Testimony 

Before the Subcommittee on Government 

Efficiency and Financial Management, 

Committee on Government Reform, 

House of Representatives 

 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2:00 p.m. EDT 

Tuesday, May 13, 2003 FINANCIAL 

MANAGEMENT 

Challenges Remain in 

Addressing the 

Government's Improper 

Payments 

Statement of McCoy Williams, Director 

Financial Management and Assurance 

GAO-03-750T 
Improper payments are a longstanding, widespread, and significant problem 

in the federal government. Agency financial statements for both fiscal years 

2002 and 2001 identified improper payment estimates of approximately $20 

billion. OMB recently testified that the amount of improper payments was 

closer to $35 billion annually for major benefit programs. As significant as 

these amounts are, they do not represent a true picture of the magnitude of 

the problem governmentwide because they do not consider other significant 

but smaller programs and other types of agency activities that could result in 

improper payments. 

Until recently OMB 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. Improper payment information varied across agencies and programs 

and included a mixture of estimated improper payment rates and actual 

improper payments, and was reported inconsistently in a variety of places, 

including annual financial statements, performance reports, and the federal 

budget. None of these reporting mediums provided a comprehensive view of 

either the scope of the improper payment problem or of individual agency or 

government efforts to reduce it. 

We are seeing increased leadership and actions—both from the Congress 

and the administration—to address the improper payment problem. 

Two recent pieces of legislation provide an impetus for all agencies to 

systematically address improper payment activity on an annual basis and to 

identify and recover contract overpayments. To illustrate this, the Improper 

Payments Information Act of 2002 requires agency heads to annually review 

all programs and activities that they administer and identify those 

susceptible to improper payments. For those with estimates of significant 

improper payments, the legislation requires further analysis and reporting. 

The National Defense Authorization Act for fiscal year 2002 contains a 

provision that requires agencies entering into sizeable contracts to carry out 

a cost recovery program for improper payments made to contractors. 

OMB has taken some actions to address our prior improper payment-related 

recommendations. For example, it has issued draft guidance for agency use 

in identifying and reporting on improper payments within their programs 

and activities. Further, preliminary follow up work on our prior 

recommendations shows a wide range of agency activities regarding 

improper payment identification and reporting. Some agencies have 

implemented detailed action plans while others are in the early stages of 

such work. OMB and the agencies need to continue to work to identify and 

measure improper payments, set performance goals, implement corrective 

actions, and report results against those goals. 

The Subcommittee asked GAO to 

testify on the Improper Payments 

Information Act (PL-107-300) and 

related draft guidance issued by the 

Office of Management and Budget 

(OMB), and on GAO 

recommendations to agencies on 

actions they can take to prevent or 

reduce improper payments. 

www.gao.gov/cgi-bin/getrpt?GAO-03-750T.

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-03-750T, a report to 

Subcommittee on Government Efficiency 

and Financial Management, Committee on 

Government Reform, House of 

Representatives 

May 13, 2003

FINANCIAL MANAGEMENT 

Challenges Remain in Addressing the 

Government's Improper Payments 
Page 1 GAO-03-750T 

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to discuss the governmentwide improper 

payment problem. Specifically, I will discuss leadership actions taken by 

the Congress and the Office of Management and Budget (OMB) to address 

this problem, and I will highlight the results of our work in this area over 

the past few years that address actions agencies can undertake to prevent 

or reduce improper payments. 

In general, improper payments are payments the government made in 

error and often result from a lack of or inadequate systems of internal 

controls. We use the term improper payments to 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 fraud and abuse by program participants and/or federal employees. 

Because improper payments are a longstanding, widespread, and 

significant problem in the federal government, few would argue that the 

goal of reducing them is not a worthy one. As we testified before this 

subcommittee on April 8, 2003,1

 improper payment estimates disclosed in 

agency financial statements totaled approximately $20 billion each year 

for both fiscal years 2002 and 2001. As significant as these amounts are, 

they do not present a true picture of the magnitude of the problem 

governmentwide. OMB recently estimated the amount of improper 

payments at about $35 billion annually. While either of these figures 

represent a considerable amount of wasted taxpayer dollars, the scope of 

the problem is likely greater because most agencies have not yet estimated 

or publicly reported the magnitude of improper payments in their 

programs and activities. 

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. These 

spending pressures and the increased size of federal programs all but 

 1

U.S. General Accounting Office, Fiscal Year 2002 U.S. Government Financial 

Statements: Sustained Leadership and Oversight Needed for Effective Implementation of 

Financial Management Reform, GAO-03-572T (Washington, D.C.: Apr. 8, 2003). 
Page 2 GAO-03-750T 

guarantee that, absent improvement in internal controls and other 

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

Our 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. Our findings in this area have 

resulted in the identification of strategies to address improper payments 

and in governmentwide recommendations for proactive leadership at the 

highest levels of government, in addition to specific procedures designed 

to help agencies better identify, measure, reduce, and report their 

improper payments. 

In October 2001, we issued an executive guide that provided information 

on strategies used successfully by public and private sector organizations 

to address their improper payment problems.2

 We found that the entities 

using these best practices shared a common focus of improving the 

internal control system. The components of this control system and a brief 

definition of each follows. 

• Control environment—creating a culture of accountability by establishing 

a positive and supportive attitude toward improvement and the 

achievement of established program outcomes. 

• Risk assessment—performing comprehensive reviews and analyses of 

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

the risks identified. 

• Control activities—taking actions to address identified risk areas and help 

ensure that management’s decisions and plans are carried out and 

program objectives are met. 

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

and timely financial and nonfinancial information in managing improper 

payment related activities. 

• Monitoring—tracking improvement initiatives, over time, and identifying 

additional actions needed to further improve program efficiency and 

effectiveness. 

 2

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

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

2001). 
Page 3 GAO-03-750T 

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. Improper payment 

information varied across agencies and programs and included a mixture 

of estimated improper payment rates and actual improper payments. 

Moreover, the information was inconsistently reported in a variety of 

places, including annual financial statements, performance plans, and the 

federal budget. None of these reporting mediums provided a 

comprehensive view of either the scope of the improper payment problem 

or of individual agency or governmentwide efforts to reduce it. As such, 

there is inadequate substantive information for use in establishing (1) a 

baseline measure of the extent of improper payments, (2) appropriate 

response levels to correct improper payment problems, and (3) 

responsibility—holding organizations and/or individuals accountable for 

performance and results. 

As a result of these findings, we recommended that federal executive 

branch agencies assign responsibilities for taking actions to minimize 

improper payments and that OMB assist agencies in developing methods 

to identify and implement those actions. 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. 

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

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

Today I will highlight these actions and provide my perspective as to their 

potential impact. I will also discuss our intent to follow up with the 24 

Chief Financial Officer (CFO) Act agencies on our previous 

recommendations that address actions agencies can take to prevent and 

reduce improper payments. 

 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 4 GAO-03-750T 

Two recent pieces of legislation—the Improper Payments Information Act 

of 20024

, and Section 831 of the National Defense Authorization Act for 

Fiscal Year 20025

—provide an impetus for all agencies to systematically 

address improper payment activity annually, and to identify and recover 

contract overpayments. 

The Improper Payments Information Act of 2002, that this subcommittee 

sponsored, contains stringent requirements in the areas of improper 

payment review and reporting. Agency heads are to annually review all 

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

susceptible to improper payments. Across-the-board implementation of 

this provision will significantly increase the number of agencies analyzing 

their programs and activities for improper payments and coincides with 

our recommendation that the 24 CFO Act agencies assign responsibility 

for establishing procedures for assessing agency and program risks of 

improper payments. 

Once agencies identify their programs that are susceptible to significant 

improper payments, the legislation requires agencies to estimate the 

annual amount of improper payments in those programs and activities. For 

programs for which estimated improper payments exceed $10 million, 

agencies are to report to the Congress on actions they are taking to reduce 

those errors. The report will also include a discussion of the causes of the 

improper payments identified, actions taken to correct those causes, and 

the results of the actions taken to address those causes. The provisions of 

this legislation coincide with our recommendation that CFO Act agencies 

take actions to reduce improper payments and 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. 

The law further requires OMB to prescribe agency guidance to implement 

the requirements of the act. 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 

 4

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

5

Pub. L. No. 107-107, 115 Stat. 1012, 1186, (2001). 

Legislation Mandates 

Agency Actions to 

Identify and Act on 

Improper Payment 

Problems 

Improper Payments Act 
Page 5 GAO-03-750T 

reporting improper payments, and for developing goals and strategies to 

address improper payments. I will discuss OMB’s actions in this area later 

in my statement. 

Our October 2001 executive guide on improper payments recognized that 

some improper payments are inevitable and identified and described 

improper payment detection activities including recovery auditing. 

Recovery auditing entails examining payment file information to identify 

possible duplicate or erroneous payments and taking recovery action. Our 

guide suggested that the techniques used in recovery auditing could be 

used more in the federal government not only to identify improper 

payments already made, but also to analyze records prior to payment to 

prevent improper payments before they occur. In our opinion, it is both 

faster and cheaper to proactively identify and prevent potential improper 

payments than to try to detect such errors and collect them after the fact. 

Section 831 of the National Defense Authorization Act for Fiscal Year 2002 

contains a provision that requires agencies entering into contracts with 

costs exceeding $500 million annually to have cost-effective programs for 

identifying errors in paying contractors and for recovering amounts 

erroneously paid. The legislation further states that a required element of 

such a program is the use of recovery audits and recovery activities. The 

law authorizes 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, may be 

credited back to the original appropriation, subject to restrictions as 

described in the legislation. With the passage of this law, the Congress has 

removed multiple barriers and granted agencies a much needed incentive 

for identifying and reducing their improper payments, in addition to 

recovering those improper payments that slip through agency prepayment 

controls. The techniques used in recovery auditing (such as examining 

payment file information to identify duplicate payments or calculation 

errors) offer the opportunity for identifying weaknesses in agency internal 

controls, which can then be modified or upgraded to be more effective in 

preventing improper payments before they occur. Further, accurate 

assignment of costs and a functioning cost accounting system to track 

those costs can assist agency management by providing the information 

needed to identify agency and contractor expenses reimbursable under 

this legislation. 

Recovery Auditing 

Legislation 
Page 6 GAO-03-750T 

OMB’s role in managing, implementing, and overseeing governmentwide 

administrative policy, its interagency perspective, and its leadership role 

on the various interagency councils make it a key player in the 

government’s effort to reduce improper payments. I would like to briefly 

discuss two actions—one legislatively and the other administratively 

driven. 

In the legislative area, OMB recently issued draft guidance on 

implementation of the Improper Payments Information Act of 2002 for 

agency comment. In this guidance, OMB addressed the specific reporting 

requirements provided by the act and laid out the steps necessary for 

agencies to meet those requirements. For example, the draft guidance 

calculates annual improper payments as the gross total of both over- and 

under- payments, and sets statistical sampling confidence and precision 

levels for estimating those payments. It also requires agencies with 

estimated improper payments in any program or activity exceeding $10 

million 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. 

On the administrative side, the President’s Management Agenda has 

identified improper payments as a key element in the administration’s 

initiative to improve financial performance throughout the federal 

government—one of five governmentwide initiatives that the Agenda 

addressed. As described in the Agenda, OMB will work with agencies to 

establish goals to reduce improper payments for each program over $2 

billion. In the past, agencies’ financial statements contained a mix of 

estimated improper payment rates and actually identified improper 

payments—this was for those agencies that had, in fact, reported improper 

payments. OMB now requires agencies to provide an improper payment 

rate based on a statistical sample projected to the universe of payments 

made. It revised the guidance in its Circular A-11 to require agencies to 

distinguish between overpayments, underpayments, and total improper 

payments, and to define the methodology used to develop their error rate. 

The revision was intended to ensure consistency in the error rates 

reported by the agencies. The Circular requires agencies to report this 

information with their initial budget submissions and prohibits agencies 

from publicly disclosing these submissions. We have stated in the past 

and continue to maintain that this information should be in the public 

OMB’s Actions to 

Address Improper 

Payments 
Page 7 GAO-03-750T 

domain since it is necessary to enable oversight and monitoring by 

interested parties, including the Congress and the public. 

Our August 2002 report on improper payments included recommendations 

to OMB designed to assist agencies with challenges in identifying and 

measuring their improper payments, setting performance goals, 

implementing corrective actions, and reporting the results against the 

goals. OMB has taken some actions to address these recommendations. 

For example, in October 2002 testimony before this committee, it 

addressed statutory roadblocks faced by the departments of Labor 

(Labor), Education (Education), and Housing and Urban Development 

(HUD) in gaining access to existing information that those agencies could 

use in verifying the employment status and income of applicants.6

 OMB 

testified that it had proposed legislation to eliminate the data-sharing 

barriers at Labor and Education, and that it was in the process of 

proposing legislation that would assist HUD in accessing much needed 

data that already exists at the Department of Health and Human Services. 

While this is a start, identifying and mitigating or eliminating barriers must 

be an ongoing process as additional agencies begin to address their 

improper payments and identify additional barriers that restrict their 

actions to reduce or eliminate improper payments. OMB’s efforts in 

working with the Congress and federal agencies to ensure successful 

implementation of the provisions of the Improper Payments Information 

Act of 2002 and other legislation and administrative actions that can 

impact improper payments are critical to the governmentwide effort to 

reduce improper payments and facilitate the implementation of our 

recommendations. 

OMB is providing additional leadership through a joint CFO Council and 

President’s Council on Integrity and Efficiency (PCIE) workgroup—the 

Improper and Erroneous Payments Work Group—to assist agencies in 

identifying and reducing erroneous payments and to produce 

documentation that would be meaningful, applied to agencies. The 

workgroup surveyed agencies concerning the existing use of improper 

payment indicators and benchmarks, analyzed survey responses, and 

publicly released lists of indicators and techniques agencies currently use 

to identify improper payments. 

 6

Office of Management and Budget, Testimony of the Honorable Mark W. Everson, Deputy 

Director for Management, before the Subcommittee on Government Efficiency, Financial 

Management, and Intergovernmental Relations, Committee on Government Reform, 

(Washington, D.C.: Oct. 3, 2002). 
Page 8 GAO-03-750T 

As noted in our prior reports and testimonies on this topic, there is no 

clear picture on the extent of the improper payment problem, only that it 

is worse than what is now acknowledged. Relatively few federal agencies 

and their components publicly report improper payment information such 

as improper payment rates, causes, and strategies for better managing 

their programs to reduce or eliminate these payments. In reviewing fiscal 

year 2001 agency and component financial statements of the 24 CFO Act 

agencies, we found references to improper payments in just 10 agencies in 

17 agency programs. This information increased to 17 agencies and 27 

programs in fiscal year 2002 agency financial statements. Several of the 17 

agencies that acknowledged the existence of improper payments did not 

present information on the amounts of those payments. While the fiscal 

year 2002 information is an improvement over fiscal year 2001 in terms of 

agencies acknowledging improper payments, merely acknowledging that 

improper payments exist is simply not enough. It is essential for agencies 

to develop appropriate methodologies for identifying and measuring those 

payments, identify cost-effective actions to correct them, implement 

actions to reduce or eliminate improper payments in their programs and 

activities, and periodically report to agency managers, the Congress, and 

the public, through publicly available documents. 

In our August 2002 report, we made a recommendation to all 24 CFO Act 

agencies to assign responsibility to a senior agency official for assessing 

risks, taking actions to reduce, and reporting the results on those actions 

on agency improper payments. The report described specific actions that 

we feel are an integral part of that responsibility. As a result of preliminary 

information received from those agencies, we have found that agencies 

have begun to assign responsibility to lead and coordinate actions to 

reduce improper payments. Some agencies have developed detailed action 

plans to determine the nature and extent of improper payments. Some 

have set target goals for improper payment rates and have 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. In ongoing work, we are meeting with officials 

from the 24 CFO Act agencies to discuss their progress in implementing 

our recommendations and OMB’s draft guidance on implementing the 

Improper Payments Information Act of 2002. 

In closing, 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 

Limited Information 

Is Available on 

Improper Payments at 

Federal Agencies 
Page 9 GAO-03-750T 

significant problem of improper payments. As I stated earlier, recent 

legislation and other actions have brought the government’s improper 

payment problems to the forefront. Implementing the legislative 

provisions and other actions is a shared responsibility that will require 

continued strong support and active and cooperative involvement from the 

Congress, the administration, and agency management. Effective 

implementation of the Improper Payments Information Act of 2002 and 

recovery auditing should help resolve these problems. Along these lines, 

OMB needs to continue to work with agencies and groups like the CFOPCIE Erroneous and Improper Payments Workgroup to address 

challenges in identifying and measuring their improper payments, setting 

performance goals, implementing corrective actions, and reporting the 

results against the goals. Further, agency management must work 

diligently to establish an environment in which improper payments are not 

acceptable business practices, evaluate program and activity risks for 

improper payments, identify and implement appropriate corrective 

actions, and openly report the progress made in reducing 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. 

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. 

Contact and 

Acknowledgements 
Page 10 GAO-03-750T 

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. 

Executive Guide: 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. 

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