HUD Purchase Cards: Poor Internal Controls Resulted in Improper
and Questionable Purchases (11-APR-03, GAO-03-489).
Due to the Department of Housing and Urban Development's (HUD)
increasing use of purchase cards and the inherent risk associated
with their use, Congress asked GAO to audit the purchase card
program concentrating on assessing internal controls and
determining whether purchases being made are a valid use of
government funds.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-489
ACCNO: A06643
TITLE: HUD Purchase Cards: Poor Internal Controls Resulted in
Improper and Questionable Purchases
DATE: 04/11/2003
SUBJECT: Financial management
Fraud
Internal controls
Credit
Credit sales
Federal procurement
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GAO-03-489
A
Report to the Secretary of Housing and Urban Development
April 2003 HUD PURCHASE CARDS Poor Internal Controls Resulted in Improper
and Questionable Purchases
GAO- 03- 489
Letter
April 11, 2003 The Honorable Mel Martinez Secretary of Housing and Urban
Development Dear Mr. Secretary: The use of purchase cards at the
Department of Housing and Urban Development (HUD) has been steadily
increasing over the last several years. During fiscal year 2001, purchase
cards were used to make over 24,000 purchases totaling more than $10
million compared to over 14,000 transactions totaling more than $7.6
million in fiscal year 1997. Purchase cards are available to federal
agencies under a General Services Administration (GSA) SmartPay Master
Contract and may be used to make purchases with minimal paperwork. GSA
administers the master contract
and also provides purchase card program guidance for government agencies
on its GSA Web site. Individual agencies are required to administer their
own purchase card programs and set the parameters for use by authorizing
employees, establishing dollar limits, and monitoring usage. 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. While we support the use of
a well- controlled purchase card program to streamline the government*s
acquisition processes, it is important that agencies have adequate
internal controls in place to protect the government from fraud, waste,
and abuse.
Given HUD*s increasing use of purchase cards and the inherent risk in
their use, we were asked to assess HUD*s purchase card activities. 1
Specifically, we were asked to determine if (1) HUD*s existing controls
over the purchase card program provide reasonable assurance that improper
payments will not occur or will be detected in the normal course of
business and (2) payments for purchase card transactions are properly
supported as a valid use of government funds. During the course of our
work, the Office of Management and Budget (OMB) issued a memorandum
requiring all agencies to develop a remedial action plan to manage the
risk
1 This work was done as part of a broader body of work on which we
testified last fall. [U. S. General Accounting Office, Strategies to
Address Improper Payments at HUD, Education, and Other Federal Agencies,
GAO- 03- 167T (Washington, D. C.: Oct. 3, 2002.)] We are currently
assessing the effectiveness of internal controls over other disbursement
processes at HUD and will report on the results of that work at a later
date.
associated with purchase card usage. Because of this memorandum*s
relevance, we expanded our work to include determining whether HUD*s
remedial action plan effectively addressed its internal control
weaknesses. Results in Brief Significant internal control weaknesses in
HUD*s purchase card program
made the agency vulnerable to and in some cases resulted in improper,
potentially improper, and questionable purchases. During our review, which
covered fiscal year 2001, we found that a preapproval process, required by
HUD to help ensure the appropriateness of each purchase, was virtually
nonexistent. Of the total $1. 8 million purchase card transactions
selected in the statistical sample, 2 $1.4 million lacked adequate
supporting
documentation for the approving official to determine the validity of the
purchase. Nevertheless, these purchases were approved for payment. Based
on the results of the sample, we estimate that $4.8 million 3 of the
total sampled population of purchases ($ 10.6 million) lacked adequate
supporting documentation. Additionally, HUD was not performing the
required periodic reviews of purchase card transactions to assess
compliance with its policies and procedures, thus preventing adequate
monitoring of the purchase card program. These weaknesses, combined with
the inherent risk of fraud and abuse associated with purchase cards,
created an environment in which improper purchases could be made with
little risk of detection. These control weaknesses likely contributed to
the approximately $2.3 million in improper, potentially improper, and
questionable purchases
we identified during our review. For example, we identified improper split
purchases and potential split purchases totaling over $1 million. Split
purchases occur when multiple charges are made to the same vendor for one
purchase in order to circumvent single purchase limits. We also identified
questionable purchases, such as those made on holidays or weekends, and
purchases made with vendors not routinely expected to engage in commerce
with HUD. To determine whether these purchases were a valid use of
government funds, we requested supporting documentation. HUD was unable to
provide adequate supporting
2 We randomly sampled 222 transactions from a total of 23, 688
transactions. 3 We are 95 percent confident that the estimate is between
$4,074,446 and $5,432,059. This estimate exceeds the tolerable amount in
error of $1,059,046 (10 percent of the population total of $10,590,461).
documentation for 1,478 transactions totaling about $1.3 million or 43
percent of the transactions we requested and 72 percent of the total
dollars requested. These unsupported transactions included $27,000 to
various department stores, $8,900 to music and audio stores, and $9,700 to
restaurants. Because HUD was unable to provide adequate documentation for
these purchases, we consider them to be a questionable use of
government funds and therefore potentially improper. HUD*s remedial action
plan for its purchase card program does not effectively address its
internal control weaknesses. Although HUD recognizes the need to improve
its internal controls, its plan lacks specific commitment of time and
resources to implement the proposed actions. Management*s commitment to
improving internal control is necessary to reduce HUD*s vulnerability to
future improper payments.
Unless HUD*s management makes specific improvements to its review and
approval process, requirements for documentation and record retention,
monitoring process, and remedial action plan, HUD will continue to be
susceptible to misuse of government funds. We are making recommendations
in each of these areas.
In commenting on a draft of this report, HUD agreed that further
improvements are needed to strengthen the department*s purchase card
controls and cited actions it is taking or plans to take to address five
of our
seven recommendations. Regarding the remaining two recommendations, we
continue to believe that HUD needs to revise its remedial action plan to
include the steps necessary to fully implement the proposed changes to
strengthen internal controls. Also, HUD needs to follow up on the
inadequately supported purchases identified during our audit.
Background HUD*s purchase card program is part of the governmentwide
commercial credit card program established to simplify federal agency
acquisition processes by providing a low- cost, efficient vehicle for
obtaining goods and services from vendors. According to Federal
Acquisition Regulation (FAR) Part 13.201( b), government purchase cards
should be used for micropurchases, which are purchases up to $2,500. 4 The
Department of the Treasury also requires agencies to establish approved
uses and limitations
4 Certain construction purchases are limited to $2,000.
on the types of purchases and spending limits. GSA administers the master
contract and HUD*s purchase card policy was derived from the GSA
governmentwide credit card program and tailored by HUD to meet its
specific needs. During the period of our review* October 2000 through
September 2001* HUD was operating under a policy dated October 1995. HUD
is currently updating its purchase card policy. HUD*s purchase card policy
states that purchase cards are intended to
procure general- purpose office supplies and other support needs. The
policy requires each approving official to develop a preapproval process
to ensure that all purchase card transactions are authorized and in
accordance with departmental and other federal regulations. The
approving official signifies that a cardholder*s purchases are appropriate
by reviewing and signing monthly statements. As required by the Department
of the Treasury, HUD*s purchase card policy
established approved uses and limitations on the types of purchases and
dollar amounts in its purchase card policy. This policy also includes a
detailed list of items that cardholders are prohibited from buying with
their government purchase cards. For example, purchase or rental of
nonexpendable property (generally defined as property of a durable nature
with a life expectancy of at least 1 year), meals, drinks, entertainment
or lodging, and construction costs exceeding $2, 000 are generally
prohibited. 5 Fiscal year 2001 single purchase limits for individual
cardholders, which
are required to be established by the approving officials and approved by
the departmental directors, ranged from $100 to $80, 000, and their
monthly limits ranged from $100 to $300,000. HUD was in the process of
reevaluating and where applicable, lowering these limits. Bank One
currently services the purchase card program at HUD.
Internal control is a major part of managing an organization and is key to
ensuring proper use of government resources. As mandated by 31 U. S. C.
3512, commonly known as the Federal Managers* Financial Integrity Act of
1982, the Comptroller General issues standards for internal control in the
federal government. 6 These standards provide the overall framework for
establishing and maintaining internal control and for identifying and
5 Under certain circumstances, some offices within HUD are permitted to
purchase some of the prohibited items in the policy. 6 U. S. General
Accounting Office, Internal Control: Standards for Internal Control in the
Federal Government, GAO/ AIMD- 00- 21. 3.1 (Washington, D. C.: November
1999).
addressing major performance and management challenges and areas at
greatest risk of fraud, waste, abuse, and mismanagement. According to
these standards, internal control comprises the plans, methods, and
procedures used to meet missions, goals, and objectives. Control
activities are the policies, procedures, techniques, and mechanisms
that enforce management*s directives and help ensure that actions are
taken to address risks. Control activities are an integral part of an
entity*s planning, implementation, review, and accountability for
stewardship of
government resources and achieving effective results. They include a wide
range of diverse activities. Some examples of control activities include
controls over information processing, physical control over vulnerable
assets, segregation of duties, proper execution of transactions and
events, and access restrictions to and accountability for resources and
records.
Scope and To determine whether HUD*s existing controls over the purchase
card Methodology
program provided assurance that improper purchases would be detected or
prevented in the normal course of business, we interviewed HUD staff and
performed walk- throughs of the process. We reviewed HUD*s policies and
procedures and prior GAO reports as well as reports by HUD*s Office of
Inspector General (OIG) and independent auditors on this topic. To test
the effectiveness of internal controls, we selected a stratified random
sample of 222 purchase card transactions made during fiscal year 2001
totaling over $1.8 million from a population of purchase card transactions
totaling $10.6 million. To identify potential improper purchases we
requested and obtained fiscal year 2001 transaction data from Bank One and
used data mining techniques 7 and other computer analyses to identify
unusual transactions and payment patterns in HUD*s fiscal year 2001
purchase card transaction data that may be indicative of improper
purchases. In order to determine if fiscal year 2001 purchases were
adequately supported and for a valid government use, we requested and
analyzed supporting documentation for those transactions that we
identified as potentially improper and questionable. While we identified
some improper,
7 Data mining for improper payments involves using computer aided auditing
techniques to highlight hidden patterns and relationships in data that
help identify unusual transactions, which may be improper payments.
potentially improper, and questionable purchases, our work was not
designed to determine the full extent of improper purchases.
We requested comments from the Secretary of Housing and Urban Development.
We conducted our work from November 2001 through November 2002 in
accordance with 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. HUD*s Internal
HUD staff did not comply with key elements of its purchase card policies
Controls over Purchase
that would have helped minimize the risk of improper purchases, including
(1) obtaining preapproval for purchases, (2) retaining adequate supporting
Cards Did Not Provide
documentation, (3) conducting supervisory review of all purchases, and
Assurance That (4) periodically reviewing purchase card transactions to
ensure compliance
Improper Purchases with key aspects of the department*s policy. This
created an environment
where improper purchases could be made with little risk of detection and
Would Be Prevented or
likely contributed to the $2.3 million in improper, potentially improper,
and Detected
questionable purchases we identified through our data mining efforts.
GAO*s Standards for Internal Control in the Federal Government 8 states
that transactions and other significant events should be authorized and
executed only by persons acting within the scope of their authority. This
is
the principal means of assuring that only valid transactions to exchange,
transfer, use, or commit resources and other events are initiated or
entered into. To address these internal control standards, HUD*s purchase
card policy contains fundamental controls designed to minimize the
agency*s
exposure to improper purchases. HUD*s policy requires each approving
official to establish a preapproval process for each cardholder to ensure
that all purchases are appropriate and for official government use.
Further, HUD*s policy states that the approving official is required to
review, certify, and monitor all cardholder purchases to ensure that they
have the
necessary approvals before purchases are made. Additionally, HUD*s
purchase card policy requires that approving officials review each
purchase along with the applicable supporting documentation in order to
certify that the purchases were appropriate and a valid use of government
funds.
8 GAO/ AIMD- 00- 21. 3.1.
Based on our review of HUD*s purchase card process, we found that most
approving officials had not established a preapproval process to ensure
the appropriateness of purchases before they are made. Only the
Information Technology Office routinely obtained authorization prior to
purchasing items with the purchase card. The approving official*s review
of each purchase card transaction is one of the most important controls to
ensure that all purchases are a valid use of government funds. We found
that this critical control was seriously compromised because of inadequate
supervisory review of supporting documentation by approving officials. To
test the effectiveness of this key internal control, we selected and
tested a
stratified random sample of 222 purchase card transactions made during
fiscal year 2001. Of the total $1. 8 million purchase card transactions
selected in the statistical sample, 9 $1.4 million lacked adequate
supporting documentation for the approving official to determine the
validity of the purchase. Based on the results of this sample, we estimate
that $4,753,253 10 of the total sampled population of purchases ($
10,590,461) made during
fiscal year 2001 lacked adequate supporting documentation. Our Standards
for Internal Control in the Federal Government states that internal
control activities help ensure that management*s directives are carried
out. One such activity is the appropriate documentation of transactions.
Internal control and all transactions and other significant
events need to be clearly documented, and the documentation should be
readily available for examination. All documentation should be properly
managed and maintained. We determined that some of HUD*s records
supporting the purchase card program were not properly managed or
maintained. For instance, HUD could not provide a complete and accurate
list of all approving officials. When we attempted to contact cardholders
and their respective approving officials to request supporting
documentation using the list the agency provided, at least 28 approving
officials provided written notification that cardholders assigned to them
according to HUD records were not their responsibility. According to HUD
officials, the purchase card program administrator is not routinely
informed of changes in approving officials and often does not have the
time to update the list regularly. Because HUD
9 We randomly sampled 222 transactions from a total of 23, 688
transactions. 10 We are 95 percent confident that the estimate is between
$4,074,446 and $5,432,059. This estimate exceeds the tolerable amount in
error of $1,059,046 (10 percent of the population total of $10,590,461).
does not know who should be approving purchases, there is an increased
risk of collusion as well as a general lack of accountability for ensuring
the proper use of government funds.
Another control activity that was available but not being used by HUD is
blocking Merchant Category Codes (MCC). Blocking categories of merchants
allows agencies to prohibit certain types of transactions that are clearly
not business related, such as purchases from jewelry stores or
entertainment establishments. During our review, we found that HUD was not
blocking any MCCs. These blocks are available as part of HUD*s purchase
card task order, under the GSA SmartPay Master Contract with
Bank One. Because HUD did not take advantage of this control, there were
no restrictions on the types of purchases employees could make during
fiscal year 2001* the period of our audit. As a result of our audit work,
on March 6, 2002, HUD began using selected MCC blocks.
Our Standards for Internal Control in the Federal Government states that
internal control should generally be designed to assure that ongoing
monitoring occurs in the course of normal operations. Internal control
monitoring should assess the quality of performance over time and ensure
that findings of audits and other reviews are promptly resolved. Program
and operational managers should monitor the effectiveness of control
activities as part of their regular duties. HUD*s purchase card policy
requires the department to perform annual program reviews and report the
results, including findings and
recommendations, to the purchase card program administrator. However, HUD
officials could locate only one such report. This November 2001 report,
prepared by a consultant, identified problems that were similar to the
findings previously reported by the OIG in February 1999. 11 Both reports
documented problems with weak internal controls and insufficient
supporting documentation. The consultant*s report also noted that HUD was
not performing the periodic program reviews required by its policies and
that employees were making improper split purchases. HUD management agreed
with the findings in the OIG report and developed and implemented an
action plan to address the identified weaknesses.
According to HUD OIG staff, its recommendations were implemented and have
been closed since September 30, 2000. However, based on our
11 Department of Housing and Urban Development Office of Inspector
General, Commercial Credit Card Program, 99- DP- 166- 0001 (Washington, D.
C.: Feb. 1, 1999).
findings, corrective actions taken at that time were not effective. The
results of our control testing indicate that HUD*s lack of internal
control over the purchase card process allows continued vulnerability to
wasteful, fraudulent, or otherwise improper purchases by employees using
government purchase cards.
Control Weaknesses Poor internal controls created an environment where
improper purchases
Contributed to could be made with little risk of detection. We define
improper purchases
as those purchases that include errors, such as duplicate charges and
Improper, Potentially
miscalculations; charges for services not rendered; multiple charges to
the Improper, and
same vendor for a single purchase to circumvent existing single purchase
Questionable Purchase
limits* known as split purchases; and purchases resulting from fraud and
abuse. We define questionable purchases as those that, while authorized,
Card Transactions were for items purchased for a questionable government
need as well as transactions for which HUD could not provide adequate
supporting documentation to enable us to determine whether the purchases
were valid.
We identified 88 transactions totaling about $112,000 that were improper
split purchases. For example, one cardholder purchased nine personal
digital assistants and the related accessories from a single vendor on the
same day in two separate transactions just 5 minutes apart. Because the
total purchase price of $3,788 exceeded the cardholder*s single purchase
limit of $2,500, the purchase was split into two transactions of $2,388
and $1, 400, respectively. These improper split purchases violate
provisions of the Federal Acquisition Regulation and HUD*s own purchase
card policy, which prohibits splitting purchases into more than one
transaction to circumvent single purchase limits. We received
documentation from some cardholders confirming that they split their
purchases because they
exceeded their single purchase limits, while one cardholder claimed the
vendor independently split the purchases. We identified an additional 465
purchases totaling over $913,000 where HUD employees made multiple
purchases from a vendor on the same day. Specifically, cardholders made
multiple purchases totaling over $2,500 on
the same day from the same vendor. Although we were unable to determine
definitively whether these purchases were improper, based on the available
supporting documentation, these transactions share similar characteristics
with the 88 split purchases, and therefore we consider these transactions
to be potentially improper.
We also found 2,507 transactions, totaling about $1.3 million, with
vendors that would not routinely be expected to engage in commerce with
HUD. In order to determine whether these questionable purchases were a
valid use of government funds, we requested supporting documentation for
each purchase. HUD was able to provide us with adequate supporting
documentation for 1,324 transactions totaling about $412,000. The
department was unable, however, to provide adequate support for the
remaining 1, 183 transactions (47 percent of total transactions requested)
totaling about $869, 000 (67 percent of total dollars requested).
Additionally, we found 940 transactions, totaling about $554,000, where
the
purchases were made either on a weekend or holiday. We requested
supporting documentation for each of these transactions. HUD was able to
provide us with adequate support for 645 transactions totaling about
$189,000. HUD was unable to provide adequate support for the remaining 295
transactions (31 percent of total transactions requested) totaling over
$364, 000 (66 percent of total dollars requested). In these instances, we
were unable to determine what was purchased, for whom, and why.
Some examples of the questionable vendor transactions for which we did not
receive adequate support included over $27,000 to various department
stores such as Best Buy, Circuit City, Dillard*s, JCPenney, Lord & Taylor,
Macy*s, and Sears; over $8,900 to several music and audio stores including
Sound Craft Systems, J& R*s Music Store, Guitar Source, and Clean Cuts
Music; and over $9,700 to various restaurants such as Legal Sea Food,
Levis Restaurant, The Cheesecake Factory, and TGI Fridays. Additional
examples of questionable or potentially improper purchases we found
include $25,400 of *no show* hotel charges for HUD employees who did not
attend scheduled training and $21,400 of purchases from vendors who appear
to have been out of business prior to the purchase. Because HUD was unable
to provide adequate documentation for these purchases, we consider them to
be a questionable use of government funds and therefore potentially
improper purchases.
We also have concerns about HUD*s accountability for computer and related
computer equipment bought with purchase cards because of the large volume
of transactions for which it did not have appropriate documentation. For
example, our testing revealed that HUD employees used their purchase cards
to buy portable assets, such as computer equipment and digital cameras,
totaling over $74, 500 for which they have provided either no support or
inadequate support. In HUD*s August 28,
2002, purchase card remedial action plan, discussed in more detail in the
next section, HUD acknowledged that items bought with purchase cards
were not being consistently entered in the department*s asset management
system. As a result, portable assets became vulnerable to loss or theft.
In our follow- up work, we plan to determine whether these items are
included
in HUD*s asset management system and are being appropriately safeguarded.
HUD*s Remedial Action
OMB*s April 18, 2002 memorandum, M- 02- 05, requires all agencies to Plan
to Correct
develop remedial action plans to manage the risk associated with purchase
card usage. Agencies were required to submit their plans to the Office of
Purchase Card
Federal Procurement Policy no later than June 1, 2002. HUD*s remedial
Program Deficiencies
action plan was submitted to OMB on May 31, 2002. Our review of HUD*s
Lacked Specificity
remedial purchase card action plan found that it did not address all the
weaknesses we identified. Although HUD*s plan includes steps for resolving
and preventing a number of potential problem areas, including the need for
(1) adequate monitoring, (2) more frequent internal audits, (3)
accountability and penalties for misuse of cards, (4) updating the
agency handbook, (5) spending limits in line with purchasing requirements,
(6) adequate program records, including proper approving officials, and
(7) entering property purchased with purchase cards in the inventory
system, the plan falls short in other key areas. For example, the plan did
not include requirements for (1) a robust review and approval function for
purchase card transactions, focusing on identifying split purchases and
other inappropriate transactions, (2) a process to periodically assess the
effectiveness of the review and approval process, and (3) specific
documentation and records to support the purchase card transactions. In
addition, the remedial plan lacked specifics as to how and when HUD would
implement it. On August 16, 2002, OMB returned HUD*s remedial action plan
and asked that a timeline be incorporated.
HUD submitted a new plan to OMB on August 28, 2002. While the revised
remedial action plan includes a broad timeline for completion of each
objective, we found that it still does not adequately address key control
weaknesses we identified, in part because it lacks specific steps
necessary to fully address identified problem areas. In addition, the
revised remedial action plan does not require the program administration
staff to begin designing a monitoring plan to assess HUD*s compliance with
key aspects of its purchase card policy until the second quarter of fiscal
year 2003 and does not give an estimated date for when this key internal
control will be implemented. Additionally, the revised plan does not
specifically identify
who is responsible for developing or implementing any of the proposed
improvements. Conclusions The problems we identified with HUD*s purchase
card program leave the
agency vulnerable to wasteful, fraudulent, or otherwise improper
purchases. The remedial action plan prepared by HUD is an important first
step toward addressing the control weaknesses we identified. At the same
time, much still remains to be done to effectively control the inherent
risk in HUD*s purchase card program. HUD management will have to
effectively follow through on its implementation plan and expand the plan
to improve its review and approval process, requirements for documentation
and record retention, monitoring process, and remedial action plan or HUD
will continue to be susceptible to misuse of government funds.
Recommendations for
To strengthen its internal control over the purchase card program and
Executive Action
reduce HUD*s vulnerability to improper purchases, we recommend that the
Secretary direct the Assistant Secretary for the Office of Administration
to take the following actions:
implement the preapproval requirement in the existing purchase card
policy;
develop and implement a robust review and approval function for purchase
card transactions, focusing on identifying split purchases and other
inappropriate transactions, and on performing a detailed review of
relevant supporting documentation for each purchase;
update the list of approving officials and their designated cardholders
quarterly to ensure accuracy and completeness;
establish specific requirements for documentation and records to support
all purchase card purchases; develop and implement a formal monitoring
process to periodically
assess the effectiveness of the enhanced review and approval process;
revise the remedial action plan for purchase cards to include the
specific steps necessary to fully implement the above five
recommendations; and
follow up on the purchases we identified for which cardholders did not
provide adequate supporting documentation to determine the validity and
the propriety of the purchases.
Agency Comments and In written comments on a draft of this report, which
are reprinted in Our Evaluation
appendix I, HUD agreed that further improvements are needed to strengthen
the department*s purchase card controls. Although HUD did not specifically
agree or disagree with our individual recommendations, the actions being
taken or planned by the agency address five of our seven recommendations.
For example, in response to our recommendation to implement the
preapproval requirement in the existing purchase card program, HUD stated
that it has always had an effective preapproval process in its field
offices through the Automated Client Response System (ACRS). While we
agree that this system is available for use, during our review of
supporting documentation, we found no evidence that cardholders were
utilizing this system. To improve its preapproval process at its
headquarters, HUD stated that it has implemented the mandatory use of HUD
Form 10.4, Requisition for Supplies, Equipment, Forms, Publications, and
Procurement Services.
In addition, to enhance its review and approval function, HUD said it had
provided mandatory training in January 2003 to approving officials on the
procedures for reviewing and approving cardholder statements. HUD also
said that it was working with Bank One to provide training to cardholders
and approving officials on the use of the automated purchase card system
and the monitoring tools available through Bank One. HUD also stated that
as of January 2003, a review of the approving officials will be performed
and the Agency Program Coordinator will make the necessary changes
quarterly to ensure the list is accurate and complete. To ensure proper
supporting documentation is maintained for all
purchases, HUD also noted that it provided training to cardholders and
approving officials starting in January 2003. Additionally, HUD stated
that in October 2002, a staff person was assigned to begin performing
planned internal reviews and random spot reviews of purchase card
transactions
with reports to be issued on an interim basis as the reviews are completed
to ensure that proper management and internal controls are maintained over
the authorization of purchases and use of the purchase card. These actions
will be helpful in strengthening the purchase card controls at HUD.
HUD did not state what, if any, action it planned to take regarding the
two remaining recommendations. Regarding our recommendation to revise its
remedial action plan, HUD stated that the plan adequately met the
requirements set forth by OMB. While the plan may address the elements
required by OMB, we do not believe it lays out an adequate approach for
resolving identified control weaknesses. As discussed in the report, the
plan lacks the specific steps necessary to fully implement the proposed
changes to strengthen internal controls.
Concerning follow- up on inadequately supported purchases we identified,
HUD stated that it had provided documentation when asked and would provide
more if necessary. On July 8, 2002, we provided HUD with a compact disk
containing all transactions for which we received either no support or
inadequate support during our fieldwork and allowed an
additional 3 weeks for the agency to provide the supporting documentation.
We have not received any additional supporting documentation since then.
It is our view that HUD has a fiduciary duty to follow up on the
inadequately supported purchases, which total about $2.1 million and
represent 57 percent of the total purchase transactions we
tested, to ensure their propriety. HUD offered several additional
technical comments, which have been incorporated into this report as
appropriate.
This report contains recommendations to you. The head of a federal agency
is required by 31 U. S. C. 720 to submit a written statement on actions
taken on these recommendations to the Senate Committee on Governmental
Affairs and the House Committee on Government Reform
and Oversight within 60 days of the date of this report. You must also
send a written statement to the House and Senate Committees on
Appropriations with the agency*s first request for appropriations more
than 60 days after the date of this report.
We are sending copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Governmental Affairs and the House
Committee on Government Reform, the Director of Office of Management and
Budget; and other interested parties. We also 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.
Should you or your staff have any questions on matters discussed in this
report, please contact me at (202) 512- 8341 or by E- mail at calboml@
gao. gov.
Sincerely yours, Linda Calbom Director, Financial Management and Assurance
Appendi xes Comments from the Department of Housing
Appendi x I and Urban Development
Appendi x II
GAO Contacts and Staff Acknowledgments GAO Contacts Dan Blair, (202) 512-
9401 Acknowledgments In addition to the contact named above, Sharon Byrd,
Lisa Crye, Sharon
Loftin, and Julie Matta made key contributions to this report.
(190083)
a
GAO United States General Accounting Office
Significant internal control weaknesses in HUD*s approximately $10.6
million purchase card program resulted in improper, potentially improper,
and questionable purchases in fiscal year 2001. Because of these internal
control weaknesses, there was often inadequate documentation supporting
many purchases GAO reviewed, and as a result, GAO was unable to determine
whether these purchases were a valid use of government funds. GAO also
found that HUD*s remedial action plan for its purchase card program does
not adequately address all the control weaknesses we identified.
These weaknesses created an environment in which improper purchases could
be made with little risk of detection and likely contributed to the $2.3
million in improper, potentially improper, and questionable purchases GAO
identified. GAO found improper and potentially improper purchases totaling
about $1 million where HUD employees either split or appeared to have
split purchases into multiple transactions to circumvent cardholder
limits. GAO also found that HUD employees lacked adequate supporting
documentation for about $1.3 million in questionable purchases including
those from vendors not expected to engage in commerce with HUD, purchases
made on holidays and weekends, and $74,500 in portable assets such as
computer equipment and digital cameras. In these instances, it was not
possible to determine what was purchased, for whom, and why. Some examples
of these inadequately supported purchases are shown in the table below.
Examples of Questionable Purchases Lacking Adequate Support Vendor
description Vendor name Amount Department stores Dillard*s, JCPenney, Lord
& Taylor, Macy*s,
Sears $27,000 Computers and electronics Ritz Camera, Sharper Image, Comp
USA,
PCMall 74,500 Restaurants Legal Sea Food, Levis Restaurant, The
Cheesecake Factory, TGI Fridays 9,700 Music and audio stores Sound Craft
Systems, J& Rs Music Store, Guitar Source 8,900
Source: GAO Internal. The problems GAO identified with HUD*s purchase card
program leave the agency vulnerable to wasteful, fraudulent, or otherwise
improper purchases. Unless HUD makes specific improvements to its review
and approval process, requirements for documentation and record retention,
monitoring process, and remedial action plan, the department remains
susceptible to fraud, waste, and abuse.
HUD PURCHASE CARDS
Poor Internal Controls Resulted in Improper and Questionable Purchases
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 489. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Linda Calbom at 202- 512- 8341 or by E- mail at
calboml@ gao. gov. Highlights of GAO- 03- 489, a report to the
Secretary of Housing and Urban Development
April 2003
Due to HUD*s increasing use of purchase cards and the inherent risk
associated with their use, Congress asked GAO to audit the purchase card
program concentrating on assessing internal controls and determining
whether
purchases being made are a valid use of government funds.
GAO is making several recommendations to strengthen internal controls
including
developing and implementing a robust review and approval function to
include requiring
and performing a detailed review of relevant supporting documentation for
each purchase, establishing specific
requirements for documentation and records to support each purchase, and
developing and implementing a
formal monitoring process to assess the effectiveness of the enhanced
review and approval process. HUD said that while it had made some
improvements, it agreed that it still needed to strengthen its
purchase card controls. HUD*s response listed actions to address five of
the seven recommendations. GAO believes that HUD needs to address the
remaining two recommendations as well.
Page i GAO- 03- 489 HUD Purchase Cards
Contents Letter 1
Results in Brief 2 Background 3 Scope and Methodology 5 HUD*s Internal
Controls over Purchase Cards Did Not Provide
Assurance That Improper Purchases Would Be Prevented or Detected 6 Control
Weaknesses Contributed to Improper, Potentially Improper, and Questionable
Purchase Card Transactions 9
HUD*s Remedial Action Plan to Correct Purchase Card Program Deficiencies
Lacked Specificity 11 Conclusions 12 Recommendations for Executive Action
12 Agency Comments and Our Evaluation 13
Appendixes
Appendix I: Comments from the Department of Housing and Urban Development
16
Appendix II: GAO Contacts and Staff Acknowledgments 20
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Appendix I
Appendix I Comments from the Department of Housing and Urban Development
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Appendix I Comments from the Department of Housing and Urban Development
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Appendix I Comments from the Department of Housing and Urban Development
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Appendix II
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