	Critical Internal Controls Were Ineffective

Our review found that VHA’s internal controls were not designed to provide  reasonable assurance that improper purchase card and convenience check  purchases would not occur or would be detected in the normal course of  business. Generally, we found that internal controls were not operating as intended  because cardholders and approving officials were not following operating  guidance governing the program, and in the case of documentation and  vendor-offered discounts, they lacked guidance. We also found instances where purchase card and convenience check  transactions lacked key supporting documentation. Noncompliance with Purchasing Requirements Resulted in Instances of Improper Purchases

The lack of adequate internal controls resulted in numerous violations of  applicable laws and regulations and VA/VHA purchase card policies. We  classified purchases made in violation of applicable laws and regulations or  VA/VHA purchase card policies as improper purchases. We found  violations that included purchases for personal use such as food or  clothing, purchases that were split into two or more transactions to  circumvent single purchase limits, purchases over the $2,500 micro- purchase threshold that were either beyond the scope of the cardholder’s  authority or lacked evidence of competition, and purchases made from an  improper source. While the total amount of improper  purchases we identified, based on limited scale audit work, is relatively  small compared to the more than $1.4 billion in annual purchase card and  convenience check transactions, we believe our results demonstrate  vulnerabilities from weak controls that could have been exploited to a  much greater extent. Poor Controls Resulted in Some Wasteful and Questionable Purchases

The ineffectiveness of internal controls was also evident in the number of  transactions that we classified as (1) wasteful, that is, excessive in cost  compared to other available alternatives or for questionable government  need, or (2) questionable because there was insufficient documentation to  determine what was purchased. Of the 982 nonstatistical sample  transactions we reviewed, 250 transactions, totaling $209,496, lacked key  purchase documentation. Because we tested only a small portion of the transactions  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. For example, we identified two  transactions for 3,348 movie gift certificates, totaling over $30,000. For  these purchases, the cardholders and A/OPCs could provide neither the  award letters nor justification for the awards. We identified a cardholder who purchased a $999 digital  camera when there were other less costly digital cameras widely available. These purchases were from vendors that would more  likely be selling unauthorized or personal use items. Examples of these  types of purchases included a purchase form Radio Shack totaling $3,305, a  purchase from Daddy’s Junky Music totaling $1,041, a purchase from Gap  Kids totaling $788, and a purchase from Harbor Cruises totaling $357. In closing, Mr. Chairman, I want to emphasize that without improvements  in its internal controls to strengthen segregation of duties; documentation  of purchase transactions; timely recording, review, and reconciliation of  transactions; and program monitoring, VHA will continue to be at risk for  noncompliance with applicable laws and regulations and its own policies  and remain vulnerable to improper, wasteful, and questionable purchases. Our report, which is being released at this hearing, makes 36  recommendations to strengthen internal controls and compliance in VHA’s  purchase card program to reduce its vulnerability to improper, wasteful,  and questionable purchases.
Why GAO Did This Study

The Department of Veterans Affairs (VA) Office of Inspector General (OIG) has continued to identify significant vulnerabilities in the department's use of government purchase cards. Over the years, the OIG has identified internal control weaknesses that resulted in instances of fraud and numerous improper and questionable uses of purchase cards. The OIG has made a number of recommendations for corrective action. Given that VA is the second largest user of the governmentwide purchase card program, with reported purchases totaling $1.5 billion for fiscal year 2002, and because of the program weaknesses reported by the OIG, GAO was asked to determine whether existing controls at the Veterans Health Administration (VHA) were designed to provide reasonable assurance that improper purchases would be prevented or detected in the normal course of business, purchase card and convenience check expenditures were made in compliance with applicable laws and regulations, and purchases were made for a reasonable cost and a valid government need. GAO's report on this issue, released concurrently with this testimony, makes 36 recommendations to strengthen internal controls and compliance in VHA's purchase card program to reduce its vulnerability to improper, wasteful, and questionable purchases.

What GAO Found

Weaknesses in VHA's controls over the use of purchase cards and convenience checks resulted in instances of improper, wasteful, and questionable purchases. These weaknesses included inadequate segregation of duties; lack of key supporting documents; lack of timeliness in recording, reconciling, and reviewing transactions; and insufficient program monitoring activities. Generally, GAO found that internal controls were not operating as intended because cardholders and approving officials were not following VA/VHA operating guidance governing the program and, in the case of documentation and vendor-offered discounts, lacked adequate guidance. The lack of adequate internal controls resulted in numerous violations of applicable laws and regulations and VA/VHA purchase card policies that GAO identified as improper purchases. GAO found violations of applicable laws and regulations that included purchases for personal use such as food or clothing, purchases that were split into two or more transactions to circumvent single purchase limits, purchases over the $2,500 micro-purchase threshold that were either beyond the scope of the cardholder's authority or lacked evidence of competition, and purchases made from an improper source. While the total amount of improper purchases GAO identified is relatively small compared to the more than $1.4 billion in annual purchase card and convenience check transactions, they demonstrate vulnerabilities from weak controls that may have been exploited to a much greater extent. The ineffectiveness of internal controls was also evident in the number of transactions classified as wasteful or questionable. GAO identified over $300,000 in wasteful or questionable purchases, including two purchases for 3,348 movie gift certificates totaling over $30,000 for employee awards for which award letters or justification for the awards could not be provided and a purchase for a digital camera totaling $999 when there were other less costly digital cameras widely available. Also, 250 questionable purchases totaling $209,496 from vendors that would more likely be selling unauthorized or personal use items lacked key purchase documentation. Examples of these types of purchases included a purchase from Radio Shack totaling $3,305, a purchase from Daddy's Junky Music totaling $1,041, a purchase from Gap Kids totaling $788, and a purchase from Harbor Cruises totaling $357. Missing documentation prevented determining the reasonableness and validity of these purchases. Because only a small portion of the transactions that appeared to have a higher risk of fraud, waste, or abuse were tested, there may be other improper, wasteful, and questionable purchases in the remaining untested transactions.