Improper Payments: Status of Agencies' Efforts to Address Improper Payment and Recovery Auditing Requirements
Published: 2008-01-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 and recouping those funds when improper payments occur. The Congress enacted the Improper Payments Information Act of 2002 (IPIA) and section 831 of the National Defense Authorization Act for Fiscal Year 2002, commonly known as the Recovery Auditing Act, to address these issues. GAO was asked to testify on agencies' efforts to eliminate and recover improper payments. Specifically, GAO focused on (1) progress made in agencies' implementation and reporting under IPIA for fiscal year 2007, (2) major challenges that continue to hinder full reporting of improper payment information, and (3) agencies' efforts to report on recovery auditing and recoup contract overpayments. This testimony is based in part on a recently issued report (GAO-08-377R) in addition to a further review and analysis of improper payment and recovery auditing information reported in agencies' fiscal year 2007 performance and accountability reports (PAR) or annual reports. The Office of Management and Budget (OMB) provided technical comments which GAO incorporated as appropriate.
section_title: What GAO Found
paragraphs: While agencies have made progress, GAO identified ongoing challenges in key areas related to IPIA and recovery auditing implementation and reporting. (1) Progress made in agencies' implementation and reporting under IPIA: Agencies reported improper payment estimates of about $55 billion in their fiscal year 2007 performance and accountability reports (PAR) or annual reports, an increase from the almost $41 billion reported in fiscal year 2006. The reported increase was primarily attributable to a component of the Medicaid program reporting improper payments for the first time totaling about $13 billion, which GAO viewed as a positive step to improve transparency over the full magnitude of improper payments. The $55 billion estimate consists of 21 agencies reporting for 78 programs, including 19 agency programs or activities reporting for the first time in fiscal year 2007. Further, select agency programs that first reported an error rate in fiscal year 2004 reported an overall decrease in their error rate estimates when compared to fiscal year 2007. OMB noted that further reductions in error rates are expected as agencies take steps to address payment errors resulting from insufficient or no documentation. (2) Challenges with IPIA implementation: Not all agencies reported conducting risk assessments of all of their programs and activities as required under IPIA. Further, agencies have not estimated for 14 risk-susceptible programs with outlays totaling about $170 billion. Additionally, in some instances, agencies did not measure improper payments for a 12-month period as generally required by OMB's implementing guidance, nor did the estimates reflect improper payments for the entire program. Four agency auditors reported noncompliance issues with IPIA regarding risk assessments, sampling methodologies, corrective actions, recovery of improper payments, and inadequate documentation. Agencies also reported that statutory or regulatory barriers may limit corrective actions to reduce improper payments. Lastly, agencies continue to face challenges in the implementation or design of internal controls to identify and prevent improper payments. Specifically, over half of agencies' Offices of Inspectors General identified management or performance challenges that could increase the risk of improper payments. (3) Agencies' efforts to report recovery auditing information continue: In total, 21 agencies reported identifying about $121 million in improper payments in fiscal year 2007 for recovery and actually recovering about $87 million, a decrease of about $217 million when compared to the reported amount identified for recovery in the prior year. Most of the decrease can be attributed to the Department of Defense's decision to stop reporting voluntary refunds. GAO noted that few agencies reported on corrective action plans to address the root causes of contract payment errors. Also, two agencies reported that conducting recovery audits was not cost beneficial. All but two agencies reported they contracted out recovery audit services, conducted in-house recovery audits, or both. The other two were silent on this on matter.

section_title: Letter
paragraphs: Thank you for the opportunity to be here today to discuss the  governmentwide problem of improper payments in federal programs and  activities and executive branch agencies’ efforts to address key  requirements of the Improper Payments Information Act of 2002 (IPIA)  and section 831 of the National Defense Authorization Act for Fiscal Year  2002, commonly known as the Recovery Auditing Act. Since fiscal year  2000, we have issued a number of reports and testimonies aimed at raising  the level of attention given to improper payments. Most recently, at the  Subcommittee’s request, we provided a report on summary data and  preliminary analysis of the improper payment estimates reported by  federal executive branch agencies in their fiscal year 2007 performance  and accountability reports (PAR) or annual reports. Our work over the  past several years has demonstrated that improper payments are a long- standing, widespread, and significant problem in the federal government.  IPIA has increased visibility over improper payments by requiring  executive branch agency heads, using guidance from the Office of  Management and Budget (OMB), to identify programs and activities  susceptible to significant improper payments, estimate amounts  improperly paid, and report on the amounts of improper payments and  their actions to reduce them. Similarly, the Recovery Auditing Act  provides an impetus for applicable agencies to systematically identify and  recover contract overpayments. This act requires, among others things,  that all executive branch agencies entering into contracts with a total  value exceeding $500 million in a fiscal year have cost-effective programs  for identifying errors in paying contractors and for recovering amounts  erroneously paid. As the steward of taxpayer dollars, the federal  government is accountable for how its agencies and grantees annually  spend hundreds of billions of taxpayer dollars and is responsible for  safeguarding those funds against improper payments as well as having  mechanisms in place to recoup those funds when improper payments  occur.
OMB has played a key role in the oversight of the governmentwide  improper payments problem. In 2005, OMB established Eliminating  Improper Payments as a new program-specific initiative under the  President’s Management Agenda (PMA). This separate PMA program  initiative is intended to help to ensure that agency managers are held  accountable for meeting the goals of IPIA and are, therefore, dedicating  the necessary attention and resources to meeting IPIA requirements. OMB  continues its commitment to address governmentwide improper payments  by working with agencies to establish corrective action plans and address  their root causes. OMB also annually reports on agencies’ efforts to  address IPIA and Recovery Auditing Act requirements.
Today, my testimony will focus on three key areas:    progress made in agencies’ implementation and reporting under IPIA  for fiscal year 2007,   several major challenges that continue to hinder full reporting of  improper payment information, and   agencies’ reporting of recovery auditing efforts to recoup contract  overpayments.
This testimony is based on our review of available fiscal year 2007  improper payment information reported by 35 federal executive branch  agencies that OMB and the Department of the Treasury (Treasury)  determined to be significant to the U.S. government’s consolidated  financial statements. We also added 4 additional executive branch  agencies included in the consolidated financial statements, increasing our  universe of review to 39 executive branch agencies (agencies). (See app. I  for a list of the 39 agencies.)
We reviewed improper payment information reported for 35 of the 39  agencies’ fiscal year 2007 PARs or annual reports. We also reviewed OMB  guidance on implementation of IPIA and the Recovery Auditing Act. In  addition, we reviewed agency Office of Inspector General (OIG) reports on  management challenges to identify internal control weaknesses and  program integrity issues for agency programs reporting improper payment  estimates for fiscal year 2007. We did not independently validate the data  that agencies reported in their PARs or annual reports. However, we are  providing agency-reported data as descriptive information that will inform  interested parties about the magnitude of reported governmentwide  improper payments and amounts recouped through recovery audits and  other improper payment-related information. We believe the data to be  sufficiently reliable for this purpose. We provided information on the  major findings discussed in this statement to OMB. OMB provided  technical comments that we incorporated as appropriate.
We conducted this performance audit from December 2007 to January  2008 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Progress Made to Estimate and Reduce Improper Payments
paragraphs: Agencies reported improper payment estimates of almost $55 billion in  their fiscal year 2007 PARs or annual reports, an increase from the fiscal  year 2006 estimate of about $41 billion. The reported increase was  primarily attributable to a component of the Medicaid program reporting  improper payment estimates for the first time totaling about $13 billion for  fiscal year 2007, which we view as a positive step to improve transparency  over the full magnitude of improper payments. The $55 billion estimate  consists of 78 programs in 21 agencies (see app. II for further details) and  represents about 2 percent of total fiscal year 2007 federal executive  branch agencies’ government outlays of almost $2.8 trillion. In addition,  the $55 billion largely consists of improper payments made in eight  programs, as shown in figure 1. Collectively, the eight programs account  for about $48 billion or approximately 88 percent of the total estimate.
Also, of the total improper payment estimate of $55 billion, we identified  19 programs and activities that estimated improper payments for the first  time in their fiscal year 2007 PARs, totaling about $16 billion. Of these 19  programs, we identified 6—including Medicaid—that had been required to  report selected improper payment information for several years prior to  the passage of IPIA. In total, these 6 programs represented $14.8 billion,  or 94 percent, of the approximately $16 billion in newly reported  programs. We view these agencies’ efforts as a positive step toward  measuring improper payments and continuing progress in meeting the  goals of IPIA.
Likewise, agencies continued to report that they had made progress to  reduce improper payments in their programs and activities. Since initial  IPIA implementation, we noted that 39 agency programs reported  improper payment estimated error rates for each of the 4 fiscal years— 2004 through 2007. Of the 39, 23 programs, or about 59 percent had  reduced error rates when comparing each program’s fiscal year 2007 error  rate to the initial or baseline error rate reported for fiscal year 2004. In a  separate analysis, we found that the number of programs with error rate  reductions totaled 34 when comparing fiscal year 2007 error rates to the  prior year rates. For example, the error rate of the U.S. Department of  Agriculture’s (USDA) Marketing Assistance Loan program decreased from  20.3 percent in fiscal year 2006 to 7.5 percent in fiscal year 2007, a  reduction of 12.8 percent. As we testified before this Subcommittee,  USDA’s high error rate for the Marketing Assistance Loan program  reported in its fiscal year 2006 PAR resulted from improvements in how it  measured its improper payments. However, in its fiscal year 2007 PAR,  USDA reported that a large percentage of fiscal year 2006 improper  payments were caused by noncompliance with administrative procedures  and that corrective actions had been taken to reduce the instance of  improper payments. Reported examples of corrective actions taken  included implementing policies related to processing payments,  conducting more frequent external audits of program effectiveness, and  making the delivery of services consistent across county offices.
OMB noted that further reductions in agency program estimated error  rates are expected as agencies take steps to address payment errors  attributed to insufficient or lack of documentation. OMB’s implementing  guidance requires agencies to discuss in their PAR the portion of payment  errors attributable to insufficient or lack of documentation, if applicable.  We identified 25 programs from 10 agencies that attributed a portion of  their payment errors to insufficient or no documentation. However, only 8  of these programs—all reported by USDA—cited what portion of the error  rate resulted from insufficient or no documentation. The other agencies  only reported that these types of errors contributed to the cause for the  improper payments in the remaining 17 programs. For example, the  Department of State (State) reported that there was insufficient  documentation to support eligibility for the grantee of an award, but did  not cite a rate for this type of error. Similarly, the Federal Communications  Commission (FCC) reported that lack of documentation was a significant  concern of the auditors’ review of program payments, but did not report  the affected portion of the error rate.
Because agencies for 17 of the 25 agency programs that attributed some of  their payment errors to insufficient or no documentation did not report the  portion of payment errors attributable to these problems, we could not  readily determine the extent to which such errors contributed to the total  improper payment estimate of $55 billion. Yet, we found that 25 of the 78  programs reporting improper payment estimates, or 32 percent, identified  insufficient or no documentation errors as a cause of their improper  payments. OMB anticipates that errors attributable to insufficient or no  documentation will decrease significantly once agencies correct the root  cause. From our review, we noted that 22 of the 25 agency programs  reported corrective action plans to address errors due to insufficient or no  documentation. Examples of these efforts included development of  policies on documentation retention, updating processing procedures, and  training for providers on the importance of supporting documentation.
section_title: Challenges Continue with IPIA Implementation
paragraphs: While agencies have shown progress, major challenges remain in meeting  the goals of IPIA and ultimately improving the integrity of payments.  Specifically, some agencies have not yet reported estimates for all risk- susceptible programs, the total improper payment estimate does not yet  reflect the full scope of improper payments across executive branch  agencies, noncompliance issues continue to exist, reported statutory or  regulatory barriers limit agencies’ ability to reduce improper payments,  and agencies continue to face challenges in the implementation or design  of internal controls to identify and prevent improper payments.
subsections: section_title: Risk Assessments
paragraphs: IPIA requires agencies to annually review all of their programs and  activities to identify those that may be susceptible to significant improper  payments. Yet, in our review, we found that not all agencies reported  conducting risk assessments. We also noted that four agencies reported  that they did not conduct a risk assessment of all of their programs and  activities because OMB guidance allows agency programs deemed not  risk-susceptible to conduct a risk assessment generally every 3 years. As  we have previously reported, this is inconsistent with the express terms  of IPIA, which require that agencies annually review all of their programs  and activities. However, OMB guidance does state that if a program  experiences a significant change in legislation, a significant increase in  funding level, or both, agencies are required to reassess the program’s risk  susceptibility during the next annual cycle, even if it is less than 3 years  from the last assessment. In its fiscal year 2007 PAR, the Department of  the Interior (Interior) reported that it did not perform a risk assessment  because the results of previous risk assessments demonstrated that  Interior was at low risk for making improper payments. As a result, the  agency reported that the next risk assessment would be completed in  fiscal year 2009. HHS reported that it had last completed risk assessments  in fiscal year 2006 in which HHS did not identify any new high-risk  programs in its fiscal year 2006 risk assessment work. HHS reported that  OMB’s implementing guidance requires risk assessments once every 3  years and as a result, HHS did not perform risk assessments during fiscal  year 2007.
We also identified three additional agencies that reported they were not  required to conduct a risk assessment for specific programs that OMB had  previously designated as risk-susceptible prior to IPIA implementation.  These agencies determined that those programs had continued to  demonstrate over a 2-year period a low-risk level for susceptibility to  improper payments and thus, OMB had granted them relief from improper  payments reporting. According to their PARs, the next risk assessments  for the Environmental Protection Agency’s (EPA) Clean Water and  Drinking Water State Revolving Funds and Department of Veterans Affairs  (VA) Insurance programs will be conducted in fiscal years 2010 and 2009,  respectively. The Department of Housing and Urban Development (HUD)  reported that it will conduct an annual risk assessment of its Community  Development and Block Grant (CDBG) program; however, because it  reported over 2 consecutive years error rates of less than $10 million for  this program, OMB granted it relief from annual improper payment  reporting and it did not report an estimate in its fiscal year 2007 PAR.
OMB reported that, in aggregate, agencies have assessed risk and  measured nearly 86 percent of all high-risk outlays and that agencies were  focusing their resources on programs with the highest risk levels of  improper payments. While we agree that, as a practical matter, a  comprehensive risk assessment may not be warranted for programs with  minimal outlays or potentially low-risk programs and activities, an  appropriately designed risk assessment should be performed annually as it  is required of agencies to comply with IPIA. As we previously reported,  OMB guidance provides that agencies annually perform risk assessments  of their programs and activities, but offers limited information on how to  conduct an appropriately designed risk assessment, thus allowing agencies  broad flexibility for determining a methodology to meet IPIA  requirements. As such, the level and extent to which agencies conduct  their risk assessments can vary. This is evident in our recent work on  selected agencies’ IPIA implementation, in which we raised significant  concerns regarding their risk assessment activities, as highlighted in the  following examples:  In September 2007, we reported that for fiscal year 2006, the  Department of Homeland Security (DHS) did not perform a risk  assessment on approximately $13 billion of its more than $29 billion in  disbursements subject to IPIA. Also, DHS only tested programs with  disbursements greater than $100 million and did not perform a  qualitative risk assessment of all program operations, such as an  assessment of internal controls, oversight and monitoring activities,  and results from external audits.
In November 2007, we reported that for fiscal years 2004 through  2006, neither the United States Agency for International Development  (USAID) nor the National Aeronautics and Space Administration  (NASA) had developed a systematic process to (1) identify risks that  exist in their payment activities or (2) evaluate the results of their  payment stream reviews, such as weighting and scoring the  effectiveness of existing internal control over payments made and  results from external audits. Furthermore, both USAID and NASA  maintained insufficient or no risk assessment documentation to  support their conclusions that no programs or activities were  susceptible to significant improper payments.
In December 2007, we reported that the Department of Defense’s  (DOD) travel payment data used to assess the program’s risk of  significant improper payments only included payments processed by  the Defense Travel System (DTS)—approximately 10 percent of the  $8.5 billion of the department’s travel obligations reported for fiscal  year 2006. Further, the travel data excluded the largest user of DTS, the  Army, which would likely have increased DOD’s travel improper  payment estimate of $8 million by over $4 million. In its fiscal year  2007 PAR, DOD reported that the agency is implementing a sampling  and review process for Army travel payments processed through its  Integrated Automated Travel System in fiscal year 2008 to meet  improper payment reporting requirements.
Although we have identified significant deficiencies in the risk assessment  methodology used to address IPIA requirements at the four agencies  mentioned above, not all agencies have been subjected to an independent  review. Therefore, the extent to which the results of the agencies’ risk  assessments can be relied on may not be fully known. We have previously  recommended that OMB expand its implementing guidance to describe in  greater detail factors that agencies should consider when conducting their  annual risk assessments, such as program complexity, operational  changes, findings from investigative reports, and financial statement and  performance audit reports. OMB agreed with this recommendation and  stated that it has taken steps to address implementing it. Specifically, OMB  stated that it had included factors to be considered in agency risk  assessments in its revised implementation guidance for IPIA.
section_title: Improper Payment Estimates
paragraphs: Our review found that not all agencies have developed improper payment  estimates for all of the programs and activities they identified as  susceptible to significant improper payments. As shown in table 1, the  fiscal year 2007 total improper payment estimate of $55 billion did not  include any amounts for 14 programs, with fiscal year 2007 outlays totaling  about $170 billion.
A majority of these programs represent newly identified risk-susceptible  programs reported by DHS. The identification of these programs as risk- susceptible is a positive step toward addressing IPIA requirements. We  also found, however, that three Department of Health and Human Services  (HHS) programs had not reported improper payment estimates for fiscal  year 2007, even though OMB had required these and other programs to  report selected improper payment information for several years before  passage of IPIA. After the enactment of IPIA, OMB’s implementing  guidance required that these programs continue to report improper  payment information under IPIA.
Since IPIA implementation, HHS has reported on its various improper  payment pilot activities to show that efforts were underway to fully  address IPIA reporting requirements. For fiscal year 2007, HHS reported  that pilot reviews were conducted in various states for the Temporary  Assistance for Needy Families and Child Care and Development Fund  programs and that estimated improper payment rates for these programs  would be reported in fiscal year 2008. Further, HHS reported that it also  expects to report a comprehensive improper payment estimate rate for the  State Children’s Health Insurance Program that will encompass its fee-for- service, managed care, and eligibility components. We recognize that  measuring improper payments for these state-administered programs and  designing and implementing actions to reduce or eliminate them are not  simple tasks, particularly for grant programs that rely on administration  efforts at the state level. Consequently, as we previously reported in April  2006, communication, coordination, and cooperation among federal  agencies and the states will be critical factors in estimating national  improper payment rates and meeting IPIA reporting requirements for  state-administered programs.
Further, we found a few instances where estimates were not based on a  12-month reporting period. For example, HHS’s Medicaid program is the  largest of the programs constituting the total improper payment estimate,  with an estimate of about $13 billion for fiscal year 2007. Reporting for the  first time, the Medicaid program estimate is based on 6 months of fee-for- service claims processed by the states rather than a complete fiscal year.  Generally, OMB guidance requires that a 12-month period be used to  generate improper payment estimates as it more fully characterizes the  extent of improper payments within a program for any given year. In its  PAR, HHS reported that it is completing its review of the remaining 6  months and will report an annual Medicaid fee-for-service error rate,  based on a full fiscal year 2006 fee-for-service claims, in its fiscal year 2008  PAR.
We also found instances where agencies’ estimates encompassed only one  component of a particular program. For example, USDA identified two  types of errors related to its Supplemental Nutrition Program for Women,  Infants, and Children—vendor payment errors and certification errors.  However, as part of its IPIA reporting, USDA only reported on improper  payments resulting from vendor payment errors. For certification errors,  USDA reported that it plans to use results from the 2008 decennial income  verification study to provide a nationally representative estimate and will  report the error rate in fiscal year 2009.
The extent to which other agencies used a period of review less than 12  months or estimated for only a component of their program is unknown,  as most of the agencies reporting estimates did not provide this level of  information in their PARs. As agencies continue to enhance their  measurement process and report on additional program components, it is  likely the total improper payment estimate will increase.
Lastly, we noted that while agencies reported improper payment estimates  for their various programs and activities, only five agencies—consisting of  nine programs—reported to some degree the amount of actual improper  payments they expect to recover and how they will go about recovering  them as part of their IPIA reporting. OMB guidance states that for program  improper payment estimates exceeding $10 million, agencies must address  this IPIA reporting requirement in their PARs. We would also point out  that this separate reporting requirement is distinct and different from the  recovery auditing reporting requirements OMB has outlined in its guidance  for agencies to address in their PAR reporting. We discuss the Recovery  Auditing Act and OMB reporting requirements later in this statement.
We found that of the 78 programs with improper payments estimates, 47  reported improper payment estimates exceeding $10 million. Of this  universe, only 9 agency programs reported on recovery of improper  payments under IPIA. Of the 9, 6 programs reported on both aspects of the  requirement—expected or actual recovery amount and how they will  recover them. The remaining 3 programs reported a recovery amount but  did not discuss how they recovered the amount, or their future plans for  recovering the funds. For example, DHS reported that for its Individuals  and Households program it had collected $18 million of Hurricane Katrina  payments identified as improper during its payment sample testing, but did  not report on its recovery method. In contrast, the Railroad Retirement  Board (RRB) reported it had recovered $104.5 million for fiscal years 2003  to 2006 in Retirement and Survivors Benefits program receivables. RRB  reported that its collection program is in full compliance with the Debt  Collection Improvement Act of 1996 and recoveries are made through a  variety of mechanisms. These include the offset of future benefits,  reclamation from the financial institution of benefits erroneously paid  after the death of a beneficiary, and direct payments from debtors. RRB  also reported that fraudulent payments are referred to the OIG for  prosecution through the Department of Justice (Justice). As agencies  continue to enhance their IPIA reporting, full and reasonable disclosures  regarding actual improper payments and actions to recover those  payments will provide needed transparency of this issue and address the  American public’s increasing demands for accountability over taxpayer  funds.
section_title: Noncompliance Issues with IPIA
paragraphs: For fiscal year 2007, a limited number of agency auditors reported on  compliance issues with IPIA as part of their financial statement audit,  although such reporting is not specifically required by IPIA. Specifically,  auditors for 5 of the 39 agencies included in our scope reported assessing  the agencies’ compliance with IPIA. Of the 5, agency auditors for all except  USAID reported noncompliance issues related to the key requirements of  the act, including risk assessments, sampling methodologies,  implementing corrective actions, recovering improper payments, and  inadequate documentation. Fiscal year 2007 reflected the fourth year that  auditors for HHS and DHS reported noncompliance issues with IPIA,  including not estimating for all risk-susceptible programs and deficiencies  related to sampling and testing of transactions. Agency auditors at the  Department of Transportation (Transportation) and DOD reported  noncompliance with IPIA for a second year. For fiscal year 2007,  Transportation auditors reported that they had not received sufficient  documentation by the time of PAR issuance to determine if the  department’s sampling plan was statistically valid. The auditors for DOD  reported for fiscal year 2007, that the department was still in the process  of developing procedures to identify improper payments and that its  efforts to manage recovery audit contracts had been largely unsuccessful.
As we previously testified before this Subcommittee, separate  assessments conducted by agency auditors provided a valuable  independent validation of agencies’ efforts to implement the act.  Independent assessments would also enhance an agency’s ability to  identify sound performance measures, monitor progress against those  measures, and help establish performance and results expectations.  Without this type of validation or other types of reviews performed by  GAO and agency OIGs, it is difficult to determine the magnitude of  deficiencies that may exist in agencies’ IPIA implementation efforts.
section_title: Statutory or Regulatory Barriers
paragraphs: As previously mentioned, for fiscal year 2007, 21 agencies reported  improper payment estimates for 78 programs totaling $55 billion for fiscal  year 2007. Of the 21 agencies, 16 reported improper payment estimates  that exceeded $10 million for one or more programs, and therefore, under  OMB guidance, were required to report on various elements as part of  their plan to reduce improper payments, including any statutory or  regulatory barrier that may limit the agencies’ corrective actions in  reducing improper payments. Of the 16 agencies required to report on any  statutory or regulatory barriers, 14 agencies reported on whether they  had such barriers which may limit corrective actions in reducing improper  payments. The remaining 2 agencies did not address whether any  statutory or regulatory barriers existed. We further noted that of the 14  agencies that addressed statutory or regulatory barriers, 9 identified such  barriers that may limit corrective actions to reduce improper payments.  The remaining 5 agencies reported that they either had no existing  statutory or regulatory barriers or were unaware of any at this time.
Agencies cited various barriers that restricted their ability to better  manage their programs against improper payments. For example, the  Office of Personnel Management’s (OPM) Retirement Program (Civil  Service Retirement System and Federal Employees Retirement System)  reported in its fiscal year 2007 PAR that it faces regulatory barriers that  restrict its ability to recover improper payments. For instance, once OPM  learns of the death of an annuitant, it requests that Treasury reclaim all  posthumously issued payments from the deceased’s bank account. When  there is insufficient money in the account, OPM would like to seek  collection from the individual who last withdrew money from the account.  According to OPM, based on current law and Treasury’s regulations,  financial institutions are barred from providing OPM with the information  necessary to recover these improper payments. The law and regulations  have specifically exempted the Social Security Administration (SSA), RRB,  and VA from this prohibition, but not OPM. Further, OPM reported that  this situation has a substantial impact on its ability to prevent and recover  improper payments. OPM has determined that the current law will need to  be amended to overcome this prohibition and Treasury has drafted  legislative language to address this issue.
The Department of Education (Education) reported that the ability to  perform data matching between Federal Student Aid applications and tax  return data would substantially reduce improper payments in the Pell  Grant program, as the large majority of errors are the result of  misreporting of income and related data fields. However, according to  OMB, Section 6103(c) of the Internal Revenue Code, concerning  confidentiality of tax return information, precludes data matching with  regard to grants by Education. In its January 2007 annual report on  improper payments, OMB reported that the President’s Fiscal Year 2008  Budget contained a series of reforms that are necessary to achieve greater  program integrity and payment accuracy, including a proposal to facilitate  data matching of Pell grant program data. This report indicates that,  through administrative changes, Education and the Internal Revenue  Service intend to implement a process to verify students’ (and their  parents’) income, tax, and certain household information appearing on  their tax return that they provided as part of their application for federal  student aid.
section_title: Management Challenges
paragraphs: Agencies continue to face challenges in the implementation or design of  internal controls to identify and prevent improper payments. Over half of  the agencies’ OIG identified management or performance challenges that  could increase the risk of improper payments, including challenges related  to internal controls. In addition, several OIGs identified instances where  agencies needed to improve their oversight of grantees receiving federal  funds. For example, in its fiscal year 2007 PAR, Education’s OIG reported  that its recent investigations continued to uncover problems, including  inadequate attention to improper payments and failure to identify and take  corrective action to detect and prevent fraudulent activities by grantees.  The Small Business Administration’s (SBA) OIG included a management  challenge related to the agency’s controls over the section 7(a) loan  guaranty purchase process. The OIG reported that the majority of the  loans made under the program are made with little or no review by SBA  prior to loan approval because SBA has delegated most of the credit  decisions to lenders originating these loans. SBA’s review of lender  requests for guaranty purchases on defaulted loans is, therefore, the  agency’s primary tool for assessing lender compliance on individual loans  and protecting SBA from making erroneous purchase payments. However,  OIG audits of early defaulted loans and SBA’s guaranty purchase process  have shown that reviews made by the National Guaranty Purchase Center  have not consistently detected lender failures to administer loans in full  compliance with SBA requirements and prudent lending practices,  resulting in improper payments.
Management challenges were also found in agency programs that did not  estimate improper payments in their fiscal year 2007 PAR. The National  Science Foundation (NSF) OIG found that NSF did not have a  comprehensive, risk-based system to oversee and monitor contract awards  and ensure that the requirements of each contract were being met. In  another example, Treasury’s OIG identified erroneous and improper  payments as a major management challenge and reported that some tax  credits, such as the Education Credit, provide opportunities for abuse in  income tax claims. Related to this issue, Treasury’s independent auditor  reported that weaknesses in controls over the collection of tax revenues  owed to the federal government and over the issuance of tax refunds  resulted in lost revenue to the federal government and potentially billions  of dollars in improper payments, which the auditors classified as a  material weakness.
section_title: Agencies’ Efforts to Report Recovery Auditing Information Continue
paragraphs: Section 831 of the National Defense Authorization Act for Fiscal Year 2002  provides an impetus for applicable agencies to systematically identify and  recover contract overpayments. The act requires that agencies that enter  into contracts with a total value in excess of $500 million in a fiscal year  carry out a cost-effective program for identifying and recovering amounts  erroneously paid to contractors. 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, shall be credited back to the original appropriation  from which the improper payment was made, subject to restrictions as  described in the legislation.
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. However, we would like to  emphasize that 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 and effective to pay bills properly in the first  place. Prevention is always preferred to detection and collection. Aside  from minimizing overpayments, preventing improper payments increases  public confidence in the administration of 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.
Beginning in fiscal year 2004, OMB required that applicable agencies  publicly report on their recovery auditing efforts as part of their PAR  reporting of improper payment information. Agencies are required to  discuss any contract types excluded from review and justification for  doing so. Agencies are also required to report, in 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. In addition, agencies are to discuss the following: a general  description and evaluation of the steps taken to carry out a recovery  auditing program, a corrective action plan to address root causes of  payment error, and a general description and evaluation of any  management improvement program.
For fiscal year 2007, agencies reported reviewing about $329 billion in  contract payments to vendors under recovery audit programs. From these  reviews, agencies reported identifying about $121 million in improper  payments for recovery and actually recovering about $87 million, or an  estimated overall rate of recovery of approximately 72 percent, as shown  in table 2.
We found that the number of agencies reporting recovery audit  information remained the same when compared to the prior year.  However, the fiscal year 2007 dollar amounts identified for recovery  significantly decreased by about $217 million from fiscal year 2006. We  noted that a significant decrease in DOD’s fiscal year 2007 reporting of  amounts identified for recovery and amounts recovered from the prior  year contributed to the overall decrease. For example, for fiscal year 2006  DOD reported $195.3 million for contract overpayments identified for  recovery. This amount decreased sharply to $24.6 million for fiscal year  2007. Similarly, DOD reported recovering $137.9 million for fiscal year  2006 compared to just $19.6 million for fiscal year 2007. According to  OMB, the significant decrease in DOD’s reported amounts resulted from  the department’s exclusion of voluntary refunds of contract payments at  the recommendation of a DOD OIG audit since the voluntary refunds did  not originate from recovery audit efforts.
In addition, we noted that agencies used different types of resources to  carry out their recovery audit programs. Of the 21 agencies reporting  recovery auditing information for fiscal year 2007, 9 reported they  contracted out their recovery audit services, 3 conducted in-house  recovery audits, 5 reported using both in-house and recovery audit  contractors, and two were silent. The remaining 2 agencies—HUD and  Labor—did not conduct recovery audits as they reported it was not cost  beneficial.
HUD reported in its fiscal year 2007 PAR that current internal controls  over its contract payment and contract close-out processes were adequate  to reduce the risks of overpayments. HUD further reported on continued  initiatives such as strengthening its fund control processes. Therefore,  HUD concluded that a recovery auditing program would not be cost  beneficial and was not warranted. Likewise, Labor reported that its  sampling and testing of nonpayroll costs, consisting of department  expenses including contract payments related to the operation and  administration of programs’ and headquarters’ activities for the current  and prior fiscal years found no improper payments in its contract  payments. Based on these results, Labor decided that a recovery auditing  program was not warranted in fiscal year 2007. However, Labor reported  that it plans to implement a recovery auditing program for contract  payments in fiscal year 2008, and will report its recovery audit actions,  costs, and amounts recovered on an annual basis.
From our review of the PARs, we found that agencies’ reporting of the  various recovery auditing reporting elements was limited. For example,  agencies generally provided some information on steps to carry out a  recovery audit program. However, less than half, or 8 agencies reported on  their corrective action plans to address root causes of contract payment  errors. For example, the Department of Energy (Energy) reported that it  established a policy that prescribes requirements for identifying  overpayments to contractors and establishes reporting standards to track  the status of recoveries. However, Energy did not report on corrective  actions to address the root causes of contract overpayments.
We also found that three agencies—Department of Commerce  (Commerce), Justice, and SSA—reported on justifications for certain  contracts that were excluded from their recovery audit review. For  example, Commerce reported that travel payments, bankcards/purchase  cards, all procurement vehicles with other federal agencies, and  government bills of lading were excluded from its review, as the costs for  recovery audit activities would likely exceed the benefits of a recovery  audit. Justice reported that certain payments at foreign offices were  excluded as they were processed by the Department of State. Lastly, SSA  reported that it excluded cost-type contracts that either (1) had not been  completed where payments are interim, provisional, or otherwise subject  to further adjustment by the government in accordance with the terms and  conditions of the contract, or (2) were completed, subjected to final  contract audit, and prior to final payment of the contractor’s final voucher,  all prior interim payments were accounted for and reconciled.
section_title: Concluding Observations
paragraphs: In closing, we recognize that measuring improper payments and designing  and implementing actions to reduce them are not simple tasks or easily  accomplished. Further, while internal control should be maintained as the  front-line of defense against improper payments, recovery auditing holds  promise as a cost-effective means of identifying contractor overpayments.  We are pleased that agencies are identifying and reporting on more risk- susceptible programs and have reported that overall program error rates  have decreased since IPIA implementation. Yet, we also note that  deficiencies continued to be identified regarding agencies’ efforts to  comply with IPIA based on independent assessments conducted by agency  auditors or from past GAO reviews. As agencies continue to strengthen  their program integrity efforts and recovery audit reviews, fulfilling the  requirements of IPIA and the Recovery Auditing Act will require sustained  attention to implementation and oversight to monitor whether desired  results are being achieved.
Mr. Chairman, this concludes my statement. I would be pleased to respond  to any questions that you or other members of the Subcommittee may  have.
section_title: Contact and Acknowledgments
paragraphs: For more information regarding this testimony, please contact McCoy  Williams, Managing Director, Financial Management and Assurance, at  (202) 512-2600 or by e-mail at williamsm1@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this testimony. Individuals making key contributions to this  testimony included Carla Lewis, Assistant Director; Gabrielle Fagan;  Neeraj Goswami; Mary Osorno; Christina Quattrociocchi; Donell Ries; and  Viny Talwar.
section_title: Appendix I: Agencies and Related Programs Included in Our Review of Fiscal Year 2007 Performance and Accountability Reports and Annual Reports
subsections: section_title: Agency for International Development
paragraphs: Community Development Block Grant (Entitlement Grants,  States/Small Cities)
Research and Education Grants and Cooperative Agreements  Federal Employees Group Life Insurance  Federal Employees Health Benefits Program    Retirement Program (Civil Service Retirement System and Federal  Employees Retirement System)  504 Certified Development Companies (Debentures)  504 Certified Development Companies (Guaranties)  7(a) Business Loan Program (Guaranty Purchases)  7(a) Business Loan Program (Guaranty Approvals)
Old Age and Survivors’ Insurance  100   Business Class Travel and Sensitive Payments  International Information Program—U.S. Speaker and Specialist  Program  International Narcotic and Law Enforcement Affairs—Narcotics  Program  109   Highway Planning and Construction  110   Earned Income Tax Credit  112   Dependency and Indemnity Compensation   nnual report was not ilble as of the end of fieldwork.
section_title: Appendix II: Improper Payment Estimates Reported in Agency Fiscal Year 2006 and 2007 Performance and Accountability Reports or Annual Reports
paragraphs: Appendix II: Improper Payment Estimates  Reported in Agency Fiscal Year 2006 and 2007  Performance and Accountability Reports or  Annual Reports Fiscal year  2006 total  estimate  (dollars in  millions)
Fiscal year  2006 error rate  (percent)
Fiscal year  2007 total  estimate  (dollars in  millions) rate (percent)
Cooperative Agreements,  Grants, and Contracts  Child and Adult Care Food  Program  Conservation Security  Program (previously Farm  Security and Rural  Investment)
Fiscal year  2006 total  estimate  (dollars in  millions)
Fiscal year  2006 error rate  (percent)
Fiscal year  2007 total  estimate  (dollars in  millions) rate (percent)
Fiscal year  2007 total  estimate  (dollars in  millions)
Fiscal year  2006 error rate  (percent) millions) rate (percent)
Fiscal year  2006 total  estimate  (dollars in  millions)
Fiscal year  2006 error rate  (percent)
Fiscal year  2007 total  estimate  (dollars in  millions) rate (percent)
Immigration and Customs  Enforcement—Detention  and Removal OperationsImmigration and Customs  Enforcement—Federal  Protective Service  Immigration and Customs  Enforcement— InvestigationsBlock Grant (Entitlement  Grants, States/Small  Cities)
Fiscal year  2006 total  estimate  (dollars in  millions)
Fiscal year  2006 error rate  (percent)
Fiscal year  2007 total  estimate  (dollars in  millions) rate (percent)
77  All programs and activities  79  All programs and activities  80  All programs and activities  83  Retirement Program (Civil  Service Retirement  System and Federal  Employees Retirement  System)  84  All programs and activities  85  All programs and activities  30  Railroad Retirement Board  86  Railroad Unemployment  Companies (Debentures)
Companies (Guaranties)  92  7(a) Business Loan  Program (Guaranty  Purchases)  93  7(a) Business Loan  Program (Guaranty  Approvals)
Fiscal year  2007 total  estimate  (dollars in  millions)
Fiscal year  2006 error rate  (percent) millions) rate (percent)
Fiscal year  2006 total  estimate  (dollars in  millions)
Fiscal year  2006 error rate  (percent)
Fiscal year  2007 total  estimate  (dollars in  millions) rate (percent) nnual improper pyment etimte or error rte.  t it hd no progr or ctivitie susceptible to ignificnt improper pyment.  l yer 2006 etimte or error rte was pdted to the revied etimte or error rte reported in  the fil yer 2007 PAR or nnual report.  te was less thn one percent or error rte ronded to zero for prpo of thi  tetimony.  bove.  ddress improper pyment or IPIA in it PAR or nnual report for fil yer 2006,  fil yer 2007, or both.  l yer 2007 was the firt yer thi gency was inclded in ocope of review.  nnual report was not ilble as of the end of fieldwork.  t it wold etimte improper pyment in the fre for thi progrm. See tble 1  of thi tetimony.  m no longer susceptible to ignificnt improper pyment.  t the nnual improper pyment mont or error rte was zero.
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