Management of Payments
PROMPT PAYMENT ACT
Timeliness of Payments
The Prompt Payment Act (PPA) requires Federal agencies to pay their bills on time or an interest penalty must be paid to vendors. During FY 2005, 96% of invoices were paid on time. Presented below is a chart that reflects the timeliness of the Department's payments from FY 2003 through FY 2005.
|FY 2003||FY 2004||FY 2005|
During FY 2005, 2% of invoices required interest penalties compared to 2% for FY 2004.
Selected Payment Data
|Interest Paid ($000)||557||431||396|
|Interest Under $1 Not Due ($000)||—||—||—|
|Interest Due But Not Paid ($000)||—||—||—|
Number of Procurement Card Transactions
The Department successfully increased the percentage of payments it makes electronically. In 2005, 85% of all payments were made by electronic funds transfer (EFT). Domestically, 98% of payments were made electronically. The Department processed 77% of its 2005 overseas payments by EFT, a 10% increase from 2004.
EFT and Check Payment Volumes
IMPROPER PAYMENTS INFORMATION ACT
The Improper Payments Information Act of 2002 (Public Law No. 107-300) (IPIA) requires agencies to annually review their programs and activities to identify those susceptible to significant improper payments. OMB Circular A-136, Financial Reporting Requirements, requires a brief summary of actual and planned accomplishments towards implementing the IPIA, which is presented in the Management's Discussion and Analysis section of this Report. OMB also requires more detailed information relating to IPIA, which is provided on the rest of this page.
Risk Assessment Procedures and Processes
For the identification and determination of significant improper payments in FY 2005, the Department implemented the approach as follows:
The first tier identifies the types of payments made by the Department. The second tier assesses the risk of these types of payments. The third tier relates to the testing of a sample of transactions for the payment classifications considered high or moderate risk for significant improper payments, and then analyzing the results of those tests to determine causes, effects and trends. The fourth tier relates to the identification of corrective actions needed to prevent and detect improper payments. The final tier relates to the Department's audit recovery efforts to recoup improper payments.
TIER 1: Reassessment of Programs and Activities Susceptible to Significant Improper Payments
Work Performed in FY 2004
In FY 2004, the Department began to institute an effort that identified programs that were susceptible to significant improper payments. An assessment was performed based on a number of factors such as dollar volume, number of vendors or recipients, internal controls, audit reports of the programs, and management's institutional knowledge. Based on the results of this assessment, the Department classified all payments into the following three categories:
- Employee Pay
- Vendor Payments
- Federal Financial Assistance
The two types of payments that were identified as having a potential high risk for significant improper payments were Federal Financial Assistance Programs and Vendor Payments. The following programs were identified as high-risk and tested in FY 2004:
Federal Financial Assistance Area
- International Information Program (IIP) - U.S. Speaker and Specialist Program
- International Narcotics and Law Enforcement (INL) - Narcotics Program
Vendor Pay Area
- Other Contractual Services
- Structures & Equipment (test work in this area was started in FY 2004 and completed in FY 2005)
Work Performed in FY 2005
In FY 2005, the Department performed a reassessment of risk to determine which categories identified in FY 2004 were still susceptible to significant improper payments. Based on the results of this reassessment of risk, the following was noted:
- Employee Pay - Based the Department's institutional knowledge and the results of past internal control reviews over this process, this category did not appear to be susceptible to significant improper payments in FY 2005. This category of payments will be considered for susceptibility to improper payments in the future.
- Vendor Payments - This category was tested for improper payments in FY 2004. Based on the results of this test work (as summarized in Tiers 3 and 4 below) and the audit recovery work currently underway, this category of payments was also not considered to be susceptible to significant improper payments in FY 2005. This category of payments will be considered for susceptibility to improper payments in FY 2006.
- Federal Financial Assistance - This was the only category of payments considered to be susceptible to significant improper payments in FY 2005.
TIER 2: Reassess Gross Risk level for Programs and Activities in those Activities Susceptible to Significant Improper Payments
Using data for the last quarter of FY 2004 and the first three quarters of FY 2005, the Department identified the population of Federal Financial Assistance payments by specific programs within each bureau. The following is a breakout of these expenditures by bureau:
The OMB threshold of $10 million and 2.5% of program payments was applied to each program within the bureaus to identify those programs that could be susceptible to significant improper payments. For the programs meeting the threshold, the Department conducted a reassessment of risk to determine whether these programs had a High, Moderate, or Low risk of susceptibility to improper payments. In addition, the Department also identified three programs that did not meet the OMB threshold but, based on the Department's institutional knowledge, could be susceptible to significant improper payments. The Department evaluated each program and assessed a risk of High, Moderate, or Low for the following fourteen attributes:
- Complexity of laws and regulations
- Emphasis on expediting payments
- Lack of audit requirements
- Need-based status of program
- Payments to ineligible recipients
- Probability of growth of the specific program
- The number of program recipients
- Complexity of the calculation of payments
- Expended amount in relation to other programs
- Lack of monitoring procedures of program recipients
- Significant volume and variability of transactions
- Political sensitivity of the specific program's goals or objectives
- The type and reputation of program recipients
- Past history of material weaknesses, internal control deficiencies, and other financial miscues
The following is a list of the programs that were classified as being susceptible to significant improper payments and the overall risk assessment for each program based on the individual risk assigned to each of the fourteen attributes noted above:
|Educational & Cultural Affairs (ECA) - Fulbright Program||Moderate|
|ECA - Teacher Exchange1||Low|
|ECA - Humphrey Program1||Low|
|ECA - Study of the U.S.1||Low|
|INL - Law Enforcement Support, Eradication, Aviation Support, & Support to the Military||Moderate|
|Population, Refugee and Migration (PRM) - Humanitarian Migration to Israel||Low|
|PRM - Refugee assistance through International Organizations||Low|
|PRM - Refugee Admissions||Low|
|PRM - Refugee Assistance (grants and contributions)||Moderate|
|International Organizations (IO) - Contributions to International Organizations
|1 Although these programs did not meet the OMB threshold, the Department identified them as being susceptible to improper payments due to the similarity in the scope of these programs to the Fulbright Program. However, based on the results of the risk assessments, these programs were classified as having a low risk of susceptibility to improper payments. (back to text)|
In addition, Structures and Equipment (classified under the Vendor Payments category in FY 2004) was classified as high-risk. The improper payments review for Structures and Equipment was started in FY 2004 and completed in FY 2005.
TIER 3: Conduct Detail Evaluation of Programs and Activities Whose Gross Risk Assessment was "High" or "Moderate"
As noted in Tier 2 above, no new high-risk programs were identified in FY 2005. As a result, the Department performed detailed evaluations for all programs classified as moderate risk and completed the review of Structures and Equipment which was classified as high-risk in FY 2004. Testing was conducted based on a statistical sample to determine if the transactions were proper or improper as defined in the OMB guidance. Improper transactions were reported as an error.
The following chart shows a breakdown of the Federal Financial Assistance dollars for the risk susceptible bureaus, the population of expenditures for moderate risk programs (identified above) for each risk susceptible bureau, and the payments reviewed for the moderate risk programs in FY 2005.
|Risk Susceptible Programs||371||635||904||2,487|
|Population of Moderate Risk Programs||168||313||682||1,891|
|Payments Reviewed for Moderate Risk Programs||7||10||79||1,512|
Statistical Sampling Process
Using OMB guidance, the Department assumed a 2.5 percent or less rate of error for each of the programs sampled since the Department had no historical error rate to use in calculating the sample sizes of the different populations. A sample size of 126 transactions was reviewed for each program (except for IO which is explained below). The sample size selected was based on the minimum required to yield an estimate with a 90% confidence level and a confidence interval of plus or minus 2.5%.
In selecting the sample for the IO program, the Department did not use a statistical sample. The population of IO payments is made up of large payments to a limited number of international organizations. As a result, the Department selected a sample of 37 of the largest payments that yielded 80% coverage of the entire population of payments.
One of the challenges faced during the testing of the Federal Financial Assistance Programs for improper payments is that the level of testing was performed based on the supporting documentation maintained at the Department. The Department did not extend the testing to the grantee level to obtain further supporting documentation to support whether the funds were spent in accordance with the grant agreement. As a result, although the Department's testing of sampled transactions yielded an actual error rate and amount of error at low levels, the results could have been different if the level of testing was extended to the grantee level. The Department will seek OMB's guidance in FY 2006 to determine whether the level of testing for Federal Financial Assistance should be extended to the grantee level. The Department will also consider best practices to follow in FY 2006.
First Nine Months
Last Quarter of FY 2004 and first Three Quarters of FY 2005
(Dollars in Millions)
|Outlays||IP %||IP $||Outlays||IP %||IP $||Outlays||IP %||IP $||Outlays||IP %||IP $||Outlays||IP %||IP $|
|Year Reviewed: 2005|
|Federal Financial Assistance Programs|
|ECA - Fulbright Program||N/A||N/A||N/A||$ 169||0.00%||$ -||$ 187||0.00%||$ -||$ 196||0.00%||$ -||$ 205||0.00%||$ -|
|PRM - Refugee Assistance||N/A||N/A||N/A||$ 682||0.00%||$ -||$ 870||0.00%||$ -||$1,009||0.00%||$ -||$1,039||0.00%||$ -|
|IO - Contributions to International Organizations and Peacekeeping||N/A||N/A||N/A||$1,891||0.00%||$ -||$1,948||0.00%||$ -||$2,006||0.00%||$ -||$2,066||0.00%||$ -|
Structures & Equipment
|$ 671||3.97%||$0.325||$ 485||<1%1||$0.235||$ 691||<1%||$0.335||$ 712||<1%||$0.345||$ 733||<1%||$0.355|
|Year Reviewed: 2004|
|Federal Financial Assistance Programs|
|INL-Narcotics Program||$ 313||0.87%||$1.7||$ 114||<1%1||$0.574||$ 117||<1%||$0.544||$ 121||<1%||$0.512||$ 125||<1%||$0.477|
|IIP-U.S. Speaker and Specialist Program||$ 30||81.18%||$1.4||$ 41||81.18%||$1.897||$ 43||40.00%||$1.183||$ 45||2.00%||$0.655||$ 47||<1%||$0.648|
|Other Contractual Services||$1,534||2%||$0.78||$3,299||<1%1||$0.358||$3,398||<1%||$0.369||$3,500||<1%||$0.380||$3,605||<1%||$0.391|
|1 For programs reviewed in FY 2004, the IP% and IP$ in the last quarter of FY 2004 and first three quarters of FY 2005 are projected. (back to text)|
TIER 4: Identification of Corrective Action taken to reduce the Improper Payments Error Rate
The potential for the Department making improper payments is low based on the FY 2004 review of high-risk programs and the FY 2005 review of moderate-risk programs. The following is a summary of the improper payments identified in FY 2004 and FY 2005, the cause of the improper payment, and corrective action plans to reduce the estimated rate of improper payments.
|Program||Description of Improper Payment||Cause||Steps to Prevent Future Occurrences|
|Year Reviewed: 2005|
|Federal Financial Assistance Programs|
|ECA - Fulbright Program||No improper payments were identified||N/A||N/A|
|PRM - Refugee Assistance||No improper payments were identified||N/A||N/A|
|INL - Law Enforcement, Eradication, Aviation Support, & Support to the Military||Test work was started in FY 2005 and will be completed in FY 2006 and reported in the FY 2006 PAR||N/A||N/A|
|IO - Contributions to International Organizations and Peacekeeping||No improper payments were identified||N/A||N/A|
Structures & Equipment
||These errors appeared to be isolated incidents caused by human error.||The Department will review and enforce its policies related to these improper payments.|
|Year Reviewed: 2004|
|Federal Financial Assistance Programs|
|IIP-U.S. Speaker and Specialist Program||Participants in this program were formerly identified as invitational travelers who should have been required to complete and submit vouchers at the completion of their travel.||The lack of travel vouchers submitted at the completion of travel made most of the travel reimbursement payments improper under IPIA.||The Department issued a revised Grants Policy Directive on Oct. 1, 2005, that reclassifies participants as grantees rather than invitational travelers. This change has been implemented, which will reduce this improper payment issue.|
|INL Narcotics Program||Federal financial assistance funds should not be used to pay for federal employee travel.||Federal financial assistance funds were used to pay for a federal employee's travel.||The Department will review and enforce its policies related to this improper payment|
|Other Contractual Services||Insufficient supporting documentation was provided to support the payment||This error appeared to be an isolated incident caused by human error.||The Department will be review and enforce its policies related to this improper payment.|
TIER 5: Audit Recovery Efforts to Recoup Improper Payments
Recovery Audit Program Results
In FY 2004, a recovery audit of vendor payments was initiated in accordance with the Improper Payments Information Act of 2002. This act required agencies to report annually on the extent of erroneous payments and the actions being taken to reduce them. An erroneous payment is any payment that should not have been made or that was made in an incorrect amount (overpayments or underpayments). In the latter half of FY 2004, the Department contracted with a recovery audit firm. Our recovery auditor reviewed all vendor domestic commercial payments from FY 2003 through June of FY 2005 subject to the Prompt Payment Act.
At the end of FY 2005, approximately 40 potential duplicate payments were identified. Of these, four payments totaling approximately $50,000 have been validated as duplicate payments and the Department has sent demand letters to the affected vendors. There are three additional payments, still in the validation process, totaling about $45,000 that are not included in the confirmed duplicate payments presented in the table below.
The Charleston Financial Services Center (CFSC) also sent letters to the Department's vendors requesting account statements. The purpose was to identify vendors with balances owed to the Department. About 4,000 letters were mailed and about 900 vendor statements were received as of September 30, 2005. Additional accounts, totaling approximately $108.7 thousand, were identified by the recovery auditors with potential balances owed to the Department. The CFSC is in the process of validating the balances in the accounts.
|Audit Program||Amount of Payments Subject to Review||Number of Payments Reviewed||Number||Amount (in $000)|
|Potential Duplicates||Actual Duplicates Confirmed||Claims Collected||Outstanding Claims||Duplicate Payments Confirmed||Duplicate Payments Collected||Outstanding Claims|
|419,688||39||4||—||4||$ 51||$ —||$ 51|
|Internal CFSC Audit||$22.2 Billion||709,235||284||255||172||83||$5,299||$5,190||$109|
To monitor on a routine basis the quality of the Department's payment processes, the CFSC has in place its own debt recovery program and a management structure to monitor for duplicate and erroneous payments. The Financial Oversight and Coordination Office (FOC) and the Office of Claims perform a monthly audit of all payments focusing on identifying potential erroneous and duplicate domestic payments. FOC uses data mining software that identifies potential duplicate and erroneous payments. Once the potential duplicate and erroneous payments are identified, the Office of Claims validates them and the collection process begins. In addition, the Office of Claims has established a debt management support structure, specifically focused on early detection, identification and collection of erroneous and duplicate commercial claims. For FY 2005, there were 284 payments identified as potential duplicate/erroneous payments. Of these, 255 were confirmed duplicate payments totaling approximately $5.3 million as shown in the above table. Of the 255 confirmed duplicate payments, 172 have been collected totaling $5.19 million while 83 remain outstanding totaling $109 thousand.
The Department is committed to reducing erroneous payments issued domestically and overseas. Programs and procedures have been instituted that will strengthen agency management and internal control procedures for prevention, detection and recovery of erroneous payments. The following improvements are being undertaken:
- Issue updated guidance for performing program reviews and risk assessments
- Strengthen policies and procedures with regard to proper documentation requirements for payments
- Provide training to affected staff regarding proper payment requirements and documentation
- Strengthen payment and debt management programs policies and practices that will improve detection, referral and recovery efforts
- Report information on improper payments in the annual Performance and Accountability Report
Based on the improper payment reviews conducted in FY 2004 and FY 2005, the improper payments identified did not result from the lack of proper information systems. Although the Department is currently in transition to implement a global financial management system by FY 2007, the current financial management system did not have an impact on the level of improper payments identified.
As previously mentioned, one of the challenges the Department faced in FY 2005 was determining to what extent federal financial assistance should be tested to obtain reasonable assurance that improper payments are not occurring at the grantee level. The Department performed limited procedures to test for improper payments that did not involve reviewing payments at the grantee level. However, to supplement the test work performed, the Department relied on monitoring procedures performed at the program offices, the A-133 reports of grantees, and the results of OIG reviews. In FY 2006, the Department will consider establishing procedures in the Bureau of Resource Management to monitor financial transactions. The Department will also seek guidance from OMB in FY 2006 to determine the most feasible way to test federal financial assistance for compliance with the IPIA. The Department will also review best practices to follow in FY 2006.
|The Department of State Charleston Financial Service Center.|
Department of State Photo