Improper Payments: Posthearing Questions Related to Agencies	 
Meeting the Requirements of the Improper Payments Information Act
of 2002 (06-SEP-06, GAO-06-1067R).				 
                                                                 
On March 9, 2006, we testified1 before your subcommittee at a	 
hearing entitled, "Reporting Improper Payments: A Report Card on 
Agencies' Progress." At the hearing, we discussed our findings on
federal agencies' challenges in meeting the requirements of the  
Improper Payments Information Act (IPIA) of 2002 based on our	 
review of agencies' fiscal year 2005 performance and		 
accountability reports (PAR) and annual reports. We were asked to
provide answers to the following follow-up questions relating to 
our March 9, 2006, testimony: (1) What concerns does GAO have	 
regarding not only DHS' inability to comply with the Improper	 
Payments Information Act; but on a greater scale with their	 
overall financial management? (2) About which Agencies that	 
reported in their fiscal year 2005 Performance and Accountability
Report that they had no programs susceptible to significant	 
improper payments does GAO have concerns about? (3) Should	 
"unavoidable overpayment" statistics at the Social Security	 
Administration be reported to the Office of Management and	 
Budget, and if so why would this be important, and how could the 
Social Security Administration implement such a process? (4) What
concerns does GAO have with the Agency for International	 
Development's (USAID) reporting on improper payments? (5) Does	 
GAO have any concerns with the rest of these agencies and their  
failure to report improper payment information? (6) has GAO done 
any analysis of the President's proposals, and if so, what is the
GAO's assessment? (7) Has GAO made any recommendations regarding 
the administration and financial controls in the EITC program?	 
(8) How can the Department of Labor's successes be carried over  
to other agencies? and (9) Is GAO concerned that CDBG's outlays  
are $5.4 billion, and not only are they not reporting, they have 
claimed that they are in compliance?				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1067R					        
    ACCNO:   A60336						        
  TITLE:     Improper Payments: Posthearing Questions Related to      
Agencies Meeting the Requirements of the Improper Payments	 
Information Act of 2002 					 
     DATE:   09/06/2006 
  SUBJECT:   Accountability					 
	     Accounting procedures				 
	     Budget obligations 				 
	     Federal/state relations				 
	     Financial management				 
	     Financial management systems			 
	     Interagency relations				 
	     Overpayments					 
	     Program abuses					 
	     Reporting requirements				 

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GAO-06-1067R

     

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September 6, 2006

The Honorable Tom Coburn

Chairman, Subcommittee on Federal Financial Management, Government

Information, and International Security

Committee on Homeland Security and Governmental Affairs

United States Senate

Subject: Improper Payments: Posthearing Questions Related to Agencies
Meeting the Requirements of the Improper Payments Information Act of 2002

Dear Mr. Chairman:

On March 9, 2006, we testified1 before your subcommittee at a hearing
entitled, "Reporting Improper Payments: A Report Card on Agencies'
Progress." At the hearing, we discussed our findings on federal agencies'
challenges in meeting the requirements of the Improper Payments
Information Act (IPIA) of 2002 based on our review of agencies' fiscal
year 2005 performance and accountability reports (PAR) and annual reports.
Our review focused on the extent to which agencies have performed the
required assessments to identify programs and activities that were
susceptible to significant improper payments, the annual amount estimated
by the reporting agencies, and the amount of improper payments recouped
through recovery audits.

This letter responds to your June 15, 2006, request that we provide
answers to follow-up questions relating to our March 9, 2006, testimony.
Your questions, along with our responses, follow.

           1.  The Department of Homeland Security reported that it had
           assessed all programs and activities and found none to be
           susceptible to making significant improper payments. Their
           independent auditor reported that the Department did not institute
           a systematic method of reviewing all programs and identifying
           those it believed were susceptible to significant improper
           payments. This was the second year in a row that the auditor
           reported IPIA noncompliance for DHS. What concerns does GAO have
           regarding not only DHS' inability to comply with the Improper
           Payments Information Act; but on a greater scale with their
           overall financial management?

           The Department of Homeland Security (DHS) continues to face
           challenges in meeting the requirements of IPIA as well as
           experience significant financial management weaknesses. For fiscal
           year 2005, DHS received a disclaimer of opinion2 on its fiscal
           year 2005 balance sheet and fiscal year 2004 consolidated
           financial statements, primarily due to financial reporting
           problems.3

           As context, DHS's auditors cited 10 material internal control
           weaknesses over areas such as financial management oversight;
           financial systems security; property, plant, and equipment; and
           accounts payable and disbursements. For example, agency auditors
           reported that DHS had not established sufficient controls to
           prevent duplicate payments to vendors related to prior year
           obligations or adopted policies to ensure receipt of goods and
           services prior to payment of invoices. In addition, DHS had not
           provided effective management and oversight to ensure corrective
           action plans were developed, implemented (with progress tracked),
           and successfully completed to support the elimination of material
           weaknesses and achieve consistent, timely, and reliable financial
           reporting departmentwide. Furthermore, the auditors found seven
           instances of noncompliance with applicable laws and regulations,
           one of those being noncompliance with IPIA. Specifically, for a
           second year in a row, its auditors found that DHS did not
           institute a systematic method of reviewing all programs and
           identifying those that are susceptible to significant erroneous
           payments.4 The auditors also reported that DHS did not perform
           test work to evaluate improper payments for all material programs
           for fiscal year 2005. DHS's testing approach only included a
           review of its programs with total disbursements exceeding $100
           million for each agency component. DHS reported that programs with
           fewer disbursements were assumed to be too small to exceed the
           Office of Management and Budget's (OMB) reporting threshold of $10
           million in improper payments.

           DHS, like other federal agencies, has a stewardship obligation to
           prevent fraud, waste, and abuse; to use tax dollars appropriately;
           and to ensure financial accountability to the President, Congress,
           and the American people. Management must establish effective
           internal controls to safeguard assets, protect revenue, and make
           authorized payments. Based on our previous work, the basic or root
           causes of improper payments can typically be traced to a lack of
           or breakdown in internal control. While DHS did not identify any
           of its programs or activities susceptible to significant improper
           payments, several of its inherited weaknesses clearly suggest risk
           for improper payments. These inherited weaknesses included
           financial accounting system design and operation limitations; lack
           of adequate accounting systems and processes to ensure property,
           plant, and equipment were properly recorded; and lack of policies
           and procedures to monitor contractor costs and performance.

           Our recent testimonies5 on select DHS programs further validate
           our position. Specifically, from our review of DHS's Individuals
           and Households program related to Hurricanes Katrina and Rita
           disaster relief efforts, we estimated that between $600 million
           and $1.4 billion in improper and potentially fraudulent individual
           assistance payments had been made. Similarly, our recent testimony
           on DHS's purchase card program identified a weak control
           environment and ineffective internal control activities that
           allowed potentially fraudulent, improper, and abusive or
           questionable transactions to occur. DHS must continue to focus on
           resolving weaknesses and developing strong internal controls to
           overcome its financial management challenges.

           2.  The following agencies reported in their fiscal year 2005
           Performance and Accountability Report that they had no programs
           susceptible to significant improper payments:

                        o  The Department of Commerce (Commerce)  
                        o  The General Services Administration (GSA)
                        o  The Department of Homeland Security (DHS)
                        o  The Department of the Interior (Interior)
                        o  The Department of Justice (Justice)
                        o  National Aeronautics and Space Administration
                        (NASA) 
                        o  The Nuclear Regulatory Commission (NRC)
                        o  The Securities and Exchange Commission (SEC)

           Please comment on any of the above agencies with which GAO has
           concerns.

           While we provided data on the above agencies' implementation
           efforts to annually review all programs and activities as required
           under IPIA, we have not analyzed their methodologies for
           conducting risk assessments to identify those programs and
           activities susceptible to significant improper payments. That
           said, noncompliance issues related to IPIA and agencies' existing
           financial management challenges raise questions regarding these
           agencies' assertions that they had no programs susceptible to
           significant improper payments. As we testified at the March 9
           hearing, auditors for DHS and Justice cited agency noncompliance
           with IPIA, primarily caused by inadequate risk assessments.

           In addition, other agency auditors have reported major management
           challenges that can hinder effective internal control. For
           example, at Interior, its auditor reported major management
           challenges in the agency's Workers Compensation Program.
           Specifically, the auditors found that (1) Interior's inefficient
           and ineffective management led to increases in the program's
           annual costs; (2) the program was understaffed, employees lacked
           training, and there was no uniform process for ensuring that costs
           are accurate; and (3) there was an overwhelming lack of awareness
           that workers' compensation fraud existed. The auditors also
           reported that, at best, the program was managed inconsistently
           and, at worst, was subject to abuse by managers seeking an easy
           way to deal with problem employees.

           Internal control serves as the first line of defense in
           safeguarding assets and preventing and detecting errors, fraud,
           waste, abuse, and mismanagement. Strong systems of internal
           control provide reasonable assurance that programs are operating
           as intended and are achieving expected outcomes. A lack of strong
           internal control was evident in at least three of the eight
           agencies listed above that reported no programs were susceptible
           to significant improper payments. DHS, GSA, and NASA reported they
           have no risk susceptible programs, yet each of these agencies
           received a disclaimer of opinion on their fiscal year 2005
           financial statement audits due to significant financial reporting
           deficiencies. In addition, agency auditors identified a total of
           47 reportable conditions6 related to internal control weaknesses
           found during the eight agencies' financial statement audits.7
           Weaknesses identified during a financial statement audit could
           materially affect an agency's program operations and thus,
           significantly increase the risk of making improper payments.

           For example, at NRC, agency auditors identified four reportable
           conditions during their examination of the effectiveness of NRC's
           internal control over financial reporting. One of these reportable
           conditions related to financial controls over disbursements.
           Specifically, auditors found that NRC lacked verification controls
           to review the propriety of edits made to vendor tables which house
           information such as the vendor name, address, tax identification
           number, and bank routing numbers. Verifying such edits helps to
           ensure the existence of the vendor prior to payment, decreasing
           the risk of improper payments to phantom vendors. The auditors
           also reported that NRC does not have controls in place for review
           and approval of high-value payments to nonfederal entities,
           ranging from amounts in excess of $250,000 to $300,000. Payments
           in the high-value category are not reviewed any differently than
           payments with lower dollar values. During their internal control
           testing, the auditors identified one improper payment in excess of
           $1 million, which had not been detected by NRC. The auditors made
           four recommendations to NRC to strengthen controls over its
           disbursements. Going forward, agency management at this agency and
           the other seven agencies listed above will need to ensure their
           risk assessment methodologies measure the potential or actual
           effect of major management challenges and internal control
           weaknesses identified from financial statement audits in order to
           assist in identifying programs and activities susceptible to
           significant improper payments.

           3.  Should "unavoidable overpayment" statistics at the Social
           Security Administration be reported to the Office of Management
           and Budget? Why would this be important, and how could the Social
           Security Administration implement such a process?

1GAO, Financial Management: Challenges Remain in Meeting Requirements of
the Improper Payments Information Act, GAO-06-482T (Washington, D.C.: Mar.
9, 2006).

2A disclaimer of opinion means that the auditor does not express an
opinion on the financial statements. This type of opinion is appropriate
when the audit scope is not sufficient to enable the auditor to express
such an opinion or when there are material uncertainties involving scope
limitations.

3DHS's auditors reported that they were engaged to audit the accompanying
consolidated balance sheets of DHS as of September 30, 2005 and 2004, and
the related consolidated statements of net cost, changes in net position,
and financing; combined statement of budgetary resources; and statement of
custodial activity for the year ended September 30, 2004. The auditors
were not engaged to audit the accompanying consolidated statements of net
cost, changes in net position, and financing; combined statement of
budgetary resources; and statement of custodial activity for the year
ended September 30, 2005.

4We consider the terms "erroneous payments" and "improper payments" to be
synonymous.

5GAO, Hurricanes Katrina and Rita Disaster Relief: Improper and
Potentially Fraudulent Individual Assistance Payments Estimated to Be
Between $600 Million and $1.4 Billion, GAO-06-844T (Washington, D.C.: June
14, 2006) and Purchase Cards: Control Weaknesses Leave DHS Highly
Vulnerable to Fraudulent, Improper, and Abusive Activity, GAO-06-957T
(Washington, D.C.: July 19, 2006).

6Reportable conditions are matters coming to an auditor's attention that,
in their judgment, should be communicated because they represent
significant deficiencies in the design or operation of internal control
that could adversely affect the federal government's ability to meet the
internal control objectives described in the audit report.

7The number of reportable conditions for each of the eight agencies ranged
from 2 to 14.

As we previously reported to your subcommittee,8 OMB has allowed the
Social Security Administration (SSA) to exclude from its estimate of
improper payments those payments that it had to make following
constitutional, statutory, or judicial requirements even though those
payments are subsequently determined to be incorrect.9 OMB deemed these
types of payments to be "unavoidable" improper payments,10 as there are no
administrative changes SSA could implement that would eliminate the
requirement to make such payments. Although the definition of improper
payments does not use the terms "avoidable"11 or "unavoidable," we agree
with OMB that a payment that was made because of a legal requirement to
make the payment, subject to subsequent determinations that the payment is
not due, should not be included in an agency's estimate of its improper
payments because it does not meet the definition of an improper payment
under the act.

Currently, SSA does not track or publicly report on these types of
payments. In addition, OMB has reported that it is not aware of other
agencies that are similarly legislatively mandated to make these types of
payments nor does OMB require governmentwide reporting of these types of
payments. Because agencies are not currently required to track, monitor,
and report these types of payments on a governmentwide basis, the
magnitude of this issue is unknown.

8GAO, Post-Hearing Questions Related to Agency Implementation of the
Improper Payments Information Act, GAO-05-1029R (Washington, D.C.: Sept.
16, 2005).

9IPIA defines an improper payment as a 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 includes any payment to an ineligible
recipient, any payment for an ineligible service, any duplicate payment,
any payment for services not received, and any payment that does not
account for credit for applicable discounts.

10OMB defines "unavoidable" payments as payments resulting from legal or
policy requirements.

11OMB defines "avoidable" payments as payments that could be reduced
through changes in

administrative actions.

           4.  As you know, the Subcommittee is committed to rigorously
           overseeing USAID and some of its programs. In a written question
           to Linda Combs following last July's improper payments hearing, I
           asked whether or not OMB supported USAID's internal assessment
           that none of their programs were considered to be at risk for
           "significant" improper payments. Her response deemed USAID's
           documentation for fiscal year 2004 as acceptable, and stated their
           intentions to re-evaluate their risk assessments in the fiscal
           year 2005 Performance and Accountability Report to determine their
           acceptability. According to GAO's report, USAID was silent as to
           whether it had programs that are susceptible to making significant
           improper payments.

           a) What concerns does GAO have with the Agency for International
           Development's (USAID) reporting on improper payments?

           As with other agencies, it is important for USAID to fulfill the
           requirements of IPIA and report the applicable improper payments
           information in its PAR. As stated in IPIA and OMB's implementing
           guidance, each agency shall annually review all programs and
           activities that it administers and identify all such programs and
           activities that may be susceptible to significant improper
           payments. For fiscal year 2005, USAID reported limited improper
           payment information in its PAR. From our review, we found no
           assertions from USAID that it had assessed all programs and
           activities for susceptibility to significant improper payments. A
           risk assessment is a key step in gaining assurance that programs
           are operating as intended and that they are achieving their
           expected outcomes. It entails a comprehensive review and analysis
           of program operations to determine where risks exist, what those
           risks are, and the potential or actual effect of those risks on
           program operations. The information developed during a risk
           assessment forms the foundation or basis upon which management can
           determine the nature and type of corrective actions needed. It
           also gives management baseline information for measuring progress
           in reducing improper payments. USAID only reported that it
           continues to monitor all its programs and payment activities.
           Because USAID's PAR lacks details about the monitoring activities
           it reportedly performed, we are uncertain as to whether this meets
           the above requirement to perform a risk assessment.

           In fact, there were five programs that did not provide sufficient
           reporting on improper payments in their fiscal year 2005
           Performance and Accountability Report: USAID, the Export-Import
           Bank, the Pension Benefit Guarantee Corporation, the Postal
           Service, and the Smithsonian.

                        b)  Does GAO have any concerns with the rest of these
                        agencies and their failure to report improper payment
                        information?

           Any agencies' failure to report improper payment information as
           required by the act is of great concern. For example, the Postal
           Service's Office of Inspector General (OIG) reported that for
           fiscal year 2005 it had identified $75 million in questioned
           costs, $261 million in funds that could have been put to better
           use, and $11 million in unrecoverable costs. The OIG further
           reported fines, restitutions, and recoveries of $66 million. These
           OIG findings suggest that the agency may not be adequately
           assessing all of its programs and activities for significant
           improper payments. In meeting the requirements of the act, the
           Postal Service, as well as other agencies, should report on their
           risk assessment activities and explicitly state whether the
           results of the risk assessment identified programs and activities
           susceptible to significant improper payments.

           Since fiscal year 2000, our work has demonstrated that improper
           payments are a long-standing, widespread, and significant problem
           in the federal government. Transparency in reporting improper
           payments is crucial at both the federal agency and governmentwide
           levels. Public reporting helps establish accountability as well as
           expectations for improvements. This includes holding agencies
           accountable for achieving target rates or otherwise implementing
           specifically planned actions. Annually identifying, estimating,
           and publicly reporting progress made to reduce improper payments
           enables agencies and others with oversight and monitoring
           responsibilities to measure this progress and determine whether
           further action is needed to minimize future improper payments.

           5.  As you know, the improper payments made in the Earned Income
           Tax Credit makes up the second largest portion of government-wide
           improper payments for fiscal year 2005, estimating $9.6 to $11.4
           billion dollars paid improperly.

           In fiscal year 2004 EITC had an improper payment rate of 25
           percent. For fiscal year 2005, it was 28 percent and this is on
           the low side, because it's just an estimate. This program does not
           just need help, it needs a complete overhaul, with an improper
           payment rate that high.

           I am familiar with the legislative proposals in the President's
           fiscal year 2007 Budget. OMB believes that if enacted, this
           proposal would save $232 million in the first year and $5 billion
           over ten years. That seems a bit under-ambitious when EITC is
           making at least $10 billion in improper payments every year. In
           other words, with improper payments of $100 billion over 10 years,
           why are you [OMB] projecting only to reduce that number by 5
           percent? Mr. Williams, has GAO done any analysis of the
           President's proposals? If so, what is the GAO's assessment? Has
           GAO made any recommendations regarding the administration and
           financial controls in the EITC program?

           To date, we have not performed an analysis or an assessment of the
           President's legislative proposals as they relate to the Earned
           Income Tax Credit (EITC) program. Regarding any recommendations
           made, since fiscal year 2001, we have issued three reports that
           included seven recommendations related to the administration and
           financial controls in the EITC program. (See table 1.)

           Table 1: GAO Recommendations since Fiscal Year 2001 Related to the
           EITC Program

                                       GAO recommendations                    
GAO report                          related to the EITC  Status of         
number      GAO findings            program              recommendations
GAO-05-221a Of the 12 federal       As participation     The               
               means-tested programs   rate estimates are   recommendation is 
               reviewed, including the developed to use as  open.             
               EITC program, we found  program performance  
               that information on     measures for the     
               participants'           EITC program, we     
               eligibility and         recommended that     
               particular recipient    steps be taken to    
               groups can help program quantify errors that 
               managers more           may result from      
               effectively address     estimating EITC      
               issues related to       participation rate   
               program access. With    estimates to help    
               regard to the EITC      users better         
               program, we found that  understand the       
               the Internal Revenue    accuracy of the data 
               Service (IRS) does not: and ensure that      
               (1) use rate            estimates will be    
               information as a        comparable over      
               performance measure or  time.                
               (2) include rate                             
               information in its                           
               performance report or                        
               other key program                            
               reports.                                     
GAO-05-92 b We found that IRS's     We made four         The first two     
               implementation of tests recommendations to   recommendations   
               to address the leading  (1) ensure the       are closed. The   
               sources of EITC errors  rationale for key    remaining two     
               was not well documented decisions is         recommendations   
               and the level and       documented, (2)      are open.         
               quality of some         obtain information   
               services provided to    on the quality and   
               test participants were  use of all types of  
               not measured.           taxpayer assistance, 
                                       (3) clearly state    
                                       limitations when     
                                       disseminating        
                                       results, and (4)     
                                       complete development 
                                       of detailed          
                                       evaluation plans for 
                                       the 2005 tests.      
GAO-01-42c  While IRS has made      We made two          The first         
               improvements since we   recommendations to   recommendation is 
               began auditing its      (1) determine why    closed. The       
               financial statements in service centers have second            
               fiscal year 1992,       been ineffective in  recommendation is 
               serious internal        stopping refunds     open.             
               control and financial   associated with      
               and operational system  questionable EITCs,  
               weaknesses continued to and (2) develop      
               affect the agency's     reliable             
               ability to effectively  cost/benefit data,   
               manage its operations   using the best       
               and produce reliable    available            
               financial statement     information from the 
               information during      screening and        
               fiscal year 1999.       examination of EITC  
                                       claims, to estimate  
                                       the tax revenue      
                                       collected by, and    
                                       the amount of        
                                       improper refunds     
                                       returned to, IRS for 
                                       each dollar spent    
                                       pursuing these       
                                       outstanding amounts. 

Source: GAO.

aGAO, Means-Tested Programs: Information on Program Access Can Be an
Important Management Tool, GAO-05-221 (Washington, D.C.: Mar. 11, 2005).

bGAO, Earned Income Tax Credit: Implementation of Three New Tests
Proceeded Smoothly, But Tests and Evaluation Plans Were Not Fully
Documented, GAO-05-92 (Washington, D.C.: Dec. 30, 2004).

cGAO, Internal Revenue Service: Recommendations to Improve Financial and
Operational Management, GAO-01-42 (Washington, D.C.: Nov. 17, 2000).

           6.  The Department of Labor has reduced improper payments in its
           Unemployment Insurance program by about $600 million between 2004
           and 2005. OMB reports that this is more than a 15 percent decrease
           in the error rate for this program since last year's reporting. A
           15 percent reduction is a significant accomplishment.

           a) How can the Department of Labor's successes be carried over to
           other agencies? b) If the Department of Labor has had this much
           success in reporting and reducing improper payments, shouldn't
           other federal-state partnered programs like Temporary Assistance
           for Needy Families (TANF), Medicaid, Foster Care, Child Care,
           State Children's Health Insurance Program (SCHIP), School Programs
           and Women, Infants and Children (WIC) be able to coordinate
           between the federal and state authorities to develop an improper
           payment estimate?

           In our April 2006 report,12 we highlighted that federal and state
           coordination was needed to develop improper payment estimates for
           federal programs administered at the state level, including some
           of the programs included in your question. State-administered
           programs and other nonfederal entities receive over $400 billion
           annually in federal funds. Thus, federal agencies and states share
           a responsibility for the prudent use of these funds. One of the
           reasons the Department of Labor (Labor) has been able to report an
           improper payment estimate for its Unemployment Insurance (UI)
           program is because of a federal requirement13 in place that
           mandates that Labor measure each state's payment accuracy rate. To
           address this requirement, Labor implemented the Benefit Accuracy
           Measurement (BAM) program, which is designed to determine the
           accuracy of paid and denied claims in the UI program. It does this
           by reconstructing the UI claims process from samples of weekly
           payments and denied claims using data verified by trained
           investigators. For claims that were overpaid, underpaid, or
           improperly denied, the BAM program determines the cause of and the
           party responsible for the error, the point in the UI claims
           process at which the error was detected, and actions taken by the
           agency and employers prior to the error. For erroneously paid
           claims, the BAM program determines the amount of benefits the
           claimants should have received, which becomes the basis for
           subsequent recovery efforts. In addition to the federal
           requirement14 in place that states must adhere to for estimating
           improper payments, Labor has attributed its successes to the
           support and commitment from top management to facilitate
           successful implementation of IPIA and excellent working
           relationships with the states.

           There are several key initiatives that federal agencies with
           state-administered programs should employ to fulfill the
           requirements of IPIA, such as establishing a culture of
           accountability, developing a system to collect program information
           at the state level for estimating improper payments, and
           monitoring program performance to determine if desired program
           outcomes have been achieved. These key initiatives are aligned
           with our Standards of Internal Control15 and executive guide16 on
           strategies to manage improper payments. Among the standards that
           are directly linked to the above key initiatives are the
           following:

                        o  Control environment-creating a culture of
                        accountability by establishing a positive and
                        supportive attitude toward improvement and the
                        achievement of established program outcomes.

                        o  Information and communication-using and sharing
                        relevant, reliable, and timely financial and
                        nonfinancial information in managing activities
                        related to improper payments.

                        o  Monitoring-tracking improvement initiatives over
                        time, and identifying additional actions needed to
                        further improve program efficiency and effectiveness.

                        As we previously reported,17 measuring improper
                        payments and designing and implementing actions to
                        reduce or eliminate them are not easy tasks,
                        particularly for grant programs that rely on
                        high-quality administration efforts at the state,
                        grantee, or subgrantee level. Given states'
                        involvement in determining eligibility and
                        distributing benefits, states are in a position to
                        assist federal agencies in reporting on IPIA
                        requirements. Communication, coordination, and
                        cooperation among federal agencies and the states
                        will be critical factors in estimating improper
                        payment rates and meeting IPIA reporting requirements
                        for state-administered programs.

           7.  There is some confusion on whether or not the Community
           Development Block Grant Program (CDBG) is required to report
           improper payments. It was one of the original programs on the
           President's Management Agenda, so it's been required to report
           since 2001. It is also required to report under the Improper
           Payments Information Act, but is not reporting under [either]
           requirements. In other hearings held by this Subcommittee as well
           as in written responses to letters sent by me and Senator Carper,
           the Department of Housing and Urban Development (HUD) has denied
           that they are out of compliance with the Improper Payments
           Information Act. The CDBG program is required to report under
           IPIA. Is GAO concerned that CDBG's outlays are $5.4 billion, and
           not only are they not reporting, they have claimed that they are
           in compliance?

           In its fiscal year 2005 PAR, HUD reported that based on completed
           testing of fiscal year 2003 payments, the CDBG program was below
           OMB's threshold for significant improper payments and, therefore,
           was removed from HUD's at-risk inventory. As such, HUD stated that
           this program was not subject to retesting unless there was a
           significant change in the nature of activity or internal control
           structure. We have several problems with HUD's position. First,
           CDBG was

           subject to the previous OMB Circular No. A-11 requirements18 and
           thus was required by OMB's guidance to continue to report improper
           payment information under IPIA, regardless of the
           agency-determined risk level. Second, during a June 2006 hearing
           before your subcommittee19 on the CDBG program, HUD's OIG reported
           on numerous instances of fraudulent, improper, and abusive use of
           program funds identified over a 2- 1/2 year period based on 35
           audits. The HUD OIG reported that its office has recovered over
           $120 million in program funds, identified over $100 million in
           questioned costs, indicted 159 individuals, initiated
           administrative actions against 143 individuals, and took 5 civil
           actions and 39 personnel actions. As evident by the HUD OIG
           reviews, the CDBG program may be at risk of making improper
           payments.

12GAO, Improper Payments: Federal and State Coordination Needed to Report
National Improper Payment Estimates on Federal Programs, GAO-06-347
(Washington, D.C.: Apr. 14, 2006).

13Part 602 of Title 20, U.S. Code of Federal Regulations.

14We have previously reported that only the Food Stamps and Unemployment
Insurance programs had federal requirements for all states to annually
estimate improper payments. See GAO-06-347.

15GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

16GAO, Strategies to Manage Improper Payments: Learning From Public and
Private Sector Organizations, GAO-02-69G (Washington, D.C.: October 2001).

17GAO-05-1029R.

                                  - - - - - -

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Sincerely yours,

McCoy Williams

Director, Financial Management and Assurance

(195093)

18Prior to the governmentwide IPIA reporting requirements beginning with
fiscal year 2004, former section 57 of OMB Circular No. A-11, 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, these 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.

19June 29, 2006 hearing before the Senate Subcommittee on Federal
Financial Management, Government Information, and International Security,
Committee on Homeland Security and Governmental Affairs.

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