oversight

HUD Purchase Cards: Poor Internal Controls Resulted in Improper and Questionable Purchases

Published by the Government Accountability Office on 2003-04-11.

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

             United States General Accounting Office

GAO          Report to the Secretary of Housing and
             Urban Development



April 2003
             HUD PURCHASE
             CARDS
             Poor Internal Controls
             Resulted in Improper
             and Questionable
             Purchases




GAO-03-489
             a
                                               April 2003


                                               HUD PURCHASE CARDS

                                               Poor Internal Controls Resulted in
Highlights of GAO-03-489, a report to the      Improper and Questionable Purchases
Secretary of Housing and Urban
Development




 Due to HUD’s increasing use of                Significant internal control weaknesses in HUD’s approximately
 purchase cards and the inherent               $10.6 million purchase card program resulted in improper, potentially
 risk associated with their use,               improper, and questionable purchases in fiscal year 2001. Because of these
 Congress asked GAO to audit the               internal control weaknesses, there was often inadequate documentation
 purchase card program                         supporting many purchases GAO reviewed, and as a result, GAO was unable
 concentrating on assessing internal
 controls and determining whether
                                               to determine whether these purchases were a valid use of government funds.
 purchases being made are a valid              GAO also found that HUD’s remedial action plan for its purchase card
 use of government funds.                      program does not adequately address all the control weaknesses we
                                               identified.

                                               These weaknesses created an environment in which improper purchases
 GAO is making several                         could be made with little risk of detection and likely contributed to the
 recommendations to strengthen                 $2.3 million in improper, potentially improper, and questionable purchases
 internal controls including                   GAO identified. GAO found improper and potentially improper purchases
                                               totaling about $1 million where HUD employees either split or appeared to
 •    developing and implementing a            have split purchases into multiple transactions to circumvent cardholder
      robust review and approval
                                               limits. GAO also found that HUD employees lacked adequate supporting
      function to include requiring
      and performing a detailed                documentation for about $1.3 million in questionable purchases including
      review of relevant supporting            those from vendors not expected to engage in commerce with HUD,
      documentation for each                   purchases made on holidays and weekends, and $74,500 in portable assets
      purchase,                                such as computer equipment and digital cameras. In these instances, it was
 •    establishing specific                    not possible to determine what was purchased, for whom, and why. Some
      requirements for                         examples of these inadequately supported purchases are shown in the table
      documentation and records to             below.
      support each purchase, and
 •    developing and implementing a
                                               Examples of Questionable Purchases Lacking Adequate Support
      formal monitoring process to
      assess the effectiveness of the
                                                Vendor description          Vendor name                                   Amount
      enhanced review and approval
      process.                                  Department stores           Dillard’s, JCPenney, Lord & Taylor, Macy’s,
                                                                            Sears                                         $27,000
 HUD said that while it had made                Computers and electronics   Ritz Camera, Sharper Image, Comp USA,
 some improvements, it agreed that                                          PCMall                                         74,500
 it still needed to strengthen its              Restaurants                 Legal Sea Food, Levis Restaurant, The
 purchase card controls. HUD’s                                              Cheesecake Factory, TGI Fridays                 9,700
 response listed actions to address             Music and audio stores      Sound Craft Systems, J&Rs Music Store,
 five of the seven recommendations.                                         Guitar Source                                   8,900
 GAO believes that HUD needs to
                                               Source: GAO Internal.
 address the remaining two
 recommendations as well.
                                               The problems GAO identified with HUD’s purchase card program leave the
                                               agency vulnerable to wasteful, fraudulent, or otherwise improper purchases.
                                               Unless HUD makes specific improvements to its review and approval
www.gao.gov/cgi-bin/getrpt?GAO-03-489.         process, requirements for documentation and record retention, monitoring
                                               process, and remedial action plan, the department remains susceptible to
To view the full report, including the scope
and methodology, click on the link above.      fraud, waste, and abuse.
For more information, contact Linda Calbom
at 202-512-8341 or by E-mail at
calboml@gao.gov.
Contents



Letter                                                                                                                 1
                            Results in Brief                                                                           2
                            Background                                                                                 3
                            Scope and Methodology                                                                      5
                            HUD’s Internal Controls over Purchase Cards Did Not Provide
                              Assurance That Improper Purchases Would Be Prevented or
                              Detected                                                                                 6
                            Control Weaknesses Contributed to Improper, Potentially Improper,
                              and Questionable Purchase Card Transactions                                              9
                            HUD’s Remedial Action Plan to Correct Purchase Card Program
                              Deficiencies Lacked Specificity                                                          11
                            Conclusions                                                                                12
                            Recommendations for Executive Action                                                       12
                            Agency Comments and Our Evaluation                                                         13


Appendixes
             Appendix I:    Comments from the Department of Housing and Urban
                            Development                                                                                16
             Appendix II:   GAO Contacts and Staff Acknowledgments                                                     20




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                            Page i                                                    GAO-03-489 HUD Purchase Cards
A
United States General Accounting Office
Washington, D.C. 20548



                                    April 11, 2003                                                                                  Leter




                                    The Honorable Mel Martinez
                                    Secretary of Housing and Urban Development

                                    Dear Mr. Secretary:

                                    The use of purchase cards at the Department of Housing and Urban
                                    Development (HUD) has been steadily increasing over the last several
                                    years. During fiscal year 2001, purchase cards were used to make over
                                    24,000 purchases totaling more than $10 million compared to over 14,000
                                    transactions totaling more than $7.6 million in fiscal year 1997. Purchase
                                    cards are available to federal agencies under a General Services
                                    Administration (GSA) SmartPay Master Contract and may be used to make
                                    purchases with minimal paperwork. GSA administers the master contract
                                    and also provides purchase card program guidance for government
                                    agencies on its GSA Web site. Individual agencies are required to
                                    administer their own purchase card programs and set the parameters for
                                    use by authorizing employees, establishing dollar limits, and monitoring
                                    usage. The benefits of using purchase cards versus traditional contracting
                                    and payment processes are lower transaction processing costs and less
                                    “red tape” for both the government and the vendor community. While we
                                    support the use of a well-controlled purchase card program to streamline
                                    the government’s acquisition processes, it is important that agencies have
                                    adequate internal controls in place to protect the government from fraud,
                                    waste, and abuse.

                                    Given HUD’s increasing use of purchase cards and the inherent risk in their
                                    use, we were asked to assess HUD’s purchase card activities.1 Specifically,
                                    we were asked to determine if (1) HUD’s existing controls over the
                                    purchase card program provide reasonable assurance that improper
                                    payments will not occur or will be detected in the normal course of
                                    business and (2) payments for purchase card transactions are properly
                                    supported as a valid use of government funds. During the course of our
                                    work, the Office of Management and Budget (OMB) issued a memorandum
                                    requiring all agencies to develop a remedial action plan to manage the risk

                                    1
                                      This work was done as part of a broader body of work on which we testified last fall. [U.S.
                                    General Accounting Office, Strategies to Address Improper Payments at HUD, Education,
                                    and Other Federal Agencies, GAO-03-167T (Washington, D.C.: Oct. 3, 2002.)] We are
                                    currently assessing the effectiveness of internal controls over other disbursement processes
                                    at HUD and will report on the results of that work at a later date.




                                    Page 1                                                     GAO-03-489 HUD Purchase Cards
                   associated with purchase card usage. Because of this memorandum’s
                   relevance, we expanded our work to include determining whether HUD’s
                   remedial action plan effectively addressed its internal control weaknesses.



Results in Brief   Significant internal control weaknesses in HUD’s purchase card program
                   made the agency vulnerable to and in some cases resulted in improper,
                   potentially improper, and questionable purchases. During our review,
                   which covered fiscal year 2001, we found that a preapproval process,
                   required by HUD to help ensure the appropriateness of each purchase, was
                   virtually nonexistent. Of the total $1.8 million purchase card transactions
                   selected in the statistical sample,2 $1.4 million lacked adequate supporting
                   documentation for the approving official to determine the validity of the
                   purchase. Nevertheless, these purchases were approved for payment.
                   Based on the results of the sample, we estimate that $4.8 million3 of the
                   total sampled population of purchases ($10.6 million) lacked adequate
                   supporting documentation. Additionally, HUD was not performing the
                   required periodic reviews of purchase card transactions to assess
                   compliance with its policies and procedures, thus preventing adequate
                   monitoring of the purchase card program. These weaknesses, combined
                   with the inherent risk of fraud and abuse associated with purchase cards,
                   created an environment in which improper purchases could be made with
                   little risk of detection.

                   These control weaknesses likely contributed to the approximately
                   $2.3 million in improper, potentially improper, and questionable purchases
                   we identified during our review. For example, we identified improper split
                   purchases and potential split purchases totaling over $1 million. Split
                   purchases occur when multiple charges are made to the same vendor for
                   one purchase in order to circumvent single purchase limits. We also
                   identified questionable purchases, such as those made on holidays or
                   weekends, and purchases made with vendors not routinely expected to
                   engage in commerce with HUD. To determine whether these purchases
                   were a valid use of government funds, we requested supporting
                   documentation. HUD was unable to provide adequate supporting


                   2
                       We randomly sampled 222 transactions from a total of 23,688 transactions.
                   3
                     We are 95 percent confident that the estimate is between $4,074,446 and $5,432,059. This
                   estimate exceeds the tolerable amount in error of $1,059,046 (10 percent of the population
                   total of $10,590,461).




                   Page 2                                                      GAO-03-489 HUD Purchase Cards
             documentation for 1,478 transactions totaling about $1.3 million or 43
             percent of the transactions we requested and 72 percent of the total dollars
             requested. These unsupported transactions included $27,000 to various
             department stores, $8,900 to music and audio stores, and $9,700 to
             restaurants. Because HUD was unable to provide adequate documentation
             for these purchases, we consider them to be a questionable use of
             government funds and therefore potentially improper.

             HUD’s remedial action plan for its purchase card program does not
             effectively address its internal control weaknesses. Although HUD
             recognizes the need to improve its internal controls, its plan lacks specific
             commitment of time and resources to implement the proposed actions.
             Management’s commitment to improving internal control is necessary to
             reduce HUD’s vulnerability to future improper payments.

             Unless HUD’s management makes specific improvements to its review and
             approval process, requirements for documentation and record retention,
             monitoring process, and remedial action plan, HUD will continue to be
             susceptible to misuse of government funds. We are making
             recommendations in each of these areas.

             In commenting on a draft of this report, HUD agreed that further
             improvements are needed to strengthen the department’s purchase card
             controls and cited actions it is taking or plans to take to address five of our
             seven recommendations. Regarding the remaining two recommendations,
             we continue to believe that HUD needs to revise its remedial action plan to
             include the steps necessary to fully implement the proposed changes to
             strengthen internal controls. Also, HUD needs to follow up on the
             inadequately supported purchases identified during our audit.



Background   HUD’s purchase card program is part of the governmentwide commercial
             credit card program established to simplify federal agency acquisition
             processes by providing a low-cost, efficient vehicle for obtaining goods and
             services from vendors. According to Federal Acquisition Regulation (FAR)
             Part 13.201(b), government purchase cards should be used for
             micropurchases, which are purchases up to $2,500.4 The Department of the
             Treasury also requires agencies to establish approved uses and limitations


             4
                 Certain construction purchases are limited to $2,000.




             Page 3                                                      GAO-03-489 HUD Purchase Cards
on the types of purchases and spending limits. GSA administers the master
contract and HUD’s purchase card policy was derived from the GSA
governmentwide credit card program and tailored by HUD to meet its
specific needs. During the period of our review—October 2000 through
September 2001—HUD was operating under a policy dated October 1995.
HUD is currently updating its purchase card policy.

HUD’s purchase card policy states that purchase cards are intended to
procure general-purpose office supplies and other support needs. The
policy requires each approving official to develop a preapproval process to
ensure that all purchase card transactions are authorized and in
accordance with departmental and other federal regulations. The
approving official signifies that a cardholder’s purchases are appropriate by
reviewing and signing monthly statements.

As required by the Department of the Treasury, HUD’s purchase card policy
established approved uses and limitations on the types of purchases and
dollar amounts in its purchase card policy. This policy also includes a
detailed list of items that cardholders are prohibited from buying with their
government purchase cards. For example, purchase or rental of
nonexpendable property (generally defined as property of a durable nature
with a life expectancy of at least 1 year), meals, drinks, entertainment or
lodging, and construction costs exceeding $2,000 are generally prohibited.5
Fiscal year 2001 single purchase limits for individual cardholders, which
are required to be established by the approving officials and approved by
the departmental directors, ranged from $100 to $80,000, and their monthly
limits ranged from $100 to $300,000. HUD was in the process of
reevaluating and where applicable, lowering these limits. Bank One
currently services the purchase card program at HUD.

Internal control is a major part of managing an organization and is key to
ensuring proper use of government resources. As mandated by 31 U.S.C.
3512, commonly known as the Federal Managers’ Financial Integrity Act of
1982, the Comptroller General issues standards for internal control in the
federal government.6 These standards provide the overall framework for
establishing and maintaining internal control and for identifying and

5
  Under certain circumstances, some offices within HUD are permitted to purchase some of
the prohibited items in the policy.
6
  U.S. General Accounting Office, Internal Control: Standards for Internal Control in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).




Page 4                                                    GAO-03-489 HUD Purchase Cards
              addressing major performance and management challenges and areas at
              greatest risk of fraud, waste, abuse, and mismanagement. According to
              these standards, internal control comprises the plans, methods, and
              procedures used to meet missions, goals, and objectives.

              Control activities are the policies, procedures, techniques, and mechanisms
              that enforce management’s directives and help ensure that actions are
              taken to address risks. Control activities are an integral part of an entity’s
              planning, implementation, review, and accountability for stewardship of
              government resources and achieving effective results. They include a wide
              range of diverse activities. Some examples of control activities include
              controls over information processing, physical control over vulnerable
              assets, segregation of duties, proper execution of transactions and events,
              and access restrictions to and accountability for resources and records.



Scope and     To determine whether HUD’s existing controls over the purchase card
              program provided assurance that improper purchases would be detected or
Methodology   prevented in the normal course of business, we interviewed HUD staff and
              performed walk-throughs of the process. We reviewed HUD’s policies and
              procedures and prior GAO reports as well as reports by HUD’s Office of
              Inspector General (OIG) and independent auditors on this topic. To test
              the effectiveness of internal controls, we selected a stratified random
              sample of 222 purchase card transactions made during fiscal year 2001
              totaling over $1.8 million from a population of purchase card transactions
              totaling $10.6 million. To identify potential improper purchases we
              requested and obtained fiscal year 2001 transaction data from Bank One
              and used data mining techniques7 and other computer analyses to identify
              unusual transactions and payment patterns in HUD’s fiscal year 2001
              purchase card transaction data that may be indicative of improper
              purchases.

              In order to determine if fiscal year 2001 purchases were adequately
              supported and for a valid government use, we requested and analyzed
              supporting documentation for those transactions that we identified as
              potentially improper and questionable. While we identified some improper,



              7
                Data mining for improper payments involves using computer aided auditing techniques to
              highlight hidden patterns and relationships in data that help identify unusual transactions,
              which may be improper payments.




              Page 5                                                     GAO-03-489 HUD Purchase Cards
                         potentially improper, and questionable purchases, our work was not
                         designed to determine the full extent of improper purchases.

                         We requested comments from the Secretary of Housing and Urban
                         Development. We conducted our work from November 2001 through
                         November 2002 in accordance with 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.



HUD’s Internal           HUD staff did not comply with key elements of its purchase card policies
                         that would have helped minimize the risk of improper purchases, including
Controls over Purchase   (1) obtaining preapproval for purchases, (2) retaining adequate supporting
Cards Did Not Provide    documentation, (3) conducting supervisory review of all purchases, and
                         (4) periodically reviewing purchase card transactions to ensure compliance
Assurance That           with key aspects of the department’s policy. This created an environment
Improper Purchases       where improper purchases could be made with little risk of detection and
Would Be Prevented or    likely contributed to the $2.3 million in improper, potentially improper, and
                         questionable purchases we identified through our data mining efforts.
Detected
                         GAO’s Standards for Internal Control in the Federal Government8 states
                         that transactions and other significant events should be authorized and
                         executed only by persons acting within the scope of their authority. This is
                         the principal means of assuring that only valid transactions to exchange,
                         transfer, use, or commit resources and other events are initiated or entered
                         into. To address these internal control standards, HUD’s purchase card
                         policy contains fundamental controls designed to minimize the agency’s
                         exposure to improper purchases. HUD’s policy requires each approving
                         official to establish a preapproval process for each cardholder to ensure
                         that all purchases are appropriate and for official government use. Further,
                         HUD’s policy states that the approving official is required to review, certify,
                         and monitor all cardholder purchases to ensure that they have the
                         necessary approvals before purchases are made. Additionally, HUD’s
                         purchase card policy requires that approving officials review each
                         purchase along with the applicable supporting documentation in order to
                         certify that the purchases were appropriate and a valid use of government
                         funds.


                         8
                             GAO/AIMD-00-21.3.1.




                         Page 6                                            GAO-03-489 HUD Purchase Cards
Based on our review of HUD’s purchase card process, we found that most
approving officials had not established a preapproval process to ensure the
appropriateness of purchases before they are made. Only the Information
Technology Office routinely obtained authorization prior to purchasing
items with the purchase card. The approving official’s review of each
purchase card transaction is one of the most important controls to ensure
that all purchases are a valid use of government funds. We found that this
critical control was seriously compromised because of inadequate
supervisory review of supporting documentation by approving officials. To
test the effectiveness of this key internal control, we selected and tested a
stratified random sample of 222 purchase card transactions made during
fiscal year 2001. Of the total $1.8 million purchase card transactions
selected in the statistical sample,9 $1.4 million lacked adequate supporting
documentation for the approving official to determine the validity of the
purchase. Based on the results of this sample, we estimate that $4,753,25310
of the total sampled population of purchases ($10,590,461) made during
fiscal year 2001 lacked adequate supporting documentation.

Our Standards for Internal Control in the Federal Government states that
internal control activities help ensure that management’s directives are
carried out. One such activity is the appropriate documentation of
transactions. Internal control and all transactions and other significant
events need to be clearly documented, and the documentation should be
readily available for examination. All documentation should be properly
managed and maintained.

We determined that some of HUD’s records supporting the purchase card
program were not properly managed or maintained. For instance, HUD
could not provide a complete and accurate list of all approving officials.
When we attempted to contact cardholders and their respective approving
officials to request supporting documentation using the list the agency
provided, at least 28 approving officials provided written notification that
cardholders assigned to them according to HUD records were not their
responsibility. According to HUD officials, the purchase card program
administrator is not routinely informed of changes in approving officials
and often does not have the time to update the list regularly. Because HUD

9
    We randomly sampled 222 transactions from a total of 23,688 transactions.
10
  We are 95 percent confident that the estimate is between $4,074,446 and $5,432,059. This
estimate exceeds the tolerable amount in error of $1,059,046 (10 percent of the population
total of $10,590,461).




Page 7                                                      GAO-03-489 HUD Purchase Cards
does not know who should be approving purchases, there is an increased
risk of collusion as well as a general lack of accountability for ensuring the
proper use of government funds.

Another control activity that was available but not being used by HUD is
blocking Merchant Category Codes (MCC). Blocking categories of
merchants allows agencies to prohibit certain types of transactions that are
clearly not business related, such as purchases from jewelry stores or
entertainment establishments. During our review, we found that HUD was
not blocking any MCCs. These blocks are available as part of HUD’s
purchase card task order, under the GSA SmartPay Master Contract with
Bank One. Because HUD did not take advantage of this control, there were
no restrictions on the types of purchases employees could make during
fiscal year 2001—the period of our audit. As a result of our audit work, on
March 6, 2002, HUD began using selected MCC blocks.

Our Standards for Internal Control in the Federal Government states that
internal control should generally be designed to assure that ongoing
monitoring occurs in the course of normal operations. Internal control
monitoring should assess the quality of performance over time and ensure
that findings of audits and other reviews are promptly resolved. Program
and operational managers should monitor the effectiveness of control
activities as part of their regular duties.

HUD’s purchase card policy requires the department to perform annual
program reviews and report the results, including findings and
recommendations, to the purchase card program administrator. However,
HUD officials could locate only one such report. This November 2001
report, prepared by a consultant, identified problems that were similar to
the findings previously reported by the OIG in February 1999. 11 Both
reports documented problems with weak internal controls and insufficient
supporting documentation. The consultant’s report also noted that HUD
was not performing the periodic program reviews required by its policies
and that employees were making improper split purchases. HUD
management agreed with the findings in the OIG report and developed and
implemented an action plan to address the identified weaknesses.
According to HUD OIG staff, its recommendations were implemented and
have been closed since September 30, 2000. However, based on our


11
   Department of Housing and Urban Development Office of Inspector General, Commercial
Credit Card Program, 99-DP-166-0001 (Washington, D.C.: Feb. 1, 1999).




Page 8                                                 GAO-03-489 HUD Purchase Cards
                        findings, corrective actions taken at that time were not effective. The
                        results of our control testing indicate that HUD’s lack of internal control
                        over the purchase card process allows continued vulnerability to wasteful,
                        fraudulent, or otherwise improper purchases by employees using
                        government purchase cards.



Control Weaknesses      Poor internal controls created an environment where improper purchases
                        could be made with little risk of detection. We define improper purchases
Contributed to          as those purchases that include errors, such as duplicate charges and
Improper, Potentially   miscalculations; charges for services not rendered; multiple charges to the
                        same vendor for a single purchase to circumvent existing single purchase
Improper, and           limits—known as split purchases; and purchases resulting from fraud and
Questionable Purchase   abuse. We define questionable purchases as those that, while authorized,
Card Transactions       were for items purchased for a questionable government need as well as
                        transactions for which HUD could not provide adequate supporting
                        documentation to enable us to determine whether the purchases were
                        valid.

                        We identified 88 transactions totaling about $112,000 that were improper
                        split purchases. For example, one cardholder purchased nine personal
                        digital assistants and the related accessories from a single vendor on the
                        same day in two separate transactions just 5 minutes apart. Because the
                        total purchase price of $3,788 exceeded the cardholder’s single purchase
                        limit of $2,500, the purchase was split into two transactions of $2,388 and
                        $1,400, respectively. These improper split purchases violate provisions of
                        the Federal Acquisition Regulation and HUD’s own purchase card policy,
                        which prohibits splitting purchases into more than one transaction to
                        circumvent single purchase limits. We received documentation from some
                        cardholders confirming that they split their purchases because they
                        exceeded their single purchase limits, while one cardholder claimed the
                        vendor independently split the purchases.

                        We identified an additional 465 purchases totaling over $913,000 where
                        HUD employees made multiple purchases from a vendor on the same day.
                        Specifically, cardholders made multiple purchases totaling over $2,500 on
                        the same day from the same vendor. Although we were unable to
                        determine definitively whether these purchases were improper, based on
                        the available supporting documentation, these transactions share similar
                        characteristics with the 88 split purchases, and therefore we consider these
                        transactions to be potentially improper.




                        Page 9                                          GAO-03-489 HUD Purchase Cards
We also found 2,507 transactions, totaling about $1.3 million, with vendors
that would not routinely be expected to engage in commerce with HUD. In
order to determine whether these questionable purchases were a valid use
of government funds, we requested supporting documentation for each
purchase. HUD was able to provide us with adequate supporting
documentation for 1,324 transactions totaling about $412,000. The
department was unable, however, to provide adequate support for the
remaining 1,183 transactions (47 percent of total transactions requested)
totaling about $869,000 (67 percent of total dollars requested).
Additionally, we found 940 transactions, totaling about $554,000, where the
purchases were made either on a weekend or holiday. We requested
supporting documentation for each of these transactions. HUD was able to
provide us with adequate support for 645 transactions totaling about
$189,000. HUD was unable to provide adequate support for the remaining
295 transactions (31 percent of total transactions requested) totaling over
$364,000 (66 percent of total dollars requested). In these instances, we
were unable to determine what was purchased, for whom, and why.

Some examples of the questionable vendor transactions for which we did
not receive adequate support included over $27,000 to various department
stores such as Best Buy, Circuit City, Dillard’s, JCPenney, Lord & Taylor,
Macy’s, and Sears; over $8,900 to several music and audio stores including
Sound Craft Systems, J&R’s Music Store, Guitar Source, and Clean Cuts
Music; and over $9,700 to various restaurants such as Legal Sea Food, Levis
Restaurant, The Cheesecake Factory, and TGI Fridays. Additional
examples of questionable or potentially improper purchases we found
include $25,400 of “no show” hotel charges for HUD employees who did not
attend scheduled training and $21,400 of purchases from vendors who
appear to have been out of business prior to the purchase. Because HUD
was unable to provide adequate documentation for these purchases, we
consider them to be a questionable use of government funds and therefore
potentially improper purchases.

We also have concerns about HUD’s accountability for computer and
related computer equipment bought with purchase cards because of the
large volume of transactions for which it did not have appropriate
documentation. For example, our testing revealed that HUD employees
used their purchase cards to buy portable assets, such as computer
equipment and digital cameras, totaling over $74,500 for which they have
provided either no support or inadequate support. In HUD’s August 28,
2002, purchase card remedial action plan, discussed in more detail in the
next section, HUD acknowledged that items bought with purchase cards



Page 10                                         GAO-03-489 HUD Purchase Cards
                        were not being consistently entered in the department’s asset management
                        system. As a result, portable assets became vulnerable to loss or theft. In
                        our follow-up work, we plan to determine whether these items are included
                        in HUD’s asset management system and are being appropriately
                        safeguarded.



HUD’s Remedial Action   OMB’s April 18, 2002 memorandum, M-02-05, requires all agencies to
                        develop remedial action plans to manage the risk associated with purchase
Plan to Correct         card usage. Agencies were required to submit their plans to the Office of
Purchase Card           Federal Procurement Policy no later than June 1, 2002. HUD’s remedial
                        action plan was submitted to OMB on May 31, 2002. Our review of HUD’s
Program Deficiencies    remedial purchase card action plan found that it did not address all the
Lacked Specificity      weaknesses we identified. Although HUD’s plan includes steps for
                        resolving and preventing a number of potential problem areas, including
                        the need for (1) adequate monitoring, (2) more frequent internal audits,
                        (3) accountability and penalties for misuse of cards, (4) updating the
                        agency handbook, (5) spending limits in line with purchasing requirements,
                        (6) adequate program records, including proper approving officials, and
                        (7) entering property purchased with purchase cards in the inventory
                        system, the plan falls short in other key areas.

                        For example, the plan did not include requirements for (1) a robust review
                        and approval function for purchase card transactions, focusing on
                        identifying split purchases and other inappropriate transactions, (2) a
                        process to periodically assess the effectiveness of the review and approval
                        process, and (3) specific documentation and records to support the
                        purchase card transactions. In addition, the remedial plan lacked specifics
                        as to how and when HUD would implement it. On August 16, 2002, OMB
                        returned HUD’s remedial action plan and asked that a timeline be
                        incorporated.

                        HUD submitted a new plan to OMB on August 28, 2002. While the revised
                        remedial action plan includes a broad timeline for completion of each
                        objective, we found that it still does not adequately address key control
                        weaknesses we identified, in part because it lacks specific steps necessary
                        to fully address identified problem areas. In addition, the revised remedial
                        action plan does not require the program administration staff to begin
                        designing a monitoring plan to assess HUD’s compliance with key aspects
                        of its purchase card policy until the second quarter of fiscal year 2003 and
                        does not give an estimated date for when this key internal control will be
                        implemented. Additionally, the revised plan does not specifically identify



                        Page 11                                          GAO-03-489 HUD Purchase Cards
                      who is responsible for developing or implementing any of the proposed
                      improvements.



Conclusions           The problems we identified with HUD’s purchase card program leave the
                      agency vulnerable to wasteful, fraudulent, or otherwise improper
                      purchases. The remedial action plan prepared by HUD is an important first
                      step toward addressing the control weaknesses we identified. At the same
                      time, much still remains to be done to effectively control the inherent risk
                      in HUD’s purchase card program. HUD management will have to
                      effectively follow through on its implementation plan and expand the plan
                      to improve its review and approval process, requirements for
                      documentation and record retention, monitoring process, and remedial
                      action plan or HUD will continue to be susceptible to misuse of
                      government funds.



Recommendations for   To strengthen its internal control over the purchase card program and
                      reduce HUD’s vulnerability to improper purchases, we recommend that the
Executive Action      Secretary direct the Assistant Secretary for the Office of Administration to
                      take the following actions:

                      • implement the preapproval requirement in the existing purchase card
                        policy;

                      • develop and implement a robust review and approval function for
                        purchase card transactions, focusing on identifying split purchases and
                        other inappropriate transactions, and on performing a detailed review of
                        relevant supporting documentation for each purchase;

                      • update the list of approving officials and their designated cardholders
                        quarterly to ensure accuracy and completeness;

                      • establish specific requirements for documentation and records to
                        support all purchase card purchases;

                      • develop and implement a formal monitoring process to periodically
                        assess the effectiveness of the enhanced review and approval process;




                      Page 12                                          GAO-03-489 HUD Purchase Cards
                      • revise the remedial action plan for purchase cards to include the
                        specific steps necessary to fully implement the above five
                        recommendations; and

                      • follow up on the purchases we identified for which cardholders did not
                        provide adequate supporting documentation to determine the validity
                        and the propriety of the purchases.



Agency Comments and   In written comments on a draft of this report, which are reprinted in
                      appendix I, HUD agreed that further improvements are needed to
Our Evaluation        strengthen the department’s purchase card controls. Although HUD did
                      not specifically agree or disagree with our individual recommendations, the
                      actions being taken or planned by the agency address five of our seven
                      recommendations.

                      For example, in response to our recommendation to implement the
                      preapproval requirement in the existing purchase card program, HUD
                      stated that it has always had an effective preapproval process in its field
                      offices through the Automated Client Response System (ACRS). While we
                      agree that this system is available for use, during our review of supporting
                      documentation, we found no evidence that cardholders were utilizing this
                      system. To improve its preapproval process at its headquarters, HUD
                      stated that it has implemented the mandatory use of HUD Form 10.4,
                      Requisition for Supplies, Equipment, Forms, Publications, and
                      Procurement Services.

                      In addition, to enhance its review and approval function, HUD said it had
                      provided mandatory training in January 2003 to approving officials on the
                      procedures for reviewing and approving cardholder statements. HUD also
                      said that it was working with Bank One to provide training to cardholders
                      and approving officials on the use of the automated purchase card system
                      and the monitoring tools available through Bank One. HUD also stated that
                      as of January 2003, a review of the approving officials will be performed
                      and the Agency Program Coordinator will make the necessary changes
                      quarterly to ensure the list is accurate and complete.

                      To ensure proper supporting documentation is maintained for all
                      purchases, HUD also noted that it provided training to cardholders and
                      approving officials starting in January 2003. Additionally, HUD stated that
                      in October 2002, a staff person was assigned to begin performing planned
                      internal reviews and random spot reviews of purchase card transactions



                      Page 13                                          GAO-03-489 HUD Purchase Cards
with reports to be issued on an interim basis as the reviews are completed
to ensure that proper management and internal controls are maintained
over the authorization of purchases and use of the purchase card. These
actions will be helpful in strengthening the purchase card controls at HUD.

HUD did not state what, if any, action it planned to take regarding the two
remaining recommendations. Regarding our recommendation to revise its
remedial action plan, HUD stated that the plan adequately met the
requirements set forth by OMB. While the plan may address the elements
required by OMB, we do not believe it lays out an adequate approach for
resolving identified control weaknesses. As discussed in the report, the
plan lacks the specific steps necessary to fully implement the proposed
changes to strengthen internal controls.

Concerning follow-up on inadequately supported purchases we identified,
HUD stated that it had provided documentation when asked and would
provide more if necessary. On July 8, 2002, we provided HUD with a
compact disk containing all transactions for which we received either no
support or inadequate support during our fieldwork and allowed an
additional 3 weeks for the agency to provide the supporting
documentation. We have not received any additional supporting
documentation since then. It is our view that HUD has a fiduciary duty to
follow up on the inadequately supported purchases, which total about
$2.1 million and represent 57 percent of the total purchase transactions we
tested, to ensure their propriety. HUD offered several additional technical
comments, which have been incorporated into this report as appropriate.

This report contains recommendations to you. The head of a federal
agency is required by 31 U.S.C. 720 to submit a written statement on
actions taken on these recommendations to the Senate Committee on
Governmental Affairs and the House Committee on Government Reform
and Oversight within 60 days of the date of this report. You must also send
a written statement to the House and Senate Committees on
Appropriations with the agency’s first request for appropriations more than
60 days after the date of this report.


We are sending copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Governmental Affairs and the House
Committee on Government Reform, the Director of Office of Management
and Budget; and other interested parties. We also will make copies




Page 14                                         GAO-03-489 HUD Purchase Cards
available to others upon request. In addition, the report will be available at
no charge on the GAO Web site at http://www.gao.gov.

Should you or your staff have any questions on matters discussed in this
report, please contact me at (202) 512-8341 or by E-mail at
calboml@gao.gov.

Sincerely yours,




Linda Calbom
Director, Financial Management and Assurance




Page 15                                           GAO-03-489 HUD Purchase Cards
Appendix I

Comments from the Department of Housing                    Appendx
                                                                 ies




and Urban Development                                       Append
                                                                 x
                                                                 Ii




             Page 16           GAO-03-489 HUD Purchase Cards
Appendix I
Comments from the Department of Housing
and Urban Development




Page 17                                   GAO-03-489 HUD Purchase Cards
Appendix I
Comments from the Department of Housing
and Urban Development




Page 18                                   GAO-03-489 HUD Purchase Cards
Appendix I
Comments from the Department of Housing
and Urban Development




Page 19                                   GAO-03-489 HUD Purchase Cards
Appendix II

GAO Contacts and Staff Acknowledgments                                                      Appendx
                                                                                                  Ii




GAO Contacts      Dan Blair, (202) 512-9401



Acknowledgments   In addition to the contact named above, Sharon Byrd, Lisa Crye, Sharon
                  Loftin, and Julie Matta made key contributions to this report.




(190083)          Page 20                                       GAO-03-489 HUD Purchase Cards
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