DOD Financial Management: Significant Improvements Needed in Efforts to Address Improper Payment Requirements
Published: 2013-05-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD reported $1.1 billion in improper payments for fiscal year 2011, which marked the eighth year of implementation of IPIA, as well as the first year of implementation of IPERA. IPIA required executive branch agencies to annually identify programs and activities susceptible to significant improper payments, estimate the amount of improper payments for such programs and activities, and report these estimates along with actions taken to reduce them. IPERA amended IPIA and expanded requirements for recovering overpayments across a broad range of federal programs.
GAO was asked to review the progress DOD has made to identify, estimate, and reduce improper payments. GAO's objective was to review the extent to which DOD has implemented key provisions of IPIA, IPERA, and OMB guidance. GAO reviewed improper payment requirements; analyzed agency financial reports, internal guidance and plans, and sampling methodologies; and interviewed cognizant officials. The scope for this engagement was DOD's reported improper payment information for fiscal year 2011 and DOD's plans and actions to estimate commercial pay improper payments for fiscal year 2012.
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) did not adequately implement key provisions of the Improper Payments Information Act of 2002 (IPIA) and the Improper Payments Elimination and Recovery Act of 2010 (IPERA) and Office of Management and Budget (OMB) requirements for fiscal year 2011. Most important, GAO found that DOD's improper payment estimates reported in its fiscal year 2011 Agency Financial Report were neither reliable nor statistically valid because of long-standing and pervasive financial management weaknesses and significant deficiencies in the department's procedures to estimate improper payments. For example, DOD did not
have key quality assurance procedures in place, such as reconciliations, to validate the completeness and accuracy of the populations used to estimate improper payments;
develop appropriate sampling methodologies for estimating improper payments;
maintain key documentation supporting its reported improper payment estimates.
Also, GAO found significant deficiencies in DOD's policies and procedures to address other key improper payment requirements for fiscal year 2011. Specifically, DOD did not
have procedures to identify root causes of improper payments and develop related corrective actions,
conduct recovery audits for any of its programs or determine that these audits would not be cost effective, and
have procedures to ensure that its annual improper payment and recovery audit reporting is complete, accurate, and in compliance with IPERA and OMB reporting requirements.
DOD has taken some actions since fiscal year 2011, such as reporting a statistical estimate for Defense Finance and Accounting Service commercial pay and issuing revised Financial Management Regulation chapters on improper payments and recovery audits. However, until the department takes action to correct the deficiencies GAO found related to identifying, estimating, reducing, recovering, and reporting improper payments and thereby fulfills legislative requirements and implements related guidance, it remains at risk of continuing to make improper payments and wasting taxpayer funds.
section_title: What GAO Recommends
paragraphs: GAO is making 10 recommendations to improve DOD's processes to identify, estimate, reduce, recover, and report on improper payments. DOD concurred with 9 and partially concurred with 1 of the recommendations and described its plans to address them.

section_title: Letter
paragraphs: The Department of Defense (DOD) reported over $1.1 billion in improper  payments for fiscal year 2011. An improper payment is 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. With  fiscal year 2011 reported gross outlays of approximately $1,017 billion,  DOD’s efforts to identify, report, and recover improper payments are  particularly significant to government-wide improper payment reduction  initiatives.
GAO, Improper Payments: Significant Improvements Needed in DOD’s Efforts to  Address Improper Payment and Recovery Auditing Requirements, GAO-09-442  (Washington, D.C.: July 29, 2009). needed to effectively implement the requirements of the Improper  Payments Information Act of 2002 (IPIA). Since that report, IPIA was  amended by the Improper Payments Elimination and Recovery Act of  2010 (IPERA). IPERA, enacted on July 22, 2010, amended IPIA and,  among other things, expanded requirements for recovering overpayments  across a broad range of federal programs.
You asked us to review the progress DOD has made to identify and  estimate improper payments and to develop appropriate and prompt  corrective action to reduce improper payments. Our objective was to  review the extent to which DOD has implemented key provisions of IPIA,  IPERA, and Office of Management and Budget (OMB) guidance. The  scope for our engagement was DOD’s improper payment information  presented in the department’s fiscal year 2011 Agency Financial Report   because this was the most current annual report available at the  (AFR), time of our review. We assessed the department’s fiscal year 2012 plans  and actions to statistically estimate improper payments for commercial  payments processed by the Defense Finance and Accounting Service  (DFAS), DOD’s largest program, because DOD’s reported improper  payment amounts for this program for fiscal year 2011 were limited to  known improper payments, rather than a statistical estimate.
To meet this audit objective, we reviewed IPIA and IPERA requirements,  OMB guidance, and relevant best practices and compared them with  DOD’s fiscal year 2011 improper payments reporting in its AFR, internal  guidance in effect during fiscal year 2011 and subsequent revisions,  sampling methodologies, risk assessments, and the department’s  corrective action and payment recapture plans. In this context, we met  with key DOD officials involved with the department’s improper payments  efforts, including officials from the Office of the Under Secretary of  Defense (Comptroller) (OUSD(C)), DFAS, the TRICARE Management  Activity (TMA), and the United States Army Corps of Engineers  (USACE).
We conducted site visits at two DFAS processing center locations  (Columbus, Ohio and Indianapolis, Indiana) to determine DFAS’s  processes for implementing improper payment requirements because  DFAS compiles the reported improper payment information for five of   We selected the DFAS-Columbus site because  DOD’s eight programs. this facility processes the largest portion of DOD’s commercial payments  and hosts the systems used to track commercial pay improper payments.  We selected DFAS-Indianapolis because this facility is responsible for  estimating improper payments and compiling and reporting the results to  the OUSD(C) for five of DOD’s programs.
DFAS develops improper payment information for military pay, civilian pay, military  retirement, DFAS commercial pay, and travel pay. TMA develops improper payment  estimates for military health benefits, and USACE develops estimates for USACE travel  pay and USACE commercial pay. substantiate the improper payment estimates reported in its fiscal year  2011 AFR. In addition, the department did not perform key quality  assurance procedures, including reconciliations on all of the populations  for its programs to validate that the populations were complete, valid, and  accurate before selecting the statistical samples that were used to  estimate improper payments. Therefore, we determined that the data  were not reliable. These problems are discussed further in our report.
We conducted this performance audit from October 2011 to May 2013 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. A more detailed description of  our scope and methodology is provided in appendix I.
subsections: section_title: Background
paragraphs: One of the five government-wide initiatives in the 2001 President’s  Management Agenda (PMA) was improved financial management, which  targeted improper payments as an area with opportunities for  improvement. This initiative called for the administration to establish a  baseline on the extent of improper payments. In July 2001, as part of its  efforts to advance the PMA initiative, OMB revised Circular No. A-11 by  requiring 16 federal agencies to submit data on improper payments,  including estimated improper payment rates. Section 831 of the National  Defense Authorization Act for Fiscal Year 2002 included the provisions  commonly referred to as the Recovery Auditing Act (RAA).required, among other things, that all executive branch agencies entering  into contracts with a total value exceeding $500 million in a fiscal year   The RAA  have cost-effective programs for identifying errors in paying contractors  and for recovering amounts erroneously paid.
Fiscal year 2011 marked the eighth year of the implementation of IPIA as  well as the first year of implementation of IPERA. IPIA required executive  agencies to (1) identify programs and activities susceptible to improper  payments (typically referred to as risk assessments), (2) estimate the  amount of improper payments in susceptible programs and activities, and  (3) report these improper payment estimates and actions taken to reduce  them.
Among other things, IPERA amended IPIA by changing the definition of  programs susceptible to significant improper payments and adding  minimum risk factors for agencies to consider in identifying such  programs. In addition, IPERA generally repealed the RAA and included a  new, broader requirement for agencies to conduct recovery audits, where  cost effective, for each program and activity with at least $1 million in  annual program outlays. This IPERA provision significantly lowered the  threshold for required recovery audits and expanded the scope for  recovery audits to all programs and activities, including grant and loan  programs. IPERA also added new accountability provisions. For example,  in its improper payments reporting, an agency is to describe how it  ensures that agency managers, programs, and states and localities  (where applicable) are held accountable for meeting applicable improper  payment reduction targets as well as establishing and maintaining  sufficient internal controls to prevent improper payments and promptly  detect and recover those improper payments that are made.
subsections: section_title: Legislative Requirements Related to Identifying, Estimating, Reducing, Recovering, and Reporting Improper Payments
paragraphs: The following sections describe key provisions of IPIA, the RAA, and  IPERA.
Under IPIA, executive agencies were required to annually review all  programs and activities that they administer and identify any that may be  susceptible to significant improper payments. OMB, in its 2006  guidance,to apply to only those programs and activities where the risk level was  unknown. For those programs deemed not risk susceptible, risk  assessments were required every 3 years. In addition, the guidance  defined “significant improper payments”—the threshold at which agencies  must perform an estimate for a program—as annual improper payments  in the program exceeding both 2.5 percent of program payments and   $10 million.   interpreted this IPIA requirement for annual risk assessments  IPERA changed several of the requirements associated with risk  assessments. Specifically, IPERA did the following:
Amended IPIA to require agency heads to review agency programs  and activities during the year following IPERA’s enactment and at  least once every 3 fiscal years thereafter to identify those that may be  susceptible to significant improper payments.
Defined “significant” in the law for the purpose of determining a  program’s susceptibility to significant improper payments. IPERA  defined “significant improper payments” as gross annual improper  payments (i.e., the total amount of overpayments plus  underpayments) in the program that may have exceeded either   (1) both 2.5 percent of program outlays and $10 million, or   (2) $100 million (regardless of the improper payment percentage of  total program outlays).  Included the following minimum risk factors likely to contribute to a  susceptibility to significant improper payments that agencies are to  consider in performing risk assessments: (1) whether a program or  activity is new to the agency; (2) the complexity of the program;   (3) the volume of payments made through the program or activity;   (4) whether payment decisions are made outside of the agency, such  as by a state or local government; (5) recent major changes in  program funding, authorities, practices, or procedures; (6) the level,  experience, and quality of training for personnel responsible for  making eligibility determinations or certifying that payments are  accurate; and (7) significant deficiencies in the audit report of the  agency or other relevant management findings that might hinder  accurate payment certification.
Under IPIA, for each program or activity identified as susceptible to  significant improper payments, the head of each agency was to   (1) estimate the annual amount of improper payments and (2) submit  those estimates to Congress before March 31 of the following applicable  year, with all agencies using the same method of reporting, as  determined by the Director of OMB.
IPERA revised the IPIA requirements for estimating improper payments  by directing agency heads to produce statistically valid estimates of their  agencies’ improper payments, or an estimate that is otherwise  appropriate using a methodology approved by the Director of OMB, and  to include the annual improper payment estimates in their performance  and accountability reports or in the agency financial reports.
Under IPIA, annual reporting requirements for reducing improper  payments included a description of the steps the agency has taken to  ensure that agency managers (including the agency head) are held  accountable for reducing improper payments.
IPERA amended IPIA’s requirements for reporting on corrective actions.  Specifically, it required that agencies’ annual reporting include the  estimated completion dates of planned corrective actions. Also, it required  agencies to report on steps taken to ensure that states and localities,  where applicable, are held accountable for reducing improper payments  in the federal programs they implement. OMB’s implementing guidance  for IPERA also states that for those agency programs not implemented  directly by federal or state agencies or governments, agencies may also  consider establishing these accountability mechanisms. OMB encouraged  agencies to leverage new technologies and techniques to assist them in  preventing and reducing improper payments. Agencies implementing  long-term, ongoing corrective actions should annually review their existing  corrective actions to determine if any existing action can be intensified or  expanded, resulting in a high-impact, high return-on-investment in terms  of reduced or prevented improper payments.
Recovery audits were not required under IPIA, but were required under  the RAA. Specifically, agencies were required to carry out a cost-effective  program of recovery audits to identify and recover improper payments to  contractors, if they entered into contracts with a total value that exceeded  $500 million in a fiscal year.
IPERA generally repealed the RAA, expanded the scope for recovery  audits beyond commercial payments to include all programs and  activities, and lowered the threshold of annual outlays requiring agencies  to conduct recovery audits—from $500 million in annual agency  contracting to $1 million in annual program expenditures. Specifically,  under the recovery auditing provisions of IPERA, agencies are required to  identify and recover improper payments by conducting recovery audits,  also known as payment recapture audits, for agency programs that  expend $1 million or more annually, if such audits would be cost effective.  In its November 2010 guidance, OMB required agencies to submit  payment recapture audit plans by January 14, 2011, that described the  agencies’ current payment recapture efforts under authorities that pre- dated IPERA and their planned payment recapture efforts based on the  new authorities provided by IPERA.
IPIA required, with respect to any program or activity of an agency with  estimated improper payments that exceeded $10 million, the head of the  agency to provide along with the estimate a report on what actions the  agency was taking to reduce the improper payments, including a discussion of the causes of the improper payments identified, actions  taken to correct those causes, and results of the actions taken to  address those causes;  statement of whether the agency had the information systems and  other infrastructure it needed in order to reduce improper payments to  minimal cost-effective levels; description of the resources the agency had requested in its budget  submission to obtain the necessary information systems and  infrastructure if the agency did not have such systems and  infrastructure; and description of the steps the agency had taken to ensure that agency  managers (including the agency head) were held accountable for  reducing improper payments.
For RAA, OMB guidance required that agencies include in their annual  reporting, among other things, a general description and evaluation of the  steps taken to carry out a recovery auditing program, the total amount of  contracts subject to review, the actual amount of contracts reviewed, the  amounts identified for recovery, and the amounts actually recovered in a  current year. Further, OMB Circular No. A-136 required agencies to report  cumulative amounts identified for recovery and amounts actually  recovered as a part of their current year reporting.
IPERA requires the reporting of estimates without regard to thresholds.  IPERA and OMB guidance require agencies to report, as part of their  agency financial reports, certain information regarding the improper  payment estimation process and efforts to recover improper payments.  These requirements include, among other things, gross estimates of the annual amount of improper payments (i.e.,  overpayments plus underpayments) made in the program and a  description of the methodology used to derive those estimates; discussion of the root causes of the improper payments identified,  actions planned or taken to correct those causes, the planned or  actual completion date of those actions, and the results of the actions  taken; and discussion of the amount of actual improper payments that the agency  expects to recover and how these payments will be recovered.
According to OMB’s recovery auditing guidance under IPERA,must continue to report information on improper contract payments  reviewed, identified, and recaptured, according to instructions contained  in OMB Circulars No. A-123 and A-136. In addition, agencies shall report   agencies  information on other types of recaptured improper contract payments. For  instance, where applicable, agencies shall also identify and report  information on improper contract payments recovered, if not already  included in the annual reporting, including  improper contract payments voluntarily returned to agencies by  contractors prior to agency or payment recapture auditor identification;  improper contract payments identified by the vendors, contractors, or  agency staff, and used to provide offsets to future payments rather  than returned to agencies;  improper contract payments identified and returned through agency  Office of Inspector General efforts such as audits, reviews, or tips  from the public;  improper contract payments identified and recovered through  management postpayment reviews other than payment recapture  audits;  improper contract payments identified and returned or paid through  contract closeout; and payment recapture targets and performance in meeting those targets  on an annual and quarterly basis.
section_title: DOD’s Improper Payments and Recovery Auditing Policies
paragraphs: DOD’s improper payment and recovery auditing policies are in two  chapters of its Financial Management Regulation (FMR). DOD uses its  FMR to govern financial management within the department by  establishing the requirements, principles, standards, systems,  procedures, and practices necessary to comply with financial  management statutory and regulatory requirements applicable to the  department. DOD’s FMR chapter on improper payments that was in effect  during fiscal year 2011 was issued in 2008, before IPERA was enacted.  In October 2011, the department issued a revised chapter on improper  payments to implement the requirements of IPERA and associated OMB  guidance.during fiscal year 2011, DOD components, which include the military  services and defense agencies, are to perform risk assessments,  statistically estimate improper payments, identify root causes and develop  corrective actions, and report improper payment information annually to   According to the FMR chapter on improper payments in effect  the OUSD(C). The OUSD(C) is responsible for consolidating component  information and preparing department-wide improper payment reports.  DOD’s FMR chapter on recovery efforts that was in effect during fiscal  year 2011 was issued in 2009, before IPERA was enacted. In October  2012, the department issued its revised FMR chapter on recovery audits  to implement the requirements of IPERA and associated OMB  guidance. The October 2012 recovery auditing chapter was published  after fiscal year 2011 was completed, and we determined that the  revisions did not affect the findings in this report.
section_title: GAO’s 2009 Report Recommendations
paragraphs: In July 2009, prior to the enactment of IPERA, we reported on DOD’s  efforts to address improper payments under IPIA and the recovery  auditing requirements under the RAA. In that report, we made 13  recommendations aimed at improving DOD’s efforts to strengthen its  improper payment and recovery auditing processes. At that time, DOD  did not concur with 12 of our 13 recommendations. However, as  discussed in that report, we continued to believe that all 13  recommendations were critical for DOD to enhance its efforts to minimize  improper payments and recover those that were made. Figure 1 lists the  recommendations from our 2009 report.
The department reported improper payment information for the following  eight programs in its fiscal year 2011 AFR:
Military health benefits are payments made to health care providers  for services provided to active duty personnel and their family  members, retirees and their family members, and family members of  deceased service members through the TRICARE program.
Military pay includes active duty pay (Army, Navy, Air Force, and  Marine Corps) as well as the reserve components’ pay (Army  Reserve, Army National Guard, Navy Reserve, Air Force Reserve, Air  National Guard, and Marine Corps Reserve).
Civilian pay includes civilian pay accounts from each of the  components (Army, Air Force, Navy/Marine Corps, and defense  agencies).
Military retirement pay includes both payments to military retirees and  the family members of deceased retirees (annuitants).
Travel pay includes travel payments made through the Defense  Travel System (DTS) for the military services and defense agencies  as well as additional travel payments made by the Army, Navy, and  Air Force for vouchers paid outside of DTS.
DFAS commercial pay includes payments made by DFAS on behalf of  DOD components to vendors and contractors.
USACE travel pay includes travel payments made by USACE to  employees.
USACE commercial pay includes contract payments made by  USACE.
Figure 2 shows the total outlays, improper payment totals (sum of the  overpayments and the underpayments), and total improper payments as  a percentage of total outlays, as reported by DOD in its fiscal year 2011  AFR. The improper payment total shown for DFAS commercial pay was  not a statistical estimate, but was limited to known improper payments.
As shown in figure 2, DOD identified its programs for improper payment  estimation and reporting in such a way that each program represents a  category of disbursements made by the department. OMB’s guidance  does not specify how agencies are to identify programs for improper  payment estimation and reporting, but advises that agencies determine  the grouping of programs that most clearly identifies and reports improper  payments for their agency.
section_title: Significant Deficiencies Existed in DOD’s Implementation of Key Provisions of IPIA, IPERA, and OMB Guidance
paragraphs: DOD did not adequately implement key provisions of IPIA, IPERA, and  OMB guidance related to estimating improper payments, identifying  programs susceptible to significant improper payments, reducing  improper payments through corrective actions, recovering improper  payments, and reporting improper payment estimates and recovery  efforts. Most important, we found that DOD’s improper payment estimates  were neither reliable nor statistically valid. Also, DOD did not conduct a  risk assessment for fiscal year 2011 in accordance with IPERA  requirements. Further, although DOD had a corrective action plan for  fiscal year 2011, the plan did not identify the underlying reasons or  conditions that caused the errors to occur. Additionally, DOD did not  conduct recovery audits nor did it determine that such audits would not be  cost effective, as required by IPERA. Finally, the department did not have  procedures to ensure that improper payment and recovery audit reporting  in its fiscal year 2011 AFR was complete, accurate and compliant.
subsections: section_title: DOD’s Improper Payment Estimates Were Neither Reliable Nor Statistically Valid
paragraphs: DOD’s improper payment estimates reported in its fiscal year 2011 AFR  were neither reliable nor statistically valid because of several deficiencies  in the department’s procedures as documented in its sampling  methodologies. Because of DOD’s long-standing and pervasive financial  management weaknesses, the department did not have complete and  accurate populations of payments from which to select statistical  samples. We also identified deficiencies related to its (1) sampling  methodologies and (2) maintenance of key documentation supporting its  improper payment estimates.
The foundation of reliable statistical sampling estimates is a complete,  accurate, and valid population from which to sample. However, the  department’s long-standing and pervasive financial management  weaknesses precluded it from validating the completeness of its payment  transaction populations. For example, DOD’s fiscal year 2011 Statement  of Budgetary Resources (SBR) reported nearly $1,017 billion in gross  outlays in fiscal year 2011. As previously shown in figure 2, the outlays  for the eight programs for which the department reported improper  payments totaled $617 billion. DOD attributed most of the difference  between the SBR gross outlays and outlays for the eight programs to  intragovernmental transactions and trust fund transfers, which IPERA  exempted from improper payment estimation and reporting requirements.  However, the department was unable to reconcile these two outlay  amounts. DOD acknowledged in its fiscal year 2011 AFR that reported  outlays for the eight programs could not be reconciled to gross outlays  reported in the SBR. As a result, DOD could not ensure that all required  outlays for improper payment reporting purposes were included in the  sample populations.
Although DOD had documented methodologies for developing improper  payment estimates, DOD did not establish and perform key quality  assurance procedures, such as reconciliations, on its program  populations to validate that the populations were complete and accurate  before selecting the statistical samples that were used to estimate  improper payments. Standards for Internal Control in the Federal  Government states that control activities such as reconciliations are an  integral part of an entity’s planning, implementing, reviewing, and  accountability for stewardship of government resources and achieving  effective results. An effective reconciliation process would involve  comparing transactions to supporting documentation, systems of record,  or both to ensure the completeness, validity, and accuracy of financial  information. An effective reconciliation process also involves resolving  any discrepancies that may have been discovered and determining if  unauthorized changes have occurred to transactions during processing.
In addition to the lack of complete, valid, and accurate populations,  deficiencies in DOD’s procedures as documented in its sampling  methodologies further impaired DOD’s ability to produce reliable improper  payment estimates. First, DOD’s sampling methodologies are based on  the use of simple random samples to select payments to review for  improper payments and thereby derive error rates. Using these  methodologies, each transaction in the programs’ sample populations had  an equal chance of selection without regard to the complexity of the  transaction or its risk of being an improper payment. OMB guidance  states that agencies will need to utilize complex sample designs to the  extent their payment population contains wide-ranging dollar amounts,  types of payments, or both.
In addition, DOD did not use a sampling unit that was statistically  appropriate for any of its programs. For example, the sampling unit for  travel pay for fiscal year 2011 was the travel voucher. Each voucher had  an equal chance of selection in the samples upon which improper  payment estimates were based. However, DOD’s travel pay transactions  range in complexity from an individual soldier’s relocation to payments  made on travel vouchers involving multiple travel orders. As another  example, DFAS commercial pay’s sampling unit was an individual  invoice. As DOD reported in the fiscal year 2012 AFR, a $10 million  invoice had the same chance of being sampled as a $100 invoice.  Generally, higher dollar payments involve more complex transactions and  thus are at greater risk of being an improper payment. If a population  contains a few large invoices and many smaller invoices, equal probability  sampling is unlikely to capture the large invoices. DOD’s sampling  methodologies do not account for this risk. By not designing more  complex sampling methodologies that utilize more statistically appropriate  sampling units, such as dollars paid, DOD’s improper payment estimates  could be significantly understated.
Further, DOD provided evidence that it used its sampling methodologies  to calculate statistically valid improper payment error rate estimates and  related confidence intervals for military pay, civilian pay, and travel pay for  fiscal year 2011, but did not provide such evidence for military health  benefits, military retirement, USACE commercial pay, or USACE travel  pay. Additionally, DOD did not generate statistically valid improper  payment dollar value estimates for any of its programs. For instance,  DOD did not use appropriate weights to calculate the reported dollar  value estimates. Moreover, DOD did not derive confidence intervals for its  improper payment dollar value estimates for any of its programs.  Generally accepted statistical standards require the calculation and  disclosure of confidence intervals around an estimate with a specified  degree of confidence. Confidence intervals are a measure of the  possible difference between the sample estimate and the actual  population value, providing an idea of how close the sample estimate is to  the actual population value.
As previously mentioned, DOD did not statistically derive an estimate of  improper payments for DFAS commercial pay for fiscal year 2011, but  instead limited its reporting to known improper payments. Although DOD  reported a statistically derived improper payment estimate—  $100.1 million—for DFAS commercial pay for fiscal year 2012, the  sampling methodology used to produce this estimate had deficiencies  similar to the methodologies used for the department’s other programs.
For example, to estimate DFAS commercial pay improper payments,  DOD did not use a statistically appropriate sampling unit or a  methodology that considered large dollar amounts or the level of  complexity of the related payments. In its AFR for fiscal year 2012, DOD  noted that the department had identified $318.3 million in known improper  payments for DFAS commercial pay for fiscal year 2012. Further, DOD  cited the sampling methodology as the main reason for the difference  between the reported estimate of $100.1 million and the known amount of  $318.3 million for DFAS commercial pay improper payments, which  provides further evidence of how the deficiencies we identified in the  sampling methodologies adversely affect the reliability of the resulting  estimates. In our July 2009 report, we recommended that DOD develop  and implement a statistically valid methodology to estimate and report  commercial improper payments (contract and vendor over- and  underpayments). This recommendation remains valid given the issues we  have found during the course of this review.
DOD did not have procedures in place to collect and maintain key  supporting documentation needed to substantiate the improper payment  estimates reported in its fiscal year 2011 AFR. For example, DOD did not  maintain complete supporting documentation for the populations of  transactions, from which statistical samples were selected, for most of the  programs for which improper payment estimates were reported. This  deficiency contributed to our determination that DOD’s reported improper  payment estimates were not reliable. DOD officials stated that they were  unaware of the extent of documentation necessary for the department to  maintain to support its improper payment estimates. Standards for  Internal Control in the Federal Government requires all transactions and  other significant events to be clearly documented and the documentation   Further, OMB guidance directs  readily available for examination. agencies to retain documentation to support the calculation of their  estimates.
To enable auditors and other parties to substantiate reported improper  payment estimates, we determined that the following documentation  would generally need to be maintained:
Description of the sampling methodology, including identification of  the sampling units accompanied by an explanation of how the  sampling units were determined.
Schedules showing the total number of items and dollar value totals  for each sample populationagency by program and month. for each military service and defense
Descriptions and results of data reliability and quality assurance  testing conducted to ensure that payment information in the sample  populations was complete and accurate.
Descriptions of how each sample was selected, including the random  number and how it was generated, the software used to select the  sample from the sample population, and copies of software program  logs and related output files. The software program logs and related  output files should have the details related to the sample population  totals and samples selected, including the total number of items and  dollar value totals in the sample population as well as a list of the  items selected to be in the sample. In addition, a description of the  method of selection of replacement items is needed.
Descriptions of attributes and variablestransaction used to derive the total dollar value of improperly paid  amounts, including source documents for each sampled transaction  that support the conclusion of whether the sampled payment was  improper.
Calculations, spreadsheets (including cell formulas), and software  programs used to evaluate the individual test results for every sample  item tested, including the calculations used to derive each improper  payment error rate and dollar value estimate and the related  confidence intervals.
Calculations, spreadsheets (including cell formulas), software  programs, inputs and outputs used to aggregate the individual error  rate and dollar value estimate and related confidence intervals from  each sample to derive the improper payment estimates reported in the  AFR. These documents should provide a clear trail showing how the  results of each sample were aggregated, from the lowest level of  sampling test results through to the estimates published in the AFR.
Schedules listing all missing sample items and how these sample  items were treated and related explanations.
Schedules listing all items replaced and related explanations.
The lack of complete supporting documentation precludes DOD and  others from being able to determine the reliability of its reported improper  payment estimates.
section_title: DOD Did Not Conduct Required Risk Assessments
paragraphs: DOD did not perform a risk assessment for fiscal year 2011 as required  by IPERA, because DOD officials told us that they did not see any added  value in doing a risk assessment. According to DOD officials, OMB  directed the department to consider all of its programs as risk- susceptible—following its review of the department’s fiscal year 2006  improper payment reporting—because of the complex nature of the  department’s business processes and the large dollar value of its annual  payments. However, DOD officials were unable to provide documentation  of this directive. Moreover, as discussed previously, IPERA laid out a  clear statutory requirement to perform a risk assessment in fiscal year  2011, which would supersede an earlier OMB directive.
Our executive guide describes characteristics of an effective risk  assessment done for the purpose of determining an entity’s susceptibility  to improper payments.comprehensive review and analysis of program operations to determine  where risks exist and what those risks are, and then measuring the  potential or actual impact of those risks on program operations. Once risk  areas are identified, their potential impact on programs and activities  should be measured and additional controls should be considered. As  risks are addressed and controls are changed, the assessment should  occasionally be revisited to determine where the risks have decreased  and where new areas of risk may exist.
A risk assessment is an activity that entails a  By not doing a risk assessment for fiscal year 2011, DOD missed the  opportunity to gain critical information for determining corrective actions  needed to reduce improper payments. Periodic risk assessments are  critical to ensuring that the department is identifying the root causes of  improper payments and developing appropriate corrective actions. The  information developed during a risk assessment forms the foundation or  basis upon which management can determine the nature and type of  corrective action needed. In addition, this information gives management  baseline data for ensuring progress in reducing improper payments.
Additionally, performing risk assessments may be more cost beneficial  than estimating improper payments for each program. Given the time and  resources needed to verify the completeness of populations, select and  test samples, and evaluate and project the results of the samples, the  department may be able to realize savings by first performing risk  assessments. Moreover, if performed in a manner similar to that  described in our executive guide, the information gained during the risk  assessment may help DOD to determine the best sampling methodology  to be used for each program, develop corrective actions, and guide  recovery auditing efforts.
DOD, FMR, Volume 4, Chapter 14, Improper Payments (October 2011). accordance with IPERA. For example, IPERA requires agencies to  perform a risk assessment in the year after enactment (fiscal year 2011)  and at least once every 3 years thereafter. However, the FMR chapter  states that components are required to conduct risk assessments only for  those programs or activities for which the risk level is unknown or is not  currently measured and reported. DOD’s FMR does not provide a  systematic approach to ensure that all programs and activities are  reviewed to determine susceptibility to improper payments. Moreover,  although DOD’s FMR states that components’ risk assessment  methodologies must be documented and maintained, the FMR does not  provide detailed requirements on what should be documented and  maintained.
section_title: DOD’s Corrective Action Plan Was Not Sufficiently Detailed to Effectively Reduce Improper Payments
paragraphs: As discussed previously, DOD’s lack of a risk assessment makes it  difficult for the department to fully identify root causes and develop a  comprehensive, effective, corrective action plan. While DOD has a policy  for developing and reporting on corrective actions, it did not have detailed  procedures for identifying root causes and related corrective actions.  Also, the department’s corrective action plan, included in its fiscal year  2011 AFR, did not contain all elements of corrective action plans required  by IPERA and OMB guidance, such as establishing accountability for  reducing improper payments and including completion dates for  implementing corrective actions.
DOD’s corrective action plan reported reasons that improper payments  occurred for all eight programs and included corrective actions to address  them, but the reported reasons identified the type of errors that resulted in  the improper payments, rather than the root causes—the underlying  conditions that caused the errors to occur. DOD’s identified reasons do  not consider possible underlying systemic causes of the errors, such as  whether manual and automated controls were either not sufficient or not  operating as intended. As a result, the related corrective action(s)  addressed specific errors and not necessarily the underlying condition  that gave rise to the error. Agencies, when developing corrective action  plans, can use the results of risk assessments to ensure that the root  causes leading to improper payments are identified.
Also, the corrective actions reported were not sufficiently detailed to  assess whether they would address the errors that were identified for  DOD’s reported programs. For example, in fiscal year 2011, DOD  reported that the corrective actions for military pay consisted of working  with the military services to advise them of the results of payment reviews  and the associated reasons for errors, including the provision of monthly  reports on the reasons for individual improper payments and improper  payment trends. While these corrective actions provide information on the  reasons for improper payments, they do not indicate what, if any, actions  the military services would take to address the causes of improper  payments.
DOD’s corrective action plan also did not describe the required steps for  ensuring that responsible officials are held accountable for reducing  improper payments, as required by IPERA. In addition, according to the  United States Chief Financial Officers Council’s (CFOC) Implementation  Guide for OMB Circular A-123, agencies should have procedures for  tracking the status of corrective action plans. The implementation guide  provides that corrective action plans should include measurable indicators  of compliance and resolution for assessing and validating progress  throughout the resolution cycle. However, DOD’s corrective action plan  did not include (1) a timetable for when the corrective actions were to be  implemented and (2) measurable indicators of compliance and resolution,  which include follow-up tests to verify whether procedures and controls  are working, to assess and validate progress in reducing improper  payments.
GAO-09-442. those actions to ensure that future improper payments will be reduced or  eliminated. However, the FMR does not provide detailed procedures for  the components to follow to identify root causes and develop corrective  actions, and for the department to follow in monitoring the implementation  of those corrective actions. DOD has not yet implemented our  recommendations and told us that it was not planning any significant  changes to its corrective action processes. Until DOD develops and  implements detailed procedures that include the information required by  IPERA and OMB guidance and recommended by best practices, DOD will  continue to be hindered in its ability to (1) develop corrective action plans  that address root causes, (2) effectively monitor and measure the  progress made in taking those corrective actions, (3) hold individuals  responsible for implementing corrective actions, and (4) communicate to  agency leaders and key stakeholders the progress made toward  remediating improper payments.
section_title: DOD Did Not Implement IPERA’s Recovery Audit Requirements
paragraphs: We identified multiple deficiencies and omissions in DOD’s efforts to  implement IPERA’s recovery audit requirements due to a lack of  appropriate procedures. DOD neither conducted recovery audits in fiscal  year 2011 nor determined that such audits would not be cost effective, as  required by IPERA. Further, most DOD programs did not identify and  collect cost information for their recovery efforts that would permit cost- effectiveness evaluations, and the programs that did collect this  information did not subsequently evaluate the programs to ensure that  they were, in fact, cost effective. We also identified deficiencies and  omissions in the payment recapture audit plan that DOD submitted to  OMB.
DOD did not conduct recovery audits for the eight programs for which it  reported improper payments in fiscal year 2011, nor has it determined  that such audits would not be cost effective (i.e., that the government  would not suffer additional financial losses because of ineffective  recovery programs), as required by IPERA, because of outdated policy  and a decision to rely on other recovery mechanisms. DOD’s FMR  chapter on recovery efforts that was in effect during fiscal year 2011 was  issued in 2009, before IPERA was enacted. As a result, the FMR  chapter did not account for the expansion of recovery audits beyond  commercial payments, as called for by IPERA. In addition, DOD cited its  difficulties in tracing transactions back to source documentation as a  major obstacle to conducting effective recovery audits.
In lieu of conducting cost-effective recovery audits, DOD’s payment  recapture audit plan stated that the department would rely on efforts such  as random sampling of improper payments, DOD Inspector General (IG)  and other auditor findings, self-reporting by recipients, and other  activities, such as periodic independent reviews of commercial payments,  to identify overpayments for potential recovery for seven programs.  However, DOD did not describe any improper payment recovery effort in  place for travel pay in the payment recapture audit plan. According to the  fiscal year 2011 AFR, DOD estimated $238.2 million in overpayments  related to travel pay during fiscal year 2011. Through procedures,  including analysis of duplicate payments from fiscal years 2009 and 2010,  DOD identified for recovery $1.6 million in travel pay overpayments, or  less than 1 percent of the program’s estimated improper payments. DOD  officials stated that they believe that a significant portion of the estimated  improper overpayment amount was due to missing supporting  documentation and did not represent funds owed to the federal  government. However, DOD was not able to quantify how much, if any, of  the overpayment estimate was due to missing documentation. Because  DOD has not established recovery audits to recapture improper  overpayments, and has not determined that such mechanisms would not  be cost effective, DOD is at risk of forgoing the detection and recovery of  potentially substantial funds owed to the government.
GAO-09-442. establish the DOD program to implement the requirements of IPERA and  associated OMB guidance with respect to recovery audits. The revised  FMR directs all components with programs and activities with annual  payments that exceed $1 million to determine if instituting recovery audits  is cost effective. However, our review of the 2012 FMR chapter indicates  that the guidance is still lacking some key elements that would enable  DOD components to fully implement IPERA and OMB guidance. For  example, the 2012 FMR chapter does not require the components to  submit information to the OUSD(C) that OMB directs agencies to report,  such as the amount of commercial pay recoveries that were used to offset  future payments and the amount of improper overpayments identified  through contract closeouts. Consequently, DOD has not yet fully  implemented our 2009 recommendation.
We found that DOD, with the exception of USACE, did not have  procedures to identify and collect information on costs related to its  payment recovery efforts. As a result, DOD did not determine if its  ongoing recovery efforts, such as periodic independent reviews of  commercial payments, were cost effective or if it would be cost effective  for the department to establish and implement recovery audits for its  programs.
Even when DOD did determine the cost of certain improper payment  recovery efforts, the department did not ensure that the efforts were cost  effective. For example, USACE officials told us that the agency’s daily  automated review system, which uses a data mining process to review  contract payments for potential errors, costs $64,000 annually. However,  USACE reported that as of December 2012, the system had only  identified and recovered one improper payment of $20.79 since its  implementation in May 2009. A USACE official stated that she believed  that the data mining process was mandatory and that USACE was  attempting to keep the cost as low as possible. By not assessing the cost- effectiveness of the daily automated review system, DOD is at risk of  operating an improper payment recovery effort that is not cost beneficial.
As stated previously, in October 2012, DOD issued an updated FMR  chapter on recovery audits that directed all components with programs  and activities with annual payments that exceed $1 million to determine if  instituting recovery audits is cost effective. Further, the FMR chapter  directed DOD components to report the total cost of their respective  recovery audits and related recovery efforts. However, until the  department establishes procedures to consistently identify and collect  information regarding costs of recovery audits, DOD will be unable to  implement the FMR policy and determine if recovery audits are cost  effective to operate.
OMB directed agencies to prepare and submit to both OMB and the  agency’s IG a payment recapture audit plan by January 2011 that  describes payment recapture efforts under both IPERA and authorities  that pre-dated IPERA. developed, would help an agency manage its activities to maximize  recovery of improper payments. DOD developed and submitted a  payment recapture audit plan to OMB and the DOD IG in January 2011.  In response to OMB and DOD IG comments, DOD revised and  resubmitted its plan in November 2011. However, we found that DOD’s  payment recapture plan did not include the following required elements:   Payment recapture audit plans, if properly
The quantity and dollar amount of payment reviews (except for  USACE, which indicated quantity of items reviewed).
Types of tools used to review payments (except for USACE, which  disclosed an Oracle-programmed data mining tool).
When the payments that were reviewed were made.
A description of whether the payment recapture audit program  focuses on programs or particular steps in a program’s payment  process that are at higher risk of fraud, waste, and abuse.
A description of the guidance that DOD provides to agency staff  related to responsibilities and procedures to implement mechanisms  to recover improper payments.
Technology being used or planned that would assist in preventing and  recapturing improper payments.
By not developing and implementing a payment recapture audit plan that  contains all elements required by OMB, DOD is not in compliance with  OMB requirements and is hindered in its ability to effectively manage its  recovery efforts.
OMB, Memorandum M-11-04.
section_title: DOD Did Not Have Documented Procedures for Improper Payment and Recovery Audits Reporting
paragraphs: DOD did not have documented procedures to ensure that improper  payment reporting in the AFR was complete, accurate, and in compliance  with statutory and regulatory guidance. We identified multiple reporting  omissions in DOD’s fiscal year 2011 AFR. For example, the department  did not include the following information required by IPERA and OMB  guidance:  corrective actions that would address the root causes of military  health benefits improper payments;  the actual or planned completion dates for corrective actions;  the portion of the improper payment estimates attributable to  insufficient supporting documentation or administrative errors; and whether the agency had the human capital, internal controls, and  accountability mechanisms necessary to reduce improper payments.
DOD also did not have documented procedures to ensure that recovery  audit reporting in the AFR was complete, accurate, and in compliance  with statutory and regulatory guidance. We identified instances where  DOD’s reporting of efforts to recover improper payments did not include  all information required by OMB guidance. For example, DOD did not  disclose the following in the fiscal year 2011 AFR:  the amount of contract payments that was voluntarily returned to  DOD;  the amount of improper contract payments identified by contract  closeouts;  the amount of commercial pay recoveries used to offset future  payments rather than returned to DOD;  improper payments identified as a result of DOD IG investigations,  GAO audits, or reviews by DOD internal review offices, such as  TMA’s Program Integrity Office, in its table of overpayments  recaptured outside of payment recapture audits; and  the total amount of and justification for identified improper  overpayments that were determined to be uncollectible in fiscal year  2011.
An OUSD(C) official told us that the OUSD(C) does not have standard  operating procedures for the compilation, review, and reporting of  improper payment and recovery audit information in its AFR. This  OUSD(C) official stated that the department uses Appendix C of OMB  Circular No. A-123, Requirements for Effective Measurement and  Remediation of Improper Payments; OMB Circular No. A-136; and other  relevant OMB instructions to prepare the improper payment addendum.  However, as evidenced by the omissions in DOD’s improper payment and  recovery audit reporting for fiscal year 2011, the department’s current  process is not producing reports that comply with IPERA and OMB  guidance.
Standards for Internal Control in the Federal Government provides that  internal control activities need to be clearly documented. documented procedures for the compilation and review of improper  payment and recovery audit information, DOD is at risk of continuing to  publish incomplete and inaccurate reports.
Further, DOD has not yet implemented our 2009 recommendations that  the DOD Comptroller perform oversight and monitoring activities to  ensure the accuracy and completeness of the improper payment and  recovery audit data submitted by DOD components for inclusion in the  AFR. During our current review, we identified multiple instances when  DOD’s oversight and monitoring of improper payment and recovery audit  data submitted by components for inclusion in the AFR did not identify  errors or omissions. For example, we identified a calculation error in the  military health benefits improper payment estimate. Specifically, TMA  used an improper denominator to calculate the improper payment rate for  its sample. Instead of dividing the dollar amount of identified improper  payments in the sample by the dollar amount paid to providers, which  would provide a percentage of improper payments, TMA divided the  dollar amount of identified improper payments by the dollar amount billed  by providers for the services rendered. As a result, TMA’s improper  payment rate of 0.24 percent, as reported in DOD’s fiscal year 2011 AFR,  was incorrect. This calculation error was not identified by OUSD(C)  personnel during their review of DOD component submissions of data for  inclusion in the AFR.
GAO/AIMD-00-21.3.1.
In addition, OUSD(C) oversight and monitoring did not detect the  overstatement of overpayment amounts identified and recovered for  military retirement. Upon receiving a notification of death for a retiree or  annuitant, DFAS records the entire amount of the last payment made to  the retiree or annuitant as an overpayment identified and, after collecting  the funds, as an overpayment recovered. However, the identified and  recovered amounts recorded did not take into account that the retiree or  his/her survivor may have been entitled to receive a portion, if not all, of  the payment. As a result, the amounts that DFAS reported to the  OUSD(C) as military retirement overpayments identified and recovered  were overstated. This is one reason why DOD reported for fiscal year  2011 that the department had identified $67.6 million in military retirement  improper overpayments for recovery, while estimating that only   $18.8 million in military retirement improper overpayments had  occurred. Further, the OUSD(C) oversight and monitoring did not  identify omissions in TMA’s submission regarding overpayments identified  outside of recovery audits. In its submission to OUSD(C), TMA did not  include improper overpayments identified through its Program Integrity  Office, which is responsible for prevention, detection, investigation and  control of TRICARE fraud, waste, and abuse. As noted above, the  OUSD(C) subsequently omitted this information from its fiscal year 2011  AFR reporting. Therefore, our prior recommendations for the DOD  Comptroller to perform oversight and monitoring activities to ensure the  accuracy and completeness of the improper payment and recovery audit  data submitted by DOD components for inclusion in the AFR remain valid  given the findings of this review.
section_title: Conclusions
paragraphs: Although DOD reported estimated and known improper payments of over  $1.1 billion for fiscal year 2011, this amount cannot be relied upon  because of the deficiencies we found related to DOD’s procedures for  identifying, estimating, reducing, recovering, and reporting improper  payments. DOD’s long-standing history of pervasive financial  management weaknesses, coupled with problematic sampling  methodologies and the lack of adequate supporting documentation,  contributed to improper payment estimates that were not reliable. Further,  DOD has not established the procedures needed to effectively implement  the improper payment and recovery auditing requirements included in  IPERA and OMB’s implementing guidance. By not performing a risk  assessment as required by IPERA, DOD did not reap the associated  benefits, including the ability to better identify root causes and develop a  comprehensive and effective corrective action plan to reduce improper  payments. DOD’s lack of a detailed and effective corrective action plan  also made it difficult for department officials to monitor and measure the  extent of progress made to remediate causes, hold individuals  responsible for implementing corrective actions, or communicate to DOD  leadership and other key stakeholders the extent of the department’s  progress in remediating the causes of improper payments. In addition,  DOD did not comply with the IPERA requirement to either conduct  recovery audits or provide justifications that such audits would not be cost  effective. Finally, the department’s lack of key required information in its  fiscal year 2011 AFR precludes DOD’s leadership and external  stakeholders from determining whether DOD has the necessary human  capital, internal controls, and accountability mechanisms to reduce  improper payments. Until the department takes definitive action to  address these deficiencies and thereby fulfills the requirements of IPERA  and its implementing guidance, it remains at risk of continuing to make  improper payments and wasting taxpayer funds.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Defense direct the Under Secretary  of Defense (Comptroller) to take the following 10 actions:
With regard to estimating improper payments:
Establish and implement key quality assurance procedures, such  as reconciliations, to ensure the completeness and accuracy of  the sampled populations.
Revise the procedures documented in DOD’s sampling  methodologies so that they (1) are in accordance with OMB  guidance and generally accepted statistical standards and   (2) produce statistically valid improper payment error rates,  statistically valid improper payment dollar estimates, and  appropriate confidence intervals for both. At a minimum, such  procedures should take into account the size and complexity of  the transactions being sampled.
Develop and implement procedures to collect and maintain the  supporting documentation necessary to support improper payment  estimates.
With regard to identifying programs susceptible to significant improper  payments, conduct a risk assessment that is in compliance with  IPERA.
With regard to reducing improper payments, establish procedures that  produce corrective action plans that:
Comply fully with IPERA and OMB implementation guidance,  including at a minimum, holding individuals responsible for  implementing corrective actions and monitoring the status of the  corrective actions.
Are in accordance with best practices, such as those  recommended by the CFOC, and include (1) measuring the  progress made toward remediating root causes and   (2) communicating to agency leaders and key stakeholders the  progress made toward remediating the root causes of improper  payments.
With regard to implementing recovery audits:
Develop and implement procedures to (1) identify costs related to  the department’s recovery audits and existing recovery efforts and  (2) evaluate existing improper payment recovery efforts to ensure  that they are cost effective.
Monitor the implementation of the revised FMR chapter on  recovery audits to ensure that the components either develop  recovery audits or demonstrate that it is not cost effective to do so.
Develop and submit to OMB for approval a payment recapture  audit plan that fully complies with OMB guidance.
With regard to reporting, design and implement procedures to ensure  that the department’s annual improper payment and recovery audit  reporting is complete, accurate, and in compliance with IPERA and  OMB guidance.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretary of Defense for  comment. In response, DOD provided written comments, in which it  concurred with nine recommendations and partially concurred with one  recommendation. In commenting on our report, DOD acknowledged that  implementing our recommendations would further strengthen its program.   DOD cited its planned actions, including (1) reviewing its sampling  methodologies to ensure that they are appropriate and properly  documented; (2) developing risk assessments and corrective actions in  accordance with IPERA, OMB guidance, and best practices; (3) reviewing  its recovery efforts to ensure that they are cost effective; and (4) ensuring  that its reporting is complete, accurate, and in compliance with IPERA  and OMB guidance.
DOD partially concurred with our recommendation to revise the  procedures documented in its sampling methodologies so that they   (1) are in accordance with OMB guidance and generally accepted  statistical standards and (2) produce statistically valid improper payment  error rates, statistically valid improper payment dollar estimates, and  appropriate confidence intervals for both. The department believes that its  sampling methodologies are in accordance with OMB guidance and  produce statistically valid improper payment rates and appropriate  confidence intervals. However, as discussed in our report, we found that  DOD produced statistically valid error rates and related error rate  confidence intervals for only three of its programs. Additionally, we found  that DOD did not produce statistically valid dollar estimates and  appropriate dollar confidence intervals for any of its programs. However,  DOD did state that it will review methodologies for all payment types and  make modifications as appropriate.
DOD also expressed concern that our characterization of the  recommended improvements as “significant” does not account for its  efforts to minimize improper payments, particularly through prepayment  reviews. We acknowledge in our report efforts DOD has made to attempt  to minimize improper payments. However, the deficiencies we identified  related to DOD’s identifying, estimating, reducing, recovering, and  reporting improper payments are significant and indicate that it has not  yet established the detailed procedures necessary to effectively  implement IPERA and OMB guidance and thus reduce the risk of making  improper payments. Accordingly, we continue to believe that  implementation of our recommendations is critical for DOD to enhance its  efforts to minimize improper payments and to recover those that are  made.
DOD’s comments are reprinted in appendix II. DOD also provided  technical comments on our draft report, which we incorporated as  appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of Defense, and other interested  parties. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  Asif A. Khan at (202) 512-9869 or khana@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objective of this engagement was to review the extent to which the  Department of Defense (DOD) has implemented key provisions of the  Improper Payments Information Act of 2002 (IPIA), the Improper  Payments Elimination and Recovery Act of 2010 (IPERA), and related  Office of Management and Budget (OMB) guidance. The scope for our  engagement was DOD’s improper payments information presented in the  department’s fiscal year 2011 Agency Financial Report (AFR), because  this was the most current annual report available at the time of our  review. As part of this objective, we assessed DOD’s plans and actions to  estimate improper payments for commercial payments made by the  Defense Finance and Accounting Service (DFAS) for fiscal year 2012,  because DOD limited its improper payment reporting for this program to  known improper payments for fiscal year 2011, rather than reporting a  statistical estimate.
Although DOD reported improper payment information for eight programs, statistical  estimates were provided for only seven of those programs for fiscal year 2011. DOD’s  improper payments reporting for DFAS commercial pay for fiscal year 2011 was limited to  known improper payments.
We interviewed officials from DFAS, the TRICARE Management  Activity (TMA),obtain additional information about these methodologies. and the U.S. Army Corps of Engineers (USACE) to
To assess the department’s plans and actions for estimating DFAS  commercial pay improper payments for fiscal year 2012, we reviewed  the department’s methodology for statistically estimating DFAS  commercial pay improper payments for fiscal year 2012 and  interviewed DFAS officials to obtain clarifications about this  methodology.
We conducted site visits at two DFAS processing center locations— DFAS-Columbus and DFAS-Indianapolis. We selected the DFAS- Columbus site because this facility processes the largest portion of  DOD’s commercial payments and hosts the systems the department  uses to track commercial pay improper payments. We interviewed  DFAS-Columbus officials regarding how improper payments were  identified and reported. We selected DFAS-Indianapolis because this  facility houses the team that performed the reviews of selected  sample transactions for military pay, civilian pay, military retirement for  deceased retirees and annuitants, and travel pay. DFAS-Indianapolis  compiles the results of the improper payment testing for all DFAS- tested programs, including DFAS commercial pay and military  retirement pay, and reports these results to DOD’s OUSD(C).
We examined the department’s corrective action plan and assessed it  with the requirements in OMB’s implementing guidance for IPERA,  OMB Circular No. A-136, and best practices suggested by the  United States Chief Financial Officers Council (CFOC). We followed  up with DOD officials, including the Improper Payments Project  Officer, to obtain additional information about the department’s  corrective action plan.
We analyzed DOD’s payment recapture plan, DOD’s FMR chapter on   and information in the AFR. We interviewed DFAS, recovery audits,TMA, and USACE officials, as well as the Improper Payments Project  Officer, about the processes used to recover improper payments.
To assess DOD’s implementation of the reporting requirements in  IPERA and OMB’s guidance, we compared the improper payment  information provided in DOD’s fiscal year 2011 AFR to the reporting  requirements. We interviewed OUSD(C), DFAS, TMA, and USACE  officials about the department’s process to compile the information  reported in the AFR.
To assess the reliability of data reported in DOD’s fiscal year 2011 AFR  related to improper payments, we reviewed DOD’s supporting  documentation and interviewed knowledgeable agency officials about the  data. In the course of this assessment, we determined that DOD did not  collect and maintain the supporting documentation necessary to  substantiate the improper payment estimates reported in its fiscal year  2011 AFR. In addition, the department did not perform key quality  assurance procedures, including reconciliations on all of the populations  for its programs to validate that the populations were complete, valid, and  accurate before selecting the statistical samples that were used to  estimate improper payments. Therefore, we determined that the data  were not reliable. These problems are discussed in our report.
We conducted this performance audit from October 2011 to May 2013 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.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Cindy Brown Barnes (Assistant  Director), Sharon Byrd (Assistant Director/Audit Sampling), Michael  Bingham, and Sandra Silzer made key contributions to this report. Also  contributing to this report were Francine DelVecchio, Justin Fisher,  Wilfred Holloway, and Jason Kirwan.