OMB_Circular_A-123_Appendix_C_2014.pdf

EXECUTIVE OFFICE OF THE PRESIDENT

OFFICE OF MANAGEMENT AND BUDGET

WASHINGTON , D. C. 20503

THE DIRECTOR October 20, 2014

M-15-02

ADS OF EXECUTIVE DEPARTMENTS AND AGENCIES

FROM:

SUBJECT: Appendix C to Circular No. A-123 , Requirements for Effective Estimation and Remediation ofImproper Payments

The Administration has made reducing improper payments-payments made to the wrong entity, in the wrong amount, or for the wrong reason-a top priority. Since coming into office, the President has signed two laws and issued three directives- including an Executive Order- that created a robust infrastructure for agencies to reduce improper payments in their programs. Through thi s committed focus , the government-wide improper payment rate has declined for four consecutive years, from 5.42 percent in fiscal year (FY) 2009 to 3.53 percent in

FY2013.

The enactment of the Improper Payments Elimination and Recovery Improvement Act (IPERIA) of201 2 provided an opportunity for the Office of Management and Budget (OMB) to re-examine existing guidance to ensure agencies are able to more efficiently reduce their improper payment rates, while also complying with multiple legislative and administrative requirements. The goal of this overhauled version of Appendix C to Circular No. A-123 1 is to transform the improper payment compliance framework to create a more unified, comprehensive, and less burdensome set of requirements. Appendix C accomplishes the following:

• Consolidates and streamlines reporting requirements for agencies and Inspectors General, and eliminates duplicative and old one-time requirements so agencies can spend less time producing compliance reports and more time focusing on game changing solutions for achieving payment accuracy;

• Establishes new categories for reporting improper payments that will provide more granularity on improper payment estimates- thus leading to more effective corrective actions at the program level and more focused strategies for reducing improper payments at the government-wide level;

1 Appendix C implements requirements from the following: (1) the Improper Payments Information Act of2002 (!PIA), as amended; (2) the Improper Payments E limination and Recovery Act of20 I 0 (IPERA); (3) the Improper Payments Elimination and Recovery Improvement Act of2012 (IPERIA); and (4) Executive Order 13520 Reducing Improper Payments- issued November 20, 2009.

• Introduces a new internal control framework to ensure that payments are made in the right amount, to the right entity, and for the right purpose; and

• Provides guidance to agencies- as required by the most recent statute, IPERIA- to strengthen the statistical validity of estimates and include payments to Federal employees in the definition of improper payments, among other things.

OMB Circular A-123 , Appendix C, Patis I and II (which were issued in April2011 as OMB Memorandum M-11-16) and Pati III (which was issued in March 2010 as OMB Memorandum M-10-13) are hereby modified. Unless otherwise noted in the guidance, the requirements found in Appendix Care effective starting in FY 2014. OMB will continue to work closely with agencies and Inspectors General to provide further implementation guidance as needed.

Please contact Flavia Menasce (fmenasce@omb.eop.gov), Heather Pajak (hpajak@omb.eop.gov), or Mike Wetklow (mwetklow@omb.eop.gov) in OMB's Office of Federal Financial Management with any questions regarding this guidance.

Attachment mailto:mwetklow@omb.eop.gov mailto:hpajak@omb.eop.gov mailto:fmenasce@omb.eop.gov

APPENDIXC

Requirements for Effective

Estimation and Remediation of

Improper Payments

TABLE OF CONTENTS

INTRODUCTION

OVERVIEW

PART I- IMPROPER PAYMENTS ELIMINATION AND RECOVERY •••••••••••••••••••••••••••••••••••••••••••••••••• 7

A. RISK-ASSESSING, ESTIMATING, AND REPORTING IMPROPER PAYMENTS

1) Which agencies are required to comply with the requirements of IPIA, IPERA, and

6) Must agencies include payments related to charge cards in improper payment risk

11) What information should agencies provide to persons or entities producing improper

12) Are agencies allowed to rely upon self-reporting by recipients of agency payments when

13) Are agencies allowed to implement an estimation approach that excludes improper payments that have been subsequently corrected and recovered from the annual estimate?

15) Should data used for estimating improper payments coincide with the fiscal year being

16) What are Federally-funded, State-administered programs, and may agencies consider

IPERIA?

2) What is an improper payment?

3) What is a payment for an ineligible good or service?

4) What is a program or activity?

5) Must agencies include payments to employees in improper payment risk assessments? ... 8 assessments?

7) Must agencies review intra-governmental transactions?

8) What constitutes an improper loan or loan guarantee payment?

9) What specific steps are agencies required to take?

Step 1: Review all programs and activities and identify those that are susceptible to significant improper payments

Step 2: Obtain a statistically valid estimate of the annual amount of improper payments in programs and activities for those programs that are identified in Step 1 as susceptible to significant improper payments

Step 3: Implement a plan to reduce improper payments

Step 4: Report annually in the AFR or PAR

10) When must agencies conduct risk assessments? ...........• payment estimates?

estimating improper payments?

·· ···· ··············· ···· ····· ····· ····· ····················· ········ ········· ········ ····· ······· ········································· 18

14) May agencies use alternative sampling and estimation approaches?

reported in the AFR or PAR?

other approaches for these types of programs?

17) Are programs that are identified as susceptible to significant improper payments, and that annually report improper payment estimates, permanently subject to improper payments reporting requirements?

18) Are programs and activities that have been deemed susceptible to significant improper payments as a result of the Disaster Relief Appropriations Act, 2013, permanently subject to improper payments reporting requirements?

B. IMPROVING THE DETERMINATION OF IMPROPER PAYMENTS

1) How will OMB determine the "high-priority" programs as required under IPERIA?

2) What are the requirements under IPERIA for establishing semi-annual or quarterly actions for reducing improper payments?

3) Do high-priority programs have any specific requirements regarding corrective actions?

4) Are there any additional reporting requirements for agencies that have high-priority programs?

C. CATEGORIES FOR REPORTING IMPROPER P AYMENTS

1) What categories should agencies use when reporting improper payment estimates?

2) How should agencies focus on fraudulent activities?

D. pAYMENT RECAPTURE AUDITS

2) What are the general agency requirements for implementing a payment recapture audit

5) What criteria should an agency consider in determining whether a payment recapture

6) What should an agency do if it determines that a payment recapture audit program would

7) Should the agency follow any particular procedures when conducting payment recapture

8) Can Federal agencies provide money to States and Local governments for Financial

11) Are there any specific requirements when using a contracted payment recapture auditing

13) Who performs recovery activities once the improper payments are discovered and

1) What are the definitions used for payment recapture auditing in this guidance?

program?

3) Should agencies establish targets for their payment recapture audit programs?

4) What is the scope for payment recapture audit programs?

audit is cost-effective?

not be cost-effective?

audits of grants payments?

Management Improvement efforts?

9) Who may perform payment recapture audits?

10) May contractors perform payment recapture audit services?

firm? ................................................................................................................... ;

12) Are there any prohibitions when using a payment recapture audit contractor?

verified?

14) What is the proper disposition of recovered amounts? .................................. .. ...... ........... 3 5

15) Are agencies authorized to implement Financial Management Improvement Programs? 3 7

16) What are the reporting requirements for payment recapture audits?

17) How are improper payment estimates different from payment recapture audit efforts? .. 3 8

PART II- COMPLIANCE WITH THE IMPROPER PAYMENT REQUIREMENTS

A. RESPONSIBILITIES OF AGENCY INSPECTORS G ENERAL

1) When should each agency Inspector General begin reviewing improper payment performance to determine whether the agency is in compliance under IPERA? ............. 3 9

2) When should the agency Inspector General complete its review of agency compliance under IPERA? .... .... .... ..... ....... ....... ................................. .. .. ..... ....... ... .... ... .... ... ... ........ ....... 3 9

3) What should each agency Inspector General review to determine if an agency is in compliance under IPERA?

4) What else should the agency Inspector General include in its compliance review and report?

5) Who should the agency Inspector General notify when it has completed its determination of whether an agency is in compliance under IPERA?

B. RESPONSIBILITIES FOR AGENCIES

1) What are the requirements for agencies not compliant under IPERA?

C. INTERNAL CONTROL OVER IMPROPER PAYMENTS

1) What are the criteria as to when an agency should initially be required to obtain an opinion on internal control over improper payments?

2) How do internal control standards apply to improper payments?

PART III- REQUIREMENTS FOR IMPLEMENTING EXECUTIVE ORDER 13520

A. GENERAL G UIDANCE

2) How will OMB determine the "high-priority" programs as required under Section 2(a)(i)

3) What are agencies required to submit for the improper payments website as required

1) Which agencies are subject to the requirements of Executive Order 13520?

of the Executive Order?

under Section 2(b) of the Executive Order?

4) Why is program access important?

5) Does this guidance create any special rights? ................. ..... ....... ............ ........ ....... ......... .. 4 7

B. SUPPLEMENTAL MEASURES

1) What are the requirements for establishing annual or semi-annual measurements in high

3) Who is required to establish annual or semi-annual measurements under the Executive

4) How should agencies establish annual or semi-annual targets for supplemental measures?

priority programs, also known as supplemental measures?

2) Which tools should agencies use to identify supplemental measures? ... ... ............ .... ....... 4 7

Order?

········ ··················· ············· ·········· ····· ··· ·· ···· ·· ···· ··· ···· ············· ··············· ······· ··· ······ ········ ·········· 49

5) Are the reduction targets described in section I.A.9 of this guidance the same as the supplemental targets that agencies will set to comply with the Executive Order?

6) How will agencies report annual or semi-annual supplemental measures and targets? ... 49

C. ACCOUNTABLE OFFICIAL REQUIREMENTS

1) Which agencies are responsible for establishing accountable officials under Section 3(a) of the Executive Order?

2) Who may serve as an agency or component accountable official under Section 3(a) of the

Executive Order?

3) What are the accountable officials' roles and responsibilities?

4) What are the agency requirements for providing a report to their IGs in response to

Section 3(b) of the Executive Order?

5) What are the Inspector General ' s responsibilities with respect to the report under Section

3(b) ofthe Executive Order?

D. AGENCY HEAD QUARTERLY HIGH-DOLLAR REPORT TO THE INSPECTOR GENERAL

1) What is a "high-dollar" overpayment?

2) Which sources should agencies utilize to identify high-dollar overpayments?

3) What information should be included in agency reporting on high-dollar overpayments?

4) Which agencies must report on high-dollar overpayments? Where shall agencies report high-dollar overpayments to the public? What if an agency has no high-dollar overpayments?

5) Are there exceptions to the reporting requirements for the high-dollar report?

INTRODUCTION

Unless otherwise noted, the requirements found in this guidance are effective for fiscal year (FY) 2014 and beyond. This guidance implements the requirements from the following:

204);

• Improper Payments Elimination and Recovery Improvement Act of2012 (IPERIA; Pub.

L. No. 112-248)1 ; and

• Executive Order 13520-Reducing Improper Payments-issued November 20,2009.

Issuance of this guidance hereby modifies the Office of Management and Budget (OMB) Circular A-123, Appendix C, Parts I and II (which were issued in April2011 as OMB Memorandum M-11-16) and Part III (which was issued in March 2010 as OMB Memorandum M-10-13).

OVERVIEW

Before the passage ofiPIA, there was no overarching government-wide framework for measuring-let alone reducing-Federal improper payments. Between 2002 and 2009, as more agencies began measuring and reporting improper payment estimates for their programs, it became increasingly clear that Federal improper payments represented a significant loss to the government. As a result, between 2009 and present time, the Federal government has built a robust infrastructure of legislative and administrative requirements with which agencies must comply in order to achieve tangible results. These requirements-which apply to a wide array of stakeholders-are described in detail in Appendix C to OMB Circular A-123 . The six paragraphs below, as well as Figure 1, provide only a cursory overview of some key Appendix C requirements. However, for a more precise and comprehensive description, readers should consult the subsequent pages of the guidance.

Payment Recapture Audits. One fundamental requirement that agencies must meet is to recover any Federal dollars that should not have gone out the door. IPERA requires any program that expends at least $1 million to implement payment recapture audits, if cost effective to the agency, in order to recover improper payments (see section I.D).

Low-Risk Programs. Independent of any payment recapture activities, IPERA also requires that all programs assess their risk for improper payments. If an agency deems a program to be at a low risk for improper payments, the agency will re-assess that program' s risk at least every three years (see section I.A.9, step 1).

Programs Susceptible to Significant Improper Payments. If an agency deems a program to be susceptible to significant improper payments, the agency is required to estimate and report improper payments for that program annually, in addition to implementing corrective actions to reduce its improper payments (see section I.A.9, steps 2-4). In doing so, agencies should identify

1 This guidance does not address the Do Not Pay initiative, which is found in Section 5 ofiPERIA.

the root causes of, and implement appropriate corrective actions to prevent and reduce the related improper payments. Agencies should continuously identify innovative corrective actions to prevent and reduce improper payments. For example, corrective actions could leverage new technologies and advanced techniques-such as forensic tools, pre-payment software, and data matches. In addition, for all programs that are susceptible to significant improper payments, Executive Order 13520-Reducing Improper Payments-requires agencies to produce a quarterly report of any "high-dollar" overpayments (see section III.D).

High-Priority Programs. IPERIA reinforces the requirements from Executive Order 13520 by:

fostering greater agency accountability; requiring OMB to designate the programs with the most egregious cases of improper payments as high-priority; and requiring those programs to develop indicators of improper payments (called supplemental measures) that are more frequent than the annual estimates, as a tool for tracking progress (see section III.B). Furthermore, Executive Order 13520 also requires those agencies with high-priority programs to name accountable officials to oversee efforts to reduce program improper payments (see section III. C).

Annual Reporting. Once a year, agencies will report in the Agency Financial Report (AFR) or the Performance and Accountability Report (PAR) most of the required components listed in Appendix C.2 As agencies implement Appendix C, they should approach improper payments with an internal control framework in mind and provide a thoughtful analysis linking agency efforts in establishing internal controls and reducing improper payment rates (see section II. C).

Annual Inspector General Compliance Review. IPERA adds an important component of accountability to the entire spectrum of improper payment efforts. Every year, each agency Inspector General reviews agency improper payment reporting in the agency's AFR or PAR to determine if the agency is in compliance with Appendix C requirements listed under section

II.A.3.

Figure 1 : Appendix C at a Glance

• IP > $750 M

• Accountable Officials

• Supplemental Measures

• Meets $10M & 1.5% (or $100M) Susceptible to ...lrlr... • Annual Estimates Significant IPs ~ • Corrective Actions

• High-Dollar Reports

Low Risk

• If Program> $1 M

• If Cost-Effective

2 Per OMB Circular No. A-136, agencies may choose either to produce a consolidated PAR or to produce a separate AFR and Annual Performance Report (APR).

PART I- IMPROPER PAYMENTS ELIMINATION AND RECOVERY

Part I discusses the requirements ofiPIA3, IPERA, and IPERIA.

A. RISK-ASSESSING, ESTIMATING, AND REPORTING IMPROPER PAYMENTS

1) Which agencies are required to comply with the requirements of IPIA, IPERA, and

IPERIA?

The agencies required to comply with IPIA, IPERA, and IPERIA are defined broadly as "a[ny] department, agency, or instrumentality in the executive branch of the United States" as defined in Title 31, Section 102 of the United States Code.

2) What is an improper payment?

An improper payment is any payment that should not have been made or that was made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirements. Incorrect amounts are overpayments or underpayments that are made to eligible recipients (including inappropriate denials of payment or service, any payment that does not account for credit for applicable discounts4

, payments that are for an incorrect amount, and duplicate payments). An improper payment also includes any payment that was made to an ineligible recipient or for an ineligible good or service, or payments for goods or services not received (except for such payments authorized by law). In addition, when an agency's review is unable to discern whether a payment was proper as a result of insufficient or lack of documentation, this payment must also be considered an improper payment.

The term "payment" in this guidance means any disbursement or transfer of Federal funds (including a commitment for future payment, such as cash, securities, loans, loan guarantees, and insurance subsidies) to any non-Federal person, non-Federal entity, or Federal employee, that is made by a Federal agency, a Federal contractor, a Federal grantee, or a governmental or other organization administering a Federal program or activity. The term "payment" includes Federal awards subject to the Single Audit Act and the Uniform Guidance for Federal assistance (2 CFR 200 Subpart F) (Single Audits) that are expended by both recipients and sub-recipients.

3) What is a payment for an ineligible good or service?

A payment for an ineligible good or service includes a payment for any good or service that is not permitted under any provision of a contract, grant, lease, cooperative agreement, or other funding mechanism.

3 Unless otherwise indicated, from this point forward in the guidance the term "IPIA" will imply "IPIA, as amended by IPERA and IPERIA."

4 Applicable discounts are only those discounts where it is both advantageous and within the agency's control to claim them.

4) What is a program or activity?

The law anticipates that agencies will examine the risk of, and feasibility of recapturing, improper payments in all programs and activities administered. The term "program" includes activities or sets of activities recognized as programs by the public, OMB, or Congress, as well as those that entail program management or policy direction. 5 This definition includes, but is not limited to, all grants including competitive grant programs and block/formula grant programs, non-competitive grants such as single-source awards, regulatory activities, research and development activities, direct Federal programs, all types of procurements (including capital assets and service acquisition), and credit programs. It also includes the activities engaged in by the agency in support of its programs.

For Federal awards subject to the Single Audit Act or otherwise listed in the Catalog of Federal Domestic Assistance (CFDA), agencies should consider using the groupings in the Compliance Supplement for Single Audits (referred to as "clusters of programs") and the CFDA. However, unless otherwise specified in OMB Circular A-11, each Federal agency, after consultation with OMB, is authorized to determine the grouping of programs which most clearly identifies and reports improper payments for their agency. Agencies must1not put programs or activities into groupings that may mask significant improper payment rates by the large size or scope of a groupmg. For transparency, the basis for these groupings must be reported in the agency's AFR or PAR.

5) Must agencies include payments to employees in improper payment risk assessments?

Yes. IPERIA amended the definition of"payment" in IPIA to include payments made to Federal employees, in addition to payments made to non-Federal persons or entities. Therefore, agencies must include payments made to employees (including salary, locality pay, travel pay, and other payments to Federal employees) in the risk assessments (beginning in FY 2014) and, if applicable, in improper payment estimates (the following fiscal year). For improper payment reporting purposes, when a shared service provider is responsible for the actual disbursements of payments to employees (for example, payroll) on behalf of a customer agency, the customer agency and shared service provider6 should assess only the portions of the process that are within their respective control.

6) Must agencies include payments related to charge cards in improper payment risk assessments?

Yes. Agencies should include such payments in risk assessments (beginning in FY 2014) and, if applicable, in improper payment estimates (the following year). Agencies should leverage guidance in OMB Circular A-123, Appendix B-Jmproving the Management ofGovernment Charge Card Programs-and OMB Memorandum M-13-21-Jmplementation ofthe

5 The term "program" in this guidance implies "program and activity."

6 Shared service providers can leverage service organization internal control reports such as Reports on Controls at a

Service Organization Relevant to User Entities' Internal Control over Financial Reporting (also known as SOC 1

Reports) or other OMB A-123 assessments.

Government Charge Card Abuse Prevention Act of2012-when performing these risk assessments.

7) Must agencies review intra-governmental transactions?

No. IPIA does not require agencies to include payments made by a Federal agency to another Federal agency. Therefore, agencies are not obligated to review intra-governmental transactions.

However, any agency may review such payments, and must do so if directed by OMB.

8) What constitutes an improper loan or loan guarantee payment?

Under a direct loan program, improper payments may include disbursements to borrowers or other payments by the Government to non-Federal entities that are based on incomplete, inaccurate, or fraudulent information. They may also include disbursements or other payments that are duplicate, in an incorrect amount, or for purposes other than those allowed by law, program regulations, or agency policy.

Under a loan guarantee program, an improper payment may include payments by the Government to non-Federal entities for defaults, delinquencies, interest and other subsidies, or other payments that are based on incomplete, inaccurate, or fraudulent information. They may also include duplicate payments, payments in an incorrect amount, or any payments that are not in compliance with law, program regulations, or agency policy.

9) What specific steps are agencies required to take?

Unless an agency has specific written approval from OMB to deviate from the steps explained below, agencies are required to follow these steps to determine whether the risk of improper payments is significant and to provide valid annual estimates of improper payments 7• The agency is responsible for maintaining the documentation to demonstrate that the following steps (if applicable) were satisfied.

Step 1: Review all programs and activities and identify those that are susceptible to significant improper payments.

a. Definition. For the purposes of this guidance, beginning with FY 2014 reporting and beyond, "significant improper payments" are defined as gross annual improper payments (i.e., the total amount of overpayments and underpayments) in the program exceeding (1) both 1.5 percent of program outlays and $10,000,000 of all program or activity payments made during the fiscal year reported or (2) $100,000,000 (regardless of the improper payment percentage of total program outlays).

7 Improper payment rates referenced here and throughout this guidance should be based on dollars rather than number of occurrences. In other words, the improper payment rate should be the amount in improper payments divided by the amount in program outlays for a given program in a given fiscal year (rather than the number of improper payments divided by the total number of payments).

b. Systematic Method. All agencies shall institute a systematic method of reviewing all programs and identify programs susceptible to significant improper payments. This systematic method could be a quantitative evaluation based on a statistical sample or a qualitative method (e.g., a risk-assessment questionnaire). At a minimum, agencies shall take into account the following risk factors likely to contribute to improper payments, regardless of which method (quantitative or qualitative) is used:

1. Whether the program or activity reviewed is new to the agency;

11. The complexity of the program or activity reviewed, particularly with respect to determining correct payment amounts;

111. The volume of payments made annually;

1v. Whether payments or payment eligibility decisions are made outside of the agency, for example, by a State or local government, or a regional Federal office;

v. Recent major changes in program funding, authorities, practices, or procedures;

v1. The level, experience, and quality of training for personnel responsible for making program eligibility determinations or certifying that payments are accurate;

Vll. Inherent risks of improper payments due to the nature of agency programs or operations;

vm. Significant deficiencies in the audit reports of the agency including, but not limited to, the agency Inspector General or the Government Accountability Office (GAO) audit report findings, or other relevant management findings that might hinder accurate payment certification; and

1x. Results from prior improper payment work.

When appropriate, agencies may leverage other existing processes to help implement this systematic method. For example, if an agency chose to develop and implement an improper payment risk -assessment questionnaire, the agency might consider leveraging another existing similar tool, such as an internal control questionnaire.

c. Other Risk Susceptible Programs. OMB may determine on a case-by-case basis (e.g., if an audit report raises questions about an agency's risk assessment or improper payments results) that certain programs that do not meet the threshold requirements described above may still be subject to the annual AFR or PAR reporting requirement.

d. Examples. To further clarify use of the quantitative evaluation method for performing risk assessments in this step, we provide four examples:

Example 1: Under the analysis in Step 1, a program has a potential improper payment rate of 1.2 percent or $14 million. Under this guidance an agency need not perform Step 2-obtaining a statistically valid estimate of improper payments in the program-because even though the potential amount of improper payments in the program exceeds $10 million, the potential improper payment rate does not exceed 1. 5 percent.

Example 2: Under the analysis in Step 1, a program has a potential improper payment rate of 1.8 percent or $9 million. Under this guidance, an agency need not perform Step 2-obtaining a statistically valid estimate of improper payments in the program-because even though the potential improper payment rate exceeds 1.5 percent, the potential amount of improper payments in the program does not exceed $1 0 million.

Example 3: Under the analysis in Step 1, a program has a potential improper payment rate of 1.8 percent and $11 million. Under this guidance, an agency must perform Step 2-obtaining a statistically valid estimate of improper payments in the program-because the potential improper payment rate exceeds

1.5 percent and the potential amount of improper payments exceeds $10 million.

The agency must report a statistically valid improper payment rate for the program in its annual AFR or PAR.

Example 4: Under the analysis in Step 1, a program has a potential improper payment rate of0.6 percent and $125 million. Under this guidance, regardless of the potential improper payment rate, the agency must perform Step 2-obtaining a statistically valid estimate of improper payments in the program-because the potential amount of improper payments in the program exceeds $100 million.

Step 2: Obtain a statistically valid estimate of the annual amount of improper payments in programs and activities for those programs that are identified in Step 1 as susceptible to significant improper payments. 8

Programs reporting improper payments for the first time and programs revising their current methodology shall conform to the process and content described below in steps

2.1 and 2.2. Programs that are currently using methodologies approved by OMB under the previous version ofOMB A-123 Appendix C do not need to resubmit a methodology plan-unless an update to the plan is warranted. Programs should consider updating their plan if the program undergoes any significant changes such as legislative, funding, structural, etc.

Step 2.1: Process. All programs and activities susceptible to significant improper payments shall design and implement appropriate statistical sampling and estimation methods to produce statistically valid improper payment estimates. In doing so, agencies shall conform to the following process:

a. Annual Estimated Amount. For all programs and activities susceptible to significant improper payments, agencies shall determine an annual estimated amount of improper payments made in those programs and activities. When calculating a program's annual improper payment amount, agencies should only utilize the amount paid improperly. For example, if a $100 payment was due, but a $110 payment was

8 Step 2 should occur in the fiscal year following the fiscal year in which the risk assessment was conducted under Step 1.

made erroneously, then the amount applied to the annual estimated improper payment amount should be $10, rather than the payment amount of $110. Similarly, if a $100 payment was due, but a $90 payment was made erroneously, then the amount applied to the annual estimated improper payment amount should be $10, rather than the payment amount of $90. However, if a $100 payment was due and made, but there is insufficient documentation to support the appropriateness of the payment or if a duplicate payment was made, then the amount applied to the annual estimated improper payment amount should be $100. Agencies are required to determine an annual estimate that is a gross total of both over and underpayments (i.e., overpayments plus underpayments). However, in addition to the gross total, agencies are also allowed to calculate and disclose in their AFRs or PARs the net total (i.e. , overpayments minus underpayments).

b. Statistical Sampling and Estimation Plans. Agencies are responsible for designing and documenting their sampling and estimation plan. Each plan shall be prepared by a statistician9 (either an agency employee or a contractor) and submitted to OMB no later than June 30 of the fiscal year for which the estimate is being produced (e.g. , the sampling methodology to be used for the FY 2014 reporting cycle must be submitted by June 30, 2014). The agency shall also include a summary oftheir sampling methodology plan in its AFR or PAR. The sampling and estimation plan shall be accompanied by a document certifying that the methodology will yield a statistically valid improper payment estimate (see below).

c. Certification. IPERA requires agencies to produce statistically valid estimates of improper payments, and therefore each plan shall be accompanied by a certification stating that the methodology will produce a statistically valid estimate. The certification shall be signed by an agency official ofthe agency's choosing (e.g., this could be the Chief Financial Officer, his/her Deputy, a program official, etc.). Upon receipt, OMB will review the documents (i.e., the proposed statistical sampling plan and the accompanying signed certification) to verify that they are complete and include all the requisite components listed in Step 2.2 below. It is important to note that OMB will not be issuing a formal approval to the agency for the sampling plan rather, it is the agency's responsibility to produce a statistically valid methodology.

The signed certification will serve as evidence that the agency believes the methodology is statistically sound. OMB does reserve the right to raise questions about the particular methodology, should the need arise.

d. Working with other Entities. Agencies should consider working with entities-such as grant recipients-that are subject to Single Audits to leverage ongoing audits to assist in the process to estimate an improper payment rate and amount.

e. Incorporating Recommendations. Whenever possible, agencies should incorporate refinements to their improper payment methodologies based on recommendations

9 This person should have training and experience designing statistical samples and using statistical methods to calculate population estimates and sampling errors from a probability sample. This person would generally have an advanced degree in statistics, biostatistics, mathematics, a quantitative social science, or a similar field.

from agency staff or auditors (such as their agency Inspector General, GAO, or private auditors).

f. Example Plans from Other Agencies. OMB will make available to agencies examples of statistical sampling and estimation plans submitted by agencies.

Agencies are encouraged to review these examples and consult with other agencies when preparing their sampling plans. While each plan will likely be slightly different given the unique nature of each program, there are some characteristics that are common across many programs, and agencies should benefit from each other's work.

However, each agency is responsible for designing and executing an appropriate sample to statistically estimate improperly paid dollars that meets the requirements in this guidance.

Step 2.2: Content of Statistical Sampling and Estimation Plans. Agencies shall clearly and concisely describe the statistical methods that will be used to design and draw the sample and produce an improper payment estimate for the program in question. The plans shall explain and justify why the proposed methodology is appropriate for the program in question-this explanation must be supported by accurate statistical formulas, tables, and any additional materials to demonstrate how the sampling and estimation will be conducted and the appropriateness of those statistical methods for the program.

Agency sampling and estimation plans must be complete and internally consistent. The following aspects must be clearly addressed:

a. Probability Sampling. Improper payment estimates shall generally be based on probability samples and shall provide estimates of the sampling error for the amount of the improper payments. Agencies may use simple random samples if those are appropriate, but many agencies have employed more complex stratified or multi-stage or clustered samples in order to obtain estimates of different components of the program that are more actionable than can be afforded by simpler sample designs.

Depending on the nature and distribution of the payments made by a program, many agencies also use unequal probabilities of selection to capture larger payments with higher probability (i.e., probability proportionate to size). If the universe of payments for a program or a component/stratum of the program is small, agencies may review a complete census of payments in those cases and would not have any sampling error for that component or stratum-assuming a statistician is consulted on this approach.

b. Assumptions about the amount of Improper Payments. The agency may use their initial determination of the potential improper payment in Step 1, above, to aid in determining the sample size. Since most agencies have been conducting ongoing reviews of their improper payments for some time, they should utilize results from previous years and make appropriate adjustments to the sample size and even the sample design based on previous findings in order to obtain a more efficient sample or obtain more useful estimates of improper payments by program component.

c. Appropriate Sample Sizes. Because of the imprecision of the risk assessment performed in Step 1, agencies should ensure that they select a sample that will meet the minimum precision requirements in Step 2.2.d below. For initial estimates of improper payments, agencies should take a conservative approach and use higher estimated improper payments in their sample size calculations to ensure that they will meet the precision targets. As noted above, since most agencies have been conducting ongoing reviews of their improper payments for some time, they should utilize results from previous years and make appropriate adjustments to the sample SIZe.

d. Precision. Agencies should design the sample and select a sample size sufficient to .

yield an estimate of improper payments with a 90 percent confidence interval of plus or minus 2.5 percent of the total amount of all payments for a program around the estimate of the dollars of improper payments. 1° For example, if the total amount of all payments for a program was $1 ,000,000,000 and the estimated total of improper payments based upon the statistical sample was $80,000,000, the 90 percent confidence interval around the estimate should be no more than plus or minus $25,000,000-i.e., $55,000,000 to $105,000,000. These guidelines for precision shall be taken as the minimum, and agencies are encouraged to increase samples above the minimum to achieve greater precision in their estimates in order for agencies to better understand underlying causes of improper payments and creating action plans.

Agencies shall maintain documentation to support the calculation of these estimates.

e. Sample Design Documentation. Agency sampling and estimation plans shall .

generally provide sufficient documentation of the sample design so that a qualified statistician would be able to replicate what was done or so that OMB, agency Inspector General, or GAO personnel can evaluate the design. Agencies shall clearly identify the frame or source for sampling payments and document its accuracy and completeness. All stages of selection, any stratification, and/or any clustering shall be clearly described. Explicit strata shall be clearly defined, as should any variables used for implicit stratification. Tables shall generally be provided showing the size of the universe and sample by strata (if applicable). Sampling plans shall also specify whether cases are selected with equal or unequal probabilities and how the probabilities of selection are determined when they are unequal.

f. Documentation of Estimation Formulas. Agency sampling and estimation plans shall include documentation of the statistical formulas that will be used to estimate the amount of improper payments (and the associated confidence intervals for the sample) and to project those results to the entire program. Documentation should include appropriate citations for these formulas. Agency sampling and estimation plans must be complete and internally consistent (for instance, estimation formulas must appropriately reflect the complexity of the sample design).

g. Updates and Changes to Agency Plans. Agencies should update their sampling and estimation plans, as needed, to reflect the current design and methods being used and incorporate refinements based on previous results, consultations with others, and/or

10 Agencies may alternatively use a 95 percent confidence interval of plus or minus 3 percent around the estimate of the dollar amount of improper payments.

recommendations from Inspectors General, GAO, or OMB. Any updated plans will need to be submitted to OMB no later than June 30 of the fiscal year for which the estimate is being produced (e.g., the sampling methodology to be used for the FY 2014 reporting cycle must be submitted by June 30, 2014). The plans shall include all the components described in steps 2.1 and 2.2 above. A plan that is being updated or changed should include some language explaining why the plan is changing and how the plan is different from the one previously submitted.

Agencies shall submit an explanation and justification to OMB for any instances where a program is not able to fulfill the requirements described in Step 2. OMB will review requests for deviation from these requirements and must approve any alternative methods (see section I.A.14 below).

Step 3: Implement a plan to reduce improper payments.

a. Root Causes and Corrective Actions. For all programs and activities as determined under Step 2 with improper payments exceeding the thresholds listed earlier in Step 1, agencies shall identify the reasons their programs and activities are at risk of improper payments and put in place a corrective action plan to reduce them. In many cases, agencies will implement long-term, on-going corrective actions that will be implemented and refined on a continuous basis (e.g., the corrective action is in place for many years, though it may be refined from year to year). Agencies 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. In addition, IPERIA requires agencies to tailor their corrective actions for programs that are deemed high-priority to better reflect the unique processes, procedures, and risks involved in each specific program. This information shall be reported in the agency's AFR or PAR annually.

More detailed information about high-priority programs can be found below in section I.B.

b. Reduction Targets. When compiling plans to reduce improper payments, agencies shall set reduction targets for future improper payment levels and a timeline within which the targets will be reached. Reduction targets must be approved by the Director of OMB (this approval process will take place during the OMB review and approval process of draft AFRs and PARs). In cases in which a program needs a few years to fully establish an improper payment rate baseline (for example, state administered programs with a "rolling rate" in which only a fraction of the states report each year), OMB does not expect the program to publish a reduction target until a full baseline has been established and reported.

c. Accountability. Agencies must ensure that managers and accountable officers (including the agency head), programs and program officials, and where applicable States and local partners, are held accountable for reducing improper payments. In addition, for programs that are not implemented directly by Federal or State agencies or government, agencies may also consider establishing these accountability mechanisms. For example, non-Federal entities could include colleges that disburse grants and loans to students, or banks that disburse loans to students. Agencies shall assess whether the organizations have the internal controls, human capital, information systems, and other infrastructure needed to reduce improper payments to minimal cost-effective levels, and identify any statutory or regulatory barriers which may limit the agencies ' corrective actions in reducing improper payments. This information shall be reported in the agency' s AFR or PAR annually.

Step 4: Report annually in the AFR or PAR.

a. Reporting. Agencies shall report to the President and Congress (through AFRs or PARs in the format required by 0 MB Circular A -13 6 for improper payment reporting) an estimate of the annual amount and rate of improper payments for all programs and activities determined to be susceptible to significant improper payments under Step 1, regardless of the dollar amount of the estimate, as further explained below. OMB approval of some improper payment requirements (e.g. , reduction targets) occurs through OMB' s review of the improper payment section of each agency's AFR or PAR. Improper payment information from AFRs and PARs is subsequently analyzed for inclusion in OMB's government-wide reporting on improper payments. This information (i.e., government-wide improper payment rates and improper payment amount estimates) is also posted on PaymentAccuracy.gov the improper payments website created under Executive Order 13520, Reducing Improper Payments.

b. Improper payment estimates that meet statutory thresholds. For programs and activities reporting improper payment estimates that meet the statutory thresholds described in Step 1(a) above, agencies shall follow all the improper payment reporting requirements delineated in OMB Circular A-136. The improper payments section in Circular A-136 outlines what information agencies are required to include in their annual AFRs or PARs regarding improper payment estimates, reduction targets, root causes, corrective actions, and other areas.

c. Improper payment estimates that DO NOT meet statutory thresholds. For programs and activities reporting improper payment estimates that DO NOT meet the statutory thresholds described in Step 1(a) above, agencies are still required to report an estimate of the annual amount and rate of improper payments, as well as reduction targets, in their annual AFRs or PARs, but they are not required to complete the additional steps referenced above in Step 4(b) and outlined in Circular A-136 (e.g. , root causes, corrective actions, etc.).

10) When must agencies conduct risk assessments?

IPERA required agencies to conduct improper payment risk assessments for all programs starting in FY 2011 , unless they received a waiver from OMB. For programs that are deemed to be low risk of significant improper payments, agencies must perform risk assessments at least once every three years thereafter (programs that have been determined to be susceptible to significant http:PaymentAccuracy.gov improper payments and that are already reporting an estimate-or in the process of establishing an estimate-do not have to perform additional risk assessments). However, if a low risk program experiences a significant change in legislation and/or a significant increase in its funding level, agencies are required to re-assess the program's risk susceptibility during the next annual cycle, even if it is less than three years from the last risk assessment.

11) What information should agencies provide to persons or entities producing improper payment estimates?

IPERIA requires OMB to instruct agencies to give persons or entities producing improper payment estimates access to all necessary payment data, including access to relevant documentation. In order to produce accurate improper payment estimates, agencies must provide full documentation to persons or entities producing their improper payment estimates. In addition, this documentation must be maintained for the length oftime required by the National Archives and Records Administration for the particular type of material being held in order for post-payment audits to be performed and to allow internal and external auditors to replicate reported results. For specific records retention requirements, agencies may contact their Senior Agency Official, a listing of which can be found at http://www.archives.gov/records mgmt/ agency Isao-list.html.

12) Are agencies allowed to rely upon self-reporting by recipients of agency payments when estimating improper payments?

IPERIA requires OMB to explicitly bar agencies from relying on self-reporting by the recipients of agency payments as the sole source basis for improper payments estimates. Specifically, agencies shall not base their improper payment estimates solely on self-reporting of actual improper payments by the sub-agencies that made the payments or individuals or entities who received the payments. In other words, agencies may not use self-reporting by recipients of actual improper payments in lieu of a statistical estimate.

However, agencies may continue to utilize sub-agencies…