Internal audit says EPA isn’t accurately tracking how SRF money is spent

Guest:	Devon Padula
Title:	Director at the EPA Office of the Inspector General
Summary:	According to the OIG, EPA regions underreported improper and unknown payments in the SRF program by tens of millions of dollars, driven by documentation gaps and incomplete reporting. The findings point to weaknesses in the agency’s largest funding stream and the controls meant to protect it.

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Interview transcript

Terry Gerton At the EPA, you all have taken a look at the potential for improper payments in the EPA’s State Revolving Fund program. Before we get into the details of what you found, help us understand what this program is and how it’s supposed to work.

Devon Padula Sure, so people might not realize it, but the state revolving funds are an important part of our daily life. The State Revolving Funds fund water infrastructure projects, which include wastewater treatment plants and drinking water treatment plants. And these facilities are all over the United States. So the EPA distributes money to the states, who thereby distributes money to cities to fund these types of projects.

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Terry Gerton Of projects throughout the United States. So then, were there some red flags in this program that kind of raised its attention level? What were you looking to find out?

Devon Padula When we were looking at doing our initial audit planning, we were looking at fiscal year ’22. SRFs are a significant portion of the EPA’s budget and fiscal year 2022 is $10 billion. And when we looked at overpayments for that same year, they were only $300,000. So the difference in the low rate of improper payments, we decided to take a further look.

Terry Gerton And what’s the headline on the findings then?

Devon Padula Our headline for the finding is EPA did not identify and resolve improper payments.

Terry Gerton Was it a big portion of the transactions?

Devon Padula We only looked at 20 transactions. So we looked at 13 transactions for fiscal year 2022 and found a majority of those had errors. And then we continued on to fiscal year 2023. We only looked at seven transactions and those continue to have errors. So in total, we looked at 20 transaction in that 19 had issues with improper payments.

Terry Gerton So that’s a pretty high percentage. Would you extrapolate that to say it’s gonna be pretty standard across all the payments?

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Devon Padula We wouldn’t extrapolate across the total population, but the amount of errors are of great concern for improper payment rates through the PEO requirement.

Terry Gerton As you dug into those particular payments, what were the categories of mistakes that were being made that led to the improper payments?

Devon Padula Most of them were related to unsigned or unapproved construction invoices and the other large one was professional services didn’t have enough detail to warrant payment.

Terry Gerton Do you think that they reflect a systemic breakdown or are they tied to just a handful of bad practices?

Devon Padula I would say it’s part of a handful of bad practices, not really a systemic problem.

Terry Gerton When you look at those, does it tell you that there’s a record keeping problem? It’s attention to detail? Why are they happening? I guess is what I’m trying to get at.

Devon Padula Yeah, I would say it’s a lack of attention to detail. This is, when someone’s looking at a construction invoice, it’s no different than when you would go to a restaurant. Like, you would get a bill from a restaurant and it would be itemized. And then when you give a restaurant your credit card, you are approving the payment. So, in looking at the construction invoices, you would expect the same thing. You have details that are provided on a construction invoice. You would have the contractor signing and requesting payment but you would also have an independent person on site who would say, yes, you know the the construction occurred, and then you would have the city approving payment. Same like professional fees, you won’t go in and just pay a bill for $100,000 for like an engineer, an architect or a lawyer. You would expect some sort of detail especially like time sheets for the work that was performed.

Terry Gerton And in these cases, they didn’t have the detail and they were signing off on the payment anyway?

Devon Padula Yeah. That was what was reported in our report.

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Terry Gerton I’m speaking with Devon Padula, she’s director at the EPA’s Office of the Inspector General. So Ms. Padula let’s kind of back up for a minute in terms of meeting statutory obligations because the report mentions the Payment Integrity Information Act and that it requires agencies to treat payments as improper when documentation is missing or insufficient. Was EPA meeting their reporting obligation here?

Devon Padula EPA relies on its testing from SRF improper payment testing to the risk of fraud in the State Revolving Fund, and as I mentioned before, the SRFs are the EPA’s largest program but the good news is the agency is already making corrective actions in accordance with recent executive orders and our recommendations that we make in the report are also in line with executive orders to Re-evaluate the risk of improper payments in the SRF and do additional testing.

Terry Gerton Walk us through those recommendations then and where EPA is already taking action.

Devon Padula So in the report, we made four recommendations. Three of them were continuing to work with the agency for resolution. The fourth one was a recommendation I just mentioned that the EPA should reevaluate its risk assessment done as part of the Improper Payment Act. The final recommendation is a recommendation that pertains to evaluating the risk assessment as a result of our test work and SRFs going forward. And EPA, in line with the executive orders, is already making improvements to that.

Terry Gerton Is EPA putting more training in place to make sure that the folks who process these payments are trained in how to look through the documentation and make sure it’s all correct?

Devon Padula We’re still working through the recommendation resolution phase with the agency as part of our general reporting process.

Terry Gerton And how will you be following up on that?

Devon Padula With any report, we have consistent communication with the agency and have meetings to discuss the outstanding recommendations to determine a resolution.

Terry Gerton As you think about all of the findings and all of the recommendations in this report, if the EPA could only pick one, what would you think would be the most important place for them to start to address this issue and make sure that they don’t repeat the errors in the future?

Devon Padula I mean, kind of, really simply put, just make sure that invoices are complete and accurate. It is such an integral part of making sure, you know, internal controls are operating effectively and for the EPA to truly evaluate the health of the SRFs.

Terry Gerton It does seem easier to say than to do, though.

Devon Padula It is a lot of work, yes.

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