Financial Management: Challenges in Meeting Requirements of the
Improper Payments Information Act (12-JUL-05, GAO-05-605T).
Improper payments are a longstanding, widespread, and significant
problem in the federal government. The Congress enacted the
Improper Payments Information Act (IPIA) of 2002 to address this
issue. Fiscal year 2004 marked the first year that federal
agencies governmentwide were required to report improper payment
information under IPIA. One result of the IPIA has been increased
visibility over improper payments by requiring federal agencies
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 in their annual Performance and Accountability
Reports (PAR). Because of continued interest in addressing the
governmentwide improper payments issue, we continue to report on
the progress being made by agencies in complying with certain
requirements of the IPIA. This testimony summarizes the results
of our most recent report on agencies' progress in meeting the
requirements of the IPIA. Ultimately, the success of this
legislation hinges on each agency's diligence and commitment to
identifying, estimating, and determining the causes of, then
taking corrective actions, and measuring progress in reducing
improper payments.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-605T
ACCNO: A29537
TITLE: Financial Management: Challenges in Meeting Requirements
of the Improper Payments Information Act
DATE: 07/12/2005
SUBJECT: Accountability
Erroneous payments
Federal agencies
Federal aid programs
Federal law
Federal legislation
Financial management
Internal controls
Performance measures
Reporting requirements
Risk management
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GAO-05-605T
United States Government Accountability Office
GAO Testimony
Before the Subcommittee on Federal Financial Management, Government
Information, and International Security, Committee on Homeland Security
and Governmental Affairs, United States Senate
For Release on Delivery 2:00 p.m. EDT Tuesday, July 12, 2005
FINANCIAL MANAGEMENT
Challenges in Meeting Requirements of the Improper Payments Information Act
Statement of McCoy Williams
Director, Financial Management and Assurance
a
GAO-05-605T
[IMG]
July 2005
FINANCIAL MANAGEMENT
Challenges in Meeting Requirements of the Improper Payments Information Act
What GAO Found
The Office of Management and Budget (OMB) has continued to provide strong
emphasis on IPIA through the President's Management Agenda, and federal
agencies' response to fulfilling the requirements of the IPIA has
generally been positive. To date, the federal government has made progress
in identifying programs susceptible to the risk of improper payments in
addressing the new IPIA requirements. At the same time, our review of the
fiscal year 2004 PARs for 29 of 35 federal agencies that the U.S. Treasury
determined to be significant to the U.S. government's consolidated
financial statements, shows that even with the enhanced emphasis on
improper payment reporting fueled by the new legislation, certain agencies
reported that they have not yet performed risk assessments of all their
programs and/or estimated improper payments for their respective programs.
As fully anticipated, the number of agencies reporting improper payment
information is growing, but the magnitude of the problem remains unknown,
because some 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. 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, Medicare. Future estimates are likely to trend higher
because agencies' governmentwide estimate did not report for 12 programs
with outlays of $248.7 billion in fiscal year 2004. These 12 were
previously 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 over $10 billion annually.
Number of Agencies and Amounts of Improper Payments Reported (Fiscal Years
1999-2004)
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
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. Our work over the
past several years has demonstrated that while improper payments are a
significant and widespread problem in the federal government, the extent
of the problem initially had been masked because only a limited number of
agencies reported their annual payment accuracy rates and estimated
improper payment amounts in their Performance and Accountability Reports
(PAR).
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 has
increased visibility over improper payments to a higher, more appropriate
level of importance by requiring executive agency heads, based on
guidance2 from the Office of Management and Budget (OMB), to identify
programs and activities susceptible to significant improper payments,
estimate amounts improperly paid, and report on the amount of and their
actions to reduce their improper payments.
Because of continued interest in addressing the governmentwide improper
payments issue, we continue to report on the progress being made by
agencies in complying with certain requirements of the IPIA. In my
testimony today, which is based on our March 31, 2005 report, 3 I will
discuss (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 of improper
payments estimated by the reporting agencies.
To obtain information for our March 2005 report, 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
1Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).
2OMB Memorandum M-03-13, "Improper Payments Information Act of 2002"
(Public Law 107-300), May 21, 2003.
3GAO, Financial Management: Challenges in Meeting Requirements of the
Improper Payments Act, GAO-05-417 (Washington, D.C.: Mar. 31, 2005).
findings, agency accomplishments, and remaining challenges. We did not
assess the effectiveness of the agencies' efforts or independently
validate the data that they or OMB reported. We conducted our work from
November 2004 through February 2005 in accordance with U.S. generally
accepted government auditing standards.
Background Before I discuss our review of the fiscal year 2004 PARs, I
would like to summarize the IPIA. The act, passed in November of 2002,
requires agency heads to review all their programs and activities annually
and identify those that may be susceptible to significant improper
payments. For each program and activity agencies identify as susceptible,
the act requires them to estimate the annual amount of improper payments
and submit those estimates to the Congress before March 31 of the
following year. The act further requires that for programs for which
estimated improper payments exceed $10 million, agencies report annually
to the Congress on the actions they are taking to reduce those payments.
The act requires the Director of OMB to prescribe guidance for federal
agencies to use in implementing it. OMB issued guidance in May 2003
requiring the use of a systematic method for the annual review and
identification of programs and activities that are susceptible to
significant improper payments. The guidance defines significant improper
payments as those in any particular program that exceed both 2.5 percent
of program payments and $10 million annually. It requires agencies to
estimate improper payments annually using statistically valid techniques
for each susceptible program 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 for fiscal years ending on or after September 30,
2004. OMB guidance requires the results to be reported in the Management
Discussion and Analysis (MD&A) section of its PAR.
Working with the Chief Financial Officer Council's Improper Payments
Committee, OMB issued a standardized format on July 22, 2004 for reporting
IPIA information. To satisfy the reporting requirements of the IPIA for
fiscal year 2004, the framework instructed agencies to provide in the MD&A
portion of the fiscal year 2004 PAR a brief summary of both what they have
accomplished and what they plan to accomplish. All other required
reporting details were 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.
The fiscal year 2004 PARs, the first set of reports representing the
results of agency assessments of improper payments for all federal
programs, was due November 15, 2004.4 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 completed agencywide assessments, and they did not
estimate improper payments for all of their susceptible programs.
I will now discuss the extent to which agencies performed the assessments
of their programs and activities.
Progress Made but We reviewed the fiscal year 2004 PARs for 29 of 35
federal agencies5 that
the U.S. Treasury determined to be significant to the U.S.
government'sChallenges Remain in consolidated financial statements.
Overall, we found that agencies made Addressing Key
Requirements of the Act
progress in identifying programs susceptible to the risk of improper
payments. At the same time, our findings suggest that even with the
enhanced emphasis on improper payment reporting, certain agencies have not
yet performed risk assessments of all their programs and/or estimated
improper payments for their respective programs. Furthermore, as shown in
table 1, we found that certain agencies required by OMB in years before
enactment of the act,6 to report selected improper payment information for
4For fiscal year 2004, OMB accelerated the financial statements reporting
date for agencies to Nov. 15, 2004.
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; therefore, these agencies were not included in our
review.
6Prior to the governmentwide IPIA reporting requirements beginning with
fiscal year 2004, OMB's Circular No. A-11, Section 57 required certain
agencies to submit similar information, including estimated improper
payment target rates, target rates for future reductions in these
payments, the types and causes of these payments, and variances from
targets and 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.
the past 3 years, had not performed much better than agencies that
reported for the first time in fiscal year 2004.
Table 1: Summary of Improper Payments Information Reported in Agency
Fiscal Year 2004 PARs
Agencies
Agencies reported Programs Programs
they that that
reported had not estimated did not
they estimate
had assessed Total improper improper Total
assessed all number of number of
Agency all
type programs programs agencies payments payments programs
Agencies with prior
reporting
requirements under
OMB Circular No.
A-11 12 3 15 34 12 46
Agencies with no
prior reporting
requirements 11 3 14 7 17a
Total 23 6 29 41 29
Source: GAO's analysis of agencies' fiscal year 2004 PARs.
aFor 10 of 17 programs, agencies reported their programs were not
susceptible to significant improper payments.
As the table shows, there were no significant differences in terms of not
meeting key requirements of the act between the two agency reporting
categories. Specifically, we found that six agencies which had not
performed risk assessments for all programs were equally divided among the
agencies with prior reporting requirements and agencies with no previous
reporting requirements. Although a majority of the agencies had performed
risk assessments to identify programs and activities susceptible to
significant improper payments, the adequacy of the risk assessments was
questionable. For example, three agency auditors cited agency
noncompliance with the IPIA in their annual reports included in the agency
PARs. Two agency auditors reported that their agency's risk assessment did
not consider all payment types or programs. The remaining auditor reported
the agency did not institute a systematic method of reviewing all programs
and identifying those it believed were susceptible to significant
erroneous payments. In all 3 instances, agencies reported having assessed
all programs and that the programs were not susceptible to significant
improper payments.
We also found that of the 29 agency programs that did not report improper
payment estimates, 12 programs had prior reporting requirements
compared to 17 programs with no prior reporting requirements. Because the
12 agency programs were required to estimate improper payments information
for the past 3 years, we believe these programs had sufficient time to
estimate their improper payments and should have been in a position to
fully comply with the requirements of the act. I will discuss these 12
programs further in the next section and highlight additional information
in table 2.
Magnitude of Improper Payments is Still Unknown
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. Specifically, of the 29 agency PARs included in our fiscal
year 2004 review, only 17 agencies reported improper payment estimates
totaling more than $45 billion for 41 programs. Although this estimate
increased about $10 billion, or 27 percent from the prior fiscal year, 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.
I would also like to point out that the governmentwide estimate did not
include the 12 programs with prior improper payment reporting requirements
which totaled $248.7 billion in outlays for fiscal year 2004. As shown in
table 2, these included some of the largest federal programs determined to
be susceptible to risk, such as the Department of Health and Human
Services' Medicaid Program, with outlays exceeding $175 billion annually,
and the Department of Education's Title I Program, with outlays of over
$10 billion annually.
Table 2: Programs That Did Not Report Improper Payment Estimates as
Previously Required Under OMB Circular No. A-11 and Target Dates for
Expected Estimates
Fiscal year 2004 outlays Program (in billions) Target fiscal year for
estimate
Did not 2005 2006 2007 2008 report
Department of Agriculture - Agriculture Marketing and $8.8 X
Assistance
Department of Health and Human Services - Foster Care -
Title
IV-E 4.7 X
Department of Health and Human Services - State Children's
Insurance Program 4.6 X
Department of Health and Human Services - Child Care and
Development Fund 4.8 X
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
Program 4.8 X
Department of Labor - Workforce Investment Act 3.1
Department of Education - Title I 10.3
Department of Health and Human Services - Temporary
Assistance for Needy Families 17.7
Department of Housing and Urban Development - Community
Development Block Grant 5.5
Total $248.7 5 1 1 1
Sources: OMB and cited agencies' fiscal year 2004 PARs.
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 for fiscal year 2004. The other 4 programs in 4 agencies did not
estimate improper payment amounts and the PARs were silent about whether
they would report estimates in the future. As a result, improper payments
for several large programs susceptible to risk will not be known for
several years, even though these agencies were required to report this
information with their fiscal year budget submissions since 2002.
OMB reported that some of the agencies were unable to determine the rate
or amount of improper payments because of measurement challenges or time
and resource constraints, which OMB expects to be resolved in future
reporting years. Although OMB reported that the $45 billion in improper
payments establishes a baseline from which short-and long-term program
improvement strategies and priorities 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 are enhanced.
Conclusion In closing, Mr. Chairman, I want to say that we recognize that
measuring improper payments and designing and implementing actions to
reduce or eliminate them are not simple tasks and will not be easily
solved. The ultimate success of the governmentwide effort to reduce
improper payments depends, in part, on each federal agency's continuing
diligence and commitment to meeting 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.
This concludes my statement, Mr. Chairman. I would be pleased to respond
to any questions that you or other Members of the Subcommittee may have.
GAO Contacts and For more information regarding this testimony, please
contact McCoy
Williams, Director, Financial Management and Assurance, at (202)
512-6906Staff or by e-mail at [email protected]. Contact points for our
Offices of Acknowledgments Congressional Relations and Public Affairs may
be found on the last page
of this testimony. Individuals making key contributions to this testimony
included Lisa Crye, Danielle Free, Carla Lewis, Donell Ries, and Alana
Stanfield.
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