Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act
Released: 2005-05-04T00:00:00

Letter

Background

The PMA issued in 2001 targeted improper payments as an area with opportunities for improvement. The PMA included five governmentwide initiatives—one of which is improved financial management, which expressly addresses improper payments as a priority. This initiative called for the administration to establish a baseline on the extent of erroneous payments. Under it, agencies were to include in their 2003 budget submissions to OMB information on improper payment rates, including actual and target rates where available, for benefit and assistance programs over $2 billion. The PMA also noted that using this information, OMB will work with agencies to establish goals to reduce improper payments identified in their programs.

In July 2001, as part of its efforts to advance the PMA initiative, OMB revised Circular No. A-11 to require 16 federal agencies (15 of the then 24 Chief Financial Officer’s (CFO) Act agencies and the Railroad Retirement Board) to submit improper payment data, assessments, and action plans for about 50 programs to OMB with their initial budget submissions. Specifically, the circular required that agencies submit information including estimated improper payment rates, target rates for future reductions in these payments, the types and causes of these payments, and variances from targets or goals established. In addition, agencies were to provide a description and assessment of the current methods for measuring the rate of improper payments and the quality of data resulting from these methods. Agencies were to first include this improper payment information in their initial fiscal year 2003 budget submissions. A June 2002 revision to the circular removed the Agency for International Development from the list and reduced the number of programs for which improper payment information was required to 46. (App. II lists the agencies and programs.)

In November 2002, the Congress passed the IPIA. The law requires agency heads to annually review all programs and activities that they administer and identify those that may be susceptible to significant improper payments. Once agencies identify their susceptible programs, the act requires them to estimate and report on the annual amount of improper payments in those programs and activities. For programs for which estimated improper payments exceed $10 million, agencies are to report annually to the Congress on the actions they are taking to reduce those payments. The report is also to include a discussion of the causes of the improper payments identified, actions taken to correct those causes, and the results of the actions taken to address those causes.

The act further requires OMB to prescribe guidance for federal agencies to use in implementing the act. OMB issued this guidance in Memorandum M- 03-13 in May 2003. It requires use of a systematic method to annually review and identify those programs and activities that are susceptible to significant improper payments. OMB guidance defines significant improper payments as annual improper payments in any particular program exceeding both 2.5 percent of program payments and $10 million. The OMB guidance then requires agencies to estimate the annual amount of improper payments 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, the IPIA and related OMB guidance require each agency to report the results of its improper payment efforts in the Management Discussion and Analysis (MD&A) section of its PAR for fiscal years ending on or after September 30, 2004. The IPIA requires the following information in their reports: 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; a statement of whether the agency has the information systems and other infrastructure it needs in order to reduce improper payments to the agency’s targeted levels; if the agency does not have such systems and infrastructure, a description of the resources the agency has requested in its most recent budget submission to obtain the necessary information systems and infrastructure; and a description of the steps the agency has taken and plans to take to ensure that agency managers (including the agency head) are held accountable for reducing improper payments.

OMB’s guidance in M-03-13 requires that three additional things be included in the report: a discussion of the amount of actual erroneous payments that the agency expects to recover and how it will go about recovering them; a description of any statutory or regulatory barriers that may limit the agency’s corrective actions in reducing erroneous payments; and provided the agency has estimated a baseline erroneous payment rate for the program, a target for the program’s future erroneous payment rate that is lower than the agency’s most recent estimated error rate.

On July 22, 2004, OMB, working with the CFO Council’s Improper Payments Committee, issued a standardized reporting format, or framework, for reporting IPIA information. This framework was included as Attachments 2 and 3 to OMB Memorandum M-04-20, “Fiscal Year 2004 Performance and Accountability (PAR) and Reporting Requirements for the Financial Report of the United States Government.” To satisfy the reporting requirements of the IPIA for fiscal year 2004, the framework instructed agencies to provide a brief summary of both what they have accomplished and what they plan to accomplish in the MD&A portion of the fiscal year 2004 PAR. All other required reporting details are to be included in an appendix to the PAR. The framework for the information reported in the appendix incorporates the requirements set forth in the law and further illustrates the reporting format required in OMB’s implementation guidance. Under accelerated financial reporting requirements of the PMA, agency fiscal year 2004 PARs were due November 15, 2004. Accordingly, the first set of reports representing the results of agencies’ assessing improper payments for all federal programs in accordance with the IPIA and OMB guidance were due in November 2004.

In August 2004, OMB established Eliminate Improper Payments as a new program-specific initiative. With this new program initiative, 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. This initiative is also to have its own scorecard requirements and rating beginning with fiscal year 2005. With the establishment of this new program-specific initiative, agency efforts to address improper payment issues will no longer be tracked under the governmentwide initiative, Improved Financial Performance.

In our December 2004 report on the U.S. government’s consolidated financial statements for the fiscal years ended September 30, 2004 and 2003, which includes our associated opinion on internal control, we reported that while most agencies acknowledged the IPIA reporting requirements in their PARs, they did not always indicate whether they had completed agencywide assessments, and they did not estimate improper payments for all of their susceptible programs.

Progress Made but Challenges Remain in Assessing Programs for Risk of Significant Improper Payments

In response to the new requirements of the IPIA, agencies overall made progress in identifying programs susceptible to the risk of improper payments. At the same time, our reviews of the fiscal year 2004 PARs for 29 of 35 federal agencies that are significant to the U.S. government’s consolidated financial statements suggest that even with the enhanced emphasis on improper payment reporting fueled by the new legislation, certain agencies have not yet performed risk assessments of all their programs. Appendix III lists the agencies included in this review.

In its guidance on implementing the IPIA, OMB required agencies to institute a systematic method of inventorying all programs and activities and identifying those the agency believes are susceptible to the risk of significant error. OMB further instructed agencies to describe, in their PARs, the risk assessments performed.

We determined that 23 of the 29 agencies reviewed reported that they had completed risk assessments for all programs and activities. Of the 15 agencies with prior reporting requirements under OMB Circular No. A-11, 12 reported that they had performed comprehensive inventories and assessed the risk of improper payments for all their programs and activities. Three of the 15 agencies stated that their risk assessments were not complete for all programs and activities. Of those 14 agencies without prior reporting requirements, 11 agencies reported that they had completed risk assessments for all programs and activities, whereas 3 agencies reported that they had not.

Recognizing weaknesses in agency risk assessments, three agency auditors cited noncompliance with the IPIA in their annual auditor’s reports included in the agency PARs. For example, two agency auditors each reported that their agency’s risk assessment did not consider all payment types or programs. Another auditor reported the agency did not institute a systematic method of reviewing all programs and identifying those it believed were susceptible to significant erroneous payments.

Magnitude of Improper Payments Is Still Unknown

Once agencies have identified programs that may be susceptible to significant improper payments, developing statistically valid estimates of the amounts of improper payments for their programs and activities has been a further challenge. Appendix IV lists the 29 agencies and 70 programs for which we reviewed fiscal year 2004 PARs for improper payment reporting. In the 29 agency PARs included in our review, 17 agencies reported over $45 billion of improper payments in 41 programs. This represented almost a $10 billion, or 27 percent, increase in the dollar amount of improper payments reported by agencies in fiscal year 2003. However, we determined that this increase was primarily attributable to changes in the method for estimating and reporting improper payment amounts in the Department of Health and Human Services’ Medicare Program. The 24 agency programs with no prior reporting requirements reported improper payment estimates that did not significantly increase the governmentwide total.

As discussed earlier, OMB Circular No. A-11 has required certain agencies to report selected improper payment information on 46 programs to OMB beginning 3 years ago with their fiscal year 2003 budget submissions. We found that for 34 of the programs, agencies reported estimates in their fiscal year 2004 PARs or stated that improper payment amounts were insignificant.

As shown in table 1, the governmentwide estimate did not include the remaining 12 programs with total outlays of $248.7 billion in 2004. This included some of the largest risk-susceptible federal programs, such as the Department of Health and Human Services’ Medicaid Program, with outlays exceeding $175 billion annually, or the Department of Education’s Title I Program, with outlays of over $10 billion annually.

The table further shows that of these 12 programs, 8 reported that they would be able to estimate and report on improper payments sometime within the next 4 years, but could not do so now. The other 4 programs in 4 agencies did not estimate improper payment amounts for their programs and were silent as to whether they would report estimates in future reports. As a result, improper payments for several large risk-susceptible programs will not become transparent for several or an undetermined number of years, although these agencies were required to report such information since their fiscal year 2003 budget submissions. Moreover, by only looking at those agencies significant to the U.S. consolidated financial statements, this estimate does not include all of the agencies subject to the IPIA.

OMB reported that in certain risk-susceptible programs, agencies were unable to determine the rate or amount of improper payments due to measurement challenges as well as time and resource constraints, which OMB expects to be resolved in the future. Although OMB reported that the $45 billion in improper payments will be used as a baseline on which short- and long-term program improvements and strategies will be based, it recognizes that fiscal year 2005 reductions in improper payments will be affected by outlay changes as well as the identification of new improper payments as additional programs are measured and methodologies for currently measured programs are enhanced.

Conclusions

Measuring improper payments and designing and implementing actions to reduce or eliminate them are not simple tasks. The ultimate success of the governmentwide effort to reduce improper payments depends, in part, on each federal agency’s continuing diligence and commitment to comply fully with the requirements of the act 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. Without such efforts, the likelihood of designing and implementing actions governmentwide to reduce or eliminate improper payments is doubtful. Fulfilling the requirements of the IPIA will require sustained attention to implementation and oversight to monitor whether desired results are being achieved.

Recommendations for Executive Action

We are making three recommendations to help ensure the successful implementation of the Improper Payments Information Act of 2002 and its goal of enhancing the accuracy and integrity of federal payments. Specifically, we recommend that the Director of 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.

Develop a plan to address the resource needs of those agencies that did not perform risk assessments or satisfy reporting requirements.

Consider as part of the budget process, for any agency that OMB deems to have not taken the IPIA requirements seriously or that has lagged behind, the feasibility of disincentives for poor performance, such as reductions in funds for the program involved or adding incentives such as gain sharing for making substantive progress.

Agency Comments and Our Evaluation

In its written comments on a draft of this report, which are enclosed in appendix V, OMB emphasized that in fiscal year 2004, federal agencies established a strong foundation for measuring improper payments, identifying and implementing the necessary corrective actions, and tracking success over time. OMB’s response further discussed key findings included in its report, Improving the Accuracy and Integrity of Federal Payments, which was issued on January 25, 2005.

With regard to our first recommendation that agencies establish time frames and identify resources needed to perform risk assessments and satisfy reporting requirements, OMB stated that pursuant to the PMA initiative called Eliminate Improper Payments, federal agencies are already required to submit relevant time frames and account for the resources necessary to complete planned actions. Further, OMB stated that the remaining risk assessments to be completed correlate to programs with relatively small outlays. While we view the PMA initiative as a positive action, it applies to 15 agencies, 3 of which we found had not yet assessed all their programs. Three other agencies—the Farm Credit System Insurance Corporation, the National Credit Union Administration, and the Pension Benefit Guaranty Corporation—which are not included in the PMA initiative and therefore are not required to establish time frames and account for needed resources, have outlays that are significant to the U.S. government’s consolidated financial statements and were silent with respect to IPIA requirements in their fiscal year 2004 PARs. In addition to these three agencies, the PMA initiative would also not cover those agencies that while not significant to the U.S. government’s consolidated financial statements, are subject to the IPIA. Our recommendation is directed to the broader range of agencies.

Regarding our second recommendation that OMB develop a plan to address resource needs of agencies that did not perform risk assessments or satisfy reporting requirements, OMB stated that agency plans for addressing IPIA reporting requirements are closely considered in identifying agency resource needs and preparing the President’s Budget. While we agree with OMB on that point, as discussed in our response to OMB’s comments on the first recommendation, certain agencies are not required to submit plans that include time frames and resource needs to OMB. As a result, resource needs may not be addressed in the budget process.

With respect to our third recommendation that it consider using incentives and disincentives, as applicable, for quick and timely action for meeting the IPIA requirements, OMB offered the view that the requirements of the PMA and inspector general reviews of agency IPIA activities provide sufficient incentive for ensuring that agencies meet the necessary requirements. We agree that these requirements will help ensure that agencies take the IPIA seriously. Our recommendation is directed at any agency that does not do so or agencies that may benefit from incentives such as gain sharing to fund efforts to reduce improper payments. Again, as discussed above, while the major 15 agencies are covered by the PMA, 3 of these had not yet assessed all their programs and a number of agencies not covered under the PMA initiative, but significant to the U.S. government’s consolidated financial statements, were silent with respect to the IPIA requirements.

OMB’s written comments and our evaluation of one comment not addressed above are presented in appendix V.

As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of the report to interested congressional committees. We will also be sending copies to the Director of the Office of Management and Budget and the heads of the agencies included in our scope of review. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-6906 or williamsm1@gao.gov.

Additional contacts and major contributors to this report are provided in appendix VI.

Scope and Methodology

This report is based on our review of agency fiscal year 2004 Performance and Accountability Reports (PAR). We reviewed the fiscal year 2004 PARs of 29 of 35 agencies that are significant to the U.S. government’s consolidated financial statements to obtain information on the status of their implementation of the Improper Payments Information Act of 2002 (IPIA) and the related Office of Management and Budget (OMB) implementation guidance. We paid particular attention to the 15 agencies with prior improper payment reporting requirements for 46 of their programs under OMB Circular No. A-11, Section 57. A list of the agencies with prior reporting requirements is presented in appendix II. In addition, we reviewed relevant agency documents, including strategic plans, agency performance plans and reports, agency audit reports, and reports from agency program partners.

We completed reviews of fiscal year 2004 PARs for 29 agencies identifying 70 key programs. Appendix III lists the agencies and programs included in this review. To supplement our review and analysis, we contacted agencies to clarify responses, requested additional information, and updated the initial responses. We did not determine the validity of representations made or the documentation provided.

We performed our work in Washington, D.C., from November 2004 through February 2005 in accordance with U.S. generally accepted government auditing standards.

Agencies and Related Programs for Which OMB Circular No. A-11 Required Erroneous Payment Information

Agencies and Related Programs Included in Our Review of Fiscal Year 2004 PARs

Improper Payment Estimates Reported in Agency Fiscal Years 2003 and 2004 PARs

2003 (in millions)

X 2003 (in millions)

X 2003 (in millions)

Will estimate within the next 6 years 28. State Children’s 29. Child Care and 30. All programs and 31. Low Income Public 32. Section 8 Tenant 33. Section 8 Project Development Block Grant (Entitlement Grants, States/Small Cities)

X 2003 (in millions)

Will estimate within the next 6 years 37. All programs and 39. Federal Employees’ 41. All programs and 42. All programs and Education Grants and Cooperative Agreements 44. All programs and (Civil Service Retirement System and Federal Employees Retirement System)

X 2003 (in millions)

Will estimate within the next 6 years 48. All programs and 51. 7(a) Business Loan Security Income Program 2003 (in millions)

Narcotic and Law Enforcement Affairs- Narcotics Program Information Program-U.S. Speaker and Specialist Program 65. Earned Income Tax 10 Agency did not address improper payments or the IPIA requirements for this program in its fiscal year 2004 PAR.

Comments from the Office of Management and Budget

The following is GAO’s comment on OMB’s letter dated March 25, 2005.

GAO Comment

1.

In our review of these agencies’ fiscal year 2004 PARs, we determined that assessments were not completed for all programs and activities.

GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgments

In addition to those named above, Lisa Crye, Bonnie McEwan, and Donell Ries made important contributions to this report.

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