[House Report 106-474]
[From the U.S. Government Publishing Office]





106th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    106-474

=======================================================================



 
                GOVERNMENT WASTE CORRECTIONS ACT OF 1999

                                _______
                                

 November 17, 1999.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

    Mr. Burton of Indiana, from the Committee on Government Reform, 
                        submitted the following

                              R E P O R T

                        [To accompany H.R. 1827]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Government Reform, to whom was referred the 
bill (H.R. 1827) to improve the economy and efficiency of 
Government operations by requiring the use of recovery audits 
by Federal agencies, having considered the same, reports 
favorably thereon with amendments and recommends that the bill 
as amended do pass.
  The amendments are as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Government Waste Corrections Act of 
1999''.

SEC. 2. FINDINGS AND PURPOSES.

  (a) Findings.--The Congress finds the following:
          (1) Overpayments are a serious problem for Federal agencies, 
        given the magnitude and complexity of Federal operations and 
        documented and widespread financial management weaknesses. 
        Federal agency overpayments waste tax dollars and detract from 
        the efficiency and effectiveness of Federal operations by 
        diverting resources from their intended uses.
          (2) In private industry, overpayments to providers of goods 
        and services occur for a variety of reasons, including 
        duplicate payments, pricing errors, andmissed cash discounts, 
rebates, or other allowances. The identification and recovery of such 
overpayments, commonly referred to as ``recovery auditing and 
activity'', is an established private sector business practice with 
demonstrated large financial returns. On average, recovery auditing and 
activity in the private sector identify overpayment rates of 0.1 
percent of purchases audited and result in the recovery of $1,000,000 
for each $1,000,000,000 of purchases.
          (3) Recovery auditing and recovery activity already have been 
        employed successfully in limited areas of Federal activity. 
        They have great potential for expansion to many other Federal 
        agencies and activities, thereby resulting in the recovery of 
        substantial amounts of overpayments annually. Limited recovery 
        audits conducted by private contractors to date within the 
        Department of Defense have identified errors averaging 0.4 
        percent of Federal payments audited, or $4,000,000 for every 
        $1,000,000,000 of payments. If fully implemented within the 
        Federal Government, recovery auditing and recovery activity 
        have the potential to recover billions of dollars in Federal 
        overpayments annually.
  (b) Purposes.--The purposes of this Act are the following:
          (1) To ensure that overpayments made by the Federal 
        Government that would otherwise remain undetected are 
        identified and recovered.
          (2) To require the use of recovery audit and recovery 
        activity by Federal agencies.
          (3) To provide incentives and resources to improve Federal 
        management practices with the goal of significantly reducing 
        Federal overpayment rates and other waste and error in Federal 
        programs.

SEC. 3. ESTABLISHMENT OF RECOVERY AUDIT REQUIREMENT.

  (a) Establishment of Requirement.--Chapter 35 of title 31, United 
States Code, is amended by adding at the end the following:

                    ``SUBCHAPTER VI--RECOVERY AUDITS

``Sec. 3561. Definitions

  ``In this subchapter, the following definitions apply:
          ``(1) Director.--The term `Director' means the Director of 
        the Office of Management and Budget.
          ``(2) Disclose.--The term `disclose' means to release, 
        publish, transfer, provide access to, or otherwise divulge 
        individually identifiable information to any person other than 
        the individual who is the subject of the information.
          ``(3) Individually identifiable information.--The term 
        `individually identifiable information' means any information, 
        whether oral or recorded in any form or medium, that identifies 
        the individual, or with respect to which there is a reasonable 
        basis to believe that the information can be used to identify 
        the individual.
          ``(4) Oversight.--The term `oversight' means activities by a 
        Federal, State, or local governmental entity, or by another 
        entity acting on behalf of such a governmental entity, to 
        enforce laws relating to, investigate, or regulate payment 
        activities, recovery activities, and recovery audit activities.
          ``(5) Payment activity.--The term `payment activity' means an 
        executive agency activity that entails making payments to 
        vendors or other nongovernmental entities that provide property 
        or services for the direct benefit and use of an executive 
        agency.
          ``(6) Recovery audit.--The term `recovery audit' means a 
        financial management technique used to identify overpayments 
        made by executive agencies with respect to vendors and other 
        entities in connection with a payment activity, including 
        overpayments that result from any of the following:
                  ``(A) Duplicate payments.
                  ``(B) Pricing errors.
                  ``(C) Failure to provide applicable discounts, 
                rebates, or other allowances.
                  ``(D) Inadvertent errors.
          ``(7) Recovery activity.--The term `recovery activity' means 
        activity otherwise authorized by law, including chapter 37 of 
        this title, to attempt to collect an identified overpayment--
                  ``(A) within 180 days after the date the overpayment 
                is identified; and
                  ``(B) through established professional practices.

``Sec. 3562. Recovery audit requirement

  ``(a) In General.--Except as exempted by the Director under section 
3565(d) of this title, the head of each executive agency--
          ``(1) shall conduct for each fiscal year recovery audits and 
        recovery activity with respect to payment activities of the 
        agency if such payment activities for the fiscal year total 
        $500,000,000 or more (adjusted by the Director annually for 
        inflation); and
          ``(2) may conduct for any fiscal year recovery audits and 
        recovery activity with respect to payment activities of the 
        agency if such payment activities for the fiscal year total 
        less than $500,000,000 (adjusted by the Director annually for 
        inflation).
  ``(b) Procedures.--In conducting recovery audits and recovery 
activity under this section, the head of an executive agency--
          ``(1) shall consult and coordinate with the Chief Financial 
        Officer and the Inspector General of the agency;
          ``(2) shall implement this section in a manner designed to 
        ensure the greatest financial benefit to the Government;
          ``(3) may conduct recovery audits and recovery activity 
        internally in accordance with the standards issued by the 
        Director under section 3565(b)(2) of this title, or by 
        procuring performance of recovery audits, or by any combination 
        thereof; and
          ``(4) shall ensure that such recovery audits and recovery 
        activity are carried out consistent with the standards issued 
        by the Director under section 3565(b)(2) of this subchapter.
  ``(c) Scope of Audits.--(1) Each recovery audit of a payment activity 
under this section shall cover payments made by the payment activity in 
a fiscal year, except that the first recovery audit of a payment 
activity shall cover payments made during the 2 consecutive fiscal 
years preceding the date of the enactment of the Government Waste 
Corrections Act of 1999.
  ``(2) The head of an executive agency may conduct recovery audits of 
payment activities for additional preceding fiscal years if determined 
by the agency head to be practical and cost-effective.
  ``(d) Recovery Audit Contracts.--
          ``(1) Authority to use contingency contracts.--
        Notwithstanding section 3302(b) of this title, as consideration 
        for performance of any recovery audit procured by an executive 
        agency, the executive agency may pay the contractor an amount 
        equal to a percentage of the total amount collected by the 
        United States as a result of overpayments identified by the 
        contractor in the audit.
          ``(2) Additional functions of contractor.--(A) In addition to 
        performance of a recovery audit, a contract for such 
        performance may authorize the contractor (subject to 
        subparagraph (B)) to--
                  ``(i) notify any person of possible overpayments made 
                to the person and identified in the recovery audit 
                under the contract; and
                  ``(ii) respond to questions concerning such 
                overpayments.
          ``(B) A contract for performance of a recovery audit shall 
        not affect--
                  ``(i) the authority of the head of an executive 
                agency under the Contract Disputes Act of 1978 and 
                other applicable laws, including the authority to 
                initiate litigation or referrals for litigation; or
                  ``(ii) the requirements of sections 3711, 3716, 3718, 
                and 3720 of this title that the head of an agency 
                resolve disputes, compromise or terminate overpayment 
                claims, collect by setoff, and otherwise engage in 
                recovery activity with respect to overpayments 
                identified by the recovery audit.
          ``(3) Limitation on authority.--Nothing in this subchapter 
        shall be construed to authorize a contractor with an executive 
        agency to require the production of any record or information 
        by any person other than an officer, employee, or agent of the 
        executive agency.
          ``(4) Required contract terms and conditions.--The head of an 
        executive agency shall include in each contract for procurement 
        of performance of a recovery audit requirements that the 
        contractor shall--
                  ``(A) protect from disclosure otherwise confidential 
                business information and financial information;
                  ``(B) provide to the head of the executive agency and 
                the Inspector General of the executive agency periodic 
                reports on conditions giving rise to overpayments 
                identified by the contractor and any recommendations on 
                how to mitigate such conditions;
                  ``(C) notify the head of the executive agency and the 
                Inspector General of the executive agency of any 
                overpayments identified by the contractor pertaining to 
                the executive agency or to another executive agency 
                that are beyond the scope of the contract; and
                  ``(D) promptly notify the head of the executive 
                agency and the Inspector General of the executive 
                agency of any indication of fraud or other criminal 
                activity discovered in the course of the audit.
          ``(5) Executive agency action following notification.--The 
        head of an executive agency shall take prompt and appropriate 
        action in response to a notification by a contractor pursuant 
        to the requirements under paragraph (4), including forwarding 
        to other executive agencies any information that applies to 
        them.
          ``(6) Contracting requirements.--Prior to contracting for any 
        recovery audit, the head of an executive agency shall conduct a 
        public-private cost comparison process. The outcome of the cost 
        comparison process shall determine whether the recovery audit 
        is performed in-house or by a contractor.
  ``(e) Inspectors General.--Nothing in this subchapter shall be 
construed as diminishing the authority of any Inspector General, 
including such authority under the Inspector General Act of 1978.
  ``(f) Privacy Protections.--
          ``(1) Limitation on disclosure of individually identifiable 
        information.--(A) Any nongovernmental entity that obtains 
        individually identifiable information through performance of 
        recovery auditing or recovery activity under this chapter may 
        disclose that information only for the purpose of such auditing 
        or activity, respectively, and oversight of such auditing or 
        activity, unless otherwise authorized by the individual that is 
        the subject of the information.
          ``(B) Any person that violates subparagraph (A) shall be 
        liable for any damages (including nonpecuniary damages, costs, 
        and attorneys fees) caused by the violation.
          ``(2) Destruction or return of information.--Upon the 
        conclusion of the matter or need for which individually 
        identifiable information was disclosed in the course of 
        recovery auditing or recovery activity under this chapter 
        performed by a nongovernmental entity, the nongovernmental 
        entity shall either destroy the individually identifiable 
        information or return it to the person from whom it was 
        obtained, unless another applicable law requires retention of 
        the information.

``Sec. 3563. Disposition of amounts collected

  ``(a) In General.--Notwithstanding section 3302(b) of this title, the 
amounts collected annually by the United States as a result of recovery 
audits by an executive agency under this subchapter shall be treated in 
accordance with this section.
  ``(b) Use for Recovery Audit Costs.--Amounts referred to in 
subsection (a) shall be available to the executive agency--
          ``(1) to pay amounts owed to any contractor for performance 
        of the audit; and
          ``(2) to reimburse any applicable appropriation for other 
        recovery audit costs incurred by the executive agency with 
        respect to the audit.
  ``(c) Use for Management Improvement Program.--Of the amount referred 
to in subsection (a), a sum not to exceed 25 percent of such amount--
          ``(1) shall be available to the executive agency to carry out 
        the management improvement program of the agency under section 
        3564 of this title;
          ``(2) may be credited for that purpose by the agency head to 
        any agency appropriations that are available for obligation at 
        the time of collection; and
          ``(3) shall remain available for the same period as the 
        appropriations to which credited.
  ``(d) Remainder to Treasury.--Of the amount referred to in subsection 
(a), there shall be deposited into the Treasury as miscellaneous 
receipts a sum equal to--
          ``(1) 50 percent of such amount; plus
          ``(2) such other amounts as remain after the application of 
        subsections (b) and (c).
  ``(e) Limitation on Application.--
          ``(1) In general.--This section shall not apply to amounts 
        collected through recovery audits and recovery activity to the 
        extent that such application would be inconsistent with another 
        provision of law that authorizes crediting of the amounts to a 
        nonappropriated fund instrumentality, revolving fund, working 
        capital fund, trust fund, or other fund or account.
          ``(2) Subsections (c) and (d).--Subsections (c) and (d) shall 
        not apply to amounts collected through recovery audits and 
        recovery activity, to the extent that such amounts are derived 
        from an appropriation or fund that remains available for 
        obligation at the time the amounts are collected.

``Sec. 3564. Management improvement program

  ``(a) Conduct of Program.--
          ``(1) Required programs.--The head of each executive agency 
        that is required to conduct recovery audits under section 3562 
        of this title shall conduct a management improvement program 
        under this section, consistent with guidelines prescribed by 
        the Director.
          ``(2) Discretionary programs.--The head of any other 
        executive agency that conducts recovery audits under section 
        3562 that meet the standards issued by the Director under 
        section 3565(b)(2) may conduct a management improvement program 
        under this section.
  ``(b) Program Features.--In conducting the program, the head of the 
executive agency--
          ``(1) shall, as the first priority of the program, address 
        problems that contribute directly to agency overpayments; and
          ``(2) may seek to reduce errors and waste in other executive 
        agency programs and operations by improving the executive 
        agency's staff capacity, information technology, and financial 
        management.
  ``(c) Integration With Other Activities.--The head of an executive 
agency--
          ``(1) subject to paragraph (2), may integrate the program 
        under this section, in whole or in part, with other management 
        improvement programs and activities of that agency or other 
        executive agencies; and
          ``(2) must retain the ability to account specifically for the 
        use of amounts made available under section 3563 of this title.

``Sec. 3565. Responsibilities of the Office of Management and Budget

  ``(a) In General.--The Director shall coordinate and oversee the 
implementation of this subchapter.
  ``(b) Guidance.--
          ``(1) In general.--The Director, in consultation with the 
        Chief Financial Officers Council and the President's Council on 
        Integrity and Efficiency, shall issue guidance and provide 
        support to agencies in implementing the subchapter. The 
        Director shall issue initial guidance not later than 180 days 
        after the date of enactment of the Government Waste Corrections 
        Act of 1999.
          ``(2) Recovery audit standards.--The Director shall include 
        in the initial guidance under this subsection standards for the 
        performance of recovery audits under this subchapter, that are 
        developed in consultation with the Comptroller General of the 
        United States and private sector experts on recovery audits.
  ``(c) Fee Limitations.--The Director may limit the percentage amounts 
that may be paid to contractors under section 3562(d)(1) of this title.
  ``(d) Exemptions.--
          ``(1) In general.--The Director may exempt an executive 
        agency, in whole or in part, from the requirement to conduct 
        recovery audits under section 3562(a)(1) of this title if the 
        Director determines that compliance with such requirement--
                  ``(A) would impede the agency's mission; or
                  ``(B) would not be cost-effective.
          ``(2) Report to congress.--The Director shall promptly report 
        the basis of any determination and exemption under paragraph 
        (1) to the Committee on Government Reform of the House of 
        Representatives and the Committee on Governmental Affairs of 
        the Senate.
  ``(e) Reports.--
          ``(1) In general.--Not later than 1 year after the date of 
        the enactment of the Government Waste Corrections Act of 1999, 
        and annually for each of the 2 years thereafter, the Director 
        shall submit a report on implementation of the subchapter to 
        the President, the Committee on Government Reform of the House 
        of Representatives, the Committee on Governmental Affairs of 
        the Senate, and the Committee on Appropriations of the House of 
        Representatives and of the Senate.
          ``(2) Contents.--Each report shall include--
                  ``(A) a general description and evaluation of the 
                steps taken by executive agencies to conduct recovery 
                audits, including an inventory of the programs and 
                activities of each executive agency that are subject to 
                recovery audits;
                  ``(B) an assessment of the benefits of recovery 
                auditing and recovery activity, including amounts 
                identified and recovered (including by administrative 
                setoffs);
                  ``(C) an identification of best practices that could 
                be applied to future recovery audits and recovery 
                activity;
                  ``(D) an identification of any significant problems 
                or barriers to more effective recovery audits and 
                recovery activity;
                  ``(E) a description of executive agency expenditures 
                in the recovery audit process;
                  ``(F) a description of executive agency management 
                improvement programs under section 3564 of this title; 
                and
                  ``(G) any recommendations for changes in executive 
                agency practices or law or other improvements that the 
                Director believes would enhance the effectiveness of 
                executive agency recovery auditing.

``Sec. 3566. General Accounting Office reports

  ``Not later than 60 days after issuance of each report under section 
3565(e) of this title, the Comptroller General of the United States 
shall submit a report on the implementation of this subchapter to the 
Committee on Government Reform of the House of Representatives, the 
Committee on Governmental Affairs of the Senate, the Committee on 
Appropriations of the House of Representatives and of the Senate, and 
the Director.''.
  (b) Application to All Executive Agencies.--Section 3501 of title 31, 
United States Code, is amended by inserting ``and subchapter VI of this 
chapter'' after ``section 3513''.
  (c) Deadline for Initiation of Recovery Audits.--The head of each 
executive agency shall begin the first recovery audit under section 
3562(a)(1) title 31, United States Code, as amended by this section, 
for each payment activity referred to in those sections by not later 
than 18 months after the date of the enactment of this Act.
  (d) Clerical Amendment.--The analysis at the beginning of chapter 35 
of title 31, United States Code, is amended by adding at the end the 
following:

                    ``SUBCHAPTER VI--RECOVERY AUDITS

``3561. Definitions.
``3562. Recovery audit requirement.
``3563. Disposition of amounts collected.
``3564. Management improvement program.
``3565. Responsibilities of the Office of Management and Budget.
``3566. General Accounting Office reports.''.

  Amend the title so as to read:

      A bill to improve the economy and efficiency of 
Government operations by requiring the use of recovery audits 
and recovery activity by Federal agencies.

                    I. Short Summary of Legislation

    H.R. 1827, the ``Government Waste Corrections Act of 
1999,'' amends chapter 35 of title 31, United States Code, to 
require Federal agencies to perform recovery audits if their 
direct purchases for goods and services total $500 million or 
more per fiscal year. Agencies that must undertake recovery 
auditing would also be required to institute a management 
improvement program to address underlying problems of their 
payment systems.

                II. Background and Need for Legislation


Overpayments in the Federal Government

    The Federal Government expends hundreds of billions of 
dollars annually for a variety of grants, payment transfers, 
and procurement of goods and services. In the context of this 
spending, improper payments by Federal agencies and departments 
are a serious problem. At a February 10, 1999 full Committee 
hearing on government waste and mismanagement, Inspectors 
General from three (3) major Federal departments--Health and 
Human Services, Housing and Urban Development, and 
Agriculture--testified about their major program and management 
problems, among them, erroneous payments.\1\ It is estimated 
that a total of about $15 billion was erroneously paid out of 
the Medicare, Food Stamps, and Housing programs in one year. 
Close to $13 billion of that was in the Medicare program alone.
---------------------------------------------------------------------------
    \1\ Waste and Fraud in Federal Government Programs, Hearings Before 
the House Government Reform Committee, 106th Cong., 1st Sess. (1999).
---------------------------------------------------------------------------
    Other Federal departments and agencies are also at-risk for 
erroneous payments. In a recent report on overpayments produced 
at the request of Senate Governmental Affairs Committee 
Chairman Fred Thompson, the General Accounting Office (GAO) 
referred to previous audits that had found improper payments at 
the Department of Defense (DOD), the Department of Education, 
and the Internal Revenue Service.\2\ At DOD, between the years 
of 1994 and 1998, Defense contractors voluntarily returned $984 
million that had been overpaid as a result of inadvertent 
errors, such as paying the same invoice twice.\3\ With over 
$130 billion annually in purchases involving contractors, the 
$984 million figure likely represents just a fraction of the 
erroneous payments DOD makes and does not include overpayments 
made due to fraud or abuse.
---------------------------------------------------------------------------
    \2\ Financial Management: Increased Attention Needed to Prevent 
Billions in Improper Payments, GAO/AIMD-00-10, United States General 
Accounting Office (1999).
    \3\ Ibid.
---------------------------------------------------------------------------
    Most agencies do not identify, estimate and report the 
nature and extent of their improper payments on their own,\4\ 
and there is no legislative requirement that they do so. Thus, 
most Federal overpayments go undetected, leaving the extent of 
the problem unknown. For nine agencies that have reported their 
estimates of erroneous payments, the total is $19.1 billion for 
fiscal year 1998.\5\ It is unclear of this amount what 
constitutes inadvertent errors versus errors due to fraud and 
abuse. The sheer size and complexity of Federal operations, 
along with documented, widespread financial management 
weaknesses are at the root of the problem with inadvertent 
erroneous payments. Ultimately, the problem wastes tax dollars 
and detracts from the efficiency and effectiveness of Federal 
operations by diverting resources from their intended uses.
---------------------------------------------------------------------------
    \4\ Ibid.
    \5\ Ibid.
---------------------------------------------------------------------------
    H.R. 1827 represents the first significant step taken to 
deal with the tens of billions of dollars in Federal 
overpayments made each year. The legislation is modeled upon an 
established private sector practice successful for identifying 
and recovering inadvertent overpayments. The practice is 
commonly known as ``recovery auditing.''

Recovery auditing in the private sector

    Inadvertent overpayments made by any entity--from a 
personal household, to a large corporation--are a fact of life. 
No matter how fine-tuned the financial management system, 
overpayments are bound to occur at one time or another. The 
larger the volume of purchases, the greater the likelihood of 
overpayments. Recovery auditing is a procedure aimed directly 
at large volumes of payments to identify and recover 
overpayments, and is a common practice in the private sector. 
It is not a ``one-time'' audit in the traditional sense of the 
word, but an on-going, systematic procedure--a financial 
management practice.
    The use of recovery auditing is not a sign of poor 
financial management. The majority of Fortune 500 companies use 
recovery auditing. There is a general recognition that when you 
have high volumes of purchases, there is no way to avoid 
overpayments. Recovery auditing is simply an acknowledged, 
effective method for maximizing the financial performance of an 
organization.
    In the course of a typical recovery audit, all purchases 
and payment transaction media is reviewed--usually involving 
the use of proprietary software--to identify where overpayments 
may have occurred. These potential overpayments are then 
further researched for verification to assemble all supporting 
documentation. Then identified overpayments are submitted to 
the client for review and approval. Subsequently, the vendor is 
notified via a 30-day letter and asked to reply. Overpayments 
are usually recovered through direct payment or administrative 
offset.
    In the private sector, recovery audits are usually 
performed by a specialist under a contingency fee contract 
arrangement, whereby the specialist is paid an agreed-upon 
percentage of the overpayments identified and recouped. Under 
this type of arrangement, there is no risk to the entity 
contracting for a recovery audit. All costs to conduct the 
audit are borne by the auditor. As overpayments are found and 
recovered, the client and the auditor share in the proceeds. 
The average recovery rate for overpayments in the private 
sector is about $1 million for every $1 billion in 
purchases.\6\
---------------------------------------------------------------------------
    \6\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Paul Dinkins, Executive Vice President, Profit Recovery 
Group International).
---------------------------------------------------------------------------

Recovery auditing in the Federal Government to date

    Recovery auditing has been implemented successfully in the 
Army and Air Force Exchange Systems (AAFES) within DOD since 
1983.\7\ AAFES makes purchases of about $5 billion per year 
with the most recently completed recovery audit (1998) 
producing close to $25 million in recovered monies.\8\ Over the 
past several years, recovery auditing has also been piloted at 
DOD's Defense Supply Center in Philadelphia (DSCP) at the 
direction of Congress. The pilot program began in 1996 when 
DSPC competitively contracted with the Profit Recovery Group 
(PRG). The audit base was $7.2 billion in payments to vendors 
from fiscal years 1993 through 1995.\9\ While the project is 
not completed, potential overpayments were originally estimated 
at about $27.3 million, proof that recovery auditing was a 
cost-effective commercial practice for DSCP.\10\ In fact, DOD 
was directed to continue and expand the recovery audit 
demonstration program in this year's defense reauthorization 
legislation. Based on his experience with recovery auditing 
contracts at DOD, the Executive Vice President of PRG, Paul 
Dinkins, estimates that the recovery rate within all DOD 
programs is about three times that of the private sector, or $3 
million for every $1 billion.\11\
---------------------------------------------------------------------------
    \7\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Gerald R. Peterson, Chief, Accounts Payable Division, 
Army and Air Force Exchange Service).
    \8\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Paul Dinkins, Executive Vice President, Profit Recovery 
Group International).
    \9\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Gerald R. Peterson, Chief, Accounts Payable Division, 
Army and Air Force Exchange Service).
    \10\ Ibid.
    \11\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Paul Dinkins, Executive Vice President, Profit Recovery 
Group International).
---------------------------------------------------------------------------

            III. Legislative Hearings and Committee Actions

    H.R. 1827 was introduced on May 17, 1999 by the Honorable 
Dan Burton (R-IN), Chairman of the Government Reform Committee. 
Original co-sponsors were Majority Leader Dick Armey (R-TX), 
Rep. Pete Sessions (R-TX), and Rep. Doug Ose (R-CA). H.R. 1827 
was referred to the Committee on Government Reform, then 
referred to the Subcommittee on Government Management, 
Information, and Technology on May 25, 1999. The subcommittee 
held a legislative hearing on June 29, 1999. A business meeting 
was held by the subcommittee on July 21, 1999, at which time 
the Chairman, Rep. Steve Horn (R-CA), offered the measure as an 
amendment in the nature of a substitute to H.R. 1827. It was 
ordered favorably reported to the full Committee by voice vote.
    On November 10, 1999, the full Committee met to consider 
H.R. 1827. Chairman Dan Burton offered an amendment in the 
nature of a substitute. An amendment from Mr. Turner was 
accepted to require privacy protections for individually 
identifiable information. Another amendment, offered by Mr. 
Waxman, was accepted. It requires that agencies conduct public-
private cost comparisons in order to decide whether to conduct 
recovery audits in-house or contract for them. The Committee 
approved the amendment in the nature of a substitute, as 
amended, by voice vote. The Committee then favorably reported 
the Act, as amended, to the House by voice vote.

              IV. Committee Hearings and Written Testimony

    On June 29, 1999, the Subcommittee on Government 
Management, Information, and Technology held formal hearings on 
H.R. 1827. Witnesses at the hearing were: David Walker, 
Comptroller General of the United States, General Accounting 
Office; Deidre Lee, Acting Deputy Director of Management and 
Administrator of the Office of Federal Procurement Policy, 
Office of Management and Budget; George H. Allen, Deputy 
Commander, Defense Supply Center Philadelphia; Gerald R. 
Peterson, Chief, Accounts Payable Division, Army and Air Force 
Exchange Service; Michelle Snyder, Director, Financial 
Management Office, and Chief Financial Officer, Health Care 
Financing Administration; Paul Dinkins, Executive Vice 
President, The Profit Recovery Group International, Inc.; 
Douglas R. Wilwerding, Chief Executive Officer and President, 
Omnium Worldwide, Inc.; Terrance Lyons, Director of Accounting, 
the Walgreen Company; Stephen R. Booma, private consultant; 
Robert Koehler, American Logistics Association.
    It is important to recognize that the legislation under 
discussion at the June 29, 1999 subcommittee hearing contained 
substantial differences from that which subsequently passed the 
full Committee. In particular, the legislation under 
consideration at this hearing would have applied the recovery 
audit mandate to all government programs (discretionary and 
entitlement) whose payment activities totaled $10 million or 
more annually. The Office of Management and Budget (OMB) was 
directed to focus on five model agencies doing recovery 
auditing to track and report on best practices. The legislation 
at that time also contained set percentage amounts for the 
distribution of recovered overpayments--25 percent would have 
been available for payment to the outside recovery auditor; 25 
percent would have been available to the agency for financial 
and program management improvements; 25 percent would be 
available to the program from which the overpayment originated; 
and 25 percent would have had to be returned to the Treasury. 
Another provision, now no longer there, would have made Federal 
employees who helped identify and correct significant agency problems 
eligible for large bonuses. Each of these provisions is now different 
from, or no longer part of, the current legislation.
    Comptroller General David Walker's (GAO) testimony 
discussed the dimensions of the overpayment problem in the 
Federal Government--the significant financial systems' 
weaknesses, problems with fundamental record keeping and 
financial reporting, incomplete documentation, weak internal 
controls, and the inability to determine the full extent of 
improper payments.\12\ He testified that H.R. 1827 was a 
positive step in the effort to identify, recover and reduce 
overpayments in the government.\13\ The strengths of the bill 
included the incentives for agencies to improve Federal 
management practices; the requirement for recovery audit 
contractors to provide periodic reports on how to mitigate 
overpayment problems; and the option for agencies to perform 
recovery auditing in-house, by contract, or using a combination 
thereof.\14\ He stressed the importance of the latter provision 
to an agency's ability to pick the low-hanging fruit before 
turning to contingency fee arrangements on the outside.\15\
---------------------------------------------------------------------------
    \12\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of David Walker, Comptroller of the United States, General 
Accounting Office).
    \13\ Ibid.
    \14\ Ibid.
    \15\ Ibid.
---------------------------------------------------------------------------
    Mr. Walker recommended that the Committee re-examine the 
bill's provision of financial incentives to the agencies, and 
consider a more substantial portion of the collected 
overpayments be returned to the Treasury.\16\ According to GAO, 
the three keys to successful execution of governmentwide 
recovery auditing are: (1) meaningful incentives for agencies 
to want to participate in the program; (2) adequate safeguards 
to ensure achievement of congressional intent, including proper 
use of appropriations; and (3) assuring transparency in the 
conduct of the program.\17\
---------------------------------------------------------------------------
    \16\ Ibid.
    \17\ Ibid.
---------------------------------------------------------------------------
    Dierdre Lee, acting Deputy Director for Management at OMB, 
testified on behalf of the administration.\18\ She indicated 
that the administration's focus was on paying correctly at the 
front end.\19\ The more promising provisions in H.R. 1827 she 
said included paying for audit recovery services out of 
proceeds, gains sharing for agencies to improve financial 
management, identifying management improvement opportunities, 
and rewarding employee performance.\20\
---------------------------------------------------------------------------
    \18\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Deirdre Lee, Acting Deputy Director of Management and 
Administrator of the Office of Federal Procurement Policy, Office of 
Management and Budget).
    \19\ Ibid.
    \20\ Ibid.
---------------------------------------------------------------------------
    Problems that Ms. Lee identified with H.R. 1827 included 
(1) the threshold amount of $10 million (too low); (2) the 
application to entitlement and benefit programs (most of which 
she indicated already had statutory provisions for identifying 
and recovering overpayments), and (3) the return of up to 25 
percent of collected amounts to agency programs instead of the 
Treasury.\21\
---------------------------------------------------------------------------
    \21\ Ibid.
---------------------------------------------------------------------------
    George Allen, Deputy Commander of the Defense Supply Center 
of Philadelphia testified regarding that entity's experience as 
the test site for the DOD demonstration project for recovery 
auditing.\22\ He indicated that of an audit base of $7.2 
billion in payments to vendors over a three-year period, $27.3 
million was identified as potential overpayments.\23\ Those 
overpayments included duplicate payments, interest paid in 
error, discounts offered but not taken, overcharges, and 
breeches of the price warranty provisions in our contracts.\24\ 
While all of the $27.3 million had not been collected, Mr. 
Allen described other benefits to the program, including more 
attention to contract terms and conditions, the identification 
of systemic problems, and the realization for closer oversight 
of the payment function itself.\25\ He testified also that the 
1998 Defense Authorization Act directed that recovery auditing 
be expanded to all Defense Working Capitol Fund activities 
using contingency fee arrangements with private recovery 
auditors.\26\
---------------------------------------------------------------------------
    \22\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of George H. Allen, Deputy Commander, Defense Supply Center 
Philadelphia).
    \23\ Ibid.
    \24\ Ibid.
    \25\ Ibid.
    \26\ Ibid.
---------------------------------------------------------------------------
    Gerald Peterson, Chief of Accounts Payable at the Army and 
Air Force Exchange Service (AAFES) testified that it currently 
has a primary and a secondary contract with two different 
recovery audit firms.\27\ In addition, AAFES has instituted an 
in-house recovery effort to detect duplicate payments and 
recover missed discounts and outstanding credits.\28\ Mr. 
Peterson indicated that a successful recovery audit program 
involves (1) good partnership with agency and audit firm and 
respect for suppliers; (2) development of an in-house recovery 
program to augment the commercial recovery; (3) a compression 
of the audit cycle so that payment errors are found in a timely 
manner; and (4) learning from the recovery audit firm what you 
might be able to recover in-house.\29\
---------------------------------------------------------------------------
    \27\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Gerald Peterson, Chief of Accounts Payable, Army and Air 
Force Exchange Service).
    \28\ Ibid.
    \29\ Ibid.
---------------------------------------------------------------------------
    According to Mr. Peterson, the problems with H.R. 1827 
included (1) caps on percentages under contingency fee 
arrangements with contractors; (2) the disposition of collected 
amounts with regard to non-appropriated fund instrumentalities; 
and (3) reporting requirements to OMB.\30\
---------------------------------------------------------------------------
    \30\ Ibid.
---------------------------------------------------------------------------
    Michelle Snyder, Chief Financial Officer of the Health Care 
Financing Administration (HCFA) which runs the Medicare 
program, testified that her agency's efforts have focused on 
the prevention of improper payments.\31\ The problems H.R. 1827 
posed for Medicare, she testified, were that the bill's 
authorization to compensate recovery auditors on a contingency 
basis could be seen as a bounty system by health care 
providers, and that the recovered monies should go back to the 
Trust Fund rather than to the agency program.\32\
---------------------------------------------------------------------------
    \31\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Michelle Snyder, Chief Financial Officer, Health Care 
Financing Administration).
    \32\ Ibid.
---------------------------------------------------------------------------
    Paul Dinkins, Executive Vice President of the Profit 
Recovery Group International, the firm that pioneered recovery 
auditing 28 years ago, testified to the success of this 
practice in the private sector. The potential benefits for the 
government he emphasized were: the risk free benefits of 
contingency fee arrangements; the recovery of funds for the 
agency and the Treasury; and executive management 
improvements.\33\ Mr. Dinkins did express his concern with the 
disbursement of recovered money with regard to revolving funds, 
trust funds and the like, and indicated that he thought the 
recovered money, minus the contractor fees, should go back to 
the revolving or trust funds.\34\
---------------------------------------------------------------------------
    \33\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Paul Dinkins, Executive Vice President of the Profit 
Recovery Group International).
    \34\ Ibid.
---------------------------------------------------------------------------
    Doug Wilwerding, Chief Executive Officer and President of 
Omnium Worldwide Incorporated, testified primarily regarding 
the recovery auditing in the healthcare industry.\35\ He 
stressed the focus on inadvertent, rather than fraudulent, 
nature of overpayments, and indicated that the vast majority of 
the overpayments in this area are due to duplicate payments, 
payments to ineligible beneficiaries, calculation errors, and 
payments to wrong providers, not judgments of medical 
necessity.\36\ The overpayment rate for the private health 
insurance sector he estimates is about 4 percent of total 
claims paid.\37\
---------------------------------------------------------------------------
    \35\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Doug Wilwerding, Chief Executive Officer and President of 
Omnium Worldwide Incorporated).
    \36\ Ibid.
    \37\ Ibid.
---------------------------------------------------------------------------
    With regard to the overpayment problem in the Medicare 
program, Mr. Wilwerding testified that the claims payment 
errors are being made by the fiscal intermediaries and carriers 
hired by HCFA to administer Medicare claims. These, he said, 
were the same carriers who hire private recovery firms to 
recover their overpaid dollars on their commercial insurance 
portfolio.\38\
---------------------------------------------------------------------------
    \38\ Ibid.
---------------------------------------------------------------------------
    The testimony of Terrence Lyons, Director of Accounting at 
the Walgreen Company, provided a private sector view of 
recovery audit benefits and how his company uses the 
process.\39\ Mr. Lyons indicated that the experience with 
overpayments at Walgreen's, a multi-billion dollar retailer, 
showed that human error is the most common contributing factor 
in payment errors that can never be entirely eliminated.\40\ 
The advantage, he says, for using a recovery audit service is 
that there is no risk or investment required on behalf of his 
company.\41\ The dollars recovered for Walgreen's on 1996 
purchases recovered $16.9 million on an audit base of $8.5 
billion.\42\ For 1997 purchases, Walgreen's expects to recover 
$17.5 million in overpayments on a purchase volume of $9.7 
billion.\43\ The error rate over this time period is about .19 
percent, meaning 99.8 percent of Walgreen's payable 
transactions were processed and paid correctly. Mr. Lyons 
explained the duties of the recovery audit contractor in this 
way:
---------------------------------------------------------------------------
    \39\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Terrence Lyons, Director of Accounting, the Walgreen 
Company).
    \40\ Ibid.
    \41\ Ibid.
    \42\ Ibid.
    \43\ Ibid.

          Our recovery audit firm has responsibilities and 
        duties to ensure the success of their effort. They gain 
        a full understanding of our purchasing and payment 
        systems for both electronic and paper transactions. 
        They meet and develop good working relationships with 
        all of the designated point of contact within our 
        organization and they protect our vendor relationships. 
        In short, we expect our contractor to function in a 
        fully outsourced manner that represents the interest of 
        the Walgreen company.\44\
---------------------------------------------------------------------------
    \44\ Ibid.

    In his oral testimony, Mr. Lyons indicated the reasons why 
---------------------------------------------------------------------------
Walgreen's employs an outside firm to do recovery auditing:

          The answer is simple. As a company, we have chosen to 
        invest our developmental dollars in what we do best: 
        systems and technology that provides improved 
        productivity within our stores and improved customer 
        service. Also the investment in technology and 
        resources needed to develop this kind of capability in-
        house could be cost-prohibitive.\45\
---------------------------------------------------------------------------
    \45\ Ibid.

    Summarizing the major benefits of recovery auditing, Mr. 
---------------------------------------------------------------------------
Lyons stressed the following:

          We recover millions of dollars each year, we incur no 
        financial burden, the process is not disruptive to our 
        normal operations, and the nature of the service is 
        ongoing with benefits, year after year.\46\
---------------------------------------------------------------------------
    \46\ Ibid.

    Stephen Booma, a health care consultant with experience at 
the Travelers Insurance Company and Mutual of Omaha Insurance 
Company, testified regarding recovery auditing in the health 
care industry.\47\ He emphasized that because it is their core 
business, that recovery audit experts be hired to perform 
recovery audits. This is because there is a strong inclination 
for the internal folks making the errors not to point those 
out.\48\ He indicated that in the health care business, 
doctors, hospitals, healthcare providers, and insurance 
companies are very familiar with this process, and that it is 
not an adversarial process.\49\
---------------------------------------------------------------------------
    \47\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Stephen Booma, health care consultant).
    \48\ Ibid.
    \49\ Ibid.
---------------------------------------------------------------------------
    Robert Koehler, senior law partner at Patton Boggs, gave 
testimony representing the American Logistics Association 
(ALA), a trade association of some 600 vendors who sell brand-
name items to the Federal Government.\50\ His most serious 
concern was that the legislation could be construed to 
authorize agencies to delegate core responsibilities from the 
contracting officer to the audit company.\51\ His bottom line 
was that ALA could support H.R. 1827 if there was no delegation 
of authority from the contracting agency to the recovery audit 
firm.\52\ (This issue has since been clarified in the current 
version of H.R. 1827; the agency, not the contractor, makes all 
final determinations and collection actions.)
---------------------------------------------------------------------------
    \50\ The Government Waste Corrections Act: Hearings on H.R. 1827 
Before the House Government Reform Subcommittee on Government 
Management, Information, and Technology, 106th Cong., 1st Sess. (1999) 
(Testimony of Robert Koehler, Attorney-at-Law, Patton Boggs).
    \51\ Ibid.
    \52\ Ibid.
---------------------------------------------------------------------------

                       V. Explanation of the Bill


General purpose of the bill

    The background and need for the legislation are detailed 
earlier in this report. H.R. 1827 itself contains a brief 
outline of findings and purposes. Essentially, the legislation 
aims to address the significant problem of Federal Government 
overpayments using a proven private sector business practice, 
known as recovery auditing, in order to identify and recoup 
inadvertent overpayments made to private vendors. The other 
major aim of the legislation is to provide Federal agencies 
monetary incentives to make improvements to their underlying 
financial and program management structures so that 
overpayments are minimized.

What is recovery auditing?

    While it is a fact that many Federal departments and 
agencies have serious financial management and systems 
weaknesses that make them vulnerable to erroneous payments, the 
use of recovery auditing is not a sign of poor financial 
management. No matter how fine-tuned an entity's financial 
management system, inadvertent overpayments are going to happen 
at one time or another. The greater the volume of purchasing, 
the greater the likelihood of overpayments. Recovery auditing 
is a common, private-sector financial management practice aimed 
directly at large volumes of payments to identify and recover 
overpayments. The majority of Fortune 500 companies use 
recovery auditing as an effective method for maximizing 
financial performance.
    In the course of a typical recovery audit, all purchases 
and payment transaction media is reviewed--usually using 
customized, proprietary software--to identify where 
overpayments may have occurred. These potential overpayments 
are then further researched for verification to assemble all 
supporting documentation. Then identified overpayments are 
submitted to the client for review and approval. Subsequently, 
the vendor is notified via a 30-day letter and asked to reply. 
Overpayments are usually recovered through direct payment or 
administrative offset.
    Traditionally, recovery audits are performed by a specialty 
firm under a contingency fee contract arrangement, whereby the 
firm is paid an agreed-upon percentage of the overpayments 
recouped. Under this type of arrangement, there is no risk to 
the entity contracting for a recovery audit. All costs to plan 
for and conduct the audit are borne by the auditor. As 
overpayments are found and recovered, the client and the 
auditor share in the proceeds.

What agencies must do recovery auditing under the bill?

    The mandate for recovery auditing under H.R. 1827 is 
triggered if the agency spends $500 million or more annually 
for the purchase of goods and services that directly benefit 
the department or agency. H.R. 1827 only applies recovery 
auditing to an agency's spending for direct contracting--the 
purchase of goods and services for the direct benefit and use 
of the government. Examples include payments to a contractor to 
build a new Veteran's hospital, or DOD's purchase of a new 
weapons system.
    H.R. 1827 would not require recovery auditing for programs 
that involve payments to third parties for the delivery of 
indirect services. Examples include education or drug treatment 
grants, or the Medicaid program. In these programs, Federal 
payments must make their way through any number of entities 
including states, localities, and other 3rd party entities, 
before service delivery to the general population. The issue is 
that the payment systems in these programs are often so 
complex, it is uncertain at this time where and how the 
recovery audit procedure would best be applied.
    The decision not to apply recovery auditing to the more 
complex payment activities was not an easy one for the 
legislation's sponsor, Committee Chairman Dan Burton. After 
all, the Medicare program alone accounts for close to $13 
billion in erroneous payments each year. Again, it is unclear 
what portions of that $13 billion constitute fraud versus 
inadvertent error. However, it is the intention of the 
Chairman, with the help of the General Accounting Office, to 
begin work immediately to find out how recovery auditing can 
best be applied to the inadvertent overpaymentsin this and 
similar Federal programs. To this end, GAO has recently begun a study 
regarding the nature of overpayment problems in the Medicare program, 
and the internal capacity of the agency to deal with these problems. 
With the final report due in May 2000, we may know more precisely where 
and how to apply recovery auditing to inadvertent overpayments in the 
Medicare program.

How will recovery auditing work under the bill?

    The Committee envisions that recovery auditing will work in 
the Federal Government similarly to the way it works in the 
private sector. H.R. 1827 provides specifically that agency 
heads conduct recovery audits to ensure the best financial 
interest of the agency. Further, the legislation mandates a 
public-private cost comparison in order to determine whether to 
do recovery auditing in-house or by contract. In conducting 
their cost comparisons, the Committee expects that agencies 
will comply with current OMB circulars, and that they will also 
ensure that their cost comparisons are realistic and fair; in 
other words, the cost comparisons should include the full cost 
of conducting the recovery audit, including the costs of 
quality assurance, liability insurance, employee retirement and 
disability benefits, and all other overhead costs.

Contingency fee contracts for recovery auditing

    Historically, firms in the private sector have used 
contingency fee contract arrangements with recovery audit 
contractors. Under a contingency-fee arrangement, all resource 
investments are made by the contractor, and payment to the 
contractor is a predetermined percentage of the overpayments 
collected back. These recouped overpayments represent 
essentially ``found'' money that the entity would otherwise 
never have seen without the recovery audit. The Committee 
supports the use of contingency fee contracts by Federal 
agencies as a no-risk approach that will obviate the need for 
an agency to make expenditures from its annual appropriations 
in order to perform recovery auditing.
    It has been stated in witness testimony that contingency 
fee arrangements could be seen as a ``bounty-hunting'' system. 
The Committee, however, does not see this as a valid argument 
against the use of such contracts. H.R. 1827 provides that 
contractors simply identify potential overpayments; they have 
no authority to make determinations or take collection action. 
Those functions remain with the agency. Recovery audit 
contractors would not get paid under a contingency fee 
arrangement on the basis of what they identify, but only on the 
basis of what the agency collects from what they identify.

What are the functions and limitations on recovery audit contractors?

    The major function of the recovery audit firm under H.R. 
1827 is to undertake a series of actions to identify potential 
agency overpayments. It is then up to the agency to determine, 
in accordance with its established procedures, whether the 
findings of the auditor in fact constitute overpayments and, if 
so, to begin the collection process. The Committee does not 
intend for this bill to conflict with any provision of the 
Federal Acquisition Regulations (FAR). Formal contact with the 
vendor should take place in the name of the agency (or 
contracting officer). H.R. 1827 does allow for informal contact 
between the recovery audit firm and the vendor in order to 
discuss possible overpayments and to answer questions 
concerning overpayments. However, the essential role of the 
audit firm would be to provide the agency the necessary 
background documentation and research to substantiate the 
agency's overpayment determinations and collection efforts.
    Issues that arise during the collection process would be 
guided by current law, including the relevant provisions of the 
Debt Collection Act. Similarly, any disputes or litigation that 
might arise between the agency and the vendor charged with the 
overpayment would be dealt with under the Contract Disputes Act 
and other applicable laws.
    The recovery audit contractor would not be authorized to 
require the production of records or information from entities 
other than the contracting agency. While the contractor may 
communicate with the vendor during the audit to seek records 
and process clarifications, the contractor is not authorized to 
mandate the provision of vendor records. Also, the recovery 
audit contractor is obligated to protect from disclosure any 
private or confidential business, personal, and financial 
information it may acquire in the course of the audit. After 
the audit is completed, individually identifiable information 
must be returned or destroyed.
    After the audit, the recovery audit contractor is required 
to provide a report to the agency head regarding the problems 
giving rise to the overpayments. The report would also contain 
recommendations for mitigating those problems. If the auditor 
comes across any information that might indicate criminal or 
fraudulent activity, the auditor must immediately notify the 
agency head and the agency inspector general.
    H.R. 1827 specifically indicates that current authorities 
under the Inspectors General Act are not to be affected by 
anything in H.R. 1827.

What happens to money collected back?

    In general, at least 50 percent of the overpayment amounts 
collected back after a recovery audit must be returned to the 
general Treasury. Not more than 25 percent would be available 
for the agency to carry out a management improvement program, 
and any other amounts would be available to reimburse the 
recovery audit contractor, or to reimburse the agency's 
appropriation for other costs incurred with respect to the 
recovery audit. The exceptions are (1) if the funds collected 
originated from a non-appropriated fund instrumentality, trust 
fund, working capital fund, revolving fund, or other such fund 
or account, the disposition requirements of H.R. 1827 would not 
apply, and; (2) if the funds collected originated from a 
current appropriation or fund that remains available for 
obligation, they could be used to pay recovery audit costs, but 
otherwise must be returned to that appropriation or fund.

What is the management improvement program?

    Looking back at past payments is a major thrust of H.R. 
1827. However, the legislation also recognizes that there is an 
equally important goal of getting the payment right in the 
first place. In addressing the front end of the problem, the 
legislation requires that agencies use part of the money they 
get back to work on improvements to their management and 
financial systems to, as a priority, improve overpayment error 
rates, and then to address other weaknesses. Improvements may 
be made to an agency's staff capacity, information technology, 
and financial management. The agencymust be able to account for 
its expenditures and activities with regard to the management 
improvement program.

What are OMB's responsibilities under the bill?

    The Office of Management and Budget (OMB) would be required 
to coordinate the implementation of the bill among the Federal 
agencies and departments. No later than 180 days after H.R. 
1827 becomes law, OMB must issue guidance to the agencies, 
after consultation with the Chief Financial Officers Council 
and the President's Council on Integrity and Efficiency. That 
guidance must include standards for recovery auditing that 
would be developed in consultation with the General Accounting 
Office and with private sector recovery audit experts. The 
Committee expects that OMB's guidance would direct agencies to 
consider opportunities with recovery audit firms that become 
approved for listing on the government-wide competitive 
schedule assembled by the General Services Administration.
    The Committee expects that the natural forces of 
competition will work sufficiently to guarantee fair and 
reasonable contract provisions between the agency and recovery 
audit contractor, particularly as it pertains to contingency 
fee percentages. While the Committee does not anticipate the 
need for it, H.R. 1827 does give the Director authority to 
place limitations on the percentage amounts that may be paid to 
contractors. The Committee expects such authority to be used on 
a case-by-case basis and in extreme circumstances, such as a 
break-down in the competitive process.
    The OMB Director is also authorized to exempt agencies from 
the provisions of the bill if recovery auditing proves not to 
be cost-effective or if it somehow impedes the agency's 
mission. The Committee does not foresee the need for exemptions 
to be made, and expects that if an exemption were made because 
of cost-effectiveness, such determination would be based on the 
agency's experience with recovery auditing for a reasonable 
period of time.
    No later than one year after H.R. 1827 becomes law, and for 
two years thereafter, OMB must submit a report to the President 
and Congress. The reports would include: (1) an inventory of 
programs and activities subject to recovery audits; (2) an 
assessment of recovery auditing with amounts identified and 
recovered; (3) an identification of best practices and 
significant problems; (4) a description of agency expenditures 
in the recovery audit process; (5) a description of the 
management improvement programs, and; (6) any recommendations 
for agency practices or changes in law that would improve the 
application of recovery auditing for the Federal Government.

GAO reports

    No later than sixty (60) days after each OMB report, the 
General Accounting Office (GAO) must submit a report on the 
implementation of the Act to the certain committees in the 
House and Senate, and to OMB.

                      SECTION-BY-SECTION ANALYSIS

Sec. 1. Short title

    Section 1 would provide that the Act might be cited as the 
``Government Waste Corrections Act of 1999.''

Sec. 2. Findings and purposes

    Section 2 would provide a statement of findings and 
purposes for the legislation. The findings are that: (1) 
overpayments are a serious problem for Federal agencies that 
waste tax dollars and detract from the efficiency and 
effectiveness of Federal operations; (2) that an established 
business practice known as ``recovery auditing'' has been used 
successfully in the private sector for many years to identify 
and recoup overpayments to providers of goods and services; and 
(3) that recovery auditing and activity have great potential 
for application to the Federal Government.
    The purposes of the legislation would be to: (1) ensure 
that overpayments made by the Federal Government--that would 
otherwise remain undetected--are identified and recovered; (2) 
require the use of recovery audits by Federal agencies in order 
to collect overpayments; and (3) provide incentives for 
agencies to make improvements in Federal management practices, 
thereby significantly reducing overpayments, waste, and error 
in Federal programs.

Sec. 3. Establishment of recovery audit requirement

    Section 3(a) would add a new subchapter to chapter 35 of 
title 31, United States Code, entitled ``Recovery Audits'' 
containing sections 3561 through 3566.
            Section 3561. Definitions
    This section would contain definitions of terms applicable 
under this legislation. The term ``Director'' would mean the 
Director of the Office of Management and Budget (OMB). The term 
``payment activity'' would mean an agency activity that entails 
making payments to vendors or other non-governmental entities 
that provide goods or services for the direct use of an agency. 
The term ``recovery audit'' would mean a financial management 
technique used to identify overpayments in agency payment 
activities. The term ``recovery activity'' would mean the 
process, otherwise authorized by law, to try and collect 
overpayments.
            Section 3562. Recovery audit requirement
    Subsection (a) would require each executive agency to 
conduct recovery audits for every fiscal year if combined 
payment activities total at least $500 million annually on 
goods or services for the use or direct benefit of the agency. 
Agencies may conduct recovery audits for payment activities 
under this threshold if they so choose.
    Subsection (b) would provide that agency heads consult and 
coordinate recovery audits with the agency Chief Information 
Officer and the Inspector General. Agencies would be directed 
to ensure the maximum financial benefit to the government. 
Agencies would be authorized to conduct recovery audits in-
house, contract with private recovery audit specialists, or use 
any combination thereof. It would be necessary for recovery 
audits to comply with a recovery audit standard to beset forth 
by the Director of OMB.
    Subsection (c) would require recovery audits to be 
performed for each fiscal year, with the agency's first 
recovery audit to cover the 2 fiscal years prior to the date 
the legislation is enacted, and every year thereafter. The 
agency head would be authorized to conduct recovery audits for 
additional preceding years if deemed practical and cost-
effective.
    Subsection (d) would prescribe authorities and functions of 
recovery audit contractors and terms and conditions required in 
recovery audit contracts. Under (d)(1), the agency head would 
have the explicit authority to use contingency contracts, 
whereby contractors would be allowed to retain a percentage of 
collections from overpayments they identify during the audit.
    Under (d)(2), a contract for the performance of recovery 
auditing would be allowed to contain authorization for the 
contractor to notify a person on behalf of the agency of 
possible overpayments and to respond to questions concerning 
such overpayments. Contracts for recovery auditing would not 
affect an agency's authorities under the Contract Disputes Act, 
the Debt Collection Act, or other applicable laws to resolve 
disputes and take collection action. Under (d)(3), contractors 
would not be authorized to require the production of records or 
information from entities other than the contracting agency.
    Under (d)(4), contractors would be required to protect any 
confidential business and financial information they come 
across in the course of their recovery audit work. They would 
be required to report to the agency on the causes of 
overpayments they identify and offer any recommendations they 
have on how to mitigate them. They would also be required to 
notify the agency of any overpayments they happen to identify 
that are beyond the scope of their contracts. They would have 
to promptly notify the agency head and the inspector general of 
suspected fraudulent or criminal activity.
    Agencies, under (d)(5), would be required to take prompt 
and appropriate action in response to contractor 
recommendations and notifications.
    Under (d)(6), agencies would have to conduct a public-
private cost comparison to determine whether to conduct 
recovery auditing in-house, or by contract.
    Subsection (e) would indicate that the legislation would 
not affect current authorities of Inspectors General, including 
such authorities under the Inspector General Act of 1978.
    Subsection (f) would limit the disclosure by recovery audit 
contractors of any individually identifiable information 
obtained during the course of the audit, and places liability 
for damages on any violators of this limitation. The subsection 
would also require the destruction or return of individually 
identifiable information at the conclusion of the audit.
            Section 3563. Disposition of amounts collected
    Subsection (a) would provide that this section applies to 
annual amounts recouped by the United States.
    Subsection (b) would provide authority for amounts 
recovered to be available to pay for a recovery audit 
contractor and to reimburse applicable appropriations for 
recovery audit costs incurred by the agency.
    Subsection (c) would provide authority for up to 25 percent 
of collections to be used to fund agency management improvement 
programs under section 3564.
    Subsection (d) would require that at least 50 percent and 
any additional amounts not used for recovery audit costs or the 
management improvement program would revert to the Treasury.
    Subsection (e)(1) would exempt from this section, amounts 
collected if the application would be inconsistent with other 
provisions of law governing the crediting of collections. 
Examples include non-appropriated fund instrumentalities, 
revolving funds, working capital funds, and trust funds. 
Subsection (e)(2) would provide that, except for use for 
recovery audit costs, the disposition authorities and 
requirements for collected amounts under this section would not 
apply to funds that remain available for obligation at the time 
the amounts are collected.
            Section 3564. Management improvement program
    Subsection (a) would require the agencies that are mandated 
to conduct recovery audits to implement management improvement 
programs consistent with guidance prescribed by the Director of 
OMB. Other agencies that conduct recovery auditing in 
compliance with OMB guidance would be authorized to implement 
management improvement programs.
    Subsection (b) would require the agency to make dealing 
with the problems that contributed to the overpayments 
collected through recovery audits the first priority of the 
management improvement program. The agency head would also be 
able to use the management improvement program for other 
initiatives to reduce error and waste in agency programs.
    Subsection (c) would authorize the agency head to integrate 
the management improvement program with other management 
improvement programs within the agency or with other agencies. 
Agency heads would have flexibility, within the guidance 
established by OMB, over how to conduct their management 
improvement programs; however, they must be able to account for 
the use of amounts made available from recovery audit proceeds.
            Section 3565. Responsibilities of the Office of Management 
                    and Budget
    Subsection (a) would assign the Director of OMB general 
responsibility for coordinating and overseeing the 
implementation of the legislation.
    Subsection (b) would require the Director of OMB in 
consultation with the Chief Financial Officers Council (CFOC) 
and the President's Council on Integrity and Efficiency (PCIE), 
to issue initial guidance within 180 days after the legislation 
becomes law. The guidance would include recovery audit 
standards to be developed in consultation with the CFOC, PCIE, 
General Accounting Office (GAO), and private recovery audit 
specialists.
    Subsection (c) would authorize the Director of OMB to place 
limitations on percentage amounts paid to contractors under 
contingency fee arrangements.
    Subsection (d) would authorize the Director of OMB to make 
exemptions from the recovery audit mandate if compliance with 
such a mandate would impede the agency's mission or would not 
be cost effective. The Director would have to promptly report 
any such determination and exemption to the House Committee on 
Government Reform and the Senate Committee on Governmental 
Affairs.
    Subsection (e) would require the Director of OMB to submit 
to the President and Congress detailed reports on 
implementation of the Act for each of the first three years 
following its enactment. The reports would include: a 
description and evaluation of agency efforts to conduct 
recovery audits; an assessment of the benefits of the Act, 
including amounts identified and recovered; an identification 
of best practices; a list of significant problems to more 
successfulrecovery audits and activity; a report on agency 
expenditures related to recovery auditing; a description of the 
management improvement programs; and recommendations for changes in 
agency practices or law that would improve agency efforts under this 
Act.
            Section 3566. General Accounting Office reports
    This section would require the GAO to make annual reports 
to Congress on implementation of the Act for the first three 
years following its enactment. Each GAO report is due not more 
than 60 days after each of the OMB reports under section 3566.
    Sec. 3(b) of the legislation would clarify that its 
provisions apply to all Executive Branch agencies.
    Sec. 3(c) of the legislation would require agencies to 
begin recovery audits not later than 18 months after the date 
of enactment of the Act.
    Sec. 3(d) of the legislation is a clerical amendment that 
would add the contents of this bill to the contents of existing 
United States Code.

                     VI. Compliance With Rule XIII

    Pursuant to rule XIII, clause 3(c)(1) of the Rules of the 
House of Representatives, under the authority of rule X, clause 
2(b)(1), the results and findings from Committee oversight 
activities are incorporated in the Bill and this report.

                  VII. Budget Analysis and Projections

    H.R. 1827 provides for no new authorization, budget 
authority, or tax expenditures. Consequently, the provisions of 
section 308(a)(1) of the Congressional Budget Act of 1994 are 
not applicable.

         VIII. Cost Estimate of the Congressional Budget Office

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, November 17, 1999.
Hon. Dan Burton,
Chairman, Committee on Government Reform,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1827, the 
Government Waste Corrections Act of 1999.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is John R. 
Righter.
            Sincerely,
                                          Dan L. Crippen, Director.
    Enclosure.

H.R. 1827--Government Waste Corrections Act of 1999

            Summary
    H.R. 1827 would require federal agencies to conduct 
specialized audits of accounts that purchase at least $500 
million of goods and services from the private sector. By 
increasing the federal government's recovery of erroneous 
payments made to the private sector, CBO estimates that 
enacting H.R. 1827 would decrease direct spending by $100 
million over the 2000-2004 period and by $90 million over the 
2000-2009 period. Consequently, pay-as-you-go procedures would 
apply to the bill. Implementing the bill could yield similar 
savings in net spending for amounts made available in years 
after fiscal year 2000, but such savings would depend on the 
amounts appropriated for the relevant accounts. In addition, 
CBO estimates that the Office of Management and Budget (OMB) 
would spend less than $500,000 a year to oversee and report on 
the bill's implementation and that the General Accounting 
Office (GAO) would spend less than $500,000 in each of fiscal 
years 2001 through 2003 to report on the bill's effectiveness.
    H.R. 1827 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would impose no costs on the budgets of state, local, or 
tribal governments.
            Description of the bill's major provisions
    H.R. 1827 would require federal agencies to conduct 
specialized audits of accounts that purchase at least $500 
million of goods and services from the private sector. The 
audits, referred to as recovery auditing, are conducted using 
software that identifies such anomalies as pricing errors on 
invoices, duplicate payments, miscalculated freight charges, 
and any failure to provide applicable rebates, allowances, and 
discounts.
    For certain accounts, H.R. 1827 would allow agencies to 
retain and spend, without further appropriation action, one-
half of any amounts collected from conducting recovery audits. 
Agencies could use the amounts they retain to improve 
management functions and to pay for the costs of performing the 
audits. The bill would require agencies to deposit the 
remaining amounts recovered in the Treasury as miscellaneous 
receipts.
    As part of its role in overseeing the bill's 
implementation, OMB could exempt agencies or programs from the 
requirements of H.R. 1827. The bill would require both OMB and 
GAO to report to the Congress on the bill's implementation in 
each of fiscal years 2001 through 2003.
            Estimated costs to the Federal Government
    CBO estimates that implementing H.R. 1827 would increase 
offsetting receipts from the recovery of overpayments by about 
$180 million over fiscal years 2001 through 2005. That estimate 
represents recovery of overpayments made with funds 
appropriated during fiscal years 1998, 1999, and 2000. Because 
the bill would allow agencies to retain and spend one-half of 
such amounts without further appropriation, CBO estimates that 
the bill would also increase direct spending by a total of 
about $90 million over fiscal years 2002 through 2006. 
Implementing the bill could yield similar savings in net 
spending for amounts made available in years after fiscal year 
2000, but such savings would depend on the amounts 
appropriated.
    The estimated budgetary impact of H.R. 1827 is shown in the 
following table. The costs of this legislation fall within 
multiple budget functions.

----------------------------------------------------------------------------------------------------------------
                                                                       By fiscal year in millions of dollars--
                                                                    --------------------------------------------
                                                                       2000     2001     2002     2003     2004
----------------------------------------------------------------------------------------------------------------
                                         CHANGES IN DIRECT SPENDING \1\

Recovery of overpayments:
    Estimated budget authority.....................................        0    (\2\)      -20     -100      -50
    Estimated outlays..............................................        0    (\2\)      -20     -100      -50
Spending by agencies:
    Estimated budget authority.....................................        0    (\2\)       10       50       25
    Estimated outlays..............................................        0    (\2\)        5       25       40
Total changes:
    Estimated budget authority.....................................        0    (\2\)      -10      -50      -25
    Estimated outlays..............................................        0    (\2\)      -15      -75      -10
----------------------------------------------------------------------------------------------------------------
\1\ Implementing the bill would also affect spending subject to appropriation.
\2\ Less than $500,000.

            Basis of estimate
    This estimate assumes that the bill will be enacted early 
in fiscal year 2000.
            Direct spending
    Audits of Appropriated Accounts.--Within 18 months of 
enactment, H.R. 1827 would require agencies to begin conducting 
recovery audits of payments made from certain accounts during 
fiscal years 1998 and 1999. CBO expects that audits of payments 
made during fiscal year 2000 would begin early in 2002. Based 
on an analysis of data from the Federal Procurement Report, 
Fiscal Year 1998, which is compiled by the General Services 
Administration, CBO estimates that recovery audits could apply 
to about $125 billion in annual payments that were made in each 
of fiscal years 1998 and 1999, net of those payments (including 
payments from revolving and working capital funds) that we 
expect will be audited under current law. However, CBO expects 
that OMB would exempt certain accounts from the bill's 
requirements, including accounts that involve the research, 
resting, and procurement of military weapons, finance federal 
law enforcement activities, and involve medical records. Thus, 
we estimate that the bill's requirement to audit payments would 
apply to about $60 billion in annual payments.
    In the private sector, companies using the recovery audit 
process have identified and collected approximately $1 for 
every $1,000 in audited payments, or a rate of 0.1 percent. 
Recovery audits of some payments made by the Department of 
Defense (DoD) have identified a payment error rate of 0.4 
percent; however, DoD's experience in recovering the identified 
overpayments is mixed. On average, CBO assumes the federal 
government would recover about 0.1 percent of the $60 billion 
audited, or $60 million a year. That rate takes into account 
the increased difficulty in collecting overpayments that are 
more than one year old and the likelihood that federal agencies 
will settle for less than full payment on some of these debts. 
We expect that agencies would not begin collecting overpayments 
from contractors until the end of fiscal year 2001.
    Audits of Revolving and Working Capital Funds.--H.R. 1827 
also could affect spending from accounts that receive no annual 
appropriations, such as revolving and working capital funds. 
Some agencies, particularly the DoD, are currently auditing 
tens of billions of dollars of payments from such accounts 
already, and CBO expects that they will continue to expand 
their use of recovery auditing to recapture overpayments made 
from these accounts. Under the bill, none of the funds 
recovered by revolving and working capital funds would be 
deposited in the Treasury. Therefore, the legislation would 
have no net budgetary effect for such accounts.
            Discretionary spending
    If recovery audits are used to collect overpayments made 
with funds appropriated after 2000, then implementing the bill 
could yield savings similar to the net recoveries estimated for 
audits of 1998, 1999, and 2000, but such savings would depend 
on the amounts appropriated for the relevant accounts. If 
appropriations were to continue at about the same level as in 
fiscal year 2000, the net savings would average about $30 
million a year in 2003 and subsequent years.
    In addition, CBO estimates that OMB would spend less than 
$500,000 a year to oversee and report on the bill's 
implementation and that GAO would spend less than $500,000 in 
each of fiscal year 2001 through 2003 to report on the bill's 
effectiveness.
            Pay-as-you-go considerations
    The Balanced Budget and Emergency Deficit Control Act sets 
up pay-as-you-go procedures for legislation affecting directing 
spending or receipts. The net changes in outlays that are 
subject to pay-as-you-go procedures are shown in the following 
table. For the purposes of enforcing pay-as-you-go procedures, 
only the effects in the budget year and the succeeding four 
years are counted.

----------------------------------------------------------------------------------------------------------------
                                                     By fiscal year, in millions of dollars--
                                 -------------------------------------------------------------------------------
                                   2000    2001    2002    2003    2004    2005    2006    2007    2008    2009
----------------------------------------------------------------------------------------------------------------
Changes in outlays..............       0       0     -15     -75     -10       7       3       0       0       0
Changes in receipts.............                                  Not applicable
----------------------------------------------------------------------------------------------------------------

            Intergovernmental and private-sector impact
    H.R. 1827 contains no intergovernmental or private-sector 
mandates as defined in UMRA and would impose no costs on the 
budgets of state, local, or tribal governments.
    Estimate prepared by: John R. Righter.
    Estimate approved by: Robert A. Sunshine, Assistant 
Director for Budget Analysis.

       IX. Specific Constitutional Authority for This Legislation

    Clauses 1, 14, and 18 of Article 1, section 8 of the 
Constitution grant Congress the power to enact this law.

                      X. Committee Recommendation

    On November 10, 1999, a quorum being present, the Committee 
on Government Reform ordered H.R. 1827, as amended, favorably 
reported.

         XI. Congressional Accountability Act; Public Law 104-1

    H.R. 1827, as amended by the Committee, amends chapter 35 
of title 31, United States Code, to require Federal agencies to 
perform recovery audits if their direct purchases for goods and 
services totaling $500 million or more per fiscal year. The 
legislation does not apply to the House of Representatives or 
to the Senate, thus H.R. 1827 does not apply to the Congress.

    XII. Federal Advisory Committee Act (5 U.S.C. App.) Section 5(b)

    The Committee finds that the legislation does not establish 
or authorize the establishment of an advisory Committee within 
the definition of 5 U.S.C. App., Section 5(b).

   XIII. Unfunded Mandates Reform Act; Public Law 104-4, Section 425

    The Committee finds that the legislation does not impose 
any Federal Mandates within the meaning of Section 423 of the 
Unfunded Mandates Reform Act (P.L. 104-4).

       XIV. Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

               CHAPTER 35 OF TITLE 31, UNITED STATES CODE


                 CHAPTER 35--ACCOUNTING AND COLLECTION


                          SUBCHAPTER I--GENERAL

Sec.
3501.  Definition.
     * * * * * * *

                     SUBCHAPTER VI--RECOVERY AUDITS

3561. Definitions.
3562. Recovery audit requirement.
3563. Disposition of amounts collected.
3564. Management improvement program.
3565. Responsibilities of the Office of Management and Budget.
3566. General Accounting Office reports.
     * * * * * * *

                     SUBCHAPTER VI--RECOVERY AUDITS

Sec. 3561. Definitions

  In this subchapter, the following definitions apply:
          (1) Director.--The term ``Director'' means the 
        Director of the Office of Management and Budget.
          (2) Disclose.--The term ``disclose'' means to 
        release, publish, transfer, provide access to, or 
        otherwise divulge individually identifiable information 
        to any person other than the individual who is the 
        subject of the information.
          (3) Individually identifiable information.--The term 
        ``individually identifiable information'' means any 
        information, whether oral or recorded in any form or 
        medium, that identifies the individual, or with respect 
        to which there is a reasonable basis to believe that 
        the information can be used to identify the individual.
          (4) Oversight.--The term ``oversight'' means 
        activities by a Federal, State, or local governmental 
        entity, or by another entity acting on behalf of such a 
        governmental entity, to enforce laws relating to, 
        investigate, or regulate payment activities, recovery 
        activities, and recovery audit activities.
          (5) Payment activity.--The term ``payment activity'' 
        means an executive agency activity that entails making 
        payments to vendors or other nongovernmental entities 
        that provide property or services for the direct 
        benefit and use of an executive agency.
          (6) Recovery audit.--The term ``recovery audit'' 
        means a financial management technique used to identify 
        overpayments made by executive agencies with respect to 
        vendors and other entities in connection with a payment 
        activity, including overpayments that result from any 
        of the following:
                  (A) Duplicate payments.
                  (B) Pricing errors.
                  (C) Failure to provide applicable discounts, 
                rebates, or other allowances.
                  (D) Inadvertent errors.
          (7) Recovery activity.--The term ``recovery 
        activity'' means activity otherwise authorized by law, 
        including chapter 37 of this title, to attempt to 
        collect an identified overpayment--
                  (A) within 180 days after the date the 
                overpayment is identified; and
                  (B) through established professional 
                practices.

Sec. 3562. Recovery audit requirement

  (a) In General.--Except as exempted by the Director under 
section 3565(d) of this title, the head of each executive 
agency--
          (1) shall conduct for each fiscal year recovery 
        audits and recovery activity with respect to payment 
        activities of the agency if such payment activities for 
        the fiscal year total $500,000,000 or more (adjusted by 
        the Director annually for inflation); and
          (2) may conduct for any fiscal year recovery audits 
        and recovery activity with respect to payment 
        activities of the agency if such payment activities for 
        the fiscal year total less than $500,000,000 (adjusted 
        by the Director annually for inflation).
  (b) Procedures.--In conducting recovery audits and recovery 
activity under this section, the head of an executive agency--
          (1) shall consult and coordinate with the Chief 
        Financial Officer and the Inspector General of the 
        agency;
          (2) shall implement this section in a manner designed 
        to ensure the greatest financial benefit to the 
        Government;
          (3) may conduct recovery audits and recovery activity 
        internally in accordance with the standards issued by 
        the Director under section 3565(b)(2) of this title, or 
        by procuring performance of recovery audits, or by any 
        combination thereof; and
          (4) shall ensure that such recovery audits and 
        recovery activity are carried out consistent with the 
        standards issued by the Director under section 
        3565(b)(2) of this subchapter.
  (c) Scope of Audits.--(1) Each recovery audit of a payment 
activity under this section shall cover payments made by the 
payment activity in a fiscal year, except that the first 
recovery audit of a payment activity shall cover payments made 
during the 2 consecutive fiscal years preceding the date of the 
enactment of the Government Waste Corrections Act of 1999.
  (2) The head of an executive agency may conduct recovery 
audits of payment activities for additional preceding fiscal 
years if determined by the agency head to be practical and 
cost-effective.
  (d) Recovery Audit Contracts.--
          (1) Authority to use contingency contracts.--
        Notwithstanding section 3302(b) of this title, as 
        consideration for performance of any recovery audit 
        procured by an executive agency, the executive agency 
        may pay the contractor an amount equal to a percentage 
        of the total amount collected by theUnited States as a 
result of overpayments identified by the contractor in the audit.
          (2) Additional functions of contractor.--(A) In 
        addition to performance of a recovery audit, a contract 
        for such performance may authorize the contractor 
        (subject to subparagraph (B)) to--
                  (i) notify any person of possible 
                overpayments made to the person and identified 
                in the recovery audit under the contract; and
                  (ii) respond to questions concerning such 
                overpayments.
          (B) A contract for performance of a recovery audit 
        shall not affect--
                  (i) the authority of the head of an executive 
                agency under the Contract Disputes Act of 1978 
                and other applicable laws, including the 
                authority to initiate litigation or referrals 
                for litigation; or
                  (ii) the requirements of sections 3711, 3716, 
                3718, and 3720 of this title that the head of 
                an agency resolve disputes, compromise or 
                terminate overpayment claims, collect by 
                setoff, and otherwise engage in recovery 
                activity with respect to overpayments 
                identified by the recovery audit.
          (3) Limitation on authority.--Nothing in this 
        subchapter shall be construed to authorize a contractor 
        with an executive agency to require the production of 
        any record or information by any person other than an 
        officer, employee, or agent of the executive agency.
          (4) Required contract terms and conditions.--The head 
        of an executive agency shall include in each contract 
        for procurement of performance of a recovery audit 
        requirements that the contractor shall--
                  (A) protect from disclosure otherwise 
                confidential business information and financial 
                information;
                  (B) provide to the head of the executive 
                agency and the Inspector General of the 
                executive agency periodic reports on conditions 
                giving rise to overpayments identified by the 
                contractor and any recommendations on how to 
                mitigate such conditions;
                  (C) notify the head of the executive agency 
                and the Inspector General of the executive 
                agency of any overpayments identified by the 
                contractor pertaining to the executive agency 
                or to another executive agency that are beyond 
                the scope of the contract; and
                  (D) promptly notify the head of the executive 
                agency and the Inspector General of the 
                executive agency of any indication of fraud or 
                other criminal activity discovered in the 
                course of the audit.
          (5) Executive agency action following notification.--
        The head of an executive agency shall take prompt and 
        appropriate action in response to a notification by a 
        contractor pursuant to the requirements under paragraph 
        (4), including forwarding to other executive agencies 
        any information that applies to them.
          (6) Contracting requirements.--Prior to contracting 
        for any recovery audit, the head of an executive agency 
        shall conduct a public-private cost comparison process. 
        The outcome of the cost comparison process shall 
        determine whether the recovery audit is performed in-
        house or by a contractor.
  (e) Inspectors General.--Nothing in this subchapter shall be 
construed as diminishing the authority of any Inspector 
General, including such authority under the Inspector General 
Act of 1978.
  (f) Privacy Protections.--
          (1) Limitation on disclosure of individually 
        identifiable information.--(A) Any nongovernmental 
        entity that obtains individually identifiable 
        information through performance of recovery auditing or 
        recovery activity under this chapter may disclose that 
        information only for the purpose of such auditing or 
        activity, respectively, and oversight of such auditing 
        or activity, unless otherwise authorized by the 
        individual that is the subject of the information.
          (B) Any person that violates subparagraph (A) shall 
        be liable for any damages (including nonpecuniary 
        damages, costs, and attorneys fees) caused by the 
        violation.
          (2) Destruction or return of information.--Upon the 
        conclusion of the matter or need for which individually 
        identifiable information was disclosed in the course of 
        recovery auditing or recovery activity under this 
        chapter performed by a nongovernmental entity, the 
        nongovernmental entity shall either destroy the 
        individually identifiable information or return it to 
        the person from whom it was obtained, unless another 
        applicable law requires retention of the information.

Sec. 3563. Disposition of amounts collected

  (a) In General.--Notwithstanding section 3302(b) of this 
title, the amounts collected annually by the United States as a 
result of recovery audits by an executive agency under this 
subchapter shall be treated in accordance with this section.
  (b) Use for Recovery Audit Costs.--Amounts referred to in 
subsection (a) shall be available to the executive agency--
          (1) to pay amounts owed to any contractor for 
        performance of the audit; and
          (2) to reimburse any applicable appropriation for 
        other recovery audit costs incurred by the executive 
        agency with respect to the audit.
  (c) Use for Management Improvement Program.--Of the amount 
referred to in subsection (a), a sum not to exceed 25 percent 
of such amount--
          (1) shall be available to the executive agency to 
        carry out the management improvement program of the 
        agency under section 3564 of this title;
          (2) may be credited for that purpose by the agency 
        head to any agency appropriations that are available 
        for obligation at the time of collection; and
          (3) shall remain available for the same period as the 
        appropriations to which credited.
  (d) Remainder to Treasury.--Of the amount referred to in 
subsection (a), there shall be deposited into the Treasury as 
miscellaneous receipts a sum equal to--
          (1) 50 percent of such amount; plus
          (2) such other amounts as remain after the 
        application of subsections (b) and (c).
  (e) Limitation on Application.--
          (1) In general.--This section shall not apply to 
        amounts collected through recovery audits and recovery 
        activity to the extent that such application would be 
        inconsistent with another provision of law that 
        authorizes crediting of the amounts to a 
        nonappropriated fund instrumentality, revolving fund, 
        working capital fund, trust fund, or other fund or 
        account.
          (2) Subsections (c) and (d).--Subsections (c) and (d) 
        shall not apply to amounts collected through recovery 
        audits and recovery activity, to the extent that such 
        amounts are derived from an appropriation or fund that 
        remains available for obligation at the time the 
        amounts are collected.

Sec. 3564. Management improvement program

  (a) Conduct of Program.--
          (1) Required programs.--The head of each executive 
        agency that is required to conduct recovery audits 
        under section 3562 of this title shall conduct a 
        management improvement program under this section, 
        consistent with guidelines prescribed by the Director.
          (2) Discretionary programs.--The head of any other 
        executive agency that conducts recovery audits under 
        section 3562 that meet the standards issued by the 
        Director under section 3565(b)(2) may conduct a 
        management improvement program under this section.
  (b) Program Features.--In conducting the program, the head of 
the executive agency--
          (1) shall, as the first priority of the program, 
        address problems that contribute directly to agency 
        overpayments; and
          (2) may seek to reduce errors and waste in other 
        executive agency programs and operations by improving 
        the executive agency's staff capacity, information 
        technology, and financial management.
  (c) Integration With Other Activities.--The head of an 
executive agency--
          (1) subject to paragraph (2), may integrate the 
        program under this section, in whole or in part, with 
        other management improvement programs and activities of 
        that agency or other executive agencies; and
          (2) must retain the ability to account specifically 
        for the use of amounts made available under section 
        3563 of this title.

Sec. 3565. Responsibilities of the Office of Management and Budget

  (a) In General.--The Director shall coordinate and oversee 
the implementation of this subchapter.
  (b) Guidance.--
          (1) In general.--The Director, in consultation with 
        the Chief Financial Officers Council and the 
        President's Council on Integrity and Efficiency, shall 
        issue guidance and provide support to agencies in 
        implementing the subchapter. The Director shall issue 
        initial guidance not later than 180 days after the date 
        of enactment of the Government Waste Corrections Act of 
        1999.
          (2) Recovery audit standards.--The Director shall 
        include in the initial guidance under this subsection 
        standards for the performance of recovery audits under 
        this subchapter, that are developed in consultation 
        with the Comptroller General of the United States and 
        private sector experts on recovery audits.
  (c) Fee limitations.--The Director may limit the percentage 
amounts that may be paid to contractors under section 
3562(d)(1) of this title.
  (d) Exemptions.--
          (1) In general.--The Director may exempt an executive 
        agency, in whole or in part, from the requirement to 
        conduct recovery audits under section 3562(a)(1) of 
        this title if the Director determines that compliance 
        with such requirement--
                  (A) would impede the agency's mission; or
                  (B) would not be cost-effective.
          (2) Report to congress.--The Director shall promptly 
        report the basis of any determination and exemption 
        under paragraph (1) to the Committee on Government 
        Reform of the House of Representatives and the 
        Committee on Governmental Affairs of the Senate.
  (e) Reports.--
          (1) In general.--Not later than 1 year after the date 
        of the enactment of the Government Waste Corrections 
        Act of 1999, and annually for each of the 2 years 
        thereafter, the Director shall submit a report on 
        implementation of the subchapter to the President, the 
        Committee on Government Reform of the House of 
        Representatives, the Committee on Governmental Affairs 
        of the Senate, and the Committee on Appropriations of 
        the House of Representatives and of the Senate.
          (2) Contents.--Each report shall include--
                  (A) a general description and evaluation of 
                the steps taken by executive agencies to 
                conduct recovery audits, including an inventory 
                of the programs and activities of each 
                executive agency that are subject to recovery 
                audits;
                  (B) an assessment of the benefits of recovery 
                auditing and recovery activity, including 
                amounts identified and recovered (including by 
                administrative setoffs);
                  (C) an identification of best practices that 
                could be applied to future recovery audits and 
                recovery activity;
                  (D) an identification of any significant 
                problems or barriers to more effective recovery 
                audits and recovery activity;
                  (E) a description of executive agency 
                expenditures in the recovery audit process;
                  (F) a description of executive agency 
                management improvement programs under section 
                3564 of this title; and
                  (G) any recommendations for changes in 
                executive agency practices or law or other 
                improvements that the Director believes would 
                enhance the effectiveness of executive agency 
                recovery auditing.

Sec. 3566. General Accounting Office reports

  Not later than 60 days after issuance of each report under 
section 3565(e) of this title, the Comptroller General of the 
United States shall submit a report on the implementation of 
this subchapter to the Committee on Government Reform of the 
House of Representatives, the Committee on Governmental Affairs 
of the Senate, the Committee on Appropriations of the House of 
Representatives and of the Senate, and the Director.

                                

