14_04 AGAJournal_Sum14_042514_LR.PDF

Improper Payments

SUMMER 2014 VOL. 63, NO. 2

6 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT SUMMER 2014

12 Federal Improper Payments: An OverviewBy: Elizabeth Owens and Carol M. Jessup, Ph.D., CPA, CFE The federal government began earnestly addressing improper payments in 2009, culminating with the Improper Payments Elimination and Recovery Act of 2010. These actions yielded a ‘Do Not Pay’ list for government use and a transparent website for the public (www.paymentaccuracy.gov). An improper payment rate reduction to 3.53% during FY 2013 resulted.

18 Are You Combat Ready to Win the War Against Improper Payments?By: Danny Werfel, JD, MPP; and Jeffrey C. Steinhoff, CGFM, CPA, CFE, CGMALet’s celebrate the 35-percent drop in the rate of improper payments, while committing to appreciably ‘up’ our game, given the remaining $100 billion annually. We explore pivotal questions regarding combat readiness and provide context on how the fight against improper payments can yield lower error rates through transformational change.

24 An Emphasis on Payment Integrity: Key Practices to Sustain and Renew Your Commitment to Ending Improper Payments By: Wendy Morton-Huddleston, CGFM, PMP; and Calandra Dixon, PMPOffices of Inspectors General reported agency compliance results in reducing and recapturing improper payments for the first time in 2012 under the Improper Payments Elimination and Recovery Act. With trends analysis, CFOs have an opportunity to evaluate their agency results and improve program performance and sustainability.

Denotes articles eligible for CPE hours through AGA’s CPE Online Program. This issue of the Journal is worth 3 CPE hours, through the CPE Online Program. Visit www.agacgfm.org/cpeonline for more information.

Contents

32 We are Here to Help: Redefining External Auditors’ RoleBy: Geoffrey Frank, MPA, CGFM; and Rich Rasa, CGFMExternal auditors, while ‘here to help,’ are wary of compromising their independence. A new model, now used in grant making agencies, could go a long way toward redefining the external auditors’ role in facilitating actions to reduce improper payments and improve program performance, while also effectively maintaining their independence.

38 DHS: The Road to a ‘Clean’ OpinionBy: David Norquist; Peggy Sherry, CPA; Larry Bedker, CGFM, CPA; and Scot Janssen, CPA On December 11, 2013, the U.S. Department of Homeland Security (DHS) received a ‘clean’ opinion on its financial statements. The effort to achieve this milestone spanned two administrations and involved hundreds of people and thousands of changes to processes, systems, and controls. This is the story of that journey

48 Taking a Proactive Approach to Improper Payments By: Ray KalustyanEvery day, government agencies make billions of dollars in payments to a staggering number of vendors and citizens; unfortunately, some payments shouldn’t have been made. To detect, mitigate and prevent improper payments, government agencies increasingly turn to diagnostic assessments and data management technology.

Contents

SUMMER 2014 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 7

Departments

4 From the Editor

8 Letter to the Editor

8 AGA Calendar

10 Standards Watch

54 Inside the Huddle

56 Controller’s Corner

58 Ethics Q&A

60 Final Entry: Meet AGA’s New President

By: Danny Werfel, JD, MPP; and Jeffrey C. Steinhoff, CGFM, CPA, CFE, CGMA

Are You Combat Ready to

Against Improper Payments?


T he latest chapter in the federal government’s long fight against improper payments began

Nov. 20, 2009, when President Obama released Executive Order (EO) 13520 — Reducing Improper Payments and Eliminating Waste in Federal Programs. The President’s message was clear: “When the federal government makes payments… it must make every effort to confirm that the right recipient is receiving the right payment for the right reason at the right time.”

The good news is the reported improper payment rate dropped 35 percent from 5.42 percent for 2009 to 3.53 percent for 2013,1 representing reported and estimated improper payments avoided of $93 billion over a four-year period.2 Also, a reported $26 billion in previous improper payments were recovered during that time.3

The journey, though, is far from over given the sheer magnitude of

what remains — a reported $106 billion for 2013.4 The stakes have never been higher — as improper payments pose a significant threat to public confidence in government at a time of daunting fiscal challenges.5 However, more than 10 years after federal agencies began implementing the seminal Improper Payments Information Act of 2002 (IPIA),6 the government has never been better positioned for success.

Specifically, a decade of experi-ence in fighting the war on improper payments has yielded a solid founda-tion of knowledge concerning the root causes of errors in federal program payments and where existing correc-tive actions and practical strategies have proven most effective. We now stand at a crossroads, where future progress on reducing improper payments will depend on the federal government’s ability to align its current base of knowledge about the nature and extent of payment errors with emerging technology and analytic solutions driving busi-ness improvements in various indus-tries today. Of note, success will require assistance from a variety of non-federal stakeholders given, for example, the more than $600 billion7 in federal program grants flowing to state and local governments annually.

Building on the spring 2009 Journal of Government Financial Management (Journal) article, “A Practical Look at Winning the Fight Against Improper Payments,”8 this article explores questions government finance orga-nizations can use to assess combat readiness and provides context for how the next chapter in the fight against improper payments can yield lower error rates through transforma-tional change.

NO SILVER BULLET, BUT A PRACTICAL FRAMEWORK FOR PROGRESS

No silver bullet will eliminate improper payments, nor is it feasible to do so. EO 13520 and federal legis-lation9 established the objective of reducing improper payments and set an expectation that agencies will take aggressive steps to meet this goal.

The 2009 Journal article focused on eight practical strategies for reducing payment errors, including among others, commitment from senior leadership, partnerships with key stakeholders, risk management, lever-aging business intelligence, and an emphasis on prevention versus ‘pay and chase.’ Now, we provide a frame-work that leverages these strategies to help agencies bridge a decade’s worth of improper payments knowledge and experience with emerging and future business solutions.

Program and Finance in the Fox-Hole Together

High-performing agencies view the fight against improper payments as much more than simply compli-ance with the Improper Payments Elimination and Recovery Act of 2010 (IPERA),10 the Improper Payments Elimination and Recovery Improve-ment Act of 2012 (IPERIA)11 and Office of Management and Budget (OMB) Circular A-123, Management’s Respon-sibility for Internal Control, Appendix C, “Requirements for Effective Measure-ment and Remediation of Improper Payments.”12 As a normal course of business, they maintain effective and efficient internal control environ-ments, employing tools and processes to instill a culture of accountability.

To be successful over the long-term, the premise must be that program managers primarily own improper payments. Finance should be viewed as a service organization, a technical expert and a leader in helping program and agency leadership develop the proper balance between control and risk. All too often, however, these matters are seen as the domain of financial managers and auditors, whereas the vast majority of high-dollar-value programs with improper payments represent program issues, such as Medicare and Medicaid, Food Stamps and the Earned Income Tax Credit (EITC).

High-performing finance orga-nizations play vital accountability roles and provide leadership and support to engender transforma-tional change. They form partnerships as trusted business advisors with program managers. They partner with programmatic experts on the best approaches for leveraging tech-


nology and enable a ‘think outside the box’ environment when formulating preventive strategies.13

Combat Readiness: Can You Answer These Questions?

Now let’s focus on how the finance organization can be an agent for trans-formational change and the common denominators of success. We believe the finance organization should chal-lenge itself and its program partners to answer the following questions:

• Do you have a strong under-standing of the portfolio of pay-ment errors that exists within your programs?

A portfolio analysis begins with understanding the root causes of payment errors. But it does not end there. It also involves understanding where error reme-diation is within the agency’s span of control versus where it is driven by exigencies beyond the agency’s control. A strong portfolio analysis also involves ongoing assessment of where existing corrective actions have proven impact versus sources of error for which current practices have proven less effective, or even futile. A strong portfolio analysis will enable agencies to determine where a high return on invest-ment (ROI) (or what we have coined ‘ROI zones’) exists within the error portfolio. ROI zones include those areas within agency spans of control, and where cor-rective actions have historically proven fruitful or show promise for positive results.

• Have you established priority areas for remediation within your error portfolio?

Clearly, an ROI zone is a pri-mary candidate for top priority within an agency’s error reduc-tion efforts. However, there may be other factors to consider when establishing priorities for attack-ing improper payments. Specifi-cally, an agency may find public policy, cultural or even regulatory barriers exist in taking on certain

types of errors. For example, the Internal Revenue Service (IRS) has expressed concerns regard-ing the disproportionate impact audits have on poor taxpayers claiming the EITC, despite how effective such audits have proven in remediating payment errors in that program.14

Another factor an agency may consider in determining priori-ties for improper payments may be how egregious the payment error is and, therefore, the extent to which such error impacts the public’s confidence in govern-ment. Using the EITC program as an example, the IRS has deter-mined it will focus on remediat-ing fraudulent schemes involving EITC and problems arising out of bad faith professional tax prepar-ers. These efforts may not yield the highest percentage reduction in the overall error rate versus investments in other possible pri-ority areas. However, one could argue this priority has a higher return in terms of citizen trust in government versus, for example, an error reduction effort where the IRS focused on individuals who are ineligible, not due to fraud or malfeasance, but for the sole reason they lived with their dependent child for less than the six-month minimum required by statute.

• Are you using research-based methods when assessing the via-bility and effectiveness of new corrective actions?

Once you have a strong port-folio analysis of your payment errors and have determined which priorities to attack within that portfolio, you will want to ensure you are entering the battle with effective weaponry. To the extent resources allow, federal agencies should pilot test vari-

ous solutions, including the use of control and treatment groups to determine corrective action effectiveness.

Something as simple as im-proved wording of a technical assistance letter to a program ben-eficiary could materially reduce the risk the beneficiary makes an error when filling out a ben-efit application. In addition, agencies should have in place a robust market research program that continuously assesses how emerging technologies and data analytics are solving similar pay-ment integrity challenges in other public or private enterprises.

• Have you developed bench-marks and metrics to drive transformation and focus on the important issues?

Once priorities are identified and you have ensured a robust approach is in place to assess the potential effectiveness of new corrective actions, you must establish goals and stretch goals to align to the priorities you have established. An arbitrary goal, such as to cut your program error rate in half, will hold little value if it is not tied to a viable critical path for improvement within the agency’s span of control. A set of realistic and achievable goals, even if modest in comparison to the overall error amount, could help drive your agency toward significant business transforma-tion, improve the public’s con-fidence in federal stewardship, and yield positive results beyond improper payments.


For example, to the extent the IRS can establish a robust set of goals for eradicating EITC pre-parer fraud, such efforts could benefit fraud reduction in other areas of tax administration, while helping build confidence among taxpayers that IRS enforcement activities are effective. A note of critical importance — any met-rics should be embedded in the performance appraisals of both finance and program manag-ers. An unrealistic or impracti-cal goal will remain unrealistic and impractical whether it is in a manager’s performance appraisal or not. On the other hand, a good set of tough, yet achievable goals, aligned to the priority areas within an agency’s error portfo-lio, will incentivize leaders to be diligent in ensuring such goals are achieved.

• Do you have a good program in place to continuously assess your portfolio of errors?

A strong continuous monitor-ing program involves keeping abreast of emerging improper payment and fraud schemes, program design changes and pending legislative or regula-tory changes, all of which may impact improper payments. The benefits of continuous monitor-ing are enormous and, as shown in Figure 1, range from greater

efficiency to enhanced controls to earlier information to reduced complexity.15

Additional ConsiderationsWinning the war against improper payments is a complex endeavor where solutions will involve a variety of factors and strategies. The notional framework identified earlier can be further reinforced and strengthened by the following considerations:

• Do you foster a positive relation-ship with the inspector general (IG) and routinely leverage the IG’s extensive knowledge, skills, abilities and work related to fraud, waste and abuse?

There’s a widely-held myth auditor independence standards in Government Auditing Standards do not permit auditors to share their technical knowledge to help management. This is just not the case when you are talking about routine activities, which include providing general advice and assistance, such as responding and sharing insights on leading practices. The auditor cannot carry out a management function or make a management decision under the auditor independence conceptual framework, but it can help agency management under-stand payment fraud risks and leading practices.16

• Are you using payment recap-ture audits to identify and reclaim improper payments?

Where prevention is not a viable option, agencies should make effective and efficient use of payment recapture contrac-tors as directed by the President’s March 10, 2010 Memorandum, Finding and Capturing Improper Payments, and required by IPERA and IPERIA. While an important tool, recapture audits should never be your first line of defense.

• Do you partner with state and local governments and non-profits administering federal funds to provide tools and incen-tives for reducing improper payments?

Strong partnership with state and local finance and program or-ganizations administering feder-al programs, such as Food Stamps and Medicare, can be mutually beneficial in terms of identify-ing payment errors, determining root causes and initiating process improvements.17

• Are you effectively implement-ing the President’s June 18, 2010 Memorandum, ‘Do Not Pay List?’

Agencies should be proactive in ensuring those on the ‘Do Not Pay List’ do not receive federal payments.

• Are you meeting all relevant reporting requirements?

Agencies should prepare reli-able and timely annual improper payment reports required by IPERA/IPERIA and OMB Circu-lar A-123 that pass the test of the

Figure 1. What are the benefits of implementing continuous monitoring?

…WHICH RESULTS IN MORE FOCUSED TIME TO ADD VALUE TO THE MISSION OPERATIONS.

GREATER EFFICIENCY• Reduced work duplication• Increased use of automation• Enhanced ability to identify and correct errors• More time for value-adding analysis instead of

error correction• Reduced travel costs by automation of testing

and remote monitoring ENHANCED CONTROLS• Corrections of errors moved closer to the

“source”• Automated controls• Control gaps and deficiencies can be moni-

tored for circumvention and/or exploitation• ERP (Enterprise Resource Planning) system

and/or business process limitations and deficiencies can be addressed

• Automated fraud prevention and detection activities

EARLIER INFORMATION• Improved speed of information delivery

to agency management• Reduced surprises, problems do not build up• Better information for decision making• Ability to perform root cause analysis for

errors, policy violations, fraud, waste and abuse

REDUCED COMPLEXITY• Greater visibility into how processes are

functioning• Appropriate setting and consistency of

thresholds• Legal and regulatory compliance can be

monitored• Ability to standardize process measures

across locations• Demonstrate good governance — use

leading-edge approach

CONTINUOUS MONITORING OFFERS A BROAD RANGE OF POTENTIAL BENEFITS…


required IG audit and the finan-cial statement audit. But perhaps more importantly, you should be prepared explain the reasons and nature of improper pay-ments made by your agency, so the public understands the con-text of improper payments. Why something happens is important. At one level, improper payments are never acceptable; but on another level, for many programs in certain situations, they are unavoidable.

For example, a Social Security payment made to a beneficiary around the time of their death is very difficult, if not impossible to avoid. And it may take some time after their death to know the person is deceased and stop pay-ments. In a case such as this, the agency reporting the improper payments should give the reader an understanding of the circum-stances by drilling down to a level of detail that categorizes reasons for improper payments and why the law and/or process cannot rea-sonably prevent the payment in the first place. The agency should also report its actions to recover any such improper payments. In this way, the public will be given greater transparency and impor-tant context. At the other extreme, continuing payments to deceased individuals for many months, or even years, thereafter, is totally unacceptable by any measure, and as well, should be highlighted in reporting to the public. In other words, put a face on the numbers and improve understanding and usefulness. The public needs to know what improper payments are and what they are not.

FINAL THOUGHTS The past four years have given us

reason to celebrate. There is light at the end of the long improper pay-ments’ tunnel. The reported rate of improper payments dropped by 35 percent, preventing an estimated $93 billion of additional improper payments, with another $26 billion reported as being recovered. But, a lot remains to be done. No one should ever be satisfied with anything close to $106 billion annually in improper payments.

We must ‘up’ our game appre-ciably to move to the next level by prioritizing on sources of error: (1) within our span of control; (2) realistically able to be remediated through reform and innovation; and (3) with maximum impact on public confidence in government. In doing so, our improper payment activi-ties should reinforce actions with broader impact in helping an agency meet its strategic plans and priori-ties. For example, to the extent the IRS can deploy a new set of strategies and tools to make significant inroads in remediating EITC preparer fraud, such efforts should reinforce other priorities within the IRS to attack other forms of tax fraud, including identify theft.

Taking stock of where you are now and being able to effectively answer the questions we pose provide a valuable improvement framework. Proven risk management practices, such as using the power of contin-uous monitoring through high-powered analytic tools, can further reduce improper payments. And continuing to enrich the level and quality of reporting will provide the public a larger window to view and understand the context of improper payments.

While the President and Congress have lit a fire, success will depend on the agencies — from the agency head to program leadership to finance, all with IG support — being fully engaged in transformation that will break the vicious cycle of improper payments. Tackling improper pay-ments should never be viewed as a process or compliance exercise, but as an opportunity to make a positive difference. Given the benefits to be gained in public trust as well as the magnitude and repercussions of con-tinued improper payments, govern-

ment officials in agencies, large and small, must join hands to win the war against improper payments and demonstrate financial stewardship and accountability.

Endnotes1. www.paymentaccuracy.gov: Actual

reported improper payment rates — 5.42 percent for 2009 (base year); 5.29 percent for 2010; 4.69 percent for 2011; 4.35 percent for 2012; and 3.53 percent for 2013

2. www.paymentaccuracy.gov: Actual reported improper payments avoided — $3 billion for 2010; $18 billion for 2011; and $26 billion for 2012. The authors extrapolated the decrease in the 2013 reported actual improper payment rate (3.53 percent) against the 2012 rate (4.35 percent and $26 billion) to develop an estimate for improper payments avoided of $46 billion for 2013.

3. www.paymentaccuracy.gov: Actual reported improper payment recoveries — $700 million for 2010; $1.2 billion for 2011; $2.5 billion for 2012; and $22 billion for 2013

4. www.paymentaccuracy.gov: Actual reported improper payment amounts — $105 billion for 2009; $121 billion for 2010; $115 billion for 2011; $108 billion for 2012; and $106 billion for 2013. Also see, Congressional Research Service, “Improper Payments and Recovery Audits: Legis-lation, Implementation, and Analysis,” October 18, 2013

5. “Establishing Long-Term Fiscal Sustainability: Daunting Choices and Shared Sacrifice,” by William R. Phillips, MBA, CGFM, and Jeffrey C. Steinhoff, CGFM, CPA, CFE, CGMA, AGA Journal of Government Financial Management, Fall 2012; and “Attacking the Fiscal Crisis: What the States Have Taught Us About the Way Forward,” by Nancy A. Valley, CGFM, CPA, and Jeffrey C. Steinhoff, CGFM, CPA, CFE, AGA Journal of Government Financial Management, Summer 2011

6. Public Law 107-300, November 26, 2002

7. U.S. Government Accountability Office, “Grants to State and Local Govern-ments: An Overview of Federal Funding Levels and Selected Challenges, “ GAO-12-1016, September 2012

8. “A Practical Look at Winning the Fight Against Improper Payments,” by Jeffrey C. Steinhoff, CGFM, CPA, CFE, AGA Journal of Government Financial Management, Spring 2011

9. Improper Payments Elimination and Recovery Act of 2010 (IPERA), Public Law 111-204, July 22, 2010; and the Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA), Public Law 112-248, January 10, 2013

10. Public Law 111-204, July 22, 201011. Public Law 112-248, January 10, 201312. OMB Circular A-123, Appendix C,

Requirements for Effective Measurement and Remediation of Improper Payments, Parts I and II, dated April 4, 2011, and Part III, dated March 22, 2010

13. The KPMG Government Institute, “A Practical Look at How Government


Agencies Can Reduce Improper Payments,” March 2011

14. Treasury Inspector General for Tax Administration, “The Internal Revenue Service Is Not in Compliance With Executive Order 13250 to Reduce Improper Payments,” August 28, 2013, Reference Number: 2013-40-084, including IRS comments on its strategy and the impact of EITC enforcement in Appendix V (http://www.treasury.gov/tigta/audit reports/2013reports/201340084fr.html)

15. “Smart Use of Data Mining Is Good Government and Good Business,” by Jeffrey C. Steinhoff, CGFM, CPA, CFE, and Terry L. Carnahan, CGFM, CPA, AGA Journal of Government Financial Management, Spring 2012

16. Government Auditing Standards, 2011 Revision, December 2011

17. In addition to IPERA and IPERIA, the Congress is providing specific focus on improper payments in appropria-tions legislation, including addressing the state government relationship. For example, the Consolidated Appropria-tions Act of 2014 (Public Law 113-76), enacted on January 17, 2014, Division H, Title 1 covering Department of Labor appropriations, requires that not less than $60 million is to be granted to states from the Employment Security Administration Account in the Unemployment Trust Fund to “conduct in-person reemployment and eligibility assessments and unemployment insurance improper payment reviews.”

Danny Werfel, JD, MPP, is the former Acting Commissioner at the Internal Revenue Service (IRS) and the former Controller of the U.S. Office of Management and

Budget (OMB). While Controller, Werfel led all aspects of government-wide financial management policy and reform and further assumed the broader responsibilities of OMB’s Deputy Director for Management, helped lead the implementation of the Recovery Act, and served as the Administra-tion’s point-person on government-wide efforts to prepare for and implement the budget sequester of Fiscal Year 2013. Werfel is a fellow at the National Academy of Public Administration and formerly was a member of the IRS Oversight Board, the Government Accountability and Transparency Board, and the Federal Accounting Standards Advisory Board. Following his co-authorship of this article, Werfel joined The Boston Consulting Group as a Director in its Public Sector practice, where he helps government clients overcome challenges to achieve lasting improvements in organizational and operational effectiveness and efficiency.

Jeffrey C. Steinhoff, CGFM, CPA, CFE, CGMA, an AGA Past National President and a member of AGA’s Washington, DC and Northern Virginia chapters,

is the executive director of the KPMG Government Institute and Managing Director in KPMG’s Federal Advisory Services Practice. During a 40-year federal career, where he was assistant comptroller general of the United States for Accounting and Information management and GAO’s managing director for Financial Manage-ment and Assurance, he served on the staff of the Senate Government Affairs Committee and was a principal architect of the CFO Act and the range of companion financial management reform legislation. He helped to found AGA’s CGFM Program, and served as the first chair of the Profes-sional Certification Board. In 2010, he was elected a fellow of the prestigious National Academy of Public Administration.


Copyright 2014. Association of Government Accountants. Reprinted with permission. All rights reserved.

14_04 AGAJournal_Sum14_042514_LR.PDF

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