Bill would curb agency overpayments to contractors

Newly introduced legislation that would require agencies to use a specific auditing procedure might be the key to reducing overpayments, double payments and payments for services not rendered in government, witnesses at a hearing on the bill said Tuesday.

H.R. 1827, the Government Waste Corrections Act of 1999, would require agencies to conduct "recovery audits" for all payment activities that cost $10 million or more annually. Recovery auditing is a process of identifying and recovering overpayments inadvertently made to suppliers of goods and services. The technique, widely used in the private sector, is considered risk-free because auditors hired to conduct such examinations are only paid a percentage of the money they recover.

Poor financial management is widely documented in the federal government, with improper payments at the top of the list of many agencies' financial problems. The General Accounting Office can't determine exactly how much the federal government overpays its contractors each year, but several factors indicate that it is a large sum. Between 1994 and 1998, contractors returned $4.6 billion in overpayments to the Defense Department alone, GAO chief David Walker said before the House Government Reform Subcommittee on Government Management, Information and Technology.

"If federal agencies do not effectively tackle these challenges, they will continue to risk erroneously paying contractors and perpetuating other financial management problems," Walker said.

Agencies most at risk for improper payments usually have complex criteria for computing payments, a large volume of transactions and a quick payment turnaround time, Walker said. Contractors don't have any incentive to return overpayments because there is no law requiring them to pay interest on funds that aren't recovered for long periods of time, Walker said. A contractor could put an overpayment in the bank and earn interest on it for years until the government finally caught the error and requested a refund.

A demonstration project using recovery auditing has been underway at the Defense Department since 1996. DoD contracted a private firm to identify and document overpayments at the Defense Supply Center in Philadelphia. Since June 1999, the firm identified $29.3 million in overpayments made for purchases of about $6 billion. The government needs to test a variety of such programs, Walker said, to identify best practices for recovery auditing governmentwide.

Walker said GAO approves of H.R. 1827, which was introduced by Rep. Dan Burton, R-Ind., in May. But GAO doesn't think recovery auditing should be mandated at all agencies yet. The bill will only be effective if agencies are given meaningful incentives to participate and make it work, Walker said. Agencies should receive at least 50 percent of the money recovered from overpayments to put toward improving auditor training, improving internal controls and investing in financial management technology.

"In our view, with the use of model programs, plus strong monetary incentives, it would be unnecessary to mandate recovery auditing across the government," Walker said.

Other witnesses at the hearing also testified in support of the legislation, but said the $10 million threshold for payment activities would limit overall recoveries. The private sector recovery standard is $1 million for every $1 billion audited, noted Deidre Lee, acting deputy director for management at the Office of Management and Budget. Using that standard, the $10 million threshold would limit individual recovery collections to about $10,000, she said.

Paul Dinkins, Executive Vice President of The Profit Recovery Group, a firm that pioneered the use of recovery auditing, agreed that the threshold should be raised. He suggested an increase to $500 million. "Small amounts will not justify the administrative burden and program costs for everyone involved," he said.