Testimony 

Before the Subcommittee on Government 

Management, Finance, and Accountability, 

Committee on Government Reform, 

House of Representatives 

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 2:00 p.m. EDT 

Wednesday, July 20, 2005 FINANCIAL 

MANAGEMENT 

Challenges in Meeting 

Governmentwide Improper 

Payment Requirements 

Statement of McCoy Williams Director, Financial 

Management and Assurance 

GAO-05-907T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-907T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact McCoy 

Williams, (202) 512-6906, 

williamsm1@gao.gov. 

Highlights of GAO-05-907T, a testimony 

before the Subcommittee on Government 

Management, Finance, and Accountability, 

Committee on Government Reform, 

House of Representatives 

July 2005

FINANCIAL MANAGEMENT 

Challenges in Meeting Governmentwide 

Improper Payment Requirements 

The Office of Management and Budget (OMB) has continued to provide 

strong emphasis on IPIA through the President’s Management Agenda, and 

federal agencies’ response to fulfilling the requirements of IPIA has generally 

been positive. To date, the federal government has made progress in 

identifying programs susceptible to the risk of improper payments in 

addressing the new IPIA requirements. At the same time, our review of the 

fiscal year 2004 PARs for 29 of 35 federal agencies that the U.S. Treasury 

determined to be significant to the U.S. government’s consolidated financial 

statements shows that even with the enhanced emphasis on improper 

payment reporting fueled by the new legislation, certain agencies reported 

that they have not yet performed risk assessments of all their programs 

and/or estimated improper payments for their respective programs. 

As fully anticipated, the number of agencies reporting improper payment 

information is growing, but the magnitude of the problem remains unknown, 

because some agencies have not yet prepared estimates of improper 

payments for all of their programs. In the 29 agency PARs included in GAO’s 

fiscal year 2004 review, 17 agencies reported over $45 billion of improper 

payments in 41 programs. This represented almost a $10 billion, or 27 

percent, increase in the amount of improper payments reported by agencies 

in fiscal year 2003. This increase was primarily attributable to changes in the 

method for estimating and reporting improper payment amounts in one 

major program, Medicare. Future estimates are likely to trend higher 

because agencies’ governmentwide estimate did not report for 12 programs 

with outlays of $248.7 billion in fiscal year 2004. These 12 were previously 

required to annually report improper payments under OMB Circular No. A-11 

during the past 3 years. This included some of the largest risk-susceptible 

federal programs, such as the Department of Health and Human Services’ 

Medicaid Program, with outlays exceeding $175 billion annually, and the 

Department of Education’s Title I Program, with outlays of over $10 billion 

annually. 

Number of Agencies and Amounts of Improper Payments Reported (Fiscal Years 1999-2004) 

Fiscal year 

Agencies reporting 

 improper paymentsa 

Reported amounts of improper 

payments (in billions)

1999 8 $20.7

2000 8 $19.6

2001 8 $20.9

2002 7 $19.5

2003 13 $35.7

2004 17 $45.4

Source: GAO. 

a Other agencies acknowledged making improper payments in their PARs but did not disclose dollar 

amounts.

Improper payments are a 

longstanding, widespread, and 

significant problem in the federal 

government. The Congress 

enacted the Improper Payments 

Information Act (IPIA) of 2002 to 

address this issue. Fiscal year 2004 

marked the first year that federal 

agencies governmentwide were 

required to report improper 

payment information under IPIA. 

One result of IPIA has been 

increased visibility over improper 

payments by requiring federal 

agencies to identify programs and 

activities susceptible to improper 

payments, estimate the amount of 

their improper payments, and 

report on the amount of and their 

actions to reduce their improper 

payments in their annual 

Performance and Accountability 

Reports (PAR). 

Because of your continued interest 

in addressing the governmentwide 

improper payments issue, you 

asked GAO to report on the 

progress being made by agencies in 

complying with certain 

requirements of IPIA. My 

testimony today summarizes the 

results of that work reported to you 

in March 2005. Ultimately, the 

success of this legislation hinges on 

each agency’s diligence and 

commitment to identifying, 

estimating, and determining the 

causes of, then taking corrective 

actions, and measuring progress in 

reducing improper payments. 
Page 1 GAO-05-907T 

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. Our work over the 

past several years has demonstrated that while improper payments are a 

significant and widespread problem in the federal government, the extent 

of the problem initially had been masked because only a limited number of 

agencies reported their annual payment accuracy rates and estimated 

improper payment amounts in their Performance and Accountability 

Reports (PAR). 

Fiscal year 2004 marked the first year that federal agencies 

governmentwide were required to report improper payment information 

under the Improper Payments Information Act of 2002 (IPIA).1

 The IPIA 

has increased visibility over improper payments to a higher, more 

appropriate level of importance by requiring executive agency heads, 

based on guidance2

 from the Office of Management and Budget (OMB), to 

identify programs and activities susceptible to significant improper 

payments, estimate amounts improperly paid, and report on the amount of 

and their actions to reduce their improper payments. 

Because of your continued interest in addressing the governmentwide 

improper payments issue, you asked GAO to report on (1) the extent to 

which agencies have performed the required assessments to identify 

programs and activities that are susceptible to significant improper 

payments and (2) the annual amount of improper payments estimated by 

the reporting agencies. We reported this information to you on March 31, 

2005.3

 In my testimony today, I will discuss the results of our March 2005 

report on agencies’ progress in meeting the requirements of IPIA. 

To obtain information for our March 2005 report, we conducted a review 

of improper payment information reported by agencies in their fiscal year 

2004 PARs. We further reviewed OMB guidance on implementation of IPIA 

and its report on the results of agency-specific reports, significant findings, 

agency accomplishments, and remaining challenges. We did not assess the 

 1

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

2

OMB Memorandum M-03-13, “Improper Payments Information Act of 2002” (Public Law 

107-300), May 21, 2003. 

3

GAO, Financial Management: Challenges in Meeting Requirements of the Improper 

Payments Act, GAO-05-417 (Washington, D.C.: Mar. 31, 2005). 
Page 2 GAO-05-907T 

effectiveness of the agencies’ efforts or independently validate the data 

that they or OMB reported. We conducted our work from November 2004 

through February 2005 in accordance with U.S. generally accepted 

government auditing standards. 

Before I discuss our review of the fiscal year 2004 PARs, I would like to 

summarize IPIA. The act, passed in November of 2002, requires agency 

heads to review all their programs and activities annually and identify 

those that may be susceptible to significant improper payments. For each 

program and activity agencies identify as susceptible, the act requires 

them to estimate the annual amount of improper payments and submit 

those estimates to the Congress before March 31 of the following year. The 

act further requires that for programs for which estimated improper 

payments exceed $10 million, agencies report annually to the Congress on 

the actions they are taking to reduce those payments. 

The act requires the Director of OMB to prescribe guidance for federal 

agencies to use in implementing it. OMB issued guidance in May 2003 

requiring the use of a systematic method for the annual review and 

identification of programs and activities that are susceptible to significant 

improper payments. The guidance defines significant improper payments 

as those in any particular program that exceed both 2.5 percent of 

program payments and $10 million annually. It requires agencies to 

estimate improper payments annually using statistically valid techniques 

for each susceptible program or activity. For those agency programs 

determined to be susceptible to significant improper payments and with 

estimated annual improper payments greater than $10 million, IPIA and 

related OMB guidance require each agency to report the results of its 

improper payment efforts for fiscal years ending on or after September 30, 

2004. OMB guidance requires the results to be reported in the Management 

Discussion and Analysis (MD&A) section of its PAR. 

Working with the Chief Financial Officer Council’s Improper Payments 

Committee, OMB issued a standardized format on July 22, 2004, for 

reporting IPIA information. To satisfy the reporting requirements of IPIA 

for fiscal year 2004, the framework instructed agencies to provide in the 

MD&A portion of the fiscal year 2004 PAR a brief summary of both what 

they have accomplished and what they plan to accomplish. All other 

required reporting details were to be included in an appendix to the PAR. 

The framework for the information reported in the appendix incorporates 

the requirements set forth in the law and further illustrates the reporting 

format required in OMB’s implementation guidance. 

Background 
Page 3 GAO-05-907T 

The fiscal year 2004 PARs, the first set of reports representing the results 

of agency assessments of improper payments for all federal programs, was 

due November 15, 2004.4

 In our December 2004 report on the U.S. 

government’s consolidated financial statements for the fiscal years ended 

September 30, 2004 and 2003, which includes our associated opinion on 

internal control, we reported that while most agencies acknowledged the 

IPIA reporting requirements in their PARs, they did not always indicate 

whether they had completed agencywide assessments and they did not 

estimate improper payments for all of their susceptible programs. 

I will now discuss the extent to which agencies performed the 

assessments of their programs and activities. 

We reviewed the fiscal year 2004 PARs for 29 of 35 federal agenciesthat 

the U.S. Treasury determined to be significant to the U.S. government’s 

consolidated financial statements.5

 Overall, we found that agencies made 

progress in identifying programs susceptible to the risk of improper 

payments. At the same time, our findings suggest that even with the 

enhanced emphasis on improper payment reporting, certain agencies have 

not yet performed risk assessments of all their programs and/or estimated 

improper payments for their respective programs. Furthermore, as shown 

in table 1, we found that certain agencies required by OMB in years before 

enactment of the act,6

 to report selected improper payment information for 

the past 3 years had not performed much better than agencies that 

reported for the first time in fiscal year 2004. 

 4

For fiscal year 2004, OMB accelerated the financial statements reporting date for agencies 

to Nov. 15, 2004. 

5

See Treasury Financial Manual, vol. 1, part 2, ch. 4700, for a list of the 35 agencies. Six of 

the 35 agencies had not issued PARs as of our fiscal year 2004 audit report on the U.S. 

government’s consolidated financial statements; therefore, these agencies were not 

included in our review. 

6

Prior to the governmentwide IPIA reporting requirements beginning with fiscal year 2004, 

OMB’s Circular No. A-11, Section 57 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, 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. 

Progress Made but 

Challenges Remain in 

Addressing Key 

Requirements of the 

Act 
Page 4 GAO-05-907T 

Table 1: Summary of Improper Payments Information Reported in Agency Fiscal Year 2004 PARs 

Agency type 

Agencies 

reported they 

had assessed 

all programs 

Agencies 

reported they 

had not 

assessed all 

programs

Total number 

of agencies

Programs that 

estimated 

improper 

payments

Programs that 

did not estimate 

improper 

payments

Total number

 of programs

Agencies with prior 

reporting 

requirements under 

OMB Circular No. 

A-11 12 3 15 34 12 46

Agencies with no 

prior reporting 

requirements 11 3 14 7 17a 24

Total 23 6 29 41 29 70

Source: GAO’s analysis of agencies’ fiscal year 2004 PARs. 

a

For 10 of 17 programs, agencies reported their programs were not susceptible to significant improper 

payments. 

As the table shows, there were no significant differences in terms of not 

meeting key requirements of the act between the two agency reporting 

categories. Specifically, we found that six agencies that had not performed 

risk assessments for all programs were equally divided among the agencies 

with prior reporting requirements and agencies with no previous reporting 

requirements. Although a majority of the agencies had performed risk 

assessments to identify programs and activities susceptible to significant 

improper payments, the adequacy of the risk assessments was 

questionable. For example, three agency auditors cited agency 

noncompliance with IPIA in their annual reports included in the agency 

PARs. Two agency auditors reported that their agency’s risk assessment 

did not consider all payment types or programs. The remaining auditor 

reported the agency did not institute a systematic method of reviewing all 

programs and identifying those it believed were susceptible to significant 

erroneous payments. In all three instances, agencies reported having 

assessed all programs and that the programs were not susceptible to 

significant improper payments. 

We also found that of the 29 agency programs that did not report improper 

payment estimates, 12 programs had prior reporting requirements, 

compared to 17 programs with no prior reporting requirements. Because 

the 12 agency programs were required to estimate improper payments 

information for the past 3 years, we believe these programs had sufficient 

time to estimate their improper payments and should have been in a 
Page 5 GAO-05-907T 

position to fully comply with the requirements of the act. I will discuss 

these 12 programs further in the next section and highlight additional 

information in table 2. 

The magnitude of the governmentwide improper payment problem is still 

unknown because, in addition to not assessing all programs, the agencies 

had not yet prepared estimates of significant improper payments for all of 

the programs. Specifically, of the 29 agency PARs included in our fiscal 

year 2004 review, only 17 agencies reported improper payment estimates 

totaling more than $45 billion for 41 programs. Although this estimate 

increased about $10 billion, or 27 percent, from the prior fiscal year, we 

determined that this increase was primarily attributable to changes in the 

method for estimating and reporting improper payment amounts in the 

Department of Health and Human Services’ Medicare Program. 

I would also like to point out that the governmentwide estimate did not 

include the 12 programs with prior improper payment reporting 

requirements, which totaled $248.7 billion in outlays for fiscal year 2004. 

As shown in table 2, these included some of the largest federal programs 

determined to be susceptible to risk, such as the Department of Health and 

Human Services’ Medicaid Program, with outlays exceeding $175 billion 

annually, and the Department of Education’s Title I Program, with outlays 

of over $10 billion annually. 

Magnitude of Improper 

Payments is Still Unknown 
Page 6 GAO-05-907T 

Table 2: Programs That Did Not Report Improper Payment Estimates as Previously Required under OMB Circular No. A-11 

and Target Dates for Expected Estimates 

Target fiscal year for estimate 

Program 

Fiscal year

 2004 outlays

 (in billions) 2005 2006 2007 2008

Did not 

report

Department of Agriculture–Agriculture 

Marketing and Assistance 

$ 8.8 X 

Department of Health and Human Services– 

Foster Care–Title IV-E 

4.7 X 

Department of Health and Human Services– 

State Children’s Insurance Program 

4.6 X 

Department of Health and Human Services– 

Child Care and Development Fund 

4.8 X 

Small Business Administration–7(a) Business 

Loan Program 

.7 X 

Department of Health and Human Services– 

Medicaid 

175.3 X 

Department of Agriculture–School Programs 8.4 X 

Department of Agriculture–Women, Infants, 

and Children Program 

4.8 X

Department of Labor–Workforce Investment 

Act 

3.1 X

Department of Education–Title I 10.3 X

Department of Health and Human Services– 

Temporary Assistance for Needy Families 

17.7 X

Department of Housing and Urban 

Development–Community Development Block 

Grant 

5.5 X

Total $248.7 5 1 1 1 4

Sources: OMB and cited agencies’ fiscal year 2004 PARs. 

Of these 12 programs, 8 reported that they would be able to estimate and 

report on improper payments sometime within the next 4 years but could 

not do so for fiscal year 2004. The other 4 programs in four agencies did 

not estimate improper payment amounts, and the PARs were silent about 

whether they would report estimates in the future. As a result, improper 

payments for several large programs susceptible to risk will not be known 

for several years, even though these agencies were required to report this 

information with their fiscal year budget submissions since 2002. 

OMB reported that some of the agencies were unable to determine the rate 

or amount of improper payments because of measurement challenges or 
Page 7 GAO-05-907T 

time and resource constraints, which OMB expects to be resolved in future 

reporting years. Although OMB reported that the $45 billion in improper 

payments establishes a baseline from which short- and long-term program 

improvement strategies and priorities will be based, it recognizes that 

fiscal year 2005 reductions in improper payments will be affected by 

outlay changes as well as the identification of new improper payments as 

additional programs are measured and methodologies are enhanced. 

In closing, Mr. Chairman, I want to say that we recognize that measuring 

improper payments and designing and implementing actions to reduce or 

eliminate them are not simple tasks and will not be easily solved. The 

ultimate success of the governmentwide effort to reduce improper 

payments depends, in part, on each federal agency’s continuing diligence 

and commitment to meeting the requirements of the act and the related 

OMB guidance. The level of importance each agency, the Administration, 

and the Congress place on the efforts to implement the act will determine 

its overall effectiveness and the level to which agencies reduce improper 

payments and ensure that federal funds are used efficiently and for their 

intended purposes. Without such efforts, the likelihood of designing and 

implementing actions governmentwide to reduce or eliminate improper 

payments is doubtful. Fulfilling the requirements of IPIA will require 

sustained attention to implementation and oversight to monitor whether 

desired results are being achieved. 

This concludes my statement, Mr. Chairman. I would be pleased to 

respond to any questions that you or other Members of the Subcommittee 

may have. 

For more information regarding this testimony, please contact McCoy 

Williams, Director, Financial Management and Assurance, at (202) 512-

6906 or by e-mail at williamsm1@gao.gov. 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 Lisa Crye, Danielle Free, Carla Lewis, Donell Ries, and Alana 

Stanfield. 

Conclusion 

GAO Contacts and 

Staff 

Acknowledgments 

(195068) 
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