U.S. DEPARTMENT OF COMMERCE 

Office of Inspector General 

Office of the Secretary 

Commerce Needs to Strengthen 

Its Improper Payment Practices 

and Reporting 

Final Report No. OIG-11-021-A 

March 25, 2011 

FOR PUBLIC RELEASE 

Office of Audit and Evaluation 
UNITED STATES DEPARTMENT OF COMMERCE 

Office of Inspector General 

Washington. D.C. 20230 

March 25,2011 

MEMORANDUM FOR: Scott B. Quehl 

Assistant Secretary for Administration 

and Chief Financial Officer 

FROM:	 Ann C. Eilers fYW'. ;;i:ie \5 

Principal Assistant Inspector General 

For Office of Audit and Evaluation 

SUBJECT:	 Commerce Needs to Strengthen 

Its Improper Payment Practices and Reporting 

Final Report No. OIG-II-021-A 

This memorandum transmits our final report on the Department's need to strengthen improper 

payment practices and improve improper payment reporting. 

We based our audit on the review of grant fraud prevention and detection in four bureaus 

receiving American Recovery and Reinvestment Act of2009 grant funding: the Economic 

Development Administration (EDA), National Institute of Standards and Technology (NIST), 

National Oceanic and Atmospheric Administration (NOAA), and National Telecommunications 

and Information Administration (NTIA). Since our January 26,2011, draft report 

recommendations affect all Commerce bureaus, we addressed our recommendations to you as 

the Department's Chief Financial Officer. 

We found that the bureaus were generally in compliance with OMB guidance on improper 

payments and preventing and detecting grant fraud, waste, and abuse; however, several 

improvements should be made. All four bureaus provided improper payment reporting as 

required; however, the reporting was incomplete because the bureaus did not consider all sources 

of improper payment information when compiling their reports. Additionally, the Department's 

recovery audit efforts did not elect to include several categories of payments, thus reducing the 

audits' effectiveness at detecting improper payments. We discussed these issues with senior 

Commerce, EDA, NIST, NOAA, and NTIA officials during our exit conferences. 

Your March 16,2011, response concurs with our draft report's recommendations and states that 

the Department is improving its processes to successfully implement the Improper Payments 

Elimination and Recovery Act of2010, which provides more clarity about improper payment 

categories. We are encouraged by your outreach to the Office of Management and Budget for 

guidance and your prompt action to develop an audit action plan. 
In accordance with Department Administrative Order 213-5, please provide us with your audit 

action plan with 60 days of the date of this memorandum. We extend our thanks to the 

Department and its bureaus for the courtesies shown to us during our fieldwork. If you have any 

questions, please contact me at (202) 482-2754 or John Bunting at (303) 312-7663. 

Attachment 

cc:	 Gordon Alston, Deputy Director for Financial Management 

Joshua Barnes, Audit Liaison, EDA 

William F. Broglie, Chief Administrative Officer, NOAA 

Milton Brown, Audit Liaison, NTlA 

Lisa Casias, Deputy Chief Financial Officer 

Mack Cato, Audit Liaison, NOAA 

John R. Fernandez, Assistant Secretary for Economic Development 

Patrick D. Gallagher, Director, National Institute of Standards and Technology 

Trudy Gallic, Audit Liaison 

Usha Ganti, Chief, Grants and Agreements Management Division, NIST 

Rachel Kinney, Audit Liaison, NIST 

Rhonda C. Lawrence, Audit Program Manager, NOAA 

Dr. Jane Lubchenco, Under Secretary of Commerce for Oceans and Atmosphere, NOAA 

Aimee Meacham, Compliance and Audit Team, NTIA 

Mitchell J. Ross, Director, Acquisitions and Grants Office, NOAA 

Lawrence E. Strickling, Assistant Secretary for Communications and Information 

and NTIA Administrator 

2
 
 

 

Report In Brief Report In Brief 

U.S. Department of Commerce Office of Inspector General 

March 25, 2011 

Why We Did This Review 

Background 

The Office of Inspector General 

(OIG) initiated this audit to review 

the Department’s compliance with 

Office of Management and Budget 

(OMB) guidance for preventing 

and detecting grant fraud, waste, 

and abuse. 

We focused on the Department’s 

practices for reporting improper 

payments—payments that either 

should not have been made, or 

that were made to ineligible 

recipients or for ineligible goods 

and services—related to American 

Reinvestment and Recovery Act of 

2009 (ARRA) funds. 

In particular, we assessed whether 

the bureaus we reviewed (1) had 

processes in place to accurately 

report and recover improper payments; (2) completed risk assessments of ARRA grant programs 

and included risks specifically 

addressing fraud, waste, and abuse; 

(3) completed thorough internal 

controls assessments; and (4) complied with OMB’s ARRA website 

requirements. 

The overarching goal of ARRA 

was to stimulate the U.S. economy 

by creating new jobs, investing in 

long-term growth, and encouraging 

accountability and transparency in 

government spending. 

The Improper Payments Information Act of 2002 was enacted to 

increase public trust in government 

spending. The act requires the head 

of each agency to review its programs, which now include ARRA 

grants and contracts, for significant 

improper payments, and to report 

these payments to Congress. 

Office of the Secretary 

Commerce Needs to Strengthen Its Improper Payment 

Practices and Reporting (OIG-11-021-A) 

What We Found 

We sampled four bureaus—the Economic Development Administration (EDA), National 

Institute of Standards and Technology (NIST), National Oceanic and Atmospheric Administration (NOAA), and National Telecommunications and Information Administration 

(NTIA)—that received funding and awarded grants through ARRA. We found that the 

bureaus were generally in compliance with OMB guidance on improper payments and preventing and detecting grant fraud, waste, and abuse; however, several improvements should 

be made. We concluded that 

1. Commerce did not have a comprehensive policy addressing all categories of improper

payments; as a result, the four bureaus did not have practices in place to accurately report and recover improper payments. While the previous OMB guidance lacked clarity, 

recent draft guidance clearly identifies additional categories of payments. 

2. Commerce did not elect to include grants in its improper payments reporting or annual

recovery audits. By not including grants, the Department missed an opportunity to find 

and recover erroneous payments. 

3. NIST, NOAA, and NTIA completed program risk assessments, but the assessments 

did not adequately measure the risk of fraud; EDA identified program risks, but did not

determine a risk rating, which is an integral part of a risk assessment and is required by

OMB guidance. 

4. All of the bureaus we reviewed had completed internal controls assessments; however, 

these assessments were not included in the program risk assessments. The assessments 

also did not include specific fraud risk scenarios as a best practice. 

5. All of the bureaus we reviewed were in compliance with OMB requirements to link 

their websites to the OIG website to report fraud, waste, and abuse. 

What We Recommended 

While we focused our review on the practices of these four bureaus, we addressed our recommendations to the Department as a whole since improper payments reporting is required 

for all programs and bureaus. We recommend the Department’s Chief Financial Officer 

work with bureaus and programs to 

1. provide additional improper payment guidance and training to Commerce bureaus to 

identify the categories, including grants, of improper payments that are required for improper payment reporting, and ensure that all categories are accurately and completely 

reported; 

2. include grant payments in future recovery audits; and 

3. expand internal control and program risk assessments to include specific fraud 

scenarios so that increased program and financial management attention can be focused 

on the likeliest risks for fraud, waste, and abuse. 
U.S. Department of Commerce Final Report No. OIG-11-021-A
 

Office of Inspector General March 25, 2011
 

Contents 

Introduction..................................................................................................................................... 1 

Findings and Recommendations ..................................................................................................... 4 

I. Department of Commerce Needs to Improve Improper Payment Practices ........................ 4 

A. Bureaus’ Improper Payment Practices Are Incomplete ................................................... 4 

B. OMB Criteria Encourage Inclusion of Grants in Recovery Audits ................................. 7 

II. Program Risk Assessments Need Increased Emphasis on Fraud Scenarios ........................ 8 

Summary of Agency Comments and OIG Response .................................................................... 10 

Appendix A: Objectives, Scope, and Methodology ..................................................................... 11 

Appendix B: Agency Comments to Draft Report......................................................................... 13 
 

 

                                                           

 

 

 

 

 

U.S. Department of Commerce Final Report No. OIG-11-021-A
 

Office of Inspector General March 25, 2011
 

Introduction 

The Office of Inspector General (OIG) initiated this 

audit to review the Department’s compliance with 

Office of Management and Budget (OMB) guidance 

for preventing and detecting grant fraud, waste, and 

abuse. We targeted our review toward American 

Reinvestment and Recovery Act of 2009 (ARRA) 

funds because Department of Commerce bureaus 

received significant funds under ARRA and were 

encouraged to obligate and spend them expediently; 

as a result, these funds have a higher risk for waste, 

fraud, and abuse. In order to ensure Commerce is 

using the appropriate procedures to guard against, 

report, and recover improper payments, our audit 

included a review of the improper payments process. 

Federal agencies make more than $2 trillion in 

payments to individuals and a variety of other entities 

each year.1

 In fiscal year 2010, improper payments 

made by the federal government totaled $125 billion.2 

The President has given his administration the 

aggressive goal of reducing government-wide 

improper payments by $50 billion and recapturing 

under existing criteria and authorities at least 

$2 billion in actual improper payments by FY 2012.3 

The Improper Payments Information Act of 2002, 

Pub. L. No. 107-300, was enacted to increase public 

trust in government spending. The act requires the 

head of each agency to annually review its programs, 

which now include ARRA grants and contracts, to 

identify programs or activities that are susceptible to 

significant improper (or “erroneous”) payments.4

 The 

act also requires agencies to report improper 

payments to Congress and provide an action plan to 

reduce further erroneous payments. 

Recent Laws and Guidance for 

Preventing Improper Payment Fraud, 

Waste, and Abuse 

Public Law 111-204, Improper Payments 

Elimination and Recovery Act of 2010 

(IPERA), updates and amends the Improper 

Payments Information Act of 2002. IPERA 

requires the head of each agency to identify 

programs that may be susceptible to significant 

improper payments by considering a variety of 

risk factors. IPERA also imposes stricter 

improper payment reporting requirements on the 

agencies. 

Office of Management and Budget (OMB) 

Memorandum M-11-04, issued November 

2010, Increasing Efforts to Recapture 

Improper Payments by Intensifying and 

Expanding Recapture Audits, lowers the 

threshold for conducting payment recapture 

audits to $1 million in annual outlays if 

conducting such audits would be cost effective. 

Executive Order 13520, issued November 

2009, Reducing Improper Payments, directs 

agencies to reduce improper payments, and 

requires OMB to identify high-priority 

programs, establish targets for improper 

payment reduction, and issue government-wide 

guidance. 

Presidential Memorandum, Enhancing 

Payment Accuracy Through a “Do Not Pay 

List.” The June 28, 2010, memorandum 

emphasized the importance of prevention of 

improper payments as compared to detection 

and recovery, and directed agencies to review 

recipient eligibility in prepayment and preaward procedures before making payments or 

awards. 

1 White House, Office of Management and Budget. Office of Federal Financial Management Improper Payments
 

[online], www.whitehouse.gov/omb/financial_fia_improper/ (accessed January 21, 2011). 2 Payment Accuracy. Learn More About Improper Payments The Problem [online].
 

www.paymentaccuracy.gov/content/about-improper-payments (accessed January 21, 2011).
 3 Office of Management and Budget, November 16, 2010. Increased Efforts to Recapture Improper Payments by
 

Intensifying and Expanding Payment Recapture Audits. Memorandum M-11-04, 1.
 4

 Significant erroneous payments are defined as annual erroneous payments in the program that exceed both 

2.5 percent of program payments and $10 million. 

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As ARRA increased the focus on government spending and transparency, new legislation, 

executive orders, and improper payment guidance were issued to increase improper payment 

requirements, as detailed in the textbox on the previous page. The Improper Payments 

Elimination and Recovery Act of 2010 (IPERA), passed in July 2010, enhanced the 2002 act by 

expanding the criteria for determining whether a program may be susceptible to improper 

payments, expanding the types of programs required to conduct recovery audits, lowering the 

review threshold for programs and activities from $500 million to $1 million in payments, and 

providing steps for federal agencies to take in order to improve their error reduction efforts 

should they be found to be non-compliant.5 The new legislation and guidance highlight the 

importance of and increased emphasis on prevention, detection, and reporting of improper 

payments made with all appropriations, including ARRA funds. 

The overarching goal of ARRA was to stimulate the U.S. economy by creating new jobs, 

investing in long-term growth, and encouraging accountability and transparency in government 

spending. As part of the plan to reach that goal, ARRA provided more than $5.1 billion in grants 

and almost $2.8 billion for contracts and staffing to five of Commerce’s bureaus—the Census 

Bureau, the Economic Development Administration (EDA), the National Institute of Standards 

and Technology (NIST), the National Oceanic and Atmospheric Administration (NOAA), and 

the National Telecommunications and Information Administration (NTIA)—as well as OIG. 

(See table 1 for a breakdown of the funds that went to these bureaus.) NTIA appropriations, for 

the Broadband Technology Opportunity Program (BTOP) and the Digital-to-Analog Converter 

Box Program, made up 67 percent of Commerce’s total ARRA appropriations. Census, EDA, 

NIST, NOAA, and OIG received the rest. 

Table 1. Department of Commerce Appropriations 

American Recovery and Reinvestment Act of 2009 

Grants Contracts & Total 

Bureau (Millions) Staffing (Millions) (Millions) 

Census $1,000 $1,000 

EDA $ 150 150 

NIST 257 353 610 

NOAA 207 623 830 

NTIA 4,549 801 5,350 

OIG 6 6 

Total 5,163 2,783 7,946 

Source: American Recovery and Reinvestment Act of 2009 and the Department of Commerce 

Program Tracking Report, June 22, 2010. 

5 White House, Office of the Press Secretary, July 22, 2010. 

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Office of Inspector General March 25, 2011
 

As of December 12, 2010, ARRA obligations totaled $6.8 billion; total disbursements were 

$1.9 billion; and transfers, memorandums of understanding, and rescissions were $1.1 billion.6 

The Department expects disbursements to increase exponentially once NTIA receives and 

finalizes all BTOP environmental assessments.7 Since all BTOP grants were required to be 

awarded by September 30, 2010, and completed within 3 years, the amount of payments or 

disbursed funds is expected to increase through 2013.8 

The objective of our audit was to determine whether the Commerce bureaus that received ARRA 

funds for grants complied with OMB ARRA guidance (OMB M-09-15) to mitigate the potential 

for grant fraud, waste, error, and abuse. In particular, we assessed whether the bureaus (1) had 

processes in place to accurately report and recover improper payments; (2) completed risk 

assessments of ARRA grant programs and included risks specifically addressing fraud, waste, 

and abuse; (3) completed thorough internal controls assessments; and (4) complied with OMB’s 

ARRA website requirements. The audit scope included ARRA grant processes for EDA, NIST, 

NOAA and NTIA. We sampled only these four bureaus since each received ARRA funding and 

awarded grants, but we addressed our recommendations to the Department as a whole since 

improper payments reporting is required for all programs and bureaus. Appendix A contains a 

full description of our objectives, scope, and methodology for this audit. We found that the 

bureaus were generally in compliance with OMB guidance on improper payments and 

preventing and detecting grant fraud, waste, and abuse; however, several improvements should 

be made. We concluded that 

1.	 Commerce did not have a comprehensive policy addressing all categories of improper 

payments, and as a result, EDA, NIST, NOAA, and NTIA did not have practices in place 

to accurately report and recover improper payments. While the previous OMB guidance 

lacked clarity, recent draft OMB guidance on implementing IPERA of 2010 clearly 

identifies additional categories of payments. 

2.	 Commerce did not elect to include grants in its improper payments reporting or recovery 

audits. 

3.	 NIST, NOAA, and NTIA completed program risk assessments, but the assessments did 

not adequately measure the risk of fraud; EDA identified program risks, but did not 

determine a risk rating, which is an integral part of a risk assessment and is required by 

OMB guidance. 

4.	 All of the bureaus we reviewed completed internal controls assessments; however, these 

assessments were not included in the program risk assessments and did not include a best 

practice of specific fraud risk scenarios. 

5.	 All of the bureaus we reviewed had complied with OMB M-09-15 requirements to link 

their websites to the OIG website to report fraud, waste, and abuse. 

6

 Department of Commerce, December 12, 2010, Bureau Spending Report. 7

 Department of Commerce Office of Inspector General, November 4, 2010. Broadband Program Faces Uncertain
 

Funding, and NTIA Needs to Strengthen Its Post-Award Operation, OIG-11-005-A, 2.
 8

 OIG, Broadband Program Faces Uncertain Funding, 6.
 

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Findings and Recommendations 

I.	 Department of Commerce Needs to Improve Improper Payment Practices 

A. Bureaus’ Improper Payment Practices Are Incomplete 

The Improper Payments Information Act of 2002 provides the following definition of improper 

payments: 

(A) means 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; and (B) 

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. 

Appendix C of OMB Circular A-123 (2006) defines payment as any payment that is 

•	 derived from federal funds or other federal sources, 

•	 ultimately reimbursed from federal funds or resources; or 

•	 made by a federal agency, a federal contractor, a governmental or other organization 

administering a federal program or activity. 

Appendix C of the circular further states that this includes federal awards subject to the Single 

Audit Act Amendments of 1996 that are expended by both recipients and sub-recipients. 

The Department’s improper payment reporting does not include all types of improper payments. 

The Department’s reporting includes overpayments, underpayments, duplicate payments, or 

erroneous vendor payments made through the Department’s accounts payable system, but the 

Department does not consider a grant recipient’s cash drawdown from Treasury accounts to be a 

payment, or an improper payment, even if the drawdown results in disallowed cost. However, the 

broad definition of improper payments includes the recipient’s use of the funds to pay for 

services not received, or for an ineligible service such as questioned or unsupported costs that 

result in disallowed costs identified in OIG grant audits, single audits9

 of grants, or Defense 

Contract Audit Agency contract audits. In a conference call with OIG and Commerce’s Office of 

Financial Management, an OMB Federal Financial Management official concurred with this 

definition of improper payments. 

The Department does not include ineligible services in its reporting on improper payments in the 

annual Performance and Accountability Report; it also states that additional OMB guidance is 

needed to define ineligible services as a disallowed cost. While past OMB guidance did not 

provide complete direction on ineligible services being reported as improper payments, the OMB 

9 OMB A-133 defines a “single audit” as an audit that includes both the audited entity's financial statements and 

federal awards. Office of Management and Budget, June 2007. Circular No. A-133, 7. 

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Office of Inspector General March 25, 2011
 

official with whom we spoke confirmed that OMB is drafting additional guidance for including 

disallowed costs as improper payments. Also, IPERA clearly defines an ineligible service as “a 

payment for any good or service that is rejected under any provision of any contract, grant, lease, 

cooperative agreement, or any other funding mechanism.” 10 

The Department has several other considerations to address in its improper payment reporting. 

NIST, for example, considers payments improper only if detected as such in its accounts payable 

system, not including grants. EDA informed us that recovery audits, OIG reviews and audits, 

single audit reports, and reports from the public are included in its reporting; however, single 

audits with more than $1.1 million in disallowed costs for EDA grants had not been considered 

for reporting under the 2002 act. NOAA does not search OIG audits, single audits, or 

investigations for further improper payment information. 

Commerce has not addressed all categories of improper payments so that bureaus can report 

payments consistently and completely. Such a policy should include a comprehensive list of 

improper payments that might occur as a result of grant disbursements as well as those 

discovered through publicly released audit reports. Appendix C of OMB Circular No. A-123 

provides a list of improper payments that should be included in bureau and department tracking 

and reporting as well as other requirements for addressing improper payments. Table 2 (on the 

next page) summarizes this list and illustrates the bureaus’ current practice with each 

requirement. 

To ensure compliance with the new IPERA and OMB guidance, and a more complete reporting 

of improper payments, the Department must expand the scope of its reporting and include 

improper payment categories that exceed minimum reporting requirements. For example, 

Commerce bureaus reported about $3.5 million in erroneous payments to the Department in 

fiscal year 2010, with the Census Bureau reporting and recovering almost $3.4 million of that 

amount. Additional sources of improper payment data, however, such as more than $7 million in 

disallowed costs published in the Department’s FY 2010 Performance and Accountability 

Report,

11 were not included. If the additional $7 million in disallowed costs were included, total 

improper payments would be three times the amount currently being reported. 

10 Pub. L. No. 111-204, § 2(e).
 11 Department of Commerce, FY 2010 Performance and Accountability Report, II, 38.
 

5 
U.S. Department of Commerce 

Office of Inspector General 

Table 2. Reporting Requirements and Bureau Practices 

OMB A123 Requirement EDA NIST 

Report estimated annual amount of improper payments in programs and activities and make progress in reducing them. 

Limited to 

accounts 

payable 

Limited to 

accounts 

payable 

L

a

Track and report improper payments identified and recovered through various agency endeavors such as 

• agency post-payment reviews to determine the accuracy of payments, 

• OIG reviews/audits, • single audit reports, • self-reported overpayments, and • reports from the public submitted through online websites, telephone 

hotlines, or other methods.a 

Yes 

No No 

Yes 

No 

Yes 

No No 

Yes 

No 

Implement a plan to reduce erroneous payments.b Yes Yes 

L

p

d

Implement and maintain a cost-effective program of internal control to prevent, detect, and recover overpayments to contractors resulting from payment errors.c Yes Yes 

Determine, prior to payment, if the recipient is on a do-not-pay list (fugitive felons, master death file, debarred, etc.) that precludes them from receiving a government payment.e 

Yes Yes 

Source: OIG analysis.a OMB Circular, Appendix C, Part III (B) (3) (o) b OMB Circular A-123, Appendix C, Part I (E), Step 3 c OMB Circular A-123, Appendix C, Part II (A) d NTIA relies on NIST and NOAA for practices. e OMB Circular A-123, Appendix C, Part III (A) (1) (c) f NTIA relies on NIST and NOAA for practices. 

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B. OMB Criteria Encourage Inclusion of Grants in Recovery Audits 

Every year, Commerce conducts a recovery audit as part of its management responsibility 

directed at recapturing improperly made payments. From fiscal years 2006 through 2010, 

Commerce has identified and reported only one recovery, for less than $100,000. 

Since 2006, OMB guidance on improper payments has encouraged, but not required, that grants 

be included in recovery audits. The Department’s recovery audit sampling method includes 

examining disbursements that exceed $100,000, but excludes travel payments, bankcard 

transactions, purchase card transactions, all procurements with other federal agencies, and grants. 

In FY 2010, the Department awarded almost $6 billion in grants (including over $5 billion in 

ARRA funds) amounting to about 27 percent of the $21.8 billion in FY 2010 Commerce budget 

authority of $13.9 billion and $7.9 billion one-time ARRA appropriations. Because the 

Department did not elect to include grants in its recovery audits from 2006 to 2010, annual grant 

totals ranging from $1 to $6 billion were not tested—eliminating an opportunity to find and 

report significant erroneous payments. 

Figure 1. FY 2006-2010 Grant Awardsa 

Billions

6

5

4

3 EDA

NIST 2

NOAA

1 NTIA

‐

Source: Office of Acquisition Management, Grants.
 a The Office of Secretary, Minority Business Development Agency, and 

International Trade Administration totals were below $75M and are 

therefore too small to display on this graph.
 

2006 2007 2008 2009 2010
 

New requirements set forth in IPERA and Executive Order 13520 specifically include grants as 

an improper payment category and lower the threshold for recapturing improper payments to 

activities with more than $1 million in annual outlays (if conducting such audits would be cost 

effective). Since most FY 2010 grant awards are for BTOP grants, which have payments 

extending up to 3 years, the Department has an opportunity to include these awards in its FY 

2011 through 2013 testing. The existing audit resolution process for grants and cooperative 

agreements in Department Administrative Order 213-5 provides a cost-effective approach to 

recovery audits for disallowed costs for grants and cooperative agreements. Because this 

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coverage is mandatory beginning in FY 2011, Commerce bureaus need to prepare for the more 

stringent compliance requirements by including grant payments in their recovery audits. 

Recommendations 

We recommend that the Chief Financial Officer work with bureaus and programs to 

1.	 provide additional improper payment guidance and training to Commerce bureaus to 

identify the categories, including grants, of improper payments that are required for 

improper payment reporting, and ensure that all categories are accurately and completely 

reported; and 

2.	 include grant payments in future recovery audits. 

II. Program Risk Assessments Need Increased Emphasis on Fraud Scenarios 

Fraud, by definition, entails intentional misconduct, designed to evade detection. Fraud risk is 

“[t]he vulnerability that an organization has to those with motive and ability to commit fraud.”12 

According to the American Institute of Certified Public Accountants’ Managing the Business 

Risk of Fraud: A Practical Guide, an effective fraud risk management assessment should identify 

“...where fraud may occur and who the perpetrators might be.” The guide identifies three steps 

in assessing risk: 

1.	 Identify inherent fraud risk: “...explicit consideration of all types of fraud schemes and 

scenarios; incentives, pressures, and opportunities to commit fraud; and IT fraud risks 

specific to the organization.” 

2.	 “Assess the relative likelihood and potential significance of identified fraud risks based 

on historical information, known fraud schemes, and interviews with staff, including 

business process owners.” 

3.	 “Decide what the response should be to address the identified risk...”13 

The bureaus’ program risk assessments do not adequately assess fraud risk. Each of the four 

bureaus included in our audit completed a risk assessment; however, the assessments focused on 

program management risks and did not include comprehensive assessments of fraud risk 

scenarios. Although OMB guidance does not require the inclusion of specific fraud scenarios 

within the program risk assessments, the Institute of Internal Auditors, American Institute of 

Certified Public Accountants, and Association of Certified Fraud Examiners name identifying 

and assessing the risk of specific fraud scenarios as a best practice. Our examination of the 

bureaus’ risk assessments revealed the following: 

12Definition taken from the Association of Certified Fraud Examiners, 2010. Fraud Examiners Manual, Section 4, 

Fraud Risk Assessment, 801.

13Managing the Business Risk of Fraud, 20. 

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•	 Of the four bureaus, only NTIA included fraud risk as part of its risk assessment; 

however, that assessment included only one line item focused on overall fraud risk and 

did not consider specific fraud scenarios. 

•	 EDA identified program risks, but they did not determine a risk rating, which is an 

integral part of a risk assessment and is required by OMB guidance. EDA chose to 

address the risks they identified through pre-award due diligence and pre-payment cost 

review. While these actions can help an organization prevent or detect fraud, EDA’s 

processes did not consider other fraud risks, such as the potential for grantees’ 

management override and collusion. EDA also lacked a process to reassess and respond 

to risks throughout the grant period. 

•	 NIST’s risk assessment and mitigation plan did not take into account the risk of fraud, 

despite the high risk of grant fraud typically associated with construction projects. The 

risk assessments for NOAA Habitat Restoration and NIST focused on three types of 

risks—technical, schedule, and budgetary—and did not include fraud risk. 

Fraud scenarios and other internal controls can focus increased program and financial 

management attention on the likeliest fraud risks. Section 3.11 of OMB M-09-15 encourages 

agencies to address, in their initial risk assessments, the adequacy of existing controls in 

mitigating the risk of waste, fraud, and abuse. While the four bureaus completed internal control 

assessments, the assessments did not specifically measure fraud risk, nor were they incorporated 

into the bureaus’ overall program risk assessments. 

Recommendation 

We recommend that the Chief Financial Officer work with bureaus and programs to 

1.	 expand internal control and program risk assessments to include specific fraud scenarios 

so that increased program and financial management attention can be focused on the 

likeliest risks for fraud, waste, and abuse. 

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Summary of Agency Comments and OIG Response 

The Department maintains that it is in full compliance with OMB requirements to date. 

However, in its response to our draft report (appendix B), the Department concurs with our 

recommendations for further improvement. Specifically, 

•	 Recommendations 1 and 2. The Department will improve the processes for 

implementing IPERA requirements. The Department also states that disallowed costs 

have not been considered in improper payments reporting and has requested clarification 

from OMB to ensure compliance with IPERA requirements. 

•	 Recommendation 3. The Department’s Office of Acquisition Management had 

previously established a management review process for ARRA grants and will include 

our recommendations in their future plans and review guidelines. 

We are encouraged by the Department’s prompt actions to address our recommendations, and 

where appropriate have adjusted our final report to reflect its comments. 

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Appendix A: Objectives, Scope, and Methodology 

The American Recovery and Reinvestment Act of 2009 (ARRA) includes about $5 billion in 

grant funding for the Economic Development Administration (EDA), the National Institute of 

Standards and Technology (NIST), the National Oceanic and Atmospheric Administration 

(NOAA), and the National Telecommunications and Information Administration (NTIA). The 

objective of our audit was to determine whether Department of Commerce bureaus complied 

with the Office of Management and Budget’s (OMB’s) ARRA guidance to mitigate the potential 

for fraud, waste, error, and abuse. In particular, we assessed whether the bureaus (1) had 

processes in place to accurately track and report improper payments; (2) completed risk 

assessments of ARRA grant programs and included risks specifically addressing fraud, waste, 

and abuse; (3) completed thorough internal controls assessments; and (4) complied with OMB’s 

ARRA website requirements. 

The audit scope included ARRA grant processes for EDA, NIST, NOAA, and NTIA. We 

sampled only these four bureaus since each received ARRA funding and awarded grants, but we 

addressed our recommendations to the Department as a whole, since improper payment reporting 

is required for all programs and all bureaus. We conducted our audit fieldwork from July 2010 to 

September 2010 in Washington, D.C. (EDA and NTIA); Gaithersburg, Maryland (NIST); and 

Silver Spring, Maryland (NOAA). We met our objectives and obtained an understanding of 

internal controls by 

•	 interviewing EDA, NIST, NOAA, NTIA and Commerce representatives to gain an 

understanding of risk assessment, erroneous payment reporting, and internal control 

assessment processes; 

•	 reviewing risk and internal control assessments provided by each bureau; and 

•	 reviewing bureau websites to ensure compliance with OMB’s website requirements 

related specifically to fraud, waste, and abuse. 

We reviewed bureau compliance with applicable provisions of pertinent laws and regulations, 

including the following: 

•	 Improper Payments Information Act of 2002 

•	 OMB M-09-15, Interim Guidance for the American Recovery and Reinvestment Act of 

2009, sections 2.7, 2.20, 3.11, 5.4, and 5.9 

•	 OMB Circular A-123, Appendix C, Part I L and Part III 

We reviewed computer-processed data and used them in this report to illustrate improper 

payment and grant award information. We obtained supporting documentation for erroneous 

payments and verified their reasonableness with agency financial personnel. For grants, we 

obtained a listing of grants with bureau and fiscal year data. We compared the order of 

magnitude of grants by bureau and fiscal year to appropriations or performance and 

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accountability reports. We determined the data were sufficiently reliable for purposes of this 

report. 

We conducted this audit in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

We performed this audit under authority of the Inspector General Act of 1978, as amended, and 

Department Organization Order 10-13, August 31, 2006. 

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U.S. Department of Commerce Final Report No. OIG-11-021-A
 

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Appendix B: Agency Comments to Draft Report 

(ARRA000903) 

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