Financial Management: Challenges Continue in Meeting Requirements
of the Improper Payments Information Act (05-APR-06,		 
GAO-06-581T).							 
                                                                 
Improper payments are a long-standing, widespread, and		 
significant problem in the federal government. The Congress	 
enacted the Improper Payments Information Act of 2002 (IPIA) to  
address this issue. Fiscal year 2005 marked the second year that 
agencies were required to report improper payment information	 
under IPIA. One result of IPIA has been increased visibility over
improper payments by requiring executive branch agencies to	 
identify programs and activities susceptible to significant	 
improper payments, estimate the amount of their improper	 
payments, and report on the amounts of improper payments and	 
their actions to reduce them in their annual performance and	 
accountability reports (PAR). Because of continued interest in	 
addressing the governmentwide improper payments issue, GAO was	 
asked to report on the progress made by agencies in complying	 
with requirements of IPIA and the status of efforts to identify, 
reduce, and eliminate improper payments. As part of the review,  
GAO looked at (1) the extent to which agencies have performed	 
risk assessments, (2) the annual amount of improper payments	 
estimated, and (3) the amount of improper payments recouped	 
through recovery audits.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-581T					        
    ACCNO:   A50937						        
  TITLE:     Financial Management: Challenges Continue in Meeting     
Requirements of the Improper Payments Information Act		 
     DATE:   04/05/2006 
  SUBJECT:   Accountability					 
	     Erroneous payments 				 
	     Federal agencies					 
	     Federal funds					 
	     Federal law					 
	     Internal controls					 
	     Performance measures				 
	     Reporting requirements				 
	     Risk assessment					 
	     Federal aid programs				 
	     Financial management				 
	     Transparency					 

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GAO-06-581T

     

     * Background
     * Some Agencies Still Have Not Assessed All Programs and Activities for
       Risk of Improper Payments
     * Magnitude of Improper Payments Is Still Unknown
     * Additional Reporting Requirements for Recovery Auditing Information
     * Concluding Observations
     * Contacts and Acknowledgments
     * Agency Improper Payment Estimate Reporting in Fiscal Year 2005
     * Improper Payment Estimates Reported in Agency Fiscal Years 2004 and
       2005 PARs or Annual Reports
     * Related GAO Products
     * PDF6-Ordering Information.pdf
          * Order by Mail or Phone

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.1 Our work over the
past several years has demonstrated that improper payments are a
long-standing, widespread, and significant 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 prior to the passage of the
Improper Payments Information Act of 2002 (IPIA).2

Fiscal year 2005 marked the second year that federal agencies
governmentwide were required to report improper payment information under
IPIA in their performance and accountability reports (PAR). IPIA has
increased visibility over improper payments to a higher, more appropriate
level of importance by requiring executive agency heads, based on guidance
from the Office of Management and Budget (OMB),3 to identify programs and
activities susceptible to significant improper payments, estimate amounts
improperly paid, and report on the amounts of improper payments and their
actions to reduce them. Further, in fiscal year 2005, OMB began to
separately track the elimination of improper payments under the
President's Management Agenda (PMA).

As collected from agencies' fiscal year 2005 PARs, the governmentwide
improper payment estimate for fiscal year 2005 exceeded $38 billion, but
did not include any amounts for some of the highest risk programs, such as
Medicaid with outlays exceeding $181 billion for fiscal year 2005. I
highlight these omissions later in my testimony. From our review, we noted
that agencies made progress in addressing improper payments by
implementing processes and controls to identify, estimate, and reduce
improper payments. For example, agencies demonstrated improved error
detection and measurement by addressing and reporting improper payments

estimates for 17 newly reported programs4 totaling about $1.2 billion,
which are included in the governmentwide improper payments estimate now
totaling over $38 billion. However, we noted that some agencies still have
not instituted systematic methods of reviewing all programs and
activities, have not identified all programs susceptible to significant
improper payments, or have not annually estimated improper payments for
their high-risk programs.

Because of the Subcommittee's interest in addressing the governmentwide
improper payments issue, you asked us to report on the progress made by
agencies in complying with requirements of IPIA and the status of efforts
to identify, reduce, and eliminate improper payments. In my testimony
today, 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, (2) the annual amount of
improper payments estimated by the reporting agencies, and (3) the amount
of improper payments recouped through recovery audits. A list of related
GAO products is provided at the end of this testimony.

The scope of our review included the 35 federal agencies5 that the
Department of the Treasury (Treasury) determined to be significant to the
U.S. government's consolidated financial statements. Based on available
information, we reviewed improper payment information reported by 33
agencies6 in their fiscal year 2005 PARs or annual reports. 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 independently
validate the data that agencies reported in their PARs or annual reports
or that OMB reported. However, we are providing these agency-reported data
as descriptive information that will inform interested parties about the
magnitude of governmentwide improper payments and other improper payments
related information. We believe the data to be sufficiently reliable for
this purpose. We conducted our work from February 2006 to March 2006 in
accordance with generally accepted government auditing standards.

Background

Before I discuss our review of agencies' fiscal year 2005 PARs, I would
like to summarize IPIA, related OMB initiatives, and statutory
requirements for recovery audits. The act, passed in November 2002,
requires executive branch agency heads to review 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 to submit those estimates to the Congress.
The act further requires that 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 act requires the Director of OMB to prescribe guidance for agencies to
use in implementing IPIA. OMB issued guidance in May 20037 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 section of the agency's PAR.

In August 2004, OMB established Eliminating Improper Payments as a new
program-specific initiative under the PMA. This separate improper payments
PMA program initiative began in the first quarter of fiscal year 2005.
Previously, agency efforts related to improper payments were tracked along
with other financial management activities as part of the Improving
Financial Performance initiative of the PMA. The objective of establishing
a separate initiative for improper payments was to ensure that agency
managers are held accountable for meeting the goals of IPIA and are
therefore dedicating the necessary attention and resources to meeting IPIA
requirements. With this new initiative, 15 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.

In August 2005, OMB revised its Circular No. A-136, Financial Reporting
Requirements, and incorporated IPIA reporting details from its May 2003
IPIA implementing guidance. Among other things, OMB Circular No. A-136
includes requirements for agencies to report on their risk assessments;
annual improper payment estimates; corrective action plans; and recovery
auditing efforts, including the amounts recovered in the current year.
Section 831 of the National Defense Authorization Act for Fiscal Year
20028 contains a provision that requires all executive branch agencies
entering into contracts with a total value exceeding $500 million in a
fiscal year to have cost-effective programs for identifying errors in
paying contractors and for recovering amounts erroneously paid. The
legislation further states that a required element of such a program is
the use of recovery audits and recovery activities. The law authorizes
federal agencies to retain recovered funds to cover in-house
administrative costs as well as to pay contractors, such as collection
agencies. Agencies that are required to undertake recovery audit programs
were directed by OMB to provide annual reports on their recovery audit
efforts, along with improper payment reporting details9 in an appendix to
their PARs.

The fiscal year 2005 PARs, the second set of annual reports representing
the results of agency assessments of improper payments for all federal
programs, were due November 15, 2005. In our December 2005 report10 on the
U.S. government's consolidated financial statements for the fiscal years
ended September 30, 2005, and 2004, which includes our associated opinion
on internal control, we reported improper payments as a material weakness
in internal control. Specifically, we reported that while progress had
been made to reduce improper payments, significant challenges remain to
effectively achieve the goals of IPIA.

Some Agencies Still Have Not Assessed All Programs and Activities for Risk
of Improper Payments

We reviewed the fiscal year 2005 PARs or annual reports for 33 of the 35
federal agencies that the Treasury determined to be significant to the
U.S. government's consolidated financial statements and that were
available as of March 2006. Of those 33 agencies, 23 reported that they
had completed risk assessments for all programs and activities. See
appendix II for detailed information on each agency. This was the same
number of agencies that reported having completed risk assessments in our
prior year review.11 The remaining 10 agencies either were silent on IPIA
reporting details in their PARs or annual reports or had not yet assessed
the risk of improper payments for all their programs.

In addition, we noted that selected agency auditors reviewed agencies'
risk assessment methodologies and identified issues of noncompliance or
other deficiencies. For example, auditors for the Departments of Justice
and Homeland Security cited agency noncompliance with IPIA in their fiscal
year 2005 annual audit reports, primarily caused by inadequate risk
assessments. The Department of Justice auditor stated that one agency
component had not established a program to assess, identify, and track
improper payments. The agency acknowledged this noncompliance in its PAR
as well. The Department of Homeland Security (DHS) auditor reported that
the department did not institute a systematic method of reviewing all
programs and identifying those it believed were susceptible to significant
erroneous payments. This was the second consecutive year that the auditor
reported IPIA noncompliance for DHS. Although the auditors identified the
agency's risk assessment methodology as inadequate, DHS reported in its
PAR that it had assessed all of its programs for risk. A third agency
auditor reported that the Department of Agriculture needed to strengthen
its program risk assessment methodology to identify and test critical
internal controls over program payments totaling over $100 million.

Magnitude of Improper Payments Is Still Unknown

As I highlighted in my introduction, agencies' reported estimates of
improper payments for fiscal year 2005 exceeded $38 billion. This
represents almost a $7 billion, or 16 percent, decrease in the amount of
improper payments reported by 17 agencies in fiscal year 2004.12 On the
surface, this appears to be good news. However, the magnitude of the
governmentwide improper payment problem remains unknown. This is because,
in addition to not assessing all programs, some agencies had not yet
prepared estimates of significant improper payments for all programs
determined to be at risk. Specifically, of the 33 agency PARs included in
our review, 18 agencies reported improper payment estimates totaling in
excess of $38 billion for some or all of their high-risk programs. The $38
billion represents estimates for 57 programs. Of the remaining 15 agencies
that did not report estimates, 8 said they did not have any programs
susceptible to significant improper payments, 6 were silent about whether
they had programs susceptible to significant improper payments, and the
remaining 1 agency identified programs susceptible to significant improper
payments and said it plans to report an estimate by fiscal year 2007.
Further details are included in appendix I.

Regarding the reported $7 billion decrease in the governmentwide improper
payment estimate for fiscal year 2005, we determined that this decrease
was primarily due to a $9.6 billion reduction in the Department of Health
and Human Services's (HHS) Medicare program improper payment estimate,
which was partially offset by more programs reporting estimates of
improper payments, resulting in a net decrease of $7 billion. Based on our
review, HHS's $9.6 billion decrease13 in its Medicare program improper
payment estimate was principally due to its efforts to educate health care
providers about its Medicare error rate testing program and the importance
of responding to its requests for medical records to perform detailed
statistical reviews of Medicare payments. HHS reported that these more
intensive efforts had dramatically reduced the number of "no
documentation" errors in its medical reviews. The relevance of this
significant decrease is that when providers do not submit documentation to
justify payments, these payments are counted by HHS as erroneous for
purposes of calculating an annual improper payment estimate for the
Medicare program. HHS reported marked reductions in its error rate
attributable to (1) nonresponses to requests for medical records and (2)
insufficient documentation submitted by the provider. We noted that these
improvements partially resulted from HHS extending the time that providers
have for responding to documentation requests from 55 days to 90 days.

These changes primarily affected HHS's processes related to its efforts to
perform detailed statistical reviews for the purposes of calculating an
annual improper payment estimate for the Medicare program. While this may
represent a refinement in the program's improper payment estimate, the
reported reduction may not reflect improved accountability over program
dollars. Our work did not include an overall assessment of HHS's
estimating methodology. However, we noted that the changes made for the
fiscal year 2005 estimate were not related to improvements in prepayment
processes, and we did not find any evidence that HHS had significantly
enhanced its preventive controls in the Medicare payment process to
prevent future improper payments. Therefore, the federal government's
progress in reducing improper payments may be exaggerated because the
reported improper payments decrease in the Medicare program accounts for
the bulk of the overall reduction in the governmentwide improper payments
estimate. Mr. Chairman, I think the only valid observation at this time is
that improper payments are a serious problem, agencies are working on this
issue at different paces, and the extent of the problem and the level of
effort necessary to control these losses are as yet unknown.

What is clear is that there is a lot of work to do in this area. Agency
auditors have reported major management challenges related to agencies'
improper payment estimating methodologies and highlighted internal control
weaknesses that continue to plague programs susceptible to significant
improper payments. For example, the Department of Labor's agency auditor
reported that inadequate controls existed in the processing of medical
bill payments for its Federal Employees' Compensation Act program.14 As a
result, medical providers were both overpaid and underpaid. Internal
control weaknesses were also identified in the Small Business
Administration's (SBA) 7(a) Business Loan program. SBA did not
consistently identify instances of noncompliance with its own
requirements, resulting in improper payments. In another example, agency
auditors for the Department of Education (Education) raised concerns about
the methodology Education used to estimate improper payments for its
Federal Student Aid program. The auditors reported that the methodology
used did not provide a true reflection of the magnitude of improper
payments in the student loan programs. To overcome these major management
challenges, agencies will need to aggressively deploy more innovative and
sophisticated approaches to correct such deficiencies and identify and
reduce improper payments.

Also, I would like to point out that the fiscal year 2005 governmentwide
improper payments estimate of $38 billion did not include seven major
programs, with outlays totaling over $227 billion for fiscal year 2005.
OMB had specifically required these seven programs to report selected
improper payment information for several years before IPIA reporting
requirements became effective.15 After passage of IPIA, OMB's implementing
guidance required that these programs continue to report improper payment
information under IPIA. As shown in table 1, the fiscal year 2005
governmentwide improper payment estimate does not include one of the
largest federal programs determined to be susceptible to risk, HHS's
Medicaid program, with outlays exceeding $181 billion annually.

Table 1: Major Programs That Did Not Report Improper Payment Estimates as
Previously Required by OMB and Target Dates for Estimates

    

Sources: OMB and cited agencies' fiscal year 2005 PARs.

Of these seven programs, four programs reported that they would be able to
estimate and report on improper payments sometime within the next 3 fiscal
years, but could not do so for fiscal year 2005. For the remaining three
programs, the agencies did not estimate improper payment amounts in their
fiscal year 2005 PARs and were silent about whether they would report
estimates in the future. As a result, improper payments for these programs
susceptible to risk will not be known for at least several years, even
though these agencies had been required to report this information since
2002, with their fiscal year 2003 budget submissions under previous OMB
Circular No. A-11 requirements. 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. However, in the case of
the HHS programs, the agency auditor recognized this lack of reporting as
a reportable condition related to the reliability of the department's
financial statements. In the component of its fiscal year 2005 audit
report dealing with compliance with laws and regulations, the auditor
reported that HHS potentially had not fully complied with IPIA because
nationwide improper payment estimates and rates for significant health
programs were under development and the agency did not expect to complete
the estimation process until fiscal year 2007.

Also, as mentioned earlier and shown in appendix I, 8 of 33 agencies said
they did not have programs susceptible to significant amounts of improper
payments. However, certain programs associated with the government's
response to mitigate the effects of Hurricane Katrina, one of the largest
natural disasters in our nation's history, had material risks of improper
payments. In order to respond to the immediate needs of disaster victims
and to rebuild the affected areas, government agencies used streamlined
eligibility verification requirements for delivery of benefits and
expedited contracting methods in order to commit contractors to begin work
immediately. These expedited processes can increase the potential for
improper payments.

For example, from our recent review of the Federal Emergency Management
Agency's (FEMA) Individuals and Households Program (IHP)16 we identified
significant flaws in the process for registering disaster victims for
assistance payments. As part of its relief efforts, FEMA had distributed
nearly $5.4 billion in IHP assistance, with $2.3 billion in the form of
expedited assistance, as of mid-December 2005. These payments were made
via checks, electronic fund transfers, and debit cards. We found limited
procedures in place designed to prevent, detect, and deter certain types
of duplicate and potentially fraudulent disaster registrations. As a
result, we determined that thousands of registrants provided incorrect
Social Security numbers, dates of birth, and addresses to obtain
assistance and found that FEMA made duplicate assistance payments to about
5,000 of the nearly 11,000 debit card recipients.

In one example of expedited contracting, the Department of Transportation
(DOT) Office of Inspector General (OIG)17 determined that DOT had overpaid
a contractor by approximately $32 million for services to provide buses
for evacuating hurricane victims from the New Orleans area. According to
the OIG, the overpayment occurred because DOT had made partial payments
based on initial task estimates and without documentation that
substantiated the dollar amount of services actually provided to date.
Although DOT promptly recovered the funds, the nature of these types of
exigencies to adequately respond to the hurricane victims makes it likely
that future improper payments are likely to occur. As a result, selected
agencies, such as DHS and DOT, have said they plan to perform concentrated
reviews of payments related to relief efforts to identify the extent of
improper payments, develop actions to reduce these types of payments, and
enhance internal controls for future relief efforts.

Additional Reporting Requirements for Recovery Auditing Information

Section 831 of the National Defense Authorization Act for Fiscal Year 2002
provides an impetus for applicable agencies to systematically identify and
recover contract overpayments. Recovery auditing is another method that
agencies can use to recoup detected improper payments. Recovery auditing
focuses on the identification of erroneous invoices, discounts offered but
not received, improper late penalty payments, incorrect shipping costs,
and multiple payments for single invoices. Recovery auditing can be
conducted in-house or contracted out to recovery audit firms. The law
authorizes federal agencies to retain recovered funds to cover in-house
administrative costs as well as to pay contractors, such as collection
agencies. Any residual recoveries, net of these program costs, shall be
credited back to the original appropriation from which the improper
payment was made, subject to restrictions as described in legislation. As
we previously reported,18 with the passage of this law, the Congress has
provided agencies a much needed incentive for identifying and reducing
their improper payments that slip through agency prepayment controls. The
techniques used in recovery auditing offer the opportunity for identifying
weaknesses in agency internal controls, which can be modified or upgraded
to be more effective in preventing improper payments before they occur.

For fiscal year 2005, OMB expanded the type of recovery auditing
information that applicable agencies are to report in their annual PARs.
Prior to fiscal year 2005, applicable agencies were only required to
report on the amount of recoveries expected, the actions taken to recover
them, and the business process changes and internal controls instituted or
strengthened to prevent further occurrences. In addition, OMB was not
reporting on a governmentwide basis agencies' recovery audit activities in
its annual report on agencies' efforts to improve the accuracy and
integrity of federal payments.

In fiscal year 2005, OMB revised its recovery auditing reporting
requirements and required applicable agencies to provide more detailed
information on their recovery auditing activities. Specifically, in
addition to the prior year requirements, agencies that entered into
contracts with a total value exceeding $500 million annually were required
to discuss any contract types excluded from review and justification for
doing so. In addition, agencies were required to report, in table format,
various amounts related to contracts subject to review and actually
reviewed, contract amounts identified for recovery and actually recovered,
and prior year amounts.

For fiscal year 2005, 19 agencies19 reported entering into contracts with
a total value in excess of the $500 million reporting threshold. These 19
agencies reported reviewing more than $300 billion in contract payments to
vendors. From these reviews, agencies reported identifying about $557
million in improper payments for recovery and reported actually recovering
about $467 million, as shown in table 2.

Table 2: Improper Payment Amounts Identified and Recovered in Fiscal Year
2005

    

Sources: OMB and cited agencies' fiscal year 2005 PARs.

aHHS reported that of the $2.1 million identified as potential improper
payments, $1.3 million was determined to be related to payments that were
either voided, subsequently credited, or both.

bFor fiscal year 2005, the Department of Housing and Urban Development
(HUD) reported that contracts subject to review totaled about $2.3
billion. Of this amount, HUD reported reviewing about $207 million in
contract payments, but identified no improper payments for recovery.

Concluding Observations

In closing, I want to say that we recognize that measuring improper
payments and designing and implementing actions to reduce them are not
simple tasks and will not be easily accomplished. The ultimate success of
the governmentwide effort to reduce improper payments depends, in part, on
each agency's continuing diligence and commitment to meeting the
requirements of IPIA 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. With budgetary
pressures rising across the federal government, and the Congress's and the
American public's increasing demands for accountability over taxpayer
funds, identifying, reducing, and recovering improper payments become even
more critical. Fulfilling the requirements of IPIA will require sustained
attention to implementation and oversight to monitor whether desired
results are being achieved.

Mr. Chairman, this concludes my statement. I would be pleased to respond
to any questions that you or other members of the Subcommittee may have.

Contacts and Acknowledgments

For more information regarding this testimony, please contact McCoy
Williams, Director, Financial Management and Assurance, at (202) 512-9095
or by e-mail at [email protected] . 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 Carla Lewis, Assistant Director; Francine DelVecchio; Christina
Quattrociocchi; and Donell Ries.

Agency Improper Payment Estimate Reporting in Fiscal Year 2005Appendix I

Source: GAO's analysis of cited agencies' fiscal year 2005 performance and
accountability reports (PAR) or annual reports.

Improper Payment Estimates Reported in Agency Fiscal Years 2004 and 2005
PARs or Annual Reports Appendix II

Source: GAO's analysis of cited agencies' fiscal year 2005 performance and
accountability reports (PAR) or annual reports.

aAgency did not report an annual improper payment estimate.

bFiscal year 2004 estimates were updated to the revised estimates reported
in the fiscal year 2005 PARs.

cSee table 1 of this testimony.

dThe agency reported that this program was not high risk, meaning not
susceptible to significant improper payments because it did not meet the
Office of Management and Budget (OMB) reporting threshold of exceeding
both $10 million and 2.5 percent of program payments.

eStudent Financial Assistance-Pell Grants and Federal Family Education
Loan are combined together as Student Financial Assistance in OMB Circular
No. A-11, Section 57.

fAgency combined with the above program.

gAn additional $266 million of improper payments exist for these three
programs. In its PAR, HUD did not provide a breakout of this amount among
the three programs.

hAgency fiscal year 2005 PAR or annual report information not available as
of the end of our fieldwork.

iAgency did not address improper payments or the Improper Payments
Information Act (IPIA) requirements for this program in its fiscal year
2005 PAR or annual report.

jAgency reported that the annual improper payment amount was zero.

Related GAO Products

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

Financial Management: Challenges in Meeting Governmentwide Improper
Payment Requirements. GAO-05-907T . Washington, D.C.: July 20, 2005.

Financial Management: Challenges in Meeting Requirements of the Improper
Payments Information Act. GAO-05-605T . Washington, D.C.: July 12, 2005.

Financial Management: Challenges in Meeting Requirements of the Improper
Payments Information Act. GAO-05-417 . Washington, D.C.: March 31, 2005.

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

Financial Management: Status of the Governmentwide Efforts to Address
Improper Payment Problems. GAO-04-99 . Washington, D.C.: October 17, 2003.

Financial Management: Effective Implementation of the Improper Payments
Information Act of 2002 Is Key to Reducing the Government's Improper
Payments. GAO-03-991T . Washington, D.C.: July 14, 2003.

Financial Management: Challenges Remain in Addressing the Government's
Improper Payments. GAO-03-750T . Washington, D.C.: May 13, 2003.

(195084)

www.gao.gov/cgi-bin/getrpt? GAO-06-581T .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact McCoy Williams at (202) 512-9095 or
[email protected].

Highlights of GAO-06-581T , a testimony before the Subcommittee on
Government Management, Finance, and Accountability, Committee on
Government Reform, House of Representatives

April 5, 2006

FINANCIAL MANAGEMENT

Challenges Continue in Meeting Requirements of the Improper Payments
Information Act

Improper payments are a long-standing, widespread, and significant problem
in the federal government. The Congress enacted the Improper Payments
Information Act of 2002 (IPIA) to address this issue. Fiscal year 2005
marked the second year that agencies were required to report improper
payment information under IPIA. One result of IPIA has been increased
visibility over improper payments by requiring executive branch agencies
to identify programs and activities susceptible to significant improper
payments, estimate the amount of their improper payments, and report on
the amounts of improper payments and their actions to reduce them in their
annual performance and accountability reports (PAR).

Because of continued interest in addressing the governmentwide improper
payments issue, GAO was asked to report on the progress made by agencies
in complying with requirements of IPIA and the status of efforts to
identify, reduce, and eliminate improper payments.  As part of the review,
GAO looked at (1) the extent to which agencies have performed risk
assessments, (2) the annual amount of improper payments estimated, and (3)
the amount of improper payments recouped through recovery audits.

The federal government continues to makeprogress in identifying programs
susceptible to the risk of improper payments in addressing the new IPIA
requirements. At the same time, significant challenges remain to
effectively achieve the goals of IPIA. The 33 fiscal year 2005 PARs GAO
reviewed show that some agencies still have not instituted systematic
methods of reviewing all programs and activities, have not identified all
programs susceptible to significant improper payments, or have not
annually estimated improper payments for their susceptible programs as
required by the act.

The full magnitude of the problem remains unknown because some agencies
have not yet prepared estimates of improper payments for all of their
programs. Of the 33 agencies reviewed, 18 reported over $38 billion of
improper payments in 57 programs. This represented almost a $7 billion, or
16 percent, decrease in the amount of improper payments reported by 17
agencies in fiscal year 2004. However, as shown in the table below, the
total improper payments estimate does not include 7 major agency programs
with outlays totaling about $228 billion.

Major Programs That Have Not Reported Improper Payments Estimates

Sources: Office of Management and Budget and cited agencies' fiscal year
2005 PARs.

Further, agency auditors have identified major management challenges
related to agencies' improper payment estimating methodologies and
significant internal control weaknesses for programs susceptible to
significant improper payments. In addition, two agency auditors cited
noncompliance with IPIA in their annual audit reports.

For fiscal year 2005 PARs, agencies that entered into contracts with a
total value exceeding $500 million annually were required to report
additional information on their recovery audit efforts. Nineteen agencies
reported reviewing over $300 billion in vendor payments, identifying
approximately $557 million to be recovered, and actually recovering about
$467 million.

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