Before I discuss our review of agencies’ fiscal year 2005 PARs, I would like to summarize IPIA, related OMB initiatives, and statutory requirements for recovery audits. The act, passed in November 2002, requires 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 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 federal agencies to use in implementing IPIA. OMB issued guidance in May 2003 requiring 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 report the results of its improper payment efforts for fiscal years ending on or after September 30, 2004. OMB guidance requires the results to be reported in the Management Discussion and Analysis section of the agency’s PAR. In August 2004, OMB established Eliminating Improper Payments as a new program-specific initiative under the PMA. This separate improper payments 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. In August 2005, OMB revised Circular No. A-136, Financial Reporting Requirements, and incorporated IPIA reporting details from its May 2003 IPIA implementing guidance. Among other things, OMB Circular No. A-136 includes requirements for agencies to report on their risk assessments; annual improper payment estimates; corrective action plans; and recovery auditing efforts, including the amounts recovered in the current year. Section 831 of the National Defense Authorization Act for Fiscal Year 2002 contains a provision that requires all 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 legislation 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 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. The fiscal year 2005 PARs, the second set of reports representing the results of agency assessments of improper payments for all federal 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 that while progress had been made to reduce improper payments, significant challenges remain to effectively achieve the goals of IPIA. We reviewed the fiscal year 2005 PARs or annual reports for 32 of the 35 federal agencies that the Treasury determined to be significant to the U.S. government’s consolidated financial statements. Of those 32 agencies, 23 reported that they had completed risk assessments for all programs and activities. See appendix II for detailed information on each agency. This was the same number of agencies that reported having completed risk assessments in our prior year review. The remaining 9 agencies either were silent on IPIA reporting details in their PARs or annual reports or had not yet assessed the risk of improper payments for all their programs. In addition, we noted that selected agency auditors reviewed agencies’ risk assessment methodologies and identified issues of noncompliance or other deficiencies. For example, auditors for the Departments of Justice and Homeland Security cited agency noncompliance with IPIA in their fiscal year 2005 annual audit reports, primarily caused by inadequate risk assessments. The Department of Justice auditor stated that one agency component had not established a program to assess, identify, and track improper payments. The agency acknowledged this noncompliance in its PAR as well. The Department of Homeland Security (DHS) auditor reported that the department did not institute a systematic method of reviewing all programs and identifying those it believed were susceptible to significant erroneous payments. This was the second consecutive year that the auditor reported IPIA noncompliance for DHS. Although the auditors identified the agency’s risk assessment methodology as inadequate, DHS reported in its PAR that it had assessed all of its programs for risk. A third agency auditor reported that the Department of Agriculture needed to strengthen its program risk assessment methodology to identify and test critical internal controls over program payments totaling over $100 million. As I highlighted in my introduction, federal agencies’ reported estimates of improper payments for fiscal year 2005 exceeded $38 billion. This represents almost a $7 billion, or 16 percent, decrease in the amount of improper payments reported by 17 agencies in fiscal year 2004. On the surface, this appears to be good news. However, the magnitude of the governmentwide improper payment problem remains unknown. This is because, in addition to not assessing all programs, some agencies had not yet prepared estimates of significant improper payments for all programs determined to be at risk. Specifically, of the 32 agency PARs included in our review, 18 agencies reported improper payment estimates totaling in excess of $38 billion for some or all of their high-risk programs. The $38 billion represents estimates for 57 programs. Of the remaining 14 agencies that did not report estimates, 8 said they did not have any programs susceptible to significant improper payments, 5 were silent about whether they had programs susceptible to significant improper payments, and the remaining 1 identified programs susceptible to significant improper payments and said it plans to report an estimate by fiscal year 2007. Further details are included in appendix I. Regarding the reported $7 billion decrease in the governmentwide improper payment estimate for fiscal year 2005, we determined that this decrease was primarily due to a $9.6 billion reduction in the Department of Health and Human Services’s (HHS) Medicare program improper payment estimate, which was partially offset by more programs reporting estimates of improper payments, resulting in a net decrease of $7 billion. Based on our review, HHS’s $9.6 billion decrease in its Medicare program improper payment estimate was principally due to its 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. The relevance of this significant decrease is that when providers do not submit documentation to justify payments, these payments are counted as erroneous for purposes of calculating an annual improper payment estimate for the Medicare program. HHS reported marked reductions in its error rate attributable to (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. 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 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. 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. Mr. Chairman, I think the only valid observation at this time is that improper payments are a serious problem, agencies are working on this issue at different paces, and the extent of the problem and the level of effort necessary to control these losses is as yet unknown. What is clear is that there is a lot of work to do in this area. Agency auditors have reported major management challenges related to agencies’ improper payment estimating methodologies and highlighted internal control weaknesses that continue to plague programs susceptible to significant improper payments. For example, the Department of Labor’s agency auditor reported that inadequate controls existed in the processing of medical bill payments for its Federal Employee Compensation Act program. As a result, medical providers were both overpaid and underpaid. Internal control weaknesses were also identified in the Small Business Administration’s (SBA) 7(a) Business Loan program. SBA did not consistently identify instances of noncompliance with its own requirements, resulting in improper payments. In another example, agency auditors for the Department of Education (Education) raised concerns about the methodology Education used to estimate improper payments for its Federal Student Aid program.