Before highlighting the results of our review of the fiscal year 2003 PARs, I would like to summarize the requirements of the Improper Payments Act. The act requires the head of each agency to annually review all programs and activities that the agency administers and identify all such programs and activities that may be susceptible to significant improper payments. For each program and activity identified, the agency is required to estimate the annual amount of improper payments and submit those estimates to the Congress before March 31 of the following applicable year. The act further requires that for any agency program or activity with estimated improper payments exceeding $10 million, the head of the agency shall provide a report on the actions the agency is taking to reduce those payments. The Improper Payments Act also required the Director of OMB to prescribe guidance to implement its requirements not later than six months after the date of its enactment (Nov. 26, 2002). OMB issued this guidance on May 21, 2003. It states that each agency shall report the results of its improper payment efforts in the Management Discussion and Analysis section of its PAR for fiscal years ending on or after September 30, 2004. In general, the first set of reports required by the guidance is due in November 2004. Significantly, the guidance issued in May 2003, also required that 15 agencies report improper payment information for 46 programs identified in OMB Circular A-11, publicly in their fiscal year 2003 PARs. Section 57 required agencies to include improper payment information for the agencies and programs in their nonpublic budget submissions to OMB, beginning with the fiscal year 2003 budget proposals. According to OMB, the programs were selected primarily because of their large dollar volume ($2 billion dollars or more in outlays). In July 2003, OMB dropped the requirement for information on erroneous payments and eliminated Section 57 requirements for preparing fiscal year 2005 budget submissions. The information previously called for in the circular includes actual and estimated improper payments and rates, targets for reducing the improper payment rates identified, and corrective action plans to reach the targets. If diligently and vigorously implemented, the Improper Payments Act should have a significant impact on the governmentwide improper payments problem. The level of importance each agency, the administration, and the Congress place on the efforts to implement the act will determine its overall effectiveness and the level to which agencies reduce improper payments and ensure that federal funds are used for their intended purposes. As you requested, we reviewed the fiscal year 2003 PARs for the 15 agencies and 46 programs previously cited in OMB Circular A-11, Section 57, to identify the improper payment information contained therein. Table 1 summarizes the improper payment estimates agencies reported in their fiscal year 2003 PARs. Further review of the table shows that the PARs contained improper payment estimates for 31 of the 46 agency programs previously listed in Circular A-11. The reports contained information on agency initiatives to prevent or reduce improper payments for 22 programs and on impediments to improper payment prevention or reduction for 11 programs. Some agencies partially reported required information. Figure 1 presents, by agency program, the level of reporting that we found for the three categories of information you asked about (improper payment amounts; initiatives to prevent improper payments, reduce them, or both; and impediments to preventing or reducing them). As you can see, the level of reporting is literally all over the board. Further, although agencies may have met the reporting requirements for particular programs by addressing them in PARs, in many cases, the information reported was limited to agency plans for future measures that may not come about. In some cases, agencies reported that they had already 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 internal control weaknesses within the programs where the design or operation of an internal control procedure did not reduce, to a relatively low level, the risk that errors, fraud, or noncompliance that would be material to the financial statements may occur and not be detected promptly by employees in the normal course of performing their duties. This situation appears contradictory. Although OMB has required agencies to perform various improper- payment-related identification and corrective action activities for the past three years for these 46 programs, figure 1 shows that only seven agencies reported all of the required elements you asked about—estimated amounts, initiatives taken to reduce improper payments, and impediments to improper payment prevention or reduction—representing only 9 of the 46 programs (20 percent). One of the agencies, for one of its programs, reported estimated improper payment amounts, discussed ongoing collaborative efforts made with and between program partners (such as state agencies) to improve payment accuracy and to share “best practice” information, and further reported that recent legislation weakened the penalties imposed on program partners for high error rates and reduced the incentives offered for lower rates. Another agency reported an improper payment amount for three of its four required programs, reported initiatives such as improving program guidance and training, and addressed impediments such as the lack of available income data needed to verify applicant-provided income information. A third agency reported an estimate for one of its three required programs, and further reported initiatives including promoting and funding data exchanges with program partners, and reported that its principal impediment was the cost of detecting eligibility issues. For 10 of the 46 programs represented in six agencies, the agencies estimated improper payment amounts and initiatives taken to reduce improper payments, but did not address any impediments. For one program, an agency estimated improper payments and discussed initiatives to correct benefit computation errors and beneficiary earnings test improvements. Another is performing annual on-site reviews. One agency reported an improper payment amount for a program and discussed initiatives, such as implementing an automated system to identify coding and billing errors. Other initiatives reported by agencies included conducting recovery audits, collaborating with other federal agencies to identify and recover payments made to ineligible beneficiaries, and issuing policy notices and providing training to agency personnel on program processes. Six agencies reported estimated amounts for 11 programs, but did not discuss initiatives taken to reduce improper payments and impediments to preventing or reducing improper payments. For three programs, agencies reported no estimated amounts or impediments, but did discuss initiatives taken to reduce improper payments, such as expanding annual post award monitoring and oversight processes. One agency did not report estimated improper payment amounts or discuss initiatives taken to reduce improper payments for one of its programs but identified some of the impediments it has encountered in preventing or reducing them, such as the unavailability of the data necessary to accurately measure improper payments. For 11 of the 46 programs for which agencies were required to report improper payment information in their fiscal year 2003 PARs, four agencies did not report estimated amounts, initiatives taken to reduce improper payments, or impediments to preventing or reducing improper payments, even though OMB Circular A-11, Section 57, originally required agencies to report improper payment data, assessments, and action plans with their initial budget submissions since July 2001. One agency reported, “… erroneous payments are very unlikely … limited to instances of fraud… ” Agencies for several programs reported only that they were continuing to develop improper payment error rates, but reported no further information. In October 2001, we issued an executive guide on strategies to manage improper payments that was based on the results of information that we obtained from public and private sector organizations that identified and took actions designed to reduce improper payments in their programs. We found that the actions that these organizations took shared a common focus of improving the internal control system over problem areas. This system consists of five primary components—the control environment, risk assessments, control activities, information and communications, and monitoring. Internal controls are not one event, but a series of actions and activities that occur throughout an entity’s operations and on an ongoing basis. People make internal controls work, and responsibility for good internal control rests with all managers. One of the biggest hurdles that many entities face in the process of managing improper payments is overcoming the tendency to deny the problem. It is easy to rationalize avoiding or deferring action to address a problem if you do not know how big the problem is. The nature and magnitude of the problem—determined through a systematic risk assessment process—needs to be determined and openly communicated to all relevant parties. When this occurs, especially in a strong control environment, denial is no longer an option, and managers have the information, as well as the incentive, to begin addressing improper payments. Fraud, waste, and abuse in federal activities and programs lead to the loss of billions of dollars of government funds, erode public confidence, and undermine the federal government’s ability to operate effectively. Unfortunately, that assessment comes from a 1985 GAO report on federal agencies implementation of 31 U.S.C. 3512 (c), (d) (commonly referred to as the Federal Managers’ Financial Integrity Act of 1982 (Financial Integrity Act)). Continuing concern over the poor condition of government internal controls and accounting systems led the Congress to pass this legislation that requires, among other things, ongoing evaluations and reports on the adequacy of the systems of internal accounting and administrative control of each executive agency. It requires the head of each agency to issue an annual report that identifies material weaknesses identified through the assessment process and the actions planned to correct those weaknesses. An August 1984 GAO report that summarized the results of our governmentwide review of agencies’ efforts to implement the Financial Integrity Act found that agencies made a good start in the first year of assessing their internal control and accounting systems and have demonstrated a management commitment to implementing the act. Top agency and OMB managers were becoming involved. The report characterized the first-year effort as a learning experience and noted that much remained to be done to complete the evaluation process and correct the problems identified. Our 1984 review of the material weaknesses identified in the annual reports of 17 major agencies revealed that 16 agencies reported accounting/financial management system 14 agencies reported procurement weaknesses; 13 agencies reported property management weaknesses; 12 agencies reported cash management weaknesses; 12 agencies reported grant, loan, and debt collection management 8 agencies reported eligibility and entitlement weaknesses.