BREAKING: Maui pCard Audit Finds “Fraud, Waste or Abuse” May Have Occurred
An audit of county-issued “pCards” or procurement credit cards found that fraud, waste, or abuse may have occurred. The audit was released today by Maui County Auditor Lance T. Taguchi and covered a 13-month period from September 2015 to May 2017.
It also identified one instance in which a pCard was used by a county director (details below) to purchase round-trip airline tickets to the mainland for family members. Although the funds were reimbursed, the auditor noted that personal use of a County pCard is “explicitly prohibited.”
The audit also noted that the transactions of one county employee were under active criminal investigation and the transactions of another employee were being investigated internally by the employing department.
Managing Director, Keith Regan said in a correspondence dated June 7, 2017 that although he is not required to comment on the incident involving the allegations he said, “please know that we are very concerned about this matter and will fully cooperate and provide any assistance needed to facilitate the investigations.”
The Department of Management further responded to audit saying they appreciate the report, and have already convened a working group that has been reviewing and assessing the pCard program and its policy and procedures to determine ways to effectively improve them.
Maui Now reported on two pCard investigations initiated in 2015 during a time frame that appears to have occurred prior to the period covered in the audit. That involved a commercial kitchen at the Wailuku Public Works Baseyard and automotive expenses charged to the county by Maui County Parks & Recreation personnel.
The pCards are issued to employees and are intended for use on goods and services needed to perform their job. The report notes that the audit was selected due to the high dollar volume of purchases made with pCards and the “inherent risks” related to the issuance of credit cards to employees. Public interests and prior audit findings were also considered.
Over the 13-month period covered in the audit, 369 pCards were used by all levels of county employees to make $4.38 million of purchases. According to the audit, while the state constitution mandates that public funds only be used for public purposes; fraud, waste, or abuse may have occurred.
The report states that “While using pCards inherently improved efficiency and brought in just under $80,000 of cash rebates to the county, we found that some of the county’s pCard use may have been fraudulent, wasteful, or abusive.”
The Maui audit came as local media outlets reported pCard abuses in Hawaiʻi County, where employees had allegedly used the cards to pay for a hostess bar in Honolulu, an expensive bicycle, surfboard and other personal use. The Office of the County Auditor set out to determine if Maui County’s pCards were exposed to similar issues.
According to the Maui audit, of the nearly 25,000 separate transactions, there were no instances of pCards being used at hostess bars observed; However, testing revealed that some hostess bars are categorized as “restaurants.” “This creates a loophole that would allow some pCards to be used at hostess or other types of bars. As such, we recommend that this loophole be addressed by finding alternative ways to pay for authorized meals,” the report stated.
The report also found that some pCard purchases were parceled–or broken up into multiple smaller transactions to avoid the $500 single purchase limits, obtaining price quotes, or other rules meant to safeguard taxpayer funds.
“To remedy this, we recommend the County make pCard training a priority, monitor and document instances where parceling continues to occur, and when appropriate discipline employees who do not comply,” the audit stated. “In addition, we also made recommendations relating to improving transparency by requiring cardholders to disclose personal businesses or “side job” work performed outside of their employment with the County and controlling pCard credit limits in order to reduce financial exposure to the County.”
Director of Finance Among Those Identified in Audit:
Near the completion of the audit, there was an instance where a county pCard was reportedly used to purchase round-trip airline tickets to the mainland for the wife and college-aged child of the Director of Finance.
“Although the Director reimbursed the County, using a County pCard to pay for family members’ travel is personal use. Personal use of a County pCard is explicitly prohibited. County taxpayers deserve better,” the auditor stated in the report.
“This personal use begs the question: can the County realistically expect its employees to follow rules meant to safeguard taxpayer money when those rules are being broken by the person making them?”
Because of the serious nature of this matter, the Office of the County Auditor brought the issue to the attention of the Managing Director on May 5, 2017.
County Communications Director Rod Antone said that in the case of the Finance Director: “the county investigated the incident internally and took the proper administrative actions.”
Also, Antone said, “what the audit fails to mention is that the Finance Director tried to pay for all three airfares (himself, wife, child) with his own credit card at first but was told the county could not reimburse his portion of the trip if he did it that way. So he wrote a check reimbursing the county for the trip and used the pCard to pay for the fares. The reimbursement to the county took place before the fares were booked. There was no attempt to misuse county funds although technically this did not follow the proper pCard procedures.”
The audit states that, “While we are hopeful that the County will make efforts to rebuild the public trust, County taxpayers deserve better. And, while we are confident that the County is capable of implementing many, if not all of our recommendations, the Director of Finance needs to regain employee trust by leading by example, not by exception.”
Fraud, Waste and Abuse:
The audit stated that, “During the course of our audit, we observed irregularities in some of the pCard transactions which may indicate fraud, waste, or abuse may have occurred.” The Office of the County Auditor followed up with this finding by contacting law enforcement. As a result, “the transactions of one employee were under active criminal investigation and the transactions of another employee were being investigated internally by the employing department.”
In order to avoid interfering with the active investigations, the Auditor’s office relied on the guidance of the US Comptroller General standards, and remains on standby as a resource instead of directly pursuing the matters.
Safeguard Limits Violated:
The audit also found that cardholders used county pCards to make multiple back-to-back purchases to avoid purchase limits meant to safeguard taxpayer funds.
Although there is a $500 purchase limit on most transactions, the audit found that the cards were being used to make smaller purchases or “parceling” to break up the larger purchase into smaller amounts.
The limit is intended to ensure the cards are not used to make larger purchases which otherwise require obtaining written quotes or using other methods which encourage competition such as requests for proposals or invitations for bids.
The auditor’s report included commentary on the parceling finding saying: “These practices are in direct violation of the Program and go against the intent of good government procurement.”
The audit also found instances where it appeared Cardholders “structured” payments with vendors by entering into revolving accounts or payment plans to purchase larger dollar valued equipment, essentially making the purchase “invisible to County management.”
The audit notes that in some of these cases, invoices showed that Cardholders had beginning and end balances–sometimes in the thousands of dollars.
Cardholders Not Required to Disclose “Side Jobs”:
The audit also found that cardholders are not required to disclose when the purchases they make could be used in their personal businesses or in doing “side job” type work.
The audit stated: “While the extent of these relationships is not known at this time, the fact that many of the items purchased by pCards are theft sensitive and Cardholders could readily use the items in their personal businesses or on “side job” type work, is cause for concern.”
The finding did not criticize employees for having other work, but rather stated that it is “reasonable to expect a heightened level of transparency.”
Excess Financial Exposure:
According to the document, individual cardholder usage for the audit period ranged from a high of $238,350 to a low of $27.11, with an average monthly charge of approximately $914 per month.
The audit found that the average monthly credit used ($914) is disproportionate to the average monthly credit limit of pCards ($15,858). The audit stated that the difference between the “credit used” and the “credit limit” is considered “excess financial exposure”, which is approximately $14,944 per pCard, per month, or 16 times higher than actual use.
Employees obtained pCards without first receiving training:
“Because there is no system in place to ensure proper training is completed by employees prior to the issuance of a pCard or assignment of review/approval responsibilities, employees may not be ready to fulfill their responsibilities,” the audit report stated.
The auditor suggested that training take place prior to the issuance of pCards and that further mandatory training be held to refresh users on rules.
Loophole for Hostess Bars Classified as Restaurants:
The auditor’s report stated that the ability for certain pCards to be used at restaurants creates a loophole which could allow those cards to be used at bars (i.e., hostess bars). The audit found that two in four hostess bars fall under the Merchant Category Code, a category not currently blocked on pCards issued to the Department of Fire and Public Safety and the Department of Liquor Control.
Under current rules, meals are allowed in certain instances relating to Board and Commission meetings or for “rehab meals” traditionally provided to firefighters during large-scale brush fires.
The auditor suggested that the County strongly consider blocking restaurant or food-related Merchant Category Codes on all pCards.
Breakdown of Expenditures:
Of the nearly 25,000 separate transactions made on county-issued pCards during the audit period, purchases were spread across approximately 890 vendors.
The auditor reports that the largest cumulative total paid to a single vendor was Hawaiian Airlines at $491,129. Meantime, the top 25 vendors in terms of total pCard spending accounted for $2.2 million, or approximately 50% of the County’s total pCard spending.
The report notes that four of the top 10 vendors were airline carriers (i.e., Hawaiian, Mokulele, American, and United) and represented $808,445 or nearly 20% of the County’s total pCard spending.
In communication withe Office of the Auditor, Managing Director Regan said he appreciates the auditor’s observations and noted that for clarity that “the auditor’s recommendations did not arise from any specific instances of irregularities found in the performance of the audit.” In written communication to the department, he said, “Management acknowledges that the recommendations are preventative controls that may be helpful in minimizing the potential risk for the misappropriation of funds.”