Financial Management: Challenges Continue in Meeting Requirements of the Improper Payments Information Act
Published: 2006-04-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Improper payments are a long-standing, widespread, and significant problem in the federal government. The Congress enacted the Improper Payments Information Act of 2002 (IPIA) to address this issue. Fiscal year 2005 marked the second year that agencies were required to report improper payment information under IPIA. One result of IPIA has been increased visibility over improper payments by requiring executive branch agencies to identify programs and activities susceptible to significant improper payments, estimate the amount of their improper payments, and report on the amounts of improper payments and their actions to reduce them in their annual performance and accountability reports (PAR). Because of continued interest in addressing the governmentwide improper payments issue, GAO was asked to report on the progress made by agencies in complying with requirements of IPIA and the status of efforts to identify, reduce, and eliminate improper payments. As part of the review, GAO looked at (1) the extent to which agencies have performed risk assessments, (2) the annual amount of improper payments estimated, and (3) the amount of improper payments recouped through recovery audits.
section_title: What GAO Found
paragraphs: The federal government continues to make progress in identifying programs susceptible to the risk of improper payments in addressing the new IPIA requirements. At the same time, significant challenges remain to effectively achieve the goals of IPIA. The 33 fiscal year 2005 PARs GAO reviewed show that some agencies still have not instituted systematic methods of reviewing all programs and activities, have not identified all programs susceptible to significant improper payments, or have not annually estimated improper payments for their susceptible programs as required by the act. The full magnitude of the problem remains unknown because some agencies have not yet prepared estimates of improper payments for all of their programs. Of the 33 agencies reviewed, 18 reported over $38 billion of improper payments in 57 programs. This represented almost a $7 billion, or 16 percent, decrease in the amount of improper payments reported by 17 agencies in fiscal year 2004. However, the total improper payments estimate does not include 7 major agency programs with outlays totaling about $228 billion. Further, agency auditors have identified major management challenges related to agencies' improper payment estimating methodologies and significant internal control weaknesses for programs susceptible to significant improper payments. In addition, two agency auditors cited noncompliance with IPIA in their annual audit reports. For fiscal year 2005 PARs, agencies that entered into contracts with a total value exceeding $500 million annually were required to report additional information on their recovery audit efforts. Nineteen agencies reported reviewing over $300 billion in vendor payments, identifying approximately $557 million to be recovered, and actually recovering about $467 million.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the governmentwide problem of  improper payments in federal programs and activities. Our work over the  past several years has demonstrated that improper payments are a long- standing, widespread, and significant problem in the federal government.  The extent of the problem initially had been masked because only a limited  number of agencies reported their annual payment accuracy rates and  estimated improper payment amounts prior to the passage of the Improper  Payments Information Act of 2002 (IPIA).
Fiscal year 2005 marked the second year that federal agencies  governmentwide were required to report improper payment information  under IPIA in their performance and accountability reports (PAR). IPIA has  increased visibility over improper payments to a higher, more appropriate  level of importance by requiring executive agency heads, based on  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. Further, in fiscal year 2005,  OMB began to separately track the elimination of improper payments  under the President’s Management Agenda (PMA).
As collected from agencies’ fiscal year 2005 PARs, the governmentwide  improper payment estimate for fiscal year 2005 exceeded $38 billion, but  did not include any amounts for some of the highest risk programs, such as  Medicaid with outlays exceeding $181 billion for fiscal year 2005. I highlight  these omissions later in my testimony. From our review, we noted that  agencies made progress in addressing improper payments by implementing  processes and controls to identify, estimate, and reduce improper  payments. For example, agencies demonstrated improved error detection  and measurement by addressing and reporting improper payments estimates for 17 newly reported programs totaling about $1.2 billion,  which are included in the governmentwide improper payments estimate  now totaling over $38 billion. However, we noted that some agencies still  have not instituted systematic methods of reviewing all programs and  activities, have not identified all programs susceptible to significant  improper payments, or have not annually estimated improper payments for  their high-risk programs.
Because of the Subcommittee’s interest in addressing the governmentwide  improper payments issue, you asked us to report on the progress made by  agencies in complying with requirements of IPIA and the status of efforts to  identify, reduce, and eliminate improper payments.  In my testimony today,  I will discuss (1) the extent to which agencies have performed the required  assessments to identify programs and activities that are susceptible to  significant improper payments, (2) the annual amount of improper  payments estimated by the reporting agencies, and (3) the amount of  improper payments recouped through recovery audits.  A list of related  GAO products is provided at the end of this testimony.
The scope of our review included the 35 federal agencies that the  Department of the Treasury (Treasury) determined to be significant to the  U.S. government’s consolidated financial statements. Based on available  information, we reviewed improper payment information reported by 33  agencies in their fiscal year 2005 PARs or annual reports. We further  reviewed OMB guidance on implementation of IPIA and its report on the  results of agency-specific reports, significant findings, agency  accomplishments, and remaining challenges. We did not independently  validate the data that agencies reported in their PARs or annual reports or  that OMB reported. However, we are providing these agency-reported data  as descriptive information that will inform interested parties about the  magnitude of governmentwide improper payments and other improper  payments related information. We believe the data to be sufficiently  reliable for this purpose. We conducted our work from February 2006 to  March 2006 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: Before I discuss our review of agencies’ fiscal year 2005 PARs, I would like  to summarize IPIA, related OMB initiatives, and statutory requirements for  recovery audits. The act, passed in November 2002, requires executive  branch agency heads to review their programs and activities annually and  identify those that may be susceptible to significant improper payments.  For each program and activity agencies identify as susceptible, the act  requires them to estimate the annual amount of improper payments and to  submit those estimates to the Congress. The act further requires that for  programs for which estimated improper payments exceed $10 million,  agencies are to report annually to the Congress on the actions they are  taking to reduce those payments.
The act requires the Director of OMB to prescribe guidance for agencies to  use in implementing IPIA. OMB issued guidance in May 2003 requiring the  use of a systematic method for the annual review and identification of  programs and activities that are susceptible to significant improper  payments. The guidance defines significant improper payments as those in  any particular program that exceed both 2.5 percent of program payments  and $10 million annually. It requires agencies to estimate improper  payments annually using statistically valid techniques for each susceptible  program or activity. For those agency programs determined to be  susceptible to significant improper payments and with estimated annual  improper payments greater than $10 million, IPIA and related OMB  guidance require each agency to report the results of its improper payment  efforts for fiscal years ending on or after September 30, 2004. OMB  guidance requires the results to be reported in the Management Discussion  and Analysis section of the agency’s PAR.
In August 2004, OMB established Eliminating Improper Payments as a new  program-specific initiative under the PMA. This separate improper  payments PMA program initiative began in the first quarter of fiscal year  2005. Previously, agency efforts related to improper payments were tracked  along with other financial management activities as part of the Improving  Financial Performance initiative of the PMA. The objective of establishing a  separate initiative for improper payments was 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. With this new initiative, 15 agencies are to measure their  improper payments annually, develop improvement targets and corrective  actions, and track the results annually to ensure the corrective actions are  effective.
In August 2005, OMB revised its Circular No. A-136, Financial Reporting  Requirements, and incorporated IPIA reporting details from its May 2003  IPIA implementing guidance. Among other things, OMB Circular No. A-136  includes requirements for agencies to report on their risk assessments;  annual improper payment estimates; corrective action plans; and recovery  auditing efforts, including the amounts recovered in the current year.  Section 831 of the National Defense Authorization Act for Fiscal Year 2002  contains a provision that requires all executive branch agencies entering  into contracts with a total value exceeding $500 million in a fiscal year to  have cost-effective programs for identifying errors in paying contractors  and for recovering amounts erroneously paid.  The legislation further states  that a required element of such a program is the use of recovery audits and  recovery activities. The law authorizes federal agencies to retain recovered  funds to cover in-house administrative costs as well as to pay contractors,  such as collection agencies. Agencies that are required to undertake  recovery audit programs were directed by OMB to provide annual reports  on their recovery audit efforts, along with improper payment reporting  details in an appendix to their PARs.
The fiscal year 2005 PARs, the second set of annual reports representing  the results of agency assessments of improper payments for all federal  programs, were due November 15, 2005. In our December 2005 report on  the U.S. government’s consolidated financial statements for the fiscal years  ended September 30, 2005, and 2004, which includes our associated  opinion on internal control, we reported improper payments as a material  weakness in internal control. Specifically, we reported that while progress  had been made to reduce improper payments, significant challenges  remain to effectively achieve the goals of  IPIA.
section_title: Some Agencies Still Have Not Assessed All Programs and Activities for Risk of Improper Payments
paragraphs: We reviewed the fiscal year 2005 PARs or annual reports for 33 of the 35  federal agencies that the Treasury determined to be significant to the U.S.  government’s consolidated financial statements and that were available as  of March 2006.  Of those 33 agencies, 23 reported that they had completed  risk assessments for all programs and activities. See appendix II for  detailed information on each agency. This was the same number of  agencies that reported having completed risk assessments in our prior year  review. The remaining 10 agencies either were silent on IPIA reporting  details in their PARs or annual reports or had not yet assessed the risk of  improper payments for all their programs.
In addition, we noted that selected agency auditors reviewed agencies’ risk  assessment methodologies and identified issues of noncompliance or other  deficiencies. For example, auditors for the Departments of Justice and  Homeland Security cited agency noncompliance with IPIA in their fiscal  year 2005 annual audit reports, primarily caused by inadequate risk  assessments. The Department of Justice auditor stated that one agency  component had not established a program to assess, identify, and track  improper payments. The agency acknowledged this noncompliance in its  PAR as well. The Department of Homeland Security (DHS) auditor  reported that the department did not institute a systematic method of  reviewing all programs and identifying those it believed were susceptible to  significant erroneous payments. This was the second consecutive year that  the auditor reported IPIA noncompliance for DHS. Although the auditors  identified the agency’s risk assessment methodology as inadequate, DHS  reported in its PAR that it had assessed all of its programs for risk. A third  agency auditor reported that the Department of Agriculture needed to  strengthen its program risk assessment methodology to identify and test  critical internal controls over program payments totaling over $100 million.
section_title: Magnitude of Improper Payments Is Still Unknown
paragraphs: As I highlighted in my introduction, agencies’ reported estimates of  improper payments for fiscal year 2005 exceeded $38 billion. This  represents almost a $7 billion, or 16 percent, decrease in the amount of  improper payments reported by 17 agencies in fiscal year 2004. On the  surface, this appears to be good news. However, the magnitude of the  governmentwide improper payment problem remains unknown. This is  because, in addition to not assessing all programs, some agencies had not  yet prepared estimates of significant improper payments for all programs  determined to be at risk. Specifically, of the 33 agency PARs included in our  review, 18 agencies reported improper payment estimates totaling in  excess of $38 billion for some or all of their high-risk programs. The $38  billion represents estimates for 57 programs. Of the remaining 15 agencies  that did not report estimates, 8 said they did not have any programs  susceptible to significant improper payments, 6 were silent about whether  they had programs susceptible to significant improper payments, and the  remaining 1 agency identified programs susceptible to significant improper  payments and said it plans to report an estimate by fiscal year 2007. Further  details are included in appendix I.
Regarding the reported $7 billion decrease in the governmentwide  improper payment estimate for fiscal year 2005, we determined that this  decrease was primarily due to a $9.6 billion reduction in the Department of  Health and Human Services’s (HHS) Medicare program improper payment  estimate, which was partially offset by more programs reporting estimates  of improper payments, resulting in a net decrease of $7 billion. Based on  our review, HHS’s $9.6 billion decrease in its Medicare program improper  payment estimate was principally due to its efforts to educate health care  providers about its Medicare error rate testing program and the importance  of responding to its requests for medical records to perform detailed  statistical reviews of Medicare payments. HHS reported that these more  intensive efforts had dramatically reduced the number of “no  documentation” errors in its medical reviews. The relevance of this  significant decrease is that when providers do not submit documentation to  justify payments, these payments are counted by HHS as erroneous for  purposes of calculating an annual improper payment estimate for the  Medicare program. HHS reported marked reductions in its error rate  attributable to (1) nonresponses to requests for medical records and   (2) insufficient documentation submitted by the provider. We noted that  these improvements partially resulted from HHS extending the time that  providers have for responding to documentation requests from 55 days to  90 days.
These changes primarily affected HHS’s processes related to its efforts to  perform detailed statistical reviews for the purposes of calculating an  annual improper payment estimate for the Medicare program. While this  may represent a refinement in the program’s improper payment estimate,  the reported reduction may not reflect improved accountability over  program dollars. Our work did not include an overall assessment of HHS’s  estimating methodology. However, we noted that the changes made for the  fiscal year 2005 estimate were not related to improvements in prepayment  processes, and we did not find any evidence that HHS had significantly  enhanced its preventive controls in the Medicare payment process to  prevent future improper payments. Therefore, the federal government’s  progress in reducing improper payments may be exaggerated because the  reported improper payments decrease in the Medicare program accounts  for the bulk of the overall reduction in the governmentwide improper  payments estimate. Mr. Chairman, I think the only valid observation at this  time is that improper payments are a serious problem, agencies are  working on this issue at different paces, and the extent of the problem and  the level of effort necessary to control these losses are as yet unknown.
What is clear is that there is a lot of work to do in this area. Agency auditors  have reported major management challenges related to agencies’ improper  payment estimating methodologies and highlighted internal control  weaknesses that continue to plague programs susceptible to significant  improper payments. For example, the Department of Labor’s agency  auditor reported that inadequate controls existed in the processing of  medical bill payments for its Federal Employees’ Compensation Act  program. As a result, medical providers were both overpaid and  underpaid. Internal control weaknesses were also identified in the Small  Business Administration’s (SBA) 7(a) Business Loan program. SBA did not  consistently identify instances of noncompliance with its own  requirements, resulting in improper payments. In another example, agency  auditors for the Department of Education (Education) raised concerns  about the methodology Education used to estimate improper payments for  its Federal Student Aid program. The auditors reported that the  methodology used did not provide a true reflection of the magnitude of  improper payments in the student loan programs. To overcome these major  management challenges, agencies will need to aggressively deploy more  innovative and sophisticated approaches to correct such deficiencies and  identify and reduce improper payments.
Also, I would like to point out that the fiscal year 2005 governmentwide  improper payments estimate of $38 billion did not include seven major  programs, with outlays totaling over $227 billion for fiscal year 2005. OMB  had specifically required these seven programs to report selected improper  payment information for several years before IPIA reporting requirements  became effective. After passage of IPIA, OMB’s implementing guidance  required that these programs continue to report improper payment  information under IPIA. As shown in table 1, the fiscal year 2005  governmentwide improper payment estimate does not include one of the  largest federal programs determined to be susceptible to risk, HHS’s  Medicaid program, with outlays exceeding $181 billion annually.
Of these seven programs, four programs reported that they would be able  to estimate and report on improper payments sometime within the next 3  fiscal years, but could not do so for fiscal year 2005. For the remaining  three programs, the agencies did not estimate improper payment amounts  in their fiscal year 2005 PARs and were silent about whether they would  report estimates in the future. As a result, improper payments for these  programs susceptible to risk will not be known for at least several years,  even though these agencies had been required to report this information  since 2002, with their fiscal year 2003 budget submissions under previous  OMB Circular No. A-11 requirements. OMB reported that some of the  agencies were unable to determine the rate or amount of improper  payments because of measurement challenges or time and resource  constraints, which OMB expects to be resolved in future reporting years.  However, in the case of the HHS programs, the agency auditor recognized  this lack of reporting as a reportable condition related to the reliability of  the department’s financial statements. In the component of its fiscal year  2005 audit report dealing with compliance with laws and regulations, the  auditor reported that HHS potentially had not fully complied with IPIA  because nationwide improper payment estimates and rates for significant  health programs were under development and the agency did not expect to  complete the estimation process until fiscal year 2007.
Also, as mentioned earlier and shown in appendix I, 8 of 33 agencies said  they did not have programs susceptible to significant amounts of improper  payments.  However, certain programs associated with the government’s  response to mitigate the effects of Hurricane Katrina, one of the largest  natural disasters in our nation’s history, had material risks of improper  payments.  In order to respond to the immediate needs of disaster victims  and to rebuild the affected areas, government agencies used streamlined  eligibility verification requirements for delivery of benefits and expedited  contracting methods in order to commit contractors to begin work  immediately. These expedited processes can increase the potential for  improper payments.
For example, from our recent review of the Federal Emergency  Management Agency’s (FEMA) Individuals and Households Program  (IHP) we identified significant flaws in the process for registering disaster  victims for assistance payments. As part of its relief efforts, FEMA had  distributed nearly $5.4 billion in IHP assistance, with $2.3 billion in the  form of expedited assistance, as of mid-December 2005. These payments  were made via checks, electronic fund transfers, and debit cards.  We found  limited procedures in place designed to prevent, detect, and deter certain  types of duplicate and potentially fraudulent disaster registrations. As a  result, we determined that thousands of registrants provided incorrect  Social Security numbers, dates of birth, and addresses to obtain assistance  and found that FEMA made duplicate assistance payments to about 5,000  of the nearly 11,000 debit card recipients.
In one example of expedited contracting, the Department of Transportation  (DOT) Office of Inspector General (OIG) determined that DOT had  overpaid a contractor by approximately $32 million for services to provide  buses for evacuating hurricane victims from the New Orleans area.  According to the OIG, the overpayment occurred because DOT had made  partial payments based on initial task estimates and without  documentation that substantiated the dollar amount of services actually  provided to date. Although DOT promptly recovered the funds, the nature  of these types of exigencies to adequately respond to the hurricane victims  makes it likely that future improper payments are likely to occur. As a  result, selected agencies, such as DHS and DOT, have said they plan to  perform concentrated reviews of payments related to relief efforts to  identify the extent of improper payments, develop actions to reduce these  types of payments, and enhance internal controls for future relief efforts.
section_title: Additional Reporting Requirements for Recovery Auditing Information
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. Recovery auditing is another method that  agencies can use to recoup detected improper payments. Recovery  auditing focuses on the identification of erroneous invoices, discounts  offered but not received, improper late penalty payments, incorrect  shipping costs, and multiple payments for single invoices. Recovery  auditing can be conducted in-house or contracted out to recovery audit  firms. 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  legislation. As we previously reported, with the passage of this law, the  Congress has provided agencies a much needed incentive for identifying  and reducing their improper payments that slip through agency  prepayment controls. 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 fiscal year 2005, OMB expanded the type of recovery auditing  information that applicable agencies are to report in their annual PARs.  Prior to fiscal year 2005, applicable agencies were only required to report  on the amount of recoveries expected, the actions taken to recover them,  and the business process changes and internal controls instituted or  strengthened to prevent further occurrences.  In addition, OMB was not  reporting on a governmentwide basis agencies’ recovery audit activities in  its annual report on agencies’ efforts to improve the accuracy and integrity  of federal payments.
In fiscal year 2005, OMB revised its recovery auditing reporting  requirements and required applicable agencies to provide more detailed  information on their recovery auditing activities. Specifically, in addition to  the prior year requirements, agencies that entered into contracts with a  total value exceeding $500 million annually were required to discuss any  contract types excluded from review and justification for doing so. In  addition, agencies were 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.
For fiscal year 2005, 19 agencies reported entering into contracts with a  total value in excess of the $500 million reporting threshold. These 19  agencies reported reviewing more than $300 billion in contract payments to  vendors. From these reviews, agencies reported identifying about $557  million in improper payments for recovery and reported actually  recovering about $467 million, as shown in table 2.
section_title: Concluding Observations
paragraphs: In closing, I want to say that we recognize that measuring improper  payments and designing and implementing actions to reduce them are not  simple tasks and will not be easily accomplished. The ultimate success of  the governmentwide effort to reduce improper payments depends, in part,  on each agency’s continuing diligence and commitment to meeting the  requirements of IPIA and the related OMB guidance. The level of  importance each agency, the administration, and the Congress place on the  efforts to implement the act will determine its overall effectiveness and the  level to which agencies reduce improper payments and ensure that federal  funds are used efficiently and for their intended purposes. With budgetary  pressures rising across the federal government, and the Congress’s and the  American public’s increasing demands for accountability over taxpayer  funds, identifying, reducing, and recovering improper payments become  even more critical. Fulfilling the requirements of IPIA 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: Contacts and Acknowledgments
paragraphs: For more information regarding this testimony, please contact McCoy  Williams, Director, Financial Management and Assurance, at (202) 512-9095  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; Francine DelVecchio; Christina  Quattrociocchi; and Donell Ries.
section_title: Agency Improper Payment Estimate Reporting in Fiscal Year 2005
section_title: Improper Payment Estimates Reported in Agency Fiscal Years 2004 and 2005 PARs or Annual Reports
paragraphs: Marketing Assistance  Loan Program  (previously Commodity  Loan Programs)
Development Block  Grant (Entitlement  Grants, States/Small  Cities)
Programs that  the agency  reported were  not susceptible  to significant  improper  (Civil Service  Retirement System  and Federal  Employees Retirement  System)
See table 1 of this testimony.
Agency fiscal year 2005 PAR or annual report information not available as of the end of our fieldwork.
Agency did not address improper payments or the Improper Payments Information Act (IPIA)  requirements for this program in its fiscal year 2005 PAR or annual report.
section_title: Related GAO Products
paragraphs: Financial Management:  Challenges Remain in Meeting Requirements of  the Improper Payments Information Act.  GAO-06-482T. Washington, D.C.:  March 9, 2006.
Financial Management: Challenges in Meeting Governmentwide  Improper Payment Requirements. GAO-05-907T. Washington, D.C.: July  20, 2005.
Financial Management: Challenges in Meeting Requirements of the  Improper Payments Information Act. GAO-05-605T. Washington, D.C.:  July 12, 2005.
Financial Management: Challenges in Meeting Requirements of the  Improper Payments Information Act. GAO-05-417. Washington, D.C.:  March 31, 2005.
Financial Management: Fiscal Year 2003 Performance and  Accountability Reports Provide Limited Information on  Governmentwide Improper Payments. GAO-04-631T. Washington, D.C.:  April 15, 2004.
Financial Management: Status of the Governmentwide Efforts to Address  Improper Payment Problems. GAO-04-99. Washington, D.C.: October 17,  2003.
Financial Management: Effective Implementation of the Improper  Payments Information Act of 2002 Is Key to Reducing the Government’s  Improper Payments. GAO-03-991T. Washington, D.C.: July 14, 2003.
Financial Management: Challenges Remain in Addressing the  Government’s Improper Payments. GAO-03-750T. Washington, D.C.: May  13, 2003.
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