Purchase Cards: Navy Vulnerable to Fraud and Abuse but Is Taking 
Action to Resolve Control Weaknesses (08-OCT-02, GAO-03-154T).	 
                                                                 
For a number of years, the Department of Defense (DOD) has been  
promoting departmentwide use of purchase cards, and their use has
dramatically increased. DOD reported that in fiscal year 2001,	 
more than 230,000 civilian and military cardholders made 10.7	 
million purchase card transactions valued at more than $6.1	 
billion. The Navy has the second largest purchase card program in
DOD. As was previously reported, there were significant 	 
breakdowns in internal control at two Navy sites that left those 
units vulnerable to fraud, waste, and abuse. These weaknesses are
representative of systematic Navy-wide purchase card control	 
weaknesses that have left Navy vulnerable to fraudulent,	 
wasteful, and abusive use of purchase cards. Since the original  
report, the Navy has been taking actions to improve the purchase 
card control environment and improve cardholder adherence to key 
purchase card control procedures. The Navy has also taken more	 
aggressive actions to identify fraudulent, improper, and abusive 
or questionable purchase card acquisitions.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-154T					        
    ACCNO:   A05248						        
  TITLE:     Purchase Cards: Navy Vulnerable to Fraud and Abuse but Is
Taking Action to Resolve Control Weaknesses			 
     DATE:   10/08/2002 
  SUBJECT:   Defense procurement				 
	     Fraud						 
	     Internal controls					 
	     Military cost control				 
	     Program evaluation 				 
	     Credit						 
	     Credit sales					 
	     DOD Purchase Card Program				 

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GAO-03-154T

a

GAO United States General Accounting Office

Test i mony Before the Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government
Reform, House of Representatives

For Release on Delivery 2: 00 p. m. Tuesday, October 8, 2002 PURCHASE
CARDS

Navy Vulnerable to Fraud and Abuse but Is Taking Action to Resolve Control
Weaknesses

Statement of Gregory D. Kutz, Director, Financial Management and Assurance

John J. Ryan, Assistant Director, Office of Special Investigations

GAO- 03- 154T

Page 1 GAO- 03- 154T Mr. Chairman, Members of the Subcommittee, and
Senator Grassley: Thank you for the opportunity to discuss the internal
controls over the

Navy*s purchase card program. This Subcommittee held hearings in July 2001
and March 2002 that identified substantial internal control weaknesses at
two Navy units in San Diego, California. 1 As a result of those hearings
and your continued concern about fraud, waste, and abuse at the Department
of Defense (DOD), this Subcommittee and Senator Grassley requested more
comprehensive audits of DOD*s purchase card use. In response to that
requested work, this testimony and the related report 2 released today
focus on the Navy- wide purchase card program. Details on our objectives,
scope, and methodology are included in that report. On July 17, 2002, we
testified 3 before this Subcommittee and issued a report 4 concerning
purchase card control weaknesses that left the Army vulnerable to fraud,
waste, and abuse. We will report to you separately on

the results of our Air Force purchase card audit. For a number of years,
DOD has been promoting departmentwide use of purchase cards, and their use
has dramatically increased. DOD reported that in fiscal year 2001, more
than 230,000 civilian and military cardholders made about 10.7 million
purchase card transactions valued at over $6.1 billion. The Navy has the
second largest purchase card program in DOD with about 25, 000
cardholders, 2.8 million transactions, and $1.8 billion in purchases in
fiscal year 2001. Purchase card transactions include acquisitions at or
below the $2, 500 micropurchase limit as well as for payments on
contracts. 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 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).

2 U. S. General Accounting Office, Purchase Cards: Navy Vulnerable to
Fraud and Abuse but Is Taking Action to Resolve Control Weaknesses, GAO-
02- 1041 (Washington, D. C.: Sept. 27, 2002). 3 U. S. General Accounting
Office, Purchase Cards: Control Weaknesses Leave Army Vulnerable to Fraud,
Waste, and Abuse, GAO- 02- 844T (Washington, D. C.: July 17, 2002).

4 U. S. General Accounting Office, Purchase Cards: Control Weaknesses
Leave Army Vulnerable to Fraud, Waste, and Abuse, GAO- 02- 732
(Washington, D. C.: July 17, 2002).

Page 2 GAO- 03- 154T program to streamline the government*s acquisition
processes. However, it is important that agencies have adequate internal
control in place to protect the government from fraud, waste, and abuse.
Summary We previously reported that significant breakdowns in internal
control at

two Navy sites 5 left those units vulnerable to fraud, waste, and abuse.
Today, I am here to report that the control weaknesses we identified at
the two Navy units in San Diego were representative of systemic Navy- wide

purchase card control weaknesses that have left the Navy vulnerable to
fraudulent, wasteful, and abusive use of purchase cards. Our current audit
work at the Atlantic Fleet, Pacific Fleet, Naval Sea Systems Command, and
the Marine Corps showed that during fiscal year 2001, the Navy had not
established an effective internal control environment. At the individual

transaction level, we also identified a substantial number of purchases
for which cardholders and approving officials at selected units assigned
to those commands had not adhered to key internal control activities and
that were not in accordance with valid requirements, policies, and
procedures. The weaknesses we identified in the control environment and
the breakdown in specific internal control activities resulted in
potentially fraudulent, improper, and abusive transactions not being
prevented or identified promptly.

Since we first reported on the Navy*s purchase card control weaknesses,
the Navy has been taking actions to improve the purchase card control
environment and improve cardholder adherence to key purchase card control
procedures. The Navy has also taken more aggressive actions to identify
fraudulent, improper, and abusive or questionable purchase card

acquisitions. Many of these improvements have been implemented in the last
few months and others have not yet been fully implemented. Thus, while we
have not assessed the impact of the Navy actions, the Navy actions
demonstrate that it is acting to improve the purchase card program.
However, to fully achieve the benefits of the purchase card program, the
Navy will need to make a sustained effort that focuses on cultural change,
and provide the infrastructure necessary to build a purchase card program
with a robust set of internal controls. Navy major command and unit
management must also actively promote the importance of a strong system of
accountability that is necessary to provide reasonable assurance that the

5 GAO- 01- 995T and GAO- 02- 506T .

Page 3 GAO- 03- 154T program is operating as intended. As discussed in the
report released today, DOD generally concurred with our recommendations to
improve the control environment; to strengthen key internal control
activities; and to increase attention to preventing potentially
fraudulent, improper, and

abusive or questionable transactions. Weak Purchase Card Control
Environment Contributed to Ineffective Controls, but Management Has Taken
Positive Steps

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 effectively (1) evaluate whether approving
officials had responsibility for a reasonable number of cardholders, (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 Navy cardholders by over 50 percent and
establishing a DOD Charge Card Task Force to further improve the purchase
card processes and controls. Improvement Initiatives Signal Proactive
*Tone at the Top* Since the July 30, 2001, congressional hearing, the DOD
Comptroller, the

DOD Purchase Card Program Office, and Naval Supply Systems Command
(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 taken action or said it
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, its 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

Page 4 GAO- 03- 154T 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 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 the 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 Significantly Reduced but Approving Official Span of
Control Remains an Issue

Although the Navy significantly reduced the number of purchase cards since
our July 30, 2001, testimony, it continued to have approving officials who
were responsible for reviewing more cardholder statements than allowed by
either DOD or Navy guidance, the later of 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 cardholders. 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 1, the Navy continued to reduce the number of
cardholders and was down to about 25,000 as of March 2002. Agency

Page 5 GAO- 03- 154T program coordinators 6 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 1: Change in Number
of Navy- wide Cardholders, October 2000 to March 2002

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

6 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. The agency program coordinator also serves as the communication
link between the purchase card issuing bank and the unit.

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.

0 15,000

30,000 45,000 75,000

60,000 Oct- 00

Nov- 00 Dec- 00

Jan- 01 Feb- 01

Mar- 01 Apr- 01

May- 01 Jun- 01

Jul- 01 Aug- 01

Sep- 01 Oct- 01

Nov- 01 Dec- 01

Jan- 02 Feb- 02

Mar- 02 Number of Navy- wide cardholders

Page 6 GAO- 03- 154T procedures for approving purchase cards and for
issuing them to activity personnel. The Navy*s requirement of a maximum
seven to one 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 last summer. At the four locations we audited, the
average ratio of cardholders to approving officials was in line with the
DOD and Navy limit of seven

cardholders per approving official. This average, however, masks the wide
range of ratios across units, including those that far exceeded the DOD
and Navy prescribed ratio of cardholders to approving officials. The
problem with a high cardholder to approving official ratio 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 a number of approving officials certifying monthly bills for
more than 100 cardholders that contained thousands of transactions and
regularly exceeded $1 million a month.

Cardholder Credit Limits Exceed Procurement Needs

While total financial exposure as measured in terms of purchase card
credit limits has decreased in the units we audited, it continues to
substantially exceed historical purchase card procurement needs. 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
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, 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.

Page 7 GAO- 03- 154T 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 1, the
four commands that we audited had credit limits that clearly exceeded
historical needs.

Table 1: Historical Purchases vs. Credit Limits for Selected Navy Commands
and Marine Corps

a Credit limit is 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 Training

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.
The instruction also requires all cardholders and approving officials to
receive refresher training every 2 years. 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. 9 The
maximum credit limit allowed by NAVSUP Instruction 4200. 94 is $9. 9
million. Command Atlantic Fleet Pacific Fleet NAVSEA Marine 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

Page 8 GAO- 03- 154T We found that from about 56 percent 10 of the fiscal
year 2001 transactions at the Marine Corps to about 87 percent 10 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.
Management 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
followup training. Without a centralized training database, it would be
extremely difficult to track when each cardholder needed the required 2-
year refresher training.

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 course curriculum for the three
positions was identical. The NAVSUP and major commands did not have
specific guidance or training concerning the role and responsibilities of
agency program coordinators or approving officials.

Monitoring and Oversight Need Improvement

We found evidence that the four units we audited conducted reviews of the
fiscal year 2001 purchase card program. However, we did not find that they
used the results of those reviews to resolve identified internal control

weaknesses. Further, an August 2001 NAVSUP- mandated review of 12 months
of purchase card transactions did not identify the extent of potentially
fraudulent, improper, and abusive or questionable transactions identified
in either Naval Audit Service or GAO audits. Specifically, 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, and
abusive or questionable transactions were occurring during the period
reviewed. 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* that 10
The numbers represent point estimates for the population based on our
sampling tests. The estimated percentages have 95 percent confidence
intervals of plus or minus 13 percentage points or less.

Page 9 GAO- 03- 154T were for personal use, or for prohibited items, or
were not a bona fide mission requirement. 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
testimony) 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. Human Capital
Resources Are Insufficient for Effective Monitoring and Oversight

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 program coordinators are
responsible for procurement programs involving hundreds of thousands of
transactions and hundreds of millions of dollars, the human capital
resources at the major command level are inadequate.

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.*
Further, we found that approving officials and most agency program
coordinators generally had other duties of higher priority than monitoring

Page 10 GAO- 03- 154T 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 knew that some approving officials
did 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, or 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 Ineffective 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 2,
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 reconciling 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.

Page 11 GAO- 03- 154T Table 2: Estimate of Fiscal Year 2001 Transactions
That Failed Control Tests

a The numbers represent point estimates for the population based on our
sampling tests. The estimated percentages have 95 percent confidence
intervals of plus or minus 13 percentage points or less. Source: GAO
testing and statistical analysis of Navy purchase card transaction files.

Little Evidence Cardholders Screen for Required Vendors

Despite DOD and Navy requirements to give priority to certain required
vendors, we found that the failure rate to document the necessary
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. Percent
breakdowns in key purchase card controls a

Screening for required

vendors Independent,

documented receipt of items

purchased Proper reconciliation

and certification of purchase card statements for payment

Atlantic Fleet units in the Norfolk, VA area 88 58 98

Pacific Fleet units in the San Diego, CA area 70 59 80 NAVSEA units in the
Norfolk, VA area 90 67 86 Marine Corps Base at Camp Lejeune, NC 89 59 94

Page 12 GAO- 03- 154T Little Evidence of Independent Receipt and
Acceptance of Items

Purchased 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. 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 Were Reconciled and Reviewed Prior to
Certification and Payment We found little evidence of cardholder
reconciliation or approving official reviews to confirm that cardholders
had reconciled the monthly purchase card transactions back to the
supporting documents throughout fiscal year 2001. 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 11 before it was paid,
and the monthly bill contained any markings or notes indicating the
amounts billed had been compared to a credit card receipt, invoice,
packing slip, or a purchase log, and

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

11 In pencil, ink, or electronically.

Page 13 GAO- 03- 154T 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, and
dates, or a lack of evidence of cardholder reconciliation or approving
official review. Without such evidence, we* and the program coordinators,
who are required to semiannually review approving official records* cannot
determine whether officials are complying with review requirements. We
found 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. For

example, 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. Major Commands Failed to
Maintain Accountability for Pilferable Items

We found accountable items acquired with purchase cards 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 installations we audited, 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 assure accountability and financial
control over these assets and, along with periodic inventory, to deter
theft or improper use of government property. Table 3 contains the results
of our review of property management records and inspection of accountable
property.

Page 14 GAO- 03- 154T Table 3: Accountable Property Items Not Recorded in
Property Books

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

Potentially Fraudulent, Improper, and Abusive or Questionable Transactions
We identified numerous purchases at the installations we audited and

through our Navy- wide data mining that were potentially fraudulent,
improper, and abusive or questionable. However, our work was not designed
to identify, and we cannot determine, the extent of potentially
fraudulent, improper, and abusive or otherwise questionable transactions.
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, abusive, and 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. Potentially
Fraudulent Purchases

We considered potentially fraudulent purchases to include those made by
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.

Command/ Base Transactions

with property

items Transactions

with items not in property

book Transactions

with items the command could

not locate

Atlantic Fleet units in Norfolk, VA 35 15 12 Pacific Fleet units in San
Diego, CA 42 23 15 NAVSEA units in Norfolk, VA 21 14 8 Marine Corps Base
at Camp Lejeune, NC 16 8 0

Page 15 GAO- 03- 154T 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

the processes and activities were operating in a manner that provided such
assurance. The following examples illustrate the cases we described in the
report that we released today.  An approving official*s failure to review
a cardholder*s statement on a

timely basis 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 automobile, 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 had been
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
statement 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

Page 16 GAO- 03- 154T 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 Naval Criminal
Investigative

Service (NCIS) 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 the 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
60- day restriction and reduction in rank.

 We also found that in March 1999 the Navy inappropriately issued five
government purchase cards to individuals who did not work for the
government. These individuals 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

Page 17 GAO- 03- 154T 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 bill the Navy interest on past due accounts. Thus, by
using the Navy purchase card, the company avoided paying interest on these
accounts that were regularly past due. Based on the results of our work,
we

referred this case to DOD for further investigation. Navy*s Fraud Database
Does Not Include Key Data We attempted to obtain examples of other
potentially fraudulent activity in 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 Transactions

Our audit work at the four commands and our Navy- wide data mining
identified numerous examples of improper transactions. Improper
transactions are those purchases that, although approved by Navy officials
and intended for government use, are not permitted by law, regulation, or
DOD policy. We identified three types of improper purchases:

Page 18 GAO- 03- 154T  Purchases that do not serve an authorized
government purpose.

 Split purchases, in which the cardholder circumvents cardholder
singlepurchase 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. 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

Authorized Government Purpose We found several instances in which
cardholders purchased goods, such as 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. The following are improper transactions we
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.  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

Page 19 GAO- 03- 154T official visitor. 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
made 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, 12
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, are usually considered personal items 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.

 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 airline flights and, therefore, should not have
been purchased with the Navy purchase card.

 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

12 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.*

Page 20 GAO- 03- 154T 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* assertions, 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. 13 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. 14 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 two or more transactions of $2,500
or 13 72 Comp. Gen. 178, 179 (1993); 65 Comp. Gen. 508, 509 (1986). 14 65
Comp. Gen. 738, 739 (1986).

Page 21 GAO- 03- 154T less. For example, a Camp Lejeune cardholder made
eight transactions totaling about $17,000 on the same day to purchase
combat boots.

All the commands that we audited represented that the practice of
splitting transactions 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 Transactions With Frequently Used Vendors Could
Result in Additional Savings

The Navy has not proactively managed the purchase card program to identify
opportunities for savings. Purchase card sales volume has grown
significantly over the last few years with the Navy now using the purchase
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 more than $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, the benefits of using purchase cards versus
traditional

contracting and payment processes include 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, the opportunity existed for the Navy to negotiate
additional savings form the 48 vendors that participated in the Multiple
Award Schedule. 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.

Page 22 GAO- 03- 154T 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 a
significant amount of money and negotiating discounts with them. For
example, during fiscal year 2001, the Navy spent about $65 million with 5
national computer vendors (i. e. Dell, Gateway, CWD Computer Centers,
Micro Warehouse,

and GTSI), $22 million with 3 office supply companies (i. e. Corporate
Express, Staples, and Office Depot), and $9 million with 2 national home
improvement stores (i. e. 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 Purchases

We identified numerous examples of abusive and questionable transactions
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 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. 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. The following
examples illustrate our point.

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

Page 23 GAO- 03- 154T 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 were often not
put to use until more than 12 months had passed. 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 had 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 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.

 Flat Panel Monitors* Our statistical sample selected transactions
containing 243 flat panel monitors purchased by the Atlantic Fleet,
Pacific Fleet, NAVSEA, and Camp Lejeune. The cost of the monitors selected
in our sample ranged from $550 to $2, 200. Conversely, the 17inch

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 an ineffective 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.

 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 away as gifts to a

Page 24 GAO- 03- 154T visiting officer in the Australian Navy, while other
designer items were personal preferences of the cardholders and requesting
individuals.  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 costing about $15.

Disciplinary Actions Seldom Taken Against Those Who Misuse the Purchase
Card

Currently, the Navy has not established specific disciplinary and/ or
administrative consequences for failure to follow purchase card control
requirements* 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 or questionable
transactions identified in our work. As part of this audit, we asked the
agency program coordinators at each command that we audited (1) whether
any cardholders referred to in this testimony were disciplined for
improper, abusive, or questionable purchases, or (2) 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.
According to the agency program coordinators, only one of the cardholders
referred to in this testimony lost his card for improper, abusive, or

questionable purchases, and no one has had any disciplinary actions taken
against them for abusing the purchase card and obtaining personal
preference items at additional expense to the government.

Conclusions We support the use of a well- controlled purchase card program
as 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. 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

Page 25 GAO- 03- 154T 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. Specifically, leadership by major command
and unit management and a strong system of accountability must be
established and sustained for effective program control. Strengthening the
control environment will require a commitment by the Navy to build a
robust purchase card control infrastructure.

Our related report on these issues released today builds on the progress
the Navy has made and includes recommendations that address the need for
the Navy to strengthen the overall control environment and improve
internal control activities. Our recommendations focus on the need for the
Navy to improve (1) overall program management and its control
environment, (2) guidance on the requirements for the specific control
activities, and (3) procedures to help prevent fraudulent, improper, and

abusive or questionable purchases. In written comments on a draft of our
related report, DOD concurred or partially concurred with our
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 to be taken
against cardholders who make improper or abusive

acquisitions, but stated that the Navy will examine whether actions the
department has already taken will appropriately address improper or
abusive use of purchase cards.

Mr. Chairman, Members of the Subcommittee, and Senator Grassley, this
concludes my prepared statement. I would be pleased to answer any
questions that you may have.

Page 26 GAO- 03- 154T Contacts and Acknowledgments For future contacts
regarding this testimony, please contact Gregory D.

Kutz at (202) 512- 9505, John J. Ryan at (202) 512- 9587, or John V. Kelly
at (202) 512- 6926. Individuals making key contributions to this testimony
included Eric Essig, Francine Delvecchio, John Ledford, and Steve
Lipscomb.

(192075)
*** End of document. ***