Public Law 95-452 requires the Office of Inspector General (OIG) to prepare an activity report to the United States Congress. This Semiannual Report, transmitted to the Congress by the Administrator of the Small Business Administration (SBA), covers the full range of OIG activities from April 1, to September 30, 1995.
Over the reporting period, the OIG closed 74 investigative cases and obtained 31 indictments and 27 convictions. The office also issued 12 audit reports; 2 inspection reports; and realized $27 million in potential dollar results (potential recoveries and fines, management avoidances due to investigative activities, disallowed costs agreed to by management, and recommendations that funds be put to better use). These tangible results enabled the Agency to make most of these funds available to qualified small business men and women who are eligible for SBA financial assistance.
For FY 1995, the OIG's fivefold return for every dollar appropriated to its operations represents a prudent investment of the American taxpayer's money. When added to the accomplishments reported earlier this year, I am pleased to report to the Congress that the OIG has had a very successful year: $47 million in dollar accomplishments; 131 cases closed, with 77 indictments and 78 convictions; and 20 audit reports and 2 inspections issued. Moreover, OIG staff has been engaged in daily consultations with the Agency's program managers in an effort to improve the efficiency and effectiveness of the SBA's programs. Also, the OIG's outreach initiatives have been productive in engaging SBA's resource partners in a constructive dialogue about ways and means of detecting and deterring fraud in their operations. With one full year's operation completed, our Federal income tax verification initiative continues to perform effectively. With over 55,000 loan applications processed in FY 1995, only 90 problems required the OIG to contact the Internal Revenue Service (IRS) to ensure their resolution. While tax verification represents a strong deterrent to many who might be inclined to risk falsifying their income when applying for an SBA loan or guarantee, FY 1995 still produced 118 referrals of false tax returns, representing 267 individuals who were denied $17 million in SBA loans or loan guarantees because of the tax verification program. These statistics are impressive and support the continuation of the program. I am very concerned, however, that after one year's operation and considerable media coverage of this initiative, there were still 267 individuals who were willing to risk the commission of a felony to gain access to SBA's financial assistance programs.
SBA's loan portfolio continues to grow (now approaching $32 billion), while the OIG's resources remain virtually static. Our limited resources cannot keep pace with the workload we are experiencing across the OIG's divisions, e.g., approximately 160 cases involving over $20 million in Government funds were declined by the OIG in FY 1995 due to insufficient resources, nor can we be as responsive to the Congress, the SBA Administrator, or other key Agency program personnel as we should be. We are currently carrying 326 investigations in progress, which translates into 1291 subjects and some $378 million of Government funds at risk. Moreover, many parts of the country are not being covered adequately by the limited numbers of OIG investigative and auditing personnel available, nor are we able to meet the growing demand for audits and inspections being requested by Agency program managers in central office. The OIG, therefore, has had to choose its priorities carefully and set rigorous dollar thresholds for the types of cases it will open and oversight requests it will entertain. This means, of course, that the SBA's business loans and disaster assistance programs continue to receive the lion's share of the OIG's attention, while the balance of the Agency's programs receives little or no independent oversight. Finally, SBA's policymakers, employees, and program participants have continued to be vigilant and helpful to the OIG in its efforts to ferret out waste, fraud, and abuse in the delivery of SBA's programs. Cooperation received from SBA's senior executives, program managers, and employees during the conduct of OIG audits, inspections, and investigations, as well as throughout the review of our findings and consideration of associated recommendations, continues to be excellent. I remain convinced, therefore, that the more the OIG works with program managers to improve the performance of the Agency during these challenging times of downsizing and fiscal constraints, the better chance we will have to ensure a more efficient and effective SBA. The challenge is clear: to eliminate opportunities for those who would take unfair advantage of SBA programs and, thereby, deny assistance to those honest, small business men and women who are truly in need of the financial assistance being offered by their Government.
James F. Hoobler
Inspector General
This report on the activities of the Office of Inspector General (OIG) of the Small Business Administration (SBA) is submitted pursuant to Section 5(b) of P.L. 95-452, the Inspector General Act of 1978, as amended. It summarizes OIG activities for the 6-month period from April 1, 1995, to September 30, 1995.
OIG audits, inspections, and investigations during this 6-month period achieved $27,391,466 in potential dollar results, 31 indictments, and 27 convictions. The dollar results consist of: (1) $4,385,377 in potential recoveries, including judicially-awarded fines and restitution; (2) $18,857,516 in management avoidances; (3) $167,790 in disallowed costs agreed to by SBA's management; and (4) $3,980,783 in management commitments to use funds more efficiently.
As noted in previous Semiannual Reports, the OIG alone could not have achieved the accomplishments set forth in this report to the Congress. The results for this period reflect the cooperation and support of other Federal audit and investigative organizations such as the Federal Bureau of Investigation (FBI), the U.S. Secret Service, the Bureau of Alcohol, Tobacco and Firearms (BATF), the Postal Inspection Service, the Internal Revenue Service (IRS), and other OIGs; the support of 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 Agency employees.
The OIG's challenge in FY 1995 was to focus its resources on those activities with the highest potential for improving the management of the SBA and deterring and detecting the loss of the Federal Government's substantial investment in SBA programs. To meet this challenge, the OIG shifted resources away from traditional oversight activities, i.e., compliance audits with minimal impact and criminal investigations with limited deterrence potential. The office currently concentrates its limited resources on efforts to produce greater dollar savings, to provide maximum deterrence and prevention of fraud, and to secure definitive improvement in SBA's program efficiency and effectiveness.
The OIG's mission over the next several years will include a special focus on the SBA's disaster assistance program. In late 1994, Congress and the Office of Management and Budget (OMB) made $3 million available to the OIG 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 will provide the needed personnel to achieve the goals of the OIG's disaster plan.
The OIG continues to build greater awareness of its mission with SBA employees, the Agency's customers, and its resource partners. The OIG's information dissemination activities should have a significant deterrent effect on fraud, while raising SBA program managers' interest in management improvement. We continue to pursue this dual goal through attendance at SBA-sponsored events, the development and use of more educational presentations, more creative use of key OIG reports and activities, and staff involvement in other initiatives designed to make the OIG more visible with the Agency and its clientele groups. One such example is the OIG's use of IGNet, an Internet-based forum for the inspector general community. Summaries of audit and inspection reports are being made available to the general public on IGNet, which is coordinated for the inspector general community by the SBA/OIG. These are relatively economical methods of reporting our work and they are having a substantial impact on the accomplishment of our mission and goals.
Annual Financial Audit Results in Qualified Opinion. The annual audit of SBA's FY 1994 financial statements resulted in a qualified opinion for the fourth straight year, i.e., SBA does not maintain comprehensive inventory records of $148 million of acquired property and fails to value the acquired property at its net realizable value. Except for these issues, the financial statements were presented fairly, meaning that they represent an accurate picture of the Agency's financial condition. In a separate report on management issues, there were nine findings related to general ledger and reporting procedures, electronic data processing internal controls, and other compliance matters.
Deputy Inspector General Testifies on Disaster Assistance Program. On May 25, 1995, the Deputy Inspector General (DIG) appeared before the Subcommittee on Government Programs of the House Committee on Small Business to discuss the SBA's disaster assistance program. The DIG summarized investigative, audit, and inspection activities; highlighted two situations which have a major impact on the rising number of fraud cases; and outlined the OIG disaster plan for the use of the supplemental funding received in FY 1994.
Availability of Credit Elsewhere. An SBA/OIG audit disclosed that the Agency is not strictly enforcing the law that prohibits making SBA-guaranteed loans to persons who can get "credit elsewhere" on reasonable terms. Based on SBA managers' and loan specialists' responses to an audit questionnaire, an estimated $244 to $316 million a year is loaned to persons who could have obtained credit elsewhere. Auditors found that both lenders and SBA have incentives-such as the pressure to reduce loan losses-that cause"credit elsewhere loans to be approved contrary to law and regulations. The SBA's Associate Administrator for Financial Assistance has taken action to improve the understanding of the credit elsewhere provision by issuing a new Agency Procedural Notice.
Section 8(a) Competitive Mix Requirements Studied. SBA is not effectively implementing the competitive mix requirements of the Section 8(a) program, thereby permitting companies to develop an unhealthy dependency on sole source, Government contracts. This failure undermines the objectives of the Business Opportunity Development Reform Act of 1988, which requires Section 8(a) companies to increase their non-8(a) sales to be ready to compete after graduating from the program. A recent audit found that SBA's business opportunity specialists were not reacting appropriately to sales reports required by the Act. As a result, many firms received millions of dollars in Section 8(a) sole source contract awards despite having insignificant levels of non-8(a) business. Companies not complying with the competitive mix targets still managed to receive $1.4 billion in Section 8(a) contracts in their last year, according to SBA's database in February 1995. The Associate Administrator for Minority Enterprise Development agreed with the audit recommendations to issue more rigorous rules for enforcement of competitive mix and to establish procedures to evaluate post-graduation success in relation to competitive mix.
SBA/OIG Investigators Receive Deputation as Special Deputy U.S. Marshals. A Memorandum of Understanding (MOU) has been signed by the SBA/OIG, the FBI, and DOJ implementing our part of a 1-year pilot project involving 7 selected OIGs. Under the MOU, all eligible SBA/OIG criminal investigators have been given a blanket deputation as Special Deputy U.S. Marshals. The MOU gives OIG criminal investigators, who have met specified training requirements, full law enforcement powers, including the authority to execute warrants and to carry firearms in the performance of official duties.
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-managed program targets cases which might not be prosecuted criminally because of the minimal dollar amounts involved, or because other facts of the case might not support a criminal prosecution. Heretofore, our ACE results had come from only seven states; however, during this reporting period, the OIG obtained its first ACE results in Indiana and Washington.
During the approximately 27 months the OIG has been involved with the ACE program, we have had a total of 38 successful cases, resulting in $1,538,403 in civil penalties and $350,758 in recoveries by SBA. Individual ACE outcomes are reported in the program area chapters.
Results of False Tax Return Cases Increase. Over the last 5 years, the OIG has received 150 allegations that false tax returns were submitted in support of SBA business or disaster loan applications. These fraud referrals, which began to surface in southern California, now represent loan applications submitted to 27 SBA district offices, totaling $98,418,150 and involving 783 individual subjects. To date, 53 individuals have been indicted on criminal charges: 42 have been adjudicated guilty, 1 indictment was dismissed in the negotiation of her husband's guilty plea, and 10 others have not yet gone to trial.
Auditing Division Builds Its Presence in the Disaster Assistance Program. Using the special disaster funding described in the preceding section, the OIG's Auditing Division took steps to establish its presence in the Agency's disaster assistance program. During the reporting period, six auditors were assigned to OIG audit initiatives related to the disaster assistance program--four in Los Angeles and one in Atlanta and Washington, D.C., respectively. Based on surveys conducted at the Los Angeles District Office and the Disaster Area Offices in Atlanta and Sacramento, the OIG has initiated several audit projects. An audit of delinquent and defaulted disaster loans has identified problems in origination, servicing, and liquidation practices; it also has resulted in a number of fraud referrals to the OIG's Investigations Division. Other areas receiving attention include:
Survey of OIG Inspection and Evaluation Units. The President's Council on Integrity and Efficiency (PCIE) Committee on Inspection and Evaluation, which is chaired by the SBA's Inspector General (IG), commissioned a survey of all inspection and evaluation units across the inspector general community. The study, which was completed in July 1995, documents the diverse roles of the units, the different ways in which they are structured and staffed, and their perceived benefits. It also provides insight into the relative value of inspection and evaluation units to their respective IGs and their host departments and agencies.