GAO

United States General Accounting Office

Testimony

Before the Subcommittee on Government Management, 

Information and Technology, Committee on Government 

Reform, House of Representatives 

For Release on Delivery 

Expected at

2 p.m., EST

Tuesday,

June 29, 1999

RECOVERY AUDITING 

Reducing Overpayments, 

Achieving Accountability, 

and the Government Waste 

Corrections Act of 1999 

Statement of David M. Walker, Comptroller General of the 

United States

GAO/T-NSIAD-99-213

Page 1 GAO/T-NSIAD-99-213

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to discuss H.R. 1827 the Government Waste 

Corrections Act of 1999, and its relationship to the long-standing issues of 

government accountability for use of public monies and overpayments and 

the role of recovery auditing in identifying and recovering overpayments. 

To put these issues in perspective, in fiscal year 1998, federal executive 

departments and agencies contracted for about $173 billion in goods and 

services. The Department of Defense (DOD) spent about $115 billion, or 

about two-thirds of this amount. In addition to direct contracting, federal 

agencies indirectly pay out many more billions of dollars annually for 

health care, education, and agricultural programs. 

One of the most important issues facing the government today is the need 

for greater accountability in managing the finances of our national 

government. It is a significant problem at many agencies, and one that has 

been the subject of frequent reports by us and others. One key aspect of 

the problem is the difficulty the government has in assuring proper 

payment of all its bills while avoiding overpayments.

My testimony, today, will discuss the dimensions of the overpayment 

problem, our past work on the DOD recovery auditing demonstration 

program, and the Government Waste Corrections Act of 1999. My 

comments on the bill reflect my belief that there are three principles that 

should guide a recovery auditing program. First, there should be 

meaningful incentives for agencies to want to participate in the program 

and make it work. Second, there should be adequate safeguards to ensure 

that the program is implemented in a manner intended by Congress and 

that preserves the integrity of the congressional appropriations process. 

Third, there should be transparency in the conduct of the program—that is, 

there should be evaluation and reporting of program implementation, in 

this case, to include how the recovered amounts are used. In the context of 

these three principles, I will suggest opportunities to strengthen H.R. 1827.

Results in Brief Significant financial management system weaknesses, problems with 

fundamental recordkeeping and financial reporting, incomplete 

documentation, and weak internal controls continue to prevent the 

government from effectively managing many of its operations. Significant 

among these problems is the inability of federal agencies to determine the 

full extent of improper payments that occur in major programs and that are 

Letr
Page 2 GAO/T-NSIAD-99-213

estimated to involve billions of dollars annually. Within the billions of 

dollars of improper payments is an unknown amount of overpayments.

While neither the federal agencies nor we have a good estimate of the 

extent of overpayments that occur each year, given the poor state of the 

financial and accounting records, we expect that they are significant. We 

know, for example, that between fiscal year 1994 and 1998, contractors 

returned about $4.6 billion in overpayments to DOD.

At the direction of Congress, DOD is conducting a recovery auditing 

demonstration program to identify overpayments for subsistence, medical, 

and clothing items purchased in fiscal years 1993 through 1995. We 

evaluated the demonstration program and concluded that the concept of 

recovery auditing offers the potential to identify overpayments. However, 

we found that implementation problems have limited the program’s 

success. As of June 1999, the recovery auditing contractor had identified 

about $29 million in overpayments made to suppliers on purchase volumes 

of roughly $6 billion. Collections by DOD amount to $2.6 million. While 

authorized to do so, DOD has been slow to expand the use of recovery 

auditing beyond the initial demonstration program.

Although contractors are sometimes overpaid, under current law, they are 

not required to inform the government of the overpayment or to return the 

money prior to the government issuing a formal demand letter1

 requesting 

repayment. In effect, the overpayment provides an interest free loan to the 

contractor. Contractors should be required to notify the government of 

overpayments when they become aware of them and to return the money 

promptly upon becoming aware of the overpayments. If they do not return 

the money promptly, there should be some economic consequence.

Given the large volume and complexity of federal payments, federal 

agencies need to concentrate on paying bills properly in the first place. 

However, recognizing that some overpayments are inevitable, they also 

need to adopt best practices to quickly identify and recover them. The 

Government Waste Corrections Act of 1999 offers an opportunity to use 

recovery auditing to identify overpayments and the factors contributing to 

overpayments. We support the objectives of this important legislation. 

Some commercial companies have used recovery auditing for many years 

as one mechanism to identify and recover overpayments. The extent to 

1

A demand letter is a formal notification to the contractor that it owes the government money.

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Page 3 GAO/T-NSIAD-99-213

which recovery auditing is applicable to the full range of federal agency 

overpayments, however, remains an open question since its use in the 

federal government has been limited. Thus, we strongly support provisions 

of the bill that provide for model programs. In this way, the government 

can assess the applicability of recovery auditing to different types of 

payments and develop best practices for its use on a wider scale. In our 

view, with this use of model programs, plus strong monetary incentives, it 

would be unnecessary to mandate recovery auditing across the 

government.

The Committee may also want to reexamine the provisions in the bill 

relating to reallocation or use of overpayment recoveries. While financial 

incentives are critical to the program’s success, incentives that are too 

large are unnecessary and may undermine the program by creating 

inappropriate incentives to making accurate and timely payments in the 

first place. The Committee may want to provide for a substantial portion of 

the recoveries to be returned to the Department of the Treasury. 

Poor Financial 

Controls Are a 

Governmentwide 

Problem

Across the government, improper payments, including overpayments, 

occur in a variety of programs and activities, including those related to 

contract management, federal financial assistance, and tax refunds. 

Reported estimates of improper payments total billions of dollars annually. 

Such payments can result from incomplete or inaccurate data that are used 

to make payment decisions, insufficient monitoring and oversight, or other 

deficiencies in agency information systems and internal controls. The risk 

of improper payments is increased in programs involving (1) complex 

criteria for computing payments, (2) a significant volume of transactions, 

or (3) an emphasis on expediting payments. The reasons for improper 

payments range from inadvertent errors to fraud and abuse.

The full extent of improper payments, however, is unknown because many 

agencies have not estimated the magnitude of improper payments in their 

programs, nor have they considered this issue in their annual performance 

plans. The use of appropriate performance measures relating to improper 

payments can provide a management focus on reducing related losses. For 

example, the Department of Health and Human Services has reported a 

national estimate of improper payments in its Medicare fee-for-service 

benefits since fiscal year 1996. For fiscal year 1998, the Department 

reported estimated improper payments of $12.6 billion, or more than

7 percent, of Medicare fee-for-service benefits—down from about 

$20 billion, or 11 percent, reported for fiscal year 1997 and $23.2 billion, or 
Page 4 GAO/T-NSIAD-99-213

14 percent, for fiscal year 1996. An analysis of improper Medicare 

payments helped to implement several initiatives intended to reduce 

improper payments. These initiatives significantly reduced the incidence 

of improper Medicare payments.

DOD Is a Case for 

Recovery Auditing

Because it spends more contracting for goods and services than all other 

agencies combined, it is particularly important that DOD have sound 

controls to ensure that contract payments are proper, accurate, and timely. 

In recent years, our reports have identified hundreds of millions of dollars 

in improper DOD payments, interest expense on late payments, and other 

financial management problems. For example, in March 1994, we reported 

that during a 6-month period in fiscal year 1993, the Defense Finance and 

Accounting Service (DFAS) in Columbus, Ohio--a principal DOD contract 

paying activity--processed $751 million in payments returned by defense 

contractors.2

 Our examination of about one-half of these checks disclosed 

that about 78 percent represented overpayments by the government. We 

also found that while some contractors returned overpayments, others did 

not. In one case, an overpayment of $7.5 million was outstanding for 

8 years. We estimated that the government lost interest on the 

overpayment amounting to nearly $5 million.

DOD continues to make substantial erroneous payments to its contractors. 

For example, in the 5 years between fiscal year 1994 and 1998, defense 

contractors returned about $4.6 billion to DFAS Columbus—in fiscal year 

1998, they returned $746 million. However, some contractors were still 

retaining overpayments. For example, 4 of the 13 contractors we visited 

during a recent review were retaining overpayments totaling about 

$1.1 million. At each location, contractor personnel told us that they had a 

practice of retaining overpayments until the government issued a demand 

letter requesting the overpayments be returned. Under current law, there is 

no requirement for contractors who have been overpaid to notify the 

government of overpayments or to return overpayments prior to the 

government issuing a demand letter for a refund. The magnitude of 

overpayments defense contractors are retaining is not known.

2

DOD Procurement: Millions in Overpayments Returned by DOD Contractors (GAO/NSIAD-94-106,

Mar. 14, 1994).
Page 5 GAO/T-NSIAD-99-213

DOD Is Taking Actions to 

Address Payment Problems

DOD is taking steps to address its payment problems. Its initiatives include 

testing and adopting some best practices. In the long term, it is developing 

procurement and payment systems that will be linked by sharing common 

data. This linkage is expected to allow one-time entry of contract data 

critical to making correct payments. In the meantime, DOD is enhancing 

its current technologies to further automate the payment process, testing 

streamlined payment practices, and making efforts to reduce the number of 

contract fund citations. But, as we state in our recent high-risk report,3

 it is 

likely to be many years before DOD gets its payment problems under 

control.

Additional Steps Could Be Taken Recognizing DOD’s actions and the fact that DOD continues to overpay its 

contractors, one question is: are there additional steps that might be taken 

to improve the process for both identifying and collecting overpayments? 

The answer is yes.

First, we believe defense contractors, and for that matter, all contractors 

should be required to promptly notify the government of overpayments 

when they become aware of them. If they do not return the money 

promptly, there should be some economic consequence. This seems simple 

enough, but currently a contractor is not required to tell the government 

that it has been overpaid, nor is it required to return an overpayment until 

the government becomes aware of the overpayment and issues a demand 

letter for repayment. Many contractors do promptly return overpayments; 

however, some do not. While we know the amount of overpayments that 

contractors have returned to the government, we do not know how much 

they are still keeping. Thus, as pointed out earlier, the true magnitude of 

the overpayment problem is not known. In this regard, we will shortly 

begin a review to assess the extent to which defense contractors are 

retaining and not promptly returning overpayments to the government.

Second, we believe that all federal agencies should take advantage of best 

practices that commercial companies use to identify and recover 

overpayments. One such practice is the use of recovery auditing 

procedures. Clearly, the government’s focus should be on paying its bills 

properly in the first place. However, for both private industry and 

government agencies, some payments are processed incorrectly for a 

variety of reasons. For instance, vendors make pricing errors on their 

3

Major Management Challenges and Program Risks, Department of Defense (GAO/OCG-99-4, Jan. 1999).
Page 6 GAO/T-NSIAD-99-213

invoices, forget to include discounts that have been publicized to the 

general public, neglect to offer allowances and rebates, or miscalculate 

freight charges. Government payment activities may also neglect to take 

discounts to which they are entitled. These mistakes, when not caught, 

result in overpayments. Identifying and recovering these types of 

overpayments is referred to as recovery auditing. 

Recovery Auditing 

Offers Potential to 

Identify and Recover 

Overpayments

Recovery auditing started about 30 years ago, and it is used in several 

industries, including the automobile, retail store, and food service 

industries. Within DOD, the Army and the Air Force Exchange Service and 

the Navy Exchange Service use recovery auditing. An external audit 

recovery group may be the only group used by an organization or it may be 

used in combination with an internal group that examines invoices for 

overpayments prior to an external group’s review.

Recognizing its potential value to the government, the Fiscal Year 1996 

National Defense Authorization Act required the Secretary of Defense to 

conduct a demonstration program to evaluate the feasibility of using 

recovery auditing to identify overpayments made to vendors by DOD. 

Authority to expand the program was provided in the Fiscal Year 1998 

National Defense Authorization Act.

The DOD demonstration program began in September 1996, when the 

Defense Supply Center, Philadelphia (DSCP), competitively contracted 

with Profit Recovery Group International (PRGI). The contract covers 

purchases made during fiscal years 1993-95 and requires PRGI to identify 

and document overpayments and to make recommendations to reduce 

future overpayments. PRGI receives a fee of 20 percent of net collected 

funds. The focus of the demonstration program is in purchases of 

subsistence, medical and clothing items, items that are typically found in 

retail merchandising.

We reviewed the program and concluded that recovery auditing offers 

potential to identify overpayments, but implementation problems hindered 

DOD from fully realizing the benefits of the program.4

 As of August 1998, 

PRGI had identified $19.1 million in overpayments. However, recoveries of 

overpayments amounted to only $1.9 million, in large part, because vendors 

4

Contract Management: Recovery Auditing Offers Potential to Identify Overpayments

(GAO/NSIAD-99-12, Dec. 3, 1998).
Page 7 GAO/T-NSIAD-99-213

took issue with some of the overpayments. This caused the recovery 

process to virtually stop for 8 months while the DSCP reviewed the merits 

of the vendors’ issues. DSCP concluded that the claims of overpayment 

were valid. However, according to the contracting officer, his letter of final 

decision regarding vendors’ indebtedness has not been issued. PRGI 

continues to identify overpayments. As of June 1999, according to PRGI, it 

had completed 90 percent of its work and identified $29.3 million in 

overpayments made to suppliers on purchases of roughly $6 billion. 

Collections by DOD as of June 1999 amounted to $2.6 million. According to 

PRGI, its overpayment identification rate under the demonstration 

program is 0.48 percent of purchases reviewed, which is consistent with its 

experience with new private sector clients before corrective measures are 

implemented. PRGI told us that, as corrective measures are implemented, 

the overpayment rate typically drops to about 0.1 percent of purchases 

reviewed.

PRGI has also made recommendations to DFAS and DSCP to reduce future 

overpayments, but, at the time of our review, DOD had not implemented 

them. 

These recommendations ranged from reprogramming payment systems to 

providing contracting personnel additional training to help them determine 

price reasonableness.

DOD Is Slow to Use 

Recovery Auditing 

Techniques

DOD has been slow to embrace recovery auditing. For example, in House 

Report 105-532, which related to a bill providing for fiscal year 1999 DOD 

authorizations, DOD was directed to use recovery auditing by selecting at 

least two commercial functions within its working capital fund and issuing 

a competitive request for proposal by December 31, 1998. We found, 

however, that DOD had not done either.5

 While DOD issued an August 1998 

memorandum encouraging the use of recovery auditing, and some 

activities have expressed an interest, no contracts had been awarded at the 

time we completed our work in March 1999. In June 1999, we checked with 

the recipients of the August 1998 memorandum and, with the exception of 

the U.S. Transportation Command, which had just entered into a contract 

for recovery auditing services, no other contracts had been awarded. The 

Defense Commissary Agency said it has completed a statement of work, 

5

Contract Management: DOD Is Examining Opportunities to Further Use Recovery Auditing

(GAO/NSIAD-99-78, Mar. 17, 1999).
Page 8 GAO/T-NSIAD-99-213

and plans to have a contract by July 30, 1999. The Defense Logistics 

Agency told us it issued a solicitation on May 28, 1999, to expand the use of 

recovery auditing from the demonstration program in place at DSCP to its 

other four supply centers. The Defense Logistics Agency said it plans to 

have a contract by August 31, 1999. Each of the services and the Defense 

Information Services Agency also expressed an interest in recovery 

auditing, and they are evaluating whether to use it.

Issues Related to Using 

Recovery Auditing

While we believe that recovery auditing could be beneficial to DOD and 

other federal agencies, there are some important implementation issues 

that need to be considered as federal agencies evaluate using recovery 

auditing to identify and recover overpayments. First, it is not clear how 

agencies should organize to perform recovery auditing. Should it be 

contracted out? Should it be performed with in-house personnel? Should 

some combination of the two be used? We believe that agencies need to 

carefully consider the extent to which recovery auditing is applicable to 

their operations and, if applicable, if it would be cost-effective to undertake 

moderate internal recovery auditing efforts to “pick the low hanging fruit” 

before turning audit recovery efforts over to an external group.

Second, it is important that there be (1) periodic reporting by those 

performing recovery auditing on the factors causing overpayments and on 

recommendations to reduce overpayments and (2) a process to evaluate 

these recommendations and implement those that make sense. One of the 

criticisms we made of the demonstration program was that DOD did not 

implement the contractor’s recommendations to reduce overpayments. 

Finally, it is important to recognize that the DOD demonstration program 

has been focusing primarily on identifying overpayments related to 

subsistence, medical, and clothing purchases. While representing an audit 

base of about $7.2 billion, it is only a small part of the dollars spent on 

contracts by DOD each year. Most DOD expenditures are for purchases of 

major weapon systems. The applicability of recovery auditing to these 

types of contract payments is, at this time, unclear.

The Government Waste 

Corrections Act of 1999

The Government Waste Corrections Act of 1999 (H.R. 1827) would require 

the use of recovery auditing by federal agencies and provide incentives to 

improve federal management practices with the goal of reducing 

overpayments. 
Page 9 GAO/T-NSIAD-99-213

We believe the act is a positive step in the government’s effort to reduce 

overpayments and to obtain timely identification and recovery of 

overpayments. The act addresses recommendations we made in our recent 

report on DOD’s demonstration program. One recommendation was to 

give the head of an executive agency the option to perform recovery 

auditing with internal staff, by contract or through a combination of both 

internal staff and contract.

We are also pleased to see that the bill requires a contractor to provide 

periodic reports with recommendations on how to mitigate overpayment 

problems and that as a part of the agency’s management improvement 

program, the agency is to give first priority to addressing problems that 

contribute to overpayments.

Finally, the proposed act allows applicable appropriations to be reimbursed 

for costs incurred by government activities in supporting recovery audit 

efforts and provides other incentives to support the use of recovery 

auditing. These features should help eliminate some of the implementation 

problems we saw in the demonstration program.

Suggestions to Improve the 

Bill

While we are positive toward the concept of recovery auditing and its 

potential for application in the federal government, the government’s 

experience with the use of recovery auditing has been limited. Thus, we 

think it is a good idea to mandate further model programs in civilian and 

defense agencies to determine the applicability of recovery auditing and to 

develop best practices for their use governmentwide. In conducting the 

mandated model programs—at least five are currently provided for in the 

bill—there should be sufficient diversity in where recovery auditing is 

modeled to adequately test the concept among the different types of 

payment activities. Beyond the mandated model programs, we believe that 

the use of recovery auditing should, at least for the time being, be available, 

but not mandated, for other federal agencies. Currently, the bill provides 

for mandatory use of recovery auditing by federal agencies, in addition to 

the model programs.

The Committee may also want to reexamine the provisions in the bill 

relating to reallocation or use of overpayment recoveries. While financial 

incentives are critical to the program’s success, incentives that are too 

great are unnecessary and may undermine the program by creating 

inappropriate incentives to making accurate and timely payments in the 

first place. The Committee may want to provide for a substantial portion of 
Page 10 GAO/T-NSIAD-99-213

the recoveries to be returned to the Treasury. We will be happy to discuss 

further technical comments with the Committee staff.

Conclusions In closing, Mr. Chairman, federal agency managers have a fiduciary 

responsibility relating to, and are accountable for, the proper use of federal 

funds. Our work has shown that, in certain cases, these responsibilities are 

not being exercised adequately and the result is billions of dollars a year in 

improper payments, a portion of which represent overpayments that may 

never be recovered. Federal agencies need to achieve more effective 

control over their payment processes. The causes of the payment 

problems are varied and many are long-standing. The solutions can be 

found in the effective use of technology, the establishment of sound 

internal control and payment processes, and the wise use of human capital. 

If federal agencies do not effectively tackle these challenges, they will 

continue to risk erroneously paying contractors and perpetuating other 

financial management problems. Effectively addressing them, however, 

will require investment and sustained commitment by top-level 

management.

Recovery auditing, which has a long-standing track record in the private 

sector, offers a low-risk opportunity to identifying and recovering 

overpayments. We strongly support provisions of H.R. 1827 that provide 

for model recovery auditing programs. In this way, the government can 

assess the applicability of recovery auditing to different types of payments 

and develop best practices for its use on a wider scale. In our view, with 

the use of model programs, plus strong monetary incentives, it would be 

unnecessary to mandate recovery auditing across the government. There 

may also be opportunities to employ novel servicing arrangements, such as 

creating a “center of excellence” in a federal agency to provide leadership 

to other agencies in implementing recovery auditing. 

The keys to the successful execution of governmentwide recovery auditing 

programs are (1) meaningful incentives for agencies to want to participate 

in the program and make it work, (2) adequate safeguards to ensure 

achieving congressional intent and the proper use of appropriations, and 

(3) transparency in the conduct of the program.

Mr. Chairman, this concludes my statement. For the record, major 

contributors to this testimony were David E. Cooper, Daniel J. Hauser, and 

Charles W. Thompson. I will be glad to answer any questions you or the 

other Members of the Subcommittee may have at this time. 

(707433 ) Letr
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