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V „y OFFICE OF INSPECTOR GENERAL
EPA Can Improve Its Improper
Payments Reporting
Report No. 12-P-0311 March 1, 2012

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Report Contributors:	Melinda Burks
Janet Kasper
Madeline Mullen
Nicole Pilate
Wendy Swan
Abbreviations
AFR
Agency Financial Report
EPA
U.S. Environmental Protection Agency
FY
Fiscal year
IPERA
Improper Payments Elimination and Recovery Act
OCFO
Office of the Chief Financial Officer
OGD
Office of Grants and Debarment
OIG
Office of Inspector General
OMB
Office of Management and Budget
SRF
State Revolving Fund
Hotline
To report fraud, waste, or abuse, contact us through one of the following methods:
e-mail: OIG Hotline@epa.gov	write: EPA Inspector General Hotline
phone: 1-888-546-8740	1200 Pennsylvania Avenue NW
fax:	202-566-2599	Mailcode 2431T
online:
http://www.epa.gov/oiq/hotline.htm
Washington, DC 20460

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*	' U.S. Environmental Protection Agency	12-P-0311
£ JUL* \ Office of Inspector General	March 1 2012
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At a Glance
Why We Did This Review
EPA Can Improve Its Improper Payments Reporting
Office of Management and
Budget (OMB) guidance for
implementation of the 2010
Improper Payments
Elimination and Recovery Act
(IPERA) specifies
responsibilities of agencies and
inspectors general. Agencies
are required, among other
things, to report on improper
payments, and inspectors
general are required to
determine whether the agency
is in compliance with IPERA.
Background
Each year, the federal
government wastes billions of
taxpayer dollars on improper
payments to individuals,
organizations, and contractors.
Such payments can be made in
the wrong amount, to the
wrong entity, or for the wrong
reason. Despite efforts to
reduce improper payments, all
federal agencies reported an
estimated $125 billion in
improper payments for fiscal
year (FY) 2010.
What We Found
The U.S. Environmental Protection Agency (EPA) complied with IPERA in that
it reported all required information on improper payments, but EPA can improve
the accuracy and completeness of the information. In the Fiscal Year 2011
Agency Financial Report (AFR), EPA reported the results of its efforts to
recapture improper payments. EPA is taking actions to improve internal controls
in preventing, reducing, and recapturing improper payments.
EPA did not report all improper payments identified in audits and reviews of
grants to tribes, state and local governments, and universities in the FY 2011
AFR. IPERA requires that agencies report on all actions to detect and recover
improper payments. EPA did not update its detection and reporting procedures to
identify all grant improper payments as required by IPERA. As a result, EPA
understated grant improper payments by thousands of dollars. The Office of
Grants and Debarment has developed draft guidance and plans to report all grant
improper payments in the FY 2012 AFR. If it does not do so, grant improper
payments will continue to be understated.
The Agency is not reporting discounts not taken as improper payments.
According to IPERA, any payment that does not account for credit for applicable
discounts is considered an improper payment. In EPA's opinion, there are valid
reasons why certain discounts cannot be taken. In such cases, discounts should be
considered "non-applicable" for improper payments reporting purposes.
EPA did not correctly calculate improper payments reported in the FY 2011
AFR. OMB Memorandum M-l 1-16 requires inspectors general to evaluate the
accuracy and completeness of agency reporting. Errors occurred because EPA's
Office of the Chief Financial Officer did not issue guidance to ensure the
accuracy of improper payment reporting. As a result, EPA understated its error
rate for State Revolving Fund programs and made errors in its consolidation of
data.
What We Recommend
For further information, contact
our Office of Congressional and
Public Affairs at (202) 566-2391.
The full report is at:
www.epa.aov/oia/reports/2012/
20120301-12-P-0311.pdf
We recommend that EPA issue guidance requiring that the results of all grant
improper payment determinations and recaptures, as well as discounts not taken
as improper payments, be reported. We also recommend that EPA issue guidance
to program offices to ensure the quality of reported information. EPA agreed with
three of the four recommendations; it did not agree with the recommendation that
EPA report discounts not taken as improper payments. That recommendation is
unresolved with resolution efforts in progress.

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* £% '
< rJK-7 5	UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
| Wl/V ®	WASHINGTON, D.C. 20460
THE INSPECTOR GENERAL
March 1, 2012
MEMORANDUM
SUBJECT: EPA Can Improve Its Improper Payments Reporting
Report No. 12-P-0311
FROM: Arthur A. Elkins, Jr.
Inspector General
TO:	Barbara J. Bennett
Chief Financial Officer

Craig E. Hooks
Assistant Administrator for Administration and Resources Management
This is our report on the subject audit conducted by the Office of Inspector General (OIG) of the
U.S. Environmental Protection Agency (EPA). This report contains findings that describe the
problems the OIG has identified and corrective actions the OIG recommends.
The Improper Payments Elimination and Recovery Act (IPERA) and Office of Management and
Budget guidance require the Inspector General to distribute this report to the following
individuals and organizations:
•	The Senate Homeland Security and Government Affairs Committee
•	The House Committee on Oversight and Governmental Reform
•	The Comptroller General
•	The Controller of the Office of Management and Budget
We have provided the report to these individuals and organizations under a separate transmittal.
Action Required
In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 90 calendar days. You should include a corrective actions plan for agreed-upon
actions, including milestone dates. Your response will be posted on the OIG's public website,
along with our memorandum commenting on your response. Your response should be provided
as an Adobe PDF file that complies with the accessibility requirements of Section 508 of the

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Rehabilitation Act of 1973, as amended. The final response should not contain data that you do
not want to be released to the public; if your response contains such data, you should identify the
data for redaction or removal. We have no objections to the further release of this report to the
public. We will post this report to our website at http://www.epa.gov/oig.
If you or your staff have any questions regarding this report, please contact Melissa Heist,
Assistant Inspector General for Audit, at (202) 566-0899 or heist.melissa@epa.gov; or
Janet Kasper at (312) 886-3059 or kasper.ianet@epa.gov.

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EPA Can Improve Its Improper
Payments Reporting
12-P-0311
Table of C
Chapters
1	Introduction		1
Purpose		1
Background		1
Noteworthy Achievements		2
Scope and Methodology		2
2	EPA Should Improve Grant Improper Payment Reporting		4
Grant Reporting Did Not Include All Programs and Activities		4
EPA Did Not Update Procedures		5
Recommendations		5
Agency Response and OIG Evaluation		6
3	EPA Should Report Discounts Not Taken as Improper Payments		7
IPERA Defines Discounts Not Taken as Improper Payments		7
EPA Is Not Reporting Discounts Not Taken		7
EPA Is Awaiting Guidance From OMB		8
Recommendation		9
Agency Response and OIG Evaluation		9
4	EPA Should Address Other Improper Payment Reporting Errors		10
EPA's SRF Error Rate Calculation Method and Process for
Consolidating Information Resulted in Reporting Errors		10
Recommendation		11
Agency Response and OIG Evaluation		11
Status of Recommendations and Potential Monetary Benefits		12
Appendices
A Agency Response to Draft Report	 13
B Distribution	 19

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Chapter 1
Introduction
Purpose
The Office of Management and Budget (OMB) issued government-wide guidance
for implementation of the 2010 Improper Payments Elimination and Recovery
Act (IPERA) on April 14, 2011.1 The guidance updated requirements for
measurement and remediation of improper payments. Agencies are required to
report on improper payments, and inspectors general are required to review
agency reporting. Our objective was to determine whether the U.S. Environmental
Protection Agency (EPA) is in compliance with IPERA.
Background
IPERA became law on July 22, 2010. It amended the Improper Payments
Information Act of 2002. IPERA requires that each agency periodically review
and identify all programs and activities that may be susceptible to significant
improper payments.2 The Act also significantly increased requirements for
payment recapture efforts by expanding the types of payments that must be
reviewed and by lowering the threshold of annual outlays that requires agencies to
conduct payment recapture audit programs.
IPERA defines an improper payment, in relevant part, as any payment that should
not have been made or that was made in an incorrect amount, 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, and any payment that
does not account for credit for applicable discounts. OMB guidance expanded the
improper payment definition to include payments without sufficient documentation.
Agencies are to report on improper payments:
•	Voluntarily returned by contractors
•	Used to offset future payments
•	Identified and returned to the agency through Office of Inspector General
(OIG) efforts, such as audits, reviews, or tips from the public
•	Identified and recovered through management post-payment reviews and
close-out3
1	As its title suggests, OMB Memorandum M-l 1-16, Issuance of Revised Parts I and II to Appendix C of OMB
Circular A-l23, revised OMB Circular A-123, Appendix C, Parts I and II.
2	IPERA defines "significant" as gross annual improper payments in the program exceeding (1) both 2.5 percent of
program outlays and $10 million of all program or activity payments made during the fiscal year reported, or
(2) $100 million (regardless of the improper payment percentage of total program outlays).
3	OMB Memorandum M-l 1-04, Increasing Efforts to Recapture Improper Payments by Intensifying and Expanding
Payment Recapture Audits.
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Each fiscal year, inspectors general are required to determine whether agencies
are in compliance with IPERA 4 Compliance means that the agency has:
•	Published an Agency Financial Report (AFR) for the most recent fiscal
year and posted it on the agency website
•	Conducted a program-specific risk assessment (if required)
•	Published improper payment estimates for all programs and activities
identified as susceptible to significant improper payments (if required)
•	Published programmatic corrective action plans (if required)
•	Published and met annual reduction targets for each program assessed to
be at risk and measured for improper payments
•	Reported a gross improper payment rate of less than 10 percent for each
program and activity for which an improper payment estimate was
obtained and published in the AFR
•	Reported information on efforts to recapture improper payments
An agency is not compliant if it does not meet one or more of these requirements.
Inspectors general should evaluate (1) the accuracy and completeness of agency
reporting, and (2) agency performance in reducing and recapturing improper
payments. Inspectors general should include any recommendations to improve
agency performance in reducing improper payments.
Noteworthy Achievements
EPA complied with IPERA in that it reported all required information on
improper payments. Further, EPA is taking actions to improve internal controls
for preventing, reducing, and recapturing improper payments. For example, EPA:
•	Emphasizes adherence to sound internal controls that prevent the
occurrence of improper payments, and aggressively recovers them
•	Initiated an Agency-wide effort to review and verify implementation of
the American Recovery and Reinvestment Act Stewardship Plan
•	Corrected errors and recovered improper payments from State Revolving
Funds (SRFs)
•	Maintains an internal improper payment recapture audit program in which
Agency employees review grants, contracts, commodities, and SRF funds
•	Met OMB' s recovery target rates for improper payments
Scope and Methodology
We conducted this compliance audit from November 2011 to January 2012 in
accordance with generally accepted government auditing standards, issued by the
Comptroller General of the United States. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to provide a
4 OMB Memorandum M-l 1-16.
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reasonable basis for our findings and conclusions based on our audit objective.
We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
To determine whether EPA is in compliance with IPERA, we reviewed EPA's
fiscal year (FY) 2011 AFR and accompanying materials. We interviewed Agency
staff at EPA headquarters from the Office of the Chief Financial Officer (OCFO),
the Office of Grants and Debarment (OGD), and the Office of Water. We also
interviewed OCFO staff from the Research Triangle Park Finance Center. We
gained an understanding of the processes, procedures, and controls used for
IPERA reporting across the three payment streams (grants, commodities and
contracts, and SRF funds). We traced judgmental samples of reported improper
payments from each payment stream back to source documentation to test the
accuracy of improper payments reporting in EPA's FY 2011 AFR.
We used information from several EPA data systems during our work:
•	Integrated Grants Management System
•	Contract Payment System
•	Small Purchase Information Tracking System
•	Financial Data Warehouse
We verified the information in the systems to source documentation and
concluded that the information provides a reasonable basis for our findings and
conclusions.
We evaluated EPA finance centers' internal controls regarding improper
payments, and we considered general controls implemented to identify and report
improper payments.
Prior Audit Coverage
In EPA OIG Report No. 1 l-P-0362, EPA Needs to Reexamine How It Defines Its
Payment Recapture Audit Program, issued July 19, 2011, we provided feedback
regarding EPA's improper payments reporting in the FY 2010 AFR. During the
current audit, we followed up on Agency corrective actions from this prior audit,
as explained in chapter 2.
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Chapter 2
EPA Should Improve Grant
Improper Payment Reporting
EPA did not report all improper payments identified in audits and reviews of
grants to tribes, state and local governments, and universities in the FY 2011
AFR. IPERA requires that agencies report on all actions to detect and recover
improper payments, including the amounts recovered, outstanding, and
determined to be not collectible. EPA did not update its detection and reporting
procedures to identify all grant improper payments as required by IPERA. As a
result, EPA understated grant improper payments by thousands of dollars. OGD
has developed draft guidance and plans to report all grant improper payments in
the FY 2012 AFR. If OGD does not do so, grant improper payments will continue
to be understated.
Grant Reporting Did Not Include All Programs and Activities
In the FY 2011 AFR, EPA did not report all grant improper payments to tribes,
state and local governments, and universities that were identified in audits and
reviews. According to IPERA, the head of each agency shall report on all actions
the agency is taking to detect and recover improper payments, including the
amounts recovered, outstanding, and determined to be not collectible. For
FY 2011, EPA only reported improper payments for one nonprofit grant in the
amount of $7,110.5 However, our sampling identified over $486,000 of grant
improper payments and over $435,000 of recaptured improper payments that
should have been reported in the FY 2011 AFR (table 1).
Table 1: Examples of unreported improper paymentsa
Type of
grantee
Grantee name
Type of review
Billed date
Improper
payment
Amount
recaptured
Nonprofit
Michigan Biotechnology
Institute
OIG audit
01/05/2010
$275,297.94
$275,297.94
Nonprofit
International City/
County Mgmt. Assoc.
OIG audit
12/01/2010
157,393.00
157,393.00
Tribe
Pedro Bay Village
Grant close-out
04/20/2010
34,051.58
2,745.46
Tribe
Alaska Intertribal Council
Grant close-out
07/27/2010
19,600.62
0.00
Total
$486,343.14
$435,436.40
Source: OIG analysis of EPA data.
a OMB approved EPA's reporting of calendar year 2010 grant improper payments for the FY 2011 AFR.
5 EPA sampled nonprofit grantees and conducted advanced monitoring reviews to assess recipients' administrative,
programmatic, and financial progress.
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EPA detects, reports, and recaptures improper payments through baseline and
advanced monitoring, but only reported on improper payments detected from a
sample of nonprofit grantees. Also, EPA has knowledge of improper payments
detected through OIG and other audits, but the information is not always included
in the compliance database, and therefore is not reported. OGD has never required
regions to record these audits in the compliance database. Our review of the
compliance database found that final determinations from audits and management
reviews were not always recorded or updated when appeals were completed.
In EPA OIG Report No. 1 l-P-0362, EPA Needs to Reexamine How It Defines Its
Payment Recapture Audit Program, issued July 19, 2011, we recommended that
the Agency include all programs and activities in the FY 2011 AFR. EPA
reported in its Management Audit Tracking System that it completed the
corrective action for the OIG recommendation on November 15, 2011. However
the issue has not yet been corrected. OGD officials stated in December 2011 that
there was miscommunication regarding what would be reported in the FY 2011
AFR. OGD could not update its systems and procedures quickly enough to
capture all the information required for the FY 2011 AFR.
EPA Did Not Update Procedures
EPA did not update its detection and reporting procedures to identify all grant
improper payments as required by IPERA. EPA continued to follow its pre-
IPERA reporting procedures, which required reporting only on a sample of
nonprofit advanced monitoring reviews.
In December 2011, OGD officials stated that they agreed with our
recommendation to issue guidance on capturing information on improper
payments. They provided draft guidance, which OGD developed to comply with
IPERA, and explained their plans for updating the compliance database. OGD
plans to provide personnel with additional guidance about what, how, and when
improper payments should be reported.
Recommendations
We recommend that the Assistant Administrator for Administration and
Resources Management:
1. Issue guidance requiring that the results of all grant improper payment
determinations and recaptures be documented in the compliance database
and reported in the FY 2012 AFR.
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We recommend that the Office of the Chief Financial Officer and the Assistant
Administrator for Administration and Resources Management:
2. Continue to track in the Management Audit Tracking System the
recommendation in OIG Report No. 1 l-P-0362—to include in the AFR all
improper payments identified through EPA reviews and OIG financial and
single audits—until the corrective actions are completed.
Agency Response and OIG Evaluation
EPA concurred with our recommendations and proposed the following corrective
actions:
•	OGD will complete additional refinements to the draft guidance prepared
during this audit. EPA expects to issue final guidance in April 2012.
•	OGD will include all improper payments in EPA's AFR; proposed
completion date is November 15, 2012.
•	OCFO reopened corrective actions in the Management Audit Tracking
System for the prior OIG IPERA audit report on February 7, 2012.
The proposed actions meet the intent of recommendations 1 and 2. EPA's
complete response is in appendix A.
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Chapter 3
EPA Should Report Discounts Not Taken as
Improper Payments
The Agency is not reporting discounts not taken as improper payments.
According to IPERA, any payment that does not account for credit for applicable
discounts is considered an improper payment. In EPA's opinion, there are valid
reasons why certain discounts cannot be taken. In such cases, discounts should be
considered "non-applicable" for improper payments reporting purposes. By taking
this position, EPA understated FY 2011 improper payments reporting for the
commodities and contracts payment stream.6
IPERA Defines Discounts Not Taken as Improper Payments
According to IPERA, any payment that does not account for credit for applicable
discounts is considered an improper payment. Specifically, IPERA defines
improper payments as follows:
The term improper payment (A) means any payment that should
not have been made or that was made in an incorrect amount
(including overpayments and underpayments) under statutory,
contractual, administrative, or other legally applicable
requirements; and (B) 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 such payments where authorized by law), and any
payment that does not account for credit for applicable discounts.
(Emphasis added)
EPA Is Not Reporting Discounts Not Taken
The Agency is not reporting discounts not taken for commodities and contracts as
improper payments as required by IPERA. When paying contractors, EPA may be
offered discounts if payments are made by a certain date. The Research Triangle
Park Finance Center identifies and tracks discounts not taken on contractor and
commodities payments, along with the reasons discounts were not taken. In
FY 2011, discounts not taken for commodities and contracts totaled $45,940.27
(table 2).
6 Commodity payments are simplified acquisitions such as small purchases and training.
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Table 2: Unreported discounts not taken
Type of payments
Discount not taken
Commodities
$29,218.61
Contracts
$16,721.66
Total
$45,940.27
Source: OIG analysis of EPA data.
EPA Is Awaiting Guidance From OMB
OCFO management does not believe that OMB intended to have federal agencies
identify all discounts not taken as improper payments and has requested
clarification from OMB on the requirements for reporting discounts not taken. In
EPA's opinion, there are valid reasons why certain discounts cannot be taken. In
such cases, discounts should be considered "non-applicable" for improper
payments reporting purposes.
OCFO management expressed concern to the OIG that making payments prior to
reviewing invoices to obtain a discount might weaken management controls.
Agency officials stated that they may not be able to take a discount for a myriad
of reasons, such as:
•	Insufficient time to review invoices
•	Percentage rate offered not sufficient to generate a cost-effective discount
•	Project officer approval not available
The Agency does track the reasons why discounts are not taken and will in the
future report improper payments in certain instances, such as:
•	Wrong discount percentage was taken
•	Discount taken beyond the specified discount period
In these instances, the Agency believes the amount of the discount taken would be
in error (i.e., improper), and it will include these improper payments in its IPERA
reporting. The Agency does not believe that discounts not taken result in an
improper payment, if the vendor was paid the proper amount due. However, OMB
guidance does not provide any additional clarification of what is in the IPERA
law in regards to discounts not taken being reported as improper payments. Until
OMB issues a clarification, the plain reading of IPERA requires EPA to report all
discounts not taken.
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Recommendation
We recommend that the Office of the Chief Financial Officer:
3. Report discounts not taken as improper payments under IPERA, starting
with the FY 2012 AFR, unless clarification from OMB states otherwise.
Agency Response and OIG Evaluation
EPA respectfully disagreed with this recommendation and stated that the OIG's
interpretation of improper payments for discounts is overly broad. EPA based its
position on OMB Memorandum M-l 1-167, which states that an improper
payment is "any payment that does not account for credit for applicable
discounts." EPA interprets "applicable discounts" as only those discounts for
which claiming them is both advantageous and within the Agency's control. EPA
cited reasons for which discounts cannot be taken and should not be considered
improper payments. EPA cited an OMB memorandum that encourages agencies
to pay small business contractors within 15 days while maintaining necessary
internal controls. EPA emphasized that maintaining internal controls is necessary
when deciding whether to take a discount.
EPA acknowledged that there are situations in which discounts ought to be
reported as improper payments, such as when the wrong discount percentage is
taken or when the discount is taken beyond the specified discount period. EPA
also pointed out that during FY 2011 it successfully claimed discounts worth
$333,641 compared with $45,940 of discounts not taken.
EPA requested that the recommendation be revised to "report discounts not taken
as improper payments under IPERA when it is both advantageous and within the
agency's control to take the discount." We acknowledge EPA's position, but we
did not change the recommendation. The IPERA law includes any payment that
does not account for credit for applicable discounts as part of the definition of
improper payments. We agree that it some cases it may not be advantageous to
the agency to take the discount if it compromises internal controls. When
reporting improper payments, the agency does present narrative detail on its
processes. For discounts not taken, the agency can include explanations as to the
reasons why.
7
OMB Memorandum M-l 1-16, Issuance of Revised Parts I and II to Appendix C of OMB Circular A-123, revised
OMB Circular A-123, Appendix C, Parts I and II.
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Chapter 4
EPA Should Address Other
Improper Payment Reporting Errors
EPA did not correctly calculate improper payments reported in the FY 2011 AFR.
OMB Memorandum M-l 1-16 requires inspectors general to evaluate the accuracy
and completeness of agency reporting. Errors occurred because EPA's OCFO did
not issue guidance to ensure the accuracy of improper payment reporting. As a
result, EPA understated its error rate for SRF programs and made errors in its
consolidation of improper payment data.
EPA's SRF Error Rate Calculation Method and Process for
Consolidating Information Resulted in Reporting Errors
EPA's error rate calculation method for SRF programs resulted in misleading
information. EPA tested $1.13 billion in SRF transactions and identified
$14.18 million in improper payments, which is an error rate of 1.25 percent.
However, EPA based its error rate on total SRF disbursements of $3.64 billion,
not the tested subset of $1.13 billion, resulting in a much lower error rate of 0.39
percent. The error rate should be calculated based on the dollar value tested, and
not the universe of all disbursements.
EPA's process for identifying and accumulating information for the AFR resulted
in overstatement of recoveries for SRF programs and understatement of improper
payments for SRFs and commodities. Our limited testing identified a few
examples of overstatements and understatements, indicating that EPA should
improve its process for consolidating information for the AFR.
Table 3: Other errors found in AFR improper payment reporting
Type of payment
Overstated
Understated
SRF
$1,582,544 inaccurately
reported as recovered
$40,001 calculation error in amount
reported as improper payments
Commodity
None
$674 calculation error in amount
reported as improper payments
$266 billing error omitted from AFR
Source: OIG analysis of EPA data.
EPA did not provide formal guidance to program offices to ensure consistent
treatment and accuracy of improper payment reporting because it was awaiting
further guidance and clarification from OMB. Therefore, EPA's consolidation
was not coordinated and the quality of provided information was not ensured.
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Recommendation
We recommend that the Office of the Chief Financial Officer:
4. Issue guidance to program offices to ensure the quality of reported
improper payment and recaptured payment information.
Agency Response and OIG Evaluation
EPA concurred with our recommendation and stated that OCFO will issue
FY 2012 annual guidance to the Office of Administration and Resources
Management, Office of Water, and the Research Triangle Park Finance Center.
The proposed completion date is February 2012. The proposed action meets the
intent of recommendation 4.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Action Official
5	Issue guidance requiring that the results of all grant
improper payment determinations and recaptures
be documented in the compliance database and
reported in the FY 2012 AFR.
6	Continue to track in the Management Audit
Tracking System the recommendation in OIG
Report No. 11 -P-0362—to include in the AFR all
improper payments identified through EPA reviews
and OIG financial and single audits—until the
corrective actions are completed.
9 Report discounts not taken as improper payments
under IPERA, starting with the FY 2012 AFR,
unless clarification from OMB states otherwise.
11 Issue guidance to program offices to ensure the
quality of reported improper payment and
recaptured payment information.
Planned
Completion
Date
Claimed
Amount
Ag reed-To
Amount
Assistant Administrator for 04/30/2012
Administration and
Resources Management
Office of the Chief 11/15/2012
Financial Officer and
Assistant Administrator for
Administration and
Resources Management
Office of the Chief
Financial Officer
Office of the Chief 02/29/2012
Financial Officer
1 O = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is unresolved with resolution efforts in progress
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Appendix A
Agency Response to Draft Report
February 9, 2012
MEMORANDUM
SUBJECT: Response to the OIG Draft Report - Proj ect No. OA-FY11 -0674
"EPA Can Improve Its Improper Payments Reporting"
FROM: Barbara J. Bennett Original Signed By:
Chief Financial Officer
Craig E. Hooks, Assistant Administrator Original Signed By:
Office of Administration and Resources Management
TO:	Arthur A. Elkins, Jr.
Inspector General
Thank you for the opportunity to respond to the findings and recommendations in the subject
draft audit report. Attention to these issues should further strengthen the agency's fiscal integrity.
Attached is our Corrective Action Plan in response to the specific report recommendations. We
disagree with the recommendation that the Office of the Chief Financial Officer report discounts
not taken as improper payments under the Improper Payments Elimination and Recovery Act
starting with FY 2012 Agency Financial Report unless clarification from the Office of
Management and Budget states otherwise. We believe that the OIG interpretation of improper
payments related to discounts is overly broad given existing laws and other OMB guidance.
Additional analysis on this issue is also attached.
If you have any questions regarding this response, please have your staff contact Stefan Silzer,
Director of the Office of Financial Management on (202) 564-4905, or Howard Corcoran,
Director of the Office of Grants and Debarment, on (202) 564-1903. Thank you.
Attachments
cc: Nanci Gelb
Maryann Froehlich
Joshua Baylson
Stefan Silzer
Jeanne Conklin
Raffael Stein
Melvin Vi snick
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Janice Kern
Douglas Barrett
Howard Corcoran
Denise Benjamin-Sirmons
Denise Polk
Melissa Heist
Janet Kasper
Dale Miller
Meshell Jones-Peeler
Sheila Frace
Charles Job
Guy Hickey
Sandy Dickens
Sandy Womack
Steven Erickson
Andrew LeBlanc
Gail Cornwell
Joe Lucia
Julie Milazzo
Sheila Piatt
Howard E. Rubin
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Attachment 1
Corrective Action Plan
Office of Inspector General Draft Report,
"EPA Can Improve Its Improper Payments Reporting"
Project No. OA-FY11-0674, dated January 25, 2012		
Rec.
No.
OIG Recommendation
Action
Official(s)
Proposed Corrective
Action
Proposed
Completion Date
1.
Issue guidance requiring that
the results of all grant
improper payment
determinations and
recaptures be documented in
the compliance database and
reported in the FY 2012
Agency Financial Report.
[WP B-06 Attachment 1 -
IPERA Compliance 2011
audit draft report, pg 6
Recommendation 1]
Office of
Administration
and Resources
Management
1.1 OARM agrees with
this recommendation.
OARM prepared draft
guidance, which was
shared with OCFO and
OIG. Both offices
concurred with the
general approach of the
guidance.
OARM is in the process
of completing additional
refinements to the draft
guidance for appropriate
agency review and final
issuance.
April 2012
2.
Continue to track in the
Management Audit Tracking
System the recommendation
in OIG Report No. 11-P-
0362—to include in the AFR
all improper payments
identified through EPA
reviews and OIG financial
and single audits—until the
corrective actions are
completed.
Office of Chief
Financial
Officer/
OARM
2.1 OCFO re-opened
corrective actions 1.2 and
1.3 from OIG Report No.
1 l-P-0362.
Recommendations will
remain open until the
corrective actions are
completed.
2.2. OGD will include in
the AFR all improper
payments identified
through EPA resolved
reviews and OIG
financial and single
audits.
Completed
February 7, 2012
November 15,
2012
3.
Report discounts not taken as
improper payments under the
Improper Payments
OCFO
3.1 OCFO respectfully
disagrees with this
recommendation. We
No Action
Required
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Rec.
No.
OIG Recommendation
Action
Official(s)
Proposed Corrective
Action
Proposed
Completion Date

Elimination and Recovery
Act of 2010, starting with the
FY 2012 AFR, unless
clarification from OMB
states otherwise.

believe the OIG's
interpretation of
improper payments
related to discounts is
overly broad given
existing laws and other
OMB guidance. In the
EPA's view, "applicable
discounts" are only those
where it is both
advantageous and within
the agency's control to
take the discount.
See Page 3, Response to
Recommendation 3.1 -
Discounts Not Taken, for
details.

4.
Issue guidance to program
offices to ensure the quality
of reported improper
payment and recaptured
payment information.
OCFO
4.1 OCFO will issue FY
2012 annual guidance to
OARM, OW, and the
RTP Finance Center.
February 2012
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Attachment 2
Response to OIG Draft Report - Project No. OA-FY11-0674
Recommendation 3.1: Discounts Not Taken
In Chapter 3 of the OIG's Draft Audit, Project No. OA-FY11-0674, the OIG recommends that
OCFO "[rjeport discounts not taken as improper payments under IPERA, starting with the FY
2012 AFR, unless clarification from OMB states otherwise."8
The agency respectfully disagrees with the OIG's interpretation of the definition of improper
payments, and requests the OIG revise the draft report to state, "We recommend that the Office
of the Chief Financial Officer report discounts not taken as improper payments under IPERA
when it is both advantageous and within the agency's control to take the discount." Our reasons
for disagreement are outlined below:
1)	The agency respectfully disagrees with the OIG's interpretation that all discounts not taken
are de facto improper payments. Our divergence of opinion stems from conflicting
interpretations of Office of Management and Budget Circular A-123, Appendix C, which
states, in relevant part, that an improper payment consists of "any payment that does not
account for credit for applicable discounts." In our opinion, the term "applicable discounts"
requires some discernment. The agency strongly believes that "applicable discounts" are only
those discounts where it is both advantageous and within the agency's control to claim them.
2)	There are valid reasons why certain discounts cannot be taken. In such cases, discounts
should be considered "non-applicable" for improper payments reporting purposes. These
situations include the following:
a.	When the late receipt of an invoice or late receipt of goods or services prevent the
agency from being able to take the discount. Prior to making payment, the agency
must receive the goods/services, invoices, and appropriate documentation in a timely
manner. Payment cannot occur within the discount window if the invoice or
goods/services are received late.
b.	When the Effective Annual Rate offered in the discount is less that the Treasury
Current Value of Funds rate. If the discount offered is less that the Current Value of
Funds, it is not advantageous for the agency to take the discount.9
c.	When the invoice approval and payment process must be rushed for the sake of
claiming a discount, if doing so would erode established internal control procedures.
Before making a payment, the agency ensures that appropriate payment
documentation is established to support payment of invoices. The agency requires
approval of all invoices prior to payment, which is in compliance with the Prompt
Payment Act. Furthermore, the agency notifies Project Officers/Approving Officials
of any invoices offering a discount and also encourages timely approval, but cannot
force officials to approve invoices without their due diligence in the review process.
8	Project No. OA-FY11-0674, p. 8.
9	Treasury's Financial Management Services website provides a discount calculator at
http://www.fms.treas.gov/prompt/discount.html
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Doing so would compromise securing "adequate documentation" to support the
payment, which in itself is a root cause of error for improper payments.
Therefore, discounts should be claimed to the extent possible, but only insofar as
internal controls can be assured. This position is supported by OMB's September 14,
2011 memorandum #M-11-32, "Accelerating Payments to Small Businesses for
Goods and Services", which encourages agencies to pay small business contractors
within 15 days while also maintaining necessary internal controls. Specifically, it
states, 'To the extent practicable, Federal agencies shall establish a goal of paying
small business contractors within 15 days of receiving proper documentation... At the
same time, agencies need to ensure expeditious processing throughout (including
inspection and acceptance) to facilitate prompt payment to small businesses, while
also maintaining necessary internal controls" [emphasis added]. This demonstrates
that the maintenance of internal controls is of fundamental importance for federal
agencies and must be balanced against the necessity of paying discounts quickly.
The agency acknowledges that there are some situations in which discounts ought to be reported
as improper payments. For example, the agency may inadvertently take the wrong discount
percentage or may take a discount beyond the specified discount period. These situations clearly
lie within the agency's realm of control and should therefore be reported as improper payments.
Even with the OIG's broad interpretation of improper payments, it should be noted that EPA
performed extremely well in claiming applicable discounts offered by vendors in FY 2011. The
RTP Finance Center successfully claimed 666 discounts worth $333,641 while only foregoing
$45,940 of discounts not taken. The claimed discount amount represents 88 percent of the dollar
value of all discounts offered to the agency, resulting in clear savings to the taxpayer.
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Appendix B
Distribution
Office of the Administrator
Chief Financial Officer
Assistant Administrator for Administration and Resources Management
Assistant Administrator for Water
Agency Follow-Up Coordinator
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for External Affairs and Environmental Education
Director, Office of Acquisition Management, Office of Administration and
Resources Management
Director, Office of Grants and Debarment, Office of Administration and Resources Management
Audit Follow-Up Coordinator, Office of the Chief Financial Officer
Audit Follow-Up Coordinator, Office of Administration and Resources Management
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