GAO-02-131R Improper Payments

United States General Accounting Office

Washington, DC 20548

November 2, 2001

The Honorable Fred Thompson

Ranking Minority Member

Committee on Governmental Affairs

United States Senate

Subject: Financial Management: Improper Payments Reported in Fiscal Year 2000

Financial Statements

Dear Senator Thompson:

As agreed with your office, this letter is in partial response to your request for an update on

our report entitled Financial Management: Billions in Improper Payments Continue to

Require Attention (GAO-01-44, October 27, 2000). Specifically, it provides information on

the amount of improper payments1

 that federal agencies reported in their fiscal year 2000

financial statements and identifies some current improper payment-related actions that the

Administration has taken. We identified the amount of improper payments reported by

obtaining and reviewing the financial statements of the 24 federal agencies and their related

components that the Chief Financial Officers (CFO) Act of 1990, as expanded by the

Government Management Reform Act of 1994, and OMB Bulletin No. 01-02, Audit

Requirements for Federal Financial Statements, require to issue financial statements.

Enclosure I lists these agencies and components. We did not independently verify the

accuracy of the improper payment information contained in the statements. In addition, we

obtained and reviewed documentation on recent Administration initiatives and guidance to

agencies on erroneous payment reporting and related issues.

At your request, we are currently (1) determining the extent to which OMB has implemented

our prior recommendations dealing with providing governmentwide guidance on identifying

and reporting improper payments, (2) assessing the extent to which agenciesí fiscal year

2002 performance plans address improper payments, and (3) identifying other actions that

might encourage agencies to better report the extent of their improper payments. We will

report to you separately on these issues.

 

1

Improper payments include inadvertent errors, such as duplicate payments and miscalculations; payments for

unsupported or inadequately supported claims; payments for services not rendered; payments to ineligible

beneficiaries; and payments resulting from outright fraud and abuse by program participants and/or federal

employees.
Page 2 GAO-02-131R Improper Payments

Results in Brief

The amounts of improper payments reported in agency financial statements has remained

consistent at about $20 billion for the past 3 years. Even though these amounts are

substantial, agency-specific audits and studies continue to indicate that the extent of the

improper payment problem is much more widespread than has been disclosed in agency

financial statement reports. As we have previously reported, agencies need to be aware of

the extent of their improper payment problems before they can take corrective action to

reduce improper payments and thus ensure that federal funds are used for the intended

purposes. The Presidentís Management Agenda, Fiscal Year 2002, has made the reduction

of improper payments a priority. In this regard, the Administration has taken steps to require

federal agencies to identify erroneous payments and to discuss planned actions to better

manage these payments.

Billions in Improper Payments Reported Although

Few Agencies Measure and Report Them

Improper payments are acknowledged to be a widespread and significant problem in the

federal government with billions of dollars in such payments reported annually in agency

financial statements. For example, federal agency financial statements for fiscal years 1998

through 2000 show improper payments of about $19.1 billion, $20.7 billion, and $19.6

billion, respectively.2 Although significant, these amounts are not indicative of the

magnitude of improper payments governmentwide. Currently, relatively few agencies report

improper payments in their financial statements, even though our audits and those of agency

inspectors general continue to identify serious improper payment problems and related

internal control issues. The following table summarizes improper payments reported in

agenciesí fiscal years 1999 and 2000 financial statements.

 

2

Financial Management: Billions in Improper Payments Continue to Require Attention (GAO-01-44, October

27, 2000) and Financial Management: Increased Attention Needed to Prevent Billions in Improper Payments

(GAO/AIMD-00-10, October 29, 1999).
Page 3 GAO-02-131R Improper Payments

Table 1: Improper Payments Reported by Federal Agencies and Components in Their Fiscal Years 1999

and 2000 Financial Statements

(Dollars in millions)

Department or agency Reported in fiscal year

1999 2000

Department of Agriculture

Food Stamp Program $1,290.0 $1,100.0

Department of Defense

Military Retirement Trust Fund 25.3 21.6

Department of Education

Education Assistance programs a 154.0b

Department of Energy

No specific program identified c a

Department of Health and Human Services

Medicare Fee-for-Service 14,100.0 12,470.0

Medicaid d e

Department of Housing and Urban Development

Housing Subsidy programs 935.0 1,254.0

Department of Justice

Federal Bureau of Investigation c a

Department of Labor

Black Lung Disability a 10.4

Federal Employees Compensation Act 19.2 14.8

Unemployment Insurance 142.3 136.0

Department of State

Foreign Service Retirement and

 Disability

c a

Department of the Treasury

Internal Revenue Service a e

United States Customs Service 0.4 c

Department of Veterans Affairs

Veterans Benefits c c

Office of Personnel Management

Retirement 84.0 102.0

Federal Employeesí Health Benefits 93.0 71.0

Federal Employeesí Group Life Insurance 0.2 0.0

Social Security Administration

Disability Insurance 1,118.0 1,284.0

Old Age and Survivors Insurance 1,325.0 1,334.0

Supplemental Security Income 1,578.0 1,644.0

Total $20,710.4 $19,595.8

a

The financial statements did not identify improper payments in these programs.

b

The independent auditorsí Report on Internal Controls, which was included in the Department of Educationís fiscal year 2000

financial statements, disclosed $154 million of duplicate payments related to education assistance programs.

c

The agencies administering these programs acknowledged making improper payments in their financial statements but did not

disclose a dollar amount.

d

HHS acknowledged making improper payments related to Medicaid in the management discussion and analysis section of its

fiscal year 1999 financial statements, but did not disclose a specific dollar amount.

e

The independent auditorsí reports, which were included in the fiscal year 2000 financial statements, revealed that these

agencies made improper payments, but did not show a specific amount.

Source: GAO analysis based on a reading of the fiscal years 1999 and 2000 financial statements of the federal agencies and

their components that the CFO Act and OMB Bulletin No. 01-02 require to prepare financial statements.
Page 4 GAO-02-131R Improper Payments

A review of the table above shows that, for fiscal year 2000, eight agencies collectively

reported improper payments of about $19.6 billion relating to at least 14 programs. (Some

agency financial statements noted that improper payments occurred in multiple programs but

did not specify the programs.) These agencies typically reported improper payments as

either costs of operations or as accounts receivable. For example, the fiscal year 2000

statements identified about $14.8 billion as an estimated cost of operations and about $4.6

billion as accounts receivable. Further, one agency identified $154 million in improper

payments in the auditorís Report on Internal Control, which was included with the agencyís

financial statements. In addition, three agencies reported improper payments in at least one

program, but did not identify the dollar amount of these payments.

About $19.1 billion (97 percent) of the improper payments reported in the fiscal year 2000

financial statements occurred in the programs administered by the Departments of

Agriculture, Health and Human Services, and Housing and Urban Development and the

Social Security Administration. This is comparable to the fiscal year 1999 information when

about $20.3 billion (98 percent) of the reported improper payments were in the same

programs. However, several changes occurred in the composition of the other agencies

reporting improper payments. The Departments of Education, Labor, and the Treasury

which did not report improper payments for at least one of their programs in fiscal year 1999,

reported them in fiscal year 2000. On the other hand, the Departments of Energy, Justice,

and State reported improper payments in programs in fiscal year 1999 but not in fiscal year

2000.

As noted above, only eight of the CFO Act agencies and components required to prepare

financial statements reported improper payment amounts in their fiscal year 2000 statements.

Recent audits as well as information provided by agency inspectors general continue to

demonstrate that improper payments are much greater than have been disclosed thus far in

financial statements. For example, historically, the Earned Income Tax Credit (EITC)

program has been vulnerable to high rates of invalid claims.3

 In 1997, the most recent year

for which estimates are available, the Internal Revenue Service (IRS) made approximately

$7.3 billion in improper payments in this program. As we reported in March 2001,4

 during

fiscal year 2000, IRS examiners completed detailed examinations of about 257,000 tax

returns claiming approximately $587 million in these tax credits and found that about

173,000 of these tax returns claiming $395 million in credits (67 percent) were invalid.

Weaknesses in IRSí controls over refund disbursements, particularly those related to EITC,

continue to expose the federal government to material losses due to disbursing improper

refunds.

Similarly, while the Department of Defense (DOD) reported improper payments related to

the Military Retirement Fund for both fiscal years 1999 and 2000, departmentwide estimates

of improper payments remain unreported. For example, over the last several years DOD has

overpaid its contractors by hundreds of millions of dollars. Specifically, the DOD Office of

 

3

High Risk Series: An Update (GAO-01-263, January 2001); Major Management Challenges and Program

Risks: Department of the Treasury (GAO-01-254, January 2001); and Financial Audit: IRSí Fiscal Year 2000

Financial Statements (GAO/AIMD-01-394, March 1, 2001).

4

Financial Audit: IRSí Fiscal Year 2000 Financial Statements (GAO-01-394, March 1, 2001).
Page 5 GAO-02-131R Improper Payments

Inspector General noted that, during fiscal years 1999 and 2000, the Defense Finance and

Accounting Service (DFAS) overpaid contractors $182.6 million and $148.3 million,

respectively, as a result of inadvertent errors, such as paying the same invoice twice and

input errors. These amounts are not an estimate of total improper payments made to

contractors. Over half of these overpayments were identified and voluntarily returned to

DFAS by the contractor, while the remainder were identified and requested by DFAS.

Further, although small in relation to total fiscal year 2000 contract payments,5

 this amount

represents a sizable amount of cash in the hands of contractors beyond what is intended to

finance and pay for the goods and services DOD purchases, and is indicative of the need for

stronger internal controls within the payment system.

The Administration Has Taken an Important Initial Step

in Measuring and Reporting Improper Payments

As we have stated in the past6 and will discuss in more detail in our ensuing report,

measuring the extent of improper payments is an essential step in assessing the need for and

types of corrective actions required to manage improper payments and help ensure efficient

and effective program operations. Nondisclosure of improper payment amounts may indicate

the absence of a significant level of improper payments or that agencies are unable to or did

not attempt to determine or estimate the amount of improper payments in their programs or

activities. Obtaining improper payment-related data would give agencies and others with

oversight responsibilities baseline information for performing the in-depth analyses

necessary for assessing the extent and causes of improper payments and for making costeffective decisions about enhancing controls to minimize future improper payments.

In this regard, during fiscal year 2001, the Administration took steps to require federal

agencies to identify erroneous payments7

 within selected programs and discuss planned

corrective actions to reduce these payments. (Because of the similarity of OMBís definition

of erroneous payments with our definition of improper payments, we consider erroneous

payments and improper payments as synonymous terms.) Most importantly, The Presidentís

Management Agenda, Fiscal Year 2002, discusses a governmentwide initiative for improved

financial performance. Under this initiative, the Administration plans to establish a baseline

of the extent of erroneous payments to serve as a gauge for monitoring progress. As an

 

5

The overpayment amount of $148.3 million is about 0.16 percent of about $90 billion in total contractor

payments made by DODís Defense Finance and Accounting Service, Columbus facility, in fiscal year 2000.

6

Strategies To Manage Improper Payments: Learning From Public and Private Sector Organizations (GAO02-69G, October 2001) and Financial Management: Billions in Improper Payments Continue to Require

Attention (GAO-01-44, October 27, 2000).

7

OMB Circular No. A-11 notes that erroneous payments are payments made that should not have been made or

were made for incorrect amounts. In this context, ìpaymentsî include the provision of benefits that do not

necessarily involve cash disbursements (e.g., loan guarantees). Examples of erroneous payments include

payments to ineligible persons or the wrong organizations, payments in the wrong amount, payments for

ineligible services, duplicate or other overpayments, and payments for services never received. Erroneous

payments may be due to procedural or administrative errors made by the payor (e.g., providing incorrect

account numbers in payment instructions) or errors or fraud by payees or claimants (e.g., underreporting of

income by beneficiary). Covered payments include overpayments and underpayments made by the federal

government, its direct contractors, and by states or other grant recipients administering federal programs.
Page 6 GAO-02-131R Improper Payments

expected result, the agenda notes that ìMore accurate benefit and assistance payments to

current recipients will enable programs to serve additional eligible recipients without

increasing their budgets and will reduce program costs.î Specifically, the agenda calls for

certain agencies to include, in their fiscal year 2003 budget submissions, information on

erroneous payment rates, including actual and target rates, where available, for benefit and

assistance programs expending over $2 billion annually. Further, OMB Circular No. A-11,

Preparation and Submission of Budget Estimates, identifies the agency programs for which

the data on erroneous payments is required and specifies reporting requirements for programs

where erroneous payment rates are not currently available. (Enclosure II lists the programs

for which erroneous payment information is required.) In addition, the management agenda

states that OMB will use this information in working with agencies to establish goals to

reduce erroneous payments for each program.

Identifying and Correcting Internal Control Weaknesses

Is Critical to Efforts to Manage Improper Payments

As repeatedly reinforced by our audit work, many of the causes of improper payments can be

traced to the lack of or an inadequate system of internal control. Federal agencies must

address these internal control deficiencies in order to resolve their improper payment

problems. We recently issued guidance8

 for federal agencies to consider when

(1) developing strategies and planning and implementing actions to strengthen their system

of internal control and (2) addressing their improper payment problems. The guidance

categorizes the actions into the following areas outlined in the Comptroller Generalís

Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1,

November 1999).9

! The control environmentócreating a culture of accountability by establishing a positive

and supportive attitude toward improvement and the achievement of established program

outcomes.

! Risk assessmentsóperforming comprehensive reviews and analyses of program

operations to determine if risks exist and the nature and extent of the risks identified.

! Control activitiesótaking actions to address identified risk areas and help ensure that

managementís decisions and plans are carried out and program objectives are met.

! Information and communicationsóusing and sharing relevant, reliable, and timely

financial and nonfinancial information in managing improper payment-related activities.

! Monitoringótracking improvement initiatives, over time, and identifying additional

actions needed to further improve program efficiency and effectiveness.

Absent improvements in internal controls and other proactive action from the President, the

Congress, top-level administration appointees, and agency management officials, improper

payments are likely to be a continuing concern. Further, once committed to a plan of action,

 

8

Strategies to Manage Improper Payments: Learning From Public and Private Sector Organizations

(GAO-02-69G, October 2001).

9

The Federal Mangersí Financial Integrity Act of 1982 required that we issue standards for internal control in

government.
Page 7 GAO-02-131R Improper Payments

federal officials must remain steadfast supporters of the end goals and their support must be

transparent to all.

- - - - -

As agreed with your office, unless you publicly announce the contents of this letter earlier,

we will not distribute it until 30 days from its date. Then, we will send copies to the

Chairman of the Senate Committee on Governmental Affairs and the Chairmen and Ranking

Minority Members of the House Committee on Government Reform, Senate Committee on

the Budget, and House Committee on the Budget. We will also send copies to the Director

of the Office of Management and Budget, the heads of the 24 CFO Act agencies and the

Railroad Retirement Board, and respective agency CFOs and inspectors general.

Please contact me at (202) 512-9450 or by e-mail at thompsons@gao.gov if you or your staff

have any questions concerning this letter. Key contributors to this letter were Tom

Broderick, Barbara House, Bonnie McEwan, and Tarunkant Mithani.

Sincerely yours,

Sally E. Thompson

Director, Financial Management and Assurance
Enclosure I

Page 8 GAO-02-131R Improper Payments

Federal Agencies and Components Required to Prepare Financial

Statements Under the CFO Act and OMB Guidance

! Department of Agriculture

Food and Nutrition Service

Forest Service

Rural Development Mission Area

! Department of Commerce

! Department of Defense

Department of Army General Funds

Department of Navy General Funds

Department of Air Force General Funds

Military Retirement Trust Funds

U.S. Army Corps of Engineers Civil Works Program

Department of Army Working Capital Fund

Department of Navy Working Capital Fund

Department of Air Force Working Capital Fund

! Department of Education

! Department of Energy

! Department of Health and Human Services

Centers for Medicare and Medicaid Services

! Department of Housing and Urban Development

! Department of the Interior

! Department of Justice

! Department of Labor

! Department of State

! Department of Transportation

Federal Aviation Administration

Highway Trust Fund

! Department of the Treasury

Bureau of Alcohol, Tobacco and Firearms

Internal Revenue Service

United States Customs Service

! Department of Veterans Affairs

! Agency for International Development

! Environmental Protection Agency

! Federal Emergency Management Agency

! General Services Administration

! National Aeronautics and Space Administration

! National Science Foundation

! Nuclear Regulatory Commission

! Office of Personnel Management

Civil Service Retirement and Disability Fund

Federal Employees Health Benefits Program

Federal Employees Life Insurance Program

! Small Business Administration

! Social Security Administration
Enclosure II

Page 9 GAO-02-131R Improper Payments

Programs for Which Erroneous Payment Information Is

Required Per OMB Circular No. A-11

Department of Agriculture Department of Transportation

Food Stamps Airport Improvement Program

Commodity Loan Program Highway Planning and Construction

National School Lunch and Breakfast Federal Transit ñ Capital Investment Grants

Women, Infants, and Children Federal Transit ñ Formula Grants

Department of Defense Department of Veterans Affairs

Military Retirement Compensation

Military Health Benefits Dependency and Indemnity Compensation

Pension

Department of Education Insurance Programs

Student Financial Assistance

Title I Agency for International Development

Special Education ñ Grants to States

Vocational Rehabilitation Grants to States Environmental Protection Agency

Clean Water State Revolving Funds

Department of Health and Human Services Drinking Water State Revolving Funds

Head Start

Medicare National Science Foundation

Medicaid

TANF

Research and Education

Grants and Cooperative Agreements

Foster Care ñ Title IV-E

Child Support Enforcement Office of Personnel Management

State Childrenís Insurance Program Retirement Program (CSRS and FERS)

Child Care and Development Fund Federal Employees Health Benefits Program

Federal Employeesí Group Life Insurance

Department of Housing and Urban

Development Railroad Retirement Boarda

Low Income Public Housing Retirement and Survivors Benefits

Section 8 Tenant Based Railroad Unemployment Insurance Benefits

Section 8 Project Based

Community Development Block Grants Small Business Administration

(Entitlement Grants, States/Small Cities) (7a) Business Loan Program

(504) Certified Development Companies

Department of Labor Disaster Assistance

Unemployment Insurance Small Business Investment Companies

Federal Employee Compensation Act

Workforce Investment Act Social Security Administration

Old Age and Survivorsí Insurance

Department of the Treasury Disability Insurance

Earned Income Tax Credit Supplemental Security Income Program

a

Not a CFO Act agency.

(193008)