Financial Management: Increased Attention Needed to Prevent Billions in
Improper Payments (Letter Report, 10/29/1999, GAO/AIMD-00-10).

Pursuant to a congressional request, GAO provided information on
improper payments in light of the projected future growth of federal
expenditures, focusing on the: (1) amounts reported by agencies as
improper payments in their fiscal year (FY) 1998 financial statements
prepared pursuant to the Chief Financial Officers (FO) Act of 1990; (2)
types of federal programs at risk of disbursing improper payments; (3)
reported causes of improper payments across the federal government; and
(4) extent to which agencies are addressing improper payments in their
performance plans under the Government Performance and Results Act of
1993.

GAO noted that: (1) in their FY 1998 financial reports, nine agencies
collectively reported improper payment estimates of $19.1 billion; (2)
these improper payment estimates relate to 17 major programs that
expended approximately $870 billion; (3) the programs and related
improper payment estimates include: (a) Medicare Fee-for-Service ($12.6
billion); (b) Supplemental Security Income ($1,648 million); (c) Food
Stamps ($1,425 million); (d) Old Age and Survivors Insurance ($1,154
million); (e) disability insurance ($941 million); (f) housing subsidies
($857 million); and (g) veterans benefits, unemployment insurance, and
others ($514 million); (4) also included are the Agency for
International Development (AID), Medicaid, and the Federal Crop
Insurance Corporation; (5) AID and the agencies administering these
programs acknowledged making improper payments in their FY 1998
financial statement, but did not disclose specific dollar amounts; (6)
improper payments are much greater than have been disclosed thus far in
agency financial statements reports, as shown by GAO's prior audits and
those of agency inspectors general; (7) agencies are not performing
comprehensive quality control reviews--internal studies or reviews--for
certain programs to determine the propriety of program expenditures; (8)
as a result, the full extent of the problem--and possible solutions to
it--is unknown; (9) comprehensive quality control reviews could also
identify the causes of improper payments, which range from inadvertent
errors to fraud and abuse; (10) working with the Office of Management
and Budget (OMB), some agencies are taking steps to mitigate this risk
by focusing attention on identifying, reporting, and reducing improper
payments through the discipline of annual audited financial statements
and the development of performance goals; (11) however, agencies
responsible for 13 of the 17 programs having made improper
payments--many of which GAO identified in its High-Risk and Performance
and Accountability series issued earlier this year--did not include
specific performance goals or strategies to comprehensively address
these payments in their FY 2000 performance plans under the Result Act;
and (12) as the federal budget grows, more taxpayer dollars are placed
at risk, thus increasing the urgency for identifying and preventing
these types of payments and providing complete accountability to
taxpayers.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-00-10
     TITLE:  Financial Management: Increased Attention Needed to
	     Prevent Billions in Improper Payments
      DATE:  10/29/1999
   SUBJECT:  Internal controls
	     Performance measures
	     Federal aid programs
	     Overpayments
	     Reporting requirements
	     Claims processing
	     Program abuses
	     Financial statement audits
	     Federal agency accounting systems
IDENTIFIER:  Supplemental Security Income Program
	     Earned Income Tax Credit
	     SSI
	     Medicare Fee-for-Service Program
	     HHS Temporary Assistance for Needy Families Program
	     Food Stamp Program
	     Old Age Survivors and Disability Insurance Program
	     Social Security Disability Insurance Program
	     Y2K
	     Unemployment Insurance Program

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Report to the Chairman of the Committee on Governmental Affairs, U.S. Senate

October 1999

FINANCIAL MANAGEMENT

Increased Attention Needed to Prevent Billions in Improper Payments

GAO/AIMD-00-10

Letter                                                                     5

Appendixes

Appendix I:Executive Departments and Agencies Covered by the CFO Act

                                                                         46

Appendix II:Agencies/Programs/Activities With Reported Improper Payments
Included in the Agencies' Fiscal Year 1998 Financial Statements

                                                                         47

Appendix III:Assessment of Performance Plans for Those Agencies Reporting
Improper Payments

                                                                         56

Appendix IV:Comments From the Office of Management and Budget

                                                                         58

Appendix V:GAO Contact and Staff Acknowledgements

                                                                         60

Related GAO Products

                                                                         61

Table 1:  Agencies and Programs that Reported Improper
Payments                                        16

Figure 1:  Trends in Certain Federal Expenditures: Fiscal
Years 1978 Through 2004                         12

Figure 2:  Improper Payments Returned to DFAS by DOD
Contractors for Fiscal Years 1994 Through 1998  19

Figure 3:  Internal Control Weaknesses Cause Improper
Payments for 17 Programs                        22

Figure 4:  Program Design Issues for the Agencies Reporting
Improper Payments for 17 Programs               30

Figure 5:  Reporting Improper Payments Within the Framework
of the CFO and Results Acts                     39

Figure 6:  Degree to Which 17 Programs Addressed Improper
Payments                                        40

ACF     Administration for Children and Families

AFDC    Aid to Families with Dependent Children

AID     Agency for International Development

C&P     Compensation and Pension Program

CFO     Chief Financial Officer

CRP     Conservation Reserve Program

CSRS    Civil Service Retirement System

DCIA    Debt Collection Improvement Act

DFAS    Defense Finance and Accounting Service

DI      Disability Insurance

DOD     Department of Defense

DOL     Department of Labor

ED      Department of Education

EITC    Earned Income Tax Credit

FASAB   Federal Accounting Standards Advisory Board

FCIC    Federal Crop Insurance Corporation

FECA    Federal Employees' Compensation Act

FEGLI   Federal Employees' Group Life Insurance

FEHBP   Federal Employees' Health Benefits Program

FEMA    Federal Emergency Management Agency

FERS    Federal Employees' Retirement System

FFMSR   Federal Financial Management System Requirements

FICA    Federal Insurance Contributions Act

FNS     Food and Nutrition Service

FSP     Food Stamp Program

GAO     General Accounting Office

GMRA    Government Management Reform Act

HCFA    Health Care Financing Administration

HHS     Department of Health and Human Services

HUD     Department of Housing and Urban Development

IG      Inspector General

IRS     Internal Revenue Service

JFMIP   Joint Financial Management Improvement Program

NRCS    Natural Resources Conservation Service

OASI    Old Age and Survivors Insurance

OIG     office of inspector general

OMB     Office of Management and Budget

OPM     Office of Personnel Management

PCIE    President's Council on Integrity and Efficiency

PHA     Public Housing Authority

SECA    Self-Employment Contributions Act

SSA     Social Security Administration

SSI     Supplemental Security Income

STAR    Systematic Technical Accuracy Review

TANF    Temporary Assistance for Needy Families

USDA    United States Department of Agriculture

VA      Department of Veterans Affairs

VBA     Veterans Benefits Administration

High-Risk Series: An Update (GAO/HR-99-1, January 1999) and Performance
and Accountability Series: Major Management Challenges and Program Risks
(GAO/OCG-
Standards for Internal Control in the Federal Government, Exposure Draft
(GAO/AIMD-
                                                 Accounting and Information
                                                        Management Division

B-282920

October 29, 1999

The Honorable Fred Thompson
Chairman, Committee on Governmental Affairs
United States Senate

Dear Mr. Chairman:

The federal government--the largest and most complex organization in the
world--annually expends hundreds of billions of dollars for a variety of
grants, transfer payments, and procurement of goods and services. As the
steward of taxpayer dollars, the federal government is accountable for how
it spends those funds and is responsible for safeguarding against improper
payments--that is, payments made for unauthorized purposes or excessive
amounts, such as overpayments to program recipients or contractors and
vendors. Reported estimates of improper payments total billions of dollars
annually. Viewed in the simplest context, improper payments are an
inefficient use of taxpayers' funds. Specifically, for programs with
legislative or regulatory eligibility criteria, improper payments indicate
that agencies are spending more than necessary to meet program goals.
Conversely, for programs with fixed funds, any waste of federal funds
translates into serving fewer recipients or accomplishing less
programmatically than could be expected.

Because of concerns regarding improper payments in light of the projected
future growth of federal expenditures, you asked us to (1) quantify, where
possible, amounts reported by agencies as improper payments in their
fiscal year 1998 financial statements prepared pursuant to the Chief
Financial Officers Act of 1990 (CFO Act),/Footnote1/ (2) identify
additional types of federal programs at risk of disbursing improper
payments, (3) determine reported causes of improper payments prevalent
across government, and (4) assess the extent to which agencies are
addressing improper payments in their performance plans under the
Government Performance and Results 

Act of 1993 (Results Act)./Footnote2/ We also considered the impact of
potential Year 2000 computing problems on improper payments.

Results in Brief

In their fiscal year 1998 financial statement reports, nine agencies
collectively reported improper payment estimates of $19.1
billion./Footnote3/ These improper payment estimates relate to 17 major
programs/Footnote4/ that expended approximately $870 billion./Footnote5/
The programs and related improper payment estimates include:

o Medicare Fee-for-Service ($12.6 billion),

o Supplemental Security Income ($1,648 million),

o Food Stamps ($1,425 million),

o Old Age and Survivors Insurance ($1,154 million),

o Disability Insurance ($941 million),

o Housing subsidies ($857 million), and

o Veterans Benefits, Unemployment Insurance, and others ($514 million).

Also included are the Agency for International Development (AID),
Medicaid, and the Federal Crop Insurance Corporation. AID and the agencies
administering these programs acknowledged making improper payments in
their fiscal year 1998 financial statements, but did not disclose specific
dollar amounts. 

While financial statement disclosures draw attention to the need to
address this problem, the full extent of the government's improper
payments is not known. Improper payments are much greater than have been
disclosed thus far in agency financial statement reports, as shown by our
prior audits and those of agency inspectors general (IG). These audit
reports identified additional agencies that made improper payments, such
as the departments of Defense (DOD) and Education (ED) and the Internal
Revenue Service (IRS). For example, audits have disclosed that between
fiscal years 1994 and 1998, DOD contractors returned to the government
$984 million that had been erroneously paid to them.

Agencies are not performing comprehensive quality control reviews--
internal studies or reviews--for certain programs to determine the
propriety of program expenditures. As a result, the full extent of the
problem--and possible solutions to it--is unknown. Comprehensive quality
control reviews could also identify the causes of improper payments, which
range from inadvertent errors to fraud and abuse. Improper payments can
result from incomplete or inaccurate data used to make payment decisions,
insufficient monitoring and oversight, or other deficiencies in agency
information systems and weaknesses in internal control. This risk is
inherently increased in programs involving (1) complex program
regulations, (2) an emphasis on expediting payments, and (3) a significant
volume of transactions. Audit reports note that other federal programs and
activities for which agencies did not report improper payments experience
the same kinds of problems as agencies that have acknowledged improper
payments--problems that are major causes leading to improper payments.
Thus, these programs also risk making improper payments.

Working with the Office of Management and Budget (OMB), some agencies are
taking steps to mitigate this risk by focusing attention on identifying,
reporting, and reducing improper payments through the discipline of annual
audited financial statements and the development of performance
goals/Footnote6/--management reforms created by the Congress in the CFO
Act and the Results Act. For example, the Department of Health and Human
Services (HHS) has identified, reported in its financial statements, and
substantially reduced improper payments in its $177 billion Medicare Fee-
for-Service program. For fiscal year 1996, through the process of
preparing audited financial statements, HHS estimated $23.2 billion in
improper payments--its first such estimate of the extent of this long-
standing serious problem. HHS' analysis of improper Medicare payments
helped lead to the implementation of several initiatives to identify and
reduce such payments. For fiscal year 1998, its estimate was significantly
less--$12.6 billion. Future annual estimates of improper payments will
provide further information on the nature of the problem and the progress
of these initiatives.

In another case, the Department of Housing and Urban Development (HUD) has
also identified improper payments in its housing subsidy programs. For
fiscal year 1998, HUD reported $857 million in improper payments.
Similarly, the Department of Agriculture (USDA) disclosed
$1.4 billion in food stamp overissuances. USDA, HUD and HHS estimated
improper payments by implementing methodologies that use statistical
sampling. For certain other programs--particularly programs whose
administration varies state-by-state--implementing a statistically valid
methodology will not be easy. Without a baseline measurement of the extent
of improper payments, agencies lack the information needed to address
improper payments. By analyzing the characteristics of cases identified as
having improper payments, agencies can then identify the circumstances and
root causes leading to improper payments. This provides a foundation for
developing sound strategies to mitigate improper payments in their
programs. 

However, agencies responsible for 13 of the 17 programs having made
improper payments--many of which we identified in our High-Risk and
Performance and Accountability series issued earlier this year/Footnote7/--
did not include specific performance goals or strategies to
comprehensively address these payments in their fiscal year 2000
performance plans under the Results Act. This may indicate inadequate
attention to developing mechanisms to comprehensively address this serious
problem. Thus, some agencies have not fully demonstrated the
accountability Congress called for in the CFO and Results Acts. Without a
systematic measurement of the extent of the problem, the establishment of
expected results, and the periodic measurement and reporting on these
results, agency management lacks the means to determine (1) whether the
problem is significant enough to require corrective action or (2) the
success of efforts implemented to reduce improper payments. 

As the federal budget grows, more taxpayer dollars are placed at risk,
thus increasing the urgency for identifying and preventing these types of
payments and providing complete accountability to taxpayers. Finally,
unless corrected, potential Year 2000 computing problems could have a
costly, widespread impact on these programs--including the extent to which
improper payments are made.

We are making recommendations to the Director of OMB directed at
developing and implementing a methodology for annually estimating and
reporting improper payments and for addressing improper payments in
agencies' annual performance and strategic plans and performance reports.
In commenting on a draft of this report, OMB agreed that its focus on
improper payments should be expanded.

Background 

Annually, the federal government expends hundreds of billions of dollars
for a variety of grants, transfer payments, and procurement of goods and
services. Because of its size, complexity, weak control environment, and
insufficient preventive controls, the federal government risks disbursing
improper payments. Agency-specific studies and audits have indicated that
improper payments are a widespread and significant problem. They occur in
a variety of programs and activities including those involving contract
management, financial assistance benefits--such as Food Stamps and
Veterans Benefits--and tax refunds. However, some overpayments, by their
nature, are not considered improper payments, such as routine contract
price adjustments./Footnote8/

Legislative efforts have focused on improving the federal government's
control environment. For example, under the Federal Managers' Financial
Integrity Act of 1982 and the Federal Financial Management Improvement Act
of 1996, agency managers are responsible for ensuring that adequate
systems of internal controls are developed and implemented. An adequate
system of internal controls, as defined by the Comptroller General's
internal control standards, which are issued pursuant to the Financial
Integrity Act, should provide reasonable assurance that an agency is
effectively and efficiently using resources, producing reliable financial 

reports, and complying with applicable laws and regulations./Footnote9/
Accordingly, cost-effective internal controls should be designed to
provide reasonable assurance regarding prevention of or prompt detection
of unauthorized acquisition, use, or disposition of an agency's assets.

Recent legislation has provided an impetus for agencies to systematically
measure and reduce the extent of improper payments. For example, with the
advent of the CFO Act, GMRA, and the Results Act, agencies are challenged
to increase attention on identifying and addressing improper payments. The
CFO Act, as expanded by GMRA, requires 24 major departments/agencies to
prepare and have audited agencywide financial statements, which are
intended to report an agency's stewardship over its financial resources--
including how it expended available funds. The Office of Management and
Budget's Bulletin 97-01, Form and Content of Agency Financial Statements,
provides implementing guidance on these CFO Act requirements. In addition,
the CFO Act sets expectations for agencies to routinely produce sound cost
and operating performance information. Effective implementation of this
requirement would enable managers to have timely information for day-to-
day management decisions. The CFO Act also requires OMB to prepare and
annually revise a governmentwide 5-year financial management plan and
status report that discusses the activities the executive branch plans to
and has undertaken to improve financial management in the federal
government. Additionally, each agency CFO is responsible for developing
annual plans to support the governmentwide 5-year financial management plan.

The Results Act seeks to improve the effectiveness and efficiency of the
federal government by requiring that agencies develop strategic and annual
performance goals and report on their progress in achieving these goals.
Agency strategic plans are required to include the agency's mission
statement; identify long-term general goals, including outcome-related
goals and objectives; and describe how the agency intends to achieve these
goals. Agencies are required to consult with the Congress when developing
their strategic plans and consider the views of other interested parties.
In their annual performance plans, agencies are required to set annual
goals, covering each program activity in an agency's budget, with
measurable target levels of performance. Agencies are also required to
issue annual performance reports that compare actual performance to the
annual goals. Together, these plans and reports are the basis for the
federal government to manage for results. The Results Act is supported by
the development of federal cost accounting standards under the CFO Act,
which require agencies to identify the costs of government
activities./Footnote10/ These standards can lead to and support linking
costs with achieving performance levels. This can give managers
information for assessing the full costs of goods, services, and benefits
compared to program outputs and results. Such information can provide the
basis for agencies to develop performance goals to monitor and track
improper payments as well as strategies for preventing such future
disbursements. 

The risk of improper payments and the government's ability to prevent them
will continue to be of concern in the future. Under current federal budget
policies, as the baby boom generation leaves the workforce, spending
pressures will grow rapidly due to increased costs of Medicare, Medicaid,
and Social Security./Footnote11/ Other federal expenditures are also
likely to increase. Thus, absent improvements over internal controls, the
potential for additional or larger volumes of improper payments will be
present. Figure 1 illustrates the reported and projected trends in federal
expenditures, excluding interest on the public debt, for fiscal years 1978
through 2004.

Figure****Helvetica:x11****1:    Trends in Certain Federal Expenditures:
                                 Fiscal Years 1978 Through 2004

*****************

*****************

Note: Expenditures for fiscal years 1999-2004 are projections.

Source: Budget of the United States Government, Fiscal Year 2000,
"Historical Tables."

Historically, the recovery rates for certain programs identified as having
improper payments have been low. Therefore, it is critical that adequate
attention be directed to strengthen controls to prevent improper payments.

Scope and Methodology

This report is based on our reviews of available major agencies' fiscal
year 1998 financial statement reports prepared under the CFO Act, as
expanded by GMRA. We reviewed these reports to identify amounts of
reported improper payments. We also identified and reviewed recent GAO
reports to identify additional types of programs at risk. We supplemented
our review with IG reports from CFO Act agencies and other information
obtained from a variety of sources, such as agency studies. In addition,
we reviewed these data sources to discern the causes of improper payments.
For the nine agencies that reported improper payments in their financial
statement reports, we reviewed the agencies' Results Act performance plans
for fiscal year 2000 to determine the extent to which the plans addressed
improper payments. We relied on recent GAO reports and guidance to
consider any impact from potential Year 2000 computing problems on
improper payments. In selected cases, we interviewed agency CFO and IG
personnel. Because of the nature of improper payments, our review would
not capture all reported instances of such payments./Footnote12/ As
requested, relevant GAO reports covering our work in these areas for the
past 4 fiscal years are listed at the end of this report.

To gather information on existing financial statement and performance
reporting criteria, we reviewed relevant professional literature,
including the American Institute of Certified Public Accountants'
Codification of Statements on Auditing Standards and the Federal
Accounting Standards Advisory Board's (FASAB) Statements of Federal
Financial Accounting Concepts and Standards. In addition, we reviewed OMB
Bulletin 97-01, Form and Content of Agency Financial Statements and OMB
Circular A-11, Part 2, Preparation and Submission of Strategic Plans,
Annual Performance Plans, and Annual Program Performance Reports.

We performed our work from June 1998 through August 1999. Our work was
conducted in accordance with generally accepted government auditing
standards. We provided a draft of this report for comment to the Director
of the Office of Management and Budget (OMB). These comments are presented
and evaluated in the "OMB Comments and Our Evaluation" section and
reprinted in appendix IV.

Improper Payments Are Widespread Across Government, but the Full Extent Is
Unknown

Agency-specific studies performed by GAO, IGs, and others indicate that
improper payments are a widespread and significant problem. However,
efforts by agencies to develop comprehensive estimates have varied. Nine
agencies have taken the initiative to disclose improper payments for 17 of
their programs in their financial statement reports, which has resulted in
the disclosure of important information for oversight and decision-making.
At the same time, the methodologies used by some agencies to estimate
improper payments do not always result in complete estimates, and many
other agencies have not even attempted to identify or estimate improper
payments. As a result, the full extent of improper payments governmentwide
is largely unknown, which hampers efforts to reduce such payments.
Ascertaining the full extent of improper payments governmentwide is
critical to determining related causes. Obtaining these data would give
agencies baseline information for making cost-effective decisions about
enhancing controls to minimize improper use of federal resources. 

Nine Agencies Reported Improper Payments, but Estimates Are Incomplete
----------------------------------------------------------------------

Nine of the CFO Act agencies that had issued their fiscal year 1998
audited financial statements as of the end of our field work,/Footnote13/
acknowledged making improper payments. For fiscal year 1998,
HHS,/Footnote14/ USDA, and HUD collectively reported improper payments of
$14.9 billion as part of their program expenses in their financial
statement reports. HHS' estimated improper Medicare benefit payments
constitute $12.6 billion of this amount, which represents 7.1 percent of
the $177 billion in Fee-for-Service payments processed in fiscal year
1998. USDA disclosed $1.4 billion in food stamp overissuances or
approximately 7 percent of its annual program cost of $20.4 billion. HUD's
excess housing subsidy payments totaled
$857 million, or 4.6 percent of its rental assistance payments for this
$18.6 billion program. These agencies have made significant progress in
estimating and reporting improper payments for these programs by
implementing methodologies that use statistical sampling. However,
implementing a statistically valid methodology will pose challenges to
agencies for certain programs.

The disclosure methods used by HHS, USDA, HUD, and the other six agencies
varied. Some agencies, such as the Social Security Administration (SSA),
reported known improper payments as receivables and provided explanatory
disclosures in the notes accompanying their financial statements. Other
agencies disclosed explanatory information in other sections of their
financial statement reports, such as in management's discussion and
analysis or in supplemental data sections. In addition, reporting within
agencies for different programs also varied. For example, USDA disclosed
improper payments of $1.4 billion for the Food Stamp Program, but only
acknowledged making improper payments without providing a specific amount
for its Federal Crop Insurance Corporation (FCIC).

Three of the nine agencies reported improper payments as expenses for 4
programs, while five agencies reported them as accounts receivable for 10
programs. Three agencies acknowledged making improper payments, but did
not quantify the dollar amounts for three programs. Eleven of the CFO Act
agencies did not report any information related to improper payments in
their financial statement reports. Such inconsistent financial reporting
makes it difficult to quantify the extent of the problem governmentwide
and indicates a need for more guidance. To address this issue, OMB is
contemplating revising its guidance to provide uniform reporting and
disclosure of improper payments by management. In addition, OMB has made
error reduction in the distribution of benefits a Priority Management
Objective,/Footnote15/ which is monitored by the OMB Director. OMB works
with agencies on an individual basis to address these issues in ways most
appropriate to the individual programs. For example, OMB is working with
ED and the Department of the Treasury to examine ways to implement new
statutory authorization for IRS verification of income of student aid
applicants, in accordance with existing tax and privacy laws.

Table 1 lists the nine agencies and the manner in which they reported
improper payments in their fiscal year 1998 financial statement reports
for the 17 programs identified. See appendix II for a description of these
agencies and/or their programs.

Table****Helvetica:x11****1:    Agencies and Programs that Reported
                                Improper Payments

-------------------------------------------------------------------------
|            :             :   :   Reported in financial statements     |
|-----------------------------------------------------------------------|
| Department : Program     :   : As a        : As part    : Othera      |
|  or Agency :             :   : fiscal      : of         :             |
|            :             :   : year 1998   : multiyear  :             |
|            :             :   : expense     : accounts   :             |
|            :             :   :             : receivable :             |
|-----------------------------------------------------------------------|
| Agency     : Not         :   :             :            : X           |
| for        : specificall :   :             :            :             |
| Internatio : y           :   :             :            :             |
| nal        : identifiedb :   :             :            :             |
| Developmen :             :   :             :            :             |
| t (AID)    :             :   :             :            :             |
|-----------------------------------------------------------------------|
| Department : Federal     :   :             :            : X           |
|  of        : Crop        :   :             :            :             |
| Agriculture: Insurance   :   :             :            :             |
|            : Corporation :   :             :            :             |
|-----------------------------------------------------------------------|
|            : Food Stamp  :   : X           :            :             |
|            : Program     :   :             :            :             |
|-----------------------------------------------------------------------|
| Department : Various     :   : X           :            :             |
|  of        : Programs    :   :             :            :             |
| Health     : under the   :   :             :            :             |
| and Human  : Administrat :   :             :            :             |
| Services   : ion for     :   :             :            :             |
|            : Children    :   :             :            :             |
|            : and Families:   :             :            :             |
|-----------------------------------------------------------------------|
|            : Medicare    :   : X           :            :             |
|            : Fee-for-    :   :             :            :             |
|            : Service     :   :             :            :             |
|-----------------------------------------------------------------------|
|            : Medicaid    :   :             :            : X           |
|-----------------------------------------------------------------------|
| Department : Housing     :   : X           :            :             |
|  of        : Subsidy     :   :             :            :             |
| Housing    : Programs    :   :             :            :             |
| and Urban  :             :   :             :            :             |
| Development:             :   :             :            :             |
|-----------------------------------------------------------------------|
| Department : Federal     :   :             : X          :             |
|  of Labor  : Employees'  :   :             :            :             |
| (DOL)      : Compensatio :   :             :            :             |
|            : n Act       :   :             :            :             |
|-----------------------------------------------------------------------|
|            : Unemploymen :   :             : X          :             |
|            : t Insurance :   :             :            :             |
|-----------------------------------------------------------------------|
| Office of  : Federal     :   :             : X          :             |
| Personnel  : Employees'  :   :             :            :             |
| Management : Group Life  :   :             :            :             |
|  (OPM)     : Insurance   :   :             :            :             |
|-----------------------------------------------------------------------|
|            : Federal     :   :             : X          :             |
|            : Employees'  :   :             :            :             |
|            : Health      :   :             :            :             |
|            : Benefits    :   :             :            :             |
|-----------------------------------------------------------------------|
|            : Retirement  :   :             : X          :             |
|-----------------------------------------------------------------------|
| Social     : Disability  :   :             : X          :             |
| Security   : Insurance   :   :             :            :             |
| Administra :             :   :             :            :             |
| tion       :             :   :             :            :             |
|-----------------------------------------------------------------------|
|            : Old Age     :   :             : X          :             |
|            : and         :   :             :            :             |
|            : Survivors   :   :             :            :             |
|            : Insurance   :   :             :            :             |
|-----------------------------------------------------------------------|
|            : Supplementa :   :             : X          :             |
|            : l Security  :   :             :            :             |
|            : Income      :   :             :            :             |
|-----------------------------------------------------------------------|
| Department : Drawbacks   :   :             : X          :             |
|  of the    : and Refunds :   :             :            :             |
| Treasury - :             :   :             :            :             |
|  Customs   :             :   :             :            :             |
|-----------------------------------------------------------------------|
| Department : Veterans    :   :             : X          :             |
|  of        : Benefits    :   :             :            :             |
| Veterans   :             :   :             :            :             |
| Affairs    :             :   :             :            :             |
| (VA)       :             :   :             :            :             |
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aAcknowledged within the financial statement report, but no amount
specifically included.

bThis represents a combination of programs at AID for which improper
payments were not separately reported.

Source: GAO analysis based on a review of the CFO Act agencies' fiscal
year 1998 financial statement reports.

The extent of the problem for certain of these agencies' programs is
unknown because agencies are not performing comprehensive quality control
reviews to estimate the range and/or identify rates of improper payments.
For example:

o SSA reported $2.5 billion in gross receivables as overpayments related
  to its Supplemental Security Income (SSI) program--a $27 billion
  program annually providing cash assistance to about 7 million
  financially needy individuals who are aged, blind, or disabled. These
  receivables consist of amounts specifically identified over multiple
  years based on SSA's discussions with recipients and the results of its
  efforts in matching data provided by recipients with information from
  other federal and state agencies, such as IRS 1099 information, VA
  benefits data, and state-maintained earnings and employment data. SSA
  reports a statistically based accuracy rate for new SSI awards of 92.5
  percent./Footnote16/ However, this accuracy rate does not consider the
  medical eligibility of recipients. Since the majority of SSI program
  dollars are historically directed to recipients with medical
  disabilities, refining the methodology to factor in any questions
  concerning medical risk is critical to determining improper payments
  within this program. According to SSA's year 2000 performance plan, SSA
  is developing a comprehensive mechanism for quantifying dollar errors
  related to SSI disability benefit payments. However, no timing for
  implementation has yet been determined.

o Although HHS reported $12.6 billion in improper payments for its
  $177 billion Medicare Fee-for-Service program based on a
  statistically valid sample, it has not attempted to estimate
  improper payments for the $98 billion Medicaid program. The HHS IG
  reported/Footnote17/ that the Health Care Financing Administration
  (HCFA)--the HHS agency responsible for overseeing the Medicaid
  program--has no comprehensive quality assurance program or other
  methodology in place for estimating improper Medicaid payments.
  Administered by state agencies, Medicaid provided health care
  services to approximately 33 million low-income individuals. The IG
  recommended that HCFA work with the states to develop a methodology
  to determine the range of improper payments in the Medicaid program.
  However, developing a statistically valid methodology to estimate
  Medicaid improper payments poses a challenge. Other state-
  administered or intergovernmental programs also face difficulties in
  developing estimates due to the variable nature of the programs and
  the need to gain the cooperation of state and local government
  officials nationwide. HCFA has recently drafted a strategy for
  discussing this issue with states.

Other Programs and Activities Have Improper Payments or Are at Risk
-------------------------------------------------------------------

Previous audits conducted by GAO and IGs have identified several other
agencies, such as DOD, ED, and IRS that had improper payments. As
illustrated in figure 2, between fiscal years 1994 and 1998, DOD
contractors voluntarily returned $984 million that DOD's Defense Finance
and Accounting Service (DFAS) erroneously paid them--resulting from
inadvertent errors, such as paying the same invoice twice or misreading
invoice amounts. As a result, the contractors, as opposed to DOD, were
determining the existence and amount of erroneous payments. As part of its
stewardship duties, DOD is responsible for making these determinations.
However, DOD has not yet made a comprehensive estimate of improper
payments to its contractors, and there are likely more overpayments that
have yet to be identified and returned. With an annual budget of over $130
billion in purchases involving contractors, DOD would benefit from
estimating the magnitude of improper payments.

Figure****Helvetica:x11****2:    Improper Payments Returned to DFAS by DOD
                                 Contractors for Fiscal Years 1994 Through
                                 1998

*****************

*****************

Source: DOD Contract Management: Greater Attention Needed to Identify and
Recover Overpayments (GAO/NSIAD-99-131, July 19, 1999).

ED is another agency with improper payments. ED's student financial
assistance programs have been designated as high risk/Footnote18/ since
our governmentwide assessment of vulnerable federal programs began in
1990. ED provides over $8 billion in grants to assist over 4 million
students in obtaining postsecondary education. As discussed in our January
1999 

Performance and Accountability Series,/Footnote19/ ED-administered student
financial aid programs have a number of features that make them inherently
risky. They provide grants to a population composed largely of students
who would not otherwise have access to the funds necessary for higher
education. ED estimates/Footnote20/ that $78.9 million, or 1 percent, was
misspent by grantees in fiscal year 1997; however, an ED IG
report/Footnote21/ indicates that this estimate may be incomplete. A more
complete estimate would allow ED to identify areas of greater risk and
target corrective actions.

Also, the Earned Income Tax Credit (EITC) program--a refundable tax credit
available to low income, working taxpayers--has historically been
vulnerable to high rates of invalid claims. During fiscal year 1998, IRS
reported that it processed EITC claims totaling over $29 billion,
including over $23 billion (79 percent) in
refunds./Footnote22/,/Footnote23/ Of the 290,000 EITC tax returns with
indications of errors or irregularities that IRS examiners reviewed, $448
million (68 percent of the $662 million claimed) was found to be invalid
during fiscal year 1998. The IRS has not disclosed any estimated improper
payments in its financial statement reports. IRS examinations of tax
returns claiming EITC are important control mechanisms for detecting
questionable claims and providing a deterrent to future invalid claims.
However, because examinations are often performed after any related
refunds are disbursed, they are less efficient and effective than
preventive controls designed to identify invalid claims before refunds are
made. OMB has worked with IRS to start a 5-year compliance initiative to
minimize losses in this area. This initiative is intended to increase
taxpayer awareness, strengthen enforcement of EITC requirements, and
research sources of EITC noncompliance. EITC compliance efforts include a
significant focus on pre-refund fraud/error prevention and detection. For
example, the EITC compliance initiative includes recalculation of
erroneous overclaims, identification of questionable returns, and
initiation of many EITC audits, all of which should occur prior to issuing
refunds. However, our work has shown that even in cases where IRS has
identified potentially erroneous claims, it released refunds prior to
completing the reviews.

Other types of federal programs and activities that undergo audits also
risk making improper payments. Internal control deficiencies and other
problems similar to those prevalent in programs that have acknowledged
improper payments suggest that additional federal financial assistance
programs, contract management activities, and other miscellaneous programs
may also be particularly vulnerable to disbursing improper payments. For
example, USDA's IG reported/Footnote24/ that the Natural Resources
Conservation Service (NRCS) exhibited significant control weaknesses when
determining if farmers qualified for annual payments under the
Conservation Reserve Program (CRP). CRP, which disbursed $1.7 billion in
fiscal year 1998, provides incentives and financial assistance to farmers
and ranchers to retire environmentally sensitive land from production. Due
to these control weaknesses, the USDA IG noted that CRP risked making
incorrect decisions. These incorrect decisions could result in USDA
disbursing improper payments. Without a measurement of the extent of
improper payments, it is difficult to assess the appropriate level of
management attention needed to mitigate these program risks. 

Once agencies have implemented methodologies to estimate the amount of
improper payments, they can use this information to develop error rates.
Agencies may find it useful to compute the dollar amount of errors as a
percentage of program outlays, and the number of transaction errors as a
percentage of the total number of transactions processed. Management could
then use these error rates to evaluate whether further action is needed to
address improper payments.

Internal Control Weaknesses Cause Improper Payments

Pervasive deficiencies in internal control across the federal government
result in the payment of federal funds for purposes other than those
originally intended. For example, several agencies face challenges in
ensuring adequate controls for assessing beneficiaries' initial and
continued eligibility due to ineffective data sharing and sources of
information. Also, some agencies have insufficient oversight and
monitoring mechanisms, such as site visits and reviews of appropriate
documentation, to ensure the validity of payments--particularly for
federal financial assistance programs. Systems deficiencies also
contribute to improper payments when accurate or timely data are not
always available for payment decisions. Figure 3 illustrates our
categorization of internal control weaknesses that contribute to improper
payments within the 17 programs where agencies reported improper payments.

Figure****Helvetica:x11****3:    Internal Control Weaknesses Cause
                                 Improper Payments for 17 Programs

*****************

*****************

Note: Six of the17 programs have two or more internal control weaknesses
reported in this chart.

Source: GAO analysis based on prior IG and GAO reports.

Internal Controls Over Eligibility Determinations Are Often Inadequate
----------------------------------------------------------------------

As highlighted in our reviews of GAO and IG reports, ensuring adequate
controls over determining beneficiaries' eligibility often proves
difficult for many agencies. Initial and/or continued eligibility
determination problems were noted for 10 of the 17 programs that reported
improper payments. For instance, initial eligibility for HUD's Section 8
and Public Housing programs--providing $18.6 billion in rental assistance
for lower income families in fiscal year 1998--is primarily based on an
applicant's self-

reported income. According to HUD's IG,/Footnote25/ HUD regulations
require owners and housing authorities to verify the information provided,
but this process often lacks effective controls to ensure that
verifications are adequately performed. In addition, the IG reported that
recipients do not always report complete or accurate information.
Consequently, improper payments have occurred. To improve HUD's procedures
for verifying participant's income and correct this long-standing problem,
the HUD IG recommended the following actions: (1) on-site reviews to
assess first hand the housing subsidy administrator's control environment,
(2) confirmations with third parties, and (3) computerized income
verification matching to IRS and SSA records. As discussed in our January
1999 Performance and Accountability Series,/Footnote26/ HUD unveiled a
multifaceted plan to identify households' unreported and/or underreported
income in fiscal year 1998. The plan includes steps to (1) further expand
HUD's computer matching efforts,
(2) strengthen recertification policies and procedures, (3) ensure that
HUD's information systems have accurate and complete data on tenants, (4)
institute penalties, and (5) perform monitoring and oversight functions.
OMB is also working with HUD in reducing payment errors in rental
assistance due to recipient underreporting of income.

In another example, the DOL is challenged to correctly identify eligible
recipients for its Unemployment Insurance (UI) program, which in fiscal
year 1998 provided over 7 million unemployed workers with about $20
billion in temporary financial support to facilitate re-employment. The
DOL IG reported/Footnote27/ that state-administered claims offices,
responsible for determining eligibility requirements, have ineffective
controls to verify information provided by claimants. Claimants declaring
themselves to be U.S. citizens are not screened for immigration legal
status, which in some cases has resulted in improper payments. For
example, ineligible individuals, including illegal aliens, were paid
millions of dollars over an approximate 2-year time frame because states
did not perform up-front verification of social security numbers provided
by claimants. OMB has worked with DOL to secure a congressional
authorization for an integrity initiative focused on reducing benefit
overpayments and improving UI tax compliance. 

Our analysis of GAO and IG reports also showed that, as with initial
eligibility determinations, agencies' controls are insufficient to ensure
the continuing eligibility of beneficiaries for 8 of the 10 programs with
eligibility determination problems. For example, SSA is mandated to
perform reviews for continued eligibility for program benefits to aid in
preventing fraud, waste, and abuse in the Disability Insurance (DI)
program--a program to provide a continuing income base for more than
6 million disabled workers and eligible members of their families.
However, acknowledged delays in performing these continuing disability
reviews have undermined the effectiveness of this control./Footnote28/
Because SSA disburses approximately $50 billion in disability benefit
payments annually, it is critical that these reviews be performed
promptly; otherwise, beneficiaries who are no longer eligible for this
program may inappropriately receive benefits. SSA has a multiyear plan to
become current with all disability reviews by 2002./Footnote29/

Since 1996, the HUD IG has reported/Footnote30/ that HUD's housing subsidy
programs experience improper payments when beneficiaries' income status
changes and they do not notify housing authorities to adjust their
benefits. Various legal, technical, and administrative obstacles impede
housing authorities from ensuring that tenants report all income sources
during the periodic determination to assess continuing eligibility. HUD
has encouraged housing authorities to computer match with state agencies
to detect unreported income, since housing authorities lack the
legislative authority to access IRS and SSA data. However, little progress
has been made in this area, since most housing authorities do not have the
systems expertise to effectively implement this technique.

In May 1998, the President's Council on Integrity and Efficiency
(PCIE)/Footnote31/ issued a report/Footnote32/ to highlight the need for
increased cooperation among federal agencies in sharing income/financial
resource information about federal program beneficiaries in an effort to
improve controls over eligibility verification. For example, the report
indicated that the DOL IG's ability to ensure eligibility of Unemployment
Insurance Program recipients could be enhanced by verifying employment
status of those recipients with IRS or SSA wage records. Currently, DOL's
IG must coordinate with states, requiring subpoena authority in some
cases, to obtain this information from states. Also, governmentwide, there
is no omnibus authority for efficiently and effectively obtaining access
to some data. We have work ongoing on this issue and will report at a
later date.

Oversight and Monitoring Controls Are Insufficient
--------------------------------------------------

Our analysis of GAO and IG reports showed that insufficient federal
monitoring and oversight of program expenditures exist in 7 of the 17
programs where agencies reported improper payments. Effective federal
monitoring assesses the quality of performance over time. It includes
regular management and supervisory activities, such as periodic
comparisons of expected and actual results and reconciliation of data to
its source. Generally, activities such as site visits, reviews of progress
and financial reports filed by contractors and grantees, and reviews of
contracts and grant agreements are techniques often used by federal
officials to oversee and monitor programs.

The lack of sufficient oversight and monitoring controls can lead to
improper payments by fostering an atmosphere that invites fraud. For 

instance, both we and the HHS IG have reported/Footnote33/ that HCFA's
insufficient oversight of the Medicare program hampered it from preventing
improper Medicare payments. To fulfill its primary mission of providing
health care coverage for approximately 39 million aged individuals,
Medicare pays contractors to process claims for health care services.
These contractors are responsible for all aspects of claims administration
and serve as HCFA's front line of defense against fraud and abuse. Yet,
vulnerabilities in contractors' procedures for paying Medicare claims have
provided a lax environment. This environment permitted unscrupulous
providers opportunities to obtain additional unjustified
payments./Footnote34/ These activities include billing for services never
rendered, misrepresenting the nature of services provided, duplicate
billing, and providing services that were not medically necessary.
Although HCFA's most recent estimate of improper payments in its $177
billion Medicare Fee-for-Service program amounted to $12.6 billion, this
estimate did not consider improper payments made as part of another $33
billion Medicare Managed Care program./Footnote35/ Therefore, the impact
of insufficient monitoring and oversight on improper payments could be
more extensive than current estimates indicate. To enhance HCFA's
oversight function, the HHS IG recommended that HCFA perform risk
assessments of contractor functions to identify those functions that
significantly affect the improper payment of claims. This would enable
HCFA to target areas and strengthen related controls. 

The Agency for International Development (AID), which spent $5.2 billion
in fiscal year 1998 to provide assistance to developing countries, also 

suffers from insufficient monitoring and oversight. We
reported/Footnote36/ that AID does not have accurate information to ensure
that its operations and programs are being managed cost-effectively and
efficiently. In addition, AID's IG reported/Footnote37/ weaknesses in
monitoring relief and rehabilitation activities. For example, mission
employees in Rwanda, who were asked to monitor relief and rehabilitation
activities, did not have basic documentation they needed to monitor relief
efforts, such as copies of grant agreements, progress reports, and
financial status reports. The impact of this control deficiency on
improper payments was not quantified. 

Based on previous GAO/Footnote38/ and IG reports, insufficient oversight
and monitoring is also present in other programs that have improper
payments but did not report them. For example, according to the ED
IG,/Footnote39/ audits performed under the Single Audit Act are ED's
principal control for ensuring that student financial assistance funds
were being disbursed to eligible students in proper amounts. However, the
IG noted that ED did not (1) ensure that all audit reports were received,
(2) follow-up on problems identified, or (3) have a systematic process in
place to measure trends in the misspending by grantees. The IG recommended
that the department
(1) complete the development of an ongoing process to identify
missing/delinquent audit reports, (2) take corrective actions against
delinquent audit report filers, and (3) develop a systematic methodology
to quantify costs to measure the effectiveness of monitoring efforts and
trends among institutions. The IG also recommended that the department use
a risk management model to determine how to effectively deploy limited
monitoring resources. Without this type of information, the department is
unable to make cost-benefit decisions to determine whether to strengthen
preventive internal controls. 

Systems Deficiencies Exist
--------------------------

Deficiencies in agencies' automated systems, or the lack of systems,
prevent personnel from accessing reliable and timely information, which is
integral to making disbursement decisions. As a result, improper payments
frequently occur because agency personnel lack needed information, rely on
inaccurate data, and/or do not have timely information. Agency systems
deficiencies have been identified in prior GAO and IG reports for 7 of the
17 programs reporting improper payments. For example, we
reported/Footnote40/ that interstate duplicate participation in the Food
Stamp Program goes undetected because there is no national system to
identify participation in more than one state. While states may currently
learn of some duplicate participation from SSA or through their own
matching efforts with neighboring states, they rely primarily on
applicants and clients to truthfully identify who resides in their
households. USDA's Food and Nutrition Service (FNS) manages the Food Stamp
Program through agreements with state agencies. Because USDA's most
current annual estimate/Footnote41/ indicates that food stamp
overissuances account for over 7 percent of the program's $20 billion in
annual benefit expenses, it is critical that action be taken to strengthen
systems and related controls. FNS is considering whether to establish a
central system to help ensure that individuals participating in the Food
Stamp Program are not being improperly included in more than one state.

System deficiencies are also a factor for agency programs that did not
disclose improper payments. For example, DOD's payment process suffers
from nonintegrated computer systems that require data to be entered more
than once in different systems, sometimes manually, which increases the
possibility of erroneous or incomplete data. Also, DOD contracts may have
from 1 to over 1,000 accounting classification reference numbers which
involve extensive data entry, also increasing the chance for errors. As
previously discussed, DOD contractors returned about $984 million between
fiscal years 1994 and 1998 to the DFAS in Columbus, Ohio, as a 

result of duplicate and erroneous payments./Footnote42/ We also
reported/Footnote43/ that pervasive weaknesses in access controls in the
Air Force vendor payment system application including inadequate
separation of duties and other internal control deficiencies resulted in
fraudulent payments and left DOD vulnerable to abuse. While no internal
control system at DOD, or any other agency, can guarantee the elimination
of improper payments and the prevention of fraud, resolving DOD's systems
problems and designing effective solutions to reduce related risks are of
critical importance, particularly since DOD expenditures comprise nearly
half of the federal government's discretionary spending. We made several
recommendations to resolve these deficiencies, such as suggesting that DOD
limit vendor payment system access levels to those appropriate for the
user's assigned duties. DOD has a number of initiatives underway to help
ensure that payments are proper--including the development of a standard
core system for procurement. However, the new system is not scheduled to
be fully implemented for several years. 

Similar to DOD, ED also lacks a fully functional integrated database to
administer over $7 billion in federal student financial aid
programs./Footnote44/ As a result, it remains vulnerable to losses because
the department and schools often do not have accurate, complete, and
timely information on program participants needed to effectively and
efficiently operate and manage its programs. We have reported/Footnote45/
that a lack of common identifiers for students and institutions makes it
difficult to track them across systems. Because each system uses different
combinations of data fields to uniquely identify, access, and update
student records, duplicate student records have been identified in key
systems. Many of ED's student financial aid systems were developed
independently over time by multiple contractors. Consequently, ED relies
on various contractors to operate its numerous systems using different
hardware and software. We recommended/Footnote46/ that ED (1) develop and
enforce a departmentwide systems architecture and
(2) ensure that the developed systems architecture addresses systems
integration, common identifiers, and data standards. The Office of Student
Financial Assistance has developed its Modernization Blueprint to guide
the development of an integrated financial aid delivery system, which ED
officials stated depicts the first 3 years of a continuing process of
modernizing its system.

Program Design Issues Contribute to Improper Payments

Often, the nature of a program can contribute to the disbursement of
improper payments. Many programs have complex program regulations, and
several emphasize expediting payments or have high volumes of transactions
to process. These program design issues inherently increase the potential
for improper payments, yet such payments are virtually impossible to
eliminate. However, strengthening business practices and developing
targets or goals for reducing improper payments can mitigate the risk of
improper payments occurring. Also, measuring progress in relation to such
targets or goals may serve as a measure of the effectiveness of an
agency's improper payment reduction program. According to our analysis of
GAO and IG reports, program design issues were present in programs with
improper payments as illustrated in figure 4.

Figure****Helvetica:x11****4:    Program Design Issues for the Agencies
                                 Reporting Improper Payments for 17 Programs

*****************

*****************

Note: Five of the 17 programs have 2 or more program design issues.

Source: GAO analysis based on prior work performed on these programs.

Some agencies currently have programs that use targets or goals to aid in
reducing improper payments. One example is the Medicaid program, wherein
states are responsible for determining the eligibility of beneficiaries
and disbursing related federal funds. According to HHS
regulations,/Footnote47/ states must have a payment error rate no greater
than 3 percent due to errors in eligibility determinations or HHS may
disallow medical assistance payments. Another example is the Food Stamp
Program administered by state agencies under USDA regulations. In this
program, USDA may pay 50 percent of each state's cost of administering the
program. To encourage states to reduce their payment error rates, the
program includes an incentive. This incentive allows USDA to increase the
50 percent reimbursement for administrative costs, by as much as 10
percent, to a total of 60 percent based on reductions in states' error
rates below 6 percent and on other conditions. State agencies also may be
required to make payments to USDA if their payment error rate exceeds
USDA's national performance measure./Footnote48/ State agencies may be
required to invest in improving their administration of the program rather
than making refunds. 

Complex Program Regulations Increase Risk of Improper Payments
--------------------------------------------------------------

Program complexity inherently increases the risk of improper payments.
Previous GAO and IG reports disclosed this condition for 11 of the 17
programs with reported improper payments. For example, the complexity of
state Medicaid programs provide challenges for federal oversight because
of the variations in managing these programs on a state-by-state basis.
Medicaid--the primary source of health care for 12 percent of the U.S.
population--provides matching grants to states based on formulas
encompassing states' per capita income. States have a variety of options
for program administration. They can elect to administer the program at
the state or county level. Also, they can operate a fee-for-service
program, a managed care program, or some combination of the two. States
may also elect to operate their claims processing systems directly or
contract with private vendors. Because of the size of this program--it
disbursed nearly $98 billion in federal funds during fiscal year 1998--it
is critical that HCFA comprehensively estimate its improper payments to
assess its risk and determine appropriate actions to strengthen oversight
controls. Such actions would help to ensure that HCFA is fulfilling its
stewardship responsibilities for this program. 

Block grants present unique challenges to providing adequate
accountability for federal funds. Block grants give states flexibility to
adapt funded activities to fit state and local needs and devolve major
responsibilities to the states themselves to oversee these
programs./Footnote49/ Under the Temporary Assistance for Needy Families
(TANF) block grant, states are authorized to collectively spend up to
$16.5 billion annually to provide assistance to needy families and promote
work activities. To implement TANF, states and localities determine the
range of services and eligibility criteria.

Many states manage the TANF, Food Stamp, and Medicaid programs through
local offices, and depending upon the state, the same staff may be
determining eligibility and benefit levels for all three programs. These
programs' eligibility rules and income tests are complex and differ from
one another; thus, although all three programs consider assets and
household income and size, the extent to which they do so varies. A
requirement that recipients notify the staff when their income changes
further complicates eligibility determinations--staff must use three sets
of eligibility criteria to recalculate benefit levels. Given the
complexity and diversity of eligibility rules among these three programs,
it is a challenge at all levels of government to adequately oversee these
programs, and improper payments are sometimes made./Footnote50/

Speed of Service Issues, Coupled With Resource Constraints, Impact
Improper Payments
---------------------------------------------------------------------------

Many programs' missions emphasize speed of service. As a result, errors
are more likely to occur, resulting in improper payments. We considered
this condition to exist for 6 of the 17 programs with reported improper
payments. It is also present in agencies that had improper payments but
did not report them. For example, IRS' ability to successfully meet the
financial management challenges it faces must be balanced with the
competing demands placed on its resources by its customer service and tax
law compliance responsibilities. IRS is mandated to process tax refunds
within 45 days of receipt of a tax return. If the refund is not processed
within this time, IRS must remit interest payments to the taxpayer.
However, IRS' systems were not designed to handle this volume of
information within these time frames. Further, we reported/Footnote51/
that IRS lacks critical preventive controls, such as comparing the
information on tax returns to third-party data such as W-2s (Wage and Tax
Statements) in a timely manner. As a result, the agency is unable to
identify and correct discrepancies between these documents that allow
duplicate refunds to be issued. Although IRS has detective (post-refund)
controls in place, they often occur months after the returns are submitted
and processed. Insufficient preventive controls expose the government to
potentially significant losses due to inappropriate disbursement of
refunds. According to IRS records, IRS' investigators identified over $17
million in alleged fraudulent refunds that had been disbursed during the
first 9 months of calendar year 1998. However, the full magnitude of
improper payments disbursed by IRS is unknown. 

The Federal Emergency Management Agency's (FEMA) Disaster Relief program
is another example of how providing service--in this case, providing
assistance to disaster victims--as quickly as possible increases the risk
of improper payments being made. FEMA provided over
$2.2 billion in disaster relief in fiscal year 1998 to assist individuals,
families, communities, and states in responding to and recovering from
disasters, such as floods, hurricanes, and tornadoes. FEMA has set
demanding performance goals for its disaster assistance activities, from
acting within 12 hours on requests to supply disaster victims with water,
food, and shelter, to processing disaster housing applications from
eligible individuals within an average of 8 days./Footnote52/ The IG has
noted that achieving these goals will require FEMA to streamline
operations and apply new technology to reduce waste and duplication of
benefits. In past years, the IG has identified specific cases of
individuals filing false claims to obtain FEMA disaster assistance;
however, the full extent of this problem has not been quantified.

We recognize that delivering services expeditiously while ensuring that
the right amount is paid to the right person poses a significant challenge
for many agencies. Without state-of-the-art information management systems
and appropriate sharing of data, agency personnel cannot readily access
needed information for payment decisions and thus are hampered from
preventing improper payments. Due to the diverse nature of programs,
consulting with congressional oversight bodies would assist agencies when
establishing targets and goals to reduce improper payments without
impairing service delivery and be an important means of obtaining
agreement with the Congress as to expected results for each program. 

Large Volumes of Transactions Increase Risk of Improper Payments
----------------------------------------------------------------

A significant volume of claims or payments is also a factor that
contributes to improper payments, especially when compounded with resource
constraints. Large volumes of claims were identified in 4 of the 17
programs with reported improper payments. For example, in a single year,
Medicare contractors process over 800 million claims with limited time for
processing. IRS is another agency with large volumes of activity. For
instance, in fiscal year 1998, it processed 1.4 billion tax and
information returns, with 88 million involving refunds. Given the high
volume of transactions, inadvertent clerical errors are more likely and
they could result in improper payments. 

Potential Year 2000 Problem Increases the Need for Effective Internal
Controls

While implementing effective internal controls is and will be an ongoing
concern, the Year 2000 problem/Footnote53/ presents a unique challenge to
ensuring effective payments controls. Many of the federal government's
computer systems were originally designed and developed 20 to 25 years
ago, are poorly documented, and use a wide variety of computer languages,
many of which are obsolete. Some applications include thousands, tens of
thousands, and even millions of lines of code, each of which must be
examined for date-format problems. Moreover, federal programs are also
vulnerable to Year 2000 risks stemming from items outside of their
control, such as the Year 2000 compliance of critical business partners.
Unless corrected, Year 2000 failures may have a costly, widespread impact
on federal, state, and local governments--including the extent to which
improper payments are made.

These many risks increase the possibility that Year 2000 induced failures
could result in increased number and amounts of improper payments as
agencies attempt to sustain their core business functions. Further,
nonexistent or ineffective internal controls, as previously discussed,
increase this risk. Accordingly, the federal government could potentially
distribute additional improper payments.

While the Year 2000 problem increases the risk of improper payments, as we
reported/Footnote54/ earlier this year, it also provides the opportunity
to institutionalize valuable lessons, such as the importance of reliable
processes and reasonable controls. Our Year 2000 enterprise readiness
guide/Footnote55/ calls on agencies to develop and implement policies,
guidelines, and procedures in such critical areas as configuration
management,/Footnote56/ quality assurance, risk management, project
scheduling and tracking, and performance metrics. To address the Year 2000
problem, several agencies have implemented such policies. For example,
HCFA has implemented policies and procedures related to configuration
management, quality assurance, risk management, project scheduling and
tracking, and performance metrics for its internal systems.

Most Agency Performance Plans Do Not Comprehensively Address Improper
Payments

As previously discussed, nine agencies acknowledged making improper
payments in 17 programs for fiscal year 1998. These agencies' fiscal year
2000 performance plans, under the Results Act, included performance goals
and strategies that address key internal control weaknesses in four
programs. For nine programs, the respective agencies did not
comprehensively address improper payments in their plans. Improper
payments were not addressed at all for the remaining four programs.
Appendix III contains our assessment of the extent to which each agency
reporting improper payments addressed them in its performance plan. For
these and other agencies at risk, the first step in addressing improper
payments is to identify the magnitude of these payments. Agencies can then
analyze the characteristics of these cases to identify the circumstances
and root causes leading to the improper payments. Using this analysis,
agencies can make cost-benefit decisions on systems and other internal
control improvements to mitigate the risk of improper payments and
implement performance goals to manage for results. 

The use of appropriate performance goals relating to improper payments can
focus management attention on reducing such payments. For example, HHS has
reported a national estimate of improper payments in its Medicare Fee-for-
Service benefits since fiscal year 1996. For fiscal year 1998, HHS
reported estimated improper payments of $12.6 billion, or more than 7
percent, in Medicare Fee-for-Service benefits--down from about $20
billion, or 11 percent, reported for fiscal year 1997 and $23.2 billion,
or 14 percent, for fiscal year 1996. As discussed earlier, HCFA would also
benefit from identifying improper payments and establishing related
performance goals for its $98 billion Medicaid program.

Analysis of improper Medicare payments, as part of the financial statement
preparation and audit process, helped lead to the implementation of
several initiatives intended to identify and reduce improper payments.
These initiatives included prepayment reviews of selected claims, an
increase in the overall level of prepay and postpay claims reviews, and
medical reviews of providers identified as having nonstandard billing
practices. Annual estimates of improper payments in future audited
financial statements will provide information on the progress of these
initiatives. 

Without a systematic measurement of the extent of the problem, management
cannot determine (1) if the problem is significant enough to require
corrective action, (2) how much to invest in internal controls or
(3) the success of efforts implemented to reduce improper payments. In
fiscal year 1998, VA piloted a new measurement system to determine the
accuracy of veterans' benefit payments--the Systematic Technical Accuracy
Review (STAR) system. Using the STAR system, the Veterans Benefits
Administration (VBA)--a component of VA--determined that its regional
offices were accurate only 64 percent of the time when making initial
benefit decisions. This measure indicated that VBA should focus additional
attention on ensuring that correct decisions are made the first time.
Using the 64 percent as a baseline, VBA established a goal of achieving a
93 percent accuracy rate by fiscal year 2004. Although it is too early to
determine whether VBA's efforts to meet its accuracy improvement goal will
be successful, the new STAR system represents an important step forward by
VBA in identifying and correcting the causes of errors and having a
baseline against which to measure results and progress. 

Currently, there is no governmentwide guidance on how to develop
mechanisms for identifying and estimating improper payments, which would
help agencies to identify whether a need exists to address improper
payments in their annual strategic and performance planning processes.
Developing such mechanisms would enable each agency's management to better
understand the full extent of its problem. With these mechanisms in place,
appropriate cost-beneficial corrective actions could be designed and
implemented.

Although no governmentwide guidance exists for identifying and estimating
improper payments, the CFO and Results Acts provide a framework for OMB
and agencies to report on efforts to minimize improper payments. Under the
CFO Act, OMB is required to prepare and annually revise a governmentwide 5-
year financial management plan and status report that discusses the
activities the executive branch has undertaken to improve financial
management in the federal government. Each agency CFO is responsible for
developing annual agency-specific plans to support the governmentwide 5-
year financial management plan. The CFO Act also requires OMB to provide
the governmentwide 5-year plan and status report to appropriate
congressional committees. This reporting process keeps the appropriate
congressional committees informed of agencies' efforts to improve
accountability and stewardship over federal funds. 

As discussed earlier, under the Results Act, agencies are required to
prepare strategic plans that identify goals and objectives at least every
3 years. Complementing the strategic plans are annual performance plans
that set annual goals with measurable target levels of performance, and
annual performance reports that compare actual performance to the annual
goals. The Results Act also requires that OMB annually prepare a
governmentwide performance plan as a part of the President's budget. The
agency performance plans are the foundation for OMB's governmentwide plan.

The framework afforded by the CFO and Results Acts suggests that agencies
have a variety of mechanisms for reporting on improper payments, depending
upon the magnitude or significance of those 

payments. OMB calls/Footnote57/ for mission-critical management problems--
those which prospectively and realistically threaten achievement of major
program goals--to be discussed in agencies' strategic plans and also in
their annual performance plans under the Results Act. In our view,
improper payments can reasonably be considered mission-critical problems
for certain programs, including the 17 programs with reported improper
payments discussed in this report. For example, for programs providing
financial assistance benefits, such as the Food Stamp Program, maintaining
integrity and accuracy in the payment of benefits is critical to the
missions of the programs. For those agencies where these payments are not
deemed mission critical, an appropriate vehicle for managing improper
payments would be agency 5-year financial management plans developed under
the auspices of the CFO Act, or other vehicles such as action plans.
Figure 5 shows how the CFO and Results Acts provide a broad structure
under which agencies can report the status of their efforts to reduce
improper payments. 

Figure****Helvetica:x11****5:    Reporting Improper Payments Within the
                                 Framework of the CFO and Results Acts

*****************

*****************

Note: The planning and reporting stages become iterative as management
assesses the relative success of internal controls employed to minimize
improper payments.

Source: GAO analysis of Results Act and CFO Act reporting requirements.

We evaluated the extent to which agencies that reported improper payments
in their financial statement reports also addressed improper payments in
their fiscal year 2000 performance plans. HHS, SSA, VA, and OPM are four
agencies that comprehensively addressed improper payments using this
framework. These agencies' performance plans included both performance
goals and strategies for minimizing improper payments for the Medicare Fee-
for-Service, Old Age and Survivors Insurance, Veterans Benefits, and
Federal Employees' Life Insurance programs. As shown in figure 6, these
programs represent 24 percent of those that reported improper payments or
61 percent of the total program dollars for the 17 programs. In contrast,
7 of the 17 programs (42 percent) did not or only cursorily addressed
improper payments in their performance plans, and 34 percent addressed
them in a moderate (i.e., less than comprehensive) manner. Some of the
nine agencies we reviewed may have addressed these issues in their 5-year
financial management, component, or other agency action plans. However,
only HHS' performance plan contained a reference or "pointer" to another
plan that addressed improper payments. Because some agencies do not appear
to be addressing improper payments in their performance plans, they may
not consider the prevention of improper payments a priority or focus
adequate attention on this issue. 

Figure****Helvetica:x11****6:    Degree to Which 17 Programs Addressed
                                 Improper Payments

*****************

*****************

Source: GAO analysis based on review of agency fiscal year 2000
performance plans.

Legend:

None: Agency performance plan does not address the issue of improper
payments for this program.

Cursory: Agency performance plan addresses the need to minimize improper
payments but does not provide any substantive performance goals or
strategies to minimize improper payments in this program.

Moderate: Agency performance plan has either performance goals to address
improper payments or strategies to minimize improper payments in this
program, but not both, or lacks a comprehensive approach.

Comprehensive: Agency performance plan has performance goals and
strategies that address key internal control weaknesses to minimize
improper payments in this program.

OMB Circular A-11, Part 2, which serves as implementing guidance for
agencies in preparing and submitting Results Act strategic and performance
plans, states that agency plans should include goals for resolving mission-
critical management problems. Circular A-11 also directs agencies to
describe actions taken to address and resolve these issues in their
performance plans by developing performance goals and discussing
strategies. We have also advocated/Footnote58/ that agencies address
mission-critical management problems, in their performance plans, by
developing performance goals and discussing strategies.

Our analysis indicates that additional guidance on improper payments may
be helpful to agency managers. Without an appropriate methodology in place
for estimating and reporting improper payments, the Congress, agency
managers, and the public are not aware of the full extent of this problem.
As a result, agency managers cannot effectively use performance goals for
managing improper payments.

Conclusions

Although reported amounts of improper payments totaled $19.1 billion in
fiscal year 1998, many agencies are not identifying, estimating, and
reporting the nature and extent of improper payments. As a result, the
magnitude is largely unknown. Based on previous audit reports, inadequate
internal control and program design issues are the primary causes of
improper payments for numerous federal programs. Compounding this problem,
some agencies have not recognized the need to address and resolve mission-
critical improper payment problems by discussing steps taken in their
strategic plans and incorporating appropriate goals into their performance
plans. 

Economic and demographic projections indicate that federal expenditures in
certain programs will grow significantly. With billions of dollars at
risk, agencies will need to continually and closely safeguard those
resources entrusted to them and assign a high priority to reducing fraud,
waste, and abuse. A first step for some agencies will involve developing
mechanisms to identify, estimate, and report the nature and extent of
improper payments annually. Without this fundamental knowledge, agencies
cannot be fully informed about the magnitude, trends, and types of payment
errors occurring within their programs. As a result, most agencies cannot
make informed cost-benefit decisions about strengthening their internal
controls to minimize future improper payments or effectively develop goals
and strategies to reduce them. Consulting with congressional oversight
committees on the development of these goals and strategies is also
important to obtaining consensus on how to address this multibillion
dollar problem.

Recommendations

To assist agencies in estimating and managing improper payments, we
recommend that the Director of the Office of Management and Budget,
through the Deputy Director for Management and OMB's Office of Federal
Financial Management, within the framework of the CFO and Results Acts:

o Develop and issue guidance to executive agencies to assist them in
  (1) developing and implementing a methodology for annually estimating
  and reporting improper payments for major federal programs and
  (2) developing goals and strategies to address improper payments in
  their annual performance plans.

o Require agencies to (1) include a description of steps being taken to
  address improper payments in their strategic and annual performance
  plans when the level of improper payments is mission critical and
  (2) consult with congressional oversight committees, as appropriate,
  on the projected target levels and goals for estimating and reducing
  improper payments, as presented in the agencies' annual performance
  plan.

OMB Comments and Our Evaluation

In commenting on a draft of this report, OMB agreed that its focus on
improper payments should be expanded. OMB agreed with our first
recommendation calling for guidance to assist agencies in developing and
implementing a methodology for annually estimating and reporting improper
payments for major federal programs and developing goals and strategies to
address improper payments in their annual performance plans.

Regarding the first element of our second recommendation, OMB expressed
concern that it may be inappropriate for agency strategic plans to always
include a general goal or objective for reducing improper payments. OMB
said it would expect agencies to include goals or objectives in their
strategic plans if the level of improper payments was determined to be
mission critical. We agree. As stated in our report, it was not our
intention that goals or objectives for reducing improper payments be
universally included in agency strategic plans. Specifically, within the
framework of the CFO and Results Acts, and as shown in figure 5, judgment
needs to be exercised so that only mission-critical management problems
are addressed in agency strategic and performance plans. To avoid any
misconception regarding this issue, we have clarified our recommendation
accordingly.

With regard to our recommendation to consult with the Congress on specific
goals and targets for improper payments, OMB noted that congressional
consultation is required by the Results Act and said that agencies
interact with the Congress throughout the year as part of the normal
appropriations and oversight processes. OMB stated that this level of
interaction provides the opportunity for both the agency and the Congress
to raise and discuss improper payment issues and should be adequate. In
this regard, it will be important that these interactions take place. As
discussed in our report, several agencies have not reported improper
payments in their performance plans even when they could reasonably be
considered mission critical. OMB's comments are reprinted in appendix IV.
OMB also provided informal technical comments, which we have incorporated
as appropriate.

As agreed with your office, unless you publicly announce contents of this
report earlier, we will not distribute it until 30 days from its date.
Then, we will send copies to Senator Joseph Lieberman, Ranking Minority
Member, Senate Committee on Governmental Affairs; Representative Dan
Burton, Chairman, and Representative Henry A. Waxman, Ranking Minority
Member, House Committee on Government Reform; Senator Pete V. Domenici,
Chairman, and Senator Frank R. Lautenberg, Ranking Minority Member, Senate
Committee on the Budget; Representative John R. Kasich, Chairman, and
Representative John M. Spratt, Jr., Ranking Minority Member, House
Committee on the Budget. We will also send copies to the Honorable Jacob
J. Lew, Director of the Office of Management and Budget; the heads of the
24 CFO agencies; and respective agency CFOs and Inspectors General. Copies
will also be made available to others upon request.

This report was prepared under the direction of Gloria L. Jarmon,
Director, Health, Education, and Human Services Accounting and Financial
Management, who may be reached at (202) 512-4476 or by e-mail at
[email protected]  if you or your staff have any questions. Staff
contacts and other key contributors to this letter are listed in appendix V.

Sincerely yours,

*****************

*****************

Jeffrey C. Steinhoff
Acting Assistant Comptroller General
Accounting and Information Management Division

--------------------------------------
/Footnote1/-^The CFO Act, as expanded by the Government Management Reform
  Act of 1994 (GMRA), requires 24 major departments/agencies to prepare
  and have audited agencywide financial statements. See appendix I for a
  list of the 24 CFO Act agencies.
/Footnote2/-^The Results Act requires agencies to prepare annual
  performance plans that include performance goals and measures,
  strategies, and resources required to achieve performance goals, and
  procedures to verify and validate performance information.
/Footnote3/-^This includes $14.9 billion in improperly paid expenses and
  an additional $4.2 billion of receivables that these agencies expect to
  collect.
/Footnote4/-^For purposes of this report, major programs include those
  that disburse $1 billion or more annually. Loan programs were not
  included in the scope of this review. See appendix II for a description
  of these agencies or their programs.
/Footnote5/-^This amount primarily consists of programs' fiscal year 1998
  net outlays.
/Footnote6/-^Performance goals are presented in agency performance plans,
  which are the vehicles agencies use to define their expected results for
  the fiscal year.
/Footnote7/-^99-22SET, January 1999). These 2 series of reports outline
  actions needed to improve the performance and accountability of, and
  manage the risk relating to, our national government.
/Footnote8/-^For example, a routine contract price adjustment allows for
  the payment of an expense at a provisional rate until the actual cost
  information is available and audited. When the actual cost is lower than
  that provisionally paid, an overpayment has occurred. These amounts may
  be offset in future payments or returned directly to the government.
  This type of overpayment is not considered an improper payment.
/Footnote9/-^99-21.3.1, May 1999).
/Footnote10/-^Statement of Federal Financial Accounting Standards No. 4,
  Managerial Cost Accounting Standards; Managerial Cost Accounting System
  Requirements, Federal Financial Management System Requirements (FFMSR)
  8, Joint Financial Management Improvement Program (JFMIP), February
  1998; The Managerial Cost Accounting Implementation Guide, Chief
  Financial Officers Council and JFMIP, February 1998.
/Footnote11/-^Federal Debt: Answers to Frequently Asked Questions--An
  Update (GAO/OCG-99-27, May 28, 1999) and Medicare and Budget Surpluses:
  GAO's Perspective on the President's Proposal and the Need for Reform
  (GAO/T-AIMD/HEHS-99-113, March 10, 1999).
/Footnote12/-^For example, to the extent that individuals who owe the
  federal government for certain programs and/or activities receive other
  federal benefits and payments, such amounts constitute missed
  opportunities for collection. If outstanding amounts are owed to the
  government for one type of program or activity, these amounts could be
  collected through either offsetting or levying other federal benefits
  and payments. Along these lines, the Debt Collection Improvement Act
  (DCIA) of 1996 calls for the centralization and aggressive pursuit of
  delinquent nontax federal receivables, including delinquent loans and
  other forms of payment owed the federal government. The Department of
  the Treasury is developing a mechanism to pursue collection of
  outstanding federal receivables as mandated by DCIA, including the
  ability to offset tax refunds and levy federal benefits and payments to
  recover other amounts owed the federal government. However, it was
  beyond the scope of this report to consider the magnitude of payments
  that might otherwise be offset or levied to recover other delinquent
  amounts owed or to review Treasury's efforts to implement DCIA. See
  Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty
  Assessments Are Owed (GAO/AIMD/GGD-99-211, August 2, 1999).
/Footnote13/-^Four of the 24 CFO Act agencies--the departments of
  Education and State, the Environmental Protection Agency, and the Small
  Business Administration had not issued audited financial statements for
  fiscal year 1998 as of the end of our field work.
/Footnote14/-^HHS also reported $6.5 million in improper payments for its
  Administration for Children and Families programs that spent $32 billion
  in fiscal year 1998.
/Footnote15/-^Priority Management Objectives focus the administration's
  efforts to meet some of the government's biggest management challenges.
  They are specific management initiatives covering a wide range of
  concerns--ranging from meeting the Year 2000 computer challenge to
  implementing the restructuring of IRS.
/Footnote16/-^This represents the fiscal year 1997 initial payment
  accuracy rate as reported in SSA's fiscal year 1998 Accountability Report.
/Footnote17/-^Report on the Financial Statement Audit of the Health Care
  Financing Administration for Fiscal Year 1998 (Department of Health and
  Human Services' Office of Inspector General Audit Report, CIN A-17-98-
  00098, February 26, 1999).
/Footnote18/-^High-Risk Series: An Update (GAO/HR-99-1, January 1999).
/Footnote19/-^Major Management Challenges and Program Risks: Department of
  Education (GAO/OCG-99-5, January 1999).
/Footnote20/-^Fiscal Year 1997 Department of Education Financial Statement
  Audit (Department of Education OIG Audit Report ACN 17-70002, June 15,
  1998).
/Footnote21/-^Accuracy of Student Aid Awards Can Be Improved By Obtaining
  Income Data From the Internal Revenue Service (Department of Education
  OIG Audit Report ACN 11-50001, January 29, 1997).
/Footnote22/-^EITC claims do not always result in refunds. They may also
  reduce tax assessments.
/Footnote23/-^Financial Audit: IRS' Fiscal Year 1998 Financial Statements
  (GAO/AIMD-99-75, March 1, 1999).
/Footnote24/-^United States Department of Agriculture Office of Inspector
  General's Semi-Annual Report, October 1 - March 31, 1998.
/Footnote25/-^Fiscal Year 1998 Department of Housing and Urban Development
  Financial Statement Audit (Department of Housing and Urban Development
  Office of Inspector General Audit Report 99-FO-177-0003, March 29, 1999).
/Footnote26/-^Major Management Challenges and Program Risks: Department of
  Housing and Urban Development (GAO/OCG-99-8, January 1999).
/Footnote27/-^Verification of Social Security Numbers Could Prevent
  Unemployment Insurance Payments to Illegal Aliens (U. S. Department of
  Labor Office of Inspector General Final Audit Report No. 04-98-001-03-
  315, March 2, 1998).
/Footnote28/-^Fiscal Year 1998 Social Security Administration Financial
  Statement Audit (Social Security Administration Office of Inspector
  General Report Number A-13-98-51036, November 20, 1998) and Fiscal Year
  1997 Social Security Administration Financial Statement Audit (Social
  Security Administration Office of Inspector General Report Number A-13-
  97-51012, November 21, 1997).
/Footnote29/-^Social Security Disability: SSA Making Progress in
  Conducting Continuing Disability Reviews (GAO/HEHS-98-198, September 18,
  1998).
/Footnote30/-^Housing and Urban Development Audit of Fiscal Year 1998
  Financial Statements (Housing and Urban Development OIG Audit Report 99-
  FO-177-0003, March 29, 1999); Housing and Urban Development Audit of
  Fiscal Year 1997 Financial Statements (Housing and Urban Development OIG
  Audit Report 98-FO-177-0004, March 20, 1998); and Housing and Urban
  Development Audit of Fiscal Year 1995 Financial Statements (Housing and
  Urban Development OIG Audit Report 96-FO-177-0003, August 16, 1996).
/Footnote31/-^The PCIE is comprised of all presidentially appointed IGs
  and members from OMB, the Federal Bureau of Investigation, the Office of
  Special Counsel, and the Office of Government Ethics.
/Footnote32/-^Eligibility Verification Needed to Deter and Detect Fraud in
  Federal Government Benefit and Credit Programs, PCIE, May 1998.
/Footnote33/-^Medicare Contractors: Despite Its Efforts, HCFA Cannot
  Ensure Their Effectiveness or Integrity (GAO/HEHS-99-115, July 14,
  1999); Medicare: Improprieties by Contractors Compromised Medicare
  Program Integrity (GAO/OSI-99-7, July 14, 1999); and Department of
  Health and Human Services' Office of Inspector General Semi-Annual
  Report to the Congress: April 1, 1998 - September 30, 1998.
/Footnote34/-^Department of Health and Human Services: Management
  Challenges and Opportunities (GAO/T-HEHS-97-98, March 18, 1997); Report
  on the Financial Statement Audit of the Health Care Financing
  Administration for Fiscal Year 1998 (Department of Health and Human
  Services' Office of Inspector General Audit Report Common Identification
  Number (CIN): A-17-98-00098, February 26, 1999); and Improper Fiscal
  Year 1998 Medicare Fee-for-Service Payments (Department of Health and
  Human Services' Office of Inspector General Audit Report CIN: A-17-99-
  00099, February 9, 1999).
/Footnote35/-^Medicare beneficiaries have the option of enrolling in
  prepaid health care plans (typically health maintenance organizations)
  that are commonly referred to as managed care plans.
/Footnote36/-^Major Management Challenges and Program Risks: Agency for
  International Development (GAO/OCG-99-16, January 1999).
/Footnote37/-^Agency for International Development's Office of Inspector
  General Semi-Annual Report to the Congress: April 1, 1997 - September
  30, 1997.
/Footnote38/-^For example, Defense Health Care: DOD Needs to Improve Its
  Monitoring of Claims Processing Activities (GAO/T-HEHS-99-78, March 10,
  1999), and Medicare HMO Institutional Payments: Improved HCFA Oversight,
  More Recent Cost Data Could Reduce Overpayments (GAO/HEHS-98-153,
  September 9, 1998).
/Footnote39/-^See footnote 19.
/Footnote40/-^Food Stamp Overpayments: Households in Different States
  Collect Benefits for the Same Individuals (GAO/RCED-98-228, August 6,
  1998).
/Footnote41/-^USDA Food and Nutrition Service's Fiscal Year 1998 Financial
  Statements (USDA OIG Audit Report No. 27401-14-HY, February 1999). 
/Footnote42/-^DOD Contract Management: Greater Attention Needed to
  Identify and Recover Overpayments (GAO/NSIAD-99-131, July 19, 1999).
/Footnote43/-^Financial Management: Improvements Needed in Air Force
  Vendor Payment Systems and Controls (GAO/AIMD-98-274, September 28, 1998).
/Footnote44/-^See footnote 19.
/Footnote45/-^Department of Education: Multiple, Nonintegrated Systems
  Hamper Management of Student Financial Aid Programs (GAO/T-HEHS/AIMD-97-
  132, May 15, 1997).
/Footnote46/-^Student Financial Aid Information: Systems Architecture
  Needed to Improve Programs' Efficiency (GAO/AIMD-97-122, July 29, 1997).
/Footnote47/-^42 C.F.R. ****ITCCentury Book:xa4**** 431.865(c).
/Footnote48/-^7 U.S.C. ****ITCCentury Book:xa4**** 2025(c); and 7 C.F.R.
  ****ITCCentury Book:xa4**** 275.1.
/Footnote49/-^Block Grants: Issues in Designing Accountability Provisions
  (GAO/AIMD-95-226, September 1, 1995).
/Footnote50/-^Welfare Benefits: Potential to Recover Hundreds of Millions
  More in Overpayments (GAO/HEHS-95-111, July 20, 1995).
/Footnote51/-^See footnote 22.
/Footnote52/-^Annual Performance Plan Fiscal Year 2000 (Federal Emergency
  Management Agency, February 23, 1999).
/Footnote53/-^The Year 2000 problem is rooted in how dates are recorded
  and computed. For the past several decades, computer systems typically
  used two digits to represent the year, such as "99" for 1999, in order
  to conserve electronic data storage and reduce operating costs. In this
  format, however, 2000 is indistinguishable from 1900 because both are
  represented as "00." As a result, if not modified, systems or
  applications that use dates or perform date- or time-sensitive
  calculations may generate incorrect results beyond 1999.
/Footnote54/-^Year 2000 Computing Crisis: Defense Has Made Progress, but
  Additional Management Controls Are Needed (GAO/T-AIMD-99-101, March 2,
  1999). 
/Footnote55/-^Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-
  10.1.14, September 1997).
/Footnote56/-^Configuration management is the continuous control of
  changes made to a system's hardware, software, and documentation
  throughout the development and operational life of the system.
/Footnote57/-^Preparation and Submission of Strategic Plans, Annual
  Performance Plans and Annual Program Performance Reports, OMB Circular A-
  11 Part 2, OMB/Executive Office of the President (Washington, D.C., July
  1999).
/Footnote58/-^Agency Performance Plans: Examples of Practices That Can
  Improve Usefulness to Decisionmakers (GAO/GGD/AIMD-99-69, February 26,
  1999).

EXECUTIVE DEPARTMENTS AND AGENCIES COVERED BY THE CFO ACT
=========================================================

Department of Agriculture
Department of Commerce
Department of Defense
Department of Education
Department of Energy
Department of Health and Human Services
Department of Housing and Urban Development
Department of the Interior
Department of Justice
Department of Labor
Department of State
Department of Transportation
Department of the Treasury
Department of Veterans Affairs
Agency for International Development
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
National Aeronautics and Space Administration
National Science Foundation
Nuclear Regulatory Commission
Office of Personnel Management
Small Business Administration
Social Security Administration

AGENCIES/PROGRAMS/ACTIVITIES WITH REPORTED IMPROPER PAYMENTS INCLUDED IN
THE AGENCIES' FISCAL YEAR 1998 FINANCIAL STATEMENTS
===========================================================================

Agency for International Development
------------------------------------

The U.S. Agency for International Development (AID) was established in
1961 pursuant to the Foreign Assistance Act of 1961. AID manages U.S.
foreign economic and humanitarian assistance programs and helps countries
recover from disaster, escape poverty, and become more democratic. AID's
mission is to contribute to U.S. national interests by supporting the
people of developing and transitional countries in their efforts to
achieve enduring economic and social progress and to participate more
fully in resolving the problems of their countries and the world. In
fiscal year 1998, AID's total outlays for its various programs were
$5.2 billion.

Department of Agriculture

Federal Crop Insurance Corporation
----------------------------------

The Federal Crop Insurance Program was established in 1938 by the Federal
Crop Insurance Act to protect crop farmers from unavoidable risks
associated with adverse weather, plant diseases, and insect infestations.
The USDA Risk Management Agency administers the Federal Crop Insurance
Program through the Federal Crop Insurance Corporation (FCIC), a
government-owned corporation. The federal government retains a portion of
the insurance risk for all policies and pays private insurance companies a
fee that is intended to reimburse them for the reasonable expenses
associated with selling and servicing crop insurance to farmers. In fiscal
year 1998, FCIC had over 1 million crop insurance policies in force, with
total premiums of $1.9 billion.

Food Stamp Program
------------------

The Food Stamp Program (FSP), enacted by the Food Stamp Act of 1964, is
the nation's principal food assistance program. FSP enables low-income
households to obtain a more nutritious diet by issuing monthly allotments
of coupons or electronic benefits redeemable for food at retail stores.
Eligibility and allotment amounts are based on household size and income
as well as on assets, housing costs, work requirements, and other factors.
In fiscal year 1998, 19.8 million individuals per month were provided food
stamps for total annual program costs of $20.4 billion. 

Department of Health and Human Services - Administration for Children and
Families

The Administration for Children and Families (ACF), a division of the
Department of Health and Human Services, is responsible for almost 50
programs that promote the economic and social well being of families,
children, individuals, and communities. Three programs do most of ACF's
spending: TANF, Foster Care, and Head Start.

TANF
----

Temporary Assistance for Needy Families (TANF) block grants were created
by the Personal Responsibility and Work Opportunity Reconciliation Act of
1996 to replace the Aid to Families with Dependent Children (AFDC)
Program. Specified goals of TANF include providing assistance to needy
families and ending the dependence of needy parents on government benefits
by promoting job preparation, work, and marriage. Over $16 billion in
federal assistance is available to states each year through 2002 to fund
the TANF program. While states have flexibility over the design and
implementation of their welfare programs, they must impose several federal
requirements, including work requirements and time limits on aid. 

Foster Care
-----------

Foster Care was originally created in 1961 under title IV of the Social
Security Act. The Foster Care Program is a permanently authorized
entitlement program that provides matching funds to states for maintenance
of eligible children in foster care homes, private nonprofit child care
facilities, or public child care institutions. In fiscal year 1998, over
half a million children were supported by the Foster Care Program with
total federal outlays of $4.5 billion.

Head Start
----------

The Head Start Program was created in 1965 as part of the war on poverty
to improve the social competence of children in low-income families. To
support the social competence goal, Head Start programs deliver a broad
range of services to children. These services include educational,
medical, nutritional, mental health, dental, and social services. Head
Start regulations require that at least 90 percent of the children
enrolled in each program be from low-income families. ACF awards Head
Start grants directly to local grantees who operate programs in all 50
states, the District of Columbia, Puerto Rico, and the U.S. territories.
In fiscal year 1998, over 800,000 children participated in Head Start
programs, and federal outlays totaled $3.3 billion.

Department of Health and Human Services - Health Care Financing
Administration

Medicaid
--------

Medicaid, established in 1965 by Title XIX of the Social Security Act, is
a federal-state matching entitlement program that pays for medical
assistance for certain vulnerable and needy individuals and families with
low incomes and resources. In 1998, it provided health care assistance to
33 million persons, at a cost of about $98 billion to the federal
government. The Health Care Financing Administration (HCFA) is responsible
for the overall management of Medicaid; however, each state is responsible
for managing its own program. Within broad federal statutory and
regulatory guidelines, each state: (1) establishes its own eligibility
standards,
(2) determines the types and range of services, (3) sets the rate of
payment for services, and (4) administers its own program. 

Medicare Fee-for-Service
------------------------

Authorized by Title XVIII of the Social Security Act in 1965, Medicare is
the nation's largest health insurance program, covering an estimated 39.6
million elderly and disabled at a cost of about $210 billion annually. The
Medicare Program is administered by HCFA. While some beneficiaries
participate in Medicare's $33 billion Managed Care program, most receive
their health care from the $177 billion Fee-for-Service portion of
Medicare. HCFA contracts with over 40 insurance companies to process fee-
for-service claims. Although contractors are the program's front line of
defense against fraud, abuse, and erroneous payments, HCFA is responsible
for overseeing these contractors and for assuring that claims are paid
accurately and efficiently. 

Department of Housing and Urban Development 
--------------------------------------------

Housing Subsidy Programs
------------------------

Housing and Urban Development's (HUD) Public Housing and Section 8
programs were established by the U.S. Housing Act of 1937 and the Housing
and Community Development Act of 1974 (revising Section 8 of the U.S.
Housing Act of 1937), respectively. These programs help eligible low-
income families obtain decent, safe, and sanitary housing by paying a
portion of their rent.

HUD's Public Housing Program is operated by approximately 3,200 public
housing authorities (PHA), which operate under state and local laws and
are funded by HUD. Public housing provides affordable shelter for low-
income families comprised of citizens or eligible immigrants. Through the
operating subsidy program, HUD provides an annual subsidy to help PHAs pay
some of the cost of operating and maintaining public housing units. In
fiscal year 1998, more than 1.2 million public housing units were under
management, with a net cost of about $3.1 billion. 

The Section 8 programs assist low-income families. Residents in subsidized
units generally pay 30 percent of their income for rent, and HUD pays the
balance. Section 8 has two assistance programs: project-based and tenant-
based assistance. Tenant-based assistance is linked to specific
individuals; the project-based assistance is linked to housing units. In
fiscal year 1998, the Section 8 programs assisted approximately 3 million
households and had net costs of $15.5 billion. 

Department of Labor 

Federal Employees' Compensation Act
-----------------------------------

Enacted in 1916, the Federal Employees' Compensation Act (FECA) provides
workers' compensation coverage to federal employees for work-related
injuries or disease. FECA, administered by the U.S. Department of Labor,
authorizes the government to compensate federal employees when they are
temporarily or permanently disabled due to injury or disease sustained
while performing their duties. In fiscal year 1998, the Department of
Labor received 165,000 federal injury reports and issued benefit payments
of more than $1.9 billion. 

Unemployment Insurance
----------------------

Unemployment Insurance, enacted by Title IX of the Social Security Act of
1935, as amended, is the nation's response to the adverse effects of
unemployment. The program's mission is to provide unemployed workers with
temporary income support and to facilitate re-employment. By doing so, the
program helps stabilize the economy. In fiscal year 1998, over 7 million
unemployed workers received approximately $20 billion from the program.

The program is administered by the states through a network of local
claims offices and central offices in each state. These offices also are
responsible for the collection of taxes from all subject employers. The
program is financed through collections of taxes from employers by both
the federal and state governments. In addition, each state is responsible
for determining eligibility requirements and levels of compensation,
including the length of time benefits are paid. 

Office of Personnel Management

Federal Employees' Health Benefits Program 
-------------------------------------------

The Federal Employees' Health Benefits Program (FEHBP) was established by
the Federal Employees Health Benefits Act of 1959 for the purpose of
making basic hospital and medical protection available to active federal
employees, annuitants, and their families through plans offered by
carriers participating in the FEHBP. In fiscal year 1998, there were
2.3 million federal civilian employees and 1.8 million annuitants enrolled
in the FEHBP. In total, FEHBP covers about 9 million individuals. Annual
premiums are over $16.3 billion, with the government paying up to 75
percent of the premiums and employees paying the remaining portion.

Federal Employees' Group Life Insurance Program
-----------------------------------------------

The Federal Employees' Group Life Insurance (FEGLI) Program was
established in 1954 by the Federal Employees' Group Life Insurance Act to
provide federal employees and annuitants with group term life insurance.
The program is administered pursuant to a contract with a life insurance
company. In fiscal year 1998, FEGLI covered 90 percent of eligible
employees and annuitants, as well as many of their family members, and had
$1.6 billion in net outlays. 

Retirement Program
------------------

The Retirement Program is a defined benefit retirement plan and includes
two components: (1) the Civil Service Retirement System (CSRS), created in
1920 by the Civil Service Retirement Act and (2) the Federal Employees'
Retirement System (FERS), established in 1986 by the Federal Employees'
Retirement System Act. CSRS is a stand-alone retirement plan intended to
pay benefits for long-service federal employees. CSRS covers most federal
employees hired before 1984 and is closed to new members. FERS covers most
employees first hired after December 31, 1983, and provides benefits to
the survivors of deceased FERS annuitants and employees. Using Social
Security as a base, FERS provides an additional defined benefit and a
voluntary thrift savings plan. OPM administers only the defined benefit
component of FERS. In fiscal year 1998, OPM had over $43 billion in
outlays, with over 2 million annuitants in CSRS, and approximately 100,000
in FERS.

Social Security Administration

Old Age and Survivors Insurance
-------------------------------

In 1935, the Social Security Act established a program to help protect
aged Americans against the loss of income due to retirement. The 1939
amendments added protection for survivors of deceased retirees by creating
the Old Age and Survivors Insurance (OASI) Program. Employee and employer
payroll tax contributions under the Federal Insurance Contributions Act
(FICA) and the Self-Employment Contributions Act (SECA) finance this
program. Administration of the program lies with the Social Security
Administration (SSA). In fiscal year 1998, SSA directly disbursed $324
billion to approximately 38 million beneficiaries under this program.

Disability Insurance
--------------------

In 1956, the Social Security Act was amended to protect disabled workers
against loss of income due to disability through creation of the
Disability Insurance (DI) Program. In 1958, amendments to the act expanded
benefits to include dependents of disabled workers. As a result, the DI
Program provides a continuing income base for eligible workers who have
qualifying disabilities and for eligible members of their families before
those workers reach retirement age. As authorized by the act, workers are
considered disabled if they have severe physical or mental conditions that
prevent them from engaging in substantial gainful activity. The condition
must be expected to last for a continuous period of at least 12 months or
to result in death. Once DI beneficiaries reach age 65, they and their
families are converted to the OASI Program. The DI Program is financed by
employee and employer payroll tax contributions under FICA and SECA. SSA,
using assistance from 54 state Disability Determination Services to make
required medical and vocational decisions, is responsible for
administering the DI Program. In fiscal year 1998, SSA disbursed
approximately 
$48 billion in monthly cash payments to about 6 million beneficiaries.

Supplemental Security Income
----------------------------

In 1972, amendments to the Social Security Act established the
Supplemental Security Income (SSI) Program. SSI provides cash assistance
to financially needy individuals who are aged, blind, or disabled. General
tax revenues finance this program. Many states supplement the federal SSI
payment, choosing either to have SSA administer the supplement or to pay
it directly. In fiscal year 1998, SSA disbursed approximately 
$27 billion in federal SSI payments to about 7 million recipients. Also,
SSA disbursed approximately $3 billion in state supplemental payments
during fiscal year 1998.

Department of the Treasury

Customs Drawbacks/Refunds
-------------------------

Refunds are payments made to importers/exporters for overpayments or
duplicate payments of duties, taxes, and fees when goods are originally
imported into the United States. A drawback is a refund of duties and/or
excise taxes already paid to Customs on imported goods which were either
(1) never entered into the commerce of the United States because they were
either re-exported or destroyed under Customs' supervision, or
(2) used (or substituted) in a process to manufacture articles which were
exported from the United States or destroyed under Customs' supervision
without being used.

The Congress initially passed legislation authorizing drawbacks in 1789,
citing the need to facilitate American commerce and manufacturing.
Drawback privileges are provided by the Tariff Act of 1930. The rationale
for drawbacks has always been to encourage American commerce or
manufacturing, or both. It permits the American manufacturer to compete in
foreign markets without the handicap of including in the costs, and
consequently in the sales price, the duty paid on imported merchandise.
Drawbacks are generally processed in Customs' port offices across the
nation. In fiscal year 1998, net outlays related to drawbacks and refunds
were over $1.3 billion.

Department of Veterans Affairs

In 1930, the Congress consolidated and coordinated various veterans'
programs with the establishment of the Veterans Administration. The
Department of Veterans Affairs (VA) was established as a Cabinet level
department in March 1989. VA's mission is to administer the laws providing
benefits and other services to veterans and their dependents and the
beneficiaries of veterans. The Veterans Benefits Administration (VBA)
administers VA's nonmedical programs, which provide financial and other
assistance to veterans, their dependents, and survivors. The compensation
and pension (C&P) program is VBA's largest, and in fiscal year 1998, VA
paid approximately $20 billion in C&P benefits to more than 3 million
veterans and their survivors.

ASSESSMENT OF PERFORMANCE PLANS FOR THOSE AGENCIES REPORTING IMPROPER
PAYMENTS
===========================================================================

                                               from Previous Page
---------------------------------------------------------------------------
| Department/a : Activity/pro :  : Degree to which the performance plan   |
| gency        : gram         :  :      addresses improper payments       |
|-------------------------------------------------------------------------|
|              :              :  : None   : Curs :  : Moderate: Comprehe  |
|              :              :  :        : ory  :  :         : nsive     |
|-------------------------------------------------------------------------|
| Agency for   : Not          :  : X      :      :  :         :           |
| Internationa : specifically :  :        :      :  :         :           |
| l Development:  identified  :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Federal      :  :        :      :  : X       :           |
| of           : Crop         :  :        :      :  :         :           |
| Agriculture  : Insurance    :  :        :      :  :         :           |
|              : Corporation  :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Food Stamp   :  :        :      :  : X       :           |
| of           : Program      :  :        :      :  :         :           |
| Agriculture  :              :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Administrati :  : X      :      :  :         :           |
| of Health    : on for       :  :        :      :  :         :           |
| and Human    : Children     :  :        :      :  :         :           |
| Services     : and Families :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Medicaid     :  : X      :      :  :         :           |
| of Health    :              :  :        :      :  :         :           |
| and Human    :              :  :        :      :  :         :           |
| Services     :              :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Medicare     :  :        :      :  :         : X         |
| of Health    : Fee-for-     :  :        :      :  :         :           |
| and Human    : Service      :  :        :      :  :         :           |
| Services     :              :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Housing      :  :        : X    :  :         :           |
| of Housing   : Subsidies    :  :        :      :  :         :           |
| and Urban    :              :  :        :      :  :         :           |
| Development  :              :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Federal      :  :        :      :  : X       :           |
| of Labor     : Employees'   :  :        :      :  :         :           |
|              : Compensation :  :        :      :  :         :           |
|              :  Act         :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Unemployment :  :        : X    :  :         :           |
| of Labor     :  Insurance   :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Office of    : Federal      :  :        : X    :  :         :           |
| Personnel    : Employees'   :  :        :      :  :         :           |
| Management   : Health       :  :        :      :  :         :           |
|              : Benefits     :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Office of    : Federal      :  :        :      :  :         : Xa        |
| Personnel    : Employees'   :  :        :      :  :         :           |
| Management   : Group Life   :  :        :      :  :         :           |
|              : Insurance    :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Office of    : Retirement   :  :        :      :  : X       :           |
| Personnel    :              :  :        :      :  :         :           |
| Management   :              :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Social       : Disability   :  :        :      :  : X       :           |
| Security     : Insurance    :  :        :      :  :         :           |
| Administrati :              :  :        :      :  :         :           |
| on           :              :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Social       : Old Age      :  :        :      :  :         : Xa        |
| Security     : Survivors    :  :        :      :  :         :           |
| Administrati : Insurance    :  :        :      :  :         :           |
| on           :              :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Social       : Supplementar :  :        :      :  : X       :           |
| Security     : y Security   :  :        :      :  :         :           |
| Administrati : Income       :  :        :      :  :         :           |
| on           :              :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Customs      :  : X      :      :  :         :           |
| of the       : Drawbacks    :  :        :      :  :         :           |
| Treasury     : and Refunds  :  :        :      :  :         :           |
|-------------------------------------------------------------------------|
| Department   : Veterans'    :  :        :      :  :         : X         |
| of Veterans  : Benefits     :  :        :      :  :         :           |
| Affairs      :              :  :        :      :  :         :           |
---------------------------------------------------------------------------

aAlthough the agency performance plans did not include strategies for
these programs, we assessed them as comprehensive because the related
payment accuracy rates were 99.8 percent for both the Old Age Survivors
Insurance and Life Insurance programs. Therefore, it may not be cost-
beneficial for these agencies to design and implement additional
strategies to mitigate improper payments. 

Source: GAO analysis based on a review of fiscal year 2000 agency
performance plans.

Legend:

None: Agency performance plan does not address the issue of improper
payments for this program.

Cursory: Agency performance plan addresses the need to minimize improper
payments but does not provide any substantive performance goals or
strategies to minimize improper payments in this program.

Moderate: Agency performance plan has either performance goals to address
improper payments or strategies to minimize improper payments in this
program, but not both, or lacks a comprehensive approach.

Comprehensive: Agency performance plan has performance goals and
strategies that address key internal controls to minimize improper
payments in this program.

COMMENTS FROM THE OFFICE OF MANAGEMENT AND BUDGET
=================================================

*****************

*****************

*****************

*****************

GAO CONTACT AND STAFF ACKNOWLEDGEMENTS
======================================

GAO Contact

Debra Sebastian, (202) 512-9385

Acknowledgements

Staff making key contributions to this report are Kwabena Ansong, Kay
Daly, Margaret Davis, Marie Kinney, Meg Mills, and Ruth Sessions as well
many other staff throughout GAO who contributed to selected sections of
this report.

RELATED GAO PRODUCTS
====================

The following lists prior GAO products dealing with improper payments, or
overpayments dating back to fiscal year 1996, as requested by the Chairman.

Crop Insurance: USDA Needs a Better Estimate of Improper Payments to
Strengthen Controls Over Claims (GAO/RCED-99-266, September 22, 1999).

Medicare: HCFA Oversight Allows Contractor Improprieties to Continue
Undetected (GAO/T-HEHS/OSI-99-174, September 9, 1999).

Food Assistance: Efforts to Control Fraud and Abuse in the WIC Program Can
Be Strengthened (GAO/RCED-99-224, August 30, 1999).

DOD Information Security: Serious Weaknesses Continue to Place Defense
Operations at Risk (GAO/AIMD-99-107, August 26, 1999).

Defense Health Care: Claims Processing Improvements Are Under Way but
Further Enhancements Are Needed (GAO/HEHS-99-128, August 23, 1999).

Medicare Fraud and Abuse: DOJ's Implementation of False Claims Act
Guidance in National Initiatives Varies (GAO/HEHS-99-170, August 6, 1999).

Defense Health Care: Improvements Needed to Reduce Vulnerability to Fraud
and Abuse (GAO/HEHS-99-142, July 30, 1999).

Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
Effectiveness or Integrity (GAO/HEHS-99-115, July 14, 1999).

Medicare: HCFA Should Exercise Greater Oversight of Claims Administration
Contractors (GAO/T-HEHS/OSI-99-167, July 14, 1999).

Department of Energy: Need to Address Longstanding Management Weaknesses
(GAO/T-RCED-99-255, July 13, 1999).

Food Stamp Program: Households Collect Benefits for Persons Disqualified
for Intentional Program Violations (GAO/RCED-99-180, July 8, 1999).

Recovery Auditing: Reducing Overpayments, Achieving Accountability, and
the Government Waste Corrections Act of 1999 (GAO/T-NSIAD-99-213, 
June 29, 1999).

Food Stamp Program: Relatively Few Improper Benefits Provided to
Individuals in Long-Term Care Facilities (GAO/RCED-99-151, June 4, 1999).

Medicare Subvention Demonstration: DOD Data Limitations May Require
Adjustments and Raise Broader Concerns (GAO/HEHS-99-39, May 28, 1999).

Medicare: Early Evidence of Compliance Program Effectiveness Is
Inconclusive (GAO/HEHS-99-59, April 15, 1999).

Auditing the Nation's Finances: Fiscal Year 1998 Results Highlight Major
Issues Needing Resolution (GAO-T-AIMD-99-131, March 31, 1999).

Financial Audit: Fiscal Year 1998 Financial Report of the U.S. Government
(GAO/AIMD-99-130, March 31, 1999).

Contract Management: DOD is Examining Opportunities to Further Use
Recovery Auditing (GAO/NSIAD-99-78, March 17, 1999).

Veterans' Benefits Claims: Further Improvements Needed in Claims-
Processing Accuracy (GAO/HEHS-99-35, March 1, 1999).

Medicare Managed Care: Better Risk Adjustment Expected to Reduce Excess
Payments Overall While Making Them Fairer to Individual Plans (GAO/T-HEHS-
99-72, February 25, 1999).

Direct Student Loans: Overpayments During the Department of Education's
Conversion to a New Payment System (GAO/HEHS-99-44R, February 17, 1999).

HCFA Management: Agency Faces Multiple Challenges in Managing Its
Transition to the 21st Century (GAO/T-HEHS-99-58, February 11, 1999).

Social Security: What the President's Proposal Does and Does Not Do (GAO/T-
AIMD/HEHS-99-76, February 9, 1999).

Supplemental Security Income: Long-Standing Issues Require More Active
Management and Program Oversight (GAO/T-HEHS-99-51, February 3, 1999).

Medicare Home Health Agencies: Role of Surety Bonds in Increasing Scrutiny
and Reducing Overpayments (GAO/HEHS-99-23, January 29, 1999).

Financial Management: Problems in Accounting for Navy Transactions Impair
Funds Control and Financial Reporting (GAO/AIMD-99-19,
January 19, 1999).

Supplemental Security Income: Increased Receipt and Reporting of Child
Support Could Reduce Payments (GAO/HEHS-99-11, January 12, 1999).

Internal Controls: Reporting Air Force Vendor Payment System Weaknesses
Under the Federal Managers' Financial Integrity Act (GAO/AIMD-99-33R,
December 21, 1998).

Contract Management: Recovery Auditing Offers Potential to Identify
Overpayments (GAO/NSIAD-99-12, December 3, 1998).

Student Loans: Improvements in the Direct Loan Consolidation Process
(GAO/HEHS-99-19R, November 10, 1998).

Internal Revenue Service: Immediate and Long-Term Actions Needed to
Improve Financial Management (GAO/AIMD-99-16, October 30, 1998).

DOD Procurement Fraud: Fraud by an Air Force Contracting Official (GAO/OSI-
98-15, September 23, 1998).

Year 2000 Computing Crisis: Progress Made at Department of Labor, But Key
Systems at Risk (GAO/T-AIMD-98-303, September 17, 1998).

Fraud, Waste, and Abuse: The Cost of Mismanagement (GAO/AIMD-
98-265R, September 14, 1998).

Supplemental Security Income: Action Needed on Long-Standing Problems
Affecting Program Integrity (GAO/HEHS-98-158, September 14, 1998).

Welfare Reform: Early Fiscal Effects of the TANF Block Grant (GAO/AIMD-98-
137, August 18, 1998).

Food Assistance: Computerized Information Matching Could Reduce Fraud and
Abuse in the Food Stamp Program (GAO/T-RCED-98-254, August 5, 1998).

Earned Income Credit: IRS' Tax Year 1994 Compliance Study and Recent
Efforts to Reduce Noncompliance (GAO/GGD-98-150, July 28, 1998).

Section 8 Project-Based Rental Assistance: HUD's Processes for Evaluating
and Using Unexpended Balances Are Ineffective (GAO/RCED-98-202, July 22,
1998).

Medicare: Application of the False Claims Act to Hospital Billing
Practices (GAO/HEHS-98-195, July 10, 1998). 

Welfare Reform: States Are Restructuring Programs to Reduce Welfare
Dependence (GAO/HEHS-98-109, June 17, 1998).

Head Start: Challenges Faced in Demonstrating Program Results and
Responding to Societal Changes (GAO/T-HEHS-98-183, June 9, 1998).

Medicare: Health Care Fraud and Abuse Control Program Financial Report for
Fiscal Year 1997 (GAO/AIMD-98-157, June 1, 1998).

Medicare Billing: Commercial System Will Allow HCFA to Save Money, Combat
Fraud and Abuse (GAO/T-AIMD-98-166, May 19, 1998).

Computer Security: Pervasive, Serious Weaknesses Jeopardize State
Department Operations (GAO/AIMD-98-145, May 18, 1998).

Medicare: Need to Overhaul Costly Payment System for Medical Equipment and
Supplies (GAO/HEHS-98-102, May 12, 1998).

Social Security: Better Payment Controls for Benefit Reduction Provisions
Could Save Millions (GAO/HEHS-98-76, April 30, 1998).

Food Assistance: Observations on Reducing Fraud and Abuse in the Food
Stamp Program (GAO/T-RCED-98-167, April 23, 1998).

Direct Student Loans: Efforts to Resolve Lender's Problems With
Consolidations are Under Way (GAO/HEHS-98-103, April 21, 1998).

Supplemental Security Income: Organizational Culture and Management
Inattention Place Program at Continued Risk (GAO/T-HEHS-98-146, 
April 21, 1998).

Department of Defense: Financial Audits Highlight Continuing Challenges to
Correct Serious Financial Management Problems (GAO/T-AIMD/NSIAD-98-158,
April 16, 1998).

Medicare Billing: Commercial Systems Could Save Hundreds of Millions
Annually (GAO/AIMD-98-91, April 15, 1998).

Internal Control: Essential for Safeguarding Assets, Compliance with Laws
and Regulations, and Reliable Financial Reporting (GAO/T-AIMD-98-125,
April 1, 1998). 

Financial Audit: 1997 Consolidated Financial Statements of the United
States Government (GAO/AIMD-98-127, March 31, 1998).

Head Start Programs: Participant Characteristics, Services, and Funding
(GAO/HEHS-98-65, March 31, 1998).

Supplemental Security Income: Opportunities Exist for Improving Payment
Accuracy (GAO/HEHS-98-75, March 27, 1998).

Food Stamp Program: Information on Trafficking Food Stamp Benefits
(GAO/RCED-98-77, March 26, 1998).

Medicare Home Health Benefit: Congressional and HCFA Actions Begin to
Address Chronic Oversight Weaknesses (GAO/T-HEHS-98-117, March 19, 1998).

CFO Act Financial Audits: Programmatic and Budgetary Implications of Navy
Financial Data Deficiencies (GAO/AIMD-98-56, March 16, 1998).

Medicare: HCFA Can Improve Methods for Revising Physician Practice Expense
Payments (GAO/HEHS-98-79, February 27, 1998).

Financial Audit: Examination of IRS' Fiscal Year 1997 Custodial Financial
Statements (GAO/AIMD-98-77, February 26, 1998).

Medicaid: Early Implications of Welfare Reform for Beneficiaries and
States (GAO/HEHS-98-62, February 24, 1998).

Food Stamp Overpayments: Thousands of Deceased Individuals Are Being
Counted as Household Members (GAO/RCED-98-53, February 11, 1998).

Financial Management: Seven DOD Initiatives That Affect the Contract
Payment Process (GAO/AIMD-98-40, January 30, 1998).

Managing for Results: The Statutory Framework for Performance-Based
Management and Accountability (GAO/GGD/AIMD-98-52, January 28, 1998).

Illegal Aliens: Extent of Welfare Benefits Received on Behalf of U.S.
Citizen Children (GAO/HEHS-98-30, November 19, 1997).

Inspectors General: Contracting Actions By Treasury Office of Inspector
General (GAO/OSI-98-1, October 31, 1997).

Food Assistance: Reducing Food Stamp Benefit Overpayments and Trafficking
(GAO/T-RCED-98-37, October 30, 1997).

DOD Procurement: Funds Returned by Defense Contractors (GAO/NSIAD-98-46R,
October 28, 1997).

Medicare Home Health: Differences in Service Use by HMO and Fee-for-
Service Providers (GAO/HEHS-98-8, October 21, 1997).

Disaster Assistance: Guidance Needed for FEMA's "Fast Track" Housing
Assistance Process (GAO/RCED-98-1, October 17, 1997).

VA Medical Care: Increasing Recoveries From Private Health Insurers Will
Prove Difficult (GAO/HEHS-98-4, October 17, 1997).

Medicare: Recent Legislation to Minimize Fraud and Abuse Requires
Effective Implementation (GAO/T-HEHS-98-9, October 9, 1997).

Budget Issues: Budgeting For Federal Insurance Programs (GAO/AIMD-
97-16, September 30, 1997).

Medicare Automated Systems: Weaknesses in Managing Information Technology
Hinder Fight Against Fraud and Abuse (GAO/T-AIMD-97-176, September 29,
1997).

Food Assistance: A Variety of Practices May Lower the Costs of WIC
(GAO/RCED-97-225, September 17, 1997).

Medicare: Control Over Fraud and Abuse Remains Elusive (GAO/T-HEHS-97-165,
June 26, 1997).

Supplemental Security Income: Timely Data Could Prevent Millions in
Overpayments to Nursing Home Residents (GAO/HEHS-97-62, June 3, 1997).

DOD High-Risk Areas: Eliminating Underlying Causes Will Avoid Billions of
Dollars in Waste (GAO/T-NSIAD/AIMD-97-143, May 1, 1997).

Financial Management: Improved Reporting Needed for DOD Problem
Disbursements (GAO/AIMD-97-59, May 1, 1997).

Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in Excess
Payments (GAO/HEHS-97-16, April 25, 1997).

Social Security Disability: SSA Actions to Reduce Backlogs and Achieve
More Consistent Decisions Deserve High Priority (GAO/T-HEHS-97-118, April
24, 1997).

Crop Insurance: Opportunities Exist to Reduce Government Costs for Private-
Sector Delivery (GAO/RCED-97-70, April 17, 1997).

Nursing Homes: Too Early to Assess New Efforts to Control Fraud and Abuse
(GAO/T-HEHS-97-114, April 16, 1997).

Contract Management: Fixing DOD's Payment Problems Is Imperative
(GAO/NSIAD-97-37, April 10, 1997).

Financial Management: Improved Management Needed for DOD Disbursement
Process Reforms (GAO/AIMD-97-45, March 31, 1997).

Medicaid Fraud and Abuse: Stronger Action Needed to Remove Excluded
Providers From Federal Health Programs (GAO/HEHS-97-63, March 31, 1997).

Department of Veterans Affairs: Programmatic and Management Challenges
Facing the Department (GAO/T-HEHS-97-97, March 18, 1997).

Social Security: Disability Programs Lag in Promoting Return to Work
(GAO/HEHS-97-46, March 17, 1997).

Food Stamps: Substantial Overpayments Result From Prisoners Counted as
Household Members (GAO/RCED-97-54, March 10, 1997).

Farm Programs: Finality Rule Should Be Eliminated (GAO/RCED-97-46, March
7, 1997).

High-Risk Areas: Benefits to Be Gained by Continued Emphasis on Addressing
High-Risk Areas (GAO/T-AIMD-97-54, March 4, 1997).

Supplemental Security Income: Long-Standing Problems Put Program at Risk
for Fraud, Waste and Abuse (GAO/T-HEHS-97-88, March 4, 1997).

Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by Improving
Accuracy of County Payment Rates (GAO-T-HEHS-97-82, February 27, 1997).

Benefit Fraud With Post Office Boxes (GAO/HEHS-97-54R, February 21, 1997).

Ex-Im Bank's Retention Allowance Program (GAO/GGD-97-37R, 
February 19, 1997).

High-Risk Series (GAO/GGD-97-37R, February 1997).

SSA Disability Redesign: Focus Needed on Initiatives Most Crucial to
Reducing Costs and Time (GAO/HEHS-97-20, December 20, 1996).

Medicaid: States' Efforts to Educate and Enroll Beneficiaries in Managed
Care (GAO/HEHS-96-184, September 17, 1996).

Supplemental Security Income: SSA Efforts Fall Short in Correcting
Erroneous Payments to Prisoners (GAO/HEHS-96-152, August 30, 1996).

Supplemental Security Income: Administrative and Program Savings Possible
by Directly Accessing State Data (GAO/HEHS-96-163, August 29, 1996).

Unemployment Insurance: Millions in Benefits Overpaid to Military
Reservists (GAO/HEHS-96-101, August 5, 1996).

Department of Education: Status of Actions to Improve the Management of
Student Financial Aid (GAO/HEHS-96-143, July 12, 1996).

Executive Guide: Effectively Implementing the Government Performance and
Results Act (GAO/GGD-96-118, June 1996).

Health Care Fraud: Information-Sharing Proposals to Improve Enforcement
Efforts (GAO/GGD-96-101, May 1, 1996).

SSA Overpayment Recovery (GAO/HEHS-96-104R, April 30, 1996).

Social Security: Issues Involving Benefit Equity for Working Women
(GAO/HEHS-96-55, April 10, 1996).

Fraud and Abuse: Providers Target Medicare Patients in Nursing Facilities
(GAO/HEHS-96-18, January 24, 1996).

Unsubstantiated DOE Travel Payments (GAO/RCED-96-58R, December 28, 1995).

Financial Management: Challenges Facing DOD in Meeting the Goals of the
Chief Financial Officers Act (GAO/T-AIMD-96-1, November 14, 1995).

Fraud and Abuse: Medicare Continues to Be Vulnerable to Exploitation by
Unscrupulous Providers (GAO/T-HEHS-96-7, November 2, 1995).

DOD Procurement: Millions in Contract Payment Errors Not Detected and
Resolved Promptly (GAO/NSIAD-96-8, October 6, 1995).

Medicare: Excessive Payments for Medical Supplies Continue Despite
Improvements (GAO/T-HEHS-96-5, October 2, 1995).

(916282)

Figure 1:  Trends in Certain Federal Expenditures: Fiscal
Years 1978 Through 2004                         12

Figure 2:  Improper Payments Returned to DFAS by DOD
Contractors for Fiscal Years 1994 Through 1998  19

Figure 3:  Internal Control Weaknesses Cause Improper
Payments for 17 Programs                        22

Figure 4:  Program Design Issues for the Agencies Reporting
Improper Payments for 17 Programs               30

Figure 5:  Reporting Improper Payments Within the Framework
of the CFO and Results Acts                     39

Figure 6:  Degree to Which 17 Programs Addressed Improper
Payments                                        40

Table 1:  Agencies and Programs that Reported Improper
Payments                                        16

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