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Credit Cards of Federal Employees - The Case For Control
Guest Column | By Steve Lilienthal | June 14, 2006
Most agencies failed to verify that purchases using purchase cards were made with approved vendors.
Imagine giving your child a credit card to buy items for school, then finding out the child placed all kinds of other charges on it -- expensive clothes, fancy restaurants and the like. You discover your child has wracked up thousands of dollars in debt. You would be angered and rightfully so. That's why sensible parents carefully scrutinize the use of credit cards by their children.
If such common sense were employed by the Federal Government employees would have their use of purchase cards scrutinized with the same care. Failure by the Federal Government to provide effective oversight of travel cards and purchase cards by Federal employees is prompting Senator Charles Grassley (R-IA) to seek strong measures to guard against fraud and abuse, even if it means likely fraud cases be referred to the United States Attorney for evaluation of prosecution.
Grassley has made a name for himself by fighting waste and fraud, winning headlines in the 1980s by challenging the hundreds of dollars paid by the Pentagon for toilet seats and hammers. Senator Grassley commented several years ago, "One would think it would have made a lasting impression at the Pentagon. Apparently, not even being hit figuratively over the head with a $400 hammer knocked enough sense into the bureaucracy."
Grassley has been waging a long war against credit-card abuse by Federal employees, calling the misuse emblematic of "a culture of indifference" within the Federal Government toward spending taxpayer dollars. (Government-issued "travel cards" are provided to individuals; purchase cards may have one user or more. The "purchase cards" are supposed to be used to procure items and services to be used by the governmental agency. Unlike travel cards, the Government – not the user – is liable for expenses incurred by misuse of purchase cards. With travel-card misuse, defaults on payment by individuals are absorbed by the credit-card company. )
Government credit-card abuse was spotlighted earlier in this decade thanks to reports by the Government Accountability Office. An Associated Press story on "Government Credit Cards Growing," printed in USA TODAY on August 14, 2001, detailed charges of fraudulent use of government-issued credit cards in a number of Federal agencies. The article stated, "AP reported last month that 1.8 million credit cards used by Pentagon employees wracked up nearly $9 billion in debt in 2000. One bank alone was forced to write off $58 million in fraudulent or abusive purchases by military personnel." Nor was the problem confined to the Department of Defense and its agencies. An investigation by the Associated Press identified 15 agencies which had more credit-cards than employees. The proliferation of cards made it difficult to exert control over their use.
Grassley, then ranking Republican on the Senate Committee on Finance, requested a series of reports by the General Accounting Office (now the Government Accountability Office, aka GAO) examining policies in the Federal Government governing credit-card use. Study after study revealed abusive and fraudulent use of credit cards in the Air Force, Navy, Army and the Department of Housing and Urban Development. Prepared testimony on "Purchase Cards: Control Weaknesses Leave Army Vulnerable To Fraud, Waste, And Abuse," was delivered on July 17, 2002 before the House Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, described how purchase card use had run amok. GAO officials Gregory D. Kutz, Director of Financial Management and Assurance, and John Ryan, Assistant Director, Office of Special Investigations, found:
Our work at five Army major commands and one installation in each of the commands showed that the Army has not established an effective internal control environment. As the use of purchase cards has expanded, Army management has not emphasized internal control activities that can provide reasonable assurance that the individual transactions are for authorized purposes or that they adhere to legal and regulatory requirements. At the individual transaction level, we identified a substantial number of purchases for which cardholders and approving officials had not adhered to important internal control activities and that were not in accordance with valid requirements, policies, and procedures. The weaknesses we identified in the control environment and the breakdown in specific internal control activities resulted in potentially fraudulent and other improper transactions not being prevented or identified promptly.
GAO considers "fraudulent purchases" to be those which were not authorized or were not made for official purposes. Other examples of fraud include times when someone is using a stolen card or when the seller has billed for items that were not purchased.
One example of fraud surfaced by GAO investigators involved a military cardholder at Fort Benning who made 178 transactions totaling $30,000 for personal goods and cash advances. The transactions continued after the cardholder had retired; certification by an "approving official" served only as a "rubber stamp."
There are "improper transactions" that may receive approval but which violate law, regulation or policy. The purchase may not fulfill a true governmental purpose, is handled by an unauthorized dealer or evades actual limits on single purchases.
GAO cited a case at Fort Benning in which, rather than buy doors in bulk to obtain lower unit prices, doors destroyed during training exercises were replaced by individual purchases. GAO reported, "The [Dismounted Battlespace Battle Lab, a combat training unit] spent $111,721 in 84 transactions with one vendor to buy doors during a 10-month period in fiscal year 2001" rather than "execute a blanket purchase agreement."
Purchases of questionable relevance to the Army were also cited by GAO. Does the Army need fine Lenox and Royal Doulton china to supply its culinary arts events? Did Palm Pilots need to have their delivery rushed, necessitating a higher cost, when documents had indicated the devices were for inventory and would be distributed upon request by personnel?
Kutz, Ryan, and David E. Cooper, GAO Director of Acquisition and Sourcing Management, delivered testimony before the Senate Government Affairs Committee on April 28, 2004, on "Purchase Cards: Increased Management Oversight And Control Could Save Hundreds Of Millions of Dollars."
GAO emphasized many internal controls were ineffective. Government officials, other than the cardholder, frequently failed to obtain documentation in the form of packing slips, invoices or receipts, an invitation to either not having the material delivered or having it lost or stolen. GAO had reported "three Navy cardholders took advantage of this weakness and fraudulently purchased $500,000 of items for themselves before they were caught." Most corporations require purchases to be reviewed by an "approving official." However, GAO discovered that many transactions escaped such scrutiny or received a "rubber-stamp" of approval. A GAO sample of transactions by the Department of Housing and Urban Development discovered $4.8 million out of $10.6 million did not have the supporting documentation that would enable approving officials to verify their legitimacy.
Most agencies failed to verify that purchases using purchase cards were made with approved vendors. Supplies such as calendars and office supplies often can be purchased for less by using prison industries and nonprofit agencies which employ workers who are blind or have other disabilities. "Our [Department of Defense] and civilian agency audits found tens of millions of dollars of purchase card transactions that did not follow statutory or agency source of supply guidelines," GAO officials stated.
GAO stated that only 20 out of 120 cardholders in the Armed Services it had cited as having engaged in improper, abusive or questionable use of purchase cards had received disciplinary action. (Retraining is not considered disciplinary action.)
Some actions had been taken to achieve savings through more careful use and monitoring of purchase cards but GAO indicated a review of eight agencies – Agriculture, Army, Navy, Air Force, Interior, Justice, Transportation, and Veterans Affairs – indicated more stringent control and use of purchase cards could result in annual savings of $300 million.
Grassley, with Sen. Norm Coleman (R-MN), has introduced S. 3480 – the Government Credit Card Abuse Prevention Act of 2006. Rep. Joe Wilson (R-SC) is sponsor of the companion bill in the House – H.R. 5581.
Grassley's bill has been referred to the Committee on Homeland Security and Governmental Affairs. (Wilson's bill is before the House Committee on Government Reform.) The bills require the heads of executive agencies to establish and maintain strong internal controls over the use of purchase cards, including the assignment of an "approving official" to each user. Documentation of purchases is to be collected and retained "in accordance with standard Government policies on the disposition of records."
The Government Credit Card Abuse Prevention Act would require the United States Attorney to be notified in cases of suspected fraud. Senator Grassley explains, "Hopefully, this will send a clear message that such activity will not be tolerated so as to act as a deterrent for others." Grassley says the Government is starting to make progress in improving its management of purchase cards and travel charge cards. More needs to be done to "put the internal controls in place to make sure these problems don't occur in the first place."
No well-run corporation would allow the kind of abuse that has occurred within the Federal Government. Nor would they tolerate deliberate fraudulent and improper use of their money by employees. Better to stop waste before it starts. Stronger internal procedures governing the use of purchase cards and travel charge cards, backed up by requirements of true oversight and accountability, can do just that.
Steve Lilienthal is Director of the Center for Privacy and Technology Policy at the Free Congress Foundation.
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