This is the accessible text file for GAO report number GAO-03-489 
entitled 'HUD Purchase Cards: Poor Internal Controls Resulted in 
Improper and Questionable Purchases' which was released on April 11, 
2003.



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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:



GAO Highlights:



Highlights of GAO-03-489, a report to the Secretary of Housing and 

Urban Development



Why GAO Did This Study:



Due to HUDís increasing use of purchase cards and the inherent risk 

associated with their use, Congress asked GAO to audit the purchase 

card program concentrating on assessing internal controls and 

determining whether purchases being made are a valid use of government 

funds.



What GAO Found:



Significant internal control weaknesses in HUDís approximately

$10.6 million purchase card program resulted in improper, potentially 

improper, and questionable purchases in fiscal year 2001. Because of 

these internal control weaknesses, there was often inadequate 

documentation supporting many purchases GAO reviewed, and as a result, 

GAO was unable to determine whether these purchases were a valid use of 

government funds. GAO also found that HUDís remedial action plan for 

its purchase card program does not adequately address all the control 

weaknesses we identified.



These weaknesses created an environment in which improper purchases 

could be made with little risk of detection and likely contributed to 

the $2.3 million in improper, potentially improper, and questionable 

purchases GAO identified.  GAO found improper and potentially improper 

purchases totaling about $1 million where HUD employees either split or 

appeared to have split purchases into multiple transactions to 

circumvent cardholder limits.  GAO also found that HUD employees lacked 

adequate supporting documentation for about $1.3 million in 

questionable purchases including those from vendors not expected to 

engage in commerce with HUD, purchases made on holidays and weekends, 

and $74,500 in portable assets such as computer equipment and digital 

cameras.  In these instances, it was not possible to determine what was 

purchased, for whom, and why.  Some examples of these inadequately 

supported purchases are shown in the table below.



The problems GAO identified with HUDís purchase card program leave the 

agency vulnerable to wasteful, fraudulent, or otherwise improper 

purchases.  Unless HUD makes specific improvements to its review and 

approval process, requirements for documentation and record retention, 

monitoring process, and remedial action plan, the department remains 

susceptible to fraud, waste, and abuse.



What GAO Recommends:



GAO is making several recommendations to strengthen internal controls 

including:



* developing and implementing a robust review and approval function to 

include requiring and performing a detailed review of relevant 

supporting documentation for each purchase,

* establishing specific requirements for documentation and records to 

support each purchase, and

* developing and implementing a formal monitoring process to assess the 

effectiveness of the enhanced review and approval process.



HUD said that while it had made some improvements, it agreed that  it 

still needed to strengthen its purchase card controls. HUDís response 

listed actions to address five of the seven recommendations. GAO 

believes that HUD needs to address the remaining two recommendations as

well.



www.gao.gov/cgi-bin/getrpt?GAO-03-489.



To view the full report, including the scope and methodology, click on 

the link above. For more information, contact Linda Calbom at 

202-512-8341 or by E-mail at calboml@gao.gov.



[End of section]



Letter:



Results in Brief:



Background:



Scope and Methodology:



HUDís Internal Controls over Purchase Cards Did Not Provide Assurance 

That Improper Purchases Would Be Prevented or Detected:



Control Weaknesses Contributed to Improper, Potentially Improper, and 

Questionable Purchase Card Transactions:



HUDís Remedial Action Plan to Correct Purchase Card Program 

Deficiencies Lacked Specificity:



Conclusions:



Recommendations for Executive Action:



Agency Comments and Our Evaluation:



Appendixes:



Appendix I: Comments from the Department of Housing and Urban 

Development:



Appendix II: GAO Contacts and Staff Acknowledgements:



:



Letter April 11, 2003:



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 ďred tapeĒ for both the 

government and the vendor community. While we support the use of a 

well-controlled purchase card program to streamline the governmentís 

acquisition processes, it is important that agencies have adequate 

internal controls in place to protect the government from fraud, waste, 

and abuse.



Given HUDís increasing use of purchase cards and the inherent risk in 

their use, we were asked to assess HUDís purchase card 

activities.[Footnote 1] Specifically, we were asked to determine if (1) 

HUDís 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 associated with purchase card 

usage. Because of this memorandumís relevance, we expanded our work to 

include determining whether HUDís remedial action plan effectively 

addressed its internal control weaknesses.



Results in Brief:



Significant internal control weaknesses in HUDís 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,[Footnote 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 million[Footnote 3] 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 

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.



HUDís 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. Managementís commitment to improving internal control is 

necessary to reduce HUDís vulnerability to future improper payments.



Unless HUDís 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 departmentís 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:



HUDís 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.[Footnote 4] 

The Department of the Treasury also requires agencies to establish 

approved uses and limitations on the types of purchases and spending 

limits. GSA administers the master contract and HUDís 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.



HUDís 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 cardholderís purchases are 

appropriate by reviewing and signing monthly statements.



As required by the Department of the Treasury, HUDís 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.[Footnote 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 Managersí Financial 

Integrity Act of 1982, the Comptroller General issues standards for 

internal control in the federal government.[Footnote 6] 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. 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 managementís directives and help ensure that 

actions are taken to address risks. Control activities are an integral 

part of an entityís 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 Methodology:



To determine whether HUDís existing controls over the purchase card 

program provided assurance that improper purchases would be detected or 

prevented in the normal course of business, we interviewed HUD staff 

and performed walk-throughs of the process. We reviewed HUDís policies 

and procedures and prior GAO reports as well as reports by HUDís 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 techniques[Footnote 7] and other 

computer analyses to identify unusual transactions and payment patterns 

in HUDís 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, 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 Presidentís Council on Integrity and 

Efficiency.



HUDís Internal Controls over Purchase Cards Did Not Provide Assurance 

That Improper Purchases Would Be Prevented or Detected:



HUD staff did not comply with key elements of its purchase card 

policies that would have helped minimize the risk of improper 

purchases, including (1) obtaining preapproval for purchases, (2) 

retaining adequate supporting documentation, (3) conducting 

supervisory review of all purchases, and 

(4) periodically reviewing purchase card transactions to ensure 

compliance with key aspects of the departmentís policy. This created an 

environment where improper purchases could be made with little risk of 

detection and likely contributed to the $2.3 million in improper, 

potentially improper, and questionable purchases we identified through 

our data mining efforts.



GAOís Standards for Internal Control in the Federal Government[Footnote 

8] 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, HUDís purchase card policy contains fundamental 

controls designed to minimize the agencyís exposure to improper 

purchases. HUDís 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, HUDís 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, HUDís 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.



Based on our review of HUDís 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 officialís 

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,[Footnote 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 

$4,753,253[Footnote 10] 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 managementís 

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 HUDís 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 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 HUDís 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.



HUDís 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.[Footnote 11] Both reports documented problems with weak internal 

controls and insufficient supporting documentation. The consultantís 

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 findings, corrective actions taken at 

that time were not effective. The results of our control testing 

indicate that HUDís 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 Contributed to Improper, Potentially Improper, and 

Questionable Purchase Card Transactions:



Poor internal controls created an environment where improper purchases 

could be made with little risk of detection. We define improper 

purchases as those purchases that include errors, such as duplicate 

charges and miscalculations; charges for services not rendered; 

multiple charges to the same vendor for a single purchase to circumvent 

existing single purchase limits--known as split purchases; and 

purchases resulting from fraud and abuse. We define questionable 

purchases as those that, while authorized, 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 

cardholderís 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 HUDís 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.



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, Dillardís, JCPenney, 

Lord & Taylor, Macyís, and Sears; over $8,900 to several music and 

audio stores including Sound Craft Systems, J&Rís 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 ďno showĒ 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 HUDís 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 HUDís August 

28, 2002, purchase card remedial action plan, discussed in more detail 

in the next section, HUD acknowledged that items bought with purchase 

cards were not being consistently entered in the departmentís 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 HUDís asset management system and are being 

appropriately safeguarded.



HUDís Remedial Action Plan to Correct Purchase Card Program 

Deficiencies Lacked Specificity:



OMBís April 18, 2002 memorandum, M-02-05, requires all agencies to 

develop remedial action plans to manage the risk associated with 

purchase card usage. Agencies were required to submit their plans to 

the Office of Federal Procurement Policy no later than June 1, 2002. 

HUDís remedial action plan was submitted to OMB on May 31, 2002. Our 

review of HUDís remedial purchase card action plan found that it did 

not address all the weaknesses we identified. Although HUDís 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 HUDís 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 

HUDís 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 who is responsible for 

developing or implementing any of the proposed improvements.



Conclusions:



The problems we identified with HUDís 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 HUDís 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 Executive Action:



To strengthen its internal control over the purchase card program and 

reduce HUDís vulnerability to improper purchases, we recommend that the 

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;



* 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 Our Evaluation:



In written comments on a draft of this report, which are reprinted in 

appendix I, HUD agreed that further improvements are needed to 

strengthen the departmentís 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 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 agencyís 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 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,



Signed by:



Linda Calbom

Director, Financial Management and Assurance:



[End of section]



Appendixes :



Appendix I: Comments from the Department of Housing and Urban 

Development:



U. S. Department of Housing and Urban Development Washington, D.C. 

20410-3000:



OFFICE OF THE ASSISTANT SECRETARY FOR ADMINISTRATION:



MAR 28 2003:



Ms. Linda Calbom:



Director, Financial Management and Assurance U.S. General Accounting 

Office:



Washington, DC 20548:



Dear Ms. Calbom:



Thank you for the opportunity to provide comments on the draft report 

entitled ďDepartment of Housing and Urban Development: Poor Internal 

Controls Over Purchase Card Program Resulted in Improper and 

Questionable PurchasesĒ (GAO-03-489). We reviewed the report and agree 

that, while the Department made some program improvements, there is 

still a need to strengthen our purchase card controls. This response 

lists the actions that have been taken and are planned to improve HUDís 

Purchase Card Program. Additional comments on several statements in the 

report are also included.



Recommendation: Implement the pre-approval requirement in the existing 

purchase card policy.



Response: HUD has always had an effective pre-approval process in our 

field offices. The Automated Client Response System (ACRS) is used by 

field staff for purchase card transactions. Receipt of the ACRS request 

by the approving official officially initiates a purchase transaction. 

The request must contain an adequate description of the item or service 

requested including the quantity needed, the prices, and proper funds 

reservation. Additionally, the (ACRS) requisition must be properly 

approved by the appropriate officials prior to any purchase.



To improve the pre-approval process in Headquarters, the Department 

implemented the mandatory use of HUD Form 10.4, Requisition for 

Supplies, Equipment, Forms, Publications and Procurement Services. This 

form documents the item or service requested for purchase, the 

quantity, and total cost. In January 2003, during our annual mandatory 

purchase card training, all cardholders were instructed to complete HUD 

Form 10.4 and obtain proper approval from their budget office and the 

approving official prior to any purchase card transaction. Failure to 

follow these procedures would result in adverse actions.



Recommendation: Develop and implement a robust review and approval 

function for purchase card transactions, focusing on identifying split 

purchases and other inappropriate transactions, as well as performing a 

detailed review of relevant supporting documentation for each purchase.



Response: In January 2003, during our annual mandatory purchase card 

training, approving officials were instructed again on the procedures 

for reviewing each cardholderís statement. Approving officials were 

directed to verify: (1) the appropriateness of each item purchased; (2) 

that HUD received the purchased items; and (3) that the transactions 

were supported by the appropriate documentation. They were also 

instructed to review the purchase logs maintained by cardholders on a 

daily basis.



Our review and approval function will also be enhanced by the 

Departmentís increasing use of automated monitoring tools. Use of the 

servicing bankís automated system will greatly enhance the monitoring 

effort. For example, cardholders will be able to review and run reports 

on their transactions enabling them to quickly detect errors and 

initiate the dispute process. Approving officials will be able to 

manage and monitor more efficiently because they will have the ability 

to review the cardholdersí statement in real time versus 30 days after 

the purchase. This will enable them to check for split purchases and 

any other prohibited or questionable transactions. Further, using the 

automated purchase card system provides for daily monitoring of 

purchase transactions by Program Administration Staff, which can ensure 

that infrequent instances of long-term cardholder abuse do not occur.



This is a coordinated effort with the servicing bank to provide 

training to cardholders and approving officials on the use of the 

automated purchase card system. Implementation of this process is being 

phased in over a period of two years. It began in November 2002 with 

the training of the Field Program Coordinators. Training is scheduled 

throughout Fiscal Years (FYs) 2003 and 2004 with completion in FY 2004.



In October 2002, HUD assigned a staff person to perform planned 

internal reviews as well as conduct random spot reviews. Use of the 

automated monitoring allows for weekly, sometimes daily, checks for 

split purchases, adequate rotation of vendors, prohibited purchases, 

and any other questionable purchases.



Recommendation: Update the list of approving officials and their 

designated cardholders quarterly to ensure accuracy and completeness.



Response: In January 2003, a list of our current approving officials, 

cardholders, and respective spending limits was distributed to each 

Assistant Secretary within the Department. Each was asked to review the 

list for accuracy and submit corrections back to the Agency Program 

Coordinator. This task will be performed quarterly.



Recommendation: Establish specific requirements for documentation and 

records to support all purchase card purchases.



Response: As of January 2003, all Headquarters cardholders were 

required to complete HUD Form 10.4, which documents the items or 

services requested for purchase, the quantity and estimated cost. Each 

cardholder is required to get approval from their Budget Office for the 

availability of funds and the approving official prior to any purchase 

card transaction.



As previously stated, approving officials are required to review the 

purchase logs maintained by cardholders. In order to ensure consistency 

throughout the Department, we provided both approving officials and 

cardholders with an example of a standardized purchase log. We also 

gave very detailed instructions on the fields of information for the 

purchase logs and the types of supporting documentation, in addition to 

invoices and receipts, which should be kept on file for

each transaction. Failure to comply with this process would result in 

adverse actions.



Recommendation: Develop and implement a formal monitoring process to 

periodically assess the effectiveness of the enhanced review and 

approval process.



Response: As previously stated, in October 2002 the Department assigned 

a staff person to perform planned internal reviews as well as random 

spot reviews. This function will ensure that proper management and 

internal controls are maintained over the authorization and use of the 

purchase card transactions. Reports will be issued on an interim basis 

as reviews are completed.



Recommendation: Revise the remedial action plan for purchase cards to 

include the specific steps necessary to fully implement the above five 

recommendations.



Response: Our remedial plan has been revised to meet the guidelines set 

forth by the Office of Management and Budget (OMB). The plan was 

resubmitted to and approved by OMB.



Recommendation: Follow up on the purchases we identified for which 

cardholders did not provide adequate supporting documentation to 

determine the validity and propriety of the purchases.



Response: During the audit, cardholders provided documentation to 

support purchase card transactions when requested. If any additional 

information is needed, we will ensure it is provided.



Listed below are additional actions that have been taken or are planned 

to further enhance and strengthen controls over the purchase card 

program.



* Validation of Need for Purchase Card. The Department is performing 

periodic reviews to verify that the need for the card is still valid, 

the spending limits are appropriate for the purchasing need and the 

delegations of authority for single purchase limits above $2,500 are 

current. The Department performed the first review in November 2002. 

These reviews are scheduled to occur annually.



* Improve Program Guidance and Communication. The Department plans to 

create a handbook supplement that will summarize the cardholder and 

approving official duties and responsibilities and clearly define each 

level of accountability. The supplement will contain a comprehensive 

list of the penalties for various types of misuse, abuse, and fraud 

associated with the purchase card. It will also contain the doís and 

doníts of the purchase and approval process. The supplement will have 

to be certified that it has been read and understood by the cardholder 

and approving official. This task is scheduled to begin in the third 

quarter FY 2003.



* Travel and Purchase Charge Card Awareness Day. On March 26, 2003, the 

Office of Administration partnered with the Office of the Chief 

Financial Officer to host a Travel and Purchase Charge Card Awareness 

Day. HUD officials who participated in the event included our 

Secretary, Chief Financial Officer, and myself. The purpose of this 

event

was to remind and educate HUD employees on the dosí and doníts of using 

purchase and travel cards. During this event, cardholders were provided 

with: (1) purchase card procedures; (2) purchase card doís and doníts; 

and, (3) the purchase card dispute process. Representatives were also 

present from HUDís Office of the Chief Procurement Officer, the Office 

of Budget and Administrative Support, and the servicing bank to answer 

questions and to provide information to cardholders. This event shows 

the level of commitment that the Department has undertaken in making 

the Purchase Charge Card Program a top priority in our daily work. The 

Awareness Day agenda along with the packets that were passed out to 

cardholders are provided as attachments.



Although the Department still faces some challenges in this area, the 

work described above demonstrates that we are in the process of taking 

specific actions designed to enhance and improve our purchase card 

program.



Thank you once again for the opportunity to comment on the draft 

report. If you have any questions concerning this response, please 

contact Glennel M. Cooper, Director, Office of Budget and 

Administrative Support, at (202) 708-1583.



Sincerely,



Vickers B. Meadows:

Assistant Secretary for Administration:



Signed by Vickers B. Meadows:



Enclosure:



[End of section]



Appendix II: GAO Contacts and Staff Acknowledgments:



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):



FOOTNOTES



[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.



[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).



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



[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).



[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.



[8] GAO/AIMD-00-21.3.1.



[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).



[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).



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