Recovery Auditing

Reducing Overpayments, Achieving Accountability, and the Government Waste Corrections Act of 1999 Gao ID: T-NSIAD-99-213 June 29, 1999

Federal agencies contracted for about $173 billion in goods and services during fiscal year 1998. The Defense Department (DOD) accounted for about two-thirds of this amount. In addition to direct contracting, agencies indirectly pay out billions more dollars each year on health care, education, and agricultural programs. One of the most pressing issues facing the government today is the need for greater accountability in managing its finances. A key problem has been the government's inability to ensure proper payment of all of its bills while avoiding overpayments. The Comptroller General's testimony discusses the dimensions of the overpayment problem, earlier GAO work on DOD's recovery auditing demonstration program, and the Government Waste Corrections Act of 1999 (H.R. 1827). GAO believes that three principles should guide any recovery auditing program. First, there should be meaningful incentives to encourage agency participation and make the program work. Second, adequate safeguards must be in place to help ensure that the program is implemented as Congress intended and that the integrity of the congressional appropriations process is preserved. Third, there should be transparency in the conduct of the program--that is, there should be evaluation and reporting of program implementation (in this case, to include how the recovered money is used). On the basis of these three principles, the Comptroller General suggests ways to strengthen H.R. 1827.

GAO noted that: (1) significant financial system weaknesses, problems with fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal controls continue to prevent the government from effectively managing many of its operations; (2) significant among these problems is the inability of federal agencies to determine the full extent of improper payments that occur in major programs and that are estimated to involve billions of dollars annually; (3) within the billions of dollars of improper payments is an unknown amount of overpayments; (4) while neither the federal agencies nor GAO have a good estimate of the extent of overpayments that occur each year, GAO expects that they are significant; (5) the Department of Defense (DOD) is conducting a recovery auditing demonstration program to identify overpayments for subsistence, medical, and clothing items purchased in fiscal years 1993 through 1995; (6) GAO evaluated the demonstration program and concluded that the concept of recovery auditing offers the potential to identify overpayments; (7) however, GAO found that implementation problems have limited the program's success; (8) as of June 1999, the recovery auditing contractor had identified about $29 million in overpayments made to suppliers on purchase volumes of roughly $6 billon; (9) collections by DOD amount to $2.6 million; (10) DOD has been slow to expand the use of recovery auditing beyond the initial demonstration program; (11) although contractors are sometimes overpaid, they are not required to inform the government of the overpayment or to return the money prior to the government issuing a formal demand letter requesting repayment; (12) in effect, the overpayment provides an interest-free loan to the contractor; (13) contractors should be required to notify the government of overpayments when they become aware of them and to return the money promptly upon becoming aware of the overpayments; (14) if they do not return the money promptly, there should be some economic consequence; (15) federal agencies need to concentrate on paying bills properly in the first place; (16) however, recognizing that some overpayments are inevitable, they also need to adopt best practices to quickly identify and recover them; (17) the Government Waste Corrections Act of 1999 offers an opportunity to use recovery auditing to identify overpayments and the factors contributing to overpayments; (18) GAO supports the objectives of this important legislation; and (19) some commercial companies have used recovery auditing for many years as one mechanism to identify and recover overpayments.

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