As we testified in July 2001, controls over grant and loan disbursements did not include a key edit check or follow-up process that would help identify schools that were disbursing Pell Grants to ineligible students. To identify improper payments that may have resulted from the absence of these controls, we performed tests to identify students 70 years of age and older because we did not expect large numbers of older students to be receiving Pell Grants, and in 1993, we identified abuses in the Pell Grant program relating to older students. Based on the initial results of our tests and because of the problems we identified in the past, we expanded our review of 7 schools that had disproportionately high numbers of older students to include recipients 50 years of age and older. We found that 3 schools fraudulently disbursed about $2 million of Pell Grants to ineligible students, and another school improperly disbursed about $1.4 million of Pell Grants to ineligible students. We also identified 31 other schools that had similar disbursement patterns to those making the payments to ineligible students. These 31 schools disbursed approximately $1.6 million of Pell Grants to potentially ineligible students. We provided information on these schools to Education for follow-up. Education staff and officials told us that they have performed ad hoc reviews in the past to identify schools that disbursed Pell Grants to ineligible students and have recovered some improper payments as a result. However, Education did not have a formal, systematic process in place specifically designed to identify schools that may be improperly disbursing Pell Grants. In September 2001, we issued an interim report in which we recommended that the Secretary of Education (1) establish appropriate edit checks to identify unusual grant and loan disbursement patterns and (2) design and implement a formal, routine process to investigate unusual disbursement patterns identified by the edit checks. In our July 2001 testimony, we told you that Education decided to implement a new edit check, effective beginning with the 2002-2003 school year to identify students who are 85 years of age or older. We explained that we believed the age limit was too high and would exclude many potential ineligible students. Education subsequently lowered the age limit for that edit to 75 years of age or older. If the student’s date of birth indicates that he or she is 75 years of age or older, the system edit will reject the application and the school will not be authorized to give the student federal education funds until the student either submits a corrected date of birth or verifies that it is correct. However, without also looking for unusual patterns and following up, the edit may not be very effective, other than to correct data entry errors or confirm older students applying for aid. Education is also in the process of implementing a new system, called the Common Origination and Disbursement (COD) system, which is to become effective starting this month. Education officials told us that this integrated system will replace the separate systems Education has used for Pell Grants, direct loans, and other systems containing information on student aid, and it will integrate with applicant data in the application processing system. The focus of COD is to improve program and data integrity. If properly implemented, a byproduct of this new system should be improved controls over grant and loan disbursements. According to Education officials, they will be able to use COD to identify schools with characteristics like those we identified. However, until there is a mechanism in place to investigate schools once unusual patterns are identified, Education will continue to be vulnerable to the types of improper Pell Grant payments we identified during our review. We identified over $32 million of other potentially improper grant and loan payments. Based on supporting documentation provided to us by Education, we determined that over $21 million of these payments were proper. However, because Education did not provide adequate supporting documentation, we were unable to determine the validity of about $12 million of these transactions or conclude on the effectiveness of the related edit checks. While the amount of improper and potentially improper grant and loan payments we identified is relatively insignificant compared to the billions of dollars disbursed for these programs annually, it represents a control risk that could easily be exploited to a greater extent. During our investigation of potentially improper transactions, we found that two students submitted counterfeit Social Security cards and fraudulent birth certificates along with their applications for federal education aid, and they received almost $55,000 in direct loans and Pell Grants. The U.S. Attorney’s Office is considering prosecuting these individuals. During our tests to determine the effectiveness of Education’s edit checks, we also found data errors, such as incorrect social security numbers (SSN) of borrowers, in the Loan Origination System (LOS), which processes all loan origination data received from schools. Such errors could negatively affect the collection of student loans because without correct identifying information, Education may not be able to locate and collect from borrowers when their loans become due. We reviewed data for more than 1,600 loans and determined that for almost 500 of these loans, the borrowers’ SSNs or dates of birth were incorrect in LOS. During the application process, which is separate from the loan origination process, corrections to items such as incorrect SSNs are processed in the Central Processing System (CPS); however, these corrections are not made to data in LOS. The new COD system discussed earlier may alleviate this situation. If this system works as intended, student data should be consistent among all of the department’s systems, including CPS and LOS, because it will automatically share corrected data. However, until the new system is fully implemented, errors in LOS could impede loan collection efforts. As we testified in April and July 2001, significant internal control weaknesses over Education’s process for third party drafts markedly increased the department’s vulnerability to improper payments. Although segregation of duties is one of the most fundamental internal control concepts, we found that some individuals at Education could control the entire payment process for third party drafts. We also found that Education employees circumvented a key computer system application control designed to prevent duplicate payments. We tested third party draft transactions and identified $8.9 million of potential improper payments, $1.7 million of which remain unresolved because Education was unable to provide us with adequate supporting documentation. Education has referred the $1.7 million to the OIG for further investigation. Because of the risks we identified in the third party draft payment process, and in response to a letter from this subcommittee, Education took action in May 2001 to eliminate the use of third party drafts. In our July 2001 testimony before this subcommittee, we described internal control weaknesses over Education’s purchase card program, including lack of supervisory review and improper authorization of transactions. We found that Education’s inconsistent and inadequate authorization and review processes for purchase cards, combined with a lack of monitoring, created an environment in which improper purchases could be made with little risk of detection. Inadequate control over these expenditures, combined with the inherent risk of fraud and abuse associated with purchase cards, resulted in fraudulent, improper, and questionable purchases, totaling about $686,000, by some Education employees. During the time of our review, Education’s purchase card program was operating under policies and procedures that were implemented in 1990. The policy provided very limited guidance on what types of purchases could be made with the purchase cards. While the policy required each cardholder and approving official to receive training on their respective responsibilities, we found that several cardholders and at least one approving official were not trained. In addition, we found that only 4 of Education’s 14 offices required cardholders to obtain authorization prior to making some or all purchases, although Education’s policy required all requests to purchase items over $1,000 be made in writing to the applicable department Executive Officer. We also found that approving officials did not use monitoring reports that were available from Bank of America to identify unusual or unauthorized purchases and that only limited use was made of available mechanisms to block specific undesirable Merchant Category Codes (MCC). These factors combined resulted in a lax control environment for this inherently risky program. Education officials told us the department relied on the approving official’s review of the cardholder’s monthly purchase card statements to ensure that all purchases made by employees were proper. We tested the effectiveness of the approving officials’ review of 5 months of cardholder statements. We reviewed all 903 monthly statements that were issued during these months, totaling about $4 million, and found that 338, or 37 percent, totaling about $1.8 million, were not approved by the appropriate approving official. To determine whether improper purchases were made without being detected, we requested documentation supporting the $1.8 million of purchases that were not properly reviewed. We also requested documentation for other transactions that appeared unusual. We reviewed the documentation provided by Education and identified some fraudulent, improper, and questionable purchases, which I will discuss in a moment. We considered fraudulent purchases to be those that were unauthorized and intended for personal use. Improper purchases included those for government use that were not, or did not appear to be, for a purpose permitted by law or regulation. We also identified as improper purchases those made on the same day from the same vendor that appeared to circumvent cardholder single purchase limits. We defined questionable transactions as those that, while authorized, were for items purchased at an excessive cost, for a questionable government need, or both, as well as transactions for which Education could not provide adequate supporting documentation to enable us to determine whether the purchases were valid. We found one instance in which a cardholder made several fraudulent purchases from two Internet sites for pornographic services. The purchase card statements contained handwritten notes next to the pornography charges indicating that these were charges for transparencies and other nondescript items.