Department of Justice Process for Identifying, Preventing, and Recovering Improper and Erroneous Payments

Audit Report 05-19
April 2005
Office of the Inspector General

Introduction


Federal agencies make more than $2 trillion in payments to individuals and organizations each year. A recent report disclosed that federal agencies made a total of $45.1 billion in improper and erroneous payments in fiscal year (FY) 2004.5 Improper and erroneous payments are payments that should not have been made or were made for incorrect amounts because of errors, poor business practices, or intentional fraud or abuse. Improper and erroneous payments are a significant problem in the federal government.

The President’s Management Agenda (PMA) was implemented in August 2001 as a strategy for improving the management and performance of the federal government. It focuses on areas where deficiencies were most apparent and where the government could begin to deliver concrete, measurable results. The PMA includes five government-wide initiatives, one of which is “Improved Financial Performance.”6 Included in that initiative are requirements for the identification and reduction of improper or erroneous payments within the federal government.

The purpose of this audit was to determine whether the Department of Justice (Department) has: 1) established policies and procedures to identify and prevent improper and erroneous payments, 2) determined the extent of improper and erroneous payments, and 3) established methods to recover improper and erroneous payments.

During this audit, we reviewed current laws, regulations, guidance, and instructions to obtain an understanding of the requirements with which federal agencies must comply. To assess Department efforts to identify, prevent, and recover improper and erroneous payments, we conducted a review of four Department components. The four components included in this audit were the Federal Bureau of Prisons (BOP), Office of Justice Programs (OJP), Federal Bureau of Investigation (FBI), and United States Marshals Service (USMS). The components were selected based on several factors, as detailed in Appendix I of this report. We conducted interviews of component management, reviewed policies and procedures related to preventing and recovering improper payments, analyzed reports that were submitted to JMD to determine whether the components complied with applicable laws and regulations, and assessed the Department’s overall compliance with relevant laws and regulations.

The terms “erroneous payment” and “improper payment” have been similarly defined by various sources. According to the Office of Management and Budget (OMB), an erroneous payment is:

Any payment that should not have been made or that was made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirement. Incorrect amounts are overpayments and under payments, including inappropriate denials of payment. An erroneous payment includes any payment that was made to an ineligible recipient or for an ineligible service. Erroneous payments are also duplicate payments, payments for services not rendered, and payments that do not account for credit for applicable discounts.

The Government Accountability Office (GAO) defines improper payments as:

Payments that should not have been made or were made for incorrect amounts. Specifically, they include inadvertent errors, such as duplicate payments and calculation errors; payments for unsupported or inadequately supported claims; payments for services not rendered or rendered to ineligible beneficiaries; and payments resulting from fraud and abuse.

Because these definitions are essentially the same, we use the terms “improper payments” and “erroneous payments” interchangeably throughout this report, and consider them synonymous.

Background

Two laws address the identification, prevention, and recovery of improper payments. The first, Public Law No. 107-300, the Improper Payments Information Act of 2002 (IPIA), enacted in November 2002, requires the heads of federal agencies to annually: 1) identify programs and activities susceptible to improper payments; 2) estimate the annual amount of improper payments and submit that estimate to Congress; and 3) for improper payments that exceed $10 million, the agency must report the actions it is taking to reduce improper payments, including a discussion of the causes.

The second, Public Law No. 107-107, the National Defense Authorization Act for FY 2002 (NDAA), Subchapter VI Recovery Audits, requires all agencies that enter into contracts with an annual total value in excess of $500 million to carry out a cost-effective program to identify errors and recover amounts erroneously paid. These programs are also known as “recovery audits.”

OMB has provided guidance for implementing these laws. Guidance on the implementation of IPIA was originally issued by OMB in Circular A-11, Section 57, in 2002. This circular required specifically identified agencies with programs considered to be at high risk for improper payments to investigate, identify, and report on improper payments. Examples of these agencies and programs included the Department of Agriculture’s Food Stamps program, the Department of Health and Human Services’ Medicare and Medicaid programs, and the Social Security Administration’s Old Age and Survivors’ Insurance program, among others. The Department of Justice and its programs were not specifically identified in this document.

In May 2003, OMB issued additional guidance in memorandum M-03-13. This guidance requires all federal agencies to annually review and identify programs susceptible to significant improper payments, defined as programs with annual improper payments exceeding both 2.5 percent of program payments and $10 million. For programs meeting this criteria, agencies must: 1) provide a statistically valid estimate of the annual amount of erroneous payments in its programs and activities; 2) identify the precise reasons the identified programs are at risk; 3) implement a plan to reduce erroneous payments, including the establishment of targets and timelines; 4) report the estimates of the annual amount of erroneous payments and progress in reducing them; and 5) provide other information on management accountability, information systems and infrastructure, and legal barriers. This information must be reported in each agency’s annual Performance and Accountability Report (PAR).7

OMB issued additional guidance relating to programs for identifying and recovering improper payments in memorandum M-03-07, dated January 2003. This guidance requires agencies with total contracts in excess of $500 million in a fiscal year to carry out a cost-effective program for identifying and recovering improper payments. This memorandum also provides guidance on the disposition of recovered amounts and requires affected agencies to submit annual reports detailing recovery audit activities. Further, this guidance states that “agency Inspectors General and other external agency auditors are encouraged to assess the effectiveness of agencies’ recovery audit programs.”

OMB issued further IPIA and recovery audit reporting guidance in memorandum M-04-20, dated July 2004. In addition to requiring information relating to agency IPIA activities, this guidance directs agencies to include the following recovery audit information in the FY 2004 PAR: 1) a discussion of each agency’s recovery auditing effort, 2) the amount of recoveries expected, 3) the actions taken to recover them, and 4) the business process changes and internal controls instituted and/or strengthened to prevent future occurrences.

Department of Justice Reporting Activities

JMD is responsible for ensuring the Department’s compliance with the laws, regulations, and guidance relating to improper payments. JMD provided IPIA and recovery audit reporting instructions to Department components in a memorandum dated August 2004. These instructions support those set forth in the guidance provided in the above-referenced OMB policy memoranda. The instructions required each component to provide the following details:

  • a description of the risk assessment performed and a list of susceptible programs;

  • the statistical sampling methodology used, if applicable;

  • the component’s plan to reduce improper payments;

  • estimates of improper payments in future years;

  • a description of the component’s recovery audit effort;

  • the steps the component is using to ensure that management is held accountable for reducing improper payments;

  • whether the information systems and infrastructure are adequate to reduce improper payments; and if not, a description of the resources requested to improve its information systems and infrastructure;

  • any statutory or regulatory barriers which may limit corrective actions in reducing improper payments; and

  • additional comments on overall agency efforts, specific programs, best practices, or common challenges identified.

In August and September 2004, Department components responded to JMD’s instructions by providing IPIA reports containing information on improper payments and the status of recovery audit efforts. JMD then compiled and consolidated all component responses and prepared one Departmentwide response, which was included in the PAR for FY 2004.

Footnotes

  1. See OMB report entitled, Improving the Accuracy and Integrity of Federal Payments, dated January 2005.

  2. These five initiatives are further detailed in Appendix III of this report.

  3. The PAR is an annual report that provides information on an agency’s actual performance and progress in achieving the goals in its strategic plan and performance budget.


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