Financial Management: Improper Payments Reported in Fiscal Year
2000 Financial Statements (02-NOV-01, GAO-02-131R).
This report provides information on improper payments that
federal agencies reported in their fiscal year 2000 financial
statements. GAO also identifies some current improper
payment-related actions that the Administration has taken. The
amount of improper payments reported in agency financial
statements has remained consistent at about $20 billion for the
past three years. Even though these amounts are substantial,
agency-specific audits and studies indicate the improper payment
problem is much more widespread than disclosed in agency
financial statement reports. The President's Management Agenda
for Fiscal Year 2002 has made the reduction of improper payments
a priority. The Administration has taken steps to require federal
agencies to identify erroneous payments and to discuss planned
actions to better manage these payments.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-131R
ACCNO: A02415
TITLE: Financial Management: Improper Payments Reported in
Fiscal Year 2000 Financial Statements
DATE: 11/02/2001
SUBJECT: Erroneous payments
Financial statement audits
Internal controls
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GAO-02-131R
GAO-02-131R Improper Payments
United States General Accounting Office Washington, DC 20548
November 2, 2001 The Honorable Fred Thompson Ranking Minority Member
Committee on Governmental Affairs United States Senate
Subject: Financial Management: Improper Payments Reported in Fiscal Year
2000 Financial Statements
Dear Senator Thompson: As agreed with your office, this letter is in partial
response to your request for an update on our report entitled Financial
Management: Billions in Improper Payments Continue to Require Attention
(GAO-01-44, October 27, 2000). Specifically, it provides information on the
amount of improper payments 1 that federal agencies reported in their fiscal
year 2000 financial statements and identifies some current improper
payment-related actions that the Administration has taken. We identified the
amount of improper payments reported by obtaining and reviewing the
financial statements of the 24 federal agencies and their related components
that the Chief Financial Officers (CFO) Act of 1990, as expanded by the
Government Management Reform Act of 1994, and OMB Bulletin No. 01-02, Audit
Requirements for Federal Financial Statements, require to issue financial
statements. Enclosure I lists these agencies and components. We did not
independently verify the accuracy of the improper payment information
contained in the statements. In addition, we obtained and reviewed
documentation on recent Administration initiatives and guidance to agencies
on erroneous payment reporting and related issues.
At your request, we are currently (1) determining the extent to which OMB
has implemented our prior recommendations dealing with providing
governmentwide guidance on identifying and reporting improper payments, (2)
assessing the extent to which agencies? fiscal year 2002 performance plans
address improper payments, and (3) identifying other actions that might
encourage agencies to better report the extent of their improper payments.
We will report to you separately on these issues.
1 Improper payments include inadvertent errors, such as duplicate payments
and miscalculations; payments for unsupported or inadequately supported
claims; payments for services not rendered; payments to ineligible
beneficiaries; and payments resulting from outright fraud and abuse by
program participants and/or federal employees.
GAO-02-131R Improper Payments Page 2
Results in Brief
The amounts of improper payments reported in agency financial statements has
remained consistent at about $20 billion for the past 3 years. Even though
these amounts are substantial, agency-specific audits and studies continue
to indicate that the extent of the improper payment problem is much more
widespread than has been disclosed in agency financial statement reports. As
we have previously reported, agencies need to be aware of the extent of
their improper payment problems before they can take corrective action to
reduce improper payments and thus ensure that federal funds are used for the
intended purposes. The President?s Management Agenda, Fiscal Year 2002, has
made the reduction of improper payments a priority. In this regard, the
Administration has taken steps to require federal agencies to identify
erroneous payments and to discuss planned actions to better manage these
payments.
Billions in Improper Payments Reported Although Few Agencies Measure and
Report Them
Improper payments are acknowledged to be a widespread and significant
problem in the federal government with billions of dollars in such payments
reported annually in agency financial statements. For example, federal
agency financial statements for fiscal years 1998 through 2000 show improper
payments of about $19.1 billion, $20.7 billion, and $19.6 billion,
respectively. 2 Although significant, these amounts are not indicative of
the magnitude of improper payments governmentwide. Currently, relatively few
agencies report improper payments in their financial statements, even though
our audits and those of agency inspectors general continue to identify
serious improper payment problems and related internal control issues. The
following table summarizes improper payments reported in agencies? fiscal
years 1999 and 2000 financial statements.
2 Financial Management: Billions in Improper Payments Continue to Require
Attention (GAO-01-44, October 27, 2000) and Financial Management: Increased
Attention Needed to Prevent Billions in Improper Payments
(GAO/AIMD-00-10, October 29, 1999).
GAO-02-131R Improper Payments Page 3
Table 1: Improper Payments Reported by Federal Agencies and Components in
Their Fiscal Years 1999 and 2000 Financial Statements
(Dollars in millions)
Reported in fiscal year Department or agency 1999 2000
Department of Agriculture Food Stamp Program $1,290.0 $1,100.0
Department of Defense Military Retirement Trust Fund 25.3 21.6 Department of
Education
Education Assistance programs a 154.0 b Department of Energy
No specific program identified c a Department of Health and Human Services
Medicare Fee-for-Service 14,100.0 12,470.0 Medicaid d e Department of
Housing and Urban Development
Housing Subsidy programs 935.0 1,254.0 Department of Justice
Federal Bureau of Investigation c a Department of Labor
Black Lung Disability a 10.4 Federal Employees Compensation Act 19.2 14.8
Unemployment Insurance 142.3 136.0 Department of State
Foreign Service Retirement and Disability
c a Department of the Treasury
Internal Revenue Service a e United States Customs Service 0.4 c Department
of Veterans Affairs
Veterans Benefits c c Office of Personnel Management
Retirement 84.0 102.0 Federal Employees? Health Benefits 93.0 71.0 Federal
Employees? Group Life Insurance 0.2 0.0 Social Security Administration
Disability Insurance 1,118.0 1,284.0 Old Age and Survivors Insurance 1,325.0
1,334.0 Supplemental Security Income 1,578.0 1,644.0
Total $20,710.4 $19,595.8
a The financial statements did not identify improper payments in these
programs. b The independent auditors? Report on Internal Controls, which was
included in the Department of Education?s fiscal year 2000 financial
statements, disclosed $154 million of duplicate payments related to
education assistance programs. c The agencies administering these programs
acknowledged making improper payments in their financial statements but did
not disclose a dollar amount. d HHS acknowledged making improper payments
related to Medicaid in the management discussion and analysis section of its
fiscal year 1999 financial statements, but did not disclose a specific
dollar amount. e The independent auditors? reports, which were included in
the fiscal year 2000 financial statements, revealed that these agencies made
improper payments, but did not show a specific amount.
Source: GAO analysis based on a reading of the fiscal years 1999 and 2000
financial statements of the federal agencies and their components that the
CFO Act and OMB Bulletin No. 01-02 require to prepare financial statements.
GAO-02-131R Improper Payments Page 4 A review of the table above shows that,
for fiscal year 2000, eight agencies collectively
reported improper payments of about $19.6 billion relating to at least 14
programs. (Some agency financial statements noted that improper payments
occurred in multiple programs but did not specify the programs.) These
agencies typically reported improper payments as either costs of operations
or as accounts receivable. For example, the fiscal year 2000 statements
identified about $14.8 billion as an estimated cost of operations and about
$4.6 billion as accounts receivable. Further, one agency identified $154
million in improper payments in the auditor?s Report on Internal Control,
which was included with the agency?s financial statements. In addition,
three agencies reported improper payments in at least one program, but did
not identify the dollar amount of these payments.
About $19.1 billion (97 percent) of the improper payments reported in the
fiscal year 2000 financial statements occurred in the programs administered
by the Departments of Agriculture, Health and Human Services, and Housing
and Urban Development and the Social Security Administration. This is
comparable to the fiscal year 1999 information when about $20.3 billion (98
percent) of the reported improper payments were in the same programs.
However, several changes occurred in the composition of the other agencies
reporting improper payments. The Departments of Education, Labor, and the
Treasury which did not report improper payments for at least one of their
programs in fiscal year 1999, reported them in fiscal year 2000. On the
other hand, the Departments of Energy, Justice, and State reported improper
payments in programs in fiscal year 1999 but not in fiscal year 2000.
As noted above, only eight of the CFO Act agencies and components required
to prepare financial statements reported improper payment amounts in their
fiscal year 2000 statements. Recent audits as well as information provided
by agency inspectors general continue to demonstrate that improper payments
are much greater than have been disclosed thus far in financial statements.
For example, historically, the Earned Income Tax Credit (EITC) program has
been vulnerable to high rates of invalid claims. 3 In 1997, the most recent
year for which estimates are available, the Internal Revenue Service (IRS)
made approximately $7.3 billion in improper payments in this program. As we
reported in March 2001, 4 during fiscal year 2000, IRS examiners completed
detailed examinations of about 257,000 tax returns claiming approximately
$587 million in these tax credits and found that about 173,000 of these tax
returns claiming $395 million in credits (67 percent) were invalid.
Weaknesses in IRS? controls over refund disbursements, particularly those
related to EITC, continue to expose the federal government to material
losses due to disbursing improper refunds.
Similarly, while the Department of Defense (DOD) reported improper payments
related to the Military Retirement Fund for both fiscal years 1999 and 2000,
departmentwide estimates of improper payments remain unreported. For
example, over the last several years DOD has overpaid its contractors by
hundreds of millions of dollars. Specifically, the DOD Office of
3 High Risk Series: An Update (GAO-01-263, January 2001); Major Management
Challenges and Program Risks: Department of the Treasury (GAO-01-254,
January 2001); and Financial Audit: IRS? Fiscal Year 2000 Financial
Statements (GAO/AIMD-01-394, March 1, 2001).
4 Financial Audit: IRS? Fiscal Year 2000 Financial Statements (GAO-01-394,
March 1, 2001).
GAO-02-131R Improper Payments Page 5 Inspector General noted that, during
fiscal years 1999 and 2000, the Defense Finance and
Accounting Service (DFAS) overpaid contractors $182.6 million and $148.3
million, respectively, as a result of inadvertent errors, such as paying the
same invoice twice and input errors. These amounts are not an estimate of
total improper payments made to contractors. Over half of these overpayments
were identified and voluntarily returned to DFAS by the contractor, while
the remainder were identified and requested by DFAS. Further, although small
in relation to total fiscal year 2000 contract payments, 5 this amount
represents a sizable amount of cash in the hands of contractors beyond what
is intended to finance and pay for the goods and services DOD purchases, and
is indicative of the need for stronger internal controls within the payment
system.
The Administration Has Taken an Important Initial Step in Measuring and
Reporting Improper Payments
As we have stated in the past 6 and will discuss in more detail in our
ensuing report, measuring the extent of improper payments is an essential
step in assessing the need for and types of corrective actions required to
manage improper payments and help ensure efficient and effective program
operations. Nondisclosure of improper payment amounts may indicate the
absence of a significant level of improper payments or that agencies are
unable to or did not attempt to determine or estimate the amount of improper
payments in their programs or activities. Obtaining improper payment-related
data would give agencies and others with oversight responsibilities baseline
information for performing the in-depth analyses necessary for assessing the
extent and causes of improper payments and for making cost- effective
decisions about enhancing controls to minimize future improper payments.
In this regard, during fiscal year 2001, the Administration took steps to
require federal agencies to identify erroneous payments 7 within selected
programs and discuss planned corrective actions to reduce these payments.
(Because of the similarity of OMB?s definition of erroneous payments with
our definition of improper payments, we consider erroneous payments and
improper payments as synonymous terms.) Most importantly, The President?s
Management Agenda, Fiscal Year 2002, discusses a governmentwide initiative
for improved financial performance. Under this initiative, the
Administration plans to establish a baseline of the extent of erroneous
payments to serve as a gauge for monitoring progress. As an
5 The overpayment amount of $148.3 million is about 0.16 percent of about
$90 billion in total contractor payments made by DOD?s Defense Finance and
Accounting Service, Columbus facility, in fiscal year 2000. 6 Strategies To
Manage Improper Payments: Learning From Public and Private Sector
Organizations (GAO- 02-69G, October 2001) and Financial Management: Billions
in Improper Payments Continue to Require Attention (GAO-01-44, October 27,
2000).
7 OMB Circular No. A-11 notes that erroneous payments are payments made that
should not have been made or were made for incorrect amounts. In this
context, ?payments? include the provision of benefits that do not
necessarily involve cash disbursements (e.g., loan guarantees). Examples of
erroneous payments include payments to ineligible persons or the wrong
organizations, payments in the wrong amount, payments for ineligible
services, duplicate or other overpayments, and payments for services never
received. Erroneous payments may be due to procedural or administrative
errors made by the payor (e.g., providing incorrect account numbers in
payment instructions) or errors or fraud by payees or claimants (e.g.,
underreporting of income by beneficiary). Covered payments include
overpayments and underpayments made by the federal government, its direct
contractors, and by states or other grant recipients administering federal
programs.
GAO-02-131R Improper Payments Page 6 expected result, the agenda notes that
?More accurate benefit and assistance payments to
current recipients will enable programs to serve additional eligible
recipients without increasing their budgets and will reduce program costs.?
Specifically, the agenda calls for certain agencies to include, in their
fiscal year 2003 budget submissions, information on erroneous payment rates,
including actual and target rates, where available, for benefit and
assistance programs expending over $2 billion annually. Further, OMB
Circular No. A-11,
Preparation and Submission of Budget Estimates, identifies the agency
programs for which the data on erroneous payments is required and specifies
reporting requirements for programs where erroneous payment rates are not
currently available. (Enclosure II lists the programs for which erroneous
payment information is required.) In addition, the management agenda states
that OMB will use this information in working with agencies to establish
goals to reduce erroneous payments for each program.
Identifying and Correcting Internal Control Weaknesses Is Critical to
Efforts to Manage Improper Payments
As repeatedly reinforced by our audit work, many of the causes of improper
payments can be traced to the lack of or an inadequate system of internal
control. Federal agencies must address these internal control deficiencies
in order to resolve their improper payment problems. We recently issued
guidance 8 for federal agencies to consider when (1) developing strategies
and planning and implementing actions to strengthen their system of internal
control and (2) addressing their improper payment problems. The guidance
categorizes the actions into the following areas outlined in the Comptroller
General?s
Standards for Internal Control in the Federal Government
(GAO/AIMD-00-21.3.1, November 1999). 9
! The control environment-creating a culture of accountability by
establishing a positive and supportive attitude toward improvement and the
achievement of established program outcomes.
! Risk assessments-performing comprehensive reviews and analyses of program
operations to determine if risks exist and the nature and extent of the
risks identified.
! Control activities-taking actions to address identified risk areas and
help ensure that management?s decisions and plans are carried out and
program objectives are met.
! Information and communications-using and sharing relevant, reliable, and
timely financial and nonfinancial information in managing improper
payment-related activities.
! Monitoring-tracking improvement initiatives, over time, and identifying
additional actions needed to further improve program efficiency and
effectiveness.
Absent improvements in internal controls and other proactive action from the
President, the Congress, top-level administration appointees, and agency
management officials, improper payments are likely to be a continuing
concern. Further, once committed to a plan of action,
8 Strategies to Manage Improper Payments: Learning From Public and Private
Sector Organizations
(GAO-02-69G, October 2001). 9 The Federal Mangers? Financial Integrity Act
of 1982 required that we issue standards for internal control in government.
GAO-02-131R Improper Payments Page 7 federal officials must remain steadfast
supporters of the end goals and their support must be
transparent to all. - - - - - As agreed with your office, unless you
publicly announce the contents of this letter earlier, we will not
distribute it until 30 days from its date. Then, we will send copies to the
Chairman of the Senate Committee on Governmental Affairs and the Chairmen
and Ranking Minority Members of the House Committee on Government Reform,
Senate Committee on the Budget, and House Committee on the Budget. We will
also send copies to the Director of the Office of Management and Budget, the
heads of the 24 CFO Act agencies and the Railroad Retirement Board, and
respective agency CFOs and inspectors general.
Please contact me at (202) 512-9450 or by e-mail at thompsons@gao.gov if you
or your staff have any questions concerning this letter. Key contributors to
this letter were Tom Broderick, Barbara House, Bonnie McEwan, and Tarunkant
Mithani.
Sincerely yours, Sally E. Thompson Director, Financial Management and
Assurance
Enclosure I GAO-02-131R Improper Payments Page 8
Federal Agencies and Components Required to Prepare Financial Statements
Under the CFO Act and OMB Guidance
! Department of Agriculture Food and Nutrition Service Forest Service Rural
Development Mission Area
! Department of Commerce
! Department of Defense Department of Army General Funds Department of Navy
General Funds Department of Air Force General Funds Military Retirement
Trust Funds U.S. Army Corps of Engineers Civil Works Program Department of
Army Working Capital Fund Department of Navy Working Capital Fund Department
of Air Force Working Capital Fund
! Department of Education
! Department of Energy
! Department of Health and Human Services Centers for Medicare and Medicaid
Services
! Department of Housing and Urban Development
! Department of the Interior
! Department of Justice
! Department of Labor
! Department of State
! Department of Transportation Federal Aviation Administration Highway Trust
Fund
! Department of the Treasury Bureau of Alcohol, Tobacco and Firearms
Internal Revenue Service United States Customs Service
! 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 Civil Service Retirement and Disability
Fund Federal Employees Health Benefits Program Federal Employees Life
Insurance Program
! Small Business Administration
! Social Security Administration
Enclosure II GAO-02-131R Improper Payments Page 9
Programs for Which Erroneous Payment Information Is Required Per OMB
Circular No. A-11
Department of Agriculture Department of Transportation
Food Stamps Airport Improvement Program Commodity Loan Program Highway
Planning and Construction National School Lunch and Breakfast Federal
Transit - Capital Investment Grants Women, Infants, and Children Federal
Transit - Formula Grants
Department of Defense Department of Veterans Affairs
Military Retirement Compensation Military Health Benefits Dependency and
Indemnity Compensation
Pension
Department of Education Insurance Programs Student Financial Assistance
Title I Agency for International Development
Special Education - Grants to States Vocational Rehabilitation Grants to
States Environmental Protection Agency
Clean Water State Revolving Funds
Department of Health and Human Services Drinking Water State Revolving Funds
Head Start Medicare National Science Foundation
Medicaid TANF Research and Education
Grants and Cooperative Agreements Foster Care - Title IV-E Child Support
Enforcement Office of Personnel Management
State Children?s Insurance Program Retirement Program (CSRS and FERS) Child
Care and Development Fund Federal Employees Health Benefits Program
Federal Employees? Group Life Insurance
Department of Housing and Urban Development Railroad Retirement Board a
Low Income Public Housing Retirement and Survivors Benefits Section 8 Tenant
Based Railroad Unemployment Insurance Benefits Section 8 Project Based
Community Development Block Grants Small Business Administration
(Entitlement Grants, States/Small Cities) (7a) Business Loan Program (504)
Certified Development Companies
Department of Labor Disaster Assistance Unemployment Insurance Small
Business Investment Companies Federal Employee Compensation Act Workforce
Investment Act Social Security Administration
Old Age and Survivors? Insurance
Department of the Treasury Disability Insurance Earned Income Tax Credit
Supplemental Security Income Program
a Not a CFO Act agency.
(193008)
*** End of document. ***