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

Letter

Background

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.

Improvements Needed in Agencies’ Reporting of Improper Payment Information

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.

Improper Payments Estimate Is Understated

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.

Some Agencies Continue to Lack Improper Payment Estimates for Susceptible Programs

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.

Certain Methodologies Used to Estimate Improper Payments Do Not Result in Accurate Estimates

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.

Reduction in Improper Payment Estimate May Not Be a Result of Improved Accountability and Enhanced Internal Controls

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.

IPIA May Need to Be Amended to Ensure Agencies Fully Meet Its Objectives

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.

Identification Threshold Limits Agency Reporting on Susceptible Programs

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.

IPIA Definition of Improper Payments Excludes Certain Payments from Reporting

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.

Agencies’ Reporting of Recovery Auditing Information Questionable

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.

Conclusions

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.

Matter for Congressional Consideration

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Objectives, Scope, and Methodology

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.

Improper Payment Estimates Reported in Agency Fiscal Year 2004 and 2005 PARs or Annual Reports

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.

Outlays, Improper Payment Estimates, and Error Rates Reported in Agency Fiscal Year 2005 PARs or Annual Reports

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.

Comments from the Office of Management and Budget

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.

GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

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.

Related GAO Products

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.