oversight

Financial Management: Challenges Remain in Addressing the Government's Improper Payments

Published by the Government Accountability Office on 2003-05-13.

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

                            United States General Accounting Office

GAO                         Testimony
                            Before the Subcommittee on Government
                            Efficiency and Financial Management,
                            Committee on Government Reform,
                            House of Representatives
For Release on Delivery
Expected at 2:00 p.m. EDT
Tuesday, May 13, 2003       FINANCIAL
                            MANAGEMENT
                            Challenges Remain in
                            Addressing the
                            Government's Improper
                            Payments
                            Statement of McCoy Williams, Director
                            Financial Management and Assurance




GAO-03-750T
                                               May 13, 2003


                                               FINANCIAL MANAGEMENT

                                               Challenges Remain in Addressing the
Highlights of GAO-03-750T, a report to
Subcommittee on Government Efficiency          Government's Improper Payments
and Financial Management, Committee on
Government Reform, House of
Representatives




The Subcommittee asked GAO to                  Improper payments are a longstanding, widespread, and significant problem
testify on the Improper Payments               in the federal government. Agency financial statements for both fiscal years
Information Act (PL-107-300) and               2002 and 2001 identified improper payment estimates of approximately $20
related draft guidance issued by the           billion. OMB recently testified that the amount of improper payments was
Office of Management and Budget                closer to $35 billion annually for major benefit programs. As significant as
(OMB), and on GAO
recommendations to agencies on
                                               these amounts are, they do not represent a true picture of the magnitude of
actions they can take to prevent or            the problem governmentwide because they do not consider other significant
reduce improper payments.                      but smaller programs and other types of agency activities that could result in
                                               improper payments.

                                               Until recently OMB guidance did not require or offer agencies a
                                               comprehensive approach to measuring improper payments, developing and
                                               implementing corrective actions, or reporting on the results of the actions
                                               taken. Improper payment information varied across agencies and programs
                                               and included a mixture of estimated improper payment rates and actual
                                               improper payments, and was reported inconsistently in a variety of places,
                                               including annual financial statements, performance reports, and the federal
                                               budget. None of these reporting mediums provided a comprehensive view of
                                               either the scope of the improper payment problem or of individual agency or
                                               government efforts to reduce it.

                                               We are seeing increased leadership and actions—both from the Congress
                                               and the administration—to address the improper payment problem.

                                               Two recent pieces of legislation provide an impetus for all agencies to
                                               systematically address improper payment activity on an annual basis and to
                                               identify and recover contract overpayments. To illustrate this, the Improper
                                               Payments Information Act of 2002 requires agency heads to annually review
                                               all programs and activities that they administer and identify those
                                               susceptible to improper payments. For those with estimates of significant
                                               improper payments, the legislation requires further analysis and reporting.
                                               The National Defense Authorization Act for fiscal year 2002 contains a
                                               provision that requires agencies entering into sizeable contracts to carry out
                                               a cost recovery program for improper payments made to contractors.

                                               OMB has taken some actions to address our prior improper payment-related
                                               recommendations. For example, it has issued draft guidance for agency use
                                               in identifying and reporting on improper payments within their programs
                                               and activities. Further, preliminary follow up work on our prior
                                               recommendations shows a wide range of agency activities regarding
                                               improper payment identification and reporting. Some agencies have
                                               implemented detailed action plans while others are in the early stages of
www.gao.gov/cgi-bin/getrpt?GAO-03-750T.
                                               such work. OMB and the agencies need to continue to work to identify and
To view the full report, including the scope   measure improper payments, set performance goals, implement corrective
and methodology, click on the link above.      actions, and report results against those goals.
For more information, contact McCoy
Williams at 202-512-6906 or
williamsm1@gao.gov.
Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss the governmentwide improper
payment problem. Specifically, I will discuss leadership actions taken by
the Congress and the Office of Management and Budget (OMB) to address
this problem, and I will highlight the results of our work in this area over
the past few years that address actions agencies can undertake to prevent
or reduce improper payments.

In general, improper payments are payments the government made in
error and often result from a lack of or inadequate systems of internal
controls. We use the term improper payments to include inadvertent
errors such as duplicate payments and miscalculations; payments for
unsupported or inadequately supported claims, payments for services not
rendered, payments to ineligible beneficiaries, and payments resulting
from fraud and abuse by program participants and/or federal employees.

Because improper payments are a longstanding, widespread, and
significant problem in the federal government, few would argue that the
goal of reducing them is not a worthy one. As we testified before this
subcommittee on April 8, 2003,1 improper payment estimates disclosed in
agency financial statements totaled approximately $20 billion each year
for both fiscal years 2002 and 2001. As significant as these amounts are,
they do not present a true picture of the magnitude of the problem
governmentwide. OMB recently estimated the amount of improper
payments at about $35 billion annually. While either of these figures
represent a considerable amount of wasted taxpayer dollars, the scope of
the problem is likely greater because most agencies have not yet estimated
or publicly reported the magnitude of improper payments in their
programs and activities.

The risk of improper payments and the government’s ability to prevent
them has important long-term implications. As the baby boom generation
leaves the workforce, spending pressures will grow rapidly due to
increased costs of programs such as Medicare, Medicaid, and Social
Security. Other federal expenditures are also likely to increase. These
spending pressures and the increased size of federal programs all but



1
  U.S. General Accounting Office, Fiscal Year 2002 U.S. Government Financial
Statements: Sustained Leadership and Oversight Needed for Effective Implementation of
Financial Management Reform, GAO-03-572T (Washington, D.C.: Apr. 8, 2003).



Page 1                                                                  GAO-03-750T
    guarantee that, absent improvement in internal controls and other
    proactive actions, the risk of even more improper payments will exist.

    Our work has demonstrated that attacking improper payment problems
    requires a strategy appropriate to the organization involved and its
    particular risks, including a consideration of the legal requirements
    surrounding security and privacy issues. Our findings in this area have
    resulted in the identification of strategies to address improper payments
    and in governmentwide recommendations for proactive leadership at the
    highest levels of government, in addition to specific procedures designed
    to help agencies better identify, measure, reduce, and report their
    improper payments.

    In October 2001, we issued an executive guide that provided information
    on strategies used successfully by public and private sector organizations
    to address their improper payment problems.2 We found that the entities
    using these best practices shared a common focus of improving the
    internal control system. The components of this control system and a brief
    definition of each follows.

•   Control environment—creating a culture of accountability by establishing
    a positive and supportive attitude toward improvement and the
    achievement of established program outcomes.
•   Risk assessment—performing comprehensive reviews and analyses of
    program operations to determine if risks exist and the nature and extent of
    the risks identified.
•   Control activities—taking actions to address identified risk areas and help
    ensure that management’s decisions and plans are carried out and
    program objectives are met.
•   Information and communications—using and sharing relevant, reliable,
    and timely financial and nonfinancial information in managing improper
    payment related activities.
•   Monitoring—tracking improvement initiatives, over time, and identifying
    additional actions needed to further improve program efficiency and
    effectiveness.




    2
      U.S. General Accounting Office, Strategies to Manage Improper Payments: Learning
    From Public and Private Sector Organizations, GAO-02-69G (Washington, D.C.: Oct.
    2001).



    Page 2                                                                   GAO-03-750T
Most recently, in a report issued last August,3 we pointed out that existing
guidance did not require or offer agencies a comprehensive approach to
measuring improper payments, developing and implementing corrective
actions, or reporting on the results of the actions taken. Improper payment
information varied across agencies and programs and included a mixture
of estimated improper payment rates and actual improper payments.
Moreover, the information was inconsistently reported in a variety of
places, including annual financial statements, performance plans, and the
federal budget. None of these reporting mediums provided a
comprehensive view of either the scope of the improper payment problem
or of individual agency or governmentwide efforts to reduce it. As such,
there is inadequate substantive information for use in establishing (1) a
baseline measure of the extent of improper payments, (2) appropriate
response levels to correct improper payment problems, and (3)
responsibility—holding organizations and/or individuals accountable for
performance and results.

As a result of these findings, we recommended that federal executive
branch agencies assign responsibilities for taking actions to minimize
improper payments and that OMB assist agencies in developing methods
to identify and implement those actions. We also presented matters for
congressional consideration to assist agencies in addressing barriers to
actions to better manage efforts to reduce improper payments and to help
them with improvement efforts.

We are seeing important leadership and action—both from the Congress
and from the administration—to address the improper payment problem.
Today I will highlight these actions and provide my perspective as to their
potential impact. I will also discuss our intent to follow up with the 24
Chief Financial Officer (CFO) Act agencies on our previous
recommendations that address actions agencies can take to prevent and
reduce improper payments.




3
 U.S. General Accounting Office, Financial Management: Coordinated Approach Needed
to Address the Government’s Improper Payments Problems, GAO-02-749 (Washington,
D.C.: Aug. 9, 2002).




Page 3                                                                GAO-03-750T
                        Two recent pieces of legislation—the Improper Payments Information Act
Legislation Mandates    of 20024, and Section 831 of the National Defense Authorization Act for
Agency Actions to       Fiscal Year 20025—provide an impetus for all agencies to systematically
                        address improper payment activity annually, and to identify and recover
Identify and Act on     contract overpayments.
Improper Payment
Problems

Improper Payments Act   The Improper Payments Information Act of 2002, that this subcommittee
                        sponsored, contains stringent requirements in the areas of improper
                        payment review and reporting. Agency heads are to annually review all
                        programs and activities that they administer and identify those that may be
                        susceptible to improper payments. Across-the-board implementation of
                        this provision will significantly increase the number of agencies analyzing
                        their programs and activities for improper payments and coincides with
                        our recommendation that the 24 CFO Act agencies assign responsibility
                        for establishing procedures for assessing agency and program risks of
                        improper payments.

                        Once agencies identify their programs that are susceptible to significant
                        improper payments, the legislation requires agencies to estimate 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 to the Congress on actions they are taking to reduce
                        those errors. The report will also 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 provisions of
                        this legislation coincide with our recommendation that CFO Act agencies
                        take actions to reduce improper payments and report to the Congress,
                        OMB, and the agency head on the progress made in achieving improper
                        payment reduction targets and future action plans for controlling improper
                        payments.

                        The law further requires OMB to prescribe agency guidance to implement
                        the requirements of the act. For years, we have recommended that OMB
                        develop and issue guidance to federal executive agencies to assist them in
                        developing and implementing a methodology for annually estimating and


                        4
                         Pub. L. No. 107-300, 116 Stat. 2350, (2002).
                        5
                         Pub. L. No. 107-107, 115 Stat. 1012, 1186, (2001).



                        Page 4                                                          GAO-03-750T
                    reporting improper payments, and for developing goals and strategies to
                    address improper payments. I will discuss OMB’s actions in this area later
                    in my statement.


Recovery Auditing   Our October 2001 executive guide on improper payments recognized that
Legislation         some improper payments are inevitable and identified and described
                    improper payment detection activities including recovery auditing.
                    Recovery auditing entails examining payment file information to identify
                    possible duplicate or erroneous payments and taking recovery action. Our
                    guide suggested that the techniques used in recovery auditing could be
                    used more in the federal government not only to identify improper
                    payments already made, but also to analyze records prior to payment to
                    prevent improper payments before they occur. In our opinion, it is both
                    faster and cheaper to proactively identify and prevent potential improper
                    payments than to try to detect such errors and collect them after the fact.

                    Section 831 of the National Defense Authorization Act for Fiscal Year 2002
                    contains a provision that requires agencies entering into contracts with
                    costs exceeding $500 million annually 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 agencies to retain recovered funds to cover in-house
                    administrative costs as well as to pay contractors, such as collection
                    agencies. Any residual recoveries, net of these program costs, may be
                    credited back to the original appropriation, subject to restrictions as
                    described in the legislation. With the passage of this law, the Congress has
                    removed multiple barriers and granted agencies a much needed incentive
                    for identifying and reducing their improper payments, in addition to
                    recovering those improper payments that slip through agency prepayment
                    controls. The techniques used in recovery auditing (such as examining
                    payment file information to identify duplicate payments or calculation
                    errors) offer the opportunity for identifying weaknesses in agency internal
                    controls, which can then be modified or upgraded to be more effective in
                    preventing improper payments before they occur. Further, accurate
                    assignment of costs and a functioning cost accounting system to track
                    those costs can assist agency management by providing the information
                    needed to identify agency and contractor expenses reimbursable under
                    this legislation.




                    Page 5                                                          GAO-03-750T
                   OMB’s role in managing, implementing, and overseeing governmentwide
OMB’s Actions to   administrative policy, its interagency perspective, and its leadership role
Address Improper   on the various interagency councils make it a key player in the
                   government’s effort to reduce improper payments. I would like to briefly
Payments           discuss two actions—one legislatively and the other administratively
                   driven.

                   In the legislative area, OMB recently issued draft guidance on
                   implementation of the Improper Payments Information Act of 2002 for
                   agency comment. In this guidance, OMB addressed the specific reporting
                   requirements provided by the act and laid out the steps necessary for
                   agencies to meet those requirements. For example, the draft guidance
                   calculates annual improper payments as the gross total of both over- and
                   under- payments, and sets statistical sampling confidence and precision
                   levels for estimating those payments. It also requires agencies with
                   estimated improper payments in any program or activity exceeding $10
                   million to include, along with the estimated amount, a discussion of the
                   amount of actual improper payments the agency expects to recover and
                   how it will go about recovering them in the Management Discussion and
                   Analysis section of their annual Performance and Accountability Report.
                   These actions will help ensure transparency in reporting for those
                   agencies with programs and activities with significant risks for improper
                   payments.

                   On the administrative side, the President’s Management Agenda has
                   identified improper payments as a key element in the administration’s
                   initiative to improve financial performance throughout the federal
                   government—one of five governmentwide initiatives that the Agenda
                   addressed. As described in the Agenda, OMB will work with agencies to
                   establish goals to reduce improper payments for each program over $2
                   billion. In the past, agencies’ financial statements contained a mix of
                   estimated improper payment rates and actually identified improper
                   payments—this was for those agencies that had, in fact, reported improper
                   payments. OMB now requires agencies to provide an improper payment
                   rate based on a statistical sample projected to the universe of payments
                   made. It revised the guidance in its Circular A-11 to require agencies to
                   distinguish between overpayments, underpayments, and total improper
                   payments, and to define the methodology used to develop their error rate.
                   The revision was intended to ensure consistency in the error rates
                   reported by the agencies. The Circular requires agencies to report this
                   information with their initial budget submissions and prohibits agencies
                   from publicly disclosing these submissions. We have stated in the past
                   and continue to maintain that this information should be in the public

                   Page 6                                                           GAO-03-750T
domain since it is necessary to enable oversight and monitoring by
interested parties, including the Congress and the public.

Our August 2002 report on improper payments included recommendations
to OMB designed to assist agencies with challenges in identifying and
measuring their improper payments, setting performance goals,
implementing corrective actions, and reporting the results against the
goals. OMB has taken some actions to address these recommendations.
For example, in October 2002 testimony before this committee, it
addressed statutory roadblocks faced by the departments of Labor
(Labor), Education (Education), and Housing and Urban Development
(HUD) in gaining access to existing information that those agencies could
use in verifying the employment status and income of applicants.6 OMB
testified that it had proposed legislation to eliminate the data-sharing
barriers at Labor and Education, and that it was in the process of
proposing legislation that would assist HUD in accessing much needed
data that already exists at the Department of Health and Human Services.
While this is a start, identifying and mitigating or eliminating barriers must
be an ongoing process as additional agencies begin to address their
improper payments and identify additional barriers that restrict their
actions to reduce or eliminate improper payments. OMB’s efforts in
working with the Congress and federal agencies to ensure successful
implementation of the provisions of the Improper Payments Information
Act of 2002 and other legislation and administrative actions that can
impact improper payments are critical to the governmentwide effort to
reduce improper payments and facilitate the implementation of our
recommendations.

OMB is providing additional leadership through a joint CFO Council and
President’s Council on Integrity and Efficiency (PCIE) workgroup—the
Improper and Erroneous Payments Work Group—to assist agencies in
identifying and reducing erroneous payments and to produce
documentation that would be meaningful, applied to agencies. The
workgroup surveyed agencies concerning the existing use of improper
payment indicators and benchmarks, analyzed survey responses, and
publicly released lists of indicators and techniques agencies currently use
to identify improper payments.


6
 Office of Management and Budget, Testimony of the Honorable Mark W. Everson, Deputy
Director for Management, before the Subcommittee on Government Efficiency, Financial
Management, and Intergovernmental Relations, Committee on Government Reform,
(Washington, D.C.: Oct. 3, 2002).



Page 7                                                                 GAO-03-750T
                       As noted in our prior reports and testimonies on this topic, there is no
Limited Information    clear picture on the extent of the improper payment problem, only that it
Is Available on        is worse than what is now acknowledged. Relatively few federal agencies
                       and their components publicly report improper payment information such
Improper Payments at   as improper payment rates, causes, and strategies for better managing
Federal Agencies       their programs to reduce or eliminate these payments. In reviewing fiscal
                       year 2001 agency and component financial statements of the 24 CFO Act
                       agencies, we found references to improper payments in just 10 agencies in
                       17 agency programs. This information increased to 17 agencies and 27
                       programs in fiscal year 2002 agency financial statements. Several of the 17
                       agencies that acknowledged the existence of improper payments did not
                       present information on the amounts of those payments. While the fiscal
                       year 2002 information is an improvement over fiscal year 2001 in terms of
                       agencies acknowledging improper payments, merely acknowledging that
                       improper payments exist is simply not enough. It is essential for agencies
                       to develop appropriate methodologies for identifying and measuring those
                       payments, identify cost-effective actions to correct them, implement
                       actions to reduce or eliminate improper payments in their programs and
                       activities, and periodically report to agency managers, the Congress, and
                       the public, through publicly available documents.

                       In our August 2002 report, we made a recommendation to all 24 CFO Act
                       agencies to assign responsibility to a senior agency official for assessing
                       risks, taking actions to reduce, and reporting the results on those actions
                       on agency improper payments. The report described specific actions that
                       we feel are an integral part of that responsibility. As a result of preliminary
                       information received from those agencies, we have found that agencies
                       have begun to assign responsibility to lead and coordinate actions to
                       reduce improper payments. Some agencies have developed detailed action
                       plans to determine the nature and extent of improper payments. Some
                       have set target goals for improper payment rates and have reported
                       progress in their annual accountability reports. For other agencies,
                       methodologies for identifying risks, determining the nature and extent of
                       improper payments, and developing corrective actions are in the early
                       stages of implementation. In ongoing work, we are meeting with officials
                       from the 24 CFO Act agencies to discuss their progress in implementing
                       our recommendations and OMB’s draft guidance on implementing the
                       Improper Payments Information Act of 2002.

                       In closing, I want to emphasize our commitment to continuing our work
                       with the Congress, the administration, and federal agencies to ensure that
                       improper payments are fully addressed governmentwide, and that actions
                       are taken to reduce or eliminate the government’s vulnerabilities to the

                       Page 8                                                            GAO-03-750T
                   significant problem of improper payments. As I stated earlier, recent
                   legislation and other actions have brought the government’s improper
                   payment problems to the forefront. Implementing the legislative
                   provisions and other actions is a shared responsibility that will require
                   continued strong support and active and cooperative involvement from the
                   Congress, the administration, and agency management. Effective
                   implementation of the Improper Payments Information Act of 2002 and
                   recovery auditing should help resolve these problems. Along these lines,
                   OMB needs to continue to work with agencies and groups like the CFO-
                   PCIE Erroneous and Improper Payments Workgroup to address
                   challenges in identifying and measuring their improper payments, setting
                   performance goals, implementing corrective actions, and reporting the
                   results against the goals. Further, agency management must work
                   diligently to establish an environment in which improper payments are not
                   acceptable business practices, evaluate program and activity risks for
                   improper payments, identify and implement appropriate corrective
                   actions, and openly report the progress made in reducing improper
                   payments.

                   Mr. Chairman, this completes my prepared statement. I would be happy to
                   respond to any questions you or other Members of the Subcommittee may
                   have at this time.


                   For information about this statement, please contact McCoy Williams,
Contact and        Director, Financial Management and Assurance, at (202) 512-6906 or at
Acknowledgements   williamsm1@gao.gov. Individuals who made key contributions to this
                   testimony include Tom Broderick, Bonnie McEwan, and Donell Ries.
                   Numerous other individuals made contributions to the GAO reports cited
                   in this testimony.




                   Page 9                                                       GAO-03-750T
Related GAO Products


             Financial Management: Coordinated Approach Needed to Address the
             Government’s Improper Payments Problems. GAO-02-749. Washington,
             D.C.: August 9, 2002.

             Financial Management: Improper Payments Reported in Fiscal Year
             2000 Financial Statements. GAO-02-131R. Washington, D.C.: November 2,
             2001.

             Executive Guide: Strategies to Manage Improper Payments, Learning
             From Public and Private Sector Organizations. GAO-02-69G.
             Washington, D.C.: October 2001.

             Financial Management: Billions in Improper Payments Continue to
             Require Attention. GAO-01-44. Washington, D.C.: October 27, 2000.




(195015)
             Page 10                                                   GAO-03-750T
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