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View metadata, citation and similar papers at core.ac.ukbrought to you byCOREprovided by Calhoun, Institutional Archive of the Naval Postgraduate SchoolCalhoun: The NPS Institutional ArchiveReports and Technical ReportsAll Technical Reports Collection2011-05-11Identifying Procurement Fraud inDefense Agencies: An Analysis of theGovernment Purchase Card ProgramRendon, Juanita M.http://hdl.handle.net/10945/33629

Identifying Procurement Fraud in DefenseAgencies: An Analysis of the GovernmentPurchase Card ProgramBy Juanita M. RendonNaval Postgraduate School1

OverviewOverview IntroductionIntroductiong((GPCP)) mProgram(GPCP)BackgroundBackground GPCPGPCPIncidentsIncidentsofofFraudFraud GPCPGPCPFraudFraudIndicatorsIndicators GPCPGPCPInternalInternalControlControlIssuesIssues RecommendationsRecommendationsy and SummarySummaryandConclusionConclusion AreasAreasforforFurtherFurtherResearchResearch

Overview IntroductionIntroductionPurpose:To identify procurement fraud indicators encies,specificallythegarea ofBackgroundPurchase Card Programs (GPCP).GovernmentGPCPIncidentsof FraudAsof 2006,, the GPCPwas 8 times largerg than the nextlargestin theworld (Fischer, 2006)GPCP rol Issues Demands better stewardshipRecommendations Efficientmanagementgof fundsy andConclusionSummary Greateraccountabilityfor resources byAreasfor FurtherResearchgovernment organizationsgg(Mills, Normand, & Palmer, 2008)

Government Purchase Card ProgramOverview BackgroundHighlights Introduction– Key Players in GPCP:– 1982: President Ronaldgg((GPCP)) GovernmentCard Program– ProgramCoordinatorsg issuedPurchaseanReagan– Approving Officials orExecutive OrderBackgroundCertifying Officials1986: Chargecardoffirst –GPCPIncidentsFraud– Cardholdersavailableil bl GPCP Fraud Indicators – GSA SmartPay Program:– 1994-2010: GPCP grew GPCPInternalfrom lessthan 1ControlBillion Issues– over 350 agencies– Citibank, JP Morgantoover 30Billion RecommendationsChase; U.S. Bank– Goals: Decrease admin. Summaryy and Conclusion – Types: Purchase,Purchase travel,travelprocurement costs, reddfleet, integrated AreasforFurthertape, &leadtime Research((streamlinepprocess))– Micro-purchases : 3,000– Spend: 30 B– Transactions:Tti100 M– # of Cards: 3M(GSA, 2011; FAR)

Government Purchase Card ProgramOverview Background (Cont.)OOversighti h Introduction Office of the Under Office of Charge Cardg within((GPCP)) SecretaryGovernmentPurchaseCardProgramof echnology, &Services Administration LogisticsGPCP Incidents of Fraud (GSA) oversees the SmartPayPProgram The Purchase Card GPCP Fraud Indicators Federal AcquisitionProgram ManagementStreamlining Act of 1994 OfficeGPCPInternalIssues((PCPMO)) reportspControlto OMB Circular A-123thedirectorof RecommendationsAppendix B RevisedOUSD(AT&L) Summaryy and Conclusion“ImprovingImproving the Management DefenseD fPProcurement anddof Government Charge Card AcquisitionAreas forPolicyFurtherResearch(DPAP) Defense AcquisitionUniversity (DAU) providestrainingPrograms” FAR PPartt 13 DoD PC Guidebook (2009)(GSA, 2011)

Government Purchase Card ProgramOverview Background (Cont.)Statisticsi i Introduction GSA S As of FY 2001, DoD DoD Charge Card Taskg (estimated((GPCP) AgenciesGovernmentPurchase Cardused purchaseForce Program(2002) 20)Backgroundcardsfor over 95% ofsaving per transaction) Other studies estimate saving qualifiedGPCPtransactionsIncidents of Fraudt betob 54 - 92 per transactiontti Only 2% of total federal GPCP Fraud Indicators 2010 Est. savings 7.1Bgovernment spending areAverage government ppurchasesGPCP InternalIssuesunder 2,500,, Control, but purchase card transaction hasconstituteover85%oftotal Recommendationsincreased from 436 in 1997procurement transaction volumeSummaryy and Conclusionto 779 in 2008 Areasfor Further In FY 2010,DoD was Researchtopagency with program spendof over 13B (44% of totalspend)((Palmer, Gupta, & Dawson, 2010; GSA, 2011)

Government Purchase Card ProgramOverview Background Introductiong((GPCP)) Government Purchase Card ProgramBackground22 M670T GPCP Incidents of Fraud 20B GPCP Fraud Indicators GPCP Internal Control Issues260 T Recommendations Summaryy and Conclusion Areas for Further Research2010Source: GSA SmartPay Performance Summary retrieved from https://smartpay.gsa.gov

Source: (GAO, 2008, March)OverviewGPCP Incidents of Fraud¾Nott permitted¾Nitt d byblaw, regulation, oragency policy Introductiong((GPCP)) Government Purchase Card ProgramBackgroundFRAUDULENT GPCPIncidents of Fraud IMPROPER GPCP Fraud Indicators GPCP Internal Control Issues¾Unauthorized¾Intended for personal use alsify/Omit Summaryy and Conclusion¾D fi i t/ii tABUSIVE ¾Deficient/inappropriateMaterial Facts Areasfor Further Research use of authority or position¾CauseInjury/Damagesor Deprive others¾P¾Personallgain/enrichmentSource: (GAO, 2008, March)¾Mismanagement¾Non prudent behavior¾Not reasonable¾Not necessary

Source: (GAO, 2008, March)OverviewGPCP Incidents of Fraud Introductiong((GPCP)) Government Purchase Card ProgramBackground GPCP Incidents of Fraud GPCP Fraud Indicators GPCP Internal Control Issues Recommendations Summaryy and Conclusion Areas for Further ResearchSource: (GAO, 2008, March)

Source: (GAO, 2002, June, p 44)OverviewGPCP Incidents of Fraud (Cont.) Introductiong((GPCP)) Government Purchase Card ProgramBackground GPCP Incidents of Fraud GPCP Fraud Indicators GPCP Internal Control Issues Recommendations Summaryy and Conclusion Areas for Further ResearchSource: (GAO, 2002, June, p 44)

OverviewGPCP Fraud IndicatorsRed Flags/Fraud/Indicatorsi IntroductionIndividual LevelSituational (Incentive)OpportunityFlags )g Red((GPCP) GovernmentPurchase CardProgramBackgroundHighpersonal debt or lossesFamiliarity with operations andposition of trust GPCP Incidents of FraudLi i beyondLivingbd one’s’ meansClCloseassociationi ti withith GPCP Fraud Indicators suppliers/vendor and key peopleor Internalspeculation Control IssuesDishonest or unethical management GamblingGPCPUse of alcohol or liquorToo much trust in key employees ExcessiveRecommendationsinequitiesin theWeak or dishonest personnely andConclusion PerceivedSummaryorganizationevaluations ResentmentAreas forFurther Researchof supervisorsInadequate training programsInadequate income or greedRapid turnover of key employees(Source: Air Force Audit Agency, 1997)

OverviewGPCP Fraud Indicators (Cont.) Introduction Red Flags/Fraud IndicatorsOrganizationalg((GPCP)) Government PurchaseCardLevelProgramRelated party transactionsBackgroundaccountingrecords GPCP PoorIncidentsof Fraudinternalcontrols GPCP PoorFraudIndicatorspeopleIssuesin key positions GPCP InexperiencedInternal ControlReluctant to give auditors needed data RecommendationsContinuousproblems with inspectorsppy and Conclusion SummaryInadequatein critical positions Areas forFurtherstaffingResearch(Source: Air Force Audit Agency, 1997)

OverviewGPCP Fraud Indicators (Cont.)DoD IG Purchase Card Fraud Indicators Introduction Numerousmissing invoices, Pattern of repeat favoritism to areceipts,and purchasespecificProgramvendorofg or group((GPCP)) GovernmentPurchase Cardjustifications.vendors.Background Purchases fall slightly below, the Cardholder and vendor have the GPCPIncidentsof Fraudpurchasethresholdof 3,000.same name. Cardholdermakes unauthorized GPCP FraudIndicators Similar invoices from differentvendors.week-end or evening purchases. GPCP employeesInternal Control Separatedcontinue Issues Purchased items are nottopurchases using the GPC. recorded in inventory records makeRecommendations Inadequate separation of duties Pattern of suspect cardholdery andConclusion Summarysuchas cardholdersapprovingpurchases from unauthorizedtheirown purchaseauthorizations.vendors such as clothing stores Areasfor FurtherResearch Pilferable items are repeatedly An excessive number ofcardholdersdh ldare assignedid tto onereportedt d as lost,l t missing,i ior stolen.t lapproving official.(Source: Purchase Card Fraud Indicators, DoD IG, 2010)

OverviewGPCP Internal Control Issues Introduction Common ThreadsGAOProgramandreports:)g IG ((GPCP) GovernmentPurchaseinCard W k Internal WeakIl ControlsClBackground ExistingInternalControls GPCPIncidentsof Fraudproperlyl implementedi ld GPCPnotFraudIndicators StandardsforControlInternalControl 9) Recommendations Serious breakdowns in internal controls Summaryy and Conclusionover GPCPsGPCP can leavelgovernment Areas for Further Researchagencies vulnerable to fraud and abuse(GAO, 2001)

GPCP Internal Control Issues (Cont.)OverviewAudit Coverage Report (FY1996 - FY2001) DoDIntroductionFederal AgencyNumber ofIssuedg Reports((GPCP)) GovernmentPurchase CardProgramGeneralAccounting Office3BackgroundInspectorGeneralof Fraud3 DoDGPCPIncidentsAuditAgency ArmyGPCPFraudIndicators 32AuditService Control Issues1 NavalGPCPInternalForce Audit Agency255 AirRecommendationsAgencies27y andInspectorConclusion DefenseSummaryGeneral & Internal Review OfficesAreas for Further ResearchArmy Internal Review Office 61Source: (“DoD PCP Audit Coverage,” 2001)

GPCP Internal Control Issues (Cont.)Overview IntroductionIdentified Systemic Issues (FY1996 - FY2001)g ((88 reports)((GPCP) GovernmentPurchaseProgram¾Account ReconciliationandCardCertificationp) )¾Administrative Controls (70 reports)Background¾Management Oversight (115 reports) GPCPIncidentsofFraud¾Property Accountability (79 reports) GPCPFraud¾PurchaseCard IndicatorsUse (50 reports)¾Purchases(222 reports) GPCPInternalControl Issues¾S¾Separationi off DutiesD i (22 reports)) Recommendations¾Training (52 reports) Summaryy and Conclusion Areas for Further Research((“DoDDoD PCP Audit Coverage,Coverage ” 2001)

OverviewRecommendations IntroductionImprove Controlsover the SegregationOfg Duties((GPCP)) (1)GovernmentPurchaseCard Program(2)BackgroundImprove Training of Cardholders and Approving Officials(3) Improve Oversight of Its Purchase Card Program (4)GPCPIncidentsFraudImplementExisting ofInternalControl Policies and ProceduresMonitorFraudand Improveweak Internal Control Procedures (5)GPCPIndicatorsImprove span of control for approving officials (6)GPCPInternal Control Issues(7) MakeM k bbettertt use off bankb k electronicl t i toolst l (8)RecommendationsProvide anti-fraud trainingRequire creditworthinessevaluations for all cardholders,y andConclusion (9)Summarynot just travel cardholders Areas for Further Research(DoD IG, 2002; GAO, 2008; “DoD IG USAID audit,” 2002)

OverviewAreas for Further Research Introduction Expandon the identifiedGPCP:)g in((GPCP) GovernmentPurchasefraudCardindicatorsProgram by developing an assessment toolBackgroundto helpidentifyoffraudvulnerabilities GPCPIncidentsFraudi GPCPsinGPCP iin federalf d l agenciesi GPCP Fraud Indicators ConductGPCP InternalControlIssuesgovernment agencies an analysisby specific Recommendationssuch as Navy, Army, Air Force, etc. Summaryy and Conclusion Areas for Further Research

OverviewSummary/Conclusions Federal Government officials, such as approving officials Introductionand cardholders, in the GPCPg((GPCP)) Government Purchase Card Program holdh ld a publicbli trustt tBackground are expected to meet the highest ethical standards. GPCP Incidents of Fraud Every dollar that is fraudulently spent takes away from GPCPIndicatorsfunds Fraudthat couldbe spent on goods and services needed tomeet themissionControlof federalIssuesagencies in support of the GPCPInternaloverallll goall off publicbli servicei to theh AmericanAipeoplel Recommendations Taxpayers should not be footing the bill for fraudulent andand Conclusion Summaryabusive ypurchases SenatorGrassleyand others in Congress introduced AreasforCharlesFurtherResearchthe bill “Government Charge Card Abuse Prevention Act of2011” (S.( 300; 112th Congress))

Contact InformationJuanita M. Rendonjmrendon@nps.edu(831) 656656-2444244420