Pressing Charges

mokey Bear flashes across the television screen. "Only you can prevent forest fires," he says in that familiar baritone.

"But Smokey's name may have been misused," says ABC News correspondent Jake Tapper. "This audit by the General Accounting Office cites the Forest Service for 'improper, wasteful and questionable purchases.' Among them, premium cable TV channels for forest rangers, including at least one pay-per-view pornographic movie."

Tapper's report, which aired Sept. 5 as an "It's Your Money" segment on ABC's World News Tonight went on to detail a host of other purchases made by Forest Service employees: Jewelry and china totaling about $1,000. A bunkhouse pool table for $2,200. More than $16,000 on costumes and a tent for a program to promote Smokey. A $3,000 aquarium for a visitor center. In total, agency employees used government charge cards to make $2.7 million in inappropriate and wasteful purchases in 2001, according to GAO.

The segment then cut to a sound bite from Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee: "That you would have government employees that ought to be the most trusted people in the world that are carefree about the taxpayers' dollars-using it to buy pool tables-the people of Iowa don't like that, I don't like it, and it does bother me."

Tapper signed off with a dramatic closing line: "There is reason to be bothered: 400,000 government employees have the same purchase cards used in these questionable transactions. They charged $14 billion in 2001 alone."

This and dozens of other news reports make it seem like federal employees are taking 'charge it' to new extremes, buying everything from escort services to porn to CD players with taxpayer dollars. It's the kind of publicity that adds to the public's general skepticism of government spending habits, as did the infamous stories about expensive hammers and toilet seats the Defense Department bought years ago.

Since launching an expansive probe of purchase card programs nearly two years ago, GAO has issued reports highlighting problems at the Education and Housing and Urban Development departments as well. The government watchdog also called into question management of card programs at the Navy and Air Force, as well as other parts of the Defense Department. Last July, the Defense inspector general reported that "182 cardholders expended about $5 million in scarce resources on potentially fraudulent and inappropriate transactions."

The high-profile allegations of fraud and misuse are a black eye for a program that has helped federal agencies save billions in administrative costs and earn millions in rebates from banks. "Across the board, we are seeing serious internal control weaknesses," says Linda Calbom, GAO's director of financial management and assurance. "This makes the cards vulnerable to misuse."

Key problems uncovered by GAO and inspectors general include inadequate documentation to support purchases; poor training; and a lack of supervisory review, largely due to having too many cardholders reporting to a single supervisor. "Most employees are pretty honest," Calbom says. "The bigger question is wasteful spending. Are there controls in place to challenge the purchases?"

Facing bad publicity, auditor scrutiny and congressional pressure, agencies are starting to take heed. From collecting and analyzing data on how cards are being used to beefing up training and instituting stringent penalties, agencies are taking steps to control purchase card use and abuse.

ANXIOUS LAWMAKERS

So far, improvements are occurring haphazardly, with some agencies taking a more aggressive stance than others, Calbom says. Several members of Congress aren't willing to rely on agencies to take the initiative.

The 2003 Defense authorization bill directed Defense agencies to increase training for employees on how cards should be used. It also required the department to routinely review purchases to ensure that employees actually need cards and are using them appropriately. And it called on the inspector general to conduct periodic audits of card programs. Finally, the law required Defense to establish stiff penalties for employees found violating card policy.

Grassley and Rep. Joe Wilson, R-S.C., introduced legislation in October that would compel civilian agencies to adopt many of the same practices. Along with requiring more reviews and increased training, the bill would force agencies to conduct credit checks on employees before issuing them cards. "Hard-working Americans are paying for government employees' Christmas shopping," Grassley said. "Purchase cards are intended to be used to purchase supplies or other items needed by a government agency. . . . It's hard to justify payments on a sapphire ring, kitchen appliances and gift certificates to department stores as necessary office expenses."

DRILLING FOR DATA

The government purchase card program has been around since 1989, when it was created as a way for agencies to streamline purchases of low-cost goods and services. Initially, about 10,000 employees were issued cards. In the first year, they made only 2,000 transactions, with a value of less than $1 million. Today, 339,000 employees have purchase cards, and in fiscal 2002, they charged $15.2 billion worth of purchases. By using the cards, agencies saved $1.4 billion, mainly in administrative costs, according to Sue McIver, director of the General Services Administration's Services Acquisition Center. In 1998, GSA centralized the card program, negotiating service agreements with five banks: Citibank, First National Bank of Chicago, Mellon Bank, NationsBank and U.S. Bank. Agencies can select from among the five card issuers.

As the card program grew, agencies failed to put in place adequate safeguards against wasteful and fraudulent spending, says Greg Kutz, director of financial management and assurance at GAO. The push was to get out as many cards as possible.

To get a better handle on their card programs, some agencies now are turning a bright light on employee purchases. Defense has undertaken one of the most ambitious of these efforts. In December 2001, the Defense IG's office, along with the Defense Finance and Accounting Service and the Defense Purchase Card Joint Program Management Office, launched a data mining initiative that has helped unearth millions in inappropriate expenditures and identify individuals who continually misuse their purchase cards. The initiative also has helped DoD identify vendors who are committing fraud. The data even has been used to locate thieves who acquired legitimate charge card numbers and used them for their own purposes.

Speaking at a purchase card event last April, Army Col. William Kelley, who runs the initiative, said, "Through data mining, we are able to drill down and see trends right away."

Officials from the inspector general's office did not respond to questions for this article. But in a June 2003 report, the IG noted that data mining can "predict future trends and behaviors as well as allow businesses to make proactive, knowledge-based decisions." Defense officials have created computer programs to search data for suspect card transactions, such as multiple purchases made at the same vendor on the same day or purchases made on weekends or holidays.

In its initial data-mining effort, the IG flagged the accounts of 1,357 Pentagon cardholders for in-depth review. Of those, 182 were ultimately shown to have improperly used their cards between October 2000 and December 2001, including:

• An Army official who bought a $232 Santa suit.
• A Navy cardholder who made 59 fraudulent purchases totaling $132,000.
• A Pentagon official who circumvented acquisition rules by using a card 52 times in an eight-week period to make a single purchase of more than $551,000.

The Education Department also is making use of data mining to strengthen internal controls. Education was the first civilian agency to come under fire as a result of GAO's review of card programs. In a March 2002 report (GAO-02-406), GAO found that weak internal controls at Education created an environment where "improper purchases could be made with little risk of detection."

One of the primary areas of concern is "split purchases," under which cardholders divide a single purchase into multiple transactions to avoid federal regulations requiring competitive bids for procurements over $2,500. For example, GAO found that an Education cardholder bought two computers from a vendor by splitting the $4,184 buy into two purchases of $2,092. The transactions were conducted at essentially the same time.

To crack down on the practice, Education, working with its card issuer, Bank of America, has set up a series of data mining programs to identify potential split purchases. "If the limit is $2,500 and we see purchases from the same vendor on the same day for $1,200, we will flag that and refer it to the cardholder's supervisor to make sure there isn't a problem," says Sally Clark, senior adviser to the deputy chief financial officer at Education. "So far, we have not had a listing of a split purchase this fiscal year."

PAPER TRAIL

Getting better data is only half the battle. As agencies begin to understand exactly how cards are being used, they need to implement controls to prevent abuses, says GAO's Calbom. That starts with determining who actually needs a card. Many agencies have been cutting back on the number of cardholders-either due to misuse or because cards simply were not being used. Education, for instance, went from 259 cardholders in the late 1990s to 183 now. The Navy went from 60,000 cardholders to nearly 22,000. And the Forest Service cut its number in half, going from 30,000 to 14,000. Indeed, the entire government has scaled back from a high of 670,000 cardholders in 2000 to 339,000 this year.

"We want to reduce our risk and financial exposure," says Hudner, explaining why Defense is canceling cards. In the 2003 Defense authorization bill, Congress capped Defense's allotment of travel and purchase cards at 1.5 million. "It's a double-edged sword, though," says Hudner. "If you have less cards, but are still doing $10 million in transactions, you have one or two organizations buying for others."

There are no hard rules for deciding who needs a card, says GSA's McIver. It's a balancing act between minimizing risk and taking advantage of the potential savings generated by card use. At Defense, one important measure is frequency of use. If a card hasn't been used for six billing cycles, or is used sparingly, it is canceled.

Once agencies have determined that cards are issued only to people who need them, they need to make sure all purchases are properly documented. GAO's reports indicate that agencies often have a hard time justifying purchases. Employees frequently do not have adequate receipts or other documents to support the need for a purchase. Telling employees they must keep complete records is just the beginning. HUD requires all of its cardholders to file an approved requisition form before making any transaction, and to keep a log of all of their transactions.

Verifying purchases is especially critical for the Homeland Security Department, because the department has decided to pay its charge card bills daily to take advantage of significant rebates negotiated with its issuing bank, U.S. Bank. As part of the contract, U.S. Bank submits a bill each day to the Coast Guard Finance Center, which acts as the central clearinghouse for the department's card program. As bills are reconciled, the Coast Guard sends payments to U.S. Bank. To keep the process running smoothly, employees must verify purchases within seven days, says Anna Dixon, director of bank card programs at DHS. Then, within 14 days, a higher-level official must approve the transaction.

The department also is implementing an aggressive plan to review purchases on a regular basis. This will complement plans at the inspector general's office to conduct periodic audits, says Dixon. "Given the amount of publicity that this issue has generated throughout the federal government, and the fact that DHS is such a high profile agency, we knew that [controlling fraud and abuse] is probably the most important aspect in setting up a new program," Dixon says.

PAYING THE PENALTY

Even with strengthened controls, managers of purchase card programs and agency heads recognize the need to put significant deterrents in place. Across the board, agencies are looking for ways to penalize employees who misuse cards. The Education Department, in consultation with its employee union, recently amended its collective bargaining agreement to include stiff penalties for staff who violate card policy. The added provisions allow for reprimands and, in some cases, firings. If fraud is uncovered, the department will refer cases to the Justice Department. Prior to the GAO report on card use at Education, the department did not have any language in its collective bargaining agreement about misuse of charge cards.

To drive the point home, in late October, acting Deputy Education Secretary Eugene Hickok sent out an all-staff e-mail reporting that two former Education employees were recently found guilty of misusing their charge cards to the tune of $160,000. One was sentenced to 33 months in prison. The other was ordered to pay back $140,000. "It makes a statement that the department is not going to just slap people on the wrist anymore," says Mark Carney, deputy chief financial officer at Education.