Department of Homeland Security: Challenges in Implementing the Improper Payments Information Act and Recovering Improper Payments
Released: 2007-10-19T00:00:00

Letter

Background

Our work over the past several years has demonstrated that improper payments are a long-standing, widespread, and significant problem in the federal government. IPIA has increased visibility over improper payments by requiring executive branch agency heads 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. Similarly, the Recovery Auditing Act provides an impetus for applicable agencies to systematically identify and recover contract overpayments. 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 as well as having mechanisms in place to recoup those funds when improper payments occur.

Improper Payments Information Act of 2002

IPIA was enacted 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 also requires the Director of OMB to prescribe guidance for agencies to use in implementing IPIA. OMB issued implementing guidance 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. OMB has stated that having high-quality risk assessments is critical to meeting the objectives of identifying improper payments and is essential for performing corrective actions to eliminate payment errors. Figure 1 provides an overview of the four key steps OMB requires agencies to perform in meeting the improper payment reporting requirements.

Recovery Auditing Act

In addition, under certain conditions, applicable agencies are required to report on their efforts to recover improper payments made to contractors under section 831 of the National Defense Authorization Act for Fiscal Year 2002, commonly known as the Recovery Auditing Act. This legislation contains a provision that requires executive branch agencies entering into contracts with a total value exceeding $500 million in a fiscal year to have cost-effective programs for identifying errors in paying contractors and for recovering amounts erroneously paid. The 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 actual 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.

OMB Guidance and Initiatives

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. While inconsistent with the language in IPIA, the revised guidance allows 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.

Other OMB guidance states that agencies must describe their corrective actions for reducing the estimate rate and amount of improper payments. Related to corrective actions, OMB’s implementing guidance for IPIA requires that agencies implement a plan to reduce erroneous payments, including identifying the following.

Root causes—For all programs and activities with erroneous payments exceeding $10 million, agencies shall identify the reasons their programs and activities are at risk of erroneous payments and put in place a corrective action plan to reduce erroneous payments.

Reduction targets—Targets are necessary for future improper payment levels and a timeline within which the targets will be reached.

Accountability—Ensure that their managers and accountable officers (including the agency head) are held accountable for reducing improper payments. Agencies shall assess whether they have the information systems and other infrastructure needed to reduce improper payments to minimal cost-effective levels, and identify any statutory or regulatory barriers that may limit agencies’ corrective actions in reducing improper payments.

OMB has also established Eliminating Improper Payments as a 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. This program initiative establishes an accountability framework for ensuring that federal agencies initiate all necessary financial management improvements for addressing this significant and widespread problem. Specifically, 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.

DHS Has Made Some Progress in Implementing the Requirements of IPIA, but Remains Noncompliant

While DHS has taken actions over the last 3 fiscal years to implement IPIA requirements, much more work needs to be done. In each of the last 3 fiscal years, DHS was unable to perform risk assessments for all of its programs and activities—the first step of IPIA implementation. This and other issues, such as concerns about program identification and testwork performed, contributed to DHS’s reported noncompliance with IPIA over the last 3 fiscal years. Until DHS is able to fully assess its programs, the potential magnitude of improper payments cannot be estimated.

For fiscal year 2006, DHS did not perform risk assessments on programs with $13 billion of its $29 billion of payments subject to IPIA. Over $6 billion of this amount related to payments for grant programs. Performing risk assessments of grant programs and testing grant payments can be difficult because of the many layers of grant recipients, as well as the type of recipients and number of grant programs. However, developing a plan to assess risk and potentially test grant payments is important because of financial management weaknesses reported at DHS grantees and concerns about DHS’s grants management process. Developing a plan will also allow DHS to gain an understanding of its risk with respect to grant payments and potentially reduce future improper payments.

DHS’s Efforts to Meet IPIA Requirements

To comply with the requirements of IPIA and related guidance from OMB, DHS initiated a plan in fiscal year 2004 to reduce its susceptibility to issuing improper payments by having each of its organizational elements complete a risk assessment of major programs by assigning each one an overall risk score. Based on this assessment, none of DHS’s programs were found to be high risk; however, DHS’s independent auditor reported that the agency was not in compliance with IPIA mainly because it had not yet instituted a systematic method of reviewing all programs and identifying those it believed were susceptible to significant erroneous payments.

In fiscal year 2005, the auditor again reported noncompliance issues regarding the adequacy of the agency’s risk assessments. Based on DHS’s guidance, each component selected its largest program and completed statistical testing. DHS regarded this quantitative selection as its risk assessment process and did not incorporate qualitative factors. As with fiscal year 2004, DHS reported that it did not identify any programs or activities as being susceptible to significant improper payments and its auditors again reported that DHS was not in compliance with IPIA.

The DHS OCFO worked with components during fiscal year 2006 to continue to refine the population of improper payment programs by having the components group Treasury Appropriation Fund Symbols (TAFS) into logical, recognizable programs. After identifying the population of disbursements for fiscal year 2006 IPIA testing, DHS components provided the necessary payment data to a contractor with expertise in statistical testing. The contractor constructed stratified sampling plans and samples for DHS components to perform IPIA testing for DHS’s risk assessment process. This testing was expanded from fiscal year 2005 to include, based on DHS’s revised guidance, all DHS programs issuing more than $100 million of IPIA-relevant payments. Two programs were found to be high risk. However, despite these efforts, DHS’s independent auditor found that the agency was still not in compliance with IPIA as reported in its fiscal year 2006 PAR, primarily because not all programs subject to IPIA were tested, and the population of disbursements tested for some programs was not complete. Appendix III contains additional information about DHS’s prior year IPIA PAR reporting and compliance issues reported by its independent auditor.

Required Risk Assessments Not Completed for All Programs for Fiscal Year 2006

Although DHS made progress in identifying its programs in fiscal year 2006, the agency did not perform a risk assessment for all programs and activities—covering approximately $13 billion of its more than $29 billion in disbursements subject to IPIA. According to DHS, this was primarily due to a lack of resources, guidance, and experience in performing this work. This was a major factor in the independent auditors’ finding that DHS was noncompliant with IPIA for fiscal year 2006. DHS performed risk assessments (step 1) for programs accounting for approximately $16 billion of the $29 billion in disbursements subject to IPIA review. Of this $16 billion covered by risk assessments, approximately $7 billion related to FEMA’s disaster relief programs that were found to be at high risk for issuing significant improper payments and therefore steps 2 through 4 were completed to estimate improper payments, develop a plan to reduce improper payments, and report this information. This testing resulted in estimated improper payments issued by FEMA from September 2005 through March 2006 of $450 million (8.56 percent) of IHP assistance payments and $319 million (7.44 percent) of disaster-related vendor payments. Although the necessary IPIA work—steps 1 and 2— was completed for the two DHS high-risk programs, the time period covered for testing and reporting (i.e., September 2005 through March 2006) was not in accordance with OMB’s implementing guidance, also contributing to DHS’s reported noncompliance with IPIA. The remaining programs with disbursements totaling $9 billion in disbursements were not found to be at risk for issuing significant improper payments and therefore DHS did not report improper payments for these programs. For some of its nondisaster programs, DHS performed statistical sample testing for those programs with disbursements greater than $100 million, without first performing a qualitative risk assessment such as an assessment of internal controls, oversight and monitoring activities, and results from external audits. While this approach is perhaps better than not doing any assessment, DHS officials concurred that it could be considered an inefficient use of resources, if a program is not at high risk.

Table 1 shows DHS’s population of programs identified for IPIA testing and the status of DHS’s IPIA risk assessment process performed in fiscal year 2006.

Since DHS did not perform the required first step—a risk assessment—on programs with approximately $13 billion of its more than $29 billion in disbursements subject to IPIA, it is unknown whether these programs are at high risk for issuing improper payments.

Grant Programs Continue to Present a Challenge for IPIA Implementation

DHS encountered challenges implementing IPIA for the programs with $13 billion of disbursements for which no risk assessment or testing was performed in fiscal year 2006. Over $6 billion of this amount related to payments for grant programs. The remaining $7 billion related primarily to FEMA nondisaster programs and TSA programs not categorized as grant or nongrant programs, and USCG operating expenses. DHS’s grant programs include the NFIP, which had disbursements of over $3 billion that should have been included in DHS’s IPIA population for review in fiscal year 2006. As we have previously reported, measuring improper payments and designing and implementing actions to reduce or eliminate them are not simple tasks, particularly for grant programs that rely on quality administration efforts at the state level. DHS has an even greater challenge in the diversity of recipients for its grants which include state and local governments, individuals, and other entities. During fiscal year 2006, DHS awarded grants to over 5 million recipients for 70 different grant programs, including state and local governments, nonprofits, and other entities and individuals. Although disbursements made related to these grants are subject to IPIA, as DHS has noted, performing risk assessments of grant programs and testing grant payments are difficult because of the many layers of grant recipients, as well as the type of recipients and number of grant programs.

Developing a plan to assess risk and potentially test grant payments is important because of noted financial management weaknesses of DHS grantees. For example, DHS’s independent auditors and the DHS OIG have reported grants management weaknesses in part because the agency did not adequately follow up on audit findings pertaining to grantees’ potential improper payments. In addition, the DHS OIG identified grants management as a major management challenge facing the department. We have also identified the NFIP as a high-risk program. A list of DHS’s grant programs is presented in appendix IV. Appendix IV also shows the primary types of recipients and fiscal year 2006 award information for each grant program, as well as the component that administers the program. Given the identified weaknesses and the high-dollar amount, as well as the inherent risk associated with grant programs, it is important for DHS to assess grant programs for susceptibility to significant improper payments in accordance with IPIA. Assessing and, if necessary, testing these grant programs will allow DHS to gain an understanding of its risk in this area related to improper payments and potentially reduce future improper payments.

During fiscal year 2006, DHS completed a risk assessment by performing sample testing for grants administered by the Transportation Security Administration (TSA) with disbursements of about $343 million; however, the department was unable to perform an assessment of its grants programs administered by the Office of Grants and Training (GT). Of the approximately $13 billion for which DHS did not perform a risk assessment, over $3 billion related to grant programs administered by GT. In addition to the NFIP, FEMA also administers other grant programs which, with the exception of IHP, were not tested during fiscal year 2006. DHS identified three IPIA programs within GT, including Domestic Preparedness, State and Local Programs, and Firefighter Assistance Grants, totaling $3.1 billion of fiscal year 2005 disbursements for fiscal year 2006 IPIA testing; however, GT did not perform an assessment or complete statistical sample testing on these grants programs. In its fiscal year 2006 PAR, DHS reported that one complication that was not overcome was how to extend statistical sample testing to grant recipients. DHS also had difficulty testing its grant programs because of the large number of grant programs identified for testing based on DHS’s guidance for fiscal year 2006 program identification and risk assessment methodology, which required that all programs with total disbursements exceeding $100 million be selected and statistically tested. DHS reported that one of the problems with its fiscal year 2006 IPIA methodology was that its risk assessments were based on strictly quantitative factors, instead of both qualitative and quantitative factors. Although OMB has not yet provided guidance as we have previously recommended, DHS issued internal guidance recognizing the need to consider qualitative factors.

One such qualitative factor that DHS could consider as part of its risk assessment process are the results of Single Audit Act, as amended, reports related to its grantees. During fiscal year 2006, DHS’s independent auditors reported that the agency was not in compliance with the Single Audit Act. According to the independent auditors’ report, FEMA and TSA are required to comply with certain provisions of OMB Circular No. A-133, which requires agencies awarding grants to ensure they receive grantee reports timely and to follow-up on grantee single audit findings. Although certain procedures have been implemented to monitor grantees and their audit findings, the auditors noted that DHS did not have procedures in place to comply with these provisions in OMB Circular No. A-133 and follow up on questioned costs and other matters identified in these reports. TSA has developed a corrective action plan to establish a new system and processes to track and review single audit reports, but FEMA has not completely developed its corrective action plans due to the previously mentioned organizational changes during fiscal year 2007. We identified 37 DHS grantees—with awards totaling $2.1 billion—that had single audit findings related to questioned costs for fiscal year 2005. Some examples of questioned costs described in audit reports follow.

One single audit report questioned $353,000 in unallowable charges for salaries and benefits due to a lack of adequate documentation.

One grantee had expenditures that did not have appropriate supporting documentation, with the questioned amount totaling almost $80,000.

Another grantee had costs of about $72,000 that were improperly charged to the grant program.

A third grantee over-claimed reimbursement amounts of about $4,000.

The DHS OIG also conducts audits relating to the programs and operations of DHS, including grant programs. The DHS OIG reviews several factors to determine which activities to audit, including current or potential dollar magnitude, and reports or allegations of impropriety or problems in implementing the programs. The objectives of these grant program audits include determining whether the grantee accounted for and expended funds according to federal regulations and DHS guidelines. For certain grantees, the DHS OIG has found questioned costs such as excessive charges, duplicate payments, ineligible contractor costs, unsupported contractor and labor costs, and other expenditures. The following are examples of DHS OIG findings from fiscal years 2005 through 2007.

The DHS OIG found that one particular grantee had questioned costs of more than $1.8 million.

The DHS OIG has also found instances where the grantee did not follow all federal procurement standards or DHS guidelines in awarding contracts, and needed improvements in procedures to make payments to subgrantees. One instance involved awarding contracts totaling more than $14 million and another instance involved more than $8 million in contract work.

In an effort to address the agency’s noncompliance with the Single Audit Act, as amended, DHS’s Office of Grant Policy and Oversight (GPO) told us that it instituted an informal oversight process for single audits during fiscal year 2007 and is in the process of developing formal procedures. According to GPO, the development of this process is an attempt to address some of the grants management concerns that have been identified at DHS by its auditors and the DHS OIG. This monitoring process will help DHS to focus on audit findings at grantees and could help DHS with performing a risk assessment over grant programs for IPIA purposes by providing qualitative criteria.

While DHS Has Developed Plans to Address IPIA Requirements and Reduce Improper Payments, Full Implementation Will Be Longer Term

DHS has taken steps to address IPIA requirements, but the agency does not plan to be compliant in fiscal year 2007 and will likely not be compliant in fiscal year 2008. During fiscal year 2007, DHS prepared, and continues to refine, a departmentwide corrective action plan to address internal control weaknesses and noncompliance issues, including IPIA; however, the agency continues to encounter challenges in developing a plan to fully perform a risk assessment process. DHS used this corrective action plan to update its guidance and, according to DHS officials, the agency plans to focus on program identification and risk assessments during fiscal year 2007. Although DHS does not expect to be compliant in fiscal year 2007, focusing on these areas will help the agency build a solid foundation for its IPIA program.

In addition to its overall corrective action plan to comply with IPIA, DHS, as required by IPIA and related OMB implementing guidance, has developed plans to reduce improper payments related to the two high-risk programs it has identified thus far. These plans include reducing manual processing, improving system interfaces, and clarifying roles and responsibilities. If properly executed, these plans should help reduce future improper payments in these programs by strengthening internal controls. With regard to system improvements, as we have previously recommended, DHS needs to conduct effective testing to provide reasonable assurance that the system will function in a disaster recovery environment.

DHS Has Developed a Corrective Action Plan for Compliance with IPIA, but Implementation Challenges Remain

DHS has developed a corrective action plan to address the findings of its independent auditor, including its noncompliance with IPIA. In its most recent audit report for fiscal year 2006, the auditor recommended that DHS follow OMB guidance to complete the necessary susceptibility assessments, perform testwork over all material programs, and institute sampling techniques to allow for statistical projection of the results of its improper payments testing.

In its IPIA corrective action plan, DHS documented the root causes that it believes have resulted in its noncompliance, and analyzed the key success factors, key performance measures, verification and validation procedures, risks, impediments, dependencies with other corrective actions, resources required, and critical milestones needed to become compliant with IPIA; however, implementation will take significant time and effort. DHS cited its lack of resources, guidance, and experience with IPIA to execute risk assessments as root causes for its noncompliance with IPIA. The corrective action plan identified the following items related to IPIA, including root causes.

DHS also identified critical milestones in its corrective action plan for IPIA compliance, including due dates and status. However, these efforts remain ongoing and DHS has already missed some milestones. For example, while DHS initially planned for each component to identify its IPIA programs and disbursement populations by January 2007, this milestone was delayed until June 2007. As of July 8, 2007, according to DHS, the agency was waiting for one component to submit its list of programs, and DHS was in the process of reviewing submissions from the other components. Because of such delays, DHS does not expect to be in compliance with IPIA in fiscal year 2007 and will likely be noncompliant in fiscal year 2008. DHS’s updated critical milestones as of June 7, 2007, related to fiscal year 2007 are presented in table 3.

DHS’s planning and assessment process to develop its IPIA corrective action plan enabled the agency to update its guidance for its components and, according to DHS, the agency plans to focus on program identification and risk assessments during fiscal year 2007. Strengthening risk assessments and identifying potential improper payments are also important in order for DHS to begin taking steps to reduce improper payments and ultimately improve the integrity of the payments it makes. According to DHS officials, the department has been working in close consultation with OMB, sharing guidance documents, program test plans and results, and recovery audit status reports. Regardless of whether DHS is able to fully complete these efforts in fiscal year 2007, focusing on these areas will help the agency build a solid foundation for a sustainable IPIA program.

The updated guidance was issued in May 2007 and is to be in effect for fiscal year 2007 reporting. In this revised guidance, DHS clarifies how its components should identify their population of programs. In addition, DHS requires its components to perform a comprehensive risk assessment in order to identify programs susceptible to significant improper payments. DHS has designed a detailed methodology to conduct the IPIA risk assessment, and this methodology is outlined in the May 2007 guidance. The methodology, which includes qualitative criteria, as we have previously discussed, involves the creation of a program risk matrix based upon specific risk elements that affect the likelihood of improper payments. Further, the guidance states that a program may be selected for testing even if it does not meet the quantitative or qualitative assessments, noting that it is entirely possible that the risk assessment process may not identify a program as high risk, but component management may believe a program is high risk due to a high-level public profile or known financial or regulatory issues (such as a high-profile contract). For those programs found to be at high risk for issuing improper payments, the guidance also provides instructions for estimating improper payments, implementing a plan to reduce improper payments, and reporting on this information. Each of these procedures outlined in the May 2007 guidance includes instructions to submit information or documentation to the Internal Controls over Financial Reporting (ICOFR) Program Management Office (PMO).

DHS’s May 2007 guidance for fiscal year 2007 also outlines possible alternative approaches for testing grants. One possible alternative is the complete documentation of the component’s grant management process and the testing of internal controls. According to DHS, this approach helps the component identify specific weaknesses within the grant process, rather than sampling payments at random to determine potential errors. A second alternative is to perform a risk assessment on the program’s grant portfolio. This alternative helps the program identify specific grants that may be more susceptible to improper payments. The identified grants would then be subject to improper payment sampling. If a component wishes to consider alternative approaches to grant sampling, an explanatory memorandum must be submitted to the ICOFR PMO for review and approval. If approved by the ICOFR PMO, DHS will submit the alternative approach request to OMB for review and approval. Also, OMB has reported that the Chief Financial Officers (CFO) Council continues to play a critical role in efforts to address and reduce improper payments through its Improper Payments Transformation Team. This group has been collaborating with nongovernmental entities to consolidate governmentwide best practices; enumerate legislative and regulatory barriers that hinder program integrity efforts; and develop forums where federal and state stakeholders from the program, audit, and financial communities work together to solve program integrity challenges. These activities could provide guidance to help DHS determine how to best test its grant programs.

DHS also plans to hold workshops for its components on statistical sample testing and reporting to ensure that they have a consistent understanding of what is expected with regard to IPIA testing and reporting. Although DHS does not expect to be in compliance with IPIA in fiscal year 2007, completing a thorough risk assessment process is an important first step.

DHS Has a Broader Initiative to Resolve Internal Control Weaknesses across the Department

In addition to developing the corrective action plans described, DHS has a broader initiative to resolve material internal control weaknesses and build management assurances across the department. During fiscal year 2007, DHS established the ICOFR PMO as a new office within the DHS OCFO. The ICOFR PMO is responsible for departmentwide implementation of OMB Circular No. A-123. In March 2007, DHS issued the ICOFR Playbook, which outlines the department’s strategy and processes to resolve material weaknesses and build management assurances and incorporates the departmentwide corrective action plans, which contain more detailed information. The ICOFR PMO is responsible for the ICOFR Playbook and, according to DHS, the agency will update the ICOFR Playbook each year, establishing milestones and focus areas that will be tracked during the year. One section of the ICOFR Playbook relates to IPIA testing, and it discusses the actions taken by DHS in fiscal year 2006 to meet IPIA requirements. This section also states that DHS will develop policies and procedures to integrate the requirements of OMB’s implementing guidance for IPIA into annual component management assurances of compliance with significant laws and regulations, as part of DHS management’s assertion on internal controls over financial reporting and in an effort to strengthen internal controls to support DHS’s mission. In addition to management providing an assertion on internal controls over financial reporting, DHS is required to obtain a related auditor’s opinion. Incorporating IPIA into this guidance will increase the likelihood of successful implementation and could also strengthen related internal controls.

The ICOFR Playbook draws attention to the process of addressing IPIA requirements across the department. By successfully addressing the requirements of IPIA, DHS will be in a better position to take steps to reduce improper payments, as the ultimate goal of IPIA reporting is to improve the integrity of payments that the agency makes. Further, DHS has testified that to ensure the long-term effectiveness of the department’s efforts to reduce improper payments, DHS requested resources in its fiscal year 2008 budget to hire additional staff so that it can enhance risk assessment procedures and conduct oversight and review of component test plans.

DHS Has Developed Plans to Reduce Improper Payments for FEMA’s Two Disaster-Related Programs, but Effects Remain Unknown

In addition to its overall corrective action plan to comply with IPIA, DHS, as required by IPIA and related OMB implementing guidance, has developed plans to reduce improper payments related to the two high-risk programs it identified in its fiscal year 2006 testing—FEMA’s IHP assistance payments and disaster-related vendor payment programs. These plans highlighted improving internal controls to prevent improper payments in each of these programs.

FEMA’s testing of its two high-risk disaster-related programs identified several key internal control weaknesses, including ineffective system controls to review data for potential duplications and inconsistently applied standards for supporting evidence and documentation. To address these findings, FEMA initiated corrective action plans aimed at reducing improper payments by strengthening internal controls. These plans included validating Social Security numbers during telephone registration, increasing IT systems capabilities to handle high volume during a catastrophic disaster, and enhancing post-payment reviews. Our prior reporting also identified significant internal control deficiencies in the IHP program.

To address OMB’s reporting requirements on actions for reducing improper payments, DHS included in its fiscal year 2006 PAR corrective action plans for IHP assistance payments and disaster-related vendor payments. For each of the two high-risk programs, DHS prepared a schedule of corrective action plans with target completion dates. For the IHP program, DHS included corrective action plans that were already completed in addition to those in process and planned. DHS has also established critical milestones for reducing improper, disaster-related vendor payments. During fiscal year 2007, DHS updated and tracked its corrective action plan critical milestones. Details of these corrective action plan critical milestones can be found in appendix V.

Based on DHS’s updated corrective action plan report for IHP, as of May 14, 2007, DHS had not completed certain critical milestones by the identified target date. These milestones included system interface improvements and certain contract awards. Missing these established critical milestones delays strengthening internal controls that are necessary to reduce future improper payments, and therefore it is important that DHS stays on track in implementing its corrective action plans.

DHS also noted that human capital is the principal requirement to execute these two corrective action plans; however, according to DHS, exact requirements are not estimable at this time. With regard to system improvements, as we have previously recommended, DHS needs to conduct effective testing to provide reasonable assurance that the system will function in a disaster recovery environment.

DHS’s Efforts to Comply with the Recovery Auditing Act and to Recover Improper Payments Need to Be Enhanced

For the last 3 years, DHS has contracted with a recovery auditing firm to perform recovery audit work to comply with the Recovery Auditing Act; however, activities in this area could be improved. Specifically, DHS encountered problems that kept it from reporting on recovery audit efforts during fiscal year 2006. DHS was not able to report recovery audit results in fiscal year 2006 for three of the four components it identified as meeting the criteria for recovery auditing as specified in the Recovery Auditing Act (i.e., over $500 million in contractor payments) due to problems obtaining disbursement data and delays in obtaining security clearances for contract personnel. In addition, DHS did not perform recovery auditing efforts at the fourth component identified as meeting the criteria. Further, DHS has not yet reported on its efforts to recover improper payments identified during its testing of FEMA’s disaster-related vendor payments and has reported limited information on its efforts to recover identified improper IHP assistance payments.

In March 2007, DHS revised its internal guidance for recovery auditing for fiscal year 2007 to discuss the issues encountered in previous years and to emphasize timelines to help ensure that all applicable components are able to report. This guidance clarifies what is expected of applicable components, but ongoing oversight within the OCFO will be necessary to ensure that components are progressing with their recovery auditing efforts and will be able to successfully report on the results of these efforts at year end. In addition, DHS’s updated guidance does not require components to report on efforts to recover improper payments identified during IPIA testing. Reporting this information in the annual PAR would provide a more complete picture of the agency’s actions to recover payments that it has identified as being improper.

Recovery Auditing Efforts at DHS Could Be Improved

As an executive branch agency, DHS is required to perform recovery audits under certain conditions as specified by the Recovery Auditing Act. Beginning with fiscal year 2004, OMB required that applicable agencies publicly report on their recovery auditing efforts as part of their PAR reporting of improper payment information. Agencies are required to discuss any contract types excluded from review and justification for doing so. Agencies are also required to report, in table format, various amounts related to contracts subject to review and actually reviewed, contract amounts identified for recovery and actually recovered, and prior-year amounts.

DHS took steps to identify and recover improperly disbursed funds by hiring an independent contractor who conducted recovery audit work at two major components, ICE and CBP. DHS began recovery auditing efforts during fiscal year 2004 but was not able to report on these efforts for that year because initial findings were not available in time to be included in the annual PAR. This recovery audit work continued during fiscal year 2005 and covered all fiscal year 2004 disbursements to contractors from these two components, ultimately identifying more than $2.1 million of improper payments and recovering more than $1.2 million, as reported in DHS’s fiscal year 2005 PAR. While DHS was able to recover about 55 percent of improper payments identified through its recovery audit efforts, based on our review of other agencies, we have previously questioned whether agency amounts identified for recovery should have been much higher, which would thereby significantly decrease the agency- specific and overall high rate of recovery.

According to DHS’s fiscal year 2006 PAR reporting, recovery audit contract work over fiscal year 2005 disbursements began in fiscal year 2005 at CBP and ICE, and DHS extended its recovery audit work to include USCG in fiscal year 2006. Delays in obtaining security clearances for contract personnel severely hampered completion of recovery audit work at CBP and ICE. Delays in supplying needed disbursement information hindered recovery audit work at USCG. As a result, DHS was not able to provide conclusive recovery audit summary results for fiscal year 2006 PAR reporting. According to DHS, four of its components—ICE, CBP, USCG, and FEMA—meet the criteria for recovery auditing as specified in the Recovery Auditing Act (i.e., each has over $500 million in contractor payments). ICE, CBP, and USCG entered into the same recovery audit contract. FEMA’s recovery audit work in fiscal year 2006 was part of a pilot study on internal controls over improper payments for IHP assistance and disaster-related vendor payments. In the aftermath of Hurricane Katrina, DHS and FEMA, with the assistance of a contractor, conducted an internal controls assessment related to improper IHP assistance and disaster-related vendor payments. Although this assessment identified improper payments, DHS has not yet reported on its efforts to recover improper payments identified during its testing of FEMA’s disaster-related vendor payments and has reported limited information, such as the dollar amount of improper payments approved for recovery and the amount returned to FEMA, related to its efforts to recover improper IHP payments.

Of the 3 years agencies have been required to report on recovery audits in table format, DHS was only able to report required recovery audit data in its fiscal year 2005 PAR. Table 4 presents DHS’s recovery audit efforts and results for fiscal years 2004 through 2006.

DHS’s Internal Guidance for Recovering Improper Payments Has Been Revised but Additional Information Could Be Reported

DHS has recently revised and clarified its internal guidance related to recovery auditing for fiscal year 2007 to discuss prior issues and emphasize timelines to help ensure that all applicable components are able to complete recovery audits and report on their efforts. The new guidance requires that applicable DHS components provide the ICOFR PMO with a general description and evaluation of the steps taken to carry out a recovery auditing program. Components are required to include a discussion of any security clearance requirements and show that there is sufficient time to allow contractors to complete audit recovery work in time to meet PAR reporting deadlines. Every update should include the total amount of contracts subject to review, the actual amount of contracts reviewed, the amount identified for recovery, and the amounts actually recovered in the current year. The year-end update should include a corrective action plan to address the root causes of payment errors. A general description and evaluation of any management improvements to address flaws in a component’s internal controls over contractor payments discovered during the course of implementing a recovery audit program, or other control activities over contractor payments, is also required. This guidance applies to the four DHS components—CBP, FEMA, ICE, and USCG—that meet Recovery Auditing Act criteria. In addition, according to DHS, the ICOFR PMO may expand recovery audit contracting to other components as the benefits of this work become clearer. Although DHS’s guidance clarifies what is expected of components, ongoing oversight within the OCFO will be necessary to ensure that the components are progressing with their recovery auditing efforts and will be able to successfully report on results at year end.

In addition to specific recovery audit work to identify improper payments made to contractors, DHS also identifies improper payments through its IPIA testing. For example, as discussed previously, DHS’s testing in fiscal year 2006 of its two high-risk programs identified improper IHP assistance payments and disaster-related vendor payments made by FEMA. However, DHS’s internal guidance does not require components to include information in its annual PAR related to its efforts to recover improper payments identified during IPIA testing and, as a result, DHS has not yet reported on its efforts to recover improper disaster-related vendor payments identified and has reported limited information on its efforts to recover identified improper IHP assistance payments. Having components report this information in the annual PAR would provide a more complete picture of the agency’s actions to recover payments that it has identified as being improper.

Conclusions

Although DHS has made some progress in implementing the requirements of IPIA, challenges remain in ensuring that all DHS programs and activities, including grant programs, have been reviewed to determine their susceptibility to significant improper payments and tested, if applicable. As DHS continues to improve its IPIA efforts and identify and test its high-risk programs, the agency should be better able to identify, and ultimately strengthen controls, to reduce improper payments.

While preventive internal controls should be maintained as the agency’s front-line defense against making improper payments, recovery auditing holds promise as a cost-effective means of identifying contractor overpayments. In addition, reporting on efforts to recover any other specific improper payments identified would provide a more complete picture of the agency’s actions to recover payments that it has identified as being improper. 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.

Recommendations for Executive Action

To help improve its efforts to implement IPIA and recover improper payments, we recommend that the Secretary of Homeland Security direct the Chief Financial Officer to take the following actions. (1) Maintain oversight and control over critical milestones identified in the DHS corrective action plan for IPIA compliance so that DHS components stay on track, specifically in regard to identifying programs and performing risk assessments and any related testing. (2) Require all applicable components to determine and document how they plan to assess their grant programs to determine whether they are at high risk for issuing significant improper payments, and, if necessary, test these grant programs. (3) Provide oversight and monitor the progress of all applicable DHS components to successfully perform and report on their recovery auditing efforts. (4) Similar to the required reporting on efforts to recover improper payments made to contractors under the Recovery Auditing Act, develop procedures for reporting in its annual PAR on the results of yearly efforts to recover any other known improper payments identified under IPIA, by the DHS OIG, or other external auditors.

Agency Comments and Our Evaluation

We requested comments on a draft of this report from the Secretary of Homeland Security. These comments are reprinted in appendix II. DHS concurred with the recommendations in our report. DHS noted that significant actions under way include strengthening the department’s financial management and oversight functions to improve the DHS control environment and implementing risk assessments to build a foundation for a sustainable IPIA program.

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If you or your staff have any questions regarding this report, please contact me at (202) 512-9095 or at williamsm1@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix VI.

Appendix I: Scope and Methodology

To determine to what extent the Department of Homeland Security (DHS) has implemented the requirements of the Improper Payments Information Act of 2002 (IPIA), we compared the IPIA legislation, and the related Office of Management and Budget (OMB) implementing guidance, with DHS improper payment risk assessment methodologies, and IPIA Performance and Accountability Report (PAR) information for fiscal years 2004 through 2006. To analyze DHS risk assessment compliance with IPIA, we obtained and reviewed documents regarding its regulations and methodology for identifying programs and activities highly susceptible to improper payments. We reviewed DHS’s PARs, Office of Inspector General (OIG) semiannual reports to the Congress, and GAO reports for fiscal years 2004 through 2006 for improper payment information. We also reviewed procedures performed by DHS’s independent financial statement auditor related to DHS’s compliance with IPIA.

We reviewed the programs that DHS identified as its IPIA population and analyzed the risk assessments that were performed during fiscal year 2006. This allowed us to determine which components did not perform a risk assessment and which programs were not covered. During our review, we noted that the Office of Grants and Training (GT), a DHS component, did not perform an assessment or complete payment statistical sample testing on its grants programs for fiscal year 2006 as required of all DHS programs issuing more than $100 million of IPIA relevant payments in fiscal year 2005. To analyze improper payments related to DHS grantees and highlight the importance of performing IPIA testing in this area, we obtained and reviewed fiscal year 2005 single audit reports of these entities. We used fiscal year 2005 reports because that is the most recent year for which complete audit results have been posted to the Federal Audit Clearinghouse (FAC). We also reviewed GAO reports and DHS OIG Financial Assistance (Grants) Reports for fiscal year 2005 through fiscal year 2007 to identify weaknesses reported at DHS grantees. In addition, we reviewed DHS OIG Management Reports (audits and inspections) for fiscal year 2005 through fiscal year 2007 that were related to grants and DHS OIG semiannual reports to the Congress for fiscal years 2005 and 2006 to identify questioned costs related to DHS grantees.

To identify what actions DHS has under way to improve IPIA compliance and reporting, we interviewed DHS staff in the Office of the Chief Financial Officer and reviewed DHS corrective action plans and the Internal Controls Over Financial Reporting (ICOFR) Playbook. We also reviewed DHS’s IPIA implementing guidance for fiscal year 2007—revised in March 2007 and May 2007—and determined whether it was consistent with IPIA requirements. We discussed these revisions with improper payment and financial management officials from DHS to inquire about what is currently being implemented and what will be implemented in the future to ensure compliance with DHS’s revised internal guidance.

To determine what efforts DHS has in place to recover improper payments, we compared section 831 of the National Defense Authorization Act for Fiscal Year 2002, commonly known as the Recovery Auditing Act, and the related OMB implementing guidance, with DHS recovery auditing procedures and PAR-reported information for fiscal year 2006. We also reviewed DHS PARs, OIG semiannual reports to the Congress, and GAO reports for fiscal years 2004 through 2006 for recovery audit information.

To assess the reliability of data reported in DHS’s PARs related to improper payments and recovery audit efforts, we (1) reviewed existing information about the data and the system that produced them and (2) interviewed agency officials knowledgeable about the data. Based on these assessments, we determined that the data were sufficiently reliable for the purposes of this report. We conducted our work from October 2006 through June 2007 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary of Homeland Security or his designee. The Director, Departmental GAO/OIG Liaison Office, provided written comments, which are presented in the Agency Comments and Our Evaluation section of this report and are reprinted in appendix II.

Appendix II: Comments from the Department of Homeland Security

Appendix III: Prior-Year IPIA Reporting by DHS and Its Independent Auditor

Table 5 presents information on prior-year IPIA reporting by DHS, including compliance issues reported by the independent auditor.

Appendix IV: DHS Grant Programs

Table 6 provides a list of DHS grant programs, primary recipients, and award information for fiscal year 2006.

Appendix V: Corrective Action Plans for High-Risk Programs

Table 7 describes the details of the open corrective action plan critical milestones as of May 14, 2007, as reported by DHS, for reducing improper IHP assistance payments.

Based on DHS’s updated corrective action plan report for IHP, as of May 14, 2007, DHS had not completed certain critical milestones by the identified target date. These milestones included system interface improvements and certain contract awards. Missing these established critical milestones only delays strengthening internal controls that are necessary to reduce future improper payments. It is important that DHS stays on track in implementing its corrective action plans.

DHS has also established critical milestones for reducing improper disaster-related vendor payments. Table 8 describes the details of the open corrective action plan critical milestones as of May 14, 2007, as reported by DHS for reducing improper disaster-related vendor payments.

DHS identified three primary root causes for why these two programs— IHP assistance payments and disaster-related vendor payments—are at high risk of issuing improper payments. According to DHS, these root causes include the following.

People—FEMA employees were not properly trained. Processes—The nature of FEMA’s work responding to disasters explains the reliance on people that are not trained in finance requirements and are dispersed throughout areas with limited infrastructure.

Policies—Policies were cited as possibly inadequate for instructing employees on the proper supporting documentation. There is a need for clear policy and procedural guidelines that sets standard operating procedures for all FEMA employees, especially those outside the finance area.

DHS also noted that human capital is the principal requirement to execute these two corrective action plans; however, according to DHS, exact requirements are not estimable at this time. These plans, if properly executed, should help reduce future improper payments in these programs by strengthening internal controls. With regard to system improvements, as we have previously recommended, DHS needs to conduct effective testing to provide reasonable assurance that the system will function in a disaster recovery environment.

Appendix VI: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, the following individuals also made significant contributions to this report: Casey Keplinger, Assistant Director; Verginie Amirkhanian; Sharon Byrd; Francine DelVecchio; Francis Dymond; Gabrielle Fagan; Jacquelyn Hamilton; and Laura Stoddard.