oversight

Major Management Challenges and Program Risks: Small Business Administration

Published by the Government Accountability Office on 2003-01-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Performance and Accountability Series




January 2003
               Major Management
               Challenges and
               Program Risks
               Small Business
               Administration




GAO-03-116
               a
A Glance at the Agency Covered in This Report
The Small Business Administration’s (SBA) mission is to maintain and strengthen
the nation’s economy by aiding, counseling, assisting, and protecting the interests
of the nation’s small businesses. SBA seeks to achieve its mission by:
●   providing access to credit for small businesses, primarily by guaranteeing bank
    loans through its 7(a) program;
●   helping businesses and households recover from disasters by providing loans
    directly;
●   ensuring that a fair proportion of government purchases and sales, contracts
    and subcontracts are placed with small businesses;
●   offering assistance to entrepreneurs through partnerships with private entities
    that offer small businesses counseling and technical assistance; and
●   administering the 8(a) program, which is designed to help small disadvantaged
    businesses obtain federal contracts.


The Small Business Administration’s Budgetary and Staff Resources


Budgetary Resources a, b                                               Staff Resources b
Dollars in billions                                                    FTEs in thousands

4                                                                      8



3                                                                      6
                                     2.6                                               4.7                            4.6
       2.5                 2.5                    2.4
                 2.1                                                         4.4                4.3
                                                                                                          4.1
2                                                                      4



1                                                                      2


0                                                                      0
      1998      1999      2000      2001          2002                      1998      1999     2000      2001         2002
      Fiscal year                                                           Fiscal year
Source: Budget of the United States Government.

a Budgetary resources include new budget authority (BA) and unobligated balances of previous BA.

b Budget and staff resources are actuals for FY 1998-2001. FY 2002 are estimates from the FY 2003 budget, which
    are the latest publicly available figures on a consistent basis as of January 2003. Actuals for FY 2002 will be
    contained in the President’s FY 2004 budget to be released in February 2003.




This Series
This report is part of a special GAO series, first issued in 1999 and updated in
2001, entitled the Performance and Accountability Series: Major Management
Challenges and Program Risks. The 2003 Performance and Accountability Series
contains separate reports covering each cabinet department, most major
independent agencies, and the U.S. Postal Service. The series also includes a
governmentwide perspective on transforming the way the government does
business in order to meet 21st century challenges and address long-term fiscal
needs. The companion 2003 High-Risk Series: An Update identifies areas at high risk
due to either their greater vulnerabilities to waste, fraud, abuse, and
mismanagement or major challenges associated with their economy, efficiency, or
effectiveness. A list of all of the reports in this series is included at the end of
this report.
                                             January 2003


                                             PERFORMANCE AND ACCOUNTABILITY SERIES

                                             Small Business Administration
Highlights of GAO-03-116, a report to
Congress included as part of GAO’s
Performance and Accountability Series




GAO’s 2001 report on major                   SBA has addressed some of the specific performance and management
challenges at the Small Business             challenges that we previously identified. For example, SBA has identified
Administration (SBA) addressed               appropriate elements for an effective lender oversight program but has been
lender oversight, the 8(a) program           slow to incorporate all of them. Other challenges continue.
for small disadvantaged businesses,
disaster loan processing, and other
issues. The information GAO                  •   Improving lender oversight. SBA has made progress in developing its
presents in this report is intended              lender oversight program but conducts only a cursory review of lenders’
to help sustain congressional                    processes, not a qualitative assessment of decisions on borrowers’
attention and SBA’s focus on                     creditworthiness and eligibility. SBA also does not routinely analyze
addressing these challenges. This                lenders’ SBA loan portfolios to assess the financial risk to SBA.
report is part of a special series of
reports on governmentwide and                •   Developing better disaster assistance performance measures.
agency-specific issues.                          SBA exceeded its timeliness goals, but the measures used provided
                                                 incomplete information. For example, in measuring customer
                                                 satisfaction, SBA uses the results of its survey of successful disaster loan
                                                 applicants; unsuccessful applicants are not surveyed.
GAO believes that SBA should

•    qualitatively assess preferred          •   Strengthening human capital management. SBA’s current
     lenders’ performance, and                   organizational structure continues to have weaknesses, such as complex,
     develop new methods to                      overlapping relationships among offices, which contribute to its
     measure the financial risks                 challenges in delivering services to small businesses. SBA has a draft 5-
     lenders pose to SBA;                        year plan to restructure its workforce and streamline its operations.

•    continue to develop the                 •   Ensuring improvement in information technology. SBA has made
     policies and practices needed               some progress in establishing policies and defining processes in
     to effectively acquire and                  information technology investment management but still needs policies
     manage its information                      for software development and acquisition, and in other areas.
     technology resources; and

•    correct various accounting and          •   Improving budget and financial accountability. SBA continues to
     budgeting errors and                        have difficulties producing complete, accurate, and timely financial
     misstatements before                        statements. SBA incorrectly calculated the accounting losses on loan
     conducting additional loan                  sales and did not perform key analyses to determine the overall financial
     asset sales.                                impact of the sales. These errors and lack of key analyses also mean that
                                                 congressional decision-makers are not receiving accurate financial data
                                                 to make informed decisions about SBA’s budget and appropriations.




www.gao.gov/cgi-bin/getrpt?GAO-03-116.

To view the full report, click on the link
above. For more information, contact Tom
McCool at (202) 512-8678 or
mccoolt@gao.gov.
Contents



Transmittal Letter                                                                                                1


Major Performance                                                                                                  2

and Accountability
Challenges

GAO Contacts                                                                                                      33


Related GAO Products                                                                                              34


Performance and                                                                                                   36

Accountability and
High-Risk Series




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                       Page i                                                        GAO-03-116 SBA Challenges
A
United States General Accounting Office
Washington, D.C. 20548
                                                                                            Comptroller General
                                                                                            of the United States




           January 2003                                                                                           T
                                                                                                                  ransmL
                                                                                                                       ta
                                                                                                                        ileter




           The President of the Senate
           The Speaker of the House of Representatives

           This report addresses the major management challenges facing the Small Business Administration
           (SBA) as it seeks to maintain and strengthen the nation’s economy by aiding, counseling, assisting,
           and protecting the interests of the nation’s small businesses and by helping businesses and individuals
           recover from disasters. It includes a summary of actions that SBA has already taken and that are
           under way to address these challenges and outlines further actions that GAO believes are needed.

           This analysis should help the new Congress and administration carry out their responsibilities and
           improve government for the benefit of the American people. For additional information about this
           report, please contact Thomas J. McCool, Managing Director, Financial Markets and Community
           Investment, at (202) 512-8678 or mccoolt@gao.gov.




           David M. Walker
           Comptroller General
           of the United States




                                     Page 1                                               GAO-03-116 SBA Challenges
Major Performance and Accountability
Challenges

              In our January 2001 report on major management challenges and program
              risks at the Small Business Administration (SBA),1 we addressed four
              issues. First, we noted that SBA needed to improve its oversight of its
              lending partners, including the need to develop a data system for
              monitoring its guaranteed loans and lending partners. This challenge has
              become increasingly important as SBA pursues its policy of delegating
              credit decisions to lenders. Second, we described how SBA’s program to
              provide business development and federal contract support to small
              disadvantaged businesses (the 8(a) program) needs to be refocused to
              more effectively assist firms in obtaining contracts. SBA’s ability to assess
              the effectiveness of this program was limited by a lack of information on
              the views and needs of 8(a) customers and an inadequate information
              system. Third, we addressed SBA’s ongoing efforts to streamline and
              modernize disaster loans processing. We reported that SBA’s data showed
              improvements in the timeliness of loan processing but noted that the
              agency needed to get more input from loan applicants and to further
              automate its loan processing procedures. Finally, we described how SBA’s
              overall performance in human capital management, information
              technology, and budgetary and financial accountability needed to be
              strengthened.

              Changes since January 2001 in the economic health and security of our
              nation have heightened the significance of how SBA performs. Stresses in
              the economy can result in a tightening of available credit and SBA
              guaranteed loans, technical assistance, and counseling provided to
              businesses in partnership with private entities may be in higher demand
              during economic downturns. The September 11, 2001, terrorist attacks
              brought additional challenges to SBA in providing assistance in the wake of
              the largest disaster since the 1994 Northridge earthquake. In addition, the
              need for assistance extended nationwide, not just in the immediate areas of
              the attacks. SBA, working with Congress, adapted its disaster loan program
              to address the unique circumstances presented by the September 11
              attacks.




              1
               U.S. General Accounting Office, Major Management Challenges and Program Risks: Small
              Business Administration, GAO-01-260 (Washington, D.C.: January 2001).




              Page 2                                                    GAO-03-116 SBA Challenges
Major Performance and Accountability
Challenges




All of the 2001 performance and accountability challenges remain, although
SBA has made some progress in addressing them. For example, although
SBA now performs reviews of more of its preferred lending partners, the
reviews—and SBA’s oversight program in general—do not address key
issues, such as borrowers’ creditworthiness and eligibility or the financial
risk lenders’ SBA portfolios pose to SBA. The tragedy of September 11
challenged SBA’s disaster loan program, but with congressional input, SBA
modified some of its standard policies and procedures to expedite and
broaden its response to affected businesses. In July 2002, SBA’s new
leadership team announced a 5-year workforce transformation plan, in
part, on the basis of the need for change identified in our work.2 Further,
SBA has made some progress in addressing our recommendations for
improving its information technology management capabilities, but more
remains to be done before the agency can effectively acquire and manage
the information technology resources it needs. Finally, SBA has improved
its financial reporting process for fiscal year 2001 but continues to have
problems producing complete, accurate, and timely financial statements.
This report discusses these ongoing challenges at SBA and the agency’s
efforts to address them.




2
 Lloyd A. Blanchard, Chief Operation Officer, U.S. Small Business Administration, statement
before the Subcommittee on Workforce, Empowerment and Government Programs,
Committee on Small Business, U.S. House of Representatives, July 16, 2002.




Page 3                                                        GAO-03-116 SBA Challenges
                        Major Performance and Accountability
                        Challenges




SBA Needs to Continue   Lender oversight has become increasingly important as SBA, in its role of
                        providing credit or access to credit for small businesses, continues to
Improving Its           delegate loan approval authority to lending partners that make SBA-
Oversight of Its        guaranteed loans to small businesses. SBA’s largest business loan program,
                        7(a), is intended to serve small businesses that cannot obtain credit
Preferred Lenders       elsewhere. Under this program, SBA provides loan guarantees of up to 85
                        percent of the loan value. In fiscal year 2001, approximately 500 preferred
                        lenders approved $5.3 billion of the approximately $9.9 billion in 7(a) loans
                        granted. These lenders, which have full authority to make 7(a) loans
                        without prior SBA approval, are primarily banks but also include Small
                        Business Lending Companies (SBLC) licensed by SBA. Currently, 12 of the
                        14 SBLCs are preferred lenders; they account for 19 percent of 7(a) lending
                        dollar volume.

                        SBA has shared oversight responsibility for the private preferred lenders in
                        its 7(a) program and complete responsibility for overseeing SBLCs.
                        Because private lenders have federal bank regulators, such as the Office of
                        the Comptroller of the Currency, that oversee their overall financial safety



                        Page 4                                               GAO-03-116 SBA Challenges
Major Performance and Accountability
Challenges




and soundness, SBA’s oversight focuses on the lenders’ SBA loan portfolios
(including risk-management strategies) and compliance with program
requirements. SBLCs, however, have no regulators other than SBA, which
is therefore responsible for examining their financial condition as well as
their portfolios and compliance with 7(a) policies and procedures.

Since our June 1998 report on SBA’s lender oversight in general and our
November 2000 report on SBLC oversight,3 SBA has made progress in
developing a program to oversee its preferred lenders. The agency has built
oversight capabilities, identifying appropriate elements for an effective
program, initiating a safety and soundness examination program for
SBLCs, and reviewing more preferred lenders more often, but it has been
slow in fully implementing other changes. These include routine analyses
of risk in lenders’ SBA loan portfolios, further developing safety and
soundness examinations of SBLCs, performing more substantive
compliance reviews, consolidating responsibilities for oversight within the
agency, and establishing an effective information technology system for
monitoring loans. SBA’s Office of the Inspector General (OIG) has also
noted SBA’s progress in addressing the challenge of improving lender
oversight.4

SBA has not taken two important steps to address risk-management issues
related to lenders’ SBA loan portfolios. First, it does not routinely analyze
the financial risk lenders’ SBA loan portfolios pose to SBA; second, its
current reviews are not designed to evaluate decisions on borrowers’
eligibility. However, in its strategic plan and in public statements by senior
officials, SBA has said that risk-management issues have assumed a higher
priority since SBA moved from direct lending to guaranteeing loans made
by lending partners.




3
 U.S. General Accounting Office, Small Business Administration: Few Reviews of
Guaranteed Lenders Have Been Conducted, GAO/GGD-98-85 (Washington, D.C.: June 11,
1998) and Small Business Administration: Actions Needed to Strengthen Small Business
Lending Company Oversight, GAO-01-192 (Washington, D.C.: Nov. 17, 2000).
4
 U.S. Small Business Administration, Office of the Inspector General, FY 2002 Agency
Management Challenges (Jan. 16, 2002).




Page 5                                                       GAO-03-116 SBA Challenges
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SBA has contracted with a federal regulator to conduct safety and
soundness examinations of SBLCs and advise the agency on ways to
improve oversight. But the agency still has not developed specific policies
and procedures that require SBLCs to address any weaknesses or unsafe
and unsound conditions identified during examinations as we
recommended in 2000. In our December 2002 report on preferred lender
oversight,5 we recommended that SBA adopt regulations that define its
authority to take supervisory actions against all preferred lenders,
including SBLCs, and specify the conditions under which the actions would
take place. SBA replied that it is working diligently to address the concerns
we raised on this issue.

Although reviews of preferred lenders serve as SBA’s primary control
mechanism for ensuring compliance with the agency’s credit and eligibility
standards, we found that the current review process involves a cursory
examination of loan files rather than a qualitative assessment of lenders’
decisions on borrowers’ creditworthiness and eligibility for the program.
The Small Business Act states that “no financial assistance shall be
extended if the applicant can obtain credit elsewhere.”6 In addition, we
found that the “credit elsewhere” standard—a test to determine whether
the borrower can obtain credit without the SBA guarantee—is broad,
making a meaningful assessment of lenders’ decisions difficult. In light of
these findings, our 2002 report on preferred lender oversight recommended
that SBA develop specific criteria to apply to the credit elsewhere standard
and perform qualitative assessments of lenders’ performance and lending
decisions. In addition, we recommended that SBA incorporate strategies in
its review process to adequately measure the financial risk lenders pose to
SBA. SBA responded that it was considering approaches for additional
methods to assess the financial risk lenders pose and allow for qualitative
assessments of its lenders but disagreed with our recommendation that
they develop specific criteria to apply to the credit elsewhere standard. We
analyzed applicable law, regulations, and SBA procedures that discuss the
credit elsewhere standard in reaching our conclusion that the standard is
broad, making a meaningful assessment of lenders’ decisions difficult. We
continue to believe that SBA should develop specific criteria to apply the
credit elsewhere standard in a meaningful way.


5
 U.S. General Accounting Office, Small Business Administration: Progress Made but
Improvements Needed in Lender Oversight, GAO-03-90 (Washington, D.C.: Dec. 9, 2002).
6
15 U.S.C. section 636(a).




Page 6                                                     GAO-03-116 SBA Challenges
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SBA has made lending partner oversight an agency priority. However, SBA
does not coordinate this oversight through a single, independent
organizational unit with a clearly defined mission, responsibilities, and
lines of authority and does not appear to have the staff required to support
it. For example, rather than having one office carry out the lender oversight
functions, SBA uses two different offices within SBA’s Office of Capital
Access—the Office of Lender Oversight and Office of Financial
Assistance—as shown in figure 1. The Office of Lender Oversight was
established in fiscal year 1999 to oversee SBA’s lending partners. The Office
of Financial Assistance is responsible for promoting the 7(a) loan program
and encouraging lender participation. Moreover, the lender oversight may
not be conducted independently since the Office of Capital Access is also
responsible for promoting the agency’s lending program. Locating lender
oversight functions in the same office that promotes and implements SBA’s
lending programs presents a possible conflict of interest. Lastly, staff in the
Office of Lender Oversight attributed delays in completing oversight tasks
to limited staff resources. For example, sometimes, SBA did not provide
final reports to lenders until several months after the lender reviews or
SBLC examinations were completed.7 SBA had no requirement for timely
issuance of these reports until recently. A draft policy calls for delivery to
lenders within 90 days of completion.




7
 SBA’s OIG also identified as a problem the untimely issuance of SBLC examination reports.
See U.S. Small Business Administration, Office of the Inspector General, Improvements Are
Needed in the Small Business Lending Company Oversight Process, Report Number 2-12
(Mar. 20, 2002).




Page 7                                                        GAO-03-116 SBA Challenges
Major Performance and Accountability
Challenges




Figure 1: Preferred Lender Oversight Responsibilities within the Office of Capital
Access




Note: GAO analysis of SBA’s Office of Capital Access structure.


In past work analyzing organizational alignment and workload issues,8 we
have described the importance of (1) tying organizational alignment to a
clear and comprehensive mission statement and strategic plan and
(2) providing adequate resources to accomplish the mission. We found that
SBA’s Office of Lender Oversight does not currently meet these criteria.
Therefore, we recommended in our December 2002 report that SBA
separate the lender oversight function from the Office of Capital Access
and establish clear authority and guidance on the successor office’s
program independence, responsibilities, and staffing. SBA appeared to
disagree with this recommendation but did not respond to it specifically. In
written comments on our report on lender oversight, SBA emphasized that
the senior executives heading the Office of Lender Oversight and the Office
of Financial Assistance report independently to the head of the Office of
Capital Access. We continue to maintain that the current structural
alignment and overlapping responsibilities of the oversight functions

8
 U.S. General Accounting Office, Small Business Administration: Current Structure
Presents Challenges for Service Delivery, GAO-02-17 (Washington, D.C.: Oct. 26, 2001).




Page 8                                                            GAO-03-116 SBA Challenges
Major Performance and Accountability
Challenges




within the two offices hinder effective oversight and present the
appearance of a conflict, given the promotional and programmatic
responsibilities involved.

SBA continues to work toward creating a loan monitoring system (LMS)
that will permit better data collection, analysis and evaluation of loans, and
lender and program oversight. We are continuing to monitor SBA’s progress
on this system acquisition effort. In April 2000,9 we recommended eight
steps to help SBA complete planning actions mandated for the LMS,
including completing the analyses of benefits and cost of alternatives for
each business process identified through SBA’s business reengineering
effort, completing the definition of specific data quality standards, and
developing an acquisition strategy that ensures a sound justification exists
for pursuing custom-developed functions. In response, SBA stated that it
had completed, initiated, or planned actions for each recommended step.
After SBA efforts to develop the LMS experienced cost increases and
schedule delays, congressional appropriations committees, in early 2001,
asked SBA to develop project and spending plans before spending any
additional funds. In June 2002, SBA adopted a new approach for the LMS
project that is characterized as more achievable and less risky than the
previous approach. This new approach incorporates modernizing the
existing loan-related system as individual components, rather than building
LMS as a single comprehensive system, and building the lender oversight
component as soon as possible.

As a first step in this new approach, in September 2002, SBA awarded a
contract for consulting expertise to assist in managing the overall LMS
project and addressing mandated planning steps. SBA also plans to award
another contract to assist with the development and implementation of a
lender oversight system. We are continuing to monitor SBA’s progress.




9
 U.S. General Accounting Office, SBA Monitoring System: Substantial Progress Yet Key
Risks and Challenges Remain, GAO/AIMD-00-124 (Washington, D.C.: Apr. 25, 2000).




Page 9                                                     GAO-03-116 SBA Challenges
                         Major Performance and Accountability
                         Challenges




8(a) Program             SBA’s business development and contracting program for socially and
                         economically disadvantaged small businesses is known as the 8(a)
Improvements Are         program. Businesses certified to participate in the program are eligible to
Under Way, but Access    receive contracts that federal agencies set aside for 8(a) firms and
                         technical assistance and management training from SBA. In fiscal year
to Contracting Has Not   2001, almost 7,000 firms participated in the program and 8(a) firms
Increased                received about $6.3 billion in federal contracts—about 3 percent of total
                         federal procurement. Since January 2001, SBA has begun to implement
                         short- and long-term strategies to address problems in the 8(a) program.
                         However, recent data suggest that only a few firms continue to receive the
                         bulk of 8(a) funding and that the volume of federal procurement funding
                         awarded to 8(a) firms has not increased.

                         In our July 2000 report,10 we found, on the basis of a survey of 1,200 8(a)
                         firms, that almost all of the firms joined the program to obtain 8(a)
                         contracts and wanted SBA to provide contracting assistance. Yet we found
                         that relatively few firms received most of the 8(a) contracts, effectively
                         limiting the developmental opportunities available to other firms in the
                         program. As a result of our findings and our review of SBA’s 2001
                         performance plan, we recommended that SBA take several actions to
                         better meet the purpose of the program, meet the needs and expectations
                         of the firms in the program, and improve the agency’s ability to determine
                         how well the program is working. These actions included instructing
                         district offices to place their highest priority on helping inform firms about
                         contracting opportunities, periodically performing a nationwide survey of
                         8(a) firms to obtain measurable program data, providing a method for
                         collecting data on each firm’s training needs, and revising the program’s
                         success measure to more meaningfully assess the program’s impact. SBA
                         concurred with our recommendations.

                         SBA has fully implemented one of our four recommendations. SBA revised
                         the program success measure used in the 2001 performance plan. For the
                         2002 and 2003 performance plans, SBA returned to a measure that it had
                         used previously—the percentage of 8(a) firms that remain viable 3 years
                         after graduating from the 9-year program. An SBA official noted, however,
                         that this measure has limitations. SBA is trying to develop a more effective


                         10
                          U.S. General Accounting Office, Small Business: SBA Could Better Focus Its 8(a)
                         Program to Help Firms Obtain Contracts, GAO/RCED-00-196 (Washington, D.C.: July 20,
                         2000).




                         Page 10                                                   GAO-03-116 SBA Challenges
Major Performance and Accountability
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measure to assess the needs of the 8(a) firms and the program’s success. In
September 2001, SBA agreed with its Inspector General’s recommendations
to improve performance measurement for the 8(a) program by the end of
fiscal year 2002. According to staff from SBA’s CFO, SBA had implemented
in December 2002 a tracking system to follow firms that are terminated
from the 8(a) program, which was one of the four recommendations.

In addition, SBA has made progress toward implementing the remaining
recommendations. SBA has begun instructing district offices to prioritize
informing firms about contracting opportunities. For example, its goals for
district offices for fiscal year 2001 included obtaining contracts for 5
percent of the 8(a) firms that had been in the program for 2 years or more
that did not already have contracts. The district offices also were expected
to conduct one procurement training course specifically for 8(a) firms and
to inform all 8(a) firms that the course was mandatory. For fiscal year 2002,
the 8(a) contracting goal was increased to 10 percent, while the
procurement training goal was eliminated. SBA officials indicated that the
district offices met the contracting goal for fiscal year 2002. SBA officials
also indicated that initial efforts had been made to conduct a nationwide
survey of 8(a) firms and to collect data on each firm’s training needs. A
draft survey was developed, but agency officials indicated that the survey
was not finalized due to a lack of funding. SBA did pilot test a software
application to identify a firm’s training needs, and it plans to incorporate
this capability into its information system.

We also reported in July 2000 that SBA’s 8(a) information system, which
was intended to be a comprehensive monitoring tool, did not meet the
information technology needs of either headquarters or district officials.
Although program officials have recognized the need to update the system
since 1996 and have planned updates, the system has not been substantially
improved. SBA officials cited frequent leadership changes at SBA in the
late 1990s as the proximate cause of these failures. We recommended that
SBA design an integrated 8(a) information system, and SBA concurred.
SBA has developed a strategic information technology plan for the 8(a)
program that includes an integrated system. However, according an SBA
official, implementing the entire plan will require between $5 and $7 million
and will take at least 5 years.




Page 11                                              GAO-03-116 SBA Challenges
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Challenges




The 8(a) program is also affected by Executive Order 13170, Increasing
Opportunities and Access for Disadvantaged Businesses, issued in
October 2000. This order mandates nondiscrimination in federal
procurement opportunities for small disadvantaged businesses, including
8(a) firms, and requires affirmative action to include these businesses in
federal contracting. The order placed several requirements on all executive
departments and agencies with procurement authority and gave certain
agencies, such as OMB and SBA, additional responsibilities. For instance,
each agency was to develop a comprehensive long-term plan to implement
the order and submit the plan to OMB within 90 days. OMB’s
responsibilities included reviewing each comprehensive plan and reporting
to the President on the sufficiency of the plans. SBA’s responsibilities
included establishing 8(a) contracting goals with each agency, reviewing
agencies’ use of contract bundling,11 and ensuring that each department’s
goals and procurement performances were publicly available.

Some progress has been made in implementing the order. According to an
OMB official, as of September 2002, several departments and agencies had
submitted comprehensive plans, but OMB had not assessed the plans and
had not submitted a report to the President. SBA officials reported that
they have recommended 8(a) contracting goals for each of the agencies,
conducted mid-year evaluation of agencies’ achievements, and notified the
agencies’ of their performance. SBA also conducted a review of contract
bundling during fiscal year 2001 and issued a report to Congress. Lastly,
contract performance reports for fiscal years 2000 and 2001 are now
available to the public on the SBA Web site.12

In addition to responding to our recommendations and the executive order,
SBA has undertaken other initiatives to improve the 8(a) program. For
example, according to SBA officials, SBA has begun trying to expedite the
8(a) award process by enabling federal agencies to work directly with the
8(a) firms. Specifically, SBA has limited its role by passing on to the
procuring agency many of the contract procurement functions under a


11
 Contract bundling is the consolidation of two or more procurement requirements for
goods or services previously provided or performed under separate, smaller contracts into a
solicitation of offers for a single contract that is likely to be unsuitable for award to a small
business. For more information on contract bundling, see U.S. General Accounting Office,
Small Businesses: Limited Information Available on Contract Bundling's Extent and
Effects, GAO/GGD-00-82 (Washington, D.C.: Mar. 31, 2000).
12
     SBA’s Web site is http://www.sba.gov/GC/goals/.




Page 12                                                            GAO-03-116 SBA Challenges
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partnership agreement. As of July 2002, SBA had 29 partnership
agreements with other federal agencies. In addition, in January 2002,
according to SBA officials, a working group was formed to reexamine the
entire 8(a) program and refocus the program on achieving its statutory
intent. As part of this effort, the working group is examining such issues as
business owners’ motivation for participating in the 8(a) program and
automating the monitoring process. The working group is exploring both
regulatory and statutory strategies to achieve its program goals. As of mid-
September 2002, the working group was soliciting comments from SBA
staff but had not submitted its report to SBA management for review.




Page 13                                              GAO-03-116 SBA Challenges
Major Performance and Accountability
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Despite these efforts, the SBA Inspector General reported in January 2002
that the 8(a) program continues to face three serious management
challenges: (1) increasing 8(a) firms’ access to business development and
federal contracts; (2) defining clearer standards to determine “economic
disadvantage,” a criteria firms must meet to participate in the program; and
(3) clarifying rules to deter 8(a) firms from passing through procurement
activity to non-8(a) firms.13 The Inspector General indicated that SBA had
made no measurable progress during fiscal year 2001 in addressing these
challenges. For example, access to 8(a) funding and the volume of federal
procurement funding awarded to 8(a) firms had not increased nationally.
We reported that in 1998 about 3 percent of the firms in the 8(a) program
received half the dollar value of all 8(a) contract dollars. About half the
firms did not receive any contracts.14 SBA’s Inspector General reported
similar results for fiscal year 2000.15 Moreover, federal procurement data
indicate that between fiscal years 1998 and 2001 the percentage of total
federal contract funding awarded to 8(a) firms declined from 3.6 to 2.9
percent. This trend is in keeping with the recent decline in the proportion
of federal procurement awarded to small businesses.16 At a congressional
hearing in February 2002,17 SBA attributed the decline in 8(a) contracting to
several factors, including government credit card purchases, federal supply
schedule contracts, and contract bundling.




13
 U.S. Small Business Administration, Office of the Inspector General, FY 2002 Update of
the Most Serious Management Challenges (Jan. 16, 2002).
14
     GAO/RCED-00-196.
15
 U.S. Small Business Administration, Office of the Inspector General, Most Serious
Management Challenges (Jan. 16, 2002).
16
 U.S. General Accounting Office, Small Business: Trends in Federal Procurement in the
1990s, GAO-01-119 (Washington, D.C.: Jan. 18, 2001).
17
 The President’s Proposed Budget for the Small Business Administration Fiscal Year
2003, hearing before the Committee on Small Business, U.S. House of Representatives,
Serial No. 107-43, February 13, 2002.




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SBA Provided Loans to    SBA’s Office of Disaster Assistance makes loans directly to households to
                         repair or replace damaged homes and personal property and help
Individuals and Small    businesses recover from both physical damage and substantial economic
Businesses Affected by   losses. SBA’s primary objective when responding to disasters is to offer
                         victims quality, timely, easy-to-access, and cost-effective loans to rebuild
the September 11,        their homes and businesses.
2001, Attacks
                         Since September 11, 2001, SBA has faced the unique challenge of providing
                         loans to restore homes and businesses across the country that were
                         affected by the terrorist attacks. In just over 1 year following the attacks,
                         SBA approved almost 9,700 home and business loans totaling about $966
                         million in loan funds to victims of the attacks. Small businesses in those
                         areas of New York and Virginia that were officially declared disaster areas
                         were eligible to apply for both an Economic Injury Disaster Loan (EIDL)
                         and a physical disaster loan to help fund repairs to business property.
                         Certain small businesses nationwide that were affected by the attacks were
                         eligible to apply for an expanded EIDL program, and those affected by the
                         loss of employees who were called up as reserve military personnel could
                         apply for the military EIDL program. Home and business owners in the
                         federally declared disaster areas received just under half of the disbursed
                         loans; the remainder went to eligible businesses nationwide (see fig. 2).




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Figure 2: Geographic Distribution of September 11 Related Loan Amounts Disbursed as of September 30, 2002




                                         Note: GAO analysis of SBA data.




                                         Page 16                                               GAO-03-116 SBA Challenges
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SBA data suggest that, overall, the agency processed loans related to
September 11 faster than it processed loans in response to previous
disasters. For example, SBA processed loans to small businesses affected
by the attacks in about 13 days on average, compared with about 16 days
on average for other business disaster loans during fiscal year 2001. The
faster processing may be attributed, in part, to the unique characteristics of
the attacks and complaints from small business applicants that prompted
SBA and Congress to adapt the loan program for September 11 victims.

SBA’s response commenced immediately after the terrorist attacks
occurred, when SBA disaster officials established communication with the
Federal Emergency Management Agency (FEMA) and state emergency
management officials. By the afternoon of September 11, officials from
SBA’s Niagara Falls area office had arrived in lower Manhattan to begin
coordinating the agency’s recovery efforts with the overall federal
response. SBA officials were meeting with disaster victims by
September 13.

In the immediate aftermath of the attacks in New York City, local
communications and travel were disrupted. SBA employed two strategies
in September 2001 to make it more convenient for victims to apply for SBA
loans. First, SBA sent agency officials door-to-door to provide loan
applications to businesses. Second, SBA began training officials from other
SBA programs with offices in New York, such as the Small Business
Development Centers (SBDC), thereby enabling victims to go to other
locations in New York to receive disaster loan applications and assistance.
Eventually, over 40 SBA locations were available to assist applicants.

In the weeks and months following the terrorist attacks, small business
owners complained to Congress about SBA’s disaster loan program. Small
business owners’ complaints involved issues such as (1) the effect of the
attacks on small businesses nationwide, (2) SBA’s communication with
applicants with low English proficiency, (3) size standards for small
businesses, (4) loan terms and underwriting criteria, and (5) the time
required to receive loan approval. These complaints prompted SBA and
Congress to modify the loan program for September 11 victims.

Small businesses complained that eligibility for SBA loans was limited to
firms located within the declared disaster areas, yet the September 11
terrorist attacks had caused economic injury to small businesses
nationwide. Small business owners, representing aviation-related, travel,
and tourism industries from across the nation, reported significant losses



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in revenue as a result of the attacks, which forced these owners to furlough
and/or terminate numerous jobs. These small businesses identified SBA as
a potential source of assistance to help them recover from the economic
injury caused by the attacks.

In response to these concerns, in October 2001, SBA made economic injury
disaster loans available to small businesses nationwide. SBA’s expanded
EIDL program enabled businesses outside of the declared disaster areas to
apply for loans to meet ordinary and necessary operating expenses that
they were unable to meet, due to the attacks or related action taken by the
federal government between September 11 and October 22, 2001.

Small businesses complained that the application process was particularly
confusing and time-consuming for applicants with low English proficiency.
To address these concerns, SBA printed informational packets in languages
such as Spanish and Chinese; provided SBA centers with staff who could
speak Arabic, Croatian, Mandarin Chinese, and Spanish; and was prepared
to send employees with additional language capabilities to application
sites. In response to complaints from businesses adversely affected by the
terrorist attacks that existing size standards—SBA’s official guidelines for
determining whether a firm constituted a small business—were overly
restrictive, in February 2002, SBA retroactively applied the recent inflation-
adjusted size standards to all September 11 economic injury loan
applicants. In addition, in March 2002, SBA increased the threshold
specifically for travel agencies adversely affected by the attacks from
$1 million to $3 million in annual revenues.

Small businesses affected by the terrorist attacks also complained that
SBA’s underwriting criteria for disaster loans were too restrictive. For
example, two small business owners testified that SBA withdrew their
applications because the owners would not put their homes up for
collateral. The business owners argued that it was too risky to put their
homes up for collateral, especially since the survival of their businesses
was uncertain. A New York SBDC official questioned the appropriateness
of SBA’s disaster loan underwriting criteria for high-cost areas. He stated
that SBA should consider the location of the businesses affected by the
attacks—New York City—where some factors relating to the high cost of
doing business fall outside of the norms.




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Although SBA approved millions in loans, 52 percent of the loan
applications related to September 11 were withdrawn or declined. SBA
stated that the agency made every effort to approve each application by
applying more lenient credit standards than private lenders.18 However, to
minimize costs and losses, SBA officials stated they had to adhere to their
credit standards. According to SBA, the most common reason for declining
September 11 loan applications was the applicant’s inability to repay the
loan. SBA officials stand by their decisions not to approve loans that
ultimately would result in the loss of a victim’s home or business. In
addition, we note that such loans would also result in losses to the
government.

Finally, applicants complained that it took too long for SBA to approve loan
applications. SBA responded to these complaints by implementing
procedures in October 2001 to expedite two stages of the process—loan
processing and loan disbursements. To expedite loan processing, loan
officers calculated economic injury loan amounts on the basis of the
applicant’s monthly gross margin instead of calculating loan amounts using
extensive economic analysis. To expedite the disbursement process, SBA
reduced the amount of documentation needed for amounts of up to
$50,000.

Despite SBA’s efforts to be responsive to the needs of small businesses
affected by the terrorist attacks, business owners asserted that SBA’s
existing disaster program did not have the authority to provide adequate
loans to small businesses within the declared disaster areas. In January
2002, Congress enacted Public Law 107-117. In addition to providing
$150 million in supplemental appropriations, the public law made several
changes in the disaster loan program, specifically for small businesses
affected by the September 11 attacks. The changes included raising the
maximum loan amount from $1.5 to $10 million and deferring payments
and interest accrual for 2 years.

SBA officials believe that many of the complaints about the disaster
program result from a clear difference between victims’ expectations of
SBA’s disaster program and what the program really offers. For example,


18
 SBA provides loans to the owners of homes and businesses who have no credit available
elsewhere at a maximum rate of 4 percent annual interest for up to 30 years. For physical
damage to homes or businesses whose owners have credit available elsewhere, SBA
provides loans at a maximum rate of 8 percent for up to 5 years.




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                        when some victims are told they can receive “assistance” from SBA, they
                        assume that this assistance is in the form of grants instead of loans. For
                        this reason, SBA officials believe it is important to have a close relationship
                        with the media and public officials so that disaster victims receive accurate
                        information about the nature of SBA assistance.

                        While it is too early to assess the outcome of SBA’s lending related to
                        September 11, SBA has exceeded all of its process-oriented goals in
                        responding to this disaster. For example, while SBA aims to establish field
                        presence within 3 days of a disaster declaration, SBA officials indicated
                        that they were on site making preparations to serve disaster victims the
                        same day the terrorist attacks occurred. Also, although SBA’s goal is to
                        process 80 percent of disaster loans within 21 days, the agency processed
                        September 11-related loans in an average of about 13 days. In addition, SBA
                        exceeded its goal of making 95 percent of initial disbursements 5 days after
                        receipt of closing documents, ordering initial disbursements in 2 days, on
                        average. Although SBA exceeded all of its timeliness goals in responding to
                        the September 11 terrorist attacks, we have some concerns about the
                        measures and goals that SBA uses to assess its performance in providing
                        disaster assistance.



Disaster Loan Program   In our June 2001 report,19 we reviewed SBA’s 2000 performance report,
                        which described its performance for fiscal year 1999, and the 2002
Performance Measures    performance plan that described its future program goals. We observed
Are of Limited Use      that SBA needed to improve the quality of the measures that it uses to
                        assess its performance and improve its performance plan for the disaster
                        loan program. Specifically, we found that SBA used inconsistent and
                        subjective measures, and that the document used to report program
                        performance to Congress lacked key information that would have provided
                        a more accurate picture of both the performance measures and the results.

                        Since the June 2001 report, SBA has not significantly improved either its
                        performance measures or the performance plan. We found that two of the
                        measures SBA uses to assess performance describe only one aspect of the
                        loan application and disbursement processes. Moreover, these measures do
                        not capture the notable progress the program has made in improving its


                        19
                         U.S. General Accounting Office, Small Business Administration: Status of Achieving Key
                        Outcomes and Addressing Major Management Challenges, GAO-01-792 (Washington, D.C.:
                        June 22, 2001).




                        Page 20                                                     GAO-03-116 SBA Challenges
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loan processing—progress that ultimately affects disaster loan applicants
and borrowers.

SBA currently uses six measures to assess performance—three to assess
outputs and three to assess outcomes. The measures that assess the
outputs of SBA’s service to disaster victims are (1) establishing a field
presence within 3 days of a disaster declaration, (2) processing loan
applications within 21 days of receiving them, and (3) ordering initial loan
disbursements within 5 days of receiving the closing documents. Officials
from SBA's disaster area offices who manage SBA’s disaster assistance
teams questioned whether these measures are appropriate indicators of
timely service to disaster victims. For example, one area office official
characterized the 3-day field presence measure as artificial and suggested
that it does not drive the agency to improve its performance. SBA has met
this measure 100 percent of the time since fiscal year 1998. Officials from
area offices indicated that planning, interagency coordination, and
technology have enabled them to have SBA staff on site and preparing to
assist disaster victims within 1 day of a disaster declaration. According to
area office staff, delays in establishing a field presence generally occur
because SBA is waiting for decisions from state officials.

Several area office officials also questioned the appropriateness of the
second measure, which required in fiscal year 2000 that SBA process 70
percent of its loan applications within 21 days of receiving them. In fiscal
year 2001, the target was increased to 80 percent. One official suggested
that providing timely assistance does not always mean providing assistance
in the shortest amount of time. Rather, providing timely assistance depends
on the needs of disaster victims. Moreover, SBA exceeded this goal for
fiscal years 2001 and 2002. SBA data indicate that in fiscal year 2002, the
agency was able to process home loans in about 10 days, on average, and
the more complex business loans were processed in about 13 days.

SBA has made several improvements to expedite loan processing. For
example, SBA implemented the Disaster Personnel Reserve Corps in order
to have trained personnel available to assist in responding to disasters. One
field office official thought that the availability of the reserve corps had
helped the office attain the 21-day processing goal for fiscal year 2001. In
addition, SBA has declined loans with poor credit scores immediately,
saving the staff time that might have been spent appraising property for
these loans.




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In 2002, SBA began reporting data on the third output measure—ordering
initial disbursements within 5 days of receiving closing documents. Yet area
office staff also question the appropriateness of this measure. Before 2002,
SBA had an internal goal of ordering disbursements within 3 days of
receiving closing documents. According to officials, when SBA included
this measure in the performance plan, the disbursement target was
increased to 5 days. Because agency officials are used to being subject to
the stricter 3-day standard, they indicated that the 5-day standard can be
met with ease. One area office piloted an expedited disbursement process
for disbursing loans of between $25,000 and $50,000.

SBA uses the next three measures to assess outcomes, or effects, of SBA
lending on disaster victims: (1) number of homes restored to predisaster
condition, (2) number of businesses restored to predisaster condition, and
(3) customer satisfaction. The principal limitation of SBA's measures is
that they only account for a portion of the outcomes. For example, SBA
reports on the number of home and business loans approved as proxy
measures for the number of homes and businesses restored to predisaster
condition. But SBA staff explained that even when loans are approved,
borrowers might cancel the loan or reduce the amount of the loan to avoid
using their home as collateral. Thus, this proxy measure likely
overestimates the number of homes and businesses restored. SBA
recognizes that these proxy measures are inadequate and is in the process
of identifying more accurate ones.

To measure customer satisfaction, SBA uses the results of its survey of
successful loan applicants. Yet, every disaster area office director indicated
that all disaster victims are SBA customers and that a broader population
should be surveyed. In 2001, the SBA Inspector General and we made the
same suggestion to SBA. As we indicated then, the current survey method
is likely to produce positively skewed responses. However, headquarters
officials were resistant to surveying those who were denied loans because
they presumed the applicants’ responses would be negative. SBA does not
currently plan to expand its fiscal year 2002 survey to a sample of all loan
applicants.

Like other federal agencies, SBA described its long-term performance goals
and associated measures, previously described, in its annual strategic plan
for fiscal years 2001 to 2006 and will provide annual reports detailing its
progress in meeting these goals. However, in our 2001 report, we found
that the fiscal year 2000 performance report for the disaster loan program
had several limitations, such as inadequate explanations and inconsistent



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or subjective information. Recent performance plans have similar
limitations. For instance, the 2003 performance plan does not explain why
the strategic goal for the disaster program was changed. In the 2002 plan,
SBA defined its performance goal as “helping families and businesses
recover from disasters.” In the 2003 plan, that goal has become
“streamlining disaster lending”—a shift in focus from an outcome to an
SBA process. OMB does not recommend, in its guidance, the approach SBA
adopts in its 2003 plan.

In addition, the 2002 and 2003 plans do not explain the linkages between
program strategies and achieving performance goals for disaster lending,
and do not explain how the performance measures and goals were
developed. These omissions make it difficult to understand how and if SBA
expects to improve or sustain its loan processing performance.

The performance plans contain incomplete or inaccurate information on
some performance indicators. For example, despite Office of Management
and Budget (OMB) and SBA guidance, validation and verification
information on field presence and loan processing measures is omitted,
making it difficult to assess the quality of performance data. In addition, the
2003 performance plan indicates that data on the number of homes
restored to predisaster condition are based on on-site inspections of
homes. However, SBA officials indicated that the actual source of data for
homes restored to predisaster condition is the number of original home
loans approved.

In our January 2003 report, we recommended that SBA develop a better
performance plan for the Disaster Loan Program.20 Specifically, the plan
needs to include more outcome measures and assess more significant
outputs. In addition, we recommended that SBA revise and expand its
research to improve its current measures and evaluate program impact. To
develop these measures, SBA should conduct research, such as surveying
its field staff and loan applicants, to identify both the direct and indirect
benefits that disaster victims receive by participating in the program. SBA
officials generally agreed with our recommendations.




20
 U.S. General Accounting Office, Small Business Administration: Response to September
11 Victims and Performance Measures for Disaster Lending, GAO-03-385 (Washington,
D.C.: Jan. 29, 2003).




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Strategic Human      SBA continues to implement some changes in its strategic human capital
                     management21 and to develop approaches to streamlining its operations,
Capital Management   but this critical area still needs to be strengthened. Since we issued our
Needs to Be          June 2001 status of management challenges report and an October 2001
                     report on SBA’s organizational structure,22 SBA has continued to build on
Strengthened         its vision for modernizing the agency by developing a 5-year workforce
                     transformation plan designed to transform the agency and its workforce “to
                     meet the modern demands of small business.”

                     We reported in October 2001 that SBA’s current organizational structure
                     had weaknesses that contributed to the challenges it faced in delivering
                     services to the small business community. Our 2002 review of lender
                     oversight, previously discussed in this report, and the loan asset sales
                     program also substantiated these weaknesses.23 Organizational alignment
                     can be an important factor in determining an agency’s efficiency and ability
                     to administer its programs. By organizational alignment, we mean the
                     integration of organizational components, activities, core processes, and
                     resources to support efficient and effective achievement of outcomes.
                     Specifically, we found that ineffective lines of communication, confusion
                     over the mission of district offices, complicated and overlapping
                     organizational relationships, and a field structure that did not consistently
                     match mission requirements combined to impede staff efforts to deliver
                     services effectively.

                     Figure 3 illustrates SBA’s complex, overlapping organizational
                     relationships, particularly between field and headquarters units. Senior
                     officials said that although some of these complex organizational
                     relationships stem from legislative requirements such as specified
                     reporting relationships, past realignment efforts that changed how SBA
                     performed its functions while leaving aspects of the previous structure
                     intact have also played a part.


                     21
                      Key elements of modern strategic human capital management include strategic human
                     capital planning and organizational alignment; leadership continuity and succession
                     planning; acquiring and deploying staff whose size, skills, and deployment meet agency
                     needs; and creating results-oriented organizational cultures.
                     22
                          GAO-01-792 and GAO-02-17.
                     23
                      GAO-03-90 and U.S. General Accounting Office, Small Business Administration:
                     Accounting Anomalies and Limited Operational Data Make Results of Loan Sales
                     Uncertain, GAO-03-87 (Washington, D.C.: Jan. 3, 2003).




                     Page 24                                                      GAO-03-116 SBA Challenges
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Figure 3: Organizational Relationships among SBA Headquarters and Regions, Districts, and Other Field Units




                                          Notes:
                                          GAO analysis of SBA organization.
                                          This figure refers to the following SBA offices: Office of Field Operations (OFO), Office of Government
                                          Contracting/Business Development (GC/BD), Office of the General Counsel (OGC), and Government
                                          Contracting Area Offices (GC Areas). This figure also uses the term “storefronts” to characterize Small
                                          Business Development Centers, Business Information Centers, Women’s Business Centers, and other
                                          such locations where the public accesses SBA programs.




                                          Page 25                                                                GAO-03-116 SBA Challenges
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For example, the district offices have a direct relationship not only with
both the Office of Field Operations and a regional office, but also with the
headquarters offices managing their programs. District staff working on
SBA loan programs report to their district management, while loan
processing and servicing center staff report directly to the Office of Capital
Access in headquarters. However, staff from district office loan programs
sometimes need to work with the loan processing and servicing centers to
get information or expedite loans for lenders in their district. Because loan
processing and servicing centers report directly to the Office of Capital
Access, requests that are directed to the centers may go from the district
through the Office of Capital Access then back to the centers, complicating
efforts to process and service loans quickly and efficiently. SBA district
officials told us that these multiple lines of communication with the district
offices have resulted in conflicting or redundant requests and difficulty
communicating priorities. SBA’s Inspector General found similar
communication problems within SBA.24

We also found confusion about the primary role of SBA’s district offices.
Headquarters executives said that the main customer of the district offices
was the small business community. However, district office officials told us
that their primary clients were the lenders that they worked with, that is,
encouraging the lenders to make more SBA guaranteed loans, providing
support, and conducting oversight reviews. SBA headquarters executives
said that the role of the district office had been in transition since the
agency had begun centralizing lending activities. But district office officials
noted that they were still responsible for interacting closely with lenders,
especially small lenders, and have a role in servicing problem loans and
liquidating defaulted loans.




24
 U.S. Small Business Administration, Office of the Inspector General, Advisory
Memorandum: Report on the Results of SBA Management Challenge Discussion Groups,
#01-04-01 (Apr. 4, 2001).




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SBA continues to deal with the problem of getting properly trained people
into the right places, especially the districts, to manage the 7(a) and 8(a)
programs. SBA officials said that 7(a) staff had seen their roles change
from loan processing to overseeing financial institutions, and that 8(a)
Business Opportunity Specialists were facing a similar change from
monitoring program compliance to acting as business development
coaches. Likewise, our review of the role of SBA’s Commercial Market
Representatives—staff who promote small business subcontracting—
found that although SBA had changed what these representatives did, it
had not strategically planned these changes or assessed their collective
impact.25 We recommended that SBA strategically assess, evaluate, and
plan the role of these staff. SBA agreed that it needed to rethink the market
representatives’ role and develop outcome and impact measures to better
assess their effectiveness. In addition, SBA’s 5-year workforce
transformation plan addresses the need to inventory the skills of all SBA
employees and provide professional development opportunities as needed.

Since 1999, SBA has been selling its disaster assistance and defaulted
business loans to reduce the amount of debt it services so that the agency
could realign employees to focus more on serving small businesses.
However, the role of loan asset sales in facilitating a realignment of SBA’s
workforce may be less than initially expected. In our January 2003 report26
on SBA’s loan asset sales, we found that although loan servicing workloads
have been reduced, the reduction has not yet translated into moving
employees out of servicing positions and into more mission-critical
positions. Some of the benefits SBA had expected may not materialize or
SBA may have overstated them. Furthermore, some district office officials
were doubtful that the loan sales would significantly reduce their role in
servicing and liquidating business loans, since most of the loans SBA has
sold were from the disaster assistance program. We recommended that
SBA more thoroughly analyze the benefits and other effects of loan asset
sales on agency operations. In commenting on our draft report, SBA did not
specifically respond to this recommendation. SBA’s 5-year workforce
transformation plan acknowledged the need to provide professional
development opportunities for any employees affected by realigning
resources due to the asset sales or other changes.

25
 U.S. General Accounting Office, Small Business Administration: The Commercial
Marketing Representative Role Needs to Be Strategically Planned and Assessed, GAO-03-54
(Washington, D.C.: Nov. 1, 2002).
26
     GAO-03-87.




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                        According to the administration’s executive branch management scorecard
                        report for SBA,27 SBA recognizes the need to restructure but made little
                        progress in doing so during fiscal year 2001. The 5-year workforce
                        transformation plan recognizes SBA’s need to restructure its workforce,
                        privatize noncore functions, adjust incentives and goals, and streamline its
                        headquarters’ operations. SBA’s leaders have acknowledged the major
                        elements we have identified that underpin a successful workforce
                        transformation—strategic planning; strategic human capital management;
                        senior leadership and accountability; alignment of activities, processes,
                        and resources to support mission achievement; and internal and external
                        collaboration.28 They plan to use these elements to guide the agency as it
                        pursues workforce transformation.



SBA Has Made Some       In May 2000,29 we reported that SBA had not established policies and
                        defined processes in a number of critical information technology (IT)
Progress in Improving   areas, including IT investment management, IT architecture, software
Its Information         development and acquisition, information systems security, and human
                        capital management. As a result, SBA could not ensure that it was
Technology, but More    effectively selecting and controlling its IT investment management,
Remains to Be Done      ensuring its systems are compatible and would meet agency needs,
                        performing essential software development and acquisition activities,
                        protecting critical information and assets from inappropriate use, and
                        identifying the knowledge and skills needed to support its IT management
                        mission. We made a number of recommendations in that report to improve
                        SBA’s IT management capabilities. SBA has made progress on some of our
                        recommendations, such as setting a target date for the implementation of
                        architecture maintenance procedures. However, SBA has not provided
                        evidence that it has completed actions to implement significant portions of
                        all the recommendations made in May 2000. Therefore, the agency cannot


                        27
                         The Executive Branch Management Scorecard is a grading system used by the
                        administration to grade agencies’ efforts at executing management improvements in the
                        areas of human capital, competitive sourcing, financial management, e-government, and
                        budget/performance integration.
                        28
                         U.S. General Accounting Office, Management Reform: Elements of Successful
                        Improvement Initiatives, GAO/T-GGD-00-26 (Washington, D.C.: Oct. 15, 1999) and
                        Executive Guide: Effectively Implementing the Government Performance and Results Act,
                        GAO/GGD-96-118 (Washington, D.C.: June 1996).
                        29
                         U.S. General Accounting Office, SBA Needs to Establish Policies and Procedures for Key
                        IT Processes, GAO/AIMD-00-170 (Washington, D.C.: May 31, 2000).




                        Page 28                                                      GAO-03-116 SBA Challenges
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ensure that policies and practices are in place to effectively acquire and
manage its IT resources. We will continue to monitor SBA’s progress in
addressing weaknesses in each of these critical IT areas.

In the investment management area, we recommended that SBA adopt
policies and procedures for selecting, controlling, and evaluating its IT
investments. Since we made our recommendations, SBA has initiated
efforts to select and control its major IT investments—including
prioritizing projects for investment and tracking some projects’ progress on
cost and schedule milestones. However, SBA has more to do to complete
its selection and control processes—such as developing a standardized
cost-benefit methodology and implementing control procedures for major
IT projects. SBA has not initiated postimplementation reviews.

To ensure that its systems were compatible and met agency needs in the IT
architecture area, we recommended that SBA create a process for
developing its architecture and establish policies and procedures for
maintaining its architecture to ensure the compatibility of its systems and
software. SBA has not yet implemented policies and procedures for
architecture development and maintenance. However, SBA officials
reported that they expect to have a maintenance policy in place by
February 2003.

In the software development and acquisition area, we recommended that
SBA establish and enforce an agencywide systems development
methodology as well as policies and procedures for software acquisition
and development. Since we made those recommendations, SBA has
established its systems development methodology but has not yet
established policies and procedures for software development and
acquisition.




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                         Major Performance and Accountability
                         Challenges




                         In the area of information systems security, we made a series of
                         recommendations to improve SBA’s ability to identify, address, and manage
                         security risks. Since we made our recommendations, SBA has established
                         policy and procedures for information systems security, made progress in
                         ensuring the security of 38 of its most sensitive computer systems, and
                         developed computer security awareness training. However, in January
                         2002, SBA’s Inspector General raised concerns about agencywide security
                         management, systems access controls, and computer security testing.30

                         In the human capital management area, we recommended that SBA
                         undertake a series of steps to identify its information technology
                         knowledge and skills requirements, assess its current information
                         technology skills, and develop strategies to acquire and maintain
                         information technology skills. Since we made our recommendations, SBA
                         has completed a technical skills assessment for IT staff, but is still in the
                         early stages of examining its workforce needs. In addition, according to its
                         fiscal year 2003 performance plan, SBA intends to collect and maintain data
                         on IT skills requirements and staff IT skills.



Challenges Still Exist   SBA faces major challenges before it can achieve financial accountability.
                         Most notably, it needs to address problems in accounting for and reporting
to Achieving Budgetary   its loan asset sales and the subsidy allowance account. These problems
and Financial            have impacted past and could impact future subsidy cost estimates and the
                         opinions on SBA’s financial statements. SBA also continues to experience
Accountability           problems with its overall financial reporting process.

                         In our recently issued report on SBA's loan asset sale program,31 we
                         reviewed SBA’s budgeting and accounting for loan sales and found that SBA
                         incorrectly calculated the accounting losses on the loan sales and lacked
                         reliable financial data to determine the overall financial impact of the sales.
                         Further, because SBA did not analyze the effect of loan sales on its
                         remaining portfolio, its reestimates of loan program costs for the budget
                         and financial statements may contain significant errors. In addition, SBA
                         could not explain significant declines in its loss allowance account for
                         disaster loans. Until SBA corrects these errors and determines the cause of


                         30
                          U.S. Small Business Administration, Office of the Inspector General, Most Serious
                         Management Challenges (Jan. 16, 2002).
                         31
                              GAO-03-87.




                         Page 30                                                       GAO-03-116 SBA Challenges
Major Performance and Accountability
Challenges




the precipitous decline in the loss allowance account, SBA’s financial
statements cannot be relied upon. Further, the reliability of current and
future subsidy cost estimates will remain unknown. These errors and the
lack of key analyses also mean that congressional decision-makers are not
receiving accurate financial data to make informed decisions about SBA’s
budget and the level of appropriations the agency should receive. We
recommended that, before conducting additional loan asset sales, SBA
correct the accounting and budgeting errors and misstatements. SBA
generally agreed with our overall findings and recommendations,
especially the need to better assess the financial impact of SBA’s loan sales
program. SBA also stated that it is actively engaging a contractor to help
resolve the accounting and budgetary issues and has worked extensively
with its independent auditors to identify causes and options for resolving
the issues we identified. Furthermore, we recommended that the Inspector
General, in conjunction with SBA’s independent auditors, assess the impact
of any identified errors in the financial statements and determine whether
previously issued audit opinions for fiscal years 2000 and 2001 need to be
revised. The Inspector General and SBA’s independent auditors agreed with
our findings and informed us in December 2002 that SBA’s independent
auditors plan to withdraw their unqualified audit opinion on the fiscal years
2000 and 2001 financial statements and issue disclaimers of opinion. The
independent auditors have stated that their audit opinions for 2000 and
2001 should no longer be relied upon because they may be materially
incorrect due to the errors identified in our report on SBA’s loan asset sales
program.

In addition to problems in accounting for loan sales and the subsidy
allowance, SBA’s overall financial reporting process remained a material
internal control weakness in fiscal year 2001. Documentation of the
financial reporting process and procedures improved; however, the
independent public accountant reported that the overall process worsened.
For example, SBA did not deliver its financial statements to the
independent public accountants performing the fiscal year 2001 audit by
the originally scheduled dates. SBA provided revised dates extending
delivery of financial statements and supporting documentation by 11 to 21
days. When finally delivered, the financial statements contained numerous
errors and misclassifications. For example, nearly $350 million in gross
costs were reported under the wrong line item on the Statement of Net
Cost, and $1.1 billion of offsetting receipts were excluded from the
Statement of Financing when the correct amount had already been
reported on the Statement of Budgetary Resources. Neither SBA’s process
for preparing the financial statements nor its quality assurance process



Page 31                                              GAO-03-116 SBA Challenges
Major Performance and Accountability
Challenges




identified these errors before the statements were submitted to the
auditors.

The deficiencies in SBA’s financial reporting process meant that the agency
did not substantially comply with the Federal Financial Management
Improvement Act of 1996 (FFMIA). FFMIA is a measure of an agency’s
ability to incorporate into its financial management system accounting
standards and reporting objectives established for the federal government,
so that all assets, liabilities, revenues, expenses, and the full costs of
programs and activities can be consistently and accurately recorded,
monitored, and uniformly reported. Substantial noncompliance with
FFMIA indicates that SBA’s financial management systems do not routinely
provide reliable, useful, timely, and consistent information to fulfill its
responsibility of being accountable to the public and of providing timely
financial information to manage on a day-to-day basis.

In August 2001, we reported that, on a cumulative basis since 1992, SBA
had overestimated the defaults on the 7(a) General Business Loan Program
by approximately $2 billion and had overestimated recoveries by
approximately $450 million.32 Because cash flow modeling is both complex
and imprecise, agencies generally revise their estimates annually. SBA’s
modeling approach used a higher default rate than recent experience
because they included more years of historical data to smooth out
fluctuations in economic conditions from year to year. This practice
provides a cushion in the event of an unexpected economic downturn.
Since this time, SBA proposed several changes in the default estimation
methodology and has recently completed work on a sophisticated
econometric modeling approach to address this issue.




32
 U.S. General Accounting Office, Small Business Administration: Section 7(a) General
Business Loans Credit Subsidy Estimates, GAO-01-1095R (Washington, D.C.: Aug. 21,
2001).




Page 32                                                    GAO-03-116 SBA Challenges
GAO Contacts




               Subject(s) covered in this report         Contact person
               Improving lender oversight                Davi M. D’Agostino, Director
                                                         Financial Markets and Community
               Improvements needed in 8(a) program       Investment
                                                         (202) 512-8678
               Response to individuals and small         dagostinod@gao.gov
               businesses affected by September 11,
               2001

               Developing better disaster assistance
               performance measures

               Strategic human capital management
               needs to be strengthened
               Progress in information technology, but   Linda Koontz, Director
               challenges still exist                    Information Management Issues
                                                         (202) 512-6240
                                                         koontzl@gao.gov
               Challenges to achieving budgetary and     Susan Irving, Director
               financial accountability                  Federal Budget Issues
                                                         (202) 512-9142
                                                         irvings@gao.gov

                                                         Linda M. Calbom, Director
                                                         Financial Management and Assurance
                                                         (202) 512-8341
                                                         calboml@gao.gov
               Other useful contacts:

               Acquisition management                    David E. Cooper, Director
                                                         Acquisition and Sourcing Management
                                                         (202) 512-4125
                                                         cooperd@gao.gov




               Page 33                                                    GAO-03-116 SBA Challenges
Related GAO Products



Improving Oversight     Small Business Administration: Progress Made but Improvements
                        Needed in Lender Oversight. GAO-03-90. Washington, D.C.: December 9,
                        2002.

                        Small Business Administration: Actions Needed to Strengthen Small
                        Business Lending Company Oversight. GAO-01-192. Washington, D.C.:
                        November 17, 2000.

                        U.S. General Accounting Office, Small Business Administration: Few
                        Reviews of Guaranteed Lenders Have Been Conducted, GAO/GGD-98-85.
                        Washington, D.C.: June 11, 1998.



8(a) Program            Small Business: SBA Could Better Focus Its 8(a) Program to Help Firms
                        Obtain Contracts. GAO/RCED-00-196. Washington, D.C.: July 20, 2000.

                        Small Business: SBA's 8( a) Information System Is Flawed and Does Not
                        Support the Program's Mission. GAO/RCED-00-197. Washington, D.C.: July
                        19, 2000.



Disaster Loan Program   Small Business Administration: Response to September 11 Victims and
                        Performance Measures for Disaster Lending. GAO-03-385. Washington,
                        D.C.: January 29, 2003.

                        September 11: Small Business Assistance in Lower Manhattan in
                        Response to the Terrorist Attacks. GAO-03-88. Washington, D.C.: November
                        1, 2002.



Strengthening Human     Small Business Administration: Workforce Transformation Plan Is
Capital Management      Evolving. GAO-02-931T. Washington, D.C.: July 16, 2002.

                        Small Business Administration: Current Structure Presents Challenges
                        for Service Delivery. GAO-02-17. Washington, D.C.: October 26, 2001.

                        Small Business Administration: Status of Achieving Key Outcomes and
                        Addressing Major Management Challenges. GAO-01-792. Washington,
                        D.C.: June 22, 2001.




                        Page 34                                          GAO-03-116 SBA Challenges
                              Related GAO Products




Some Progress in Improving    Loan Monitoring System: SBA Needs to Evaluate Use of Software.
Information Technology, but   GAO-02-188. Washington, D.C.: November 30, 2001.
More Remains to Be Done       Information Technology Management: SBA Needs to Establish Policies
                              and Procedures for Key IT Processes. GAO/AIMD-00-170. Washington,
                              D.C.: May 31, 2000.



Challenges to Achieving       Small Business Administration: Accounting Anomalies and Limited
Budgetary and Financial       Operational Data Make Results of Loan Sales Uncertain. GAO-03-87.
                              Washington, D.C.: January 3, 2003.
Accountability
                              Small Business Administration: Section 7(a) General Business Loans
                              Credit Subsidy Estimates. GAO-01-1095R. Washington, D.C.: August 21,
                              2001.



Other Issues                  Small Business Administration: The Commercial Marketing
                              Representative Role Needs to Be Strategically Planned and Assessed.
                              GAO-03-54. Washington, D.C.: November 1, 2002.

                              Small Business: Status of Small Disadvantaged Business Certifications.
                              GAO-01-273. Washington, D.C.: January 19, 2001.

                              Small Business: Trends in Federal Procurement in the 1990s.
                              GAO-01-119. Washington, D.C.: January 18, 2001.

                              Small Business: Limited Information Available on Contract Bundling's
                              Extent and Effects. GAO/GGD-00-82. Washington, D.C.: March 31, 2000.




                              Page 35                                          GAO-03-116 SBA Challenges
Performance and Accountability and High-
Risk Series

              Major Management Challenges and Program Risks: A Governmentwide
              Perspective. GAO-03-95.

              Major Management Challenges and Program Risks: Department of
              Agriculture. GAO-03-96.

              Major Management Challenges and Program Risks: Department of
              Commerce. GAO-03-97.

              Major Management Challenges and Program Risks: Department of
              Defense. GAO-03-98.

              Major Management Challenges and Program Risks: Department of
              Education. GAO-03-99.

              Major Management Challenges and Program Risks: Department of
              Energy. GAO-03-100.

              Major Management Challenges and Program Risks: Department of
              Health and Human Services. GAO-03-101.

              Major Management Challenges and Program Risks: Department of
              Homeland Security. GAO-03-102.

              Major Management Challenges and Program Risks: Department of
              Housing and Urban Development. GAO-03-103.

              Major Management Challenges and Program Risks: Department of the
              Interior. GAO-03-104.

              Major Management Challenges and Program Risks: Department of
              Justice. GAO-03-105.

              Major Management Challenges and Program Risks: Department of
              Labor. GAO-03-106.

              Major Management Challenges and Program Risks: Department of State.
              GAO-03-107.

              Major Management Challenges and Program Risks: Department of
              Transportation. GAO-03-108.




              Page 36                                       GAO-03-116 SBA Challenges
Performance and Accountability and High-
Risk Series




Major Management Challenges and Program Risks: Department of the
Treasury. GAO-03-109.

Major Management Challenges and Program Risks: Department of
Veterans Affairs. GAO-03-110.

Major Management Challenges and Program Risks: U.S. Agency for
International Development. GAO-03-111.

Major Management Challenges and Program Risks: Environmental
Protection Agency. GAO-03-112.

Major Management Challenges and Program Risks: Federal Emergency
Management Agency. GAO-03-113.

Major Management Challenges and Program Risks: National
Aeronautics and Space Administration. GAO-03-114.

Major Management Challenges and Program Risks: Office of Personnel
Management. GAO-03-115.

Major Management Challenges and Program Risks: Small Business
Administration. GAO-03-116.

Major Management Challenges and Program Risks: Social Security
Administration. GAO-03-117.

Major Management Challenges and Program Risks: U.S. Postal Service.
GAO-03-118.

High-Risk Series: An Update. GAO-03-119.

High-Risk Series: Strategic Human Capital Management. GAO-03-120.

High-Risk Series: Protecting Information Systems Supporting the
Federal Government and the Nation’s Critical Infrastructures. GAO-03-
121.

High-Risk Series: Federal Real Property. GAO-03-122.




Page 37                                         GAO-03-116 SBA Challenges
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