U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1

89–010

" ! SENATE 106TH CONGRESS

2d Session

REPORT

2000

106–502

Calendar No. 950

TO AMEND TITLE 31, UNITED STATES CODE,

TO PROVIDE FOR EXECUTIVE AGENCIES TO

CONDUCT ANNUAL RECOVERY AUDITS AND

RECOVERY ACTIVITIES, AND FOR OTHER

PURPOSES

R E P O R T

OF THE

COMMITTEE ON GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

together with

ADDITIONAL VIEWS

TO ACCOMPANY

S. 3030

TO AMEND TITLE 31, UNITED STATES CODE, TO PROVIDE FOR

EXECUTIVE AGENCIES TO CONDUCT ANNUAL RECOVERY AUDITS AND RECOVERY ACTIVITIES, AND FOR OTHER PURPOSES

OCTOBER 12 (legislative day, SEPTEMBER 22), 2000.—Ordered to be printed

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

FRED THOMPSON, Tennessee, Chairman

WILLIAM V. ROTH, JR., Delaware

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ARLEN SPECTER, Pennsylvania

JUDD GREGG, New Hampshire

JOSEPH I. LIEBERMAN, Connecticut

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

JOHN EDWARDS, North Carolina

HANNAH S. SISTARE, Staff Director and Counsel

ELLEN B. BROWN, Senior Counsel

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel

DEBORAH COHN LEHRICH, Minority Counsel

DARLA D. CASSELL, Chief Clerk

Calendar No. 950

106TH CONGRESS REPORT

2d Session " ! SENATE 106–502

AMENDING TITLE 31, UNITED STATES CODE, TO PROVIDE FOR EXECUTIVE

AGENCIES TO CONDUCT ANNUAL RECOVERY AUDITS AND RECOVERY

ACTIVITIES, AND FOR OTHER PURPOSES

OCTOBER 12 (legislative day, SEPTEMBER 22), 2000.—Ordered to be printed

Mr. THOMPSON, from the Committee on Governmental Affairs,

submitted the following

REPORT

[To accompany S. 3030]

The Committee on Governmental Affairs, to which was referred

the bill (S. 3030) amending title 31, United States Code, to provide

for executive agencies to conduct annual recovery audits and recovery activities, and for other purposes, having considered the same,

reports favorably thereon without amendment and recommends

that the bill do pass.

CONTENTS

Page

I. Purpose and Summary .................................................................................. 1

II. Background and Need for Legislation .......................................................... 2

III. Legislative History ......................................................................................... 3

IV. Section-by-Section Analysis .......................................................................... 4

V. Regulatory Impact Statement ....................................................................... 7

VI. CBO Cost Estimate ........................................................................................ 8

VII. Additional Views ............................................................................................ 12

VIII. Changes to Existing Law .............................................................................. 15

I. PURPOSE AND SUMMARY

S. 3030 amends chapter 35 of title 31, United States Code, to require Federal agencies to perform recovery audits if their direct

purchases for goods and services total $500 million or more per fiscal year. Agencies that must undertake recovery auditing also

would be required to institute a management improvement program to address underlying problems of their payment systems.

2

II. BACKGROUND AND NEED FOR LEGISLATION

Improper payments in the Federal Government

Each year, the Federal government spends hundreds of billions

of dollars for a variety of grants, transfer payments, and the procurement of goods and services. The Federal government must be

accountable for how it spends these funds and for safeguarding

against improper payments. Unfortunately, the problem of improper payments by Federal agencies and departments is immense.

The General Accounting Office recently identified $20.7 billion in

improper payments in just 20 major programs administered by 12

Federal agencies in Fiscal Year 1999 alone (Financial Management: Improper Payments Reported in Fiscal Year 1999 Financial

Statements (GAO/AIMD–00–261R)). This represents an increase of

more than $1.5 billion from the previous year’s estimate. In its report, GAO wrote that its ‘‘audits and those of agency inspectors

general continue to demonstrate that improper payments are much

more widespread than agency financial statement reports have disclosed thus far.’’

Legislative efforts have focused on improving the Federal government’s financial control processes. Recently-enacted laws, such as

the Chief Financial Officers Act, the Government Management Reform Act, and the Government Performance and Results Act, have

provided an impetus for agencies to systematically measure and reduce the extent of improper payments.

However, the risk of improper payments and the government’s

inability to prevent them continue to be significant problems. While

the Committee continues to work to improve the government’s

widespread financial management weaknesses, it is important to

begin to address the recovery of the tens of billions of dollars in improper payments.

Recovery auditing in the private sector

Recovery auditing is used extensively by private sector businesses, including a majority of Fortune 500 companies. These businesses typically contract with specialized recovery auditing firms

that are paid a contingent fee based on the amounts recovered from

payment errors they identify. Recovery auditing is not ‘‘auditing’’ in

the usual sense. Recovery auditing firms do not examine the

records of vendors doing business with their client companies or assess the vendors’ performance. Instead, these firms develop and use

computer software programs that are capable of analyzing their clients’ own contract and payment records in order to identify discrepancies in those records between what was owed and what was paid.

They focus on obvious but inadvertent errors, such as duplicate

payments or failure to get credit for applicable discounts and allowances.

Payment errors identified by private sector recovery auditors average only 0.1 percent of all payments reviewed. Nevertheless, recoveries are substantial when applied to large volumes of transactions. The 0.1 percent average error rate produces $1 million in

recoveries for each $1 billion of payments reviewed.

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III. LEGISLATIVE HISTORY

HOUSE ACTIVITY

The House companion to S. 3030—H.R. 1827—was introduced on

May 17, 1999 by Rep. Dan Burton (R–IN), Chairman of the Committee on Government Reform. Original co-sponsors were Majority

Leader Dick Armey (R–TX), Rep. Pete Sessions (R–TX), and Rep.

Doug Ose (R–CA). H.R. 1827 was referred to the Committee on

Government Reform, then referred to the Subcommittee on Government Management, Information, and Technology on May 25, 1999.

The Subcommittee held a legislative hearing on June 29, 1999.

Witnesses at the hearing were: David Walker, Comptroller General

of the United States, General Accounting Office; Deidre Lee, Acting

Deputy Director of Management and Administrator of the Office of

Federal Procurement Policy, Office of Management and Budget;

George H. Allen, Deputy Commander, Defense Supply Center

Philadelphia; Gerald R. Peterson, Chief, Accounts Payable Division,

Army and Air Force Exchange Service; Michelle Snyder, Director,

Financial Management Office, and Chief Financial Officer, Health

Care Financing Administration; Paul Dinkins, Executive Vice

President, The Profit Recovery Group International, Inc.; Douglas

R. Wilwerding, Chief Executive Officer and President, Omnium

Worldwide, Inc.; Terrance Lyons, Director of Accounting, the

Walgreen Company; Stephen R. Booma, private consultant; Robert

Koehler, American Logistics Association.

A business meeting was held by the Subcommittee on July 21,

1999, at which time the Subcommittee chairman, Rep. Steve Horn

(R–CA), offered an amendment in the nature of a substitute to H.R.

1827. It was ordered favorably reported to the full Committee on

Government Reform by voice vote. On November 10, 1999, the full

Committee on Government Reform met to consider H.R. 1827.

Chairman Dan Burton offered an amendment in the nature of a

substitute. Two additional amendments were offered and accepted.

The Committee on Government Reform approved the amendment

in the nature of a substitute, as amended, by voice vote. The Committee on Government Reform then ordered the bill reported favorably, as amended, to the House by voice vote. On November 17,

1999, the bill was reported by the Committee on Government Reform and placed on the House Calendar. On March 8, 2000, H.R.

1827 was passed by the House 375–0.

SENATE ACTIVITY

S. 3030 was introduced by Committee on Governmental Affairs

Chairman Fred Thompson on September 12, 2000, and referred to

the Committee. On September 27, 2000, the Committee held a

business meeting and discussed S. 3030. Chairman Thompson recognized that some issues still remained open and committed to

working with the Committee to resolve them prior to bringing S.

3030 up for consideration by the full Senate.

The Committee ordered S. 3030 reported without amendment favorably to the full Senate by voice vote (en bloc). Senators present

were: Thompson, Roth, Stevens, Collins, Voinovich, Domenici,

Cochran, Levin, Akaka, Durbin, Torricelli, Cleland, and Edwards.

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IV. SECTION-BY-SECTION ANALYSIS

Section 1. Recovery audits

Section 1(a)(1) would add a new subchapter to chapter 35 of title

31, United States Code, entitled ‘‘Recovery Audits’’ containing sections 3561 through 3566.

Section 3561. Definitions

This section would contain definitions of terms applicable under

this legislation. For example, the term ‘‘Director’’ would mean the

Director of the Office of Management and Budget (OMB). The definition of ‘‘facial discrepancy payment error’’ is meant to convey

Congressional intent with respect to the conduct and meaning of

‘‘recovery audit’’ in this legislation. Under this legislation, the subject of the recovery audit is the contract, invoice, and payment documents held by the agency. A recovery audit contractor would not

be authorized to access or audit the vendor’s records. The Committee intends for the recovery audit to be performed strictly to

identify payment errors found from a review of the facts and figures on the ‘‘face’’ of contract, invoice, and payment documents held

by the agency and would not entail assessments, evaluations, or

judgement calls regarding the quality of goods or services provided

to the agency. Further, the language is not meant to restrict a recovery audit contractor from substantiating agency payment errors

such as missed discounts or rebates. The term ‘‘payment activity’’

would mean an agency activity that entails making payments to

vendors or other nongovernmental entities that provide goods or

services to support the performance of the agency’s mission. The

term ‘‘recovery audit’’ would mean a financial management technique used by an agency to perform internal audits of its records

to identify payment errors in connection with agency payment activities. The term ‘‘recovery activity’’ would mean the process, otherwise authorized by law, to try and collect payment errors.

Section 3562. Recovery audit requirement

Subsection (a) would require each executive agency to conduct recovery audits for every fiscal year if combined payment activities

total at least $500 million annually on goods or services for the use

or direct benefit of the agency. Agencies may conduct recovery audits for payment activities under this threshold if they so choose.

Subsection (b) would provide agency heads the authority to seek

from the Director of OMB exemptions to the requirement in (a).

Subsection (c) would provide that agency heads prescribe procedures for recovery audits and recovery activities which will ensure

the greatest financial benefit to the United States. It also would

provide that agency heads consult and coordinate recovery audits

with the agency Chief Information Officer and the Inspector General. Agencies would be authorized to conduct recovery audits inhouse, contract with private recovery audit specialists, or use any

combination thereof. It would be necessary for recovery audits to

comply with a recovery audit standard to be set forth by the Director of OMB.

Subsection (d) would prescribe authorities and functions of recovery audit contractors and terms and conditions required in recovery

audit contracts. Under (d)(1), the agency head would have the exVerDate 11-MAY-2000 14:37 Oct 16, 2000 Jkt 089010 PO 00000 Frm 00006 Fmt 6659 Sfmt 6602 E:\HR\OC\SR502.XXX pfrm01 PsN: SR502
5

plicit authority to use contingency contracts, whereby contractors

would be allowed to retain a percentage of collections from payment errors they identify during the audit.

Under (d)(2), it is made explicit that a contract for recovery auditing would not affect an agency’s authorities under the Contract

Disputes Act, the Debt Collection Act, or other applicable laws to

resolve disputes and take collection action. It also is made clear

that nothing in this subchapter would require the production of

documents by anyone other than the executive agency or that nothing in this subchapter would create the authority for a physical

presence on the property of a vendor by the executive agency.

Under (d)(3), recovery audit contractors would be required to protect any financial information they come across in the course of

their recovery audit work or any other information which has not

been released for general public use. They would be required to report periodically to the agency on the causes of payment errors

they identify and offer any recommendations they have on how to

mitigate them. They also would be required to notify the agency of

any payment errors they happen to identify that are beyond the

scope of their contracts. They would have to promptly notify the

agency head of suspected fraudulent or criminal activity.

Agencies, under (d)(4), would be required to take prompt and appropriate action in response to contractor recommendations and notifications.

Under (d)(5), agencies would have to conduct a public-private

cost comparison to determine whether to conduct recovery auditing

in-house or by contract.

Subsection (e) would indicate that the legislation would not affect

current authorities of Inspectors General, including such authorities under the Inspector General Act of 1978.

Subsection (f) would specify that the legislation would not affect

current payment authorities and claim procedures for certain types

of transportation provided to the government.

Subsection (g) would limit the disclosure by recovery audit contractors of any individually identifiable information obtained during the course of the audit and places liability for damages on any

violators of this restriction. The subsection also would require the

return of individually identifiable information at the conclusion of

the audit.

Section 3563. Disposition of amounts collected

Subsection (a) would provide that this section applies to annual

amounts recouped by the United States.

Subsection (b) would provide authority for amounts recovered to

be available to pay recovery audit contractors and to reimburse applicable appropriations for recovery audit costs incurred by the

agency.

Subsection (c) would provide authority for up to 25 percent of collections to be used to fund agency management improvement programs under section 3564.

Subsection (d) would require that at least 50 percent and any additional amounts not used for recovery audit costs or the management improvement program would revert to the Treasury.

Subsection (e)(1) would exempt from this section amounts collected if the application would be inconsistent with other provisions

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of law governing the crediting of collections. Examples include nonappropriated fund instrumentalities, revolving funds, working capital funds, and trust funds.

Subsection (e)(2) would provide that, except for use for the recovery audit contract, the disposition authorities and requirements for

collected amounts under this section would not apply to funds that

remain available for obligation at the time the amounts are collected.

Section 3564. Management improvement program

Subsection (a) would require the agencies that are mandated to

conduct recovery audits to implement management improvement

programs consistent with guidance prescribed by the Director of

OMB. Other agencies that conduct recovery auditing in compliance

with OMB guidance would be authorized to implement management improvement programs.

Subsection (b) would require the agency to address the problems

that contributed to the payment errors as the first priority of the

management improvement program. The agency head also would

be able to use the management improvement program for other initiatives to reduce error and waste in agency programs.

Subsection (c) would authorize the agency head to integrate the

management improvement program with other management improvement programs within the agency or with other agencies.

Agency heads would have flexibility, within the guidance established by OMB, over how to conduct their management improvement programs; however, they must be able to account for the use

of amounts made available from recovery audit proceeds.

Section 3565. Responsibilities of the Office of Management

and Budget

Subsection (a) would assign the Director of OMB general responsibility for coordinating and overseeing the implementation of the

legislation.

Subsection (b) would require the Director of OMB in consultation

with the Chief Financial Officers Council (CFOC) and the President’s Council on Integrity and Efficiency (PCIE), to issue implementation guidance and support to the agencies. The guidance

must include recovery audit standards to be developed in consultation with GAO and private recovery audit specialists. This subsection also would require the guidance to include specific standards and procedures for the identification and disposition of payment errors which cause underpayments to vendors.

Subsection (c) would authorize the Director of OMB to place limitations on percentage amounts paid to recovery audit contractors

under contingency fee arrangements.

Section 3566. Exemptions

Subsection (a) would authorize the Director of OMB to make exemptions from the recovery audit mandate if compliance with such

a mandate would impede the agency’s mission or would not be cost

effective. Under subsection (b), the Director of OMB would have to

promptly report any such determination and exemption to Congress.

7

Subsection (c) would provide exemptions for certain contracts

which, under current law, already are subject to extensive audit

scrutiny and oversight.

Section (1)(a)(2) would add the new table of sections to chapter

35.

Section (1)(b) would clarify that its provisions apply to all Executive Branch agencies.

Section (1)(c) would require the Director of OMB to issue initial

guidance on implementation of this legislation not later than 180

days after enactment, and such initial guidance shall include the

standards required by paragraph (2) of section 3565(b).

Section (1)(d) would require each executive agency to begin the

first recovery audit required under section 3562(a)(1) not later than

18 months after date of enactment and that such recovery audit

will cover 2001, the preceding fiscal year, and any additional fiscal

years that the head of the executive agency determines are practical and cost-effective.

Section (1)(e) would prohibit information obtained from a recovery audit to be used by plaintiffs in certain actions.

Section (1)(f) would authorize the Director of OMB to establish

a recovery audit pilot program at one or more agencies to test the

feasibility and effectiveness of recovery audits with respect to payment activities other than those related to Federal contracts for the

procurement of goods and services.

Section (1)(g)(1) would require the Director of OMB to submit to

the President and Congress, not later than 30 months after the

date of enactment and then annually for each of the two years

thereafter, detailed reports on implementation of this legislation.

The reports would include: a description and evaluation of agency

efforts to conduct recovery audits; an assessment of the benefits of

the Act, including amounts identified and recovered; an identification of best practices; a list of any significant problems or barriers

to more effective performance of recovery audits and activities; a

report on agency expenditures related to recovery auditing; a description of the management improvement programs; recommendations for changes in agency practices or law that would improve

agency efforts under this Act; and a description and evaluation of

each pilot program conducted.

Section (1)(g)(2) would require the GAO, not later than 60 days

after the submittal of each report under paragraph (1), to report to

Congress and the Director of OMB on implementation of this legislation.

Section (1)(h) would require the Director of OMB to conduct a

study on the effects of recovery audits including any problems relating to improper or inadequate notice of recovery audits. The

study would be reported to Congress and would contain the Director’s findings, conclusions, and recommendations.

V. REGULATORY IMPACT STATEMENT

Paragraph 11(b)(1) of the Standing Rules of the Senate requires

that each report accompanying a bill evaluate ‘‘the regulatory impact which would be incurred in carrying out this bill.’’

The enactment of this legislation will not have significant regulatory impact. S. 3030 contains no intergovernmental or privateVerDate 11-MAY-2000 14:37 Oct 16, 2000 Jkt 089010 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\SR502.XXX pfrm01 PsN: SR502
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sector mandates as defined in the Unfunded Mandates Reform Act

and would have no impact on state, local or tribal governments.

VI. CBO COST ESTIMATE

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, October 11, 2000.

Hon. FRED THOMPSON,

Chairman, Committee on Governmental Affairs,

U.S. Senate, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for S. 3030, a bill to amend title

31, United States Code, to provide for executive agencies to conduct

annual recovery audits and recovery activities, and for other purposes.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contact is John R. Righter.

Sincerely,

BARRY B. ANDERSON

(For Dan L. Crippen, Director).

Enclosure.

S. 3030—A bill to amend title 31, United States Code, to provide

for executive agencies to conduct annual recovery audits and recovery activities, and for other purposes

Summary: S. 3030 would require federal agencies to conduct specialized audits of accounts that purchase at least $500 million of

goods and services in a given year from the private sector. By increasing the federal government’s recovery of erroneous payments

made to the private sector, CBO estimates that enacting S. 3030

would decrease direct spending by $60 million over the 2001–2010

period. Consequently, pay-as-you-go procedures would apply to the

bill. Implementing the bill also could yield similar savings for

amounts made available in future years, but such savings would

depend on the amounts appropriated for the relevant accounts. In

addition, CBO estimates that the Office of Management and Budget (OMB) would spend less than $500,000 a year to oversee and report on the bill’s implementation and that the General Accounting

Office (GAO) would spend less than $500,000 in each of fiscal years

2001 through 2003 to report on the bill’s effectiveness.

S. 3030 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA)

and would impose no costs on the budgets of state, local, or tribal

governments.

Major provisions: S. 3030 would require federal agencies to conduct specialized audits of accounts that purchase at least $500 million of goods and services in a given year from the private sector.

The audits, referred to as recovery auditing, are conducted using

software that identifies such anomalies as pricing errors on invoices, duplicate payments, miscalculated freight charges, and any

failure to provide applicable rebates, allowances, and discounts.

For certain accounts, S. 3030 would allow agencies to retain and

spend, without further appropriation action, one-half of any

amounts collected from conducting recovery audits. Agencies could

9

use the amounts they retain to improve management functions and

to pay for the costs of performing the audits. The bill would require

agencies to deposit the remaining amounts recovered in the Treasury as miscellaneous receipts.

S. 3030 would require both OMB and GAO to report to the Congress on the bill’s implementation in each of fiscal years 2001

through 2003. As part of its role in overseeing such implementation, OMB could exempt agencies or programs from the bill’s requirements.

Estimated cost to the Federal Government: CBO estimates that

implementing S. 3030 would increase offsetting receipts from the

recovery of overpayments by about $120 million over fiscal years

2002 through 2005. That estimate represents recovery of overpayments made with funds appropriated during fiscal years 2000 and

2001. Because the bill would allow agencies to retain and spend

one-half of such amounts without further appropriation, CBO estimates that agencies would spend about $60 million of those recoveries over fiscal years 2002 through 2006. Implementing the bill

could yield similar savings in net spending for amounts made available in years after fiscal year 2001, but such savings would depend

on the amounts appropriated.

The estimated budgetary impact of S. 3030 is shown in the following table. The costs of this legislation fall within multiple budget functions.

By fiscal year, in millions of dollars—

2001 2002 2003 2004 2005

Recovery of Overpayments:

Estimated Budget Authority ........................................................................... 0 (2) ¥20 ¥90 ¥10

Estimated Outlays .......................................................................................... 0 (2) ¥20 ¥90 ¥10

Spending by Agencies:

Estimated Budget Authority ........................................................................... 0 (2) 10 45 5

Estimated Outlays .......................................................................................... 0 (2) 5 25 25

Net Changes:

Estimated Budget Authority ........................................................................... 0 (2) ¥10 ¥45 ¥5

Estimated Outlays .......................................................................................... 0 (2) ¥15 ¥65 15

1 Implementing the bill would also affect spending subject to appropriation.

2 Less than $500,000.

Basis of estimate: This estimate assumes that the bill will be enacted early in fiscal year 2001 and that it would apply to appropriations provided for 2001 and 2000.

Direct spending

Audits of Appropriated Accounts. Within 18 months of enactment, S. 3030 would require agencies to begin conducting recovery

audits of payments made from certain accounts during fiscal years

2000 and 2001. Based on an analysis of 1998 and 1999 data from

the Federal Procurement Report, which is compiled by the General

Services Administration, CBO estimates that recovery audits could

apply to about $125 billion in annual payments made in each of fiscal years 2000 and 2001, net of those payments (including payments from revolving and working capital funds) that we expect

will be audited under current law. However, CBO expects that

OMB would exempt certain accounts from the bill’s requirements,

including accounts that involve the research, testing, and procurement of military weapons, finance federal law enforcement activiVerDate 11-MAY-2000 14:37 Oct 16, 2000 Jkt 089010 PO 00000 Frm 00011 Fmt 6659 Sfmt 6602 E:\HR\OC\SR502.XXX pfrm01 PsN: SR502
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ties, and involve medical records. Thus, we estimate that the bill’s

requirement to audit payments would apply to about $60 billion in

annual payments.

In the private sector, companies using the recovery audit process

have identified and collected approximately $1 for every $1,000 in

audited payments, or a rate of 0.1 percent. Recovery audits of some

payments made by the Department of Defense (DoD) have identified a payment error rate of 0.4 percent; however, DoD’s experience

in recovering the identified overpayments is mixed. On average,

CBO assumes the federal government would recover about 0.1 percent of the $60 billion audited, or $60 million a year. That rate

takes into account the increased difficulty in collecting overpayments that are more than one year old and the likelihood that federal agencies will settle for less than full payment on some of these

debts. We expect that agencies would not begin collecting overpayments from contractors until the end of fiscal year 2002.

Audits of Revolving and Working Capital Funds. S. 3030 also

could affect spending from accounts that receive no annual appropriations, such as revolving and working capital funds. Some agencies, particularly the DoD, are currently auditing tens of billions of

dollars of payments from such accounts already, and CBO expects

that they will continue to expand their use of recovery auditing to

recapture overpayments made from these accounts. Under the bill,

none of the funds recovered by revolving and working capital funds

would be deposited in the Treasury. Therefore, the legislation

would have no net budgetary effect for such accounts.

Spending subject to appropriation

If recovery audits are used to collect overpayments made with

funds appropriated after 2001, then implementing the bill could

yield savings similar to the net recoveries estimated for audits of

2000 and 2001, but such savings would depend on the amounts appropriated for the relevant accounts. If appropriations were to continue at about the same level as in fiscal year 2001, the net savings

would average about $30 million a year in 2004 and subsequent

years (allowing time for agencies to complete their audits of 2000

and 2001 funds and begin recovering 2002 overpayments).

In addition, CBO estimates that OMB would spend less than

$500,000 a year to oversee and report on the bill’s implementation

and that GAO would spend less than $500,000 in each of fiscal

years 2001 through 2003 to report on the bill’s effectiveness.

Pay-as-you-go considerations: The Balanced Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. The net changes in

outlays that are subject to pay-as-you-go procedures are shown in

the following table. For the purposes of enforcing pay-as-you-go

procedures, only the effects in the budget year and the succeeding

four years are counted.

By fiscal year, in millions of dollars—

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Changes in outlays ..................... 0 0 ¥15 ¥65 15 5 0 0 0 0

Changes in receipts .................... Not applicable

11

Intergovernmental and private-sector impact: S. 3030 contains no

intergovernmental or private-sector mandates as defined in UMRA

and would impose no costs on the budgets of state, local, or tribal

governments.

Previous CBO estimate: On November 17, 1999, CBO prepared

a cost estimate for H.R. 1827, the Government Waste Corrections

Act of 1999, as ordered reported by the House Committee on Government Reform. CBO estimated that H.R. 1827 would decrease direct spending by $100 million over the 2000–2004 period and by

$90 million over the 2000–2009 period. The estimate of net savings

under H.R. 1827 is higher because that bill would require that federal agencies conduct specialized audits of payments made in the

year in which the bill is enacted and the two preceding fiscal years.

In contrast, S. 3030 would require that agencies only audit payments made in the year in which the bill is enacted and the preceding fiscal year. As a result, our estimate of total recoveries—

and, therefore, net savings—is greater under H.R. 1827.

Estimate prepared by: John R. Righter.

Estimate approved by: Peter H. Fontaine, Deputy Assistant Director for Budget Analysis.

(12)

VII. ADDITIONAL VIEWS

ADDITIONAL VIEWS OF SENATOR LEVIN

I fully support the objective of S. 3030 to encourage federal agencies to conduct recovery audits to identify and recover erroneous

payments. Reviews by the General Accounting Office and others indicate that federal agencies make erroneous payments far too often,

and rely far too much on contractors and other recipients of federal

funds to identify the errors and volunteer repayment.

However, I have a number of concerns about the details of S.

3030. First and foremost, it appears that this bill would exclude

from its coverage most of the federal payments with which the

General Accounting Office and others have identified problems.

The bill would address only contract payments, excluding payments

to States, entitlement payments, and federal grants and loans. The

vast majority of contract payments would be excluded from coverage as well, because the bill contains an exclusion for all contracts that are covered by the Truth In Negotiations Act, the Cost

Accounting Standards, or statutory audit requirements. Such contracts account for most contract dollars, including the major weapons systems contracts on which GAO has identified significant

problems.

The result is that the bill would establish detailed and prescriptive requirements for a small number of contracts (where there has

been no identifiable problem) while excluding the bulk of federal

payments. While it would make sense to give agencies the authority to structure their own recovery audit programs, and to exclude

categories of contracts for which the costs of conducting recovery

audits would exceed the benefits, broad statutory exclusions like

those in S. 3030 could send the message that Congress does not expect federal agencies to address payments that account for the vast

majority of federal dollars.

Secretary of Defense William Cohen expressed additional concerns about the bill in a February 10, 2000 letter to the House of

Representatives. These concerns included the following: • The bill would permit agencies to take a significant percentage

of funds recovered by recovery audits and put them into ‘‘management improvement programs.’’ All of the funds recovered were authorized and appropriated for specific programs identified by Congress—not for ‘‘management improvement programs’’ selected by

the executive branch. For this reason, Congress should carefully

consider Secretary Cohen’s request that the bill be modified to

‘‘[r]ecognize that funds collected from recovery audit activities

should not be used for management improvement programs or returned to the Treasury if those funds are needed for liquidation of

obligations or obligational adjustment.’’

13

• The bill would require a public-private competition before any

recovery audit could be conducted by a private sector company.

This requirement appears to go beyond the requirements of OMB

Circular A–76, because it would apply even in the case of audit

work which is not currently being performed by government employees. For this reason, Congress should carefully consider Secretary Cohen’s request that the bill be revised to ‘‘eliminate the requirement to conduct public-private cost comparisons before any

agency may contract for recovery audit services,’’ where those audits are not now being conducted in the public sector.

It is my hope that we will be able to address these issues before

S. 3030 is brought to the Senate floor.

CARL LEVIN.

(14)

ADDITIONAL VIEWS OF SENATOR AKAKA

During the markup of S. 3030, I pointed out that H.R. 1827, a

similar bill to S. 3030, was approved on a roll call vote of 375–0.

I noted that the reason the House bill enjoyed such wide bipartisan

support was because the measure included a provision requiring

that whenever an agency is planning to do a recovery audit, that

government employees must be given an opportunity to compete

against any outside contractors for that work.

This public-private competition, as it is called, would determine

whether the audit would be performed in-house or by a private recovery audit contractor. Although a similar provision is included in

S. 3030, it has been altered slightly. The two largest federal employee unions—the National Treasury Employees Union and the

American Federation of Government Employees—expressed concern that section 3562(c)(2)(B) of S. 3030 would prevent the use of

interagency service agreements and would limit in-house performance of the recovery audit to payment office personnel. The unions

argue that such limitations micro-manage agencies in a way that

could limit public-private competition. For example, if an agency

develops a proficiency for recovery audits, that agency should be allowed to compete with other agencies’ in-house staff, as well as outside firms. Similarly, agencies should be allowed to determine if

they want to reallocate their contract administration personnel to

meet the mandate to perform recovery audits, and, therefore,

should not be limited to using only payment office personnel. I suggest that the language found in H.R. 1827 be considered in lieu of

that in S. 3030.

I also note that federal Inspector Generals and the Office of Management and Budget have some lingering concerns about S. 3030,

as drafted. I understand that the Majority is working on those

issues. I am pleased that Chairman Thompson recognized that

there are those who expressed concern with the bill and that he

would attempt to address those concerns.

DANIEL K. AKAKA.

(15)

VIII. CHANGES TO EXISTING LAW

In compliance with paragraph 12 of rule XXVI of the Standing

Rules of the Senate, changes in existing law made by the bill, as

reported, are shown as follows, (existing law proposed to be omitted

is enclosed in black brackets, new material is printed in italic, existing law in which no change is proposed is shown in roman).

CHAPTER 35 OF TITLE 31, UNITED STATES CODE

CHAPTER 35—ACCOUNTING AND COLLECTION

Subchapter I—General

Sec.

3501. Definition.

* * * * * * *

Subchapter VI—Recovery Audits

3561. Definitions.

3562. Recovery audit requirement.

3563. Disposition of amounts collected.

3564. Management improvement program.

3565. Responsibilities of the Office of Management and Budget.

3566. Exemptions.

* * * * * * *

Subchapter VI—Recovery Audits

§ 3561. Definitions

‘‘In this subchapter:

‘‘(1) AMOUNTS COLLECTED.—The term ‘amounts collected’

means monies received or credited, by any means, including offset, by the United States Government.

‘‘(2) CHIEF FINANCIAL OFFICER.—The term ‘Chief Financial

Officer’ means—

‘‘(A) the official appointed or designated under section

901 of this title; or

‘‘(B) in the case of an executive agency that is not required to have a Chief Financial Officer under that section,

an official of the agency whose authority and functions are

substantially equivalent to the authority and functions of

an agency Chief Financial Officer under section 902 of this

title.

‘‘(3) DIRECTOR.—The term ‘Director’ means the Director of the

Office of Management and Budget.

‘‘(4) DISCLOSE.—The term ‘disclose’, with respect to individually identifiable information on any person, means release,

publish, transfer, provide access to, or otherwise divulge the individually identifiable information to any other person.

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‘‘(5) FACIAL-DISCREPANCY PAYMENT ERROR.—The term ‘facialdiscrepancy payment error’—

‘‘(A) means, except as provided in subparagraph (B), any

error in a payment made by an executive agency for goods

or services that is apparent from a review of the face of an

invoice or other payment document that is presented to the

executive agency by the supplier of the goods or services in

the usual and customary conduct of business or pursuant

to a requirement in law or a contract to substantiate the

claim for the payment, including any such document that

is presented electronically; and

‘‘(B) does not include a payment error identified, resulting, or supported from a document that is—

‘‘(i) a record of a proprietary nature that is maintained solely by the supplier of the goods or services;

‘‘(ii) not specifically required to be presented to the

executive agency by contract, law, or regulation, or not

necessary for the substantiation of the claim for the

payment; or

‘‘(iii) submitted to the executive agency for evaluative

purposes before the award of the contract under which

the payment was made.

‘‘(6) INDIVIDUALLY IDENTIFIABLE INFORMATION.—The term ‘individually identifiable information’, with respect to a person,

means any information, whether oral or recorded in any form

or medium, that identifies the person or with respect to which

there is a reasonable basis to believe that the information can

be used to identify the person.

‘‘(7) OVERSIGHT.—The term ‘oversight’, with respect to a payment activity, recovery audit, or recovery activity, means activities by a Federal, State, or local governmental entity to enforce

laws relating to, to investigate, or to regulate such audit or activity.

‘‘(8) PAYMENT ACTIVITY.—The term ‘payment activity’ means

an executive agency activity to pay nongovernmental sources for

goods or services acquired from those sources by the agency to

support the performance of the agency’s mission.

‘‘(9) RECOVERY AUDIT.—The term ‘recovery audit’ means a financial management technique of an executive agency that is

used by the executive agency to perform internal audits of its

records to identify facial-discrepancy payment errors that are

made by the executive agency in connection with a payment activity, including facial-discrepancy payment errors that result

from any of the following:

‘‘(A) Duplicate payments.

‘‘(B) Invoice errors.

‘‘(C) Failure to take advantage of applicable discounts,

rebates, or other allowances.

‘‘(D) Any other similar facial-discrepancy payment errors

resulting in inaccurate payments, including underpayments

identified pursuant to guidance issued under section

3565(b)(3) of this title.

‘‘(10) RECOVERY ACTIVITY.—The term ‘recovery activity’ means

an executive agency activity to attempt to collect, under the auVerDate 11-MAY-2000 14:37 Oct 16, 2000 Jkt 089010 PO 00000 Frm 00018 Fmt 6604 Sfmt 6603 E:\HR\OC\SR502.XXX pfrm01 PsN: SR502
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thority of chapter 37 of this title or any other provision of law,

a payment error identified in a recovery audit.

‘‘(11) RECOVERY AUDIT CONTRACTOR.—The term ‘recovery

audit contractor’ means any private sector person who is obligated under a contract entered into with an executive agency to

perform a recovery audit for the executive agency.

‘‘§ 3562. Recovery audit requirement

‘‘(a) IN GENERAL.—Except as exempted under section 3566 of this

title, the head of each executive agency—

‘‘(1) shall conduct each fiscal year—

‘‘(A) recovery audits of the payment activities of the agency for the preceding fiscal year if the payment activities for

the fiscal year total at least $500,000,000 (adjusted by the

Director annually for inflation); and

‘‘(B) the recovery activities determined warranted with respect to those payment activities; and

‘‘(2) may conduct in any fiscal year—

‘‘(A) recovery audits of the payment activities of the agency for the preceding fiscal year if the payment activities for

the fiscal year total less than $500,000,000 (adjusted by the

Director annually for inflation); and

‘‘(B) the recovery activities determined warranted with respect to those payment activities.

‘‘(b) REQUEST FOR EXEMPTION.—The head of an executive agency

required to conduct a recovery audit under subsection (a)(1) may request that the Director exempt a payment activity, in whole or in

part, from that requirement if the head of the executive agency determines and can demonstrate that the exemption is justified on any

basis described in section 3566(a) of this title.

‘‘(c) PROCEDURES.—

‘‘(1) IN GENERAL.—The head of each executive agency shall

prescribe procedures for the performance of recovery audits and

recovery activities in the agency that implement this section in

a manner designed to ensure the greatest financial benefit to

the United States.

‘‘(2) SPECIFIC PROCEDURES.—In conducting recovery audits

and recovery activities under this section, the head of an executive agency—

‘‘(A) shall consult and coordinate with the Chief Financial Officer and the Inspector General of the agency to

avoid any duplication of effort;

‘‘(B) may conduct recovery audits and recovery activities

regarding payments by the executive agency by using personnel of the agency’s payment office without reimbursement or payment for services in accordance with the standards issued by the Director under section 3565(b)(2) of this

title, by procuring the performance of recovery audits by

contractors, or by any combination of both methods; and

‘‘(C) shall ensure that the recovery audits and recovery

activities are carried out consistent with the standards

issued by the Director under section 3565(b)(2) of this title.

‘‘(d) RECOVERY AUDIT CONTRACTS.—

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‘‘(1) AUTHORITY TO USE CONTINGENCY CONTRACTS.—Notwithstanding section 3302(b) of this title, as consideration for performance of any recovery audit procured by an executive agency,

the head of the executive agency may pay the recovery audit

contractor an amount equal to a percentage of the total amount

collected by the United States as a result of payment errors

identified by the recovery audit contractor in the audit.

‘‘(2) CONSTRUCTION.—

‘‘(A) RELATIONSHIP TO OTHER EXECUTIVE AUTHORITIES.—

A contract for the performance of a recovery audit shall not

affect—

‘‘(i) any authority of the head of an executive agency,

or any other person, under the Contract Disputes Act

of 1978 (41 U.S.C. 601 et seq.) and other applicable

laws, including authority to initiate litigation or referrals for litigation; or

‘‘(ii) the requirements of sections 3711, 3716, 3718,

and 3720 of this title that the head of an executive

agency resolve disputes, compromise, or terminate payment of error claims, collect by offset, and otherwise engage in recovery activities with respect to payment errors identified by the recovery audit.

‘‘(B) CONTRACTOR AUTHORITIES AND DUTIES.—Nothing in

this subchapter shall be construed to authorize a recovery

audit contractor with an executive agency—

‘‘(i) to require the production of any record or information by any person other than an officer, employee,

or agent of the executive agency; or

‘‘(ii) to establish, or otherwise have, a physical presence on the property or premises of any private sector

entity as part of its contractual obligations to an executive agency.

‘‘(3) REQUIRED CONTRACT TERMS AND CONDITIONS.—The head

of an executive agency shall include in each contract for the procurement of the performance of a recovery audit the following

requirements:

‘‘(A) That the recovery audit contractor protect from improper use and from disclosure to any person inside or outside the recovery audit contractor’s firm who is not directly

involved in the identification or recovery of payment

errors—

‘‘(i) any financial information that is viewed or obtained in the course of carrying out a recovery audit for

an executive agency; and

‘‘(ii) any other information so viewed or obtained that

has not been released for general public use by the audited person or an authorized agent of that person.

‘‘(B) That the recovery audit contractor submit to the

head of the executive agency periodic reports on conditions

giving rise to payment errors identified by the recovery

audit contractor and any recommendations on how to mitigate such conditions.

‘‘(C) That the recovery audit contractor notify the head of

the executive agency of any payment errors identified by the

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contractor pertaining to the executive agency or to another

executive agency that are beyond the scope of the contract.

‘‘(D) That the recovery audit contractor promptly notify

the head of the executive agency of any indication of fraud

or other criminal activity discovered in the course of the

audit.

‘‘(4) EXECUTIVE AGENCY ACTION FOLLOWING NOTIFICATION.—

The head of an executive agency shall take prompt and appropriate action in response to a notification by a recovery audit

contractor pursuant to the requirements under paragraph (3),

including forwarding to the head of another executive agency

any information that applies to that agency.

‘‘(5) CONTRACTING REQUIREMENTS.—Before contracting for

any recovery audit, the head of an executive agency shall determine and compare the cost of using employees of the United

States to perform the audit and the cost of procuring the performance of the audit from the private sector. The head of the

executive agency shall use the outcome of the cost comparison

process to determine whether to use the employees of the United

States or to procure recovery audit services from the private sector.

‘‘(e) RELATIONSHIP TO AUTHORITY OF INSPECTORS GENERAL.—

Nothing in this subchapter shall be construed as impairing the authority of an Inspector General under the Inspector General Act of

1978 or any other provision of law.

‘‘(f) RELATIONSHIP TO REQUIREMENTS FOR PAYMENTS FOR TRANSPORTATION.—Nothing in this subchapter shall be construed to affect

the requirements and authorities provided in section 3726 of this

title.

‘‘(g) PRIVACY PROTECTIONS.—

‘‘(1) LIMITATION ON DISCLOSURE OF INDIVIDUALLY IDENTIFIABLE INFORMATION.—

‘‘(A) RESTRICTION.—Any recovery audit contractor that

obtains individually identifiable information on a person

through the performance of a recovery audit or recovery activity under this subchapter may disclose that information

only for the purpose of such audit or activity, respectively,

and for the oversight of such audit or activity, unless otherwise authorized by that person.

‘‘(B) SANCTIONS.—Any person that violates subparagraph

(A) shall be liable for any damages (including nonpecuniary damages, costs, and attorneys’ fees) caused by the violation.

‘‘(2) RETURN OF INFORMATION.—

‘‘(A) REQUIREMENT.—Upon the date determined under

subparagraph (B), a recovery audit contractor having possession of individually identifiable information disclosed in

the course of a recovery audit or recovery activity that is

performed under this subchapter by the recovery audit contractor shall return it to the person from whom it was obtained unless another applicable law requires retention of

the information.

‘‘(B) TIME FOR RETURN OF INFORMATION.—The date referred to in subparagraph (A) is the date of the conclusion

20

of the matter or need for which the information was disclosed, except that if, on that date, the recovery audit contractor has actual notice of any oversight of the recovery

audit or recovery activity, the date referred to in subparagraph (A) is the date of the conclusion of such oversight.

‘‘§ 3563. Disposition of amounts collected

‘‘(a) IN GENERAL.—Notwithstanding section 3302(b) of this title,

the total amount collected in a fiscal year by the United States as

a result of recovery audits by an executive agency under this subchapter shall be disposed of in accordance with this section.

‘‘(b) USE FOR RECOVERY AUDIT COSTS.—

‘‘(1) CONTRACTOR PAYMENTS.—Amounts referred to in subsection (a) shall be available to the executive agency to pay

amounts owed to any recovery audit contractor for performance

of the audit.

‘‘(2) OTHER COSTS.—Subject to the limitation in subsection

(e), amounts referred to in subsection (a) shall be available to

the executive agency—

‘‘(A) to reimburse any applicable appropriation for other

recovery audit costs incurred by the executive agency with

respect to the audit; and

‘‘(B) to pay any fees authorized under chapter 37 of this

title.

‘‘(c) USE FOR MANAGEMENT IMPROVEMENT PROGRAM.—Subject to

the limitation in subsection (e), up to a total of 25 percent (as determined under the guidance issued under section 3565 of this title) of

the amount referred to in subsection (a)—

‘‘(1) shall be available to the executive agency to carry out the

management improvement program of the agency under section

3564 of this title; and

‘‘(2) may be credited for that purpose by the head of the executive agency to any agency appropriation that is available for obligation at the time of the collection and shall be merged with

other amounts in, and shall remain available for the same period as, the appropriation to which credited.

‘‘(d) REMAINDER TO TREASURY.—Subject to the limitation in subsection (e), there shall be deposited into the Treasury as miscellaneous receipts a sum equal to—

‘‘(1) 50 percent of the amount referred to in subsection (a);

plus

‘‘(2) any of that amount that remains unallocated after the

application of subsections (b) and (c).

‘‘(e) LIMITATION ON APPLICATION.—

‘‘(1) IN GENERAL.—This section does not apply to amounts collected through recovery audits and recovery activities to the extent that such application would be inconsistent with another

provision of law that authorizes the crediting of the amounts to

a nonappropriated fund instrumentality, revolving fund, working-capital fund, trust fund, or other fund or account.

‘‘(2) AMOUNTS PAID OUT OF CURRENTLY AVAILABLE FUNDS.—

Subsections (b)(2), (c), and (d) shall not apply to amounts collected through recovery audits and recovery activities that were

21

paid out of an appropriation or fund that remains available for

obligation at the time the amounts are collected.

‘‘§ 3564. Management improvement program

‘‘(a) IN GENERAL.—

‘‘(1) REQUIRED PROGRAM.—The head of each executive agency

that is required to conduct recovery audits under section 3562

of this title shall conduct a management improvement program

under this section, consistent with guidelines prescribed by the

Director.

‘‘(2) DISCRETIONARY PROGRAM.—The head of any other executive agency that conducts recovery audits under section 3562 of

this title that meet the standards issued by the Director under

section 3565(b)(2) may conduct a management improvement

program under this section.

‘‘(b) PROGRAM FEATURES.—In conducting a management improvement program under this section, the head of an executive agency—

‘‘(1) shall, as the first priority of the program, address problems that contribute directly to payment errors of the executive

agency; and

‘‘(2) may seek to reduce errors and waste in other programs

and operations of that executive agency by improving the executive agency’s staff capabilities, information technology, and financial management.

‘‘(c) INTEGRATION WITH OTHER ACTIVITIES.—The head of an executive agency—

‘‘(1) subject to paragraph (2), may integrate the program

under this section, in whole or in part, with other management

improvement programs and activities of that agency or other executive agencies; and

‘‘(2) shall retain the ability to account specifically for the use

of amounts available to the executive agency under section 3563

of this title.

‘‘§ 3565. Responsibilities of the Director of the Office of Management and Budget

‘‘(a) IN GENERAL.—The Director shall coordinate and oversee the

implementation of this subchapter.

‘‘(b) GUIDANCE.—

‘‘(1) IN GENERAL.—The Director, in consultation with the

Chief Financial Officers Council and the President’s Council on

Integrity and Efficiency, shall issue guidance and provide support to the executive agencies for the implementation of this subchapter.

‘‘(2) RECOVERY AUDIT STANDARDS.—The Director shall include

in the guidance standards for the performance of recovery audits under this subchapter. The Director shall develop the guidance in consultation with the Comptroller General and private

sector experts on recovery audits, including such experts who

use recovery auditing as part of their financial management

procedures.

‘‘(3) TREATMENT OF UNDERPAYMENTS.—The guidance developed under this subsection shall include specific standards and

procedures for the identification and disposition of facial-disVerDate 11-MAY-2000 14:37 Oct 16, 2000 Jkt 089010 PO 00000 Frm 00023 Fmt 6604 Sfmt 6603 E:\HR\OC\SR502.XXX pfrm01 PsN: SR502
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crepancy payment errors that result in underpayments to vendors.

‘‘(c) FEE LIMITATIONS.—The Director may limit the percentage

amounts that may be paid to recovery audit contractors under section 3562(d)(1) of this title.

‘‘§ 3566. Exemptions

‘‘(a) IN GENERAL.—The Director may exempt an executive agency,

in whole or in part, from the requirement to conduct recovery audits

under section 3562(a)(1) of this title if the Director determines that

compliance with the requirement—

‘‘(1) would impair the performance of the agency’s mission; or

‘‘(2) would not, or would no longer, be cost-effective.

‘‘(b) REPORT TO CONGRESS.—The Director shall promptly report

the basis of any determination made and exemption granted under

subsection (a)(1) to Congress.

‘‘(c) EXEMPTION OF CERTAIN CONTRACTS.—The requirements of

section 3562(a) of this title shall not apply to any of the following

contracts:

‘‘(1) A contract that provides for periodic audit of invoices

pursuant to section 2313 of title 10 or section 304C of the Federal Property and Administrative Services Act of 1949 (41

U.S.C. 254d).

‘‘(2) A contract for which cost or pricing data were required

to be provided pursuant to section 2306a of title 10 or section

304A of the Federal Property and Administrative Services Act

of 1949 (41 U.S.C. 254b).

‘‘(3) A contract that is subject to cost accounting standards

issued by the Cost Accounting Standards Board under section

26 of the Office of Federal Procurement Policy Act (41 U.S.C.

422).’’.

Æ