a

GAO

United States Government Accountability Office

Testimony

Before the Subcommittee on Federal Financial 

Management, Government Information, and International 

Security, Committee on Homeland Security and 

Governmental Affairs, U.S. Senate

For Release on Delivery

Expected at 2:30 p.m. EST 

Thursday, March 9, 2006

FINANCIAL 

MANAGEMENT

Challenges Remain in 

Meeting Requirements of 

the Improper Payments 

Information Act

Statement of McCoy Williams, Director

Financial Management and Assurance

GAO-06-482T
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-482T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact McCoy 

Williams at (202) 512-9095 or 

williamsm1@gao.gov. 

Highlights of GAO-06-482T, a testimony 

before the Subcommittee on Federal 

Financial Management, Government 

Information, and International Security, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate 

March 9, 2006

FINANCIAL MANAGEMENT 

Challenges Remain in Meeting 

Requirements of the Improper Payments 

Information Act 

The federal government continues to make progress in identifying programs 

susceptible to the risk of improper payments in addressing the new IPIA 

requirements. At the same time, significant challenges remain to effectively 

achieve the goals of IPIA. The 32 fiscal year 2005 PARs GAO reviewed show 

that some agencies still have not instituted systematic methods of reviewing 

all programs and activities, have not identified all programs susceptible to 

significant improper payments, or have not annually estimated improper 

payments for their high-risk programs as required by the act. 

The full magnitude of the problem remains unknown because some agencies 

have not yet prepared estimates of improper payments for all of their 

programs. Of the 32 agencies reviewed, 18 reported over $38 billion of 

improper payments in 57 programs. This represented almost a $7 billion, or 

16 percent, decrease in the amount of improper payments reported by 17 

agencies in fiscal year 2004. However, as shown in the table below, the 

governmentwide improper payments estimate does not include 7 major 

agency programs with outlays totaling about $228 billion. 

Major Programs That Have Not Reported Improper Payment Estimates 

Dollars in billions 

Agency Program 

Fiscal year 

2005 outlays 

Target fiscal year 

for estimating

Department of Agriculture School Programs $8.2 2007

Department of Health and 

Human Services 

State Children’s Insurance 

Program 5.1 2007

Department of Agriculture 

Women, Infants, and 

Children 4.8 2008

Department of Health and 

Human Services Medicaid 181.7 2008

Department of Health and 

Human Services 

Child Care and Development 

Fund 4.9 Did not report

Department of Health and 

Human Services 

Temporary Assistance for 

Needy Families 17.4 Did not report

Department of Housing and 

Urban Development 

Community Development 

Block Grant 5.4 Did not report

Total $227.5

Sources: Office of Management and Budget and cited agencies’ fiscal year 2005 PARs. 

Further, agency auditors have identified major management challenges 

related to agencies’ improper payment estimating methodologies and 

significant internal control weaknesses for programs susceptible to 

significant improper payments. In addition, two agency auditors cited 

noncompliance with IPIA in their annual audit reports. 

For fiscal year 2005 PARs, agencies that entered into contracts with a total 

value exceeding $500 million annually were required to report additional 

information on their recovery audit efforts. Nineteen agencies reported 

reviewing over $300 billion in vendor payments, identifying approximately 

$557 million to be recovered, and actually recovering about $467 million. 

Improper payments are a longstanding, widespread, and 

significant problem in the federal 

government. The Congress 

enacted the Improper Payments 

Information Act of 2002 (IPIA) to 

address this issue. Fiscal year 

2005 marked the second 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 amounts of 

improper payments and their 

actions to reduce them in their 

annual performance and 

accountability reports (PAR). 

GAO was asked to testify on the 

progress being made by agencies 

in complying with requirements 

of IPIA and the magnitude of 

improper payments. As part of 

the review, GAO looked at (1) the 

extent to which agencies have 

performed risk assessments, 

(2) the annual amount of 

improper payments estimated, 

and (3) the amount of improper 

payments recouped through 

recovery audits. 
Page 1 GAO-06-482T 

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.1

 Our work over the 

past several years has demonstrated that improper payments are a longstanding, widespread, and significant 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 prior to the passage of the Improper 

Payments Information Act of 2002 (IPIA).2

Fiscal year 2005 marked the second year that federal agencies 

governmentwide were required to report improper payment information 

under IPIA in their performance and accountability reports (PAR). IPIA has 

increased visibility over improper payments to a higher, more appropriate 

level of importance by requiring executive agency heads, based on 

guidance from the Office of Management and Budget (OMB),3

 to identify 

programs and activities susceptible to significant improper payments, 

estimate amounts improperly paid, and report on the amounts of improper 

payments and their actions to reduce them. Further, in fiscal year 2005, 

OMB began to separately track the elimination of improper payments 

under the President’s Management Agenda (PMA).

As reported in agencies’ fiscal year 2005 PARs, the governmentwide 

improper payments estimate for fiscal year 2005 exceeded $38 billion, but 

did not include some of the highest risk programs, such as Medicaid with 

outlays exceeding $181 billion for fiscal year 2005. I highlight these 

omissions later in my testimony. From our review, we noted that federal 

agencies made progress in addressing improper payments by implementing 

processes and controls to identify, estimate, and reduce improper 

payments. For example, agencies demonstrated improved error detection 

and measurement by reporting improper payment estimates for 17 newly

1

Improper payments include inadvertent errors, such as duplicate payments and 

miscalculations; payments for unsupported or inadequately supported claims; payments for 

services not rendered; payments to ineligible beneficiaries; and payments resulting from 

fraud and abuse by program participants, federal employees, or both. 

2

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

3

OMB Memorandum M-03-13, “Improper Payments Information Act of 2002 (Public Law 107-

300),” May 21, 2003.
Page 2 GAO-06-482T 

reported programs4 totaling about $1.2 billion, which are included in the 

governmentwide improper payments estimate totaling over $38 billion. 

However, we noted that some agencies still have not instituted systematic 

methods of reviewing all programs and activities, have not identified all 

programs susceptible to significant improper payments, or have not 

annually estimated improper payments for their high-risk programs. 

Because of ongoing interest in addressing the governmentwide improper 

payments issue, we continue to report on the progress being made by 

agencies in complying with certain requirements of IPIA. A list of related 

GAO products is provided at the end of this testimony. As you requested, in 

my testimony today, I will discuss (1) the extent to which agencies have 

performed the required assessments to identify programs and activities 

that are susceptible to significant improper payments, (2) the annual 

amount of improper payments estimated by the reporting agencies, and

(3) the amount of improper payments recouped through recovery audits.

The scope of our review included the 35 federal agencies5 that the 

Department of the Treasury (Treasury) determined to be significant to the 

U.S. government’s consolidated financial statements. Based on available 

information, we reviewed improper payment information reported by 32 

agencies6

 in their fiscal year 2005 PARs or annual reports. 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 independently 

validate the data that agencies reported in their PARs or annual reports or 

that OMB reported. However, we are reporting it in order to provide 

descriptive information that will inform interested parties about the 

magnitude of governmentwide improper payments and other improper 

payments related information. We believe the data to be sufficiently 

reliable for this purpose. We provided the major findings discussed in this 

statement to OMB; however, they had not provided official comments by 

the date of this hearing. We conducted our work in February 2006 in 

accordance with generally accepted government auditing standards. 

4

Fiscal year 2005 was the first time that these agency programs reported under the 

governmentwide reporting requirements of IPIA.

5

See Treasury Financial Manual, vol. 1, part 2, ch. 4700. A list of the 35 agencies is included 

in app. II. 

6

Three agencies’ annual reports were not available prior to the end of our fieldwork.
Page 3 GAO-06-482T 

Background Before I discuss our review of agencies’ fiscal year 2005 PARs, I would like 

to summarize IPIA, related OMB initiatives, and statutory requirements for 

recovery audits. The act, passed in November 2002, requires agency heads 

to review 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. The act further requires that for programs for which estimated 

improper payments exceed $10 million, agencies are to 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 IPIA. OMB issued guidance in May 20037

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 section of the agency’s PAR.

In August 2004, OMB established Eliminating Improper Payments as a new 

program-specific initiative under the PMA. This separate improper 

payments PMA program initiative began in the first quarter of fiscal year 

2005. Previously, agency efforts related to improper payments were tracked 

along with other financial management activities as part of the Improving 

Financial Performance initiative of the PMA. The objective of establishing a 

separate initiative for improper payments was 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. With this new initiative, 15 agencies are to measure their 

improper payments annually, develop improvement targets and corrective 

7

OMB Memorandum M-03-13. 
Page 4 GAO-06-482T 

actions, and track the results annually to ensure the corrective actions are 

effective.

In August 2005, OMB revised Circular No. A-136, Financial Reporting 

Requirements, and incorporated IPIA reporting details from its May 2003 

IPIA implementing guidance. Among other things, OMB Circular No. A-136 

includes requirements for agencies to report on their risk assessments; 

annual improper payment estimates; corrective action plans; and recovery 

auditing efforts, including the amounts recovered in the current year. 

Section 831 of the National Defense Authorization Act for Fiscal Year 20028

contains a provision that requires 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. The legislation further states 

that a required element of such a program is the use of recovery audits and 

recovery activities. 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. Agencies that are required to undertake 

recovery audit programs were directed by OMB to provide annual reports 

on their recovery audit efforts, along with improper payment reporting 

details9

 in an appendix to their PARs. 

The fiscal year 2005 PARs, the second set of reports representing the 

results of agency assessments of improper payments for all federal 

programs, were due November 15, 2005. In our December 2005 report10 on 

the U.S. government’s consolidated financial statements for the fiscal years 

ended September 30, 2005 and 2004, which includes our associated opinion 

on internal control, we reported improper payments as a material 

weakness in internal control. Specifically, we reported that while progress 

8

Pub. L. No. 107-107, § 831, 115 Stat.1012, 1186 (Dec. 28, 2001) (codified at 31 U.S.C. §§ 3561-

3567).

9

In November 2005, OMB issued draft revisions to its IPIA implementing guidance. This 

implementing guidance together with recovery auditing guidance is to be consolidated into 

Parts I and II of Appendix C to OMB Circular No. A-123, Management’s Responsibility for 

Internal Controls (Dec. 21, 2004).

10For GAO’s audit report on the U.S. government’s consolidated financial statements for 

fiscal year 2005, see Department of the Treasury, Financial Report of the United States 

Government (Washington, D.C.: December 2005), 135-154, which can be found on GAO’s 

Internet site at www.gao.gov.
Page 5 GAO-06-482T 

had been made to reduce improper payments, significant challenges 

remain to effectively achieve the goals of IPIA.

Some Agencies Still 

Have Not Assessed All 

Programs and 

Activities for Risk of 

Improper Payments 

We reviewed the fiscal year 2005 PARs or annual reports for 32 of the 35 

federal agencies that the Treasury determined to be significant to the U.S. 

government’s consolidated financial statements. Of those 32 agencies, 

23 reported that they had completed risk assessments for all programs and 

activities. See appendix II for detailed information on each agency. This 

was the same number of agencies that reported having completed risk 

assessments in our prior year review.11 The remaining 9 agencies either 

were silent on IPIA reporting details in their PARs or annual reports or had 

not yet assessed the risk of improper payments for all their programs. 

In addition, we noted that selected agency auditors reviewed agencies’ risk 

assessment methodologies and identified issues of noncompliance or other 

deficiencies. For example, auditors for the Departments of Justice and 

Homeland Security cited agency noncompliance with IPIA in their fiscal 

year 2005 annual audit reports, primarily caused by inadequate risk 

assessments. The Department of Justice auditor stated that one agency 

component had not established a program to assess, identify, and track 

improper payments. The agency acknowledged this noncompliance in its 

PAR as well. The Department of Homeland Security (DHS) auditor 

reported that the department did not institute a systematic method of 

reviewing all programs and identifying those it believed were susceptible to 

significant erroneous payments. This was the second consecutive year that 

the auditor reported IPIA noncompliance for DHS. Although the auditors 

identified the agency’s risk assessment methodology as inadequate, DHS 

reported in its PAR that it had assessed all of its programs for risk. A third 

agency auditor reported that the Department of Agriculture needed to 

strengthen its program risk assessment methodology to identify and test 

critical internal controls over program payments totaling over $100 million.

11GAO, Financial Management: Challenges in Meeting Requirements of the Improper 

Payments Information Act, GAO-05-417 (Washington, D.C.: Mar. 31, 2005).
Page 6 GAO-06-482T 

Magnitude of Improper 

Payments Is Still 

Unknown

As I highlighted in my introduction, federal agencies’ reported estimates of 

improper payments for fiscal year 2005 exceeded $38 billion. This 

represents almost a $7 billion, or 16 percent, decrease in the amount of 

improper payments reported by 17 agencies in fiscal year 2004.12 On the 

surface, this appears to be good news. However, the magnitude of the 

governmentwide improper payment problem remains unknown. This is 

because, in addition to not assessing all programs, some agencies had not 

yet prepared estimates of significant improper payments for all programs 

determined to be at risk. Specifically, of the 32 agency PARs included in our 

review, 18 agencies reported improper payment estimates totaling in 

excess of $38 billion for some or all of their high-risk programs. The 

$38 billion represents estimates for 57 programs. Of the remaining 14 

agencies that did not report estimates, 8 said they did not have any 

programs susceptible to significant improper payments, 5 were silent about 

whether they had programs susceptible to significant improper payments, 

and the remaining 1 identified programs susceptible to significant improper 

payments and said it plans to report an estimate by fiscal year 2007. Further 

details are included in appendix I. 

Regarding the reported $7 billion decrease in the governmentwide 

improper payment estimate for fiscal year 2005, we determined that this 

decrease was primarily due to a $9.6 billion reduction in the Department of 

Health and Human Services’s (HHS) Medicare program improper payment 

estimate, which was partially offset by more programs reporting estimates 

of improper payments, resulting in a net decrease of $7 billion. Based on 

our review, HHS’s $9.6 billion decrease13 in its Medicare program improper 

payment estimate was principally due to its efforts to educate health care 

providers about its Medicare error rate testing program and the importance 

of responding to its requests for medical records to perform detailed 

statistical reviews of Medicare payments. HHS reported that these more 

intensive efforts had dramatically reduced the number of “no 

documentation” errors in its medical reviews. The relevance of this 

significant decrease is that when providers do not submit documentation to 

12In their fiscal year 2005 PARs, selected agencies updated their fiscal year 2004 improper 

payment estimates to reflect changes since issuance of their fiscal year 2004 PARs. These 

updates increased the governmentwide improper payment estimate for fiscal year 2004 from 

$45 billion to $46 billion.

13HHS reported an improper payment estimate for its Medicare program of $12.1 billion for 

fiscal year 2005 and $21.7 billion for fiscal year 2004.
Page 7 GAO-06-482T 

justify payments, these payments are counted as erroneous for purposes of 

calculating an annual improper payment estimate for the Medicare 

program. HHS reported marked reductions in its error rate attributable to 

(1) nonresponses to requests for medical records and (2) insufficient 

documentation submitted by the provider. We noted that these 

improvements partially resulted from HHS extending the time that 

providers have for responding to documentation requests from 55 days to 

90 days. 

These changes primarily affected HHS’s processes related to its efforts to 

perform detailed statistical reviews for the purposes of calculating an 

annual improper payment estimate for the Medicare program. While this 

may represent a refinement in the program’s improper payment estimate, 

the reported reduction may not reflect improved accountability over 

program dollars. Our work did not include an overall assessment of HHS’s 

estimating methodology. However, we noted that the changes made for the 

fiscal year 2005 estimate were not related to improvements in prepayment 

processes, and we did not find any evidence that HHS had significantly 

enhanced its preventive controls in the Medicare payment process to 

prevent future improper payments. Therefore, the federal government’s 

progress in reducing improper payments may be exaggerated because the 

reported improper payments decrease in the Medicare program accounts 

for the bulk of the overall reduction in the governmentwide improper 

payments estimate. Mr. Chairman, I think the only valid observation at this 

time is that improper payments are a serious problem, agencies are 

working on this issue at different paces, and the extent of the problem and 

the level of effort necessary to control these losses is as yet unknown.

What is clear is that there is a lot of work to do in this area. Agency auditors 

have reported major management challenges related to agencies’ improper 

payment estimating methodologies and highlighted internal control 

weaknesses that continue to plague programs susceptible to significant 

improper payments. For example, the Department of Labor’s agency 

auditor reported that inadequate controls existed in the processing of 

medical bill payments for its Federal Employee Compensation Act 

program. As a result, medical providers were both overpaid and underpaid. 

Internal control weaknesses were also identified in the Small Business 

Administration’s (SBA) 7(a) Business Loan program. SBA did not 

consistently identify instances of noncompliance with its own 

requirements, resulting in improper payments. In another example, agency 

auditors for the Department of Education (Education) raised concerns 

about the methodology Education used to estimate improper payments for 
Page 8 GAO-06-482T 

its Federal Student Aid program. The auditors reported that the 

methodology used did not provide a true reflection of the magnitude of 

improper payments in the student loan programs. To overcome these major 

management challenges, agencies will need to aggressively deploy more 

innovative and sophisticated approaches to correct such deficiencies and 

identify and reduce improper payments. 

Also, I would like to point out that the fiscal year 2005 governmentwide 

improper payments estimate of $38 billion did not include seven major 

programs, with outlays totaling over $227 billion for fiscal year 2005. OMB 

had specifically required these seven programs to report selected improper 

payment information for several years before IPIA reporting requirements 

became effective.14 After passage of IPIA, OMB’s implementing guidance 

required that these programs continue to report improper payment 

information under IPIA. As shown in table 1, the fiscal year 2005 

governmentwide improper payment estimate does not include one of the 

largest federal programs determined to be susceptible to risk, HHS’s 

Medicaid program, with outlays exceeding $181 billion annually. 

14Prior 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.
Page 9 GAO-06-482T 

Table 1: Major Programs That Did Not Report Improper Payment Estimates as Previously Required by OMB and Target Dates for 

Estimates 

Sources: OMB and cited agencies’ fiscal year 2005 PARs.

Of these seven programs, four programs reported that they would be able 

to estimate and report on improper payments sometime within the next 3 

fiscal years, but could not do so for fiscal year 2005. For the remaining 

three programs, the agencies did not estimate improper payment amounts 

in their fiscal year 2005 PARs and were silent about whether they would 

report estimates in the future. As a result, improper payments for these 

programs susceptible to risk will not be known for at least several years, 

even though these agencies had been required to report this information 

since 2002, with their fiscal year 2003 budget submissions under previous 

OMB Circular No. A-11 requirements. 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. 

However, in the case of the HHS programs, the agency auditor recognized 

this lack of reporting as a reportable condition. In its fiscal year 2005 audit 

report on compliance with laws and regulations, the auditor reported that 

HHS potentially had not fully complied with IPIA because nationwide 

improper payment estimates and rates for significant health programs were 

Dollars in billions

Agency/program

Fiscal year 2005

outlays

Target date for improper payment estimates

Fiscal year 

2007

Fiscal year 

2008

Did

not

report target 

date

Department of Agriculture—School Programs $8.2 X

Department of Health and Human Services—State 

Children’s Insurance Program

5.1 X

Department of Agriculture—Women, Infants, and 

Children 

4.8 X

Department of Health and Human Services—Medicaid 181.7 X

Department of Health and Human Services—Child Care 

and Development Fund

4.9 X

Department of Health and Human Services—Temporary 

Assistance for Needy Families

17.4 X

Department of Housing and Urban Development—

Community Development Block Grant

5.4 X

Total $227.5 2 2 3
Page 10 GAO-06-482T 

under development and the agency did not expect to complete the 

estimation process until fiscal year 2007. 

Another factor which may affect the magnitude of improper payments is 

Hurricane Katrina, one of the largest natural disasters in our nation’s 

history. In order to respond to the immediate needs of disaster victims and 

to rebuild the affected areas, government agencies streamlined eligibility 

verification requirements for delivery of benefits and expedited contracting 

methods in order to commit contractors to begin work immediately. These 

expedited processes can increase the potential for improper payments. For 

example, from our recent review of the Federal Emergency Management 

Agency’s (FEMA) Individuals and Households Program15 we identified 

significant flaws in the process for registering disaster victims for 

assistance payments. We found limited procedures in place designed to 

prevent, detect, and deter certain types of duplicate and potentially 

fraudulent disaster registrations. As a result, we determined that thousands 

of registrants provided incorrect Social Security numbers, dates of birth, 

and addresses to obtain assistance and found that FEMA made duplicate 

assistance payments to about 5,000 of the nearly 11,000 debit card 

recipients. 

In one example of expedited contracting, the Department of Transportation 

(DOT) Office of Inspector General (OIG)16 determined that DOT had 

overpaid a contractor by approximately $32 million for services to provide 

buses for evacuating hurricane victims from the New Orleans area. 

According to the OIG, the overpayment occurred because DOT had made 

partial payments based on initial task estimates and without 

documentation that substantiated the dollar amount of services actually 

provided to date. Although DOT promptly recovered the funds, the nature 

of these types of exigencies to adequately respond to the hurricane victims 

illustrates that future improper payments are likely to occur. As a result, 

selected agencies, such as DHS and DOT, have said they plan to perform 

concentrated reviews of payments related to relief efforts to identify the 

15GAO, Expedited Assistance for Victims of Hurricanes Katrina and Rita: FEMA’s Control 

Weaknesses Exposed the Government to Significant Fraud and Abuse, GAO-06-403T

(Washington, D.C.: Feb. 13, 2006). 

16Department of Transportation Office of Inspector General, Internal Controls Over the 

Emergency Disaster Relief Transportation Services Contract, AV-2006-032 (Washington, 

D.C.: Jan. 20, 2006).
Page 11 GAO-06-482T 

extent of improper payments, develop actions to reduce these types of 

payments, and enhance internal controls for future relief efforts. 

Additional Reporting 

Requirements for 

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. Recovery auditing is another method that 

agencies can use to recoup detected improper payments. Recovery 

auditing 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 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 

legislation. As we previously reported,17 with the passage of this law, the 

Congress has provided agencies a much needed incentive for identifying 

and reducing their improper payments that slip through agency 

prepayment controls. 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 fiscal year 2005, OMB clarified the type of recovery auditing 

information that applicable agencies are to report in their annual PARs. 

Prior to fiscal year 2005, applicable agencies were only required to report 

on the amount of recoveries expected, the actions taken to recover them, 

and the business process changes and internal controls instituted or 

strengthened to prevent further occurrences. In addition, OMB was not 

reporting on a governmentwide basis agencies’ recovery audit activities in 

its annual report on agencies’ efforts to improve the accuracy and integrity 

of federal payments. 

In fiscal year 2005, OMB revised its recovery auditing reporting 

requirements and required applicable agencies to provide more detailed 

information on their recovery auditing activities. Specifically, in addition to 

17GAO, Financial Management: Challenges Remain in Addressing the Government’s 

Improper Payments, GAO-03-750T (Washington, D.C.: May 13, 2003).
Page 12 GAO-06-482T 

the prior year requirements, agencies that entered into contracts with a 

total value exceeding $500 million annually were required to discuss any 

contract types excluded from review and justification for doing so. In 

addition, agencies were 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. For fiscal year 2005, 19 agencies18 reported entering into 

contracts with a total value in excess of the $500 million reporting 

threshold. These 19 agencies reported reviewing more than $300 billion in 

contract payments to vendors. From these reviews, agencies reported 

identifying about $557 million in improper payments for recovery and 

reported actually recovering about $467 million, as shown in table 2. 

Table 2: Improper Payment Amounts Recovered in Fiscal Year 2005

18We identified one additional agency—the Department of Commerce—that should have 

reported recovery auditing amounts in its PAR. OMB was unable to provide further 

information on this omission prior to the hearing date. We also noted that the Department of 

Labor did not follow the required reporting format included in OMB’s guidance. Labor 

reported that no improper payments were noted from its recovery auditing activities for 

fiscal year 2005 and that recovery audit efforts were not necessary.

Department or agency

Amount 

identified for 

recovery in 

fiscal year 2005

Amount 

recovered in 

fiscal year 2005

1 Agency for International Development $5,900,000 $5,782,000

2 Department of Agriculture 333,000 189,000

3 Department of Defense 473,000,000 418,500,000

4 Department of Education 274,367 112,506

5 Department of Energy 10,600,000 9,500,000

6 Department of Health and Human Services 2,100,000 14,430

7 Department of Homeland Security 2,191,000 1,207,000

8 Department of Housing and Urban 

Developmenta

0 0

9 Department of the Interior 1,548,620 195,479

10 Department of Justice 1,044,320 765,086

11 National Aeronautics and Space 

Administration

617,442 617,442

12 Department of State 5,350,000 5,190,000
Page 13 GAO-06-482T 

Sources: OMB and cited agencies’ fiscal year 2005 PARs.

a

For fiscal year 2005, the Department of Housing and Urban Development (HUD) reported that 

contracts subject to review totaled about $2.3 billion. Of this amount, HUD reported reviewing about 

$207 million in contract payments, but identified no improper payments for recovery.

Concluding 

Observations

In closing, I want to say that we recognize that measuring improper 

payments and designing and implementing actions to reduce them are not 

simple tasks and will not be easily accomplished. The ultimate success of 

the governmentwide effort to reduce improper payments depends, in part, 

on each federal agency’s continuing diligence and commitment to meeting 

the requirements of IPIA 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. With budgetary 

pressures rising across the federal government, and the Congress’s and the 

American public’s increasing demands for accountability over taxpayer 

funds, identifying, reducing, and recovering improper payments become 

even more critical. Fulfilling the requirements of IPIA will require sustained 

attention to implementation 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.

13 Department of Transportation 2,663,984 2,663,984

14 Department of the Treasury 428,977 364,680

15 Department of Veterans Affairs 23,001,137 12,957,264

16 Environmental Protection Agency 130,000 130,000

17 General Services Administration 26,638,654 8,317,187

18 Social Security Administration 317,000 50,000

19 Tennessee Valley Authority 909,573 443,763

 Total $557,048,074 $466,999,821

(Continued From Previous Page)

 Department or agency

Amount 

identified for 

recovery in 

fiscal year 2005

Amount 

recovered in 

fiscal year 2005
Page 14 GAO-06-482T 

Contacts 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 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 Carla Lewis, Assistant Director; Francine DelVecchio; Christina 

Quattrociocchi; and Donell Ries.
Page 15 GAO-06-482T 

Appendix I

Federal Agency Improper Payment Estimate 

Reporting in Fiscal Year 2005 ApendxiI

Agency did not report estimate

 Department or agency

Agency reported 

estimate for one or 

more programs

Agency reported that 

no programs were 

susceptible to 

significant improper 

payments

Agency silent as to 

whether it had 

programs susceptible 

to significant 

improper payments

Agency reported 

future date to 

report estimate

1 Agency for International 

Development 

X

2 Department of Agriculture X

3 Department of Commerce X

4 Department of Defense X

5 Department of Education X

6 Department of Energy X

7 Environmental Protection Agency X

8 Export-Import Bank of the United 

States

X

9 Federal Communications 

Commission

X

10 General Services Administration X

11 Department of Health and 

Human Services

X

12 Department of Homeland 

Security

X

13 Department of Housing and 

Urban Development 

X

14 Department of the Interior X

15 Department of Justice X

16 Department of Labor X

17 National Aeronautics and Space 

Administration

X

18 National Science Foundation X

19 Nuclear Regulatory Commission X

20 Office of Personnel Management X

21 Pension Benefit Guaranty 

Corporation

X

22 Postal Service X

23 Railroad Retirement Board X

24 Securities and Exchange 

Commission

X
Appendix I

Federal Agency Improper Payment Estimate 

Reporting in Fiscal Year 2005

Page 16 GAO-06-482T 

Source: GAO’s analysis of cited agencies’ fiscal year 2005 PARs.

25 Small Business Administration X

26 Smithsonian Institution X

27 Social Security Administration X

28 Department of State X

29 Tennessee Valley Authority X

30 Department of Transportation X

31 Department of the Treasury X

32 Department of Veterans Affairs X

 Total 18 8 5 1

(Continued From Previous Page)

Agency did not report estimate

 Department or agency

Agency reported 

estimate for one or 

more programs

Agency reported that 

no programs were 

susceptible to 

significant improper 

payments

Agency silent as to 

whether it had 

programs susceptible 

to significant 

improper payments

Agency reported 

future date to 

report estimate
Page 17 GAO-06-482T 

Appendix II

Improper Payment Estimates Reported in 

Agency Fiscal Years 2004 and 2005 PARs or 

Annual Reports ApendxiI

Dollars in millions

 Improper payment 

estimates reported

Department or 

agency 

Program or 

activity 2004 2005

Previous OMB 

Circular No. A-11 

reporting 

requirements

Agency 

reported it 

had assessed 

all programs

Programs that 

the agency 

reported were 

not susceptible 

to significant 

improper 

payments

1. Agency for 

International 

Development 

1. All programs and 

activities

0.0a 0.0a

2.

 

Department of 

Agriculture

 All programs and 

activities

X

2. Marketing 

Assistance Loan 

Program 

(previously 

Commodity Loan 

Programs)

0.0a $45.0 X

3. Food Stamp 

Program

$1,400.0b 1,432.0 X

4. School Programsc 0.0 0.0 X

5. Women, Infants, 

and Childrenc

0.0 0.0 X

6. Child and Adult 

Care Food Program

0.0a 0.0a

7. Wildland Fire 

Suppression 

Management

0.0a 73.0

8. Rental Assistance 

Program

20.0b 27.0

9. Federal Crop 

Insurance 

Corporation

125.0 28.0

10. Farm Security and 

Rural Investment

0.0a 16.0

11. Milk Income Loss 

Contract Program

0.0a 0.2

12. Loan Deficiency 

Payments

0.0a 5.0

3. Department of 

Commerce 

13. All programs and 

activities

0.0 0.0 X X
Appendix II

Improper Payment Estimates Reported in 

Agency Fiscal Years 2004 and 2005 PARs or 

Annual Reports

Page 18 GAO-06-482T 

4. Department of 

Defense 

 All programs and 

activities

X

14. Military Retirement 

Fund

66.0b 49.3 X Xd

15. Military Health 

Benefits

99.6b 150.0 X Xd

16. Military Pay 0.0a 432.0

5. Department of 

Education

 All programs and 

activities

X

17. Student Financial 

Assistance—Pell 

Grantse

571.0b 617.0 X

18. Student Financial 

Assistance—

Federal Family 

Education Loane

10.0b 16.0

19. Title I 0.0a 149.0 X Xd

6. Department of 

Energy 

20. Payment programs 20.3 14.5 X Xd

7. Environmental 

Protection Agency

21. Clean Water State 

Revolving Funds

10.3 3.1 X X 

22. Drinking Water 

State Revolving 

Fund

0.0f 0.0f X X 

8. Export-Import Bank 

of the United 

Statesi

23. All programs and 

activities

0.0 0.0

9. Farm Credit System 

Insurance 

Corporationh

24. All programs and 

activities

0.0 0.0

(Continued From Previous Page)

Dollars in millions

 Improper payment 

estimates reported

Department or 

agency 

Program or 

activity 2004 2005

Previous OMB 

Circular No. A-11 

reporting 

requirements

Agency 

reported it 

had assessed 

all programs

Programs that 

the agency 

reported were 

not susceptible 

to significant 

improper 

payments
Appendix II

Improper Payment Estimates Reported in 

Agency Fiscal Years 2004 and 2005 PARs or 

Annual Reports

Page 19 GAO-06-482T 

10. Federal 

Communications 

Commission

 All programs and 

activities

X

25. Universal Service 

Fund’s Schools and 

Libraries

0.0a 0.0a

26. High Cost Support 

Program

0.0a 0.0a

11. Federal Deposit 

Insurance 

Corporationh

27. All programs and 

activities

0.0 0.0

12. General Services 

Administration

28. All programs and 

activities

0.0 0.0 X X

13. Department of 

Health and Human 

Services

 All programs and 

activities

X

29. Medicaidc 0.0 0.0 X X 

30. Medicare 21,700.0 12,100.0 X X 

31. Head Start 255.0 110.0 X Xd

32. Temporary 

Assistance for 

Needy Familiesc

0.0 0.0 X X 

33. Foster Care—Title 

IV-E

186.0b 182.0 X X 

34. State Children’s 

Insurance Programc

0.0 0.0 X X 

35. Child Care and 

Development Fundc

0.0 0.0 X X 

14. Department of 

Homeland Security

36. All programs and 

activities

0.0 0.0 X X 

(Continued From Previous Page)

Dollars in millions

 Improper payment 

estimates reported

Department or 

agency 

Program or 

activity 2004 2005

Previous OMB 

Circular No. A-11 

reporting 

requirements

Agency 

reported it 

had assessed 

all programs

Programs that 

the agency 

reported were 

not susceptible 

to significant 

improper 

payments
Appendix II

Improper Payment Estimates Reported in 

Agency Fiscal Years 2004 and 2005 PARs or 

Annual Reports

Page 20 GAO-06-482T 

15. Department of 

Housing and Urban 

Development 

 All programs and 

activities

X

37. Low Income Public 

Housing

356.0 326.0g X

38. Section 8 Tenant 

Based

840.0 551.0g X

39. Section 8 Project 

Based

511.0 324.0g X

40. Community 

Development Block 

Grant (Entitlement 

Grants, 

States/Small 

Cities)c

0.0 0.0 X X

41. Federal Housing 

Administration’s 

Single Family 

Acquired Asset 

Management 

System

26.1 2.2 X

42. Public Housing 

Capital Fund

0.0a 133.5

16. Department of the 

Interior

43. All programs and 

activities

0.0 0.0 X X

17. Department of 

Justice

44. All programs and 

activities

0.0 0.0 X

18. Department of 

Labor 

 All programs and 

activities

X

45. Unemployment 

Insurance

3,861.0 3,267.0 X

46. Federal Employees’ 

Compensation Act 

6.4 3.3 X X

47. Workforce 

Investment Act

0.0a 7.9 X X

(Continued From Previous Page)

Dollars in millions

 Improper payment 

estimates reported

Department or 

agency 

Program or 

activity 2004 2005

Previous OMB 

Circular No. A-11 

reporting 

requirements

Agency 

reported it 

had assessed 

all programs

Programs that 

the agency 

reported were 

not susceptible 

to significant 

improper 

payments
Appendix II

Improper Payment Estimates Reported in 

Agency Fiscal Years 2004 and 2005 PARs or 

Annual Reports

Page 21 GAO-06-482T 

19. National 

Aeronautics and 

Space 

Administration

48. All programs and 

activities

0.0 0.0 X X

20. National Credit 

Union 

Administrationh

49. All programs and 

activities

0.0 0.0

21. National Science 

Foundation 

50. Research and 

Education Grants 

and Cooperative 

Agreements

4.4 1.1 X X X 

22. Nuclear Regulatory 

Commission

51. All programs and 

activities

0.0 0.0 X X

23. Office of Personnel 

Management

 All programs and 

activities

X

52. Retirement 

Program (Civil 

Service Retirement 

System and 

Federal Employees 

Retirement 

System)

197.7 152.2 X X 

53. Federal Employees 

Health Benefits 

Program 

86.1 196.5 X X 

54. Federal Employees 

Group Life 

Insurance 

2.1 2.0 X X 

24. Pension Benefit 

Guaranty 

Corporationi

55. All programs and 

activities

0.0 0.0

25. Postal Servicei 56. All programs and 

activities

0.0 0.0

26. Railroad 

Retirement Board 

 All programs and 

activities

X

 57. Retirement and 

Survivors Benefits 

147.9b 150.6 X Xd

(Continued From Previous Page)

Dollars in millions

 Improper payment 

estimates reported

Department or 

agency 

Program or 

activity 2004 2005

Previous OMB 

Circular No. A-11 

reporting 

requirements

Agency 

reported it 

had assessed 

all programs

Programs that 

the agency 

reported were 

not susceptible 

to significant 

improper 

payments
Appendix II

Improper Payment Estimates Reported in 

Agency Fiscal Years 2004 and 2005 PARs or 

Annual Reports

Page 22 GAO-06-482T 

 58. Railroad 

Unemployment 

Insurance Benefits 

2.6b 2.3 X X

27. Securities and 

Exchange 

Commission

59. All programs and 

activities

0.0 0.0 X

28. Small Business 

Administration 

 All programs and 

activities

X

60. 7(a) Business Loan 

Program

0.0a 31.4 X

61. 504 Certified 

Development 

Companies

0.0 0.0 X X

62. Disaster Assistance 1.1 1.6 X X

63. Small Business 

Investment 

Companies

129.0 10.5 X Xd

29. Smithsonian 

Institutioni

64. All programs and 

activities

0.0 0.0

30. Social Security 

Administration 

 All programs and 

activities

X

 65. Old Age and 

Survivors’ 

Insurance

1,707.0 3,681.0 X Xd

 66. Disability Insurance 0.0f 0.0f X

 67. Supplemental 

Security Income 

Program

2,639.0 2,910.0 X

31. Department of 

State

 All programs and 

activities

X

68. International 

Narcotic and Law 

Enforcement 

Affairs-Narcotics 

Program

1.7 0.6

(Continued From Previous Page)

Dollars in millions

 Improper payment 

estimates reported

Department or 

agency 

Program or 

activity 2004 2005

Previous OMB 

Circular No. A-11 

reporting 

requirements

Agency 

reported it 

had assessed 

all programs

Programs that 

the agency 

reported were 

not susceptible 

to significant 

improper 

payments
Appendix II

Improper Payment Estimates Reported in 

Agency Fiscal Years 2004 and 2005 PARs or 

Annual Reports

Page 23 GAO-06-482T 

69. International 

Information 

Program-U.S. 

Speaker and 

Specialist Program

1.4 1.9

70. Vendor payments 0.8 0.4 X

71. Structures and 

Equipment

0.3b 0.2 X

32. Tennessee Valley 

Authority

72. Payment programs 8.1 36.3

33. Department of 

Transportation 

 All programs and 

activities

X

73. Airport 

Improvement 

Program

0.0j 0.0j X X

74. Highway Planning 

and Construction

0.0j 0.0j X X

75. Federal Transit—

Capital Investment 

Grants

0.0j 0.0j X X

76. Federal Transit—

Formula Grants

0.0j 0.0j X X

34. Department of the 

Treasury

 All programs and 

activities

X

77. Earned Income Tax 

Credit

10,300.0b 10,500.0 X

35. Department of 

Veterans Affairs

 All programs and 

activities

X

78. Compensation 302.4b 322.9 X

79. Dependency and 

Indemnity 

Compensation

0.0f 0.0f X

80. Education 

programs

70.0b 64.0

81. Pension 280.7b 261.0 X

(Continued From Previous Page)

Dollars in millions

 Improper payment 

estimates reported

Department or 

agency 

Program or 

activity 2004 2005

Previous OMB 

Circular No. A-11 

reporting 

requirements

Agency 

reported it 

had assessed 

all programs

Programs that 

the agency 

reported were 

not susceptible 

to significant 

improper 

payments
Appendix II

Improper Payment Estimates Reported in 

Agency Fiscal Years 2004 and 2005 PARs or 

Annual Reports

Page 24 GAO-06-482T 

Source: GAO's analysis of cited agencies’ fiscal year 2005 performance and accountability reports (PAR) or annual reports.

a

Agency did not report an annual improper payment estimate.

b

Fiscal year 2004 estimates were updated to the revised estimates reported in the fiscal year 2005 

PARs.

c

See table 1 of this testimony.

d

The agency reported that this program was not high risk, meaning not susceptible to significant 

improper payments because it did not meet the Office of Management and Budget (OMB) reporting 

threshold of exceeding both $10 million and 2.5 percent of program payments.

e

Student Financial Assistance—Pell Grants and Federal Family Education Loan are combined together 

as Student Financial Assistance in OMB Circular No. A-11, Section 57.

f

Agency combined with the above program.

g

An additional $266 million of improper payments exist for these three programs. In its PAR, HUD did 

not provide a breakout of this amount among the three programs.

h

Agency fiscal year 2005 PAR or annual report information not available as of the end of our fieldwork.

i

Agency did not address improper payments or the Improper Payments Information Act (IPIA) 

requirements for this program in its fiscal year 2005 PAR or annual report.

j

Agency reported that the annual improper payment amount was zero.

82. Insurance 

programs

0.3b 0.3 X X

83. Loan Guaranty 6.3 4.2

84. Vocational 

Rehabilitation

9.5 9.8

 Total $45,962.1 $38,404.8 46 23 42

(Continued From Previous Page)

Dollars in millions

 Improper payment 

estimates reported

Department or 

agency 

Program or 

activity 2004 2005

Previous OMB 

Circular No. A-11 

reporting 

requirements

Agency 

reported it 

had assessed 

all programs

Programs that 

the agency 

reported were 

not susceptible 

to significant 

improper 

payments
Page 25 GAO-06-482T 

Related GAO Products

Financial Management: Challenges in Meeting Governmentwide 

Improper Payment Requirements. GAO-05-907T. Washington, D.C.: 

July 20, 2005.

Financial Management: Challenges in Meeting Requirements of the 

Improper Payments Information Act. GAO-05-605T. Washington, D.C.: 

July 12, 2005.

Financial Management: Challenges in Meeting Requirements of the 

Improper Payments Information Act. GAO-05-417. Washington, D.C.: 

March 31, 2005.

Financial Management: Fiscal Year 2003 Performance and 

Accountability Reports Provide Limited Information on 

Governmentwide Improper Payments. GAO-04-631T. Washington, D.C.: 

April 15, 2004.

Financial Management: Status of the Governmentwide Efforts to Address 

Improper Payment Problems. GAO-04-99. Washington, D.C.: October 17, 

2003.

Financial Management: Effective Implementation of the Improper 

Payments Information Act of 2002 Is Key to Reducing the Government’s

Improper Payments. GAO-03-991T. Washington, D.C.: July 14, 2003.

Financial Management: Challenges Remain in Addressing the 

Government’s Improper Payments. GAO-03-750T. Washington, D.C.: 

May 13, 2003.

(195083)
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