Financial Management
Status of the Government Efforts to Address Improper Payment Problems Gao ID: GAO-04-99 October 17, 2003Improper payments are a longstanding,widespread,and significant problem in the federal government.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. Because of its continued interest and concerns regarding financial management in the federal government, Congress asked GAO to follow-up on the implementation of the recommendations contained in our August 2002 report (GAO-02-749). Our 2002 report recommended that Chief Financial Officers Act (CFO Act) agencies take actions to minimize improper payments in their programs and activities and for OMB to assist agencies in developing methods to identify and implement those actions. OMB described our report as largely fair and accurate. It characterized the administration's current efforts to reduce erroneous payments as the most comprehensive assessment of the government's payment processes in history.
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 on, measure, and report progress in reducing all improper payments. While each of the 23 CFO Act agencies has assigned responsibility for the improper payment program to a senior official, GAO's discussions with officials at these agencies revealed a wide disparity in the progress made in implementing actions to perform risk assessments, identify and take actions to address internal control problems identified during the risk assessments, and publicly report the results of actions to reduce improper payments. Generally, the 14 CFO Act agencies that OMB Circular A-11 required to report erroneous payment information in their initial budget submissions were more active in conducting risk assessments, implementing corrective actions, and reporting on improper payments than the 9 CFO Act agencies not cited in the circular. Officials at the 14 agencies noted that their agencies had completed risk assessments for 15 of the 44 programs cited in the circular. Of the 9 CFO Act agencies not cited in the circular, officials at only one agency stated that they had completed risk assessments of all of the agency's programs. Not all agencies have implemented control activities to address internal control weaknesses identified through risk assessments designed to identify improper payments. 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 designing or modernizing their program 's general internal control systems. Specifically, officials stated that their agencies were relying on general internal control activities already in place to manage improper payments. Officials at each of the 23 CFO Act agencies stated that their agency would meet the reporting requirements in OMB's guidance on the implementation of the Improper Payments Information Act of 2002. This guidance calls for agencies to report significant amounts of 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. 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 has issued guidance for agencies' use in implementing their improper payment program including the performance of risk assessments, the identification of the causes of improper payments, and the issuance of reports on the results of the actions taken to reduce these payments.
GAO-04-99, Financial Management: Status of the Government Efforts to Address Improper Payment Problems
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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:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-99] GAO-04-99:
GAO Highlights:
Highlights of GAO-04-99, a report to the Subcommittee on Government
Efficiency and Financial Management, Committee on Government Reform,
House of Representatives
Why GAO Did This Study:
Improper payments are a longstanding, widespread, and significant
problem in the federal government. 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.
Because of its continued interest and concerns regarding financial
management in the federal government, the Subcommittee asked GAO to
follow-up on the implementation of the recommendations contained in
our August 2002 report (GAO-02-749).
Our 2002 report recommended that Chief Financial Officers Act (CFO
Act) agencies take actions to minimize improper payments in their
programs and activities and for OMB to assist agencies in developing
methods to identify and implement those actions.
OMB described our report as largely fair and accurate. It
characterized the administration‘s current efforts to reduce erroneous
payments as the most comprehensive assessment of the government‘s
payment processes in history.
What GAO Found:
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
on, measure, and report progress in reducing all improper payments.
While each of the 23 CFO Act agencies has assigned responsibility for
the improper payment program to a senior official, GAO‘s discussions
with officials at these agencies revealed a wide disparity in the
progress made in implementing actions to perform risk assessments,
identify and take actions to address internal control problems
identified during the risk assessments, and publicly report the
results of actions to reduce improper payments. Generally, the 14 CFO
Act agencies that OMB Circular A-11 required to report erroneous
payment information in their initial budget submissions were more
active in conducting risk assessments, implementing corrective
actions, and reporting on improper payments than the 9 CFO Act
agencies not cited in the circular.
Officials at the 14 agencies noted that their agencies had completed
risk assessments for 15 of the 44 programs cited in the circular. Of
the 9 CFO Act agencies not cited in the circular, officials at only
one agency stated that they had completed risk assessments of all of
the agency‘s programs.
Not all agencies have implemented control activities to address
internal control weaknesses identified through risk assessments
designed to identify improper payments. 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 designing or
modernizing their program‘s general internal control systems.
Specifically, officials stated that their agencies were relying on
general internal control activities already in place to manage
improper payments.
Officials at each of the 23 CFO Act agencies stated that their agency
would meet the reporting requirements in OMB‘s guidance on the
implementation of the Improper Payments Information Act of 2002. This
guidance calls for agencies to report significant amounts of 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.
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 has issued guidance for agencies‘ use in implementing
their improper payment program including the performance of risk
assessments, the identification of the causes of improper payments,
and the issuance of reports on the results of the actions taken to
reduce these payments.
www.gao.gov/cgi-bin/getrpt?GAO-04-99
To view the full product, 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]
Contents:
Letter:
Results in Brief:
Background:
Recent Legislation Targets Improper Payments:
Executive Agency Actions to Implement Recommendations:
OMB's Actions to Implement Recommendations:
Conclusions:
OMB's Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: CFO Act Agencies and Related Programs for Which OMB
Circular A-11 Requires Erroneous Payment Information:
Appendix III: CFO Act Agencies Included in This Review:
Appendix IV: Comments from the Office of Management and Budget:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
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:
Letter 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.
Our August 2002 report[Footnote 1] 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.
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.[Footnote 2] Appendix I contains
further details on our scope and methodology.
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
agencies[Footnote 3] 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 2002[Footnote 4] (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:
Erroneous Payments, required 14 CFO Act agencies[Footnote 5] 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 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.
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,[Footnote 6]
the administration's President's Management Agenda, Fiscal Year
2002[Footnote 7] (PMA), and the House Committee on Government Reform's
The Federal Government's Continuing Efforts to Improve Financial
Management[Footnote 8] 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 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 Targets Improper Payments:
In November 2002, the Congress passed the Improper Payments Act. The
requirements of the act correspond to the recommendations in our 2002
report. Specifically, it requires agency heads to annually review all
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 OMB to prescribe guidance for
federal agency use in implementing the act. OMB issued this guidance in
May 2003.
Executive Agency Actions to Implement Recommendations:
While all 23 CFO Act agencies have assigned responsibility for improper
payment activities to a senior official, we found limited progress in
the performance of risk assessments, the design and implementation of
actions to address improper payment problems identified, and public
reporting of improper payment amounts. Of the 23 CFO Act agencies, OMB
Circular A-11 (2002)[Footnote 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 Senior Official:
Officials at each of the 23 CFO Act agencies told us that a 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.
[See PDF for image]
[End of figure]
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
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.
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,[Footnote 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 Determine the Nature and Extent of Improper
Payments:
Based on our discussions with officials at the 23 CFO Act agencies, 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. Officials
at 8 of the 9 CFO Act 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.
[See PDF for image]
[End of figure]
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 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;
* 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.
* 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.
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 and Implement Control Activities to Reduce
Improper Payments:
By identifying programs and activities with improper payments and the
causes of these payments, risk assessments set the stage for the
identification, design, and implementation of control activities to
address the causes of the problems. We found that, although most
agencies 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.
[See PDF for image]
[End of figure]
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
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
Act[Footnote 11] and IG audits and reviews for questionable costs or
other potential improper payment activity.
* 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.[Footnote 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
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 and Progress in Reducing Them:
Improper payments are a significant problem and information on federal
actions and the results of those actions is a critical element in the
overall process of reducing those payments. Currently, few agencies
publicly 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.
[See PDF for image]
[End of figure]
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 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 Implement Recommendations:
As the President's agent for managing and implementing policy, OMB
issues guidance and oversees the administrative organization and
operations of federal agencies. Its role in managing, implementing, and
overseeing 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.
Issue Specific Guidance on an Approach to Reduce Improper Payments:
OMB has issued two key guidance documents that, in addition to
addressing our recommendations, have provided agencies with
instructions for identifying, measuring, and reporting their improper
payments.
[See PDF for image]
[End of figure]
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:
* 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.
Work With Agencies to Reduce Improper Payments:
According to officials at OMB, they have been working with agency
officials and interagency councils to provide assistance to agencies as
they begin to address their improper payment problems.
[See PDF for image]
[End of figure]
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)[Footnote
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 [Hyperlink, www.ignet.gov/pande/
audit.html#sub] 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.
* 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 Address Barriers to Reducing Improper Payments:
OMB and agency officials told us that they have jointly identified and
discussed barriers that restrict agency actions to better manage their
improper payments. OMB further told us that, based on these
discussions, it has initiated several actions, such as proposing
legislation designed to 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.
:
[See PDF for image]
[End of figure]
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.
:
[See PDF for image]
[End of figure]
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 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 Our Evaluation:
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 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.
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 [Hyperlink, http://www.gao.gov] 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 [Hyperlink, williamsm1@gao.gov] 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.
Signed by:
McCoy Williams
Director
Financial Management and Assurance:
[End of section]
Appendixes:
[End of section]
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.[Footnote 14]
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 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.
:
[End of section]
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.
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.
[End of table]
[End of section]
Appendix III CFO Act Agencies Included in This Review1:
CFO Act Agencies With Prior Improper Payment Reporting Requirement.
1. CFO Act Agencies With Prior Improper Payment Reporting Requirement:
Department of Agriculture.
2. CFO Act Agencies With Prior Improper Payment Reporting Requirement:
Department of Defense.
3. CFO Act Agencies With Prior Improper Payment Reporting Requirement:
Department of Education.
4. CFO Act Agencies With Prior Improper Payment Reporting Requirement:
Department of Health and Human Services.
5. CFO Act Agencies With Prior Improper Payment Reporting Requirement:
Department of Housing and Urban Development.
6. CFO Act Agencies With Prior Improper Payment Reporting Requirement:
Department of Labor.
7. CFO Act Agencies With Prior Improper Payment Reporting Requirement:
Department of the Treasury.
8. CFO Act Agencies With Prior Improper Payment Reporting Requirement:
Department of Transportation.
9. CFO Act Agencies With Prior Improper Payment Reporting Requirement:
Department of Veterans Affairs.
10. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Environmental Protection Agency.
11. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: National Science Foundation.
12. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Office of Personnel Management.
13. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Small Business Administration.
14. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Social Security Administration.
CFO Act Agencies With No Prior Improper Payment Reporting Requirement.
15. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Department of Commerce.
16. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Department of Energy.
17. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Department of the Interior.
18. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Department of Justice.
19. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Department of State.
20. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Agency for International Development.
21. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: General Services Administration.
22. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: National Aeronautics and Space Administration.
23. CFO Act Agencies With Prior Improper Payment Reporting
Requirement: Nuclear Regulatory Commission.
Source: GAO.
[End of table]
[Footnote 15]
[End of section]
Appendix IV: Comments from the Office of Management and Budget:
THE CONTROLLER:
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON. D. C. 20803:
OCT 15 2003:
Mr. McCoy Williams
Director:
Financial Management and Assurance
U.S. General Accounting Office
Washington, D.C. 20548:
Dear Mr. Williams:
Thank you for the opportunity to comment on the draft report,
"Financial Management: Status of the Governmentwide Efforts to Address
Improper Payments." The report provides an assessment of the
Administration's initiative to reduce erroneous payments that is
largely fair and accurate. I want to emphasize several points, however,
that could be missed by someone reading your report.
First, the Administration's Reducing Erroneous Payments initiative is
the most comprehensive assessment of the government's payment processes
in its history. When agency efforts are fully implemented, virtually
every dollar the government spends will
be subject to some level of scrutiny to assess the appropriateness of
the payment.
Second, agencies are publishing statistically valid error rates more
regularly today than ever before. And beginning with FY 2003, more
agencies will be reporting those error rates in their annual
Performance and Accountability Reports.
Third, we have met individually with every agency's Chief Financial
Officer and Inspector General to ensure that: each agency has
identified the individual responsible for managing the initiative to
reduce erroneous payments, agency management understands
the requirements of the initiative, and agency management is
implementing those requirements comprehensively and aggressively.
I believe your report should be modified to more appropriately reflect
the progress we have made or the benefits we have, and will have,
achieved when the Administration's initiative is fully implemented.
Thank you, again, for the opportunity to provide the views of the
Office of Management and Budget.
Sincerely,
Linda M. Springer
Controller:
Signed by Linda M. Springer:
[End of section]
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):
FOOTNOTES
[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).
[2] OMB Memorandum M-03-13, Improper Payments Information Act of 2002
(Public Law 107-300), May 21, 2003.
[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).
[5] The circular required certain improper payment-related actions by
15 federal agencies--14 CFO Act agencies and the Railroad Retirement
Board.
[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).
[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.
[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).
[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.
[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.
[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.
[14] 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.
[15] 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.
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