Financial Management: Effective Implementation of the Improper	 
Payments Information Act of 2002 Is Key to Reducing the 	 
Government's Improper Payments (14-JUL-03, GAO-03-991T).	 
                                                                 
The Subcommittee on Government Efficiency and Financial 	 
Management, House Committee on Government Reform asked GAO to	 
testify on the implementation of the Improper Payments		 
Information Act of 2002 (PL 107-300) and related Office of	 
Management and Budget (OMB) guidance, and on GAO's strategies to 
reduce improper payments.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-991T					        
    ACCNO:   A07534						        
  TITLE:     Financial Management: Effective Implementation of the    
Improper Payments Information Act of 2002 Is Key to Reducing the 
Government's Improper Payments					 
     DATE:   07/14/2003 
  SUBJECT:   Federal agencies					 
	     Financial management				 
	     Reporting requirements				 
	     Erroneous payments 				 

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GAO-03-991T

GAO United States General Accounting Office

A

Test i mony Before the Subcommittee on Government Efficiency and Financial
Management, Committee on Government Reform, House of Representatives

For Release on Delivery Expected at 8: 00 a. m. CDT Monday, July 14, 2003
FINANCIAL

MANAGEMENT Effective Implementation of the Improper Payments Information
Act of 2002 Is Key to Reducing the Government*s Improper Payments

Statement of McCoy Williams Director, Financial Management and Assurance

GAO- 03- 991T

Improper payments are a longstanding, widespread, and significant problem
in the federal government. This past April, OMB estimated improper
payments of about $35 billion annually for major federal benefit programs
that made payments in excess of $1. 2 trillion annually. Importantly, this
estimate does not account for all federal programs and activities.

The Improper Payments Information Act of 2002 contains requirements in the
areas of improper payment identification and reporting. It requires agency
heads to annually review all programs and activities, identify those that
may be susceptible to significant improper payments, estimate annual
improper payments in the susceptible programs and activities, and report
the results of their improper payment activities. The legislation also
requires OMB to prescribe guidance for federal agency use in implementing
the act.

OMB issued the guidance in May 2003. OMB*s guidance addresses the specific
reporting requirements called for in the act and lays out the general
steps agencies are to perform to meet those requirements. The guidance
defines key terms used in the law, such as programs and activities, and
offers criterion that clarify the meaning of the term significant improper
payments. It requires that agencies use statistical sampling when
estimating improper payments and sets statistical sampling confidence and
precision levels for estimation purposes. It also requires that agencies
report the results of their improper payment activities in their annual
Performance and Accountability Report. As with any legislation or
implementing guidance, the act*s ultimate success hinges on each agency*s
diligence and commitment to identify, estimate, determine the causes of,
take corrective actions, and measure progress in reducing all improper
payments.

Our prior work has demonstrated that attacking improper payment problems
requires a strategy appropriate to the organization involved and its
particular risks. We have found that entities using successful strategies
to address their improper payment problems shared a common focus of
improving the internal control system* the first line of defense in
safeguarding assets and preventing and detecting errors and fraud. The
components of the control system are:

 control environment* creating a culture of accountability,  risk
assessment* performing analyses of program operations to

determine if risks exist,  control activities* taking actions to address
identified risk areas,  information and communications* using and sharing
relevant, reliable,

and timely information, and  monitoring* tracking improvement initiatives
and identifying additional

actions needed to further improve program efficiency and effectiveness.
The Subcommittee asked GAO to testify on the implementation of the
Improper Payments Information Act of 2002 (PL 107300) and related Office
of

Management and Budget (OMB) guidance, and on GAO*s strategies to reduce
improper payments. www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 991T. 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- 991T, a testimony

before the Subcommittee on Government Efficiency and Financial Management,
Committee on Government Reform, House of Representatives July 14, 2003

FINANCIAL MANAGEMENT

Effective Implementation of the Improper Payments Information Act of 2002
Is Key to Reducing the Government*s Improper Payments

Page 1 GAO- 03- 991T

Mr. Chairman and Members of the Subcommittee: I am pleased to be here
today to discuss OMB*s guidance 1 to federal agencies on the
implementation of the Improper Payments Information Act of 2002 (Improper
Payments Act) and some strategies that federal agencies should consider
when planning and implementing actions to prevent

improper payments. Improper payments are a longstanding, widespread, and
significant problem in the federal government and few would argue that the
goal of reducing them is not a worthy one. As noted in our prior reports
and testimonies on this topic, there is no clear picture of the extent of
the problem. Historically, relatively few federal agencies and their
components have publicly reported improper payment information such as
improper payment rates, causes, and strategies for better managing their
programs to reduce or eliminate these payments. This past April, OMB
estimated improper payments to be about $35 billion annually for major
federal

benefit programs that made payments in excess of $1.2 trillion annually.
Importantly, this estimate does not account for all federal programs and
activities.

Further, 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. The

increased size of federal programs and spending pressures, such as the
implementation of new programs and changes in existing programs, all but
guarantee that, absent improvement in internal controls and other
proactive actions, the risk of even more improper payments will exist.

The Improper Payments Act, which this subcommittee sponsored, defines
improper payments as any payment that should not have been made or that
was made in an incorrect amount (including overpayments and underpayments)
under statutory, contractual, administrative, or other legally applicable
requirements. They include payments to ineligible recipients or payments
for ineligible services. Improper payments also

1 OMB Memorandum M- 03- 13, Improper Payments Information Act of 2002,
Public Law 107- 300 (May 21, 2003).

Page 2 GAO- 03- 991T

include duplicate payments, payments for services not received, and
payments that do not appropriately reflect applicable discounts offered.
The act contains requirements in the areas of improper payment

identification and reporting. It requires agency heads to annually review
all programs and activities that they administer, identify those that may
be susceptible to significant improper payments, and estimate annual
improper payments for those programs and activities identified as
susceptible to significant improper payments. Governmentwide
implementation of these requirements will significantly increase the
number of agencies analyzing their programs and activities for improper
payments and coincides with our recommendation that the head of the CFO
Act agencies assign responsibility to a senior official for establishing
procedures for assessing agency and program risks of improper payments.

For programs for which estimated improper payments exceed $10 million,
agencies are to report certain information to the Congress including the
causes of the improper payments, actions taken to correct those causes,
and the results of those actions. This provision coincides with our

recommendation that CFO Act agencies 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.

OMB*s Guidance on Addressing Improper Payments

The Improper Payments Act requires OMB to prescribe guidance for federal
agency use in implementing the act. OMB issued this guidance in May 2003.
As with any legislation or implementing guidance, the ultimate success of
the Improper Payments Act hinges on each agency*s diligence and its
commitment to identify, estimate, determine the causes of, take corrective
actions, and measure progress in reducing all improper payments.

OMB*s guidance addresses the specific reporting requirements called for in
the act and lays out the general steps agencies are to perform to meet
those requirements. The guidance defines key terms used in the law. For
example, it defines the term programs and activities to include
*activities or sets of activities recognized as programs by the public,
OMB, or the Congress as well as those that entail program management or
policy direction.* The guidance specifies that grants include competitive
grant programs, regulatory activities, research and development
activities, direct federal programs, all procurements including capital
assets and service

Page 3 GAO- 03- 991T

acquisition, and credit programs. Also included are agency activities that
support its programs. As I noted earlier, the act requires agencies to
identify programs and activities that are susceptible to significant
improper payments. OMB*s

guidance defines significant erroneous payments as annual erroneous
payments in the program exceeding both 2.5 percent of program payments and
$10 million. (GAO considers the terms improper payments and erroneous
payments to be synonymous.) For those programs and activities susceptible
to significant erroneous payments, the guidance instructs agencies to
calculate annual improper payment estimates based on the gross total of
both overpayments and underpayments, and to set statistical sampling
confidence and precision levels for estimating those payments. It further
requires agencies with estimated improper payments exceeding $10 million
in any program or activity 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.

According to the guidance, information on the results of improper payment-
related efforts will generally be first reported in agency Performance and
Accountability Reports for fiscal years ending on or after September 30,
2004. These reports should be available in November 2004. However, the
guidance calls for those federal agencies already required by OMB Circular
No. A- 11, Preparation and Submission of Budget

Estimates, to report improper payment information in their initial budget
submissions to OMB to also include that improper payment information in
their fiscal year 2003 Performance and Accountability Reports. This will
result in publicly available information on improper payments for about 50

major federal programs, such as Medicare and Food Stamps, about one year
earlier than the reporting date for all other federal programs and
activities. 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 reporting improper payments, and
for developing goals and strategies to address improper payments. This
Improper Payments Act guidance is a good start in this area.

Page 4 GAO- 03- 991T

Strategies for Preventing Improper Payments

Because of the magnitude of improper payments and the actual and potential
impact these payments can have on federal programs, it is essential that
agencies develop appropriate methodologies for identifying and measuring
improper payments, identifying cost- effective actions to correct them,
implementing those actions, and periodically reporting improper payment-
related information to agency managers, the Congress, and the public
through publicly available documents. Our prior 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. In October 2001, we issued an executive guide 2 that
provided information on strategies used successfully by public and private
sector organizations to address their improper payment problems. We found
that the federal, private sector, state, and foreign entities using these
best practices shared a

common focus of improving the internal control system over the program or
activity that experienced improper payments. The components of this
control system and a brief definition of each follows.  Control
environment* create a culture of accountability by establishing

a positive and supportive attitude toward improvement and the achievement
of established program outcomes.

 Risk assessment* perform comprehensive reviews and analyses of program
operations to determine if risks exist and the nature and extent of the
risks identified.

 Control activities* address identified risk areas and help ensure that
management*s decisions and plans are carried out and program objectives
are met.

 Information and communications* use and share relevant, reliable, and
timely financial and nonfinancial information in managing improper
payment- related activities.

2 U. S. General Accounting Office, Strategies to Manage Improper Payments:
Learning From Public and Private Sector Organizations, GAO- 02- 69G
(Washington, D. C.: October 2001).

Page 5 GAO- 03- 991T

 Monitoring* track improvement initiatives, over time, and identify
additional actions needed to further improve program efficiency and
effectiveness.

The entities that participated in our study found that they could
effectively and efficiently manage improper payments by focusing on the
components of internal controls and (1) changing their organizations*
control environments or cultures, (2) performing risk assessments, (3)
implementing activities to reduce fraud and errors, (4) providing

relevant, reliable, and timely information and communication of results to
management, and (5) monitoring performance over time. It is important to
note that the implementation of the improvement process that addresses
these internal control components will likely not be easy or quick. It
will require strong support, not just in words but in actions, from the
President,

the Congress, top- level administration appointees, and agency managers.
Once committed to a plan of action, they must remain steadfast supporters
of the end goals and their support must be transparent to all. 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. As a result of
our findings, we recommended, among other things, that the head of each
CFO Act agency assign responsibility to a senior agency official for
taking

actions to minimize improper payments and that the Director of OMB work
with agency officials to provide all reasonable assistance in implementing
the corrective action plans developed to reduce improper payments. 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.

As this subcommittee requested in May, we will issue a report later this
year on the status of actions the CFO Act agencies and OMB have taken in
designing and implementing programs to address our previous
recommendations. As a result of preliminary information received from
those agencies, we have found that they have begun to assign
responsibility to lead and coordinate actions to reduce improper payments.
Some

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 6 GAO- 03- 991T

agencies have (1) developed detailed action plans to determine the nature
and extent of improper payments, (2) set target goals for improper payment
rates, and (3) 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. As a part of our efforts, we
will also discuss CFO Act agency progress in implementing the Improper
Payments Act.

In closing, as the Congress and the American public have increased demands
for accountability from corporations and their leaders, the federal
government must demonstrate the same standards of accountability and
responsibility expected from the private sector within its programs and
activities. Areas vulnerable to fraud, waste, abuse, and mismanagement
must be evaluated to ensure that scarce resources reach their intended
beneficiaries and are not diverted for inappropriate, illegal,
inefficient, or ineffective purposes.

We are seeing important leadership and action* both from the Congress and
from the administration* to address the improper payment problem, but, as
I mentioned earlier, the reduction or elimination of the government*s
improper payments problems will not be quick or easy. 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 significant problem of
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. Contact and Acknowledgments

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.

Page 7 GAO- 03- 991T

Related GAO Products

Financial Management: Challenges Remain in Addressing the Government*s
Improper Payments. GAO- 03- 750T. Washington, D. C.: May 13, 2003.

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.

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.

(195017)

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