	Background

The Improper Payments Information Act of 2002 (IPIA)—as amended by  the Improper Payments Elimination and Recovery Act of 2010 (IPERA)  and the Improper Payments Elimination and Recovery Improvement Act  of 2012 (IPERIA)—requires federal executive branch agencies to   (1) review all programs and activities, (2) identify those that may be  susceptible to significant improper payments,amount of improper payments for those programs and activities,   (4) implement actions to reduce improper payments and set reduction  targets, and (5) report on the results of addressing the foregoing  requirements. Office of Management and Budget, Revised, Financial Reporting Requirements, OMB  Circular No. OMB and Agencies Reported Estimates of Improper Payments

Federal agency improper payment estimates totaled $105.8 billion in  fiscal year 2013, a decrease of $1.3 billion from the prior year’s revised  estimate of $107.1 billion. The $105.8 billion in estimated federal improper payments  reported for fiscal year 2013 was attributable to 84 programs spread  among 18 agencies. For example, with OMB approval an agency can  obtain relief from estimating improper payments if the agency has  reported improper payments under the threshold for significant improper  payments at least 2 consecutive years. Consequently, the specific  programs included in the government-wide improper payment estimate  may change from year to year. For example, a net of 10 additional  programs were added to the government-wide estimate by OMB in fiscal  year 2013 when compared to fiscal year 2012.Department of Education’s improper payment estimate for the Direct Loan  program, approximately $1.1 billion, was included in the government-wide  improper payment estimate for the first time in fiscal year 2013. Challenges in Achieving Complete and Accurate Reporting of Improper Payments

In our fiscal year 2013 audit of the Financial Report of the United States  Government, we reported the issue of improper payments as a material  weakness in internal control because the federal government is unable to  determine the full extent to which improper payments occur and  reasonably assure that appropriate actions are taken to reduce them.the agency level, we also found that existing internal control  weaknesses—such as financial system limitations and information system  control weaknesses—heighten the risk of improper payments occurring. Specifically, four federal  agencies did not report fiscal year 2013 estimated improper payment  amounts for four risk-susceptible programs. For example, HHS’s fiscal  year 2013 reporting cited statutory limitations for its state-administered  Temporary Assistance for Needy Families (TANF) program, which  prohibited it from requiring states to participate in developing an improper  payment estimate for the TANF program. In addition, two programs that reported estimates in fiscal year 2013 were  not included in the government-wide totals because their estimation  methodologies were not approved by OMB. In addition to noncompliance reported in financial statement audits,  various IGs reported deficiencies related to compliance with the criteria  listed in IPERA for fiscal year 2013 at their respective federal agencies,  including risk-susceptible programs that did not have reported improper  payment estimates, estimation methodologies that were not statistically  valid, and risk assessments that may not accurately assess the risk of  improper payment. Strategies to Reduce Improper Payments

As previously reported, there are a number of strategies that can help  agencies in reducing improper payments, including analyzing the root  causes of improper payments and implementing effective preventive and  detective controls. Designed and implemented effectively, these  strategies could help advance the federal government’s efforts to reduce  improper payments. According to OMB guidance, agencies are required to  classify the root causes of estimated improper payments into three  general categories for reporting purposes: (1) documentation and  administrative errors, (2) authentication and medical necessity errors, and  (3) verification errors.improper payments for their respective programs in their fiscal year 2013  financial reports using these categories, a more detailed analysis beyond  these general categories regarding the root causes can help agencies to  identify and implement more effective preventive, detective, and  corrective actions in the various programs. Many agencies and programs are  in the process of implementing preventive controls to avoid improper  payments, including overpayments and underpayments.controls may involve a variety of activities such as up-front validation of  eligibility, predictive analytic tests, and training programs. The  following are examples of preventive strategies, some of which are  currently under way. Up-front eligibility validation through data sharing. Implementing Effective Detective Controls to Identify and Recover Overpayments

Although strong preventive controls remain the frontline defense against  improper payments, effective detection techniques can help to quickly  identify and recover those overpayments that do occur. Data mining. Recovery auditing.
Why GAO Did This Study

Over the past decade, GAO has issued numerous reports and testimonies highlighting improper payment issues across the federal government as well as at specific agencies. The Improper Payments Information Act of 2002, as amended by the Improper Payments Elimination and Recovery Act of 2010 and the Improper Payments Elimination and Recovery Improvement Act of 2012, requires federal executive branch agencies to (1) review all programs and activities, (2) identify those that may be susceptible to significant improper payments, (3) estimate the annual amount of improper payments for those programs and activities, (4) implement actions to reduce improper payments and set reduction targets, and (5) report on the results of addressing the foregoing requirements. In general, reported improper payment estimates include payments that should not have been made, were made in the incorrect amount, or were not supported by sufficient documentation.
This testimony addresses (1) federal agencies' reported estimates of improper payments, (2) remaining challenges in meeting current requirements to estimate and report improper payments, and (3) strategies for reducing improper payments. This testimony is primarily based on GAO's fiscal year 2013 audit of the Financial Report of the United States Government and prior GAO reports related to improper payments issued over the past 3 years. The testimony also includes improper payment information recently presented in federal agencies' fiscal year 2013 financial reports.

What GAO Found

Federal agencies reported an estimated $105.8 billion in improper payments in fiscal year 2013, a decrease from the prior year revised estimate of $107.1 billion. The fiscal year 2013 estimate was attributable to 84 programs spread among 18 agencies. The specific programs included in the government-wide estimate may change from year to year. For example, with Office of Management and Budget (OMB) approval, an agency can obtain relief from estimating improper payments if the agency has reported improper payments under a certain threshold for at least 2 consecutive years. A net of 10 additional programs were added to the government-wide estimate by OMB in fiscal year 2013 when compared to fiscal year 2012.
For fiscal year 2013, GAO identified the federal government's inability to determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce them as a material weakness in internal control. In addition, existing internal control weaknesses at the agency level continued to increase the risk of improper payments occurring. In fiscal year 2013, four agencies did not report estimates for four risk-susceptible programs, including the Department of Health and Human Services' (HHS) Temporary Assistance for Needy Families (TANF) program. HHS cited a statutory barrier that prevents it from requiring states to estimate improper payments for TANF. Estimates reported for two programs were also not included in the government-wide total because their estimation methodologies were not approved by OMB. Further, inspectors general reported deficiencies related to compliance with criteria listed in the Improper Payments Elimination and Recovery Act of 2010 for fiscal year 2013, such as the use of estimation methodologies that were not statistically valid.
As GAO has previously found, a number of strategies across government, some of which are currently under way, could help to reduce improper payments. For example
Analysis of the root causes of improper payments can help agencies target effective corrective actions. Some agencies reported root causes of improper payments using three error categories required by OMB (documentation and administrative, authentication and medical necessity, and verification). However, because the three categories are general, more detailed analysis to understand the root causes could help agencies identify and implement more effective corrective actions.
Designing and implementing strong preventive controls can help defend against improper payments, increasing public confidence and avoiding the difficult “pay and chase” aspects of recovering improper payments. Preventive controls involve activities such as up-front validation of eligibility through data sharing, predictive analytic tests, and training programs.
Implementing effective detection techniques to quickly identify and recover improper payments after they have been made is also important to a successful reduction strategy. Detection activities include data mining and recovery audits. Another area for further exploration is the broader use of incentives to encourage and support states in efforts to implement effective preventive and detective controls in state-administered programs.