Financial Management
Effective Implementation of the Improper Payments Information Act of 2002 Is Key to Reducing the Government's Improper Payments Gao ID: GAO-03-991T July 14, 2003The Subcommittee on Government Efficiency and Financial Management, House Committee on Government Reform asked GAO to testify on the implementation of the Improper Payments Information Act of 2002 (PL 107-300) and related Office of Management and Budget (OMB) guidance, and on GAO's strategies to reduce improper payments.
Improper payments are a longstanding, widespread, and significant problem in the federal government. This past April, OMB estimated improper payments of about $35 billion annually for major federal benefit programs that made payments in excess of $1.2 trillion annually. Importantly, this estimate does not account for all federal programs and activities. The Improper Payments Information Act of 2002 contains requirements in the areas of improper payment identification and reporting. It requires agency heads to annually review all programs and activities, identify those that may be susceptible to significant improper payments, estimate annual improper payments in the susceptible programs and activities, and report the results of their improper payment activities. The legislation also requires OMB to prescribe guidance for federal agency use in implementing the act. OMB issued the guidance in May 2003. OMB's guidance addresses the specific reporting requirements called for in the act and lays out the general steps agencies are to perform to meet those requirements. The guidance defines key terms used in the law, such as programs and activities, and offers criterion that clarify the meaning of the term significant improper payments. It requires that agencies use statistical sampling when estimating improper payments and sets statistical sampling confidence and precision levels for estimation purposes. It also requires that agencies report the results of their improper payment activities in their annual Performance and Accountability Report. As with any legislation or implementing guidance, the act's ultimate success hinges on each agency's diligence and commitment to identify, estimate, determine the causes of, take corrective actions, and measure progress in reducing all improper payments. Our prior work has demonstrated that attacking improper payment problems requires a strategy appropriate to the organization involved and its particular risks. We have found that entities using successful strategies to address their improper payment problems shared a common focus of improving the internal control system--the first line of defense in safeguarding assets and preventing and detecting errors and fraud. The components of the control system are: control environment--creating a culture of accountability; risk assessment--performing analyses of program operations to determine if risks exist; control activities--taking actions to address identified risk areas; information and communications--using and sharing relevant, reliable, and timely information; and monitoring--tracking improvement initiatives and identifying additional actions needed to further improve program efficiency and effectiveness.
GAO-03-991T, Financial Management: Effective Implementation of the Improper Payments Information Act of 2002 Is Key to Reducing the Government's Improper Payments
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Improper Payments Information Act of 2002 Is Key to Reducing the
Government's Improper Payments' which was released on July 14, 2003.
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Testimony :
Before the Subcommittee on Government Efficiency and Financial
Management, Committee on Government Reform, House of Representatives:
For Release on Delivery Expected at 8:00 a.m. CDT Monday, July 14,
2003:
FINANCIAL MANAGEMENT:
Effective Implementation of the Improper Payments Information Act of
2002 Is Key to Reducing the Government's Improper Payments:
Statement of McCoy Williams, Director Financial Management and
Assurance:
GAO-03-991T:
GAO Highlights:
Highlights of GAO-03-991T, a testimony before the 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 implementation of the
Improper Payments Information Act of 2002 (PL 107-300) and related
Office of Management and Budget (OMB) guidance, and on GAO‘s
strategies to reduce improper payments.
What GAO Found:
Improper payments are a longstanding, widespread, and significant
problem in the federal government. This past April, OMB estimated
improper payments of about $35 billion annually for major federal
benefit programs that made payments in excess of $1.2 trillion
annually. Importantly, this estimate does not account for all federal
programs and activities.
The Improper Payments Information Act of 2002 contains requirements in
the areas of improper payment identification and reporting. It
requires agency heads to annually review all programs and activities,
identify those that may be susceptible to significant improper
payments, estimate annual improper payments in the susceptible
programs and activities, and report the results of their improper
payment activities. The legislation also requires OMB to prescribe
guidance for federal agency use in implementing the act. OMB issued
the guidance in May 2003.
OMB‘s guidance addresses the specific reporting requirements called
for in the act and lays out the general steps agencies are to perform
to meet those requirements. The guidance defines key terms used in the
law, such as programs and activities, and offers criterion that
clarify the meaning of the term significant improper payments. It
requires that agencies use statistical sampling when estimating
improper payments and sets statistical sampling confidence and
precision levels for estimation purposes. It also requires that
agencies report the results of their improper payment activities in
their annual Performance and Accountability Report. As with any
legislation or implementing guidance, the act‘s ultimate success
hinges on each agency‘s diligence and commitment to identify,
estimate, determine the causes of, take corrective actions, and
measure progress in reducing all improper payments.
Our prior work has demonstrated that attacking improper payment
problems requires a strategy appropriate to the organization involved
and its particular risks. We have found that entities using successful
strategies to address their improper payment problems shared a common
focus of improving the internal control system”the first line of
defense in safeguarding assets and preventing and detecting errors and
fraud. The components of the control system are:
* control environment”creating a culture of accountability,
* risk assessment”performing analyses of program operations to
determine if risks exist,
* control activities”taking actions to address identified risk areas,
* information and communications”using and sharing relevant, reliable,
and timely information, and
* monitoring”tracking improvement initiatives and identifying
additional actions needed to further improve program efficiency and
effectiveness.
www.gao.gov/cgi-bin/getrpt?GAO-03-991T.
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:
I am pleased to be here today to discuss OMB's guidance[Footnote 1] to
federal agencies on the implementation of the Improper Payments
Information Act of 2002 (Improper Payments Act) and some strategies
that federal agencies should consider when planning and implementing
actions to prevent improper payments.
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. As noted in our prior reports and
testimonies on this topic, there is no clear picture of the extent of
the problem. Historically, relatively few federal agencies and their
components have publicly reported improper payment information such as
improper payment rates, causes, and strategies for better managing
their programs to reduce or eliminate these payments. This past April,
OMB estimated improper payments to be about $35 billion annually for
major federal benefit programs that made payments in excess of $1.2
trillion annually. Importantly, this estimate does not account for all
federal programs and activities.
Further, 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. The increased size of federal programs and spending
pressures, such as the implementation of new programs and changes in
existing programs, all but guarantee that, absent improvement in
internal controls and other proactive actions, the risk of even more
improper payments will exist.
The Improper Payments Act, which this subcommittee sponsored, defines
improper payments as any payment that should not have been made or that
was made in an incorrect amount (including overpayments and
underpayments) under statutory, contractual, administrative, or other
legally applicable requirements. They include payments to ineligible
recipients or payments for ineligible services. Improper payments also
include duplicate payments, payments for services not received, and
payments that do not appropriately reflect applicable discounts
offered.
The act contains requirements in the areas of improper payment
identification and reporting. It requires agency heads to annually
review all programs and activities that they administer, identify those
that may be susceptible to significant improper payments, and estimate
annual improper payments for those programs and activities identified
as susceptible to significant improper payments. Governmentwide
implementation of these requirements will significantly increase the
number of agencies analyzing their programs and activities for improper
payments and coincides with our recommendation that the head of the CFO
Act agencies assign responsibility to a senior official for
establishing procedures for assessing agency and program risks of
improper payments.
For programs for which estimated improper payments exceed $10 million,
agencies are to report certain information to the Congress including
the causes of the improper payments, actions taken to correct those
causes, and the results of those actions. This provision coincides with
our recommendation that CFO Act agencies 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.
OMB's Guidance on Addressing Improper Payments:
The Improper Payments Act requires OMB to prescribe guidance for
federal agency use in implementing the act. OMB issued this guidance in
May 2003. As with any legislation or implementing guidance, the
ultimate success of the Improper Payments Act hinges on each agency's
diligence and its commitment to identify, estimate, determine the
causes of, take corrective actions, and measure progress in reducing
all improper payments.
OMB's guidance addresses the specific reporting requirements called for
in the act and lays out the general steps agencies are to perform to
meet those requirements. The guidance defines key terms used in the
law. For example, it defines the term programs and activities to
include "activities or sets of activities recognized as programs by the
public, OMB, or the Congress as well as those that entail program
management or policy direction." The guidance specifies that grants
include competitive grant programs, regulatory activities, research and
development activities, direct federal programs, all procurements
including capital assets and service acquisition, and credit programs.
Also included are agency activities that support its programs.
As I noted earlier, the act requires agencies to identify programs and
activities that are susceptible to significant improper payments. OMB's
guidance defines significant erroneous payments as annual erroneous
payments in the program exceeding both 2.5 percent of program payments
and $10 million. (GAO considers the terms improper payments and
erroneous payments to be synonymous.) For those programs and activities
susceptible to significant erroneous payments, the guidance instructs
agencies to calculate annual improper payment estimates based on the
gross total of both overpayments and underpayments, and to set
statistical sampling confidence and precision levels for estimating
those payments. It further 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. These actions
will help ensure transparency in reporting for those agencies with
programs and activities with significant risks for improper payments.
According to the guidance, information on the results of improper
payment-related efforts will generally be first 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. However, the guidance calls for those federal agencies already
required by OMB Circular No. A-11, Preparation and Submission of Budget
Estimates, 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 will result in publicly available information on improper
payments for about 50 major federal programs, such as Medicare and Food
Stamps, about one year earlier than the reporting date for all other
federal programs and activities.
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. This Improper Payments Act guidance is a good start
in this area.
Strategies for Preventing Improper Payments:
Because of the magnitude of improper payments and the actual and
potential impact these payments can have on federal programs, it is
essential that agencies develop appropriate methodologies for
identifying and measuring improper payments, identifying cost-
effective actions to correct them, implementing those actions, and
periodically reporting improper payment-related information to agency
managers, the Congress, and the public through publicly available
documents. Our prior 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.
In October 2001, we issued an executive guide[Footnote 2] that provided
information on strategies used successfully by public and private
sector organizations to address their improper payment problems. We
found that the federal, private sector, state, and foreign entities
using these best practices shared a common focus of improving the
internal control system over the program or activity that experienced
improper payments. The components of this control system and a brief
definition of each follows.
* Control environment--create a culture of accountability by
establishing a positive and supportive attitude toward improvement and
the achievement of established program outcomes.
* Risk assessment--perform comprehensive reviews and analyses of
program operations to determine if risks exist and the nature and
extent of the risks identified.
* Control activities--address identified risk areas and help ensure
that management's decisions and plans are carried out and program
objectives are met.
* Information and communications--use and share relevant, reliable, and
timely financial and nonfinancial information in managing improper
payment-related activities.
* Monitoring--track improvement initiatives, over time, and identify
additional actions needed to further improve program efficiency and
effectiveness.
The entities that participated in our study found that they could
effectively and efficiently manage improper payments by focusing on the
components of internal controls and (1) changing their organizations'
control environments or cultures, (2) performing risk assessments, (3)
implementing activities to reduce fraud and errors, (4) providing
relevant, reliable, and timely information and communication of results
to management, and (5) monitoring performance over time. It is
important to note that the implementation of the improvement process
that addresses these internal control components will likely not be
easy or quick. It will require strong support, not just in words but in
actions, from the President, the Congress, top-level administration
appointees, and agency managers. Once committed to a plan of action,
they must remain steadfast supporters of the end goals and their
support must be transparent to all.
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. As a result of our findings, we recommended, among other
things, that the head of each CFO Act agency assign responsibility to a
senior agency official for taking actions to minimize improper payments
and that the Director of OMB work with agency officials to provide all
reasonable assistance in implementing the corrective action plans
developed to reduce improper payments. 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.
As this subcommittee requested in May, we will issue a report later
this year on the status of actions the CFO Act agencies and OMB have
taken in designing and implementing programs to address our previous
recommendations. As a result of preliminary information received from
those agencies, we have found that they have begun to assign
responsibility to lead and coordinate actions to reduce improper
payments. Some agencies have (1) developed detailed action plans to
determine the nature and extent of improper payments, (2) set target
goals for improper payment rates, and (3) 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. As a part of our efforts, we will also discuss CFO Act
agency progress in implementing the Improper Payments Act.
In closing, as the Congress and the American public have increased
demands for accountability from corporations and their leaders, the
federal government must demonstrate the same standards of
accountability and responsibility expected from the private sector
within its programs and activities. Areas vulnerable to fraud, waste,
abuse, and mismanagement must be evaluated to ensure that scarce
resources reach their intended beneficiaries and are not diverted for
inappropriate, illegal, inefficient, or ineffective purposes.
We are seeing important leadership and action--both from the Congress
and from the administration--to address the improper payment problem,
but, as I mentioned earlier, the reduction or elimination of the
government's improper payments problems will not be quick or easy. 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.
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 Acknowledgments:
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:
[End of section]
Financial Management: Challenges Remain in Addressing the Government's
Improper Payments. GAO-03-750T. Washington, D.C.: May 13, 2003.
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.
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.
(195017):
FOOTNOTES
[1] OMB Memorandum M-03-13, Improper Payments Information Act of 2002,
Public Law 107-300 (May 21, 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.: October 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).
