January 16, 2003
MEMORANDUM FOR HEADS
OF EXECUTIVE DEPARTMENTS AND AGENCIES
E. Daniels, Jr.
|| Programs to
Identify and Recover Erroneous Payments to Contactors
Improved Financial Performance initiative, part of the President’s
Management Agenda, includes an initiative to reduce erroneous payments made
by the federal government. Erroneous payments waste taxpayer dollars and
divert resources from their intended beneficiaries. The attached guidance
provides agencies with a tool that can help recover and, more importantly,
prevent erroneous contract payments.
Section 831 of the
Defense Authorization Act for Fiscal Year 2002 added a new subchapter to
the U.S. Code (31 USC §§3561-3567) that requires agencies that
enter into contracts with a total value in excess of $500,000,000 in a fiscal
year to carry out a cost-effective program for identifying errors made in
paying contractors and for recovering amounts erroneously paid to the contractors.
A required element of such a program is the use of recovery audits and recovery
Federal agencies have
tested the use of recovery auditing with success. Congress enacted the government-wide
requirement to implement recovery auditing as a result of such testing.
Recovery auditing is viewed by Congress and the Administration as a cost-effective
way to identify and recover erroneous contract and other payments.
The guidance in the
attachment to this memorandum is intended to assist agencies to successfully
implement recovery auditing and recovery activity as part of an overall
program of effective internal control over contract payments.
The statute requires that by December 31, 2004, agencies which are required
to undertake a recovery audit program shall provide a report to the Office
of Management and Budget (OMB) that shall include the following information
for programs conducted under this guidance during FY 20031:
-- A general description
and evaluation of the steps taken to carry out a recovery auditing program;
-- The total cost
of the agency’s recovery auditing program. Report separately the
costs of the agency’s recovery audit program activities (agency
salaries and expenses) and contracted recovery audit services (amounts
paid and payable to recovery audit contractors);
-- The total amount
of payment errors identified under the recovery auditing program, the
total amount subsequently deemed not recoverable, the total amount recovered,
and the total amount outstanding pending final resolution or collection.
Report separate totals from amounts attributable to internal agency
activities and to recovery audit contractors;
-- A general description
and evaluation of any management improvement program carried out pursuant
to this memorandum;
-- A description
of the classes of contracts excluded by the agency head.
A similar report is
due December 31, 2005, and 2006, covering the fiscal year ending the preceding
To the extent that
agencies believe the guidance does not clarify questions relating to recovery
auditing activities or they have questions about the application of this
guidance, they should contact their Resource Management Office at OMB.
1 At its discretion, an agency can
also include information concerning its recovery audit program established
pursuant to P.L. 107-107 and conducted prior to FY 2003.
Guidance on Implementing a Recovery
General: Agencies shall have a cost effective program of internal
control to prevent, detect, and recover overpayments to contractors
resulting from payment errors. A program of internal control may include
policies and activities such as prepayment reviews, a requirement that
all relevant documents be made available before making payment (e.g.,
invoice, packing list, receiving report, inspection report, etc.), payment
of only original invoices (as opposed to photocopies), and performance
of contract audits. For agencies that enter into contracts with a total
value of more than $500,000,000 in a fiscal year, a recovery audit program
is a required element of their internal controls over contractor payments.
For purposes of this guidance:
- A Contract
Audit refers to a post-award examination of the books and records
of a Federal contractor that is performed by the contracting officer,
or an authorized representative of the contracting officer, pursuant
to the audit and records clause incorporated in the contract. A contract
audit is normally performed by an auditor that serves in an advisory
capacity to the contracting officer. A post-award contract audit,
as distinguished from a recovery audit, is normally performed for
the purpose of determining if amounts claimed by the contractor are
in compliance with the terms of the contract and applicable laws and
regulations. For example, the scope of a post-award contract audit
may include a review of the direct and indirect costs claimed to have
been incurred or anticipated to be incurred under a negotiated contract.
Such reviews involve the contractor’s accounting records, including
the contractor’s internal control systems. A post-award contract
audit may also include a review of other pertinent contractor records,
e.g., reviews to determine if a contractor’s proposal was complete,
accurate, and current; reviews of contractor prices charged for commercial
items sold to other Federal and non-Federal customers; reviews of
the contractor’s systems established for identifying and returning
any erroneous payments received under its Federal contracts.
- A Recovery
Audit Contingency Contract is a contract for recovery audit services
in which the recovery audit contractor is paid a portion of the amount
recovered. The amount the contractor is paid, generally a percentage
of the recoveries, is based on the amount actually collected based
on the evidence discovered and reported by the recovery audit contractor
to the appropriate agency official.
- A Management
Improvement Program is an agency-wide program to address the
flaws in an agency's internal controls over contractor payments discovered
during the course of implementing a recovery audit program or other
control activities over contractor payments.
are errors resulting from duplicate payments; errors on invoices or
financing requests; failure to reduce payments by applicable sales
discounts, cash discounts, rebates, or other allowances; payments
for items not received; mathematical or other errors in determining
payment amounts and executing payments; and the failure to obtain
credit for returned merchandise.
Activity is any activity by an executive agency to attempt to
recover overpayments identified by a recovery audit.
- A Recovery
Audit is a review and analysis of the agency's books, supporting
documents, and other available information supporting its payments
that is specifically designed to identify overpayments to contractors
that are due to payment errors. It is not an audit in the traditional
sense. Rather it is a control activity designed to assure the integrity
of contract payments, and as such, it is a management function and
- A Recovery
Audit Program is an agency's overall plan for the performance
of recovery audits and recovery activities. The head of the agency
will determine the manner and combination of recovery audits and activities
that are expected to yield the most cost-effective recovery audit
program for the agency. This program should include a management improvement
program as defined above and discussed in Section IX.
- Scope of Recovery
- All classes
of contracts and contract payments should be considered for recovery
audits. Agencies should review their different types of contracting
categories and identify those classes of contracts that have a higher
potential for payment errors, i.e., contract categories where the
benefits would likely exceed the agency’s costs of the recovery
audits and recovery activities.
- Agency heads
may exclude classes of contracts and contract payments from recovery
audit activities if the agency head determines that recovery audits
are inappropriate or are not a cost-effective method for identifying
and recovering erroneous payments. The following are examples of
classes of contracts and contract payments that may be so excluded:
contracts that have not been completed where payments are interim,
provisional, or otherwise subject to further adjustment by the
Government in accordance with the terms and conditions of the
contracts that were completed, subjected to a final contract
audit and, prior to final payment of the contractor’s
final voucher, all prior interim payments made under the contract
were accounted for and reconciled.
contracts that provide for contract financing payments or other
payments that are interim, provisional, or otherwise subject
to further adjustment by the Government in accordance with the
terms and conditions of the contract.
payments may be excluded for a reasonable period of time in
order to allow the agency’s normal post-payment processes
to identify and correct any overpayments.
auditing contractors may, with the consent of the employing agency,
communicate with the agency’s contractors for the purpose
of verifying the validity of potential payment errors they have
identified. A recovery auditing contractor shall not maintain a
presence on the property of the contractors that are the subject
of recovery auditing.
- Agency heads
shall take steps to ensure that the implementation of their recovery
audit program does not result in duplicative audits of contractor
records. In this regard, actions to follow-up with contractors on
potential overpayments identified through recovery audits of agency
records do not constitute audits of contractor records. However,
recovery auditing activities should not duplicate other audits of
the same (contractor or agency) records that specifically employ
recovery audit techniques to identify and recover payment errors.
At a minimum, agency heads should coordinate with the agency Inspector
General and other organizations with audit jurisdiction over agency
- In addition
to identifying and documenting specific overpayments resulting from
payment errors, recovery auditors should also analyze the reasons
why payment errors occurred and, where appropriate, recommend cost-effective
controls to prevent such overpayments in the future. The results
of such analysis and related recommendations should be considered
by the agency as part of its management improvement program. If
requested, the agency should provide such information to its Office
of Inspector General.
of potential fraud discovered through recovery audits and recovery
activities shall be reported immediately to the agency Inspector
- Sources of Recovery
Audits: Recovery audits may be performed by employees of the executive
agency, by any other department or agency of the United States Government
acting on behalf of the executive agency, or by contractors performing
recovery audit services under contracts awarded by the executive agency.
- Role and Authority
of Inspectors General
- Nothing in
this guidance should be construed to impair the authority of an
Inspector General under the Inspector General Act of 1978 or any
other law. However, because the recovery audit program required
by this guidance is an integral part of the agency’s internal
control over contract payments, and therefore a management function,
independence considerations would normally preclude the Inspector
General and other agency external auditors from carrying out management’s
recovery audit program.
- Agency Inspectors
General and other external agency auditors are encouraged to assess
the effectiveness of agencies’ recovery audit programs as
part of their internal control work on existing audits, e.g., the
annual financial statement audit, or as a separate audit.
- Recovery Audit
Services Performed by Contractors
- Agency heads
may enter into any appropriate type of contract, including a contingency
contract for recovery audit services. However, amounts recovered
due to interim payment errors made under ongoing contracts, i.e.,
duplicate progress payments or cost reimbursement claims, may not
be available to pay the recovery audit fee if these amounts are
still needed to make subsequent payments under the contract. Agencies
need to establish other funding arrangements when making payments
to recovery audit contractors in such cases.
- In addition
to provisions that describe the scope of recovery audits (and any
other provisions required by law, regulation, or agency policy),
any contract with a private sector firm for recovery audit services
shall include contract provisions that:
the recovery audit contractor from:
production of any records or information by the agency’s
contractors. Only duly authorized employees of the agency
can compel the production of information or records from
the agency's contractors, in accordance with applicable
contract terms and agency regulations;
or otherwise having a physical presence on the property
or premises of any other agency contractor for the purpose
of performing the contract;
as an agent for the Federal Government in the recovery of
funds erroneously paid to contractors;
or sharing sensitive financial information with any individual
or organization, whether associated with the Federal Government
or not, that has not been released for use by the general
public, except for the purpose of fulfilling the recovery
audit contract; and
any information that identifies an individual, or reasonably
can be used to identify an individual, for any purpose other
than performing the recovery audit.
the recovery audit contractor to take steps to safeguard the
confidentiality of sensitive financial information that has
not been released for use by the general public and any information
that could be used to identify a person.
- Recovery Activity
- Recovery activity shall be carried out by Federal employees. Agencies
shall follow applicable laws and regulations governing collection of
amounts owed to the Federal Government.
- Disposition of
- A. Funds collected
under a recovery audit program less any amounts needed to make payments
under the related contract(s) shall be available to the executive
agency for the following purposes:
- To reimburse
the actual expenses incurred by the executive agency for the
administration of the program (including payments made to other
agencies that carry out recovery audit services on behalf of
the executive agency).
- To pay
contractors for recovery audit services.
- Except as
provided in paragraph C., any amounts erroneously paid by an executive
agency that are recovered under a recovery audit program that are
not used to reimburse expenses of the executive agency or pay recovery
audit contractors under paragraph A:
be credited to the appropriations from which the erroneous payments
were made, shall be merged with other amounts in those appropriations,
and shall be available for the purposes and period for which
such appropriations are available; or
- if no
such appropriations remain available, shall be deposited in
the Treasury as miscellaneous receipts.
- When required
or authorized by other provisions of law, any funds remaining after
reimbursing expenses of the executive agency and paying recovery
audit contractors, shall be credited to a non-appropriated fund
instrumentality, revolving fund, working-capital fund, trust fund,
or other fund or account.
fee contracts shall preclude any payment to the recovery contractor
until the recoveries are actually collected by the agency.
- All funds
collected and all direct expenses incurred as part of the recovery
audit program shall be accounted for specifically. The identity
of all funds recovered shall be maintained as necessary to facilitate
the crediting of recovered funds to the correct appropriations and
identify applicable time limitations associated with the appropriated
- Management Improvement
of title 31, U.S. Code, also authorizes agencies to implement “management
improvement programs.” Such programs shall take the information
gleaned from the recovery audit program, as well as other audits, reviews,
or information that identify weaknesses in an agency’s internal
controls, and ensure that actions are undertaken to improve the agency’s
internal controls governing contract payments.
- Grant Programs
- Agencies whose grant programs fund significant contract activity by
grant recipients may consider including contracts at the grant recipient
level in their recovery audit program. Agencies can engage contractors
on a contingency basis to the extent otherwise authorized by law.