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entitled 'Financial Management: Challenges Remain in Addressing the 
Government's Improper Payments' which was released on May 13, 2003.

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United States General Accounting Office:

GAO:

For Release on Delivery Expected at 2:00 p.m. EDT:

Tuesday, May 13, 2003:

Financial Management:

Challenges Remain in Addressing the Government's Improper Payments:

Statement of McCoy Williams, Director
Financial Management and Assurance:

GAO-03-750T:

GAO Highlights:

Highlights of GAO-03-750T, a report to Subcommittee on Government 
Efficiency and Financial Management, Committee on Government Reform, 
House of Representatives 

Why GAO Did This Study:

The Subcommittee asked GAO to testify on the Improper Payments 
Information Act (PL-107-300) and related draft guidance issued by the 
Office of Management and Budget (OMB), and on GAO recommendations to 
agencies on actions they can take to prevent or reduce improper 
payments.  

What GAO Found:

Improper payments are a longstanding, widespread, and significant 
problem in the federal government.  Agency financial statements for 
both fiscal years 2002 and 2001 identified improper payment estimates 
of approximately $20 billion.  OMB recently testified that the amount 
of improper payments was  closer to $35 billion annually for major 
benefit programs.  As significant as these amounts are, they do not 
represent a true picture of the magnitude of the problem 
governmentwide because they do not consider other significant but 
smaller programs and other types of agency activities that could 
result in improper payments.  

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

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

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

OMB has taken some actions to address our prior improper payment-
related recommendations.  For example, it has issued draft guidance 
for agency use in identifying and reporting on improper payments 
within their programs and activities.  Further, preliminary follow up 
work on our prior recommendations shows a wide range of agency 
activities regarding improper payment identification and reporting.  
Some agencies have implemented detailed action plans while others are 
in the early stages of such work.  OMB and the agencies need to 
continue to work to identify and measure improper payments, set 
performance goals, implement corrective actions, and report results 
against those goals.  

www.gao.gov/cgi-bin/getrpt?GAO-03-750T.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact McCoy Williams at 202-512-6906 or 
williamsm1@gao.gov.

[End of section]

Mr. Chairman and Members of the Subcommittee:

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

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

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

The risk of improper payments and the government's ability to prevent 
them has important long-term implications. As the baby boom generation 
leaves the workforce, spending pressures will grow rapidly due to 
increased costs of programs such as Medicare, Medicaid, and Social 
Security. Other federal expenditures are also likely to increase. These 
spending pressures and the increased size of federal programs all but 
guarantee that, absent improvement in internal controls and other 
proactive actions, the risk of even more improper payments will exist.

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

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

* Control environment--creating a culture of accountability by 
establishing a positive and supportive attitude toward improvement and 
the achievement of established program outcomes.

* Risk assessment--performing comprehensive reviews and analyses of 
program operations to determine if risks exist and the nature and 
extent of the risks identified.

* Control activities--taking actions to address identified risk areas 
and help ensure that management's decisions and plans are carried out 
and program objectives are met.

* Information and communications--using and sharing relevant, reliable, 
and timely financial and nonfinancial information in managing improper 
payment related activities.

* Monitoring--tracking improvement initiatives, over time, and 
identifying additional actions needed to further improve program 
efficiency and effectiveness.

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

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

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

Legislation Mandates Agency Actions to Identify and Act on Improper 
Payment Problems:

Two recent pieces of legislation--the Improper Payments Information Act 
of 2002[Footnote 4], and Section 831 of the National Defense 
Authorization Act for Fiscal Year 2002[Footnote 5]--provide an impetus 
for all agencies to systematically address improper payment activity 
annually, and to identify and recover contract overpayments.

Improper Payments Act:

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

Once agencies identify their programs that are susceptible to 
significant improper payments, the legislation requires agencies to 
estimate the annual amount of improper payments in those programs and 
activities. For programs for which estimated improper payments exceed 
$10 million, agencies are to report to the Congress on actions they are 
taking to reduce those errors. The report will also include a 
discussion of the causes of the improper payments identified, actions 
taken to correct those causes, and the results of the actions taken to 
address those causes. The provisions of this legislation coincide with 
our recommendation that CFO Act agencies take actions to reduce 
improper payments and report to the Congress, OMB, and the agency head 
on the progress made in achieving improper payment reduction targets 
and future action plans for controlling improper payments.

The law further requires OMB to prescribe agency guidance to implement 
the requirements of the act. For years, we have recommended that OMB 
develop and issue guidance to federal executive agencies to assist them 
in developing and implementing a methodology for annually estimating 
and reporting improper payments, and for developing goals and 
strategies to address improper payments. I will discuss OMB's actions 
in this area later in my statement.

Recovery Auditing Legislation:

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

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

OMB's Actions to Address Improper Payments:

OMB's role in managing, implementing, and overseeing governmentwide 
administrative policy, its interagency perspective, and its leadership 
role on the various interagency councils make it a key player in the 
government's effort to reduce improper payments. I would like to 
briefly discuss two actions--one legislatively and the other 
administratively driven.

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

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

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

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

Limited Information Is Available on Improper Payments at Federal 
Agencies:

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

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

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

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

Contact and Acknowledgements:

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

[End of section]

Related GAO Products:

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

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

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

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

FOOTNOTES

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

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

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

[4] Pub. L. No. 107-300, 116 Stat. 2350, (2002).

[5] Pub. L. No. 107-107, 115 Stat. 1012, 1186, (2001).

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


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