Improper Payments Podcast Recording Transcript


Kim: Hello and welcome to EPA Uncovered, the official podcast of the EPA Office of Inspector General. I'm your host, Kim Wheeler. And today we're talking about improper payments. Now, if you've heard that phrase recently and wondered exactly what it means, the basic idea is actually pretty simple. Federal agencies spend taxpayer dollars to carry out government programs, and they need to have systems in place to make sure those payments are going to the right recipient for the right amount for an allowable purpose. And that there's documentation to prove it. Over the past several months, the EPA OIG has issued two reports looking at different pieces of that responsibility at the EPA. In January, we reported on improper payments in the EPA state revolving fund program, which provides billions of dollars to support drinking water and wastewater infrastructure. Then in August, we issued our annual audit examining whether the EPA complied with the Payment Integrity Information Act, called PIIA for short. Taken together, these two reports tell a broader story about why the details behind payment reviews matter. And here to talk to us about that is our deputy assistant inspector general for audit, Marcus Gullett. Marcus, thanks for being here.

Marcus: Thanks for having me, Kim.

Kim: So, before we get into these reports, can you walk us through some basics? When people hear the term “improper payment,” they may assume it means fraud or that the government paid money to someone who shouldn't have received it. Is that always the case?

Marcus: No, definitely not. I mean, I think you did a great job in your intro talking about the definition of a proper payment, right, the baseline, which is that the payment is going the right recipient in the right amount and that it's kind of following all applicable requirements of that payment. So, you know, given that definition, you can see that an improper payment doesn't necessarily mean that there's fraud. It can mean that the payment was again to the wrong person for the wrong amount, or it didn't follow some type of process. I'd also mention just for context that, you know, there's an additional type of payment which is called an unknown payment, and these payments are those that are made without sufficient documentation to determine whether the payment was proper or not. And a lot of the findings that we have in these two reports get to these unknown payments and how the EPA treats them. So, you know, going back to the original question, no, it doesn't necessarily mean that fraud is taking place, but without the proper documentation, often times you can't rule out fraud either, which puts public funds at risk and, as we kind of lay out, that can undermine the effectiveness of these programs.

Kim: So, with that in mind, let's dig into what your teams found in these audits. Let's start with the report issued in January. So, the EPA administers 2 state revolving fund programs. There's one for clean water, one for drinking water. For listeners who aren't familiar with the SRFs, what are these programs and what do they do?

Marcus: Sure. So the State Revolving Funds, or SRFs as we can call them for short, were established by Congress, the Clean Water SRF in in 1987 and then the Drinking Water SRF in 1996.
So the way that works is that Congress provides funding, usually on a yearly basis, then the EPA awards that funding in the form of capitalization grants to the states, and then those states make the funding available for a variety of water-related projects, including construction equipment and materials that might be necessary to treat and distribute water wastewater. And then also there's funding available for removing and replacing lead service lines amongst a number of other acceptable uses of that money. So, from 2017 to 2021, Congress provided an average of $2.7 billion for the SRF program. But then in 2021, with the Infrastructure Investment and Jobs Act,
Congress provided another $43 billion over the next five years through 2026 to fund clean water and drinking water projects as well.

Kim: OK. So, these are really high-dollar programs. It's probably especially important to have effective controls to make sure the payments from those programs are being properly reviewed and documented. So  when our audit came out in January, what were those findings?

Marcus: Yeah. So, we issued the SRF audit report earlier this year in January as you mentioned and this was another one in a series of reports that the EPA OIG has been doing, looking at EPA’s oversight of supplemental appropriations, including the oversight of SRFs and we looked for this report at a key activity that the EPA performs to ensure that payments made through the SRFs are proper. Each year, the EPA tests SRF transactions. They pick a number of transactions from the clean water side and the drinking water side for each of the states funded through SRFs, and then they'll look to see if those payments are properly supported. So, for the scope of our audit, we looked at 2 years—we looked at fiscal years 2022 and 2023, and in those two years, the EPA tested over 750 transactions. So, we started with those 750 transactions. We took about 20 of them to look at.
We looked at those transactions and we found errors in 19 out of the 20. You know, some of the examples of the errors that we found were instances where the reviewer accepted unapproved or unsigned construction invoices as evidence of payment. In some cases, it looked like the invoice approvals were pre-populated and not completed at the time that the invoice was submitted for payment. We also saw other instances of summary data to support, you know, payroll expenses, for example, where we'd see a certain handwritten figure on the payroll but then it didn't match the actual kind of figures coming out of the payroll system. We also saw, you know, contracted hourly and professional services like attorney and engineering fees that didn't include support like time sheets or service descriptions. But ultimately, as I said, for a sample of 20 payments, we found issues with nineteen of those payments that represented over $63 million.

Kim: Wow. So, if that's just what's happening in the sample that you're looking at, what does that mean for, you know, the larger portfolio of payments?

Marcus: Well, it highlights something that that we talked about in the SRF report and we'll talk a little bit about in the Payment Integrity report as well—that there's kind of a breakdown in the type of support that reviewers are looking at and then also sort of in the standard operating procedures or the guidance that these reviewers are following is not prescriptive enough to allow for kind of a complete look at the propriety of the payments.

Kim: You mentioned the August audit, so we can shift to that. The January audit took a close look at one specific area, the SRF program. The August audit zooms out and asks like a broader question: Does the EPA comply with the federal payment integrity requirements for fiscal year 2025? Before we talk about what your team found, what exactly does PIIA require for federal agencies?

Marcus: So, as you mentioned, the Payment Integrity Information Act of 2019—we call it PIIA for short—it requires a number of activities on the agency side and a number of activities on the Office of Inspector General side. So, the agency needs to review every program over with annual outlays over $10 million and they need to do that every three years, and then they need to identify which ones are susceptible to making significant improper payments. For those that they determine are susceptible to making significant proper payments, then they have to publish an improper and unknown estimate in their financial report and then a number of other items that they take to show progress in reducing and recovering any improper payments. As far as the OIG, we're responsible for annually determining whether the agency is in compliance with PIIA requirements. In any given year, there's up to 10 potential compliance criteria, and the standard is 100 percent. So if the agency gets 9 out of 10, for example, they're still not compliant with PIIA that year, even though they might be compliant with certain aspects of PIIA in any given year.

Kim: So, how did the agency do for fiscal year 2025?

Marcus: So, for the fiscal year 2025 audit, there were four applicable requirements that the EPA had to follow, and they complied with three out of four. They published their required information in their annual financial statement. Then they posted that information on their website, and they also conducted risk assessments for their applicable payment streams. There was one area that we found EPA noncompliant in, and that was that they did not adequately conclude whether two of their payment streams were likely to make significant, improper and unknown payments.
And as I mentioned, you know, in order to achieve overall PIIA, compliance agencies need to comply with all of the applicable requirements in a given year. So that one requirement that they did not comply with resulted in the EPA not complying overall with PIIA requirements for fiscal year 2025.

Kim: So coming back to that area of noncompliance—for someone who's not an auditor, doesn't have a background in accounting, can you explain that in layman's term what that means?

Marcus: Yes. So, one of the requirements for the agency is to accurately determine or adequately conclude whether their payment streams are likely to make significant, improper and unknown payments. And in our FY2025 report, we identified where the agency for two of its payment streams for the grants and the Clean School Bus grant programs did not adequately make that determination. And the reason for that was, you know, in order to make that determination, the EPA takes a sample of payments to look at whether those are properly supported, and they'll make a determination whether that's a proper payment, an improper payment, or maybe an unknown payment. So, we went and tried to replicate those results and found a lack of supporting documentation and also just a lack of kind of the decision-making process behind how the EPA ultimately determined those were proper payments, which then calls into question the overall risk assessment, which is important because these risk assessments  are what triggers  additional steps for the EPA to be able to prevent and recoup future improper payments as well.

Kim: Thank you. That that's very helpful. Stepping back, it seems like these reports are telling a similar story. What is the overlap? How do these two audits connect, and what do they tell us about how the EPA is monitoring for and reporting improper payments overall?

Marcus: Sure. I mean a couple of themes across these reports and others that we've issued over the years. One issue that I would bring up is that there's some level of procedures that kind of outline how these reviews should take place in both our SRF job earlier in the year and this PIIA report, but these procedures don't include the level of specificity necessary to make them effective, right. So, for example, both reports indicate a need for procedures to more clearly define what types of documentation are acceptable to support that proper payment determination. But I think you know one of the most important themes that comes from that, from that lack of specificity, is that both reports highlight that, in fact, in practical terms, when reviewers are looking at these transactions, there's a lack of supporting documentation. You know, I mentioned in the SRF report, we found issues in 19 of our 20 sampled items. For PIIA, we reviewed 39 payments and questioned about 73 percent of the value of the dollars claimed in those payments, representing about $26.7 million. And that’s two-fold. So, one, it's the lack of documentation supporting the payments themselves, right, which both the reports discuss the type of support that would allow a reviewer to determine again that that the payment went to the right person, the right amount, and in accordance with applicable requirements. So, for example, there was a grant recipient who claimed $400,000 to replace asphalt, but there is no documentation that tied that expense to the EPA grant in question as opposed to an unrelated expense of that grantee . So, that's the first part—lack of documentation in the payments themselves that we were looking at. But then the second part was the lack of support that would show us what reviewers are considering in designating payments as proper. So, we saw instances where, yeah, it seemed like the reviewer annotated a discrepancy like they saw something that was, but ultimately, they classified that payment as proper. So, that could be due to maybe their knowledge of the grant or maybe they checked another source, we don't know. But you know as auditors, we need to be able to follow that decision making process. Oftentimes, we just didn't see the support to come to the same conclusions. And again, we're not saying that these payments are wrong. We're saying that the documentation wasn't there to show that they were proper.

Kim: Thank you for making that important distinction for our listeners, and speaking of our listeners, let's bring this back to the average person, the taxpayer. If we're not saying that these payments were definitely wrong and we're not saying that these are instances of fraud, why should someone listening to this podcast care whether the EPA is properly categorizing an unknown payment or documenting a risk assessment. Why does this matter?

Marcus: That's a fair question, Kim. You know, what I would say is first that the EPA uses the results of these transaction tests to make, you know, decisions about which programs are more susceptible to improper payments than others. And that determination informs whether the EPA has to take additional steps to publish a corrective action plan, for example, to set reduction targets to ensure that sort of payments are going to the right person in the right amount and in in accordance with policy. So, there's a built-in capability when reviewers are making accurate determinations as to whether a payment is proper or improper. But then second, I would mention that, you know, that the EPA is managing a significant increase in appropriations over the past few years. You know, the Infrastructure Investment and Jobs Act effectively doubled the EPA's yearly budget, and most of this increase represents funds that the agency is then awarding and distributing to other recipients. So, the stakes are a lot higher. The risks of fraud, waste and abuse are compounded, and these controls are really important to ensure the safeguarding of that money.

Kim: Thanks, Marcus. All very important, and we definitely want to see the Agency address this problem. So, what did the OIG recommend here?

Marcus: So we make a total of 10 recommendations in these two reports, the SRF report and the PIIA report, really focusing on three main areas. One, getting a handle on the supporting documentation that's available to show that payments are proper. Two, adding specificity to the instructions given to the reviewers to ensure that they know kind of the leading practices on the types of documentation that should be available. And then three, determining whether any update should be made to the risk assessments based on our findings. As I mentioned, you know, one step is to do these transaction tests, but that feeds other steps in the process. So we really want the agency to look to see if they need to be updating their risk assessments. When we make recommendations in reports, the agency is required to respond, they propose a solution that meets the intent of the recommendation, and then we follow up with the agency to ensure that, you know, that the corrective actions are taking place within the established milestones and have a conversation about how those corrective actions are meeting the intent of our recommendations.

Kim: Thanks, Marcus. That really gives us a good picture of what happens after an audit and how the OIG follows up with the agency and continues to monitor the progress of these recommendations and to help the agency address the issues that we find. We're out of time, but before we go, can you kind of tie it all together for us—these reports, this discussion, what is the take away?

Marcus: So, the SRF report, the PIIA report, there's a common theme here, and I think the key take-away here is that, you know, the determination of whether a payment is proper or not is kind of the first step in a chain of activities that really gives leaders the information at the EPA on what level of risk to assign to a program and then how much attention to place on that program in order to manage that risk. So, this first step needs to be improved, right? Reviewers need to know what documentation they need to look at. The agency needs to hold everyone accountable to that standard so that the integrity of that chain can be preserved. And ultimately, really this comes down to ensuring that decision makers have that information they need to make decisions that protect taxpayer dollars, but more specifically, safeguard these fund that are intended to protect human health and the environment.

Kim: Excellent. Thank you, Marcus. Thank you so much for taking the time to walk us through these reports. Thank you for helping us to better understand them, and to our audience, thank you for joining us. Thank you for listening. You can find both of these reports and learn more about the work of the EPA, Office of Inspector General on our website at www.epaoig.gov. Until next time, thank you for joining.