OMB details new, expanded approach to fighting improper payments

A new memo and guidance from OMB makes four significant changes to Appendix C of Circular A-123.

After four years of consistent reductions in the governmentwide improper payments rate, the Office of Management and Budget is pushing agencies to go further to root out these problems. OMB released an update of Appendix C to Circular No. A- 123 on Oct. 20 with significant changes to the policy that oversees how agencies track, report and oversee improper payments.

“The goal of this overhauled version of Appendix C to Circular No. A-123 1 is to transform the improper payment compliance framework to create a more unified, comprehensive, and less burdensome set of requirements,” wrote OMB Director Shaun Donovan in the memo to agency executives.

Since fiscal 2009, the governmentwide improper payment rate dropped from 5.42 percent to 3.53 percent in 2013 for a total of about $106 billion. OMB has not yet released the new rate for 2014.

There is some disagreement among experts, however, on whether OMB’s calculations are accurate.

The Government Accountability Office testified in July at a House Oversight and Government Reform Committee hearing that some agencies don’t develop estimates for programs that could be susceptible to improper payments. GAO said the Defense Department estimates may not be reliable.

The Pentagon estimates that less than 1 percent of its payments are improper. The GAO found last year that the Pentagon’s estimates for 2011 “were neither reliable nor statistically valid because of long-standing and pervasive financial management weaknesses.”

Over the last five years, Congress and the White House have tried to improve both the tracking and oversight of improper payments. Lawmakers passed and the President signed two laws, and the administration issued three directives focusing on reducing improper payments.

Donovan said all that activity required OMB to reassess and update Appendix C.

“The guidance is necessary to update requirements in the Improper Payments Elimination and Recovery Improvement Act. More importantly, however, it represents a lot of lessons we’ve learned over the last decade measuring, preventing and recovering improper payments,” said Robert Shea, a principal with Grant Thornton and a former OMB official.

One of the biggest changes in the new policy are a new set of categories for reporting improper payments. OMB said each program shall distribute its total improper payment estimate, which is based on dollars, as opposed to number of occurrences, across 25 cells in the matrix-with the understanding, of course, that not every cell will apply to every program.

The cells are distributed by overpayments and underpayments across the top of the chart, and along the side the categories include areas such as inability to authenticate eligibility or administrative or process errors.

“These new categories will: (1) prove more pertinent to the vast array of programs across the federal landscape; (2) help agencies better present the different categories of improper payments in their programs and the percentage of the total improper payment estimate that each category represents; and (3) provide more granularity on improper payment estimates-thus leading to more effective corrective actions at the program level and more focused strategies for reducing improper payments at the government-wide level,” OMB wrote in the new Appendix C.

OMB also said more specifics should lead to more effective corrective actions at the program level and more focused strategies for reducing improper payments at the governmentwide level.

Another major change in Appendix C is a new internal control framework to ensure that payments are made in the right amount, to the right entity and for the right purpose.

The Improper Payments Elimination and Recovery Improvement Act (IPERIA) required agencies to apply internal controls to programs where improper payments could occur.

In the guidance, OMB says agencies shall summarize the status of their internal controls in an effort to link how these efforts will reduce improper payments.

OMB wants agencies rate each program on a scale of 1 to 4 — with 1 on the low end — across five categories: control environment, risk assessment, control activities, information and communication and monitoring.

“OMB will utilize the agency internal control summaries to monitor progress and ensure that planned actions result in the outcome of reducing improper payment rates,” administration officials wrote in the appendix.

Two other major changes include OMB’s attempt to consolidate and streamline reporting requirements for agencies and inspectors general; and guidance to implement IPERIA and strengthen agency estimates as well as expanding the definition of improper payments to include payments to federal employees.

Donovan said Appendix C is effective immediately.


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