Improper Payments: Incomplete Reporting under the Improper
Payments Information Act Masks the Extent of the Problem
(05-DEC-06, GAO-07-254T).
Fiscal year 2005 marked the second year that executive agencies
were required to report improper payment information under the
Improper Payments Information Act of 2002 (IPIA). The ultimate
goal is to minimize such payments because, as a practical matter,
they cannot be entirely eliminated. GAO's testimony is primarily
based on its recently issued report, GAO-07-92, which included a
review of improper payment information reported by 35 agencies in
their fiscal year 2005 performance and accountability or annual
reports. This statement focuses on the progress agencies have
made in their improper payment reporting, the challenges that
remain, and the total amount of improper payments recouped
through recovery auditing.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-254T
ACCNO: A63884
TITLE: Improper Payments: Incomplete Reporting under the
Improper Payments Information Act Masks the Extent of the Problem
DATE: 12/05/2006
SUBJECT: Accountability
Audit reports
Data integrity
Erroneous payments
Executive agencies
Government information
Internal controls
Payments
Program abuses
Program evaluation
Program management
Questionable payments
Reporting requirements
Risk assessment
Policies and procedures
Program goals or objectives
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GAO-07-254T
* [1]Summary
* [2]Significant Trends in IPIA Reporting
* [3]Challenges That Hinder Full Reporting of Improper Payment In
* [4]Improvements Needed in Agencies' Reporting of Improper Payme
* [5]Statutory or Regulatory Barriers That May Hinder Agency
Repo
* [6]Improper Payments Estimate Does Not Include Several Large, R
* [7]Threshold Criteria in OMB Guidance Limit Agency Reporting
* [8]IPIA Definition of Improper Payments Excludes Certain Paymen
* [9]Agencies' Reporting of Recovery Auditing Information Questio
* [10]GAO Recommendations for Continued Progress in Capturing the
* [11]Contact and Acknowledgments
* [12]GAO's Mission
* [13]Obtaining Copies of GAO Reports and Testimony
* [14]Order by Mail or Phone
* [15]To Report Fraud, Waste, and Abuse in Federal Programs
* [16]Congressional Relations
* [17]Public Affairs
Testimony
Before the Subcommittee on Federal Financial Management, Government
Information, and International Security, Committee on Homeland Security
and Governmental Affairs, U.S. Senate
United States Government Accountability Office
GAO
For Release on Delivery Expected at 10:30 a.m. EST
Tuesday, December 5, 2006
IMPROPER PAYMENTS
Incomplete Reporting under the Improper Payments Information Act Masks the
Extent of the Problem
Statement of David M. Walker Comptroller General of the United States
GAO-07-254T
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to be here today to discuss the
governmentwide problem of improper payments in federal programs and
activities. My testimony today is based on our November 2006 report1 as
well as on our previous testimonies2 on this topic issued earlier this
year. We focused on agencies' fiscal year 2005 reporting under the
Improper Payments Information Act of 2002 (IPIA),3 the most recent data
available at the time we started this body of work. As agencies recently
reported their fiscal year 2006 data, my testimony today also includes
some preliminary observations on this information. IPIA has increased
visibility over improper payments4 by requiring executive agency heads,
based on guidance from the Office of Management and Budget (OMB),5 to
identify programs and activities susceptible to significant improper
payments,6 estimate amounts improperly paid, and report on the amounts of
improper payments and their actions to reduce them. As the steward of
taxpayer dollars, the federal government is accountable for how its
agencies and grantees spend hundreds of billions of taxpayer dollars and
is responsible for safeguarding those funds against improper payments.
However, although the ultimate goal is to identify and minimize these
payments through a variety of strategies, it is important to recognize
that, given the complexity, diversity, and magnitude of federal payments
across the executive branch, such improper payments will never be
completely eliminated.
1GAO, Improper Payments: Agencies' Fiscal Year 2005 Reporting under the
Improper Payments Information Act Remains Incomplete, [18]GAO-07-92
(Washington, D.C.: Nov. 14, 2006).
2GAO, Financial Management: Challenges Remain in Meeting Requirements of
the Improper Payments Information Act, [19]GAO-06-482T (Washington, D.C.:
Mar. 9, 2006), and Financial Management: Challenges Continue in Meeting
Requirements of the Improper Payments Information Act, [20]GAO-06-581T
(Washington, D.C.: Apr. 5, 2006).
3Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).
4IPIA defines improper payments as any payment that should not have been
made or that was made in an incorrect amount (including overpayments and
underpayments) under statutory, contractual, administrative, or other
legally applicable requirements. It includes any payment to an ineligible
recipient, any payment for an ineligible service, any duplicate payment,
payments for services not received, and any payment that does not account
for credit for applicable discounts.
5OMB Memorandum M-03-13, "Improper Payments Information Act of 2002
(Public Law 107-300)" May 21, 2003, and OMB Circular No. A-136, Financial
Reporting Requirements, S II.5.6 (July 24, 2006). OMB recently issued
revised guidance for fiscal year 2006 reporting in OMB Memorandum M-06-23,
"Issuance of Appendix C to OMB Circular No. A-123" (Aug. 10, 2006).
6OMB's guidance defines significant improper payments as those in any
particular program that exceed both 2.5 percent of program payments and
$10 million annually.
Today, my testimony will focus on the following key points:
o trends in agencies' reporting under IPIA from fiscal year 2004
through fiscal year 2006,
o several major challenges that continue to hinder full reporting
of improper payment information,
o agencies' reporting of recovery auditing efforts to recoup
improper payments, and
o our proposals for continued progress in capturing the full
extent of improper payments.
This testimony is primarily based on our recent review, which
included the 35 federal agencies that the Department of the
Treasury (Treasury) determined to be significant to the U.S.
government's consolidated financial statements. We reviewed
improper payment information reported by the 35 agencies in their
fiscal year 2005 performance and accountability reports (PAR) or
annual reports. We also performed a preliminary review of
agencies' fiscal year 2006 PARs or annual reports. We reviewed OMB
guidance on implementation of IPIA and its report7 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 the data that OMB reported. However, we
are providing agency-reported data as descriptive information that
will inform interested parties about the magnitude of
governmentwide improper payments and other improper
payment-related information. We believe the data to be
sufficiently reliable for this purpose. We conducted our work from
April 2006 through September 2006 in accordance with generally
accepted government auditing standards. Our November 2006 report
contains additional details on our scope and methodology.
Summary
Under OMB's leadership, progress has been made in the first 3
years of IPIA implementation. Agencies' reporting under the act's
provisions though, does not yet reflect the full scope of improper
payments across executive branch agencies. For fiscal years 2004
and 2005, we concluded that the magnitude of the governmentwide
improper payments problem was still unknown because agencies had
not yet prepared improper payment estimates for all of their
programs. Our preliminary review of fiscal year 2006 reporting
indicates that while additional progress is being made, several
challenges noted in our report on fiscal year 2005 reporting
continue to hinder full reporting of improper payment information.
Similar to our previous results, we found that some agencies have
not annually reviewed all programs and activities, have not
estimated improper payments for their risk-susceptible programs,
or only estimated improper payments for one component of the
program. For example, we noted that the total improper payment
estimate for fiscal year 2006 still does not include 9
risk-susceptible federal programs, including Medicaid with total
program outlays of about $183 billion for fiscal year 2006. In
addition, federal agency auditors continue to identify weaknesses
in agencies' compliance with the requirements of IPIA.
Our review of agencies' fiscal year 2005 reporting of selected
improper payment information identified three key challenges to
fully addressing improper payments reporting requirements.
o First, we found that agencies' reporting of improper payment
information was incomplete and the extent and level of detail of
agencies' improper payment information varied. Although 18
agencies collectively identified and estimated improper payments
for 57 programs and activities totaling $38 billion, some agencies
still had not instituted systematic methods of reviewing all
programs, resulting in their identification of none or only a few
programs as susceptible to significant improper payments. In many
cases, these same agencies had well-known and well-documented
financial management weaknesses as well as fraudulent, improper,
and questionable payments. A lack of detailed guidance may be a
contributing factor to agencies' inability to adequately assess
their programs for risks. Specifically, we found that OMB's
implementing guidance does not include a description of the common
types of risk factors agencies should consider when annually
reviewing their programs, such as program complexity, operational
changes, findings from investigative reports, and financial
statement and performance audit reports. Further, improper
payments estimates totaling about $389 million for 9 programs were
not based on a valid statistical sampling methodology as required.
Higher estimates would have been expected had statistically valid
methods been used, given that total outlays for these 9 programs
exceeded $58.2 billion in fiscal year 2005.
o Second, the total improper payment estimate does not include
several large, risk-susceptible federal programs. Agencies have
not estimated improper payments for 10 risk-susceptible programs
with outlays totaling over $234 billion, even though most of these
programs had such reporting requirements predating IPIA.8 Further,
although the total improper payment estimate of about $38 billion
represents almost a $7 billion, or 16 percent, decrease from the
$45 billion of improper payments reported by agencies in fiscal
year 2004, the reported reduction may not reflect improved
accountability or strengthened internal controls. As we previously
reported in March and April 2006, this estimate reduction is
primarily attributable to a decrease in the Department of Health
and Human Services' (HHS) Medicare program improper payment
estimate. This decrease mainly resulted from a change to
Medicare's estimating methodology rather than from improved
payment controls. We noted that HHS's Office of Inspector General
(OIG) continued to cite the integrity of Medicare payments as a
top management challenge in HHS's fiscal year 2005 PAR.
o Third, OMB's implementation of the act's broad criteria to
identify risk-susceptible programs limit the disclosure and
transparency of governmentwide improper payments. This limitation
does not further the objectives of IPIA, as programs that do not
meet OMB's criteria--improper payments exceeding $10 million and
2.5 percent of program payments--are excluded from agencies'
improper payment reporting. For example, one agency identified
three programs with estimated improper payments exceeding $10
million, but because the estimates did not exceed 2.5 percent of
program outlays, they were not included in the governmentwide
improper payment total.
In addition, we noted that the definition of improper payments
under IPIA excludes certain types of payments required to be made
under constitutional, statutory, or judicial requirements, even if
those payments are subsequently determined to be incorrect. These
include payments that an agency must make pursuant to a statute or
court order that later are determined to be overpayments. Yet,
because agencies are not required to track, monitor, and report on
these types of overpayments, the governmentwide magnitude of this
issue is unknown.
With regard to agencies' recovery auditing efforts, a mechanism
used to detect and recoup improper payments, we found that the
data reported may not present an accurate view of the extent or
success of these efforts. While 21 agencies were required to
report on their recovery audit efforts, we identified
discrepancies in several agencies' information and found limited
reviews over contract payments. For example, for fiscal year 2005,
the National Aeronautics and Space Administration (NASA) reported
that it had identified and recovered $617,442 in contract
payments, a reported 100 percent recovery rate. Yet, the NASA OIG
reported it had identified over $515 million in questioned
contract costs during fiscal year 2005, of which NASA management
decided to pursue recovery of $51 million. Had the $51 million
amount been compared to the $617,442 NASA actually recovered, its
recovery rate would drop from the reported 100 percent to 1.2
percent. In addition, we noted that 5 of the 21 agencies did not
review all of their agency components as part of their recovery
audit efforts while 2 agencies reported that recovery auditing was
not cost beneficial without reporting any details to support this
determination.
Our November 2006 report included one matter for congressional
consideration and four recommendations for executive action.
Specifically, to ensure that the full extent of improper payments
is being captured, we believe the Congress should consider
amending existing IPIA provisions to add more specific criteria,
such as a dollar threshold agencies should use to identify which
programs and activities are susceptible to significant improper
payments, thereby triggering improper payment estimating and
reporting requirements. In addition, to facilitate agencies'
progress in ensuring accurate and complete improper payments and
recovery auditing reporting, we recommended that OMB take several
actions regarding (1) risk assessment methodologies and the level
of detail necessary to meet the annual improper payment reporting
requirements, (2) statistically valid estimates, (3) extent of
payments agencies make under statute or judicial determinations
that later are determined to be overpayments, and (4) agencies'
rationale that recovery auditing is not cost beneficial. In
written comments on the draft of our report, OMB agreed with our
assessment of the challenges that remain in meeting the goals of
IPIA. OMB generally agreed with our recommendations and
highlighted progress made in the second year of governmentwide
improper payments reporting, as well as initiatives under way to
measure improper payments in selected programs susceptible to
significant improper payments. However, in a subsequent letter to
GAO, OMB's Controller raised concerns about the report, including
the timing of our analysis and report issuance, which we discuss
later in this testimony.
Significant Trends in IPIA Reporting
I would now like to focus on the progress that has been made in
the first 3 years of IPIA implementation. Regarding the first year
reporting under IPIA, as we reported in March 2005,9 the improper
payment estimate of $45 billion reported by 17 agencies did not
include any amounts for some of the highest risk programs, such as
Medicaid with outlays in excess of $175 billion for fiscal year
2004. Further, we noted that some agencies still had not
instituted systematic methods of reviewing all programs and
activities or had not identified all programs susceptible to
significant improper payments. We concluded that the magnitude of
the governmentwide improper payments problem was still unknown
because agencies had not yet prepared improper payment estimates
for all of their programs. In that report, we made three
recommendations to OMB to help ensure successful implementation of
IPIA requirements. OMB commented that its management emphasis and
inspector general oversight offer sufficient incentives to ensure
agencies meet IPIA requirements.
Regarding the second year of IPIA reporting, we recently reported
in November 200610 that while making progress, agencies' fiscal
year 2005 reporting under IPIA does not yet reflect the full scope
of improper payments across executive branch agencies. For fiscal
year 2005, 18 agencies reported improper payment estimates
totaling in excess of $38 billion,11 which is $7 billion less than
the $45 billion reported for fiscal year 2004.12 All indications
are that the estimate should be markedly higher because the total
improper payment estimate did not include certain factors that if
included, would increase the estimate. For example, agencies had
not estimated improper payments for 10 risk-susceptible programs
with outlays totaling over $234 billion, even though most of these
programs had such reporting requirements predating IPIA.13 In
addition, we found that improper payment estimates totaling about
$389 million for 9 programs were not based on a statistical
sampling methodology.14 Given that total outlays for these 9
programs exceeded $58.2 billion in fiscal year 2005, estimates for
these programs would likely have been much greater had
statistically valid methods been used. Further, we reported that
agencies identified a number of statutory or regulatory barriers
that limited their corrective actions in reducing improper
payments. I will discuss these matters in greater detail later in
my statement. We concluded that major challenges remain in meeting
the goals of the act and ultimately improving the integrity of
payments.
Based on our preliminary review15 of available information for
fiscal year 2006, 18 agencies estimated improper payments totaling
about $42 billion, a net increase of about $4 billion, or 11
percent, from the prior year improper payment estimate of $38
billion.16 This increase was attributable to 10 newly reported
programs with improper payment estimates totaling about $2.3
billion and federal agencies reporting an increase in estimates
for programs that had previously reported.
Our preliminary review of federal agencies' fiscal year 2006
reporting of selected improper payment information identified that
while progress is being made, improvements are still needed to
fully address improper payments reporting requirements. Similar to
our previous results, we found that some agencies have not yet
annually reviewed all programs and activities, have not yet
estimated improper payments for their risk-susceptible programs,
or only estimated improper payments for one component of the
program. For example, we noted that the fiscal year 2006 total
improper payment estimate of $42 billion still does not include 9
risk-susceptible federal programs, including Medicaid with total
program outlays of about $183 billion for fiscal year 2006. In
addition, some federal agency auditors continue to identify
weaknesses in agencies' compliance with the requirements of IPIA.
Five agency auditors that tested compliance with IPIA cited
agencies that were either in noncompliance with the act or had not
fully complied with certain aspects of the act requirements, such
as not estimating for all risk-susceptible programs, excluding
certain types of payments from reviews, and estimating improper
payments using samples that were not statistically derived. In
addition to the noncompliance issues, many federal agencies' OIGs
again reported on major management challenges, including reducing
improper payments in programs and payment activities. For example,
one agency's OIG reported that ineffective oversight and
monitoring of policies, programs, and its program participants has
hindered the agency's ability to identify and correct improper
payments. Another agency's OIG reported that improving acquisition
and contract management is needed to reduce cost and eliminate
improper payments.
I would also like to address certain concerns recently raised by
OMB's Controller in a letter to us dated November 28, 2006. In
that letter, the Controller stated that our report issued on
November 14, 2006, contained out-of-date information because it
was based on agencies' fiscal year 2005 reporting. We had a number
of reasons for the timing of our analysis and report issuance.
First, it is important to note that we first stated our findings
related to fiscal year 2005 improper payments less than 4 months
after agencies reported their fiscal year 2005 information. On
March 9, 2006, and again on April 5, 2006, we testified17 before
the Senate and House Government Reform subcommittees on agencies'
progress in meeting IPIA reporting requirements for fiscal year
2005. In those testimony statements, we focused on selected
reporting requirements, and our objectives included (1) the extent
to which agencies performed risk assessments of all programs and
activities, (2) the annual amount of improper payments estimated
by reporting agencies, and (3) the amount of improper payments
recouped through recovery audits. For our November 14 report, the
objectives were similar but broader, and focused on additional
improper payment reporting requirements as well as on the
definition and the types of improper payments included in IPIA and
OMB's implementing guidance. The latter issues, it should be
noted, are unrelated to specific fiscal year reporting. Thus, the
issuance of our report was timely, given the body of work we
issued prior to November 14--the two testimonies mentioned above,
another related report on improper payments in state-administered
programs,18 and our responses to posthearing questions.19
Second, the issuance of our report was in accordance with the
congressional schedule this fall, which included a lengthy recess
for mid-term elections. Third, the information in our November 14
report provides a sound framework for documenting the issues that
affected agencies and OMB in fiscal year 2005 and which they
continue to face. Most of the findings discussed in our report
continue to be relevant for the fiscal year 2006 improper payment
reporting. Specifically, our November 14 report highlighted
incomplete reporting of improper payment information related to
agencies' risk assessments and improper payment estimates, as well
as risk-susceptible programs that still are unable to report
improper payment estimates. As discussed previously, based on our
preliminary review of the fiscal year 2006 PARs, these issues
continue to exist.
Finally, let me add that we provided a draft of our report to OMB
prior to publication for its review and comment. The Controller
sent detailed written comments in a letter dated October 26, 2006,
which are reprinted in full in our final report. These comments
make no mention of any concerns with the timeliness of the data
included in our report. Indeed, the official comments state that
OMB generally agreed with our assessment that challenges remain in
meeting the goals of IPIA.
Challenges That Hinder Full Reporting of Improper Payment Information
While showing progress, agencies' fiscal year 2005 reporting under
IPIA does not yet reflect the full scope of improper payments
across executive branch agencies. Major challenges remain in
meeting the goals of the act and ultimately improving the
integrity of payments. We found that the following challenges
continue to hinder full reporting of improper payment information:
existing reporting remains incomplete, large programs are still
not included, and OMB's threshold criteria limit complete
reporting.
Improvements Needed in Agencies� Reporting of Improper Payment
Information
Of the 35 agencies whose fiscal year 2005 agency PARs or annual
reports were included in our review, 23, the same number of
agencies that reported having risk assessments in our prior year
review, reported they had performed risk assessments of all of
their programs and activities. The remaining 12 agencies either
did not report this information in their PARs or annual reports,
or included some improper payment details in their PARs but did
not report assessing for the risk of improper payments for all of
their programs and activities.
Although OMB's guidance identifies the scope of payments agencies
are to review, such as federal awards made by recipients and
subrecipients subject to the Single Audit Act, as amended,20 it
does not provide agencies detailed information on how to conduct a
risk assessment in order to adequately carry out their
responsibilities to meet the requirements of the act.
Specifically, we found that OMB's guidance lacks a description of
the common types of risk factors agencies should consider when
annually reviewing their programs, such as program complexity;
operational changes; and findings from investigative, financial
statement, and performance audit reports. Developing such a
framework would begin the process to effectively identify and
target high-risk areas within a program and better position
agencies as they determine which control activities to implement
to reduce risks and ultimately reduce fraud and errors.
Although 23 agencies reported meeting this requirement for all of
their programs and activities, other readily available information
suggests to us that the adequacy of agencies' risk assessments was
questionable. For example, auditors for the Department of Justice
(DOJ) and the Department of Homeland Security (DHS) cited agency
noncompliance with IPIA in their fiscal year 2005 annual audit
reports, primarily caused by inadequate risk assessments. The DOJ
auditors stated that one agency component had not established a
program to assess, identify, and track improper payments. The DHS
auditors 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 auditors reported
IPIA noncompliance for DHS. Although the auditors identified the
agency's risk assessment methodology as inadequate, DHS again
reported in its PAR that it had assessed all of its programs for
risk and found none susceptible to significant improper payments.
However, existing significant financial management weaknesses at
these agencies highlight visible, well-known risks for improper
payments. For example, DHS continues to face significant financial
management weaknesses as illustrated by previous reviews of the
Federal Emergency Management Agency's (FEMA)--a DHS
component--Individuals and Households Program (IHP). The DHS OIG
has also cited disaster response and recovery as one of DHS's
major management challenges for fiscal year 2005.
In May 2005, the DHS OIG reported21 weaknesses in DHS's IHP,
including inspection and verification of losses reported by
individuals related to the 2004 hurricane season as well as
eligibility issues. Subsequently, in July 2005, the Senate
Committee on Homeland Security and Governmental Affairs released
its investigation results of FEMA's response to the 2004 Florida
hurricanes, in particular, Hurricane Frances, and found similar
weaknesses in FEMA's IHP. In discussing its risk assessment
methodology, DHS reported that FEMA's IHP might be at high risk
for issuing improper payments as a result of the weaknesses
identified in the DHS OIG report and performed a second round of
testing of its fiscal year 2004 disbursements. From its test
results, DHS concluded that its estimate of improper payments for
IHP did not meet OMB's criteria of exceeding $10 million and 2.5
percent of program payments. DHS reported that IHP would receive
closer scrutiny and undergo an independent payment review in
fiscal year 2006, but that its sample payment testing did not show
the program to be at high risk for improper payments.
Our recent review of FEMA's IHP shows a dramatically different
result. In our June 2006 report,22 we estimated improper payments
related to FEMA's IHP of about $1 billion as of February 2006,
related to individual assistance payments in response to
hurricanes Katrina and Rita that occurred in 2005. This amount
represents 16 percent of the IHP payments. For example, we
determined that millions of dollars in expedited and housing
assistance payments went to registrants who provided the names and
Social Security numbers of individuals incarcerated in federal and
state prisons during the hurricanes. In addition, FEMA improperly
paid individuals twice for their lodging--paying both hotels and
rental assistance. Also, FEMA could not confirm that 750 debit
cards worth $1.5 million went to Hurricane Katrina victims.
In addition to these problems with agency risk assessments, we
found that only a limited number of agencies were estimating
improper payments and several of those that were did not base
their estimates on a valid statistical sampling methodology as
required. Of the 35 agencies, 18 agencies accounting for 57
programs reported improper payment estimates totaling in excess of
$38 billion23 for some or all of their high-risk programs. (See
[21]GAO-07-92 , app. II, for further details.) This represents
approximately 2 percent of the total fiscal year 2005 government
outlays of $2.5 trillion. For the remaining 17 agencies that did
not report estimates, 8 said they did not have any programs
susceptible to significant improper payments, 8 were silent about
whether they had programs susceptible to significant improper
payments, and the remaining agency identified programs susceptible
to significant improper payments and said it planned to report an
estimate by fiscal year 2007. (See [22]GAO-07-92 , table 2, for
further details.)
Unless previously approved by OMB, the improper payments estimates
must be based on a statistically valid sampling methodology24 and
should include a gross total of both over- and underpayments. In
its Circular No. A-136, OMB encourages agencies to break out over-
and underpayments as part of improper payment reporting, if
available. (For more details related to over- and underpayment
estimates, see [23]GAO-07-92 , app. III.) With statistical
sampling, sample results can be generalized to the entire
population from which the sample was taken. From our review, we
found six agencies that did not use statistical sampling as a
basis for reporting improper payments totaling approximately $389
million for nine programs with outlays exceeding $58 billion.
For example, the Department of Labor (Labor) analyzed fiscal year
2003 single audits to identify questioned costs for its Workforce
Investment Act25 program, which, in turn, were used as a proxy for
reporting its improper payment estimate. Specifically, the
improper payment rate was determined by calculating the projected
questioned costs and dividing this total amount by the
corresponding outlays. We do not believe this is a reasonable
proxy for improper payment levels because single audits, by
themselves, may lack the level of detail necessary for achieving
IPIA compliance. Specifically, single audits generally focus on
the largest dollars in an auditee's portfolio. Thus, all programs
identified as susceptible to improper payments at the federal
level may not receive extensive coverage under a single audit.
Consequently, both the depth and level of detail of single audit
results are, generally, insufficient to identify improper
payments, estimate improper payments, or both.
We also found instances where agencies estimated improper payments
for only one component of the risk-susceptible program. For
example, HHS's Medicare program is the largest program
constituting the total improper payment estimate, with an estimate
of $12.1 billion for fiscal year 2005. However, this estimate
represents payment errors only for its fee-for-service program
component. HHS has not yet begun to estimate improper payments for
its managed care component, with outlays totaling about $52
billion, or 15 percent of Medicare program outlays. In its fiscal
year 2005 financial report, HHS's Centers for Medicare and
Medicaid Services (CMS) identified bringing the Medicare managed
care component into compliance with IPIA as a key challenge in the
coming years. In addition, CMS's external auditors identified
Medicare's managed care benefits payment cycle as a material
weakness in its report on internal controls. Specifically, the
auditors found that existing CMS policies and procedures are not
sufficient to adequately reduce the risk of material benefit
payment errors from occurring or not being detected and corrected
in a timely manner.
Statutory or Regulatory Barriers That May Hinder Agency Reporting
and Corrective Actions
A key element that agencies are required to address as part of
their improper payment reporting includes a description of any
statutory or regulatory barrier that may limit the agencies'
corrective actions in reducing improper payments. Reporting this
type of information gives the Congress the ability to use its
authorization, appropriation, and oversight responsibility to help
agencies meet performance goals. Citing specific statutory or
regulatory barriers as part of its improper payments reporting
allows the Congress to determine whether the public's needs are
adequately served by federal programs, and thus can take
corrective action through legislative changes. It should be
recognized that this type and other barriers exist as a result of
decisions to ensure beneficiary privacy and other data safeguards
and the inherent nature of some federal programs. As a result, it
may be difficult to eliminate or mitigate these barriers to the
point where they no longer restrict agency actions in certain
areas to better manage their improper payment problems.
During our review of agencies' fiscal year 2005 PARs, we found
that nine agencies identified statutory or regulatory barriers
that may limit corrective actions to reduce improper payments.26
Agencies cited various barriers that restrict their ability to
manage their programs against improper payments, including three
agencies that cited barriers related to data matching.27 Data
matching and other computer-related techniques play a significant
role not only in identifying improper payments, but also in
providing data on why these payments were made and, in turn,
highlighting areas that need strengthened prevention controls. The
adoption of these techniques allows agencies to have effective
detection methods to quickly identify and recover improper
payments. These powerful internal control tools provide more
useful and timely access to information. The use of these
techniques can achieve potentially significant savings by
identifying client-related reporting errors and misinformation
during the eligibility determination process--before payments are
made--or by detecting improper payments that have been made.
Therefore, it will be critical for the Congress, federal agencies,
and the administration to carefully consider the information
reported on statutory barriers to ensure that agencies can take
advantage of such tools to the greatest extent possible.
For example, Education reported that requirements in the Internal
Revenue Code precluded data matching, but that a database match
with the Internal Revenue Service (IRS) would likely improve the
accuracy of Pell Grant awards. In addition, it would eliminate the
need for schools to rely on paper copies of tax returns submitted
by applicants, which are used to verify applicants' adjusted gross
income and taxes paid. Currently, the schools have limited
assurance that the tax returns submitted by the applicants contain
the same information that is filed with IRS. However, Education's
proposal to amend the Internal Revenue Code to permit a 100
percent database match has not yet been enacted, and Education is
uncertain whether or when such legislation may be enacted. As a
further illustration, Labor reported that for its Federal
Employees' Compensation Act (FECA) program,28 legislation does not
currently permit FECA to verify employment earnings with the
Social Security Administration (SSA) without the claimant's
written permission. Compensation benefits may be overpaid if an
employee has unreported earnings and does not grant Labor
permission to verify earnings with SSA.
Improper Payments Estimate Does Not Include Several Large,
Risk-Susceptible Programs
The fiscal year 2005 governmentwide improper payments estimate of
$38 billion did not include any amounts for 10 programs, with
fiscal year 2005 outlays totaling over $234 billion. OMB had
specifically required 7 of these programs to report selected
improper payment information for several years before IPIA
reporting requirements became effective. After passage of IPIA,
OMB's implementing guidance required that these programs continue
to report improper payment information under IPIA. The remaining 3
risk-susceptible programs, with no previous reporting requirement,
provided target dates for estimating improper payments. As shown
in table 1, the fiscal year 2005 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.
7Office of Management and Budget, Improving the Accuracy and Integrity of
Federal Payments (Washington, D.C.: Feb. 2, 2006).
8Prior to the executive branch-wide 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.
9GAO, Financial Management: Challenges in Meeting Requirements of the
Improper Payments Information Act, [24]GAO-05-417 (Washington, D.C.: Mar.
31, 2005).
10 [25]GAO-07-92 .
11Included in this estimate were 10 agencies reporting for the first time
improper payment estimates of almost $1.2 billion for 17 programs. Also,
the governmentwide estimate includes both over- and underpayments. OMB's
implementing guidance requires agencies to report the gross versus net
total of both over- and underpayments.
12In their fiscal year 2005 PARs, several agencies updated their fiscal
year 2004 improper payment estimates to reflect changes since issuance of
their fiscal year 2004 PARs. These updates increased the governmentwide
improper payment estimate for fiscal year 2004 from $45 billion to $46
billion.
13See footnote 8.
14Agency-reported estimates were primarily based on known cases identified
through Office of Inspector General audits and other isolated instances.
However, one agency reported using a combination of statistical and
nonstatistical methodologies, but did not identify what portion of the
estimate was calculated using statistical sampling. Any agency that
reported using nonstatistical sampling methodologies to calculate its
programs' improper payment estimates was included in this analysis.
15We plan to report further details of agencies' fiscal year 2006 improper
payment reporting in 2007.
16In their fiscal year 2006 PARs, selected federal agencies updated their
fiscal year 2005 improper payment estimates to reflect changes since
issuance of their fiscal year 2005 PARs. These updates increased the
governmentwide improper payment estimate for fiscal year 2005 from $38
billion to $39 billion.
17 [26]GAO-06-581T and [27]GAO-06-482T .
18GAO, Improper Payments: Federal and State Coordination Needed to Report
National Improper Payment Estimates on Federal Programs, [28]GAO-06-347
(Washington, D.C.: Apr. 14, 2006).
19GAO, Improper Payments: Posthearing Questions Related to Agencies
Meeting the Requirements of the Improper Payments Information Act of 2002,
[29]GAO-06-1067R (Washington, D.C.: Sept. 6, 2006).
2031 U.S.C. SS 7501-7507. Under the Single Audit Act, as amended, and
implementing guidance, independent auditors audit state and local
governments and nonprofit organizations that expend federal awards to
assess, among other things, compliance with laws, regulations, and the
provisions of contracts or grant agreements material to the entities'
major federal programs. Organizations are required to have single audits
if they annually expend $500,000 or more in federal funds.
21Department of Homeland Security, Office of Inspector General, Audit of
FEMA's Individuals and Households Program in Miami-Dade County, Florida,
for Hurricane Frances, OIG-05-20 (Washington, D.C.: May 2005).
22GAO, Hurricanes Katrina and Rita Disaster Relief: Improper and
Potentially Fraudulent Individual Assistance Payments Estimated to Be
Between $600 Million and $1.4 Billion, [30]GAO-06-844T (Washington, D.C.:
June 14, 2006).
23Included in this estimate were 17 newly reported programs in 10
agencies, totaling about $1.2 billion for fiscal year 2005.
24OMB requires that agencies' statistical sampling methodologies be
designed to yield estimates with a 90 percent confidence interval of plus
or minus 2.5 percent.
25Pub. L. No. 105-220, 112 Stat. 936 (Aug. 7, 1998).
26We did not independently verify the validity of these agency assertions.
27Data matching is the process in which information from one source is
compared with information from another to identify any inconsistencies.
28This act was repealed and parts of it are now codified in code sections
of Titles 1, 5, and 18 of the United States Code.
Table 1: Susceptible Programs That Did Not Report Improper Payment
Estimates and Target Dates for Estimates
Dollars in billions
Target date
for improper Previously
Fiscal year payment required to
Agency/program 2005 outlays estimates estimate
Department of Agriculture--School $8.2 2007 X
Programs
Federal Communications 1.7 2007
Commission--Universal Service
Fund's Schools and Libraries
Federal Communications 3.8 2007
Commission--High Cost Support
Program
Department of Health and Human 5.1 2008 X
Services--State Children's
Insurance Program
Department of Agriculture--Women, 4.8 2008 X
Infants, and Children
Department of Health and Human 181.7 2008 X
Services--Medicaid
Department of Agriculture--Child 2.1 2010
and Adult Care Food Program
Department of Health and Human 4.9 Did not report X
Services--Child Care and target date
Development Fund
Department of Health and Human 17.4 Did not report X
Services--Temporary Assistance for target date
Needy Families
Department of Housing and Urban 5.0 Did not report X
Development--Community Development target date
Block Grant
Total $234.7 7
Sources: OMB and cited agencies' fiscal year 2005 PARs.
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. For example, since fiscal year 2002, HHS has conducted
pilots at the state level to further its progress toward reporting a
national improper payments estimate for its Medicaid program. Each state
is responsible for designing and overseeing its own Medicaid program
within the federal government structure. This type of program structure
presents challenges for implementing a methodology to estimate improper
payments as HHS must work with states to obtain applicable documentation
used in the calculation. An additional challenge HHS and other agencies
with state-administered programs say they face is the ability to hold
states accountable for meeting targets to reduce and recover improper
payments in the absence of specific statutory authority.
Of the three programs that did not report a target date for estimating,
the Department of Housing and Urban Development's (HUD) Community
Development Block Grant (CDBG) program was the only one that did not
report any actions under way to begin estimating improper payments. In its
fiscal year 2005 PAR, HUD reported that based on completed testing of
fiscal year 2003 payments, this program is below OMB's threshold
criteria--exceeding $10 million and 2.5 percent of program payments--for
significant improper payments and, therefore, was removed from HUD's
at-risk inventory. 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. The CDBG program was subject
to the previous OMB Circular No. A-11 requirements and thus was required
by OMB's guidance to continue to report improper payment information under
IPIA, regardless of the agency-determined risk level, which based on other
known information may not reflect actual risk. During a June 2006
hearing29 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 evidenced by the HUD OIG reviews, the CDBG
program may be at risk of significant improper payments.
Further, we noted that the total improper payment estimate of about $38
billion represents almost a $7 billion, or 16 percent, decrease from the
$45 billion of improper payments reported by agencies in fiscal year
2004.30 On the surface, this would suggest that significant progress has
been made. However, the reported $7 billion decrease in the governmentwide
estimate is primarily attributable to a decrease in Medicare's estimate.31
29June 29, 2006, hearing before the Senate Subcommittee on Federal
Financial Management, Government Information, and International Security,
Committee on Homeland Security and Governmental Affairs.
30In their fiscal year 2005 PARs, several agencies updated their fiscal
year 2004 improper payment estimates to reflect changes since issuance of
their fiscal year 2004 PARs. These updates increased the governmentwide
improper payment estimate for fiscal year 2004 from $45 billion to $46
billion.
Based on our review, the Medicare improper payment estimate decrease was
principally caused by increased 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. HHS reported marked
reductions in its error rate attributable to fewer cases of (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. 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.
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 validation
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. Further, we also found that HHS's OIG
continues to cite the integrity of Medicare payments as a top management
challenge. In addition, health care fraud schemes continue to hamper HHS's
efforts to improve accountability. For example, in May 2006, DOJ
reported32 that a businessman pleaded guilty to conspiracy to defraud
Medicare of $40 million in fraudulent billings over a 16-month period. The
fraud scheme included billing Medicare for motorized wheelchairs that were
either not required by the Medicare beneficiary, not delivered, or both.
31We determined that the decrease was primarily caused by a $9.6 billion
reduction in the 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. The $9.6 billion
reduction is the difference between the fiscal year 2004 estimate of $21.7
billion and the fiscal year 2005 estimate of $12.1 billion.
Threshold Criteria in OMB Guidance Limit Agency Reporting
For purposes of assessing what programs and activities are at risk of
improper payments, IPIA states that agency heads must review their
agencies' programs and activities to determine those that are susceptible
to significant improper payments. The law does not define susceptibility.
In its implementing guidance, OMB directed that a program or activity is
susceptible to significant improper payments if it meets two
criteria--potential improper payments exceeding $10 million and 2.5
percent of program payments. Therefore, both criteria must be met for an
agency to subject the program to the later steps requiring the agency to
estimate improper payments and address the various improper payment
reporting requirements.
As I stated earlier, the information developed during a risk assessment
forms the foundation 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. Thus,
these assessment criteria affect how agencies identify, estimate, report
on, and reduce those programs susceptible to significant improper
payments. For example, of the 23 agencies that reported assessing all
programs and activities, we found that 6 agencies limited their risk
assessment reviews to only those programs that would likely meet OMB's
definition of programs susceptible to significant improper payments. Two
of these 6 agencies reported that they did not perform a comprehensive
risk assessment for those programs with outlays of less than $10 million
because the programs would not have exceeded both of OMB's threshold
criteria. The remaining 4 agencies did not perform a comprehensive risk
assessment of programs with outlays ranging from $40 million to $200
million, generally citing the threshold criteria as the reason for their
exclusion.
32Department of Justice, United States Attorney's Office, Southern
District of Texas, News Release, "Local Businessman Pleads Guilty to
Conspiracy to Defraud Medicare of $40 Million," May 30, 2006.
We also noted instances where agencies with large program outlays reported
that their programs or activities were not susceptible to significant
improper payments because the improper payment estimates only exceeded one
of OMB's criteria for reporting improper payment information, another
example of how OMB's criteria could materially affect the extent to which
agencies report improper payment information in their PARs. From our
review of the 57 agency programs and activities that were included in the
total $38 billion improper payment estimate, we identified 20 programs or
activities that reported improper payment estimates exceeding $10 million,
but not 2.5 percent of program outlays. We also identified 1 program that
reported an error rate exceeding 2.5 percent of program outlays, but not
$10 million. See table 2 for additional details.
Table 2: Agency Improper Payment Estimates Included in the Governmentwide
Total That Met One of the Two OMB Reporting Criteria
Fiscal
year 2005 Fiscal year
improper 2005 Previous OMB
Program payment improper Circular No.
outlays estimate payment A-11
Department or (in (in error rate reporting
agency Program or activity millions) millions) (percentage) requirements
1 Department of Marketing $6,400.0 $45.0 0.70 X
Agriculture Assistance Loan
Program (previously
Commodity Loan
Programs)
2 Federal Crop 3,170.0 28.0 0.89
Insurance
Corporation
3 Farm Security and 1,027.0 16.0 1.55
Rural Investment
4 Department of Military Retirement 35,700.0 49.3 0.14 X
Defense Fund
5 Military Health 7,500.0 150.0 2.00 X
Benefits
6 Military Pay 69,100.0 432.0 0.63
7 Department of Student Financial 10,085.0 16.0 0.16
Education Assistance--Federal
Family Education
Loan
8 Title I 12,520.0 149.0 1.19 X
9 Department of Payment programs 24,114.0 14.5 0.06
Energy
10 Department of Head Start 6,865.0 110.0 1.60 X
Health and
Human Services
11 Office of Retirement Program 54,800.0 152.2 0.28 X
Personnel (Civil Service
Management Retirement System
and Federal
Employees
Retirement System)
12 Federal Employees 29,400.0 196.5 0.67 X
Health Benefits
Program
13 Railroad Retirement and 9,185.4 150.6 1.64 X
Retirement Survivors Benefits
Board
14 Small Business Small Business 1,568.2 10.5 0.67 X
Administration Investment
Companies
15 Social Old Age and 493,300.0 3,681.0 0.74 X
Security Survivors'
Administration Insurance
16 Disability X
Insurancea
17 Department of International 41.0 1.9 4.63
State Information
Program-U.S.
Speaker and
Specialist Program
18 Tennessee Payment programs 7,080.0 36.3 0.05
Valley
Authority
19 Department of Compensation 28,960.0 322.9 1.12 X
Veterans
Affairs
20 Dependency and X
Indemnity
Compensationa
21 Education programs 2,661.0 64.0 2.40
Total $803,476.6 $5,625.7 13
Source: GAO analysis of fiscal year 2005 PARs and annual reports.
aAgency combined with the above program.
We identified, in total, 21 programs or activities with improper estimates
exceeding $5.6 billion that meet only one of OMB's reporting criteria.
Most of these program estimates greatly exceeded $10 million and, without
certain stipulations, could have avoided reporting improper payment
information under OMB's reporting criteria. However, OMB has required that
13 of these 21 programs estimate improper payments regardless of dollar
amount or error rate, because they had previous reporting requirements
under OMB Circular No. A-11.33 Nonetheless, if the Circular No. A-11
requirements did not apply or agencies decided not to voluntarily report
on their improper payment estimates that were under OMB's reporting
threshold, OMB's definition of significant improper payments could
potentially mask the full scope of improper payments.
Although we do not know the extent of improper payments that are not
reported, a limited number of agencies voluntarily provided information in
their PARs that allowed us to determine the amount of improper payments
for certain programs and activities that were excluded from the total
improper payments estimate of $38 billion for fiscal year 2005. For
example, the Department of Education identified three programs with
estimated improper payments exceeding $10 million for each program, which
totaled about $155 million in improper payments. In light of OMB's
criteria, because these estimates did not exceed 2.5 percent of program
outlays, they were not included in the agency's total improper payment
estimate. In another example, the Department of Defense (DOD) OIG
reported34 it had identified about $23 million in improper payments
related to the procurement of fuel at the Defense Energy Support Center
during fiscal year 2005. DOD did not report this information in its PAR
since the improper fuel payments did not exceed 2.5 percent of program
payments.
As these examples illustrate, OMB's current criteria for identifying
risk-susceptible programs limit the disclosure of valuable information
that the Congress, the public, and others with oversight and monitoring
interests need to hold agencies accountable for reporting and reducing
improper payments. Thus, amending existing IPIA provisions to define
risk-susceptible programs and activities, such as the use of a specific
dollar threshold, would allow for more complete disclosure and
transparency of governmentwide improper payment reporting and, in turn,
would require OMB to revise its implementing guidance to reflect such
amendments as well as align existing guidance with the intent of the act.
33See footnote 8.
34Department of Defense, Office of Inspector General, Financial
Management: Improper Payments for Defense Fuel, D-2006-094 (Washington,
D.C.: June 29, 2006).
IPIA Definition of Improper Payments Excludes Certain Payments from Reporting
IPIA 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. This 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.
On August 28, 2003, OMB advised the Social Security Administration (SSA)
on improper payment reporting. Under this advice, SSA was allowed to
exclude from its estimate of improper payments those payments that it made
following constitutional, statutory, or judicial requirements, even though
those payments were subsequently determined to be incorrect. These
payments were deemed by OMB to be "unavoidable" improper payments,35 as
there are no administrative changes SSA could implement that would
eliminate such payments, nor would SSA be likely to receive other relief
from such requirements.
As we previously reported,36 although the definition of improper payments
does not use the terms avoidable37 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. We agree
with OMB's conclusion not because it is an "unavoidable" payment but
rather because it does not meet the definition of an improper payment
under the act.
In its Supplemental Security Income (SSI) program, SSA disburses
disability payments to recipients at the beginning of the month based on
the income and asset levels recipients expect to maintain during the
month.38 If SSA initially determines that an overpayment occurred, court
decisions39 and language in the Social Security Act allow individuals to
continue receiving the same amount of SSI benefits pending the results of
a hearing to determine eligibility. If the initial determination is
affirmed, the payments made during the hearing and appeals processes are
considered overpayments, which SSA may recover using a variety of means.40
35OMB defines "unavoidable" payments as payments resulting from legal or
policy requirements.
36GAO, Post-Hearing Questions Related to Agency Implementation of the
Improper Payments Information Act, [31]GAO-05-1029R (Washington, D.C.:
Sept. 16, 2005).
37OMB defines "avoidable" payments as payments that could be reduced
through changes in administrative actions.
38Some government programs pay benefits in advance under the assumption
that the beneficiary's circumstances, such as income and asset levels,
will remain the same during the period for which payment was rendered.
In this example, SSA, because of the statutory requirement, must make the
payment. The statute requires SSA to make the payment until applicable due
process requirements result in a determination that the person is
ineligible; therefore, the mandatory payments whether subsequently deemed
to be correct or incorrect, have not been made to an ineligible recipient
at the time they were made. Accordingly, the facts would not support
inclusion of these overpayments as improper payments as defined under
IPIA. However, if as a result of the due process procedures, it is
subsequently determined that the recipient is no longer eligible for
benefits and SSA makes a payment subsequent to these procedures, that
amount would be an improper payment.
Yet, we would not go so far as to conclude that any payment that is
unavoidable should not be included as an improper payment under IPIA.
Rather, the exclusion of payments should be made individually on a
fact-specific basis using the definition provided in IPIA. In addition, we
believe that agencies should track and monitor these types of payments as
part of their debt collection efforts and have the ability to readily
report this type of information upon request. OMB currently does not
require SSA to report in its PAR details relating to these types of
overpayments, nor does OMB require governmentwide reporting of these types
of overpayments, thus the magnitude of this issue is unknown. Having
agencies annually report on these types of overpayments would provide the
Congress, agency management, and other decision makers valuable
information with which to determine the extent of these types of
overpayments and to make policy decisions, if needed, to appropriately
address this issue.
39Cardinale v. Mathews, 399 F. Supp. 1163 (D.D.C. 1975), and Goldberg v.
Kelly, 397 U.S. 254 (1970).
4042 U.S.C. SS 423(g)(2) and 404.
Agencies' Reporting of Recovery Auditing Information Questionable
We noted discrepancies in selected agencies' reporting of recovery audit
information and limited reviews over contract payments. As a result,
reporting for recovery auditing information may not represent an accurate
view of the extent of agencies' efforts. From our review of agencies' PARs
and discussions with OMB, we determined that 21 agencies reported entering
into contracts with a total value in excess of $500 million and thus were
subject to recovery auditing requirements under section 831 of the
National Defense Authorization Act for Fiscal Year 2002. Generally, these
agencies reported on their recovery auditing efforts, such as the amount
identified for recovery and the amount recovered. However, we noted a few
instances where the agency amount of contract costs identified for
recovery was considerably lower than the corresponding OIG amount
identified from current year audit reviews. These discrepancies raise
questions as to whether the agency amount identified for recovery should
have been much higher, thereby significantly decreasing the reported
agency-specific and overall governmentwide high rate of recovery. We also
noted that 5 of the 21 agencies did not review all of their agency
components as part of their recovery audit efforts, and 2 agencies
reported that recovery auditing was not cost beneficial.
Section 831 of the National Defense Authorization Act provides an impetus
for applicable agencies to systematically identify and recover contract
overpayments. 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, are to be credited back to the original appropriation
from which the improper payment was made, subject to restrictions as
described in legislation. As we previously testified,41 with the passage
of this law, the Congress has provided agencies a much-needed incentive
for identifying and recovering their improper payments that slip through
agency prepayment controls.
Recovery auditing is a method that agencies can use to recoup detected
improper payments. Recovery auditing is a detective control to help
determine whether contractor costs were proper. Specifically, it 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 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 subsequent
contract outlays.
41GAO, Financial Management: Challenges Remain in Addressing the
Government's Improper Payments, [32]GAO-03-750T (Washington, D.C.: May 13,
2003).
Nonetheless, effective internal control calls for a sound, ongoing invoice
review and approval process as the first line of defense in preventing
unallowable contract costs. Given the large volume and complexity of
federal payments and historically low recovery rates for certain programs,
it is much more efficient to pay bills and provide benefits properly in
the first place. Aside from minimizing overpayments, preventing improper
payments increases public confidence in the administration of benefit
programs and avoids the difficulties associated with the "pay and chase"
aspects of recovering improper payments. Without strong preventive
controls, agencies' internal control activities over payments to
contractors will not be effective in reducing the risk of improper
payments.
For fiscal year 2005, OMB expanded the type of recovery auditing
information that agencies are to report in their annual PARs. Prior to
fiscal year 2005, 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 agencies'
recovery audit activities on a governmentwide basis in its annual report
on agencies' efforts to improve the accuracy and integrity of federal
payments. In fiscal year 2005, OMB required applicable agencies to discuss
any contract types excluded from review and justification for doing so. In
addition, agencies were required to report, in a standard 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.
Twenty-one agencies reported over $340 billion as amounts subject to
review for fiscal year 2005, while the contract amounts reviewed totaled
over $287 billion. In addition, the 21 agencies reported identifying about
$557 million in contracts for recovery, which represented less than
two-tenths of a percentage of the $287 billion amount reviewed. Of the
$557 million identified, agencies reported recovering $467 million in
improper payments, an 84 percent recovery rate. However, we found two
instances where the agency amount of contract costs identified for
recovery was considerably lower than the corresponding OIG amount
identified from current year audit reviews. These discrepancies raise
questions as to whether the agency amount identified for recovery should
have been much higher, thereby significantly decreasing the
agency-specific and overall high rate of recovery.
For example, for fiscal year 2005, NASA reported in its PAR that it had
identified and recovered $617,442 in contract payments, a 100 percent
recovery rate. Yet, the NASA OIG reported42 it had identified over $515
million in questioned contract costs during fiscal year 2005. Of this
amount, NASA management decided that $51 million in contract costs should
be pursued for recovery. When comparing the $51 million in questioned
contract costs identified for recovery to the $617,442 NASA actually
recovered, the recovery rate decreases from the reported 100 percent
recovery rate to a 1.2 percent rate.43 In another example, DOD reported in
its PAR that it had identified for recovery $473 million and recovered
about $419 million in contract payments, an 89 percent recovery rate.
However, the DOD OIG reported44 it had identified over $2 billion in
questioned contract costs as of September 30, 2005. When comparing the $2
billion in questioned contract costs45 to the $419 million DOD actually
recovered, the recovery rate significantly decreases from a reported 89
percent recovery rate to 21 percent.
These two discrepancies alone significantly decrease OMB's reported
overall recovery rate of 84 percent to a 22 percent recovery rate. Other
factors would also suggest the recovery rate is indeed much lower. We
noted other instances where OIG-reported questioned costs exceeded agency
contract amounts identified for recovery. Because these costs were not
specifically identified as contractor costs versus other payment types, we
were unable to determine how much of the OIG-identified questioned costs
related to contract costs.
42National Aeronautics and Space Administration, Office of Inspector
General, Semi-Annual Reports October 1, 2004-March 31, 2005 and April
1-September 30, 2005 (Washington, D.C.).
43We found that the recovery rate could have been higher than the 1.2
percent calculation had we solely used the OIG reported amounts regarding
the universe of questioned contract costs and subsequent amounts
recovered. Specifically, the OIG reported that of the $51 million in
questioned contract costs decided by NASA management, $16 million had been
recovered. This results in a recovery rate of about 31 percent. While this
recovery rate is higher than our calculated 1.2 percent recovery rate, it
is still significantly lower than the 100 percent recovery rate reported
by NASA in its PAR.
44Department of Defense, Office of Inspector General, Semi-Annual Reports
October 1, 2004-March 31, 2005 and April 1-September 30, 2005 (Washington,
D.C.).
45The OIG reported that the $2 billion in contract costs were deemed
questionable because they did not comply with rules, regulations, laws,
contractual terms, or a combination of these. Thus, we used the entire $2
billion to illustrate the disparity between what the OIG and agency
reported.
In addition, another factor that may call into question the reported high
recovery rate is that 5 of the 21 agencies did not review all of their
agency components as part of their recovery audit efforts, and 2 agencies
(HUD and Labor) reported that recovery auditing was not cost beneficial.
For example, HUD determined that based on its review of $206.6 million in
contract payments, none were found to be improper. Thus, HUD determined
that pursuit of an ongoing recovery auditing program was not cost
beneficial or necessary. Because section 831 of the National Defense
Authorization Act requires agencies to carry out a cost-effective program
for identifying errors made in paying contractors and for recovering
amounts erroneously paid to contractors, agencies have determined that
they may opt out of conducting a recovery audit if it is not deemed to be
cost beneficial. However, neither of the two agencies that determined it
was not cost beneficial to conduct a recovery audit provided support in
their fiscal year 2005 PARs for this determination.
GAO Recommendations for Continued Progress in Capturing the Full Extent of
Improper Payments
Our November 2006 report included one matter for congressional
consideration and four recommendations for executive action. Specifically,
to ensure that the full extent of improper payments is being captured, the
Congress should consider amending existing IPIA provisions to define
specific criteria, such as a dollar threshold, agencies should use to
identify which programs and activities are susceptible to significant
improper payments, thereby triggering improper payment estimating and
reporting requirements. In addition, to facilitate agencies' progress in
ensuring accurate and complete improper payments and recovery auditing
reporting, we recommended that OMB take several actions regarding (1) risk
assessment methodologies and the level of detail necessary to meet the
annual improper payment reporting requirements, (2) statistically valid
estimates, (3) extent of payments agencies make under statute or judicial
determinations that later are determined to be overpayments, and (4)
agencies' rationale that recovery auditing is not cost beneficial.
OMB generally agreed with our recommendations and also agreed with our
assessment that challenges remain in meeting the goals of IPIA. However,
in a subsequent letter to GAO, OMB's Controller raised concerns about the
report, including the timing of our analysis and report issuance, which I
previously discussed in this testimony. In its original comments, OMB
emphasized that progress in estimating and reporting improper payments had
been made by agencies in fiscal year 2005 and highlighted initiatives
under way to measure improper payments in other programs susceptible to
significant improper payments. OMB pointed out that agencies estimated
improper payments for 17 additional programs for fiscal year 2005, and
that this number will increase by 10 programs for fiscal year 2006. OMB
also said that beginning with fiscal year 2007, it expects HHS to begin
reporting component error rates for its Medicaid, Temporary Assistance for
Needy Families, and State Children's Health Insurance programs.
While we agree with OMB that there has been progress, we continue to
question the validity of certain agencies' risk assessment methodologies
used to identify, estimate, and report improper payments for all
risk-susceptible programs and are concerned with how OMB defines high-risk
programs for purposes of agencies' improper payment reporting. Our
continuing concern with OMB's criteria relates to those agencies with
large program outlays that have improper payment estimates that exceed the
$10 million threshold but not the 2.5 percent of program payments
threshold. Applying the 2.5 percent threshold criteria to large programs
could exclude potentially billions of dollars of improper payments from
being reported.
According to OMB, the rationale for its threshold criteria is to ensure
that agencies focus their resources on programs with the highest levels of
risk for improper payments. OMB commented that going forward, it is now
requiring agencies to track any programs that exceed the $10 million
threshold but have an error rate of less than 2.5 percent. OMB stated that
this tracking facilitates a framework that would appropriately mitigate
the risk that high-risk programs will be left out of IPIA reporting
activities. We view this as a positive step. Although OMB's recently
revised implementing guidance was outside the scope of our recent review,
our preliminary assessment found no mention of this tracking requirement.
The guidance does state that OMB may determine on a case-by-case basis
that certain programs that do not meet the threshold requirements may
still be subject to the annual PAR improper payment reporting requirement.
In light of OMB's stated intention to require agencies to track such
programs, we believe it is key that the revised implementing guidance
clearly reflects this tracking requirement and that agencies be required
to publicly report this information as part of their annual improper
payments reporting. Visibility over this type of information would help
facilitate the Congress's understanding of the nature and extent of the
governmentwide improper payments problem.
In closing, Mr. Chairman, improper payments are a serious problem.
Agencies are working on this issue at different paces, and OMB has
continued to provide important leadership. 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 executive branch's 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. Full and
reasonable disclosure of the extent of the problem could be enhanced by
modifying the act's underlying criteria used to identify which programs
and activities are susceptible to significant improper payments. OMB's
implementing guidance can also be strengthened in several key areas. With
the ongoing imbalance between revenues and outlays 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 on
the part of OMB and the agencies, as well as continued congressional
oversight, such as this hearing today, to monitor whether desired results
are being achieved.
Mr. Chairman, this concludes my prepared statement. I would be happy to
answer any questions that you or other members of the Subcommittee may
have at this time.
Contact and Acknowledgments
For further information about this testimony, please contact McCoy
Williams at (202) 512-9095 or williamsm1@gao.gov . Contact points for
our Offices of Congressional Relations and Public Affairs may be found on
the last page of this testimony. In addition to the above contacts, the
following individuals made key contributions to this testimony: Carla
Lewis, Assistant Director; Sharon Byrd; Francine DelVecchio; Francis
Dymond; Lisa M. Galvan; Jacquelyn Hamilton; Christina Quattrociocchi;
Donell Ries; and Chris Rodriguez.
(195106)
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Highlights of [41]GAO-07-254T , a testimony before the Subcommittee on
Federal Financial Management, Government Information, and International
Security, Committee on Homeland Security and Governmental Affairs, U.S.
Senate
December 5, 2006
IMPROPER PAYMENTS
Incomplete Reporting under the Improper Payments Information Act Masks the
Extent of the Problem
Fiscal year 2005 marked the second year that executive agencies were
required to report improper payment information under the Improper
Payments Information Act of 2002 (IPIA). The ultimate goal is to minimize
such payments because, as a practical matter, they cannot be entirely
eliminated. GAO's testimony is primarily based on its recently issued
report, GAO-07-92, which included a review of improper payment information
reported by 35 agencies in their fiscal year 2005 performance and
accountability or annual reports. This statement focuses on the progress
agencies have made in their improper payment reporting, the challenges
that remain, and the total amount of improper payments recouped through
recovery auditing.
[42]What GAO Recommends
In its related report, GAO suggested that the Congress consider amending
IPIA to define specific criteria agencies should use to ensure that the
full extent of improper payments is captured. GAO also made
recommendations to the Office of Management and Budget (OMB) to help
ensure accurate and complete improper payment and recovery auditing
reporting. OMB generally agreed with GAO's recommendations and outlined
actions planned and under way for continued progress. However, in a
subsequent letter to GAO, OMB's Controller raised concerns about the
report, including the timing of issuance.
While agencies are making progress, their fiscal year 2005 reporting under
IPIA does not yet reflect the full scope of improper payments across
executive branch agencies. Major challenges remain in meeting the goals of
the act and ultimately improving the integrity of payments. GAO found that
three challenges in particular continue to hinder full reporting of
improper payment information:
o Existing reporting incomplete. Although 18 agencies collectively
identified and estimated improper payments for 57 programs and
activities totaling $38 billion, some agencies still had not
instituted systematic methods of reviewing all programs, resulting
in their identification of none or only a few programs as
susceptible to significant improper payments. In many cases, these
same agencies had well-known and well-documented financial
management weaknesses as well as fraudulent, improper, and
questionable payments. Further, improper payments estimates
totaling about $389 million for 9 programs were not based on a
valid statistical sampling methodology as required. Materially
higher estimates would have been expected had the correct methods
been used, given that total outlays for these 9 programs exceeded
$58.2 billion.
o Large programs still not included. Estimates of improper
payments for 10 risk-susceptible programs with outlays totaling
over $234 billion still have not been provided. Most of these
programs were subject to OMB reporting requirements that preceded
IPIA.
o Threshold criteria limit reporting. The act includes broad
criteria to identify risk-susceptible programs. OMB's implementing
guidance includes more specific criteria that limit the disclosure
and transparency of agencies' improper payments.
GAO's preliminary review of fiscal year 2006 data indicates that while
additional progress is being made, agencies continue to face many of the
significant challenges noted in GAO's report on fiscal year 2005
reporting.
With regard to agencies' recovery audit efforts, GAO found that the data
reported may present an overly optimistic view of these efforts. While 21
agencies were required to report on their recovery audit efforts, GAO
identified discrepancies in several agencies' information and found
limited reviews over contract payments. For example, for fiscal year 2005,
the National Aeronautics and Space Administration (NASA) reported that it
had identified and recovered $617,442 in contract payments, a 100 percent
recovery rate. Yet, the NASA Office of Inspector General reported it had
identified over $515 million in questioned contract costs during fiscal
year 2005, of which NASA management decided to pursue recovery of $51
million. Had this amount been compared to the $617,442 NASA actually
recovered, its recovery rate would drop from the reported 100 percent to
1.2 percent.
References
Visible links
18. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
19. http://www.gao.gov/cgi-bin/getrpt?GAO-06-482T
20. http://www.gao.gov/cgi-bin/getrpt?GAO-06-581T
21. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
22. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
23. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
24. http://www.gao.gov/cgi-bin/getrpt?GAO-05-417
25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
26. http://www.gao.gov/cgi-bin/getrpt?GAO-06-581T
27. http://www.gao.gov/cgi-bin/getrpt?GAO-06-482T
28. http://www.gao.gov/cgi-bin/getrpt?GAO-06-347
29. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1067R
30. http://www.gao.gov/cgi-bin/getrpt?GAO-06-844T
31. http://www.gao.gov/cgi-bin/getrpt?GAO-05-1029R
32. http://www.gao.gov/cgi-bin/getrpt?GAO-03-750T
41. http://www.gao.gov/cgi-bin/getrpt?GAO-07-254T
*** End of document. ***