Background

Before highlighting the results of our review of the fiscal year 2003 PARs, I  would like to summarize the requirements of the Improper Payments Act.   The act requires the head of each agency to annually review all programs  and activities that the agency administers and identify all such programs  and activities that may be susceptible to significant improper payments.   For each program and activity identified, the agency is required to estimate  the annual amount of improper payments and submit those estimates to the  Congress before March 31 of the following applicable year.  The act further  requires that for any agency program or activity with estimated improper  payments exceeding $10 million, the head of the agency shall provide a  report on the actions the agency is taking to reduce those payments.
The Improper Payments Act also required the Director of OMB to prescribe  guidance to implement its requirements not later than six months after the  date of its enactment (Nov. 26, 2002).  OMB issued this guidance on May 21,  2003.  It states that each agency shall report the results of its improper  payment efforts in the Management Discussion and Analysis section of its  PAR for fiscal years ending on or after September 30, 2004.  In general, the  first set of reports required by the guidance is due in November 2004.   Significantly, the guidance issued in May 2003, also required that 15  agencies report improper payment information for 46 programs identified  in OMB Circular A-11, publicly in their fiscal year 2003 PARs.  Section 57  required agencies to include improper payment information for the  agencies and programs in their nonpublic budget submissions to OMB,  beginning with the fiscal year 2003 budget proposals.  According to OMB,  the programs were selected primarily because of their large dollar volume  ($2 billion dollars or more in outlays).  In July 2003, OMB dropped the  requirement for information on erroneous payments and eliminated  Section 57 requirements for preparing fiscal year 2005 budget submissions.   The information previously called for in the circular includes actual and  estimated improper payments and rates, targets for reducing the improper  payment rates identified, and corrective action plans to reach the targets.
If diligently and vigorously implemented, the Improper Payments Act  should have a significant impact on the governmentwide improper  payments problem.  The level of importance each agency, the  administration, and the Congress place on the efforts to implement the act  will determine its overall effectiveness and the level to which agencies  reduce improper payments and ensure that federal funds are used for their  intended purposes.

	Fiscal Year 2003 PARs Contain Limited Improper Payment Information

As you requested, we reviewed the fiscal year 2003 PARs for the 15  agencies and 46 programs previously cited in OMB Circular A-11, Section  57, to identify the improper payment information contained therein.  Table  1 summarizes the improper payment estimates agencies reported in their  fiscal year 2003 PARs.
Further review of the table shows that the PARs contained improper  payment estimates for 31 of the 46 agency programs previously listed in  Circular A-11.  The reports contained information on agency initiatives to  prevent or reduce improper payments for 22 programs and on impediments  to improper payment prevention or reduction for 11 programs.
Some agencies partially reported required information.  Figure 1 presents,  by agency program, the level of reporting that we found for the three  categories of information you asked about (improper payment amounts;  initiatives to prevent improper payments, reduce them, or both; and  impediments to preventing or reducing them).  As you can see, the level of  reporting is literally all over the board.
Further, although agencies may have met the reporting requirements for   particular programs by addressing them in PARs, in many cases, the  information reported was limited to agency plans for future measures that  may not come about.  In some cases, agencies reported that they had  already determined that programs were not susceptible to significant  improper payments, despite the fact that the auditor’s reports in the same  PARs identified management challenges, or  material internal control  weaknesses within the programs where the design or operation of an  internal control procedure did not reduce, to a relatively low level, the risk  that errors, fraud, or noncompliance that would be material to the financial  statements may occur and not be detected promptly by employees in the  normal course of performing their duties.  This situation appears  contradictory.
Although OMB has required agencies to perform various improper- payment-related identification and corrective action activities for the past  three years for these 46 programs, figure 1 shows that only seven agencies  reported all of the required elements you asked about—estimated amounts,  initiatives taken to reduce improper payments, and impediments to  improper payment prevention or reduction—representing only 9 of the 46  programs (20 percent).  One of the agencies, for one of its programs,  reported estimated improper payment amounts, discussed ongoing  collaborative efforts made with and between program partners (such as  state agencies) to improve payment accuracy and to share “best practice”  information, and further reported that recent legislation weakened the  penalties imposed on program partners for high error rates and reduced the  incentives offered for lower rates.  Another agency reported an improper  payment amount for three of its four required programs, reported  initiatives such as improving program guidance and training, and addressed  impediments such as the lack of available income data needed to verify  applicant-provided income information.  A third agency reported an  estimate for one of its three required programs, and further reported  initiatives including promoting and funding data exchanges with program  partners, and reported that its principal impediment was the cost of  detecting eligibility issues.
For 10 of the 46 programs represented in six agencies, the agencies  estimated improper payment amounts and initiatives taken to reduce  improper payments, but did not address any impediments.  For one  program, an agency estimated improper payments and discussed initiatives  to correct benefit computation errors and beneficiary earnings test  improvements.  Another is performing annual on-site reviews.  One agency  reported an improper payment amount for a program and discussed  initiatives, such as implementing an automated system to identify coding  and billing errors.  Other initiatives reported by agencies included  conducting recovery audits, collaborating with other federal agencies to  identify and recover payments made to ineligible beneficiaries, and issuing  policy notices and providing training to agency personnel on program  processes.
Six agencies reported estimated amounts for 11 programs, but did not  discuss initiatives taken to reduce improper payments and impediments to  preventing or reducing improper payments.  For three programs, agencies  reported no estimated amounts or impediments, but did discuss initiatives  taken to reduce improper payments, such as expanding annual post award  monitoring and oversight processes.  One agency did not report estimated  improper payment amounts or discuss initiatives taken to reduce improper  payments for one of its programs but identified some of the impediments it  has encountered in preventing or reducing them, such as the unavailability  of the data necessary to accurately measure improper payments.
For 11 of the 46 programs for which agencies were required to report  improper payment information in their fiscal year 2003 PARs, four agencies  did not report estimated amounts, initiatives taken to reduce improper  payments, or impediments to preventing or reducing improper payments,  even though OMB Circular A-11, Section 57, originally required agencies to  report improper payment data, assessments, and action plans with their  initial budget submissions since July 2001.  One agency reported, “…  erroneous payments are very unlikely … limited to instances of fraud… ”   Agencies for several programs reported only that they were continuing to  develop improper payment error rates, but reported no further information.

	Stronger Internal Control Systems Are Key to Reducing Governmentwide Improper Payments

In October 2001, we issued an executive guide on strategies to manage  improper payments that was based on the results of information that we  obtained from public and private sector organizations that identified and  took actions designed to reduce improper payments in their programs.  We  found that the actions that these organizations took shared a common  focus of improving the internal control system over problem areas.  This  system consists of five primary components—the control environment,  risk assessments, control activities, information and communications, and  monitoring.  Internal controls are not one event, but a series of actions and  activities that occur throughout an entity’s operations and on an ongoing  basis.  People make internal controls work, and responsibility for good  internal control rests with all managers.
One of the biggest hurdles that many entities face in the process of  managing improper payments is overcoming the tendency to deny the  problem.  It is easy to rationalize avoiding or deferring action to address a  problem if you do not know how big the problem is.  The nature and  magnitude of the problem—determined through a systematic risk  assessment process—needs to be determined and openly communicated to  all relevant parties.  When this occurs, especially in a strong control  environment, denial is no longer an option, and managers have the  information, as well as the incentive, to begin addressing improper  payments.

		The Federal Managers’ Financial Integrity Act of 1982 Set Internal Control Review and Reporting Requirements

Fraud, waste, and abuse in federal activities and programs lead to the loss  of billions of dollars of government funds, erode public confidence, and  undermine the federal government’s ability to operate effectively.   Unfortunately, that assessment comes from a 1985 GAO report on federal  agencies implementation of 31 U.S.C. 3512 (c), (d) (commonly referred to  as the Federal Managers’ Financial Integrity Act of 1982 (Financial Integrity  Act)).  Continuing concern over the poor condition of government internal  controls and accounting systems led the Congress to pass this legislation  that requires, among other things, ongoing evaluations and reports on the  adequacy of the systems of internal accounting and administrative control  of each executive agency.  It requires the head of each agency to issue an  annual report that identifies material weaknesses identified through the  assessment process and the actions planned to correct those weaknesses.
An August 1984 GAO report that summarized the results of our  governmentwide review of agencies’ efforts to implement the Financial  Integrity Act found that agencies made a good start in the first year of  assessing their internal control and accounting systems and have  demonstrated a management commitment to implementing the act.  Top  agency and OMB managers were becoming involved.  The report  characterized the first-year effort as a learning experience and noted that  much remained to be done to complete the evaluation process and correct  the problems identified.  Our 1984 review of the material weaknesses  identified in the annual reports of 17 major agencies revealed that  16 agencies reported accounting/financial management system   14 agencies reported procurement weaknesses;  13 agencies reported property management weaknesses;  12 agencies reported cash management weaknesses;  12 agencies reported grant, loan, and debt collection management   8 agencies reported eligibility and entitlement weaknesses.
We concluded that, since the initial work in implementing the act had been  accomplished, agencies needed to develop comprehensive plans to correct  the material weaknesses identified.  Correction of problems represents the  “bottom line” of the act.  We further recognized that many of the  weaknesses identified were long-standing.  They did not develop overnight,  and their solutions would not be easy.  It would take a sustained, high- priority commitment.  In commenting on this report, OMB agreed that a  long-term commitment to improving internal control was necessary and  that weaknesses identified in the first year must be corrected. “According to the testimony, a good beginning has been made toward implementing the Act.   It is clear, however, that much more remains to be done ….  This year agencies began the  review process.  Now, they must improve on the work they did last year and conduct in- depth internal control reviews.  Above all, corrective actions must be taken on the  deficiencies found.”
In our report, we noted that, while the act required agency heads to report  material weaknesses in their annual reports, the annual reviews conducted  identified significant numbers of less serious internal control weaknesses.   For example, although Treasury did not report any additional material  weaknesses in its 1984 annual statement, its component bureaus identified  89 weaknesses that they considered material and reported 127 associated  corrective actions.  According to Treasury’s 1984 annual statement, the  bureaus had completed 46 (36 percent) of these 127 corrective actions.   Similarly, the military services identified and reported correcting thousands  of control weaknesses at lower levels.  Army managers, for example,  reported correcting 3,600 internal control weaknesses in 1984 that were not  considered to be material from an agency perspective.
In November 1989 testimony, former Comptroller General Charles A.  Bowsher again addressed this issue by noting that based on the results of  the internal control assessments and  examinations of the systems  problems that agencies have reported and that GAO and federal audit  organizations have identified in their audit reports, it is evident that   the government does not currently have the internal control and  accounting systems necessary to effectively operate many of its  programs and safeguard its assets;  many weaknesses are long-standing and have resulted in billions of  dollars of losses and wasteful spending;  major government scandals and system breakdowns serve to reinforce  the public’s perception that the federal government is poorly managed,  with little or no control over its activities; and   top-level officials must provide leadership if this situation is to change.
In summary, during the 1980s, federal agencies conducted significant  numbers of internal control assessments and identified and reported taking  corrective actions to eliminate the weaknesses found.  Yet, at the end of the  decade, controls remained inadequate and these weaknesses resulted in  billions in losses and wasteful spending.  Significantly, the final item cited  by Mr. Bowsher in his 1989 testimony is indicative of a weak control  environment.  Our past work has shown that the control environment is  perhaps the most significant component of internal control to the  identification, development, and implementation of activities to reduce  improper payments.  As pointed out in our executive guide on managing  improper payments, without this top-level leadership, the outlook for  overall improvements in the governmentwide effort to reduce improper  payments is limited.

		Initiatives since 1990 Have Also Emphasized the Importance of Strong Internal Controls

From the early 1990s to the present, additional initiatives called for actions  to strengthen internal controls over federal programs and financial  management activities.  The Chief Financial Officers Act (CFO) of 1990 as  expanded by the Government Performance and Results Act of 1993  (GPRA); the Government Management Reform Act of 1994; and the  President’s Management Agenda are a few of these initiatives. Our reports  that discuss these initiatives may not specifically focus on improper  payments and agency efforts to reduce such payments but they do discuss  agency internal controls over various programs, activities, or both and  actions to identify weaknesses in those controls and to design and  implement actions to eliminate those weaknesses.  Therefore, there is a  direct relationship between agency activities regarding those initiatives and  agency actions to implement the Improper Payments Act.
In recent testimony before this subcommittee on the fiscal year 2003 U.S.  government financial statements, Comptroller General David M. Walker  noted that certain material weaknesses in internal control and in selected  accounting and reporting practices resulted in conditions that continued to  prevent GAO from being able to provide the Congress and American  citizens with an opinion as to whether the consolidated financial  statements of the U.S. government are fairly stated in conformity with U.S.  generally accepted accounting principles.  One of these material  weaknesses involved improper payments that, based on the limited  information available, exceeded $35 billion annually.  The testimony noted  that without a systematic measurement of the extent of improper  payments, federal agency management cannot determine (1) if improper  payment problems that require corrective action exist, (2) mitigation  strategies and the appropriate amount of investments to reduce them, and  (3) the success of efforts implemented to reduce improper payments.
GPRA is the centerpiece of a statutory framework that the Congress put in  place during the 1990s to help resolve the long-standing management  problems that have undermined the federal government’s efficiency and  effectiveness and to provide greater accountability for results.  GPRA was  intended to address several broad purposes, including strengthening the  confidence of the American people in their government; improving federal  program effectiveness, accountability, and service delivery; and enhancing  congressional decision making by providing more objective information on  program performance.
It has resulted in a great deal of progress in making federal agencies more  results oriented, but numerous challenges still exist.  Top leadership  commitment and sustained attention to achieving results, both within the  agencies and at OMB, is essential to GPRA implementation. Top  leadership commitment is a characteristic of a positive control  environment. This again raises the issue of the adequacy of the control  environment at federal agencies.  Leadership commitment is important, not  only to GPRA implementation, but other management activities and  initiatives, including successful implementation of the Improper Payments  Act. Our executive guide on managing improper payments identified a  positive control environment as perhaps the most significant element  critical to the identification, development, and implementation of activities  to reduce improper payments.  The guide can provide useful information to  leaders in formulating and implementing their programs to reduce  improper payments.
In an October 2003 report on governmentwide efforts to address improper  payment problems, we noted that, as part of the President’s Management  Agenda, officials at OMB told us that they had met with officials from all  relevant agencies to provide assistance and to ensure that agencies   (1) understood the requirements set forth in its guidance for implementing  the Improper Payments Act, (2) have started to inventory their programs  and activities for significant risk of improper payments, (3) understand the  risk assessment process, and (4) understand the reporting requirements  under the Improper Payments Act.  In that report, we concluded that the  governmentwide effort to identify and assess the magnitude of improper  payments, to take actions to reduce those payments, and to publicly report  the results of those efforts is generally in its infancy.   We further reported  that although OMB Circular A-11 had required 14 CFO Act agencies to  report selected improper payment information on 44 programs to OMB  beginning with their fiscal year 2003 budget submissions, those agencies  had completed risk assessments for only 15 of the programs, despite the  Congress’s mandate in 1982 through the Financial Integrity Act that  agencies continually assess their internal control systems and report  annually on their adequacy.  Since the issuance of our October 2003  report,  federal agencies have issued their fiscal year 2003 PARs.  As I discussed  earlier in this testimony, the fiscal year 2003 PARs typically contained  limited amounts of improper payment information even for those programs  previously cited in Circular A-11 for which a reporting requirement has  existed since agency submissions of their fiscal year 2003 budgets to OMB.
Our executive guide on managing improper payments recognized that in  federal agencies, implementation of a strong system of internal control will  likely not be easy or quick and will require strong support and continuous  action from the President, the Congress, top-level administration  appointees, and agency management officials.  Once committed to a plan of  action, they must remain steadfast supporters of the end goals and their  support must be transparent to all.  Agencies must be held accountable for  appropriately managing and controlling their programs and safeguarding  program assets.  OMB must continue to provide direction and support to  agency management in the implementation of governmentwide efforts,  such as those involving improper payments, and conduct appropriate  oversight of federal agency efforts to meet their stewardship and program  management responsibilities.  It is also critical that the Congress continue  its oversight, through public hearings such as this one, to make it clear to  agency and OMB officials that efforts to reduce improper payments are  expected and that failure to do so is not an option.

	Conclusions

Since 1982, various legislative and administrative initiatives have focused  on and required agency assessments of internal controls over programs and  financial management activities.  Although these initiatives may not  specifically target improper payments, by emphasizing internal controls,  they have recognized the important role that internal controls have in  ensuring that federal programs achieve their intended results and that  federal agencies operate them effectively and efficiently.  Given this long- standing emphasis on internal control and the various long-standing  requirements to identify and implement actions to correct control system  weaknesses identified, it is fair to ask two questions.  First, is it reasonable  to expect that federal agencies have significant information on the  condition of internal controls over their programs and activities? Second,  should agencies be able to identify their programs and activities that are  susceptible to improper payments and to meet the other requirements  established by the Improper Payments Act?  Based on the legislative and  administrative initiatives over the past 20-plus years, I think that the  answer to both is an emphatic yes.
Many positive improvements have resulted from the various initiatives  related to internal control and financial management over the past 20-plus  years.  However, I am concerned that we continue to see a trend in agency  actions to address internal control problems.  Agencies often get off to a  good start, but they do not sustain their efforts.  Given this history and the  unknown and potentially significant magnitude of improper payments  governmentwide, it is clear that we are facing a major management  challenge in adequately addressing the problem.  The needed  governmentwide initiatives are in place, they must now be effectively  implemented.  Key to this effort is the need for a strong control  environment that creates a culture of accountability and establishes a  positive and supportive attitude toward reducing improper payments.
This concludes my prepared statement.  I would be pleased to respond to  any questions that you or other Members of the Subcommittee may have.

	Contacts and Acknowledgments

For further information, please contact McCoy Williams, Director,  Financial Management and Assurance, at (202) 512-9508, or Tom Broderick,  Assistant Director, at (202) 512-8705.  You can also reach them by e-mail at  williamsm1@gao.gov or broderickt@gao.gov.  Individuals making key  contributions to this testimony included Bonnie McEwan and Donell Ries.

Agencies and Programs for Which OMB Circular A-11 Required Erroneous Payment Information for Fiscal Year 2003

1. Department of Agriculture  2.  Commodity Loan Program 3.  National School Lunch and Breakfast  4.  Women, Infants, and Children 2.  Department of Defense 6.  Military Health Benefits 3.  Department of Education  7.  Student Financial Assistance 4.  Department of Health and Human Services  13.  Foster Care – Title IV-E 14.  State Children’s Insurance Program 15.  Child Care and Development Fund 5.  Department of Housing and Urban Development  16.  Low Income Public Housing 17.  Section 8 Tenant Based 18.  Section 8 Project Based 19.  Community Development Block Grants (Entitlement Grants, States/Small  Cities) 6.  Department of Labor 21.  Federal Employee Compensation Act 22.  Workforce Investment Act 7.  Department of the Treasury 23.  Earned Income Tax Credit 8.  Department of Transportation  24.  Airport Improvement Program 25.  Highway Planning and Construction 26.  Federal Transit – Capital Investment Grants 27.  Federal Transit – Formula Grants (Continued From Previous Page) 9.  Department of Veterans Affairs  29.  Dependency and Indemnity Compensation 10.  Environmental Protection Agency 32.  Clean Water State Revolving Funds 33.  Drinking Water State Revolving Funds 11.  National Science Foundation  34.  Research and Education Grants and Cooperative Agreements 12.  Office of Personnel Management  35.  Retirement Program (Civil Service Retirement System and Federal Employees’  Retirement System)  36.  Federal Employees Health Benefits Program 37.  Federal Employees’ Group Life Insurance 13.  Railroad Retirement Board  38.  Retirement and Survivors Benefits 39.  Railroad Unemployment Insurance Benefits 14.  Small Business Administration 40.  7(a) Business Loan Program 41.  504 Certified Development Companies 43.  Small Business Investment Companies 15.  Social Security Administration  44.  Old Age and Survivors’ Insurance 46.  Supplemental Security Income Program This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.

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Summary:
Why GAO Did This Study

The Improper Payments Information Act of 2002 requires that agencies annually review all their programs and activities and identify those that may be susceptible to significant improper payments. It further requires those agencies with improper payments exceeding $10 million to provide a report on the actions being taken to reduce those payments. This testimony updates agency progress in implementing the act based on our review of agency fiscal year 2003 Performance and Accountability Reports for the 15 agencies and 46 programs previously cited in Office of Management and Budget Circular A-11, Section 57. It required those agencies and programs to report improper payment information to the Office of Management and Budget beginning with their fiscal year 2003 budget proposals. The areas we addressed were (1) agencies that reported improper payments information and the programs and activities on which that information was based, (2) amounts of improper payments reported, (3) initiatives agencies reported taking to reduce those payments and the results of those initiatives, and (4) impediments to the prevention or reduction of improper payments reported.

What GAO Found

The fiscal year 2003 Performance and Accountability Reports (PAR) typically contained limited amounts of improper payment information even for those programs previously cited in Circular A-11 for which a reporting requirement has existed for at least three years. The PARs contained improper payment estimates for 31 of the 46 programs listed in Circular A-11. They contained information on agency initiatives to prevent or reduce improper payments for 22 programs and on impediments to improper payment prevention or reduction for 11 programs. Seven of 15 agencies reported on all three categories of information requested (improper payment amounts, initiatives taken to reduce or prevent improper payments, and impediments to improper payment prevention or reduction) for 9 of the 46 programs. For 11 of the 46 programs, the four agencies did not report on any of the three elements. In some cases, agencies reported that they had already determined that their programs were not susceptible to significant improper payments. However, the auditor's reports in the same PARs identified management challenges or material internal control weaknesses within the programs where the design or operation of internal control procedures did not reduce, to a relatively low level, the risk that errors, fraud, or noncompliance that would be material to the financial statements may occur and not be detected promptly by employees in the normal course of performing their duties. Key to the effort of reducing improper payments is the need for a strong control environment, including top leadership commitment and sustained attention to achieving results. Since 1982, various legislative and administrative initiatives have focused on and required agency assessments of internal controls over programs and financial management activities. Although these initiatives may not specifically target improper payments, by emphasizing internal controls, they have recognized the importance of internal controls--including a strong control environment--in ensuring that federal programs achieve their intended results and that federal agencies operate them effectively and efficiently. If diligently and vigorously implemented, the Improper Payments Information Act of 2002 should have a significant impact on the governmentwide improper payments problem. The level of importance each agency, the administration, and the Congress place on the efforts to implement the act will determine its overall effectiveness and the level to which agencies reduce improper payments and ensure that federal funds are used efficiently and for their intended purposes.