Auditors question agency estimates on payment errors

Reporting on erroneous program payments is fraught with gaps and federal agencies almost certainly underestimate how much they misspend, according to a new report.

Government Accountability Office auditors who reviewed agencies' fiscal 2005 reports under the 2002 Improper Payments Information Act -- which covers payments made mistakenly to ineligible recipients or as a result of fraud or other error -- found that some large high-risk programs had been excluded from reporting. Some financially troubled agencies reported few or no risk-susceptible programs, GAO found.

Auditors said 18 agencies together estimated $38 billion in improper payments in 57 programs and activities. But the Homeland Security Department, General Services Administration and NASA were among eight reporting they had no programs susceptible to improper payments, the auditors' report (GAO-07-92) stated.

Homeland Security has never received a clean audit opinion on its financial statements, and House Government Reform Committee hearings over the past year have sought to work through 10 major recurring problems in the agency's accounting processes. GAO reviewers noted that in the DHS fiscal 2005 audit, the agency was cited for noncompliance with its statutory improper payment obligations, primarily because of inadequate risk assessments.

Among the DHS programs known to be problematic is the Federal Emergency Management Agency's Individuals and Households Program, which issued payments in the wake of hurricanes Katrina and Rita in 2005. In a separate June report, GAO estimated the program's hurricane-related improper payments at about $1 billion as of February 2006.

But despite the avalanche of reports, public hearings and news stories recounting fraudulent and wasteful payments, DHS reported that in fiscal 2005, the program did not meet Office of Management and Budget criteria for risk susceptibility.

In addition to nonreporting agencies, GAO noted that the fiscal 2005 improper payment estimates did not include information for 10 major programs with more than $234 billion in spending -- among them Medicaid, the Agriculture Department's school lunch and breakfast programs and the Temporary Assistance for Needy Families program. Those 10 programs, for which the statute explicitly requires reports, have adopted target reporting dates ranging from 2007 to 2010. Three did not inform GAO of any target reporting date.

GAO auditors also found that nine programs with $389 million in improper payment estimates had not used proper methods to reach those numbers. They said appropriate statistical sampling methods would likely have found higher erroneous payments, noting that the program costs together were more than $58 billion.

"Although the federal government continues to make progress in meeting the requirements of [the Improper Payments Information Act], agencies' fiscal year 2005 reporting does not yet reflect the full scope of improper payments across the government," auditors concluded. "Because the extent of the problem remains significantly understated, the level of effort necessary to address the full extent of improper payments is as yet unknown."

Auditors recommended that Congress amend the statute to clarify how agencies should identify programs susceptible to significant improper payments. Such a change would almost certainly increase the number of programs subject to estimation and remediation planning.

They also recommended that OMB develop more explicit guidance for agencies' risk assessments and improper payment reporting, enforce existing guidance on how to estimate payments in a statistically valid way, gather additional information on payments that are made according to existing laws but later found to be improper and require agencies to justify their decisions not to conduct recovery audits to recoup erroneous payments.

OMB generally agreed with the recommendations, and emphasized progress made in reporting since the improper payments law went into effect. OMB justified the decision to use some statistically unsound methodologies while programs develop more solid ones, and said the threshold criteria for improper payment tracking has changed to reduce the chances of missing high-risk programs.

In its most recent management score card, OMB rated 15 agencies on their progress in eliminating improper payments. Only three received red, the lowest rating in the traffic-light-style system, while six earned the top green rating and six -- including DHS -- earned yellow, for "mixed results."