Small Business Administration

The Small Business Investment Companies (SBIC) and Specialized Small Business Investment Companies (SSBIC) that GAO reviewed engaged in such improper practices as loans to associates, including officers and directors of the licensees; loans for prohibited real estate purchases; and loans to ineligible persons. In addition, the SBICs and SSBICs seldom took timely measures to correct violations after being notified by the Small Business Administration (SBA), nor did SBA ensure that the violations it had identified during examinations had been corrected promptly. Therefore, the same or similar violations were identified during later examinations. Such mismanagement or misconduct may have led to the liquidations or the bankruptcy of some of the SBICs and SSBICs, with the government picking up the tab. Estimated losses for three of the five companies that have gone into liquidation or bankruptcy have exceeded $4 million. SBA now examines the performance of SBICs and SSBICs more often, has expanded the comprehensiveness of those examination, and has recently changed its licensing procedures so that new SBICs are more experienced and capitalized. However, GAO has found that SBA had not responded in a timely manner to serious regulatory violations identified during examinations.

GAO found that: (1) all of the companies engaged in improper management practices that violated program regulations, including providing loans to associates, making prohibited real estate purchases, and making loans to ineligible individuals; (2) infrequent SBA examinations of the companies resulted in the late discovery of violations, which often placed SBA funds at risk; (3) the companies seldom took timely action to correct identified violations; (4) SBA failed to take appropriate action when it identified violations or ensure that companies timely took corrective action; (4) such violations may have contributed to some companies' liquidation or bankruptcy, with the resultant loss of millions of dollars to the government; (5) SBA has improved its SBIC and SSBIC programs by decreasing the period of time between examinations and requiring examiners to make site visits; and (6) SBA asserts that its competing roles in supporting small business make it difficult to determine the most appropriate action to take in response to program violations, but it did not conduct adequate oversight to ensure that companies corrected improper management practices.