Improper Payments: Agencies' Fiscal Year 2005 Reporting under the Improper Payments Information Act Remains Incomplete
Published: 2006-11-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Fiscal year 2005 marked the second year that executive agencies were required to report improper payment information under the Improper Payments Information Act of 2002 (IPIA). As a steward of taxpayer dollars, the federal government is accountable for how its agencies and grantees spend billions of taxpayer dollars and is responsible for safeguarding those funds against improper payments. GAO was asked to determine the progress agencies have made in their improper payment reporting and the total amount of improper payments recouped through recovery auditing. To accomplish this, GAO reviewed improper payment information reported by 35 agencies in their fiscal year 2005 performance and accountability or annual reports.
section_title: What GAO Found
paragraphs: While making progress, agencies' fiscal year 2005 reporting under IPIA does not yet reflect the full scope of improper payments across executive branch agencies. Major challenges remain in meeting the goals of the act and ultimately improving the integrity of payments. GAO found that these challenges continue to hinder full reporting of improper payment information because of the following three factors: (1) Existing reporting incomplete. Although 18 agencies collectively identified and estimated improper payments for 57 programs and activities totaling $38 billion, some agencies still had not instituted systematic methods of reviewing all programs, resulting in their identification of none or only a few programs as susceptible to significant improper payments. In many cases, these same agencies had well-known and documented financial management weaknesses as well as fraudulent, improper, and questionable payments. Further, improper payment estimates totaling about $389 million for 9 programs were not based on a valid statistical sampling methodology as required. Higher estimates would have been expected had the correct methods been used, given that total outlays for these 9 programs exceeded $58.2 billion. (2) Large programs still not included. Improper payment estimates for 10 risk-susceptible programs with outlays totaling over $234 billion still have not been provided. Most of these programs were subject to Office of Management and Budget (OMB) reporting requirements that preceded IPIA. (3) Threshold criteria limit reporting. The act includes broad criteria to identify risk-susceptible programs. OMB's implementing guidance includes more specific criteria that limit the disclosure and transparency of agencies' improper payments. With regard to agencies' recovery audit efforts, GAO found that the data reported may present an overly optimistic view of these efforts. While 21 agencies were required to report on their recovery audit efforts, GAO identified discrepancies in several agencies' information and found limited reviews over contract payments. For example, for fiscal year 2005, the National Aeronautics and Space Administration (NASA) reported that it had identified and recovered $617,442 in contract payments, a 100 percent recovery rate. Yet, the NASA Office of Inspector General reported it had identified over $515 million in questioned contract costs during fiscal year 2005, of which NASA management decided to pursue recovery of $51 million. Had this amount been compared to the $617,442 NASA actually recovered, its recovery rate would drop from the reported 100 percent to 1.2 percent. In addition, we noted that 5 of the 21 agencies did not review all of their agency components as part of their recovery audit efforts while 2 agencies reported that recovery auditing was not cost beneficial without reporting any details to support this determination.

section_title: Letter
paragraphs: Fiscal year 2005 marked the second year that federal executive branch  agencies were required to report improper payment information under the  Improper Payments Information Act of 2002 (IPIA). IPIA has increased  visibility over improper payments 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. As the steward of  taxpayer dollars, the federal government is accountable for how its  agencies and grantees spend hundreds of billions of taxpayer dollars and is  responsible for safeguarding those funds against improper payments.
Our work over the past several years has demonstrated that improper  payments are a long-standing, widespread, and significant problem in the  federal government. Yet, 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 IPIA.
As we reported in March 2005, regarding the first year reporting under  IPIA, the improper payment estimate of $45 billion did not include any  amounts for some of the highest risk programs, such as Medicaid with  outlays in excess of $175 billion for fiscal year 2004. Further, we noted that  some agencies still had not instituted systematic methods of reviewing all  programs and activities or had not identified all programs susceptible to  significant improper payments. We concluded that the magnitude of the  governmentwide improper payments problem is still unknown because  agencies have not yet prepared improper payment estimates for all of their  programs. In that report, we made three recommendations to OMB to help  ensure successful implementation of IPIA requirements.
Because of the continued interest in addressing the governmentwide  improper payments issue, you asked us to determine (1) the extent to  which agencies have included required improper payment information in  their performance and accountability reports (PAR), (2) the annual  improper payment estimate reported by agencies for fiscal year 2005,   (3) whether the definition and types of improper payments included in IPIA  and OMB’s implementing guidance provide adequate disclosure of the  extent of improper payments at the agencies, and (4) the reported amount  of improper payments recouped through recovery audits.
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. We reviewed  improper payment information reported by the 35 agencies in their fiscal  year 2005 PARs or annual reports. We also 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 the data that OMB reported.  However, we are providing this 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 April 2006 through September 2006 in  accordance with generally accepted government auditing standards. See  appendix I for more details on our scope and methodology.
subsections: section_title: Background
paragraphs: IPIA was passed in November 2002 with the major objective of enhancing  the accuracy and integrity of federal payments. IPIA 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 implementing guidance in May 2003,  which requires 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 annually report the results of its efforts to  reduce improper payments.
In addition, applicable agencies are required to report their efforts to  recoup contract-related improper payments under section 831 of the  National Defense Authorization Act for Fiscal Year 2002. This legislation  contains a provision that requires all executive branch agencies entering  into contracts with a cumulative 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 act 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  other 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.
In August 2006, OMB revised its IPIA implementing guidance. The revision  consolidates into Appendix C of OMB Circular No. A-123, Management’s  Responsibility for Internal Control, all guidance for improper payments  and recovery auditing reporting. The revised guidance includes  authorization for risk assessments to be conducted less often than annually  for programs where improper payment baselines are already established,  are in the process of being measured, or are scheduled to be measured by  an established date. Although OMB kept its criteria for defining significant  improper payments as those exceeding both 2.5 percent of program  payments and $10 million, OMB added that it may determine on a case-by- case basis that certain programs that do not meet the threshold may be  subject to the annual reporting requirement. Additionally, the revised  guidance allows agencies to use alternative sampling methodologies and  requires agencies to report on and provide a justification for using these  methodologies in their PARs. This revised guidance is effective for  agencies’ fiscal year 2006 improper payment estimating and reporting in the  PARs or annual reports. For the purposes of evaluating agency reporting in  this report, we used the requirements from the OMB implementing  guidance effective for fiscal year 2005.
OMB has also established Eliminating Improper Payments as a new  program-specific initiative under the President’s Management Agenda  (PMA). This separate 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.
The fiscal year 2005 PARs, the second set of annual reports representing  the results of improper payments assessments for federal executive branch  agency 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 progress  in implementing processes and controls to identify, estimate, and reduce  improper payments, but that significant challenges remain to effectively  achieve the goals of IPIA.
section_title: Improvements Needed in Agencies’ Reporting of Improper Payment Information
paragraphs: Our review of agencies’ reporting of select improper payment information  identified that improvements are still needed to fully address improper  payment reporting requirements. Of the 35 fiscal year 2005 agency PARs or  annual reports included in our review, 23 agencies reported they had  performed risk assessments of all of their programs and activities.  However, the results of certain agencies’ risk assessments appear  questionable. For example, agency management at DOJ and DHS reported  that based on their risk assessments, no risk-susceptible programs were  identified. Yet, these agencies’ auditors cited agency noncompliance with  IPIA in their fiscal year 2005 annual audit reports, primarily caused by  inadequate risk assessments.
Eighteen of the 35 agencies reported improper payment estimates totaling  in excess of $38 billion for some or all of their high-risk programs in fiscal  year 2005. Of the 18 agencies, 14 reported having one or more programs  with improper payment estimates that exceeded $10 million, and thus were  required to implement plans to reduce improper payments and report on  actions taken. Based on our review of these key improper payment  reporting requirements, we generally found that the applicable agencies  reported this information for one or more of their programs in their PARs  as required. However, the extent and details of reporting varied among the  agencies. For example, the Office of Personnel Management (OPM)  addressed the manager accountability reporting requirement in one  sentence for its risk-susceptible programs, while USDA and the  Department of Veterans Affairs (VA) provided information on how each  program manager was held accountable for each high-risk program  identified. Six different agencies reported that the responsibility for  improper payments is included in management’s performance plans;  however, specific details were not discussed.
IPIA and OMB’s implementing guidance require agencies to annually  review and identify programs susceptible to significant improper  payments, estimate the amount of their improper payments, and report on  the amount of their improper payments and their actions to reduce  improper payments. OMB requires the results of these steps to be reported  in the agencies’ PARs, in the Management Discussion and Analysis section  and as a separate appendix for each fiscal year ending on or after  September 30, 2004. Figure 1 provides an overview of the four key steps  OMB requires agencies to perform in meeting the improper payment  reporting requirements.
Agencies must estimate improper payments for each susceptible program  identified during the risk assessment process. In addition, agency programs  that were included in former section 57 of OMB Circular No. A-11 must  estimate improper payments even if the estimate does not exceed   $10 million and 2.5 percent of program payments. Further, some agency  programs voluntarily reported an improper payment estimate or other  improper payment information. When the program improper payment  estimates exceed $10 million, agencies are required to report on various  actions they are taking to reduce improper payments, such as determining  causes of improper payments and taking corrective actions and ensuring  manager accountability, and statutory barriers that limit corrective actions  to reduce improper payments. To address these three reporting  requirements, OMB requires agencies to report the following information in  their PARs:  Causes of improper payments and corrective action. 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.
Manager accountability. A description of the steps (including timeline)  the agency has taken and plans to take to ensure that agency managers  (including the agency head) are held accountable for reducing and  recovering erroneous payments.
Statutory barriers. A description of any statutory or regulatory barriers  that may limit the agency’s corrective actions in reducing erroneous  payments.
section_title: Improper Payments Estimate Is Understated
paragraphs: The total improper payment estimate of about $38 billion represents almost  a $7 billion, or 16 percent, decrease from the $45 billion of improper  payments reported by agencies in fiscal year 2004. On the surface, this  would suggest that significant progress has been made. However, this is not  the case because the reported $7 billion reduction in the total improper  payments estimate may not reflect improved accountability or  strengthened internal controls. As we previously reported in March and  April 2006, this estimate reduction is primarily attributable to a decrease  in HHS’s Medicare program improper payment estimate. This decrease  mainly resulted from a change to Medicare’s estimating methodology rather  than from improved payment controls. Regardless of whether prior year  estimates were reliable, the reported reduction is unlikely to represent a  measurable improvement in internal control and accountability given that  HHS’s OIG continued to cite the integrity of Medicare payments as a top  management challenge in HHS’s fiscal year 2005 PAR. As discussed  previously, other agency auditors have reported major management  challenges that highlight internal control weaknesses that continue to  plague programs susceptible to significant improper payments. In some  cases, agencies reported that their programs were not susceptible to  significant improper payments, despite the fact that the auditor’s reports in  the same PARs identified major management challenges, including  significant internal control weaknesses, for some of the agencies’  programs.
Also, the total improper payment estimate does not include certain factors  that if resolved, would materially increase reports of estimated improper  payments. For example, 10 risk-susceptible programs with outlays totaling  over $234 billion for fiscal year 2005 did not estimate improper payments,  even though OMB required most of these programs to report selected  improper payment information several years before IPIA became effective.  In addition, we found six agencies that did not use statistical sampling for 9  programs to estimate improper payment amounts. Because nonstatistical  sampling methods were used, such as results from Single Audit Act  reports and internal performance reviews, the $389 million reported  represents only the known improper payment amounts reported by  agencies. Given that total outlays for these 9 programs exceeded   $58.2 billion in fiscal year 2005, the improper payment estimate for these  programs would likely have been much greater had statistically valid  methods been used. We also found instances where agencies estimated  improper payments for only one component of the risk-susceptible  program. Using these types of methodologies results in estimates that may  be significantly understated.
subsections: section_title: Some Agencies Continue to Lack Improper Payment Estimates for Susceptible Programs
paragraphs: The fiscal year 2005 governmentwide improper payments estimate of   $38 billion did not include any amounts for 10 programs, with fiscal year  2005 outlays totaling over $234 billion. OMB had specifically required 7 of  these 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.  The remaining 3 risk-susceptible programs, with no previous reporting  requirement, provided target dates for estimating improper payments. As  shown in table 5, the fiscal year 2005 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 10 programs, 7 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 3 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 7 of these  programs 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. For example, since fiscal year 2002, HHS has conducted  pilots at the state level to further its progress toward reporting a national  improper payments estimate for its Medicaid program. Each state is  responsible for designing and overseeing its own Medicaid program within  the federal government structure. This type of program structure presents  challenges for implementing a methodology to estimate improper  payments as HHS must work with states to obtain applicable  documentation used in the calculation. An additional challenge HHS and  other agencies with state-administered programs face is the ability to hold  states accountable for meeting targets to reduce and recover improper  payments in the absence of specific statutory authority.
Of the three programs that did not report a target date for estimating, the  Department of Housing and Urban Development’s (HUD) Community  Development Block Grant (CDBG) program was the only one that did not  report any actions under way to begin estimating improper payments. In its  fiscal year 2005 PAR, HUD reported that based on completed testing of  fiscal year 2003 payments, this program is below OMB’s threshold  criteria—exceeding  $10 million and 2.5 percent of program payments—for   significant improper payments and, therefore, was removed from HUD’s at- risk inventory. HUD stated that this program was not subject to retesting  unless there was a significant change in the nature of activity or internal  control structure.
We have several problems with HUD’s position. The CDBG program was  subject to the previous OMB Circular No. A-11 requirements and thus was  required by OMB’s guidance to continue to report improper payment  information under IPIA, regardless of the agency-determined risk level,  which based on other known information may not reflect actual risk.  During a June 2006 hearing on the CDBG program, HUD’s OIG reported  on numerous instances of fraudulent, improper, and abusive use of  program funds identified over a 2-½-year period based on 35 audits. The  HUD OIG reported that its office has recovered over $120 million in  program funds, identified over $100 million in questioned costs, indicted  159 individuals, initiated administrative actions against 143 individuals, and  took 5 civil actions and 39 personnel actions. As evidenced by the HUD OIG  reviews, the CDBG program may be at risk of significant improper  payments.
section_title: Certain Methodologies Used to Estimate Improper Payments Do Not Result in Accurate Estimates
paragraphs: The total executive branch-wide improper payment estimate may also be  understated because of nonstatistical sampling methodologies agencies  used to estimate improper payments in its programs. OMB’s implementing  guidance requires that agencies use a statistical sample to estimate  improper payments. With statistical sampling, sample results can be  generalized to the entire population from which the sample was taken.  From our review, we found six agencies that did not use statistical  sampling to estimate improper payments totaling approximately   $389 million for nine programs with outlays exceeding $58 billion.
For example, Labor analyzed fiscal year 2003 single audits to identify  questioned costs for its Workforce Investment Act program, which, in  turn, were used as a proxy for reporting its improper payment estimate.  Specifically, the improper payment rate was determined by calculating the  projected questioned costs and dividing this total amount by the  corresponding outlays. We do not believe this is a reasonable proxy for  improper payment levels because single audits, by themselves, may lack  the level of detail necessary for achieving IPIA compliance. Specifically,  single audits generally focus on the largest dollars in an auditee’s portfolio.  Thus, all programs identified as susceptible to improper payments at the  federal level may not receive extensive coverage under a single audit.  Consequently, both the depth and level of detail of single audit results are,  generally, insufficient to identify improper payments, estimate improper  payments, or both.
We also found instances where agencies estimated improper payments for  only one component of the risk-susceptible program. For example, HHS’s  Medicare program is the largest program constituting the total improper  payment estimate, with an estimate of $12.1 billion for fiscal year 2005.  However, this estimate represents payment errors only for its fee-for- service program component. HHS has not yet begun to estimate improper  payments for its managed care component, with outlays totaling about   $52 billion, or 15 percent of Medicare program outlays. In its fiscal year  2005 financial report, HHS’s Centers for Medicare and Medicaid Services  (CMS) identified bringing the Medicare managed care component into  compliance with IPIA as a key challenge in the coming years. In addition,  CMS’s external auditors identified Medicare’s managed care benefits  payment cycle as a material weakness in its report on internal controls.  Specifically, the auditor found that existing CMS policies and procedures  are not sufficient to adequately reduce the risk of material benefit payment  errors from occurring or not being detected and corrected in a timely  manner.
In addition, the Department of Transportation (DOT) reported zero  improper payments based on its testing of four state-administered grant  programs with outlays totaling $42.1 billion in fiscal year 2005. (See app. II.)  DOT stated that none of these programs exceeded OMB’s reporting criteria.  However, DOT’s test procedures only applied to payments made by DOT to  grantee entities. Test procedures did not address subsequent “flow down”  payments made at the grantee level, where the risk of improper payments  is at its greatest. As such, the DOT OIG reported in the agency’s fiscal year  2005 PAR that detecting improper payments and stopping wasteful  spending by grantees is a top management challenge for the agency. DOT  stated that it had actions under way to implement an improper payment  methodology for its grant programs and plans to implement nationwide  testing beginning in fiscal year 2007.
section_title: Reduction in Improper Payment Estimate May Not Be a Result of Improved Accountability and Enhanced Internal Controls
paragraphs: The reported $7 billion decrease in the governmentwide estimate is  primarily attributable to a decrease in Medicare’s estimate. However, we  found that this decrease was mainly a result of an improvement made to  Medicare’s estimating methodology rather than to improved payment  controls. When providers do not submit documentation to justify payments  received, these payments were counted by HHS as erroneous for purposes  of calculating an annual improper payment estimate for the Medicare  program. However, the decreased error rates achieved this year because of  increased efforts to obtain provider documentation are not directly  comparable to those reported in prior years before the new procedures  were implemented.
Based on our review, the Medicare improper payment estimate decrease  was principally caused by increased 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. HHS reported marked  reductions in its error rate attributable to fewer cases of (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. 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.
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 validation  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. Further, we also found that HHS’s OIG  continues to cite the integrity of Medicare payments as a top management  challenge. In addition, health care fraud schemes continue to hamper  HHS’s efforts to improve accountability. For example, in May 2006, DOJ  reported that a businessman pleaded guilty to conspiracy to defraud  Medicare of $40 million in fraudulent billings over a 16-month period. The  fraud scheme included billing Medicare for motorized wheelchairs that  were either not required by the Medicare beneficiary, not delivered, or  both.
Other agency auditors have also reported major management challenges  related to agencies’ internal control weaknesses that continue to plague  programs susceptible to significant improper payments. For example,  SBA’s auditors reported that for the 7(a) Business Loan program, SBA did  not consistently identify instances of noncompliance with its own  requirements, resulting in improper payments. In some cases, agencies  reported that they had determined that programs were not susceptible to  significant improper payments despite the fact that the auditor’s reports in  the same PARs identified management challenges, or material weaknesses  within the programs. For example, the Department of the Interior’s OIG  reported that the agency’s grant programs lacked proper management,  creating accountability and stewardship deficiencies, as well problems  related to data reliability, training, and ensuring that funds were spent  appropriately. Likewise, the General Services Administration’s (GSA) OIG  reported several issues related to the agency’s contract management  practices, such as unauthorized personnel issuing task orders, not  inspecting completed work projects prior to payment, not ensuring  services were rendered prior to payment, and paying invoices that often  lacked supporting documentation.
Table 6 provides four other examples of agencies’ major management  challenges, as reported in the fiscal year 2005 PARs, in specific agency  programs or activities. None of the programs listed in table 6 have been  identified by agencies as susceptible to significant improper payments, and  thus are not included in the total improper payment estimate. These  examples raise further questions about the adequacy of agencies’ risk  assessments to identify susceptible programs, and whether agencies  considered major management challenges identified by the OIG as part of  their risk assessment process.
section_title: IPIA May Need to Be Amended to Ensure Agencies Fully Meet Its Objectives
paragraphs: IPIA includes broad criteria that agencies should use to annually assess  what programs and activities are at risk of having improper payments.  However, OMB has prescribed more specific criteria in its implementing  guidance that in practice have the effect of limiting the disclosure and  transparency of governmentwide improper payments. This limitation  appears contrary to the objective of IPIA, which, among other things, was  created to facilitate the Congress’s understanding of the nature and extent  of the governmentwide improper payment problem and hold agencies  accountable for improved management over federal funds. An amendment  to the act could clarify the criteria that agencies should use to identify  which programs and activities are susceptible to significant improper  payments to ensure agencies meet the intent of the act. In addition, we note  that the definition of improper payments under IPIA excludes certain types  of payments that are required to be made under constitutional, statutory, or  judicial requirements, even though those payments are subsequently  determined to be incorrect. This includes payments that an agency is  required to make under statute or court order that later are determined to  be overpayments. Because agencies are not required to track, monitor, and  report on a governmentwide basis these types of overpayments, the  magnitude of this issue is unknown.
subsections: section_title: Identification Threshold Limits Agency Reporting on Susceptible Programs
paragraphs: For purposes of assessing what programs and activities are at risk of  improper payments, IPIA states that agency heads must review their  agencies’ programs and activities to determine those that are susceptible to  significant improper payments. The law does not define susceptibility. In its  implementing guidance, OMB directed that a program or activity is  susceptible to significant improper payments if it meets two criteria— potential improper payments exceeding $10 million and 2.5 percent of  program payments. Therefore, both criteria must be met for an agency to  subject the program to the later steps requiring the agency to estimate  improper payments and address the various improper payment reporting  requirements.
As stated earlier in this report, the information developed during a risk  assessment forms the foundation upon which management can determine  the nature and type of corrective actions needed. It also gives management  baseline information for measuring progress in reducing improper  payments. Thus, these assessment criteria affect how agencies identify,  estimate, report on, and reduce those programs susceptible to significant  improper payments. For example, of the 23 agencies that reported  assessing all programs and activities, we found that 6 agencies limited their  risk assessment reviews to only those programs that would likely meet  OMB’s definition of programs susceptible to significant improper  payments. Two of these 6 agencies reported that they did not perform a  comprehensive risk assessment for those programs with outlays of less  than $10 million because the programs would not have exceeded both of  OMB’s threshold criteria. The remaining 4 agencies did not perform a  comprehensive risk assessment of programs with outlays ranging from   $40 million to $200 million, generally citing the threshold criteria as the  reason for their exclusion.
We also noted instances where agencies with large program outlays  reported that their programs or activities were not susceptible to  significant improper payments because the improper payment estimates  only exceeded one of OMB’s criteria for reporting improper payment  information, another example of how OMB’s criteria could materially affect  the extent to which agencies report improper payment information in their  PARs. From our review of the 57 agency programs and activities that were  included in the total $38 billion improper payment estimate, we identified  20 programs or activities that reported improper payment estimates  exceeding $10 million, but not 2.5 percent of program outlays. We also  identified 1 program that reported an error rate exceeding 2.5 percent of  program outlays, but not $10 million. See table 7 for additional details.
As table 7 shows, we identified, in total, 21 programs or activities with  improper payment estimates exceeding $5.6 billion that meet only one of  OMB’s reporting criteria. Most of these program estimates greatly  exceeded $10 million and, without certain stipulations, could have avoided  reporting improper payment information under OMB’s reporting criteria.  However, OMB has required that 13 of these 21 programs estimate  improper payments regardless of dollar amount or error rate, because they  had previous reporting requirements under OMB Circular No. A-11.  Nonetheless, if the Circular No. A-11 requirements did not apply or  agencies decided not to voluntarily report on their improper payment  estimates that were under OMB’s reporting threshold, OMB’s definition of  significant improper payments could potentially mask the full scope of  improper payments.
In addition to our analytical reviews above, we also found specific  instances where OMB’s definition of significant improper payments limits  agencies’ reporting. Although we do not know the extent of improper  payments that are not reported, a limited number of agencies voluntarily  provided information in their PARs that allowed us to determine the  amount of improper payments for certain programs and activities that were  excluded from the total improper payments estimate of $38 billion for fiscal  year 2005. For example, Education identified three programs with  estimated improper payments exceeding $10 million for each program,  which totaled about $155 million in improper payments. In light of OMB’s  criteria, because these estimates did not exceed 2.5 percent of program  outlays, they were not included in the agency’s total improper payment  estimate. In another example, the Department of Defense (DOD) OIG  reported it had identified about $23 million in improper payments related  to the procurement of fuel at the Defense Energy Support Center during  fiscal year 2005. DOD did not report this information in its PAR since the  improper fuel payments did not exceed 2.5 percent of program payments.
As these examples illustrate, OMB’s current criteria for identifying risk- susceptible programs limit the disclosure of valuable information that the  Congress, the public, and others with oversight and monitoring interests  need to hold agencies accountable for reporting and reducing improper  payments. Thus, amending existing IPIA provisions to define risk- susceptible programs and activities, such as the use of a specific dollar  threshold, would allow for more complete disclosure and transparency of  govermentwide improper payment reporting and, in turn, would require  OMB to revise its implementing guidance to reflect such amendments as  well as align existing guidance with the intent of the act.
section_title: IPIA Definition of Improper Payments Excludes Certain Payments from Reporting
paragraphs: IPIA defines an improper payment as a 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. This includes any payment to an ineligible  recipient, any payment for an ineligible service, any duplicate payment, any  payment for services not received, and any payment that does not account  for credit for applicable discounts.
On August 28, 2003, OMB advised SSA on improper payment reporting.  Under this advice, SSA was allowed to exclude from its estimate of  improper payments those payments that it made following constitutional,  statutory, or judicial requirements, even though those payments were  subsequently determined to be incorrect. These payments were deemed by  OMB to be “unavoidable” improper payments, as there are no  administrative changes SSA could implement that would eliminate such  payments, nor would SSA be likely to receive other relief from such  requirements.
As we previously reported, although the definition of improper payments  does not use the terms avoidable or unavoidable, we agree with OMB that  a payment that was made because of a legal requirement to make the  payment subject to subsequent determinations that the payment is not due  should not be included in an agency’s estimate of its improper payments.  We agree with OMB’s conclusion not because it is an “unavoidable”  payment but rather because it does not meet the definition of an improper  payment under the act.
In its Supplemental Security Income (SSI) program, SSA disburses  disability payments to recipients at the beginning of the month based on  the income and asset levels recipients expect to maintain during the  month. If SSA initially determines that an overpayment occurred, court  decisions and language in the Social Security Act allow individuals to  continue receiving the same amount of SSI benefits pending the results of a  hearing to determine eligibility. If the initial determination is affirmed, the  payments made during the hearing and appeals processes are considered  overpayments, which SSA may recover using a variety of means.
In this example, SSA, because of the statutory requirement, must make the  payment. The statute requires SSA to make the payment until applicable  due process requirements result in a determination that the person is  ineligible; therefore, the mandatory payments whether subsequently  deemed to be correct or incorrect, have not been made to an ineligible  recipient at the time they were made. Accordingly, the facts would not  support inclusion of these overpayments as improper payments as defined  under IPIA. However, if as a result of the due process procedures, it is  subsequently determined that the recipient is no longer eligible for benefits  and SSA makes a payment subsequent to these procedures, that amount  would be an improper payment.
Yet, we would not go so far as to conclude that any payment that is  unavoidable should not be included as an improper payment under IPIA.  Rather, the exclusion of payments should be made individually on a fact- specific basis using the definition provided in IPIA. In addition, we believe  that agencies should track and monitor these types of payments as part of  their debt collection efforts and have the ability to readily report this type  of information upon request. OMB currently does not require SSA to report  in its PAR details relating to these types of overpayments, nor does OMB  require governmentwide reporting of these types of overpayments, thus the  magnitude of this issue is unknown. Having agencies annually report on  these types of overpayments would provide Congress, agency  management, and other decision maker’s valuable information with which  to determine the extent of these types of overpayments and to make policy  decisions, if needed, to appropriately address this issue.
section_title: Agencies’ Reporting of Recovery Auditing Information Questionable
paragraphs: We noted discrepancies in selected agencies’ reporting of recovery audit  information and limited reviews over contract payments. As a result,  reporting for recovery auditing information may not represent an accurate  view of the extent of agencies’ efforts. From our review of agencies’ PARs  and discussions with OMB, we determined that 21 agencies reported  entering into contracts with a total value in excess of $500 million and, thus  were subject to recovery auditing requirements under section 831 of the  National Defense Authorization Act for Fiscal Year 2002. Generally, these  agencies reported on their recovery auditing efforts, such as the amount  identified for recovery and the amount recovered. However, we noted a few  instances where the agency amount of contract costs identified for  recovery was considerably lower than the corresponding OIG amount  identified from current year audit reviews. These discrepancies raise  questions as to whether the agency amount identified for recovery should  have been much higher, thereby significantly decreasing the reported  agency-specific and overall governmentwide high rate of recovery. We also  noted that 5 of the 21 agencies did not review all of their agency  components as part of their recovery audit efforts, and 2 agencies reported  that recovery auditing was not cost beneficial.
Section 831 of the National Defense Authorization Act provides an impetus  for applicable agencies to systematically identify and recover contract  overpayments. 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, are to be credited back to the original appropriation from which the  improper payment was made, subject to restrictions as described in  legislation. As we previously testified, with the passage of this law, the  Congress has provided agencies a much-needed incentive for identifying  and recovering their improper payments that slip through agency  prepayment controls.
Recovery auditing is a method that agencies can use to recoup detected  improper payments. Recovery auditing is a detective control to help  determine whether contractor costs were proper. Specifically, it 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 techniques used in recovery  auditing offer the opportunity for identifying weaknesses in agency internal  controls, which can be modified or upgraded to be more effective in  preventing improper payments before they occur for subsequent contract  outlays.
Nonetheless, effective internal control calls for a sound, ongoing invoice  review and approval process as the first line of defense in preventing  unallowable contract costs. Given the large volume and complexity of  federal payments and historically low recovery rates for certain programs,  it is much more efficient to pay bills and provide benefits properly in the  first place. Aside from minimizing overpayments, preventing improper  payments increases public confidence in the administration of benefit  programs and avoids the difficulties associated with the “pay and chase”  aspects of recovering improper payments. Without strong preventive  controls, agencies’ internal control activities over payments to contractors  will not be effective in reducing the risk of improper payments.
For fiscal year 2005, OMB expanded the type of recovery auditing  information that agencies are to report in their annual PARs. Prior to fiscal  year 2005, 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 required applicable agencies to discuss  any contract types excluded from review and justification for doing so. In  addition, agencies were required to report, in a standard 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.
As shown in table 8, 21 agencies reported over $340 billion as amounts  subject to review for fiscal year 2005, while the contract amounts reviewed  totaled over $287 billion. In addition, the 21 agencies reported identifying  about $557 million in contracts for recovery, which represented less than  two-tenths of a percentage of the $287 billion amount reviewed. Of the   $557 million identified, agencies reported recovering $467 million in  improper payments, an 84 percent recovery rate. However, we found two  instances where the agency amount of contract costs identified for  recovery was considerably lower than the corresponding OIG amount  identified from current year audit reviews. These discrepancies raise  questions as to whether the agency amount identified for recovery should  have been much higher, thereby significantly decreasing the agency- specific and overall high rate of recovery.
For example, for fiscal year 2005, NASA reported in its PAR that it had  identified and recovered $617,442 in contract payments, a 100 percent  recovery rate. Yet, the NASA OIG reported it had identified over   $515 million in questioned contract costs during fiscal year 2005. Of this  amount, NASA management decided that $51 million in contract costs  should be pursued for recovery. When comparing the $51 million in  questioned contract costs identified for recovery to the $617,442 NASA  actually recovered, the recovery rate decreases from the reported 100  percent recovery rate to a 1.2 percent rate. In another example, DOD  reported in its PAR that it had identified for recovery $473 million and  recovered about $419 million in contract payments, an 89 percent recovery  rate. However, the DOD OIG reported it had identified over $2 billion in  questioned contract costs as of September 30, 2005. When comparing the  $2 billion in questioned contract costs to the $419 million DOD actually  recovered, the recovery rate significantly decreases from a reported 89  percent recovery rate to 21 percent.
These two discrepancies alone significantly decrease OMB’s reported  overall recovery rate of 84 percent to a 22 percent recovery rate. Other  factors would also suggest the recovery rate is indeed much lower. We  noted other instances where OIG-reported questioned costs exceeded  agency contract amounts identified for recovery. Because these costs were  not specifically identified as contractor costs versus other payment types,  we were unable to determine how much of the OIG-identified questioned  costs related to contract costs.
In addition, another factor that may call into question the reported high  recovery rate is that 5 of the 21 agencies did not review all of their agency  components as part of their recovery audit efforts, and 2 agencies  reported that recovery auditing was not cost beneficial. For example, HUD  determined that based on its review of $206.6 million in contract payments,  none were found to be improper. Thus, HUD determined that pursuit of an  ongoing recovery auditing program was not cost beneficial or necessary.  Because section 831 of the National Defense Authorization Act requires  agencies to carry out a cost-effective program for identifying errors made  in paying contractors and for recovering amounts erroneously paid to  contractors, agencies have determined that they may opt out of conducting  a recovery audit if it is not deemed to be cost beneficial. However, neither  of the two agencies that determined it was not cost beneficial to conduct a  recovery audit provided support in their fiscal year 2005 PARs for this  determination.
section_title: Conclusions
paragraphs: Improper payments are a serious problem. Agencies are working on this  issue at different paces, and OMB has provided important leadership.  Because the extent of the problem remains significantly understated, the  level of effort necessary to address the full extent of improper payments is  as yet unknown. 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 executive  branch’s 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. Full and reasonable  disclosure of the extent of the problem could be enhanced by modifying the  act’s underlying criteria used to identify which programs and activities are  susceptible to significant improper payments. OMB’s implementing  guidance can also be strengthened in several key areas. In this regard, in  addition to the recommendations in this report, we reiterate that OMB  require those agencies that did not address the IPIA requirements or did  not perform risk assessments of all of their programs and activities to  establish time frames and identify resources needed to perform risk  assessments and satisfy reporting requirements. We also reiterate that  OMB develop a plan to address the resource needs of those agencies that  did not perform risk assessments or satisfy reporting requirements. With  the ongoing imbalance between revenues and outlays 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 on  the part of OMB and the agencies, as well as continued congressional  oversight to monitor whether desired results are being achieved.
section_title: Matter for Congressional Consideration
paragraphs: To help ensure the complete disclosure and transparency of  governmentwide improper payments, the Congress should consider  amending existing IPIA provisions to define specific criteria, such as a  dollar threshold, agencies should use to identify which programs and  activities are susceptible to significant improper payments.
section_title: Recommendations for Executive Action
paragraphs: We are making four recommendations to OMB to help further the progress  toward meeting the goals of IPIA and ensuring the integrity of payments.  Specifically, we recommend that the Director, Office of Management and  Budget,  expand OMB’s IPIA implementing guidance to describe in greater detail   factors that agencies should consider when conducting their annual  risk assessments, such as program complexity, operational changes,  findings from investigative reports, and financial statement and  performance audit reports, and   factors agencies should use when reporting improper payments in  their PARs, such as (1) provide a baseline of what agencies should  include when reporting on causes, corrective actions, and manager  accountability and (2) require that applicable agencies cite the  specific law or regulation in their PARs when describing statutory  barriers that may limit the agencies’ corrective actions for reducing  improper payments;   enforce existing guidance requiring agencies to use a statistically valid  sampling methodology to calculate improper payment estimates;  gather from agencies the dollar amount of payments that agencies make  under statute or judicial determinations that later are determined to be  overpayments in order for OMB to assess and determine the magnitude  of the issue and whether additional reporting is warranted; and  modify existing guidance to require those agencies stating that recovery  auditing over contract payments is not cost beneficial to include their  rationale for this determination.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from OMB, and  have reprinted them in appendix IV. OMB generally agreed with our  recommendations and also agreed with our assessment that challenges  remain in meeting the goals of IPIA. In its comments, OMB emphasized that  progress in estimating and reporting improper payments had been made by  agencies in fiscal year 2005 and highlighted initiatives underway to  measure improper payments in other programs susceptible to significant  improper payments. OMB pointed out that agencies estimated improper  payments for 17 additional programs for fiscal year 2005, and that this  number will increase by 10 programs for fiscal year 2006. OMB also said  that beginning with fiscal year 2007, it expects HHS to begin reporting  component error rates for its Medicaid, Temporary Assistance for Needy  Families, and State Children’s Health Insurance programs.
OMB stated that there has been substantial progress in that 85 percent of  the cost for the programs identified as high risk ($1.3 trillion of the   $1.5 trillion) reported an error measurement rate for fiscal year 2005. While  we agree with OMB that there has been progress, as discussed in this  report, we continue to question the validity of certain agencies’ risk  assessment methodologies used to identify, estimate, and report improper  payments for all risk susceptible programs and are concerned with how  OMB defines high risk programs for purposes of agencies’ improper  payment reporting. OMB’s definition of programs susceptible to significant  improper payments covers only those agencies with programs that exceed  the criteria of 2.5 percent of program outlays and $10 million to estimate  improper payments. Our continuing concern with OMB’s criteria relates to  those agencies with large program outlays that have improper payment  estimates that exceed the $10 million threshold but not the 2.5 percent of  program payments threshold. Applying the 2.5 percent threshold criteria to  large programs could exclude potentially billions of dollars of improper  payments from being reported.
According to OMB, the rationale for its threshold criteria is to ensure that  agencies focus their resources on programs with the highest levels of risk  for improper payments. OMB commented that going forward, it is now  requiring agencies to track any programs that exceed the $10 million  threshold, but have an error rate of less than 2.5 percent.  OMB stated that  this tracking facilitates a framework that would appropriately mitigate the  risk that high risk programs will be left out of IPIA reporting activities. We  view this as a positive step. Although OMB’s recently revised implementing  guidance was outside the scope of this review, our preliminary assessment  found no mention of this tracking requirement. The guidance does state  that OMB may determine on a case-by-case basis that certain programs that  do not meet the threshold requirements may still be subject to the annual  PAR improper payment reporting requirement. In light of OMB’s stated  intention to require agencies to track such programs, we believe it is key  that the revised implementing guidance clearly reflects this tracking  requirement and that agencies be required to publicly report this  information as part of their annual improper payments reporting. Visibility  of this type of information would help facilitate the Congress’s  understanding of the nature and extent of the governmentwide improper  payments problem. To this end, we included a matter for congressional  consideration to amend IPIA to eliminate any uncertainties regarding the  identification of programs and activities that are susceptible to significant  improper payments.
In its comments, OMB also mentioned that alternative sampling  methodologies for deriving program component error rates are acceptable  interim error measurements for select programs until comprehensive  statistical estimates are completed. We would consider this a pragmatic  approach for working with agencies to determine and implement  appropriate and evolving methodologies for improving the sophistication  of improper payment estimates for these programs. Realistically, larger,  complex agency programs may require additional time to plan and  implement actions to fully measure their improper payments, such as the  programs cited by OMB as using alternative methodologies—Earned  Income Tax Credit and National School Lunch and Breakfast—as well as  initiating reporting of component error rates in the future—Medicaid,  Temporary Assistance for Needy Families, and State Children’s Health  Insurance Program. It will be important that agencies make good use of  this additional time. OMB had specifically required a number of agencies  just now starting to report or planning to do so shortly, to report selected  improper payment information since 2002, several years before the  legislative reporting requirements in IPIA became effective. Until agencies  begin to fully measure and report improper payments for these large  programs, the extent of the problem and level of effort necessary to control  these losses are as yet unknown.
We are sending copies of this report to the Director, Office of Management  and Budget; appropriate congressional committees; and other interested  parties. We will also make copies available to others upon request. In  addition, the report is available at no charge on GAO’s Web site at  http://www.gao.gov.
Please contact me at (202) 512-9095 or williamsm1@gao.gov if you or your  staffs have any questions about this report. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Major contributors to this report are listed in   appendix V.
section_title: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to determine (1) the extent to which  agencies have included required improper payment information in their  performance and accountability reports (PAR), (2) the annual improper  payment estimate reported by agencies for fiscal year 2005, (3) whether the  definition and types of improper payments reported in the Improper  Payments Information Act of 2002 (IPIA) and the Office of Management  and Budget’s (OMB) implementing guidance provide adequate disclosure of  the extent of improper payments at the agencies, and (4) the reported  amount of improper payments recouped through recovery audits. The  scope of our review included the 35 federal agencies that the Department  of the Treasury determined to be significant to the U.S. government’s  consolidated financial statements.
To address the above objectives, we reviewed improper payment  information reported by the 35 agencies in their fiscal year 2005 PARs or  annual reports. We further reviewed and analyzed the provisions of IPIA  and OMB’s implementing guidance, as well as OMB’s annual report on the  results of agency-specific reports, significant findings, agency  accomplishments, and remaining challenges. We contacted OMB officials  for clarification of reported information as needed. We also reviewed office  of inspector general (OIG) reports, prior GAO reports, and other publicly  available documents for reported improper payments information,  including identifying agency reported improper or potentially fraudulent  payments related to hurricanes Katrina and Rita. In addition, we utilized  the results from our recent testimonies on agencies challenges’ in meeting  IPIA reporting requirements.
As part of our review and analysis of agencies’ reported improper payment  information in their fiscal year 2005 PARs or annual reports, we   determined whether agencies’ had reviewed all programs and activities  for risk-susceptible programs and reviewed details of agencies’ risk- assessment methodologies when reported;  identified program improper payment estimates, including error  amounts and error rates, a breakdown of overpayments and  underpayments, and program outlays;  identified agencies’ sampling methodologies used to estimate program   determined the extent and level of detail agencies reported on key  improper payment reporting elements, including manager  accountability, causes of improper payments, corrective actions, and  statutory barriers;  conducted an analysis of OMB’s assessment criteria—exceeding   $10 million in improper payments and 2.5 percent of program outlays— to identify programs that met only one of OMB’s criteria and thus would  not be required to estimate and report improper payment information  based on these criteria alone;   analyzed OIG-reported major management challenges for various  programs and activities; and  analyzed the amount of improper payments recouped through agencies’  recovery audit activities.
We did not independently validate the data that agencies reported in their  PARs or annual reports or the data that OMB reported. We are providing  the agency-reported data as descriptive information that will inform  interested parties about the magnitude of governmentwide improper  payments and other related information. We believe the data to be  sufficiently reliable for that purpose. We requested comments on a draft of  this report from the Director of the Office of Management and Budget or  his designee.  Written comments were received from the Controller, OMB,  dated October 26, 2006. OMB’s comments are reprinted in appendix IV. We  conducted our work from April 2006 through September 2006 in  accordance with generally accepted government auditing standards.
section_title: Improper Payment Estimates Reported in Agency Fiscal Year 2004 and 2005 PARs or Annual Reports
paragraphs: Marketing Assistance  Loan Program  (previously Commodity  Loan Programs)
Development Block  Grant (Entitlement  Grants, States/Small  Cities)
Federal Housing  Administration’s Single  Family Acquired Asset  Management System Federal Employees’  Compensation Act  Education Grants and  Cooperative  Agreements (Civil Service  Retirement System and  Federal Employees  Retirement System)
See table 5 of this report.
Agency did not address improper payments or IPIA requirements in its fiscal year 2005 PAR or annual  report.
section_title: Outlays, Improper Payment Estimates, and Error Rates Reported in Agency Fiscal Year 2005 PARs or Annual Reports
paragraphs: Marketing  Assistance Loan  Program  (previously  Commodity Loan  Programs)
State Children’s  Insurance ProgramChild Care and  Development FundCommunity  Development Block  Grant (Entitlement  Grants,  States/Small  Cities)
Federal Housing  Administration’s  Single Family  Acquired Asset  Management  System Federal Employees’  Compensation Act  Investment Act Research and  Education Grants  and Cooperative  Agreements Retirement  Program (Civil  Service Retirement  System and  Federal Employees  Retirement System)
See table 5 of this report.
Agency did not address improper payments or IPIA.
section_title: Comments from the Office of Management and Budget
paragraphs: The overall dollar amount of improper payments for the 30 programs reported in  FY 2004 decreased 17% from $45.1 billion to $37.3 billion.
Medicare substantially improved its claim documentation and reduced its error  rate reporting in the Fee for Service portion of the program from 10.1% in FY  2004 to 5.2% in FY 2005.
Food Stamps reported its lowest error rate ever in FY 2005 (5.88%).   Unemployment Insurance decreased improper payments by $600 million from FY  2004 to FY 2005.
The Department of Housing & Urban Development’s Public Housing and Rental  Assistance programs have reduced improper payments by more than $1 billion  since FY 2000.
Only a handful of agencies reported on their recovery auditing activities in their  FY 2004 PARs; in FY 2005 an additional 19 agencies reported on their recovery  auditing efforts, and several agencies have plans to expand these efforts to more  contract categories for FY 2006 reporting.
We fully expect that these trends of reporting more programs and reducing  improper payments will continue.  In fact, in FY 2005, OMB launched a separate  initiative under the President’s Management Agenda to hold agencies accountable for  both improving improper payment measurements and initiating corrective actions to  eliminate payment errors.
As we chart a course forward, we recognize that alternative strategies need to be  considered in order to advance the overall improper payment initiative.  Permitting  alternative strategies is a flexibility that OMB believes is necessary to support  government-wide IPIA compliance, particularly for programs that have never been able  to report a payment error rate.  Appendix C to OMB Circular A-123 still requires that all  high risk programs report a statistically valid rate, but not necessarily within one year.
For example, beginning with the FY 2007 PAR reporting, Medicaid, Temporary  Assistance to Needy Families, and the State Children’s Health Insurance Program will  begin reporting component error rates.  For FY 2008 reporting, we project that these  programs will report a statistically valid national error estimate.  Therefore, by permitting  some variation, more programs are able to report sooner on some form of error rate and  dollar amount.  This is a significant improvement over FY 2004 reporting.  While there  are a few large programs without current error measurements being reported, we are  progressively moving towards full reporting.
GAO continues to express concern that OMB’s use of reporting threshold criteria  ($10 million and 2.5 percent error rate) limits agency review and reporting of improper  payments.  We can appreciate GAO’s concern that this criterion limits reporting;  however, our specific rationale for adding the 2.5 percent requirement was not  highlighted in the report, and further explanation and understanding of the 2.5 percent  requirement may alleviate some of GAO’s concern.  Specifically, since the  implementation of IPIA and OMB's guidance M-03-13, all programs originally listed in  Section 57 of OMB Circular A-11 were automatically determined to be risk susceptible  and were therefore required to be reported upon annually in agency PARs.  OMB  included the 2.5 percent as part of its threshold criteria for determining risk, to ensure that  agencies were focusing their resources on programs with the highest levels of risk for  improper payments.  Most notably, even with the 2.5 percent threshold in place, Federal  agencies deemed more than 60% of all outlays (or $1.5 trillion) as high risk.  Further, an  additional $300 billion in outlays are being tracked under the Recovery Audit Act.  For  the remaining outlays, OMB is now requiring agencies to track any programs that are  discovered to have a high risk for significant improper payment, but an error rate less  than 2.5 percent.  With these facts, we believe our framework is appropriately mitigating  the risk that high risk programs will be left out of our IPIA reporting activities.
Below are OMB’s specific responses to the four recommendations included in the  Regarding the first recommendation to expand the IPIA implementing guidance to  describe in greater detail (a) factors that agencies should consider when conducting their  annual risk assessments and (b) factors that agencies should use when reporting improper  payments in their PARs, OMB agrees with both recommendations and has taken steps to  implement them.  In our revised implementation guidance for IPIA (OMB Circular A- 123, Appendix C) issued in August of 2006, we included factors to be considered in  agency risk assessments.  Additionally, OMB lists the requirements for agency PAR IPIA  reporting in OMB Circular A-136, Financial Report Requirements, Section II.5.6., IPIA  Reporting Details.
Regarding the second recommendation to enforce existing guidance requiring  agencies to use a statistically valid sampling methodology to calculate improper payment  estimates, OMB generally agrees with the recommendation and believes that our actions  to date reflect this approach for the most part.  However, we believe that allowing  alternative sampling methodologies, prior to a full statistically valid sample, is acceptable  as long as the alternative is used as an interim error measurement on a path toward a  more comprehensive statistical estimate.  This method is discussed in OMB Circular A- 123, Appendix C and is a method OMB has been working with agencies on for a number  of years.  It recognizes that a single approach is not feasible for many large, complex  programs, such as the Earned Income Tax Credit and the National School Lunch and  Breakfast programs and ensures that such programs have interim information on payment  errors so that targeted corrective actions could be defined and initiated in the short term,  rather than waiting until a more comprehensive rate was in place.  In most cases, a  statistically valid and comprehensive sampling methodology will be achieved within two  to three years.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Carla Lewis, Assistant Director;  Sharon Byrd; Francine DelVecchio; Francis Dymond; Lisa M. Galvan;  Jacquelyn Hamilton; James Maziasz; Christina Quattrociocchi; Donell Ries;  and Autumn Schmid made important contributions to this report.
section_title: Related GAO Products
paragraphs: Improper Payments: Federal and State Coordination Needed to Report  National Improper Payment Estimates on Federal Programs. GAO-06- 347. Washington, D.C.: April 14, 2006.
Financial Management: Challenges Continue in Meeting Requirements  of the Improper Payments Information Act. GAO-06-581T. Washington,  D.C.: April 5, 2006.
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.