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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

May 2013: 

DOD Financial Management: 

Significant Improvements Needed in Efforts to Address Improper Payment 
Requirements: 

GAO-13-227: 

GAO Highlights: 

Highlights of GAO-13-227, a report to congressional requesters. 

Why GAO Did This Study: 

DOD reported $1.1 billion in improper payments for fiscal year 2011, 
which marked the eighth year of implementation of IPIA, as well as the 
first year of implementation of IPERA. IPIA required executive branch 
agencies to annually identify programs and activities susceptible to 
significant improper payments, estimate the amount of improper 
payments for such programs and activities, and report these estimates 
along with actions taken to reduce them. IPERA amended IPIA and 
expanded requirements for recovering overpayments across a broad range 
of federal programs. 

GAO was asked to review the progress DOD has made to identify, 
estimate, and reduce improper payments. GAO’s objective was to review 
the extent to which DOD has implemented key provisions of IPIA, IPERA, 
and OMB guidance. GAO reviewed improper payment requirements; analyzed 
agency financial reports, internal guidance and plans, and sampling 
methodologies; and interviewed cognizant officials. The scope for this 
engagement was DOD’s reported improper payment information for fiscal 
year 2011 and DOD’s plans and actions to estimate commercial pay 
improper payments for fiscal year 2012. 

What GAO Found: 

The Department of Defense (DOD) did not adequately implement key 
provisions of the Improper Payments Information Act of 2002 (IPIA) and 
the Improper Payments Elimination and Recovery Act of 2010 (IPERA) and 
Office of Management and Budget (OMB) requirements for fiscal year 
2011. Most important, GAO found that DOD’s improper payment estimates 
reported in its fiscal year 2011 Agency Financial Report were neither 
reliable nor statistically valid because of long-standing and 
pervasive financial management weaknesses and significant deficiencies 
in the department’s procedures to estimate improper payments. For 
example, DOD did not: 

* have key quality assurance procedures in place, such as 
reconciliations, to validate the completeness and accuracy of the 
populations used to estimate improper payments; 

* develop appropriate sampling methodologies for estimating improper 
payments; 

* produce a statistical estimate for its largest program, Defense 
Finance and Accounting Service (DFAS) commercial pay; and; 

* maintain key documentation supporting its reported improper payment 
estimates. 

Also, GAO found significant deficiencies in DOD’s policies and 
procedures to address other key improper payment requirements for 
fiscal year 2011. Specifically, DOD did not: 

* perform a required risk assessment to identify those programs 
susceptible to significant improper payments, 

* have procedures to identify root causes of improper payments and 
develop related corrective actions, 

* conduct recovery audits for any of its programs or determine that 
these audits would not be cost effective, and, 

* have procedures to ensure that its annual improper payment and 
recovery audit reporting is complete, accurate, and in compliance with 
IPERA and OMB reporting requirements. 

DOD has taken some actions since fiscal year 2011, such as reporting a 
statistical estimate for Defense Finance and Accounting Service 
commercial pay and issuing revised Financial Management Regulation 
chapters on improper payments and recovery audits. However, until the 
department takes action to correct the deficiencies GAO found related 
to identifying, estimating, reducing, recovering, and reporting 
improper payments and thereby fulfills legislative requirements and 
implements related guidance, it remains at risk of continuing to make 
improper payments and wasting taxpayer funds. 

What GAO Recommends: 

GAO is making 10 recommendations to improve DOD’s processes to 
identify, estimate, reduce, recover, and report on improper payments. 
DOD concurred with 9 and partially concurred with 1 of the 
recommendations and described its plans to address them. 

View [hyperlink, http://www.gao.gov/products/GAO-13-227]. For more 
information, contact Asif A. Khan at (202) 512-9869 or khana@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Significant Deficiencies Existed in DOD's Implementation of Key 
Provisions of IPIA, IPERA, and OMB Guidance: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Department of Defense: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: GAO's 2009 Report Recommendations to DOD: 

Figure 2: DOD's Fiscal Year 2011 Reported Outlays and Improper 
Payments: 

Abbreviations: 

AFR: Agency Financial Report: 

CFOC: United States Chief Financial Officers Council: 

DFAS: Defense Finance and Accounting Service: 

DOD: Department of Defense: 

DTS: Defense Travel System: 

FMR: Financial Management Regulation: 

IG: Inspector General: 

IPERA: Improper Payments Elimination and Recovery Act of 2010: 

IPERIA: Improper Payments Elimination and Recovery Improvement Act of 
2012: 

IPIA: Improper Payments Information Act of 2002: 

OMB: Office of Management and Budget: 

OUSD(C): Office of the Under Secretary of Defense (Comptroller): 

PMA: President's Management Agenda: 

RAA: Recovery Auditing Act: 

SBR: Statement of Budgetary Resources: 

TMA: TRICARE Management Activity: 

USACE: United States Army Corps of Engineers: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

May 13, 2013: 

The Honorable Thomas R. Carper: 
Chairman: 
The Honorable Tom Coburn: 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Claire McCaskill: 
Chairman: 
Subcommittee on Financial and Contracting Oversight: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Department of Defense (DOD) reported over $1.1 billion in improper 
payments for fiscal year 2011.[Footnote 1] An improper payment is any 
payment that should not have been made or that was made in an 
incorrect amount (including overpayments and underpayments) under 
statutory, contractual, administrative, or other legally applicable 
requirements.[Footnote 2] With fiscal year 2011 reported gross outlays 
of approximately $1,017 billion, DOD's efforts to identify, report, 
and recover improper payments are particularly significant to 
government-wide improper payment reduction initiatives. 

In July 2009,[Footnote 3] we reported that significant improvements 
were needed in DOD's efforts to address improper payment requirements 
because the department had not established the processes and detailed 
guidance needed to effectively implement the requirements of the 
Improper Payments Information Act of 2002 (IPIA).[Footnote 4] Since 
that report, IPIA was amended by the Improper Payments Elimination and 
Recovery Act of 2010 (IPERA).[Footnote 5] IPERA, enacted on July 22, 
2010, amended IPIA and, among other things, expanded requirements for 
recovering overpayments across a broad range of federal programs. 

You asked us to review the progress DOD has made to identify and 
estimate improper payments and to develop appropriate and prompt 
corrective action to reduce improper payments. Our objective was to 
review the extent to which DOD has implemented key provisions of IPIA, 
IPERA, and Office of Management and Budget (OMB) guidance. The scope 
for our engagement was DOD's improper payment information presented in 
the department's fiscal year 2011 Agency Financial Report (AFR), 
[Footnote 6] because this was the most current annual report available 
at the time of our review. We assessed the department's fiscal year 
2012 plans and actions to statistically estimate improper payments for 
commercial payments processed by the Defense Finance and Accounting 
Service (DFAS),[Footnote 7] DOD's largest program, because DOD's 
reported improper payment amounts for this program for fiscal year 
2011 were limited to known improper payments, rather than a 
statistical estimate. 

To meet this audit objective, we reviewed IPIA and IPERA requirements, 
OMB guidance, and relevant best practices and compared them with DOD's 
fiscal year 2011 improper payments reporting in its AFR, internal 
guidance in effect during fiscal year 2011 and subsequent revisions, 
sampling methodologies, risk assessments, and the department's 
corrective action and payment recapture plans.[Footnote 8] In this 
context, we met with key DOD officials involved with the department's 
improper payments efforts, including officials from the Office of the 
Under Secretary of Defense (Comptroller) (OUSD(C)), DFAS, the TRICARE 
Management Activity (TMA),[Footnote 9] and the United States Army 
Corps of Engineers (USACE). 

We conducted site visits at two DFAS processing center locations 
(Columbus, Ohio and Indianapolis, Indiana) to determine DFAS's 
processes for implementing improper payment requirements because DFAS 
compiles the reported improper payment information for five of DOD's 
eight programs.[Footnote 10] We selected the DFAS-Columbus site 
because this facility processes the largest portion of DOD's 
commercial payments and hosts the systems used to track commercial pay 
improper payments. We selected DFAS-Indianapolis because this facility 
is responsible for estimating improper payments and compiling and 
reporting the results to the OUSD(C) for five of DOD's programs. 

To assess the reliability of data reported in DOD's fiscal year 2011 
AFR related to improper payments, we reviewed DOD's supporting 
documentation and interviewed knowledgeable agency officials about the 
data. During the course of this assessment, we determined that DOD did 
not collect and maintain the supporting documentation necessary to 
substantiate the improper payment estimates reported in its fiscal 
year 2011 AFR. In addition, the department did not perform key quality 
assurance procedures, including reconciliations on all of the 
populations for its programs to validate that the populations were 
complete, valid, and accurate before selecting the statistical samples 
that were used to estimate improper payments. Therefore, we determined 
that the data were not reliable. These problems are discussed further 
in our report. 

We conducted this performance audit from October 2011 to May 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. A more 
detailed description of our scope and methodology is provided in 
appendix I. 

Background: 

One of the five government-wide initiatives in the 2001 President's 
Management Agenda (PMA) was improved financial management, which 
targeted improper payments as an area with opportunities for 
improvement. This initiative called for the administration to 
establish a baseline on the extent of improper payments. In July 2001, 
as part of its efforts to advance the PMA initiative, OMB revised 
Circular No. A-11 by requiring 16 federal agencies to submit data on 
improper payments, including estimated improper payment rates. 
[Footnote 11] Section 831 of the National Defense Authorization Act 
for Fiscal Year 2002 included the provisions commonly referred to as 
the Recovery Auditing Act (RAA).[Footnote 12] The RAA required, among 
other things, that all executive branch agencies entering into 
contracts with a total value exceeding $500 million in a fiscal year 
have cost-effective programs for identifying errors in paying 
contractors and for recovering amounts erroneously paid. 

Fiscal year 2011 marked the eighth year of the implementation of IPIA 
as well as the first year of implementation of IPERA. IPIA required 
executive agencies to (1) identify programs and activities susceptible 
to improper payments (typically referred to as risk assessments), (2) 
estimate the amount of improper payments in susceptible programs and 
activities, and (3) report these improper payment estimates and 
actions taken to reduce them. 

Among other things, IPERA amended IPIA by changing the definition of 
programs susceptible to significant improper payments and adding 
minimum risk factors for agencies to consider in identifying such 
programs. In addition, IPERA generally repealed the RAA and included a 
new, broader requirement for agencies to conduct recovery audits, 
where cost effective, for each program and activity with at least $1 
million in annual program outlays. This IPERA provision significantly 
lowered the threshold for required recovery audits and expanded the 
scope for recovery audits to all programs and activities, including 
grant and loan programs. IPERA also added new accountability 
provisions. For example, in its improper payments reporting, an agency 
is to describe how it ensures that agency managers, programs, and 
states and localities (where applicable) are held accountable for 
meeting applicable improper payment reduction targets as well as 
establishing and maintaining sufficient internal controls to prevent 
improper payments and promptly detect and recover those improper 
payments that are made. 

Legislative Requirements Related to Identifying, Estimating, Reducing, 
Recovering, and Reporting Improper Payments: 

The following sections describe key provisions of IPIA, the RAA, and 
IPERA. 

Performing Risk Assessments: 

Under IPIA, executive agencies were required to annually review all 
programs and activities that they administer and identify any that may 
be susceptible to significant improper payments. OMB, in its 2006 
guidance,[Footnote 13] interpreted this IPIA requirement for annual 
risk assessments to apply to only those programs and activities where 
the risk level was unknown. For those programs deemed not risk 
susceptible, risk assessments were required every 3 years. In 
addition, the guidance defined "significant improper payments"--the 
threshold at which agencies must perform an estimate for a program--as 
annual improper payments in the program exceeding both 2.5 percent of 
program payments and $10 million. 

IPERA changed several of the requirements associated with risk 
assessments.[Footnote 14] Specifically, IPERA did the following: 

* Amended IPIA to require agency heads to review agency programs and 
activities during the year following IPERA's enactment and at least 
once every 3 fiscal years thereafter to identify those that may be 
susceptible to significant improper payments. 

* Defined "significant" in the law for the purpose of determining a 
program's susceptibility to significant improper payments. IPERA 
defined "significant improper payments" as gross annual improper 
payments (i.e., the total amount of overpayments plus underpayments) 
in the program that may have exceeded either (1) both 2.5 percent of 
program outlays and $10 million, or (2) $100 million (regardless of 
the improper payment percentage of total program outlays).[Footnote 15] 

* Included the following minimum risk factors likely to contribute to 
a susceptibility to significant improper payments that agencies are to 
consider in performing risk assessments: (1) whether a program or 
activity is new to the agency; (2) the complexity of the program; (3) 
the volume of payments made through the program or activity; (4) 
whether payment decisions are made outside of the agency, such as by a 
state or local government; (5) recent major changes in program 
funding, authorities, practices, or procedures; (6) the level, 
experience, and quality of training for personnel responsible for 
making eligibility determinations or certifying that payments are 
accurate; and (7) significant deficiencies in the audit report of the 
agency or other relevant management findings that might hinder 
accurate payment certification. 

Estimating Improper Payments: 

Under IPIA, for each program or activity identified as susceptible to 
significant improper payments, the head of each agency was to (1) 
estimate the annual amount of improper payments and (2) submit those 
estimates to Congress before March 31 of the following applicable 
year, with all agencies using the same method of reporting, as 
determined by the Director of OMB. 

IPERA revised the IPIA requirements for estimating improper payments 
by directing agency heads to produce statistically valid estimates of 
their agencies' improper payments, or an estimate that is otherwise 
appropriate using a methodology approved by the Director of OMB, and 
to include the annual improper payment estimates in their performance 
and accountability reports or in the agency financial reports. 
[Footnote 16] 

Reducing Improper Payments: 

Under IPIA, annual reporting requirements for reducing improper 
payments included a description of the steps the agency has taken to 
ensure that agency managers (including the agency head) are held 
accountable for reducing improper payments. 

IPERA amended IPIA's requirements for reporting on corrective actions. 
Specifically, it required that agencies' annual reporting include the 
estimated completion dates of planned corrective actions. Also, it 
required agencies to report on steps taken to ensure that states and 
localities, where applicable, are held accountable for reducing 
improper payments in the federal programs they implement. OMB's 
implementing guidance for IPERA also states that for those agency 
programs not implemented directly by federal or state agencies or 
governments, agencies may also consider establishing these 
accountability mechanisms. OMB encouraged agencies to leverage new 
technologies and techniques to assist them in preventing and reducing 
improper payments. Agencies implementing long-term, ongoing corrective 
actions should annually review their existing corrective actions to 
determine if any existing action can be intensified or expanded, 
resulting in a high-impact, high return-on-investment in terms of 
reduced or prevented improper payments. 

Recovering Improper Payments: 

Recovery audits were not required under IPIA, but were required under 
the RAA. Specifically, agencies were required to carry out a cost-
effective program of recovery audits to identify and recover improper 
payments to contractors, if they entered into contracts with a total 
value that exceeded $500 million in a fiscal year. 

IPERA generally repealed the RAA, expanded the scope for recovery 
audits beyond commercial payments to include all programs and 
activities, and lowered the threshold of annual outlays requiring 
agencies to conduct recovery audits--from $500 million in annual 
agency contracting to $1 million in annual program expenditures. 
Specifically, under the recovery auditing provisions of IPERA, 
agencies are required to identify and recover improper payments by 
conducting recovery audits, also known as payment recapture audits, 
for agency programs that expend $1 million or more annually, if such 
audits would be cost effective. In its November 2010 guidance, 
[Footnote 17] OMB required agencies to submit payment recapture audit 
plans by January 14, 2011, that described the agencies' current 
payment recapture efforts under authorities that pre-dated IPERA and 
their planned payment recapture efforts based on the new authorities 
provided by IPERA. 

Reporting Annually on Improper Payments and Recoveries: 

IPIA required, with respect to any program or activity of an agency 
with estimated improper payments that exceeded $10 million, the head 
of the agency to provide along with the estimate a report on what 
actions the agency was taking to reduce the improper payments, 
including a: 

* discussion of the causes of the improper payments identified, 
actions taken to correct those causes, and results of the actions 
taken to address those causes; 

* statement of whether the agency had the information systems and 
other infrastructure it needed in order to reduce improper payments to 
minimal cost-effective levels; 

* description of the resources the agency had requested in its budget 
submission to obtain the necessary information systems and 
infrastructure if the agency did not have such systems and 
infrastructure; and: 

* description of the steps the agency had taken to ensure that agency 
managers (including the agency head) were held accountable for 
reducing improper payments. 

For RAA, OMB guidance required that agencies include in their annual 
reporting, among other things, a general description and evaluation of 
the steps taken to carry out a recovery auditing program, the total 
amount of contracts subject to review, the actual amount of contracts 
reviewed, the amounts identified for recovery, and the amounts 
actually recovered in a current year. Further, OMB Circular No. A-136 
required agencies to report cumulative amounts identified for recovery 
and amounts actually recovered as a part of their current year 
reporting. 

IPERA requires the reporting of estimates without regard to 
thresholds. IPERA and OMB guidance require agencies to report, as part 
of their agency financial reports, certain information regarding the 
improper payment estimation process and efforts to recover improper 
payments. These requirements include, among other things, 

* gross estimates of the annual amount of improper payments (i.e., 
overpayments plus underpayments) made in the program and a description 
of the methodology used to derive those estimates; 

* discussion of the root causes of the improper payments identified, 
actions planned or taken to correct those causes, the planned or 
actual completion date of those actions, and the results of the 
actions taken; and: 

* discussion of the amount of actual improper payments that the agency 
expects to recover and how these payments will be recovered. 

According to OMB's recovery auditing guidance under IPERA,[Footnote 
18] agencies must continue to report information on improper contract 
payments reviewed, identified, and recaptured, according to 
instructions contained in OMB Circulars No. A-123 and A-136. In 
addition, agencies shall report information on other types of 
recaptured improper contract payments. For instance, where applicable, 
agencies shall also identify and report information on improper 
contract payments recovered, if not already included in the annual 
reporting, including: 

* improper contract payments voluntarily returned to agencies by 
contractors prior to agency or payment recapture auditor 
identification; 

* improper contract payments identified by the vendors, contractors, 
or agency staff, and used to provide offsets to future payments rather 
than returned to agencies; 

* improper contract payments identified and returned through agency 
Office of Inspector General efforts such as audits, reviews, or tips 
from the public; 

* improper contract payments identified and recovered through 
management postpayment reviews other than payment recapture audits; 

* improper contract payments identified and returned or paid through 
contract closeout; and: 

* payment recapture targets and performance in meeting those targets 
on an annual and quarterly basis. 

DOD's Improper Payments and Recovery Auditing Policies: 

DOD's improper payment and recovery auditing policies are in two 
chapters of its Financial Management Regulation (FMR). DOD uses its 
FMR to govern financial management within the department by 
establishing the requirements, principles, standards, systems, 
procedures, and practices necessary to comply with financial 
management statutory and regulatory requirements applicable to the 
department. DOD's FMR chapter on improper payments that was in effect 
during fiscal year 2011 was issued in 2008, before IPERA was enacted. 
[Footnote 19] In October 2011, the department issued a revised chapter 
on improper payments to implement the requirements of IPERA and 
associated OMB guidance.[Footnote 20] According to the FMR chapter on 
improper payments in effect during fiscal year 2011, DOD components, 
which include the military services and defense agencies, are to 
perform risk assessments, statistically estimate improper payments, 
identify root causes and develop corrective actions, and report 
improper payment information annually to the OUSD(C). The OUSD(C) is 
responsible for consolidating component information and preparing 
department-wide improper payment reports. DOD's FMR chapter on 
recovery efforts that was in effect during fiscal year 2011 was issued 
in 2009, before IPERA was enacted.[Footnote 21] In October 2012, the 
department issued its revised FMR chapter on recovery audits to 
implement the requirements of IPERA and associated OMB 
guidance.[Footnote 22] The October 2012 recovery auditing chapter was 
published after fiscal year 2011 was completed, and we determined that 
the revisions did not affect the findings in this report. 

GAO's 2009 Report Recommendations: 

In July 2009,[Footnote 23] prior to the enactment of IPERA, we 
reported on DOD's efforts to address improper payments under IPIA and 
the recovery auditing requirements under the RAA. In that report, we 
made 13 recommendations aimed at improving DOD's efforts to strengthen 
its improper payment and recovery auditing processes. At that time, 
DOD did not concur with 12 of our 13 recommendations. However, as 
discussed in that report, we continued to believe that all 13 
recommendations were critical for DOD to enhance its efforts to 
minimize improper payments and recover those that were made. Figure 1 
lists the recommendations from our 2009 report. 

Figure 1: GAO's 2009 Report Recommendations to DOD: 

[Refer to PDF for image: table] 

Key provisions of IPIA/RAA: Risk Assessments; 
GAO 2009 recommendations: 
* Establish a systematic approach, as part of the risk assessment 
process, to ensure all programs and activities are reviewed to 
determine susceptibility to improper payments.
* Develop and implement detailed guidance for conducting risk 
assessments, including the steps to determine if risk exists, what 
those risks are, and the potential or actual impact of those risks on 
program operations.
* Require DOD agencies and the military services to document the risk 
assessment methodology used, including the risk factors considered, 
and the rationale for assessing the risk level for the payment 
activity. 

Key provisions of IPIA/RAA: Estimating; 
GAO 2009 recommendations: 
* Develop and implement a statistically valid methodology to estimate 
and report commercial improper payments (contract and vendor over-and 
underpayments). This methodology should include all payment errors 
regardless of the source of the error-—DOD, contractors, or vendors-—
as required by IPIA. 

Key provisions of IPIA/RAA: Reducing Improper Payments; 
GAO 2009 recommendations: 
* Identify and fully disclose the root causes of improper payments 
annually in the AFR.
* Identify and fully disclose the corrective actions, and monitor the 
corrective actions to ensure that they address applicable root causes. 

Key provisions of IPIA/RAA: Reporting; 
GAO 2009 recommendations: 
* Perform oversight and monitoring activities to ensure the accuracy 
and completeness of the improper payment data submitted by the DOD 
agencies and the military services for inclusion in the AFR. 

Key provisions of IPIA/RAA: Recovery Auditing; 
GAO 2009 recommendations: 
* Establish and implement processes specifically designed to identify 
and recover commercial overpayments.
* Develop and implement detailed guidance to assist DOD agencies and 
the military services in effectively carrying out recovery audits and 
activities, including the payment and accounting systems to be 
reviewed, the frequency of these reviews, applicable roles and 
responsibilities, and reporting requirements. 
* Establish and implement a process to identify costs related to the 
department’s recovery auditing program, including costs for employees’
salaries. 
* Establish and implement a process to identify and report vendor 
overpayments and the associated recovered amounts. 
* Maintain documentation to support the amounts reported in the AFR to 
allow for independent evaluation of this information. 
* Perform oversight and monitoring activities to ensure the accuracy 
and completeness of the recovery auditing data submitted by the DOD 
agencies and the military services for inclusion in the AFR. Also, 
document the roles and responsibilities of the Recovery Auditing 
Project Officer. 

Source: GAO. 

[End of figure] 

DOD's Improper Payment Reporting in Its Fiscal Year 2011 Agency 
Financial Report: 

The department reported improper payment information for the following 
eight programs in its fiscal year 2011 AFR: 

* Military health benefits are payments made to health care providers 
for services provided to active duty personnel and their family 
members, retirees and their family members, and family members of 
deceased service members through the TRICARE program. 

* Military pay includes active duty pay (Army, Navy, Air Force, and 
Marine Corps) as well as the reserve components' pay (Army Reserve, 
Army National Guard, Navy Reserve, Air Force Reserve, Air National 
Guard, and Marine Corps Reserve). 

* Civilian pay includes civilian pay accounts from each of the 
components (Army, Air Force, Navy/Marine Corps, and defense agencies). 

* Military retirement pay includes both payments to military retirees 
and the family members of deceased retirees (annuitants). 

* Travel pay includes travel payments made through the Defense Travel 
System (DTS) for the military services and defense agencies as well as 
additional travel payments made by the Army, Navy, and Air Force for 
vouchers paid outside of DTS. 

* DFAS commercial pay includes payments made by DFAS on behalf of DOD 
components to vendors and contractors. 

* USACE travel pay includes travel payments made by USACE to employees. 

* USACE commercial pay includes contract payments made by USACE. 

Figure 2 shows the total outlays, improper payment totals (sum of the 
overpayments and the underpayments), and total improper payments as a 
percentage of total outlays, as reported by DOD in its fiscal year 
2011 AFR. The improper payment total shown for DFAS commercial pay was 
not a statistical estimate, but was limited to known improper payments. 

Figure 2: DOD's Fiscal Year 2011 Reported Outlays and Improper 
Payments: 

[Refer to PDF for image: table] 

Program: Military Health Benefits; 
Outlays: $12.591 billion; 
Improper payment total: $30.2 million; 
Improper payment percentage: 0.24%. 

Program: Military Pay; 
Outlays: $95.959 billion; 
Improper payment total: $474.3 million; 
Improper payment percentage: 0.49%. 

Program: Civilian Pay; 
Outlays: $58.643 billion; 
Improper payment total: $90.9 million; 
Improper payment percentage: 0.16%. 

Program: Military Retirement; 
Outlays: $42.156 billion; 
Improper payment total: $18.9 million; 
Improper payment percentage: 0.04%. 

Program: Travel Pay; 
Outlays: $8.728 billion; 
Improper payment total: $286.6 million; 
Improper payment percentage: 3.28%. 

Program: DFAS Commercial Pay; 
Outlays: $368.524 billion; 
Improper payment total: $224.6 million; 
Improper payment percentage: 0.06%. 

Program: USACE Travel Pay; 
Outlays: $212.5 billion; 
Improper payment total: $2.1 million; 
Improper payment percentage: 1.00%. 

Program: USACE Commercial Pay; 
Outlays: $30.497 billion; 
Improper payment total: $11.9 million; 
Improper payment percentage: 0.04%. 

Program: Total; 
Outlays: $617.311 billion; 
Improper payment total: $1.140 billion; 
Improper payment percentage: 0.18%. 

Source: GAO analysis of DOD's data on improper payment amounts. 

[End of figure] 

As shown in figure 2, DOD identified its programs for improper payment 
estimation and reporting in such a way that each program represents a 
category of disbursements made by the department. OMB's guidance does 
not specify how agencies are to identify programs for improper payment 
estimation and reporting, but advises that agencies determine the 
grouping of programs that most clearly identifies and reports improper 
payments for their agency. 

Significant Deficiencies Existed in DOD's Implementation of Key 
Provisions of IPIA, IPERA, and OMB Guidance: 

DOD did not adequately implement key provisions of IPIA, IPERA, and 
OMB guidance related to estimating improper payments, identifying 
programs susceptible to significant improper payments, reducing 
improper payments through corrective actions, recovering improper 
payments, and reporting improper payment estimates and recovery 
efforts. Most important, we found that DOD's improper payment 
estimates were neither reliable nor statistically valid. Also, DOD did 
not conduct a risk assessment for fiscal year 2011 in accordance with 
IPERA requirements. Further, although DOD had a corrective action plan 
for fiscal year 2011, the plan did not identify the underlying reasons 
or conditions that caused the errors to occur. Additionally, DOD did 
not conduct recovery audits nor did it determine that such audits 
would not be cost effective, as required by IPERA. Finally, the 
department did not have procedures to ensure that improper payment and 
recovery audit reporting in its fiscal year 2011 AFR was complete, 
accurate and compliant. 

DOD's Improper Payment Estimates Were Neither Reliable Nor 
Statistically Valid: 

DOD's improper payment estimates reported in its fiscal year 2011 AFR 
were neither reliable nor statistically valid because of several 
deficiencies in the department's procedures as documented in its 
sampling methodologies. Because of DOD's long-standing and pervasive 
financial management weaknesses, the department did not have complete 
and accurate populations of payments from which to select statistical 
samples. We also identified deficiencies related to its (1) sampling 
methodologies and (2) maintenance of key documentation supporting its 
improper payment estimates. 

Deficiencies in Identifying Complete and Accurate Populations of 
Payments: 

The foundation of reliable statistical sampling estimates is a 
complete, accurate, and valid population from which to sample. 
However, the department's long-standing and pervasive financial 
management weaknesses precluded it from validating the completeness of 
its payment transaction populations. For example, DOD's fiscal year 
2011 Statement of Budgetary Resources (SBR) reported nearly $1,017 
billion in gross outlays in fiscal year 2011.[Footnote 24] As 
previously shown in figure 2, the outlays for the eight programs for 
which the department reported improper payments totaled $617 billion. 
DOD attributed most of the difference between the SBR gross outlays 
and outlays for the eight programs to intragovernmental transactions 
and trust fund transfers,[Footnote 25] which IPERA exempted from 
improper payment estimation and reporting requirements. However, the 
department was unable to reconcile these two outlay amounts. DOD 
acknowledged in its fiscal year 2011 AFR that reported outlays for the 
eight programs could not be reconciled to gross outlays reported in 
the SBR. As a result, DOD could not ensure that all required outlays 
for improper payment reporting purposes were included in the sample 
populations. 

Although DOD had documented methodologies for developing improper 
payment estimates, DOD did not establish and perform key quality 
assurance procedures, such as reconciliations, on its program 
populations to validate that the populations were complete and 
accurate before selecting the statistical samples that were used to 
estimate improper payments. Standards for Internal Control in the 
Federal Government states that control activities such as 
reconciliations are an integral part of an entity's planning, 
implementing, reviewing, and accountability for stewardship of 
government resources and achieving effective results.[Footnote 26] An 
effective reconciliation process would involve comparing transactions 
to supporting documentation, systems of record, or both to ensure the 
completeness, validity, and accuracy of financial information. An 
effective reconciliation process also involves resolving any 
discrepancies that may have been discovered and determining if 
unauthorized changes have occurred to transactions during processing. 

Deficiencies in Sampling Methodologies: 

In addition to the lack of complete, valid, and accurate populations, 
deficiencies in DOD's procedures as documented in its sampling 
methodologies further impaired DOD's ability to produce reliable 
improper payment estimates. First, DOD's sampling methodologies are 
based on the use of simple random samples to select payments to review 
for improper payments and thereby derive error rates. Using these 
methodologies, each transaction in the programs' sample populations 
had an equal chance of selection without regard to the complexity of 
the transaction or its risk of being an improper payment. OMB guidance 
states that agencies will need to utilize complex sample designs to 
the extent their payment population contains wide-ranging dollar 
amounts, types of payments, or both. 

In addition, DOD did not use a sampling unit that was statistically 
appropriate for any of its programs. For example, the sampling unit 
for travel pay for fiscal year 2011 was the travel voucher. Each 
voucher had an equal chance of selection in the samples upon which 
improper payment estimates were based. However, DOD's travel pay 
transactions range in complexity from an individual soldier's 
relocation to payments made on travel vouchers involving multiple 
travel orders. As another example, DFAS commercial pay's sampling unit 
was an individual invoice. As DOD reported in the fiscal year 2012 
AFR, a $10 million invoice had the same chance of being sampled as a 
$100 invoice. Generally, higher dollar payments involve more complex 
transactions and thus are at greater risk of being an improper 
payment. If a population contains a few large invoices and many 
smaller invoices, equal probability sampling is unlikely to capture 
the large invoices. DOD's sampling methodologies do not account for 
this risk. By not designing more complex sampling methodologies that 
utilize more statistically appropriate sampling units, such as dollars 
paid, DOD's improper payment estimates could be significantly 
understated. 

Further, DOD provided evidence that it used its sampling methodologies 
to calculate statistically valid improper payment error rate estimates 
and related confidence intervals for military pay, civilian pay, and 
travel pay for fiscal year 2011, but did not provide such evidence for 
military health benefits, military retirement, USACE commercial pay, 
or USACE travel pay. Additionally, DOD did not generate statistically 
valid improper payment dollar value estimates for any of its programs. 
For instance, DOD did not use appropriate weights to calculate the 
reported dollar value estimates. Moreover, DOD did not derive 
confidence intervals for its improper payment dollar value estimates 
for any of its programs. Generally accepted statistical standards 
require the calculation and disclosure of confidence intervals around 
an estimate with a specified degree of confidence.[Footnote 27] 
Confidence intervals are a measure of the possible difference between 
the sample estimate and the actual population value, providing an idea 
of how close the sample estimate is to the actual population value. 

As previously mentioned, DOD did not statistically derive an estimate 
of improper payments for DFAS commercial pay for fiscal year 2011, but 
instead limited its reporting to known improper payments. Although DOD 
reported a statistically derived improper payment estimate--$100.1 
million--for DFAS commercial pay for fiscal year 2012, the sampling 
methodology used to produce this estimate had deficiencies similar to 
the methodologies used for the department's other programs. For 
example, to estimate DFAS commercial pay improper payments, DOD did 
not use a statistically appropriate sampling unit or a methodology 
that considered large dollar amounts or the level of complexity of the 
related payments. In its AFR for fiscal year 2012, DOD noted that the 
department had identified $318.3 million in known improper payments 
for DFAS commercial pay for fiscal year 2012. Further, DOD cited the 
sampling methodology as the main reason for the difference between the 
reported estimate of $100.1 million and the known amount of $318.3 
million for DFAS commercial pay improper payments, which provides 
further evidence of how the deficiencies we identified in the sampling 
methodologies adversely affect the reliability of the resulting 
estimates. In our July 2009 report,[Footnote 28] we recommended that 
DOD develop and implement a statistically valid methodology to 
estimate and report commercial improper payments (contract and vendor 
over-and underpayments). This recommendation remains valid given the 
issues we have found during the course of this review. 

Deficiencies in Maintenance of Key Supporting Documentation: 

DOD did not have procedures in place to collect and maintain key 
supporting documentation needed to substantiate the improper payment 
estimates reported in its fiscal year 2011 AFR. For example, DOD did 
not maintain complete supporting documentation for the populations of 
transactions, from which statistical samples were selected, for most 
of the programs for which improper payment estimates were reported. 
This deficiency contributed to our determination that DOD's reported 
improper payment estimates were not reliable. DOD officials stated 
that they were unaware of the extent of documentation necessary for 
the department to maintain to support its improper payment estimates. 
Standards for Internal Control in the Federal Government requires all 
transactions and other significant events to be clearly documented and 
the documentation readily available for examination.[Footnote 29] 
Further, OMB guidance directs agencies to retain documentation to 
support the calculation of their estimates.[Footnote 30] 

To enable auditors and other parties to substantiate reported improper 
payment estimates, we determined that the following documentation 
would generally need to be maintained: 

* Description of the sampling methodology, including identification of 
the sampling units accompanied by an explanation of how the sampling 
units were determined. 

* Schedules showing the total number of items and dollar value totals 
for each sample population[Footnote 31] for each military service and 
defense agency by program and month. 

* Descriptions and results of data reliability and quality assurance 
testing conducted to ensure that payment information in the sample 
populations was complete and accurate. 

* Descriptions of how each sample was selected, including the random 
number and how it was generated, the software used to select the 
sample from the sample population, and copies of software program logs 
and related output files. The software program logs and related output 
files should have the details related to the sample population totals 
and samples selected, including the total number of items and dollar 
value totals in the sample population as well as a list of the items 
selected to be in the sample. In addition, a description of the method 
of selection of replacement items is needed. 

* Descriptions of attributes[Footnote 32] and variables[Footnote 33] 
tested for each sampled transaction used to derive the total dollar 
value of improperly paid amounts, including source documents for each 
sampled transaction that support the conclusion of whether the sampled 
payment was improper. 

* Calculations, spreadsheets (including cell formulas), and software 
programs used to evaluate the individual test results for every sample 
item tested, including the calculations used to derive each improper 
payment error rate and dollar value estimate and the related 
confidence intervals. 

* Calculations, spreadsheets (including cell formulas), software 
programs, inputs and outputs used to aggregate the individual error 
rate and dollar value estimate and related confidence intervals from 
each sample to derive the improper payment estimates reported in the 
AFR. These documents should provide a clear trail showing how the 
results of each sample were aggregated, from the lowest level of 
sampling test results through to the estimates published in the AFR. 

* Schedules listing all missing sample items and how these sample 
items were treated and related explanations. 

* Schedules listing all items replaced and related explanations. 

The lack of complete supporting documentation precludes DOD and others 
from being able to determine the reliability of its reported improper 
payment estimates. 

DOD Did Not Conduct Required Risk Assessments: 

DOD did not perform a risk assessment for fiscal year 2011 as required 
by IPERA, because DOD officials told us that they did not see any 
added value in doing a risk assessment. According to DOD officials, 
OMB directed the department to consider all of its programs as risk-
susceptible--following its review of the department's fiscal year 2006 
improper payment reporting--because of the complex nature of the 
department's business processes and the large dollar value of its 
annual payments. However, DOD officials were unable to provide 
documentation of this directive. Moreover, as discussed previously, 
IPERA laid out a clear statutory requirement to perform a risk 
assessment in fiscal year 2011, which would supersede an earlier OMB 
directive. 

Our executive guide describes characteristics of an effective risk 
assessment done for the purpose of determining an entity's 
susceptibility to improper payments.[Footnote 34] A risk assessment is 
an activity that entails a comprehensive review and analysis of 
program operations to determine where risks exist and what those risks 
are, and then measuring the potential or actual impact of those risks 
on program operations. Once risk areas are identified, their potential 
impact on programs and activities should be measured and additional 
controls should be considered. As risks are addressed and controls are 
changed, the assessment should occasionally be revisited to determine 
where the risks have decreased and where new areas of risk may exist. 

By not doing a risk assessment for fiscal year 2011, DOD missed the 
opportunity to gain critical information for determining corrective 
actions needed to reduce improper payments. Periodic risk assessments 
are critical to ensuring that the department is identifying the root 
causes of improper payments and developing appropriate corrective 
actions. The information developed during a risk assessment forms the 
foundation or basis upon which management can determine the nature and 
type of corrective action needed. In addition, this information gives 
management baseline data for ensuring progress in reducing improper 
payments. 

Additionally, performing risk assessments may be more cost beneficial 
than estimating improper payments for each program. Given the time and 
resources needed to verify the completeness of populations, select and 
test samples, and evaluate and project the results of the samples, the 
department may be able to realize savings by first performing risk 
assessments. Moreover, if performed in a manner similar to that 
described in our executive guide, the information gained during the 
risk assessment may help DOD to determine the best sampling 
methodology to be used for each program, develop corrective actions, 
and guide recovery auditing efforts. 

In our July 2009 report,[Footnote 35] we made three recommendations to 
DOD with regard to risk assessments. Specifically, we recommended that 
the department (1) establish and implement a systematic approach, as a 
part of the risk assessment process, to ensure that all programs and 
activities are reviewed to determine susceptibility to improper 
payments; (2) develop and implement detailed guidance for conducting 
risk assessments, including the steps to determine if risk exists, 
what those risks are, and the potential or actual impact of those 
risks on program operations; and (3) require DOD agencies and military 
services to document the risk assessment methodology used, including 
the risk factors considered and the rationale for assessing the risk 
level for the payment activity. 

DOD has not fully implemented these recommendations. In October 2011, 
DOD updated its FMR chapter on improper payments,[Footnote 36] but the 
section discussing the frequency of risk assessments was not in 
accordance with IPERA. For example, IPERA requires agencies to perform 
a risk assessment in the year after enactment (fiscal year 2011) and 
at least once every 3 years thereafter. However, the FMR chapter 
states that components are required to conduct risk assessments only 
for those programs or activities for which the risk level is unknown 
or is not currently measured and reported. DOD's FMR does not provide 
a systematic approach to ensure that all programs and activities are 
reviewed to determine susceptibility to improper payments. Moreover, 
although DOD's FMR states that components' risk assessment 
methodologies must be documented and maintained, the FMR does not 
provide detailed requirements on what should be documented and 
maintained. 

DOD's Corrective Action Plan Was Not Sufficiently Detailed to 
Effectively Reduce Improper Payments: 

As discussed previously, DOD's lack of a risk assessment makes it 
difficult for the department to fully identify root causes and develop 
a comprehensive, effective, corrective action plan. While DOD has a 
policy for developing and reporting on corrective actions, it did not 
have detailed procedures for identifying root causes and related 
corrective actions. Also, the department's corrective action plan, 
included in its fiscal year 2011 AFR, did not contain all elements of 
corrective action plans required by IPERA and OMB guidance,[Footnote 
37] such as establishing accountability for reducing improper payments 
and including completion dates for implementing corrective actions. 

DOD's corrective action plan reported reasons that improper payments 
occurred for all eight programs and included corrective actions to 
address them, but the reported reasons identified the type of errors 
that resulted in the improper payments, rather than the root causes--
the underlying conditions that caused the errors to occur. DOD's 
identified reasons do not consider possible underlying systemic causes 
of the errors, such as whether manual and automated controls were 
either not sufficient or not operating as intended. As a result, the 
related corrective action(s) addressed specific errors and not 
necessarily the underlying condition that gave rise to the error. 
Agencies, when developing corrective action plans, can use the results 
of risk assessments to ensure that the root causes leading to improper 
payments are identified. 

Also, the corrective actions reported were not sufficiently detailed 
to assess whether they would address the errors that were identified 
for DOD's reported programs. For example, in fiscal year 2011, DOD 
reported that the corrective actions for military pay consisted of 
working with the military services to advise them of the results of 
payment reviews and the associated reasons for errors, including the 
provision of monthly reports on the reasons for individual improper 
payments and improper payment trends. While these corrective actions 
provide information on the reasons for improper payments, they do not 
indicate what, if any, actions the military services would take to 
address the causes of improper payments. 

DOD's corrective action plan also did not describe the required steps 
for ensuring that responsible officials are held accountable for 
reducing improper payments, as required by IPERA. In addition, 
according to the United States Chief Financial Officers Council's 
(CFOC) Implementation Guide for OMB Circular A-123, agencies should 
have procedures for tracking the status of corrective action plans. 
[Footnote 38] The implementation guide provides that corrective action 
plans should include measurable indicators of compliance and 
resolution for assessing and validating progress throughout the 
resolution cycle. However, DOD's corrective action plan did not 
include (1) a timetable for when the corrective actions were to be 
implemented and (2) measurable indicators of compliance and 
resolution, which include follow-up tests to verify whether procedures 
and controls are working, to assess and validate progress in reducing 
improper payments. 

In our July 2009 report,[Footnote 39] we recommended that DOD identify 
and fully disclose the root causes of improper payments. We also 
recommended that the department identify and fully disclose the 
corrective actions, and monitor the corrective actions to ensure that 
they address applicable root causes. According to DOD's improper 
payments chapter in its FMR,[Footnote 40] DOD components are to (1) 
identify root causes, (2) develop corrective actions and a timeline 
for implementation, and (3) periodically monitor those actions to 
ensure that future improper payments will be reduced or eliminated. 
However, the FMR does not provide detailed procedures for the 
components to follow to identify root causes and develop corrective 
actions, and for the department to follow in monitoring the 
implementation of those corrective actions. DOD has not yet 
implemented our recommendations and told us that it was not planning 
any significant changes to its corrective action processes. Until DOD 
develops and implements detailed procedures that include the 
information required by IPERA and OMB guidance and recommended by best 
practices, DOD will continue to be hindered in its ability to (1) 
develop corrective action plans that address root causes, (2) 
effectively monitor and measure the progress made in taking those 
corrective actions, (3) hold individuals responsible for implementing 
corrective actions, and (4) communicate to agency leaders and key 
stakeholders the progress made toward remediating improper payments. 

DOD Did Not Implement IPERA's Recovery Audit Requirements: 

We identified multiple deficiencies and omissions in DOD's efforts to 
implement IPERA's recovery audit requirements due to a lack of 
appropriate procedures. DOD neither conducted recovery audits in 
fiscal year 2011 nor determined that such audits would not be cost 
effective, as required by IPERA. Further, most DOD programs did not 
identify and collect cost information for their recovery efforts that 
would permit cost-effectiveness evaluations, and the programs that did 
collect this information did not subsequently evaluate the programs to 
ensure that they were, in fact, cost effective. We also identified 
deficiencies and omissions in the payment recapture audit plan that 
DOD submitted to OMB. 

DOD Did Not Conduct Recovery Audits as Required: 

DOD did not conduct recovery audits for the eight programs for which 
it reported improper payments in fiscal year 2011, nor has it 
determined that such audits would not be cost effective (i.e., that 
the government would not suffer additional financial losses because of 
ineffective recovery programs), as required by IPERA, because of 
outdated policy and a decision to rely on other recovery mechanisms. 
DOD's FMR chapter on recovery efforts that was in effect during fiscal 
year 2011 was issued in 2009, before IPERA was enacted.[Footnote 41] 
As a result, the FMR chapter did not account for the expansion of 
recovery audits beyond commercial payments, as called for by IPERA. In 
addition, DOD cited its difficulties in tracing transactions back to 
source documentation as a major obstacle to conducting effective 
recovery audits. 

In lieu of conducting cost-effective recovery audits, DOD's payment 
recapture audit plan stated that the department would rely on efforts 
such as random sampling of improper payments, DOD Inspector General 
(IG) and other auditor findings, self-reporting by recipients, and 
other activities, such as periodic independent reviews of commercial 
payments, to identify overpayments for potential recovery for seven 
programs. However, DOD did not describe any improper payment recovery 
effort in place for travel pay in the payment recapture audit plan. 
According to the fiscal year 2011 AFR, DOD estimated $238.2 million in 
overpayments related to travel pay during fiscal year 2011.[Footnote 
42] Through procedures, including analysis of duplicate payments from 
fiscal years 2009 and 2010, DOD identified for recovery $1.6 million 
in travel pay overpayments, or less than 1 percent of the program's 
estimated improper payments. DOD officials stated that they believe 
that a significant portion of the estimated improper overpayment 
amount was due to missing supporting documentation and did not 
represent funds owed to the federal government. However, DOD was not 
able to quantify how much, if any, of the overpayment estimate was due 
to missing documentation. Because DOD has not established recovery 
audits to recapture improper overpayments, and has not determined that 
such mechanisms would not be cost effective, DOD is at risk of 
forgoing the detection and recovery of potentially substantial funds 
owed to the government. 

In our July 2009 report,[Footnote 43] we recommended that the DOD 
Comptroller develop and implement detailed guidance to assist DOD 
agencies and the military services in effectively carrying out 
recovery audits and activities. DOD issued a revised FMR chapter on 
recovery audits in November 2009,[Footnote 44] before IPERA was 
enacted, and again in October 2012.[Footnote 45] The October 2012 
version of the FMR chapter is designed to establish the DOD program to 
implement the requirements of IPERA and associated OMB guidance with 
respect to recovery audits. The revised FMR directs all components 
with programs and activities with annual payments that exceed $1 
million to determine if instituting recovery audits is cost effective. 
However, our review of the 2012 FMR chapter indicates that the 
guidance is still lacking some key elements that would enable DOD 
components to fully implement IPERA and OMB guidance. For example, the 
2012 FMR chapter does not require the components to submit information 
to the OUSD(C) that OMB directs agencies to report, such as the amount 
of commercial pay recoveries that were used to offset future payments 
and the amount of improper overpayments identified through contract 
closeouts. Consequently, DOD has not yet fully implemented our 2009 
recommendation. 

DOD Does Not Have a Process in Place to Assess Cost-effectiveness: 

We found that DOD, with the exception of USACE, did not have 
procedures to identify and collect information on costs related to its 
payment recovery efforts. As a result, DOD did not determine if its 
ongoing recovery efforts, such as periodic independent reviews of 
commercial payments, were cost effective or if it would be cost 
effective for the department to establish and implement recovery 
audits for its programs. 

Even when DOD did determine the cost of certain improper payment 
recovery efforts, the department did not ensure that the efforts were 
cost effective. For example, USACE officials told us that the agency's 
daily automated review system, which uses a data mining process to 
review contract payments for potential errors, costs $64,000 annually. 
However, USACE reported that as of December 2012, the system had only 
identified and recovered one improper payment of $20.79 since its 
implementation in May 2009. A USACE official stated that she believed 
that the data mining process was mandatory and that USACE was 
attempting to keep the cost as low as possible. By not assessing the 
cost-effectiveness of the daily automated review system, DOD is at 
risk of operating an improper payment recovery effort that is not cost 
beneficial. 

As stated previously, in October 2012, DOD issued an updated FMR 
chapter on recovery audits that directed all components with programs 
and activities with annual payments that exceed $1 million to 
determine if instituting recovery audits is cost effective. Further, 
the FMR chapter directed DOD components to report the total cost of 
their respective recovery audits and related recovery efforts. 
However, until the department establishes procedures to consistently 
identify and collect information regarding costs of recovery audits, 
DOD will be unable to implement the FMR policy and determine if 
recovery audits are cost effective to operate. 

In our July 2009 report,[Footnote 46] we recommended that the DOD 
Comptroller establish and implement a process to identify costs 
related to the department's recovery auditing program, including costs 
for employees' salaries. DOD has not implemented our recommendation 
and given the findings of this review, our prior recommendation 
remains valid. 

Omissions in DOD's Payment Recapture Audit Plan: 

OMB directed agencies to prepare and submit to both OMB and the 
agency's IG a payment recapture audit plan by January 2011 that 
describes payment recapture efforts under both IPERA and authorities 
that pre-dated IPERA.[Footnote 47] Payment recapture audit plans, if 
properly developed, would help an agency manage its activities to 
maximize recovery of improper payments. DOD developed and submitted a 
payment recapture audit plan to OMB and the DOD IG in January 2011. In 
response to OMB and DOD IG comments, DOD revised and resubmitted its 
plan in November 2011. However, we found that DOD's payment recapture 
plan did not include the following required elements: 

* The quantity and dollar amount of payment reviews (except for USACE, 
which indicated quantity of items reviewed). 

* Types of tools used to review payments (except for USACE, which 
disclosed an Oracle-programmed data mining tool). 

* When the payments that were reviewed were made. 

* A description of whether the payment recapture audit program focuses 
on programs or particular steps in a program's payment process that 
are at higher risk of fraud, waste, and abuse. 

* A description of the guidance that DOD provides to agency staff 
related to responsibilities and procedures to implement mechanisms to 
recover improper payments. 

* Technology being used or planned that would assist in preventing and 
recapturing improper payments. 

By not developing and implementing a payment recapture audit plan that 
contains all elements required by OMB, DOD is not in compliance with 
OMB requirements and is hindered in its ability to effectively manage 
its recovery efforts. 

DOD Did Not Have Documented Procedures for Improper Payment and 
Recovery Audits Reporting: 

DOD did not have documented procedures to ensure that improper payment 
reporting in the AFR was complete, accurate, and in compliance with 
statutory and regulatory guidance. We identified multiple reporting 
omissions in DOD's fiscal year 2011 AFR. For example, the department 
did not include the following information required by IPERA and OMB 
guidance:[Footnote 48] 

* corrective actions that would address the root causes of military 
health benefits improper payments; 

* the actual or planned completion dates for corrective actions; 

* the portion of the improper payment estimates attributable to 
insufficient supporting documentation or administrative errors; and: 

* whether the agency had the human capital, internal controls, and 
accountability mechanisms necessary to reduce improper payments. 

DOD also did not have documented procedures to ensure that recovery 
audit reporting in the AFR was complete, accurate, and in compliance 
with statutory and regulatory guidance. We identified instances where 
DOD's reporting of efforts to recover improper payments did not 
include all information required by OMB guidance. For example, DOD did 
not disclose the following in the fiscal year 2011 AFR: 

* the amount of contract payments that was voluntarily returned to DOD; 

* the amount of improper contract payments identified by contract 
closeouts; 

* the amount of commercial pay recoveries used to offset future 
payments rather than returned to DOD; 

* improper payments identified as a result of DOD IG investigations, 
GAO audits, or reviews by DOD internal review offices, such as TMA's 
Program Integrity Office, in its table of overpayments recaptured 
outside of payment recapture audits; and: 

* the total amount of and justification for identified improper 
overpayments that were determined to be uncollectible in fiscal year 
2011. 

An OUSD(C) official told us that the OUSD(C) does not have standard 
operating procedures for the compilation, review, and reporting of 
improper payment and recovery audit information in its AFR. This 
OUSD(C) official stated that the department uses Appendix C of OMB 
Circular No. A-123, Requirements for Effective Measurement and 
Remediation of Improper Payments;[Footnote 49] OMB Circular No. A-136; 
and other relevant OMB instructions to prepare the improper payment 
addendum. However, as evidenced by the omissions in DOD's improper 
payment and recovery audit reporting for fiscal year 2011, the 
department's current process is not producing reports that comply with 
IPERA and OMB guidance. 

Standards for Internal Control in the Federal Government provides that 
internal control activities need to be clearly documented.[Footnote 
50] Without documented procedures for the compilation and review of 
improper payment and recovery audit information, DOD is at risk of 
continuing to publish incomplete and inaccurate reports. 

Further, DOD has not yet implemented our 2009 recommendations that the 
DOD Comptroller perform oversight and monitoring activities to ensure 
the accuracy and completeness of the improper payment and recovery 
audit data submitted by DOD components for inclusion in the AFR. 
[Footnote 51] During our current review, we identified multiple 
instances when DOD's oversight and monitoring of improper payment and 
recovery audit data submitted by components for inclusion in the AFR 
did not identify errors or omissions. For example, we identified a 
calculation error in the military health benefits improper payment 
estimate. Specifically, TMA used an improper denominator to calculate 
the improper payment rate for its sample. Instead of dividing the 
dollar amount of identified improper payments in the sample by the 
dollar amount paid to providers, which would provide a percentage of 
improper payments, TMA divided the dollar amount of identified 
improper payments by the dollar amount billed by providers for the 
services rendered. As a result, TMA's improper payment rate of 0.24 
percent, as reported in DOD's fiscal year 2011 AFR, was incorrect. 
This calculation error was not identified by OUSD(C) personnel during 
their review of DOD component submissions of data for inclusion in the 
AFR. 

In addition, OUSD(C) oversight and monitoring did not detect the 
overstatement of overpayment amounts identified and recovered for 
military retirement. Upon receiving a notification of death for a 
retiree or annuitant, DFAS records the entire amount of the last 
payment made to the retiree or annuitant as an overpayment identified 
and, after collecting the funds, as an overpayment recovered. However, 
the identified and recovered amounts recorded did not take into 
account that the retiree or his/her survivor may have been entitled to 
receive a portion, if not all, of the payment. As a result, the 
amounts that DFAS reported to the OUSD(C) as military retirement 
overpayments identified and recovered were overstated. This is one 
reason why DOD reported for fiscal year 2011 that the department had 
identified $67.6 million in military retirement improper overpayments 
for recovery, while estimating that only $18.8 million in military 
retirement improper overpayments had occurred.[Footnote 52] Further, 
the OUSD(C) oversight and monitoring did not identify omissions in 
TMA's submission regarding overpayments identified outside of recovery 
audits. In its submission to OUSD(C), TMA did not include improper 
overpayments identified through its Program Integrity Office, which is 
responsible for prevention, detection, investigation and control of 
TRICARE fraud, waste, and abuse. As noted above, the OUSD(C) 
subsequently omitted this information from its fiscal year 2011 AFR 
reporting. Therefore, our prior recommendations for the DOD 
Comptroller to perform oversight and monitoring activities to ensure 
the accuracy and completeness of the improper payment and recovery 
audit data submitted by DOD components for inclusion in the AFR remain 
valid given the findings of this review. 

Conclusions: 

Although DOD reported estimated and known improper payments of over 
$1.1 billion for fiscal year 2011, this amount cannot be relied upon 
because of the deficiencies we found related to DOD's procedures for 
identifying, estimating, reducing, recovering, and reporting improper 
payments. DOD's long-standing history of pervasive financial 
management weaknesses, coupled with problematic sampling methodologies 
and the lack of adequate supporting documentation, contributed to 
improper payment estimates that were not reliable. Further, DOD has 
not established the procedures needed to effectively implement the 
improper payment and recovery auditing requirements included in IPERA 
and OMB's implementing guidance. By not performing a risk assessment 
as required by IPERA, DOD did not reap the associated benefits, 
including the ability to better identify root causes and develop a 
comprehensive and effective corrective action plan to reduce improper 
payments. DOD's lack of a detailed and effective corrective action 
plan also made it difficult for department officials to monitor and 
measure the extent of progress made to remediate causes, hold 
individuals responsible for implementing corrective actions, or 
communicate to DOD leadership and other key stakeholders the extent of 
the department's progress in remediating the causes of improper 
payments. In addition, DOD did not comply with the IPERA requirement 
to either conduct recovery audits or provide justifications that such 
audits would not be cost effective. Finally, the department's lack of 
key required information in its fiscal year 2011 AFR precludes DOD's 
leadership and external stakeholders from determining whether DOD has 
the necessary human capital, internal controls, and accountability 
mechanisms to reduce improper payments. Until the department takes 
definitive action to address these deficiencies and thereby fulfills 
the requirements of IPERA and its implementing guidance, it remains at 
risk of continuing to make improper payments and wasting taxpayer 
funds. 

Recommendations for Executive Action: 

We recommend that the Secretary of Defense direct the Under Secretary 
of Defense (Comptroller) to take the following 10 actions: 

* With regard to estimating improper payments: 

- Establish and implement key quality assurance procedures, such as 
reconciliations, to ensure the completeness and accuracy of the 
sampled populations. 

- Revise the procedures documented in DOD's sampling methodologies so 
that they (1) are in accordance with OMB guidance and generally 
accepted statistical standards and (2) produce statistically valid 
improper payment error rates, statistically valid improper payment 
dollar estimates, and appropriate confidence intervals for both. At a 
minimum, such procedures should take into account the size and 
complexity of the transactions being sampled. 

- Develop and implement procedures to collect and maintain the 
supporting documentation necessary to support improper payment 
estimates. 

* With regard to identifying programs susceptible to significant 
improper payments, conduct a risk assessment that is in compliance 
with IPERA. 

* With regard to reducing improper payments, establish procedures that 
produce corrective action plans that: 

- Comply fully with IPERA and OMB implementation guidance, including 
at a minimum, holding individuals responsible for implementing 
corrective actions and monitoring the status of the corrective actions. 

- Are in accordance with best practices, such as those recommended by 
the CFOC, and include (1) measuring the progress made toward 
remediating root causes and (2) communicating to agency leaders and 
key stakeholders the progress made toward remediating the root causes 
of improper payments. 

* With regard to implementing recovery audits: 

- Develop and implement procedures to (1) identify costs related to 
the department's recovery audits and existing recovery efforts and (2) 
evaluate existing improper payment recovery efforts to ensure that 
they are cost effective. 

- Monitor the implementation of the revised FMR chapter on recovery 
audits to ensure that the components either develop recovery audits or 
demonstrate that it is not cost effective to do so. 

- Develop and submit to OMB for approval a payment recapture audit 
plan that fully complies with OMB guidance. 

* With regard to reporting, design and implement procedures to ensure 
that the department's annual improper payment and recovery audit 
reporting is complete, accurate, and in compliance with IPERA and OMB 
guidance. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Secretary of Defense for 
comment. In response, DOD provided written comments, in which it 
concurred with nine recommendations and partially concurred with one 
recommendation. In commenting on our report, DOD acknowledged that 
implementing our recommendations would further strengthen its program. 
DOD cited its planned actions, including (1) reviewing its sampling 
methodologies to ensure that they are appropriate and properly 
documented; (2) developing risk assessments and corrective actions in 
accordance with IPERA, OMB guidance, and best practices; (3) reviewing 
its recovery efforts to ensure that they are cost effective; and (4) 
ensuring that its reporting is complete, accurate, and in compliance 
with IPERA and OMB guidance. 

DOD partially concurred with our recommendation to revise the 
procedures documented in its sampling methodologies so that they (1) 
are in accordance with OMB guidance and generally accepted statistical 
standards and (2) produce statistically valid improper payment error 
rates, statistically valid improper payment dollar estimates, and 
appropriate confidence intervals for both. The department believes 
that its sampling methodologies are in accordance with OMB guidance 
and produce statistically valid improper payment rates and appropriate 
confidence intervals. However, as discussed in our report, we found 
that DOD produced statistically valid error rates and related error 
rate confidence intervals for only three of its programs. 
Additionally, we found that DOD did not produce statistically valid 
dollar estimates and appropriate dollar confidence intervals for any 
of its programs. However, DOD did state that it will review 
methodologies for all payment types and make modifications as 
appropriate. 

DOD also expressed concern that our characterization of the 
recommended improvements as "significant" does not account for its 
efforts to minimize improper payments, particularly through prepayment 
reviews. We acknowledge in our report efforts DOD has made to attempt 
to minimize improper payments. However, the deficiencies we identified 
related to DOD's identifying, estimating, reducing, recovering, and 
reporting improper payments are significant and indicate that it has 
not yet established the detailed procedures necessary to effectively 
implement IPERA and OMB guidance and thus reduce the risk of making 
improper payments. Accordingly, we continue to believe that 
implementation of our recommendations is critical for DOD to enhance 
its efforts to minimize improper payments and to recover those that 
are made. 

DOD's comments are reprinted in appendix II. DOD also provided 
technical comments on our draft report, which we incorporated as 
appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
appropriate congressional committees, the Secretary of Defense, and 
other interested parties. In addition, the report will be available at 
no charge on the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact Asif A. Khan at (202) 512-9869 or khana@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. Key contributors to this 
report are listed in appendix III. 

Signed by: 

Asif A. Khan 
Director, Financial Management and Assurance: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objective of this engagement was to review the extent to which the 
Department of Defense (DOD) has implemented key provisions of the 
Improper Payments Information Act of 2002 (IPIA),[Footnote 53] the 
Improper Payments Elimination and Recovery Act of 2010 (IPERA), 
[Footnote 54] and related Office of Management and Budget (OMB) 
guidance.[Footnote 55] The scope for our engagement was DOD's improper 
payments information presented in the department's fiscal year 2011 
Agency Financial Report (AFR),[Footnote 56] because this was the most 
current annual report available at the time of our review. As part of 
this objective, we assessed DOD's plans and actions to estimate 
improper payments for commercial payments made by the Defense Finance 
and Accounting Service (DFAS) for fiscal year 2012, because DOD 
limited its improper payment reporting for this program to known 
improper payments for fiscal year 2011, rather than reporting a 
statistical estimate.[Footnote 57] 

To meet this audit objective, we identified the requirements agencies 
must meet by reviewing IPIA and IPERA requirements and OMB guidance. 
We analyzed key documents--such as DOD's improper payments reporting 
in its fiscal year 2011 AFR, internal guidance in its Financial 
Management Regulation (FMR) in effect for fiscal year 2011 and 
subsequent revisions, sampling methodologies, risk assessments, as 
well as the department's corrective action and payment recapture 
plans--and compared them with legal requirements, OMB guidance, and 
relevant best practices.[Footnote 58] We interviewed agency officials, 
including the Deputy Chief Financial Officer and Improper Payments 
Project Officer from the Office of the Under Secretary of Defense 
(Comptroller) (OUSD(C)), and the DFAS Deputy Director of Operations, 
for additional information and clarifications. Specifically, we 
performed the following work: 

* To assess DOD's process to review all agency programs and identify 
those susceptible to significant improper payments, we reviewed DOD 
documentation regarding the department's identification of its eight 
programs,[Footnote 59] included in the department's fiscal year 2011 
improper payments reporting, and why these programs were deemed to be 
risk-susceptible. We interviewed DOD officials, such as the Improper 
Payments Project Officer, to obtain needed clarifications on how these 
programs were identified as being susceptible to significant improper 
payments. In addition to DOD officials, we interviewed OMB officials 
and requested supporting documentation for clarification as to any 
instructions the department received from OMB. We also compared DOD's 
practices to the GAO executive guide for managing improper 
payments.[Footnote 60] 

* We performed an independent analysis of DOD's sampling methodologies 
for the seven programs,[Footnote 61] including a review of their 
sampling plans and other underlying documentation, and evaluated 
whether DOD's sampling methodologies complied with OMB guidance and 
generally accepted statistical sampling practices.[Footnote 62] 

* We interviewed officials from DFAS, the TRICARE Management Activity 
(TMA),[Footnote 63] and the U.S. Army Corps of Engineers (USACE) to 
obtain additional information about these methodologies. 

* To assess the department's plans and actions for estimating DFAS 
commercial pay improper payments for fiscal year 2012, we reviewed the 
department's methodology for statistically estimating DFAS commercial 
pay improper payments for fiscal year 2012 and interviewed DFAS 
officials to obtain clarifications about this methodology. 

* We conducted site visits at two DFAS processing center locations--
DFAS-Columbus and DFAS-Indianapolis. We selected the DFAS-Columbus 
site because this facility processes the largest portion of DOD's 
commercial payments and hosts the systems the department uses to track 
commercial pay improper payments. We interviewed DFAS-Columbus 
officials regarding how improper payments were identified and 
reported. We selected DFAS-Indianapolis because this facility houses 
the team that performed the reviews of selected sample transactions 
for military pay, civilian pay, military retirement for deceased 
retirees and annuitants, and travel pay. DFAS-Indianapolis compiles 
the results of the improper payment testing for all DFAS-tested 
programs, including DFAS commercial pay and military retirement pay, 
and reports these results to DOD's OUSD(C). 

* We examined the department's corrective action plan and assessed it 
with the requirements in OMB's implementing guidance for IPERA, 
[Footnote 64] OMB Circular No. A-136,[Footnote 65] and best practices 
suggested by the United States Chief Financial Officers Council 
(CFOC).[Footnote 66] We followed up with DOD officials, including the 
Improper Payments Project Officer, to obtain additional information 
about the department's corrective action plan. 

* We analyzed DOD's payment recapture plan, DOD's FMR chapter on 
recovery audits,[Footnote 67] and information in the AFR. We 
interviewed DFAS, TMA, and USACE officials, as well as the Improper 
Payments Project Officer, about the processes used to recover improper 
payments. 

* To assess DOD's implementation of the reporting requirements in 
IPERA and OMB's guidance,[Footnote 68] we compared the improper 
payment information provided in DOD's fiscal year 2011 AFR to the 
reporting requirements. We interviewed OUSD(C), DFAS, TMA, and USACE 
officials about the department's process to compile the information 
reported in the AFR. 

To assess the reliability of data reported in DOD's fiscal year 2011 
AFR related to improper payments, we reviewed DOD's supporting 
documentation and interviewed knowledgeable agency officials about the 
data. In the course of this assessment, we determined that DOD did not 
collect and maintain the supporting documentation necessary to 
substantiate the improper payment estimates reported in its fiscal 
year 2011 AFR. In addition, the department did not perform key quality 
assurance procedures, including reconciliations on all of the 
populations for its programs to validate that the populations were 
complete, valid, and accurate before selecting the statistical samples 
that were used to estimate improper payments. Therefore, we determined 
that the data were not reliable. These problems are discussed in our 
report. 

We conducted this performance audit from October 2011 to May 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Department of Defense: 

Under Secretary of Defense: 
1100 Defense Pentagon   
Washington, DC 203O1-1100: 

April 15, 2013: 

Mr. Asif Khan: 
Director, Financial Management and Assurance: 
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548: 

Dear Mr. Khan: 

This is the Department of Defense (DoD) response to the Government 
Accountability Office (GAO) draft report, GA0-13-227, "DoD Financial 
Management: Significant Improvements Needed in Efforts to Address 
Improper Payment Requirements," dated March 18, 2013 (GAO Engagement 
Code 197109). The Department's response is enclosed which addresses 
all 10 GAO recommendations. 

I continue to believe this program is fundamentally sound and I remain 
fully committed to comply in all respects with current statutory 
requirements. We welcome external reviews such as this one, conducted 
over the past 18 months. As discussed in the enclosed response, we 
concur with each finding and implementation will further strengthen 
our program. 

I am concerned, however, that characterizing the recommended 
improvements as "significant" may not adequately recognize the work 
that has already been done by DoD to minimize improper payments. 
Significant emphasis has been placed on minimizing improper payments 
by expanding pre-payment reviews. While Statistical Sampling for 
commercial payments was not included in the Fiscal Year (FY) 2011 
business that your team reviewed, it was put into place for the FY 
2012 reporting cycle. Consistent with your recommendations we will 
carefully review sampling methodology to ensure it is properly 
documented and appropriate for payments being sampled. Finally, we 
will continue to work closely with OMB and other federal agencies 
where appropriate to learn and apply best practices. In a separate but 
related initiative, the Department's progress toward audit readiness 
will further reinforce public confidence in this program and in our 
stewardship of taxpayer dollars. 

We appreciate the opportunity to comment on GAO's draft report Should 
you need further information, my point of contact for this matter is 
Ms. Sally Beccroft. She may be reached at (703) 602-0391 or 
sally.beecroft@osd.mil. 

Sincerely, 

Signed by: 

Robert F. Bale: 

Enclosure: As stated: 

Government Accountability Office (GAO) Draft Report: 
Dated March 18, 2013: 
GAO-13-227 (Engagement Code 197109): 

"DOD Financial Management: Significant Improvements Needed In Efforts 
To Address Improper Payment Requirements" 

Department of Defense (DoD) Comments to the GAO Recommendations: 

Recommendation 1: With regard to estimating improper payments, 
establish and implement key quality assurance procedures, such as 
reconciliations, to ensure the completeness and accuracy of the 
sampled populations. 

DOD Response: Concur. DoD will work with the Defense Finance and 
Accounting Service (DFAS) to implement key quality assurance 
procedures, such as reconciliations, to ensure the completeness and 
accuracy of the sampled populations. Estimated Completion Date (ECD) 
11/15/2014. 

Recommendation 2: With regard to estimating improper payments, revise 
the procedures documented in DoD's sampling methodologies so that they 
(1) are in accordance with OMB guidance and generally accepted 
statistical standards, and (2) produce statistically valid improper 
payment error rates, improper payment dollar estimates, and 
appropriate confidence intervals for both. At a minimum, such 
procedures should take into account the size and complexity of the 
transactions being sampled. 

DOD Response: Partially concur. As documented in past audits, sampling 
methodologies are in accordance with OMB guidance and produce 
statistically valid improper payment rates and appropriate confidence 
intervals around the rate. These methodologies will be reviewed for 
all payment types and will be modified where appropriate to produce 
valid improper payment dollar estimates and appropriate confidence 
intervals around the dollars. The sampling should take into account 
the size and complexity of the transactions being sampled. ECD 
12/31/2013. 

Recommendation 3: Develop and implement procedures to collect and 
maintain the supporting documentation necessary to support improper 
payment estimates. 

DOD Response: Concur. DoD will collaborate with DFAS and Defense 
Manpower Data Center to develop and implement procedures to collect 
and maintain the supporting documentation necessary to support 
improper payment estimates. ECD 9/30/2013. 

Recommendation 4: With regard to identifying programs susceptible to 
significant improper payments, conduct a risk assessment that is in 
compliance with IPERA. 

DOD Response: Concur. DoD will work collaboratively with the 
applicable Defense Components to develop a framework to conduct a risk 
assessment that is in compliance with IPERA. ECD 12/31/2013. 

Recommendation 5: With regard to reducing improper payments, establish 
procedures that produce corrective action plans that comply fully with 
IPERA and OMB implementation guidance, including at a minimum, holding 
individuals responsible for implementing corrective actions and 
monitoring the status of the corrective actions. 

DOD Response: Concur. DoD will work collaboratively with the 
applicable Defense Components to establish procedures that produce 
corrective action plans that fully comply with IPERA and OMB 
implementation guidance. These procedures will include individual 
accountability for implementing corrective actions and monitoring the 
status of the corrective actions. ECD 11/15/2014. 

Recommendation 6: With regard to reducing improper payments, establish 
procedures that produce corrective actions plans that are in 
accordance with best practices, such as those recommended by the Chief 
Financial Officers Council, and include (1) measuring the progress 
made toward remediating root causes and (2) communicating to agency 
leaders and key stakeholders the progress made toward remediating the 
root causes of improper payments. 

DOD Response: Concur. DoD will work collaboratively with the 
applicable Defense Components to establish procedures that produce 
corrective actions plans that are in accordance with best practices, 
such as those recommended by the Chief Financial Officers Council. 
These plans will include (1) measuring the progress made toward 
remediating root causes and (2) communicating to agency leaders and 
key stakeholders the progress made toward remediating the root causes 
of improper payments. ECD 11/15/2014. 

Recommendation 7: With regard to implementing recovery audits, develop 
and implement procedures to (1) identify costs related to the 
Department's recovery audits and existing recovery audits, and (2) 
evaluate existing improper payment recovery efforts to ensure that 
they are cost effective. 

DOD Response: Concur. The procedures previously developed for 
identifying costs related to DoD's recovery activities will be 
reviewed to ensure currency and accuracy. In addition, analyses will 
be performed to ensure the Department's recovery efforts are cost-
effective. ECD 11/15/2014. 

Recommendation 8: With regard to implementing recovery audits, monitor 
the implementation of the revised FMR chapter on recovery audits to 
ensure that the Components either develop recovery audits or 
demonstrate that is not cost effective to do so. 

DOD Response: Concur. DoD will work with the applicable Defense 
Components to monitor the implementation of the revised DoD Financial 
Management Regulation chapter on recovery audits. This action will 
help to ensure that recovery audits are developed, or will demonstrate 
that it is not cost-effective to do so. ECD 11/15/2014. 

Recommendation 9: With regard to implementing recovery audits, develop 
and submit to OMB for approval a payment recapture audit plan that 
fully complies with OMB guidance. 

DOD Response: Concur. DoD will develop and submit for OMB approval a 
payment recapture audit plan that fully complies with OMB guidance and 
is informed by a cost-effectiveness analysis. ECD 11/15/2014. 

Recommendation 10: With regard to reporting, design and implement 
procedures to ensure that the Department's annual improper payment and 
recovery audit reporting is complete, accurate, and in compliance with 
IPERA and OMB guidance. 

DOD Response: Concur. DoD will design and implement procedures to 
further ensure the Department's annual improper payment and recovery 
audit reporting is complete, accurate, and in compliance with IPERA 
and OMB guidance. ECD 11/15/2014. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Asif A. Khan, (202) 512-9869 or khana@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Cindy Brown Barnes (Assistant 
Director), Sharon Byrd (Assistant Director/Audit Sampling), Michael 
Bingham, and Sandra Silzer made key contributions to this report. Also 
contributing to this report were Francine DelVecchio, Justin Fisher, 
Wilfred Holloway, and Jason Kirwan. 

[End of section] 

Footnotes: 

[1] This figure is based on GAO's analysis of DOD's improper payment 
reporting in its fiscal year 2011 Agency Financial Report. 

[2] Improper payments include any payment to an ineligible recipient, 
any payment for an ineligible good or service, any duplicate payment, 
any payment for a good or service not received (except for such 
payments where authorized by law), and any payment that does not 
account for credit for applicable discounts. According to guidance 
from the Office of Management and Budget, agencies should also report 
as improper payments any payments for which insufficient or no 
documentation is found. 

[3] GAO, Improper Payments: Significant Improvements Needed in DOD's 
Efforts to Address Improper Payment and Recovery Auditing 
Requirements, [hyperlink, http://www.gao.gov/products/GAO-09-442] 
(Washington, D.C.: July 29, 2009). 

[4] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002), codified as 
amended at 31 U.S.C. § 3321 note. 

[5] Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010). Additional 
amendments to IPIA were made by the Improper Payments Elimination and 
Recovery Improvement Act of 2012 (IPERIA), Pub. L. No. 112-248, 126 
Stat. 2390 (Jan. 10, 2013). This new act was outside the scope of our 
audit and therefore, had no bearing on our findings, conclusions, and 
recommendations. 

[6] DOD's Agency Financial Report for fiscal year 2011 provides an 
overview of the department's financial information and performance 
goals and objectives. Additional information, such as the department's 
reporting on improper payments, is in Addendum A to the AFR. 

[7] DFAS is responsible for providing professional, financial, and 
accounting services to DOD and other federal agencies. It delivers 
mission-essential payroll, contract and vendor pay, and accounting 
services. 

[8] OMB, Memorandum M-11-16, Issuance of Revised Parts I and II to 
Appendix C of OMB Circular A-123 (Apr. 14, 2011); OMB, Circular No. A-
136 Revised, Financial Reporting Requirements (October 27, 2011); OMB, 
Memorandum M-11-04, Increasing Efforts to Recapture Improper Payments 
by Intensifying and Expanding Payment Recapture Audits (Nov. 16, 
2010); OMB, Standards and Guidelines for Statistical Surveys 
(September 2006); GAO, Assessing the Reliability of Computer-Processed 
Data, [hyperlink, http://www.gao.gov/products/GAO-09-680G] 
(Washington, D.C.: July 2009); GAO, Strategies to Manage Improper 
Payments, Learning From Public and Private Sector Organizations, 
[hyperlink, http://www.gao.gov/products/GAO-02-69G] (Washington, D.C.: 
October 2001); and United States Chief Financial Officers Council, 
Implementation Guide for OMB Circular A-123, Management's 
Responsibility for Internal Control, Appendix A, Internal Control over 
Financial Reporting (Washington, D.C.: July 2005). 

[9] DOD's TMA administers the TRICARE program, which provides military 
health benefits to active duty personnel and their families, retirees 
and their family members, and family members of deceased service 
members. 

[10] DFAS develops improper payment information for military pay, 
civilian pay, military retirement, DFAS commercial pay, and travel 
pay. TMA develops improper payment estimates for military health 
benefits, and USACE develops estimates for USACE travel pay and USACE 
commercial pay. 

[11] OMB, Circular No. A-11, Preparing and Submitting Budget Estimates 
(July 17, 2001). The 16 agencies included the Departments of 
Agriculture, Defense, Education, Health and Human Services, Housing 
and Urban Development, Labor, the Treasury, Transportation, and 
Veterans Affairs. The other agencies were the United States Agency for 
International Development, Environmental Protection Agency, National 
Science Foundation, Office of Personnel Management, Railroad 
Retirement Board, Small Business Administration, and Social Security 
Administration. 

[12] Pub. L. No. 107-107, div. A, title VIII, § 831, 115 Stat. 1012, 
1186 (Dec. 28, 2001), formerly codified at 31 U.S.C. §§ 3561-3567, 
repealed by IPERA § 2(h)(6) (repeal retained only 31 U.S.C. § 3562(a)). 

[13] OMB, Memorandum M-06-23, Issuance of Appendix C to OMB Circular A-
123 (Aug. 10, 2006). 

[14] For the purposes of this report, "risk assessment" refers to the 
required identification of programs and activities susceptible to 
significant improper payments under subsection 2(a) of IPIA, as 
amended. 

[15] IPERA required that agencies use 1.5 percent as the threshold 
rate, with all other aspects of the definition as described above, for 
fiscal years 2011 through 2012, transitioning to 2.5 percent in fiscal 
year 2013. OMB's implementing guidance instructed agencies to apply a 
2.5 percent rate for 2011 and 2012, and a 1.5 percent rate thereafter. 
IPERIA, effective January 10, 2013, provided that a 2.5 percent rate 
be used through fiscal year 2013, and a 1.5 percent rate be used 
thereafter. See IPERIA, Pub. L. No. 112-248, § 4. 

[16] OMB's implementing guidance for IPERA states that the sampling 
methodologies are to be approved by OMB prior to conducting the 
sampling measurements. 

[17] OMB, Memorandum M-11-04. 

[18] OMB, Memorandum M-11-04. 

[19] DOD, FMR, Volume 4, Chapter 14, Improper Payments (December 2008). 

[20] DOD, FMR, Volume 4, Chapter 14, Improper Payments (October 2011). 
An additional update to this chapter was made in October 2012. 

[21] DOD, FMR, Volume 10, Chapter 22, Recovery Audits (November 2009). 

[22] DOD, FMR, Volume 10, Chapter 22, Payment Recapture Audits 
(October 2012). 

[23] [hyperlink, http://www.gao.gov/products/GAO-09-442]. 

[24] The SBR is designed to provide information on authorized budgeted 
spending authority reported in the Budget of the United States 
Government (President's Budget), including budgetary resources, 
availability of budgetary resources, and how obligated resources have 
been used. An outlay is the issuance of a check, disbursement of cash, 
or electronic transfer of funds made to liquidate a federal obligation. 

[25] Intragovernmental transactions are collections from and payments 
to other federal government accounts, often as payment for goods or 
services provided. A trust fund is used to finance specific purposes 
or programs under a trust agreement or statute. 

[26] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[27] See OMB, Standards and Guidelines for Statistical Surveys, and 
[hyperlink, http://www.gao.gov/products/GAO-09-680G]. 

[28] [hyperlink, http://www.gao.gov/products/GAO-09-442]. 

[29] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[30] OMB, Memorandum M-11-16. 

[31] The sample population is defined as the population from which the 
sample was selected. 

[32] Attribute sampling is used to test whether the item being sampled 
does or does not possess specified attributes. The results of an 
attribute sample can be used to identify the extent to which an 
improper payment had been made, and the error rate based on the sample 
results. 

[33] Variable sampling results identify whether an error has been made 
and the dollar amount of the error. 

[34] [hyperlink, http://www.gao.gov/products/GAO-02-69G]. 

[35] [hyperlink, http://www.gao.gov/products/GAO-09-442]. 

[36] DOD, FMR, Volume 4, Chapter 14, Improper Payments (October 2011). 

[37] OMB, Memorandum M-11-16. 

[38] CFOC, Implementation Guide for OMB Circular A-123. The guide is 
intended to assist federal managers with implementing a process for 
assessing the effectiveness of an entity's internal control over 
financial reporting. 

[39] [hyperlink, http://www.gao.gov/products/GAO-09-442]. 

[40] DOD, FMR, Volume 4, Chapter 14, Improper Payments (October 2011). 

[41] DOD, FMR, Volume 10, Chapter 22, Recovery Auditing (November 
2009). 

[42] As shown in figure 2, the total travel pay improper payment 
estimate for fiscal year 2011 was $286.6 million. This amount 
consisted of $238.2 million in estimated overpayments and $48.4 
million in estimated underpayments. 

[43] [hyperlink, http://www.gao.gov/products/GAO-09-442]. 

[44] DOD, FMR, Volume 10, Chapter 22, Recovery Audits (November 2009). 

[45] DOD, FMR, Volume 10, Chapter 22, Payment Recapture Audits 
(October 2012). 

[46] [hyperlink, http://www.gao.gov/products/GAO-09-442]. 

[47] OMB, Memorandum M-11-04. 

[48] OMB, Circular No. A-136 Revised (October 27, 2011), and OMB, 
Memorandum M-11-16. 

[49] OMB Memorandum M-11-16 comprises the current version of Parts I 
and II of Appendix C to Circular No. A-123. 

[50] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[51] [hyperlink, http://www.gao.gov/products/GAO-09-442]. 

[52] As shown in figure 2, the total military retirement improper 
payment estimate for fiscal year 2011 was $18.9 million. This amount 
consisted of $18.8 million in estimated overpayments and $0.1 million 
in estimated underpayments. 

[53] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002), codified, as 
amended, at 31 U.S.C. § 3321 note. 

[54] Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010). 

[55] OMB, Memorandum M-11-16, Issuance of Revised Parts I and II to 
Appendix C of OMB Circular A-123 (Apr. 14, 2011); OMB, Circular No. A-
136 Revised, Financial Reporting Requirements (October 27, 2011); OMB, 
Memorandum M-11-04, Increasing Efforts to Recapture Improper Payments 
by Intensifying and Expanding Payment Recapture Audits (Nov. 16, 2010). 

[56] DOD's Agency Financial Report (AFR) for Fiscal Year 2011 provides 
an overview of the department's financial information and performance 
goals and objectives. Additional information, such as the department's 
reporting on improper payments, is in Addendum A to the AFR. 

[57] DFAS is responsible for providing professional, financial, and 
accounting services to DOD and other federal agencies. It delivers 
mission-essential payroll, contract and vendor pay, and accounting 
services. 

[58] OMB, Standards and Guidelines for Statistical Surveys (September 
2006); GAO, Assessing the Reliability of Computer-Processed Data, 
[hyperlink, http://www.gao.gov/products/GAO-09-680G] (Washington, 
D.C.: July 2009); GAO, Strategies to Manage Improper Payments: 
Learning From Public and Private Sector Organizations, [hyperlink, 
http://www.gao.gov/products/GAO-02-69G] (Washington, D.C.: October 
2001); and United States Chief Financial Officers Council 
Implementation Guide for OMB Circular A-123, Management's 
Responsibility for Internal Control, Appendix A, Internal Control over 
Financial Reporting (Washington, D.C.: July 2005). 

[59] The eight programs are military health benefits, military pay, 
civilian pay, military retirement, travel pay, DFAS commercial pay, 
U.S. Army Corps of Engineers (USACE) travel pay, and USACE commercial 
pay. 

[60] [hyperlink, http://www.gao.gov/products/GAO-02-69G]. 

[61] Although DOD reported improper payment information for eight 
programs, statistical estimates were provided for only seven of those 
programs for fiscal year 2011. DOD's improper payments reporting for 
DFAS commercial pay for fiscal year 2011 was limited to known improper 
payments. 

[62] OMB, Memorandum M-11-16; OMB, Standards and Guidelines for 
Statistical Surveys; and [hyperlink, 
http://www.gao.gov/products/GAO-09-680G]. 

[63] DOD's TRICARE Management Activity (TMA) administers the TRICARE 
program, which provides military health benefits to active duty 
personnel and their families, retirees and their family members, and 
family members of deceased service members. 

[64] OMB, Memorandum M-11-16. 

[65] OMB, Circular No. A-136 Revised (October 27, 2011). 

[66] CFOC, Implementation Guide for OMB Circular A-123. 

[67] DOD, FMR, Volume 10, Chapter 22, Recovery Auditing (November 
2009). 

[68] OMB, Circular No. A-136 Revised (October 27, 2011). 

[End of section] 

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