The benefits of using purchase cards versus traditional contracting and payment processes are lower transaction processing costs and less red tape for both the government and the vendor community. We support the use of a well-controlled purchase card program to streamline the governments acquisition processes. However, it is important that agencies have adequate internal controls in place to protect the government from fraud, waste, and abuse. We found that both HUD and Education lacked fundamental internal controls over their purchase card programs that would have minimized the risk of improper purchases. For example, both agencies had inconsistent and inadequate pre-approval and review processes for purchase card transactions key preventive and detective controls. Combined with a lack of monitoring, environments were created at HUD and Education where improper purchases could be made with little risk of detection. Inadequate controls over these expenditures, along with the inherent risk of fraud and abuse associated with purchase cards, likely contributed to the $4.0 million of fraudulent, improper, and questionable purchases we identified at HUD and Education through our data mining efforts. According to our Standards for Internal Control in the Federal Government,transactions and other significant events should be authorized and executed only by persons acting within the scope of their authority. Although pre-approval and review of transactions by persons in authority is the principal means of assuring that transactions are valid, we found that the pre-approval and review process for purchase card purchases was inadequate at both HUD and Education. During our review of HUD and Educations purchase card programs, we found that department personnel did not consistently obtain pre-approval prior to making some or all purchases, as required by the departments policies. According to HUDs October 30, 1995, purchase card policy, the approving official is required to establish a pre-approval process for each cardholder to ensure that purchases have the necessary technical approval or clearance before purchases are made and that all transactions are appropriate and for official use only. However, during our review we found that only the Information Technology Office routinely obtained authorization prior to purchasing items with the purchase card. Similarly, at the Department of Education, we found that 10 of its 14 offices did not require cardholders to obtain authorization prior to making some or all purchases, although Educations policy required that all requests to purchase items over $1,000 be made in writing to the applicable department executive officer. One of the most important internal controls in the purchase card process is the review of supporting documentation and approval of each purchase by the approving official. Approving officials at both HUD and Education are required to review each monthly statement of purchases along with the applicable supporting documentation and certify that these purchases were appropriate, in accordance with department regulations, and a valid use of government funds. Based on our testing of both HUD and Educations approving officials review of monthly purchase card statements, we found that this key control was not an effective means of detecting improper purchases. At HUD, we selected a stratified random sample of 222 purchase card transactions made during fiscal year 2001, and found that $1.4 million, or about 77 percent, of the $1.8 million of sampled purchases lacked adequate support for the approving official to determine what was purchased, whether the purchase was previously authorized, and if there was a legitimate government need for the items purchased. We found similar problems at Education. To test the effectiveness of Educations approving officials review, we analyzed 5 months of cardholder statements and found that 37 percent of the 903 monthly cardholder statements we reviewed were not approved by the appropriate official. These 338 unapproved statements totaled about $1.8 million. Another control that is effective in helping to prevent improper purchases is the blocking of certain merchant category codes (MCC). This control, available as part of the agencies purchase card contracts with the card issuing financial institutions, allows agencies to prohibit certain types of purchases that are clearly not business related, such as purchases from jewelry stores or entertainment establishments. During our reviews, we noted that, initially, neither HUD nor Education was effectively using the MCCs as a preventive control. HUD was not blocking any MCCs and Education blocked only four MCCs. As a result, there were almost no restrictions on the types of purchases employees could make during the period of our audit. Both agencies took action to block more of the MCCs after we began our reviews of their purchase card programs. Our Standards for Internal Control in the Federal Government state that internal control should generally be designed to assure that ongoing monitoring occurs in the course of normal operations. Internal control monitoring should assess the quality of performance over time and ensure that findings of audits and other reviews are promptly resolved. Program and operational managers should monitor the effectiveness of control activities as part of their regular duties. HUDs purchase card policy requires the department to perform annual program reviews and report the results, including findings and recommendations, to the purchase card program administrator. However, HUD officials could locate only one such report. This November 2001 report, prepared by a consultant, identified problems that were similar to the findings previously reported by the Office of Inspector General (OIG) in February 1999. Both reports documented problems with weak internal controls and insufficient supporting documentation. The consultants report also noted that HUD was not performing the periodic program reviews required by its policies and that employees were making improper split purchases. HUD management agreed with the findings in the OIG report and developed and implemented an action plan to address the identified weaknesses. According to HUD OIG staff, its recommendations were implemented and have been closed. However, based on our findings, corrective actions taken at that time were not fully effective. At the time of our review, Education did not have a monitoring system for purchase card activity to determine whether its staff was complying with key aspects of the purchase card program. We also found that approving officials at Education did not use monitoring reports that were available from its purchase card contractor to identify unusual or unauthorized purchases. However, as I will discuss later, the department subsequently issued new policies and procedures that, among other things, establish a quarterly quality review of a sample of purchase card transactions to ensure compliance with key aspects of the departments policy. The types of internal control weaknesses that I have just described created environments where improper purchases could be made with little risk of detection and likely contributed to the $4 million of fraudulent, improper, and questionable purchases we identified through our data mining efforts at both HUD and Education. We also found that property purchased with purchase cards was not always recorded in Educations property records, which likely contributed to missing or stolen property. This could also be an issue at HUD based on our preliminary inquiries into its property management system. I will now provide a few examples of how employees used their purchase cards to make fraudulent, improper, and questionable purchases. We considered fraudulent purchases to be those that were unauthorized and intended for personal use. Improper payments include errors, such as duplicate payments and miscalculations; payments for services not rendered; multiple payments to the same vendor for a single purchase to circumvent existing single purchase limits known as split purchases; and payments resulting from fraud and abuse. We defined questionable transactions as those that, while authorized, were for items purchased at excessive costs, for questionable government need, or both, as well as transactions for which the departments could not provide adequate supporting documentation to enable us to determine whether the purchases were valid. In May 2002, we provided HUD with 5,459 transactions, totaling about $3.8 million in which the (1) payee appeared to be an unusual vendor to be engaging in commerce with the agency, (2) purchase was made on either a holiday or weekend, or (3) purchase appeared to be a split purchase. As of September 2002, HUD was able to provide adequate support for 3,428 of these questionable transactions, totaling about $1.5 million. HUD could not provide adequate supporting documentation to enable us to assess the propriety of the remaining 2,031 transactions totaling about $2.3 million, or 38 percent of the total questionable transactions and 61 percent of the total dollars requested. For these transactions, HUD could not provide support to determine what was purchased, whether it was authorized, and whether there was a legitimate government need for the item purchased. These purchases included (1) 1,183 questionable vendor transactions totaling about $869,000, (2) 31 purchases made on holidays totaling about $10,000, (3) 264 weekend purchases totaling about $354,000; and (4) 541 potential improper split transactions totaling about $1 million. Some examples of questionable vendor transactions for which we did not receive adequate support included (1) over $27,000 to various department stores, such as Best Buy, Circuit City, Dillards, JC Penny, Lord & Taylor, Macys, and Sears, (2) over $8,900 to several music and audio stores, including Sound Craft Systems, J&Rs Music Store, Guitar Source, and Clean Cuts Music, and (3) over $9,700 to various restaurants, such as Legal Sea Foods, Levis Restaurant, The Cheesecake Factory, and TGI Fridays. Additional examples of questionable or improper purchases we found included $25,400 of no show hotel charges for HUD employees who did not attend scheduled training and $21,400 of purchases from vendors where it appears the vendors were out of business prior to the purchases. Because HUD was unable to provide adequate documentation for these purchases, we consider them to be questionable uses of government funds and therefore potentially improper purchases. In order to identify potential improper payments in Educations purchase card program, we requested supporting documentation for (1) 338 monthly statements totaling $1.8 million that our testing of the approval function identified as not properly approved, and (2) other transactions, identified using data mining techniques, that appeared unusual. Education was unable to provide adequate supporting documentation to enable us to determine the validity of purchases totaling over $218,000.