What are Improper Payments?

Under OMB (Office of Management and Budget), Federal agencies are required to periodically review payments under contracts, awards, grants, and other expenditures for improper payments. Within DoD, many agencies have programs in place to test for improper payments. DCAA (Defense Contract Audit Agency), for example, checks for improper payments in connection with "Testing of Paid Vouchers".

What are "improper payments"? Here's the OMB definition (which comes from Public Law No. 107-300).

1. 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, and includes any payment to an ineligible recipient, and
2. Any payment for an ineligible service, any duplicate payment, any payments for services not received, and any payment that does not account for credit for applicable discounts.

One primary purpose of an adequate billing system is to minimize improper payments. That's why contract auditors place so much emphasis on billing systems and associated internal controls. Many improper payments are inadvertent and could be avoided with a good billing system.

One area that has come into focus regarding improper payments is provisional billing rates. Contractors with cost-type contracts are reimbursed their actual direct costs and reimbursed their indirect costs at provisional billing rates. Provisional billing rates are trued up after the end of the year when contractors submit their annual incurred cost proposals. But it is contractors' responsibility to ensure that their provisional billing rates accurately reflect their best estimate of the final rate. At the beginning of the year, indirect rates are just educated guesses but as the year progresses, it becomes easier and easier to see what the final rate will look like. If the provisional billing rate is significantly higher than what the final rate is expected to be, contractors have an affirmative duty to revise those rates downward. Billing excessive provisional rates for too long will land contractors in the improper payment pool.

DoD Not Doing Enough to Reduce Improper Payments - Seemingly

Last week, Senator McCaskill (MO) wrote a letter to the Secretary of Defense in her position as ranking member of the Homeland Security and Governmental Affairs Committee requesting information regarding DoD's efforts to improve the collection and reporting of improper payments.

A recently published report by DoD's Office of the Inspector General (OIG) reviewed the Department's compliance with the Improper Payments Elimination and Recovery Act (IPERA). The OIG noted that DoD had failed to comply with five out of six statutory requirements. For example, DoD failed to publish the required Agency Financial Report on time due to unresolved disagreement over the accounting of specific transactions. Also, the Department did not conduct the necessary risk assessments and publish improper payment estimates for some of its programs (e.g. travel reimbursements).

DoD didn't seem too upset by the negative report. It defended its actions stating "we consider the improper payments program, as a whole, to be fundamentally sound.

McCaskill wasn't too impressed with that response and asked DoD for written responses to the following questions:

• Provide an update on DoD's status of implementing OIG's recommendations to reform agency compliance with IPERA including whether deadlines in DoD's action plan have been met, are on track for completion, or have been adjusted.d
• Describe any other steps, beyond implementing OIG's recommendations, that DoD has taken to address and reduce improper payments.

Many other agencies beside DoD have had difficulties complying with the provisions of IPERA. Refer to "Improper Payments Acts -Government Efforts to Reduce Improper Payments" for additional information on the Act and GSA's (General Services Administration) problems in complying with its provisions. Many agencies have targeted employee travel reimbursements as their highest risk area for improper payments. That is also a concern of DoD but their biggest risk is improper payments to its contractors.

Improper Payment Acts - DoD's Implementation

Last week we discussed GSA's (General Services Administration) progress toward compliance with the Improper Payments Acts citing a report by the Agency's Office of Inspector General that identified deficiencies in reporting and evaluating improper payments (see Improper Payment Acts - Government Efforts to Reduce Improper Payments). The Acts require federal agencies to review their programs and identify those that are susceptible to significant improper payments.

The Department of Defense Office of Inspector General (DoD-IG) recently issued their report on DoD's compliance with the Improper Payment Acts (see The DoD Did Not Comply With the Improper Payment Elimination and Recovery Act in FY 2016). As the report title implies, the DoD-IG found significant room for improvement in DoD's compliance with the statutory requirements of the Acts.

The DoD identified 10 programs that are at high risk for improper payments. Among the 10 are four at-risk areas affecting payments to contractors. These are,

1. Defense Finance and Accounting Service (DFAS) Commercial Pay - This is where most DoD contractors send their public vouchers and progress payments.
2. U.S. Army Corps of Engineers Commercial Pay
3. Navy Enterprise Resource Planning Commercial Pay
4. Navy Commercial Bill Pay - Naples

DoD organizations are required to implement comprehensive systems of internal controls that provides reasonable assurance that programs are operating as intended and to evaluate the effectiveness of the controls. DoD did not perform risk assessments in some cases nor did it publish estimates that were statistically valid, nor did ity publish corrective actions with planned or actual completion dates.

The DFAS Commercial Pay is one of the programs that report improper payments and the testing that was performed for this system excluded billions of dollars worth of transactions. About $3 billion was excluded because DoD inappropriately believed that since the costs were being audited by DCAA, it was of low risk.

The DoD-IG made a number of recommendations which were essentially concurred to by DoD. As a result, some defense contractors may see increased oversight by the Government in its increased efforts to reduce (or eliminate, if possible) improper payments.

Improper Payment Acts - Government Efforts to Reduce Improper Payments

The Improper Payments Information Act of 2002, the Improper Payments Elimination and Recovery Act of 2010, and the Improper Payments Elimination and Recovery Improvement Act of 2012 are collectively referred to as the Improper Payments Acts. The purpose of these Acts is to eliminate and recover payments improperly made by federal agencies. The Acts require federal agencies to review their programs and identify those that are susceptible to significant improper payments. Many Government contractors have felt the impact of these efforts, either through the respective finance (payment) offices, contract administration, and contract auditors. Improper payments can take many forms and do not necessarily mean that anything fraudulent, wasteful, or abusive has occurred. Sometimes timing issues result in temporary improper payments because, for example, contractors have not had time to update their billings to reflect final, rather than provisional, indirect expense rates.

In fiscal year 2015, the Federal Government estimated $136 billion in improper payments - payments that under statutory, contractual, administrative, or other legally applicable requirements should not have been made or were made in an incorrect amount. Such payments are generally believed to be widespread and a significant problem in the Federal Government.

The OMB (Office of Management and Budget) issued guidance on how Agencies should (or could) eliminate improper payments. First, agencies must conduct risk assessments to identify the programs most susceptible to significant improper payments. Then, agencies must come up with corrective action plans and estimate and report improper payments for those programs annually. Most importantly however, agencies must recover funds that were inappropriately expended.

So how are agencies doing in ferreting out and recovering improper payments?

A recent report by GSA's (General Service Administration) Office of Inspector General (OIG) gives us some insight on this issue. The report concluded that GSA's Office of Chief Financial Officer (the department tasked with ensuring compliance with the Improper Payment Acts) was deficient in its reporting and evaluation of improper payments. Specifically, the OIG found:

• GSA did not have adequate internal controls over reporting improper payments. Its fiscal year 2016 report was published with numerous errors.
• GSA was not successful in identifying ineffective controls through its continuous monitoring of vendor payments, and
• GSA did not sufficiently implement corrective action related programs previously identified as high risk.

The GSA experience may or may not be indicative of the Government as a whole however GSA is one of the Government's biggest spenders of taxpayer funds. It is apparent that the emphasis on eliminating improper payments will continue. Contractors can continue to expect increased levels of oversight on public vouchers, progress payments, and other forms of payments from the Government.