Financial Management: Challenges in Meeting Requirements of the  
Improper Payments Information Act (31-MAR-05, GAO-05-417).	 
                                                                 
Fiscal year 2004 marked the first year that federal agencies	 
governmentwide were required to report improper payment 	 
information under the Improper Payments Information Act of 2002  
(IPIA). The increasing scope of reporting over the past several  
years has demonstrated that improper payments are a significant  
and widespread problem in federal agencies, and in the past a	 
limited number of agencies reported in their Performance and	 
Accountability Reports (PAR) annual payment accuracy rates and	 
estimated improper payment amounts. Because of your continued	 
interest in addressing the governmentwide improper payments	 
issue, you asked GAO to report on (1) the extent to which	 
agencies have performed the required assessments to identify	 
programs and activities that are susceptible to significant	 
improper payments and (2) the annual amount estimated for	 
improper payments by the agencies.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-417 					        
    ACCNO:   A20621						        
  TITLE:     Financial Management: Challenges in Meeting Requirements 
of the Improper Payments Information Act			 
     DATE:   03/31/2005 
  SUBJECT:   Accountability					 
	     Erroneous payments 				 
	     Federal agencies					 
	     Federal aid programs				 
	     Federal law					 
	     Federal legislation				 
	     Financial management				 
	     Performance measures				 
	     Reporting requirements				 
	     Risk management					 
	     Federal funds					 
	     Internal controls					 
	     Payments						 
	     Budget obligations 				 

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GAO-05-417

United States Government Accountability Office

GAO	Report to the Chairman, Subcommittee on Government Management, Finance, and
    Accountability, Committee on Government Reform, House of Representatives

March 2005

FINANCIAL MANAGEMENT

  Challenges in Meeting Requirements of the Improper Payments Information Act

                                       a

GAO-05-417

[IMG]

March 2005

FINANCIAL MANAGEMENT

Challenges in Meeting Requirements of the Improper Payments Information Act

                                 What GAO Found

The federal government made progress in identifying programs susceptible
to the risk of improper payments in response to the new IPIA requirements.
The fiscal year 2004 PARs for 29 of 35 federal agencies that are
significant to the U.S. government's consolidated financial statements
show that even with the enhanced emphasis on improper payment reporting
fueled by the new legislation, 6 agencies reported that they did not
perform risk assessments of all their programs.

The magnitude of the governmentwide improper payment problem is still
unknown, because agencies have not yet prepared estimates of improper
payments for all of their programs. In the 29 agency PARs included in
GAO's fiscal year 2004 review, 17 agencies reported over $45 billion of
improper payments in 41 programs governmentwide. This represented almost a
$10 billion, or 27 percent, increase in the amount of improper payments
reported by agencies in fiscal year 2003. This increase was primarily
attributable to changes in the method for estimating and reporting
improper payment amounts in one major program. Looking forward, future
estimates are likely to trend higher because the governmentwide estimate
did not include 12 programs with outlays of $248.7 billion in fiscal year
2004 that were required to annually report improper payments under OMB
Circular No. A-11 during the past 3 years. This included some of the
largest risksusceptible federal programs, such as the Department of Health
and Human Services' Medicaid Program, with outlays exceeding $175 billion
annually, or the Department of Education's Title I Program, with outlays
of over $10 billion annually.

Number of Agencies and Amounts of Improper Payments Reported (Fiscal Years
                                   1999-2004)

Fiscal year

Number of agencies reporting improper paymentsa

                                    8 $20.7

                                    8 $19.6

                                    8 $20.9

                                    7 $19.5

                                    13 $35.7

                                    17 $45.4

Source: GAO.

a Other agencies acknowledged making improper payments in their PARs but
did not disclose dollar amounts.

                 United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
Progress Made but Challenges Remain in Assessing Programs for

Risk of Significant Improper Payments
Magnitude of Improper Payments Is Still Unknown
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

1 3 4

8

9 11 11 12

Appendixes                                                              
                Appendix I:             Scope and Methodology              15 
                             Agencies and Related Programs for Which OMB   
               Appendix II:                  Circular No.                  
                             A-11 Required Erroneous Payment Information   16 
                            Agencies and Related Programs Included in Our  
              Appendix III:                   Review of                    
                                        Fiscal Year 2004 PARs              18 
                            Improper Payment Estimates Reported in Agency  
              Appendix IV:                      Fiscal                     
                                       Years 2003 and 2004 PARs            21 
                Appendix V:   Comments from the Office of Management and   28 
                                                Budget                     
              Appendix VI:      GAO Contacts and Staff Acknowledgments     32 

Table Table 1:	Programs Required to Report under A-11 and Projected Year
of Improper Payment Estimates

Contents

Abbreviations

CFO Chief Financial Officer
IPIA Improper Payments Information Act of 2002
MD&A Management Discussion and Analysis
OMB Office of Management and Budget
PAR Performance and Accountability Report
PMA President's Management Agenda

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separately.

A

United States Government Accountability Office Washington, D.C. 20548

March 31, 2005

The Honorable Todd R. Platts

Chairman

Subcommittee on Government Management, Finance, and Accountability
Committee on Government Reform House of Representatives

Dear Mr. Chairman:

Federal agencies expended a record $2.3 trillion through thousands of
programs and activities to address the needs of the American people in
fiscal year 2004. As the steward of taxpayer dollars, the federal
government is accountable for how its agencies and grantees spent this
money, including the safeguarding of federal funds from improper payments.
Our work over the past several years has demonstrated that improper
payments are a significant and widespread problem in the federal
government, with only a limited number of agencies reporting in their
Performance and Accountability Reports (PAR) the annual payment accuracy
rates and estimated improper payment amounts. Fiscal year 2004 marked the
first year that federal agencies governmentwide were required to report
improper payment information under the Improper Payments Information Act
of 2002 (IPIA).1 The IPIA raised improper payments to a new level of
importance by requiring agency heads, based on guidance from the Office of
Management and Budget (OMB),2 to identify programs and activities
susceptible to improper payments, estimate the amount of their improper
payments, and report on the amount of and their actions to reduce their
improper payments.

An improper payment is defined by the IPIA as an amount that should not
have been paid or was paid for an incorrect amount. Specifically, improper
payments include inadvertent errors, such as duplicate payments and
calculation errors; payments for unsupported or inadequately supported
claims; payments for services not rendered or rendered to ineligible
beneficiaries; and payments resulting from fraud and abuse. The OMB

1Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).

2OMB Memorandum M-03-13, "Improper Payments Information Act of 2002
(Public Law 107300)," May 21, 2003.

implementation guidance requires that estimates, and if applicable, a
corrective action report, be included in federal agencies' PARs beginning
with fiscal year 2004.

Prior to the IPIA, OMB Circular No. A-11, Preparation and Submission of
Budget Estimates, Section 57, "Information on Erroneous Payments,"3
required 46 programs in 15 agencies to annually report improper payment
information. Last year we testified on the federal agencies that reported
under OMB Circular No. A-11.4 We noted that federal agency fiscal year
2003 PARs typically contained limited amounts of improper payment
information. Historically, relatively few federal agencies and their
components have publicly reported improper payment information. Estimates
reported for fiscal year 2003 were about $36 billion annually for major
federal benefit programs required to report under OMB Circular No. A-11.
These programs managed payments in excess of $1.2 trillion annually.
Importantly, this estimate did not account for payments made by all
federal programs and activities, which totaled over $2.1 trillion in
fiscal year 2003. Not only did the enactment of the IPIA expand the range
of agencies, it also expanded the programs agencies are required to assess
for improper payments to include all federal programs and payments.

Because of your continued interest in addressing the governmentwide
improper payments issue, you asked us to report on the progress being made
by agencies in complying with certain requirements of the IPIA. This
report summarizes (1) the extent to which agencies have performed the
required assessments to identify programs and activities that are
susceptible to significant improper payments and (2) the annual amount
estimated for improper payments by the agencies.

To respond to your request, we conducted a review of improper payment
information reported by agencies in their fiscal year 2004 PARs. We
further reviewed OMB guidance on implementation of the IPIA and its report
on the results of agency-specific reports, significant findings, agency
accomplishments, and remaining challenges. We did not assess the

3Section 57 was eliminated from OMB Circular No. A-11. See OMB Circular
No. A-11, Transmittal Memorandum #77, July 25, 2003. App. I lists the 15
agencies and 46 programs previously cited in Section 57.

4GAO, Financial Management: Fiscal Year 2003 Performance and
Accountability Reports Provide Limited Information on Governmentwide
Improper Payments, GAO-04-631T (Washington, D.C.: Apr. 15, 2004).

effectiveness of the agencies' efforts or independently validate the data
that they or OMB reported. The results of our review are detailed in this
report. We conducted our work from November 2004 through February 2005 in
accordance with U.S. generally accepted government auditing standards.
Appendix I contains further details on our scope and methodology. OMB
provided written comments on a draft of this report that are reprinted in
appendix V.

Results in Brief	In response to the new IPIA requirements, agencies
overall made progress in identifying programs susceptible to the risk of
improper payments. At the same time, our reviews of the fiscal year 2004
PARs for 29 of 35 federal agencies5 that are significant to the U.S.
government's consolidated financial statements show that even with the
enhanced emphasis on improper payment reporting fueled by the new
legislation, certain agencies did not perform risk assessments of all
their programs. Specifically, 23 of the 29 agencies we reviewed reported
that they had completed risk assessments for all programs and activities.

The magnitude of the governmentwide improper payment problem is still
unknown because, in addition to not assessing all programs, the agencies
had not yet prepared estimates of significant improper payments for all of
the programs that they determined were susceptible to the risk of improper
payments. In the 29 agency PARs included in our fiscal year 2004 review,
17 agencies reported over $45 billion of improper payments in 41 programs.
This represented almost a $10 billion, or 27 percent, increase in the
dollar amount of improper payments reported by agencies in fiscal year
2003. However, we determined that this increase was primarily attributable
to changes in the method for estimating and reporting improper payment
amounts in one program. Further, the governmentwide estimate did not
include 12 programs with total outlays of $248.7 billion in fiscal year
2004 that were required to annually report improper payments under OMB
Circular No. A-11 during the past 3 years. This included some of the
largest risk-susceptible federal programs, such as the Department of
Health and Human Services' Medicaid Program, with outlays exceeding $175
billion annually, or the Department of Education's Title I Program, with
outlays of

5See Treasury Financial Manual, vol. 1, part 2, ch. 4700, for a list of
the 35 agencies. Six of the 35 agencies had not issued PARs as of our
fiscal year 2004 audit report on the U.S. government's consolidated
financial statements, dated December 14, 2004; therefore, these agencies
were not included in our review.

over $10 billion annually. Eight of these 12 programs reported that they
would be able to estimate and report on improper payments sometime within
the next 4 years, but the remaining 4 were silent as to when they would
report estimates in the future.

We are making three recommendations to OMB to help ensure successful
implementation of IPIA requirements. In its comments, OMB emphasized that
in fiscal year 2004, federal agencies established a strong foundation for
measuring improper payments, identifying and implementing the necessary
corrective actions, and tracking success over time. OMB also pointed out
that there are already procedures in place for the 15 federal agencies
under the new President's Management Agenda (PMA) initiative to meet the
objectives of our recommendations and sufficient incentives and
disincentives for ensuring that agencies meet the necessary IPIA
requirements. However, our recommendations focus on all federal agencies
meeting the IPIA requirements and are directed at any agency that does not
do so or agencies that may benefit from incentives such as gain sharing to
fund efforts to reduce improper payments.

Background	The PMA issued in 2001 targeted improper payments as an area
with opportunities for improvement. The PMA included five governmentwide
initiatives-one of which is improved financial management, which expressly
addresses improper payments as a priority. This initiative called for the
administration to establish a baseline on the extent of erroneous
payments. Under it, agencies were to include in their 2003 budget
submissions to OMB information on improper payment rates, including actual
and target rates where available, for benefit and assistance programs over
$2 billion. The PMA also noted that using this information, OMB will work
with agencies to establish goals to reduce improper payments identified in
their programs.

In July 2001, as part of its efforts to advance the PMA initiative, OMB
revised Circular No. A-11 to require 16 federal agencies (15 of the then
24 Chief Financial Officer's (CFO) Act agencies and the Railroad
Retirement Board) to submit improper6 payment data, assessments, and
action plans for about 50 programs to OMB with their initial budget
submissions. Specifically, the circular required that agencies submit
information

6OMB's guidance uses the term erroneous payments rather than improper
payments. We consider the terms synonymous.

including estimated improper payment rates, target rates for future
reductions in these payments, the types and causes of these payments, and
variances from targets or goals established. In addition, agencies were to
provide a description and assessment of the current methods for measuring
the rate of improper payments and the quality of data resulting from these
methods. Agencies were to first include this improper payment information
in their initial fiscal year 2003 budget submissions. A June 2002 revision
to the circular removed the Agency for International Development from the
list and reduced the number of programs for which improper payment
information was required to 46. (App. II lists the agencies and programs.)

In November 2002, the Congress passed the IPIA. The law requires agency
heads to annually review all programs and activities that they administer
and identify those that may be susceptible to significant improper
payments.7 Once agencies identify their susceptible programs, the act
requires them to estimate and report on 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
annually to the Congress on the actions they are taking to reduce those
payments. The report is also to 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 act further requires OMB to prescribe guidance for federal agencies to
use in implementing the act. OMB issued this guidance in Memorandum M03-13
in May 2003. It requires use of a systematic method to annually review and
identify those programs and activities that are susceptible to significant
improper payments. OMB guidance defines significant improper payments as
annual improper payments in any particular program exceeding both 2.5
percent of program payments and $10 million. The OMB guidance then
requires agencies to estimate the annual amount of improper payments using
statistically valid techniques for each susceptible program

7The law defines "payment" as any payment (including a commitment for
future payment, such as a loan guarantee) that is (1) made by a federal
agency, a federal contractor, or a governmental or other organization
administering a federal program or activity and (2) derived from federal
funds or other federal resources or that will be reimbursed from federal
funds or other federal resources. The law defines an "improper payment" as
(1) 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 and (2) any payment to an ineligible recipient, any payment
for an ineligible service, any duplicate payment, payment for services not
received, and any payment that does not account for credit for applicable
discounts.

or activity. For those agency programs determined to be susceptible to
significant improper payments and with estimated annual improper payments
greater than $10 million, the IPIA and related OMB guidance require each
agency to report the results of its improper payment efforts in the
Management Discussion and Analysis (MD&A) section of its PAR for fiscal
years ending on or after September 30, 2004. The IPIA requires the
following information in their reports:

o 	a discussion of the causes of the improper payments identified, actions
taken to correct those causes, and results of the actions taken to address
those causes;

o 	a statement of whether the agency has the information systems and other
infrastructure it needs in order to reduce improper payments to the
agency's targeted levels;

o 	if the agency does not have such systems and infrastructure, a
description of the resources the agency has requested in its most recent
budget submission to obtain the necessary information systems and
infrastructure; and

o 	a description of the steps the agency has taken and plans to take to
ensure that agency managers (including the agency head) are held
accountable for reducing improper payments.

OMB's guidance in M-03-13 requires that three additional things be
included in the report:

o 	a discussion of the amount of actual erroneous payments that the agency
expects to recover and how it will go about recovering them;

o 	a description of any statutory or regulatory barriers that may limit
the agency's corrective actions in reducing erroneous payments; and

o 	provided the agency has estimated a baseline erroneous payment rate for
the program, a target for the program's future erroneous payment rate that
is lower than the agency's most recent estimated error rate.

On July 22, 2004, OMB, working with the CFO Council's Improper Payments
Committee, issued a standardized reporting format, or framework, for
reporting IPIA information. This framework was included as Attachments 2
and 3 to OMB Memorandum M-04-20, "Fiscal Year 2004

Performance and Accountability (PAR) and Reporting Requirements for the
Financial Report of the United States Government." To satisfy the
reporting requirements of the IPIA for fiscal year 2004, the framework
instructed agencies to provide a brief summary of both what they have
accomplished and what they plan to accomplish in the MD&A portion of the
fiscal year 2004 PAR. All other required reporting details are to be
included in an appendix to the PAR. The framework for the information
reported in the appendix incorporates the requirements set forth in the
law and further illustrates the reporting format required in OMB's
implementation guidance. Under accelerated financial reporting
requirements of the PMA, agency fiscal year 2004 PARs were due November
15, 2004. Accordingly, the first set of reports representing the results
of agencies' assessing improper payments for all federal programs in
accordance with the IPIA and OMB guidance were due in November 2004.

In August 2004, OMB established Eliminate Improper Payments as a new
program-specific initiative. 8 With this new program initiative, agencies
are to measure their improper payments annually, develop improvement
targets and corrective actions, and track the results annually to ensure
the corrective actions are effective. This initiative is also to have its
own scorecard requirements and rating beginning with fiscal year 2005.
With the establishment of this new program-specific initiative, agency
efforts to address improper payment issues will no longer be tracked under
the governmentwide initiative, Improved Financial Performance.

In our December 2004 report on the U.S. government's consolidated
financial statements for the fiscal years ended September 30, 2004 and
2003, which includes our associated opinion on internal control, we
reported that while most agencies acknowledged the IPIA reporting
requirements in their PARs, they did not always indicate whether they had

8The PMA issued in 2001 included nine program initiatives, including
reform of food aid programs. When OMB issued this August 2004 report to
federal employees, the reform of food aid program initiative was the only
initiative not carried forward from the 2001 PMA. OMB also added two new
program initiatives-(1) Strengthen Real Property Management and Optimize
the Use of Federal Property and (2) Eliminate Improper Payments. As a
result to these changes, 10 program-specific initiatives are currently in
place under the PMA.

completed agencywide assessments, and they did not estimate improper
payments for all of their susceptible9 programs.

  Progress Made but Challenges Remain in Assessing Programsfor Risk of
  Significant Improper Payments

In response to the new requirements of the IPIA, agencies overall made
progress in identifying programs susceptible to the risk of improper
payments. At the same time, our reviews of the fiscal year 2004 PARs for
29 of 35 federal agencies10 that are significant to the U.S. government's
consolidated financial statements suggest that even with the enhanced
emphasis on improper payment reporting fueled by the new legislation,
certain agencies have not yet performed risk assessments of all their
programs. Appendix III lists the agencies included in this review.

In its guidance on implementing the IPIA, OMB required agencies to
institute a systematic method of inventorying all programs and activities
and identifying those the agency believes are susceptible to the risk of
significant error. OMB further instructed agencies to describe, in their
PARs, the risk assessments performed.

We determined that 23 of the 29 agencies reviewed reported that they had
completed risk assessments for all programs and activities. Of the 15
agencies with prior reporting requirements under OMB Circular No. A-11, 12
reported that they had performed comprehensive inventories and assessed
the risk of improper payments for all their programs and activities. Three
of the 15 agencies stated that their risk assessments were not complete
for all programs and activities. Of those 14 agencies without prior
reporting requirements, 11 agencies reported that they had completed risk
assessments for all programs and activities, whereas 3 agencies reported
that they had not.

Recognizing weaknesses in agency risk assessments, three agency auditors
cited noncompliance with the IPIA in their annual auditor's reports
included in the agency PARs. For example, two agency auditors each
reported that their agency's risk assessment did not consider all payment
types or programs. Another auditor reported the agency did not institute a

9In determining which programs are susceptible to significant improper
payments, OMB defines significant erroneous payments as those annual
erroneous payments in a program exceeding both 2.5 percent of program
payments and $10 million.

10See Treasury Financial Manual, vol. 1, part 2, ch. 4700, for a list of
the 35 agencies.

systematic method of reviewing all programs and identifying those it
believed were susceptible to significant erroneous payments.

  Magnitude of Improper Payments Is Still Unknown

Once agencies have identified programs that may be susceptible to
significant improper payments, developing statistically valid estimates of
the amounts of improper payments for their programs and activities has
been a further challenge. Appendix IV lists the 29 agencies and 70
programs for which we reviewed fiscal year 2004 PARs for improper payment
reporting. In the 29 agency PARs included in our review, 17 agencies
reported over $45 billion of improper payments in 41 programs. This
represented almost a $10 billion, or 27 percent, increase in the dollar
amount of improper payments reported by agencies in fiscal year 2003.
However, we determined that this increase was primarily attributable to
changes in the method for estimating and reporting improper payment
amounts in the Department of Health and Human Services' Medicare Program.
The 24 agency programs with no prior reporting requirements reported
improper payment estimates that did not significantly increase the
governmentwide total.

As discussed earlier, OMB Circular No. A-11 has required certain agencies
to report selected improper payment information on 46 programs to OMB
beginning 3 years ago with their fiscal year 2003 budget submissions. We
found that for 34 of the programs, agencies reported estimates in their
fiscal year 2004 PARs or stated that improper payment amounts were
insignificant.

As shown in table 1, the governmentwide estimate did not include the
remaining 12 programs with total outlays of $248.7 billion in 2004. This
included some of the largest risk-susceptible federal programs, such as
the Department of Health and Human Services' Medicaid Program, with
outlays exceeding $175 billion annually, or the Department of Education's
Title I Program, with outlays of over $10 billion annually.

 Table 1: Programs Required to Report under A-11 and Projected Year of Improper
               Payment Estimates Target fiscal year for estimate

Program

Fiscal year 2004 outlays

(in billions) 2005 2006 2007 2008

Did not report

      Department of Agriculture - Agriculture Marketing and     $8.8  X     
                           Assistance                                       
     Department of Health and Human Services - Foster Care -      4.7 X     
                           Title IV-E                                       
Department of Health and Human Services - State Children's     4.6 X     
                        Insurance Program                                   
    Department of Health and Human Services - Child Care and      4.8 X     
                        Development Fund                                    
Small Business Administration - 7(a) Business Loan Program      .7 X     
       Department of Health and Human Services - Medicaid      175.3    X   
           Department of Agriculture - School Programs            8.4     X 
    Department of Agriculture - Women, Infants, and Children      4.8       X 
                             Program                                        
         Department of Labor - Workforce Investment Act           3.1       
                Department of Education - Title I               10.3        
       Department of Health and Human Services - Temporary      17.7        
                           Assistance                                       
                       for Needy Families                                   
     Department of Housing and Urban Development - Community      5.5       
                     Development Block Grant                                
                              Total                            $248.7 5 1 1 1 

Sources: Cited agencies' fiscal year 2004 PARs and OMB.

The table further shows that of these 12 programs, 8 reported that they
would be able to estimate and report on improper payments sometime within
the next 4 years, but could not do so now. The other 4 programs in 4
agencies did not estimate improper payment amounts for their programs and
were silent as to whether they would report estimates in future reports.
As a result, improper payments for several large risk-susceptible programs
will not become transparent for several or an undetermined number of
years, although these agencies were required to report such information
since their fiscal year 2003 budget submissions. Moreover, by only looking
at those agencies significant to the U.S. consolidated financial
statements, this estimate does not include all of the agencies subject to
the IPIA.

OMB reported that in certain risk-susceptible programs, agencies were
unable to determine the rate or amount of improper payments due to
measurement challenges as well as time and resource constraints, which OMB
expects to be resolved in the future. Although OMB reported that the

$45 billion in improper payments will be used as a baseline on which
shortand long-term program improvements and strategies will be based, it
recognizes that fiscal year 2005 reductions in improper payments will be
affected by outlay changes as well as the identification of new improper
payments as additional programs are measured and methodologies for
currently measured programs are enhanced.

Conclusions	Measuring improper payments and designing and implementing
actions to reduce or eliminate them are not simple tasks. The ultimate
success of the governmentwide effort to reduce improper payments depends,
in part, on each federal agency's continuing diligence and commitment to
comply fully with the requirements of the act and the related OMB
guidance. 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. Without such efforts, the likelihood of designing and
implementing actions governmentwide to reduce or eliminate improper
payments is doubtful. Fulfilling the requirements of the IPIA will require
sustained attention to implementation and oversight to monitor whether
desired results are being achieved.

  Recommendations for Executive Action

We are making three recommendations to help ensure the successful
implementation of the Improper Payments Information Act of 2002 and its
goal of enhancing the accuracy and integrity of federal payments.
Specifically, we recommend that the Director of OMB:

o 	Require those agencies that did not address the IPIA requirements or
did not perform risk assessments of all of their programs and activities
to establish time frames and identify resources needed to perform risk
assessments and satisfy reporting requirements.

o 	Develop a plan to address the resource needs of those agencies that did
not perform risk assessments or satisfy reporting requirements.

o 	Consider as part of the budget process, for any agency that OMB deems
to have not taken the IPIA requirements seriously or that has lagged
behind, the feasibility of disincentives for poor performance, such as

reductions in funds for the program involved or adding incentives such as
gain sharing for making substantive progress.

  Agency Comments and Our Evaluation

In its written comments on a draft of this report, which are enclosed in
appendix V, OMB emphasized that in fiscal year 2004, federal agencies
established a strong foundation for measuring improper payments,
identifying and implementing the necessary corrective actions, and
tracking success over time. OMB's response further discussed key findings
included in its report, Improving the Accuracy and Integrity of Federal
Payments, which was issued on January 25, 2005.

With regard to our first recommendation that agencies establish time
frames and identify resources needed to perform risk assessments and
satisfy reporting requirements, OMB stated that pursuant to the PMA
initiative called Eliminate Improper Payments, federal agencies are
already required to submit relevant time frames and account for the
resources necessary to complete planned actions. Further, OMB stated that
the remaining risk assessments to be completed correlate to programs with
relatively small outlays. While we view the PMA initiative as a positive
action, it applies to 15 agencies, 3 of which we found had not yet
assessed all their programs. Three other agencies-the Farm Credit System
Insurance Corporation, the National Credit Union Administration, and the
Pension Benefit Guaranty Corporation-which are not included in the PMA
initiative and therefore are not required to establish time frames and
account for needed resources, have outlays that are significant to the
U.S. government's consolidated financial statements and were silent with
respect to IPIA requirements in their fiscal year 2004 PARs. In addition
to these three agencies, the PMA initiative would also not cover those
agencies that while not significant to the U.S. government's consolidated
financial statements, are subject to the IPIA. Our recommendation is
directed to the broader range of agencies.

Regarding our second recommendation that OMB develop a plan to address
resource needs of agencies that did not perform risk assessments or
satisfy reporting requirements, OMB stated that agency plans for
addressing IPIA reporting requirements are closely considered in
identifying agency resource needs and preparing the President's Budget.
While we agree with OMB on that point, as discussed in our response to
OMB's comments on the first recommendation, certain agencies are not
required to submit plans that include time frames and resource needs to

OMB. As a result, resource needs may not be addressed in the budget
process.

With respect to our third recommendation that it consider using incentives
and disincentives, as applicable, for quick and timely action for meeting
the IPIA requirements, OMB offered the view that the requirements of the
PMA and inspector general reviews of agency IPIA activities provide
sufficient incentive for ensuring that agencies meet the necessary
requirements. We agree that these requirements will help ensure that
agencies take the IPIA seriously. Our recommendation is directed at any
agency that does not do so or agencies that may benefit from incentives
such as gain sharing to fund efforts to reduce improper payments. Again,
as discussed above, while the major 15 agencies are covered by the PMA, 3
of these had not yet assessed all their programs and a number of agencies
not covered under the PMA initiative, but significant to the U.S.
government's consolidated financial statements, were silent with respect
to the IPIA requirements.

OMB's written comments and our evaluation of one comment not addressed
above are presented in appendix V.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its date. At that time, we will send copies of the report to interested
congressional committees. We will also be sending copies to the Director
of the Office of Management and Budget and the heads of the agencies
included in our scope of review. We will make copies available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at http://www.gao.gov.

Should you or your staff have any questions on matters discussed in this
report, please contact me at (202) 512-6906 or [email protected].

Additional contacts and major contributors to this report are provided in
appendix VI.

Sincerely yours,

McCoy Williams Director, Financial Management and Assurance

Appendix I

Scope and Methodology

This report is based on our review of agency fiscal year 2004 Performance
and Accountability Reports (PAR). We reviewed the fiscal year 2004 PARs of
29 of 35 agencies1 that are significant to the U.S. government's
consolidated financial statements to obtain information on the status of
their implementation of the Improper Payments Information Act of 2002
(IPIA) and the related Office of Management and Budget (OMB)
implementation guidance. We paid particular attention to the 15 agencies
with prior improper payment reporting requirements for 46 of their
programs under OMB Circular No. A-11, Section 57. A list of the agencies
with prior reporting requirements is presented in appendix II. In
addition, we reviewed relevant agency documents, including strategic
plans, agency performance plans and reports, agency audit reports, and
reports from agency program partners.2

We completed reviews of fiscal year 2004 PARs for 29 agencies identifying
70 key programs. Appendix III lists the agencies and programs included in
this review. To supplement our review and analysis, we contacted agencies
to clarify responses, requested additional information, and updated the
initial responses. We did not determine the validity of representations
made or the documentation provided.

We performed our work in Washington, D.C., from November 2004 through
February 2005 in accordance with U.S. generally accepted government
auditing standards.

1See Treasury Financial Manual, vol. 1, part 2, ch. 4700, for a list of
the 35 agencies. Six of the 35 agencies had not issued PARs as of our
fiscal year 2004 audit report on the U.S. government's consolidated
financial statements, dated December 14, 2004; therefore, these agencies
were not included in our review.

2Program partners can include other agencies or intermediaries responsible
for carrying out different aspects of the program and might include
federal agencies, states or localities, grant recipients, participating
financial institutions, regulated bodies, and contractors.

Appendix II

Agencies and Related Programs for Which OMB Circular No. A-11 Required Erroneous
Payment Information

Agency Program or activity

1. Department of Agriculture 1. Food Stamp Program

2. Commodity Loan Program

3. National School Lunch and Breakfast

4. Women, Infants, and Children

2. Department of Defense 5. Military Retirement Fund

6. Military Health Benefits

3. Department of Education 7. Student Financial Assistance

8. Title I

4. Department of Health and Human 9. Head Start
Services

10. Medicare

11. Medicaid

12. Temporary Assistance for Needy Families

13. Foster Care - Title IV-E

14. State Children's Insurance Program

15. Child Care and Development Fund

5. Department of Housing and Urban 16. Low Income Public Housing
Development

17. Section 8 Tenant Based

18. Section 8 Project Based

19. Community Development Block Grants

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

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

Appendix II Agencies and Related Programs for Which OMB Circular No. A-11
Required Erroneous Payment Information

(Continued From Previous Page)

Agency Program or activity

11. National Science Foundation 34. Research and Education Grants and
Cooperative Agreements

12. Office of Personnel Management 35. Retirement Program (Civil Service
Retirement Systems 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

Source: GAO.

Appendix III

Agencies and Related Programs Included in Our Review of Fiscal Year 2004 PARs

Agency Program or activity

1. Agency for International 1. All programs and activities
Development

2. Department of Agriculture 2. Marketing Assistance Loan Program
(previously
Commodity Loan Program)

3. Food Stamp Program

4. School Programs

5. Women, Infants, and Children

6. Child and Adult Care Food Program

7. Wildland Fire Suppression Management

8. Rental Assistance Program

9. Federal Crop Insurance Corporation

10. Farm Security and Rural Investment

3. Department of Commerce 11. All programs and activities

4. Department of Defense 12. Military Retirement Fund

13. Military Health Benefits

5. Department of Education 14. Student Financial Assistance

15. Title I

6. Department of Energy 16. All programs and activities

7. Environmental Protection 17. Clean Water State Revolving Funds
Agency 18. Drinking Water State Revolving Funds

8. Farm Credit System 19. All programs and activities
Insurance Corporation

9. Federal Communications 20. Universal Service Fund's Schools and
Libraries
Commission 21. High Cost Support Programs

10. General Services 22. All programs and activities
Administration

11. Department of Health and 23. Medicaid
Human Services 24. Medicare

25. Head Start

26. Temporary Assistance for Needy Families

27. Foster Care-Title IV-E

28. State Children's Insurance Program

29. Child Care and Development Fund

12. Department of Homeland 30. All programs and activities
Security

Appendix III Agencies and Related Programs Included in Our Review of
Fiscal Year 2004 PARs

(Continued From Previous Page)

Agency Program or activity

13. Department of Housing 31. Low Income Public Housing and Urban
Development 32. Section 8 Tenant Based

33. Section 8 Project Based

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

35. Federal Housing Administration's Single Family Acquired Asset
Management System

14. Department of the Interior 36. All programs and activities

15. Department of Justice 37. All programs and activities

16. Department of Labor 38. Unemployment Insurance

39. Federal Employees' Compensation Act

40. Workforce Investment Act

17. National Aeronautics and 41. All programs and activities Space
Administration

18. National Credit Union 42. All programs and activities Administration

19. National Science 43. Research and Education Grants and Cooperative
Foundation Agreements

20. Nuclear Regulatory 44. All programs and activities Commission

21. Office of Personnel 45. Retirement Program (Civil Service Retirement

Management System and Federal Employees Retirement System)

46. Federal Employees Health Benefits Program

47. Federal Employees Group Life Insurance

22. Pension Benefit Guaranty 48. All programs and activities Corporation

23. Railroad Retirement Board 49. Retirement and Survivors Benefits

50. Railroad Unemployment Insurance Benefits

24. Small Business 51. 7(a) Business Loan Program Administration 52. 504
Certified Development Companies

53. Disaster Assistance

54. Small Business Investment Companies

25. Social Security 55. Old Age and Survivors' Insurance Administration
56. Disability Insurance

57. Supplemental Security Income Program

Appendix III Agencies and Related Programs Included in Our Review of
Fiscal Year 2004 PARs

(Continued From Previous Page)

                           Agency Program or activity

26. Department of State 58. International Narcotic and Law Enforcement
Affairs-Narcotics Program

59. International Information Program-U.S. Speaker and Specialist Program

60. Vendor Payments

27. Department of 61. Airport Improvement Program Transportation 62.
Highway Planning and Construction

63. Federal Transit-Capital Investment Grants

64. Federal Transit-Formula Grants

28. Department of the 65. Earned Income Tax Credit Treasury

29. Department of Veterans 66. Compensation Affairs 67. Dependency and
Indemnity Compensation

68. Education Programs

69. Pension

70. Insurance Programs

Source: GAO.

Appendix IV

Improper Payment Estimates Reported in Agency Fiscal Years 2003 and 2004 PARs

Improper payments reported

                                            Agency Programs that the     Will 
                                            reported agency reported estimate 
                                         it had were not susceptible   within 
                                             assessed to significant the next 
                                               all programs improper          
                                                            payments  6 years

2003 (in millions)

                                      2004
                               (in millions) A-11

                           Agency Program or activity

1.	Agency for International Development

1. All programs and activities

                                   0.00.0 X X

     2.   Department of     2.         Marketing         $153.0    0.0    X   
            Agriculture             Assistance Loan                      
                                  Program (previously                    
                                     Commodity Loan                      
                                        Program)                         

3.	 Food Stamp 1,419.0a $1,613.4 X Program

4. School Programs 0.0 0.0 X

5. Women, Infants, and 0.0 0.0 X Children

6. Child and Adult 0.0 0.0 Care Food Program

7. Wildland Fire 0.0 0.0 Suppression Management

8. Rental Assistance 0.0 0.0b Unknown Program

9. Federal Crop 0.0 125.0 Insurance Corporation

10. Farm Security and 0.0 0.0b Unknown Rural Investment

3. Department of 11. All programs and 0.0 0.0 X X Commerce activities

4. Department of All programs and X Defense activities

12. Military Retirement 33.1 34.1 X Fund

13. Military Health 33.2a 100.1 X Benefits

Appendix IV Improper Payment Estimates Reported in Agency Fiscal Years
2003 and 2004 PARs

                         (Continued From Previous Page)

Improper payments reported

                                            Agency Programs that the     Will 
                                            reported agency reported estimate 
                                         it had were not susceptible   within 
                                             assessed to significant the next 
                                               all programs improper          
                                                            payments  6 years

2003 (in millions)

                                      2004
                               (in millions) A-11

                           Agency Program or activity

5. Department of All programs and X Education activities

14. Student Financial 482.5 797.0 X Assistance

15. Title I 0.0 0.0b X Unknown

6. Department of 16. All programs and 13.7a 20.3 X Energy activities

7. Environmental Protection Agency

17. Clean Water State Revolving Funds

                                   0.0 10.3 X

18. Drinking Water State Revolving Funds

                                   0.0 0.0c X

     8.     Farm Credit      19. All programs and     0.0    0.0      Unknown 
               System             activities                       
             Insurance                                             
            Corporationd                                           

9.	Federal Communications Commission All programs and activities

                                       X

20. Universal Service Fund's Schools and Libraries

                                   0.0 0.0 X

21. High Cost Support 0.0 0.0 X Programs

10. General 22. All programs and 0.0 0.0 X X Services activities
Administration

Appendix IV Improper Payment Estimates Reported in Agency Fiscal Years
2003 and 2004 PARs

                         (Continued From Previous Page)

Improper payments reported

                                            Agency Programs that the     Will 
                                            reported agency reported estimate 
                                         it had were not susceptible   within 
                                             assessed to significant the next 
                                               all programs improper          
                                                            payments  6 years

2003 (in millions)

                                      2004
                               (in millions) A-11

                           Agency Program or activity

11. Department of Health and Human Services All programs and activities

                                       X

23. Medicaid 0.0 0.0 X

24. Medicare 11,600.0 21,700.0 X

25. Head Start 0.0 255.0 X

26. Temporary 0.0 0.0b X Unknown Assistance for Needy Families

27. Foster Care-Title 0.0 0.0 X IV-E

28. State Children's 0.0 0.0 X Insurance Program

29. Child Care and 0.0 0.0 X Development Fund

12. Department of 30. All programs and 0.0 0.0 X X Homeland activities
Security

13. Department of Housing and Urban Development All programs and
activities

                                       X

31. Low Income Public Housing

                                 650.0 356.0 X

32. Section 8 Tenant 1,215.0 840.0 X Based

33. Section 8 Project 662.0 511.0 X Based

                 34. Community    0.0        0.0b            X        Unknown 
        Development Block                                      
       Grant (Entitlement                                      
      Grants, States/Small                                     
                       Cities)                                 

35. Federal Housing        0.0        26.1 
Administration's                  
Single Family                     
Acquired Asset                    
Management                        
System                            

14. Department of 36. All programs and 0.0 0.0 X X the Interior activities

Appendix IV Improper Payment Estimates Reported in Agency Fiscal Years
2003 and 2004 PARs

                         (Continued From Previous Page)

Improper payments reported

                                            Agency Programs that the     Will 
                                            reported agency reported estimate 
                                         it had were not susceptible   within 
                                             assessed to significant the next 
                                               all programs improper          
                                                            payments  6 years

2003 (in millions)

                                      2004
                               (in millions) A-11

                           Agency Program or activity

15. Department of 37. All programs and 0.0 0.0 X X Justice activities

16. Department of All programs and X Labor activities

38. Unemployment 4,225.0 3,861.0 X Insurance

39. Federal Employees' 9.1 6.4 X Compensation Act

40. Workforce 3.1 0.0b X Unknown Investment Act

     17.        National       41. All programs and    0.0    0.0    X      X 
              Aeronautics           activities                           
               and Space                                                 
           Administration                                                

18. National Credit 42. All programs and 0.0 0.0 Unknown Union activities
Administrationd

19.     National       43. Research and       0.0     4.4       X 
           Science          Education Grants                   
           Foundation       and Cooperative                    
                               Agreements                      

20. Nuclear 44. All programs and 0.0 0.0 X X Regulatory activities
Commission

21. Office of Personnel Management All programs and activities

                                       X

45. Retirement Program (Civil Service Retirement System and Federal
Employees Retirement System)

                                 177.3 197.7 X

46. Federal Employees 28.2 86.1 X Health Benefits Program

47. Federal Employees 0.4 2.1 X Group Life Insurance

Appendix IV
Improper Payment Estimates Reported in
Agency Fiscal Years 2003 and 2004 PARs

                         (Continued From Previous Page)

Improper payments reported

                                            Agency Programs that the     Will 
                                            reported agency reported estimate 
                                         it had were not susceptible   within 
                                             assessed to significant the next 
                                               all programs improper          
                                                            payments  6 years

2003
(in millions)

                                      2004
                               (in millions) A-11

                           Agency Program or activity

22. Pension Benefit 48. All programs and 0.0 0.0 Unknown Guaranty
activities Corporationd

23. Railroad
Retirement
Board

All programs and activities

                                       X

49. Retirement and
Survivors Benefits

                                 168.3 172.8 X

50. Railroad 2.8 3.3 X
Unemployment
Insurance Benefits

24. Small Business All programs and X
Administration activities

51. 7(a) Business Loan 13.0 0.0b X
Program

52. 504 Certified 0.0 0.0e X
Development
Companies

53. Disaster Assistance 0.0 1.1 X

54. Small Business 0.0 129.0 X
Investment
Companies

25. Social Security All programs and X
Administration activities

55. Old Age and 600.0 1,707.0 X
Survivors' Insurance

56. Disability Insurance 340.0 0.0c X

57. Supplemental 2,740.0 2,639.0 X
Security Income
Program

Appendix IV
Improper Payment Estimates Reported in
Agency Fiscal Years 2003 and 2004 PARs

                         (Continued From Previous Page)

Improper payments reported

                                            Agency Programs that the     Will 
                                            reported agency reported estimate 
                                         it had were not susceptible   within 
                                             assessed to significant the next 
                                               all programs improper          
                                                            payments  6 years

2003
(in millions)

                                      2004
                               (in millions) A-11

                           Agency Program or activity

26. Department of All programs and X
State activities

58. International 0.0 1.7 Narcotic and Law Enforcement Affairs-Narcotics
Program

59. International 0.0 1.4 Information Program-U.S. Speaker and Specialist
Program

60. Vendor Payments 0.0 0.8

27. Department of All programs and X
Transportation activities

61. Airport Improvement 14.0 0.0f X
Program

62. Highway Planning 1.4 0.0e X
and Construction

63. Federal Transit- 32.0 0.0e X
Capital Investment
Grants

64. Federal Transit- 64.0 0.0e X
Formula Grants

28. Department of All programs and X
the Treasury activities

65. Earned Income Tax 10,500.0 9,650.0 X
Credit

29. Department of All programs and X
Veterans Affairs activities

66. Compensation 256.0a 238.0 X

67. Dependency and 0.0c 0.0c X
Indemnity
Compensation

68. Education Programs 52.0a 55.0

69. Pension 284.0 262.0 X

70. Insurance Programs 0.3 0.4 X
Totals $35,772.4 $45,407.5 46 23 10 10

        Source: GAO's analysis of cited agencies' fiscal year 2004 PARs.

Appendix IV Improper Payment Estimates Reported in Agency Fiscal Years
2003 and 2004 PARs

aFiscal year 2003 estimates were updated to the revised estimates reported
in the fiscal year 2004 PARs.

bAgency did not report an annual improper payment estimate.

cAgency combined with the above program.

dAgency did not address improper payments or the IPIA requirements for
this program in its fiscal year 2004 PAR.

eAgency reported that its annual improper payment estimate was zero.

fAgency reported an annual improper payment estimate, but it was an
insignificant amount that rounded to zero for purposes of this table.

Appendix V

Comments from the Office of Management and Budget

Note: GAO comment supplementing those in the report text appears at the
end of this appendix.

Appendix V
Comments from the Office of Management
and Budget

                                 See comment 1.

Appendix V
Comments from the Office of Management
and Budget

                                   Appendix V
                     Comments from the Office of Management
                                   and Budget

      The following is GAO's comment on OMB's letter dated March 25, 2005.

GAO Comment 1.	In our review of these agencies' fiscal year 2004 PARs, we
determined that assessments were not completed for all programs and
activities.

Appendix VI

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	Carla Lewis, (202) 512-6915
Alana Stanfield, (202) 512-3197

Acknowledgments	In addition to those named above, Lisa Crye, Bonnie
McEwan, and Donell Ries made important contributions to this report.

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