OIG audits, inspections, and investigations over the last 6 months achieved $15,133,398 in potential dollar
results, 36 indictments, and 44 convictions. The dollar results consist of (1) $2,041,896 in potential recoveries,
including judicially-awarded fines and restitution; (2) $10,857,466 in management avoidances; (3) $1,313,113 in
disallowed costs agreed to by SBA's management; and (4) $1,437,923 in management commitments to use funds more
efficiently. This brings the OIG=s FY 1996 accomplishments to almost $70 million.
The OIG alone could not have achieved the accomplishments set forth in this report to the Congress. The results
for this reporting period reflect the cooperation and support of other Federal audit, inspection, and investigative
organizations such as the Federal Bureau of Investigation (FBI); U.S. Secret Service; Bureau of Alcohol, Tobacco
and Firearms (BATF); Internal Revenue Service (IRS); Air Force Office of Special Investigations; Federal Protective
Service; other Federal OIGs; Department of Justice (DOJ) prosecutors; and, most importantly, the actions of SBA
program managers and employees. Indeed, much of our success is due to referrals made by conscientious SBA employees.
OIG Mission for FY 1997
In FY 1997, the OIG will continue to focus its attention on SBA's two largest programs--Business Loans and Disaster
Assistance. The continuing growth of these two programs, as discussed throughout this report, has been substantial
over the last several years. While the number of dollars at risk in these two programs continues to grow, both
the Agency and the OIG have undergone reductions in resources for their respective management and oversight activities.
The Agency's total portfolio, which includes its loan and disaster programs, now exceeds $35.3 billion. This
represents a 7 percent growth over last year's portfolio of $32.8 billion. The burgeoning size of the oversight
universe is clearly outpacing the OIG's ability to provide responsible levels of monitoring, and this is a major
concern of the Inspector General.
Using $3 million made available to the OIG by the President and the Congress in FY 1994 for the purpose of disaster-related
oversight, the OIG subsequently developed a strategy to guide disaster-related oversight activity and to make optimal
use of these funds. Increased temporary staffing, located near disaster sites, now provides needed personnel to
meet the oversight goals of the OIG's disaster plan. The Congress again demonstrated its concern in the FY 1997
budget by appropriating an additional $500,000 to the OIG for its the disaster-oversight effort.
The OIG continues to build greater awareness of its mission with SBA employees, program participants, and the Agency's
resource partners. We believe the OIG's information dissemination activities are deterring some level of fraud,
but equally important, these activities are also raising SBA program managers' interest in management and systems
improvement. The office continues to pursue this dual goal through attendance at SBA-sponsored events, the development
and use of educational presentations, more creative use of key OIG reports and activities, and staff involvement
in other initiatives designed to make the OIG more visible within the Agency and its client groups. One such example
is the OIG's use of IGnet, an Internet-based forum for the inspector general community and the public at large.
Summaries of OIG audit and inspection reports are being made available over IGnet, a communications system coordinated
for the federal inspector general community by the SBA/OIG. IGnet can be reached through the Internet at http://www.sbaonline.sba.gov/ignet.
These are relatively economical methods of reporting our work, and they are having a substantial impact on the
accomplishment of our mission goals. The OIG is also becoming progressively more visible to SBA's resource partners
through attendance of key OIG officials at the National Association of Guaranteed Government Lenders (NAGGL) conference,
active leadership and participation in the activities of the National Intergovernmental Audit Forum, and professional
presentations at the annual meeting of the American Institute of Certified Public Accountants and other professional
and trade organizations. The OIG's visibility is also enhanced through the Inspector General's (IG) leadership
role in the President's Council on Integrity and Efficiency (PCIE).
Highlights of the Past Six Months
Efforts to Improve SBA Program Management
Annual Audit of SBA's Financial Statements Yields Qualified Opinion. Three material weaknesses caused a qualified
opinion to be issued for the FY 1995 independent audit of SBA's financial statements, required by the Chief Financial
Officers Act of 1990. SBA did not (1) maintain comprehensive inventory records of acquired property, (2) consistently
value the acquired property at its net realizable value, and (3) reconcile certain fund balances with the U.S.
Department of Treasury. The first two exceptions were repeated from the 1994 audit. Because of the lack of an
automated inventory system with unit detail, SBA cannot reconcile the estimated $140 million of collateral purchased
property to its general ledger. The SBA's CFO has indicated, however, that field office records fully document
this general ledger balance. The fund balance problem refers to loan accounting balances, which were reported
to be $32 million higher on SBA's books than on those of the Department of Treasury. The CFO has been reconciling
these balances over the past year, working with the audit staff. The FY 1996 audit is underway, and the CFO has
been correcting the problems reported in previous years working toward an unqualified opinion for FY 1996.
Two Audits Call for Procedural Changes To Prevent Abuse in the Section 8(a) Program. One OIG audit report addressed
a procurement method called basic ordering agreements (BOA). Such agreements can result in unlimited sole source
awards to single companies, thereby undermining statutory competitive thresholds. The OIG auditors recommended
(1) limiting the dollar amount of sole source BOA delivery orders to regulatory competitive thresholds, i.e.,
$5 million for manufacturing and $3 million for other SIC codes; and (2) limiting Standard Industrial Classification
(SIC) codes in a BOA to one major group.
A second audit report called for SBA to require firms to be established wholesalers or retailers in the products
they sell to the Government. Section 8(a) contractors would also have to supply the products of a small business,
if available. These requirements would aid the firms in developing their businesses while reducing the pass-through
of contracts to large businesses.
OIG Audits SBA's New Low Documentation (LowDoc) Loan Program. An audit of the LowDoc program found that, as of
July 1996, only 2 of 70 loans examined were past due or in liquidation, indicating a relatively low failure rate
due to LowDoc credit procedures. The audit did, however, find that 5 loans out of the sample of 70 were approved
for borrowers with questionable repayment ability and 2 were approved for ineligible borrowers. The auditors also
found that 54 loans, including 6 of the 7 with approval errors, had at least one other processing or disbursement
deficiency compared to Section 7(a) loan program guidelines.
Inspector General Community Supports OIG Involvement in the GPRA Process. Under the auspices of the President's
Council on Integrity and Efficiency (PCIE), the SBA and Treasury Department Inspectors General recently directed
a survey of all IGs. The survey's goals were to determine current and planned OIG involvement in the implementation
of the Government Performance and Results Act (GPRA) within host agencies and to solicit IG perceptions as to the
appropriate role of the IGs in that process. The majority of IG respondents believed OIGs should act in an advisory/consultative
capacity in the Act's implementation stages, but they should also perform independent audits and reviews of results
once the host department or Agency has had an opportunity to implement both its strategic and performance plans.
SBA Should Discontinue Using the Section 7(a) Loan Program Commercial Loss Rate. An OIG inspection report, requested
by the SBA Administrator, found that the methodology for determining the Section 7(a) general business loan program's
commercial loss rate is valid. The rate is not, however, comparable with banking industry loss rates because of
significant differences in the loan portfolios. SBA's loan-making objectives also vary considerably from those
of the for-profit banking industry, and differing charge-off policies affect the timing of charge-offs and, therefore,
loss rates. The commercial loss rate is further misleading as an indicator of the Agency's Section 7(a) loan program
performance because of the rapidly expanding portfolio and the 3-to-4 year lag between loan disbursals and charge-offs.
For these reasons, the IG recommended that SBA discontinue using the Section 7(a) commercial loss rate to compare
Section 7(a) program performance with that of the banking industry.
Activities to Enhance Fraud Detection and Deterrence
California Loan Broker and Nine Others Charged With Making False Statements. A loan broker from La Canada, California,
and nine other southern Californians involved with SBA-guaranteed business loans he brokered, were charged with
making false statements. The broker and seven of the nine others have pled guilty.
The loan broker pled guilty to five counts of making false statements in a loan application to a Federally-insured
financial institution. He also pled guilty to a criminal forfeiture count allowing the Government to recapture
the illegal proceeds of his crimes. Between 1987 and 1992, the man brokered more than two dozen fraudulent loans
totaling more than $9 million. His scheme involved the submission of falsified financial information, including
Federal tax returns, financial statements, invoices, etc., to induce the banks and SBA to grant the loans. When
the banks and SBA approved the loan applications, the broker would launder part of the proceeds through a business
which he fraudulently represented had sold equipment to various applicants.
Results of False Tax Return Cases Increase. Over the last 6 years, the OIG has received 284 allegations that false
tax returns were submitted in support of SBA business or disaster loan applications. These fraud referrals now
involve loan applications submitted to 44 SBA district offices, totaling $115 million and involving 1,039 individual
subjects. To date, 82 individuals have been indicted on criminal charges: 72 have been adjudicated guilty, 2 indictments
were dismissed, and 8 others have not yet gone to trial.
Affirmative Civil Enforcement Program. The OIG continues to expand the scope of its efforts to make optimal use
of the Department of Justice's Affirmative Civil Enforcement (ACE) program. This U.S. Attorney program targets
cases which might not be prosecuted criminally because of the minimal dollar amounts involved, absence of financial
loss to the Government, or because other facts of the case might not support a criminal prosecution. Heretofore,
our success with the ACE program was focused in only ten states; however, during this reporting period, the OIG
realized its first ACE results in Iowa, Kansas, and Utah.
During the approximately 39 months the OIG has been involved with the ACE program, we have had a total of 52 successful
cases, resulting in $2,372,917 in civil penalties and $1,656,218 in recoveries by SBA. Individual ACE outcomes
are reported in the program area chapters, as appropriate.
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* Updated: 2/4/98