OIG audits, inspections, and investigations over the last 6 months achieved $24,649,175 in potential dollar
results, 30 indictments, and 20 convictions. The dollar results consist of $3,429,588 in potential recoveries,
including judicially-awarded fines and restitution; $15,044,652 in management avoidances; $22,264 in disallowed
costs agreed to by SBA's management; and $52,671 in management commitments to use funds more efficiently. The results
also include a $6.1 million settlement related to audit work conducted during 1993.
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
components of organizations such as the Federal Bureau of Investigation (FBI); U.S. Secret Service (USSS); U.S.
Marshals Service (USMS); Internal Revenue Service (IRS); Office of the Comptroller of the Currency (OCC); Resolution
Trust Corporation (RTC); Environmental Protection Agency's (EPA) Office of Criminal Enforcement; other Federal
OIGs; and the Department of Justice (DOJ). Most importantly, the actions of SBA program managers and employees
must be acknowledged. Indeed, much of our success is due to referrals made by these conscientious SBA employees.
OIG Mission for FY 1997
The OIG's mission for 1997 is delineated in its recently completed Strategic Plan for Fiscal Years 1997-2002. The
first two goals of the strategic plan and their associated objectives provide a roadmap for the execution of the
OIG's mission. The OIG's first goal is to improve the economy, efficiency, and effectiveness of SBA programs through
the Agency's adoption of recommendations resulting from the OIG's oversight activities. Achievement of this goal
will be accomplished by meeting the following objectives:
1. Find opportunities for the reduction of operating costs (salaries and expenses) associated with and supporting
activities of SBA's programs.
2. Identify means for reducing the subsidy cost of SBA programs.
3. Ensure that SBA programs are meeting mandated public policy goals, high performance standards, and the needs
of targeted participants.
4. Improve the accuracy of SBA accounting and management information.
5. Assure Agency implementation of accepted OIG recommendations and, to the extent that OIG resources allow, provide
assistance to program managers in implementing recommendations.
6. Reduce the opportunity for loan packager fraud through cooperation with Agency officials in the registration
of loan packagers and the pursuit of packager investigations.
7. Review proposed legislation, regulations, standard operating procedures, and other SBA issuances to improve
Agency programs and to eliminate the potential for mismanagement.
8. Identify program vulnerabilities or systems weaknesses found during investigations and alert appropriate SBA
program managers.
The OIG's second goal is to reduce fraud and abuse in Agency programs and foster integrity in SBA's personnel and
the Agency's resource partners. This goal will be accomplished by meeting the following objectives:
1. Assist the SBA in its efforts to deter fraud and abuse by auditing a sample of defaulted loans and Section 8(a)
program participants suspected of abusing the contracting assistance program.
2. Assist the SBA in deterring waste, fraud, and abuse by responding to complaints concerning such activities with
OIG staff assistance and consultation.
3. Recommend actions to reduce any program vulnerabilities uncovered as a result of OIG oversight activities.
4. Conduct investigations into allegations of fraud in SBA programs according to the perceived level of risk to
the Agency and the potential for program impact or increased deterrence.
5. Pursue asset forfeiture proceedings in all applicable cases.
6. Participate in development of SBA's fraud and corruption awareness training programs and emphasize cooperation
of Section 7(a) lenders in combating fraud through fraud awareness briefings and outreach contacts with lenders.
7. Refer an average of 75 cases annually to the Department of Justice for Affirmative Civil Enforcement (ACE) and
increase the value of civil fines imposed.
8. Preclude persons of poor character from participating in SBA programs or employment through the use of name
check requests, fingerprint requests, pre-employment screening, and required background investigations.
The OIG's last two goals involve communicating it=s findings, recommendations, and results to all SBA stakeholders
and ensuring the economical, efficient, and effective operation of the OIG. The extent to which the OIG will be
able to achieve its objectives depends, in part, on the sufficiency of resources available to fund its operations.
Highlights of the Past Six Months
Efforts to Improve SBA Program Management
White Paper Describing Critical Issues Facing the Small Business Administration Provided to SBA's New Administrator
In May 1997, the OIG provided Administrator Aida Alvarez a compendium of critical issues facing the SBA. The document
presented a range of issues facing the Agency and offered recommendations on actions to be taken. The critical
issues identified were derived from recent audit and inspection oversight activities, as well as other program
vulnerabilities identified through investigations conducted over the last few years. Additional issues and recommended
actions, drawn from the experiences, perceptions, and concerns of OIG staff, were also shared in this same document.
While acknowledging that resource shortfalls could be an impediment to reform, the Inspector General counseled
that most shortfalls could be accommodated through a rational reprogramming of existing resources and increased
productivity generated by the introduction of new management systems, use of state of the art technologies, and
a retrained employee base that works smarter than ever before.
Lastly, the paper expressed the view that both OMB and the Congress would be more sympathetic to Agency resource
needs if SBA could demonstrate that it had already done all it could do to make itself a model financial credit
agency, as envisioned by the SBA Administrator.
Administrator Alvarez has distributed the critical issues paper to the Agency's program managers and is in the
process of evaluating the OIG's recommended actions.
Inspector General Testifies Before the U.S. Senate Committee on Small Business Concerning the HUBZone Act of 1997
On April 10, 1997, the Inspector General testified before the U.S. Senate Committee on Small Business regarding
SBA's ability to implement the HUBZone Act of 1997. The Act is intended to provide Federal contracting opportunities
for small business concerns located in historically underutilized business zones. The Committee also specifically
requested the Inspector General's views on SBA's management of the Section 8(a) contract assistance program and
his judgment on whether the program is meeting its public policy purpose. A synopsis of the Inspector General's
testimony is included in the Minority Enterprise Development chapter of this report.
CPA Firm Pays $6.1 Million Settlement to SBA for Inadequate Audits
A major CPA firm agreed this year to pay $6.1 million to settle SBA's claim that inadequate audits contributed
to the Agency's loss when a large small business investment company (SBIC) failed.
Based upon the OIG Auditing Division's review of the CPA firm's working papers, SBA's General Counsel and the Department
of Justice alleged that the firm was negligent in not requiring financial statement disclosure of risky participation
agreements negotiated by the SBIC. After an arbitration panel ruled in favor of SBA, but declined to set damages,
the parties negotiated a $6.1 million settlement that was concluded in June 1997.
Follow-Up Audit of Agency's LowDoc Program Confirms Previous Findings
A follow-up audit of the Low Documentation (LowDoc) loan program confirmed the results of the report issued in
September 1996. Each audit found that about 10 percent of LowDoc loans should not have been approved because of
departures from required procedures.
The first report was based on a nationwide random sample of 70 LowDoc loans. At the request of the former Administrator,
the Auditing Division repeated the audit with a larger sample of 120 loans, 30 each in Atlanta, Santa Ana, Washington,
and Dallas. Separate reports were issued on the four offices; a consolidated report will be issued early in FY
1998.
Audit of Loan Guarantee Purchases Raises Conflict of Interest Issue
An audit of business loan guarantee purchases found that at least 8 out of 58 purchase decisions reviewed were
inappropriate because lenders did not comply with SBA requirements in processing and servicing the loans. An additional
nine purchases were not supported by sufficient documentation at the time of the decision, but documentation obtained
during the audit found that five of these decisions were acceptable when all the facts were known. The auditors
concluded that district offices may be too lenient with lenders because of an inherent conflict between pursuit
of loan production and enforcement of SBA policies. The report recommended that SBA centralize the guarantee purchase
function to eliminate the possibility of a conflict of interest at the local level of SBA operations.
Audit of Surety Company Results in Withdrawal of Claims Against SBA
One of SBA's largest preferred surety firms agreed to withdraw two claims totaling $934,492 during an audit of
the surety's claims. Both of the projects that led to the claims started before the bond was issued, a clear violation
of SBA regulations.
Audit Finds That Disaster Home Loan Processing Complies with Regulations
An audit of disaster loan processing found that processing was generally consistent with regulations. About 91
percent of disaster home loan approvals were consistent with SBA regulations and procedures; the other 9 percent
lacked support for repayment ability, credit worthiness, or other eligibility criteria. Disaster field office managers
attributed the approval errors to limited training and experience and to policy imperatives on processing speed.
OIG Study Evaluates SBA and Lender Loan Liquidation Responsibilities
The OIG issued an inspection report on Increasing Lender Liquidation Responsibility in the Section 7(a) Business
Loan Program. The report explores the potential for increasing Preferred Lender Program (PLP) and Certified Lender
Program (CLP) lenders responsibility for liquidating SBA loans. It concludes that SBA currently has in place sufficient
regulations, procedures, and other controls to encourage lenders to obtain maximum recoveries and to allow the
Agency to take action for negligent liquidation actions. It also found, however, that SBA does not take full advantage
of lender liquidation capabilities. Some districts give lenders a great deal of latitude, while others insist on
making many of the liquidation decisions themselves. Given the Agency's reduced resources, the OIG believes SBA
should no longer involve itself in step-by-step liquidation transactions on PLP- and CLP-defaulted loans. Instead,
SBA needs to commit its resources to monitoring the way PLP and CLP lenders are handling these activities. The
study is detailed in the Business Loan chapter of this report.
Activities to Enhance Fraud Detection and Deterrence
Results of False Tax Return Cases Increase
Over the last 7 years, the OIG has received 366 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 50
SBA district offices, totaling $122 million and involving 1,194 individual subjects. To date, 99 individuals have
been indicted on criminal charges: 91 have been adjudicated guilty, 3 have had indictments dismissed, and 5 others
are awaiting 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 relatively new program targets cases for civil action which might otherwise
not be prosecuted criminally because of the minimal dollar amounts involved, absence of financial loss to the Government,
or because the facts of the case might not support a criminal prosecution. Heretofore, the OIG's success with the
ACE program was focused in only 15 states and the Commonwealth of Puerto Rico; however, over the course of this
reporting period, the OIG also realized its first ACE results in Maryland, Missouri, and South Carolina.
During the time that the OIG has been involved with the ACE program, it has had a total of 95 successful cases,
resulting in $2,853,260 in civil penalties and $4,085,900 in recoveries. Individual ACE outcomes are reported in
the program area chapters, as appropriate.
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Updated: 2/4/98