Mr. David Mosso
Chairman
Federal Accounting Standards Advisory Board
441 G Street, NW
Room 6K17V
Washington, DC 20548

Dear Mr. Mosso:

As you know, the problem of improper payments in federal programs is immense. In its most recent tally of improper payment estimates, the General Accounting Office (GAO) found that 20 major programs made almost $21 billion in incorrect payments. In its report, GAO wrote that "improper payments are much more widespread than agency financial statement reports have disclosed thus far." For example, according to a recent report by the Inspector General for Tax Administration, overpayments in the Earned Income Tax Credit program could total an additional $9 billion annually.

This GAO report, which was done at my request, (Financial Management: Improper Payments Reported in Fiscal Year 1999 Financial Statements (GAO/AIMD-00-261R)) demonstrates that the problem has worsened from last year and that too few agencies are reporting their improper payments. GAO notes that only 12 agencies have taken the initiative to disclose improper payment estimates of $20.7 billion for 20 of their programs in their fiscal year 1999 financial statements.

A year ago, when I first asked GAO to address the improper payments problem, GAO tallied reported improper payments at $19.1 billion. In that report, GAO warned that the methodologies used by some agencies to estimate improper payments do not always result in complete estimates and that many other agencies have not attempted to identify or estimate improper payments. Consequently, GAO recommended that the Office of Management and Budget "develop and issue guidance to executive agencies to assist them in (1) developing and implementing a methodology for annually estimating and reporting improper payments for major federal programs and (2) developing goals and strategies to address improper payments in their annual performance plans."

Following up on this GAO recommendation, I wrote to OMB Director Jack Lew a year ago and asked that he "issue the guidance necessary to require agencies to (1) estimate and report improper payments and (2) develop goals and strategies for improving programs in which improper payments are made." In his response to me, Director Lew wrote that he intended to "develop improved methodologies for estimating improper payments for major programs" and "issue general guidance to agencies." Regrettably, OMB has not acted on either of these recommendations. I hope the Federal Accounting Standards Advisory Board will take the necessary action to ensure that GAO’s recommendations are implemented.

Disclosing overpayment levels and then undertaking specific and measurable performance commitments to reduce them provides the discipline and incentive agencies need to take these problems seriously. More importantly, such commitments make agencies accountable to Congress and the public. The progress of the Health Care Financing Administration (HCFA) in reducing Medicare overpayments proves this point. While Medicare overpayments are still much too high, they have dropped by almost one half since HCFA began disclosing estimated overpayment levels in its financial statements and adopting specific overpayment reduction goals in its Results Act performance plans.

Because of the critical importance of this issue to the Congress and the public and because of the variation in reporting improper payment estimates by the 24 Chief Financial Officer (CFO) Act agencies, I am requesting that FASAB undertake a project to determine such reporting and disclosure requirements. My expectation is that beginning with the FY 2000 financial statements, all 24 CFO Act agencies that have estimated improper payments would be disclosing these amounts and having this information audited, as is now the case for the Medicare Fee-for-Service program. A number of options exist for disclosing improper payment estimates. At a minimum, all agencies should be making the necessary evaluations to estimate improper payments.

I understand the difficulty some agencies may have in developing appropriate methodologies for preparing such estimates. However, only when we have some sense of the extent of the problem can we begin to solve it.

Thank you for your consideration of this request. If you have any questions regarding the information provided in this letter, please do not hesitate to contact me directly.

Sincerely,

Fred Thompson
Chairman

FT/rjs