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 2004, 94% of invoices were paid on time. Presented below is a table that reflects the timeliness of the Department's payments from FY 2002 through FY 2004.
| FY 2002 | FY 2003 | FY 2004 | |
|---|---|---|---|
| On Time | 96% | 92% | 94% |
| Late | 4% | 8% | 6% |
During FY 2004, 2% of invoices required interest penalties compared to 3% for FY 2003.
| 2004 | 2003 | 2002 | |
|---|---|---|---|
| Interest Paid ($000) | 431 | 396 | 443 |
| Interest Under $1 Not Due ($000) | — | — | 4 |
| Interest Due But Not Paid ($000) | — | — | — |
|
Number of Procurement Card Transactions | |||
|
Domestic |
61,838 | 57,312 | 53,379 |
|
Overseas |
66,416 | 112,766 | 46,297 |
The Department successfully increased the percentage of payments it makes electronically. In 2004, 80% of all payments were made by electronic funds transfer (EFT). Domestically, 96% of payments were made electronically. The Department processed 67% of its 2003 overseas payments by EFT, a 2% increase from 2003.
| Payment Type | 2004 | 2003 | 2002 | |||
|---|---|---|---|---|---|---|
| Number | Percent | Number | Percent | Number | Percent | |
|
EFT: | ||||||
|
Domestic |
981,427 | 1,248,335 | 1,210,054 | |||
|
Overseas |
885,623 |
988,329 |
841,050 |
|||
|
EFT Subtotal |
1,867,050 |
80 |
2,236,664 |
79 |
2,051,104 |
77 |
|
Checks: | ||||||
|
Domestic |
26,012 | 47,043 | 56,668 | |||
|
Overseas |
440,394 |
531,046 |
560,026 |
|||
|
Checks Subtotal |
466,406 |
20 |
578,089 |
21 |
616,694 |
23 |
|
Total Payments |
2,333,456 |
100 |
2,814,753 |
100 |
2,667,798 |
100 |
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 Memorandum M-04-20, FY 2004 Performance and Accountability Reports and Reporting Requirements for the Financial Report of the United States Government, 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 below.
For the identification and determination of significant improper payments, the Department has implemented a three-tier 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 final tier relates to the testing of a sample of transactions for the payment classifications considered high-risk for significant improper payments and the identification of corrective actions needed to prevent and detect improper payments.
TIER 1- PROGRAM ASSESSMENT. The first tier provides an initial assessment of payments made at the object class level (e.g., payroll, travel, contracts, federal financial assistance). Payments are grouped into three categories: employee pay such as payroll, benefits and travel, vendor payments, and federal financial assistance, such as grants. These three payment groups are assessed for susceptibility to significant improper payments. This assessment is based on the institutional knowledge of the payment process for each type, as well as information contained in recent reports issued by the Office of Inspector General (OIG) and independent auditor's reports. As a result of this assessment, two types of payment were identified as having a potential high risk for significant improper payments—Federal Financial Assistance Programs and Vendor Pay.
TIER 2- GROSS RISK ASSESSMENT. The second tier provides an assessment of gross risk for programs and activities that have federal financial assistance and vendor payments by bureau, and by specific programs within a bureau. The assessment consists of a review of controls, policies and procedures for the individual programs, and interviews with personnel familiar with these programs. Based on this assessment, individual federal financial assistance programs and vendor payment categories are assigned a rating of high, moderate or low risk of having significant improper payments.
TIER 3 - DETAILED EVALUATION OF HIGH-RISK PROGRAMS. The third tier involves detailed testing of the individual federal financial assistance and vendor payment categories classified as highly susceptible to improper payments. Testing is conducted based on a statistical sample to determine if the transactions are proper. Improper transactions are reported as an error. Total errors are then statistically projected to the population.
Based on the risk assessment conducted in Tier Two, the following programs were considered at high-risk for significant improper payments during FY 2002 when our initial assessments were performed.
Based on these assessments, the Department began reviews of the high-risk programs using FY 2002 payment data. The first review was conducted on PRM—Contributions to International Organization. Lessons learned from this review and additional information obtained as part of the Department's IPIA implementation efforts in FY 2004, led to a reassessment of programs with a high-susceptibility of improper payment. The results of this reassessment are as follows:
The following programs were tested for potential improper payments in FY 2004:
Structures and Equipment remain a type of payment susceptible to significant improper payments. This area will be tested during FY 2005.
The federal financial assistance programs were grouped into three different populations based on the type of assistance being provided. Using OMB guidance, the Department assumed a 2.5% or less rate of error for each of the programs sample since the Department had no historical error rate to use in calculating the sample sizes of the different populations. Listed below are the three populations and anticipated error rate.
| Program | Anticipated Error Rate |
|---|---|
| Federal Financial Assistance: | |
|
IIP - U.S. Speaker and Specialist Program |
2.5% or less |
|
INL-Narcotics Program |
2.5% or less |
| Vendor Payments-—Other Contractural Services | 2.5% or less |
Based on the Department's testing of sampled transactions, the actual error rate and the amount of error were determined to be low with the exception of the IIP-U.S. Speakers and Specialist Program. This program advances America's interests by informing and influencing international publics about U.S. policy and society. IIP sends out nearly a thousand speakers annually to discuss with foreign audiences issues identified by U.S. embassies. Participants in this program have not been required to complete and submit vouchers at the completion of their travel making most travel reimbursement payments "improper" under IPIA. Travel reimbursement payments under this program are high in volume yet small in terms of dollars. As a result, the improper payment error rate for this program is high at 81.18%, while the estimated amount of improper payments is low at $1.4 million, which is less than the $10 million statutory and regulatory definition of significant improper payments. Refer to the table under Improvement Targets for actual FY 2004 sample results.
The potential for the Department making improper payments is low based on preliminary risk assessments and the FY 2004 review of high-risk programs, except for IIP's U.S. Speaker and Specialist Program where the error rate was high. IIP is planning to modify its policies and procedures to ensure that adequate documentation is generated and retained to support travel expenses in accordance with Department standards. These changes also will include training for administrative officers and regional bureau and post personnel involved with this program.
| Projected FY 2004 |
Projected FY 2005 |
Projected FY 2006 |
Projected FY 2007 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Program (Dollars in Millions) |
Outlays | IP % | IP $ | Outlays | IP % | Outlays | IP % | Outlays | IP % |
| Federal Financial Assistance Prgrams | |||||||||
| INL-Narcotics Program | $ 313 | 0.87% | $1.7 | $ 434 | <1% | $ 451 | <1% | $ 469 | <1% |
| IIP-U.S. Speaker and Specialist Program | $ 30 | 81.18% | $1.4 | $ 40 | 70% | $ 41 | 35% | $ 41 | 5% |
| Vendor Payments | |||||||||
|
Other Contractual Services |
$1,534 | 2% | $0.78 | $2,363 | 2% | $2,457 | 2% | $2,556 | 2% |
A key part of the Department's program to identify improper payments is to recover amounts erroneously paid. During the fourth quarter of FY 2004, the Department obtained the services of a contractor to perform recovery audits. Under contingency-based contract, the contractor is paid based on a percentage of the amount of erroneous payments identified and successfully collected. A work plan detailing the scope of this effort is currently being developed with audit recovery work expected to begin in FY 2005.
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:
In implementing the IPIA, the Department identified several potential opportunities to use the Single Audit Act (PL104-056), as amended, to assist in implementing the IPIA. For instance, if auditors conducting single audits projected error rates for each of the federal assistance programs tested at the grantee-level, agencies could rely more extensively on that process to implement the IPIA.
The Department also experienced difficulty in FY 2004 obtaining supporting documentation for grantee expenditures. We are working to develop a contemporaneous sampling plan for FY 2005 whereby grant payments will be selected for sampling throughout the year as draw-downs are processed.
State is not providing targeted reductions in over and underpayment at this time. This is State's first improper payment review and it was limited to only certain high-risk programs. Because of this limited information we feel that we could not provide a meaningful target estimate on the reduction of over and underpayments. In FY 2005, with improvements made in the Department's IPIA program, we plan to provide this type of information.
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The Department of State Charleston Financial Service Center. Department of State Photo |
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