Government Office Financials

The federal government has an annual multibillion-dollar improper payments problem. Your organization can be part of the solution.

Industry trends

Your Federal Agency Can — and Must — Rein in Improper Payments

  • 9/8/2017

Improper payments by federal government agencies are costing taxpayers significant amounts of money and contributing to the U.S. government’s fiscal unsustainability. The problem is costly ($1.2 trillion since 20031) and is escalating in both dollars and percentages. Some initial steps are being taken to understand and remedy the matter. The Office of Management and Budget (OMB) and federal agencies themselves have done much to better understand and document the problem, but a great deal more effort lies ahead.

There are measures your federal agency can — and should — take, too, to substantially reduce improper payments within your organization. But before we look at those, it’s important to discuss the true magnitude of the situation and what the root causes are.

Understanding the scope of the improper payments problem

An improper payment is one that should not have been made at all or one that was made incorrectly (e.g., an overpayment or underpayment, though underpayments are a smaller percentage of the totals). These can be duplicate payments, those made to ineligible recipients, those issued in incorrect amounts, or those made with insufficient approval or incomplete documentation. Notably, in over two-thirds of improper payments, the cause is administrative and did not result in payments of amounts which were not owed to the recipient. They were improper payments because agencies failed to follow their own payment guidance or validate the recipient’s qualification for the benefits before they issued the payment.

The OMB started collecting data in 2003 and now gathers figures from 112 programs across 22 agencies. The Government Accountability Office (GAO) audits and analyzes the data. The GAO has found that, of these 112 programs, just five2 account for over 78 percent3 of the federal government’s improper payments: Medicare (three programs), Medicaid, and the IRS’s earned income tax credit (EITC).

For fiscal year 2016 alone, the federal government’s improper payments reached a new annual summit of $144 billion4 after four straight years of increases. Not only has the dollar amount grown, but the rate5 expressed as a percentage of total expenditures (from all reporting agencies) has climbed from 4.3 percent in FY 2012 to 5.1 percent in FY 2016.

These figures are eye-opening, but the actual amounts are potentially worse. Estimates of improper payments are unavailable for 18 programs at eight “risk-susceptible”6 (GAO’s term) agencies because of material weaknesses in their internal controls7. Such programs include the U. S. Department of Agriculture (USDA) Child and Adult Care Food Program, Health and Human Services Temporary Assistance for Needy Families Program, and Veterans Affairs Medical Care Contracts and Agreements. Also included is the USDA Supplemental Nutrition Program (SNAP) (i.e., food stamps), which is a particularly egregious example for the following reasons:

  • Based on this USDA’s in-depth, systematic review of all state quality control systems, it determined that it could not release a national improper payment rate for SNAP.
  • The USDA is unable to calculate a national improper payment rate because of the unreliability of some state-reported data.
  • The USDA’s Inspector General reported in September 2015 that the Food and Nutrition Services’ two-tier quality control process was vulnerable to state abuse. There is a conflict of interest between the accurate reporting of improper payment rates and the incurring of penalties.

SNAP paid out $71 billion8 in benefits in 2016. If we were to imagine that just the current federal government-wide annual rate (5.1 percent) of improper payments were to apply to this program, that’s another $3.6 billion we could conceivably add to the total. And when you consider the untracked and unknown amounts of improper payments from the 17 other risk-susceptible programs, you get a sense of the enormity of the problem.

Aside from the waste of hardworking taxpayers’ money (one-third of improper payments go to recipients not entitled to them), legitimate beneficiaries are harmed. When a check for school breakfast, supplemental nutrition, unemployment, or medical care goes astray, people — particularly children — suffer needlessly.

Better quality data are revealing the root causes of improper payments

The OMB and individual agencies are making strides in collecting information that sheds light on both the breadth of improper payments and their causes. In the last two years, since the effort to track root causes has been implemented, OMB has amassed data on the reasons for payment errors, which in large part appear to show that agencies are failing to follow their own established guidance or neglecting to validate recipients’ benefit qualifications before issuing payments.

The reported root causes9 are many and include:

  • Administrative process errors
  • Insufficient supporting documentation
  • Inability of the agency to authenticate eligibility
  • Medical necessity in which an unsupported procedure needs to be performed to save life and limb
  • Program design errors such as a state having no statutory authority to monitor receipts from a federal program
  • Failure to verify data

Still, there’s room for improvement in the reporting. The OMB’s litmus test for requiring agencies to report could be expanded. Its criteria are based on statistical testing of programs’ improper payment rates, and only those that show greater than 1.5 percent and actual losses of at least $10 million must submit data. Based on this threshold, many programs are off the hook and automatically excluded from federal government-wide figures, skewing both numerators and denominators. This diminishes the scale of the problem. It also makes the five most offending programs appear slightly worse in proportion than they actually may be.

What can we do system-wide to help fix the improper payments problem?

We need to build upon the work the federal financial community has done in the past few years to better understand the root causes of the problem, but we still need more information, both to comprehend contributing factors and hold agencies accountable. The OMB should mandate that all risk-susceptible programs such as SNAP compute and report an improper payment rate. If there is no statutory requirement for a state to do so, federal legislation should be passed to that effect.

Your federal agency can contribute to the solution to improper payments

Public and Congressional pressure on federal entities to rein in improper payments is increasing. Good stewardship of taxpayers’ dollars is a worthy goal. The entire federal financial community, including OMB, GAO, the Offices of Inspectors General, and agencies themselves, are on board with the need for improvement. Independent public accounting firms (IPAs) have a role to play as well.

You can work with an independent public accounting (IPA) firm to:

  • Develop specific criteria for improper payments issued by your agency
  • Conduct a rigorous root cause analysis within your organization
  • Employ data mining techniques to isolate patterns and concentrations of improper payments
  • Execute formal recovery audits of improper payments
  • Identify financial systems’ limitations and information system control weaknesses that contribute to the growth of improper payments
  • Map payment processes and streamline procedures for validating and verifying payment beneficiaries

IPAs are particularly well suited to helping federal agencies because their professionals have knowledge of and experience with all kinds of government organizations. An IPA can work with you to apply best practices and avoid pitfalls found at other agencies. An independent perspective can lend a critical (but helpful) view of weaknesses and failures in systems and controls so you can design more effective reviews and protocols.

At a time when the fiscal sustainability of the U.S. government is nearing crisis levels, the amount of improper payments must be alleviated. There is much that can and should be done rein in this problem, and the entire federal financial community needs to be part of the solution.