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entitled 'Financial Management: Coordinated Approach Needed to Address 
the Government's Improper Payments Problems' which was released on 
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Report to Ranking Minority Member, Committee on Governmental Affairs, 
U.S. Senate: 

United States General Accounting Office: 

GAO: 

August 2002: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Objectives, Scope, and Methodology: 

Agency Financial Statements Provide Limited Information on Federal 
Improper Payments: 

Limited Information on Improper Payments or on Progress in Reducing 
Them Is Publicly Available: 

Efforts by Four Agencies to Address Improper Payments Have Met with 
Some Success: 

Barriers to More Effectively Managing Improper Payments: 

Collaborative Effort Is Needed for Managing Improper Payments: 

Conclusions: 

Recommendations for Executive Action 51 Matters for Congressional 
Consideration: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Programs for Which Erroneous Payment Information Is 
Required per OMB Circular A-11: 

Appendix II: Federal Agencies and Components Required to Prepare 
Financial Statements under the CFO Act and OMB Guidance: 

Appendix III: GAO Products Addressing Agency Key Outcomes and Major 
Management Challenges: 

Appendix IV: Comments from the Department of Health and Human 
Services:  

Appendix V: Comments from the Department of Housing and Urban 
Development: 

Appendix VI: Comments from the Social Security Administration: 

Appendix VII: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Improper Payments Reported by Federal Agencies and Components 
in Their Fiscal Years 1999, 2000, and 2001 Financial Statements: 

Table 2: Evaluation of How Agencies Addressed Improper Payments in 
Their Fiscal Year 2002 Annual Performance Plans: 

Table 3: Agency Participation in Councils: 

Figures: 

Figure 1: Key Governmentwide Components in the Coordination Effort: 

Figure 2: Key Agency Components in the Coordination Effort: 

Figure 3: Key Administration Components in the Coordination Effort: 

Figure 4: Key Congressional Areas in the Coordination Effort: 

Abbreviations: 

CCC: Commodity Credit Corporation: 
CFO: Chief Financial Officer: 
CFOC: Chief Financial Officers Council: 
CIO: Chief Information Officer: 
CIOC: Chief Information Officers Council: 
CMS: Centers for Medicare and Medicaid Services: 
COO: Chief Operating Officer: 
DFAS: Defense Finance and Accounting Service: 
DI: Disability Insurance: 
DOD: Department of Defense: 
EITC: Earned Income Tax Credit: 
FCIC: Federal Crop Insurance Corporation: 
FNS: Food and Nutrition Service: 
FSA: Farm Service Agency: 
GPRA: Government Performance and Results Act: 
HHS: Department of Health and Human Services: 
HUD: Department of Housing and Urban Development: 
OIG: Office of the Inspector General: 
IRS: Internal Revenue Service: 
OASI: Old Age and Survivors Insurance: 
OMB: Office of Management and Budget OPM Office of Personnel Management
PCIE: President’s Council on Integrity and Efficiency: 
PHA: public housing agencies: 
PMC: President’s Management Council: 
POA: public housing authority, owner, or agent: 
REAC: Real Estate Assessment Center: 
RHIIP: Rental Housing Integrity Improvement Project: 
RMA: Risk Management Agency: 
SSA: Social Security Administration:
SSI: Supplemental Security Income: 
USDA: Department of Agriculture: 

August 9, 2002: 

The Honorable Fred Thompson: 
Ranking Minority Member: 
Committee on Governmental Affairs: 
United States Senate: 
Dear Senator Thompson: 

The federal government of the United States spends approximately $1.8 
trillion dollars annually for a variety of grants, transfer and other 
payments, and procurement of goods and services. As the steward of 
taxpayer dollars, the federal government is accountable for how its 
agencies and grantees spend those funds and is responsible for 
safeguarding those funds against improper payments. As noted in the 
reports we have issued on this matter over the past 3 years, the 
federal government’s record in identifying and reporting the magnitude 
of program funds associated with improper payments and actions to 
better manage these payments needs improvement.[Footnote 1] 

In our view, improper payments include payments that should not have 
been made or were made for incorrect amounts. Specifically, they 
include inadvertent errors, such as duplicate payments and calculation 
errors; payments for unsupported or inadequately supported claims; 
payments for services not rendered or rendered to ineligible 
beneficiaries; and payments resulting from fraud and abuse. They occur 
in a variety of programs and activities, including those related to 
contractors and contract management; health care programs, such as 
Medicare and Medicaid; financial assistance benefits, such as food 
stamps and housing subsidies; and tax refunds. Improper payments result 
in spending taxpayer dollars for other than their intended purposes, 
services to those not entitled to program benefits at the expense of 
legitimate beneficiaries, or both. 

As we noted in our report on strategies to manage improper 
payments,[Footnote 2] these payments occur for many reasons including 
insufficient oversight or monitoring, inadequate eligibility controls, 
and automated system deficiencies. However, one point is clear—the 
basic or root cause of improper payments can typically be traced to a 
lack of or breakdown in internal controls. A lack of internal controls 
can result from factors beyond an agency’s control, such as statutory 
barriers and program design issues, as well as factors within its 
control, such as ineffective program procedures. Collectively, internal 
controls are an integral component of an organization’s management that 
are intended to provide reasonable assurance that the organization 
achieves its objectives of (1) effective and efficient operations, (2) 
reliable financial reporting, and (3) compliance with laws and 
regulations. Internal controls are not one event, but a series of 
actions and activities that occur throughout an entity’s operations on 
an ongoing basis.

Because of your continued interest and concerns regarding financial 
management in the federal government, you asked us to update certain 
aspects of our 2000 report on improper payments.[Footnote 3] 
Specifically, you requested that we (1) quantify, where possible, the 
amount of improper payments reported in agencies’ fiscal year 2000 
financial statements, (2) assess the extent to which agencies’ fiscal 
year 2002 performance plans address improper payments, (3) determine 
the extent to which the Office of Management and Budget (OMB) has 
implemented the recommendations made in our prior reports, and (4) 
identify other actions that might encourage agencies to better report 
the extent of their improper payments. On November 2, 2001, we reported 
that agency fiscal year 2000 financial statements identified about 
$19.6 billion in improper payments,[Footnote 4] the first item in your 
request. This report addresses the remaining areas and identifies the 
amount of improper payments reported in agencies’ fiscal year 2001 
financial statements. 

Results in Brief: 

A review of the improper payments reported in agency financial 
statements over the past 3 years shows some change in the amounts 
individual agencies reported and the programs with improper payments, 
but relatively little change in the total amount of improper payments 
over the period. While the total amount reported in agency financial 
statements has decreased from about $20.7 billion for fiscal year 1999 
to about $19.1 billion for fiscal year 2001 and the number of agencies 
reporting improper payments fell from eight to six over the same 
period, these figures do not present a true picture of the level of 
improper payments in federal programs and activities. As significant as 
the $19 billion in improper payments is, the actual extent of improper 
payments governmentwide is unknown, is likely to be billions of dollars 
more, and will likely grow in the future without concerted and 
coordinated efforts by agencies, the administration, and the Congress.

The four agencies collectively reporting the majority of reported 
improper payments—the Departments of Agriculture (USDA), Health and 
Human Services (HHS), Housing and Urban Development (HUD), and the 
Social Security Administration (SSA)—have been actively working to 
address improper payments through their systems of internal control. 
While they have met with some success in identifying and reducing 
improper payments, they have also encountered barriers that have 
restricted their ability to better manage against improper payments. 
These barriers include legislation-based requirements or prohibitions, 
program design obstacles, and resource constraints. Since agencies 
alone cannot address these barriers, a united approach involving 
federal agencies, the administration, and the Congress is needed. 
Together these parties can eliminate or otherwise mitigate the 
barriers, as deemed appropriate. 

Agencies’ annual performance plan discussions of improper payments do 
not provide the information needed to adequately assess and evaluate 
the seriousness of the problem or the effectiveness of actions taken to 
address it. The Government Performance and Results Act (GPRA) requires 
agencies to prepare annual performance plans for use by agency 
officials, the administration, the Congress, and the public as tools 
for evaluating the effectiveness of federal programs and the resources 
spent in operating them. Of the 15 agency performance plans we 
reviewed, only 4 comprehensively addressed any of the GPRA-required 
report elements of goals, measures, strategies, and procedures to 
validate performance data for improper payments. Further, agency 
progress in addressing improper payment problems was difficult to 
measure because of continual changes that were hard to track or that 
were made with insufficient explanation.

Transparency in reporting improper payments is crucial at both the 
federal agency and governmentwide levels. Public reporting helps 
establish accountability as well as expectations for improvements. Yet 
requirements for federal agencies to publicly report on the extent of 
their improper payments and on their actions to address these payments 
are very limited. The administration has taken steps to strengthen the 
government’s actions to identify and address its improper payments 
problems; however, the required reporting is limited to the initial 
budget submissions to OMB for about 50 programs in 16 federal agencies, 
15 of which are Chief Financial Officers (CFO) Act agencies. Since the 
initial budget submissions to OMB are not publicly disclosed, the 
improper payment information contained in them is not routinely or 
consistently available for congressional or public review and analysis 
or for holding federal agencies accountable for improvement.[Footnote 5]

Current requirements and guidance do not require or offer a 
comprehensive approach to measuring improper payments, developing and 
implementing corrective actions, or reporting on the results of the 
actions taken. We previously recommended that OMB issue guidance to 
assist federal agencies in developing and implementing a methodology 
for annually estimating and reporting improper payments for major 
federal programs. We also recommended that OMB consult with 
congressional oversight committees regarding their efforts to help 
agencies reduce improper payments. In commenting on those reports, OMB 
agreed that its focus on improper payments should be expanded, and it 
has begun to implement changes. For example, under OMB’s guidance, 
interagency councils have met to address improper payments and have 
started carrying out specific tasks such as preparing a set of 
indicators and other agency guidance. 

This report contains recommendations for federal executive branch 
agencies to assign responsibilities for taking actions to minimize 
improper payments and for OMB to assist agencies in developing methods 
to identify and implement those actions. We are also presenting matters 
for congressional consideration to assist agencies with barriers and to 
help agencies with improvement efforts.

In commenting on this report, HHS, HUD, SSA, and OMB noted that they 
had actions in progress or that were completed that addressed our 
recommendations or that agency units supported the essence of the 
topics covered by the report. Each of these organizations and USDA also 
provided technical comments and other editorial suggestions for our 
consideration. We considered all comments and made changes to the 
report, as appropriate.

Background: 

As the steward of taxpayer dollars, the federal government is 
accountable for how its agencies and grantees spend hundreds of 
billions of dollars and is responsible for safeguarding those funds 
against improper payments. Our work over the past several years has 
demonstrated that improper payments are a significant and widespread 
problem in federal agencies. In addition, reports such as the Senate 
Committee on Governmental Affairs’ Government at the Brink[Footnote 6] 
and The President’s Management Agenda, Fiscal Year 2002,[Footnote 7] 
highlight the impact of improper payments on federal programs and the 
need for actions to strengthen the system of internal control over 
areas where improper payments occur. 

Our past reports have shown that relatively few agencies report 
improper payments in their financial statements, even though our audits 
and those of agency Offices of Inspector General (OIG) continue to 
identify serious improper payment problems and related internal control 
issues. Federal agency financial statements for fiscal years 1999 and 
2000 show improper payments of about $20.7 billion and $19.6 billion, 
respectively. Along with this decrease in the total amount of improper 
payments reported, changes have occurred in the agencies reporting 
improper payments and in the programs identified with improper 
payments. 

During this same period, agency-specific audits and studies continued 
to indicate that the extent of the improper payment problem was much 
more widespread than had been disclosed in agency financial statements. 
For example, in March 2001 we reported[Footnote 8] that, during fiscal 
year 2000, the Internal Revenue Service (IRS), relying on past 
experience, screened tax returns claiming Earned Income Tax Credits 
(EITC) to identify (for detailed examination) those considered most 
likely to be invalid. IRS examiners performed detailed reviews of about 
257,000 tax returns claiming approximately $587 million in 
EITC[Footnote 9] and found that about 173,000 of those tax returns 
claiming $395 million in credits (67 percent) were invalid. At the 
Department of Defense (DOD) the OIG noted that, during fiscal years 
1999 and 2000, the Defense Finance and Accounting Service (DFAS) 
overpaid contractors about $183 million and $148 million, respectively, 
as a result of inadvertent errors, such as paying the same invoice 
twice and data input errors. None of these amounts show up in our 
improper payment totals because neither the IRS nor DOD financial 
statements reported improper payments for those programs for those 
years.

The basic or root causes of improper payments can typically be traced 
to a lack of or breakdown in internal controls. Internal controls are 
an integral component of an organization’s management that are intended 
to provide reasonable assurance that the organization achieves its 
objectives of (1) effective and efficient operations, (2) reliable 
financial reporting, and (3) compliance with laws and regulations. 

The President’s Management Agenda, Fiscal Year 2002, includes five 
governmentwide initiatives—one of which is improved financial 
management. This initiative calls for the administration to establish a 
baseline on the extent of erroneous payments.[Footnote 10] Under it, 
agencies were to include, in their 2003 budget submissions to OMB, 
information on improper payment rates, including actual and target 
rates, where available, for benefit and assistance programs over $2 
billion. The agenda also notes that, using this information, OMB will 
work with agencies to establish goals to reduce improper payments 
identified in the programs. In addition, the agenda included specific 
program initiatives for HUD and the Department of Education that 
addressed improper payments. In July 2001, OMB issued revisions to OMB 
Circular A-11, Preparation and Submission of Budget Estimates, 
requiring 16 federal agencies[Footnote 11] to include certain improper 
payment information for about 50 programs in their initial budget 
submissions to OMB. (Appendix I lists these programs.) 

Objectives, Scope, and Methodology: 

We reviewed fiscal year 2001 financial statement reports prepared under 
the CFO Act, as expanded by the Government Management Reform Act, and 
OMB guidance to identify improper payments reported. (Appendix II lists 
the agencies covered by the CFO Act and the OMB guidance.) We also 
identified and reviewed recent reports by us and by agency OIGs to 
identify additional agencies and/or programs that experienced improper 
payments. 

We reviewed the performance plans of the 15 CFO Act agencies required 
by OMB Circular A-11 to submit improper payment data, assessments, and 
action plans with their initial budget submissions to OMB. We reviewed 
these plans to identify improper payment information addressing the 
four reporting content elements required by GPRA (goals, measures, 
strategies, and procedures to validate performance data). Further, we 
reviewed GAO reports that focused on the status of federal agency 
actions in achieving key outcomes and addressing major management 
challenges at each of the 15 CFO Act agencies covered by OMB Circular A-
11. (See app. III for a list of these reports.) Among other things, 
some of these reports often included sections on agency efforts to 
reduce fraud, waste, and errors in programs that reported improper 
payments. They also compared fiscal years 2001 and 2002 performance 
plans for consistency and assessed the progress reported in achieving 
these outcomes as well as the strategies agencies have in place to 
achieve them. 

Recent revisions to OMB Circular A-11 require selected agencies to 
report improper payment information in their initial budget submissions 
to OMB. In addition, one of the initiatives in the President’s 
Management Agenda, Fiscal Year 2002, called for agencies to establish a 
baseline on the extent of erroneous payments. We reviewed the Budget of 
the United States Government, Fiscal Year 2003, to assess the extent to 
which it contained the improper payment information agencies were to 
submit with their initial budget submissions to OMB and/or the baseline 
information requested in the agenda.

Since little information was publicly available on agency actions to 
reduce improper payments, we reviewed agency responses you provided us 
to the June 2001 letters that you and the Chairman of the Senate 
Committee on Governmental Affairs sent to the heads and OIGs of the 24 
CFO Act agencies. These letters asked the agency heads and OIGs to 
assess their improper payment efforts in the five areas outlined in our 
October 2001 report, Strategies to Manage Improper Payments: Learning 
From Public and Private Sector Organizations. These areas are (1) the 
control environment, (2) risk assessments, (3) control activities, (4) 
information and communications, and (5) monitoring. 

We also selected four CFO Act agencies (USDA, HHS, HUD, and SSA) for 
more detailed review of their efforts to reduce improper payments. 
These agencies accounted for over 97 percent of the improper payments 
reported in fiscal years 1999 and 2000 financial statements. At these 
agencies, we spoke to officials in the inspector general, chief 
financial officer, and program offices and obtained reports and other 
documentation evidencing actions that they have taken or are planning 
to take to reduce improper payments. We focused on obtaining 
information on the agency actions to reduce the improper payments 
reported in their financial statements and/or performance plans. We 
also obtained information on barriers that they encountered when 
attempting to develop and/or implement methodologies to reduce improper 
payments.

Finally, we met with OMB officials and reviewed documents regarding 
OMB’s progress in implementing recommendations made in our prior 
report. This included a review of revisions to OMB Circular A-11 and 
correspondence and other guidance to agencies on improper payment 
related issues. 

We performed our work from May 2001 through April 2002. Our work was 
conducted in accordance with generally accepted government auditing 
standards. We provided a draft of this report for comment to the 
Secretaries of HHS, HUD, and USDA, the Commissioner of SSA, and the 
Director of OMB. We received written comments from HHS, HUD, and SSA 
and have reprinted those comments in appendixes IV, V, and VI, 
respectively. USDA responded by e-mail and OMB provided oral comments.

Agency Financial Statements Provide Limited Information on Federal  
Improper Payments: 

Improper payments are acknowledged to be a widespread and significant 
problem in the federal government with billions of dollars in such 
payments reported annually in agency financial statements and billions 
more identified in audit and other reports. For example, federal agency 
financial statements for fiscal years 1999 through 2001 show improper 
payments of about $20.7 billion, $19.6 billion, and $19.1 billion, 
respectively. Although significant, these amounts are not indicative of 
the magnitude of improper payments governmentwide. Currently, 
relatively few agencies report improper payments in their financial 
statements, even though our audits and those of agency OIGs continue to 
identify serious improper payment problems and related internal control 
issues. The following table summarizes improper payments reported in 
agencies’ fiscal years 1999, 2000, and 2001 financial statements. 

Table 1: Improper Payments Reported by Federal Agencies and Components 
in Their Fiscal Years 1999, 2000, and 2001 Financial Statements: 

[See PDF for image] 

[A] The financial statements did not identify improper payments in 
these programs. 

[B] The agencies administering these programs acknowledged making 
improper payments in their financial statements but did not disclose a 
dollar amount. 

Source: GAO developed based on a review of agency fiscal years 1999, 
2000, and 2001 financial statements. 

[End of table] 

The dollar amount of improper payments reported annually for fiscal 
years 1999 through 2001 decreased by about $1.7 billion and the number 
of agencies reporting a specific amount of improper payments in their 
financial statements declined from 8 to 6. A review of the table above 
shows that, for fiscal years 1999 and 2000, 8 agencies collectively 
reported $20.7 billion and $19.6 billion, respectively, whereas for 
fiscal year 2001, 6 agencies collectively reported improper payments of 
about $19.1 billion. About $18.8 billion (99 percent) of the improper 
payments reported in the fiscal year 2001 financial statements occurred 
in the programs administered by HHS, HUD, and SSA. In total, 13 
agencies acknowledged making improper payments or reported a specific 
amount in their financial statements within the 3-year time frame. Ten 
of the 13 agencies reported or acknowledged making improper payments 
for fiscal year 2001. 

A comparison of the fiscal years 2001 and 2000 improper payment 
information reported in agency financial statements revealed several 
significant differences in the programs reporting improper payments and 
the amounts reported.

* In fiscal year 2000, USDA’s Food and Nutrition Service’s (FNS) 
financial statements identified improper food stamp payments of $1.1 
billion. For fiscal year 2001, FNS did not publicly issue separate 
financial statements. While USDA’s financial statements contained FNS’s 
financial information and recognized that improper payments occurred in 
the food stamp program, the statements did not identify a specific 
improper payment amount.

* HUD reported improper payments of $1.25 billion in fiscal year 2000 
and $2 billion in fiscal year 2001. Specifically, in fiscal year 2000 
it estimated $1.94 billion in annual housing subsidy overpayments and 
$.69 billion in underpayments. In fiscal year 2001, it reported 
overpayments of $2.65 billion and underpayments of about $.65 billion. 
In commenting on this report, HUD noted that, in fiscal year 2000, it 
also identified $617 million in improper payments due to underreporting 
of tenant income. We do not include this amount in the HUD total in 
table 1 because HUD’s fiscal year 2000 financial statement notes that 
the $1.25 billion and $617 million “should not be considered totally 
additive.” An unknown amount of overlap exists in these amounts. 
Regarding the increase in Page 12 GAO-02-749 Improper Payments improper 
payments reported since fiscal year 1999, HUD revised its methodology 
for measuring the types of errors that make up its improper payments 
estimate. In fiscal year 2000, it expanded the scope of its error 
estimation to include subsidy determination errors by its 
administrative intermediaries in addition to the impacts of tenant 
underreporting of income. In fiscal year 2001, it refined its 
methodology to obtain a combined estimate of both types of errors. More 
specifically, HUD’s error measurement methodology covers errors made by 
public housing authorities, owners, and agents (POAs) in determining 
tenant income and rent as well as errors made by the tenants in 
reporting their income. Past estimates only considered the impact of 
tenants underreporting income for amounts over $3,000 and used a sample 
of tenants from HUD’s data systems. However, the fiscal year 2001 
estimate was based on more stringent criteria. It considered tenant 
underreported income for amounts over $1,000 and was based on a random 
selection of all tenants, including those who were not covered in the 
past. 

* At the Office of Personnel Management (OPM), the fiscal years 1999 
and 2000 financial statements identified improper payment amounts for 
the retirement, federal employees’ health benefits, and federal 
employees’ group life programs. The fiscal year 2001 statements did not 
identify improper payment amounts, but recognized that an unidentified 
amount of improper payments occurred in the retirement program and 
federal employees’ health benefits.

* At the Department of Labor, the fiscal year 2001 financial statements 
identified the total amount of improper payments for three of its 
programs but did not separately identify the improper payments relating 
to each program—as it had done in the past. 

Recent audits as well as information provided by agency OIGs continue 
to demonstrate that improper payments are much greater than has been 
disclosed thus far in financial statements. For example, historically, 
the IRS’s EITC program has been vulnerable to high rates of invalid 
claims.[Footnote 12] IRS follows up on only a portion of the suspicious 
EITC claims it identifies. The amount of improper payments included in 
the almost $26 billion IRS disbursed for EITC in fiscal year 2001 is 
unknown.[Footnote 13] However, based on an IRS report of the estimated 
$31.3 billion in EITC claims made by taxpayers for tax year 1999, an 
estimated $8.5 billion to $9.9 billion (27 percent to about 32 percent) 
should not have been paid.[Footnote 14] Weaknesses in IRS’s controls 
over refund disbursements, particularly those related to EITC, continue 
to expose the federal government to material losses due to disbursing 
improper refunds. 

Similarly, while DOD reported improper payments related to the Military 
Retirement Fund for fiscal years 1999, 2000, and 2001, departmentwide 
estimates of improper payments remain unreported in the financial 
statements. For example, over the last several years DOD has overpaid 
its contractors by hundreds of millions of dollars. Specifically, 
according to DFAS Columbus (the largest centralized DFAS disbursing 
activity) records, in fiscal year 2001 DOD contractors refunded about 
$128 million primarily attributed to DFAS payment errors and duplicate 
invoices. This amount might not reflect total improper payments DOD 
made to contractors because contract reconciliation is likely to 
identify additional overpayments. Further, although small in relation 
to the approximately $78 billion that DFAS Columbus disbursed in fiscal 
year 2001 to DOD contractors, this amount represents a sizable amount 
of cash in the hands of contractors beyond what is intended to finance 
and pay for the goods and services DOD purchases, and is indicative of 
the need for stronger internal controls within the payment system. 

Limited Information on Improper Payments or on Progress in Reducing 
Them Is Publicly Available: 

Periodically and consistently estimating the rate and/or amount of 
improper payments and publicly reporting progress enables agencies and 
others with oversight and monitoring responsibilities to measure 
progress over time and determine whether further action is needed to 
minimize future improper payments. It enhances accountability by 
identifying performance measures and progress against those measures 
and by helping to establish performance and results expectations. 
Improper payment information is currently reported in a variety of 
places, including annual financial statements, performance plans, and 
the budget. However, neither the financial statements, as previously 
discussed; the performance plans; nor the budget provide a 
comprehensive view of either the scope of the improper payment problem 
or of individual agency or governmentwide efforts to reduce it. As 
such, they provide limited information for use in establishing (1) 
appropriate response levels to correct the problems or (2) 
responsibility—holding organizations and/or individuals accountable for 
performance and results.

GPRA requires agencies to prepare annual performance plans that inform 
the Congress and the public of (1) the annual performance goals for 
agencies’ major programs and activities, (2) the measures that will be 
used to gauge performance against these goals, (3) the strategies and 
resources required to achieve the performance goals, and (4) the 
procedures that will be used to verify and validate performance 
information. Agencies develop plans for use by agency officials, the 
administration, the Congress, and the public. They provide information 
on the purpose and effectiveness of federal programs and on the 
resources spent in conducting them. On February 14, 2001, the Director 
of OMB issued a memorandum to agency heads requiring agencies to update 
their fiscal year 2002 performance plans to include performance goals 
for the President’s governmentwide reforms for every reform that would 
significantly enhance the administration and operation of the agency. 
One of these reforms is reducing improper payments to beneficiaries and 
other recipients of government funds. We did not determine the level of 
significance of improper payments at any agency. However, as a result 
of the memorandum, we expected improper payment-related actions to have 
been discussed in agencies’ fiscal year 2002 performance plans, at 
least for those agencies required to report improper payment 
information in their initial budget submissions to OMB. We reviewed the 
plans for improper payment-related issues. In general, our review 
revealed that none of the 15 performance plans examined contained 
detailed information for all of the areas that GPRA requires agencies 
to address—goals, measures, strategies, or procedures to validate Page 
15 GAO-02-749 Improper Payments performance data—for each reform 
discussed in the performance plan. Only 4 of the plans comprehensively 
addressed any of the four areas in their improper payments discussion. 

Table 2 summarizes our evaluation of the extent to which the annual 
performance plans contained improper payment-related discussions for 
the four areas GPRA requires to be addressed—goals, measures, 
strategies, and procedures to validate performance data—for the 15 CFO 
Act agencies required by OMB Circular A-11 to report improper payment 
information in their initial budget submissions. This evaluation was 
based on the performance plan assessments contained in the separate 
agency reports that we issued last year. (Appendix III lists these 
reports.) We considered an agency to have comprehensively addressed 
goals, measures, strategies, and procedures to validate performance 
data if our report did not reveal any weaknesses for how the 
performance plan addressed each of those elements for improper payment-
related issues. 

Table 2: Evaluation of How Agencies Addressed Improper Payments in 
Their Fiscal Year 2002 Annual Performance Plans: 

[See PDF for image] 

[A] As of May 21, 2002, DOD had not issued a fiscal year 2002 
performance plan. 

[B] These agencies made no reference to improper payments in their 
fiscal year 2002 annual performance plans. Therefore, we were unable to 
evaluate their plans or actions to address improper payments, if these 
types of payments existed at these agencies. 

Legend: 

Yes: The performance plan comprehensively addressed improper payments. 
Some: The performance plan did not comprehensively address improper 
payments. 
No: The performance plan did not address this element for improper 
payments. 

[End of figure] 

We found that, although 10 of the 15 agencies discussed improper 
payments in their fiscal year 2002 performance plans, none 
comprehensively addressed improper payments for all four of the plan 
elements required by GPRA. Furthermore, only 4 of the 15 agencies 
comprehensively addressed improper payments for any of the GPRA 
required elements. In addition, six performance plans discussed at 
least one of the elements but not comprehensively. That is, the reports 
acknowledged improper payments and cited some information regarding 
GPRA required elements one or more of the elements, but that 
information was not adequate to use as a basis for evaluating agency 
actions or progress in addressing improper payment problems. Further, 
four plans made no reference to improper payments. 

Our key outcomes reports noted the following examples of weaknesses in 
agency performance plans.

* Within HHS, the Centers for Medicare and Medicaid Services 
(CMS)[Footnote 15] had adequate procedures to validate performance 
data, but the strategies needed to achieve its improper payment goals 
were not adequately addressed and these goals were not consistently 
measurable. In some instances, the plan stated generally that the 
accomplishment of a goal was the target and did not explain, in 
sufficient detail, CMS’s strategies to ensure that the goal is 
accomplished. In others, progress was difficult to measure because of 
continual goal changes that were sometimes hard to track or that were 
made without sufficient explanation. Specifically, in both the fiscal 
years 2001 and 2002 performance plans, goals were dropped, revised or 
subsumed into other goals, or goals were added for the Medicare program 
integrity outcome. While refinements may be desirable as efforts become 
more mature, the inability to track individual initiatives makes it 
difficult to measure progress in achieving outcomes. Furthermore, 
because many of the baselines and measures for the new and revised 
goals were under development, CMS’s intended performance regarding them 
was unclear. 

* IRS’s EITC program under Treasury has historically been vulnerable to 
high rates of improper refunds—paying billions of dollars for improper 
EITC claims. Treasury’s performance plan did not report on performance 
measures for any aspect of IRS’s administration of the EITC, and IRS 
lacked performance measures for the program. Therefore, we are unable 
to assess progress toward achieving less waste, fraud, and error in the 
program. The performance plan noted that, in 1998, IRS began 
implementing a 5-year EITC compliance initiative that involved several 
components directed at the major sources of EITC noncompliance. While 
IRS is collecting data on the initiative’s results, the data are not 
yet sufficient to determine whether the initiative has reduced the 
overall noncompliance rate. 

* SSA’s annual performance plan includes several goals and performance 
measures targeted specifically at increasing program integrity and 
reducing fraud and abuse. Yet the performance plan was not clear about 
SSA’s progress in meeting these goals because of continued revisions to 
prior indicators and goals as well as SSA’s inability to provide timely 
performance data.

Since the conclusion of our fieldwork, some agencies have issued their 
annual performance plans for fiscal year 2003. Some of those plans may 
have addressed improper payments more thoroughly. In future work, we 
plan to review these plans for information on improper payments and 
compare fiscal years 2002 and 2003 performance plans for consistency 
and to assess the progress reported in achieving improper payment-
related outcomes and strategies.

Although no specific requirement exists for public reporting on 
improper payment-related activities at the agency level, the 
administration has recognized the importance of reducing governmentwide 
improper payments. The President’s Management Agenda, Fiscal Year 2002, 
discusses the reduction of improper payments as a key element under its 
initiative to improve financial performance within the government. As a 
result of this initiative, OMB revised its Circular A-11 to incorporate 
needed efforts to address improper payments within 16 selected federal 
agencies and about 50 programs within those agencies. Section 57.3 
requires the selected agencies to include specific improper payment-
related information in their fiscal year 2003 initial budget 
submissions to OMB. More specifically, the circular states that 
agencies that currently estimate improper payment rates for the 
programs identified are required to submit the following data:

* estimated improper payment rates projected for fiscal year 2001; 

* actual improper payment rates for fiscal years 1999 and 2000, if 
available;

* target rates (goals) for improper payments for fiscal years 2002 and 
2003;

* causes of improper payments;

* variances from targets or goals that were established; and: 

* descriptions and assessments of the current methods for measuring the 
rate of improper payments, and of the quality of data resulting from 
these methods.

The circular also requires each of these agencies to submit an 
assessment of the effectiveness of current agency efforts to minimize 
improper payments as well as an action plan that includes: 

* additional actions the agency could take to prevent and correct 
improper payments,

* an evaluation of the costs and benefits of implementing these 
corrective actions,

* a description of programmatic and legal considerations, and: 

* an assessment of the extent to which undertaking these actions would 
hinder the achievement of major program objectives. 

For programs administered by states or other organizations for which 
agencies are not currently estimating improper payment rates, the 
circular requires each agency to submit an analysis of whether and how 
improper payments could be estimated and of the costs and benefits of 
collecting new or additional data. In preparing their responses, 
agencies were told to consider programmatic and legal obstacles to 
collecting additional data or establishing estimation procedures. Both 
the circular and the President’s Management Agenda, Fiscal Year 2002, 
note that OMB plans to review the information provided and coordinate 
with each agency to develop detailed action plans on a program-by-
program basis. 

Furthermore, in August 2001, OMB distributed a memorandum to agency 
CFOs and budget officers containing supplemental guidance on submitting 
the improper payment information required by OMB Circular A-11. Among 
other things, it identified eight basic principles all federal agencies 
should recognize to minimize improper payments. The principles are: 

* prevention is more effective than after-the-fact efforts, 

* program payment integrity is a joint management responsibility, 

* improper payments should be kept to the lowest practical level, 

* payments should be balanced with program goals and other competing 
priorities,

* controls should take into account both the benefits and costs, 

* performance measurement and reporting provide better accountability, 

* data verification strengthens program payment integrity, and: 

* impediments to effective controls may exist and should be considered. 

The discussion of one of these principles—performance measurement and 
reporting provides better accountability—further notes that “Public 
reporting of progress enhances accountability. Agency performance can 
be reported in a variety of places, including reporting under the 
Government Performance and Results Act, annual financial reports, or 
regularly-issued stand-alone program reports.” The memorandum also 
requires documentation to support any conclusion that estimating 
improper payments is unnecessary or would not be cost-beneficial 
because the program is not susceptible to significant improper 
payments, has strong internal controls to prevent improper payments, or 
has not experienced an improper payment problem, or that the burden 
outweighs the benefit to be gained by developing estimates. OMB is 
currently analyzing the submissions and revising the requirements based 
on feedback from agencies.

In addition, other OMB initiatives include (1) working with the 
Congress on legislation to improve agency access to data for data 
sharing and drafting related agency guidance, (2) refining the OMB 
Circular A-11 guidance on reporting improper payment activity, (3) 
funding improper payment activities in the budget, (4) establishing 
electronic government Web sites including GovBenefits—which should 
improve the up-front accuracy of benefit determinations, and (5) 
assessing quarterly executive branch management scorecards to track how 
well agencies are executing the President’s management initiatives. 

These actions are appropriate for tracking and managing progress in 
this area. Unfortunately, the vehicle being used to assemble these data 
inhibits public disclosure of the information. OMB Circular A-11 
requires selected programs and agencies to submit improper payment data 
with their initial fiscal year 2003 budget submissions but Section 36 
of the circular prohibits the submissions from being publicly 
disclosed. Therefore, we reviewed the Budget of the United States 
Government, Fiscal Year 2003, to determine the improper payment 
information it contained. Since OMB incorporates the individual 
agencies’ budget requests into the budget and since the administration 
has made the reduction of improper payments a priority, we expected to 
find some improper payment information in the budget. Our review showed 
minimal discussion of improper payments as compared to the detailed 
information OMB Circular A-11 requires agencies to provide in their 
initial budget submissions. For example, even though OMB Circular A-11 
requires 15 CFO Act agencies to provide improper payment information on 
about 50 programs, the budget shows: 

* actual improper payment rates for fiscal year 2000 for 2 
programs—food stamps and Medicare,

* target error rates for food stamps and Supplemental Security Income, 

* types and causes of improper payments for the Department of 
Education’s Student Financial Aid Program and HHS’s Medicare and 
Medicaid programs, and: 

* a description of additional actions 6 agencies could take to prevent 
or correct improper payments for 8 programs. 

Furthermore, the Budget did not contain information for any agency for 
several areas cited in OMB Circular A-11, including an analysis and 
description of whether and how improper payments could be estimated, an 
analysis of the costs and benefits of collecting new or additional 
data, and obstacles to collecting additional data or establishing 
estimation procedures.

Given the fact that the agency financial statements, fiscal year 2002 
performance plans, and the budget contained little substantive 
information on improper payments, we attempted to locate other data 
that might offer added insights into agency efforts. One source was 
agency responses to June 2001 congressional requests to agency heads 
and OIGs for information on agency efforts to control improper 
payments. The requests, from the Chairman and Ranking Minority Member 
of the Senate Committee on Governmental Affairs, asked for specific 
information about the five components of internal control—control 
environment, risk assessment, control activities, information and 
communication, and monitoring—outlined in our report that addressed 
strategies to manage improper payments.

The congressional requesters received responses from either the agency 
head, the IG, or both for 9 agencies. Specifically, we found that, for 
the 15 CFO Act agencies required to report improper payment information 
under OMB Circular A-11, 9 agency heads and 8 OIGs responded to the 
congressional request. For 6 of the agencies, neither the agency head 
nor the OIG responded. Of those that did respond, 5 agency heads and 2 
OIGs addressed all of the internal control components, as requested, as 
demonstrated in the following examples. 

* The responses of the Secretary and OIG of HUD show, among other 
things, how HUD (1) promoted an environment of accountability to reduce 
improper payments by establishing the Rental Housing Integrity 
Improvement Project (RHIIP) to help ensure that the “right benefits go 
to the right person,” (2) estimated its improper payments in the past 
and is now implementing plans for a more comprehensive error 
measurement process, and (3) reduced the risk of improper payments by 
implementing new rent calculation systems and performing data matches 
with IRS and SSA data.

* The Secretary of HHS’s response showed how the agency (1) addressed 
the control environment through numerous oversight and program 
integrity activities, (2) computed an error rate for Medicare fee-
forservice claims and determined the cause of these improper payments, 
(3) established a GPRA goal to reduce the percentage of improper 
payments made under the Medicare fee-for-service program, (4) worked on 
a methodology to measure improper payments for the Medicare Managed 
Care and Medicaid programs, (5) assisted medical providers in 
submitting claims correctly, and (6) developed statistical analyses to 
stem fraud, waste, and abuse.

* The Acting Commissioner of SSA explained how SSA (1) created a 
culture of accountability through the day-to-day operation of its 
compliance program, (2) estimated payment errors through stewardship 
reviews, (3) detected and deterred improper payments through a series 
of system enhancements, (4) collected improper payments by using 
various methods such as credit bureaus and the Treasury offset program, 
and (5) established payment accuracy goals and methods to track 
progress as part of its annual performance plan. 

We expected agencies to have accurate and timely information available 
to respond to the congressional request since, in February 2001, OMB 
had asked these agencies to address their improper payment issues in 
their fiscal year 2002 performance plans. However, for the most part, 
the responses provide only partial answers showing that, while the 
agencies agreed that managing improper payments is important, they 
lacked comprehensive strategies to do so. For example, one agency 
answered all of the questions, yet indicated that it did not know the 
aggregate amount of improper payments made on a departmentwide level 
and that the most recent estimate of improper payments for one of its 
high-risk programs was from 1997. Another agency stated that it has not 
performed a risk assessment and has no formal process to estimate or 
track improper payments because it has an inherent culture of high 
standards, operating efficiency, sophisticated systems, and personal 
attention to detail, which results in few improper payments. A third 
agency could not provide substantive answers to the request. Rather, it 
stated that while audits have recommended improving internal controls, 
it does not believe they disclosed an unacceptable level of risk. This 
agency did not estimate the amount of its improper payments or provide 
details of any related risk assessments. 

The Congress and the administration have clearly indicated that 
agencies should consider the reduction of improper payments a top 
priority. Despite this focus, little improper payment information is 
publicly available. Public disclosure provides information against 
which agency efforts to reduce improper payments can be measured and 
evaluated. It can also help form a basis for holding agency officials, 
the administration, and the Congress accountable for actions that 
reduce improper payments and improve program performance.

Efforts by Four Agencies to Address Improper Payments Have Met with Some
Success: 

The USDA, HHS, HUD, and SSA collectively reported about $19.1 billion 
of improper payments in their fiscal year 2000 financial statements. 
Individual amounts of improper payments reported ranged from $1.1 
billion for the food stamp program at USDA to $12.5 billion for 
Medicare-related payments at HHS. Because of the magnitude of the 
amounts reported, we contacted representatives at each agency to 
determine their efforts to reduce and manage improper payments. Each 
agency has been actively working to address its improper payment 
problems. These efforts typically involved activities related to the 
five components of internal control—control environment, risk 
assessments, control activities, information and communications, and 
monitoring. The following sections highlight some of the efforts 
undertaken by these agencies.

Control Environment: 

The control environment is perhaps the most critical element in 
reducing improper payments because it establishes a culture of 
accountability and assigns responsibility for actions. A sound control 
environment stresses the importance of prevention of improper payments 
and efficient and effective program operations while maintaining a 
balance with privacy and information security in a world where most 
payments are made electronically. In establishing a sound control 
environment, agency management recognizes that personnel throughout the 
organization make internal controls work and, therefore, human capital 
issues must be seriously considered in all changes to the system of 
internal control. 

As noted in our report on strategies to manage improper payments, 
changes in the control environment may require actions by both the 
Congress and agency officials. These actions can include enacting 
legislation, setting and maintaining the ethical tone, delegating roles 
and responsibilities, and implementing human capital initiatives. 

Legislative and management actions that affected the control 
environment over improper payments occurred at each of the agencies. 
Legislative actions involved passing laws that revised program 
operations and called for various prevention and detection 
methodologies and periodic reporting on the status of agency 
improvement efforts. For example, the Agriculture Risk Protection Act 
of 2000: 

* authorizes additional resources to assist the Risk Management 
Agency’s (RMA) Federal Crop Insurance Corporation (FCIC)[Footnote 16] 
in identifying fraud, waste, abuse, and mismanagement in its programs; 
16The FCIC is a government-owned corporation within USDA. Page 25 GAO-
02-749 Improper Payments; 

* helps FCIC collect bad debts by imposing severe penalties and 
interest and offsetting future benefit payments for those who willfully 
and intentionally provide false or inaccurate information with respect 
to a policy or plan of insurance;[Footnote 17] 

* requires RMA’s Office of Risk Compliance to use data mining, data 
warehousing, and data reconciliation to identify potential improper 
payments and provides up to $23 million in funding for these efforts 
through fiscal year 2005.[Footnote 18] 

Two legislative reforms have helped the HHS’s CMS enhance Medicare’s 
anti-fraud and abuse activities. First, the Health Insurance 
Portability and Accountability Act of 1996 established the Medicare 
Integrity Program, which provides CMS with levels of funding for 
Medicare program safeguard activities such as audits of cost reports 
and medical prepayment claim reviews. In the cost report area alone, 
CMS reported $570 million and $493 million in improper payments for 
fiscal years 2000 and 2001, respectively. In addition, the Balanced 
Budget Act of 1997 provided CMS with increased authority to keep health 
care providers who have been convicted of health care related crimes 
out of the Medicare program, exclude providers who abuse the program, 
and impose monetary penalties on such providers. 

At SSA, the Foster Care Independence Act of 1999 helped strengthen 
program integrity by: 

* authorizing SSA to conduct matches with Medicare data and simplify 
procedures to gain access to recipient records from financial 
institutions to help verify Supplemental Security Income (SSI) 
recipients’ financial eligibility;

* authorizing SSA to prohibit individuals who provide false or 
misleading eligibility information from collecting Old Age and 
Survivors Insurance (OASI) and Disability Insurance (DI) and SSI cash 
benefits; 

* making a representative payee—a person authorized to receive benefit 
payments for a qualified individual—liable for OASI and DI or SSI 
overpayments caused by payments made to deceased beneficiaries; and: 

* authorizing SSA to use all available debt collection authorities to 
recover SSI debt.

Equally, if not more important, an effective control environment 
requires management’s commitment to reduce improper payments. Agency 
management can affect the control environment by, among other things, 
setting expectations and goals for reducing improper payments, 
implementing program-specific measures to reduce fraud and errors, 
calling for periodic performance reporting, and requiring follow-up 
actions based on performance results.

For example, USDA’s FNS administers the food stamp program under which 
state welfare agencies certify eligibility and provide benefits to 
households. Although not reported in USDA’s financial statements, FNS 
identified about $976 million in food stamp program overpayments for 
fiscal year 2001. FNS strives to increase the accuracy of eligibility 
determinations and benefit computations and also oversees the level of 
benefits issued. Its food stamp Quality Control System (QC) measures 
the accuracy of eligibility determinations and benefit computations and 
then publicly reports each state’s overissuance rate. FNS reviews these 
data to identify areas needing corrective action and practices that are 
effective in improving payment accuracy.

USDA management also encourages state agencies to minimize improper 
payments by offering financial incentives for those with high payment 
accuracy and imposing sanctions on those with payment overissuance 
rates above the national average. In fiscal year 2000, FNS imposed $46 
million in financial sanctions on 18 states with overissuance rates 
above the national average. At the same time, it provided $55 million 
in supplementary funding to 11 states with payment overissuance rates 
equal to or below 5.9 percent—a rate well below the national average of 
about 8.9 percent.[Footnote 19] These actions have resulted in a 
decline in state payment error rates from 10.7 percent in fiscal year 
1998 to 9.9 percent in fiscal year 1999, to 8.9 percent for fiscal year 
2000. However, FNS and OMB officials believe that the Farm Security and 
Rural Investment Act of 2002[Footnote 20] will likely reduce the number 
of states sanctioned in future years, as only those with persistently 
high rates of improper benefit and eligibility determinations (those 
exceeding 105 percent of the national performance measure for 2 or more 
consecutive fiscal years) would be penalized. 

SSA management demonstrated its commitment to reduce improper payments 
in its 1997 strategic plan, Keeping the Promise. One of the strategic 
goals cited in the plan is to make SSA program management the best in 
business with zero tolerance for fraud and abuse. To achieve this goal, 
SSA initiated a program of anti-fraud efforts to: 

* eliminate wasteful practices that erode public confidence in the 
Social Security system;

* vigorously prosecute individuals or groups who damage the integrity 
of the programs; and: 

* change programs, systems, and operations to reduce instances of 
fraud. 

Senior SSA management oversees the implementation and coordination of 
these fraud elimination strategies. At the local level, each SSA region 
has a Regional Anti-Fraud Committee that acts as the focal point for 
the agency’s effort to combat fraud.

At HUD, management took steps to reduce errors in the rental housing 
assistance programs by establishing the Rental Housing Integrity 
Improvement Project. A RHIIP advisory group develops and implements 
plans to reduce program errors and correct related material management 
control deficiencies in HUD’s high-risk subsidized rental housing 
programs. According to a HUD official, the advisory group has taken 
steps to increase HUD’s income data matching authority and utilization 
to enable upfront income data sharing to avoid subsidy errors 
attributed to unreported and underreported income sources. In addition, 
a RHIIP subgroup develops rent calculation software and proposals for 
program simplification. 

Risk Assessment: 

Risk assessment is a key step in gaining assurance that programs are 
operating as intended and that they are achieving their expected 
outcomes. It entails a comprehensive review and analysis of program 
operations to determine where risks exist, what those risks are, and 
the potential or actual impact of those risks on program operations. 
The information developed during a risk assessment forms the foundation 
or basis upon which management can determine the nature and type of 
corrective actions needed. It also gives management baseline 
information for measuring progress in reducing improper payments. In 
performing a risk assessment, management should consider all 
significant interactions between the entity and other parties as well 
as internal factors at both the entitywide and activity levels.

The specific risk assessment methodology used can vary by organization 
because of differences in missions and the methods used in assigning 
risk levels. As we noted in the improper payment strategies report 
cited earlier, risk identification methods often include qualitative 
and quantitative ranking activities, management conferences, 
forecasting and strategic planning, and consideration of findings from 
audits and other assessments. The information obtained from the four 
agencies we visited revealed frequent use of similar risk assessment 
activities. 

USDA’s FNS conducts annual quality control reviews to identify the 
extent and causes of improper payments in several of its programs, 
including the food stamp program. The two most recent reviews estimated 
overpayments of $1.1 billion and $976 million in fiscal years 2000 and 
2001, respectively. These reviews provided more detailed information 
about the causes of the improper payments. For example, the report of 
fiscal year 2000 payments found that about 56 percent of the 
overpayments and underpayments in the food stamp program occurred when 
state food stamp workers made mistakes such as misapplying complex food 
stamp rules in calculating benefits. The remaining 44 percent of the 
errors occurred because participants, either inadvertently or 
deliberately, did not provide accurate information to state food stamp 
offices. 

HHS measures improper payments within the Medicare fee-for-service 
program and estimated improper payments in this program of $11.9 
billion and $12.1 billion for fiscal years 2000 and 2001, respectively. 
Further, the agency reports that the Medicare fee-for-service claims 
error rate was reduced to 6.3 percent in fiscal year 2001 from 6.8 
percent in fiscal year 2000 and 7.97 percent in fiscal year 1999. 
However, we cannot conclude that these error rate differences are 
statistically significant. As reported in the OIG fiscal year 2001 
Medicare fee-for-service payments review, “The decrease this year may 
be due to sampling variability; that is, selecting different claims 
with different dollar values and errors will inevitably produce a 
different estimate of improper payments.”[Footnote 21] 

CMS has initiated projects to improve the precision of Medicare fee-
forservice improper payment estimates and aid in the development of 
corrective actions to reduce improper payment losses. In fiscal year 
2001, CMS implemented a provider compliance rate to measure the 
appropriateness of claims submitted prior to payments. In addition, CMS 
developed a comprehensive error testing program that will produce 
contractor-, provider-, and benefit-specific error rates. These error 
rates can be aggregated to add greater precision to the national level 
estimates similar to the Medicare fee-for-service error rate. 

GAO has designated HUD’s rental housing assistance programs as high 
risk since 1994. HUD has taken several actions to identify the risks 
associated with these programs and is working to further refine the 
procedures currently used to obtain more useful assessment information. 
In one example, HUD analyzed risk designed to measure postpayment 
accuracy. An annual study of rent calculation errors estimated the 
extent, severity, costs, and sources of rent errors for the Public 
Housing and Section 8 programs. The study, which relied on the 
integrity of the data supplied by the tenants and third-party income 
verification sources, matched independent determinations of tenants’ 
incomes, rents, and subsidies to those made by local public housing 
agencies (PHAs) and Section 8 staff to identify incorrect rental 
calculations due to administrative and mathematical errors. The study 
results, issued in June 2001, reported tenant rental underpayments of 
approximately $1.7 billion annually (an average of $95 per household) 
in 34 percent of households and tenant rental overpayments of over $600 
million annually (an average of $56 per household) in 22 percent of 
households. HUD used the study results to strengthen its procedures for 
ensuring administrative compliance with regulations.

In another study, HUD developed an approach to identify differences 
between tenant federal income tax data and the income tenants reported 
to HUD by using a large-scale computer matching income verification 
process. While initial results were effective in identifying certain 
errors in tenant reporting, HUD is currently developing different 
methodologies to improve the accuracy of this type of risk assessment. 

HUD recently began to expand the scope of its error measurement 
methodology to cover the three primary types of rental assistance 
program errors—public housing authorities, owners and agents income and 
rent determinations; tenant reporting of income; and POA billings to 
HUD for subsidy payments. The current error measurement methodology 
addresses the first two of these three components and, starting in 
2003, HUD intends to annually measure and report on all three error 
components. HUD’s goal is to reduce processing errors and resulting 
improper payments by 50 percent by 2005.

Control Activities: 

Once an organization has committed to reducing the risk of improper 
payments, identified program areas that are at risk, quantified the 
possible extent of the risk, and has set a goal for reducing the risk, 
it must act to achieve that goal. Control activities are the policies, 
procedures, techniques, and other mechanisms designed to help ensure 
that management’s decisions and plans are carried out. Control 
activities used by organizations to address improper payments vary 
according to the specific threats faced and risks incurred. The types 
of payment activities identified as presenting the most significant 
risk of improper payments and the kinds of data and other resources 
available dictate the specific actions pursued by individual entities. 
Additionally, the actions must comply with all relevant laws and strike 
a balance between the sometimes competing goals of privacy and program 
integrity. 

Given the large volume and complexity of federal payments and 
historically low recovery rates for certain programs, it is generally 
most efficient to pay bills and provide benefits properly in the first 
place. Aside from minimizing overpayments, preventing improper payments 
increases public confidence in the administration of benefit programs 
and avoids the difficulties associated with the “pay and chase” aspects 
of recovering improper payments. However, since some overpayments are 
inevitable, agencies also need to adopt effective detection techniques 
to quickly identify and recover them. Detection activities play a 
significant role not only in identifying improper payments, but also in 
providing data on why these payments were made and, in turn, 
highlighting areas that need strengthened prevention controls. The 
agencies in our study used many different prevention and detection 
control activities to manage improper payments. The nature of these 
activities ranged from sophisticated computer analyses of beneficiary 
and program participant data using data sharing and computer-editing 
techniques to on-site verification of claim information.

Data sharing allows entities to compare information from different 
sources to identify inconsistencies and thus help ensure that payments 
are appropriate. For example, data matches of social security numbers 
and other data can help determine whether beneficiaries are 
inappropriately receiving payments at more than one address. For 
government agencies, data sharing can be particularly useful in 
confirming initial or continuing eligibility of participants in benefit 
programs and in identifying improper payments that have already been 
made. 

Of the four agencies included in our review, SSA is the most active in 
the data sharing arena. It performs over 20 data matches with over 10 
federal agencies and more than 3,500 state and local entities. For 
instance, SSA shares data with HUD so that HUD can perform a match to 
verify the identity of recipients of housing benefits and identify 
potentially fraudulent claims.

In addition to sharing data with other entities, SSA also uses data 
from other sources to perform matches to help prevent and detect 
improper payments in its programs. For example, it obtains death 
records from states to determine if deceased individuals are still 
receiving benefit checks. SSA estimates that it saves $350 million 
annually for OASI and DI, and $325 million annually for SSI through its 
use of data matching. Further, the savings are not limited to those 
realized by SSA. According to SSA, its matches save other agencies 
approximately $1.5 billion each year. 

According to SSA’s Performance and Accountability Report, Fiscal Year 
2001, it uses computer matching and other payment-safeguard activities 
to assist it in finding and correcting improper payments and in 
identifying and deterring fraud in its entitlement programs. In 
commenting on our report, SSA noted that the OASI accuracy rate for 
fiscal year 2000 was 99.9 percent and the SSI accuracy rate was 94.7 
percent. It did not provide a fiscal year 2000 DI accuracy rate. In 
continuing efforts to improve payment accuracy, SSA invested more than 
$1 billion in processing over 9 million alerts in fiscal year 2001. 
Current estimates indicate that these payment-safeguard activities 
detected or prevented about $7 billion in overpayments. 

Data mining is a computer-based control activity that analyzes diverse 
data for relationships that have not previously been discovered. The 
central repository of data commonly used to perform data mining is 
called a data warehouse. Data warehouses store tables of historical and 
current information that are logically grouped. Applying data mining to 
a data warehouse allows an organization to efficiently query the system 
to identify potential improper payments, such as multiple payments for 
an individual invoice to an individual recipient on a certain date, or 
to the same address. 

The large number of Medicare transactions precludes a manual 
examination of each transaction to identify associations and patterns 
of unusual activities, making data mining an effective and efficient 
alternative. CMS is currently involved in two data mining efforts. Its 
claims administration contractors currently use data mining and 
statistical analysis as part of their postpayment review activities. At 
the request of the states, CMS has also undertaken a Medicare/Medicaid 
data exchange project. This project’s goal is to use data mining to 
query data from both programs in an effort to find fraudulent or 
abusive patterns that may not be evident when billings for either 
program are viewed in isolation, but would become evident when they are 
compared. 

Computerized edit checks are used to ensure that valid and authorized 
transactions are recorded and executed according to management and 
program requirements. USDA’s RMA provides the regulations, crop 
policies, underwriting standards, and loss-adjustment standards for 
crop insurance policies, although private insurance companies deliver 
the actual crop insurance program. RMA’s crop insurance program uses a 
variety of computer-generated edit checks to ensure valid program 
requirements are met. These edit checks include ensuring that the 
liability was not increased at the time of loss, the cause of loss was 
insurable according to policy language, and the insurance company 
applied appropriate calculations to determine the loss payment. In 
addition, RMA matches each producer’s social security and employer 
identification numbers with the agent and loss adjuster to ensure that 
the producers have not been debarred from participating in the crop 
insurance program. Once information is accepted through the above edit 
processes, RMA loads it into databases where it is subject to further 
audit and review. 

The computerized data sharing and data mining efforts discussed in this 
report help identify improper payments by providing more useful and 
timely access to information. These techniques can result in 
significant savings by identifying client reporting errors and 
misinformation during the eligibility determination process—before 
payments are made—or by detecting improper payments that have been 
made. However, the extensive use of personal information in an evolving 
technological environment raises new questions about how individual 
privacy should be protected. In the federal arena, such activities must 
be implemented consistent with all protections of the Privacy Act of 
1974, as amended by the Computer Matching and Privacy Protection Act of 
1988, and other privacy statutes.

Not every control activity identified involved computer applications. 
The agencies that participated in this review also used on-site visits 
and manual claims reviews to help reduce improper payments. For 
example, USDA’s Farm Service Agency (FSA) administers programs for the 
Commodity Credit Corporation (CCC). Among other income and commodity 
support programs, CCC indemnifies food producers for the extraordinary 
losses of crops or livestock resulting from weather-related disasters 
and pest infestations. Over 2,200 FSA local county offices are 
responsible for ensuring that producers provide reliable claim 
information. FSA performs random reviews of about 5 to 20 percent of 
producer-provided information to verify that, among other things, 
acreage has not been overstated. (These spot checks search for 
anomalies such as numbers outside of reasonable ranges.) Similarly, at 
HHS, CMS manually reviews Medicare claims to determine whether benefits 
are provided to eligible beneficiaries, charges are covered, and 
services are medically necessary and reasonable. 

Information, Communications, and Monitoring: 

Once an organization has identified its improper payment-related risks 
and undertaken activities to reduce them, federal officials with 
program management, oversight, and monitoring roles need relevant, 
reliable, and timely information to help them make operating decisions 
and monitor performance on a day-to-day basis and over time. For 
example, a major objective of the Federal Financial Management 
Improvement Act is to have systems that provide good cost accounting 
information that program managers can use in managing day-to-day 
operations. Managerial cost accounting is aimed at providing reliable 
and timely information on the full cost of federal programs, their 
activities, and outputs. This cost information can be used by the 
Congress and federal executives in making decisions about allocating 
federal resources, authorizing and modifying programs, evaluating 
program performance, and developing the information to support GPRA 
requirements. 

The need for information and communication extends beyond 
organizational boundaries. Educational activities for both 
beneficiaries and other program participants help reduce improper 
payments and strengthen program operations. Complex program regulations 
can be confusing to both agency personnel and beneficiaries and thus 
can potentially contribute to improper payments. The better educated 
agency employees, contractors, and beneficiaries are about what is 
expected of them and the consequences of not meeting those 
expectations, the greater the chances for reducing fraud and errors in 
the payment process. All four agencies visited educated recipients and 
service providers on complex program regulations using various 
mechanisms, including the Internet and printed materials.

For example, at USDA, FSA maintains a Web site with program 
descriptions and information for producers. This site has hyperlinks to 
additional information, guidance, and contacts for FSA and CCC. It 
includes links to farm loan information, youth loans, disaster 
assistance, price supports, and conservation programs. Furthermore, CCC 
regularly sends out news releases explaining policies and procedures. 

Agencies also use printed materials to educate recipients and service 
providers. HUD publishes reference guides, handbooks, forms, and other 
tools for homeowners and lenders. Its OIG has also published fraud 
prevention guidance, Guidelines for Public Housing Authorities to 
Prevent, Detect and Report Fraud. At USDA, FNS publishes guidance that 
focuses on improving both access to the food stamp program and the 
accuracy of eligibility requirements for benefit determinations. For 
example, in September 2001, FNS updated its food stamp program fact 
sheet, which is distributed to applicants in state food stamp agencies 
and is available on its Web site. The fact sheet describes the rules 
and types of documentation that applicants will need to provide at the 
interviews to verify eligibility. SSA has also developed brochures and 
printed materials Page 35 GAO-02-749 Improper Payments as part of its 
campaign to keep the public informed about Social Security programs.

Barriers to More Effectively Managing Improper Payments: 

When discussing actions to reduce improper payments, officials at all 
four agencies cited barriers that restricted their ability to better 
manage their programs against improper payments. Generally, agency 
officials noted that they encounter barriers due to legislative 
provisions, program design factors, and resource limitations. It should 
be recognized that many of these barriers exist as a result of 
decisions to ensure beneficiary privacy and other data safeguards, the 
inherent nature of some federal programs, and budgetary realities. As a 
result, it may be difficult to eliminate or mitigate these barriers to 
the point where they no longer restrict agency actions in certain areas 
to better manage their improper payment problems. However, to the 
extent that that is the situation, federal agencies, the 
administration, the Congress, and the public must recognize that some 
level of improper payments will occur because of these decisions. This 
section of the report discusses these types of barriers. 

Legislation-Based Barriers: 

Legislative actions can give agencies the authority to implement 
activities to identify improper payments and, subsequently, to hold the 
responsible parties accountable. They can compel agencies to work 
together using common data to detect and prevent improper payments, and 
can authorize agencies to develop incentive programs to increase 
accuracy in program administration. Yet they can also limit an agency’s 
ability to take actions to reduce improper payments. Agencies trying to 
identify ineligible individuals receiving government benefits and hold 
them accountable have met with legislation-based barriers that limit 
their efforts to minimize improper payments. 

HUD officials told us that, to reduce improper payments in subsidized 
housing programs, they could benefit by having access, even if it is 
only limited access, to data from other federal agencies and by sharing 
relevant information with entities implementing HUD’s programs. 
However, they stated that the Internal Revenue Code and the Privacy Act 
of 1974 have prevented or made it difficult for HUD to obtain this 
information and have limited how HUD can use it. Specifically, HUD 
officials noted that the agency can only disclose federal tax data to 
the tenants and not to the POAs—the entities that determine monthly 
housing benefits based, in part, on income information. When HUD 
identifies discrepancies, it sends Page 36 GAO-02-749 Improper Payments 
letters to the tenants notifying them of the discrepancies and 
directing them to submit revised income information to their respective 
POAs. At the same time, HUD notifies the POAs that discrepancies exist 
between the income in HUD’s tenant databases and federal tax data for 
specific tenants, but it is prohibited from identifying the specific 
amounts in question. HUD then requests that the POAs resolve the 
unspecified discrepancies and report the resolution to HUD.

Data currency is also a factor. HUD receives taxpayer income data in 
September for the previous year and, by then, many of the beneficiaries 
were either no longer working, had changed jobs, or had moved. While 
more timely data are available, legislation prevents HUD from using it. 
For example, the HHS Office of Child Support Enforcement maintains the 
National Directory of New Hires containing employee wage data that is 
updated quarterly, versus the IRS data that is updated annually. 
However, Section 453 of the Social Security Act limits use of the data 
to those entities listed in the act, and HUD is not one of those 
entities.[Footnote 22] 

Some improper payments are inevitable because agencies are not 
permitted to stop or adjust payments until the due process hearing or 
appeals processes are completed. For example, SSA disburses SSI 
payments to recipients at the beginning of the month based on the 
income and asset levels recipients expect to maintain during the month. 
Some government programs pay benefits in advance under the assumption 
that the beneficiary’s circumstances, such as income and asset levels, 
will remain the same during the period for which payment was rendered. 
If SSA initially determines that an overpayment occurred, court 
decisions[Footnote 23] and language in the Social Security Act allow 
individuals to continue receiving the same amount of SSI and DI 
benefits pending the results of a hearing to determine eligibility. If 
the initial determination is affirmed, the payments made during the 
hearing and appeals processes are considered overpayments, which SSA 
may recover using a variety of means.[Footnote 24] 

USDA’s FNS faces a similar situation. FNS officials stated that the 
Privacy Act of 1974 has several disclosure prohibitions, access and 
amendment provisions, and record-keeping requirements that hinder its 
efforts to share information with other federal agencies and with state 
agencies. The Computer Matching and Privacy Protection Act of 1988 
amended the Privacy Act of 1974 to add procedural requirements for 
agencies to follow when conducting computer matching. For example, 
agencies must provide matching subjects with opportunities to receive 
notice and to refute adverse information before having a benefit denied 
or terminated. Agencies must establish data protection boards to 
oversee the data matching activities. Exceptions to the disclosure 
requirements are possible but require a series of due process steps 
designed to validate the debt and offer the individual an opportunity 
to repay it. In commenting on this report, OMB officials told us that 
it prefers removing statutory barriers only when appropriate privacy 
safeguards are in place. 

Program Design Barriers: 

Benefit or entitlement programs operated by the federal government in 
partnership with state or local governments or private intermediary 
organizations are particularly vulnerable to improper payments. 
Generally, the federal government provides broad statutory and 
regulatory guidelines as well as all or a part of the program funding, 
while the other entities manage the day-to-day program operations. As 
such, federal agencies must depend on state, county, and local 
officials and other entities to ensure that eligibility requirements 
are met and that benefit amounts are determined correctly. Further, 
these third-party organizations that manage federal programs often have 
little incentive to ensure that the right amounts go to the right 
individuals.

Medicaid is the primary source of health care for 34 million enrollees, 
or about 12 percent of the U.S. population. In fiscal year 2000, 
federal and state Medicaid outlays totaled $207 billion—of which $119 
billion represented federal expenses. Medicaid legislation provides 
states with a variety of options for program administration. They can 
elect to administer the program at the state or county level, and they 
can operate fee-forservice programs, managed care programs, or some 
combination of the two. States may also elect to operate their claims-
processing systems directly or contract with private vendors. The 
variety and complexity of the state Medicaid programs provide 
challenges for federal oversight. CMS assists interested states in 
developing methodologies and conducting pilot studies to measure and 
ultimately reduce improper payments. However, according to CMS 
officials, only a limited number of states are Page 38 GAO-02-749 
Improper Payments interested in participating in these studies since 
they believe that measuring improper payments could lead to penalties 
against states based on their error rates. There are, however, some 
promising activities. Some states are devoting more resources to 
program integrity activities than they had previously and are obtaining 
more sophisticated computer analytic capacity to review payment trends 
and spot improper billing. Still others are implementing stricter 
health care fraud and abuse control laws and policies. 

HUD officials also face the problem of third-party management of a 
federal program and the lack of a financial benefit or other incentive 
to encourage the POAs to minimize improper payments. For example, HUD’s 
public housing programs are operated by over 3,000 PHAs, which operate 
under state and local laws but are funded by HUD. Initial rent 
determination is based on reported income levels. HUD officials stated 
that PHAs have little incentive to protect the interests of the 
government when determining the tenant benefit amount since it is 
easier to collect payments from HUD than from tenants. Thus, PHA’s have 
the incentive to keep the HUD payment portion as high as possible.

Resource Barriers: 

Each of the agencies visited processes a large number of payments and 
claims and emphasizes providing benefits to needy individuals and 
families as fast as possible. At these agencies, officials noted that 
speed of service issues coupled with resource constraints can result in 
improper payments. For example, CMS contracts with health insurance 
companies to process 890 million Medicare fee-for-service claims each 
year and SSA processes monthly payments to approximately 51 million 
individuals. Officials at these agencies stated that resource 
limitations hinder their ability to perform oversight and monitoring 
functions, such as site visits and documentation reviews, to ensure 
that payments are valid. 

USDA’s RMA expressed similar concerns. Private insurance companies 
administer the crop insurance for RMA. These companies are responsible 
for educating the agents who sell crop insurance policies and the 
parties that purchase the policies. Improper payments can result when 
crop producers misunderstand the policies or when they detect program 
vulnerabilities and intentionally misuse the system. RMA has less than 
two investigators per state and over 1 million policies nationwide, 
making compliance with laws, policies, and procedures difficult to 
monitor. Also at USDA, CCC officials stated that there is no time for 
second-party review of the over 2,300 county offices administering the 
programs because staff size Page 39 GAO-02-749 Improper Payments has 
decreased while the number of programs has increased over recent years.

Legislative, program design, and resource barriers represent serious 
obstacles to an organization’s ability to effectively manage improper 
payments and affect the amounts of improper payments occurring in 
federal programs. They can be significant inhibitors that departments 
must face, but which they often do not have the ability to eliminate 
through independent actions. Addressing these barriers will require 
coordination and cooperation between federal agencies, state and local 
organizations, the administration, and the Congress. 

A Collaborative Effort Is Needed for Managing Improper Payments: 

The magnitude of improper payments reported in agency financial 
statements, GAO and OIG audit reports, and other documents over the 
past 3 years clearly demonstrates the need for a governmentwide effort 
to remedy this situation. Many individual agencies have taken measures 
to address their improper payments during this period, yet the total 
amount reported has remained fairly constant at around $19 billion to 
$20 billion. 

As we noted in our report on strategies to manage improper payments, 
high levels of improper payments need not and should not be an accepted 
cost of running federal programs. Identifying and implementing steps to 
reduce improper payments will likely be difficult, time consuming, and 
costly. While individual agencies must be responsible for their own 
programs and related improper payments, the collective efforts of 
agency management, the administration, and the Congress are necessary 
to attack improper payments on an agency and governmentwide basis to 
achieve greater results.

Figure 1: Key Governmentwide Components in the Coordination Effort: 

This figure is a circular flowchart showing Congress, Agencies, and 
Administration in a circular motion illustrating key governmentwide 
components in the coordination effort. 

[See PDF for image] 

[End of figure] 

Each of these organizational bodies brings different perspectives and 
expertise to the solutions process, which, when consolidated, can help 
reduce the governmentwide improper payment problem. Further, once 
committed to a plan of action, all parties must remain steadfast 
supporters of the end goals and their support must be transparent to 
all. 

Federal Agencies: 

Within federal agencies, program, Chief Operating Officer (COO), CFO, 
Chief Information Officer (CIO), and IG offices have different missions 
and areas of responsibility. They also have the common goal of ensuring 
that federal programs and activities operate as effectively and 
efficiently as possible. Therefore, agencies would benefit by 
consolidating the program knowledge, expertise, and experience found in 
these various offices when developing and implementing controls to 
minimize improper payments. 

Figure 2: Key Agency Components in the Coordination Effort: 

This figure is a flowchart showing key agency components: Congress, 
Agencies, and Administration in the coordination effort. 

[End of figure] 

COOs are appointed by agency heads. They are responsible for providing 
overall organization management to improve agency performance. The COO 
has agencywide authority and reports directly to the agency head. COOs 
provide leadership such as overseeing efforts to improve financial 
management, which includes reducing improper payments. 

The agency CFO oversees the financial management activities relating to 
agency programs and operations. CFOs are responsible for providing 
complete, reliable, and timely financial information and for developing 
and maintaining integrated financial management and accounting systems 
related to financial reporting and internal controls. The information 
prepared by the CFO includes internal management reports and agency 
financial reports. Agency officials responsible for managing and 
controlling program operations need reliable and timely financial 
information, including improper payment data, to make operating 
decisions, monitor performance, and allocate resources. CFOs may 
identify and incorporate estimated improper payment disclosures into 
their agencies’ annual financial reports, which could promote 
transparency and help establish accountability. In addition, CFOs may 
be required to provide significant input for agency efforts in 
developing the improper payment information required by the recent 
revisions to OMB Circular A-11. 

CIOs are responsible for managing agency information technology 
resources of their agencies. In addition to developing new systems, 
CIOs evaluate and monitor existing systems to determine if they meet 
agency needs. Many of the techniques for detecting improper payments, 
such as data sharing and data mining, rely on computerized information 
systems. Agencies’ computer-related activities must also be consistent 
with all protections of the Privacy Act of 1974, as amended by the 
Computer Matching and Privacy Protection Act of 1988, and other privacy 
statutes. Furthermore, inadequate computer systems can have a serious 
impact on agency efforts to minimize improper payments since agencies 
use a wide range of computer-assisted activities to address improper 
payments. These activities range from simple comparative analysis 
(e.g., comparing beneficiaries with mortality rolls) to sophisticated 
computer models for interactive analysis of large amounts of 
information. Furthermore, organizations use computer-generated 
information to obtain, summarize, and communicate information needed to 
evaluate program performance. 

When performing audits and investigations, OIGs develop information on 
and an understanding of agency internal control systems and detect 
fraud and errors involving agency programs and activities. OIG audits 
have historically identified instances of improper payments within 
agency programs. For example, the HHS OIG identified $11.9 billion in 
overpayments for services in the Medicare fee-for-service program in 
fiscal year 2000 by selecting a sample of payments to providers and 
then reviewing the medical records that supported these payments. In 
addition, at the Department of Labor, an OIG investigation found that a 
claimant created 13 fictitious companies and submitted Unemployment 
Insurance claims for 36 fictitious claimants. 

Program managers are the agency’s first line of defense against 
improper payments. They manage their respective programs on a day-to-
day basis and are the principal federal points of contact for program 
participants, such as state and local governments, that administer 
billions of dollars in federal program and grant funds annually. In 
performing their responsibilities to ensure that their respective 
programs operate as intended, they should become aware of the extent 
and causes of improper payments in their programs.

Although the various offices cited above have different missions and 
areas of responsibility, they must work together and contribute to the 
successful management of improper payments. Central leadership within 
the agency is necessary to coordinate and consolidate the knowledge, 
skills, and abilities of these diverse entities. The COOs appear to be 
the logical choice to lead this effort due to the central management 
role played by this position within each federal agency. 

The Administration: 

Identifying, measuring, preventing, and collecting improper payments 
are continuing processes for which interagency cooperation can identify 
practices and procedures that may prove effective governmentwide. 

Figure 3: Key Administration Components in the Coordination Effort: 

This figure is a circular flowchart showing key administration 
components in the coordination effort: Congress, Agencies, and 
Administration. 

[See PDF for image] 

[End of figure] 

As the President’s agent for managing and implementing policy, OMB 
issues guidance and oversees the administrative organization and 
operations of federal agencies. OMB’s staff draws on experience in many 
areas of government to challenge the thinking of other agencies, which 
often cannot see beyond their own programs. To promote information 
sharing across agencies, OMB leads and participates in interagency 
groups, such as the President’s Management Council (PMC), the Chief 
Financial Officers Council (CFOC), the Chief Information Officers 
Council (CIOC), and the President’s Council on Integrity and Efficiency 
(PCIE). These councils, which are further described below, are good 
sources of best practice information for both agencies and OMB to draw 
on when developing guidance on improper payment issues. OMB’s role in 
managing, implementing, and overseeing governmentwide administrative 
policy, its interagency perspective, and its leadership role on the 
various interagency councils make it a key player in the government’s 
effort to reduce improper payments. The following table summarizes the 
agencies that are members of each council.[Footnote 25] 

Table 3: Agency Participation in Councils: 

[See PDF for image] 

[A] Indicates member of the Council.

[End of table] 

Based on its charter, the PMC’s membership consists of the Deputy 
Director of OMB, the Director of OPM, the COOs from the agencies listed 
in table 3, and other officials. Some of PMC’s responsibilities include 
implementing the President’s Management Agenda, Fiscal Year 2002, 
coordinating management-related efforts to improve government 
throughout the executive branch, resolving interagency management 
issues, ensuring the adoption of new management practices in agencies, 
and identifying and sharing examples of best management practices. PMC 
also seeks advice and information, as appropriate, from federal 
agencies and considers the management reform experiences of 
corporations, nonprofit organizations, state and local governments, 
government employees, public sector unions, and customers of government 
services. 

The CFOC was established under the provisions of the CFO Act of 1990 to 
improve financial management in the federal government. Its membership 
consists of the CFOs and deputy CFOs of the largest agencies along with 
the senior officials of OMB and Treasury, and it is chaired by the 
Deputy Director for Management, OMB.[Footnote 26] The CFOC recently 
established an Erroneous Payments Committee. The committee convenes to 
discuss and develop methods to address improper payments made by 
federal agencies. 

The CIOC was established in July 1996 by Executive Order 13011 as a 
governmentwide body to address crosscutting information technology 
issues. CIOs and deputy CIOs of the 28 largest federal agencies, two 
CIOs representing the smaller federal agencies, and other OMB and 
advisory members, make up the council’s membership, under the 
leadership of OMB’s Deputy Director for Management. The council was 
established to improve agency practices on information technology 
matters such as the design, modernization, use, sharing, and 
performance of agency information resources. It also facilitates 
intergovernmental approaches for using information resources to support 
common operational areas such as reducing improper payments. For 
example, it could assist interagency efforts to compare payment 
information to ensure that initial eligibility of individuals for 
benefits is determined correctly or to determine whether improper 
payments have already been made. 

The PCIE primarily consists of the presidentially appointed IGs and is 
chaired by the Deputy Director for Management of OMB.[Footnote 27] Its 
mission includes addressing integrity, economy, and effectiveness 
issues that transcend individual government agencies. The council 
conducts interagency audits, inspections, and investigations to promote 
economy and efficiency in federal programs and operations, and 
addresses governmentwide issues of fraud, waste, and abuse, including 
improper payments. PCIE and CFOC have recently established a joint 
working group to address improper payments. The working group is 
carrying out several tasks, including: 

* preparing a report that defines its position on mitigating and 
managing payment risks;

* preparing a critique on the effectiveness of the differing processes 
used to determine improper payment rates; 

* preparing a set of indicators that can be used to effectively 
represent the nature and extent of the problem of improper payments; 

* preparing guidance to ensure sufficient oversight and monitoring, and 
adequate eligibility controls and automated systems for agencies 
experiencing improper payment problems; and: 

* developing a proposal on funding the administrative costs associated 
with activities related to improper payments. 

Within these groups, OMB draws together operational, financial, 
information technology, procurement, and other experts from across the 
government to establish governmentwide goals in their areas of 
expertise and to marshal the resources within individual agencies to 
improve government performance.[Footnote 28] By drawing together 
representatives from these various councils, OMB can provide leadership 
and build on council members’ combined knowledge, skills, and abilities 
and work with them to develop systems and perform other actions to 
reduce improper payments. Collectively, these organizations can achieve 
more than they can by working alone.

The Congress: 

The Congress can further agency efforts to reduce improper payments by 
using its appropriation, authorization, and oversight responsibility to 
continue to demonstrate a leadership role and by helping to ensure that 
agencies are held accountable for meeting performance goals. 

Figure 4: Key Congressional Areas in the Coordination Effort: 

This figure is a circular flowchart showing key congressional areas in 
the coordination effort. 

[See PDF for image] 

[End of figure] 

The Congress reviews and determines federal financial priorities. 
Through the appropriations process, it has the opportunity to review 
recent expenditures in detail. Specifically, the Congress can use its 
appropriations authority to assist agencies in setting financial 
priorities that support identifying, reducing, and collecting improper 
payments. For example, the SSA’s fiscal year 2003 budget proposes $1.05 
billion for ensuring that only those who remain disabled continue 
receiving benefits and for assessing whether SSI recipients continue to 
meet the financial eligibility requirements. In considering this budget 
request, the Congress can help set priorities and expectations for 
specific program outcomes. 

The Congress also reviews the actions taken and regulations formulated 
by departments and agencies to make certain that program officials 
execute laws according to congressional intent. Therefore, it can 
determine whether the public’s needs are adequately served by federal 
programs, and thus lead corrective action through legislation or 
administrative changes. For example, in the Budget of the United States 
Government, Fiscal Year 2003, the President proposes a legislative 
change to allow IRS to match the income reported on student aid 
applications with tax return data. According to the budget, this action 
could help reduce improper payments in the Department of Education’s 
student aid programs, resulting in an estimated $138 million savings in 
2003. 

Congressional oversight committees investigate alleged instances of 
poor administration and fraud, waste, and abuse that could result in 
improper payments in federal programs. On July 9, 2002, the House of 
Representatives passed the “Improper Payments Information Act of 2002” 
(H.R. 4878). This legislation is currently at the Senate for its 
consideration. This bill requires more stringent requirements in the 
areas of improper payment review and reporting than is currently 
required by the President’s Management Agenda, Fiscal Year 2002, and 
OMB Circular A-11. Specifically, it requires that agency heads review 
all programs and activities that they administer, identify those that 
may be susceptible to improper payments, estimate the annual amount of 
improper payments, and, where estimated improper payments exceed the 
lesser of 1 percent of the total program budget or $1,000,000 annually, 
report on actions the agency is taking to reduce improper payments. On 
the other hand, the President’s Management Agenda, Fiscal Year 2002, 
and OMB Circular A-11 apply only to large-dollar programs.

Further, most federal agencies and programs are under regular and 
frequent reauthorizations. As a consequence of these oversight efforts, 
the Congress can abolish or curtail obsolete or ineffective programs by 
cutting off or reducing funds. Conversely, the Congress may enhance 
effective programs by increasing funds or reducing legislative barriers 
to agency actions to better control improper payments. 

Conclusions: 

The extent of governmentwide improper payments is not known but is 
likely to be billions of dollars more than the approximately $19 
billion to Page 50 GAO-02-749 Improper Payments $20 billion reported 
annually in agency financial statements over the past 3 years. Current 
requirements and guidance do not require or offer a comprehensive 
approach to measuring improper payments, developing and implementing 
corrective actions, or reporting on the results of the actions taken.

Measuring improper payments and designing and implementing actions to 
reduce or eliminate these payments are not simple tasks. However, as 
evidenced by the actions taken by USDA, HUD, HHS, and SSA, federal 
agencies can perform them and these actions can result in reductions in 
improper payment rates. Determining payment error rates is important to 
ensure program integrity. In addition, the administration and the 
Congress have taken important steps to address improper payments. For 
example, the President’s Management Agenda, Fiscal Year 2002, and OMB’s 
revisions to Circular A-11 demonstrate the administration’s interest in 
and plans to address improper payments across the government. Both 
documents call for OMB to work with agencies to establish goals and 
action plans to reduce improper payments. The agenda and the revisions 
to the circular are important first steps. The administration must now 
take all necessary actions to ensure that federal agencies meet the 
requirements set forth in those documents. In addition, through 
legislation, the Congress has provided resources for anti-fraud and 
abuse activities and agencies with the authority to impose penalties 
and take actions to keep dishonest recipients from further program 
participation. Legislative initiatives such as these are critical to 
governmentwide actions to reduce improper payments and demonstrate that 
the Congress is willing to take actions to address improper payments. 
As stated in the Budget of the United States Government, Year 2003, 
“The Administration cannot improve the federal government’s performance 
and accountability on its own. It is a shared responsibility that must 
involve the Congress.” 

Few agencies publicly report improper payment information such as 
improper payment rates, causes, and strategies for better managing 
their programs to reduce or eliminate these payments. This is evidenced 
by the fact that publicly available documents such as annual agency 
financial statements and the performance plans required by GPRA contain 
minimal information on the extent of improper payments, the actions 
taken by agencies to address them, and the impact or results of those 
actions on improper payment levels. OMB Circular A-11 requires that 16 
agencies report improper payment information, including error rates and 
target rates for improvement, but that information is not publicly 
reported and, therefore, the Congress, the public, and others with 
oversight and monitoring interests cannot use this information to hold 
agencies accountable for achieving target rates or otherwise 
implementing specifically planned actions.

On a case-by-case basis, agencies’ abilities to control improper 
payments can be hindered by legislative, program design, and resource 
barriers. These barriers can hamper the design and implementation of 
actions to prevent, detect, and mitigate improper payments. Reducing or 
eliminating some of these barriers may not be feasible without 
legislative or program design changes that could significantly alter 
federal program missions or the methods used to achieve the program 
goals and objectives established by the Congress and the 
administration. Yet it must be recognized that, barring actions in 
these areas, these barriers will continue to restrict an agency’s 
ability to address all of its improper payment problems. 

As we noted in our report on strategies for managing improper payments, 
significant progress in minimizing improper payments can only occur as 
a collaborative governmentwide effort. The government’s reduction of 
improper payments will only be achieved as a result of the design, 
development, and implementation of better internal controls. These 
efforts will require strong support and active involvement from agency 
management, the administration, and the Congress. Once committed to a 
plan of action, all parties must remain involved and committed to the 
end goals and their support must be transparent to all. Agency 
management, the administration, and the Congress must work together to 
identify and implement effective controls to reduce improper payments. 
The mechanisms already exist for this to happen. Agency experts in 
financial matters, information systems, and general management issues; 
governmentwide councils under OMB’s direction; and the Congress each 
provide valuable resources that could be useful in addressing the 
government’s improper payment problems. Individually, each can have an 
impact; collectively, they can achieve more by sharing experiences and 
practices and working together to address improper payment problems. 

Recommendations for Executive Action: 

CFO Act Agencies: 

The head of each CFO Act agency should assign responsibility to a 
senior official, such as the COO or the CFO, for establishing policies 
and procedures for assessing agency and program risks of improper 
payments, taking actions to reduce those payments, and reporting the 
results of the actions to agency management for oversight and other 
actions as deemed appropriate. These responsibilities should include, 
but not be limited to: 

* developing detailed action plans to determine the nature and extent 
of possible improper payments for all agency programs and/or activities 
spending federal funds;

* identifying cost-effective control activities to address the 
identified risk areas;

* assigning responsibility for specific areas of improper payment-
related activities to appropriate program or activity officials; 

* establishing improper payment goals or targets and measuring 
performance against those goals to determine progress made and areas 
needing additional actions;

* developing procedures for working with OMB and the Congress to 
address barriers encountered that inhibit actions to reduce improper 
payments; and: 

* periodically reporting, through publicly available documents, to the 
agency head, OMB, and the Congress on the progress made in achieving 
improper payment reduction targets and future action plans for 
controlling improper payments.

Office of Management and Budget: 

We recommend that the Director of OMB take the following actions. 

* Develop, as a result of interactions with agency officials and 
through participation on interagency groups, information on lessons 
learned and best practices that federal agencies have used to address 
their improper payment problems. Once developed, OMB should issue 
specific guidance, as we have previously recommended, to agencies that 
provides a comprehensive approach to reducing improper payments, 
including providing the transparency in reporting that is crucial to 
addressing this problem.

* Work with agency officials to provide all reasonable assistance in 
implementing the corrective action plans developed to reduce improper 
payments.

* Work with agency officials to identify and help eliminate or reduce, 
to the extent practicable, the barriers that restrict agency actions to 
reduce improper payments. OMB should work with the agencies in clearly 
defining and evaluating these barriers and in assisting agencies in 
eliminating them.

* Work with the Congress to identify and develop actions to reduce or 
eliminate, to the extent practical, barriers that hinder agency actions 
to reduce improper payments.

* Require federal agencies to report the information called for by OMB 
Circular A-11 on improper payments in a specific, publicly available 
document such as annual performance reports, annual agency financial 
statements, or other annual report. All agencies should report this 
information in the same document to facilitate oversight and monitoring 
by interested parties including the Congress and the public. 

Matters for Congressional Consideration: 

The Congress should consider using available improper payment 
information to engage agencies in discussions about progress that is 
being made, additional steps planned, and actions the Congress can take 
to help reduce improper payments. When, based on these discussions, the 
congressional actions necessary to eliminate barriers to agency 
corrective action are identified, the Congress should consider taking 
the legislative and oversight actions necessary to provide the agencies 
and the administration with tools needed to reduce improper payments, 
both at the agency and governmentwide levels.

Agency Comments and Our Evaluation: 

In commenting on this report, HHS, HUD, SSA, and OMB noted that they 
had actions in progress or that were completed that addressed our 
recommendations or that agency units supported the essence of the 
topics covered by the report. Each of these organizations and USDA also 
provided technical comments and other editorial suggestions for our 
consideration. We considered all comments and made changes to the 
report, as appropriate. HHS, HUD, and SSA provided written comments to 
our draft report. USDA provided comments via e-mail and OMB provided 
its comments orally. (The written comments from HHS, HUD, and SSA are 
reprinted in appendixes IV through VI, respectively.) 

In oral comments, OMB generally agreed with the report’s findings. OMB 
also stated that it believes its current focus on improper payments 
will address the majority of the concerns the report raises. OMB 
considers the recommendations in the report to already be in place, 
since the President has made addressing and reducing improper payments 
a priority in his management agenda and the Chief Financial Officers 
Council has established an Erroneous Payments Committee to address the 
problem. The President’s focus on improper payments, OMB’s leadership 
in this area, and the administration’s efforts to date are positive 
steps to ultimately addressing the serious problems in this area. At 
the same time, agencies still face significant challenges in 
identifying and measuring their improper payments, setting performance 
goals, implementing corrective actions, and reporting the results 
against the goals. Fully implementing our recommendations will be 
important to addressing the underlying internal control problems 
agencies face in reducing improper payments. 

In written comments (reprinted in app. IV) HHS stated that CMS is 
already implementing the recommendations of the report and is in the 
process of designating a senior official to oversee the identification, 
correction, and reporting of improper payments, as we recommended. 
Furthermore, CMS has undertaken a number of efforts to better manage 
all of its financial management systems. The comments also suggested 
technical revisions and clarifications, which we considered and 
included in the report, where appropriate.

HUD generally agreed with the report’s conclusions and recommendations. 
Its comments (reprinted in app. V) stated that strengthening management 
controls and reducing improper payments are priorities for HUD’s 
administration. HUD further indicated, that, as acknowledged in the 
draft report, it has already initiated corrective actions to strengthen 
management controls and reduce improper payments in the rental housing 
assistance program area. Its comments also identified several revisions 
and technical or editorial issues. We considered these issues and 
included them in the report, as appropriate.

SSA’s comments (reprinted in app. VI) stated that each of its 
components, directly or indirectly, supports the essence of the topic 
of our report— reducing improper payments. Its efforts involve 
collaboration between SSA components, data match partners, OMB, and the 
Congress. The comments also noted that the Deputy Commissioner of SSA 
(Chief Operating Officer) has overall responsibility for addressing the 
responsibilities outlined in our recommendations to the federal 
agencies. They also provided information on the improper payment 
efforts of SSA units other than those included in our review and 
provided suggested revisions and clarifications to the report. We 
considered these suggestions and included them in the report, as 
appropriate. 

USDA responded via e-mail. The comments provided several editorial 
and/or clarification points which we considered and included in the 
report, as appropriate.

We are sending copies of this report to the Chairman, Senate Committee 
on Governmental Affairs, and the Chairmen and Ranking Minority Members 
of the House Committee on Government Reform, Senate Committee on the 
Budget, and House Committee on the Budget. We will also send copies to 
the Director of the Office of Management and Budget and the heads of 
the CFO agencies and components required to prepare financial 
statements and their respective agency CFOs and OIGs. Copies will also 
be made available to others upon request. In addition, the report will 
be available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov. 

This report was prepared under the direction of Sally E. Thompson, 
Director, Financial Management and Assurance, who may be reached at 
(202) 512-9450 or by e-mail at thompsons@gao.gov if you or your staff 
have any questions. Staff contacts and other key contributors to this 
report are listed in appendix VII.

Sincerely Yours,

Signed by: 

Sally E. Thompson: 
Director: 
Financial Management and Assurance: 

Appendix I: 

Programs for Which Erroneous Payment Information Is Required per OMB
Circular A-11: 

Department of Agriculture: 
Food Stamps: 
Commodity Loan Program: 
National School Lunch and Breakfast Women, Infants, and Children: 

Department of Transportation: 
Airport Improvement Program: 
Highway Planning and Construction: 
Federal Transit – Capital Investment Grants: 
Federal Transit – Formula Grants: 

Department of Defense: 
Military Retirement: 
Military Health Benefits: 

Department of Veterans Affairs: 
Compensation: 
Dependency and Indemnity Compensation Pension: 
Insurance Programs: 

Department of Education: 
Student Financial Assistance: 
Title I: 
Special Education – Grants to States: 
Vocational Rehabilitation Grants to States: 

Agency for International Development: 

Environmental Protection Agency: 
Clean Water State Revolving Funds: 
Drinking Water State Revolving Funds: 
National Science Foundation: 
Research and Education: 
Grants and Cooperative Agreements: 

Department of Health and Human Services: 
Head Start: 
Medicare: 
Medicaid: 
TANF: 
Foster Care – Title IV-E: 
Child Support Enforcement: 
State Children’s Health Insurance Program: 
Child Care and Development Fund: 

Office of Personnel Management: 
Retirement Program (Civil Service Retirement System and Federal 
Employees’ Retirement System): 
Federal Employees Health Benefits Program: 
Federal Employees’ Group Life Insurance: 

Department of Housing and Urban Development: 
Low Income Public Housing: 
Section 8 Tenant Based: 
Section 8 Project Based: 
Community Development Block Grants: 
(Entitlement Grants, States/Small Cities) 

Railroad Retirement Board[A]: 
Retirement and Survivors Benefits: 
Railroad Unemployment Insurance Benefits: 

Small Business Administration: 
(7a) Business Loan Program: 
(504) Certified Development Companies: 
Disaster Assistance: 
Small Business Investment Companies: 

Department of Labor: 
Unemployment Insurance: 
Federal Employee Compensation Act: 
Workforce Investment Act: 

Department of the Treasury: 
Earned Income Tax Credit: 

Social Security Administration: 
Old Age and Survivors’ Insurance: 
Disability Insurance: 
Supplemental Security Income: 

[A] Not a CFO Act agency. 

[End of table] 

Appendix II: Federal Agencies and Components Required to Prepare 
Financial Statements under the CFO Act and OMB Guidance: 

Department of Agriculture: 
Food and Nutrition Service: 
Forest Service: 
Rural Development Mission Area: 
Department of Commerce: 
Department of Defense: 
Department of Army General Funds: 
Department of Navy General Funds: 
Department of Air Force General Funds: 
Military Retirement Trust Funds: 
U.S. Army Corps of Engineers Civil Works Program: 
Department of Army Working Capital Fund: 
Department of Navy Working Capital Fund: 
Department of Air Force Working Capital Fund: 
Department of Education: 
Department of Energy: 
Department of Health and Human Services: 
Centers for Medicare and Medicaid Services: 
Department of Housing and Urban Development: 
Department of the Interior: 
Department of Justice: 
Department of Labor: 
Department of State: 
Department of Transportation: 
Federal Aviation Administration: 
Highway Trust Fund: 
Department of the Treasury: 
Bureau of Alcohol, Tobacco and Firearms: 
Internal Revenue Service: 
United States Customs Service: 
Department of Veterans Affairs: 
Agency for International Development: 
Environmental Protection Agency: 
Federal Emergency Management Agency: 
General Services Administration: 
National Aeronautics and Space Administration: 
National Science Foundation: 
Nuclear Regulatory Commission
Office of Personnel Management: 
Civil Service Retirement and Disability Fund: 
Federal Employees Health Benefits Program: 
Federal Employees Life Insurance Program: 
Small Business Administration: 
Social Security Administration: 

[End of section] 

Appendix III: GAO Products Addressing Agency Key Outcomes and Major 
Management Challenges: 

The following lists the GAO products that addressed the status of CFO 
Act agency actions to achieve key outcomes and address major management 
challenges.

U.S. General Accounting Office. U.S. Agency for International 
Development: Status of Achieving Key Outcomes and Addressing Major 
Management Challenges. GAO-01-721. Washington, D.C.: August 17, 2001. 

U.S. General Accounting Office. Department of Agriculture: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-761. Washington, D.C.: August 23, 2001. 

U.S. General Accounting Office. Department of Commerce: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-793. Washington, D.C.: June 15, 2001. 

U.S. General Accounting Office. Department of Defense: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-783. Washington, D.C.: June 25, 2001.  

U.S. General Accounting Office. Department of Education: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-827. Washington, D.C.: June 29, 2001. 

U.S. General Accounting Office. Department of Energy: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-823. Washington, D.C.: June 29, 2001.  

U.S. General Accounting Office. Environmental Protection Agency: Status 
of Achieving Key Outcomes and Addressing Major Management Challenges. 
GAO-01-774. Washington, D.C.: June 15, 2001.  

U.S. General Accounting Office. Federal Emergency Management Agency: 
Status of Achieving Key Outcomes and Addressing Major Management 
Challenges. GAO-01-832. Washington, D.C.: July 9, 2001. 

U.S. General Accounting Office. General Services Administration: Status 
of Achieving Key Outcomes and Addressing Major Management Challenges. 
GAO-01-931. Washington, D.C.: August 3, 2001. 

U.S. General Accounting Office. Health and Human Services: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-748. Washington, D.C.: June 15, 2001. 

U.S. General Accounting Office. Department of Housing and Urban 
Development: Status of Achieving Key Outcomes and Addressing Major 
Management Challenges. GAO-01-833. Washington, D.C.: July 6, 2001. 

U.S. General Accounting Office. Department of the Interior: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-759. Washington, D.C.: June 15, 2001. 

U.S. General Accounting Office. Department of Justice: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-729. Washington, D.C.: June 26, 2001. 

U.S. General Accounting Office. Department of Labor: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01- 779. Washington, D.C.: June 15, 2001. 

U.S. General Accounting Office. NASA: Status of Achieving Key Outcomes 
and Addressing Major Management Challenges. GAO-01-868. Washington, 
D.C.: July 31, 2001. 

U.S. General Accounting Office. National Science Foundation: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-758. Washington, D.C.: June 15, 2001. 

U.S. General Accounting Office. Nuclear Regulatory Commission: Status 
of Achieving Key Outcomes and Addressing Major Management Challenges. 
GAO-01-760. Washington, D.C.: June 29, 2001. 

U.S. General Accounting Office. Office of Personnel Management: Status 
of Achieving Key Outcomes and Addressing Major Management Challenges. 
GAO-01-884. Washington, D.C.: July 9, 2001. 

U.S. General Accounting Office. Small Business Administration: Status 
of Achieving Key Outcomes and Addressing Major Management Challenges. 
GAO-01-792. Washington, D.C.: June 22, 2001. 

U.S. General Accounting Office. Social Security Administration: Status 
of Achieving Key Outcomes and Addressing Major Management Challenges. 
GAO-01-778. Washington, D.C.: June 15, 2001. 

U.S. General Accounting Office. Department of State: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
02- 42. Washington, D.C.: December 7, 2001. 

U.S. General Accounting Office. Department of Transportation: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-834. Washington, D.C.: June 22, 2001. 

U.S. General Accounting Office. Department of the Treasury: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges. GAO-
01-712. Washington, D.C. June 15, 2001. 

U.S. General Accounting Office. Veterans Affairs: Status of Achieving 
Key Outcomes and Addressing Major Management Challenges. GAO-01-752. 
Washington, D.C. June 15, 2001.

[End of section] 

Appendix IV: Comments from the Department of Health and Human Services: 

Department of Health and Human Services: 
Office of Inspector General: 
Washington D.C. 20201: 

Ms. Sally E. Thompson: 
Director, FInancial Management and Assurance: 
United States General Accounting Office: 
Washington, D.C. 20548: 

Dear Ms. Thompson: 

Enclosed are the Department's comments on your draft report entitled 
"Financial Management: Unified Approach Needed to Better Manage the 
Government's Improper Payments Problems." The comments represent the 
tentative position of the Department and are subject to reevaluation 
when the final version of this report is received. 

The Department also provided several technical comments directly to 
your staff. 

The Department appreciates the opportunity to comment on this draft 
report before its publication. 

Sincerely, 

Signed by: 

Janet Rehnquist: 

Inspector General: 

Enclosure: 

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for General Accounting reports. 
The OIG has not conducted an independent assessment of these comments 
and therefore expresses no opinion on them. 

Comments of the Department of Health and Human Services on the General 
Accounting Office's Draft Report, "Financial Management: Unified 
Approach Needed to Better Manage the Government's Improper Payments 
Problems" (GAO-02-749): 

The Department of Health and Human Services (HHS) appreciates the 
opportunity to commend on this draft report and concurs with all the 
findings in the report. 

General Comments: 

The Centers for Medicare and Medicaid Services (CMS) have been 
undertaking a number of efforts to better manage all of its financial 
management systems. The CMS has begun of the implementation of the 
Healthcare Integrated General Ledger Accounting System (HIGLAS), which 
will eventually replace the 53 different systems now in use by the 
private insurance companies, that process and pay for nearly 3 million 
Medicare claims every day. In addition, CMS has developed and its in 
the process of implementing the Comprehensive Error Rate Testing 
Program and the Payment Error Prevention Program, which will assist CMS 
management in identifying and managing improper payments. 

In addition, the rate of improper Medicare payments continued to 
decline in 2001. The improper payment rate, which estimates the portion 
of Medicare fee-for-service payments that do not comply with MEdicare 
laws and regulations, was 6.3 percent in fiscal year 1996, the first 
year HHS' Office of Inspector General calculated the rate. 

The CMS is already implementing the recommendations of the report and 
is in the process of designating a senior official for oversight of 
identification, correction of and reporting of improper overpayment, as 
GAO recommended. 

[End of section] 

Appendix V: Comments from the Department of Health and Human Services: 

U.S. Department of Housing and Urban Development: 
Washington D.C. 20410-0100: 

Office of the Chief Financial Officer: 

June 28, 2002: 

Ms. Sally E. Thompson: 
Director, Financial Management and Assurance: 
441 G. Street, NW: 
Washington, DC 20548: 

Dear Ms. Thompson: 

Thank you for the opportunity to review and comment on the U.S. General 
Accounting Office's (GAO) draft report entitled Financial Management: 
Unified Approach Needed to Better Manage the Government's Improper 
Payments Problems (GAO-02-749). The U.S. Department of Housing and 
Urban Development (HUD) generally agrees with the GAO's conclusions and 
recommendations for consideration by the CFO Act Agencies, the Office 
of Management and Budget, and the Congress. Strengthening management 
controls and reducing improper payments are priorities for HUD's new 
administration. 

As indicated in the draft report, HUD has already initiated corrective 
actions to strengthen management controls and reduce improper payments 
in the rental housing assistance programs area, our largest 
appropriated activity. The goal of reducing improper rental assistance 
payments 50 percent by 2005 is included in the President's mAnagement 
Agenda and HUD's Fiscal YEar (FY) 2003 Annual Performance Plan, along 
with HUD's plans and interim annual goals for attaining that overall 
goal. While the stated scope of the GAO review focused on the content 
of agencies' FY 2002 Annual Performance Plan, we are enclosing relevant 
excerpts from our FY 2003 Annual Performance Plan, which was published 
in April 2002, is the first Annual Performance Plan to fully reflect 
the goals and plans of HUD's new administration. 

The following are our comments or requested revisions on technical or 
editorial issues for the GAO's consideration in completing the final 
report. 

1. On page 9, the last sentence of the second paragraph of the 
Background section should be corrected to clarify the intended meaning. 

2. On page 16, it is requested that the table be revised as follows to 
more clealy and correctly reflect the nature of HUD's evolving 
development and reporting of improper payment estimates in the 
footnotes to its consolidated financial statements for FYs 1999, 2000 
and 2001. 

[See PDF for image] 

3. On page 15, it is requested that a footnote be added to the row on 
HUD's rental housing subsidy programs stating: "In fiscal year 2000, 
HUD expanded the scope of its error estimation to include subsidy 
determination errors by its administrative intermediaries, in addition 
to the impacts of tenant underreporting of income, and further 
perfected its methodology with a combined estimate of both types of 
errors in FY 2001." 

4. On page 39, we request that the last sentence before the Risk 
Assessment section be deleted as it does not correctly reflect the role 
of REAC. We suggest the following sentence be added in its place: "The 
RHIIP advisory group has taken steps to increase HUD's income data 
matching authority and utilization. This will enable "upfront" income 
data sharing to avoid subsidy errors attributed to unreported and 
underreported income sources." 

Again, the Department appreciates the opportunity to comment on this 
draft report before publication. If you have any questions, please 
contact James M. Martin, Assistance Chief Financial Officer for 
Financial Management, at (202) 708-0638. 

Sincerely, 

Signed Angela M. Antonelli: 

Chief Financial Officer: 

Enclosure: 

Appendix VI: Comments from the Social Security Administration: 

Social Security: 
Office of the Commissioner: 
Social Security Administration: 
Washington D.C. 20254: 

July 3, 2002: 

Ms. Sally E. Thompson: 
Director, Financial Management and Assurance: 
U.S. General Accounting Office: 
Washington. D.C. 20548: 

Dear Ms. Thompson: 

Thank you for the opportunity to review and comment on the draft 
report, "Financial Management: Unified Approach Needed to Better Manage 
the Government's Improper Payments Problems" (GAO-02-749). Our comments 
on the report are enclosed. If you have any questions, please have your 
staff contact Mark Welch at (410) 965-0374. 

Sincerely, 

Signed by: 

Jo Anne B. Barnhart: 

Commissioner: 

Enclosure: 

Comments of the Social Security Administration (SSA) on the General 
Accounting Office's (GAO) Draft Report, "Financial Management: Unified 
Approach Needed to Better Manage the Government's Improper Payments 
Problem" (GAO-08-749): 

Thank you for the opportunity to provide comments on this GAO draft 
report. We appreciate that SSA acknowledged for being in the forefront 
of reporting on and addressing improper payments. We also appreciate 
GAO's presentation of factors that go beyond agency control that can 
cause improper payments. 

Although the dollar amount of the improper payments in Social Security 
programs contained in this report appear large, we think it is 
important to represent them in some context with the size of the 
outlays involved and the accuracy rates achieved for the programs. 
Specifically, total outlays for the OASI program for FY2000 were $353.4 
billion and $33.1 billion foe the SSI program. The OASI accuracy rate 
for FY 2000 was 99.9 percent and the SSI accuracy rate was 94.7 
percent. 

GAO Recommendation: 

The head of each Chief Financial Officers (CFO) Act agency should 
assign responsibility to a senior official, such as the Chief Operating 
Office or the CFO, for establishing policies and procedures for 
assessing agency and program risks to improper payments, taking actions 
to reduce those payments, reporting the results of the actions to upper-
level agency management for oversight and other actions as deemed 
appropriate. These responsibilities should include, but not be limited 
to: 

* Developing detailed action plans to determine the nature and extent 
of the possible improper payments for all agency programs and/or 
activities spending federal funds; 

* Identifying cost-effective control activities to address the 
identified risk areas; 

* assigning responsibility for specific areas of improper payment-
related activities appropriate program or activity officials; 

* Establishing improper payment goals or targets and measuring 
performances against those goals to determine progress made and areas 
needing additional actions; 

* Developing procedures for working with the Office of Management and 
Budget (OMB) and the Congress to address barriers encountered that 
inhibit actions to reduce improper payments; and: 

* Periodically reporting, through publicly available documents, to the 
agency head, OMB, and the Congress on the progress made in achieving 
improper payment reduction targets and future action plans for 
controlling improper payments. 

SSA Comment: 

At SSA, every component, directly or indirectly, supports the essence 
of the topic of the GAO report- reducing improper payments. This 
collaborative effort involves SSA components, data match partners, OMV 
and Congress. The Deputy Commissioner of SSA (Chief Operating Officer) 
has overall responsibility for addressing the responsibilities outlined 
on page 69 of the report. Three Deputy Commissioner-level components 
have the lead in addressing specific portions. The responsibilities of 
the Deputy Commissioner and the component leads are: 

* Deputy Commissioner of SSA-- oversees the Agency's efforts to 
identify and reduce sources of improper payments. One specific example 
is the Agency's SSI Corrective Action Plan, which outlines our efforts 
to better manage the SSI program and remove the SSI program from the 
GAO's "high risk" designation. The Deputy Commissioner had the lead 
responsibility for the development of the Plan and is responsible for 
its implementation. The Commissioner and the Deputy  have met with the 
Comprotoller General about the Plan and the initiatives we plan to 
pursue to improve prevention of overpayments, increase overpayment 
detection and increase collection of debt. 

* Office of Disability and Income Support Programs (ODISP)-- establish 
the operational policies and procedures of the Agency to minimize the 
occurrence of improper payments. ODISP is also the lead component for 
establishing and maintaining data match agreements with outside 
entities. 

* Office of Operations--implements the operational policies and 
procedures set by ODISP. The Office of Operations provides valuable 
input into policy and procedures development to ensure the efficacy in 
reducing improper payments. 

* Office of Finance, Assessment and Management (OFAM)--measures the 
accuracy of program payments through the stewardship studies. OFAM also 
reports on the level of improper payments outside the Agency through 
the budget submission process and the Annual Performance and 
Accountability Report. 

Additional Comments" 

Table 1 on page 16 of the report is entitled "Improper Payments 
Reported by Federal Agencies and Components in Their Fiscal YEars 1999, 
2000, and 2001 Financial Statements." For SSA, the Old-Age and 
Survivors Insurance (OASI) and Disability Insurance (DI) "improper 
payments" totals shown appear to be taken from the "Net Accounts 
Receivable" amounts found in the "Balance Sheet by Major Program" 
included in the SSA Performance and Accountability Report (PAR) for 
these fiscal years, It is important to note that the amounts included 
in "accounts receivable" are not synonymous with the definition of 
"improper payments" cited on page  of the GAO report report and in the 
middle paragraph on page 9 of the report. Although the accounts 
receivable represent overpayments (monies overpaid that are due SSA), 
many if these overpayments were not improperly made in that SSA was 
required by law/regulation, or by Federal Court decision, to make the 
payment. Examples include but are not limited to: (1) DI overpayments 
that result from disability cessations where SSA was required to 
continue payments during the appeals process, (2) Supplemental Security 
Income program (SSI) payments issued while people pursue their appeal 
rights under the Goldberg/Kelly court decision, and (3) cases in which 
an individual alleging noon-receipt for benefit payments cashes both 
the original and subsequently issues replacement benefit checks. 

The Table 1 dollar amounts relating to the SSA DI and OASI programs for 
FY 2001 are reversed. The correct amounts are $1,313 million for DI and 
$1,339 for OAISI. 

GAO reviewed agencies' FY 2001 and FY 2002 annual  plans and the Budget 
of the United States Government for FY 2003 to assess the extent to 
which information on agencies' improper payments was included. On page 
26 of the report, GAO states its intent to review GY 2003 annual 
performance plans to assess the progress agencies have made in 
addressing improper payments. We expect that GAO's subsequent report 
will show improvement at SSA. 

We suggest that GAO's subsequent report also include a review of 
agencies' annual performance reports, the vehicles for reporting actual 
performance in meeting agency performance goals, and which also 
describe goals, measures, strategies, and procedures to validate 
performance data related to improper payments. This expanded, updated 
review will enable GAO to more filly evaluate agencies' progress in 
addressing erroneous payment problems. 

The explanation at the top of page 52 GAO draft report about how income 
affects the monthly amount for SSI benefits is incomplete. We believe 
this explanation should include a discussion of how retrospective 
monthly accounting works, including mention that once the individual or 
couple is determined to be eligible based on income received in the 
current month, the amount of payment is generally based on countable 
income received in the second month before the current month. 

On page 61 of GAO's report, Table 3 lists agencies participating in 
councils. Under the last column, "President's Council on Integrity and 
Efficiency," there is no check for SSA. Since SSA's Office of the 
Inspector General is a member of this council, we suggest that this 
information be added to GAO's chart. 

[End of section] 

Appendix VII: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Tom Broderick, (202) 512-8705: 
Barbara House, (213) 830-1107: 

Acknowledgments: 

In addition to those named above, the following individuals made 
important contributions to this report: David Elder, Bonnie McEwan, and 
Tarunkant Mithani. 

Footnotes: 

[1] U.S. General Accounting Office, Financial Management: Improper 
Payments Reported in Fiscal Year 2000 Financial Statements, GAO-02-131R 
(Washington, D.C.: Nov. 2, 2001); U.S. General Accounting Office, 
Financial Management: Billions in Improper Payments Continue to Require 
Attention, GAO-01-44 (Washington, D.C.: Oct. 27, 2000); and U.S. 
General Accounting Office, Financial Management: Increased Attention 
Needed to Prevent Billions in Improper Payments, GAO/AIMD-00-10 
(Washington, D.C.: Oct. 29, 1999). 

[2] U.S. General Accounting Office, Strategies to Manage Improper 
Payments: Learning From Public and Private Sector Organizations, GAO-02-
69G (Washington, D.C.: Oct. 2001). 

[3] U.S. General Accounting Office, Financial Management: Billions in 
Improper Payments Continue to Require Attention, GAO-01-44 (Washington, 
D.C.: Oct. 27, 2000). 

[4] U.S. General Accounting Office, Financial Management: Improper 
Payments Reported in Fiscal Year 2000 Financial Statements, GAO-02-131R 
(Washington, D.C.: Nov. 2, 2001). 

[5] In an August 17, 2001, memorandum to Circular A-11, Preparing and 
Submitting Budget Estimates, OMB encourages agencies to report improper 
payments through other venues such as agency performance reports, 
annual financial statements, or regularly issued standalone program 
reports. 

[6] Senator Fred Thompson, Committee on Governmental Affairs, United 
States Senate, Government at the Brink, Volume I, Urgent Federal 
Government Management Problems Facing the Bush Administration 
(Washington, D.C.: June 2001). 

[7] Executive Office of the President, Office of Management and Budget, 
The President’s Management Agenda, Fiscal Year 2002 (Washington, D.C.: 
Aug. 2001). 

[8] U.S. General Accounting Office, Financial Audit: IRS’ Fiscal Year 
2000 Financial Statements, GAO-01-394 (Washington, D.C.: Mar. 1, 2001). 

[9] The EITC is a refundable tax credit available to low-income working 
taxpayers. 

[10] Because of the similarity of OMB’s definition of erroneous 
payments with our definition of improper payments, we consider 
erroneous payments and improper payments as synonymous terms.

[11] One of these agencies, the Railroad Retirement Board, is not a CFO 
Act agency and is consequently outside the scope of our work. 

[12] U.S. General Accounting Office, High-Risk Series: An Update, GAO-
01-263 (Washington, D.C.: Jan. 2001); U.S. General Accounting Office, 
Major Management Challenges and Program Risks: Department of the 
Treasury, GAO-01-254 (Washington, D.C.: Jan. 2001); and U.S. General 
Accounting Office, Financial Audit: IRS’ Fiscal Year 2000 Financial 
Statements, GAO-01-394 (Washington, D.C.: Mar. 1, 2001). 

[13] U.S. General Accounting Office, Financial Audit: IRS’s Fiscal 
Years 2001 and 2000 Financial Statements, GAO-02-414 (Washington, D.C.: 
Feb. 27, 2002). 

[14] Department of the Treasury, Internal Revenue Service, Compliance 
Estimates for Earned Income Tax Credit Claimed on 1999 Returns, Feb. 
28, 2002. 

[15] Effective July 1, 2001, the Health Care Financing Administration 
became CMS. CMS is responsible for managing and operating the Medicare 
and Medicaid programs and, consequently, for safeguarding the programs’ 
financial resources against improper payments. 

[17] Authorized sanctions include civil fines of up to $10,000 and 
disqualification of future benefits for a period of up to 5 years. 

[18] Data mining involves specialized software programs that analyze 
large volumes of claims data to identify potential overpayments. These 
programs typically contain algorithms to identify billing errors and 
abusive practices. Data warehouses store historical and current data 
and consist of tables of information that are logically grouped 
together. They allow program and financial data from different 
nonintegrated systems throughout an organization to be captured and 
placed in a single database where users can query the system for 
information. 

[19] U.S. General Accounting Office, Food Stamp Program: Program 
Integrity and Participation Challenges, GAO-01-881T (Washington, D.C.: 
June 27, 2001). 

[20] P.L. 107-171; Section 4118. Reform of the Quality Control (QC) 
system provision that made substantial changes to the QC system that 
measures states’ payment accuracy in issuing food stamp benefits.

[21] Department of Health and Human Services, Office of Inspector 
General, Improper Fiscal Year 2001 Medicare Fee-for-Service Payments, A-
17-01-02002 (Washington, D.C.; Feb. 15, 2002). 

[22] Pursuant to Section 453(i)(3), (42 U.S. Code, Section 553(i)(3)) 
the Treasury Department has routing access to this data for limited 
purposes, including administration of the EITC and employment 
verification. 

[23] Cardinale v. Mathews, 399 F. Supp. 1163 (D.D.C. 1975), and 
Goldberg v. Kelly, 397 U.S. 254 (1970). 

[24] Social Security Act, 42 USC §§ 423(g) (2) and 404 (2002). 

[25] All councils can select additional members, as designated. 

[26] Other members of the CFO Council are the Controller of the Office 
of Federal Financial Management, OMB, and the Fiscal Assistant 
Secretary of the Treasury. 

[27] Other members of the PCIE are the Controller of the Office of 
Federal Financial Management of OMB, the Vice Chairperson of the 
Executive Council on Integrity and Efficiency, the Associate Deputy 
Director for Investigations of the Federal Bureau of Investigation, the 
Director of the Office of Government Ethics, the Special Counsel of the 
U.S. Office of Special Counsel, and the Deputy Director of OPM. 

[28] Office of Management and Budget, Testimony before the Subcommittee 
on Government Management, Information and Technology, Committee on 
Government Reform, U.S. House of Representatives (Washington, D.C.: 
Apr. 7, 2000). 

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