Improper Payments: Agencies' Efforts to Address Improper Payment 
and Recovery Auditing Requirements Continue (29-MAR-07, 	 
GAO-07-635T).							 
                                                                 
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 as well as for recouping those funds when improper	 
payments occur. The Congress enacted the Improper Payments	 
Information Act of 2002 (IPIA) and the Recovery Auditing Act to  
address these issues. Fiscal year 2006 marked the 3rd year that  
agencies were required to report improper payment and recovery	 
audit information in their Performance and Accountability	 
Reports. GAO was asked to testify on the progress agencies have  
made in these areas. Specifically, GAO focused on (1) trends in  
agencies' reporting under IPIA from fiscal years 2004 through	 
2006, (2) challenges in reporting improper payment information	 
and improving internal control, and (3) agencies' reporting of	 
recovery auditing efforts. This testimony is based on GAO's	 
previous reports on agencies' efforts to implement IPIA 	 
requirements for fiscal years 2005 and 2004 and current review of
available fiscal year 2006 improper payment and recovery auditing
information. The Office of Management and Budget (OMB) provided  
technical comments that were incorporated as appropriate.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-635T					        
    ACCNO:   A67427						        
  TITLE:     Improper Payments: Agencies' Efforts to Address Improper 
Payment and Recovery Auditing Requirements Continue		 
     DATE:   03/29/2007 
  SUBJECT:   Accountability					 
	     Allocation (Government accounting) 		 
	     Erroneous payments 				 
	     Financial management				 
	     Government collections				 
	     Internal controls					 
	     Noncompliance					 
	     Overpayments					 
	     Regulatory agencies				 
	     Reporting requirements				 
	     Risk assessment					 

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GAO-07-635T

   

     * [1]Significant Trends in IPIA Reporting

          * [2]Risk Assessments
          * [3]Improper Payment Dollar and Error Rate Estimates
          * [4]Noncompliance Issues with IPIA Continue

     * [5]Challenges Continue in Reporting Improper Payment Informatio

          * [6]Improper Payments Estimate Excludes Several Large Risk-Susce
          * [7]Certain Methodologies Used to Estimate Improper Payments Do
          * [8]Improved Internal Control Is Key to Resolving Improper Payme

     * [9]Agencies' Reporting of Recovery Auditing Information
     * [10]Concluding Observations

          * [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, Federal Services, 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 10:00 a.m. EDT
Thursday, March 29, 2007

IMPROPER PAYMENTS

Agencies' Efforts to Address Improper Payment and Recovery Auditing
Requirements Continue

Statement of McCoy Williams, Director
Financial Management and Assurance

GAO-07-635T

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 and agencies' efforts
to address key requirements of the Improper Payments Information Act of
2002 (IPIA)^1 and Section 831 of the National Defense Authorization Act
for Fiscal Year 2002, commonly known as the Recovery Auditing Act.^2 Since
fiscal year 2000, we have issued a number of reports and testimonies aimed
at raising the level of attention given to improper payments. Our work
over the past several years has demonstrated that improper payments are a
long-standing, widespread, and significant problem in the federal
government. IPIA has increased visibility over improper payments^3 by
requiring executive agency heads, based on guidance from the Office of
Management and Budget (OMB),^4 to identify programs and activities
susceptible to significant improper payments,^5 estimate amounts
improperly paid, and report on the amounts of improper payments and their
actions to reduce them. Similarly, the Recovery Auditing Act provides an
impetus for applicable agencies to systematically identify and recover
contract overpayments. This act requires, among others things, that 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. 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 as well as having mechanisms in place to
recoup those funds when improper payments occur.

^1Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).

^2Section 831 of the National Defense Authorization Act for Fiscal Year
2002, Pub. L. No. 107-107, div. A, title VIII, S 831, 115 Stat. 1012, 1186
(Dec. 28, 2001) (codified at 31 U.S.C. SS 3561-3567).

^3IPIA 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.

^4OMB Memorandum M-06-23, "Issuance of Appendix C to OMB Circular No.
A-123" (Aug. 10, 2006).

^5OMB'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.

OMB has played a key role in the oversight of the governmentwide improper
payments problem. In 2005, OMB established Eliminating Improper Payments
as a new program-specific initiative under the President's Management
Agenda (PMA). This separate PMA program initiative helps 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. OMB continues its commitment to identify all
improper payments governmentwide by working with agencies to establish
corrective action plans to address their root causes. OMB also annually
reports^6 on agencies' efforts to address IPIA and Recovery Auditing Act
requirements.

Today, my testimony will focus on three key areas:

           o trends in agencies' reporting under IPIA for fiscal years 2004
           through 2006,
           o challenges in reporting improper payment information and
           improving internal control, and
           o agencies' reporting of recovery auditing efforts to recoup
           improper payments.

This testimony is based on our previous reports on agencies' efforts to
implement IPIA requirements for fiscal years 2005 and 2004^7 and our
current review of available fiscal year 2006 improper payment information
reported by 36 of the 38 federal agencies that the Department of the
Treasury (Treasury) determined to be significant to the U.S. government's
consolidated financial statements. (See app. I for a list of the 38
agencies.) The remaining 2 federal government corporations have a
different year-end reporting date and had not issued their annual reports
as of the end of our fieldwork. We reviewed improper payment information
reported in the 36 agencies' fiscal year 2006 performance and
accountability reports (PAR) or annual reports. We also reviewed OMB
guidance on implementation of IPIA and the Recovery Auditing Act and its
annual report on agencies' efforts to identify and reduce improper
payments. In addition, we reviewed GAO reports and agency Office of
Inspector General (OIG) management challenges reports to identify internal
control weaknesses and program integrity issues for agency programs
reporting improper payment estimates for fiscal year 2006. 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 reported governmentwide improper
payments and amounts recouped through recovery audits and other improper
payment-related information. We believe the data to be sufficiently
reliable for this purpose. We provided information on the major findings
discussed in this statement to OMB. OMB provided technical comments that
we have incorporated as appropriate. We conducted our work in March 2007
in accordance with generally accepted government auditing standards.
Details on our scope and methodology related to fiscal year 2005 and 2004
findings can be found in our prior reports.^8

6Office of Management and Budget, Improving the Accuracy and Integrity of
Federal Payments, (Washington, D.C.: Jan. 31, 2007).

^7GAO, 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) and Financial Management: Challenges in
Meeting Requirements of the Improper Payments Information Act,
[19]GAO-05-417 (Washington, D.C.: Mar. 31, 2005).

Significant Trends in IPIA Reporting

I would now like to focus on agencies' efforts to address select IPIA
reporting requirements during the first 3 years of IPIA implementation,
fiscal years 2004 through 2006. Generally, agencies must perform four key
steps to address the improper payments reporting requirements-- (1)
perform a risk assessment, (2) estimate improper payments for
risk-susceptible programs and activities, (3) implement a plan to reduce
improper payments for programs with estimates exceeding $10 million, and
(4) annually report improper payment estimates and actions to reduce them.
OMB requires the results of these steps to be reported in the agencies'
PARs, in the Management Discussion and Analysis section and as a separate
appendix, for each fiscal year ending on or after September 30, 2004.
Today, I will touch on progress made and challenges that remain in these
areas.

Risk Assessments

Our past and current reviews of agencies' reported risk assessments have
raised questions regarding their adequacy. For fiscal years 2004 through
2006, we found 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 also reported
that certain agencies' risk assessments appear questionable. Conducting a
risk assessment is an essential part of agencies' efforts to comply with
IPIA. Risk assessment is a key step in helping to gain a reasonable level
of assurance that programs are operating as intended and that they are
achieving their expected outcomes. Done properly, it entails a
comprehensive review and analysis of program operations to determine if
risks exist, what those risks are, and the potential or actual effect of
those risks on program operations. The information developed during a risk
assessment forms the foundation or basis upon which management can
determine the nature and type of corrective actions needed. It also gives
management baseline information for measuring progress in reducing
improper payments.

^8 [20]GAO-07-92 and [21]GAO-05-417 .

           o For the first year of reporting under IPIA, we reported in March
           2005,^9 that of the 29 agencies reviewed, 23 had completed risk
           assessments for all programs and activities for fiscal year 2004.
           However, for 3 of these, agencies' auditors raised noncompliance
           issues with the risk assessments. For example, agency auditors for
           the Department of Justice (DOJ) and the National Aeronautics and
           Space Administration (NASA) reported that the risk assessments did
           not consider all payment types or programs. The auditor for the
           Department of Homeland Security (DHS) reported that the agency did
           not institute a systematic method of reviewing all programs and
           identifying those it believed were susceptible to significant
           erroneous payments.

           o Regarding the second year of IPIA reporting, we reported in
           November 2006,^10 that the same number of agencies, 23, had
           performed risk assessments of all of their programs and activities
           based on our review of 35 agency PARs or annual reports for fiscal
           year 2005. Similar to the first year of IPIA reporting, we noted
           that auditors for DOJ and DHS again raised noncompliance issues
           regarding the adequacy of the agencies' risk assessments. We noted
           other risk assessment deficiencies as well. For example, the
           Department of Agriculture (USDA) OIG reported^11 that the agency's
           risk assessments were not adequate to estimate the agency's
           susceptibility to improper payments because the guidance from the
           USDA's Office of the Chief Financial Officer (OCFO) was not
           sufficiently prescriptive and detailed to translate into
           meaningful results. As such, the OIG recommended that the USDA
           OCFO strengthen guidance over its IPIA risk assessments to provide
           reasonable assurance that the requirements of the act are met.
           Further, the OIG stated that USDA should identify risk factors
           that are discrete to the program being assessed and consider
           information from all sources, such as audit reports.

           o For fiscal year 2006, the third year of IPIA reporting, we found
           that 30 of the 36 agencies had reported performing some type of
           assessment to identify programs and activities susceptible to
           significant improper payments. The remaining 6 agencies either did
           not report improper payments information in their PARs or annual
           reports, or did not report assessing for risk of improper payments
           for all of their programs and activities. Of the 30, 18 agencies
           reported reviewing all programs and activities as part of the risk
           assessment process, while the remaining 12 agencies provided
           enough details that indicated some level of review was performed.
           For example, 1 agency reported that it had evaluated its major
           programs based on its developed risk criteria. Although the major
           programs made up a significant portion of the agency's outlays,
           the agency did not report that it had assessed the remaining
           programs and activities. We also found instances where an agency's
           description of the risk assessment performed contradicted its
           assertion that all programs and activities had been reviewed. For
           example, 1 agency reported in its PAR that it had assessed all
           programs and activities, but also reported in the same PAR that
           assessments for two activities had not been conducted. Another
           agency reported that it had assessed all of its payment programs,
           but later stated in its PAR that its risk assessment only covered
           certain types of programs.

^9 [22]GAO-05-417 .

^10 [23]GAO-07-92 .

^11Department of Agriculture, Office of Inspector General, Memorandum for
the Secretary, "Management Challenges," September 2, 2005.

Similar to the previous years, agency auditors continued to find
inadequacies in agencies' risk assessments for fiscal year 2006. The DHS
auditor reported that the agency did not perform a risk assessment for all
programs and activities. Further, the NASA auditor reported that the
agency had potentially violated certain requirements of IPIA as NASA had
been unable to provide the auditor with sufficient documentation to
support performance of an annual review of all programs and activities
that the agency administers.

Other agencies reported improving and refining their risk assessment
methodologies for fiscal year 2006. For example, USDA's Farm Service
Agency reported that it made improvements to its risk assessments and as a
result, four additional programs were determined to be susceptible to
significant improper payments. Two other agencies reported redefining
their programs to conduct their risk assessments. DOJ reported that it
addressed its noncompliance with IPIA by performing risk assessments in
its U.S. Marshals Service component. Other agencies identified plans for
improving future risk assessments. For example, the Office of Personnel
Management (OPM) reported that it will assess in fiscal year 2007 whether
any agency payment streams, other than its former OMB Circular No. A-11
programs,^12 are susceptible to significant improper payments. The
Department of Defense reported that it is developing a program to review
its intergovernmental payments and payments for afloat and deployed
forces. NASA reported that it plans to perform a risk assessment of the
agency's commercial and noncommercial disbursement activities.

Finally, we noted that the number of agencies conducting risk assessments
may decrease in future reporting, because OMB's revised IPIA implementing
guidance allows agencies to perform risk assessments every 3 years for
those agency programs not deemed susceptible to significant improper
payments. Prior to issuing its revised implementing guidance, OMB
discussed the proposed changes with us. We advised OMB that the provision
to perform risk assessments every 3 years for those programs not deemed
risk-susceptible was inconsistent with the IPIA requirement for agencies
to review all programs and activities annually. In its fiscal year 2006
PAR, the General Services Administration (GSA) reported that because it
does not have any programs or activities susceptible to significant
improper payments, GSA will perform the next risk assessment in fiscal
year 2008. Additionally, several programs included in OMB's former
Circular No. A-11, reported that OMB had granted them a waiver from
improper payments reporting because they did not have programs susceptible
to significant improper payments. These programs included the
Environmental Protection Agency's Clean and Drinking Water State Revolving
Funds, the National Science Foundation's Research and Education Grants and
Cooperative Agreements, and the Department of Veterans Affairs (VA)
Insurance programs. OMB's previous implementing guidance required agencies
to annually estimate improper payments for their programs that were
included in former Circular No. A-11, regardless of amount.

^12Prior to the governmentwide IPIA reporting requirements beginning with
fiscal year 2004, former section 57 of OMB Circular No. A-11 required
certain agencies to submit similar information, including estimated
improper payment target rates, target rates for future reductions in these
payments, the types and causes of these payments, and variances from
targets and goals established. In addition, these agencies were to provide
a description and assessment of the current methods for measuring the rate
of improper payments and the quality of data resulting from these methods.

Improper Payment Dollar and Error Rate Estimates

Since fiscal year 2004, agencies have made progress in reporting improper
payment information. For example, the number of programs reporting
improper payment estimates for fiscal year 2004 totaled 41, as compared to
60 programs reporting for fiscal year 2006, a net increase of 19
programs.^13 The total improper payments dollar estimate was $45 billion
in fiscal year 2004, $38 billion in fiscal year 2005, and about $42
billion^14 in fiscal year 2006. (See app. II for further details.)

We have previously testified^15 before this subcommittee regarding the
decrease in the total improper payment estimate from $45 billion in fiscal
year 2004 to $38 billion in fiscal year 2005. Specifically, we reported
that the $7 billion decrease was primarily attributable to a decrease in
the Medicare estimate that resulted from increased efforts to educate
health care providers on the importance of responding to requests for
medical records to perform detailed statistical reviews. Also, the
Department of Health and Human Services (HHS) extended the time that
providers have for responding to documentation requests from 55 days to 90
days. We further reported that 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 represents a refinement, it may not
reflect improved accountability over program dollars given that GAO
continues to designate the Medicare program as a high-risk area.
Specifically, in our January 2007 report,^16 we reported that further
action must be taken to refine Medicare's payment methods and collection
of data used as a basis for setting payment rates and address program
integrity weaknesses, among others. Also, HHS's OIG continued to report
the integrity of Medicare payments as a top management challenge for
fiscal year 2006.

^13The net increase represents newly reported programs for applicable
years as well as programs that may have reported in one year but not in a
subsequent fiscal year.

^14For fiscal year 2006, OMB reported total improper payments of about $41
billion, a difference of $1 billion. The difference is primarily
attributable to OMB excluding improper payment estimates for the Tennessee
Valley Authority and agency-reported improper payment estimates related to
commercial or vendor payments because, according to OMB, those estimates
are reported in agencies' recovery auditing amounts. Rounding differences
also exist.

^15GAO, Improper Payments: Incomplete Reporting under the Improper
Payments Information Act Masks the Extent of the Problem, [24]GAO-07-254T
(Washington, D.C.: Dec. 5, 2006).

^16GAO, High-Risk Series: An Update, [25]GAO-07-310 (Washington, D.C.:
January 2007).

For fiscal year 2006, the total improper payment estimate increased to
about $42 billion from the reported $38 billion for fiscal year 2005. The
increase in improper payments was primarily attributable to 15 newly
reported programs or activities totaling about $2.4 billion, and a $1.6
billion increase in USDA's Marketing Assistance Loan program due to
improvements in how it measured its improper payments. In addition,
several programs experienced increases in their improper payment estimates
as a result of lax upfront eligibility controls to facilitate rapid
benefit delivery to victims devastated by Hurricane Katrina. According to
OMB, the programs most directly affected included the Federal Emergency
Management Agency's Individuals and Households program (IHP), Department
of Labor's (Labor) Disaster Unemployment Insurance (UI) program, and the
Small Business Administration's Disaster Assistance Loan program. For
example, Labor identified more than $100 million in improper payments
related to Hurricane Katrina for the Disaster UI program. To respond to
the challenges of the Gulf Coast hurricanes, on August 29, 2006, the
President signed Executive Order 13411, Improving Assistance for Disaster
Victims, which established a task force on disaster coordination
responsible for recommending specific actions to improve the delivery of
federal disaster assistance while strengthening controls designed to
prevent improper payments and other forms of fraud, waste, and abuse.

Mr. Chairman, I commend agencies' efforts to decrease improper payment
error rates. For example, from our review of agency programs initially
reporting error rates in the first year of IPIA implementation, fiscal
year 2004, we noted that of the 32 agency programs with changes in their
error rates, 18 program error rates, or 56 percent, had declined when
compared to fiscal year 2006. However, it should be noted that in this
still-early stage of IPIA implementation, a decrease in the reported error
rate may not signal improved accountability just as an increase may not
necessarily indicate a greater number of control weaknesses. In some
cases, these fluctuations may be attributed to changes in the estimating
methodology used. For example, USDA's Marketing Assistance Loan program
did not report an estimate in fiscal year 2004 and reported a small
estimate for fiscal year 2005. However, with improvements in how it
measures improper payments, this program estimated an error rate of 20.3
percent for fiscal year 2006. The Marketing Assistance Loan program is now
in a greatly improved position to identify the root causes of these errors
and ultimately improve the integrity of its payments--the primary goal of
IPIA reporting.

Table 1 highlights improper payment error rates for the 8 major programs
that accounted for 86 percent of the $42 billion total improper payment
estimate for fiscal year 2006.

Table 1: Reported Improper Payment Error Rates for Major Programs for
Fiscal Years 2004 through 2006

                                   FY 2004        FY 2005         FY 2006    
                                                                              Estimate                                
                                                                              (dollars                                
                                        Error Estimate(dollars         Error        in         Error Estimate(dollars 
Agency         Program          rate(percent)     in billions) rate(percent) billions) rate(percent)     in billions) 
Health and     Medicare                                                                                               
Human Services (Fee-for-Service                                                                                       
               component)                10.1            $21.7           5.2     $12.1           4.4            $10.8 
Department of  Earned Income                                                                                          
the Treasury   Tax Credit                24.5              9.7          25.5      10.5          25.5             10.7 
Department of  Unemployment                                                                                           
Labor          Insurance                 10.3              3.9          10.1       3.3          10.7              3.4 
Social         Old Age,                                                                                               
Security       Survivors, and                                                                                         
Administration Disability                                                                                             
               Insurance                  0.3              1.7           0.7       3.7           0.6              3.3 
Social         Supplemental                                                                                           
Security       Security Income                                                                                        
Administration Program                    7.3              2.6           7.7       2.9           7.8              3.0 
Department of  Food Stamp                                                                                             
Agriculture    Program                    6.6              1.6           5.9       1.4           5.8              1.6 
Department of  Marketing                                                                                              
Agriculture    Assistance Loan                                                                                        
               Program                    0.0              0.0           0.7       0.5          20.3              1.6 
Housing and    Public                                                                                                 
Urban          Housing/Rental                                                                                         
Development    Assistance                 6.9              1.7           5.6       1.5           5.4              1.5 
               Total                                     $42.9                   $35.9                          $35.9 
               Estimate for all                                                                                       
               programs                                   45.4                    38.4                           41.6 
               Major programs                                                                                         
               as a percent of                                                                                        
               total for all                                                        93                                
               programs                             94 percent                 percent                     86 percent 

Sources: GAO analysis of agencies' fiscal years 2004 to 2006 PARs and OMB.

Noncompliance Issues with IPIA Continue

Although they are not specifically required to do so by the act, some
agency auditors have reported on noncompliance issues related to
implementation of IPIA since the first year of IPIA reporting. For
example, for fiscal years 2004 and 2005, we reported^17 that agency
auditors had identified instances of noncompliance, such as the lack of a
systematic method for reviewing all programs and risk assessments that did
not consider all payment types or programs. For fiscal year 2006, agency
auditors reported instances of noncompliance such as an agency still being
in its early stages of IPIA implementation or not yet having reported for
all risk-susceptible programs.

^17 [26]GAO-05-417 and [27]GAO-07-92 , respectively.

We found that the level of noncompliance and types of issues raised varied
over the first 3 years of IPIA reporting. From our review of the agency
auditors' description of the noncompliance, we classified the findings
into three categories--full noncompliance, partial noncompliance, and
potential noncompliance. We noted that agency auditors reported problems
related to agencies' risk assessments, the definition of programs for IPIA
purposes, sampling methodologies, lack of reporting for all
risk-susceptible programs, and supporting documentation, as shown in table
2. Fully addressing these matters should lead to improved reporting under
IPIA. Although IPIA does not include a separate reporting requirement for
auditors to assess agencies' compliance, we noted that those that included
this assessment provided a valuable independent validation of agencies'
efforts to implement the act.

Table 2: Noncompliance Issues Reported by Some Agency Auditors for Fiscal
Years 2004 through 2006

Category of           Fiscal    Fiscal    Fiscal Type of noncompliance     
noncompliance      year 2004 year 2005 year 2006 issue                     
Full noncompliance                               Defining programs and     
                                                    activities, risk          
                                                    assessment, sampling,     
                                                    early stages of IPIA      
                              3         2         1 implementation            
Partial                                          Not estimating for all    
noncompliance                                    risk-susceptible          
                                                    programs, risk            
                              1         1         4 assessment, sampling      
Potential                                        Documentation does not    
noncompliance                                    support work reportedly   
                              0         0         1 performed                 
Total                      4         3         6                           

Source: GAO analysis.

From our analysis, we noted that four agencies^18 had reported
noncompliance issues for at least 2 of the 3 IPIA reporting years. For
example, agency auditors for DHS have reported noncompliance issues for
the first 3 years of IPIA reporting. As mentioned earlier in this
testimony, the first 2 years of noncompliance were primarily caused by
inadequate risk assessments. For fiscal year 2006, DHS auditors reported
that the agency had not fully complied with IPIA due to several
inadequacies related to sampling methodologies, trained staff, and
monitoring of results to ensure testing was completed for all required
programs. DHS auditors recommended that the agency follow OMB guidance for
fiscal year 2007, including completing the necessary susceptibility
assessments, testing for all material programs, and instituting sampling
techniques to allow for statistical projection of improper payments
testing results.

^18The four agencies include HHS, DHS, DOJ, and NASA.

Challenges Continue in Reporting Improper Payment Information and Improving
Internal Control

While showing progress, agencies' fiscal year 2006 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. Specifically, some
agencies have not yet reported for all risk-susceptible programs, and
certain methodologies used to estimate improper payments do not result in
reliable estimates. Also, we noted that management challenges related to
agencies' internal control weaknesses continue to plague programs
susceptible to significant improper payments.

Improper Payments Estimate Excludes Several Large Risk-Susceptible
Programs

The fiscal year 2006 total improper payment estimate of about $42 billion
did not include any amounts for 13 risk-susceptible programs having fiscal
year 2006 outlays totaling about $329 billion. The Medicaid program
represents the largest program that has not yet reported, with reported
outlays of about $183 billion. OMB had specifically required 9 of these
programs, including the Medicaid program 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. See table 3 for more detailed information.

Table 3: Risk-Susceptible Programs That Did Not Report Improper Payment
Estimates and Target Dates for Estimates

                                         Fiscal year  Target date             
                                        2006 outlays for improper  Previously 
                                         (dollars in      payment required to 
Agency/program                          billions)     estimate    estimate 
Department of Agriculture--National                                        
School Lunch and School Breakfast                                          
Programs (previously School                                                
Programs)                                    $6.5         2007           X 
Federal Communications                                                     
Commission--High Cost Support                                              
Program                                       3.8         2007             
Federal Communications                                                     
Commission--Universal Service Fund's                                       
Schools and Libraries                         1.7         2007             
Small Business Administration--504                                         
Certified Development Companies               4.3         2007           X 
Department of                                                              
Transportation--Airport Improvement                                        
Program                                       3.8         2007           X 
Department of                                                              
Transportation--Capital Investments           3.1         2007           X 
Department of                                                              
Transportation--Formula Grants                1.9         2007           X 
Department of Health and Human                                             
Services--Child Care and Development                                       
Fund                                          4.9       2008^a           X 
Department of Health and Human                                             
Services--Medicaid                          182.9         2008           X 
Department of Health and Human                                             
Services--State Children's Insurance                                       
Program                                       5.8         2008           X 
Department of Health and Human                                             
Services--Temporary Assistance for                                         
Needy Families                               17.4       2008^a           X 
Department of Health and Human                         Did not             
Services--Medicare Advantage                          report a             
                                                55.4  target date             
Department of Health and Human                         Did not             
Services--Medicare Prescription Drug                  report a             
Benefit                                      37.4  target date             
Total                                      $328.9                        9 

Sources: OMB and cited agencies' fiscal year 2006 PARs.

^aAlthough not reported in HHS's fiscal year 2006 PAR, according to OMB,
both the Child Care and Development Fund and Temporary Assistance for
Needy Families programs anticipate reporting a component error measurement
in HHS's fiscal year 2008 PAR.

Of these 13 programs, 11 reported that they would be able to estimate and
report on improper payments in the next 2 fiscal years, but could not do
so for fiscal year 2006. The remaining 2 programs were silent about when
they would report estimates in the future. As a result, improper payment
reporting of these programs susceptible to risk remain unknown.

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 that 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. In April 2006, we
reported^19 on the need for federal and state coordination to report
national improper payment estimates on federal programs as
state-administered programs and other nonfederal entities receive over
$400 billion annually in federal funds. Thus, federal agencies and states
share a responsibility for the prudent use of these funds.

Certain Methodologies Used to Estimate Improper Payments Do Not Result in
Accurate Estimates

We have previously noted that agencies employed different sampling
methodologies to estimate improper payments, including statistical
sampling, nonstatistical sampling, or a combination of the two. OMB's
implementing guidance requires that agencies generally use a statistical
sample to estimate improper payments. Agencies may also use an alternative
sampling approach provided they obtain OMB approval prior to
implementation. The advantage of using statistical sampling is that sample
results can be generalized to the entire population from which the sample
was taken. Based on our review of fiscal year 2006 reporting, we found
seven agencies that did not use statistical sampling to estimate improper
payments for nine programs totaling about $202 million, with program
outlays exceeding $88 billion. Given that total outlays for these nine
risk-susceptible programs exceeded $88 billion for fiscal year 2006, the
improper payment estimate for these programs would likely have been much
greater had statistically valid methods been used.

^19GAO, 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).

For example, Labor analyzed fiscal year 2004 audits done under the Single
Audit Act,^20 as amended, to identify questioned costs for its Workforce
Investment Act^21 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. Using this
methodology, Labor reported a $6.4 million improper payment estimate for
fiscal year 2006. 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 noted that Labor's OIG reported
the use of single audits as a major management challenge because serious
deficiencies in single audits, including inadequate sampling methodologies
have been reported, thus making them unreliable for purposes of estimating
improper payments.

We also found that five agencies used a combination of statistical and
nonstatistical sampling methods to estimate improper payments totaling
about $11.6 billion for ten programs. For example, VA reported that
improper payment estimates for its Compensation and Pension programs are
based on statistical sampling of its quality assurance program together
with actual amounts of debt incurred that are referred to the VA Debt
Management Center. In another example, the Railroad Retirement Board (RRB)
reported that improper payment estimates for its Retirement and Survivors
Benefits program and Railroad Unemployment Insurance Benefits program were
based on a statistical sample of railroad retirement awards and
unemployment and sickness insurance claims as well as special studies and
audits that were not entirely statistically based. In its fiscal year 2006
PAR, RRB reported that in May 2005, its general counsel issued a legal
opinion that since the levels of improper payments did not exceed OMB's
designated thresholds--exceeding $10 million and 2.5 percent of program
payments--the agency was not required to conduct statistical sampling. We
noted that both of these programs were required to report 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, including using statistical sampling to estimate improper payments.

^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 $500,000 or more in
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.

^21Pub. L. No. 105-220, 112 Stat. 936 (Aug. 7, 1998).

In addition, we noted instances where agencies estimated improper payments
for only one component of the risk-susceptible program. For example, HHS's
Medicare program is the largest of the programs constituting the total
improper payment estimate, with an estimate of $10.8 billion for fiscal
year 2006. 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 (also known as Medicare
Advantage), with outlays totaling about $55 billion, or 14 percent of
Medicare program outlays. HHS's auditor, an independent public accounting
firm that audited its financial statements for fiscal year 2006,
identified Medicare's managed care benefits payment cycle as a reportable
condition in its report on internal controls. The auditor found that HHS
lacks a comprehensive control environment in which the risk of inaccurate
payments is not sufficiently mitigated. Specifically, HHS had inadequate
procedures to review and process managed care payments, lacked
documentation and procedures to determine eligibility of new providers,
and provided inadequate oversight of managed care organizations. In its
fiscal year 2006 PAR, HHS reported that a methodology to estimate improper
payments for the Medicare Advantage program was in the initial stage of
development. During fiscal year 2007, HHS plans to perform a comprehensive
risk assessment for the Medicare Advantage program to determine potential
areas vulnerable to payment errors. HHS anticipates reporting on the
measurement project and select findings in its fiscal year 2008 PAR.
However, HHS has not yet provided a target date for reporting an improper
payment estimate for its Medicare Advantage program.

Improved Internal Control Is Key to Resolving Improper Payments

Agency OIGs reported management challenges in the annual PARs related to
agencies' internal control weaknesses that continue to plague programs
susceptible to significant improper payments. In accordance with OMB
Circular No. A-136, OIGs are required to highlight issues that the OIGs
consider to be the most serious management and performance challenges
facing agencies. Management challenges involving internal control have a
direct effect on program integrity and improper payment issues, and thus a
review of the OIGs' statements on management challenges can be instructive
in this regard. Generally, improper payments result from a lack of or an
inadequate system of internal control, but some result from program design
issues.

Internal control is a major part of managing an organization. It comprises
the plans, methods, and procedures used to meet missions, goals, and
objectives and supports performance-based management. Internal control
also serves as the first line of defense in safeguarding assets and
preventing and detecting errors and fraud. Our Standards for Internal
Control in the Federal Government provide a road map for entities to
establish control for all aspects of their operations and a basis against
which entities' control structures can be evaluated.^22 Also, our
executive guide on strategies to manage improper payments focuses on
internal control standards as they relate to reducing improper
payments.^23

We found that over half of the programs reporting improper payment
estimates also had reported management challenges that could increase the
risk of improper payments, including challenges related to internal
controls. For example, in the Department of Education's (Education) fiscal
year 2006 PAR, the Education OIG reported that recent audits, inspections,
and investigations continue to uncover problems with program control and
oversight of program participants, placing billions of taxpayer dollars at
risk of waste, fraud, abuse, and noncompliance. The OIG concluded that
only by improving effective oversight of its operations and demanding
accountability by its managers, staff, contractors, and grantees can the
agency be an effective steward of the billions of taxpayer dollars
supporting its programs and operations. Education's OIG also reported that
identifying and correcting improper payments remains a challenge for the
agency due to ineffective oversight and monitoring of its policies,
programs, and participants.

^22GAO, Standards for Internal Control in the Federal Government,
[29]GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

^23GAO, Strategies to Manage Improper Payments: Learning From Public and
Private Sector Organizations, [30]GAO-02-69G (Washington, D.C.: October
2001).

Another example involved an agency's systems used to detect fraudulent
activity. Specifically, Treasury's OIG reported that some tax credits,
such as the Earned Income Tax Credit, provide opportunities for abuse in
income tax claims. In past years, the Internal Revenue Service (IRS) used
its Web-based Electronic Fraud Detection System (EFDS) to search for signs
of fraud at the time that tax returns are filed to help eliminate the
issuing of questionable refunds. For its 2005 processing year,^24 IRS
stopped over $412 million in improper payments. However, IRS was unable to
utilize EFDS for the 2006 processing year^25 because the contractor it had
hired to update the fraud detection program could not produce a working
program within the established timeframe. Because IRS believed that the
contractor would deliver the updated program, it had not developed a
contingency plan nor taken any action to return to the old system. As a
result, the Treasury OIG reported that more than $300 million in
fraudulent refunds may have been issued in 2006. We identified this issue
as a material weakness during our audit of IRS's fiscal years 2005 and
2006 financial statements.^26

Agencies' Reporting of 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. The act requires that agencies that enter
into contracts with a total value in excess of $500 million in a fiscal
year carry out a cost-effective program for identifying and recovering
amounts erroneously paid to contractors. 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 the legislation.

^24A processing year is the calendar year in which tax returns and related
data are processed.

^25During processing year 2006, IRS processed primarily 2005 tax returns.

^26GAO, Financial Audit: IRS's Fiscal Years 2006 and 2005 Financial
Statements, [31]GAO-07-136 (Washington, D.C.: Nov. 9, 2006).

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.

I would like to emphasize that 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 and effective to pay bills and
provide benefits properly in the first place. Prevention is always
preferred to detection and collection. 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.

Beginning with fiscal year 2004, OMB required that applicable agencies
publicly report on their recovery auditing efforts as part of their PAR
reporting of improper payment information. Agencies are required to
discuss any contract types excluded from review and justification for
doing so. Agencies are also 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.

From fiscal year 2004 to 2006, we noted that the number of agencies
reporting recovery auditing information and the dollar amounts identified
for recovery and actually recovered had increased, as shown in table 4.

Table 4: Improper Payment Amounts Identified and Recovered for Fiscal
Years 2004 to 2006

                         Fiscal year 2004                Fiscal year 2005                Fiscal year 2006
                  Agency-reported                 Agency-reported                 Agency-reported                 
                           amount Agency-reported          amount Agency-reported          amount Agency-reported 
Department or   identified for          amount  identified for          amount  identified for          amount 
agency                recovery       recovered        recovery       recovered        recovery       recovered 
1  Agency for                                                                                                     
International                                                                                                  
Development     did not report  did not report      $5,900,000      $5,782,000     $17,100,000     $17,090,000 
2  Department of                                                                                                  
Agriculture             $2,000          $2,000         333,000         189,000         379,000       538,000^a 
3  Department of                                                                                                  
Commerce        did not report  did not report          96,354          84,551          96,000          96,000 
4  Department of                                                                                                  
Defense              6,300,000       6,300,000     473,000,000     418,500,000     195,300,000     137,900,000 
5  Department of                                                                                                  
Education              269,000          79,000         274,367         112,506  did not report  did not report 
6  Department of                                                                                                  
Energy               6,000,000       6,000,000      10,600,000       9,500,000      11,900,000      10,300,000 
7  Environmental                                                                                                  
Protection                                                                                                     
Agency          did not report  did not report         130,000         130,000       1,102,000             0^b 
8  General                                                                                                        
Services                                                                                                       
Administration      14,409,000      11,117,000      26,638,654       8,317,187      46,721,742      45,917,920 
9  Department of                                                                                                  
Health and                                                                                                     
Human Services  did not report  did not report       2,100,000          14,430     1,600,000^c        40,000^c 
10 Department of                                                                                                  
Homeland                                                                                                       
Security        did not report  did not report       2,191,000       1,207,000   502,000,000^c     6,016,000^c 
11 Department of                                                                                                  
Housing and                                                                                                    
Urban                                             reported not    reported not    reported not    reported not 
Development            227,000          40,000 cost beneficial cost beneficial cost beneficial cost beneficial 
12 Department of                                                                                                  
the Interior           231,000         231,000       1,548,620         195,479       4,407,345         505,743 
13 Department of                                                                                                  
Justice                973,000         780,000       1,044,320         765,086       1,851,709       1,734,421 
14 Department of                                     reported not    reported not    reported not    reported not 
Labor           did not report  did not report cost beneficial cost beneficial cost beneficial cost beneficial 
15 National                                                                                                       
Aeronautics                                                                                                    
and Space                                                                                                      
Administration  did not report  did not report         617,442         617,442         256,255         139,420 
16 Social                                                                                                         
Security                                                                                                       
Administration           5,000           5,000         317,000          50,000         178,000         178,000 
17 Department of                                                                                                  
State           did not report  did not report       5,350,000       5,190,000       2,397,200       2,276,700 
18 Tennessee                                                                                                      
Valley                                                                                                         
Authority       did not report  did not report         909,573         443,763     6,793,581^d       1,202,651 
19 Department of                                                                                                  
Transportation         216,000         216,000       2,663,984       2,663,984       6,450,993          45,109 
20 Department of                                                                                                  
the Treasury           855,000         669,000         428,977         364,680       2,305,424       1,442,708 
21 Department of                                                                                                  
Veterans                                                                                                       
Affairs             29,500,000      27,300,000      23,001,137      12,957,264      39,155,454      30,378,423 
Total              $58,987,000     $52,739,000    $557,144,428    $467,084,372    $839,994,703    $255,801,095 

Sources: OMB and agencies' fiscal year 2005 and 2006 PARs.

aAccording to USDA, amount recovered in fiscal year 2006 include some
recoveries identified in fiscal year 2005.

^bAgency did not report an amount recovered in its PAR. According to OMB,
only four improper payments were identified and dollars were not
statistically significant.

^cWe obtained this amount from OMB.

^dThis amount represents the agency-reported amount of $1,208,498 and an
additional $5,585,083 identified from Tennessee Valley Authority's (TVA)
OIG contract compliance audits, which is also included in the annual
report. TVA noted that there is a partial overlap between these two
amounts, but could not identify the overlapped amount.

We are pleased that progress has been made over the past 3 fiscal years to
identify amounts for recovery and those amounts actually recovered. We
also noted that the rate of recovery of contract overpayments for fiscal
year 2006, about 30 percent, had substantially decreased from the prior
year reported recovery rate of 84 percent. In our November 2006 report,^27
we raised questions regarding the overall high recovery rate of 84 percent
and found discrepancies, such as the contract costs identified for
recovery were considerably lower than the corresponding OIG amount
identified from that year's audit reviews. We determined that the
discrepancies significantly decreased the overall recovery rate from 84
percent to 22 percent. Although we have not performed a detailed review of
the agencies' recovery rates for fiscal year 2006, the reported overall
recovery rate of 30 percent may provide a more realistic view of agencies'
recovery audit efforts.

^27 [32]GAO-07-92 .

From our review, we noted that 12 agencies reported recovering about $53
million for fiscal year 2004 compared to 18 agencies that reported
recovering about $256 million for fiscal year 2006. In addition to the 18
agencies, we found that 3 agencies--Education, the Department of Housing
and Urban Development (HUD), and Labor--did not report recovery auditing
information for fiscal year 2006. Education reported that it reviewed all
of its vendor payments from fiscal years 1998 to 2005 and found that
potential recoveries were minimal. During fiscal year 2007, Education
plans to review fiscal year 2006 contract payments. Education also noted
that its purchase card and travel card programs are subject to monthly
reviews and reconciliations to identify potential misuse or abuse. HUD and
Labor reported that based on their recovery audit results, a recovery
auditing program was not cost-beneficial or necessary, similar to what
they reported for fiscal year 2005. Specifically, in fiscal year 2006, HUD
reported that its recovery audit contractor had determined that procedures
and systems in place provide strong controls for processing contract
payments. Labor reported that from its statistical sample of 50
transactions, no improper payments were found, and therefore recovery
audit efforts were not necessary. In addition, we noted that of the 18
agencies reporting for fiscal year 2006, 3 agencies had conducted in-house
recovery audits, 8 agencies reported they contracted out their recovery
audit services, another 6 agencies reported using both in-house and
recovery audit contractors to perform recovery auditing, and the remaining
1 agency was silent.

Concluding Observations

In closing, we recognize that measuring improper payments and designing
and implementing actions to reduce them are not simple tasks and will not
be easily accomplished. Further, while internal control should be
maintained as the front-line defense against improper payments, recovery
auditing holds promise as a cost-effective means of identifying contractor
overpayments.

Given today's budgetary pressures and the American public's increasing
demands for accountability over taxpayer funds, oversight hearings such as
this one today and the continuing leadership of OMB under the PMA, help
keep agencies focused on the goals of IPIA and being accountable for
results. Preventing, identifying, and recovering improper payments in that
order are what is needed across government. 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.

Contact 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; Heather Rasmussen; Donell Ries; and Viny Talwar.

Appendix I: Agencies and Related Programs Included in Our Review of Fiscal
Year 2006 Performance and Accountability Reports and Annual Reports

      Department or agency            Program or activity                     
1  Agency for International     1  Cash Transfers                          
      Development                                                             
                                   2  Cooperative Agreements, Grants, and     
                                      Contracts                               
2  Department of Agriculture    3  Child and Adult Care Food Program       
                                   4  Conservation Reserve Program            
                                   5  Direct and Counter-Cyclical Payments    
                                   6  Disaster Programs                       
                                   7  Farm Security and Rural Investment      
                                   8  Federal Crop Insurance Corporation      
                                   9  Food Stamp Program                      
                                   10 Loan Deficiency Payments                
                                   11 Marketing Assistance Loan Program       
                                   12 Milk Income Loss Contract Program       
                                   13 National School Lunch and School        
                                      Breakfast Programs (previously School   
                                      Programs)                               
                                   14 Noninsured Assistance Program           
                                   15 Rental Assistance Program               
                                   16 Wildland Fire Suppression Management    
                                   17 Women, Infants, and Children            
3  Department of Commerce       18 All programs and activities             
4  Department of Defense        19 Civilian Pay                            
                                   20 Commercial Pay                          
                                   21 Military Health Benefits                
                                   22 Military Pay                            
                                   23 Military Retirement Fund                
                                   24 Travel Pay                              
5  Department of Education      25 Student Financial Assistance--Federal   
                                      Family Education Loan                   
                                   26 Student Financial Assistance--Pell      
                                      Grants                                  
                                   27 Title I                                 
6  Department of Energy         28 Payment programs                        
7  Environmental Protection     29 Clean Water State Revolving Funds       
      Agency                                                                  
                                   30 Drinking Water State Revolving Funds    
8  Export-Import Bank of the    31 All programs and activities             
      United States                                                           
9  Farm Credit System Insurance 32 All programs and activities             
      Corporation^a                                                           
10 Federal Communications       33 High Cost Support Program               
      Commission                                                              
                                   34 Universal Service Fund's Schools and    
                                      Libraries                               
11 Federal Deposit Insurance    35 All programs and activities             
      Corporation                                                             
12 Federal Trade Commission     36 All programs and activities             
13 General Services             37 All programs and activities             
      Administration                                                          
14 Department of Health and     38 Child Care and Development Fund         
      Human Services                                                          
                                   39 Foster Care--Title IV-E                 
                                   40 Head Start                              
                                   41 Medicaid                                
                                   42 Medicare Advantage                      
                                   43 Medicare Fee-for-Service                
                                   44 Medicare Prescription Drug Benefit      
                                   45 State Children's Insurance Program      
                                   46 Temporary Assistance for Needy Families 
15 Department of Homeland       47 Individuals and Households Program      
      Security                                                                
                                   48 Vendor Payments                         
16 Department of Housing and    49 Community Development Block Grant       
      Urban Development                                                       
                                   50 Federal Housing Administration's Single 
                                      Family Acquired Asset Management System 
                                   51 Low Income Public Housing               
                                   52 Public Housing Capital Fund             
                                   53 Section 8--Project Based                
                                   54 Section 8--Tenant Based                 
17 Department of the Interior   55 All programs and activities             
18 Department of Justice        56 All programs and activities             
19 Department of Labor          57 Federal Employees' Compensation Act     
                                   58 Unemployment Insurance                  
                                   59 Workforce Investment Act                
20 National Aeronautics and     60 All programs and activities             
      Space Administration                                                    
21 National Archives and        61 All programs and activities             
      Records Administration                                                  
22 National Credit Union        62 All programs and activities             
      Administration^a                                                        
23 National Science Foundation  63 Research and Education Grants and       
                                      Cooperative Agreements                  
24 National Transportation      64 All programs and activities             
      Safety Board                                                            
25 Nuclear Regulatory           65 All programs and activities             
      Commission                                                              
26 Office of Personnel          66 Federal Employees Group Life Insurance  
      Management                                                              
                                   67 Federal Employees Health Benefits       
                                      Program                                 
                                   68 Retirement Program (Civil Service       
                                      Retirement System and Federal Employees 
                                      Retirement System)                      
27 Pension Benefit Guaranty     69 All programs and activities             
      Corporation                                                             
28 U.S. Postal Service          70 All programs and activities             
29 Railroad Retirement Board    71 Railroad Unemployment Insurance         
                                      Benefits                                
                                   72 Retirement and Survivors Benefits       
30 Securities and Exchange      73 All programs and activities             
      Commission                                                              
31 Small Business               74 504 Certified Development Companies     
      Administration                                                          
                                   75 7(a) Business Loan Program              
                                   76 Disaster Assistance                     
                                   77 Small Business Investment Companies     
32 Smithsonian Institution      78 All programs and activities             
33 Social Security              79 Old Age and Survivors' Insurance        
      Administration                                                          
                                   80 Disability Insurance                    
                                   81 Supplemental Security Income Program    
34 Department of State          82 International Information Program--U.S. 
                                      Speaker Specialist Program              
                                   83 International Narcotic and Law          
                                      Enforcement Affairs--Narcotics Program  
                                   84 Structures and Equipment                
                                   85 Vendor payments                         
35 Tennessee Valley Authority   86 Payment programs                        
36 Department of Transportation 87 Airport Improvement Program             
                                   88 Federal Transit--Capital Investment     
                                      Grants                                  
                                   89 Federal Transit--Formula Grants         
                                   90 Highway Planning and Construction       
37 Department of the Treasury   91 Earned Income Tax Credit                
38 Department of Veterans       92 Compensation                            
      Affairs                                                                 
                                   93 Dependency and Indemnity Compensation   
                                   94 Education programs                      
                                   95 Insurance programs                      
                                   96 Loan Guaranty                           
                                   97 Pension                                 
                                   98 Vocational Rehabilitation               

Sources: GAO's analysis of cited agencies' fiscal year 2006 performance
and accountability reports and annual reports.

^aAgency PAR or annual report was not available as of the end of
fieldwork.

Appendix II: Improper Payment Estimates Reported in Agency Fiscal Year
2005 and 2006 Performance and Accountability Reports or Annual Reports

                                              2005                2006      
                                             Total               Total      
                                          estimate      2005  estimate      2006
                                                       Error               Error
                                          (dollars      rate  (dollars      rate
    Department or     Program or                in                  in      
    agency            activity           millions) (percent) millions) (percent)
 1  Agency for     1  Cash Transfers         0.9^a     0.1^a       7.0       0.8
    International                                                           
    Development                                                             
                   2  Cooperative            0.2^a  0.0^a, b      15.1       0.2
                      Agreements,                                           
                      Grants, and                                           
                      Contracts                                             
 2  Department of  3  Child and Adult        0.0^c     0.0^c      16.0       1.8
    Agriculture       Care Food Program                                     
                   4  Conservation           0.0^c     0.0^c      64.0       3.5
                      Reserve Program                                       
                   5  Direct and             0.0^c     0.0^c     424.0       5.0
                      Counter-Cyclical                                      
                      Payments                                              
                   6  Disaster Programs      0.0^c     0.0^c     291.0      12.3
                   7  Farm Security and       16.0       1.6       3.0       0.2
                      Rural Investment                                      
                   8  Federal Crop            28.0       0.9      62.0       1.9
                      Insurance                                             
                      Corporation                                           
                   9  Food Stamp Program   1,432.0       5.9   1,645.0       5.8
                   10 Loan Deficiency          5.0       1.0     443.0       9.3
                      Payments                                              
                   11 Marketing               45.0       0.7   1,611.0      20.3
                      Assistance Loan                                       
                      Program                                               
                      (previously                                           
                      Commodity Loan                                        
                      Programs)                                             
                   12 Milk Income Loss         0.2       0.1     0.0^c     0.0^c
                      Contract Program                                      
                   13 National School          0.0       0.0       0.0       0.0
                      Lunch and School                                      
                      Breakfast Programs                                    
                      (previously School                                    
                      Programs)^d                                           
                   14 Noninsured             0.0^c     0.0^c      25.0      22.9
                      Assistance Program                                    
                   15 Rental Assistance       27.0       3.2      22.0       3.5
                      Program                                               
                   16 Wildland Fire         18.0^a     3.7^a       7.0       2.5
                      Suppression                                           
                      Management                                            
                   17 Women, Infants,        0.0^c     0.0^c      21.0       0.6
                      and Children                                          
 3  Department of  18 All programs and         0.0       0.0       0.0       0.0
    Commerce          activities^e                                          
 4  Department of  19 Civilian Pay           0.0^c     0.0^c      62.8       0.1
    Defense                                                                 
                   20 Commercial Pay         0.0^c     0.0^c     550.0       0.2
                   21 Military Health       87.8^a     1.2^a     140.0       2.0
                      Benefits                                              
                   22 Military Pay           432.0       0.6      65.9       0.1
                   23 Military                49.3       0.1      48.8       0.1
                      Retirement Fund                                       
                   24 Travel Pay             0.0^c     0.0^c       8.0       1.0
 5  Department of  25 Student Financial    190.0^a     2.2^a     401.0       2.2
    Education         Assistance--                                          
                      Federal Family                                        
                      Education Loan                                        
                   26 Student Financial    444.0^a     3.5^a     422.0       3.5
                      Assistance--Pell                                      
                      Grants                                                
                   27 Title I                149.0       1.2      25.2       0.2
 6  Department of  28 Payment programs        14.5       0.1      18.4       0.1
    Energy                                                                  
 7  Environmental  29 Clean Water State      3.0^a     0.1^a       3.5       0.2
    Protection        Revolving Funds                                       
    Agency                                                                  
                   30 Drinking Water         0.0^f     0.0^f     0.0^f     0.0^f
                      State Revolving                                       
                      Funds                                                 
 8  Export-Import  31 All programs and         0.0       0.0       0.0       0.0
    Bank of the       activities                                            
    United                                                                  
    States^g                                                                
 9  Farm Credit    32 All programs and       0.0^g     0.0^g     0.0^h     0.0^h
    System            activities                                            
    Insurance                                                               
    Corporation                                                             
 10 Federal        33 High Cost Support        0.0       0.0       0.0       0.0
    Communications    Program^d                                             
    Commission                                                              
                   34 Universal Service        0.0       0.0       0.0       0.0
                      Fund's Schools and                                    
                      Libraries^d                                           
 11 Federal        35 All programs and         0.0       0.0       0.0       0.0
    Deposit           activities                                            
    Insurance                                                               
    Corporation^g                                                           
 12 Federal Trade  36 All programs and       0.0^i     0.0^i     0.0^e     0.0^e
    Commission        activities                                            
 13 General        37 All programs and         0.0       0.0       0.0       0.0
    Services          activities^e                                          
    Administration                                                          
 14 Department of  38 Child Care and           0.0       0.0       0.0       0.0
    Health and        Development Fund^d                                    
    Human Services                                                          
                   39 Foster Care--Title   152.0^a     8.6^a     134.0       7.7
                      IV-E                                                  
                   40 Head Start           109.0^a       1.6     210.0       3.1
                   41 Medicaid^d               0.0       0.0       0.0       0.0
                   42 Medicare                 0.0       0.0       0.0       0.0
                      Advantage^d                                           
                   43 Medicare            12,100.0       5.2  10,800.0       4.4
                      Fee-for-Service                                       
                   44 Medicare                 0.0       0.0       0.0       0.0
                      Prescription Drug                                     
                      Benefit^d                                             
                   45 State Children's         0.0       0.0       0.0       0.0
                      Insurance                                             
                      Program^d                                             
                   46 Temporary                0.0       0.0       0.0       0.0
                      Assistance for                                        
                      Needy Families^d                                      
 15 Department of  47 Individuals and      397.0^a     8.6^a     334.0       8.6
    Homeland          Households Program                                    
    Security                                                                
                   48 Vendor payments      494.0^a     7.4^a     502.0       7.4
 16 Department of  49 Community              8.0^a     0.2^a       4.4       0.1
    Housing and       Development Block                                     
    Urban             Grant (Entitlement                                    
    Development       Grants,                                               
                      States/Small                                          
                      Cities)                                               
                   50 Federal Housing          2.2       0.6     0.0^j     0.0^j
                      Administration's                                      
                      Single Family                                         
                      Acquired Asset                                        
                      Management System                                     
                   51 Low Income Public      326.0       5.6     378.5       1.4
                      Housing                                               
                   52 Public Housing         133.5       5.1     0.0^j     0.0^j
                      Capital Fund                                          
                   53 Section 8--Project     324.0     0.0^f     362.6       1.3
                      Based                                                 
                   54 Section 8--Tenant      551.0     0.0^f     723.2       2.7
                      Based                                                 
 17 Department of  55 All programs and         0.0       0.0       0.0       0.0
    the Interior      activities^e                                          
 18 Department of  56 All programs and         0.0       0.0       0.0       0.0
    Justice           activities^e                                          
 19 Department of  57 Federal Employees'       3.3       0.1       0.3     0.0^b
    Labor             Compensation Act                                      
                   58 Unemployment         3,267.0      10.1   3,376.0      10.7
                      Insurance                                             
                   59 Workforce              7.8^a       0.2       6.4       0.2
                      Investment Act                                        
 20 National       60 All programs and         0.0       0.0       0.0       0.0
    Aeronautics       activities^e                                          
    and Space                                                               
    Administration                                                          
 21 National       61 All programs and       0.0^i     0.0^i     0.0^e     0.0^e
    Archives and      activities                                            
    Records                                                                 
    Administration                                                          
 22 National       62 All programs and       0.0^g     0.0^g     0.0^h     0.0^h
    Credit Union      activities                                            
    Administration                                                          
 23 National       63 Research and             1.1     0.0^b     0.0^j     0.0^j
    Science           Education Grants                                      
    Foundation        and Cooperative                                       
                      Agreements                                            
 24 National       64 All programs and       0.0^i     0.0^i     0.0^g     0.0^g
    Transportation    activities                                            
    Safety Board                                                            
 25 Nuclear        65 All programs and         0.0       0.0       0.0       0.0
    Regulatory        activities^e                                          
    Commission                                                              
 26 Office of      66 Federal Employees      3.4^a     0.3^a       0.8       0.1
    Personnel         Group Life                                            
    Management        Insurance                                             
                   67 Federal Employees    196.7^a     0.7^a      62.5       0.2
                      Health Benefits                                       
                      Program                                               
                   68 Retirement Program   153.0^a     0.3^a     253.5       0.4
                      (Civil Service                                        
                      Retirement System                                     
                      and Federal                                           
                      Employees                                             
                      Retirement System)                                    
 27 Pension        69 All programs and       0.0^g     0.0^g     0.0^e     0.0^e
    Benefit           activities                                            
    Guaranty                                                                
    Corporation                                                             
 28 U.S. Postal    70 All programs and         0.0       0.0       0.0       0.0
    Service^g         activities                                            
 29 Railroad       71 Railroad               2.6^a     2.3^a       2.7       2.3
    Retirement        Unemployment                                          
    Board             Insurance Benefits                                    
                   72 Retirement and       151.8^a     1.7^a     157.0       1.7
                      Survivors Benefits                                    
 30 Securities and 73 All programs and         0.0       0.0       0.0       0.0
    Exchange          activities^e                                          
    Commission                                                              
 31 Small Business 74 504 Certified            0.0       0.0       0.0       0.0
    Administration    Development                                           
                      Companies^d                                           
                   75 7(a) Business Loan     8.7^a     1.4^a      10.2       1.6
                      Program                                               
                   76 Disaster                 1.6       0.1      89.4       0.8
                      Assistance                                            
                   77 Small Business       125.0^a     4.7^a     0.0^c     0.0^c
                      Investment                                            
                      Companies                                             
 32 Smithsonian    78 All programs and         0.0       0.0       0.0       0.0
    Institution^g     activities                                            
 33 Social         79 Old Age and          3,681.0       0.7   3,280.0       0.6
    Security          Survivors'                                            
    Administration    Insurance                                             
                   80 Disability             0.0^f     0.0^f     0.0^f     0.0^f
                      Insurance                                             
                   81 Supplemental         2,910.0       7.7   3,028.0       7.8
                      Security Income                                       
                      Program                                               
 34 Department of  82 International            1.9      81.2     6.7^k      23.8
    State             Information                                           
                      Program--U.S.                                         
                      Speaker and                                           
                      Specialist Program                                    
                   83 International            0.6     0.0^b    12.4^k       4.0
                      Narcotic and Law                                      
                      Enforcement                                           
                      Affairs--Narcotics                                    
                      Program                                               
                   84 Structures and           0.2     0.0^b     0.0^j     0.0^j
                      Equipment                                             
                   85 Vendor payments          0.4     0.0^b     0.0^j     0.0^j
 35 Tennessee      86 Payment programs        36.3       0.5       7.5       0.1
    Valley                                                                  
    Authority                                                               
 36 Department of  87 Airport                0.0^l     0.0^l     0.0^d     0.0^d
    Transportation    Improvement                                           
                      Program                                               
                   88 Federal                0.0^l     0.0^l     0.0^d     0.0^d
                      Transit--Capital                                      
                      Investment Grants                                     
                   89 Federal                0.0^l     0.0^l     0.0^d     0.0^d
                      Transit--Formula                                      
                      Grants                                                
                   90 Highway Planning       0.0^l     0.0^l      30.2       0.2
                      and Construction                                      
 37 Department of  91 Earned Income Tax   10,500.0      25.5  10,700.0      25.5
    the Treasury      Credit                                                
 38 Department of  92 Compensation         306.0^a       1.1     324.6       1.0
    Veterans                                                                
    Affairs                                                                 
                   93 Dependency and         0.0^f     0.0^f     0.0^f     0.0^f
                      Indemnity                                             
                      Compensation                                          
                   94 Education programs    32.3^a     1.2^a      67.2       2.2
                   95 Insurance programs       0.3     0.0^b     0.0^j     0.0^j
                   96 Loan Guaranty          3.5^a     0.3^a       0.9       0.1
                   97 Pension              370.9^a    10.9^a     370.6      10.7
                   98 Vocational             6.2^a     1.1^a       6.0       1.0
                      Rehabilitation                                        
    Total                                $39,310.2           $41,643.3           

Sources: GAO prior report and analysis of cited agencies' fiscal year 2006
PARs or annual reports.

^aFiscal year 2005 estimates or error rates were updated to the revised
estimates reported in the fiscal year 2006 PARs or annual reports.

^bAgency reported error rate was less than one percent or reported the
error rate rounded to zero for purposes of this testimony.

^cAgency did not report an annual improper payment estimate or error rate.

^dSee table 3 of this testimony.

^eAgency reported that it had no programs or activities susceptible to
significant improper payments.

^fAgency combined with the program above.

^gAgency did not address improper payments or IPIA in its PAR or annual
report for fiscal year 2005, fiscal year 2006, or both.

^hAgency PAR or annual report was not available as of the end of
fieldwork.

^iFiscal year 2006 was the first year this agency was included in our
scope of review.

^jAgency reported program no longer susceptible to significant improper
payments.

^kWe obtained this amount from OMB.

^lAgency reported that the annual improper payment amount or error rate
was zero.

(195112)

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Highlights of [41]GAO-07-635T , a testimony before the Subcommittee on
Federal Financial Management, Government Information, Federal Services,
and International Security, Committee on Homeland Security and
Governmental Affairs, U.S. Senate

March 29, 2007

IMPROPER PAYMENTS

Agencies' Efforts to Address Improper Payment and Recovery Auditing
Requirements Continue

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 as well as for
recouping those funds when improper payments occur. The Congress enacted
the Improper Payments Information Act of 2002 (IPIA) and the Recovery
Auditing Act to address these issues. Fiscal year 2006 marked the 3rd year
that agencies were required to report improper payment and recovery audit
information in their Performance and Accountability Reports.

GAO was asked to testify on the progress agencies have made in these
areas. Specifically, GAO focused on (1) trends in agencies' reporting
under IPIA from fiscal years 2004 through 2006, (2) challenges in
reporting improper payment information and improving internal control, and
(3) agencies' reporting of recovery auditing efforts. This testimony is
based on GAO's previous reports on agencies' efforts to implement IPIA
requirements for fiscal years 2005 and 2004 and current review of
available fiscal year 2006 improper payment and recovery auditing
information. The Office of Management and Budget (OMB) provided technical
comments that were incorporated as appropriate.

GAO identified several key trends related to IPIA reporting requirements.

           o Risk assessments. For fiscal years 2004 through 2006, 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. Further, certain
           agencies' risk assessments appeared questionable. GAO also noted
           that OMB's recently revised IPIA implementing guidance, which
           allows certain agencies to perform risk assessments every 3 years
           instead of annually, may result in fewer agencies conducting risk
           assessments in the future.
           o Improper payment estimates. Since fiscal year 2004, agencies
           have made some progress in reporting improper payment information.
           The number of programs reporting improper payment estimates for
           fiscal year 2004 totaled 41, compared to 60 programs for fiscal
           year 2006. The total improper payments dollar estimate was $45
           billion in fiscal year 2004, $38 billion in fiscal year 2005, and
           about $42 billion in fiscal year 2006.
           o Noncompliance issues. Although not currently required by IPIA to
           do so, some agency auditors continued to report problems related
           to agencies' risk assessments, definition of programs for IPIA
           purposes, sampling methodologies, lack of reporting for all
           risk-susceptible programs, and supporting documentation.

Although showing progress under OMB's continuing leadership, agencies'
fiscal year 2006 reporting under IPIA does not yet reflect the full scope
of improper payments. Major challenges remain in meeting the goals of the
act and ultimately improving the integrity of payments. First, some
agencies have not yet reported for all risk-susceptible programs. For
example, the fiscal year 2006 total improper payment estimate of about $42
billion did not include any amounts for 13 risk-susceptible programs that
had fiscal year 2006 outlays totaling about $329 billion. Second, certain
methodologies used to estimate improper payments did not result in
accurate estimates. Finally, GAO noted that internal control weaknesses
continued to plague programs susceptible to significant improper payments.

From fiscal years 2004 through 2006, the number of agencies reporting
recovery auditing information for contract overpayments and the dollar
amounts identified for recovery and actually recovered increased. For
fiscal year 2004, 12 agencies reported recovering about $53 million,
compared to 18 agencies that reported recovering about $256 million for
fiscal year 2006. Given the large volume and complexity of federal
contract payments and historically low recovery rates for certain
programs, GAO emphasized that it is much more efficient to pay bills
properly in the first place. Effective internal control calls for a sound,
ongoing invoice review and approval process as the first line of defense
in preventing erroneous payments.

References

Visible links

  18. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-05-417
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-05-417
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-05-417
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-07-254T
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-05-417
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-06-347
  29. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.3.1
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-02-69G
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-07-136
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-07-92
  41. http://www.gao.gov/cgi-bin/getrpt?GAO-07-635T
*** End of document. ***