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entitled 'Federal Grants: Agencies Performed Internal Control 
Assessments Consistent with Guidance and Are Addressing Internal 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

July 2014: 

Federal Grants: 

Agencies Performed Internal Control Assessments Consistent with 
Guidance and Are Addressing Internal Control Deficiencies: 

GAO-14-539: 

GAO Highlights: 

Highlights of GAO-14-539, a report to congressional requesters. 

Why GAO Did This Study: 

In fiscal year 2013, the federal government obligated over $555 
billion for grants. Effective oversight of internal controls is 
important for providing reasonable assurance that grants are awarded 
properly, recipients are eligible, and federal grant funds are used as 
intended. 

GAO was asked to review internal control issues over grants. This 
report (1) examines whether the five largest grant-making agencies' 
internal control oversight processes for their grant programs were 
consistent with OMB requirements and (2) describes internal control 
issues that have been reported related to the grants management 
process and key grant programs. 

To achieve these objectives, GAO reviewed the fiscal year 2012 
internal control assessment processes for the five largest grant-
making agencies' grants programs, as conducted under OMB Circular No. 
A-123. GAO reviewed the agencies' assessment documentation and 
reviewed grants internal control findings reported in other reviews of 
these agencies for fiscal years 2012 and 2013. GAO did not include 
Medicaid—the largest federal grant program—which has been well covered 
in other GAO and HHS OIG reviews. 

What GAO Found: 

For fiscal year 2012, the processes used by the five largest grant-
making agencies to conduct their internal control assessments were 
consistent with the requirements of Office of Management and Budget 
(OMB) Circular No. A-123, which requires that agencies identify 
significant areas within their operations in which to implement key 
controls, continuously monitor and test those controls, and report 
annually on management's judgment regarding the adequacy and 
effectiveness of internal control. The five largest grant-making 
agencies by amount of grant obligations are the Departments of Health 
and Human Services (HHS), Education, Transportation (DOT), Agriculture 
(USDA), and Housing and Urban Development (HUD). The agencies 
identified areas of risk, including grants programs and grants 
management processes, in which to implement key controls and then 
monitored and tested those controls. The agencies identified 
deficiencies through control tests, prepared and implemented 
corrective action plans to address the deficiencies identified, and 
reported on their internal control through annual management assurance 
statements. HHS, DOT, and USDA qualified their internal control 
management assurance statements for fiscal year 2012, in part because 
of material weaknesses affecting their grant programs. For fiscal year 
2013, HHS, USDA, and HUD gave qualified statements of assurance in 
part because of material weaknesses in their grant programs. 

In addition to issues identified through the OMB Circular No. A-123 
process, other audits and reviews have reported internal control 
issues related to the grants management process and grant programs. 
For example: 

* For fiscal years 2012 and 2013, DOT's financial statement auditors 
reported that DOT did not timely identify and deobligate unused grant 
obligations. DOT took actions to address the recommendations, 
resulting in the auditors reducing the issue from a material weakness 
in fiscal year 2012 to a significant deficiency in fiscal year 2013. 

* In July 2013, HUD's Office of Inspector General (OIG) reported that 
guidance for ensuring whether grantees are carrying out grant 
activities in a timely manner in compliance with requirements of the 
Community Development Block Grant program was not always implemented 
effectively. HUD generally concurred with the recommendations and 
stated its intent to address them. 

* In both fiscal years 2012 and 2013, HHS reported over $1 billion in 
estimated improper payments in grant programs. HHS's OIG determined 
that HHS did not comply with all requirements of the Improper Payments 
Elimination and Recovery Act of 2010 for certain grant programs. HHS 
reported that it has steps planned and under way to help prevent and 
reduce improper payments. 

OMB Circular No. A-123 notes that agency managers and staff should be 
encouraged to identify control deficiencies, as this reflects 
positively on the agency's commitment to recognizing and addressing 
management problems. Financial statement auditors, OIGs, and GAO 
continue to focus on grants internal controls through their audits and 
reviews, and the agencies continue to use the results of these reviews 
and their own assessments to develop corrective actions and oversee 
internal controls of federal grants to ensure that necessary controls 
are in place and operating effectively. 

What GAO Recommends: 

GAO is not making any recommendations but continues to monitor grants 
management as part of its work on key issues. 

In general, the five agencies concurred with the information in the 
report. Some agencies also provided technical comments that were 
incorporated, as appropriate. 

View [hyperlink, http://www.gao.gov/products/GAO-14-539]. For more 
information, contact Beryl H. Davis at (202) 512-2623 or 
davisbh@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Agencies' Assessments of Internal Controls over Grants Programs Were 
Consistent with OMB Requirements: 

Internal Control Issues Reported Include Control Deficiencies, 
Improper Payments, and Management Challenges: 

Concluding Observations: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Department of Education: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Grant Program Offices Included in Our Review and Their 
Largest Grant Programs: 

Table 2: Grants-Related Processes and Programs Selected for Internal 
Control Assessment in Fiscal Year 2012: 

Table 3: Factors Considered by the Five Largest Grant-Making Agencies 
When Determining the Controls to Test for Their Annual Internal 
Control Assessments: 

Table 4: Improper Payment Estimates and Error Rates in Grant Programs, 
Fiscal Years 2012 and 2013: 

Table 5: Amount and Percentage of Grant Obligations (Excluding 
Medicaid) for the Five Largest Grant-Making Agencies and Their Largest 
Program Offices, Fiscal Year 2012: 

Figure: 

Figure 1: Internal Control Activities through the Grants Life Cycle: 

Abbreviations: 

ACF: Administration for Children and Families: 

CFDA: Catalog of Federal Domestic Assistance: 

CHIP: Children's Health Insurance Program: 

CMS: Centers for Medicare & Medicaid Services: 

CPD: Office of Community and Planning Development: 

DOT: Department of Transportation: 

FFMIA: Federal Financial Management Improvement Act of 1996: 

FHWA: Federal Highway Administration: 

FMFIA: Federal Managers' Financial Integrity Act of 1982: 

FNS: Food and Nutrition Service: 

FSA: Federal Student Aid: 

FTA: Federal Transit Administration: 

HHS: Department of Health and Human Services: 

HUD: Department of Urban Development: 

IPERA: Improper Payments Elimination and Recovery Act of 2010: 

IPIA: Improper Payments Information Act of 2002: 

NIFA: National Institute of Food and Agriculture: 

NIH: National Institutes of Health: 

OESE: Office of Elementary and Secondary Education: 

OIG: Office of Inspector General: 

OMB: Office of Management and Budget: 

OSERS: Office of Special Education and Rehabilitative Services: 

PIH: Office of Public and Indian Housing: 

USDA: Department of Agriculture: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

July 30, 2014: 

The Honorable Tom Carper: 
Chairman: 
The Honorable Tom Coburn, M.D. 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Claire McCaskill: 
Chairman: 
Subcommittee on Financial and Contracting Oversight: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

Federal grants are a significant tool for helping to achieve national 
objectives as they fund many programs important to the public. 
[Footnote 1] In fiscal year 2013, the federal government obligated 
over $555 billion for grants for a wide array of activities, including 
building highways, bridges, and mass transit systems; hiring teachers 
and increasing student access to higher education; funding medical and 
other types of research; and providing medical services, nutrition 
programs, and housing assistance for the economically disadvantaged. 
[Footnote 2] Effective financial and management controls, also known 
as internal controls, are important for providing reasonable assurance 
to federal managers and taxpayers that grants are awarded properly, 
recipients are eligible, and federal grant funds are used as intended 
and in accordance with applicable laws and regulations. In numerous 
reviews over the years, we and agency Offices of Inspector General 
(OIG) have reported weaknesses in agencies' internal controls for 
managing and overseeing grants. (See the Related GAO Products list at 
the end of this report.) 

Because of concerns about reported weaknesses in grants management and 
oversight across federal agencies, you asked us to review internal 
control issues over grants. This report (1) examines whether the five 
largest grant-making agencies' internal control oversight processes 
for their grant programs were consistent with Office of Management and 
Budget (OMB) requirements and (2) describes internal control issues 
that have been reported related to the grants management process and 
key grant programs. According to fiscal year 2012 USAspending.gov 
data, the most current available data at the time we started our 
review, the five largest grant-making agencies by grant dollars 
obligated were the Departments of Health and Human Services (HHS), 
Education (Education), Transportation (DOT), Agriculture (USDA), and 
Housing and Urban Development (HUD), which we selected as the subjects 
of our review.[Footnote 3] 

Using fiscal year 2012 USAspending.gov data, we selected 2 or 3 of the 
largest program offices in each of the five agencies, for a total of 
12 program offices, so that our review would cover a large portion of 
the federal funds awarded for grants.[Footnote 4] Although Medicaid, 
an HHS grant program, amounted to over 43 percent of the total 
obligations incurred for grants in fiscal year 2012, we elected to 
exclude the Medicaid grant program from our review because it has been 
the subject of numerous reviews, including many by GAO and HHS's OIG. 
Further, by doing so, we were able to include HHS programs that 
otherwise would not have been covered in our review and still comply 
with our selection criteria to cover over 80 percent of an agency's 
grant obligations, excluding Medicaid obligations. Thus our scope 
covers oversight of internal controls over a large percentage of the 
non-Medicaid federal grant dollars. 

To assess the reliability of the USAspending.gov obligations data, we 
(1) reviewed recent GAO work that used the data and (2) compared 
results of ranking agencies by obligation amounts to the results of 
ranking agencies based on outlay amounts reported by OMB.[Footnote 5] 
In our recent work, we had assessed the reliability of USAspending.gov 
obligations data for a report we issued in September 2012 by (1) 
performing electronic testing of required data elements, (2) reviewing 
existing information about the data and the system that produced them, 
and (3) interviewing agency officials knowledgeable about the data, 
and we determined that the data were sufficiently reliable for the 
purposes of that report. We also determined that the data were 
sufficiently reliable for the purpose of selecting agencies and 
program offices to review for this report. Further, to assess the 
reasonableness of our decision to use USAspending.gov obligations data 
to select the top five grant-making agencies, we reviewed OMB's 
Historical Table 12.3, Total Outlays for Grants to State and Local 
Governments, by Function, Agency and Program: 1940-2013, to determine 
the five largest grant-making agencies based on outlays for 
grants.[Footnote 6] We reviewed and summarized the data and found that 
the same five agencies we selected based on USAspending.gov data were 
also the top five grant-making agencies according to OMB's data. As 
the OMB budget data had undergone rigorous review by OMB, we 
considered it sufficiently reliable for the purposes of this report. 
[Footnote 7] See appendix I for information about our selection of 
program offices and further details on our scope and methodology. 

To examine whether the agencies' internal control oversight processes 
for their grant programs were consistent with OMB requirements, we 
focused on the fiscal year 2012 internal control evaluation processes 
they performed to comply with the internal control assessment and 
reporting requirements of OMB Circular No. A-123 and its Appendix A. 
[Footnote 8] We reviewed documentation of the OMB Circular No. A-123 
internal control assessment processes for the selected program offices 
in the five agencies, including documentation of deficiencies 
identified and planned corrective actions. We interviewed agency 
officials and officials in the agencies' OIGs about the agencies' 
assessment processes and oversight of grants-related internal 
controls. We based our evaluation on OMB Circular No. A-123 and 
Standards for Internal Control in the Federal Government, specifically 
the standard for monitoring.[Footnote 9] 

To identify internal control issues that have been reported related to 
the grants management process and key grant programs, we reviewed the 
agencies' financial statement audit reports for fiscal years 2012 and 
2013, and relevant GAO and OIG reports issued in fiscal years 2012 and 
2013. We also reviewed improper payments information reported by the 
agencies in their fiscal year 2012 and 2013 agency financial reports 
and the results of the OIGs' reviews of agencies' compliance with 
improper payments laws. Finally, we reviewed management challenges 
reported by the agencies' OIGs. Appendix I provides details of our 
scope and methodology. 

We conducted this performance audit from November 2012 to July 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Grant Types and Programs: 

The federal government uses grants--forms of federal financial 
assistance to a state, a local government, or a nongovernmental 
recipient authorized to receive U.S. government assistance (e.g., 
charitable or educational institutions) for a specified public 
purpose--to achieve national objectives and respond to emerging 
trends, such as changing demographics and changing threats to homeland 
security. Federal grant programs are diverse and can vary in numerous 
ways including type, size, nature of recipients, and types of programs 
they fund. Grant programs also vary in the amount of discretion they 
give to the recipient in how the funds will be used and the way the 
funds are allocated or awarded. The types of grants awarded by the 
agencies in our review include the following: 

* Block grants allow recipients, predominately states, to fund a broad 
range of activities within more general policy areas, such as 
community development or law enforcement. 

* Formula grants are awarded to all eligible grantees based on a 
statutory allocation formula, which may be based on a number of 
variables, including population, poverty rate in a given area, or tax 
effort. The grants are typically awarded to states, which often pass 
funds through to eligible local government agencies and nonprofit 
organizations. 

* Project grants are generally awarded on a competitive basis and 
provide funding for fixed or known periods for specific projects or 
the delivery of specific services or products. Project grants can 
include fellowships, scholarships, research grants, training grants, 
traineeships, experimental and demonstration grants, evaluation 
grants, planning grants, technical assistance grants, survey grants, 
and construction grants. 

These categories are not mutually exclusive and can overlap when used 
to define grant programs. For example, HUD awards Community 
Development Block Grant funds to states using a formula, and then the 
states distribute the funds to localities, sometimes as project grants. 

Some agencies also use cooperative agreements, another form of 
financial assistance similar to grants, but one in which the federal 
agency is more involved with the recipient in implementing the 
financial assistance program. The distinguishing factor between a 
grant and a cooperative agreement is the degree of federal 
participation or involvement during the performance of the work 
activities. 

Program Offices and Grant Programs in Our Review: 

Most of the program offices included in our review oversee and monitor 
large block and formula grant programs, while others award and manage 
numerous project or other smaller grants, as described in table 1. 
[Footnote 10] 

Table 1: Grant Program Offices Included in Our Review and Their 
Largest Grant Programs: 

Department and program office: Department of Health and Human Services; 

Department and program office: 
* Administration for Children and Families (ACF); 
Description: ACF's Temporary Assistance for Needy Families program 
awards block grants to states to help needy families achieve self-
sufficiency. 

* National Institutes of Health (NIH); 
Description: NIH does not administer a specific large grant program; 
rather it awards and manages a number of project grants for medical 
research. 

* Centers for Medicare & Medicaid Services (CMS); 
Description: The Children's Health Insurance Program is the second 
largest grant program within CMS.[A] It is a formula grant program 
funded and administered jointly by CMS and the states. 

Department and program office: Department of Education; 

* Federal Student Aid (FSA); 
Description: FSA's Pell Grant Program provides need-based grants to 
low-income undergraduate and certain postbaccalaureate students to 
promote access to postsecondary education. 

* Office of Elementary and Secondary Education (OESE); 
Description: OESE's Title I grants program to state educational 
agencies provides financial assistance through formula grants to local 
educational agencies and schools with high numbers or high percentages 
of children from low-income families to help ensure that all children 
meet challenging state academic standards. 

* Office of Special Education and Rehabilitative Services (OSERS); 
Description: OSERS's Individuals with Disabilities Education Act, Part 
B Grants to States program provides formula grants to assist the 50 
states, the District of Columbia, Puerto Rico, Outlying Areas, and the 
Freely Associated States in meeting the excess costs of providing 
special education and related services to children with disabilities. 

Department and program office: Department of Transportation; 

* Federal Highway Administration (FHWA); 
Description: FHWA's major grant program is Highway Planning and 
Construction, a formula grant program that provides funds to state 
departments of transportation. 

* Federal Transit Administration (FTA); 
Description: FTA's major grant program is the Urbanized Area Formula 
Program, which provides funds through formula grants to public 
entities in urbanized areas to support transportation services. 

Department and program office: Department of Agriculture; 

* Food and Nutrition Service (FNS); 
Description: FNS's largest grant program is the National School Lunch 
Program, which consists of formula grants to state agencies to 
reimburse schools for lunches served to low-income children. 

* National Institute of Food and Agriculture (NIFA); 
Description: NIFA does not administer a specific large grant program; 
rather, it provides a number of formula grants to land-grant 
universities and competitive grants to researchers in land-grant and 
other universities for research and education. 

Department and program office: Department of Housing and Urban 
Development; 

* Office of Community Planning and Development (CPD); 
Description: The largest grant program in CPD is the Community 
Development Block Grant program, which provides annual grants on a 
formula basis to general units of local government and states to 
ensure decent affordable housing, provide services to the most 
vulnerable in our communities, and create jobs through the expansion 
and retention of businesses. 

* Office of Public and Indian Housing (PIH); 
Description: The largest grant program in PIH, the Public Housing 
Operating Fund, provides funds to public housing authorities through 
formula grants for the operation and management of public housing. 

Source: GAO analysis of USAspending.gov data and agency information. 
GAO-14-539. 

[A] Medicaid is CMS's (and the federal government's) largest grant 
program, accounting for over 43 percent of all federal grant 
obligations in fiscal year 2012. We elected to exclude Medicaid from 
our review because it has been the subject of numerous reviews, 
including many by us and HHS's OIG. Further, by doing so, we were able 
to include HHS grant programs that otherwise would not have been 
covered in our review and still comply with our selection criteria to 
cover over 80 percent of an agency's grant obligations, excluding 
Medicaid. 

[End of table] 

Importance of Internal Control: 

At all stages of the grants life cycle, it is essential that effective 
internal control systems are in place. Internal control represents an 
agency's plans, methods, and procedures used to meet its mission, 
goals, and objectives and serves as the first line of defense in 
safeguarding assets and preventing and detecting errors, fraud, waste, 
abuse, and mismanagement. Effective oversight of internal controls for 
grant programs is important to provide reasonable assurance to 
taxpayers that grants are awarded properly, recipients are eligible, 
and federal funds are used as intended and in accordance with 
applicable laws and regulations. The term reasonable assurance is 
important because no matter how well-designed and well-operated, 
internal control cannot provide absolute assurance that agency 
objectives will be met. Cost-benefit is an important concept to 
internal control considerations. Internal control is very broad and 
encompasses all controls within an agency, covering an agency's entire 
mission and operations, not just financial operations. Figure 1 shows 
examples of agencies' control activities in each phase of the grants 
life cycle. 

Figure 1: Internal Control Activities through the Grants Life Cycle: 

[Refer to PDF for image: illustration] 

Pre-award: 
Review potential recipients' applications; 
Reserve funds for approved grantees. 

Award: 
Approve obligation of funds; 
Perform risk assessments to identify and mitigate risk. 

Implementation: 
Review performance reviews and oversight reports; 
Conduct audits and required assessments. 

Closeout: 
Perform final project reviews; 
Deobligate unused funds. 

Source: GAO analysis of agencies' internal control documentation. GAO-
14-539. 

[End of figure] 

Congress passed the Federal Managers' Financial Integrity Act (FMFIA) 
[Footnote 11] to help improve the management of federal government 
programs and strengthen agency internal control systems by requiring 
ongoing evaluations and reports on the adequacy of executive agency 
internal control systems.[Footnote 12] FMFIA, as implemented by GAO 
standards and OMB guidance, requires agency managers to establish 
internal control systems that provide reasonable assurance regarding 
the agency's proper use of funds and resources, compliance with 
statutes and regulations, and preparation of reliable financial 
reports. In accordance with FMFIA, OMB has established guidance for 
agencies for evaluating and reporting on their internal controls. This 
guidance is now contained in OMB Circular No. A-123, Management's 
Responsibility for Internal Control. FMFIA also requires GAO to issue 
internal control standards for the federal government, which are now 
contained in Standards for Internal Control in the Federal 
Government.[Footnote 13] These standards provide the overall framework 
for establishing and maintaining internal control and for identifying 
and addressing major performance and management challenges and areas 
at greatest risk of fraud, waste, abuse, and mismanagement. The 
standards also provide that for internal control to be effective, an 
agency's management should establish both a supportive overall control 
environment and specific control activities directed at carrying out 
the agency's objectives. 

Annual Internal Control Assessment and Reporting: 

OMB Circular No. A-123 states that management is responsible for 
establishing and maintaining internal control to achieve the 
objectives of effective and efficient operations, reliable financial 
reporting, and compliance with applicable laws and regulations. OMB 
Circular No. A-123 provides guidance to federal managers on improving 
the accountability and effectiveness of federal programs and 
operations by establishing, assessing, correcting, and reporting on 
internal control. OMB Circular No. A-123 requires federal agencies and 
managers to take systematic and proactive measures to, among other 
things, assess the adequacy of internal control in federal programs 
and operations and report annually on internal control through 
management assurance statements. 

To assess the adequacy of internal controls, federal agencies conduct 
an annual assessment that includes testing key controls, identifying 
needed improvements, and developing and implementing corrective action 
plans. As part of this assessment, OMB Circular No. A-123 states that 
management should consider a variety of internal and external sources, 
including management knowledge and internal program reviews, financial 
statement audit reports, single audit reports, and improper payment 
reviews and reports. Further, OMB Circular No. A-123 provides that the 
agency head should consider input from senior program officials and 
the OIG. 

OMB Circular No. A-123 requires management to annually provide 
assurances about the adequacy and effectiveness of its internal 
control in a management assurance statement. This statement of 
assurance, which is included in an agency's performance and 
accountability report or agency financial report, represents the 
agency head's informed judgment as to the overall adequacy and 
effectiveness of internal control within the agency based on 
management's assessment as described above, including the 
consideration of outside sources such as the results of financial 
statement audits. Management will give an unqualified statement of 
assurance when there are no material weaknesses to report and will 
give a qualified statement of assurance when there are material 
weaknesses related to internal control.[Footnote 14] 

Other Mechanisms for Overseeing and Monitoring Grant Program Internal 
Controls: 

Federal agencies, including the five in our review, use other 
mechanisms and processes, in addition to OMB Circular No. A-123, to 
oversee and monitor their grants internal controls. The single audit--
audit of federal awards, including grant funds, administered by state 
and local governments and nonprofit organizations--is intended to be 
an important mechanism used by federal agencies to ensure 
accountability for federal funds.[Footnote 15] Single audit reports 
provide information about the validity of grant expenditures, adequacy 
of internal controls over federal funds, compliance with grant rules 
and regulations, and questioned amounts. Grant-making agencies use 
single audit reports to monitor grantees' compliance with program and 
financial requirements. The agencies also use other mechanisms to 
monitor their grant programs, for example, creating annual grant 
performance plans, performing eligibility determinations, reviewing 
grantee financial reports, and conducting management control reviews. 

Improper Payments: 

Congress passed three successive acts from 2002 to 2013 toward 
eliminating improper payments.[Footnote 16] The Improper Payments 
Information Act of 2002 (IPIA) required executive branch agencies to 
annually review all programs and activities to identify those that are 
susceptible to significant improper payments, to estimate the annual 
amount of improper payments for such programs and activities, and to 
report these estimates along with actions taken to reduce improper 
payments for programs with estimates that exceed $10 million.[Footnote 
17] This act was subsequently amended by the Improper Payments 
Elimination and Recovery Act of 2010 (IPERA), which expanded on the 
previous requirements for identifying, estimating, and reporting on 
programs and activities susceptible to significant improper payments 
and for recovering overpayments across a broad range of federal 
programs.[Footnote 18] On January 10, 2013, the Improper Payments 
Elimination and Recovery Improvement Act of 2012 was enacted to impose 
further requirements to identify, prevent, and recover payment errors. 
[Footnote 19] 

IPERA requires that OIGs determine whether their agencies are in 
compliance with the criteria listed in IPERA and annually report the 
results to the head of the agency, among others. OMB also plays a key 
role in the oversight of the government-wide improper payments 
issue.[Footnote 20] OMB has established guidance in Appendix C of OMB 
Circular No. A-123 to implement the requirements of IPERA.[Footnote 
21] IPERA and the OMB guidance require an OIG to use the following 
criteria in making a compliance determination on whether the agency 
has: 

* published the agency financial report and OMB-required accompanying 
information on the agency's website, 

* conducted a risk assessment for specific programs to determine 
whether they are susceptible to significant improper payments, 

* published improper payment estimates for all high-risk programs, 

* reported on actions to reduce improper payments, 

* published and met targets for reducing improper payments, 

* reported a gross improper payment rate of less than 10 percent for 
each high-risk program, and: 

* reported efforts to recapture improper payments. 

For the period within the scope of this report, IPERA defined 
significant improper payments as those in any particular program or 
activity that exceed both 2.5 percent of program or activity payments 
and $10 million annually or that exceed $100 million.[Footnote 22] For 
each program identified as susceptible and determined to be at risk of 
improper payments, agencies are required to report to the President 
and Congress the annual amount of estimated improper payments, along 
with steps taken and actions planned to reduce them. Agencies report 
this information in their annual performance and accountability report 
or agency financial report. 

Agencies' Assessments of Internal Controls over Grants Programs Were 
Consistent with OMB Requirements: 

The processes used by all five agencies to conduct their internal 
control assessments for fiscal year 2012 were consistent with the 
requirements in OMB Circular No. A-123. The agencies identified areas 
of risk in which to implement key controls and then monitored and 
tested those controls. The agencies identified deficiencies through 
the control tests, prepared and implemented corrective action plans to 
address the deficiencies identified, and reported on their internal 
control through management assurance statements. 

Agencies Identified Significant Grants Programs and Processes to 
Include in Their Fiscal Year 2012 Internal Control Assessments: 

OMB Circular No. A-123 requires that agencies identify significant 
areas within their operations in which to implement key controls and 
then continuously monitor and test those controls. All five agencies 
conducted a risk assessment to identify significant processes or 
programs to include in their internal control assessment processes for 
fiscal year 2012. Based on these risk assessments, as shown in table 
2, each agency selected its grants management process (or parts of its 
grants management process) or it selected grant programs to test 
controls as part of its fiscal year 2012 OMB Circular No. A-123 
internal control assessment process.[Footnote 23] OMB Circular No. A-
123 does not specify a recommended approach for evaluating or testing 
controls for processes or programs. 

Table 2: Grants-Related Processes and Programs Selected for Internal 
Control Assessment in Fiscal Year 2012: 

Department and program office: Department of Health and Human Services; 

* Administration for Children and Families; 
Grants-related process and program selected for review: Grants 
management. 

* National Institutes of Health; 
Grants-related process and program selected for review: Grants 
management. 

* Centers for Medicare & Medicaid Services; 
Grants-related process and program selected for review: Children's 
Health Insurance Program[A]. 

Department and program office: Department of Education; 

* Federal Student Aid; 
Grants-related process and program selected for review: Pell Grant 
Program Operations; Student Eligibility/Application Processing; 
School Eligibility Service Group Processes. 

* Office of Elementary and Secondary Education; 
Grants-related process and program selected for review: Grants 
management - process for ensuring grantees correct findings resulting 
from monitoring activities[B]. 

* Office of Special Education and Rehabilitative Services; 
Grants-related process and program selected for review: Grants 
management - process for ensuring grantees correct findings resulting 
from monitoring activities[B]. 

Department and program office: Department of Transportation; 

* Federal Highway Administration; 
Grants-related process and program selected for review: Grants 
management. 

* Federal Transit Administration; 
Grants-related process and program selected for review: Grants 
management. 

Department and program office: Department of Agriculture; 

* Food and Nutrition Service; 
Grants-related process and program selected for review: Grants 
management/cooperative agreements. 

* National Institute of Food and Agriculture; 
Grants-related process and program selected for review: Grants 
management/cooperative agreements. 

Department and program office: Department of Housing and Urban 
Development; 

* Community Planning and Development[C]; 
Grants-related process and program selected for review: Disaster 
Recovery Assistance; Neighborhood Stabilization Program #1. 

* Office of Public and Indian Housing; 
Grants-related process and program selected for review: Public Housing 
Operating Fund. 

Source: GAO analysis of agency data. GAO-14-539. 

[A] Medicaid, the largest federal grant program, is part of the 
Centers for Medicare & Medicaid Services. As discussed in app. I, we 
did not include Medicaid in our review. 

[B] Based on the deficiencies identified in fiscal year 2011, the 
Department of Education determined its fiscal year 2012 OMB Circular 
No. A-123 assessment would focus on the process for ensuring grantee 
correction of findings resulting from monitoring activities, across 
multiple program offices, including the Offices of Elementary and 
Secondary Education and Special Education and Rehabilitative Services. 

[C] Disaster Recovery Assistance and the Neighborhood Stabilization 
Program are program areas within the Community Development Block Grant 
program. 

[End of table] 

When conducting these risk assessments, the agencies considered the 
effect that various factors could have on the risk that program 
objectives may not be met or a misstatement may be made in the 
financial statements. OMB Circular No. A-123 does not include 
requirements regarding specific factors to consider when determining 
which controls to test, and the agencies differed in the number of and 
specific risk factors they considered, as shown in table 3. Management 
at all of the agencies approved the selection of processes or programs 
to be included in their agencies' internal control assessments. 

Table 3: Factors Considered by the Five Largest Grant-Making Agencies 
When Determining the Controls to Test for Their Annual Internal 
Control Assessments: 

Factors: Impact on mission; vision and sensitivity; 
Five largest grant-making agencies: 
Department of Health and Human Services: [Check]; 
Department of Education: [Empty]; 
Department of Transportation: [Check]; 
Department of Agriculture: [Empty]; 
Department of Housing and Urban Development: [Empty]. 

Factors: Prior year findings or known issues; 
Five largest grant-making agencies: 
Department of Health and Human Services: [Check]; 
Department of Education: [Check]; 
Department of Transportation: [Check]; 
Department of Agriculture: [Check]; 
Department of Housing and Urban Development: [Empty]. 

Factors: Included in prior year A-123 review; 
Five largest grant-making agencies: 
Department of Health and Human Services: [Empty]; 
Department of Education: [Check]; 
Department of Transportation: [Check]; 
Department of Agriculture: [Check]; 
Department of Housing and Urban Development: [Empty]. 

Factors: Nature or complexity of process; 
Five largest grant-making agencies: 
Department of Health and Human Services: [Check]; 
Department of Education: [Check]; 
Department of Transportation: [Check]; 
Department of Agriculture: [Check]; 
Department of Housing and Urban Development: [Empty]. 

Factors: Human capital; 
Five largest grant-making agencies: 
Department of Health and Human Services: [Check]; 
Department of Education: [Check]; 
Department of Transportation: [Empty]; 
Department of Agriculture: [Check]; 
Department of Housing and Urban Development: [Empty]. 

Factors: New or significantly changed programs or operations; 
Five largest grant-making agencies: 
Department of Health and Human Services: [Check]; 
Department of Education: [Check]; 
Department of Transportation: [Empty]; 
Department of Agriculture: [Check]; 
Department of Housing and Urban Development: [Empty]. 

Factors: Fraud, waste, and abuse; 
Five largest grant-making agencies: 
Department of Health and Human Services: [Check]; 
Department of Education: [Check]; 
Department of Transportation: [Check]; 
Department of Agriculture: [Check]; 
Department of Housing and Urban Development: [Empty]. 

Factors: Material to financial reporting; 
Five largest grant-making agencies: 
Department of Health and Human Services: [Check]; 
Department of Education: [Check]; 
Department of Transportation: [[Check]; 
Department of Agriculture: [Check]; 
Department of Housing and Urban Development: [Check]. 

Source: GAO analysis of agency documentation. GAO-14-539. 

[End of table] 

Agencies Identified Grants Internal Control Issues and Developed 
Corrective Action Plans: 

OMB Circular No. A-123 requires agencies to identify needed 
improvements in controls and take corresponding corrective actions. It 
also notes that agency managers and staff should be encouraged to 
identify control deficiencies, as this reflects positively on the 
agency's commitment to recognizing and addressing management problems. 
Further, Standards for Internal Control in the Federal Government 
states that findings of audits and other reviews should be promptly 
resolved.[Footnote 24] The agencies identified deficiencies in certain 
grants internal controls as a result of their fiscal year 2012 OMB 
Circular No. A-123 assessment processes. When agencies identified 
control deficiencies, they prepared corrective action plans that 
included steps to be taken, responsible parties, and timeframes for 
completion. We reviewed these plans and determined that if implemented 
effectively, the steps to be taken should correct the deficiencies. 
For example: 

* HHS's Administration for Children and Families tested controls for 
the grants management process and identified deficiencies that 
contributed to delays in receiving grantee financial reports and 
resolving single audit findings. The Administration for Children and 
Families developed and implemented corrective actions, including 
following up with and providing assistance to grantees to improve the 
timeliness of periodic reporting and taking steps to ensure proper 
approvals and signatures on documents related to addressing single 
audit findings. 

* HHS's National Institutes of Health tested controls for the grants 
management process and found deficiencies in following up with 
grantees regarding their late filing of financial reports during the 
grant closeout phase and resolution of single audit findings. The 
National Institutes of Health prepared a corrective action plan that 
includes procedures to improve the timeliness of grantee reports and 
actions to improve instructions to grantees regarding repayment of 
disallowed funds found in single audits. It plans to complete these 
actions by December 2014. 

* Education's Internal Controls Evaluation Group (Evaluation Group) in 
the Office of the Chief Financial Officer tested related controls for 
discretionary and formula grants across several program offices, 
including the Office of Elementary and Secondary Education and Office 
of Special Education and Rehabilitative Services, and identified 
deficiencies. Some controls were found to be deficient primarily 
because of a lack of documentation. The deficiencies resulted in two 
findings in various offices, including the Office of Elementary and 
Secondary Education. According to the Evaluation Group, the Office of 
Elementary and Secondary Education implemented corrective actions, 
which included ensuring that grantees are making progress on their 
noncompliance issues before being awarded additional grant funds and 
providing technical assistance to grantees to help them successfully 
carry out their projects. 

* DOT's Federal Transit Administration identified a deficiency related 
to tracking single audit findings. The findings were not being entered 
into the automated system used to manage oversight program activities 
and were being tracked offline. The Federal Transit Administration 
implemented its corrective action plan by issuing a memo to regional 
offices reiterating the requirements to enter single audit findings in 
the system in a timely manner and holding routine conference calls and 
training sessions with regional offices about the issue. Also, 
according to the Federal Transit Administration, it updated the 
standard operating procedures for single audit findings, which were in 
the agency's review process as of April 2014. 

* USDA's Food and Nutrition Service and its National Institute of Food 
and Agriculture tested controls for the grants management process and 
identified deficiencies related to grant accruals, completion of site 
visit reports, and review of single audits. For example, the National 
Institute of Food and Agriculture identified a deficiency in the 
control related to timely review and resolution of single audits. Its 
corrective action plan included drafting standard operating 
procedures; developing a single audit tracking spreadsheet to document 
open reviews, findings, and timelines; and obtaining contractor 
assistance to help clear the extensive backlog of single audit 
reviews. As of February 2014, according to the National Institute of 
Food and Agriculture, the backlog was being addressed. 

* HUD's Office of Community Planning and Development assessed controls 
for the Neighborhood Stabilization Program and identified a deficiency 
related to the timeliness of grantee reports used to monitor grantees. 
In response to the finding, a corrective action plan was created to 
address the untimely filing of these reports. According to HUD, the 
Office of Community Planning and Development solicited and received 
recommendations from field offices for improvements to the process. 
The field office feedback is being incorporated into guidance, and the 
Office of Community Planning and Development plans to communicate the 
updated guidance to field offices no later than June 30, 2014. 

Agencies Reported on Their Internal Control Assessments in Management 
Assurance Statements: 

OMB Circular No. A-123 requires agencies to report annually on 
management's judgment regarding the adequacy and effectiveness of 
internal control in assurance statements signed by management. All 
five agencies included management assurance statements in their annual 
agency financial reports, as required. Based on their fiscal year 2012 
OMB Circular No. A-123 assessment processes, which included testing of 
key program and process controls, results of financial statement 
audits, and other information, all five agencies gave a qualified 
statement of assurance for fiscal year 2012.[Footnote 25] 

* Three of the five agencies (HHS, DOT, and USDA) qualified their 
assurance statements because of weaknesses in grants processes or 
grants programs. Specifically, HHS and USDA reported material 
weaknesses because of noncompliance with IPERA for some large grant 
programs, which is discussed later in this report. DOT reported a 
material weakness involving unliquidated obligations, including in 
grant programs.[Footnote 26] These weaknesses were also identified by 
financial statement auditors, as discussed later in this report. 

* HUD and Education qualified their fiscal year 2012 assurance for 
reasons not directly related to grants. HUD qualified its assurance 
because of weaknesses in its human capital operations, and Education 
qualified its assurance because of weaknesses in its servicing systems 
for student loan programs. 

In their fiscal year 2013 management assurance statements, HHS and 
USDA continued to qualify their assurance regarding internal controls 
because of noncompliance with IPERA. For fiscal year 2013, Education 
management gave an unqualified statement of assurance (no material 
weaknesses reported). DOT took steps to correct the problems with its 
unliquidated obligations and no longer reported the issue as a 
material weakness in fiscal year 2013. However, HUD qualified its 
fiscal year 2013 assurance because of, among other reasons, a material 
weakness related to its accounting for formula grants. 

Internal Control Issues Reported Include Control Deficiencies, 
Improper Payments, and Management Challenges: 

In addition to the issues identified through the OMB Circular No. A-
123 process, other audits and reviews have reported internal control 
issues related to the grants management process and grant programs. We 
examined the agencies' financial statement audit reports and other 
reports issued by GAO and the agencies' OIGs and found that internal 
control deficiencies related to grants, including weaknesses in 
controls for monitoring and oversight of grantees and unliquidated 
grant obligations and certain accounting methods for grant programs, 
have been reported. Further, some of the agencies identified and 
reported on improper payments in grants programs, and OIGs for some of 
the agencies reported issues related to agencies' improper payments 
information. OIGs have also reported management challenges related to 
grants. 

Financial Statement Auditors Reported Significant Deficiencies in 
Controls over Grants Programs: 

The primary purpose of a financial statement audit is to provide an 
opinion about whether an entity's financial statements are presented 
fairly in all material respects in conformity with an applicable 
financial reporting framework. Reporting on financial statement audits 
also includes reports on internal control over financial reporting and 
on compliance with provisions of laws, regulations, contracts, and 
grant agreements that have a material effect on the financial 
statements. Financial statement auditors for three of the agencies 
reported deficiencies in grants monitoring controls and grants 
accounting methods. 

Specifically, for fiscal years 2012 and 2013, financial statement 
auditors for DOT, USDA, and HUD reported significant deficiencies, 
some of which were considered to be material weaknesses, in the 
agencies' internal controls associated with grant programs.[Footnote 
27] Reported grants-related deficiencies primarily related to 
accounting for grant programs and monitoring procedures over grant 
activities. A common issue at many agencies is deficiencies in 
controls over unliquidated grants obligations. Financial statement 
auditors at DOT, USDA, and HUD reported such deficiencies, as 
discussed below, and we have previously reported on the issue. In 
April 2012, we reported that millions of dollars of grant obligations 
remain in expired grant accounts--accounts that were more than 3 
months past the grant end date and had no activity for 9 months or 
more.[Footnote 28] Agency regulations typically impose closeout 
procedures upon both the awarding agency and the grantee. Generally, 
within 90 days after the completion of the grant award, grantees must 
submit all financial, performance, and other reports as required by 
the terms and conditions of the award. Also within this 90-day period, 
grantees generally are to liquidate all obligations incurred under the 
award. These closeout procedures make funds less susceptible to fraud, 
waste, and mismanagement; reduce the potential costs to agencies for 
fees paid to maintain grant accounts; and may enable agencies to 
redirect resources to other projects. 

DOT's financial statement auditors reported deficiencies related to 
unliquidated obligations in grants programs for both fiscal years 2012 
and 2013 and controls over grant accruals in fiscal year 2012. 

* In fiscal year 2012, the auditors reported a material weakness 
related to controls over the review and monitoring of grant and 
nongrant unliquidated obligations, including those at the Federal 
Highway Administration and the Federal Transit Administration. 
Specifically, the Federal Highway Administration and the Federal 
Transit Administration did not timely identify and deobligate unused 
obligation balances. DOT subsequently performed the necessary 
deobligations to correct its financial data. Further, to correct the 
underlying cause, the Federal Highway Administration and the Federal 
Transit Administration revised their procedures for reviewing and 
addressing unliquidated obligations in February 2013 and May 2013, 
respectively. In fiscal year 2013, while the auditors continued to 
identify issues with unused obligations, they no longer considered the 
issue a material weakness and reduced it to a significant deficiency. 

* In fiscal year 2012, the auditors reported a significant deficiency 
related to controls over grant accruals at some program offices, 
including the Federal Highway Administration. At fiscal year-end, DOT 
calculated and recorded an estimated liability for amounts owed to its 
grantees for costs incurred under grant agreements but not yet billed 
to or reimbursed by DOT. The auditors reported that the Federal 
Highway Administration did not have adequate controls in place to 
ensure that all significant grantees and grant programs were properly 
included in DOT's grant accrual estimate methodology, and as a result, 
the grant accruals were potentially understated. This issue was no 
longer reported as a significant deficiency in fiscal year 2013. 

For fiscal years 2012 and 2013, USDA financial statement auditors 
reported a significant deficiency involving unliquidated obligations. 
They reported that ineffective monitoring and reviewing resulted in 
invalid obligations remaining open, thus restricting the availability 
of funding authority and increasing the risk of misstating obligations 
as of year-end. In the fiscal year 2012 audit report, the auditors 
noted that substantial improvements had been made to effectively 
monitor and review unliquidated obligations since fiscal year 2011, 
when the auditors reported this issue as a material weakness. The 
auditors made no new related recommendations in the fiscal year 2012 
report and downgraded the material weakness to a significant 
deficiency. In the fiscal year 2013 audit report, the auditors again 
reported the issue as a significant deficiency and recommended that 
the department emphasize the importance of complying with USDA's 
requirements related to unliquidated obligations. The auditors also 
noted that USDA management reported that the Forest Service was not in 
compliance with certain federal requirements related to managing 
grants programs in fiscal years 2012 and 2013.[Footnote 29] 

HUD's financial statement auditors reported significant deficiencies 
related to controls over unliquidated obligations and controls for 
monitoring some grant programs for fiscal years 2012 and 2013. In 
addition, the auditors reported a material weakness caused by HUD's 
noncompliance with the Federal Financial Management Improvement Act of 
1996 (FFMIA), including noncompliance associated with the Office of 
Community Planning and Development's information systems for fiscal 
years 2012 and 2013.[Footnote 30] 

* During the financial statement audits for fiscal years 2012 and 
2013, HUD's financial statement auditors reported a significant 
deficiency related to unliquidated obligations. The auditors found 
inadequate procedures related to timely reviews and recapture of 
unexpended obligations for several grant programs, including those 
within the Office of Community Planning and Development, which led to 
misstatements in HUD's obligation balances. In the fiscal year 2013 
audit report, the auditors reported that review and closeout policies 
had been drafted but not finalized or implemented because of competing 
priorities. The auditors recommended that the Office of Community 
Planning and Development review and deobligate invalid obligations. 

* For fiscal year 2012, the auditors reported a significant deficiency 
related to the Office of Community Planning and Development's controls 
for monitoring grantees, including that the system used to communicate 
the results and status of on-site monitoring was not effective because 
field offices did not always follow the monitoring handbook and did 
not always update the information system to reflect current status of 
monitoring reviews. The auditors repeated recommendations from the 
prior year to ensure that the monitoring handbook is followed, the 
information in the grants management system is accurate, and findings 
from grantee reviews are closed and funds are collected. By fiscal 
year 2013, most of the recommendations had been implemented, and the 
auditors no longer reported this issue as a significant deficiency for 
fiscal year 2013. 

* The auditors reported material weaknesses for fiscal years 2012 and 
2013 because HUD's financial management systems did not comply with 
FFMIA, including noncompliance associated with the Office of Community 
Planning and Development's information systems. The material weakness 
was due, in part, to the Office of Community Planning and 
Development's method of accounting and the system used for disbursing 
obligations, which did not comply with the requirements of FFMIA for 
maintaining financial management systems that substantially comply 
with federal financial management systems requirements and applicable 
federal accounting standards. The auditors reported that the Office of 
Community Planning and Development was taking steps to address the 
issues. 

Because of many of these internal control issues and ones identified 
at other federal agencies, we reported a significant deficiency in 
internal controls related to grants management in our audit reports on 
the U.S. government's consolidated financial statements for fiscal 
years 2012 and 2013.[Footnote 31] Deficiencies in grants management 
internal controls could adversely affect the federal government's 
ability to ensure that grant funds are being properly reported and 
used in accordance with applicable program laws and regulations. 

In addition to reporting on deficiencies in internal controls, 
financial statement auditors also report on instances of noncompliance 
with certain laws and regulations. Auditors for HHS and USDA reported 
instances of noncompliance with IPERA for some grant programs for 
fiscal years 2012 and 2013, which are discussed later in this report. 

GAO and OIGs Reported Issues Related to Grants Monitoring and Other 
Aspects of Grant Programs: 

We and agency OIGs have reviewed federal grants programs and reported 
findings and recommendations related to monitoring and other aspects 
of grant programs at many federal agencies, including the five in our 
review. For example: 

* In December 2012, we reported on HHS's Administration for Children 
and Families Temporary Assistance for Needy Families program.[Footnote 
32] We found that the Temporary Assistance for Needy Families 
program's accountability framework provided incomplete information on 
how states' noncash services were contributing to the program's 
purposes. States are required to submit several reports to HHS. Taken 
together, these reports serve as the accountability framework in place 
to help HHS and Congress ensure that states use Temporary Assistance 
for Needy Families program funds for proper purposes and identify 
needed program improvements. We recommended that HHS develop a 
detailed plan with timelines to revise reporting categories for 
program expenditures. HHS formed an internal workgroup to review and 
revise a Temporary Assistance for Needy Families program reporting 
form for collecting more-detailed expenditure data, and published two 
Federal Register notices in September 2013 and January 2014, regarding 
proposed revisions to the financial reporting form. HHS plans to issue 
the form effective for fiscal year 2015. 

* In June 2011, we reported on education reform grants to states 
required by the American Recovery and Reinvestment Act of 2009 
(Recovery Act).[Footnote 33] We found that Education had provided 
extensive support to grantee states and had begun monitoring states' 
progress in meeting program goals.[Footnote 34] Education also 
developed ways for grantees to share information, such as hosting 
meetings on specific initiatives. Some officials from grantee states 
said they would find this information useful, but they were generally 
unaware of these resources or were unable to access them. We 
recommended that Education facilitate information sharing among 
grantees. Among other things, Education established communities of 
practice to address multiple topics. Education oversees the activities 
of each community by managing a work plan that includes the target 
dates for each activity. In addition, Education communicates these 
activities to members of each community of practice via emails and 
calls as well as a monthly update to all grantees with upcoming dates 
and events. 

* In December 2011, HHS's OIG reported on a science awards program at 
the National Institutes of Health.[Footnote 35] The program is 
administered through cooperative agreements, which are similar to 
grants but require more involvement by the awarding agency. The OIG 
reported that it found documentation and reporting issues, which the 
National Institutes of Health is taking steps to correct. 
Specifically, the Clinical and Translational Science Awards Program 
did not properly document awardees' progress under their cooperative 
agreements. The OIG recommended that the National Institutes of Health 
ensure that program staff document their monitoring of awardee 
progress; ensure timely submission of required reports; maintain 
official files in accordance with federal policy; and, as required for 
cooperative agreements, provide substantial involvement to Clinical 
and Translational Science Awards Program awardees. The National 
Institutes of Health concurred with the recommendations and stated 
that it had taken or planned to take steps to implement them. 

* In August 2012, DOT's OIG reported on weaknesses in grants oversight 
at the Federal Transit Administration and made several related 
recommendations.[Footnote 36] Specifically, the OIG reported that the 
Federal Transit Administration lacked adequate guidance for ensuring 
that findings from grantee oversight reviews were consistently 
identified and adequately tracked to ensure grantees were complying 
with laws and regulations and implementing corrective actions. In 
response, the Federal Transit Administration stated that it was (1) 
revising its oversight and review processes to, among other things, 
identify grant recipients needing technical assistance and (2) 
developing standard operating procedures to provide more consistency 
across regions and implementing new performance measures. The OIG 
reported that these actions, both those taken and planned, were 
responsive to the recommendations. 

* In February 2012, USDA's OIG performed work related to the Recovery 
Act and reported that it found that the Food and Nutrition Service did 
not create adequate, proactive controls to ensure that states awarded 
grants for schools to purchase and renovate food service equipment 
based on Recovery Act criteria, and did not ensure timely reporting of 
Recovery Act spending data on Recovery.gov as required by OMB guidance 
on using funds pursuant to the Recovery Act.[Footnote 37] The OIG 
recommended that the Food and Nutrition Service continue to update and 
implement adequate, proactive controls for its standard competitive 
grant award process. The Food and Nutrition Service agreed that 
continuous improvement of controls over the competitive award process 
was warranted and agreed with the OIG's recommendation to update 
controls. According to USDA's Office of the Chief Financial Officer, 
the Food and Nutrition Service took corrective action and the 
recommendation was closed in February 2013. 

* In July 2013, HUD's OIG reported that HUD's guidance for ensuring 
grantee compliance with the Community Development Block Grant 
program's timeliness spending requirement was not always implemented 
effectively, and documentation of HUD's rationale for not sanctioning 
noncompliant grantees was inadequate.[Footnote 38] HUD is to annually 
determine whether Community Development Block Grant grantees--states, 
cities, and counties--are carrying out grant activities in a timely 
manner, which includes timely drawdown of grant funds. HUD is to 
generate a monthly report to help field offices monitor grantees' 
compliance with the timeliness spending requirement. The OIG 
recommended, among other things, that HUD (1) strengthen controls over 
Community Development Block Grant procedures related to the monthly 
timeliness report and notification to noncompliant grantees and (2) 
establish documentation requirements and procedures for grantees that 
do not comply with the timeliness spending requirement. HUD generally 
concurred with these recommendations and stated that it would enhance 
current procedures to address the recommendations. 

Agencies Reported Improper Payments in Grant Programs: 

In both fiscal years 2012 and 2013, four of the largest grant-making 
agencies reported almost $5 billion in estimated improper payments in 
grants programs. Agencies are required by IPIA, as amended by IPERA 
and implemented by OMB guidance, to periodically review and assess all 
programs and activities to identify those susceptible to significant 
improper payments, estimate the annual amount of improper payments, 
and report these estimates along with actions taken to reduce improper 
payments when the estimates exceed both $10 million annually and 2.5 
percent of program or activity payments (or 1.5 percent of program or 
activity payments starting in fiscal year 2014) or when the estimates 
exceed $100 million. 

As shown in table 4, four of the agencies reported improper payment 
estimates and error rates (i.e., amount of estimated improper payments 
divided by total program outlays) in grant programs administered by 
the program offices in our review for fiscal years 2012 and 2013. 
[Footnote 39] 

Table 4: Improper Payment Estimates and Error Rates in Grant Programs, 
Fiscal Years 2012 and 2013: 

Department: Department of Health and Human Services (HHS); 

Grant program: Head Start; 
Fiscal year 2012: 
Improper payments: $46.2 million; 
Error rate (percentages): 0.6%; 
Fiscal year 2013: 
Improper payments: [A]; 
Error rate (percentages): [A]. 

Grant program: Foster Care; 
Fiscal year 2012: 
Improper payments: $80.2 million; 
Error rate (percentages): 6.2%; 
Fiscal year 2013: 
Improper payments: $70.0 million; 
Error rate (percentages): 5.3%. 

Grant program: Child Care and Development Funds; 
Fiscal year 2012: 
Improper payments: $474 million; 
Error rate (percentages): 9.2%; 
Fiscal year 2013: 
Improper payments: $306.0 million; 
Error rate (percentages): 5.9%. 

Grant program: Children's Health Insurance Program; 
Fiscal year 2012: 
Improper payments: $704 million; 
Error rate (percentages): 8.2%; 
Fiscal year 2013: 
Improper payments: $646 million; 
Error rate (percentages): 7.1%. 

Department: Department of Education (Education); 

Grant program: Pell Grants; 
Fiscal year 2012: 
Improper payments: $829 million; 
Error rate (percentages): 2.5%; 
Fiscal year 2013: 
Improper payments: $731 million; 
Error rate (percentages): 2.3%. 

Grant program: Title I Grants; 
Fiscal year 2012: 
Improper payments: $28.3 million; 
Error rate (percentages): 0.2%; 
Fiscal year 2013: 
Improper payments: $56.7 million; 
Error rate (percentages): 0.4%. 

Department: Department of Transportation (DOT); 

Grant program: Planning and Construction; 
Fiscal year 2012: 
Improper payments: $103.2 million; 
Error rate (percentages): 0.2%; 
Fiscal year 2013: 
Improper payments: $91.4 million; 
Error rate (percentages): 0.2%. 

Grant program: Formula Grants; 
Fiscal year 2012: 
Improper payments: $38.1 million; 
Error rate (percentages): 0.4%; 
Fiscal year 2013: 
Improper payments: $62.6 million; 
Error rate (percentages): 0.7%. 

Department: Department of Agriculture (USDA); 

Grant program: School Lunch Program; 
Fiscal year 2012: 
Improper payments: $1.557 billion; 
Error rate (percentages): 15.5%; 
Fiscal year 2013: 
Improper payments: $1.774 billion; 
Error rate (percentages): 15.7%. 

Grant program: Special Supplemental Nutrition Program for Women, 
Infants, and Children; 
Fiscal year 2012: 
Improper payments: $202 million; 
Error rate (percentages): 4.1%; 
Fiscal year 2013: 
Improper payments: $198 million; 
Error rate (percentages): 4.4%. 

Grant program: School Breakfast Program; 
Fiscal year 2012: 
Improper payments: $752 million; 
Error rate (percentages): 25.2%; 
Fiscal year 2013: 
Improper payments: $831 million; 
Error rate (percentages): 25.3%. 

Grant program: Child and Adult Care Food Program; 
Fiscal year 2012: 
Improper payments: $14 million; 
Error rate (percentages): 1.6%; 
Fiscal year 2013: 
Improper payments: $10 million; 
Error rate (percentages): 1.1%. 

Source: Agency financial reports for fiscal years 2012 and 2013 for 
HHS, Education, DOT, and USDA. | GAO-14-539: 

[A] According to HHS, OMB granted HHS relief from reporting annual 
error rate estimates for fiscal year 2013 because of Head Start's 
strong internal controls, monitoring systems, and low reported error 
rates. 

[End of table] 

OIGs Reported Issues with Agencies' Improper Payments Information: 

IPERA requires, among other things, OIGs to determine whether their 
agencies are in compliance with the criteria listed in IPERA and 
annually report the results to the heads of their agencies, the 
Comptroller General, and certain congressional committees. Many OIGs 
do so by reviewing their agencies' improper payment reporting in the 
annual agency financial report and accompanying materials. For fiscal 
years 2012 and 2013, the OIGs reported the following for their 
respective agencies. 

* The HHS OIG reported that while HHS met many of IPERA's compliance 
requirements, it did not fully comply with IPERA for fiscal years 2012 
and 2013 for some of its grant programs.[Footnote 40] Specifically, 
the OIG reported that HHS did not comply with IPERA for the Children's 
Health Insurance Program for fiscal year 2012 because it did not 
publish a corrective action plan for the program's improper payments. 
HHS did publish a corrective action plan for this program for fiscal 
year 2013. For the Foster Care program, the OIG reported that HHS did 
not comply for fiscal year 2012 because the improper payment rate of 
6.2 percent exceeded HHS's target rate of 4.5 percent. For fiscal year 
2013, HHS's Foster Care improper payments rate of 5.3 percent met the 
target rate of 6 percent for that year. In the case of the Temporary 
Assistance for Needy Families program, the OIG reported that HHS did 
not report an improper payments estimate for either fiscal year 2012 
or fiscal year 2013. According to HHS, statutory limitations related 
to obtaining state data prohibited HHS from developing an estimate. 
However, HHS has reported that is taking steps and has planned actions 
to help prevent and reduce improper payments, including providing 
technical assistance to help strengthen state program integrity 
efforts, revisions to the Temporary Assistance to Needy Families 
financial reporting form so that states can provide more accurate 
information about how they are using program funds, and sharing with 
states information and best practices for reducing improper payments. 

* The USDA OIG reported that USDA did not meet IPERA's compliance 
requirements for fiscal years 2012 and 2013 for some of its grants 
programs, including the School Lunch and School Breakfast Programs and 
the Child and Adult Care Food Program.[Footnote 41] The OIG reported 
that the School Lunch and School Breakfast Programs did not comply 
because they reported improper payment rates that exceeded 10 percent 
for both fiscal years 2012 and 2013. According to the OIG, the Food 
and Nutrition Service's administration of these programs was highly 
decentralized and involved many governmental and nongovernmental 
organizations to provide benefits at approximately 100,000 locations. 
The OIG reported that Food and Nutrition Service officials stated that 
they were aware of the significant improper payment rate in these two 
programs, and they hired a contractor to conduct a study to help 
develop initiatives and practices to address this problem. The OIG 
reported that the results of the study were pending at the time of its 
review for fiscal year 2013 and noted that Food and Nutrition Service 
officials believed it would take time to achieve an error rate less 
than 10 percent.[Footnote 42] For the Child and Adult Care Food 
Program, the OIG reported that USDA reported only a partial estimate 
of improper payments for both fiscal years 2012 and 2013 because the 
Food and Nutrition Service did not have a cost-effective method for 
estimating improper payments for one of the program's two components--
Family Day Care Homes Meal Claims. Food and Nutrition Service 
officials continued to report difficulties in determining a gross 
estimate for the Child and Adult Care Food Program, which included 
over 190,000 participating day care homes and centers with varied 
eligibility requirements for each of the program's two components. 
According to the OIG's report on its fiscal year 2013 review, the Food 
and Nutrition Service has conducted feasibility studies since 2006 to 
develop a reliable method for estimating improper payments, but the 
studies were not reliable. The Food and Nutrition Service told us that 
it continues to assess methods of estimating erroneous payments and 
that a new study will be conducted in 2014 to explore an alternative 
method of measuring the rate of erroneous payments. 

* For both fiscal years 2012 and 2013, Education's OIG reported that 
Education met IPERA's compliance requirements; however, improvements 
were needed in the estimation methodology for both the Pell Grant and 
Direct Loan Programs.[Footnote 43] The OIG recommended that Education 
(1) continue working with OMB to obtain approval for an estimation 
methodology that addresses current limitations with some data used and 
(2) where estimates are based on the results of program reviews, 
include all program review results for a sufficient period of time in 
the universe of potential improper payments. Education agreed with the 
OIG's recommendations and noted that it had modified its fiscal year 
2014 estimation methodologies. 

* For fiscal years 2012 and 2013, DOT's OIG reported that although DOT 
met IPERA's compliance requirements, some of the information reported 
in its agency financial reports was inaccurate.[Footnote 44] The OIG 
recommended, among other things, that DOT implement procedures to 
ensure that all elements required for IPERA reporting are accurate and 
supported by documentation. The OIG also reported that while DOT's 
programs met IPERA's required improper payment rate of less than 10 
percent for both fiscal years 2012 and 2013, the Federal Transit 
Administration did not meet its target error rates for those years. In 
its 2012 and 2013 agency financial reports, DOT reported error rates 
of 0.44 percent and 0.73 percent, respectively, for its Formula Grants 
Program. These rates did not did not meet the target error rates 
reported in DOT's fiscal year 2012 and 2013 agency financial reports 
of 0.25 percent and 0.50 percent, respectively. 

OIGs Reported Management Challenges Related to Grant Programs: 

The Reports Consolidation Act of 2000 requires each OIG to prepare a 
statement that summarizes what the OIG considers to be the most 
serious management and performance challenges facing its 
agency.[Footnote 45] Agencies are to include the OIG's summary of 
management challenges in their annual agency financial report or 
performance and accountability report. 

* HHS's OIG reported grants management and identifying and reducing 
improper payments as top grants-related management challenges for 
fiscal year 2012. HHS is the largest grant-making agency in the 
federal government, and oversight and management of both new and 
continuing grant programs are crucial to HHS's mission. The OIG has 
found internal control deficiencies, problems with financial 
stability, inadequate organizational structures, inadequate 
procurement and property management, and inadequate personnel policies 
and procedures among grantees. In addition, the OIG reported that HHS 
faces challenges complying with IPERA for some of its programs, 
including the Temporary Assistance for Needy Families program, as 
discussed above. For fiscal year 2013, the OIG reported a similar 
challenge for grants management-
-protecting HHS grants and contract funds from fraud, waste, and 
abuse. The improper payments-related challenge reported by the OIG for 
fiscal year 2013 was focused on Medicare programs and not on grants 
programs. 

* Education's OIG reported management challenges for fiscal years 2012 
and 2013, including oversight and monitoring of the department's 
programs and grantees and improper payments. Regarding oversight and 
monitoring, the OIG reported that the number of different entities and 
programs requiring monitoring and oversight, the amount of funding 
that flows through the department, and the impact that ineffective 
monitoring could have on stakeholders make monitoring and oversight a 
challenge. The OIG also reported that Education faces challenges in 
its efforts to successfully prevent, identify, and recapture improper 
payments in some programs, including the Pell Grant and Title I 
Programs. For fiscal year 2013, while the OIG noted progress was being 
made in some areas, it reported management challenges similar to those 
for fiscal year 2012. 

* For fiscal year 2012, DOT's OIG reported a grants-related management 
challenge: ensuring effective oversight of Recovery Act projects and 
applying related lessons learned to improve DOT's infrastructure 
programs. For fiscal year 2013, the OIG reported challenges in 
strengthening existing highway and transit project oversight 
mechanisms and improving financial management over grants to better 
use funds, create jobs, and improve infrastructure. 

* For fiscal years 2012 and 2013, USDA's OIG reported a management 
challenge: identifying, reporting, and reducing improper payments, 
including those in some grant programs. The OIG reported, among other 
things, that USDA continues to struggle to meet IPERA's compliance 
requirements for reporting and preventive measures. Also, the OIG 
noted that related quarterly reports did not always provide accurate, 
complete, and timely information. 

* Among other issues, HUD's OIG reported oversight and monitoring of 
some of its grant programs as a management challenge in fiscal years 
2012 and 2013. The challenges included oversight of Recovery Act funds 
and monitoring grants for housing assistance programs and for disaster 
recovery. For example, the OIG reported that HUD faces challenges in 
monitoring Community Development Block Grant Disaster Recovery 
Assistance funds because of, among other things, limited resources for 
performing oversight, the broad nature of HUD projects, a lack of 
understanding of disaster recovery grants by the recipients, and the 
length of time needed to complete projects. 

Concluding Observations: 

In fiscal year 2013, the federal government obligated over $555 
billion in grants for a wide array of activities. Effective oversight 
of internal controls is important for providing reasonable assurance 
to federal managers and taxpayers that grants are awarded properly, 
recipients are eligible, and federal grant funds are used as intended 
and in accordance with applicable laws and regulations. Our review 
found that the five largest grant-making agencies' internal control 
assessment processes were consistent with the requirements in OMB 
Circular No. A-123 and its Appendix A. The findings from these 
assessment processes and from other reviews identified material 
weaknesses and significant deficiencies in grants management. OMB 
Circular No. A-123 notes that agency managers and staff should be 
encouraged to identify control deficiencies, as this reflects 
positively on the agency's commitment to recognizing and addressing 
management problems. Further, agencies are estimating that billions of 
dollars in improper payments occur each year in the grants programs. 
Financial statement auditors, OIGs, and we continue to focus on grants 
internal controls through audits and reviews, and the agencies 
continue to use the results of these reviews and their own assessments 
to develop corrective actions and oversee internal controls of federal 
grants to ensure controls are in place and operating effectively. 

Agency Comments: 

We provided a draft of this report to the Secretaries of Health and 
Human Services, Education, Transportation, Agriculture, and Housing 
and Urban Development. In general, all five agencies concurred with 
the information in the report. Education, DOT, USDA, and HUD also 
provided technical comments that were incorporated as appropriate. In 
addition, Education provided written comments, which are reprinted in 
appendix II. We also provided a draft of the report to the Director of 
OMB, and OMB responded that it had no comments. 

We are sending copies of this report to the Secretaries of Health and 
Human Services, Education, Transportation, Agriculture, and Housing 
and Urban Development; the Director of the Office of Management and 
Budget; appropriate congressional committees; and other interested 
parties. In addition, the report is available at no charge on the GAO 
website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-2623 or davisbh@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff members who made key 
contributions to this report are listed in appendix III. 

Signed by: 

Beryl H. Davis: 
Director, Financial Management and Assurance: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives were to (1) examine whether the five largest grant-
making agencies' internal control oversight processes for their grant 
programs were consistent with Office of Management and Budget (OMB) 
requirements and (2) describe internal control issues that have been 
reported related to the grants management process and key grant 
programs.[Footnote 46] 

Agency Selection: 

To select the agencies to include in our review and to obtain adequate 
coverage of federal grant dollars for fiscal year 2012--the most 
recently completed fiscal year at the time we started our review--we 
reviewed and summarized grant obligations data reported by agencies 
through USAspending.gov (as of November 19, 2012).[Footnote 47] We 
decided to include the five agencies with the highest amounts of 
grants obligations, which accounted for almost 75 percent of total 
federal grant obligations for fiscal year 2012, excluding Medicaid, as 
discussed further below. The Departments of Health and Human Services 
(HHS), Education (Education), Transportation (DOT), Agriculture 
(USDA), and Housing and Urban Development (HUD) were the top five 
federal grant-making agencies based on grants obligations for fiscal 
year 2012. We also reviewed USAspending.gov data for fiscal year 2013 
(as of January 27, 2014) and confirmed that the five largest grant-
making agencies, based on obligations, in fiscal year 2012 remained 
the same in fiscal year 2013. 

To assess the reliability of the USAspending.gov obligations data, we 
(1) reviewed recent GAO work that used the data and (2) compared 
results of ranking agencies by obligation amounts to the results of 
ranking agencies based on outlay amounts reported by OMB, as discussed 
below.[Footnote 48] In our recent work, we had assessed the 
reliability of USAspending.gov obligations data for a report we issued 
in September 2012 by (1) performing electronic testing of required 
data elements, (2) reviewing existing information about the data and 
the system that produced them, and (3) interviewing agency officials 
knowledgeable about the data, and we determined the data were 
sufficiently reliable for the purposes of that report. We also 
determined the data were sufficiently reliable for the purpose of 
selecting agencies and program offices to review for this report. 

Further, to assess the reasonableness of our decision to use 
USAspending.gov obligations data to select the top five grant-making 
agencies, we reviewed OMB's Historical Table 12.3, Total Outlays for 
Grants to State and Local Governments, by Function, Agency and 
Program: 1940-2013, to determine the five largest grant-making 
agencies based on outlays for grants.[Footnote 49] We reviewed and 
summarized the data and found that the same five agencies we selected 
based on USAspending.gov data were also the top five grant-making 
agencies according to OMB's data. As the OMB budget data had undergone 
rigorous review by OMB, we considered them sufficiently reliable for 
the purposes of this report.[Footnote 50] 

In our review of the USAspending.gov data, we noted that grant 
obligations for Medicaid, one of HHS's grant programs, amounted to 
over 43 percent of total obligations incurred by the federal 
government for grants in fiscal year 2012. We elected to exclude the 
Medicaid program from our review because it has been the subject of 
numerous reviews, including many by GAO and HHS's OIG, and by doing 
so, we were able to include HHS grant programs that otherwise would 
not have been covered in our review and still comply with our 
selection criteria to cover over 80 percent of each agency's grant 
obligations. (See table 5 and the related discussion.) Even after 
excluding Medicaid funds for fiscal year 2012, HHS was still the 
largest grant-making agency as measured by grant obligations. 

During our initial planning work, we learned that agencies generally 
include cooperative agreements as part of their grants programs. 
[Footnote 51] We also learned that although USAspending.gov data for 
Education categorize Pell Grants as "direct payments for a specified 
use" and do not identify them as "grants," Education considers Pell 
Grants to be grants, and the Pell Grant Program is Education's largest 
grant program.[Footnote 52] Therefore, in addition to 
USAspending.gov's obligations for grants, we included in the scope of 
our review USAspending.gov amounts for cooperative agreements for the 
five agencies and Pell Grants. In addition, while HUD considers its 
Public Housing Operating Fund a subsidy program, and the Catalog of 
Federal Domestic Assistance categorizes the program as "direct 
payments for specified use," we included the program in our review 
based on the USAspending.gov categorization.[Footnote 53] 

In addition, during our planning work, we found that federal agencies 
rely on their program offices to provide assurance statements 
regarding the effectiveness of their internal controls. The program 
office assurance statements are then rolled up into the agency-wide 
management assurance statement, which the agencies are required by OMB 
to provide in their performance and accountability reports or agency 
financial reports. Therefore, to obtain the most dollar coverage and 
cover the greatest subject area during our review, we selected the 2 
or 3 largest program offices from each agency in order to cover over 
80 percent of grant obligations for each agency, resulting in a total 
of 12 program offices, as shown in table 5. These 12 program offices 
together represented almost 75 percent of the total government-wide 
grants obligations (excluding Medicaid) for fiscal year 2012. If we 
had not excluded Medicaid, the National Institutes of Health grant 
programs would not have been selected for inclusion in our review as 
the Centers for Medicare & Medicaid Services and the Administration 
for Children and Families together would have accounted for about 88 
percent of HHS grant obligations. By excluding Medicaid, we were able 
to include the National Institutes of Health grant obligations, 
allowing us to cover additional grant programs. 

Table 5: Amount and Percentage of Grant Obligations (Excluding 
Medicaid) for the Five Largest Grant-Making Agencies and Their Largest 
Program Offices, Fiscal Year 2012: 

Agency: Department of Health and Human Services; 
Amount of grant obligations: $98.400 billion; 
Percentage of grant obligations[A]: 100.0%. 

Program office: Administration for Children and Families; 
Amount of grant obligations: $47.517 billion; 
Percentage of grant obligations[A]: 48.3%. 

Program office: National Institutes of Health; 
Amount of grant obligations: 22.242 billion; 
Percentage of grant obligations[A]: 22.6%. 

Program office: Centers for Medicare and Medicaid Services[B]; 
Amount of grant obligations: $10.569 billion; 
Percentage of grant obligations[A]: 10.7%. 

Total percentage of obligations for selected program offices: 81.6%. 

Agency: Department of Education; 
Amount of grant obligations: $77.696 billion; 
Percentage of grant obligations[A]: 100.0%. 

Program office: Federal Student Aid; 
Amount of grant obligations: $33.647 billion; 
Percentage of grant obligations[A]: 43.3%. 

Program office: Office of Elementary and Secondary Education; 
Amount of grant obligations: $21.859 billion; 
Percentage of grant obligations[A]: 28.1%. 

Program office: Office of Special Education and Rehabilitative 
Services; 
Amount of grant obligations: $15.840 billion; 
Percentage of grant obligations[A]: 20.4%. 

Total percentage of obligations for selected program offices: 91.8%. 

Agency: Department of Transportation; 
Amount of grant obligations: $51.932 billion; 
Percentage of grant obligations[A]: 100.0%. 

Program office: Federal Highway Administration; 
Amount of grant obligations: $34.454 billion; 
Percentage of grant obligations[A]: 66.3%. 

Program office: Federal Transit Administration; 
Amount of grant obligations: $11.871 billion; 
Percentage of grant obligations[A]: 22.9%. 

Total percentage of obligations for selected program offices: 89.2%. 

Agency: Department of Agriculture; 
Amount of grant obligations: $30.876 billion; 
Percentage of grant obligations[A]: 100.0%. 

Food and Nutrition Service; 
Amount of grant obligations: $28.296 billion; 
Percentage of grant obligations[A]: 91.6%. 

Program office: National Institute of Food and Agriculture; 
Amount of grant obligations: $1.238 billion; 
Percentage of grant obligations[A]: 4.0%. 

Total percentage of obligations for selected program offices: 95.6%. 

Agency: Department of Housing and Urban Development; 
Amount of grant obligations: $12.107 billion; 
Percentage of grant obligations[A]: 100.0%. 

Program office: Office of Community Planning and Development; 
Amount of grant obligations: $6.845 billion; 
Percentage of grant obligations[A]: 56.5%. 

Program office: Office of Public and Indian Housing; 
Amount of grant obligations: $5.131 billion; 
Percentage of grant obligations[A]: 42.4%. 

Total percentage of obligations for selected program offices: 98.9%. 

Total for agencies (excluding Medicaid); 
Amount of grant obligations: $271.011 billion. 

Total for program offices (excluding Medicaid); 
Amount of grant obligations: $239.509 billion. 

Source: GAO analysis of USAspending.gov data for fiscal year 2012 (as 
of November 19, 2012). GAO-14-539. 

[A] The program offices listed in this table are the two or three 
largest program offices in the agency, based on grant obligations. We 
selected those program offices that together constitute over 80 
percent of an agency's grants obligations. Therefore, percentages for 
program offices in this table do not add up to 100 percent. 

[B] The Centers for Medicare & Medicaid Services amounts exclude 
Medicaid obligations. 

[End of table] 

Examination of Agencies' Internal Control Oversight: 

To examine whether the five largest grant-making agencies' internal 
control oversight processes for their grants programs were consistent 
with OMB requirements, we focused on the agencies' fiscal year 2012 
internal control evaluations performed to meet the internal control 
assessment and reporting requirements of OMB Circular No. A-123 and 
its Appendix A. We also considered Standards for Internal Control in 
the Federal Government, specifically, the standard for monitoring. 
[Footnote 54] The standards provide the overall framework for 
establishing and maintaining internal control in federal programs. The 
monitoring standard states that internal control monitoring should 
assess the quality of performance over time and ensure that the 
findings of audits and other reviews are promptly resolved. 

We obtained and analyzed documentation from the 12 program offices and 
from each of the five agencies' Office of the Chief Financial Officer. 
This documentation included or described relevant policies and 
procedures, risk assessments, testing methodologies and results, 
deficiencies found and corrective action plans developed and 
implemented as part of the fiscal year 2012 OMB Circular No. A-123 
internal control assessment process. We used a data collection 
instrument to collect and summarize information obtained from the 
agencies. We did not reperform agency testing of internal controls or 
conduct our own testing of controls. 

We also interviewed officials in the 12 program offices and officials 
from each of the five agencies' Office of the Chief Financial Officer 
and OIG about the agencies' assessment processes and oversight of 
grants-related internal control. 

Identification of Reported Internal Control Issues: 

To identify internal control issues that have been reported related to 
the grants management process and key grant programs, we reviewed the 
agencies' financial statement audit reports for fiscal years 2012 and 
2013 and relevant GAO and OIG reports issued in fiscal years 2012 and 
2013 to identify grants-related internal control findings and 
recommendations. We also reviewed improper payment information 
reported by the five agencies in their agency financial reports for 
fiscal years 2012 and 2013 to determine whether the agencies 
identified improper payments in their grants programs.[Footnote 55] We 
reviewed the OIGs' reports on their agencies' compliance with the 
criteria listed in the Improper Payments Elimination and Recovery Act 
of 2010 for fiscal years 2012 and 2013. We also reviewed management 
challenges reported by the agencies' OIGs for fiscal years 2012 and 
2013. 

We conducted this performance audit from November 2012 to July 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Department of Education: 

United States Department of Education: 
Office of The Chief Financial Officer: 
The Chief Financial Officer: 
400 Maryland Ave. S.W. 
Washington, D.C. 20202-4300: 
[hyperlink, http://www.ed.gov] 

July 10, 2014: 

Ms. Beryl Davis: 
Director, Financial Management and Assurance: 
Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Davis: 

Thank you for the Opportunity to respond to the Government 
Accountability Office's (GAO's) draft report titled "Federal Grants: 
Agencies Performed Internal Control Assessments Consistent with 
Guidance and Are Addressing Internal Control Deficiencies" (GAO-14-
539). 

Department of Education (Department) officials found the report 
generally balanced and informative. As the report indicates, we 
believe the Department's implementation of internal controls is 
consistent with Office or Management and Budget (OMB) guidance and 
continues to improve and be more robust. Ensuring program integrity 
and safeguarding taxpayers' interests are top priorities for the 
Department. To this end, the Department continues to strengthen
internal controls over all programs through the use of innovative 
internal controls reviews, strategic training in initiatives to build 
program capacity, and efficient use of technology. This increases our 
effectiveness in overseeing and monitoring the Department's programs and
grantees, which includes identifying, correcting, and, in many cases, 
preventing the improper use or Federal funds. 

It is important to note the methodologies we use to estimate improper 
payments for the Pell and Title I Grant Programs are both thorough and 
complex, yet are approximations that may tend to overestimate the 
expected overpayments. For example. these estimates are based on audit 
and review data that often include grant expenditures or award amounts 
that are found to be appropriate but were initially lacking sufficient 
documentation. They are also based in large part on independent, 
single audits of varying quality, and usually lacking in specific and
comprehensive detail by their very nature as organization-wide audits. 
Department offices, managers, and staff responsible for programs are 
held accountable for promptly detecting, investigating, and recovering 
any improper payments that may occur through a variety of mechanisms. 
These mechanisms include the establishment, monitoring, and reporting of
sufficient internal controls, including a control environment that 
focuses on preventing improper payments from being made. 

OMS designated Pell Grants as a "high-priority" program per Executive 
Order 13520. In developing the estimation methodologies for Pell, our 
Office or Federal Student Aid (FSA) leveraged the substantial 
investment in and available data from its existing internal control
framework (to include compliance and assessment functions, such as 
program reviews). Leveraging existing investments in and data from the 
program review process avoids significant costs. Further, the analysis 
of this rich data set helps inform tangible corrective actions. This
approach provides for a more efficient allocation of resources and 
enables improvements to these core underlying processes over time. 

In 2012 and 2013, the OIG found the Department to be in compliance 
with the Improper Payments Elimination and Recovery Act of 2010. The 
OIG suggested that estimating improper payments for FSA programs as 
well as Title I could be strengthened, and the Department has acted 
promptly on those recommendations. The Department will continue to 
prioritize top-quality internal controls in grant programs, especially 
with respect to improper payments. 

The Department appreciates GAO's thorough reporting on this important 
topic. Should you have any questions or need additional assistance, 
please contact Phillip Juengst in the Department's Office of the Chief 
Financial Officer at 202-245-8030. 

Sincerely, 

Signed by: 

Thomas Skelly: 
Director, Budget Service and Delegated to Perform Functions and Duties 
of the Chief Financial Officer: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Beryl H. Davis, (202) 512-2623 or davisbh@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Kimberly McGatlin (Assistant 
Director), Laura Bednar, Maria C. Belaval, Bruce David, Lauren S. 
Fassler, Maxine Hattery, Diane Morris, Danietta Williams, and 
Elizabeth Wood made significant contributions to this report. 

[End of section] 

Related GAO Products: 

School-Meals Programs: USDA Has Enhanced Controls, but Additional 
Verification Could Help Ensure Legitimate Program Access. [hyperlink, 
http://www.gao.gov/products/GAO-14-262]. Washington, D.C. May 15, 2014. 

Recovery Act: Grant Implementation Experiences Offer Lessons for 
Accountability and Transparency. [hyperlink, 
http://www.gao.gov/products/GAO-14-219]. Washington, D.C.: January 24, 
2014. 

Grants Performance: Justice and FEMA Collect Performance Data for 
Selected Grants, but Action Needed to Validate FEMA Performance Data. 
[hyperlink, http://www.gao.gov/products/GAO-13-552]. Washington, D.C.: 
June 24, 2013. 

Grants Management: Improved Planning, Coordination, and Communication 
Needed to Strengthen Reform Efforts. [hyperlink, 
http://www.gao.gov/products/GAO-13-383]. Washington, D.C.: May 23, 
2013. 

Grants Management: Oversight of Selected States' Disbursement of 
Federal Funds Addresses Timeliness and Administrative Allowances. 
[hyperlink, http://www.gao.gov/products/GAO-13-392]. Washington, D.C.: 
April 16, 2013. 

WIC Program: Improved Oversight of Income Eligibility Determination 
Needed. [hyperlink, http://www.gao.gov/products/GAO-13-290]. 
Washington, D.C.: February 28, 2013. 

Temporary Assistance for Needy Families: More Accountability Needed to 
Reflect Breadth of Block Grant Services. [hyperlink, 
http://www.gao.gov/products/GAO-13-33]. Washington, D.C.: December 6, 
2012. 

Grants to State and Local Governments: An Overview of Federal Funding 
Levels and Selected Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-12-1016]. Washington, D.C.: September 
25, 2012. 

Recovery Act: Housing Programs Met Spending Milestones, but Asset 
Management Information Needs Evaluation. [hyperlink, 
http://www.gao.gov/products/GAO-12-634]. Washington, D.C.: June 18, 
2012. 

Highway Infrastructure: Federal-State Partnership Produces Benefits 
and Poses Oversight Risks. [hyperlink, 
http://www.gao.gov/products/GAO-12-474]. Washington, D.C.: April 26, 
2012. 

Grants Management: Action Needed to Improve the Timeliness of Grant 
Closeouts by Federal Agencies. [hyperlink, 
http://www.gao.gov/products/GAO-12-360]. Washington, D.C.: April 16, 
2012. 

Improper Payments: Remaining Challenges and Strategies for 
Governmentwide Reduction Efforts. [hyperlink, 
http://www.gao.gov/products/GAO-12-573T]. Washington, D.C.: March 28, 
2012. 

Foster Care Program: Improved Processes Needed to Estimate Improper 
Payments and Evaluate Related Corrective Actions. [hyperlink, 
http://www.gao.gov/products/GAO-12-312]. Washington, D.C.: March 7, 
2012. 

National Institutes of Health: Employment and Other Impacts Reported 
by NIH Recovery Act Grantees. [hyperlink, 
http://www.gao.gov/products/GAO-12-32]. Washington, D.C.: November 10, 
2011. 

Highway Emergency Relief: Strengthened Oversight of Project 
Eligibility Decisions Needed. [hyperlink, 
http://www.gao.gov/products/GAO-12-45]. Washington, D.C.: November 8, 
2011. 

TANF and Child Welfare Programs: Increased Data Sharing Could Improve 
Access to Benefits and Services. [hyperlink, 
http://www.gao.gov/products/GAO-12-2]. Washington, D.C.: October 7, 
2011. 

Disadvantaged Students: School Districts Have Used Title I Funds 
Primarily to Support Instruction. [hyperlink, 
http://www.gao.gov/products/GAO-11-595]. Washington, D.C.: July 15, 
2011. 

Race to the Top: Reform Efforts Are Under Way and Information Sharing 
Could Be Improved. [hyperlink, 
http://www.gao.gov/products/GAO-11-658]. Washington, D.C.: June 30, 
2011. 

Federal Grants: Improvements Needed in Oversight and Accountability 
Processes. [hyperlink, http://www.gao.gov/products/GAO-11-773T]. 
Washington, D.C.: June 23, 2011. 

Grants.gov: Additional Action Needed to Address Persistent Governance 
and Funding Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-11-478]. Washington, D.C.: May 6, 2011. 

Medicaid and CHIP: Reports for Monitoring Children's Health Care 
Services Need Improvement. [hyperlink, 
http://www.gao.gov/products/GAO-11-293R]. Washington, D.C.: April 5, 
2011. 

Department of Education: Improved Oversight and Controls Could Help 
Education Better Respond to Evolving Priorities. [hyperlink, 
http://www.gao.gov/products/GAO-11-194]. Washington, D.C.: February 
10, 2011. 

[End of section] 

Footnotes: 

[1] As used in this report, "grant" refers to federal financial 
assistance that federal agencies provide to nonfederal entities for a 
public purpose pursuant to a grant agreement or a cooperative 
agreement and "grantee" refers to a nonfederal entity that enters into 
such agreements. Neither grant agreements nor cooperative agreements 
include an agreement under which is provided only direct U.S. 
government cash assistance to an individual, a subsidy; a loan, a loan 
guarantee, or insurance. Grant and cooperative agreements, however, 
are not identical. Under a grant agreement, the grantee is free to 
implement an agreed-upon program without substantial federal agency 
involvement. Under a cooperative agreement, the grantee has a 
significant amount of independence in carrying out its program, but 
the federal agency is involved in selected areas deemed essential to 
meeting program requirements and ensuring achievement of program 
objectives. These areas include, for example, approval of work plans, 
designation of key positions and approval of key personnel, and 
approval of monitoring and evaluation plans. 

[2] The $555 billion represents the amount of obligations incurred for 
grants in fiscal year 2013 based on USAspending.gov data as of January 
27, 2014. Established by the Office of Management and Budget pursuant 
to the Federal Funding Accountability and Transparency Act of 2006, 
Pub. L. No. 109-282, 120 Stat. 1186 (Sept. 26, 2006), USAspending.gov 
is a publicly available online database that allows users to search 
for detailed information about entities that are awarded federal 
grants, loans, contracts, and other forms of financial assistance. 
While the General Services Administration currently operates and 
maintains USAspending.gov, those responsibilities are being 
transferred to the Department of the Treasury's Bureau of the Fiscal 
Service. The transition is planned to be completed by September 30, 
2014. 

[3] We reviewed USAspending.gov data for fiscal year 2013 (as of 
January 27, 2014) and confirmed that these five agencies remained the 
largest grant-making agencies, based on obligations, in fiscal year 
2013. See app. I for details. 

[4] Federal grant obligations totaled over $564 billion in fiscal year 
2012, according to USAspending.gov data as of November 19, 2012. 

[5] An obligation is a definite commitment that creates a legal 
liability of the federal government for payment of goods and services 
ordered or received. A federal agency incurs an obligation, for 
example, when it awards a grant. An outlay is a payment to liquidate a 
federal obligation. 

[6] OMB collects data from federal agencies each year to prepare the 
President's budget. OMB uses these data for a number of purposes 
related to the budget, including producing the Historical Tables, 
which are publicly available on OMB's website. One series of 
Historical Tables contains information on federal outlays for grants 
to state and local governments. According to OMB, the purpose of this 
series of Historical Tables is to identify federal government outlays 
that constitute income to state and local governments to help finance 
their services. 

[7] We also reviewed OMB data for fiscal year 2013 and confirmed that 
the five largest grant-making agencies, based on outlays, remained the 
same in fiscal year 2013. 

[8] Office of Management and Budget, Management's Responsibility for 
Internal Control, OMB Circular No. A-123 (Dec. 21, 2004). 

[9] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[10] We selected for review programs categorized as grants in 
USAspending.gov. One of the programs selected, the Public Housing 
Operating Fund, is categorized in the Catalog of Federal Domestic 
Assistance (CFDA) as "direct payments for specified use," which is a 
form of financial assistance from the federal government provided 
directly to individuals, private firms, and other private institutions 
to encourage or subsidize a particular activity by conditioning the 
receipt of the assistance on a particular performance by the 
recipient. While not considered a grant program in the traditional 
sense by CFDA or by HUD, we included the program in our review based 
on the USAspending.gov categorization. 

[11] The key provisions of the Federal Managers' Financial Integrity 
Act, Pub. L. No. 97-255, 96 Stat. 814 (Sept. 8, 1982), have been 
codified at 31 U.S.C. §3512 (c), (d). 

[12] See the legislative history for Pub. L. No. 97-255, as reflected 
in 128 Cong. Rec. 19273-19274 (Aug. 4, 1982) (statement of Senator 
Roth) and H. Rep. No. 97-38 (May 14, 1981). 

[13] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[14] OMB Circular No. A-123 provides that management categorize 
deficiencies identified during the annual internal control assessment 
as control deficiencies, reportable conditions, or material 
weaknesses. If management determines that a control deficiency, or a 
combination of deficiencies, could adversely affect the agency's 
ability to meet its objectives, management should categorize the 
deficiencies as reportable conditions, which are tracked and monitored 
within the agency. If management determines that the deficiencies are 
significant enough to report outside the agency, then they are to be 
considered material weaknesses and result in a qualified statement of 
assurance. 

[15] The Single Audit Act, as amended and implemented, requires each 
reporting entity that expends the applicable threshold amount or more 
in federal awards, including grants and other assistance, in a fiscal 
year to obtain an annual "single audit," which includes an audit of 
the entity's financial statements and schedule of the expenditure of 
federal awards and a review of related internal controls. In December 
2013, OMB issued new single audit guidance in Uniform Administrative 
Requirements, Cost Principles, and Audit Requirements for Federal 
Awards, which raised the single audit threshold amount from $500,000 
to $750,000 effective for audits of nonfederal entity fiscal years 
beginning on or after December 26, 2014. See 78 Fed. Reg. 78590 (Dec. 
26, 2013). 

[16] Under the Improper Payments Information Act of 2002, as amended, 
improper payments are statutorily defined as any payment that should 
not have been made or that was made in an incorrect amount under 
statutory, contractual, administrative, or other legally applicable 
requirements. Incorrect amounts are overpayments or underpayments that 
are made to eligible recipients (including inappropriate denials of 
payment or service, any payment that does not account for credit for 
applicable discounts, payments that are for the incorrect amount, and 
duplicate payments). An improper payment also includes any payment 
that was made to an ineligible recipient or for an ineligible good or 
service, or payments for goods or services not received (except for 
such payments authorized by law). In addition, pursuant to OMB 
implementing guidance, when an agency's review is unable to discern 
whether a payment was proper as a result of insufficient documentation 
or lack of documentation, this payment must also be considered an 
improper payment. 

[17] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

[18] Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010). 

[19] We did not consider this statute (Pub. L. No. 112-248) in this 
report because it was not in effect in fiscal year 2012, the time 
period covered by our review. 

[20] Section 2(g)(1) of IPERA required the Director of OMB to 
prescribe guidance for agencies to implement the requirements of IPERA. 

[21] Office of Management and Budget, Issuance of Revised Parts I and 
II to Appendix C of OMB Circular A-123, OMB Memorandum M-11-16 
(Washington, D.C.: Apr. 14, 2011), and Issuance of Part III to OMB 
Circular A-123, Appendix C, OMB Memorandum M-10-13 (Washington, D.C.: 
Mar. 22, 2010). 

[22] Beginning in fiscal year 2014, IPERA reduced the threshold for 
"significant" improper payment from 2.5 percent to 1.5 percent. Also, 
pursuant to the Disaster Relief Appropriations Act, 2013, Pub. L. No. 
113-2, § 904(b), 127 Stat. 4, 17 (Jan. 29, 2013), agencies will be 
required to estimate improper payments in programs funded by Hurricane 
Sandy relief funds. 

[23] The agencies also selected other processes and programs to 
evaluate controls in fiscal year 2012. The scope of our review is 
focused on the portions of the OMB Circular No. A-123 process that 
evaluated grants-related controls. 

[24] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1], 20. 

[25] Management will give a qualified statement of assurance when 
there are material weaknesses to report and will give an unqualified 
statement of assurance when no material weaknesses are being reported. 

[26] Undisbursed balances or unliquidated obligations are funds that 
the federal awarding agency has obligated by entering into a grant 
agreement but that the grantee has not drawn down or the federal 
awarding agency has not disbursed. 

[27] A deficiency in internal control exists when the design or 
operation of a control does not allow management or employees, in the 
normal course of performing their assigned functions, to prevent, or 
detect and correct misstatements on a timely basis. Financial 
statement auditors, who are independent of management, categorize 
internal control deficiencies as material weaknesses or significant 
deficiencies. For financial audit purposes, a material weakness is a 
deficiency, or a combination of deficiencies, in internal control such 
that there is a reasonable possibility that a material misstatement of 
the entity's financial statements will not be prevented, or detected 
and corrected, on a timely basis. A significant deficiency is a 
deficiency, or a combination of deficiencies, in internal control that 
is less severe than a material weakness yet important enough to merit 
attention by those charged with governance. The definitions and 
reporting requirements for control deficiencies identified in 
financial statement audits differ from those used under OMB Circular 
No. A-123. 

[28] GAO, Grants Management: Action Needed to Improve the Timeliness 
of Grant Closeouts by Federal Agencies, [hyperlink, 
http://www.gao.gov/products/GAO-12-360] (Washington, D.C.: Apr. 16, 
2012). 

[29] The Forest Service accounted for about 1 percent of USDA's grant 
obligations in fiscal year 2012 and was not included in our review. 

[30] FFMIA requires the departments and agencies covered by the Chief 
Financial Officers Act of 1990 (CFO Act agencies) to implement and 
maintain financial management systems that comply substantially with 
federal financial management systems requirements, applicable federal 
accounting standards, and the U.S. Government Standard General Ledger 
at the transaction level. FFMIA defines the term financial management 
systems to include the financial systems and the financial portions of 
mixed systems necessary to support financial management, including 
automated and manual processes, procedures, controls, data, hardware, 
software, and support personnel dedicated to the operation and 
maintenance of system functions. See Federal Financial Management 
Improvement Act of 1996, Pub. L. No. 104-208, div. A., § 101(f), title 
VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996) (reprinted in 31 
U.S.C. § 3512 note). 

[31] GAO, Financial Audit: U.S. Government's Fiscal Years 2013 and 
2012 Consolidated Financial Statements, [hyperlink, 
http://www.gao.gov/products/GAO-14-319R] (Washington, D.C.: Feb. 27, 
2014), and Financial Audit: U.S. Government's Fiscal Years 2012 and 
2011 Consolidated Financial Statements, [hyperlink, 
http://www.gao.gov/products/GAO-13-271R] (Washington, D.C.: Jan. 17, 
2013). 

[32] GAO, Temporary Assistance for Needy Families: More Accountability 
Needed to Reflect Breadth of Block Grant Services, [hyperlink, 
http://www.gao.gov/products/GAO-13-33] (Washington, D.C.: Dec. 6, 
2012). 

[33] Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009). 

[34] GAO, Race to the Top: Reform Efforts Are Under Way and 
Information Sharing Could Be Improved, [hyperlink, 
http://www.gao.gov/products/GAO-11-658] (Washington, D.C.: June 30, 
2011). 

[35] Department of Health and Human Services Office of Inspector 
General, NIH Administration of the Clinical and Translational Science 
Awards Program, OEI-07-09-00300 (Washington, D.C.: December 2011). 

[36] Department of Transportation Office of Inspector General, 
Improvements Needed in FTA's Grant Oversight Program, MH-2012-168 
(Washington, D.C.: Aug. 2, 2012). 

[37] Department of Agriculture Office of Inspector General, American 
Recovery and Reinvestment Act of 2009, National School Lunch Program 
Equipment Assistance Grants, Report 27703-0001-HQ (Washington, D.C.: 
Feb. 15, 2012). 

[38] Department of Housing and Development Office of Inspector 
General, Controls Over the Timeliness of CDBG Entitlement Spending, 
2013-NY-0003 (Washington, D.C.: July 19, 2013). 

[39] HUD did not report estimated improper payments for its grant 
programs. According to the OIG's April 2014 report on HUD's compliance 
with IPERA, HUD had previously identified Community Development Block 
Grant programs as susceptible to improper payments; however, HUD found 
that estimated improper payments in those programs were below the $10 
million threshold for 2 consecutive years. Therefore, in 2007, OMB 
approved HUD's request for relief from the annual improper payment 
reporting for the Community Development Block Grant programs. In its 
fiscal year 2013 agency financial report, HUD noted that it will 
continue to conduct an annual risk assessment of the programs and 
provide results annually to OMB. 

[40] Department of Health and Human Services Office of Inspector 
General, U.S. Department of Health and Human Services Met Many 
Requirements of the Improper Payments Information Act of 2002 But Was 
Not Fully Compliant, A-17-13-52000 (Washington, D.C.: March 2013), and 
U.S. Department of Health and Human Services Met Many Requirements of 
the Improper Payments Information Act of 2002 But Did Not Fully Comply 
for Fiscal Year 2013, A-17-14-52000 (Washington, D.C.: April 2014). 

[41] Department of Agriculture Office of Inspector General, U.S. 
Department of Agriculture Improper Payments Elimination and Recovery 
Act of 2010 Compliance Review for Fiscal Year 2012, 50024-0004-11 
(Washington, D.C.: Mar. 14, 2013), and U.S. Department of Agriculture 
Improper Payments Elimination and Recovery Act of 2010 Compliance 
Review for Fiscal Year 2013, 50024-0005-11 (Washington, D.C.: Apr. 15, 
2014). 

[42] According to the Food and Nutrition Service, the study will 
develop and validate models for updating erroneous payment estimates, 
among other things. The Food and Nutrition Service expects the final 
report on the study in early 2015. 

[43] Department of Education Office of Inspector General, U.S. 
Department of Education's Compliance with the Improper Payments 
Elimination and Recovery Act of 2010 for Fiscal Year 2012, ED-
OIG/A03N0001 (Washington, D.C.: Mar. 15, 2013), and U.S. Department of 
Education's Compliance with the Improper Payments Elimination and 
Recovery Act of 2010 for Fiscal Year 2013, ED-OIG/A19O0002 
(Washington, D.C.: Apr. 15, 2014). 

[44] Department of Transportation Office of Inspector General, DOT's 
FY 2012 Improper Payment Reporting Generally Complies with IPERA, FI-
2013-053 (Washington, D.C.: Mar. 14, 2013), and Accuracy and 
Reliability of DOT's Improper Payment Reporting Can Be Improved, FI-
2014-037 (Washington, D.C.: April 15, 2014). 

[45] Pub. L. No. 106-531, 114 Stat. 2537 (Nov. 22, 2000), codified, as 
amended, at 31 U.S.C. § 3516. 

[46] As used in this report, "grant" refers to federal financial 
assistance that federal agencies provide to nonfederal entities for a 
public purpose pursuant to a grant agreement or a cooperative 
agreement and "grantee" refers to a nonfederal entity that enters into 
such agreements. Neither grant agreements nor cooperative agreements 
include an agreement under which is provided only direct U.S. 
government cash assistance to an individual, a subsidy, a loan, a loan 
guarantee, or insurance. Grant and cooperative agreements, however, 
are not identical. Under a grant agreement, the grantee is free to 
implement an agreed-upon program without substantial federal agency 
involvement. Under a cooperative agreement, the grantee has a 
significant amount of independence in carrying out its program, but 
the federal agency is involved in selected areas deemed essential to 
meeting program requirements and ensuring achievement of program 
objectives. These areas include, for example, approval of work plans, 
designation of key positions and approval of key personnel, and 
approval of monitoring and evaluation plans. 

[47] Established by OMB pursuant to the Federal Funding Accountability 
and Transparency Act of 2006, Pub. L. No. 109-282, 120 Stat. 1186 
(Sept. 26, 2006), USAspending.gov is a publicly available online 
database that allows users to search for detailed information about 
entities that are awarded federal grants, loans, contracts, and other 
forms of financial assistance. While the General Services 
Administration operates and maintains USAspending.gov, those 
responsibilities are being transferred to the Department of the 
Treasury's Bureau of the Fiscal Service. The transition is planned to 
be completed by September 30, 2014. 

[48] An obligation is a definite commitment that creates a legal 
liability of the federal government for payment of goods and services 
ordered or received. A federal agency incurs an obligation, for 
example, when it awards a grant. An outlay is a payment to liquidate a 
federal obligation. 

[49] OMB collects data from federal agencies each year to prepare the 
President's budget. OMB uses these data for a number of purposes 
related to the budget, including producing the Historical Tables, 
which are publicly available on OMB's website. One series of 
Historical Tables contains information on federal outlays for grants 
to state and local governments. According to OMB, the purpose of this 
series of Historical Tables is to identify federal government outlays 
that constitute income to state and local governments to help finance 
their services. 

[50] We also reviewed OMB data for fiscal year 2013 and confirmed that 
the five largest grant-making agencies, based on outlays, remained the 
same in fiscal year 2013. 

[51] Like grants, cooperative agreements are a form of financial 
assistance. The distinguishing factor between a grant and a 
cooperative agreement is that cooperative agreements require a greater 
degree of federal participation or involvement during the performance 
of the work activities. 

[52] "Direct payments for a specific use" is another form of financial 
assistance whereby the federal government directly provides payments 
to individuals, private firms, and other private institutions to 
encourage or to subsidize a particular activity by conditioning the 
receipt of the assistance on a specific action by the recipient. 

[53] As we reported in our September 2012 report Grants to State and 
Local Governments: An Overview of Federal Funding Levels and Selected 
Challenges, [hyperlink, http://www.gao.gov/products/GAO-12-1016], 
determining a definitive number of federal grant programs presents 
certain difficulties. The Catalog of Federal Domestic Assistance 
(CFDA) is the single authoritative, government-wide compendium and 
source document for descriptions of federal programs that provide 
assistance or benefits to the public. Officials from the General 
Services Administration told us that each agency determines how to 
organize and describe its programs for publication in the CFDA, as 
long as the agency adheres to the underlying requirement to describe 
the program's legal authority, administering office, funding, purpose, 
benefits, and beneficiaries. 

[54] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[55] The amounts and error rates the agencies reported for improper 
payments are based on the amounts of program outlays, which differ 
from the obligation amounts we used to select the agencies. The 
differences could be related to timing differences, as obligations are 
recorded when grants are awarded, and outlays are recorded when funds 
are actually disbursed to grantees. Also, the sources for the amounts 
differ. We used obligations data reported to USAspending.gov (as of 
November 19, 2012), and the outlay data the agencies reported came 
from other agency sources of expenditure data. 

[End of section] 

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