oversight

Financial Management: Effective Implementation of the Improper Payments Information Act of 2002 Is Key to Reducing the Government's Improper Payments

Published by the Government Accountability Office on 2003-07-14.

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 8:00 a.m. CDT
Monday, July 14, 2003
                            FINANCIAL
                            MANAGEMENT
                            Effective Implementation
                            of the Improper Payments
                            Information Act of 2002 Is
                            Key to Reducing the
                            Government’s Improper
                            Payments
                            Statement of McCoy Williams
                            Director, Financial Management and Assurance




GAO-03-991T
                            A
                                               July 14, 2003


                                               FINANCIAL MANAGEMENT

                                               Effective Implementation of the Improper
Highlights of GAO-03-991T, a testimony         Payments Information Act of 2002 Is Key
before the Subcommittee on Government
Efficiency and Financial Management,           to Reducing the Government’s Improper
Committee on Government Reform,
House of Representatives                       Payments


The Subcommittee asked GAO to                  Improper payments are a longstanding, widespread, and significant problem
testify on the implementation of               in the federal government. This past April, OMB estimated improper
the Improper Payments                          payments of about $35 billion annually for major federal benefit programs
Information Act of 2002 (PL 107-               that made payments in excess of $1.2 trillion annually. Importantly, this
300) and related Office of                     estimate does not account for all federal programs and activities.
Management and Budget (OMB)
guidance, and on GAO’s strategies
to reduce improper payments.                   The Improper Payments Information Act of 2002 contains requirements in
                                               the areas of improper payment identification and reporting. It requires
                                               agency heads to annually review all programs and activities, identify those
                                               that may be susceptible to significant improper payments, estimate annual
                                               improper payments in the susceptible programs and activities, and report the
                                               results of their improper payment activities. The legislation also requires
                                               OMB to prescribe guidance for federal agency use in implementing the act.
                                               OMB issued the guidance in May 2003.

                                               OMB’s guidance addresses the specific reporting requirements called for in
                                               the act and lays out the general steps agencies are to perform to meet those
                                               requirements. The guidance defines key terms used in the law, such as
                                               programs and activities, and offers criterion that clarify the meaning of the
                                               term significant improper payments. It requires that agencies use
                                               statistical sampling when estimating improper payments and sets statistical
                                               sampling confidence and precision levels for estimation purposes. It also
                                               requires that agencies report the results of their improper payment activities
                                               in their annual Performance and Accountability Report. As with any
                                               legislation or implementing guidance, the act’s ultimate success hinges on
                                               each agency’s diligence and commitment to identify, estimate, determine the
                                               causes of, take corrective actions, and measure progress in reducing all
                                               improper payments.

                                               Our prior work has demonstrated that attacking improper payment problems
                                               requires a strategy appropriate to the organization involved and its particular
                                               risks. We have found that entities using successful strategies to address
                                               their improper payment problems shared a common focus of improving the
                                               internal control system—the first line of defense in safeguarding assets and
                                               preventing and detecting errors and fraud. The components of the control
                                               system are:

                                               •   control environment—creating a culture of accountability,
                                               •   risk assessment—performing analyses of program operations to
                                                   determine if risks exist,
                                               •   control activities—taking actions to address identified risk areas,
                                               •   information and communications—using and sharing relevant, reliable,
www.gao.gov/cgi-bin/getrpt?GAO-03-991T.
                                                   and timely information, and
To view the full report, including the scope   •   monitoring—tracking improvement initiatives and identifying additional
and methodology, click on the link above.          actions needed to further improve program efficiency and effectiveness.
For more information, contact McCoy
Williams at 202-512-6906 or
williamsm1@gao.gov.
Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss OMB’s guidance1 to federal
agencies on the implementation of the Improper Payments Information Act
of 2002 (Improper Payments Act) and some strategies that federal agencies
should consider when planning and implementing actions to prevent
improper payments.

Improper payments are a longstanding, widespread, and significant
problem in the federal government and few would argue that the goal of
reducing them is not a worthy one. As noted in our prior reports and
testimonies on this topic, there is no clear picture of the extent of the
problem. Historically, relatively few federal agencies and their components
have publicly reported improper payment information such as improper
payment rates, causes, and strategies for better managing their programs to
reduce or eliminate these payments. This past April, OMB estimated
improper payments to be about $35 billion annually for major federal
benefit programs that made payments in excess of $1.2 trillion annually.
Importantly, this estimate does not account for all federal programs and
activities.

Further, 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. The
increased size of federal programs and spending pressures, such as the
implementation of new programs and changes in existing programs, all but
guarantee that, absent improvement in internal controls and other
proactive actions, the risk of even more improper payments will exist.

The Improper Payments Act, which this subcommittee sponsored, defines
improper payments as any payment that should not have been made or that
was made in an incorrect amount (including overpayments and
underpayments) under statutory, contractual, administrative, or other
legally applicable requirements. They include payments to ineligible
recipients or payments for ineligible services. Improper payments also



1
 OMB Memorandum M-03-13, Improper Payments Information Act of 2002, Public Law
107-300 (May 21, 2003).




Page 1                                                              GAO-03-991T
                      include duplicate payments, payments for services not received, and
                      payments that do not appropriately reflect applicable discounts offered.

                      The act contains requirements in the areas of improper payment
                      identification and reporting. It requires agency heads to annually review all
                      programs and activities that they administer, identify those that may be
                      susceptible to significant improper payments, and estimate annual
                      improper payments for those programs and activities identified as
                      susceptible to significant improper payments. Governmentwide
                      implementation of these requirements will significantly increase the
                      number of agencies analyzing their programs and activities for improper
                      payments and coincides with our recommendation that the head of the
                      CFO Act agencies assign responsibility to a senior official for establishing
                      procedures for assessing agency and program risks of improper payments.

                      For programs for which estimated improper payments exceed $10 million,
                      agencies are to report certain information to the Congress including the
                      causes of the improper payments, actions taken to correct those causes,
                      and the results of those actions. This provision coincides with our
                      recommendation that CFO Act agencies 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.



OMB’s Guidance on     The Improper Payments Act requires OMB to prescribe guidance for
                      federal agency use in implementing the act. OMB issued this guidance in
Addressing Improper   May 2003. As with any legislation or implementing guidance, the ultimate
Payments              success of the Improper Payments Act hinges on each agency’s diligence
                      and its commitment to identify, estimate, determine the causes of, take
                      corrective actions, and measure progress in reducing all improper
                      payments.

                      OMB’s guidance addresses the specific reporting requirements called for in
                      the act and lays out the general steps agencies are to perform to meet those
                      requirements. The guidance defines key terms used in the law. For
                      example, it defines the term programs and activities to include “activities
                      or sets of activities recognized as programs by the public, OMB, or the
                      Congress as well as those that entail program management or policy
                      direction.” The guidance specifies that grants include competitive grant
                      programs, regulatory activities, research and development activities, direct
                      federal programs, all procurements including capital assets and service



                      Page 2                                                            GAO-03-991T
acquisition, and credit programs. Also included are agency activities that
support its programs.

As I noted earlier, the act requires agencies to identify programs and
activities that are susceptible to significant improper payments. OMB’s
guidance defines significant erroneous payments as annual erroneous
payments in the program exceeding both 2.5 percent of program payments
and $10 million. (GAO considers the terms improper payments and
erroneous payments to be synonymous.) For those programs and activities
susceptible to significant erroneous payments, the guidance instructs
agencies to calculate annual improper payment estimates based on the
gross total of both overpayments and underpayments, and to set statistical
sampling confidence and precision levels for estimating those payments. It
further requires agencies with estimated improper payments exceeding
$10 million in any program or activity 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.

According to the guidance, information on the results of improper
payment-related efforts will generally be first reported in agency
Performance and Accountability Reports for fiscal years ending on or after
September 30, 2004. These reports should be available in November 2004.
However, the guidance calls for those federal agencies already required by
OMB Circular No. A-11, Preparation and Submission of Budget
Estimates, to report improper payment information in their initial budget
submissions to OMB to also include that improper payment information in
their fiscal year 2003 Performance and Accountability Reports. This will
result in publicly available information on improper payments for about 50
major federal programs, such as Medicare and Food Stamps, about one
year earlier than the reporting date for all other federal programs and
activities.

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 reporting improper payments,
and for developing goals and strategies to address improper payments.
This Improper Payments Act guidance is a good start in this area.




Page 3                                                          GAO-03-991T
Strategies for        Because of the magnitude of improper payments and the actual and
                      potential impact these payments can have on federal programs, it is
Preventing Improper   essential that agencies develop appropriate methodologies for identifying
Payments              and measuring improper payments, identifying cost-effective actions to
                      correct them, implementing those actions, and periodically reporting
                      improper payment-related information to agency managers, the Congress,
                      and the public through publicly available documents. Our prior 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.

                      In October 2001, we issued an executive guide2 that provided information
                      on strategies used successfully by public and private sector organizations
                      to address their improper payment problems. We found that the federal,
                      private sector, state, and foreign entities using these best practices shared a
                      common focus of improving the internal control system over the program
                      or activity that experienced improper payments. The components of this
                      control system and a brief definition of each follows.

                      • Control environment—create a culture of accountability by establishing
                        a positive and supportive attitude toward improvement and the
                        achievement of established program outcomes.

                      • Risk assessment—perform comprehensive reviews and analyses of
                        program operations to determine if risks exist and the nature and extent
                        of the risks identified.

                      • Control activities—address identified risk areas and help ensure that
                        management’s decisions and plans are carried out and program
                        objectives are met.

                      • Information and communications—use and share relevant, reliable, and
                        timely financial and nonfinancial information in managing improper
                        payment-related activities.




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




                      Page 4                                                                  GAO-03-991T
• Monitoring—track improvement initiatives, over time, and identify
  additional actions needed to further improve program efficiency and
  effectiveness.

The entities that participated in our study found that they could effectively
and efficiently manage improper payments by focusing on the components
of internal controls and (1) changing their organizations’ control
environments or cultures, (2) performing risk assessments,
(3) implementing activities to reduce fraud and errors, (4) providing
relevant, reliable, and timely information and communication of results to
management, and (5) monitoring performance over time. It is important to
note that the implementation of the improvement process that addresses
these internal control components will likely not be easy or quick. It will
require strong support, not just in words but in actions, from the President,
the Congress, top-level administration appointees, and agency managers.
Once committed to a plan of action, they must remain steadfast supporters
of the end goals and their support must be transparent to all.

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. As a result of our
findings, we recommended, among other things, that the head of each CFO
Act agency assign responsibility to a senior agency official for taking
actions to minimize improper payments and that the Director of OMB work
with agency officials to provide all reasonable assistance in implementing
the corrective action plans developed to reduce improper payments. 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.

As this subcommittee requested in May, we will issue a report later this
year on the status of actions the CFO Act agencies and OMB have taken in
designing and implementing programs to address our previous
recommendations. As a result of preliminary information received from
those agencies, we have found that they have begun to assign responsibility
to lead and coordinate actions to reduce improper payments. Some


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 5                                                                   GAO-03-991T
                  agencies have (1) developed detailed action plans to determine the nature
                  and extent of improper payments, (2) set target goals for improper
                  payment rates, and (3) 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. As a part of
                  our efforts, we will also discuss CFO Act agency progress in implementing
                  the Improper Payments Act.

                  In closing, as the Congress and the American public have increased
                  demands for accountability from corporations and their leaders, the federal
                  government must demonstrate the same standards of accountability and
                  responsibility expected from the private sector within its programs and
                  activities. Areas vulnerable to fraud, waste, abuse, and mismanagement
                  must be evaluated to ensure that scarce resources reach their intended
                  beneficiaries and are not diverted for inappropriate, illegal, inefficient, or
                  ineffective purposes.

                  We are seeing important leadership and action—both from the Congress
                  and from the administration—to address the improper payment problem,
                  but, as I mentioned earlier, the reduction or elimination of the government’s
                  improper payments problems will not be quick or easy. 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 significant problem of
                  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.



Contact and       For information about this statement, please contact McCoy Williams,
                  Director, Financial Management and Assurance, at (202) 512-6906 or at
Acknowledgments   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 6                                                             GAO-03-991T
Related GAO Products


             Financial Management: Challenges Remain in Addressing the
             Government’s Improper Payments. GAO-03-750T. Washington, D.C.:
             May 13, 2003.

             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.

             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.




(195017)     Page 7                                                     GAO-03-991T
This is a work of the U.S. government and is not subject to copyright protection in the
United States. It may be reproduced and distributed in its entirety without further
permission from GAO. However, because this work may contain copyrighted images or
other material, permission from the copyright holder may be necessary if you wish to
reproduce this material separately.
GAO’s Mission            The General Accounting Office, the audit, evaluation and investigative arm of
                         Congress, exists to support Congress in meeting its constitutional responsibilities
                         and to help improve the performance and accountability of the federal government
                         for the American people. GAO examines the use of public funds; evaluates federal
                         programs and policies; and provides analyses, recommendations, and other
                         assistance to help Congress make informed oversight, policy, and funding
                         decisions. GAO’s commitment to good government is reflected in its core values of
                         accountability, integrity, and reliability.


Obtaining Copies of      The fastest and easiest way to obtain copies of GAO documents at no cost is
                         through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full-
GAO Reports and          text files of current reports and testimony and an expanding archive of older
                         products. The Web site features a search engine to help you locate documents
Testimony                using key words and phrases. You can print these documents in their entirety,
                         including charts and other graphics.
                         Each day, GAO issues a list of newly released reports, testimony, and
                         correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site
                         daily. The list contains links to the full-text document files. To have GAO e-mail this
                         list to you every afternoon, go to www.gao.gov and select “Subscribe to
                         e-mail alerts” under the “Order GAO Products” heading.


Order by Mail or Phone   The first copy of each printed report is free. Additional copies are $2 each. A check
                         or money order should be made out to the Superintendent of Documents. GAO
                         also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a single
                         address are discounted 25 percent. Orders should be sent to:
                         U.S. General Accounting Office
                         441 G Street NW, Room LM
                         Washington, D.C. 20548
                         To order by Phone:     Voice: (202) 512-6000
                                                TDD: (202) 512-2537
                                                Fax: (202) 512-6061


To Report Fraud,         Contact:
                         Web site: www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in      E-mail: fraudnet@gao.gov
Federal Programs         Automated answering system: (800) 424-5454 or (202) 512-7470



Public Affairs           Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800
                         U.S. General Accounting Office, 441 G Street NW, Room 7149
                         Washington, D.C. 20548