Veterans Health Administration: Inadequate Controls over the	 
Purchase Card Program Resulted in Improper and Questionable	 
Purchases (17-JUN-04, GAO-04-857T).				 
                                                                 
The Department of Veterans Affairs (VA) Office of Inspector	 
General (OIG) has continued to identify significant		 
vulnerabilities in the department's use of government purchase	 
cards. Over the years, the OIG has identified internal control	 
weaknesses that resulted in instances of fraud and numerous	 
improper and questionable uses of purchase cards. The OIG has	 
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 2002, and because of the program weaknesses reported 
by the OIG, GAO was asked to determine whether existing controls 
at the Veterans Health Administration (VHA) were designed to	 
provide reasonable assurance that 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. GAO's report on	 
this issue, released concurrently with this testimony, makes 36  
recommendations to strengthen internal controls and compliance in
VHA's purchase card program to reduce its vulnerability to	 
improper, wasteful, and questionable purchases. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-857T					        
    ACCNO:   A10460						        
  TITLE:     Veterans Health Administration: Inadequate Controls over 
the Purchase Card Program Resulted in Improper and Questionable  
Purchases							 
     DATE:   06/17/2004 
  SUBJECT:   Accounting procedures				 
	     Credit sales					 
	     Federal procurement				 
	     Fraud						 
	     Internal controls					 
	     Noncompliance					 
	     Program abuses					 
	     Questionable payments				 
	     Questionable procurement charges			 
	     Government purchase cards				 
	     Government Purchase Card Program			 

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GAO-04-857T

United States General Accounting Office

                                 GAO Testimony

Before the Committee on Veterans' Affairs, House of Representatives

For Release on Delivery Expected at 10:00 a.m. EDT Thursday, June 17, 2004

VETERANS HEALTH ADMINISTRATION

  Inadequate Controls over the Purchase Card Program Resulted in Improper and
                             Questionable Purchases

Statement of McCoy Williams
Director, Financial Management and Assurance

                                       a

GAO-04-857T

Highlights of GAO-04-857T, a testimony before the Committee on Veterans'
Affairs, House of Representatives

The Department of Veterans Affairs (VA) Office of Inspector General (OIG)
has continued to identify significant vulnerabilities in the department's
use of government purchase cards. Over the years, the OIG has identified
internal control weaknesses that resulted in instances of fraud and
numerous improper and questionable uses of purchase cards. The OIG has
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 2002, and because of the program weaknesses reported by the OIG, GAO
was asked to determine whether existing controls at the Veterans Health
Administration (VHA) were designed to provide reasonable assurance that
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.

GAO's report on this issue, released concurrently with this testimony,
makes 36 recommendations to strengthen internal controls and compliance in
VHA's purchase card program to reduce its vulnerability to improper,
wasteful, and questionable purchases.

June 17, 2004

VETERANS HEALTH ADMINISTRATION

Inadequate Controls over the Purchase Card Program Resulted in Improper and
Questionable Purchases

Weaknesses in VHA's controls over the use of purchase cards and
convenience checks resulted in instances of improper, wasteful, and
questionable purchases. These weaknesses included inadequate segregation
of duties; lack of key supporting documents; lack of timeliness in
recording, reconciling, and reviewing transactions; and insufficient
program monitoring activities. Generally, GAO 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 adequate
guidance.

The 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. GAO 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 or lacked evidence of competition, and purchases
made from an improper source. While the total amount of improper purchases
GAO identified is relatively small compared to the more than $1.4 billion
in annual purchase card and convenience check transactions, they
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 classified as wasteful or questionable. GAO 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 for which award letters or justification for the awards could not
be provided and a purchase for a digital camera totaling $999 when there
were other less costly digital cameras widely available. Also, 250
questionable purchases totaling $209,496 from vendors that would more
likely be selling unauthorized or personal use items lacked key purchase
documentation. Examples of these types of purchases included a purchase
from Radio Shack totaling $3,305, a purchase from Daddy's Junky Music
totaling $1,041, a purchase from Gap Kids totaling $788, and a purchase
from Harbor Cruises totaling $357. Missing documentation prevented
determining the reasonableness and validity of these purchases. Because
only a small portion of the transactions that appeared to have a higher
risk of fraud, waste, or abuse were tested, there may be other improper,
wasteful, and questionable purchases in the remaining untested
transactions.

www.gao.gov/cgi-bin/getrpt?GAO-04-857T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact McCoy Williams at (202)
512-6906 or [email protected].

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss internal controls over the use of
purchase cards at the Veterans Health Administration (VHA). At the outset,
I want to make clear that GAO supports the concept of the purchase card
program. The benefits of using purchase cards are lower costs and less
bureaucracy for both the government and the vendor community. At the same
time, given the nature, scale, and increasing use of purchase cards, it is
important that agencies 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.

As you know, the Department of Veterans Affairs (VA) Office of Inspector
General (OIG) has continued to identify significant vulnerabilities in the
department's use of government purchase cards. 1 In its most recent
report, the OIG identified internal control weaknesses that resulted in
instances of fraud and numerous improper and questionable uses of purchase
cards. 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 2002, and because of the program weaknesses reported by the OIG, you
asked that we review VHA's purchase card program for fiscal year 2002 to
determine if control problems still existed. Our report on this issue is
being released today at this hearing.

You also asked that we review internal control activities (1) over
thirdparty billings and collections at selected VHA medical centers to
assess whether those controls were designed and implemented effectively
and (2) in three areas of operation at selected VHA medical centers-
accountability over personal property, drugs returned for credit, and
parttime physician time and attendance. These two reports will be issued
later this month.

In my testimony today, I will discuss the inadequacy of internal controls
over VHA's purchase card program. The scope of our work, which was
performed from April 2003 through April 2004 in accordance with generally

1U.S. Department of Veterans Affairs, Office of Inspector General,
Evaluation of the Department of Veterans Affairs Government Purchase Card
Program, Report Number 0201481-135 (Washington, D.C.: Apr. 26, 2004).

accepted government auditing standards, is detailed in the report being
released today.

Heads of agencies are required to establish systems of internal control
consistent with our Standards for Internal Control in the Federal
Government.2 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.

As I will discuss in my testimony, we found that (1) existing controls at
VHA were not designed to provide reasonable assurance that improper
purchases would be prevented or detected in the normal course of business,
(2) lack of compliance with applicable laws and regulations in VHA's
purchase card and convenience check programs led to improper purchases,
and (3) poor controls resulted in some wasteful and questionable
purchases. We focused on the approximately $1.4 billion of disbursements
that VHA made during fiscal year 2002, the most recent fiscal year for
which complete data were available when we began our review.

I will first address the inadequacy of VHA's internal controls.

  Critical Internal Controls Were Ineffective

Our review found that 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 operating
guidance governing the program, and in the case of documentation and
vendor-offered discounts, they lacked guidance. We also noted that

2U.S. General Accounting Office, Standards for Internal Control in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

monitoring activities could be strengthened, for example, 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.

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 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. They should be effective and
efficient in accomplishing the agency's objectives and should occur at all
levels and functions of the entity.

We found that VHA lacked adequate segregation of duties regarding
independent receiving of goods and separation of responsibilities within
the purchasing process. Independent receiving, which means someone other
than the cardholder receives the goods or services, provides additional
assurance that items are not acquired for personal use and that they come
into the possession of the government. This reduces the risk of error or
fraud. From our purchase card internal control testing, we estimate that
$75 million3 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 agency or
organization program coordinators (A/OPC) who were also cardholders and
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 own activities.

We also found instances where purchase card and convenience check
transactions lacked key supporting documentation. This would include

3We 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.

internal written authorization for convenience check disbursements and
vendor invoices that support the description, quantity, and price of what
was purchased. VHA's purchase card guidance does not address the types of
documentation that cardholders should maintain to support their purchases.
It only addresses documentation requirements in its audit guide, which is
an appendix to the purchase card guidance that provides instructions to
internal reviewers for 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. Of the 283 purchase card
sample transactions we tested, 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 million4 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 million5 of
the fiscal year 2002 convenience check transactions lacked key supporting
documentation.

We also noted that VA's operating guidance over convenience checks does
not provide detailed procedures regarding appropriate written
documentation or authorization that must be forwarded to the authorizing
employee before funds are disbursed 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

4We 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.

5We 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.

documentation be required prior to issuing checks to vendors. In addition,
VA's guidance only requires that the authorizing employees issuing
convenience checks retain copies for 1 year. This documentation
requirement is inconsistent with the Federal Acquisition Regulation (FAR)
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.6

We found that of 255 convenience check transactions, 17, totaling $8,890,
lacked written authorization needed for issuance. Based on these results,
we estimate that $1.7 million7 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 million8 of the
fiscal year 2002 convenience check transactions lacked this supporting
documentation. Although VA only requires copies of convenience checks to
be retained for 1 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 a
transaction was proper and in compliance with acquisition policies and
procedures.

At the time of our work, VHA had also established several timeliness
standards for cardholders and approving officials 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,9 the cardholder must reconcile 75 percent of

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

7We are 95 percent confident that the total dollar value of convenience
check transactions that lacked written authorization was between $.8
million and $2.7 million.

8We 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.

9Citibank issues purchase cards to VA operating administrations, including
VHA.

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, the
approving official, through an electronic signature, certify in the
purchase card order system that all procurements are legal and proper and
have been received.10

Our review found untimely recording, reconciliation, and approving
official review. Table 1 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.

10VA revised its timeliness standards in the agencywide 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.

Table 1: Summarization of VHA Timeliness Standards Exceptions

                                    Estimated            Estimated Confidence 
                                        total               dollar   interval 
    VHA timeliness  Number of       number of Confidence  value of    at a 95 
                    sample                     interval     amount    percent 
       tests of     transactions transactions    at a 95  in error confidence 
       purchase                                  percent                level 
      card order        in error     in error confidence       (in        (in 
        system                                  level    millions)  millions) 
    Purchase card                                                  
     orders were                                                   
       entered                                                     
     within 1 day             36      289,352 164,100 -     $152.5    $99.9 - 
                                              458,414                  $205.1 
      Cardholder                                                   
    reconciliation                                                 
        within                                                     
       17 days                53      351,256 216,683 -     $252.7   $184.4 - 
                                              522,909                  $321.0 
      Approving                                                    
       official                                                    
    certification                                                  
      within 14                                                    
                              44              181,930 -     $212.4   $149.2 - 
         days                         308,448 475,207                  $275.7 

Source: GAO.

Note: 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. For
instance, one cardholder made a purchase on July 9, 2002, of $994, but did
not record the information in VA's purchase card order system until August
29, 2002- 51 days later and 50 days after VHA policy required that the
information be entered. Another cardholder made a purchase of $100 on
August 24, 2002. Citibank sent charge information for this purchase to VHA
on October 8, 2002. According to VHA policy, the cardholder should have
reconciled this charge within 17 days. Instead, we found that the account
was not reconciled until September 8, 2003, or 335 days after receiving
the charge information. In another instance, a cardholder reconciled a
purchase card transaction totaling more than $3,000, which should have
been reviewed and certified by an approving official within 14 calendar
days. We found no evidence that the approving official reviewed this
cardholder's reconciliation until 227 days later. 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.

We also found instances where cardholders did not consistently take
advantage of vendor-offered purchase discounts. Our review identified 69
invoices containing vendor-offered discounts totaling $15,785 that were
not taken at the time of purchase or subsequently credited for the
discount

amount. When purchases are made, vendors may offer purchase discounts if
buyers make early payments of their invoices. Typically, the vendor
specifies a period 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. Therefore, it is critical that
cardholders ask about 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 it lacked purchase card
guidance to ensure cardholders ask about vendor payment terms to determine
whether discounts were being offered.

For example, one vendor offered VHA a discount of 2.9 percent, or $896,
for an invoice amount of $30,888 if it was paid within 15 days. Citibank,
on behalf of VA, made payment to the vendor within the 15-day time frame,
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.

A factor that may contribute to cardholder inconsistencies in taking
advantage of vendor discounts is the lack of established policies and
procedures that address this issue. We found that VHA's purchase card
guidance did not include procedures to ensure that cardholders take
advantage of available vendor discounts before 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
frequency of these occurrences and actual dollars lost by the government.

While VHA's purchase card guidance includes prescribed monitoring
procedures to help ensure purchases are legal and proper, we found no
monitoring procedures to identify active accounts of cardholders who had
separated from VA nor any provisions to assess cardholder credit limits.
We also noted insufficient human capital resources at the A/OPC level for
executing the prescribed monitoring activities. For instance, we
identified 18 instances in which purchase card accounts remained active
after the cardholders left VA and all related outstanding purchase orders
had been reconciled. Of the 18 purchase card accounts that remained active
after

the cardholders 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. The remaining 4 purchase
cards had been promptly canceled after all outstanding purchase orders
were reconciled.

Of the 14 accounts that were untimely cancelled, 11 accounts remained open
between 6 and 150 days and 3 accounts remained open between 151 and 339
days. For example, one cardholder separated from VA on April 3, 2002, with
five outstanding purchase card orders made 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.
Requiring monitoring procedures to identify active accounts of departed
cardholders and to 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.

In addition to accounts left open, our analysis of purchases VHA
cardholders made in 2002 showed that cumulatively they bought $112 million
of goods and services per month on average, but they had credit limits of
$1.2 billion, or about 11 times their actual spending. 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 singlepurchase and monthly creditlimits. However, we found no
guidance on what factors to consider when recommending the dollar amounts
to be assigned to each cardholder. Further, we found no monitoring
procedures that require the A/OPC or approving official to determine
periodically whether cardholder limits should be changed based on existing
and expected future use.

Periodic monitoring and analysis of cardholders' actual monthly and
average charges, in conjunction with existing credit limits would help VHA
management make 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. During
our review, for instance, the difference between the monlthly cumulative
credit limits of $1.2 billion and actual spending of $112 million
represents a $1.1 billion financial exposure. 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.

Furthermore, 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 or
performed other assigned duties, for example, as a systems analyst, budget
analyst, and contract specialist. Of the 90 A/OPCs who responded to a GAO
question regarding other duties assigned, 55 A/OPCs, or 61 percent,
reported that they spend 50 percent or less of their time performing A/OPC
duties. 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. 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.

  Noncompliance with Purchasing Requirements Resulted in Instances of Improper
  Purchases

The 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 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 micropurchase
threshold that were either beyond the scope of the cardholder's authority
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 could have been exploited to a much greater extent.

For instance, from the nonstatistical sample, we identified 17 purchases,
totaling $14,054, for clothing, food, and other items that cardholders
purchased for personal use. Items that are classified as personal expenses
may not be purchased with appropriated funds without specific statutory
authority. The FAR emphasizes that the governmentwide commercial purchase
card may be used only for purchases that are otherwise authorized by law
or regulation.11

We identified eight 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 generates jobs and training for Americans who
are blind or have severe disabilities by requiring that 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.

We noted that cardholders did not consistently purchase items from JWOD
suppliers when they should have. For example, a cardholder purchased day
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, which would have cost
$1,126, or $465 less. 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 the 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.

Using data mining techniques, we identified purchases that appeared to
have been split into two or more transactions by cardholders to circumvent
their single purchase limit. We requested documentation for a
statistically determined sample of 280 potential split transactions
totaling $4 million. Of these 280 transactions, we determined that 49 were
actual splits. Based

1148 C.F.R. S: 13.301 (a).

on these results, we estimate that $17.1 million12 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 in 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 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.

The FAR provides that the purchase card may be used by contracting
officers or individuals who have been delegated micro-purchase authority
in accordance with agency procedures.13 Only warranted contracting
officers, who must promote competition to the maximum extent practical,
may make purchases above the micro-purchase threshold using the purchase
card. Contracting officers must consider solicitation of quotations from
at least three sources,14 and they must minimally document the use of
competition or provide a written justification for the use of other than
competitive procedures.15 When cardholders circumvent these laws and
regulations, VHA has no assurance that purchases comply with certain
simplified acquisition procedures and that cardholders are

12We are 95 percent confident that the total dollar value for actual split
purchase card transactions was between $12.4 million and $21.9 million.

1348 C.F.R. S: 13.301 (a).

1448 C.F.R. S: 13.104.

1548 C.F.R. S: 13.106-3(b).

making contractual commitments on behalf of VHA within the limits of their
delegated purchasing authority.

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 million16 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 million17 of the total fiscal year
2002 purchases totaling more than $2,500 lacked evidence of competition.

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 may be paid for only in the
event that free space is not available, and require that complete
documentation of efforts to secure free conference space be maintained in
the purchase order file.18 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
3day 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.

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

16We are 95 percent confident that the total dollar value for purchases
over $2,500 made by nonwarranted cardholders was between $52.8 million and
$170.9 million.

17We 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.

18We are 95 percent confident that the total dollar value for actual split
convenience check transactions was between $13.6 million and $14.0
million.

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 the
Department of the Treasury, restricting convenience check use to instances
when vendors do not accept purchase cards. From the 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 million19 of the total fiscal year 2002
convenience check transactions were improperly used to pay for purchases
exceeding the established limits. In April 2003, VA issued new purchase
card guidance providing that for micro-purchases, convenience checks may
be used in lieu of purchase cards 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 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. Of the 982 nonstatistical
sample transactions we reviewed, 250 transactions, totaling $209,496,
lacked key purchase documentation. As a result, we could not 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. 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.

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 before they make credit card purchases. We

19The Department of Veterans Affairs Acquisition Regulation, Part 870,
subpart 113 (VAAR 870.113).

considered items wasteful if they were excessive in cost when compared to
available alternatives, and questionable if 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. 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 officewide and organizational awards.

Many award purchases were for gift certificates and gift cards. 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 either the
recipients of the awards or the purposes for which the recipients were
being recognized. Therefore, we categorized these purchases as of
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 provide neither the award
letters nor justification for the awards. Consequently, VHA could provide
no evidence that these purchases were actually used for awards.

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 6-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 the more expensive model
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, at roughly $25 per minute, seemed excessive.

We also found questionable purchases. As I discussed earlier, we
identified numerous transactions from the statistical samples that were
missing adequate supporting documentation on what was actually purchased,
how many items were purchased, and the cost of the items purchased. 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,
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 either provided 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. For 184 of these transactions, totaling $155,429,
internal documentation was available but no vendor documentation was
available. No documentation at all was available for the remaining 66
transactions, totaling $54,068. These purchases were from vendors that
would more likely be selling unauthorized or personal use items. Examples
of these types of purchases included a purchase form Radio Shack totaling
$3,305, a purchase from Daddy's Junky Music totaling $1,041, a purchase
from Gap Kids totaling $788, and a purchase from Harbor Cruises totaling
$357.

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 $37.50. 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. We
believe that at least some of the items we identified 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 for which VHA cardholders provided no documentation to
support the purchase, 32 transactions (49 percent) represented 2 or more
transactions by 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 we characterized as
questionable but appeared to be either improper or wasteful, the
documentation we received either was not correct 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, the company 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.

We also identified 68 transactions, totaling $31,772, involving the
purchase of tickets for sporting events, plays, movies, amusement or theme
parks, and other recreation activities for veterans and VA volunteers. The
documentation provided for these transactions was inadequate or missing
vendor invoices; therefore, we could not determine whether these tickets
were used in support of the volunteers or veterans. As a result, we
categorized these purchases as questionable. Various programs under VHA,
such as Recreation Therapy, Voluntary Services, and Blind Rehabilitation
Service, sponsor assorted activities for veterans and 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 accounted for properly. 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 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.

In closing, Mr. Chairman, I want to emphasize that 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
noncompliance with applicable laws and regulations and its own policies
and remain vulnerable to improper, wasteful, and questionable purchases.
Our report, which is being released at this hearing, makes 36
recommendations to strengthen internal controls and compliance in VHA's
purchase card program to reduce its vulnerability to improper, wasteful,
and questionable purchases.

This concludes my statement. I would be happy to answer any questions you
or other members of the committee may have.

  Contact and Acknowledgments

(195041)

For information about this statement, please contact McCoy Williams,
Director, Financial Management and Assurance, at (202) 512-6906, or Alana
Stanfield, Assistant Director, at (202) 512-3197. You may also reach them
by e-mail at [email protected] or [email protected]. Individuals who
made key contributions to this testimony include Lisa Crye, Carla Lewis,
and Gloria Medina.

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