VHA Purchase Cards: Internal Controls Over the Purchase Card	 
Program Need Improvement (07-JUN-04, GAO-04-737).		 
                                                                 
The Department of Veterans Affairs Office of Inspector General	 
(OIG) has identified significant vulnerabilities in Veterans	 
Affairs' (VA) use of government purchase cards. In its April 26, 
2004 report, the OIG reported instances of fraudulent activity	 
totaling $435,900, and numerous improper and questionable uses of
the purchase cards totaling $1.1 million. Given that VHA	 
comprised at least 90 percent of VA's dollar and transaction	 
volume for fiscal year 2002, GAO was asked to determine whether  
existing controls at VHA were designed to provide reasonable	 
assurance that in the future, improper purchases would be	 
prevented or detected in the normal course of business, purchase 
card and convenience check expenditures were made in compliance  
with applicable laws and regulations, and purchases were made for
a reasonable cost and a valid government need.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-737 					        
    ACCNO:   A10405						        
  TITLE:     VHA Purchase Cards: Internal Controls Over the Purchase  
Card Program Need Improvement					 
     DATE:   06/07/2004 
  SUBJECT:   Accounting procedures				 
	     Credit sales					 
	     Fraud						 
	     Internal controls					 
	     Program abuses					 
	     Federal procurement				 
	     Questionable payments				 
	     Questionable procurement charges			 
	     Government purchase cards				 

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GAO-04-737

United States General Accounting Office

GAO	Report to the Chairman, Subcommittee on Oversight and Investigations,

            Committee on Veterans' Affairs, House of Representatives

June 2004

VHA PURCHASE CARDS

       Internal Controls Over the Purchase Card Program Need Improvement

                                       a

GAO-04-737

Highlights of GAO-04-737, a report to the Chairman, Subcommittee on
Oversight and Investigations, Committee on Veterans' Affairs, House of
Representatives.

The Department of Veterans Affairs Office of Inspector General (OIG) has
identified significant vulnerabilities in Veterans Affairs' (VA) use of
government purchase cards. In its April 26, 2004 report, the OIG reported
instances of fraudulent activity totaling $435,900, and numerous improper
and questionable uses of the purchase cards totaling $1.1 million. Given
that VHA comprised at least 90 percent of VA's dollar and transaction
volume for fiscal year 2002, GAO was asked to determine whether existing
controls at VHA were designed to provide reasonable assurance that in the
future, improper purchases would be prevented or detected in the normal
course of business, purchase card and convenience check expenditures were
made in compliance with applicable laws and regulations, and purchases
were made for a reasonable cost and a valid government need.

June 2004

VHA PURCHASE CARDS

Internal Controls Over the Purchase Card Program Need Improvement

Weaknesses in the Veterans Health Administration's (VHA) controls over use
of purchase cards and convenience checks resulted in instances of
improper, wasteful, and questionable purchases. These internal control
weaknesses included inadequate segregation of duties; lack of key
supporting documents; lack of timely recording, reconciling, and reviewing
of transactions; and insufficient program monitoring activities.

This lack of adequate internal controls resulted in numerous violations of
applicable laws and regulations and VA/VHA purchase card policies that GAO
identified as improper purchases. These included purchases intended for
personal use, purchases made from an improper source, purchases split into
two or more transactions to circumvent single purchase limits,
noncompliance with simplified acquisition procedures, incorrect
procurement procedures, and improper use of convenience checks.

GAO's work also identified over $300,000 in purchases that were considered
wasteful - that is, excessive in cost or for questionable government need
- or were considered questionable because there was insufficient or no
documentation to determine the propriety of the transaction. Examples of
wasteful and questionable purchases included two purchases for 3,348 movie
gift certificates totaling over $30,000 for employee awards that were not
supported by award letters or justifications; a purchase for a digital
camera totaling $999 when there were other less costly digital cameras
widely available; and a purchase of 3 cases of beer totaling $38. Some
examples of questionable purchases from vendors that would more likely be
selling unauthorized or personal use items are shown in the table below.

                                   Examples of Purchases    
          GAO is making 36         Where No Documentation   
                                   Was Provided             
    recommendations to strengthen           Vendor                Transaction 
                                                                       amount 
VA/VHA's internal controls and        Radio Shack                   $3,305 
compliance in its purchase card  The Sharper Image The                     
    program. In responding to our     Brass Elephant (a                       
     draft report, VA generally    restaurant, fine dining) 2,127 2,081 1,705
agreed with our conclusions and  Baltimore Orioles FFP               1,478
expressly concurred with 32 of       Palm Computing      
               the 36                                       
      recommendations. For the       Daddy's Junky Music                1,041 
    remaining 4 recommendations,         Eddie Bauer                      900 
                 VA,                                        
in principle, concurred with 3          Gap Kids                       788 
                 of                                         
      these recommendations and    Hollywood Beach Country                500 
                                             Club           

              presented reasons and/or               Southwest Airlines   399 
         alternative action steps to address           Harbor Cruises     357 
          the weaknesses identified in our                Hecht's         280 
report. www.gao.gov/cgi-bin/getrpt?GAO-04-737.        L.L. Bean        239 
                                                      Christmas Palace    209 
                                                   Source: GAO's analysis 
    To view the full product, including the scope    of nonstatistical    
      and methodology, click on the link above.    transactions selected  
                                                   for fiscal year 2002.  
         For more information, contact McCoy                              
            Williams at (202) 512-6906 or                                 
                 [email protected].                                      

Contents

  Letter

Results in Brief
Background
Scope and Methodology
Critical Internal Controls Were Ineffective
Noncompliance With Purchasing Requirements Resulted in

Instances of Improper Purchases Poor Controls Resulted in Some Wasteful
and Questionable

Purchases Conclusions Recommendations for Executive Action Agency Comments
and Our Evaluation

                                                                   1 2 4 8 12

27

35 41 41 46

Appendixes                                                              
                              Comments from the Department of Veterans     49 
               Appendix I:                     Affairs                     
                                            GAO Comments                   54 
              Appendix II:              Staff Acknowledgments              56 
                                           Acknowledgments                 56 
     Tables                  Table 1: Description of Statistical Samples   11 
                              Table 2: Summarization of VHA Timeliness     
                                              Standards                    
                                             Exceptions                    19 
                             Table 3: Range of Days Departed Cardholder    
                                          Accounts Remained                
                                                Open                       24 
                           Table 4: Transactions Identified as Wasteful or 36 
                                            Questionable                   
                               Table 5: Examples of Purchases Where No     
                                          Documentation Was                
                                              Provided                     39 
     Figure                     Figure 1: Time Spent on A/OPC Duties       

Contents

Abbreviations

A/OPC Agency/Organization Program Coordinator
CFO Chief Financial Officer
DHHS Department of Health and Human Services
EFT Electronic Funds Transfers
FAR Federal Acquisition Regulation
FSC Financial Service Center
GSA General Services Administration
JWOD Javits-Wagner-O'Day
MCC Merchant Category Code
OIG Office of Inspector General
USPS United States Postal Service
VA Department of Veterans Affairs
VAAR Veterans Affairs Acquisition Regulation
VHA Veterans Health Administration
VISN Veterans Integrated Service Network

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A

United States General Accounting Office Washington, D.C. 20548

June 7, 2004

The Honorable Steve Buyer
Chairman
Subcommittee on Oversight and Investigations
Committee on Veterans' Affairs
House of Representatives

Dear Mr. Chairman:

The use of purchase cards in the federal government has dramatically
increased in past years as agencies have sought to eliminate the
bureaucracy and paperwork long associated with making small purchases.
The benefits of using purchase cards are lower administrative costs and
less red tape for both the government and the vendor community.
However, given the nature, scale, and increasing use of purchase cards, it
is
important for agencies to have adequate internal controls in place to help
ensure proper use of purchase cards and thus to protect the government
from waste, fraud, and abuse.

The Department of Veterans Affairs Office of Inspector General (OIG) has
continued to identify significant vulnerabilities in the Veterans Affairs'
(VA)
use of government purchase cards. On April 26, 2004, the OIG issued a
report on its evaluation of internal controls over VA's purchase card
program.1 This report summarizes the results of 83 reports issued during
the period March 1999 through September 2003, that stem from various
OIG investigations, hotline calls, and combined assessment program
reviews performed at VA medical facilities and regional offices. In its
2004
report, the OIG identified internal control weaknesses such as inadequate
segregation of duties and purchases that lacked supporting documentation.
The OIG also reported instances of fraudulent activity totaling $435,900,
and numerous improper and questionable uses of the purchase cards
totaling $1.1 million. The OIG made a number of recommendations for
corrective action.

Given that VA is the second largest user of the governmentwide purchase
card program with reported purchases totaling $1.5 billion for fiscal year

1Department of Veterans Affairs Office of Inspector General: Evaluation of
the Department of Veterans Affairs Government Purchase Card Program,
Report Number 02-01481-135 (Washington, D.C.: April 26, 2004).

2002, and because of known program weaknesses previously reported by the
OIG, you requested that we review the Veterans Health Administration's
(VHA) purchase card program for fiscal year 2002, which comprised at least
90 percent of VA's dollar and transaction volume, to determine if control
problems still existed.

In response to your request, we initiated a body of work designed to
determine whether (1) existing controls at VHA were designed to provide
reasonable assurance that improper purchases would be prevented or
detected in the normal course of business, (2) the VA's purchase card and
convenience check expenditures were made in compliance with applicable
laws and regulations, and (3) purchases were made for a reasonable cost
and a valid government need. Our review focused on the approximately $1.4
billion of disbursements that the VHA made during fiscal year 2002, the
most recent fiscal year for which complete data were available when we
began our review.

Results in Brief	VHA's internal controls were not designed to provide
reasonable assurance that improper purchase card and convenience check
purchases would not occur or would be detected in the normal course of
business. We found that (1) VHA lacked adequate segregation of duties
between those purchasing and receiving goods; (2) payments for purchase
card and convenience check transactions often did not have key supporting
documents; (3) timeliness standards for recording, reconciling, and
reviewing transactions were not met; and (4) cardholders did not
consistently take advantage of vendor-offered purchase discounts.
Generally, we found that internal controls were not operating as intended
because cardholders and approving officials were not following VA/VHA
operating guidance governing the program, and in the case of documentation
and vendor-offered discounts, lacked guidance. We also noted that
monitoring activities could be strengthened, such as in instances where
(1) accounts remained active long after the cardholder had left service at
VA, (2) credit limits on accounts were significantly higher than actual
usage, and (3) human capital resources were insufficient to enable
adequate monitoring of the purchase card program.

This lack of adequate internal controls resulted in numerous violations of
applicable laws and regulations and VA/VHA purchase card policies. We
classified purchases made in violation of applicable laws and regulations
or VA/VHA purchase card policies as improper purchases. We found
violations of applicable laws and regulations that included purchases for

personal use such as food or clothing, purchases that were split into two
or more transactions to circumvent single purchase limits, purchases over
the $2,500 micro-purchase threshold that were either beyond the scope of
the cardholder's authority and/or lacked evidence of competition, and
purchases made from an improper source. We also found violations of VA/VHA
policy that included using convenience checks to pay for purchases even
though the vendor accepted the government purchase card, convenience check
payments that exceeded established limits, and purchases for which
procurement procedures were not followed. While the total amount of
improper purchases we identified, based on limited scale audit work, is
relatively small compared to the more than $1.4 billion in annual purchase
card and convenience check transactions, we believe our results
demonstrate vulnerabilities from weak controls that may have been
exploited to a much greater extent.

The ineffectiveness of internal controls was also evident in the number of
transactions that we classified as (1) wasteful, that is, excessive in
cost compared to other available alternatives or for questionable
government need or (2) questionable because there was insufficient
documentation to determine what was purchased. Our work identified over
$300,000 in wasteful or questionable purchases, including two purchases
for 3,348 movie gift certificates totaling over $30,000 for employee
awards where award letters or justification for the awards could not be
provided; a purchase for a digital camera totaling $999 when there were
other less costly digital cameras widely available; and a purchase of 3
cases of beer totaling $38, where the cardholder stated that the purchase
was made at the request of a VA pharmacy for a patient. We also noted 250
questionable purchases totaling $209,496 that lacked key purchase
documentation from vendors that would more likely be selling unauthorized
or personal use items. Examples of these types of purchases included a
purchase from Radio Shack totaling $3,305, a purchase from Gap Kids
totaling $788, and a purchase from Harbor Cruises totaling $357. Missing
documentation prevented us from determining the reasonableness and
validity of these purchases. Because we tested only a small portion of the
transactions that appeared to have a higher risk of fraud, waste, or
abuse, there may be other improper, wasteful, and questionable purchases
in the remaining untested transactions.

Without improvements in its internal controls to strengthen segregation of
duties, documentation of purchase transactions, timely recording, review
and reconciliation of transactions, and program monitoring, VHA will
continue to be at risk for non-compliance with applicable laws and

regulations and its own policies and remain vulnerable to improper,
wasteful and questionable purchases. We make 36 recommendations in this
report to address the internal control and compliance issues we
identified.

In commenting on a draft of this report, VA generally agreed with our
conclusions and expressly concurred with 32 of the 36 recommendations. For
these recommendations, VA reported that it has actions either already in
place or planned that meet the intent of our recommendations. For the
remaining four recommendations, VA, in principle, concurred with three of
these recommendations and presented reasons and/or alternative action
steps to address the weaknesses identified in our report, which we believe
are responsive to the intent of our recommendations. VA also included some
technical comments that we have addressed in finalizing our report where
appropriate.

Background	The General Services Administration (GSA) administers the
federal government's contracts in support of agencies' purchase card
programs. GSA contracts with commercial banks to issue purchase cards to
federal employees to make official government purchases. Citibank issues
purchase cards to VA operating administrations, including VHA. Use of the
purchase card is intended to streamline federal agency acquisition
processes by providing a low-cost, efficient vehicle for obtaining goods
and services directly from vendors. VA's purchase card program, including
VHA, also includes the use of convenience checks to pay vendors that do
not accept purchase cards as payment.

VA is subject to the Federal Acquisition Regulation (FAR), which governs
the acquisition of goods and services by all executive agencies. To
implement and supplement these regulations, VA issues the Department of
Veterans Affairs Acquisition Regulations (VAAR), which prescribes VA
procurement policies and procedures.

To implement and supplement the VAAR, VA issues directives that set forth
policy, and handbooks, that prescribe procedures for implementing the
applicable policy. For the purchase card program, VA issued departmentwide
guidance, VA Directive 4080, Government Purchase Card Policy, and VA
Handbook 4080, Government Purchase Card Procedures, both dated April 4,
2003. VA has separate policies and procedures for the use of convenience
checks related to the purchase card program: VA Directive 4010, Agent
Cashier Policy, and VA Handbook 4010, Agent

Cashier Procedures, both dated October 17, 1994; and VA Directive 4070,
Cash Management, and VA Handbook 4070.2, Disbursement Mechanisms, both
dated April 21, 1997.

VHA Directive 1730.1 Use of the Government Purchase Card in VHA, (May 19,
2003) and VHA Handbook 1730.1, Use and Management of the Government
Purchase Card Program (June 14, 2000) provide policies and procedures that
VHA facilities and program offices must follow when using the government
purchase card. VHA uses this guidance, in conjunction with VA's
departmentwide guidance, to operate its VHA purchase card program. VA and
VHA mandate the use of the purchase card for all micropurchases -
acquisitions of supplies and services generally at or below $2,5002 and
provides that the purchase card must be used to the maximum extent
practical for all purchases up to the simplified acquisition threshold,
currently $100,000.3

In fiscal year 2002, VHA used purchase cards and convenience checks to
make 2.8 million purchases totaling $1.4 billion. During this time frame,
about 14,000 of the approximately 188,000 VHA employees, or 7 percent of
the VHA workforce, had purchase cards or convenience check accounts. For
the purchase cards, a majority of the cardholders had single purchase
limits between $2,500 and $25,000. For the convenience checks, the single
purchase limits were either set at $2,500 or $10,000.

The VHA Chief Financial Officer (CFO) has overall responsibility for the
implementation and oversight of the purchase card program within VHA. A
facility director and/or regional office director at each of VHA's 21
Veterans Integrated Service Network (VISN)4 is responsible for
implementing the purchase card program at the local level. These officials
are also responsible for designating5 an agency or organization program
coordinator (A/OPC) to oversee the purchase card program at each facility

2This requirement is more stringent than the FAR, which only provides that
the purchase card shall be the preferred method to purchase and pay for
micro-purchases, 48 C.F.R. S: 13.201(b).

348 C.F.R. S: 2.101.

4A VISN represents integrated networks of health care facilities that
provides coordinated services to veterans to facilitate continuity through
all phases of health care.

5The VISN director is also responsible for designating a billing officer
and dispute officer whose roles affect the purchase card process.

within the director's geographic area. There are approximately 162 VHA
medical centers and about 148 local A/OPCs responsible for the primary
management of the purchase card activity at their facilities.

Generally, at each facility, personnel in three positions - A/OPC,
cardholder, and approving official - are collectively responsible for
providing reasonable assurance that purchase card transactions are
appropriate and meet a valid government need. The A/OPC is responsible for
the day-to-day management, administration, and oversight of the program
such as ensuring appropriate training has been provided, setting up
cardholder and approving official accounts, retrieving and canceling all
unneeded cards, and performing reviews of purchase card activity to ensure
compliance with applicable laws, regulations, policies and procedures.
VHA's purchase card guidance states that the A/OPC cannot be a cardholder
or an approving official.

The cardholders are responsible for making purchases, inputting purchase
information in the local purchasing system, maintaining supporting
documentation, and electronically reconciling their purchases by matching
the payment charges from the purchase card program contractor to the local
purchasing system. The approving officials, who typically are responsible
for more than one cardholder, are charged with monitoring purchase card
usage to ensure compliance with applicable laws and regulations and VA/VHA
policies and procedures, are to ensure applicable documentation is
maintained, and according to VHA guidance, certify, through an electronic
signature, that all procurements are legal and proper and that the items
have been received. VA's guidance also provides that in most cases, the
approving official should not be a cardholder. However, where staffing
levels necessitate, the approving official may be a cardholder, but cannot
approve his or her own transactions.

VHA's purchase card program also allows the use of convenience checks to
pay vendors that do not accept credit cards. VA's disbursement mechanism
policy provides that convenience checks be used in lieu of cash but only
when the government purchase card cannot be used. Agent cashiers are
responsible for making payments to the payee upon receiving authorization
and supporting purchase documentation from the office requesting payment,
reconciling the check payments as they clear VA's purchase card account,
and maintaining a copy or carbon copy of the check for a period of one
year.

On February 12, 1999, the OIG issued a report of VA's purchase card
program.6 The OIG reported that management controls were not effectively
implemented to ensure the integrity of the purchase card program and that
maximum benefits were not being realized. Among other things, the OIG
found weaknesses related to account reconciliation and certification,
documentation, split purchases, and safeguarding of purchase cards. The
OIG made several recommendations for corrective action.

During the period March 1999 through September 2003, the OIG issued an
additional 83 reports that continued to identify internal control
weaknesses in the VA's purchase card program. A summarization of these
results, was reported in the OIG's April 26, 2004 report on its evaluation
of VA's purchase card program. Specifically, during this time frame, the
OIG reported 5 fraud cases totaling $435,900. The fraud cases involved
former and current employees and in one instance, a non-VA employee. Items
purchased included computers, televisions, stereos, DVD and CD players, a
diamond ring, and other merchandise. The OIG reported that generally,
cardholders were able to commit purchase card fraud because approving
officials did not ensure that purchases were legal and proper and that
items had been received and were for official government use.

In addition, the OIG reported it had identified 457 improper or
questionable purchases totaling $1.1 million that did not comply with the
FAR, VA policy, or were not adequately supported by documentation. The
improper and questionable purchases included (1) procurements over the
$2,500 micropurchase threshold without the use of competition, (2)
purchases split into two or more transactions to circumvent the
micro-purchase limit, (3) use of the purchase card by someone other than
the cardholder, and (4) recurring purchases from the same vendor where the
cardholders did not maintain vendor documentation to support the
purchases. The OIG made two new recommendations in its 2004 report that
(1) direct VA facility managers to conduct quarterly audits, (2) provide
for the development and implementation of procedures and checklists for
approving officials to use in monitoring cardholder activity, (3) update
VA's purchase card policy to include span of control criteria for
approving officials, and (4) expand internal audit procedures to include
identifying questionable purchases through data mining. The OIG reported
that the Under Secretary for

6Department of Veterans Affairs Office of Inspector General: Audit of the
Department of Veterans Affairs Purchase Card Program, Report Number
9R3-E99-037 (Washington, D.C.: February 12, 1999).

Health, the Under Secretary for Benefits, and the Assistant Secretary for
Management agreed with the findings and recommendations and provided
acceptable improvement plans.

  Scope and Methodology

To determine whether existing controls at VHA were designed to provide
reasonable assurance that improper purchases would be prevented or
detected in a normal course of business, we obtained an understanding of
VA/VHA's purchase card and convenience check policies and procedures, and
the related internal controls. We then assessed the adequacy of those
controls using various GAO prescribed guidance and by performing detailed
tests of transactions. Specifically, we

o 	reviewed applicable laws and regulations, VA and VHA directives and
handbooks, and previous reports issued by VA's OIG,

o 	conducted walkthroughs and telephone interviews with VHA personnel to
identify key purchase card and convenience check policies and procedures,

o 	assessed the adequacy of internal controls, using our Audit Guide:
Auditing and Investigating the Internal Control of Government Purchase
Card Programs,7 Standards for Internal Control in the Federal Government,8
Internal Control Management and Evaluation Tool,9 Guide for Evaluating and
Testing Controls Over Sensitive Payments,10 and Executive Guide:
Strategies to Manage Improper Payments, 11 and

7U.S. General Accounting Office, Audit Guide: Auditing and Investigating
the Internal Control of Government Purchase Card Programs, GAO-04-87G
(Washington, D.C.: November 2003).

8U.S. General Accounting Office, Standards for Internal Control in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 2000).

9U.S. General Accounting Office, Internal Control Management and
Evaluation Tool, GAO01-1008G (Washington, D.C.: August 2001).

10U.S. General Accounting Office, Guide for Evaluating and Testing
Controls Over Sensitive Payments, GAO/AFMD-8.1.2 (Washington, D.C.: May
1993).

11U.S. General Accounting Office, Strategies to Manage Improper Payments:
Learning From Public and Private Sector Organizations, GAO-02-69G
(Washington, D.C.: October 2001).

o 	performed tests of those control activities that we considered to be
key in creating a system to provide reasonable assurance that transactions
are correct and proper throughout the purchase card procurement process
and convenience check payment process. The key internal control activities
we tested included the following.

o 	Segregation of duties - (1) independent receiving and acceptance of
goods and services by someone other than the cardholder, and (2) dividing
key duties and responsibilities among different people to reduce the risk
of error or fraud,

o 	Adequate supporting documentation - (1) cardholders and agent cashiers
obtaining and maintaining invoices or other documentation that support
their purchases and provide a basis for reconciling purchases, (2) agent
cashiers obtaining written authorization to disburse funds for payment,
and (3) agent cashiers maintaining copies of checks issued, and

o 	Timely recording of transactions and events - prompt recording,
reconciliation, and review of transactions in VHA's electronic purchase
card order system.

In addition, although not a primary focus of the internal control testing,
we reviewed purchase card and convenience check supporting documentation
to determine whether any vendor-offered discounts were taken for purchased
goods. We also inquired of and reviewed VHA's monitoring procedures over
the purchase card program to determine if ongoing monitoring occurred in
the normal course of operations.

To determine whether purchase card and convenience check expenditures were
made in compliance with applicable laws and regulations, we reviewed the
Federal Acquisition Regulation, VA's acquisition regulation, and VA/VHA
policies and procedures, and performed tests of federal and agency
acquisition requirements related to the purchase card procurement process
and convenience check payment process.

To perform tests of internal controls and applicable laws and regulations,
we selected purchase card and convenience check transactions using two
different methods. For each method of selection, we provided VHA with the
transactions selected and obtained and reviewed related supporting
documentation. The two methods are as follows.

o 	Data Mining.12 We performed data mining on VA's Financial Service
Center (FSC)13 database of fiscal year 2002 purchase card and convenience
check transactions for indicators of potential noncompliance with
established policies and procedures. Specifically, we looked for purchases
that were split into two or more transactions to circumvent single
purchase limits, convenience check purchases that exceeded established
limits, purchases made against designated blocked merchant category codes
(MCCs),14 A/OPCs with card accounts, cardholders who were payees on
convenience checks, ratio of cardholders assigned to approving officials,
comparison of single and monthly credit limits to actual purchase card
activity, former employees who had active purchase card accounts after
their separation dates, and purchases from vendors on the Department of
Health and Human Services Office of Inspector General (DHHS OIG) Exclusion
List.15 We forwarded the results of the transactions that met the specific
criteria to the VHA Central Office in Washington, D.C. to obtain responses
and related documentation, which we used to assess whether in fact these
were violations of applicable laws and regulations or policy.

We also asked Citibank, VHA's purchase card program contractor, to extract
from its database of VHA cardholders, all inactive VHA purchase card
accounts. We analyzed this data and forwarded our results to the VHA
Central Office for further review and assessment of cardholders' ongoing
need for the card.

12Data mining applies a search process to a data set, analyzing for
trends, relationships, and interesting associations. For instance, it can
be used to efficiently query transaction data for characteristics that may
indicate potentially improper activity.

13The FSC is the designated payment office responsible for making payments
to the purchase card program contractor, Citibank, for all VA purchase
card accounts. FSC makes daily electronic payments to Citibank for
purchase card and convenience check purchases.

14 MCCs are standard codes that the credit card industry maintains to
categorize merchants.

15 Section 4331(c) of the Balanced Budget Act of 1997, Public Law 105-33,
111 Stat. 251, 396, amended sections 1128 (a) and (b) of the Social
Security Act 42 U.S.C. S: 1320a-7, to significantly expand the authority
of the DHHS OIG to exclude certain individuals and entities from all
federal health care programs. Accordingly, these programs are now required
to ensure that no excluded individual or entity is receiving payments from
any federal health care program for items or services furnished on or
after the effective date of the OIG exclusion.

o 	Statistical Sampling. We selected five stratified random statistical
samples of purchase card and convenience check transactions from five
populations of purchase card and convenience check transactions paid from
October 1, 2001 through September 30, 2002. See table 1 below for a
description of each sample and their related populations which were
aggregated from a database of all purchase card and convenience check
transactions for fiscal year 2002 to test specific control activities and
compliance with applicable laws and regulations, and policies. We
stratified transactions in each sample on the basis of the total dollar
values for each population. Sample units in each sample were subsequently
weighted in the analysis to account statistically for all the transactions
in the population, including those that were not selected. Results from
these statistical samples were projected to their respective populations
of purchase card and convenience check transactions for fiscal year 2002.

                  Table 1: Description of Statistical Samples

                                                      Total Dollar 
                                         Total Number     Value of   Total Dollar 
                                         of                                 Value 
                                         Transactions                          of 
                       Number of         in                          Transactions 
                                  Sample                   Sampled             in 
  Sample      Sample       Strata   Size     the      Transactions the Population 
Description    Type                       Population               
 Internal                                                          
 control -  Stratified                                             
 purchase                                                          
cards      random           10    283    1,884,695   $4,766,287 $1,309,391,363 
 Internal   Stratified                                             
 control -                                                         
convenience   random            8    255       82,582     $358,917    $30,675,553 
  checks                                                           
Split                                                           
purchases - Stratified                                             
 purchase                                                          
cards      random            9    280       63,502   $4,047,212    $89,365,980 
 Exceeding  Stratified                                             
 limits -                                                          
convenience   random            3    105        5,925     $403,553    $14,230,649 
  checks                                                           
 Purchases                                                         
  greater                                                          
than       Simple                                               
  $2,500      random      Not         76       84,375     $435,249   $546,026,889 
                       applicable                                  

Source: GAO statistically determined samples for fiscal year 2002 testing.

To determine whether purchases were made for a reasonable cost and a valid
government need, we selected transactions on a nonstatistical basis to
allow us to identify transactions that appeared to have a higher risk of
fraud, waste, or abuse, although the results cannot be projected to the
overall population of purchases. To select these transactions, we first
performed data mining on fiscal year 2002 transactions to identify
purchases from certain vendors that would more likely be selling
unauthorized or personal use items; purchases made on the weekends,

during holidays, or at fiscal year-end; purchases from travel-related
vendors; and purchases of sensitive assets. This resulted in tens of
thousands of transactions identified, from which we then selected 982
transactions totaling $1.2 million to test whether these purchases were
made at excessive cost and/or for questionable government need, and
whether they complied with select purchasing regulations, policies, and
procedures.

While we identified some improper purchases, our work was not designed to
identify all fraudulent or otherwise improper purchases made by VA. We
conducted our review from April 2003 through April 2004 in accordance with
generally accepted government auditing standards.

  Critical Internal Controls Were Ineffective

VHA's internal controls were not designed to provide reasonable assurance
that improper purchase card and convenience check purchases would not
occur or would be detected in the normal course of business. We found that
VHA lacked adequate segregation of duties between purchasing and receiving
goods; that purchase card and convenience check transactions often did not
have key supporting documents; that timeliness standards for recording,
reconciling, and reviewing transactions were not met; and that cardholders
did not consistently take advantage of vendor-offered purchase discounts.
Generally, we found that internal controls were not operating as intended
because cardholders and approving officials were not following VA/VHA
operating guidance governing the program, and in the case of documentation
and vendor-offered discounts, lacked guidance. We also noted instances
where monitoring activities could be strengthened through prescribed
operating procedures to decrease the risk of improper purchases.

Effective internal controls are the first line of defense in safeguarding
assets and in preventing and detecting fraud. In addition, they help to
ensure that actions are taken to address risks, and are an integral part
of an entity's accountability for the stewardship of government resources.
Our Standards for Internal Control in the Federal Government requires that
(1) key duties and responsibilities be divided or segregated among
different people to reduce the risk of error or fraud, (2) all
transactions and other significant events be clearly documented and
readily available for examination, and other significant events be
authorized and executed only by persons acting within the scope of their
authority, (3) transactions should be promptly recorded to maintain their
relevance and value to management in controlling operations and decisions,
and (4) internal

control monitoring be performed to assess the quality of performance over
time and ensure that audit findings are promptly resolved. Similarly,
internal control activities help ensure that management's directives are
carried out. The control activities should be effective and efficient in
accomplishing the agency's control objectives. Control activities occur at
all levels and functions of the entity. They include a wide range of
diverse activities such as approvals, authorizations, verifications,
reconciliations, performance reviews, and the production of records and
documentation.

    Segregation of Purchasing Duties Was Inadequate

VHA lacked adequate segregation of duties regarding independent receiving
of goods and separation of responsibilities within the purchasing process.
Independent receiving-receiving of goods and services by someone other
than the cardholder- provides additional assurance that purchased items
are not acquired for personal use and that the purchased items come into
the possession of the government. Such separation of responsibilities
within the purchasing process reduces the risk of error or fraud. From our
purchase card internal control testing, we estimate that $75 million16 in
transactions did not have evidence that independent receiving of goods had
occurred. In addition, our data mining of the purchase card and
convenience check activity identified 15 A/OPCs who were also cardholders
that collectively made 9,411 purchases totaling $5.5 million during fiscal
year 2002. Because A/OPCs are responsible for monitoring cardholders' and
approving officials' activities for indications of fraud, waste, and
abuse, these A/OPCs were essentially monitoring their ownactivities.

VA's and VHA's purchase card guidance varied regarding segregation of
duties within the purchasing process. VHA's guidance does not require
independent receiving by someone other than the cardholder; however, it
does state that cardholders are responsible for ensuring that goods and
services ordered are received. In addition, VA's current guidance, dated
April 4, 2003, makes no mention of the receiving function regarding
cardholder purchases. The guidance only requires a clear separation of
duties for authorizing transactions, making purchases, and recording
transactions.

16 We are 95 percent confident that the total dollar value of purchase
card transactions that lacked independent receiving was between $37.4
million and $112.6 million.

Although there is no written agency-wide requirement for independent
receiving, agency officials informed us that the purchase card order
system includes an option that allows for independent receiving when a
cardholder creates a detailed purchase card order17 in the system.
Specifically, the cardholder can select an option that requires
independent receiving of goods at the applicable VHA facility warehouse.
Once goods are physically received and notated to that effect via an
electronic signature in the purchase card order system, the cardholder can
print the receiving report and maintain it in his or her files. Although
this option is available, we found that cardholders did not consistently
select the detailed process option when creating a purchase card order in
the system. One of the factors contributing to this inconsistency is the
ambiguity of the criteria that VA has instituted for determining when the
detailed process option should be selected for creating a purchase card
order. According to the purchase card order system's user guide, the
cardholder should use the detailed process option to keep track of
specific items in the inventory system. However, this user guide does not
identify the types of procured goods that should be inventoried, tracked,
and accounted for by this system.

To test the independent receiving function, we requested certain system
data print screens for each transaction included in the purchase card
internal control sample to determine whether the cardholder had created a
detailed purchase card order that would allow for independent receiving.
From the documentation provided, we determined that 142 of the 283 sample
transactions were detailed purchase card orders and thus, had
characteristics of independent receiving. Of the 142, we found 16
transactions totaling $70,475 where cardholders did not provide evidence
that independent receiving had occurred. Based on the results of our
review, we estimate that $75 million18 of the total sampled population of
purchase card transactions lacked evidence of independent receiving. We
believe documented independent receiving is a basic internal control
activity that provides additional assurance to the government that
purchased items come into the possession of the government.

17VA uses the term "detailed purchase card order" to identify orders where
cardholders need to track items for inventory purposes and/or enter
additional information about specific items on the order.

18See footnote 16.

Another weakness we identified regarding segregation of duties included
A/OPCs who are also cardholders. VHA's purchase card guidance explicitly
prohibits A/OPCs from being cardholders. When A/OPCs perform in this dual
capacity, they are essentially monitoring their own activities. During our
data mining of the purchase card and convenience check activity, we
identified 15 of 180 A/OPCs who were also cardholders and had collectively
made 9,411 purchases totaling $5.5 million during fiscal year 2002. When
we inquired about the dual responsibilities, we were told that certain VHA
facilities cannot adequately segregate purchasing duties because of the
small number of employees located at those sites and that management is
aware of the dual responsibilities. Although this segregation of duties
issue was prevalent during fiscal year 2002, our period of review, it has
been largely rectified, since all but one A/OPC account had been closed as
of the end of fieldwork. Regarding the open account, the national program
coordinator provided us a copy of a memorandum, dated December 1, 1997,
from the Chief of Acquisition and Material Management to the director of
that facility requesting approval to keep the A/OPC as a cardholder
because the office has no other staff to perform these cardholder
responsibilities. In the memorandum, the Chief also stated that the office
has a "double check audit" in place to ensure there are no problems with
any of the A/OPC's purchases.

    Purchases Lacked Key Documentation

We found instances where purchase card and convenience check transactions
lacked key supporting documentation such as internal written authorization
for convenience check disbursements and vendor invoices that independently
support the description and quantity of what was purchased and the price
paid. We also found that VHA's purchase card guidance does not address the
types of documentation that cardholders should maintain to support
purchases made. The guidance only addresses documentation requirements in
its audit guide, which is an appendix to the purchase card guidance that
provides instructions to internal reviewers when performing their
monitoring functions. Furthermore, we noted that VA's operating guidance
for convenience checks has no requirement that vendor documentation be
provided before checks are issued. The guidance only provides that
sufficient documentation, such as a VA-created purchase order, must be
evident before checks are issued.

The invoice is a key document in purchase card internal control
activities. Without an invoice, independent evidence of the description
and quantity of what was purchased and the price charged is not available.
In addition, the invoice is the basic document that should be forwarded to
the

approving official or supervisor so that he or she can perform an adequate
review of the cardholder's purchases.

In testing for evidence of an invoice, we accepted either a copy of the
invoice, sales receipt, packing slip, in cases where the item description
could be directly traced to the cardholder's detailed purchase card order,
and the purchase card order amount agreed to the charged amount, or other
store receipt. Of the 283 purchase card sample transactions, 74
transactions totaling $2.1 million lacked an invoice, credit card slip, or
other adequate vendor documentation to support the purchase. Based on
these results, we estimate that $312.8 million19 of the fiscal year 2002
purchase card transactions lacked key supporting documentation. For the
convenience check sample, we found 35 of 255 transactions totaling $43,669
lacked the same key documentation. Based on these results, we estimate
that $3.8 million20 of the fiscal year 2002 convenience check transactions
lacked key supporting documentation.

We also noted missing documentation in the other three statistical samples
(purchases over $2,500, purchase card split purchases, and convenience
checks exceeding established limits) and one nonstatistical sample. For
the three statistical samples, in instances where VHA did not provide
documentation to us to perform our test work, we reported these purchases
as exceptions for each attribute tested. Based on our audit work, we
estimate that $45.9 million21 of the fiscal year 2002 purchase card and
convenience check transactions had missing documentation. For the
nonstatistical sample, we reported all transactions with key missing
documentation as questionable transactions, as discussed later in this
report. In some instances, cardholders or others told us that the invoice
or other file documentation had been lost, sent to storage, destroyed
after a year, or not retained when the cardholder retired or separated
from VA. However, there were instances for which no explanation was
provided as to why cardholders could not submit supporting documentation
as of the end of our fieldwork. Without such documentation, we could not
verify

19We are 95 percent confident that the total dollar value of purchase card
transactions that lacked key supporting documentation was between $243.2
million and $382.4 million.

20We are 95 percent confident that the total dollar value of convenience
check transactions that lacked key supporting documentation was between
$2.4 million and $5.3 million.

21We are 95 percent confident that the total dollar value of purchase card
and convenience check transactions that had missing documentation was
between $30.8 million and $61 million.

what was purchased, whether it was for a legitimate government purpose, or
complied with acquisition requirements.

A valid invoice to show what was purchased and the price paid is a basic
document for the transactions, and a missing invoice could be an indicator
of potential fraud. Without an invoice, two key internal control
activities- independent receiving and approving official review-become
ineffective. Independent receiving cannot confirm that the purchased items
were received and the approving official cannot review a cardholder's
reconciled purchase with the supporting invoice. A near zero failure rate
is a reasonable goal considering that invoices are easily obtained or
replaced when inadvertently lost.

VA's operating guidance over convenience checks does not provide detailed
procedures regarding appropriate written documentation or authorization
that is required to be forwarded to the authorizing employee (agent
cashier) prior to the disbursement of funds to a third party. VA's
operating guidance only provides that the required documentation be the
same as that for paying with cash such as a purchase order. The guidance
makes no mention of independent vendor documentation and that this type of
documentation be required prior to issuing checks to vendors. In addition,
VA's guidance requires that the agent cashiers issuing convenience checks
retain copies of issued convenience checks for only one year. This
documentation requirement is inconsistent with the Federal Acquisition
Regulation and VHA's Records, Control Schedule 10-1, dated February 14,
2002, which requires that such records be retained for 6 years and 3
months after final payment for procurements exceeding the simplified
acquisition threshold and for 3 years after final payment for procurements
below the simplified acquisition threshold.22

22 48 C.F.R. S: 4.805. See also General Records Schedule 3, Transmittal
No. 8 (Dec. 1998).

In testing for evidence of written authorization, we accepted either a
copy of a purchase order, standard forms VA uses for certain types of
expenditures such as salary and travel, or signed internal memorandums. Of
the 255 convenience check transactions, 17 transactions totaling $8,890
lacked written authorization needed to issue the convenience check. Based
on these results, we estimate that $1.7 million23 of the fiscal year 2002
convenience check transactions lacked written authorization. In addition,
we noted that 19 of the 255 convenience check transactions lacked a copy
of the check or carbon copy. Based on these results, we estimate that $2.3
million24 of the fiscal year 2002 convenience check transactions lacked
this supporting documentation. Although VA only requires copies of
convenience checks to be retained for one-year, retaining the copies and
the supporting documentation for the longer retention period mandated by
the FAR and incorporated in VHA's Records, Control Schedule 10-1, would
facilitate subsequent internal and external reviews in assessing whether
or not transaction activity was proper and in compliance with acquisition
policies and procedures.

    Timeliness Standards Were Not Met for Recording, Reconciling and Reviewing
    Transactions

As part of the purchase card process, VHA has established several
timeliness standards that cardholders and approving officials must meet to
ensure prompt recording, reconciliation, and review of purchases.
Specifically, within 1 workday of making a purchase, cardholders are
required to input or record the purchase information in VA's purchase card
order system. Within 10 calendar days of electronically receiving the
transaction charge information from Citibank, the cardholder must
reconcile 75 percent of these Citibank charges to the purchase information
in the system. Within 17 calendar days, 95 percent of the Citibank charges
must be reconciled. As evidence of reconciliation, the purchase card order
system assigns the date the cardholder reconciled the purchase in the
system. For testing the timeliness of cardholder reconciliations, we used
the 17 calendar day criteria. In addition, VHA requires that within 14
calendar days of electronically receiving the cardholder's reconciled
purchases, that the approving official, through an electronic signature,

23We are 95 percent confident that the total dollar value of convenience
check transactions that lacked key supporting documentation was between
$.8 million and $2.7 million.

24We are 95 percent confident that the total dollar value of convenience
check transactions that lacked a copy of the check or carbon copy was
between $1.2 million and $3.4 million.

certify in the purchase card order system that all procurements are legal,
proper, and have been received.25

Table 2 summarizes the statistical results of VHA's timeliness standards
that cardholders and approving officials must meet to ensure prompt
recording, reconciliation, and review of purchases. Our work shows that
the internal controls were not operating as intended to ensure prompt
recording of transactions and events.

         Table 2: Summarization of VHA Timeliness Standards Exceptions

                                      Estimated Total 
VHA Timeliness                           Number of         Confidence 
                     Number of Sample                           Interval 
Tests of Purchase     Transactions    Transactions    at a 95 Percent 
Card Order System         in Error        in Error   Confidence Level 

                      Estimated Dollar Value of Amount in Error (in millions)

Confidence Interval at a 95 Percent Confidence Level (in millions)

        Purchase card                                          
     orders were entered                                       
        within 1 day       36 289,352 164,100 - 458,414 $152.5 $99.9 - $205.1 
         Cardholder                                            
    reconciliation within                                      
           17 days         53 351,256 216,683 - 522,909 $252.7       $184.4 - 
                                                                       $321.0 
     Approving official                                        
certification within 14                                     
                           44                           $212.4       $149.2 - 
            days              308,448 181,930 - 475,207                $275.7 

Source: GAO's estimate of the audit results for 283 sampled transactions
selected to test VHA timeliness standards for fiscal year 2002. The
population total of transactions from which this stratified random sample
was selected was 1,884,695.

The following examples illustrate the extent of untimely recording,
reconciliation, and review of the purchase card transactions.

o 	Untimely recording. A cardholder made a purchase on July 9, 2002 for
$994, but did not input information into the VA's purchase card order
system until August 29, 2002 or 51 days later. According to VHA policy,
the cardholder was required to input information about this purchase
within one workday of making a purchase. The purpose of this timeliness
standard is to ensure that VHA has proper control over the

25VA revised its timeliness standards in the agency-wide government
purchase card procedures issued April 4, 2003. Specifically, cardholders
are now required to reconcile all of their purchases within 5 working days
instead of 10 calendar days. VA has removed the incremental reconciliation
goals of 75 percent of the purchases within 10 calendar days and 95
percent within 17 calendar days. Also, VA converted the 14 calendar days
formerly allotted to approving officials for review and certification to
10 working days.

obligation and expenditure of its resources. By allowing this timeliness
standard to be circumvented, VHA has less control over its financial
resources.

o 	Untimely reconciliation. A cardholder made a purchase of $100 on August
24, 2002. Citibank electronically sent charge information to VHA for this
purchase on October 8, 2002. According to the VHA policy, the cardholder
should have reconciled this charge within 17 days, or by October 25, 2002,
of receiving the Citibank charge information to meet the 95 percent
reconciliation timeliness standard. However, the cardholder did not
reconcile this charge until September 8, 2003, or 335 days later after
receiving the Citibank charge information. The purpose of cardholder
reconciliation is to detect invalid transactions, including billing errors
and unauthorized purchases. If cardholders do not promptly reconcile their
purchase card charges, the risk increases that fraudulent, improper, and
wasteful purchase card expenditures could occur and go undetected.

Also, during our review of cardholder reconciliations, we found 17
instances of cardholders who had electronically notated that the
reconciliation had been completed, but the invoice amount and the charged
amount did not agree and there was no documentation to explain the
difference. VHA's purchase card guidance requires that cardholders match
Citibank payment charges to VA's purchase card order system within VHA's
prescribed tolerance level, currently $100 or 10 percent, whichever is
less.26 However, VHA's guidance only requires that cardholders provide a
written explanation when differences, at the prescribed tolerance level,
occur between the vendor invoice amount and Citibank payment charged
amount. Cardholders are not required to document any differences below the
prescribed tolerance level. We believe cardholder reconciliation is a key
control activity for detecting invalid transactions, including billings
and unauthorized purchases. Documenting any difference between the invoice
amount and payment charged amount provides additional assurances that
transactions are properly reconciled and charged amounts are correct. We
brought this issue to the attention of several VHA officials. VHA
officials agreed that

26VHA's operating guidance incorrectly reports the tolerance level at $100
or 100 percent, whichever is less. When we inquired about the tolerance
criteria, VHA officials stated that the tolerance level included in the
operating guidance was incorrect and that the correct tolerance level for
matching transactions is $100 or 10 percent. VHA officials stated that
they would revise the guidance to correct this error.

cardholders should explain any difference in the purchase card order
system and said they would proceed to have VHA's purchase card guidance
revised to clarify this cardholder responsibility.

o 	Approving Official Review. A cardholder reconciled his purchase card
transaction totaling $3,149 on December 21, 2002. According to the VHA
policy, the approving official should review the reconciled purchase and
certify within 14 calendar days that the purchase was legal, proper, and
has been received. We noted that for this transaction, there was no
evidence that the approving official reviewed this cardholder's
reconciliation until August 6, 2003 or 227 days later from the receipt of
cardholder reconciliation. The purpose of an independent approving
official review of reconciled cardholder purchase card transactions is to
ensure that key responsibilities in the purchase card program are
segregated and that no one individual has control over all aspects of a
purchase card transaction. If approving officials do not promptly review
cardholder purchase card transactions, VHA has no assurance that purchase
card activity did not involve fraudulent, improper, or wasteful
transactions.

It is critical that cardholders and approving officials promptly record,
reconcile, and review purchase card transactions so that erroneous charges
can be quickly disputed with the vendor and any fraudulent, improper, or
wasteful purchases can be quickly detected and acted upon.

    Vendor Discounts Not Consistently Taken

From our detailed tests of transactions, we found instances where
cardholders did not consistently take advantage of vendor-offered purchase
discounts. Specifically, we identified 69 invoices containing
vendor-offered discounts totaling $15,785 that were available to the
cardholder, but not taken at the time of purchase or subsequently credited
for the discount amount, as evident by the amount charged to the
cardholders' account. When purchases are made, vendors may offer purchase
discounts if buyers make early payments of their invoices. Typically, the
vendor specifies a period of time during which the discount is offered,
but expects the full invoice amount for payments made after that period.
When cardholders use the purchase card, payment to vendors, via Citibank,
generally occurs at the time of purchase. In turn, Citibank bills VA for
the purchases through a daily electronic file. VA makes daily payments to
Citibank to pay charges made from the previous day. Therefore, it is
critical that cardholders inquire of any vendor-offered discounts at the
time of purchase and make efforts to obtain a credit upon

receipt and review of the invoice. Our detailed testing indicated that VHA
did not always take advantage of vendor-offered discounts and that VHA
lacked purchase card guidance to ensure cardholders inquired of or
reviewed vendor payment terms to determine whether discounts were being
offered for the applicable goods and services rendered.

For example, one vendor offered VHA a discount of 2.9 percent, or $896,
for an invoice amount of $30,888, if paid within 15 days. Citibank, on
behalf of VA, made payment to the vendor within the 15-day timeframe, yet
the vendor charged the cardholder's account for the full invoice amount.
We found no evidence that the cardholder attempted to obtain a credit for
the available discount offered. In another example, we found that a
cardholder had taken advantage of the vendor-offered discount. The vendor
offered VHA a discount of 3 percent, or $180, for an invoice amount of
$6,000, if paid within 30 days. We noted that the vendor charged the
cardholder's account for the discount amount of $5,820.

A factor that may contribute to cardholder inconsistencies for taking
advantage of vendor discounts is the lack of established policies and
procedures that address this issue. Specifically, we found that VHA's
purchase card guidance did not include established procedures to ensure
cardholders take advantage of available vendor discounts prior to making
payments, or require that approving officials identify instances when
cardholders did not take advantage of vendor discounts in order to
determine the frequency of these occurrences. Without such guidance, VHA
will not be able to determine the extent of this type of occurrence and
actual dollars lost to the government.

    Program Monitoring Improvements Could Be Made

Our review found that VHA's monitoring requirements lacked procedures to
ensure that cardholder accounts were cancelled promptly when an employee
left service and that cardholder credit limits were based on actual
spending patterns. In addition, we found that VHA management has not
provided sufficient human capital resources at the A/OPC level, to enable
adequate monitoring of the purchase card program. Our Standards of
Internal Control state that internal control monitoring assess the quality
of performance over time and that ongoing monitoring should occur in the
course of normal operations. It includes regular management and
supervisory activities, comparisons, reconciliations, and other actions
people take in performing their duties.

VHA's purchase card guidance includes prescribed monitoring procedures
over its purchase card program to help ensure purchases are legal and
proper. For example, the purchase card guidance requires that on a monthly
basis, the Head of the Contracting Activity office at each VHA facility,
the A/OPC and billing officer, perform joint reviews to include various
aspects of the purchase process, such as proper accounting of purchases;
proper oversight to ensure purchases were for a legitimate government
need; and timely recording, reconciliation, and review of purchases.
Although VHA's guidance requires these reviews, we found no monitoring
procedures to identify active accounts of cardholders who had separated
from VA nor provisions for ongoing assessment of cardholders' credit
limits. We also noted insufficient human capital resources at the A/OPC
level, for executing the prescribed monitoring activities over its
purchase card program.

o 	Prompt cancellation of departing cardholder accounts. We identified 18
instances of purchase card accounts that remained active after the
cardholder separated from VA and all related outstanding purchase orders
had been reconciled. Specifically, we found that the cancellation of these
accounts varied from the date that the last purchase had been reconciled,
ranging from 1 day to 339 days. Of the 18 purchase card accounts that
remained active after the cardholder had left VA, we determined that 14
accounts remained active 6 or more days after the cardholders' outstanding
purchase orders had been reconciled, which we deemed too long.27 For
example, one cardholder separated from VA on April 3, 2002 with 5
outstanding purchase card orders that were made against the cardholder's
account prior to separation. The last purchase transaction was reconciled
on May 21, 2002, but the account was not canceled until April 25, 2003, or
339 days after reconciliation.

According to VHA's purchase card guidance, departed cardholders are
responsible for turning in their purchase card to the A/OPC in accordance
with facility procedures, and providing the approving official with
records of outstanding orders and unreconciled charges prior to leaving
service. The approving official is responsible for ensuring a designated
alternate approving official takes appropriate

27For the remaining four purchase card accounts, we determined that these
had been promptly canceled after all outstanding purchase orders were
reconciled. Specifically, two accounts were canceled within 1 day, one
account within 2 days, and the remaining account within 4 days of
reconciliation.

action necessary to complete the pending orders of departed cardholders
and notifies the A/OPC when the last purchase has been reconciled so that
the card account will be canceled promptly. However, VHA has no specific
procedures for determining the time period for prompt cancellation of card
accounts once all outstanding orders have been reconciled. As a result,
for analysis purposes, we determined that untimely cancellation of
cardholder accounts occurred when accounts were not canceled within 5 days
of the reconciliation date for the last purchase charged against that
account, as shown in table 3 below.

Table 3: Range of Days Departed Cardholder Accounts Remained Open

Range of Days Accounts Remained Open

        Number of Departed Cardholders' Accounts That Were Untimely Cancelled
                                                     Within the Range of Days

6-50 days

51-100 days

101-150 days

151-200 days

201-250 days

251-300 days

301-339 days

Source: GAO's analysis of VHA departed cardholder accounts that were
untimely cancelled in fiscal year 2002.

In addition to the above analysis, we also identified 3 card accounts from
two VHA facilities where the applicable A/OPC did not provide us the
necessary documentation as of the end of our audit fieldwork to determine
the time period when the departed cardholders' accounts had been canceled
once the transactions against their accounts had been reconciled.
Therefore, we were unable to determine if these departed cardholder
accounts had been promptly canceled once all outstanding purchase orders
had been reconciled. Requiring monitoring procedures to identify active
accounts of departed cardholders and ensure prompt closure once
outstanding purchase orders have been reconciled would assist in reducing
the risk of fraud, waste, and abuse that could occur when accounts remain
open beyond the necessary time frame.

o 	Reasonableness of cardholder credit limits. Our analysis of purchases
VHA cardholders made in fiscal year 2002 showed that, on average per

month, cardholders cumulatively purchased $112 million of goods and
services, but they had credit limits of $1.2 billion or 11 times their
actual spending. The difference between the cumulative credit limits of
$1.2 billion and actual spending of $112 million per month on average
represents a monthly financial exposure of $1.1 billion to VHA. For
example, we identified 5 cardholders with monthly credit limits of about
$10 million each, yet each cardholder's average purchases for one month
only totaled $111,310.

According to VHA's purchase card guidance, the approving official, in
conjunction with the A/OPC, billing officer, and head of contracting
activity, recommends cardholder single purchase and monthly credit limits.
However, we found no guidance on what factors to consider when
recommending the dollar amounts to be assigned to each cardholder, such as
existing and continuing needs of program operations and cardholders.
Further, we found no monitoring procedures that require the A/OPC or
approving official to determine, on an ongoing basis, whether or not
cardholder limits should be changed based on existing and expected future
use. Although 29 of the 111 A/OPCs who responded to a GAO data collection
instrument question regarding monitoring cardholder's single and monthly
credit limits, reported that such monitoring occurs and that cardholders'
limits were increased or decreased to reflect actual spending patterns, we
found no consistent application VHA-wide.

A determination of cardholders' spending limits requires an objective
effort by operational supervisors and management, with assistance from
purchase card program management, to evaluate the existing and continuing
needs of operations and cardholders. Periodic monitoring and analysis of
cardholders' actual monthly and average charges, in conjunction with
existing credit limits would aid VHA management in making reasonable
determinations of cardholder spending limits. Without adequate monitoring,
the financial exposure in VHA's purchase card program can become excessive
when its management does not exercise judgment in determining single
purchase and monthly credit limits. Limiting credit available to
cardholders is a key factor in managing the VHA purchase card program,
minimizing the government's financial exposure, and enhancing operational
efficiency.

o 	Inadequate human capital resources. VHA has not provided sufficient
human capital resources to enable monitoring of the purchase card program.
One key position for monitoring purchases and overseeing the program is
the A/OPC. While the A/OPC position is a specifically designated
responsibility, we found in many instances that the A/OPC also functioned
in another capacity and/or performed other assigned duties such as a
systems analyst, budget analyst, and contract specialist. Of the 90 A/OPCs
that responded to a GAO data collection instrument question regarding
other duties assigned, including a percentage breakdown of time spent on
the various duties,28 55 A/OPCs, or 61 percent, reported that they spend
50 percent or less of their time performing A/OPC duties. The bar graph
below provides further information on the allocation of resources directed
at monitoring the VHA purchase card programs at the local level.

Figure 1: Time Spent on A/OPC Duties

Number of A/OPC's

35

30

25

20

15

10

5

0 0 to 25 26 to 50 51 to 75 76 to 100

Percentage range of time

Source: GAO analysis of the A/OPC monitoring related to fiscal year 2002.

28 We actually received 111 responses to this question, and found that 97,
or 87 percent of the A/OPCs, function in another capacity and/or perform
other assigned duties. However, 21 of these responses did not include a
breakout of the percentage of time spent on each responsibility and
therefore, were excluded from this analysis for comparative purposes.

The bar graph above depicts the percentage of time that A/OPCs reported
they spend to carry out their duties related to the purchase card program.
Of the 90 A/OPCs who provided a percentage breakdown of performing their
assigned duties, we found that 31 A/OPCs spend up to 25 percent of their
time performing A/OPC assigned tasks, 24 A/OPCs spend between 26 and 50
percent, 11 A/OPCs spend between 51 and 75 percent, and the remaining 24
A/OPCs spend between 76 and 100 percent. For example, at the extreme low
end of the scale, one A/OPC responded that he was also the budget analyst
and that he spends 100 percent of his time on budget analyst duties,
leaving no time for A/OPC duties on an ongoing basis. In another example,
an A/OPC responded that she was also the director of the finance center
and that she spends 99.5 percent of her time on these director duties,
leaving less than 15 minutes per 40-hour week for A/OPC duties on an
ongoing basis. Given that VHA makes millions of purchase card and
convenience check transactions annually, which in fiscal year 2002,
exceeded $1.4 billion, it is essential that VHA management devote adequate
attention to monitoring its purchase card program to ensure that it is
properly managed to reduce the risk of fraud, waste, and abuse.

Although VHA has prescribed some monitoring procedures to ensure purchases
are made in compliance with laws, regulations, policies, and procedures,
these procedures do not adequately address other aspects of the program as
described previously, that, if not frequently monitored, could increase
the program's risk of fraud, waste, and abuse. In addition, these types of
monitoring activities become more critical when existing internal controls
are not operating as intended and result in improper, wasteful, and
questionable purchases as we identify in the remainder of this report.

  Noncompliance With Purchasing Requirements Resulted in Instances of Improper
  Purchases

The lack of adequate internal controls resulted in numerous purchases made
in violation of either applicable laws and regulations or VA/VHA purchase
card policies that we classified as improper purchases. Improper purchases
we found due to violations of applicable laws and regulations included (1)
purchases of items for personal use, such as food for internal meetings
and clothing, (2) purchases made from an improper source, (3) purchases
split into two or more transactions to circumvent single purchase limits,
(4) purchases, over the $2,500 micro-purchase threshold that exceeded the
cardholders' delegated purchasing authority, and (5) no evidence of
competition for purchases exceeding the $2,500 micropurchase threshold.
Improper purchases we found due to violations of VA/VHA policy included
(1) obtaining conference rooms and other items

without following applicable procurement procedures, (2) convenience check
payments that exceeded established limits, and (3) using convenience
checks to pay purchases even though the vendor accepted the government
purchase card.

While the total amount of improper purchases we identified is relatively
small compared to the over $1.4 billion in annual purchase card and
convenience check transactions, it demonstrates vulnerabilities from weak
controls that could easily be exploited to a greater extent.

The just-cited violations are discussed in more detail here.

o 	Purchases of items for personal use. From the nonstatistical sample, we
identified 17 purchases totaling $14,054 for clothing, food, and other
items in which cardholders purchased goods that were for personal use.
Items that are classified as personal expenses may not be purchased with
appropriated funds without specific statutory authority. The Federal
Acquisition Regulation emphasizes that the governmentwide commercial
purchase card may be used only for purchases that are otherwise authorized
by law or regulation.29 We identified 6 purchases of clothing totaling
$2,377 that were for personal use and not authorized by law. One
transaction was a purchase of 4 winter jackets totaling $286 for warehouse
employees exposed to inclement weather. Absent specific statutory
authority, cold weather clothing is an employee's personal responsibility
for which appropriated funds are not available.30 In another example, we
found a purchase of 18 pairs of Wrangler and Levi's jeans totaling $405
that VHA indicated were to be used as "employee uniforms" for the
engineering office. Under 5 U.S.C. S: 5901, appropriated funds are
available to furnish employees with either uniforms or a uniform
allowance. Because the statute does not define "uniform," the Comptroller
General has relied on the common meaning of the term "uniform" in
determining what wearing apparel may be purchased with appropriated
funds.31 Merriam-Webster's Tenth Collegiate Dictionary (2001) defines a
"uniform" as "dress of a

2948 C.F.R. S: 13.301 (a).

30B-289683, Purchase of Cold Weather Clothing, Rock Island District, U.S.
Army, Oct. 7, 2002; B-288828, Purchase of Insulated Coveralls, Vicksburg,
Mississippi, Oct. 3, 2002.

31B-251189, Agency for International Development - Purchase of Business
Suits for Agency Chauffeurs, Apr. 8, 1993.

distinctive design or fashion worn by members of a particular group and
serving as a means of identification" and broadly regarded as "distinctive
or characteristic clothing." Jeans would not qualify as a uniform under
that definition as jeans are common everyday attire and would not
distinguish or set a group apart.

We also found 11 transactions that included purchases of food totaling
$11,677 that were for personal use and not authorized by law. We
identified 5 transactions that included the purchase of food for
government meetings totaling $3,142 and 6 transactions where a significant
portion of the purchases were for food related to refreshments or meals
for training sessions or conferences in the medical center's immediate
geographic area totaling $11,309. For example, one transaction totaling
$575 included lunch and beverages purchased from the Pacific Athletic Club
in the amount of $277 in addition to a room rental fee. According to
documentation provided, this purchase was for seven VA employees to
discuss the Compensated Work Therapy program. In another example,
breakfast and lunch meals totaling $2,430 were purchased during a weeklong
training conference for new supervisors at a local inn. All attendees were
on staff at the nearby medical facility and the documentation provided
indicates that networking was scheduled to take place during breakfast and
lunch. This and other purchases of refreshments identified during our
testing were improper to the extent that employees were not in a travel
status or the agency did not justify providing meals to employees.32

o 	Improper Source. We identified 8 purchases totaling $7,510 in the
nonstatistical sample that were subject to procurement from a mandatory
source of supply but were obtained from other sources. Various federal
laws and regulations such as the Javits-Wagner-O'Day Act (JWOD) require
government cardholders to acquire certain products from designated
sources. The JWOD program is a mandatory source of supply for all federal
entities. It generates job and training for Americans who are blind or
have severe disabilities by requiring that

32 We recognize that VA may have been relying in part on a provision of
the Federal Travel Regulation in effect at the time of VA's purchases that
allowed for the purchase of light refreshments at conferences where more
than 50 percent of attendees were in travel status. However, as discussed
in B-288266, this provision was not authorized. Matter of: Use of
Appropriated Funds to Purchase Light Refreshments at Conferences, B-288266
(Jan. 27, 2003).

federal agencies purchase supplies and services furnished by nonprofit
agencies, such as the National Industries for the Blind and the National
Institute for the Severely Handicapped. Most JWOD program supplies are
small value items such as office supplies, cleaning products, or
medical/surgical supplies that nearly always fall into the micro-purchase
category.

Based on our nonstatistical testing, we noted that cardholders did not
consistently purchase items from JWOD when they should have. For example,
a cardholder purchased planner starter kits and refills for employees
totaling $1,591 from Franklin Covey, a high-end office supply store. These
items provide essentially the same features as the JWOD items, and would
have cost $1,126, or $465 less, if they had been procured through JWOD or
a JWOD supplier. During our data mining, we noted that VHA made 652
purchases totaling $76,350 from Franklin Covey during 2002. While we did
not review all of these individual purchases, based on our detailed
testing of similar transactions, it is likely that many of them should
have been procured from a mandatory source at a much lower cost.

o 	Split purchases. Using data mining techniques, we identified card
purchases that appeared to have been split into two or more transactions
by cardholders to circumvent their single purchase limit.33 We requested
documentation for a statistically determined sample of 280 potential split
transactions totaling $4 million. Of these 280 transactions, we determined
that 49 transactions were actual splits. Based on these results, we
estimate that $17.1 million34 of the total fiscal year 2002 purchase card
transactions were split transactions. For example, a cardholder with a
single purchase limit of $2,500 purchased accommodations at 110 hotel
rooms totaling $4,950. When performing follow-up, the cardholder stated
that VA provides lodging accommodations for veterans receiving medical
services such as radiation therapy, chemotherapy, and day surgery who live
at least 150

33Using data mining, we identified instances where one cardholder made
multiple purchases from the same vendor on the same day that, in total,
exceeded the cardholder's established single purchase limit. We then
followed up with the A/OPCs and cardholders and, based on the
documentation and responses provided, determined whether split purchases
had been made.

34We are 95 percent confident that the total dollar value for actual split
purchase card transactions was between $12.4 million and $21.9 million.

miles from the medical facility. The cardholder created two separate
purchase orders and had the vendor create two separate charges, one for
$2,500 and the other for $2,450, so that the purchase could be made. On
the documentation provided, the cardholder stated the "purchase was split
per the direction of the previous purchase card program administrator."
The cardholder also stated that currently, her purchase card at that
facility is no longer used to pay hotel lodging for veterans. Hotel
payments are now disbursed electronically via VA's Financial Service
Center. The purpose of the single purchase limit is to require that
purchases above established limits be subject to additional controls to
ensure that they are properly reviewed and approved before the agency
obligates funds. By allowing these limits to be circumvented, VA had less
control over the obligation and expenditure of its resources.

o 	Noncompliance with simplified acquisition procedures. The Federal
Acquisition Regulation provides that the purchase card may be used by
contracting officers or individuals who have been delegated micropurchase
authority in accordance with agency procedures.35 Purchases above the
micro-purchase threshold using the purchase card are permissible only by
warranted contracting officers who must promote competition to the maximum
extent practicable when making such purchases.36 Contracting officers must
consider solicitation of quotations from at least three sources,37 and
they must minimally document the use of competition or provide a written
justification for the use of other than competitive procedures.38 When
cardholders circumvent these laws and regulations, VHA has no assurance
that purchases comply with certain simplified acquisition procedures and
that cardholders are making contractual commitments on behalf of VHA
within the limits of their delegated purchasing authority.

35 48 C.F.R. S: 13.301 (a).

36The FAR uses the term "contracting officer" to mean a person with the
authority to enter into, administer, and/or terminate contracts and make
related determinations and findings, 48 C.F.R. S: 2.101. The term
"warrant" is commonly used to refer to the SF 1402, Certificate of
Appointment, which is the written document appointing an individual to be
a contracting officer and stating any limitations on the scope of
authority to be exercised, other than limitations already contained in
applicable laws or regulations, 48 C.F.R. S: 1.603-3(a).

3748 C.F.R. S: 13.104

3848 C.F.R. S: 13.106-3(b).

From the statistical sample of purchases over $2,500, we found that for 19
of the 76 transactions, cardholders lacked warrant authority needed to
make these types of purchases. Based on these results, we estimate that
cardholders with only micro-purchase authority, made $111.9 million39 of
the total fiscal year 2002 purchases that exceeded $2,500. In addition, we
found that 12 of the 76 transactions lacked evidence of competition. Based
on these results, we estimate that $60 million40 of the total fiscal year
2002 purchases totaling more than $2,500 lacked evidence of competition.

For example, one cardholder made a purchase of 2,000 washcloths totaling
$3,100, but could provide no evidence that competition was used. According
to the cardholder, at the time of purchase, he was under the impression
that VA had a contract with the vendor to procure the goods and therefore,
did not seek competition. We also found one cardholder who purchased flu
vaccine syringes for a VA pharmacy totaling $19,943, but was not a
warranted contracting officer. In addition, we found instances where
cardholders were warranted contracting officers, but not at the time of
purchase for specific transactions we selected. Specifically, we found
seven cardholders who made purchases over the micro-purchase threshold,
with a combined total of $27,473, where the warrants provided were dated
after the purchase of goods. These cardholders could not provide
documentation to show that they were warranted contracting officers at the
time these purchases were made.

39We are 95 percent confident that the total dollar value for purchases
over $2,500 made by a non-warranted cardholder was between $52.8 million
and $170.9 million.

40We are 95 percent confident that the total dollar value for purchases
over $2,500 that lacked evidence of competition was between $26.3 million
and $93.7 million.

o 	Incorrect procurement procedures used to obtain conference room rentals
and other items. We identified 23 purchase card transactions totaling
$112,924 in the nonstatistical sample related to the rental of conference
room facilities used for internal VA meetings, conferences, and training.
For these purchases, the cardholders could not provide documentation to
show that efforts had been made to secure free conference space. VA's
acquisition regulations state that rental conference space will be
obtained (paid for) only in the event that free space is not available and
that complete documentation of efforts to secure free conference space
will be maintained in the purchase order file.41 For one purchase, VHA
paid $31,610 for conference room facilities and related services for 3
days at the Flamingo Hilton Hotel in Las Vegas. The cardholder provided no
evidence that attempts to secure free facilities had been made. In
addition, of the 23 purchase card transactions cited, 12 purchases
totaling $103,662 occurred at one VHA facility. This included one
transaction totaling $12,000 for a 3-day Training Course on Prevention and
Management of Disruptive Behavior at the MGM Grand Hotel in Las Vegas.
Again, we were not provided evidence that efforts had been made to secure
free conference space.

Two additional transactions totaling $755 were for different types of
purchases where VA's acquisition regulation was not followed. One purchase
was a recruitment advertisement totaling $690. VA requires that approval
be obtained prior to making this type of purchase and that evidence of
this approval be maintained in the file. We found no evidence that
approval had been obtained prior to making the purchase. For the second
transaction, the cardholder paid annual membership dues associated with an
international honor society of nursing in an employee's name totaling $65.
VA used its general post funds to pay this charge despite the fact that VA
policy prohibits the use of general post funds for membership fees.
Additionally, as appropriated funds are not available to pay employees'
membership fees in societies or associations,42 VA policy requires that
membership in organizations be in the agency's name, not the employee's
name.

41 The Department of Veterans Affairs Acquisition Regulation, Part 870,
subpart 113 (VAAR 870.113).

425 U.S.C. S: 5946.

o 	Improper use of the convenience checks. We identified improper use of
convenience checks related to purchases that exceeded VA's established
limits of $2,500 and $10,000 and payments to vendors who accept the
purchase card payments. VA's convenience check guidance requires that a
single draft transaction be limited to $2,500 or in some cases $10,000
unless a waiver has been obtained from Department of the Treasury, and
restricts convenience check use to instances where vendors do not accept
purchase cards. From our statistical testing of convenience check limits,
we found that 91 of 105 convenience check purchases were paid using
multiple checks because the total purchase amount exceeded the established
convenience check limit. Based on these results, we estimate that $13.8
million43 of the total fiscal year 2002 convenience check transactions
were improperly used to pay purchases exceeding the established limits.

For example, we found 29 different purchases for metered postage from the
United States Postal Service (USPS) where the purchase amount exceeded the
convenience check limit. One purchase for postage totaled $50,000, but the
single transaction limit on convenience checks for that facility is
$2,500. In order to make payment, the agent cashier issued 20 different
checks at $2,500 each. Regarding an explanation of the purchase, the agent
cashier stated that separate checks were written because the convenience
checks cannot be written over $2,500. The agent cashier also stated that
since this purchase, the VHA facility has implemented new procedures that
allow for electronic funds transfers (EFT) to USPS. During our review, we
also found another VHA facility that is currently using EFTs as an
alternate payment mechanism to USPS. Based on the explanations obtained
for the various improper check purchases we identified, it appears to be
routine practice for agent cashiers to issue numerous checks when the
purchase amount exceeds the established check limit of $2,500 or $10,000.
For example, at one VHA facility, the agent cashier provided a written
explanation that it is their policy to issue numerous checks instead of
increasing the check limit.

43We are 95 percent confident that the total dollar value for actual split
convenience check transactions was between $13.6 million and $14.0
million.

We also found instances where convenience checks were used to pay vendors
who accept the purchase card as payments. VA's disbursement mechanism
guidance provides that third party drafts (convenience checks) should be
used in lieu of cash but only when the government purchase card cannot be
used. From a statistical sample of 255 convenience checks transactions, we
found 23 instances where vendors accepted the purchase card as payment,
yet convenience checks were issued instead to make payments. In these
instances, we were provided no documentation as to why the convenience
check was used in lieu of the purchase card. Based on these results, we
estimate that $2.6 million44 of the total fiscal year 2002 convenience
check payments made to vendors in lieu of the purchase card lacked this
type of documentation. For example, an agent cashier made a convenience
check payment of $8,327.32 to a party rental vendor for the purchase of
various stage equipment, chairs and tents used for an outside cemetery
dedication. We contacted the vendor and found that it accepts credit cards
as a form of payment. The agent cashier provided no documentation showing
why the convenience check was used in lieu of the purchase card.

In April 2003, VA issued new purchase card guidance that attempted to
clarify the use of convenience checks. Specifically, this guidance
provides that for micro-purchases, convenience checks may be used in lieu
of the purchase card only when it is advantageous to the government and it
has been documented as the most cost-effective and practical procurement
and disbursement method. However, we found no established criteria for
determining the "most cost-effective and practical procurement and
disbursement method."

  Poor ControlsResulted in Some Wasteful and Questionable Purchases

The inadequacies and ineffectiveness of internal controls were also
evident in the number of transactions identified that we classified as
wasteful- that is, excessive in cost compared to other available
alternatives or for questionable government need. We also identified other
transactions that we classified as questionable because there was
insufficient or no documentation to determine what was purchased.
Specifically, of the 982 nonstatistical sample transactions we reviewed,
250 transactions totaling $209,496 lacked key purchase documentation. As a
result, we could not

44We are 95 percent confident that the total dollar value for convenience
check transactions that were incorrectly used was between $1.4 million and
$3.7 million.

determine what was actually purchased, how many items were purchased, the
cost of each of the items purchased, and, whether there was a legitimate
government need for such items.

Table 4 summarizes the number of transactions and dollar amounts that we
determined to be wasteful or questionable. While not significant to the
overall purchase card program, these transactions are indicative of what
can occur when the use of the cards is not properly controlled. Because we
tested only a small portion of the transactions that appeared to have a
higher risk of fraud, waste, or abuse, there may be other improper,
wasteful, and questionable purchases in the remaining untested
transactions.

Table 4: Transactions Identified as Wasteful or Questionable

Number of Dollar amount of Transaction category transactions transactions

          Wasteful transactions 20 $56,655 Questionable transactions:

                                        Missing invoicea   250       $209,496 
                     Inadequate/incomplete documentation   65         $37,100 
                         Total Questionable Transactions   315       $246,596 
            Total Wasteful and Questionable Transactions   335       $303,251 

Source: GAO's analysis of nonstatistical transactions selected for fiscal
year 2002.

a The missing invoice category includes (1) 184 transactions totaling
$155,429 where VHA provided internal documentation, but no independent
vendor documentation to support the purchase, and (2) 66 transactions
totaling $54,068 where VHA provided no documentation at all regarding the
purchases.

Wasteful Purchases 	We identified 20 purchases totaling $56,655 that we
determined to be wasteful because they were excessive in cost relative to
available alternatives or were of questionable government need. The
limited number of wasteful purchases found in the nonstatistical sample
demonstrates that cardholders are generally prudent in determining that
prices of goods and services are reasonable prior to making credit card
purchases. For items labeled as wasteful, we considered them excessive in
cost when compared to available alternatives that would meet the same
basic needs or questionable as government expenditures because they
appeared to be items that were a matter of personal preference or
convenience, were not reasonably required as part of the usual and
necessary equipment for the

work the employees were engaged in, or did not appear to be for the
principal benefit of the government. Specifically, we identified 18
purchases totaling $55,156 for which we questioned the government need and
2 purchases totaling $1,499 that we considered excessive in cost. A
majority of the purchases were related to office-wide and organizational
awards.

We noted several purchases for items to be presented as awards. Many of
these types of purchases were for gift certificate and gift card awards.
Although VA policy gives managers great latitude in determining the nature
and extent of awards, we identified 10 purchases totaling $51,117 for
award gifts for which VHA was unable to provide information on the
recipients of the award or the purposes for which the recipients were
being recognized. Therefore, we categorized these purchases as
questionable government need. For example, we identified two transactions
for 3,348 movie gift certificates totaling over $30,000. For these
purchases, the cardholders and A/OPCs could not provide the award letters
or justification for the awards. Consequently, it could provide no
evidence that these purchases were truly used for awards. We also
identified one purchase for an award event totaling $2,500 for which the
cardholder was unable to provide a justification for the ceremony or
detail what awards were presented. Also, based on VHA purchase order
documentation provided, we noted one additional purchase of items to be
used as awards totaling $250 for which no vendor documentation was
provided to support the purchase. Therefore, we classified and reported
this transaction under our missing invoice category.

We also identified two purchases that we considered wasteful because of
excessive cost. We identified a cardholder who purchased a $999 digital
camera when there were other less costly digital cameras widely available.
For example, during the same six-month period from February 2002 through
July 2002, two other cardholders purchased digital cameras for $526 and
$550. No documentation was available to show why that particular model
camera was necessary. In the second example, we identified a purchase for
a 20-minute magic show totaling $500 that was performed during a VA
volunteer luncheon. Although VA policies allow for funds for volunteer
events, this expenditure as roughly $25 per minute, seemed excessive.

Questionable Purchases 	As discussed earlier in this report, we identified
numerous transactions from the statistical samples that were missing
adequate supporting

documentation to identify what was actually purchased, how many items were
purchased, and the cost of the items purchased. In these instances, we
reported those sample transactions as exceptions for each attribute we
tested. In addition, we requested supporting documentation for a
nonstatistical sample of 982 transactions totaling $1.2 million. Of these,
we identified 315 transactions totaling $246,596 that appeared to be
improper or wasteful, but for which VHA either provided insufficient or no
documentation to support the propriety of the transactions.

We classified 250 of these 315 transactions, totaling $209,496, as missing
invoices because the cardholders provided either VHA internal
documentation, but no vendor documentation to support the purchase, or
provided no documentation at all to support the purchase. VHA internal
documentation includes purchase orders, reconciliation documents, and
receiving reports. Vendor documentation includes invoices, sales receipts,
and packing slips. Specifically, internal documentation was available for
184 of these transactions totaling $155,429 but no vendor documentation
was available. No documentation was available at all for the remaining 66
transactions totaling $54,068.

An example of a transaction with internal documentation, but no vendor
documentation included a purchase from Circuit City where the cardholder
stated that the purchase was for three $650 television sets and three $100
television stands, totaling $2,300 (including $50 shipping), that were
needed to replace the existing ones in the VA facility's waiting area. In
another transaction, no vendor documentation was available for a
transaction from Black & Gold Beer where the cardholder stated that the
purchase of beer was for a patient. The purchase order shows that three
cases were purchased at $12.50 each, totaling $38. The cardholder stated
that the purchase was at the request of the pharmacy for a specific
patient; however, no documentation was provided to support this claim.
Table 5 illustrates some transactions in the nonstatistical sample for
which cardholders provided no documentation to support what was purchased.

Table 5: Examples of Purchases Where No Documentation Was Provided

                       Vendor Name Transaction Amount ($)

                               Radio Shack 3,305

                          Wyndham Hotels Resort 2,953

                            The Sharper Image 2,127

The Brass Elephant
(a restaurant, fine dining) 2,081

                        Gibby's Steak and Seafood 1,758

                            Baltimore Orioles 1,705

                            FFP Palm Computing 1,478

                           Daddy's Junky Music 1,041

                                Eddie Bauer 900

                                  Gap Kids 788

                        Hollywood Beach Country Club 500

                             Southwest Airlines 399

                               Harbor Cruises 357

                                  Hecht's 280

                                 L.L. Bean 239

                              Christmas Palace 209

                                 Macys.com 163

Source: GAO's analysis of nonstatistical transactions selected for fiscal
year 2002.

Based on these examples and other transactions identified in the
nonstatistical sample, we believe that at least some of these items may
have been determined to be potentially fraudulent, improper, or wasteful
had the documentation been provided or available. In addition, we noted
that of the 66 transactions where VHA cardholders provided no
documentation to support the purchase, 32 transactions (48 percent)
represented 2 or more transactions to the same cardholder. For example,
one cardholder did not provide documentation for 5 transactions totaling
$5,799 from various types of merchants, including two restaurants, a movie
theater, a country club, and an airport cafe.

For 65 transactions totaling $37,100 that appeared to be either improper
or wasteful, the documentation we received was not the correct supporting
documentation or was inadequate, and we were unable to determine the
propriety of the transactions. For example, one transaction was for $1,350
to Hollywood Entertainment; however, the purchase order and invoice listed
Hear, Inc. as the vendor for closed captioning services. The

cardholder stated that she believed Hollywood Entertainment is an
associate company name for Hear, Inc.; however, they could not provide any
documentation to support this statement. Additionally, from our Internet
searches of both Hollywood Entertainment and Hear, Inc. we found no
information to indicate that these two companies were associated in any
way.

In another example, the transaction was for $1,400 to Fabulous Pewterware,
a company that sells handcrafted items made of pewter; however, the
purchase order and invoice listed Ball Med & Associates Inc., a company
that provides medical services, as the vendor and described the purchase
as repairs. The A/OPC stated that Fabulous Pewterware is synonymous with
Ball Med & Associates Inc.; however, he could not provide documentation
supporting this claim. From our Internet search of Fabulous Pewterware, we
found no information to indicate that these two companies were one and the
same.

We also identified 68 transactions totaling $31,772 involving the purchase
of tickets for sporting events, plays, movies, amusement/theme parks, and
other recreation activities for veterans and VA volunteers. The
documentation provided for these transactions was inadequate or missing a
vendor invoice; therefore, we could not determine whether these tickets
were used in support of the volunteers or veterans. 45 As a result, these
purchases were also categorized as questionable. Various programs under
VHA, such as Recreation Therapy, Voluntary Services, and Blind
Rehabilitation Service, sponsor assorted activities for the benefit of
veterans and for VA volunteers. From our review of these types of
purchases, we found that VHA does not have procedures in place to ensure
that the purchased items were used by the intended recipients and are
properly accounted for. In most cases, there was inadequate or no
documentation to account for how the tickets were distributed and who
participated in the events.

For example, we found one purchase of 62 theme park tickets to Six Flags
totaling $997 for veterans. Upon request, we received a list of veterans
to whom tickets were distributed and we noted that the list only accounted

45Of the 68 transactions, 52, totaling $24,442, did not have adequate
documentation and therefore, are included in the inadequate/incomplete
documentation category. The remaining 16 transactions, totaling $6,600
were missing vendor documentation and therefore, are included in the
missing invoice category.

for 28 tickets. When we contacted the cardholder to obtain clarification
for the discrepancy, we were told that the difference was due to veterans
receiving additional tickets for their family members; however, there was
no evidence to support this claim. As a result, we were unable to
determine whether the remaining 34 tickets were provided to veterans for
the intended purpose. In another example, we found a purchase of 46
tickets totaling $812 for veterans to attend a Pittsburgh Pirates baseball
game. However, we were provided no documentation that identified who
received the tickets or who attended the baseball game. Proper
accountability over the distribution and receipt of tickets for such
events is needed to help ensure that tickets are not improperly used for
personal use.

Conclusions	Overall, VHA's internal controls were not designed to ensure
improper purchases would be detected or prevented in the normal course of
business. While VHA has some internal controls, they are often not
operating as intended because cardholders and approving officials are not
adhering to internal control requirements guidance, resulting in
violations of federal acquisition regulations as well as VA/VHA's own
policies. In other instances, internal controls are lacking, as in the
case of documentation requirements, in which there is not adequate
guidance. The lack of compliance with established internal control
requirements coupled with a lack of internal control guidance in some
areas such as documentation, resulted in improper, wasteful, and
questionable purchases. Although the total amount of these purchases is
small in comparison with the size of the purchase card and convenience
check program, it reveals a vulnerability from weak controls that could be
exploited. Until controls are strengthened and guidance is expanded and
clarified, VHA will continue to be at risk of improper payments through
purchase card and convenience check transactions.

Recommendations for 	We are making the following 36 recommendations to the
Acting Under Secretary for Health and, in some instances, the Secretary of
Veterans

Executive Action	Affairs to strengthen internal controls and compliance in
its purchase card program in order to reduce VHA's vulnerability to
improper, wasteful, and questionable purchases.

Internal Controls	With regard to improving internal controls over
purchasing, we recommend that the Acting Under Secretary for Health do the
following.

Segregation of duties:

o 	Establish appropriate criteria, including types of items and dollar
thresholds for requiring and documenting independent receiving and
acceptance of items obtained with a purchase card.

o 	Establish specific procedures for documenting independent receiving,
such as requiring the cardholder to maintain a signed copy of the
receiving report showing the purchase was received in the warehouse, or
requiring the approving official or supervisor to sign and date the vendor
invoice, packing slip, sales or credit card receipt to verify that the
items purchased were actually received.

o 	Require that VHA senior management at the VA headquarters in
Washington, D.C. document its approval that the one VHA
Agency/Organization Program Coordinator (A/OPC) can continue to function
as a cardholder since this is inconsistent with VA/VHA policy.

o 	Establish procedures that require an independent person to periodically
review this A/OPCs' purchasing activities.

Documentation:

o 	Establish guidance dictating vendor documentation needed to support the
purchase transactions (in description, quantity, and price) that provides
the basis for reconciling electronically received charges from Citibank.

o 	Require cardholders to maintain documentation of timely and independent
receiving and acceptance of items obtained with a purchase card.

o 	Incorporate into VHA's existing purchase card guidance, file retention
requirements as mandated by FAR Subpart 4.805 Storage, Handling, and
Disposal of Contract Files.

o 	Identify cardholders who repeatedly fall outside the required
timeframes for recording purchase card order information into the VA's

purchase card order system and for performing reconciliations of
purchases.

o 	Identify approving officials who continually fail to meet the required
timeframes for reviewing and certifying that cardholder purchases are
legal and proper.

o 	Provide adequate retraining for these cardholders and approving
officials and consider whether to suspend their responsibilities if the
established timeframes continue not to be met.

Vendor Discounts:

o 	Establish procedures that require cardholders, at the time of purchase,
to determine whether vendors offer purchase discounts when early payments
are made for goods and services rendered.

o  Establish procedures requiring internal management review auditors to

o  identify loss of vendor-offered discounts,

o 	determine frequency of occurrences and actual dollars lost to the
government, and

o 	periodically report to VHA management for consolidation and further
review so that appropriate actions can be taken.

Program Monitoring:

o 	Establish timeframes for the prompt cancellation of purchase card
accounts when the cardholder has left the agency and all outstanding
purchase orders have been reconciled.

o 	Establish procedures to ensure prompt cancellation of purchase cards
when cardholders leave VA, are reassigned, or no longer have valid needs
for the cards.

o 	Establish procedures to periodically assess whether each cardholder
continues to have a valid need for a purchase card.

o 	Review existing credit limits and monthly spending and develop policies
and strategies on credit limits provided to cardholders with a focus on

minimizing specific cardholder spending authority and minimizing the
federal government's financial exposure.

o 	Assess the adequacy of human capital resources devoted to the purchase
card program, especially for oversight activities, at the A/OPC level, and
provide needed resources.

    Compliance with Purchasing Requirements

With regard to improving and enforcing compliance with purchasing
requirements, we recommend that VHA develop written detailed procedures
and guidelines to aid cardholders in complying with the Federal
Acquisition Regulation, Veterans Affairs Acquisition Regulations and other
internal policies and procedures when using the purchase cards and
convenience checks as procurement and payment mechanisms for goods and
services rendered. Such procedures could be either incorporated in VHA's
existing guidance over the purchase card program or presented separately.
Specifically, we recommend that the Acting Under Secretary for Health do
the following.

o 	Establish steps to be followed when circumstances permit the purchase
of generally prohibited items such as clothing, food, and gifts.

o 	Establish steps to be followed when the purchase amount will exceed the
$2,500 micro-purchase limit or the cardholders' single purchase limit to
prevent splitting the purchase.

o 	Establish steps to be followed if the cardholders, with only
micropurchase authority, need to make a purchase over the $2,500
micropurchase threshold.

o 	Establish steps to be followed when cardholders request to make
purchases of office supplies and other goods from other than a mandatory
source supplier for items that are "essentially the same."

o 	Establish steps on how to document the use of competition and
circumstances under which it can be justified not to use competitive
procedures.

o 	Establish steps on how to document efforts to secure free conference
space before purchasing rental of conference room facilities.

o 	Reiterate in VHA's refresher training to cardholders and approving
officials areas discussed in this report, such as segregation of duties,
documentation requirements and retention of supporting documentation,
taking advantage of available vendor-offered discounts, canceling of
departed cardholders' accounts, applicable laws and regulations, and
agency policies and procedures.

o 	Provide refresher training to agent cashiers on the areas discussed in
this report, such as purchases that exceeded established check limits and
payments to vendors who accept the purchase card as a form of payment.

o 	Consider whether to revoke or suspend purchasing authority of
cardholders who are found to be frequently or flagrantly noncompliant with
policies and procedures, such as cardholders making split purchases,
procuring goods and services beyond their purchasing authority, or making
purchases exceeding established dollar thresholds.

    Wasteful and Questionable Purchases

With regard to purchases that may be at an excessive cost or for
questionable government need, we recommend that the Acting Under Secretary
for Health do the following.

o 	Require that cardholders or others track and document award purchases
to the end user, including who received the award and the purposes for
which the recipient is being recognized. Copies should also be maintained
in the purchase card order file.

o 	Require that cardholders or others track and document ticket purchases
for recreational activities to the end user, including who received the
ticket, date received, and signature by the recipient as evidence of
receipt. Copies should also be maintained in the purchase card order file.

o 	 Follow up on transactions we identified for which no supporting
documentation was provided to determine whether the items purchased were
for a legitimate government need.

o 	Take appropriate disciplinary or corrective action for purchases
determined to be not for a legitimate government need.

Convenience Checks	Policies and procedures over convenience checks are
established at the department level only. Therefore, we are making four
recommendations to the Secretary of Veterans Affairs to strengthen and
improve controls over convenience check usage in its purchase card
program. Specifically, to improve internal controls over convenience check
purchasing, we recommend that the Secretary of the Veterans Affairs, in
conjunction with the Acting Under Secretary for Health, do the following.

o 	Require agent cashiers to maintain written documentation that
authorizes the disbursement of funds to third parties.

o 	Establish detailed procedures that specify the types of documentation
that agent cashiers must obtain from the requesting office that support
the disbursement of funds to third parties via convenience checks.

o 	Establish detailed criteria in VA's purchase card guidance for
determining under what situations convenience checks provide the "most
cost-effective and practical procurement and disbursement method" when
using in lieu of the purchase card. Incorporate this criteria in VA's
convenience check guidance as well.

o 	Incorporate into VA's existing convenience check guidance, file
retention requirements as mandated by FAR Subpart 4.805 Storage, Handling,
and Disposal of Contract Files.

  Agency Comments and Our Evaluation

The Department of Veterans Affairs (VA) provided written comments on a
draft of this report. In its response, VA generally agreed with our
conclusions and expressly concurred with 32 of the 36 recommendations. For
these recommendations, VA reported that it has actions either already in
place or planned that meet the intent of the recommendations. For the
remaining four recommendations, VA, in principle, concurred with three of
these recommendations and presented reasons and/or alternative action
steps to address the weaknesses identified in our report.

Regarding these four recommendations, two recommendations addressed
segregation of duties weaknesses related to an A/OPC that also functioned
as a cardholder. We recommended that VHA senior management in Washington,
D.C. approve this dual responsibility since this is inconsistent with
VA/VHA policy and that procedures be established to require an independent
person to periodically review this A/OPC's purchasing

activities. In essence, VA agreed that the dual responsibility of the
A/OPC constituted a violation of department policy and stated that VHA
headquarters never granted approval for the A/OPC to function in this dual
capacity and would not do so. VA also reported that it has instructed the
director of the facility in question that the dual responsibilities of the
A/OPC is a violation of department policy and may not continue. We believe
that VA's planned action is an acceptable approach to solving the problem
we identified, and if implemented will address the intent of our
recommendations and resolve this segregation of duties issue and policy
violation.

We also recommended that VHA establish steps to be followed if
cardholders, with only micro-purchase authority, need to make a purchase
over the $2,500 micro-purchase threshold. VA responded that purchases
greater than $2,500 should require a warrant and that any exception could
complicate and thereby weaken existing policy. We agree that cardholders
must have the applicable purchasing authority to make purchases over the
$2,500 micro-purchase threshold and did not intend for VHA to establish
procedures that were contrary to this FAR purchasing requirement. We
believe VA has misinterpreted the intent of our recommendation. Our intent
was to address the need for additional written purchase card guidance for
cardholders who need to procure specific goods and services, yet the
purchase amount exceeds their micro-purchase threshold. Such guidance
could include instructing cardholders to contact their local procurement
office so that a contracting officer can make the purchase instead. We
believe additional written guidance to cardholders is needed as evidenced
by our findings and similar findings reported by the OIG as far back as
1999.

Lastly, we recommended that VHA require cardholders or others to track and
document ticket purchases for recreational activities to the end user. VA
reported that the burden of having each patient sign for each ticket would
be onerous. As an alternative, VA stated that the cardholder should ensure
that an accurate patient count is kept on file in the purchase card order
file. We believe this proposed alternative method does not sufficiently
address the accountability issue over these types of purchases. By only
maintaining an accurate patient count, internal and external reviewers
still will not have enough information available to determine who received
the ticket or attended the event. A "patient count" provides only limited
assurances over the accountability of tickets. Independent evidence from
the recipient is needed to support that he/she received or attended such
events and would increase the accountability over these

types of purchases to help ensure that tickets are not improperly used for
personal use. In a few instances, we found that VHA local offices had
implemented, at varying degrees, tracking procedures of ticket purchases
similar to those envisioned by our recommendation. For example, one field
office, maintained an attendance sheet that identified the recreational
activity, date and time of the activity, the particpants' names and check
marks as to whether or not participants attended the event. At another
field office, we were provided a similar attendance sheet, including each
recipient's signature and last four digits of his/her social security
number. Employing these types or similar procedures agencywide appears
reasonable since some of the VHA field offices already have existing
procedures in place.

Also, in its response letter, VA included some technical comments that we
have addressed in finalizing our report where appropriate. VA's written
comments and our evaluation of certain comments not addressed above are
presented in appendix I.

As arranged with your offices, unless you announce the contents of this
report earlier, we will not distribute it until 2 days from its issuance
date. We will then send copies of this report to the Secretary of the
Department of Veterans Affairs, the Acting Under Secretary for Health,
appropriate congressional committees, and other interested parties. We
will also make copies available to others upon request. In addition, this
report will be available at no charge on GAO's 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) 512-6906 or [email protected]; or
Alana Stanfield, Assistant Director, at (202) 512-3197
[email protected]. Major contributors to this report are acknowledged
in appendix II.

Sincerely yours,

McCoy Williams Director, Financial Management and Assurance

Appendix I

Comments from the Department of Veterans Affairs

Note: GAO comments supplementing those in the report text appear at the
end of this appendix.

See comment 1.

See comment 2.

Appendix I
Comments from the Department of Veterans
Affairs

                                 See comment 3.

Appendix I
Comments from the Department of Veterans
Affairs

Appendix I
Comments from the Department of Veterans
Affairs

Appendix I
Comments from the Department of Veterans
Affairs

                                   Appendix I
                    Comments from the Department of Veterans
                                    Affairs

      The following are GAO's comments on VA's letter dated May 24, 2004.

  GAO Comments 1.

2.

We did not indicate that the VHA purchase card program operations were
effective overall. During the exit conference meeting on April 26, 2004,
we communicated that the weaknesses identified at VHA were similar to the
internal control weaknesses we reported at other federal agencies,
although the extent of fraud, waste, and abuse that we identified at some
of those agencies were not as prevalent at VHA. We also communicated that
our findings stemmed from weak internal controls over the purchase card
program and that strengthening controls would reduce the program's
vulnerability to improper, wasteful, and questionable purchases. We
further stated that we would be making a number of recommendations for
each of the identified areas that were discussed at the meeting.

Regarding the $435,900 cited as fraudulent activity, we reported that this
amount was identified from the OIG's work and not GAO's work. However, VA
should not be deriving unjustified levels of assurances that its program
is "effectively managed" based on the OIG's findings and our findings
identified in this report from data mining and nonstatistical testing of
transactions. As we indicated in our report, while the total amount of
improper purchases we identified, based on limited scale audit work, is
relatively small compared to the more than $1.4 billion in annual purchase
card and convenience check transactions, we believe our results
demonstrate vulnerabilities from weak controls that may have been
exploited to a much greater extent. In addition, our internal control
findings and noncompliance with federal and agency purchasing requirements
identified from the statistical testing further illustrate that controls
were ineffective and improved management is needed over program
operations.

In our opinion, the approving official's certification of the purchase
card order for most micro-purchases does not provide sufficient assurance
that purchased items are not acquired for personal use and that they come
into the possession of the government. Various types of sensitive items
such as personal digital assistants, cell phones, digital cameras,
laptops, and computers can be purchased below the $2,500 micro-purchase
threshold. These and other items that can be easily pilfered should go
through a central receiving point to reduce the risk of error or fraud.

Appendix I
Comments from the Department of Veterans
Affairs

3.	We recently provided VHA a schedule of purchase card transactions in
which no documentation was provided during our fieldwork to support the
purchases selected for review.

Appendix II

                             Staff Acknowledgments

Acknowledgments Staff members who made key contributions to this report
include:

Sharon Byrd, Polly Cheung, Lisa Crye, Danielle Free, Carla Lewis, Julia
Matta, Gloria Medina, Tarunkant Mithani, Donell Ries, and Stacey Smith.

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