Pacific Northwest National Laboratory: Enhancements Needed to
Strengthen Controls Over the Purchase Card Program (05-AUG-04,
GAO-04-988R).
The Pacific Northwest National Laboratory (PNNL) located in
Richland, Washington, is a government-owned, contractor-operated
Department of Energy (DOE) national laboratory. The Battelle
Memorial Institute manages the lab under a costreimbursable
contract with DOE. Battelle 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, GAO was asked to review selected procurement and property
management practices at two NNSA and two DOE contractor labs,
including PNNL. This report summarizes the information provided
during our June 14, 2004 briefing to staff of the House
Committees on Science and Energy and Commerce on these issues as
they relate to PNNL. Specifically, we reviewed PNNL'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 (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
four recommendations for action--three related to actions needed
to be taken by PNNL and one related to action needed to be taken
by the DOE contracting officer for PNNL.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-988R
ACCNO: A11461
TITLE: Pacific Northwest National Laboratory: Enhancements
Needed to Strengthen Controls Over the Purchase Card Program
DATE: 08/05/2004
SUBJECT: Internal controls
Laboratories
Program abuses
Questionable procurement charges
Credit sales
Federal procurement
Fraud
GOCO
Inventory control
Procurement records
Property and supply management
Government purchase cards
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GAO-04-988R
United States Government Accountability Office Washington, DC 20548
August 6, 2004
Congressional Requesters
Subject: Pacific Northwest National Laboratory: Enhancements Needed to
Strengthen Controls Over the Purchase Card Program
The Pacific Northwest National Laboratory (PNNL) located in Richland,
Washington, is a government-owned, contractor-operated Department of
Energy (DOE) national laboratory. The Battelle Memorial Institute manages
the lab under a costreimbursable contract with DOE. Battelle 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 NNSA1 and two DOE contractor labs,
including PNNL.2
This report summarizes the information provided during our June 14, 2004
briefing to your staff on these issues as they relate to PNNL. The
enclosed briefing slides highlight the results of our work and the
information provided.3 Specifically, we reviewed PNNL'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
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-04-988R PNNL Purchase Card Controls
would be properly recorded and tracked.4 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 four recommendations for action-three related to
actions needed to be taken by PNNL and one related to action needed to be
taken by the DOE contracting officer for PNNL.
Results in Brief
The lab had established a number of internal controls to help ensure that
improper purchases would not occur or would be detected in the normal
course of business. However, we identified additional control areas in the
lab's Pcard program that need to be strengthened in order to further
reduce the risk of improper purchases. For example, during the majority of
our review period, the Pcard administrator and her assistant-who were
responsible for monitoring cardholder compliance with Pcard policies,
requesting new cards, and authorizing spending limit increases-were also
cardholders. This created a conflict of interest that could compromise
program oversight. In addition, of the 148 nonstatistically selected Pcard
transactions obtained through data mining5 for fiscal year 2002 and the
first half of fiscal year 2003, we found 12 (9 percent) of the
transactions totaling $21,834 lacked sufficient documentation such as an
invoice, credit receipt, or other sales documentation necessary to fully
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.
We also identified $104,250 of improper, wasteful, and questionable
purchases in our review of transactions selected on a statistical and
nonstatistical basis. While relatively small compared to the approximately
$44 million in purchase card activity that occurred during the review
period, it demonstrates areas where additional enhancements in controls
are needed. Specifically, we found improper purchases consisting of:
o Ten groups of split purchases-that is, groups of two or more similar
transactions that were split to circumvent single purchase
limits-consisting of 21 transactions totaling $81,448 from a statistical
sample. Based on our audit work, we estimate that $777,766 of total fiscal
year 2002 and the first half of fiscal year 2003 purchase transactions
identified as potentially split, were split purchases.6
4Throughout this document, references to purchases and transactions refer
to those made by the
contractor employees of the lab that are charged to the DOE contract.
Although the lab's purchase
cards are issued by the contractor, purchases charged to the DOE contract
are ultimately reimbursed
and thus paid for by the federal government. Similarly, property purchased
that is charged to DOE
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.
6The total dollar value of the population of 211 potentially split
purchases identified from data mining
was $1,794,477. We are 95 percent confident that the total dollar value of
actual split purchases was
between $462,787 and $1,092,745.
Page 2 GAO-04-988R PNNL Purchase Card Controls
o Seven transactions totaling $7,956 that were improperly charged to
cardholders' accounts by someone other than the cardholder, contrary to
lab policy. These were for purchases at vendors with whom the cardholders
had a preexisting account.
o Eleven transactions totaling $8,534 that were improper because they
were unallowable under the contract or were prohibited from being
purchased with a Pcard. For example, one transaction for $1,277 was for
catering services that were unallowable at the time of purchase.
We also identified three transactions totaling $693 that we considered
wasteful because they were excessive in cost when compared to other
alternatives and/or were of questionable need and four transactions
totaling $5,619 that we considered questionable because they were missing
key documentation that would enable us or the lab to determine what items
were purchased and whether they 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 PNNL's property management system. Of the 32 accountable assets
totaling $52,753 that were in the test population, 3 assets totaling
$4,700 had not been recorded in the property management system.
The lab has made a number of recent policy and procedural changes that, if
properly implemented, should help improve internal controls over its 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 Secretary of Energy direct the Pacific Northwest National Laboratory's
Director to take the following three actions to strengthen internal
controls over the purchase card program and reduce the lab's vulnerability
to improper, wasteful, and questionable purchases.
o Cancel purchase card accounts for cardholders who also perform
oversight functions over the purchase card program to help ensure
appropriate independence and separation of duties between these functions.
o Establish policies and procedures requiring that purchasers 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, during their review of cardholder
transaction documentation, to ensure that the cardholders obtained a sales
receipt or
Page 3 GAO-04-988R PNNL Purchase Card Controls
invoice to support each purchase, and that the cardholder obtained and
documented any required preapprovals before purchase.
We also recommend that the Secretary of Energy direct the DOE 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 DOE.
Agency Comments
We met with laboratory and local DOE officials to obtain their oral
comments on a draft of this briefing. They generally agreed with our
findings and recommendations and indicated that the lab has taken or will
take action to address the issues identified. For example, lab officials
indicated that while the practice has been to provide the most complete
source documentation available, they agreed to formalize the requirement
and plan to work with the contracting officer to establish the most
complete level of documentation required to support Pcard transactions.
They also indicated they would emphasize this and other requirements
during training. In addition, the lab cancelled the Pcard administrator's
assistant's Pcard effective June 7, 2004. The lab also provided technical
and clarifying comments, which we incorporated as appropriate.
Scope and Methodology
To determine if PNNL'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 PNNL's contract
with DOE and applicable provisions of the DOE Acquisition Regulation
(DEAR) and the Federal Acquisition Regulation (FAR), performed
walkthroughs of key processes, interviewed PNNL and DOE management and
staff, and compared the results to the lab's policies and GAO's
7
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 sensitive assets.
Based on the results, we (1) identified 211 potential split purchases
consisting of 1,338 transactions. From these, we selected a statistical
sample of 27 potential
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 4 GAO-04-988R PNNL Purchase Card Controls
split purchases consisting of 75 transactions and tested to determine
whether they were in fact split purchases, (2) used a nonstatistical
selection of 25 transactions made by cardholders while on leave or by
former employees to determine whether they were proper purchases, and, (3)
tested a nonstatistical selection of 148 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, and 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.
We requested oral comments on a draft of the enclosed briefing slides from
the Secretary of Energy 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.
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; and the Pacific
Northwest 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
[email protected] or [email protected]. Additional contributors to this
assignment were Rick Kusman, Delores Lee, Kelly Lehr, Diane Morris, Eileen
Peguero, Estelle Tsay, and Eric Wenner.
Linda M. Calbom
Director, Financial Management and Assurance
Enclosure
Page 5 GAO-04-988R PNNL 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 6 GAO-04-988R PNNL Purchase Card Controls
June 14, 2004, Briefing
Pacific Northwest National Laboratory
Enhancements 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 Pacific Northwest National Laboratory (PNNL) located in Richland,
Washington, is a government-owned, contractor-operated Department of
Energy (DOE) national laboratory. It is managed by the Battelle Memorial
Institute under a cost-reimbursable contract with DOE. Battelle 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 NNSA1
and two DOE contractor labs, including PNNL.2
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.
Introduction and Objectives (cont'd)
The objectives of our review at PNNL were to determine whether:
o 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.
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 who are charged
to the DOE contract. Although the lab's purchase cards are authorized by
the contractor, purchases charged to the DOE contract are ultimately
reimbursed and thus paid for by the federal government. Similarly,
property purchased that is charged to DOE becomes government property.
Results in Brief
o The lab has established a number of internal controls to help ensure
that improper purchases would not occur or would be detected in the normal
course of business. However, we identified additional control areas in the
lab's Pcard program that need to be strengthened in order to further
reduce the risk of improper purchases. For example:
o During the majority of our review period, the Pcard administrator and
her assistant-who were responsible for monitoring cardholder compliance
with Pcard policies, requesting new cards, and authorizing spending limit
increases-were also cardholders. This created a conflict of interest that
could compromise program oversight.
o 12 (9 percent) of 148 nonstatistically selected transactions totaling
$21,834 lacked sufficient documentation such as an invoice, credit
receipt, or other sales documentation necessary to fully validate the
dollar amount, quantity, and nature of the items purchased.
Results in Brief (cont'd)
o We also noted $104,250 of improper, wasteful, and questionable
purchases in our review of transactions selected on a statistical and
nonstatistical basis. While relatively small compared to the approximately
$44 million in purchase card activity that occurred during the review
period, it demonstrates areas where additional enhancements and controls
are needed. These included:
o Ten groups of improper split purchases-that is, groups of two or more
similar transactions that were split to circumvent single purchase
limits-consisting of 21 transactions totaling $81,448 from the statistical
sample. Based on our audit work, we estimate that $777,766 of total fiscal
year 2002 and the first half of fiscal year 2003 purchase transactions
identified as potentially split, were split purchases.3
o Seven transactions totaling $7,956 that were improperly charged to
cardholders' accounts by someone other than the cardholder, contrary to
lab policy. These were for purchases at vendors with whom the cardholders
had a preexisting account.
3The total dollar value of the population of 211 potentially split
purchases identified from data mining was $1,794,477. We are 95 percent
confident that the total dollar value of actual split purchases was
between $462,787 and $1,092,745.
Results in Brief (cont'd)
o Eleven transactions totaling $8,534 that were improper because they
were unallowable under the contract or were prohibited from being
purchased with a Pcard.
o Three transactions totaling $693 that we considered wasteful because
they were excessive in cost when compared to other alternatives and/or
were of questionable need, such as $413 for an oversized laptop case with
wheels when comparable cases were available for about $100.
o Four transactions totaling $5,619 that we considered questionable
because they were missing key documentation that would enable us or the
lab to determine what items were purchased and whether they were proper
and reasonable.
Results in Brief (cont'd)
o Accountable assets we tested generally were properly accounted for and
tracked in PNNL's property management system. Of the 32 accountable assets
totaling $52,753 that were in the test population, 3 assets totaling
$4,700 had not been recorded in the property management system.
o The lab has made a number of recent policy and procedural changes that,
if properly implemented, should help improve internal controls over its
Pcard program. We are making four recommendations to address issues raised
in our review that require additional action.
o Lab and local DOE officials generally agreed with our recommendations.
The lab indicated it cancelled the Pcard administrator's assistant's card
effective June 7, 2004, and agreed to work with the contracting officer to
establish the most complete level of documentation required to support
Pcard transactions. Lab officials also indicated they would emphasize this
and other requirements during training.
Background
o PNNL is a multiprogram research laboratory located in Richland,
Washington, and has been operated by the Battelle Memorial Institute, a
nonprofit entity, since 1965.
o The lab's 4,000 staff are Battelle employees. Its fiscal year 2003
budget was about $550 million.
o PNNL implemented the Pcard program in 1995. During fiscal year 2002,
the lab made about $31 million in Pcard purchases.
o As of March 2003, the lab had 869 active Pcards. In response to recent
internal and DOE reviews, PNNL management has been reducing the number of
cardholders. As of May 2004, there were 671 active Pcards.
Background (cont'd)
o Most cardholders have $5,000 or $10,000 single purchase transaction
limits. Eight cardholders have single purchase limits ranging from $25,000
to $100,000, due to their responsibilities for making certain labwide
purchases (e.g., telephone services, furniture, vehicle leases).
o PNNL's property management section provides policy and oversight for
property management at the lab.
o PNNL uses two receiving facilities to receive procured goods including
Pcard purchases. As items are received, central receiving staff are to
review the corresponding purchase records and packing slips to determine
if the package appears to contain accountable assets. If so, they are to
open the packages and apply inventory bar-codes and/or ownership tags to
the items, as appropriate.
o Specific managers within each organization are assigned the
responsibility for coordinating with property management to track the
physical assets and ensure that recorded information for each accountable
asset is current.
Background (cont'd)
o Items that qualify as accountable assets are bar-coded and recorded in
the property management system. Accountable assets include:
o All assets with an acquisition value of $5,000 or more, and
o Designated sensitive assets, which are items susceptible to theft and
generally have an acquisition value of $500 or more, and include items
such as laptops and DVD recorders.
o As of March 2003, PNNL's property management system contained about
20,000 DOE-owned accountable assets with a total recorded acquisition cost
of $306 million.
Scope and Methodology
To determine if PNNL'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 PNNL's contract with DOE and applicable provisions of the DOE
Acquisition Regulation (DEAR) and the Federal Acquisition Regulation
(FAR), and
o Performed walkthroughs of key processes, interviewed PNNL and DOE
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)
To test specific control activities and determine whether Pcard
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 indicators of 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) and transactions on cards assigned to employees on leave
or former employees.
Scope and Methodology (cont'd)
o Because our data mining for split purchases yielded 1,338 transactions
that made up 211 potential split purchases, we selected a statistical
sample of 75 transactions that made up 27 potential split purchases. We
reviewed the related supporting documentation and the lab's response in
assessing whether these were in fact split purchases.
o Because our data mining for transactions made by cardholders while on
leave or by former employees also yielded hundreds of transactions, we
made a nonstatistical selection of 25 of these transactions and forwarded
the results 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 identify purchases that appeared to be from unusual
vendors, purchases made on weekends, during the holidays, or at
fiscal-year end, and purchases of sensitive assets.
Scope and Methodology (cont'd)
o As these analyses yielded thousands of transactions, we then made a
nonstatistical selection of 150 of these transactions totaling $175,936,
taking into account factors such as item description, amount, and
frequency of similar purchases, among other things. We did not select any
transactions that were previously identified by internal audit and agreed
to by PNNL management as unallowable items. However, we did select some in
which the lab had not yet determined allowability.
o Based on our review of supporting documents, we determined that two
transactions were made by unknown perpetrators with stolen Pcards. Because
we were able to verify that the charges were subsequently reversed by the
issuing bank, we eliminated these from the nonstatistical selection, thus
reducing the total selection to 148 transactions.
o We tested the 148 transactions for specific control activities, such as
evidence of supervisory review and approval, adequacy of supporting
documentation, as well as to examine the reasonableness of the purchases.
Scope and Methodology (cont'd)
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, and
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.
o While we identified some improper, wasteful, and questionable
purchases, our work was not designed to determine the full extent of such
purchases.
o 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
PNNL management has recognized the inherent risks associated with the
Pcard program and has implemented controls to help ensure that improper
purchases would not occur or would be detected in the normal course of
business. However, the exceptions noted in our review, primarily split
purchases, point to additional areas that need to be addressed to further
enhance controls over the Pcard program. PNNL management is already
addressing some of these issues in response to recent audits.
Internal Control Weaknesses (cont'd)
Examples of Pcard controls that were instituted at PNNL to reduce the risk
of improper purchases and help ensure that accountable property was
recorded and tracked included the following:
o Based on the dollar amount of the purchase entered into the Pcard
system for each order, the Pcard system automatically flagged certain
purchases to alert central receiving staff that the item may require
certain ownership tags and property bar-codes.
o Central receiving staff could access the Pcard system for detailed
purchase information to facilitate the identification of accountable
assets and alert the Pcard office of purchases that appeared improper.
o Property management reviewed exception reports to identify potential
accountable assets purchased via Pcards that had been marked as received
but were not entered in the property management system.
Internal Control Weaknesses (cont'd)
However, during our review, we noted two weaknesses in the design of the
controls over the Pcard program that increased the risk of improper
purchases.
o Segregation of Duties: The Pcard administrator and her assistant were
also cardholders.
o As Pcard administrators, they were responsible for monitoring and
enforcing cardholder compliance with Pcard policies. The Pcard
administrator was also responsible for taking disciplinary actions such as
warnings, suspensions, and/or card cancellations.
Internal Control Weaknesses (cont'd)
o The Pcard administrator was the primary contact with the bank, and thus
had authority to order new cards and request credit-limit increases.
o This situation created a conflict of interest between the cardholder
and program oversight roles, elevating the risk that spending
improprieties would not be detected.
Internal Control Weaknesses (cont'd)
o Transaction Documentation: During our testing of a nonstatistical
selection of transactions, 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 Out of 148 transactions reviewed, we found 12 (9 percent) totaling
$21,834 that lacked sufficient documentation such as an invoice, credit
receipt, or other sales documentation necessary to fully validate the
dollar amount, quantity, and nature of the items purchased.
Internal Control Weaknesses (cont'd)
o Without such documentation, the laboratory did not have sufficient
independent evidence of the description and quantity of what was purchased
and/or the price paid.
o This lack of documentation is partly due to PNNL policy. Although lab
policy requires each transaction to be supported, it does not specifically
require cardholders to request or retain the sales receipts or invoices. A
lab official informed us that the Pcard office will allow packing slips or
order forms in lieu of such documents if a reviewer can reasonably
validate the quantity and items purchased. However, packing slips
typically do not show the costs of the items purchased, and order forms do
not represent confirmation of goods actually purchased and received. While
lab officials stated they emphasize to cardholders that receipts are the
preferable form of evidence, they acknowledged that the current policy
does not clearly specify this.
Improper, Wasteful, and Questionable Purchases
We also identified improper, wasteful, and questionable transactions
totaling $104,250 indicating additional areas where controls could be
improved. As discussed below, most of these related to split purchases.
Based on our review of a statistical sample of potential split purchases,
we estimate that $777,766 of total fiscal year 2002 and the first half of
fiscal year 2003 purchase transactions were actual split purchases.5
Improper Purchases: We identified 39 transactions totaling $97,938 of
improper purchases, which we defined as purchases that violated the DOE
contract or lab policy. These included the following:
5Our population of 211 potential split purchases had a total value of over
$1,794,477. We are 95 percent confident that the total dollar value of
actual split purchases was between $462,787 and $1,092,745.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Split purchases: PNNL's Pcard policy prohibits splitting purchases into
more than one transaction to circumvent single purchase limits. Using data
mining techniques, we identified 211 potential split purchases-that is,
groups of two or more similar transactions that potentially were split to
circumvent single purchase limits. In the statistical sample of 27 of
these potential split purchases consisting of 75 total transactions, we
found 10 were in fact improper split purchases consistingof 21
transactions totaling $81,448. Based on these results, we estimate that
$777,766 of total fiscal year2002 and the first half of fiscal year 2003
purchase transactions were split purchases.
Improper, Wasteful, and Questionable Purchases (cont'd)
o For example, a cardholder with a $10,000 limit made two separate
purchases of hardware totaling $14,929. Supporting documents indicated
that the orders were placed on the same date with the same vendor. Both
orders were received the same day.
o Reviewing officials had approved the monthly statements containing
these split purchases, indicating some approving officials were not fully
aware of the split purchase policy.
o While PNNL's internal controls (central receiving and Pcard office
staff) had previously discovered two of these split purchases totaling
$13,558, it had not detected the other eight. According to PNNL officials,
up until October 2003, the computer program which the Pcard office was
using to monitor cardholder activity for compliance was not effective in
detecting split purchases.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Unauthorized purchase actions: We also identified seven transactions
totaling $7,956 that were placed against cardholders' accounts by someone
other than the cardholders.
o PNNL policy prohibits the use of Pcards by anyone other than the
cardholder. Although cardholders may have delegates to help them perform
some of their purchasing responsibilities such as reconciling
transactions, delegates may not place orders for the cardholders.
o We reviewed a nonstatistical selection of 25 Pcard transactions that
occurred while cardholders were on leave or after they retired from or
terminated employment with PNNL. While most turned out to be proper
purchases (e.g., cardholder placed order prior to leaving but was not
charged by the vendor until after they left), we identified seven
transactions where the orders were placed by the cardholders' delegates
during their absence.
Improper, Wasteful, and Questionable Purchases (cont'd)
o In all of these instances, the cardholders had preexisting accounts
with the vendors from whom the purchases were made. For example:
o Two transactions totaling $2,009 were placed by a cardholder's delegate
for services related to an on-goingbuilding improvement project. The
vendor charged the cardholder's account on file.
o Two other transactions totaling $5,158 were placed by a delegate to
purchase a computer, two printers, and peripherals. The order appeared to
have been placed by someone accessing the cardholder's account on the
lab's internal online ordering system.
o While all of the purchases appeared to be for legitimate purposes, the
ability for someone other than the cardholder to make purchases against
their account increases the vulnerabilityof fraud, waste, or abuse.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Unallowable and Pcard-prohibited purchases: In the nonstatistical
selection of 148 transactions, we identified 11 transactions totaling
$8,534 that were improper because they were unallowable under the contract
or were prohibited from being purchased with a Pcard.
o Six of these transactions totaling $1,472, which related to unallowable
food and personal items, had been discovered by PNNL's internal reviews.
These were repaid to DOE by the lab.
o Some of the remaining five transactions totaling $7,062 included
o One transaction of $2,866 for graphics services. PNNL policy prohibits
the use of Pcards to purchase services over $2,500.
o One transaction totaling $1,277 for catering services that were
unallowable at the time of purchase.
o Two transactions totaling $1,360 for gifts or mementos.
Improper, Wasteful, and Questionable Purchases (cont'd)
Wasteful Purchases: Out of 148 transactions, we also identified 3
transactions totaling $693 that we determined to be wasteful-that is, were
excessive in cost compared to other available alternatives and/or were of
questionable need.
o We considered them excessive in cost when compared to available
alternatives that would meet the same basic needs, 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 DOE.
These consisted of the following:
Improper, Wasteful, and Questionable Purchases (cont'd)
o One $413 oversized, laptop-carrying case with wheels. PNNL management
concluded that this purchase was reasonable because it was made to
accommodate a staff member with an injury and who had a need for frequent
business travel. However, this purchase appears excessive given that
comparable oversized, laptop-carrying cases with wheels could be purchased
for around $100.
o A $72 transaction for Hawaiian leis given to graduates of a management
development program, and $208 for tablecloths purchased for use while
serving meals to training participants. We questioned the business need
for these items.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Questionable Purchases: We also identified four transactions totaling
$5,619 that we classified as questionable because there was insufficient
documentation to determine what was actually purchased, how many items
were purchased, the cost of the items purchased, and whether the purchase
was reasonable. Some of these included the following:
o Two of these transactions totaling $5,575 were for the purchase of $75
and $100 gift certificates from Barnes and Noble. They were issued to
staff to allow them to purchase training materials for staff development.
However, they did not require the staff to provide any subsequent receipts
to ensure that the gift certificates were used for their intended purpose.
As such, PNNL management agreed to make a cost correction for the total
amount even though theybelieved that some purchases may have been
appropriate.
o One transaction was for a $25 gift certificate originally purchased for
award purposes. PNNL records indicate that the certificate was used to
purchase office supplies instead, but no receipt was provided to support
how the gift card was ultimately spent.
Improper, Wasteful, and Questionable Purchases (cont'd)
o Purchases of gift cards are particularly risky because they can be used
like cash. Unlike purchases made with a Pcard, which appear on a monthly
billing statement to be approved by an approving official and supported by
receipts, purchases made with a gift card have no such subsequent audit
trail. Consequently, if the gift cards are lost, stolen, or misused, there
is no means for determining how they were spent.
Improper, Wasteful, and Questionable Purchases (cont'd)
o These instances of improper, wasteful, and questionable transactions
may be attributable, in part, to inadequate training of cardholders,
reviewing officials, and cardholder delegates on the Pcard policy.
o During our scope of review, only new cardholders received formal Pcard
training. There were no refresher training courses offered for
cardholders. Additionally, there were no requirements for approving
officials or cardholder delegates to attend initial or refresher Pcard
training.
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 cardholders 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)
While the $104,250 of improper, wasteful, and questionable transactions is
relatively small compared to the approximately $44 million in lab purchase
card activity during the review period, it demonstrates 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.
Property Management
GAO's Standards for Internal Control in the Federal Government requires
establishing physical control to secure and safeguard vulnerable assets.
Such assets should be periodically counted and compared to control
records. PNNL policy requires that controlled and sensitive property be
tagged with bar-code property numbers and tracked in the property
management system.
o In our review of 148 transactions, there were 19 transactions for the
purchase of 32 accountable assets totaling $52,753.
o PNNL property management recorded all but three of the assets totaling
$4,700 in its property management system.
o According to PNNL officials, this occurred because a new staff member
in property management erroneously sent the cardholders government
property ownership tags instead of barcode tags with assigned inventory
numbers.
Recent Policy and Procedural Changes
o PNNL management has been responsive to recent Pcard reviews and has
implemented or is in the process of implementing several changes in its
Pcard policies and procedures to address audit concerns. Many of these
changes are the result of recent internal audits and other reviews of the
Pcard program, including ours.
o Beginning in January 2003, the Pcard office began receiving a monthly
report of all personnel status changes such as organizational assignments,
leave of absences, terminations, and retirements. Prior to this date, it
was left up to the cardholder to notify the Pcard office of any changes in
status.
o In January 2003, the lab cancelled the Pcard administrator's Pcard
account.
Recent Policy and Procedural Changes (cont'd)
o In June 2003, the lab revised its list of Pcard-prohibited purchases.
Among the new items prohibited from being purchased with a Pcard were
gifts, gift certificates, decorations and party favors, food and
beverages, and tablecloths.
o In July 2003 PNNL implemented new Pcard training requirements for
cardholders, approving officials, and delegates (cardholders' backups).
o New cardholders, approving officials, and delegates are required to
take the initial Pcard training course and successfully complete a test.
o Every 2 years, cardholders, approving officials, and delegates must
successfully complete a Web-based recertification training course. This
training reemphasizes the lab's policies on split purchases, authorized
users of Pcards, restricted and prohibited items, and consideration of
best value in making purchases. In addition, the training reemphasizes the
criteria for determining accountable assets and the requirement to notify
property management if such assets are purchased.
Recent Policy and Procedural Changes (cont'd)
o The cardholder's or approving official's failure to successfully
complete the required training will result in the suspension of the
cardholder's Pcard. The delegate's failure to successfully complete the
required training will result in the suspension of the delegate's Pcard
duties.
o The internal audit group performed a review of cell phone practices. As
a result of their review, the following changes took effect in September
2003:
o Cardholders were prohibited from using Pcards to purchase cellular
phones and services.
o The lab assigned a centralized unit the responsibility for procuring
cellular phone services. It also required the lab's managers to
periodically review their staff members' cellular phone bills for proper
telephone use.
Recent Policy and Procedural Changes (cont'd)
o According to PNNL officials, in October 2003, PNNL's internal audit
group began training Pcard office staff on a new software program to
perform data mining techniques to better detect improper and wasteful
purchases, such as split purchases. According to the Pcard program
manager, this includes performing key word searches to find items and
vendors that could be considered high-risk purchases. Identified purchases
are further reviewed for allowability and/or prohibited use of the Pcard.
Conclusions
PNNL has established a system of internal controls over its Pcard program
and property management functions to help prevent and detect improper
purchases and safeguard assets. However, our testing indicated that
additional enhancements to strengthen these controls are needed. To its
credit, the lab has been responsive to recent audit findings and, as a
result, has made some significant changes to its Pcard policies and
procedures. While these are positive steps, it will be important for lab
management to monitor compliance with these new policies and procedures
and to periodically assess their effectiveness in helping minimize
improper and wasteful purchases.
Recommendations
We recommend that the Secretary of Energy direct the Pacific Northwest
National Laboratory's Director to take the following three actions to
strengthen internal controls over the purchase card program and reduce the
lab's vulnerability to improper, wasteful, and questionable purchases.
o Cancel purchase card accounts for cardholders who also perform
oversight functions over the purchase card program to help ensure
appropriate independence and separation of duties between these functions.
o Establish policies and procedures requiring that purchasers maintain a
copy of the detailed sales receipt, invoice, or other independent support
showing the description, quantity, and price of individual items
purchased.
Recommendations (cont'd)
o Require approving officials, during their review of cardholder
transaction documentation, to ensure that the cardholders obtained a sales
receipt or invoice to support each purchase, and that the cardholder
obtained and documented any required preapprovals before purchase.
o We also recommend that the Secretary of Energy direct the DOE
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 DOE.
Agency Comments
o We met with laboratory and local DOE officials to obtain their oral
comments on a draft of this briefing. They generally agreed with our
findings and recommendations and indicated that the lab has taken or will
take action to address the issues identified.
o For example, lab officials indicated that while the practice has been
to provide the most complete source documentation available, they agreed
to formalize the requirement and plan to work with the contracting officer
to establish the most complete level of documentation required to support
Pcard transactions. They also indicated they would emphasize this and
other requirements during training. In addition, the lab cancelled the
Pcard administrator's assistant's Pcard effective June 7, 2004.
o The lab also provided technical and clarifying comments, which we
incorporated as appropriate.
(190131)
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