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entitled 'FEMA Cerro Grande Claims: Payments Properly Processed, but
Reported Payments Somewhat Overstated' which was released on May 08,
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Report to the Committee on Appropriations, U.S. Senate, and the
Committee on Appropriations, House of Representatives:
May 2003:
FEMA Cerro Grande Claims:
Payments Properly Processed, but Reported Payments Somewhat Overstated:
GAO-03-623:
GAO Highlights:
Highlights of GAO-03-623, a report to the Committee on Appropriations,
U.S. Senate, and the Committee on Appropriations, House of
Representatives
Why GAO Did This Study:
The Cerro Grande Fire Assistance Act mandated that GAO annually audit
all claim payments made to compensate the victims of the Cerro Grande
Fire in northern New Mexico. For this second report on this topic, GAO
determined whether the Federal Emergency Management Agency (FEMA),
which is now a part of the Department of Homeland Security, (1) had
revised its policies and procedures to address prior GAO
recommendations and processed and paid claims consistent with that
guidance and (2) properly reported such payments to the Congress.
What GAO Found:
FEMA implemented corrective actions to address the recommendations from
GAO’s prior report to strengthen its policies and procedures. GAO
found that claims were processed, approved, and paid in accordance with
FEMA’s established applicable guidelines, providing adequate supporting
documentation and evidence of supervisory reviews. However, as
discussed below, claimed amounts approved for payment but not paid were
not properly tracked in the Office of Cerro Grande Fire Claims’ (OCGFC)
payment approval system.
FEMA’s report to the Congress included somewhat overstated claim
payment information. The report used claimed amounts approved by OCGFC
for payment, rather than amounts actually paid by FEMA. This occurred
because FEMA had not reconciled the approved amounts from its payment
approval system to amounts paid per its accounting system and was not
aware of the differences, which amounted to about
$12 million, or 3 percent of total reported payments, as of
September 7, 2002. FEMA is currently attempting to reconcile the
approved amounts with the paid amounts. This difference resulted
because approved amounts that were not paid when claims were delayed
for appeal or canceled for other reasons were not removed from or
adjusted in the payment approval system. As a result, the claim
payment information reported to the Congress does not provide a
completely accurate picture of OCGFC claim payments. This information
was also used by FEMA to determine its request for additional funding.
Since FEMA received less than it requested, this error likely did not
result in an appropriation in excess of amounts needed to pay claims.
During its review, GAO also noted that FEMA’s estimate of its unfunded
claims liability increased by $91 million from September 30, 2001, to
October 2, 2002. While FEMA’s external auditors found that FEMA used a
reasonable methodology to calculate the most recent estimate, they were
unable to explain the reason for the increase in the estimate. This
occurred because FEMA changed the methodology used but did not provide
a crosswalk between the two approaches. In April 2003, FEMA officials
stated that they planned to contract for an analysis to be performed to
determine the effect that the change in methodology and other factors
had on the calculation of the estimated liability.
What GAO Recommends:
To improve FEMA’s ability to accurately report claims status, including
amounts paid, and request additional funding, GAO recommends that the
Secretary of Homeland Security require the Emergency Preparedness and
Response Directorate to
* reconcile claim amounts approved to amounts paid and correct all
identified errors in its payment approval system and
* perform monthly reconciliation of the claims in both systems.
The Department of Homeland Security’s Emergency Preparedness and
Response Directorate concurred with our recommendations and indicated
that it has several actions under way to address them.
www.gao.gov/cgi-bin/getrpt?GAO-03-623.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Linda Calbom at (202) 512-9508 or
calboml@gao.gov.
[End of section]
Letter:
Results in Brief:
Background:
Scope and Methodology:
Policies and Procedures for Claims Processing Improved and Followed:
Reported Claim Payment Information Was Somewhat
Overstated:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix:
Appendix I: Comments from the Department of Homeland Security:
Abbreviations :
ACIS: Automated Claim Information System:
CGFAA: Cerro Grande Fire Assistance Act:
DFC: Disaster Finance Center:
FEMA: Federal Emergency Management Agency:
NOL: Notice of Loss:
OCGFC: Office of Cerro Grande Fire Claims:
Letter May 8, 2003:
The Honorable Ted Stevens
Chairman
The Honorable Robert C. Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate:
The Honorable C.W. Bill Young
Chairman
The Honorable David R. Obey
Ranking Minority Member
Committee on Appropriations
House of Representatives:
On July 13, 2000, the President signed into law the Cerro Grande Fire
Assistance Act (CGFAA).[Footnote 1] CGFAA established the Office of
Cerro Grande Fire Claims (OCGFC) and directed the Federal Emergency
Management Agency (FEMA)[Footnote 2] to expeditiously investigate
victims' claims, determine damages, and compensate the victims of the
Cerro Grande fire in northern New Mexico. CGFAA also requires FEMA to
submit an annual report to the Congress by August 28 that provides
information on claims submitted during the year. CGFAA, as
amended,[Footnote 3] requires that we audit all claim payments made
under the act, including subrogation claims[Footnote 4] made by
insurance companies, and report the results of our audit within 120
days of the issuance of FEMA's annual report. In this our second report
under CGFAA, we determined whether FEMA (1) implemented new policies
and procedures to address our prior report's recommendations and
processed and paid fire claims in accordance with applicable policies
and procedures and (2) properly reported such payments to the Congress.
We did not review any subrogated claim payments as part of this audit
because as of January 15, 2003, the end of our fieldwork, no subrogated
claims payments had been made.[Footnote 5] However, FEMA did report to
the Congress that as of September 7, 2002, insurance companies had
submitted 4,553 subrogated claims totaling approximately $103
million.[Footnote 6] FEMA also reported that as soon as 95 percent of
all nonsubrogee claims have been paid, and when funds become
available,[Footnote 7] payments for subrogation claims will be made to
insurers expeditiously. We will review payments made for subrogated
claims as part of our next audit.
Results in Brief:
FEMA revised its policies and procedures to address our prior report's
recommendations and processed and paid fire claims in accordance with
its applicable policies and procedures. In response to our prior audit
report, issued in July 2001,[Footnote 8] FEMA implemented corrective
actions to address our recommendations to (1) document all steps and
procedures performed by claims reviewers to determine the validity of a
claim and the amount recommended for payment, (2) incorporate all
existing informal guidance into a set of formal policies and
procedures, and (3) establish standardized policies and procedures to
address claims for which no policy had existed. Based on the results of
our statistical testing, we found that claims were processed, approved,
and paid in accordance with FEMA's revised policies and procedures.
However, as discussed below, we found that claimed amounts approved but
not yet paid were not properly tracked in OCGFC's payment approval
system.
FEMA's second annual report to the Congress, dated December 16, 2002,
included somewhat overstated claim payment information. FEMA's report
was based on claimed amounts approved for payment, as reported in its
payment approval system, rather than amounts actually paid, as reported
in FEMA's accounting system. FEMA officials said they believed the
amounts to be the same, but had not reconciled the data and were not
aware of a
$12 million difference between the two systems, which was almost 3
percent of amounts reported paid. FEMA is currently attempting to
reconcile the approved claim amounts with the amounts actually reported
as paid. We found that the primary reason for the difference was
overstatements of claimed amounts approved for payment in OCGFC's
payment approval system. This overstatement was caused by approved
claim amounts that were being appealed, replaced by other claims, or
otherwise not paid that were not removed from or adjusted in the
payment approval system. As a result, the claim payment information
reported to the Congress does not provide a completely accurate picture
of Cerro Grande claim payment activity for the year. In addition, the
erroneous approved claims data were used to determine FEMA's request
for additional appropriated funding. Because $90 million, rather than
the $155 million FEMA stated it needed, was appropriated to FEMA, it
does not appear that the errors resulted in an appropriation in excess
of the amount needed to pay claims.
In reviewing FEMA's fiscal year 2002 financial statements, we also
noted that FEMA's estimate of its unfunded claims liability increased
significantly compared to the prior year--from $36.5 million as of
September 30, 2001, to $127.5 million as of October 2, 2002.[Footnote
9] While FEMA's external auditors found that FEMA used a reasonable
methodology to calculate the current year liability, they were unable
to explain the reason for the differences in the two estimates since
FEMA changed the methodology but did not provide a crosswalk between
the two approaches. The auditors noted this lack of analysis of the
change in methodology as a weakness in their report on internal
controls for fiscal year 2002. In April 2003, FEMA officials stated
that FEMA would award a contract to perform an analysis to determine
the dollar impact on the liability estimate due to changes in
methodology, assumptions, systems, data, or other factors, from fiscal
years 2002 through 2001.
We are making two recommendations that, if properly implemented, will
improve FEMA's ability to track claims it approves and pays and help
ensure the accuracy of amounts approved and paid in its systems, in
reports to the Congress, and in amounts used to request additional
funding. In commenting on a draft of the report, the Acting Director of
the Recovery Division of the Department of Homeland Security's
Emergency Preparedness and Response Directorate agreed with our
recommendations and outlined several corrective actions that it is
currently undertaking to address these issues.
Background:
On May 4, 2000, the National Park Service initiated a prescribed burn
on federal land at Bandelier National Monument, New Mexico, in an
effort to reduce the threat of wildfires in the area. The plan was to
burn up to 900 acres. On May 5, 2000, the prescribed burn exceeded the
capabilities of the National Park Service, spread to other federal and
nonfederal land, and was characterized as a wildfire. On May 13, 2000,
the President issued a major disaster declaration, and subsequently,
the Secretary of the Interior and the National Park Service assumed
responsibility for the fire and the loss of federal, state, local,
tribal, and private property. The fire, known as the Cerro Grande fire,
burned approximately 48,000 acres in four counties and two Indian
pueblos, destroyed over 200 residential structures, and forced the
evacuation of more than 18,000 residents.
On July 13, 2000, the President signed CGFAA into law. Under CGFAA,
each claimant is entitled to be compensated by the United States
government for certain injuries and damages that resulted from the
Cerro Grande fire. The Congress appropriated $455 million to FEMA for
the payment of such claims and $45 million for the administration of
the Cerro Grande program. In March 2002, FEMA requested, but did not
receive, additional appropriated funding of $80 million to cover excess
claims and administrative costs. In December 2002, FEMA revised its
estimate and requested additional appropriated funding of $155 million,
including
$5 million for administrative costs. The revised estimate was based on
more complete claim information since the final date to submit claims
passed on August 28, 2002. In February 2003, FEMA was appropriated an
additional $90 million, of which $5 million may be made available for
administrative purposes.
CGFAA requires that FEMA submit an annual report to the Congress that
provides information about claims submitted under the act. This annual
report is to include the amounts claimed, a description of the nature
of the claims, and the status or disposition of the claims, including
the amounts paid. FEMA's report is to be issued annually by August 28.
CGFAA, as amended, requires that we conduct annual audits on the
payment of all claims made and report the results of the audits to the
Congress within 120 days of FEMA's issuance of its annual report. The
act also requires that our report include a review of all subrogation
claims for which insurance companies have been paid. On January 8,
2003, FEMA notified us that it had issued the annual report to the
Congress through a transmittal letter dated December 16, 2002,[Footnote
10] and FEMA provided us a copy of the annual report on January 9,
2003. We are publishing our report within 120 days of FEMA's
notification of its issuance.
CGFAA required that FEMA promulgate and publish implementing
regulations for the Cerro Grande program within 45 days of enactment of
the law. On August 28, 2000, FEMA published Disaster Assistance: Cerro
Grande Fire Assistance; Interim Final Rule in the Federal Register
(Interim Final Rules).[Footnote 11] FEMA modified the Interim Rule with
a set of implementing policies and procedures on November 13, 2000.
FEMA updated these policies and procedures in January and March 2001.
After reviewing public comments on the interim rule, FEMA finalized and
published Disaster Assistance: Cerro Grande Fire Assistance Final Rule
(Final Rule) on March 21, 2001.[Footnote 12] Since our prior report,
FEMA revised and implemented policies and procedures, which are
discussed later in this report.
The claims payment process is initiated when an injured party submits a
Notice of Loss (NOL)[Footnote 13] to OCGFC. After the NOL is received,
claim reviewers contact the claimant to discuss the claim, explain the
claims process, and determine the best means to substantiate the loss
or damages. The claim reviewer then assigns a claim number and enters
the information into OCGFC's claim-processing database, the Automated
Claim Information System (ACIS). The claims reviewer then begins the
process of verifying the victim's claim. Once completed, the claims
reviewer prepares a claim payment recommendation package, which
specifies that a claimant's injuries or damages occurred as a result of
the Cerro Grande fire and that claimed amounts are eligible for
compensation under CGFAA. The claim reviewer also inputs reserve
amounts equal to the total claimed amounts it expects to be paid into
the claim-processing database and a claims supervisor reviews and
approves each recommendation package. This review, among other things,
is intended to ensure that a proper investigation of the claim occurred
and that the proper documentation exists.
Following the approval of the claim payment recommendation package, an
Approval for Payment form is completed and sent to an OCGFC authorizing
official for review and approval. The amounts approved for payment are
then added to a Schedule of Payments that is forwarded to the
Comptroller. The Comptroller reviews a sample of requested and approved
payments and then approves the Schedule of Payments and records the
approved amounts in OCGFC's payment approval system before sending it
on to FEMA's Disaster Finance Center (DFC) for additional manual
processing and final approval for the Department of the Treasury to
disburse the funds. FEMA records all payments in its accounting system,
the Integrated Financial Management Information System, which is not
linked to OCGFC's payment approval system.
In addition to this process, which is used for both partial
payments[Footnote 14] and final payments, prior to processing a final
payment, the claims reviewer prepares a Proof of Loss form. This form
summarizes all amounts recommended for payment, including those amounts
previously paid through a partial payment. The Proof of Loss form must
be signed by the claimant subject to the provisions of 18 U.S.C. §1001,
which establishes criminal penalties for false statements. Once a
signed Proof of Loss form is received, an OCGFC authorized official
sends a Letter of Final Determination to tell the claimant the total
amount of compensation being offered under CGFAA. Accompanying this
letter is a Release and Certification form that the claimant signs if
he or she accepts the OCGFC compensation determination, thereby
releasing the federal government from any additional claims arising
from the Cerro Grande fire.[Footnote 15] Upon receipt of the signed
Release and Certification form, FEMA will process and mail a claimant's
final payment.
Scope and Methodology:
In performing our review, we considered the Standards for Internal
Control in the Federal Government.[Footnote 16] To reaffirm our
understanding of the claim review and payment process established by
OCGFC and to follow up on the changes made to this process since our
last report, we interviewed FEMA officials and analyzed data used (1)
in FEMA's annual report to the Congress, (2) by KPMG during its audit
of FEMA's financial statements, and (3) by FEMA to determine the
estimated claim liability. We also reviewed the following:
* the requirements of CGFAA,
* the final regulations published in the Federal Register,
* FEMA's policies and procedures manual,
* the independent actuarial report estimating FEMA's total claim
liability for fiscal year 2001,
* a summary of FEMA's unpaid claim liability estimates for fiscal year
2002,
* FEMA's fiscal years 2001 and 2002 audited financial statements, and:
* the current year Cerro Grande trial balance and other documentation
concerning the Cerro Grande program.
We also obtained, reviewed, and considered the results of numerous desk
reviews, by FEMA's Office of Inspector General, of claims approved for
payment. Finally, we selected two statistical samples from the
population of all partial and final claim payments to determine whether
FEMA processed, approved, and paid the Cerro Grande fire claims in
accordance with its applicable policies and procedures.
To determine whether FEMA implemented corrective actions to address our
prior year recommendations and OCGFC processed and paid claims in
accordance with the revised policies and procedures, we followed up on
FEMA's corrective actions and performed certain tests to ensure that
policies and procedures were being followed. We reviewed the revised
policies and procedures to ensure that they were incorporated into
FEMA's policies and procedures or modified in its claim-processing
contract, and performed tests of both claims approved for payment by
OCGFC and amounts paid by DFC, as reported by FEMA, as follows.
* We selected a dollar unit (statistical) sample of 95 claims totaling
$311,232,388 that were approved for payments from a population of
15,394 reported partial and final claim amounts that had been approved
for payment from August 28, 2000 (inception), through September 7,
2002, to test specific control activities, such as adequacy of
supporting documentation, evidence of claims manager and approving
official review, and actual payment by FEMA. We obtained and reviewed
related supporting documentation for the approved claim payments that
were selected from OCGFC's payment approval system.
* We selected a dollar unit (statistical) sample of 77 claim payments
totaling $152,493,242 from a population of 47,674 actual payments made
by FEMA from August 28, 2000, through September 7, 2002, to verify that
only approved claims were paid. We obtained and reviewed related
supporting documentation for the claim payments that were selected from
a database of claim payments made by DFC as reported in FEMA's
accounting system.
In order to determine whether FEMA properly reported claim payment
information to the Congress, we compared its reported payment
information to the claimed amounts that were approved by OCGFC for
payment from its payment approval system and to the actual claim
payments made by DFC and reported in FEMA's accounting system. We also
obtained and reviewed supporting documentation and discussed the
unreconciled differences we identified with FEMA officials.
As mentioned previously, we did not audit subrogated claim payments
since none were paid. We did, however, obtain a report from OCGFC
indicating that as of January 15, 2003, 3,847 of 4,561, or 84 percent,
of the subrogated claims totaling approximately $103 million had been
submitted and approved for payment, but not yet paid.
Our work was conducted in Santa Fe, New Mexico; Denton, Texas;[Footnote
17] and Washington, D.C., from September 2002 through January 2003 in
accordance with generally accepted government auditing standards. We
requested agency comments on a draft of this report from the Under
Secretary of the Department of Homeland Security's Emergency
Preparedness and Response Directorate. The Department of Homeland
Security's Office of Inspector General provided certain technical
comments orally, which we have incorporated as appropriate. The Acting
Director of the Recovery Division of the Department of Homeland
Security's Emergency Preparedness and Response Directorate also
provided written comments in response to our draft on behalf of FEMA
and OCGFC, which are reprinted in appendix I. We discussed the written
comments in the "Agency Comments and Our Evaluation" section of this
report.
Policies and Procedures for Claims Processing Improved and Followed:
Since our last audit report, FEMA implemented corrective actions and
revised its policies and procedures to address issues related to its
controls over the claims review process. Based on the results of our
statistical testing, claims were processed, approved, and paid in
accordance with FEMA guidelines that were established and in place at
the time the claims were reviewed and processed.[Footnote 18]
In response to our July 2001 report, FEMA implemented corrective
actions to address our recommendations related to its policies and
procedures. In that report, we recommended that FEMA (1) require claims
reviewers to document all steps and procedures they perform to
determine the validity of a claim and the amount recommended for
payment, (2) review and consolidate all existing informal guidance and
incorporate this guidance into a set of formal policies and procedures,
and (3) establish standardized policies and procedures to address
claims for which no policy currently exists. During this review, we
confirmed that FEMA had done this. Specifically, FEMA's improvements
consisted of revising its policies and procedures and issuing a new
task order.
* FEMA revised its contract with its claims reviewers and issued a new
task order. This task order required that certain documentation
obtained related to claims verification or attempts the claims reviewer
made to obtain this sort of documentation[Footnote 19] be placed in
each claim file. The required documentation consists of items such as
proof of identity, proof of ownership or occupancy at the time of the
fire, systems used to verify or estimate values, proof of vehicle
ownership (title or registration) at the time of the fire, and
verification of insurance as part of efforts to preclude duplicate
reimbursements for losses. The task order also required evidence of
supervisory review, with the signatures of the claims manager and
approving official on the Approval for Payment form. Based on the
results of our statistical testing, we found that all claim files
submitted after the implementation of the new task order contained the
required documentation and evidence of supervisory review.
* In April 2002, FEMA issued revised guidelines to ensure that all
existing informal guidance was incorporated into a set of formally
documented policies and procedures and distributed them to all staff
members responsible for the claims review and award determination
process. FEMA stated that the revised guidelines were distributed to
all staff members and that it now has a process to review its policy
manual monthly and incorporate new policies or policy changes into it
as needed. We reviewed the new guidelines and verified that the
previously informal and unofficial policies that the claim reviewers
used had been incorporated.
* FEMA also developed various policies and procedures to cover
situations for which none previously existed. For example, to address
claimants' concerns about the declining value of residential property
as a result of the fire, FEMA determined the decline to be temporary
and developed policies and procedures to compensate claimants only for
losses suffered if their residential property was sold at less than
fair market value.[Footnote 20] Policies and procedures were also
developed to address the unique aspects of compensation under CGFAA,
such as legal issues regarding who is a proper claimant if the injured
party is now deceased and compensation for lost rental income. We
reviewed the new guidelines and verified that such policies and
procedures were incorporated.
The improvements FEMA made to its claims processing function help
ensure that paid claims are valid and reasonable. However, as discussed
in the next section, we found four errors related to FEMA's tracking
and reporting of amounts approved and paid.
Reported Claim Payment Information Was Somewhat Overstated:
FEMA's report to the Congress overstated the amount of claim payments
made under CGFAA through September 7, 2002, by about $12 million, or 3
percent of reported payments. CGFAA requires FEMA to issue a report
detailing the amounts claimed, a brief description of the nature of the
claims, and their status or disposition, including the amount of any
payments. For its most recent annual report to the Congress, FEMA used
the information contained in OCGFC's payment approval system, which
contains amounts approved for payment by OCGFC. However, there were
errors in this system that overstated the amounts actually paid by DFC
to claimants by approximately $12 million. The overstated approved
claim data were also used to determine FEMA's December 2002 requests
for additional appropriations. However, since FEMA received less than
it requested, this error likely did not result in an appropriation in
excess of amounts needed to pay claims.
The overstatement of the claims paid amount was not identified by FEMA
because it did not reconcile the amounts OCGFC approved for payment to
the actual DFC payment data[Footnote 21] and was not aware of the
differences between the two databases. As a result, FEMA incorrectly
reported in its annual report to the Congress that $418 million was
paid on claims through September 7, 2002, instead of the almost $406
million actually paid, as summarized in FEMA's accounting system for
activity through the same date, a difference of $12 million, or about 3
percent of amounts reported paid.
Most of the difference was due to FEMA's treatment of claimed amounts
that were approved for payment and/or appealed claims. When approved
amounts are not fully paid because of appeals or other reasons, the
payment approval system continues to show the entire claimed amount
that was approved for payment even though the approved amount or a
portion of it has, in fact, been withheld from payment, canceled and
not paid, or replaced by a new claim request. FEMA did not remove these
amounts from its system or adjust the total approved amounts not yet
paid. As a result, OCGFC's payment approval system overstates approved
claims designated as paid.
For example, as part of our review of the 95 statistically selected
approved claims, we found 4 claims in which the approved amounts
reported in OCGFC's payment approval system were larger than the actual
payments made by DFC.[Footnote 22] In one case, a claim file included
more than $1.8 million in approved payments, while the actual amount
paid was $919,802.[Footnote 23] OCGFC records on this case showed that
it originally approved $934,802 for a final payment. However, when the
claimant appealed the amount, OCGFC approved the claimant's request to
pay $919,802 as a partial payment pending the appeal. OCGFC prepared
and approved a second claim without canceling the original claim or
removing the original amount from its payment approval system. This one
oversight alone overstated the approved claim amounts by $934,802. As
of February 2003, FEMA officials began manually reconciling the payment
data between the two systems and identifying the errors in the payment
approval system.
The overstated payment amounts were also used to determine FEMA's
request for additional funding from the Congress. In December 2002,
FEMA requested additional funding of $155 million for fiscal year 2002,
including $5 million for administrative costs.[Footnote 24] However,
only $90 million was appropriated to FEMA.[Footnote 25] Thus, it does
not appear that the overstated payments resulted in an appropriation in
excess of the amounts needed to pay estimated claims.
We also noted that FEMA's estimate of unfunded claims liability had
increased significantly compared to the prior year. In January 2003,
FEMA revised its estimated unpaid Cerro Grande claims liability as of
October 2, 2002, and calculated an estimated unpaid claim liability of
$177.5 million, of which $127.5 million was unfunded.[Footnote 26] This
compares to an actuarially determined estimate calculated by an
independent accounting firm of $260.1 million as of September 30, 2001,
of which $36.5 million was unfunded. As part of the audit of FEMA's
fiscal year 2002 financial statements, its auditors assessed FEMA's
methodology for calculating its estimated unfunded liability for fiscal
year 2002 and attempted to determine the reason for the $91 million
increase in the liability since the prior year.
The auditors determined that FEMA's fiscal year 2002 methodology was
reasonable, but were unable to explain the reason for the difference in
the two estimates since FEMA used a different methodology to calculate
the estimate than had been previously used, but did not provide a
"crosswalk" between the two approaches. The auditors reported this as a
weakness in FEMA's process for estimating the remaining liability for
the Cerro Grande program in its internal control report for fiscal year
2002. The weakness specifically related to a lack of (1) an impact
analysis for the change in estimating methodology and (2) supporting
documentation for certain factors and assumptions, for which FEMA
eventually re-created the documentation to support the
calculation.[Footnote 27] In April 2003, FEMA officials stated FEMA is
in the process of awarding a contract to perform an analysis to
determine the dollar effect on the increased claim liability estimate
due to changes in methodology, assumptions, systems, data, or other
factors, from fiscal year 2001 to fiscal year 2002.
Conclusion:
FEMA's actions to strengthen its policies and procedures over its claim
approval process helped ensure that paid claims were valid and
reasonable. However, weaknesses in how the Emergency Preparedness and
Response Directorate records and tracks approved claims in its payment
approval system resulted in an overstatement of approved claims, which
had a cascading effect on payment amounts reported to the Congress and
used to calculate requests for additional funding. While the amount of
the overstatement was relatively insignificant, left unchecked, the
weaknesses in the payment approval system could result in larger errors
in future reports to the Congress and requests for additional funding.
Recommendations for Executive Action:
We recommend that the Secretary of the Department of Homeland Security
direct the Emergency Preparedness and Response Directorate to:
* complete the reconciliation of the amounts approved for payment in
its payment approval system to amounts actually paid in FEMA's
accounting system and correct all identified errors in its payment
approval system and:
* perform monthly reconciliations of the approved claim amounts in its
payment approval system with the actual amounts reported in its
accounting system as paid by DFC for as long as both systems are used
to track and report paid amounts or request additional funding.
Agency Comments and Our Evaluation:
FEMA, in a letter from the Acting Director of the Recovery Division of
the Department of Homeland Security's Emergency Preparedness and
Response Directorate, agreed with our recommendations and described
specific corrective actions currently under way to address each one.
For example, the Acting Director indicated that OCGFC has substantially
completed the reconciliation of the amounts approved for payment in its
payment approval system to amounts actually paid in FEMA's accounting
system and intends to implement monthly reconciliations beginning this
month. We will perform a follow-up review of these activities as part
of our review of the Cerro Grande annual report that is due to the
Congress on August 28, 2003. The Department of Homeland Security's
comments are reprinted in appendix I.
We are sending copies of this report to the congressional committees
and subcommittees responsible for issues related to FEMA and the
Department of Homeland Security; the Secretary of the Department of
Homeland Security, the Under Secretary of the Department of Homeland
Security's Emergency Preparedness and Response Directorate; and the
Inspector General of the Department of Homeland Security. Copies will
also be made available to others upon request.
If you have any questions about this report, please contact me at (202)
512-9508 or Steven Haughton, Assistant Director, at (202) 512-5999. The
other key contributor to this assignment was Christine Fant.
Linda M. Calbom
Director, Financial Management and Assurance:
Signed by Linda M. Calbom
[End of section]
Appendixes:
Appendix I: Comments from the Department of Homeland Security:
Office of Cerro Grande Fire Claims:
Post Office Box 90215 Denton, Texas 76202:
May 1, 2003:
Linda M. Calbom:
Director, Financial Management and Assurance Office United State
General Accounting Office:
441 G Street, N.W. 5THFloor Washington, D.C. 20548:
Dear Ms. Calbom:
I am writing in response to the draft General Accounting Office (GAO)
report entitled "FEMA Cerro Grande Claim Payments Are Properly
Processed, But Reported Payments Somewhat Overstated (GAO-03-623)". I
appreciate your having forwarded the draft report on April 17, 2003, so
we are able to provide comments on the report before it is finalized.
We agree with the recommendations contained in the draft report and, as
indicated in the balance of this letter, we are already well underway
in taking steps to implement the recommendations.
The Office of Cerro Grande Fire Claims (OCGFC) is pleased with GAO's
acknowledgment of our implementation of the recommendations included in
GAO's initial audit report of July 2001. The primary recommendations
from the earlier report suggested more detailed documentation,
increased formalized guidance to OCGFC staff, as well as the
establishment of additional standardized policies and procedures and
assurance of supervisory reviews. As you have acknowledged in the draft
report, these recommendations were initiated upon receipt of GAO's
initial report, and they have served to strengthen the Cerro Grande
program. Based upon our ongoing discussions with GAO staff, action on
recommendations that we expected in this year's report has already
commenced and is nearing completion.
The draft GAO report recommends that OCGFC "...complete the
reconciliation of the amounts approved for payment in its payment
approval system to amounts actually paid in FEMA's accounting system
and correct all identified errors in its payment approval system..." As
you know, initially OCGFC processed fire claim payments only in paper-
based format. Early in 2001 we developed an automated Payment Approval:
System (PAS). After implementation, it was necessary to import
historical paper-based data. These imports included approval data, but
initially did not include payment schedule data. As a result, the
initial reporting algorithm did not ensure consistency between payment
schedule data and payment approval data. Upon identification of this
discrepancy, the reporting algorithm was redesigned. Although
Information Management Systems staff "backfilled" schedules data,
partial incomplete consideration of such data over time caused our PAS
to "over-report" funding commitments by approximately 3% of total
reported payments as of early September 2002.
GAO identified this anomaly in reporting during the OCGFC second annual
audit and has recommended that the Office perform an approval vs.
payment reconciliation. We initiated this process by coordinating
between the OCGFC staff and IT staff to conduct research, create
programs, and formulate spreadsheets allowing the completion of the
task through automation insofar as possible. Automated research of
almost 16,000 files involving approximately 64,000 partial and final
payments resulted in successful reconciliation of approximately 90% of
all payments from the program inception to the project target date of
February 19, 2003.
For those files which could not be reconciled through an automated
approach, we generated spreadsheets to resolve any differences through
access to "hard copy" paper records. It became apparent that the manual
reconciliation process would necessitate identification and correction
of two data sets - financial ("dollar") reconciliation, matching
approvals to actual payments, and administrative ("data only" -
transposed digits in Tax ID Numbers, etc.) reconciliation in order to
comply with the GAO recommendation that OCGFC " ... correct all
identified errors in its payment approval system...." Therefore, OCGFC
staff manually researched approximately 315 claimant records and
approximately 1450 investigation items. The reconciliation process is
now complete. As of the previously established target date, February
19, 2003, our approach resulted in successful reconciliation of all but
approximately $5,000.00 out of $426.3 million dollars approved in PAS
and paid in IFMIS.
GAO's draft report also recommends that we "...perform monthly
reconciliations of the approved claim amounts in (the OCGFC) payment
approval system with the actual amounts reported in its accounting
system as paid..." OCGFC intends to perform the first periodic
reconciliation encompassing data from the end of the initial
reconciliation (February 19, 2003) through April 30, 2003. This
reconciliation will be performed at the end of May. Following that,
monthly reconciliations will be performed at the end of each month, and
we will maintain appropriate records.
Finally, the draft GAO report points out that OCGFC unfunded claims
liability increased from an estimated $36.5 million as of the end of
Fiscal year 2001 to $127.5 million as of the end of Fiscal Year 2002.
During Fiscal Year 2002, OCGFC recognized that the methodology used for
Fiscal Year 2001 needed to be refined to improve the accuracy in
projecting liabilities. Accordingly, a new methodology was developed to
estimate future liabilities as of the end of Fiscal Year 2002.
Successive checks of this methodology and the endorsement of FEMA's
external auditor have proven the current methodology to be sound.
However, a variety of factors have prevented OCGFC from constructing a
"crosswalk" between the two methodologies. OCGFC plans to address this
problem by contracting with a forensic accountant to perform a
"decomposition of change analysis" that will enable us to successfully
document the shortcomings of the previous methodology ("lessons
learned"), construct the "crosswalk" between the previous and present
systems, and solidify our confidence factor in the methodology
currently being used to move the program toward closeout. We are in
discussions with accountants who have the expertise to perform such an
analysis, and we hope to soon identify the firm that will develop the
analysis.
We appreciate the cooperation you and your staff have demonstrated in
our work with each other on the Cerro Grande claims processing
activities. We are pleased that your draft report acknowledges the
strides we have made over the course of our implementation of this
unique program. We are also satisfied that we are already well underway
in our implementation of the recommendations you have made in the draft
report. We would therefore appreciate your revising the draft report to
reflect the significant progress we have already made with respect to
your recommendations relating to the reconciliation process and the
decomposition of change analysis.
Please call me at (940) 891-8799 if you have any questions about this
letter. Thank you again for all of the helpful input and assistance
which you and your staff have provided to this Office.
Sincerely,
Laurence W. Zensinger
Acting Director, Recovery Division:
Emergency Preparedness & Response Directorate,
Department of Homeland Security:
Signed by Laurence W. Zensinger:
[End of section]
(190078):
FOOTNOTES
[1] Pub. L. 106-246, Div. C, Title I, 114 Stat. 511, 583 (2000).
[2] As of March 2003, FEMA became part of the Emergency Preparedness
and Response Directorate of the Department of Homeland Security.
[3] Pub. L. 107-73, Title IV, § 428, 115 Stat. 651, 697 (2001).
[4] A subrogation claim is the right of one who has paid an obligation
that another should have paid to be indemnified by the other. In this
case, insurance companies and possibly others paid claims that the
federal government is responsible for paying.
[5] CGFAA specifies that nonsubrogee claims, to the maximum extent
practicable, be paid before subrogee claims.
[6] OCGFC stated that the amount represents either the amount of claims
processed and approved by the claims reviewer or, if not processed, the
amount submitted by the claimants.
[7] In its transmittal letter dated December 16, 2002, which
accompanied its annual report to the Congress, FEMA stated that an
additional $155 million, including $5 million in administrative costs,
was needed. In February 2003, FEMA was appropriated an additional $90
million, of which $5 million is available for administrative purposes.
[8] U.S. General Accounting Office, Federal Emergency Management
Agency: Weaknesses Exist in the Cerro Grande Fire Assistance Claim
Validation Process, GAO-01-848 (Washington, D.C.: July 13, 2001).
[9] In January 2003, FEMA's auditor used the correct payment data, plus
other adjustments, and proposed an adjustment to the October 2, 2002,
unfunded liability, with which FEMA's management concurred. This
resulted in a reduction of $21.7 million.
[10] In its fiscal year 2002 financial statement audit, FEMA's external
auditors reported the late submission of the annual report as an
instance of noncompliance with CGFAA in their report on compliance with
laws and regulations.
[11] 65 FR 52260, 44 C.F.R. Part 295 (2000).
[12] 66 FR 15948, 44 C.F.R. Part 295 (2001).
[13] The NOL describes in general terms the types of injury and/or
damages a claimant has incurred as a result of the fire.
[14] In order to get assistance to fire survivors as soon as possible,
CGFAA allows for claimants to receive partial payments before the start
of the rebuilding process. Partial payments may be based upon actual
receipts or estimates. Final payments are made only after the entire
claims review process is completed.
[15] Section 295.34 of the final rule published in the Federal Register
provides for the reopening of claims, not withstanding the submission
of a Release and Certification form, under certain circumstances.
[16] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999).
[17] In December 2002, OCGFC closed its headquarters operations in
Santa Fe, New Mexico, and moved the remaining claims operations to
FEMA's National Processing Center in Denton, Texas.
[18] We did not identify any control weaknesses in our review of the 95
statistically selected approved claims.
[19] Claims reviewers are now required to include documentation of all
telephone conversations and attempts to contact or obtain support from
claimants in the notes maintained in ACIS. In cases where documentation
submitted is insufficient, the claims reviewers will perform the
independent investigations necessary to make recommendations to FEMA.
[20] Fair market values were established in PricewaterhouseCooper's
Economic Study of the Los Alamos Post-Fire Residential Real Estate
Market (Final Report).
[21] As part of FEMA's fiscal year 2002 financial statement audit, its
auditors determined that amounts were correctly reported as paid by DFC
in FEMA's accounting system. In addition, our review of the 77
statistically selected claim payments verified the accuracy of the
amounts paid by DFC and no control weaknesses were identified.
[22] We did not statistically estimate the total amount in error since
the reconciliation between the two systems revealed that $12 million
was the actual dollar amount of the total errors in the payment
approval system.
[23] The claimant originally submitted a claim with total damages and
losses in the amount of $1.6 million.
[24] The request was based on FEMA's original calculation of its
October 2, 2002, unfunded liability, which was for $149.2 million.
[25] In February 2003, the VA, HUD and Independent Agencies
Appropriations Act appropriated FEMA an additional $90 million, of
which $5 million may be made available for administrative purposes
(Pub. L. 108-07, Div. K, 2003).
[26] The unfunded liability was adjusted for the overstated payments
plus another adjustment as part of the fiscal year 2002 audit of FEMA's
financial statements. Therefore, FEMA's initial estimate of the
unfunded liability of $149.2 million was decreased to $127.5 million.
[27] The auditors recommended that FEMA (1) perform an analysis to
determine the dollar impact on the liability estimate due to changes in
methodology, assumptions, systems, data, or other factors, from fiscal
years 2002 through 2001, and (2) ensure that supporting documentation
for program estimates that are used for financial reporting purposes be
maintained as part of the estimate documentation file. FEMA agreed with
the recommendation.
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