Weaknesses in Overall Control Environment

Management and employees should establish and maintain an environment throughout  the organization that sets a positive and supportive attitude toward internal control and  conscientious management.  A positive control environment is the foundation for all other  standards.  It provides discipline and structure as well as the climate which influences the  quality of internal control.  GAO’s Standards for Internal Control in the Federal  Government (GAO/AIMD-00-21.3.1, November 1999)
We found overall control environment weaknesses at the four case study  locations we audited as well as indications of similar weaknesses in our Air  Force-wide analysis that contributed to breakdowns in key control  activities and potentially fraudulent, improper, and abusive purchase card  transactions.  For example, we encountered numerous instances where  supporting documentation was not available because installations  destroyed purchase card records on a rolling 1-year basis due to faulty  records retention guidance in the Air Force purchase card Instruction that  did not comply with federal guidelines.  We also found weaknesses in the  areas of (1) the number of cardholders and accounts, (2) approving official  span of control, (3) credit limits compared to historical spending,   (4) documentation of cardholder and approving official training,   (5) implementation of audit and internal review recommendations, and   (6) accountability and disciplinary action.  Further, given the magnitude of  the purchase card program at the installations we audited, we found the  human capital infrastructure for program monitoring and oversight to be  inadequate.  As discussed in a later section of this report, these control  environment weaknesses have contributed to fraudulent, improper, and  abusive purchase card activity.
We also found some positive aspects of the Air Force purchase card  program, such as Air Force-wide purchase card operating procedures and  aggressive Air Force Audit Agency reviews of installation purchase card  programs since 1996.  The importance of the role of management in  establishing a positive internal control environment cannot be overstated.   GAO’s Standards for Internal Control in the Federal Government,  discusses management’s key role in demonstrating and maintaining an  organization’s integrity and ethical values, especially in setting and  maintaining the organization’s ethical tone, providing guidance for proper  behavior, and removing temptations for unethical behavior.

		Failure to Comply with Federal Records Retention Requirements

During our audit of Air Force fiscal year 2001 purchase card activity, we  encountered numerous instances where supporting documentation was  not available because installations destroyed purchase card records on a  rolling 1-year basis due to faulty records retention guidance in the Air  Force purchase card Instruction.  Federal records retention requirements  in the Federal Acquisition Regulation, the General Records Schedule  established by the National Archives and Records Administration (NARA),  and DOD’s Financial Management Regulation require records  supporting program and contracting activity to be retained for 3 years and  records supporting financial transactions to be retained for 6 years and 3  months.  However, the records retention guidance in Air Force Instruction  64-117 called for documentation received and generated by the cardholder,  such as vendor invoices, sales receipts, and shipping reports, and  cardholder logs to be maintained for only 1 year after the final payment.  In  addition, 36 C.F.R. 1228.30, which covers disposition of federal records,  requires agencies to establish a schedule for disposing of their records and  obtain approval of their records disposition schedules from the NARA.  We  saw no evidence that the Air Force developed a records disposition  schedule related for purchase card records.
While missing records affected all aspects of purchase card controls, the  greatest impact was on cardholder and approving official appointments  and training and cardholder delegations of purchasing authority.  Further,  we found that cardholders at Wilford Hall Medical Center, located at  Lackland Air Force Base (AFB), did not adhere to the Air Force  requirement to retain purchase card transaction records for even the 1-year  period.  As discussed in the next section of this report on tests of key  controls, 52 of the 152 transactions in our Lackland AFB sample were for  Wilford Hall purchase card activity, and required supporting  documentation was not available for 23 of these 52 transactions.
The Air Force Instruction also called for documentation generated by the  installation program coordinator and approving officials, such as records  of training, delegations of authority, and surveillances, to be retained only  as long as the cardholder and approving official are performing that  function.  Air Force headquarters officials told us that the Air Force  Instruction, which is currently being revised, would include corrections to  the records retention guidelines.

		Proliferation of Cardholders and Accounts Result in Unreasonable Span of Control

While the number of Air Force purchase cardholders peaked at about  80,000 cardholder accounts in September 2001, the overall number of  cardholders from October 2000 through September 2002 has remained  about the same.  As of September 2002, the Air Force reported that it had  about 77,000 purchase card accounts—translating to about 1 purchase card  for every 7 employees.  In contrast, the Navy had reduced the number of its  purchase cardholders from about 52,000 to about 23,000 and only about 1  of every 31 employees was a purchase cardholder.
We determined that the Air Force did not have specific policies governing  the number of cards to be issued or criteria for identifying employees  eligible for the privilege of cardholder status.  Purchase cards were given  out on the basis of a request from an individual employee’s unit  commander.  The request was then forwarded to the installation’s purchase  card Agency program coordinator, who approved the request and began the  process for obtaining a new card from U.S. Bank.
In addition to an excessive number of cardholders, we found that some Air  Force cardholders had as many as 10 government purchase cards.  The Air  Force permits cardholders to have numerous purchase card accounts to  facilitate accounting for purchase card expenditures related to different  funding sources—appropriated and nonappropriated funds—as well as  different accounting lines within the same fund source.  Assigning multiple  purchase cards is not an appropriate method of accounting for purchase  card transactions.  Further, this practice places substantial credit risk in the  hands of one individual.

		Some Approving Officials’ Span of Control over Purchase Card Accounts Exceeds DOD Guidelines

In response to concerns about approving official span of control raised  during our initial Navy purchase card work, the Director of DOD’s  Purchase Card Joint Program Management Office issued a memorandum  on July 5, 2001, that called for no more than five to seven cardholders per  approving official.  During fiscal year 2002, the Air Force established goals  for reducing the number of cardholder accounts assigned to approving  officials.  Our analysis of span of control ratios at the four installations we  audited disclosed that when looking at average ratios, the Air Force has  adhered to the DOD span of control guidelines.  However, as shown in table  1, these averages have masked the wide range of ratios across each Air  Force installation—some of which exceeded the DOD guidelines.  As of  August 2002, we found that the four installations we audited had from 22 to  32 approving officials that were responsible for more than 7 cardholder  accounts, including four approving officials at two installations—Travis  AFB and Edwards AFB—that were responsible for more than 20  cardholder accounts.
As shown in table 1, the percentage of approving officials whose span of  control exceeded DOD guidelines ranged from 18 percent to 32 percent at  the four Air Force locations we audited.

		Credit Limits Exceed Procurement Needs

Our analysis of purchase card spending compared with credit limits  showed that monthly credit limits for the four case study locations far  exceeded their actual monthly spending.  Limiting credit available to  cardholders is a key factor in managing the purchase card program and in  minimizing the government’s financial exposure.  On August 13, 2001,  DOD’s Director of Defense Procurement sent a memorandum to the  directors of all defense agencies stating that supervisors should set  reasonable limits based on what each person needs to buy as part of his or  her job and that every cardholder does not need to have the maximum  transaction or monthly credit limit.
Air Force officials told us that their credit limits appear excessive because  these limits include credit limits of primary and alternate, or backup,  approving officials and cardholders.  The officials explained that they  assign primary and alternate approving officials and cardholders to local  units to ensure that purchases can continue when primary approving  officials or cardholders are on leave, assigned to temporary duty locations,  or deployed.  The officials also told us that alternate approving officials and  cardholders are given the same credit limits as the primary approving  officials and cardholders.  The Director of DOD’s Purchase Card Joint  Program Management Office told us that DOD guidelines suggest that  credit limits for inactive accounts, including alternate accounts, should be  reduced to $1.  However, Air Force officials told us that they do not  deactivate alternate accounts or reduce credit limits during periods when  alternate purchasing authority is not needed due to frequent schedule  changes and the administrative burden associated with turning accounts on  and off.  As shown in table 2, total financial exposure as measured in terms  of purchase card credit limits substantially exceeded historical purchase  card spending.
Air Force officials told us that to better control cardholder spending limits,  they worked with U.S. Bank to develop an automated control that will tie  quarterly authorizations of budget authority to cardholder credit limits.   According to Air Force officials, this control was implemented during fiscal  year 2002.

		Lack of Documentation of Cardholder and Approving Official Training and Authority

Effective management of an organization’s workforce—its human capital—is essential to  achieving results and an important part of internal control.  Training should be aimed at  developing employee skill levels to meet changing organizational needs.  GAO’s  Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1,  November 1999)
Documentation of cardholder and approving official training and authority  varied widely across the four locations we audited.  For example, we found  that two of our four case study locations had maintained documentation on  cardholder and approving official appointments, cardholder delegations of  purchasing authority, and cardholder and approving official training.   However, at Edwards AFB and Travis AFB, our test results indicated that  12 percent and 51 percent, respectively, of their fiscal year 2001  purchase card transactions were made by cardholders and/or approving  officials who had no documentation showing they had received initial  training.  Further, none of the four case study locations we audited had  adequate documentation to show that both cardholder and approving  official training was current for the transactions in our sample.
Air Force Instruction 64-117 requires commanders or chiefs to prepare a  Letter of Appointment designating the proposed cardholder and approving  official and identifying their name, rank, duty title, telephone number, and  e-mail address; the types of purchases to be made; and funds to be used to  pay for the purchase card purchases.  The installation program coordinator  is to coordinate single and monthly purchase limits with the designated  billing official and forward documentation to the bank to set up the  purchase card account.  While the Instruction provides for denial of  appointments, it does not provide criteria or qualifications for who may be  a cardholder or approving official.
The Instruction also requires that prior to establishing a purchase card  account and issuing a purchase card, all prospective cardholders and  approving officials must receive training on requirements in the Federal  Acquisition Regulation and Air Force purchase card and acquisition  policies and procedures.  Once initial training is received, the Instruction  requires all cardholders to receive supplemental training in the form of  annual refresher training and it implies that approving officials should have  refresher training.  The Air Force Instruction requires installation  program coordinators to maintain documentation of approving official and  cardholder purchase card appointments and training and cardholder  delegations of purchasing authority as long as these individuals are serving  in those capacities.
Contracting officials at Travis AFB explained that in accordance with Air  Force Instruction 64-117, they did not retain records of appointments,  training, and delegations of authority for approving officials and purchase  cardholders who were no longer performing those duties or were no longer  at Travis AFB.  We also found that Travis AFB did not maintain central files  to document cardholder and approving official appointments and  cardholder delegations of purchasing authority, and documentation of  training was incomplete or could not be located by individual units at that  installation.  In addition, Edwards AFB contracting officials told us that  they did not retain cardholder and approving official appointment letters.   Table 3 shows the results of our statistical tests for documentation of  appointments, delegations of purchasing authority, and training for  cardholders and approving officials associated with the transactions in our  sample.
Although Edwards AFB and Travis AFB officials asserted that their  cardholders and approving officials had received required purchase card  training, we found numerous improper purchase card transactions related  to failure to follow federal guidelines on micropurchases and mandated  sources of supply that indicate that cardholders and approving officials  either had not been trained, training was inadequate, or cardholders were  not following guidelines addressed in the training classes.  For example, we  found that cardholders at Edwards AFB were unaware that they are  required to obtain competitive price quotes from three different vendors  when their purchases exceed the $2,500 micropurchase threshold.  We also  found that Travis AFB cardholders frequently were not following these  guidelines.  Further, we found that the Edwards AFB installation program  coordinator routinely waived micropurchase and cardholder transaction  limits to permit cardholders to purchase goods and services at higher  amounts.  We also found that Edwards AFB cardholders frequently did not  follow federal guidelines on mandated sources of supply and Travis AFB  cardholders did not notify property book officers when they used the  purchase card to buy computer equipment and other pilferable property.
In addition, we were unable to determine whether cardholder and  approving official training was current due to missing documentation and  the use of E-mail notices, bulletins, and newsletters used to update  purchase card training at three case study locations.  Travis AFB lacked  documented evidence that most of its cardholders and approving officials  had received annual refresher training and the other three case study  locations could not document informal training that was provided outside  of classrooms.  During fiscal year 2002, due to concerns about whether  approving officials and cardholders had received adequate refresher  training, Edwards AFB and Nellis AFB began using classroom training and  sign-in sheets to document annual purchase card refresher training for both  approving officials and cardholders.

		Significant Audit Activity, but Corrective Actions Not Always Taken

Monitoring of internal control should include policies and procedures for ensuring that the  findings of audits and other reviews are promptly resolved.  GAO’s Standards for Internal  Control in the Federal Government (GAO/AIMD-00-21.3.1 November 1999)
We found that the four case study locations conducted annual purchase  card internal reviews, called surveillances, and the Air Force Audit Agency  performed aggressive reviews; however, we also identified significant  repeat findings indicating a lack of commitment to adhere to purchase card  regulations and DOD and Air Force policies and procedures.  In addition, at  one of the four case study locations we audited—Edwards AFB—internal  reviewers did not disclose all identified problems in the reports on  surveillance results.  The Air Force Audit Agency reported similar  findings in its reviews of fiscal year 2000 installation-level purchase card  activity.  The Air Force auditors concluded that without enforcement of  purchase card requirements, such as administratively disciplining the  offenders or revoking purchase card privileges, purchase card  discrepancies will likely continue.  The Air Force Audit Agency reported  that inaction by contracting officials reduced the effectiveness of other  purchase controls, increased transaction errors, and undermined the Air  Force purchase card goals.
As stated in GAO’s Standards for Internal Control in the Federal  Government, monitoring of internal control should include policies and  procedures for ensuring that the findings of audits and other reviews are  promptly resolved.  Managers are to (1) promptly evaluate findings from  audits and other reviews, including those showing deficiencies, and  recommendations reported by auditors and others who evaluate agency  operations, (2) determine proper actions in response to findings and  recommendations from audits and reviews, and (3) complete, within  established time frames, all actions that correct or otherwise resolve the  matters brought to management’s attention.

			Internal Surveillances

The Air Force purchase card Instruction, which was issued in December  2000, requires the installation purchase card program coordinator to  perform a surveillance (internal review) of each approving official’s billing  account and 25 percent of the cardholders’ accounts at least every 12  months.  The Air Force Instruction includes an optional surveillance  checklist that covers key purchase card requirements, including most of  the control activities covered in our audit.  Our review of the surveillances  associated with the approving officials and cardholders responsible for the  transactions in our case study samples showed that many of the problems  identified by installation internal reviewers were consistent with the  problems we found in our audit.  For example, these surveillance results  identified failure to adhere to Air Force guidance on $2,500 micropurchase  limits, purchases from required sources, failure of billing officials to review  their cardholders’ accounts, prohibited purchases, and failure to maintain  purchase logs.
Further, we determined that Edwards AFB intentionally did not address  problems related to noncompliance with micropurchase requirements and  mandated sources of supply nor did it recommend corrective actions in its  reports on surveillance results.  For example, 40 of the 44 Edwards AFB  surveillance reports that we reviewed stated “no discrepancies were  noted,” even though documentation supporting this conclusion for 11  surveillance reports indicated that problems, such as splitting purchases to  avoid obtaining competitive prices when purchases exceeded the $2,500  micropurchase threshold and failure to use mandated vendors, were  identified.  Further, while use of the surveillance checklist is optional, we  found that several of the checklists provided as documented support for  the surveillances that we reviewed were blank.  As a result, we were unable  to determine whether a review had been performed, but was not  documented, or if no review had been performed as a basis for the  conclusions in the associated surveillance letters.  When we discussed our  concerns with the Director of Contracting at Edwards AFB, the Director  told us that internal reviewers do not address splitting purchases to avoid  micropurchase requirements and failure to use mandated sources of supply  in their surveillance reports because they consider these requirements to  be “procedural matters.”  However, the guidelines on micropurchases and  mandated sources of supply are prescribed in law and the Federal  Acquisition Regulation and are not merely procedural.  It is important that  surveillance reports identify noncompliance with requirements in law and  regulations, which are designed to prevent improper purchases.  Air Force  headquarters officials agreed with our position.
In addition, we found that installation program coordinators at two of our  four case study locations had issued their surveillance reports to approving  officials rather than unit commanders.  In contrast, Nellis AFB surveillance  letters were addressed to unit commanders and were signed by the  Contracting Director.  Further, the Nellis AFB Contracting Director wrote  personal notes on the face of the surveillance letters commending unit  commanders for good surveillance results and noting areas that must be  improved when the surveillances had identified failure to follow purchase  card guidelines.  This positive “tone at the top” served to hold unit  commanders accountable for effective implementation of their purchase  card programs.

			Air Force Audit Agency Audits

In its August 2002 report on the results of its audit of fiscal year 2000  purchase card transactions at 46 Air Force installations, Air Force Audit  Agency auditors concluded that overall, Air Force guidance established  adequate purchase card controls and oversight procedures.  At the same  time, Air Force auditors found that installation purchase card program  coordinators and approving officials did not adhere to this guidance in  executing their surveillance responsibilities.  For example, consistent with  our audit, Air Force auditors found continuing problems with (1) advance  approval for purchases of computer equipment, (2) splitting purchases into  multiple transactions to circumvent micropurchase and cardholder single  transaction limits, (3) accountability for pilferable property items  purchased with a purchase card, and (4) purchase card statement  reconciliations and approving official review.  Further, according to Air  Force auditors, of the nearly $150 million in transactions evaluated,  cardholders acquired supplies and services totaling approximately  $25.4 million using purchase methods specifically disallowed under  established policy and guidance.
Specifically, Air Force auditors reported the following findings related to  their audits of purchase card activity during fiscal year 2000 at Edwards,  Lackland, and Travis Air Force bases and purchase activity during fiscal  year 2001 at Nellis AFB.
At Edwards AFB, Air Force auditors had repeat findings of split  purchases and lack of required advance purchase authorizations for  purchases of computer equipment.  The auditors also found that  cardholders were not familiar with micropurchase requirements.
At Lackland AFB, Air Force auditors reported that the issues of  improper reconciliation procedures to validate purchases and charges  and ineffective surveillance of cardholders and billing officials were  repeat conditions reported in a prior audit report.
Air Force auditors reported a repeat finding that Travis AFB did not  always maintain property accountability for items costing over $500.  In  addition, the auditors reported that cardholders did not always obtain  required advance authorizations for purchases of computer and  communication equipment.
Air Force Audit Agency auditors reported that the 99th Wing at Nellis  AFB effectively controlled purchase card purchases, noting that  purchases were properly approved, recorded in cardholder logs, and  that approving officials reviewed cardholder records monthly.  However,  the auditors found that some units improperly purchased bottled water  and that opportunity existed for unit commanders to ensure greater  visibility over unit purchases by reviewing automated records in U.S.  Bank’s database.

		Weaknesses in Accountability and Lack of Disciplinary Actions

Management plays a key role in demonstrating and maintaining an organization’s integrity  and ethical values, especially in setting and maintaining the organization’s ethical tone,  providing guidance for proper behavior, removing temptations for unethical behavior, and  providing discipline when appropriate.  GAO’s Standards for Internal Control in the  Federal Government (GAO/AIMD-00-21.3.1 November 1999)
During our work, we noted that misuse of the purchase card was not  always subject to strong disciplinary action or consequences, even though  Air Force Instruction 64-117 requires installation purchase card program  coordinators to take appropriate action to document violations and  preclude their reoccurrence.  The Instruction also requires approving  officials to document cardholder violations and forward the information to  the program coordinator.  The Instruction states that action(s) taken  should be commensurate with the violation(s) and gives examples of  actions, such as suspending the cardholder or approving official account,  requiring remedial training, requiring restitution for any unauthorized  purchases, and permanently revoking purchase card privileges.  Holding  individuals responsible for proper program execution is an integral part of  a strong control environment.
Our review of the results of annual purchase card surveillances performed  all four case study locations determined that the surveillances found  violations of Federal Acquisition Regulation guidelines on  micropurchases and requirements to use mandated sources of supply.   Recommended disciplinary actions for violations of these federal  regulations were limited to requiring the offending approving officials and  cardholders to take remedial training.  For repeat offenders, the  surveillance reports generally recommended that the cardholder’s and/or  approving official’s purchase card account(s) be suspended until remedial  training was completed.  In only a few cases, had surveillance reports  recommended canceling the accounts and revoking cardholder privileges,  even for repeat offenders.  As previously discussed, Edwards AFB  surveillances did not include findings on these issues and, therefore,  Edwards AFB did not take disciplinary action for failure to follow federal  guidelines on micropurchases and using mandated sources of supply.
Further, although three Edwards AFB surveillance reports identified  improper use of the purchase card to buy food for employees, pay for party  supplies, and purchase invitations for a change of command ceremony, the  reports did not recommend disciplinary action, and we saw no evidence  that the cardholder or the benefiting individuals were required to pay for  the unauthorized purchases.  According to the Edwards AFB Contracting  Director, cardholders have been counseled and in some cases referrals  were made to unit commanders to take appropriate disciplinary action for  improper use of the purchase card.  However, Edwards AFB officials  provided no documentation that any disciplinary actions were taken.
The Air Force Audit Agency reported that inaction by contracting officials  reduced the effectiveness of other purchase controls, increased transaction  errors, and undermined the Air Force purchase card goals.  Air Force  auditors concluded that without enforcement of purchase card  requirements, such as administratively disciplining the offenders or  revoking purchase card privileges, purchase card discrepancies will likely  continue.  We agree with the Air Force Audit Agency’s conclusions.
In response to our DOD purchase card audits, the Congress has recently  addressed the question of discipline for those who misuse the government  purchase card.  Section 8149(c) of the Department of Defense  Appropriations Act, 2003 (fiscal year 2003 appropriations act), and  section 1007(a) of the Bob Stump National Defense Authorization Act for  Fiscal Year 2003 (fiscal year 2003 authorization act) provide that the  Secretary of Defense establish guidelines and procedures for disciplinary  actions to be taken against department personnel for improper, fraudulent,  or abusive use of government purchase cards.

		Inadequate Infrastructure for Program Monitoring and Oversight

Management should ensure that skill needs are continually assessed and that the  organization is able to obtain a workforce that has the required skills that match those  necessary to achieve organizational goals….As a part of its human capital planning,  management should also consider how best to retain valuable employees, plan for their  eventual succession, and ensure continuity of needed skills and abilities. GAO’s  Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1,  November 1999)
Ineffective oversight of the purchase card program also contributed to  weaknesses in the overall environment.  Installation program coordinators  are established as the pivotal officials in managing and overseeing the  purchase card program. The coordinators at the installations we audited  had little training on what they should be doing to oversee the program and  limited time to carry out oversight activities that are called for in Air Force  Instruction 64-117, such as reviewing U.S. Bank exception reports and  following up on suspicious transaction activity as well as conducting  annual surveillances.  Effective oversight activities also would include  other management reviews and evaluations to assess risks associated with  the number of credit card accounts, credit limits, and approving official  span of control and to assess the effectiveness of controls, identify  systemic weaknesses, and determine the extent of potentially fraudulent,  improper, and abusive or questionable purchases.
We also found that the program coordinators did not have the grade level or  organizational authority—“clout”—to routinely deal with unit  commanders, approving officials, and resource managers across the  installation, who may significantly outrank them, to enforce purchase card  guidelines and controls.  Program coordinators have the primary  responsibility for purchase card program management and significant  control over procurement activities carried out by a large number of  individuals.  For example, during fiscal year 2001, the Nellis AFB program  coordinator who was a GS-9, similar in grade to a master sergeant, had  responsibility for over 55,000 purchase card transactions totaling over  $27 million involving 638 cardholder accounts and 99 approving officials.
Installation contracting officials told us that program coordinator staffing  had not kept pace with the growth in the purchase card program.  GSA data  show that Air Force purchase card activity has grown from 2.8 million  transactions totaling $1.3 billion at the beginning of fiscal year 2000 to 3.2  million transactions totaling about $1.4 billion at the end of fiscal year 2001.   During fiscal year 2002, Lackland AFB increased the number of staff  assigned to the program coordinator’s office from three staff assigned in  fiscal year 2001 to a total of six staff to provide better oversight of Wilford  Hall’s purchase card program as well as to monitor purchase card use by  units transferred to Lackland AFB when Kelly AFB closed.  The other three  installations we audited had not increased their program coordinator  staffing.  As of September 2002, Edwards AFB had three staff assigned,  Nellis AFB had two staff, and Travis AFB had one and a half staff to oversee  their purchase card programs.  Further, at Travis AFB, where military  employees have held the program coordinator position, there have been  four different individuals assigned to the program coordinator position  since October 2000 due to high turnover associated with military positions.   As a result, Travis AFB program coordinators spend much of their time  learning versus overseeing the purchase card process.  Table 4 shows the  grade level, staffing, and span of control data for installation purchase card  program coordinators at our four case study locations as of August 2002.
In September 2002, the Travis AFB Contracting Director told us that he had  requested approval to hire a full-time GS-9 staff member to assist the  program coordinator.  In early November, the Deputy Contracting Director  told us that they had received approval hire a GS-11 civilian employee as  the installation purchase card program coordinator as well as the GS-9  assistant, beginning in January 2003.
Given the risks associated with ineffective purchase card program  management identified in our purchase card work, it is imperative that  agencies have sufficient numbers of qualified, experienced purchase card  program coordinator staff to help oversee their purchase card programs  and that their grade levels be commensurate with their responsibilities.

	Tests of Key Control Activities

Internal control activities help ensure that management’s directives are carried out.  The  control activities should be effective and efficient in accomplishing the agency’s control  objectives.  GAO’s Standards for Internal Control in the Federal Government (GAO/AIMD- 00-21.3.1, November 1999)
Our tests of statistical samples of transactions at four Air Force  installations found weaknesses in key purchase card control activities.  For  example, of the five key control activities we tested, we found that all four  Air Force locations had significant control breakdowns in at least three of  them.  However, on a positive note, our tests of easily pilferable property  items included in our statistical sample transactions showed that two of the  four Air Force installations we audited were able to account for all the  property items that we selected for testing.
Control activities occur at all levels and functions of an agency.  They  include a wide range of diverse activities such as approvals, authorizations,  verifications, reconciliations, performance reviews, and the production of  records and documentation.  For the Air Force purchase card program, we  tested those control activities that we considered to be key in creating a  system to provide reasonable assurance that transactions are correct and  proper throughout the procurement process.  The key control activities and  techniques we tested include (1) advance approval of purchases,  (2) independent receiving and acceptance of goods and services,  (3) cardholder reconciliation of monthly statements, (4) independent  review by an approving official of the cardholder’s reconciled statements  and supporting documentation within the Air Force-prescribed time frame,  and (5) cardholders obtaining receipts and maintaining invoices that  support their purchases and provide the basis for reconciling cardholder  statements.  Table 5 summarizes the results of our statistical testing.   Appendix I includes the specific criteria that we used to conclude on the  effectiveness of these controls.
The results in table 5 include transactions for which supporting  documentation was destroyed due to improper records retention guidance  in the Air Force Instruction.

		Advance Authorization of Purchases

Our test work showed that, for the most part, the four case study locations  we tested had documentation of required advance authorization with  estimated failure rates for required advance authorization of purchases  ranging from 2 percent to 12 percent.  The segregation of duties between  officials who authorize a purchase and the cardholder who makes the  purchase helps reduce the risk of fraud, waste, and abuse in the purchase  card program.  The Air Force purchase card program Instruction 64-117  requires cardholders to obtain authorization from the specified  controlling/servicing organization on base for certain purchases, including  purchases of computer and communication equipment, video equipment,  medical items, and hazardous materials, before making the purchase.  The  Air Force installations we audited documented advance authorizations on  forms established specifically for that purpose.

		Independent Receiving and Acceptance

The requirement for documentation of independent receiving and  acceptance by someone other than the cardholder is not specifically  addressed in DOD policy or Air Force purchase card program Instruction  64-117.  We believe that independent documentation of receipt of items  purchased by a cardholder is a basic internal control activity that provides  additional assurance to the government that purchased items are not  acquired for personal use and that they come into the possession of the  government.  Based on our statistical testing, we estimated that the failure  rate for independent documentation of receipt and acceptance—receiving  of goods and services by someone other than the cardholder—ranged from  53 percent to 68 percent at the four Air Force locations we tested.  The  types of items in our sampled transactions that lacked independent  evidence of receipt and acceptance included computer software and  memory cards, a fax machine, a cassette recorder, camera film, hardware,  supplies, and tools.  These items were purchased at stores such as  Homebase, Staples, and Radio Shack.  Because the Air Force purchases  items for valid, government purposes from stores that are widely used by  consumers to acquire items for personal use, verification of receipt of  goods and services by an individual other than the cardholder is necessary  to reduce the risk of fraudulent transactions.

		Cardholder Reconciliation and Approving Official Review

Cardholder reconciliation is a key control activity for detecting invalid  transactions, including billing errors and unauthorized purchases.   However, based on our statistical testing, we estimated that cardholders at  the four case study locations lacked documented evidence of timely  reconciliations of monthly purchase card statements from 21 percent to 37  percent of the time.  As evidence that purchase card statements were  reconciled, we accepted check marks, notes, sequential numbering, and  numbering systems that tied transactions on the statement to items on the  cardholders’ purchase card logs.  Independent approving official review of  monthly, reconciled cardholder statements is a key control activity for  segregation of duties, whereby no one individual has control over all  aspects of a transaction.  Based on our statistical testing, we estimated that  approving officials at the four case study locations lacked documented  evidence that they had reviewed monthly, reconciled purchase card  statements, or had reviewed them within required time frames, from 69  percent to 87 percent of the time.  Our statistical tests of approving official  review considered only documented review of statements with evidence of  reconciliation.  The high failure rates are due, in part, to approving officials’  failure to date the reconciled monthly statements when they reviewed  them.  The failure rate also may be attributable to approving official duties  falling into the category of “other duties as assigned” and the span of  control issues discussed earlier.
The high failure rate for approving official review is of particular concern  because the Air Force uses a “pay and confirm” policy, which is  inconsistent with governmentwide and DOD guidelines on reconciliation  and payment of purchase card bills.  In a letter dated April 30, 2002, DOD  informed us that its reengineering memorandums and other  pronouncements are in compliance with 10 U.S.C. 2784, which requires the  Secretary of Defense to issue regulations that require, among other things,  reconciliation of purchase card statements to receipts before the  statements are forwarded to the disbursing office.  Both section 4535 of  volume 1 of the Treasury Financial Manual and DOD’s Purchase Card  Reengineering Implementation Memorandum #3 (change 1, June 30, 1998)  require that purchase card statements be reconciled and forwarded for  payment in a timely manner and allow “pay and confirm” only with respect  to verification of government receipt of the purchased items or services.
In contrast, Air Force purchase card policy permits cardholder statements  to be reconciled and approved after payment has been made.  While a  conscientious postpayment reconciliation and approval process may  provide reasonable control, the lack of documented evidence of  postpayment reconciliation and approval and the undisputed, potentially  fraudulent transactions identified in our work underscore concerns about  noncompliance with the law.  In July 2002, Air Force management asked its  contractor, U.S. Bank, to “shut down” (suspend from use) over 4,000  unreconciled, unapproved cardholder accounts until the reconciliations  were completed and the approving officials had reviewed them.  Accounts  that had not been reconciled as of the end of August 2002 were canceled.   According to an Air Force headquarters official, these accounts would need  to be manually reconciled because they are no longer active in U.S. Bank’s  system.
Under Air Force “pay and confirm” procedures, the installation Financial  Services Office designates a certifying officer to verify availability of  funding and certify the monthly installation purchase card invoices for  payment prior to receipt of the confirmation of reconciled statements from  the approving official.  Monthly invoices are to be paid in full and are not to  be adjusted for disputed items.  Instead, cardholders and approving  officials are to resolve any irregularities through a separate dispute  process.  The Air Force Instruction requires that approving officials review  and approve reconciled cardholder statements and submit the confirmed  statements to the Financial Services Office within 15 days of receipt of the  monthly statement, but no later than the 15th day of the following month— commonly referred to as the 15-day rule.  The Financial Services Office  files the confirmed statements with a copy of the previously certified  statement.
The pay and confirm process has yielded benefits, such as increased rebate  earnings, and has almost eliminated late payment interest.  However,  without effective controls over cardholder reconciliation and approving  official review, the pay and confirm process increases the risk that  fraudulent, improper, and wasteful purchase card expenditures could  occur and go undetected.  DOD and Air Force officials told us that they  were concerned about the lack of compliance with requirements for  purchase card statement reconciliation and approval.
DOD and U.S. Bank officials told us that this control was implemented  upon receipt of the April 25, 2002, monthly purchase card statements.  The  officials told us that on July 1, 2002, approximately 4,000 cardholder  accounts were suspended and no further charges could be made to these  accounts until they were reconciled, and reviewed and approved by the  approving officials.  The officials also told us that reconciliation of these  accounts resulted in a high volume of disputed transactions as cardholders  began to reconcile their statements and approving officials had to review  and approve them, indicating that fraudulent or erroneous transactions  may have occurred and had not been previously detected.
On August 22, 2002, DOD’s Purchase Card Joint Program Management  Office Director told us that 149 of the purchase card accounts that were  suspended on July 1, 2002, had not been reviewed and confirmed by the  approving officials and, as a result, the accounts had not been reactivated.   The DOD Director said that he planned to cancel these accounts because  they apparently are not needed.  However, the failure to reconcile these  accounts raises questions about whether cardholders and/or approving  officials may have made fraudulent or improper transactions for which  they want to avoid scrutiny.  Without reconciliation and independent  review, DOD and the Air Force have no assurance that such purchase card  activity did not involve fraudulent or improper transactions.

		Supporting Invoice or Receipt

As shown in table 5, three of the Air Force case study locations we  audited—Edwards, Nellis, and Travis Air Force bases—maintained the vast  majority of the receipts for items purchased with the government purchase  card.  For example, our statistical test results showed the estimated failure  rates for this control activity ranged from 0 to about 9 percent across these  three locations.  Our statistical test results for Lackland AFB showed that  this location had an estimated 30 percent failure rate for this control  activity.  Of the 37 Lackland AFB transactions that were missing receipts,  23 related to Wilford Hall Medical Center transactions.  Another three of  the transactions in our Lackland AFB sample related to a security forces  unit that transferred to another Air Force installation and did not retain  purchase card documentation.  In testing for evidence of a receipt, we  accepted either the original or a copy of the invoice, sales slip, or other  store receipt.
GAO’s Internal Control Standards state, “all transactions and other  significant events need to be clearly documented, and the documentation  should be readily available for examination.  All documentation and  records should be properly managed and maintained.”   Without supporting  sales receipts or invoices, it is not possible to tell the quantity and type of  items purchased or whether those items were for government business or  of a personal nature.  In such cases, a thorough investigation would be  needed to determine whether a transaction was proper, or if it represented  a potentially fraudulent, improper, or abusive transaction needing  corrective action.  Further, without a receipt, two other key control  activities—independent receipt and acceptance and approving official  review—become ineffective.  Independent receiving cannot confirm that  the purchased items were received and the approving official cannot  review a cardholder statement reconciled with the supporting receipt.  A  near zero failure rate is a reasonable goal considering that receipts are  easily obtained or replaced when inadvertently lost.

		Controls Over Accountable Property

As shown in table 6, three of the four installations we audited recorded  most of the items we selected for testing in their accountable property  records.  In addition, the Air Force was able to locate and we confirmed  that all of the items that were not recorded at two installations were in the  possession of the government.  However, Air Force officials were unable to  locate 4 of the 114 accountable property items we tested at Edwards AFB  and 14 of the 70 accountable items we tested at Travis AFB, indicating that  these items may have been lost or stolen.  The property book officer at  Travis AFB told us that cardholders do not always notify the property office  and provide documentation of accountable items purchased with the  government credit card—even though many of them are easily pilferable  and desirable items.  As previously discussed, Travis AFB’s failure to record  in the installation’s property records, accountable property purchased  using a government purchase card was also an Air Force Audit Agency  repeat audit finding.
Items such as a digital camera, a laser printer, and computers and monitors  were not included in base property records.  The Edwards AFB property  items that could not be located included two computer servers and two  monitors costing a total of $11,258 that were ordered for other installations.   The Travis AFB property items that could not be located included a digital  camera costing $812 that, according to investigative records, was  previously reported stolen from an employee’s office and eight computers  costing $14,128 that were allegedly sent to the Defense Reutilization  Marketing Service (DRMS) as excess items during the year they were  purchased.  Because serial numbers for the computers had not been  recorded, we could not confirm that the eight computers we selected for  testing were items that were sent to DRMS.  A Travis AFB contracting  official told us that these new computers should not have been sent to  DRMS as excess property.  The official told us that unneeded computer  equipment is required to be turned in to the information technology unit for  assignment to other installation units.  Other missing items included a  laptop computer and four computer monitors costing under $500.
GAO’s internal control standards and DOD Instruction 5000.64, Defense  Property Accountability, require that accountable property be recorded in  property records as it is acquired.  The DOD Instruction refers to  accountable property as “controlled inventory items” and defines these  items as those designated as having characteristics that require them to be  identified, accounted for, secured, segregated, or handled in a special  manner to ensure their safekeeping and integrity.  The Instruction defines  pilferable items as those that have a ready resale value or application to  personal possession and that are, therefore, especially subject to theft.   However, the DOD Instruction does not include a list of items that fall into  these categories. Accountable property generally includes high-cost  property items and easily pilferable or sensitive items, such as computers  and related equipment, cameras, cell phones, and power tools.
Air Force Instruction 33-112, Computer Systems Management, requires  mandatory inclusion of computer items costing $500 or more in inventory  records.  However, the Air Force does not have a policy for recording other  types of easily pilferable or sensitive items in its property records.   According to an Air Force headquarters acquisition official, decisions on  how to control items, such as computers and related equipment, cameras,  cell phones, and power tools, are left to the discretion of the installation  commanders.  As a result, there is no assurance that Air Force installations  are following DOD policy.  At the four installations we audited, we found  that most computers were recorded in either central or unit-level property  systems.  However, cardholders at the installations we audited were not  always aware that items such as digital cameras, fax machines, or  computer items costing less than $500 meet the definition of controlled  inventory items and/or pilferable items and thus should be recorded in their  property records.
One factor that may explain the positive Air Force test results at three of  the four installations we audited is that these installations made greater use  of centralized purchasing and receiving for computer equipment.  As a  result, contracting and information technology units controlled purchasing  and receiving for these items and assured that the items were recorded in  the property records when they were received.  In contrast, at Travis AFB,  nearly half of the property items tested were not recorded in property  records and management could not locate many of these items.   The use of  central purchasing and receiving helps to mitigate against control  breakdowns where cardholders do not take action to ensure that  accountable items are recorded in property records.

	Potentially Fraudulent, Improper, and Abusive or Questionable Transactions

We identified numerous purchase card transactions at the four installations  we audited and in our Air Force-wide data mining that were potentially  fraudulent, improper, and abusive or questionable.  Buying items with  purchase cards without the requisite control environment and key control  activities in place creates unnecessary risk of fraud and abusive and  wasteful spending.  Also, the lack of records previously discussed raises  concerns about whether files could have been destroyed so that potentially  fraudulent, improper, or abusive transactions were not documented and  subjected to review.  In addition, we saw a number of potentially fraudulent  transactions at the case study locations we audited and in our Air Force- wide analysis that related to compromised accounts.  We did not review all  potentially fraudulent, improper, and abusive transactions identified in our  work.  As discussed in appendix I, our work was not designed to identify,  and we cannot determine, the extent of potentially fraudulent, improper,  and abusive or otherwise questionable transactions.

		Potentially Fraudulent Purchase Card Transactions

We identified transactions that Air Force officials acknowledged to be  fraudulent, as well as potentially fraudulent transactions for which no  supporting documentation was available, at all four installations we  audited, as well as in our Air Force-wide analysis.  Some transactions  identified as potentially fraudulent resulted from compromised accounts in  which a purchase card or account number was stolen and used by someone  other than the cardholder to make unauthorized purchases.  We found five  potentially fraudulent transactions involving two purchase card accounts  that were not disputed with the bank.  Further, none of these transactions  were referred to Air Force investigators until we questioned them.  We  considered potentially fraudulent purchases to include those made by  cardholders that were unauthorized and intended for personal use.  We also  considered transactions for which there was no supporting documentation  to be potentially fraudulent because, in the absence of supporting  documentation, it is not possible to determine whether these transactions  represented valid government purchases, fraudulent transactions that went  undetected, or fraudulent transactions for which documentation was  intentionally destroyed to cover up the fraud.  In these instances,  cardholders and approving officials were unable to tell us the types of  items purchased or the purpose of the transactions.  However, we  determined that they had not disputed any of these transactions.   Potentially fraudulent transactions can also involve vendors charging  purchase cards for items that cardholders did not buy.  Although collusion  can circumvent what otherwise might be effective internal control  activities, a robust system of guidance, internal control activities, and  oversight can create a control environment that provides reasonable  assurance of preventing or quickly detecting fraud, including collusion.
Air Force and U.S. Bank officials told us that in July 2001, U.S. Bank  identified numerous fraudulent transactions due to compromised  accounts.  According to U.S. Bank officials, this was a widespread fraud  involving many credit card banks that was apparently related to a fraud  ring that used a computer to randomly generate credit card account  numbers and/or counterfeit credit cards, which they then used.  U.S. Bank  officials told us that the compromised accounts initially were believed to  be associated with transactions in a few states, including California and  Georgia.  However, the fraud was subsequently determined to be a  nationwide problem.  According to Air Force and U.S. Bank officials,  numerous Air Force purchase card accounts were canceled due to this  fraud.  Given the risk associated with such fraud, it is extremely important  that cardholders reconcile their monthly statements in order to detect and  dispute potentially fraudulent transactions.  Table 7 illustrates the types of  potentially fraudulent transactions that we identified.
Our Air Force-wide data mining and analysis of purchase card  documentation identified potentially fraudulent purchase card transactions  at Andrews and McConnell Air Force bases that were never disputed with  the bank or credited to the government.  Our analysis of documentation  related to the potentially fraudulent transactions that were not disputed  disclosed the following facts.
The E-Z Pawn transaction was for a $2,443 down payment on a $10,000  sapphire ring. An October 4, 2001, agency program coordinator  purchase card surveillance report indicated that the reviewer had  questioned the lack of receipt for the E-Z Pawn transaction; however,  the surveillance did not question the propriety of this transaction.  No  further action was taken, even though pawnshops are coded to a  merchant category that is required to be blocked as a means of  preventing fraudulent transactions from being processed.  In response  to our inquiry, the program coordinator told us that there is no evidence  that either the cardholder or the approving official disputed the  transaction.  Also, we found no credit for this transaction in the Air  Force purchase card database from U.S. Bank.  According to the  cardholder, at the time the potentially fraudulent transaction occurred,  he did not have possession of the purchase card.  The cardholder told us  that his purchase card account was being closed due to outsourcing of  his unit’s function, and he had turned over his purchase card to another  individual.  The cardholder stated that, as a result, he never received his  monthly statement and thus did not perform a reconciliation or identify  the potentially fraudulent transaction.  We determined that the program  coordinator took no further action to ensure that the potentially  fraudulent transaction was disputed.
The Air Force headquarters acquisition official who obtained the  supporting documentation on these transactions for our review and  analysis told us that she referred these transactions to the Air Force  Office of Special Investigations and our investigators confirmed that  Air Force investigators had opened a case to investigate these frauds.
The four potentially fraudulent McConnell AFB transactions totaling  $3,232 were made on July 31, 2001.  These potentially fraudulent  transactions included charges made at San Diego area stores, including  $690 at a Ross Store, $873 at Old Navy, $689 at K-Mart, and $980 at  Target.  These charges were all made when the purchase card was in the  possession of the approving official while the cardholder was assigned  to Biloxi, Mississippi, for over 2 months for noncommissioned officer  training.  Although the approving official stated that his review of the  cardholder’s August 2001 statement detected the potentially fraudulent  transactions, he did not dispute these transactions.  The program  coordinator told us that disputing erroneous charges is covered  repeatedly in cardholder and approving official training.  The program  coordinator also told us that she counseled the approving official  extensively on cardholder and approving official responsibilities.  The  program coordinator told us that she informed the approving official  that she had reduced the credit limit on the account to $1 to avoid  further charges.  She also said that she instructed the approving official  that he should dispute these transactions in the absence of the  cardholder’s dispute.   However, instead of disputing these transactions,  the approving official waited for the cardholder to return from training  in mid-September and asked the cardholder to seek guidance from the  program coordinator.  A circular discussion ensued about who would  take action to dispute the potentially fraudulent transactions, with the  approving official stating that the cardholder was to dispute these  transactions and the cardholder stating that he thought the program  coordinator would dispute the transactions.   As a result, the  transactions were never disputed and the program coordinator took no  further action.
The Air Force headquarters acquisition official who obtained the  supporting documentation on these transactions for our review and  analysis told us that she referred these transactions to the Air Force  Office of Special Investigation.  However, Air Force investigators told  us they did not initiate an investigation because they believed that the  transactions had been credited.  Our review of the Air Force purchase  card database and discussions with the installation program  coordinator determined that the transaction had not been credited and  the potential fraud is unresolved.  Therefore, we have referred this  matter to our investigators for further investigation.
In contrast to the failure to dispute the potentially fraudulent transactions  discussed above, the following are examples of potentially fraudulent  transactions that Air Force cardholders detected and disputed.
A $19,000 charge for a duplicator from BEF Corporation—an imaging  technology vendor in Allentown, Pennsylvania—related to a  compromised purchase card account.  Our investigators confirmed that  the Edwards AFB cardholder called the bank and disputed the  transaction before the item was delivered.  As a result, neither the  government nor the bank incurred a loss related to this compromised  account. Our investigators confirmed that the cardholder had referred  the transaction to Air Force investigators.
Three unauthorized Travis AFB purchases, including one transaction at  Flowers Sent Today, Inc., and two transactions at Flowers Anytime,  totaling $432 were made by an inmate at a local county jail.  Travis AFB  officials told us that they disputed these transactions because they were  unauthorized and they believed that the account had been  compromised.  These potentially fraudulent transactions were  subsequently investigated by U.S. Bank and the purchase card account  was canceled.
Five potentially fraudulent charges were made to a Scott AFB, Illinois,  cardholder’s account on August 21 and August 22, 2001, totaling about  $2,400.  The charges were made at vendors in the Miami area, including  charges at Ocean Drive Fashions, Inc., for $426, Rendezvous on the  Beach for $224, Donald Pliner Concept Store for $520, Sunglass Hut for  $586, and Watch World for $645.  Our review of Air Force records  showed that the cardholder disputed these transactions and a U.S. Bank  investigation of the potentially fraudulent transactions was initiated on  November 9, 2001.  Our review of U.S. Bank records showed that the  purchase card account was credited for the fraudulent transactions on  June 6, 2002—nearly a year after the transactions were made.
A Patrick AFB cardholder identified unauthorized purchase card  transactions totaling $249 that were made at Citgo 7-Eleven, Publix,  Chevron, Kash N Karry, and Speed SM by his wife between April 1 and 6,  2001.  According to the unit commander, the cardholder’s purchase card  privileges were revoked, and the cardholder agreed to pay for his wife’s  unauthorized charges.  However, as of the end of October 2002, we  determined that the cardholder had not reimbursed the government for  his wife’s unauthorized use of the purchase card.  We suggested that the  employee should submit a check to the installation’s Financial Services  Office along with an explanation for the payment.
We also contacted the Air Force Office of Special Investigations to inquire  about their purchase card fraud cases.  Investigators told us that their  investigative database did not contain codes that permit them to identify  purchase card fraud cases.  As a result, the investigators had to manually  review all procurement-related cases to attempt to identify cases involving  purchase card fraud. Appendix III summarizes some of the purchase card  fraud cases that were investigated by the Air Force Office of Special  Investigations.

		Improper Purchases and Improper Use of the Purchase Card

Besides potentially fraudulent activity, our work also identified numerous  examples of transactions related to improper purchases, as well as  improper use of the purchase card.  Improper purchases are those  purchases that, although approved by Air Force officials and justified as  intended for government use, are not permitted by law or regulation or  DOD or Air Force policy.  Improper use of the purchase card related to use  of the card as an acquisition tool without a negotiated contract, use of the  card by a nongovernment activity, and improper use of convenience  checks associated with purchase card accounts.

			Improper Purchases

We identified the following three types of improper purchases.
Purchases that did not serve a legitimate government purpose.
Split purchases in which the cardholder circumvents the micropurchase  limit or other transaction limits.
Purchases from improper sources.  Various federal laws and regulations  require procurement officials to acquire certain products from  designated sources, such as Javits-Wagner-O’Day Act (JWOD) vendors.   In addition, agencies are required to purchase furniture, if available,  from Federal Prison Industries, Inc. (UNICOR), and DOD policy requires  that printing services be obtained in-house through the Defense  Automated Printing Service.
We found several instances of purchases, such as clothing, luggage, and  food, in which cardholders improperly used their purchase cards, or they  purchased goods that were not authorized by law or regulation.  The  Federal Acquisition Regulation, 48 C.F.R. 13.301(a), provides that the  governmentwide commercial purchase card may be used only for  purchases that are otherwise authorized by law or regulation.  We  identified the improper Air Force transactions as part of our analysis of  questionable vendor transactions at the four installations we audited and in  our Air Force-wide data mining.  Table 8 summarizes examples of the  improper transactions we identified that do not serve a legitimate  government purpose.
The following examples illustrate the types of purchases included in table  8.
Clothing and sunglasses.  We identified numerous purchases of clothing  for military personnel that appeared to be personal preference items.  We  determined that these purchases were improper based on our review of  DOD directives, Air Force policies, and discussions with Air Force  headquarters officials.  For example, at Lackland AFB, one of our test  locations, we identified purchases of clothing for drill instructors, including  physical fitness clothing items from LL Bean costing $816 and 16 fleece  jackets from Oakley costing $880.  We also identified numerous purchases  of military clothing items from REI totaling $20,698, including paratrooper  jumpsuits and cold weather pilot jackets.  These clothing items are covered  under the military pay clothing allowance funded in the Military Personnel,  Air Force, appropriation and should not have been purchased with  Operation and Maintenance appropriations using the purchase card.
In addition, we found purchases of what we consider to be personal  clothing and accessory items that were authorized by installation officials.   For example, Hanscom AFB, Massachusetts, authorized the purchase of a  blue blazer from Filene’s costing $180 and eight dresses from Dress Barn  costing $648 for civilian employees who participated in the Eubank Service  Award Competition.  Hickam AFB, in Hawaii, purchased two wool coats  from Hecht’s in Waldorf, Maryland, costing $380 for a flight attendant  assigned to the 65th Airlift Squadron.  In addition, the Lackland AFB  pararescue team purchased 12 pairs of sunglasses from Oakley costing  $540 and improperly justified them as meeting the requirement for free-fall  paratrooper goggles.  Oakley sunglasses do not qualify as paratrooper  goggles.  None of these items are authorized by Air Force policy.   Therefore, we concluded that all of these purchases involved personal  items, which employees should pay for from their own salaries.
Luggage and briefcases.  We identified numerous purchases of luggage  deemed necessary for employees who travel frequently, including 50  Samsonite suitcases costing $5,500 for members of the Thunderbirds team  and garment bags costing $2,250 for the Bolling AFB band, and purchases  of two Pathfinder Pullman suitcases costing $620 for recruiters.  In  addition, our review of a limited selection of Franklin Covey transactions  identified six purchases of leather briefcases costing $212 each (after a 20  percent discount) and purchases of 203 flight bags (similar to a briefcase)  costing from about $50 to $86 each.  Luggage and briefcases are considered  personal items that should be paid for from employees’ salaries.
Food and water for employees.  We identified purchases of meals, bottled  water, and payment for a unit luncheon.  Without statutory authority,  appropriated funds may not be used to furnish meals to employees within  their normal duty stations.  We identified improper charges for food  provided to employees during an internal government meeting and unit  luncheons.  For example, Lackland AFB scheduled a strategic planning  meeting for local employees of the Tri-Care organization at a Marriott Hotel  in San Antonio, Texas.  The total cost of the meeting was $1,052, including  $538 for breakfast and lunch for 18 individuals—3 consultants and 15  employees who were not on travel.  In addition, appropriated funds may  not be used to purchase bottled water for employees unless they are  assigned to a duty station without potable water.  Food and bottled water  are considered personal items that employees should pay for from their  own salaries.

			Split Purchases

Another category of improper transactions is a split purchase, which  occurs when a cardholder splits a transaction into more than one segment  to circumvent the requirement to obtain competitive prices for purchases  over the $2,500 micropurchase threshold or to avoid the other established  credit limits. The Federal Acquisition Regulation and Air Force  Instruction 64-117 prohibit these practices.  Once items exceed the $2,500  threshold, they are to be purchased in accordance with simplified  acquisition procedures, which are more stringent than those for  micropurchases.  Our analysis of purchases made at the four case study  locations and our Air Force-wide data mining identified numerous split  purchases.  In addition, Air Force Audit Agency auditors identified split  purchases as a continuing Air Force-wide problem.
One split purchase we identified involved a violation of appropriations law.   The purchase was made to avoid the expiration of unused fiscal year 2001  operation and maintenance appropriations.  Our inquiries disclosed the  following events surrounding this transaction.  On September 30, 2001, at  approximately 9:00 p.m. Eastern Standard Time, Air Combat Command  headquarters at Langley AFB, Virginia, determined that $100,000 in fiscal  year 2001 operation and maintenance appropriations would expire in 3  hours—at midnight—unless the funds could be obligated and spent quickly.   At 6:00 p.m. Pacific Standard Time, the command contacted the USAF  Weapons School, 57th Operations Support Squadron at Nellis AFB, Las  Vegas, Nevada, with the direction to use the funds before they expired.  At  approximately 7:00 p.m., the Nellis AFB cardholder purchased 120 helmets  at more than $800 each and several other items totaling just under $100,000  from the base supply store.  The purchase was split into four separate  transactions to stay within the cardholder’s single transaction limit of  $25,000 per transaction.  The items purchased were placed “on hold” and  were not taken from the store.  Over the next few days—October 1 and  October 2—the cardholder “returned” the items, exchanging them for other  items totaling the same amounts.  In an explanatory memorandum, the  cardholder wrote that the unit had not previously identified its unfilled  requirements and, therefore, did not have a list of items for purchase if  “end-of-year” money was available.  The subsequent credits and reuse of  the funds in early October 2001, in effect, converted fiscal year 2001  appropriations to fiscal year 2002 budget authority.

			Improper Sources

Another type of improper purchase occurs when cardholders do not buy  from a mandatory procurement source.  Various federal laws and  regulations, such as the Javits-Wagner-O’Day Act (JWOD), require  government cardholders to acquire certain products from designated  sources.  The JWOD program is a mandatory source of supply for all  federal entities.  It generates jobs and training for Americans who are blind  or have other severe disabilities by requiring federal agencies to purchase  supplies and services furnished by nonprofit agencies, such as the National  Industries for the Blind and the National Institute for the Severely  Handicapped.  Most JWOD program supplies are small-value items such as  office supplies, cleaning products, or medical/surgical supplies that nearly  always fall into the micropurchase category.  We noted that most  cardholders at the four installations we audited made purchases from  required sources and three of the four installations had JWOD stores on  base.  However, we found numerous Air Force-wide purchases from  Franklin Covey for office supplies, such as calendars and day planners,  which could have been purchased from JWOD vendors.  We also found that  Air Force cardholders charged $2,220 for 82 high-quality pens from  Franklin Covey costing from $16 to $60 each.  Table 9 summarizes  transactions we identified that were made from other than required  sources of supply.
The failure to purchase designated items from JWOD vendors who support  the handicapped undermines public policy objectives to support programs  for the handicapped. For example, as discussed in our Army purchase card  report, the Director of Sales for the National Industries for the Blind told  us that this program has experienced large decreases in sales over the past  2 years because cardholders were purchasing from commercial firms  rather than buying the mandated products.  Further, operating revenues of  government service organizations, such as the Defense Automated Printing  Service (DAPS), which is a required source of printing services for DOD  agencies, and Federal Prison Industries, Inc. (UNICOR), which is a required  source for furniture, are significantly reduced to the extent that  cardholders do not use these sources for mandated printing and related  services.

			Improper Use of Purchase Cards and Convenience Checks

In addition to the improper transactions discussed above, our analysis of  Air Force-wide purchase card transactions identified the following three  types of improper use of the purchase card.
Use of the purchase card as acquisition tool where a negotiated contract   Purchase card use by a religious fund activity without authority in law,  regulation, or DOD or Air Force policy, and  Improper use of convenience checks billed to the purchase card  account.
The following examples illustrate the types of purchases included in table  10.
Month-to-Month Equipment Rental.  We found that a cardholder at  Whiteman AFB, Missouri, improperly used the purchase card as an  acquisition vehicle without a negotiated contract.  Specifically, the  cardholder used the purchase card to rent tractors for use by the  installation’s waste treatment facility at a cost of about $10,000 during  fiscal year 2001.  Our analysis of records related to this lease showed that  an initial month-to-month rental of a tractor covered 3 years beginning in  November 1997.  In November 2000, the cardholder initiated monthly rental  of a new tractor for 2 years.  According to the installation program  coordinator, the current cost to purchase the type of tractor that was  rented during fiscal years 2000 and 2001 would be in the $35,000 to $45,000  range; however, a lease versus purchase cost-benefit analysis was never  performed.  We determined that the cost of the two rentals, which together  covered a 5-year period, totaled over $50,000.
Unauthorized Use of the Card by Chaplain’s Religious Fund.  Our analysis  of fiscal year 2001 FE Warren AFB, Wyoming, purchase card transactions  totaling over $6,600 by a Chaplain Office volunteer, who later became a  contractor, raised a number of questions about the proper use of the  purchase card.  Air Force purchase card policies state that commercial  purchase cards are provided to military members and federal civilian  employees to pay for official government purchases, and that only  employees may be cardholders.  According to the Chaplain Office officials,  these transactions were for authorized purchases.  They said they often use  parishioners and volunteers to assist them in carrying out religious  activities.  However, Air Force purchase card policies state that  commercial purchase cards are provided to military members and federal  civilian employees to pay for official government purchases.  Chaplain  Office officials told us that because the Chaplain Religious Fund did not fall  under Air Force purchase card authority as either an appropriated fund or a  nonappropriated fund activity, they believed they could set up the  government purchase card program for their office by working  independently with the bank.
We discussed our concerns about Chaplain Office authority to use the  government purchase card with Air Force attorneys and acquisition and  Chaplain Office officials.  After reviewing Air Force policy, Air Force  attorneys advised us that the Chaplain’s Office did not have authority to use  the government purchase card for Chaplain Religious Fund activities.
Convenience Checks.  We identified improper use of convenience checks  related to payments in amounts over $2,500, payments for recurring  services, and payments to vendors who accept purchase card payments.   Air Force Instruction 64-117 limits the use of convenience checks to  amounts of no more than $2,500 per check, prohibits the use of  convenience checks for recurring services, and restricts convenience  check use to instances where vendors do not accept purchase cards.   Splitting amounts across more than one check to keep below the $2,500  limit also is prohibited.  Another area of improper use of convenience  checks related to reimbursement of employees for tuition assistance.  We  determined that reimbursement to employees is not a permitted use of  convenience checks.   Further, because there is a 1.7 percent fee for using a  convenience check, cost-benefit considerations are required when using  convenience checks.
Our analysis of fiscal year 2001 convenience check use determined that Air  Force purchase cardholders who had convenience check authority had  issued 45 convenience checks totaling over $200,000 for amounts over  $2,500.  We also found that a cardholder at Luke AFB, Arizona, improperly  used convenience checks for recurring monthly payments on a 2-year  automobile lease for authorized use by a military officer.  It is common  knowledge that car dealerships accept credit cards.  At one of our case  study locations—Travis AFB—we found that a cardholder had reimbursed  employees for $12,214 in tuition expenses.  The cardholder wrote two  convenience checks—one check for $2,090 and another for $500—to  reimburse an employee for a total of $2,590 in tuition expenses.  The  cardholder wrote two additional convenience checks—one check for  $6,125 and another for $3,500—to reimburse two other employees for  $9,614 in tuition expenses.  The 1.7 percent fee on the first two checks was  $44 and the fee on the second two checks was about $163—significantly  more that the Defense Finance and Accounting Service fee of  approximately $7 to process electronic payments.
In its August 2002 purchase card report, the Air Force Audit Agency stated  that its review found that cardholders issued convenience checks to pay  salaries and wages totaling $512,378 for dieticians, nurses, and  administrative personnel, and to acquire recurring services, such as aircraft  washing totaling $84,830, local area network support costing $110,495,  equipment rentals costing $20,700, and lawn-care services costing $43,505.   Air Force auditors determined that cardholders expended $2.6 million for  recurring services and incurred unnecessary bank fees of $15,228  associated with the 1.7 percent service fee.

		Abusive or Questionable Use of the Purchase Card

We also identified abusive and questionable transactions at installations we  audited and in our Air Force-wide data mining.  We defined abusive  transactions as those that were authorized, but the items purchased were  at an excessive cost (e.g., “gold plated”) or for a questionable government  need, or both.  Abuse occurs when the conduct of a government  organization, program, activity, or function falls short of societal  expectations of prudent behavior.  Often, improper purchases, such as  those discussed in the previous section, are also abusive.  For example, the  purchases of personal clothing and luggage for employees were also  abusive purchases because they were for a questionable government need.
Questionable transactions are those that appear to be improper or abusive  but for which there is insufficient documentation to conclude either.  We  deemed questionable those purchases for which there was not a reasonable  and/or documented justification.  Questionable purchases often do not  easily fit within generic governmentwide guidelines on purchases that are  acceptable for the purchase card program.  They tend to raise questions  about their reasonableness.  Many, such as gym-quality exercise equipment  for fitness centers, are common Air Force—and DOD—purchases because  the Air Force must provide more than merely a work environment for its  soldiers.  However, others involving excessive purchases of alcohol,  payment for taxidermy services, and purchases of expensive leather  computer cases discussed in this section, raise questions about whether  they are appropriate purchases.  Precisely because these types of  purchases tend to raise questions and subject the Air Force to criticism,  they require a higher level of advance purchase review and documentation  than other purchases.
When we examined these types of purchases, we usually did not find  evidence of advance purchase justification.  In attempting to justify  whether purchases were acceptable, improper, or abusive, program  coordinators, approving officials, and cardholders often provided after-the- fact rationales for the purchases.  We believe that these types of  questionable purchases require scrutiny before the purchase, not after.  The  examples in table 11 illustrate our point.
The following examples illustrate the problems associated with some of the  transactions we identified as abusive or questionable.
At Nellis AFB, the purchase card was used to pay for dinner and a show  for 18 people costing $2,141 at Treasure Island—a Las Vegas hotel and  casino.  The purpose of the event was to entertain the General of U.S.  Joint Forces Command, who was visiting the base.  Air Force  Instruction 65-603, Official Representation Funds – Guidance and  Procedures, permits the use of government funds for official  entertainment.  However, we determined that the nature of this  entertainment did not meet certain Force guidelines related to  requirements to conduct entertainment on a modest basis that is in the  interest of the taxpayer.  For example, we determined that the cost of  the dinner party, which totaled $2,141, included about $800 for alcohol  for the 18 people who attended the event—over $40 per person.  We  believe the excessive cost of alcohol purchased at this event falls short  of societal expectations of prudent behavior and modest cost.
An Air Force Academy Natural Resource office in Colorado Springs,  Colorado, used the purchase card to pay Timberline Taxidermy $375 to  prepare a shoulder mount of a mule deer head.  According to the  approving official, the deer was “road kill” that he found on the roadside  and brought to the Natural Resources Office.  The approving official  then approved the purchase of the taxidermy service to prepare a  stuffed shoulder mount of the deer.  The deer head was hung on the wall  in the Natural Resources Office.  The justification of the purchase of  taxidermy services provided to our auditors stated, "The mule deer  (Odocoileus hemionus) is the most common large mammal present on  US Air Force Academy grounds.  The mount was created as an  educational/interpretive tool and is on display in the USAFA Natural  Resources office.  The mount can be removed from the office wall for  use in educational presentations to the base population (e.g., that only  males have antlers which are shed and re-grown each year.)  The deer  died after being struck by a vehicle and was salvaged by USAFA Natural  Resources personnel."  When our auditor asked the cardholder how  often the deer head was removed from the office wall and used for  educational purposes, the cardholder stated, "not much."  The  cardholder, the approving official, and two other Natural Resource  employees occupy the office where the deer head currently hangs.
The Edwards AFB, 412th Test Wing/Electronic Warfare used fiscal 2001  year-end funds to purchase 21 computers and monitors at a total cost of  $47,372.  An e-mail message dated September 13, 2001, within the 412th  Test Wing had subject lines stating “Last Minute Purchasing” and  included one message line that stated, “… I gather they have quite a bit  of unspent credit card money and want to move out on it this week.”   The 21 computers and monitors were received on October 23, 2001.  At  the time of our inspection of these items in June 2002, 11 of the  computers and 9 of the monitors were located in a storage area and  many of the items were still in the original shipping boxes.  According to  the Contracting Director, the computers were purchased to support  hiring of engineers and engineering contractors.  However, recruiting  efforts were delayed because some applicants did not accept offered  positions and further recruiting efforts were suspended during  implementation of a new personnel system in the fall of 2001.  The  Contracting Director told us that the unit commander directed that the  computers be stored in their original boxes for safekeeping until  recruiting was completed and the equipment could be assigned to  engineering staff, which was accomplished in July or August 2002.  The  fact that the computers were still in their original boxes at least 9  months after they were ordered raises questions about whether there  was a legitimate need for these items to be purchased with fiscal year  2001 appropriations.  Appropriated funds are available only to meet  legitimate needs of the agency during the fiscal year for which the funds  were appropriated.
Our testing of property items identified two Travis AFB transactions  dated October 4, 2000, for purchases of computer equipment totaling  $14,128 that involved wasteful spending.  For example, when we  attempted to observe the items to confirm their existence, we were told  that the unit had decided to convert to Dell computers.  As a result,  within 1 year of their purchase, these items, as well as a number of other  computers, were sent to the Defense Reutilization Marketing Service as  excess property.
In addition, we questioned purchases of civilian clothing for military  assistants and costumes for regional band members.  While DOD and the  Air Force have issued policy that permits the purchase of these types of  clothing and designates them as “uniforms,” we believe this clothing  represents personal preference attire and should be paid for by the  employees.  For example, in addition to standard issue uniform clothing  items, military assistants are permitted to purchase slacks or skirts, shirts,  and blazers to wear while serving as aides to general officers.  In addition,  we noted purchases including two tuxedos, six dresses, and earrings as  costumes for members of regional Air Force bands.  Under Air Force  policy, regional bands are permitted to purchase tuxedos and evening  gowns to be worn as costumes during performances.  While the civilian  clothing for military assistants and band costumes are considered  government property, which may be reused as appropriate, they are not  likely to be reissued to others.  Therefore, we question whether taxpayer  funds should be used to pay for these items.

	Management Improvements

DOD and Air Force managers told us that they initiated a number of actions  during fiscal year 2002 to improve purchase card controls.  These initiatives  include use of automated U.S. Bank controls to (1) tie cardholder credit  limits to allocations of budget authority, (2) automatically deactivate  purchase card accounts where monthly statements have not been  reconciled and reviewed by the approving officials within prescribed time  frames, and (3) cancel purchase card accounts for approving officials with  responsibility for excessive numbers of cardholders.  According to Air  Force officials, they plan to periodically lower the threshold for suspending  purchase card accounts until the approving official’s span of control  complies with DOD span of control guidelines.
In addition, the DOD Comptroller appointed a Charge Card Task Force,  which issued its final report on June 27, 2002.  The Task Force report  included a number of recommendations, including establishing a purchase  card concept of operations, accelerating the electronic certification and bill  paying process, improving training materials, identifying best practices in  areas such as span of control and purchase card management skill sets, and  establishing more effective means of disciplining those who abuse the  purchase cards.  The recommendations address many of the concerns we  identified in our Air Force work.
In response to our DOD audits, the Congress has recently enacted  amendments in section 1007(a) of DOD’s fiscal year 2003 authorization act  that address requirements for (1) periodic reviews to be performed to  determine whether each purchase card holder has a need for the purchase  card, (2) periodic inspector general audits to identify potentially  fraudulent, improper, and abusive uses of purchase cards,    (3) appropriate  training for cardholders and oversight officials, and (4) specific policies  regarding the number of purchase cards issued by various organizations,  authorized credit limits, and categories of employees eligible to be issued  purchase cards.  Further, DOD’s fiscal year 2003 appropriation and  authorization acts each include requirements that the regulations issued by  the Secretary of Defense provide for appropriate disciplinary actions or  other punishment to be imposed in cases in which DOD employees violate  purchase card regulations or are negligent or engage in misuse, abuse, or  fraud with respect to a purchase card, including removal in appropriate  cases.

	Conclusions

A well-controlled purchase card program is a valuable tool for streamlining  the government’s acquisition processes.  However, the problems we  identified with missing receipts, lack of cardholder reconciliations and  approving official review, and failure to follow requirements in laws,  regulations, and DOD and Air Force policies and procedures resulted in  control environment weaknesses that leave the Air Force vulnerable to  fraud and improper use of the purchase card, as well as abuse and wasteful  spending.  Also, although Air Force management has been proactive in  establishing improved controls, it has not ensured that installation-level  program coordinators—the primary program management officials—have  the tools to develop local control systems and adequate oversight activities.   Further, installation contract officials have not consistently demonstrated  the commitment to enforce established controls.  Strengthening the control  environment will require a renewed focus and attention and commitment  to building a robust purchase card infrastructure.

	Recommendations for Executive Action

To strengthen the overall control environment and improve internal control  over the Air Force purchase card program, we recommend that the  following actions be taken.

		Overall Program Management and Environment

We recommend that the Secretary of the Air Force direct the Assistant  Secretary of the Air Force for Acquisition and the Deputy Assistant  Secretary for Contracting to take the following actions.
Establish specific policies and strategies governing the number of  purchase cards to be issued with a focus on minimizing the number of  cardholders.
Direct all command and installation-level agency program coordinators  to review purchase card use with a view toward eliminating unneeded  purchase card accounts.
Eliminate purchase cards used to facilitate line item accounting.
Direct all agency program coordinators to review the number of  cardholders who report to an approving official and make the changes  necessary so that approving officials do not have responsibility for  reviewing more cardholder accounts than allowed by Air Force and  DOD policies.
Review existing credit limits and monthly spending and develop policies  and strategies on credit limits provided to cardholders with a focus on  minimizing specific cardholder spending authority and minimizing the  federal government’s financial exposure.
Deactivate purchase card accounts of alternate cardholders and  approving officials when primary cardholders and approving officials  are available.
Establish specific training courses for cardholders, approving officials,  and agency program coordinators tailored to the specific  responsibilities associated with each of those roles.
Require installation program coordinators to track and monitor  corrective actions on purchase card audit and annual surveillance  findings and provide periodic status reports to their installation  contracting directors.
Develop and implement a program oversight system for program  coordinators that includes standard activities and analytical tools to be  used in evaluating program results.
Require reports on annual surveillance results to include an assessment  of control environment issues, including the ratio of cardholders to  employees, ratio of approving officials to cardholder accounts, ratio of  monthly credit limits to actual spending, and number of cardholders and  approving officials requiring training.
Assess the adequacy of human capital resources devoted to the  purchase card program, especially for oversight activities, at each  management level, and provide needed resources where appropriate.
We also recommend that the Secretary of the Air Force direct the Assistant  Secretary of the Air Force for Acquisition and the Deputy Assistant  Secretary for Contracting to make to following revisions to Air Force  Instruction 64-117, Air Force Government-wide Purchase Card Program.
Correct faulty records retention guidance by referring to specific  guidelines in the Federal Acquisition Regulation, National Archives and  Records Administration federal records retention guidelines, DOD’  Financial Management Regulation, and other federal guidelines as  appropriate.
Require purchase card program management and administrative  records generated by installation program coordinators and approving  officials, such as records of cardholder and approving official  appointments and training, cardholder delegations of authority, and  purchase card surveillances, to be retained for 3 years.
Stipulate, in the body of the Instruction, that approving officials are  required to have annual purchase card refresher training.
Require that the surveillance checklist, which is included in an appendix  to the Air Force Instruction, be used to guide and document surveillance  results.
Require reports on the results of annual surveillances to be signed by  installation contracting directors to demonstrate management oversight  and “tone at the top.”
Require reports on surveillance results to be addressed to unit  commanders.
Require reports on surveillance results to include recommendations for  unit commander action, where approving officials and cardholders have  failed to follow Air Force policy—particularly policy related to federal  regulations, such as micropurchase requirements and mandated sources  of supply.

		Key Control Activities

To resolve noncompliance with requirements in law for proper certification  of purchase card payments, we recommend that the Secretary of the Air  Force take the following actions.
Direct the Assistant Secretary of the Air Force for Acquisition and the  Deputy Assistant Secretary for Contracting to work with the Under  Secretary of Defense (Comptroller) to resolve inconsistencies between  DOD and Air Force policies and procedures for reconciling purchase  card statements prior to payment.
Develop a strategy for achieving Air Force compliance with  requirements in the law that DOD purchase card policies and  procedures require reconciliation of purchase card statements prior to  payment.
We recommend that the Secretary of the Air Force direct the Assistant  Secretary of the Air Force for Acquisition and the Deputy Assistant  Secretary for Contracting to revise Air Force Instruction 64-117 to provide  cardholders, approving officials, and installation program coordinators  with detailed instructions on the following specific control activities.
Establish appropriate criteria, including types of items and dollar  thresholds for documenting independent receiving and acceptance of  items obtained with a purchase card.
Establish specific procedures for documenting independent receiving,  such as requiring the approving official or supervisor to sign and date  the vendor invoice, sales receipt, or credit card receipt, or requiring the  approving official to sign the cardholder’s monthly purchase log to  verify that items noted as having been received were actually received.
Require cardholders to maintain documentation of timely and  independent receiving and acceptance of items obtained with a  purchase card.
Require reconciliation of monthly purchase card statements associated  with accounts that were “shut down” (suspended) in July 2002 due to  lack of cardholder reconciliation and approving official review.
Verify that all potentially fraudulent and erroneous transactions that  have been detected are disputed and properly resolved.
Require timely cardholder notification to the property accountability  officer of pilferable property, such as fax machines, digital cameras, and  palm pilots obtained with the purchase card.
Encourage installation contracting officers to consider the benefits of  central purchasing and receiving and acceptance of computer  equipment by installation information technology units to facilitate  recording computer equipment in accountable property records at the  time it is received.
We also recommend that the Deputy Assistant Secretary for Contracting  revise Air Force Instruction 64-117 to define and list examples of sensitive  and pilferable property purchased with a government purchase card,  including cell phones, digital cameras, fax machines, palm pilots, and  copiers and printers, and require prompt recording of these items in  installation property systems.
In addition, we recommend that the Assistant Secretary of the Air Force for  Logistics establish policies and procedures for recording all pilferable and  sensitive property, including digital cameras, palm pilots, and cell phones,  in installation accountable property records.  At a minimum, require  installations to follow DOD policies and procedures on accountable  property.

		Potentially Fraudulent, Improper, and Abusive and Questionable Purchase Card Activity

We recommend that the Assistant Secretary of the Air Force for Financial  Management (Comptroller) direct the Air Force Audit Agency and Air  Force Office of Special Investigations to establish an Air Force-wide  database of known fraud cases by type of fraud, including purchase card  fraud, that can be used to identify systemic weaknesses and deficiencies in  existing internal control and to develop and implement additional control  activities, if warranted or justified.
We recommend that the Assistant Secretary of the Air Force for Acquisition  and the Deputy Assistant Secretary for Contracting take the following  actions.
Establish an Air Force-wide database of known purchase card fraud  cases by type of fraud, including vendor fraud and compromised  accounts, that can be used to identify deficiencies in existing internal  control and implement additional control activities, if warranted.
Identify vendors with which the Air Force used purchase cards to make  frequent, recurring purchases, evaluate Air Force purchasing practices  with those vendors, and where appropriate, develop contracts with  those vendors to optimize Air Force purchasing power.
Review organizational use of the purchase card and revoke purchase  cards issued to organizations that do not have authority to participate in  the governmentwide purchase card program.
Cancel convenience check privileges of cardholders who have  continued to improperly use convenience checks.
Require accounting adjustments to be made to correct transactions that  were charged to the wrong appropriation account with respect to fiscal  year and purpose of the expenditures.
Establish appropriate, consistent Air Force-wide policy as a guide for  taking disciplinary actions with respect to cardholders and approving  officials who make or approve fraudulent, improper, or abusive  purchase card transactions.
Require cardholders and/or approving officials to reimburse the  government for any unauthorized or erroneous purchase card  transactions that were not disputed.
Require benefiting individuals to reimburse the government for the cost  of any personal items that they requested or directed a cardholder to  purchase for them.
We also recommend that the Under Secretary of Defense (Comptroller)  direct the Charge Card Task Force to assess the above recommendations,  as well as the strengths in the Air Force purchase card program that we  identified, and to the extent applicable, incorporate them into its future  recommendations to improve purchase card policies and procedures  throughout DOD.

	Agency Comments and Our Evaluation

On December 13, 2002, DOD’s Purchase Card Joint Program Management  Office and the Air Force provided oral comments on a draft of this report.   DOD and Air Force purchase card officials concurred on 29 of our 39  recommendations and partially concurred with the remaining 9  recommendations.  At the time we finalized our work, DOD had not  provided a response to our remaining recommendation that the Charge  Card Task Force assess the recommendations in this report and  incorporate them to the extent applicable, into its future recommendations  to improve purchase card policies and procedures throughout DOD.  Of the  9 recommendations involving partial concurrences, the DOD and Air Force  officials (1) agreed in substance with 5 of our recommendations, (2) noted  that the Air Force Office of Special Investigations and DOD Inspector  General have responsibility for actions on two of our recommendations  related to establishing a database of fraud cases by type of fraud that can  be used to identify systemic weaknesses and deficiencies in controls, and  (3) indicated alternative actions have been initiated on the remaining 2  recommendations.
With regard to agreement on the substance of our recommendations, Air  Force officials stated that they would (1) suspend alternate accounts when  primary cardholders and billing officials are available, (2) revise the Air  Force purchase card Instruction to require reports on purchase card  surveillance results to be signed by contracting squadron commander or  chief of the contracting office, (3) require reconciliation of monthly  purchase card statements associated with accounts that were “shut down”  (suspended) in July 2002, (4) issue a policy letter to encourage installation  Contracting Officers to consider the benefits of central purchasing and  receiving and acceptance of computer equipment by installation  Information Technology units, and (5) revise the Air Force purchase card  Instruction to define and list examples of sensitive and pilferable property  and establish clear accountability and/or visibility criteria.
With regard to two recommendations related to establishing an Air Force- wide database of known fraud cases by type of fraud to identify and correct  systemic weaknesses and deficiencies in existing internal control, Air  Force officials stated that the Air Force Office of Special Investigations in  conjunction with the other Defense Criminal Investigative Organizations  now reports quarterly information on purchase card investigations to the  DOD Inspector General.  The officials told us that the DOD Inspector  General has been directed to develop a centralized purchase card database  on known fraud cases and audit results that can be used to identify  potential deficiencies in existing internal controls.  They said that the Air  Force will evaluate the Air Force cases and audits to determine the  effectiveness of existing internal controls and implement additional control  activities, if warranted.
Alternative Air Force actions relate to our recommendations that the  Deputy Assistant Secretary for Contracting (1) review organizational use of  the purchase card and revoke purchase cards issued to organizations that  do not have authority to participate in the governmentwide purchase card  program and (2) establish appropriate, consistent Air Force-wide policy as  a guide for taking disciplinary actions with respect to cardholders and  approving officials who make or approve fraudulent, improper, or abusive  purchase card transactions.  With regard to action on the first  recommendation, Air Force officials stated that the Chaplain Service has  authority to issue its own policies and procedures, including purchase card  authority.  However, they stated that the Head of the Air Force Chaplain  Office will recommend reinstatement of the Chaplain Funds in DOD  Directive 1015.1, Establishment, Management, and Control of  Nonappropriated Fund Instrumentalities, which is in the process of being  updated to reflect current DOD and Air Force policies regarding the  government purchase card.  The Air Force also agreed to review  organizational use of the purchase card and revoke purchase cards issued  to organizations that do not have authority to participate in the  governmentwide purchase card program.
With regard to action on our recommendation to establish Air Force-wide  policy as a guide for taking disciplinary actions, Air Force officials noted  the existing guidance in the Air Force purchase card Instruction, which is  discussed earlier in this report.  They also stated that the Deputy Assistant  Secretary of the Air Force (Contracting) has issued a memorandum  requiring that a summary of each purchase card fraud and each instance of  repeated misuse of the purchase card be briefed quarterly by the  contracting squadron commander to the installation commander along  with the disciplinary action taken.  The Congress recently enacted  provisions in DOD’s appropriation and authorization acts that require the  Secretary of Defense to establish guidelines and procedures for  disciplinary actions to be taken against department personnel for improper,  fraudulent, or abusive use of government purchase cards.
In addition, the Air Force provided technical comments on our draft report  stating that it disagreed with our position that civilian clothing for enlisted  aides and costumes for military band members represented abusive or  questionable transactions.  The Air Force referred to its Enlisted Aide  Handbook and Air Force Instruction 36-2123 as authority for purchasing  civilian attire, which is designated as a “uniform” for enlisted aides.  Air  Force officials pointed out that their handbook specifically states,  “operation and maintenance funds are used when purchasing uniform  items” and “local purchase is authorized and encouraged.” Air Force  officials also stated that band costumes are authorized purchases in  accordance with Air Force Instruction 35-101 and that band costumes may  be reused, as appropriate. The Air Force’s position appears to be that any  item defined in its policy as a uniform or band costume can be purchased  using a purchase card and paid for with appropriated funds. We continue to  believe that these clothing purchases are questionable because the Air  Force did not adequately explain the circumstances of the purchases, such  as the purpose of clothing and the vendor. The Air Force’s policy opens the  door for abuse and its implementation merits close scrutiny.
As agreed with your offices, unless you announce the contents of this  report earlier, we will not distribute this report until 30 days from its date.
At that time, we will send copies to interested congressional committees;  the Secretary of Defense; the Under Secretary of Defense for Acquisition,  Technology, and Logistics; the Under Secretary of Defense (Comptroller);  the Secretary of the Air Force; the Assistant Secretary of the Air Force for  Acquisition; the Deputy Assistant Secretary of the Air Force for  Contracting; the Assistant Secretary of the Air Force for Logistics; the  Director of the Defense Finance and Accounting Service; and the Director  of the Office of Management and Budget.  We will make copies available to  others upon request.  The report also will be available free of charge on  GAO’s Web page at http://www.gao.gov.
Please contact Gregory D. Kutz at (202) 512-9505 or kutzg@gao.gov, John  Ryan at (202) 512-9587 or ryanj@gao.gov, or Gayle L. Fischer at (202) 512- 9577 or fischerg@gao.gov, if you or your staff have any questions  concerning this report.  Major contributors to this report are acknowledged  in appendix IV.

Objectives, Scope, and Methodology

We audited the effectiveness of the Air Force’s internal controls and  payment of its fiscal year 2001 purchase card transactions.  The Air Force’s  purchase card program is the smallest of the three services, with fewer  transactions and dollars spent than the Army or the Navy.  We selected our  four case study locations by identifying major commands with the largest  purchase card sales volume and number of transactions.  We selected  major Air Force commands that accounted for about 69 percent of total  purchase card charges and 65 percent of total transactions for fiscal year  2001.  We then selected one installation within each of the four commands  based on the magnitude of purchase card activity (sales volume and  number of transactions).  We also considered the results of prior Air Force  Audit Agency work.   We selected the following Air Force installations for  our case study work.
At the four Air Force installations, we evaluated the policies and  procedures used to guide the purchase card program, and we evaluated the  activities they engage in to oversee the program.  We used a case study  approach to evaluate the local purchase card program, and our work  consisted of three major segments—(1) an assessment of the overall  control environment, including the adequacy of the Air Force’s policies and  procedures, (2) an evaluation of the effectiveness of key internal control  activities, and (3) a determination of whether evidence existed of  potentially fraudulent, improper, and abusive or questionable transactions.   Finally, we assessed management actions taken in fiscal year 2002 to  improve purchase card controls.
To assess the overall control environment, we used as our primary criteria  applicable laws and regulations; our Standards for Internal Control in the  Federal Government (GAO/AIMD-00-21.3.1, November 1999); and our  Internal Control Standards:  Internal Control Management and  Evaluation Tool (GAO-01-1008G, August 2001).  To assess the management  control environment, we applied the fundamental concepts and standards  in GAO’s Internal Control Standards to the practices followed by  management.
To test the implementation of key control activities during fiscal year 2001  at the four installations we audited, we obtained from DOD, U.S. Bank’s  database of Air Force purchase card transactions from October 1, 2000,  through September 30, 2001.  We did not verify the accuracy of U.S. Bank’s  database.  We selected stratified random probability samples of 150 to 152  purchase card transactions from the population of Air Force transactions  for each case study location.  With these statistically valid samples, each  transaction in the four locations’ populations had a nonzero probability of  being included, and that probability could be computed for any transaction.   Within each installation we stratified the population of transactions by the  dollar value of the transaction and by whether the transaction was likely to  be for a purchase of computers and related equipment.  Each sample  transaction for an installation was subsequently weighted in the analysis to  account statistically for all the transactions in the population of that  installation, including those that were not selected.
For each transaction sampled, we tested whether key internal control  activities had been performed.  For each control activity tested, we  projected an estimate of the percent of transactions for which the control  activity was not performed, for each installation.  Because we followed a  probability procedure based on random selections of transactions, our  sample for each installation is only one of a large number of samples that  we might have drawn.  Since each sample could have produced different  estimates, we express our confidence in the precision of our particular  samples’ results (that is, the sampling error) as 95 percent confidence  intervals.  These are intervals that would contain the actual population  value for 95 percent of the samples we could have drawn.  As a result, we  are 95 percent confident that each of the confidence intervals in this report  will include the true (unknown) values in the study populations.
Although we projected the results of our samples to the populations of  transactions at the respective case study locations, the results cannot be  projected to the population of Air Force transactions or installations as a  whole.  Tables 13 through 20 present (1) the results of our tests for one or  more control attributes, (2) the point estimates of the failure rate for the  attributes, (3) the two-sided 95 percent confidence intervals for the failure  rates for each attribute, (4) our assessments of the effectiveness of the  controls, and (5) the relevant lower and upper bounds of a one-sided 95  percent confidence interval for the failure rate.  All numbers in these tables  are rounded to the nearest percentage point.
We use one-sided confidence bounds to classify the effectiveness of a  control activity.  If the one-sided upper bound does not exceed 5 percent,  then the control activity is effective. If the one-sided lower bound exceeds  10 percent, then the control is ineffective.  Otherwise, we say that the  control is partially effective.  Partially effective controls may include those  for which there is not enough evidence to assert either effectiveness or  ineffectiveness.  For example, if we were 95 percent confident that the  failure rate for a particular control is less than 3 percent, we would  categorize that control activity as “effective” because 3 percent is less than  the 5 percent standard.  Similarly, if we were 95 percent confident that the  failure rate for a particular control is greater than 72 percent, we would  categorize that control as “ineffective” because 72 percent is greater than  the 10 percent standard.
Table 13 shows the results of our tests of controls for documenting  cardholder and approving official appointments.  Local commanders  appoint cardholders and approving officials for their units and notify the  installation program coordinator who then schedules these individuals for  purchase card training.
Table 14 shows the results of our tests of controls for documenting initial  training of cardholders and approving officials.  Air Force Instruction 64- 117 requires cardholders and approving officials to receive purchase card  training before they can be assigned a purchase card account.
Table 15 shows the results of our tests of controls for documenting  cardholder delegations of purchasing authority.  After cardholders  complete purchase card training, installation program coordinators are to  prepare a letter of delegation of purchasing authority indicating the  cardholder’s transaction level spending limit and monthly credit limit.
Table 16 presents the results of our tests for documentation of advance  purchase authorization.  Air Force Instruction 64-117 requires advance  authorization for purchases of certain items, including computer and  communication equipment, video equipment, medical items, and hazardous  materials.  Estimates for this table are based only on the sample  transactions for which advance authorization of purchases was required.
Table 17 presents the results of our tests for documentation of independent  receiving and acceptance, by someone other than the cardholder, of goods  and services purchased with a government purchase card.  This  requirement is not specifically addressed in DOD policy or Air Force  purchase card program Instruction 64-117.  We believe that independent  documentation of receipt of items purchased by a cardholder is a basic  internal control activity that provides additional assurance to the  government that purchased items are not acquired for personal use and  that they come into the possession of the government.
Table 18 presents the results of our tests for documentation of cardholder  reconciliations.   Cardholder reconciliations are key to identifying  potentially fraudulent transactions resulting from compromised accounts,  duplicate or improper vendor charges, and errors.  As evidence that  purchase card statements were reconciled, we accepted check marks,  notes, sequential numbering, and numbering systems that tied transactions  on the statement to items on the cardholders’ purchase card logs.
Table 19 presents the results of our tests of timely approving official review  of cardholders’ monthly, reconciled statements.  Approving official review  is a recognized control activity at all levels of the purchase card program,  and the approving official review process has been described as the first  line of defense against misuse of the card.  DOD’s Purchase Card Joint  Program Management Office and Air Force Instruction 64-117 recognize  that approving official review of monthly purchase card statements is  central to ensuring that purchase card transactions are appropriate.  The  Air Force Instruction requires that approving officials review and approve  reconciled cardholder statements within 15 days of receipt of the monthly  statement, but no later than the 15th day of the following month.
Table 20 shows the results of our tests for documentation of supporting  invoices or receipts.  GAO’s Internal Control Standards state, “all  transactions and other significant events need to be clearly documented,  and the documentation should be readily available for examination.  All  documentation and records should be properly managed and maintained.”    Without a receipt, independent evidence of the description and quantity of  what was purchased and the price paid is not available.  In testing for  evidence of a receipt, we accepted either the original or a copy of the  invoice, sales slip, or other store receipt.
We also tested nonrepresentative selections of accountable property items  that were included in our sampled transactions.  Because some  transactions were for property items that were physically located off base,  we elected to perform our test work on property items that were assigned  to the base.  We tested whether these items had been recorded in the  installation’s accountable property records, including unit-level records, in  a timely manner and whether the installation could demonstrate the item’s  existence.  We confirmed existence of the items we tested through physical  observation.
In addition to our audit of statistical samples of transactions at the four  case study installations, we also used data mining techniques to identify  other selected transactions at the four locations and throughout the Air  Force’s fiscal year 2001 purchase card transactions to determine if  indications exist of potentially fraudulent, improper, and abusive or  questionable purchase card activity.  Our data mining included identifying  transactions with certain vendors were more likely to sell items that would  be unauthorized or that would be personal items.  We also based our  selection on the nature, dollar amount, date, and other identifying  characteristics of the transactions. Because of the large number of  transactions that met these criteria, we did not look at all potential abuses  of the purchase card.  For a small number of these transactions at each of  the four installations and from the Air Force-wide database, we requested  limited documentation, usually the supporting invoice, that could provide  additional indications as to whether the transactions were potentially  fraudulent, improper, or abusive or questionable.   If the additional  documentation indicated that the transactions were likely proper and valid,  we did not pursue further documentation.  If the additional documentation  was not provided, or if it indicated further issues related to the  transactions, we obtained and analyzed additional documentation or  information about these transactions.  While we identified some potentially  fraudulent, improper, and abusive or questionable transactions, our work  was not designed to identify, and we cannot determine, the extent of  potentially fraudulent, improper, or abusive transactions.
For those potentially fraudulent transactions that had been or were being  investigated at the four audited installations, we discussed the cases with  the investigators and/or obtained records and reports on the investigations.    We also interviewed purchase card officials and Air Force criminal  investigators to identify other Air Force purchase card fraud cases that had  been or were being investigated.
We did not audit the Defense Finance and Accounting Service’s purchase  card payment process.  We also did not audit electronic data processing  controls used in processing purchase card transactions.  The installations  received hard copy paper monthly bills containing the charges for their  purchases and used manual processes for much of the period we audited,  which reduced the relevance of auditing electronic data processing  controls.
We briefed DOD managers, including officials in DOD’s Purchase Card  Joint Program Management Office, major command purchase card  program coordinators, and purchase card program officials at the  installations we audited on the details of our audit, including our  objectives, scope, and methodology and our findings.  On November 20, we  requested comments on a draft of this report.  We obtained oral comments  from DOD and Air Force purchase card officials on December 13, 2002, and  have summarized those comments in the “Agency Comments and Our  Evaluation” section of this report.  We conducted our audit work from  January through mid-November 2002 in accordance with U.S. generally  accepted government auditing standards, and we performed our  investigative work in accordance with standards prescribed by the  President’s Council on Integrity and Efficiency.

Overview of the Air Force Purchase Card Process

The Air Force purchase card program is part of the governmentwide  Commercial Purchase Card Program established to streamline federal  agency acquisition processes by providing a low-cost, efficient vehicle for  obtaining goods and services directly from vendors.  Under the General  Services Administration’s blanket contract, the Air Force has contracted  with U.S. Bank for its purchase card services.  DOD reported that it used  purchase cards to make about 10.7 million transactions for goods and  services at a cost of over $6.1 billion.  During this same period, the Air  Force reported that it used government purchase cards to make about 3  million transactions at a cost of about $1.4 billion.  This represents about 23  percent of DOD’s activity for fiscal year 2001.  Air Force purchase card  transactions were made using about 80,000 VISA cards issued to civilian  and military employees.
DOD has mandated the use of the purchase card for all purchases at or  below $2,500 and has authorized the use of the card to pay for specified  larger purchases.  For example, the purchase card may be used to purchase  authorized supplies, equipment, and nonpersonal services up to the $2,500  micropurchase threshold.  If authorized to make purchases above $2,500,  cardholders not in contracting organizations are to use the government  purchase card only to obtain items from prepriced contracts and other  pricing agreements, such as the Federal Supply Schedule, blanket purchase  agreements, and Indefinite Delivery/Indefinite Quantity contracts.   Purchases over the $2,500 micropurchase threshold and up to the  simplified acquisition threshold of $25,000 must be in accordance with  streamlined acquisition guidelines in the Federal Acquisition Regulation  (FAR).  The purchase card should normally not be used for cash advances;  travel-related purchases; rentals or leases of land or buildings; utility  services; or hazardous/dangerous items, such as explosives, munitions,  toxins, and firearms.

	Government Purchase Card Program Guidelines

The purchase card can be used for both micropurchases and payment of  other purchases.  Although most cardholders have limits of $2,500, some  have limits of $25,000 or higher.  The Federal Acquisition Regulation, Part  13, “Simplified Acquisition Procedures,” establishes criteria for using  purchase cards to place orders and make payments.  DOD has a  supplement to this regulation that contains sections on simplified  acquisition procedures.  U.S. Treasury regulations govern purchase card  payment certification processing and disbursements.  DOD’s Purchase  Card Joint Program Management Office, which is in the Office of the  Assistant Secretary of the Army for Acquisition Logistics and Technology,  has issued departmentwide guidance related to the use of purchase cards.   However, each service has its own policies and procedures governing the  purchase card program.

	Air Force Purchase Card Acquisition and Payment Processes

The Air Force purchase card program operates under federal Air Force  guidance as the policy and procedural foundation for its purchase card  program.  The Air Force headquarters Acquisition Office is responsible for  the overall management of the Air Force’s purchase card program.  The  Acquisition Office has published servicewide guidelines in Air Force  Instruction 64-117, Governmentwide Purchase Card Program, dated  December 6, 2000, to establish responsibilities and procedures and provide  administrative guidance for its government purchase card operations.   Under the Air Force instruction, each Air Force command’s head  contracting officer authorizes agency purchase card program coordinators  in local Air Force units to obtain purchase cards and establish credit limits.   The program coordinators are responsible for administering the purchase  card program within their designated span of control and serve as the  communication link between Air Force units and the purchase card-issuing  bank.  The other key personnel in the purchase card program are the  approving officials and the cardholders.  They are responsible for  implementing internal controls to ensure that transactions are appropriate.

	Purchase Card Process

Figure 2 illustrates the general design of the purchase card processes for  the Air Force.  The overall process begins with the cardholder ordering or  purchasing goods or services.  Each Air Force installation’s Financial  Services Office certifies monthly bills for payment upon receipt.  After  certification, the Financial Services Offices notify the Defense Finance and  Accounting Service that monthly purchase card statements are ready for  payment.  The process ends with cardholder reconciliation and approving  official review and approval of monthly purchase card statements after the  bills have been paid.  Any invalid transactions identified during the  reconciliation and review process are to be disputed first with the vendor,  and if not resolved, a “Disputed Item” form is to be submitted to U.S. Bank  for credit.
Purchase cardholders are delegated limited contracting officer-ordering  responsibilities, but they do not negotiate or manage contracts.  When a  supervisor requests that a staff member receive a purchase card, the  agency program coordinator is to first provide training on purchase card  policies and procedures and then establish a credit limit and issue a  purchase card to the staff member.  After receiving training, cardholders  are issued a purchase card, which bears their name and the account  number that has been assigned to them.  The cardholder is expected to  safeguard the purchase card as if it were cash.  Each cardholder has an  established daily and monthly credit limit and is designated to make  purchases at selected types of vendors.  Cardholders use purchase cards to  order goods and services for their units as well as their customers.   Cardholders may pick up items ordered directly form the vendor or request  that items be shipped directly to receiving locations or end users.
The approving official is responsible for providing assurance that all  purchases made by the cardholders within his or her cognizance were  appropriate and that the charges are accurate.  The approving official is  supposed to resolve all questionable purchases with the cardholder.  In the  event an unauthorized purchase is detected, the approving official is  supposed to notify the agency program coordinator and other appropriate  personnel within the command in accordance with the command  procedures.  Under governmentwide guidelines, agencies are required to  first attempt to resolve invalid transactions with the vendors.  Transactions  that are not resolved with the vendors may be disputed with the U.S. Bank.
The purchase card payment process begins with receipt of the monthly  purchase card billing statements from the bank.  The Air Force uses a pay  and confirm process whereby the monthly purchase card statements  received from U.S. Bank are certified as proper for payment by each  installation’s Financial Services Office within 3 to 5 business days and  forwarded to the Defense Finance and Accounting Service (DFAS) for  payment.  Under guidelines in the Air Force purchase card Instruction,  cardholders are required to review and reconcile their monthly purchase  card statements within 5 days of receipt, and approving officials are  required to review cardholders’ monthly statements as reconciled and  dispute any invalid charges within 15 days of receipt, but no later than the  15th day of the following month.
DFAS effectively serves as a payment processing service and relies on the  Air Force Financial Services Office certification of the consolidated  monthly bill for each installation as support to make the payment. The  DFAS vendor payment system then makes a single payment to U.S. Bank by  electronic funds transfer for each Air Force installation’s monthly purchase  card expenditures.
During the summer of 2001, the Air Force began implementing U.S. Bank’s  Customer Automation and Reporting Environment (CARE) system.  CARE  provides several automated purchase card management features, including  on-line cardholder purchase logs, transaction histories, and management  reporting and inquiry functions.  CARE management reports identify  managing accounts, approving officials and cardholders’ accounts,  transaction history, rejected transactions, and the reasons for the  rejections, such as transactions in excess of the cardholder’s credit limit,  potential split purchases, inactive accounts, and blocked merchant  category codes.
During fiscal year 2002, the Air Force implemented additional purchase  card management controls using U.S. Bank’s CARE system.  These  enhanced controls include an automated link of cardholder credit limits to  budgetary funding authorizations to help ensure that purchase card activity  will not exceed available funds.  Another control feature monitors  approving official span of control over cardholder accounts to help ensure  that installations are meeting DOD and Air Force goals for reducing and  eliminating excessive approving official span of control.  The enhanced  controls also include automated tracking of cardholder review of individual  transactions on their monthly purchase card statements and billing  officials’ approval of those statements.  Statements cannot be approved  until the cardholders have physically “touched” (clicked on) each  transaction on the computer screen to indicate that they have reviewed the  transactions.  CARE automatically shuts down the accounts of billing  officials who have not approved their consolidated statements within 60  days.  No charges can be processed against these accounts until they are  reviewed/reconciled and approved.  U.S. Bank has also shut down accounts  that indicate potential fraud.  For example, the bank has shut down Air  Force purchase card accounts due to out of state transactions on weekends  and other suspicious patterns of activity that indicate potentially  compromised accounts.

Examples of Air Force Purchase Card Fraud Cases

The following examples illustrate the types of cases investigated by the Air  Force Office of Special Investigations.

	Case #1

During May 2000, after a Nellis AFB approving official retired, the new  approving official’s review of a cardholder’s monthly statements detected  questionable transactions for which no receipts were available.  The new  official notified contracting officials who contacted Air Force investigators.   The cardholder, an E-4, senior airman, used her government purchase card  to obtain between $5,000 and $20,000 in merchandise, which she then stole  and sold, pawned, or left at her residence.  When questioned by her  supervisor, who was the approving official, the airman admitted that she  stole the items she had purchased with the government purchase card.   When confronted by investigators, the airman refused to identify specific  items of equipment that she stole.  For example, the airman only stated that  she purchased items from Home Depot and a local hardware store.  Nellis  AFB contracting officials told us that the cardholder used the purchase  card to buy fax machines, calling cards, cordless telephones, digital  cameras, chairs, and laser jet printers and sold them to pawnshops and at  swap meets for personal gain.
The day before being court-martialed, the airman paid back approximately  $7,100 to the government.  The airman waived her Article 31 rights and  pleaded guilty to purchasing and pawning over $7,100 worth of personal  items on her purchase card between May 1, 1999, and May 1, 2000.  The  airman was convicted of larceny in a General Court-Martial and sentenced  on March 17, 2001, resulting in a reduction in grade to E-1, $14,768 in  military pay forfeiture, 7 month’s confinement, and a Bad Conduct  Discharge.  This fraud was able to occur and continue because the first  approving official apparently had not reviewed the cardholder’s monthly  purchase card statements and, therefore, had not detected or questioned  the fraudulent transactions.

	Case #2

On September 27, 2000, the purchase card program coordinator at Misawa  Air Base, Japan, notified Air Force investigators about possible government  purchase card fraud.  The program coordinator’s audit of a cardholder’s  account had revealed numerous undocumented charges/purchases.  Air  Force investigators determined that the fraud was committed by an E-4,  senior airman, in the Civil Engineering Squadron whose own purchase card  had been revoked for misuse.  The airman took advantage of a co-worker’s  inexperience and limited English language capability to obtain and  improperly use her purchase card.  The cardholder was a Japanese citizen  employed by the Air Force.
In early October 2000, the cardholder gave investigators a signed, sworn  statement, in which she related that from approximately March through  September 2000, an E-4, senior airman in the Civil Engineering Squadron  had repeatedly used the cardholder’s government purchase card to pay bills  and make purchases, often without the cardholder’s knowledge.  While the  cardholder was aware that some of the purchases were made at the  squadron’s Self Help Store, she told Air Force investigators that she had no  knowledge of the types of items purchased.  The cardholder also stated  that when she inquired as to the nature of the purchases, the senior airman  told her that he would take care of purchases using the card because of her  limited English language capabilities.  No attempt was made to correct this  misuse of the purchase card until the bank declined a large purchase of  approximately $50,000 due to the high dollar amount.  The declined  transaction flagged the account, and the contracting squadron initiated an  inquiry.
Contracting squadron records showed that the senior airman had  purchased approximately $10,000 of merchandise using the Japanese  cardholder’s account.  Air Force investigators’ review of Self Help Store  records failed to identify what was purchased and/or if the items had ever  been received at the store.  As a result, investigators were unable to  determine whether criminal abuse had occurred.  However, because the  investigation did identify procedural violations, investigators referred this  matter to the command for action.  The airman subsequently was  reassigned from the civil engineering squadron.  The airman was able to  use the purchase card for unauthorized transactions because the  cardholder failed to maintain custody of the purchase card.

	Case #3

On August 14, 2001, investigators assigned to the 325th Security Forces  Squadron at Tyndall AFB, Florida, received an allegation that a WG-5  maintenance employee was using his government purchase card to buy  personal use items.  According to a witness, the cardholder had bragged  about using his government purchase card to purchase tools, a television  set, and a computer for his personal use.  The witness told the investigators  that he had accompanied the cardholder to a local hardware and auto parts  stores in Panama City, Florida, and had observed the cardholder using his  government purchase card to buy tools and other items for his son’s  vehicle.  The cardholder subsequently gave one of the tools to the witness  and told him to keep it for his personal use.  Squadron investigators  coordinated with a local hardware store and obtained security videotape as  evidence.  The video depicted the cardholder, who was present with the  witness, purchasing a drill bit, which the cardholder subsequently gave to  the witness.  The cardholder also allegedly used his government purchase  card to pay for major engine repairs to his son’s vehicle.
The investigators’ preliminary review of the cardholder’s account disclosed  several unauthorized charges for dental work totaling approximately  $1,800 and charges for an automotive engine repair for $1,181.  Numerous  additional suspect charges were identified on the cardholder’s purchase  card account.  The investigation, which is ongoing, has identified an  estimated $5,000 in fraudulent purchases.  Coordination with the  cardholder’s command disclosed indications of an almost total lack of  oversight on the part of the approving official.

GAO Contacts and Staff Acknowledgments

	GAO Contacts

	Acknowledgments

Staff making key contributions to this report include Bertram J. Berlin,  James D. Berry, Jr., Cindy Barnes-Brown, Francine DelVecchio, Carlos M.  Garcia, Kenneth M. Hill, Jeffrey A. Jacobson, Noel J. Lance, Richard A.  Larsen, James D. Moses, Jerrod J. O’Nelio, Mark F. Ramage, Kenneth H.  Roberts, Sidney H. Schwartz, and Gary R. Wiggins.

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Summary:
Why GAO Did This Study

In July 2001 and March 2002, GAO testified on significant breakdowns in internal controls over purchase card transactions at two Navy sites that resulted in fraud, waste, and abuse. As a result, the Congress asked GAO to audit purchase card controls at DOD. This report focuses on Air Force purchase card controls and addresses whether the overall management control environment and key internal controls were effective in preventing potentially fraudulent, improper, and abusive purchase card transactions.

What GAO Found

Weaknesses in the overall control environment and breakdowns in key controls relied on to manage the purchase card program leave the Air Force vulnerable to fraud, waste, and abuse. Major contributors to the weak control environment included excessive numbers of purchase cards, with about one purchase card for every seven employees, approving official span of control that far exceeded DOD guidelines, and credit limits that were 12 to 20 times higher than actual spending. Of the five key control activities tested, the Air Force had significant control breakdowns in at least three of them (1) receiving of goods and services by someone other than the card holder, (2) cardholder reconciliation, and (3) approving official review of the cardholder's reconciled statements. The highest failure rates--69 to 87 percent--at the four locations tested related to approving official review--viewed by DOD as the first line of defense against misuse of the purchase card. The control breakdowns resulted in purchases that were potentially fraudulent, improper, and abusive or questionable. GAO also identified potentially fraudulent transactions for which supporting documentation was not available to show the quantity and type of items purchased. Air Force officials could not recall the purpose of these transactions. In addition, GAO identified (1) improper transactions related to weaknesses in controls relied on to prevent splitting purchases into multiple transactions to circumvent micropurchase and cardholder transaction limits and (2) the failure to use mandated sources of supply. Finally, GAO found that cardholders who abused or improperly used the purchase card were not subject to strong disciplinary action or consequences. The Air Force has taken a number of steps to improve control over the purchase card program. For example, it implemented automated controls during fiscal year 2002 to help monitor approving official span of control, credit limits, and cardholder reconciliation and approving official review of monthly statements. If effectively implemented, these controls should help strengthen the overall Air Force purchase card control environment as well as controls over statement reconciliation and approval.