> November 3, 2005

CONTROL NUMBER

[ED-OIG/A19F0015]{.underline}

## 

Raymond Simon

Deputy Secretary

## Office of the Deputy Secretary 

U.S. Department of Education

Federal Building No. 6, Room 7W310

400 Maryland Avenue, SW

Washington, DC 20202

Dear Mr. Simon:

This **Final Audit Report** (Control Number ED-OIG/A19F0015) presents
the results of our audit of *Controls Over Purchase Card Use in the
Office of the Secretary, Office of the Deputy Secretary, and Office of
the Under Secretary.* The objectives of our audit were to assess the
current effectiveness of internal control over the purchase card program
and the appropriateness of current purchase card use in the Office of
the Secretary, the Office of the Deputy Secretary, and the Office of the
Under Secretary (OS/ODS/OUS).

# BACKGROUND

The Government purchase card is a less costly and more efficient way for
offices and organizations to purchase needed goods and services directly
from vendors. The purchase card eliminates the need to process purchase
requests through procurement offices and avoids the administrative and
documentation requirements of traditional contracting processes. The
Department of Education (Department) selected Bank of America to provide
purchase card support and services.

The Office of the Chief Financial Officer (OCFO), Contracts and
Acquisitions Management (CAM), coordinates the purchase card program
within the Department and acts as the liaison with Bank of America. The
Executive Officer is responsible for administering the purchase card
program in OS/ODS/OUS. Approving Officials (AOs) and alternate approving
officials (AAOs) are appointed by the Executive Officer and are the
primary officials responsible for authorizing cardholder purchases and
ensuring timely reconciliation of cardholder statements.

On August 31, 2000, the Office of Inspector General (OIG) issued a
report entitled "Results of the OIG Review of OS/ODS/\[Office of
Congressional and Legislative Affairs\] OLCA's Internal Controls Over
the Procurement of Goods and Services," (Control Number A&I 2000-010).
OIG reported a number of deficiencies in OS/ODS/OLCA's internal controls
over the purchase card program including lack of familiarity with
Department policies and procedures, lack of written OS/ODS/OLCA policies
and procedures, no evidence of preapprovals, inadequate and/or missing
documentation to support purchase card transactions, purchase card
sharing among office staff, split purchases, lack of documentation or
oral quotations, lack of sole source justifications, and payment of
sales tax.[^1]

On September 19, 2000, the OIG issued a report entitled "Results of the
OIG Review of OUS\'s Internal Controls Over the Procurement of Goods and
Services," (Control Number A&I 2000-011). Issues noted in this review
included lack of appropriate warrants for all cardholders, lack of
written OUS policies and procedures, lack of familiarity with Department
policies and procedures, missing supporting documentation for purchase
card transactions, and split purchase transactions.

This audit is part of a review of the purchase card program being
performed Department- wide. A random sample of transactions across the
Department, as well as all transactions over \$2,500, charges to blocked
merchant category codes, and potential split purchases are being
reviewed. This report represents the results of the portion of the
random sample and other transaction categories reviewed in OS/ODS/OUS. A
summary report will be provided to the Department's Chief Financial
Officer upon completion of the audits in individual offices.

#### 

#### AUDIT RESULTS

While improvements were noted from the prior OIG reviews, OS/ODS/OUS
needs to further improve internal control over purchase card use. We
found that OS/ODS/OUS cardholders did not always obtain or maintain
adequate documentation to support purchases, and OS/ODS/OUS had not
established a central filing location for purchase card statements and
supporting documentation as required by Department policy. We also noted
that one purchase was split to avoid exceeding the \$2,500 micropurchase
limit, and arrangements for six purchases were made by a person other
than the cardholder for services that were subsequently paid with the
purchase card.

These issues occurred because cardholders did not consistently apply
Department requirements, and the AOs did not always ensure that
cardholders submitted complete supporting documentation prior to
approving statements for payment. The Executive Officer stated, in some
cases, purchases had to be completed quickly to fill an immediate need,
so pre-approvals were not always obtained. We also noted in some cases,
purchases were arranged by other OS/ODS/OUS staff who were not aware
that only the cardholders should arrange the purchases.

Lack of adequate supporting documentation reduces assurance that
purchases were appropriate and were made in accordance with Federal
regulations, Department policy and procedures, and OS/ODS/OUS
guidelines. Failure to document receipt could result in payment for
goods and services that were not received. Approving purchases without
reviewing adequate supporting documentation increases the Department's
vulnerability to potential misuse or waste of government resources.

Splitting purchases to stay within the micropurchase limit decreases
competition and hampers government initiatives to set aside purchases
for small businesses. The practice of allowing purchases to be arranged
by staff other than the cardholder results in purchases made by
individuals without appropriate procurement training and authority to
obligate funds on behalf of the Department. In addition, funds may not
be available for the purchases made.

Decentralized filing of purchase card documentation does not ensure that
records are being appropriately maintained and may result in loss of
information required to support Department purchases.

The issues noted above regarding lack of adequate supporting
documentation for purchases, lack of prior approval, and split purchases
were also reported in the prior OIG reviews of purchase card activity in
OS/ODS/OUS.

In his response to the Draft Audit Report, the Deputy Secretary
concurred with our finding and provided corrective actions to address
each of the recommendations included in our report. The complete text of
the Deputy Secretary's response is included as Attachment 1 to this
report.

Finding 1 OS/ODS/OUS Needs To Further Improve Internal Control Over
Purchase Card Use

While improvements were noted from the prior OIG review, OS/ODS/OUS
needs to further improve internal control over purchase card use. We
reviewed 46 purchases totaling \$41,310 made by 7 OS/ODS/OUS
Headquarters cardholders. We found that OS/ODS/OUS cardholders did not
always obtain or maintain adequate documentation to support purchases as
required by Department policy and procedures and OS/ODS/OUS guidelines.
Overall, we found that 34 of the 46 purchases reviewed (74 percent) did
not include one or more required elements. Specifically, we found:[^2]

-   Seven purchases were not supported by a written request prior to
    purchase.

-   Three purchases did not include a record of purchase.

-   29 purchases were not supported by a record of receipt for the
    good/service.

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-   12 purchases did not include evidence of prior approval as required
    by OS/ODS/OUS guidelines.

We also reviewed 19 potential split purchases (e.g. purchases to the
same vendor on the same day or within a few days). Of these 19
purchases, we found one instance where the cardholder inappropriately
split one purchase into two transactions to avoid exceeding the \$2,500
micropurchase limit. The purchase card files did not include any
evidence that bids were obtained or documentation of justification for
sole source purchase. We also noted that six additional purchases
represented arrangements made by a person other than the cardholder for
services that were subsequently paid with the purchase card. This
represents an inappropriate practice, as the individuals who made the
arrangements did not have procurement authority. The cardholder was not
aware of the purchases until invoices were received at a later date.

During our review, we also noted that OS/ODS/OUS had not established a
central filing location for purchase card statements and supporting
documentation as required by Department policy. Instead, some
cardholders maintained their purchase card files for the current fiscal
year, and centrally filed the documentation after the close of each
fiscal year.

Departmental Directive OCFO: 3-104, "Government-wide Commercial Purchase
Card Program," Section VI, dated January 23, 2002, defines cardholder
and AO responsibilities. The Directive states,

> H. The Cardholder is responsible for . . . 2. Purchasing goods or
> services in accordance with established Department policy, procurement
> regulations, and individual internal office procedures . . . 6.
> Providing documentation to support purchases for AO approval and
> official record keeping. This documentation includes receipts,
> invoices, logs, etc.

F.  An Approving Official (AO) is responsible for . . . 6. Reviewing,
    validating, and approving for payment the Cardholder\'s reconciled
    bank statement each billing cycle . . . 14. Reviewing all management
    reports of Cardholder activity under his or her authority . . . 15.
    Reviewing appropriateness of purchases. This includes determining
    individual purchases are appropriate, that the goods or services
    were properly received and accepted, and that the payment was

> proper . . . .

Section VII.A.7 of the Directive further states, "The Cardholder should
secure a written request (email or requisition) from the appropriate
Department employee requesting the Cardholder to procure goods or
services."

Section VII.B.4.e of the Directive includes additional AO requirements
that state,

> Upon approval of the bank statement, forward documentation to a
> central filing location for retention.

OCFO Procedure CO-097, "Procedure for Buying, Using a Government
Commercial Purchase Card," revised March 2003, Section 10.d, states,

Retain data supporting the purchases (including records of oral
quotations). Keep your files neat, up-to-date, and easily retrievable.
Documentation will be retained in a central filing location established
by your Principal Office. The record should be kept for 3 years after
final payment. The records must be kept secure and be easily retrievable
upon request. Documentation includes:

-   Request for purchase (a written request from the requisitioner).

-   Record of purchase (i.e. written notes, printout of CPSS Quick
    Purchase screen, invoice, internet printout, etc.).

-   Record of receipt and acceptance (i.e. packing slip, training
    certificate) . . . .

In July 2002, OS established additional guidelines for purchase card use
within its offices. These procedures state, "Requests for purchases must
be approved in advance. E-mail from the employee requesting the
purchase, to a cardholder, and then on to the Executive Officer for
approval will suffice, as will a written request."

In addition to the OS procedures, OUS established separate internal
procedures for its cardholders that were in effect during our scope
period. These procedures state, "All requests for purchases using the
government purchase card must be approved in advance, through the use of
a purchase request form. This form is to be signed by all designated
parties prior to proceeding with a purchase."

The Federal Acquisition Regulation (FAR) prohibits splitting a
transaction into more than one segment to avoid the requirement to
obtain competitive bids for purchases over the \$2,500 micropurchase
threshold, or to avoid other established limits. Specifically, FAR
Section 13.003(c)(2) states,

> Do not break down requirements aggregating more than the simplified
> acquisition threshold (or for commercial items, the threshold in
> Subpart 13.5) or the micro-purchase threshold into several purchases
> that are less than the applicable threshold merely to- (i) Permit use
> of simplified acquisition procedures; or (ii) Avoid any requirement
> that applies to purchases exceeding the micro-purchase threshold.

Section VII.A.3 of the Directive also refers to this section of the FAR,
stating, "Purchases are not to be split to stay within the single
purchase limit or to avoid following procedures for Simplified
Acquisitions, in accordance with FAR 13.003(c)."

We found that implementation of controls over purchase card use was not
always effective because:

-   The cardholders and the AOs did not consistently follow policies and
    procedures established by the Department.

-   The AOs did not ensure that the cardholders submitted complete
    supporting documentation prior to approving the statements for
    payment.

-   In some cases, purchases had to be completed quickly to fill an
    immediate need.

-   Other OS/ODS/OUS staff initiated transactions with vendors and were
    not aware that purchases should only be initiated by the
    cardholders.

Lack of adequate supporting documentation reduces assurance that
purchases were appropriate and were made in accordance with Federal
regulations, Department policy and procedures, and OS/ODS/OUS
guidelines. Failure to document receipt could result in payment for
goods and services that were not received. Approving purchases without
reviewing adequate supporting documentation increases the Department's
vulnerability to potential misuse or waste of government resources.

Splitting purchases to stay within the micropurchase limit decreases
competition and hampers government initiatives to set aside purchases
for small businesses. The practice of allowing purchases to be arranged
by staff other than the cardholder results in purchases made by
individuals without appropriate procurement training and authority to
obligate funds on behalf of the Department. In addition, funds may not
be available for the purchases made.

Decentralized filing of purchase card documentation does not ensure that
records are being appropriately maintained and may result in loss of
information required to support Department purchases.

Subsequent to our review, OS/ODS/OUS began to take corrective actions to
ensure that cardholders maintain appropriate supporting documentation.
Specifically, OS/ODS/OUS developed a checklist to ensure that all
purchases have the required supporting documentation, as well as a
certification form to ensure goods and services are received. The
Executive Officer also revised the internal purchase card procedures,
and reported that, effective July 2005, all purchase card files are
being centrally located.

The Executive Officer also stated that she has implemented an additional
level of review in the purchase card reconciliation process to ensure
that all necessary documentation is obtained prior to approval for
payment.

**[Recommendations:]{.underline}**

We recommend that the Deputy Secretary hold the Executive Officer, AOs,
and cardholders accountable for their responsibilities in the purchase
card program by establishing a process to:

1.1 Ensure OS/ODS/OUS cardholders and AOs are familiar with the
Department's policies and requirements for obtaining and maintaining
supporting documentation, and prohibitions against splitting purchases.

2.  Ensure cardholders consistently obtain and maintain written purchase
    requests and approvals, records of purchase, and records of receipt
    for purchases as required by Department policy and procedures and
    OS/ODS/OUS guidelines.

3.  Require AOs to thoroughly review reconciliation packages provided by
    cardholders to ensure that adequate supporting documentation is
    maintained

and purchases are not split.

4.  Revise and implement internal purchase card guidelines to ensure
    that purchase card statements and supporting documentation are
    maintained in a central file consistent with Department policy.

5.  Ensure all OS/ODS/OUS staff are aware that purchases should only be
    arranged by cardholders.

**[Deputy Secretary Response:]{.underline}**

In response to our Draft Audit Report, the Deputy Secretary concurred
with our finding and provided corrective actions to address each
recommendation. The Deputy Secretary stated he is directing cardholders
to attend training to reinforce the Department's policies, and AOs will
certify to the Deputy Secretary that each cardholder has completed the
training and is fully aware of policies governing the use of purchase
cards. The Deputy Secretary stated the Executive Officer will issue a
memorandum to cardholders advising them that their adherence to
Department policy and other internal guidance will be included as part
of their annual performance appraisal.

The Deputy Secretary also stated a separate review is now conducted of
each transaction to ensure all supporting documentation is included, all
purchase card files are now centrally located, and internal purchase
card procedures have been updated. Finally, the Deputy Secretary stated
he is directing the Executive Officer to issue a memorandum to all staff
advising them that only those with designated authority may be involved
in the purchase process. He further stated any individual who executes a
contractual obligation without the authority to do so is personally
responsible for the expense.

# OBJECTIVES, SCOPE, AND METHODOLOGY

The objectives of our audit were to assess the current effectiveness of
internal control over the purchase card program and the appropriateness
of current purchase card use in OS/ODS/OUS. To accomplish our
objectives, we performed a review of internal control applicable to
OS/ODS/OUS' administration and management of its purchase cards. We
evaluated the prior OIG reviews of the purchase card program in
OS/ODS/OUS to determine issues previously reported. We reviewed
requirements related to the purchase card program in the Treasury
Financial Manual, FAR, Office of Management and Budget memoranda, and
Bank of America's contract and task order. We also reviewed Departmental
Directives, OCFO procedures, and internal OS/ODS/OUS guidance applicable
to the purchase card program.

We conducted interviews with OCFO and OS/ODS/OUS officials to obtain
information and an understanding of the purchase card program. We also
reviewed training records for staff participating in the program. To
test controls and evaluate the appropriateness of purchase card use, we
reviewed supporting documentation provided by OS/ODS/OUS staff for
purchases made during the scope period noted below.

The scope of our review included purchases made by Washington, DC,
(Headquarters) cardholders during the period July 1, 2003, through June
30, 2004. We used sampling and data mining to select purchases for
review. From the universe of purchases made by Department Headquarters
cardholders, we randomly selected purchases of \$50 or more for review.
The random sample was chosen to provide a representative review of
purchases across the Department. We also identified high-risk categories
of potentially inappropriate purchases and reviewed all transactions in
those categories -- purchases over \$2,500, charges to blocked merchant
category codes, and potential split purchases. In OS/ODS/OUS, the random
sample included 36 purchases. High-risk purchases for OS/ODS/OUS
included 10 blocked merchant category code purchases and 19 potentially
split purchases. No purchases over \$2,500 were identified for
OS/ODS/OUS. Two transactions were included in both the blocked merchant
category code and potentially split purchase samples. Overall, 63
purchases totaling \$64,401 made by 7 cardholders were included in our
review.

In total, OS/ODS/OUS Headquarters cardholders made 1,110 purchases
totaling \$450,882 during the scope period. The purchases we reviewed
represented 6 percent of the total number and 14 percent of the total
amount of purchases made during the period. Since the random sample was
selected based on the universe of all purchases of \$50 or more made by
Headquarters cardholders in the Department, the results of this review
cannot be projected to the universe of OS/ODS/OUS purchases.

We relied on computer-processed data initially obtained from Bank of
America's Electronic Account Government Ledger System to select
cardholder purchases made during the scope period. This data was also
recorded in the Department's Contracts and Purchasing Support System and
reconciled by OS/ODS/OUS and OCFO staff through Education's Central
Automated Processing System. We verified the completeness and accuracy
of the data by reviewing cardholder statements, invoices, receipts, and
other supporting documentation to validate purchase amounts recorded in
these systems. Based on our testing, we concluded that the
computer-processed data were sufficiently reliable for the purpose of
our audit.

We also reviewed reports prepared by OCFO staff that reported purchase
card transactions that were overdue for reconciliation. These reports
were part of the "Fast Facts" reports distributed monthly to all
Department staff through the Department's Intranet. We did not validate
the accuracy of these reports, as we used them for informational
purposes only, as an indicator of reconciliation timeliness.

We conducted fieldwork at Department offices in Washington, DC, during
the period May 12, 2005 through September 12, 2005. We held an exit
conference with OS/ODS/OUS staff on September 22, 2005. Our audit was
performed in accordance with generally accepted government auditing
standards appropriate to the scope of the review described above.

##### ADMINISTRATIVE MATTERS

Corrective actions proposed (resolution phase) and implemented (closure
phase) by your office will be monitored and tracked through the
Department's Audit Accountability and Resolution Tracking System.
Department policy requires that you develop a final corrective action
plan (CAP) for our review in the automated system within 30 days of the
issuance of this report. The CAP should set forth the specific action
items, and targeted completion dates, necessary to implement final
corrective actions on the finding and recommendations contained in this
final audit report.

In accordance with the Inspector General Act of 1978, as amended, the
Office of Inspector General is required to report to Congress twice a
year on the audits that remain unresolved after six months from the date
of issuance.

Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this report represent the opinions of
the Office of Inspector General. Determinations of corrective action to
be taken will be made by the appropriate Department of Education
officials.

In accordance with the Freedom of Information Act (5 U.S.C. § 522),
reports issued by the Office of Inspector General are available to
members of the press and general public to the extent information
contained therein is not subject to exemptions in the Act.

We appreciate the cooperation provided to us during this review. Should
you have any questions concerning this report, please call Michele
Weaver-Dugan at (202) 245-6941. Please refer to the control number in
all correspondence related to the report.

> Sincerely,

Helen Lew /s/

> Assistant Inspector General for Audit Services

cc: JoAnn Ryan, OS/ODS/OUS Executive Officer

October 26, 2005

Ms. Michele Weaver-Dugan

Director, Operations Internal Audit Team

U.S. Department of Education

Office of Inspector General

400 Maryland Avenue, SW

Washington, DC 20202

Dear Ms. Weaver-Dugan:

Thank you for the Draft Audit Report on the results of your review of
purchase card use in the Office of the Secretary, Office of the Deputy
Secretary, and Office of the Under Secretary (ED-OIG/A19F0015). Several
offices from ODS and OUS that were included in your review are now part
of the Office of Planning, Evaluation, and Policy Development (OPEPD).
OPEPD is serviced by the OS Executive Office.

I have reviewed the report and concur with your finding and
recommendations. I am initiating the following actions in response to
your review:

## [Recommendation]{.underline}

1.  Ensure OS/ODS/OUS cardholders and AOs are familiar with the
    Department's policies and requirements for obtaining and maintaining
    supporting documentation, and prohibitions against splitting
    purchases.

# [Response]{.underline}

> I am directing OS/ODS/OUS/OPEPD cardholders to attend training to
> reinforce the Department's policies. The Approving Official will
> certify to me that each cardholder has completed a refresher training
> course and is fully aware of the policies governing the use of
> purchase cards.

## [Recommendation]{.underline}

2.  Ensure cardholders consistently obtain and maintain written purchase
    requests and approvals, records of purchase, and records of receipt
    for purchases as required by Department policy and procedures for
    OS/ODS/OUS guidelines.

# [Response]{.underline}

> In addition to the training that will reinforce the Department's
> policies, I am directing the OS/ODS/OUS/OPEPD Executive Officer to
> issue a memorandum to cardholders advising them that their adherence
> to Department policy and other internal guidance will be included as
> part of their annual performance appraisal.

## [Recommendation]{.underline}

3.  Require AOs to thoroughly review reconciliation packages provided by
    cardholders to ensure that adequate supporting documentation is
    maintained and purchases are not split.

# [Response]{.underline}

> As noted in your Draft Audit Report, the OS/ODS/OUS/OPEPD Executive
> Officer has already initiated changes to address this issue. A
> separate review is now conducted of each transaction to ensure all
> supporting documentation is included. The review provides consistency
> in each transaction and each file is certified prior to the Approving
> Official's release for payment.

## [Recommendation]{.underline}

4.  Revise and implement internal purchase card guidelines to ensure
    that purchase card statements and supporting documentation are
    maintained in a central file consistent with Department policy.

# [Response]{.underline}

> As of July 25, all purchase card files within the purview of your
> report are centrally located and the internal purchase card procedures
> have been updated. Most of the staff members for whom Brenda Long
> serves as reviewing official are in the process of relocating to the
> central OS Executive Office. Their files, which currently are
> centrally located, will be combined with the purchase card files of
> the other cardholders in the Executive Office, so the files for OS,
> ODS, OUS, and OPEPD are in one location.

## [Recommendation]{.underline}

5.  Ensure all OS/ODS/OUS staff are aware that purchases should only be
    arranged by cardholders.

# [Response]{.underline}

> I am directing the OS/ODS/OUS/OPEPD Executive Officer to issue a
> memorandum to all staff advising them that only those with the
> designated authority may be involved in the purchase process. Any
> individual who executes a contractual obligation without the authority
> to do so is personally responsible for the expense.

I assure you that we are committed to complying fully with the
Department's policies and procedures on the use of purchase cards.

Thank you for the opportunity to review and respond to this report.

> Sincerely,
>
> Raymond Simon /s/

cc: JoAnn Ryan

[^1]: OLCA was part of OS until August 2003. Since OLCA is now a
    separate principal office, it was reviewed separately under this
    audit and is not included in this report. OS, ODS, and OUS were
    combined into one review for this audit as these offices share an
    Executive Office and the Executive Officer is responsible for the
    purchase card program in all three organizations.

[^2]: Some purchases included exceptions in more than one category.