Small Business Administration
Steps Have Been Taken to Improve Administration of the 8(a) Program, but Key Controls for Continued Eligibility Need Strengthening Gao ID: GAO-10-353 March 30, 2010The Small Business Administration's (SBA) 8(a) program helps eligible socially and economically disadvantaged small businesses compete in the economy by providing business development activities, such as counseling and technical assistance, and providing opportunities to obtain federal contracts on a set-aside basis. GAO was asked to review SBA's internal control procedures for determining 8(a) eligibility. Specifically, we (1) evaluated the procedures and processes that SBA has implemented to ensure that only eligible firms participate in the 8(a) program, and (2) assessed the extent to which SBA uses external mechanisms such as complaint information in helping to ensure that only eligible firms participate. To address these objectives, GAO reviewed SBA guidance and prior reports, interviewed SBA officials, and conducted site visits and file reviews of 123 randomly sampled 8(a) firms covering the most recent 2 years of annual reviews at five SBA locations.
SBA relies primarily on its annual review of 8(a) firms to ensure their continued eligibility in the program, but inconsistencies and weaknesses in annual review procedures limit program oversight. GAO's review of a random sample of 8(a) firms identified an estimated 55 percent in which SBA staff failed to complete required annual review procedures intended to assess fundamental eligibility criteria, such as being economically disadvantaged. Multiple factors appear to have contributed to the inconsistencies identified, including the lack of specific criteria in SBA's current regulations and procedures that relate to some eligibility requirements such as determining whether firms exceed program thresholds for industry size averages, personal compensation, and personal asset limits. As a result, firms that may have outgrown the program continued to receive 8(a) program benefits. For example, GAO estimated that 17 percent of the firms we reviewed had exceeded one or more eligibility criteria for 2 consecutive years, but were recommended by SBA for retention. SBA has taken steps to clarify some, but not all, of these rules in recent proposed rule changes. SBA is required by statute to perform annual reviews on 100 percent of 8(a) firms but staff spent significant amounts of time trying to obtain annual review documents from firms--especially firms that did not have 8(a) contracts--which affected the timeliness of reviews. GAO identified a significant number of instances in which firms failed to submit annual review documents as required but still were recommended for retention. The Business Development Specialists' (BDS) dual role of advocacy for and monitoring of the firms may have contributed in part to the retention of ineligible firms. SBA has been addressing some data integrity and compatibility issues by enhancing its primary electronic system for annual review information. Finally, SBA did not maintain an accurate inventory of 8(a) Mentor-Prot?g? Program participant data, which limited the agency's ability to monitor these firms. SBA's program offices did not maintain comprehensive data on or have a system in place to track complaints on the eligibility of firms participating in the 8(a) program. District staff were not aware of the types and frequency of complaints across the agency. As a result, SBA staff lacked information that could be used with other information to help identify issues relating to program integrity and help improve the effectiveness of SBA oversight. Although complaint data are not a primary mechanism to ensure program eligibility, continuous monitoring is a key component in detecting and deterring fraud.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: William B. Shear Team: Government Accountability Office: Financial Markets and Community Investment Phone: (202) 512-4325GAO-10-353, Small Business Administration: Steps Have Been Taken to Improve Administration of the 8(a) Program, but Key Controls for Continued Eligibility Need Strengthening
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Report to the Chairwoman, Committee on Small Business, House of
Representatives:
United States Government Accountability Office:
GAO:
March 2010:
Small Business Administration:
Steps Have Been Taken to Improve Administration of the 8(a) Program,
but Key Controls for Continued Eligibility Need Strengthening:
GAO-10-353:
GAO Highlights:
Highlights of GAO-10-353, a report to the Chairwoman, Committee on
Small Business, House of Representatives.
Why GAO Did This Study:
The Small Business Administration‘s (SBA) 8(a) program helps eligible
socially and economically disadvantaged small businesses compete in
the economy by providing business development activities, such as
counseling and technical assistance, and providing opportunities to
obtain federal contracts on a set-aside basis. GAO was asked to review
SBA‘s internal control procedures for determining 8(a) eligibility.
Specifically, we (1) evaluated the procedures and processes that SBA
has implemented to ensure that only eligible firms participate in the
8(a) program, and (2) assessed the extent to which SBA uses external
mechanisms such as complaint information in helping to ensure that
only eligible firms participate. To address these objectives, GAO
reviewed SBA guidance and prior reports, interviewed SBA officials,
and conducted site visits and file reviews of 123 randomly sampled
8(a) firms covering the most recent 2 years of annual reviews at five
SBA locations.
What GAO Found:
SBA relies primarily on its annual review of 8(a) firms to ensure
their continued eligibility in the program, but inconsistencies and
weaknesses in annual review procedures limit program oversight. GAO‘s
review of a random sample of 8(a) firms identified an estimated 55
percent in which SBA staff failed to complete required annual review
procedures intended to assess fundamental eligibility criteria, such
as being economically disadvantaged (see table). Multiple factors
appear to have contributed to the inconsistencies identified,
including the lack of specific criteria in SBA‘s current regulations
and procedures that relate to some eligibility requirements such as
determining whether firms exceed program thresholds for industry size
averages, personal compensation, and personal asset limits. As a
result, firms that may have outgrown the program continued to receive
8(a) program benefits. For example, GAO estimated that 17 percent of
the firms we reviewed had exceeded one or more eligibility criteria
for 2 consecutive years, but were recommended by SBA for retention.
SBA has taken steps to clarify some, but not all, of these rules in
recent proposed rule changes. SBA is required by statute to perform
annual reviews on 100 percent of 8(a) firms but staff spent
significant amounts of time trying to obtain annual review documents
from firms”especially firms that did not have 8(a) contracts”which
affected the timeliness of reviews. GAO identified a significant
number of instances in which firms failed to submit annual review
documents as required but still were recommended for retention. The
Business Development Specialists‘ (BDS) dual role of advocacy for and
monitoring of the firms may have contributed in part to the retention
of ineligible firms. SBA has been addressing some data integrity and
compatibility issues by enhancing its primary electronic system for
annual review information. Finally, SBA did not maintain an accurate
inventory of 8(a) Mentor-Protégé Program participant data, which
limited the agency‘s ability to monitor these firms.
SBA‘s program offices did not maintain comprehensive data on or have a
system in place to track complaints on the eligibility of firms
participating in the 8(a) program. District staff were not aware of
the types and frequency of complaints across the agency. As a result,
SBA staff lacked information that could be used with other information
to help identify issues relating to program integrity and help improve
the effectiveness of SBA oversight. Although complaint data are not a
primary mechanism to ensure program eligibility, continuous monitoring
is a key component in detecting and deterring fraud.
Table: Estimated Percentage of Time That SBA Did Not Complete Selected
Annual Review Procedures Relating to 8(a) Eligibility:
Requirement not met: Taking action when a firms exceeded industry
averages for economic success by notifying firms that exceeded four of
seven industry averages for 1 year (intended to make firms aware they
may be subject to early graduation);
Estimated percentage: 26%.
Requirement not met: Taking action when a firms exceeded industry
averages for economic success by graduating or explaining retention of
firms that exceeded four of seven industry trends for 2 consecutive
years;
Estimated percentage: 4%.
Requirement not met: Taking action when a firms exceeded industry
averages for economic success by reviewing net worth or graduating
firms in which individuals exceeded adjusted net worth limitations;
Estimated percentage: 7%.
Requirement not met: Taking action when a firms exceeded industry
averages for economic success by performing required eligibility
reviews due to a change in the firms‘ ownership;
Estimated percentage: 4%.
Requirement not met: Taking action when a firms exceeded industry
averages for economic success by completing required annual reviews;
Estimated percentage: 2%.
Source: GAO analysis of a random sample of 123 8(a) firms.
[End of table]
What GAO Recommends:
GAO makes six recommendations to SBA that include providing more
guidance to help ensure staff more consistently follow procedures,
reassessing BDSs‘ workload distribution, and developing more standard
processes for documenting and analyzing certain program data. In
responding to a draft of this report, SBA agreed with each of the six
recommendations and stated that some corrective measures have already
been implemented and additional actions are planned to be implemented
in the near future.
View [hyperlink, http://www.gao.gov/products/GAO-10-353] or key
components. For more information, contact William B. Shear at (202)
512-8678 or shearw@gao.gov.
[End of section]
Contents:
Letter:
Background:
While SBA Has Made Improvements to Its 8(a) Annual Reviews, Internal
Control Weaknesses and Other Challenges Limit Program Oversight:
SBA Lacks a Formal Mechanism to Collect and Analyze Complaint Data
Related to 8(a) Eligibility:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Small Business Administration:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Key Eligibility Requirements for 8(a) Program Participation:
Table 2: Estimated Percentage of Time That SBA Did Not Complete
Selected Annual Review Procedures Relating to 8(a) Eligibility:
Table 3: Number of Terminations and Voluntary Withdrawals from the
8(a) Program, 2005-2008:
Table 4: Total Number of Files and Sample Sizes at Five Selected
District Offices:
Table 5: 95 Percent Confidence Intervals for Statistical Sample
Estimates in Table 2:
Abbreviations:
BDMIS: Business Development Management Information System:
BDS: Business Development Specialist:
DCI: data collection instrument:
FPDS-NG: Federal Procurement Data System-Next Generation:
IRS: Internal Revenue Service:
NAICS: North American Industry Classification System:
OBD: Office of Business Development:
OFO: Office of Field Operations:
OHA: Office of Hearing and Appeals:
OIG: Office of Inspector General:
SBA: Small Business Administration:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
March 30, 2010:
The Honorable Nydia M. Velázquez:
Chairwoman:
Committee on Small Business:
House of Representatives:
Dear Madam Chairwoman:
In fiscal year 2008, the federal government awarded $93.3 billion in
contracts to small businesses. The Small Business Administration (SBA)
plays an important role in ensuring that small businesses gain access
to federal contracting opportunities. Section 8(a) of the Small
Business Act is intended to help small businesses owned by socially
and economically disadvantaged individuals compete in the economy by
providing business development activities, such as counseling and
technical assistance, and providing access to federal contracting
opportunities. The 8(a) program does not guarantee that participating
firms will obtain federal contracts, but the firms are eligible for
competitive (for which only 8(a) firms can compete) and sole-source
(for which awards are made without competition) federal contracts when
certain requirements are met.[Footnote 1] As of fiscal year 2008,
approximately 9,460 firms were in the program.
However, we and others have identified oversight weaknesses in SBA
controls that are intended to help ensure that only eligible small
businesses gain access to federal contracting opportunities. For
example, in congressional hearings on SBA's Historically Underserved
Business Zone (HUBZone) Program that you held on July 17, 2008, we
highlighted fraud and eligibility control weaknesses in the program
that allowed the participation of fictitious and ineligible firms.
[Footnote 2] In a November 2008 report on the 8(a) program, we noted
that SBA faced several challenges in its overall administration of the
8(a) program, including competing demands on a limited number of
staff. For example, the amount of time staff spent on statutorily
mandated annual reviews of all 8(a) firms diminished the amount of
time they could devote to business development activities.[Footnote 3]
Our recommendations to SBA included assessing the workloads of
business development specialists (BDS) to ensure they could carry out
their responsibilities and improving processes to terminate firms. SBA
agreed with these recommendations in its written comments on the
report.
You asked us to review SBA's internal control procedures for
determining 8(a) eligibility, including mentor-protégé arrangements
(which provide technical and management assistance as well as
assistance in performing federal contracts as a prime contractor
through joint-venture arrangements). Specifically, we (1) evaluated
the procedures and processes that SBA has implemented to ensure that
only eligible firms remain in the 8(a) program, and (2) assessed the
extent to which SBA uses external mechanisms, such as complaints by
other 8(a) firms, to help ensure that only eligible firms participate.
To address these objectives, we reviewed applicable statutes and the
legislative history of the 8(a) program, SBA's regulations and
guidance for administering the program, our previous reports, and
studies of the program conducted by SBA, the SBA Inspector General,
and external organizations. To assess SBA's compliance with its
eligibility review procedures, we visited 5 of the 68 SBA districts
and reviewed files of 123 randomly sampled 8(a) firms and an
additional 13 8(a) firms that had mentor-protégé agreements.[Footnote
4] For each firm, we reviewed the most recent 2 years of annual
reviews for the period 2007-2009, and any existing mentor-protégé
agreements, related documents, and correspondence. We developed a data
collection instrument to collect key annual review information from
each file, including SBA documentation and evidence supporting
eligibility criteria such as financial disadvantage. We selected SBA
districts based on the size of their 8(a) portfolios of firms with
contracts and for geographic diversity. These 5 districts represented
29 percent (or 672) of all active fiscal year 2008 8(a) firms with
contracts and 37 percent (or about $2 billion) of contracting
obligation dollars. The results of the interviews and sample results
cannot be generalized to all 68 district offices; however, the results
of our file review sample can be generalized to all files managed by
the 5 district offices we included in our review. We also interviewed
SBA officials in the Office of Business Development, Division of
Program Certification and Eligibility, and district staff to discuss
their procedures for determining initial and continuing eligibility,
oversight efforts, technical assistance offered, and mechanisms to
help identify ineligible firms in the program. Appendix I discusses
our scope and methodology in further detail.
We conducted our work in Boston, Massachusetts; Denver, Colorado; San
Antonio, Texas; San Francisco, California; and Washington, D.C.,
between May 2009 and March 2010 in accordance with generally accepted
government auditing standards. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
Background:
A firm must meet several initial eligibility requirements to qualify
for the 8(a) program (a process known as certification), and then meet
other requirements to continue participation. In general, a concern
meets the basic requirements for admission to the program if it is a
small business that is unconditionally owned and controlled by one or
more socially and economically disadvantaged individuals who are of
good character and U.S. citizens, and which demonstrates the potential
for success. Table 1 summarizes the key requirements.
Table 1: Key Eligibility Requirements for 8(a) Program Participation:
General requirement: Socially disadvantaged individual;
General description[A]: Socially disadvantaged individuals are those
who have been subjected to racial or ethnic prejudice or cultural bias
because of their identity as members of a group and without regard to
their individual qualities. Members of designated groups are entitled
to a rebuttable presumption of social disadvantage; other individuals
must prove they are socially disadvantaged by a preponderance of the
evidence.[B].
General requirement: Economically disadvantaged individual;
General description[A]: Economically disadvantaged individuals are
socially disadvantaged individuals whose ability to compete in the
free enterprise system has been impaired because of diminished capital
and credit opportunities as compared with others in the same or
similar business area who are not socially disadvantaged. SBA
considers various factors, including adjusted net worth, that for
initial eligibility must be less than $250,000, and for continued
eligibility must be less than $750,000.
General requirement: Ownership;
General description[A]: 8(a) applicants concerns or participants must
be at least 51 percent unconditionally and directly owned by one or
more socially and economically disadvantaged individuals who are U.S.
citizens.
General requirement: Control;
General description[A]: 8(a) applicants or participants must be
controlled by one or more socially and economically disadvantaged
individuals; control includes both strategic policy setting and day-to-
day management and administration of business opportunities, and a
participant's management and daily operations must also be conducted
by one or more disadvantaged individuals.
General requirement: Small business;
General description[A]: The firm must qualify as a small business
concern as defined by SBA's size standards, based on the North
American Industry Classification System code. This includes
affiliations.
General requirement: Good character;
General description[A]: The applicant or participant and all of its
principals must have good character. SBA considers such things as
criminal conduct and violations of SBA regulations. Debarred or
suspended concerns are ineligible.
General requirement: Potential for success;
General description[A]: The applicant or participant must possess
reasonable prospects for success in competing in the private sector.
Specifically, applicants or participants must show that they have been
in the primary industry for 2 years as of date of application by
showing revenues on 2 years of tax returns. This requirement may be
waived if the firm shows revenues and adequate business management and
technical expertise. Other requirements include demonstrating
financial capability, technical expertise, contract success, and
contract support for the industry of applicant or participant.
General requirement: U.S. citizenship;
General description[A]: Applicant or participant must be a U.S.
citizen. Individuals born outside the United States must show proof of
citizenship through a U.S. passport or naturalization papers.
Source: GAO.
[A] Does not include tribal firms, Alaskan Native Corporations, Native
Hawaiian Organizations, or Community Development Corporation-owned
firms.
[B] Designated groups include (1) Black Americans, (2) Hispanic
Americans, (3) Native Americans, and (4) Asian Pacific Americans.
[End of table]
Participation in the 8(a) program lasts 9 years, and once it is
completed, a firm and the individual cannot reapply. The 9-year
program tenure is divided into two stages--a developmental stage
covering years 1 through 4, and a transitional stage covering years 5
through 9. During the transitional years, firms are required to meet
certain activity targets for non-8(a) contracts to ensure they do not
develop an unreasonable reliance on the program. Additionally, firms
in the 8(a) program are eligible to receive sole-source and
competitively awarded set-aside federal contracts.[Footnote 5]
As part of the 8(a) program, SBA developed the Mentor-Protégé Program,
in which experienced firms mentor 8(a) firms to enhance the
capabilities of the protégé, provide various forms of business
developmental assistance, and improve the protégé's ability to
successfully compete for contracts.[Footnote 6] To qualify initially
as a protégé, an 8(a) firm must meet one of three conditions: (1) be
in the developmental stage of the 8(a) program, or (2) never have
received an 8(a) contract, or (3) be of a size that is less than half
the size standard corresponding to its primary standard industry code.
The mentor and protégé enter into a written agreement that sets forth
the protégé's needs and details the assistance the mentor commits to
provide to address those needs. SBA must review and approve the
initial agreement and annually evaluate specific mentor-protégé
requirements.
SBA's 8(a) program is delivered collaboratively by two departments of
SBA. The Office of Business Development (OBD) is responsible for
policy formation and the certifications of 8(a) applications, approval
of mentor-protégé applications, as well as the approval of existing
8(a) firms that are exiting the program (early graduations, approval
of changes of ownership, approval of voluntary withdrawals, approval
of terminations, and suspensions). OBD is also responsible for the
virtual training and relevant policy briefings provided to SBA staff
across the country responsible for executing the 8(a) program on an
ongoing basis throughout the year. The Office of Field Operations
(OFO) is responsible for supporting the business development
specialists, tasked with executing the 8(a) program, who are located
in 68 district offices across the country. Selected BDSs will have
8(a) firms assigned to them. The BDSs work directly with 8(a) firms to
help prepare business plans; provide technical assistance; review
continuing eligibility; coordinate with resource partners that provide
counseling, training, loans, and other assistance to small businesses;
and coordinate additional assistance and training for firms through
another SBA program.[Footnote 7] BDS staff also conduct annual reviews
of the firms' progress in implementing business plans and analyze
firms' year-end financial statements, income tax returns, and records
of contracting activity for certain compliance requirements, including
program eligibility. The purpose of the annual reviews is to determine
if firms continue to meet eligibility requirements and to identify
business development needs. SBA long has been required by statute to
complete annual reviews of all firms.[Footnote 8] As of fiscal year
2008, SBA had 182.5 full-time-equivalent BDS staff.
While SBA Has Made Improvements to Its 8(a) Annual Reviews, Internal
Control Weaknesses and Other Challenges Limit Program Oversight:
SBA relies primarily on its annual reviews of 8(a) firms to ensure the
continued eligibility of firms enrolled in the program, but we
observed inconsistencies and weaknesses in annual review procedures
related to determining continued eligibility for the program. For
example, we found that SBA did not consistently notify or graduate
8(a) firms that exceeded industry averages for economic success or
graduate firms that exceeded the net worth threshold of $750,000. The
lack of specific criteria in the current regulations and procedures
may have contributed to the inconsistencies that we observed, and SBA
has taken steps to clarify some, but not all, of these requirements in
a recent proposed rule change. Although BDSs have been challenged to
perform all their responsibilities--in particular the statutory
requirement to perform annual reviews on 100 percent of 8(a) firms--
SBA has not yet assessed its workload to ensure it could carry out its
responsibilities as we recommended in our 2008 report.[Footnote 9] SBA
recently has implemented new procedures intended to streamline
terminations that may address some of these inconsistencies that we
identified with the lack of termination actions taken against firms
that did not submit annual review documents as required. Finally, we
found that SBA did not maintain an accurate inventory of Mentor-
Protégé Program participants and did not document some annual
oversight activities of these firms. As a result of these
inconsistencies and weaknesses, there is increased potential that
firms that no longer meet SBA 8(a) continuing eligibility requirements
could be allowed to continue in the program and receive 8(a) contracts.
SBA's Staff Did Not Follow Required Annual Review Procedures Related
to Continuing Program Eligibility in about Half of the Files We
Reviewed:
In a substantial number of cases we reviewed, SBA staff failed to
complete required annual review procedures intended to assess
fundamental eligibility conditions, such as the firm's net worth, used
to determine if participants continue to meet the criteria for being
economically disadvantaged. SBA may terminate firms found to be
ineligible based on several conditions, including failure to submit
required documentation for the annual review process or failure to
maintain ownership and control by a disadvantaged individual. SBA may
also graduate firms that have successfully completed the program by
substantially achieving the targets, objectives, and goals in their
business plans prior to the expiration of their program terms, and
demonstrated their ability to compete in the marketplace without
assistance from the program, or where one or more of the disadvantaged
owners no longer are economically disadvantaged (a process known as
early graduation). Criteria used to determine continuing eligibility
and associated conditions such as economic disadvantage include
factors such as personal assets, income, and net worth, while criteria
used to determine if a firm successfully met targets and objectives
include exceeding industry averages for economic success and owners
making excessive withdrawals of company funds or other assets.
We selected a random sample of files from each of the five district
offices we visited to determine if district offices' practices for
monitoring 8(a) firms were consistent with requirements in
regulations, policies, and procedures.[Footnote 10] Specifically, we
estimated that for the five district offices, SBA failed to complete
one or more annual required review procedures 55 percent of the time.
[Footnote 11] Our estimates were based on a statistical sample of 123
annual review files from a population of 672 files. Of the 123 files
sampled, we identified 67 instances where SBA failed to complete one
or more annual review procedures related to eligibility determinations
(a 55 percent rate). We tested seven specific annual review
requirements relating to continuing eligibility: (1) notifying 8(a)
firms that they had exceeded industry averages for economic success,
(2) reviewing or graduating 8(a) firms or providing an explanation for
retention if they had exceeded industry averages for 2 consecutive
years, (3) reviewing net worth or graduating firms in which
individuals exceeded the net worth threshold of $750,000, (4)
performing eligibility reviews when required for such cases as a
change in the firm's ownership, (5) completing the required annual
reviews, (6) obtaining required supervisory reviews (and signatures),
and (7) imposing remedial actions or obtaining waivers for firms not
meeting business activity targets. Table 2 shows information on the
extent to which SBA did not complete these annual review requirements.
Table 2: Estimated Percentage of Time That SBA Did Not Complete
Selected Annual Review Procedures Relating to 8(a) Eligibility:
Requirement not met: Taking action when a firm exceeded industry
averages for economic success by notifying firms that exceeded four of
seven industry averages for 1 year;
Estimated percentage: 26%.
Requirement not met: Taking action when a firm exceeded industry
averages for economic success by graduating or explaining retention of
firms that exceeded four of seven industry averages for 2 consecutive
years;
Estimated percentage: 4%.
Requirement not met: Reviewing net worth or graduating firms in which
individuals exceeded adjusted net worth limitations;
Estimated percentage: 7%.
Requirement not met: Performing required eligibility reviews because
of a change in the firms' ownership;
Estimated percentage: 4%.
Requirement not met: Completing required annual reviews;
Estimated percentage: 2%.
Requirement not met: Documenting supervisory reviews;
Estimated percentage: 23%.
Requirement not met: Imposing remedial actions or obtaining waivers
for firms not meeting business activity targets;
Estimated percentage: 10%.
Source: GAO.
Note: These estimates are based upon a random sample. See table 5 in
appendix I for the associated 95 percent confidence intervals.
[End of table]
* Exceeding industry averages: Officials from two of the five district
offices told us that while the guidance requires notifying 8(a) firms
when they have exceeded industry averages for economic success, in
practice the districts have been using discretion in notifying the
firm after the first year in which this condition occurs. SBA
procedures identify exceeding industry averages as a criterion for
considering that the firm has met its goals and therefore may no
longer be economically disadvantaged. The notification is intended to
make participants aware that they may be subject to early graduation
proceedings if they exceed industry averages for 2 consecutive years.
SBA procedures state that if the firm exceeds industry averages for 2
consecutive years, the participant no longer can be considered
economically disadvantaged unless the BDS provides evidence that early
graduation is not warranted because of compelling reasons. Officials
from these district offices explained that they did not follow these
procedures, even though they were required, because they did not think
that exceeding industry averages always indicated that participants no
longer were economically disadvantaged. The level of staff knowledge
about calculations for industry averages and the way in which staff
entered the calculations into information systems also may have
contributed to failures to meet this requirement. One district office
told us it was not clear how the ratios were calculated. We also found
errors in the calculations of industry averages at another district
office. As we discuss in more detail later in the report, the industry
ratio calculations require the BDS to manually enter data into a
template that will then calculate the ratio of the firm's performance
against that of industry. As shown in table 2, we estimate that staff
failed to complete this requirement in about 26 percent of the cases
in which a notification letter was required, and in about 4 percent of
cases in which industry averages were exceeded for 2 consecutive
years.[Footnote 12]
* Reviewing net worth or graduating firms in which individuals
exceeded adjusted net worth limitations: One of the clearest
indicators of economic disadvantage that SBA uses is the net worth
requirement. The regulations specifically state that for continued
eligibility after admission into the program, adjusted net worth must
be less than $750,000. Our file review shows that SBA retained an
estimated 7 percent of the firms we sampled, in which there was no
evidence that staff reviewed the firms' net worth, or retained firms
in the program despite their exceeding the net worth limits.[Footnote
13] Similarly, in our companion report investigating the potential for
8(a) program fraud and abuse, we identified cases in which SBA's files
clearly indicated that the firms were not eligible for the 8(a)
program, yet SBA staff failed to terminate or graduate the firms from
the program.[Footnote 14] Later in this report we discuss different
factors that may have contributed to the retention of firms that
clearly appeared to be no longer eligible, including the BDSs' dual
role of advocacy for and monitoring of the firms and workload
constraints.
* Completing eligibility reviews: We estimated that about 4 percent of
our file sample contained no evidence that SBA staff had performed a
separate required eligibility review.[Footnote 15] Eligibility reviews
are required in cases in which the BDS has reason to question a
participant's eligibility, including a change in the firm's ownership
(the factor we used for our analysis).[Footnote 16] Eligibility
reviews are critical because they could uncover program participants
that no longer met control and ownership eligibility requirements.
Representatives from one district office we visited explained that
these reviews were a low priority compared with other
responsibilities, such as completing annual reviews and initial
certifications.
* Completing annual reviews: Although SBA is statutorily required to
perform annual reviews of 100 percent of 8(a) firms, we estimated that
in about 2 percent of our sample, the files contained no evidence that
SBA had performed the annual reviews.[Footnote 17] For example, in two
cases, a district office had no record on file that annual reviews had
been performed, and in three other cases it had bundled 2 years of
reviews because of a change in the internal deadline for completing
annual reviews (it skipped an annual review). Our sample of 123 files
included only firms that received contracts. As a result, SBA could be
unaware that a potentially ineligible firm had received contracts
because it had not performed an annual review.
We also identified a few instances in which SBA failed to follow
procedural requirements related to the annual reviews, including not
consistently documenting supervisory reviews in one district and
failing to take remedial actions for firms not meeting their business
activity targets.
* Documenting supervisory reviews: One district office did not always
have the required supervisory signatures on the BDSs' annual review
recommendations.[Footnote 18] Of the 64 files that we sampled in that
district, 20 lacked evidence of supervisory review signatures. That
is, it appeared that only a BDS recommended a firm's retention or
dismissal from the program. Overall, we estimated that SBA did not
meet this requirement for about 23 percent of the files in the five
district offices.[Footnote 19] The noncompliance rate in this district
may be attributable to the large size of its 8(a) portfolio--about 20
percent of all active fiscal year 2008 8(a) firms. According to
district officials, the office also had competing priorities, such as
the need to review applications for the Mentor-Protégé Program.
[Footnote 20] Nevertheless, SBA officials were not properly monitoring
their staff in these cases. Without the quality controls intended by
the supervisory reviews, SBA has limited assurances that the annual
reviews are fulfilling their intended purpose.
* Imposing remedial actions or obtaining waivers for firms not meeting
business activity targets: In about 10 percent of the files we
reviewed, district offices did not submit required documentation of
remedial actions or a waiver when a firm in the transitional phase of
the program did not meet its business activity targets.[Footnote 21]
The remedial action is intended as an incentive for firms to obtain
non-8(a) contracts so that they will be prepared to compete in the
marketplace without the assistance of the 8(a) program upon
graduation. Firms are required to achieve their targets or otherwise
are not eligible to receive 8(a) sole-source contracts. By not
notifying firms and setting up a remedial plan when required, the
BDSs' actions did not appear to be consistent with a key business
development activity intended to help firms develop and exit from the
program. Furthermore, SBA could be providing opportunities for
potentially ineligible firms to receive sole-source contracts.
Although SBA Has Proposed Changes to Its Regulations to Improve
Eligibility Determinations, It Still Lacks Specific Guidance for Some
Criteria:
Our file review results and interviews with district office officials
identified numerous instances in which staff did not consistently
apply objective standards relating to eligibility determinations. SBA
lacks specific criteria in its current regulations and procedures that
relate to some of the eligibility requirements such as determining
whether a firm should be graduated from the program when it exceeds
size standards, industry averages (such as total assets, net sales,
working capital, or pretax profit), limits for personal compensation
and assets, and excessive withdrawals. Furthermore, SBA guidance
directs staff to rely on Office of Hearings and Appeals (OHA)
decisions to use as thresholds for eligibility criteria, such as total
assets and total compensation, in order to make eligibility
determinations. However, as we noted in our related investigation,
agency staff did not follow case law consistently.[Footnote 22]
More specifically, we estimate that 17 percent of the firms had
exceeded one or more eligibility criteria for 2 consecutive years,
indicating that the firms may have been outgrowing the program, but
were recommended by SBA for retention.[Footnote 23] Although each
criterion in and of itself may not be a determinant for early
graduation based on the current regulations, each is an important
factor in determining if these firms continue to meet eligibility
requirements and if they should remain in the program. SBA considers
the totality of circumstances to determine whether a firm has met its
goals and objectives and should be recommended for early graduation.
* In two cases in one district office, firms had exceeded both average
compensation limits and the limits for excessive withdrawals for 2
consecutive years, and still were recommended for retention. The
District Director and staff at the district office agreed that the two
cases were red flags and that the firms should have been recommended
for early graduation or termination.
* In another example, at a different district office, one firm that,
over its 8-year tenure in the 8(a) program. had exceeded (1) industry
averages for 5 years (in 2 of these years, the firm could have been
considered for early graduation because it exceeded industry averages
for 2 consecutive years), (2) compensation limits by having an average
salary of more than $200,000 for 2 years, (3) the size standard for
its primary North American Industry Classification System code, (4)
and made excessive withdrawals in 1 year, but in each year was
recommended for retention. This firm had more than $16 million in
contracts by its sixth year in the program.[Footnote 24]
We also found inconsistencies in the use of third-party sources to
verify firm-reported data. For instance, two districts told us they
reviewed third-party sources such as Internal Revenue Service (IRS)
tax transcripts, debarments, and bank information such as withdrawals
more routinely as part of their annual review, while two other
districts told us they had not performed any third-party verification.
At least in part, these inconsistencies can be attributed to lack of
specific guidance or criteria regarding the need for third-party
verification. Overall, the regulations state that SBA may terminate a
firm on the basis of discovering false information, but contain few
specific requirements to consult third-party sources for continuing
eligibility. For example, participants must submit the IRS 4506-T
transcript request form as part of the annual review requirements,
which allows SBA to request tax return information. Additionally, the
regulations suggest that staff should consult the federal list of
debarred and suspended firms, since such firms are ineligible for
admission to the 8(a) program. However, we found little evidence of
regulatory requirements to obtain other third-party verifications. As
noted in our report on the potential for 8(a) program fraud and abuse,
validating data against other government or third-party sources is a
fraud preventive control meant to keep ineligible firms from entering
the program.[Footnote 25] However, we found that SBA relied heavily on
self-reported information from the firms during the initial
certification and annual reviews, with limited data validation
performed after the firms had entered the program. Additionally, in
that report we make a recommendation to assess the feasibility of
using additional third-party data sources and site visits, based on
random or risk-based criteria, to allow more independent verification
of firm-reported data.
SBA recently proposed changes to its Small Business Size and 8(a)
Business Development Regulations to address technical issues as well
as make more substantive changes resulting from its experience in
implementing the current regulations.[Footnote 26] The agency last
updated most of these regulations in 1998. According to a senior SBA
official, these changes are intended to help SBA administer the
program more effectively. The proposed rules would introduce more
detailed guidance and allow for less staff judgment, particularly for
the standards that appeared to be associated with the inconsistencies
in the annual review procedures in our review of 8(a) case files. For
example, the proposed regulations define more specific thresholds for
considering an individual's personal assets and compensation, and
whether a firm has exceeded size standards. However, the proposed
regulations do not introduce more specific requirements relating to
exceeding industry averages, and would increase staff flexibility to
make judgments relating to excessive withdrawals. Furthermore, the
proposed rule changes do not address under what circumstances or to
what extent staff should verify firm-reported information with third-
party sources. According to SBA, the proposed rules attempt to address
areas where the current regulations needed more clarity to ensure
consistency with SBA policy as well as areas where the current
regulations may unreasonably restrict participants. For example, the
proposed rule changes allow for flexibility in judgment regarding
excessive withdrawals because SBA believes that it is important that
SBA look at the totality of the circumstances in determining whether
to include a specific amount as a withdrawal in an effort to prevent
some firms from circumventing excessive withdrawal limitations.
However, the lack of specific criteria in the current regulations and
procedures reduces assurances that the BDSs are making consistent and
objective determinations about 8(a) firms' continued eligibility in
the program.
SBA Has Not Assessed BDS Workload, a Significant Portion of Which Is
Devoted to Annual Reviews, a Fact That Limits Other 8(a) Activities:
BDSs devote significant time and resources to complying with the
statutory requirement to perform annual reviews on 100 percent of 8(a)
firms, a fact that affects the time and resources they can devote to
other 8(a) activities. Monitoring the firms' continuing eligibility
for the 8(a) program is just one of many responsibilities of the BDS.
The BDS also has an advocacy role--maintaining an ongoing
responsibility to assist the participant in developing the business to
the fullest extent possible. This includes striving to increase both
the dollar value and the percentage of 8(a) contracts through
communication of procurement activities, training, and counseling. SBA
guidance requires the BDS to be the primary provider in helping firms
develop business plans, seek loans, and receive counseling on
finances, marketing, and management practices.
Officials in all five of the district offices we visited indicated
that they met the 100 percent annual review goal for fiscal year 2008
but stated it was a time-and resource-intensive process. For example,
district staff estimated that the annual review process consumed from
about 40 to 70 percent of their time. BDSs in the district offices
told us their individual portfolios ranged from about 30 to 140 firms,
depending on their experience level. Three districts noted that BDS
turnover resulted in newer staff initially taking more time to process
reviews and having smaller portfolios while they were learning their
job. One of the districts told us that all available staff in the
district office, including staff not assigned to the 8(a) program, had
to assist in completing and processing annual reviews in order to meet
the review goal. District office staff also told us that they spent a
significant amount of time and resources following up with 8(a) firms
to have them submit required documentation such as tax and business
financial information, which also slowed the review process.[Footnote
27] District offices indicated that firms that did not have contracts
were especially prone to submitting documents late because annual
reviews were not a priority for them.[Footnote 28] These delays, in
turn, reduced the amount of time that the BDSs had to spend on firms
that exhibited a high risk of misrepresentation or noncompliance with
8(a) eligibility requirements--monitoring necessary for effective
program oversight.
Furthermore, in our November 2008 report we noted that demands of the
annual review process and resource constraints affected SBA's ability
to conduct other program activities.[Footnote 29] For this report,
some districts noted that the annual review goal affected their
ability to perform site visits; follow up on issues that warranted
more attention, such as red flags identified in the prior year's
annual review; and conduct other core business development activities.
For instance, the frequency of site visits varied in the five offices
we visited. One district office told us that staff were able to
conduct site visits for all firms, but another district conducted site
visits for about half of its firms, and the remaining districts
performed site visits on a limited basis, citing circumstances such as
a firm transferring into the district or confirming that a firm was
operating at a bona fide place of business. Another district stated
that staff do not have time to follow up on red flags such as concerns
identified in prior annual reviews because of the emphasis on meeting
the annual review goal. Another district also told us that meeting the
100 percent annual review goal has limited the district's ability to
get out and educate agencies and firms. This included providing
outreach and awareness training. Finally, another district told us the
annual reviews have affected its ability to provide developmental
assistance and services to address the 8(a) firm's needs. The
officials also stated that it was hard to develop working
relationships with the firms because of the amount of work reports,
projects, and other duties assigned.
Although BDSs have been challenged to perform all their
responsibilities, SBA has not yet assessed their workload to ensure
they could carry out their responsibilities, as we recommended in our
2008 report.[Footnote 30] As we reported, SBA did recognize
specifically that staffing constraints affected its ability to perform
annual reviews. For example, according to its 2006 Performance and
Accountability Report, a main contributing factor in the agency's
inability to complete annual reviews of all 8(a) firms was a lack of
staff resources in the district offices. However, since our previous
work in 2008, the emphasis on meeting annual review compliance
requirements has strained staff capacity to conduct other core
activities for the 8(a) program.
By not assessing BDS workloads, SBA may be bypassing opportunities to
better support the mission of the 8(a) program--that is, to develop
and prepare small disadvantaged firms for procurement and other
business opportunities. In addition, the lack of time to follow up on
issues of concern identified in prior-year reviews also undermines
SBA's ability to carry out its monitoring responsibilities.
Noncompliant Firms Remain in the 8(a) Program, although Termination
Rates Have Increased and New Procedures Should Streamline the
Termination Process:
On the basis of our file review, we observed instances in which firms
were not compliant with 8(a) continuing eligibility requirements
related to document submission, but remained in the program. Failure
to submit documentation as required is the primary source of
noncompliance in the 8(a) program, and is listed in the regulations as
an example of good cause for termination.[Footnote 31] Our file review
showed that business development staff frequently accepted incomplete,
incorrect, and late documentation from firms and in many cases
recommended the noncompliant firms for retention.
Most Firms Submitted Documents Late, but Few Were Terminated for This
Cause:
Of the 123 firms we tested, 61 percent were noncompliant because of
failures to submit documents as required, but staff recommended 3
percent for termination.[Footnote 32] According to the regulations and
procedures, unless participants are also suspended in conjunction with
termination proceedings, 8(a) firms remain eligible to receive program
benefits and to compete for contracts during termination proceedings,
a fact that affords them the opportunity for notice and an opportunity
to appeal a termination decision.[Footnote 33]
During interviews with district office staff, SBA officials
acknowledged that some firms took more time than allowed to submit
documents. One district office official stated that some firms did not
take deadlines seriously and would delay the annual review process.
District staff estimated that despite a 30-day deadline, most firms
submitted documents within 30 to 45 days and in some cases, up to 60
days after their anniversary date. As mentioned earlier, our file
review of 123 firms showed that 49 percent submitted late
documentation. In one case, a firm failed to provide documents on time
and SBA staff waited 4 months before recommending the firm for
termination. After receiving the letter of intent to terminate, the
firm took another 2 months to submit the requested documents. SBA then
reinstated the firm after a total of 6 months' delinquency. In another
case, a firm failed to submit financial information, and business
development staff sent the letter of intent to terminate shortly after
the firm's deadline passed. SBA waited another 6 months for the firm
to submit the required documentation, which turned out to be
incomplete, but upon receipt SBA chose to reinstate the firm. The next
year, the firm submitted a personal financial statement identical to
the previous year's (including dates), but SBA did not take action.
Advocacy Role of BDSs May Contribute to Decisions to Retain Firms:
As previously discussed, the BDS's role as an advocate for 8(a) firms
may have contributed to a reluctance to terminate firms even if the
BDSs had a basis for doing so. Staff in one district office explained
they worked with firms before initiating the termination process, in
an attempt to avoid termination and to achieve the program mission of
preparing disadvantaged firms to compete in the market. Similarly, as
noted in our companion report, SBA staff responsible for annually
assessing the eligibility of participants were not actively looking
for fraud and abuse in the program--and in some cases, staff supported
firms despite eligibility concerns that we raised.[Footnote 34]
Furthermore, our file review provides examples of reluctance to
terminate noncompliant firms.
* An 8(a) firm sent an unsigned annual update form 3 months after its
deadline. One month later, SBA recommended retention pending receipt
of the firm's remaining documents, such as the personal financial
statement and tax returns required to demonstrate economic
disadvantage. More than 2 months later, the firm provided partial
financial documentation. Although SBA's recommendation to retain the
firm was based on expecting to eventually receive the firm's remaining
documents, these required documents still were outstanding at the time
of our file review--which occurred approximately 1.5 years after the
initial annual review deadline. As a result, it is unknown whether the
firm was eligible to continue participating in the 8(a) program
because SBA did not have the needed information to fully assess the
financially disadvantaged status of the firm.
* We also have observed instances in which the BDS recommended
termination but higher levels of management retained the noncompliant
firms in the program. For example, one firm did not submit any annual
review documentation and the BDS subsequently recommended it for
termination. SBA headquarters disagreed with the determination and
chose to retain the firm. However, there was no documentation in the
file to explain the basis for this decision.
The Overall Trend in Recent Years Showed an Increase in Terminations:
In contrast to these cases, there has been an overall upward trend of
firms exiting the 8(a) program through termination or voluntary
withdrawal. According to headquarters officials, this trend is a
result of the agency's emphasis in recent years on fully meeting its
statutory requirements to conduct annual reviews of all firms. By
requesting the annual update from the firm in anticipation of
completing the annual review, business development staff provide the
firms an opportunity to demonstrate basic program compliance.
Table 3 shows exit data trends over the past several years. The most
recent data indicate a sharp increase in overall terminations and
voluntary withdrawals from the 8(a) program. For example, from 2007 to
2008, the number of terminations increased more than threefold. Firms
are given the option to withdraw from the program when faced with
termination proceedings. SBA headquarters officials explained that
some firms prefer a withdrawal instead of a termination on their
record, and that the increase in annual reviews also increased this
opportunity.
Table 3: Number of Terminations and Voluntary Withdrawals from the
8(a) Program, 2005-2008:
Number of 8(a) firms;
Fiscal year: 2005: 9,470;
Fiscal year: 2006: 9,667;
Fiscal year: 2007: 9,423;
Fiscal year: 2008: 9,462.
Number of terminations;
Fiscal year: 2005: 130;
Fiscal year: 2006: 318;
Fiscal year: 2007: 143;
Fiscal year: 2008: 537.
Percentage terminated;
Fiscal year: 2005: 1;
Fiscal year: 2006: 3;
Fiscal year: 2007: 2;
Fiscal year: 2008: 6.
Number of voluntary withdrawals;
Fiscal year: 2005: 98;
Fiscal year: 2006: 95;
Fiscal year: 2007: 149;
Fiscal year: 2008: 228.
Percentage of voluntary withdrawals;
Fiscal year: 2005: 1;
Fiscal year: 2006: 1;
Fiscal year: 2007: 2;
Fiscal year: 2008: 2.
Source: SBA. Percentages calculated by GAO and rounded to the nearest
whole number.
[End of table]
SBA Has Streamlined Termination Procedures, but Has Not Provided
Additional Guidance on Conditions That Would Warrant Termination:
Effective September 2009, SBA revised its 8(a) program procedures to
shorten the termination process and improve internal controls. The
procedural change shortens the termination process by 30 days to 135
days.[Footnote 35] While this falls short of the 75-day reduction SBA
officials planned at the time of our November 2008 report, it may
succeed in removing more ineligible firms from the program.[Footnote
36] It remains to be seen what effect this time reduction will have on
termination as an eligibility control.
To create the 30-day reduction in the termination procedure, SBA gave
the district offices responsibility for sending letters of intent to
terminate directly to the firms. Previously, district offices had to
submit termination information to headquarters before an intent letter
could be mailed. Because of this change, the district office primarily
will be in charge of handling new documents the firm submits after
receiving the intent letter. By giving the district offices direct
responsibility for tracking documentation and communicating with the
firm during this phase, SBA intends the process to be more streamlined
and straightforward.
While the new procedures reaffirm that firms may be terminated for
good cause (as outlined in the program regulations), they provide no
additional discussion of what factors or conditions would warrant
termination.[Footnote 37] The 8(a) regulations to which the program
procedures refer do provide examples of "good cause," including a
"pattern of failure" to make required submissions in a timely manner.
[Footnote 38] However, they provide no examples or criteria for staff
to use in determining what constitutes a pattern of failure. The lack
of guidance may have contributed to staff decisions to retain or
reinstate noncompliant firms.
SBA Plans to Address Compatibility and Functionality Issues in the
8(a) Program's Management Information System to Improve the Efficiency
of Annual Reviews:
Issues such as data integration, compatibility, and functionality
associated with SBA's Business Development Management Information
System (BDMIS) for the 8(a) program present challenges that affect
effective program management. The agency has been planning to address
some data integrity and compatibility issues with BDMIS and E-8(a), a
database that provides business status and business contract activity
for each participant in the 8(a) program. District office officials
indicated that information discrepancies existed between the two
systems and required dual data entry of some firm information. SBA
officials stated they were reconciling the information in E-8(a) and
BDMIS to address discrepancies. Additionally, the officials explained
that some information had to be entered separately into the two
systems but that they were moving toward a single data feed. The
officials expected this change to occur by the end of the third
quarter of fiscal year 2010.
As of October 2008, BDMIS was operational in all district offices,
allowing 8(a) participants to submit their annual review data
electronically and the BDSs to review the documentation
electronically. District staff identified benefits and challenges with
the implementation of the online annual review process in BDMIS. For
example, one district told us that learning the BDMIS system was
challenging initially for some 8(a) participants and depended on
participants' skills and abilities to enter information into the
system. Another district noted that a calculator that assesses a
firm's performance in its respective industry was a positive addition
to the BDMIS system, allowing the BDS to move through reviews more
quickly and efficiently. But the BDS still had to enter firm financial
data manually into the calculator, a fact that could increase the
likelihood for data entry errors. (The industry ratio calculations
require the BDS to manually enter data into a template that calculates
the ratio between the firm's performance and that of industry.) For
example, at one district we visited, we observed BDS staff manually
entering industry performance ratios. District staff also told us that
BDMIS's functionality has been limited because the system did not
allow staff to access complete firm information, such as contract and
historical information, and develop reports. Some district offices
also told us that the BDSs' overall workload has not improved and that
BDSs spend a significant amount of their time following up with 8(a)
firms to submit relevant annual review documents. Despite these
challenges, district staff with whom we spoke said BDMIS has been
helping to achieve better organization and tracking and anticipated
that when fully operational, it could save time and increase
transparency.
SBA officials also told us that they have been planning to upgrade
BDMIS, which currently is operating in its first version. SBA expects
to complete three upgrades by the end of the fiscal year 2010. As part
of the upgrades, SBA plans to integrate an existing federal database,
the Federal Procurement Data System-Next Generation, that contains
contracting information that could help SBA staff to verify firms'
contracting information and enable district staff to run reports on
their 8(a) firms. District staff told us they rely on the 8(a) firm
and federal agencies to provide contract information that is used in
the annual review to determine a firm's ratio of 8(a) and non-8(a)
contracts. As the firm matures, the goal for 8(a) firms is to increase
the amount of non-8(a) contract work and decrease reliance on 8(a)
contracts. However, one district explained that contract information
such as contracts pending and awarded is recorded in E8(a) but the
information is not complete because it does not contain obligation
data.
SBA's planned system upgrades could improve the efficiency of annual
reviews, particularly because they would likely address duplicative
data entry, make more information readily available to staff, and
decrease the amount of time spent on annual reviews. However, it is
too early to tell whether these changes, once implemented and fully
operational, would achieve their intended purposes.
SBA Did Not Have an Accurate Inventory of Mentor-Protégé Firms and Did
Not Follow Important Procedures to Properly Monitor the Program:
SBA did not maintain an accurate list of Mentor-Protégé Program
participants. Specifically, the headquarters office has had difficulty
verifying which firms actively participate in the program. An SBA
headquarters official responsible for the program stated that staff
added firms to a working list based on agreements once they were
approved at headquarters. However, this list is not systematically
updated when mentor-protégé agreements are extended or dissolved,
which occurs at the district office level instead of at headquarters.
While the list constituted the agency's only central participation
roster for the program, officials stated it was not meant to be used
as an eligibility control. Most district offices that we visited kept
their own lists, which occasionally were used to verify the
headquarters list. One district office we visited did not compile a
list of its mentor-protégé participants, but instead relied on
individual program files and the list from headquarters for
information. When we followed up with other district offices, we found
contradictory or inconsistent data in comparison with those of
headquarters. For example, the headquarters list showed two active
mentor-protégé agreements for a district office that stated it had no
active participants.
Because there is no list of active mentor-protégé agreements, SBA may
not be able to properly monitor 8(a) protégé firms that submit
agreements with more than one mentor, or mentors that submit
agreements with more than one 8(a) protégé. Currently, mentors may
have more than one protégé if specially approved by SBA. At least 28
mentor firms appeared to have more than one protégé firm, but SBA was
unable to confirm whether 5 of these mentors were authorized to do so.
SBA has proposed new regulations that would limit mentor firms to a
maximum of 3 protégé firms at a time.[Footnote 39] SBA also has
proposed changes to the regulations that would allow protégé firms to
have more than 1 mentor under limited circumstances.[Footnote 40] To
date, the regulations have prohibited protégé firms from having more
than one mentor at a time.[Footnote 41] However, we identified 12
protégé firms that appeared to have 2 mentors at the same time. SBA
indicated that some of these relationships had been dissolved, but
these firms remained on its list of approved mentor-protégé
agreements. The current lack of data limits the agency's ability to
fully monitor the Mentor-Protégé Program. As a result, unauthorized
partnerships could receive 8(a) set-aside contracts.
Maintaining an accurate list of firms participating in SBA's Mentor-
Protégé Program is an important control mechanism to ensure
participation only by eligible firms and that the agency has relevant
and reliable information for management. Monitoring eligibility for
the Mentor-Protégé Program is especially important because
participants were more successful in earning proceeds from federal
contracts in fiscal year 2008 than the larger pool of 8(a) firms.
[Footnote 42] Mentor-protégé participants averaged $4.1 million in
sales compared with $2.4 million for other 8(a) firms. As a group,
these participants earned $638 million in fiscal year 2008.
In addition to finding high-level data inconsistencies, including
unverifiable participation lists and mentors and protégés with
multiple agreements, we found cases in which SBA failed to properly
document analysis and monitoring of the Mentor-Protégé Program. As
part of our file review across five district offices, we tested 20
8(a) firms with mentor-protégé agreements. We focused on initial
agreement information, annual updates, and recommendations. Our file
review results showed that SBA staff failed to comply with certain
initial review and annual review procedures for participants in 6 of
the 20 mentor-protégé cases that we reviewed. These procedures include
providing a written eligibility analysis and ensuring a signed
supervisory review of the BDS's recommendation. In our interviews with
district office officials, we also found that Mentor-Protégé
eligibility information had not been incorporated into BDMIS. District
offices were not able to integrate initial approval recommendations
and annual review monitoring with the firm's general 8(a) eligibility
information held electronically in BDMIS. As a result of the lack of
documentation and the data limitations discussed above, SBA has not
been able to properly oversee this program.
SBA Lacks a Formal Mechanism to Collect and Analyze Complaint Data
Related to 8(a) Eligibility:
SBA can receive information and complaints from other 8(a) firms,
disgruntled 8(a) employees, and anonymous sources, but SBA does not
maintain comprehensive data about complaints such as allegations that
certain 8(a) firms may not comply with eligibility requirements.
[Footnote 43] Although complaint information is not the primary
mechanism for ensuring continuing program eligibility, it can be an
additional tool for identifying fraud or wrongdoing. As we noted in
our other GAO investigative report on the 8(a) program, detection and
monitoring are crucial elements in a well-designed fraud prevention
system.[Footnote 44] Complaints and other allegations regarding the
eligibility of firms in the program can serve as red flags for SBA
staff to take additional steps to ensure that firms continue to meet
program requirements.
District office officials told us that complaints received at the
district receive an initial review (to determine if they warrant
follow-up), which may include follow-up with other agencies and the
specific firm to gather more information. SBA's standard operating
procedures instruct staff to refer to SBA's Office of Inspector
General (OIG) any possible criminal violations and other wrongdoing
involving SBA programs, such as knowingly making or using a statement
or document that is false, fictitious, or fraudulent. If warranted,
complaints are to be referred to SBA's OIG for possible investigation.
One district told us that the district counsel reviews the evidence,
and if the case has merit, the information is referred to the SBA OIG
for further investigation. Two other districts told us the BDS will
seek more information by checking with the contracting agency involved
regarding the nature of the complaint or contacting the 8(a) firm for
clarification before making a referral to OIG.
However, because district staff do not collect and maintain
comprehensive complaint information involving 8(a) firms, staff are
not aware of the types and frequency of complaints across the agency,
including potential eligibility concerns. Specifically, none of the
five districts that we visited were able to provide us with a list of
complaints or allegations that they received over the past year
regarding the potential ineligibility of 8(a) firms in their
districts. While OIG maintains general complaint information such as
the name of the 8(a) firm and type of complaint, a senior OIG official
told us that 8(a) complaints involving a single company generally did
not rank high in priority for a review because of resource limitations
and other priorities but that it might be considered in the OIG's work-
planning effort. OIG officials explained that the OIG ultimately also
could refer a case to the U.S. Attorney for prosecution, but that the
threshold for prosecutions was high and many cases did not meet that
threshold.
As a result, it appears that complaint data involving 8(a) firms are
not being utilized to the full extent as a means to identify potential
areas of concern such as program eligibility issues. Without a
standard process for collecting and analyzing complaints, SBA staff--
and the agency as a whole--lack information that could be used to help
identify issues relating to program integrity and help improve the
effectiveness of SBA oversight.
Conclusions:
SBA's 8(a) program provides opportunities for participating firms to
collectively receive billions of dollars in federal contracts on a
competitive or noncompetitive basis. As a result, it is critical that
SBA's annual reviews of 8(a) firms are performed effectively to help
ensure that only eligible firms are allowed to continue to participate
in and benefit from the program. However, our file review at five
district offices found inconsistencies in the annual review policies
and procedures followed by SBA staff related to program eligibility.
This suggests a need for greater monitoring by SBA and potentially a
need for more guidance and training to ensure greater consistency in
the performance of required annual review procedures.
Furthermore, the lack of specific criteria in the current regulations
related to eligibility determinants such as size standards and
industry averages and the dual roles of the BDSs--providing oversight
and being an advocate for the firm--may have contributed to the
variation in annual review practices we observed. By clarifying
guidance, further detailing or expanding procedures, and emphasizing
the importance of quality controls, SBA could help eliminate
ambiguities, improve the quality of reviews, and provide clearer
criteria against which to judge eligibility and ensure that only
intended recipients benefit from program participation.
Workload constraints of BDS staff may have been a contributing factor
to the inconsistencies and deficiencies identified in our review of
annual review files in the five districts that we visited. While the
annual review process is central to ensuring program integrity, SBA's
statutory requirement to conduct annual reviews of 100 percent of 8(a)
firms also is time-and resource-intensive. The workload demands
associated with the annual review process likely have affected the
quality of these reviews as well as detracted from the time staff have
been able to devote to other core 8(a) program responsibilities,
ranging from technical assistance to mentoring. As we previously
recommended and continue to believe, an assessment of the BDS workload
could help ensure the BDSs can carry out their responsibilities and
determine what mechanisms can be used to prioritize or redistribute
their workload. Such an assessment also would be helpful in assessing
the multiple roles and responsibilities of BDS staff, including ways
to mitigate the conflicting roles of business development, and
ensuring that only eligible firms are allowed to participate in the
program. In a fiscally challenged environment and with workload
constraints as a constant, it is important that the agency review
staff and resource allocations and identify process efficiencies
wherever possible.
Changes that SBA recently made to termination procedures, coupled with
the increase in terminations overall, may help to alleviate workload
constraints for district office staff. As we noted in our November
2008 report, the inefficient termination process consumed scarce SBA
resources and may have affected business development activities.
District staff could take advantage of the revised, more efficient
termination process to minimize time spent waiting for documents from
firms and free up time for business development and other activities.
However, SBA retained some firms that repeatedly did not submit
required documentation for annual reviews. By monitoring the
implementation of regulations relating to documentation requirements,
SBA could help staff more readily identify firms for termination,
reduce the time staff spent "chasing" documentation, and help improve
the timeliness of annual reviews. Additionally, by providing specific
examples in the regulations or procedures of what is considered to be
a pattern of failure, staff would be able to better justify
termination decisions.
The agency also faces a number of challenges in effectively monitoring
and managing the Mentor-Protégé Program, which is an important subset
of the 8(a) program. For example, SBA headquarters and district
offices could not agree or provide current and basic information on
the total number of mentor-protégé agreements. Maintaining accurate
information on participants is a basic and important control mechanism
to monitor 8(a) protégé firms that submit agreements with more than
one mentor, or mentors that submit agreements with more than one 8(a)
protégé. By developing a centralized process to collect and maintain
information on program participants, SBA would have a critical tool
necessary to properly monitor and oversee the program.
Finally, SBA also has an opportunity to develop another tool that
could enhance its oversight of the 8(a) program. Currently, SBA lacks
comprehensive data on complaints involving 8(a) firms because it does
not systematically collect and analyze information on the nature of
the complaints and their disposition. Although complaint data are not
a primary mechanism to ensure program eligibility, continual
monitoring is a key component in detecting and deterring fraud. By
developing an agencywide process for documenting and analyzing
complaints, SBA would have an information resource that could be used
with other efforts to provide reasonable assurance that only eligible
firms are participating in the program.
Recommendations for Executive Action:
To improve the monitoring of and procedures used in assessing the
continuing eligibility of firms to participate in and benefit from the
8(a) program, we recommend that the Administrator of SBA take the
following six actions:
* To help ensure greater consistency in carrying out annual review
procedures and improve the overall quality of these reviews, we
recommend that the SBA Administrator monitor, and provide additional
guidance and training to, district offices on the procedures used to
determine continuing eligibility, including:
- taking appropriate action when firms exceed four of seven industry
size averages, including notifying firms the first year and enforcing
procedures relating to early graduation of firms that exceed industry
averages for 2 consecutive years;
- obtaining appropriate supervisory signatures to finalize annual
review decisions;
- submitting remedial action or a waiver for firms in the transition
phase that did not meet business activity targets;
- graduating firms that exceed the net worth threshold of $750,000;
- performing timely eligibility reviews in required cases; and:
- completing required annual reviews.
* To help reduce inconsistencies between districts and BDS staff in
annual review procedures requiring judgment, we recommend that SBA
review its existing 8(a) program regulations and its proposed changes
with the intent of providing additional criteria and examples for
staff when assessing key areas of program eligibility and determining
whether a firm should be graduated from the program when it exceeds
size standards, industry averages (such as total assets, net sales,
working capital, or pretax profit), and limits for personal
compensation and assets, and excessive withdrawals.
* To help address competing demands on 8(a) resources, SBA should
assess the workload of business development specialists to ensure that
they can carry out all their responsibilities. As part of this
assessment, SBA should review the roles and responsibilities of the
BDSs to minimize or mitigate to the extent possible the potentially
conflicting roles of advocacy for firms in the program with the
responsibility of ensuring that only eligible firms are allowed to
continue to participate in the program. In addition, SBA should review
the size of the 8(a) portfolio for all business development
specialists and, if necessary, determine what mechanisms should be
used to prioritize or redistribute their workload.
* To reduce the practice of retaining firms that fail to submit annual
review documentation as required, SBA should monitor the
implementation of regulations relating to termination to see if they
are achieving their purpose or whether business development staff need
further guidance in interpreting the regulations. SBA should consider
providing specific examples of what might be considered a pattern of
failure to submit documentation as required.
* To better manage and monitor participation in the Mentor-Protégé
Program, including compliance with the number of allowable mentor and
protégé firms, SBA should develop a centralized process to collect and
maintain up-to-date and accurate data on 8(a) firms participating in
the Mentor-Protégé Program. SBA should consider incorporating
information on Mentor-Protégé approvals, extensions, and dissolutions
in existing electronic data systems used for the annual review process.
* To more fully utilize and leverage third-party complaints to
identify potentially ineligible firms participating in the 8(a)
program, design and implement a standard process for documenting and
analyzing complaint data.
Agency Comments and Our Evaluation:
We requested SBA's comments on a draft of this report, and SBA's
Associate Administrator of the Office of Government Contracting and
Business Development provided written comments that are presented in
appendix II. SBA agreed with each of the six recommendations and
stated that some corrective measures have already been implemented and
additional actions are planned to be implemented in the near future.
For example, SBA stated it has implemented a comprehensive training
curriculum, revised guidance for annual review procedures, and will
provide additional examples that will assist staff in assessing key
areas in making annual review determinations. SBA also indicated that
it had begun to develop a routine centralized process to collect and
maintain accurate data related to the Mentor-Protégé Program. Finally,
SBA stated that it plans to assess BDS workload and develop a central
repository for third-party complaints.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to other interested congressional committees and the Administrator of
the Small Business Administration. The report will also be available
at no charge on the GAO Web site at [hyperlink, http://www.gao.gov].
If you or your office have any questions about this report, please
contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in appendix III.
Sincerely yours,
Signed by:
William B. Shear:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Scope and Methodology:
Our objectives were to (1) evaluate the procedures and processes that
the Small Business Administration (SBA) has implemented to ensure that
only eligible firms remain in the 8(a) program, and (2) assess the
extent to which SBA used external mechanisms, such as complaints by
other 8(a) firms, to help ensure that only eligible firms participate
in the program.
To evaluate the procedures and processes that SBA has implemented to
help to ensure that only eligible firms participate in the 8(a)
program, we reviewed applicable statutes and the legislative history
of the 8(a) program, SBA's regulations and guidance for administering
the program, our previous reports, and studies of the program
conducted by SBA, SBA's Office of Inspector General (OIG), and
external organizations. Additionally, we randomly sampled files for
review at 5 selected district offices to assess SBA's compliance with
its eligibility review procedures for the 8(a) and Mentor-Protégé
programs.[Footnote 45] We selected the 5 district offices based on the
high dollar value of contract obligations in these districts and
geographic diversity.[Footnote 46] Our sample population included
firms that were active in the 8(a) program in fiscal year 2008 and had
8(a) contracts in fiscal year 2008. We identified these firms by using
SBA's list of active fiscal year 2008 8(a) firms and matching these
data to the Federal Procurement Data System-Next Generation (FPDS-NG)
to determine which of those firms had obligations. For our review, we
excluded those firms that joined the program during calendar year
2008, because these firms would not yet have been in the program long
enough to have an annual review on file.[Footnote 47] We also excluded
Alaska Native Corporations, tribally owned, Native Hawaiian
Organization-owned, other Native American-owned, and Community
Development Corporation-owned firms because of the different 8(a)
eligibility requirements applied to these entities. The results of our
sample are generalizable only to the 5 district offices. We randomly
sampled 123 8(a) firms from our population, and an additional 13 8(a)
firms that had mentor-protégé agreements, which we judgmentally
selected from SBA's list of Mentor-Protégé firms as of September 2009.
[Footnote 48] For each firm, we reviewed its most recent 2 years of
annual reviews for the period 2007-2009, and any existing mentor-
protégé agreements, related documents, and correspondence. We
developed a data collection instrument (DCI) to collect key annual
review data from each file. The DCI was pretested in 2 district
offices and modified based on these tests. We also analyzed mentor-
protégé data to identify protégé firms that may have multiple mentors,
which are against regulation, and mentor firms that may have multiple
protégés, which is allowable only when specially authorized by SBA. To
identify these cases, we sorted the data by firm name and searched for
duplicate matches. A total of 672 firms met our study criteria and are
shown in table 4.
Table 4: Total Number of Files and Sample Sizes at Five Selected
District Offices:
SBA field office: Washington, D.C.;
Number of files: 479;
Sample size: 64.
SBA field office: Denver;
Number of files: 70;
Sample size: 14.
SBA field office: San Antonio;
Number of files: 56;
Sample size: 15.
SBA field office: Massachusetts;
Number of files: 27;
Sample size: 15.
SBA field office: San Francisco;
Number of files: 40;
Sample size: 15.
SBA field office: Total;
Number of files: 672;
Sample size: 123.
Source: GAO.
[End of table]
We randomly selected the indicated number of cases within each
regional office. We treated this as a stratified random sample and
weighted the sample cases accordingly for our analysis. Our estimates
are statistically representative for all files maintained in these 5
SBA regional offices.
Because we treated our file review as a stratified random sample, we
assumed our sample was only one of a large number that could have been
drawn. Because each sample could have provided different estimates, we
expressed our confidence in the precision of our particular sample's
results as a 95 percent confidence interval. This is the interval that
would contain the actual population value for 95 percent of the
samples we could have drawn. As a result, we are 95 percent confident
that each of the confidence intervals based on the file review
includes the true values in the sample population. The 95 percent
confidence intervals for each of the estimates are summarized in table
5.
Table 5: 95 Percent Confidence Intervals for Statistical Sample
Estimates in Table 2:
Requirement not met: Taking action when a firms exceeded industry
averages by notifying firms that exceeded four of seven industry
averages for 1 year;
Estimated percentage: 26%;
Lower endpoint of 95 percent confidence interval: 19%;
Upper endpoint of 95 percent confidence interval: 35%.
Requirement not met: Taking action when a firms exceeded industry
averages by graduating or explaining retention of firms that exceeded
four of seven industry averages for 2 consecutive years;
Estimated percentage: 4%;
Lower endpoint of 95 percent confidence interval: 1%;
Upper endpoint of 95 percent confidence interval: 9%.
Requirement not met: Taking action when a firms exceeded industry
averages by reviewing net worth or graduating firms in which
individuals exceeded adjusted net worth limitations;
Estimated percentage: 7%;
Lower endpoint of 95 percent confidence interval: 3%;
Upper endpoint of 95 percent confidence interval: 13%.
Requirement not met: Taking action when a firms exceeded industry
averages by performing required eligibility reviews;
Estimated percentage: 4%;
Lower endpoint of 95 percent confidence interval: 1%;
Upper endpoint of 95 percent confidence interval: 9%.
Requirement not met: Taking action when a firms exceeded industry
averages by completing required annual reviews;
Estimated percentage: 2%;
Lower endpoint of 95 percent confidence interval: 1%;
Upper endpoint of 95 percent confidence interval: 7%.
Requirement not met: Taking action when a firms exceeded industry
averages by documenting supervisory reviews;
Estimated percentage: 23%;
Lower endpoint of 95 percent confidence interval: 15%;
Upper endpoint of 95 percent confidence interval: 31%.
Requirement not met: Taking action when a firms exceeded industry
averages by imposing remedial actions or obtaining waivers for firms
not meeting business activity targets;
Estimated percentage: 10%;
Lower endpoint of 95 percent confidence interval: 5%;
Upper endpoint of 95 percent confidence interval: 17%.
Source: GAO.
[End of table]
We performed appropriate data reliability procedures for our sample
testing at the 5 district offices and analysis of inappropriate mentor-
protégé relationships. We compared SBA data with data from other
sources such as FPDS-NG and the Central Contractor Registry, performed
electronic testing, reviewed related documentation and internal
controls, and performed interviews with knowledgeable agency
officials. We determined that the data were sufficient to perform our
sample testing and project our results to the 5 district offices in
our population of 8(a) firms. We also determined through these methods
that data relating to mentor-protégé participants were sufficient to
report on descriptive statistics of mentor-protégé firms with
contracts. The discrepancies we found in the general list of mentor-
protégé participants are documented within the report.
To assess the extent that external mechanisms exist, such as
complaints by other 8(a) firms, to help ensure that only eligible
firms participate, we interviewed agency and SBA Office of Inspector
General officials, and we reviewed SBA OIG complaint data. We also
interviewed officials in SBA's Office of Business Development,
Division of Program Certification and Eligibility, and district office
staff to discuss their procedures for determining initial and
continuing eligibility, oversight efforts, technical assistance
offered, and mechanisms to help identify ineligible firms in the
program.
We conducted our work in Boston, Massachusetts; Denver, Colorado; San
Antonio, Texas; San Francisco, California; and Washington, D.C.,
between May 2009 and March 2010 in accordance with generally accepted
government auditing standards. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
[End of section]
Appendix II: Comments from the Small Business Administration:
U.S. Small Business Administration:
Washington, D.C. 20116:
March 10, 2010:
Mr. William B. Shear:
Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Shear:
The U.S. Small Business Administration (SBA) is pleased to provide a
response addressing the issues outlined in your draft Government
Accountability Office (GAO) Report Number: GA0-10-353, entitled,
"Steps Have Been Taken to Improve Administration of the 8(a) Program,
but Key Controls for Continued Eligibility Need Strengthening.“
Background:
As you are aware, the SBA's 8(a) Business Development (BD) program
seeks to foster the business growth and development of firms deemed
socially and economically disadvantaged and offers a number of
programmatic benefits which include advocacy support, management,
technical, financial, and procurement assistance. While there is a
continual need to implement policy and procedural guidance to ensure
proper internal controls, oversight, monitoring and compliance, SBA is
encouraged by the significant strides that the agency has already made
along these lines.
SBA also recognizes that there are weaknesses and areas that require
immediate action and implementation of corrective measures. Since the
timeframe in which this GAO audit was conducted, the Office of
Business Development (OBD) has already implemented (or will implement)
corrective measures that will address all of the recommendations
outlined in this GAO Report.
One significant step toward addressing many of these weaknesses
occurred in October 2009, when SBA announced in the Federal Register
proposed regulatory revisions aimed at strengthening opportunities for
disadvantaged small businesses to benefit from its 8(a) BD program.
The proposed 8(a) regulation changes are the result of the first
comprehensive review of the 8(a) BD program in a number of years. The
rules cover a variety of areas of the program, ranging from providing
further clarification on determining economic disadvantage to
requirements on Joint Ventures and the Mentor-Protégé program. The
public comment period was extended to January 28, 2010, in an effort
to obtain comments from our broad customer base as well as other
stakeholders.
The 8(a) BD program has a proven track record as an effective program
for helping socially and economically disadvantaged small businesses
gain access to training and contracting opportunities to help them
grow, create jobs and ultimately succeed in the marketplace upon
leaving the program. We believe that the proposed rule changes build
on that foundation of success, and will strengthen the program and
maximize its benefits for eligible small businesses.
The OBD, in conjunction with the Office of Field Operations, will be
conducting an extensive National Training Conference in June 2010 that
will include all of the Business Development (BD) personnel from our
68 district offices. This National Training Conference will emphasize
all aspects of continuing eligibility for 8(a) BD participants.
The following is SBA's response to the six recommendations made by GAO
regarding SBA's need to improve the monitoring of and procedures used
in assessing the continuing eligibility of firms to participate and
benefit from the 8(a) program. Some of the responses include
corrective measures already implemented and actions that are planned
to be implemented in the near future.
GAO's Recommendations For Executive Action:
Recommendation 1:
To help ensure greater consistency in carrying out annual review
procedures and improve the overall quality of these reviews, we
recommend that the SBA Administrator should monitor, and provide
additional guidance and training to district offices on the procedures
used to determine continuing eligibility, including:
* taking appropriate action when firms exceed four of the seven
industry size averages, including notifying firms the first year and
enforcing procedures relating to early graduation of firms that exceed
industry averages for 2 consecutive years;
* obtaining appropriate supervisory signatures to finalize annual
review decisions;
* submitting remedial action or waiver for firms in the transition
phase that did not meet business activity targets;
* graduating firms that exceeded the net worth threshold of 5750,000;
* performing timely eligibility reviews in required cases; and;
* completing required annual reviews.
SBA's Response To Recommendation 1:
SBA agrees with the recommendation and has already begun implementing
corrective measures.
In an effort to ensure consistency and improve the overall quality of
annual reviews, the OBD has implemented a comprehensive Training
Curriculum that consists of training sessions (utilizing Ready Talk
conferencing) for BD personnel on a variety of programmatic issues and
topics. This training (which is recorded and archived on a share
portal for access by BD personnel) covered the following aspects of
the annual review process:
* an outline of the steps involved in the annual review process;
* procedures related to conducting a "Personal Asset Test" to include
reviewing and analyzing financial statements;
* the importance of financial analysis in determining business trends
and other growth indicators;
* excessive withdrawals of an individual 8(a) participant or an 8(a)
firm calculating a disadvantaged individuals average two year income
for S Corporations, Partnerships and LLC's.
OBD revised and issued Chapter 5 "Participant Review Process" of the
8(a) BD program Standard Operation Procedure 80 05 3 (SOP) to provide
guidance regarding the process for obtaining appropriate supervisory
signatures to finalize annual review decisions; conducting eligibility
reviews, where appropriate, and the process for recommending firms for
early graduation, where appropriate.
The OBD conducted a training sessions for all BD personnel on October
15 and 22, 2009, solely on newly issued Chapter 10 of the 8(a) BD
program SOP shortly after its release.
In addition, the OBD has issued the following procedural and policy
guidance to ensure uniformity as it relates to annual review
processing:
* SBA Information Notice (issued 5/15/09), "8(a) Business Development
Program Application and Continuing Eligibility Processing"
* SBA Procedural Notice (issued 11/18/08), "Oversight of 8(a) Program
Participants"
We will evaluate the guidance outlined in the newly revised Chapter 10
(Leaving the 8(a) Business Development Program) of the 8(a) SOP
concerning procedures related to early graduation of firms that exceed
industry averages for two consecutive years and take appropriate
action, where necessary.
Recommendation 2:
To help reduce inconsistencies between districts and BDS staff in
annual review procedures requiring judgment, we recommend that SBA
review its existing 8(a) program regulations and its proposed changes
with the intent of providing additional criteria and examples for
staff when assessing key areas of program eligibility and determining
whether a firm should be graduated from the program when it exceeds
size standards, industry averages (such as total assets, net sales,
working capital, pre-tax profit), and limits for personal compensation
and assets, and excessive withdrawals.
SBA'S Response To Recommendation 2: SBA agrees with this recommendation.
We will continue to conduct training on this topic as well as revise
the applicable sections of the 8(a) BD SOP to provide examples that
will assist staff in assessing key areas and making determinations ”
after analyzing a myriad of factors that include taking into
consideration that the 8(a) Program is a business development program
as to whether or not early graduation is appropriate.
Recommendation 3:
To help address competing demands on 8(a) resources, SBA should assess
the workload of business development specialists to ensure that they
can carry out all their responsibilities. As part of this assessment,
SBA should review the roles and responsibilities of the BDS to
minimize or mitigate to the extent possible the potentially
conflicting roles of advocacy for firms in the program with the
responsibility of ensuring that only eligible firms are allowed to
continue to participate in the program, In addition, SBA should review
the size of the 8(a) portfolio for all business development
specialists and, if necessary, determine what mechanisms should be
used to prioritize or redistribute their workload.
SBA's Response To Recommendation 3:
SBA agrees with this recommendation.
SBA's OFO will assess the workload of BDSs to review roles and
responsibilities and evaluate staffing levels.
A key component of SBA's mission is advocacy support on behalf() of
small businesses. To that end, 8(a) BD program participants are small
businesses first and foremost, who happen to have an additional tool
(8(a) certification) to increase their competitive viability in the
Federal marketplace. These 8(a) BD program participants often require
advocacy support as well as individual business counseling assistance.
The BDS is the primary individual responsible for servicing an 8(a)130
program participant during its nine year term and as such, cultivates
a business and professional relationship with that 8(a) BD program
participant. There are often occasions where the BDS works with the
8(a) BD program participant to recommend technical assistance and as a
result of that technical assistance, the participant (who may not have
met its business activity target) will be able to obtain a non-8(a)
contract award and; thereby meet the required business activity
target. Because the 8(a) BD program is a business development program,
the BDS must evaluate and assess the totality of the circumstance and
in some cases, make a judgment call.
Recommendation 4:
To reduce the practice of retaining firms that fail to submit annual
review documentation as required, SBA should monitor the
implementation of regulations relating to termination to see if they
are achieving their purpose or whether business development staff
needs further guidance in interpreting the regulations. SBA should
consider providing specific examples of what might be considered a
pattern of failure to submit documentation as required.
SBA's Response To Recommendation 4:
SBA agrees with this recommendation.
SBA will continue to conduct training on the annual review and
termination actions reinforcing the requirements of the regulations
and the guidance provided in Chapters 5 and 10 of the 8(a) SOP whereby
a pattern of failure (repeated failures to respond to SBA's requests
for required submissions or responses in a timely manner) is
established.
Recommendation 5:
To better manage and monitor participation in the Mentor-Protegé
Program, including compliance with the number of allowable mentors and
protege firms, SBA should develop a centralized process to collect and
maintain up-to-date and accurate data on 8(a) firms participating in
the Mentor-Protégé Program.
SBA's Response To Recommendation 5:
SBA agrees with this recommendation.
The OBD has already begun to develop a routine centralized process to
collect and maintain accurate data related to 8(a) BD program
participants in the Mentor-Protégé Program. We are developing a
Procedural Notice that will be issued to the BD field staff outlining
this process.
Recommendation 6:
To more fully utilize and leverage third-party complaints to identify
potentially ineligible firms participating in the 8(a) program, design
and implement a standard process for documenting and analyzing
complaint data.
SBA's Response To Recommendation 6:
SBA agrees with this recommendation.
We will work with the Office of General Counsel to develop a central
repository for third-party complaints that will be accessible on the
agency's homepage to provide a centralized location for such
complaints. SBA will then maintain this data for follow-up and
appropriate action, as necessary.
Again, thank you for the opportunity to provide comments on this draft
GAO Report. My staff and I look forward to working with you in
resolving the issues outlined in this draft GAO Report as we seek to
strengthen the SBA's 8(a) BD program.
If you have additional questions or comments, please contact me
directly.
Signed by:
Joseph G. Jordan:
Associate Administrator:
Office of Government Contracting and Business Development:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
William B. Shear, (202) 512-8678 or shearw@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Harry Medina (Assistant
Director), Carl Barden, Tania Calhoun, Janet Fong, Cindy Gilbert,
Julia Kennon, Amy Moran Lowe, Barbara Roesmann, Verginie Tarpinian,
and William Woods made key contributions to this report.
[End of section]
Footnotes:
[1] Section 8(a) authorizes SBA to enter into contracts with
government agencies and to, in turn, contract with qualified 8(a)
firms for the performance of its requirements. SBA enters into
partnership agreements with government agencies that delegate its
contracting functions to the agencies and establish the basic
procedures for expediting the award of 8(a) contract requirements.
[2] GAO, HUBZone Program: SBA's Control Weaknesses Exposed the
Government to Fraud and Abuse, [hyperlink,
http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.: July 17,
2008), and Small Business Administration: Additional Actions Are
Needed to Certify and Monitor HUBZone Businesses and Assess Program
Results, [hyperlink, http://www.gao.gov/products/GAO-08-975T]
(Washington, D.C.: July 17, 2008). In the HUBZone program, certain
small businesses located in economically distressed communities
(Historically Underutilized Business Zones) may be eligible for set-
aside and sole-source contracts.
[3] GAO, Small Business Administration: Agency Should Assess Resources
Devoted to Contracting and Improve Several Processes in the 8(a)
Program, [hyperlink, http://www.gao.gov/products/GAO-09-16]
(Washington, D.C.: Nov. 21, 2008).
[4] In addition to the 13 8(a) firms with mentor-protégé arrangements,
another 7 firms in our sample of 123 had mentor-protégé agreements on
file.
[5] Competitively awarded contracts can be set aside for 8(a) firms if
there is a reasonable expectation that at least two 8(a) firms will
submit offers and the award can be made at a fair price. Sole-source
contracts can be awarded when the dollar thresholds are $5.5 million
or less for acquisitions involving manufacturing and $3.5 million or
less for all other acquisitions.
[6] Under the program, the mentor and protégé may operate a joint
venture as a small business for any government contract.
[7] Through the 7(j) Management and Technical Assistance Program, SBA
provides qualifying businesses with counseling and training in the
areas of financing, business development, management, accounting,
bookkeeping, marketing, and other small business operating concerns.
The 7(j) program by its terms applies to 8(a) firms.
[8] Pub. L. No. 100-656, §209, 102 Stat. 3853, 3863 (1988), codified
at 15 U.S.C. §637 (a)(6)(B). The requirement to complete annual
reviews of all program participants, along with other provisions in
the law, was intended to prevent ineligible firms from participating
in the program.
[9] [hyperlink, http://www.gao.gov/products/GAO-09-16].
[10] Criteria for our selection of five district offices (Boston,
Massachusetts; Denver, Colorado; San Antonio, Texas; San Francisco,
California; and Washington, D.C.) included the dollar amount of
contract obligations in the districts and geographic diversity. See
appendix I for more information on our scope and methodology.
[11] Because these estimates are based on a probability sample, they
are subject to sampling error. The 95 percent confidence interval for
SBA not complying with one or more annual review procedures is (46,
64) percent of all the cases in the five offices.
[12] The corresponding 95 percent confidence intervals for these
estimates are (19, 35) and (1, 9).
[13] The 95 percent confidence interval for this estimate is (3, 13).
[14] GAO, 8(a) Program: Fourteen Ineligible Firms Received $325
Million in Sole Source and Set-aside Contracts, [hyperlink,
http://www.gao.gov/products/GAO-10-425] (Washington, D.C.: March 30,
2010).
[15] The 95 percent confidence interval for this estimate is (1, 9).
[16] Upon receipt of specific and credible information alleging that a
participant no longer meets the eligibility requirements for continued
program eligibility, SBA will review the concern's eligibility for
continued participation in the program. As part of an annual review,
each participant must certify that it meets the eligibility
requirements and that there have been no changed circumstances that
could adversely affect its eligibility, and may be required to submit
supporting documentation.
[17] The 95 percent confidence interval for this estimate is (1, 7).
[18] We identified one case in another district office without the
required supervisory signature.
[19] The 95 percent confidence interval for this estimate is (15, 31).
[20] Applications to the Mentor-Protégé Program are time-sensitive and
therefore are prioritized above annual reviews. We discuss additional
workload constraints in greater detail later in this report.
[21] The business activity targets require a certain ratio of revenues
from 8(a) versus non-8(a) contracts, depending on how many years the
firm has been in the program. The 95 percent confidence interval for
this estimate is (5, 17).
[22] [hyperlink, http://www.gao.gov/products/GAO-10-425].
[23] The 95 percent confidence interval for this estimate is (11, 25).
[24] This includes both 8(a) and non-8(a) contracts.
[25] [hyperlink, http://www.gao.gov/products/GAO-10-425].
[26] SBA, Small Business Size Regulations; 8(a) Business Development/
Small Disadvantaged Business Status Determinations, 74 Fed. Reg. 55694
(proposed Oct. 28, 2009) (to be codified at 13 C.F.R. pts. 121 and
124). The public comment period for the proposed regulations ended on
January 28, 2010, and, according to an SBA official, the regulations
are expected to be finalized by the end of fiscal year 2010.
[27] Annual review documents are due each year, 30 days after a firm's
certification date, and BDSs are required to complete the review
within 30 days after receiving all required documentation. However,
our file review of 123 8(a) firms found about 49 percent of the firms
submitted documentation late. The corresponding 95 percent confidence
interval for this estimate is (40, 57).
[28] About 50 percent of the firms listed on the 8(a) participant list
for fiscal year 2008 had active contracts, which include any contract
having a modification in fiscal year 2008 even if those modifications
were non-monetary.
[29] [hyperlink, http://www.gao.gov/products/GAO-09-16].
[30] [hyperlink, http://www.gao.gov/products/GAO-09-16].
[31] According to 8(a) regulations, SBA may, but is not required to,
terminate a firm for good cause, one example of which is a "pattern of
failure" to make required submissions in a timely manner. 13 C.F.R. §
124.303(a)(7).
[32] The corresponding 95 percent confidence intervals for these
estimates are (52, 69) and (1, 8), respectively.
[33] SBA may suspend a participant when it is determined that
suspension is needed to protect the interests of the federal
government, such as cases in which information showing a clear lack of
program eligibility or conduct indicating a lack of business integrity
exists. This includes cases in which the firm or one of its principals
submitted false statements to the government, including false
information in its 8(a) application. The criteria that make an 8(a)
firm eligible for termination are not the same as the causes for
suspension. See 13 C.F.R. § 124.303 and Federal Acquisition Regulation
§ 9.407-2.
[34] [hyperlink, http://www.gao.gov/products/GAO-10-425].
[35] Effective from September 2009, termination proceedings may last
approximately 135 days from the firm's anniversary date, including the
time the firm is allowed to appeal its case to OHA.
[36] [hyperlink, http://www.gao.gov/products/GAO-09-16].
[37] SBA Standard Operating Procedures 80 05 3B, effective September
22, 2009.
[38] 13 C.F.R. § 124.303(a)(7).
[39] SBA, Small Business Size Regulations; 8(a) Business Development/
Small Disadvantaged Business Status Determinations, 74 Fed. Reg.
55694, 55707 (proposed Oct. 28, 2009) (to be codified at 13 C.F.R Pt.
121 and 124).
[40] 74 Fed. Reg. 55694, 55708.
[41] 13 C.F.R. § 124.520(c)(3).
[42] Excludes Alaska Native Corporations, Native Hawaiian
Organizations, tribally owned firms, and firms owned by Community
Development Corporations.
[43] SBA officials stated that there was a great deal of "self-
policing" in the program, since firms were aware of which competitor
has received contracts.
[44] [hyperlink, http://www.gao.gov/products/GAO-10-425].
[45] The 8(a) program is managed from 68 district offices, each one
containing the paper documents we wanted to evaluate. Because our
compliance review required a site visit to a district office to review
the file documents for a particular firm, we narrowed the scope of our
review down to 5 district offices: Washington, D.C., San Antonio,
Denver, Massachusetts, and San Francisco SBA district offices.
[46] The 5 districts we selected represented 29 percent (or 672) of
all active fiscal year 2008 8(a) firms with contracts and 37 percent
(or about $2 billion) of the contracting obligation dollars.
[47] SBA is required by statute to conduct annual reviews to monitor
continuing eligibility of 8(a) firms. These reviews begin 1 year after
the firm's certification date.
[48] In addition to the 13 8(a) firms with mentor-protégé
arrangements, another 7 firms in our sample of 123 had mentor-protégé
agreements on file.
[End of section]
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