Improper payment is a defined term in federal financial management, and its definition has two parts that work differently.
The term means any payment that should not have been made or that was made in an incorrect amount, including an overpayment or underpayment, under a statutory, contractual, administrative, or other legally applicable requirement, and it includes 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 those payments where authorized by law, and any payment that does not account for credit for applicable discounts (31 U.S.C. 3351(4)).
The first part is the test. The five items are an inclusive list rather than the boundary, so a payment can be improper without appearing on it, and the word includes is what keeps the list open.
Three things follow that surprise people meeting the term for the first time. An underpayment is improper. A payment to an entirely eligible recipient can be improper if the amount is wrong. And nothing in the definition mentions intent, so error and fraud both land inside it.
What Counts as a Payment
The definition of payment is broader than cash leaving an account. The term means any transfer or commitment for future transfer of Federal funds such as cash, securities, loans, loan guarantees, and insurance subsidies to any non-Federal person or entity or a 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 (31 U.S.C. 3351(5)).
Two clauses in there do most of the work. A commitment for future transfer counts, so a loan guarantee is inside the measure before any money moves. And the payer can be a contractor, a grantee, or a state or local body administering a federal program, not only a federal agency.
The rejected goods clause is defined separately. Payment for an ineligible good or service includes a payment for any good or service that is rejected under any provision of any contract, grant, lease, cooperative agreement, or other funding mechanism (31 U.S.C. 3351(6)).
Missing Documentation Counts as Improper
This is the rule that most often surprises a preparer, and it is written plainly.
For the purpose of producing an estimate under section 3352(c)(1), when the executive agency cannot determine, due to lacking or insufficient documentation, whether a payment is proper or not, the payment shall be treated as an improper payment (31 U.S.C. 3352(c)(2)(A)).
The statute then allows the two to be told apart in the reporting. The head of an executive agency may report separately on what portion of the improper payments estimate for a program or activity is attributable to lacking or insufficient documentation (31 U.S.C. 3352(c)(2)(B)).
So a headline improper payment figure does not mean that much money went to the wrong place. Part of it is money whose propriety could not be established from the file. Which of the two a given estimate is carrying is a question worth asking before quoting the number, and the discipline that produces the file in the first place is the ordinary one covered in internal control and evidenced through the audit trail.
When a Program Becomes Susceptible
Not every federal program has to produce an estimate. The head of each executive agency, in accordance with guidance prescribed by the Director of the Office of Management and Budget, periodically reviews all programs and activities it administers and identifies those with outlays exceeding the statutory threshold dollar amount described in the definition of significant below that may be susceptible to significant improper payments, and that review is performed for each program and activity not less frequently than once every 3 fiscal years (31 U.S.C. 3352(a)(1) and (a)(2)).
Significant has an arithmetic meaning and it is a two route test. In the preceding fiscal year, the sum of a program or activity’s improper payments and payments whose propriety cannot be determined due to lacking or insufficient documentation may have exceeded either $10,000,000 of all reported program or activity payments of the executive agency made during that fiscal year and 1.5 percent of program outlays, or $100,000,000 (31 U.S.C. 3352(a)(3)(A)).
Read the first route as two conditions joined, a dollar floor and a percentage floor together, and the second route as a dollar figure standing alone. A very large program can trip the second without coming near the percentage.
The risk factors the review takes into account are named, and several of them are audit findings rather than payment data: whether the program is new, its complexity, the volume of payments, whether payment or eligibility decisions are made outside the agency such as by a state or local government, recent major changes in funding or procedures, the level and quality of training for personnel making eligibility determinations or certifying payments, significant deficiencies in the agency’s audit report or other management findings that might hinder accurate payment certification, similarities to other programs already deemed susceptible, the accuracy and reliability of previously reported estimates, whether the program lacks information or data systems to confirm eligibility, and the risk of fraud as assessed by the executive agency under the Standards for Internal Control in the Federal Government published by the Government Accountability Office, commonly known as the Green Book (31 U.S.C. 3352(a)(3)(B)).
Compliance Is Its Own Defined Term
An agency is either in compliance or it is not, and the word has a six part definition rather than a general meaning.
Compliance means that an executive agency has published improper payments information with its annual financial statement for the most recent fiscal year and posted that statement and any accompanying materials required under OMB guidance on its website; has, if required, conducted a program specific risk assessment for each program or activity that conforms with the risk assessment requirements; publishes, if required, improper payments estimates for all programs and activities identified under section 3352(a) in the accompanying materials; publishes any programmatic corrective action plans in the accompanying materials; publishes any improper payments reduction targets in the accompanying materials for each program or activity assessed to be at risk, and has demonstrated improvements and developed a plan to meet those targets; and has reported an improper payment rate of less than 10 percent for each program and activity for which an estimate was published (31 U.S.C. 3351(2)).
All six have to hold. An agency that publishes everything asked of it and reports a rate at or above 10 percent for one program is out of compliance on that ground alone.
Who Makes the Compliance Call
Not the agency. Each fiscal year the Inspector General of each executive agency determines whether the agency is in compliance and submits a report on that determination to the head of the agency, to the Committee on Homeland Security and Governmental Affairs of the Senate, to the Committee on Oversight and Reform of the House of Representatives, and to the Comptroller General of the United States (31 U.S.C. 3353(a)(1)).
The guidance behind those determinations tells the Inspectors General to evaluate and take into account the adequacy of agency risk assessments, improper payment estimate methodology and action plans; to take into account whether the agency has correctly identified the causes of improper payments and whether its actions to address them are adequate and effective; to evaluate the adequacy of the action plans; and to include an evaluation of the agency’s prevention and reduction efforts with any recommendations (31 U.S.C. 3353(a)(3)).
That is an audit of methodology rather than of transactions, which puts it closer to the standards work covered in GAGAS than to a payables review.
Common Questions
No. The definition turns on whether the payment should have been made and in what amount, and it says nothing about state of mind (31 U.S.C. 3351(4)). A fraudulent payment will normally also be improper, and most improper payments are not fraudulent. Treating the two as synonyms overstates one number and understates the other.
Yes, expressly. The definition names an overpayment or underpayment in the same breath (31 U.S.C. 3351(4)(A)). Anyone reading the term as money lost is reading only half of it.
The definition is written for federal payments, and it reaches further than federal payers. A payment made by a federal contractor, a federal grantee, or a governmental or other organization administering a federal program or activity is inside the definition of payment (31 U.S.C. 3351(5)). A state agency or a nonprofit disbursing federal program funds is therefore making payments that the measure counts, whatever it calls them internally.
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