GAO

United States General Accounting Office

A

Testimony

Before the Subcommittee on Government Efficiency and 

Financial Management, Committee on Government 

Reform, House of Representatives

For Release on Delivery

Expected at 8:00 a.m. CDT

Monday, July 14, 2003

FINANCIAL 

MANAGEMENT 

Effective Implementation 

of the Improper Payments 

Information Act of 2002 Is 

Key to Reducing the 

Government’s Improper 

Payments 

Statement of McCoy Williams

Director, Financial Management and Assurance

GAO-03-991T
Improper payments are a longstanding, widespread, and significant problem 

in the federal government. This past April, OMB estimated improper 

payments of about $35 billion annually for major federal benefit programs 

that made payments in excess of $1.2 trillion annually. Importantly, this 

estimate does not account for all federal programs and activities. 

 

The Improper Payments Information Act of 2002 contains requirements in 

the areas of improper payment identification and reporting. It requires 

agency heads to annually review all programs and activities, identify those 

that may be susceptible to significant improper payments, estimate annual 

improper payments in the susceptible programs and activities, and report the 

results of their improper payment activities. The legislation also requires 

OMB to prescribe guidance for federal agency use in implementing the act. 

OMB issued the guidance in May 2003. 

OMB’s guidance addresses the specific reporting requirements called for in 

the act and lays out the general steps agencies are to perform to meet those 

requirements. The guidance defines key terms used in the law, such as 

programs and activities, and offers criterion that clarify the meaning of the 

term significant improper payments. It requires that agencies use 

statistical sampling when estimating improper payments and sets statistical 

sampling confidence and precision levels for estimation purposes. It also 

requires that agencies report the results of their improper payment activities 

in their annual Performance and Accountability Report. As with any 

legislation or implementing guidance, the act’s ultimate success hinges on 

each agency’s diligence and commitment to identify, estimate, determine the 

causes of, take corrective actions, and measure progress in reducing all 

improper payments. 

Our prior work has demonstrated that attacking improper payment problems 

requires a strategy appropriate to the organization involved and its particular 

risks. We have found that entities using successful strategies to address 

their improper payment problems shared a common focus of improving the 

internal control system—the first line of defense in safeguarding assets and 

preventing and detecting errors and fraud. The components of the control 

system are: 

• control environment—creating a culture of accountability, 

• risk assessment—performing analyses of program operations to 

determine if risks exist, 

• control activities—taking actions to address identified risk areas, 

• information and communications—using and sharing relevant, reliable, 

and timely information, and 

• monitoring—tracking improvement initiatives and identifying additional 

actions needed to further improve program efficiency and effectiveness. 

The Subcommittee asked GAO to 

testify on the implementation of 

the Improper Payments 

Information Act of 2002 (PL 107-

300) and related Office of 

Management and Budget (OMB) 

guidance, and on GAO’s strategies 

to reduce improper payments. 

www.gao.gov/cgi-bin/getrpt?GAO-03-991T.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact McCoy 

Williams at 202-512-6906 or 

williamsm1@gao.gov. 

Highlights of GAO-03-991T, a testimony 

before the Subcommittee on Government 

Efficiency and Financial Management, 

Committee on Government Reform, 

House of Representatives 

July 14, 2003 

FINANCIAL MANAGEMENT 

Effective Implementation of the Improper 

Payments Information Act of 2002 Is Key 

to Reducing the Government’s Improper 

Payments 
Page 1 GAO-03-991T 

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss OMB’s guidance1

 to federal 

agencies on the implementation of the Improper Payments Information Act 

of 2002 (Improper Payments Act) and some strategies that federal agencies 

should consider when planning and implementing actions to prevent 

improper payments. 

Improper payments are a longstanding, widespread, and significant 

problem in the federal government and few would argue that the goal of 

reducing them is not a worthy one. As noted in our prior reports and 

testimonies on this topic, there is no clear picture of the extent of the 

problem. Historically, relatively few federal agencies and their components 

have publicly reported improper payment information such as improper 

payment rates, causes, and strategies for better managing their programs to 

reduce or eliminate these payments. This past April, OMB estimated 

improper payments to be about $35 billion annually for major federal 

benefit programs that made payments in excess of $1.2 trillion annually. 

Importantly, this estimate does not account for all federal programs and 

activities. 

Further, the risk of improper payments and the government’s ability to 

prevent them has important long-term implications. As the baby boom 

generation leaves the workforce, spending pressures will grow rapidly due 

to increased costs of programs such as Medicare, Medicaid, and Social 

Security. Other federal expenditures are also likely to increase. The 

increased size of federal programs and spending pressures, such as the 

implementation of new programs and changes in existing programs, all but 

guarantee that, absent improvement in internal controls and other 

proactive actions, the risk of even more improper payments will exist. 

The Improper Payments Act, which this subcommittee sponsored, 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. They include payments to ineligible 

recipients or payments for ineligible services. Improper payments also 

1

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

107-300 (May 21, 2003).
Page 2 GAO-03-991T 

include duplicate payments, payments for services not received, and 

payments that do not appropriately reflect applicable discounts offered. 

The act contains requirements in the areas of improper payment 

identification and reporting. It requires agency heads to annually review all 

programs and activities that they administer, identify those that may be 

susceptible to significant improper payments, and estimate annual 

improper payments for those programs and activities identified as 

susceptible to significant improper payments. Governmentwide 

implementation of these requirements will significantly increase the 

number of agencies analyzing their programs and activities for improper 

payments and coincides with our recommendation that the head of the 

CFO Act agencies assign responsibility to a senior official for establishing 

procedures for assessing agency and program risks of improper payments. 

For programs for which estimated improper payments exceed $10 million, 

agencies are to report certain information to the Congress including the 

causes of the improper payments, actions taken to correct those causes, 

and the results of those actions. This provision coincides with our 

recommendation that CFO Act agencies report to the Congress, OMB, and 

the agency head on the progress made in achieving improper payment 

reduction targets and future action plans for controlling improper 

payments. 

OMB’s Guidance on 

Addressing Improper 

Payments

The Improper Payments Act requires OMB to prescribe guidance for 

federal agency use in implementing the act. OMB issued this guidance in 

May 2003. As with any legislation or implementing guidance, the ultimate 

success of the Improper Payments Act hinges on each agency’s diligence 

and its commitment to identify, estimate, determine the causes of, take 

corrective actions, and measure progress in reducing all improper 

payments. 

OMB’s guidance addresses the specific reporting requirements called for in 

the act and lays out the general steps agencies are to perform to meet those 

requirements. The guidance defines key terms used in the law. For 

example, it defines the term programs and activities to include “activities 

or sets of activities recognized as programs by the public, OMB, or the 

Congress as well as those that entail program management or policy 

direction.” The guidance specifies that grants include competitive grant 

programs, regulatory activities, research and development activities, direct 

federal programs, all procurements including capital assets and service 
Page 3 GAO-03-991T 

acquisition, and credit programs. Also included are agency activities that 

support its programs. 

As I noted earlier, the act requires agencies to identify programs and 

activities that are susceptible to significant improper payments. OMB’s 

guidance defines significant erroneous payments as annual erroneous 

payments in the program exceeding both 2.5 percent of program payments 

and $10 million. (GAO considers the terms improper payments and 

erroneous payments to be synonymous.) For those programs and activities 

susceptible to significant erroneous payments, the guidance instructs 

agencies to calculate annual improper payment estimates based on the 

gross total of both overpayments and underpayments, and to set statistical 

sampling confidence and precision levels for estimating those payments. It 

further requires agencies with estimated improper payments exceeding 

$10 million in any program or activity to include, along with the estimated 

amount, a discussion of the amount of actual improper payments the 

agency expects to recover and how it will go about recovering them in the 

Management Discussion and Analysis section of their annual Performance 

and Accountability Report. These actions will help ensure transparency in 

reporting for those agencies with programs and activities with significant 

risks for improper payments.

According to the guidance, information on the results of improper 

payment-related efforts will generally be first reported in agency 

Performance and Accountability Reports for fiscal years ending on or after 

September 30, 2004. These reports should be available in November 2004. 

However, the guidance calls for those federal agencies already required by 

OMB Circular No. A-11, Preparation and Submission of Budget 

Estimates, to report improper payment information in their initial budget 

submissions to OMB to also include that improper payment information in 

their fiscal year 2003 Performance and Accountability Reports. This will 

result in publicly available information on improper payments for about 50 

major federal programs, such as Medicare and Food Stamps, about one 

year earlier than the reporting date for all other federal programs and 

activities. 

For years, we have recommended that OMB develop and issue guidance to 

federal executive agencies to assist them in developing and implementing a 

methodology for annually estimating and reporting improper payments, 

and for developing goals and strategies to address improper payments. 

This Improper Payments Act guidance is a good start in this area. 
Page 4 GAO-03-991T 

Strategies for 

Preventing Improper 

Payments

Because of the magnitude of improper payments and the actual and 

potential impact these payments can have on federal programs, it is 

essential that agencies develop appropriate methodologies for identifying 

and measuring improper payments, identifying cost-effective actions to 

correct them, implementing those actions, and periodically reporting 

improper payment-related information to agency managers, the Congress, 

and the public through publicly available documents. Our prior work has 

demonstrated that attacking improper payment problems requires a 

strategy appropriate to the organization involved and its particular risks, 

including a consideration of the legal requirements surrounding security 

and privacy issues. 

In October 2001, we issued an executive guide2

 that provided information 

on strategies used successfully by public and private sector organizations 

to address their improper payment problems. We found that the federal, 

private sector, state, and foreign entities using these best practices shared a 

common focus of improving the internal control system over the program 

or activity that experienced improper payments. The components of this 

control system and a brief definition of each follows. 

• Control environment—create a culture of accountability by establishing 

a positive and supportive attitude toward improvement and the 

achievement of established program outcomes.

• Risk assessment—perform comprehensive reviews and analyses of 

program operations to determine if risks exist and the nature and extent 

of the risks identified.

• Control activities—address identified risk areas and help ensure that 

management’s decisions and plans are carried out and program 

objectives are met.

• Information and communications—use and share relevant, reliable, and 

timely financial and nonfinancial information in managing improper 

payment-related activities. 

2

U.S. General Accounting Office, Strategies to Manage Improper Payments: Learning 

From Public and Private Sector Organizations, GAO-02-69G (Washington, D.C.: October 

2001).
Page 5 GAO-03-991T 

• Monitoring—track improvement initiatives, over time, and identify 

additional actions needed to further improve program efficiency and 

effectiveness. 

The entities that participated in our study found that they could effectively 

and efficiently manage improper payments by focusing on the components 

of internal controls and (1) changing their organizations’ control 

environments or cultures, (2) performing risk assessments, 

(3) implementing activities to reduce fraud and errors, (4) providing 

relevant, reliable, and timely information and communication of results to 

management, and (5) monitoring performance over time. It is important to 

note that the implementation of the improvement process that addresses 

these internal control components will likely not be easy or quick. It will 

require strong support, not just in words but in actions, from the President, 

the Congress, top-level administration appointees, and agency managers. 

Once committed to a plan of action, they must remain steadfast supporters 

of the end goals and their support must be transparent to all. 

Most recently, in a report issued last August,3

 we pointed out that existing 

guidance did not require or offer agencies a comprehensive approach to 

measuring improper payments, developing and implementing corrective 

actions, or reporting on the results of the actions taken. As a result of our 

findings, we recommended, among other things, that the head of each CFO 

Act agency assign responsibility to a senior agency official for taking 

actions to minimize improper payments and that the Director of OMB work 

with agency officials to provide all reasonable assistance in implementing 

the corrective action plans developed to reduce improper payments. We 

also presented matters for congressional consideration to assist agencies in 

addressing barriers to actions to better manage efforts to reduce improper 

payments and to help them with improvement efforts.

As this subcommittee requested in May, we will issue a report later this 

year on the status of actions the CFO Act agencies and OMB have taken in 

designing and implementing programs to address our previous 

recommendations. As a result of preliminary information received from 

those agencies, we have found that they have begun to assign responsibility 

to lead and coordinate actions to reduce improper payments. Some 

3

U.S. General Accounting Office, Financial Management: Coordinated Approach Needed to 

Address the Government’s Improper Payments Problems, GAO-02-749 (Washington, D.C.: 

Aug. 9, 2002).
Page 6 GAO-03-991T 

agencies have (1) developed detailed action plans to determine the nature 

and extent of improper payments, (2) set target goals for improper 

payment rates, and (3) reported progress in their annual accountability 

reports. For other agencies, methodologies for identifying risks, 

determining the nature and extent of improper payments, and developing 

corrective actions are in the early stages of implementation. As a part of 

our efforts, we will also discuss CFO Act agency progress in implementing 

the Improper Payments Act. 

In closing, as the Congress and the American public have increased 

demands for accountability from corporations and their leaders, the federal 

government must demonstrate the same standards of accountability and 

responsibility expected from the private sector within its programs and 

activities. Areas vulnerable to fraud, waste, abuse, and mismanagement 

must be evaluated to ensure that scarce resources reach their intended 

beneficiaries and are not diverted for inappropriate, illegal, inefficient, or 

ineffective purposes.

We are seeing important leadership and action—both from the Congress 

and from the administration—to address the improper payment problem, 

but, as I mentioned earlier, the reduction or elimination of the government’s 

improper payments problems will not be quick or easy. I want to 

emphasize our commitment to continuing our work with the Congress, the 

administration, and federal agencies to ensure that improper payments are 

fully addressed governmentwide, and that actions are taken to reduce or 

eliminate the government’s vulnerabilities to the significant problem of 

improper payments. 

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

respond to any questions you or other Members of the Subcommittee may 

have at this time.

Contact and 

Acknowledgments

For information about this statement, please contact McCoy Williams, 

Director, Financial Management and Assurance, at (202) 512-6906 or at 

williamsm1@gao.gov. Individuals who made key contributions to this 

testimony include Tom Broderick, Bonnie McEwan, and Donell Ries. 

Numerous other individuals made contributions to the GAO reports cited in 

this testimony.
Page 7 GAO-03-991T 

Related GAO Products

Financial Management: Challenges Remain in Addressing the 

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

May 13, 2003.

Financial Management: Coordinated Approach Needed to Address the 

Government’s Improper Payments Problems. GAO-02-749. Washington, 

D.C.: August 9, 2002. 

Financial Management: Improper Payments Reported in Fiscal Year 

2000 Financial Statements. GAO-02-131R. Washington, D.C.: 

November 2, 2001. 

Strategies to Manage Improper Payments: Learning From Public and 

Private Sector Organizations. GAO-02-69G. Washington, D.C.: October 

2001. 

Financial Management: Billions in Improper Payments Continue to 

Require Attention. GAO-01-44. Washington, D.C.: October 27, 2000. 

(195017)
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