Investigation finds Army personnel 
used government charge cards at strip clubs 

DAVID PACE / AP 17jul02

[GAO Report below]

WASHINGTON -- Some 200 Army personnel used government charge cards to get $38,000 in cash that they spent on "lap dancing and other forms of entertainment" at strip clubs near military bases, Sen. Charles Grassley said Wednesday.

Citing a congressional investigation, Grassley, R-Iowa, said the soldiers used their military identification and government travel card to obtain cash from adult entertainment bars and then spent the money there.

The General Accounting Office, which conducted the investigation, said the clubs charged a 10 percent fee to supply the soldiers with cash, billing their travel cards for the full amount as a restaurant charge.

An Army spokesman said he did not know what, if any, disciplinary action had been taken against the 200 individuals.

But the GAO said it found "little evidence of documented disciplinary action against Army personnel who misused the card, or that Army travel program managers or supervisors were even aware that Army personnel were using their travel cards for personal use."

The GAO report is the latest volley in a two-year congressional probe of the Pentagon's credit card program. The program is huge. Last year, the 1.4 million defense employees used government travel cards for $2.1 billion in travel purchases; another 230,000 Defense Department workers used purchase cards for $6.1 billion in goods and services.

Defense Secretary Donald H. Rumsfeld created a special task force earlier this year to look into credit card abuses, and it made 25 recommendations last month to tighten controls over cards and to increase prosecutions of those who abuse or misuse them.

In its Army investigation, the GAO also found that government cards had been used for personal purchases of more than $100,000 for computers and other electronic equipment, $45,000 for cruises, and $7,373 for closing costs on a home.

Investigators also questioned purchases on government cards of fine china, cigars, wine, a trip to Las Vegas, Internet and casino gambling, and two pictures of Elvis Presley purchased at his Graceland mansion in Memphis.

Rep. Jan Schakowsky, D-Ill., one of the House government reform leaders who requested the GAO investigation, said the findings point to an overall management failure at the Pentagon.

"Financial management at the Department of Defense is as bad or worse as at Enron, WorldCom or any other corporation that has misled the public," she said.

James T. Inman, the Army's acting deputy assistant secretary, said the service is "aggressively correcting" the problems uncovered by the GAO investigation.

In one instance, the GAO found government charge cards were used for a $30,000 purchase of 80 Palm Pilots at the Pentagon's top procurement office. An Internal e-mail said there was a need "to get enough goodies for everyone."

Grassley said the e-mail sends a message that "we can splurge at the taxpayers' expense and not worry about it. It's unfortunate that such an attitude is being nurtured in the purchase card 'czar's' front office. It sends the wrong message to the troops in the field."

The new GAO report is the first to focus on the Army, which has more than 430,000 travel cardholders and more than 100,000 purchase cards in use. The Army's charge bill last year totaled more than $3 billion.

Investigators audited purchase card transactions in five major Army commands, including detailed work at Fort Benning and Fort Gordon in Georgia, Fort Hood and the Army National Guard in Texas, and the Soldier, Biological and Chemical Command in Massachusetts.

The travel card audits were conducted at two separate commands at Fort Bragg in North Carolina plus Fort Drum in New York and the California National Guard.

The GAO said the Army has worked to maximize the use of purchase cards to save money by reducing procurement costs, but "has not focused equal attention on internal control."

Auditors said they found that 40 percent to 86 percent of the monthly purchase charge bills at the five bases had not been reviewed by managers to ensure charges were properly documented.

The GAO also found 1,200 Defense Department personnel had written bad checks to pay their government travel card bills. In examining the worst 105 cases, the GAO found 40 of those cardholders hold secret, top secret or higher security classifications. Bank of America, which runs the Army charge card program, had to write off nearly $150,000 in bad debts on those 40 accounts.

Army Purchase Cards:
Control Weaknesses Leave Army Vulnerable to Fraud, Waste, and Abuse

GAO-02-732 Army Purchase Card Control 15jul02

GAO-02-732 Army Purchase Card Control
United States General Accounting Office
Washington, D.C. 20548

June 27, 2002

The Honorable Charles E. Grassley
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Stephen Horn
Chairman
The Honorable Janice D. Schakowsky
Ranking Minority Member
Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations
Committee on Government Reform
House of Representatives

The Department of Defense (DOD) is promoting departmentwide use of purchase cards for obtaining goods and services. It reported that for the year ended September 30, 2001, about 230,000 cardholders used purchase cards to make about 10.7 million transactions at a cost of over $6.1 billion. Purchase cards are to be used exclusively for government-related purchases. Purchase card transactions include acquisitions at or below the $2,500 micropurchase threshold, commercial training requests valued at or below $25,000, and payments on contracts. The use of purchase cards has dramatically increased in past years as agencies have sought to eliminate the lengthy process and paperwork long associated with making small purchases. 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.

We support the use of a well-controlled purchase card program to streamline the government’s acquisition processes. However, it is important that agencies have adequate internal control in place to protect the government from fraud, waste, and abuse. In July 2001 and March 2002, we testified on significant breakdowns in internal control over purchase card transactions at two Navy sites in San Diego, California.1 This work identified a weak internal control environment; ineffective internal control; and potentially fraudulent,2 improper, and abusive purchases.

As a result of our work at the two Navy sites and continuing concern about fraud, waste, and abuse in DOD’s purchase card program, you requested that we expand our audits of purchase card controls. As the initial part of this requested work, this report focuses on the Army, which has the largest purchase card program in DOD. In fiscal year 2001, the Army had about 109,000 cardholders, 4.4 million transactions, and $2.4 billion in purchases. We plan to report to you separately on the results of our audits of the Navy and Air Force purchase card programs.

The objective of our audit of the Army’s purchase card program was to assess the adequacy of internal control over the authorization, purchase, and payment of purchase card transactions during fiscal year 2001. Specifically, we addressed whether (1) the Army’s overall control environment and management of the purchase card program were effective, (2) the Army’s key internal control activities operated effectively and provide reasonable assurance that purchase cards were used appropriately, and (3) indications existed of potentially fraudulent, improper, and abusive and questionable transactions. We audited the Army’s internal control policies, procedures, and activities at five major commands that account for about 66 percent of total purchases and 62 percent of total transactions. At one installation in each of the commands, we tested a statistical sample of purchase card transactions and conducted other audit work to evaluate the design and implementation of key internal control procedures and activities. The results of our review of the transactions comprising the statistical samples can only be projected to the individual installation at which we performed the testing and cannot be used to project to the command level or to the Army as a whole. The cumulative results of all our work offer significant perspective on the adequacy of the design and implementation of purchase card program internal control within the Army.

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1 U.S. General Accounting Office, Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO-01-995T (Washington, D.C.: July 30, 2001) and Purchase Cards: Continued Control Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO-02-506T (Washington, D.C.: Mar. 13, 2002).

2 For this report, we limit the use of the term “fraudulent” to describe those instances in which someone has been convicted, or punished under the Uniform Code of Military Justice, of fraudulent activity. In all other circumstances we use the phrase “potentially fraudulent.”

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We also looked for indications of potentially fraudulent, improper, and abusive or questionable purchases as part of our statistical sampling and through nonrepresentative selections of transactions using data mining of fiscal year 2001 transactions. Our data mining included identifying transactions with certain vendors that had a more likely chance of selling items that would be unauthorized or that would be personal items. Because of the large number of transactions that met these criteria, we did not look at all potential abuses of the purchase card. While we identified some potentially fraudulent, improper, and abusive or questionable purchases, our work was not designed to identify, and we cannot determine, the extent of potentially fraudulent, improper, and abusive or questionable purchases. See appendix I for further details on our scope and methodology.

We requested comments from the Secretary of Defense or his designee on a draft of this report. We received comments from the Acting Director of the Army Contracting Agency dated June 17, 2002, and have reprinted those comments in this report. We conducted our audit work from June 2001 through April 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, as adapted for GAO’s work.

Results in Brief

The purchase card program offers significant benefits; however, a weak overall control environment and breakdowns in key internal control activities leave the Army vulnerable to potentially fraudulent, improper, and abusive purchases. Our work at five Army major commands and one installation in each of the commands showed that the Army has not established an effective internal control environment. As the use of purchase cards has greatly expanded, Army management has not emphasized internal control activities that can provide reasonable assurance that the individual transactions are for authorized purposes or that they adhere to legal and regulatory requirements. At the individual transaction level, we identified a substantial number of purchases for which cardholders and approving officials had not adhered to important internal control activities and that were not in accordance with valid requirements, policies, and procedures.

A major contributor to the weak overall control environment and weak program management is informal and incomplete operating procedures. While existing governmentwide, DOD-wide, and Army-wide procurement regulations are the foundation for the Army purchase card program, the Army has not issued servicewide regulations or operating procedures, but relies on ad hoc memorandums and other informal guidance. This informal guidance does not provide the purchase card program with consistent, comprehensive policies and procedures to guide those implementing the program. For example, the scope of responsibilities and specific duties of installation-level program coordinators, the primary focal points for managing the purchase card program, are not addressed in Army guidance. The major commands and installations we audited had established policies and procedures; however, these policies and procedures were inconsistent between commands and did not provide adequate guidance on key control environment issues.

Another major contributor to the weak overall control environment is ineffective oversight of the purchase card program. The Army purchase card program did not have the infrastructure—guidance and human capital—needed to implement the oversight activities that are essential for effective internal control. Army and major command management levels did not conduct meaningful oversight activities of their own and did not provide direction to installation-level program coordinators on needed oversight activities. At the local installation level, the sporadic oversight activities performed did not provide reasonable assurance that internal control procedures and activities were followed. For example, program coordinators did not routinely perform annual reviews of approving officials’ activities as required, and the reviews that were made were seldom documented. Program coordinators told us that they did not have sufficient human capital to conduct required annual reviews or to define and conduct other needed oversight activities. In addition, approving officials’ activities usually were considered “other duties as assigned” and were not the primary duties on which the officials were evaluated and rewarded. They generally said that many other duties were of a higher priority than monitoring purchases and reviewing monthly cardholder statements.

We identified a significant breakdown in key internal control activities. Control activities tested were (1) advance approval of purchases, (2) receiving of goods and services by someone other than cardholders, (3) approving officials reviewing cardholders’ monthly reconciled bills and supporting documentation, and (4) whether transaction files contained invoices that supported the transactions. Our statistical sample results at the five installations showed significant failure rates for all four tested control activities. The high failure rate—40 to 86 percent—for approving official review is of particular concern because it is perhaps the most important control activity.

The weaknesses we identified in the control environment and the breakdown in specific internal control activities had specific consequences—potentially fraudulent, improper, and abusive and questionable transactions were not being prevented or identified promptly. Potentially fraudulent transactions are (1) cardholder purchases that are intended for personal benefit, (2) unauthorized transactions by vendors, or (3) other purchases using compromised accounts. At three of the five installations, we found that potentially fraudulent transactions went undetected because of breakdowns in internal control. For example, Eisenhower Army Medical Center, at Fort Gordon, Augusta, Georgia, had two fraud cases that were not identified by appropriate approving official review. Each case involved tens of thousands of dollars, with cardholders purchasing jewelry, clothing, and other items for their personal use. Another fraud case under investigation at the end of our fieldwork involved purchases of over $100,000 of electronic equipment, computers, and other items. The actions of the cardholder, approving official, and other service members were being investigated. In our Army-wide data mining,3 potentially fraudulent transactions include the purchase of escort services and the use of a compromised account to purchase athletic shoes.

We also identified a number of improper transactions—meaning those in which the purchase was intended for government use but was not permitted by law, regulation, or DOD policy—involving clothing, food, or other items. For example, at the Soldier, Biological and Chemical Command – Natick, in Natick, Massachusetts, the purchase of L.L. Bean Gore-Tex parkas for 10 civilian employees at a cost of $2,400 was not an appropriate use of federal funds because the parkas were not treated solely as government property available only for official use. Other improper purchases included meals, fruit baskets, luggage, and services. We also identified as improper numerous purchases in which cardholders made a substantial number of purchases of similar items (split purchases) to circumvent the legislatively mandated micropurchase limit of $2,500 for a single purchase. Using contracts for such purchases would comply with procurement requirements and could result in lower prices for the purchased items.

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3 In our work, data mining involved the manual or electronic sorting of purchase card data to identify and select for further follow-up and analysis transactions with unusual or questionable characteristics.

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We identified abusive and questionable transactions at each of the five installations we audited as well as in our Army-wide data mining. Abusive transactions are those that were authorized, but the items purchased were at an excessive cost or for a questionable government need, or both. Questionable transactions were those that cardholders purchased items for which there was not a reasonable and/or documented justification. Examples of abusive and/or questionable purchases included sunglasses, fine china, cigars, wine, and a $2,250 tree. The purchase card transaction files we examined generally did not include explanations or advance approvals that would justify these types of purchases and permit a determination that the purchases were not improper or abusive. Explanations and advance approvals for purchases of potentially questionable items could increase visibility and oversight of such purchases and reduce the potential for abusive and wasteful spending.

During our audit, the commands we audited began to address many of the deficiencies we identified and implement many of the recommendations applicable at their levels. In addition, DOD established a task force to develop recommendations to improve procedures.

This report contains recommendations to the Army to improve the overall control environment for the Army’s purchase card program; to strengthen key internal control activities; and to increase attention to preventing potentially fraudulent, improper, and abusive and questionable transactions. We also recommend that the task force assess the DOD-wide applicability of the recommendations addressed to the Army. In written comments on a draft of this report, DOD concurred with our recommendations and described actions completed, under way, or planned to implement them. Although it concurred with our recommendation for an Army-wide standard operating procedure directing the implementation of specific internal control activities, DOD took exception to broad application of two of the five recommended activities—advance approval and independent receiving. We agree that not all purchases require advance approval and independent receiving. However, we continue to believe these are important control activities and that the Army-wide standard operating procedure should (1) discuss the criteria for determining when these activities are applicable and (2) articulate guidelines for implementing them.

• For full report visit the GAO website at www.gao.gov