Education used  various payment methods for these expenses, including third party drafts  and government purchase cards. In April 2002, Education plans to implement a new grant and loan  disbursement system designed to improve controls and reduce the risk of  future improper grant payments. Controls Over Third Party Draft Process Were Ineffective

Significant internal control weaknesses over Education’s process for third  party drafts, which were used to pay expenses totaling $55 million from  May 1998 through September 2000, increased the department’s  vulnerability to improper payments. We found that some individuals at Education could  control the entire payment process for third party drafts. We  found that Education’s inconsistent and inadequate authorization and  review processes, combined with a lack of monitoring, created an  environment in which improper purchases could be made with little risk of  detection. Inadequate control over these expenditures, combined with the  inherent risk of fraud and abuse associated with purchase cards, resulted  in fraudulent, improper, and questionable purchases by some Education  employees. We found that Education lacked adequate physical controls over its  computers, which contributed to 241 missing personal computers and  computer-related equipment with an acquisition cost of about $261,500. In the area of Pell Grants and loans, we recommend that the Secretary  direct the Chief Operating Officer of student financial assistance programs  to  conduct on-site investigations, including interviews of school personnel  and students, at the 28 schools with characteristics similar to those we  found that improperly disbursed Pell Grants to determine whether the  grants were properly disbursed;  follow up with the schools that had high concentrations of the  $12 million in potential improper payments for which the department  did not provide adequate supporting documentation; and  implement a process to verify borrowers’ SSNs and dates of birth  submitted by schools to LOS.
Why GAO Did This Study

Because of internal control weaknesses, the Department of Education's student financial assistance programs are at high risk for fraud or erroneous payments. GAO discovered fraud in the grant and loan areas and pervasive control breakdowns and improper payments in other areas. Controls over grant and loan disbursements lacked a key edit check or follow-up process that would identify schools improperly disbursing Pell Grants. Significant internal control weaknesses over Education's third party drafts also increased the department's vulnerability.

What GAO Found

GAO found that individual Education employees could control the entire payment process for third party drafts. Education employees also circumvented a key computerized control designed to prevent duplicate payments. Education eliminated third party drafts in May 2001. Inconsistent and inadequate authorization and review processes for purchase cards, combined with a lack of monitoring, meant that improper purchases were unlikely to be detected. Inadequate control over these expenditures, combined with the inherent risk of fraud and abuse associated with purchase cards, led to fraudulent, improper, and questionable purchases totaling $686,000. Poor internal controls over computers acquired with purchase cards and third party drafts led to 241 missing personal computers and other equipment valued at $261,500. Although Education changed policies and procedures over disbursements to improve internal controls and program integrity, many of these changes have not been effectively implemented.