Education Financial Management: Weak Internal Controls Led to Instances of Fraud and Other Improper Payments

Highlights

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. 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.

Recommendations

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Department of Education	To strengthen its internal controls over Pell Grants and loans, purchase cards, and computer equipment and to reduce Education's vulnerability to improper payments and lost assets, the Secretary of Education should, in the area of Pell Grants and loans, 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 GAO found that improperly disbursed Pell Grants to determine whether the grants were properly disbursed.	Closed – Implemented Education independently performed data mining tests and identified schools that had abnormal concentrations of the characteristics similar to those GAO found (i.e., older, non-citizen Pell Grant recipients) at the schools that improperly disbursed Pell Grants. Education's tests identified six of the 28 schools as having such abnormally high concentrations of older, non-citizen Pell Grant recipients. The remaining 22 schools were found to have concentrations within a normal range. However, Education identified 14 additional schools having abnormally high concentrations of the characteristics. Education reviewed the 20 schools and determined that five of the schools were already under investigation by the Office of the Inspector General (OIG). Education conducted on-site reviews at the other 15 schools, and (1) referred two of the 15 schools to the OIG for possible fraudulent activity, (2) found violations at three schools resulting in liabilities totaling about $22,000 being assessed, and (3) determined that there were no adverse findings for the other 10 schools.
Department of Education	To strengthen its internal controls over Pell Grants and loans, purchase cards, and computer equipment and to reduce Education's vulnerability to improper payments and lost assets, the Secretary of Education should, in the area of Pell Grants and loans, direct the Chief Operating Officer of student financial assistance programs to 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.	Closed – Implemented The $12 million was disbursed at hundreds of schools. Education did not follow up with those schools having a small number (less than 20) of instances of potential improper payments because they said it was not a wise use of their resources. GAO agreed with them and pointed out that 20 of these schools had from 20 to 138 instances of potential improper payments totaling $1.5 million. Education followed up on those 20 schools. When performing its data mining tests to identify schools with abnormal concentrations of older, non-citizen Pell Grant recipients, Education determined that three of the 20 schools fit that criteria and conducted on-site reviews at the schools and determined there were no eligibility violations.
Department of Education	To strengthen its internal controls over Pell Grants and loans, purchase cards, and computer equipment and to reduce Education's vulnerability to improper payments and lost assets, the Secretary of Education should, in the area of Pell Grants and loans, direct the Chief Operating Officer of student financial assistance programs to implement a process to verify borrowers' Social Security Numbers and dates of birth submitted by schools to Loan Organization System.	Closed – Implemented The Department replaced the Loan Origination System with the Common Origination and Disbursement (COD) system. COD interacts with the application processing system (Central Processing System - CPS) to match prospective borrowers' SSNs and dates of birth against the applicant file. If CPS returns a non-match to COD, it results in the rejection of the loan origination record. COD notifies the school of the reject and the process is halted until the borrower has satisfied eligibility requirements.
Department of Education	In the third party drafts area, the Secretary should direct the Chief Financial Officer to follow up on the $1.7 million of third party draft payments for which the department did not provide adequate supporting documentation to use to determine their validity.	Closed – Implemented Education's OCFO referred these third party draft payments to ED-OIG for resolution. ED-OIG confirmed that 101 payments totaling $1.0 million were valid. Education has determined that OCFO and OIG have done all they can to address the questionable payments. Furthermore, no cases of fraud were found by either GAO or ED-OIG. Education considers this action to be fully completed. GAO concurs.
Department of Education	For purchase cards, the Secretary should direct the Chief Financial Officer to implement an effective review and approval process that ensures all approving officials (1) conduct a thorough review of all purchases made, including the review of all supporting documentation, (2) are knowledgeable of the cardholders' daily responsibilities and therefore can effectively assess the appropriateness of each purchase, (3) are not reviewing a large volume of purchase card statements each month, and (4) are appropriately trained on how to perform their approving official responsibilities.	Closed – Implemented The actions have been completed. OCFO has conducted, and will continue to conduct, quarterly internal control reviews of purchase card transactions to ensure that both the cardholder and the approving official (AO) fulfill their responsibilities (e.g., reviewing supporting documentation) appropriately and thoroughly. OCFO issued a directive that requires that offices have a reasonable number of AOs to cardholders and that AOs are knowledgeable of cardholders' daily responsibilities. OCFO then assessed the offices and determined they met the requirements of the directive. In addition, OCFO trained AOs about the purchase card policy. AOs must recertify their training every 2 years.
Department of Education	For purchase cards, the Secretary should direct the Chief Financial Officer to perform periodic tests of this new approval process and, where necessary, take action to ensure that approving officials comply with it.	Closed – Implemented Education developed a plan to review internal controls over purchase cards in response to another recommendation in this report (see previous recommendation). Education's Office of the Chief Financial Officer conducts quarterly internal control reviews of purchase card transactions to ensure that both the cardholder and approving officials completed their responsibilities appropriately and thoroughly. Based on a March 2003 memo, Education has completed the first review, and further reviews will be ongoing thereafter.
Department of Education	For purchase cards, the Secretary should direct the Chief Financial Officer to take action to recover questioned tuition costs from the two employees.	Closed – Implemented ED-OIG prepared a report and letter that was issued to the Principal Office and Employee Relations in August 2002. Action is being taken to have funds recovered.
Department of Education	For purchase cards, the Secretary should direct the Chief Financial Officer to follow up on the $218,000 of purchases for which the department did not provide adequate supporting documentation for GAO to use to determine the validity, to determine whether the purchases were proper.	Closed – Implemented ED issued letters in July 2002 to each cardholder requesting the supporting documentation for each transaction and a warning to them against future program violations. Also, OCFO is now conducting quarterly reviews of purchase card transactions to ensure, among other things, cardholders comply with their responsibilities, including proper documentation retention. These reviews will reinforce the requirements and help to prevent this problem from occurring in the future.
Department of Education	Regarding computer equipment, the Secretary should direct the Director, Office of Management, to conduct routine inventories of computer equipment, including reconciling computer purchases with property records.	Closed – Implemented Education's Office of Management (OM) developed policies and procedures that specify inventory reviews by accountable officers and reconciliation with property records. The inventories are being conducted using the American Society for Testing and Materials standards for acceptable inventory adjustments. OM completed the fiscal year 2002 and 2003 annual physical inventories of the department's accountable property, which includes computer equipment, and reconciled the results to the property management system. The inventories will continue on an annual basis. Also, OM included in the functional requirements for the Asset Management Database system an interface with the Contracts and Purchasing Subsystem to ensure that procurement and property agree on assets purchased, barcode tag numbers, and assignment to organization/users.
Department of Education	Regarding computer equipment, the Secretary should direct the Director, Office of Management, to enhance physical security over the computer storage rooms.	Closed – Implemented Education's Office of Management (OM) implemented new property procedures which are described in it's new property manual (issued June 30, 2002). The procedures, among other things, (1) limit access to storage rooms only to authorized individuals, (2) limit storage of computer assets to 60 days, after which time the computer equipment must be sent to the Office of the Chief Information Officer if it is no longer needed by the program office, and (3) require that all requests for capital and accountable assets must be ordered through Contracting and Purchasing Operations. These actions, taken together, have strengthened controls over computer equipment and address the access and storage problems GAO found.
Department of Education	Regarding computer equipment, the Secretary should direct the Director, Office of Management, to provide access to computer storage rooms only to authorized individuals.	Closed – Implemented Education's Office of Management (OM) implemented new property procedures which are described in it's new property manual (issued June 30, 2002). The procedures, among other things, require that access to storage areas where accountable property, which includes computer equipment, is stored can only be given to those authorized by the Property Management Officer. This requirement, and other new required procedures regarding the storage of computer assets, have strengthened controls over computer equipment and address the access and storage problems GAO found.
Department of Education	Regarding computer equipment, the Secretary should direct the Director, Office of Management, to ensure that security personnel in the Washington, D.C. facilities inspect all bags, cases, and boxes leaving the buildings to determine if they contain computer equipment and that property passes accompany all equipment removed from the buildings.	Closed – Implemented The department implemented a Physical Security Program Directive that requires personnel and package screening and exit package checks. In addition, Post Orders (i.e, duties and responsibilities for security guards) require post guards to "challenge individuals removing equipment and other items from the building to ensure a property pass has an authorized signature to match the signature roster, and required information to match items being removed from the building."
Department of Education	Regarding computer equipment, the Secretary should direct the Director, Office of Management, to establish appropriate monitoring procedures to ensure that security personnel are actually inspecting items being removed from the buildings.	Closed – Implemented The department implemented a Physical Security Program Directive that requires personnel and package screening and exit package checks. In addition, Post Orders (i.e, duties and responsibilities for security guards) for the Program Manager require the manager to verify that all post orders and instructions are being followed, and to check to ensure that post guards are in compliance with all departmental procedures.