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I	S U.S. ENVIRONMENTAL PROTECTION AGENCY
%	/ OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Special Report
EPA Needs to Reexamine
How It Defines Its Payment
Recapture Audit Program
Report No. 11-P-0362
July 19, 2011

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Report Contributors:
Janet Kasper
Madeline Mullen
Abbreviations
EPA	U.S. Environmental Protection Agency
FY	Fiscal year
IPERA	Improper Payments Elimination and Recovery Act
OIG	Office of Inspector General
OMB	Office of Management and Budget
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:	703-347-8330	Mailcode 8431P (Room N-4330)
online:	http://www.epa.qov/oiq/hotline.htm	Washington, DC 20460

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*	' U.S. Environmental Protection Agency	n-p-0362
£	\ Office of Inspector General	July 19 2011

At a Glance
Catalyst for Improving the Environment
Why We Did This Review
In November 2010, the Office
of Management and Budget
(OMB) required all agencies
to submit a payment recapture
audit plan describing current
payment recapture efforts. The
U.S. Environmental Protection
Agency (EPA), Office of
Inspector General (OIG), was
required to review the action
plan and provide feedback to
EPA.
Background
Each year the federal
government loses billions of
dollars on improper payments
to individuals, organizations,
and contractors. Therefore,
agencies are required to have a
cost-effective program of
internal controls to prevent,
detect, and recover
overpayments.
For further information,
contact our Office of
Congressional, Public Affairs
and Management at
(202) 566-2391.
The full report is at:
www.epa.aov/oia/reports/2011/
20110719-11-P-0362.pdf
EPA Needs to Reexamine How It Defines its
Payment Recapture Audit Program
What We Found
EPA makes numerous efforts to recapture improper payments, but does not
consider its activities to be a formal payment recapture audit program, as defined
by OMB guidance. A payment recapture audit program is an agency's overall plan
for risk analysis and the performance of payment recapture audits and recovery
activities. In its January 2011 submission to OMB, EPA stated that it did not have
a formal payment recapture audit program. However, based on the OMB guidance
issued in April 2011 and information EPA had previously submitted to OMB, we
determined that many of the activities EPA already conducts meet the definition of
a payment recapture audit program.
We reviewed EPA's improper payments methodology and found three areas
where all improper payment efforts were not quantified for the Improper Payments
Elimination and Recovery Act submission to OMB and the fiscal year 2010
Agency Financial Report. These areas involved contract cost issues identified by
the Defense Contract Audit Agency, costs questioned identified during Agency
post-award grant reviews, and costs questioned in OIG and Single Audit reports.
EPA can use funds collected under a payment recapture audit program to
reimburse itself for payment recapture work and fund future financial
improvement programs.
What We Recommend
We recommend that EPA report the results of all activities, including audits the
OIG and other audit organizations conduct, when reporting on its payment
recapture audit program in 2011. During a March 29,2011, meeting with EPA,
Agency staff agreed and stated that all sources of improper payment information
would be reported in compliance with OMB guidance. In response to the draft
report, EPA concurred with our recommendation and identified corrective actions
that will be completed by November 15, 2011. EPA's response adequately
addresses the report findings and recommendations.

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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
THE INSPECTOR GENERAL
July 19,2011
MEMORANDUM
SUBJECT: EPA Needs to Reexamine How It Defines
Its Payment Recapture Audit Program
Report No. ll-P-0362
FROM: Arthur A. Elkins, Jr
Inspector General
TO:	Barbara J. Bennett
Chief Financial Officer
This is our report on the subject review 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. This report
represents the opinion of the OIG and does not necessarily represent the final EPA position.
Final determinations on matters in this report will be made by EPA managers in accordance with
established audit resolution procedures.
The estimated direct labor and travel costs for this report are $31,099.
Action Required
In accordance with EPA Manual 2750, we are closing this report on issuance in our tracking
system. The agreed-to milestones for each recommendation are required to be tracked in the
Management Audit Tracking System until the corrective actions are complete. While a formal
response to the final report is not required, we request that you provide us with documentation of
the policies and procedures that you prepare and issue in response to this report. We have no
objections to the further release of this report to the public. This report will be available at
http://www.epa.gov/oig.
If you or your staff have any questions regarding this report, please contact Melissa Heist 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 Needs to Reexamine How It Defines Its	11-P-0362
Payment Recapture Audit Program
		Table of 	
Purpose		1
Background		1
Scope and Methodology		2
EPA Needs to Expand What It Considers a
Payment Recapture Audit Program		2
Recommendation		4
Agency Response and OIG Comments		4
Status of Recommendations and Potential Monetary Benefits		5
Appendices
A Agency Response	 6
B Distribution	 8

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Purpose
The Office of Management and Budget's (OMB 's) memorandum, Increasing
Efforts to Recapture Improper Payments by Intensifying and Expanding Payment
Recapture Audits, November 16, 2010, required all agencies to submit a payment
recapture audit plan. The plan was to describe current payment recapture efforts
pre-dating the 2010 Improper Payments Elimination and Recovery Act (IPERA)
as well as planned new recapture efforts. Agencies were to submit plans to OMB
and each agency's inspector general by January 14, 2011. Each Office of
Inspector General (OIG) was to review the action plan and provide feedback to
the agency. This report provides our feedback to the U.S. Environmental
Protection Agency (EPA) regarding its January 14, 2011, submission.
Background
The IPERA of 2010 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. The Act also significantly increased requirements
for payment recapture efforts by expanding the types of payments that can be
reviewed and lowering the threshold of annual outlays that require agencies to
conduct payment recapture audit programs.
IPERA defined an improper payment as any payment that should not have been
made or that was made in an incorrect amount, or any payment to an ineligible
recipient, for an ineligible good or service, a duplicate payment, payment for a
good or service not received, or a payment that does not account for credit for
applicable discounts. OMB guidance added to the improper payment definition
those payments that agencies are unable to discern whether they are proper as a
result of insufficient documentation.
According to OMB guidance, an improper payment recapture audit program is an
agency's overall plan for risk analysis and the performance of payment recapture
audits and recovery activities. The program includes policies and activities such
as prepayment reviews, a requirement that all relevant documents be made
available before making payments, and post-award audits. For agencies that
expend more than $1 million in a fiscal year, a payment recapture audit program
is a required element of their internal controls over payments if conducting such
audits is cost effective.
OMB's November 2010 memorandum included directions for submitting plans to
OMB that describe their payment recapture audit programs. For agencies that did
not have payment recapture audit programs, the guidance required that agencies
list all potential program and activity areas that could be reviewed by payment
recapture auditors under IPERA's expanded authorities, including newly created
and existing programs and activity areas. The OMB memo also expanded the
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requirements for what types of improper payments are to be included in the
annual financial report. Agencies are to report on improper payments:
•	Voluntarily returned by contractors
•	Used to offset future payments
•	Identified and returned to the agency through OIG efforts, such as audits,
reviews, or tips from the public
•	Identified and recovered through management post-payment reviews and
close-out.
Scope and Methodology
Our work performed does not constitute an audit under Government Auditing
Standards because our purpose was limited to review and comment on EPA's
January 14, 2011, IPERA submission. We analyzed EPA's fiscal year (FY) 2010
improper payments reporting that was included in the OMB submission and the
FY 2010 Agency Financial Report. We limited our review to assessing the
completeness of the information that was included in the OMB submission and
Agency Financial Report. To accomplish this, we interviewed EPA Headquarters
staff in the Office of the Chief Financial Officer (OCFO) and reviewed supporting
documentation. Although our review was limited to an assessment of the
methodology for accumulating data on improper payments, we plan to analyze
EPA's FY 2011 Agency Financial Report for improper payments in greater detail.
We conducted our work from January to June 2011.
EPA Needs to Expand What It Considers a Payment Recapture Audit
Program
EPA makes numerous efforts to recapture improper payments, but does not
consider its activities to be a formal payment recapture audit program as defined
by OMB guidance. A payment recapture audit program is an agency's overall
plan for risk analysis and the performance of payment recapture audits and
recovery activities. In its January 2011 submission to OMB, EPA stated that it did
not have a formal payment recapture audit program. However, based on the OMB
guidance issued in April 2011 and information EPA had previously submitted to
OMB, we determined that many of the activities EPA already conducts meet the
definition of a payment recapture audit program. We believe that these activities
should be included as part of its formal program. We also found three areas where
all improper payment efforts were not quantified for the IPERA submission and
the FY 2010 Agency Financial Report.
EPA's IPERA submission described a strong program of internal reviews and
controls which could be considered part of a payment recapture recovery audit
program. EPA reviews and analyzes accounting and financial records, supporting
documentation, and other pertinent information within grants, contracts, and State
Revolving Fund activities. EPA's program includes:
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•	Contract invoice reviews
•	Defense Contract Audit Agency audits of large contracts
•	Post-award reviews (baseline and advanced monitoring) of grants
•	State revolving funds transaction testing
•	OMB Circular A-123 reviews of payroll, travel, and purchase cards
Since EPA conducts such activities and, as a result, identifies and recaptures
overpayments, we believe that EPA's activities should be included as part of its
formal program. EPA can use funds collected under a payment recapture audit
program for several purposes:
•	Reimburse the actual expenses of the payment recapture audit services
•	Establish a financial management improvement program that ensures
actions are taken to address the problems that directly contributed to the
improper payments
•	Spend monies for activities related to the original purpose of the funds.
We reviewed EPA's improper payments methodology and found three areas
where all improper payment efforts were not quantified for the IPERA submission
and the FY 2010 Agency Financial Report, as shown in table 1.
Table 1: Additional activities that meet definition of payment recapture audit program
EPA area
Comments
Contracts &
Commodities
Defense Contract Audit Agency audits were not included. According
to EPA's FY 2010 Agency Financial Report for the period October 1,
2009, through September 30, 2010, EPA achieved final action on 20
Defense Contract Audit Agency audits. The funds recovered from
these audits were not considered part of potential payment recapture
audit activities.
Grants
Only non-profits were included, so improper payments that EPA
found and documented for tribes, state and local governments, and
universities were not reported. Also, OIG financial audit and Single
Audit sustained costs were not reported with the other improper
payments.
State Revolving
Funds
Sustained costs identified through single audits were not included.
Source: OIG review of EPA's January 14, 2011, submission to OMB.
We believe that all improper payments detected through EPA efforts, and reports
EPA receives regarding improper payments from audit organizations, meet the
definition of a payment recapture audit program and should be reported in the
Agency Financial Report in order to comply with the Improper Payment
Information Act. OMB's November 2010 guidance specifically identifies
improper payments from OIG audits and agency post-award reviews as having to
be included in the Agency Financial Report. During a March 29, 2011, meeting
with EPA, Agency staff agreed with our analysis and stated that all sources of
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improper payment information would be reported in compliance with the April
2011 OMB guidance.
Recommendation
1. We recommend that the Chief Financial Officer report the results of all
activities, including audits the OIG and other audit organizations conduct,
when reporting on its payment recapture audit program in 2011.
Agency Response and OIG Comments
EPA agreed with our recommendation. The response divides the recommendation
into three separate actions that will address:
•	Defense Contract Audit Agency audits
•	Post-award grant review questioned costs
•	OIG and Single Audit report results
EPA plans to implement all corrective actions by November 15, 2011, which is
when the next Agency Financial Report is due. The response addresses the
recommendation and provides a timeframe for completing the actions.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec. Page
No. No.
Subject
Status1
Actual/Planned
Completion
Action Official	Date
Report the results of all activities, including audits
the OIG and other audit organizations conduct,
when reporting on its payment recapture audit
program in 2011.
Chief Financial Officer
11/15/2011
Claimed
Amount
Agreed-To
Amount
1 0 = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is undecided with resolution efforts in progress
11-P-0362
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Appendix A
Agency Response
JUL -1 2011
MEMORANDUM
SUBJECT: Response to the Office of Inspector General's Draft Special Report:
EPA Needs to Reexamine How It Defines Its Payment Recapture
Audit Program, Project No. OA-FYI I-0123, dated June 6, 2011
FROM:	/s/ Barbara J. Bennett
Chief Financial Officer
TO:	Arthur A. Elkins, Jr.
Inspector General
Thank you for providing us with the opportunity to comment on and respond to the findings and
recommendations made in the "Draft Special Report: EPA Needs to Reexamine How It Defines
Its Payment Recapture Audit Program." We have reviewed the draft report and attached is our
proposed plan for response. Additionally, we request closure upon issuance of your final report.
If you have any questions concerning the audit response, please contact Stefan Silzer, Director,
Office of Financial Management at (202) 564-5389 or Steve Erickson of the Financial Policy and
Planning Staff at (202) 564-1780.
Attachment
cc: Maryann Froehlich
Melissa Heist
Joshua Baylson
Janet Rasper
Stefan Silzer
Howard Corcoran
John Bashista
Raffael Stein
Susan Dax
Melvin Visnick
Jeanne Conklin
Lisa Maass
Meshell Jones-Peeler
Dale Miller
Madeline Mullen
Steven Erickson
Stephen Daniels
Samuel Peterson
Howard Rubin
Sheila Piatt
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Attachment
OCFO'S Response to OIG Draft Report
"EPA Needs to Reexamine How It Defines Its Payment Recapture Audit Program"
Project No. OA-FY11-0123, dated June 6, 2011
Rec.
No.
OIG Recommendation
Action
Official (s)
Proposed Action
Proposed
Completion
Date
1.1
Report the results of improper
payment efforts involving
contract cost issues identified by
the Defense Contract Audit
Agency.
OARM/OAM
EPA concurs with this
recommendation. The
Defense Contract Audit
Agency (DCAA) audits are
an important tool and
information source.
However, except in limited
instances, DCAA audits
address the costs claimed in
the incurred cost submission
and not the amounts billed
and paid.
EPA will report DCAA audit
efforts in the Agency
Financial Report (AFR) that
result in amounts over and
under billed by the
contractor.
11/15/2011
1.2
Report the results of improper
payment efforts involving costs
questioned that have been
identified during agency post-
award grant reviews.
OARM/OGD
EPA concurs with this
recommendation. Questioned
costs determined to be
improper payments that are
identified during all post-
award grant reviews will be
reported in the AFR,
including state and local
governments, tribes, and
universities.
11/15/2011
1.3
Report the results of improper
payment efforts involving costs
questioned in Office of Inspector
General (OIG) and Single Audit
reports.
OARM/OGD,
OW
EPA concurs with this
recommendation. Questioned
costs determined to be
improper payments that are
identified through OIG audits
and state Single Audit
reports will be reported in the
AFR.
11/15/2011
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Appendix B
Distribution
Office of the Administrator
Chief Financial Officer
Assistant Administrator, Office of Administration and Resources Management
Assistant Administrator, Office of Water
Agency Followup 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 Followup Coordinator, Office of the Chief Financial Officer
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