Financial Management: Fiscal Year 2003 Performance and		 
Accountability Reports Provide Limited Information on		 
Governmentwide Improper Payments (15-APR-04, GAO-04-631T).	 
                                                                 
The Improper Payments Information Act of 2002 requires that	 
agencies annually review all their programs and activities and	 
identify those that may be susceptible to significant improper	 
payments. It further requires those agencies with improper	 
payments exceeding $10 million to provide a report on the actions
being taken to reduce those payments. This testimony updates	 
agency progress in implementing the act based on our review of	 
agency fiscal year 2003 Performance and Accountability Reports	 
for the 15 agencies and 46 programs previously cited in Office of
Management and Budget Circular A-11, Section 57. It required	 
those agencies and programs to report improper payment		 
information to the Office of Management and Budget beginning with
their fiscal year 2003 budget proposals. The areas we addressed  
were (1) agencies that reported improper payments information and
the programs and activities on which that information was based, 
(2) amounts of improper payments reported, (3) initiatives	 
agencies reported taking to reduce those payments and the results
of those initiatives, and (4) impediments to the prevention or	 
reduction of improper payments reported.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-631T					        
    ACCNO:   A09809						        
  TITLE:     Financial Management: Fiscal Year 2003 Performance and   
Accountability Reports Provide Limited Information on		 
Governmentwide Improper Payments				 
     DATE:   04/15/2004 
  SUBJECT:   Erroneous payments 				 
	     Financial management				 
	     Internal controls					 
	     Reporting requirements				 
	     Risk management					 
	     Financial disclosure				 
	     Accounting procedures				 
	     Federal agencies					 
	     Program evaluation 				 

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GAO-04-631T

United States General Accounting Office

GAO Testimony

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

For Release on Delivery Expected at 2:30 p.m. EDT Thursday, April 15, 2004

FINANCIAL MANAGEMENT

    Fiscal Year 2003 Performance and Accountability Reports Provide Limited
                Information on Governmentwide Improper Payments

Statement of McCoy Williams
Director, Financial Management and Assurance

                                       a

GAO-04-631T

Highlights of GAO-04-631T, a testimony before the Subcommittee on
Government Efficiency and Financial Management, Committee on Government
Reform, House of Representatives

The Improper Payments Information Act of 2002 requires that agencies
annually review all their programs and activities and identify those that
may be susceptible to significant improper payments. It further requires
those agencies with improper payments exceeding $10 million to provide a
report on the actions being taken to reduce those payments.

This testimony updates agency progress in implementing the act based on
our review of agency fiscal year 2003 Performance and Accountability
Reports for the 15 agencies and 46 programs previously cited in Office of
Management and Budget Circular A-11, Section 57. It required those
agencies and programs to report improper payment information to the Office
of Management and Budget beginning with their fiscal year 2003 budget
proposals.

The areas you asked us to address were (1) agencies that reported improper
payments information and the programs and activities on which that
information was based, (2) amounts of improper payments reported, (3)
initiatives agencies reported taking to reduce those payments and the
results of those initiatives, and (4) impediments to the prevention or
reduction of improper payments.

We are not making any new recommendations in this testimony.

www.gao.gov/cgi-bin/getrpt?GAO-04-631T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact McCoy Williams at (202)
512-9508 or [email protected].

April 15, 2004

FINANCIAL MANAGEMENT

Fiscal Year 2003 Performance and Accountability Reports Provide Limited
Information on Governmentwide Improper Payments

The fiscal year 2003 Performance and Accountability Reports (PAR)
typically contained limited amounts of improper payment information even
for those programs previously cited in Circular A-11 for which a reporting
requirement has existed for at least three years. The PARs contained
improper payment estimates for 31 of the 46 programs listed in Circular
A-11. They contained information on agency initiatives to prevent or
reduce improper payments for 22 programs and on impediments to improper
payment prevention or reduction for 11 programs. Seven of 15 agencies
reported on all three categories of information requested (improper
payment amounts, initiatives taken to reduce or prevent improper payments,
and impediments to improper payment prevention or reduction) for 9 of the
46 programs. For 11 of the 46 programs, the four agencies did not report
on any of the three elements.

In some cases, agencies reported that they had already determined that
their programs were not susceptible to significant improper payments.
However, the auditor's reports in the same PARs identified management
challenges or material internal control weaknesses within the programs
where the design or operation of internal control procedures did not
reduce, to a relatively low level, the risk that errors, fraud, or
noncompliance that would be material to the financial statements may occur
and not be detected promptly by employees in the normal course of
performing their duties.

Key to the effort of reducing improper payments is the need for a strong
control environment, including top leadership commitment and sustained
attention to achieving results. Since 1982, various legislative and
administrative initiatives have focused on and required agency assessments
of internal controls over programs and financial management activities.
Although these initiatives may not specifically target improper payments,
by emphasizing internal controls, they have recognized the importance of
internal controls-including a strong control environment-in ensuring that
federal programs achieve their intended results and that federal agencies
operate them effectively and efficiently.

If diligently and vigorously implemented, the Improper Payments
Information Act of 2002 should have a significant impact on the
governmentwide improper payments problem. The level of importance each
agency, the administration, and the Congress place on the efforts to
implement the act will determine its overall effectiveness and the level
to which agencies reduce improper payments and ensure that federal funds
are used efficiently and for their intended purposes.

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the governmentwide problem of
improper payments in federal programs and activities. First, I would like
to respond to your request that we highlight and discuss our review of the
fiscal year 2003 Performance and Accountability Reports (PAR) of 15
agencies and identify, for 46 programs previously cited in Office of
Management and Budget (OMB) Circular A-11, Preparation and Submission of
Budget Estimates, Section 57, "Information on Erroneous Payments,"1 the

o 	agencies that reported improper payments information and the programs
and activities on which that information was based,

o  amounts of improper payments reported,

o 	initiatives agencies reported taking to reduce those payments and the
results of those initiatives, and

o  impediments to the prevention or reduction of the improper payments.

I will then discuss the importance of effective internal control to the
success of the Improper Payments Information Act of 2002 (Improper
Payments Act).2 In this regard, it is important to recognize that various
legislative and administrative initiatives have called for continuing
assessments and improvements in internal control and financial management
systems over the past two decades, at least. Meeting the requirements of
these initiatives should have resulted in agencies having significant
information available on their programs and activities that are
susceptible to improper payments.

Background 	Before highlighting the results of our review of the fiscal
year 2003 PARs, I would like to summarize the requirements of the Improper
Payments Act. The act requires the head of each agency to annually review
all programs

1Section 57 was eliminated from OMB Circular A-11. See OMB Circular A-11,
Transmittal Memorandum #77, July 25, 2003. Appendix I lists the 15
agencies and 46 programs previously cited in Section 57.

2Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).

and activities that the agency administers and identify all such programs
and activities that may be susceptible to significant improper payments.
For each program and activity identified, the agency is required to
estimate the annual amount of improper payments and submit those estimates
to the Congress before March 31 of the following applicable year. The act
further requires that for any agency program or activity with estimated
improper payments exceeding $10 million, the head of the agency shall
provide a report on the actions the agency is taking to reduce those
payments.

The Improper Payments Act also required the Director of OMB to prescribe
guidance to implement its requirements not later than six months after the
date of its enactment (Nov. 26, 2002). OMB issued this guidance on May 21,
2003.3 It states that each agency shall report the results of its improper
payment efforts in the Management Discussion and Analysis section of its
PAR for fiscal years ending on or after September 30, 2004. In general,
the first set of reports required by the guidance is due in November 2004.
Significantly, the guidance issued in May 2003, also required that 15
agencies report improper payment information for 46 programs identified in
OMB Circular A-11, publicly in their fiscal year 2003 PARs. Section 57
required agencies to include improper payment4 information for the
agencies and programs in their nonpublic budget submissions to OMB,
beginning with the fiscal year 2003 budget proposals. According to OMB,
the programs were selected primarily because of their large dollar volume
($2 billion dollars or more in outlays). In July 2003, OMB dropped the
requirement for information on erroneous payments and eliminated Section
57 requirements for preparing fiscal year 2005 budget submissions. The
information previously called for in the circular includes actual and
estimated improper payments and rates, targets for reducing the improper
payment rates identified, and corrective action plans to reach the
targets.

If diligently and vigorously implemented, the Improper Payments Act should
have a significant impact on the governmentwide improper payments problem.
The level of importance each agency, the administration, and the Congress
place on the efforts to implement the act will determine its overall
effectiveness and the level to which agencies

3Office of Management and Budget Memorandum M-03-13, "Improper Payments
Information Act of 2002 (Public Law 107-300)," May 21, 2003.

4OMB's guidance uses the term erroneous payments rather than improper
payments. We consider the terms synonymous.

reduce improper payments and ensure that federal funds are used for their
intended purposes.

Fiscal Year 2003 PARs As you requested, we reviewed the fiscal year 2003
PARs for the 15

agencies and 46 programs previously cited in OMB Circular A-11,
SectionContain Limited 57, to identify the improper payment information
contained therein. Table Improper Payment 1 summarizes the improper
payment estimates agencies reported in their Information fiscal year 2003
PARs.

  Table 1: Improper Payment Estimates Reported in Agency Fiscal Year 2003 PARs

Reported amount of Agency Program improper payments

1. Department of Agriculture (USDA) 1. Food Stamps $1,507,000,000

2. Commodity Loan Programs 153,000,000

3. National School Lunch and Breakfast o

4. Women, Infants, and Children o

2. Department of Defense (DOD) 5. Military Retirement Fund 33,087,000

6. Military Health Benefits 53,484,000

3. Department of Education (ED) 7. Student Financial Assistance-Pell
Grants Student Financial Assistance-non-program specific

                            377,500,000 105,000,000

8. Title I o

4. Department of Health and Human Services (HHS) 9. Medicaid o

10. Medicare 11,600,000,000

11. Head Start o

12. Temporary Assistance for Needy Families (TANF) o

13. Foster Care-Title IV-E o

14. State Children's Insurance Program o

15. Child Care and Development Fund o

5. Department of Housing and Urban Development 16. Low Income Public
Housing 650,000,000 (HUD)

17. Section 8 Tenant Based 1,215,000,000

18. Section 8 Project Based 662,000,000

19. Community Development Block Grant (CDBG) o (Entitlement Grants,
States/Small Cities)

6. Department of Labor (DOL) 20. Unemployment Insurance 4,225,000,000

21. Federal Employees' Compensation Act (FECA) 9,055,000

(Continued From Previous Page)

Reported amount of Agency Program improper payments

22. Workforce Investment Act 3,066,075

7. Department of Treasury (TREAS) 23. Earned Income Tax Credit (EITC)
10,500,000,000

8. Department of Transportation (DOT) 24. Airport Improvement Program
14,000,000

25. Highway Planning and Construction 1,400,000

26. Federal Transit-Capital Investment Grants 32,000,000

27. Federal Transit-Formula Grants 64,000,000

9. Department of Veterans Affairs (VA) 28. Compensation 129,063,000

29. Dependency and Indemnity Compensation o

30. Pension 250,535,000

31. Insurance Programs 261,000

10. Environmental Protection Agency (EPA)a 32. Clean Water State Revolving
Funds .13%

Reported as a rate, no amount 33. Drinking Water State Revolving Funds
.04%

Reported as a rate, no amount

11. National Science Foundation (NSF) 34. Research and Education Grants
and Cooperative Agreements o

12. Office of Personnel Management (OPM) 35. Retirement Program (Civil
Service Retirement 177,300,000 System (CSRS) and Federal Employees
Retirement System (FERS)) 36. Federal Employees Health Benefits Program
28,200,000 (FEHB)

37. Federal Employees Group Life Insurance (FEGLI) 448,000

13. Railroad Retirement Board (RRB) 38. Retirement and Survivors Benefits
168,327,370

39. Railroad Unemployment Insurance Benefits 2,778,000

14. Small Business Administration (SBA) 40. 7(a) Business Loan Program
13,000,000

41. 504 Certified Development Companies None

42. Disaster Assistance ob

43. Small Business Investment Companies oc

15. Social Security Administration (SSA) 44. Old Age and Survivors'
Insurance 600,000,000

45. Disability Insurance 340,000,000

46. Supplemental Security Income (SSI) Program 2,740,000,000

Total	31 of 46 agency programs $35,654,504,445 reported estimated amounts

Source: Agency fiscal year 2003 Performance and Accountability Reports
(data); GAO (analysis).

Note: An "o" indicates that the agency did not report amounts for the
program.

aNote that although EPA reported improper payment rates instead of a
dollar amount, for the purposes of our table and figure, we included EPA
as having reported improper payment estimates.

bSBA reported improper payment rates and amounts for certain disaster
loans; it did not provide a programwide estimate of improper payments.

CSBA reported potential improper payment rates and amounts for certain
small business investment company transactions; it did not provide a
programwide estimate of improper payments.

Further review of the table shows that the PARs contained improper payment
estimates for 31 of the 46 agency programs previously listed in Circular
A-11. The reports contained information on agency initiatives to prevent
or reduce improper payments for 22 programs and on impediments to improper
payment prevention or reduction for 11 programs.

Some agencies partially reported required information. Figure 1 presents,
by agency program, the level of reporting that we found for the three
categories of information you asked about (improper payment amounts;
initiatives to prevent improper payments, reduce them, or both; and
impediments to preventing or reducing them). As you can see, the level of
reporting is literally all over the board.

Figure 1: Level of Agency Improper Payment Reporting by Program

            HUD - Section 8 Tenant Based SSA - Disability Insurance TREAS -   
3    9    Earned Income Tax Credit USDA - Food Stamps DOL - Unemployment   
            Insurance ED - Student Financial Assistance HHS - Medicare HUD -  
                Low Income Public Housing HUD - Section 8 Project Based       
               SSA - Old Age Survivors' Insurance SSA - SSI Program VA -      
           Compensation VA - Insurance Programs VA - Pension DOL - FECA DOT - 
2    10       Airport Improvement Program DOT - Highway Planning and       
            Construction EPA - Clean Water State Revolving Funds SBA - 7(a)   
                                 Business Loan Program                        
        1                    USDA - Commodity Loan Program                    
               OPM - Federal Employees Group Life Insurance OPM - Federal     
            Employees Health Benefits Program OPM - Retirement Program (CSRS  
            and FERS) RRB - Retirement and Survivors Benefits RRB - Railroad  
        11 Unemployment Insurance Benefits DOD - Military Health Benefits DOD 
             - Military Retirement Fund DOL -Workforce Investment Act DOT -   
1       Federal Transit - Capital Investment Grants DOT - Federal Transit  
              - Formula Grants EPA - Drinking Water State Revolving Funds     
             NSF - Research and Education Grants and Cooperative Agreements   
        3   USDA -Women, Infants, and Children VA - Dependency and Indemnity  
                                      Compensation                            
        1              USDA - National School Lunch and Breakfast             
           HHS -TANF HUD - CDBG (Entitlement Grants, States/Small Cities) SBA 
           - 504 Certified Development Companies SBA - Disaster Assistance    
0    11 SBA - Small Business Investment Companies ED -Title 1 HHS - Child  
           Care and Development Fund HHS - Foster Care-Title IV-E HHS - Head  
           Start HHS - Medicaid HHS - State Children's Insurance Program      

Reported all three categories Reported two categories Reported one
category Reported no categories

Source: GAO.

Further, although agencies may have met the reporting requirements for
particular programs by addressing them in PARs, in many cases, the
information reported was limited to agency plans for future measures that
may not come about. In some cases, agencies reported that they had already
determined that programs were not susceptible to significant improper
payments, despite the fact that the auditor's reports in the same PARs
identified management challenges, or material internal control weaknesses
within the programs where the design or operation of an internal control
procedure did not reduce, to a relatively low level, the risk that errors,
fraud, or noncompliance that would be material to the financial statements
may occur and not be detected promptly by employees in the normal course
of performing their duties. This situation appears contradictory.

Although OMB has required agencies to perform various
improperpayment-related identification and corrective action activities
for the past three years for these 46 programs, figure 1 shows that only
seven agencies reported all of the required elements you asked
about-estimated amounts, initiatives taken to reduce improper payments,
and impediments to improper payment prevention or reduction-representing
only 95 of the 46 programs (20 percent). One of the agencies, for one of
its programs, reported estimated improper payment amounts, discussed
ongoing collaborative efforts made with and between program partners (such
as state agencies) to improve payment accuracy and to share "best
practice" information, and further reported that recent legislation
weakened the penalties imposed on program partners for high error rates
and reduced the incentives offered for lower rates. Another agency
reported an improper payment amount for three of its four required
programs, reported initiatives such as improving program guidance and
training, and addressed impediments such as the lack of available income
data needed to verify applicant-provided income information. A third
agency reported an estimate for one of its three required programs, and
further reported initiatives including promoting and funding data
exchanges with program partners, and reported that its principal
impediment was the cost of detecting eligibility issues.

5The nine programs are (1) DOL - Unemployment Insurance, (2) ED - Student
Financial Assistance, (3) HHS - Medicare, (4) HUD - Low Income Public
Housing, (5) HUD - Section 8 Project Based, (6) HUD - Section 8 Tenant
Based, (7) SSA - Disability Insurance, (8) TREAS - Earned Income Tax
Credit, and (9) USDA - Food Stamps.

For 106 of the 46 programs represented in six agencies, the agencies
estimated improper payment amounts and initiatives taken to reduce
improper payments, but did not address any impediments. For one program,
an agency estimated improper payments and discussed initiatives to correct
benefit computation errors and beneficiary earnings test improvements.
Another is performing annual on-site reviews. One agency reported an
improper payment amount for a program and discussed initiatives, such as
implementing an automated system to identify coding and billing errors.
Other initiatives reported by agencies included conducting recovery
audits, collaborating with other federal agencies to identify and recover
payments made to ineligible beneficiaries, and issuing policy notices and
providing training to agency personnel on program processes.

Six agencies reported estimated amounts for 117 programs, but did not
discuss initiatives taken to reduce improper payments and impediments to
preventing or reducing improper payments. For three programs, agencies
reported no estimated amounts or impediments, but did discuss initiatives
taken to reduce improper payments, such as expanding annual post award
monitoring and oversight processes. One agency did not report estimated
improper payment amounts or discuss initiatives taken to reduce improper
payments for one of its programs but identified some of the impediments it
has encountered in preventing or reducing them, such as the unavailability
of the data necessary to accurately measure improper payments.

6The 10 programs are (1) DOL - FECA, (2) DOT - Airport Improvement
Program, (3) DOT - Highway Planning and Construction, (4) EPA - Clean
Water State Revolving Funds, (5) SBA

- 7(a) Business Loan Program, (6) SSA - Old Age Survivors' Insurance, and
(7) SSA - SSI Program, (8) VA - Compensation, (9) VA - Insurance Programs,
and (10) VA --Pension.

7The 11 programs are (1) DOD - Military Health Benefits, (2) DOD -
Military Retirement Fund, (3) DOL - Workforce Investment Act, (4) DOT -
Federal Transit-Capital Investment Grants, (5) DOT - Federal
Transit-Formula Grants, (6) EPA - Drinking Water State Revolving Funds,
(7) OPM- Federal Employees Group Life Insurance, (8) OPM - Federal
Employee's Health Benefits Program, (9) OPM - Retirement Program (CSRS and
FERS), (10) RRB - Retirement and Survivor Benefits, and (11) RRB -
Unemployment Insurance.

For 118 of the 46 programs for which agencies were required to report
improper payment information in their fiscal year 2003 PARs, four agencies
did not report estimated amounts, initiatives taken to reduce improper
payments, or impediments to preventing or reducing improper payments, even
though OMB Circular A-11, Section 57, originally required agencies to
report improper payment data, assessments, and action plans with their
initial budget submissions since July 2001. One agency reported, "...
erroneous payments are very unlikely ... limited to instances of fraud...
" Agencies for several programs reported only that they were continuing to
develop improper payment error rates, but reported no further information.

  Stronger Internal Control Systems Are Key to Reducing Governmentwide Improper
  Payments

In October 2001, we issued an executive guide on strategies to manage
improper payments that was based on the results of information that we
obtained from public and private sector organizations that identified and
took actions designed to reduce improper payments in their programs.9 We
found that the actions that these organizations took shared a common focus
of improving the internal control system over problem areas. This system
consists of five primary components-the control environment, risk
assessments, control activities, information and communications, and
monitoring. Internal controls are not one event, but a series of actions
and activities that occur throughout an entity's operations and on an
ongoing basis. People make internal controls work, and responsibility for
good internal control rests with all managers.

One of the biggest hurdles that many entities face in the process of
managing improper payments is overcoming the tendency to deny the problem.
It is easy to rationalize avoiding or deferring action to address a
problem if you do not know how big the problem is. The nature and
magnitude of the problem-determined through a systematic risk assessment
process-needs to be determined and openly communicated to all relevant
parties. When this occurs, especially in a strong control

8The 11 programs are (1) ED - Title I, (2) HHS - Medicaid, (3) HHS - Head
Start, (4) HHS - TANF, (5) HHS - Foster Care-Title IV-E, (6) HHS - State
Children's Insurance Program, (7) HHS - Child Care and Development Fund,
(8) HUD - CDBG (Entitlement Grants, States/Small Cities), (9) SBA - 504
Certified Development Companies, (10) SBA - Disaster Assistance, and (11)
SBA - Small Business Investment Companies.

9U.S. General Accounting Office, Strategies to Manage Improper Payments:
Learning From Public and Private Sector Organizations, GAO-02-69G
(Washington, D.C.: October 2001).

environment, denial is no longer an option, and managers have the
information, as well as the incentive, to begin addressing improper
payments.

The Federal Managers' Financial Integrity Act of 1982 Set Internal Control
Review and Reporting Requirements

Fraud, waste, and abuse in federal activities and programs lead to the
loss of billions of dollars of government funds, erode public confidence,
and undermine the federal government's ability to operate effectively.
Unfortunately, that assessment comes from a 1985 GAO report10 on federal
agencies implementation of 31 U.S.C. 3512 (c), (d) (commonly referred to
as the Federal Managers' Financial Integrity Act of 1982 (Financial
Integrity Act)). Continuing concern over the poor condition of government
internal controls and accounting systems led the Congress to pass this
legislation that requires, among other things, ongoing evaluations and
reports on the adequacy of the systems of internal accounting and
administrative control of each executive agency. It requires the head of
each agency to issue an annual report that identifies material weaknesses
identified through the assessment process and the actions planned to
correct those weaknesses.

An August 1984 GAO report11 that summarized the results of our
governmentwide review of agencies' efforts to implement the Financial
Integrity Act found that agencies made a good start in the first year of
assessing their internal control and accounting systems and have
demonstrated a management commitment to implementing the act. Top agency
and OMB managers were becoming involved. The report characterized the
first-year effort as a learning experience and noted that much remained to
be done to complete the evaluation process and correct the problems
identified. Our 1984 review of the material weaknesses identified in the
annual reports of 17 major agencies revealed that

o 	16 agencies reported accounting/financial management system weaknesses;

o  14 agencies reported procurement weaknesses;

10U.S. General Accounting Office, Financial Integrity Act: The Government
Faces Serious Internal Control and Accounting Systems Problems,
GAO/AFMD-86-14 (Washington, D.C.: Dec. 23, 1985).

11U.S. General Accounting Office, Implementation of the Federal Managers'
Financial Integrity Act: First Year, GAO/OCG-84-3 (Washington, D.C.: Aug.
24, 1984).

o  13 agencies reported property management weaknesses;

o  12 agencies reported cash management weaknesses;

o 	12 agencies reported grant, loan, and debt collection management
weaknesses; and

o  8 agencies reported eligibility and entitlement weaknesses.

We concluded that, since the initial work in implementing the act had been
accomplished, agencies needed to develop comprehensive plans to correct
the material weaknesses identified. Correction of problems represents the
"bottom line" of the act. We further recognized that many of the
weaknesses identified were long-standing. They did not develop overnight,
and their solutions would not be easy. It would take a sustained,
highpriority commitment. In commenting on this report, OMB agreed that a
long-term commitment to improving internal control was necessary and that
weaknesses identified in the first year must be corrected.

In our December 1985 report, we cited a congressional committee report on
the first-year implementation of the Financial Integrity Act, based on a
May 22, 1984, hearing held by the Subcommittee on Legislation and National
Security, House Committee on Government Operations, on federal efforts to
improve internal control and accounting systems and on the Financial
Integrity Act's implementation, that stated the following:

"According to the testimony, a good beginning has been made toward
implementing the Act. It is clear, however, that much more remains to be
done .... This year agencies began the review process. Now, they must
improve on the work they did last year and conduct indepth internal
control reviews. Above all, corrective actions must be taken on the
deficiencies found."12

In our report, we noted that, while the act required agency heads to
report material weaknesses in their annual reports, the annual reviews
conducted identified significant numbers of less serious internal control
weaknesses. For example, although Treasury did not report any additional
material weaknesses in its 1984 annual statement, its component bureaus
identified 89 weaknesses that they considered material and reported 127
associated

12House Government Operations Committee, House of Representatives, First
Year Implementation of the Federal Managers' Financial Integrity Act, H.R.
Rep. No. 98-937 (1984).

corrective actions. According to Treasury's 1984 annual statement, the
bureaus had completed 46 (36 percent) of these 127 corrective actions.
Similarly, the military services identified and reported correcting
thousands of control weaknesses at lower levels. Army managers, for
example, reported correcting 3,600 internal control weaknesses in 1984
that were not considered to be material from an agency perspective.

In November 1989 testimony,13 former Comptroller General Charles A.
Bowsher again addressed this issue by noting that based on the results of
the internal control assessments and examinations of the systems problems
that agencies have reported and that GAO and federal audit organizations
have identified in their audit reports, it is evident that

o 	the government does not currently have the internal control and
accounting systems necessary to effectively operate many of its programs
and safeguard its assets;

o 	many weaknesses are long-standing and have resulted in billions of
dollars of losses and wasteful spending;

o 	major government scandals and system breakdowns serve to reinforce the
public's perception that the federal government is poorly managed, with
little or no control over its activities; and

o  top-level officials must provide leadership if this situation is to
change.

In summary, during the 1980s, federal agencies conducted significant
numbers of internal control assessments and identified and reported taking
corrective actions to eliminate the weaknesses found. Yet, at the end of
the decade, controls remained inadequate and these weaknesses resulted in
billions in losses and wasteful spending. Significantly, the final item
cited by Mr. Bowsher in his 1989 testimony is indicative of a weak control
environment. Our past work has shown that the control environment is
perhaps the most significant component of internal control to the
identification, development, and implementation of activities to reduce
improper payments. As pointed out in our executive guide on managing
improper payments, without this top-level leadership, the outlook for

13U.S. General Accounting Office, Federal Internal Control and Financial
Management Systems Remain Weak and Obsolete, GAO/T-AFMD-90-9 (Washington,
D.C.: Nov. 29, 1989).

overall improvements in the governmentwide effort to reduce improper
payments is limited.

Initiatives since 1990 Have Also Emphasized the Importance of Strong Internal
Controls

From the early 1990s to the present, additional initiatives called for
actions to strengthen internal controls over federal programs and
financial management activities. The Chief Financial Officers Act (CFO) of
199014 as expanded by the Government Performance and Results Act of 1993
(GPRA);15 the Government Management Reform Act of 1994;16 and the
President's Management Agenda are a few of these initiatives. Our reports
that discuss these initiatives may not specifically focus on improper
payments and agency efforts to reduce such payments but they do discuss
agency internal controls over various programs, activities, or both and
actions to identify weaknesses in those controls and to design and
implement actions to eliminate those weaknesses. Therefore, there is a
direct relationship between agency activities regarding those initiatives
and agency actions to implement the Improper Payments Act.

In recent testimony before this subcommittee on the fiscal year 2003 U.S.
government financial statements,17 Comptroller General David M. Walker
noted that certain material weaknesses18 in internal control and in
selected accounting and reporting practices resulted in conditions that
continued to prevent GAO from being able to provide the Congress and
American citizens with an opinion as to whether the consolidated financial
statements of the U.S. government are fairly stated in conformity with
U.S. generally accepted accounting principles. One of these material
weaknesses involved improper payments that, based on the limited
information available, exceeded $35 billion annually. The testimony noted

14Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).

15Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993).

16Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994).

17U.S. General Accounting Office, Fiscal Year 2003 U.S. Government
Financial Statements: Sustained Improvement in Federal Financial
Management Is Crucial to Addressing Our Nation's Future Fiscal Challenges,
GAO-04-477T (Washington, D.C.: Mar. 3, 2004).

18A material weakness is a condition that precludes the entity's internal
control from providing reasonable assurance that misstatements, losses, or
noncompliance material in relation to the financial statements or to
stewardship information would be prevented or detected on a timely basis.

that without a systematic measurement of the extent of improper payments,
federal agency management cannot determine (1) if improper payment
problems that require corrective action exist, (2) mitigation strategies
and the appropriate amount of investments to reduce them, and (3) the
success of efforts implemented to reduce improper payments.

GPRA is the centerpiece of a statutory framework that the Congress put in
place during the 1990s to help resolve the long-standing management
problems that have undermined the federal government's efficiency and
effectiveness and to provide greater accountability for results. GPRA was
intended to address several broad purposes, including strengthening the
confidence of the American people in their government; improving federal
program effectiveness, accountability, and service delivery; and enhancing
congressional decision making by providing more objective information on
program performance.

It has resulted in a great deal of progress in making federal agencies
more results oriented, but numerous challenges still exist. Top leadership
commitment and sustained attention to achieving results, both within the
agencies and at OMB, is essential to GPRA implementation.19 Top leadership
commitment is a characteristic of a positive control environment. This
again raises the issue of the adequacy of the control environment at
federal agencies. Leadership commitment is important, not only to GPRA
implementation, but other management activities and initiatives, including
successful implementation of the Improper Payments Act. Our executive
guide on managing improper payments identified a positive control
environment as perhaps the most significant element critical to the
identification, development, and implementation of activities to reduce
improper payments. The guide can provide useful information to leaders in
formulating and implementing their programs to reduce improper payments.

19U.S. General Accounting Office, Results-Oriented Government: GPRA Has
Established a Solid Foundation for Achieving Greater Results, GAO-04-38
(Washington, D.C.: Mar. 10, 2004).

In an October 2003 report on governmentwide efforts to address improper
payment problems,20 we noted that, as part of the President's Management
Agenda, officials at OMB told us that they had met with officials from all
relevant agencies to provide assistance and to ensure that agencies (1)
understood the requirements set forth in its guidance for implementing the
Improper Payments Act, (2) have started to inventory their programs and
activities for significant risk of improper payments, (3) understand the
risk assessment process, and (4) understand the reporting requirements
under the Improper Payments Act. In that report, we concluded that the
governmentwide effort to identify and assess the magnitude of improper
payments, to take actions to reduce those payments, and to publicly report
the results of those efforts is generally in its infancy. We further
reported that although OMB Circular A-11 had required 14 CFO Act agencies
to report selected improper payment information on 44 programs21 to OMB
beginning with their fiscal year 2003 budget submissions, those agencies
had completed risk assessments for only 15 of the programs, despite the
Congress's mandate in 1982 through the Financial Integrity Act that
agencies continually assess their internal control systems and report
annually on their adequacy. Since the issuance of our October 2003 report,
federal agencies have issued their fiscal year 2003 PARs. As I discussed
earlier in this testimony, the fiscal year 2003 PARs typically contained
limited amounts of improper payment information even for those programs
previously cited in Circular A-11 for which a reporting requirement has
existed since agency submissions of their fiscal year 2003 budgets to OMB.

Our executive guide on managing improper payments recognized that in
federal agencies, implementation of a strong system of internal control
will likely not be easy or quick and will require strong support and
continuous action from the President, the Congress, top-level
administration appointees, and agency management officials. Once committed
to a plan of action, they must remain steadfast supporters of the end
goals and their support must be transparent to all. Agencies must be held
accountable for appropriately managing and controlling their programs and
safeguarding program assets. OMB must continue to provide direction and
support to

20U.S. General Accounting Office, Financial Management: Status of the
Governmentwide Efforts to Address Improper Payment Problems, GAO-04-99
(Washington, D.C.: Oct. 17, 2003).

21Our scope in that report was limited to only the 23 CFO Act agencies, of
which 14 agencies and 44 programs were previously cited in OMB Circular
A-11, Section 57. We did not review the Railroad Retirement Board.

agency management in the implementation of governmentwide efforts, such as
those involving improper payments, and conduct appropriate oversight of
federal agency efforts to meet their stewardship and program management
responsibilities. It is also critical that the Congress continue its
oversight, through public hearings such as this one, to make it clear to
agency and OMB officials that efforts to reduce improper payments are
expected and that failure to do so is not an option.

Conclusions	Since 1982, various legislative and administrative initiatives
have focused on and required agency assessments of internal controls over
programs and financial management activities. Although these initiatives
may not specifically target improper payments, by emphasizing internal
controls, they have recognized the important role that internal controls
have in ensuring that federal programs achieve their intended results and
that federal agencies operate them effectively and efficiently. Given this
longstanding emphasis on internal control and the various long-standing
requirements to identify and implement actions to correct control system
weaknesses identified, it is fair to ask two questions. First, is it
reasonable to expect that federal agencies have significant information on
the condition of internal controls over their programs and activities?
Second, should agencies be able to identify their programs and activities
that are susceptible to improper payments and to meet the other
requirements established by the Improper Payments Act? Based on the
legislative and administrative initiatives over the past 20-plus years, I
think that the answer to both is an emphatic yes.

Many positive improvements have resulted from the various initiatives
related to internal control and financial management over the past 20-plus
years. However, I am concerned that we continue to see a trend in agency
actions to address internal control problems. Agencies often get off to a
good start, but they do not sustain their efforts. Given this history and
the unknown and potentially significant magnitude of improper payments
governmentwide, it is clear that we are facing a major management
challenge in adequately addressing the problem. The needed governmentwide
initiatives are in place, they must now be effectively implemented. Key to
this effort is the need for a strong control environment that creates a
culture of accountability and establishes a positive and supportive
attitude toward reducing improper payments.

This concludes my prepared statement. I would be pleased to respond to any
questions that you or other Members of the Subcommittee may have.

Contacts and	For further information, please contact McCoy Williams,
Director, Financial Management and Assurance, at (202) 512-9508, or Tom
Broderick,

Acknowledgments	Assistant Director, at (202) 512-8705. You can also reach
them by e-mail at [email protected] or [email protected]. Individuals
making key contributions to this testimony included Bonnie McEwan and
Donell Ries.

Appendix I

Agencies and Programs for Which OMB Circular A-11 Required Erroneous Payment
Information for Fiscal Year 2003

1. Department of Agriculture

1. Food Stamps

2. Commodity Loan Program

3. National School Lunch and Breakfast

4. Women, Infants, and Children

2. Department of Defense

5. Military Retirement

6. Military Health Benefits

3. Department of Education

7. Student Financial Assistance

8. Title I

4. Department of Health and Human Services

9. Head Start

10. Medicare

11. Medicaid

12. TANF

13. Foster Care - Title IV-E

14. State Children's Insurance Program

15. Child Care and Development Fund

5. Department of Housing and Urban Development

16. Low Income Public Housing

17. Section 8 Tenant Based

18. Section 8 Project Based

19. Community Development Block Grants (Entitlement Grants, States/Small
Cities)

6. Department of Labor

20. Unemployment Insurance

21. Federal Employee Compensation Act

22. Workforce Investment Act

7. Department of the Treasury

23. Earned Income Tax Credit

8. Department of Transportation

24. Airport Improvement Program

25. Highway Planning and Construction

26. Federal Transit - Capital Investment Grants

27. Federal Transit - Formula Grants

Appendix I
Agencies and Programs for Which OMB
Circular A-11 Required Erroneous Payment
Information for Fiscal Year 2003

(Continued From Previous Page)

9. Department of Veterans Affairs

28. Compensation

29. Dependency and Indemnity Compensation

30. Pension

31. Insurance Programs

10. Environmental Protection Agency

32. Clean Water State Revolving Funds

33. Drinking Water State Revolving Funds

11. National Science Foundation

34. Research and Education Grants and Cooperative Agreements

12. Office of Personnel Management

35. Retirement Program (Civil Service Retirement System and Federal
Employees'
Retirement System)

36. Federal Employees Health Benefits Program

37. Federal Employees' Group Life Insurance

13. Railroad Retirement Board

38. Retirement and Survivors Benefits

39. Railroad Unemployment Insurance Benefits

14. Small Business Administration

40. 7(a) Business Loan Program

41. 504 Certified Development Companies

42. Disaster Assistance

43. Small Business Investment Companies

15. Social Security Administration

44. Old Age and Survivors' Insurance

45. Disability Insurance

46. Supplemental Security Income Program

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