a

Joint Report by the United States Government Accountability 

Office and the Office of the Inspector General—Department of 

Homeland Security to Congressional Committees

September 2006 PURCHASE CARDS

Control Weaknesses 

Leave DHS Highly 

Vulnerable to 

Fraudulent, Improper, 

and Abusive Activity

GAO-06-1117
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2006

PURCHASE CARDS

Control Weaknesses Leave DHS Highly 

Vulnerable to Fraudulent, Improper, and 

Abusive Activity 

Highlights of GAO-06-1117, a report to 

congressional committees 

In the wake of the 2005 hurricanes

in the Gulf Region, GAO and the

Department of Homeland Security

Office of Inspector General (DHS

OIG) initiated a number of audits 

and investigations addressing the

federal government’s response to 

those events. On July 19, 2006, 

GAO testified on the results of its 

purchase card work. This report 

summarizes the testimony and 

provides recommendations. 

Department of Homeland Security

(DHS) cardholders made

thousands of transactions related 

to hurricane relief operations. GAO 

analyzed transactions between 

June and November of 2005 to 

determine if (1) DHS’s control 

environment and management of

purchase card usage were

effective; (2) DHS’s key internal

control activities operated

effectively and provided reasonable

assurance that purchase cards 

were used appropriately; and 

(3) potentially fraudulent, 

improper, and abusive purchase 

card activity existed at DHS. 

What GAO Recommends

To provide reasonable assurance 

that fraud, waste, and abuse related

to the use of purchase cards is

minimized, GAO recommends that 

DHS (1) make changes to the draft 

purchase card manual and issue a 

final, agencywide version (2) 

establish policies and procedures

to ensure more effective oversight 

and enforcement of the purchase 

card program. DHS concurred with

all of our recommendations. 

A weak control environment and breakdowns in key controls exposed DHS 

to fraud and abuse in its use of the purchase card. While DHS’s draft 

Purchase Card Manual generally contained effective control procedures, it 

was not finalized due to a lack of leadership by the Chief Financial Officer in 

resolving disagreements over its implementation. This led to DHS 

cardholders following different procedures. Inadequate staffing, insufficient 

training, and ineffective monitoring, along with inconsistent purchase card 

policies contributed to a weak control environment and breakdowns in 

specific key controls. GAO and DHS OIG found a lack of documentation that 

key purchase card internal controls were performed. Based on a statistical 

sample, GAO and DHS OIG estimated that 45 percent of DHS’s purchase 

card transactions were not properly authorized, 63 percent did not have 

evidence that the goods or services were received, and 53 percent did not 

give priority to designated procurement sources. GAO and DHS OIG also 

found cardholders who failed to dispute improper charges, which resulted in 

losses to the federal government. Because of the urgent needs caused by the

hurricanes, DHS made a number of noncompetitive purchase card 

acquisitions. GAO recognizes that DHS had the authority to make 

noncompetitive purchases; however, GAO found transactions where DHS 

cardholders could have exercised greater prudence without jeopardizing 

relief efforts. 

The weak control environment and ineffective internal control activities

allowed potentially fraudulent, improper, and abusive or questionable 

transactions to occur. Although this work was not designed to identify, and 

we cannot determine the full extent of fraud, waste, and abuse, GAO and the 

DHS OIG identified numerous examples of potentially fraudulent, improper, 

and abusive or questionable transactions. The table below lists examples of 

potentially fraudulent activity related to items acquired with DHS purchase 

cards. In addition, poor control over accountable property acquired with 

purchase cards may have resulted in lost or misappropriated assets. 

Examples of Potential Fraud 

Item Purchased Description Amount of Transaction

Lap Tops (FEMA) Over 100 missing and presumed stolen $300,000

Boats (FEMA) Unauthorized use of card by a vendor $208,000

Printers (FEMA) Over 20 missing and presumed stolen $84,000

Lap Tops (Coast Guard) 3 missing and reported stolen $8,000

Source: GAO and DHS OIG. 

GAO and DHS OIG also found examples of improper use of the purchase 

card such as the use of convenience checks to pay $460,000 for pre-packaged 

meals. Other instances of abusive or questionable transactions included the 

purchase of a beer brewing kit, a 63-inch plasma television costing $8,000 

which was found unused in its original box 6 months after being purchased, 

and tens of thousands of dollars for training at golf and tennis resorts. GAO 

referred cardholders responsible for many of these and other purchases to 

DHS management for administrative action. 

www.gao.gov/cgi-bin/getrpt?GAO-06-1117.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Greg Kutz at 

(202) 512-7455 or kutzg@gao.gov or 

Matthew Jadacki at (202) 254-4100 or 

matt.jadacki@dhs.gov. 
Page i GAO-06-1117 Purchase Cards

Contents

Letter 1

Overview of Testimony 2

Conclusions 4

Recommendations for Executive Action 4

Agency Comments 6

Appendixes

Appendix I: Testimony GAO-06-957T 10

Appendix II: Comments from the Department of Homeland Security 53

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.

Abbreviations

DHS U.S. Department of Homeland Security

DHS OIG U.S. Department of Homeland Security Office of 

Inspector General

FEMA Federal Emergency Management Agency

GSA U.S. General Services Administration
Page 1 GAO-06-1117 Purchase Cards

United States Government Accountability Office

Washington, D.C. 20548

A

September 28, 2006 Letr

Congressional Committees 

On July 19, 2006, GAO testified before the Committee on Homeland 

Security and Governmental Affairs on the results of our audit and 

investigation of purchase card transactions at the Department of Homeland 

Security (DHS) for the 5-month period beginning in June 2005.1

 The 

General Service Administration’s SmartPay® purchase card program has 

proven to be a valuable tool for the government by providing federal 

agencies and their employees a more flexible and efficient way to purchase 

commercial goods and services. However, to ensure the most effective use 

of the purchase card, federal agencies must foster a strong control 

environment and establish sound internal controls related to the use of the 

card. To this end, agencies must establish policies and procedures that 

ensure appropriate oversight of their purchase card programs. Our work 

focused on determining whether (1) DHS’s control environment and 

management of purchase card usage were effective; (2) DHS’s key internal 

control activities operated effectively and provided reasonable assurance 

that purchase cards were used appropriately; and (3) potentially 

fraudulent, improper, and abusive or questionable purchase card activity 

existed at DHS. 

This report summarizes the GAO testimony, which is reprinted in appendix 

I, and makes specific recommendations for corrective actions. We hope 

that these recommendations; the criminal referrals we provided to the 

Katrina Fraud Task Force, the Coast Guard Investigative Service, and the 

Federal Bureau of Investigation; as well as the administrative referrals we 

provided to DHS serve to assist DHS in its ongoing effort to improve the 

purchase card program. We conducted our audit work from November 

2005 through June 2006 in accordance with U.S. generally accepted 

government auditing standards. We performed our investigative work in 

accordance with standards prescribed by the President’s Council on 

Integrity and Efficiency.

1

GAO, Purchase Cards: Control Weaknesses Leave DHS Highly Vulnerable to Fraudulent, 

Improper, and Abusive Activity, GAO-06-957T (Washington, D.C.: July 19, 2006).
Page 2 GAO-06-1117 Purchase Cards

Overview of Testimony In our testimony, we stated that a weak control environment and 

breakdowns in key controls exposed DHS to fraud, waste, and abuse in its 

purchase card program. While DHS’s draft Purchase Card Manual 

generally incorporated adequately designed controls, disagreements 

among DHS organizational elements concerning the implementation of the 

manual prevented a final copy from being issued. As a result of DHS not 

finalizing the Purchase Card Manual and not making it applicable to all 

organizational elements within DHS, a weak control environment resulted 

where cardholders adopted inconsistent and inadequate purchase card 

practices. For example, some cardholders at the U.S. Coast Guard believed 

that obtaining written authorization prior to purchase was required while 

others did not.

The testimony described how inadequate staffing and ineffective 

monitoring contributed to a weak control environment, which, in addition 

to the prevalence of thousands of unused purchase cards, left DHS 

vulnerable to fraud, waste, and abuse. DHS had roughly 13,900 purchase 

cards but failed to assign sufficient resources to manage its purchase card 

program as evidenced by the fact that we found numerous instances where 

approving officials assumed oversight responsibilities for an excessive 

number of cardholders. We found, for example, three approving officials 

who were responsible for more than 30 cardholders each. In contrast, GAO 

has issued an audit guide2

 prescribing that the ratio of cardholders to 

approving officials should not exceed seven to one. As an example of 

ineffective monitoring, we found that the U.S. Coast Guard has only one 

individual responsible for administering and overseeing its purchase card 

activity, which totaled over $227 million in goods and services with their 

purchase cards in fiscal year 2005.

Further, our testimony showed that we were unable to obtain evidence to 

confirm that DHS is providing appropriate training to enable cardholders to 

be aware of and follow internal controls related to use of the purchase 

card. We found that for 60 of the 96 transactions in our statistical sample, 

the cardholder lacked documentation showing that they received either the 

required initial training or the refresher training. Without adequate training, 

DHS can not expect cardholders and approving officials to understand and 

2

GAO, Audit Guide: Auditing and Investigating the Internal Control of Government 

Purchase Card Programs, GAO-04-87G (Washington, D.C.: Nov. 1, 2003).
Page 3 GAO-06-1117 Purchase Cards

comply with purchase card policies, thus elevating the risk associated with 

card usage. 

Our testimony also described DHS’s failure to conduct timely and effective 

postpayment audits. The postpayment audit is conducted by DHS after 

cardholders have made purchases and requires that cardholders submit 

purchase-related documentation for transactions selected for audit. We 

also found that DHS failed to suspend cards and discipline cardholders 

who did not provide the required supporting documentation for audit. 

Without a strong postpayment audit process, DHS is not able to obtain 

reasonable assurance that purchases are valid and appropriate, which 

needlessly exposes DHS to additional risk of fraud, waste, and abuse.

GAO and DHS’s Office of Inspector General (DHS OIG) performed 

statistical testing on purchase card transactions and identified weak 

implementation of several key internal controls. On the basis of a statistical 

sample of DHS’s purchase card transactions for a 5-month period beginning 

in June 2005, we estimated that 45 percent lacked prior written 

authorization, 8 percent failed to provide required sales documentation, 63 

percent lacked documentation evidencing proper receipt and acceptance, 

and 53 percent did not give priority to designated sources. 

Our work also identified specific incidents of (1) potentially fraudulent, 

(2) improper, and (3) abusive or questionable purchases made by DHS 

cardholders. A U.S. Coast Guard employee potentially committed fraud by 

misappropriating laptops and then falsifying records to hide the fraud. As 

an example of an improper purchase, we identified an instance where a 

DHS cardholder failed to dispute an improper transaction in a timely 

manner, resulting in losses to the federal government of $153,000. Also, a 

U.S. Coast Guard cardholder used his purchase card to acquire a beer 

brewing kit—a questionable use of taxpayer money.

Further, we found purchases where DHS cardholders failed to adopt 

prudent pricing practices, resulting in waste of government funds. 

Although DHS had the authority to make noncompetitive purchases in 

response to the hurricanes in the Gulf Region, GAO identified instances 

where DHS cardholders could have saved the government money by 

purchasing items from GSA vendors, or by using the government’s 

substantial purchasing power to negotiate better pricing and or delivery 

terms. In one case, a Federal Emergency Management Agency (FEMA) 

cardholder used his purchase card to acquire flat-bottom boats at double 

the retail price. We also found unnecessary purchases due to procurement 
Page 4 GAO-06-1117 Purchase Cards

problems. For example, a FEMA cardholder unnecessarily purchased 

items totaling $68,000 that was inadvertently included on a provision list. 

Although these procurement problems are not isolated to purchase card 

acquisitions, they do represent examples in which DHS cardholders used 

the government purchase card and wasted tax dollars.

Finally, our testing found many instances where assets acquired using the 

purchase card were not promptly or accurately entered into a property 

tracking system. The way DHS used purchase cards to acquire accountable 

property allowed for such assets to be susceptible to the risk of not being 

properly tracked in the property system. As a result, we found a significant 

number of assets that DHS could not locate. By not following procedures to 

appropriately track assets in a property system, DHS is subject to greater 

risk of misappropriation of its assets. Of the 433 assets we attempted to 

locate and which were obtained with DHS purchase cards, 154 could not be 

located by GAO or DHS (e.g., boats, laptops, and printers).

Conclusions The purchase card has proven to be a valuable tool for the government to 

purchase commercial goods and services. However, empowering 

approximately 14,000 DHS cardholders with purchasing authority, while 

not implementing effective controls and performing adequate management 

oversight, allowed potentially fraudulent, improper, and abusive or 

questionable usage of purchase cards to go undetected. Many of the 

transactions we highlighted as examples of misuse of the purchase card in 

our testimony were related to hurricane response efforts in the Gulf 

Region, demonstrating that the government is particularly vulnerable when 

purchase cards are used during times of disaster and even more so if an 

effective internal control structure is not in place and faithfully 

implemented. Taking immediate actions to improve its purchase card 

program will help DHS maximize the value and benefit of the purchase card 

program and provide reasonable assurance that fraud, waste, and abuse are 

minimized. 

Recommendations for 

Executive Action

To provide reasonable assurance that fraud, waste, and abuse related to 

DHS’s purchase card program are minimized and that government assets 

acquired with purchase cards are controlled, we are making six 

recommendations. Specifically, we recommend that the Secretary of DHS 

take the following actions:
Page 5 GAO-06-1117 Purchase Cards

• Implement changes to DHS’s draft Purchase Card Manual to include 

policies and procedures addressing the four areas detailed below. After 

implementing the changes, the Purchase Card Manual should be 

finalized agencywide.

• Training: Establish policies and procedures that document that all 

cardholders have completed the appropriate training. The 

documentation should include the date of the training, a description 

of the training, and the name of the recipient of the training.

• Independent Receipt and Acceptance: Develop policies and 

procedures for the performance and documentation of independent 

receipt and acceptance attesting to the receipt of goods or the 

complete rendering of services. This documentation would be 

maintained along with other required documentation supporting 

each transaction. 

• Accountable Property: Develop policies and procedures to provide 

reasonable assurance that highly pilferable assets such as laptop 

computers, cell phones, personal digital assistants, memory storage 

devices, and other pilferable property acquired with a purchase card 

are entered into an accountable property system immediately after 

being received. Cardholders should be required to contact 

accountable property officers (or others acting in a similar capacity) 

before acquiring accountable property, or within a reasonable time 

thereafter, so that the property is properly bar coded and tracked in 

the property system. This should be completed prior to placement of 

the asset in service. The property system should include accurate 

information on the location of the asset, the individual responsible 

for the asset, the manufacturer’s serial number, as well as the 

agency’s unique identification code for the asset (e.g., a bar code).

• Disciplinary or Administrative Actions: The agency should 

develop a range of potential disciplinary and administrative actions 

that may occur as a result of a cardholder or others failing to comply 

with the policies and procedures in the Purchase Card Manual. 

• Improve the existing electronic systems to allow those with oversight 

responsibilities the ability to determine if cardholders and approving 

officials performed their reconciliation and certifying duties in a 

meaningful way.
Page 6 GAO-06-1117 Purchase Cards

• Conduct a review to determine if adequate resources are devoted to 

administering, maintaining, and enforcing the purchase card program at 

both the agency level and the organizational element level. DHS should 

further develop specific oversight responsibilities that need to be 

carried out at both the agency level and at the organizational element 

level.

• Adopt prudent purchasing practices by entering into arrangements with 

dependable sources in the government or vendors who can provide 

reasonable pricing for specific goods and services with a foreseeable 

demand in the event of an emergency. In anticipation of future 

emergencies, DHS should take the following actions:

• Identify specific sources in the federal government or vendors in the 

private sector that can reliably supply the necessary goods and 

services for DHS to accomplish its mission in emergency situations.

• In the case of vendors in the private sector, negotiate pricing and 

delivery terms with these sources using the federal government’s 

substantial purchasing power so that in a time of crisis DHS will be 

able to efficiently obtain the necessary goods and services.

• Develop policies and procedures to limit approving officials’ span of 

control. The number of cardholders and card accounts that any one 

approving official is responsible for should be reasonable and should be 

established in consideration of the approving official’s other 

responsibilities. In addition, approving officials should have an 

appropriate number of transactions so that they may conduct a 

thorough and proper review of supporting documentation for each 

transaction. 

• Continuously monitor and review open accounts to provide reasonable 

assurance that only cardholders who have a documented need to 

acquire items for the government are issued a purchase card. Instances 

where cards have not been used for over a year should be analyzed to 

determine if a valid need for the card exists. If a valid need can not be 

established, the purchase card should be suspended or the account 

closed. 

Agency Comments In written comments dated September 15, 2006, on a draft of this report, 

DHS concurred with all of our recommendations. In the comments, which 
Page 7 GAO-06-1117 Purchase Cards

are reprinted in appendix II, DHS stated that it has incorporated the 

relevant changes into its Purchase Card Manual and offered additional 

details on the actions it has taken or which it plans to take in the near 

future.

Specifically, DHS offered the language it had added to the draft Purchase 

Card Manual relating to: training; independent receipt and acceptance; 

tracking of accountable property; disciplinary and administrative actions; 

and approving official span-of-control. Furthermore, and importantly, DHS 

issued the finalized DHS Purchase Card Manual on September 15, 2006, 

after incorporating the recommended changes. For other 

recommendations, DHS stated that it is working to develop policies and 

procedures to enhance its purchase card control environment. For 

example, DHS said it is working with its purchase card vendor to 

incorporate specific control activities into the automated system which will 

address the validity of cardholder reconciliations and approving official 

certifications.

As agreed with your offices, we will send copies to interested 

congressional committees and the Office of the Chief Financial Officer at 

DHS. We will make copies available to others upon request. In addition, the 

report will be available at no charge on the GAO Web site at 

http://www.gao.gov. Please contact Gregory Kutz at (202) 512-7455 or 

kutzg@gao.gov, or Matt Jadacki at (202) 254-4100 or matt.jadacki@dhs.gov

if you or your staffs have any questions concerning this report. Contact 
Page 8 GAO-06-1117 Purchase Cards

points for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this report.

Gregory D. Kutz

Managing Director

Forensic Audits and Special Investigations

Matthew Jadacki

Special Inspector General

Department of Homeland Security
Page 9 GAO-06-1117 Purchase Cards

List of Committees

The Honorable Susan M. Collins

Chairman

The Honorable Joseph I. Lieberman

Ranking Minority Member

Committee on Homeland Security and Governmental Affairs

United States Senate

The Honorable Charles E. Grassley

Chairman

The Honorable Max Baucus

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Tom Davis

Chairman

The Honorable Henry A. Waxman

Ranking Minority Member

Committee on Government Reform

House of Representatives

The Honorable Harold Rogers

Chairman

The Honorable Martin Olav Sabo

Ranking Minority Member

Subcommittee on Homeland Security

Committee on Appropriations

House of Representatives

The Honorable Michael McCaul

Chairman

The Honorable Bob Etheridge

Ranking Minority Member

Subcommittee on Investigations

Committee on Homeland Security

House of Representatives

The Honorable Anthony Weiner

House of Representatives
Page 10 GAO-06-1117 Purchase Cards

Appendix I

Testimony GAO-06-957T AAppenednxidexiIs

United States Government Accountability Office

GAO Testimony

Before the Senate Homeland Security

and Governmental Affairs Committee 

PURCHASE CARDS For Release on Delivery

Expected 10:00 a.m. EST 

Wednesday, July 19, 2006

Control Weaknesses Leave 

DHS Highly Vulnerable to 

Fraudulent, Improper, and 

Abusive Activity

Statement of Gregory D. Kutz, Managing Director 

Forensic Audits and Special Investigations

John J. Ryan, Assistant Director 

Forensic Audits and Special Investigations

GAO-06-957T
Appendix I

Testimony GAO-06-957T

Page 11 GAO-06-1117 Purchase Cards

What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights Accountability Integrity Reliability

July 19, 2006

PURCHASE CARDS

Control Weaknesses Leave DHS Highly 

Vulnerable to Fraudulent, Improper and 

Abusive Activity Highlights of GAO-06-957T, a testimony

before the Committee on Homeland

Security and Governmental Affairs, U.S.

Senate,

In the wake of the 2005 hurricanes

in the Gulf Region, GAO and the

Department of Homeland Security

Office of Inspector General (DHS

OIG) initiated a number of audits

and investigations addressing the

federal government’s response to 

those events.

Department of Homeland Security

(DHS) cardholders made

thousands of transactions related

to hurricane rescue and relief

operations. GAO, working with 

DHS OIG, interviewed DHS

personnel and reviewed purchase

card policies and procedures to 

assess the control environment.

GAO and DHS OIG conducted

statistical tests from a random 

sample of transactions and 

performed data mining on all DHS

purchase card transactions for a 5-

month period beginning in June

2005. GAO and DHS OIG looked at

all transactions in this period

because the database did not

distinguish hurricane related from

routine purchases. GAO and DHS

OIG used the testing results to

determine the extent of control

weaknesses and identify instances

of fraud, waste, and abuse.

This testimony addresses whether

(1) DHS’s control environment and

management of purchase card

usage were effective; (2) DHS’s key

internal control activities operated

effectively and provided reasonable

assurance that purchase cards

were used appropriately; and (3)

indications existed of potentially

fraudulent, improper, and abusive

or questionable purchase card

activity at DHS.

A weak control environment and breakdowns in key controls exposed DHS

to fraud and abuse in its use of the purchase card. While DHS’s draft 

Purchase Card Manual generally contained effective control procedures, it 

was not finalized due to a lack of leadership by the CFO in resolving

disagreements over its implementation. This led to DHS cardholders not 

following the same procedures. Inadequate staffing, insufficient training, and 

ineffective monitoring also contributed to the weak control environment.

The weak control environment and inconsistent purchase card policies

contributed to breakdowns in specific key controls. GAO and DHS OIG 

found a lack of documentation that key purchase card internal controls were 

performed. Based on a statistical sample, GAO and DHS OIG estimated that 

45 percent of DHS’s purchase card transactions were not properly

authorized, 63 percent did not have evidence that the goods or services were

received, and 53 percent did not give priority to designated sources. GAO 

and DHS OIG also found cardholders who failed to dispute improper 

transactions, which resulted in losses to the federal government. Because of 

the urgent needs caused by the hurricanes, DHS made a number of

noncompetitive purchase card acquisitions. GAO recognizes that DHS had 

the authority to make noncompetitive purchases; however, GAO found 

transactions where DHS cardholders could have exercised greater prudence

without jeopardizing relief efforts.

The weak control environment and ineffective internal control activities

allowed potentially fraudulent, improper, and abusive or questionable

transactions to occur. Although this work was not designed to identify, and 

we cannot determine, the full extent of fraud, waste, and abuse, GAO and 

DHS OIG identified numerous examples of potentially fraudulent, improper, 

and abusive or questionable transactions. The table below lists the

potentially fraudulent activity related to items acquired with DHS purchase 

cards. In addition, poor control over accountable property acquired with 

purchase cards may have resulted in lost or misappropriated assets.

Examples of Potential Fraud 

Item Purchased Description Amount of Transaction

Lap Tops (FEMA) Over 100 missing and presumed stolen $300,000

Boats (FEMA) Unauthorized use of card by a vendor $208,000

Printers (FEMA) Over 20 missing and presumed stolen $84,000

Lap Tops (Coast Guard) 3 missing and reported stolen $8,000

Source: GAO and DHS OIG investigation.

GAO and DHS OIG also found examples of improper use of the purchase

card such as the use of convenience checks to pay $460,000 for pre-packaged

meals. Further, they found instances of abusive or questionable transactions

that included the purchase of a beer brewing kit, a 63” plasma television

costing $8,000 which was found unused in its original box 6 months after 

being purchased, and tens of thousands of dollars for training at golf and 

tennis resorts. GAO intends to refer the cardholders responsible for many of 

these and other purchases to DHS management for administrative action.

www.gao.gov/cgi-bin/getrpt?GAO-06-957T.

To view the full product, click on the link 

above. For more information, contact Gregory

D. Kutz at (202) 512-7455 or kutz@gao.gov

and Matthew A. Jadacki at (202) 254-5477 or 

matt.jadacki@dhs.gov.
Appendix I

Testimony GAO-06-957T

Page 12 GAO-06-1117 Purchase Cards

Madam Chairman and Members of the Committee:

Thank you for the opportunity to discuss the results of the forensic audit and 

investigation of the Department of Homeland Security’s (DHS) purchase card program, a

joint audit by GAO and DHS’s Office of Inspector General (DHS OIG). This joint audit is

one among a number of audits and investigations that GAO and DHS OIG initiated in the 

wake of Hurricanes Katrina and Rita to review the effectiveness of the federal 

government’s disaster response. A crucial tool DHS used to expedite the government’s

response to the two disasters was the SmartPay® purchase card program, a program 

implemented to provide federal agencies and their employees a more flexible and 

efficient way to purchase commercial goods and services. GAO and DHS OIG support

the use of a well-controlled purchase card program, which our experience shows

reduces transaction processing costs and provides agencies with flexibility to achieve 

their mission objectives. This testimony builds on GAO’s substantial experience in

identifying fraud, waste, and abuse in government purchase card programs (see app. I for 

previous audit reports) and DHS OIG’s significant experience auditing one of our 

nation’s largest federal agencies.

With the creation of DHS in 2002,1

 the management of thousands of purchase 

cardholders from 22 separate federal agencies was combined under one umbrella

program, the DHS Purchase Card Program. The legacy agencies such as the Federal 

Emergency Management Agency (FEMA), the U.S. Coast Guard (Coast Guard), and the 

U.S. Customs and Border Protection (CBP) are now referred to as DHS organizational

elements. During fiscal year 2005, these organizational elements accumulated more than

$420 million in charges, ranking DHS among the top purchase card users in the federal 

government. In response to Hurricanes Katrina and Rita, DHS made thousands of 

purchase card transactions to buy goods and services for hurricane rescue and relief 

operations. For Katrina-related procurements, Congress authorized an increase to the 

1

The Homeland Security Act of 2002, Pub. L. No. 107-296, led to the creation in January 2003 of DHS—the most

substantial reorganization of the federal government since the 1940s. The creation of DHS, which began operations

in March 2003, represents the fusion of 22 federal agencies to coordinate and centralize the leadership of many

homeland security activities under a single department.

Page 1 GAO-06-957T
Appendix I

Testimony GAO-06-957T

Page 13 GAO-06-1117 Purchase Cards

micropurchase threshold from $2,500 to $250,000.

 2 When making micropurchases, 

authorized cardholders are not required to solicit competitive bids if they consider the 

price to be reasonable. For further details on the DHS purchase card program, see 

appendix II.

Our testimony today addresses whether (1) DHS’s control environment and management 

of the purchase card program were effective; (2) DHS’s key control activities operated

effectively and provided reasonable assurance that purchase cards were used 

appropriately; and (3) indications existed of potentially fraudulent, improper, and 

abusive or questionable activity related to items acquired with DHS purchase cards.3

Following this testimony, we plan to issue a joint report with recommendations to DHS

for improving internal controls over its purchase card activities.

The scope of our joint audit covered all DHS purchase card transactions from June 13, 

2005, through November 12, 2005. We selected all transactions during this period 

because we could not distinguish between routine and hurricane-related purchases in the 

database provided by U.S. Bank (DHS’s purchase card contractor). To assess the design

and implementation of controls over purchase card transactions, we conducted 

interviews of purchase card administrators and compared DHS’s purchase card policies

and procedures to the Office of Management and Budget’s (OMB) Circular No. A-123,

GAO’s Standards for Internal Controls in the Federal Government (Standards for 

Internal Controls) and to the best practices for purchase card programs outlined in

GAO’s Audit Guide: Auditing and Investigating the Internal Control of Government 

Purchase Card Programs (GAO’s Audit Guide). Using purchase card data provided by

U.S. Bank, we conducted statistical tests from a random sample of transactions and 

2

Second Emergency Supplemental Appropriations Act to Meet Immediate Needs Arising from the Consequences of

Hurricane Katrina, 2005, Pub. L. No. 109-62, Sec. 101 (Sept. 8, 2005).

3

We considered potentially fraudulent purchases to be those which were unauthorized and intended for personal use.

The transactions we determined to be improper are those purchases intended for government use, but are not for a

purpose that is permitted by law, regulation, or policy. We also identified as improper a number of purchases made

on the same day from the same vendor, and which appeared to circumvent cardholder single transaction limits or 

bidding requirements. We defined abusive transactions as those that may be authorized, but the items purchased

were at an excessive cost or were not needed by the government, or both. Questionable transactions could be

improper or abusive but for which there is insufficient documentation to conclude either.

Page 2 GAO-06-957T
Appendix I

Testimony GAO-06-957T

Page 14 GAO-06-1117 Purchase Cards

performed other audit work to evaluate the design and implementation of key internal 

control activities.

We also performed data mining on the transactions to determine whether there were 

potentially fraudulent, improper, abusive, or questionable activities related to the

purchase card program. Our data mining efforts included reviewing and analyzing

transactions to determine whether split payments occurred,4

 whether DHS maintained 

appropriate controls over property accountability, and whether DHS was able to 

leverage the hundreds of millions of dollars it spends with a purchase card to obtain

favorable pricing from frequently used vendors, among others. We used forensic audit 

and investigative techniques to determine if the purchase card was used in a potentially

fraudulent manner. Although we did identify some potentially fraudulent, improper, and 

abusive or questionable transactions, our work was not designed to identify, and we 

cannot determine, the extent of fraudulent, improper, and abusive or questionable 

transactions. See appendix III for further details on our scope and methodology. We 

conducted our audit work from November 2005 through June 2006 in accordance with 

U.S. generally accepted government auditing standards. We performed our investigative 

work in accordance with standards prescribed by the President’s Council on Integrity

and Efficiency. We briefed DHS on the details of our work, including our scope, and 

methodology and our findings.

Summary

A weak control environment and breakdowns in key internal controls exposed DHS to 

fraud, waste, and abuse in its purchase card program. Our review of DHS’s draft

Purchase Card Manual (draft manual) found that the draft manual generally

incorporated well-designed internal controls for an agencywide purchase card program 

that were consistent with OMB’s Circular No. A-123, GAO’s Standards for Internal 

4

A split payment 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 (in the case of 

Hurricanes Katrina and Rita, a micropurchase threshold of up to $250,000) or to avoid other established credit

limits.

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Controls, and the best practices for purchase card programs outlined in GAO’s Audit 

Guide.

5

 However, according to representatives from the Office of the Chief Financial 

Officer, the draft manual was not issued in its final format due to ongoing disagreements

with DHS organizational elements over its implementation. Without a final policy, DHS

organizational elements adopted inconsistent purchase card practices. Some 

organizational elements followed purchase card policies from their legacy agencies, 

others observed requirements from the draft DHS policy, and yet others relied on a

combination. Overall, we found that a lack of leadership in finalizing the draft manual, 

inadequate resources devoted to the purchase card program, insufficient training, and 

ineffective monitoring and oversight each contributed to a weak control environment.

We also found weaknesses in specific key control activities over purchase card 

transactions. Specifically, we found a lack of documentation that required internal 

controls over purchase card transactions were performed. Based on our sample of DHS

purchase card transactions, we estimated that 45 percent did not have prior written

authorization, 8 percent did not provide required sales documentation, 63 percent did not 

have evidence that the goods or services were actually received, and 53 percent did not 

give priority to required or preferred vendors (designated sources). We also found

instances where DHS cardholders failed to dispute improper transactions, resulting in

losses to the federal government from improper and potentially fraudulent purchases.

Further, DHS did not invoke the special authority provided to increase the threshold for 

micropurchases from $2,500 to $250,000. Instead, DHS invoked other clauses in the 

Federal Acquisition Regulations (FAR) to make noncompetitive purchases under existing

procurement authority. While we recognize that DHS has authority to make such 

noncompetitive purchases under the FAR, we identified transactions where DHS

cardholders could have obtained better pricing without jeopardizing relief efforts or 

where the purchase was unnecessary. Later in our testimony, we identify examples of 

5

Because we believe DHS’s draft manual, Department of Homeland Security Purchase Card Manual (Washington,

D.C.: Mar. 8, 2004) is largely consistent with GAO’s Audit Guide: Auditing and Investigating the Internal Control

of Government Purchase Card Programs, GAO-04-87G (Washington, D.C.: Nov. 1, 2003) and Standards for

Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C. Nov. 1999), we generally

used the draft manual as the criteria against which we tested internal controls.

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poor pricing and unnecessary purchases, but also highlight instances where the

cardholder acted prudently to obtain the best pricing.

The weak control environment and weak implementation of specific internal control 

activities allowed potentially fraudulent, improper, abusive, or questionable transactions

to go undetected. In one potential fraud case, ineffective procurement practices resulted 

in DHS paying double the retail price for 20 flat-bottom boats. The vendor in this case 

improperly used the DHS purchase card number to purchase boats from retailers before 

reselling them to DHS. In another potentially fraudulent case, breakdowns in property

accountability controls allowed a DHS employee to submit falsified records related to 

three stolen laptops. As an example of improper use of a purchase card, we identified a

cardholder who used convenience checks to pay a vendor who normally accepted credit 

cards but who did not want to pay credit card transaction fees for a large purchase—in

which case the cardholder violated DHS policy. As a result of this policy violation, the 

DHS incurred $8,000 in unnecessary processing fees related to the use of convenience 

checks.

Other cardholders abused their purchase card privileges or made questionable 

purchases. For example, one cardholder purchased a beer brewing kit and ingredients to 

brew beer for official parties. Another cardholder, based on questionable need, 

purchased a Samsung 63-inch plasma screen television for about $8,000 at the end of the 

fiscal year. We observed this large-screen television unused and in its original packaging

6 months after it was purchased. In cases where appropriate, we plan to refer 

cardholders responsible for these and other purchases to DHS management for possible 

administrative action. We also found instances where items acquired with a DHS

purchase card highlight weaknesses in DHS’s inventory control and procurement 

practices that led to potentially fraudulent and abusive or questionable activity. For 

example, over 100 laptops were lost or misappropriated when shipped to New Orleans as

part of the relief efforts. The above examples of potential fraud, improper use of the 

purchase card, and abusive or questionable activity relating to items acquired with DHS

purchases cards are further detailed below.

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Weaknesses in DHS’s Overall Control Environment Contributed to Ineffective

Purchase Card Program Controls

DHS has not established an effective internal control environment to manage its

government purchase card program. Specifically, for the last two years, DHS did not 

finalize its departmentwide purchase card policy that detailed the internal control 

policies and procedures that organizational elements must follow. As a result, 

cardholders did not consistently apply basic control procedures, which were necessary

to provide reasonable assurance that acquisitions made with purchase cards adhered to 

governmentwide requirements. Inadequate staffing and training, and a weak 

postpayment audit function further contributed to a weak overall internal control 

environment and left DHS vulnerable to fraud, waste, and abuse.

Unimplemented Agencywide Manual Contributes to Inconsistency and Confusion

DHS’s Chief Financial Officer (CFO) distributed the agency’s most recent draft of the 

departmentwide purchase card policies and procedures in March 2004. Since then the 

draft manual has been out for agencywide comment twice. The internal control 

procedures described in that draft document were largely consistent with OMB Circular 

No. A-123, GAO’s Standards for Internal Controls, and GAO’s Audit Guide. According to 

the Office of the Chief Financial Officer, the draft policies were not accepted and 

implemented across DHS due to disputes with organizational elements over 

implementation of the draft manual. Further, officials within the Office of the Chief 

Financial Officer do not have a plan or timeline for resolving these disputes in order to 

finalize DHS’s draft manual. Consequently, some organizational elements are following

internal control policies that existed in their legacy environments prior to their 

absorption into DHS, while others adopted DHS’s draft policies. Others are adhering to 

elements from both. We found that although some internal control policies from legacy

agencies were consistent with GAO’s Standards for Internal Controls and GAO’s Audit 

Guide, others were not. For example, the Organizational Program Coordinator (OPC) for 

the Purchase Card Program at the Coast Guard stated that written authorization prior to 

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purchase is generally required. In contrast, CBP indicated that written authorization is

not required prior to use by a CBP cardholder.

As a result of the unimplemented DHS draft manual, organizational elements were 

confused about and did not consistently apply purchase card policies and procedures, 

which negatively affected the control environment. As an example, the OPC at the Coast 

Guard, in charge of the largest purchase card program within DHS, informed us that 

some cardholders within Coast Guard followed the draft DHS manual, while others did 

not consider the manual applicable.

Insufficient Resources Committed to Purchase Card Program

DHS failed to assign sufficient resources to manage its purchase card program. As a

result, we found many instances where approving officials had oversight responsibilities

for an excessive number of cardholders. Additionally, we found that DHS lacked 

sufficient staffing to effectively manage and oversee the purchase card program.

GAO’s Audit Guide and OMB Circular No. A-123 emphasize the importance of 

establishing reasonable levels of responsibility for approving officials who are 

responsible for reviewing and certifying purchase card transactions. Assigning approving

officials more cardholders than they can effectively supervise is a symptom of a weak 

control environment, as it is unreasonable to expect approving officials who have too 

many transactions to conduct a thorough and proper review of supporting

documentation for each transaction. Basic fraud prevention concepts and our previous

audits of purchase card programs have shown that opportunities for fraud and abuse 

arise if cardholders know that their purchases are not being properly reviewed.

We found that DHS’s draft manual contained requirements for approving officials that 

are consistent with OMB Circular A-123 and GAO’s Audit Guide. Specifically, the 

proposed DHS policy stipulates that a single approving official may not oversee more 

than 7 cardholders. However, our work showed that DHS organizational elements did 

not adhere to this guidance. As shown in table 1, as of the end of fiscal year 2005, we 

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found that 176 DHS approving officials, out of approximately 3,300 approving officials

departmentwide, had oversight responsibilities for more than 7 cardholders.6

 At the 

Coast Guard alone, 147 approving officials supervised more than 7 cardholders, with 3 

individuals managing more than 30 cardholders. According to the OPC at the Coast 

Guard, insufficient staff to monitor and oversee the purchase card program is a primary

cause for the large number of approving officials with excessive span of control. Having

approving officials responsible for more than 7 cardholders is inconsistent with the DHS

draft manual and is contrary to GAO’s best practices guidance.

Table 1: Number of Approving Officials at DHS Organizational Elements with 

Excessive Span of Control 

Number of approving officials with excessive

span of control, stratified by number of

cardholders managed 

Organizational element 8–10 11–20 21–30 > 30 Total

U.S. Coast Guard 84 53 7 3 147

U.S. Customs and Border Protection 7 3 0 0 10

Federal Emergency Management Agency 5 3 0 0 8

U.S. Secret Service 3 2 0 2 7

DHS Science and Technology 1 0 0 0 1

Transportation Security Administration 0 1 0 0 1

U.S. Citizenship and Immigration Service 1 0 0 0 1

Federal Air Marshal Service 1 0 0 0 1

Total 102 62 7 5 176

Source: GAO analysis of U.S. Bank data. 

Our analysis of purchase card data uncovered other fundamental breakdowns in

controls. For example, we identified 6 cardholder accounts where the approving official 

and the cardholder were the same individual—a major conflict of interest. We also 

identified 2,468 open accounts—19 percent of DHS’s purchase cards—that as of 

December 13, 2005, had not been used since before January 2005. According to OMB and 

the U.S. General Services Administration (GSA),7 purchase cards should only be issued 

to individuals who have a documented need to acquire items for the government with the 

6

On an agencywide basis, 2,150 cardholders, or over 20 percent of DHS’s over 9,000 cardholders, were managed by

approving officials whose span of control exceeded the 7:1 cardholder to approving official internal control as 

contained in the DHS draft manual.

7

Federal agency purchase card programs operate under a government wide GSA SmartPay® master contract. 

Agency purchase card programs must comply with the terms of the contract and task orders under which the agency

placed its order for purchase card services.

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purchase card. It is difficult to argue that the 2,468 individuals who have not made a

single purchase in an entire year have such a need. Consequently, those accounts should 

have been closed to minimize the risk of fraud, waste, and abuse.

Furthermore, we found that at both the DHS level and organizational element level, there 

were inadequate resources to effectively manage the program. As stated in GAO’s Audit 

Guide, it is vital for purchase card programs to be sufficiently staffed to manage the 

program. At the DHS agencywide level, the DHS Agency Program Coordinator (APC) is

the sole person responsible for overseeing not only DHS’s Purchase Card Program, one 

of the government’s largest purchase card programs, but also DHS’s Travel Charge Card 

Program and Fleet Charge Card Program.

8

 In total, DHS spent nearly $1 billion on these 

three charge card programs during fiscal year 2005. Based on our assessment of the 

control environment and discussions with the APC, a lack of adequate resources caused 

insufficient management and oversight of the purchase card program at the DHS

agencywide level.

At the organizational element level, we found a similar lack of staffing resources devoted 

to the management of the purchase card program. For example, as shown in table 2, the 

number of personnel assisting the OPC at the organizational element level is not 

consistent with the risk of exposure, as measured by expenditures. In fact, the largest 

organizational element, the Coast Guard, provides no additional staff to the OPC to assist 

in managing and overseeing the purchase card program. Based on our assessment of the 

control environment and discussions with the OPC at the Coast Guard, the Coast Guard 

did not have adequate resources to both administer the purchase card program and 

provide adequate compliance control.

8

The GSA offers SmartPay®, a federal government charge card program that improves travel, purchase, and fleet 

payment services for federal employees by simplifying payments and cutting administrative costs.

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Table 2: Employees Responsible for Management of the Purchase Card Program 

at Four of the Largest Organizational Elements within DHS

Organizational element

Staff devoted to purchase

card

Fiscal year 2005

total purchase card 

dollars (millions)

U.S. Coast Guard 1 (OPC) $ 227

Federal Emergency Management Agency 2 (1 OPC and 1 additional staff) 32

U.S. Immigration and Customs Enforcement 4 (1 OPC and 3 additional staff) 21

U.S. Customs and Border Protection 6 (1 OPC and 5 additional staff) 66

Source: DHS data.

Evidence Lacking that Most Cardholders Received Required Training

Evidence was not provided to show that DHS is providing the training necessary to 

obtain reasonable assurance that its cardholders understand the purchase card 

program’s key controls. Adequate training is essential to ensuring that the cardholders

and approving officials have the skills necessary to achieve organizational goals in an

effective and efficient manner. OMB Circular A-123 and DHS’s draft manual require that 

all cardholders be trained prior to receiving a purchase card and receive annual refresher 

training. We found that for 60 of the 96 transactions in our statistical sample, the 

cardholder lacked documentation showing that they received either the required initial 

training or the refresher training.

Monitoring and Oversight Needs Improvement

Our review of the DHS purchase card program found that DHS had ineffective 

procedures to monitor and oversee cardholder’s compliance with agencywide and 

governmentwide purchase card policies through postpayment audits. The purpose of the 

postpayment audit is to provide reasonable assurance that the purchases made by

cardholders, and payments made to the bank, were valid and appropriate. However, our 

audit found that DHS did not conduct postpayment audits effectively. Specifically, we 

found that the organizational elements did not follow up with cardholders who failed to 

provide the required supporting documentation. We identified 10,339 transactions

between December 2003 and February 2006 that were selected for audit, but which were 

not audited because cardholders did not submit the required supporting documentation.

Many of the cardholders who failed to submit the required supporting documentation

were nevertheless allowed to continue using their purchase cards. Failure to suspend 

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those cards and discipline users exposed DHS to fraud, waste, and abuse in its purchase 

card program.

Inconsistently Implemented Control Activities Leave DHS Vulnerable to Fraud, 

Waste, and Abuse 

The results of our testing of key controls at DHS revealed significant failure rates that 

bring into question the efficacy of DHS’s implementation of internal controls. Internal

control activities associated with purchase card transactions occur at various levels

within an agency. Activities include a wide range of diverse actions such as

authorizations, verifications, reconciliations, certifications, and the production of 

records and documentation. However, our statistical tests of DHS purchase card 

transactions from June 13, 2005, through November 12, 2005, found that several key

transaction-level controls were ineffective, with failure rates ranging from 8 percent to 

63 percent. In addition, the high rates of failure associated with authorization and 

independent receipt and acceptance also led us to question the effectiveness of the DHS

reconciliation and certification process. Specifically, DHS’s automated systems and 

practices associated with reconciling and certifying purchase card transactions for 

payment were not effective to provide reasonable assurance that charges appearing on

the cardholder’s bank statements were valid. We also found instances where DHS lacked 

effective controls to ensure proper follow-through of disputed transactions, leaving DHS

at an increased risk of fraud, waste, and abuse associated with the payment of purchase 

card transactions.

Finally, while DHS did not rely on its increased micropurchase threshold authority, DHS

did activate certain FAR provisions to streamline the acquisition process for transactions

made in response to the hurricane disaster in the Gulf Region. We are not questioning the 

authority on which DHS relied. However, we have identified examples where DHS did

not exercise prudent pricing practices.

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Statistical Tests Indicated Weak Internal Controls

Control activities we tested included whether (1) cardholders obtained written

authorization prior to purchases, (2) invoices supporting the transactions existed, (3) 

independent receipt and acceptance of goods and services occurred, and (4) cardholders

screened for required or preferred vendors (designated sources). As shown in table 3, the 

failure rates for the four attributes that we tested ranged from 8 percent to 63 percent.

We looked for documented evidence that these control activities were followed;

therefore, these rates may be higher than actual failures rates if control activities were 

followed but not documented.

Table 3: Results of Statistical Testing for Four Key Internal Controls (percent)

Source: GAO and DHS OIG testing and statistical analysis of DHS purchase card transactions provided by U.S. 

Bank.

Internal control Point estimatea 95-percent confidence intervalb

Authorization 45 35–55

Sales documentation 8 4 – 16 

Independent receipt and acceptance 63 53 – 73 

Priority for designated sources 53 43–63

a

The numbers represent point estimates for the population based on our random sample rounded to the nearest

percentage point. b

The numbers represent a 2-sided confidence interval assuming a 95 percent confidence level.

Lack of Written Authorization—In 45 percent of the sample transactions, the 

cardholders did not obtain written authorization prior to obtaining the items in question.

Requiring the cardholder to obtain written authorization prior to using the purchase card 

is key to providing reasonable assurance that the purchase represents a legitimate 

government need. The draft manual addresses this fundamental internal control element 

by proposing to require written authorization prior to purchases. However, as indicated 

by the high rate of failure, cardholders did not consistently adhere to this internal control 

standard, thereby exposing DHS to misuse of the purchase card. For example, a

cardholder from CBP acquired nearly $2,500 in rain jackets without written

preauthorization. Had the cardholder been subject to DHS’s requirement for written

authorization prior to purchase, as outlined in the draft manual, this improper purchase 

may have been prevented.

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Lack of Sales Documentation Supporting Purchases—We estimate that 8 percent of 

DHS cardholders failed to provide sales documentation, such as a receipt, for the items

obtained with a purchase card. This is inconsistent with the draft manual, which would 

require cardholders to obtain and retain all sales documentation relevant to their

transaction. Requiring cardholders to obtain and retain sales related documentation from 

the vendor is a basic internal control to reduce the risk of fraud, waste, and abuse.

Without sales documentation, an approving official has no means of reasonably

determining whether the item purchased represents a legitimate government need or is

fraudulent, improper, or abusive.

Lack of Independent Receipt and Acceptance—We estimate that 63 percent of DHS

transactions did not have independent receipt and acceptance. Receipt and acceptance 

of goods and services by someone other than the cardholder provides reasonable 

assurance that the organization actually received what it purchased. This internal control 

procedure segregates the duties involved in the acquisition of goods and services and 

thereby reduces the risk of fraud, waste, and abuse. According to GAO’s Audit Guide, a

properly documented independent receipt and acceptance must contain the signature of 

the independent individual, who should also document the date of receipt. Failure to 

adhere to proper receipt and acceptance procedures exposes agencies to increased risk 

of fraud, waste, and abuse. For example, a transaction we sampled involved the purchase 

of three laptop computers by a Coast Guard cardholder. However, independent receipt 

and acceptance was not performed, and the laptops were not recorded in the property

records. Subsequently, the laptops could not be located and were later reported as

stolen. If proper receipt and acceptance had been performed, theft of the laptops may

have been prevented.

Failure to Give Priority to Designated Sources—We estimate that in 53 percent of the 

sampled transactions, the cardholder failed to document whether they gave priority to 

designated sources. In one example, a cardholder purchased 25 portable global

positioning system (GPS) units at full retail price from Best Buy when the same units

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could have been obtained through a GSA Advantage9 vendor for 15 percent less. The DHS

draft manual would require that cardholders use designated sources if the source is

capable of providing the goods or services as needed. GSA Advantage is identified as a

designated source in the draft manual. Generally, the goods and services provided by

designated sources will be offered at reasonable prices.10 In this case, the failure to 

consider designated source resulted in the cardholder paying Best Buy about $2,700 

more than if the units were acquired through GSA Advantage. Although the cardholder

was acquiring the GPS units for an emergency situation, we found that GSA Advantage 

can often deliver goods on an expedited basis. Alternatively, the cardholder could have 

obtained a special discount from Best Buy if he had opened a government account.

Online Reconciliation and Certification Processes Not Fully Effective

Effective reconciliation and certification are crucial in helping to provide reasonable 

assurance that all charges appearing on the cardholder’s bank statement are valid.

However, our review of the DHS purchase card systems found that the practices used by

the Coast Guard, FEMA, CBP, and U.S. Immigration and Customs Enforcement (ICE) 

were not fully effective. Each of these organizational elements primarily relied upon

online reconciliation and certification capabilities inherent in their respective purchase 

card systems, but none of these systems provided sufficient evidence to determine if a

comprehensive reconciliation and certification was actually performed. While online 

processes can provide an efficient and effective means for accomplishing such tasks

without the burden of a paper-laden environment, reliance upon online processes

requires effective internal controls (e.g., sufficient audit trails, implementation of sound 

business practices) to gain reasonable assurance that the processes were properly

performed. However, none of these DHS components had fully effective systems or 

practices to provide reasonable assurance that cardholders exercised due diligence in

9

GSA Advantage, a program offered by the GSA, is a convenient one-stop shopping source to meet federal

agencies’ procurement needs by selecting and listing vendors who may offer the best value.

10Using designated sources results in the agency obtaining reasonable prices or purchasing goods and services that

meet other policy objectives, such as creating jobs and training opportunities for people who are blind or have other

severe disabilities.

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reconciling their statements. One attribute lacking was notations, such as the ability to 

enter check marks indicating that transactions on the cardholder’s monthly statements

were individually reviewed and reconciled. In addition, these components did not 

demonstrate that they had fully effective systems or practices that would allow them to 

track the length of time a cardholder spent performing their reconciliation and an

approving official spent certifying statements to rule out the possibility of merely “rubber 

stamping” monthly statements. Further, we found many instances where approving

officials did not certify their respective cardholders’ statements. DHS’s draft manual 

requires approving officials to certify a cardholder’s bill within 14 days of the close of 

billing cycle. Based on the results of our analysis, we identified 8,630 uncertified

statements that were pending approving official certification as of February 12, 2006.

As previously discussed, given the insufficient resources committed to the purchase card 

program and the high rates of failure associated with the authorization and independent

receipt and acceptance, comprehensive reconciliations and certifications are crucial in

helping to provide reasonable assurance that all charges are valid. As a result of these 

internal control weaknesses, DHS’s compliance with controls to prevent or detect 

fraudulent, improper, or abusive purchases is in question.

Pay and Confirm Environment Increased Risk of Fraud, Waste, and Abuse

We found instances where DHS cardholders failed to dispute unauthorized transactions.

The dispute process is especially critical in DHS’s pay and confirm environment, called 

SmartPay®. One feature of GSA’s SmartPay® program is that, unlike a normal credit 

card monthly billing process, the agency pays charges daily. By agreeing to pay first and 

confirm later, agencies can reduce costs since the bank provides rebates

11 based on how 

quickly the charges are paid. However, the pay and confirm environment requires

diligence on the part of cardholders to perform thorough and comprehensive 

reconciliations of their charges and to submit timely disputes of improper charges to the 

11As part of GSA’s SmartPay® program, contracting banks provide rebates (refunds) to agencies based on sales

volume (payments) and payment timeliness.

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bank for credit. Because agencies have already paid the bank for the potential 

unauthorized charges prior to receiving the monthly billing statement, the payment will 

not be reversed unless a dispute is submitted.

Because of weaknesses in the implementation of the dispute process in some instances, 

DHS did not identify and obtain credits for unauthorized transactions. In one instance, a

cardholder appropriately initiated the dispute process when a vendor improperly

charged the government $153,000 prior to completion of contracted services. However,

the cardholder failed to perform appropriate follow-through and submit the required 

dispute documentation. Consequently, DHS made a second payment to the vendor when

services were complete, resulting in a double payment of $153,000. FEMA was unaware 

of the double payment until we questioned the payments in May 2006. At that time, 

FEMA contacted the vendor and recovered the overpayment. In another example, 

discussed later in this testimony, a cardholder’s failure to dispute $30,000 in

unauthorized charges resulted in FEMA making payments for potentially fraudulent and 

improper charges for flat-bottom boats. In this case, the cardholder and the approving

official failed to dispute the unauthorized charges.

Although the pay and confirm environment can bring economic benefits (i.e., rebates) to 

federal agencies, it requires the implementation of effective controls to detect and 

correct charges that should be disputed and reversed. The high rates of failure in our 

tests of key internal controls and the examples highlighted above bring into question

whether DHS’s pay and confirm process exposes DHS to unacceptable levels of risk for

fraud, waste, and abuse.

DHS Used a Provision of the Federal Acquisitions Regulations to Avoid Obtaining

Competitive Bids

To facilitate the government’s response to hurricanes Katrina and Rita, Congress

authorized an increase to the micropurchase threshold from $2,500 to $250,000. When

making micropurchases, authorized cardholders need not solicit for competitive bids if 

they consider the price reasonable. Executive agencies such as DHS could have 

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extended this authority to certain cardholders directly supporting hurricane-related 

rescue and relief operations. However DHS told us that they did not implement the 

increased threshold because they had the flexibility they needed to make noncompetitive 

purchases under existing procurement authority. DHS cited their justification for other 

than full and open competition under the Unusual and Compelling Urgency provisions

of the Federal Acquisition Regulations.

12 Under these provisions, cardholders had 

discretion to select contractors noncompetitively as long as the purchase was directly

related to Hurricane Katrina response efforts.

Although DHS has authority to make purchases without competition, we highlight 

transactions where DHS cardholders failed to adopt prudent pricing practices and 

subsequently wasted government funds. Part of DHS’s mission is to respond to 

emergency situations like Katrina and Rita and a reasonable person would expect DHS to 

be more prepared for relief and rescue operations than other agencies with routine

functions. In this light, we question the propriety of several of the noncompetitive

transactions that we investigated for potential fraud. In the next section we identify

many examples of potential fraud, improper purchases, and abusive or questionable 

transactions. Some of the examples are multifaceted and touch on several issues

including the pricing and requirements management issues discussed previously.

Potentially Fraudulent, Improper, Abusive, or Questionable Transactions

Our forensic audit and investigative work identified numerous transactions where DHS

failed to prevent or detect potential fraudulent, improper, abusive, or questionable 

purchases. Many of these examples also show that the government could have obtained 

better pricing. However, our work was not designed to identify all instances of, or 

estimate the full extent of fraud, waste, and abuse. Therefore we did not determine, and 

make no representations regarding, the overall extent of fraudulent, improper, and 

abusive or questionable transactions.

126.302-2 and 41 U.S.C. § 253(c)(2), state that “[a]n executive agency may use procedures other than competitive

procedures only when . . . the executive agency’s need for the property or services is of such an unusual and 

compelling urgency that the Government would be seriously injured unless the executive agency is permitted to

limit the number of sources from which it solicits bids or proposals.” See also 48 C.F.R. § 6.302-2, Unusual and

compelling urgency.

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Potentially Fraudulent and Improper Activity Related to Purchase Card Acquisitions

Our data mining work identified many instances of both potentially fraudulent and 

improper use of the purchase cards, and potentially fraudulent and improper activity

related to items acquired with the purchase card. We considered potentially fraudulent 

purchases to be those which were unauthorized and intended for personal use. The 

transactions we determined to be improper are those intended for government use, but 

which are not for a purpose that is permitted by law, regulation, or policy.

Potentially Fraudulent Activity—Table 4 shows five cases of potential fraud involving

both use of a DHS purchase card and weaknesses with DHS’s accountable property13

controls that led to potentially fraudulent misappropriation of government assets.

Property that is unaccounted for may simply be misplaced; or it may be that the assets

were misappropriated for a use other than that of the government. The misappropriation

of government assets (theft) represents fraudulent activity. These five potentially

fraudulent cases involve 154 missing items out of the 433 accountable property items

that we tested. Because only a limited number of transactions in our statistical sample 

contained accountable or pilferable property, we did not attempt to estimate the extent 

to which DHS could not account for pilferable property.

13DHS’s Personal Property Management Directive 565 defines accountable property as personal property with an 

initial acquisition cost at or above a specific threshold, and items designated as sensitive. These items are to be

recorded in the organization’s automated control system. DHS’s Capitalization and Inventory of Personal Property

Management Directive 1120 establishes differing thresholds for tracking accountable property. Generally, DHS

requires its organizational elements to track electronic communications equipment with a cost greater than or equal 

to $1,000, information technology equipment with memory at any cost, and other personal property with a cost

greater than or equal to $5,000.

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Table 4: Potentially Fraudulent Activity 

Case Items purchased

Organizational

element Vendor Additional facts

Amount of 

transaction

1 Laptop computers FEMA CDW 107 of 200 not located $300,000

2 Flat-bottom boats FEMA Banita

Creek Hall 

Unauthorized use of purchase

card by a vendor, 12 of 20

boats not in property system

177,000

3 Printers FEMA CDW 22 of 100 not located 84,000

4 GPS units FEMA Best Buy 2 of 25 not located 18,000

5 Laptop computers Coast Guard Best Buy 3 of 3 reported as stolen 13,000

Source: GAO and DHS OIG investigation.

Our testing work for the above transactions included traveling to the location of the 

accountable property to observe the item and determine if the asset existed or was in

possession of the government. More detailed information is as follows:

x In cases 1, 3, and 4, FEMA purchased 200 laptops, 100 printers, and 25 GPS units in

five separate transactions totaling about $400,000. While FEMA documented 

independent receipt and acceptance for the laptops and the GPS units, it did not do 

so for the printers. Further, FEMA did not properly record and track some of the

assets in its property records. As a result, FEMA could not locate the accountable 

property items when asked, and consequently was not able to account for 107 

laptops, 22 printers, and 2 GPS units that cost about $170,000.

Based on the information FEMA provided for the location of the assets in question, in

March 2006 we traveled to the FEMA field offices in New Orleans and Baton Rouge to 

observe assets acquired using a purchase card. After arriving at these locations,

however, FEMA gave us different location information. We were instead informed 

that the laptops were shipped directly to and currently located in a conference room 

at the Royal Sonesta Hotel in the French Quarter, which was serving as the Joint 

Command Post for the various federal, state, and local authorities. We were told that 

many of the laptops and printers were being used by the New Orleans Police 

Department (NOPD) at the Joint Command Post. However, as shown in figure 1, 

when FEMA’s accountable property officer took us to the conference room, it was

vacant and the laptops and printers were missing.

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Figure 1. Hotel Conference Room Where FEMA Laptops and Printers Were 

Supposed to Be 

Source: GAO.

We questioned NOPD to find the location of the laptops and printers and we were 

able to account for 28 laptops and 16 printers in the possession of NOPD personnel 

and 4 laptops in possession of the Louisiana District Attorneys Office (LADA). These 

assets were on loan to NOPD and LADA to assist them in their hurricane response 

efforts. We subsequently accounted for 61 laptops, 72 printers, and 23 GPS units at 

FEMA field offices in Baton Rouge and New Orleans. Despite substantial efforts to 

locate the property, neither FEMA, GAO, or DHS OIG was able to find all the 

accountable property at the time of our field testing. Ultimately, FEMA could not 

account for 107 laptops, 22 printers, and 2 GPS units with a total value of about 

$170,000.

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Significantly, we found that FEMA failed to enter the laptops into their accountable 

property system until two months after delivery. In addition, when FEMA did add the 

laptops to the property system, they failed to accurately record who was in

possession of the laptops. In February 2006, after we made inquiries regarding the 

laptops, FEMA made an effort to track down the laptops and properly record who 

was in possession of and accountable for the laptops. However, they were unable to 

do so for most of the laptops. The process for using a purchase card to obtain highly

pilferable and expensive equipment such as laptops should include controls that

ensure such property is accurately recorded and tracked in a property system. In this

case, the absence of effective controls led to potential fraud and a substantial cost to 

the taxpayer.

x For case 2, FEMA paid a vendor $208,000, or twice the retail price, to deliver 20 flatbottom boats (with motors and trailers) needed for relief operations in New Orleans.

This vendor, a broker who did not possess any boats himself, used the FEMA 

purchase card account number to pay for the boats prior to delivery to FEMA. He 

also used the card number to make two unauthorized payments for 6 of the 20 boats

totaling about $30,000. Although the vendor billed FEMA for all 20 of the boats, the 

vendor failed to pay one retailer who provided 11 of the 20 boats. This retailer 

provided the boats to the broker believing he was dealing with a FEMA 

representative, and therefore the retailer did not require payment up-front. The 

retailer has since reported the 11 boats as stolen and not provided title to the vendor.

Further, FEMA only has 8 of the 20 boats in its property records and could not 

provide the location for the other 12 boats.

Many issues surround the purchase of the 20 boats, but the most significant involve 

the vendor. We estimate that the vendor walked away with over $150,000, including

the profit he made on the 11 boats that the vendor obtained without payment. We are 

coordinating our investigation with both local law enforcement and the Federal 

Bureau of Investigation. Key control breakdowns relating to this transaction include

the cardholder not obtaining adequate receipt and acceptance as evidenced by the 

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fact that FEMA did not receive title to at least 11 boats, and the fact that neither the 

cardholder or the approving official flagged two unauthorized charges on the monthly

purchase card statement.

x Case 3 involved one or more Coast Guard employees who submitted falsified records

and provided false information pertaining to the theft of three laptop computers. Our 

investigative work found that a Coast Guard cardholder, accompanied by an

Information Technology (IT) specialist, purchased 13 laptops from Best Buy using his

government purchase card. The cardholder placed the laptops in an unsecured trailer, 

but did not immediately record the serial numbers so they could be entered into an

accountable property system. According to the cardholder, 3 laptops went missing

the next day. In an interview with our investigator and the Coast Guard Investigative 

Service, the cardholder admitted that he did not record the serial numbers

immediately as instructed by his superior, and the property log was subsequently

falsified to include fictitious serial numbers for the missing laptops. During separate 

interviews with the cardholder and the IT specialist, we noted inconsistencies in their 

explanations. We attempted to conduct a follow-up interview with the IT specialist, 

but after being notified to report for the scheduled interview, the IT specialist took 

actions that made himself unavailable. The Coast Guard Investigative Service is

continuing to investigate the stolen laptops.

Improper Transactions—We identified numerous instances where cardholders used 

their purchase cards to make improper purchases. According to the FAR, purchase cards

may be used only for purchases that are otherwise authorized by law, regulation, or 

organizational policy. Table 5 contains some examples of improper transactions.

Table 5. Examples of Improper Purchase Card Transactions

Case Items purchased

Organizational

element Vendor

Amount of 

transaction

1 Meals ready to eat (MRE’s) CBP MRE Foods.com $465,000

2 Waste removal FEMA EMO Energy Solutions 153,000

3 Rain jackets CBP Helly Hansen 2,500

4 Men’s clothing ICE Hecht’s 430

Source: DHS data. 

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The following contains detailed information on some improper transactions shown in

table 5:

x Case 1 related to the improper use of convenience checks, where a CBP cardholder 

improperly issued five convenience checks totaling about $465,000 to prepay for a 2 

months’ supply of meals-ready-to-eat (MRE), about $30,000 of which was for 

shipping. The MREs were sent to the Gulf Region for consumption by CBP employees

who were deployed to assist in the response to the hurricanes. In general, DHS

policies consider the use of convenience checks a tool of last resort, that is, to be 

used only after “maximum efforts” have been made to find alternate vendors who 

accept the government purchase card. However, we found that the CBP cardholder 

violated DHS policies related to use of convenience checks.

In addition, the CBP employees who were sent to the Gulf Region were pulled out 

earlier than anticipated and almost half of the MREs purchased were delivered to a

CBP training facility in El Paso, Texas. Because the cardholder prepaid for the MREs, 

the cardholder precluded the option of buying in increments as the fluid 

circumstances might have dictated. Because the demand did not materialize, 

thousands of MREs are sitting in a warehouse in El Paso, Texas.

The cardholder in this instance relied on the Unusual and Compelling Urgency

provisions of the Federal Acquisition Regulations to expedite the purchase and meet 

an apparent need. While we are not questioning the cardholder’s reliance on these 

provisions, we identified actions taken by the cardholder that unnecessarily

increased the cost to the taxpayer:

o Instead of contracting with the Defense Logistics Agency14 (DLA) to deliver 

MREs on an as-needed basis, the cardholder acquired about 62,000 MREs from 

a vendor on the internet. However, DLA informed us that it had a large supply

14DLA provides worldwide logistics support for the missions of the military departments and the Unified Combatant

Commands under conditions of peace and war. It also provides logistics support to other DOD components and

certain federal agencies such as DHS. 

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of MREs when Hurricane Katrina hit the Gulf Region and would have been

able to meet CBP’s demand for MREs and provide free shipping. Further, we 

found that a GSA Advantage vendor was selling similar MRE’s at a

substantially lower price than what the cardholder paid. The vendor selected 

by the cardholder was not a GSA Advantage vendor and the cardholder 

acknowledged that she did not contact this GSA Advantage vendor. Had the 

cardholder contacted the GSA Advantage vendor, she may have saved 

taxpayers over $100,000.

o The website of the vendor selected by the cardholder clearly shows that it 

accepts credit cards. However, according to the cardholder, the vendor did not 

want to incur a credit card processing fee on the large order. The cardholder 

therefore paid the vendor using convenience checks, which cost the

government a 1.75 percent processing fee. Therefore, due to the cardholder’s

improper use of convenience checks, DHS paid $8,000 in processing fees

unnecessarily.

x In case 3, a CBP cardholder improperly used his purchase card to acquire 37 black 

rain jackets from Helly Hansen for nearly $2,500 and obtained a government 

discount to the personal benefit of CBP employees. The purchase violated CBP’s

policy against using a purchase card to acquire clothing. The cardholder claimed 

the rain jackets were personal protective equipment (PPE) for which there is an

exception. The cardholder explained that the black rain jackets are given to safety

officials on the firing range and allow these officials to be readily identified.

However, these officials are issued red shirts for safety and identification

purposes and when it rains, the red shirts are covered by the rain jackets. Other 

individuals who are not safety officials also wear black rain jackets, making these 

other individuals indistinguishable from safety officials. Therefore, the rain

jackets do not serve a safety purpose and are not PPE. The cardholder also 

admitted that when the rain is heavy, the firing range is normally shut down.

Furthermore, the rain jackets were not kept on the firing range but were given to 

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range officials to keep, without any record of who was receiving the rain jackets.

While safety of CBP employees should be a primary concern, the facts in this case 

indicate that cardholder obtained a government discount from the vendor to 

provide personal clothing to CBP employees and for which no safety related 

purpose was served.

Abusive and Questionable Transactions

We identified numerous examples of abusive and questionable items acquired with DHS

purchase cards during our testing. We defined abusive transactions as those that were 

authorized, but the items purchased were at an excessive cost (unreasonable pricing) or 

were not needed by the government, or both. As an organization whose mandate is to 

deal with security and emergency needs, DHS and its employees should adopt prudent 

purchasing practices by implementing existing agreements with vendors to allow

favorable pricing even in times of disaster. Questionable transactions are defined as

transactions that appear to be improper or abusive but for which there is insufficient 

documentation on which to conclude.

15

Obtaining reasonable pricing for goods or services includes not only avoiding excessive 

pricing, but also includes taking reasonable steps to obtain appropriate discounts.

However, vendors often will not provide discounts unless the government cardholder 

asks if a discount is available. We found instances where it was likely a vendor discount 

could have been obtained but was not. However, we noted several occasions where 

cardholders obtained a point-of-sale discount. For example, an ICE cardholder obtained 

60 sleeping bags and cots from Cabela’s. The sleeping bags and cots were acquired to 

meet the needs of those affected by the hurricanes. The cardholder was able to obtain a

10 percent point-of-sale discount from the manager. By asking for the discount, the 

cardholder was able to save the taxpayer over $750. In another example, FEMA 

purchased over $600,000 in medical equipment and supplies from Medtronic Physio15GAO’s Guide for Evaluating and Testing Controls Over Sensitive Payments (GAO/AFMD-8.1.2, May 1993)

states: “Abuse is distinct from illegal acts (non-compliance). When abuse occurs, no law or regulation is violated.

Rather, abuse occurs when the conduct of a government organization, program, activity, or function falls short of

societal expectations of prudent behavior.”

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Control in three separate transactions in order to supply special medical response teams

after the hurricanes. FEMA obtained almost $18,000 in point-of-sale discounts from this

vendor.

In order to obtain the best pricing, it is often beneficial to make arrangements with 

vendors in advance of potential spikes in demand for goods or services. We noted

numerous instances where we believe better pricing could have been obtained had 

various DHS organizational elements made arrangements with vendors in advance of the 

devastating hurricanes along the Gulf Region. If DHS does not anticipate its needs and 

get prearranged pricing from quality vendors, then it must often scramble to acquire the 

necessary goods and services during a crisis. Frequently, the emphasis shifts from 

efficiency to expediency when acquiring goods and services during a crisis, resulting in

additional and unnecessary costs to the government. Table 6 lists some examples of 

abusive and questionable purchases that we identified at DHS.

Table 6: Abusive and Questionable Transactions

Transaction Item purchased

Organizational

element Vendor

Nature of 

transaction Amount

1 Shower units CBP MD Descant Abusive $71,000

2 Dog booties FEMA Backcountry Gear Limited Abusive $68,000

3 GPS units FEMA Best Buy Abusive $18,000

4 63” Plasma screen

television

FEMA Jan-Tronics Abusive $8,000

5 iPod Nanos and Shuffles USSS Apple Questionable $7,000

6 Training seminar CBP Sea Palms Golf and Tennis Resort Abusive $2,000

7 Leadership conference CIS Hyatt Golf Resort, Spa & Marina Abusive $2,000

8 Beer brewing kit Coast Guard Beer and Wine Hobby Abusive $230

Source: GAO and DHS OIG investigations of DHS data.

The following provides further details on a number of transactions listed above:

x The first case involved a CBP cardholder who paid for three 6-person portable 

shower units when less expensive units could have been rented. In this instance, CBP 

represented to us that they did not have time to obtain competing bids because of the 

need to prepare immediate shower units for CBP personnel in the Gulf Region

responding to hurricanes. However, because CBP did not specify the need for hot 

water and sinks, the portable shower units did not come with this capability. In

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contrast, a vendor in GSA Advantage could have rented two prefabricated 16-person

mobile shower units with hot water capabilities and had them delivered in less time 

than it took the original vendor to deliver. The cost from the GSA Advantage vendor 

would have been approximately $45,000, or 36 percent less than the nearly $71,000 

CBP paid.

x In case 2, a FEMA cardholder unnecessarily purchased over 2,000 sets of canine 

booties at a cost exceeding $68,000. Canine booties are used to protect the dog’s

paws in a debris laden environment. According to FEMA, after the terrorist attacks of 

9-11 many donated dog booties were placed in storage facilities and were mistakenly

placed on emergency provisioning lists. When the hurricanes struck the Gulf Region, 

FEMA acquired items on the provisioning lists including thousands of additional dog

booties unnecessarily. However, we were informed by FEMA that since most of the 

search and rescue dogs in the Gulf Region were not accustomed to wearing booties, 

the canine booties continue to sit unused in FEMA storage facilities. The error of 

placing the booties on the emergency provisioning list resulted in a $68,000 

unnecessary expenditure.

x In case 4, a FEMA cardholder abused a purchase card to acquire a Samsung 63 inch 

plasma screen television on September 16, 2005 for almost $8,000, lacking a

government need. The plasma screen, which was not timely recorded in an

accountable property system, was still unused and in its original box six months after 

its purchase. The fact that it was unused after such an extended period of time casts

significant doubt as to whether there was a legitimate government need for acquiring

the 63 inch plasma screen in the first place. In addition, as the cost of high-end 

electronic equipment can fall dramatically in a short period of time, we found that the 

same 63 inch plasma screen television could have been obtained for $1,200 less at the 

time we observed it in the box at FEMA. Considering the plasma screen was bought 

at the end of the fiscal year and that it was unused 6 months after the purchase, a

concern arises regarding whether the purchase was made to use up remaining funds

at the end of the fiscal year.

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x In case 5, the U.S. Secret Service (USSS) spent over $7,000 to acquire 12 Apple iPod 

Nanos and 42 iPod Shuffles. This purchase is questionable because iPods are 

generally used to store and play music—not a legitimate government need. In

addition the USSS did not enter the iPod shuffles into its accountable property

system. After we questioned the validity of the purchase, USSS provided a

memorandum justifying the purchase on the basis that the iPods were used for 

training and data storage. However, we found that other memory devices existed that 

were not primarily designed to play music but would have satisfied the need for data

storage. USSS did not provide evidence to support its claim that the iPods were used 

in training. Further, USSS represented to us that they did not track the iPod shuffles

because the iPods cost less than the $300 threshold required for accountable 

property. This is inconsistent with established DHS policy that requires all memory

devices be tracked in a property system. Without appropriate substantiation, we 

could not obtain assurance that the iPods were used for legitimate government needs.

x Case 6 involved the abusive use of government funds to hold a CBP training seminar 

at the Sea Palms Resort at Saint Simons Island in Georgia. We identified a purchase 

card transaction related to this event for about $2,000 and performed additional audit 

work to determine the basis for selecting the resort. We found that the golf and tennis

resort was used to train 32 newly hired attorneys when the nearby Federal Law 

Enforcement Training Center (FLETC) in Glynco, Georgia, could have been used with 

a savings of approximately $10,000. According to the CBP officials we interviewed, 

CBP had determined that the FLETC facility could not accommodate their training.

However, CBP could not produce any documentation such as a request form 

indicating that CBP had contacted FLETC for determining availability. Further, a

FLETC official in charge of scheduling informed us that FLETC did not receive a

request from CBP and that had CBP given FLETC sufficient notice, it was more than

likely that FLETC would have been able to accommodate CBP. While training is a

necessary investment in human capital, cardholders and government officials need to 

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be careful stewards of taxpayer’s funds. By not contacting FLETC and instead using

the resort for training, CBP failed to act prudently with taxpayer dollars.

x In case 7, the U.S. Citizenship and Immigration Services (CIS) held its annual 

leadership conference at the Hyatt Regency Chesapeake Bay Golf Resort, Spa and 

Marina in Cambridge, MD, which cost the government about $40,000 in additional

travel expenses. We initially selected this transaction because a CIS cardholder had 

paid the resort about $2,300 for materials used in a team building exercise.

Irrespective of the merits of the team building exercise expenses, holding the annual 

leadership conference about 90 miles outside Washington, D.C. resulted in roughly 50 

Washington, D.C. based staff incurring travel expenses for lodging, meals, and other 

expenses. About 110 CIS employees attended the July 2005 conference. According to 

a March 25, 2005, CIS memorandum documenting the CIS conference planning

efforts, CIS officials only contacted resorts outside the Washington, D.C. normal

commuting area. If CIS had held the annual conference within the Washington, D.C.

commuting area, the 50 of the employees would not have incurred travel expenses

and the savings to the government would have been about $40,000.

x Case 8 involved a Coast Guard cardholder who abused his purchase card to obtain

beer brewing equipment and ingredients, and wasted government resources by

brewing alcohol while on duty. The cardholder, whose duties involved planning, 

procuring, and organizing social functions for the Coast Guard Academy, purchased a

beer brewing kit for about $230 and additional ingredients. According to the Coast 

Guard, the beer kit provided the Academy with both a cost savings and a quality

product for official parties attended by cadets, dignitaries, and other guests of the

Superintendent. The Coast Guard also explained that the Coast Guard beer, with the 

custom Coast Guard themed labels, functioned as an “ice-breaker” for discussion at 

these official parties.

Our subsequent work indicated that the Academy achieved no cost savings by

brewing their own beer. From early August 2005 through March 2006, the Academy

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used an additional $800 on beer brewing ingredients

16 to brew 532 bottles of beer, or 

12 batches. The Coast Guard estimated that it took two hours to brew, bottle, and 

label each batch of Coast Guard beer. Given a conservative approximate hourly labor 

rate of $15, it would cost over $13 for a six-pack of Coast Guard beer—considering

the variable costs alone (ingredients and labor). The Coast Guard provided GAO with 

a detailed 5-year analysis showing a cost savings but the analysis failed to account for 

any labor costs. Absent the purported cost savings and the dubious need for the 

government to brew its own alcohol, the purchase of the kit and the beer brewing

activity itself fall short of prudent use of taxpayer dollars and therefore exemplify

purchase card abuse.

Concluding Observations

The purchase card has proven to be a valuable tool that provides the government 

flexibility in making purchases and saves money on transaction processing. However, 

putting purchasing decisions in the hands of about 9,000 DHS employees with ineffective 

management oversight and control has allowed potentially fraudulent, improper, and 

abusive or questionable usage of these purchase cards to go undetected. Some of the 

examples highlighted in this testimony related to Hurricanes Katrina and Rita show that 

the government is particularly vulnerable when purchase cards are used during times of 

disaster. Taking immediate action to improve the processes and internal controls over its

purchase card program will help DHS maximize the value and benefit of the purchase 

card and provide reasonable assurance that fraud, waste, and abuse are minimized.

16According to Coast Guard finance personnel, funds from the Coast Guard Foundation, Inc. were used to purchase

the beer brewing ingredients. The Foundation is a public nonprofit organization that provides annual funding to 

support the men and women of the U.S. Coast Guard and Coast Guard Academy. The Foundation's fundraising

efforts address needs not met through traditional governmental and military funding sources. The Foundation

supports such activities as a holiday calling-card program, capital improvements, and education grants. Although the

ingredients were not purchased with appropriated funds, the resources provided by the Foundation could have been

spent for other purposes, for example educational grants, had they not been used to brew beer.

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_________________________________________________

Madam Chairman and Members of the Committee, this concludes our statement. We 

would be pleased to answer any questions that you or other members of the committee

may have at this time.

Contacts and Acknowledgments

For further information about this testimony, please contact Gregory D. Kutz at (202) 

512-7455 or kutzg@gao.gov at GAO or Matt A. Jadacki at (202) 254-5477 or 

matt.jadacki@dhs.gov at DHS OIG. GAO individuals making key contributions to this

testimony included James Ashley, Kord Basnight, James Berry, Beverly Burke, Jennifer 

Costello, Danielle Free, Christine Hodakievic, Ryan Holden, Aaron Holling, John Kelly, 

Tram Le, John Ledford, Barbara Lewis, Jenny Li, John Ryan, Robert Sharpe, Bethany

Smith, Tuyet-Quan Thai, Patrick Tobo, and Michael Zola. DHS OIG individuals making

key contributions to this testimony included Modupe Akinsika, Andre Marseille, and 

Frank Parrott.

Contact points for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this testimony.

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Appendix I: Prior GAO Purchase Card Audits

VHA Purchase Cards: Internal Controls Over the Purchase Card Program Need 

Improvement. GAO-04-737. Washington, D.C.: June 7, 2004.

Purchase Cards: Increased Management Oversight and Control Could Save Hundreds 

of Millions of Dollars. GAO-04-717T. Washington, D.C.: April 28, 2004.

Forest Service Purchase Cards: Internal Control Weaknesses Resulted in Instances of

Improper, Wasteful, and Questionable Purchases. GAO-03-786. Washington, 

D.C.: August 11, 2003.

HUD Purchase Cards: Poor Internal Controls Resulted in Improper and Questionable 

Purchases. GAO-03-489. Washington, D.C.: April 11, 2003.

Purchase Cards: Steps Taken to Improve DOD Program Management, but Actions 

Needed to Address Misuse. GAO-04-156. Washington, D.C.: December 2, 2003.

FAA Purchase Cards: Weak Controls Resulted in Instances of Improper and Wasteful 

Purchases and Missing Assets. GAO-03-405. Washington, D.C.: March 21, 2003.

Purchase Cards: Control Weaknesses Leave the Air Force Vulnerable to Fraud, Waste, 

and Abuse. GAO-03-292. Washington, D.C.: December 20, 2002.

Purchase Cards: Navy is Vulnerable to Fraud and Abuse but Is Taking Action to 

Resolve Control Weaknesses. GAO-02-1041. Washington, D.C.: September 27, 2002.

Government Purchase Cards: Control Weaknesses Expose Agencies to Fraud and 

Abuse. GAO-02-676T. Washington, D.C.: May 1, 2002.

Purchase Cards: Control Weaknesses Leave Army Vulnerable to Fraud, Waste, and 

Abuse. GAO-02-732. Washington, D.C.: June 27, 2002.

Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to Fraud and 

Abuse. GAO-02-32. Washington, D.C.: November 30, 2001.

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Appendix II: Background

The Department of Homeland Security’s (DHS) purchase card program is part of the 

General Services Administration’s (GSA) Smart Pay® program, which was established to 

streamline federal agency acquisition processes for eligible purchases by providing a

low-cost, efficient vehicle for obtaining goods and services directly from vendors. Under 

the GSA blanket contract, DHS has contracted with U.S. Bank for its purchase card 

services.

To assist DHS organizational elements in carrying out their various missions, such as

that of the U.S. Coast Guard (Coast Guard),17 U.S. Customs and Border Protection

(CBP),18 Transportation Security Administration (TSA),19

and the Federal Emergency

Management Agency (FEMA),20 DHS reported that it used purchase cards for more than

1.1 million transactions valued at more than $420 million in fiscal year 2005. According to 

DHS data, the purchase card activity for the Coast Guard, CBP, TSA, and FEMA 

accounted for $364 million or about 86 percent of the more than $420 million in fiscal 

year 2005 DHS purchase card payments. Table 1 identifies the number and dollar 

amount of purchase card transactions during fiscal year 2005 for these and other DHS

components.

17The Coast Guard’s mission is to protect the public, the environment, and U.S. economic interest in the nation’s

ports and waterways, along the coast, on international waters, or in any maritime region as required to support

national security. 

18CBP is responsible for protecting U.S. borders in order to prevent terrorists and terrorists’ weapons from entering 

the U.S. while facilitating the flow of legitimate trade and travel.

19TSA’s mission is to protect the nation’s transportation systems to ensure freedom of movement for people and

commerce.

20FEMA is responsible for preparing the nation for hazards, managing federal responses and recovery efforts

following any national incidents or disasters, and administering the National Flood Insurance Program.

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Table 7: Number and Amount of Fiscal Year 2005 Purchase Card Transactions

DHS Component 

Number of 

transactions

(in thousands) 

Amount of

transactions

(in millions) 

Percentage of 

DHS purchase

card payments

Coast Guard 568 $227 54%

CBP 295 66 16

TSA 74 38 9

FEMA 31 32 8

Other DHS components 178 60 13

Total 1,146 $423 100%

Source: GAO analysis of U.S. Coast Guard Finance Center’s reports.

Management of the DHS Purchase Card Program

DHS’s Purchase Card Program Management Office, which is within the office of the 

Under Secretary for Management—Chief Financial Officer (CFO), is responsible for the 

overall management of the DHS purchase card program. In carrying out its management

responsibilities, the Purchase Card Program Management Office has a directive for use 

by all DHS components on the Government Purchase Card Program. In addition, the 

Office of the Chief Financial Officer developed a draft manual, which has been in draft 

since March 8, 2004. This draft manual describes the various roles and responsibilities of

key program management functions and the overall business process for carrying out the 

purchase card program. Regarding key management functions, the Agency Program

Coordinator has responsibility for managing the overall program and working through

the CFO and Chief Procurement Officer on purchase card issues; developing, 

implementing, and updating the program policies, procedures, and guidelines; and 

ensuring the implementation of and compliance with adequate internal controls in the 

management of the program, as well as serve as the communication liaison between DHS

and the U.S. Bank. Further, within each DHS component, an Organizational Program 

Coordinator(s) is designated to oversee the purchase card program within that 

component (e.g., Coast Guard). Their responsibilities include controlling issuance, 

revocation, and the closing of purchase cards; providing, monitoring, and maintaining

training prior to issuance of the purchase card and annual refresher training for all 

cardholders and approving officials; and managing and conducting oversight of the 

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program (includes span of control and ongoing and annual reviews to ensure compliance 

with the program requirements). Figure 3 illustrates DHS’s business process for carrying

out the purchase card program.

Figure 3: DHS Purchase Card Program Flowchart

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Coast Guard Is a Steward for DHS’s Purchase Card Program

Since February 2004, the U.S. Coast Guard Finance Center (Finance Center) has been

operating under a Memorandum of Understanding with DHS to be the servicing agent 

providing centralized invoicing and payment of all DHS purchase card activity. The 

Finance Center has developed and implemented a system that supports the receipt of 

daily invoices from U.S. Bank for all DHS components, supports the payment of those 

invoices within one business day of receipt, and provides transmission of an electronic 

file containing transaction data to each component’s accounting system. The intent of 

the daily payment is to maximize the performance rebates earned by the purchase card 

program.

On a daily basis, U.S. Bank’s Customer Automation and Reporting Environment 

generates an invoice file containing transaction level data for all DHS purchase card 

activity posted on the previous day and submits the file to the Finance Center, where the 

file is loaded into the Finance Center’s Consolidated Billing System. Among other things, 

this system is used to process all purchase card transactions and provide data to 

participating DHS components. Cardholders are responsible for identifying any

discrepancies on their billing statements and contacting the merchant to resolve any

disputed transactions. If the cardholder is unable to resolve the dispute with the 

merchant, he or she has up to 60 days from the statement date to file a dispute form with 

U.S. Bank and request a credit. Approving officials are responsible for (1) receiving and 

reviewing their assigned cardholders’ monthly statement to ensure all charges were 

allowable and conducted within acquisition guidelines, (2) determining that the goods or 

services were received, and documentation is complete, and (3) verifying that the

cardholder follows through in resolving any disputed transactions with the merchant and 

U.S. Bank. An approving official’s certification of the monthly billing statement cannot 

occur until the cardholder, or in some cases, the approving official, performs and 

completes a reconciliation of all charges on the statement.

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Appendix III: Scope and Methodology 

To assess whether DHS’s internal control policies and procedures are adequately

designed to provide reasonable assurance that fraud, waste, and abuse are minimized

and are operating effectively to prevent or detect potentially fraudulent, abusive, and 

improper purchase card use, we reviewed and tested key purchase card controls over 

purchase card use by DHS’s major organizational elements.21 Our review of purchase 

card controls covered:

x DHS’s and its organizational elements’ overall management control environment, 

including (1) management’s role in establishing needed controls, (2) the numbers of 

cardholders, cardholder accounts, approving/billing officials, and program 

coordinators, (3) training provided for cardholders, (4) monitoring and audit of 

purchase card activity, and (5) effectiveness of purchase card infrastructure;

x attribute tests on a statistical sample of key controls over purchase card 

transactions made during the period from June 13, 2005 through November 12, 

2005, including (1) proper written preauthorization of purchases, (2) maintenance

of sales documentation, (3) documented performance of independent confirmation

that items or services paid for with the purchase card were received, and (4) 

documentation that cardholders gave priority to designated sources; and

x data mining of the population of transactions made during the above mentioned test 

period to identify potentially fraudulent, improper, and abusive or questionable 

purchase card transactions.

21Major organizational elements include the U.S. Secret Service, U.S. Coast Guard, Transportation Security 

Administration, U.S. Customs and Border Protection, U.S. Citizenship and Immigration Services, U.S. Immigration

and Customs Enforcement, Federal Emergency Management Agency, Federal Law Enforcement Training Center,

and other headquarters-level entities.

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Departmental and Organizational Element Control Environment

To assess the overall management control environment for DHS’s purchase card 

program, we obtained an understanding of the processes utilized by DHS and its major 

organizational elements by interviewing officials involved in overseeing and managing

the various purchase card activities, analyzing each entity’s control procedures and 

processes, and performing walk-throughs of the detailed processes utilized at the major 

organizational elements to request, approve/authorize, make, document, and 

verify/certify transactions using purchase cards. We also analyzed the database of active 

cardholders to assess the ratios of approving/billing officials to assigned cardholders and 

cardholder accounts and assessed cardholder training. For these tests, we utilized the 

active member cardholder database provided by U.S. Bank covering the period from 

June 2005 through December 2005. We also visited and interviewed officials of the Coast 

Guard’s Finance Center, Chesapeake, Virginia, DHS’s purchase card paying agent, to 

discuss the payment and management oversight processes utilized to ensure the timely

processing of payments and the reasonableness and appropriateness of transactions.

Statistical Sample of Internal Control Procedures

We obtained and reviewed the U.S. Bank-provided database of purchase card 

transactions covering the period from June 13, 2005, through November 12, 2005, and 

analyzed a random probability sample of these transactions to assess compliance with 

key internal controls. The sample design was a simple random probability sample of 96 

transactions. The sample size was calculated to achieve a precision of any estimated 

internal control error rate for the category (except accountable property) to be +/- 10 

percentage points or less. With this probability sample, each transaction in the 

population had a known, nonzero probability of being selected. Each selected 

transaction was subsequently weighted in the analysis to account statistically for all the 

transactions in the population, including those not selected.

Because we selected a sample of transactions, our results are estimates of a population

of transactions and thus are subject to sample errors that are associated with samples of 

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this size and type. Our confidence in the precision of the results from this sample is

expressed in 95-percent confidence intervals. The 95-percent confidence intervals are 

expected to include the actual results in 95 percent of the samples of this type. We 

calculated confidence intervals for this sample based on methods that are appropriate 

for a simple random probability sample.

To test compliance with internal controls, we applied procedures in GAO’s Audit Guide:

Auditing and Investigating the Internal Control of Government Purchase Card 

Programs (GAO-04-87G, Washington, D.C.: November 2003) and internal control 

standards included in the draft manual dated March 8, 2004. We utilized DHS’s draft 

manual because we found that DHS had not issued an official standardized set of 

purchase card policies and procedures since the department was established by the 

Homeland Security Act in November 2002. Further, our review of the draft procedures

showed that the procedures contained a reasonable set of standards that were generally

consistent with good purchase card operating policies and procedures utilized by other 

governmental entities we had audited and covered in GAO’s Audit Guide. We also 

reviewed (1) OMB Circular No. A-123, (2) Treasury Financial Manual Vol. 1 Part 4-4500 

“Government Purchase Cards,” (3) FAR, (4) organizational policies, including draft 

organizational policies, and (5) GAO’s Standards for Internal Controls.

Data Mining

In addition to selecting statistically projectable samples of transactions to test specific 

internal controls, we also made nonrepresentative selections of transactions from these 

entities. We conducted separate analysis of transactions that appeared on the surface to 

be potentially fraudulent, improper, and abusive or questionable.

Our data mining for transactions was limited in scope. For this review, we scanned the 

population of transactions for vendor names and merchant codes that are likely to sell 

goods or services that are personal in nature, listed on DHS’s restricted/prohibited lists, 

or are otherwise questionable. Our expectation was that transactions with certain

vendors had a more likely chance of being fraudulent, improper, and abusive or 

questionable. We reviewed and made inquiries about 200 transactions with vendors that 

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sold such items as sporting goods, sporting event tickets, groceries, clothing, jewelry, 

alcohol, entertainment, or were third-party payers, such as PayPal. Our inquiries also 

identified some purchases that turned out to be legitimate in terms of need but could 

have been obtained from vendors at significant price savings. We found other purchases

were made during conditions of exigency that under normal operating conditions would 

not or should not have been made. While we identified, and performed limited inquiries

about, some potentially fraudulent, improper, and abusive or questionable transactions, 

our work was not designed to identify, and we cannot determine, the extent of 

fraudulent, improper, and abusive or questionable transactions.

We briefed DHS on the details of our work, including our scope, and methodology and 

our findings. We conducted our audit work from October 2005 through June 2006 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.

(192211)

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Page 53 GAO-06-1117 Purchase Cards

Appendix II

Comments from the Department of Homeland 

Security ApendxiI
Appendix II

Comments from the Department of Homeland 

Security

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Appendix II

Comments from the Department of Homeland 

Security

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Appendix II

Comments from the Department of Homeland 

Security

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Appendix II

Comments from the Department of Homeland 

Security

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Appendix II

Comments from the Department of Homeland 

Security

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Appendix II

Comments from the Department of Homeland 

Security

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