This is the accessible text file for GAO report number GAO-03-991T 
entitled 'Financial Management: Effective Implementation of the 
Improper Payments Information Act of 2002 Is Key to Reducing the 
Government's Improper Payments' which was released on July 14, 2003.

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov.

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.

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).