Veterans Health Administration: Inadequate Controls over the Purchase Card Program Resulted in Improper and Questionable Purchases
Published: 2004-06-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Veterans Affairs (VA) Office of Inspector General (OIG) has continued to identify significant vulnerabilities in the department's use of government purchase cards. Over the years, the OIG has identified internal control weaknesses that resulted in instances of fraud and numerous improper and questionable uses of purchase cards. The OIG has made a number of recommendations for corrective action. Given that VA is the second largest user of the governmentwide purchase card program, with reported purchases totaling $1.5 billion for fiscal year 2002, and because of the program weaknesses reported by the OIG, GAO was asked to determine whether existing controls at the Veterans Health Administration (VHA) were designed to provide reasonable assurance that improper purchases would be prevented or detected in the normal course of business, purchase card and convenience check expenditures were made in compliance with applicable laws and regulations, and purchases were made for a reasonable cost and a valid government need. GAO's report on this issue, released concurrently with this testimony, makes 36 recommendations to strengthen internal controls and compliance in VHA's purchase card program to reduce its vulnerability to improper, wasteful, and questionable purchases.
section_title: What GAO Found
paragraphs: Weaknesses in VHA's controls over the use of purchase cards and convenience checks resulted in instances of improper, wasteful, and questionable purchases. These weaknesses included inadequate segregation of duties; lack of key supporting documents; lack of timeliness in recording, reconciling, and reviewing transactions; and insufficient program monitoring activities. Generally, GAO found that internal controls were not operating as intended because cardholders and approving officials were not following VA/VHA operating guidance governing the program and, in the case of documentation and vendor-offered discounts, lacked adequate guidance. The lack of adequate internal controls resulted in numerous violations of applicable laws and regulations and VA/VHA purchase card policies that GAO identified as improper purchases. GAO found violations of applicable laws and regulations that included purchases for personal use such as food or clothing, purchases that were split into two or more transactions to circumvent single purchase limits, purchases over the $2,500 micro-purchase threshold that were either beyond the scope of the cardholder's authority or lacked evidence of competition, and purchases made from an improper source. While the total amount of improper purchases GAO identified is relatively small compared to the more than $1.4 billion in annual purchase card and convenience check transactions, they demonstrate vulnerabilities from weak controls that may have been exploited to a much greater extent. The ineffectiveness of internal controls was also evident in the number of transactions classified as wasteful or questionable. GAO identified over $300,000 in wasteful or questionable purchases, including two purchases for 3,348 movie gift certificates totaling over $30,000 for employee awards for which award letters or justification for the awards could not be provided and a purchase for a digital camera totaling $999 when there were other less costly digital cameras widely available. Also, 250 questionable purchases totaling $209,496 from vendors that would more likely be selling unauthorized or personal use items lacked key purchase documentation. Examples of these types of purchases included a purchase from Radio Shack totaling $3,305, a purchase from Daddy's Junky Music totaling $1,041, a purchase from Gap Kids totaling $788, and a purchase from Harbor Cruises totaling $357. Missing documentation prevented determining the reasonableness and validity of these purchases. Because only a small portion of the transactions that appeared to have a higher risk of fraud, waste, or abuse were tested, there may be other improper, wasteful, and questionable purchases in the remaining untested transactions.

section_title: Letter
paragraphs: I am pleased to be here today to discuss internal controls over the use of  purchase cards at the Veterans Health Administration (VHA).  At the outset,  I want to make clear that GAO supports the concept of the purchase card  program.  The benefits of using purchase cards are lower costs and less  bureaucracy for both the government and the vendor community.  At the  same time, given the nature, scale, and increasing use of purchase cards, it  is important that agencies have adequate internal controls in place to help  ensure proper use of purchase cards and thus to protect the government  from waste, fraud, and abuse.
As you know, the Department of Veterans Affairs (VA) Office of Inspector  General (OIG) has continued to identify significant vulnerabilities in the  department’s use of government purchase cards.  In its most recent report,  the OIG identified internal control weaknesses that resulted in instances of  fraud and numerous improper and questionable uses of purchase cards.   The OIG made a number of recommendations for corrective action.
Given that VA is the second largest user of the governmentwide purchase  card program, with reported purchases totaling $1.5 billion for fiscal year  2002, and because of the program weaknesses reported by the OIG, you  asked that we review VHA’s purchase card program for fiscal year 2002 to  determine if control problems still existed.  Our report on this issue is being  released today at this hearing.
You also asked that we review internal control activities (1) over third-  party billings and collections at selected VHA medical centers to assess  whether those controls were designed and implemented effectively and   (2) in three areas of operation at selected VHA medical centers—  accountability over personal property, drugs returned for credit, and part- time physician time and attendance.  These two reports will be issued later  this month.
In my testimony today, I will discuss the inadequacy of internal controls  over VHA’s purchase card program. The scope of our work, which was  performed from April 2003 through April 2004 in accordance with generally  accepted government auditing standards, is detailed in the report being  released today.
Heads of agencies are required to establish systems of internal control  consistent with our Standards for Internal Control in the Federal  Government.   Effective internal controls are the first line of defense in  safeguarding assets and in preventing and detecting fraud.  In addition, they  help to ensure that actions are taken to address risks and are an integral  part of an entity’s accountability for the stewardship of government  resources.
As I will discuss in my testimony, we found that (1) existing controls at  VHA were not designed to provide reasonable assurance that improper  purchases would be prevented or detected in the normal course of  business, (2) lack of compliance with applicable laws and regulations in  VHA’s purchase card and convenience check programs led to improper  purchases, and (3) poor controls resulted in some wasteful and  questionable purchases.  We focused on the approximately $1.4 billion of  disbursements that VHA made during fiscal year 2002, the most recent  fiscal year for which complete data were available when we began our  review.
I will first address the inadequacy of VHA’s internal controls.
subsections: section_title: Critical Internal Controls Were Ineffective
paragraphs: Our review found that VHA’s internal controls were not designed to provide  reasonable assurance that improper purchase card and convenience check  purchases would not occur or would be detected in the normal course of  business.  We found that (1) VHA lacked adequate segregation of duties  between those purchasing and receiving goods; (2) payments for purchase  card and convenience check transactions often did not have key supporting  documents; (3) timeliness standards for recording, reconciling, and  reviewing transactions were not met; and (4) cardholders did not  consistently take advantage of vendor-offered purchase discounts.   Generally, we found that internal controls were not operating as intended  because cardholders and approving officials were not following operating  guidance governing the program, and in the case of documentation and  vendor-offered discounts, they lacked guidance.  We also noted that  monitoring activities could be strengthened, for example, as in instances  where (1) accounts remained active long after the cardholder had left  service at VA, (2) credit limits on accounts were significantly higher than  actual usage, and (3) human capital resources were insufficient to enable  adequate monitoring of the purchase card program.
Our Standards for Internal Control in the Federal Government requires  that (1) key duties and responsibilities be divided or segregated among  different people to reduce the risk of error or fraud; (2) all transactions and  other significant events be clearly documented and readily available for  examination, and other significant events be authorized and executed only  by persons acting within the scope of their authority; (3) transactions be  promptly recorded to maintain their relevance and value to management in  controlling operations and decisions; and (4) internal control monitoring  be performed to assess the quality of performance over time and ensure  that audit findings are promptly resolved.  Similarly, internal control  activities help ensure that management’s directives are carried out.  They  should be effective and efficient in accomplishing the agency’s objectives  and should occur at all levels and functions of the entity.
We found that VHA lacked adequate segregation of duties regarding  independent receiving of goods and separation of responsibilities within  the purchasing process.  Independent receiving, which means someone  other than the cardholder receives the goods or services, provides  additional assurance that items are not acquired for personal use and that  they come into the possession of the government.  This reduces the risk of  error or fraud.  From our purchase card internal control testing, we  estimate that $75 million in transactions did not have evidence that  independent receiving of goods had occurred.  In addition, our data mining  of the purchase card and convenience check activity identified 15 agency  or organization program coordinators (A/OPC) who were also cardholders  and collectively made 9,411 purchases totaling $5.5 million during fiscal  year 2002.  Because A/OPCs are responsible for monitoring cardholders’  and approving officials’ activities for indications of fraud, waste, and abuse,  these A/OPCs were essentially monitoring their own activities.
We also found instances where purchase card and convenience check  transactions lacked key supporting documentation.  This would include  internal written authorization for convenience check disbursements and  vendor invoices that support the description, quantity, and price of what  was purchased.  VHA’s purchase card guidance does not address the types  of documentation that cardholders should maintain to support their  purchases.  It only addresses documentation requirements in its audit  guide, which is an appendix to the purchase card guidance that provides  instructions to internal reviewers for performing their monitoring  functions.  Furthermore, we noted that VA’s operating guidance for  convenience checks has no requirement that vendor documentation be  provided before checks are issued.  The guidance only provides that  sufficient documentation, such as a VA-created purchase order, must be  evident before checks are issued.
The invoice is a key document in purchase card internal control activities.   Without an invoice, independent evidence of the description and quantity  of what was purchased and the price charged is not available.  In addition,  the invoice is the basic document that should be forwarded to the  approving official or supervisor so that he or she can perform an adequate  review of the cardholder’s purchases.  Of the 283 purchase card sample  transactions we tested, 74 transactions totaling $2.1 million lacked an  invoice, credit card slip, or other adequate vendor documentation to  support the purchase.  Based on these results, we estimate that   $312.8 million of the fiscal year 2002 purchase card transactions lacked  key supporting documentation.  For the convenience check sample, we  found 35 of 255 transactions totaling $43,669 lacked the same key  documentation.   Based on these results, we estimate that $3.8 million of  the fiscal year 2002 convenience check transactions lacked key supporting  documentation.
We also noted that VA’s operating guidance over convenience checks does  not provide detailed procedures regarding appropriate written  documentation or authorization that must be forwarded to the authorizing  employee before funds are disbursed to a third party.  VA’s operating  guidance only provides that the required documentation be the same as  that for paying with cash, such as a purchase order.  The guidance makes  no mention of independent vendor documentation and that this type of  documentation be required prior to issuing checks to vendors.  In addition,  VA’s guidance only requires that the authorizing employees issuing  convenience checks retain copies for 1 year.  This documentation  requirement is inconsistent with the Federal Acquisition Regulation (FAR)  and VHA’s Records, Control Schedule 10-1, dated February 14, 2002, which  requires that such records be retained for 6 years and 3 months after final  payment for procurements exceeding the simplified acquisition threshold  and for 3 years after final payment for procurements below the simplified  acquisition threshold.
We found that of 255 convenience check transactions, 17, totaling $8,890,  lacked written authorization needed for issuance.  Based on these results,  we estimate that $1.7 million of the fiscal year 2002 convenience check  transactions lacked written authorization.  In addition, we noted that 19 of  the 255 convenience check transactions lacked a copy of the check or  carbon copy.  Based on these results, we estimate that $2.3 million of the  fiscal year 2002 convenience check transactions lacked this supporting  documentation.  Although VA only requires copies of convenience checks  to be retained for 1 year, retaining the copies and the supporting  documentation for the longer retention period mandated by the FAR and  incorporated in VHA’s Records, Control Schedule 10-1, would facilitate  subsequent internal and external reviews in assessing whether a  transaction was proper and in compliance with acquisition policies and  procedures.
At the time of our work, VHA had also established several timeliness  standards for cardholders and approving officials to ensure prompt  recording, reconciliation, and review of purchases.  Specifically, within 1  workday of making a purchase, cardholders are required to input or record  the purchase information in VA’s purchase card order system.  Within 10  calendar days of electronically receiving the transaction charge  information from Citibank, the cardholder must reconcile 75 percent of  these Citibank charges to the purchase information in the system.  Within  17 calendar days, 95 percent of the Citibank charges must be reconciled.   As evidence of reconciliation, the purchase card order system assigns the  date the cardholder reconciled the purchase in the system.  For testing the  timeliness of cardholder reconciliations, we used the 17 calendar day  criteria.  In addition, VHA requires that within 14 calendar days of  electronically receiving the cardholder’s reconciled purchases, the  approving official, through an electronic signature, certify in the purchase  card order system that all procurements are legal and proper and have been  received.
Our review found untimely recording, reconciliation, and approving official  review.  Table 1 summarizes the statistical results of VHA’s timeliness  standards that cardholders and approving officials must meet to ensure  prompt recording, reconciliation, and review of purchases.  Our work  shows that the internal controls were not operating as intended to ensure  prompt recording of transactions and events.
The following examples illustrate the extent of untimely recording,  reconciliation, and review of the purchase card transactions.  For instance,  one cardholder made a purchase on July 9, 2002, of $994, but did not record  the information in VA’s purchase card order system until August 29, 2002— 51 days later and 50 days after VHA policy required that the information be  entered.  Another cardholder made a purchase of $100 on August 24, 2002.   Citibank sent charge information for this purchase to VHA on October 8,  2002.  According to VHA policy, the cardholder should have reconciled this  charge within 17 days.  Instead, we found that the account was not  reconciled until September 8, 2003, or 335 days after receiving the charge  information.  In another instance, a cardholder reconciled a purchase card  transaction totaling more than $3,000, which should have been reviewed  and certified by an approving official within 14 calendar days.  We found no  evidence that the approving official reviewed this cardholder’s  reconciliation until 227 days later.  It is critical that cardholders and  approving officials promptly record, reconcile, and review purchase card  transactions so that erroneous charges can be quickly disputed with the  vendor and any fraudulent, improper, or wasteful purchases can be quickly  detected and acted upon.
We also found instances where cardholders did not consistently take  advantage of vendor-offered purchase discounts.  Our review identified 69  invoices containing vendor-offered discounts totaling $15,785 that were not  taken at the time of purchase or subsequently credited for the discount  amount.  When purchases are made, vendors may offer purchase discounts  if buyers make early payments of their invoices.  Typically, the vendor  specifies a period during which the discount is offered, but expects the full  invoice amount for payments made after that period.  When cardholders  use the purchase card, payment to vendors, via Citibank, generally occurs  at the time of purchase.  In turn, Citibank bills VA for the purchases through  a daily electronic file.  Therefore, it is critical that cardholders ask about  any vendor-offered discounts at the time of purchase and make efforts to  obtain a credit upon receipt and review of the invoice.  Our detailed testing  indicated that VHA did not always take advantage of vendor-offered  discounts and that it lacked purchase card guidance to ensure cardholders  ask about vendor payment terms to determine whether discounts were  being offered.
For example, one vendor offered VHA a discount of 2.9 percent, or $896, for  an invoice amount of $30,888 if it was paid within 15 days.  Citibank, on  behalf of VA, made payment to the vendor within the 15-day time frame, yet  the vendor charged the cardholder’s account for the full invoice amount.   We found no evidence that the cardholder attempted to obtain a credit for  the available discount offered.  In another example, we found that a  cardholder had taken advantage of the vendor-offered discount.
A factor that may contribute to cardholder inconsistencies in taking  advantage of vendor discounts is the lack of established policies and  procedures that address this issue.  We found that VHA’s purchase card  guidance did not include procedures to ensure that cardholders take  advantage of available vendor discounts before making payments or  require that approving officials identify instances when cardholders did not  take advantage of vendor discounts in order to determine the frequency of  these occurrences. Without such guidance, VHA will not be able to  determine the frequency of these occurrences and actual dollars lost by the  government.
While VHA’s purchase card guidance includes prescribed monitoring  procedures to help ensure purchases are legal and proper, we found no  monitoring procedures to identify active accounts of cardholders who had  separated from VA nor any provisions to assess cardholder credit limits.   We also noted insufficient human capital resources at the A/OPC level for  executing the prescribed monitoring activities.  For instance, we identified  18 instances in which purchase card accounts remained active after the  cardholders left VA and all related outstanding purchase orders had been  reconciled.  Of the 18 purchase card accounts that remained active after  the cardholders had left VA, we determined that 14 accounts remained  active 6 or more days after the cardholders’ outstanding purchase orders  had been reconciled, which we deemed too long.  The remaining 4  purchase cards had been promptly canceled after all outstanding purchase  orders were reconciled.
Of the 14 accounts that were untimely cancelled, 11 accounts remained  open between 6 and 150 days and 3 accounts remained open between 151  and 339 days.  For example, one cardholder separated from VA on April 3,  2002, with five outstanding purchase card orders made prior to separation.   The last purchase transaction was reconciled on May 21, 2002, but the  account was not canceled until April 25, 2003, or 339 days after  reconciliation.  Requiring monitoring procedures to identify active  accounts of departed cardholders and to ensure prompt closure once  outstanding purchase orders have been reconciled would assist in reducing  the risk of fraud, waste, and abuse that could occur when accounts remain  open beyond the necessary time frame.
In addition to accounts left open, our analysis of purchases VHA  cardholders made in 2002 showed that cumulatively they bought   $112 million of goods and services per month on average, but they had  credit limits of $1.2 billion, or about 11 times their actual spending.   According to VHA’s purchase card guidance, the approving official, in  conjunction with the A/OPC, billing officer, and head of contracting  activity, recommends cardholder single purchase and monthly credit limits.   However, we found no guidance on what factors to consider when  recommending the dollar amounts to be assigned to each cardholder.   Further, we found no monitoring procedures that require the A/OPC or  approving official to determine periodically whether cardholder limits  should be changed based on existing and expected future use.
Periodic monitoring and analysis of cardholders’ actual monthly and  average charges, in conjunction with existing credit limits would help VHA  management make reasonable determinations of cardholder spending  limits.  Without adequate monitoring, the financial exposure in VHA’s  purchase card program can become excessive when its management does  not exercise judgment in determining single purchase and monthly credit  limits.  During our review, for instance, the difference between the  monlthly cumulative credit limits of $1.2 billion and actual spending of $112  million represents a $1.1 billion financial exposure.  Limiting credit  available to cardholders is a key factor in managing the VHA purchase card  program, minimizing the government’s financial exposure, and enhancing  operational efficiency.
Furthermore, VHA has not provided sufficient human capital resources to  enable monitoring of the purchase card program.  One key position for  monitoring purchases and overseeing the program is the A/OPC.  While the  A/OPC position is a specifically designated responsibility, we found in  many instances that the A/OPC also functioned in another capacity or  performed other assigned duties, for example, as a systems analyst, budget  analyst, and contract specialist. Of the 90 A/OPCs who responded to a GAO  question regarding other duties assigned, 55 A/OPCs, or 61 percent,  reported that they spend 50 percent or less of their time performing A/OPC  duties.  For example, at the extreme low end of the scale, one A/OPC  responded that he was also the budget analyst and that he spends 100  percent of his time on budget analyst duties, leaving no time for A/OPC  duties on an ongoing basis. Given that VHA makes millions of purchase  card and convenience check transactions annually, which in fiscal year  2002 exceeded $1.4 billion, it is essential that VHA management devote  adequate attention to monitoring its purchase card program to ensure that  it is properly managed to reduce the risk of fraud, waste, and abuse.
section_title: Noncompliance with Purchasing Requirements Resulted in Instances of Improper Purchases
paragraphs: The lack of adequate internal controls resulted in numerous violations of  applicable laws and regulations and VA/VHA purchase card policies.  We  classified purchases made in violation of applicable laws and regulations or  VA/VHA purchase card policies as improper purchases.  We found  violations that included purchases for personal use such as food or  clothing, purchases that were split into two or more transactions to  circumvent single purchase limits, purchases over the $2,500 micro- purchase threshold that were either beyond the scope of the cardholder’s  authority or lacked evidence of competition, and purchases made from an  improper source.  We also found violations of VA/VHA policy that included  using convenience checks to pay for purchases even though the vendor  accepted the government purchase card, convenience check payments that  exceeded established limits, and purchases for which procurement  procedures were not followed.  While the total amount of improper  purchases we identified, based on limited scale audit work, is relatively  small compared to the more than $1.4 billion in annual purchase card and  convenience check transactions, we believe our results demonstrate  vulnerabilities from weak controls that could have been exploited to a  much greater extent.
For instance, from the nonstatistical sample, we identified 17 purchases,  totaling $14,054, for clothing, food, and other items that cardholders  purchased for personal use.  Items that are classified as personal expenses  may not be purchased with appropriated funds without specific statutory  authority.  The FAR emphasizes that the governmentwide commercial  purchase card may be used only for purchases that are otherwise  authorized by law or regulation.
We identified eight purchases totaling $7,510, in the nonstatistical sample  that were subject to procurement from a mandatory source of supply but  were obtained from other sources.  Various federal laws and regulations,  such as the Javits-Wagner-O’Day Act (JWOD), require government  cardholders to acquire certain products from designated sources.  The  JWOD program generates jobs and training for Americans who are blind or  have severe disabilities by requiring that federal agencies purchase  supplies and services furnished by nonprofit agencies, such as the National  Industries for the Blind and the National Institute for the Severely  Handicapped.
We noted that cardholders did not consistently purchase items from JWOD  suppliers when they should have.  For example, a cardholder purchased  day planner starter kits and refills for employees, totaling $1,591, from  Franklin Covey, a high-end office supply store. These items provide  essentially the same features as the JWOD items, which would have cost  $1,126, or $465 less.  During our data mining, we noted that VHA made 652  purchases totaling $76,350 from Franklin Covey during 2002.  While we did  not review all of the individual purchases, based on our detailed testing of  similar transactions, it is likely that many of them should have been  procured from a mandatory source at a much lower cost.
Using data mining techniques, we identified purchases that appeared to  have been split into two or more transactions by cardholders to circumvent  their single purchase limit.  We requested documentation for a statistically  determined sample of 280 potential split transactions totaling $4 million.   Of these 280 transactions, we determined that 49 were actual splits.  Based on these results, we estimate that $17.1 million of the total fiscal year 2002  purchase card transactions were split transactions.
For example, a cardholder with a single purchase limit of $2,500 purchased  accommodations in 110 hotel rooms totaling $4,950.  When performing  follow-up, the cardholder stated that VA provides lodging accommodations  for veterans receiving medical services such as radiation therapy,  chemotherapy, and day surgery who live at least 150 miles from the medical  facility.  The cardholder created two separate purchase orders and had the  vendor create two separate charges, one for $2,500 and the other for $2,450,  so that the purchase could be made.  On the documentation provided, the  cardholder stated the “purchase was split per the direction of the previous  purchase card program administrator.”  The cardholder also stated that  currently, her purchase card at that facility is no longer used to pay hotel  lodging for veterans.  Hotel payments are now disbursed electronically via  VA’s Financial Service Center.  The purpose of the single purchase limit is to  require that purchases above established limits be subject to additional  controls to ensure that they are properly reviewed and approved before the  agency obligates funds.  By allowing these limits to be circumvented, VA  had less control over the obligation and expenditure of its resources.
The FAR provides that the purchase card may be used by contracting  officers or individuals who have been delegated micro-purchase authority  in accordance with agency procedures.  Only warranted contracting  officers, who must promote competition to the maximum extent practical,  may make purchases above the micro-purchase threshold using the  purchase card.  Contracting officers must consider solicitation of  quotations from at least three sources, and they must minimally  document the use of competition or provide a written justification for the  use of other than competitive procedures.  When cardholders circumvent  these laws and regulations, VHA has no assurance that purchases comply  with certain simplified acquisition procedures and that cardholders are  making contractual commitments on behalf of VHA within the limits of  their delegated purchasing authority.
From the statistical sample of purchases over $2,500, we found that for 19  of the 76 transactions, cardholders lacked warrant authority needed to  make these types of purchases.  Based on these results, we estimate that  cardholders with only micro-purchase authority, made $111.9 million of  the total fiscal year 2002 purchases that exceeded $2,500.  In addition, we  found that 12 of the 76 transactions lacked evidence of competition.  Based  on these results, we estimate that $60 million of the total fiscal year 2002  purchases totaling more than $2,500 lacked evidence of competition.
We identified 23 purchase card transactions totaling $112,924 in the  nonstatistical sample related to the rental of conference room facilities  used for internal VA meetings, conferences, and training.  For these  purchases, the cardholders could not provide documentation to show that  efforts had been made to secure free conference space.  VA’s acquisition  regulations state that rental conference space may be paid for only in the  event that free space is not available, and require that complete  documentation of efforts to secure free conference space be maintained in  the purchase order file.  For one purchase, VHA paid $31,610 for  conference room facilities and related services for 3 days at the Flamingo  Hilton Hotel in Las Vegas.  The cardholder provided no evidence that  attempts to secure free facilities had been made.  In addition, of the 23  purchase card transactions cited, 12 purchases totaling $103,662 occurred  at one VHA facility.  This included one transaction totaling $12,000 for a 3- day training course on Prevention and Management of Disruptive Behavior  at the MGM Grand Hotel in Las Vegas.  Again, we were not provided  evidence that efforts had been made to secure free conference space.
We identified improper use of convenience checks related to purchases  that exceeded VA’s established limits of $2,500 and $10,000 and payments to  vendors who accept the purchase card payments.  VA’s convenience check  guidance requires that a single draft transaction be limited to $2,500 or in  some cases $10,000 unless a waiver has been obtained from the  Department of the Treasury, restricting convenience check use to instances  when vendors do not accept purchase cards.  From the statistical testing of  convenience check limits, we found that 91 of 105 convenience check  purchases were paid using multiple checks because the total purchase  amount exceeded the established convenience check limit.  Based on these  results, we estimate that $13.8 million of the total fiscal year 2002  convenience check transactions were improperly used to pay for purchases  exceeding the established limits.  In April 2003, VA issued new purchase  card guidance providing that for micro-purchases, convenience checks  may be used in lieu of purchase cards only when it is advantageous to the  government and it has been documented as the most cost-effective and  practical procurement and disbursement method.  However, we found no  established criteria for determining the most cost-effective and practical  procurement and disbursement method.
section_title: Poor Controls Resulted in Some Wasteful and Questionable Purchases
paragraphs: The ineffectiveness of internal controls was also evident in the number of  transactions that we classified as (1) wasteful, that is, excessive in cost  compared to other available alternatives or for questionable government  need, or (2) questionable because there was insufficient documentation to  determine what was purchased.  Of the 982 nonstatistical sample  transactions we reviewed, 250 transactions, totaling $209,496, lacked key  purchase documentation.  As a result, we could not determine what was  actually purchased, how many items were purchased, the cost of each of  the items purchased, and whether there was a legitimate government need  for such items.  Because we tested only a small portion of the transactions  that appeared to have a higher risk of fraud, waste, or abuse, there may be  other improper, wasteful, and questionable purchases in the remaining  untested transactions.
We identified 20 purchases totaling $56,655 that we determined to be  wasteful because they were excessive in cost relative to available  alternatives or were of questionable government need. The limited number  of wasteful purchases found in the nonstatistical sample demonstrates that  cardholders are generally prudent in determining that prices of goods and  services are reasonable before they make credit card purchases.  We  considered items wasteful if they were excessive in cost when compared to  available alternatives, and questionable if they appeared to be items that  were a matter of personal preference or convenience, were not reasonably  required as part of the usual and necessary equipment for the work the  employees were engaged in, or did not appear to be for the principal  benefit of the government.  We identified 18 purchases, totaling $55,156, for  which we questioned the government need and 2 purchases, totaling  $1,499, that we considered excessive in cost.  A majority of the purchases  were related to officewide and organizational awards.
Many award purchases were for gift certificates and gift cards.  Although  VA policy gives managers great latitude in determining the nature and  extent of awards, we identified 10 purchases, totaling $51,117, for award  gifts for which VHA was unable to provide information on either the  recipients of the awards or the purposes for which the recipients were  being recognized.  Therefore, we categorized these purchases as of  questionable government need.  For example, we identified two  transactions for 3,348 movie gift certificates, totaling over $30,000.  For  these purchases, the cardholders and A/OPCs could provide neither the  award letters nor justification for the awards.  Consequently, VHA could  provide no evidence that these purchases were actually used for awards.
We also identified two purchases that we considered wasteful because of  excessive cost.  We identified a cardholder who purchased a $999 digital  camera when there were other less costly digital cameras widely available.   For example, during the same 6-month period from February 2002 through  July 2002, two other cardholders purchased digital cameras for $526 and  $550.  No documentation was available to show why the more expensive  model was necessary.   In the second example, we identified a purchase for  a 20-minute magic show, totaling $500, that was performed during a VA  volunteer luncheon.  Although VA policies allow for funds for volunteer  events, this expenditure, at roughly $25 per minute, seemed excessive.
We also found questionable purchases.  As I discussed earlier, we identified  numerous transactions from the statistical samples that were missing  adequate supporting documentation on what was actually purchased, how  many items were purchased, and the cost of the items purchased.  We  requested supporting documentation for a nonstatistical sample of 982  transactions, totaling $1.2 million.  Of these, we identified 315 transactions,  totaling $246,596, that appeared to be improper or wasteful, for which VHA  either provided insufficient or no documentation to support the propriety  of the transactions.
We classified 250 of these 315 transactions, totaling $209,496, as missing  invoices because the cardholders either provided VHA internal  documentation but no vendor documentation to support the purchase or  provided no documentation at all to support the purchase.  VHA internal  documentation includes purchase orders, reconciliation documents, and  receiving reports.  Vendor documentation includes invoices, sales receipts,  and packing slips.  For 184 of these transactions, totaling $155,429, internal  documentation was available but no vendor documentation was available.   No documentation at all was available for the remaining 66 transactions,  totaling $54,068.  These purchases were from vendors that would more  likely be selling unauthorized or personal use items.  Examples of these  types of purchases included a purchase form Radio Shack totaling $3,305, a  purchase from Daddy’s Junky Music totaling $1,041, a purchase from Gap  Kids totaling $788, and a purchase from Harbor Cruises totaling $357.
An example of a transaction with internal documentation but no vendor  documentation included a purchase from Circuit City where the cardholder  stated that the purchase was for three $650 television sets and three $100  television stands, totaling $2,300 (including $50 shipping), that were  needed to replace the existing ones in the VA facility’s waiting area.  In  another transaction, no vendor documentation was available for a  transaction from Black & Gold Beer where the cardholder stated that the  purchase of beer was for a patient.  The purchase order shows that three  cases were purchased at $12.50 each, totaling $37.50.  The cardholder  stated that the purchase was at the request of the pharmacy for a specific  patient; however, no documentation was provided to support this claim.   We believe that at least some of the items we identified may have been  determined to be potentially fraudulent, improper, or wasteful had the  documentation been provided or available.  In addition, we noted that of  the 66 transactions for which VHA cardholders provided no documentation  to support the purchase, 32 transactions (49 percent) represented 2 or  more transactions by the same cardholder.  For example, one cardholder  did not provide documentation for 5 transactions, totaling $5,799, from  various types of merchants, including two restaurants, a movie theater, a  country club, and an airport café.
For 65 transactions, totaling $37,100, that we characterized as questionable  but appeared to be either improper or wasteful, the documentation we  received either was not correct or was inadequate, and we were unable to  determine the propriety of the transactions.  For example, one transaction  was for $1,350 to Hollywood Entertainment; however, the purchase order  and invoice listed Hear, Inc., as the vendor for closed captioning services.
The cardholder stated that she believed Hollywood Entertainment is an  associate company name for Hear, Inc.; however, the company could not  provide any documentation to support this statement.  Additionally, from  our Internet searches of both Hollywood Entertainment and Hear, Inc. we  found no information to indicate that these two companies were associated  in any way.
We also identified 68 transactions, totaling $31,772, involving the purchase  of tickets for sporting events, plays, movies, amusement or theme parks,  and other recreation activities for veterans and VA volunteers.  The  documentation provided for these transactions was inadequate or missing  vendor invoices; therefore, we could not determine whether these tickets  were used in support of the volunteers or veterans.  As a result, we  categorized these purchases as questionable.  Various programs under  VHA, such as Recreation Therapy, Voluntary Services, and Blind  Rehabilitation Service, sponsor assorted activities for veterans and VA  volunteers.  From our review of these types of purchases, we found that  VHA does not have procedures in place to ensure that the purchased items  were used by the intended recipients and accounted for properly.  In most  cases, there was inadequate or no documentation to account for how the  tickets were distributed and who participated in the events.  For example,  we found a purchase of 46 tickets, totaling $812, for veterans to attend a  Pittsburgh Pirates baseball game.  However, we were provided no  documentation that identified who received the tickets or who attended the  baseball game.  Proper accountability over the distribution and receipt of  tickets for such events is needed to help ensure that tickets are not  improperly used for personal use.
In closing, Mr. Chairman, I want to emphasize that without improvements  in its internal controls to strengthen segregation of duties; documentation  of purchase transactions; timely recording, review, and reconciliation of  transactions; and program monitoring, VHA will continue to be at risk for  noncompliance with applicable laws and regulations and its own policies  and remain vulnerable to improper, wasteful, and questionable purchases.   Our report, which is being released at this hearing, makes 36  recommendations to strengthen internal controls and compliance in VHA’s  purchase card program to reduce its vulnerability to improper, wasteful,  and questionable purchases.
This concludes my statement. I would be happy to answer any questions  you or other members of the committee may have.
section_title: Contact and Acknowledgments
paragraphs: For information about this statement, please contact McCoy Williams,  Director, Financial Management and Assurance, at (202) 512-6906, or Alana  Stanfield, Assistant Director, at (202) 512-3197.  You may also reach them  by e-mail at williamsm1@gao.gov or stanfielda@gao.gov.  Individuals who  made key contributions to this testimony include Lisa Crye, Carla Lewis,  and Gloria Medina.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.