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entitled 'Pacific Northwest National Laboratory: Enhancements Needed to 
Strengthen Controls Over the Purchase Card Program' which was released 
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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 calboml@gao.gov or 
engd@gao.gov. 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

[1] 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.

[2] 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.

[3] Separate briefings were provided for each of the labs reviewed, 
which we also summarized in separate letters. 

[4] 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.

[5] 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.

[6] 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.

[7] U.S. General Accounting Office, Standards for Internal Control in 
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 
1999). 

[8] Internal Control--Integrated Framework, Committee of Sponsoring 
Organizations of the Treadway Commission (COSO).