on July 30, 2001, which
highlighted purchase card control weaknesses at the two San Diego units,
DOD directed all military units to reassess the number of cardholders and

to ensure that purchase cards are limited to those who need them. At the
Navy, this resulted in the reduction in the number of cardholders by more
than half* from about 59,000 in June 2001 to about 25,000 in March 2002.
DOD also directed all military units to reevaluate cardholder credit
limits. This resulted in the four commands that we audited reducing their

combined credit limits by about $140 million. The Navy also directed that
all cardholders and approving officials take refresher purchase card
training. In addition, the Navy reported that it either implemented or is

planning to implement all 29 recommendations made in our November 30,
2001, report.

However, further improvements are needed to achieve an effective control
environment. For example, as of March 2002, the four Navy commands we
reviewed continued to have approving officials with spans of control that

exceeded DOD and Navy requirements, and cardholder credit limits exceeded
demonstrated needs. We also question the effectiveness of transaction
monitoring conducted by the four commands that we audited. In November
2001, these four commands completed an analysis of

1,225,000 fiscal year 2001 transactions and found about 0.1 percent of
their transactions were for personal use, or prohibited items, or did not
fulfill a bona fide mission requirement. In contrast, our analysis of a
statistically

selected sample of 624 fiscal year 2001 transactions found that about 15
percent of the transactions we reviewed were potentially fraudulent,
improper, abusive, or questionable. In addition, we determined that the
Navy did not provide cardholders, approving officials, and agency program
coordinators with sufficient human capital resources* e. g., time and
training* to effectively perform oversight and manage the program. The
weaknesses in the Navy*s purchase card control environment at the units
audited led to a significant breakdown in key control activities in

fiscal year 2001. Specifically, we determined that (1) cardholders did not
screen for the availability of goods from required sources, (2)
cardholders did not document that someone independent of the cardholder
received and accepted the goods and services, (3) many Navy units did not
maintain accountability over pilferable property acquired with the
purchase card, and (4) cardholders did not reconcile monthly purchase card
statements to supporting documentation and approving officials did not
review the cardholders* reconciled bills prior to payment certification.
These controls are intended to provide the Navy with reasonable assurance
that purchase card transactions are for valid and necessary government
expenditures. The high failure rate* 80 percent to 98 percent* of
cardholder reconciliation and approving official review is of particular
concern because it is perhaps the most important control by providing
reasonable assurance that purchases are appropriate and for a legitimate
government need. The weak control environment and breakdown in key
internal controls

contributed to potentially fraudulent, improper, and abusive or
questionable transactions that went undetected at units in all three Navy
commands and the Marine Corps base we audited. For example, two
cardholders selected in our Atlantic Fleet statistical sample were part of
a fraud investigation conducted by the Naval Criminal Investigative
Service (NCIS). Both of these cardholders were part of an overall plot by
these cardholders and up to seven vendors to defraud the Navy of nearly
$89,000. Our site- specific and Navy- wide data mining transaction reviews
identified

other potentially fraudulent transactions including the purchase of
computers, cell phones, food, cameras, power tools, televisions, personal
digital assistants, clothing, and stereos. We also identified numerous
examples of improper transactions, which are transactions for goods or
services that are intended for government use but are not permitted by
law, Navy regulation, or DOD policy. Improper purchases were made for
food,

clothing, printing services, office supplies, rental cars, and hotel
lodging and services.

We also identified abusive and questionable transactions at all three Navy
commands and the Marine Corps base we audited and in our Navy- wide data
mining. Abusive transactions are those where the goods or services are
authorized, but are purchased at an excessive cost or for a questionable
government need. Questionable transactions are those that could be

considered improper or abusive, but the support is insufficient for a
determination. The purchase card transactions that we considered to be
questionable generally did not include an explanation or advance
authorization that would justify these purchases or permit a determination
of whether the purchases were improper or abusive. Examples of abusive or
questionable purchases include designer leather products such as Coach and
Dooney and Bourke merchandise; fine china; athletic equipment; beer; $2,
200 flat- panel computer monitors; excessive and uneconomical cell phone
use; and transactions for which the Navy does not have any documentation
indicating what was purchased.

This report includes 19 additional recommendations to (1) improve the
overall control environment for the Navy*s purchase card program, (2)
strengthen key internal control activities, and (3) increase attention to
preventing potentially fraudulent, improper, and abusive or questionable
transactions. In written comments on a draft of this report, DOD

concurred with 16 and partially concurred with the remaining 3
recommendations and described actions completed, underway, or planned to
implement them. While DOD partially concurred with our

recommendations dealing with linking the performance appraisals of
purchase card officials to achieving performance standards, and
maintaining accountability over pilferable property, the actions DOD has
agreed to take will implement the most significant aspects of those
recommendations. DOD also partially concurred with our recommendation
concerning establishing a schedule of disciplinary actions that may be
taken against cardholders who make improper or abusive acquisitions and
stated that Navy will examine whether actions the department has already
taken will appropriately deal with the improper or abusive uses of
purchase cards.

Background The Navy*s purchase card program is part of the governmentwide
Commercial Purchase Card Program established to simplify federal agency

acquisition processes by providing a low- cost, efficient vehicle for
obtaining goods and services directly from vendors. DOD has mandated the
use of the purchase card for all purchases at or below $2,500 and has
authorized the use of the card to pay for specified larger purchases. DOD

has seen significant growth in the program since its inception and
estimated that in fiscal year 2001 about 95 percent of its transactions of
$2,500 or less were made by purchase card.

The purpose of the program is to simplify the process of making small
purchases. It allows cardholders to make micropurchases of $2,500 or less
and pay for training of $25,000 or less without having to execute a
contract. The government purchase card can also be used for larger
transactions, but only under a contract. For larger transactions, the card
is referred to as a *payment card* because it pays for an acquisition made
under a legally executed contract.

The Navy uses a combination of governmentwide, DOD, and Navy guidance as
the policy and procedural foundation for its purchase card program. The
Navy purchase card program operates under a governmentwide General
Services Administration purchase card contract, as do the purchase card
programs of all federal agencies. In addition, government acquisition laws
and regulations such as the Federal Acquisition Regulation provide overall
governmentwide guidance. DOD and the Navy have issued clarifying guidance
to these regulations. The Under Secretary of Defense for Acquisition,
Technology, and Logistics* in cooperation with the Under Secretary of
Defense

(Comptroller)* has overall responsibility for DOD*s purchase card program.
The DOD Purchase Card Joint Program Management Office, in the office of
the Assistant Secretary of the Army for Acquisitions Logistics and
Technology, is responsible for overseeing DOD*s program. The Commander of
the Naval Supply Systems Command (NAVSUP) has been designated the Navy*s
chief contracting officer, and under his command is the Navy purchase card
program manager. However, primary day- to- day management responsibility
for the program lies with the agency program coordinators in the Navy*s
major commands and local units. Figure 1 depicts the management hierarchy
of the Navy purchase card program for the units at the four major commands
that we audited. The figure shows each major command where we conducted
audit work; for each location we selected for a case study analysis, the
figure also shows the total

number of subordinate level agency program coordinators, approving
officials, and cardholders. It is important to note that at the major
commands and the subordinate level units that we audited, most agency
program coordinators, approving officials, and cardholders were not
dedicated to the purchase card program on a full- time basis. Rather, most

individuals had additional job responsibilities and performed purchase
card duties when needed.

Figure 1: Navy Purchase Card Program Management Structure, September 2001
DOD Purchase Card Joint Program Management Office

Department of Navy eBusiness Operations Office

Navy Agency Program Coordinator

Atlantic Fleet Pacific Fleet

Naval Sea Systems U. S. Marine Corps

Command

Major Command Agency Major Command Agency

Major Command Agency Major Command Agency

Program Coordinator Program Coordinator

Program Coordinator Program Coordinator

Norfolk, VA Area San Diego, CA Area Norfolk, VA Area

Camp Lejeune, NC

Agency program Agency program

Agency program Agency program

coordinators at coordinators at

coordinators at coordinators at

subordinate units 98 subordinate units 66

subordinate units 10 subordinate units 15

Approving officials 286 Approving officials 168

Approving officials 78 Approving officials 173

Cardholders 769 Cardholders 417 Cardholders 235

Cardholders 496 Source: GAO analysis of Navy purchase card program
organization.

At the major commands and units audited, personnel in three positions*
agency program coordinator, cardholder, and approving official 6 *are
collectively responsible for providing reasonable assurance that purchase
6 Approving officials are also referred to as either billing officials or
certifying officials. DOD

often uses these three terms interchangeably.

card transactions are appropriate and meet a valid government need. Agency
program coordinators work at both the major command and unit levels. Major
command agency program coordinators operate under the direction of the
command*s director of the contracting office, and are responsible for the
day- to- day management, administration, and oversight of the program.
Unit level agency program coordinators develop local standard operating
procedures, issue and cancel cards, train cardholders and approving
officials, and work with other Navy units and the cardissuing bank.
Cardholders are to make purchases, maintain supporting documentation, and
reconcile their monthly statements. Approving officials, who typically are
responsible for more than one cardholder, are to review each cardholder*s
transactions and reconciled statements, and certify for payment their
cardholders* purchases. Appendix I provides

additional details on the Navy purchase card program. Weak Purchase Card
Control Environment

Mangement and employees should establish and maintain an

Contributed to

environment throughout the organization that sets a positive and
supportive attitude toward internal control and conscientious

Ineffective Controls,

management. A positive control environment is the foundation for all

but Management has

other standards. It provides discipline and structure as well as the

Taken Positive Steps

climate which influences the quality of internal control. GAO*s Standards
for Internal Control in the Federal Government (GAO/ AIMD- 00- 21.3.1,
November 1999)

We found that the Navy and Marine Corps units we audited had not
established an effective internal control environment in fiscal year 2001,
and although significant improvements have been made, further action in
several areas is necessary. Specifically, we found that in fiscal year
2001, these locations did not (1) effectively evaluate whether approving
officials maintained reasonable spans of control, (2) limit purchase card
credit limits to historical procurement needs, (3) ensure that cardholders
and approving officials were properly trained, (4) utilize the results of
purchase card program monitoring efforts, and (5) establish an
infrastructure necessary to effectively monitor and oversee the purchase
card program. As a result of our July 30, 2001, testimony, the Navy and
DOD have taken

significant actions to improve purchase card controls, including reducing
the number of cardholders by over 50 percent and establishing a Charge

Card Task Force to further improve the purchase card processes and
controls. Improvement Initiatives Signal Proactive *Tone at

Management plays a key role in demonstrating and maintaining

the Top*

an organization's integrity and ethical values, especially in setting and
maintaining the organization's ethical tone, providing guidance for proper
behavior, removing temptations for unethical behavior, and providing
discipline when appropriate. GAO's Standards for Internal Control in the
Federal Government (GAO/ AIMD- 00- 21.3.1, November 1999)

Since the July 30, 2001, congressional hearing, the DOD Comptroller, the
DOD Purchase Card Joint Program Management Office, and NAVSUP have issued
a number of directives and policy changes citing previous audit findings
and the need to improve both the purchase card control environment and
adherence to control techniques. Specifically, in response to our November
2001 report, the Navy has acted on or plans to implement all 29 of our
recommendations to improve controls over the purchase card program. While
we believe that some of the Navy*s actions to implement our
recommendations are not sufficient to achieve the necessary changes,
planned and implemented actions to date are a significant step forward.

In addition, the DOD Comptroller appointed a Charge Card Task Force, which
issued its final report on June 27, 2002. The report identified many of
the control weaknesses we identified in this and previous reports and
testimonies. In the report, the DOD Comptroller stated that this ** is an
excellent first step in an on- going process to continually seek ways to
improve charge card programs. We must continue to identify new ways of
reducing the government*s cost of doing business while at the same time
ensuring that we operate in a manner that preserves the public*s trust in
our ability to provide proper stewardship of public funds.* The task force
report included a number of recommendations including establishing a
purchase card concept of operations; accelerating the electronic
certification and bill paying process; improving training materials;

identifying best practices in areas such as span of control and purchase
card management skill sets; and establishing more effective means of

disciplining those who abuse the purchase cards. These recommendations
address many of the concerns that we previously identified and provide
management at the Pacific Fleet, Atlantic Fleet, Naval Sea Systems Command
(NAVSEA), and Marine Corps the opportunity to take a proactive role in
correcting control weaknesses and ensuring that the purchase card remains
a valuable tool.

Number of Cardholders Although the Navy significantly reduced the number
of purchase cards

Significantly Reduced but since our July 30, 2001, testimony, it continued
to have approving officials

Approving Official Span of who were responsible for reviewing more
cardholder statements than

Control Remains an Issue allowed by either DOD or Navy guidance, which
limits the number of

cardholders that an approving official should review to seven. The
convenience of the purchase card must be balanced against the time and
cost involved in the training, monitoring, and oversight of cardholders.
It must also be balanced against the exposure of the Navy to the legally
binding obligations incurred by those transactions. The proliferation of
purchase cards and high cardholder- to- approving- official ratios
increase the risks associated with the purchase card program. In response
to the July 2001 hearing, DOD*s Director of Procurement instructed the
directors of Defense agency procurement and contracting departments on
August 13, 2001, to limit purchase cards to only those personnel who need
to purchase goods and services as part of their jobs. As a result of this
heightened concern, the Navy reduced the number of cardholders by more
than half*

from about 59,000 in June 2001 to about 28,000 by September 2001. In
October 2001, the Navy followed up the initial reduction in cardholders
with an interim change to the NAVSUP existing purchase card instructions
that established minimum criteria for prospective purchase card holders.

As shown in figure 2, the Navy continued to reduce the number of
cardholders and was down to about 25, 000 as of March 2002. Agency program
coordinators at the commands we audited told us that the reduction was a
result of (1) employee attrition, and (2) cancellation of cards of
individuals who no longer needed them.

Figure 2: Change in Number of Navy- wide Cardholders, October 2000 to
March 2002 75,000

Number of Navy- wide cardholders 60,000 45,000 30,000 15,000

0 Oct- 00

00 00

Jan- 01 01

01 Apr- 01

01 Jun- 01

Jul- 01 01

01 Oct- 01

01 01

Jan- 02 02

02 Nov- Dec- Feb- Mar- May- Aug- Sep- Nov- Dec- Feb- Mar- Source: General
Services Administration.

NAVSUP*s interim change limiting purchase cards also established a maximum
ratio of seven cardholders to each approving official, 7 and required that
Navy and Marine Corps units establish local policies and procedures for
approving purchase cards and for issuing them to activity personnel. The
Navy*s requirement of a maximum 7- to- 1 ratio of cardholders to an
approving official is consistent with guidance issued by the Department of
Defense Purchase Card Joint Program Management

Office on July 5, 2001, shortly before the congressional hearing. As shown
in table 1, at the four locations we audited, the average ratio of
cardholders to approving officials was well in line with the DOD and Navy
limit of seven cardholders per approving official. This average, however,
7 The approving official is responsible for reviewing and verifying the
monthly purchase card

statements of the cardholders under his or her purview. The approving
official is responsible for verifying that all purchases were necessary
and were made for official government purposes in accordance with
applicable policies, laws, and regulations. Unless otherwise specified,
the approving official must also be the certifying officer for his/ her
cardholders and in that capacity must certify that the monthly purchase
card statement is appropriate and ready for payment.

masks the wide range of ratios across units, including those that far
exceeded the DOD and Navy prescribed ratio of cardholders to approving
official. The problem of high cardholder- to- approving- official ratios
remains especially acute at NAVSEA, which at some locations used one
approving official to certify a single payment for all the unit*s
cardholders. This resulted in approving officials certifying monthly bills
that contained thousands of transactions and regularly exceeded $1 million
a month.

Table 1: Ratio of Cardholders to Approving Officials, September 2000
through March 2002 Average ratio of

Number of approving Highest ratio of cardholders to

officials with more than 7 cardholders to Command Date

approving official cardholders to review

approving official

Atlantic Fleet Sept. 2000 3.0 to 1 72 66 to1 March 2002 2.8 to 1 15 17 to1
Pacific Fleet Sept. 2000 2.7 to 1 53 36 to1

March 2002 2.5 to 1 32 15 to1 NAVSEA Sept. 2000 2.8 to 1 51 382 to 1

March 2002 2.6 to 1 20 375 to 1 Marine Corps Sept. 2000 3.3 to 1 84 410 to
1

March 2002 2.6 to 1 17 68 to 1 Source: GAO analysis of Citibank data
provided by Navy.

Cardholder Credit Limits While total financial exposure as measured in
terms of purchase card credit

Exceed Procurement Needs limits has decreased in the units we audited, as
shown in figure 3, it

continues to substantially exceed historical purchase card procurement
needs.

Figure 3: Available Credit Limits for the Four Major Commands We Audited
as of September 2000, September 2001, and March 2002 vs. Average FY 2001
Monthly Purchases 500

Dollars in millions

443 454

436 400 300

245 236

201 211 199

200

160 159 159

128

100 0

14 11 22 19

Atlantic Fleet Pacific Fleet NAVSEA Marine Corps

Average fiscal year 2001 monthly purchases Sept. 2000 Sept. 2001 March
2002

Source: GAO analysis of Citibank data provided by Navy.

Limiting credit available to cardholders is a key factor in managing the
purchase card program and in minimizing the government*s financial
exposure. Therefore, to determine the maximum credit available we analyzed
the credit limits available to both cardholders and approving officials. 8
In August 2001, the Under Secretary of Defense for Acquisition,
Technology, and Logistics sent a memorandum to the directors of all
defense agencies stating that supervisors should set reasonable limits
based on what each person needs to buy as part of his or her job and that
every cardholder does not need to have the maximum transaction or monthly
credit limit. Similarly, in October 2001, NAVSUP issued an interim change
to the purchase card program instruction which requires agency program
coordinators to monitor cardholder credit limits and ensure that

the credit limits are appropriate for mission requirements. We concur with
both the Under Secretary*s statement and NAVSUP*s interim change to the
purchase card instructions, and continue to believe that limiting
cardholder spending authority is an effective way of minimizing the
federal government*s financial exposure. However, we have not seen
adequate progress in this area at the locations that we audited. None of
the units we visited tied either the cardholder*s or the approving

official*s credit limit to the unit*s historical spending. Rather, they
often established arbitrary credit limits of $10,000 to $25,000. In some
instances, we found cardholders and approving officials who had credit
limits that far exceeded historical spending needs. For example, as of
September 2001, we identified over 60 cardholders with $9.9 million 9
credit limits, and more than 2,300 approving officials with $9. 9 million
credit limits at the four commands we audited. As shown in table 2, the
four commands that we audited had credit limits that clearly exceeded
historical needs. 8 There are two credit limits that can restrict a
cardholder*s ability to use a purchase card*

the approving official*s credit limit and the cardholder*s credit limit*
both of which are set by the unit agency program coordinator. A
cardholder*s credit limit is the maximum amount that a cardholder can
purchase in a billing cycle, normally 1 month. An approving official*s
credit limit is the maximum amount that all the cardholders who report to
an approving

official may spend. However, the available credit limit of the approving
official cannot exceed the sum of the credit limits available to all of
the cardholders he or she authorizes for payment.

9 The maximum credit limit allowed by NAVSUP Instruction 4200.94 is $9.9
million.

Table 2: Historical Purchases vs. Credit Limits for Selected Navy Commands
and Marine Corps

Atlantic Pacific

Marine Fleet Fleet NAVSEA Corps

Credit limits as of March 2002 $128 million $159 million $199 million $454
million

Fiscal year 2001 average monthly purchase activity $14 million $11 million
$22 million $19 million

Ratio of credit limit a to average fiscal year 2001 monthly expenditures 9
to 1 14 to 1 9 to 1 24 to 1

Cardholders with $9. 9 million credit limits as of September 2001 7 15 10
34

Approving officials with $9.9 million credit limits as of September 2001
544 497 614 724

a Credit limit as of March 2002 to reflect the reduction in credit limits
made by the commands. Source: GAO analysis of Citibank data provided by
Navy.

Navy Units Lacked Documented Evidence of

Effective management of an organization's workforce- its human

Training capital- is essential to achieving results and an important part
of internal control* Training should be aimed at developing and

retraining employee skill levels to meet changing organizational needs.
GAO's Standards for Internal Control in the Federal Government (GAO/ AIMD-
00- 21.3.1, November 1999)

Most of the units we audited did not have documented evidence that their
purchase card holders had received the initial or supplemental training
required by the Navy purchase card program guidance. Training is key to
ensuring that the workforce has the skills necessary to achieve
organizational goals. In accordance with NAVSUP Instruction 4200.94, all
cardholders and approving officials must receive purchase card training.
Specifically, NAVSUP Instruction 4200. 94 requires that prior to the
issuance of a purchase card account, the prospective cardholder and
approving

official must receive training regarding both Navy policies and procedures
and local procedures. The instruction also requires all cardholders and

approving officials to receive refresher training every 2 years. In
response to the July 30, 2001, hearing, the Assistant Secretary of the
Navy for Research, Development and Acquisition sent a message in August
2001 to all Navy units directing them to train all of their cardholders on
or about September 12, 2001, concerning the proper use of the purchase
cards. While acknowledging this need, the Navy does not have a database
that

would enable agency program coordinators to monitor training for
cardholders and approving officials. Therefore, the Navy does not have a
systematic means to determine whether NAVSUP Instruction 4200. 94 or its
directives are being carried out. As shown in table 3, we found that from
about 56 percent of the fiscal year

2001 transactions at the Marine Corps to about 87 percent of the
transactions at the Atlantic Fleet were made by cardholders or approved
for payment by approving officials for whom there was no documented

evidence of either initial training or refresher training at the time the
transaction was made. Managers at all four locations told us that they
require all cardholders to receive training prior to receiving their
purchase cards. Not all managers were as confident that cardholders and
approving

officials received follow- up training. Without a centralized training
database it would be extremely difficult to track when each cardholder
needed the required 2- year refresher training.

Table 3: Lack of Documented Current Training for Cardholders and Approving
Officials

Atlantic Fleet units

Pacific Marine

in the Fleet units

NAVSEA Corps Base, Norfolk

in the San units in the

Camp area

Diego area Norfolk area

Lejeune

Percentage a of transactions made by cardholders or certified for payment
by approving officials without

documented current training at the time the transactions were made 87% 73%
80% 56% a The numbers represent point estimates for the population based
on our sampling tests. The confidence intervals for our sample estimates
are presented in appendix II of this report. Source: GAO analysis of Navy
records.

Further, for training to be effective it should be tailored to provide the
knowledge needed for the different tasks in purchase card management.
However, we found that, even though the functions performed by the agency
program coordinators, approving officials, and cardholders are
substantially different, the training curriculum for the three positions
was identical. Neither NAVSUP nor the major commands had specific guidance
or training concerning the role and responsibilities of agency program
coordinators or approving officials. Monitoring and Oversight

Need Improvement Agency internal control monitoring assesses the quality
of performance over time. It does this by putting procedures in place to
monitor internal control on an ongoing basis as a part of the process of
carrying out its regular activities. It includes ensuring that managers
and supervisors know their responsibilities for internal control and the
need to make internal control monitoring part of their regular operating
processes. Ongoing monitoring occurs during normal operations and includes
regular management and supervisory activities, comparisons,
reconciliations, and other actions people take in performing their duties.
GAO's Internal Control Standards: Internal Control Management and
Evaluation Tool (GAO- 01- 1008G, August 2001)

We found evidence that the Pacific Fleet, Atlantic Fleet, Naval Sea
Systems Command units, and the Marines Corps base that we audited
conducted reviews of the fiscal year 2001 purchase card program. However,
we did not find that these commands used the results of those reviews to
resolve identified internal control weaknesses. Further, an August 2001
NAVSUPmandated

review of 12 months of purchase card transactions failed to identify the
extent of potentially fraudulent, improper, and abusive or questionable
transactions identified in either Naval Audit Service or GAO audits.
NAVSUP Instruction 4200.94 calls for agency program coordinators 10 to
perform semiannual reviews of their units* purchase card program,
including the program*s adherence to internal operating

procedures, applicable training requirements, micropurchase procedures,
receipt and acceptance procedures, and statement certification and prompt
payment procedures. These reviews are to serve as a basis for agency
program coordinators* to initiate appropriate action to improve the local
program or correct problem areas. Throughout fiscal year 2001, the Navy
purchase card instructions did not require that written reports on the
results of internal reviews be submitted to either local management or a
central Navy office for monitoring and oversight. As a result, the Navy
did not have a consistent process for documenting the results of purchase
card reviews, identifying systemic problems, or monitoring corrective
actions to help provide assurance that the actions are effectively
implemented. In October 2001, in response to our previous audit work, the
Navy issued an interim change to NAVSUP Instruction 4200.94 that requires
each command twice a year to summarize the results of monitoring in their
subordinate commands and to forward each summary to NAVSUP.

Results of Periodic Reviews Although agency program coordinators and the
Naval Audit Service have conducted periodic reviews of the purchase card
program that showed cardholders and approving officials were not adhering
to required control

procedures, we found no evidence that the commands or units that we
audited used the results of those reviews to improve the control
environment or adherence to control procedures. The internal control
weaknesses identified by agency program coordinators included (1) a lack
of independent documentation that the Navy received items ordered,

(2) accountable items not recorded in the property records, (3) inadequate
10 NAVSUP Instruction 4200.94 authorizes agency program coordinators to
administer the purchase card program within their designated units,
establish credit limits, and authorize the issuance of cards to Navy
employees. Agency program coordinators also serve as the communication
link between the purchase card issuing bank and their units.

documentation for transactions, and (4) split purchases. In addition, the
Naval Audit Service issued a report dated May 29, 2002, that was critical
of the controls that the Naval Sea Systems Command exercised over the
purchase card transactions at eight locations. The Naval Audit Service
report not only highlighted findings similar to those listed here, but
also identified 265 questionable transactions for such items as gift
certificates, clothing, watches, and rental cars.

Results of Stand- Down Reviews In contrast to the findings of the agency
program coordinators and the Naval Audit Service, the four major commands
reported relatively few, if any, inappropriate purchase card transactions
when they conducted a self assessment of transactions in response to a
NAVSUP August 2001 directive. In that directive, NAVSUP required that each
Navy unit conduct a standdown review of all purchase card transactions the
unit made during the previous 12 months and report the results to NAVSUP
by November 15, 2001. Based on the results of the reviews conducted by the
units we audited, we question the design and performance of the review.
Its results do not indicate a thorough and critical analysis of the nature
and magnitude of the control weaknesses and of the extent to which
fraudulent, improper, or abusive transactions were occurring during the
period reviewed. As

shown in table 4, the four major commands that we audited represented that
they reviewed about 1,225, 000 transactions but reported that they found
only 1,355 purchases* about 0.1 percent of the transactions reviewed* were
for personal use or for prohibited items, or were not bona

fide mission requirements. In our statistical sample of 624 fiscal year
2001 transactions, we found 102 potentially fraudulent, improper, and
abusive or questionable transactions* about 15 percent of the transactions
audited. Furthermore, we found numerous examples of abusive and improper
transactions (discussed in more detail in the following section of this
report) as part of our data mining. In response to this issue, command
level agency program coordinators told us that they did not have
sufficient time to perform their transaction reviews.

Table 4: Reported Results of NAVSUP Mandated Self Assessment of 12 Months
of Purchase Card Transactions

Atlantic Fleet Pacific Fleet NAVSEA Marine Corps

Number of transactions 303,000 214, 000 321,000 388, 000 Activities that
did not complete review 12 7 1 0

Purchases not required to fulfill bona fide mission requirements 0 86 30
342

Purchases for personal use 5 14 25 252 Purchases of prohibited items 57
201 68 275 Split purchases 224 163 1,241 1, 145 Source: Navy records.

Human Capital Resources Are Insufficient for

Effective management of an organization's workforce its human

Effective Monitoring and

capital is essential to achieving results and an important part of

Oversight

internal control. Management should view human capital as an asset rather
than a cost. Only when the right personnel for the job are on board and
are provided the right training, tools, structure, incentives and
responsibilities is operational success possible. GAO's Standards for
Internal Control in the Federal Government (GAO/ AIMD- 00- 21.3.1,
November 1999)

The Navy has not provided sufficient human capital resources to enable
effective monitoring of purchases and to develop a robust oversight
program. The three key positions for overseeing the program and monitoring
purchases are the command- level agency program coordinator, the unit-
level agency program coordinator, and the approving official.

During the period of our review, none of the major command agency program
coordinators we audited worked full time in that position. This is despite
the fact that they were responsible for managing procurement programs that
incurred between 227,000 and 380,000 transactions totaling from about $137
million to about $268 million annually. Further, these agency program
coordinators were responsible for managing the

procurement activities of cardholders who were located not only on the
East and West Coasts of the United States but in some instances on other
continents. In addition, these part- time major command coordinators
generally had one or two staff in their immediate office* who were also
assigned other responsibilities* that helped monitor the program.
Considering that the major command agency coordinators are responsible for
procurement programs involving hundreds of thousands of transactions

and hundreds of millions of dollars, as shown in table 5, the human
capital resources at the major command level are inadequate.

Table 5: Program Coordinators* Span of Control, September 2001 Atlantic

Pacific Marine Command Fleet Fleet NAVSEA Corps

Number of people in the major command agency program coordinator office 2
2 2 3

Number of subordinate level agency program coordinators 400 321 46 130

Number of approving officials 1, 088 926 968 1, 498 Number of cardholder
accounts 3,543 2, 341 2, 738 4,766

Number of fiscal year 2001 transactions (in thousands) 303 227 319 380

Value of fiscal year 2001 transactions (in millions) $173 $137 $268 $224

Source: GAO analysis of Navy purchase card program data as of September
30, 2001.

We also found that the major commands we audited did not provide the
subordinate level agency program coordinators and approving officials with
the time, training, tools, or incentives* also human capital resources*
needed to perform their monitoring responsibilities necessary for the
operational success of the program. Rather, the responsibilities of
approving officials and many subordinate level agency program coordinators
fell into the category of *other duties as assigned,* with

minimal time, training, or tools to carry out these responsibilities.
Further, we found that approving officials and most agency program
coordinators generally had other duties of higher priority than monitoring
purchases and reviewing cardholders* statements. This was especially true
for approving officials, some of whom were engineers and computer

technicians, whose annual ratings generally did not cover their approving
official duties. One subordinate level agency program coordinator told us
that she knows that some approving officials do not review the cardholder
statements because (1) some cardholders make thousands of purchases in a
month and (2) the approving officials have other responsibilities. Another
agency program coordinator told us that some agency program

coordinators and approving officials fear that questioning certain
purchases could be career- limiting decisions. Further, neither the Navy
nor the major commands have established a position description, an
adequate statement of duties, or other information on the scope, duties,
or specific responsibilities for subordinate- level agency program
coordinators and approving officials.

Critical Internal Controls Were

Internal control activities help ensure that management*s directives

Ineffective

are carried out. The control activities should be effective and efficient
in accomplishing the agency*s control objectives. GAO's

Standards for Internal Control in the Federal Government (GAO/ AIMD- 00-
21.3.1, November 1999)

Basic internal controls over the purchase card program were ineffective at
the units in the major commands we audited during fiscal year 2001
primarily because they were not effectively implemented. Based on our
tests of statistical samples of purchase card transactions, we determined
that key transaction- level controls were ineffective, rendering the
purchase card transactions at the units we audited vulnerable to
fraudulent and

abusive purchases and to the theft and misuse of government property. The
problems we found primarily resulted from inadequate guidance and a lack
of adherence to valid policies and procedures. The specific controls that
we tested were (1) screening for required vendors, (2) documenting
independent receipt and acceptance of goods and services, (3) documenting
cardholder reconciliation and approving official review prior to
certifying the monthly purchase card statement for payment, and (4)
recording pilferable property in accountable records. As shown in table 6,
the failure rates for the first three attributes that we tested ranged

from 58 percent to 98 percent respectively for the Atlantic Fleet units in
Norfolk for documenting independent receipt and acceptance obtained with a
purchase card and reviewing cardholder statements prior to certifying them
for payment. Most transactions in our statistical sample

did not contain pilferable property. Thus, we are not projecting the
results of that test to the population of transactions that we tested at
those units.

Table 6: Estimate of Fiscal Year 2001 Transactions That Failed Control
Tests Percent breakdowns in key purchase card controls a

Independent, Proper reconciliation and Screening

documented certification of purchase for required

receipt of items card statements for vendors

purchased payment

Atlantic Fleet units in the Norfolk area 88 58 98 Pacific Fleet units in
the San Diego area 70 59 80

NAVSEA units in the Norfolk area 90 67 86

Marine Corps Base at Camp Lejeune 89 59 94 a The numbers represent point
estimates for the population based on our sampling tests. The confidence
intervals for our sample estimates are presented in appendix II of this
report.

Little Evidence Cardholders Despite DOD and Navy requirements to give
priority to certain required

Screen for Required vendors, we found that the failure rate to document
the necessary

Vendors screening of purchases ranged from about 70 percent at the Pacific
Fleet to

about 90 percent at NAVSEA. Because of the units* failure to document
screening for statutory vendors, the Navy and Marine Corps do not know the
extent to which cardholders failed to acquire items from these required
vendors. The Navy*s purchase card instructions require that prior to using
the purchase card, cardholders must document that they have screened all
their intended purchase card acquisitions for availability from statutory
sources of supply. These sources of supply include vendors qualifying
under the Javits- Wagner- O*Day Act (JWOD), Federal Prison Industries, and
DOD*s Document Automation and Production Service (DAPS). JWOD

vendors are nonprofit agencies that employ people who are blind or have
other severe disabilities. JWOD vendors primarily sell office supplies and
calendars, which often cost less than items sold by commercial vendors. In
a June 2001 letter to all procurement officials, DOD*s Director of

Procurement reminded cardholders of the need to purchase listed items from
JWOD sources unless they have a specific waiver. Federal Prison Industries
employ and provide skills training to inmates of federal prisons.

They sell a wide variety of products including textiles, electronics,
industrial products, and office furniture. Finally, DAPS is responsible
for document automation and printing within DOD, encompassing electronic
conversion, retrieval, and output and distribution of digital and hardcopy
information.

We cannot determine the precise amount spent on purchases that were not
made from required vendors; however, as shown in table 7, our analysis of
fiscal year 2001 vendor activity showed that the units we audited spent
about $235,000 with five vendors (Franklin Covey, Kinko*s, PIP Printing,
Kwik Kopy, and Sir Speedy) that sold items or services that are also sold
by required vendors. Further, some of the items purchased at Franklin
Covey

were personal items that are considered to be abusive purchases. We
performed a similar vendor analysis of the fiscal year 2001 Navy- wide
purchase card activity and found that during fiscal year 2001, the Navy
spent about $1.6 million with those five vendors. Due to the diverse
nature of items sold by Federal Prison Industries, we did not attempt to
identify vendors that sell similar products.

Table 7: Purchase Card Transactions with Five Vendors That Sell Products
Also Sold by Required Suppliers Pacific Atlantic

Fleet Marine Corps Fleet in

in San NAVSEA

Base, Camp NavyItems/ Services a

Norfolk Diego in Norfolk

Lejeune wide

Timemanagement products (Franklin Covey) $39,000 $12, 000 $86, 000 $10,
000 $738, 000

Printing (Kinko*s, Kwik Kopy, PIP Printing, Sir Speedy) $31,000 $20, 000
$31, 000 $6, 000 $864, 000 a These amounts represent the total value of
purchase that the Navy made directly with these vendors during fiscal year
2001. Some of these purchases could have been for items not sold by
required sources of supply.

We found that NAVSUP and some units provided cardholders with examples of
how to document the screening process; however, cardholders failed to use
the NAVSUP- suggested purchase log or complete local purchase request
forms containing a section to document screening for required sources of
supply. For example, the NAVSUP sample purchase card log included in
NAVSUP Instruction 4200.94 contains a column for the

cardholder to document whether or not he or she screened the items
purchased for availability from statutory sources of supply. However, we
found that the suggested purchase card log was often not used, or if used,
many cardholders did not complete that column.

Little Evidence of Independent Receipt and

Key duties and responsibilities need to be divided or segregated

Acceptance of Items

among different people to reduce the risk of error or fraud. This

Purchased

should include separating the responsibilities for ... handling any
related assets. Simply put, no one individual should control all the key
aspects of a transaction or event. GAO's Standards for Internal Control in
the Federal Government (GAO/ AIMD- 00- 21.3.1, November 1999)

The units we audited generally did not have evidence documenting that
someone independent of the cardholder received and accepted items ordered
and paid for with a purchase card, as required by NAVSUP Instruction 4200.
94. That is, the units generally did not have a receipt,

invoice, or packing slip for the acquired goods and services that was
signed and dated by someone other than the cardholder. As a result, there
is no documented evidence that the government received the items purchased
or that those items were not lost, stolen, or misused. Some units have
developed a system using ink stamps that need to be completed to document
receipt and acceptance; however, these systems have not been implemented
effectively. As shown in table 6, we estimated that about 58 percent to 67
percent of the units* fiscal year 2001 transactions did not have
documented evidence of independent receipt and acceptance of goods and
services acquired with the purchase card. While some of the items for
which these units did not have independent documented receipts were
consumable office supplies, other items that failed this key internal
control test included laptop computers, digital cameras, and personal
digital assistants, which could be subject to theft or misuse.

Little Evidence That Monthly Purchase Card Bills

Transactions and other significant events should be authorized

Were Reconciled and

and executed only by persons acting within the scope of their

Reviewed Prior to

authority. This is the principal means of assuring that only valid

Certification and Payment

transactions to exchange, transfer, use, or commit resources and other
events are initiated or entered into. GAO's Standards for Internal Control
in the Federal Government (GAO/ AIMD- 00- 21.3.1, November 1999)

Control activities ensure that only valid transactions * are initiated or
entered into *. Control activities are established to ensure that all
transactions * that are entered into are authorized and executed only by
employees acting within the scope of their authority. GAO*s Internal
Control Standards: Internal Control Management and Evaluation Tool (GAO-
01- 1008G, August 2001)

We found little evidence of cardholder reconciliation or approving
official reviews to confirm that cardholders had reconciled the monthly
statement of purchase card transactions back to the supporting documents
throughout fiscal year 2001. All levels of the purchase card program
recognize effective cardholder reconciliation and approving official
review of the monthly statement as a key control activity. DOD*s Purchase
Card Joint Program Management Office, the Navy, command procedures, and
the units* operating procedures recognize that cardholder reconciliation
and approving official review are central to ensuring that purchase card

transactions are appropriate. Under 31 U. S. C. 3325 and DOD*s Financial
Management Regulation, 11 disbursements are required to be made on the
basis of a voucher certified by an authorized agency official. The
certifying official is responsible for ensuring (1) the adequacy of
supporting documentation, (2) the accuracy of payment calculations, and
(3) the legality of the proposed payment under the appropriation or fund
charged. The certification function is a preventive control that requires
certifying

officers to maintain proper controls over public funds. It also helps 11
DOD Financial Management Regulation, Volume 5, Chapter 33, section 330305,
*Accountable Officials and Certifying Officers.*

prevent fraudulent and improper payments, including unsupported or
prohibited transactions, split purchases, and duplicate payments. Further,
section 2784 of title 10, United States Code, requires the Secretary of
Defense to prescribe regulations that ensure that each purchase card

holder and approving official is responsible for reconciling charges on a
billing statement with receipts and other supporting documentation before
certification of the monthly bill. Consistent with these requirements,
Navy purchase card guidance calls for cardholders to reconcile the monthly
purchase card statements to supporting records. It calls for approving
officials to ensure that all cardholder purchases were appropriate and all
charges were accurate, and to resolve all questionable purchases with the
cardholder. According to NAVSUP Instruction 4200.94, after the approving
official reviews the monthly bill, the approving official will certify it
for payment. Because certification is necessary for payment, it is likely
to occur whether

or not cardholders and approving officials have performed required
reconciliations and reviews. Thus, when we tested whether the cardholder
reconciled the monthly statement and whether the approving official
reviewed the monthly statement, we did not simply look for a physical or
electronic signature on a form. Rather, for this test we considered that
proper reconciliation and review occurred if:

 the cardholder signed and dated the monthly bill 12 before it was paid,
and the monthly bill contained any markings or notes linking the amounts
billed to a credit card receipt, invoice, packing slip, or a purchase log;
and

 the approving official*s review of the cardholders* monthly statements
was signed and dated prior to certification for payment, and there were
virtually any markings or notes on the monthly statements evidencing that
review. Our testing revealed that documented evidence of adequate
cardholder

reconciliation or approving official review of cardholder transactions did
not exist for most of our sample transactions. Examples of inadequate
documentation included missing statements, invoices, signatures, or dates,
or a lack of evidence of cardholder reconciliation or approving official
review. Without such evidence, we* and the program coordinators, who 12 In
pencil, ink, or electronically.

are required to semiannually review approving official records* cannot
determine whether officials are complying with review requirements. As
shown in table 6, the failure rate for this internal control activity at
the units in the four commands audited was among the highest of the
controls we tested.

The failure rates for this attribute were similar to the failure rates
that we reported for this attribute in our previous testimony related to
two San Diego- based Navy units. The Navy agreed with our initial
recommendations concerning the need to clarify the payment certification
portion of the purchase card instruction. Based on this audit*s broader
review of the Navy*s purchase card program, we believe that the high
failure rate may also be attributable to the fact that approving official
and cardholder responsibilities fall into the category of *other duties as
assigned* without any specific time allocated for their performance, as
discussed previously. Further, cardholders and approving officials are not

necessarily in the same geographic location. Consequently, while an
approving official might be able to review cardholder transactions
electronically, the approving official will not necessarily be able to
review the documentation supporting the transaction. Approving officials
and cardholders told us they had many duties of a higher priority than
reviewing the monthly purchase card statements. A large workload,

especially in *other duties as assigned,* and geographical separation of
cardholders and approving officials can lead to less attention than
expected or desired. For example, one NAVSEA approving official*s ability
to promptly and accurately review cardholders* monthly statements was
hampered because (1) the approving official was responsible for reviewing
the statements of nearly 400 cardholders and regularly certified for
payment monthly statements exceeding $1 million and (2) the approving
official who was located in Rhode Island was responsible for reviewing the
statements of cardholders not only located in Rhode Island but also
cardholders located in Virginia, Washington, and Florida. We identified
numerous instances of purchases that had not been

adequately reviewed and reconciled to the monthly statements, but in which
the statements were, nonetheless, certified for payment. Such activities
allow potentially fraudulent, improper, and abusive or questionable
purchases (discussed in more detail in the following section of this
report) to go undetected. Also, mistaken or other improper charges by
vendors might not be detected. The following are examples of such charges
that we identified:

 At Camp Lejeune, we found 29 transactions totaling over $50, 000 for
which the Marine Corps was unable to provide any supporting documentation
concerning what was purchased or whether the items purchased had a
legitimate government use. The vendors that the Marine Corps paid without
adequate supporting documentation included Internet vendors, rental car
companies, gift stores, and a stereo store. Considering that Camp Lejeune
did not have documentation that cardholders and approving officials
routinely reconciled or reviewed the monthly statements prior to payment,
neither the Marine Corps nor we can determine whether these accounts had
been compromised and someone was using them to fraudulently obtain goods
or services at the government*s expense. Navy purchase card instructions
require cardholders to retain documentation received from the vendor, such
as a sales slip or cash register receipt to verify the accuracy of the
charges made. The purpose of maintaining this documentation is to provide
an audit trail that supports each decision to use the card and any
required

special approvals.  In December 2000, NAVSEA paid a hotel $12, 200
despite the fact that neither the cardholder nor the approving official
had any evidence

concerning how the hotel arrived at the $12,200 amount. When we questioned
the cardholder concerning the charge, he gave us a written statement that
the transaction was for the rental of a conference room and audiovisual
equipment. The statement also said that he did not authorize the purchase
of any food. However, a copy of the bill we obtained from the hotel showed
that the Navy paid $8,260 for food. Major Commands Failed to

Maintain Accountability for

An agency must establish physical control to secure and safeguard

Pilferable Items

vulnerable assets. Examples include security for and limited access to
assets such as cash, securities, inventories, and equipment which might be
vulnerable to risk of loss or unauthorized use. Such assets should be
periodically counted and compared to control records. GAO's Standards for
Internal Control in the Federal Government (GAO/ AIMD- 00- 21.3.1,
November 1999)

We found accountable items acquired with purchase cards that were often
not recorded in property records of the units we audited. In addition,

officials at three of the four major commands could not locate some of the
property items included in our statistical samples. While some or all of
the items might, in fact, be at the installation, officials could not
provide conclusive evidence that they were in the possession of the
government. Unrecorded property and items that cannot be located indicate
a weak control environment and problems in the property management system.
Consistent with GAO*s internal control standards, DOD*s Property, Plant

and Equipment Accountability Directive and Manual, which was issued in
draft for implementation on January 19, 2000, requires accountable
property to be recorded in property records as it is acquired. Accountable
property includes items that can be easily pilfered, such as computers and
related equipment, and cameras. Entering such items in the property
records is an important step to help ensure accountability and financial

control over these assets and, along with periodic inventory, to deter
theft or improper use of government property. Table 8 contains the results
of our review of property management records and inspection of accountable

property. Table 8: Accountable Property Items Not Recorded in Property
Books Transactions

Transactions Transactions with items with

with items not the command could not property

in property demonstrate were in Command/ Base

items book

government possession

Atlantic Fleet units located in Norfolk 35 15 12

Pacific Fleet units located in San Diego 42 23 15

NAVSEA units located in Norfolk 21 14 8

Marine Corps Base at Camp Lejeune 16 8 0

Source: GAO analysis of stratified random samples from Navy and Marine
Corps purchase card transaction files.

One example of the Navy*s failure to record pilferable property in
property management records involved Atlantic Fleet transactions with a
computer vendor, GTSI. On September 30, 2000, the Navy contracted with
GTSI to purchase 430 computers, 213 flat panel monitors, and other
computer hardware and software using the GSA Multiple Award Schedule
pricing. GTSI shipped the computers, monitors, and equipment to the
Atlantic Fleet

warehouse in November and December 2000, and the Atlantic Fleet paid GTSI
about $757,000 for those items in January 2001. While the Atlantic Fleet*s
documents concerning these two transactions show that an employee at the
warehouse signed as receiving the computers, the Atlantic Fleet did not
record the serial numbers of the computers or the monitors, and did not
record the computers or monitors in any type of property accountability
system.

After we contacted GTSI and obtained the serial numbers, we were able to
determine that between January 2001 and January 2002, the Atlantic Fleet
shipped 243 of the computers and 126 flat panel monitors to land- and
seabased Atlantic Fleet users. However, the Atlantic Fleet could not
provide us adequate evidence confirming the location of the 187 remaining
computers and 87 flat panel monitors.

Effectively managing accountable property has long been a problem area,
and the use of the purchase card has added further difficulties. With
about 25,000 Navy cardholders, the number of people buying accountable
property has greatly expanded as the purchase card program has grown.
Cardholders are responsible for reporting on the accountable property they

buy* so that it can be recorded in the unit*s accountable property books*
but they often do not. Change in Navy Property

As we previously reported, 13 on August 1, 2001, the Navy modified its
policy Accountability Policy

concerning pilferable property by changing the definition of what it
considered pilferable property. This change in the definition has
contributed to the lack of accountability over such property. Unlike the
previous policy, which specifically defined pilferable items, the new
policy provides commanding officers with latitude in determining what is
and what is not pilferable. The new policy defines pilferable to be an
item* regardless of cost* that is portable, can be easily converted to
personal use, is critical to the activity*s business/ mission, and is hard
to repair or replace. Citing the *hard to repair or replace* criterion in
the new policy, some unit commanders told us they have determined that
only desktop and

laptop computers would be considered pilferable items. Thus, these units
do not maintain accountability over numerous pilferable items, such as
digital cameras and personal digital assistants (PDAs), leaving them 13 U.
S. General Accounting Office, Purchase Cards: Continued Control Weaknesses
Leave

Two Navy Units Vulnerable to Fraud and Abuse, GAO- 02- 506T (Washington,
D. C.: Mar. 13, 2002).

vulnerable to possible theft, misuse, or transfer to personal use.
However, not all unit commanders made this assertion and continued to
maintain accountability over items that were considered pilferable under
the previous policy. Potentially Fraudulent,

We identified numerous purchases at the installations we audited and
Improper, and Abusive

through our Navy- wide data mining that were potentially fraudulent,
improper, and abusive or questionable. As discussed in appendix II, our or
Questionable

work was not designed to identify, and we cannot determine, the extent of
Transactions

potentially fraudulent, improper, and abusive or otherwise questionable
transactions. However, considering the control weaknesses identified at
each unit audited, it is not surprising that these transactions were not

detected or prevented. In addition, the existence of similar improper, and
abusive or questionable transactions in our Navy- wide data mining of
selected transactions provides additional indications that a weak control
environment and ineffective specific controls exist throughout the Navy.
In addition, appendix IV contains an update on two fraud investigations
involving Navy units based in San Diego that we discussed in our March
2002 testimony.

Potentially Fraudulent We considered potentially fraudulent purchases to
include those made by

Purchases cardholders that were unauthorized and intended for personal
use.

Potentially fraudulent purchases can also result from compromised accounts
in which a purchase card or account number is stolen and used to make a
potentially fraudulent purchase. Potentially fraudulent transactions can
also involve vendors charging purchase cards for items that cardholders
did not buy. The Navy and the major commands we audited had policies and
procedures that were designed to prevent and detect potentially fraudulent
purchases. For example, as discussed previously, approving officials are
required to review the supporting documentation for each transaction for
legality and proper government use of funds. However, our testing showed
that these control activities had not been implemented as intended.

Although collusion can circumvent what otherwise might be effective
internal control activities, a robust system of guidance, internal control
activities, and oversight can create a control environment that provides
reasonable assurance of preventing or quickly detecting fraud, including

collusion. However, in auditing the Navy*s internal control at units

assigned to four major commands during fiscal year 2001, we did not find
that the processes and activities were operating in a manner that provided
such assurance. The Navy does not have an automated system that
identifies, captures, and

reports key information on potentially fraudulent purchases that have been
identified or are being investigated within the purchase card program. In
table 9, we identified instances of fraudulent and potentially fraudulent

transactions at the commands we audited and by making inquiries with Naval
Criminal Investigative Service. All of the purchases that we discuss in
this section were included in monthly cardholder statements that were
certified and paid by the Navy.

Table 9: Examples of Fraudulent and Potentially Fraudulent Navy Purchase
Card Transactions Type of items purchased Command Total Individuals
involved

Personal items: remote control helicopter items, Atlantic Fleet $250,000
Cardholder Internet purchases, highway toll tags, and a dog Televisions,
car batteries, tires, air conditioner parts, Atlantic Fleet $150,000
Cardholder

and other auto supplies Electrical and other spare part items Atlantic
Fleet $89,000 Cardholders and vendors Personal items purchased at
department store Atlantic Fleet $40,000 Cardholder Unidentified Internet
purchases Marine Corps $15, 000 Compromised account Personal items from
Wal- Mart, Sun Coast Videos, New

Marine Corps $12, 200 Cardholder Monde Junior Clothing Store, and
Journey*s Shore Store

Power tools Atlantic Fleet Between $3, 000 Cardholder and $5, 000 Six
months worth of long- distance phone calls Marine Corps $4,800
Unauthorized use of card by military serviceman other than cardholder

Palm Pilots, color television, camera, and other Pacific Fleet $2, 500
Cardholder unauthorized items Cell phone charges and pizza Atlantic Fleet
$2, 000 Compromised account

Internet pornography Navy- wide $40 Compromised accounts Source: GAO
analysis of Naval Criminal Investigative Service files and Navy records.
The following examples of fraud are illustrative of the cases in table 9:
 An approving official*s failure to review a cardholder*s statements

promptly contributed to an Atlantic Fleet cardholder making over $250, 000
in unauthorized purchases between September 2000 and July

2001. In July 2001, when a command supply official began reviewing the
cardholder*s monthly statements, he noticed that over $80,000 of those
charges were unsupported. Included in those unsupported charges were
numerous transactions with suspicious vendors. After command supply
officials asked the cardholder about the unsupported purchases, the
cardholder admitted to making thousands of dollars of illegal

Internet purchases and illegally purchasing EZ Pass prepaid toll tags,
expensive remote control helicopters, and a dog. The Navy decided to
prosecute the cardholder, and a court martial is pending.

 An approving official*s failure to review a cardholder*s statements and
the cardholder*s failure to keep evidence of what was purchased
contributed to an Atlantic Fleet cardholder fraudulently using his
purchase card from January 2000 through October 2000 to purchase an
estimated $150,000 in automotive, building, and home improvement supplies.
The cardholder sold some of the items to generate cash. According to Navy
investigators, the cardholder destroyed many of the requisitions,
receipts, and purchase logs for the stolen items in an attempt to cover up
his actions. In addition, according to Navy criminal investigators, if the
monthly purchase card billing statements were properly reviewed, the
cardholder*s fraudulent activities would have been exposed. In exchange
for pleading guilty to multiple counts of larceny and other criminal
violations, the cardholder*s jail time was

reduced to 24 months.  An approving official*s failure to adequately
review a cardholder*s statements contributed to two Atlantic Fleet
cardholders conspiring with at least seven vendors to submit about $89,000
in fictitious and inflated invoices. The cardholders had the vendors ship
supply items to an Atlantic Fleet warehouse and the personal items
directly to their

residences. The cardholders also had vendors inflate the price and/ or
quantity of items purchased. According to Navy investigators, the
cardholders would sell, use, and barter the illegally obtained items,
while the vendor sales representatives received inflated sales commissions
and an estimated $3, 000 to $5,000 in Navy property that was given to them
as bribes. One vendor sales representative who admitted to conspiring to
supply false invoices said that he could not get sufficient business until
he altered the invoices like the other vendors. According to the caller
who informed NCIS of the illegal activity, it was common knowledge that
the cardholders were getting kickbacks because of their positions as Navy
buyers. Based on the results of the NCIS investigations, one of the
cardholders received 24- months

confinement and a bad conduct discharge while the other received a 60day
restriction and reduction in rank. In another case of potential fraud, we
found that in March 1999 the Navy

inappropriately issued five government purchase cards to individuals who
did not work for the government. The individuals who received the Navy
purchase cards worked for a consulting company that occasionally provided
services to the Navy. NAVSUP Instruction 4200. 94 limits the Navy purchase
card to authorized government personnel in support of official

government purchases. Between March 1999 and November 2001 these
individuals used the Navy purchase cards to make purchases totaling about
$230,000 with vendors including airlines, hotels, rental car companies,
gas stations, restaurants, a florist, and golf courses. We discovered
these charges in November 2001 as part of our data mining for suspicious
transactions at the Pacific Fleet. Within a week of our inquiries to the
Pacific Fleet concerning the charges on these accounts, the Pacific Fleet
agency program coordinator instructed Citibank to (1) immediately
deactivate the accounts and (2) close the accounts once the balances were
paid.

While the consulting company ultimately paid Citibank for all charges made
with those cards, the consulting company was 30 days past due on the
account 28 times during the 38 months that the accounts were open.
Further, the Navy was contractually liable for all purchases made with the

cards and would have been responsible for payment if the consulting
company had failed to pay. The risk to the Navy was real because, when the
Navy had Citibank deactivate the accounts in November, the company, which
still owed $8,600, threatened to withhold payment unless the Navy reopened
the accounts. In addition, the consulting company contacted

Citibank directly and tried to assume control of the accounts by claiming
the company had *spun off from the Navy.* While the consulting company did
eventually pay Citibank, it was not until March 2002* 4 months after the
accounts were deactivated. Our Office of Special Investigations researched
some of the charges and

found that, by using a Navy purchase card, the consulting company avoided
paying state sales taxes and obtained discounts at airlines and hotels
that are typically offered only to the federal government. The airline
discounts are particularly advantageous because airlines offer the federal
government significantly discounted tickets that are not encumbered with
the penalties and limitations that are imposed upon private sector

companies and the general public. Finally, Citibank does not post an

interest charge on past due accounts. Thus, by using the Navy purchase
card, the company avoided paying interest on the past due accounts. Based
on the results of our work, we referred this case to the Naval Criminal
Investigative Service for further investigation.

Navy*s Fraud Database Does Not We attempted to obtain examples of other
potentially fraudulent activity in

Include Key Data the Navy purchase card program from NCIS in Washington,
D. C. NCIS

investigators acknowledged that they have investigated a number of
purchase card fraud cases; however, their investigation database does not
permit a breakdown of fraud cases by type, such as purchase cards.
Purchase card program officials and NCIS officials said that they had no

information on the total number of purchase card fraud investigation cases
throughout the Navy that had been completed or were ongoing. Based on our
identification of a number of fraudulent and potentially fraudulent cases
at the installations that we audited, we believe that the number of cases
involving fraudulent and potentially fraudulent transactions could be
significant. Without such data, the Navy does not know the significance,
in numbers or dollar amounts, of fraud cases that have been or are being
investigated and is hampered in taking corrective actions to prevent such
cases in the future.

Improper Purchases and Our audit work at the four commands and our Navy-
wide data mining

Transactions identified numerous examples of improper transactions.
Improper

transactions are those purchases that, although approved by the Navy
officials and intended for government use, are not permitted by law,
regulation, or DOD policy. We identified the following three types of

improper purchases.  Purchases that do not serve an authorized government
purpose.  Split purchases, in which the cardholder circumvents cardholder
single purchase limits. The Federal Acquisition Regulation guidelines

prohibit splitting purchase requirements into more than one transaction to
avoid the need to obtain competition on purchases over the $2,500
micropurchase threshold. Cardholders also split purchases to circumvent
higher single- transaction limits for payments on contracts

exceeding the micropurchase threshold.  Purchases from improper sources
as previously discussed. Various federal laws and regulations require
procurement officials to acquire certain products from designated sources
such as JWOD vendors. The

JWOD program is a mandatory source of supply for all federal entities. It
generates jobs and training for Americans who are blind or have other
severe disabilities, requiring federal agencies to purchase supplies and
services furnished by nonprofit agencies* such as the National

Industries for the Blind and the National Industries for the Severely
Handicapped* who employ such individuals. The improper transactions that
resulted from purchasing items from nonstatutory sources were previously
discussed in the section on adherence with control procedures.

We believe that if the Navy better monitored the vendors with which its
cardholders conducted business, the Navy could minimize its number of
improper purchases. Such monitoring could also provide the Navy the
opportunity to leverage its purchase volume and negotiate discounts with
frequently used vendors. Purchases That Do Not Serve an

We found several instances in which cardholders purchased goods, such as
Authorized Government Purpose

clothing, that were not authorized by law or regulation. The Federal
Acquisition Regulation, 48 C. F. R. 13.301( a), provides that the
governmentwide commercial purchase card may be used only for purchases
that are otherwise authorized by law or regulations. Therefore, a
procurement using the purchase card is lawful only if it would be lawful
using conventional procurement methods. Under 31 U. S. C. 1301( a), *[ a]
ppropriations shall be applied only to the objects for which the

appropriations were made** In the absence of specific statutory authority,
appropriated funds may only be used to purchase items for official
purposes, and may not be used to acquire items for the personal benefit of
a government employee. Improper transactions, as shown in table 10, were
identified as part of our review of fiscal year 2001

transactions and related activity at the four commands and as part of our
Navy- wide data mining of transactions with questionable vendors.

Table 10: Examples of Improper Purchases Description of items Vendor
Clothing

Gore- tex jackets, and other clothing Cabellas Civilian clothes for
military personnel

Nordstrom and Hecht*s Flight jacket

San Diego Leather Polo shirts

Islander Hardware and Sporting Goods

Meals/ Food

Meals and light refreshments for training Hotels, catering services events
Personal meals

Local restaurants Coffeemakers

Service Merchandise

Other Cell phone time charges Various vendors Sales taxes

Various vendors Radio/ stereos

Bose Personal travel luggage California Luggage Lodging

Var i ous hot el s Rental cars

Various rental car companies Source: GAO analysis of Navy purchase card
transactions.

The following examples of improper transactions are illustrative of the
type of cases included in table 10.

 We identified a Pacific Fleet cardholder who used the purchase card in
January 2001 to buy a $199 leather flight jacket as a personal gift for an
official visitor. Secretary of the Navy (SECNAV) Instruction 7042.7J
specifically identifies flight jackets as a prohibited personal gift to a
visitor. In November 2001, when we questioned the deputy commander
concerning the flight jacket, he told us that the purpose of the gift was
to recognize the individual*s contributions to the Navy*s San Diego
installations. The deputy commander subsequently told us that the

personnel involved with the gift were counseled, and that he, the deputy
commander, had reimbursed the Navy for the jacket in January 2002.

 We identified purchases of clothing by NAVSEA that should not have been
purchased with appropriated funds. Generally, agencies may not use
appropriated funds to purchase clothing for civilian employees. One
exception is 5 U. S. C. 7903, which authorizes agencies to purchase
protective clothing for employee use if the agency can show that (1) the
item is special and not part of the ordinary furnishings that an employee
is expected to supply, (2) the item is essential for the safe and
successful accomplishment of the agency*s mission, not solely for the
employee*s protection, and (3) the employee is engaged in hazardous duty.
Further, according to a Comptroller General decision dated March 6, 1984,
14 clothing purchased pursuant to this statute is property of the U. S.
government and must only be used for official government business. Thus,
clothing purchases, except for rare circumstances in which the purchase
meets stringent requirements, is usually considered a personal item for
which appropriated funds should not be used. In

one transaction, a NAVSEA cardholder purchased polo shirts and other gifts
for a *Bring- Your- Child- to- Work Day* at a total cost of about $1,600.

 In another example of clothing for personal use from our Navy- wide data
mining, several charges for amounts from $70 to $230 were identified at
Hecht*s and Nordstrom. We were informed that these were for purchases of
civilian clothes* slacks, shirts, and suits* for enlisted

personnel who were serving in an official capacity as assistants to
admirals and general officers, and to wear when playing in a jazz band.
The Director, Purchase Card Unit, Defense Contracting Command Washington,
informed us that this appears to be a fairly widespread practice. Clothing
needs of military personnel are covered by the clothing allowances that
they receive.  As part of our data mining of Navy- wide purchase card
transactions, we

identified two purchases in which cardholders purchased Bose headsets at
$300 each. The headsets were for personal use* listening to music* while
taking commercial flights and, therefore, should not have been purchased
with the Navy purchase card.

14 63 Comptroller General Decisions 245, 247 (1984). In requesting the
Comptroller General*s approval of the purchases, the agency represented
that *the parkas would be labeled as [agency] property, centrally
controlled, and issued and reissued to employees only for job
requirements.*

 At NAVSEA, we identified charges to hotels in Newport News and
Portsmouth, Virginia, totaling about $8,000 for locally based NAVSEA
employees to attend meetings at which they were inappropriately provided
meals and refreshments at the government*s expense. The cardholders told
us that they authorized the hotels to bill for audiovisual equipment and
conference room rental. The cardholders said the hotel was not authorized
to bill for food. However, despite the cardholders* assertion, the
detailed bills showed that the hotels charged NAVSEA about $7,000 for
meals including breakfasts, lunches, and snacks. Pursuant to 31 U. S. C.
1301( a), "[ a] ppropriations shall be applied only to

the objects for which the appropriations were made . . . ." In the absence
of specific statutory authority, appropriated funds may only be used to
purchase items for official purposes, and may not be used to acquire items
for the personal benefit of a government employee. For example, without
statutory authority, appropriated funds may not be used to furnish meals
or refreshments to employees within their normal duty

stations. 15 Free food and other refreshments normally cannot be justified
as a necessary expense of an agency's appropriation because these items
are considered personal expenses that federal employees

should pay for from their own salaries. 16  Three of the four commands
audited paid improper and abusive phone charges. For example in June 2001,
the Atlantic Fleet paid $1,175 for monthly service charges for 22 phones.
We determined that some cell phone calls were long distance toll calls
that were not for legitimate government business. The Navy*s and Atlantic
Fleet*s command level procedures prohibit the use of cell phones for other
than officially approved uses. In addition, even though Atlantic Fleet
guidance requires subordinate units to verify monthly cell phone usage,
the units were not reviewing the monthly bills as required. Our audit of
the calls made using the cell phones determined that some were to personal
residences* not military facilities or merchants supplying goods and
services to the Navy. In addition, we found wasteful charges for cell
phones. For example, the Navy paid for 13 months of service at $15 per
month for a cell phone that had been returned to the vendor. It was not
until we inquired about the lack of use on the phone that the Navy

15 72 Comp. Gen. 178, 179 (1993); 65 Comp. Gen. 508, 509 (1986). 16 65
Comp. Gen. 738, 739 (1986).

realized it was paying for a phone that had been returned over 1 year
earlier. Split Purchases Another category of improper transaction is a
split purchase, which occurs

when a cardholder splits a transaction into segments to avoid the
requirement to obtain competition for purchases over the $2,500
micropurchase threshold or to avoid other established credit limits. The

Federal Acquisition Regulation prohibits splitting a purchase into more
than one transaction to avoid the requirement to obtain competition for
purchases over the $2,500 micropurchase threshold. Navy purchase card
instructions also prohibit splitting purchases to avoid other established
credit limits. Once items exceed the $2,500 threshold, they are to be
purchased through a contract in accordance with simplified acquisition
procedures that are more stringent than those for micropurchases. Our
analysis of data on purchases at the four major commands we audited

and our data mining efforts identified numerous occurrences of potential
split purchases. In addition, internal auditors at all four commands that
we audited identified split purchases as a continuing problem. In some of
these instances, the cardholder*s purchases exceeded the $2, 500 limit,
and the cardholder split the purchase into 2 or more transactions of
$2,500 or

less. For example, a Camp Lejeune cardholder made 8 transactions totaling
about $17,000 on 1 day to purchase combat boots. In addition, a NAVSEA
cardholder made 14 purchases totaling over $30,000 in 1 day from an
electronic supply store. All the commands that we audited said that
cardholders splitting purchases

to circumvent the micropurchase threshold was a problem. As we previously
reported, by circumventing the competitive requirements of the simplified
acquisition procedures, the commands may not be getting the

best prices possible for the government. For the Navy to reduce split
transactions, it will need to monitor the vendors with whom cardholders
are conducting business.

Better Management of The Navy has not proactively managed the purchase
card program to

Transactions with Frequently identify opportunities for savings. Purchase
card sales volume has grown

Used Vendors Could Result in significantly over the last few years with
the Navy now using the purchase

Additional Savings card to procure nearly $2 billion a year in goods and
services. We believe

that the Navy could better leverage its volume of purchases and negotiate
discounts with frequently used vendors. For example, during fiscal year
2001, the Navy paid over $1 million each to 122 different vendors using
the purchase card. In total during fiscal year 2001, the Navy paid those
122

vendors about $330 million. However, the Deputy Director of the Navy
eBusiness Operations Office told us that, despite this heavy sales volume,
the Navy had not negotiated reduced- price contracts with any of the
vendors.

As previously stated, one of the benefits of using purchase cards versus
traditional contracting and payment processes is lower transaction
processing costs and less red tape for both the government and the vendor.
Through increased analysis of purchase card procurement patterns, the

Navy has the opportunity to leverage its high volume of purchases and
achieve additional savings from vendors by negotiating volume discounts
similar to those the General Service Administration (GSA) has negotiated
in its Multiple Award Schedule program. Under GSA*s Multiple Award
Schedule, participating vendors agree to sell their products at preferred
customer prices to all government purchasing agents. According to the
Deputy Director of the Navy*s eBusiness Operations Office, 74 of the 122
vendors with which the Navy spent more than $1 million using the

purchase card during fiscal year 2001 did not participate in the Multiple
Award Schedule program. In addition, for 48 of the vendors with which Navy
spent more than $1 million and that did participate in the Multiple Award
Schedule, the opportunity existed for the Navy to negotiate additional
savings. GSA encourages agencies to enter into blanket purchase agreements
(BPAs) and negotiate additional discounts with Multiple Award Schedule
vendors from which they make recurring purchases. By analyzing Navy- wide
cardholder buying patterns, the Navy should be

able to achieve additional savings by identifying vendors and vendor
categories for which it uses the purchase card for significant amounts of
money and negotiate discounts with them. For example, during fiscal year
2001, the Navy spent about $65 million with 5 national computer vendors
(Dell, Gateway, CDW Computer Centers, Micro Warehouse, and GTSI), $22
million with 3 office supply companies (Corporate Express, Staples,

and Office Depot), and $9 million with 2 national home improvement stores
(Home Depot and Lowe*s). While 8 of these 10 vendors participate in GSA*s
Multiple Award Schedule program, the Navy could not tell us whether its
purchases from these vendors were made using that program*s preferred
price schedules. Further, considering the Navy*s volume of purchases, it
is reasonable to assume that it could negotiate additional savings with
these and other vendors if it used historical purchase card sales data as
a bargaining tool.

Abusive and Questionable We identified numerous examples of abusive and
questionable transactions

Purchases at each of the four installations we audited. We defined abusive

transactions as those that were authorized, but in which the items were
purchased at an excessive cost (e. g., *gold plated*) or for a
questionable government need, or both. Abuse can be viewed when the
conduct of a government organization, program, activity, or function falls
short of societal expectations of prudent behavior. Often, improper
purchases such as those discussed in the previous section are also
abusive. Transactions that are both improper and abusive were discussed
previously, such as the excessive cell phone charges at the Atlantic
Fleet. Questionable transactions are those that appear to be improper or
abusive

but for which there is insufficient documentation to conclude either. We
consider transactions to be questionable when they do not fit within the
Navy guidelines on purchases that are acceptable for the purchase card
program, and when there is not a reasonable or documented justification to
acquire the item purchased. When we examined the support for questionable
transactions, we usually did not find evidence of why the Navy or Marine
Corps needed the item purchased. Consequently, the cardholder provided an
after- the- fact rationale that the item purchased was not improper or
abusive. To prevent unnecessary costs, these types of questionable
purchases require scrutiny before the purchase, not after. Table 11
identifies examples of both abusive and questionable purchases.

Table 11: Examples of Abusive and Questionable Purchases Tot al
Description of purchase Where identified amount

Questionable purchases of computer Atlantic Fleet, Pacific Fleet equipment
$613, 000

High- cost flat panel computer monitors Atlantic Fleet, Pacific Fleet, and
NAVSEA $185, 000

Designer leather products from the Atlantic Fleet, Pacific Fleet, Coach
Store, Dooney and Bourke, and NAVSEA, Marine Corps, and Franklin Covey,
and others

Navy- wide data mining $163, 000 Unknown goods from electronic

Pacific Fleet, NAVSEA, Marine retailers, Internet sites, gift stores,

Corps department stores, and home improvement stores

$111, 000 Meals, beer, and refreshments Atlantic Fleet, Pacific Fleet,

NAVSEA, Navy- wide data mining $43, 000 Palm Pilots without documented
need Atlantic Fleet, Pacific Fleet $41, 000 Audiovisual equipment from
Bose, Bang

Atlantic Fleet, Pacific Fleet, and Olufsen, and others Navy- wide data
mining $28, 000

Expenses at casinos Navy- wide data mining $4, 200 China, and accessories
for commanding

Pacific Fleet, Navy- wide data officers mining $3, 900

Bose clock radios Navy- wide data mining $2, 400 Oakley sunglasses Marine
Corps $220 Source: GAO analysis of Navy purchase card transactions.

The following include details of some of the abusive and questionable
purchases in table 11.

 Computer and related equipment exceeding documented need* The Navy used
the purchase card to acquire computer and computer- related items far in
advance of its needs. Considering that computer prices

decrease over time while their capabilities improve, warehousing computers
and related items is an especially ineffective use of government funds.
Despite this time, price, and capability relationship, we found in our
statistical sample that the Atlantic Fleet, Pacific Fleet, and NAVSEA
purchased computers, monitors, and printers that often remained unused for
more than 12 months. For example, the computers

purchased by the Atlantic Fleet in September 2000 that were discussed in
the section on pilferable property had Pentium III microprocessors. By the
time the Atlantic Fleet issued some of those computers in

January 2002, the manufacturer was selling computers with Pentium IV

microprocessors at a cost of less than what the Atlantic Fleet paid for
the Pentium IIIs. Further, our statistical sample at the Atlantic Fleet
identified 22 other computers that the Navy purchased in April 2001 that,
as shown in figure 4, were unused and still in their original boxes in

June 2002. Similarly, we found two $3,500 laser printers purchased in
September 2000 that were selected in our statistical sample of Pacific
Fleet transactions still in their original boxes at a Pacific Fleet
warehouse in January 2002. Figure 4: Computers Purchased by the Atlantic
Fleet in April 2001 That Remained Unused as of June 21, 2002

We have previously identified DOD*s inventory management as an area at
high risk for fraud, waste, and abuse. In our report on DOD major
management challenges and program risk 17 we stated that because of its
unreliable inventory management systems managers may request

funds to obtain additional items that were on hand. Our review of fiscal
17 U. S. General Accounting Office, Performance and Accountability Series:
Major Management Challenges and Program Risks, Department of Defense, GAO-
01- 244 (Washington, D. C.: January 2001).

year 2001 Atlantic Fleet transactions found that despite having these
unopened items, the unit had in fact purchased additional computers after
September 2000 and the Pacific Fleet purchased laser printers after June
2001.

 Designer leather goods* In September and October 2000, NAVSEA made two
separate transactions totaling nearly $1,800 to obtain designer leather
folios and PDA holders costing up to $300 each made by Coach and Dooney
and Bourke. Two of the folios were given as gifts to a visiting officer in
the Australian Navy, while other designer items were personal preferences
of the cardholders and requesting individuals.  Flat panel monitors* Our
statistical sample selected transactions containing 243 flat panel
monitors purchased by the Atlantic Fleet, Pacific Fleet, and NAVSEA. The
cost of the monitors selected in our

sample ranged from $550 to $2,200. Conversely, the 17- inch standard
monitors selected in the sample cost about $200. As we have reported in
the past, we believe the purchase of flat panel monitors* particularly
those that cost far in excess of standard monitors* to be abusive and not
an effective use of government funds in the absence of a documented need
based on technical, space, or other considerations. Further, in our
statistical sample, we found that some of the flat panel

monitors that the Atlantic Fleet purchased were placed in a warehouse and
not issued for more than a year after the Navy took possession.
Warehousing flat panel monitors is especially inefficient because, like

computers, as time passes the price of flat panel monitors decreases and
technology increases. The flat panel monitors that we found still in the
box cost the Navy $709 each. As of June 2002, the GSA price for the same
flat panel monitors was about $480.

 Personal digital assistants* We found that the Atlantic Fleet and
Pacific Fleet purchased PDAs for staff without documenting why the staff
needed them to perform their official duties. In one instance, the
Atlantic Fleet purchased 90 PDAs for $32,500 in October 2000 without any
documented justification of need. As of June 1, 2002, 14 of the 90 PDAs
had not been issued and were still in inventory. Further, the competitive
bid price worksheet showed that the Navy did not accept the lowest bid for
the PDAs. According to the competitive bid worksheet, the Atlantic Fleet
received three bids for the PDAs that ranged from a low of $30,400 to a
high of $32,850. The Atlantic Fleet accepted the middle bid of $32,500.
Federal Acquisition Regulation allows purchasing agents to reject lower
bids if the purchasing agent

determines that the items being delivered do not conform to the applicable
specifications, or if the vendors cannot deliver the goods or services
within the specified time requirements. We saw no evidence that quality or
timeliness were a factor in selecting the higher priced bid.

 Clock radios* As part of our Navy- wide data mining we inquired about a
$2,443 transaction with Bose Corporation on September 30, 2000. In
response to that inquiry, the Navy command that made the purchase told us
that it purchased seven Bose *Wave Radios* costing $349 each. The command
justified the purchase by stating that Navy regulations require

all visiting office quarters to be supplied with a clock radio. While we
do not question the need to supply visiting officer quarters with clock
radios, we do question the judgment of purchasing $349 clock radios when
there are numerous models of clock radios made by GE, Sony, and Panasonic
costing about $15 from GSA.

Disciplinary Actions Seldom In our November 30, 2001, report 18 and March
13, 2002, testimony 19 on the

Taken Against Those Who purchase card controls at the Space and Naval
Warfare Systems Command

Misuse Purchase Cards (SPAWAR) Systems Center and NPWC, we recommended
that action be taken to help provide assurance that cardholders adhere to
applicable

purchase card laws, regulations, internal control and accounting
standards, and policies and procedures. Specifically, we recommended that
the Commander, Naval Supply Systems Command, revise NAVSUP Instruction
4200. 94 to include specific consequences for noncompliance with purchase

card policies and procedures. In response to the November 2001 report, DOD
did not concur with that recommendation and stated that existing Navy
policy clearly identifies consequences for fraud, abuse, and misuse. On
May 29, 2002, the Navy told us that in response to our recommendation,

the Assistant Secretary of the Navy for Research, Development and
Acquisition issued a Naval Message reiterating compliance; accountability;
and consequences of fraud, abuse, and misuse.

While we would agree that the issuance of such a message has benefits, we
continue to believe that the Navy needs to establish specific consequences
for these purchase card problems because existing Navy policy does not
identify any specific consequences for failure to follow control 18 GAO-
02- 32. 19 GAO- 02- 506T.

requirements. Currently, the Navy has not established specific
disciplinary and/ or administrative consequences* such as withdrawal of
cardholder status, reprimand, suspension from employment for several days,
and, if

necessary, firing. Unless cardholders and approving officials are held
accountable for following key internals controls, the Navy is likely to
continue to experience the types of fraudulent, improper, and abusive and
questionable transactions identified in our work. As part of this audit,
we asked the agency program coordinators at each command that we audited
whether any cardholders referred to in this report were disciplined for
improper, abusive, or questionable purchases; or if the reduction in the
number of cardholders could be attributed to individuals who lost the card
because they made improper, abusive, or questionable purchases. However,
according to the agency program coordinators, only one of the cardholders
referred to in this report lost a card for improper, abusive, or
questionable purchases, and no one has received any disciplinary actions

for abusing the purchase card. Conclusions We support the use of a well-
controlled purchase card program. It is a

valuable tool for streamlining the government*s acquisition processes.
However, the Navy program is not well controlled and as a result is
vulnerable to fraud, waste, and abuse. The primary cause of the control
breakdowns is the lack of adherence to valid policies and procedures.
Nonetheless, the control environment at the Navy has improved over the

last year. For example, the Navy has reduced the number of cardholders by
over 50 percent, from 59,000 to 25, 000, thus improving the prospects for
effective program management. However, further actions are needed to
achieve an effective control environment. For example, leadership by

major command and unit management and a strong system of accountability
must be established for effective program control. Strengthening the
control environment will require a commitment by the Navy to build a
robust purchase card control infrastructure.

Recommendations for In our November 30, 2001, report on control weaknesses
at two units in San

Executive Action Diego, we made 29 recommendations to improve management
of the

purchase card program primarily at the two locations audited. Based on the
broader scope of our current work we are making the following additional
recommendations to strengthen the overall control environment and improve
internal controls for the Navy*s purchase card program.

Overall Program We recommend that the Director of the Department of the
Navy eBusiness

Management and Operations Office take the following actions.

Environment  Direct all agency program coordinators to review the number
of

cardholders who report to an approving official and make the changes
necessary to prevent approving officials from having the responsibility of
reviewing more cardholders than allowed by Navy and DOD policies.

 Establish a database that maintains information on all purchase card
training taken by cardholders, approving officials, and agency program
coordinators. Require that agency program coordinators update that
database whenever these purchase card program officials take training. 
Establish specific training courses for cardholders, approving officials,

and agency program coordinators tailored to the specific responsibilities
associated with each of those roles.

 Direct agency program coordinators to review an approving official*s
overall workload and determine whether the approving official has the time
necessary to perform the required review functions.  Establish job
descriptions that identify responsibility and performance

standards for cardholders, approving officials, and agency program
coordinators.  Link the cardholders*, approving officials*, and agency
program

coordinators* performance appraisals to achieving their performance
standards.

 Work with the Naval Audit Service and Command Evaluation staff to begin
periodic audits of the purchase card program to provide Navy management*
at the command and unit level* an independent assessment of the control
environment and whether the agency program coordinators, approving
officials, and cardholders are adhering to

control procedures.  Identify vendors with which the Navy or Marine Corps
uses purchase

cards to make frequent purchases, evaluate Navy purchasing practices with
those vendors, and forward the results of that evaluation to the Assistant
Secretary of the Navy for Research, Development and Acquisition to
contract with them, when applicable, to optimize Navy purchasing power.

We recommend that the Secretary of the Navy modify the definition of
*Pilferable Personal Property* in SECNAV Instruction 7320.10 dated August
1, 2001, by eliminating the requirement that a portable item easily
converted to personal use also be difficult to repair or replace, and
specifically identify items such as computers, cameras, personal digital
assistants, and audiovisual equipment as meeting the definition of being
pilferable and thus accountable.

Specific Internal Control We recommend that the Director of the Department
of the Navy eBusiness

Activities Operations Office modify NAVSUP Instruction 4200.94 to provide

cardholders, approving officials, and agency program coordinators detailed
instructions on the following specific control activities:  timely and
independent receiving and acceptance of items obtained with a purchase
card and documenting the results of that process,  screening purchases
for their availability from required vendors and documenting the results
of the screening,  promptly reconciling of the monthly purchase card
statements to

supporting documentation and documenting the results of that
reconciliation,

 promptly reviewing of a cardholder purchase card statement by the
approving official prior to certifying the statement for payment and
documenting the results of that review, and  prompt cardholder
notification to property accountability officer of the

pilferable property obtained with the purchase card, and approving
official responsibility for monitoring that the pilferable property has
been recorded in the accountability records.

Potentially Fraudulent, We recommend that the Director, Department of Navy
eBusiness

Improper, and Abusive or Operations Office take the following actions.

Questionable Purchases  Modify NAVSUP Instruction 4200.94 to require
cardholders to maintain

documented justification and advanced approval of purchases that fall
outside the normal procurements of the cardholder in terms of either
dollar amount or type of purchase.

 Establish a Navy- wide database of known purchase card fraud cases by
type of fraud that can be used to identify deficiencies in existing
internal control and to develop and implement additional control
activities, if warranted or justified.

 Establish a Navy- wide data mining, analysis, and investigation function
to supplement other oversight activities. This function should include
providing oversight results and alerts to major commands and installations
when warranted.

 Modify NAVSUP Instruction 4200.94 to include a schedule of disciplinary
actions as a guide for taking actions against cardholders who make
improper or abusive acquisitions with the purchase card. We also recommend
that the Under Secretary of Defense (Comptroller) direct the Charge Card
Task Force to assess the above recommendations and to the extent
applicable, incorporate them into its future

recommendations to improve purchase card policies and procedures
throughout DOD.

Agency Comments and In written comments on a draft of this report, which
are reprinted in Our Evaluation

appendixes VI and VII, DOD concurred with 16 of our 19 recommendations.
DOD partially concurred with the remaining 3 recommendations dealing with
(1) linking the performance appraisals of purchase card officials to
achieving performance standards, (2) maintaining accountability over
pilferable property, and (3) establishing a schedule of disciplinary
actions that will be taken against cardholders who make improper or
abusive acquisitions. However, the actions that DOD plans to take on these
3 recommendations appear to address their most significant aspects.
Concerning linking staff performance to purchase card performance

standards, DOD responded that the Department of Navy eBusiness Operations
Office will work with the Navy Human Resources Office to determine the
need, legality, and feasibility of adding cardholder, approving official,
and agency program coordinator performance standards to performance
appraisals. Such measures are an important aspect of the purchase card
program and are responsive to our recommendation. We encourage the Navy
eBusiness Operations Office to work expeditiously

with the Navy Human Resources Office to develop performance standards that
make carrying out this fiduciary responsibility a matter to be considered
in assessing staff.

Regarding property more susceptible to theft, DOD stated that Navy would
modify its definition of pilferable property to be the same as the DOD
definition of pilferable property. By adopting the DOD definition, the
Navy will remove the requirement that the item be *hard to repair or
replace* from its definition of pilferable property. DOD did not, however,
agree with the aspect of our recommendation that it provide commanders
examples of items considered pilferable. DOD stated that a listing of
specific pilferable

items would require continual update and vigilance, and prove ultimately
to be subjective and unscientific. We agree that a listing of specific
pilferable items would require periodic updating. That was not the intent
of our recommendation. Instead, we believe that providing commanders
examples of types of pilferable property that can be easily removed from
Navy facilities and have immediate use outside the Navy, would help ensure
that items such as camera equipment and laptop computers are

consistently included in accountable records. Concerning our
recommendation to establish a schedule of disciplinary actions that will
be taken against cardholders who abuse their purchase card privileges, DOD
stated that the department has already taken actions to deal with improper
and abusive uses of purchase cards, and that the Navy*s eBusiness
Operations Office will examine whether actions that have already been
taken are appropriate. However, DOD also stated that to the extent the
recommendation contemplates the prescription of mandatory disciplinary or
other actions, it is objectionable. DOD stated that disciplinary and other
actions in response to improper and abusive purchase card use are properly
addressed as matters of command and supervisory discretion. We never
contemplated that the schedule would prescribe mandatory

actions. Rather, we intended the schedule to be a guide of disciplinary
actions to be taken against cardholders. It would also serve as an
important internal control feature that clearly identified the
consequences associated with improper and abusive purchase card use and
would serve

as a deterrent to such abuse. Further, the schedule of disciplinary
actions could include a range of actions that would be appropriate for
various types of purchase card misuse. Commanders and supervisors would
still

maintain their discretion to select the specific disciplinary action, if
any, depending on the circumstances of individual cases. To eliminate any
confusion concerning the intent of our recommendation, we made a slight
modification to the text of the recommendation.

As agreed with your offices, unless you announce the contents of this
report earlier, we will not distribute this report until 30 days from its
date. At that time, we will send copies to interested congressional
committees; the Secretary of Defense; the Under Secretary of Defense for
Acquisition, Technology, and Logistics; the Under Secretary of Defense,
Comptroller; the Secretary of the Navy; the Assistant Secretary of the
Navy for Research, Development and Acquisition; the Director of the
Defense Finance and

Accounting Service; and the Director of the Office of Management and
Budget. We will make copies available to others upon request. In addition,
the report will be available at no charge on the GAO web site at http://
www. gao. gov.

Please contact Gregory D. Kutz at (202) 512- 9505 or kutzg@ gao. gov, John
Ryan at (202) 512- 9587 or ryanj@ gao. gov, or John Kelly at (202) 512-
6926 or kellyj@ gao. gov if you or your staffs have any questions
concerning this report. Major contributors to this report are acknowledged
in appendix VIII. Gregory D. Kutz

Director Financial Management and Assurance

Ronald D. Malfi Director Office of Special Investigations

Appendi Appendi xes x I

Background The Navy*s purchase card program is 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. According
to the General Services Administration (GSA), the Department of Defense
(DOD) reported that during fiscal year 2001 it used purchase cards for
more than 10.7 million transactions, valued at $6.1 billion. The Navy*s
reported purchase card activity* MasterCards issued to civilian and

military personnel* totaled about 2.8 million transactions, valued at $1.8
billion, during fiscal year 2001. This represented nearly 30 percent of
DOD*s purchase card activity for fiscal year 2001. According to unaudited
fiscal year 2001 purchase card data, four commands included in our current
audit* Atlantic Fleet, Pacific Fleet, Naval Sea Systems Command, and the
Marine Corps* made about $173 million, $137 million, $268 million, and
$224 million, respectively, in purchase card acquisitions. In addition,
according to unaudited fiscal year 2001 purchase card data for the two
commands included in our March 2002 testimony, the Naval Facilities
Engineering Command (Public Works Center) and Space and Naval Warfare
Systems Command made about $117 million and $85 million in purchase card
acquisitions respectively. See table 12 for further detail on fiscal year
2001 purchase card spending.

Table 12: Number and Value of Transactions in Fiscal Year 2001 Number of

Cost of Percent of transactions

transactions Navy purchase Navy major command

(in thousands) (in millions)

card costs

Atlantic Fleet 307 $173 10 Pacific Fleet 227 $137 8 Naval Sea Systems
Command 319 $268 15 Marine Corps 380 $224 12 Naval Facilities Engineering
Command 224 $117 6

Space and Naval Warfare Systems Command 114 $85 5

Other major commands 1,255 $804 44

Total 2, 826 $1, 808 100

Source : GAO analysis of Navy purchase card program data.

Because the four commands have cardholders located throughout the world,
we limited our testing of the transactions made by the units of those
commands to cardholders located in specific geographical areas, and used a
case study approach to evaluate each command*s local purchase card
program. According to unaudited fiscal year 2001 purchase card data,
Pacific Fleet cardholders in San Diego made about $35 million in purchase
card acquisitions; Atlantic Fleet cardholders located in the Norfolk area
made about $48 million in purchase card acquisitions; Naval Sea Systems
Command cardholders in the Norfolk area made about $49 million in purchase
card acquisitions; and Marine Corps cardholders at Camp Lejeune made about
$36 million in purchase card acquisitions.

The Pacific Fleet, Atlantic Fleet, and the Marine Corps are warfighting
units, while the Naval Sea Systems Command is a support command. The
Pacific Fleet is responsible for providing trained and combat- ready naval
forces to the Commander- in- Chief U. S. Pacific Command. Its headquarters
is in Honolulu, and its lower echelon commands are located in Honolulu and
San Diego. The Atlantic Fleet provides trained, combat- ready forces to
support the United States and the North Atlantic Treaty Organization
(NATO) commanders in regions of conflict. Its headquarters and lower

echelon commands are located in Norfolk. The Naval Sea Systems Command is
responsible for providing the Navy operationally superior and affordable
ships, systems, and ordnance. NAVSEA is headquartered in Washington, D.
C., and has major shipbuilding and repair facilities on both the East and
West Coasts including Norfolk. The Marine Corps is responsible for
providing a highly flexible, combat- ready force in a high state of
readiness, prepared to support the military*s strategy. The Marine Corps
has bases located throughout the United States, including Camp Lejeune.

Governmentwide Purchase The purchase card can be used for both
micropurchases and payment of Card Program Guidelines

other purchases. Although most cardholders have limits of $2,500, some
have limits of $25,000 or higher. The Federal Acquisition Regulation, Part
13, *Simplified Acquisition Procedures,* establishes criteria for using
purchase cards to place orders and make payments. DOD and the Navy have
supplements to this regulation that contain sections on simplified
acquisition procedures. U. S. Treasury regulations govern purchase card
payment certification processing and disbursements. DOD*s Purchase Card
Joint Program Management Office, which is in the Office of the Assistant
Secretary of the Army for Acquisition Logistics and Technology, has issued
departmentwide guidance related to the use of purchase cards.

However, each service has its own policies and procedures governing the
purchase card program.

Navy Purchase Card The Naval Supply Systems Command (NAVSUP) is
responsible for the

Acquisition and Payment overall management of the Navy*s purchase card
program, and has

Processes published NAVSUP Instruction 4200.94, Department of the Navy
Policies

and Procedures for Implementing the Governmentwide Purchase Card Program.
Under the NAVSUP instruction, each Navy command*s head contracting officer
authorizes agency purchase card program coordinators in local Navy units
to obtain purchase cards and establish credit limits. The program
coordinators are responsible for administering the purchase card program
within their designated span of control and serve as the communication
link between Navy units and the purchase card issuing bank. The other key
personnel in the purchase card program are the approving officials and the
cardholders. Figure 5 illustrates the standard process in which the Navy
purchase card is used to acquire goods and services and certify the
monthly bill for payment.

Figure 5: Navy Purchase Card Process Approving Officials Purchase
cardholder orders/ charges goods

Items picked up Vendor and services

Items shipped Independent documentation

Pilferable items that items have been

are recorded in received and accepted

accountable property records

Citibank reverses disputed Monthly purchase card

charges and credits statements are received

monthly statement from bank

Cardholder reconciles underlying receipts/ sales slips

Cardholder logs items not to monthly purchase

received and follows up to card statements, identifies

(1) confirm receipt or any invalid charges, and

(2) dispute the charge prepares dispute forms

Cardholder or approving Approving official reviews

DFAS processes official logs disputed

cardholder support, and purchase card charges and sends forms

certifies monthly statements payments to Citibank to Citibank for credit

for payment

If operating effectively, the approving official is responsible for
ensuring that all purchases made by the cardholders within his or her
cognizance are appropriate and that the charges are accurate. The
approving official is supposed to resolve all questionable purchases with
the cardholder before certifying the bill for payment. In the event an
unauthorized purchase is detected, the approving official is supposed to
notify the agency program coordinator and other appropriate personnel
within the command in accordance with the command procedures. After
reviewing the monthly

statement, the approving official is to certify the monthly invoice and
send it to the Defense Finance and Accounting Service (DFAS) for payment.

Cardholders A purchase cardholder is a Navy employee who has been issued a
purchase card. The purchase card bears the cardholder*s name and the
account number that has been assigned to the individual. The cardholder is
expected to safeguard the purchase card as if it were cash.

Designation of Cardholders When a supervisor requests that a staff member
receive a purchase card, the agency program coordinator is to first
provide training on purchase card policies and procedures and then
establish a credit limit and issue a purchase card to the staff member.
Ordering Goods and Services Purchase cardholders are delegated limited
contracting officer ordering

responsibilities. As limited contracting officers, purchase cardholders do
not negotiate or manage contracts. Rather, cardholders use purchase cards
to order goods and services for their units and their customers as well.
Cardholders may pick up items ordered directly from the vendor or request

that items be shipped directly to an end user (requesters). Upon receipt
of purchased items, the cardholder is to record the transaction in his or
her purchase log and obtain documented independent confirmation from the
end user, the supervisor, or another individual that the items have been
received and accepted by the government. The cardholder is also to notify
the property book- officer of accountable items received so that these
items can be recorded in the accountable property records.

Payment Processing The purchase card payment process begins with receipt
of the monthly purchase card billing statements. Section 2784 of title 10,
United States Code, requires DOD to issue regulations that ensure that
purchase cardholders and each official with authority to authorize
expenditures charged to the purchase card reconcile charges with receipts
and other supporting documentation before paying the monthly purchase card
statement. NAVSUP Instruction 4200.94 states that upon receipt of the
individual cardholder statement, the cardholder has 5 days to reconcile
the transactions appearing on the statement by verifying their accuracy
documentation supporting the transaction and to notify the approving

official in writing of any discrepancies in the statement. In addition,
under NAVSUP Instruction 4200.94, before the credit card bill is paid, the
approving official is responsible for (1) ensuring that all purchases made
by the cardholders within his or her cognizance are

appropriate and that the charges are accurate and (2) the timely
certification of the monthly summary statement for payment by the DFAS.
The instruction further states that within 5 days of receipt, the
approving official must review and certify for payment the monthly billing
statement, which is a summary invoice of all transactions of the
cardholders under the approving official*s purview. The approving official
is instructed to presume that all transactions on the monthly statements
are proper unless notified in writing by the purchase cardholder to the
contrary. However, the presumption does not relieve the approving official
from reviewing the

statements for blatantly improper purchase card transactions and taking
the appropriate action prior to certifying the invoice for payment. In
addition, the approving official is responsible for forwarding disputed
charge forms for submission to Citibank for credit. Under the Navy*s task
order, Citibank allows the Navy up to 60 days after the statement date to
dispute invalid transactions and request a credit. Upon receipt of the
certified monthly purchase card summary statement, a

DFAS vendor payment clerk is to (1) review the statement and supporting
documents to confirm that the prompt- payment certification form has been
properly completed and (2) subject it to automated and manual validations.
DFAS effectively serves as a payment processing service and relies on the
approving- official certification of the monthly bill as support to make
the payment. The DFAS vendor payment system then batches all of the
certified purchase card payments for that day and generates a tape for a
single payment to Citibank by electronic funds transfer. Figure 5
illustrates the current design of the purchase card payment process for
the Navy command units we reviewed.

Appendi x II

Scope and Methodology We reviewed key purchase card controls for units of
four Navy commands. In addition, as you requested, we followed up on (1)
the status of the recommendations we made in our November 30, 2001,
report, (2) the status of the former commanding officer of SPAWAR Systems
Center San Diego, (3) the status of two potential fraud cases that we
reported on in the March

2002 testimony, and (4) any other fraud cases we identified as part of
this audit. Our review of key purchase card controls for the Atlantic
Fleet, Pacific Fleet, NAVSEA, and the Marine Corps covered

 the overall management control environment, including (1) management*s
attitude in establishing the needed controls, (2) the numbers of
cardholder and approving officials, (3) cardholder and approving official
credit limits, (4) training for cardholders and approving officials, 20
(5) monitoring and audit of purchase card activity, and (6) effectiveness
of purchase card infrastructure;

 tests of statistical samples of key controls over purchase card
transactions made during the first 11 months of fiscal year 2001 including
(1) screening for required vendors, (2) documentation of

independent confirmation that items or services paid for with the purchase
card were received, (3) proper certification of the monthly purchase card
statement for payment, and (4) substantive tests of pilferable property
items included in our sample transactions to verify whether they were
recorded in an accountable record;

 analytical reviews of transactions entered into during the last month of
fiscal year 2001;

20 We also tested the statistical samples of transactions to determine
whether the units had documented evidence that cardholders had received
required purchase card training.

 data mining of the population of fiscal year 2001 transactions to
identify potentially fraudulent, improper, and abusive or questionable
transactions; 21  analysis and audit work related to invoices and other
information

obtained from Franklin Covey, from which, based on interviews with
cardholders and our review of other transactions, we had reason to believe
that the units at the four commands had made improper and abusive or
questionable purchases during fiscal year 2001;  analysis of the
population of fiscal year 2001 purchase card transactions,

for the four command units, to identify purchases that were split into two
or more transactions to avoid the micropurchase threshold or other
spending limits; and

 analysis of the population of Navy- wide fiscal year 2001 purchase card
transactions to determine whether the Navy was effectively managing its
purchases with frequently used vendors. In addition, our Office of Special
Investigations worked with DOD*s criminal investigative agencies,
Citibank, and credit card industry representatives to identify known and
potentially fraudulent purchase card cases. Our Office of Special
Investigations also investigated potentially fraudulent or abusive
purchase card transactions that we identified while analyzing fiscal year
2001 purchase card transactions at the units in the four commands. Because
the Navy does not have a database of purchase

card fraud cases, we were unable to determine the extent of known fraud
cases at either the case study locations or Navy- wide. 21 We considered
potentially fraudulent purchases to include those made by cardholders that

were unauthorized and intended for personal use. The transactions we
determined to be improper are those purchases intended for government use,
but not for a purpose that is permitted by law, regulation, or DOD policy.
We also identified as improper numerous purchases made on the same day
from the same vendor that appeared to circumvent cardholder single-
transaction limits. Many of the purchases we found to be abusive or
questionable fall into categories described in GAO*s Guide for Evaluating
and Testing Controls Over Sensitive Payments (GAO/ AFMD- 8. 1.2, May
1993). The guide states, *Abuse is distinct from illegal acts
(noncompliance). When abuse occurs, no law or regulation is violated.
Rather, abuse occurs when the conduct of a government organization,
program, activity, or function falls short of societal expectations of
prudent behavior.*

We used as our primary criteria applicable laws and regulations; our

Standards for Internal Control in the Federal Government; 22 and our

Guide for Evaluating and Testing Controls Over Sensitive Payments. 23 To
assess the management control environment, we applied the fundamental
concepts and standards in the GAO internal control standards to the
practices followed by management in the areas reviewed.

Statistical Samples of To test controls, we selected stratified random
probability samples from Internal Control Procedures

the population of purchase card transactions by cardholders who had
mailing addresses at the four locations we visited. All purchase card
transactions subjected to sampling occurred during the first 11 months of
fiscal year 2001. We performed analytical reviews on the transactions that

occurred during the last month of fiscal year 2001. Specifically, we
selected 150 transactions of Atlantic Fleet cardholders based in Norfolk
from a population of 72,000 transactions totaling $43 million; 166
transactions of Pacific Fleet cardholders based in San Diego from a
population of 46,000 transactions totaling $30 million; 158 transactions
from Naval Sea Systems Command cardholders based in Norfolk from a
population of 46,000 transactions totaling $41 million; and 150 Marine
Corps cardholders based in Camp Lejeune from a population of 52,000
transactions totaling $32 million.

Within each command we stratified the population of transactions by the
dollar value of the transaction and by whether the transaction was likely
to be for a purchase of computer- related equipment. With this
statistically

valid probability sample, each transaction in the population had a nonzero
probability of being included, and that probability could be computed for
any transaction. Each sample element was subsequently weighted in the
analysis to account statistically for all the transactions in the
population, including those that were not selected. Table 13 presents our
test results

on cardholder and approving official training and three key transaction22

Standards for Internal Control in the Federal Government (GAO/ AIMD- 00-
21. 3.1) was prepared to fulfill our statutory requirement under the
Federal Managers* Financial Integrity Act to issue standards that provide
the overall framework for establishing and maintaining internal control
and for identifying and addressing major performance and management
challenges and areas at greatest risk of fraud, waste, abuse, and
mismanagement.

23 Guide for Evaluating and Testing Controls Over Sensitive Payments (GAO/
AFMD- 8. 1.2) provides a framework for evaluating and testing the
effectiveness of internal controls that have been established in various
sensitive payment areas.

level controls, and shows the confidence intervals for the estimates for
the population of purchase card transactions made by units at the four
commands during the first 11 months of fiscal year 2001. Although we

projected the results of those samples to the populations of transactions
at the respective commands, the results cannot be projected to the
population of Navy- wide transactions or commands. Because most of the
sampled transactions did not contain pilferable property, we did not
project the results of that attribute test to the populations of
transactions tested. Table 13: Estimate of 11 Months of Fiscal Year 2001
Transactions That Failed Control Tests

Pacific Fleet, Naval Sea Systems

Marine Corps, Camp Atlantic Fleet, Norfolk San Diego Command, Norfolk
Lejeune

Key purchase card Point

Point Point

Point control estimate Interval a estimate Interval a estimate Interval a
estimate Interval a

Training 77% to

61% to 67% to

43% to 87% 94% 73% 83% 80% 89% 56% 68%

Independent, documented receipt of

46% to 48% to

54% to 47% to items purchased 58% 70% 59% 70% 67% 78% 59% 71%

Screening for required 78% to

58% to 79% to

78% to vendors 88% 95% 70% 80% 90% 97% 89% 96%

Proper certification of purchase card

89% to 70% to

75% to 86% to statements for payment 98% 99% 80% 88% 86% 94% 94% 98%

a The projections represent point estimates for the populations based on
our statistical samples. The intervals are two- sided 95 percent
confidence intervals. Data Mining In addition to selecting statistical
samples of Pacific Fleet, Atlantic Fleet,

Naval Sea Systems Command, and Marine Corps transactions to test specific
internal controls, we also made nonrepresentative selections of fiscal
year 2001 transactions from these commands and the Navy as a whole. We
conducted separate analysis of acquisitions that were

potentially fraudulent, improper, and abusive or otherwise questionable.
Our data mining for potentially fraudulent, improper, and abusive or
questionable transactions was limited in scope. For this review, we
scanned the population of transactions at the four commands visited and
the overall Navy database for vendors that are likely to sell goods or
services (1) on NAVSUP*s list of prohibited items, (2) that are personal
items, and (3) that are otherwise questionable. Our expectation was that

transactions with certain vendors had a more likely chance of being
fraudulent, improper, and abusive or questionable. Because of the large
number of transactions that met these criteria we did not look at all
potential abuses of the purchase card. Rather, we made nonrepresentative
selections of transactions with the vendors that fit these criteria. For
example, we reviewed, and in some cases made inquiries, concerning 443
transactions and other related transactions on the same monthly purchase
card statement with vendors that sold such items as sporting goods,
groceries, luggage, flowers, and clothing. While we identified some
potentially fraudulent, improper, and abusive or questionable
transactions, our work was not designed to identify, and we cannot
determine, the extent

of fraudulent, improper, and abusive or questionable transactions. Our
data mining also included nonrepresentative selections of acquisitions
that these units made during fiscal year 2001 that may have been split
into multiple transactions to circumvent either the micropurchase
competition requirements or cardholder single- transaction thresholds.

We briefed DOD managers (including officials in DOD*s Purchase Card Joint
Program Management Office) and Navy managers (including NAVSUP, Pacific
Fleet, Atlantic Fleet, Naval Sea Systems Command, and the Marine Corps
officials) on the details of our review, including our objectives, scope,
and methodology and our findings and conclusions. We received comments
from the Director, DOD Purchase Card Joint Program

Management Office dated September 16, 2002, and have reprinted those
comments in appendix VI. We also received comments from the Under
Secretary of Defense (Comptroller) dated September 23, 2002, and have
reprinted those comments in appendix VII. We conducted our audit work from
November 2001 through July 2002 in accordance with U. S. generally
accepted government auditing standards, and we performed our investigative
work in accordance with standards prescribed by the President*s Council on
Integrity and Efficiency.

Status of GAO Recommendations to Improve

Appendi x III

Navy Purchase Card Operations In our November 30, 2001, report 24 we made
29 recommendations to the Navy to address key findings related to the weak
management control environment and internal control discussed in our July
30, 2001, testimony. 25 In response to our November 2001 report, DOD
concurred with 19 recommendations, partially concurred with 7
recommendations, and disagreed with 3 recommendations. On May 29, 2002,
the Navy provided us with its assessment of its corrective actions to
implement all 29 recommendations. The following chart summarizes (1) those

recommendations, (2) the Navy*s representations as to actions taken, and
(3) our observations on the status of the recommendations. We noted in
many instances the Navy had taken positive steps to improve the purchase

card controls; however, given the significant control problems that exist,
the Navy will need to diligently monitor the purchase card program to
attain and maintain a high level of adherence to the policies and
directives.

24 GAO- 02- 32. 25 GAO- 01- 995T.

Table 14: Status of Previous GAO Recommendations Status of GAO
recommendation, as

GAO observation on the status of GAO recommendation reported by Navy
recommendation

Proliferation of Cardholders

The Commanding Officers of the SPAWAR and the Navy Public Works Center San
Diego work with the NAVSUP and DOD*s Purchase Card Joint Program
Management Office to do the following:

 Establish specific policies and strategies The Navy Purchase Card
Program

Implemented. However, our current audit governing the number of purchase
cards to

Management Office (PCPMO) issued policy work found that operating units
are not

be issued with a focus on minimizing the as an interim change to NAVSUP
Instruction

adhering to the interim policy. number of cardholders. 4200.94 * Navy
purchase card Internal Management Controls, establishing guidance for span
of control and criteria for

issuing card accounts as well as minimum requirements for regular account
maintenance by the agency program coordinator. Navy PCPMO issued letters
to all activities with accounts outside the recommended span of control
directing

immediate corrective action be taken. Span of control is being monitored
on a continual basis.

 Develop criteria for identifying employees The Navy PCPMO issued policy
as an

Partially implemented. The criterion on eligible for the privilege of
cardholder interim change to NAVSUP Instruction

eligibility for cardholder*s duties has been status. As part of the effort
to develop 4200.94 * Navy purchase card Internal

developed. However our current audit work these criteria, assess the
feasibility and Management Controls establishing eligibility found that
operating units are not adhering cost- benefit of performing credit checks
on

criteria for issuing card accounts. The issue to the interim policy.
employees prior to assigning them

of credit checks was deferred to DOD. The issue of credit checks has not
been

cardholder responsibilities to ensure that addressed.

employees authorized to use government purchase cards have demonstrated
credit worthiness and financial integrity.

 Develop policies and strategies on credit The Navy PCPMO issued policy
as an

Implemented. However, our current audit limits provided to cardholders
with a focus

interim change to NAVSUP Instruction work identified operating units that
have not

on minimizing specific cardholder 4200.94 * Navy purchase card Program

successfully implemented the reduction in spending authority and
minimizing the Internal Management Controls, establishing credit limits to
a reasonable amount. federal government*s financial exposure. guidance on
creating and maintaining credit limits and reporting guidelines for
cardholders and billing officials. Credit limits are being assessed across
the Navy and will be addressed through letters to the activities

where it appears existing credit limits exceed mission requirements.
Credit limits are now a critical element in the revised semiannual review
procedures.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

Training

The Commander of NAVSUP  confirm that required training has been

The Navy conducted a departmentwide Partially implemented. Our current
audit

completed and documented and purchase card stand- down that required all
work identified operating units that have not

program participants to complete the Navy complied with the requirement.

Purchase Card Training Tutorial CD- ROM and provide documentation to the
activity program coordinator as well the Navy PCPMO. The account of any
program participant (with the exception of deployed personnel) who did not
complete the training was canceled and will not be reinstated until
documentation is presented to show successful completion of the training.
Annual and semiannual reporting

requirements now include the status of training for all program
participants.  incorporate into purchase card training

In progress. The NAVSUP Instruction In progress, not implemented. The Navy

programs any relevant changes in policies 4200.94 is in the final stages
of being

has not completed the necessary changes and procedures made as a result of
the

revised to incorporate all interim changes in its policy. recommendations
in this report.

issued by policy letter as a result of the GAO report. The expected
release date is summer 2002. Navy PCPMO training materials are being
updated to incorporate relevant changes. Department of Navy

(DON) PCPMO conducted the Semi Annual Agency Program Coordinator (APC)
Conference on May 7, 2002, in Norfolk covering a broad range of topical
material, including changes in policies and procedures. Attendance was
mandatory for all command level APCs and encouraged for subordinate level
APCs. The second semiannual conference is scheduled for November 2002 in
San Diego.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

Rebates

The Commander of the NAVSUP work with the Navy Comptroller and the Defense
Finance and Accounting Service to  investigate ways to maximize potential

In progress. Fielding of on- line statement In progress, not implemented.
However, rebates, such as (1) working with Citibank distribution, review,
approval and Navy has taken steps to address this to facilitate timely
receipt of monthly certification process is ongoing. Currently

recommendation. purchase card statements and (2)

54 percent of DON activities are reducing the time associated with mailing

implemented with the remainder expected to and receipt of hard copy
billing statements, be implemented within the next 12 months.

 establish effective policies and procedures The Navy requested
independent

In progress, not implemented. The Naval for routinely calculating and
verifying

verification of the Citibank rebate process by Audit Service has not
responded to Citibank rebates, and

Naval Audit Service. Navy PCPMO also NAVSUP request for periodic audits.
requested the Defense Contract Audit Agency to conduct an audit of the
banks* rebate calculation.

 develop guidance for routine distribution of The Navy made a
determination to retain

Implemented. The Navy*s actions appear to rebate earnings to Navy units
and the rebates at the department level in lieu of meet the intent of our
recommendation. activities. disbursing them to lower echelons.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

Monitoring and Review

The Commander of the Naval Supply Systems Command

 establish in NAVASUP Instruction 4200. 94, The Navy PCPMO issued policy
as an Implemented. However, our current audit

further guidelines for an effective internal interim change to NAVSUP
Instruction work found that operating units are not

review program, such as having reviewers 4200.94 * Semiannual Major
Claimant effectively conducting and or utilizing the analyze monthly
summary statements to Reporting Requirement that establishes

results of the program monitoring process. identify (1) potentially
fraudulent, improper, more comprehensive reviews, elevates Continued
diligent monitoring by the Navy and abusive purchases and (2) any

reporting requirements and provides purchase card program officials will
be patterns of improper cardholder

uniformity of evaluation and rating criteria. necessary to attain and
maintain a high level

transactions, such as purchases of food or The Assistant Secretary of the
Navy for

of adherence to the policy. other prohibited items,

Research, Development and Acquisition now requires purchase card reviews
be made part of procurement management reviews, and ordered a one- time
expanded semiannual review by all Navy activities to be completed and
results reported to the Navy PCPMO by the summer of 2002. Navy

PCPMO is conducting routine transaction screening to identify potentially
fraudulent, improper, and abusive purchases.  revise NAVSUP Instruction
4200. 94 to

The Navy PCPMO issued policy as an Implemented. However, our current audit

require that (1) written reports on the interim change to NAVSUP
Instruction

work found that even though Navy has made results of internal reviews
along with any 4200.94 * Semiannual Major Claimant changes in its policy,
not all operating units recommendations for corrective actions be
Reporting Requirement that establishes

are adhering to the interim policy. prepared and submitted to local more
comprehensive reviews, elevates management and cognizant commands
reporting requirements, and provides and (2) commands identify and report
uniformity of evaluation and rating criteria.

systemic weaknesses and corrective The NAVSUP Instruction is being revised
to action plans to the Naval Supply Systems

incorporate interim policy to include Command for monitoring and
oversight,

reporting of systemic weaknesses. Navywide purchase card stand- down
required a top- to- bottom review and notice to the Navy

PCPMO of compliance with purchase card policies and procedures by all
activities. Results of all annual and semiannual

reviews, along with any systemic weaknesses, will be reported to the
activity commander/ commanding officer and to the Navy PCPMO through
command level agency program coordinators.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

 require purchase card Agency Program Navy- wide purchase card stand-
down Implemented. However, our current audit Coordinators to report in
writing to the unit

required a top- to- bottom review and notice work found that, although
Navy has made commander and the Commander of Naval

of compliance to purchase card policies and changes in policy, not all
operating units Supply Systems Command any internal procedures by all
activities. Results of all

have successfully implemented the standdown. control weakness identified
during the annual and semiannual reviews, along with semiannual program
reviews, and

any systemic weaknesses, will be reported to the activity commander/
commanding officer and to the Navy PCPMO through

command level agency program coordinators.

 disclose systemic purchase card control Navy included systemic purchase
card

Implemented. The Navy included purchase weaknesses along with corrective
action weaknesses identified from the semiannual card control weaknesses
in the SECNAV plans in the Secretary of the Navy*s Annual report in the
Secretary of the Navy*s Annual

fiscal year 2001 Annual Statement of Statement of Assurance. Statement of
Assurance. Assurance.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

Receipt of Goods and Services

 The Commander of the Naval Supply In progress. The NAVSUP Instruction

In progress, not implemented. Navy has not Systems Command revise NAVSUP

4200.94 is in the final stages of being completed the necessary changes in
its

Instruction 4200.94 to eliminate revised to incorporate all interim
changes policy. ambiguous language suggesting that

issued by policy letter as a result of the GAO advance independent
authorization of a

report. purchase can be substituted for independent confirmation that
goods and services ordered and paid for with a purchase card have been
received and

accepted by the government, and  The Commanding Officer of the SPAWAR

The Navy PCPMO issued policy as an Reported implemented. However, because

Systems Center San Diego and the interim change to NAVSUP Instruction we
did not conduct additional tests at

Commanding Officer of the Navy Public 4200.94 * Separation Of Functions.
It

SPAWAR or the Navy Public Works Center, Works Center San Diego implement

provides detailed guidance on proper we cannot verify the extent to which
this

procedures to require and document receipt, inspection, and acceptance

recommendation has been implemented. independent confirmation of receipt
of procedures. Public Works Center San goods and services acquired with a

Diego and SPAWAR Systems Center San purchase card.

Diego both incorporated specific guidelines into their local internal
operating procedures. Navy- wide purchase card

stand- down also reiterated the requirement for independent receipt and
acceptance.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

Proper Payment Certification

To provide assurance that certifications of monthly purchase card
statements for payment reflect certifying officer responsibilities in 31
U. S. C. 3325, 3528, and the approving official*s informed judgment that
purchases are proper:

 the Commander of the Naval Supply In progress. The NAVSUP Instruction

In progress, not implemented. The Navy Systems Command revise NAVSUP

4200.94 is being revised to incorporate all has not completed the
necessary changes

Instruction 4200.94 to require that (1) interim changes issued by policy
letter as a

in its policy. cardholders notify approving officials prior result of the
GAO report. The expected to payment that purchase card statements
completion date is summer 2002. have been reconciled to supporting
documentation, (2) approving officials certify monthly statements only
after reviewing them for potentially fraudulent, improper, and abusive
transactions, and (3) approving officials verify, on a sample basis,
supporting documentation for various cardholders* transactions prior to
certifying monthly statements for payment, and

 the Navy Comptroller withdraw the June 3, The Navy Comptroller policy
letter dated Implemented. 1999, policy memorandum or revise the June 3,
1999, was rescinded effective March policy guidance to be consistent with
the

12, 2002. preceding recommendation for revising payment certification
guidance in NAVSUP

Instruction 4200.94.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

Proper and Timely Accounting

 The Commanding Officers of the SPAWAR Both Public Works Center San Diego
and

Reported Implemented. However, because and Navy Public Works Center San
Diego SPAWAR Systems Center San Diego

we did not conduct additional tests at monitor and confirm that purchase
card

concurred and are complying. Internal SPAWAR or the Navy Public Works
Center, transactions are recorded to projects that

operating procedures at both sites include we cannot verify the extent to
which this benefited from the goods and services or guidance on the issue.

recommendation has been implemented. to relevant overhead accounts
promptly, in accordance with internal control standards and federal
accounting standards.  The Commander of the Naval Supply

The Navy PCPMO issued policy as an Implemented.

Systems Command revise NAVSUP interim change to NAVSUP Instruction

Instruction 4200.94 to require that 4200.94 * Standards of Compliance for

purchase card expenses be properly Timely Recording and Classifying of
Navy

classified in the Navy*s detailed accounting Purchase Card Commitments and

records. Obligations, which reiterated existing Navy

and DOD Financial Management Regulation policy regarding the issue.

 The Commanding Officers of SPAWAR Both Public Works Center San Diego and

Reported Implemented. However, because and Navy Public Works Center San
Diego SPAWAR Systems Center San Diego

we did not conduct additional tests at verify that their detail purchase
card concurred and are complying. The Navy

SPAWAR or the Navy Public Works Center, transaction records reflected the
proper

issued policy as an interim change to we cannot verify the extent to which
this object classification of expense.

NAVSUP Instruction 4200. 94 * Standards of recommendation has been
implemented. Compliance for Timely Recording and

Classifying of Navy Purchase Card Commitments and Obligations, which
reiterated existing Navy and DOD Financial Management Regulation policy
regarding the issue.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

Accountable Property

 We recommend that the Commanding Both the Navy Public Works Center San

Implemented. However, the Navy changed Officers of SPAWAR and the Navy
Public Diego and SPAWAR Systems Center San

its policy addressing accountable and Works Center San Diego require and
verify

Diego concurred and are complying. pilferable property in August 2001, and
has

that accountable property obtained using a represented that the Navy
Public Works purchase card is promptly recorded in Center San Diego and
SPAWAR Systems property records as it is acquired, in

Center San Diego are complying with a accordance with DOD and Navy
policies

policy that we believe needs to be changed. and procedures. This report
contains additional

recommendations concerning maintaining accountability over pilferable
property.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

The following were our recommendations to identify and address potentially
fraudulent, improper, and abusive purchase card transactions prior to
payment.

Fraudulent, Improper, and Abusive Transactions

The Commander of the NAVSUP:  Immediately cancel all known active All
compromised accounts are closed. Implemented. compromised purchase card
accounts.  Determine whether purchases of

At the direction of the Navy PCPMO, a Partially implemented. Current audit
work excessive cost, questionable government

100% transactional review was conducted at indicates that not all units
performed the

need, or both, such as items for personal all activities, with one of the
review elements 100% transaction review, and that the

use, including personal digital assistants being purchases made at
excessive cost

transaction reviews performed were not (such as Palm Pilots), and flat
screen

and/ or of questionable need. Where thorough enough to identify items of
computer monitors, that were identified by activities identified items of
excessive cost excessive cost or questionable need.

GAO are proper government purchases. If or questionable need, they
certified to the

not, the Commander should prohibit their Navy PCPMO that appropriate
action was

purchase. taken.

 Establish written policies and criteria Revised Navy Instruction and
updated In progress, not implemented. Navy has not

requiring documented justifications and training materials will reference
and clarify completed the necessary changes in its

procurement management approval for existing acquisition policy addressing
this

policy. types of items that can be acquired with a issue. government
purchase card.  Examine purchase card acquisition Navy instruction and
purchase card training In progress, not implemented. Navy has not guidance
to determine whether the

is being revised to provide expanded completed the necessary changes in
its purchase card is the right vehicle for

guidance on the use of mandatory sources policy. acquiring certain goods
and services, such

of supply and the requirement to utilize as vehicle and equipment
maintenance, existing contractual vehicles to the installation of upgraded
computer maximum practical extent.

software, and other recurring or installationwide services, or whether
these items should be subject to negotiated contracts.

 Work with the Under Secretary for Navy instruction and purchase card
training In progress, not implemented. Navy has not

Acquisition, Technology, and Logistics and is being revised to provide
expanded completed the necessary changes in its

DOD*s Purchase Card Joint Program guidance on the use of mandatory sources

policy. Office to determine whether the purchase of supply and the
requirement to utilize card should be used to acquire computers existing
contractual vehicles to the and other equipment or property items maximum
practical extent. individually that could be more economically and
efficiently procured through bulk purchases.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

 Revise NAVSUP Instruction 4200.94 to Revised instruction will
specifically state that In progress, not implemented. Navy has not

make it consistent with the Federal in absence of specific statutory
authority, completed the necessary changes in its

Acquisition Regulation, 48 C. F. R. purchase of items for the personal
benefit of policy. 13.301( a), which states that the *card may

government employees, such as flowers or be used only for purchases that
are

food, are not permitted and are therefore otherwise authorized by law or
regulation.* improper transactions. The clarifying guidance should
specifically state that in the absence of specific statutory authority,
purchases of items for

the personal benefit of government employees, such as flowers or food, are
not permitted and are therefore improper transactions.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

Split Purchases

The Commanding Officers of the SPAWAR and Navy Public Works Center San
Diego

 prohibit splitting purchases into multiple The language in the NAVSUP
Instruction

Reported implemented. However, because transactions as required by the
Federal 4200.94, both in the existing and upcoming

we did not conduct additional tests at Acquisition Regulation and
emphasize this revised versions, prohibits split purchases.

SPAWAR or the Navy Public Works Center, prohibition in purchase card
training Training emphasizes the prohibition on split

we cannot verify the extent to which this provided to cardholders and
approving

purchases, as will all future annual and recommendation has been
implemented. officials, and

semiannual program reviews. Agency program coordinators have an on- line
tool to proactively monitor split purchases.

 require approving officials to monitor Agency program coordinators have
been

Reported partially implemented. Because monthly purchase card statements
and given the necessary tools to proactively we did not conduct additional
tests at identify and report to them regarding any

monitor split purchases and are required to SPAWAR or the Navy Public
Works Center, split purchases and the names of

report such purchases to the appropriate we cannot verify the extent to
which this

cardholders who made the transactions. local management.

recommendation has been implemented. Further, the Navy*s response
addresses actions that the agency program coordinators can take. Our
recommendation was to have the approving officials monitor for splitting
and report the names of cardholders who made split purchases.

(Continued From Previous Page)

Status of GAO recommendation, as GAO observation on the status of GAO
recommendation reported by Navy recommendation

Overall Accountability

 To help ensure that cardholders adhere to NAVSUP Instruction 4200.94
refers

Not implemented. The Navy has not made applicable purchase card laws,

commanders to applicable existing the necessary changes in its policies to

regulations, internal control and regulations that they should use to
guide an

establish specific consequences for accounting standards, and policies and

appropriate course of action taking into noncompliance with the provisions
of procedures, we recommend that the

account the specific circumstances of the NAVSUP Instruction 4200.94,
which

Commander of the Naval Supply Systems event. Assistant Secretary of the
Navy for

address internal control policies and Command revise NAVSUP Instruction

Research Development and Acquisition procedures (e. g., required training,

4200.94 to include specific consequences issued a Naval message dated
August 31, independent receipting, statutory vendor

for noncompliance with these guidelines 2001, reiterating compliance,
accountability,

screening, splitting purchases, cardholder and enforce the guidelines. and
consequences of fraud, abuse, and

account reconciliation, disputing improper misuse.

charges, approving official review and certification).

Appendi x IV

Status of Previously Identified Fraud Cases In our March 13, 2002,
testimony, we identified a number of cases of potentially fraudulent
purchase card use that we referred to our Office of Special Investigations
for further investigation. One case involved transactions totaling about
$164,000 with a communication contractor. A second case involved payment
for food and refreshments at a local hotel. The information provided below
summarizes the status of those cases.

Communications In the March testimony, we reported that during fiscal year
2001, SPAWAR Contractor

made 75 transactions totaling about $164,000 for what appeared to be
advance payments for services to a telecommunications contractor. Our
Office of Special Investigations subsequently learned that the
transactions were payments made by SPAWAR based on cost estimates provided
by the contractor. In almost all 75 transactions, the amount paid by
SPAWAR was more than the actual cost incurred by the contractor* even
after the actual expenses were adjusted for estimated overhead and
standard profit margin. Further, the work paid for by the purchase card
was work that

should have been paid for under an existing delivery order contract.
According to contractor and SPAWAR personnel, the purchase card was used
because it was a faster vehicle to get work done. The SPAWAR official also
told us that when there was no funding remaining on a particular delivery
order contract line item, SPAWAR used the purchase card rather than
modifying the contract. Our Office of Special Investigations determined
that SPAWAR overpaid the contractor about $34,000 for the 75 transactions
identified in the March testimony. A SPAWAR official told us that on
September 10, 2002, it received a check

from the contractor in the amount of $9,862. The payment represented a
refund for work the contractor did not perform on 4 transactions. The
SPAWAR official also told us that the contractor disagrees with our Office
of Special Investigations assessment that the contractor over charged
SPAWAR about $24,000 on the 71 other transactions we reviewed.

Food and Refreshments at a The SPAWAR Inspector General and Staff Judge
Advocate investigated the Local Hotel

use of a Navy purchase card at a San Diego hotel for an off- site meeting
in which SPAWAR used appropriated funds to pay for meals provided to Navy
personnel. As we have previously reported, without statutory authority,
appropriated funds may not be used to furnish meals or refreshments to
employees within their normal duty stations. 26 The SPAWAR Inspector
General told us the investigation determined that a SPAWAR Deputy

Program Manager, Assistant Program Manager, and cardholder used the
purchase card to improperly purchase food. Further, the SPAWAR Inspector
General found that both the Assistant Program Manager and the cardholder
made false statements to GAO when asked about purchasing food. However,
the investigation has not been completed and we are not aware of any
actions* administrative or disciplinary* that have been taken against the
SPAWAR Deputy Program Manager, the Assistant Program Manager, or the
cardholder for improper use of the purchase card.

26 72 Comp. Gen. 178,179 (1993); 65 Comp. Gen. 508, 509 (1986).

Status of the Former Commander, Space and Naval Warfare Systems Command,
Systems

Appendi x V

Center San Diego In our March 13, 2002, 27 testimony on the purchase card
controls at SPAWAR Systems Center and NPWC, we reported that the
commanding officer of the Space and Naval Warfare Command, Systems Center
San Diego, was relieved of his command in December 2001 for matters
unrelated to the purchase card program. According to the SPAWAR Inspector
General, on December 8, 2001, the admiral in charge of SPAWAR held a
nonjudicial punishment hearing and found that the SPAWAR System Center
commanding officer had violated two articles of the Uniform Code of
Military Justice, including dereliction of duty and conduct unbecoming an
officer. The admiral issued the commanding officer a punitive Letter of
Reprimand, relieved him of his command at SPAWAR Systems Center San Diego,
and endorsed the captain*s request for retirement from the Navy.

Subsequently, information came to our attention that the former commanding
officer of SPAWAR System Center San Diego was still employed by SPAWAR at
the same rank he held* captain* when the admiral determined he was
derelict in his duties and acted in a manner unbecoming an officer. In
June 2002, our Office of Special Investigations contacted a DOD official
and inquired if the former commanding officer was still on the Navy
payroll as a captain. On July 31, 2002, a senior Navy official informed us
that the former commanding officer was still on the Navy payroll and
employed by SPAWAR as a Navy captain, but his retirement would become
effective August 1, 2002.

27 GAO- 02- 506T.

Comments From the Department of Defense Purchase Card Joint Program
Management

Appendi x VI Office

Comments from the Under Secretary of

Appendi x VII Defense (Comptroller)

Appendi x VIII

GAO Contacts and Staff Acknowledgments GAO Contacts John Kelly, (202) 512-
6926 John Ryan, (202) 512- 9587 Acknowledgments Individuals who made key
contributions to this testimony include Fannie

Bivins, Bertram Berlin, Kriti Bhandari, Francine DelVecchio, K. Eric
Essig, Michael Hansen, Kenneth Hill, Jeffrey Jacobson, Tram Le, John
Ledford, Latrealle Lee, Stephen Lipscomb, Susan Mason, Melissa McDowell,
Sidney Schwartz, Carolyn Voltz, and Robert Wagner.

(192041)

a

GAO United States General Accounting Office

Page i GAO- 02- 1041 Navy Is Vulnerable to Fraud and Abuse

Contents

Contents

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Appendix I

Appendix I Background

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Appendix I Background

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Appendix I Background

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Appendix I Background

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Appendix I Background

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Appendix II

Appendix II Scope and Methodology

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Appendix II Scope and Methodology

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Appendix II Scope and Methodology

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Appendix II Scope and Methodology

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Appendix III

Appendix III Status of GAO Recommendations to Improve Navy Purchase Card
Operations

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Appendix IV

Appendix IV Status of Previously Identified Fraud Cases

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Appendix V

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Appendix VI

Appendix VI Comments From the Department of Defense Purchase Card Joint
Program Management Office

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Appendix VII

Appendix VII Comments from the Under Secretary of Defense (Comptroller)

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Appendix VIII

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