The Postal Reorganization Act of 1970 granted the Postal Service its independent status and allowed the Service to develop its own purchasing rules and regulations. Although it had the authority for greater flexibility, the Service followed prevailing federal practices until 1988 when it adopted a new procurement manual designed to take advantage of the best public and private purchasing practices. Compared to federal purchasing requirements, the Service’s rules were designed to give contracting officers more discretion in meeting the needs of operating customers. For example, the federal policy of “full and open competition,” as required for most federal contracts by the Competition in Contracting Act of 1984 was replaced with a policy of “adequate competition,” and postal contracting officers may limit competition to selected or prequalified offerors. In 1991, we reported that there had been no problems from the adoption of the new purchasing rules but that they also had not been used enough to be declared a success. After a 1986 conviction of one of the Postal Board of Governors for fraud in a major purchase of automation equipment, the Senate and House postal oversight committees requested that we examine Postal Service purchasing practices. We reported that while the Postal Service routinely applied accepted internal controls to deter fraud, this did not guarantee that purchases could not be compromised by collusion or errors in judgment. Total purchases by the Postal Service in 1994 amounted to $4.6 billion, including $2.4 billion for facilities and equipment, and $2.2 billion for transportation. The proposed purchase of a capital and expense (i.e., noncapital) item costing $7.5 million or more is to be reviewed by a Capital Investment Committee, made up of Service executives and the Postmaster General. The Postal Board of Governors must also review proposed capital purchases costing $10 million or more. Board of Governors’ approval is not required for purchases of expense items, including supplies or services such as transportation. However, if the expense item purchase exceeds $10 million, the Board of Governors is to receive an “information letter” on the purchase. Service officials said that the Board of Governors may review certain purchases because of their significance or unusual nature, regardless of the amount. In 1994, the Board of Governors reviewed 16 projects. Three of the seven purchases we reviewed involved ethics problems. The Postal Service is covered by the Ethics in Government Act of 1978. Under this act, the Service is required to provide an ethics program to implement the act and related governmentwide regulations. The Office of Government Ethics periodically reviews the adequacy of executive agency ethics programs, including the Service. Concerned about the adequacy of the Postal Service’s procurement program, the Chairman of the former House Post Office and Civil Service Committee asked us to determine (1) if previously reported problems with several Postal Service purchases were due to any underlying causes that should be addressed through a legislative solution, and if not, (2) whether additional procedural safeguards could be employed by the Service to minimize future occurrences of such problems. Following the 1995 congressional reorganization and the elimination of the House Post Office and Civil Service Committee, we agreed to report to the newly formed Subcommittee on the Postal Service of the House Government Reform and Oversight Committee. To address the objectives, we reviewed our and other published reports on these purchases, as well as contract files and associated records. We discussed the purchases with the Service’s purchasing personnel and executives and collected general purchasing and performance data. To understand the oversight process for major purchases, we obtained information from and interviewed responsible officials at the Board of Governors, the Capital Investment Committee, and the Postal Inspection Service. We also discussed recent developments in federal purchasing reform and contract oversight and compliance with the former Assistant Administrator for Acquisition Policy of the General Services Administration. Because three of the seven purchases involved ethics problems, we reviewed recent Office of Government Ethics reports on the Service’s ethics program and discussed the program with Office of Government Ethics officials. The Postmaster General provided written comments on a draft of this report. His comments are discussed on page 11 and reprinted in appendix II. Our work was done between August 1994 and May 1995 in accordance with generally accepted government auditing standards. The problems encountered in the seven purchases we reviewed had various causes, but certain practices recurred. These included officials agreeing to forgo required checks and reviews in the purchase process and failing to resolve conflict-of-interest situations, both real and apparent. Problems with real estate transactions were apparently due to shortcutting important integrity safeguards through a mistaken sense of urgency. Contributing factors were the belief, not always correct, that other parties were interested in the properties or that offers to sell in areas where suitable sites were scarce were good opportunities. For example, in the St. Louis case, space was needed to house a data processing center that was being displaced from the main post office to make room for automation equipment. Because of an internal breakdown in communication, the facilities officials responsible for finding a new site were not aware of the moving date until a few months beforehand. Outright purchase would normally have been used; however, because capital funds were not available at the time, field real estate specialists arranged to acquire the building through a lease/purchase agreement. The Capital Investment Committee approved the project, which was then canceled by the Chairman of that Committee because of the General Counsel concerns about the financing arrangements between the Service and the building’s seller. The next day the real estate specialists were directed to immediately, and without time to prepare, renegotiate the purchase from lease/purchase to an outright purchase. Congressional and Postal Inspection Service reports on this purchase further disclosed the following: The Capital Investment Committee was not given an opportunity to approve the purchase. The purchase was seriously misrepresented before the Board of Governors, including erroneous information that the Service needed to close the deal quickly because another party was anxious to buy the building. The Postal Service paid $12.5 million to the seller who had acquired the building for $4 million earlier the same day. In another case, the Postal Service accepted an unsolicited offer for purchase of a building in the Bronx, NY, on the basis that suitable sites in the area were hard to find, and the building presumably could be used as a general mail facility to solve severe mail processing capacity limitations in the area. However, the building was acquired before complete suitability assessments were made. The building was later determined to be unusable for its intended purpose because it did not have sufficient room for automated mail processing equipment. The building is used for Priority Mail and other mail processing from the main post office. In December 1995, when commenting on our proposed report, Service officials said that the Capital Investment Committee had approved $5 million for design work on the building and that the Postmaster General’s and Board of Governors’ approval will also be requested. When most of the seven purchases occurred, the purchasing function was not organized in a way that fostered contracting officers’ independence. This was according to a 1993 study by the Logistics Management Institute entitled “Consolidating Postal Contracting,” which was commissioned by the Postal Service. At the time, the contracting function was fragmented into independent groups for purchasing, transportation, and facilities. This structure, according to the study, led to inconsistent accountability over the performance and integrity of the contracting process. The study also found that contracting officers were not sufficiently independent because many of them reported directly to those officials who required the contracted products or services. Not only did this make it extremely difficult for contracting officers to exercise independent judgment and follow Postal Service policies, but the soundness of contracting decisions could be subordinated to their timeliness. No compliance or contract file reviews of major pending purchases were being made in any of the three groups, and contracting personnel in facilities and transportation were inadequately trained to handle their responsibilities. In some cases, contracting was a secondary duty assigned to individuals with other program responsibilities. The study recommended that the Postal Service establish a single purchasing executive, reporting to the Postmaster General, with management authority over the three separate purchasing groups. The study also stated that the new purchasing executive could resolve other weaknesses, such as training and the independence of the contracting workforce. Three of the seven purchases involved ethics violations. The most severe, discussed below, were two similar instances in which the contracting officer failed to correct situations where individuals had financial relationships with the Postal Service and with certain offerors. In the 1992 award of a 10-year contract for air transportation, a consultant, who was helping the Postal Service review the proposals, informed the Service that he had a job offer that he might accept from one of the offerors to the solicitation. The Service’s General Counsel advised the contracting officer that the consultant should either decline the job offer or be removed from the evaluation team. The contracting officer instead approved an arrangement whereby the consultant should merely remain out of contact with the offeror until after the contract was awarded. The offeror won the contract, which was then challenged by a losing offeror. The court set aside the contract because of the conflict of interest that existed when the proposals were evaluated. The Service incurred extra costs of $10 million, paid to the original winning offeror for start-up costs incurred, and $8 million annually for a more costly replacement contract. In another case, during the development and purchase of automated barcode sorting systems, the Postal Service first retained a consultant in 1990 for software development. Shortly thereafter, the consultant sought permission from the Service to offer related support to the barcode system supplier. The Service responded by inserting conflict-of-interest clauses into its contract with the consultant that prohibited him from entering into contracts with the system supplier. However, the Service did not enforce the clauses, and the consultant was retained under contract by the supplier. Despite advice from the Service’s General Counsel that the contract with the consultant should not be renewed, the arrangement continued while the Service tested and solicited proposals for upgraded barcode sorters. A contract was awarded to the same supplier in March 1993.