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Mitigating fraud waste_misuse

The U.S. Government was one of the earliest adopters of the P-Card. The program has grown exponentially since with approximately $17 billion in purchases in 2005 and an cost-savings of $1.2 billion annually.

However, implementation of a streamlined procurement process was not without it's missteps. This paper will discuss how to optimize the benefits of a streamlined purchasing process while minimizing risk / exposure, using the U.S. Government as a case study.

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Mitigating fraud waste_misuse

  1. 1. Mitigating Fraud, Waste and Misuse within the Procurement Function A Case Study of P-Card Adoption within the U.S. Government
  2. 2. The Continuous Balancing Act <ul><li>The traditional P.O.-driven transaction costs $93 over and above the cost of the good or service purchased (from sourcing to payment). 1 </li></ul><ul><li>The P-Card decreases the average cost of transaction by more than 75%. 2 </li></ul><ul><li>However, 73% of organizations surveyed experienced attempted or actual payment fraud in 2009. 3 </li></ul><ul><li>These figures illustrate the importance of thoughtful and thorough implementation of fraud prevention policies, but not without considering the value of a streamlined and cost-efficient procurement program. </li></ul>Purchasing Convenience vs. Purchasing Control
  3. 3. The U.S. Government as a Case Study The U.S. Government was one of the earliest adopters of the P-Card. The program has grown exponentially since with approximately $17 billion in purchases in 2005 and an cost-savings of $1.2 billion annually. Executive order encourages “more efficient” small purchase procurement options Department of Commerce conducts pilot program General Services Administration assigned to management of PTF card programs National Performance review dubs P-card a “promising initiative Federal Acquisition Streamlining Act Federal Acquisition Reform Act Standards for Internal Control in the Federal Government
  4. 4. Card Issuing and User Training In 2001 and 2002 the GAO identifies a significant portion of issued cards for which there was no transaction history (the cards had never been used) or there was no documentation justifying that the cardholder should need a purchasing card. As the result of these audits, several military agencies cut back their cardholders and implemented strict card issuance policies. Over a six-year period, total federal cardholders dropped from 586,000 to 357,000. 5 Limiting Risk
  5. 5. Card Issuing and User Training A study conducted in 2008 reviewed the stagnation of P-card use in the federal government as the result of new card issuance policies. Estimated cost savings that could have been achieved through additional cardholders and transactions during this six-year timeframe were estimated to be $5.4 billion. Rebate revenue left unearned over this time period was estimated at $26 million. 5 Optimizing Value
  6. 6. Card Issuing and User Training Ensuring that only the most appropriate employees are issued card / account responsibility limits financial exposure. However, new payment methods such as e-cards, virtual cards, and one-time use cards ensure that “casual” users have access to streamlined payment tools while agencies reap the benefit of administrative cost savings – without overexposure to risk. Formal training on appropriate use of the account and purchasing procedures should be conducted and documented for each cardholder . Finding the Balance
  7. 7. Purchase Controls / Purchase Authorization A 2002 audit of one federal department noted that 10 out of 14 offices studied disregarded the department’s purchasing policy requiring that all purchases of items over $1,000 be requested and approved in writing by an executive officer prior to purchase. 6 That same year, two employees within another department made repeated micro-purchases, adding up to over $121,000 in computer equipment. The total purchase clearly exceeding the cardholders’ established purchase limits and was deemed a misuse of the purchasing cards. 6 A 2008 audit of government wide purchasing card programs estimated that nearly 41% of the transactions sampled from 2005-2006 failed to show that the transaction was properly authorized and that an individual other than the cardholder signed for the item once the product was delivered. 9 With Convenience Comes Risk.
  8. 8. Purchase Controls / Purchase Authorization MCC Blocking in an Open-loop card program limits the type of companies a cardholder can purchase from based upon the company’s merchant category codes. Closed-loop card networks hand pick a select group of merchants with which a cardholder may conduct business (i.e. fuel stations, retail locations of a preferred supplier, parts and service shops). One government agency has implemented an order-to-payment e-procurement platform. Users are classified hierarchically and guided through the procurement process to ensure compliance with procurement policies. Zero instances of fraud have been identified on this system since launch. 7 Automating Controls.
  9. 9. Purchase Controls / Purchase Authorization <ul><li>Additional user-level purchasing controls are also available today: </li></ul><ul><ul><ul><ul><ul><li>Transaction volume or frequency limitations, </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Single transaction minimum or maximum values, </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Product code limitations, </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Purchase order (PO) requirements and even PO format requirements, </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Hierarchical structures, </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Reference number requirements such as unit number, department number, vehicle identification number (VIN) and more. </li></ul></ul></ul></ul></ul>Automating Controls.
  10. 10. Monitoring Tools and Alerts <ul><li>Backend technologies in new payment technologies can monitor </li></ul><ul><li>the transaction database for pre-established conditions, </li></ul><ul><li>indicating fraud, waste or misuse. </li></ul><ul><li>A payment program for one government agency incorporates more than 250 unique invoice verification data points alone into its verification program. Over a 5-year period, the system identified more than 54,000 errors before transaction information was ever submitted for payment </li></ul><ul><ul><ul><ul><ul><li>approval. 8 </li></ul></ul></ul></ul></ul>Mitigating Risk.
  11. 11. Monitoring Tools and Alerts Agencies are also able to develop exception alerts and reports, which call attention to purchases that may or may not have been made for approved government use (i.e. home furnishings, toys, cosmetics), been purchased from designated government sources, or obtained at excessive cost. Alerts may be prompted when indicators of split procurements such as sequential invoice numbers, receipts issued within specific time periods of one another, and sequential PO numbers for similar items purchased are present. Mitigating Risk.
  12. 12. Review and Approval A 2002 GAO audit reviewing 5 months of cardholder statements at one government department identified that 1 out of 3 statements had not been approved by the appropriate official. The unapproved statements totaled $1.8 million. Even after a new approval process was implemented, the GAO noted that officials were not ensuring that each statement was supported by adequate documentation. 6 Another agency had instituted a broad policy allowing the AO to presume that any transactions made were appropriate / authorized unless the AO was notified to the contrary by the cardholder. 6 Similarly, a 2010 audit of an additional agency noted that more than 75% of obligations allowed one official to act in two or more functions throughout the procurement function: request, authorization of purchase, recording the obligation of funds, verifying arrival of goods, and approving payment. 9 Catching the Excess.
  13. 13. Review and Approval In most of the above cases, it was found that AOs were overburdened by an excessive number of cardholder statements, leading to oversights within or a complete abandonment of appropriate approval policies. The GAO recommends a ratio of 5-7 cardholders to one approving official within a high-frequency transaction program. 6 For low-frequency, high-value transaction programs, a transaction-by-transaction approval process may be the best measure against inappropriate use of funds. One procurement agency implemented a fully-prompted e-procurement platform which prompts the approving official via email to review and approve transaction details prior to invoice submission to payables. This same system compiles supporting documentation for each transaction within the system, recording the competitive bidding process, sole-source justifications, purchase logs, object-class codes, invoices, MSDSs, etc. in an auditable trail for the AO’s review. Opportunity for Refinement.
  14. 14. Conclusion <ul><li>Step by step, here are six methods to optimize the benefits of a </li></ul><ul><li>streamlined purchasing process while minimizing risk exposure. </li></ul><ul><ul><li>Evaluate departmental, agency and individual purchasing requirements to determine appropriate accountholders, accepting locations, credit line requirements and risk exposure. </li></ul></ul><ul><ul><li>Ensure that policies are established, shared and easily referenced by any accountholder or AO. </li></ul></ul><ul><ul><li>Ensure that AOs are knowledgeable of procurement policies and trained on how to perform their responsibilities. </li></ul></ul><ul><ul><li>Determine and implement appropriate automations and front-end purchase authorization features to minimize opportunity for fraud, waste and misuse. </li></ul></ul><ul><ul><li>Establish criteria to help identify account misuse and implement automated alerts and / or reports to notify the appropriate official when such instances occur. </li></ul></ul><ul><ul><li>Establish minimum account review and auditing expectations and ensure an appropriate ratio of accounts to accountable officials. </li></ul></ul>
  15. 15. Visually, you can think of each step in the process as a filter, siphoning out inappropriate spending.
  16. 16. Resources 1 Palmer, Richard and Mehendra Gupta. 2010 Purchasing Card Benchmark Survey Results. MG Research Corporation. 2 2010 AFP Payment Fraud and Control Survey. Report of Survey Results. 3 United States Department of Defense. Office of Inspector General. “ Fraud Indicators in Procurement and Other Defense Activities: Fraud, Waste, and Abuse Defined.” . 4 AGA Corporate Partner Advisory Research Group. The Federal Purchase Card: Use, Policy and Best Practice. AGA CPAG Research Series: Report No. 4. April 2006. 5 Palmer, Richard J., Mehendra Gupta and Rodney Dawson. U.S. Government Use of Commercial Card Technology: A Case for Change in Military Card Distribution Policy. Defense AR Journal. Volume 17, Number 3, Issue 55, July 2010. 6 Calbom, Linda M. United States GAO. Testimony Before the Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, House of Representatives. Government Purchase Cards: Control Weaknesses Expose Agencies to Fraud and Abuse. May 1, 2002. 7 A Better Procurement Process. Multi Service Corporation. March 2010. 8 Multi Service Corporation (2010). Retrieved April, 2010.(Rack11D) Multi Service database. 9 Ragland, Susan. US GAO. Testimony Before the Committee on Veteran Affairs, House of Representatives, Department of Veteran Affairs: Longstanding Weaknesses in Miscellaneous Obligations and Financial Reporting Controls. July 2010. 10. Inspection and Evaluation Committee. A Practical Guide for Reviewing Government Purchase Card Programs. June 2002.