U.S. mines p-card data for fraud and spend control
Daniel Gottlieb -- Purchasing, 9/2/2004 2:00:00 AM
When the federal government introduced procurement cards in 1989, the goals were to scrap mounds of paperwork for low dollar buys, speed up fulfillment, and cut transaction costs. Those objectives have been largely achieved. Savings for FY 2003 were approximately $1.4 billion with purchase card orders valued around $16.3 billion. Now agencies are being pressured by Congress to look for even more savings by using P-card purchasing volume to leverage discounts from suppliers. Congress' watchdog, the Government Accountability Office (renamed from the Government Accounting Office) in a review of a handful of agencies, found that if they sought a 10% discount from suppliers, the savings would total $300 million annually.
P-cards have made it possible for a federal employee on the road or a soldier in Iraq to buy a wide range of items needed quickly and to complete his or her mission. An Army truck mechanic, for example, needing a gasket, no longer needs to fill out a requisition, get it approved by a supervisor and a contract officer and then wait weeks for the gasket to be delivered. As an authorized cardholder, he or she just goes online or calls a provider or a local hardware store and gets it delivered the next day.
Countering fraud
But as card use has grown (sales have doubled since 1999) the media and Congress have uncovered cases of improper or fraudulent use, including kickbacks from suppliers. GAO, for example, has uncovered instances of P-card purchases of items for personal use, items available at lower prices on government schedules, or selection of the more expensive models, such as a $1,000 digital camera.
Last year Congress mandated more controls. Civilian agencies have responded with measures to reduce the number of cards issued. (government wide cut in half), impose spending limits on individual cards, and require close monitoring of employee card use. The Defense Department has taken similar action (see box) in response to GAO audits and congressional mandates. The rate of card abuse in the federal government and states is now lower than in any other public or private institution says Neal Fox, the top official in GSA with oversight of the card program. He cites an independent academic study that places the rate at approximately .017%. or $170 per million dollars of transactions. Further steps recommended by GAO, such as instituting credit checks on employees before issuing government cards to them are under consideration by the President's Office of Management and Budget (OMB).
"The government has to be more conscious of how they spend their money," says Doug Ichiuji Sr., vice president for government services of Minneapolis-based U.S. Bank, which accounts for more than a quarter of the government's P-Card buys.
Abuse happens not just in government but everywhere, Ichiuji says. "So I think, personally the government has gotten a bad rap." Even with controls in place, he says, not every instance of fraud can be stopped.
GSA and its customer agencies are taking further actions, however, to reduce program risk. According to Fox. they include:
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Closing unused or infrequently used card accounts. Purchase card accounts, which peaked at over 670,000 in FY 2000, now are down to slightly over 300,000.
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Decreasing the span of control over purchase cardholders, which at 23 major departments and agencies now averages 3.5 cardholders per approving official.
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Taking appropriate action against employees whenever fraud or misuse is detected, including training or discipline, based upon the nature of the procurement card misuse.
Using P-card data for spend analysis
"At GSA we are now turning our attention to the next round of priorities for the purchase card program," Fox told Congress earlier this year. The strategy: "obtaining more detailed purchase card data . . . to obtain more favorable pricing." This will include educating cardholders on goods and services that can be bought off GSA's government-wide discounted schedules.
Although the military service branches are making some use of GSA procurement cards and GSA schedules, the Department of Defense is looking at both centralized and local-oriented solutions.
"The Department believes that a full range of measures should be utilized more to leverage our purchasing volume (card related) in the marketplace," says Dennis Hudner of the Army Contracting Agency which is managing the DoD initiatives. "However, the department believes that less emphasis should be placed on agency-wide contract agreements, which are costly to establish and maintain and may work at cross purposes to the Department's small business goals," he adds. "We believe that the same results can be achieved through less formal measures both at the local level and on a Department-wide basis."
Officials note that some laws, such as those establishing quotas for buys from small and disadvantaged businesses, sometimes hinder the ability to buy items at the most favorable discounts available.
The government has several banks that have provided card issuance and transaction reporting systems especially for the government.
Looking for finer data
As P-cards have come to account for a bigger slice of the estimated $200 billion annual federal procurement pie, Congress and the agencies have begun to focus on the potential of getting information to card holders about discounts available through basic purchasing agreements and government schedules (like catalogs) and using data mining to identify opportunities for negotiating discounts.
Capturing finer data on card purchases isn't straightforward, however, GSA's Fox explains. It relies on merchants to install point-of-sale (POS) systems that can gather and automatically transmit more detail on transactions to the bankcard companies.
The use of data mining was initially confined to agency efforts to combat fraud. The Navy, for example, has run a pilot analysis on P-card transactions over nearly a year at a single base. Using an automated method called the Purchase Card Automated Review Transaction Tool (PCARTT), the Navy found 1,200 purchases were flagged, but only one was found questionable—the purchase of a weight belt for $13.99 for personal use.
It is now fine-tuning the filters used to kick out questionable transactions. "The challenge is to create a control environment that balances the risk against the sizeable (approximately $200 million in FY 2003) internal savings that are generated through the program," according to a DoD white paper.
The Navy pilot is just part of overall DoD initiatives to track fraud and opportunities for savings in P-Card buys.
Working with merchants
The government is also seeking help from the commercial card providers in gathering and reporting more granular data. The U.S. Bank's Ichiuji says the government has asked for help in encouraging merchants to report more POS detail. Merchants who do not already have this capability are being asked to install automated equipment that can capture Level 3, or items sold detail.
"What we've done is to build an electronic access system (EAS) for the government that basically provides card holders and managers the means to manage cards on an individual basis," Ichiuji explains. "It's an Internet-based system that allows customers around the world go online to view their statements." The reporting is near real time, he adds, "with what you purchase today, viewable tomorrow."
Department of Defense steps to correct improper card purchases
| GAO problem identification | DoD actions |
| Source: Government Accountability Agency Report 04-156 Dec. 2003 and Department of Defense Information |
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| Proliferation of cardholders resulting in unmanageable approving official span of control and excessive credit limits. | · Purchase cards reduced from about 239,000 in March 2001 to about 145,000 in March 2003. |
| · Issued policy which mandates the linkage of card spending limits based on historical spending patterns. | |
| More than half of approving officials had no training. | · Made online courses available for purchase cardholder and billing officials. |
| · Required new program to take the training and pass a knowledge test before they can be issued a card or assigned as an approving official. | |
| The purchase card program offices of the military services did not systematically monitor the purchase card program. | · Reduced workload burden on approving officials to ensure accurate and complete reviews are possible. |
| · Expanding data mining to screen for high-risk transactions. A DoD Inspector General's review of 1,357 purchase cardholders last year identified 182 who potentially used cards inappropriately or fraudulently. | |
| · The intention is to design a product that will block the most egregious transactions at point of sale and flag highest risk transactions in order to reduce the amount of oversight needed. | |
| The military did not discipline cardholders or officials who authorized purchase of items with excessive cost or without documented government need. | DoD has issued disciplinary guidelines for nonfraudulent use or oversight including counseling and suspension of card privileges. |
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