Purchase Cards: Increased Management Oversight and Control Could
Save Hundreds of Millions of Dollars (28-APR-04, GAO-04-717T).
From 1994 to 2003, the use of government purchase cards increased
from $1 billion to $16 billion. During this time, agencies
primarily focused on ways to increase the use of purchase cards.
Beginning in 2001, GAO testified and reported that significant
weaknesses in internal controls made agencies vulnerable to
fraud, waste, and abuse, and inefficient purchasing actions. In
response to increased use of purchase cards and serious control
weaknesses in the purchase card program, GAO was asked to
summarize the growth of the purchase card program, the control
weaknesses that led to fraud and misuse of the cards, actions
taken to tighten controls and discipline cardholders, and agency
actions to leverage the government's buying power when using the
purchase card.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-717T
ACCNO: A09903
TITLE: Purchase Cards: Increased Management Oversight and
Control Could Save Hundreds of Millions of Dollars
DATE: 04/28/2004
SUBJECT: Accounting procedures
Cost control
Credit sales
Federal procurement
Federal procurement policy
Financial management
Fraud
Internal controls
Program abuses
Questionable procurement charges
Small purchases
Employee disciplinary actions
Government purchase cards
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-04-717T
United States General Accounting Office
GAO Testimony
Before the Committee on Governmental Affairs, U.S. Senate
For Release on Delivery Expected at 10:00 a.m. EDT Wednesday, April 28,
2004
PURCHASE CARDS
Increased Management Oversight and Control Could Save Hundreds of Millions of
Dollars
Statement of Gregory D. Kutz
Director, Financial Management and Assurance
David E. Cooper
Director, Acquisition and Sourcing Management
John J. Ryan
Assistant Director, Office of Special Investigations
a
GAO-04-717T
Highlights of GAO-04-717T, a testimony before the Committee on
Governmental Affairs, U.S. Senate
From 1994 to 2003, the use of government purchase cards increased from $1
billion to $16 billion. During this time, agencies primarily focused on
ways to increase the use of purchase cards. Beginning in 2001, GAO
testified and reported that significant weaknesses in internal controls
made agencies vulnerable to fraud, waste, and abuse, and inefficient
purchasing actions. In response to increased use of purchase cards and
serious control weaknesses in the purchase card program, GAO was asked to
summarize the growth of the purchase card program, the control weaknesses
that led to fraud and misuse of the cards, actions taken to tighten
controls and discipline cardholders, and agency actions to leverage the
government's buying power when using the purchase card.
In a companion report released today, GAO made recommendations to the
Office of Management and Budget and General Services Administration, and
the Departments of Agriculture, Defense, Interior, Justice,
Transportation, and Veterans Affairs aimed at encouraging agencies to
begin taking steps to achieve savings through better management of
purchase card spending. In general, the agencies that responded agreed
with GAO's findings and recommendations.
April 28, 2004
PURCHASE CARDS
Increased Management and Oversight Could Save Hundreds of Millions of Dollars
Governmentwide efforts to promote increased usage of purchase cards for
small and routine purchases have dramatically increased the number of
purchase card accounts and spending. The use of a well-controlled purchase
card program is a useful tool in streamlining the government's acquisition
processes and providing agencies flexibility to make small and routine
purchases. However, improvements in program management and oversight could
save hundreds of millions of dollars by (1) strengthening controls and
monitoring transaction activity to minimize fraudulent, improper, and
abusive purchase card transactions and (2) leveraging the government's
buying power to achieve discounts with frequently used vendors.
GAO's audits of purchase card controls at DOD and four civilian agencies
and federal agency Inspectors General audits identified ineffective
management oversight and weak internal controls, leaving agencies
vulnerable to fraudulent, improper, and abusive purchase card activity.
GAO's data mining, forensic audit follow-up, and investigations identified
numerous purchases of personal items such as jewelry, designer leather
goods, clothing, stereo equipment, food, and entertainment. While agencies
responded to these audit reports by issuing and updating purchase card
policies and procedures, GAO's work at DOD demonstrated that little
disciplinary or administrative action was taken against those who made
improper or abusive charges.
GAO also found that agencies generally did not take advantage of
opportunities to obtain more favorable prices on purchase card buys with
frequently used vendors-vendors where an agency spends more than $1
million annually. GAO's examination of six federal agencies that account
for over 85 percent of federal government purchase card spending
identified isolated examples of agencies negotiating discounts for items
such as office supplies and technology purchases. However, a conservative
approach indicated that if the six agencies obtained discounts of only 10
percent from vendors where they spent more than $1 million a year, annual
savings of up to $300 million could be achieved without sacrificing the
ability to acquire items quickly or compromising socioeconomic goals. As
shown in the following table, during fiscal year 2002, these agencies
spent nearly $3 billion with frequently used vendors.
Amount Spent in Fiscal Year 2002 with Frequently Used Vendors (in
Millions)
Defense $1,614
Veterans Affairs 822
Agriculture 72
Justice 154
Interior 85
www.gao.gov/cgi-bin/getrpt?GAO-04-717T. Transportation 74
To view the full product, including the scope Total $2,821
and methodology, click on the link above. Source: GAO analysis.
For more information, contact Gregory Kutz at
(202) 512-9095 or [email protected].
Madam Chairman and Members of the Committee:
Thank you for the opportunity to discuss the status of fraud, waste, and
abuse in the federal government's purchase card program, improvements
made, and opportunities for savings. Our testimony is based on findings
from our report1 released today, which was requested by this Committee,
Senator Russell Feingold, and Representative Janice Schakowsky, as well as
on findings from numerous testimonies and reports that we issued in recent
years2 that identified significant breakdowns in purchase card controls.
The report released today looked at whether the six federal agencies with
the largest purchase card spending have effectively leveraged the
government's buying power. Our prior reports and testimonies assessed
controls and vulnerability to fraudulent, improper, and abusive use of the
purchase card at the Departments of Defense (DOD), Education, and Housing
and Urban Development (HUD); the Federal Aviation Administration (FAA);
and the USDA Forest Service. Our work was performed between September 2000
and January 2004 in accordance with generally accepted government auditing
standards.
For a number of years, the federal government promoted increased use of
purchase cards primarily for small and routine purchases, and use of
purchase cards has dramatically increased. The General Services
Administration (GSA) reported that in fiscal year 2003 more than 325,000
cardholders used purchase cards to make about 26.5 million transactions
for over $16.4 billion in goods and services. Purchase card transactions
include acquisitions at or below the $2,500 micropurchase3 limit and
payments on contracts. The benefits of using purchase cards versus
traditional contracting and payment processes are lower transaction
processing costs and less administrative effort or "red tape" for both the
government and the vendor community.
1U.S. General Accounting Office, Contract Management: Agencies Can Achieve
Significant Savings on Purchase Card Buys, GAO-04-430 (Washington, D.C.:
Mar. 12, 2004).
2A list of related GAO products is included at the end of this statement.
348 C.F.R. S: 2.101 (2003). However, the limit is $2,000 for certain
construction costs and $15,000 for supplies or services related to the
defense against or recovery from nuclear, biological, chemical, or
radiological attack. 48 C.F.R. S: 13.201 (2003).
Our testimony today has five sections:
o growth of purchase card usage in the federal government;
o control weaknesses that led to fraudulent, improper, and abuse
purchases;
o limited disciplinary actions taken for misuse of the purchase card;
o steps taken to improve purchase card internal controls; and
o governmentwide opportunities to save hundreds of millions of dollars by
leveraging buying power.
Summary We support the use of a well-controlled purchase card program to
streamline the federal acquisition processes. However, improved management
oversight and internal control will be critical to fully realize the
potential benefits of the purchase card. The purchase card offers
significant benefits to the federal government from reduced transaction
processing costs and increased flexibility to make small, routine
purchases. Recognizing these benefits, federal agencies quickly expanded
the use of the purchase card program from about $1 billion in fiscal year
1994 to over $16 billion in fiscal year 2003. During this substantial
growth period, hundreds of thousands of purchase cards were issued to
employees across the federal government, with a peak of 500,000 cards
outstanding in fiscal year 2000.
While agency management made significant efforts to promote increased use
of the purchase card, we and Inspectors General across the government
determined that purchase card management oversight and internal control
were ineffective. A weak overall control environment and significant
breakdowns in key internal control activities left federal agencies across
the government vulnerable to fraudulent, improper, and abusive use of the
purchase card. Our data mining, forensic audit followup, and
investigations identified cardholder fraud, vendor fraud, and fraud due to
compromised accounts. We found numerous purchases of personal items, such
as jewelry, designer leather goods, clothing, stereo equipment, food, and
entertainment charged to government purchase cards. In addition, we
identified examples of vendors that have exploited control weaknesses to
submit fraudulent bills that, in some cases, were not detected by
cardholders or approving official review and thus were paid by
agencies. Our work at DOD demonstrated that unless a cardholder has been
convicted of fraud by a court of law, little disciplinary or
administrative action is taken against those who have made improper or
abusive charges.
As a result of our audits and those conducted by agency Inspectors
General, executive branch agency focus on the development and
implementation of effective internal controls has increased substantially.
For example, the Office of Management and Budget (OMB) directed executive
branch agencies to increase monitoring of the purchase card program and
the Congress included language in DOD's fiscal year 2003 authorization and
appropriation acts requiring DOD and the military services to take
positive steps to improve the controls over the purchase card program. In
addition, DOD and other executive branch agencies have issued revised
purchase card policies and procedures, retrained cardholders and approving
officials on the proper use of purchase cards, and substantially reduced
the number of purchase card accounts from about 500,000 in September 2000
to about 315,000 in January 2004. These actions better articulate what the
purchase card can and cannot be used for and improve the control
environment and the design of key internal controls. If implemented
effectively, these recent actions should significantly reduce the risk of
fraudulent, improper, and abusive use of the purchase card. It is
important to note that while DOD and civilian agencies have instituted
numerous program improvements, we have not performed comprehensive audit
and investigative work to verify whether these improvements are operating
as intended.
While substantial attention has been focused on internal controls in
recent years, very little management focus and attention has been placed
on the aggressive pursuit of savings through use of the purchase card. As
discussed in our report released today,4 increased focus on negotiating
discounts and leveraging the government's over $16 billion in purchase
card spending could result in hundreds of millions of tax dollars saved
each year. Based on our examination of six federal agencies that account
for over 85 percent of federal government purchase card spending, we found
that most agencies have not identified and taken advantage of
opportunities to obtain more favorable prices on purchase card buys.
However, we did identify examples where agencies effectively negotiated
discounts for items, such as office supplies and technology purchases. For
4GAO-04-430.
these agencies, notable savings of 8 percent to 35 percent less than GSA's
Federal Supply Schedule (Schedule) contracts were achieved. A conservative
approach indicates that if the agencies that we audited obtained discounts
of only 10 percent from their major purchase card vendors-those vendors
where the government spends more than $1 million a year-annual savings of
up to $300 million might be achieved.5 These savings could be achieved
without sacrificing the ability to acquire items quickly or compromising
socioeconomic goals.
Significant Growth of the Federal Purchase Card Program
The governmentwide purchase card program was established in 1989 to
streamline federal agency acquisition processes by providing an efficient
vehicle for obtaining goods and services directly from vendors without
first preparing a contract or purchase order. GSA, which manages the
purchase card program governmentwide, has awarded contracts to banks to
provide standard commercial charge cards for use by federal employees. Use
of the purchase card was initially restricted to procurement personnel.
The Federal Acquisition Streamlining Act of 1994 (FASA) authorized
cardholders to make micropurchases without obtaining competitive
quotations, if they considered the price reasonable, and directed that
purchases be distributed equitably among qualified suppliers.6 The act
also provided authority to delegate procurement authority to cardholders
who are not procurement officials. The Federal Acquisition Regulation
(FAR) designates the purchase card as the preferred method of making
micropurchases.7
Since the passage of FASA, the dollar value of goods and services acquired
through the purchase card has increased significantly. As shown in figure
1, the amount the government spent with purchase cards increased from
about $1 billion in fiscal year 1994 to more than $16 billion in fiscal
year 2003.
5The six agencies' spending with major vendors totaled about $3 billion in
fiscal year 2002.
6Pub. L. No. 103-355, S: 4301, 108 Stat. 3243, 3346 (Oct. 13, 1994).
748 C.F.R. S: 13.201(b) (2003). Further, FAR Subpart13.301 establishes
guidelines for the use and management of the purchase card.
Figure 1: Purchase Card Expenditures-Fiscal Years 1994 to 2003
Purchases in billions of dollars $20
16.4
$15
$10
$5
$0 FY 94 FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03
Source: GSA.
As the purchase card program expanded during the 1990s, the number of
cardholders increased in roughly the same proportion as expenditures
increased. In the late 1990s, senior DOD management mandated the use of
purchase cards for virtually all micropurchases, and cited an Army Audit
Agency study that found that the purchase card provided administrative
cost savings of $92 per transaction compared to using purchase orders. DOD
estimated that increased use of the purchase card would save DOD millions
of dollars in annual processing costs and that the savings could be used
to modernize and maintain our fighting forces.
GSA-whose mission includes helping federal agencies better serve the
public by offering acquisition services at the best value-has created
several tools that can help cardholders obtain more favorable pricing for
goods and services. The most common of these is the Schedule program,
which offers discounted prices on a wide range of commercial goods and
services from multiple vendors.8 Further, the GSA Advantage on-line
shopping service allows agencies to compare prices under various Schedule
contracts, place orders, and make payments-all over the Internet.
Control Weaknesses Led to Fraudulent, Improper, and Abusive Purchases
We and Inspectors General across the government found ineffective
management oversight and internal control over purchase card use. A weak
overall control environment and substantial breakdowns in internal control
left agencies vulnerable to fraudulent,9 improper,10and abusive11 charges.
The importance of the role of management in establishing a strong control
environment cannot be overstated. GAO's Standards for Internal Control12
discuss management's key role in demonstrating and maintaining an
organization's integrity and ethical values, especially in setting and
maintaining the organization's ethical tone, providing guidance for proper
behavior, and removing temptations for unethical behavior.
Agencies Had Not Established a Strong Control Environment
In establishing their purchase card programs, we found that the federal
agencies that we audited primarily focused on maximizing the use of the
purchase card, paying bills quickly, and developing performance measures
for these activities. Agency purchase card managers did not equally focus
their attention on establishing a strong control environment that promoted
adherence to internal control procedures, and they did not develop
8Although GSA negotiates discounted prices with various vendors on behalf
of government agencies, the GSA Inspector General has raised concerns as
to whether GSA is negotiating the best possible prices. In addition, at
the request of this committee we are also assessing whether GSA is
negotiating the best possible prices.
9Fraudulent purchases include charges made by cardholders that were
unauthorized and intended for personal use or unauthorized transactions
made by third parties.
10Improper purchases are those purchases intended for government use, but
not for a purpose that is permitted by law, regulation, or agency policy.
11Abusive transactions include 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 occur even though no
law or regulation is violated. Rather, abuse also occurs when the conduct
of a government organization, program, activity, or function falls short
of societal expectations of prudent behavior.
12U.S. General Accounting Office, Standards for Internal Control in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999).
performance measures to assess the adequacy of internal control
activities. Rather, the only real metrics in place for purchase cards were
related to the timeliness of payments and maximizing purchase card
rebates.13 Consequently, at the agencies we audited, we found an
ineffective overall internal control environment. Specifically, we found
that agencies generally did not effectively (1) control the number of
purchase cards issued, (2) limit approving officials' responsibilities to
a reasonable number of purchase cardholders, (3) limit purchase card
credit limits to historical procurement needs, (4) ensure that cardholders
and approving officials were properly trained on the proper use of the
purchase card, and (5) monitor and maintain an infrastructure necessary to
effectively oversee the purchase card program.
o Proliferation of Cardholders. Agencies that we audited often did not
have specific policies and procedures governing the number of cards issued
or established criteria for identifying employees eligible for the
privilege of cardholder status. The failure to establish effective policy
concerning the number of cardholders necessary to accomplish the mission
and who should be a cardholder resulted in a proliferation of purchase
cards at DOD and other federal agencies. We reported that one DOD unit
issued purchase cards to about 36 percent of its employees and an FAA
office had issued cards to about half of its employees. Further, when the
number of governmentwide cardholders peaked in September 200014 at about
500,000 cardholders, nearly 16 percent of government employees had a
purchase card. In comparison, information we obtained from six large
defense contractors on their purchase card programs showed that the
percent of the contractors' employees that were cardholders ranged from
about 2 percent to nearly 4 percent-significantly less than the
governmentwide peak of about 16 percent and the current rate of about 10
percent of government employees.
o Unreasonable Approving Official Span of Control. At the agencies we
audited, we found that some approving officials were responsible for
review and approval of excessive numbers of monthly cardholder statements.
The proliferation of cardholders can create a situation
13Under federal agency purchase card task orders with credit card issuing
banks, agencies earn rebates (refunds) based on the sales volume
(purchases) and the timeliness of their payments.
14According to General Services Administration data.
where it is virtually impossible to maintain a positive control
environment if the agencies do not establish a sufficient number of
approving officials to review cardholder spending activities. For example,
we reported that at one DOD unit a significant span of control issue
existed with one approving official responsible for certifying monthly
summary billing statements covering an average of over 700 monthly
purchase card statements relating to 1,526 purchase cardholders. We also
reported that HUD did not have a complete and accurate list of approving
officials and the cardholders assigned to them. The span of control issue,
along with effective implementation of an approving official review
function, are particularly important for the integrity of purchase card
program because supervisors and, in some cases, cardholders themselves,
are responsible for authorizing purchases, rather than an independent
contracting officer as is the case under the standard procurement process.
Thus, the approving official serves as a key control in certifying
cardholder purchases.
o Cardholder Credit Limits Exceed Procurement Needs. The total financial
exposure of the purchase card program is measured in terms of purchase
card credit limits. Limiting credit available to cardholders is a key
factor in managing the purchase card program and in minimizing the
government's financial exposure. None of the agencies that we audited tied
either the cardholder's or the approving official's credit limit to the
unit's historical spending. Rather, they generally 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, we reported that 60 Navy
cardholders each had credit limits of $9.9 million, and more than 2,300
Navy approving officials each had $9.9 million credit limits. By managing
credit limits, the government's exposure to fraudulent usage of the card
is limited.
o Agencies Lacked Evidence that Purchase Card Officials Were Trained. We
found a lack of documented evidence that cardholders and approving
officials were adequately trained. GAO's internal control standards
emphasize that effective management of an organization's workforce-its
human capital-is essential to achieving results and is an important part
of internal control. Training is key to ensuring that the workforce has
the skills necessary to achieve organizational goals. While agencies we
audited required all cardholders and approving officials to receive
initial and refresher purchase card training, all of the agencies lacked
documentation to verify that all cardholders and
approving officials had received the required training. For example, at
one FAA field office we found no evidence that 38 percent of the
cardholders and 67 percent of the approving officials had received
purchase card training since 1996-a 5-year gap.
o Insufficient Human Capital Resources. Most agencies that we audited had
not provided sufficient human capital resources to enable effective
monitoring of purchases and to develop a robust oversight program. The key
positions for monitoring purchases are the department-level agency program
coordinator, the bureau or agency-level program coordinator, and the local
approving official. At DOD, none of the major commands that we audited had
agency program coordinators who worked full time in that position. This is
despite the fact that some agency program coordinators 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. We also found that the major commands 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 monitoring responsibilities necessary for the
operational success of the program. The responsibilities of approving
officials and many subordinate level agency program coordinators fell into
the category of "other duties as assigned."
Key Internal Controls Were Ineffective
Key internal controls over the purchase card program were ineffective at
the agencies we audited. We determined that DOD and the four civilian
agencies had weaknesses in key transaction-level controls leaving the
agencies vulnerable to fraudulent, improper, 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) documenting independent receipt and acceptance of goods and services,
(2) documenting cardholder reconciliation and approving official review
prior to certifying monthly purchase card statements for payment, (3)
screening for required vendors, and (4) recording pilferable property in
accountable records.
o Independent Receipt and Acceptance of Items Purchased. Most agencies
that we audited generally did not have evidence documenting that someone
independent of the cardholder received and accepted
items ordered and paid for them with a purchase card. 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 was no documented evidence that
the government received the items purchased or that those items were not
lost, stolen, or misused. For example, we reported that three Navy
cardholders took advantage of this weakness and fraudulently purchased
$500,000 of items for themselves before they were caught.
o Reconciling and Reviewing Monthly Statements. At the agencies we
audited, we found little evidence that either cardholders reconciled the
monthly purchase card invoices back to the supporting documents or that an
approving official reviewed the cardholder's activity to confirm that they
had been properly reconciled to the monthly invoices. Our testing revealed
that documented evidence of adequate cardholder reconciliation or
approving official review of cardholder transactions did not exist for
most transactions. We often found that either the cardholder and/or the
approving official review were simply a "rubber stamp." For example, at
HUD, we estimated that $4.8 million of a $10.6 million sample population
lacked adequate supporting documentation for the approving official to
determine the validity of the purchases.
o Screening for Required Vendors. Despite govermentwide requirements to
give priority to certain preferred vendors, we have reported that most
agencies that we audited did not document whether the necessary screening
occurred. Due to the lack of documentation, agencies did not know the
extent to which cardholders acquired items from these vendors. Most
agencies 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 the Federal Prison Industries, Inc., known as
UNICOR, and vendors qualifying under the Javits-Wagner-O'Day Act (JWOD).
JWOD vendors are nonprofit agencies that employ people who are blind or
have other severe disabilities. JWOD vendors primarily sell office
supplies and calendars that often cost less than similar items sold by
commercial vendors. Our DOD and civilian agency audits found tens of
millions of dollars of purchase card transactions that did not follow
statutory or agency source of supply guidelines.
o Accountability for Pilferable Items. All of the agencies we audited had
difficulty ensuring that sensitive and pilferable property acquired with
purchase cards were recorded in property records. In addition, none of the
agencies could locate every property item invoiced in our statistical
samples. Because agency officials could not provide conclusive evidence
that missing property was in the possession of the government, they could
not determine whether these items were lost or stolen. For example, the
Department of Education could not locate 241 personal computers and
related equipment valued at $261,500 acquired using purchase cards. GAO's
Standards for Internal Control state that accountable property should be
recorded in property records as it is acquired. Accountable property
obtained with purchase cards includes items that can be easily pilfered,
such as computers and related equipment, and cameras. Entering such items
in the property records and performing periodic inventories are important
steps to help assure accountability and financial control over these
assets and deter theft or improper use of government property.
Limited Disciplinary Actions Taken by DOD
As previously mentioned, at the request of the House and Senate Defense
Authorization and Appropriations Committees, we followed up with DOD to
determine what disciplinary or administrative actions were taken against
the cardholders we had cited in our examples of fraudulent, improper, or
abusive purchases in our DOD purchase card reports and testimonies.
Specifically, we listed 51 examples of cardholders who had used the
government purchase card to make fraudulent or potentially fraudulent
purchases and 120 examples of cardholders who made improper and abusive or
questionable purchases. We reported that when a court of law determined
that a cardholder fraudulently used the purchase card, all the military
services generally took strong disciplinary actions (such as, assessed
fines, and in the case of uniformed personnel, sentenced the individual to
jail/confinement). We also found that the military services either took
strong disciplinary action or were actively investigating the cases we
reported as potentially fraudulent. For example, our two Navy reports
identified 26 fraudulent and potentially fraudulent transactions totaling
more than $1,342,000. The Navy reported that in response, it fired six
cardholders, reduced the grade of others, confined several uniformed
serviceman for periods of 14 to 60 months, and required repayment to the
government of over $460,000. Other actions taken on fraudulent or
potentially fraudulent transactions included suspending or revoking
purchase card privileges, requiring repayment to the government for the
cost of the items obtained, returning items obtained to the government,
and issuing written reprimands.
However, the military services generally did not take disciplinary or
administrative actions against the 120 cardholders associated with our
examples of improper, abusive, or questionable transactions. As shown in
table 1, using our examples of problem transactions, DOD disciplined only
20 of the 120 cardholders we cited as examples in our reports. DOD revoked
the purchase card privileges of 8 of the cardholders we cited, gave verbal
or written reprimands to 3 cardholders, required the items obtained by 7
cardholders to be returned to the government, and gave 2 cardholders
verbal reprimand and required them to return the item to the government.
DOD did not take any action against 94 of the 120 examples that we
identified. We noted that DOD required 33 of these 94 cardholders to take
purchase card training. Because all cardholders are required to take
periodic training, we did not consider retraining to be a disciplinary
action.
Table 1: Disciplinary Actions Taken against DOD Cardholders Who Made
Improper, Abusive, or Questionable Transactions
Type of disciplinary action taken Total
Value of transactions reported by GAO $3,062,445
Number of transactions reported by GAO 120 Type of Disciplinary Action
Give item to government or repay for cost of improper, abusive, or
questionable charge 7
Written or verbal reprimand 3
Credit card revocation or suspension 8
Verbal reprimand and required to return the item to the government 2
Total disciplinary actions
No disciplinary actions
Still under review/investigation or written policy authorizing purchase 6
Source: GAO analysis of responses provided by Army, Navy, and Air Force.
Table 2 shows examples of abusive and wasteful items identified in our
statistical samples, data mining, and forensic auditing, that government
cardholders charged to their purchase cards. It is important to note that
none of the cardholders were disciplined for using tax dollars to pay for
personal items.
Table 2: Examples of Abusive and Wasteful Items Obtained with a Purchase
Card Reported By GAO
Justification provided to GAO auditors and investigators
Action taken
Item purchased
Coach brief cases, $400$500 each
More durable than standard briefcases. None
Mounted deer head Educate airmen about local deer population. None
$250 Louis Vuitton Personal preference. None designer folios
$100 Dooney and Bourke Personal preference. None designer PDA cases
Luggage DOD personnel were traveling on None
official business.
Garment bags DOD personnel were traveling on None
official business.
$224 leather backpack To hold items while traveling. None
$300 Bose headset Traveler would be more rested after None
long flights.
$500 Bose wave radio Cardholder wanted a radio for his None
office.
Wine Authorized by a "competent authority None
in the course
of execution of a highly classified
compartmented
program."
Cigars Gifts to be given to very important None
people.
Leather bomber jackets Personal preference. None
Ski clothing A DOD civilian was traveling to cold None
weather area.
Oakley sun glasses Entitlement. None
$200 Lego toy robots Teach Navy engineers about robotics. None
Source: GAO analysis of agency purchase card invoices and supporting
documentation.
Steps Taken to Improve Management of the Purchase Card Program
In response to the reported breakdowns in internal controls and
fraudulent, improper, and abusive purchases, the Office of Management and
Budget (OMB), Congress, DOD, and civilian agencies have taken numerous
actions to improve management oversight and internal controls over the
government purchase card program. Specifically, OMB requested all agencies
to review the adequacy of internal controls for purchase card
expenditures, prepare separate remedial action plans for control
weaknesses, and submit quarterly reports on purchase card activity. The
Congress directed DOD to improve the management of the purchase card
program in the fiscal year 2003 DOD authorization and appropriations acts.
In response to OMB and congressional actions and GAO and Inspectors
General reports, DOD and civilian agencies updated policies and procedures
to strengthen purchase card program controls.
Office of Management and Budget Actions
On April 18, 2002, OMB issued a memorandum to executive branch agencies
stating that the fraudulent and unauthorized use of government credit
cards identified by GAO and Inspectors General was unacceptable and
required prompt and effective remedial action. In the memorandum, OMB
requested that each agency review the adequacy of internal controls for
purchase card expenditures and prepare separate remedial action plans for
its purchase and travel card programs. The remedial action plans were to
highlight the problems each agency identified, the internal controls that
will be used to manage risk associated with these programs (such as,
management oversight and review, authorized spending limits, and
training), and include an examination of the number of cards issued at the
agency. OMB recommended that agencies deactivate all current cards and
reactivate them selectively for a smaller number of cardholders, based on
demonstrated necessity. According to the OMB memorandum, if the program
was to continue, agencies must improve the internal control over the
purchase card program. In October 2002, OMB issued a memorandum requiring
federal agencies to prepare and submit quarterly reports on purchase card
activity beginning with the first quarter of 2003.
Legislative Actions The Congress included in DOD's fiscal year 2003
authorization and appropriations acts15 requirements for DOD to take
specific actions to improve the management of the purchase card program,
in particular, the weaknesses we identified. Specifically, these acts
required DOD to (1) limit the number of purchase cards, (2) train purchase
card officials, (3) monitor purchase card activity, (4) review purchase
card activity to better aggregate purchases and obtain lower prices, (5)
establish guidelines and procedures to discipline cardholders who misuse
the purchase card, and (6) assess the credit worthiness of cardholders. By
the end of fiscal year 2003, DOD and the military services initiated
actions to address these requirements. DOD made significant progress by
taking the following steps:
o DOD reduced the total number of purchase cards from about 239,000 in
March 2001 to about 135,000 in January 200416 and established a maximum
ratio of cardholders to approving officials of 7 to 1.
15Bob Stump National Defense Authorization Act for Fiscal Year 2003, Pub.
L. No. 107-314, 116 Stat. 2458 (Dec. 2, 2002) and Department of Defense
Appropriations Act, 2003, Pub. L. No. 107-248, 116 Stat. 1519 (Oct. 23,
2002).
16According to GSA.
o DOD made available several on-line, self-paced purchase card courses on
its Defense Acquisition University Web site. DOD's on-line curriculum
included courses for cardholders and approving officials on regulatory
requirements and other guidelines related to the purchase card program,
and a GSA module aimed at providing advanced training for agency program
coordinators who have completed basic training on the purchase card
program.
o DOD also increased its monitoring of purchase card transactions. DOD's
Office of the Inspector General and the Navy prototyped a data mining
capability to screen for and identify high-risk purchase card transactions
(such as potentially fraudulent, improper, and abusive use of the cards,
including prohibited purchases) for subsequent investigation. On June 27,
2003, the DOD Inspector General issued a report17 summarizing the results
of an in-depth review of purchase card transactions made by 1,357 purchase
cardholders. Using data mining technology, the report identified 182
cardholders who may have inappropriately or fraudulently used their
purchase cards.
In several other cases DOD and the military services have issued policies
and guidelines for implementing the legislative mandates. However,
sufficient time has not passed to implement the legislative mandate. For
example:
o DOD issued separate disciplinary guidelines18 for civilian and military
employees intended to ensure that management emphasis is given to the
important issue of personal accountability. However, DOD told us in
response to our December 2003 report,19 DOD does not intend to monitor
whether commanders are consistently applying those guidelines.
o DOD established a senior focus group consisting of acquisition,
financial management, and general counsel executives to determine how to
17Department of Defense, Office of the Inspector General, Summary Report
on Joint Review of Selected DOD Purchase Card Transactions, D2003-109
(Washington, D.C.: June 27, 2003).
18Military employees are subject to the Uniformed Code of Military
Justice.
19U.S. General Accounting Office Purchase Cards DOD: Steps Taken to
Improve DOD Program Management, but Actions Needed to Address Misuse,
GAO-04-156 (Washington, D.C.: Dec. 2, 2003.).
implement therequirement to evaluate an individual's credit worthiness.
The focus group concluded that there are conflicts between implementing
this legislation through the use of credit checks and the Fair Credit
Reporting Act. The department is pursuing an alternative solution that
would rely on a self-certification process by prospective cardholders and
is researching the legality and practicality of the alternative.
DOD Action on GAO Recommendations
Recently, we reported20 that the Army, Navy, and Air Force have either
completed or initiated actions to implement nearly all of the 109
recommendations we made to improve the management of the purchase card
program. The recommendations that the services told us they have
implemented closely tie to requirements in the DOD fiscal year 2003
authorization and appropriation acts. However, DOD had not fully
implemented the recommendations dealing with leveraging purchase card
buying power; establishing servicewide databases for data mining;
investigating suspected and known fraud; and linking cardholder, approving
official, and agency program coordinator performance appraisals to
performance standards encompassing purchase card goals and objectives. The
Air Force planned to complete action on all of the recommendations by the
spring of 2004. The Army and the Navy did not provide target dates for
completing actions that are underway to address our recommendations.
Agencies Can Achieve Significant Savings on Purchase Card Buys
As we discuss in the report released today, substantial attention has been
focused on internal controls in recent years, but very little management
focus and attention has been placed on the aggressive pursuit of savings
through use of the purchase card. 21 Although some agencies have begun to
take actions to achieve such savings through their purchase card programs,
most have not identified nor taken advantage of opportunities to obtain
more favorable prices from their major purchase card vendors-
opportunities that could yield hundreds of millions of dollars in savings.
A conservative approach indicates that the agencies we reviewed-
Agriculture, Army, Navy, Air Force, Interior, Justice, Transportation, and
20GAO-04-156. 21GAO-04-430.
Veterans Affairs-might be able to achieve annual savings on the order of
$300 million. In our view, these savings could be achieved without
sacrificing the ability to acquire items quickly or compromising
socioeconomic goals.
Agencies Generally Have Not Taken Advantage of Opportunities to Obtain
Savings
Although we found some initiatives under way to obtain vendor discounts
from major purchase card vendors, agencies generally had not seized
opportunities to obtain more favorable prices on purchase card buys.
Agency efforts to obtain more favorable prices for purchase cardholders
had generally been limited to a few agencywide agreements with major
vendors. Further, training for cardholders usually focused on internal
controls and regulatory policies and did not provide practical information
about steps cardholders can take to get better prices. As a result,
cardholders often paid higher prices than necessary. The successful
initiatives taken within some agencies demonstrate that, if agencies
negotiated effective discount agreements with major purchase card vendors
and improved communications to cardholders about how to obtain more
favorable prices, significant savings could be realized. Some of our major
findings regarding this issue include:
o Scope and Coverage of Negotiated Discount Agreements Varied. We found a
wide variation in the number of agencywide discount agreements that the
agencies we reviewed had negotiated with their major purchase card
vendors. For example, Veterans Affairs had negotiated agencywide discount
agreements with 37 of its 196 major purchase card vendors-the largest
number of any of the agencies reviewed. In contrast, Transportation's
senior procurement executive told us his agency had no discount agreements
that could be used agencywide.
Even where agencies had agreements in place, the agreements did not cover
all the products and services cardholders were buying. For example,
Veterans Affairs agreements that we examined covered single products or
product types-specimen containers, bandages, or washcloths-instead of the
vendor's full product line. Estimated sales for these agreements were as
low as $27,000. According to agency officials, the intent of the
agreements was to standardize specific products, and the agency has now
identified its highest dollar value products for standardization.
o Most Agency Guidance and Training Did Not Provide Practical Information
on Obtaining Favorable Pricing. Each of the agencies we reviewed had
developed guidance and training programs for their cardholders that
focused on regulatory policies and internal controls intended to prevent
misuse of the purchase card. However, most of the guidance and training
programs did not provide cardholders with practical information to help
them get better pricing by using GSA Schedule contracts or agency discount
agreements. Some locations found more practical training beneficial. For
example, the Air Force's Air Mobility Command developed an extensive
briefing that highlights the importance of comparison shopping and is
providing hands-on training to show cardholders how to order from Schedule
contracts. Command officials told us that in addition to providing
cardholders with practical tools to help them be effective buyers, the
briefings and training increased cardholder awareness of the importance of
comparison shopping.
o Cardholders Paid More Than Necessary. Dun and Bradstreet's analysis of
fiscal year 2002 Interior transactions, conducted on our behalf,
illustrates that cardholders frequently paid more than necessary. For
example, the company analyzed Interior purchases from three office supply
vendors that provided product descriptions along with their purchase card
billing information. This analysis showed that ink cartridges were the
most frequently purchased product. For one specific model of ink
cartridge, 411 of 791 purchases were made at prices higher than the GSA
Schedule prices the vendors offered, indicating that cardholders had
generally not taken advantage of discounts available through Schedule
contracts. The prices paid for the same cartridge model ranged from $20.00
to $34.99.
Some cardholders appeared not to accept any responsibility for getting
reasonable prices. For example, a Transportation cardholder paid about 20
percent more than the GSA Schedule contract price for office supply items,
even though he admitted he knew that the vendor had a Schedule contract.
An Agriculture cardholder, who paid about 13 percent more for cellular
telecommunications service than the GSA contract price, told us that her
only role in the transaction was to pay the monthly bill for the cell
phone user.
A number of other cardholders purchased items that were not available
through the vendor's Schedule contract and did not consider whether
products that met their needs were available from other vendors that
offered discounted Schedule prices. For example, an Army cardholder
purchased word-processing software from an office supply vendor's retail
store and did not consider whether other vendors might offer discounts on
the same software through their Schedule contracts.
Experience at Some Agencies Suggests That Significant Savings Are Possible
Several agencies reported significant savings from their initiatives to
leverage buying power by negotiating discount agreements with major
purchase card vendors, suggesting that the potential exists for
significant savings governmentwide. For example, Interior recently
negotiated several agencywide discount agreements for information
technology products. These agreements provided for savings ranging from 20
percent to 35 percent for laptop computers. Sales under Agriculture's
discount agreement for office supplies totaled $15.4 million during fiscal
year 2003, and the agency achieved savings of $1.8 million, or about 10
percent off Schedule prices. While the scope of our work did not include
developing a governmentwide estimate of the potential savings from
leveraging purchase card buying power, these examples indicate that the
potential for savings is significant. A conservative approach indicates
that, if these agencies were to achieve savings of just 10 percent on
their purchase card expenditures with major vendors, annual savings of
$300 million could be realized.
Agency officials expressed concerns that achieving these savings might
require them to sacrifice the ability to acquire items quickly or
compromise socioeconomic goals. Although agency officials consistently
identified these challenges, our review suggests that the challenges are
not insurmountable, as evidenced by the individual agency initiatives to
address them. The Air Mobility Command, for example, is supporting small
businesses while generating savings. The Command contacted local
suppliers-many of which were small businesses-to determine what customary
trade discounts they were willing to extend to government purchase
cardholders and provided this information to the cardholders. Cardholders
were encouraged to request the applicable discount, typically about 10
percent, when dealing with these suppliers.
Concluding Remarks We support the use of a well-managed and controlled
purchase card program in the federal government. To date, the purchase
card has provided significant benefits in reduced transaction processing
costs and increased flexibility for agencies to meet their procurement
needs.
However, ineffective management oversight and control have prevented the
government from fully realizing the benefits of using the purchase card.
Although significant progress has been made in improving management focus
and the design of internal controls, it is too early to tell whether
controls are in place to provide reasonable assurance that fraudulent,
improper and abusive purchases are being minimized. The federal government
has also not effectively leveraged the $16 billion a year buying power of
its purchase card activity. With the serious fiscal challenges facing our
nation, it is important that the hundreds of millions of dollars of
potential savings available through better management of the purchase card
program be realized.
Madam Chairman, Members of the Committee, this concludes our prepared
statement. We would be pleased to answer any questions that you may have.
Contacts and For future contacts regarding this testimony, please contact
Gregory D. Kutz at (202) 512-9095, David E. Cooper at (202) 512-4841, and
John J. Ryan
Acknowledgments at (202) 512-9587. Individuals making key contributions to
this testimony included Mario Artesiano, Francine DelVecchio, Bonnie
Derby, Gayle Fischer, John Kelly, Michele Mackin, Monty Peters, Alana
Stanfield, Edward Tanaka, and Bernard Trescavage.
Related GAO Products
Products concerning purchase card internal controls:
Purchase Cards: Steps Taken to Improve DOD Program Management, but Actions
Needed to Address Misuse (GAO-04-156, Dec. 2, 2003).
Audit Guide: Auditing and Investigating the Internal Control of Government
Purchase Card Programs (GAO-04-87G, Nov. 1, 2003).
Forest Service Purchase Cards: Internal Control Weaknesses Resulted in
Instances of Improper, Wasteful, and Questionable Purchases (GAO-03786,
Aug. 11, 2003).
HUD Purchase Cards: Poor Internal Controls Resulted in Improper and
Questionable Purchases (GAO-03-489, Apr. 11, 2003).
Data Mining: Results and Challenges for Government Program Audits and
Investigations (GAO-03-591T, Mar. 25, 2003).
FAA Purchase Cards: Weak Controls Resulted in Instances of Improper and
Wasteful Purchases and Missing Assets (GAO-03-405, Mar. 21, 2003).
Purchase Cards: Control Weaknesses Leave the Air Force Vulnerable to
Fraud, Waste, and Abuse (GAO-03-292, Dec. 20, 2002).
Purchase Cards: Navy Vulnerable to Fraud and Abuse but is Taking Action to
Resolve Control Weaknesses (GAO-03-154T, Oct. 8, 2002).
Purchase Cards: Navy Is Vulnerable to Fraud and Abuse but Is Taking Action
to Resolve Control Weaknesses (GAO-02-1041, Sept. 27, 2002).
Purchase Cards: Control Weaknesses Leave Army Vulnerable to Fraud, Waste,
and Abuse (GAO-02-844T, July 27, 2002).
Purchase Cards: Control Weaknesses Leave Army Vulnerable to Fraud, Waste,
and Abuse (GAO-02-732, June 27, 2002).
FAA Alaska: Weak Controls Resulted in Improper and Wasteful Purchases
(GAO-02-606, May 30, 2002).
Government Purchase Cards: Control Weaknesses Expose Agencies to Fraud and
Abuse. (GAO-02-676T, May 1, 2002).
Related GAO Products
Education Financial Management: Weak Internal Controls Led to Instances of
Fraud and Other Improper Payments (GAO-02-406, Mar. 28, 2002).
Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to
Fraud and Abuse (GAO-02-506T, Mar. 13, 2002).
Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to
Fraud and Abuse (GAO-02-32, Nov. 30, 2001).
Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to
Fraud and Abuse (GAO-01-995T, July 30, 2001).
Products concerning strategic purchasing:
Contract Management: Agencies Can Achieve Significant Savings on Purchase
Card Buys (GAO-04-430, Mar. 12, 2004).
Contract Management: Restructuring GSA's Federal Supply Service and
Federal Technology Service (GAO-04-132T, Oct. 2, 2003).
Best Practices: Improved Knowledge of DOD Service Contracts Could Reveal
Significant Savings (GAO-03-661, June 9, 2003).
Contract Management: Taking a Strategic Approach to Improving Service
Acquisitions (GAO-02-499T, Mar. 7, 2002).
Best Practices: Taking a Strategic Approach Could Improve DOD's
Acquisition of Services (GAO-02-230, Jan. 18, 2002).
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
GAO's Mission The General Accounting Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony
The fastest and easiest way to obtain copies of GAO documents at no cost
is through the Internet. GAO's Web site (www.gao.gov) contains abstracts
and fulltext files of current reports and testimony and an expanding
archive of older products. The Web site features a search engine to help
you locate documents using key words and phrases. You can print these
documents in their entirety, including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document files.
To have GAO e-mail this list to you every afternoon, go to www.gao.gov and
select "Subscribe to e-mail alerts" under the "Order GAO Products"
heading.
Order by Mail or Phone The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:
U.S. General Accounting Office 441 G Street NW, Room LM Washington, D.C.
20548
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061
To Report Fraud, Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htmWaste, and Abuse in E-mail:
[email protected] Federal Programs Automated answering system: (800)
424-5454 or (202) 512-7470
Public Affairs Jeff Nelligan, Managing Director, [email protected] (202)
512-4800 U.S. General Accounting Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
Presorted Standard
Postage & Fees Paid
GAO
Permit No. GI00
United States
General Accounting Office
Washington, D.C. 20548-0001
Official Business
Penalty for Private Use $300
Address Service Requested
*** End of document. ***