United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Federal Financial 

Management, Government Information, and 

International Security, Committee on Homeland 

Security and Governmental Affairs, U.S. Senate 

IMPROPER PAYMENTS

Incomplete Reporting under 

the Improper Payments 

Information Act Masks the 

Extent of the Problem 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 10:30 a.m. EST 

Tuesday, December 5, 2006

 

GAO-07-254T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

December 5, 2006

IMPROPER PAYMENTS

Incomplete Reporting under the Improper 

Payments Information Act Masks the 

Extent of the Problem 

Highlights of GAO-07-254T, a testimony 

before the Subcommittee on Federal 

Financial Management, Government 

Information, and International Security, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate 

Fiscal year 2005 marked the second

year that executive agencies were

required to report improper

payment information under the 

Improper Payments Information 

Act of 2002 (IPIA). The ultimate 

goal is to minimize such payments

because, as a practical matter, they

cannot be entirely eliminated. 

GAO’s testimony is primarily based 

on its recently issued report, GAO07-92, which included a review of

improper payment information 

reported by 35 agencies in their 

fiscal year 2005 performance and 

accountability or annual reports. 

This statement focuses on the 

progress agencies have made in

their improper payment reporting,

the challenges that remain, and the 

total amount of improper payments 

recouped through recovery 

auditing. 

What GAO Recommends

In its related report, GAO

suggested that the Congress 

consider amending IPIA to define

specific criteria agencies should 

use to ensure that the full extent of

improper payments is captured. 

GAO also made recommendations 

to the Office of Management and 

Budget (OMB) to help ensure 

accurate and complete improper 

payment and recovery auditing

reporting. OMB generally agreed 

with GAO’s recommendations and 

outlined actions planned and under 

way for continued progress. 

However, in a subsequent letter to 

GAO, OMB’s Controller raised 

concerns about the report, 

including the timing of issuance. 

While agencies are making progress, their fiscal year 2005 reporting under 

IPIA does not yet reflect the full scope of improper payments across 

executive branch agencies. Major challenges remain in meeting the goals of 

the act and ultimately improving the integrity of payments. GAO found that 

three challenges in particular continue to hinder full reporting of improper 

payment information: 

• Existing reporting incomplete. Although 18 agencies collectively 

identified and estimated improper payments for 57 programs and 

activities totaling $38 billion, some agencies still had not instituted 

systematic methods of reviewing all programs, resulting in their 

identification of none or only a few programs as susceptible to 

significant improper payments. In many cases, these same agencies had 

well-known and well-documented financial management weaknesses as 

well as fraudulent, improper, and questionable payments. Further, 

improper payments estimates totaling about $389 million for 9 programs 

were not based on a valid statistical sampling methodology as required. 

Materially higher estimates would have been expected had the correct 

methods been used, given that total outlays for these 9 programs 

exceeded $58.2 billion. 

• Large programs still not included. Estimates of improper payments 

for 10 risk-susceptible programs with outlays totaling over $234 billion 

still have not been provided. Most of these programs were subject to 

OMB reporting requirements that preceded IPIA. 

• Threshold criteria limit reporting. The act includes broad criteria to 

identify risk-susceptible programs. OMB’s implementing guidance 

includes more specific criteria that limit the disclosure and transparency

of agencies’ improper payments.

GAO’s preliminary review of fiscal year 2006 data indicates that while

additional progress is being made, agencies continue to face many of the 

significant challenges noted in GAO’s report on fiscal year 2005 reporting. 

With regard to agencies’ recovery audit efforts, GAO found that the data 

reported may present an overly optimistic view of these efforts. While 21

agencies were required to report on their recovery audit efforts, GAO 

identified discrepancies in several agencies’ information and found limited 

reviews over contract payments. For example, for fiscal year 2005, the 

National Aeronautics and Space Administration (NASA) reported that it had 

identified and recovered $617,442 in contract payments, a 100 percent 

recovery rate. Yet, the NASA Office of Inspector General reported it had 

identified over $515 million in questioned contract costs during fiscal year 

2005, of which NASA management decided to pursue recovery of $51 million. 

Had this amount been compared to the $617,442 NASA actually recovered, 

its recovery rate would drop from the reported 100 percent to 1.2 percent. 

www.gao.gov/cgi-bin/getrpt?GAO-07-254T.

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. 
Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to be here today to discuss the 

governmentwide problem of improper payments in federal programs and 

activities. My testimony today is based on our November 2006 report1

 as 

well as on our previous testimonies2

 on this topic issued earlier this year. 

We focused on agencies’ fiscal year 2005 reporting under the Improper 

Payments Information Act of 2002 (IPIA),3

 the most recent data available

at the time we started this body of work. As agencies recently reported 

their fiscal year 2006 data, my testimony today also includes some 

preliminary observations on this information. IPIA has increased visibility 

over improper payments4

 by requiring executive agency heads, based on 

guidance from the Office of Management and Budget (OMB),5

 to identify 

programs and activities susceptible to significant improper payments,6

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

payments and their actions to reduce them. As the steward of taxpayer 

dollars, the federal government is accountable for how its agencies and 

grantees spend hundreds of billions of taxpayer dollars and is responsible 

for safeguarding those funds against improper payments. However, 

although the ultimate goal is to identify and minimize these payments 

 1

GAO, Improper Payments: Agencies’ Fiscal Year 2005 Reporting under the Improper 

Payments Information Act Remains Incomplete, GAO-07-92 (Washington, D.C.: Nov. 14, 

2006). 

2

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

Improper Payments Information Act, GAO-06-482T (Washington, D.C.: Mar. 9, 2006), and

Financial Management: Challenges Continue in Meeting Requirements of the Improper 

Payments Information Act, GAO-06-581T (Washington, D.C.: Apr. 5, 2006).

3

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

4

IPIA defines improper payments as any payment that should not have been made or that

was made in an incorrect amount (including overpayments and underpayments) under

statutory, contractual, administrative, or other legally applicable requirements. It includes 

any payment to an ineligible recipient, any payment for an ineligible service, any duplicate 

payment, payments for services not received, and any payment that does not account for 

credit for applicable discounts.

5

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

107-300)” May 21, 2003, and OMB Circular No. A-136, Financial Reporting Requirements, § 

II.5.6 (July 24, 2006). OMB recently issued revised guidance for fiscal year 2006 reporting in 

OMB Memorandum M-06-23, “Issuance of Appendix C to OMB Circular No. A-123” (Aug. 10, 

2006). 

6

OMB’s guidance defines significant improper payments as those in any particular program

that exceed both 2.5 percent of program payments and $10 million annually. 

Page 1 GAO-07-254T 
through a variety of strategies, it is important to recognize that, given the 

complexity, diversity, and magnitude of federal payments across the 

executive branch, such improper payments will never be completely 

eliminated. 

Today, my testimony will focus on the following key points:

• trends in agencies’ reporting under IPIA from fiscal year 2004 through 

fiscal year 2006, 

• several major challenges that continue to hinder full reporting of improper 

payment information, 

• agencies’ reporting of recovery auditing efforts to recoup improper 

payments, and 

• our proposals for continued progress in capturing the full extent of 

improper payments. 

This testimony is primarily based on our recent review, which included the 

35 federal agencies that the Department of the Treasury (Treasury) 

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

financial statements. We reviewed improper payment information reported 

by the 35 agencies in their fiscal year 2005 performance and accountability 

reports (PAR) or annual reports. We also performed a preliminary review 

of agencies’ fiscal year 2006 PARs or annual reports. We reviewed OMB 

guidance on implementation of IPIA and its report7

 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 the data that OMB 

reported. However, we are providing agency-reported data as descriptive 

information that will inform interested parties about the magnitude of 

governmentwide improper payments and other improper payment-related 

information. We believe the data to be sufficiently reliable for this 

purpose. We conducted our work from April 2006 through September 2006 

in accordance with generally accepted government auditing standards. 

Our November 2006 report contains additional details on our scope and 

methodology. 

Under OMB’s leadership, progress has been made in the first 3 years of 

IPIA implementation. Agencies’ reporting under the act’s provisions Summary 

 7

Office of Management and Budget, Improving the Accuracy and Integrity of Federal 

Payments (Washington, D.C.: Feb. 2, 2006).

Page 2 GAO-07-254T 
though, does not yet reflect the full scope of improper payments across 

executive branch agencies. For fiscal years 2004 and 2005, we concluded 

that the magnitude of the governmentwide improper payments problem 

was still unknown because agencies had not yet prepared improper 

payment estimates for all of their programs. Our preliminary review of 

fiscal year 2006 reporting indicates that while additional progress is being 

made, several challenges noted in our report on fiscal year 2005 reporting

continue to hinder full reporting of improper payment information. Similar 

to our previous results, we found that some agencies have not annually 

reviewed all programs and activities, have not estimated improper 

payments for their risk-susceptible programs, or only estimated improper 

payments for one component of the program. For example, we noted that 

the total improper payment estimate for fiscal year 2006 still does not 

include 9 risk-susceptible federal programs, including Medicaid with total 

program outlays of about $183 billion for fiscal year 2006. In addition, 

federal agency auditors continue to identify weaknesses in agencies’

compliance with the requirements of IPIA. 

Our review of agencies’ fiscal year 2005 reporting of selected improper 

payment information identified three key challenges to fully addressing 

improper payments reporting requirements. 

• First, we found that agencies’ reporting of improper payment information 

was incomplete and the extent and level of detail of agencies’ improper 

payment information varied. Although 18 agencies collectively identified

and estimated improper payments for 57 programs and activities totaling 

$38 billion, some agencies still had not instituted systematic methods of 

reviewing all programs, resulting in their identification of none or only a 

few programs as susceptible to significant improper payments. In many 

cases, these same agencies had well-known and well-documented financial 

management weaknesses as well as fraudulent, improper, and 

questionable payments. A lack of detailed guidance may be a contributing

factor to agencies’ inability to adequately assess their programs for risks.

Specifically, we found that OMB’s implementing guidance does not include 

a description of the common types of risk factors agencies should 

consider when annually reviewing their programs, such as program 

complexity, operational changes, findings from investigative reports, and 

financial statement and performance audit reports. Further, improper 

payments estimates totaling about $389 million for 9 programs were not 

based on a valid statistical sampling methodology as required. Higher 

estimates would have been expected had statistically valid methods been 

used, given that total outlays for these 9 programs exceeded $58.2 billion 

in fiscal year 2005. 

Page 3 GAO-07-254T 
• Second, the total improper payment estimate does not include several 

large, risk-susceptible federal programs. Agencies have not estimated 

improper payments for 10 risk-susceptible programs with outlays totaling 

over $234 billion, even though most of these programs had such reporting 

requirements predating IPIA.8

 Further, although the total improper 

payment estimate of about $38 billion represents almost a $7 billion, or 

16 percent, decrease from the $45 billion of improper payments reported 

by agencies in fiscal year 2004, the reported reduction may not reflect 

improved accountability or strengthened internal controls. As we 

previously reported in March and April 2006, this estimate reduction is 

primarily attributable to a decrease in the Department of Health and 

Human Services’ (HHS) Medicare program improper payment estimate. 

This decrease mainly resulted from a change to Medicare’s estimating 

methodology rather than from improved payment controls. We noted that 

HHS’s Office of Inspector General (OIG) continued to cite the integrity of 

Medicare payments as a top management challenge in HHS’s fiscal year 

2005 PAR. 

• Third, OMB’s implementation of the act’s broad criteria to identify risksusceptible programs limit the disclosure and transparency of 

governmentwide improper payments. This limitation does not further the 

objectives of IPIA, as programs that do not meet OMB’s criteria—improper 

payments exceeding $10 million and 2.5 percent of program payments—

are excluded from agencies’ improper payment reporting. For example, 

one agency identified three programs with estimated improper payments 

exceeding $10 million, but because the estimates did not exceed 

2.5 percent of program outlays, they were not included in the 

governmentwide improper payment total. 

In addition, we noted that the definition of improper payments under IPIA 

excludes certain types of payments required to be made under 

constitutional, statutory, or judicial requirements, even if those payments 

are subsequently determined to be incorrect. These include payments that 

an agency must make pursuant to a statute or court order that later are 

determined to be overpayments. Yet, because agencies are not required to

 8

Prior to the executive branch-wide 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 4 GAO-07-254T 
track, monitor, and report on these types of overpayments, the 

governmentwide magnitude of this issue is unknown. 

With regard to agencies’ recovery auditing efforts, a mechanism used to 

detect and recoup improper payments, we found that the data reported 

may not present an accurate view of the extent or success of these efforts. 

While 21 agencies were required to report on their recovery audit efforts, 

we identified discrepancies in several agencies’ information and found 

limited reviews over contract payments. For example, for fiscal year 2005, 

the National Aeronautics and Space Administration (NASA) reported that

it had identified and recovered $617,442 in contract payments, a reported 

100 percent recovery rate. Yet, the NASA OIG reported it had identified 

over $515 million in questioned contract costs during fiscal year 2005, of 

which NASA management decided to pursue recovery of $51 million. Had 

the $51 million amount been compared to the $617,442 NASA actually 

recovered, its recovery rate would drop from the reported 100 percent to 

1.2 percent. In addition, we noted that 5 of the 21 agencies did not review

all of their agency components as part of their recovery audit efforts while 

2 agencies reported that recovery auditing was not cost beneficial without 

reporting any details to support this determination. 

Our November 2006 report included one matter for congressional 

consideration and four recommendations for executive action. 

Specifically, to ensure that the full extent of improper payments is being 

captured, we believe the Congress should consider amending existing IPIA

provisions to add more specific criteria, such as a dollar threshold 

agencies should use to identify which programs and activities are 

susceptible to significant improper payments, thereby triggering improper 

payment estimating and reporting requirements. In addition, to facilitate 

agencies’ progress in ensuring accurate and complete improper payments

and recovery auditing reporting, we recommended that OMB take several

actions regarding (1) risk assessment methodologies and the level of detail 

necessary to meet the annual improper payment reporting requirements, 

(2) statistically valid estimates, (3) extent of payments agencies make 

under statute or judicial determinations that later are determined to be 

overpayments, and (4) agencies’ rationale that recovery auditing is not 

cost beneficial. In written comments on the draft of our report, OMB 

agreed with our assessment of the challenges that remain in meeting the 

goals of IPIA. OMB generally agreed with our recommendations and 

highlighted progress made in the second year of governmentwide 

improper payments reporting, as well as initiatives under way to measure 

improper payments in selected programs susceptible to significant 

improper payments. However, in a subsequent letter to GAO, OMB’s 

Page 5 GAO-07-254T 
Controller raised concerns about the report, including the timing of our 

analysis and report issuance, which we discuss later in this testimony. 

I would now like to focus on the progress that has been made in the first 

3 years of IPIA implementation. Regarding the first year reporting under 

IPIA, as we reported in March 2005,9

 the improper payment estimate of 

$45 billion reported by 17 agencies did not include any amounts for some 

of the highest risk programs, such as Medicaid with outlays in excess of 

$175 billion for fiscal year 2004. Further, we noted that some agencies still 

had not instituted systematic methods of reviewing all programs and 

activities or had not identified all programs susceptible to significant 

improper payments. We concluded that the magnitude of the 

governmentwide improper payments problem was still unknown because 

agencies had not yet prepared improper payment estimates for all of their 

programs. In that report, we made three recommendations to OMB to help 

ensure successful implementation of IPIA requirements. OMB commented 

that its management emphasis and inspector general oversight offer 

sufficient incentives to ensure agencies meet IPIA requirements. 

Regarding the second year of IPIA reporting, we recently reported in 

November 200610 that while making progress, agencies’ fiscal year 2005 

reporting under IPIA does not yet reflect the full scope of improper 

payments across executive branch agencies. For fiscal year 2005, 18

agencies reported improper payment estimates totaling in excess of 

$38 billion,11 which is $7 billion less than the $45 billion reported for fiscal

year 2004.12 All indications are that the estimate should be markedly higher 

because the total improper payment estimate did not include certain 

factors that if included, would increase the estimate. For example, 

Significant Trends in 

IPIA Reporting 

 9

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

Payments Information Act, GAO-05-417 (Washington, D.C.: Mar. 31, 2005).

10GAO-07-92. 

11Included in this estimate were 10 agencies reporting for the first time improper payment 

estimates of almost $1.2 billion for 17 programs. Also, the governmentwide estimate 

includes both over- and underpayments. OMB’s implementing guidance requires agencies 

to report the gross versus net total of both over- and underpayments. 

12In their fiscal year 2005 PARs, several 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. 

Page 6 GAO-07-254T 
agencies had not estimated improper payments for 10 risk-susceptible 

programs with outlays totaling over $234 billion, even though most of 

these programs had such reporting requirements predating IPIA.13 In 

addition, we found that improper payment estimates totaling about 

$389 million for 9 programs were not based on a statistical sampling 

methodology.14 Given that total outlays for these 9 programs exceeded

$58.2 billion in fiscal year 2005, estimates for these programs would likely 

have been much greater had statistically valid methods been used. Further, 

we reported that agencies identified a number of statutory or regulatory 

barriers that limited their corrective actions in reducing improper 

payments. I will discuss these matters in greater detail later in my 

statement. We concluded that major challenges remain in meeting the 

goals of the act and ultimately improving the integrity of payments. 

Based on our preliminary review15 of available information for fiscal year 

2006, 18 agencies estimated improper payments totaling about $42 billion,

a net increase of about $4 billion, or 11 percent, from the prior year 

improper payment estimate of $38 billion.16 This increase was attributable 

to 10 newly reported programs with improper payment estimates totaling 

about $2.3 billion and federal agencies reporting an increase in estimates 

for programs that had previously reported. 

Our preliminary review of federal agencies’ fiscal year 2006 reporting of 

selected improper payment information identified that while progress is 

being made, improvements are still needed to fully address improper 

payments reporting requirements. Similar to our previous results, we 

found that some agencies have not yet annually reviewed all programs and 

activities, have not yet estimated improper payments for their risk-

 13See footnote 8. 

14Agency-reported estimates were primarily based on known cases identified through 

Office of Inspector General audits and other isolated instances. However, one agency

reported using a combination of statistical and nonstatistical methodologies, but did not 

identify what portion of the estimate was calculated using statistical sampling. Any agency

that reported using nonstatistical sampling methodologies to calculate its programs’ 

improper payment estimates was included in this analysis. 

15We plan to report further details of agencies’ fiscal year 2006 improper payment reporting

in 2007. 

16In their fiscal year 2006 PARs, selected federal agencies updated their fiscal year 2005 

improper payment estimates to reflect changes since issuance of their fiscal year 2005

PARs. These updates increased the governmentwide improper payment estimate for fiscal 

year 2005 from $38 billion to $39 billion. 

Page 7 GAO-07-254T 
susceptible programs, or only estimated improper payments for one 

component of the program. For example, we noted that the fiscal year 

2006 total improper payment estimate of $42 billion still does not include 9 

risk-susceptible federal programs, including Medicaid with total program 

outlays of about $183 billion for fiscal year 2006. In addition, some federal 

agency auditors continue to identify weaknesses in agencies’ compliance 

with the requirements of IPIA. Five agency auditors that tested compliance 

with IPIA cited agencies that were either in noncompliance with the act or 

had not fully complied with certain aspects of the act requirements, such 

as not estimating for all risk-susceptible programs, excluding certain types 

of payments from reviews, and estimating improper payments using 

samples that were not statistically derived. In addition to the 

noncompliance issues, many federal agencies’ OIGs again reported on 

major management challenges, including reducing improper payments in 

programs and payment activities. For example, one agency’s OIG reported 

that ineffective oversight and monitoring of policies, programs, and its 

program participants has hindered the agency’s ability to identify and 

correct improper payments. Another agency’s OIG reported that improving 

acquisition and contract management is needed to reduce cost and 

eliminate improper payments. 

I would also like to address certain concerns recently raised by OMB’s 

Controller in a letter to us dated November 28, 2006. In that letter, the 

Controller stated that our report issued on November 14, 2006, contained

out-of-date information because it was based on agencies’ fiscal year 2005

reporting. We had a number of reasons for the timing of our analysis and

report issuance. First, it is important to note that we first stated our 

findings related to fiscal year 2005 improper payments less than 4 months

after agencies reported their fiscal year 2005 information. On March 9, 

2006, and again on April 5, 2006, we testified17 before the Senate and House 

Government Reform subcommittees on agencies’ progress in meeting IPIA 

reporting requirements for fiscal year 2005. In those testimony statements, 

we focused on selected reporting requirements, and our objectives 

included (1) the extent to which agencies performed risk assessments of 

all programs and activities, (2) the annual amount of improper payments 

estimated by reporting agencies, and (3) the amount of improper payments 

recouped through recovery audits. For our November 14 report, the 

objectives were similar but broader, and focused on additional improper 

payment reporting requirements as well as on the definition and the types 

 17GAO-06-581T and GAO-06-482T. 

Page 8 GAO-07-254T 
of improper payments included in IPIA and OMB’s implementing guidance. 

The latter issues, it should be noted, are unrelated to specific fiscal year 

reporting. Thus, the issuance of our report was timely, given the body of 

work we issued prior to November 14—the two testimonies mentioned 

above, another related report on improper payments in state-administered 

programs,18 and our responses to posthearing questions.19

Second, the issuance of our report was in accordance with the 

congressional schedule this fall, which included a lengthy recess for midterm elections. Third, the information in our November 14 report provides 

a sound framework for documenting the issues that affected agencies and 

OMB in fiscal year 2005 and which they continue to face. Most of the 

findings discussed in our report continue to be relevant for the fiscal year 

2006 improper payment reporting. Specifically, our November 14 report 

highlighted incomplete reporting of improper payment information related 

to agencies’ risk assessments and improper payment estimates, as well as

risk-susceptible programs that still are unable to report improper payment

estimates. As discussed previously, based on our preliminary review of the 

fiscal year 2006 PARs, these issues continue to exist. 

Finally, let me add that we provided a draft of our report to OMB prior to 

publication for its review and comment. The Controller sent detailed 

written comments in a letter dated October 26, 2006, which are reprinted 

in full in our final report. These comments make no mention of any 

concerns with the timeliness of the data included in our report. Indeed, the 

official comments state that OMB generally agreed with our assessment 

that challenges remain in meeting the goals of IPIA. 

 18GAO, Improper Payments: Federal and State Coordination Needed to Report National 

Improper Payment Estimates on Federal Programs, GAO-06-347 (Washington, D.C.: Apr.

14, 2006). 

19GAO, Improper Payments: Posthearing Questions Related to Agencies Meeting the

Requirements of the Improper Payments Information Act of 2002, GAO-06-1067R 

(Washington, D.C.: Sept. 6, 2006). 

Page 9 GAO-07-254T 
While showing progress, agencies’ fiscal year 2005 reporting under IPIA 

does not yet reflect the full scope of improper payments across executive

branch agencies. Major challenges remain in meeting the goals of the act 

and ultimately improving the integrity of payments. We found that the 

following challenges continue to hinder full reporting of improper 

payment information: existing reporting remains incomplete, large 

programs are still not included, and OMB’s threshold criteria limit 

complete reporting. 

Of the 35 agencies whose fiscal year 2005 agency PARs or annual reports 

were included in our review, 23, the same number of agencies that 

reported having risk assessments in our prior year review, reported they 

had performed risk assessments of all of their programs and activities. The 

remaining 12 agencies either did not report this information in their PARs 

or annual reports, or included some improper payment details in their 

PARs but did not report assessing for the risk of improper payments for all 

of their programs and activities. 

Although OMB’s guidance identifies the scope of payments agencies are to

review, such as federal awards made by recipients and subrecipients 

subject to the Single Audit Act, as amended,20 it does not provide agencies 

detailed information on how to conduct a risk assessment in order to 

adequately carry out their responsibilities to meet the requirements of the 

act. Specifically, we found that OMB’s guidance lacks a description of the

common types of risk factors agencies should consider when annually 

reviewing their programs, such as program complexity; operational 

changes; and findings from investigative, financial statement, and 

performance audit reports. Developing such a framework would begin the 

process to effectively identify and target high-risk areas within a program 

and better position agencies as they determine which control activities to 

implement to reduce risks and ultimately reduce fraud and errors. 

Although 23 agencies reported meeting this requirement for all of their 

programs and activities, other readily available information suggests to us 

Challenges That 

Hinder Full Reporting 

of Improper Payment 

Information 

Improvements Needed in 

Agencies’ Reporting of 

Improper Payment 

Information 

 2031 U.S.C. §§ 7501-7507. Under the Single Audit Act, as amended, and implementing 

guidance, independent auditors audit state and local governments and nonprofit 

organizations that expend federal awards to assess, among other things, compliance with 

laws, regulations, and the provisions of contracts or grant agreements material to the

entities’ major federal programs. Organizations are required to have single audits if they 

annually expend $500,000 or more in federal funds.

Page 10 GAO-07-254T 
that the adequacy of agencies’ risk assessments was questionable. For 

example, auditors for the Department of Justice (DOJ) and the 

Department of Homeland Security (DHS) cited agency noncompliance 

with IPIA in their fiscal year 2005 annual audit reports, primarily caused by

inadequate risk assessments. The DOJ auditors stated that one agency

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

improper payments. The DHS auditors 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 auditors reported IPIA 

noncompliance for DHS. Although the auditors identified the agency’s risk 

assessment methodology as inadequate, DHS again reported in its PAR 

that it had assessed all of its programs for risk and found none susceptible 

to significant improper payments. 

However, existing significant financial management weaknesses at these 

agencies highlight visible, well-known risks for improper payments. For 

example, DHS continues to face significant financial management 

weaknesses as illustrated by previous reviews of the Federal Emergency 

Management Agency’s (FEMA)—a DHS component—Individuals and 

Households Program (IHP). The DHS OIG has also cited disaster response 

and recovery as one of DHS’s major management challenges for fiscal year 

2005. 

In May 2005, the DHS OIG reported21 weaknesses in DHS’s IHP, including 

inspection and verification of losses reported by individuals related to the 

2004 hurricane season as well as eligibility issues. Subsequently, in July 

2005, the Senate Committee on Homeland Security and Governmental 

Affairs released its investigation results of FEMA’s response to the 2004 

Florida hurricanes, in particular, Hurricane Frances, and found similar 

weaknesses in FEMA’s IHP. In discussing its risk assessment 

methodology, DHS reported that FEMA’s IHP might be at high risk for 

issuing improper payments as a result of the weaknesses identified in the

DHS OIG report and performed a second round of testing of its fiscal year 

2004 disbursements. From its test results, DHS concluded that its estimate 

of improper payments for IHP did not meet OMB’s criteria of exceeding 

$10 million and 2.5 percent of program payments. DHS reported that IHP 

 21Department of Homeland Security, Office of Inspector General, Audit of FEMA’s

Individuals and Households Program in Miami-Dade County, Florida, for Hurricane 

Frances, OIG-05-20 (Washington, D.C.: May 2005). 

Page 11 GAO-07-254T 
would receive closer scrutiny and undergo an independent payment 

review in fiscal year 2006, but that its sample payment testing did not show 

the program to be at high risk for improper payments. 

Our recent review of FEMA’s IHP shows a dramatically different result. In

our June 2006 report,22 we estimated improper payments related to 

FEMA’s IHP of about $1 billion as of February 2006, related to individual

assistance payments in response to hurricanes Katrina and Rita that 

occurred in 2005. This amount represents 16 percent of the IHP payments. 

For example, we determined that millions of dollars in expedited and 

housing assistance payments went to registrants who provided the names 

and Social Security numbers of individuals incarcerated in federal and 

state prisons during the hurricanes. In addition, FEMA improperly paid 

individuals twice for their lodging—paying both hotels and rental 

assistance. Also, FEMA could not confirm that 750 debit cards worth 

$1.5 million went to Hurricane Katrina victims. 

In addition to these problems with agency risk assessments, we found that 

only a limited number of agencies were estimating improper payments and 

several of those that were did not base their estimates on a valid statistical 

sampling methodology as required. Of the 35 agencies, 18 agencies 

accounting for 57 programs reported improper payment estimates totaling 

in excess of $38 billion23 for some or all of their high-risk programs. (See 

GAO-07-92, app. II, for further details.) This represents approximately 

2 percent of the total fiscal year 2005 government outlays of $2.5 trillion. 

For the remaining 17 agencies that did not report estimates, 8 said they did 

not have any programs susceptible to significant improper payments, 8 

were silent about whether they had programs susceptible to significant 

improper payments, and the remaining agency identified programs 

susceptible to significant improper payments and said it planned to report 

an estimate by fiscal year 2007. (See GAO-07-92, table 2, for further 

details.) 

 22GAO, Hurricanes Katrina and Rita Disaster Relief: Improper and Potentially

Fraudulent Individual Assistance Payments Estimated to Be Between $600 Million and 

$1.4 Billion, GAO-06-844T (Washington, D.C.: June 14, 2006). 

23Included in this estimate were 17 newly reported programs in 10 agencies, totaling about 

$1.2 billion for fiscal year 2005.

Page 12 GAO-07-254T 
Unless previously approved by OMB, the improper payments estimates 

must be based on a statistically valid sampling methodology24 and should 

include a gross total of both over- and underpayments. In its Circular No. 

A-136, OMB encourages agencies to break out over- and underpayments as 

part of improper payment reporting, if available. (For more details related 

to over- and underpayment estimates, see GAO-07-92, app. III.) With 

statistical sampling, sample results can be generalized to the entire 

population from which the sample was taken. From our review, we found 

six agencies that did not use statistical sampling as a basis for reporting 

improper payments totaling approximately $389 million for nine programs 

with outlays exceeding $58 billion. 

For example, the Department of Labor (Labor) analyzed fiscal year 2003 

single audits to identify questioned costs for its Workforce Investment 

Act25 program, which, in turn, were used as a proxy for reporting its 

improper payment estimate. Specifically, the improper payment rate was 

determined by calculating the projected questioned costs and dividing this 

total amount by the corresponding outlays. We do not believe this is a 

reasonable proxy for improper payment levels because single audits, by

themselves, may lack the level of detail necessary for achieving IPIA 

compliance. Specifically, single audits generally focus on the largest 

dollars in an auditee’s portfolio. Thus, all programs identified as 

susceptible to improper payments at the federal level may not receive

extensive coverage under a single audit. Consequently, both the depth and 

level of detail of single audit results are, generally, insufficient to identify

improper payments, estimate improper payments, or both. 

We also found instances where agencies estimated improper payments for 

only one component of the risk-susceptible program. For example, HHS’s 

Medicare program is the largest program constituting the total improper 

payment estimate, with an estimate of $12.1 billion for fiscal year 2005. 

However, this estimate represents payment errors only for its fee-forservice program component. HHS has not yet begun to estimate improper 

payments for its managed care component, with outlays totaling about 

$52 billion, or 15 percent of Medicare program outlays. In its fiscal year 

2005 financial report, HHS’s Centers for Medicare and Medicaid Services 

(CMS) identified bringing the Medicare managed care component into 

 24OMB requires that agencies’ statistical sampling methodologies be designed to yield 

estimates with a 90 percent confidence interval of plus or minus 2.5 percent.

25Pub. L. No. 105-220, 112 Stat. 936 (Aug. 7, 1998). 

Page 13 GAO-07-254T 
compliance with IPIA as a key challenge in the coming years. In addition, 

CMS’s external auditors identified Medicare’s managed care benefits 

payment cycle as a material weakness in its report on internal controls. 

Specifically, the auditors found that existing CMS policies and procedures 

are not sufficient to adequately reduce the risk of material benefit payment 

errors from occurring or not being detected and corrected in a timely 

manner. 

A key element that agencies are required to address as part of their 

improper payment reporting includes a description of any statutory or 

regulatory barrier that may limit the agencies’ corrective actions in 

reducing improper payments. Reporting this type of information gives the 

Congress the ability to use its authorization, appropriation, and oversight 

responsibility to help agencies meet performance goals. Citing specific 

statutory or regulatory barriers as part of its improper payments reporting 

allows the Congress to determine whether the public’s needs are 

adequately served by federal programs, and thus can take corrective 

action through legislative changes. It should be recognized that this type 

and other barriers exist as a result of decisions to ensure beneficiary 

privacy and other data safeguards and the inherent nature of some federal 

programs. As a result, it may be difficult to eliminate or mitigate these 

barriers to the point where they no longer restrict agency actions in 

certain areas to better manage their improper payment problems. 

During our review of agencies’ fiscal year 2005 PARs, we found that nine 

agencies identified statutory or regulatory barriers that may limit 

corrective actions to reduce improper payments.26 Agencies cited various 

barriers that restrict their ability to manage their programs against 

improper payments, including three agencies that cited barriers related to

data matching.27 Data matching and other computer-related techniques 

play a significant role not only in identifying improper payments, but also 

in providing data on why these payments were made and, in turn, 

highlighting areas that need strengthened prevention controls. The 

adoption of these techniques allows agencies to have effective detection 

methods to quickly identify and recover improper payments. These 

powerful internal control tools provide more useful and timely access to 

information. The use of these techniques can achieve potentially 

Statutory or Regulatory 

Barriers That May Hinder 

Agency Reporting and 

Corrective Actions 

 26We did not independently verify the validity of these agency assertions. 

27Data matching is the process in which information from one source is compared with 

information from another to identify any inconsistencies. 

Page 14 GAO-07-254T 
significant savings by identifying client-related reporting errors and 

misinformation during the eligibility determination process—before 

payments are made—or by detecting improper payments that have been 

made. Therefore, it will be critical for the Congress, federal agencies, and 

the administration to carefully consider the information reported on 

statutory barriers to ensure that agencies can take advantage of such tools 

to the greatest extent possible. 

For example, Education reported that requirements in the Internal 

Revenue Code precluded data matching, but that a database match with 

the Internal Revenue Service (IRS) would likely improve the accuracy of 

Pell Grant awards. In addition, it would eliminate the need for schools to 

rely on paper copies of tax returns submitted by applicants, which are 

used to verify applicants’ adjusted gross income and taxes paid. Currently, 

the schools have limited assurance that the tax returns submitted by the 

applicants contain the same information that is filed with IRS. However, 

Education’s proposal to amend the Internal Revenue Code to permit a 

100 percent database match has not yet been enacted, and Education is 

uncertain whether or when such legislation may be enacted. As a further 

illustration, Labor reported that for its Federal Employees’ Compensation 

Act (FECA) program,28 legislation does not currently permit FECA to 

verify employment earnings with the Social Security Administration (SSA) 

without the claimant’s written permission. Compensation benefits may be 

overpaid if an employee has unreported earnings and does not grant Labor 

permission to verify earnings with SSA. 

The fiscal year 2005 governmentwide improper payments estimate of 

$38 billion did not include any amounts for 10 programs, with fiscal year 

2005 outlays totaling over $234 billion. OMB had specifically required 7 of

these programs to report selected improper payment information for 

several years before IPIA reporting requirements became effective. After 

passage of IPIA, OMB’s implementing guidance required that these 

programs continue to report improper payment information under IPIA. 

The remaining 3 risk-susceptible programs, with no previous reporting 

requirement, provided target dates for estimating improper payments. As 

shown in table 1, the fiscal year 2005 improper payment estimate does not 

include one of the largest federal programs determined to be susceptible 

Improper Payments 

Estimate Does Not Include 

Several Large, RiskSusceptible Programs 

 28This act was repealed and parts of it are now codified in code sections of Titles 1, 5, and 

18 of the United States Code. 

Page 15 GAO-07-254T 
to risk, HHS’s Medicaid program, with outlays exceeding $181 billion 

annually. 

Table 1: Susceptible Programs That Did Not Report Improper Payment Estimates and Target Dates for Estimates 

Dollars in billions 

Agency/program 

Fiscal year 

2005 outlays

Target date for improper 

payment estimates

Previously 

required to

estimate

Department of Agriculture—School Programs $8.2 2007 X

Federal Communications Commission—Universal Service Fund’s 

Schools and Libraries 

1.7 2007

Federal Communications Commission—High Cost Support Program 3.8 2007

Department of Health and Human Services—State Children’s 

Insurance Program 

5.1 2008 X

Department of Agriculture—Women, Infants, and Children 4.8 2008 X

Department of Health and Human Services—Medicaid 181.7 2008 X

Department of Agriculture—Child and Adult Care Food Program 2.1 2010

Department of Health and Human Services—Child Care and 

Development Fund 

4.9 Did not report target date X

Department of Health and Human Services—Temporary Assistance 

for Needy Families 

17.4 Did not report target date X

Department of Housing and Urban Development—Community 

Development Block Grant 

5.0 Did not report target date X

Total $234.7 7

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

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. For example, since fiscal year 2002, HHS has conducted 

pilots at the state level to further its progress toward reporting a national 

improper payments estimate for its Medicaid program. Each state is 

responsible for designing and overseeing its own Medicaid program within 

the federal government structure. This type of program structure presents 

challenges for implementing a methodology to estimate improper 

payments as HHS must work with states to obtain applicable 

documentation used in the calculation. An additional challenge HHS and 

other agencies with state-administered programs say they face is the 

ability to hold states accountable for meeting targets to reduce and 

recover improper payments in the absence of specific statutory authority.

Page 16 GAO-07-254T 
Of the three programs that did not report a target date for estimating, the 

Department of Housing and Urban Development’s (HUD) Community 

Development Block Grant (CDBG) program was the only one that did not 

report any actions under way to begin estimating improper payments. In 

its fiscal year 2005 PAR, HUD reported that based on completed testing of

fiscal year 2003 payments, this program is below OMB’s threshold 

criteria—exceeding $10 million and 2.5 percent of program payments—for 

significant improper payments and, therefore, was removed from HUD’s 

at-risk inventory. HUD stated that this program was not subject to 

retesting unless there was a significant change in the nature of activity or 

internal control structure. 

We have several problems with HUD’s position. The CDBG program was 

subject to the previous OMB Circular No. A-11 requirements and thus was 

required by OMB’s guidance to continue to report improper payment 

information under IPIA, regardless of the agency-determined risk level, 

which based on other known information may not reflect actual risk. 

During a June 2006 hearing29 on the CDBG program, HUD’s OIG reported 

on numerous instances of fraudulent, improper, and abusive use of 

program funds identified over a 2-1⁄2-year period based on 35 audits. The 

HUD OIG reported that its office has recovered over $120 million in 

program funds, identified over $100 million in questioned costs, indicted 

159 individuals, initiated administrative actions against 143 individuals, 

and took 5 civil actions and 39 personnel actions. As evidenced by the 

HUD OIG reviews, the CDBG program may be at risk of significant 

improper payments. 

Further, we noted that the total improper payment estimate of about 

$38 billion represents almost a $7 billion, or 16 percent, decrease from the 

$45 billion of improper payments reported by agencies in fiscal year 2004.30

On the surface, this would suggest that significant progress has been 

 29June 29, 2006, hearing before the Senate Subcommittee on Federal Financial 

Management, Government Information, and International Security, Committee on 

Homeland Security and Governmental Affairs. 

30In their fiscal year 2005 PARs, several 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. 

Page 17 GAO-07-254T 
made. However, the reported $7 billion decrease in the governmentwide 

estimate is primarily attributable to a decrease in Medicare’s estimate.31

Based on our review, the Medicare improper payment estimate decrease

was principally caused by increased 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. HHS reported marked 

reductions in its error rate attributable to fewer cases of (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. 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. 

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 validation

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. Further, we also found that HHS’s OIG 

continues to cite the integrity of Medicare payments as a top management 

challenge. In addition, health care fraud schemes continue to hamper 

HHS’s efforts to improve accountability. For example, in May 2006, DOJ 

 31We determined that the decrease was primarily caused by a $9.6 billion reduction in the 

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. The $9.6 billion reduction is the difference between the fiscal year 2004 estimate of 

$21.7 billion and the fiscal year 2005 estimate of $12.1 billion. 

Page 18 GAO-07-254T 
reported32 that a businessman pleaded guilty to conspiracy to defraud 

Medicare of $40 million in fraudulent billings over a 16-month period. The 

fraud scheme included billing Medicare for motorized wheelchairs that 

were either not required by the Medicare beneficiary, not delivered, or 

both. 

Threshold Criteria in OMB 

Guidance Limit Agency 

Reporting 

For purposes of assessing what programs and activities are at risk of 

improper payments, IPIA states that agency heads must review their 

agencies’ programs and activities to determine those that are susceptible 

to significant improper payments. The law does not define susceptibility. 

In its implementing guidance, OMB directed that a program or activity is

susceptible to significant improper payments if it meets two criteria—

potential improper payments exceeding $10 million and 2.5 percent of 

program payments. Therefore, both criteria must be met for an agency to 

subject the program to the later steps requiring the agency to estimate 

improper payments and address the various improper payment reporting 

requirements. 

As I stated earlier, the information developed during a risk assessment 

forms the foundation upon which management can determine the nature 

and type of corrective actions needed. It also gives management baseline

information for measuring progress in reducing improper payments. Thus, 

these assessment criteria affect how agencies identify, estimate, report on, 

and reduce those programs susceptible to significant improper payments. 

For example, of the 23 agencies that reported assessing all programs and 

activities, we found that 6 agencies limited their risk assessment reviews 

to only those programs that would likely meet OMB’s definition of 

programs susceptible to significant improper payments. Two of these 6 

agencies reported that they did not perform a comprehensive risk 

assessment for those programs with outlays of less than $10 million 

because the programs would not have exceeded both of OMB’s threshold 

criteria. The remaining 4 agencies did not perform a comprehensive risk 

assessment of programs with outlays ranging from $40 million to 

$200 million, generally citing the threshold criteria as the reason for their 

exclusion. 

 32Department of Justice, United States Attorney’s Office, Southern District of Texas, News 

Release, “Local Businessman Pleads Guilty to Conspiracy to Defraud Medicare of $40 

Million,” May 30, 2006.

Page 19 GAO-07-254T 
We also noted instances where agencies with large program outlays 

reported that their programs or activities were not susceptible to 

significant improper payments because the improper payment estimates 

only exceeded one of OMB’s criteria for reporting improper payment 

information, another example of how OMB’s criteria could materially 

affect the extent to which agencies report improper payment information 

in their PARs. From our review of the 57 agency programs and activities 

that were included in the total $38 billion improper payment estimate, we 

identified 20 programs or activities that reported improper payment 

estimates exceeding $10 million, but not 2.5 percent of program outlays. 

We also identified 1 program that reported an error rate exceeding 

2.5 percent of program outlays, but not $10 million. See table 2 for 

additional details. 

Table 2: Agency Improper Payment Estimates Included in the Governmentwide Total That Met One of the Two OMB Reporting

Criteria 

Department or

agency Program or activity 

Program outlays 

(in millions)

Fiscal year 

2005 

improper

payment 

estimate (in

millions)

Fiscal year 2005 

improper payment 

error rate 

(percentage) 

Previous OMB 

Circular No. A-11 

reporting 

requirements

1 Department of

Agriculture 

Marketing Assistance 

Loan Program 

(previously Commodity 

Loan Programs) 

$6,400.0 $45.0 0.70 X

2 Federal Crop Insurance 

Corporation 

3,170.0 28.0 0.89 

3 Farm Security and Rural 

Investment 

1,027.0 16.0 1.55 

4 Department of

Defense 

Military Retirement 

Fund 

35,700.0 49.3 0.14 X

5 Military Health Benefits 7,500.0 150.0 2.00 X

6 Military Pay 69,100.0 432.0 0.63 

7 Department of

Education 

Student Financial 

Assistance—Federal 

Family Education Loan 

10,085.0 16.0 0.16 

8 Title I 12,520.0 149.0 1.19 X

9 Department of Energy Payment programs 24,114.0 14.5 0.06 

10 Department of Health 

and Human Services 

Head Start 6,865.0 110.0 1.60 X

Page 20 GAO-07-254T 
Department or

agency Program or activity 

Program outlays 

(in millions)

Fiscal year 

2005 

improper

payment 

estimate (in

millions)

Fiscal year 2005 

improper payment 

error rate 

(percentage) 

Previous OMB 

Circular No. A-11 

reporting 

requirements

11 Office of Personnel 

Management 

Retirement Program 

(Civil Service

Retirement System and 

Federal Employees 

Retirement System) 

54,800.0 152.2 0.28 X

12 Federal Employees 

Health Benefits

Program 

29,400.0 196.5 0.67 X

13 Railroad Retirement

Board 

Retirement and 

Survivors Benefits 

9,185.4 150.6 1.64 X

14 Small Business

Administration 

Small Business 

Investment Companies 

1,568.2 10.5 0.67 X

15 Social Security

Administration 

Old Age and Survivors’ 

Insurance 

493,300.0 3,681.0 0.74 X

16 Disability InsuranceaX

17 Department of State International Information 

Program-U.S. Speaker 

and Specialist Program 

41.0 1.9 4.63 

18 Tennessee Valley

Authority 

Payment programs 7,080.0 36.3 0.05 

19 Department of

Veterans Affairs 

Compensation 28,960.0 322.9 1.12 X

20 Dependency and 

Indemnity 

Compensationa

X

21 Education programs 2,661.0 64.0 2.40 

Total $803,476.6 $5,625.7 13

Source: GAO analysis of fiscal year 2005 PARs and annual reports.

a

Agency combined with the above program. 

We identified, in total, 21 programs or activities with improper estimates 

exceeding $5.6 billion that meet only one of OMB’s reporting criteria. Most 

of these program estimates greatly exceeded $10 million and, without 

certain stipulations, could have avoided reporting improper payment 

information under OMB’s reporting criteria. However, OMB has required 

that 13 of these 21 programs estimate improper payments regardless of 

dollar amount or error rate, because they had previous reporting 

Page 21 GAO-07-254T 
requirements under OMB Circular No. A-11.33 Nonetheless, if the Circular 

No. A-11 requirements did not apply or agencies decided not to voluntarily 

report on their improper payment estimates that were under OMB’s 

reporting threshold, OMB’s definition of significant improper payments 

could potentially mask the full scope of improper payments. 

Although we do not know the extent of improper payments that are not 

reported, a limited number of agencies voluntarily provided information in 

their PARs that allowed us to determine the amount of improper payments

for certain programs and activities that were excluded from the total 

improper payments estimate of $38 billion for fiscal year 2005. For 

example, the Department of Education identified three programs with 

estimated improper payments exceeding $10 million for each program, 

which totaled about $155 million in improper payments. In light of OMB’s 

criteria, because these estimates did not exceed 2.5 percent of program 

outlays, they were not included in the agency’s total improper payment 

estimate. In another example, the Department of Defense (DOD) OIG 

reported34 it had identified about $23 million in improper payments related 

to the procurement of fuel at the Defense Energy Support Center during 

fiscal year 2005. DOD did not report this information in its PAR since the 

improper fuel payments did not exceed 2.5 percent of program payments. 

As these examples illustrate, OMB’s current criteria for identifying risksusceptible programs limit the disclosure of valuable information that the 

Congress, the public, and others with oversight and monitoring interests 

need to hold agencies accountable for reporting and reducing improper 

payments. Thus, amending existing IPIA provisions to define risksusceptible programs and activities, such as the use of a specific dollar 

threshold, would allow for more complete disclosure and transparency of 

governmentwide improper payment reporting and, in turn, would require 

OMB to revise its implementing guidance to reflect such amendments as 

well as align existing guidance with the intent of the act. 

 33See footnote 8. 

34Department of Defense, Office of Inspector General, Financial Management: Improper 

Payments for Defense Fuel, D-2006-094 (Washington, D.C.: June 29, 2006).

Page 22 GAO-07-254T 
IPIA defines an improper payment as a payment that should not have been 

made or that was made in an incorrect amount (including overpayments 

and underpayments) under statutory, contractual, administrative, or other 

legally applicable requirements. This includes any payment to an ineligible 

recipient, any payment for an ineligible service, any duplicate payment, 

any payment for services not received, and any payment that does not 

account for credit for applicable discounts. 

IPIA Definition of 

Improper Payments 

Excludes Certain 

Payments from Reporting 

On August 28, 2003, OMB advised the Social Security Administration (SSA) 

on improper payment reporting. Under this advice, SSA was allowed to 

exclude from its estimate of improper payments those payments that it 

made following constitutional, statutory, or judicial requirements, even

though those payments were subsequently determined to be incorrect. 

These payments were deemed by OMB to be “unavoidable” improper 

payments,35 as there are no administrative changes SSA could implement 

that would eliminate such payments, nor would SSA be likely to receive

other relief from such requirements. 

As we previously reported,36 although the definition of improper payments 

does not use the terms avoidable37 or unavoidable, we agree with OMB that

a payment that was made because of a legal requirement to make the 

payment subject to subsequent determinations that the payment is not due 

should not be included in an agency’s estimate of its improper payments. 

We agree with OMB’s conclusion not because it is an “unavoidable” 

payment but rather because it does not meet the definition of an improper 

payment under the act. 

In its Supplemental Security Income (SSI) program, SSA disburses 

disability payments to recipients at the beginning of the month based on 

the income and asset levels recipients expect to maintain during the 

month.38 If SSA initially determines that an overpayment occurred, court 

 35OMB defines “unavoidable” payments as payments resulting from legal or policy 

requirements. 

36GAO, Post-Hearing Questions Related to Agency Implementation of the Improper 

Payments Information Act, GAO-05-1029R (Washington, D.C.: Sept. 16, 2005). 

37OMB defines “avoidable” payments as payments that could be reduced through changes 

in administrative actions. 

38Some government programs pay benefits in advance under the assumption that the

beneficiary’s circumstances, such as income and asset levels, will remain the same during

the period for which payment was rendered.

Page 23 GAO-07-254T 
decisions39 and language in the Social Security Act allow individuals to 

continue receiving the same amount of SSI benefits pending the results of 

a hearing to determine eligibility. If the initial determination is affirmed, 

the payments made during the hearing and appeals processes are 

considered overpayments, which SSA may recover using a variety of 

means.40

In this example, SSA, because of the statutory requirement, must make the 

payment. The statute requires SSA to make the payment until applicable 

due process requirements result in a determination that the person is 

ineligible; therefore, the mandatory payments whether subsequently 

deemed to be correct or incorrect, have not been made to an ineligible 

recipient at the time they were made. Accordingly, the facts would not 

support inclusion of these overpayments as improper payments as defined 

under IPIA. However, if as a result of the due process procedures, it is 

subsequently determined that the recipient is no longer eligible for 

benefits and SSA makes a payment subsequent to these procedures, that 

amount would be an improper payment. 

Yet, we would not go so far as to conclude that any payment that is 

unavoidable should not be included as an improper payment under IPIA. 

Rather, the exclusion of payments should be made individually on a factspecific basis using the definition provided in IPIA. In addition, we believe 

that agencies should track and monitor these types of payments as part of 

their debt collection efforts and have the ability to readily report this type 

of information upon request. OMB currently does not require SSA to 

report in its PAR details relating to these types of overpayments, nor does 

OMB require governmentwide reporting of these types of overpayments, 

thus the magnitude of this issue is unknown. Having agencies annually 

report on these types of overpayments would provide the Congress, 

agency management, and other decision makers valuable information with 

which to determine the extent of these types of overpayments and to make 

policy decisions, if needed, to appropriately address this issue. 

 39Cardinale v. Mathews, 399 F. Supp. 1163 (D.D.C. 1975), and Goldberg v. Kelly, 397 U.S. 

254 (1970). 

4042 U.S.C. §§ 423(g)(2) and 404. 

Page 24 GAO-07-254T 
We noted discrepancies in selected agencies’ reporting of recovery audit

information and limited reviews over contract payments. As a result, 

reporting for recovery auditing information may not represent an accurate

view of the extent of agencies’ efforts. From our review of agencies’ PARs 

and discussions with OMB, we determined that 21 agencies reported 

entering into contracts with a total value in excess of $500 million and thus 

were subject to recovery auditing requirements under section 831 of the 

National Defense Authorization Act for Fiscal Year 2002. Generally, these

agencies reported on their recovery auditing efforts, such as the amount 

identified for recovery and the amount recovered. However, we noted a 

few instances where the agency amount of contract costs identified for 

recovery was considerably lower than the corresponding OIG amount 

identified from current year audit reviews. These discrepancies raise 

questions as to whether the agency amount identified for recovery should 

have been much higher, thereby significantly decreasing the reported 

agency-specific and overall governmentwide high rate of recovery. We also 

noted that 5 of the 21 agencies did not review all of their agency 

components as part of their recovery audit efforts, and 2 agencies reported 

that recovery auditing was not cost beneficial. 

Agencies’ Reporting 

of Recovery Auditing 

Information 

Questionable 

Section 831 of the National Defense Authorization Act provides an impetus 

for applicable agencies to systematically identify and recover contract 

overpayments. 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, are to be credited back to the original appropriation from which the 

improper payment was made, subject to restrictions as described in 

legislation. As we previously testified,41 with the passage of this law, the 

Congress has provided agencies a much-needed incentive for identifying

and recovering their improper payments that slip through agency 

prepayment controls. 

Recovery auditing is a method that agencies can use to recoup detected 

improper payments. Recovery auditing is a detective control to help 

determine whether contractor costs were proper. Specifically, it 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 

 41GAO, Financial Management: Challenges Remain in Addressing the Government’s

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

Page 25 GAO-07-254T 
in-house or contracted out to recovery audit firms. 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 

subsequent contract outlays. 

Nonetheless, effective internal control calls for a sound, ongoing invoice 

review and approval process as the first line of defense in preventing 

unallowable contract costs. Given the large volume and complexity of 

federal payments and historically low recovery rates for certain programs, 

it is much more efficient to pay bills and provide benefits properly in the 

first place. Aside from minimizing overpayments, preventing improper 

payments increases public confidence in the administration of benefit 

programs and avoids the difficulties associated with the “pay and chase” 

aspects of recovering improper payments. Without strong preventive 

controls, agencies’ internal control activities over payments to contractors 

will not be effective in reducing the risk of improper payments. 

For fiscal year 2005, OMB expanded the type of recovery auditing 

information that agencies are to report in their annual PARs. Prior to fiscal 

year 2005, 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 agencies’ 

recovery audit activities on a governmentwide basis in its annual report on 

agencies’ efforts to improve the accuracy and integrity of federal 

payments. In fiscal year 2005, OMB required applicable agencies to discuss 

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

addition, agencies were required to report, in a standard 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. 

Twenty-one agencies reported over $340 billion as amounts subject to 

review for fiscal year 2005, while the contract amounts reviewed totaled 

over $287 billion. In addition, the 21 agencies reported identifying about 

$557 million in contracts for recovery, which represented less than twotenths of a percentage of the $287 billion amount reviewed. Of the 

$557 million identified, agencies reported recovering $467 million in 

improper payments, an 84 percent recovery rate. However, we found two 

instances where the agency amount of contract costs identified for 

recovery was considerably lower than the corresponding OIG amount 

identified from current year audit reviews. These discrepancies raise 

Page 26 GAO-07-254T 
questions as to whether the agency amount identified for recovery should 

have been much higher, thereby significantly decreasing the agencyspecific and overall high rate of recovery. 

For example, for fiscal year 2005, NASA reported in its PAR that it had 

identified and recovered $617,442 in contract payments, a 100 percent 

recovery rate. Yet, the NASA OIG reported42 it had identified over 

$515 million in questioned contract costs during fiscal year 2005. Of this 

amount, NASA management decided that $51 million in contract costs 

should be pursued for recovery. When comparing the $51 million in 

questioned contract costs identified for recovery to the $617,442 NASA 

actually recovered, the recovery rate decreases from the reported 

100 percent recovery rate to a 1.2 percent rate.43 In another example, DOD 

reported in its PAR that it had identified for recovery $473 million and 

recovered about $419 million in contract payments, an 89 percent recovery 

rate. However, the DOD OIG reported44 it had identified over $2 billion in 

questioned contract costs as of September 30, 2005. When comparing the 

$2 billion in questioned contract costs45 to the $419 million DOD actually 

recovered, the recovery rate significantly decreases from a reported 

89 percent recovery rate to 21 percent. 

These two discrepancies alone significantly decrease OMB’s reported 

overall recovery rate of 84 percent to a 22 percent recovery rate. Other 

factors would also suggest the recovery rate is indeed much lower. We 

noted other instances where OIG-reported questioned costs exceeded 

agency contract amounts identified for recovery. Because these costs were 

 42National Aeronautics and Space Administration, Office of Inspector General, SemiAnnual Reports October 1, 2004-March 31, 2005 and April 1-September 30, 2005 

(Washington, D.C.).

43We found that the recovery rate could have been higher than the 1.2 percent calculation 

had we solely used the OIG reported amounts regarding the universe of questioned 

contract costs and subsequent amounts recovered. Specifically, the OIG reported that of 

the $51 million in questioned contract costs decided by NASA management, $16 million had 

been recovered. This results in a recovery rate of about 31 percent. While this recovery rate 

is higher than our calculated 1.2 percent recovery rate, it is still significantly lower than the 

100 percent recovery rate reported by NASA in its PAR. 

44Department of Defense, Office of Inspector General, Semi-Annual Reports October 1,

2004-March 31, 2005 and April 1-September 30, 2005 (Washington, D.C.).

45The OIG reported that the $2 billion in contract costs were deemed questionable because 

they did not comply with rules, regulations, laws, contractual terms, or a combination of 

these. Thus, we used the entire $2 billion to illustrate the disparity between what the OIG 

and agency reported. 

Page 27 GAO-07-254T 
not specifically identified as contractor costs versus other payment types,

we were unable to determine how much of the OIG-identified questioned 

costs related to contract costs. 

In addition, another factor that may call into question the reported high 

recovery rate is that 5 of the 21 agencies did not review all of their agency

components as part of their recovery audit efforts, and 2 agencies (HUD 

and Labor) reported that recovery auditing was not cost beneficial. For 

example, HUD determined that based on its review of $206.6 million in 

contract payments, none were found to be improper. Thus, HUD 

determined that pursuit of an ongoing recovery auditing program was not 

cost beneficial or necessary. Because section 831 of the National Defense 

Authorization Act requires agencies to carry out a cost-effective program 

for identifying errors made in paying contractors and for recovering 

amounts erroneously paid to contractors, agencies have determined that 

they may opt out of conducting a recovery audit if it is not deemed to be

cost beneficial. However, neither of the two agencies that determined it 

was not cost beneficial to conduct a recovery audit provided support in 

their fiscal year 2005 PARs for this determination. 

Our November 2006 report included one matter for congressional 

consideration and four recommendations for executive action. 

Specifically, to ensure that the full extent of improper payments is being 

captured, the Congress should consider amending existing IPIA provisions 

to define specific criteria, such as a dollar threshold, agencies should use 

to identify which programs and activities are susceptible to significant 

improper payments, thereby triggering improper payment estimating and 

reporting requirements. In addition, to facilitate agencies’ progress in 

ensuring accurate and complete improper payments and recovery auditing

reporting, we recommended that OMB take several actions regarding 

(1) risk assessment methodologies and the level of detail necessary to 

meet the annual improper payment reporting requirements, (2) statistically 

valid estimates, (3) extent of payments agencies make under statute or 

judicial determinations that later are determined to be overpayments, and 

(4) agencies’ rationale that recovery auditing is not cost beneficial. 

GAO 

Recommendations for 

Continued Progress in 

Capturing the Full 

Extent of Improper 

Payments 

OMB generally agreed with our recommendations and also agreed with 

our assessment that challenges remain in meeting the goals of IPIA. 

However, in a subsequent letter to GAO, OMB’s Controller raised concerns 

about the report, including the timing of our analysis and report issuance, 

which I previously discussed in this testimony. In its original comments, 

OMB emphasized that progress in estimating and reporting improper 

Page 28 GAO-07-254T 
payments had been made by agencies in fiscal year 2005 and highlighted 

initiatives under way to measure improper payments in other programs 

susceptible to significant improper payments. OMB pointed out that 

agencies estimated improper payments for 17 additional programs for 

fiscal year 2005, and that this number will increase by 10 programs for 

fiscal year 2006. OMB also said that beginning with fiscal year 2007, it 

expects HHS to begin reporting component error rates for its Medicaid, 

Temporary Assistance for Needy Families, and State Children’s Health 

Insurance programs. 

While we agree with OMB that there has been progress, we continue to 

question the validity of certain agencies’ risk assessment methodologies 

used to identify, estimate, and report improper payments for all risksusceptible programs and are concerned with how OMB defines high-risk 

programs for purposes of agencies’ improper payment reporting. Our 

continuing concern with OMB’s criteria relates to those agencies with 

large program outlays that have improper payment estimates that exceed 

the $10 million threshold but not the 2.5 percent of program payments 

threshold. Applying the 2.5 percent threshold criteria to large programs 

could exclude potentially billions of dollars of improper payments from

being reported. 

According to OMB, the rationale for its threshold criteria is to ensure that 

agencies focus their resources on programs with the highest levels of risk 

for improper payments. OMB commented that going forward, it is now 

requiring agencies to track any programs that exceed the $10 million 

threshold but have an error rate of less than 2.5 percent. OMB stated that 

this tracking facilitates a framework that would appropriately mitigate the 

risk that high-risk programs will be left out of IPIA reporting activities. We 

view this as a positive step. Although OMB’s recently revised 

implementing guidance was outside the scope of our recent review, our 

preliminary assessment found no mention of this tracking requirement. 

The guidance does state that OMB may determine on a case-by-case basis 

that certain programs that do not meet the threshold requirements may 

still be subject to the annual PAR improper payment reporting 

requirement. In light of OMB’s stated intention to require agencies to track 

such programs, we believe it is key that the revised implementing guidance 

clearly reflects this tracking requirement and that agencies be required to

publicly report this information as part of their annual improper payments 

reporting. Visibility over this type of information would help facilitate the 

Congress’s understanding of the nature and extent of the governmentwide 

improper payments problem. 

Page 29 GAO-07-254T 
In closing, Mr. Chairman, improper payments are a serious problem. 

Agencies are working on this issue at different paces, and OMB has 

continued to provide important leadership. 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 executive branch’s effort to reduce improper 

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

commitment to meeting the requirements of IPIA and the related OMB 

guidance. Full and reasonable disclosure of the extent of the problem 

could be enhanced by modifying the act’s underlying criteria used to 

identify which programs and activities are susceptible to significant 

improper payments. OMB’s implementing guidance can also be 

strengthened in several key areas. With the ongoing imbalance between 

revenues and outlays 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 on the part of OMB and the 

agencies, as well as continued congressional oversight, such as this 

hearing today, to monitor whether desired results are being achieved. 

Mr. Chairman, this concludes my prepared statement. I would be happy to

answer any questions that you or other members of the Subcommittee 

may have at this time. 

For further information about this testimony, please contact McCoy 

Williams at (202) 512-9095 or williamsm1@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on the 

last page of this testimony. In addition to the above contacts, the following 

individuals made key contributions to this testimony: Carla Lewis, 

Assistant Director; Sharon Byrd; Francine DelVecchio; Francis Dymond; 

Lisa M. Galvan; Jacquelyn Hamilton; Christina Quattrociocchi; Donell Ries; 

and Chris Rodriguez. 

Page 30 GAO-07-254T 

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