For both private industry and government agencies, some payments are processed incorrectly for a variety of reasons. For instance, vendors make pricing errors on their invoices, forget to include discounts that have been publicized to the general public, neglect to offer allowances and rebates, miscalculate freight charges, and so forth. These mistakes, when not caught, result in overpayments. Identifying and recovering overpayments is referred to as recovery auditing. Recovery auditing started about 30 years ago, and it is used in several industries, including the automobile, retail store, and food service industries, and within DOD, by the Army and Air Force Exchange Service and the Navy Exchange Service. An external audit recovery group may be the only group used by an organization or it may be used in combination with an internal group that examines invoices for overpayments prior to an external group’s review. The demonstration program began in September 1996, when the Defense Supply Center, Philadelphia (DSCP), competitively contracted with Profit Recovery Group International (PRGI). The contract, which has been extended twice and will end in May 1999, covers purchases made during fiscal years 1993-95. It requires PRGI to identify and document overpayments and to make recommendations to reduce future overpayments. PRGI receives a fee of 20 percent of net collected funds. DSCP is the Defense Logistics Agency inventory control point that procures subsistence items, clothing and textiles, and medicines and medical supplies for the U.S. Armed Forces and other non-DOD customers, such as the Veterans Administration and Job Corps centers. Payment for the commodities bought by DSCP and covered under the demonstration program are made by the Defense Finance and Accounting Service (DFAS), Columbus, Ohio. DFAS does not typically review these types of items for overpayments. In late 1997, Congress authorized expansion of the program to other payments managed through the Defense Business Operations Fund and DOD is examining how to implement the congressional direction. In an August 1998 memorandum, the DOD Comptroller encouraged DOD agencies to use recovery auditing as a way to identify and correct payment problems. PRGI’s methodology involves four key steps. These steps are (1) understand the procurement and payment processes for all transactions; (2) identify the data needed to establish an audit trail, such as purchase orders/agreements, paid history files, invoices, receiving information, vendor term files, and data from procurement files, such as price lists, promotional allowances, and volume allowances; (3) examine the data using proprietary software to identify missed discounts, price discrepancies, duplicate payments, and other overpayments; and (4) generate a hard copy claim, with supporting documentation, for each potential overpayment. In applying this methodology to DFAS payments, PRGI initially focused on identifying missed discounts and price discrepancies. PRGI compared cash discounts and prices offered to commercial customers to the cash discounts offered to and prices paid by DSCP. It also sent letters to vendors requesting current statements of their accounts with DSCP. Between March 1997 and July 1998, two separate mailings were made asking vendors to provide statements of their accounts. About 20 percent of the vendors responded, resulting in the recovery of $1.2 million. One recovery of $957,000 related to the recall of a withdrawn immunization serum for which DOD had not taken credit. As of August 14, 1998, according to PRGI, it had audited about 80 percent of the $7.2-billion audit base and identified about $19.1 million in overpayments. Table 1 shows the types and amounts of overpayments identified by PRGI and recovered by DOD. A number of factors have inhibited the identification or recovery of overpayments. Foremost, vendors disagreed with DSCP claims that it did not receive most favored customer status because it was not offered cash discounts offered to commercial customers. As a result, the recovery process was virtually halted for 8 months while DSCP reviewed the basis of the vendors’ claims. In addition, because of the time between the purchases by DSCP (fiscal years 1993-95) and the audit recovery (fiscal years 1997-98), both PRGI and the vendors had difficulty finding supporting documentation. PRGI also had considerable difficulty identifying potential duplicate payments because its proprietary software was incompatible with the payment systems. Finally, according to PRGI, even though the contract was awarded in September 1996, PRGI could not begin audit work in earnest until June 1997, due to delays in obtaining computerized payment files. This, in combination with the time required to become knowledgeable of DSCP procurement processes and DFAS payment systems, delayed the progress of the demonstration program. Certain subsistence vendors are designated brand name suppliers because only the vendors’ products are specified for procurement, precluding competition. This practice is authorized for purchases of products bought by DSCP and resold to other government agencies, such as the Defense Commissary Agency. In short, a brand name product is a product desired or preferred by a customer. Kellogg’s Corn Flakes is an example of a brand name product. Because there is no competition, brand name contracts require that all prices offered the government be as advantageous as the prices offered the vendor’s most favored customer. This provision expressly includes quantity discounts, allowances, rebates, special promotions, and billing advantage. PRGI interpreted the term billing advantage to mean that vendors are required to offer the government cash discounts for prompt payment similar to those offered the vendor’s most favored customer. PRGI identified cases where the government was not offered the same “billing advantage,” or discount for prompt payment, as was offered the vendor’s most favored customer. As a result, claims were written against vendors for cash discounts not offered. For example, according to PRGI, one vendor routinely offered a 2-percent discount to its commercial customers if payment was made within 10 days, but this discount was not offered to the government. As a result, a claim of about $187,000 was made against this vendor. As PRGI identified potential overpayments made to brand name subsistence vendors, it sent letters of indebtedness to them. Many vendors protested both individually and through their trade association, the American Logistics Association (ALA). The brand name vendors and the ALA made the following arguments. The claims process did not follow the Federal Acquisition Regulation (FAR). Many of the letters of indebtedness were signed by the government contracting officer’s representative, and PRGI responded to vendor questions. The vendors and ALA argued that, according to the FAR, only a contracting officer can sign letters of indebtedness and that PRGI should not respond to vendor questions. Cash discounts were not offered because, historically, DSCP did not pay its bills within the discount period. DOD did receive most favorable customer prices. During the 1993-95 time frame, DSCP contracted for subsistence items that it resold to the Defense Commissary Agency for sale in commissaries in Europe. Even though the prices charged by the vendors to DSCP may not have reflected most favorable customer prices, the vendors and ALA contend that subsequent voluntary price reductions provided by vendors to the Defense Commissary Agency for promotional purposes effectively reduced item costs to most favored customer prices after items were received by the commissaries. In addition, vendors complained that the tone of the demand letters, which cited interest penalties, automatic offsets within 30 days, and liability for civil and/or criminal prosecution under the False Claims Act, was threatening. They also believed the 30-day time period provided to review claims was unreasonable. As a result of these concerns, the process of recovering PRGI-identified overpayments was virtually halted. PRGI continued to look for overpayments, but no letters of indebtedness, regardless of the cause, were sent to vendors. DSCP spent the next 8 months reviewing complaints by brand name subsistence vendors. On April 15, 1998, DSCP concluded that the vendors’ concerns were not valid. As a result, DSCP decided to pursue the cash discount claims identified by PRGI. However, letters representing the final decision on amounts owed have not been sent to vendors. The time between the years the payments were made by DSCP (fiscal years 1993-95) and the date of the recovery audit (fiscal years 1997-98) made finding supporting documentation difficult for both PRGI and the vendors. In some cases, documentation was unavailable; in others, the vendors needed additional time to locate files. Although typical recovery auditing occurs within 6 months to a year of a transaction, the legislative mandate required the audit of purchases during the fiscal year 1993-95 time frame, 4 to 6 years before the demonstration program. As a result, PRGI had difficulty obtaining documentation from DFAS. For example, PRGI was unable to verify any fiscal year 1993 transactions from one payment system because supporting documentation, including vendor invoice copies, had been discarded prior to storage. Consequently, the audit base for the demonstration program was reduced from $8.9 billion to $7.2 billion. Because of the age of the payments, some vendors said that their documentation had been sent to storage. Consequently, vendors received up to 90 days to review DSCP’s claims of indebtedness. PRGI had difficulty identifying potential duplicate payments because of limitations with its proprietary software. According to PRGI officials, payments in the private sector are invoice based, and PRGI software was developed based on private sector practices. However, the DOD payment systems do not retain invoice numbers or invoice dates. The DFAS payment systems pay by contract or contract line item number. To compensate for these limitations, PRGI manually sorted through records sent to storage to identify potential duplicate payments. According to PRGI, its proprietary software is being modified to identify duplicate payments given the specialized nature of DFAS payment systems.