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HEARING: Billions Lost in Government Financial Mistakes

Eliminating and Recovering Improper Payments

March 29, 2007

The Subcommittee held a hearing to:

• Examine why certain agencies are still doing such a poor job of fixing and preventing financial mistakes (or “improper payments”)
• Discuss recent cross-agency policy changes that are contrary to the law and will increase improper payments, and
• Highlight the benefits and limitations of “recovery audits” by agencies. Recovery audits are audits embarked on not just to report financial position  of an agency, but specifically to find and recover funds lost to improper payments. These audits pay for themselves because auditing firms are only paid out of a portion of the funds they successfully recover.

To help agencies fix and prevent payment errors, the Improper Payments Information Act of 2002 requires the following:

1) Perform a risk assessment
2) Develop a statistically valid estimate of improper payments
3) Develop a corrective action plan
4) Report the results of IPIA activities to Congress

Note that the first step that all the other steps are dependent on is the risk assessment. If agencies don’t do a risk assessment or do it badly, they may not move on to the next step of reporting their payment error rate when they should. In FY 2006, the agencies which report their improper payments (only about half) reported $40.5 billion in improper payments, an increase of $2 billion from last fiscal year according to the Office of Management and Budget (OMB). However, five years after the passage of the IPIA, the inexcusable fact that only half of the 36 agencies have conducted complete risk assessments of all programs stills leaves Congress and the American taxpayer in the dark about the magnitude of the improper payment problem.

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• Chairman's Statement (36.5 KBs)

Major Findings:

• The extent and severity of the improper payment problem is still unknown as only 18 out of 36 agencies have conducted a complete risk assessment of all programs, which is only step one in complying with the IPIA that passed in 2002. Even programs that have conducted risk assessments are not complying with step two of the IPIA which is to estimate improper payments. There are 13 programs that did step 1 but failed to do the next steps required by law. They are reportedly at risk of payment errors but are not reporting their error rate. Together, these programs pay out $328.9 billion each year.

• Some agencies have failed to comply with step one. They are not using statistically valid measurements to conduct risk assessments, which results in inaccurate estimates. $389 million worth of improper payments for 9 programs were not based on a valid, statistical sampling methodology as required by OMB guidance.

• Inexplicably, OMB requirements were recently loosened to allow some agencies to skip out on the risk assessment process. The OMB document indicates that programs that complete the risk assessment process and are self-designated “not susceptible” to making significant improper payments are off the hook for the law’s annual risk assessment process, and can move to doing risk assessments every 3 years. Given that GAO found that many of these risk assessments are shoddy and inadequate, as well as the law’s requirement of annual assessment, this policy not only violates the law, but it’s financially ill-advised.

• Agencies are not utilizing the full potential of recovery audits. In FY 2006, $840 million in improper payments were identified for recovery, yet only $256 million was recovered.

• One of the worst actors regarding improper payments is NASA, which has been out of compliance with the IPIA every year since the inception of improper payment reporting.

Impact on Taxpayers:

• At the very minimum, over $40 billion is lost every year that could have been used to fund the war on terror, improve healthcare for seniors, pay down the $9 trillion debt, or returned to taxpayers.

• The deterrent effect of cracking down on fraudulent government contractors, beneficiaries and others is lost by continued payment errors, encouraging more corruption and criminal behavior by those parties and others who would otherwise fear getting caught.

• Continued mediocrity in government by a refusal to hold agency officials accountable for fixing the problem. Mediocrity will only attract more mediocrity.

These Findings Demand a Response:

• OMB should rescind the guidance that allows programs that complete the risk assessment process and are designated “not susceptible” to making significant improper payments are only required to do risk assessments every three years.

• Taxpayers should not be forced to subsidize government programs that don’t measure and don’t prevent bureaucratic financial mistakes. Appropriations should be conditioned upon compliance with the Improper Payments Information Act of 2002.

• The Improper Payments Information Act of 2002 is up for reauthorization and should be amended to clarify what constitutes a valid risk assessment, how “susceptibility” is determined during that risk assessment, and hold agencies accountable for measurable progress in eliminating payment errors.