Financial Management
Challenges in Meeting Requirements of the Improper Payments Information Act Gao ID: GAO-05-605T July 12, 2005Improper payments are a longstanding, widespread, and significant problem in the federal government. The Congress enacted the Improper Payments Information Act (IPIA) of 2002 to address this issue. Fiscal year 2004 marked the first year that federal agencies governmentwide were required to report improper payment information under IPIA. One result of the IPIA has been increased visibility over improper payments by requiring federal agencies to identify programs and activities susceptible to improper payments, estimate the amount of their improper payments, and report on the amount of and their actions to reduce their improper payments in their annual Performance and Accountability Reports (PAR). Because of continued interest in addressing the governmentwide improper payments issue, we continue to report on the progress being made by agencies in complying with certain requirements of the IPIA. This testimony summarizes the results of our most recent report on agencies' progress in meeting the requirements of the IPIA. Ultimately, the success of this legislation hinges on each agency's diligence and commitment to identifying, estimating, and determining the causes of, then taking corrective actions, and measuring progress in reducing improper payments.
The Office of Management and Budget (OMB) has continued to provide strong emphasis on IPIA through the President's Management Agenda, and federal agencies' response to fulfilling the requirements of the IPIA has generally been positive. To date, the federal government has made progress in identifying programs susceptible to the risk of improper payments in addressing the new IPIA requirements. At the same time, our review of the fiscal year 2004 PARs for 29 of 35 federal agencies that the U.S. Treasury determined to be significant to the U.S. government's consolidated financial statements, shows that even with the enhanced emphasis on improper payment reporting fueled by the new legislation, certain agencies reported that they have not yet performed risk assessments of all their programs and/or estimated improper payments for their respective programs. As fully anticipated, the number of agencies reporting improper payment information is growing, but the magnitude of the problem remains unknown, because some agencies have not yet prepared estimates of improper payments for all of their programs. In the 29 agency PARs included in GAO's fiscal year 2004 review, 17 agencies reported over $45 billion of improper payments in 41 programs. This represented almost a $10 billion, or 27 percent, increase in the amount of improper payments reported by agencies in fiscal year 2003. This increase was primarily attributable to changes in the method for estimating and reporting improper payment amounts in one major program, Medicare. Future estimates are likely to trend higher because agencies' governmentwide estimate did not report for 12 programs with outlays of $248.7 billion in fiscal year 2004. These 12 were previously required to annually report improper payments under OMB Circular No. A-11 during the past 3 years. This included some of the largest risk-susceptible federal programs, such as the Department of Health and Human Services' Medicaid Program, with outlays exceeding $175 billion annually, or the Department of Education's Title I Program, with outlays of over $10 billion annually.
GAO-05-605T, Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act
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Testimony:
Before the Subcommittee on Federal Financial Management, Government
Information, and International Security, Committee on Homeland Security
and Governmental Affairs, United States Senate:
For Release on Delivery 2:00 p.m. EDT Tuesday, July 12, 2005:
Financial Management:
Challenges in Meeting Requirements of the Improper Payments Information
Act:
Statement of McCoy Williams, Director, Financial Management and
Assurance:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-605T]:
GAO Highlights:
Highlights of GAO-05-605T, a testimony before the Subcommittee on
Federal Financial Management, Government Information, and International
Security, Committee on Homeland Security and Governmental Affairs,
United States Senate:
Why GAO Did This Study:
Improper payments are a longstanding, widespread, and significant
problem in the federal government. The Congress enacted the Improper
Payments Information Act (IPIA) of 2002 to address this issue. Fiscal
year 2004 marked the first year that federal agencies governmentwide
were required to report improper payment information under IPIA. One
result of the IPIA has been increased visibility over improper payments
by requiring federal agencies to identify programs and activities
susceptible to improper payments, estimate the amount of their improper
payments, and report on the amount of and their actions to reduce their
improper payments in their annual Performance and Accountability
Reports (PAR).
Because of continued interest in addressing the governmentwide improper
payments issue, we continue to report on the progress being made by
agencies in complying with certain requirements of the IPIA. My
testimony today summarizes the results of our most recent report on
agencies' progress in meeting the requirements of the IPIA. Ultimately,
the success of this legislation hinges on each agency's diligence and
commitment to identifying, estimating, and determining the causes of,
then taking corrective actions, and measuring progress in reducing
improper payments.
What GAO Found:
The Office of Management and Budget (OMB) has continued to provide
strong emphasis on IPIA through the President's Management Agenda, and
federal agencies' response to fulfilling the requirements of the IPIA
has generally been positive. To date, the federal government has made
progress in identifying programs susceptible to the risk of improper
payments in addressing the new IPIA requirements. At the same time, our
review of the fiscal year 2004 PARs for 29 of 35 federal agencies that
the U.S. Treasury determined to be significant to the U.S. government's
consolidated financial statements, shows that even with the enhanced
emphasis on improper payment reporting fueled by the new legislation,
certain agencies reported that they have not yet performed risk
assessments of all their programs and/or estimated improper payments
for their respective programs.
As fully anticipated, the number of agencies reporting improper payment
information is growing, but the magnitude of the problem remains
unknown, because some agencies have not yet prepared estimates of
improper payments for all of their programs. In the 29 agency PARs
included in GAO's fiscal year 2004 review, 17 agencies reported over
$45 billion of improper payments in 41 programs. This represented
almost a $10 billion, or 27 percent, increase in the amount of improper
payments reported by agencies in fiscal year 2003. This increase was
primarily attributable to changes in the method for estimating and
reporting improper payment amounts in one major program, Medicare.
Future estimates are likely to trend higher because agencies'
governmentwide estimate did not report for 12 programs with outlays of
$248.7 billion in fiscal year 2004. These 12 were previously required
to annually report improper payments under OMB Circular No. A-11 during
the past 3 years. This included some of the largest risk-susceptible
federal programs, such as the Department of Health and Human Services'
Medicaid Program, with outlays exceeding $175 billion annually, or the
Department of Education's Title I Program, with outlays of over $10
billion annually.
Number of Agencies and Amounts of Improper Payments Reported (Fiscal
Years 1999-2004):
Fiscal year: 1999;
Agencies reporting: improper payments[A]: 8;
Reported amounts of improper payments (in billions): $20.7.
Fiscal year: 2000;
Agencies reporting: improper payments[A]: 8;
Reported amounts of improper payments (in billions): $19.6.
Fiscal year: 2001;
Agencies reporting: improper payments[A]: 8;
Reported amounts of improper payments (in billions): $20.9.
Fiscal year: 2002;
Agencies reporting: improper payments[A]: 7;
Reported amounts of improper payments (in billions): $19.5.
Fiscal year: 2003;
Agencies reporting: improper payments[A]: 13;
Reported amounts of improper payments (in billions): $35.7.
Fiscal year: 2004;
Agencies reporting: improper payments[A]: 17;
Reported amounts of improper payments (in billions): $45.4.
Source: GAO.
[A] Other agencies acknowledged making improper payments in their PARs
but did not disclose dollar amounts.
[End of table]
www.gao.gov/cgi-bin/getrpt?GAO-05-605T.
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]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the governmentwide problem of
improper payments in federal programs and activities. Our work over the
past several years has demonstrated that while improper payments are a
significant and widespread problem in the federal government, the
extent of the problem initially had been masked because only a limited
number of agencies reported their annual payment accuracy rates and
estimated improper payment amounts in their Performance and
Accountability Reports (PAR).
Fiscal year 2004 marked the first year that federal agencies
governmentwide were required to report improper payment information
under the Improper Payments Information Act of 2002 (IPIA).[Footnote 1]
The IPIA has increased visibility over improper payments to a higher,
more appropriate level of importance by requiring executive agency
heads, based on guidance[Footnote 2] from the Office of Management and
Budget (OMB), to identify programs and activities susceptible to
significant improper payments, estimate amounts improperly paid, and
report on the amount of and their actions to reduce their improper
payments.
Because of continued interest in addressing the governmentwide improper
payments issue, we continue to report on the progress being made by
agencies in complying with certain requirements of the IPIA. In my
testimony today, which is based on our March 31, 2005 report,[Footnote
3] I will discuss (1) the extent to which agencies have performed the
required assessments to identify programs and activities that are
susceptible to significant improper payments and (2) the annual amount
of improper payments estimated by the reporting agencies.
To obtain information for our March 2005 report, we conducted a review
of improper payment information reported by agencies in their fiscal
year 2004 PARs. We further reviewed OMB guidance on implementation of
the IPIA and its report on the results of agency-specific reports,
significant findings, agency accomplishments, and remaining challenges.
We did not assess the effectiveness of the agencies' efforts or
independently validate the data that they or OMB reported. We conducted
our work from November 2004 through February 2005 in accordance with
U.S. generally accepted government auditing standards.
Background:
Before I discuss our review of the fiscal year 2004 PARs, I would like
to summarize the IPIA. The act, passed in November of 2002, requires
agency heads to review all their programs and activities annually and
identify those that may be susceptible to significant improper
payments. For each program and activity agencies identify as
susceptible, the act requires them to estimate the annual amount of
improper payments and submit those estimates to the Congress before
March 31 of the following year. The act further requires that for
programs for which estimated improper payments exceed $10 million,
agencies report annually to the Congress on the actions they are taking
to reduce those payments.
The act requires the Director of OMB to prescribe guidance for federal
agencies to use in implementing it. OMB issued guidance in May 2003
requiring the use of a systematic method for the annual review and
identification of programs and activities that are susceptible to
significant improper payments. The guidance defines significant
improper payments as those in any particular program that exceed both
2.5 percent of program payments and $10 million annually. It requires
agencies to estimate improper payments annually using statistically
valid techniques for each susceptible program or activity. For those
agency programs determined to be susceptible to significant improper
payments and with estimated annual improper payments greater than $10
million, the IPIA and related OMB guidance require each agency to
report the results of its improper payment efforts for fiscal years
ending on or after September 30, 2004. OMB guidance requires the
results to be reported in the Management Discussion and Analysis (MD&A)
section of its PAR.
Working with the Chief Financial Officer Council's Improper Payments
Committee, OMB issued a standardized format on July 22, 2004 for
reporting IPIA information. To satisfy the reporting requirements of
the IPIA for fiscal year 2004, the framework instructed agencies to
provide in the MD&A portion of the fiscal year 2004 PAR a brief summary
of both what they have accomplished and what they plan to accomplish.
All other required reporting details were to be included in an appendix
to the PAR. The framework for the information reported in the appendix
incorporates the requirements set forth in the law and further
illustrates the reporting format required in OMB's implementation
guidance.
The fiscal year 2004 PARs, the first set of reports representing the
results of agency assessments of improper payments for all federal
programs, was due November 15, 2004.[Footnote 4] In our December 2004
report on the U.S. government's consolidated financial statements for
the fiscal years ended September 30, 2004 and 2003, which includes our
associated opinion on internal control, we reported that while most
agencies acknowledged the IPIA reporting requirements in their PARs,
they did not always indicate whether they had completed agencywide
assessments, and they did not estimate improper payments for all of
their susceptible programs.
I will now discuss the extent to which agencies performed the
assessments of their programs and activities.
Progress Made but Challenges Remain in Addressing Key Requirements of
the Act:
We reviewed the fiscal year 2004 PARs for 29 of 35 federal
agencies[Footnote 5] that the U.S. Treasury determined to be
significant to the U.S. government's consolidated financial statements.
Overall, we found that agencies made progress in identifying programs
susceptible to the risk of improper payments. At the same time, our
findings suggest that even with the enhanced emphasis on improper
payment reporting, certain agencies have not yet performed risk
assessments of all their programs and/or estimated improper payments
for their respective programs. Furthermore, as shown in table 1, we
found that certain agencies required by OMB in years before enactment
of the act,[Footnote 6] to report selected improper payment information
for the past 3 years, had not performed much better than agencies that
reported for the first time in fiscal year 2004.
Table 1: Summary of Improper Payments Information Reported in Agency
Fiscal Year 2004 PARs:
Agency type: Agencies with prior reporting requirements under OMB
Circular No. A-11;
Agencies reported they had assessed all programs: 12;
Agencies reported they had not assessed all programs: 3;
Total number of agencies: 15;
Programs that estimated improper payments: 34;
Programs that did not estimate improper payments: 12;
Total number of programs: 46.
Agency type: Agencies with no prior reporting requirements;
Agencies reported they had assessed all programs: 11;
Agencies reported they had not assessed all programs: 3;
Total number of agencies: 14;
Programs that estimated improper payments: 7;
Programs that did not estimate improper payments: 17[A];
Total number of programs: 24.
Agency type: Total;
Agencies reported they had assessed all programs: 23;
Agencies reported they had not assessed all programs: 6;
Total number of agencies: 29;
Programs that estimated improper payments: 41;
Programs that did not estimate improper payments: 29;
Total number of programs: 70.
Source: GAO's analysis of agencies' fiscal year 2004 PARs.
[A] For 10 of 17 programs, agencies reported their programs were not
susceptible to significant improper payments.
[End of table]
As the table shows, there were no significant differences in terms of
not meeting key requirements of the act between the two agency
reporting categories. Specifically, we found that six agencies which
had not performed risk assessments for all programs were equally
divided among the agencies with prior reporting requirements and
agencies with no previous reporting requirements. Although a majority
of the agencies had performed risk assessments to identify programs and
activities susceptible to significant improper payments, the adequacy
of the risk assessments was questionable. For example, three agency
auditors cited agency noncompliance with the IPIA in their annual
reports included in the agency PARs. Two agency auditors reported that
their agency's risk assessment did not consider all payment types or
programs. The remaining auditor reported the agency did not institute a
systematic method of reviewing all programs and identifying those it
believed were susceptible to significant erroneous payments. In all 3
instances, agencies reported having assessed all programs and that the
programs were not susceptible to significant improper payments.
We also found that of the 29 agency programs that did not report
improper payment estimates, 12 programs had prior reporting
requirements compared to 17 programs with no prior reporting
requirements. Because the 12 agency programs were required to estimate
improper payments information for the past 3 years, we believe these
programs had sufficient time to estimate their improper payments and
should have been in a position to fully comply with the requirements of
the act. I will discuss these 12 programs further in the next section
and highlight additional information in table 2.
Magnitude of Improper Payments is Still Unknown:
The magnitude of the governmentwide improper payment problem is still
unknown because, in addition to not assessing all programs, the
agencies had not yet prepared estimates of significant improper
payments for all of the programs. Specifically, of the 29 agency PARs
included in our fiscal year 2004 review, only 17 agencies reported
improper payment estimates totaling more than $45 billion for 41
programs. Although this estimate increased about $10 billion, or 27
percent from the prior fiscal year, we determined that this increase
was primarily attributable to changes in the method for estimating and
reporting improper payment amounts in the Department of Health and
Human Services' Medicare Program.
I would also like to point out that the governmentwide estimate did not
include the 12 programs with prior improper payment reporting
requirements which totaled $248.7 billion in outlays for fiscal year
2004. As shown in table 2, these included some of the largest federal
programs determined to be susceptible to risk, such as the Department
of Health and Human Services' Medicaid Program, with outlays exceeding
$175 billion annually, and the Department of Education's Title I
Program, with outlays of over $10 billion annually.
Table 2: Programs That Did Not Report Improper Payment Estimates as
Previously Required Under OMB Circular No. A-11 and Target Dates for
Expected Estimates:
Program: Department of Agriculture - Agriculture Marketing and
Assistance;
Fiscal year 2004 outlays (in billions): $8.8;
Target fiscal year for estimate: 2005.
Program: Department of Health and Human Services - Foster Care - Title
IV-E;
Fiscal year 2004 outlays (in billions): $4.7;
Target fiscal year for estimate: 2005.
Program: Department of Health and Human Services - State Children's
Insurance Program;
Fiscal year 2004 outlays (in billions): $4.6;
Target fiscal year for estimate: 2005.
Program: Department of Health and Human Services - Child Care and
Development Fund;
Fiscal year 2004 outlays (in billions): $4.8;
Target fiscal year for estimate: 2005.
Program: Small Business Administration - 7(a) Business Loan Program;
Fiscal year 2004 outlays (in billions): $0.7;
Target fiscal year for estimate: 2005.
Program: Department of Health and Human Services - Medicaid;
Fiscal year 2004 outlays (in billions): $175.3;
Target fiscal year for estimate: 2006.
Program: Department of Agriculture - School Programs;
Fiscal year 2004 outlays (in billions): $8.4;
Target fiscal year for estimate: 2007.
Program: Department of Agriculture - Women, Infants, and Children
Program;
Fiscal year 2004 outlays (in billions): $4.8;
Target fiscal year for estimate: 2008.
Program: Department of Labor - Workforce Investment Act;
Fiscal year 2004 outlays (in billions): $3.1;
Target fiscal year for estimate: Did not report.
Program: Department of Education - Title I;
Fiscal year 2004 outlays (in billions): $10.3;
Target fiscal year for estimate: Did not report.
Program: Department of Health and Human Services - Temporary Assistance
for Needy Families;
Fiscal year 2004 outlays (in billions): $17.7;
Target fiscal year for estimate: Did not report.
Program: Department of Housing and Urban Development - Community
Development Block Grant;
Fiscal year 2004 outlays (in billions): $5.5;
Target fiscal year for estimate: Did not report.
Program: Total;
Fiscal year 2004 outlays (in billions): $248.7;
Target fiscal year for estimate: 2005: 5;
Target fiscal year for estimate: 2006: 1;
Target fiscal year for estimate: 2007: 1;
Target fiscal year for estimate: 2008: 1;
Target fiscal year for estimate: Did not report: 4.
Sources: OMB and cited agencies' fiscal year 2004 PARs.
[End of table]
Of these 12 programs, 8 reported that they would be able to estimate
and report on improper payments sometime within the next 4 years, but
could not do so for fiscal year 2004. The other 4 programs in 4
agencies did not estimate improper payment amounts and the PARs were
silent about whether they would report estimates in the future. As a
result, improper payments for several large programs susceptible to
risk will not be known for several years, even though these agencies
were required to report this information with their fiscal year budget
submissions since 2002.
OMB reported that some of the agencies were unable to determine the
rate or amount of improper payments because of measurement challenges
or time and resource constraints, which OMB expects to be resolved in
future reporting years. Although OMB reported that the $45 billion in
improper payments establishes a baseline from which short-and long-term
program improvement strategies and priorities will be based, it
recognizes that fiscal year 2005 reductions in improper payments will
be affected by outlay changes as well as the identification of new
improper payments as additional programs are measured and methodologies
are enhanced.
Conclusion:
In closing, Mr. Chairman, I want to say that we recognize that
measuring improper payments and designing and implementing actions to
reduce or eliminate them are not simple tasks and will not be easily
solved. The ultimate success of the governmentwide effort to reduce
improper payments depends, in part, on each federal agency's continuing
diligence and commitment to meeting the requirements of the act and the
related OMB guidance. The level of importance each agency, the
administration, and the Congress place on the efforts to implement the
act will determine its overall effectiveness and the level to which
agencies reduce improper payments and ensure that federal funds are
used efficiently and for their intended purposes. Without such efforts,
the likelihood of designing and implementing actions governmentwide to
reduce or eliminate improper payments is doubtful. Fulfilling the
requirements of the IPIA will require sustained attention to
implementation and oversight to monitor whether desired results are
being achieved.
This concludes my statement, Mr. Chairman. I would be pleased to
respond to any questions that you or other Members of the Subcommittee
may have.
GAO Contacts and Staff Acknowledgments:
For more information regarding this testimony, please contact McCoy
Williams, Director, Financial Management and Assurance, at (202) 512-
6906 or by e-mail at [Hyperlink, williamsm1@gao.gov]. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this testimony. Individuals making key
contributions to this testimony included Lisa Crye, Danielle Free,
Carla Lewis, Donell Ries, and Alana Stanfield.
(195065):
FOOTNOTES
[1] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).
[2] OMB Memorandum M-03-13, "Improper Payments Information Act of 2002"
(Public Law 107-300), May 21, 2003.
[3] GAO, Financial Management: Challenges in Meeting Requirements of
the Improper Payments Act, GAO-05-417 (Washington, D.C.: Mar. 31,
2005).
[4] For fiscal year 2004, OMB accelerated the financial statements
reporting date for agencies to Nov. 15, 2004.
[5] See Treasury Financial Manual, vol. 1, part 2, ch. 4700, for a list
of the 35 agencies. Six of the 35 agencies had not issued PARs as of
our fiscal year 2004 audit report on the U.S. government's consolidated
financial statements; therefore, these agencies were not included in
our review.
[6] Prior to the governmentwide IPIA reporting requirements beginning
with fiscal year 2004, OMB's Circular No. A-11, Section 57 required
certain agencies to submit similar information, including estimated
improper payment target rates, target rates for future reductions in
these payments, the types and causes of these payments, and variances
from targets and goals established. In addition, agencies were to
provide a description and assessment of the current methods for
measuring the rate of improper payments and the quality of data
resulting from these methods.
