March 11, 1997

Dear Mr. Barram:

This report presents the results of the President's Council on Integrity and Efficiency (PCIE) review of the General Services Administration's (GSA) procurement initiative for the next generation of card-based payment systems. The U.S. Department of Agriculture's Office of Inspector General (OIG) was designated as the lead agency for this effort. We coordinated our review with the audit staffs of numerous Inspectors General throughout government and members of the Chief Financial Officer's (CFO) Council.

This project consolidated current issues or concerns of the OIG and CFO community that may need to be considered and addressed as the GSA moves forward with initiatives to develop contract proposals. Information in this report is a "roll up" from completed audits, evaluations/inspections, or investigations, plus information obtained from various agency personnel regarding procedures followed in processing travel, fleet, and purchase card transactions. The participating OIG's made recommendations to their respective agencies as appropriate, and our recommendations to the GSA are included in this report.

The PCIE is very supportive of GSA's efforts involving the next generation of card-based payment systems. If properly implemented, these new systems can streamline travel, procurement, and payment procedures. The PCIE is committed to working with GSA as this initiative continues.

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .1

Audit Objectives, Scope and Methodology . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Recommendations . .. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Background

Review Approach

The President's Council on Integrity and Efficiency (PCIE) designated the U.S. Department of Agriculture, Office of Inspector General (OIG), as the lead agency to consolidate issues and concerns identified regarding Governmentwide credit card activities for travel, purchase, and fleet card services. The review was coordinated with the audit staffs of numerous Inspectors General and the Chief Financial Officer's (CFO) Council.

As part of its ongoing effort to enhance the services provided to Federal agencies, the General Services Systems Administration (GSA) is changing its single vendor-single service program to a multiple vendor contract for each of its charge/credit account programs. The proposed new system will simplify purchases of more than $4 billion a year. GSA has developed a procurement strategy to meet the Government's requirements for the next generation of a card-based payment system. GSA plans to solicit "business lines" for fleet, travel, purchase cards, and an "integrated solution" for card services. The initial term of the contract will be for 5 years, with five 1-year options.

In the move from paper-based to electronic systems, GSA plans to make full use of existing and future card-based services and technologies. The enhanced technology for the new system will provide the Government with electronic systems that streamline processes, improve accountability and tracking, provide access to and interaction with financial and administrative data, and enable timely reconciliation and settlement processes.

GSA's ultimate goal is the capability to operate multiple applications, both financial and administrative, through a single platform.

GSA plans to solicit an "integrated solution or business line" for providing fleet, travel, and purchase card services. Offerors must meet the core requirements specified for each card service independently; and, at a minimum, integrate the reporting function for all three programs.

This "business line" offers the Government the ability to operate travel, purchase, and fleet card programs in a single, streamlined environment.

Through an "integrated solution," GSA plans to: Gain cost efficiencies; improve Government operations, particularly accountability and performance reporting; and streamline procurement, payment, and administrative procedures.

Objectives of the Travel, Purchase, andFleet Services Card Program

GSA has identified the following objectives for its Travel, Fleet and Purchase Card System.

Improve Government cash management practices.

Reduce/eliminate imprest funds.

Streamline travel, procurement, and payment procedures.

Reduce administrative costs.

Take advantage of technological advances.

Audit Objectives, Scope, and Methodology

Objective

The objective of this review was to identify and consolidate OIG and CFO concerns regarding the current processes followed in processing travel, fleet, and purchase card transactions, and to assist the GSA as it moves forward with initiatives to develop contract proposals.

Scope

Our review focused on the audit work completed by selected OIG offices and issues raised through our analysis of their reports and reviews involving the travel, purchase, and fleet card programs. Coverage also included an evaluation of Governmentwide efforts to improve and expand the use of these card programs through implementing streamlined procedures and emerging technology such as smart cards. We also coordinated our review effort with the CFO Council.

Methodology

To accomplish the proposed objectives, we did the following.

Contacted various OIG's for information on completed audits and reviews of activities involving the travel, purchase, and fuel card programs.

Interviewed responsible program personnel to determine if new initiatives, best practices, and technical procedures have been implemented.

Obtained comments from responsible program personnel and CFO personnel on card features they believe should be included in the new contract, as well as current features or procedures which should be eliminated or changed.

Met with banking industry representatives to obtain information on commercial practices and procedures for credit card operations.

Executive Summary

GSA Methodology Sound

The General Services Administration's master contract approach has effectively established the basis for identifying the Government's requirements for the next generation of card-based payment systems. In our discussions with members of the CFO community, as well as agency procurement and program officials, we learned that GSA has considered the diverse needs and interests of its customers, and has established a sound economic case for industry participation and competition. GSA held meetings, symposiums and focus group sessions with its customers to obtain their input for the next generation of card programs. Many agency officials told us GSA has "listened" to their concerns and has addressed them in the recently issued draft Statement of Work. Our review has shown that GSA is moving forward to find new and innovative methods to streamline the card programs and enhance their usefulness to the user community.

Some Additional Areas for Consideration

During our review, we noted several areas of concern that GSA may wish to consider as it moves toward issuing contracts in the coming months. We learned that inequities in the tax exempt treatment among the card programs result in additional costs in the travel program from $80 million to $100 million annually. Also, the lack of a uniform Governmentwide policy for the treatment of rebates has caused some confusion among agencies. We believe GSA should take the lead in these areas to bring about consistency in the treatment of tax exemptions and rebates.

Further, we noted that agencies have developed a variety of systems (both manual and automated) for managing card transactions. GSA should encourage agencies to consider using automated systems currently available at selected agencies prior to developing new and costly systems independently. In addition, GSA needs to ensure that contracts include appropriate requirements for audits of service providers, in accordance with Statement of Auditing Standard No. 70. Finally, our discussions with banking industry officials disclosed that many automated controls exist in the private sector to monitor transactions for potential abuses. GSA may need to evaluate these enhanced features to determine their appropriateness for Government systems.

We presented our findings to officials of GSA who agreed with our results. They concurred that resolution of the tax and rebate issues may require the involvement of Office of Management and Budget (OMB) and the U.S. Department of the Treasury (Treasury) to bring about appropriate Governmentwide changes in these areas.

Tax Exemptions

GSA needs to take the lead in establishing Governmentwide credit card programs that provide for an exemption from taxes on all official transactions. Currently, purchases made with the travel card that are billed directly to the traveler are taxed at the prevailing rate for the locality where the transaction took place, while purchases made with the GSA commercial credit card (IMPAC) and fleet cards are exempt from any State or local taxes. Eliminating this disparity could result in savings to the government of an estimated $80 million to $100 million annually.

The GSA IMPAC program is intended to streamline payment procedures and reduce the administrative burden associated with traditional purchasing of supplies and services. Cards are issued directly to approved individuals who use the cards to obtain goods and services. Purchases are billed directly to the participating agencies which are responsible for timely payment of the invoice. Purchases made with the IMPAC card are exempt from all State and local taxes. Similarly, fleet cards are available to purchase fuel, maintenance services, and fleet-related expenses. Like the IMPAC card, fleet card purchases are also centrally billed and are exempt from tax.

Inequity in the Travel Card System

The GSA travel expense system consists of individually billed accounts, centrally billed accounts, ATM access and travelers checks, all of which are for use in connection with official Government travel and travel-related expenses. Employees with individually billed accounts are responsible to pay their account balances in full each month and obtain appropriate reimbursement from their agency. Transactions charged to individually billed accounts are generally subject to State and local taxes. Centrally billed accounts are established by some agencies to pay for travel and travel-related expenses under special circumstances, and are exempt from State and local taxes. Historically, it has been held that purchases billed directly to an agency of the Federal Government are exempt from tax, while purchases billed to individuals generally are taxed, regardless of their status as federal employees on official business. Under the present system, agencies seeking to avoid these taxes are required to negotiate separately with each provider (hotels, rental car companies, etc.) to obtain central billing and to ensure their purchases are not taxed.

No Easy Solutions

In our discussions with GSA, we learned that attempts have been made in the past to rectify this tax inequity, but without achieving adequate solutions. For example, it has been suggested that all transactions be centrally billed, thereby avoiding all taxes. However, concerns were raised over situations where a traveler might charge a non-reimbursable expense to the travel card, and the expense was ultimately paid through a centrally billed account. This could occur if, for example, a traveler charged a restaurant or gift shop purchase to their hotel bill. To preclude this situation, one approach would be for the contracting card vendor to develop an accounting system that could breakout centrally billed, non-taxable purchases from those which are the responsibility of the individual traveler. Another solution currently being discussed within GSA is the use of a stored-value card for travelers. This would be a debit card issued in the name of the Government rather than an individual traveler, thereby rendering it tax exempt. The card would contain a specific amount of money available for travel purposes, and could be replenished on a trip-by-trip basis.

While there are obstacles to overcome to effect a positive change, we believe GSA should actively pursue a course of action to bring about such changes. According to GSA, during the travel card contract period 1993 to 1996, approximately 1.3 million Federal travelers charged an estimated $3.3 billion annually in travel-related expenses. GSA officials advised us that the potential tax savings represented by this level of activity could be estimated to be between $80 million and $100 million annually.

Recommendations

1. GSA should take the lead, in conjunction with OMB and Treasury, to bring about legislative, regulatory, or administrative change over the tax inequity in the travel card program.

2. In the interim, GSA may need to task potential travel card contractors to propose possible solutions to the tax inequity in the travel card program. For example, one option would be a system that:

a. Includes central billing as a primary feature,

b. establishes procedures for distinguishing between non-taxable transactions and those which are the responsibility of the individual traveler, and

c. creates an information network to assist service providers to account for taxable and non-taxable transactions.

3. Based on the changes brought about through Recommendations Nos. 1 and 2, GSA should establish procedures for Federal travelers which clearly define approved taxable and non-taxable transactions, and provide appropriate procedures for reporting the transactions and obtaining reimbursements, as applicable.

Uniform Procedures are Needed

GSA needs to work with OMB and Treasury to establish consistency in the treatment of rebates to agencies participating in the Governmentwide credit card programs. Our review disclosed that agencies were unsure of how rebates should be credited, whether the rebates could be used to offset program costs, or if they needed to be returned to the Treasury. Further, some agencies paid their accounts as quickly as possible in order to maximize their rebates. In one case, this process violated provisions of the Prompt Payment Act requiring that agencies not pay invoices early without first considering the cost of money to the Government, and if appropriate, obtaining a waiver from OMB to do so.

Currently, contractors are required to pay rebates to agencies based on certain factors, such as volume of activity or timeliness of payments. GSA's draft Statement of Work, dated December 19, 1996, continues to apply the rebate provisions to the new contracts. Under the sections entitled "Financial Considerations to Agencies," GSA requires that contractors provide each agency a financial return based on net purchase volume.

Rebates Encourage Improvements

In addition, agencies can elect to participate in a productivity rebate based on the agency's performance (e.g., faster pay, reduced delinquencies, electronic receipt of invoices/reports, reduced write-offs, etc.). The productivity rebate is designed to motivate agencies to improve and streamline credit card operations and payments. For example, if an agency elects to receive electronic invoices, it will receive a fixed rebate amount. Further, if the agency pays the invoice within a short time, say for example, 20 days, the agency will receive an additional rebate calculated based on the payment date.



Lack of Consistency Creates Confusion

In our discussions with agency officials, we learned they were cognizant of the benefits of rebates and they encouraged their staff's to take advantage of them. However, we also learned that program officials in some agencies were unsure of how to handle the rebates once received. Personnel in one agency told us they returned the rebate to Treasury, while another agency returns it to their program general fund. Both agencies indicated they were not sure their process was correct. In another agency, an Inspector General audit disclosed that agency personnel returned the rebate checks to the contractor for credit to their account rather than entering the check into the agency's accounting system. Finally, GSA's Statement of Work states that agencies may use rebates to offset the cost of items ordered from the contractor, such as bank checks. We believe GSA needs to address these inconsistencies, in consultation with OMB, to ensure that procedures are consistent throughout Government, and rebates are used in accordance with established policy.

Maximizing Rebates

During our review, we noted that some agencies attempt to pay the invoice as quickly as possible, thereby increasing their rebate amount. Current GSA contract provisions require that the contractor remit a refund to agencies which accelerate payment of their accounts. The contract stipulates 54 days as the baseline (file turn) at which no refund is earned. A file turn is the average number of calendar days between the time a charge is posted and payment is received by the contractor. Agencies can earn refunds by reducing their file turn below 54 days. Under the contract, rebates begin with a file turn of 53 days, and progressively increase to the maximum available rebate with a file turn of 1 day.

Rebates Could be Costly

We spoke with officials of one agency that have achieved a 1 day file turn. The officials advised us they arranged with the contractor to receive electronic invoices on a daily basis, and the agency pays the invoice each day electronically. Consequently, this agency receives the maximum possible rebate. We learned that, in carrying out this process, the agency has not considered the requirements of OMB Circular A-125, "Prompt Payment," which states that agencies shall make payments no more than 7 days prior to the payment due date, unless warranted based on a case-by-case determination. Further, the circular cautions against the frequent use of this authority without considering the cost of funds to the government. The agency officials advised us they have not determined if the 1 day file turn maximizes rebates at the expense of added costs to the government. Although the GSA contract makes reference to the requirement of the Prompt Payment Act to pay interest on late payments, it is silent on the provisions pertaining to early payment.

Recommendations

1. GSA should consult with OMB and Treasury to establish uniform Governmentwide policy for the control, accounting and application of rebates, including their applicability and relationship to provisions of the Prompt Payment Act.

2. Contract modifications should be made to ensure that provisions of the contract address the requirements of the Prompt Payment Act, including consideration of the cost of money to the Government when making payments early.

National Performance Review

The National Performance Review (NPR) established a goal to create a Government that works better and costs less. Governmentwide procurement reform was identified as one avenue to accomplish this objective. GSA's draft Statement of Work shows that GSA plans to move rapidly ahead to provide advanced services to agencies in fleet, travel, and purchase card areas.

Multiple Systems

Our review has shown that agencies currently have a variety of systems and processes in place for reconciliation, accounting, and control of purchase card transactions. These agencies are also at various stages in transitioning to electronic commerce. Some of these agency systems are paper-based and labor intensive. Other agencies have implemented or are in the process of implementing automated systems for reconciliation, reporting, and payment of card transactions.

We believe that agencies should be encouraged to leverage the benefits of developed systems, including cross-servicing, prior to development of new accounting and payment systems. One such source, the Department of Agriculture, has developed a centralized automated system that streamlines and integrates the administrative and financial process for management of purchase card transactions. This new system strengthens financial management over existing conventional purchase card processes.

Recommendation

1. GSA should advise agencies to consider using available automated software prior to creating new systems to function with the new purchase card program.

SAS 70 Audits Needed

Contracts for services provided under the "Fleet, Travel, Purchases, and Integrated Solution Services" should require annual audits of contractor or subcontractor service operations. These audits, conducted in accordance with Statement of Auditing Standard No. 70, "Reports on the Processing of Transactions by Service Organizations," would provide the necessary assurances that agency auditors would need to obtain in order to audit each agency's financial statements as required by the Chief Financial Officers Act of 1990 and the Government Management Reform Act of 1994.

With billions of dollars in estimated activity, the services provided will affect the agency's ability to record, process, summarize, and report financial information in its financial statements. The nature and materiality of the transactions affected by the services and the high degree of interaction between the control structure of the agency and the service provider, will require each agency's auditor to assess the control risk for the assertions embodied in the account balances and transaction classes. Potentially, each user agency's auditor would be required to review the contractor's internal control structure. A SAS 70 audit would provide these assurances and only subject the contractor to a single review.

Recommendation

1. GSA needs to ensure that vendor contracts include appropriate language to require that audits of the contractors be performed in accordance with SAS 70.

Automated Controls

GSA needs to request input from the vendor community regarding the availability and use of advanced applications (artificial intelligence) to monitor cardholder transaction activity for potential abuses. The draft statement of work addresses requirements for required authorization controls at the point of sale, and provides that the contractor shall monitor account transactions and notify the agency of any unusual spending patterns. However, it does not address specific requirements and the types of controls that the contractor will be required to implement to monitor card transaction activity.

In our discussions with the vendor community, we learned that advanced applications are available for transaction checking and identification of changes in cardholder spending patterns or frequencies. Some specific checks that could be established include the following.

Identifying multiple purchases having the characteristics of a "split purchasing" pattern (a purchase split between two or more purchase orders to evade maximum order limitations).

Alerting to attempted purchases at excluded merchants.

Flagging purchases that are made on dates and times that are outside of normal cardholder spending patterns.

Recommendation

1. In its Request for Proposals, GSA should task potential contractors to offer proposals that provide the most current technological advances to monitor transaction activity for potential abuses.