Purchase Cards: Navy is Vulnerable to Fraud and Abuse but Is Taking Action to Resolve Control Weaknesses
Published: 2002-09-27T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) is promoting departmentwide use of purchase cards for obtaining goods and services. It reported that for the year ended September 30, 2001, purchase cards were used by 230,000 cardholders to make 10.7 million transactions valued at more than $6.1 billion. The benefits of using purchase cards versus traditional contracting and payment processes are lower transaction processing costs and less red tape for both the government and the vendor community. Although GAO supports the purchase card program concept, it is important that agencies have adequate internal controls in place to protect the government from fraud, waste, and abuse. A weak overall control environment and breakdowns in key internal controls leave the Navy vulnerable to potentially fraudulent, improper, and abusive purchases. In response to GAO's previous findings, DOD and Navy have begun improving the control environment over the purchase card program. However, further improvements are needed to achieve an effective control environment. GAO determined that the Navy did not provide cardholders, approving officials, and agency program coordinators with sufficient human capital resources--time and training--to effectively perform oversight and manage the program. The weaknesses in the Navy's purchase card control environment at the units audited led to a significant breakdown in key control activities in fiscal year 2001. GAO determined that (1) cardholders did not screen for the availability of goods from required sources, (2) cardholders did not document that someone independent of the cardholder received and accepted the goods and services, (3) many Navy units did not maintain accountability over pilferable property acquired with the purchase card, and (4) cardholders did not reconcile monthly purchase card statements to supporting documentation and approving officials did not review the cardholders' reconciled bills prior to payment certification. The weak control environment and breakdown in key internal controls contributed to potentially fraudulent, improper, and abusive or questionable transactions that went undetected at units in all three Navy commands and the Marine Corps base GAO audited. GAO's site-specific and Navy-wide data mining transactions reviews identified other potentially fraudulent transactions including the purchase of computers, cell phones, food, cameras, power tools, televisions, personal digital assistants, clothing, and stereos. GAO also identified abusive and questionable transactions at all three Navy commands and the Marine Corps base audited and in GAO's Navy-wide data mining. The purchase card transactions that GAO considered to be questionable generally did not include and explanation or advance authorization that would justify these purchases or permit a determination of whether the purchases were improper or abusive.

section_title: Letter
paragraphs: The Department of Defense (DOD) is promoting departmentwide use of  purchase cards for obtaining goods and services.  It reported that for the  year ended September 30, 2001, purchase cards were used by about 230,000  cardholders to make about 10.7 million transactions valued at over $6.1  billion.   Purchase card transactions include acquisitions at or below the  $2,500 micropurchase threshold, payment for commercial training requests  valued at or below $25,000, and for payment on contracts.  The use of  purchase cards has dramatically increased in past years as agencies have  sought to eliminate the lengthy process and paperwork long associated  with making small purchases.  The benefits of using purchase cards versus  traditional contracting and payment processes are lower transaction  processing costs and less red tape for both the government and the vendor  community.  We support the use of a well-controlled purchase card  program to streamline the government’s acquisition processes.
While we support the purchase card program concept, it is important that  agencies have adequate internal controls in place to protect the  government from fraud, waste, and abuse.   In July 2001 and March 2002,  we testified on significant breakdowns in internal control over purchase  card transactions at two Navy sites in San Diego, California.
As a result of our work at the two Navy sites and continuing concern about  fraud, waste, and abuse in DOD’s purchase card program, you requested  that we expand our audits of purchase card controls.   On June 27, 2002, we  reported on control weaknesses in the Army’s purchase card program.   This report focuses on purchase card activities at the Navy.  The Navy is the  second largest purchase card program in DOD.  During fiscal year 2001, the  Navy had about 2.8 million transactions and $1.8 billion in purchases, and  as of September 2001 it had about 28,000 cardholders.  We plan to report to  you separately on the results of our audit of the Air Force purchase card  program.
The objective of our audit of the Navy’s purchase card program was to  assess the adequacy of internal control over the authorization, purchase,  and payment of purchase card transactions during fiscal year 2001, and  determine whether the purchase card control weaknesses identified at two  Navy units in San Diego were isolated examples or were indicative of Navy- wide weaknesses with the purchase card program.   Specifically, we  addressed whether (1) the Navy’s overall control environment and  management of the purchase card program were effective, (2) the Navy’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  transactions.  We supplemented our previous fiscal year 2001 audit work at  the Space and Naval Warfare Systems Command Systems Center in San  Diego, and the Naval Facilities Engineering Command’s Navy Public Works  Center in San Diego by auditing the Navy’s internal control policies,  procedures, and key activities at three major warfighting commands  (Atlantic Fleet, Pacific Fleet, and the Marine Corps), and one other major  support command (Naval Sea Systems Command).  These six major  commands account for about 56 percent of the Navy’s total fiscal year 2001  purchases and 56 percent of the Navy’s total fiscal year 2001 transactions.   For each major command audited, we selected a geographic location (e.g.,  for the Pacific Fleet we selected cardholders based in or near San Diego)  where we conducted a case study analysis by testing a statistical sample of  purchase card transactions and performing other audit work to evaluate  the design and implementation of key internal control procedures and  activities.  The results of our audit for transactions that comprised the  statistical samples can only be projected to the units where we performed  testing and cannot be used for projections to the entire command or to the  Navy as a whole.  However, the cumulative results of all our work offer  significant perspective on the adequacy of the design and implementation  of purchase card program internal controls across the Navy.
We also looked for indications of potentially fraudulent, improper, and  abusive or questionable purchases as part of our statistical sampling and  through nonrepresentative selections of transactions using data mining of  Navy-wide fiscal year 2001 transactions.  Our data mining included  identifying transactions with certain vendors that were more likely to sell  items that would be unauthorized or that would be personal items (e.g.,  department and jewelry stores).  Because of the large number of  transactions that met these criteria, we did not look at all potential abuses  of the purchase card.  While we identified some potentially fraudulent,  improper, and abusive or questionable purchases, our work was not  designed to identify, and we cannot determine, the extent of these  purchases.  See appendix I for background on the purchase card program  and see appendix II for details on our scope and methodology.
Finally, per your request, this report also provides the status of (1) the  Navy’s progress in implementing the November 30, 2001,  recommendations to improve purchase card internal controls (see app.  III), (2) two potential fraud cases referred to in our March 13, 2002,  testimony (see app. IV), and (3) the former commanding officer at the  Space and Naval Warfare Systems Command, Systems Center San Diego  (see app. V).
We requested comments from the Secretary of Defense or his designee on a  draft of this report.  We received comments from the Director, DOD  Purchase Card Joint Program Management Office dated September 16,  2002, and from the Under Secretary of Defense (Comptroller) dated  September 23, 2002.  We reprinted those comments in appendix VI and  appendix VII of this report.  We conducted our audit work from November  2001 through July 2002 in accordance with U.S. generally accepted  government auditing standards, and we performed our investigative work  in accordance with standards prescribed by the President’s Council on  Integrity and Efficiency.
subsections: section_title: Background
paragraphs: The Navy’s purchase card program is part of the governmentwide  Commercial Purchase Card Program established to simplify federal agency  acquisition processes by providing a low-cost, efficient vehicle for  obtaining goods and services directly from vendors.  DOD has mandated  the use of the purchase card for all purchases at or below $2,500 and has  authorized the use of the card to pay for specified larger purchases.  DOD  has seen significant growth in the program since its inception and  estimated that in fiscal year 2001 about 95 percent of its transactions of  $2,500 or less were made by purchase card.
The purpose of the program is to simplify the process of making small  purchases.  It allows cardholders to make micropurchases of $2,500 or less  and pay for training of $25,000 or less without having to execute a contract.   The government purchase card can also be used for larger transactions, but  only under a contract.  For larger transactions, the card is referred to as a  “payment card” because it pays for an acquisition made under a legally  executed contract.
The Navy uses a combination of governmentwide, DOD, and Navy guidance  as the policy and procedural foundation for its purchase card program.   The Navy purchase card program operates under a governmentwide  General Services Administration purchase card contract, as do the  purchase card programs of all federal agencies.   In addition, government  acquisition laws and regulations such as the Federal Acquisition  Regulation provide overall governmentwide guidance.  DOD and the Navy  have issued clarifying guidance to these regulations.
The Under Secretary of Defense for Acquisition, Technology, and  Logistics—in cooperation with the Under Secretary of Defense  (Comptroller)—has overall responsibility for DOD’s purchase card  program.  The DOD Purchase Card Joint Program Management Office, in  the office of the Assistant Secretary of the Army for Acquisitions Logistics  and Technology, is responsible for overseeing DOD’s program.  The  Commander of the Naval Supply Systems Command (NAVSUP) has been  designated the Navy’s chief contracting officer, and under his command is  the Navy purchase card program manager.  However, primary day-to-day  management responsibility for the program lies with the agency program  coordinators in the Navy’s major commands and local units.  Figure 1  depicts the management hierarchy of the Navy purchase card program for  the units at the four major commands that we audited.  The figure shows  each major command where we conducted audit work; for each location  we selected for a case study analysis, the figure also shows the total  number of subordinate level agency program coordinators, approving  officials, and cardholders.  It is important to note that at the major  commands and the subordinate level units that we audited, most agency  program coordinators, approving officials, and cardholders were not  dedicated to the purchase card program on a full-time basis.  Rather, most  individuals had additional job responsibilities and performed purchase  card duties when needed.
At the major commands and units audited, personnel in three positions—  agency program coordinator, cardholder, and approving official—are  collectively responsible for providing reasonable assurance that purchase  card transactions are appropriate and meet a valid government need.   Agency program coordinators work at both the major command and unit  levels.  Major command agency program coordinators operate under the  direction of the command’s director of the contracting office, and are  responsible for the day-to-day management, administration, and oversight  of the program.  Unit level agency program coordinators develop local  standard operating procedures, issue and cancel cards, train cardholders  and approving officials, and work with other Navy units and the card- issuing bank.  Cardholders are to make purchases, maintain supporting  documentation, and reconcile their monthly statements.  Approving  officials, who typically are responsible for more than one cardholder, are to  review each cardholder’s transactions and reconciled statements, and  certify for payment their cardholders’ purchases.  Appendix I provides  additional details on the Navy purchase card program.
section_title: Weak Purchase Card Control Environment Contributed to Ineffective Controls, but Management has Taken Positive Steps
paragraphs: Mangement and employees should establish and maintain an environment throughout the organization that sets a positive and supportive attitude toward internal control and conscientious management.  A positive control environment is the foundation for all other standards.  It provides discipline and structure as well as the climate which influences the quality of internal control.
GAO’s Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999)
We found that the Navy and Marine Corps units we audited had not  established an effective internal control environment in fiscal year 2001,  and although significant improvements have been made, further action in  several areas is necessary.  Specifically, we found that in fiscal year 2001,  these locations did not (1) effectively evaluate whether approving officials  maintained reasonable spans of control, (2) limit purchase card credit  limits to historical procurement needs, (3) ensure that cardholders and  approving officials were properly trained, (4) utilize the results of purchase  card program monitoring efforts, and (5) establish an infrastructure  necessary to effectively monitor and oversee the purchase card program.   As a result of our July 30, 2001, testimony, the Navy and DOD have taken  significant actions to improve purchase card controls, including reducing  the number of cardholders by over 50 percent and establishing a Charge  Card Task Force to further improve the purchase card processes and  controls.
subsections: section_title: Improvement Initiatives Signal Proactive “Tone at the Top”
paragraphs: Management plays a key role in demonstrating and maintaining an organization's integrity and ethical values, especially in setting and maintaining the organization's ethical tone, providing guidance for proper behavior, removing temptations for unethical behavior, and providing discipline when appropriate.  GAO's Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999)
Since the July 30, 2001, congressional hearing, the DOD Comptroller, the  DOD Purchase Card Joint Program Management Office, and NAVSUP have  issued a number of directives and policy changes citing previous audit  findings and the need to improve both the purchase card control  environment and adherence to control techniques.  Specifically, in  response to our November 2001 report, the Navy has acted on or plans to  implement all 29 of our recommendations to improve controls over the  purchase card program.  While we believe that some of the Navy’s actions  to implement our recommendations are not sufficient to achieve the  necessary changes, planned and implemented actions to date are a  significant step forward.
In addition, the DOD Comptroller appointed a Charge Card Task Force,  which issued its final report on June 27, 2002.  The report identified many  of the control weaknesses we identified in this and previous reports and  testimonies.  In the report, the DOD Comptroller stated that this “…is an  excellent first step in an on-going process to continually seek ways to  improve charge card programs.  We must continue to identify new ways of  reducing the government’s cost of doing business while at the same time  ensuring that we operate in a manner that preserves the public’s trust in our  ability to provide proper stewardship of public funds.”  The task force  report included a number of recommendations including establishing a  purchase card concept of operations; accelerating the electronic  certification and bill paying process; improving training materials;  identifying best practices in areas such as span of control and purchase  card management skill sets; and establishing more effective means of  disciplining those who abuse the purchase cards.  These recommendations  address many of the concerns that we previously identified and provide  management at the Pacific Fleet, Atlantic Fleet, Naval Sea Systems  Command (NAVSEA), and Marine Corps the opportunity to take a  proactive role in correcting control weaknesses and ensuring that the  purchase card remains a valuable tool.
section_title: Number of Cardholders Significantly Reduced but Approving Official Span of Control Remains an Issue
paragraphs: Although the Navy significantly reduced the number of purchase cards  since our July 30, 2001, testimony, it continued to have approving officials  who were responsible for reviewing more cardholder statements than  allowed by either DOD or Navy guidance, which limits the number of  cardholders that an approving official should review to seven.  The  convenience of the purchase card must be balanced against the time and  cost involved in the training, monitoring, and oversight of cardholders.  It  must also be balanced against the exposure of the Navy to the legally  binding obligations incurred by those transactions.  The proliferation of  purchase cards and high cardholder-to-approving-official ratios increase  the risks associated with the purchase card program.  In response to the  July 2001 hearing, DOD’s Director of Procurement instructed the directors  of Defense agency procurement and contracting departments on August 13,  2001, to limit purchase cards to only those personnel who need to purchase  goods and services as part of their jobs.  As a result of this heightened  concern, the Navy reduced the number of cardholders by more than half— from about 59,000 in June 2001 to about 28,000 by September 2001.  In  October 2001, the Navy followed up the initial reduction in cardholders  with an interim change to the NAVSUP existing purchase card instructions  that established minimum criteria for prospective purchase card holders.   As shown in figure 2, the Navy continued to reduce the number of  cardholders and was down to about 25,000 as of March 2002.  Agency  program coordinators at the commands we audited told us that the  reduction was a result of (1) employee attrition, and (2) cancellation of  cards of individuals who no longer needed them.
NAVSUP’s interim change limiting purchase cards also established a  maximum ratio of seven  cardholders to each approving official, and  required that Navy and Marine Corps units establish local policies and  procedures for approving purchase cards and for issuing them to activity  personnel.  The Navy’s requirement of a maximum 7-to-1 ratio of  cardholders to an approving official is consistent with guidance issued by  the Department of Defense Purchase Card Joint Program Management  Office on July 5, 2001, shortly before the congressional hearing.
As shown in table 1, at the four locations we audited, the average ratio of  cardholders to approving officials was well in line with the DOD and Navy  limit of seven cardholders per approving official.  This average, however,  masks the wide range of ratios across units, including those that far  exceeded the DOD and Navy prescribed ratio of cardholders to approving  official. The problem of high cardholder-to-approving-official ratios  remains especially acute at NAVSEA, which at some locations used one  approving official to certify a single payment for all the unit’s cardholders.   This resulted in approving officials certifying monthly bills that contained  thousands of transactions and regularly exceeded $1 million a month.
section_title: Cardholder Credit Limits Exceed Procurement Needs
paragraphs: While total financial exposure as measured in terms of purchase card credit  limits has decreased in the units we audited, as shown in figure 3, it  continues to substantially exceed historical purchase card procurement  needs.
Limiting credit available to cardholders is a key factor in managing the  purchase card program and in minimizing the government’s financial  exposure.  Therefore, to determine the maximum credit available we  analyzed the credit limits available to both cardholders and approving  officials.  In August 2001, the Under Secretary of Defense for Acquisition,  Technology, and Logistics sent a memorandum to the directors of all  defense agencies stating that supervisors should set reasonable limits  based on what each person needs to buy as part of his or her job and that  every cardholder does not need to have the maximum transaction or  monthly credit limit.   Similarly, in October 2001, NAVSUP issued an interim  change to the purchase card program instruction which requires agency  program coordinators to monitor cardholder credit limits and ensure that  the credit limits are appropriate for mission requirements.  We concur with  both the Under Secretary’s statement and NAVSUP’s interim change to the  purchase card instructions, and continue to believe that limiting cardholder  spending authority is an effective way of minimizing the federal  government’s financial exposure.  However, we have not seen adequate  progress in this area at the locations that we audited.
None of the units we visited tied either the cardholder’s or the approving  official’s credit limit to the unit’s historical spending.  Rather, they often  established arbitrary credit limits of $10,000 to $25,000.  In some instances,  we found cardholders and approving officials who had credit limits that far  exceeded historical spending needs.  For example, as of September 2001,  we identified over 60 cardholders with $9.9 million credit limits, and more  than 2,300 approving officials with $9.9 million credit limits at the four  commands we audited.  As shown in table 2, the four commands that we  audited had credit limits that clearly exceeded historical needs.
section_title: Navy Units Lacked Documented Evidence of Training
paragraphs: Effective management of an organization's workforce-its human capital-is essential to achieving results and an important part of internal control… Training should be aimed at developing and retraining employee skill levels to meet changing organizational needs.  GAO's Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999)
Most of the units we audited did not have documented evidence that their  purchase card holders had received the initial or supplemental training  required by the Navy purchase card program guidance.  Training is key to  ensuring that the workforce has the skills necessary to achieve  organizational goals.  In accordance with NAVSUP Instruction 4200.94, all  cardholders and approving officials must receive purchase card training.   Specifically, NAVSUP Instruction 4200.94 requires that prior to the issuance  of a purchase card account, the prospective cardholder and approving  official must receive training regarding both Navy policies and procedures  and local procedures.  The instruction also requires all cardholders and  approving officials to receive refresher training every 2 years.   In response  to the July 30, 2001, hearing, the Assistant Secretary of the Navy for  Research, Development and Acquisition sent a message in August 2001 to  all Navy units directing them to train all of their cardholders on or about  September 12, 2001, concerning the proper use of the purchase cards.   While acknowledging this need, the Navy does not have a database that  would enable agency program coordinators to monitor training for  cardholders and approving officials.  Therefore, the Navy does not have a  systematic means to determine whether NAVSUP Instruction 4200.94 or its  directives are being carried out.
As shown in table 3, we found that from about 56 percent of the fiscal year  2001 transactions at the Marine Corps to about 87 percent of the  transactions at the Atlantic Fleet were made by cardholders or approved  for payment by approving officials for whom there was no documented  evidence of either initial training or refresher training at the time the  transaction was made.   Managers at all four locations told us that they  require all cardholders to receive training prior to receiving their purchase  cards.  Not all managers were as confident that cardholders and approving  officials received follow-up training.  Without a centralized training  database it would be extremely difficult to track when each cardholder  needed the required 2-year refresher training.
Further, for training to be effective it should be tailored to provide the  knowledge needed for the different tasks in purchase card management.   However, we found that, even though the functions performed by the  agency program coordinators, approving officials, and cardholders are  substantially different, the training curriculum for the three positions was  identical.  Neither NAVSUP nor the major commands had specific guidance  or training concerning the role and responsibilities of agency program  coordinators or approving officials.
section_title: Monitoring and Oversight Need Improvement
paragraphs: Agency internal control monitoring assesses the quality of performance over time.  It does this by putting procedures in place to monitor internal control on an ongoing basis as a part of the process of carrying out its regular activities.  It includes ensuring that managers and supervisors know their responsibilities for internal control and the need to make internal control monitoring part of their regular operating processes.  Ongoing monitoring occurs during normal operations and includes regular management and supervisory activities, comparisons, reconciliations, and other actions people take in performing their duties. GAO's Internal Control Standards: Internal Control Management and Evaluation Tool (GAO-01-1008G, August 2001)
We found evidence that the Pacific Fleet, Atlantic Fleet, Naval Sea Systems  Command units, and the Marines Corps base that we audited conducted  reviews of the fiscal year 2001 purchase card program.  However, we did  not find that these commands used the results of those reviews to resolve  identified internal control weaknesses.  Further, an August 2001 NAVSUP- mandated review of 12 months of purchase card transactions failed to  identify the extent of potentially fraudulent, improper, and abusive or  questionable transactions identified in either Naval Audit Service or GAO  audits.  NAVSUP Instruction 4200.94 calls for agency program  coordinators to perform semiannual reviews of their units’ purchase card  program, including the program’s adherence to internal operating  procedures, applicable training requirements, micropurchase procedures,  receipt and acceptance procedures, and statement certification and prompt  payment procedures.  These reviews are to serve as a basis for agency  program coordinators’ to initiate appropriate action to improve the local  program or correct problem areas.  Throughout fiscal year 2001, the Navy  purchase card instructions did not require that written reports on the  results of internal reviews be submitted to either local management or a  central Navy office for monitoring and oversight.  As a result, the Navy did  not have a consistent process for documenting the results of purchase card  reviews, identifying systemic problems, or monitoring corrective actions to  help provide assurance that the actions are effectively implemented.  In  October 2001, in response to our previous audit work, the Navy issued an  interim change to NAVSUP Instruction 4200.94 that requires each command  twice a year to summarize the results of monitoring in their subordinate  commands and to forward each summary to NAVSUP.
subsections: section_title: Results of Periodic Reviews
paragraphs: Although agency program coordinators and the Naval Audit Service have  conducted periodic reviews of the purchase card program that showed  cardholders and approving officials were not adhering to required control  procedures, we found no evidence that the commands or units that we  audited used the results of those reviews to improve the control  environment or adherence to control procedures.  The internal control  weaknesses identified by agency program coordinators included (1) a lack  of independent documentation that the Navy received items ordered, (2) accountable items not recorded in the property records, (3) inadequate  documentation for transactions, and (4) split purchases.  In addition, the  Naval Audit Service issued a report dated May 29, 2002, that was critical of  the controls that the Naval Sea Systems Command exercised over the  purchase card transactions at eight locations.  The Naval Audit Service  report not only highlighted findings similar to those listed here, but also  identified 265 questionable transactions for such items as gift certificates,  clothing, watches, and rental cars.
section_title: Results of Stand-Down Reviews
paragraphs: In contrast to the findings of the agency program coordinators and the  Naval Audit Service, the four major commands reported relatively few, if  any, inappropriate purchase card transactions when they conducted a self  assessment of transactions in response to a NAVSUP August 2001 directive.   In that directive, NAVSUP required that each Navy unit conduct a stand- down review of all purchase card transactions the unit made during the  previous 12 months and report the results to NAVSUP by November 15,  2001.  Based on the results of the reviews conducted by the units we  audited, we question the design and performance of the review.  Its results  do not indicate a thorough and critical analysis of the nature and magnitude  of the control weaknesses and of the extent to which fraudulent, improper,  or abusive transactions were occurring during the period reviewed.  As  shown in table 4, the four major commands that we audited represented  that they reviewed about 1,225,000 transactions but reported that they  found only 1,355 purchases—about 0.1 percent of the transactions  reviewed—were for personal use or for prohibited items, or were not bona  fide mission requirements.  In our statistical sample of 624 fiscal year 2001  transactions, we found 102 potentially fraudulent, improper, and abusive or  questionable transactions—about 15 percent of the transactions audited.   Furthermore, we found numerous examples of abusive and improper  transactions (discussed in more detail in the following section of this  report) as part of our data mining.  In response to this issue, command level  agency program coordinators told us that they did not have sufficient time  to perform their transaction reviews.
section_title: Human Capital Resources Are Insufficient for Effective Monitoring and Oversight
paragraphs: Effective management of an organization's workforce  its human capital  is essential to achieving results and an important part of internal control.  Management should view human capital as an asset rather than a cost.  Only when the right personnel for the job are on board and are provided the right training, tools, structure, incentives and responsibilities is operational success possible.
GAO's Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999)
The Navy has not provided sufficient human capital resources to enable  effective monitoring of purchases and to develop a robust oversight  program.  The three key positions for overseeing the program and  monitoring purchases are the command-level agency program coordinator,  the unit-level agency program coordinator, and the approving official.   During the period of our review, none of the major command agency  program coordinators we audited worked full time in that position.  This is  despite the fact that they were responsible for managing procurement  programs that incurred between 227,000 and 380,000 transactions totaling  from about $137 million to about $268 million annually.  Further, these  agency program coordinators were responsible for managing the  procurement activities of cardholders who were located not only on the  East and West Coasts of the United States but in some instances on other  continents.  In addition, these part-time major command coordinators  generally had one or two staff in their immediate office—who were also  assigned other responsibilities—that helped monitor the program.   Considering that the major command agency coordinators are responsible  for procurement programs involving hundreds of thousands of transactions  and hundreds of millions of dollars, as shown in table 5, the human capital  resources at the major command level are inadequate.
We also found that the major commands we audited did not provide the  subordinate level agency program coordinators and approving officials  with the time, training, tools, or incentives—also human capital  resources—needed to perform their monitoring responsibilities necessary  for the operational success of the program.  Rather, the responsibilities of  approving officials and many subordinate level agency program  coordinators fell into the category of “other duties as assigned,” with  minimal time, training, or tools to carry out these responsibilities.
Further, we found that approving officials and most agency program  coordinators generally had other duties of higher priority than monitoring  purchases and reviewing cardholders’ statements.  This was especially true  for approving officials, some of whom were engineers and computer  technicians, whose annual ratings generally did not cover their approving  official duties.  One subordinate level agency program coordinator told us  that she knows that some approving officials do not review the cardholder  statements because (1) some cardholders make thousands of purchases in  a month and (2) the approving officials have other responsibilities.   Another agency program coordinator told us that some agency program  coordinators and approving officials fear that questioning certain  purchases could be career-limiting decisions.  Further, neither the Navy nor  the major commands have established a position description, an adequate  statement of duties, or other information on the scope, duties, or specific  responsibilities for subordinate-level agency program coordinators and  approving officials.
section_title: Critical Internal Controls Were Ineffective
paragraphs: Internal control activities help ensure that management’s directives are carried out.  The control activities should be effective and efficient in accomplishing the agency’s control objectives. GAO's Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999)
Basic internal controls over the purchase card program were ineffective at  the units in the major commands we audited during fiscal year 2001  primarily because they were not effectively implemented.  Based on our  tests of statistical samples of purchase card transactions, we determined  that key transaction-level controls were ineffective, rendering the purchase  card transactions at the units we audited vulnerable to fraudulent and  abusive purchases and to the theft and misuse of government property.   The problems we found primarily resulted from inadequate guidance and a  lack of adherence to valid policies and procedures.  The specific controls  that we tested were (1) screening for required vendors, (2) documenting  independent receipt and acceptance of goods and services,  (3) documenting cardholder reconciliation and approving official review  prior to certifying the monthly purchase card statement for payment, and  (4) recording pilferable property in accountable records.   As shown in  table 6, the failure rates for the first three attributes that we tested ranged  from 58 percent to 98 percent respectively for the Atlantic Fleet units in  Norfolk for documenting independent receipt and acceptance obtained  with a purchase card and reviewing cardholder statements prior to  certifying them for payment.  Most transactions in our statistical sample  did not contain pilferable property.  Thus, we are not projecting the results  of that test to the population of transactions that we tested at those units.
subsections: section_title: Little Evidence Cardholders Screen for Required Vendors
paragraphs: Despite DOD and Navy requirements to give priority to certain required  vendors, we found that the failure rate to document the necessary  screening of purchases ranged from about 70 percent at the Pacific Fleet to  about 90 percent at NAVSEA.  Because of the units’ failure to document  screening for statutory vendors, the Navy and Marine Corps do not know  the extent to which cardholders failed to acquire items from these required  vendors.  The Navy’s purchase card instructions require that prior to using  the purchase card, cardholders must document that they have screened all  their intended purchase card acquisitions for availability from statutory  sources of supply.   These sources of supply include vendors qualifying  under the Javits-Wagner-O’Day Act (JWOD), Federal Prison Industries, and  DOD’s Document Automation and Production Service (DAPS).  JWOD  vendors are nonprofit agencies that employ people who are blind or have  other severe disabilities.  JWOD vendors primarily sell office supplies and  calendars, which often cost less than items sold by commercial vendors.  In  a June 2001 letter to all procurement officials, DOD’s Director of  Procurement reminded cardholders of the need to purchase listed items  from JWOD sources unless they have a specific waiver.  Federal Prison  Industries employ and provide skills training to inmates of federal prisons.
They sell a wide variety of products including textiles, electronics,  industrial products, and office furniture.   Finally, DAPS is responsible for  document automation and printing within DOD, encompassing electronic  conversion, retrieval, and output and distribution of digital and hardcopy  information.
We cannot determine the precise amount spent on purchases that were not  made from required vendors; however, as shown in table 7, our analysis of  fiscal year 2001 vendor activity showed that the units we audited spent  about $235,000 with five vendors (Franklin Covey, Kinko’s, PIP Printing,  Kwik Kopy, and Sir Speedy) that sold items or services that are also sold by  required vendors.  Further, some of the items purchased at Franklin Covey  were personal items that are considered to be abusive purchases.  We  performed a similar vendor analysis of the fiscal year 2001 Navy-wide  purchase card activity and found that during fiscal year 2001, the Navy  spent about $1.6 million with those five vendors.  Due to the diverse nature  of items sold by Federal Prison Industries, we did not attempt to identify  vendors that sell similar products.
We found that NAVSUP and some units provided cardholders with  examples of how to document the screening process; however, cardholders  failed to use the NAVSUP-suggested purchase log or complete local  purchase request forms containing a section to document screening for  required sources of supply.  For example, the NAVSUP sample purchase  card log included in NAVSUP Instruction 4200.94 contains a column for the  cardholder to document whether or not he or she screened the items  purchased for availability from statutory sources of supply.  However, we  found that the suggested purchase card log was often not used, or if used,  many cardholders did not complete that column.
section_title: Little Evidence of Independent Receipt and Acceptance of Items Purchased
paragraphs: Key duties and responsibilities need to be divided or segregated among different people to reduce the risk of error or fraud. This should include separating the responsibilities for ... handling any related assets. Simply put, no one individual should control all the key aspects of a transaction or event. GAO's Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999)
The units we audited generally did not have evidence documenting that  someone independent of the cardholder received and accepted items  ordered and paid for with a purchase card, as required by NAVSUP  Instruction 4200.94.  That is, the units generally did not have a receipt,  invoice, or packing slip for the acquired goods and services that was signed  and dated by someone other than the cardholder.  As a result, there is no  documented evidence that the government received the items purchased or  that those items were not lost, stolen, or misused.  Some units have  developed a system using ink stamps that need to be completed to  document receipt and acceptance; however, these systems have not been  implemented effectively.   As shown in table 6, we estimated that about 58  percent to 67 percent of the units’ fiscal year 2001 transactions did not have  documented evidence of independent receipt and acceptance of goods and  services acquired with the purchase card.   While some of the items for  which these units did not have independent documented receipts were  consumable office supplies, other items that failed this key internal control  test included laptop computers, digital cameras, and personal digital  assistants, which could be subject to theft or misuse.
section_title: Little Evidence That Monthly Purchase Card Bills Were Reconciled and Reviewed Prior to Certification and Payment
paragraphs: Transactions and other significant events should be authorized and executed only by persons acting within the scope of their authority.  This is the principal means of assuring that only valid transactions to exchange, transfer, use, or commit resources and other events are initiated or entered into. GAO's Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999)
Control activities ensure that only valid transactions … are initiated or entered into …. Control activities are established to ensure that all transactions … that are entered into are authorized and executed only by employees acting within the scope of their authority.
GAO’s Internal Control Standards: Internal Control Management and Evaluation Tool (GAO-01-1008G, August 2001)
We found little evidence of cardholder reconciliation or approving official  reviews to confirm that cardholders had reconciled the monthly statement  of purchase card transactions back to the supporting documents  throughout fiscal year 2001.  All levels of the purchase card program  recognize effective cardholder reconciliation and approving official review  of the monthly statement as a key control activity.  DOD’s Purchase Card  Joint Program Management Office, the Navy, command procedures, and  the units’ operating procedures recognize that cardholder reconciliation  and approving official review are central to ensuring that purchase card  transactions are appropriate.  Under 31 U.S.C. 3325 and DOD’s Financial  Management Regulation,disbursements are required to be made on the  basis of a voucher certified by an authorized agency official.  The certifying  official is responsible for ensuring (1) the adequacy of supporting  documentation, (2) the accuracy of payment calculations, and (3) the  legality of the proposed payment under the appropriation or fund charged.   The certification function is a preventive control that requires certifying  officers to maintain proper controls over public funds.  It also helps  prevent fraudulent and improper payments, including unsupported or  prohibited transactions, split purchases, and duplicate payments.  Further,  section 2784 of title 10, United States Code, requires the Secretary of  Defense to prescribe regulations that ensure that each purchase card  holder and approving official is responsible for reconciling charges on a  billing statement with receipts and other supporting documentation before  certification of the monthly bill.  Consistent with these requirements, Navy  purchase card guidance calls for cardholders to reconcile the monthly  purchase card statements to supporting records.  It calls for approving  officials to ensure that all cardholder purchases were appropriate and all  charges were accurate, and to resolve all questionable purchases with the  cardholder.  According to NAVSUP Instruction 4200.94, after the approving  official reviews the monthly bill, the approving official will certify it for  payment.
Because certification is necessary for payment, it is likely to occur whether  or not cardholders and approving officials have performed required  reconciliations and reviews.  Thus, when we tested whether the cardholder  reconciled the monthly statement and whether the approving official  reviewed the monthly statement, we did not simply look for a physical or  electronic signature on a form.  Rather, for this test we considered that  proper reconciliation and review occurred if:  the cardholder signed and dated the monthly bill before it was paid,  and the monthly bill contained any markings or notes linking the  amounts billed to a credit card receipt, invoice, packing slip, or a  purchase log; and  the approving official’s review of the cardholders’ monthly statements  was signed and dated prior to certification for payment, and there were  virtually any markings or notes on the monthly statements evidencing  that review.
Our testing revealed that documented evidence of adequate cardholder  reconciliation or approving official review of cardholder transactions did  not exist for most of our sample transactions.  Examples of inadequate  documentation included missing statements, invoices, signatures, or dates,  or a lack of evidence of cardholder reconciliation or approving official  review.  Without such evidence, we—and the program coordinators, who  are required to semiannually review approving official records—cannot  determine whether officials are complying with review requirements.   As  shown in table 6, the failure rate for this internal control activity at the  units in the four commands audited was among the highest of the controls  we tested.
The failure rates for this attribute were similar to the failure rates that we  reported for this attribute in our previous testimony related to two San  Diego-based Navy units.  The Navy agreed with our initial  recommendations concerning the need to clarify the payment certification  portion of the purchase card instruction.   Based on this audit’s broader  review of the Navy’s purchase card program, we believe that the high  failure rate may also be attributable to the fact that approving official and  cardholder responsibilities fall into the category of “other duties as  assigned” without any specific time allocated for their performance, as  discussed previously.  Further, cardholders and approving officials are not  necessarily in the same geographic location.  Consequently, while an  approving official might be able to review cardholder transactions  electronically, the approving official will not necessarily be able to review  the documentation supporting the transaction.  Approving officials and  cardholders told us they had many duties of a higher priority than  reviewing the monthly purchase card statements.  A large workload,  especially in “other duties as assigned,” and geographical separation of  cardholders and approving officials can lead to less attention than  expected or desired.  For example, one NAVSEA approving official’s ability  to promptly and accurately review cardholders’ monthly statements was  hampered because (1) the approving official was responsible for reviewing  the statements of nearly 400 cardholders and regularly certified for  payment monthly statements exceeding $1 million and (2) the approving  official who was located in Rhode Island was responsible for reviewing the  statements of cardholders not only located in Rhode Island but also  cardholders located in Virginia, Washington, and Florida.
We identified numerous instances of purchases that had not been  adequately reviewed and reconciled to the monthly statements, but in  which the statements were, nonetheless, certified for payment.  Such  activities allow potentially fraudulent, improper, and abusive or  questionable purchases (discussed in more detail in the following section  of this report) to go undetected.  Also, mistaken or other improper charges  by vendors might not be detected.  The following are examples of such  charges that we identified:  At Camp Lejeune, we found 29 transactions totaling over $50,000 for  which the Marine Corps was unable to provide any supporting  documentation concerning what was purchased or whether the items  purchased had a legitimate government use.  The vendors that the  Marine Corps paid without adequate supporting documentation  included Internet vendors, rental car companies, gift stores, and a stereo  store.  Considering that Camp Lejeune did not have documentation that  cardholders and approving officials routinely reconciled or reviewed the  monthly statements prior to payment, neither the Marine Corps nor we  can determine whether these accounts had been compromised and  someone was using them to fraudulently obtain goods or services at the  government’s expense.  Navy purchase card instructions require  cardholders to retain documentation received from the vendor, such as  a sales slip or cash register receipt to verify the accuracy of the charges  made.  The purpose of maintaining this documentation is to provide an  audit trail that supports each decision to use the card and any required  special approvals.
In December 2000, NAVSEA paid a hotel $12,200 despite the fact that  neither the cardholder nor the approving official had any evidence  concerning how the hotel arrived at the $12,200 amount.  When we  questioned the cardholder concerning the charge, he gave us a written  statement that the transaction was for the rental of a conference room  and audiovisual equipment.  The statement also said that he did not  authorize the purchase of any food.  However, a copy of the bill we  obtained from the hotel showed that the Navy paid $8,260 for food.
section_title: Major Commands Failed to Maintain Accountability for Pilferable Items
paragraphs: An agency must establish physical control to secure and safeguard vulnerable assets.  Examples include security for and limited access to assets such as cash, securities, inventories, and equipment which might be vulnerable to risk of loss or unauthorized use.
Such assets should be periodically counted and compared to control records. GAO's Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999)
We found accountable items acquired with purchase cards that were often  not recorded in property records of the units we audited.   In addition,  officials at three of the four major commands could not locate some of the  property items included in our statistical samples.  While some or all of the  items might, in fact, be at the installation, officials could not provide  conclusive evidence that they were in the possession of the government.   Unrecorded property and items that cannot be located indicate a weak  control environment and problems in the property management system.
Consistent with GAO’s internal control standards, DOD’s Property, Plant  and Equipment Accountability Directive and Manual, which was issued  in draft for implementation on January 19, 2000, requires accountable  property to be recorded in property records as it is acquired.  Accountable  property includes items that can be easily pilfered, such as computers and  related equipment, and cameras.  Entering such items in the property  records is an important step to help ensure accountability and financial  control over these assets and, along with periodic inventory, to deter theft  or improper use of government property.  Table 8 contains the results of  our review of property management records and inspection of accountable  property.
One example of the Navy’s failure to record pilferable property in property  management records involved Atlantic Fleet transactions with a computer  vendor, GTSI.  On September 30, 2000, the Navy contracted with GTSI to  purchase 430 computers, 213 flat panel monitors, and other computer  hardware and software using the GSA Multiple Award Schedule pricing.   GTSI shipped the computers, monitors, and equipment to the Atlantic Fleet  warehouse in November and December 2000, and the Atlantic Fleet paid  GTSI about $757,000 for those items in January 2001.  While the Atlantic  Fleet’s documents concerning these two transactions show that an  employee at the warehouse signed as receiving the computers, the Atlantic  Fleet did not record the serial numbers of the computers or the monitors,  and did not record the computers or monitors in any type of property  accountability system.
After we contacted GTSI and obtained the serial numbers, we were able to  determine that between January 2001 and January 2002, the Atlantic Fleet  shipped 243 of the computers and 126 flat panel monitors to land- and sea- based Atlantic Fleet users.  However, the Atlantic Fleet could not provide  us adequate evidence confirming the location of the 187 remaining  computers and 87 flat panel monitors.
Effectively managing accountable property has long been a problem area,  and the use of the purchase card has added further difficulties.  With about  25,000 Navy cardholders, the number of people buying accountable  property has greatly expanded as the purchase card program has grown.   Cardholders are responsible for reporting on the accountable property they  buy—so that it can be recorded in the unit’s accountable property books— but they often do not.
subsections: section_title: Change in Navy Property Accountability Policy
paragraphs: As we previously reported, on August 1, 2001, the Navy modified its policy  concerning pilferable property by changing the definition of what it  considered pilferable property.   This change in the definition has  contributed to the lack of accountability over such property.  Unlike the  previous policy, which specifically defined pilferable items, the new policy  provides commanding officers with latitude in determining what is and  what is not pilferable.  The new policy defines pilferable to be an item— regardless of cost—that is portable, can be easily converted to personal  use, is critical to the activity’s business/mission, and is hard to repair or  replace.  Citing the “hard to repair or replace” criterion in the new policy,  some unit commanders told us they have determined that only desktop and  laptop computers would be considered pilferable items.  Thus, these units  do not maintain accountability over numerous pilferable items, such as  digital cameras and personal digital assistants (PDAs), leaving them  vulnerable to possible theft, misuse, or transfer to personal use.  However,  not all unit commanders made this assertion and continued to maintain  accountability over items that were considered pilferable under the  previous policy.
section_title: Potentially Fraudulent, Improper, and Abusive or Questionable Transactions
paragraphs: We identified numerous purchases at the installations we audited and  through our Navy-wide data mining that were potentially fraudulent,  improper, and abusive or questionable.  As discussed in appendix II, our  work was not designed to identify, and we cannot determine, the extent of  potentially fraudulent, improper, and abusive or otherwise questionable  transactions.  However, considering the control weaknesses identified at  each unit audited, it is not surprising that these transactions were not  detected or prevented.  In addition, the existence of similar improper, and  abusive or questionable transactions in our Navy-wide data mining of  selected transactions provides additional indications that a weak control  environment and ineffective specific controls exist throughout the Navy.  In  addition, appendix IV contains an update on two fraud investigations  involving Navy units based in San Diego that we discussed in our March  2002 testimony.
subsections: section_title: Potentially Fraudulent Purchases
paragraphs: We considered potentially fraudulent purchases to include those made by  cardholders that were unauthorized and intended for personal use.   Potentially fraudulent purchases can also result from compromised  accounts in which a purchase card or account number is stolen and used to  make a potentially fraudulent purchase.  Potentially fraudulent  transactions can also involve vendors charging purchase cards for items  that cardholders did not buy.  The Navy and the major commands we  audited had policies and procedures that were designed to prevent and  detect potentially fraudulent purchases.  For example, as discussed  previously, approving officials are required to review the supporting  documentation for each transaction for legality and proper government use  of funds.  However, our testing showed that these control activities had not  been implemented as intended.
Although collusion can circumvent what otherwise might be effective  internal control activities, a robust system of guidance, internal control  activities, and oversight can create a control environment that provides  reasonable assurance of preventing or quickly detecting fraud, including  collusion.  However, in auditing the Navy’s internal control at units  assigned to four major commands during fiscal year 2001, we did not find  that the processes and activities were operating in a manner that provided  such assurance.
The Navy does not have an automated system that identifies, captures, and  reports key information on potentially fraudulent purchases that have been  identified or are being investigated within the purchase card program.  In  table 9, we identified instances of fraudulent and potentially fraudulent  transactions at the commands we audited and by making inquiries with  Naval Criminal Investigative Service.  All of the purchases that we discuss  in this section were included in monthly cardholder statements that were  certified and paid by the Navy.
The following examples of fraud are illustrative of the cases in table 9:   An approving official’s failure to review a cardholder’s statements  promptly contributed to an Atlantic Fleet cardholder making over  $250,000 in unauthorized purchases between September 2000 and July  2001.  In July 2001, when a command supply official began reviewing the  cardholder’s monthly statements, he noticed that over $80,000 of those  charges were unsupported.  Included in those unsupported charges  were numerous transactions with suspicious vendors.  After command  supply officials asked the cardholder about the unsupported purchases,  the cardholder admitted to making thousands of dollars of illegal  Internet purchases and illegally purchasing EZ Pass prepaid toll tags,  expensive remote control helicopters, and a dog.  The Navy decided to  prosecute the cardholder, and a court martial is pending.
An approving official’s failure to review a cardholder’s statements and  the cardholder’s failure to keep evidence of what was purchased  contributed to an Atlantic Fleet cardholder fraudulently using his  purchase card from January 2000 through October 2000 to purchase an  estimated $150,000 in automotive, building, and home improvement  supplies.  The cardholder sold some of the items to generate cash.   According to Navy investigators, the cardholder destroyed many of the  requisitions, receipts, and purchase logs for the stolen items in an  attempt to cover up his actions.  In addition, according to Navy criminal  investigators, if the monthly purchase card billing statements were  properly reviewed, the cardholder’s fraudulent activities would have  been exposed.   In exchange for pleading guilty to multiple counts of  larceny and other criminal violations, the cardholder’s jail time was  reduced to 24 months.
An approving official’s failure to adequately review a cardholder’s  statements contributed to two Atlantic Fleet cardholders conspiring  with at least seven vendors to submit about $89,000 in fictitious and  inflated invoices.  The cardholders had the vendors ship supply items to  an Atlantic Fleet warehouse and the personal items directly to their  residences.  The cardholders also had vendors inflate the price and/or  quantity of items purchased.  According to Navy investigators, the  cardholders would sell, use, and barter the illegally obtained items,  while the vendor sales representatives received inflated sales  commissions and an estimated $3,000 to $5,000 in Navy property that  was given to them as bribes.  One vendor sales representative who  admitted to conspiring to supply false invoices said that he could not get  sufficient business until he altered the invoices like the other vendors.   According to the caller who informed NCIS of the illegal activity, it was  common knowledge that the cardholders were getting kickbacks  because of their positions as Navy buyers.  Based on the results of the  NCIS investigations, one of the cardholders received 24-months  confinement and a bad conduct discharge while the other received a 60- day restriction and reduction in rank.
In another case of potential fraud, we found that in March 1999 the Navy  inappropriately issued five government purchase cards to individuals who  did not work for the government.  The individuals who received the Navy  purchase cards worked for a consulting company that occasionally  provided services to the Navy.  NAVSUP Instruction 4200.94 limits the Navy  purchase card to authorized government personnel in support of official  government purchases.  Between March 1999 and November 2001 these  individuals used the Navy purchase cards to make purchases totaling about  $230,000 with vendors including airlines, hotels, rental car companies, gas  stations, restaurants, a florist, and golf courses.  We discovered these  charges in November 2001 as part of our data mining for suspicious  transactions at the Pacific Fleet.  Within a week of our inquiries to the  Pacific Fleet concerning the charges on these accounts, the Pacific Fleet  agency program coordinator instructed Citibank to (1) immediately  deactivate the accounts and (2) close the accounts once the balances were  paid.
While the consulting company ultimately paid Citibank for all charges  made with those cards, the consulting company was 30 days past due on  the account 28 times during the 38 months that the accounts were open.   Further, the Navy was contractually liable for all purchases made with the  cards and would have been responsible for payment if the consulting  company had failed to pay.  The risk to the Navy was real because, when  the Navy had Citibank deactivate the accounts in November, the company,  which still owed $8,600, threatened to withhold payment unless the Navy  reopened the accounts.  In addition, the consulting company contacted  Citibank directly and tried to assume control of the accounts by claiming  the company had “spun off from the Navy.”  While the consulting company  did eventually pay Citibank, it was not until March 2002—4 months after  the accounts were deactivated.
Our Office of Special Investigations researched some of the charges and  found that, by using a Navy purchase card, the consulting company avoided  paying state sales taxes and obtained discounts at airlines and hotels that  are typically offered only to the federal government.  The airline discounts  are particularly advantageous because airlines offer the federal  government significantly discounted tickets that are not encumbered with  the penalties and limitations that are imposed upon private sector  companies and the general public.  Finally, Citibank does not post an  interest charge on past due accounts.  Thus, by using the Navy purchase  card, the company avoided paying interest on the past due accounts.  Based  on the results of our work, we referred this case to the Naval Criminal  Investigative Service for further investigation.
subsections: section_title: Navy’s Fraud Database Does Not Include Key Data
paragraphs: We attempted to obtain examples of other potentially fraudulent activity in  the Navy purchase card program from NCIS in Washington, D.C.  NCIS  investigators acknowledged that they have investigated a number of  purchase card fraud cases; however, their investigation database does not  permit a breakdown of fraud cases by type, such as purchase cards.   Purchase card program officials and NCIS officials said that they had no  information on the total number of purchase card fraud investigation cases  throughout the Navy that had been completed or were ongoing.  Based on  our identification of a number of fraudulent and potentially fraudulent  cases at the installations that we audited, we believe that the number of  cases involving fraudulent and potentially fraudulent transactions could be  significant.  Without such data, the Navy does not know the significance, in  numbers or dollar amounts, of fraud cases that have been or are being  investigated and is hampered in taking corrective actions to prevent such  cases in the future.
section_title: Improper Purchases and Transactions
paragraphs: Our audit work at the four commands and our Navy-wide data mining  identified numerous examples of improper transactions.  Improper  transactions are those purchases that, although approved by the Navy  officials and intended for government use, are not permitted by law,  regulation, or DOD policy.  We identified the following three types of  improper purchases.
Purchases that do not serve an authorized government purpose.
Split purchases, in which the cardholder circumvents cardholder single- purchase limits.  The Federal Acquisition Regulation guidelines  prohibit splitting purchase requirements into more than one transaction  to avoid the need to obtain competition on purchases over the $2,500  micropurchase threshold.  Cardholders also split purchases to  circumvent higher single-transaction limits for payments on contracts  exceeding the micropurchase threshold.
Purchases from improper sources as previously discussed.  Various  federal laws and regulations require procurement officials to acquire  certain products from designated sources such as JWOD vendors.  The  JWOD program is a mandatory source of supply for all federal entities.   It generates jobs and training for Americans who are blind or have other  severe disabilities, requiring federal agencies to purchase supplies and  services furnished by nonprofit agencies—such as the National  Industries for the Blind and the National Industries for the Severely  Handicapped—who employ such individuals.  The improper  transactions that resulted from purchasing items from nonstatutory  sources were previously discussed in the section on adherence with  control procedures.
We believe that if the Navy better monitored the vendors with which its  cardholders conducted business, the Navy could minimize its number of  improper purchases.  Such monitoring could also provide the Navy the  opportunity to leverage its purchase volume and negotiate discounts with  frequently used vendors.
subsections: section_title: Purchases That Do Not Serve an Authorized Government Purpose
paragraphs: We found several instances in which cardholders purchased goods, such as  clothing, that were not authorized by law or regulation.  The Federal  Acquisition Regulation, 48 C.F.R. 13.301(a), provides that the  governmentwide commercial purchase card may be used only for  purchases that are otherwise authorized by law or regulations.  Therefore,  a procurement using the purchase card is lawful only if it would be lawful  using conventional procurement methods.  Under 31 U.S.C. 1301(a),  “ppropriations shall be applied only to the objects for which the  appropriations were made…”  In the absence of specific statutory  authority, appropriated funds may only be used to purchase items for  official purposes, and may not be used to acquire items for the personal  benefit of a government employee.  Improper transactions, as shown in  table 10, were identified as part of our review of fiscal year 2001  transactions and related activity at the four commands and as part of our  Navy-wide data mining of transactions with questionable vendors.
The following examples of improper transactions are illustrative of the type  of cases included in table 10.
We identified a Pacific Fleet cardholder who used the purchase card in  January 2001 to buy a $199 leather flight jacket as a personal gift for an  official visitor.  Secretary of the Navy (SECNAV) Instruction 7042.7J  specifically identifies flight jackets as a prohibited personal gift to a  visitor.  In November 2001, when we questioned the deputy commander  concerning the flight jacket, he told us that the purpose of the gift was to  recognize the individual’s contributions to the Navy’s San Diego  installations.  The deputy commander subsequently told us that the  personnel involved with the gift were counseled, and that he, the deputy  commander, had reimbursed the Navy for the jacket in January 2002.
We identified purchases of clothing by NAVSEA that should not have  been purchased with appropriated funds. Generally, agencies may not  use appropriated funds to purchase clothing for civilian employees. One  exception is 5 U.S.C. 7903, which authorizes agencies to purchase  protective clothing for employee use if the agency can show that  (1) the item is special and not part of the ordinary furnishings that an  employee is expected to supply, (2) the item is essential for the safe and  successful accomplishment of the agency’s mission, not solely for the  employee’s protection, and (3) the employee is engaged in hazardous  duty.  Further, according to a Comptroller General decision dated March  6, 1984, clothing purchased pursuant to this statute is property of the  U.S. government and must only be used for official government  business.  Thus, clothing purchases, except for rare circumstances in  which the purchase meets stringent requirements, is usually considered  a personal item for which appropriated funds should not be used.  In  one transaction, a NAVSEA cardholder purchased polo shirts and other  gifts for a “Bring-Your-Child-to-Work Day” at a total cost of about $1,600.
In another example of clothing for personal use from our Navy-wide  data mining, several charges for amounts from $70 to $230 were  identified at Hecht’s and Nordstrom.  We were informed that these were  for purchases of civilian clothes—slacks, shirts, and suits—for enlisted  personnel who were serving in an official capacity as assistants to  admirals and general officers, and to wear when playing in a jazz band.   The Director, Purchase Card Unit, Defense Contracting Command  Washington, informed us that this appears to be a fairly widespread  practice.  Clothing needs of military personnel are covered by the  clothing allowances that they receive.
As part of our data mining of Navy-wide purchase card transactions, we  identified two purchases in which cardholders purchased Bose headsets  at $300 each.  The headsets were for personal use—listening to music— while taking commercial flights and, therefore, should not have been  purchased with the Navy purchase card.
At NAVSEA, we identified charges to hotels in Newport News and  Portsmouth, Virginia, totaling about $8,000 for locally based NAVSEA  employees to attend meetings at which they were inappropriately  provided meals and refreshments at the government’s expense.  The  cardholders told us that they authorized the hotels to bill for audiovisual  equipment and conference room rental.  The cardholders said the hotel  was not authorized to bill for food.  However, despite the cardholders’  assertion, the detailed bills showed that the hotels charged NAVSEA  about $7,000 for meals including breakfasts, lunches, and snacks.   Pursuant to 31 U.S.C. 1301(a), "ppropriations shall be applied only to  the objects for which the appropriations were made . . . ."  In the absence  of specific statutory authority, appropriated funds may only be used to  purchase items for official purposes, and may not be used to acquire  items for the personal benefit of a government employee.  For example,  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.
Three of the four commands audited paid improper and abusive phone  charges.  For example in June 2001, the Atlantic Fleet paid $1,175 for  monthly service charges for 22 phones.  We determined that some cell  phone calls were long distance toll calls that were not for legitimate  government business.  The Navy’s and Atlantic Fleet’s command level  procedures prohibit the use of cell phones for other than officially  approved uses.  In addition, even though Atlantic Fleet guidance  requires subordinate units to verify monthly cell phone usage, the units  were not reviewing the monthly bills as required.  Our audit of the calls  made using the cell phones determined that some were to personal  residences—not military facilities or merchants supplying goods and  services to the Navy.  In addition, we found wasteful charges for cell  phones.  For example, the Navy paid for 13 months of service at $15 per  month for a cell phone that had been returned to the vendor.  It was not  until we inquired about the lack of use on the phone that the Navy  realized it was paying for a phone that had been returned over 1 year  earlier.
section_title: Split Purchases
paragraphs: Another category of improper transaction is a split purchase, which occurs  when a cardholder splits a transaction into segments to avoid the  requirement to obtain competition for purchases over the $2,500  micropurchase threshold or to avoid other established credit limits.  The  Federal Acquisition Regulation prohibits splitting a purchase into more  than one transaction to avoid the requirement to obtain competition for  purchases over the $2,500 micropurchase threshold.  Navy purchase card  instructions also prohibit splitting purchases to avoid other established  credit limits.  Once items exceed the $2,500 threshold, they are to be  purchased through a contract in accordance with simplified acquisition  procedures that are more stringent than those for micropurchases.
Our analysis of data on purchases at the four major commands we audited  and our data mining efforts identified numerous occurrences of potential  split purchases.   In addition, internal auditors at all four commands that we  audited identified split purchases as a continuing problem.  In some of  these instances, the cardholder’s purchases exceeded the $2,500 limit, and  the cardholder split the purchase into 2 or more transactions of $2,500 or  less.  For example, a Camp Lejeune cardholder made 8 transactions  totaling about $17,000 on 1 day to purchase combat boots.  In addition, a  NAVSEA cardholder made 14 purchases totaling over $30,000 in 1 day from  an electronic supply store.
All the commands that we audited said that cardholders splitting purchases  to circumvent the micropurchase threshold was a problem.  As we  previously reported, by circumventing the competitive requirements of the  simplified acquisition procedures, the commands may not be getting the  best prices possible for the government.  For the Navy to reduce split  transactions, it will need to monitor the vendors with whom cardholders  are conducting business.
section_title: Better Management of Transactions with Frequently Used Vendors Could Result in Additional Savings
paragraphs: The Navy has not proactively managed the purchase card program to  identify opportunities for savings.  Purchase card sales volume has grown  significantly over the last few years with the Navy now using the purchase  card to procure nearly $2 billion a year in goods and services.  We believe  that the Navy could better leverage its volume of purchases and negotiate  discounts with frequently used vendors.  For example, during fiscal year  2001, the Navy paid over $1 million each to 122 different vendors using the  purchase card.  In total during fiscal year 2001, the Navy paid those 122  vendors about $330 million.  However, the Deputy Director of the Navy  eBusiness Operations Office told us that, despite this heavy sales volume,  the Navy had not negotiated reduced-price contracts with any of the  vendors.
As previously stated, one of the benefits of using purchase cards versus  traditional contracting and payment processes is lower transaction  processing costs and less red tape for both the government and the vendor.   Through increased analysis of purchase card procurement patterns, the  Navy has the opportunity to leverage its high volume of purchases and  achieve additional savings from vendors by negotiating volume discounts  similar to those the General Service Administration (GSA) has negotiated  in its Multiple Award Schedule program.  Under GSA’s Multiple Award  Schedule, participating vendors agree to sell their products at preferred  customer prices to all government purchasing agents.  According to the  Deputy Director of the Navy’s eBusiness Operations Office, 74 of the 122  vendors with which the Navy spent more than $1 million using the  purchase card during fiscal year 2001 did not participate in the Multiple  Award Schedule program.  In addition, for 48 of the vendors with which  Navy spent more than $1 million and that did participate in the Multiple  Award Schedule, the opportunity existed for the Navy to negotiate  additional savings.  GSA encourages agencies to enter into blanket  purchase agreements (BPAs) and negotiate additional discounts with  Multiple Award Schedule vendors from which they make recurring  purchases.
By analyzing Navy-wide cardholder buying patterns, the Navy should be  able to achieve additional savings by identifying vendors and vendor  categories for which it uses the purchase card for significant amounts of  money and negotiate discounts with them.  For example, during fiscal year  2001, the Navy spent about $65 million with 5 national computer vendors  (Dell, Gateway, CDW Computer Centers, Micro Warehouse, and GTSI),  $22 million with 3 office supply companies (Corporate Express, Staples,  and Office Depot), and $9 million with 2 national home improvement stores  (Home Depot and Lowe’s).  While 8 of these 10 vendors participate in GSA’s  Multiple Award Schedule program, the Navy could not tell us whether its  purchases from these vendors were made using that program’s preferred  price schedules.  Further, considering the Navy’s volume of purchases, it is  reasonable to assume that it could negotiate additional savings with these  and other vendors if it used historical purchase card sales data as a  bargaining tool.
section_title: Abusive and Questionable Purchases
paragraphs: We identified numerous examples of abusive and questionable transactions  at each of the four installations we audited.  We defined abusive  transactions as those that were authorized, but in which the items were  purchased at an excessive cost (e.g., “gold plated”) or for a questionable  government need, or both.  Abuse can be viewed when the conduct of a  government organization, program, activity, or function falls short of  societal expectations of prudent behavior.  Often, improper purchases such  as those discussed in the previous section are also abusive.  Transactions  that are both improper and abusive were discussed previously, such as the  excessive cell phone charges at the Atlantic Fleet.
Questionable transactions are those that appear to be improper or abusive  but for which there is insufficient documentation to conclude either.  We  consider transactions to be questionable when they do not fit within the  Navy guidelines on purchases that are acceptable for the purchase card  program, and when there is not a reasonable or documented justification to  acquire the item purchased.  When we examined the support for  questionable transactions, we usually did not find evidence of why the  Navy or Marine Corps needed the item purchased. Consequently, the  cardholder provided an after-the-fact rationale that the item purchased was  not improper or abusive.  To prevent unnecessary costs, these types of  questionable purchases require scrutiny before the purchase, not after.   Table 11 identifies examples of both abusive and questionable purchases.
The following include details of some of the abusive and questionable  purchases in table 11.
Computer and related equipment exceeding documented need—The  Navy used the purchase card to acquire computer and computer-related  items far in advance of its needs.  Considering that computer prices  decrease over time while their capabilities improve, warehousing  computers and related items is an especially ineffective use of  government funds.  Despite this time, price, and capability relationship,  we found in our statistical sample that the Atlantic Fleet, Pacific Fleet,  and NAVSEA purchased computers, monitors, and printers that often  remained unused for more than 12 months.  For example, the computers  purchased by the Atlantic Fleet in September 2000 that were discussed  in the section on pilferable property had Pentium III microprocessors.   By the time the Atlantic Fleet issued some of those computers in  January 2002, the manufacturer was selling computers with Pentium IV  microprocessors at a cost of less than what the Atlantic Fleet paid for  the Pentium IIIs.  Further, our statistical sample at the Atlantic Fleet  identified 22 other computers that the Navy purchased in April 2001  that, as shown in figure 4, were unused and still in their original boxes in  June 2002.  Similarly, we found two $3,500 laser printers purchased in  September 2000 that were selected in our statistical sample of Pacific  Fleet transactions still in their original boxes at a Pacific Fleet  warehouse in January 2002.
We have previously identified DOD’s inventory management as an area  at high risk for fraud, waste, and abuse.  In our report on DOD major  management challenges and program risk we stated that because of  its unreliable inventory management systems managers may request  funds to obtain additional items that were on hand.  Our review of fiscal  year 2001 Atlantic Fleet transactions found that despite having these  unopened items, the unit had in fact purchased additional computers  after September 2000 and the Pacific Fleet purchased laser printers  after June 2001.
Designer leather goods—In September and October 2000, NAVSEA  made two separate transactions totaling nearly $1,800 to obtain designer  leather folios and PDA holders costing up to $300 each made by Coach  and Dooney and Bourke.  Two of the folios were given as gifts to a  visiting officer in the Australian Navy, while other designer items were  personal preferences of the cardholders and requesting individuals.
Flat panel monitors—Our statistical sample selected transactions  containing 243 flat panel monitors purchased by the Atlantic Fleet,  Pacific Fleet, and NAVSEA.  The cost of the monitors selected in our  sample ranged from $550 to $2,200.  Conversely, the 17-inch standard  monitors selected in the sample cost about $200.  As we have reported in  the past, we believe the purchase of flat panel monitors—particularly  those that cost far in excess of standard monitors—to be abusive and  not an effective use of government funds in the absence of a  documented need based on technical, space, or other considerations.  Further, in our statistical sample, we found that some of the flat panel  monitors that the Atlantic Fleet purchased were placed in a warehouse  and not issued for more than a year after the Navy took possession.   Warehousing flat panel monitors is especially inefficient because, like  computers, as time passes the price of flat panel monitors decreases and  technology increases.  The flat panel monitors that we found still in the  box cost the Navy $709 each.  As of June 2002, the GSA price for the  same flat panel monitors was about $480.
Personal digital assistants—We found that the Atlantic Fleet and  Pacific Fleet purchased PDAs for staff without documenting why the  staff needed them to perform their official duties.  In one instance, the  Atlantic Fleet purchased 90 PDAs for $32,500 in October 2000 without  any documented justification of need.  As of June 1, 2002, 14 of the 90  PDAs had not been issued and were still in inventory.  Further, the  competitive bid price worksheet showed that the Navy did not accept  the lowest bid for the PDAs.  According to the competitive bid  worksheet, the Atlantic Fleet received three bids for the PDAs that  ranged from a low of $30,400 to a high of $32,850.  The Atlantic Fleet  accepted the middle bid of $32,500.  Federal Acquisition Regulation  allows purchasing agents to reject lower bids if the purchasing agent  determines that the items being delivered do not conform to the  applicable specifications, or if the vendors cannot deliver the goods or  services within the specified time requirements.  We saw no evidence  that quality or timeliness were a factor in selecting the higher priced bid.
Clock radios—As part of our Navy-wide data mining we inquired about a  $2,443 transaction with Bose Corporation on September 30, 2000.  In  response to that inquiry, the Navy command that made the purchase told  us that it purchased seven Bose “Wave Radios” costing $349 each.  The  command justified the purchase by stating that Navy regulations require  all visiting office quarters to be supplied with a clock radio.  While we do  not question the need to supply visiting officer quarters with clock  radios, we do question the judgment of purchasing $349 clock radios  when there are numerous models of clock radios made by GE, Sony, and  Panasonic costing about $15 from GSA.
section_title: Disciplinary Actions Seldom Taken Against Those Who Misuse Purchase Cards
paragraphs: In our November 30, 2001, report and March 13, 2002, testimony on the  purchase card controls at the Space and Naval Warfare Systems Command  (SPAWAR) Systems Center and NPWC, we recommended that action be  taken to help provide assurance that cardholders adhere to applicable  purchase card laws, regulations, internal control and accounting standards,  and policies and procedures.  Specifically, we recommended that the  Commander, Naval Supply Systems Command, revise NAVSUP Instruction  4200.94 to include specific consequences for noncompliance with purchase  card policies and procedures.  In response to the November 2001 report,  DOD did not concur with that recommendation and stated that existing  Navy policy clearly identifies consequences for fraud, abuse, and misuse.    On May 29, 2002, the Navy told us that in response to our recommendation,  the Assistant Secretary of the Navy for Research, Development and  Acquisition issued a Naval Message reiterating compliance; accountability;  and consequences of fraud, abuse, and misuse.
While we would agree that the issuance of such a message has benefits, we  continue to believe that the Navy needs to establish specific consequences  for these purchase card problems because existing Navy policy does not  identify any specific consequences for failure to follow control  requirements.  Currently, the Navy has not established specific disciplinary  and/or administrative consequences—such as withdrawal of cardholder  status, reprimand, suspension from employment for several days, and, if  necessary, firing.  Unless cardholders and approving officials are held  accountable for following key internals controls, the Navy is likely to  continue to experience the types of fraudulent, improper, and abusive and  questionable transactions identified in our work.  As part of this audit, we  asked the agency program coordinators at each command that we audited  whether any cardholders referred to in this report were disciplined for  improper, abusive, or questionable purchases; or if the reduction in the  number of cardholders could be attributed to individuals who lost the card  because they made improper, abusive, or questionable purchases.   However, according to the agency program coordinators, only one of the  cardholders referred to in this report lost a card for improper, abusive, or  questionable purchases, and no one has received any disciplinary actions  for abusing the purchase card.
section_title: Conclusions
paragraphs: We support the use of a well-controlled purchase card program.  It is a  valuable tool for streamlining the government’s acquisition processes.   However, the Navy program is not well controlled and as a result is  vulnerable to fraud, waste, and abuse.  The primary cause of the control  breakdowns is the lack of adherence to valid policies and procedures.   Nonetheless, the control environment at the Navy has improved over the  last year.  For example, the Navy has reduced the number of cardholders by  over 50 percent, from 59,000 to 25,000, thus improving the prospects for  effective program management.  However, further actions are needed to  achieve an effective control environment.  For example, leadership by  major command and unit management and a strong system of  accountability must be established for effective program control.   Strengthening the control environment will require a commitment by the  Navy to build a robust purchase card control infrastructure.
section_title: Recommendations for Executive Action
paragraphs: In our November 30, 2001, report on control weaknesses at two units in San  Diego, we made 29 recommendations to improve management of the  purchase card program primarily at the two locations audited.  Based on  the broader scope of our current work we are making the following  additional recommendations to strengthen the overall control environment  and improve internal controls for the Navy’s purchase card program.
subsections: section_title: Overall Program Management and Environment
paragraphs: We recommend that the Director of the Department of the Navy eBusiness  Operations Office take the following actions.
Direct all agency program coordinators to review the number of  cardholders who report to an approving official and make the changes  necessary to prevent approving officials from having the responsibility  of reviewing more cardholders than allowed by Navy and DOD policies.
Establish a database that maintains information on all purchase card  training taken by cardholders, approving officials, and agency program  coordinators.  Require that agency program coordinators update that  database whenever these purchase card program officials take training.
Establish specific training courses for cardholders, approving officials,  and agency program coordinators tailored to the specific  responsibilities associated with each of those roles.
Direct agency program coordinators to review an approving official’s  overall workload and determine whether the approving official has the  time necessary to perform the required review functions.
Establish job descriptions that identify responsibility and performance  standards for cardholders, approving officials, and agency program  coordinators.
Link the cardholders’, approving officials’, and agency program  coordinators’ performance appraisals to achieving their performance  standards.
Work with the Naval Audit Service and Command Evaluation staff to  begin periodic audits of the purchase card program to provide Navy  management—at the command and unit level—an independent  assessment of the control environment and whether the agency program  coordinators, approving officials, and cardholders are adhering to  control procedures.
Identify vendors with which the Navy or Marine Corps uses purchase  cards to make frequent purchases, evaluate Navy purchasing practices  with those vendors, and forward the results of that evaluation to the  Assistant Secretary of the Navy for Research, Development and  Acquisition to contract with them, when applicable, to optimize Navy  purchasing power.
We recommend that the Secretary of the Navy modify the definition of  “Pilferable Personal Property” in SECNAV Instruction 7320.10 dated August  1, 2001, by eliminating the requirement that a portable item easily  converted to personal use also be difficult to repair or replace, and  specifically identify items such as computers, cameras, personal digital  assistants, and audiovisual equipment as meeting the definition of being  pilferable and thus accountable.
section_title: Specific Internal Control Activities
paragraphs: We recommend that the Director of the Department of the Navy eBusiness  Operations Office modify NAVSUP Instruction 4200.94 to provide  cardholders, approving officials, and agency program coordinators detailed  instructions on the following specific control activities:  timely and independent receiving and acceptance of items obtained with  a purchase card and documenting the results of that process,  screening purchases for their availability from required vendors and  documenting the results of the screening,  promptly reconciling of the monthly purchase card statements to  supporting documentation and documenting the results of that  reconciliation,   promptly reviewing of a cardholder purchase card statement by the  approving official prior to certifying the statement for payment and  documenting the results of that review, and    prompt cardholder notification to property accountability officer of the  pilferable property obtained with the purchase card, and approving  official responsibility for monitoring that the pilferable property has  been recorded in the accountability records.
section_title: Potentially Fraudulent, Improper, and Abusive or Questionable Purchases
paragraphs: We recommend that the Director, Department of Navy eBusiness  Operations Office take the following actions.
Modify NAVSUP Instruction 4200.94 to require cardholders to maintain  documented justification and advanced approval of purchases that fall  outside the normal procurements of the cardholder in terms of either  dollar amount or type of purchase.
Establish a Navy-wide database of known purchase card fraud cases by  type of fraud that can be used to identify deficiencies in existing internal  control and to develop and implement additional control activities, if  warranted or justified.
Establish a Navy-wide data mining, analysis, and investigation function  to supplement other oversight activities.  This function should include  providing oversight results and alerts to major commands and  installations when warranted.
Modify NAVSUP Instruction 4200.94 to include a schedule of  disciplinary actions as a guide for taking actions against cardholders  who make improper or abusive acquisitions with the purchase card.
We also recommend that the Under Secretary of Defense (Comptroller)  direct the Charge Card Task Force to assess the above recommendations  and to the extent applicable, incorporate them into its future  recommendations to improve purchase card policies and procedures  throughout DOD.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, which are reprinted in  appendixes VI and VII, DOD concurred with 16 of our 19 recommendations.   DOD partially concurred with the remaining 3 recommendations dealing  with (1) linking the performance appraisals of purchase card officials to  achieving performance standards, (2) maintaining accountability over  pilferable property, and (3) establishing a schedule of disciplinary actions  that will be taken against cardholders who make improper or abusive  acquisitions.  However, the actions that DOD plans to take on these 3  recommendations appear to address their most significant aspects.
Concerning linking staff performance to purchase card performance  standards, DOD responded that the Department of Navy eBusiness  Operations Office will work with the Navy Human Resources Office to  determine the need, legality, and feasibility of adding cardholder, approving  official, and agency program coordinator performance standards to  performance appraisals.  Such measures are an important aspect of the  purchase card program and are responsive to our recommendation.  We  encourage the Navy eBusiness Operations Office to work expeditiously  with the Navy Human Resources Office to develop performance standards  that make carrying out this fiduciary responsibility a matter to be  considered in assessing staff.
Regarding property more susceptible to theft, DOD stated that Navy would  modify its definition of pilferable property to be the same as the DOD  definition of pilferable property.  By adopting the DOD definition, the Navy  will remove the requirement that the item be “hard to repair or replace”  from its definition of pilferable property.  DOD did not, however, agree with  the aspect of our recommendation that it provide commanders examples of  items considered pilferable.   DOD stated that a listing of specific pilferable  items would require continual update and vigilance, and prove ultimately to  be subjective and unscientific.  We agree that a listing of specific pilferable  items would require periodic updating.  That was not the intent of our  recommendation.  Instead, we believe that providing commanders  examples of types of pilferable property that can be easily removed from  Navy facilities and have immediate use outside the Navy, would help ensure  that items such as camera equipment and laptop computers are  consistently included in accountable records.
Concerning our recommendation to establish a schedule of disciplinary  actions that will be taken against cardholders who abuse their purchase  card privileges, DOD stated that the department has already taken actions  to deal with improper and abusive uses of purchase cards, and that the  Navy’s eBusiness Operations Office will examine whether actions that have  already been taken are appropriate.  However, DOD also stated that to the  extent the recommendation contemplates the prescription of mandatory  disciplinary or other actions, it is objectionable.  DOD stated that  disciplinary and other actions in response to improper and abusive  purchase card use are properly addressed as matters of command and  supervisory discretion.
We never contemplated that the schedule would prescribe mandatory  actions.  Rather, we intended the schedule to be a guide of disciplinary  actions to be taken against cardholders.  It would also serve as an  important internal control feature that clearly identified the consequences  associated with improper and abusive purchase card use and would serve  as a deterrent to such abuse.  Further, the schedule of disciplinary actions  could include a range of actions that would be appropriate for various  types of purchase card misuse.  Commanders and supervisors would still  maintain their discretion to select the specific disciplinary action, if any,  depending on the circumstances of individual cases.   To eliminate any  confusion concerning the intent of our recommendation, we made a slight  modification to the text of the recommendation.
As agreed with your offices, unless you announce the contents of this  report earlier, we will not distribute this report until 30 days from its date.   At that time, we will send copies to interested congressional committees;  the Secretary of Defense; the Under Secretary of Defense for Acquisition,  Technology, and Logistics; the Under Secretary of Defense, Comptroller;  the Secretary of the Navy; the Assistant Secretary of the Navy for Research,  Development and Acquisition; the Director of the Defense Finance and  Accounting Service; and the Director of the Office of Management and  Budget.  We will make copies available to others upon request.  In addition,  the report will be available at no charge on the GAO web site at  http://www.gao.gov.
Please contact Gregory D. Kutz at (202) 512-9505 or kutzg@gao.gov, John  Ryan at (202) 512-9587 or ryanj@gao.gov, or John Kelly at (202) 512-6926 or  kellyj@gao.gov if you or your staffs have any questions concerning this  report.  Major contributors to this report are acknowledged in appendix  VIII.
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.  According  to the General Services Administration (GSA), the Department of Defense  (DOD) reported that during fiscal year 2001 it used purchase cards for  more than 10.7 million transactions, valued at $6.1 billion. The Navy’s  reported purchase card activity—MasterCards issued to civilian and  military personnel—totaled about 2.8 million transactions, valued at $1.8 billion, during fiscal year 2001.  This represented nearly 30 percent of  DOD’s purchase card activity for fiscal year 2001. According to unaudited  fiscal year 2001 purchase card data, four commands included in our current  audit—Atlantic Fleet, Pacific Fleet, Naval Sea Systems Command, and the  Marine Corps—made about $173 million, $137 million, $268 million, and  $224 million, respectively, in purchase card acquisitions.  In addition,  according to unaudited fiscal year 2001 purchase card data for the two  commands included in our March 2002 testimony, the Naval Facilities  Engineering Command (Public Works Center) and Space and Naval  Warfare Systems Command made about $117 million and $85 million in  purchase card acquisitions respectively.  See table 12 for further detail on  fiscal year 2001 purchase card spending.
Because the four commands have cardholders located throughout the  world, we limited our testing of the transactions made by the units of those  commands to cardholders located in specific geographical areas, and used  a case study approach to evaluate each command’s local purchase card  program.  According to unaudited fiscal year 2001 purchase card data,  Pacific Fleet cardholders in San Diego made about $35 million in purchase  card acquisitions; Atlantic Fleet cardholders located in the Norfolk area  made about $48 million in purchase card acquisitions; Naval Sea Systems  Command cardholders in the Norfolk area made about $49 million in  purchase card acquisitions; and Marine Corps cardholders at Camp  Lejeune made about $36 million in purchase card acquisitions.
The Pacific Fleet, Atlantic Fleet, and the Marine Corps are warfighting  units, while the Naval Sea Systems Command is a support command.  The  Pacific Fleet is responsible for providing trained and combat-ready naval  forces to the Commander-in-Chief U.S. Pacific Command.   Its headquarters  is in Honolulu, and its lower echelon commands are located in Honolulu  and San Diego.  The Atlantic Fleet provides trained, combat-ready forces to  support the United States and the North Atlantic Treaty Organization  (NATO) commanders in regions of conflict.  Its headquarters and lower  echelon commands are located in Norfolk.  The Naval Sea Systems  Command is responsible for providing the Navy operationally superior and  affordable ships, systems, and ordnance.  NAVSEA is headquartered in  Washington, D.C., and has major shipbuilding and repair facilities on both  the East and West Coasts including Norfolk.  The Marine Corps is  responsible for providing a highly flexible, combat-ready force in a high  state of readiness, prepared to support the military’s strategy.  The Marine  Corps has bases located throughout the United States, including Camp  Lejeune.
subsections: section_title: Governmentwide Purchase Card Program Guidelines
paragraphs: The purchase card can be used for both micropurchases and payment of  other purchases.  Although most cardholders have limits of $2,500, some  have limits of $25,000 or higher.  The Federal Acquisition Regulation, Part  13, “Simplified Acquisition Procedures,” establishes criteria for using  purchase cards to place orders and make payments.  DOD and the Navy  have supplements to this regulation that contain sections on simplified  acquisition procedures.  U.S. Treasury regulations govern purchase card  payment certification processing and disbursements.  DOD’s Purchase  Card Joint Program Management Office, which is in the Office of the  Assistant Secretary of the Army for Acquisition Logistics and Technology,  has issued departmentwide guidance related to the use of purchase cards.
However, each service has its own policies and procedures governing the  purchase card program.
section_title: Navy Purchase Card Acquisition and Payment Processes
paragraphs: The Naval Supply Systems Command (NAVSUP) is responsible for the  overall management of the Navy’s purchase card program, and has  published 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 agency 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.  The other key personnel in the purchase card program are the  approving officials and the cardholders. Figure 5 illustrates the standard  process in which the Navy purchase card is used to acquire goods and  services and certify the monthly bill for payment.
If operating effectively, the approving official is responsible for ensuring  that all purchases made by the cardholders within his or her cognizance are  appropriate and that the charges are accurate. The approving official is  supposed to resolve all questionable purchases with the cardholder before  certifying the bill for payment. In the event an unauthorized purchase is  detected, the approving official is supposed to notify the agency program  coordinator and other appropriate personnel within the command in  accordance with the command procedures. After reviewing the monthly  statement, the approving official is to certify the monthly invoice and send  it to the Defense Finance and Accounting Service (DFAS) for payment.
subsections: section_title: Cardholders
paragraphs: A purchase cardholder is a Navy employee who has been issued a purchase  card. The purchase card bears the cardholder’s name and the account  number that has been assigned to the individual.  The cardholder is  expected to safeguard the purchase card as if it were cash.
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.
section_title: Ordering Goods and Services
paragraphs: Purchase cardholders are delegated limited contracting officer ordering  responsibilities.  As limited contracting officers, purchase cardholders do  not negotiate or manage contracts.  Rather, cardholders use purchase cards  to order goods and services for their units and their customers as well.   Cardholders may pick up items ordered directly from the vendor or request  that items be shipped directly to an end user (requesters).  Upon receipt of  purchased items, the cardholder is to record the transaction in his or her  purchase log and obtain documented independent confirmation from the  end user, the supervisor, or another individual that the items have been  received and accepted by the government.  The cardholder is 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 2784 of title 10, United States  Code, requires DOD to issue regulations that ensure that purchase  cardholders and each official with authority to authorize expenditures  charged to the purchase card reconcile charges with receipts and other  supporting documentation before paying the monthly purchase card  statement.  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  documentation supporting the transaction and to notify the approving  official in writing of any discrepancies in the statement.
In addition, under NAVSUP Instruction 4200.94, before the credit card bill  is paid, 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 the 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 instructed to  presume that all transactions on the monthly statements are proper unless  notified in writing by the purchase cardholder to the contrary.  However,  the presumption does not relieve the approving official from reviewing the  statements for blatantly improper purchase card transactions and taking  the appropriate action prior to certifying the invoice for payment.  In  addition, the approving official is responsible for forwarding disputed  charge forms for submission to Citibank for credit.  Under the Navy’s task  order, Citibank allows the Navy up to 60 days after the statement date to  dispute invalid transactions and request a credit.
Upon receipt of the certified monthly purchase card summary statement, a  DFAS vendor payment clerk is to (1) review the statement and supporting  documents to confirm that the prompt-payment certification form has been  properly completed and (2) subject it to automated and manual validations.  DFAS effectively serves as a payment processing service and relies on the  approving-official certification of the monthly bill as support to make the  payment. The DFAS vendor payment system then batches all of the  certified purchase card payments for that day and generates a tape for a  single payment to Citibank by electronic funds transfer.  Figure 5 illustrates  the current design of the purchase card payment process for the Navy  command units we reviewed.
section_title: Scope and Methodology
paragraphs: We reviewed key purchase card controls for units of four Navy commands.   In addition, as you requested, we followed up on (1) the status of the  recommendations we made in our November 30, 2001, report, (2) the status  of the former commanding officer of SPAWAR Systems Center San Diego,  (3) the status of two potential fraud cases that we reported on in the March  2002 testimony, and (4) any other fraud cases we identified as part of this  audit.  Our review of key purchase card controls for the Atlantic Fleet,  Pacific Fleet, NAVSEA, and the Marine Corps covered  the overall management control environment, including  (1) management’s attitude in establishing the needed controls, (2) the  numbers of cardholder and approving officials, (3) cardholder and  approving official credit limits, (4) training for cardholders and  approving officials, (5) monitoring and audit of purchase card activity,  and (6) effectiveness of purchase card infrastructure;   tests of statistical samples of key controls over purchase card  transactions made during the first 11 months of fiscal year 2001  including (1) screening for required vendors, (2) documentation of  independent confirmation that items or services paid for with the  purchase card were received, (3) proper certification of the monthly  purchase card statement for payment, and (4) substantive tests of  pilferable property items included in our sample transactions to verify  whether they were recorded in an accountable record;   analytical reviews of transactions entered into during the last month of  fiscal year 2001;   data mining of the population of fiscal year 2001 transactions to identify  potentially fraudulent, improper, and abusive or questionable  transactions;   analysis and audit work related to invoices and other information  obtained from Franklin Covey, from which, based on interviews with  cardholders and our review of other transactions, we had reason to  believe that the units at the four commands had made improper and  abusive or questionable purchases during fiscal year 2001;    analysis of the population of fiscal year 2001 purchase card transactions,  for the four command units, to identify purchases that were split into  two or more transactions to avoid the micropurchase threshold or other  spending limits; and    analysis of the population of Navy-wide fiscal year 2001 purchase card  transactions to determine whether the Navy was effectively managing  its purchases with frequently used vendors.
In addition, our Office of Special Investigations worked with DOD’s  criminal investigative agencies, Citibank, and credit card industry  representatives to identify known and potentially fraudulent purchase card  cases.  Our Office of Special Investigations also investigated potentially  fraudulent or abusive purchase card transactions that we identified while  analyzing fiscal year 2001 purchase card transactions at the units in the  four commands.  Because the Navy does not have a database of purchase  card fraud cases, we were unable to determine the extent of known fraud  cases at either the case study locations or Navy-wide.
We used as our primary criteria applicable laws and regulations; our  Standards for Internal Control in the Federal Government; and our  Guide for Evaluating and Testing Controls Over Sensitive Payments.   To assess the management control environment, we applied the  fundamental concepts and standards in the GAO internal control standards  to the practices followed by management in the areas reviewed.
subsections: section_title: Statistical Samples of Internal Control Procedures
paragraphs: To test controls, we selected stratified random probability samples from  the population of purchase card transactions by cardholders who had  mailing addresses at the four locations we visited.  All purchase card  transactions subjected to sampling occurred during the first 11 months of  fiscal year 2001.  We performed analytical reviews on the transactions that  occurred during the last month of fiscal year 2001.  Specifically, we selected  150 transactions of Atlantic Fleet cardholders based in Norfolk from a  population of 72,000 transactions totaling $43 million; 166 transactions of  Pacific Fleet cardholders based in San Diego from a population of 46,000  transactions totaling $30 million; 158 transactions from Naval Sea Systems  Command cardholders based in Norfolk from a population of 46,000  transactions totaling $41 million; and 150 Marine Corps cardholders based  in Camp Lejeune from a population of 52,000 transactions totaling  $32 million.
Within each command we stratified the population of transactions by the  dollar value of the transaction and by whether the transaction was likely to  be for a purchase of computer-related equipment.  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 13 presents our test results  on cardholder and approving official training and three key transaction- level controls, and shows the confidence intervals for the estimates for the  population of purchase card transactions made by units at the four  commands during the first 11 months of fiscal year 2001.  Although we  projected the results of those samples to the populations of transactions at  the respective commands, the results cannot be projected to the population  of Navy-wide transactions or commands.  Because most of the sampled  transactions did not contain pilferable property, we did not project the  results of that attribute test to the populations of transactions tested.
section_title: Data Mining
paragraphs: In addition to selecting statistical samples of Pacific Fleet, Atlantic Fleet,  Naval Sea Systems Command, and Marine Corps transactions to test  specific internal controls, we also made nonrepresentative selections of  fiscal year 2001 transactions from these commands and the Navy as a  whole.  We conducted separate analysis of acquisitions that were  potentially fraudulent, improper, and abusive or otherwise questionable.
Our data mining for potentially fraudulent, improper, and abusive or  questionable transactions was limited in scope.  For this review, we  scanned the population of transactions at the four commands visited and  the overall Navy database for vendors that are likely to sell goods or  services (1) on NAVSUP’s list of prohibited items, (2) that are personal  items, and (3) that are otherwise questionable. Our expectation was that  transactions with certain vendors had a more likely chance of being  fraudulent, improper, and abusive or questionable.  Because of the large  number of transactions that met these criteria we did not look at all  potential abuses of the purchase card.  Rather, we made nonrepresentative  selections of transactions with the vendors that fit these criteria.  For  example, we reviewed, and in some cases made inquiries, concerning 443  transactions and other related transactions on the same monthly purchase  card statement with vendors that sold such items as sporting goods,  groceries, luggage, flowers, and clothing. While we identified some  potentially fraudulent, improper, and abusive or questionable transactions,  our work was not designed to identify, and we cannot determine, the extent  of fraudulent, improper, and abusive or questionable transactions.
Our data mining also included nonrepresentative selections of acquisitions  that these units made during fiscal year 2001 that may have been split into  multiple transactions to circumvent either the micropurchase competition  requirements or cardholder single-transaction thresholds.
We briefed DOD managers (including officials in DOD’s Purchase Card  Joint Program Management Office) and Navy managers (including  NAVSUP, Pacific Fleet, Atlantic Fleet, Naval Sea Systems Command, and  the Marine Corps officials) on the details of our review, including our  objectives, scope, and methodology and our findings and conclusions.  We  received comments from the Director, DOD Purchase Card Joint Program  Management Office dated September 16, 2002, and have reprinted those  comments in appendix VI.  We also received comments from the Under  Secretary of Defense (Comptroller) dated September 23, 2002, and have  reprinted those comments in appendix VII.  We conducted our audit work  from November 2001 through July 2002 in accordance with U.S. generally  accepted government auditing standards, and we performed our  investigative work in accordance with standards prescribed by the  President’s Council on Integrity and Efficiency.
section_title: Status of GAO Recommendations to Improve Navy Purchase Card Operations
paragraphs: In our November 30, 2001, report we made 29 recommendations to the  Navy to address key findings related to the weak management control  environment and internal control discussed in our July 30, 2001,  testimony. In response to our November 2001 report, DOD concurred with  19 recommendations, partially concurred with 7 recommendations, and  disagreed with 3 recommendations.  On May 29, 2002, the Navy provided us  with its assessment of its corrective actions to implement all 29  recommendations.  The following chart summarizes (1) those  recommendations, (2) the Navy’s representations as to actions taken, and  (3) our observations on the status of the recommendations.  We noted in  many instances the Navy had taken positive steps to improve the purchase  card controls; however, given the significant control problems that exist,  the Navy will need to diligently monitor the purchase card program to  attain and maintain a high level of adherence to the policies and directives.
section_title: Status of Previously Identified Fraud Cases
paragraphs: In our March 13, 2002, testimony, we identified a number of cases of  potentially fraudulent purchase card use that we referred to our Office of  Special Investigations for further investigation.  One case involved  transactions totaling about $164,000 with a communication contractor.  A  second case involved payment for food and refreshments at a local hotel.   The information provided below summarizes the status of those cases.
subsections: section_title: Communications Contractor
paragraphs: In the March testimony, we reported that during fiscal year 2001, SPAWAR  made 75 transactions totaling about $164,000 for what appeared to be  advance payments for services to a telecommunications contractor.   Our  Office of Special Investigations subsequently learned that the transactions  were payments made by SPAWAR based on cost estimates provided by the  contractor.  In almost all 75 transactions, the amount paid by SPAWAR was  more than the actual cost incurred by the contractor—even after the actual  expenses were adjusted for estimated overhead and standard profit  margin.  Further, the work paid for by the purchase card was work that  should have been paid for under an existing delivery order contract.   According to contractor and SPAWAR personnel, the purchase card was  used because it was a faster vehicle to get work done.  The SPAWAR official  also told us that when there was no funding remaining on a particular  delivery order contract line item, SPAWAR used the purchase card rather  than modifying the contract.  Our Office of Special Investigations  determined that SPAWAR overpaid the contractor about $34,000 for the 75  transactions identified in the March testimony.
A SPAWAR official told us that on September 10, 2002, it received a check  from the contractor in the amount of $9,862.  The payment represented a  refund for work the contractor did not perform on 4 transactions.  The  SPAWAR official also told us that the contractor disagrees with our Office  of Special Investigations assessment that the contractor over charged  SPAWAR about $24,000 on the 71 other transactions we reviewed.
section_title: Food and Refreshments at a Local Hotel
paragraphs: The SPAWAR Inspector General and Staff Judge Advocate investigated the  use of a Navy purchase card at a San Diego hotel for an off-site meeting in  which SPAWAR used appropriated funds to pay for meals provided to Navy  personnel.  As we have previously reported, without statutory authority,  appropriated funds may not be used to furnish meals or refreshments to  employees within their normal duty stations.  The SPAWAR Inspector  General told us the investigation determined that a SPAWAR Deputy  Program Manager, Assistant Program Manager, and cardholder used the  purchase card to improperly purchase food.  Further, the SPAWAR  Inspector General found that both the Assistant Program Manager and the  cardholder made false statements to GAO when asked about purchasing  food.  However, the investigation has not been completed and we are not  aware of any actions—administrative or disciplinary—that have been taken  against the SPAWAR Deputy Program Manager, the Assistant Program  Manager, or the cardholder for improper use of the purchase card.
section_title: Status of the Former Commander, Space and Naval Warfare Systems Command, Systems Center San Diego
paragraphs: In our March 13, 2002, testimony on the purchase card controls at  SPAWAR Systems Center and NPWC, we reported that the commanding  officer of the Space and Naval Warfare Command, Systems Center San  Diego, was relieved of his command in December 2001 for matters  unrelated to the purchase card program.  According to the SPAWAR  Inspector General, on December 8, 2001, the admiral in charge of SPAWAR  held a nonjudicial punishment hearing and found that the SPAWAR System  Center commanding officer had violated two articles of the Uniform Code  of Military Justice, including dereliction of duty and conduct unbecoming  an officer.  The admiral issued the commanding officer a punitive Letter of  Reprimand, relieved him of his command at SPAWAR Systems Center San  Diego, and endorsed the captain’s request for retirement from the Navy.
Subsequently, information came to our attention that the former  commanding officer of SPAWAR System Center San Diego was still  employed by SPAWAR at the same rank he held—captain—when the  admiral determined he was derelict in his duties and acted in a manner  unbecoming an officer.  In June 2002, our Office of Special Investigations  contacted a DOD official and inquired if the former commanding officer  was still on the Navy payroll as a captain.  On July 31, 2002, a senior Navy  official informed us that the former commanding officer was still on the  Navy payroll and employed by SPAWAR as a Navy captain, but his  retirement would become effective August 1, 2002.
section_title: Comments From the Department of Defense Purchase Card Joint Program Management Office
section_title: Comments from the Under Secretary of Defense (Comptroller)
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: Individuals who made key contributions to this testimony include Fannie  Bivins, Bertram Berlin, Kriti Bhandari, Francine DelVecchio, K. Eric Essig,  Michael Hansen, Kenneth Hill, Jeffrey Jacobson, Tram Le, John Ledford,  Latrealle Lee, Stephen Lipscomb, Susan Mason, Melissa McDowell, Sidney  Schwartz, Carolyn Voltz, and Robert Wagner.
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