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entitled 'Lawrence Livermore National Laboratory: Further Improvements 
Needed to Strengthen Controls Over the Purchase Card Program' which was 
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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).