This is the accessible text file for GAO report number GAO-04-986R entitled 'Lawrence Livermore National Laboratory: Further Improvements 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: Lawrence Livermore National Laboratory: Further Improvements Needed to Strengthen Controls Over the Purchase Card Program: The Lawrence Livermore National Laboratory (LLNL) located in Livermore, California is a government-owned, contractor-operated national laboratory of the Department of Energy's (DOE) National Nuclear Security Administration (NNSA).[Footnote 1] The University of California manages the lab under a cost-reimbursable contract with NNSA. The university 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 DOE and two NNSA contractor labs, including LLNL.[Footnote 2] This report summarizes the information provided during our June 14, 2004 briefing to your staff on these issues as they relate to Lawrence Livermore. The enclosed briefing slides highlight the results of our work and the information provided.[Footnote 3] Specifically, we reviewed LLNL'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 five recommendations for action--four related to actions needed to be taken by Livermore and one related to action needed to be taken by the NNSA contracting officer for Livermore. Results in Brief: LLNL had implemented a number of internal controls over its Pcard program and property management functions. However, weaknesses in LLNL's Pcard program increased the lab's risk of improper purchases. For example, lab policy did not require approving officials to verify purchases listed in the cardholder's transaction summary report against supporting documents, which compromised the effectiveness of the review process in detecting improper purchases. Of the 144 nonstatistically selected transactions obtained through data mining[Footnote 5] for fiscal year 2002 and the first half of fiscal year 2003, we found 15 (10 percent) totaling $23,923 lacked an invoice, credit receipt, or other sales documentation necessary to 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. Additionally, during our review period, the lab allowed supplemental labor personnel--staff that worked at the lab for a labor subcontractor and thus were not LLNL employees--to be issued Pcards, but did not have adequate controls in place to help ensure that the Pcards were returned if supplemental employees stopped working at the lab. Instead, it relied on the subcontractor to perform this function, with no oversight by lab employees. These control weaknesses likely contributed to the $97,348 in improper, wasteful, and questionable purchases we identified in our review.[Footnote 6] While relatively small compared to the approximately $120 million in purchase card activity that occurred during the review period, it demonstrates vulnerabilities from weak controls that could be exploited to a greater extent. Specifically, 87 of the 144 purchases in the nonstatistical selection we reviewed were for the purchase of controlled items that LLNL's policy requires to be preapproved. Thirty-two of these 87 transactions (37 percent) totaling $31,571 did not have any evidence of preapproval. We also identified two improper split purchases--that is, groups of two or more similar transactions that were split to circumvent single purchase limits-- consisting of 11 transactions totaling $28,137 from a statistical sample. Further, we considered 11 transactions totaling $9,945 to be wasteful because they were excessive in cost compared to other available alternatives and/or were of questionable need. For example, one cardholder spent $1,559 for a reclining leather chair. While the requester had a documented medical need for a special chair due to back problems, in a similar situation another cardholder purchased an orthopedic chair from a medical supply store for $599. We considered 12 transactions totaling $28,220 to be questionable because they were missing key documentation that would enable us or the lab to determine what was purchased, the quantity and cost of the items purchased, and whether the items purchased 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 LLNL's property management system. Out of 144 transactions reviewed, there were 6 transactions for the purchase of 26 accountable assets totaling $70,048. Of these 26 assets, one item totaling $3,481 had not been recorded in the property management system. In response to recent internal audit and other reviews, LLNL management has made a number of improvements to its internal controls that, if properly implemented, should further enhance controls over the 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 Administrator of NNSA direct Lawrence Livermore National Laboratory's Director to take the following four actions to strengthen internal controls over the purchase card program and reduce the lab's vulnerability to improper, wasteful, and questionable purchases. * Establish policies and procedures requiring that purchasers request and 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 to review transaction documentation before approving transactions listed on the cardholders' monthly transaction summary reports. This should include determining that there is independent support for the description, quantity, and price of individual items purchased, and that the cardholder obtained and documented any required preapprovals before purchase. * Consider modifying the Pcard system so that purchases that are not reconciled timely by the cardholder are charged to a temporary suspense account rather than to each cardholder's default account codes. * In conjunction with the implementation of the lab's online training and recertification for cardholders and approving officials, include in such training an emphasis on (1) the lab's policy to obtain preapprovals for all purchases of items listed on the controlled items and services list, and (2) consideration of best value in making and approving purchases. Because the controlled items and services list is frequently updated, the training should include reviewing the items on the current list and any recent changes. We also recommend that the Administrator of NNSA direct the NNSA 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 NNSA. Agency Comments: We obtained oral comments on a draft of this briefing from NNSA officials. They generally agreed with the findings and recommendations, and indicated that the lab has made a number of improvements to its controls in light of the problems identified at Los Alamos. We also obtained oral comments from LLNL officials, who disagreed with the recommendations to (1) require sales documentation such as a receipt or invoice and (2) require approving officials to review such documentation before approving purchases. They indicated sales receipts and invoices were not always available and did not feel they were necessary to support purchases. Instead, they felt that as long as the order amount entered into the Pcard system by the cardholder matched the total purchase amount charged by the bank, that was sufficient evidence to support that the purchase was proper. We disagree. The matching of the total dollar amount of the transaction to the order amount entered by the cardholder without independent evidence of the description, quantity, and price of individual items purchased does not provide sufficient evidence that the items purchased were proper. Because the cardholder enters the order, makes the purchase, and reconciles any differences, a reviewer would not be able to determine if the original order amounts were correct nor whether additional items were purchased under that order. Consequently, sufficient independent evidence for the individual items purchased and corresponding supervisory review of such evidence is necessary to help reduce the risk of improper purchases. The lab also provided technical and clarifying comments, which we incorporated as appropriate. Scope and Methodology: To determine if LLNL'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 LLNL's contract with NNSA and applicable provisions of the DOE Acquisition Regulation (DEAR) and the Federal Acquisition Regulation (FAR), performed walkthroughs of key processes, interviewed LLNL and NNSA 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 attractive assets. Based on the results, we (1) selected a statistical sample of 27 potential split purchases and tested to determine whether they were in fact split purchases, and (2) tested a nonstatistical selection of 144 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, 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, and performed a physical observation of selected assets to determine whether they could be properly accounted for. We requested oral comments on a draft of the enclosed briefing slides from the Administrator of NNSA 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, Estelle Tsay, and Eric Wenner. 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 NNSA contract. Although the lab's purchase cards are issued by the contractor, purchases charged to the NNSA contract are ultimately reimbursed and thus paid for by the federal government. Similarly, property purchased that is charged to NNSA 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] This is the net total after adjusting for one $525 purchase that was both improper because the cardholder failed to obtain a required preapproval and wasteful because it was excessive in cost. [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).