Contract overpayments continue to plague Defense Department

Defense Department contractors returned $488 million in overpayments to the agency in fiscal 2001, despite the agency's efforts to prevent improper payments, according to a new General Accounting Office report. In its report "DoD Contract Management: Overpayments Continue and Management and Accounting Issues Remain," (02-635) GAO looked at 183 Defense contractors to gauge the extent of improper payments made by the agency. The watchdog agency also reviewed Defense Finance and Accounting Service information on overpayments, assessed the status of new initiatives under way to eliminate improper payments, and examined management of improper payments at the agency. Improper payments are overpayments to contractors and beneficiaries that result from fraud or error. GAO found that short-term actions taken by the Defense Department to crack down on overpayments worked well. Those strategies included auditing major Defense contractors to identify overpayments, evaluating control mechanisms for identifying overpayments and reconciling and closing old accounts. "As of January 2002, the Defense Contract Audit Agency has completed audits of overpayments at 46 contractors and identified more than $22.7 million in overpayments," GAO found. "These results illustrate what can be can be accomplished from programs to identify payment errors and recover erroneous payments." However, internal accounting systems fall short of what is needed to completely eliminate overpayments to contractors, the watchdog agency said. "Its procedures and practices do not fully meet federal accounting standards and federal financial system requirements for the recording of accounts receivable and liabilities," the report said. "As a result, Defense managers do not have important information for effective financial management, such as ensuring that contractor debt is promptly collected." Improper payments could be eliminated if Defense adopted federal accounting standards and made managers more accountable, according to GAO. To that end, GAO recommended that Defense Department Comptroller Dov Zakheim work with Michael Wynne, the Defense Department's deputy undersecretary for acquisition, technology and logistics, to implement recovery auditing, a new internal control method mandated under the 2002 Defense Authorization Act. Recovery auditing, used widely in the private sector, uses computer software programs to analyze agency contract and payment information to root out discrepancies in data, such as duplicate payments, uncollected rebates and unauthorized expenditures. The two officials should also reassess established accounting procedures and revise them as needed so that they align with federal accounting standards and federal financial system requirements. A more comprehensive and complete record of improper payments needs to be developed and maintained as well, the report said. In a written response to GAO's report, Zakheim agreed with the agency's findings and said that the Defense Department is developing performance measures for senior managers that focus on accounts receivable and overpayments.