Research & Commentary: Recovery Audits

Published August 9, 2011

For decades, retailers and other private-sector businesses have hired independent auditors to track down improper payments and recover the money. Now governments at all levels are being encouraged and even required to do the same thing.

Every system that makes payments makes mistakes. A recent Government Accountability Office report estimates an overall error rate of 2.9 to 3.9 percent on all federal spending. Nearly all mistaken payments are to the disadvantage of taxpayers: The Centers for Medicare and Medicaid Services notified states in October 2010 that “overpayment recoveries exceeded underpayment identification by more than a 9:1 ratio.”

About a dozen states are actively auditing for improper payments, and more are considering doing so. In most cases, audit firms identify improper payments and submit the findings to the government for approval. Once approved, the audit firm recovers the money and charges a fee, generally a percentage of the funds actually recovered. These contingency-based recoveries are a no-risk proposition for taxpayers.

In July 2010, President Barack Obama signed Public Law 111-204, the Improper Payments Elimination and Recovery Act of 2010 (IPERA), which requires the head of each federal agency to review agency programs every three fiscal years and identify those that may be susceptible to significant improper payments.

The following articles examine recovery audits and the Improper Payments Elimination and Recovery Act from multiple perspectives.

Recovery Audit: A Success Story in Two Parts
This article from Statewise, a Texas state government publication, lauds the success of the state’s recovery audit program and outlines plans to expand the program in coming years.

Recovery Audits Would Reduce Impact of Overpayments
The Freedom Foundation examines recovery audits and argues the audits, combined with additional reforms such as an Office of Inspector General and a False Claims Act, are valuable tools for government officials to reduce overpayments and fraud.

State Budget Reform Toolkit  
Leonard Gilroy and Jonathan Williams recommend the use of recovery audits as part of the American Legislative Exchange Council’s State Budget Reform Toolkit.

Taxpayers Support the Improper Payments Elimination and Recovery Act  
The National Taxpayers Union and Council for Citizens Against Government Waste declare their support for the Improper Payments Elimination and Recovery Act, arguing that efforts to recover improper payments, including recovery audits, are good public policy that taxpayers support.

ALEC NTU—An Act Relating to Recovery Audits for Government Over Payments of Tax Dollars
Model legislation from ALEC and NTU would allow for individual states to contract for recovery audits to recoup any overpayments of state or federal tax dollars. The bill recognizes recovery audits as a best practice for disbursements management and emphasizes their ability to provide insight for improving operational efficiency and internal controls in the state’s disbursement of tax dollars.

Administering Overpayment Recovery Audits in the State of Texas
The Texas Comptroller of Public Accounts reports in this paper on the state’s successful recovery audits program, how it was implemented, and the results in retrieving overpayments.

Improper Payments Information Act of 2002: Background, Implementation, and Assessment
The Congressional Research Service prepared this report about the Improper Payments Information Act of 2002, analyzing its implementation and assessing its effects.