August 17, 2001
MEMORANDUM FOR CHIEF FINANCIAL OFFICERS AND BUDGET OFFICERS OF
EXECUTIVE DEPARTMENTS AND AGENCIES
Stewardship responsibility over public funds requires that all Federal agencies have appropriate policies
and procedures to ensure the integrity of Federal program payments. The attachment contains a set of
basic principles all Federal agencies should recognize when implementing their existing responsibilities to
minimize erroneous payments.
The recent release of OMB Circular A-11, Preparing and Submitting Budget Estimates, contains a
new section 57 requesting that, for certain specified programs, information on erroneous payments be
included in the initial FY 2003 budget submissions of the affected agencies. You should review section
57 of OMB Circular A-11 to determine whether any of your agency's programs are identified and, if so,
what information should be included in your budget submission. The basic principles contained in the
attachment may also be useful when performing the assessment of current efforts to minimize erroneous
payments required by OMB Circular A-11.
For each indirect program listed in Exhibit 57 of OMB Circular A-11 where erroneous payment rates
are not currently estimated, agencies are required to determine whether and how erroneous payments
could be estimated. This analysis should include an assessment of the costs and benefits of collecting
new or additional data and should describe programmatic and legal obstacles to collecting additional
data or establishing estimation procedures. Examples of the type of information to consider in your
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||Minimizing Erroneous Payments and Supplemental Guidance on Erroneous Payment
Information to be Included in Fiscal Year 2003 Budget Submissions
Additional information should be provided to support any conclusion that estimating erroneous payments
is unnecessary or would not be cost-beneficial because (1) the program is not susceptible to significant
erroneous payments, (2) the program has strong internal controls to prevent (or identify and correct in a
timely manner) erroneous payments, (3) the program has not experienced an erroneous payment
problem, and/or (4) the administrative or policy burden outweighs the benefit to be gained by developing
estimates. Such information could include, as needed:
- A description of the types of erroneous payments that could occur [e.g., administrative errors by
payors (miscalculations, duplicate payments, etc.), errors by payees (i.e., incorrect or duplicate
billings, etc.), and/or errors or fraud by program participants/beneficiaries/agency employees (under
reporting of income, other false claims, etc.)], and
- A description of the procedures that would be necessary to develop an estimate, including (i) the
need for and type of action that would be required by non-Federal entities, (ii) the location of the
information needed to develop the estimate (e.g., central Federal database, decentralized Federal
field offices, States, other) and any practical or legal obstacles to obtaining access to the information,
(iii) an estimate of the cost of implementing the procedures to develop an estimate, and (iv) any other
information that you believe is relevant to making a decision on whether to begin developing estimates
of erroneous payments for the program.
Your Office of Inspector General (OIG) has skills and institutional knowledge or specific data that may
helpful to you in performing your analysis. You may want to enlist the OIG's help to support your
Public reporting of progress in meeting goals for minimizing erroneous payments enhances accountability
and we expect agencies to do so. As indicated in the basic principles (No. 6) in the attachment, this
information can be reported in a variety of places, including, agency performance reports under the
Government Performance and Results Act, annual financial reports, or regularly-issued stand-alone
For general questions on this guidance, contact George Rippey, Office of Federal Financial
Management, Office of Management and Budget, phone (202) 395-3993, fax (202) 395-4915, e-mail
email@example.com. For guidance on application of this policy to specific programs, contact the
appropriate Resource Management Office in OMB.
- A description of the controls in place to prevent erroneous payments,
- Statistical and descriptive information on audits and reviews conducted of program activities over the
last 2 years and the results that support your conclusions (e.g., number of audits performed, number
and types of findings, questioned costs), and
- Explanation and description of data or evidence that additional emphasis on preventing or detecting
erroneous payments would inhibit, to an unacceptable degree, achieving the objectives of the
program or other national public purpose.
Federal agencies should recognize the following fundamental principles relating to managing Federal
benefit program payments:
- Prevention is More Effective Than After-the-Fact Efforts
It is often very difficult or impossible to recover overpayments or correct underpayments after they
occur. Effective procedures to ensure the integrity of payments before they are made is the most
efficient and effective method for keeping erroneous payments to a minimum.
- Program Payment Integrity is a Joint Management Responsibility
Senior leadership shall place appropriate resources and emphasis on the need to minimize the level of
erroneous payments. Agency managers shall work together to assure that there is an adequate level of
control to minimize erroneous payments. Inspectors General may assist agency leadership in identifying
opportunities to strengthen controls and in assessing the agency's progress in improving payment
- Erroneous Payments Should be Kept to the Lowest Practical Level
In any program, some level of erroneous payments is unavoidable; the goal is to keep them to the lowest
practical level, given the circumstances of the program. Zero erroneous payments would be the ultimate
goal; however, there are other considerations that make such a goal unrealistic. For Federal programs,
erroneous payments are similar to shoplifting and obsolescence in the retail industry, and spoilage in the
agriculture and food industries. In these industries, such occurrences are a recognized cost of doing
business, and efficient management strives to keep these costs within tolerable levels.
- Balance With Program Goals and Other Competing Priorities
The goal of minimizing erroneous payments shall be balanced against the need to achieve the objectives
of the program and the objectives of other national priorities. Often, Federal program goals emphasize
providing benefits timely to all eligible beneficiaries and protecting individual privacy. Meeting these
goals may require accepting a higher level of payments to ineligible recipients and fewer controls.
Federal agencies should consider consulting and working with program stakeholders, including those
involved in program and agency oversight, program administration, and program creation, when
designing internal controls to minimize the level of erroneous payments.
- Controls Should Take Into Account Both the Benefits and Costs
The cost of procedures to minimize or collect erroneous payments should not exceed the benefit to be
gained. Consideration shall be given to the administrative burden not only at the Federal level, but also
on program beneficiaries, grantees (e.g., States and local governments administering Federal programs),
and other third parties administering a program.
- Performance Measurement and Reporting Provides Better Accountability
Periodically and consistently estimating the rate of erroneous payments enables agencies to measure
progress over time and determine whether further action is needed to minimize future improper
payments. This is true even if, as is frequently the case in error estimates, erroneous payments projected
from a sample may not be recoverable. Public reporting of progress enhances accountability. Agency
performance can be reported in a variety of places, includingreporting under the Government
Performance and Results Act, annual financial reports, or regularly-issued stand-alone program reports.
- Data Verification Strengthens Program Payment Integrity
When practical and permitted by law, agencies shall verify key information supporting benefit payments
with information maintained internally and by others. Conversely, agencies shall share data that can be
used to prevent or identify improper payments. Data sharing and use of data shall be consistent with
relevant laws and with OMB Memorandum M-01-05, Guidance on Inter-Agency Sharing of
Personal Data - Protecting Personal Privacy (available on the OMB website at
- Impediments to Effective Controls May Exist and Should Be Considered
Periodic assessments may identify statutory and other impediments to improving payment integrity.
Agencies should determine if such impediments can and should be removed by the agency and, if so,
promptly take action to remove them. Agencies should consult with stakeholders about these
impediments as well as impediments that cannot be removed by agency action alone.