Lawrence Livermore National Laboratory: Further Improvements
Needed to Strengthen Controls Over the Purchase Card Program
(05-AUG-04, GAO-04-986R).
The Lawrence Livermore National Laboratory (LLNL) is a
government-owned, contractor-operated national laboratory of the
Department of Energy's (DOE) National Nuclear Security
Administration (NNSA). The University of California manages the
lab under a cost-reimbursable contract with NNSA. During the fall
of 2002, the Federal Bureau of Investigation began investigating
two Los Alamos National Laboratory employees for alleged misuse
of lab credit cards. Other allegations of theft and misuse of
government funds at Los Alamos soon followed. In light of the
problems identified at Los Alamos, Congress asked us to review
selected procurement and property management practices at two DOE
and two NNSA contractor labs, including LLNL. This report
summarizes the information provided during our June 4, 2004
briefing to Congressional staff on these issues as they relate to
Lawrence Livermore. Specifically, we reviewed LLNL's purchase
card program and property management practices to determine
whether (1) internal controls over the lab's purchase card
(Pcard) program provided reasonable assurance that improper
purchases would not occur or would be detected in the normal
course of business, (2) purchase card expenditures made under the
contract properly complied with lab policies and other applicable
requirements and were reasonable in nature and amount and thus
were allowable costs payable to the contractor under the
contract, and (3) property controls over selected asset
acquisitions provided reasonable assurance that accountable
assets would be properly recorded and tracked. Our review covered
selected transactions that occurred during fiscal year 2002 and
the first half of fiscal year 2003, which were the most current
data available when we requested the data for our review.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-986R
ACCNO: A11457
TITLE: Lawrence Livermore National Laboratory: Further
Improvements Needed to Strengthen Controls Over the Purchase Card
Program
DATE: 08/05/2004
SUBJECT: Credit sales
Federal procurement
Fraud
GOCO
Internal controls
Inventory control
Laboratories
Procurement records
Program abuses
Property and supply management
Questionable procurement charges
Government purchase cards
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GAO-04-986R
United States Government Accountability Office Washington, DC 20548
August 6, 2004
Congressional Requesters
Subject: Lawrence Livermore National Laboratory: Further Improvements
Needed to Strengthen Controls Over the Purchase Card Program
The Lawrence Livermore National Laboratory (LLNL) located in Livermore,
California is a government-owned, contractor-operated national laboratory
of the Department of Energy's (DOE) National Nuclear Security
Administration (NNSA).1 The University of California manages the lab under
a cost-reimbursable contract with NNSA. The university is paid a
management fee to operate the lab and is reimbursed for all allowable
costs charged to the contract.
During the fall of 2002, the Federal Bureau of Investigation began
investigating two Los Alamos National Laboratory employees for alleged
misuse of lab credit cards. Other allegations of theft and misuse of
government funds at Los Alamos soon followed. In light of the problems
identified at Los Alamos, you asked us to review selected procurement and
property management practices at two DOE and two NNSA contractor labs,
including LLNL.2
This report summarizes the information provided during our June 14, 2004
briefing to your staff on these issues as they relate to Lawrence
Livermore. The enclosed
3
briefing slides highlight the results of our work and the information
provided. Specifically, we reviewed LLNL's purchase card program and
property management practices to determine whether (1) internal controls
over the lab's purchase card (Pcard) program provided reasonable assurance
that improper purchases would not occur or would be detected in the normal
course of business, (2) purchase card expenditures made under the contract
properly complied with lab policies and other applicable requirements and
were reasonable in nature and amount and thus were allowable costs payable
to the contractor under the contract, and (3) property controls over
selected asset acquisitions provided reasonable assurance that
1The National Nuclear Security Administration (NNSA) was created in fiscal
year 2000 as a separately
organized agency within DOE. As part of its national security mission,
NNSA has responsibility for the
institutional stewardship of three national security laboratories.
2The four labs we reviewed were DOE's Lawrence Berkeley National
Laboratory and Pacific Northwest
National Laboratory, and NNSA's Lawrence Livermore National Laboratory and
Sandia National
Laboratories.
3Separate briefings were provided for each of the labs reviewed, which we
also summarized in separate
letters.
GAO-04-986R LLNL Purchase Card Controls
4
accountable assets would be properly recorded and tracked. Our review
covered selected transactions that occurred during fiscal year 2002 and
the first half of fiscal year 2003 (October 1, 2001, through March 31,
2003), which were the most current data available when we requested the
data for our review. This report also includes five recommendations for
action-four related to actions needed to be taken by Livermore and one
related to action needed to be taken by the NNSA contracting officer for
Livermore.
Results in Brief
LLNL had implemented a number of internal controls over its Pcard program
and property management functions. However, weaknesses in LLNL's Pcard
program increased the lab's risk of improper purchases. For example, lab
policy did not require approving officials to verify purchases listed in
the cardholder's transaction summary report against supporting documents,
which compromised the effectiveness of the review process in detecting
improper purchases. Of the 144 nonstatistically selected transactions
obtained through data mining5 for fiscal year 2002 and the first half of
fiscal year 2003, we found 15 (10 percent) totaling $23,923 lacked an
invoice, credit receipt, or other sales documentation necessary to
validate the dollar amount, quantity, and nature of the items purchased.
The lack of such documentation minimizes the effectiveness of supervisory
review of Pcard transactions. Additionally, during our review period, the
lab allowed supplemental labor personnel-staff that worked at the lab for
a labor subcontractor and thus were not LLNL employees-to be issued
Pcards, but did not have adequate controls in place to help ensure that
the Pcards were returned if supplemental employees stopped working at the
lab. Instead, it relied on the subcontractor to perform this function,
with no oversight by lab employees.
These control weaknesses likely contributed to the $97,348 in improper,
wasteful, and questionable purchases we identified in our review.6 While
relatively small compared to the approximately $120 million in purchase
card activity that occurred during the review period, it demonstrates
vulnerabilities from weak controls that could be exploited to a greater
extent. Specifically, 87 of the 144 purchases in the nonstatistical
selection we reviewed were for the purchase of controlled items that
LLNL's policy requires to be preapproved. Thirty-two of these 87
transactions (37 percent) totaling $31,571 did not have any evidence of
preapproval. We also identified two improper split purchases-that is,
groups of two or more similar transactions that were split to circumvent
single purchase limits-consisting of 11 transactions totaling $28,137 from
a statistical sample. Further, we considered 11
4Throughout this document, references to purchases and transactions refer
to those made by the
contractor employees of the lab that are charged to the NNSA contract.
Although the lab's purchase
cards are issued by the contractor, purchases charged to the NNSA contract
are ultimately reimbursed
and thus paid for by the federal government. Similarly, property purchased
that is charged to NNSA
becomes government property.
5Data 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.
6This is the net total after adjusting for one $525 purchase that was both
improper because the
cardholder failed to obtain a required preapproval and wasteful because it
was excessive in cost.
Page 2 GAO-04-986R LLNL Purchase Card Controls
transactions totaling $9,945 to be wasteful because they were excessive in
cost compared to other available alternatives and/or were of questionable
need. For example, one cardholder spent $1,559 for a reclining leather
chair. While the requester had a documented medical need for a special
chair due to back problems, in a similar situation another cardholder
purchased an orthopedic chair from a medical supply store for $599. We
considered 12 transactions totaling $28,220 to be questionable because
they were missing key documentation that would enable us or the lab to
determine what was purchased, the quantity and cost of the items
purchased, and whether the items purchased were proper and reasonable.
Because we only tested a small portion of the transactions we identified
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.
Accountable assets we tested generally were properly accounted for and
tracked in LLNL's property management system. Out of 144 transactions
reviewed, there were 6 transactions for the purchase of 26 accountable
assets totaling $70,048. Of these 26 assets, one item totaling $3,481 had
not been recorded in the property management system.
In response to recent internal audit and other reviews, LLNL management
has made a number of improvements to its internal controls that, if
properly implemented, should further enhance controls over the Pcard
program. However, additional corrective actions are needed to address
weaknesses identified.
Recommendations for Executive Action
In order to address the issues identified in our review, we recommend that
the Administrator of NNSA direct Lawrence Livermore National Laboratory's
Director to take the following four actions to strengthen internal
controls over the purchase card program and reduce the lab's vulnerability
to improper, wasteful, and questionable purchases.
o Establish policies and procedures requiring that purchasers request
and maintain a copy of the detailed sales receipt, invoice, or other
independent support showing the description, quantity, and price of
individual items purchased.
o Require approving officials to review transaction documentation
before approving transactions listed on the cardholders' monthly
transaction summary reports. This should include determining that there is
independent support for the description, quantity, and price of individual
items purchased, and that the cardholder obtained and documented any
required preapprovals before purchase.
o Consider modifying the Pcard system so that purchases that are not
reconciled timely by the cardholder are charged to a temporary suspense
account rather than to each cardholder's default account codes.
Page 3 GAO-04-986R LLNL Purchase Card Controls
o In conjunction with the implementation of the lab's online training
and recertification for cardholders and approving officials, include in
such training an emphasis on (1) the lab's policy to obtain preapprovals
for all purchases of items listed on the controlled items and services
list, and (2) consideration of best value in making and approving
purchases. Because the controlled items and services list is frequently
updated, the training should include reviewing the items on the current
list and any recent changes.
We also recommend that the Administrator of NNSA direct the NNSA
contracting officer for the lab to review the improper, wasteful, and
questionable items we identified to determine whether any of these
purchases should be repaid to NNSA.
Agency Comments
We obtained oral comments on a draft of this briefing from NNSA officials.
They generally agreed with the findings and recommendations, and indicated
that the lab has made a number of improvements to its controls in light of
the problems identified at Los Alamos.
We also obtained oral comments from LLNL officials, who disagreed with the
recommendations to (1) require sales documentation such as a receipt or
invoice and (2) require approving officials to review such documentation
before approving purchases. They indicated sales receipts and invoices
were not always available and did not feel they were necessary to support
purchases. Instead, they felt that as long as the order amount entered
into the Pcard system by the cardholder matched the total purchase amount
charged by the bank, that was sufficient evidence to support that the
purchase was proper.
We disagree. The matching of the total dollar amount of the transaction to
the order amount entered by the cardholder without independent evidence of
the description, quantity, and price of individual items purchased does
not provide sufficient evidence that the items purchased were proper.
Because the cardholder enters the order, makes the purchase, and
reconciles any differences, a reviewer would not be able to determine if
the original order amounts were correct nor whether additional items were
purchased under that order. Consequently, sufficient independent evidence
for the individual items purchased and corresponding supervisory review of
such evidence is necessary to help reduce the risk of improper purchases.
The lab also provided technical and clarifying comments, which we
incorporated as appropriate.
Scope and Methodology
To determine if LLNL's internal controls over its Pcard program provided
reasonable assurance that improper purchases would not occur or would be
detected in the normal course of business, we reviewed LLNL's contract
with NNSA and applicable provisions of the DOE Acquisition Regulation
(DEAR) and the Federal Acquisition
Page 4 GAO-04-986R LLNL Purchase Card Controls
Regulation (FAR), performed walkthroughs of key processes, interviewed
LLNL and NNSA management and staff, and compared the results to the lab's
policies and
7
GAO's Standards for Internal Control in the Federal Government. These
standards provide the overall framework for establishing and maintaining
internal control and for identifying and addressing major performance and
management challenges and areas at greatest risk of fraud, waste, abuse,
and mismanagement and are based on internal control guidance for the
private sector.8
To determine whether Pcard expenditures complied with lab policies and
other applicable requirements and were reasonable in nature and amount, we
performed data mining on fiscal year 2002 and the first half of fiscal
year 2003 Pcard transactions to identify indicators of potential
noncompliance with policies and procedures and to identify purchases that
appeared to be from unusual vendors, purchases made on weekends, during
the holidays, or at fiscal-year end, and purchases of attractive assets.
Based on the results, we (1) selected a statistical sample of 27 potential
split purchases and tested to determine whether they were in fact split
purchases, and (2) tested a nonstatistical selection of 144 transactions
for evidence of supervisory review and approval, adequacy of supporting
documentation, and reasonableness of the purchases.
To determine if property controls over selected asset acquisitions
provided reasonable assurance that accountable assets would be properly
recorded and tracked, we performed walkthroughs to observe property
controls, reviewed property management policies and procedures, tested
accountable property items selected in the nonstatistical selection to
determine whether these assets had been entered into the lab's property
system prior to our review, performed data mining on the property database
to identify possible database errors or inaccuracies such as property
assigned to terminated employees and multiple property items with the same
serial number, and performed a physical observation of selected assets to
determine whether they could be properly accounted for.
We requested oral comments on a draft of the enclosed briefing slides from
the Administrator of NNSA or his designee and have included any comments
as appropriate in the letter and enclosed slides. While we identified some
improper, wasteful, and questionable purchases, our work was not designed
to determine the full extent of such purchases. We conducted our work on
all four labs from March 2003 through May 2004 in accordance with
generally accepted government auditing standards.
7U.S. General Accounting Office, Standards for Internal Control in the
Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
8Internal Control-Integrated Framework, Committee of Sponsoring
Organizations of the Treadway
Commission (COSO).
Page 5 GAO-04-986R LLNL Purchase Card Controls
Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days after its date. At that time, we
will send copies of this report to the Ranking Minority Member, House
Committee on Energy and Commerce; the Secretary of Energy; the
Administrator of NNSA; and the Lawrence Livermore National Laboratory
Director. Copies will also be made available to others upon request. In
addition, the report will be available at no charge on our home page at
http://www.gao.gov. If you have any questions about this report, please
contact me at (202) 512-9508 or Doreen Eng, Assistant Director, at (206)
287-4858. You may also reach us by e-mail at calboml@gao.gov or
engd@gao.gov. Additional contributors to this assignment were Rick Kusman,
Delores Lee, Kelly Lehr, Diane Morris, Estelle Tsay, and Eric Wenner.
Linda M. Calbom
Director, Financial Management and Assurance
Enclosure
Page 6 GAO-04-986R LLNL Purchase Card Controls
List of Requesters
The Honorable Sherwood Boehlert, Chairman
The Honorable Bart Gordon, Ranking Minority Member
Committee on Science
House of Representatives
The Honorable Joe Barton, Chairman
Committee on Energy and Commerce
House of Representatives
The Honorable Jerry Costello
The Honorable James Greenwood
The Honorable W.J. "Billy" Tauzin
House of Representatives
Page 7 GAO-04-986R LLNL Purchase Card Controls
June 14, 2004, Briefing
Lawrence Livermore National Laboratory
Further Improvements Needed to Strengthen Controls Over the Purchase Card
Program
Briefing to the Staff of the Committees on Science and Energy and
Commerce, House of Representatives
June 14, 2004
Table of Contents
o Introduction and Objectives
o Results in Brief o Background
o Scope and Methodology
o Internal Control Weaknesses
o Improper, Wasteful, and Questionable Purchases
o Property Management
o Recent Policy and Procedural Changes
o Conclusions
o Recommendations
o Agency Comments
Introduction and Objectives
o The Lawrence Livermore National Laboratory (LLNL) is a governmentowned,
contractor-operated national laboratory of the Department of Energy's
(DOE) National Nuclear Security Administration (NNSA).1 It is managed by
the University of California under a cost-reimbursable contract with NNSA.
The university is paid a management fee to operate the lab and is
reimbursed for all allowable costs charged to the contract.
o During the fall of 2002, the Federal Bureau of Investigation began
investigating two Los Alamos National Laboratory employees for alleged
misuse of lab credit cards. Other allegations of theft and misuse of
government funds at Los Alamos soon followed.
o In light of the problems identified at Los Alamos, you asked us to
review selected procurement and property management practices at two DOE
and two NNSA contractor labs, including LLNL.2
1NNSA was created in fiscal year 2000 as a separately organized agency
within DOE. As part of its national security mission, NNSA has
responsibility for the institutional stewardship of the three national
security laboratories which includes LLNL. 2The four labs we reviewed were
DOE's Lawrence Berkeley National Laboratory and Pacific Northwest National
Laboratory, and NNSA's Lawrence Livermore National Laboratory and Sandia
National
Laboratories.
Introduction and Objectives (cont'd)
o The objectives of our review at LLNL were to determine whether:
o Internal controls over LLNL's purchase card (Pcard) program provided
reasonable assurance that improper purchases would not occur or would be
detected in the normal course of business.
o Purchase card expenditures made under the contract (1) properly
complied with lab policies and other applicable requirements and (2) were
reasonable in nature and amount and thus were allowable costs payable to
the contractor under the contract.
o Property controls over selected asset acquisitions provided reasonable
assurance that accountable assets would be properly recorded and tracked.
Introduction and Objectives (cont'd)
o Our review covered selected transactions that occurred during fiscal
year 2002 and the first half of fiscal year 2003 (October 1, 2001, through
March 31, 2003), which were the most current data available when we
requested the data for our review.
o Throughout this document, references to purchases and transactions
refer to those made by the contractor employees of the lab that are
charged to the NNSA contract. Although the lab's purchase cards are
authorized by the contractor, purchases charged to the NNSA contract are
ultimately reimbursed and thus paid for by the federal government.
Similarly, property purchased that is charged to NNSA becomes government
property.
Results In Brief
o LLNL had implemented a number of internal controls over its Pcard
program and property management functions. However, weaknesses in LLNL's
Pcard program increased the lab's risk of improper purchases. Our review
of a nonstatistical selection of 144 transactions, while not projectable
to the universe of transactions, indicated a number of control weaknesses.
For example,
o Lab policy did not require approving officials to verify purchases
listed in the cardholder's transaction summary report against supporting
documents, which compromises the effectiveness of the review process in
detecting improper purchases.
o Fifteen (10 percent) of 144 nonstatistically selected transactions
totaling $23,923 lacked an invoice, credit receipt, or other sales
documentation necessary to validate the dollar amount, quantity, and
nature of the items purchased.
Results in Brief (cont'd)
o During our review period, the lab allowed supplemental labor
personnel-staff that worked at the lab for a labor subcontractor and thus
were not LLNL employees-to be issued Pcards. However, the lab did not have
controls in place to help ensure that the Pcards were returned if
supplemental employees stopped working at the lab. Instead, it relied on
the subcontractor to perform this function.
o These control weaknesses likely contributed in part to the $97,3483 in
improper, wasteful, and questionable transactions we identified during our
review. For example,
o Eighty-seven of the 144 purchases in the nonstatistical selection we
reviewed were for the purchase of controlled items that LLNL's policy
requires to be preapproved. Of these 87, 32 transactions (37 percent)
totaling $31,571 did not have any evidence of preapproval.
3This is the net total after adjusting for one $525 purchase that was both
improper because the cardholder failed to obtain a required preapproval
and wasteful because it was excessive in cost.
Results in Brief (cont'd)
o Two were improper split purchases-that is, groups of two or more
similar transactions that were split to circumvent single purchase
limits-consisting of 11 transactions totaling $28,137.
o Eleven transactions totaling $9,945 we determined to be wasteful
because they were excessive in cost compared to other available
alternatives and/or were of questionable need. For example, one cardholder
spent $1,559 for a reclining leather chair. While the requester had a
documented medical need for a special chair due to back problems, in a
similar situation another cardholder purchased an orthopedic chair from a
medical supply store for $599.
o Twelve transactions totaling $28,220 we considered questionable because
they were missing key documentation that would enable us or the lab to
determine what was purchased, the quantity and cost of the items
purchased, and whether the items purchased were proper and reasonable.
Results in Brief (cont'd)
o Accountable assets we tested generally were properly accounted for and
tracked in LLNL's property management system. Out of 144 transactions
reviewed, there were 6 transactions for the purchase of 26 accountable
assets totaling $70,048. Of these 26 assets, one item totaling $3,481 had
not been recorded in the property management system.
o In response to recent internal audit and other reviews, LLNL management
has made a number of improvements to its internal controls which, if
properly implemented, should further enhance controls over the Pcard
program. We are making five recommendations to address issues raised in
our review that require additional action.
o NNSA headquarters officials generally agreed with the findings and
recommendations. Lab officials disagreed with recommendations to (1)
require cardholders to maintain documentation such as a receipt or invoice
and (2) require approving officials to review such documentation before
approval, stating such documentation was unnecessary. We disagree, as
independent evidence of the description, quantity, and price of individual
items purchased and the supervisory review of such evidence is critical to
reducing the risk of improper purchases.
Background
o LLNL is a nuclear weapons and research lab located in Livermore,
California and has been operated by the University of California since it
opened in 1952.
o The lab's 8,900 staff are University of California employees. Its
fiscal year 2003 budget was about $1.6 billion.
o During fiscal year 2002, the lab made about $80 million in Pcard
purchases.
o As of March 2003, the lab had 284 active Pcard users.
Background (cont'd)
o Most cardholders have a $5,000 or $10,000 single purchase limit with
monthly limits ranging from $100,000 to $250,000. Five cardholders have
monthly limits from $500,000 to $3,000,000 because they purchase specific
items for the entire lab (i.e., furniture, shop stock, and library items).
o LLNL's property management department provides policy and oversight for
property management at the lab.
o Specific property center representatives within each organization are
responsible for coordinating with property management to track the
physical assets and ensure that information recorded in the property
database for each accountable asset is current.
Background (cont'd)
o Items that qualify as accountable assets are recorded and tracked in
the property management system. Accountable assets include:
o Assets with an acquisition value of $5,000 or more.
o Designated "attractive assets", which are items that are considered
susceptible to theft and generally have an acquisition value of $300 or
more, such as computers and digital cameras.
o Lab policy does not allow cardholders to purchase accountable assets
with a Pcard unless the cardholder receives prior approval to do so.
o As of June 2003 LLNL's property management system contained over 61,000
NNSA-owned accountable assets with a total recorded acquisition cost of
$1.3 billion.
Scope and Methodology
To determine if LLNL's internal controls over its Pcard program provided
reasonable assurance that improper purchases would not occur or would be
detected in the normal course of business, we
o Reviewed LLNL's contract with NNSA and applicable provisions of the DOE
Acquisition Regulation (DEAR) and the Federal Acquisition Regulation
(FAR),
o Performed walkthroughs of key processes, interviewed LLNL and NNSA
management and staff, and compared the results to the lab's policies and
GAO's Standards for Internal Control in the Federal Government. These
standards provide the overall framework for establishing and maintaining
internal control and for identifying and addressing major performance and
management challenges and areas at greatest risk of fraud, waste, abuse,
and mismanagement and are based on internal control guidance for the
private sector.4
4Internal Control - Integrated Framework, Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Scope and Methodology (cont'd)
o To test specific control activities and determine whether purchase card
expenditures complied with lab policies and other applicable requirements
and were reasonable in nature and amount, we first obtained from the lab
the database of purchase card transactions for fiscal year 2002 and the
first 6 months of fiscal year 2003. We separately obtained from the lab's
Pcard issuing bank the total dollar value of Pcard purchases for the
period to compare to the database for completeness.
We then selected transactions using the following methods.
o Data mining. We performed data mining on the Pcard transaction database
to identify potential noncompliance with policies and procedures.
o We looked for potential split purchases (i.e., groups of two or more
similar transactions that potentially were split to circumvent single
purchase limits), cardholders with multiple purchase cards, and
transactions on cards assigned to employees on leave or former employees.
Scope and Methodology (cont'd)
o Because of the high volume of potential split transactions, we
forwarded the results of a statistical sample of potential split purchase
transactions to the lab for a response and related documentation that we
then used to assess the transactions.
o For all other data mining selections, we forwarded the results that met
specific criteria to the lab for a response and related documentation that
we used to assess the transactions.
o Nonstatistical selection. We performed additional data mining on Pcard
transactions to first identify purchases that appeared to be from unusual
vendors, purchases made on weekends, during the holidays, or at fiscal
year-end, and purchases of attractive assets.
o As these analyses yielded thousands of transactions, we then made a
nonstatistical selection of 150 of these transactions totaling $276,969,
taking into account factors such as item description, amount, and
frequency of similar purchases, among other things.
Scope and Methodology (cont'd)
o Based on our review of the supporting documents, we determined 6
transactions were reversed by the vendor shortly after the purchases were
made. Thus, we eliminated these from further review, reducing the total
nonstatistical selection from 150 to 144 transactions.
o We used the 144 transactions to test specific control activities, such
as segregation of duties, evidence of supervisory review and approval, and
adequacy of supporting documentation, as well as to examine the
allowability and reasonableness of the purchases.
Scope and Methodology (cont'd)
o To determine if property controls over selected asset acquisitions
provided reasonable assurance that accountable assets would be properly
recorded and tracked, we
o Performed walkthroughs to observe property controls,
o Reviewed property management policies and procedures,
o Tested accountable property items selected in the nonstatistical
selection to determine whether these assets had been entered into the
lab's property systemprior to our review,
Scope and Methodology (cont'd)
o Performed data mining on the property database to identify possible
database errors or inaccuracies such as property assigned to terminated
employees and multiple property items with the same serial number, and
o Performed a physical observation of selected assets to determine
whether they could properly be accounted for.
o While we identified some improper, wasteful, and questionable
purchases, our work was not designed to determine the full extent of
improper purchases. We conducted our work on all four labs from March 2003
through May 2004 in accordance with generally accepted government auditing
standards.
Internal Control Weaknesses
During the period of our review, LLNL's internal controls did not provide
reasonable assurance that improper Pcard purchases would not occur or
would be detected in the normal course of business. Weaknesses we
identified included the following:
o Supervisory Review: The approving official's review of each purchase
card transaction is one of the most important controls to help ensure that
Pcard purchases are appropriate. We found that this critical control was
compromised because LLNL policy did not require approving officials to
verify transactions listed on the cardholders' monthly transaction summary
report against the supporting documentation. Without reviewing supporting
documentation such as the vendor invoice or receipt, the approving
official may not be aware of what specifically was purchased, the
quantity, or the dollar amounts.
Internal Control Weaknesses (cont'd)
o Certain transactions, because of the way they were set up by the lab,
were not subject to any supervisory review.
o LLNL's electronic data interchange (EDI) system allowed cardholders to
electronically make purchases called "material requests" from certain
vendors that had agreements with LLNL. Material requests were limited to
certain items in the vendor's catalog as negotiated with the lab. When a
cardholder submitted a material request order, the EDI system
electronically sent the order to the vendor along with authorization to
charge an institutional credit card number.
o Because these purchases were charged to an institutional credit card
number, they did not show up on individual cardholders' monthly
transaction summary reports and thus were not reviewed or approved by the
cardholders' approving official to determine if there was a legitimate
need for the items purchased. Two of the 144 transactions we reviewed were
EDI purchases and thus did not have any supervisory review.
Internal Control Weaknesses (cont'd)
o Transaction Documentation: We identified several transactions that
lacked key supporting documentation to verify specifically what was
purchased and the related cost.
o GAO's Standards for Internal Control in the Federal Government states
that transactions and other significant events need to be clearly
documented, and the documentation should be readily available for
examination.
o LLNL's Pcard policy required each cardholder to maintain the monthly
reconciliation reports signed by the cardholder and approving official
along with the corresponding backup information (e.g, packing slips,
receipts, or invoices) for up to 3 years.
Internal Control Weaknesses (cont'd)
o Out of the 144 transactions we reviewed, 15 (10 percent) totaling
$23,923 lacked an invoice, receipt, or other sales documentation.
o Without such documentation, the laboratory did not have any independent
evidence of the description and quantity of what was purchased and/or the
price paid.
o This lack of documentation was largely due to the fact that the Pcard
policy did not require cardholders to request the sales receipts or
invoices, if packing slips or order forms were available. However, packing
slips do not typically show the costs of the items purchased, and order
forms do not represent confirmation of goods actually purchased and
received.
Internal Control Weaknesses (cont'd)
Reconciliation of transactions: Cardholders were to reconcile their
transactions electronically on the Pcard system to supporting documents
weekly to verify that the charges were correct, input the item
descriptions, and record the proper account codes for each transaction. If
the cardholder did not perform this reconciliation, the Pcard system
automatically charged the transactions to the cardholder's default account
code which may not be appropriate for each purchase.
o Each cardholder must establish a default account code when they
complete the application for a Pcard. The account code determines whether
costs are charged to the NNSA contract, a contract for another agency or
sponsor, or absorbed by the contractor as in the case of unallowable
costs. This code also indicates the specific project or overhead account
that the expense is to be charged to.
Internal Control Weaknesses (cont'd)
o Since each cardholder may make purchases for many requesters and
purposes, their default codes may not be appropriate for some purchases.
For example, if the cardholder's default codes are for a specific NNSA
project and they make purchases that are not supposed to be charged to the
contract, if they do not perform the monthly reconciliation these
purchases will initially be charged to NNSA. If uncorrected, NNSA may
reimburse the lab for these non-NNSA expenditures.
o For example, the nonstatistical selection of transactions we reviewed
included a $463 charge that the cardholder did not reconcile because he
said he didn't recognize the charge and thus, allowed it to automatically
charge to his default account code. Although he erroneously applied a
credit received 6 months later from a different transaction to partially
offset the charge, the remainder was charged to NNSA via the cardholder's
default code, even though NNSA received no benefit from the expense.
Internal Control Weaknesses (cont'd)
Pcards Issued to Supplemental Employees: LLNL subcontracted with certain
companies to supply the lab with additional staff to supplement its
workforce. These supplemental employees were employees of the
subcontractor and not the lab. Until December 2003, the lab allowed
supplemental employees to have Pcards. However, the lab did not have
controls in place to help ensure that the accounts were cancelled and the
Pcards returned if the supplemental employee stopped working at the lab.
Instead, it relied on the subcontractor to perform this function.
o During our review period, 31 supplemental employees had active Pcard
accounts.
Internal Control Weaknesses (cont'd)
o LLNL did not maintain a database to track supplemental employees' start
and termination dates. Instead, it relied on the subcontractor that
employed the staff to track this information.
o Although there was an exit checklist to be completed when a
supplemental employee left the lab, LLNL also relied on the subcontractor
to ensure the checklist was completed and that the purchase cards were
turned in. Consequently, the lab could not ensure that Pcards issued to
supplemental employees were cancelled timely and returned to the lab upon
termination, increasing the risk of improper purchases.
Improper, Wasteful, and Questionable Purchases
We also identified improper, wasteful, and questionable transactions
totaling $97,3485 indicating additional areas where controls could be
improved.
Improper Purchases: We identified 43 transactions totaling $59,708 of
improper purchases, which we defined as purchases that violated the NNSA
contract or lab purchasing policies. Four of these transactions had been
discovered as improper by the procurement department's internal review
group during its periodic purchase transaction reviews. The improper
purchases identified included the following:
5This is the net total after adjusting for one $525 purchase that was both
improper because the cardholder purchased a restricted item without
preapproval and wasteful because it was excessive in cost.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Controlled or restricted items without preapproval. In the
nonstatistical selection of 144 transactions, 87 were for the purchase of
items listed on the lab's Controlled Items and Services List (CISL). Of
these 87, 32 transactions (37 percent) totaling $31,571 were improper
because they were either restricted items that had not received
preapproval as required by lab policy, or were prohibited from being
purchased with a Pcard.
o Four of these transactions totaling $3,887 were discovered by the lab's
internal review process.
o Examples of the remaining 28 transactions totaling $27,684 include the
following:
o Eight purchases for catering services and other food items totaling
$9,776, despite the fact food is a restricted item.
Improper, Wasteful, and Questionable Purchases (cont'd)
o A portable video projector for $3,481 for which the cardholder did not
obtain preapproval, despite the fact video projectors are on the CISL and
thus require preapproval.
o A purchase of a laptop case using Paypal, a prohibited thirdparty
payment facilitator. Paypal accepts credit card payments from the
purchaser, then remits the proceeds to the vendor who typically does not
directly accept credit cards. Because Paypal shows up as the vendor name
on the cardholder's statement, and not the vendor that provided the goods
or services purchased, there is no way to verify who actually was paid and
what was received in return.
o Two purchase transactions for digital cameras costing $487 and $1,120.
The CISL requires digital cameras over $300 to be purchased under a
different purchase method.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Split Purchases: LLNL's Pcard policy prohibits splitting purchases into
more than one transaction to circumvent single purchase limits. Using data
mining techniques, we identified 210 potential split purchases-that is,
groups of two or more similar transactions that potentially were split to
circumvent single purchase limits. After selecting a statistical sample of
27 of these potential split purchases, we found 2 were in fact improper
split purchases consisting of 11 transactions totaling $28,137. LLNL's
internal reviews had discovered one of these two split purchases totaling
$16,332. Our sample also included one potential split purchase consisting
of 8 transactions totaling $18,108 for which the lab was unable to provide
sufficient documentation to determine whether this was in fact a split
purchase. Therefore, we considered this to be potentiallyimproper.
o An internal review group in the lab's procurement department performs
data mining procedures to identify potential split purchases. They then
follow up with identified cardholders to determine whether the purchases
were in fact split purchases and to reinforce the policy. Based on the
results above, these controls appeared to help minimize the frequency of
split purchases.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Wasteful Purchases: Out of 144 transactions, we also identified 11
transactions totaling $9,945 that we determined to be wasteful-that is,
were excessive in cost compared to other available alternatives and/or
were of questionable need or both.
o We considered them excessive in cost when compared to available
alternatives that would meet the same basic need, or of questionable need
when they appeared to be items that were a matter of personal preference
or convenience, were not part of the usual and necessary equipment for the
work the employees were engaged in, and/or did not appear to benefit NNSA.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Two of these transactions totaling $2,020 were identified by the lab's
internal review process or by its internal auditors. These included the
following:
o One purchase of five sets of Bose noise-canceling headsets costing $299
each. Similar noise-canceling headsets are available from other vendors
for $85-$150. In March 2004, LLNL implemented a policy requiring all
purchase requests for these types of headsets to be reviewed and approved
by the Environment, Safety, and Health team before purchase. The
contractor subsequently repaid NNSA for the cost of these headsets.
o One purchase of two air purifiers costing $262 each from The Sharper
Image. We question both the government need for these items and the cost,
given that other air purifiers are available for $100-$220 and the need
for this equipment had not been documented. In March 2004, LLNL began
requiringthat all purchase requests of air purifiers be reviewed and
approved by the Environment, Safety, and Health team before purchase. The
contractor subsequently repaid NNSA for the cost of these air purifiers.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Some of the remaining 9 transactions totaling $7,925 included:
o A reclining leather "zero-gravity" chair costing $1,559. While the
requester had a documented medical need for a special chair due to back
problems, another cardholder purchased an orthopedic chair from a medical
supply store for $599 to meet a similar need.
o A beverage-serving cart purchased for a conference room that cost
$1,688. We identified other quality beverage tables and carts available
for about $400.
o Rain gear purchased for $460 which included two jackets costing$150
each and other apparel. We identified other heavy duty work-related rain
gear costing from around $60.
o $842 for motivational posters purchased from Skymall costingfrom $70 to
$120 each. The same or similar posters were available from other vendors
for $36 to $68 each.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Questionable Purchases: We identified 12 transactions totaling $28,220
that we classified as questionable because there was insufficient
documentation to determine what was actually purchased, the quantity and
cost of items purchased, and whether the purchase was proper and
reasonable. These included the following:
o Two of these transactions totaling $6,725 were cash advances that were
used to purchase money orders from the post office. According to a lab
official, the money orders were used to purchase visas from the Russian
embassy for a number of LLNL employees scheduled to travel to Russia.
However, the cardholder could not provide any receipt from the Russian
embassy documenting how the money orders were spent. Without additional
supporting documentation, we were unable to verify how the money orders
were ultimately used.
Improper, Wasteful, and Questionable Purchases (cont'd)
o One transaction was for a total purchase of $1,388 from REI, an outdoor
sporting goods store. The cardholder could not provide the receipt for the
purchase. The lab indicated that the purchase was for protective clothing
for a qualified emergency response employee who needed to be able to
respond to emergencies under all weather conditions. However, without a
receipt, there is no independent evidence of what was purchased and thus,
we could not determine whether the purchase was reasonable.
o One $2,000 transaction was for the purchase of 20 $100 Sears gift
certificates. According to the purchase request, these gift certificates
were for the Directorate Awards Program. However, LLNL was unable to
provide any support indicating the recipients of these awards and whether
they were all distributed.
Improper, Wasteful, and Questionable Purchases (cont'd)
o As mentioned previously, we also identified a potential split purchase
that consisted of eight transactions totaling $18,108 with characteristics
similar to a split purchase. However, the lab was unable to provide
sufficient supporting documentation to determine whether this was in fact
a split purchase. Because of this lack of documentation, we could not
determine whether the purchases were proper and therefore also consider
these to be questionable.
Improper, Wasteful, and Questionable Purchases (cont'd)
o These instances of improper, wasteful, and questionable transactions
may be attributed in part to inadequate training of cardholders and
reviewing officials.
o Although approving officials were expected to be cognizant of Pcard
policies to fulfill their responsibilities as approving officials,
training for approving officials was not offered or required until August
2002. Additionally, refresher training courses were not offered or
required for approving officials. Instead, Pcard policies and procedures
and updates to policies were made available via an internal Web site.
o Because purchasing requirements often change, adequate training on the
proper use of the Pcard for all parties involved in the purchasing process
is essential. While updates to Pcard policies were sent to approving
officials and made available via an internal Web site, without formal
training and refresher courses, Pcard policies and changes are more likely
to be forgotten or overlooked.
Improper, Wasteful, and Questionable Purchases (cont'd)
o While the $97,3486 of improper, wasteful, and questionable purchases
identified by GAO are relatively small compared to the $120 million in
purchase card activity at the lab during our review period, they
demonstrate vulnerabilities from weak controls that could be exploited to
a greater extent. In addition, because we only tested a small portion of
the transactions we identified 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.
6This is the net total after adjusting for one $525 purchase that was both
improper because the cardholder purchased a restricted item without
preapproval and wasteful because it was excessive in cost.
Property Management
o GAO's Standards for Internal Control in the Federal Government requires
agencies to establish physical controls to secure and safeguard vulnerable
assets. Such assets should be periodically counted and compared to control
records. LLNL policy requires that controlled and attractive property be
tagged with bar-code property numbers and tracked in the property
management system.
o In our review of 144 nonstatistically selected transactions, 6 were for
the purchase of 26 accountable property items totaling $70,048.
o LLNL property management recorded all of these assets in the property
management system except for one item totaling $3,481. LLNL subsequently
entered the item to its property database.
o We selected all 26 of these assets for physical observation. We
physically verified 23 of the assets and reviewed supportingdocumentation
to confirm the status for the remaining 3, 2 of which were off-site and
1-a $390 cellular phone-which had been reported stolen and was under
investigation.
Property Management (cont'd)
o We also selected five additional items totaling $5,663 that appeared to
be attractive items but were not listed on the attractive items list as
items required to be tracked in the property database. We were able to
locate all of these items.
o The low incidence of unrecorded items may be attributed to two factors.
One, lab policy prohibits the purchase of controlled and attractive items
with a Pcard unless the cardholder has obtained prior approval. Secondly,
lab officials informed us that, for the past 3 years, a procurement review
group has performed periodic unannounced inspections of Pcard packages at
central receiving. Since Pcard packages are not normally opened by central
receiving, lab officials stated that these inspections have identified
accountable assets purchased by cardholders.
Recent Policy and Procedural Changes
According to LLNL management, it has recently implemented several new
controls in response to recent Pcard reviews.
o In August 2002, LLNL implemented a policy requiring Pcard approving
officials to go through a formal training process on Pcard purchasing
policies. Previously, only cardholders were required to have such
training. In addition, lab officials stated they are currently in the
process of implementing an online training and recertification process for
cardholders and approving officials.
Recent Policy and Procedural Changes (cont'd)
o The lab's director of internal audit informed us that, following an
internal audit review completed in April 2003, the lab began generating a
weekly report of unreconciled transactions that were automatically charged
to the cardholders' default accounting codes. An internal review group is
responsible for reviewing and following up on these items to determine
adequate resolution.
o The lab's director of internal audit stated that in October 2003,
internal audit provided training to the procurement department on data
mining techniques to help procurement better detect improper purchases.
o According to a lab official, all three of the University of California
laboratories began using new, consistent criteria for determining
sensitive property beginning in October 2003.
Recent Policy and Procedural Changes (cont'd)
o In December 2003 LNNL changed its policy to prohibit non-lab personnel
such as supplemental employees from having Pcards. According to LLNL
management, all Pcards issued to supplemental employees were cancelled at
that time.
o In February 2004, LLNL clarified its guidelines on purchases of
catering services made by one of its off-site locations. The revised
guidelines included minimum time requirements for business meetings,
preapproval requirements, and definitions of visitors. The revisions were
made in response to an internal audit of fiscal year 2002 and 2003
off-site catered events that resulted in repaying NNSA $11,458 for
unallowable meal purchases.
Recent Policy and Procedural Changes (cont'd)
o On March 5, 2004, LLNL began requiring formal review and documentation
of the Environment, Safety, andHealth team's assessment of site conditions
and requiring preapproval for all requests to purchase air purifiers and
noise-canceling headphones. This change was in response to a recent
internal audit review which resulted in the lab repaying NNSA $5,490 for
11 air purifiers and 9 headphones.
o According to lab officials, the EDI system that charged certain
purchases against a central purchase card account rather than individual
cardholders' Pcard accounts was eliminated in May 2004. Now, purchases
that were made through EDI are to go through a different system that
charges the account of the cardholder making the purchase. Thus, such
charges would appear on the cardholder's monthly statement for review by
their approving official.
Recent Policy and Procedural Changes (cont'd)
o Lab officials also informed us that they expect to implement an
automated control in the Pcard system by October 2004 that will flag
certain purchases. This systems upgrade is being designed to better alert
cardholders and approving officials of purchases that may be in LLNL's
restricted or prohibited items list which require preapproval and/or a
waiver to purchase with a Pcard.
Conclusions
LLNL has implemented a number of noteworthy internal controls over its
Pcard program and property management functions. However, weaknesses in
certain control areas made the lab vulnerable to, and in some instances
contributed to, improper, wasteful, and questionable purchases. In
response to recent audits, the lab has continued to make changes to
address certain identified weaknesses. While these are positive steps,
further strengthening of controls is needed and management needs to ensure
that it gives continued attention to ongoing monitoring of compliance with
established policies and procedures.
Recommendations
o We recommend that the Administrator of NNSA direct Lawrence Livermore
National Laboratory's Director to take the following four actions to
strengthen internal controls over the purchase card program and reduce the
lab's vulnerability to improper, wasteful, and questionable purchases.
o Establish policies and procedures requiring that purchasers request and
maintain a copy of the detailed sales receipt, invoice, or other
independent support showing the description, quantity, and price of
individual items purchased.
o Require approving officials to review transaction documentation before
approving transactions listed on the cardholders' monthly transaction
summary reports. This should include determining that there is independent
support for the description, quantity, and price of individual items
purchased, and that the cardholder obtained and documented any required
preapprovals before purchase.
Recommendations (cont'd)
o Consider modifying the Pcard system so that purchases that are not
reconciled timely by thecardholder are charged to a temporary suspense
account rather than to each cardholder's default account codes.
o In conjunction with the implementation of the lab's online training and
recertification for cardholders and approving officials, include in such
training an emphasis on (1) the lab's policy to obtain preapprovals for
all purchases of items listed on the controlled items and services list,
and (2) consideration of best value in making and approving purchases.
Because the controlled items and services list is frequently updated, the
training should include reviewing the items on the current list and any
recent changes.
Recommendations (cont'd)
o We also recommend that the Administrator of NNSA direct the NNSA
contracting officer for the lab to review the improper, wasteful, and
questionable items we identified to determine whether any of these
purchases should be repaid to NNSA.
Agency Comments
o We obtained comments on a draft of this briefing from NNSA officials.
They generally agreed with the findings and recommendations, and indicated
that the lab has made a number of improvements to its controls in light of
the problems identified at Los Alamos.
o We also obtained comments from LLNL officials, who disagreed with the
recommendations to (1) require sales documentation such as a receipt or
invoice and (2) require approving officials to review such documentation
before approving purchases. They indicated sales receipts and invoices
were not always available and did not feel they were necessary to support
purchases. Instead, they felt that as long as the order amount entered
into the Pcard system by the cardholder matched the total purchase amount
charged by the bank, that was sufficient evidence to support that the
purchase was proper.
Agency Comments (cont'd)
o We disagree. The matching of the total dollar amount of the transaction
to the order amount entered by the cardholder without independent evidence
of the description, quantity, and price of individual items purchased does
not provide sufficient evidence that the items purchased were proper.
Because the cardholder enters the order, makes the purchase, and
reconciles any differences, a reviewer would not be able to determine if
the original order amounts were correct nor whether additional items were
purchased under that order. Consequently, sufficient independent evidence
for the individual items purchased and corresponding supervisory review of
such evidence is necessary to help reduce the risk of improper purchases.
o The lab also provided technical and clarifying comments, which we
incorporated as appropriate.
Lawrence Livermore National Laboratory
(190129)
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