oversight

Financial Management: Status of the Government Efforts to Address Improper Payment Problems

Published by the Government Accountability Office on 2003-10-17.

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

               United States General Accounting Office

GAO	           Report to the Subcommittee on
               Government Efficiency and Financial
               Management, Committee on Government
               Reform, House of Representatives

October 2003
               FINANCIAL
               MANAGEMENT
               Status of the
               Governmentwide
               Efforts to Address
               Improper Payment
               Problems




GAO-04-99

               a

                                                October 2003


                                                FINANCIAL MANAGEMENT

                                                Status of the Governmentwide Efforts to
Highlights of GAO-04-99, a report to the        Address Improper Payment Problems
Subcommittee on Government Efficiency
and Financial Management, Committee on
Government Reform, House of
Representatives




Improper payments are a                         The ultimate success of the governmentwide effort to reduce improper
longstanding, widespread, and                   payments hinges on each federal agency’s diligence and commitment to
significant problem in the federal              identify, estimate, determine the causes of, take corrective actions on,
government. This past April, the                measure, and report progress in reducing all improper payments.
Office of Management and Budget
(OMB) estimated these payments
to be about $35 billion annually for
                                                While each of the 23 CFO Act agencies has assigned responsibility for the
major federal benefit programs.                 improper payment program to a senior official, GAO’s discussions with
Importantly, this estimate does not             officials at these agencies revealed a wide disparity in the progress made in
account for all federal programs                implementing actions to perform risk assessments, identify and take actions
and activities and considers less               to address internal control problems identified during the risk assessments,
than half of the $2.3 trillion net cost         and publicly report the results of actions to reduce improper payments.
of the federal government for fiscal            Generally, the 14 CFO Act agencies that OMB Circular A-11 required to
year 2002.                                      report erroneous payment information in their initial budget submissions
                                                were more active in conducting risk assessments, implementing corrective
Because of its continued interest               actions, and reporting on improper payments than the 9 CFO Act agencies
and concerns regarding financial                not cited in the circular.
management in the federal
government, the Subcommittee
asked GAO to follow-up on the                   Officials at the 14 agencies noted that their agencies had completed risk
implementation of the                           assessments for 15 of the 44 programs cited in the circular. Of the 9 CFO Act
recommendations contained in our                agencies not cited in the circular, officials at only one agency stated that
August 2002 report (GAO-02-749).                they had completed risk assessments of all of the agency’s programs.

Our 2002 report recommended that                Not all agencies have implemented control activities to address internal
Chief Financial Officers Act (CFO               control weaknesses identified through risk assessments designed to identify
Act) agencies take actions to                   improper payments. While officials generally acknowledged that they had
minimize improper payments in                   not fully assessed all of their programs and activities to identify program
their programs and activities and               risks of improper payments, some stated that they had considered those
for OMB to assist agencies in
developing methods to identify and
                                                risks when designing or modernizing their program’s general internal control
implement those actions.                        systems. Specifically, officials stated that their agencies were relying on
                                                general internal control activities already in place to manage improper
OMB described our report as                     payments.
largely fair and accurate. It
characterized the administration’s              Officials at each of the 23 CFO Act agencies stated that their agency would
current efforts to reduce erroneous             meet the reporting requirements in OMB’s guidance on the implementation
payments as the most                            of the Improper Payments Information Act of 2002. This guidance calls for
comprehensive assessment of the                 agencies to report significant amounts of improper payment information in
government’s payment processes in               their annual Performance and Accountability Reports. Depending on the
history.                                        agency and program, this reporting can begin as early as the fiscal year 2003
                                                report but not later than the fiscal year 2004 report.

                                                OMB has taken actions to address each of our recommendations. It has met
                                                with officials from each of the CFO Act agencies to provide assistance and
www.gao.gov/cgi-bin/getrpt?GAO-04-99
                                                has issued guidance for agencies’ use in implementing their improper
To view the full product, including the scope   payment program including the performance of risk assessments, the
and methodology, click on the link above.       identification of the causes of improper payments, and the issuance of
For more information, contact McCoy
Williams at (202) 512-6906 or
                                                reports on the results of the actions taken to reduce these payments.
williamsm1@gao.gov.
Contents




Letter                                                                                                               1
                             Results in Brief                                                                        4
                             Background                                                                              7
                             Recent Legislation Targets Improper Payments                                            8
                             Executive Agency Actions to Implement Recommendations                                   9
                             OMB’s Actions to Implement Recommendations                                             20
                             Conclusions                                                                            26
                             OMB’s Comments and Our Evaluation                                                      27


Appendixes
              Appendix I:    Scope and Methodology                                                                  29
             Appendix II:    CFO Act Agencies and Related Programs for Which OMB
                             Circular A-11 Requires Erroneous Payment Information                                   31
             Appendix III:   CFO Act Agencies Included in This Review                                               33
             Appendix IV:    Comments from the Office of Management and Budget                                      34
              Appendix V:    GAO Contacts and Staff Acknowledgments                                                 35
                             GAO Contacts                                                                           35
                             Acknowledgments                                                                        35

                             Abbreviations

                             CFO          Chief Financial Officer

                             CFO Act      Chief Financial Officers Act

                             CFOC         Chief Financial Officers Council

                             COO          Chief Operating Officer

                             DCI          Data Collection Instrument

                             IG           Inspector General

                             IRS          Internal Revenue Service

                             OMB          Office of Management and Budget

                             PCIE         President's Council on Integrity and Efficiency

                             PMA          President's Management Agenda





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                             Page i                                                      GAO-04-99 Improper Payments
Page ii   GAO-04-99 Improper Payments
A

United States General Accounting Office
Washington, D.C. 20548



                                    October 17, 2003


                                    The Honorable Todd R. Platts

                                    Chairman

                                    The Honorable Edolphus Towns

                                    Ranking Minority Member

                                    Subcommittee on Government Efficiency and Financial Management

                                    Committee on Government Reform

                                    House of Representatives


                                    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. This past April, the Office of 

                                    Management and Budget (OMB) estimated these payments to be about $35

                                    billion annually for major federal benefit programs. Importantly, this 

                                    estimate does not account for all federal programs and activities and 

                                    considers less than half of the $2.3 trillion net cost of the federal 

                                    government for fiscal year 2002. In addition to these annual costs, 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. 


                                    Improper payments include amounts that should not have been made or 

                                    were made for incorrect amounts. Specifically, they include inadvertent 

                                    errors, such as duplicate payments and calculation errors; payments for 

                                    unsupported or inadequately supported claims; payments for services not 

                                    rendered or rendered to ineligible beneficiaries; and payments resulting 

                                    from fraud and abuse. Measuring improper payments and designing and

                                    implementing actions to reduce or eliminate them will not be easy. 

                                    Agencies can have success in this area, but that success will be dependent 

                                    on the design, development, and implementation of better internal 

                                    controls. This will require strong support and active involvement from 

                                    agency management, the administration, and the Congress. Once 

                                    committed to a plan of action, all parties must remain involved and 

                                    committed to the end goals and their support must be transparent to all.





                                    Page 1                                             GAO-04-99 Improper Payments
Our August 2002 report1 called for a coordinated approach to address the
governmentwide improper payment problem and recommended actions to
be taken by federal agencies and OMB. Specifically, we recommended that
the heads of all Chief Financial Officers Act (CFO Act) agencies assign
responsibility for managing improper payments to a senior official, such as
the Chief Financial Officer (CFO) or the Chief Operating Officer (COO),
and that those responsibilities include

•	 establishing policies and procedures for assessing agency and program
   risks of improper payments;

• taking actions to reduce those payments; and

•	 reporting the results of the agency actions to agency management for
   oversight, and other actions, as deemed appropriate.

We also recommended that the Director of OMB

•	 develop information on improper payments and issue specific guidance
   to agencies that provides a comprehensive approach to reducing
   improper payments, including providing the transparency in reporting
   that is crucial to addressing the problem;

•	 work with agency officials to provide reasonable assistance in
   implementing corrective action plans developed to reduce improper
   payments;

•	 work with agency officials and the Congress to identify and help
   eliminate or reduce the barriers that restrict agency actions to reduce
   improper payments; and

•	 require agencies to report improper payment information in a specific,
   publicly available document.

Because of your continued interest and concerns regarding financial
management in the federal government, you asked us to follow-up on the
implementation of the recommendations contained in our 2002 report.


1
  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 2                                                   GAO-04-99 Improper Payments
Specifically, you requested that we determine the actions taken by the CFO
Act agencies and OMB in designing and implementing programs to address
our recommendations, including

•	 assigning responsibility for agency improper payment activities to a
   senior official,

•	 developing detailed action plans to determine the nature and extent of
   possible improper payments,

•	 identifying and implementing cost-effective control activities to address
   identified risk areas, and

• publicly reporting the results of their efforts.

Based on the results of our initial meetings with CFO Act agency officials, it
became clear that many agencies were in the initial stages of designing and
implementing actions to address the recommendations. Therefore, we
limited our efforts to interviewing agency officials and obtaining
documentation, when available, that identified and discussed agency
actions on the recommendations. Again, because of the early stages of
many of the agency actions, we did not assess the effectiveness of the
agencies’ efforts or independently validate the data they provided. We plan
to concentrate on specific agency actions in future improper payments-
related assignments. We also interviewed key OMB officials to determine
the status of their actions to address the recommendations and the
improper payment-related guidance that OMB issued in May 2003.2
Appendix I contains further details on our scope and methodology.




2
 OMB Memorandum M-03-13, Improper Payments Information Act of 2002 (Public Law
107-300), May 21, 2003.




Page 3                                               GAO-04-99 Improper Payments
Results in Brief	   The ultimate success of the governmentwide effort to reduce improper
                    payments hinges on each federal agency’s diligence and commitment to
                    identify, estimate, determine the causes of, take corrective actions, and
                    measure progress in reducing all improper payments. Our 2002 report
                    recognized the significance of the governmentwide improper payment
                    problem and addressed recommendations to the 23 CFO Act agencies3 and
                    OMB to focus attention on and take actions to reduce the problem.
                    Subsequent to the issuance of our report, the Improper Payments
                    Information Act of 20024 (Improper Payments Act) was enacted. This
                    legislation required many of the same actions that we previously
                    recommended to federal agencies and OMB and that you asked us to
                    address in this report.

                    We recommended that each CFO Act agency assign responsibility for
                    managing improper payments to a senior official and noted that this
                    individual should be responsible for establishing policies and procedures
                    for assessing risks of improper payments, taking actions to reduce
                    improper payments, and publicly reporting the results of the actions taken.
                    Based on discussions with officials at each of the 23 CFO Act agencies, a
                    senior official, either the COO or the CFO, is now responsible for improper
                    payment activities at each agency. The communication of the delegation of
                    this responsibility varied by agency with 14 agencies issuing some type of
                    agencywide announcement and 9 agencies assigning responsibility but
                    making no official announcement of the action.

                    While officials at each of the 23 CFO Act agencies told us that they had
                    assigned improper payment program responsibilities to a senior official,
                    our discussions revealed a wide disparity in the progress made in
                    performing risk assessments, identifying and taking actions to address
                    internal control problems identified during the risk assessments, and
                    publicly reporting on the results of actions taken to reduce improper
                    payments. The 2002 version of OMB Circular A-11, Preparation,
                    Submission, and Execution of the Budget, section 57, Information on




                    3
                     We originally made recommendations to 24 CFO Act agencies. We subsequently omitted
                    the Federal Emergency Management Agency, a CFO Act agency that became part of the
                    Department of Homeland Security in March 2003.
                    4
                     Pub. L. No. 107-300, 116 Stat. 2350 (2002).




                    Page 4                                                  GAO-04-99 Improper Payments
Erroneous Payments, required 14 CFO Act agencies5 to report erroneous
payment information in their initial budget submissions to OMB for 44
programs beginning with their fiscal year 2003 budget submissions. (GAO
considers the terms “improper payments” and “erroneous payments” to be
synonymous.) In general, these 14 agencies were more active in
conducting risk assessments, implementing corrective actions, and
reporting on improper payments than the 9 CFO Act agencies that were not
cited in the circular. Despite this, discussions with officials at the 14
agencies revealed that the agencies had completed risk assessments for
only 15 of the 44 programs cited in the circular. Further, these officials
provided us with supporting documentation of these risk assessments for
only 7 of the 15 programs. Of the 9 CFO Act agencies that were not cited in
the circular, officials at only one agency stated that they had completed a
risk assessment of the agency’s programs.

Another activity the agency improper payment designee should oversee is
the identification and implementation of actions to address the internal
control deficiencies identified by risk assessments. Not all agencies have
implemented control activities to address internal control weaknesses
identified through risk assessments designed to identify improper
payments. Officials at the 14 agencies cited in OMB Circular A-11 told us
that they have developed and implemented some internal control activities,
such as data-matching and recovery auditing, based on the risk assessment
results for 15 of the 44 programs cited in the circular.

While officials generally acknowledged that they had not fully assessed all
of their programs and activities to identify program risks of improper
payments, some stated that they had considered those risks when initially
designing or modernizing their general program internal control systems.
Specifically, officials stated that their agencies rely on general internal
control activities already in place, and that they will make appropriate
modifications to their control systems once risk assessments are
completed.

Our earlier review of agency fiscal year 2002 Performance and
Accountability Reports showed that the type and amount of improper
payment information reported were inconsistent across federal agencies.
Public reporting of this information is critical to change and, under OMB’s


5
 The circular required certain improper payment-related actions by 15 federal agencies—14
CFO Act agencies and the Railroad Retirement Board.




Page 5                                                     GAO-04-99 Improper Payments
guidance for implementing the Improper Payments Act, agencies are to
publicly report the results of their actions to reduce improper payments.
This guidance calls for agencies with significant amounts of improper
payments to report improper payment-related information in their annual
Performance and Accountability Reports. Depending on the agency and
program, this reporting can begin as early as the fiscal year 2003 report but
not later than the fiscal year 2004 report. Officials at each of the 23 CFO
Act agencies stated that their agencies will meet the reporting
requirements.

OMB has taken several actions to address our recommendations. It has
issued guidance for agencies’ use in implementing their improper payment
programs including the performance of risk assessments, determining the
causes of improper payments, and reporting on the results of the actions
taken to reduce improper payments. In addition, OMB officials stated that
they have met with officials from each CFO Act agency to provide improper
payment-related assistance and to ensure that agencies (1) understand the
requirements set forth in the guidance implementing the Improper
Payments Act, (2) have started to inventory their programs and activities to
identify those at significant risk of improper payments, (3) understand the
risk assessment process, and (4) understand the reporting requirements.

OMB officials also noted that they are working with agency officials and
the Congress to identify and eliminate barriers that restrict agency actions
to reduce improper payments, such as restricted access to data for
eligibility verification and limited funding for the costs of eligibility reviews
and other stewardship integrity activities. They further told us that, based
on these discussions, they have initiated several actions, such as proposing
legislation designed to improve certification of eligibility and allocating
funds in the federal budget, to help measure, reduce, and recover improper
payments.

In commenting on this report, OMB stated that the report provided an
assessment of the administration’s initiative to reduce erroneous payments
that is largely fair and accurate. The response further noted that the
administration’s initiative to reduce improper payments is the most
comprehensive assessment of the government’s payment processes in its
history. It further suggested changes to the report to reflect the progress
made, or the benefits that have been, or will be, achieved when the
administration’s initiative is fully implemented.




Page 6                                                GAO-04-99 Improper Payments
Background	   As the steward of taxpayer dollars, the federal government is accountable
              for how its agencies and grantees spend hundreds of billions of dollars and
              is responsible for safeguarding those funds against improper payments.
              Our work over the past several years has demonstrated that improper
              payments are a significant and widespread problem in federal agencies. In
              addition, reports such as the Senate Committee on Governmental Affairs’
              Government at the Brink,6 the administration’s President’s Management
              Agenda, Fiscal Year 20027 (PMA), and the House Committee on
              Government Reform’s The Federal Government’s Continuing Efforts to
              Improve Financial Management8 highlight the impact of improper
              payments on federal programs and the need for actions to strengthen the
              system of internal control over areas where improper payments occur.

              Our past reports have shown that relatively few agencies report improper
              payments in their financial statements, even though our audits and those of
              agency offices of the Inspector General (IG) continue to identify serious
              improper payment problems and related internal control issues. Federal
              agency financial statements for fiscal years 2000, 2001, and 2002 reported
              improper payments of about $20 billion each year. In April 2003, OMB
              estimated that improper payments amount to about $35 billion annually for
              major federal benefit programs. Importantly, this estimate does not
              account for all federal programs and activities and considers less than half
              of the $2.3 trillion net cost of the federal government for fiscal year 2002.

              The PMA includes five governmentwide initiatives—one of which is
              improved financial management. This initiative calls for the administration
              to establish a baseline on the extent of erroneous payments. Under it,
              agencies were to include, in their 2003 budget submissions to OMB,
              information on improper payment rates, including actual and target rates,
              where available, for benefit and assistance programs over $2 billion. The
              PMA also notes that, using this information, OMB will work with agencies


              6
                Senator Fred Thompson, Committee on Governmental Affairs, United States Senate,
              Government at the Brink, Volume I, Urgent Federal Government Management Problems
              Facing the Bush Administration (Washington, D.C.: June 2001).
              7
              Executive Office of the President, Office of Management and Budget, The President’s
              Management Agenda, Fiscal Year 2002 (Washington, D.C.: Aug. 2001).
              8
               Dan Burton, Committee on Government Reform, United States House of Representatives,
              The Federal Government’s Continuing Efforts to Improve Financial Management
              (Washington, D.C.: Oct. 2002).




              Page 7                                                     GAO-04-99 Improper Payments
                     to establish goals to reduce improper payments identified in their
                     programs.

                     In July 2001, as part of its efforts to advance the PMA initiative, OMB
                     revised Circular A-11 to require 16 federal agencies (15 CFO Act agencies
                     and the Railroad Retirement Board) to submit erroneous payment data,
                     assessments, and action plans for about 50 programs to OMB with their
                     initial budget submissions. Specifically, the circular required that agencies
                     submit information including estimated erroneous payment rates, target
                     rates for future reductions in these payments, the types and causes of these
                     payments, and variances from targets or goals established. In addition,
                     agencies were to provide a description and assessment of the current
                     methods for measuring the rate of erroneous payments and the quality of
                     data resulting from these methods. Based on an August 2001 memorandum
                     from the Deputy Controller, OMB, to the CFOs and budget officers of
                     executive departments and agencies, agencies were to first include this
                     erroneous payment information in their initial fiscal year 2003 budget
                     submissions. A June 2002 revision to the circular reduced the number of
                     CFO Act agencies required to submit erroneous payment data to 14 (OMB
                     removed the Agency for International Development from the list) and
                     reduced the number of programs for which improper payment information
                     was required to 44. (Appendix II lists the agencies and programs.) In July
                     2003, OMB revised the circular by eliminating the requirement for
                     information on improper payments. Despite this action, OMB officials have
                     stated that they will require the agencies cited in the earlier version of the
                     circular to report their efforts to reduce improper payments in the
                     programs previously identified in the circular.



Recent Legislation   In November 2002, the Congress passed the Improper Payments Act. The
                     requirements of the act correspond to the recommendations in our 2002
Targets Improper     report. Specifically, it requires agency heads to annually review all
Payments             programs and activities that they administer and identify those that may be
                     susceptible to significant improper payments. Once agencies identify their
                     susceptible programs, the act requires them to estimate 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 the actions they are taking to reduce those
                     payments. The report is also to include a discussion of the causes of the
                     improper payments identified, actions taken to correct those causes, and
                     the results of the actions taken to address those causes. It further requires




                     Page 8                                              GAO-04-99 Improper Payments
                             OMB to prescribe guidance for federal agency use in implementing the act.
                             OMB issued this guidance in May 2003.



Executive Agency             While all 23 CFO Act agencies have assigned responsibility for improper
                             payment activities to a senior official, we found limited progress in the
Actions to Implement         performance of risk assessments, the design and implementation of actions
Recommendations              to address improper payment problems identified, and public reporting of
                             improper payment amounts. Of the 23 CFO Act agencies, OMB Circular A-
                             11 (2002)9 required 14 agencies to report improper payment information in
                             their initial budget submissions to OMB beginning with their fiscal year
                             2003 submissions. However, even though the requirements have existed
                             for two years, the applicable agencies have only conducted risk
                             assessments for 15 of the 44 programs listed in the circular. In addition,
                             these agencies had implemented more of our recommendations than the 9
                             CFO Act agencies not cited in the circular.



Assign Responsibility to a   Officials at each of the 23 CFO Act agencies told us that a senior official
Senior Official	             now has responsibility for managing improper payments. The
                             communication of that responsibility varied by agency with 14 agencies
                             issuing some type of announcement of the designation and 9 agencies
                             making no formal announcement of the assignment.


                                 Recommendation: The head of each CFO Act agency should assign responsibility to a
                                 senior official, such as the COO or the CFO, for establishing policies and procedures for
                                 assessing agency and program risks of improper payments, taking actions to reduce
                                 those payments, and reporting the results of the actions to agency management for
                                 oversight and other actions as deemed appropriate.


                             By focusing their attention on and communicating their intent to reduce
                             improper payments throughout an organization and to all affected
                             organizational units and individuals, top-level officials set the stage for
                             change. They instill a culture of accountability by adopting a positive and
                             supportive attitude toward improvement and the achievement of
                             established program outcomes. They also establish a transparent
                             environment in which their expectations for program improvement are


                             9
                              Unless noted otherwise, when referring to OMB Circular A-11 in this report, we are
                             referring to the circular as revised in June 2002.




                             Page 9                                                          GAO-04-99 Improper Payments
clearly defined and accountability for achieving these improvements is set.
The actions of these officials should include setting and maintaining the
ethical tone, delegating roles and responsibilities, and implementing human
capital initiatives clearly communicating the need for change.

Based on our discussions with officials at the 23 CFO Act agencies and
review of documents that they provided, 21 agencies have assigned
responsibility for managing improper payments to the agency CFO and 2
have assigned the responsibility to the COO. This assignment of
responsibility was communicated to agency personnel by various means.
Fourteen of the agencies made either oral or written announcements of the
designation and 9 made no formal announcement. Specifically, agency
officials described the communication of the assignment as follows.

•	 Nine agencies communicated the assignment by issuing written
   communications or sending e-mail to bureau CFOs or office directors.

•	 Four agency officials told us that the agency had communicated this
   assignment agencywide through staff meetings.

•	 One agency communicated the assignment orally through high-level
   meetings held with executive management or department CFOs.

•	 Officials at five agencies told us that, while the role was assigned to an
   agency official, there was no official communication or documentation
   of the assignments.

•	 Officials at four agencies informed us that job descriptions in the agency
   personnel manual, agency policies, directives, and delegations of
   authority—which usually give a broad range of financial management
   responsibility to the CFO/COO but do not specifically mention improper
   payments—sufficiently covered the assignment and the agencies did not
   issue any formal or official communication to agency staff regarding the
   designated agency official’s improper payment responsibilities.




Page 10                                             GAO-04-99 Improper Payments
                           Regardless of the method used to delegate improper payment
                           responsibilities and communicate that delegation, successful
                           implementation of an improper payment program depends on the ability of
                           the individual given the responsibility to set the tone that the organization
                           regards improper payments as unacceptable. This may require a change in
                           organizational culture for some agencies and programs. In the
                           organizations we studied in our executive guide,10 the pressures for change
                           applied by top management were instrumental as change agents. These
                           officials not only defined and communicated a need for improved program
                           operations but, most important, they redefined the organizational culture.
                           Further, by being transparent in redefining the culture, top management set
                           expectations and obtained buy-in on the need for and importance of change
                           from individuals throughout the organizations. This culture of
                           accountability was essential to begin the critical next step in managing
                           improper payments—the risk assessment process.



Status of Actions to       Based on our discussions with officials at the 23 CFO Act agencies, 9 of the
Determine the Nature and   14 CFO Act agencies cited in OMB Circular A-11 had not yet developed
                           action plans to conduct or had conducted risk assessments for all of their
Extent of Improper         programs and activities cited in the circular. Officials at 8 of the 9 CFO Act
Payments                   agencies not cited in the circular stated that their agencies were in the
                           initial stages of developing action plans to perform risk assessments.
                           Officials at the other agency stated that the risk assessments have been
                           completed.


                                Recommendation: Develop detailed action plans to determine the nature and extent
                                of possible improper payments for all agency programs and/or activities spending
                                federal funds.


                           Agencies demonstrate a strong control environment and interest in
                           addressing improper payment issues by taking appropriate actions to
                           address risks. An essential element of developing an action plan is the
                           completion of a risk assessment, which can be used to prioritize time and
                           resources and set error rate reduction targets. A risk assessment is a key
                           step in gaining assurance that programs are operating as intended and are
                           achieving their expected outcomes. It entails a comprehensive review and


                           10
                            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 11                                                    GAO-04-99 Improper Payments
analysis of program operations to determine where risks exist, what those
risks are, and the potential or actual impact of those risks on program
operations. The specific risk assessment methodology used can vary by
organization because of differences in missions and the methods used in
assigning risk levels. The information developed during a risk assessment
forms the foundation or basis upon which management can determine the
nature and type of corrective actions needed. It also gives management
baseline information for measuring progress in reducing improper
payments.

The performance of risk assessments will make information on the causes
and extent of improper payments available to agency officials, program
managers, and others with oversight and monitoring responsibilities. While
no requirement to perform assessments to identify the risk of improper
payments for all agency programs and activities existed prior to the
Improper Payments Act, OMB Circular A-11 required that 14 CFO Act
agencies perform these assessments for 44 selected programs. Specifically,
the circular required the agencies to

•	 determine program-wide estimates for each listed program for which
   erroneous payments are currently being estimated,

•	 provide the implementation status of action plans to perform risk
   assessments or develop baseline estimates for programs that are not
   currently estimating erroneous payments,

•	 provide the status of action plans for preventing and/or reducing
   erroneous payments for all programs cited in the circular, and

•	 report the results of these assessments in agency initial budget
   submissions to OMB.

The Improper Payments Act and the related OMB guidance to implement
the act extended the improper payment requirements to programs and
activities beyond those cited in OMB Circular A-11. The act requires all
agencies

•	 to review all programs and activities and identify those that are
   susceptible to significant improper payments;




Page 12                                            GAO-04-99 Improper Payments
•	 to identify programs where the risk of improper payments is significant,
   estimate the annual amount of improper payments, and submit those
   estimates to the Congress;

•	 that identify programs with estimates of improper payments that exceed
   $10 million, to include, with the improper payment estimates, a report
   discussing the causes, actions taken, and results of actions taken to
   address those causes. The report should also include a statement
   regarding the capability of the agencies’ information systems and
   infrastructure to reduce improper payments or a description of the
   related resources needed to do so, as well as a description of the steps
   the agency has taken to ensure that agency managers are held
   accountable for reducing improper payments.

Although the act did not quantify “significant improper payments,” OMB’s
May 2003 guidance on implementing the act—which we will discuss later in
this report—defined the term as “annual erroneous payments in the
program exceeding both 2.5 percent of program payments and $10 million.”

As a result of OMB Circular A-11, improper payment-related identification
and reporting requirements existed at 14 of the CFO Act agencies before
such requirements existed at the remaining 9 CFO Act agencies. Because
of this earlier requirement, we will summarize and present the results of
our interviews and documentation reviews for the 14 agencies cited in the
circular separately from the 9 CFO Act agencies not cited.

We found that, according to agency officials, 9 of the 14 CFO Act agencies
cited in OMB Circular A-11 had not yet developed action plans to conduct
or had conducted risk assessments for all of their programs and activities
cited in the circular.

•	 While the agencies identified in OMB Circular A-11 are responsible for
   additional programs and activities other than those identified in the
   circular, agency officials told us that the focus at those agencies has
   been on the programs cited in the circular. They further stated that their
   primary attention was on programs of higher risk or those constituting
   larger dollar amounts.

•	 Agency officials told us that they had completed risk assessments for 15
   of 44 programs cited in the circular. Officials could provide us with
   supporting documentation of these risk assessments for only 7 of the 15
   programs.



Page 13                                            GAO-04-99 Improper Payments
•	 We found that three of the agencies that had not completed
   comprehensive risk assessments of a circular program had estimated
   and reported improper payment amounts in those programs in their
   annual Performance and Accountability Reports. Another agency was
   able to report improper payment estimates because, according to
   agency officials, it had assessed a portion of its programs listed in the
   circular. However, they further told us that they were still assessing
   other aspects of their programs for the risk of improper payments and
   would consider additional controls and revise their estimate based on
   the assessment results.

•	 Officials at five of the agencies stated that the significance of the risk of
   improper payments in their programs—including some of the OMB
   Circular A-11 programs—that were not yet assessed was unknown.
   Officials at two CFO Act agencies identified in the circular told us that
   they believed the risk of improper payments in the programs not yet
   assessed was insignificant, but acknowledged that they had not
   performed detailed risk assessments to confirm that view.

Prior to the passage of the Improper Payments Act, the nine CFO Act
agencies not cited in the circular had no requirement to perform the
improper payment-related activities called for in the legislation. In general,
we found that most of these agencies were in the initial stages of
developing action plans to perform risk assessments, as indicated below.

•	 Seven agencies were in the process of planning and developing action
   plans for conducting risk assessments of their programs and activities.

•	 One agency had completed its risk assessments and provided us with
   supporting documentation. The agency requires department managers
   to submit quarterly reports on improper payments and then, based on a
   review of those reports, may require corrective actions such as
   automating a previous manual process or providing training to
   individuals processing payments. According to agency officials, these
   detailed reports allow agency leaders to continually monitor payment
   performance.

•	 One agency had no plans to conduct a risk assessment because the
   agency only made administrative payments, such as payroll and
   commercial and travel payments, and did not consider those payments
   to be susceptible to improper payments.




Page 14                                              GAO-04-99 Improper Payments
                             While we found that most improper payment-related risk assessments
                             conducted focused on the OMB Circular A-11 programs, under the
                             requirements of the Improper Payments Act, all agencies are now required
                             to annually assess all of their programs and activities for improper
                             payments. OMB’s guidance for agency implementation of the Improper
                             Payments Act states that agencies are required to annually review all
                             programs, identify those susceptible to significant erroneous payments,
                             and maintain documentation to support the review and the results.



Agency Actions to Identify   By identifying programs and activities with improper payments and the
and Implement Control        causes of these payments, risk assessments set the stage for the
                             identification, design, and implementation of control activities to address
Activities to Reduce
                             the causes of the problems. We found that, although most agencies
Improper Payments            acknowledged that they had not fully assessed all of their programs and
                             activities to identify the magnitude of improper payments, if any, some
                             stated that they had addressed those risks when initially designing or
                             modernizing their general program internal control systems. Specifically,
                             the agency officials we interviewed said that they rely on general internal
                             control activities already in place to minimize improper payments. These
                             general internal control activities include data-sharing, computer-editing
                             techniques, on-site visits, manual claims reviews, prepayment accuracy
                             reviews, inspector general reviews, and postpayment recovery audits.
                             Further, some agency officials indicated that, with the diverse missions of
                             their programs and the different processes used in the administration of
                             those programs, developing an agencywide methodology for assessing risk
                             and accumulating the resulting data might take considerable time. Rather
                             than waiting for comprehensive risk assessments to be completed, some
                             agency officials told us that they had begun to implement additional pre-
                             and postpayment controls designed to help identify and reduce improper
                             payments resulting from duplicate payments, split purchases, and
                             miscalculations. They noted that, as additional data become available from
                             the risk assessments, control system weakness can be remedied.


                             Recommendation: Identify cost-effective control activities to address identified risk areas.


                             Control activities are the policies, procedures, techniques, and other
                             mechanisms designed to help ensure that management’s decisions and
                             plans are carried out and program objectives are met. The control
                             activities used by organizations to address improper payments vary



                             Page 15                                                      GAO-04-99 Improper Payments
according to the specific risks incurred. As noted in our executive guide,
the types of payment activities identified as presenting the most significant
risk of improper payments and the kinds of data and other resources
available dictate the specific changes in internal control systems needed to
adequately guard against improper payments.

Not all agencies have implemented control activities to address internal
control weaknesses identified through risk assessments designed to
identify improper payments. Officials of programs already required by
OMB Circular A-11 to report improper payment information in their initial
budget submissions to OMB told us that they understand some of the
causes of their improper payments and have begun implementing actions,
as demonstrated below.

•	 According to officials at 6 of the 14 agencies, their control activities
   include monitoring and reviewing the results of Single Audit Act11 and
   IG audits and reviews for questionable costs or other potential improper
   payment activity.




11
  The Single Audit Act, as amended, requires nonfederal entities that expend $300,000
($500,000 for fiscal years ending after December 31, 2003) or more in a year in federal
awards to have a single or program-specific audit conducted for that year and provide a
copy of the audit report to the Federal Audit Clearinghouse. The Clearinghouse will
forward a copy of the report to the awarding agency when the report discloses audit
findings relating to that agency’s programs.




Page 16                                                     GAO-04-99 Improper Payments
•	 Officials at three agencies reported that they are analyzing payment data
   for potential improper payments and are using data-mining techniques
   as a postpayment procedure to review and analyze diverse data for
   relationships that have not previously been discovered.12

•	 Officials at five agencies stated that they perform data-sharing or data-
   matching with other government agencies to compare information from
   different sources to verify that accurate eligibility information is
   reported to help ensure that payments are appropriate before they are
   made.

•	 Officials at four agencies mentioned their use of recovery auditing—the
   examination of agency payments to identify duplicate payments, errors
   on invoices, payments for items not received, errors in determining
   payment amounts and executing payments, and the failure to account
   for credits for applicable discounts or returned merchandise.

Officials at most of the 9 agencies not cited in OMB Circular A-11 stated
that they are generally still assessing their programs for risks and have not
identified cost-effective controls designed to target improper payment
activities. They rely on their general internal control procedures already in
place to ensure payments are correct. However, like the 14 CFO Act
agencies that were cited in the circular, some plan to implement, have
begun to implement, or have implemented pre- and postpayment controls
designed to help identify and reduce improper payments resulting from
duplicate payments, split purchases, and miscalculations.

•	 Officials at one agency told us that they have initiated recovery auditing
   programs, as required by legislation, to identify errors made in paying
   contractors and to recover amounts erroneously paid to contractors.

•	 Officials at two agencies cited plans to begin a recovery auditing
   program. Officials at one of these agencies stated that the agency has


12
  The central repository of data commonly used to perform data-mining is called a data
warehouse. Data warehouses store historical and current data and consist of tables of
information that are logically grouped together. The data warehouse allows program and
financial data from different nonintegrated systems throughout an organization to be
captured and placed in a single database where users can query the system for information.
The information can then be “mined” or searched according to specific criteria to identify
associations, sequences, patterns, and clusters between different pieces of information—
relationships that are often hidden in separate databases.




Page 17                                                     GAO-04-99 Improper Payments
                               begun a recovery auditing pilot program while the other agency was still
                               meeting with outside auditors to discuss contracting the effort.

                            •	 Officials at two agencies mentioned that a portion of their funds were
                               cross-serviced by another federal government agency. For these funds,
                               they are relying exclusively on the internal controls of the agency
                               service provider in detecting and preventing improper payments.

                            Although comprehensive risk assessments and action plans to perform
                            them may not be completed, some agency officials reported that they are
                            developing and performing risk assessments and, at the same time, are
                            beginning to develop additional control activities to reduce improper
                            payment activity in their programs. As further risk assessments are
                            completed and potential improper payments are identified, additional
                            controls can be developed and implemented to target these problem areas.



Public Reporting on         Improper payments are a significant problem and information on federal
Improper Payments and       actions and the results of those actions is a critical element in the overall
                            process of reducing those payments. Currently, few agencies publicly
Progress in Reducing Them   report the amounts of their improper payments or other information such
                            as barriers to identifying and/or reducing improper payments, targets and
                            goals set for improvement, and progress in identifying, minimizing, and
                            recovering improper payments. For example, for fiscal years 2000 through
                            2002, agencies reported improper payment information in their annual
                            Performance and Accountability Reports totaling about $20 billion each
                            year. However, the type and amount of information reported was
                            inconsistent across federal agencies. Some agencies estimated amounts
                            for one or some of their programs but not others, while others
                            acknowledged making improper payments but did not report specific
                            improper payment amounts. Some agencies reported amounts in their
                            Performance and Accountability Reports one year but not the next. One
                            agency did not update its annual estimate one year and reported the same
                            estimated amount from the prior year.


                              Recommendation: Agencies should periodically report, through publicly available
                              documents, to the agency head, OMB, and the Congress on the progress made in
                              achieving improper payment reduction targets and future action plans for controlling
                              improper payments.




                            Page 18                                                     GAO-04-99 Improper Payments
Minimizing improper payments often requires the exchange of relevant,
reliable, and timely information between individuals and units within an
organization and with external entities with oversight and monitoring
responsibilities or interests. As we reported in our executive guide, it is
important that the results of the actions taken be openly communicated or
available not only to the Congress and agency management but also to the
general public. This transparency demonstrates the importance that the
government places on the need for change and openly communicates
performance results. It also acts as an incentive for agencies to be ever
vigilant in their efforts to address the wasteful spending that results from
lapses in controls that lead to improper payments.

An August 2001 memorandum from the Deputy Controller, OMB, to the
CFOs and budget officers of executive departments and agencies noted
that “Public reporting of progress in meeting goals for minimizing
erroneous payments enhances accountability and we expect agencies to do
so.” OMB strengthened its position on the importance of public reporting
when, in May 2003, it issued guidance on implementing the Improper
Payments Act and required agencies to report improper payment
information in their annual Performance and Accountability Reports.
Depending on the agency and program, this reporting can begin as early as
the fiscal year 2003 report but not later than the fiscal year 2004 report.

To determine the extent that agencies were already reporting improper
payment information publicly, we reviewed agency fiscal year 2002
Performance and Accountability Reports. Of the 14 CFO Act agencies that
were required to report improper payment rates, estimates, and other
information for 44 programs in their initial budget submissions to OMB, 4
reported improper payment estimates for all required programs in their
fiscal year 2002 financial statements. (Financial statements are an integral
component of the annual Performance and Accountability Reports.)
Another 3 agencies reported partial estimates for some of their programs.
The remaining 7 agencies—accounting for 20 of the 44 programs—did not
report current estimates of improper payments in their fiscal year 2002
Performance and Accountability Reports.

In our discussions with agency officials about public reporting, officials at
one agency reported that the agency makes improper overpayment and
underpayment rate information available for one of its programs, but that it
does not report annual dollar estimates. An official at another agency told
us that when required to do so, the agency will publicly report all improper




Page 19                                            GAO-04-99 Improper Payments
                   payment information; however, it feels that this is sensitive information and
                   is concerned that the information may be used inappropriately.

                   Further, officials at some agencies stated that they consider disclosure of
                   improper payment information in public hearings or in federal budget
                   documents submitted to OMB to be public reporting. In making our
                   recommendation, we envisioned a more transparent medium such as
                   agency annual Performance and Accountability Reports where not only the
                   Congress but the public and others with oversight and monitoring interests
                   could obtain and use the information to hold agencies accountable for
                   achieving target rates or otherwise implementing specifically planned
                   actions to reduce improper payments.

                   Eventually, agencies will provide public reporting since current OMB
                   guidance, which resulted from the Improper Payments Act, calls for
                   agencies to report significant amounts of improper payment-related
                   information in their annual Performance and Accountability Reports. This
                   reporting can begin as early as the fiscal year 2003 report but not later than
                   the fiscal year 2004 report. Officials at each of the 23 CFO Act agencies
                   stated that their agency will meet the reporting requirements.



OMB’s Actions to   As the President’s agent for managing and implementing policy, OMB issues
                   guidance and oversees the administrative organization and operations of
Implement          federal agencies. Its role in managing, implementing, and overseeing
Recommendations    governmentwide administrative policy, its interagency perspective, and its
                   leadership role on interagency councils make it a key player in the
                   government’s effort to reduce improper payments. OMB, which has shown
                   leadership in the improper payments area, has issued guidance to federal
                   agencies on the design and implementation of improper payment programs
                   and has initiated contact and is working with agency officials to address
                   improper payment-related issues. OMB Circular A-11’s improper payment-
                   related requirements, the OMB guidance issued for implementing the
                   Improper Payments Act, and OMB contacts with agency and congressional
                   officials have fulfilled the intent of the majority of our OMB-related
                   recommendations. It is important to remember, however, that the
                   effectiveness of the governmentwide effort to reduce improper payments is
                   largely dependent on individual agency assessments of the extent of their
                   improper payment problems, the causes of those problems, and the
                   implementation of actions to reduce their problems.




                   Page 20                                             GAO-04-99 Improper Payments
Issue Specific Guidance on   OMB has issued two key guidance documents that, in addition to
an Approach to Reduce        addressing our recommendations, have provided agencies with
                             instructions for identifying, measuring, and reporting their improper
Improper Payments            payments.


                              Recommendation: Issue specific guidance to agencies that provides a comprehensive
                              approach to reducing improper payments.


                             The PMA established priorities for five crosscutting initiatives to improve
                             the management and performance of the federal government. One of the
                             initiatives, to improve financial performance, focuses special attention on
                             addressing improper payments. To assist agencies in implementing the
                             PMA initiatives, in June 2001 OMB revised Circular A-11, adding Section 57,
                             Information on Erroneous Payments, which provided some degree of
                             guidance to agencies by

                             • defining the term “erroneous payments,”

                             •	 establishing a formula for determining error rates and amount
                                estimates, and

                             • setting the format for agency reporting.

                             While this guidance was a good first start, the circular was not applicable to
                             all agencies or all programs and activities and the required reporting was
                             limited to the agency’s initial budget submissions to OMB. Since these
                             submissions are not publicly disclosed, the improper payment information
                             contained in them is not routinely or consistently available for
                             congressional or public review and analysis, or for holding federal agencies
                             accountable for improvement. OMB updated the guidance in June 2002
                             and required a more in-depth analysis of improper payment information
                             from agencies, but the reporting mechanism continued to be the initial
                             budget submissions.

                             In May 2003, OMB included a requirement for public reporting in its
                             guidance on implementing the Improper Payments Act. This guidance
                             defines key terms used in the law, addresses the specific reporting
                             requirements provided by the act, and lays out the steps necessary for
                             agencies to meet those requirements. For example, it




                             Page 21                                                GAO-04-99 Improper Payments
•	 defines annual improper payments to include both over-and
   underpayments;

•	 defines the term “programs and activities” to include “activities or sets
   of activities recognized as programs by the public, OMB, or Congress as
   well as those that entail program management or policy direction;”

•	 defines “significant erroneous payments” as annual erroneous payments
   in the program exceeding both 2.5 percent of program payments and
   $10 million,

•	 denotes that “grants” include competitive and block/formula grant
   programs, regulatory activities, research and development activities,
   direct federal programs, all procurements including capital assets and
   service acquisition, credit programs, and agency activities that support
   its programs;

•	 sets statistical sampling confidence and precision levels for estimating
   improper payments; and

•	 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.

The guidance provides information for agency use that had not previously
been available. However, as with any legislation or implementing guidance,
the ultimate success or failure of the Improper Payments Act hinges on
each agency’s diligence and its commitment to identify, estimate, determine
the causes of, take corrective actions on, measure, and report progress in
reducing all improper payments.




Page 22                                            GAO-04-99 Improper Payments
Work With Agencies to       According to officials at OMB, they have been working with agency
Reduce Improper Payments	   officials and interagency councils to provide assistance to agencies as they
                            begin to address their improper payment problems.


                                 Recommendation: Work together with agency officials to provide reasonable
                                 assistance in implementing corrective action plans developed to reduce improper
                                 payments.


                            As part of the PMA initiative to improve financial performance, officials at
                            OMB told us they have met with officials from all relevant agencies to
                            provide assistance and to ensure that agencies (1) understand the
                            requirements set forth in the guidance implementing the Improper
                            Payments Act, (2) have started to inventory their programs and activities
                            for significant risk of improper payments, (3) understand the risk
                            assessment process, and (4) understand the reporting requirements under
                            the Improper Payments Act.

                            OMB officials also told us that they have been working with a joint work
                            group of members of the Chief Financial Officers Council (CFOC) and the
                            President’s Council on Integrity and Efficiency (PCIE)13 to address
                            improper and erroneous payments. The work group periodically convenes
                            to discuss and develop best practices and other methods to reduce or
                            eliminate, where possible, improper and erroneous payments made by
                            federal government agencies. It has issued reports and other outputs to the
                            CFOC/PCIE, reflecting work group deliberations and determinations. For
                            example, the following guidance documents are available through the
                            website www.ignet.gov/pande/audit.html#sub.

                            •	 Report on improper payment indicators—lists events or conditions that
                               either demonstrate that an erroneous payment has been made or
                               suggest that erroneous payments are likely to occur. The report
                               includes a list of methods used to identify erroneous payments, possible
                               indicators of erroneous payments, and limitations or obstacles to
                               agencies’ use of indicators to identify and prevent improper payments.




                            13
                             The PCIE is an interagency council comprising principally the Presidentially appointed
                            and Senate-confirmed IGs, which were established by Executive Order No. 12301 in 1981 to
                            coordinate and enhance the work of the IGs.




                            Page 23                                                      GAO-04-99 Improper Payments
                        •	 Report on benchmarks—discusses the process of continually measuring
                           performance and comparing against the best performing organizations
                           to gain information on best practices that will help organizations
                           improve performance.

                        •	 Critique on the effectiveness of the differing processes used to
                           determine improper payment rates—identifies and discusses the
                           effectiveness of the methodologies used by 9 federal agencies and 17
                           different programs, ranging from entitlement programs to grant and
                           credit programs, to determine improper payment rates.

                        The work group is considering further best practices guidance to assist
                        agencies in implementing the Improper Payments Act.

                        In July 2003, OMB and the joint CFOC/PCIE Erroneous and Improper
                        Payments Working Group hosted an Improper Payments Act kick-off
                        meeting. This meeting provided agencies with information on the
                        legislation and the guidance and presented information on various ways
                        agencies could begin to address their improper payment problems.

                        OMB officials also told us that the meetings with agency officials, along
                        with meetings of the joint CFOC/PCIE Erroneous and Improper Payments
                        Working Group, have provided OMB with the opportunity to explicitly
                        encourage information sharing across agencies, offer assistance to
                        agencies in measuring their improper payments and developing action
                        plans, and discuss actions to reduce or eliminate barriers that restrict
                        agency actions to reduce improper payments.



Work With Agencies to   OMB and agency officials told us that they have jointly identified and
Address Barriers to     discussed barriers that restrict agency actions to better manage their
                        improper payments. OMB further told us that, based on these discussions,
Reducing Improper       it has initiated several actions, such as proposing legislation designed to
Payments	               improve certification of eligibility and allocating funds in the Budget of the
                        United States Government, Fiscal Year 2004, to help measure, reduce, and
                        recover improper payments.




                        Page 24                                             GAO-04-99 Improper Payments
                              Recommendation: Work with agency officials and the Congress to identify and help
                              eliminate or reduce, to the extent practicable, the barriers that restrict agency actions
                              to reduce improper payments.


                             Examples of agency barriers that OMB stated it has begun to contend with
                             include restricted access to data for verification of benefit eligibility and
                             the lack of agency funding to perform analysis of payment accuracy and/or
                             implement corrective actions. To address these barriers, OMB stated that it
                             has proposed data-sharing legislation to the Congress to address restricted
                             agency access to needed data and has acted as an advocate for agencies’
                             needs in requesting funding for improper payment-related efforts to
                             implement the PMA’s call for actions to better manage improper payments.

                             For example, the Budget of the United States Government, Fiscal Year
                             2004, includes the following improper payment-related provisions.

                             •	 A proposal allows the Internal Revenue Service (IRS) to match income
                                data reported in the Department of Education’s student aid applications
                                with the applicant’s tax data to ensure that students do not receive
                                awards in excess of the amount for which they are eligible. The
                                proposal is projected to save $638 million in Pell Grant costs over 2003-
                                2004.

                             •	 Allocate $20 million in Health Care Fraud and Abuse Control funding to
                                help finance an initiative for the Health and Human Services agency to
                                develop a methodology to measure Medicaid and State Children’s Health
                                Insurance Program improper payments, including producing error rates.

                             •	 Increase the IRS budget by $100 million to lower erroneous earned
                                income tax credit payments.



Transparency in Reporting	   OMB has set a requirement for the 14 CFO Act agencies identified in OMB
                             Circular A-11 to begin annual reporting of improper payment information in
                             their fiscal year 2003 Performance and Accountability Reports and for all
                             other agencies to begin annual reporting in their fiscal year 2004
                             Performance and Accountability Reports.




                             Page 25                                                      GAO-04-99 Improper Payments
                Recommendation: Require all federal agencies to report the information called for by
                OMB Circular A-11 on improper payments in a specific, publicly available document.


               In May 2003, OMB issued guidance implementing the Improper Payments
               Act that states that information on the results of improper payment-related
               efforts must be 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.) Moreover, the guidance
               requires the 14 CFO Act agencies already required by OMB Circular A-11 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 should result in
               publicly available information on improper payments for about 44 major
               federal programs, such as Medicare and Food Stamps, about one year
               earlier than the reporting date for all other federal programs and activities.
               These actions will help ensure transparency in reporting for those agencies
               with programs and activities with significant risks for improper payments.

               While OMB has shown progress in developing the framework and issuing
               guidance to agencies to implement the requirements of the Improper
               Payments Act, additional or supplemental guidance may be necessary to
               ensure consistency in measuring and reporting among agencies.
               Importantly, commitment from the CFO Act agencies and OMB’s continued
               leadership and support will be needed as agencies begin to scrutinize their
               programs and activities for improper payments and design and implement
               actions to address the causes of the improper payments identified.



Conclusions	   The governmentwide effort to identify and assess the magnitude of
               improper payments, to take actions to reduce those payments, and to
               publicly report the results of those efforts is generally in its infancy stages.
               All CFO Act agencies have assigned improper payment evaluation and
               reduction responsibilities to a senior level official. However, while some
               agencies have taken significant actions to identify improper payments in
               selected programs, officials at only one of these agencies indicated that
               they have completed assessments of all agency programs and activities to
               determine if improper payments are occurring, their magnitude, and the
               need for actions to address the problems identified. Further, although
               OMB Circular A-11 has required 14 CFO Act agencies to report selected
               improper payment information on 44 programs to OMB beginning with
               their fiscal year 2003 budget submissions, those agencies have completed


               Page 26                                                   GAO-04-99 Improper Payments
                       risk assessments for only 15 of the programs. Based on discussions with
                       officials at the 23 CFO Act agencies, risk assessments have either not
                       begun or are in progress for the other programs cited in the circular and all
                       other agency programs and activities.

                       By legislatively requiring assessment of significant improper payments,
                       corrective action, and reporting responsibilities, the Improper Payments
                       Act could result in a focused governmentwide approach to clearly defining
                       the magnitude of the improper payment problem and to actions to reduce
                       or eliminate the problem. However, as we stated in our 2002 report,
                       measuring improper payments and designing and implementing actions to
                       reduce or eliminate them are not simple tasks. They will require strong
                       support and active involvement from agency top management, the
                       administration, and the Congress. As important as this OMB and
                       congressional involvement is, however, the ultimate success of the
                       govenrmentwide effort to reduce improper payments hinges on each
                       federal agency’s diligence and commitment to identify, estimate, determine
                       the causes of, take correction actions on, measure, report progress on, and
                       hold officials accountable for reducing all improper payments.

                       The public reporting of improper payment information called for in the
                       Improper Payments Act will begin with the fiscal year 2003 Performance
                       and Accountability Reports for selected agencies and programs and for all
                       other agencies beginning no later than their fiscal year 2004 Performance
                       and Accountability Reports. Review and evaluation of the information in
                       these reports should help clarify the actual magnitude of the
                       governmentwide improper payments problem, the actions taken to address
                       them, and future planned efforts in this area. The reports will also provide
                       a clearer picture of the level of effort and importance that each agency has
                       placed on the identification and reduction of improper payments within
                       their programs and activities. As such, they will provide useful information
                       for continuing coordination and communications among the agencies, the
                       administration, and the Congress.



OMB’s Comments and 	   We received written comments from OMB on a draft of this report, which
                       are reprinted in appendix IV. In its response, OMB stated that the report
Our Evaluation	        provided an assessment of the administration’s initiative to reduce
                       erroneous payments that is largely fair and accurate. The response further
                       noted that the administration’s initiative to reduce improper payments is
                       the most comprehensive assessment of the government’s payment
                       processes in its history. It further suggested changes to the report to reflect



                       Page 27                                             GAO-04-99 Improper Payments
the progress made, or the benefits that have been, or will be, achieved 

when the administration’s initiative is fully implemented. 


We recognize that OMB has shown leadership in the improper payments

area, however, as we stated in our report, the ultimate success of the 

governmentwide effort to reduce improper payments is largely dependent 

on the specific actions taken by each of the agencies. Until the 

administration’s initiative is fully or significantly implemented and the 

results of agency actions to address improper payments are made public, it 

would be premature to assess the achievement of actual or potential

benefits. We considered all of OMB’s comments and made changes to the 

report as appropriate. 


We are sending copies of this report to the Chairman and Ranking Minority 

Members of the Senate Committee on Governmental Affairs, the House 

Committee on Government Reform, the Senate Committee on the Budget, 

the House Committee on the Budget, and other appropriate congressional

committees. We will also be sending copies to the Director of the Office of 

Management and Budget and the heads of the CFO Act agencies. Copies 

will also be made available to others upon request. In addition, the report 

will be available at no cost on the GAO Web site at http://www.gao.gov.


This report was prepared under the direction of McCoy Williams, Director, 

Financial Management and Assurance, who may be reached at (202) 512-

6906 or williamsm1@gao.gov if you or your staff have any questions. Staff 

contacts and other key contributors to this report are listed in appendix V.





McCoy Williams

Director

Financial Management and Assurance





Page 28                                            GAO-04-99 Improper Payments
Appendix I

Scope and Methodology



              The Government Management Reform Act of 1994 expanded the
              requirements of the Chief Financial Officers Act of 1990 by requiring,
              among other things, the annual preparation and audit of organizationwide
              financial statements of 24 executive departments and agencies. Since
              March 2003, when the Federal Emergency Management Agency was
              incorporated into the Department of Homeland Security, 23 agencies are
              subject to this act.

              To obtain information on the status of agency actions on the
              recommendations contained in our 2002 report, we developed a data
              collection instrument (DCI) that contained a standardized set of questions
              for each recommendation. Using this instrument, we interviewed officials
              at each of the 23 CFO Act agencies and OMB to obtain information on the
              status of their implementation of the recommendations and to discuss
              implementation of the Improper Payments Information Act of 2002 and the
              related OMB implementation guidance. A list of the CFO Act agencies,
              which accounted for about 89 percent of the government’s net cost in fiscal
              years 2001 and 2002, is presented in appendix III. We also requested that
              the agency officials provide all available documentation to support their
              statements about the status of agency actions to implement the
              recommendations. At one agency’s request, we conducted the interview by
              telephone. In addition, we reviewed relevant agency documents including
              strategic plans, agency performance plans and reports, and reports from
              agency program partners.1

              We completed DCIs for all 23 CFO Act agencies and OMB. We reviewed the
              completed DCIs and all accompanying documentation. To facilitate our
              analysis, we developed a database to sort agency responses and categorize
              them across several dimensions. Where necessary, we contacted agencies
              to clarify responses, request additional information, and update the initial
              responses. Because the agencies are generally in the initial stages of their
              implementation efforts, we did not determine the validity of
              representations made or the documentation provided.

              We performed our work in Washington, D.C. between January and
              September 2003 in accordance with generally accepted government
              auditing standards. We requested written comments on a draft of this


              1
               Program partners can include other agencies or intermediaries responsible for carrying out
              different aspects of the program and might include federal agencies, states or localities,
              grant recipients, participating financial institutions, regulated bodies, and contractors.




              Page 29                                                     GAO-04-99 Improper Payments
Appendix I

Scope and Methodology





report from the Director of the Office of Management and Budget. The
comments are discussed in the section entitled OMB Comments and Our
Evaluation and are reprinted in appendix IV. We considered all of OMB’s
comments and made changes to the report as appropriate.




Page 30                                         GAO-04-99 Improper Payments
Appendix II

CFO Act Agencies and Related Programs for
Which OMB Circular A-11 Requires Erroneous
Payment Information


              1.       Department of Agriculture
                   1    Food Stamps

                   2    Commodity Loan Program

                   3    National School Lunch and Breakfast 

                   4    Women, Infants, and Children

              2.       Department of Defense
                   5 Military Retirement
                   6 Military Health Benefits
              3.       Department of Education
                   7 Student Financial Assistance
                   8 Title I
              4.       Department of Health and Human Services
                   9     Head Start

                   10    Medicare

                   11    Medicaid

                   12    TANF

                   13    Foster Care – Title IV-E

                   14    State Children’s Insurance Program

                   15    Child Care and Development Fund

              5.       Department of Housing and Urban Development
                   16    Low Income Public Housing

                   17    Section 8 Tenant Based

                   18    Section 8 Project Based

                   19    Community Development Block Grants (Entitlement Grants, States/Small Cities)

              6.       Department of Labor
                   20 Unemployment Insurance
                   21 Federal Employee Compensation Act
                   22 Workforce Investment Act
              7.       Department of the Treasury
                   23 Earned Income Tax Credit
              8.       Department of Transportation
                   24    Airport Improvement Program
                   25    Highway Planning and Construction
                   26    Federal Transit – Capital Investment Grants
                   27    Federal Transit – Formula Grants
              9.       Department of Veterans Affairs
                   28    Compensation

                   29    Dependency and Indemnity Compensation

                   30    Pension

                   31    Insurance Programs





              Page 31                                                       GAO-04-99 Improper Payments
Appendix II
CFO Act Agencies and Related Programs for
Which OMB Circular A-11 Requires
Erroneous Payment Information




(Continued From Previous Page)


10. Environmental Protection Agency
   32 Clean Water State Revolving Funds
   33 Drinking Water State Revolving Funds
11. National Science Foundation
   34 Research and Education Grants and Cooperative Agreements
12. Office of Personnel Management
   35 Retirement Program (Civil Service Retirement System and Federal Employees’
      Retirement System)
   36 Federal Employees Health Benefits Program
   37 Federal Employees’ Group Life Insurance
13. Small Business Administration
   38   7(a) Business Loan Program

   39   504 Certified Development Companies

   40   Disaster Assistance

   41   Small Business Investment Companies

14. Social Security Administration
   42 Old Age and Survivors’ Insurance

   43 Disability Insurance

   44 Supplemental Security Income Program

Source: GAO.




Page 32                                                 GAO-04-99 Improper Payments
Appendix III

CFO Act Agencies Included in This Review1





               CFO Act Agencies With Prior Improper Payment Reporting Requirement
               1.    Department of Agriculture

               2.    Department of Defense

               3.    Department of Education

               4.    Department of Health and Human Services

               5.    Department of Housing and Urban Development

               6.    Department of Labor

               7.    Department of the Treasury

               8.    Department of Transportation

               9.    Department of Veterans Affairs

               10. Environmental Protection Agency

               11. National Science Foundation

               12. Office of Personnel Management

               13. Small Business Administration

               14. Social Security Administration

               CFO Act Agencies With No Prior Improper Payment Reporting Requirement
               15. Department of Commerce

               16. Department of Energy

               17. Department of the Interior

               18. Department of Justice

               19. Department of State

               20. Agency for International Development

               21. General Services Administration

               22. National Aeronautics and Space Administration

               23. Nuclear Regulatory Commission

               Source: GAO.




               1
                 This list, previously comprising 24 agencies, has been revised to omit the Federal
               Emergency Management Agency, a former independent CFO Act agency that became part of
               the Department of Homeland Security in March 2003.




               Page 33                                                 GAO-04-99 Improper Payments
Appendix IV

Comments from the Office of Management
and Budget




              Page 34           GAO-04-99 Improper Payments
Appendix V


GAO Contacts and Staff Acknowledgments




GAO Contacts	      Tom Broderick, (202) 512-8705

                   Bonnie McEwan, (202) 512-4668




Acknowledgments	   In addition to those named above, Donell Ries made important
                   contributions to this report.




(195004)           Page 35                                        GAO-04-99 Improper Payments
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