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United States Government Accountability Office: 

GAO: 

Testimony: 

Before the Senate Homeland Security and Governmental Affairs Committee: 

For release on Delivery Expected: 

10:00 a.m. EST: 

Wednesday, July 19, 2006: 

Purchase Cards: 

Control Weaknesses Leave DHS Highly Vulnerable to Fraudulent, Improper, 
and Abusive Activity: 

Statement of Gregory D. Kutz, Managing Director: Forensic Audits and 
Special Investigations: 

John J. Ryan, Assistant Director: 
Forensic Audits and Special Investigations: 

GAO-06-957T: 

GAO Highlights: 

Highlights of GAO-06-957T, a testimony before the Committee on Homeland 
Security and Governmental Affairs, U.S. Senate, 

Why GAO Did This Study: 

In the wake of the 2005 hurricanes in the Gulf Region, GAO and the 
Department of Homeland Security Office of Inspector General (DHS OIG) 
initiated a number of audits and investigations addressing the federal 
government’s response to those events. 

Department of Homeland Security (DHS) cardholders made thousands of 
transactions related to hurricane rescue and relief operations. GAO, 
working with DHS OIG, interviewed DHS personnel and reviewed purchase 
card policies and procedures to assess the control environment. GAO and 
DHS OIG conducted statistical tests from a random sample of 
transactions and performed data mining on all DHS purchase card 
transactions for a 5-month period beginning in June 2005. GAO and DHS 
OIG looked at all transactions in this period because the database did 
not distinguish hurricane related from routine purchases. GAO and DHS 
OIG used the testing results to determine the extent of control 
weaknesses and identify instances of fraud, waste, and abuse. 

This testimony addresses whether (1) DHS’s control environment and 
management of purchase card usage were effective; (2) DHS’s key 
internal control activities operated effectively and provided 
reasonable assurance that purchase cards were used appropriately; and 
(3) indications existed of potentially fraudulent, improper, and 
abusive or questionable purchase card activity at DHS. 

What GAO Found: 

A weak control environment and breakdowns in key controls exposed DHS 
to fraud and abuse in its use of the purchase card. While DHS’s draft 
Purchase Card Manual generally contained effective control procedures, 
it was not finalized due to a lack of leadership by the CFO in 
resolving disagreements over its implementation. This led to DHS 
cardholders not following the same procedures. Inadequate staffing, 
insufficient training, and ineffective monitoring also contributed to 
the weak control environment. The weak control environment and 
inconsistent purchase card policies contributed to breakdowns in 
specific key controls. GAO and DHS OIG found a lack of documentation 
that key purchase card internal controls were performed. Based on a 
statistical sample, GAO and DHS OIG estimated that 45 percent of DHS’s 
purchase card transactions were not properly authorized, 63 percent did 
not have evidence that the goods or services were received, and 53 
percent did not give priority to designated sources. GAO and DHS OIG 
also found cardholders who failed to dispute improper transactions, 
which resulted in losses to the federal government. Because of the 
urgent needs caused by the hurricanes, DHS made a number of 
noncompetitive purchase card acquisitions. GAO recognizes that DHS had 
the authority to make noncompetitive purchases; however, GAO found 
transactions where DHS cardholders could have exercised greater 
prudence without jeopardizing relief efforts. 

The weak control environment and ineffective internal control 
activities allowed potentially fraudulent, improper, and abusive or 
questionable transactions to occur. Although this work was not designed 
to identify, and we cannot determine, the full extent of fraud, waste, 
and abuse, GAO and DHS OIG identified numerous examples of potentially 
fraudulent, improper, and abusive or questionable transactions. The 
table below lists the potentially fraudulent activity related to items 
acquired with DHS purchase cards. In addition, poor control over 
accountable property acquired with purchase cards may have resulted in 
lost or misappropriated assets. 

Table: Examples of Potential FRaud: 

Item Purchased: Lap Tops (FEMA); 
Description: Over 100 missing and presumed stolen; Amount of 
transaction: $300,000. 

Item Purchased: Boast (FEMA); 
Description: Unauthorized use of card by a vendor; Amount of 
transaction: $208,000. 

Item Purchased: Printers (FEMA); 
Description: Over 20 missing and presumed stolen; Amount of 
Transaction: $84,000. 

Item purchased: Lap Tops (Coast Guard); Description: 3 missing and 
reported stolen; Amount of transaction: $8,000. 

Source: GAO and DHS OIG investigation. 

[End of Table] 

GAO and DHS OIG also found examples of improper use of the purchase 
card such as the use of convenience checks to pay $460,000 for pre-
packaged meals. Further, they found instances of abusive or 
questionable transactions that included the purchase of a beer brewing 
kit, a 63” plasma television costing $8,000 which was found unused in 
its original box 6 months after being purchased, and tens of thousands 
of dollars for training at golf and tennis resorts. GAO intends to 
refer the cardholders responsible for many of these and other purchases 
to DHS management for administrative action. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-957T]. 

To view the full product, click on the link above. For more 
information, contact Gregory D. Kutz at (202) 512-7455 or kutz@gao.gov 
and Matthew A. Jadacki at (202) 254-5477 or matt.jadacki@dhs.gov. 

[End of Section] 

Madam Chairman and Members of the Committee: 

Thank you for the opportunity to discuss the results of the forensic 
audit and investigation of the Department of Homeland Security's (DHS) 
purchase card program, a joint audit by GAO and DHS's Office of 
Inspector General (DHS OIG). This joint audit is one among a number of 
audits and investigations that GAO and DHS OIG initiated in the wake of 
Hurricanes Katrina and Rita to review the effectiveness of the federal 
government's disaster response. A crucial tool DHS used to expedite the 
government's response to the two disasters was the SmartPay® purchase 
card program, a program implemented to provide federal agencies and 
their employees a more flexible and efficient way to purchase 
commercial goods and services. GAO and DHS OIG support the use of a 
well-controlled purchase card program, which our experience shows 
reduces transaction processing costs and provides agencies with 
flexibility to achieve their mission objectives. This testimony builds 
on GAO's substantial experience in identifying fraud, waste, and abuse 
in government purchase card programs (see app. I for previous audit 
reports) and DHS OIG's significant experience auditing one of our 
nation's largest federal agencies. 

With the creation of DHS in 2002,[Footnote 1] the management of 
thousands of purchase cardholders from 22 separate federal agencies was 
combined under one umbrella program, the DHS Purchase Card Program. The 
legacy agencies such as the Federal Emergency Management Agency (FEMA), 
the U.S. Coast Guard (Coast Guard), and the U.S. Customs and Border 
Protection (CBP) are now referred to as DHS organizational elements. 
During fiscal year 2005, these organizational elements accumulated more 
than $420 million in charges, ranking DHS among the top purchase card 
users in the federal government. In response to Hurricanes Katrina and 
Rita, DHS made thousands of purchase card transactions to buy goods and 
services for hurricane rescue and relief operations. For Katrina- 
related procurements, Congress authorized an increase to the 
micropurchase threshold from $2,500 to $250,000.[Footnote 2] When 
making micropurchases, authorized cardholders are not required to 
solicit competitive bids if they consider the price to be reasonable. 
For further details on the DHS purchase card program, see appendix II. 

Our testimony today addresses whether (1) DHS's control environment and 
management of the purchase card program were effective; (2) DHS's key 
control activities operated effectively and provided reasonable 
assurance that purchase cards were used appropriately; and (3) 
indications existed of potentially fraudulent, improper, and abusive or 
questionable activity related to items acquired with DHS purchase 
cards.[Footnote 3] Following this testimony, we plan to issue a joint 
report with recommendations to DHS for improving internal controls over 
its purchase card activities. 

The scope of our joint audit covered all DHS purchase card transactions 
from June 13, 2005, through November 12, 2005. We selected all 
transactions during this period because we could not distinguish 
between routine and hurricane-related purchases in the database 
provided by U.S. Bank (DHS's purchase card contractor). To assess the 
design and implementation of controls over purchase card transactions, 
we conducted interviews of purchase card administrators and compared 
DHS's purchase card policies and procedures to the Office of Management 
and Budget's (OMB) Circular No. A-123, GAO's Standards for Internal 
Controls in the Federal Government (Standards for Internal Controls) 
and to the best practices for purchase card programs outlined in GAO's 
Audit Guide: Auditing and Investigating the Internal Control of 
Government Purchase Card Programs (GAO's Audit Guide). Using purchase 
card data provided by U.S. Bank, we conducted statistical tests from a 
random sample of transactions and performed other audit work to 
evaluate the design and implementation of key internal control 
activities. 

We also performed data mining on the transactions to determine whether 
there were potentially fraudulent, improper, abusive, or questionable 
activities related to the purchase card program. Our data mining 
efforts included reviewing and analyzing transactions to determine 
whether split payments occurred,[Footnote 4] whether DHS maintained 
appropriate controls over property accountability, and whether DHS was 
able to leverage the hundreds of millions of dollars it spends with a 
purchase card to obtain favorable pricing from frequently used vendors, 
among others. We used forensic audit and investigative techniques to 
determine if the purchase card was used in a potentially fraudulent 
manner. Although we did identify some potentially fraudulent, improper, 
and abusive or questionable transactions, our work was not designed to 
identify, and we cannot determine, the extent of fraudulent, improper, 
and abusive or questionable transactions. See appendix III for further 
details on our scope and methodology. We conducted our audit work from 
November 2005 through June 2006 in accordance with U.S. generally 
accepted government auditing standards. We performed our investigative 
work in accordance with standards prescribed by the President's Council 
on Integrity and Efficiency. We briefed DHS on the details of our work, 
including our scope, and methodology and our findings. 

Summary: 

A weak control environment and breakdowns in key internal controls 
exposed DHS to fraud, waste, and abuse in its purchase card program. 
Our review of DHS's draft Purchase Card Manual (draft manual) found 
that the draft manual generally incorporated well-designed internal 
controls for an agencywide purchase card program that were consistent 
with OMB's Circular No. A-123, GAO's Standards for Internal Controls, 
and the best practices for purchase card programs outlined in GAO's 
Audit Guide.[Footnote 5] However, according to representatives from the 
Office of the Chief Financial Officer, the draft manual was not issued 
in its final format due to ongoing disagreements with DHS 
organizational elements over its implementation. Without a final 
policy, DHS organizational elements adopted inconsistent purchase card 
practices. Some organizational elements followed purchase card policies 
from their legacy agencies, others observed requirements from the draft 
DHS policy, and yet others relied on a combination. Overall, we found 
that a lack of leadership in finalizing the draft manual, inadequate 
resources devoted to the purchase card program, insufficient training, 
and ineffective monitoring and oversight each contributed to a weak 
control environment. 

We also found weaknesses in specific key control activities over 
purchase card transactions. Specifically, we found a lack of 
documentation that required internal controls over purchase card 
transactions were performed. Based on our sample of DHS purchase card 
transactions, we estimated that 45 percent did not have prior written 
authorization, 8 percent did not provide required sales documentation, 
63 percent did not have evidence that the goods or services were 
actually received, and 53 percent did not give priority to required or 
preferred vendors (designated sources). We also found instances where 
DHS cardholders failed to dispute improper transactions, resulting in 
losses to the federal government from improper and potentially 
fraudulent purchases. Further, DHS did not invoke the special authority 
provided to increase the threshold for micropurchases from $2,500 to 
$250,000. Instead, DHS invoked other clauses in the Federal Acquisition 
Regulations (FAR) to make noncompetitive purchases under existing 
procurement authority. While we recognize that DHS has authority to 
make such noncompetitive purchases under the FAR, we identified 
transactions where DHS cardholders could have obtained better pricing 
without jeopardizing relief efforts or where the purchase was 
unnecessary. Later in our testimony, we identify examples of poor 
pricing and unnecessary purchases, but also highlight instances where 
the cardholder acted prudently to obtain the best pricing. 

The weak control environment and weak implementation of specific 
internal control activities allowed potentially fraudulent, improper, 
abusive, or questionable transactions to go undetected. In one 
potential fraud case, ineffective procurement practices resulted in DHS 
paying double the retail price for 20 flat-bottom boats. The vendor in 
this case improperly used the DHS purchase card number to purchase 
boats from retailers before reselling them to DHS. In another 
potentially fraudulent case, breakdowns in property accountability 
controls allowed a DHS employee to submit falsified records related to 
three stolen laptops. As an example of improper use of a purchase card, 
we identified a cardholder who used convenience checks to pay a vendor 
who normally accepted credit cards but who did not want to pay credit 
card transaction fees for a large purchase--in which case the 
cardholder violated DHS policy. As a result of this policy violation, 
the DHS incurred $8,000 in unnecessary processing fees related to the 
use of convenience checks. 

Other cardholders abused their purchase card privileges or made 
questionable purchases. For example, one cardholder purchased a beer 
brewing kit and ingredients to brew beer for official parties. Another 
cardholder, based on questionable need, purchased a Samsung 63-inch 
plasma screen television for about $8,000 at the end of the fiscal 
year. We observed this large-screen television unused and in its 
original packaging 6 months after it was purchased. In cases where 
appropriate, we plan to refer cardholders responsible for these and 
other purchases to DHS management for possible administrative action. 
We also found instances where items acquired with a DHS purchase card 
highlight weaknesses in DHS's inventory control and procurement 
practices that led to potentially fraudulent and abusive or 
questionable activity. For example, over 100 laptops were lost or 
misappropriated when shipped to New Orleans as part of the relief 
efforts. The above examples of potential fraud, improper use of the 
purchase card, and abusive or questionable activity relating to items 
acquired with DHS purchases cards are further detailed below. 

Weaknesses in DHS's Overall Control Environment Contributed to 
Ineffective Purchase Card Program Controls: 

DHS has not established an effective internal control environment to 
manage its government purchase card program. Specifically, for the last 
two years, DHS did not finalize its departmentwide purchase card policy 
that detailed the internal control policies and procedures that 
organizational elements must follow. As a result, cardholders did not 
consistently apply basic control procedures, which were necessary to 
provide reasonable assurance that acquisitions made with purchase cards 
adhered to governmentwide requirements. Inadequate staffing and 
training, and a weak postpayment audit function further contributed to 
a weak overall internal control environment and left DHS vulnerable to 
fraud, waste, and abuse. 

Unimplemented Agencywide Manual Contributes to Inconsistency and 
Confusion: 

DHS's Chief Financial Officer (CFO) distributed the agency's most 
recent draft of the departmentwide purchase card policies and 
procedures in March 2004. Since then the draft manual has been out for 
agencywide comment twice. The internal control procedures described in 
that draft document were largely consistent with OMB Circular No. A- 
123, GAO's Standards for Internal Controls, and GAO's Audit Guide. 
According to the Office of the Chief Financial Officer, the draft 
policies were not accepted and implemented across DHS due to disputes 
with organizational elements over implementation of the draft manual. 
Further, officials within the Office of the Chief Financial Officer do 
not have a plan or timeline for resolving these disputes in order to 
finalize DHS's draft manual. Consequently, some organizational elements 
are following internal control policies that existed in their legacy 
environments prior to their absorption into DHS, while others adopted 
DHS's draft policies. Others are adhering to elements from both. We 
found that although some internal control policies from legacy agencies 
were consistent with GAO's Standards for Internal Controls and GAO's 
Audit Guide, others were not. For example, the Organizational Program 
Coordinator (OPC) for the Purchase Card Program at the Coast Guard 
stated that written authorization prior to purchase is generally 
required. In contrast, CBP indicated that written authorization is not 
required prior to use by a CBP cardholder. 

As a result of the unimplemented DHS draft manual, organizational 
elements were confused about and did not consistently apply purchase 
card policies and procedures, which negatively affected the control 
environment. As an example, the OPC at the Coast Guard, in charge of 
the largest purchase card program within DHS, informed us that some 
cardholders within Coast Guard followed the draft DHS manual, while 
others did not consider the manual applicable. 

Insufficient Resources Committed to Purchase Card Program: 

DHS failed to assign sufficient resources to manage its purchase card 
program. As a result, we found many instances where approving officials 
had oversight responsibilities for an excessive number of cardholders. 
Additionally, we found that DHS lacked sufficient staffing to 
effectively manage and oversee the purchase card program. 

GAO's Audit Guide and OMB Circular No. A-123 emphasize the importance 
of establishing reasonable levels of responsibility for approving 
officials who are responsible for reviewing and certifying purchase 
card transactions. Assigning approving officials more cardholders than 
they can effectively supervise is a symptom of a weak control 
environment, as it is unreasonable to expect approving officials who 
have too many transactions to conduct a thorough and proper review of 
supporting documentation for each transaction. Basic fraud prevention 
concepts and our previous audits of purchase card programs have shown 
that opportunities for fraud and abuse arise if cardholders know that 
their purchases are not being properly reviewed. 

We found that DHS's draft manual contained requirements for approving 
officials that are consistent with OMB Circular A-123 and GAO's Audit 
Guide. Specifically, the proposed DHS policy stipulates that a single 
approving official may not oversee more than 7 cardholders. However, 
our work showed that DHS organizational elements did not adhere to this 
guidance. As shown in table 1, as of the end of fiscal year 2005, we 
found that 176 DHS approving officials, out of approximately 3,300 
approving officials departmentwide, had oversight responsibilities for 
more than 7 cardholders.[Footnote 6] At the Coast Guard alone, 147 
approving officials supervised more than 7 cardholders, with 3 
individuals managing more than 30 cardholders. According to the OPC at 
the Coast Guard, insufficient staff to monitor and oversee the purchase 
card program is a primary cause for the large number of approving 
officials with excessive span of control. Having approving officials 
responsible for more than 7 cardholders is inconsistent with the DHS 
draft manual and is contrary to GAO's best practices guidance. 

Table 1: Number of Approving Officials at DHS Organizational Elements 
with Excessive Span of Control: 

Organizational element: U.S. Coast Guard; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 8-10: 84; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 11-20: 53; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 21-30: 7; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: >30: 3; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: Total: 147. 

Organizational element: U.S. Customs and Border Protection; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 8-10: 7; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 11-20: 3; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 21-30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: >30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: Total: 10. 

Organizational element: Federal Emergency Management Agency; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 8-10: 5; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 11-20: 3; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 21-30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: >30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: Total: 8. 

Organizational element: U.S. Secret Service; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 8-10: 3; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 11-20: 2; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 21-30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: >30: 2; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: Total: 7. 

Organizational element: DHS Science and Technology; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 8-10: 1; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 11-20: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 21-30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: >30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: Total: 1. 

Organizational element: Transportation Security Administration; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 8-10: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 11-20: 1; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 21-30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: >30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: Total: 1. 

Organizational element: U.S. Citizenship and Immigration Services; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 8-10: 1; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 11-20: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 21-30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: >30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: Total: 1. 

Organizational element: Federal Air Marshal Service; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 8-10: 1; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 11-20: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 21-30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: >30: 0; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: Total: 1. 

Organizational element: Total; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 8-10: 102; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 11-20: 62; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: 21-30: 7; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: >30: 5; 
Number of Approving officials with excessive span of control, 
stratified by number of cardholders managed: Total: 176. 

Source: GAO analysis of U.S. Bank data. 

[End of table] 

Our analysis of purchase card data uncovered other fundamental 
breakdowns in controls. For example, we identified 6 cardholder 
accounts where the approving official and the cardholder were the same 
individual--a major conflict of interest. We also identified 2,468 open 
accounts--19 percent of DHS's purchase cards--that as of December 13, 
2005, had not been used since before January 2005. According to OMB and 
the U.S. General Services Administration (GSA),[Footnote 7] purchase 
cards should only be issued to individuals who have a documented need 
to acquire items for the government with the purchase card. It is 
difficult to argue that the 2,468 individuals who have not made a 
single purchase in an entire year have such a need. Consequently, those 
accounts should have been closed to minimize the risk of fraud, waste, 
and abuse. 

Furthermore, we found that at both the DHS level and organizational 
element level, there were inadequate resources to effectively manage 
the program. As stated in GAO's Audit Guide, it is vital for purchase 
card programs to be sufficiently staffed to manage the program. At the 
DHS agencywide level, the DHS Agency Program Coordinator (APC) is the 
sole person responsible for overseeing not only DHS's Purchase Card 
Program, one of the government's largest purchase card programs, but 
also DHS's Travel Charge Card Program and Fleet Charge Card 
Program.[Footnote 8] In total, DHS spent nearly $1 billion on these 
three charge card programs during fiscal year 2005. Based on our 
assessment of the control environment and discussions with the APC, a 
lack of adequate resources caused insufficient management and oversight 
of the purchase card program at the DHS agencywide level. 

At the organizational element level, we found a similar lack of 
staffing resources devoted to the management of the purchase card 
program. For example, as shown in table 2, the number of personnel 
assisting the OPC at the organizational element level is not consistent 
with the risk of exposure, as measured by expenditures. In fact, the 
largest organizational element, the Coast Guard, provides no additional 
staff to the OPC to assist in managing and overseeing the purchase card 
program. Based on our assessment of the control environment and 
discussions with the OPC at the Coast Guard, the Coast Guard did not 
have adequate resources to both administer the purchase card program 
and provide adequate compliance control. 

Table 2: Employees Responsible for Management of the Purchase Card 
Program at Four of the Largest Organizational Elements within DHS:  

Organizational element: U.S. Coast Guard; 
Staff devoted to purchase card: 1 (OPC); 
Fiscal year 2005 total purchase card dollars (millions): $ 227. 

Organizational element: Federal Emergency Management Agency; 
Staff devoted to purchase card: 2 (1 OPC and 1 additional staff); 
Fiscal year 2005 total purchase card dollars (millions): 32. 

Organizational element: U.S. Immigration and Customs Enforcement; 
Staff devoted to purchase card: 4 (1 OPC and 3 additional staff); 
Fiscal year 2005 total purchase card dollars (millions): 21. 

Organizational element: U.S. Customs and Border Protection; 
Staff devoted to purchase card: 6 (1 OPC and 5 additional staff); 
Fiscal year 2005 total purchase card dollars (millions): 66. 

Source: DHS data. 

[End of table] 

Evidence Lacking that Most Cardholders Received Required Training: 

Evidence was not provided to show that DHS is providing the training 
necessary to obtain reasonable assurance that its cardholders 
understand the purchase card program's key controls. Adequate training 
is essential to ensuring that the cardholders and approving officials 
have the skills necessary to achieve organizational goals in an 
effective and efficient manner. OMB Circular A-123 and DHS's draft 
manual require that all cardholders be trained prior to receiving a 
purchase card and receive annual refresher training. We found that for 
60 of the 96 transactions in our statistical sample, the cardholder 
lacked documentation showing that they received either the required 
initial training or the refresher training. 

Monitoring and Oversight Needs Improvement: 

Our review of the DHS purchase card program found that DHS had 
ineffective procedures to monitor and oversee cardholder's compliance 
with agencywide and governmentwide purchase card policies through 
postpayment audits. The purpose of the postpayment audit is to provide 
reasonable assurance that the purchases made by cardholders, and 
payments made to the bank, were valid and appropriate. However, our 
audit found that DHS did not conduct postpayment audits effectively. 
Specifically, we found that the organizational elements did not follow 
up with cardholders who failed to provide the required supporting 
documentation. We identified 10,339 transactions between December 2003 
and February 2006 that were selected for audit, but which were not 
audited because cardholders did not submit the required supporting 
documentation. Many of the cardholders who failed to submit the 
required supporting documentation were nevertheless allowed to continue 
using their purchase cards. Failure to suspend those cards and 
discipline users exposed DHS to fraud, waste, and abuse in its purchase 
card program. 

Inconsistently Implemented Control Activities Leave DHS Vulnerable to 
Fraud, Waste, and Abuse: 

The results of our testing of key controls at DHS revealed significant 
failure rates that bring into question the efficacy of DHS's 
implementation of internal controls. Internal control activities 
associated with purchase card transactions occur at various levels 
within an agency. Activities include a wide range of diverse actions 
such as authorizations, verifications, reconciliations, certifications, 
and the production of records and documentation. However, our 
statistical tests of DHS purchase card transactions from June 13, 2005, 
through November 12, 2005, found that several key transaction-level 
controls were ineffective, with failure rates ranging from 8 percent to 
63 percent. In addition, the high rates of failure associated with 
authorization and independent receipt and acceptance also led us to 
question the effectiveness of the DHS reconciliation and certification 
process. Specifically, DHS's automated systems and practices associated 
with reconciling and certifying purchase card transactions for payment 
were not effective to provide reasonable assurance that charges 
appearing on the cardholder's bank statements were valid. We also found 
instances where DHS lacked effective controls to ensure proper follow-
through of disputed transactions, leaving DHS at an increased risk of 
fraud, waste, and abuse associated with the payment of purchase card 
transactions. 

Finally, while DHS did not rely on its increased micropurchase 
threshold authority, DHS did activate certain FAR provisions to 
streamline the acquisition process for transactions made in response to 
the hurricane disaster in the Gulf Region. We are not questioning the 
authority on which DHS relied. However, we have identified examples 
where DHS did not exercise prudent pricing practices. 

Statistical Tests Indicated Weak Internal Controls: 

Control activities we tested included whether (1) cardholders obtained 
written authorization prior to purchases, (2) invoices supporting the 
transactions existed, (3) independent receipt and acceptance of goods 
and services occurred, and (4) cardholders screened for required or 
preferred vendors (designated sources). As shown in table 3, the 
failure rates for the four attributes that we tested ranged from 8 
percent to 63 percent. We looked for documented evidence that these 
control activities were followed; therefore, these rates may be higher 
than actual failures rates if control activities were followed but not 
documented. 

Table 3: Results of Statistical Testing for Four Key Internal Controls 
(percent): 

Internal control: Authorization; 
Point estimate[A]: 45; 
95-percent confidence interval[B]: 35-55. 

Internal control: Sales documentation; 
Point estimate[A]: 8; 
95-percent confidence interval[B]: 4 - 16. 

Internal control: Independent receipt and acceptance; 
Point estimate[A]: 63; 
95-percent confidence interval[B]: 53 - 73. 

Internal control: Priority for designated sources; 
Point estimate[A]: 53; 
95-percent confidence interval[B]: 43-63. 

Source: GAO and DHS OIG testing and statistical analysis of DHS 
purchase card transactions provided by U.S. Bank. 

[A] The numbers represent point estimates for the population based on 
our random sample rounded to the nearest percentage point. 

[B] The numbers represent a 2-sided confidence interval assuming a 95 
percent confidence level. 

[End of table] 

Lack of Written Authorization--In 45 percent of the sample 
transactions, the cardholders did not obtain written authorization 
prior to obtaining the items in question. Requiring the cardholder to 
obtain written authorization prior to using the purchase card is key to 
providing reasonable assurance that the purchase represents a 
legitimate government need. The draft manual addresses this fundamental 
internal control element by proposing to require written authorization 
prior to purchases. However, as indicated by the high rate of failure, 
cardholders did not consistently adhere to this internal control 
standard, thereby exposing DHS to misuse of the purchase card. For 
example, a cardholder from CBP acquired nearly $2,500 in rain jackets 
without written preauthorization. Had the cardholder been subject to 
DHS's requirement for written authorization prior to purchase, as 
outlined in the draft manual, this improper purchase may have been 
prevented. 

Lack of Sales Documentation Supporting Purchases--We estimate that 8 
percent of DHS cardholders failed to provide sales documentation, such 
as a receipt, for the items obtained with a purchase card. This is 
inconsistent with the draft manual, which would require cardholders to 
obtain and retain all sales documentation relevant to their 
transaction. Requiring cardholders to obtain and retain sales related 
documentation from the vendor is a basic internal control to reduce the 
risk of fraud, waste, and abuse. Without sales documentation, an 
approving official has no means of reasonably determining whether the 
item purchased represents a legitimate government need or is 
fraudulent, improper, or abusive. 

Lack of Independent Receipt and Acceptance--We estimate that 63 percent 
of DHS transactions did not have independent receipt and acceptance. 
Receipt and acceptance of goods and services by someone other than the 
cardholder provides reasonable assurance that the organization actually 
received what it purchased. This internal control procedure segregates 
the duties involved in the acquisition of goods and services and 
thereby reduces the risk of fraud, waste, and abuse. According to GAO's 
Audit Guide, a properly documented independent receipt and acceptance 
must contain the signature of the independent individual, who should 
also document the date of receipt. Failure to adhere to proper receipt 
and acceptance procedures exposes agencies to increased risk of fraud, 
waste, and abuse. For example, a transaction we sampled involved the 
purchase of three laptop computers by a Coast Guard cardholder. 
However, independent receipt and acceptance was not performed, and the 
laptops were not recorded in the property records. Subsequently, the 
laptops could not be located and were later reported as stolen. If 
proper receipt and acceptance had been performed, theft of the laptops 
may have been prevented. 

Failure to Give Priority to Designated Sources--We estimate that in 53 
percent of the sampled transactions, the cardholder failed to document 
whether they gave priority to designated sources. In one example, a 
cardholder purchased 25 portable global positioning system (GPS) units 
at full retail price from Best Buy when the same units could have been 
obtained through a GSA Advantage[Footnote 9] vendor for 15 percent 
less. The DHS draft manual would require that cardholders use 
designated sources if the source is capable of providing the goods or 
services as needed. GSA Advantage is identified as a designated source 
in the draft manual. Generally, the goods and services provided by 
designated sources will be offered at reasonable prices.[Footnote 10] 
In this case, the failure to consider designated source resulted in the 
cardholder paying Best Buy about $2,700 more than if the units were 
acquired through GSA Advantage. Although the cardholder was acquiring 
the GPS units for an emergency situation, we found that GSA Advantage 
can often deliver goods on an expedited basis. Alternatively, the 
cardholder could have obtained a special discount from Best Buy if he 
had opened a government account. 

Online Reconciliation and Certification Processes Not Fully Effective: 

Effective reconciliation and certification are crucial in helping to 
provide reasonable assurance that all charges appearing on the 
cardholder's bank statement are valid. However, our review of the DHS 
purchase card systems found that the practices used by the Coast Guard, 
FEMA, CBP, and U.S. Immigration and Customs Enforcement (ICE) were not 
fully effective. Each of these organizational elements primarily relied 
upon online reconciliation and certification capabilities inherent in 
their respective purchase card systems, but none of these systems 
provided sufficient evidence to determine if a comprehensive 
reconciliation and certification was actually performed. While online 
processes can provide an efficient and effective means for 
accomplishing such tasks without the burden of a paper-laden 
environment, reliance upon online processes requires effective internal 
controls (e.g., sufficient audit trails, implementation of sound 
business practices) to gain reasonable assurance that the processes 
were properly performed. However, none of these DHS components had 
fully effective systems or practices to provide reasonable assurance 
that cardholders exercised due diligence in reconciling their 
statements. One attribute lacking was notations, such as the ability to 
enter check marks indicating that transactions on the cardholder's 
monthly statements were individually reviewed and reconciled. In 
addition, these components did not demonstrate that they had fully 
effective systems or practices that would allow them to track the 
length of time a cardholder spent performing their reconciliation and 
an approving official spent certifying statements to rule out the 
possibility of merely "rubber stamping" monthly statements. Further, we 
found many instances where approving officials did not certify their 
respective cardholders' statements. DHS's draft manual requires 
approving officials to certify a cardholder's bill within 14 days of 
the close of billing cycle. Based on the results of our analysis, we 
identified 8,630 uncertified statements that were pending approving 
official certification as of February 12, 2006. 

As previously discussed, given the insufficient resources committed to 
the purchase card program and the high rates of failure associated with 
the authorization and independent receipt and acceptance, comprehensive 
reconciliations and certifications are crucial in helping to provide 
reasonable assurance that all charges are valid. As a result of these 
internal control weaknesses, DHS's compliance with controls to prevent 
or detect fraudulent, improper, or abusive purchases is in question. 

Pay and Confirm Environment Increased Risk of Fraud, Waste, and Abuse: 

We found instances where DHS cardholders failed to dispute unauthorized 
transactions. The dispute process is especially critical in DHS's pay 
and confirm environment, called SmartPay®. One feature of GSA's 
SmartPay® program is that, unlike a normal credit card monthly billing 
process, the agency pays charges daily. By agreeing to pay first and 
confirm later, agencies can reduce costs since the bank provides 
rebates[Footnote 11] based on how quickly the charges are paid. 
However, the pay and confirm environment requires diligence on the part 
of cardholders to perform thorough and comprehensive reconciliations of 
their charges and to submit timely disputes of improper charges to the 
bank for credit. Because agencies have already paid the bank for the 
potential unauthorized charges prior to receiving the monthly billing 
statement, the payment will not be reversed unless a dispute is 
submitted. 

Because of weaknesses in the implementation of the dispute process in 
some instances, DHS did not identify and obtain credits for 
unauthorized transactions. In one instance, a cardholder appropriately 
initiated the dispute process when a vendor improperly charged the 
government $153,000 prior to completion of contracted services. 
However, the cardholder failed to perform appropriate follow-through 
and submit the required dispute documentation. Consequently, DHS made a 
second payment to the vendor when services were complete, resulting in 
a double payment of $153,000. FEMA was unaware of the double payment 
until we questioned the payments in May 2006. At that time, FEMA 
contacted the vendor and recovered the overpayment. In another example, 
discussed later in this testimony, a cardholder's failure to dispute 
$30,000 in unauthorized charges resulted in FEMA making payments for 
potentially fraudulent and improper charges for flat-bottom boats. In 
this case, the cardholder and the approving official failed to dispute 
the unauthorized charges. 

Although the pay and confirm environment can bring economic benefits 
(i.e., rebates) to federal agencies, it requires the implementation of 
effective controls to detect and correct charges that should be 
disputed and reversed. The high rates of failure in our tests of key 
internal controls and the examples highlighted above bring into 
question whether DHS's pay and confirm process exposes DHS to 
unacceptable levels of risk for fraud, waste, and abuse. 

DHS Used a Provision of the Federal Acquisitions Regulations to Avoid 
Obtaining Competitive Bids: 

To facilitate the government's response to hurricanes Katrina and Rita, 
Congress authorized an increase to the micropurchase threshold from 
$2,500 to $250,000. When making micropurchases, authorized cardholders 
need not solicit for competitive bids if they consider the price 
reasonable. Executive agencies such as DHS could have extended this 
authority to certain cardholders directly supporting hurricane-related 
rescue and relief operations. However DHS told us that they did not 
implement the increased threshold because they had the flexibility they 
needed to make noncompetitive purchases under existing procurement 
authority. DHS cited their justification for other than full and open 
competition under the Unusual and Compelling Urgency provisions of the 
Federal Acquisition Regulations.[Footnote 12] Under these provisions, 
cardholders had discretion to select contractors noncompetitively as 
long as the purchase was directly related to Hurricane Katrina response 
efforts. 

Although DHS has authority to make purchases without competition, we 
highlight transactions where DHS cardholders failed to adopt prudent 
pricing practices and subsequently wasted government funds. Part of 
DHS's mission is to respond to emergency situations like Katrina and 
Rita and a reasonable person would expect DHS to be more prepared for 
relief and rescue operations than other agencies with routine 
functions. In this light, we question the propriety of several of the 
noncompetitive transactions that we investigated for potential fraud. 
In the next section we identify many examples of potential fraud, 
improper purchases, and abusive or questionable transactions. Some of 
the examples are multifaceted and touch on several issues including the 
pricing and requirements management issues discussed previously. 

Potentially Fraudulent, Improper, Abusive, or Questionable 
Transactions: 

Our forensic audit and investigative work identified numerous 
transactions where DHS failed to prevent or detect potential 
fraudulent, improper, abusive, or questionable purchases. Many of these 
examples also show that the government could have obtained better 
pricing. However, our work was not designed to identify all instances 
of, or estimate the full extent of fraud, waste, and abuse. Therefore 
we did not determine, and make no representations regarding, the 
overall extent of fraudulent, improper, and abusive or questionable 
transactions. 

Potentially Fraudulent and Improper Activity Related to Purchase Card 
Acquisitions: 

Our data mining work identified many instances of both potentially 
fraudulent and improper use of the purchase cards, and potentially 
fraudulent and improper activity related to items acquired with the 
purchase card. We considered potentially fraudulent purchases to be 
those which were unauthorized and intended for personal use. The 
transactions we determined to be improper are those intended for 
government use, but which are not for a purpose that is permitted by 
law, regulation, or policy. 

Potentially Fraudulent Activity--Table 4 shows five cases of potential 
fraud involving both use of a DHS purchase card and weaknesses with 
DHS's accountable property[Footnote 13] controls that led to 
potentially fraudulent misappropriation of government assets. Property 
that is unaccounted for may simply be misplaced; or it may be that the 
assets were misappropriated for a use other than that of the 
government. The misappropriation of government assets (theft) 
represents fraudulent activity. These five potentially fraudulent cases 
involve 154 missing items out of the 433 accountable property items 
that we tested. Because only a limited number of transactions in our 
statistical sample contained accountable or pilferable property, we did 
not attempt to estimate the extent to which DHS could not account for 
pilferable property. 

Table 4: Potentially Fraudulent Activity: 

Case: 1; 
Items purchased: Laptop computers; 
Organizational element: FEMA; 
Vendor: CDW; 
Additional facts: 107 of 200 not located; 
Amount of transaction: $300,000. 

Case: 2; 
Items purchased: Flat-bottom boats; 
Organizational element: FEMA; 
Vendor: Banita Creek Hall; 
Additional facts: Unauthorized use of purchase card by a vendor, 12 of 
20 boats not in property system; 
Amount of transaction: 177,000. 

Case: 3; 
Items purchased: Printers; 
Organizational element: FEMA; 
Vendor: CDW; 
Additional facts: 22 of 100 not located; 
Amount of transaction: 84,000. 

Case: 4; 
Items purchased: GPS units; 
Organizational element: FEMA; 
Vendor: Best Buy; 
Additional facts: 2 of 25 not located; 
Amount of transaction: 18,000. 

Case: 5; 
Items purchased: Laptop computers; 
Organizational element: Coast Guard; 
Vendor: Best Buy; 
Additional facts: 3 of 3 reported as stolen; 
Amount of transaction: 13,000. 

Source: GAO and DHS OIG investigation. 

[End of table] 

Our testing work for the above transactions included traveling to the 
location of the accountable property to observe the item and determine 
if the asset existed or was in possession of the government. More 
detailed information is as follows: 

* In cases 1, 3, and 4, FEMA purchased 200 laptops, 100 printers, and 
25 GPS units in five separate transactions totaling about $400,000. 
While FEMA documented independent receipt and acceptance for the 
laptops and the GPS units, it did not do so for the printers. Further, 
FEMA did not properly record and track some of the assets in its 
property records. As a result, FEMA could not locate the accountable 
property items when asked, and consequently was not able to account for 
107 laptops, 22 printers, and 2 GPS units that cost about $170,000. 

Based on the information FEMA provided for the location of the assets 
in question, in March 2006 we traveled to the FEMA field offices in New 
Orleans and Baton Rouge to observe assets acquired using a purchase 
card. After arriving at these locations, however, FEMA gave us 
different location information. We were instead informed that the 
laptops were shipped directly to and currently located in a conference 
room at the Royal Sonesta Hotel in the French Quarter, which was 
serving as the Joint Command Post for the various federal, state, and 
local authorities. We were told that many of the laptops and printers 
were being used by the New Orleans Police Department (NOPD) at the 
Joint Command Post. However, as shown in figure 1, when FEMA's 
accountable property officer took us to the conference room, it was 
vacant and the laptops and printers were missing. 

Figure 1. Hotel Conference Room Where FEMA Laptops and Printers Were 
Supposed to Be: 

[See PDF for Image] 

Source: GAO. 

[End of Figure] 

We questioned NOPD to find the location of the laptops and printers and 
we were able to account for 28 laptops and 16 printers in the 
possession of NOPD personnel and 4 laptops in possession of the 
Louisiana District Attorneys Office (LADA). These assets were on loan 
to NOPD and LADA to assist them in their hurricane response efforts. We 
subsequently accounted for 61 laptops, 72 printers, and 23 GPS units at 
FEMA field offices in Baton Rouge and New Orleans. Despite substantial 
efforts to locate the property, neither FEMA, GAO, or DHS OIG was able 
to find all the accountable property at the time of our field testing. 
Ultimately, FEMA could not account for 107 laptops, 22 printers, and 2 
GPS units with a total value of about $170,000. 

Significantly, we found that FEMA failed to enter the laptops into 
their accountable property system until two months after delivery. In 
addition, when FEMA did add the laptops to the property system, they 
failed to accurately record who was in possession of the laptops. In 
February 2006, after we made inquiries regarding the laptops, FEMA made 
an effort to track down the laptops and properly record who was in 
possession of and accountable for the laptops. However, they were 
unable to do so for most of the laptops. The process for using a 
purchase card to obtain highly pilferable and expensive equipment such 
as laptops should include controls that ensure such property is 
accurately recorded and tracked in a property system. In this case, the 
absence of effective controls led to potential fraud and a substantial 
cost to the taxpayer. 

* For case 2, FEMA paid a vendor $208,000, or twice the retail price, 
to deliver 20 flat-bottom boats (with motors and trailers) needed for 
relief operations in New Orleans. This vendor, a broker who did not 
possess any boats himself, used the FEMA purchase card account number 
to pay for the boats prior to delivery to FEMA. He also used the card 
number to make two unauthorized payments for 6 of the 20 boats totaling 
about $30,000. Although the vendor billed FEMA for all 20 of the boats, 
the vendor failed to pay one retailer who provided 11 of the 20 boats. 
This retailer provided the boats to the broker believing he was dealing 
with a FEMA representative, and therefore the retailer did not require 
payment up-front. The retailer has since reported the 11 boats as 
stolen and not provided title to the vendor. Further, FEMA only has 8 
of the 20 boats in its property records and could not provide the 
location for the other 12 boats. 

Many issues surround the purchase of the 20 boats, but the most 
significant involve the vendor. We estimate that the vendor walked away 
with over $150,000, including the profit he made on the 11 boats that 
the vendor obtained without payment. We are coordinating our 
investigation with both local law enforcement and the Federal Bureau of 
Investigation. Key control breakdowns relating to this transaction 
include the cardholder not obtaining adequate receipt and acceptance as 
evidenced by the fact that FEMA did not receive title to at least 11 
boats, and the fact that neither the cardholder or the approving 
official flagged two unauthorized charges on the monthly purchase card 
statement. 

* Case 3 involved one or more Coast Guard employees who submitted 
falsified records and provided false information pertaining to the 
theft of three laptop computers. Our investigative work found that a 
Coast Guard cardholder, accompanied by an Information Technology (IT) 
specialist, purchased 13 laptops from Best Buy using his government 
purchase card. The cardholder placed the laptops in an unsecured 
trailer, but did not immediately record the serial numbers so they 
could be entered into an accountable property system. According to the 
cardholder, 3 laptops went missing the next day. In an interview with 
our investigator and the Coast Guard Investigative Service, the 
cardholder admitted that he did not record the serial numbers 
immediately as instructed by his superior, and the property log was 
subsequently falsified to include fictitious serial numbers for the 
missing laptops. During separate interviews with the cardholder and the 
IT specialist, we noted inconsistencies in their explanations. We 
attempted to conduct a follow-up interview with the IT specialist, but 
after being notified to report for the scheduled interview, the IT 
specialist took actions that made himself unavailable. The Coast Guard 
Investigative Service is continuing to investigate the stolen laptops. 

Improper Transactions--We identified numerous instances where 
cardholders used their purchase cards to make improper purchases. 
According to the FAR, purchase cards may be used only for purchases 
that are otherwise authorized by law, regulation, or organizational 
policy. Table 5 contains some examples of improper transactions. 

Table 5. Examples of Improper Purchase Card Transactions: 

Case: 1; 
Items purchased: Meals ready to eat (MRE's); 
Organizational element: CBP; 
Vendor: MRE Foods.com; 
Amount of transaction: $465,000. 

Case: 2; 
Items purchased: Waste removal; 
Organizational element: FEMA; 
Vendor: EMO Energy Solutions; 
Amount of transaction: 153,000. 

Case: 3; 
Items purchased: Rain jackets; 
Organizational element: CBP; 
Vendor: Helly Hansen; 
Amount of transaction: 2,500. 

Case: 4; 
Items purchased: Men's clothing; 
Organizational element: ICE; 
Vendor: Hecht's; 
Amount of transaction: 430. 

Source: DHS data. 

[End of table] 

The following contains detailed information on some improper 
transactions shown in table 5: 

* Case 1 related to the improper use of convenience checks, where a CBP 
cardholder improperly issued five convenience checks totaling about 
$465,000 to prepay for a 2 months' supply of meals-ready-to-eat (MRE), 
about $30,000 of which was for shipping. The MREs were sent to the Gulf 
Region for consumption by CBP employees who were deployed to assist in 
the response to the hurricanes. In general, DHS policies consider the 
use of convenience checks a tool of last resort, that is, to be used 
only after "maximum efforts" have been made to find alternate vendors 
who accept the government purchase card. However, we found that the CBP 
cardholder violated DHS policies related to use of convenience checks. 

In addition, the CBP employees who were sent to the Gulf Region were 
pulled out earlier than anticipated and almost half of the MREs 
purchased were delivered to a CBP training facility in El Paso, Texas. 
Because the cardholder prepaid for the MREs, the cardholder precluded 
the option of buying in increments as the fluid circumstances might 
have dictated. Because the demand did not materialize, thousands of 
MREs are sitting in a warehouse in El Paso, Texas. 

The cardholder in this instance relied on the Unusual and Compelling 
Urgency provisions of the Federal Acquisition Regulations to expedite 
the purchase and meet an apparent need. While we are not questioning 
the cardholder's reliance on these provisions, we identified actions 
taken by the cardholder that unnecessarily increased the cost to the 
taxpayer: 

* Instead of contracting with the Defense Logistics Agency[Footnote 14] 
(DLA) to deliver MREs on an as-needed basis, the cardholder acquired 
about 62,000 MREs from a vendor on the internet. However, DLA informed 
us that it had a large supply of MREs when Hurricane Katrina hit the 
Gulf Region and would have been able to meet CBP's demand for MREs and 
provide free shipping. Further, we found that a GSA Advantage vendor 
was selling similar MRE's at a substantially lower price than what the 
cardholder paid. The vendor selected by the cardholder was not a GSA 
Advantage vendor and the cardholder acknowledged that she did not 
contact this GSA Advantage vendor. Had the cardholder contacted the GSA 
Advantage vendor, she may have saved taxpayers over $100,000. 

* The website of the vendor selected by the cardholder clearly shows 
that it accepts credit cards. However, according to the cardholder, the 
vendor did not want to incur a credit card processing fee on the large 
order. The cardholder therefore paid the vendor using convenience 
checks, which cost the government a 1.75 percent processing fee. 
Therefore, due to the cardholder's improper use of convenience checks, 
DHS paid $8,000 in processing fees unnecessarily. 

* In case 3, a CBP cardholder improperly used his purchase card to 
acquire 37 black rain jackets from Helly Hansen for nearly $2,500 and 
obtained a government discount to the personal benefit of CBP 
employees. The purchase violated CBP's policy against using a purchase 
card to acquire clothing. The cardholder claimed the rain jackets were 
personal protective equipment (PPE) for which there is an exception. 
The cardholder explained that the black rain jackets are given to 
safety officials on the firing range and allow these officials to be 
readily identified. However, these officials are issued red shirts for 
safety and identification purposes and when it rains, the red shirts 
are covered by the rain jackets. Other individuals who are not safety 
officials also wear black rain jackets, making these other individuals 
indistinguishable from safety officials. Therefore, the rain jackets do 
not serve a safety purpose and are not PPE. The cardholder also 
admitted that when the rain is heavy, the firing range is normally shut 
down. Furthermore, the rain jackets were not kept on the firing range 
but were given to range officials to keep, without any record of who 
was receiving the rain jackets. While safety of CBP employees should be 
a primary concern, the facts in this case indicate that cardholder 
obtained a government discount from the vendor to provide personal 
clothing to CBP employees and for which no safety related purpose was 
served. 

Abusive and Questionable Transactions: 

We identified numerous examples of abusive and questionable items 
acquired with DHS purchase cards during our testing. We defined abusive 
transactions as those that were authorized, but the items purchased 
were at an excessive cost (unreasonable pricing) or were not needed by 
the government, or both. As an organization whose mandate is to deal 
with security and emergency needs, DHS and its employees should adopt 
prudent purchasing practices by implementing existing agreements with 
vendors to allow favorable pricing even in times of disaster. 
Questionable transactions are defined as transactions that appear to be 
improper or abusive but for which there is insufficient documentation 
on which to conclude.[Footnote 15] 

Obtaining reasonable pricing for goods or services includes not only 
avoiding excessive pricing, but also includes taking reasonable steps 
to obtain appropriate discounts. However, vendors often will not 
provide discounts unless the government cardholder asks if a discount 
is available. We found instances where it was likely a vendor discount 
could have been obtained but was not. However, we noted several 
occasions where cardholders obtained a point-of-sale discount. For 
example, an ICE cardholder obtained 60 sleeping bags and cots from 
Cabela's. The sleeping bags and cots were acquired to meet the needs of 
those affected by the hurricanes. The cardholder was able to obtain a 
10 percent point-of-sale discount from the manager. By asking for the 
discount, the cardholder was able to save the taxpayer over $750. In 
another example, FEMA purchased over $600,000 in medical equipment and 
supplies from Medtronic Physio-Control in three separate transactions 
in order to supply special medical response teams after the hurricanes. 
FEMA obtained almost $18,000 in point-of-sale discounts from this 
vendor. 

In order to obtain the best pricing, it is often beneficial to make 
arrangements with vendors in advance of potential spikes in demand for 
goods or services. We noted numerous instances where we believe better 
pricing could have been obtained had various DHS organizational 
elements made arrangements with vendors in advance of the devastating 
hurricanes along the Gulf Region. If DHS does not anticipate its needs 
and get prearranged pricing from quality vendors, then it must often 
scramble to acquire the necessary goods and services during a crisis. 
Frequently, the emphasis shifts from efficiency to expediency when 
acquiring goods and services during a crisis, resulting in additional 
and unnecessary costs to the government. Table 6 lists some examples of 
abusive and questionable purchases that we identified at DHS. 

Table 6: Abusive and Questionable Transactions: 

Transaction: 1; 
Item purchased: Shower units; 
Organizational element: CBP; 
Vendor: MD Descant; 
Nature of transaction: Abusive; 
Amount: $71,000. 

Transaction: 2; 
Item purchased: Dog booties; 
Organizational element: FEMA; 
Vendor: Backcountry Gear Limited; 
Nature of transaction: Abusive; 
Amount: $68,000. 

Transaction: 3; 
Item purchased: GPS units; 
Organizational element: FEMA; 
Vendor: Best Buy; 
Nature of transaction: Abusive; 
Amount: $18,000. 

Transaction: 4; 
Item purchased: 63" Plasma screen television; 
Organizational element: FEMA; 
Vendor: Jan-Tronics; 
Nature of transaction: Abusive; 
Amount: $8,000. 

Transaction: 5; 
Item purchased: iPod Nanos and Shuffles; 
Organizational element: USSS; 
Vendor: Apple; 
Nature of transaction: Questionable; 
Amount: $7,000. 

Transaction: 6; 
Item purchased: Training seminar; 
Organizational element: CBP; 
Vendor: Sea Palms Golf and Tennis Resort; 
Nature of transaction: Abusive; 
Amount: $2,000. 

Transaction: 7; 
Item purchased: Leadership conference; 
Organizational element: CIS; 
Vendor: Hyatt Golf Resort, Spa & Marina; 
Nature of transaction: Abusive; 
Amount: $2,000. 

Transaction: 8; 
Item purchased: Beer brewing kit; 
Organizational element: Coast Guard; 
Vendor: Beer and Wine Hobby; 
Nature of transaction: Abusive; 
Amount: $230. 

Source: GAO and DHS OIG investigations of DHS data. 

[End of table] 

The following provides further details on a number of transactions 
listed above: 

* The first case involved a CBP cardholder who paid for three 6-person 
portable shower units when less expensive units could have been rented. 
In this instance, CBP represented to us that they did not have time to 
obtain competing bids because of the need to prepare immediate shower 
units for CBP personnel in the Gulf Region responding to hurricanes. 
However, because CBP did not specify the need for hot water and sinks, 
the portable shower units did not come with this capability. In 
contrast, a vendor in GSA Advantage could have rented two prefabricated 
16-person mobile shower units with hot water capabilities and had them 
delivered in less time than it took the original vendor to deliver. The 
cost from the GSA Advantage vendor would have been approximately 
$45,000, or 36 percent less than the nearly $71,000 CBP paid. 

* In case 2, a FEMA cardholder unnecessarily purchased over 2,000 sets 
of canine booties at a cost exceeding $68,000. Canine booties are used 
to protect the dog's paws in a debris laden environment. According to 
FEMA, after the terrorist attacks of 9-11 many donated dog booties were 
placed in storage facilities and were mistakenly placed on emergency 
provisioning lists. When the hurricanes struck the Gulf Region, FEMA 
acquired items on the provisioning lists including thousands of 
additional dog booties unnecessarily. However, we were informed by FEMA 
that since most of the search and rescue dogs in the Gulf Region were 
not accustomed to wearing booties, the canine booties continue to sit 
unused in FEMA storage facilities. The error of placing the booties on 
the emergency provisioning list resulted in a $68,000 unnecessary 
expenditure. 

* In case 4, a FEMA cardholder abused a purchase card to acquire a 
Samsung 63 inch plasma screen television on September 16, 2005 for 
almost $8,000, lacking a government need. The plasma screen, which was 
not timely recorded in an accountable property system, was still unused 
and in its original box six months after its purchase. The fact that it 
was unused after such an extended period of time casts significant 
doubt as to whether there was a legitimate government need for 
acquiring the 63 inch plasma screen in the first place. In addition, as 
the cost of high-end electronic equipment can fall dramatically in a 
short period of time, we found that the same 63 inch plasma screen 
television could have been obtained for $1,200 less at the time we 
observed it in the box at FEMA. Considering the plasma screen was 
bought at the end of the fiscal year and that it was unused 6 months 
after the purchase, a concern arises regarding whether the purchase was 
made to use up remaining funds at the end of the fiscal year. 

* In case 5, the U.S. Secret Service (USSS) spent over $7,000 to 
acquire 12 Apple iPod Nanos and 42 iPod Shuffles. This purchase is 
questionable because iPods are generally used to store and play music--
not a legitimate government need. In addition the USSS did not enter 
the iPod shuffles into its accountable property system. After we 
questioned the validity of the purchase, USSS provided a memorandum 
justifying the purchase on the basis that the iPods were used for 
training and data storage. However, we found that other memory devices 
existed that were not primarily designed to play music but would have 
satisfied the need for data storage. USSS did not provide evidence to 
support its claim that the iPods were used in training. Further, USSS 
represented to us that they did not track the iPod shuffles because the 
iPods cost less than the $300 threshold required for accountable 
property. This is inconsistent with established DHS policy that 
requires all memory devices be tracked in a property system. Without 
appropriate substantiation, we could not obtain assurance that the 
iPods were used for legitimate government needs. 

* Case 6 involved the abusive use of government funds to hold a CBP 
training seminar at the Sea Palms Resort at Saint Simons Island in 
Georgia. We identified a purchase card transaction related to this 
event for about $2,000 and performed additional audit work to determine 
the basis for selecting the resort. We found that the golf and tennis 
resort was used to train 32 newly hired attorneys when the nearby 
Federal Law Enforcement Training Center (FLETC) in Glynco, Georgia, 
could have been used with a savings of approximately $10,000. According 
to the CBP officials we interviewed, CBP had determined that the FLETC 
facility could not accommodate their training. However, CBP could not 
produce any documentation such as a request form indicating that CBP 
had contacted FLETC for determining availability. Further, a FLETC 
official in charge of scheduling informed us that FLETC did not receive 
a request from CBP and that had CBP given FLETC sufficient notice, it 
was more than likely that FLETC would have been able to accommodate 
CBP. While training is a necessary investment in human capital, 
cardholders and government officials need to be careful stewards of 
taxpayer's funds. By not contacting FLETC and instead using the resort 
for training, CBP failed to act prudently with taxpayer dollars. 

* In case 7, the U.S. Citizenship and Immigration Services (CIS) held 
its annual leadership conference at the Hyatt Regency Chesapeake Bay 
Golf Resort, Spa and Marina in Cambridge, MD, which cost the government 
about $40,000 in additional travel expenses. We initially selected this 
transaction because a CIS cardholder had paid the resort about $2,300 
for materials used in a team building exercise. Irrespective of the 
merits of the team building exercise expenses, holding the annual 
leadership conference about 90 miles outside Washington, D.C. resulted 
in roughly 50 Washington, D.C. based staff incurring travel expenses 
for lodging, meals, and other expenses. About 110 CIS employees 
attended the July 2005 conference. According to a March 25, 2005, CIS 
memorandum documenting the CIS conference planning efforts, CIS 
officials only contacted resorts outside the Washington, D.C. normal 
commuting area. If CIS had held the annual conference within the 
Washington, D.C. commuting area, the 50 of the employees would not have 
incurred travel expenses and the savings to the government would have 
been about $40,000. 

* Case 8 involved a Coast Guard cardholder who abused his purchase card 
to obtain beer brewing equipment and ingredients, and wasted government 
resources by brewing alcohol while on duty. The cardholder, whose 
duties involved planning, procuring, and organizing social functions 
for the Coast Guard Academy, purchased a beer brewing kit for about 
$230 and additional ingredients. According to the Coast Guard, the beer 
kit provided the Academy with both a cost savings and a quality product 
for official parties attended by cadets, dignitaries, and other guests 
of the Superintendent. The Coast Guard also explained that the Coast 
Guard beer, with the custom Coast Guard themed labels, functioned as an 
"ice-breaker" for discussion at these official parties. 

Our subsequent work indicated that the Academy achieved no cost savings 
by brewing their own beer. From early August 2005 through March 2006, 
the Academy used an additional $800 on beer brewing 
ingredients[Footnote 16] to brew 532 bottles of beer, or 12 batches. 
The Coast Guard estimated that it took two hours to brew, bottle, and 
label each batch of Coast Guard beer. Given a conservative approximate 
hourly labor rate of $15, it would cost over $13 for a six-pack of 
Coast Guard beer--considering the variable costs alone (ingredients and 
labor). The Coast Guard provided GAO with a detailed 5-year analysis 
showing a cost savings but the analysis failed to account for any labor 
costs. Absent the purported cost savings and the dubious need for the 
government to brew its own alcohol, the purchase of the kit and the 
beer brewing activity itself fall short of prudent use of taxpayer 
dollars and therefore exemplify purchase card abuse. 

Concluding Observations: 

The purchase card has proven to be a valuable tool that provides the 
government flexibility in making purchases and saves money on 
transaction processing. However, putting purchasing decisions in the 
hands of about 9,000 DHS employees with ineffective management 
oversight and control has allowed potentially fraudulent, improper, and 
abusive or questionable usage of these purchase cards to go undetected. 
Some of the examples highlighted in this testimony related to 
Hurricanes Katrina and Rita show that the government is particularly 
vulnerable when purchase cards are used during times of disaster. 
Taking immediate action to improve the processes and internal controls 
over its purchase card program will help DHS maximize the value and 
benefit of the purchase card and provide reasonable assurance that 
fraud, waste, and abuse are minimized. 

Madam Chairman and Members of the Committee, this concludes our 
statement. We would be pleased to answer any questions that you or 
other members of the committee may have at this time. 

Contacts and Acknowledgments: 

For further information about this testimony, please contact Gregory D. 
Kutz at (202) 512-7455 or kutzg@gao.gov at GAO or Matt A. Jadacki at 
(202) 254-5477 or matt.jadacki@dhs.gov at DHS OIG. GAO individuals 
making key contributions to this testimony included James Ashley, Kord 
Basnight, James Berry, Beverly Burke, Jennifer Costello, Danielle Free, 
Christine Hodakievic, Ryan Holden, Aaron Holling, John Kelly, Tram Le, 
John Ledford, Barbara Lewis, Jenny Li, John Ryan, Robert Sharpe, 
Bethany Smith, Tuyet-Quan Thai, Patrick Tobo, and Michael Zola. DHS OIG 
individuals making key contributions to this testimony included Modupe 
Akinsika, Andre Marseille, and Frank Parrott. 

Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this testimony. 

Appendix I: Prior GAO Purchase Card Audits: 

VHA Purchase Cards: Internal Controls Over the Purchase Card Program 
Need Improvement. GAO-04-737. Washington, D.C.: June 7, 2004. 

Purchase Cards: Increased Management Oversight and Control Could Save 
Hundreds of Millions of Dollars. GAO-04-717T. Washington, D.C.: April 
28, 2004. 

Forest Service Purchase Cards: Internal Control Weaknesses Resulted in 
Instances of Improper, Wasteful, and Questionable Purchases. GAO-03- 
786. Washington, D.C.: August 11, 2003. 

HUD Purchase Cards: Poor Internal Controls Resulted in Improper and 
Questionable Purchases. GAO-03-489. Washington, D.C.: April 11, 2003. 

Purchase Cards: Steps Taken to Improve DOD Program Management, but 
Actions Needed to Address Misuse. GAO-04-156. Washington, D.C.: 
December 2, 2003. 

FAA Purchase Cards: Weak Controls Resulted in Instances of Improper and 
Wasteful Purchases and Missing Assets. GAO-03-405. Washington, D.C.: 
March 21, 2003. 

Purchase Cards: Control Weaknesses Leave the Air Force Vulnerable to 
Fraud, Waste, and Abuse. GAO-03-292. Washington, D.C.: December 20, 
2002. 

Purchase Cards: Navy is Vulnerable to Fraud and Abuse but Is Taking 
Action to Resolve Control Weaknesses. GAO-02-1041. Washington, D.C.: 
September 27, 2002. 

Government Purchase Cards: Control Weaknesses Expose Agencies to Fraud 
and Abuse. GAO-02-676T. Washington, D.C.: May 1, 2002. 

Purchase Cards: Control Weaknesses Leave Army Vulnerable to Fraud, 
Waste, and Abuse. GAO-02-732. Washington, D.C.: June 27, 2002. 

Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to 
Fraud and Abuse. GAO-02-32. Washington, D.C.: November 30, 2001. 

Appendix II: Background: 

The Department of Homeland Security's (DHS) purchase card program is 
part of the General Services Administration's (GSA) Smart Pay® program, 
which was established to streamline federal agency acquisition 
processes for eligible purchases by providing a low-cost, efficient 
vehicle for obtaining goods and services directly from vendors. Under 
the GSA blanket contract, DHS has contracted with U.S. Bank for its 
purchase card services. 

To assist DHS organizational elements in carrying out their various 
missions, such as that of the U.S. Coast Guard (Coast Guard),[Footnote 
17] U.S. Customs and Border Protection (CBP),[Footnote 18] 
Transportation Security Administration (TSA),[Footnote 19] and the 
Federal Emergency Management Agency (FEMA),[Footnote 20] DHS reported 
that it used purchase cards for more than 1.1 million transactions 
valued at more than $420 million in fiscal year 2005. According to DHS 
data, the purchase card activity for the Coast Guard, CBP, TSA, and 
FEMA accounted for $364 million or about 86 percent of the more than 
$420 million in fiscal year 2005 DHS purchase card payments. Table 1 
identifies the number and dollar amount of purchase card transactions 
during fiscal year 2005 for these and other DHS components. 

Table 7: Number and Amount of Fiscal Year 2005 Purchase Card 
Transactions: 

DHS Component: Coast Guard; 
Number of transactions (in thousands): 568; 
Amount of transactions (in millions): $227; 
Percentage of; DHS purchase card payments: 54%. 

DHS Component: CBP; 
Number of transactions (in thousands): 295; 
Amount of transactions (in millions): 66; 
Percentage of; DHS purchase card payments: 16. 

DHS Component: TSA; 
Number of transactions (in thousands): 74; 
Amount of transactions (in millions): 38; 
Percentage of; DHS purchase card payments: 9. 

DHS Component: FEMA; 
Number of transactions (in thousands): 31; 
Amount of transactions (in millions): 32; 
Percentage of; DHS purchase card payments: 8. 

DHS Component: Other DHS components; 
Number of transactions (in thousands): 178; 
Amount of transactions (in millions): 60; 
Percentage of; DHS purchase card payments: 13. 

Total; 
Number of transactions (in thousands): 1,146; 
Amount of transactions (in millions): $423; 
Percentage of; DHS purchase card payments: 100%. 

Source: GAO analysis of U.S. Coast Guard Finance Center's reports. 

[End of table] 

Management of the DHS Purchase Card Program: 

DHS's Purchase Card Program Management Office, which is within the 
office of the Under Secretary for Management--Chief Financial Officer 
(CFO), is responsible for the overall management of the DHS purchase 
card program. In carrying out its management responsibilities, the 
Purchase Card Program Management Office has a directive for use by all 
DHS components on the Government Purchase Card Program. In addition, 
the Office of the Chief Financial Officer developed a draft manual, 
which has been in draft since March 8, 2004. This draft manual 
describes the various roles and responsibilities of key program 
management functions and the overall business process for carrying out 
the purchase card program. Regarding key management functions, the 
Agency Program Coordinator has responsibility for managing the overall 
program and working through the CFO and Chief Procurement Officer on 
purchase card issues; developing, implementing, and updating the 
program policies, procedures, and guidelines; and ensuring the 
implementation of and compliance with adequate internal controls in the 
management of the program, as well as serve as the communication 
liaison between DHS and the U.S. Bank. Further, within each DHS 
component, an Organizational Program Coordinator(s) is designated to 
oversee the purchase card program within that component (e.g., Coast 
Guard). Their responsibilities include controlling issuance, 
revocation, and the closing of purchase cards; providing, monitoring, 
and maintaining training prior to issuance of the purchase card and 
annual refresher training for all cardholders and approving officials; 
and managing and conducting oversight of the program (includes span of 
control and ongoing and annual reviews to ensure compliance with the 
program requirements). Figure 3 illustrates DHS's business process for 
carrying out the purchase card program. 

Figure 2: DHS Purchase Card Program Flowchart: 

[See PDF for Image] 

Source: GAO analysis of the business process for the DHS Purchase Card 
Program. 

[End of Figure] 

Coast Guard Is a Steward for DHS's Purchase Card Program: 

Since February 2004, the U.S. Coast Guard Finance Center (Finance 
Center) has been operating under a Memorandum of Understanding with DHS 
to be the servicing agent providing centralized invoicing and payment 
of all DHS purchase card activity. The Finance Center has developed and 
implemented a system that supports the receipt of daily invoices from 
U.S. Bank for all DHS components, supports the payment of those 
invoices within one business day of receipt, and provides transmission 
of an electronic file containing transaction data to each component's 
accounting system. The intent of the daily payment is to maximize the 
performance rebates earned by the purchase card program. 

On a daily basis, U.S. Bank's Customer Automation and Reporting 
Environment generates an invoice file containing transaction level data 
for all DHS purchase card activity posted on the previous day and 
submits the file to the Finance Center, where the file is loaded into 
the Finance Center's Consolidated Billing System. Among other things, 
this system is used to process all purchase card transactions and 
provide data to participating DHS components. Cardholders are 
responsible for identifying any discrepancies on their billing 
statements and contacting the merchant to resolve any disputed 
transactions. If the cardholder is unable to resolve the dispute with 
the merchant, he or she has up to 60 days from the statement date to 
file a dispute form with U.S. Bank and request a credit. Approving 
officials are responsible for (1) receiving and reviewing their 
assigned cardholders' monthly statement to ensure all charges were 
allowable and conducted within acquisition guidelines, (2) determining 
that the goods or services were received, and documentation is 
complete, and (3) verifying that the cardholder follows through in 
resolving any disputed transactions with the merchant and U.S. Bank. An 
approving official's certification of the monthly billing statement 
cannot occur until the cardholder, or in some cases, the approving 
official, performs and completes a reconciliation of all charges on the 
statement. 

Appendix III: Scope and Methodology: 

To assess whether DHS's internal control policies and procedures are 
adequately designed to provide reasonable assurance that fraud, waste, 
and abuse are minimized and are operating effectively to prevent or 
detect potentially fraudulent, abusive, and improper purchase card use, 
we reviewed and tested key purchase card controls over purchase card 
use by DHS's major organizational elements.[Footnote 21] Our review of 
purchase card controls covered: 

* DHS's and its organizational elements' overall management control 
environment, including (1) management's role in establishing needed 
controls, (2) the numbers of cardholders, cardholder accounts, 
approving/billing officials, and program coordinators, (3) training 
provided for cardholders, (4) monitoring and audit of purchase card 
activity, and (5) effectiveness of purchase card infrastructure; 

* attribute tests on a statistical sample of key controls over purchase 
card transactions made during the period from June 13, 2005 through 
November 12, 2005, including (1) proper written preauthorization of 
purchases, (2) maintenance of sales documentation, (3) documented 
performance of independent confirmation that items or services paid for 
with the purchase card were received, and (4) documentation that 
cardholders gave priority to designated sources; and: 

* data mining of the population of transactions made during the above 
mentioned test period to identify potentially fraudulent, improper, and 
abusive or questionable purchase card transactions. 

Departmental and Organizational Element Control Environment: 

To assess the overall management control environment for DHS's purchase 
card program, we obtained an understanding of the processes utilized by 
DHS and its major organizational elements by interviewing officials 
involved in overseeing and managing the various purchase card 
activities, analyzing each entity's control procedures and processes, 
and performing walk-throughs of the detailed processes utilized at the 
major organizational elements to request, approve/authorize, make, 
document, and verify/certify transactions using purchase cards. We also 
analyzed the database of active cardholders to assess the ratios of 
approving/billing officials to assigned cardholders and cardholder 
accounts and assessed cardholder training. For these tests, we utilized 
the active member cardholder database provided by U.S. Bank covering 
the period from June 2005 through December 2005. We also visited and 
interviewed officials of the Coast Guard's Finance Center, Chesapeake, 
Virginia, DHS's purchase card paying agent, to discuss the payment and 
management oversight processes utilized to ensure the timely processing 
of payments and the reasonableness and appropriateness of transactions. 

Statistical Sample of Internal Control Procedures: 

We obtained and reviewed the U.S. Bank-provided database of purchase 
card transactions covering the period from June 13, 2005, through 
November 12, 2005, and analyzed a random probability sample of these 
transactions to assess compliance with key internal controls. The 
sample design was a simple random probability sample of 96 
transactions. The sample size was calculated to achieve a precision of 
any estimated internal control error rate for the category (except 
accountable property) to be +/-10 percentage points or less. With this 
probability sample, each transaction in the population had a known, 
nonzero probability of being selected. Each selected transaction was 
subsequently weighted in the analysis to account statistically for all 
the transactions in the population, including those not selected. 

Because we selected a sample of transactions, our results are estimates 
of a population of transactions and thus are subject to sample errors 
that are associated with samples of this size and type. Our confidence 
in the precision of the results from this sample is expressed in 95- 
percent confidence intervals. The 95-percent confidence intervals are 
expected to include the actual results in 95 percent of the samples of 
this type. We calculated confidence intervals for this sample based on 
methods that are appropriate for a simple random probability sample. 

To test compliance with internal controls, we applied procedures in 
GAO's Audit Guide: Auditing and Investigating the Internal Control of 
Government Purchase Card Programs (GAO-04-87G, Washington, D.C.: 
November 2003) and internal control standards included in the draft 
manual dated March 8, 2004. We utilized DHS's draft manual because we 
found that DHS had not issued an official standardized set of purchase 
card policies and procedures since the department was established by 
the Homeland Security Act in November 2002. Further, our review of the 
draft procedures showed that the procedures contained a reasonable set 
of standards that were generally consistent with good purchase card 
operating policies and procedures utilized by other governmental 
entities we had audited and covered in GAO's Audit Guide. We also 
reviewed (1) OMB Circular No. A-123, (2) Treasury Financial Manual Vol. 
1 Part 4-4500 "Government Purchase Cards," (3) FAR, (4) organizational 
policies, including draft organizational policies, and (5) GAO's 
Standards for Internal Controls. 

Data Mining: 

In addition to selecting statistically projectable samples of 
transactions to test specific internal controls, we also made 
nonrepresentative selections of transactions from these entities. We 
conducted separate analysis of transactions that appeared on the 
surface to be potentially fraudulent, improper, and abusive or 
questionable. 

Our data mining for transactions was limited in scope. For this review, 
we scanned the population of transactions for vendor names and merchant 
codes that are likely to sell goods or services that are personal in 
nature, listed on DHS's restricted/prohibited lists, or are otherwise 
questionable. Our expectation was that transactions with certain 
vendors had a more likely chance of being fraudulent, improper, and 
abusive or questionable. We reviewed and made inquiries about 200 
transactions with vendors that sold such items as sporting goods, 
sporting event tickets, groceries, clothing, jewelry, alcohol, 
entertainment, or were third-party payers, such as PayPal. Our 
inquiries also identified some purchases that turned out to be 
legitimate in terms of need but could have been obtained from vendors 
at significant price savings. We found other purchases were made during 
conditions of exigency that under normal operating conditions would not 
or should not have been made. While we identified, and performed 
limited inquiries about, some potentially fraudulent, improper, and 
abusive or questionable transactions, our work was not designed to 
identify, and we cannot determine, the extent of fraudulent, improper, 
and abusive or questionable transactions. 

We briefed DHS on the details of our work, including our scope, and 
methodology and our findings. We conducted our audit work from October 
2005 through June 2006 in accordance with U.S. generally accepted 
government auditing standards, and we performed our investigative work 
in accordance with standards prescribed by the President's Council on 
Integrity and Efficiency. 

(192211): 

FOOTNOTES 

[1] The Homeland Security Act of 2002, Pub. L. No. 107-296, led to the 
creation in January 2003 of DHS--the most substantial reorganization of 
the federal government since the 1940s. The creation of DHS, which 
began operations in March 2003, represents the fusion of 22 federal 
agencies to coordinate and centralize the leadership of many homeland 
security activities under a single department. 

[2] Second Emergency Supplemental Appropriations Act to Meet Immediate 
Needs Arising from the Consequences of Hurricane Katrina, 2005, Pub. L. 
No. 109-62, Sec. 101 (Sept. 8, 2005). 

[3] We considered potentially fraudulent purchases to be those which 
were unauthorized and intended for personal use. The transactions we 
determined to be improper are those purchases intended for government 
use, but are not for a purpose that is permitted by law, regulation, or 
policy. We also identified as improper a number of purchases made on 
the same day from the same vendor, and which appeared to circumvent 
cardholder single transaction limits or bidding requirements. We 
defined abusive transactions as those that may be authorized, but the 
items purchased were at an excessive cost or were not needed by the 
government, or both. Questionable transactions could be improper or 
abusive but for which there is insufficient documentation to conclude 
either. 

[4] A split payment occurs when a cardholder splits a transaction into 
more than one segment to circumvent the requirement to obtain 
competitive prices for purchases over the $2,500 micropurchase 
threshold (in the case of Hurricanes Katrina and Rita, a micropurchase 
threshold of up to $250,000) or to avoid other established credit 
limits. 

[5] Because we believe DHS's draft manual, Department of Homeland 
Security Purchase Card Manual (Washington, D.C.: Mar. 8, 2004) is 
largely consistent with GAO's Audit Guide: Auditing and Investigating 
the Internal Control of Government Purchase Card Programs, GAO-04-87G 
(Washington, D.C.: Nov. 1, 2003) and Standards for Internal Control in 
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C. Nov. 
1999), we generally used the draft manual as the criteria against which 
we tested internal controls. 

[6] On an agencywide basis, 2,150 cardholders, or over 20 percent of 
DHS's over 9,000 cardholders, were managed by approving officials whose 
span of control exceeded the 7:1 cardholder to approving official 
internal control as contained in the DHS draft manual. 

[7] Federal agency purchase card programs operate under a government 
wide GSA SmartPay® master contract. Agency purchase card programs must 
comply with the terms of the contract and task orders under which the 
agency placed its order for purchase card services. 

[8] The GSA offers SmartPay®, a federal government charge card program 
that improves travel, purchase, and fleet payment services for federal 
employees by simplifying payments and cutting administrative costs. 

[9] GSA Advantage, a program offered by the GSA, is a convenient one- 
stop shopping source to meet federal agencies' procurement needs by 
selecting and listing vendors who may offer the best value. 

[10] Using designated sources results in the agency obtaining 
reasonable prices or purchasing goods and services that meet other 
policy objectives, such as creating jobs and training opportunities for 
people who are blind or have other severe disabilities. 

[11] As part of GSA's SmartPay® program, contracting banks provide 
rebates (refunds) to agencies based on sales volume (payments) and 
payment timeliness. 

[12] 6.302-2 and 41 U.S.C. § 253(c)(2), state that "[a]n executive 
agency may use procedures other than competitive procedures only when . 
. . the executive agency's need for the property or services is of such 
an unusual and compelling urgency that the Government would be 
seriously injured unless the executive agency is permitted to limit the 
number of sources from which it solicits bids or proposals." See also 
48 C.F.R. § 6.302-2, Unusual and compelling urgency. 

[13] DHS's Personal Property Management Directive 565 defines 
accountable property as personal property with an initial acquisition 
cost at or above a specific threshold, and items designated as 
sensitive. These items are to be recorded in the organization's 
automated control system. DHS's Capitalization and Inventory of 
Personal Property Management Directive 1120 establishes differing 
thresholds for tracking accountable property. Generally, DHS requires 
its organizational elements to track electronic communications 
equipment with a cost greater than or equal to $1,000, information 
technology equipment with memory at any cost, and other personal 
property with a cost greater than or equal to $5,000. 

[14] DLA provides worldwide logistics support for the missions of the 
military departments and the Unified Combatant Commands under 
conditions of peace and war. It also provides logistics support to 
other DOD components and certain federal agencies such as DHS. 

[15] GAO's Guide for Evaluating and Testing Controls Over Sensitive 
Payments (GAO/AFMD-8.1.2, May 1993) states: "Abuse is distinct from 
illegal acts (non-compliance). When abuse occurs, no law or regulation 
is violated. Rather, abuse occurs when the conduct of a government 
organization, program, activity, or function falls short of societal 
expectations of prudent behavior." 

[16] According to Coast Guard finance personnel, funds from the Coast 
Guard Foundation, Inc. were used to purchase the beer brewing 
ingredients. The Foundation is a public nonprofit organization that 
provides annual funding to support the men and women of the U.S. Coast 
Guard and Coast Guard Academy. The Foundation's fundraising efforts 
address needs not met through traditional governmental and military 
funding sources. The Foundation supports such activities as a holiday 
calling-card program, capital improvements, and education grants. 
Although the ingredients were not purchased with appropriated funds, 
the resources provided by the Foundation could have been spent for 
other purposes, for example educational grants, had they not been used 
to brew beer. 

[17] The Coast Guard's mission is to protect the public, the 
environment, and U.S. economic interest in the nation's ports and 
waterways, along the coast, on international waters, or in any maritime 
region as required to support national security. 

[18] CBP is responsible for protecting U.S. borders in order to prevent 
terrorists and terrorists' weapons from entering the U.S. while 
facilitating the flow of legitimate trade and travel. 

[19] TSA's mission is to protect the nation's transportation systems to 
ensure freedom of movement for people and commerce. 

[20] FEMA is responsible for preparing the nation for hazards, managing 
federal responses and recovery efforts following any national incidents 
or disasters, and administering the National Flood Insurance Program. 

[21] Major organizational elements include the U.S. Secret Service, 
U.S. Coast Guard, Transportation Security Administration, U.S. Customs 
and Border Protection, U.S. Citizenship and Immigration Services, U.S. 
Immigration and Customs Enforcement, Federal Emergency Management 
Agency, Federal Law Enforcement Training Center, and other headquarters-
level entities. 

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