This is the accessible text file for GAO report number GAO-04-988R entitled 'Pacific Northwest National Laboratory: Enhancements Needed to Strengthen Controls Over the Purchase Card Program' which was released on September 07, 2004. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. August 5, 2004: Congressional Requesters: Subject: Pacific Northwest National Laboratory: Enhancements Needed to Strengthen Controls Over the Purchase Card Program: The Pacific Northwest National Laboratory (PNNL) located in Richland, Washington, is a government-owned, contractor-operated Department of Energy (DOE) national laboratory. The Battelle Memorial Institute manages the lab under a cost-reimbursable contract with DOE. Battelle is paid a management fee to operate the lab and is reimbursed for all allowable costs charged to the contract. During the fall of 2002, the Federal Bureau of Investigation began investigating two Los Alamos National Laboratory employees for alleged misuse of lab credit cards. Other allegations of theft and misuse of government funds at Los Alamos soon followed. In light of the problems identified at Los Alamos, you asked us to review selected procurement and property management practices at two NNSA[Footnote 1] and two DOE contractor labs, including PNNL.[Footnote 2] This report summarizes the information provided during our June 14, 2004 briefing to your staff on these issues as they relate to PNNL. The enclosed briefing slides highlight the results of our work and the information provided.[Footnote 3] Specifically, we reviewed PNNL's purchase card program and property management practices to determine whether (1) internal controls over the lab's purchase card (Pcard) program provided reasonable assurance that improper purchases would not occur or would be detected in the normal course of business, (2) purchase card expenditures made under the contract properly complied with lab policies and other applicable requirements and were reasonable in nature and amount and thus were allowable costs payable to the contractor under the contract, and (3) property controls over selected asset acquisitions provided reasonable assurance that accountable assets would be properly recorded and tracked.[Footnote 4] Our review covered selected transactions that occurred during fiscal year 2002 and the first half of fiscal year 2003 (October 1, 2001, through March 31, 2003), which were the most current data available when we requested the data for our review. This report also includes four recommendations for action--three related to actions needed to be taken by PNNL and one related to action needed to be taken by the DOE contracting officer for PNNL. Results in Brief: The lab had established a number of internal controls to help ensure that improper purchases would not occur or would be detected in the normal course of business. However, we identified additional control areas in the lab's Pcard program that need to be strengthened in order to further reduce the risk of improper purchases. For example, during the majority of our review period, the Pcard administrator and her assistant--who were responsible for monitoring cardholder compliance with Pcard policies, requesting new cards, and authorizing spending limit increases--were also cardholders. This created a conflict of interest that could compromise program oversight. In addition, of the 148 nonstatistically selected Pcard transactions obtained through data mining[Footnote 5] for fiscal year 2002 and the first half of fiscal year 2003, we found 12 (9 percent) of the transactions totaling $21,834 lacked sufficient documentation such as an invoice, credit receipt, or other sales documentation necessary to fully validate the dollar amount, quantity, and nature of the items purchased. The lack of such documentation minimizes the effectiveness of supervisory review of Pcard transactions. We also identified $104,250 of improper, wasteful, and questionable purchases in our review of transactions selected on a statistical and nonstatistical basis. While relatively small compared to the approximately $44 million in purchase card activity that occurred during the review period, it demonstrates areas where additional enhancements in controls are needed. Specifically, we found improper purchases consisting of: * Ten groups of split purchases--that is, groups of two or more similar transactions that were split to circumvent single purchase limits-- consisting of 21 transactions totaling $81,448 from a statistical sample. Based on our audit work, we estimate that $777,766 of total fiscal year 2002 and the first half of fiscal year 2003 purchase transactions identified as potentially split, were split purchases.[Footnote 6] * Seven transactions totaling $7,956 that were improperly charged to cardholders' accounts by someone other than the cardholder, contrary to lab policy. These were for purchases at vendors with whom the cardholders had a preexisting account. * Eleven transactions totaling $8,534 that were improper because they were unallowable under the contract or were prohibited from being purchased with a Pcard. For example, one transaction for $1,277 was for catering services that were unallowable at the time of purchase. We also identified three transactions totaling $693 that we considered wasteful because they were excessive in cost when compared to other alternatives and/or were of questionable need and four transactions totaling $5,619 that we considered questionable because they were missing key documentation that would enable us or the lab to determine what items were purchased and whether they were proper and reasonable. Because we only tested a small portion of the transactions we identified that appeared to have a higher risk of fraud, waste, or abuse, there may be other improper, wasteful, and questionable purchases in the remaining untested transactions. Accountable assets we tested generally were properly accounted for and tracked in PNNL's property management system. Of the 32 accountable assets totaling $52,753 that were in the test population, 3 assets totaling $4,700 had not been recorded in the property management system. The lab has made a number of recent policy and procedural changes that, if properly implemented, should help improve internal controls over its Pcard program. However, additional corrective actions are needed to address weaknesses identified. Recommendations for Executive Action: In order to address the issues identified in our review, we recommend that the Secretary of Energy direct the Pacific Northwest National Laboratory's Director to take the following three actions to strengthen internal controls over the purchase card program and reduce the lab's vulnerability to improper, wasteful, and questionable purchases. * Cancel purchase card accounts for cardholders who also perform oversight functions over the purchase card program to help ensure appropriate independence and separation of duties between these functions. * Establish policies and procedures requiring that purchasers maintain a copy of the detailed sales receipt, invoice, or other independent support showing the description, quantity, and price of individual items purchased. * Require approving officials, during their review of cardholder transaction documentation, to ensure that the cardholders obtained a sales receipt or invoice to support each purchase, and that the cardholder obtained and documented any required preapprovals before purchase. We also recommend that the Secretary of Energy direct the DOE contracting officer for the lab to review the improper, wasteful, and questionable items we identified to determine whether any of these purchases should be repaid to DOE. Agency Comments: We met with laboratory and local DOE officials to obtain their oral comments on a draft of this briefing. They generally agreed with our findings and recommendations and indicated that the lab has taken or will take action to address the issues identified. For example, lab officials indicated that while the practice has been to provide the most complete source documentation available, they agreed to formalize the requirement and plan to work with the contracting officer to establish the most complete level of documentation required to support Pcard transactions. They also indicated they would emphasize this and other requirements during training. In addition, the lab cancelled the Pcard administrator's assistant's Pcard effective June 7, 2004. The lab also provided technical and clarifying comments, which we incorporated as appropriate. Scope and Methodology: To determine if PNNL's internal controls over its Pcard program provided reasonable assurance that improper purchases would not occur or would be detected in the normal course of business, we reviewed PNNL's contract with DOE and applicable provisions of the DOE Acquisition Regulation (DEAR) and the Federal Acquisition Regulation (FAR), performed walkthroughs of key processes, interviewed PNNL and DOE management and staff, and compared the results to the lab's policies and GAO's Standards for Internal Control in the Federal Government.[Footnote 7] These standards provide the overall framework for establishing and maintaining internal control and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement and are based on internal control guidance for the private sector.[Footnote 8] To determine whether Pcard expenditures complied with lab policies and other applicable requirements and were reasonable in nature and amount, we performed data mining on fiscal year 2002 and the first half of fiscal year 2003 Pcard transactions to identify indicators of potential noncompliance with policies and procedures and to identify purchases that appeared to be from unusual vendors, purchases made on weekends, during the holidays, or at fiscal-year end, and purchases of sensitive assets. Based on the results, we (1) identified 211 potential split purchases consisting of 1,338 transactions. From these, we selected a statistical sample of 27 potential split purchases consisting of 75 transactions and tested to determine whether they were in fact split purchases, (2) used a nonstatistical selection of 25 transactions made by cardholders while on leave or by former employees to determine whether they were proper purchases, and, (3) tested a nonstatistical selection of 148 transactions for evidence of supervisory review and approval, adequacy of supporting documentation, and reasonableness of the purchases. To determine if property controls over selected asset acquisitions provided reasonable assurance that accountable assets would be properly recorded and tracked, we performed walkthroughs to observe property controls, reviewed property management policies and procedures, tested accountable property items selected in the nonstatistical selection to determine whether these assets had been entered into the lab's property system prior to our review, and performed data mining on the property database to identify possible database errors or inaccuracies such as property assigned to terminated employees and multiple property items with the same serial number. We requested oral comments on a draft of the enclosed briefing slides from the Secretary of Energy or his designee and have included any comments as appropriate in the letter and enclosed slides. While we identified some improper, wasteful, and questionable purchases, our work was not designed to determine the full extent of such purchases. We conducted our work on all four labs from March 2003 through May 2004 in accordance with generally accepted government auditing standards. This report is available at no charge on our home page at http:// www.gao.gov. If you have any questions about this report, please contact me at (202) 512-9508 or Doreen Eng, Assistant Director, at (206) 287-4858. You may also reach us by e-mail at email@example.com or firstname.lastname@example.org. Additional contributors to this assignment were Rick Kusman, Delores Lee, Kelly Lehr, Diane Morris, Eileen Peguero, Estelle Tsay, and Eric Wenner. Signed by: Linda M. Calbom: Director, Financial Management and Assurance: Enclosure: List of Requesters: The Honorable Sherwood Boehlert, Chairman: The Honorable Bart Gordon, Ranking Minority Member: Committee on Science: House of Representatives: The Honorable Joe Barton, Chairman: Committee on Energy and Commerce: House of Representatives: The Honorable Jerry Costello: The Honorable James Greenwood: The Honorable Billy Tauzin: House of Representatives: Enclosure: [See PDF for image] [End of slide presentation] FOOTNOTES  The National Nuclear Security Administration (NNSA) was created in fiscal year 2000 as a separately organized agency within DOE. As part of its national security mission, NNSA has responsibility for the institutional stewardship of three national security laboratories.  The four labs we reviewed were DOE's Lawrence Berkeley National Laboratory and Pacific Northwest National Laboratory, and NNSA's Lawrence Livermore National Laboratory and Sandia National Laboratories.  Separate briefings were provided for each of the labs reviewed, which we also summarized in separate letters.  Throughout this document, references to purchases and transactions refer to those made by the contractor employees of the lab that are charged to the DOE contract. Although the lab's purchase cards are issued by the contractor, purchases charged to the DOE contract are ultimately reimbursed and thus paid for by the federal government. Similarly, property purchased that is charged to DOE becomes government property.  Data mining applies a search process to a data set, analyzing for trends, relationships, and interesting associations. For instance, it can be used to efficiently query transaction data for characteristics that may indicate potentially improper activity.  The total dollar value of the population of 211 potentially split purchases identified from data mining was $1,794,477. We are 95 percent confident that the total dollar value of actual split purchases was between $462,787 and $1,092,745.  U.S. General Accounting Office, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).  Internal Control--Integrated Framework, Committee of Sponsoring Organizations of the Treadway Commission (COSO).