Payment Processing (Coast Guard)

Published by the Government Accountability Office on 1997-01-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management   Division


      January 27, 1997

      Captain Ronald D. Reck
      Commanding Officer
      U.S.C.G. Finance Center
      U.S. Coast Guard

      Dear Captain Reck:

      This letter responds to your September 10, 1996, request for an interpretation of
      the requirements of Title 7, “Fiscal Procedures,” of GAO’s Policv and Procedures
      Manual for Guidance of Federal Agencies. You specifically asked whether, for
      small purchases under $2,500 made with a government credit card, it is
      permissible to (1) retain supporting receipts and documentation at the field office
      where purchases occur rather than forwarding them to the Coast Guard’s
      certifying officer in Chesapeake, Virginia, and (2) eliminate the monthly l-percent
      stat&&al sample performed after payment to verily that the internal controls in
      the payment process are working as intended.

      As described in your letter, and explained by your staff during subsequent
      discussions, the Coast Guard is evaluating its existing voucher examination
      program with the intention of streamlining its operations and reducing the cost
      of government. We support initiatives to create a government that works better
      and costs less. At the same time, we believe that agencies have the
      responsibility to protect the government’s interest.

      To supplement the information in your letter, we contacted your staff to discuss
      your questions in more detail. Since we did not test your current system, our
      response only addresses your questions conceptually.

      Based on our understanding of your proposal, we have no objection to your
      retaining supporting receipts and documents at the field offices provided that the
      employees responsible for maintaining the documents are familiar with required
      retention and storage procedures and are aware of Fe possibility that the
      documentation for some payments wiIl need to be forwarded to the Coast
      Guard’s Finance Center in Chesapeake, Viiginia, for review or audit. However,
      statistical sampling procedures conducted after payment are necessary and

                                   GAOMMD-97-35R Payment Processing (Coast Guard)
should be continued since they provide a critical control in ensuring that the
system is operating as intended, but the sample size and the frequency of the
procedure can be modified based on the results of prior samples. These matters
are discussed in detail in the following sections.


Your staff provided the following information about the overall payment system
practices, the volume of transactions occurring, the number of field offices
affected, and the employees involved in the purchase process. The Coast Guard
makes approximately 336,000 government credit card’ purchases a year, totaling
about $100 million. About 7,800 Coast Guard employees are authorized to make
purchases using their government-issued credit cards when conducting official
business. These employees are assigned to approximately 1,300 field of&es
around the country, where 1,285 Coast Guard employees are designated as
officials authorized to approve monthly credit card statements to be forwarded
for payment. In a typical month, the Coast Guard’s Finance Center in
Chesapeake,Virginia, receives approximately 3,900 approved credit card
statements that contain about 28,000 transactions to be certified for payment.

As your staff explained, each Coast Guard employee who makes credit card
purchases receives a credit card statement listing data on each purchase during
the month, including date of purchase, vendor, amount of purchase, vendor’s
transa&on number for the item(s) purchased, and the outstanding total for the
month. The employee must verify the accuracy of the statement, attach to the
statement all receipts and related documentation that support each purchase, and
provide a description of the items purchased Then, the employee must sign the
statement and forward it and the attached support to the approving official at the
local unit for further processing.

The approving official reviews the statement and related attachments, signs the
statement, and forwards it and the attachments to the F’inance Center for
payment certilication. Your staff told us that the approving official’s signature
indicates that (1) budget authority was previously obligated and the items
purchased were needed to achieve program objectives, (2) amounts on the
statement are accurate, and (3) the items were received and accepted. If an
unidentifiable purchase or improper amount has been charged by the vendor, the

‘Except for imprest fund purchases, all purchases are made with govemment-
issued credit cards, and the cards are issued to authorized Coast Guard
employees under an agreement with one bank.

2                          GAOMMD-9735R        Payment Processing (Coast Guard]
approving official’s signature afIirms that the credit card bank has been notified
and the purchase or amount has not been approved for payment.

Each month, the Finance Center receives the approved statements with
supporting documents from the field offices and an electronic file from the credit
card bank containing the statements of all Coast Guard employees who made
credit card purchases during the month. Finance Center employees verify that
the approval signature is made by an authorized approving official and scan the
statements looking for vendor names that may indicate questionable purchases.
Any discrepancies or questionable items uncovered during the initial scan review
are researched and resolved before F’inance Center employees process the credit
card statement in question. Then, the Finance Center employees enter two items
into the automated consolidated billing system (CBS): the date the approved
statements are received from the field offices and the total amount for each
statement. Your staff advised us that the CBS then runs several electronic check
and edit routines. One routine compares the total amount (the sum of all totals
from all cardholders) with the related amount on the monthly invoice provided
by the bank in order to help ensure completeness and accuracy. Any
discrepancies are researched and adjusted prior to payment authorization.

Another automated routine, as your staff further explained, is one that reviews of
each statement to identify purchases that may be unauthorized or require special
approval. Using its Standard Industrial Codes @ IQ2 file, which contains a
universal data bank of “merchant types,” the Center will judgmentally select a
number of SICs (such as bars, cellular phone companies, auto rental and video
rental merchants, and florists). The system can search all monthly statements
and identify and report any statements that contain purchases from any of the
chosen SICs. Based on vendor name and predefined dollar threshold amounts,
the purchases idenaed through the SIC comparison would be researched and
either require special approval by the field office approving official or be

%ICs are four-digit numbers assigned to types of private-sector merchants, such
as restaurants, video rental stores, motor boat parts stores, and so on. The
codes were developed by the credit card company (VISA) for the purpose of
identifying the types of merchants. Each credit card purchase, whether for
government business or the private sector, requires the seller to record its
assigned number, which identifies, among other data, the merchant type and
specific merchant.

3                          GAO/AIMD-97-35R Payment Processing (Coast Guard)
Each month after payment is authorized and made, a l-percent statistical sample
is selected from the universe of all paid transactions for further examination to
ensure that the payment processing controls are working as intended. Your staff
explained that the sample selection and testing follow the requirements of Title 7.
Each transaction selected for review, along with its attached supporting
documentation, is examined thoroughly to determine, among other items, that the
amount is accurate, the purchase is for authorized goods or services, and the
cardholder is an authorized Coast Guard employee.


You propose two changes to the current system. F’irst, instead of requiring
cardholders and their approving officials to forward all credit card statements
and supporting documentation to the F’inance Center each month, you would
require them to use an alternative standardized, comprehensive Purchase Log.3
Each month, the Purchase Log would be completed by the cardholder, listing for
each purchase the date of purchase, vendor name and identification code,
description of the goods or services purchased, amount of the purchase, and
monthly totals. The cardholder would sign the log and the monthly credit card
statement; ensure that the card statement and the log are reconciled; and
forward them, along with all related receipts and supporting documentation, to
the approving official. The approving official would review the log and
statement, sign them, retain the receipts and supporting documentation on file,
and forward the log and the statement to the Finance Center. The receipts and
documentation would be retained at the field office for the required period and
be available for review as needed.

When the log and the statement are received by the Finance Center, the Center’s
employees would perform the same tasks that are currently done, except that the
log entries describing the item(s) purchased would be reviewed in place of the
hard copy supporting documentation, as is currently done. The automated check
and edit routines would remain the same.

3Although the Coast Guard will require the use of the log in the foreseeable
future, until the requirement is fully implemented, each field office would be
given the option (to gain the support of the field office employees) of either
forwarding the log without the supporting documents or forwarding the
supporting documents, as is presently done.

4                          GAO/AlMD-97-35R Payment Processing (Coast Guard)
According to your staff, the use of the log offers many benefits over the current
system. The most compelling benefits are (1) eliminating photocopying and
forwarding enormous volumes of receipts and supporting documents to the
Finance Center and (2) relieving the Center’s staff of having to scan, review, and
analyze the documents, except when questions arise. All the needed information
for authorizing and certifying payments would be contained in the log. You
estimate that use of the log, when fully adopted, will result in approxjmately
$180,000 in ann u al savings/cost avoidance to the Coast Guard.

Second, you propose to eliminate the l-percent stat&&al sample of transactions
after payment, which is currently conducted to ensure that the controls are
working as intended. Your staff explained that the vast majority of discrepancies
or questionable purchases are uncovered not as a result of the l-percent
sampling procedures, but during the manual scan reviews, SIC routines, and
automated check and edit routines. Your staff stated that the scan reviews and
SIC routines would verify whether the payment processing controls are working
as they should.


Title 7 requires that payment be based on suBWent evidence to establish the
validity of the claim prior to payment being made. To establish validity, the
certifying officer must ensure the (1) propriety of the amounts claimed, (2)
legality of disbursements, (3) correctness of the computations, and (4) accuracy
of the facts stated on the claim voucher and supporting documents. However,
GAO has long recognized that because of the high volume of transactons and the
geographical dispersion of activities, the ceitifying officer must rely on the
system of internal controls in the payment processing activities as the basis for
assessing the validity of claims. The following sections discuss each of your two
proposed modifications.

Retainine Documentation
at the Field Offices

The certifying officer relies on two major controls within the payment processing
system-a                approval and the review of supporting documentation.
The administrative approval is normally done by an official who works with or
supervises the employee making the purchase, knows the circumstances
surrounding the purchase and, therefore, can help assure the certifying officer
that the purchase was valid. Review and examination of the supporting
documentation-such as sales receipts, packing slips, common carrier statements,

5                         GAO/AIMD-9735R Payment Processing (Coast Guard)

and invoices-also provides assurance to the certifying officer that the purchase is
adequately supported and accurate.

Under your proposed modifications, admWstrative approval will remain a critical
control in establishing the validity of purchases. The approving official would
continue to be familiar with the circumstances surrounding purchases and would
review invoices (the monthly bank credit card statements) and supporting
documentation to assessthe accuracy, propriety, and correctness of the invoices.
The log, containing all the detailed information about each purchase, would be
sent to the certifying officer’s location (the Finance Center); only the supporting
documentation would remain at the fieId office.

As we have previously reported on systems for processing employee travel
claims,4 supporting documentation can be maintained at the official duty station
where claims are initiated. Documentation supporting the validity of payments
must be maintained for specified periods and under conditions that physicaUy
protect the documents. If the documents are needed for review by either the
certifying officer (if questions arise or samples are selected for testing) or
auditors (in the periodic examk&ion of the system), they should be provided as
requested. Also, we believe that the administrative approval process you propose
should continue to provide the detailed information needed for payments to be
certified. However, as a result of the changing procedures, the individual
responsible for maintaining the supporting documents must be made fully aware
(1) of the retention and storage requirements set forth in Title 8, ‘Records
Retention,” of GAO’s Policv and Procedures Manual and (2) that he or she may
be requested to forward the documents for review by the certifying officer or an
auditor. Notifying the responsible person of these two requirements will help
ensure that the quality of the documents is maintained and the documents are
readily accessible and will be forwarded promptly when requested.

You propose to eliminate the stalktical sampling procedures currently performed
at your Finance Center because both the frequency and amount of errors
uncovered have been minimaL However, we believe the sampling procedures are
critical since they provide a mechanism for determining if the controls in the
system are operating as intended and the document retention requirements are

4SeeEmnlovee Travel claims (GAOKIMD-957lR, February 6, 1995); Air Force
Automated Travel &stem (GAO/AIMD-9574R, February 14, 1995); and Emnlovee
Travel Claims - DOD (GAO/AlMD-95171R, June 26,1996).

6                          GAOBIMD-973sR Payment Processing (Coast Guard)
understood and being satisfied. Over time, processes may change and the
effectiveness of controls may weaken; however, periodic sampling procedures
should identify those controls that are not operating as intended and need
corrective actions, thus ensuring over time that controls are effective. This
sampling procedure helps the certifying officer effectively discharge his or her
responsibilities, since staff independent of the field offices verify that (1)
employees purchasing goods and services made proper, legal, and authorized
purchases within the scope of their responsibilities and (2) the adminMrative
officers’ review and examination of the purchases were complete, accurate, and
effectively carried out.

The depth and frequency of sampling procedures may xuy depending upon the
number and materiality of errors uncovered during the prior sampling processes.
The objective is to use the sampling process to the extent necessary to ensure
that the system is working as intended. If, as you stated, the current sampling
process at the Finance Center uncovers minimal and immaterial errors, a smaller
sample size could be selected and the procedure could be performed less
frequently, such as once every quarter or longer. Conversely, if a sample
uncovers higher error rates and/or greater materiality, the frequency and sample
size would need to be increased accordingly.

In conclusion, we believe it is necessary to periodically verify the adequacy of
the system operation as is currently done by sampling procedures conducted
after payment. Also, we believe it is necessary to ensure that field office
employees are adequately discharging their responsibility to retain
documentation. Therefore, the following procedures or steps should be
maintained or implemented:

-   Continue conducting some level of after-payment sampling to ensure that the
    system is operating as intended and that documents are being retained.

-   Formally communicate with or conduct training sessions for employees and
    officials responsible for mai.utaining supporting documentation at the field
    offices regarding the retention and storage requirements set forth in Title 8.

-   Formally communicate to field office personnel that some documentation
    supporting those purchases will be requested for review or detailed
    examination and would need to be forwarded to the Center.

                           GAOMMD-97-36R Payment Processing (Coast Guard)
The contents of this letter were discussed with Mr. John Barcynsld of your staff.
We hope our comments are helpful. If you have any questions or would like to
discuss these matters further, please contact me at (202) 512-9406or Bruce
Michelson, Assistant Director, at (202) 6X2-9366.

Sincerely yours,

Robert W. Gramling
Director, Corporate Audits and Standards


 8                          GAOMMD-97-36R Payment Processing (Coast Guard)

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