GAO-01-294R Survey on Third Party Payment Usage

United States General Accounting Office

Washington, DC 20548

December 22, 2000

The Honorable John R. Kasich

Chairman, Committee on the Budget

House of Representatives

The Honorable John E. Sununu

House of Representatives

Subject: Third Party Payments: Survey on Use and Related Internal Controls by

Government Entities

This letter summarizes the information we provided during a December 12, 2000,

briefing to staff from the Budget Committee and from Representative Sununu’s office.

In your May 17, 2000, letter to the Comptroller General, you, as Chairman of the

Committee on Budget and Chairman of the Housing and Infrastructure Task Force1

respectively, had asked us to conduct a survey on the use of third party payment

instruments by government entities. Third party payments represent blank-form

financial instruments that enable government employees to directly pay authorized

mission-specific, mission-related, and/or administrative expenses when other forms

of payment, such as traditional government check, electronic funds transfer, or

government credit card, are not feasible or possible. Your request for the survey

followed a joint hearing before the Committee and the Housing and Infrastructure

Task Force into abuses and mismanagement of a third party payment system used by

the National Transportation Safety Board (NTSB).2

As agreed with your office, the objectives of the survey were to identify, for fiscal

years 1997, 1998, and 1999:

• Which government entities used third party payment instruments.

• The number of third party payment instruments issued.

• The total dollar value of third party payment instruments issued.

• The purposes for which the third party payment instruments were issued.

1

At the time of the joint request for the survey, Representative Sununu was the Chairman of the

Committee on Budget’s Housing and Infrastructure Task Force. On September 13, 2000, the Task

Force’s term of operation ended.

2

Separately, you requested that GAO conduct a preliminary review of NTSB internal controls and

compliance with applicable laws and regulations to identify areas that may be vulnerable to fraud,

waste, and abuse. Work on that request is underway.
Page 2 GAO-01-294R Survey on Third Party Payment Usage

• Whether government entities had basic internal controls related to their entity’s

use of third payment instruments.

The enclosed briefing slides summarize the work we performed and the survey

responses, which were provided during the briefing. As noted in the briefing slides,

we did not verify either the quantitative data or comment information provided by the

respondents.

Results in Brief

As identified in attachments 1 and 2 to the enclosed briefing slides, a total of 86

entities responded to our survey. Forty of the 86 reported that they had used third

party payment instruments at some time during fiscal years 1997 through 1999. For

these 40, although the reported number of payment transactions declined 3.7 percent

during this period – from 1.91 million in fiscal year 1997 to 1.84 million in fiscal year

1999 – the reported total dollar amount associated with these transactions increased

13.4 percent – from $725.2 million in fiscal year 1997 to $822.6 million in fiscal year

1999. Based on the transaction data reported, the average dollar value of each

payment increased 17.6 percent, from $380 in fiscal year 1997 to $447 in fiscal year

1999. In addition, for those entities that reported transactions and dollar data, almost

twice as many reported using third party payment instruments in fiscal year 1999 than

reported using them in fiscal year 1997.

Among the 40 entities, the most common reasons cited by respondents for using third

party payment instruments were (1) to pay for small purchases of supplies and

services, (2) to pay contractors that either could not or would not accept government

checks, electronic funds transfers (EFTs) or credit card payments, (3) to make

emergency payments, (4) to provide immediate reimbursement for out-of-pocket

expenses, or (5) as an alternative to disbursing a cash advance.

In response to questions concerning whether entities employed certain internal

controls, all 40 entities reported restricting the number of employees authorized to

use third party payments and monitoring, in some way, third party payment activities,

with slightly more than half (23) responding that the monitoring occurred at least

annually. Thirty-nine of the 40 entities reported monitoring and/or reviewing

employee use of third party payments, and 33 reported monitoring service providers’

payment process. Thirty-seven of the 40 entities reported requiring authorization

signatures, submission of supporting documentation, and set dollar limits for

individual payment amounts. Thirty-six of the 40 entities reported requiring that

payments be recorded timely in accounting records; 35 entities also reported

requiring independent review and inspection of payment supporting documentation

and timely reconciliation of payments processed by service providers to internal

accounting records. Thirty-four of the 40 entities reported requiring that payments be

sequentially numbered; 32 entities reported establishing written policies or guidance

on the use of third party payments; and 30 entities reported segregating incompatible

duties associated with use and handling third party payments.
Page 3 GAO-01-294R Survey on Third Party Payment Usage

Scope and Methodology

To address your specific questions about government entities’ use of third-party

payment instruments in fiscal years 1997, 1998 and 1999, we reviewed documents

related to NTSB use of the Rapidraft Payment System, General Services

Administration (GSA) Government Purchase Card regulations, and an informal

survey by the department of the Treasury’s Financial Management Service (FMS) on

Chief Financial Officer (CFO) agencies’ use of imprest funds and third party payment

instruments as replacement for them. We also reviewed background materials

describing third party payment systems offered by various service providers. We held

discussions with Treasury, GSA, and other agency officials. We developed and

pretested a survey questionnaire, and developed a population of entities to receive

the survey using GAO’s fiscal year 2001 Compendium of Budget Accounts3 to identify

those entities that obligated over $10 million in federal funds in fiscal year 1999. We

did not verify either the quantitative data or comment information provided by

respondents. We conducted our work in compliance with generally accepted

government auditing standards. We performed our work from June through

December 2000.

-----

We are sending copies of this letter to Representative John M. Spratt, Jr., Ranking

Minority Member of the Committee on the Budget and Representative Ken Bentsen,

Ranking Minority Member on the Housing and Infrastructure Task Force. The letter

will also be available on GAO’s home page at http://www.gao.gov.

If you have any questions about this letter or the briefing, please contact me at (202)

512-9508 or John Reilly, Assistant Director at (202) 512-9517. Key contributors to this

assignment were Patt Summers, Don Campbell and Mike Vu.

Linda Calbom

Director, Financial Management and Assurance

Enclosure

3

Compendium of Budget Accounts: Fiscal Year 2001 (GAO/AIMD-00-143; April 2000).
Enclosure

Page 4 GAO-01-294R Survey on Third Party Payment Usage

Briefing to the House Committee on the Budget

1

Survey Results on the Use of Third Party Payment

Instruments by Government Entities

Briefing to the House Committee on the Budget

December 12, 2000
Enclosure

Page 5 GAO-01-294R Survey on Third Party Payment Usage

2

Contents

• Objectives

• Background

• Scope and Methodology

• Survey Results
Enclosure

Page 6 GAO-01-294R Survey on Third Party Payment Usage

3

Objectives

• The Chairman of the House Committee on the Budget and

the Chairman of the Subcommittee on Housing and

Infrastructure Task Force asked us to conduct a survey for

fiscal years 1997, 1998 and 1999 to identify:

• Which government entities used third party payment

instruments.

• The number of third party payment instruments issued.

• The total dollar value of third party payment instruments

issued.

• The purposes for which these third party payment

instruments were issued.

• Whether government entities using third party payment

instruments have basic internal controls in operation.
Enclosure

Page 7 GAO-01-294R Survey on Third Party Payment Usage

4

Background

• Third party payment instruments can take the form of either a draft or a

convenience check. Both forms of payment are blank-form checks

provided to a government employee for use in paying authorized

mission-specific, mission-related, and/or administrative expenses.

• Third party draft checks represent check writing privileges arranged

through agency contracts with financial institutions known as service

providers.

• Convenience checks represent check writing privileges provided via

options available under the General Services Administration’s (GSA)

Government Purchase Card Program.

• Pursuant to a Treasury policy directive, these third party payment

instruments may be used when payment by government check,

purchase card, or electronic funds transfer is not feasible or possible.
Enclosure

Page 8 GAO-01-294R Survey on Third Party Payment Usage

5

Scope and Methodology

• In order to obtain the requested information, we

• Reviewed background materials -- Documents related to

NTSB use of the Rapidraft Payment System, GSA

Government Purchase Card regulations, Treasury/FMS

informal survey on imprest funds usage at CFO agencies

and the use of third party payment instruments to

replace imprest funds.

• Held discussions with Treasury, GSA, financial service

providers, as well as other agency officials.

• Developed and pre-tested a survey questionnaire to

obtain the requested information on third party payment.
Enclosure

Page 9 GAO-01-294R Survey on Third Party Payment Usage

6

Scope and Methodology

(cont.)

• In preparing and administering our survey, we developed a

population of entities to receive the survey.

• We used GAO’s FY 2001 Compendium of Budget

Accounts to select those entities that obligated more than

$10 million in federal funds in fiscal year 1999.

• For purposes of this survey, we refer to the population as

“government entities” based solely on their receipt of

more than $10 million in funds from the federal

government in FY 1999.

• We excluded the House, Senate, and Judicial branch

entities.
Enclosure

Page 10 GAO-01-294R Survey on Third Party Payment Usage

7

Scope and Methodology

(cont.)

• We sent the survey to 89 entities and received responses

from 86.

• Of the 86 respondents,

• 75 submitted entity-wide responses.

• 11 submitted a total of 103 separate responses

covering individual components e.g., departments,

bureaus, agencies and/or regional offices.

• We compiled the component responses for each of

the 11 entities into a single response. Where entity

components provided differing responses, we

determined the entity-wide response based on the

majority of responses received.
Enclosure

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8

Scope and Methodology

(cont.)

• We reviewed and tabulated the 86 entity responses

received.

• We did not verify either the quantitative data or

comment information provided by respondents.

• We conducted our work in compliance with applicable

provisions of generally accepted government auditing

standards.

• We performed our work between June and December,

2000.
Enclosure

Page 12 GAO-01-294R Survey on Third Party Payment Usage

9

Survey Results

Usage of Third Party Instruments

• 40 of the 86 entities reported that they used third party

payment instruments at some time during fiscal years

1997 through 1999. (See Attachment I for a listing of

the 40 entities.)

• 46 of the 86 entities reported that they did not use

third party instruments at any time during fiscal years

1997 through 1999. (See Attachment II for a listing of

the 46 entities.)
Enclosure

Page 13 GAO-01-294R Survey on Third Party Payment Usage

10

Survey Results (cont.)

For the 40 entities that reported using third party

instruments, the number of payment transactions declined

3.7 percent from 1.91 million in FY1997 to 1.84 million in

FY1999. Number of transactions

(in millions)

1.909 1.937

1.839
Enclosure

Page 14 GAO-01-294R Survey on Third Party Payment Usage

11

Survey Results (cont.)

For the 40 entities that reported using third party

instruments, the total dollar amounts increased 13.4

percent from $725.2 million in FY1997 to $822.6 million in

FY1999.

Dollars reported

(in millions)

$725.2 $780.5 $822.6
Enclosure

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12

Survey Results (cont.)

• For those entities who reported transactions and dollar data

in their survey response, the number who reported using

third party payments in 1999 (36) was almost twice the

number who reported using third party payments in 1997

(19).

• Over the three year period from FY 1997 through FY 1999,

the average dollar amount of each payment increased from

$380 to $447, for a total increase of 17.6%
Enclosure

Page 16 GAO-01-294R Survey on Third Party Payment Usage

13

Survey Results (cont.)

• The 40 entities cited a variety of reasons -- often more than

one -- for using third party payment instruments. The most

common reasons reported were:

• To pay for small purchases for supplies and services

(32 entities).

• To pay contractors that either could not or would not

accept government checks, EFTs, or credit card

payments (31 entities).

• To make emergency payments (25 entities).

• To provide immediate reimbursement for out-of-pocket

expenses (25 entities).

• As an alternative to disbursing a cash advance

(21 entities).
Enclosure

Page 17 GAO-01-294R Survey on Third Party Payment Usage

14

Survey Results (cont.)

• In response to survey questions about whether entities

have basic internal controls over the use of third-party

payment instruments, the 40 entities reported management

monitoring and review activities as follows.

• Third-party payment activities monitored

in some way

• At least annually

• Employee use monitored and/or reviewed

• Service provider payment process monitored

and/or reviewed

• Written policies or guidance established

Yes No

40 0

23 —

39 1

33 7

32 8
Enclosure

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15

Survey Results (cont.)

• In response to a list of 9 potential internal controls that might

be employed to manage and control third party payments,

entities reported those that applied to their use, as follows.

• Number of employees authorized to

use third party payments was restricted.

• Specific dollar limits set on individual

payment amounts.

• Required authorization signatures.

• Required the submission of supporting

documentation.

Yes No

40 0

37 3

37 3

37 3
Enclosure

Page 19 GAO-01-294R Survey on Third Party Payment Usage

16

Survey Results (cont.)

• Timely recording of payments in accounting records.

• Independent review and inspection of supporting

documentation for each payment.

• Timely reconciliation of payments processed by

service provider to internal accounting records.

• Sequential numbering of payment instruments.

• Segregation of incompatible duties associated

with using and handling payment instruments.

Yes No

36 4

35 5

35 5

34 6

30 10
Enclosure

Page 20 GAO-01-294R Survey on Third Party Payment Usage

17

Survey Results (cont.)

• 4 entities offered other internal controls they employed,

that were not listed in the survey.

• As noted in the Scope and Methodology, we did not verify

each responding entity response to these questions.
Enclosure

Page 21 GAO-01-294R Survey on Third Party Payment Usage

Briefing Attachments
Enclosure

Page 22 GAO-01-294R Survey on Third Party Payment Usage

(917618)