Financial Management: Challenges in Meeting Governmentwide
Improper Payment Requirements (20-JUL-05, GAO-05-907T).
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 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 your continued interest in addressing
the governmentwide improper payments issue, you asked GAO to
report on the progress being made by agencies in complying with
certain requirements of IPIA. My testimony today summarizes the
results of that work reported to you in March 2005. 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-05-907T
ACCNO: A30438
TITLE: Financial Management: Challenges in Meeting
Governmentwide Improper Payment Requirements
DATE: 07/20/2005
SUBJECT: Accountability
Budget obligations
Erroneous payments
Federal agencies
Federal aid programs
Federal funds
Federal legislation
Financial management
Internal controls
Payments
Performance measures
Reporting requirements
Risk management
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-05-907T
United States Government Accountability Office
GAO Testimony
Before the Subcommittee on Government Management, Finance, and
Accountability, Committee on Government Reform, House of Representatives
For Release on Delivery
Expected at 2:00 p.m. EDT FINANCIAL
Wednesday, July 20, 2005
MANAGEMENT
Challenges in Meeting Governmentwide Improper Payment Requirements
Statement of McCoy Williams Director, Financial Management and Assurance
GAO-05-907T
[IMG]
July 2005
FINANCIAL MANAGEMENT
Challenges in Meeting Governmentwide Improper Payment Requirements
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 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, and 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
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 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 of improper payments estimated by the
reporting agencies. We reported this information to you on March 31,
2005.3 In my testimony today, I will discuss the results of our March 2005
report on agencies' progress in meeting the requirements of IPIA.
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 IPIA and
its report on the results of agency-specific reports, significant
findings, agency accomplishments, and remaining challenges. We did not
assess the
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).
Background
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.
Before I discuss our review of the fiscal year 2004 PARs, I would like to
summarize 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, 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 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.
Progress Made but Challenges Remain in Addressing Key Requirements of the Act
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.
We reviewed the fiscal year 2004 PARs for 29 of 35 federal agenciesthat
the U.S. Treasury determined to be significant to the U.S. government's
consolidated financial statements.5 Overall, we found that agencies made
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
the past 3 years had not performed much better than agencies that reported
for the first time in fiscal year 2004.
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.
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 number
Agency all of of
type programs programs agencies payments payments programs
Agencies with prior
reporting
requirements under
OMB Circular No.
A-11 12 315341246
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 that 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 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 three 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
Target fiscal year for estimate
Program
Fiscal year 2004 outlays
(in billions) 2005 2006 2007 2008
Did not report
Department of Agriculture-Agriculture $ 8.8 X
Marketing and Assistance
Department of Health and Human Services- 4.7 X
Foster Care-Title IV-E
Department of Health and Human Services- 4.6 X
State Children's Insurance Program
Department of Health and Human Services- 4.8 X
Child Care and Development Fund
Small Business Administration-7(a) Business .7 X
Loan Program
Department of Health and Human Services- 175.3 X
Medicaid
Department of Agriculture-School Programs 8.4 X
Department of Agriculture-Women, Infants, 4.8 X
and Children Program
Department of Labor-Workforce Investment 3.1
Act
Department of Education-Title I 10.3
Department of Health and Human Services- 17.7
Temporary Assistance for Needy Families
Department of Housing and Urban 5.5
Development-Community Development Block
Grant
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 four 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
Conclusion
GAO Contacts and Staff Acknowledgments
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.
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 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.
For more information regarding this testimony, please contact McCoy
Williams, Director, Financial Management and Assurance, at (202) 5126906
or by e-mail at williamsm1@gao.gov. Contact points for our Offices of
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.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
GAO's Mission
Obtaining Copies of GAO Reports and Testimony
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.
The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site (www.gao.gov). Each weekday, GAO posts newly
released reports, testimony, and correspondence on its Web site. To have
GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."
Order by Mail or Phone The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061
To Report Fraud, Contact:
Waste, and Abuse in Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.govFederal Programs Automated answering system: (800)
424-5454 or (202) 512-7470
Gloria Jarmon, Managing Director, JarmonG@gao.gov (202)
512-4400Congressional U.S. Government Accountability Office, 441 G Street
NW, Room 7125 Relations Washington, D.C. 20548
Public Affairs Paul Anderson, Managing Director, AndersonP1@gao.gov (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
PRINTED ON RECYCLED PAPER
*** End of document. ***