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entitled 'Financial Management: Challenges in Meeting Governmentwide 
Improper Payment Requirements' which was released on July 20, 2005. 

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Testimony: 

Before the Subcommittee on Government Management, Finance, and 
Accountability, Committee on Government Reform, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

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

Wednesday, July 20, 2005: 

Financial Management: 

Challenges in Meeting Governmentwide Improper Payment Requirements: 

Statement of McCoy Williams, Director, Financial Management and 
Assurance: 

GAO-05-907T: 

GAO Highlights: 

Highlights of GAO-05-907T, a testimony before the Subcommittee on 
Government Management, Finance, and Accountability, 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. 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 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 your continued interest in addressing the governmentwide 
improper payments issue, you asked GAO to report on the progress being 
made by agencies in complying with certain requirements of IPIA. My 
testimony today summarizes the results of that work reported to you in 
March 2005. Ultimately, the success of this legislation hinges on each 
agencyís 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 Presidentís Management Agenda, and 
federal agenciesí response to fulfilling the requirements of 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. governmentís 
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 GAOís 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 agenciesí 
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 Servicesí 
Medicaid Program, with outlays exceeding $175 billion annually, and the 
Department of Educationís 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): $20.70. 

Fiscal year: 2000; 
Agencies reporting improper payments[A]: 8; 
Reported amounts of improper payments (in billions): $19.60. 

Fiscal year: 2001; 
Agencies reporting improper payments[A]: 8; 
Reported amounts of improper payments (in billions): $20.90. 

Fiscal year: 2002; 
Agencies reporting improper payments[A]: 7; 
Reported amounts of improper payments (in billions): $19.50. 

Fiscal year: 2003; 
Agencies reporting improper payments[A]: 13; 
Reported amounts of improper payments (in billions): $35.70. 

Fiscal year: 2004; 
Agencies reporting improper payments[A]: 17; 
Reported amounts of improper payments (in billions): $45.40. 

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-05-907T. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact McCoy Williams, (202) 512-
6906, 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 your continued interest in addressing the governmentwide 
improper payments issue, you asked GAO to report on (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. We reported this information to you on March 
31, 2005.[Footnote 3] In my testimony today, I will discuss the results 
of our March 2005 report on agencies' progress in meeting the 
requirements of IPIA. 

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 
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 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, 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 
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 agenciesthat 
the U.S. Treasury determined to be significant to the U.S. government's 
consolidated financial statements.[Footnote 5] 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: 17a; 
Total number of programs: 24. 

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 that 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 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 three 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. 

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 four 
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 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 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. 

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.