The PMA issued in 2001 targeted improper payments as an area with opportunities for improvement. The PMA included five governmentwide initiatives—one of which is improved financial management, which expressly addresses improper payments as a priority. This initiative called for the administration to establish a baseline on the extent of erroneous payments. Under it, agencies were to include in their 2003 budget submissions to OMB information on improper payment rates, including actual and target rates where available, for benefit and assistance programs over $2 billion. The PMA also noted that using this information, OMB will work with agencies to establish goals to reduce improper payments identified in their programs. In July 2001, as part of its efforts to advance the PMA initiative, OMB revised Circular No. A-11 to require 16 federal agencies (15 of the then 24 Chief Financial Officer’s (CFO) Act agencies and the Railroad Retirement Board) to submit improper payment data, assessments, and action plans for about 50 programs to OMB with their initial budget submissions. Specifically, the circular required that agencies submit information including estimated improper payment rates, target rates for future reductions in these payments, the types and causes of these payments, and variances from targets or goals established. In addition, agencies were to provide a description and assessment of the current methods for measuring the rate of improper payments and the quality of data resulting from these methods. Agencies were to first include this improper payment information in their initial fiscal year 2003 budget submissions. A June 2002 revision to the circular removed the Agency for International Development from the list and reduced the number of programs for which improper payment information was required to 46. (App. II lists the agencies and programs.) In November 2002, the Congress passed the IPIA. The law requires agency heads to annually review all programs and activities that they administer and identify those that may be susceptible to significant improper payments. Once agencies identify their susceptible programs, the act requires them to estimate and report on the annual amount of improper payments in those programs and activities. 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 report is also to include a discussion of the causes of the improper payments identified, actions taken to correct those causes, and the results of the actions taken to address those causes. The act further requires OMB to prescribe guidance for federal agencies to use in implementing the act. OMB issued this guidance in Memorandum M- 03-13 in May 2003. It requires use of a systematic method to annually review and identify those programs and activities that are susceptible to significant improper payments. OMB guidance defines significant improper payments as annual improper payments in any particular program exceeding both 2.5 percent of program payments and $10 million. The OMB guidance then requires agencies to estimate the annual amount of improper payments 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, the IPIA and related OMB guidance require each agency to report the results of its improper payment efforts in the Management Discussion and Analysis (MD&A) section of its PAR for fiscal years ending on or after September 30, 2004. The IPIA requires the following information in their reports: 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; a statement of whether the agency has the information systems and other infrastructure it needs in order to reduce improper payments to the agency’s targeted levels; if the agency does not have such systems and infrastructure, a description of the resources the agency has requested in its most recent budget submission to obtain the necessary information systems and infrastructure; and a description of the steps the agency has taken and plans to take to ensure that agency managers (including the agency head) are held accountable for reducing improper payments. OMB’s guidance in M-03-13 requires that three additional things be included in the report: a discussion of the amount of actual erroneous payments that the agency expects to recover and how it will go about recovering them; a description of any statutory or regulatory barriers that may limit the agency’s corrective actions in reducing erroneous payments; and provided the agency has estimated a baseline erroneous payment rate for the program, a target for the program’s future erroneous payment rate that is lower than the agency’s most recent estimated error rate. On July 22, 2004, OMB, working with the CFO Council’s Improper Payments Committee, issued a standardized reporting format, or framework, for reporting IPIA information. This framework was included as Attachments 2 and 3 to OMB Memorandum M-04-20, “Fiscal Year 2004 Performance and Accountability (PAR) and Reporting Requirements for the Financial Report of the United States Government.” To satisfy the reporting requirements of the IPIA for fiscal year 2004, the framework instructed agencies to provide a brief summary of both what they have accomplished and what they plan to accomplish in the MD&A portion of the fiscal year 2004 PAR. All other required reporting details are to be included in an appendix to the PAR. The framework for the information reported in the appendix incorporates the requirements set forth in the law and further illustrates the reporting format required in OMB’s implementation guidance. Under accelerated financial reporting requirements of the PMA, agency fiscal year 2004 PARs were due November 15, 2004. Accordingly, the first set of reports representing the results of agencies’ assessing improper payments for all federal programs in accordance with the IPIA and OMB guidance were due in November 2004. In August 2004, OMB established Eliminate Improper Payments as a new program-specific initiative. With this new program initiative, 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. This initiative is also to have its own scorecard requirements and rating beginning with fiscal year 2005. With the establishment of this new program-specific initiative, agency efforts to address improper payment issues will no longer be tracked under the governmentwide initiative, Improved Financial Performance. In our December 2004 report on the U.S. government’s consolidated financial statements for the fiscal years ended September 30, 2004 and 2003, which includes our associated opinion on internal control, we reported that while most agencies acknowledged the IPIA reporting requirements in their PARs, they did not always indicate whether they had completed agencywide assessments, and they did not estimate improper payments for all of their susceptible programs. In response to the new requirements of the IPIA, agencies overall made progress in identifying programs susceptible to the risk of improper payments. At the same time, our reviews of the fiscal year 2004 PARs for 29 of 35 federal agencies that are significant to the U.S. government’s consolidated financial statements suggest that even with the enhanced emphasis on improper payment reporting fueled by the new legislation, certain agencies have not yet performed risk assessments of all their programs. Appendix III lists the agencies included in this review. In its guidance on implementing the IPIA, OMB required agencies to institute a systematic method of inventorying all programs and activities and identifying those the agency believes are susceptible to the risk of significant error. OMB further instructed agencies to describe, in their PARs, the risk assessments performed. We determined that 23 of the 29 agencies reviewed reported that they had completed risk assessments for all programs and activities. Of the 15 agencies with prior reporting requirements under OMB Circular No. A-11, 12 reported that they had performed comprehensive inventories and assessed the risk of improper payments for all their programs and activities. Three of the 15 agencies stated that their risk assessments were not complete for all programs and activities. Of those 14 agencies without prior reporting requirements, 11 agencies reported that they had completed risk assessments for all programs and activities, whereas 3 agencies reported that they had not. Recognizing weaknesses in agency risk assessments, three agency auditors cited noncompliance with the IPIA in their annual auditor’s reports included in the agency PARs. For example, two agency auditors each reported that their agency’s risk assessment did not consider all payment types or programs. Another auditor reported the agency did not institute a systematic method of reviewing all programs and identifying those it believed were susceptible to significant erroneous payments. Once agencies have identified programs that may be susceptible to significant improper payments, developing statistically valid estimates of the amounts of improper payments for their programs and activities has been a further challenge. Appendix IV lists the 29 agencies and 70 programs for which we reviewed fiscal year 2004 PARs for improper payment reporting. In the 29 agency PARs included in our review, 17 agencies reported over $45 billion of improper payments in 41 programs. This represented almost a $10 billion, or 27 percent, increase in the dollar amount of improper payments reported by agencies in fiscal year 2003. However, we determined that this increase was primarily attributable to changes in the method for estimating and reporting improper payment amounts in the Department of Health and Human Services’ Medicare Program. The 24 agency programs with no prior reporting requirements reported improper payment estimates that did not significantly increase the governmentwide total. As discussed earlier, OMB Circular No. A-11 has required certain agencies to report selected improper payment information on 46 programs to OMB beginning 3 years ago with their fiscal year 2003 budget submissions. We found that for 34 of the programs, agencies reported estimates in their fiscal year 2004 PARs or stated that improper payment amounts were insignificant. As shown in table 1, the governmentwide estimate did not include the remaining 12 programs with total outlays of $248.7 billion in 2004. This included some of the largest risk-susceptible federal programs, such as the Department of Health and Human Services’ Medicaid Program, with outlays exceeding $175 billion annually, or the Department of Education’s Title I Program, with outlays of over $10 billion annually.