This is the accessible text file for GAO report number GAO-04-987R entitled 'Lawrence Berkeley National Laboratory: Further Improvements Needed to Strengthen Controls Over the Purchase Card Program' which was released on September 07, 2004. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. August 5, 2004: Congressional Requesters: Subject: Lawrence Berkeley National Laboratory: Further Improvements Needed to Strengthen Controls Over the Purchase Card Program: The Lawrence Berkeley National Laboratory (Lawrence Berkeley) located in Berkeley, California, is a government-owned, contractor-operated Department of Energy (DOE) national laboratory. The University of California manages the lab under a cost-reimbursable contract with DOE. 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 NNSA[Footnote 1] and two DOE contractor labs, including Lawrence Berkeley.[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 Berkeley. The enclosed briefing slides highlight the results of our work and the information provided.[Footnote 3] Specifically, we reviewed Lawrence Berkeley'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 seven recommendations for action--six related to actions needed to be taken by Lawrence Berkeley and one related to action needed to be taken by the DOE contracting officer for Lawrence Berkeley. Results in Brief: Internal control weaknesses in Lawrence Berkeley's Pcard program increased the lab's risk of improper purchases. These included weaknesses in supervisory review and approval of transactions, documentation, and segregation of duties. Specifically, of the nonstatistical selection of 144 transactions obtained through data mining[Footnote 5] for fiscal years 2002 and the first half of fiscal year 2003, we found that cardholder monthly statements for 35 (24 percent) were not signed by approving officials in a timely manner or were not signed at all. For example, two statements were signed only after they were selected for our review--more than 2 years after the two purchases were made. We also found that 31 (22 percent) of the 144 nonstatistically selected transactions we reviewed, totaling $38,680, lacked sufficient documentation such as an invoice, credit card receipt, or other sales documentation necessary to validate the dollar amount, quantity, and nature of the items purchased. This was due in part to the fact that monthly approvers were not required to verify purchases listed in the cardholder statement against supporting documents. This weakness in the review and approval function combined with the insufficient documentation of transactions created an environment where improper Pcard purchases could occur with little risk of detection. Further, two key personnel responsible for overseeing the lab's Pcard program were also cardholders, creating a lack of independence between their cardholder role and their Pcard administration role. These control weaknesses likely contributed to the approximately $326,396 in improper, wasteful, and questionable purchases we identified during our review.[Footnote 6] While relatively small compared to the approximately $24 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, we found improper purchases consisting of: * Twenty-one improper split purchases--that is, groups of two or more similar transactions that were split to circumvent single purchase limits--consisting of 60 transactions totaling $160,011. * Thirty-two restricted items purchased totaling $47,139 that did not have documented pre-approval as required. * One purchase charged by a cardholder's monthly approver against the cardholder's account while the cardholder was out on disability leave. We also considered 23 transactions totaling $10,911 as wasteful because they were excessive in cost when compared to other alternatives and/or were of questionable need, such as $985 for three Bose noise-canceling headsets and $403 for an air purifier from The Sharper Image. We considered 51 transactions totaling $116,894 as questionable because they had insufficient documentation that would enable us or the lab to determine what was purchased and whether the purchases 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. Lawrence Berkeley did not ensure assets were accounted for and tracked properly and in a timely manner. For example, our data mining tests showed 303 assets totaling $3.5 million were assigned to persons who no longer worked at the lab. The majority of these assets were subsequently reassigned in April 2004, shortly before we conducted a physical observation of assets. In addition, 28 assets totaling $363,759 had been transferred from the Lawrence Livermore National Laboratory to Lawrence Berkeley in August 2003. However, Lawrence Berkeley did not enter these assets into the property database until we brought them to their attention in April 2004. All of the 100 assets selected for physical observation were either found or the lab provided documentation that the asset had been transferred or retired. However, we found several inaccuracies between the physical assets and the information recorded in the property database, including inaccurate serial numbers, incorrect property custodians, and inaccurate location information. These types of inaccuracies make the assets more susceptible to undetected loss or theft. Subsequent to our review period, the lab made a number of policy and procedural changes that, if properly implemented, should help improve internal controls over its Pcard program and accountability for property. This included the implementation of a new Pcard program that significantly changed the lab's Pcard process. However, additional improvements are needed to further reduce the risk of improper and wasteful purchases. Recommendations for Executive Action: In order to address the issues identified in our review, we recommend that the Secretary of Energy direct the Director of the Lawrence Berkeley National Laboratory to take the following six actions: * To strengthen internal controls over the purchase card program and reduce the lab's vulnerability to improper, wasteful, and questionable purchases, we recommend the following: * Cancel purchase card accounts for cardholders who also perform oversight functions over the purchase card program to help ensure appropriate independence and separation of duties between these functions. * Establish policies and procedures requiring that purchasers 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 (1) sales receipts, invoices, or other independent support showing the description, quantity, and price of individual items purchased and (2) restricted items approvals before approving purchases to ensure such items were obtained and documented where applicable. * Implement tools, such as data mining, for the Pcard program or other review staff to use in reviewing cardholder purchases for improper purchases. These tools should be used to systematically monitor for split purchases, unusual vendors, and other potentially improper or wasteful purchases, and to monitor timeliness of reconciliations and supervisory approvals. * To help improve Lawrence Berkeley's controls over the purchasing, recording, and safeguarding of assets, we recommend the following: * Establish a policy requiring property management to provide a report of all missing assets detected during physical inventories to Lawrence Berkeley Security. * Establish a process to test the accuracy of key information recorded in the property management system, including the serial number, assigned custodian, location, and bar-code number. We also recommend that the Secretary of Energy direct the DOE 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 DOE. Agency Comments: Lab and local DOE officials agreed with all of the recommendations except for the recommendations to (1) require sales documentation such as a receipt or invoice and (2) require approving officials to review sales documentation and restricted item approvals before approving purchases. They indicated that the new Pcard program has the data to support item price, quantity, and description via the requisition, monthly cardholder statement, and receiving data. While the new system as described by lab officials may have improved the segregation of duties which is an important part of a good system of internal control, it does not substitute for independent, detailed supporting documentation of the description, quantity, and cost of items purchased in all cases. Without such detail, a reviewer would not be able to determine if the original order amounts were correct or 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 Lawrence Berkeley'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 Lawrence Berkeley's contract with DOE and applicable provisions of the DOE Acquisition Regulation (DEAR) and the Federal Acquisition Regulation (FAR), performed walkthroughs of key processes, interviewed lab and DOE 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 sensitive assets. Based on the results, we (1) identified 62 potential split purchases and tested all of them 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 Secretary of Energy 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 Stephanie Chen, Barbara House, Kelly Lehr, Gail Luna, Lien To, and LaDonna Towler. Signed by: 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 images] [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 DOE contract. Although the lab's purchase cards are issued by the contractor, purchases charged to the DOE contract are ultimately reimbursed and thus paid for by the federal government. Similarly, property purchased that is charged to DOE 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 transactions totaling $8,559 that were in multiple categories. Five transactions totaling $7,852 were both improper because the cardholders failed to obtain required pre-approvals for restricted items, and wasteful because they were excessive in cost. In addition, $707 in sales tax that we considered wasteful is included in the transaction amounts of other transactions we considered improper, wasteful, or questionable. [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).