State's Centrally Billed Foreign Affairs Travel: Internal Control Breakdowns and Ineffective Oversight Lost Taxpayers Tens of Millions of Dollars
Released: 2006-04-10T00:00:00

Letter

Background

State derives its authority to grant leave and travel reimbursements to its foreign service employees from the Foreign Service Act of 1980. To implement provisions of the act, the department issued the FAM and the FAH. Travel by State’s civil service employees is generally governed by the General Services Administration’s (GSA) Federal Travel Regulation (FTR), but in some cases is also governed by the FAM. State’s general policy is for its foreign and civil service employees to travel using coach-class accommodations provided by common carriers. However, regulations governing foreign service and civil service travel authorize the use of premium-class travel under specific circumstances. Both foreign service and civil service travel regulations require the agency head or his or her designee to authorize first-class travel in advance. These regulations also require the authorizing official at a post abroad or the executive director of the funding bureau or office domestically to authorize premium-class travel other than first class. Further, in September 2004, the Assistant Secretary of State for Administration sent a memorandum to all State executive directors emphasizing “that it is wrong to authorize premium-class travel on a blanket basis” and “that a separate justification for premium-class travel is required for each trip.” Federal and State travel regulations authorize premium-class accommodation when at least one of the following conditions exists: no space is available in coach-class accommodations, regularly scheduled flights provide only premium-class an employee with a disability or special need requires premium-class security issues or exceptional circumstances, travel lasts in excess of 14 hours without a rest stop, foreign-carrier coach-class air accommodations are inadequate, overall cost savings, such as when a premium-class ticket is less expensive than a coach-class ticket or in consideration of other economic factors, transportation costs are paid in full through agency acceptance of payment from a nonfederal source, or required because of agency mission (e.g., courier).

The regulations also allow for the traveler to upgrade to premium-class accommodations, at the traveler’s expense or by using frequent traveler benefits, but the upgrade cannot be charged to the centrally billed account.

State has the second largest centrally billed travel card program in the federal government. During fiscal years 2003 and 2004, State used 155 different centrally billed accounts-–143 international and 12 domestic-–to purchase more than $360 million in transportation services, such as airline tickets, train tickets, and bus tickets, for State and other foreign affairs agencies. Each bureau has its own travel budget and is responsible for obligating its travel expenses. The local travel-authorizing official or the executive director of the funding office is responsible for determining the necessity of travel, issuing the travel order, certifying the availability of funds, and recording an obligation against a unit’s appropriated funds.

State’s travel management centers (TMC) make airline reservations, issue airline tickets charged to the centrally billed account upon receipt of a signed travel order, and perform a reconciliation between the tickets it issued and tickets charged on the Citibank invoice. To complete this reconciliation process, TMCs are responsible for associating each charge with a specific travel order. The financial management officer (FMO) at overseas posts and resource management’s Global Financial Operations in Charleston, South Carolina, for domestic activity, are generally responsible for reviewing a TMC’s monthly reconciliation, making appropriate changes, and certifying or authorizing Citibank’s invoice for payment. Upon receipt of the TMC’s reconciliation, billed transaction report (BTR), and supporting files, State pays Citibank for the tickets purchased on the centrally billed account. State also pays travelers for nontransportation costs claimed on their individual travel voucher. Figure 1 shows the design of the processes used to issue an airline ticket on centrally billed accounts and reimburse travelers for travel expenses. It also explains the roles of different offices in providing reasonable assurance that airline tickets charged to these cards are appropriate and meet a valid government need.

Ineffective Controls over Authorization and Justification of Premium-Class Travel Led to Wasted Taxpayer Dollars

Premium-class travel accounted for almost half of travel expenditures charged to State’s over 260 centrally billed accounts during most of fiscal years 2003 and 2004, including domestic and overseas operations, and this trend continued for fiscal year 2005. On the basis of our statistical sample, we estimate that 67 percent of premium-class travel during April 2003 through September 2004 for State and other foreign affairs personnel was improper--either not properly authorized or properly justified because of breakdowns in key internal controls. Examples of breakdowns in key controls include travelers flying premium-class travel when the travel orders did not authorize premium-class travel; subordinates authorizing their supervisors to take premium-class flights; and travel orders authorizing premium-class travel using criteria of a total flight time of more than 14 hours, even though the actual flight time, including layovers, was less than 14 hours. Also, State’s diplomatic couriers used premium-class travel even when it was not justified. In addition, we found that State’s top executives, including under secretaries and assistant secretaries, often used premium-class travel regardless of the length of the flight. Further, senior State officials told us that the department offered premium-class travel as a benefit to its employees, as part of their human capital initiative, for all flights lasting over 14 hours, which is allowed by federal and State regulations but is costly to taxpayers. However, State did not perform a cost-benefit analysis before offering this benefit. In comparison, agencies— such as DOD—attempt to avoid the significant additional cost associated with premium-class travel on flights lasting more than 14 hours by encouraging employees to take a rest stop en route to their final destination, saving hundreds, sometimes thousands, of tax dollars per trip. Prior to 2002, State policy prohibited the use of premium-class accommodations for permanent change of station travel even when the duration of the travel exceeded 14 hours—a prohibition established by many other agencies with staff stationed overseas. However in 2002, State eliminated that prohibition.

Extent of Premium-Class Travel Is Significant

Between April 2003 and September 2004, State and other foreign affairs agencies purchased over 32,000 airline tickets costing about $140 million that contained at least one leg of premium-class travel for State and other foreign affairs personnel using State’s centrally billed account travel cards.

In addition, we determined that premium-class travel continues to be significant for fiscal year 2005. As discussed later in this report, because State does not obtain or maintain any information on premium-class travel, it cannot monitor its proper use, identify trends, or determine alternate, less expensive means of transportation. As shown in figure 2, premium- class travel represents about 19 percent of the tickets issued, and State’s and other foreign affairs agencies’ spending on premium-class travel represented about 49 percent of the $286 million spent on airfare charged to the centrally billed accounts during the period April 2003 through September 2004. Our analysis excluded all travel transactions at overseas posts that were not procured through the centrally billed travel accounts because it was outside the scope of our request. State told us that at some overseas posts travelers purchase airline tickets using Government Travel Requests (GTR) and purchase orders. Further, the information State provided for some tickets purchased with GTRs did not distinguish between premium- and coach-class tickets.

Key Internal Controls over Premium Travel Were Ineffective

Breakdowns in key internal control activities led to significant numbers of transactions lacking proper authorization and justification for premium- class travel. On the basis of our sample of premium transactions, an estimated 67 percent of premium-class travel was not properly authorized, justified, or both. Specifically, 39 percent of the premium-class airline tickets charged to State’s centrally billed account from April 2003 through September 2004 were not properly authorized. In addition, 28 percent of premium-class transactions that were authorized were not justified in accordance with either federal or State regulations. (See app. I for further details of our statistical sampling test results.) Further, State did not maintain accurate and complete data on the extent of premium-class travel and thus had a lack of controls in place to oversee and manage this travel. Each fiscal year State is required to report to GSA on first-class travel taken by all State and other foreign affairs personnel. However, we found 23 roundtrip first-class tickets valued at more than $85,000, obtained for State or other foreign affairs agencies, that were not reported by State to GSA as required in fiscal years 2003 and 2004. Further, we saw no evidence of external or internal audits of State’s centrally billed travel program.

Proper Authorization Did Not Exist

Requiring premium-class travel to be properly authorized is the first step in preventing improper premium-class travel. Federal and State regulations require premium-class travel to be specifically authorized. State travel regulations specify that premium-class travel must be authorized in advance of travel, unless extenuating circumstances or emergencies make prior authorization impossible, in which case the traveler is required to request written approval from the appropriate authority as soon as possible after the travel. Using these regulations, we found that transactions failed the authorization test in the following two categories: (1) the documentation did not specifically authorize premium-class travel or a blanket travel authorization was used to authorize premium-class travel and (2) the travel order authorizing premium-class travel was not signed.

Premium-class travel was not specifically authorized. On the basis of our statistical sample, we estimated that the travel orders and other supporting documentation for 13 percent of the premium-class transactions did not specifically authorize the traveler to fly premium class, and thus the travel management center should not have issued the premium-class ticket. We estimated that an additional 17 percent of the transactions were authorized by a blanket authorization, including all diplomatic courier travel. A blanket authorization is not an appropriate vehicle for authorizing premium-class travel because federal and State travel regulations require that all premium-class travel be authorized on a trip-by-trip basis. In September 2004, State issued a memorandum to all executive directors reminding them about the use of blanket orders, emphasizing that it is wrong to authorize business-class travel on a blanket basis and also reminding the executive directors that a trip-specific justification must be provided for each business-class authorization.

Travel order was not signed. We estimated that 5 percent of premium- class transactions did not have signed travel authorizations. Ensuring that travel orders are signed, and signed by an appropriate official, is a key control for preventing improper premium-class travel. If the travel order is not signed, or not signed by the individual designated to do so, State cannot guarantee that the substantially higher cost of the premium-class tickets was properly reviewed to ensure it represented an efficient use of government resources.

Documentation of Valid Justification for Premium-Class Travel Often Did Not Exist

Another internal control weakness identified in the statistical sample was that the justification used for premium-class travel was not provided, not accurate, or not complete enough to warrant the additional cost to the government. To determine whether premium-class travel was justified, we looked at whether there was documented authorization and, if there was, whether the authorization for premium-class travel was supported by a valid reason. Thirty-nine percent of premium-class transactions were not authorized and, therefore, could not have been justified. State asserts that even if business-class authorization for some trips was not properly documented, the premium travel was nevertheless justified so long as the trips were in excess of 14 hours. However, without properly documented authorization, we cannot assess the propriety of such travel notwithstanding the 14-hour travel rule and therefore must conclude that it was unjustified premium-class travel. In addition, 28 percent of premium- class transactions were authorized but were not supported by valid justification. Federal and State travel regulations provide that travel in excess of 14 hours, without a rest stop en route or a rest period on arrival is justification for premium class. We found premium travel included trips with such rest stops for flights lasting under 14 hours.

Table 1 contains specific examples of both unauthorized and unjustified travel from both our statistical sample and data mining work. These examples illustrate the improper use of premium-class travel and a resulting increase in travel costs. More detailed information about some of the cases follows the table.

Traveler #1 flew from Washington, D.C., to Honolulu, Hawaii. The total cost of the trip was $3,228. In comparison, the unrestricted government fare from Washington, D.C., to Honolulu was $790. According to State regulation, travelers using premium-class travel are not entitled to an overnight rest stop en route. Furthermore, the travel was authorized by a blanket premium-travel authorization signed by a subordinate of the traveler and a separate trip authorization was not included to specifically authorize this trip, as required. The travel authorization did not provide specific justification for business-class travel and the travel was not more than 14 hours. Therefore, the transaction failed authorization and justification.

Travelers #2 and #3 traveled from Johannesburg to Asmara through Frankfurt, at a cost of about $8,353 each, a total of $16,706. Although they traveled business class for the entire trip, they were reimbursed for a hotel room during the layover in Frankfurt on the return visit, at a cost of about $171 each. According to State regulation, travelers using premium-class travel are not entitled to a government-funded rest stop en route. If the travelers had flown coach for this round trip and taken a rest stop en route, the airfare would have cost about $2,921 and State could have saved about $11,000 for the two tickets. One of these travelers approved the travel authorizations for both himself and the other traveler.

Traveler #4 flew first class from Washington, D.C., to Hawaii on a blanket travel order that only authorized travel within Europe. Although the travel was less than 14 hours, State provided no justification for first class, and State did not report the first-class travel to GSA. We found that State issued a first-class airline ticket to Hawaii using a blanket travel authorization that authorized premium-class accommodations. State issued the ticket to an unauthorized destination–Hawaii–because the blanket travel order authorized travel to Europe and State’s travel officials did not review the blanket authorization to ensure that the travel authorization was current, valid, and the trip was to an authorized destination. Because State did not follow its own policies for authorization and review of travel, the government paid $4,155 for an unauthorized trip.

Management Decisions to Offer Premium Travel as a Benefit

State’s management allowed top State and other foreign affairs executives to use premium-class travel by approving blanket travel orders, similar to a blank check. State also allowed premium-class travel as a benefit–without considering less expensive alternatives–to other employees for flights lasting over 14 hours and for permanent change of station travel, costing taxpayers tens of millions of dollars. Further, State’s practice is for diplomatic couriers to use premium-class travel accommodations to escort diplomatic pouches.

Executive Premium-Class Travelers

State’s top executives, including under secretaries and assistant secretaries, often used premium-class travel regardless of the length of the flight. Our data mining of frequent premium-class travelers showed that many of these travelers were senior foreign affairs executives. On the basis of this information, we expanded our data mining to include trips taken by selected presidential appointees and SES-level foreign affairs staff to determine if their travel was authorized and justified according to federal and State regulations. In addition to the federal and State regulations, we also applied the criteria set forth in our internal control standards and sensitive payments guidelines in evaluating the proper authorization of premium-class travel. For example, State travel regulations and policies do not restrict subordinates from authorizing their supervisors’ premium-class travel, a practice which our internal control standards consider to be flawed. Therefore, a premium-class transaction that was approved by a subordinate would fail the control test based on our internal control standards. State and other foreign affairs agencies paid over $1 million for 269 premium-class tickets for flights taken by 17 foreign affairs executives during April 2003 through September 2004. We found 65 tickets containing business- and first-class segments costing about $300,000 that were under 14 hours. Most of these flights were to destinations within the United States, South America, and Western Europe. Further, over $860,000 in premium-class trips taken by executives were obtained using blanket authorizations. For each premium-class trip, State regulation requires specific authorization to fly premium class. In most cases, the blanket travel orders authorized premium-class travel for an entire year and were signed by subordinates. State officials told us that because the blanket authorization allowed premium class, the executives obtained premium- class tickets even when the trip was under 14 hours. The subordinate authorizers told us they could not challenge an under secretary or an assistant secretary. Examples of premium-class trips associated with improper accommodation and their additional cost to taxpayers are included in figure 3 to illustrate the issues associated with executive premium-class travel found through our data mining.

State also made a management decision to offer premium-class travel to its employees as a benefit, resulting in increased costs to taxpayers. Although State officials were aware that offering employees rest stops on longer flights was often less expensive than premium-class travel, they offered the more expensive premium-class travel to employees for all flights lasting over 14 hours, which increased costs. For example, one individual in our statistical sample flew premium-class roundtrip from Washington, D.C., to Tel Aviv at a cost of over $6,000. Although the trip lasted over 14 hours, as an alternative to paying the premium-class rates, State could have flown this employee coach and paid the cost of an overnight rest stop in London, for a total cost of about $2,300 (about $1,600 for the GSA contract airfare and $700 in lodging and per diem expenses). Overall, this option could have saved taxpayers over $3,700. State officials explained that they made these decisions about premium-class travel to improve morale and retain highly qualified foreign-service personnel. State officials also believed that, among other factors, their decisions about premium-class travel for trips in excess of 14 hours have led to increased morale, as reflected in “The Best Places to Work” survey. However, State could not provide any empirical evidence that showed a direct correlation that offering premium-class travel increased its scores on the survey or increased retention of foreign-service personnel, and could not provide evidence that travel was a metric in the “Best Places to Work” survey. In contrast, agencies, such as DOD, attempt to avoid the significant additional cost associated with premium-class travel on flights lasting more than 14 hours by encouraging employees to take a rest stop en route to their final destination, saving hundreds, sometimes thousands, of tax dollars per trip. Finally, our testing showed that all State employees, not just those in the foreign service that are governed by State regulations, were authorized to use premium-class, without constraint, when the trip was over 14 hours.

State also decided to offer premium-class travel to foreign service employees for permanent change of station moves for all flights that exceeded 14 hours, in accordance with federal and State regulations. However, State’s decision resulted in increased costs to taxpayers. Permanent change of station and similar moves accounted for about $17 million (12 percent) of State’s and other foreign affairs agencies’ premium-class travel for April 2003 through September 2004. Prior to 2002, State policy prohibited the use of premium-class accommodations for permanent change of station travel, even when the duration of the travel exceeded 14 hours—a prohibition established by many other agencies with staff stationed overseas, including DOD. However, in 2002, State eliminated that prohibition at a significant cost to taxpayers. We found numerous examples in our statistical sample in which premium-class travel was properly authorized, and as such these transactions were among the 33 percent of transactions that were considered to be properly authorized and justified. However, it is important to note that because of State’s decision to treat premium-class travel as a benefit, State did not consider having the travelers take alternative, less expensive forms of travel.

Premium-Class Travel by Diplomatic Couriers

As mentioned, we did not evaluate whether couriers were necessary or appropriate or if there were any security issues associated with courier service procedures. same travel regulations explained earlier as all State and other foreign affairs employees.

We tested diplomatic courier transactions in our statistical sample of premium-class transactions and performed data mining of fiscal year 2003 and 2004 transactions. In total, we tested over 20 diplomatic courier premium-class transactions. We found control breakdowns similar to those described above with blanket authorization and justification of courier premium-class travel. Blanket travel orders were used to authorize premium-class courier travel for all courier transactions that we tested but, as stated, blanket orders do not specifically authorize premium travel as required by State regulations. Although the Courier Service used mission security requirements to justify premium-class travel by its couriers, we found examples of premium-class travel when couriers were returning empty-handed, commonly referred to as “deadheading.” In response to these findings, Courier Service officials acknowledged that the use of premium class is not justified when couriers return empty-handed unless the 14-hour rule applies. Courier Service officials also told us that couriers may not know when they will be returning empty-handed until they arrive at an airport and are told that the post did not complete the expected outgoing pouch. By that time, they may not be able to downgrade their return ticket to economy class because a foreign airline is unwilling to do so, or time does not permit them to return to the gate to change their ticket. However, the Courier Service did not indicate on the documentation that it provided to us any attempts to downgrade their tickets in a deadheading or any other situation where premium-class travel was not justified. Further, the Courier Service Deputy Director told us that because there are still some problems in this area, they routinely check courier trip reports to identify and address any noncompliance.

We found that State’s Courier Service has begun to institute cost-saving measures that, if expanded, could save taxpayer dollars. These measures include the expanded use of cargo carriers (e.g., FedEx), which do not require the couriers to purchase passenger tickets and charge lower freight costs than the commercial airlines. Our analysis of a FedEx study performed for the Courier Service showed that substantial air cargo savings and benefits could be achieved through direct cargo flights with multiple stops along a designated route. Although the Courier Service initiated the use of cargo carriers in late 2004, expanding this approach to the extent practical could achieve substantial savings. However, to achieve the additional savings, the Courier Service would need to overcome foreign mission resistance to meeting cargo aircraft outside of business hours. According to Courier Service officials, foreign mission personnel have been unwilling to meet air cargo shipments that arrive outside normal business hours and at cargo airports outside city limits. According to State, Mexico City has recently indicated a willingness to support cargo flight arrivals at Toluca airport. Courier Service officials also told us that while all agencies receiving diplomatic pouches should share responsibility for meeting and taking custody of diplomatic pouch shipments, the burden has generally fallen on State employees.

Lack of Oversight and Controls Led to Other Breakdowns

Ineffective oversight and breakdowns in controls also led to problems with State’s other centrally billed travel activities. For example, although federal agencies are entitled to recover payments made to airlines for tickets that they ordered but did not use, State and other foreign affairs agencies paid for about $6 million in airline tickets that were not used and not processed for refund. We found paper and electronic unused tickets for both domestic and international flights. State was unaware of this problem before our audit because it did not monitor employees’ adherence to travel regulations and did not have a systematic process in place for TMCs to identify and process unused tickets. State also failed to reconcile or dispute over $420,000 of unauthorized and potentially fraudulent charges before paying its account. Instead of disputing these charges with Citibank, State simply deducted the amounts from its credit card bill. This action had the unanticipated consequence of substantially reducing the amount of rebates that State would have been eligible to receive. Thus, State earned only $700,000 out of a possible $2.8 million in rebates that could have been earned if State disputed unauthorized charges and paid the bill in accordance with the terms of the contract with Citibank.

Ineffective Controls and Monitoring Led to Numerous Unused Tickets

We asked for data on unused tickets purchased on State’s centrally billed accounts from the top six domestic airlines—United, Continental, American, Delta, Northwest, and U.S. Airways. All airlines except U.S. Airways directly provided us electronic data on unused tickets. Data provided by the five airlines and verified against Citibank’s data showed that over 2,700 airline tickets with a face value of about $6 million purchased with State’s centrally billed accounts were unused and not refunded. The airline tickets State purchased, for State and other foreign affairs personnel, through the centrally billed accounts are generally acquired under the terms of the air transportation services contract that GSA negotiates with U.S. airlines. Airline tickets purchased under this contract have no advance purchase requirements, have no minimum or maximum stay requirements, are fully refundable, and do not incur penalties for changes or cancellations. Under this contract, federal agencies are entitled to recover payments made to airlines for tickets that agencies acquired but did not use. While generally there is a 6-year statute of limitation on the government’s ability to file an action for financial damages based on a contractual right, the government also has up to 10 years to offset future payments for amounts it is owed.

State Did Not Monitor Employee Adherence to Travel Regulations

During fiscal years 2003 and 2004, State did not implement controls to monitor State’s and other foreign affairs employees’ adherence to travel regulations requiring notification of TMC or the appropriate State officials about unused tickets. Federal and State travel regulations require a traveler who purchased a ticket using the centrally billed account either to return any unused tickets purchased to the travel management center that furnished the airline ticket or to turn in unused tickets immediately upon arrival at their post to the administrative officer or, upon arrival in Washington, D.C., to the executive officer of the appropriate managing bureau or office. This notification of an unused ticket initiates a process to submit requests to the airlines for refunds.

Figure 4 illustrates where control breakdowns can occur if travelers do not adhere to State requirements. As shown, once a ticket is charged to the centrally billed account and given to the traveler, State has no systematic controls to determine independently if the ticket was used—or remains unused—unless notified by the traveler. If the traveler does not report an unused ticket, the ticket would not be refunded unless TMC monitored the status of airline tickets issued electronically and applied for the refunds.

Figure 4 shows that the failure of the traveler to notify the appropriate official of an unused paper ticket would result in the ticket being unused and not refunded. Although bank data indicate that State received some credits for airline tickets purchased, State did not maintain data in such a manner as to allow it to identify the extent of unused tickets and to determine whether credits were received.

State did not have a systematic process in place to monitor whether TMCs were consistently identifying and filing for refunds on unused tickets. For instance, State contractually required the domestic TMC to identify and process all unused electronic tickets. In exchange, the TMC received a fee for each refund received for an unused ticket. However, State did not implement procedures to determine whether unused tickets were being identified and credits were being received. Instead, State officials took the TMC’s monthly report indicating only the total dollar amount of refunds submitted to the airlines as evidence of contractual compliance. Unless State implements control procedures to verify whether TMCs were identifying and filing for refunds on the unused tickets consistently, State cannot provide reasonable assurance that all requests for refunds resulted in a credit to the government.

Even when a TMC had procedures in place to identify and process unused electronic tickets, State was still unable to identify unused paper tickets. For example, by fiscal years 2003 and 2004, State’s domestic TMC and TMCs at both of the overseas locations we visited had the capability to identify or search the databases of the airlines that participate in electronic ticketing or to receive notification from the airlines of unused tickets, and subsequently obtain refunds. However, even though the TMCs can identify electronic tickets, they cannot independently identify paper tickets, which are typically used for international travel. State has not implemented a systematic process to verify whether a significant portion of airline tickets are unused, such as matching tickets issued by TMC with travel vouchers submitted by travelers upon completion of their trip. Without such a process State will not have reasonable assurance that tickets purchased through the centrally billed accounts are used or refunded.

In addition to the $6 million dollars of unused tickets or trip segments we identified using the airline data, we estimated that, based on the statistical sample, 3 percent of premium-class airline tickets were unused and not refunded. This 3 percent estimate is for premium-class tickets only and excludes coach accommodations.

Table 2 contains specific examples of tickets that the airlines identified as unused that we tested as a part of our statistical sample of premium class transactions and data mining selections. Since these tickets were not used, they resulted in waste and increased costs to taxpayers.

State Did Not Dispute Unauthorized Transactions and Lost Performance Rebates

State did not dispute over 320 unauthorized transactions, totaling over $420,000, associated with its two primary domestic centrally billed accounts during fiscal year 2003 and fiscal year 2004. TMCs reconcile transactions on the monthly credit card invoice to the tickets issued by the TMC and recorded in the airline reservation system. Disputes are typically filed for transactions that neither the TMC nor State identified as having issued or authorized. Tickets that do not match could occur for many reasons, such as an airline charging the ticket to the wrong credit card account, an individual fraudulently obtaining an airline ticket, or the merchant or credit card vendor failing to provide enough information to allow the transaction to match. State did not have processes or procedures in place to file disputes for transactions that failed to reconcile between the bank invoice and the computer reservation system. We provided State a list of 219 travelers’ names associated with the over 320 unauthorized transactions to verify that they were State employees or otherwise authorized by State or other foreign affairs agencies to travel. According to State, 38 of the 219 travelers were individuals for whom State had no record of ever working for State as an employee, contractor, or being authorized to travel as an invited guest. Thus, these transactions could be potentially fraudulent charges. As for the remaining 181 travelers, State informed us that while the airline tickets purchased were for individuals who are either current or former State employees, contractors, or invited guests, State has no evidence that the trips had been authorized. Thus, these trips also could represent potentially fraudulent charges.

As a result of not disputing unauthorized charges and not paying its bill in accordance with the contract, State faced the unanticipated consequence of substantially reducing the amount of rebates that it would have been eligible to receive. For example, if State had effectively managed the domestic accounts and disputed these charges, State could have earned over $1 million in rebates. Instead, State earned only about $174,000 in performance rebates for its domestic accounts. In contrast, at two overseas posts that we visited, State was properly disputing transactions. However, as previously noted, State still did not effectively manage its centrally billed accounts departmentwide and, consequently, earned only $700,000 out of a possible $2.8 million in performance rebates from Citibank.

The contract that State entered into with Citibank to issue centrally billed account travel cards enables State to earn performance rebates based on how quickly State pays the monthly bill. To earn the performance rebate, State must pay the bill within 30 calendar days from the statement date. State earns the maximum performance rebate if it pays the centrally billed account—less any disputed charges—on the statement date; for unpaid bills, the amount of the rebate decreases each day thereafter. If State pays the centrally billed account more than 30 days after the statement date, State does not earn a performance rebate.

Throughout the audit period, State generally submitted payment for its domestic centrally billed accounts within the 30 day window; however, State frequently failed to pay the entire amount of the bill, leaving potentially unauthorized charges unpaid, but not properly disputed. During fiscal years 2003 and 2004, State did not dispute any of the previously mentioned over 320 unauthorized charges applied to its domestic centrally billed accounts, and instead simply deducted the amounts due from its credit card bill. If State had disputed these charges, Citibank would have given State a 60-day grace period to investigate whether the charges were appropriate and the disputed amounts would not have to be paid until the investigation was completed. An average person cannot simply determine which charges on their credit card bill they are going to pay but must notify the bank of any unauthorized charges. Since State did not dispute the charges, it was still liable for the amounts associated with these charges and simply deducting them from the credit card bill did not relieve State of its responsibility for these charges. Consequently, State was not only paying for potentially fraudulent charges, but it also lost the performance rebates it could have earned by promptly paying its monthly centrally billed account bill.

Conclusion

The State department serves a critical role for the federal government and in that role State and other foreign affairs employees are required to travel extensively, often internationally. However, travel regulations state that employees on official government travel must follow published requirements and exercise the same standard of care in incurring expenses that a prudent person would exercise when traveling on personal business. Our work shows that travelers using State’s over 260 centrally billed travel accounts often do not meet that standard, which has resulted in millions of dollars of unnecessary costs to taxpayers. With the serious fiscal challenges facing the federal government, agencies need to do everything they can to operate as efficiently as possible. Improved management and oversight of the State department’s centrally billed travel program would save taxpayers tens of millions of dollars annually.

Recommendations for Executive Action

We are making the following 18 recommendations to improve internal control over the authorization and justification of premium-class travel and to strengthen the control environment as part of an overall effort to reduce improper premium-class travel and unnecessary or inappropriate State costs. Because of the substantial cost and sensitive nature of premium- class travel, we recommend that the Secretary of State direct the appropriate officials to implement specific internal control activities over the use of premium travel and establish policies and procedures to incorporate federal and State regulations as well as guidance specified in our Standards for Internal Control and our Guide for Evaluating and Testing Controls Over Sensitive Payments. While a wide range of activities can contribute to a system that provides reasonable assurance that premium-class travel is authorized and justified, at a minimum, the internal control activities should include the following: Develop procedures to identify the extent of premium-class travel, including all business-class travel, and monitor for trends and potential misuse.

Develop procedures to identify all first-class fares so that State can prepare and submit complete and accurate first-class travel reports to GSA.

Require State to develop a management plan requiring that audits of State’s issuance of premium-class travel are conducted regularly, and the results of these audits are reported to senior management. Audits of premium-class travel should include reviews of whether travel management centers adhere to all governmentwide and State regulations for issuing premium-class travel.

Periodically provide notices to travelers and supervisors/managers that specifically identify the limitations on premium-class travel, the limited situations in which premium-class travel may be authorized, and how the additional cost of premium-class travel can be avoided.

Require that premium-class travel be approved by individuals who are at least of the same grade as the travelers and specifically prohibit the travelers themselves or their subordinates from approving requests for premium-class travel.

Prohibit the use of blanket authorization for premium-class travel, including management decisions offering premium-class travel as a benefit to executives and other employees.

Encourage State department personnel traveling as a result of a permanent change of station to take a rest stop en route to their final destination to avoid the significant additional cost associated with premium-class flights and thus save the taxpayer thousands of dollars per trip.

Urge other users of State’s centrally billed travel accounts to take parallel steps to comply with existing travel requirements.

To promote the economy and efficiency of Courier Service operations, we recommend that the Secretary of State direct the Courier Service to take the following actions: Expand the use of cargo carriers, such as FedEx, to the extent practicable.

Direct foreign missions to assure that organizations using diplomatic courier services share responsibility for meeting and accepting air cargo shipments of diplomatic pouches.

Clarify written policy to clearly state that diplomatic couriers must use economy class accommodations when in a “dead-head” capacity unless relevant exceptions (e.g., 14-hour rule) exist, and enforce the requirement.

To recover outstanding claims on unused tickets, we recommend that the Secretary of State initiate the following actions: Immediately submit claims to the airlines to recover the $6 million in fully and partially unused tickets identified by the airlines and discussed in this report.

Work with the five airlines identified in this report and other airlines from which State purchased tickets with centrally billed accounts to determine the feasibility of recovering other fully and partially unused tickets, the value of the unused portions of those tickets, and initiate actions to obtain refunds.

To enable State to systematically identify future unused airline tickets purchased through the centrally billed accounts, and improve internal controls over the processing of unused airline tickets for refunds, we recommend that the Secretary of State direct the appropriate personnel within services and agencies to take the following actions: Evaluate the feasibility of implementing procedures to reconcile airline tickets acquired using the centrally billed accounts to travel vouchers in the current travel system.

Enforce employees’ adherence to existing travel regulations requiring notification of unused tickets.

Modify existing travel management center contracts to include a requirement that the international travel management centers establish a capability to systematically identify unused electronic tickets in their computer reservation systems and file for refunds on the tickets identified as unused.

Routinely compare unused tickets processed by the travel management centers to the credits on the Citibank invoice.

To provide assurance of accurate and timely payments of the centrally billed accounts and to maximize rebates, we recommend that the Secretary of State establish procedures to ensure that all transactions on the Citibank invoice are either paid in accordance with the contract or properly disputed.

Agency Comments and Our Evaluation

In written comments on a draft of this report, State concurred with all 18 of our recommendations and said that it is firmly committed to aggressive stewardship of the taxpayers’ resources entrusted to the department. However, State also commented that our report overstates the problem, fails to identify improper travel conducted for other than official government travel, identifies only a few instances of unjustified travel, and implies incorrectly that State carelessly implemented business-class regulations without regard to the increased cost. We disagree.

We do not agree with State’s position that we overstate the nature and extent of its control breakdowns and ineffective oversight. State and other foreign affairs travelers charged almost $140 million on premium-class travel from April 2003 through September 2004. On the basis of our statistical sample, 67 percent of premium-class travel was not properly authorized, justified, or both. This failure rate and the associated dollars spent on premium class travel shows that taxpayers lost tens of millions of dollars on improper travel. For example, State issued premium-class tickets to a family of four traveling from Washington to Moscow for a permanent change of duty station. Although this trip was well under the required 14 hours to justify premium-class travel, State purchased the premium class accommodations for almost four times the cost of coach seats. In addition to the waste exemplified here and elsewhere in our report, taxpayers lost millions more because State failed to recover payments made to airlines for tickets issued but never used and failed to reconcile and dispute other charges properly. For example, State paid for a premium-class ticket for roundtrip travel between New Mexico and Ethiopia that was neither used nor refunded. These specific examples and our overall analysis clearly show how ineffective oversight—not just procedural problems—resulted in substantial waste of taxpayers’ dollars.

As our report clearly explains, we did not specifically question whether travel charged to State’s centrally billed travel accounts were necessary. Therefore, we purposely did not identify improper travel conducted for other than official government travel and thus our report makes no conclusions on this matter.

State’s position that our findings of improper travel are simply the result of “procedural problems” and that “only a few instances” of travel were conducted outside of the regulations are inconsistent with the facts. In this regard, over half of the transactions we tested—not just a few instances— were not simply the result of procedural problems (e.g., not properly authorized), they were unjustified because the travel was conducted outside of the regulations. Over half of the travelers improperly flew premium-class on trips lasting shorter than 14 hours or flew business class and also took a rest stop, which is to be used in lieu of using premium-class accommodations to economize travel. For example, one State traveler flew premium-class between points in Europe on a trip lasting well short of 14 hours and also took an unjustified rest stop, which further added lodging and subsistence expenses to the total cost of travel. Another traveler flying short of 14 hours on a premium-class ticket enjoyed 3 nights of rest upon her return. These and other examples of unjustified travel underscore problems beyond what State says are simply “deficient procedural protocols” and demonstrate how State’s ineffective oversight of premium- class travel resulted in substantial losses to taxpayers.

Finally, State takes exception with our characterization that it treated premium-class travel as an employee benefit. This position, however, is in stark contrast to the representations State made throughout our review. For example, although State prohibits blanket authorizations for premium- class travel, many of State’s top executives consistently flew on blanket travel orders improperly authorizing premium class from Washington to numerous domestic and other destinations that were well below the 14 hours required to justify such travel. For example, one senior State executive completed 45 premium-class trips costing $213,000, many of which were under 14 hours, using a blanket travel order. These executive travelers set a tone at the top that premium-class travel was in fact a benefit to the traveler and not something that should be minimized or used sparingly. In addition, during our review, State said that it indeed offered premium-class travel as a benefit to its employees and that such travel contributed to their improved employee feedback provided to “The Best Places to Work” survey. However, State could not provide evidence that travel was a metric in that survey. Moreover, regardless of the increased cost associated with such moves, State began in 2002 and continues today to offer premium-class travel for permanent change of station moves as a benefit to its employees and their families. We believe these examples, especially the top State executives who gave themselves the benefit of flying premium class when federal law and regulations did not allow such travel, demonstrate that the tone at the top of the department indicates that premium-class travel is in fact a benefit, without specific regard to cost. State’s comments are reprinted in appendix II.

As agreed with your offices, unless you announce the contents of this report earlier, we will not distribute it until 30 days from its date. At that time, we will send copies to interested congressional committees; the Secretary of State, the Director and Deputy Director of the Diplomatic Courier 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 me at (202) 512-7455 or kutzg@gao.gov if you or your staffs have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors are listed in appendix III.

Objectives, Scope, and Methodology

This report responds to your request that we audit and investigate internal controls over State’s centrally billed travel accounts, which include travel related to the Department of State, other U.S. government agencies principally engaged in activities abroad, and other domestic departments and agencies with international operations. The objectives of our audit were to determine the effectiveness of the Department of State’s internal controls over its centrally billed travel card program and determine whether fraudulent, improper, and abusive travel expenses exist. Specifically we evaluated the effectiveness of State’s internal controls over (1) the authorization and justification of premium-class tickets charged to State’s centrally billed travel accounts and (2) monitoring unused tickets, reconciling monthly statements, and maximizing performance rebates.

To assess the effectiveness of internal controls over State’s use of the centrally billed accounts, we obtained an understanding of the travel process, including premium-class travel authorization, unused ticket identification, and overall travel card management and oversight, by interviewing State officials from Resource Management, Travel and Transportation Management Division; Diplomatic Security, Overseas Building Operations; Educational and Cultural Affairs; U.S. Consulate, Frankfurt, Germany and U.S. Embassy, Pretoria. We also interviewed key officials from the American Express, Carlson Wagonlit, and Concorde travel management centers. We reviewed General Services Administration’s (GSA) Federal Travel Regulations (FTR) and State’s Foreign Affairs Manual (FAM) and Foreign Affairs Handbook (FAH). We reviewed State’s internal department notices and other travel-related guidance. Finally, we conducted “walk-throughs” of the domestic and overseas travel processes.

Evaluating the Effectiveness of Controls over Premium-Class Travel

We audited controls over the authorization and issuance of premium-class travel during fiscal years 2003 and 2004. State’s credit card vendor, Citibank, could not provide the first 6 months of fiscal year 2003 (October 2002–March 2003) level III data due to limitations in its archiving capabilities. The level III data indicate whether a transaction is premium or coach. Therefore, we used 18 months of data from April 2003 through September 2004 to select a probability sample of premium-class transactions and also used this same time period for our data mining and analysis of premium-class transactions. Our assessment covered the following: The extent to which State used the centrally billed accounts to obtain premium-class travel was determined.

Testing a statistical sample of premium-class transactions to assess the implementation of key management controls and processes for authorizing and issuing premium-class travel, including approval by an authorized official and justification in accordance with regulations. We also used data mining to identify other selected transactions throughout the premium-class travel transactions to determine if indications of improper transactions existed.

State’s management policy towards the use of premium-class travel was determined.

Magnitude of Premium- Class Travel

To assess the magnitude of premium-class travel by State and other foreign affairs agencies, we obtained from Citibank a database of fiscal years 2003, 2004, and 2005 travel transactions charged to State’s centrally billed and individually billed travel card accounts. The databases contained transaction-specific information, including ticket fares, codes used to price the tickets—fare basis codes—ticket numbers, names of passengers, and numbers of segments in each ticket. We reconciled these data files to control totals provided by Citibank and to data reported by GSA on State’s centrally billed account activities. We queried the database of positive debit transactions (charges) for fare codes that corresponded to the issuance of first- and business-class travel, identifying all airline transactions that contained at least one leg in which State and other foreign affairs agencies paid for premium-class travel accommodations.

We further limited the first- and business-class transactions to those costing more than $750 because many premium-class tickets on intra- European flights cost less than $750 and the corresponding coach-class tickets were not appreciably less. By eliminating from our population first- and business-class transactions costing less than $750, we avoided the possibility of identifying a large number of transactions in which the difference in cost was not significant enough to raise concerns of the effectiveness of the internal controls. The total number of transactions excluded was 1,067, costing approximately $532,000. While we excluded premium-class transactions costing less than $750, we (1) did not exclude all intra-European flights and (2) potentially excluded unauthorized premium-class flights. Limitations of the database prevented a more precise methodology of excluding lower-cost first- and business-class tickets.

Statistical Sampling and Data Mining

Table 3 summarizes the population of State and other foreign affairs agencies’ airline travel transactions containing at least one premium-class leg charged to State’s centrally billed accounts from April 2003 through September 2004 and the subpopulation subjected to testing.

To assess the implementation of key controls over the authorization and issuance of premium-class travel, we tested a probability sample of premium-class transactions. In general, the population from which we selected our transactions for testing was the set of positive debit transactions totaling $750 or more for both first- and business-class travel that were charged to State’s centrally billed accounts during April 2003 through September 2004. Because our objective was to test controls over travel card expenses, we excluded credits and miscellaneous debits (such as fees) that would not have been for ticket purchases from the populations tested.

We further limited the population of first- and business-class transactions to those without a matching credit. By eliminating transactions with matching credits, we avoided selecting a large number of transactions in which the potential additional cost of the premium-class ticket was mitigated by a credit refund so as not to raise concerns about the effectiveness of the internal controls. The total number of transactions excluded was 2,799, totaling approximately $11.7 million. While we excluded premium-class transactions with a matching credit, we did not exclude all transactions with a matching credit because sometimes the data did not always identify the fare basis codes to allow us to determine if the travel was premium or coach.

To test the implementation of key control activities over the issuance of premium-class travel transactions, we selected a probability sample of transactions. Specifically, we selected 107 premium-class transactions totaling about $467,000. For each transaction sampled, we requested that State provide us the travel order, travel voucher, travel itinerary, and other related supporting documentation. We used that information to test whether documentation existed that demonstrated that State had adhered to key internal controls over authorizing and justifying premium-class tickets. On the basis of the information State provided, we determined whether a valid official approved the premium-class travel and whether the premium-class travel was justified in accordance with State regulations. We also applied criteria set forth in our internal control standards and sensitive payments guidelines in evaluating the proper authorization of premium- class travel. For example, while State travel regulations and policies do not address subordinates authorizing their supervisors’ premium-class travel, our internal control standards consider such a policy to be flawed; therefore, a premium-class transaction that was approved by a subordinate would fail the control test. The results of the samples of these control attributes can be projected to the population of transactions at State and other foreign affairs agencies as a whole, but not to individual bureaus or posts.

With our 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. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s estimates as 95- percent confidence intervals (e.g., plus or minus 10 percentage points.) These are intervals that would contain the actual population value for 95- percent of the samples we could have drawn. As a result, we are 95-percent confident that each of the confidence intervals in this report will include the true values in the study population. All percentage estimates from the sample of premium-class air travel have sampling errors (confidence interval widths) of plus or minus 10 percentage points or less. Table 4 summarizes the premium-class statistical sample results.

In addition to our statistical sample, we selected other transactions identified by our data mining efforts for review. Our data mining identified individuals who frequently flew using first- or business-class accommodations. For data mining transactions, we also requested that State provide us the travel order, travel voucher, travel itinerary, and any other supporting documentation that could provide evidence that the premium-class travel was properly authorized and justified in accordance with State policies. If the documentation provided indicated that the transactions were proper and valid, we did not pursue the matter further. However, if the documentation was not provided, or if it indicated further issues related to the transactions, we obtained and reviewed additional documentation about these transactions.

High-Level Officials

Our initial data mining efforts identified executives that frequently flew first and business class. On the basis of our findings, we expanded our selection of high-level officials to include most of State’s top executives, including presidential appointees and senior executives. We evaluated these transactions in the same manner as described above.

Diplomatic Couriers

Based on the statistical sample of premium class transactions, we estimate that 6 percent of the transactions in the sample population represent travel by diplomatic couriers. We also identified courier transactions by data mining for travelers that frequently flew first and business class. We found six courier transactions in our statistical sample and an additional 16 transactions identified during data mining for proper authorization and justification. We reviewed pertinent laws, federal regulations, and State department policies and procedures and interviewed current and former Diplomatic Courier Service staff. We also conducted an on-site inspection of classified pouch procedures at the Logistics Operations Center and observed the FedEx process for inventory, pouching, and packaging of classified materials for shipment to London, Paris, and Frankfurt. We did not have authorization to open, inspect, and verify that classified pouches contained only classified materials. Also, we did not observe and assess courier procedures at foreign airports related to accessing the tarmac to take custody of outgoing and incoming diplomatic pouch materials. During the course of our work, we interviewed Department of State Inspector General, Diplomatic Courier Service, and Administrative Logistics Management officials and Department of Homeland Security officials responsible for customs and border protection.

Evaluating the Effectiveness of Controls over Other Centrally Billed Account Activities

We also audited the controls over other centrally billed account activities, including the identification and processing of unused tickets and disputing of unauthorized transactions, during fiscal years 2003 and 2004. Our assessment covered the magnitude of centrally purchased tickets that were not used and not processed for a refund, and the extent of unauthorized transactions that were not disputed and of the rebates lost, as a result.

To assess the internal controls over these other CBA activities, we first applied the fundamental concepts and standards set forth in our Standards for Internal Control in the Federal Government to the practices followed by these units to manage unused tickets and to dispute transactions that did not match or that the reconciliation process determined were unresolved. Because we determined that controls over unused tickets were ineffective, we did not assess these controls.

Magnitude of Unused Tickets

To assess the magnitude of tickets charged to the centrally billed accounts, which were unused and not refunded, we requested that the six airlines that State and other foreign affairs agencies used most frequently provide us with data relating to tickets State and other foreign affairs agencies purchased during fiscal years 2003 and 2004 that were unused and not refunded. These six airlines—American, Delta, Northwest, Continental, United, and U.S. Airways—together accounted for about 80 percent of the value of total airline tickets State and other foreign affairs agencies purchased. To obtain assurance that the tickets the airlines reported as unused represented only airline tickets charged to State centrally billed accounts, we compared data provided by the airlines to transaction data provided by Citibank. Because State does not track whether tickets purchased with centrally billed accounts were used, we were unable to confirm that the population of unused tickets that the airlines provided was complete in that it included all State and other foreign affairs agencies’ tickets that were unused and not refunded.

While American, Delta, Northwest, and United provided data that allowed us to identify the centrally purchased tickets that were fully unused and not refunded and partially used and not refunded, Continental could only provide data on fully unused and not refunded tickets and U.S. Airways did not provide any data. Because none of the airlines provided data sufficient for calculating the exact unused value (residual value), we were limited to reporting the amount charged to the centrally billed accounts related to both fully unused and partially unused tickets.

Extent of Unauthorized Transactions Not Disputed

To determine the extent of airline tickets that did not reconcile between the tickets issued by State’s travel management center and the Citibank invoice of tickets purchased on the centrally billed account, we (1) obtained unresolved transaction reports for State’s largest domestically managed centrally billed accounts and (2) verified that the transactions were charged to a State centrally billed account using the Citibank transaction data.

Magnitude of Rebates Lost

To identify the potential rebates lost on State’s centrally billed accounts, we requested that Citibank provide (1) the total amount of rebates earned by State on its centrally billed account program for fiscal year 2003 and fiscal year 2004, (2) the volume of transactions used by Citibank to compute the rebate amounts, and (3) the rebate pricing schedule Citibank used to determine the amount of rebates. Using the volume of transactions and the rebate pricing schedule provided by Citibank, we calculated the highest potential rebate that State could have earned on the centrally billed account program. We then compared the potential rebate amounts to the actual rebates earned.

Data Reliability Assessment

We assessed the reliability of the Citibank centrally billed account data by (1) performing various testing of required data elements, (2) reviewing existing information about the data and system that produced them, and (3) interviewing Citibank officials knowledgeable about the data. In addition, we verified that totals from the databases agreed with the centrally billed account activity reported by GSA. We determined that data were sufficiently reliable for the purposes of our report.

To assess the reliability of the unused ticket data provided to us by American, Continental, Delta, Northwest, and United Airlines, we (1) consulted airline officials knowledgeable about the data and (2) performed testing on specific data elements. In addition, we validated that the tickets reported as unused by each airline represented tickets centrally purchased by State by comparing each airline’s data to the Citibank centrally billed account. We also reviewed the 2003 and 2004 Notes to the Consolidated Financial Statements for each airline to verify that amounts related to unused tickets were included as a liability. We concluded that the data were sufficiently reliable for the purposes of this report.

Comments from the Department of State

GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

Key contributors to this report include Cindy Barnes, Felicia Brooks, Norman Burrell, Beverly Burke, Jennifer Costello, Francine DelVecchio, Abe Dymond, Aaron Holling, Jason Kelly, John V. Kelly, Andrea Levine, Barbara Lewis, Jenny Li, Katherine Peterson, Mark Ramage, John Ryan, Sidney H. Schwartz, and Michael C. Zola.