Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse
Published: 2001-11-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO reviewed purchase card activity at the Space and Naval Warfare Systems Command (SPAWAR) Systems Center and the Navy Public Works Center in San Diego and found significant breakdowns in internal controls over purchase card transactions, including fraudulent, improper, and abusive purchases and theft and misuse of government property. Neither SPAWAR nor the Navy Public Works Center had effective policies for issuing purchase cards, establishing credit limits, and minimizing the federal government's financial exposure. Any employee having supervisory approval could get a card.
section_title: What GAO Found
paragraphs: GAO found that the units did not do credit checks on prospective cardholders. GAO also found that nearly half of SPAWAR's fiscal year 2000 purchase card transactions and more than half of the Navy Public Works Center's transactions were made by employees who did not have documented evidence of timely training. Policies for rebate management were deficient, including a lack of procedures to maximize rebates and ensure that bank calculations of rebates were correct. Management was not effectively using internal reviews and audits to determine whether purchase card internal controls were effectively implemented. These internal control weaknesses allowed purchases that were potentially fraudulent, improper, or abusive. GAO summarized this report in testimony before Congress ( GAO-01-995T , July 2001).

section_title: Letter
paragraphs: On July 30, 2001, we testified before the Subcommittee on Government  Efficiency, Financial Management, and Intergovernmental Relations on the  results of our review of internal controls over purchase card activity at two  Navy units in San Diego, California.  In our testimony, which is reprinted in  appendix I, we reported that the two Navy units we reviewed had a  significant breakdown in internal controls over the $68 million in fiscal year  2000 purchase card transactions that we tested, leaving the Space and  Naval Warfare Systems Command (SPAWAR) Systems Center and the Navy  Public Works Center vulnerable to fraudulent, improper, and abusive  purchases and theft and misuse of government property.  This report  summarizes the results of our review and makes specific recommendations  for corrective action.
Overview of Testimony In our testimony, we stated that a weak internal control environment at the  SPAWAR Systems Center San Diego and the Navy Public Works Center San  Diego contributed to internal control weaknesses, fraud, and abuse.  Our  specific findings included the following.
Neither SPAWAR nor the Navy Public Works Center had effective  policies for issuance of purchase cards, establishing credit limits, and  minimizing the federal government’s financial exposure.  Any employee  having supervisory approval could get a card.  These units did not  perform credit checks on prospective cardholders.
Nearly half of SPAWAR’s fiscal year 2000 purchase card transactions and  over half of the Navy Public Works Center’s transactions were made by  employees who did not have documented evidence of timely training.
Policies for rebate management were deficient, including a lack of  procedures to maximize rebates and ensure that bank calculations of  rebates were correct.
Management was not effectively utilizing internal reviews and audits to  determine whether purchase card internal controls were being  effectively implemented.
Three basic internal controls that we tested— (1) independent,  documented receipt and acceptance of goods and services,  (2) independent, documented certification of monthly purchase card  statements, and (3) proper accounting for purchase card transactions— were ineffective.  In addition, we found that easily pilferable or sensitive  items included in statistical samples of transactions that we tested were  not recorded in the units’ accountable property records, as required, to  help prevent theft, loss, and misuse of government assets.  The two units  did not record a total of 46 of the 65 accountable items included in our  sampled transactions in their property records, and they were unable to  provide conclusive evidence that 31 of the 65 items, including laptop  computers, personal digital assistants (PDA) such as Palm Pilots, and  digital cameras, were in the possession of the government.
Weak internal controls contributed to five recent Naval Audit Service cases  of alleged purchase card fraud related to Navy units in the San Diego area,  including two involving Navy Public Works Center employees.  One case  has been successfully prosecuted, while the remaining four cases are still  under investigation.  According to Naval Criminal Investigative Service  investigators, one of the ongoing cases involved as many as 2,600  compromised Navy San Diego purchase card accounts, including 684  accounts for which specific account number information was obtained.  As  of May 21, 2001, we identified 22 compromised SPAWAR accounts that  were still open.  The financial exposure related to credit limits associated  with these 22 accounts is $900,000.
The specific internal control weaknesses that we identified at the two units  we reviewed contributed to additional purchases that we believe are  potentially fraudulent, improper, or abusive.
We found records of unauthorized, potentially fraudulent purchases of  personal items, including cosmetics, gift certificates, and clothing at  both units.  We referred these transactions to our Office of Special  Investigations for further investigation.
The abusive purchases we identified relate primarily to SPAWAR San  Diego and include items purchased at excessive cost, or items of  questionable government need, or both.  For example, we found  purchases for flat panel computer monitors costing from about $800 to  $2,500 each, compared to standard General Services Administration  (GSA) schedule monitors costing about $300 each.
We also found routine purchases without documented government need  at SPAWAR, including personal digital assistants, such as Palm Pilots, as  well as purchases of $100 designer Palm Pilot carrying cases and two  $400 designer briefcases.  The Navy Public Works Center San Diego also  had numerous purchases of personal digital assistants.  It appears that  these items and the flat panel monitors were purchased to satisfy the  personal preferences of purchase cardholders.
Improper transactions involved SPAWAR’s use of federal funds for  personal items, such as flowers for Secretary’s Day and food for  employees, and the purchase of a $1,500 file cabinet from Macy’s.   Although purchases of file cabinets are subject to rules prescribed in  Title 41 of the Code of Federal Regulations, we found no documented  evidence that SPAWAR followed these rules.
We also identified a number of purchases made on the same day from  the same vendor, which appeared to circumvent cardholder single  transaction limits and the more stringent $2,500 micropurchase  threshold.  Split purchases are specifically prohibited by the Federal  Acquisition Regulation.
In response to concerns raised by Chairman Horn during the hearing, we  stated that we question whether the purchase card—rather than negotiated  contracts—was the right vehicle for acquiring certain types of items.   Chairman Horn also asked whether the purchase card should be used to  acquire computers and other equipment or property items individually that  could be more economically and efficiently procured through bulk  purchases.  DOD and Navy witnesses stated that they would examine these  issues.
When we brought the control failures and other issues we identified to the  attention of the Executive Officer at the Navy Public Works Center San  Diego, he demonstrated a proactive position to identifying and correcting  the weaknesses.   In addition, the SPAWAR Systems Center San Diego  Commanding Officer stated that he planned to implement an automated  enterprise resource planning system to help improve controls.  However,  the Commanding Officer also testified that for the most part, SPAWAR had  good controls and employees that could be trusted. However, as noted in  our testimony, we found significant problems with every management  aspect of the SPAWAR Systems Center San Diego purchase card program.
This report contains our recommendations for improvements in controls  over the purchase card acquisition, payment, and accounting processes.  In  commenting on a draft of this report, DOD concurred with the majority of  our recommendations.  However, DOD did not concur with three  recommendations, and it partially concurred with seven other  recommendations.  In addition, DOD stated that the SPAWAR Systems  Center in San Diego and the Navy Public Works Center San Diego had  initiated or completed corrective actions on some of our  recommendations.  As agreed with your offices, we plan to assess the  adequacy and effectiveness of these two San Diego Navy units’ corrective  actions during the next few months and advise you of the results of our  work.  See the "Agency Comments and Our Evaluation" section of this  report for our discussion of DOD’s comments, which are reprinted in  appendix II.
We performed our work from August 2000 through June 2001 in accordance  with 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.  Our testimony, which  includes our detailed findings and our objectives, scope, and methodology,  is reprinted in appendix I.
subsections: section_title: Conclusions
paragraphs: The serious breakdown in internal controls at the SPAWAR Systems Center  San Diego and the Navy Public Works Center San Diego are the result of a  weak overall internal control environment, flawed or nonexistent policies  and procedures, and employees that do not adhere to valid policies.  We  found significant problems with every aspect of purchase card  management that we reviewed at SPAWAR and the Navy Public Works  Center.  To fix these problems, SPAWAR and Navy Public Works Center  management will need to demonstrate leadership in this area and establish  accountability, proper incentives, and consequences for their employees in  order to ensure acceptable behavior.
section_title: Recommendations for Executive Action
paragraphs: The following are our recommendations to address the key findings related  to the weak  management control environment discussed in our testimony.
Proliferation of Cardholders We recommend that the Commanding Officer of the SPAWAR Systems  Center San Diego and the Commanding Officer of the Navy Public Works  Center San Diego work with the Naval Supply Systems Command and  DOD’s Purchase Card Joint Program Management Office to do the  following.
Establish specific policies and strategies governing the number of  purchase cards to be issued with a focus on minimizing the number of  cardholders.
Develop criteria for identifying employees eligible for the privilege of  cardholder status.  As part of the effort to develop these criteria, assess  the feasibility and cost-benefit of performing credit checks on  employees prior to assigning them cardholder responsibilities to ensure  that employees authorized to use government purchase cards have  demonstrated credit worthiness and financial integrity.
Develop policies and strategies on credit limits provided to cardholders  with a focus on minimizing specific cardholder spending authority and  minimizing the federal government’s financial exposure.
subsections: section_title: Training
paragraphs: We recommend that the Commander of the Naval Supply Systems  Command  confirm that required training has been completed and documented, and  incorporate into purchase card training programs any relevant changes  in policies and procedures made as a result of the recommendations in  this report.
section_title: Rebates
paragraphs: We recommend that the Commander of the Naval Supply Systems  Command work with the Navy Comptroller and the Defense Finance and  Accounting Service to   investigate ways to maximize potential rebates, such as (1) working  with Citibank to facilitate timely receipt of monthly purchase card  statements and (2) reducing the time associated with mailing and  receipt of hard copy billing statements,  establish effective policies and procedures for routinely calculating and  verifying Citibank rebates, and   develop guidance for routine distribution of rebate earnings to Navy  units and activities.
section_title: Monitoring and Review
paragraphs: We recommend that the Commander of the Naval Supply Systems  Command  establish in NAVASUP Instruction 4200.94, further guidelines for an  effective internal review program, such as having reviewers analyze  monthly summary statements to identify (1) potentially fraudulent,  improper, and abusive purchases and (2) any patterns of improper  cardholder transactions, such as purchases of food or other prohibited  items,  revise NAVSUP Instruction 4200.94 to require that (1) written reports on  the results of internal reviews along with any recommendations for  corrective actions be prepared and submitted to local management and  cognizant commands and (2) commands identify and report systemic  weaknesses and corrective action plans to the Naval Supply Systems  Command for monitoring and oversight,  require purchase card Agency Program Coordinators to report in writing  to the unit commander and the Commander of Naval Supply Systems  Command any internal control weakness identified during the  semiannual program reviews, and  disclose systemic purchase card control weaknesses along with  corrective action plans in the Secretary of the Navy’s Annual Statement  of Assurance prepared under 31 U.S.C. 3512(d) (commonly referred to  as the Federal Managers’ Financial Integrity Act of 1982).
The following are our recommendations to address breakdowns in key  controls over the purchase card program at the SPAWAR Systems Center  San Diego and the Navy Public Works Center San Diego.
section_title: Receipt of Goods and Services
paragraphs: the Commander of the Naval Supply Systems Command revise NAVSUP  Instruction 4200.94 to eliminate ambiguous language suggesting that  advance independent authorization of a purchase can be substituted for  independent confirmation that goods and services ordered and paid for  with a purchase card have been received and accepted by the  government, and  the Commanding Officer of the SPAWAR Systems Center San Diego and  the Commanding Officer of the Navy Public Works Center San Diego  implement procedures to require and document independent  confirmation of receipt of goods and services acquired with a purchase  card.
section_title: Proper Payment Certification
paragraphs: To provide assurance that certifications of monthly purchase card  statements for payment reflect certifying officer responsibilities in 31  U.S.C. 3325, 3528, and the approving official’s informed judgment that  purchases are proper, we recommend that   the Commander of the Naval Supply Systems Command revise NAVSUP  Instruction 4200.94 to require that (1) cardholders notify approving  officials prior to payment that purchase card statements have been  reconciled to supporting documentation, (2) approving officials certify  monthly statements only after reviewing them for potentially fraudulent,  improper, and abusive transactions, and (3) approving officials verify, on  a sample basis, supporting documentation for various cardholders’  transactions prior to certifying monthly statements for payment, and  the Navy Comptroller withdraw the June 3, 1999, policy memorandum  or revise the policy guidance to be consistent with the preceding  recommendation for revising payment certification guidance in NAVSUP  Instruction 4200.94.
section_title: Proper and Timely Accounting
paragraphs: the Commanding Officer of the SPAWAR Systems Center San Diego and  the Commanding Officer of the Navy Public Works Center San Diego  monitor and confirm that purchase card transactions are recorded to  projects that benefited from the goods and services or to relevant  overhead accounts in a timely manner, in accordance with internal  control standards and federal accounting standards,  the Commander of the Naval Supply Systems Command revise NAVSUP  Instruction 4200.94 to require that purchase card expenses be properly  classified in the Navy’s detail accounting records, and  the Commanding Officer of the SPAWAR Systems Center San Diego and  the Commanding Officer of the Navy Public Works Center San Diego  verify that their detail purchase card transaction records reflect the  proper object classification of expense.
section_title: Accountable Property
paragraphs: We recommend that the Commanding Officer of the SPAWAR Systems  Center San Diego and the Commanding Officer of the Navy Public Works  Center San Diego require and verify that accountable property obtained  using a purchase card is promptly recorded in property records as it is  acquired, in accordance with DOD and Navy policies and procedures.
The following are our recommendations to identify and address potentially  fraudulent, abusive and improper purchase card transactions prior to  payment.
section_title: Fraudulent, Improper, and Abusive Transactions
paragraphs: We recommend that the Commander of the Naval Supply Systems  Command do the following.
Act immediately to cancel all known active compromised purchase card  accounts.
Determine whether purchases of excessive cost, questionable  government need, or both, such as items for personal use, including  personal digital assistants (such as Palm Pilots), and flat screen  computer monitors, that were identified by GAO are proper government  purchases.  If not, the Commander should prohibit their purchase.
Establish written policies and criteria requiring documented  justifications and procurement management approval for types of items  that can be acquired with a government purchase card.
Examine purchase card acquisition guidance to determine whether the  purchase card is the right vehicle for acquiring certain goods and  services, such as vehicle and equipment maintenance, installation of  upgraded computer software, and other recurring or installationwide  services, or whether these items should be subject to negotiated  contracts.
Work with the Under Secretary for Acquisition, Technology, and  Logistics and DOD’s Purchase Card Joint Program Office to determine  whether the purchase card should be used to acquire computers and  other equipment or property items individually that could be more  economically and efficiently procured through bulk purchases.
Revise NAVSUP Instruction 4200.94 to make the Instruction consistent  with the Federal Acquisition Regulation, 48 C.F.R. 13.301(a), which  states that the “card may be used only for purchases that are otherwise  authorized by law or regulation.”  The clarifying guidance should  specifically state that in the absence of specific statutory authority,  purchases of items for the personal benefit of government employees,  such as flowers or food, are not permitted and are therefore improper  transactions.
section_title: Split Purchases
paragraphs: We recommend that the Commanding Officer of the SPAWAR Systems  Center San Diego and the Commanding Officer of the Navy Public Works  Center San Diego   prohibit splitting purchases into multiple transactions as required by the  Federal Acquisition Regulation and emphasize this prohibition in  purchase card training provided to cardholders and approving officials,  and    require approving officials to monitor monthly purchase card  statements and identify and report to them regarding any split  purchases and the names of cardholders who made the transactions.
section_title: Overall Accountability
paragraphs: To help ensure that cardholders adhere to applicable purchase card laws,  regulations, internal control and accounting standards, and policies and  procedures, we recommend that the Commander of the Naval Supply  Systems Command revise NAVSUP Instruction 4300.94 to include specific  consequences for noncompliance with these guidelines and enforce the  guidelines.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, DOD stated that it was in overall  agreement with 19 of our 29 recommendations. DOD did not concur with  three recommendations, and it partially concurred with seven other  recommendations.  In addition, DOD indicated that the SPAWAR Systems  Center San Diego and the Navy Public Works Center San Diego have  initiated or completed corrective actions on certain of our  recommendations.  We plan to assess the adequacy and effectiveness of the  corrective actions during the next few months and advise you of the results  of our assessment. The DOD comment letter is reprinted in appendix II.
The recommendations that DOD disagreed with related to four major  issues addressed in our work—(1) the need for specific policies and  strategies on minimizing the number of cardholders, (2) the need for Navy- wide criteria on the types of items that can be acquired using a government  purchase card, (3) whether their purchases of food and flowers are proper,  and (4) the need for Navy guidelines setting forth specific consequences for  noncompliance with applicable purchase card laws, regulations, internal  controls and accounting standards, and policies and procedures.
DOD stated that the Navy executes the department’s purchase card  program in a decentralized manner consistent with DOD policy.  We are  concerned that the lack of adequate Navy-wide guidance and the delegation  of policy-making responsibility to local commands without Navy  Department oversight will continue to result in a weak management  control environment and the types of problem transactions identified in  this report.  We plan to examine this issue as part of our ongoing, broader  review of the Navy's purchase card program.
subsections: section_title: Minimizing the Number of Cardholders
paragraphs: DOD stated that it believed that the intent of our recommendation to  establish specific policies and strategies governing the number of credit  cards to be issued was to encourage a manageable span of control between  billing officials and cardholders.  DOD maintained that in accordance with  DOD policy, the Navy's decentralized execution of the purchase card  program allows individual commands to issue purchase cards to employees  as mission requirements warrant.  DOD noted that the Naval Supply  Systems Command’s recently released policy implementing DOD “Span of  Control Goals” will result in approving officials being responsible for  review and payment certification of a reasonable number of cardholder  statements. DOD's "Span of Control Goals" states that as a general rule,  billing officials should have no more than five to seven cardholders  assigned to them for oversight.
We agree with DOD that our recommendation is intended, in part, to ensure  a manageable span of control between approving, or billing, officials and  cardholders. At SPAWAR, we found only one approving official responsible  for reviewing and certifying payment of 1,526 cardholders' monthly  purchase card statements, creating a substantial span of control issue.   Providing several hundred approving officials to create a reasonable span  of control over SPAWAR's 1,526 cardholders would not be a practical or  economical course of action for SPAWAR.  We found no valid justification  for 1,526, 36 percent, of SPAWAR's employees to have purchase cards.   Further, the intent of our recommendation is broader than the span of  control issue.  We are also concerned about the financial exposure  associated with the excessive number of cardholders.  As stated in our  testimony, the two Navy units had given purchase cards to over 1,700  employees, most of whom had credit limits of $20,000 or more and the  authority to make their own purchase decisions.  For example, most of  SPAWAR's 1,526 cardholders had a $25,000 credit limit and most of the  Navy Public Works Center's 254 cardholders had a $20,000 credit limit.  The  proliferation of cardholders, particularly at SPAWAR San Diego,  significantly increased the government's financial exposure and created a  situation where it was virtually impossible to maintain a positive control  environment.  To reduce the financial exposure associated with the large  number of cardholders, we continue to recommend that the two Navy  commands establish specific policies and strategies governing the number  of purchase cards to be issued with a focus on minimizing the number of  cardholders.   In addition, the Naval Supply Systems Command guidance  implementing the Department's "Span of Control Goals" merely restates  DOD’s guideline that approving officials should have no more than five to  seven cardholders under their purview—it does not provide specific  guidance for reducing the number of cardholders.
DOD also stated that the criteria for employees being issued purchase  cards should be a function of mission requirements and the level of trust  between the cardholder and supervisor.  Further, DOD stated that the Navy  believes the supervisor's judgment is sufficient as to the trustworthiness of  the employee to obligate on the part of the government.  We continue to  believe that DOD should assess the feasibility and cost benefit of  performing credit checks on employees prior to issuing a purchase card.   Individuals who have a history of personal credit problems are more likely  to improperly use their government purchase cards if their access to  personal credit has been limited.  In fact, our review of the Navy purchase  card fraud cases discussed in our testimony shows this to be true for at  least one of the cases.  Further, as discussed in our testimony, we identified  several cases of potentially fraudulent, improper, and abusive transactions  at both the SPAWAR Systems Center San Diego and the Navy Public Works  Center San Diego that had been certified as proper for payment.  We are  continuing to investigate several of these cases as part of our follow-up  work and plan to assess the correlation between fraudulent, abusive, and  improper use of the government purchase card and cardholders who have  personal credit problems.
section_title: Criteria on the Types of Items That Can Be Acquired Using a Purchase Card
paragraphs: DOD stated that it is the responsibility of the local Navy commands to  establish written policies and procedures and ensure that purchases are  made for official use, meet mission requirements, and are made at a fair  and reasonable price.  DOD also stated that due to differing and unique  mission requirements throughout the Navy, it is difficult to develop a  general listing of what items can be purchased with or without special  justification.  For example, DOD stated that ticket purchases to Disneyland  may be an appropriate purchase not requiring special justification within a  “Non-Appropriated Funded activity,” but may require such documentation  for an “Appropriated Funded activity.”
We continue to believe there is a need for Navy-wide guidance in the form  of written policies and criteria requiring documented justifications and  procurement management approval for types of items can be acquired with  a government purchase card.  For example, we found some instances  where employees were buying flat panel monitors costing from $800 to  $2,500 each while others were buying traditional monitors costing about  $300 each.  In addition, at SPAWAR, we found that employees made abusive  purchases of high-cost personal items, including two designer brief cases  costing about $400 each and several designer palm pilot cases costing  about $100 each.  In these instances, the decision of what to buy and the  quality of the items purchased often appeared to be a matter of cardholder  preference.  Further, the fact that such purchases were not questioned  supports our recommendation that specific written guidelines be  established for purchases of these types of items.  DOD’s example of the  purchase of tickets for Disneyland is another example of the type of  purchase card use that should be specifically addressed in the NAVSUP  Instruction 4200.94 to avoid misuse of the card and abusive purchases.   Establishing criteria for determining the propriety of purchases of high- cost items and prohibiting the purchase of personal preference items, such  as designer brief cases and designer palm pilot cases, would help prevent  abusive purchases in the future and avoid unnecessary federal  expenditures.
section_title: Propriety of Buying Food and Flowers Using a Purchase Card
paragraphs: DOD stated that the present language in the policy section of NAVSUP  Instruction 4200.94 provides clear guidance on the propriety of buying food  and flowers using the purchase card.  We disagree.  The policy section of  NAVSUP Instruction 4200.94 merely states that the “purchase card shall  only be used for authorized U.S. Government purchases.”  We found  numerous potentially fraudulent, improper, and abusive purchases that had  been approved by supervisors as authorized government purchases.  The  Federal Acquisition Regulation (FAR), 48 C.F.R. 13.301(a), states that the  Governmentwide Commercial Purchase Card "may be used only for  purchases that are otherwise authorized by law or regulations."   Therefore,  a procurement using the purchase card is lawful only if it would be lawful  using conventional procurement methods.  Further, the Treasury Financial Manual (TFM) requires agencies to establish guidance on approved  uses of the government purchase card and limitations on types of  transactions permitted.  The NAVSUP Instruction 4200.94 policy statement  does not address these specific purchase card requirements of the FAR or  the TFM.
As stated in our testimony, without statutory authority, appropriated funds  may not be used to furnish meals or refreshments to employees within their  normal duty stations.  Free food and other refreshments normally cannot  be justified as a necessary expense of an agency's appropriation because  these items are considered personal expenses that federal employees  should pay for from their own salaries.  Likewise, appropriated funds may  not be used to purchase gifts for employees or others unless an agency can  demonstrate that the items further the purposes for which the  appropriation was enacted.  The purchase of the flowers and food were  both personal rather than official in nature and, therefore, may not be paid  for with appropriated funds. Given the problems we found, clarifyng the  current guidance on the propriety of purchasing food, flowers, and similar  personal items could help reduce improper purchase card use for these  items.
section_title: Consequences for Noncompliance With Purchase Card Controls
paragraphs: DOD stated that the present language in the NAVSUP Instruction 4200.94  policy section clearly identifies the consequences for fraud, abuse, and  misuse of the purchase card.  We disagree.  The policy section of the  NAVSUP Instruction only states that deliberate misuse of the purchase card  may be prosecuted as fraud.  It does not identify any specific consequences  for failure to follow control requirements, such as the failure to (1) obtain  independent documentation of receipt and acceptance of goods and  services, (2) notify property book officers of accountable items acquired  with a purchase card, (3) properly certify purchase card statements for  payment, and (4) comply with prohibitions on certain purchases and split  transactions.  Our work identified pervasive failures to follow established  controls in these and other areas.  To ensure that the Navy's purchase card  controls are effective, it is critical that the Navy enforce those controls by  establishing specific disciplinary consequences—such as removal of  cardholder status, reprimands, suspension from employment for several  days, and firing—for those employees who fail to follow established  controls even if their action does not amount to fraud against the United  States.  Unless cardholders and approving officials are held accountable for  following key internal controls, the Navy is likely to continue to experience  the types of fraudulent, abusive, and improper transactions identified in  our work.
As agreed with your offices, unless you announce the contents of this  report earlier, we will not distribute this report until 30 days from its date.  At that time, we will send copies of this report to the Secretary of Defense,  the Under Secretary of Defense (Acquisition, Technology, and Logistics),  the Director of the Department’s Purchase Card Joint Program  Management Office, the Under Secretary of Defense (Comptroller), the  Secretary of the Navy, the Navy Comptroller, the Commander of the Naval  Supply Systems Command, the Commander of the Space and Naval  Warfare Systems Command, the Commanding Officer of the Space and  Naval Warfare Systems Command’s Systems Center in San Diego, the  Commander of the Navy Public Works Center, the Commanding Officer of  the Navy Public Works Center in San Diego, and the Director of the  Defense Finance and Accounting Service.  We are also sending copies to  the Chairman of the Senate Committee on Finance; the Chairman and  Ranking Minority Member of the Senate Committee on Governmental  Affairs; the Chairman and Ranking Minority Member of the House  Committee on Government Reform; the Ranking Minority Member of the  Subcommittee on Government Efficiency, Financial Management, and  Intergovernmental Relations, House Committee on Government Reform;  other interested congressional committees; and the Director of the Office  of Management and Budget.  Copies will be made available to others upon  request.
Please contact Gregory D. Kutz at (202) 512-9095 or kutzg@gao.gov, Robert  H. Hast at (202) 512-7455 or hastr@gao.gov, or Gayle Fischer, Assistant  Director at (202) 512-9577 or fischerg@gao.gov, if you or your staff have  any questions concerning this report.  Major contributors to this work are  acknowledged in appendix III.
section_title: Testimony on Purchase Card Control Weakness at Two Navy Units
paragraphs: Mr. Chairman, Members of the Subcommittee, and Senator Grassley: Thank you for the opportunity to discuss Department of Defense (DOD)  internal controls and accounting practices for purchase card transactions  and payments. DOD reported that it used purchase cards—MasterCard or  VISA cards issued to its civilian and military personnel—for more than 10  million transactions valued at $5.5 billion in fiscal year 2000. DOD has  increased the use of purchase cards with the intention of eliminating the  bureaucracy and paperwork long associated with making small purchases  and intends to expand the use of purchase cards over the next several  years. Given the rapid growth of purchase card use at DOD, ensuring that  key controls are in place over the program is critical to protecting the  government from fraud, waste, and abuse.
We began looking into this issue at the request of Senator Grassley, who  was concerned about internal control weaknesses that may have  contributed to reports of purchase card fraud related to Navy programs  based in San Diego, California. As a result, we agreed to obtain and review  DOD fraud case information related to Navy purchase card programs in the  San Diego area and to review purchase card controls and accounting for  two Navy units based in San Diego—the Space and Naval Warfare Systems  Command (SPAWAR) Systems Center and the Navy Public Works Center.  Further background information on the Navy purchase card program is  included in appendix I.
Today, I will discuss the results of our review of Navy purchase card  controls, including (1) the purchase card control environment at the two  Navy units’ San Diego activities and overall management issues that affect  the Navy-wide purchase card program, (2) the results of our test work on  statistical samples of purchase card transactions at the two Navy units,  which identified control weaknesses in four critical areas, and (3)  potentially fraudulent, improper, and abusive transactions made by the two  Navy units. Some of these transactions are similar to those involved in five  specific fraud cases related to Navy programs based in San Diego that had  been identified at the time of our work. Information on the five fraud cases  is presented in appendix II.
subsections: section_title: Background
paragraphs: The Navy’s purchase card program is part of the Governmentwide  Commercial Purchase Card Program, which was established to streamline  federal agency acquisition processes by providing a low-cost, efficient  vehicle for obtaining goods and services directly from vendors. DOD  reported that it used purchase cards for 95 percent of its eligible  transactions—more than 10 million transactions, valued at $5.5 billion—in  fiscal year 2000. The Navy’s reported purchase card activity represented  nearly one third of the reported DOD total during fiscal year 2000—2.7  million transactions, valued at $1.7 billion. According to unaudited DOD  data, SPAWAR and Navy Public Works Center San Diego-based activities  accounted for $68 million (about 15 percent) of the $451 million in fiscal  year 2000 Navy purchase card payments processed by DFAS San Diego.
Although SPAWAR San Diego and the Navy Public Works Center San Diego  are both working capital fund activities, their missions are very different.  SPAWAR San Diego is a highly technical systems operation staffed by  scientists and engineers who provide research, technology, and engineering  support to other Navy programs worldwide. The Navy Public Works Center  San Diego provides maintenance, construction, and operations support to  other Navy programs in the San Diego area.
subsections: section_title: Governmentwide Purchase Card Program Guidelines
paragraphs: Under the Federal Acquisition Streamlining Act of 1994, the Defense  Federal Acquisition Regulation Supplement guidelines, eligible purchases  include (1) micro-purchases (transactions up to $2,500 for which  competitive bids are not needed); (2) purchases for training services up to  $25,000; and (3) payment of items costing over $2,500 that are on the  General Services Administration’s (GSA) pre-approved schedule, including  items on requirements contracts. The streamlined acquisition threshold for  such contract payments is $100,000. Accordingly, cardholders may have  single transaction purchase limits of $2,500 or $25,000, and a few  cardholders may have transaction limits of up to $100,000 or more. Under  the GSA blanket contract, the Navy has contracted with Citibank for its  purchase card services, while the Army and the Air Force have contracted  with U.S. Bank. the Assistant Secretary of the Army for Acquisition, Logistics, and  Technology, has established departmentwide policies and procedures  governing the use of purchase cards. The Under Secretary of Defense  (Comptroller) has established related financial management policies and  procedures in various sections of DOD’s Financial Management  Regulation.
section_title: Navy Purchase Card Acquisition And Payment Processes
paragraphs: The Navy Supply Systems Command is responsible for the overall  management of the Navy’s purchase card program, and has published the  Navy Supply Command (NAVSUP) Instruction 4200.94, Department of the  Navy Policies and Procedures for Implementing the Governmentwide  Purchase Card Program. Under the NAVSUP Instruction, each Navy  Command’s head contracting officer authorizes purchase card program  coordinators in local Navy units to obtain purchase cards and establish  credit limits. The program coordinators are responsible for administering  the purchase card program within their designated span of control and  serve as the communication link between Navy units and the purchase card  issuing bank.
subsections: section_title: Designation of Cardholders
paragraphs: When a supervisor requests that a staff member receive a purchase card,  the agency program coordinator is to first provide training on purchase  card policies and procedures and then establish a credit limit and issue a  purchase card to the staff member. The Navy had a total of about 1,700  purchase card program coordinators during fiscal year 2000, including one  program coordinator at SPAWAR San Diego and one at the Navy Public  Works Center San Diego.
section_title: Ordering Goods and Services
paragraphs: Purchase cardholders are delegated contracting officer ordering  responsibilities, but they do not negotiate or manage contracts. SPAWAR  San Diego and Navy Public Works Center San Diego cardholders use  purchase cards to order goods and services for their units as well as their  customers. Cardholders may pick up items ordered directly from the  vendor or request that items be shipped directly to end users (requestors).  Upon receipt of items acquired by purchase cards, cardholders are to  record the transaction in their purchase log and obtain independent  confirmation from the end user, their supervisor, or another individual that  the items have been received and accepted by the government. They are  also to notify the property book officer of accountable items received so  that these items can be recorded in the accountable property records.
section_title: Payment Processing
paragraphs: The purchase card payment process begins with receipt of the monthly  purchase card billing statements. Section 933 of the National Defense  Authorization Act for Fiscal Year 2000, Public Law 106-65, requires DOD to  issue regulations that ensure that purchase card holders and each official  with authority to authorize expenditures charged to the purchase card  reconcile charges with receipts and other supporting documentation.  NAVSUP Instruction 4200.94 states that upon receipt of the individual  cardholder statement, the cardholder has 5 days to reconcile the  transactions appearing on the statement by verifying their accuracy to the  transactions appearing on the statement and notify the approving official in  writing of any discrepancies in the statement. In addition, under the  NAVSUP Instruction, the approving official is responsible for (1) ensuring  that all purchases made by the cardholders within his or her cognizance are  appropriate and that the charges are accurate and (2) the timely  certification of the monthly summary statement for payment by DFAS. The  Instruction further states that within 5 days of receipt, the approving  official must review and certify for payment the monthly billing statement,  which is a summary invoice of all transactions of the cardholders under the  approving official’s purview. The approving official is to presume that all  transactions on the monthly statements are proper unless notified in  writing by the purchase cardholder. However, the presumption does not  relieve the approving official from reviewing for blatant improper purchase  card transactions and taking the appropriate action prior to certifying the  invoice for payment. In addition, the approving official is to forward  disputed charge forms to the unit’s comptroller’s office for submission to  Citibank for credit. Under the Navy’s contract, Citibank allows the Navy up  to 60 days after the statement date to dispute invalid transactions and  request a credit. generates a tape for payment by electronic funds transfer to the purchase  card bank, and sends the file to the accounting station for recording the  payment as a summary record in the Navy’s accounting system. Figure 1  illustrates the current purchase card payment process used by SPAWAR  and the Naval Public Works Center in San Diego.
The Navy earns purchase card rebate revenue from Citibank of up to 0.8  percent based on sales volume (purchases) and payment timeliness.  According to the DOD Deputy Director of DOD’s Purchase Card Joint  Program Management Office, rebate revenue is generally to be recorded to  the purchase card statements and used to offset monthly charges.
section_title: San Diego Related Fraud Cases Investigated by NCIS
paragraphs: Pursuant to Senator Grassley’s request, we identified five fraud cases  related to Navy programs based in the San Diego, California, area and  investigated by the Naval Criminal Investigative Service (NCIS).  All of  these cases can be linked to the types of internal control weaknesses  discussed in this testimony.  Of these five cases, two involved Navy Public  Works Center San Diego employees and one involved 2,600 compromised  purchase card accounts, including 22 currently active SPAWAR San Diego  accounts.  One of the remaining cases, which has been concluded, was  related to a fraud that occurred at the Navy’s Millington (Tennessee) Flying  Club—an activity of the Navy Morale, Welfare, and Recreation entity, which  is based in San Diego.  The other case involved a military officer and other  service members who were assigned to the Marine Corps Station in  Miramar, near San Diego.
subsections: section_title: Case #1
paragraphs: The first San Diego-related purchase card fraud case is an example of the  lack of segregation of duties.  This case involved the cardholder at the  Navy’s Millington (Tennessee) Flying Club, an entity of the U.S. Navy’s  Morale, Welfare, and Recreation activity, which is based in San Diego,  California.  The cardholder, who was having financial problems, was hired  by her stepfather, who was the club’s treasurer.  The stepfather delegated  nearly all purchase card duties to the cardholder, as well as the authority  for writing checks to pay the Flying Club’s monthly purchase card  statements.  The cardholder made over $17,000 in fraudulent transactions  to acquire personal items from Wal-Mart, The Home Depot, shoe stores, pet  stores, boutiques, an eye care center, and restaurants over an 8-month  period from December 1998 through July 1999.  The fraud was identified  when the club’s checking account was overdrawn due to excessively high  purchase card payments and a bank official contacted the president of the  Flying Club.  The cardholder pleaded guilty and was sentenced to 15  months in jail and assessed about $28,486 in restitution due to purchase  card fraud and bounced checks. The defendant commented that illegal use  of the card was “too easy” and that she was the sole authorizer of the card  purchases.
section_title: Case #2
paragraphs: documentation of independent confirmation of receipt and acceptance and  recording accountable items in property records would have made  detection easier.  In this instance, the military officer allegedly conspired  with cardholders under his supervision to make nearly $400,000 in  fraudulent purchases from five companies—two that he owned, one owned  by his sister, and the other two owned by friends or acquaintances.   They  charged thousands of dollars for items such as DVD players, Palm Pilots,  and desktop and laptop computers.  The officer also allegedly made cash  payments to employees to keep silent about the fraud and provided  auditors with falsified purchase authorizations and invoices to cover the  fraud.  The fraud occurred from June 1999 through September 2000.  The  total amount of the alleged fraud is unknown. The alleged fraud was  identified based on a tip from a service member.  The U.S. Attorney’s Office  in San Diego has accepted the case for prosecution and four other active  service members are under investigation.
section_title: Case #3
paragraphs: The third case involved a Navy Public Works Center San Diego  maintenance/construction supervisor who allegedly made at least $52,000  in fraudulent transactions to a suspect contractor on work orders for which  the work was not performed by that contractor. Adequate monitoring of  purchase card transactions along with enforcing controls such as  independent, documented receipt and acceptance and recording  accountable items in property books would have made detection easier.  Navy investigators believe that the employee also may have used his  government purchase card to make unauthorized purchases for personal  use, including jewelry, an air conditioner, and other personal items from  The Home Depot from April 1997 through October 1998.  The total amount  of this alleged purchase card fraud is unknown. The alleged fraud was  identified when the employee’s supervisor reviewed Navy Public Works  Center work orders and noticed that four work orders totaling  approximately $7,000 were completed by the employee and paid for with  the suspect’s government purchase card.  Further inquiry by the supervisor  revealed that Navy Public Works Center employees, not the contractor, had  completed the work.  NCIS investigators and Naval Audit Service auditors  identified approximately $52,000 in purchase card transactions made by  the employee to a suspect contractor for work that was performed by  either the Public Works Center or other legitimate contractors.  The  employee has resigned and an investigation by the Federal Bureau of  Investigation and NCIS is ongoing. The U.S. Attorney’s Office in San Diego  has accepted the case for prosecution.
section_title: Case #4
paragraphs: The fourth case involved a Navy Public Works Center San Diego purchasing  agent that allegedly made at least $12,000 in fraudulent purchases and  planned to submit approximately $103,000 in fraudulent disputed charge  forms, including payments for hotels, airline tickets, computers, phone  cards, and personal items from The Home Depot.  The alleged fraud  occurred from April 1997 through July 1999.  As with the other cases,  adequate monitoring of purchase card transactions along with enforcing  controls such as independent, documented receipt and acceptance and  recording accountable items in property books would have made detection  easier.  The alleged fraud was identified during an investigation of a  possible bribery/kickback scheme.  The employee has resigned and an  NCIS investigation is ongoing.  The U.S. Attorney’s Office in San Diego has  accepted the case for prosecution.
section_title: Case #5
paragraphs: The fifth Navy purchase card fraud case is ongoing and involves the  compromise of up to 2,600 purchase card accounts assigned to Navy  activities in the San Diego area.  Investigators were only able to obtain a  partial list consisting of 681 compromised accounts so the exact number is  not known.  At least 45 of the compromised accounts were for SPAWAR  San Diego and one of the compromised accounts was for the Navy Public  Works Center in San Diego.  Of these 46 compromised accounts, 22  SPAWAR San Diego accounts were still active in May 2001.  None of the  active accounts on the partial listing found by investigators were for the  Navy Public Works Center San Diego.  Although the account numbers  showed up on a computer printer in a community college library in San  Diego in September 1999, the Navy has not canceled all of the  compromised accounts.  Instead, according to NCIS and Navy Supply  Command officials, the Navy is canceling the compromised accounts as  fraudulent transactions are identified.  Naval Supply Systems Command,  SPAWAR San Diego, and Navy Public Works Center San Diego officials told  us that they were aware of this incident but did not have a listing of the  account numbers affected.  As a result, the Navy did not take any measures  to flag the compromised accounts and implement special monitoring  procedures to detect any potential fraudulent use of these accounts. associated with the 22 compromised accounts showed that SPAWAR  continued to have an aggregate monthly financial exposure of $900,000  associated with these accounts nearly 2 years after the compromised list  was discovered in a San Diego community college library in September  1999.  Further, with the lack of controls over receipt of goods and  certification of purchase card statements that we identified at the two  activities we reviewed, it is impossible for the Navy to identify fraudulent  purchases as they occur or to determine the extent of the fraudulent use of  the compromised accounts.  As a result, when fraudulent use of one of the  comprised accounts was identified, the Navy could not determine if the  incident was due to cardholder fraud or use of the compromised account  by an outside party.  A joint task force in San Diego, comprised of NCIS, the  U.S. Secret Service, local police, and the U.S. Attorney’s Office, investigated  this fraud.  The task force investigators recently traced the list of  compromised accounts to a vendor used by the Navy, which acknowledged  that the list came from its database.  The vendor identified two former  employees as possible suspects.
section_title: Objectives, Scope, and Methodology
paragraphs: Pursuant to Senator Grassley’s request, we obtained and reviewed  information on five fraud cases related to Navy purchase card programs in  the San Diego, California, area and to review purchase card controls and  accounting for two Navy units based in San Diego—the Space and Naval  Warfare Systems Command (SPAWAR) Systems Center and the Navy  Public Works Center. Our assessment of SPAWAR San Diego and the Navy  Public Works Center San Diego purchase card controls covered   the overall management control environment, including (1) span of  control issues related to the number of cardholders, (2) training for  cardholders and accountable officers, (3) management of rebates, and  (4) monitoring and audit of purchase card activity;  tests of statistical samples of key controls over purchase card  transactions, including (1) documentation of independent confirmation  that items ordered by purchase card were received, (2) proper  certification of purchase card statements for payment, and (3) proper  accounting for purchase card transactions;   substantive tests of accountable items in our sample transactions to  verify whether they were recorded in property records and whether they  could be found; and   analysis of the universe of transactions to identify (1) any potentially  improper, fraudulent, and abusive transactions and (2) purchases that  were split into one or more transactions to avoid micro-purchase  thresholds or other credit limits. concepts and standards in the GAO internal control standards to the  practices followed by management in the four areas reviewed.
To test controls, we selected stratified random probability samples of 135  SPAWAR San Diego purchase card transactions from a population of 47,035  transactions totaling $38,357,656, and 121 Navy Public Works Center San  Diego transactions from a population of 53,026 transactions totaling  $29,824,160 that were recorded by the Navy during fiscal year 2000. We  stratified the samples into two groups—transactions from computer  vendors and other vendors. With this statistically valid probability sample,  each transaction in the population had a nonzero probability of being  included, and that probability could be computed for any transaction. Each  sample element was subsequently weighted in the analysis to account  statistically for all the transactions in the population, including those that  were not selected. Table 7 presents our test results on three key  transaction-level controls and shows the confidence intervals for the  estimates for the universes of fiscal year 2000 purchase card transactions  made by SPAWAR and the Navy Public Works Center in San Diego.
Projection (millions)
Projection (millions)
Projection (millions)
65% (+/- 10%) $14.5 (+/- $4.4)
83% (74-90%) $20.4 (+/- $5.1)
47% (+/- 12%) $12.9 (+/- $6.3)
35% (+/- 11.4%) $11.2 (+/- $ 6.2)
The projections represent point estimates for the population based on our sampling tests at a 95- percent confidence level.
All seven approving officials with certifying officer responsibilities told us that they did not review  support for transactions before certifying purchase card statements for payment. of store receipts (such as those from The Home Depot) were missing, we  were unable to determine whether certain purchases were made for  personal use. In addition, we did not physically examine purchases made to  determine whether goods and services were received and used for  government purposes. While we identified some improper and potentially  fraudulent and abusive transactions, our work was not designed to identify,  and we cannot determine, the extent of fraudulent, improper, or abusive  transactions.
We briefed DOD managers, including officials in DOD’s Purchase Card  Joint Program Management Office and the Defense Finance and  Accounting Service, and Navy managers, including Navy Supply Command,  Navy Comptroller, SPAWAR San Diego, and Navy Public Works Center San  Diego officials on the details of our review, including our objectives, scope,  and methodology and our findings and conclusions. We conducted our  audit work from August 2000 through June 2001 in accordance with  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. Following this testimony,  we plan to issue a report, which will include recommendations to DOD and  the Navy for improving internal controls over purchase card activity. (918994)
section_title: Comments From the Department of Defense
paragraphs: The following are GAO’s comments on the DOD letter dated October 3,  2001.
subsections: section_title: GAO Comments
paragraphs: Comment 1.  See the "Agency Comments and Our Evaluation" section of  this report.
Comment 2. We are concerned that DOD’s support of the current process  whereby Agency Program Coordinators report the results of their purchase  card internal reviews to their unit’s contracting activity or their local  commanding officer will not ensure that the results of purchase card  internal reviews are fully communicated to central Navy management to  support oversight and corrective actions on systemic control weaknesses.   During our review, we found documented evidence that SPAWAR  management ignored written reports on results of Agency Program  Coordinator internal reviews, which identified problems that are consistent  with the control weaknesses discussed in our testimony and summarized in  this report.  For example, SPAWAR Agency Program Coordinator reviews  identified the lack of independent documentation that the Navy had  received items ordered by purchase card, accountable items that were not  recorded in the property records, inadequate documentation for  transactions, split purchases, and transactions that did not appear to be  related to government business purposes.  SPAWAR San Diego  management ignored the internal review results, primarily due to  complaints from cardholders and their supervisors regarding the  administrative burden associated with procedural changes that would be  needed to address the review findings.  Further, although the Naval Audit  Service reviewed Navy Public Works Center San Diego purchase card  activity and the SPAWAR San Diego Command Inspector General reviewed  SPAWAR Systems Center San Diego purchase card activities, reports were  not issued on the results of either of these reviews. Therefore, we continue  to recommend that Agency Program Coordinators report any internal  control weaknesses identified during semiannual reviews to the  Commander of the Naval Supply Systems Command in addition to their  unit commanders.
Comment 3. While DOD stated that using a single object class for all micro- purchases streamlines the accounting process and reduces the numbers of  problem disbursements resulting from manual keystrokes when entering  such data, this practice results in unreliable expense data.  As we stated in  our testimony, aggregating all micro-purchases under one object class does  not show the nature and type of expenditures made using purchase cards.
Because SPAWAR San Diego and the Navy Public Works Center San Diego  did not ensure that their detail transaction records reflected the proper  classification of expense, 100 percent of the SPAWAR and Navy Public  Works Center transactions in our samples were recorded to the wrong  object class.  For example, although the majority of the SPAWAR purchase  card transactions in our sample—76 transactions totaling over $73,000— were for equipment purchases, none of these transactions were properly  classified and recorded.  Further, SPAWAR did not maintain sufficient  documentation to determine the correct object class for 15 of the  transactions in our sample totaling $12,000.  Office of Management and  Budget (OMB) Circular A-11, Preparation and Submission of Budget  Estimates, requires federal agencies to report obligations and  expenditures by object class, such as salaries, benefits, travel, supplies,  services, and equipment, to indicate the nature of expenditures of federal  funds.  Accurate object classification data are critical to the reliability of  information reported in the President's budget submission and budget  projections and other analyses that are based on these data.  In addition,  because the Congress has asked for and is using object class information  for its oversight activities, it is important that these data be properly  recorded.  Therefore, we continue to recommend that detail purchase card  transaction records reflect the proper object classification of expense.   Further, an appropriate procedure for summarizing detail purchase card  transactions would be to record a separate summary record for each  classification of expense--such as services, supplies, and equipment.
Comment 4. The steps outlined in DOD's response do not ensure that  cardholders will obtain reasonable prices or the best value.  For example,  we found numerous examples of individual purchases of computers and  property items, and purchases of services, such as the installation of  upgraded computer software, that were not made as part of a negotiated  contract or a bulk purchase.  Because these purchases did not appear to be  cost-effective, we continue to recommend that the Navy determine  whether the purchase card is (1) the right vehicle for acquiring certain  items and services and (2) if items, such as computers, should be procured  individually or through bulk purchases.  The intent of our recommendation  is that these determinations would result in Navy-wide policy guidance on  the cost-effective use of purchase cards.
section_title: GAO Contact and Staff Acknowledgements
subsections: section_title: GAO Contact
section_title: Acknowledgements
paragraphs: Staff making key contributions to this report were Bertram Berlin,  Francine DelVecchio, Steve Donahue, Douglas Ferry, Kenneth Hill, Jeffrey  Jacobson, John Kelly, and John Ryan.
section_title: GAO’s Mission
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subsections: section_title: Order by Mail or Phone
section_title: Visit GAO’s Document Distribution Center
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
paragraphs: Web site: www.gao.gov/fraudnet/fraudnet.htm, E-mail: fraudnet@gao.gov, or 1-800-424-5454 (automated answering system).
section_title: Public Affairs