Financial Management: Challenges Remain in Addressing the
Government's Improper Payments (13-MAY-03, GAO-03-750T).
The Subcommittee on Government Efficiency and Financial
Management, House Committee on Government Reform asked GAO to
testify on the Improper Payments Information Act (PL-107-300) and
related draft guidance issued by the Office of Management and
Budget (OMB), and on GAO recommendations to agencies on actions
they can take to prevent or reduce improper payments.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-750T
ACCNO: A06866
TITLE: Financial Management: Challenges Remain in Addressing the
Government's Improper Payments
DATE: 05/13/2003
SUBJECT: Erroneous payments
Internal controls
Risk management
Strategic planning
Financial management
Federal agency accounting systems
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GAO-03-750T
Testimony Before the Subcommittee on Government Efficiency and Financial
Management, Committee on Government Reform, House of Representatives
United States General Accounting Office
GAO For Release on Delivery Expected at 2: 00 p. m. EDT Tuesday, May 13,
2003 FINANCIAL
MANAGEMENT Challenges Remain in Addressing the Government's Improper
Payments
Statement of McCoy Williams, Director Financial Management and Assurance
GAO- 03- 750T
Improper payments are a longstanding, widespread, and significant problem
in the federal government. Agency financial statements for both fiscal
years 2002 and 2001 identified improper payment estimates of approximately
$20 billion. OMB recently testified that the amount of improper payments
was closer to $35 billion annually for major benefit programs. As
significant as
these amounts are, they do not represent a true picture of the magnitude
of the problem governmentwide because they do not consider other
significant but smaller programs and other types of agency activities that
could result in improper payments. Until recently OMB guidance did not
require or offer agencies a comprehensive approach to measuring improper
payments, developing and
implementing corrective actions, or reporting on the results of the
actions taken. Improper payment information varied across agencies and
programs and included a mixture of estimated improper payment rates and
actual improper payments, and was reported inconsistently in a variety of
places, including annual financial statements, performance reports, and
the federal budget. None of these reporting mediums provided a
comprehensive view of either the scope of the improper payment problem or
of individual agency or government efforts to reduce it.
We are seeing increased leadership and actions* both from the Congress and
the administration* to address the improper payment problem.
Two recent pieces of legislation provide an impetus for all agencies to
systematically address improper payment activity on an annual basis and to
identify and recover contract overpayments. To illustrate this, the
Improper Payments Information Act of 2002 requires agency heads to
annually review all programs and activities that they administer and
identify those susceptible to improper payments. For those with estimates
of significant improper payments, the legislation requires further
analysis and reporting. The National Defense Authorization Act for fiscal
year 2002 contains a provision that requires agencies entering into
sizeable contracts to carry out a cost recovery program for improper
payments made to contractors.
OMB has taken some actions to address our prior improper payment- related
recommendations. For example, it has issued draft guidance for agency use
in identifying and reporting on improper payments within their programs
and activities. Further, preliminary follow up work on our prior
recommendations shows a wide range of agency activities regarding improper
payment identification and reporting. Some agencies have implemented
detailed action plans while others are in the early stages of such work.
OMB and the agencies need to continue to work to identify and measure
improper payments, set performance goals, implement corrective actions,
and report results against those goals. The Subcommittee asked GAO to
testify on the Improper Payments Information Act (PL- 107- 300) and
related draft guidance issued by the Office of Management and Budget
(OMB), and on GAO recommendations to agencies on actions they can take to
prevent or reduce improper payments. www. gao. gov/ cgi- bin/ getrpt? GAO-
03- 750T. To view the full report, including the scope
and methodology, click on the link above. For more information, contact
McCoy Williams at 202- 512- 6906 or williamsm1@ gao. gov. Highlights of
GAO- 03- 750T, a report to
Subcommittee on Government Efficiency and Financial Management, Committee
on Government Reform, House of Representatives
May 13, 2003
FINANCIAL MANAGEMENT
Challenges Remain in Addressing the Government's Improper Payments
Page 1 GAO- 03- 750T Mr. Chairman and Members of the Subcommittee: Thank
you for the opportunity to discuss the governmentwide improper
payment problem. Specifically, I will discuss leadership actions taken by
the Congress and the Office of Management and Budget (OMB) to address this
problem, and I will highlight the results of our work in this area over
the past few years that address actions agencies can undertake to prevent
or reduce improper payments.
In general, improper payments are payments the government made in error
and often result from a lack of or inadequate systems of internal
controls. We use the term improper payments to 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 fraud
and abuse by program participants and/ or federal employees.
Because improper payments are a longstanding, widespread, and significant
problem in the federal government, few would argue that the goal of
reducing them is not a worthy one. As we testified before this
subcommittee on April 8, 2003, 1 improper payment estimates disclosed in
agency financial statements totaled approximately $20 billion each year
for both fiscal years 2002 and 2001. As significant as these amounts are,
they do not present a true picture of the magnitude of the problem
governmentwide. OMB recently estimated the amount of improper
payments at about $35 billion annually. While either of these figures
represent a considerable amount of wasted taxpayer dollars, the scope of
the problem is likely greater because most agencies have not yet estimated
or publicly reported the magnitude of improper payments in their programs
and activities.
The risk of improper payments and the government*s ability to prevent them
has important long- term implications. As the baby boom generation leaves
the workforce, spending pressures will grow rapidly due to increased costs
of programs such as Medicare, Medicaid, and Social Security. Other federal
expenditures are also likely to increase. These spending pressures and the
increased size of federal programs all but
1 U. S. General Accounting Office, Fiscal Year 2002 U. S. Government
Financial Statements: Sustained Leadership and Oversight Needed for
Effective Implementation of Financial Management Reform, GAO- 03- 572T
(Washington, D. C.: Apr. 8, 2003).
Page 2 GAO- 03- 750T guarantee that, absent improvement in internal
controls and other proactive actions, the risk of even more improper
payments will exist.
Our work has demonstrated that attacking improper payment problems
requires a strategy appropriate to the organization involved and its
particular risks, including a consideration of the legal requirements
surrounding security and privacy issues. Our findings in this area have
resulted in the identification of strategies to address improper payments
and in governmentwide recommendations for proactive leadership at the
highest levels of government, in addition to specific procedures designed
to help agencies better identify, measure, reduce, and report their
improper payments. In October 2001, we issued an executive guide that
provided information on strategies used successfully by public and private
sector organizations to address their improper payment problems. 2 We
found that the entities using these best practices shared a common focus
of improving the internal control system. The components of this control
system and a brief definition of each follows.
Control environment* creating a culture of accountability by
establishing a positive and supportive attitude toward improvement and the
achievement of established program outcomes. Risk assessment* 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. 2 U. S. General Accounting Office, Strategies to Manage
Improper Payments: Learning From Public and Private Sector Organizations,
GAO- 02- 69G (Washington, D. C.: Oct. 2001).
Page 3 GAO- 03- 750T Most recently, in a report issued last August, 3 we
pointed out that existing guidance did not require or offer agencies a
comprehensive approach to measuring improper payments, developing and
implementing corrective
actions, or reporting on the results of the actions taken. Improper
payment information varied across agencies and programs and included a
mixture of estimated improper payment rates and actual improper payments.
Moreover, the information was inconsistently reported in a variety of
places, including annual financial statements, performance plans, and the
federal budget. None of these reporting mediums provided a
comprehensive view of either the scope of the improper payment problem or
of individual agency or governmentwide efforts to reduce it. As such,
there is inadequate substantive information for use in establishing (1) a
baseline measure of the extent of improper payments, (2) appropriate
response levels to correct improper payment problems, and (3)
responsibility* holding organizations and/ or individuals accountable for
performance and results.
As a result of these findings, we recommended that federal executive
branch agencies assign responsibilities for taking actions to minimize
improper payments and that OMB assist agencies in developing methods to
identify and implement those actions. We also presented matters for
congressional consideration to assist agencies in addressing barriers to
actions to better manage efforts to reduce improper payments and to help
them with improvement efforts.
We are seeing important leadership and action* both from the Congress and
from the administration* to address the improper payment problem. Today I
will highlight these actions and provide my perspective as to their
potential impact. I will also discuss our intent to follow up with the 24
Chief Financial Officer (CFO) Act agencies on our previous recommendations
that address actions agencies can take to prevent and reduce improper
payments.
3 U. S. General Accounting Office, Financial Management: Coordinated
Approach Needed to Address the Government*s Improper Payments Problems,
GAO- 02- 749 (Washington, D. C.: Aug. 9, 2002).
Page 4 GAO- 03- 750T Two recent pieces of legislation* the Improper
Payments Information Act of 2002 4 , and Section 831 of the National
Defense Authorization Act for
Fiscal Year 2002 5 *provide an impetus for all agencies to systematically
address improper payment activity annually, and to identify and recover
contract overpayments.
The Improper Payments Information Act of 2002, that this subcommittee
sponsored, contains stringent requirements in the areas of improper
payment review and reporting. Agency heads are to annually review all
programs and activities that they administer and identify those that may
be susceptible to improper payments. Across- the- board implementation of
this provision will significantly increase the number of agencies
analyzing their programs and activities for improper payments and
coincides with our recommendation that the 24 CFO Act agencies assign
responsibility for establishing procedures for assessing agency and
program risks of improper payments.
Once agencies identify their programs that are susceptible to significant
improper payments, the legislation requires agencies to estimate the
annual amount of improper payments in those programs and activities. For
programs for which estimated improper payments exceed $10 million,
agencies are to report to the Congress on actions they are taking to
reduce those errors. The report will also include a discussion of the
causes of the
improper payments identified, actions taken to correct those causes, and
the results of the actions taken to address those causes. The provisions
of this legislation coincide with our recommendation that CFO Act agencies
take actions to reduce improper payments and report to the Congress,
OMB, and the agency head on the progress made in achieving improper
payment reduction targets and future action plans for controlling improper
payments.
The law further requires OMB to prescribe agency guidance to implement the
requirements of the act. For years, we have recommended that OMB develop
and issue guidance to federal executive agencies to assist them in
developing and implementing a methodology for annually estimating and
4 Pub. L. No. 107- 300, 116 Stat. 2350, (2002). 5 Pub. L. No. 107- 107,
115 Stat. 1012, 1186, (2001). Legislation Mandates
Agency Actions to Identify and Act on Improper Payment Problems
Improper Payments Act
Page 5 GAO- 03- 750T reporting improper payments, and for developing goals
and strategies to address improper payments. I will discuss OMB*s actions
in this area later
in my statement. Our October 2001 executive guide on improper payments
recognized that some improper payments are inevitable and identified and
described improper payment detection activities including recovery
auditing. Recovery auditing entails examining payment file information to
identify possible duplicate or erroneous payments and taking recovery
action. Our guide suggested that the techniques used in recovery auditing
could be used more in the federal government not only to identify improper
payments already made, but also to analyze records prior to payment to
prevent improper payments before they occur. In our opinion, it is both
faster and cheaper to proactively identify and prevent potential improper
payments than to try to detect such errors and collect them after the
fact.
Section 831 of the National Defense Authorization Act for Fiscal Year 2002
contains a provision that requires agencies entering into contracts with
costs exceeding $500 million annually to have cost- effective programs for
identifying errors in paying contractors and for recovering amounts
erroneously paid. The legislation further states that a required element
of such a program is the use of recovery audits and recovery activities.
The
law authorizes agencies to retain recovered funds to cover in- house
administrative costs as well as to pay contractors, such as collection
agencies. Any residual recoveries, net of these program costs, may be
credited back to the original appropriation, subject to restrictions as
described in the legislation. With the passage of this law, the Congress
has removed multiple barriers and granted agencies a much needed incentive
for identifying and reducing their improper payments, in addition to
recovering those improper payments that slip through agency prepayment
controls. The techniques used in recovery auditing (such as examining
payment file information to identify duplicate payments or calculation
errors) offer the opportunity for identifying weaknesses in agency
internal controls, which can then be modified or upgraded to be more
effective in preventing improper payments before they occur. Further,
accurate assignment of costs and a functioning cost accounting system to
track those costs can assist agency management by providing the
information needed to identify agency and contractor expenses reimbursable
under this legislation. Recovery Auditing
Legislation
Page 6 GAO- 03- 750T OMB*s role in managing, implementing, and overseeing
governmentwide administrative policy, its interagency perspective, and its
leadership role
on the various interagency councils make it a key player in the
government*s effort to reduce improper payments. I would like to briefly
discuss two actions* one legislatively and the other administratively
driven.
In the legislative area, OMB recently issued draft guidance on
implementation of the Improper Payments Information Act of 2002 for agency
comment. In this guidance, OMB addressed the specific reporting
requirements provided by the act and laid out the steps necessary for
agencies to meet those requirements. For example, the draft guidance
calculates annual improper payments as the gross total of both over- and
under- payments, and sets statistical sampling confidence and precision
levels for estimating those payments. It also requires agencies with
estimated improper payments in any program or activity exceeding $10
million to include, along with the estimated amount, a discussion of the
amount of actual improper payments the agency expects to recover and how
it will go about recovering them in the Management Discussion and Analysis
section of their annual Performance and Accountability Report. These
actions will help ensure transparency in reporting for those agencies with
programs and activities with significant risks for improper payments.
On the administrative side, the President*s Management Agenda has
identified improper payments as a key element in the administration*s
initiative to improve financial performance throughout the federal
government* one of five governmentwide initiatives that the Agenda
addressed. As described in the Agenda, OMB will work with agencies to
establish goals to reduce improper payments for each program over $2
billion. In the past, agencies* financial statements contained a mix of
estimated improper payment rates and actually identified improper
payments* this was for those agencies that had, in fact, reported improper
payments. OMB now requires agencies to provide an improper payment rate
based on a statistical sample projected to the universe of payments made.
It revised the guidance in its Circular A- 11 to require agencies to
distinguish between overpayments, underpayments, and total improper
payments, and to define the methodology used to develop their error rate.
The revision was intended to ensure consistency in the error rates
reported by the agencies. The Circular requires agencies to report this
information with their initial budget submissions and prohibits agencies
from publicly disclosing these submissions. We have stated in the past and
continue to maintain that this information should be in the public OMB*s
Actions to
Address Improper Payments
Page 7 GAO- 03- 750T domain since it is necessary to enable oversight and
monitoring by interested parties, including the Congress and the public.
Our August 2002 report on improper payments included recommendations to
OMB designed to assist agencies with challenges in identifying and
measuring their improper payments, setting performance goals,
implementing corrective actions, and reporting the results against the
goals. OMB has taken some actions to address these recommendations. For
example, in October 2002 testimony before this committee, it addressed
statutory roadblocks faced by the departments of Labor (Labor), Education
(Education), and Housing and Urban Development (HUD) in gaining access to
existing information that those agencies could use in verifying the
employment status and income of applicants. 6 OMB
testified that it had proposed legislation to eliminate the data- sharing
barriers at Labor and Education, and that it was in the process of
proposing legislation that would assist HUD in accessing much needed data
that already exists at the Department of Health and Human Services.
While this is a start, identifying and mitigating or eliminating barriers
must be an ongoing process as additional agencies begin to address their
improper payments and identify additional barriers that restrict their
actions to reduce or eliminate improper payments. OMB*s efforts in working
with the Congress and federal agencies to ensure successful implementation
of the provisions of the Improper Payments Information Act of 2002 and
other legislation and administrative actions that can impact improper
payments are critical to the governmentwide effort to reduce improper
payments and facilitate the implementation of our recommendations.
OMB is providing additional leadership through a joint CFO Council and
President*s Council on Integrity and Efficiency (PCIE) workgroup* the
Improper and Erroneous Payments Work Group* to assist agencies in
identifying and reducing erroneous payments and to produce
documentation that would be meaningful, applied to agencies. The workgroup
surveyed agencies concerning the existing use of improper payment
indicators and benchmarks, analyzed survey responses, and publicly
released lists of indicators and techniques agencies currently use to
identify improper payments.
6 Office of Management and Budget, Testimony of the Honorable Mark W.
Everson, Deputy Director for Management, before the Subcommittee on
Government Efficiency, Financial Management, and Intergovernmental
Relations, Committee on Government Reform, (Washington, D. C.: Oct. 3,
2002).
Page 8 GAO- 03- 750T As noted in our prior reports and testimonies on this
topic, there is no clear picture on the extent of the improper payment
problem, only that it
is worse than what is now acknowledged. Relatively few federal agencies
and their components publicly report improper payment information such as
improper payment rates, causes, and strategies for better managing their
programs to reduce or eliminate these payments. In reviewing fiscal
year 2001 agency and component financial statements of the 24 CFO Act
agencies, we found references to improper payments in just 10 agencies in
17 agency programs. This information increased to 17 agencies and 27
programs in fiscal year 2002 agency financial statements. Several of the
17 agencies that acknowledged the existence of improper payments did not
present information on the amounts of those payments. While the fiscal
year 2002 information is an improvement over fiscal year 2001 in terms of
agencies acknowledging improper payments, merely acknowledging that
improper payments exist is simply not enough. It is essential for agencies
to develop appropriate methodologies for identifying and measuring those
payments, identify cost- effective actions to correct them, implement
actions to reduce or eliminate improper payments in their programs and
activities, and periodically report to agency managers, the Congress, and
the public, through publicly available documents.
In our August 2002 report, we made a recommendation to all 24 CFO Act
agencies to assign responsibility to a senior agency official for
assessing risks, taking actions to reduce, and reporting the results on
those actions on agency improper payments. The report described specific
actions that we feel are an integral part of that responsibility. As a
result of preliminary
information received from those agencies, we have found that agencies have
begun to assign responsibility to lead and coordinate actions to reduce
improper payments. Some agencies have developed detailed action plans to
determine the nature and extent of improper payments. Some have set target
goals for improper payment rates and have reported progress in their
annual accountability reports. For other agencies, methodologies for
identifying risks, determining the nature and extent of improper payments,
and developing corrective actions are in the early stages of
implementation. In ongoing work, we are meeting with officials from the 24
CFO Act agencies to discuss their progress in implementing our
recommendations and OMB*s draft guidance on implementing the Improper
Payments Information Act of 2002.
In closing, I want to emphasize our commitment to continuing our work with
the Congress, the administration, and federal agencies to ensure that
improper payments are fully addressed governmentwide, and that actions are
taken to reduce or eliminate the government*s vulnerabilities to the
Limited Information
Is Available on Improper Payments at Federal Agencies
Page 9 GAO- 03- 750T significant problem of improper payments. As I stated
earlier, recent legislation and other actions have brought the
government*s improper
payment problems to the forefront. Implementing the legislative provisions
and other actions is a shared responsibility that will require continued
strong support and active and cooperative involvement from the Congress,
the administration, and agency management. Effective implementation of the
Improper Payments Information Act of 2002 and recovery auditing should
help resolve these problems. Along these lines, OMB needs to continue to
work with agencies and groups like the CFOPCIE Erroneous and Improper
Payments Workgroup to address challenges in identifying and measuring
their improper payments, setting performance goals, implementing
corrective actions, and reporting the results against the goals. Further,
agency management must work diligently to establish an environment in
which improper payments are not acceptable business practices, evaluate
program and activity risks for improper payments, identify and implement
appropriate corrective actions, and openly report the progress made in
reducing improper payments.
Mr. Chairman, this completes my prepared statement. I would be happy to
respond to any questions you or other Members of the Subcommittee may have
at this time.
For information about this statement, please contact McCoy Williams,
Director, Financial Management and Assurance, at (202) 512- 6906 or at
williamsm1@ gao. gov. Individuals who made key contributions to this
testimony include Tom Broderick, Bonnie McEwan, and Donell Ries. Numerous
other individuals made contributions to the GAO reports cited in this
testimony. Contact and
Acknowledgements
Page 10 GAO- 03- 750T Financial Management: Coordinated Approach Needed to
Address the Government*s Improper Payments Problems. GAO- 02- 749.
Washington,
D. C.: August 9, 2002.
Financial Management: Improper Payments Reported in Fiscal Year 2000
Financial Statements. GAO- 02- 131R. Washington, D. C.: November 2, 2001.
Executive Guide: Strategies to Manage Improper Payments, Learning From
Public and Private Sector Organizations. GAO- 02- 69G. Washington, D. C.:
October 2001.
Financial Management: Billions in Improper Payments Continue to Require
Attention. GAO- 01- 44. Washington, D. C.: October 27, 2000. Related GAO
Products
(195015)
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