oversight

U.S. Department of Education's Compliance with Executive Order 13520, "Reducing Improper Payments" for Fiscal Years 2012 ands 2013

Published by the Department of Education, Office of Inspector General on 2014-09-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

    U.S. Department of Education’s Compliance With 

Executive Order 13520, “Reducing Improper Payments” for 

               Fiscal Years 2012 and 2013

 

                                 FINAL AUDIT REPORT 





                                                             

                                              

                                    ED-OIG/A03N0004 

                                    September 22, 2014 





Our mission is to promote the                              U.S. Department of Education
efficiency, effectiveness, and                             Office of Inspector General
integrity of the Department’s                              Philadelphia, Pennsylvania
programs and operations.
 




                                NOTICE 




    Statements that managerial practices need improvements, as well as
    other conclusions and recommendations in this report, represent the
      opinions of the Office of Inspector General. Determinations of
        corrective action to be taken will be made by the appropriate
                     Department of Education officials.



    In accordance with the Freedom of Information Act (5 U.S.C. § 552),
       reports issued by the Office of Inspector General are available to
      members of the press and general public to the extent information
           contained therein is not subject to exemptions in the Act.
                        UNITED	STATES	DEPARTMENT	OF	EDUCATION
	
                                        OFFICE	OF	INSPECTOR	GENERAL
 




September 22, 2014


TO:            Thomas P. Skelly
               Delegated the Authority to Perform the Functions and Duties
               of the Chief Financial Officer
               Office of Chief Financial Officer
               Lead Action Official

               John W. Hurt, III
               Chief Financial Officer
               Federal Student Aid

FROM:          Patrick J. Howard /s/
               Assistant Inspector General for Audit

SUBJECT:       Final Audit Report
               “U.S. Department of Education’s Compliance with Executive Order 13520,
               ‘Reducing Improper Payments’ for Fiscal Years 2012 and 2013”
               Control Number ED-OIG/A03N0004


Attached is the subject final audit report that covers the results of our review of the Department’s
compliance with Executive Order 13520 for the period from October 1, 2011, through September
30, 2013. An electronic copy has been provided to your Audit Liaison Officers. We received
your comments partially concurring with the finding and nonconcurring with the
recommendation.

Corrective actions proposed (resolution phase) and implemented (closure phase) by your offices
will be monitored and tracked through the Department’s Audit Accountability and Resolution
Tracking System. The Department’s policy requires that you develop a final corrective action
plan (CAP) for our review in the automated system within 30 days of the issuance of this report.
The CAP should set forth the specific action items, and targeted completion dates, necessary to
implement final corrective actions on the finding and recommendation contained in this final
audit report.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector




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Page 2 of 2 - Final Audit Report
U.S. Department of Education’s Compliance with Executive Order 13520, “Reducing Improper Payments for Fiscal
Years 2012 and 2013”, Control Number ED-OIG/A03N0004
 
General is required to report to Congress twice a year on the audits that remain unresolved after
6 months from the date of issuance.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the
extent information contained therein is not subject to exemptions in the Act.

We appreciate the cooperation given us during this review. If you have any questions, please
call Bernard Tadley, Regional Inspector General for Audit, at 215-656-6279.

Attachment

cc: 	   James Runcie, Chief Operating Officer, FSA
        Karen Sefton, Audit Liaison Officer, FSA
        Abigail Cornish, Audit Liaison Officer, OCFO
        William Blot, Supervisory Systems Accountant, FSA
        Phillip Juengst, Director of Internal Control, OCFO
        Mark Reger, Interim Controller, Office of Management and Budget




                                                       
 


                       Abbreviations, Acronyms, and Short Forms 

                                  Used in this Report 



AFR                   Agency Financial Report

Department            U.S. Department of Education

DRT                   Data Retrieval Tool

FAFSA                 Free Application for Federal Student Aid

FSA                   Federal Student Aid

FY                    Fiscal Year

FY 2012 Accountable FY 2012 Accountable Official’s Report on the Pell Grant
Official’s Report   High-Priority Program

FY 2013 Accountable FY 2013 Accountable Official’s Report on the Pell Grant
Official’s Report   High-Priority Program

IRS                   Internal Revenue Service

NSLDS                 National Student Loan Data System

OIG                   Office of Inspector General

OMB                   Office of Management and Budget

Pell                  Federal Pell Grant




                                              
Final Audit Report                                                                                     Page 1 of 15
ED-OIG/A03N0004

                                                               RESULTS IN BRIEF

Executive Order 13520, “Reducing Improper Payments,” mandates that Federal agencies with
high-priority programs intensify efforts to eliminate payment error, waste, fraud, and abuse in the
major programs administered by the Federal Government. The Executive Order requires that
Federal agencies with high-priority programs1 name an accountable official to oversee an
agency’s efforts to reduce improper payments. In fiscal year (FY) 2010, the Office of
Management and Budget (OMB) designated the Federal Pell Grant (Pell) program as the only
high-priority program administered by the U.S. Department of Education (Department). The Pell
program provides need-based grants to low-income undergraduate and certain post-baccalaureate
students for postsecondary education.

The Executive Order and implementing OMB guidance require an accountable official to report
annually to its agency’s Office of Inspector General (OIG) on the agency’s methodology for
identifying and measuring improper payments by the program, the agency’s plans for meeting
improper payment reduction targets in the program, and the agency’s plan for ensuring that its
efforts to reduce improper payments do not unduly burden eligible beneficiaries’ access and
participation in the program. The OIG is required to review the accountable official’s annual
report for compliance with the Executive Order requirements.

What We Did

Our audit focused on the Department’s FY 2012 and FY 2013 Accountable Official’s Reports on
the Pell Grant High-Priority Program (FY 2012 Accountable Official’s Report and FY 2013
Accountable Official’s Report, respectively).2 The FY 2012 Accountable Official’s Report
covered the period from October 1, 2011, through September 30, 2012, and the FY 2013
Accountable Official’s Report covered the period from October 1, 2012, through
September 30, 2013. Our objective was to determine whether the Department’s FY 2012 and
FY 2013 Accountable Official’s Reports complied with the requirements of Executive Order
13520 “Reducing Improper Payments,” adequately addressed improper payment risks, and
described an adequate level of oversight by Federal Student Aid (FSA) to reduce and recapture
improper payments.




                                                            
1
   A high-priority program is a program that is susceptible to significant improper payments as defined by legislation 

and OMB implementing guidance. For FY 2011, the error threshold for high priority programs was $750 million in

improper payments, as reported in an agency’s Agency Financial Report or Performance and Accountability Report. 

(OMB Circular A-123, Appendix C, Part III, Requirements for Implementing Executive Order 13520, “Reducing

Improper Payments,” March 22, 2010).
  
2
   On July 2, 2014, we added the FY 2013 Accountable Official’s Report to the audit scope and objective.  



                                                                        
Final Audit Report                                                                                Page 2 of 15
ED-OIG/A03N0004
What We Found

We found that for both FY 2012 and FY 2013, the Department complied with Executive Order
13520, adequately addressed improper payment risks, and described an adequate level of
oversight to reduce and recapture improper payments. However, we found that the Department
still had not addressed monitoring and oversight of the most significant root cause of potential
improper payments, inaccurate self-reported income, for Pell program applicants who (1) do not
use the Internal Revenue Service (IRS) Data Retrieval Tool (DRT) when completing their Free
Application for Federal Student Aid (FAFSA) and (2) are not selected for verification of self-
reported income. We had a similar finding in our audit of the FY 2011 Accountable Official’s
Report. The IRS DRT enables financial aid applicants to transfer certain income and tax
information from an IRS Web site directly to their online FAFSA. Verification is a process that
schools are required to conduct to confirm specific information the applicant reported on the
FAFSA. OMB guidance states that agencies shall identify the reasons their programs and
activities are at risk of improper payments and put in place a corrective action plan to reduce
them.3

What We Recommend

The Department should include the self-reported income component in a study of Pell program
recipients who do not use the IRS DRT and who are not selected for verification. This study will
assist the Department in determining whether it has adequate controls in place to mitigate the
risk of improper payments to that population of Pell program recipients.

In April 2014, we provided a draft of the finding and recommendation, based on our audit of the
FY 2012 Accountable Official’s Report, to the Department for comment. The Department
partially concurred with the finding and did not concur with the recommendation. We
summarized the Department’s response at the end of the finding and included its written
response as an appendix to this report.

In August 2014, we provided a draft of the finding and recommendation, based on our review of
the FY 2013 Accountable Official’s Report, to the Department for comment. The Department
instructed us to consider its previous response as the final response to our audit of both the
FY 2012 and FY 2013 Accountable Official’s Reports.




                                                            
3
    OMB Circular A-123, Appendix C, Part I, “Improper Payment Elimination and Recovery,” April 14, 2011.  


                                                                
Final Audit Report                                                                    Page 3 of 15
ED-OIG/A03N0004

                                      BACKGROUND

Executive Order 13520, “Reducing Improper Payments”
On November 20, 2009, the President signed Executive Order 13520 (74 Federal Register 62201,
November 25, 2009), which states that when the Federal Government makes payments to
individuals and businesses as program beneficiaries, grantees, or contractors, or on behalf of
program beneficiaries, it must make every effort to confirm that the right recipient is receiving
the right payment for the right reason at the right time. The purpose of the order was to reduce
improper payments by intensifying efforts to eliminate payment error, waste, fraud, and abuse in
the major programs administered by the Federal Government, while continuing to ensure that
Federal programs serve and provide access to their intended beneficiaries. The order mandates
that OMB and Federal agencies with high-priority programs, such as the Pell program, take
actions to reduce and prevent improper payments and report on these efforts.

OMB Circular A-123, Appendix C, Part III, “Requirements for Implementing Executive Order
13520, Reducing Improper Payments,” March 22, 2010, provides guidance for the
implementation of Executive Order 13520.

Improper Payments 
Under Section 2(f)(2) of the Improper Payments Information Act of 2002 (Pub. L.107-300), as
amended by the Improper Payments Elimination and Recovery Act of 2010 (Pub. L.111-204), an
improper payment is any payment that should not have been made or that was made in an
incorrect amount (including overpayments and underpayments) to eligible recipients. An
improper payment also includes any payment made to an ineligible recipient, payment for an
ineligible good or service, or payments for goods or services not received. In addition, according
to OMB Circular A-123, Appendix C, Part I, if an agency cannot determine whether a payment
is proper because of insufficient or lack of documentation, the agency must also consider this
payment an error.

Accountable official reports must include the agency’s methodology for calculating the high-
priority program’s estimated improper payment rate, plans for meeting improper payment
reduction targets, and plans to ensure program access and participation by eligible beneficiaries.
Under OMB Circular A-123, Appendix C, Part III, Section C, the report to the agency’s OIG
must contain the following.

       1.	 A description of the agency’s methodology for obtaining a statistically valid estimate
           of annual improper payments. This information should include the improper payment
           rate measurement methodology, sample size and related calculations, results of
           annual measurements, and other measurement-related information as applicable.




                                                  
Final Audit Report                                                                              Page 4 of 15
ED-OIG/A03N0004
              2. The agency’s plans and supporting analysis for meeting the reduction targets for
                 improper payments, which include
                     root causes of error in the program;
                     corrective actions that are being implemented and their full implementation
                        date;
                     the types of errors the corrective actions will address and their expected
                        impact;
                    	 the anticipated costs of the corrective actions and their likely return on
                        investment (that is, amount of errors prevented or reduced for each dollar
                        spent); and
                    	 an explanation of the program’s performance in meeting its reduction targets.

              3. 	 The agency’s plan, together with supporting analysis, for ensuring that initiatives to
                   reduce and prevent improper payments do not unduly burden program access and
                   participation by eligible beneficiaries.

OMB designates a program as high-priority based on improper payment information in an
agency’s annual Agency Financial Report (AFR) or Performance and Accountability Report and
annually reevaluates the high-priority program list after agencies publish those reports.
Beginning with FY 2010 reporting and for all subsequent years, OMB will notify agencies of the
new improper payment threshold4 and whether any programs will be added or removed (based
on reporting errors above or below the new threshold) from the high-priority list within
30 calendar days of the agency publishing its AFR or Performance and Accountability Report.
OMB designated the Pell program, which FSA administers, as a high-priority program in
FY 2010. The Department issued its FY 2012 Accountable Official’s Report on March 15, 2013,
and its FY 2013 Accountable Official’s Report on April 11, 2014.

The agency’s OIG is responsible for reviewing the agency’s accountable official’s report for
compliance with Executive Order 13520. Additionally, the OIG must assess the level of risk
associated with the applicable programs; determine the extent of oversight warranted; and
provide the agency head with recommendations, if any, for modifying the agency’s
methodology, improper payment reduction plans, or program access and participation plans.




                                                            
4
 The threshold for FY 2012 and FY 2013 is $750 million in improper payments as reported in the AFR or
Performance and Accountability Report.  


                                                                
Final Audit Report                                                                                  Page 5 of 15
ED-OIG/A03N0004

                              COMPLIANCE WITH EXECUTIVE ORDER 13520

We found that the Department complied with the Executive Order 13520 as it related to the Pell
program for each of the following compliance areas:

       1.	 Reported Improper Payment Rate Measurement Methodology, Sample Size, Results
           of Annual Measurements, and Related Calculations
           The Department complied with the requirement to report its improper payment rate (error
           rate) measurement methodology, sample size, and the results of annual measurements
           and related calculations for both the FY 2012 and FY 2013 Accountable Official’s
           Reports. The Department reported that the improper payment rates for both fiscal years
           were based on the OMB-approved methodology: the FAFSA/IRS Data Statistical Study.
           The Department also used a proposed alternate estimation methodology, which was based
           on program reviews, to calculate an improper payment rate. The proposed estimation
           methodology includes a baseline statistical estimate with a stated confidence interval
           based on data from the results of program reviews of schools. This methodology was
           pending OMB approval at the time of our audit.

              For FY 2012, the OMB-approved methodology to calculate the improper payment rate
              was based on a sample of 3,299,819 applicants drawn from the Title IV Central
              Processing System. Based on the Department’s analysis, the error rate was 2.49 percent,
              resulting in estimated improper payments of $829 million. 

              Using the proposed alternate methodology, the improper payment rate was based on the
              analysis of a sample of 802 students across 61 institutions with program reviews
              conducted from October 1, 2011, through May 31, 2012. Based on the Department’s
              analysis, the error rate was 2.10 percent5, resulting in estimated improper payments of
              $699 million.

              For FY 2013, the OMB-approved methodology to calculate the improper payment rate
              was based on a sample of 1,375,256 applicants drawn from the Title IV Central
              Processing System. Based on the Department’s analysis, the error rate was 2.26 percent,
              resulting in estimated improper payments of $731 million. Using the proposed alternate
              methodology, the error rate was 2.22 percent, or $718 million.




                                                            
5
  The 2.10 percent error rate the Department improperly reported was the lower bound of the estimate’s confidence
interval; the point estimate was 3.36 percent and the upper bound of the estimate’s confidence interval was
4.62 percent. 


                                                                
Final Audit Report                                                                                     Page 6 of 15
ED-OIG/A03N0004
              Improper Payment Rate Percentages and Amounts by Methodology and Fiscal Year
                 Fiscal Year                 FAFSA/IRS Data Statistical Study         Program Reviews
                                              Percentage  Amount (millions)     Percentage      Amount
                                                                                               (millions)
                       2012                           2.49        $829             2.10          $699
                       2013                           2.26        $731             2.22          $718

              In our reports on the Department’s compliance with the Improper Payments Elimination
              and Recovery Act of 2010 (IPERA) for FY 2012 and FY 2013, we found weaknesses
              with both methodologies: the FAFSA/IRS Data Statistical Study and the program
              reviews.6 For FY 2012 and FY 2013, we found that the estimation methodology based on
              the FAFSA/IRS Data Statistical Study did not consider populations of recipients who
              may pose a higher risk of improper payments and did not consider all potential sources of
              improper payments. Specifically, the FAFSA/IRS Data Statistical Study did not analyze
              non-matches with the U.S. Social Security Administration or IRS, eligibility factors other
              than an applicant’s income, and recalculations of a Pell grant award when a recipient’s
              enrollment status changes. For FY 2013, we found that the estimation methodology based
              on program reviews was not complete, because the Department was unable to include in
              the calculation data from a significant number of program reviews. In addition, for
              FY 2012, we found that the estimation methodology based on program reviews replaced
              the point estimate with its confidence interval’s lower bound and excluded other sources
              of potential improper payments, such as the FAFSA/IRS Data Statistical Study and the
              work of the OIG.

       2. Reported Root Causes of Errors in the Program
          The Department complied with the requirement to report the root causes of Pell program
          errors in both the FY 2012 and FY 2013 Accountable Official’s Reports. The Department
          identified the inaccuracy of self-reported financial income on the FAFSA as the most
          significant root cause of potential Pell program improper payments and deemed the error
          to be a verification error,7 as defined in OMB Circular A-123, Appendix C, Part III,
          (B)(1)(b). The report also identified documentation and administrative errors8 as a root
          cause of improper payments in the Pell program.



                                                            
6
   “U.S. Department of Education’s Compliance with the Improper Payments Elimination and Recovery Act of 2010
for Fiscal Year 2012,” and “U.S. Department of Education’s Compliance with the Improper Payments Elimination
and Recovery Act of 2010 for Fiscal Year 2013.”  
7
   Verification errors are errors caused by the failure or inability to verify recipient information or errors due to
beneficiaries failing to report correct information to an agency.  
8
  Documentation and administrative errors are errors caused by the absence of supporting documentation necessary
to verify the accuracy of a payment; or errors caused by incorrect inputting, classifying, or processing of
applications or payments.  


                                                                      
Final Audit Report                                                                                           Page 7 of 15
ED-OIG/A03N0004
              Root Causes of Improper Payments Identified for Pell Grants
                                                                                      Documentation and
                         Fiscal Year                           Verification Errors
                                                                                     Administrative Errors
                                2012                                  64%                    36%
                                2013                                  73%                    27%

       3. Reported Corrective Actions and Implementation Date
          The Department complied with the requirement to report corrective actions and related
          implementation dates to address the root cause of improper payments in the Pell program
          for both the FY 2012 and FY 2013 Accountable Official’s Reports.

              The FY 2012 Accountable Official’s Report stated that its corrective actions will include
              a test of its internal controls on Pell program payments, as a function of the FY 2013
              OMB Circular A-123, Appendix A assessment,9 for students who did not use the IRS
              DRT and who were not selected for verification (this corrective action is discussed in
              Finding No. 1 of this report). The Department also stated that FSA continues to use two
              corrective actions reported in the FY 2011 Accountable Official’s Report: the IRS DRT
              and school’s verification of income reported by applicants.

              In addition, the Department noted in the FY 2012 Accountable Official’s Report that it
              implemented new controls to address issues related to the Pell program. The new controls
              are enhancements to student eligibility functionality in FSA systems. The new
              functionality includes a Pell program Lifetime Eligibility Used percentage and warning
              indicator, and an Unusual Enrollment History indicator in the Institutional Student
              Information Record process. The Department also noted that schools administering the
              Pell program are also subject to corrective actions through FSA’s program review
              process.

              For the FY 2013 Accountable Official’s Report, the Department implemented two
              additional new controls to address issues related to the Pell program. The new controls
              consist of the National Student Loan Data System (NSLDS) Fraud Loan Flag, and two
              new IRS Display Flags added to the Central Processing System and included in FAFSA
              reports sent to institutions and students: the Student IRS Display Flag and the Parent IRS
              Display Flag.

              The NSLDS Fraud Loan Flag notifies both the institution and the FAFSA applicant that
              NSLDS indicates a student has one or more student loans that may have been obtained
              fraudulently, and as a result, is not eligible to receive any student aid until the issue is
              resolved.
                                                            
9
    OMB Circular A-123, Appendix A, “Internal Control Over Financial Reporting.”  


                                                                                 
Final Audit Report                                                                                    Page 8 of 15
ED-OIG/A03N0004


              The IRS Display Flags inform schools whether the student or parent completing the
              FAFSA was given the option to use the IRS DRT. For example, the IRS DRT is not
              available to applicants who use a paper FAFSA, have a conflict between the marital
              status reported on the FAFSA and the tax return filing status, or filed an amended tax
              return. The IRS Display flags are used in addition to the Student IRS Request Flag and
              Parent IRS Request Flag, which describe the student or parent's use of the IRS DRT. The
              IRS Request Flags inform schools if the applicant was eligible for the IRS DRT, if the
              data was retrieved from the IRS, and if the data from the IRS was modified.

              The Department also noted that it continues to utilize the verification process as a key
              action in addressing the inaccuracies on the FAFSA by enhancing verification regulations
              which are published in the Federal Register annually.

              In addition, the Department reported that it continues to refine the verification process
              and to conduct statistical analysis to establish the most effective and efficient criteria for
              selecting applicants for verification who have the highest probability of error on their
              FAFSA submissions. Changes to the 2014-2015 award year include adding “other
              untaxed income” and “identity/statement of educational purpose”10 to the FAFSA items
              selected for the verification process.

       4.	 Reported the Types of Errors the Corrective Actions Will Address and Their
           Expected Impact
           The Department complied with the requirement to report on the types of errors and the
           expected impact that the reported corrective actions will address for both the FY 2012
           and FY 2013 Accountable Official’s Reports. The FY 2012 Accountable Official’s
           Report indicated that its internal control testing should determine whether its existing
           controls are sufficient to mitigate the risks of improper payments. Both the FY 2012 and
           FY 2013 Accountable Official’s Reports indicated that the Department continues to use
           the IRS DRT and school verification of income because it expects these corrective
           actions contribute to fewer instances of inaccurate self-reported financial information and
           a reduction in improper payments.




                                                            
10
  Identity/statement of educational purpose requires that the student appear in person at the school and present a
valid, government-issued photo identification. The student must also sign a statement of educational purpose that
certifies who they are and that the Federal student aid they may receive will be used only for educational purposes
and for the cost of attending the school for the corresponding school year (students who are unable to appear in
person must use a notary public to sign the statement of educational purpose, and then submit supporting
documentation to the school for verification). 


                                                                
Final Audit Report                                                                                 Page 9 of 15
ED-OIG/A03N0004
       5.	 Anticipated Cost of Corrective Actions and Return on Investment
           The Department complied with the requirement to report on the anticipated cost of the
           corrective actions and the return on the investment from implementing the corrective
           actions for both the FY 2012 and FY 2013 Accountable Official’s Reports. The
           Department stated that the anticipated costs to improving the IRS DRT so that more
           FAFSA applicants use the tool are marginal compared to projected savings and increased
           simplicity of use. The Department stated that the increased cost to schools and colleges
           that performed the income verification was more significant, but it could not estimate
           those costs. However, the Department stated that to the extent applicants use the IRS
           DRT, school verification efforts will be reduced.

       6.	 Explained Program’s Performance in Meeting its Reduction Targets
           The Department complied with the requirement to explain the Department’s performance
           in meeting the reduction targets for the Pell program for both the FY 2012 and FY 2013
           Accountable Official’s Reports. For the last six fiscal years (2008 through 2013) the
           Department reported a decrease in annual improper payment and target rates from
           3.69 percent in FY 2008, to 2.26 percent in FY 2013, as measured using estimates based
           on the FAFSA/IRS Study. The Department received approval from OMB to keep the
           target rate at its most recent reported improper payment rate estimate.11

       7.	 Reported Plan for Ensuring Initiatives Do Not Unduly Burden Program Access
           The Department complied with the requirement to report its plan for ensuring that its
           initiatives for reducing Pell program improper payments do not unduly burden
           participants’ access to the program for both the FY 2012 and FY 2013 Accountable
           Official’s Reports. The Department’s efforts include using the IRS DRT, decreasing the
           average time it takes to complete the FAFSA online, and offering additional FAFSA
           application methods. FSA’s Customer Experience group announced a new partnership
           alliance between FSA and the IRS that will focus on reaching more people in low- to
           moderate-income communities with the goal of providing them with information,
           assistance, and access to relevant IRS and FSA services. In addition, the FY 2013
           Accountable Official’s Report noted a new IRS “Get Transcript Online” tool enabling the
           tax filer to request and receive their tax transcripts more easily, which potentially reduces
           the burden on FAFSA applicants who are requested to provide their transcripts to the
           schools for verification. The Department believes that its efforts will reduce improper
           payments without burdening applicants’ program access and participation.




                                                            
11
 The FY 2012 Accountable Official’s Report reflected a target rate of 2.49 percent through FY 2015, while the
FY 2013 Accountable Official’s Report reflected a target rate of 2.26 percent through FY 2016.  


                                                                
Final Audit Report                                                                    Page 10 of 15
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Improper Payment Risk
The Department complied with the requirement to adequately address improper payment risks.
Both the FY 2012 and FY 2013 Accountable Official’s Reports identified the inaccuracy of self-
reported financial income on the FAFSA as the most significant root cause (risk) of potential
improper payments. In addition, the Department stated that it has implemented significant
controls to prevent and detect inaccurate data and to mitigate the risk that inaccurate data results
in improper payments. Some of the controls include data checks or edits on FAFSA data within
the Central Processing System, matching FAFSA data against various authentication sources,
expanding the IRS DRT, and enhancing verification of FAFSA information by schools.

In the FY 2012 Accountable Official’s Report, the Department implemented new control
enhancements in its systems that include a Pell program Lifetime Eligibility Used percentage and
warning indicator, and an Unusual Enrollment History indicator in the Institutional Student
Information Record process.

In the FY 2013 Accountable Official’s Report, the Department implemented two additional
control enhancements in its systems. These enhancements include the NSLDS Fraud Loan Flag,
and two new IRS Display Flags added to CPS and included in FAFSA reports sent to schools
and students: the Student IRS Display Flag and the Parent IRS Display Flag.

Although other risks and causes of improper payments exist, the Department believes that its
controls assist it in its efforts to minimize and eliminate improper payments.  

 

 

 

 

 

 

 

 

 

 

 




                                                   
Final Audit Report                                                                  Page 11 of 15
ED-OIG/A03N0004

                       FINDING AND RECOMMENDATION

Level of Oversight by FSA
The Department generally described an adequate level of oversight to reduce and recapture
improper payments in its sole high-priority program. The FY 2012 and FY 2013 Accountable
Official’s Reports described the controls in the Department’s systems, the proposed estimate
methodology, improvement to the IRS DRT, and enhancements to the verification requirements
for schools. All of these elements are part of FSA’s oversight efforts to reduce and recapture
improper payments. However, as we found for FY 2011 (“U.S. Department of Education’s
Compliance with Executive Order 13520, ‘Reducing Improper Payments’ for
Fiscal Year 2011”), we found that again for FYs 2012 and 2013, the Department’s oversight
efforts and improper payment monitoring did not adequately consider the population of Pell
program applicants who did not use the IRS DRT and who were not selected for verification.

FINDING NO. 1 - FSA Needs To Include the Self-Reported Income Component From
                FAFSA in its Analysis of Pell Program Applicants That Did Not Use the
                IRS DRT and Who Were Not Selected for Verification in its Monitoring
                and Oversight Efforts

Both the FY 2012 and FY 2013 Accountable Official’s Reports detailed the Department’s
current and planned monitoring and oversight efforts to reduce Pell program improper payments.
These efforts focus on (1) Pell program applicants who use the IRS DRT to transfer their income
to their FAFSA and (2) Pell program applicants selected for verification. However, the oversight
and monitoring efforts described in both Accountable Official’s Reports did not include a
description of how the Department plans to address inaccurate self-reported data on the FAFSA
and the resulting risk of improper payments to Pell program applicants who do not use the IRS
DRT and who are not selected for verification. OMB Circular A-123, Appendix C, Part I,
Section (A)(7) Step 3c states that agencies must ensure that their managers and accountable
officers, programs, and program officials are held accountable for reducing improper payments.
Part I, Section (A)(14) states that agencies should annually review their existing corrective
actions to determine whether any existing action can be intensified or expanded, resulting in a
high-impact return-on-investment in terms of reduced or prevented improper payments. In
addition, Part I, Section (A)(7) Step 3a states that agencies shall identify the reasons their
programs and activities are at risk of improper payments and put in place a corrective action plan
to reduce them.

We determined that the Department’s corrective actions in response to our report, “U.S.
Department of Education’s Compliance With Executive Order 13520, ‘Reducing Improper
Payments’ for Fiscal Year 2011” (A03M0004), did not adequately address the finding and
recommendation contained in our report. We found that for FY 2011, the Department did not
consider Pell program applicants who did not use the IRS DRT and who were not selected for
verification in its improper payment monitoring and oversight efforts. For these populations of


                                                  
Final Audit Report                                                                   Page 12 of 15
ED-OIG/A03N0004
Pell program applicants, there is a risk of inaccurate self-reporting of income data on the
FAFSA. We recommended that the Department study this population of Pell program applicants
to determine whether adequate controls are in place to mitigate the risk of improper payments to
the population of Pell program applicants who did not use the IRS DRT and who were not
selected for verification.

In response to our prior finding and recommendation, the Department tested its existing controls
to confirm that this population of applicants was eligible to receive a Pell Grant based on Pell
Grant eligibility requirements. Examples of eligibility requirements the Department tested
included an applicant’s graduation status, social security number, signature on application,
citizenship status, and Selective Service status for males. However, the Department did not
include verification of self-reported income in its testing. We identified in our finding, and the
Department also identified, inaccurate self-reported income as the most significant root cause of
improper payments. For this population of Pell program applicants, the risk of improper
payments based on inaccurate self-reporting of income data on the FAFSA remains.

RECOMMENDATION

We recommend that the Chief Financial Officer for the Office of the Chief Financial Officer, in
conjunction with the Chief Financial Officer for FSA, require FSA to —

       1.1 Perform a valid statistical analysis of the Pell program applicants who did not use the
           IRS DRT and who were not selected for verification that includes the most significant
           root cause of potential Pell program improper payments (self-reported income
           component of the FAFSA) to determine whether the Department has adequate
           internal controls in place or needs to implement additional controls to mitigate the
           risk of improper payments to this population of Pell program applicants.  

Department Comments

The Department partially concurred with the draft finding and acknowledged that it did not
verify self-reported income in its testing of the Pell population in question. However, the
Department stated that its risk model for verification selection, based on yearly statistical
analysis, identifies the most error-prone records.

The Department did not concur with the draft recommendation to perform a valid statistical
analysis of Pell applicants who did not use the IRS DRT and who were not selected for
verification. It stated that the various statistical analyses and reviews currently performed
adequately address and mitigate the risk of improper payments.




                                                  
Final Audit Report                                                                    Page 13 of 15
ED-OIG/A03N0004
OIG Response

In its comments to the draft finding, the Department stated that its risk model for verification
selection identifies the most error-prone records. The Department has identified inaccurate self-
reported income as the most significant cause of improper payments. However, the Department
does not have information on how the self-reported income error rate for applicants selected for
verification compares to applicants not selected for verification. Information on these error rates
would help to inform the risk model.

The Department stated that it had determined that its eligibility determination controls were
operating effectively for the Pell program in general and for the population of Pell applicants
who did not use the IRS DRT and who were not selected for verification. The Department
conducted testing of Pell applicants who did not use the IRS DRT and who were not selected for
verification. Based upon this testing, the Department concluded this population was low-risk.
However, the Department acknowledged that the testing performed did not include
authentication or verification of self-reported income data, because the applicants are not
required to provide documentation of income reported by the applicant. As a result, the
Department’s testing provided no basis for concluding that this population of Pell applicants
presented a low risk of reporting inaccurate self-reported income.

Based on the information provided by the Department in response to the draft finding and
recommendation, no changes were made to the final report.
 

                  OBJECTIVES, SCOPE, AND METHODOLOGY

The objectives of our audit were to determine whether the Department’s “FY 2012 and FY 2013
Accountable Official’s Reports on the Pell Grant High-Priority Program” (1) complied with the
requirements of Executive Order 13520, “Reducing Improper Payments;” (2) adequately
addressed improper payment risks; and (3) described an adequate level of oversight by FSA to
reduce and recapture improper payments.

Our audit covered the Department’s FY 2012 and FY 2013 Accountable Official’s Reports and
the Department’s improper payment measurement methodology, plans, and supporting analysis
for reducing and recapturing improper payments and for ensuring access for the Pell program
from October 1, 2011, through September 30, 2013.

Our audit was for the limited purpose described and would not necessarily identify all
deficiencies in internal controls. We gained an understanding of the Department’s internal
controls for preventing improper payments in the Pell program through interviews of Department
officials and reviews of the Department’s processes, plans, and corrective actions detailed below.



                                                   
Final Audit Report                                                                Page 14 of 15
ED-OIG/A03N0004
To accomplish our objectives, we performed the following.

   1.	 Reviewed background information about the Department and the Pell program.

   2.	 Reviewed the following laws, regulations, and guidance:
          a.	 Improper Payments Elimination Recovery Act of 2010;

          b.	 Improper Payments Information Act of 2002;

          c.	 OMB Circular A-123, Appendix C, Parts I and II, “Requirements for Effective
              Measurement and Remediation of Improper Payments,” April 14, 2011;

          d.	 OMB Memorandum M-11-04, “Increasing Efforts to Recapture Improper
              Payments by Intensifying and Expanding Payment Recapture Audits,”
              November 16, 2010;

          e.	 OMB Circular A-123, Appendix C, Part III, “Requirements for Implementing
              Executive Order 13520: Reducing Improper Payments,” March 22, 2010; and

          f.	 Executive Order 13520, “Reducing Improper Payments,” November 20, 2009.

   3.	 Reviewed the Department’s AFR for FYs 2012 and 2013, including the attachment,
       “Improper Payments Reporting Details.” We compared information within the AFRs to
       the applicable Accountable Official’s Report.

   4.	 Reviewed the FY 2012 and FY 2013 Accountable Official’s Reports to determine the
       Department’s compliance with Executive Order 13520. Specifically, we reviewed the
       report to determine whether the Department reported the following:
          a.	 Pell program improper payment rate measurement methodology, sample size,
               results of annual measurements and related calculations;
          b.	 root causes of improper payments in the Pell program; 
          c.	 corrective actions and implementation dates;
          d.	 the types of improper payments the corrective actions will address and their
               expected impact;
          e.	 the anticipated cost of corrective actions and their return on investment;
          f.	 an explanation of the Pell program’s performance in meeting its reduction targets;
               and
          g.	 a plan for ensuring that initiatives to prevent and reduce improper payments do
               not unduly burden program access.

   5.	 Interviewed officials from FSA’s Finance office and FSA’s designated contractor
       (Deloitte Consulting) for its OMB Circular A-123, “Management’s Responsibility for




                                                
Final Audit Report                                                                 Page 15 of 15
ED-OIG/A03N0004
       Internal Control Testing”. Additionally, we consulted with the OIG audit team for
       FY 2013 Improper Payment Elimination and Recovery Act Audit.

   6.	 Reviewed “U.S. Department of Education’s Compliance with the Improper Payments
       Elimination and Recovery Act of 2010 for Fiscal Year 2012,” March 15, 2013,
       ED-OIG/A03N0001. We also reviewed the Department’s corrective action plans in
       response to the recommendation contained in the OIG’s audit of the “U.S. Department of
       Education’s Compliance With Executive Order 13520: Reducing Improper Payments for
       Fiscal Year 2011” (A03M0004).

   7.	 Reviewed “U.S. Department of Education’s Compliance with the Improper Payments
       Elimination and Recovery Act of 2010 for Fiscal Year 2013,” April 2014,
       ED-OIG/A19O0002. 

We performed fieldwork at the Department’s offices, located in Washington, D.C., from
September 18, 2013, through September 19, 2013. We conducted follow-up work from February
10, 2014, through February 13, 2014, and from July 16, 2014, through July 17, 2014. We briefed
Department officials on the results of our audit on April 2, 2014, and on August 7, 2014.

We conducted this audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our finding and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusions based on our audit objectives.




                                                 
                                               Appendix



                       UNITED STATES DEPARTMENT OF EDUCATION

                              OFFlCE OF THE CHIEF FINANCIAL omCBR.




                                                            Apri125,2014

MEMORANDUM

TO:             P<tt Howard
                Assistant Inspector General for Audit
                Office of Inspector General

                Bernie Tadley
                Regional Inspector General for Audit
                Office of Inspector General

FROM:           Thomas P. Skelly   /s/
                Delegated to Perform the Function
                 and Duties of the Chief Financial Office.­
                Office of the Oiief Financial Officer

                John W. Hurt, Ill /s/
                Chief Fmancfal Office.r
                Federal Student Aid

SUBJECT:        Draft Response to OIG Review of the Department's Accountable Official's Report
                llnder Executive Order 13520

We appreciate the opportunity you have given us to respond to the Office of Inspector General's (OIG)
draft report on the Pell Grant High-Priority Program, and the way in wtiic:h you collaborated with the
Department in conducting this review. We are pleased your audit found the Department in compliance
with the Execut.i ve Order 13520, Redudng Improper Payments, as it relates to the Pell Grant Program.

The Department h as wor1ced diligently to im~ement Executive Order 13520. We will c.o ntinue to re­
assess and implement strategies to reduce improper payments in the Pell Grant Program. Our response
to this finding is included below.

Bccmmc tg fl!Mfjnc 1

The Department partially conans with this findi"I:. The Department adnowtedges that verification of
seff-f'eported income was not included in its testing of the !Pell population in question (Pell Program
appliGlnts who did not use the IRS Data Retrieval Tool (ORT) and who were not selected for verification).
However, the Oeipartment contends that its risk model for verification selection, based on year1y
statistical analysis, identifies the most l!fTI>f"-prone records. Annually, the Department selects
approximately 30 pe.-cent of aDFAFSA appliants f<>< veriftcation in accordance with Code of Feder.11
Regulations (34 CfR 668. 51-61) and thi! reanution that 100 pe.-cent verification is not anently .f easible




                                                         
                                                 Appendix



~     2 - Dnft Respon.se to OIG Review of the Department's Accountable OffidaYs Report Under
Executive Order 13520

for over 20 million FAFSA appliolnts. The rurrent verific:Altion process limits the administrative burden on
students and schools while ensuring access to federal student aid is not impacted.

In adcfrtion, over 90 percent of an applicants selected for verification are Pell~ligjble applicants. Thus,
the annual verifiation process is heavily in favor of Pell~ligjble applicants. As previously reported, the
Department considers the use of the IRS ORT when selectini; a record for verification. In most c:ases, if
the student or parent used the IRS ORT and did not change any of the data that was transferred, we will
not select that record for verifiC3tion. This me;ins that we are able to select other, more error prone
Pel~lii;ible appr.ants who did not use the 'IRS ORT within our select:ion pool


Rapgmc: to RupmmmdaJim J

The Department does not concur with the OIG's reconvnendation t o perform a statistical analysis for
applicants who did not use the IRS ORT and who were not selected for verification.

The Department now •performs various statistical analyses of the Pell program, to indude annu;il reviews
of our CPS risk model (to determine who is selected for veriflCiltion) and two improper payment
estimation methodologies. Our historical, OMS-approved improper payment estimation methodology
uses an IRS statistical study to assess for a Uapplicants the most significant root cause of potential PeD
Proi;ram improper payments (i.e., erron; in self-<eported income data on the FAFSA used to determine
eliJ;ibility and the amount of award}. As described in our report we have improved the IRS ORT and have
expanded and streni;thened wrification requil-ements to address this root cause resulting in year-over-
year reductions ·in our impropet" payment rate. Based on upward trends in IRS ORT usage, the
percentage of ~ients who do not use the IRS ORT and who are not selected for verification is
expected to decrease.

Our proposed new estimation methodology that we continue to wort with OMB to review, edit, and
approve expands our analysis to additional improper payment ri$1cs_ Part of our intent in developing this
mettiodology is to better inform root cause analysis, for example by quantifying error by type,
associatini; to a corrective action .(e.g., improved controls), and t ari;etiog specific reductions.

The recommendation states ttiat we should perform this analysis to determine whettier we have
sufficient controls in place to mitigate tfle risk of improper payment to this segme-nt of the population.
We annually assess and have confidence in tfle effectiveness of our ove<all controls OYer Pell payments._
As not.e d in the draft report, for our 2011 correct:ive action we assessed the effectiveness of e lii;ibil'jty
det ermination controls for Pell recipients, induding those who did not use the IRS ORT and who were
not verified, and determined tflat these controls were operating effectively overall and for this segment
of the population. These tests did not include authentication or verification of self-reported income
data for those recipients who did not use ttie IRS ORT and who were not verified, beause these
applicants are not required to provide this d<ltil.

Once again, we appreciat e the opportunity to review and respond to the report. If you have any
questions or need additional information rei;arcfmg this response, please contact Jillf Hurt at (202) 377-
3453.

cc:     Robert Janney, Assistant Regional Inspector General tor Au<frt
        Jolvl Mclemore, Auditor
        Erin Hudson, Auditor