[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                  REDUCING DUPLICATION AND PROMOTING 
          EFFICIENCY AT THE SBA: THE INSPECTOR GENERAL'S VIEW

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                              JUNE 5, 2013

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 113-020
              Available via the GPO Website: www.fdsys.gov



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Sam Graves..................................................     1
Hon. Nydia Velazquez.............................................     2

                                WITNESS

Hon. Peggy Gustafson, Inspector General, United States Small 
  Business Administration, Washington, DC........................     3

                                APPENDIX

Prepared Statements:
    Hon. Peggy Gustafson, Inspector General, United States Small 
      Business Administration, Washington, DC....................    20
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    None.


REDUCING DUPLICATION AND PROMOTING EFFICIENCY AT THE SBA: THE INSPECTOR 
                             GENERAL'S VIEW

                              ----------                              


                        WEDNESDAY, JUNE 5, 2013

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360, Rayburn House Office Building. Hon. Sam Graves [chairman 
of the Committee] presiding.
    Present: Representatives Graves, Chabot, Luetkemeyer, 
Hanna, Collins, Velazquez, Schrader, Chu, Hahn, Schneider, and 
Murphy.
    Chairman GRAVES. Good afternoon. And we will call the 
hearing to order.
    Today's hearing is going to address an issue that first 
seems unusual, which is Federal Government efficiency. Congress 
established a framework for improving the operations of all 
federal agencies. It is this framework that we are going to be 
looking at in today's hearing.
    Although the Small Business Administration's budget is 
small, in the context of the overall Federal Government, its 
$100 billion loan portfolio, presents a significant risk to the 
taxpayer if it is not properly managed. The Inspector General's 
statutory responsibility to investigate and recommend changes 
in the SBA's operation of its lending programs provides 
significant protection to the federal taxpayer, namely that 
they will not have to absorb losses associated with 
mismanagement of that loan portfolio.
    The SBA's government contracting programs do not present 
the same financial risk to the federal taxpayers of the 
agency's capital access portfolio. However, improper insight of 
the contracting programs can lead to the award of contracts to 
other than eligible small businesses. This harms small 
businesses that are eligible for such awards. The inspector 
general's obligation to undercover fraud and abuse helps ensure 
that the small business contracting programs assist those 
businesses designated by Congress.
    On April 23rd, this Committee heard testimony from the 
Administrator concerning a number of new pilot programs that 
she intended to create, even though they had not yet been 
authorized by Congress. Absent appropriate measures of 
performance, it is unclear whether these programs will be 
effective. If they are not effective, then the SBA is simply 
wasting taxpayer dollars.
    To combat an effective use of federal funds, Congress 
enacted the Government Performance and Results Act in 1993 and 
strengthened the Act with amendments in 2010. The act requires 
federal agencies to develop appropriate performance criteria to 
determine whether the programs are effective. The Inspector 
General, using her audit powers, assesses whether the agency 
has appropriate performance measures to ensure that the SBA's 
unauthorized pilot programs will be effective or a simple waste 
of federal tax dollars.
    Given the current deficit, it is imperative that SBA 
operate in the most efficient manner possible. And I am glad to 
welcome SBA's Inspector General, Peggy Gustafson, to further 
expand on ensuring that the agency operates in a cost-effective 
manner in reducing the possibility of fraud, waste, and abuse. 
And with that I turn to Ranking Member Velazquez.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    The Small Business Administration provides a wide range of 
services to hundreds of thousands of entrepreneurs each year. 
From loans to contracts to training, these programs are 
critical to both start-ups seeking to build a future and to 
existing companies trying to forge ahead. Making sure that 
these initiatives function as Congress intended them to, while 
also ensuring that they are free from fraud and abuse is 
absolutely critical. This important job falls to the inspector 
general. In this capacity, the IG functions as both an 
evaluator and as an investigator. They assess performance 
across the agency's operation, providing valuable insights into 
what is working and what is not. As a result, SBA management 
can take steps to improve its program and services. Similarly, 
the IG also acts to investigate serious problems arising from 
poorly written policies or improper personnel actions, 
including potentially criminal behavior.
    As a result of the IG's efforts, programmatic flaws are 
remedied, while would-be fraudsters are put on notice that they 
will be caught. Taken together, the IG's role is vital to the 
SBA's ability to achieve its mission. Through its work, the IG 
recovered and saved the agency $90 million last year. This 
included issuing 22 reports and the indictment of 59 
individuals, all of which were convicted. These actions show 
that the IG has a full plate before it, which is great news if 
you are employed there, but far more troubling if you are a 
taxpayer. To this point, the Office of the IG is growing, while 
the SBA itself is shrinking. This raises a serious question 
about whether the agency is able to effectively implement its 
programs, and I hope to gain a better understanding of this 
from the IG's testimony today.
    The agency's lending programs play a significant role in 
allowing entrepreneurs to secure capital at affordable rates. 
However, the SBA now makes the largest loans that it ever has 
in its history, while also expanding its use of delegated 
authorizations to lenders. Such moves are questionable policy 
goals for an agency that is supposed to serve small businesses 
and at the same time safeguard taxpayers' dollars.
    They also raise programmatic administration issues. For 
instance, larger loans may increase the likelihood that 
criminals tried to obtain financing through the SBA 
fraudulently. Delegated authority without sufficient oversight 
raises similar questions, namely who is watching the piggy 
bank. Ensuring that these policy changes are not Trojan horses 
is a paramount concern to this committee.
    On a similar note, SBA's procurement programs also play an 
important role in helping speed our economic recovery. When 
small and disadvantaged firms are awarded further contracts, 
the additional revenue allows them to add staff, creating jobs. 
Unfortunately, as we have seen time and again, front companies 
and large corporations too often find ways to masquerade as 
small businesses, depriving legitimate entrepreneurs of 
promising work. The GAO has identified numerous instances where 
firms failed to meet the appropriate standard and won 
procurement work. It is my hope that together we can identify 
ways to close these gaps and ensure this type of behavior is 
curtailed.
    While the SBA's lending and contracting programs are but 
only two areas of the agency, the IG's efforts are critical 
across the entire agency. Ensuring that all SBA initiatives are 
well run and free of fraud and abuse is essential not only to 
the small businesses they serve directly, but also to the 
taxpayers who are responsible for footing the final bill. By 
identifying how the SBA can improve in its function, the 
inspector general is instrumental in the agency achieving its 
mandate of assisting small businesses. Without a robust, 
effective, and well-managed IG, it is doubtful that the Small 
Business Administration could perform its mission of fostering 
entrepreneurship, which is critical to our economy. I therefore 
look forward to hearing the witness and thank her for being 
here today.
    I yield back.
    Chairman GRAVES. Thank you. We would again like to thank 
Inspector General Peggy Gustafson back to the Committee. And 
please take as much time as you would like. We would love to 
hear what you have to say.

STATEMENT OF PEGGY GUSTAFSON, INSPECTOR GENERAL, UNITED STATES 
                 SMALL BUSINESS ADMINISTRATION

    Ms. GUSTAFSON. Thank you very much. Chairman Graves, 
Ranking Member Velazquez, and distinguished members of the 
Committee, thank you for the opportunity to be here today and 
for your continued support of our work. I am extremely proud to 
represent the dedicated men and women of the SBA OIG.
    As you know, we are an independent office within SBA that 
conducts and supervises audits, inspections, and investigations 
related to SBA programs and supporting operations. We seek to 
detect and to prevent waste, fraud, and abuse, and promote 
economy, efficiency, and effectiveness in the administration 
and management of those programs.
    I believe our investigations and report recommendations are 
having a positive impact on the integrity of SBA programs and 
that the results are measurable. During fiscal year 2012, as 
already noted, and thank you very much, the OIG issued 22 
reports, containing 126 recommendations for improving SBA 
operations, reducing fraud and unnecessary losses, and 
recovering funds. And again, thank you as noting our 
investigations last fiscal year led to 59 indictments and 59 
convictions of subjects who had defrauded the government.
    In all, the OIG efforts resulted in more than $90 million 
in office-wide dollar accomplishments during fiscal year 2012. 
To put that into perspective, our fiscal year 2012 operating 
budget was $17.3 million, which included a $1 million transfer 
from the Agency's Disaster Loan Program account. The total 
office-wide dollar accomplishments therefore represent a more 
than five-fold return in the investment in the Office of 
Inspector General to the American taxpayers.
    Though these figures are reassuring that our work is 
focused on areas of high risk within the Agency, they do point 
to the fact that significant improvements are still needed in 
SBA's planning, implementing, and assessing of programs 
assisting small businesses across the nation. The GPRA 
Modernization Act of 2010, the Act, was signed into law in 
January 2011, and as noted, the Act emphasizes the use of goals 
and measures to improve outcomes and requires the Federal 
Government to adopt a limited number of cross-cutting goals 
defined as objectives that cut across organizational 
boundaries.
    Now, currently, my office does have ongoing work to 
determine the Agency's compliance with GPRA requirements, but 
even while that work is ongoing, recently conducted reviews 
have evidenced a concern relative to accountability and 
performance management in SBA. Many of our recent reviews, 
which are highlighted in the written statement that I have 
asked to be introduced into the record, found SBA programs 
lacking measurable performance goals. It is vital that 
accountability and performance metrics be incorporated into 
each of SBA's programs and activities so that managers can 
appropriately assess their performance and make any necessary 
adjustments to achieve efficiency of operations.
    While SBA's programs are essential to strengthening 
America's economy, the Agency does face a number of challenges 
in carrying out its mission, including fraudulent schemes 
affecting all SBA programs, significant losses from defaulted 
loans, procurement flaws that allow large firms to obtain small 
business awards, excessive improper payments in some of these 
programs, and outdated legacy information systems. The Agency 
also faces significant management challenges which, as you 
know, we report on every year to the Congress in October. This 
management challenge report represents our current assessment 
of agency programs and/or activities that pose significant 
risks, including those that are particularly vulnerable to 
fraud, waste, error, mismanagement, or inefficiencies.
    Overall, in fiscal year 2012, the Agency made improvements 
across all of these management challenges, with the exception 
of one of the recommended actions under Management Challenge 6 
and three of the recommended actions under Management Challenge 
8. Specifically, just to point out Management Challenge 8, 
which was most concerning to us at the time of that report, 
this is the challenge on SBA needing to modernize its loan 
accounting system and migrated off the mainframe, the large 
LMAS project. That, in our last management challenge report, 
was downgraded from a rating of orange, which meant limited 
progress, to a rating of red, which meant no progress.
    Now, despite the two management challenges where there had 
been a reduction or a lowering of the ratings, the progress 
made on all the other management challenges in the last report 
was notable. The effort made by agency staff and leadership 
throughout fiscal year 2012 on the recommended actions 
demonstrated commitment to improving the Agency's programs and 
operations.
    With the support of this Committee, the OIG will continue 
to promote economy, efficiency, and effectiveness, and work to 
deter and detect waste, fraud, and abuse in the Agency's 
programs and operations. We certainly anticipate that our 
ongoing work will be met with a significant return on 
investment to the taxpayer and result in a better SBA.
    Again, thank you very much for inviting me back. It has 
been a while since I have been here, so thank you very much. 
And I look forward to your questions.
    Chairman GRAVES. Absolutely. I turn to Ranking Member 
Velazquez to open up.
    Ms. VELAZQUEZ. The sequester has taken effect and has not 
spared the SBA IG's Office. In fact, the estimated cost is 
going to be $800,000. How will this affect your ability to stop 
further fraudulent practices at SBA?
    Ms. GUSTAFSON. It has already affected our ability. As you 
noted, we took a cut of over $800,000, which as you know, my 
office is all people. We are salaries and expenses. We do not 
have any programs. And so the net effect of that was basically 
to take away the salary of, I believe we worked out to, 10 
people for seven months that we could not sustain. Anticipating 
that sequester was going to happen, we have been under a self-
imposed hiring freeze. I am not anticipating furloughing 
employees, but the only way I was able to do that was as we 
have lost people as normally happens, we have not replaced 
them. So we are by the numbers lower than we were a year, year 
and a half ago. And obviously, I am auditors and I am criminal 
investigators with a little support staff. So the minute that I 
lose those people I am losing some of our ability to do our 
mission.
    Ms. VELAZQUEZ. Can we talk about how the IG and GAO have 
identified repeated occurrences of fraud in the SBA contracting 
programs? Some of the reports were issued by GAO at my request. 
Why does it seem to be a recurring problem with these programs? 
And if there is one step that the agency could take right now 
to reduce fraud and abuse, what would that be, what is your 
recommendation?
    Ms. GUSTAFSON. You are absolutely right. There is always--
--
    Ms. VELAZQUEZ. Especially in the area of contracting.
    Ms. GUSTAFSON. Yes, there is always a concern about the 
contracting programs. As you know, the Federal Government has a 
goal of 23 percent of all federal contract dollars are supposed 
to be going to small business. SBA has several set aside 
programs for 8(a), HubZone, programs like that that they 
administer.
    One of the reasons, of course, that there is always fraud 
is there is always money. You know, where there is money and 
there is federal dollars there are going to be people trying to 
find a way to get that money even if they do not deserve it. As 
you noted, the rules for each program are slightly different. 
The way that you get into each program is slightly different, 
but the key really is--and some of the concerns that we have 
seen is they need to make sure that the wrong people are not 
getting in this program. Pass-throughs, as you noted in your 
opening statement, are always a problem. You know, the shell 
companies put up specifically to get a big business--the small 
business contracting dollars is an issue. Enforcement is the 
key. Taking their role seriously as far as making sure the 
wrong people do not get into the program is key.
    For example, the HubZone. You know, they have made some 
improvements. I will say in the HubZone program, that was a 
series of very hard-hitting reports, and so I know that they 
have upped their enforcement actions. They have to be very 
serious, as do the procuring agencies. Everybody has a role in 
this.
    Ms. VELAZQUEZ. And do you believe that the site visits play 
an important role?
    Ms. GUSTAFSON. The site visits play a crucial role. So 
absolutely. And on 8(a), the annual reviews. That can never be 
left to the wayside because it will always be there.
    Ms. VELAZQUEZ. Okay. Thank you.
    The LMAS project seems to be the project that never ends, 
costing taxpayers millions of dollars. Why is this taking so 
long in your judgment?
    Ms. GUSTAFSON. Well, the LMAS project has been going on a 
very long time, and I think, for the record, that is a very 
large IT project that we first noted--my office first noted 
very strong concerns about the possibility that this project 
was not going to work in 2005 when it was an even bigger 
project and they were trying to do it all at once. I think the 
LMAS project is kind of symbolic of a lot of very large 
government IT projects in that back then not the best planning 
was happening. There were things--it has been scrapped a couple 
times and started over. I think, to be fair, the LMAS project 
seems to be on the right track now. One of the things, the 
Agency has scaled it down. They have broken it down into more 
doable components and are doing it in stages. I think it is, 
unfortunately, just an example that I think a lot of agencies 
have of a big IT project going off the rails and needed to be 
reset.
    Ms. VELAZQUEZ. So do you feel that SBA has the capability 
to take on another IT project of this magnitude?
    Ms. GUSTAFSON. I think the key for SBA--because we are very 
pleased with the direction that LMAS is going. We are very 
pleased at how they are doing it. I think that the key for SBA 
is to take those lessons from LMAS--and there are a lot of 
lessons to have been learned as far as the proper planning, the 
proper scaling of that project, and you know, what you intend 
for a project to do. If they take those lessons, I think--and 
do it in that incremental process, there is no reason for me to 
think that they could not do it.
    Ms. VELAZQUEZ. Lessons at what cost? But that is a 
discussion for another day.
    Ms. GUSTAFSON. The cost, yes, I understand.
    Ms. VELAZQUEZ. In 2010, changes were made to increase the 
loan sizes of 7(a) and 504 loans. Are these larger loan sizes 
making SBA products more attractive to criminals interested in 
defrauding the government?
    Ms. GUSTAFSON. The increase in loan size was a concern to 
us when it happened simply because it just puts so much more of 
taxpayer dollars at risk. I think it is, in fairness, premature 
to see if this has caused an uptick in fraud. I do not think 
that I am prepared to say that that has happened. Very often 
the lending--even the fraudulent loans quite frankly tend to go 
for a while before they default for numerous reasons, and so I 
would not be prepared to say that. But it is something that we 
have definitely emphasized to the Agency that they need to make 
sure they are doing all they need to do as far as their 
oversight of lenders to make sure that does not happen.
    Ms. VELAZQUEZ. Responding to large scale disasters, like 
Hurricanes Katrina and Sandy, is perhaps the most critical role 
that SBA plays. In this regard, the IG reported in January that 
the SBA did not have sufficient research staff and human 
resources to effectively respond to such massive disasters. Do 
you believe that this lack of trained staff is the reason that 
SBA performance in the aftermath of Hurricane Sandy has been 
below average?
    Ms. GUSTAFSON. First off, I want to take this opportunity 
to thank the Congress. My office has received additional 
funding to perform----
    Ms. VELAZQUEZ. I know $5 million----
    Ms. GUSTAFSON.--oversight. So that we can perform oversight 
of Sandy, which I think was absolutely crucial because Sandy, 
as you know, is the first big task for SBA after Katrina. There 
certainly have been large disasters between then and now but 
nothing along this scale.
    You are correct that we had some staffing concerns that 
resulted in an audit in January. We are beginning our work. I 
think there is a lot, you know, we are just now beginning our 
work to see if they have learned those lessons from Sandy to 
see if there were new challenges. And so I cannot say that that 
is what happened, but it is certainly something that is on our 
radar.
    Ms. VELAZQUEZ. Well, I issued a report regarding the 
decline rate by SBA of small businesses that were impacted by 
Sandy. And the decline rate was much higher than during 
Hurricane Katrina. So I just need to know if you are planning 
to look into this area as well.
    Ms. GUSTAFSON. We are. And I want to thank you for the 
report, Representative Velazquez. It is going to be very 
informative for us. There were several things in that report 
that were very telling. The increase in the time. There was a 
huge delay for a while there that the time in processing the 
applications once again got pretty large and the denial rates 
and also the withdrawal rates, which I believe is something GAO 
is looking at. We are certainly coordinating with GAO. We are 
not going to duplicate their work, but that is going to be 
something very useful to us as we are doing our audit work. 
Thank you.
    Ms. VELAZQUEZ. Thank you.
    Chairman GRAVES. Mr. Leutkemeyer.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman.
    Ms. Gustafson, to follow up on what the ranking member was 
talking about a minute ago with regards to some of the 
contracting problems that were had, in today's Washington Post 
there is an article about the inspector general for the GSA 
that found a number of problems with some of the contracting 
they were doing. And one of the comments that was made, the 
staff members told investigators that they feared for their 
jobs because they were trying to do the right thing and protect 
taxpayers by whistleblowing on some of the pressure that was 
being put on them with regards to giving some favorable 
treatment to certain contractors. Did you find any of that with 
regards to what was going on with the SBA and the contracting 
problems that you found?
    Ms. GUSTAFSON. Well, Representative Leutkemeyer, one of our 
biggest criminal cases we have ever had is a contracting case 
that was involving kickbacks actually with the Army Corps of 
Engineer, which resulted in at least $20 million simply being 
skimmed off the top by everybody being involved in steering the 
contracts both--to certain small--to certain companies. And so 
it is a very large issue. There are a lot of pressures in the 
contracting industry or in the contracting arena that often do 
not help us with fraud. Sometimes there is pressure steering. 
Sometimes there is just a pressure to get the contract out. 
Sometimes we often find, you know, the procuring agency wants 
their stuff. You know, they want their stuff and they want it 
now. Very often, going small business is faster because you do 
not go through the whole full and open competition. That is 
another pressure that happens very often. And so all of those 
pressures I think add to it being a very lucrative area for 
somebody to try to get.
    Mr. LUETKEMEYER. In response to what you found, did you put 
some recommendations--did you put out some recommendations or 
did they put some recommendations in place that you suggested 
to try and solve this problem or improve it?
    Ms. GUSTAFSON. Well, as far as our investigation, they are 
all going to prison for a very long time, so that is the best--
--
    Mr. LUETKEMEYER. Good for you.
    Ms. GUSTAFSON. That is the best result we could have.
    Mr. LUETKEMEYER. We can keep you busy in a few other 
agencies.
    Ms. GUSTAFSON. But I do think that one of the key things, 
especially in the 8(a) arena, which is one of the biggest small 
business contracting programs, one of the things that we have 
really focused on is making sure that somebody is taking 
responsibility for making sure that these 8(a) companies are 
legitimate. I think when you have that kind of divided among 
the SBA has the program but the Army or the Navy or Ag has the 
contract, a lot of times whether this company is legitimate 
will sometimes fall through the cracks, which is a huge 
problem. That has been something we have been focused on 
certainly since I have been the inspector general. Because 
although the government gets their stuff, first off, a lot of 
times they get it at a much greater cost because there are 
either kickbacks or, you know, there is no competition and 
therefore, we are not getting the best deal. And quite frankly, 
those programs are not doing what they are supposed to be 
doing. If the money is not going to legitimate small 
businesses, then the money is not doing the good that it is 
supposed to be doing anyway. So, you know, I think it is a very 
big problem.
    And to your point I think the oversight has to be key and 
the enforcement has to be key. And people need to go to jail. 
And I am very proud of the fact that people are beginning to go 
to jail, even though the government got their widgets. So I 
think that is important.
    Mr. LUETKEMEYER. Very good. Thank you.
    Just also I have got a curious question here.
    We found also in the last couple weeks that a lot of 
directors of different agencies have multiple e-mail accounts. 
Did you find that problem existed with the SBA director as 
well?
    Ms. GUSTAFSON. I have not found anything like that.
    Mr. LUETKEMEYER. Okay. Just curious.
    Also, in some of the information you gave us you talk about 
unauthorized commitments by the SBA and what an extremely high 
number it is compared to other agencies. Is there a problem 
there or is it just some really, really small things that are 
being overlooked? What is your analysis?
    Ms. GUSTAFSON. The SBA Procurement office and their whole 
procurement process, their method of buying things is actually 
something that we added to the management challenges list 
because that was a process that had kind of fallen apart and 
was not going very well. And what you found in these 
unauthorized commitments--and I would argue that it is an 
important thing because in the end maybe it was not that much 
money and maybe in the end we got our services. But there are 
many internal controls. You are basically not supposed to 
commit the government to paying money unless everything is in 
place, you know, such that the money is rightfully committed. 
That is what an unauthorized commitment is.
    So when you are paying something when you have not really 
done all of the work that needs to be done, it is an internal 
control problem. You know, it is a problem that the auditors 
get very worked up about because it could in theory lead to 
things like violations of the Anti-Deficiency Act. You know, 
because you are, by definition, not doing the planning and 
having everything kind of all tied up before the money is going 
out the door. And so that is why we issued the report.
    The Procurement office has undergone a lot of changes. They 
actually moved it from Washington, D.C., to Denver, so they are 
kind of in a building period but they need to be showing--one 
of the aspects of the report was to emphasize they need to be 
showing progress now that they have kind of restarted, you 
know, what they do on them.
    Mr. LUETKEMEYER. To me this is a head scratcher from the 
standpoint in the private sector, you know, if you have a 
procurement procedure, you know, you can have somebody do the 
work and have a supervisor sign off. I mean, it is very simple 
to get this done, and yet that seemed like a procedure that is 
not even in place here.
    Ms. GUSTAFSON. I do not know that I would ever say that 
federal procurement is simple. I think it can be amazingly 
convoluted.
    But to your point, absolutely. There is supposed to be the 
process. And then, you know, then it becomes routine. I mean, 
you are buying--you have a copier contractor, a BlackBerry 
contract. It is all----
    Mr. LUETKEMEYER. To me it blows my mind that we are having 
this problem, that you can even find it. I mean, I can 
understand a couple of oversights, but the numbers you cite 
here are just off the charts. I mean, to me that just shows 
incompetence up and down the procurement procedure process or 
so.
    My time is over. Thank you very much.
    Ms. GUSTAFSON. Thank you.
    Chairman GRAVES. Mr. Schrader.
    Mr. SCHRADER. Thank you, Mr. Chairman. And thank you, Ms. 
Gustafson, for being here.
    At the outset, when the ranking member started talking 
about reductions in budget and then sequester on top of 
reductions in budget, how have you prioritized your audits and 
investigations as a result of that? How have you changed what 
you were doing to what you are going to be doing in the future?
    Ms. GUSTAFSON. Well, we always have to prioritize, of 
course, our audits, because I am basically at full staff. I am 
about 102 people. And again, the loan portfolio is about $103 
billion. Small business contracting is about 97 billion. And 
then I have not even talked about all the other programs in 
there. So we always go through a priority process looking at 
high risk areas, areas of congressional interest, how long it 
has been since we have been in a program. We naturally end up 
not having to focus, but certainly, focusing on the contracting 
and the loan programs because of the sheer volume of money that 
goes through there.
    Basically, what sequester has caused us to do is we always 
go through that process but whereas maybe my list was this 
long, was six long, maybe it is five long. You know, everything 
is going to take longer to get to when I am smaller.
    Mr. SCHRADER. And again, the ranking member talked about 
the computer system, the antiquated and the long. Has the 
Agency or has the IG, have you set targets for when this should 
be done given all the new information, lessons learned that you 
alluded to so that we could monitor this a little bit better?
    Ms. GUSTAFSON. They definitely have set targets for LMAS, 
which is the project that has been ongoing for many years. And 
there are targets that are due for each step, which is exactly 
what we wanted. They do not always meet them. They come close 
but, I mean, that is definitely available. They are doing it. 
We do interim reports on it. GAO is looking at it very 
carefully, too, but they definitely do that. Yes.
    Mr. SCHRADER. Okay, good.
    The other thing that we learned to begin this new budget 
coming forward that we are going to end up--it looks like SBA 
is suggesting they reduce the number of site visits going 
forward in order to fund some other programs that they feel are 
more beneficial. You indicated a moment ago that the site 
visits are extremely important for the contracting stuff, all 
the fraud that goes on with regard to misrepresentation, being 
a small business when indeed you are a shell. What do you think 
about that reallocation?
    Ms. GUSTAFSON. I think that in general--and there are 
several different kinds of iterations of site visits that they 
do and loan programs and the contracting programs. I think two 
things are crucial. One, that they continue to happen. I 
definitely think site visits need to continue to happen.
    Mr. SCHRADER. Should they continue at a decreased level or 
an increased level?
    Ms. GUSTAFSON. Well, without getting into it, I am not 
ready to say that they are doing too many. I certainly do not 
think that they are doing too many. The other key is though----
    Mr. SCHRADER. Therefore, a reduction would not be good?
    Ms. GUSTAFSON. A reduction would probably not be helpful.
    Mr. SCHRADER. Okay.
    Ms. GUSTAFSON. The other key is I do think that they 
definitely need to be targeted. You know, I think it is key 
that the Agency always be taking in the lessons learned from 
before. They are always going to have to do a risk-based 
approach, and I think that is going to be the key, too, so that 
when they are doing that they are going to the right places. I 
think that is crucial, too.
    Mr. SCHRADER. In this era of budget limitations that we all 
have, you indicated that they were not doing very well on 
setting up performance metrics, much less even achieving 
certain outcomes. Certainly, I happen to be a fan of the recent 
administrator and moved things along in the fraud, waste, and 
abuse thing. But we have not made that progress in performance 
outcomes. And to be that is critical. And in an era where we 
theoretically are supposed to determine, not the administrator, 
what the priorities are or at least with her or he, we should 
be able to get into that. We do not have that at this point in 
time. Are there certain metrics you would suggest to this body 
that we should be focusing on and, you know, setting a target 
like we did with the computer stuff? Setting some dates, 
setting some intermediary dates, and some actual results by 
then?
    Ms. GUSTAFSON. I am not prepared to offer metrics. I think 
that they are beginning to use metrics, you know, come up with 
metrics. You know, some of our reports that I mentioned raise 
some concerns about maybe some of the metrics listed. I think 
you are absolutely right; that is your role. And in all 
fairness to the Agency, that is their role as well. And so I 
think, you know, as you said, they are beginning to do that. 
You know, their metrics are coming out in the GPRA. I will be 
looking at that but----
    Mr. SCHRADER. Should not Congress help them? Should not 
this Committee help them? I mean, theoretically, Congress is in 
charge, you know, not the Agency. And they execute our design. 
Should we not help them or be developing metrics that we think 
are important as a group and suggesting to the administrator, 
whoever he or she may be, about what they maybe want to look 
at?
    Ms. GUSTAFSON. First off, I certainly think that that is up 
to you. Like you said, you are in charge, so you can do 
whatever you want. I think that sometimes, for example, in the 
STEP program, I think sometimes Congress does do that, or at 
least it tells the administration or the administrator and the 
Agency we want you to do metrics. We want you to report to us. 
And then certainly it would behoove Congress to look at that 
and see if you are hitting the right thing; if you are getting 
the right measures and whether they are helpful. This is a 
lengthy process, I think, because I think the next step will be 
are they acting on those metrics and is it being run better? 
And so this is a multi-year process, I think. But absolutely, 
your role is crucial right now while they are doing it as well.
    Mr. SCHRADER. Thank you.
    I yield back my time.
    Chairman GRAVES. Mr. Hanna.
    Mr. HANNA. Thank you, Chairman.
    Hi, thanks for being here.
    A couple of things. You mentioned that you had 55 or 59 
cases, 59 prosecutions. Along the notions that Mr. Schrader 
mentioned and Ms. Velazquez, it is easy for Congress to be 
penny wise and dollar foolish. What did you learn from those 59 
cases? Is there a theme? Are there consequences for people who 
spend government money outside of arms length transactions? In 
other words, I like this guy. I am going to hire this guy. 
Regardless of corruption or anything illegal, just generally, 
are there consequences? And you talked about the payback for 
the work that you do, which, you know, is interesting because 
it is an investment if you want to look at it. I mean, that is 
the way we should. I think we should look at it.
    Can you talk generally about a theme along those lines and 
why it is beneficial to fund your agency more and what we could 
expect in return, along with the idea of if you have structural 
consequences, which I do not know that we have now for 
individuals who would be sloppy, for lack of a better word. 
Maybe you can just get me up to speed.
    Ms. GUSTAFSON. So as far as the results of our 
investigations, you know, the investigations that make me 
happiest are the ones that not only do they go to jail, and I 
really like when they go to jail because that is a pretty 
strong message. Of course, I also like when they are getting 
hit hard with a really big fine because sometimes that hurts 
people more.
    But there are definitely times when as a result of some of 
these investigations, especially some of the very complex ones 
that we do, there are a lot of very complex schemes out there. 
The ones that find where there are weaknesses in the system 
that we can then go to the Agency and say these are things that 
need to be shored up. Again, some of the contracting, some of 
the contracting fraud cases will show where the weakness is at. 
For example, in the HubZone program. You know, what is it? You 
know, what part of the HubZone program are they kind of taking 
advantage to get into the program when they should not be. You 
know? Is it the attempt--is it the residency requirements for 
the companies or things like that?
    One of the biggest things that we have seen in the last 
several years that had become a management challenge is the 
fact that we were seeing a lot of very big loan fraud schemes 
involving loan brokers. So people who were out there saying let 
me help you package your loan and get it through. And I am 
going to get you an SBA loan. And that broker was deeply 
involved in getting the document falsified and making 
everything pretty and getting a loan that never should have 
been made that immediately defaulted. It was basically, you 
know, a theft. And doing that dozens and dozens of times 
because, you know, they just did that. And one of the things 
that we had recommended to the Agency--it has been a management 
challenge for a long time and they are beginning to make 
progress on that--is let us track these guys. And let us make 
sure that we know for each loan who this loan broker is such 
that, you know, maybe if we begin to have a really bad case, 
just an egregious case, let us see if this person has been 
involved in other loans and let us see how the other loans are 
doing.
    Mr. HANNA. I understand that. It makes perfect sense.
    But also, you mentioned that you have a number of problems 
and a large number I think you said of people who are inside 
the system just basically being sloppy. What are the 
consequences for that, if any? I mean, one of the things that 
works well is advertising; right? You know, we own a Helmsley 
and tax evasion, all of those things that we remember. What do 
you do along those lines? What can Congress help you in terms 
of creating consequences for--you know, maybe well intentioned 
but that is really kind of irrelevant when they are doing 
something wrong--that we can help you with?
    Ms. GUSTAFSON. Well, I think----
    Mr. HANNA. And are there enough consequences?
    Ms. GUSTAFSON. Yeah, I do not know that there are a lot of 
consequences, for example, for contracting that is done 
sloppily. You know, for contracting where maybe they did not do 
quite the due diligence that they should have done as far as 
what that company is. I actually do not know that there are 
many consequences.
    Mr. HANNA. But should there be? I guess that is the 
question. Do you feel as though there is a lack of authority 
and severity in terms of them taking their job seriously 
enough? Or is this such a casual process that sloppiness goes 
uncorrected?
    Ms. GUSTAFSON. I think that maybe even the bigger issue 
with that--and I will tell you sometimes some of the things 
that we have encountered in cases that are very frustrating is 
we have encountered cases when the Agency--our contracting 
cases basically, they involve an SBA program but 99 times out 
of 100 the contract was let by a different agency. And a lot of 
times what we will find is that agency is not as nearly as 
angry as we are that that company should not have been getting 
that contract because they liked that company and they liked 
what they got from that company. And that has sometimes been a 
big roadblock for us because we would like, you know, Agency X 
to come in and say we are as mad as SBA about this and we would 
not have let this contract, if we had known this. And we do not 
always get that response. And that is very frustrating. Maybe 
that is where the consequences should be before you talk about 
sloppy contracting.
    Mr. HANNA. Thank you, Chairman. Thank you.
    Chairman GRAVES. Mr. Murphy.
    Mr. MURPHY. Thank you, Mr. Chair. Thank you, Ms. Gustafson.
    In your testimony you spoke briefly about the Disaster 
Assistance Loan Program. It looks like there have been some 
improvements from 28 percent down to 18 percent of these that 
have been fraudulent. What are you continuing to do to bring 
this level down, and is there anything we can do to help you?
    Ms. GUSTAFSON. So the numbers that you are referring to is 
the rate of improper payments in the disaster loan program, 
which is to say that payments that for one reason or another 
should not have been made; so loans that should not have gone 
out.
    In all candor that is an extremely high number, but given 
the nature of disaster loans, we are very pleased by the 
progress that the Agency has made because those loans--there is 
always a pressure kind of to get money out the door, but 
especially, for understandable reasons, in the disaster arena. 
And very often you are dealing with people whose records have 
been washed away or something like that. And so while that is a 
very high rate, that is a good example, actually, of where the 
agency--that part of the management challenge has gone away. 
They have set their quality assurance process and their 
improper payment review process in the disaster loan arena is 
something we are very pleased to see. That 28 to 17 percent; 
that happened in the course of a year, I think.
    So they are going in the right direction. I do not know 
that anything needs to be done. Again, Sandy is going to be a 
big test for them because that was a big influx of 
applications. But I definitely think the Agency has done a good 
job in the improper payments arena, especially in disaster 
loans. So.
    Mr. HANNA. Okay. So nothing specific there.
    Ms. GUSTAFSON. No.
    Mr. HANNA. To keep pushing.
    Ms. GUSTAFSON. Right.
    Mr. HANNA. The next question is on sort of priorities. I 
guess your 2014 budget submission is around 20.4 million. This 
is 3.1 million or about 20 percent higher than fiscal year 
2012.
    Ms. GUSTAFSON. Right.
    Mr. HANNA. If you were to receive the full funding, you 
know, what are the priorities there? What would receive more or 
less funding?
    Ms. GUSTAFSON. Yeah, so our budget request has been kind of 
same request for the last couple years. We are still hopeful at 
some point that we get it. But a couple of our priorities for 
that, one of the things that we are--because we are as small as 
we are, I think one of the places where I would like us to do 
more work is to do some work, for example, on early defaulted 
loans. We have a very good process. Early defaulted loans are 
very often or more likely than not, an indicator that something 
was very wrong, either in the way that loan was made, either 
through fraud or just very bad--or bad underwriting.
    Very often we see that indicator but we cannot do more with 
that once we get there. We simply do not have enough. I think 
that there is a lot to be learned if we were able to spend more 
time looking at these early defaulted loans. I think we are 
going to find a fair amount of fraud, which very often the 
money gets back to the government that way. And I think we may 
also find some process improvements. So that has been something 
that is very on our kind of wish list, as is the hotline. One 
of the things that I did, we have a hot line where this is very 
often the only place where citizens will call with allegations 
of waste, fraud, or abuse. That is their contact with my 
office. When I got there it was my secretary, basically. That 
was it. We are up to two people. I am very pleased about that 
because, again, sometimes that is where we learn about the 
fraud, and sometimes that is where the people who are directly 
reaching out to us. That is how they reach out to us. And I 
want to be sure that we are, again, learning what we need to 
learn from there, and getting those allegations to the right 
places. So that was something that was also in my budget 
request.
    Mr. HANNA. Excuse my ignorance here but are there any sort 
of whistleblower programs?
    Ms. GUSTAFSON. The whistleblowers report to the hotline. 
We, as the inspector general, have a role under the 
Whistleblower Protection Act. We certainly have a role. When 
somebody comes with an allegation, we would investigate. And 
the hotline plays a big role in that because everything gets 
funneled through the hotline. But often the counselor 
investigations will take over an actual investigation of a 
whistleblower complaint.
    Mr. HANNA. Okay. And just to the LMAS. It was brought up a 
couple times. What have you done to get it sort of back on 
track?
    Ms. GUSTAFSON. Well, LMAS has again been a series of 
reports. You know, we do not get it on track, of course, but we 
have been paying a lot of attention to it. The Agency has 
gotten it back on track. Again, we do interim reports on LMAS. 
It is always a subject on our management challenges. And so 
that is kind of a constant discussion with the Agency where we 
kind of have a dedicated ``how is LMAS going'' kind of thing. 
It is not just a function of one report and then we go. That is 
something that we are always working on.
    Mr. HANNA. Okay. All right. Thank you.
    Chairman GRAVES. I have a question on these pilot programs. 
The administrator has proposed some of these pilot programs in 
her budget. Do you think that they have enough performance 
standards to be able to evaluate these at this time or even 
what are your thoughts on them implementing those given the 
tight budget situation we are obviously in?
    Ms. GUSTAFSON. In all candor, Chairman Graves, we are aware 
of the pilot programs, obviously. We are aware of the budget 
request. I guess I would phrase my answer more akin to my 
opening statement. We are worried in general about performance 
measures because some of the work that we have done in programs 
already instituted have shown that they need to be strengthened 
and more thought needs to be put into it. As far as looking at 
any of those new programs, I have not done so, and so I am 
really not ready to opine.
    Chairman GRAVES. Mr. Schneider.
    Mr. SCHNEIDER. Thank you, Mr. Chairman. And I thank you for 
joining us here today with your testimony. I am sorry I had to 
step out, if I am being redundant.
    But I know we have seen an increase of 7(a) and 504 loans, 
which is a good thing. But with the increase, and you touched 
on it earlier, you mentioned these early default loans. What 
impact is the growth of those programs having on your office's 
ability to do proper oversight? What resources, if any, would 
you need to push it further?
    Ms. GUSTAFSON. Thank you for your question because, again, 
we are worried about the risk associated with the $5 million--
with the much bigger loans. And I am the same size I was when 
the loans were smaller so, you know, it is really a function of 
that is certainly an area of concern for us. It is something we 
are monitoring. Again, these loans tend to be--you do not know 
if there is a problem right away so this is something that I 
think if it is going to be a problem, we are going to be seeing 
it soon. Loans are always a priority. Lending is always a very 
big priority for us because of the $102 billion loan portfolio. 
So I think it remains to be seen, but we anticipate, especially 
given our concerns in the past about lender oversight. They 
have made improvements, but lender oversight was a management 
challenge for a long time. Quality control in the centers was a 
concern and as part of our management challenges. We will be 
there. We are going to be there. It is on our radar and if 
something else falls by the wayside it will. It is a big 
priority for us.
    Mr. SCHNEIDER. As you make that case going forward, you 
know, lack of oversight leading to waste, fraud, and abuse 
here, are there metrics in place for the work that you do that 
tracks the return on investment we are making in oversight that 
captures fraud, that adding one more person would result in X 
dollars of savings so to speak?
    Ms. GUSTAFSON. Well, we, certainly, in our semi-annual 
reports and every time I testify in front of you I am always 
touting what our dollar accomplishments are and how it compared 
to our size. Again, it was about a fivefold. If you want to do 
the quick math, the math that I could do, it is about a 
fivefold return on the investment when you look at our 
appropriation and the money, the savings that we have.
    You know, I kind of hate to break it down into one person 
just because I do not know that that is the most accurate 
thing. My audit at any given time, every auditor, you know, 
every audit is three or four people. I try not to get too much 
into that but there is absolutely no question that like every 
IG office, I am very proud of our accomplishments and we 
definitely can show a return on our investment. There is no 
question in my mind that 103 people is small for the amount of 
risk that is in SBA programs, and so the budget request, that 
was my number. You see a lot of transparency in the IG's budget 
and that is what we requested. We are hoping to grow because I 
do think in general more oversight is needed and more return on 
the money is not a bad thing.
    Mr. SCHNEIDER. And this is my concern obviously with across 
the board cuts, like sequester is where you lost I think you 
said 10 people for seven months. But that is a direct savings 
if you are on sequester, but the indirect cost of that could be 
a lot of fraud and abuse that is not being captured, which is a 
concern.
    Changing subjects and real briefly on the LMAS system, and 
you said you are getting, you know, you cannot change the 
implementation but you get reports on progress. How frequently 
are you getting reports on progress?
    Ms. GUSTAFSON. The nice thing about SBA in a way is we are 
all in one building and we are all kind of the headquarters. We 
are co-located with headquarters, and my audit division is 
basically three separate groups, one of which is an IT group. 
And so it is not even a function of getting reports. It is 
really a constant communication. They talk to the LMAS people 
all the time. We do the interim reports. And so----
    Mr. SCHNEIDER. But is there a formal oversight so you are 
tracking progress against milestones?
    Ms. GUSTAFSON. We do issue those interim reports, and so 
that is how--and the management challenges, and when you will 
look at our management challenge report, which has LMAS's 
challenge number--I forget, but they are one of them--you know, 
we have very specific things that we are looking at and we are 
rating them on and they get a color grade. And so that is once 
a year. The interim reports come when we have enough work to 
show. There are some milestones coming up that I think they are 
expected to--I think one of their milestones is in September of 
2013. They are hoping to migrate almost everything off the 
mainframe. That is something we will be looking at. And so we 
do get the reports and then we issue them--when there is enough 
to say we issue them. When we have enough to say we issue those 
reports. And they are public and on our website.
    Mr. SCHNEIDER. Great. Thank you.
    Ms. GUSTAFSON. Thank you.
    Mr. SCHNEIDER. Thank you. I appreciate your time here.
    Chairman GRAVES. Mr. Collins.
    Mr. COLLINS. Thank you. I am sorry I was late. I was at an 
Immigration hearing.
    I guess I may have missed some things. I am just more 
curious when we talk about efficiency and waste, fraud, and 
abuse as one piece, an important piece. If I walked into the 
director's office or when the director comes to work, is there 
a dashboard with colors like red, green, yellow? If there is 50 
things to track that you might see 35 greens, you know, and 
eight yellows and so many reds to know where we put our 
attention that day? I mean, that level of metrics and dated, 
does that exist?
    Ms. GUSTAFSON. Well, in all candor, I have no idea what is 
on the administrator's desk. I do not know what she has, so I 
cannot really speak to actually how they track. I do know that, 
for example, in our management challenges report, that is a 
report that we issue annually with the color ratings of the 
most serious management challenges and the specific things that 
we need to see improvement that actually have red, green, and 
yellow. I will tell you that those meetings do not happen at 
the administrator level except for maybe when it is issued. But 
those are meetings that happen often. Not daily. I am talking 
more about my work, you know, where we will again stay in 
contact with them and have kind of in-process meetings. Where 
are we? Where do you think we are going? What is the next 
report going to look like? But quite frankly, as far as what 
she faces when she wakes up in the morning, I just do not know.
    Mr. COLLINS. That would be interesting to know because we 
would like to think the focus was on return.
    Ms. GUSTAFSON. Right.
    Mr. COLLINS. So on, you know, what we would call efficiency 
or process mapping, does that go on or do you look at that to 
say here is a department processing loan applications. You 
know, I am thinking the Lien Six Sigma Model of process mapping 
to take waste out or make it more efficient and therefore, 
reduce the need for people so maybe we could do it with fewer 
or do more with less?
    Ms. GUSTAFSON. Well, I think that a lot of our audit 
reports are focused on that type of--given the fact that one of 
the things the IG Act says we are to promote economy and 
efficiency I think in government programs. It says something 
almost directly like that. That is something that we look at 
very often, is whether the programs are running as efficiently. 
So I do not know again how they do it but I certainly hope and 
think that our audits will touch on that and talk about 
efficiencies that can be had and whether the process needs to 
be changed. Like any agency, you know, SBA is slow. You know, I 
think there are some things being done at SBA that have been 
done that way a long time, you know, and so I think they are--
that is always something that we try to look at and to see if 
there are improvements that can be made.
    Mr. COLLINS. You know, I think perhaps if you asked the 
question and said give me a list of 50 processes and which ones 
you can tackle, and then you go back in with an audit and say 
how many steps does it take to process this loan application? 
Now, first, they are probably going to say they do not know. So 
then you make them process map it and it comes back that there 
are 57 steps.
    Ms. GUSTAFSON. Right.
    Mr. COLLINS. And then you say, okay, we can cut that down 
to 23. That makes it more efficient, less prone to mistakes. 
And if you held them accountable for that----
    Ms. GUSTAFSON. Right.
    Mr. COLLINS.--over a period of time they would become more 
efficient because they know you are asking the questions to 
which initially they probably do not have the answers. Right?
    Ms. GUSTAFSON. Just, you know, in looking at that piece of 
efficiency where you can do more with less because people cost 
a lot of money, you know, just a suggestion that that kind of 
process mapping, process improvement could make it so they 
could get their job done with less folks.
    Ms. GUSTAFSON. Well, it is an interesting idea, and my head 
of audits is right behind me and is probably chomping at the 
bit. He loves that kind of stuff, so I am sure that we will 
have a discussion further on what we can do.
    Mr. COLLINS. Because I can tell you I have never yet seen a 
buffet line that you cannot reorganize, make efficient. So 
every process can be, I think, made more efficient. I think 
there is a rule of thumb. You can probably reduce 22 percent of 
the personnel costs and probably cut most of the steps almost 
in half. But the key thing there is it takes the waste out and 
also the errors. The more time someone touches that piece of 
paper, the more opportunity is for someone to make a mistake.
    Ms. GUSTAFSON. Right.
    Mr. COLLINS. And sometimes you have to implement technology 
to get rid of the people side, but technology, if it is done 
right, is less prone to mistakes.
    Ms. GUSTAFSON. Sure.
    Mr. COLLINS. Just a couple suggestions. Thanks for keeping 
your eye on our tax dollars.
    Ms. GUSTAFSON. Well, thank you.
    Mr. COLLINS. And keep up the good work. Thank you.
    Ms. GUSTAFSON. Thank you.
    Mr. COLLINS. I yield back.
    Chairman GRAVES. With that I would like to thank the 
Inspector General for coming in today, taking the time to 
testify before the Committee.
    Ms. GUSTAFSON. Thank you very much.
    Chairman GRAVES. And I would ask unanimous consent that all 
members have five legislative days to submit statements or 
supporting materials for the record. Without objection that is 
so ordered. And with that the hearing is adjourned. Thank you.
    Ms. GUSTAFSON. Thank you.
    [Whereupon, at 2:04 p.m., the Committee was adjourned.]


                            A P P E N D I X

[GRAPHIC] [TIFF OMITTED] T1420.001

                              INTRODUCTION


    Chairman Graves, Ranking Member Velazquez, and 
distinguished members of the Committee, thank you for giving 
the Small Business Administration (SBA or Agency) Office of 
Inspector General (OIG) an opportunity to discuss our oversight 
activities of SBA programs and operations. The SBA was 
established to maintain and strengthen the nation's economy by 
protecting the interests of and assisting small businesses, and 
by helping families and businesses recover from disasters.

    The OIG was established within SBA by statute to promote 
economy, efficiency, and effectiveness and to deter and detect 
waste, fraud, and abuse in the Agency's programs and 
operations. Every year, our staff of approximately 104 
employees--which includes criminal investigators, auditors and 
program analysts, attorneys, and support staff--conduct 
criminal investigations, audits, and other reviews, resulting 
in numerous indictments, convictions, debarments, monetary 
payments by fraud perpetrators and many recommendations to the 
Agency for improvement and elimination of wasteful or 
inefficient practices.

    During Fiscal Year (FY) 2012, the OIG issued 22 reports 
containing 126 recommendations for improving SBA operations, 
reducing fraud and unnecessary losses, and recovering funds in 
FY 2012. In addition, OIG investigators obtained 59 indictments 
and 59 convictions of subjects who defrauded the government. In 
all, OIG efforts resulted in more than $90 million in office-
wide dollar accomplishments during FY 2012.

                           AGENCY PERFORMANCE


    On January 4, 2011, the GPRA Modernization Act of 2010 (the 
Act) was signed into law (Public Law 111-352). The Act 
modernizes the Federal Government's performance management 
framework, retaining and amplifying aspects of the Government 
Performance and Results Act of 1993 (GPRA) while also 
addressing some of its weaknesses. On April 9, 2013, the OIG 
initiated a review of the SBA's compliance with GPRA 
requirements as described in OMB Memorandum M-11-31, Delivering 
an Efficient, Effective and Accountable Government and OMB 
Circular A-11, Part 6, PReparation and Submission of Strategic 
Plans, Annual Performance Plans, and Annual Program Performance 
Reports. The review is in its preliminary stages, and we 
anticipate publishing our findings later this year.

    The Act emphasizes the use of goals and measures to improve 
outcomes, and requires the Federal Government to adopt a 
limited number of crosscutting goals, defined as objectives 
that cut across organizations (such as agency) boundaries. 
These goals are expected to focus on outcomes in a limited 
number of crosscutting policy areas, as well government-wide 
management objectives in the areas of financial management, 
human capital, procurement and acquisition, information 
technology, and real property. The Act also requires agencies 
to report performance against those goals through a single 
Federal website.

    Effectively measuring performance is important to support 
agency management resource allocation and other policy 
decisions to improve service delivery, compliance monitoring 
and program effectiveness. Importantly, performance 
measurement, because of its ongoing nature, can serve as an 
early warning system to management and as a vehicle for 
improving accountability to the public.

    Although we currently have ongoing work to determine the 
Agency's compliance with GPRA requirements, recently conducted 
reviews have evidenced concern relative to accountability and 
performance measurement within certain programs:

           Audit Report 13-15: Briefing Report for the 
        FY 2012 Federal Information Security Management Act 
        Review

          This report presents the results of the OIG's Federal 
        Information Security Management Act (FISMA) review of 
        the SBA. Under FISMA, agencies report their compliance 
        with information security requirements. The OIG reports 
        on the effectiveness of the agency's information 
        security program in accordance with OMB criteria. For 
        Fiscal Year (FY) 2012, the OIG was required to report 
        on the following 11 areas: 1) continuous monitoring 
        management; 2) configuration management; 3) identity 
        and access management; 4) incident and response 
        reporting; 5) risk management, 6) security training; 7) 
        plan of actions and milestones; 8) remote access 
        management; 9) contingency planning; 10) contractor 
        systems, and 11) security capital planning.

          The OIG found that the SBA continues to show 
        improvement in its IT Security Program. Specifically, 
        the SBA showed improvement in the areas of Incident 
        Response and Risk Management, continues to meet 
        requirements in the area of Security Capital Planning, 
        and needs to make significant improvement in the area 
        of Configuration Management. The OIG also recommended 
        the SBA update its Telework SOP, which contained 
        outdated technical procedures. However, significant 
        concerns remain regarding SBA's IT security operations, 
        and the OIG has a longstanding management challenge to 
        the Agency identifying key concerns.

          Audit Report 13-14: The SBA's 417 Unauthorized 
        Commitments Impacted Mission-Related Services and 
        Increased Costs

          This report presents the results of the OIG's audit 
        of the Small Business Administration's Unauthorized 
        Commitments. An unauthorized commitment occurs when a 
        government official agency procures goods or services 
        without the necessary authority. The audit objective 
        was to determine the extent and reasons unauthorized 
        commitments occurred. The OIG determined that the SBA 
        received invoices associated with 417 unauthorized 
        commitments, valuing more than $1.4 million between 
        November 2010 and May 2012. The OIG found that the 
        total number of unauthorized commitments at the SBA in 
        the last two fiscal years greatly exceeded the total 
        number of unauthorized commitments at six other federal 
        agencies of a similar size. Further, the OIG believes 
        that the 417 unauthorized commitments directly affected 
        the ability of the Agency to procure goods and services 
        for its daily operations legally and efficiently, and 
        limited its ability to provide needed support to small 
        businesses.

          The SBA continues to improve its acquisition process 
        and preventing unauthorized commitments, however, 
        transformation of the culture needs to occur. In order 
        to implement a successful culture change, the SBA needs 
        to hold its employees accountable for their actions, 
        have detailed policy and guidance readily accessible to 
        all employees, and provide meaningful training to all 
        employees. The OIG recommended seven actions to improve 
        contract management at the SBA and significantly 
        decrease the total number of future unauthorized 
        commitments.

           Audit Report 13-13: Evaulation of SBA's 
        Progress in Reducing Improper Payments in FY 2012

          The objective of this audit was to determine the 
        adequacy of SBA's compliance with IPERA and OMB's 
        implementing guidance. To achieve the audit objective, 
        the OIG determined whether the SBA addressed required 
        provisions, and performed limited testing of compliance 
        with these provisions. The OIG also reviewed the 
        completeness of improper payments disclosures in the 
        SBA's Agency Financial Report for fiscal year (FY) 
        2012, and assessed the Agency's efforts to prevent and 
        reduce improper payments.

          The OIG found that the SBA was generally compliant in 
        meeting the minimum requirements, in accordance with 
        OMB guidance. Further, the OIG found that the SBA's 
        efforts to prevent and reduce improper payments have 
        resulted in significant progress since the FY 2011 
        assessment. Specifically, the Disaster Assistance Loan 
        Program made progress through the deployment of 
        improved controls and process improvements, which 
        reduced their improper payments rate from 28.4 percent 
        in FY 2011 to 17.9 percent in FY 2012. In addition, the 
        7(a) and 504 programs improved their testing procedures 
        for loan guaranty approvals. The revised procedures 
        were more robust and led to the identification of more 
        improper payments during the testing process. As a 
        result, the improper payments estimate increased from 
        $0 in FY 2011 to $233 million and $105 million, 
        respectively, in FY 2012. Notwithstanding these 
        accomplishments, further improvement is still needed in 
        the effectiveness and development of SBA improper 
        payment controls and processes for all of the programs 
        or activities.

          The OIG also assessed whether the SBA complied with 
        IPERA reporting requirements, as specified in OMB 
        guidance. This guidance requires a limited review of 
        controls over Agency reporting. This evaluation found 
        that the SBA generally met all the IPERA reporting 
        requirements. However, the Disaster Assistance Loan 
        program was not compliant because their improper 
        payment rate exceeded the 10 percent threshold. In 
        addition, three of the five programs or activities did 
        not achieve their annual reduction targets. The OIG was 
        unable to evaluate the accuracy and completeness of the 
        improper payments rate reported for the Acquisition 
        Program.

           Audit Briefing Report 13-11: The SBA's Loan 
        Management and Accounting System-Incremental 
        Improvement Projects
          This report presents the results of the OIG's review 
        of the SBA's efforts to modernize its loan management 
        system and migrate off the mainframe environment. Since 
        2004, a significant challenge facing the SBA is the 
        modernization of the loan accounting process. 
        Specifically, this report addresses issues identified 
        in the planning, management, and oversight of SBA's 
        ongoing migration efforts.

          The OIG found that the SBA successfully migrated the 
        data-entry of over 44% of its loan and lending 
        transactions from mainframe data entry to web-based 
        data entry. This was the first step in fully migrating 
        off SBA's legacy mainframe and utilizing updated 
        technology. During the review, the OIG also found that 
        the:

            SBA did not have an incremental improvement project 
        to migrate its newly created COBOL code into 
        production.

            Root Cause Analysis Project was altered from its 
        initially approved project.

            User Interface Migration Project screens were not 
        security tested and validated.

            Quality Assurance and Independent Verification and 
        Validations programs did not exist.

    The OIG identified five findings that put the development 
of this project at risk for not meeting the needs and 
expectations of the SBA, the Office of Management and Budget 
(OMB), and Congress. The OIG also issued six recommendations. 
As discussed below, the OIG has issued a management challenge 
to SBA regarding LMAS system.

           Audit Report 13-03: Benefits of Mentor 
        Protege Joint Ventures are Unknown: Robust Oversight is 
        Needed to Assure Success and Avoid Abuse

          This report presents the results of the OIG's audit 
        on Protege Benefits from Joint Venture Agreements with 
        Mentors. The audit objectives were to (1) determine the 
        extent to which the joint venture agreement between a 
        mentor and protege resulted in substantial benefits to 
        the 8(a) participant, and (2) assess the SBA's 
        oversight of Mentor Protege Joint Venture Arrangements.

          The OIG found that the SBA lacked performance 
        measurements for joint venture arrangements and did not 
        effectively oversee 8(a) firms that have joint venture 
        agreements. As a result, the SBA did not have the 
        information necessary to determine whether mentor 
        protege joint ventures benefitted the 8(a) participant. 
        This lack of information weakened SBA's ability to 
        effectively oversee and assess the development of 8(a) 
        participants with mentor and protege joint venture 
        agreements and increased the risk of program abuse by 
        participants. The OIG made six recommendations.

           Audit Report 12-21: Review of SBA's State 
        Trade and Export Promotion (STEP) Grant Program

          This report presents the results of our audit, Review 
        of SBA's State Trade and Export Promotion (STEP) Grant 
        Program, a three year pilot that will end in FY 2014. 
        We reviewed the five largest grants, awarded to 
        California, Pennsylvania, Washington, Michigan, and 
        Illinois, in order to determine whether grant 
        recipients were measuring program performance, as well 
        as the results of those measurements. In addition, we 
        reviewed the overall management and effectiveness of 
        the STEP grant program.

          We found that grant recipients' performance measures 
        did not demonstrate whether STEP program goals were 
        achievable. Specifically, grant recipients' metrics 
        were not adequate to measure performance. In addition, 
        SBA personnel did not meet with Congress to identify 
        and clarify the FY 2011 STEP program measures for 
        success. Personnel from the SBA Office of International 
        Trade and the Office of Grant Management awarded a 
        grant to an ineligible applicant, provided untimely and 
        inaccurate responses to inquiries, and failed to 
        enforce grant terms and conditions. The audit team 
        recommended a total of nine specific actions that we 
        believe will improve the accountability and performance 
        of the STEP grant program.

           Report 11-11 - Effectiveness of the Small 
        Business Administration's Surveillance Review Process

          This report presents the results of our audit of the 
        effectiveness of the SBA's Surveillance Review Process. 
        Our audit objectives were to determine whether: (1) 
        SBA's small business and 8(a) surveillance reviews 
        adequately assessed the small business programs of 
        contracting activities; and (2) appropriate action was 
        taken to ensure that areas of non-compliance were 
        corrected in a timely manner.

          SBA undertakes on-site visits, known as surveillance 
        reviews, to review procuring agency files to determine, 
        among other things, whether contracting offices are 
        properly awarding and monitoring preferential contracts 
        consistent with applicable regulations. Our review 
        found that SBA had only evaluated a limited number of 
        procuring offices over the past seven years, and did 
        not use a systematic, thorough, or consistent approach 
        in identifying which offices were reviewed or which 
        information was evaluated.

          In addition, although SBA delegated its 8(a) 
        execution authority to procuring agencies over 10 years 
        ago, and said that it would monitor procuring agency 
        compliance with 8(a) requirements through its 
        surveillance reviews, our audit of surveillance reviews 
        found that this had not been done. Lastly, there are 
        regulatory limits on subcontracting which serve as an 
        important control to preclude small business set-aside 
        contracts from becoming ``pass-throughs'' to large 
        businesses. However, our audit found that the SBA 
        review teams generally did not evaluate whether small 
        businesses and 8(a) firms were performing the 
        percentage of work that is required by these 
        regulations. The OIG made 12 recommendations.

    The policies and procedures that guide SBA officials in 
considering OIG-issued reports are set forth in OMB Circular A-
50. This Circular appropriately indicates audit follow-up is an 
integral part of good management and is a shared responsibility 
of agency management officials and of auditors. For our part, 
OIG officials are responsible for undertaking independent 
audits and reviewing the agency's responses to recommendations 
made in these reports. SBA management officials are responsible 
for receiving and analyzing OIG reports, providing timely 
responses, and taking corrective action, where appropriate. OMB 
Circular A-50 indicates that management officials are 
responsible for identifying and providing the OIG dates for 
achieving corrective action as part of their written comments 
on reported findings and recommendations. Significant 
disagreements in this process are addressed with the audit 
follow-up official--the SBA Deputy Administrator.

    There are 47 open recommendations associated with the 
reports highlighted above, several of which recommend 
establishing meaningful performance metrics and periodically 
assessing the same. We have noted the increased cooperative 
efforts with SBA officials to root out fraud, waste, and abuse 
in SBA programs, and timely implementation of corrective action 
demonstrates commitment to improve the effectiveness and 
efficiency of SBA programs, though challenges persist.

                       TOP MANAGEMENT CHALLENGES


    While SBA's programs are essential to strengthening 
America's economy, the Agency faces a number of challenges in 
carrying out its mission, including fraudulent schemes 
affecting all SBA programs, significant losses from defaulted 
loans, procurement flaws that allow large firms to obtain small 
business awards, excessive improper payments, and outdated 
legacy information systems. The Agency also faces significant 
management challenges.

    In accordance with the Reports Consolidation Act of 2000, 
the OIG released its Report on the Most Serious Management and 
Performance Challenges Facing the Small Business Administration 
in FY 2013 in October 2012. This report represents our current 
assessment of Agency programs and/or activities that pose 
significant risks, including those that are particularly 
vulnerable to fraud, waste, error, mismanagement, or 
inefficiencies. Our report is based on specific OIG, Government 
Accountability Office (GAO), and other official reports, as 
well as our general knowledge of SBA's programs and operations.

[GRAPHIC] [TIFF OMITTED] T1420.002

    Overall, in FY 2012, the Agency made improvements across 
all the challenges, with the exception of one of the 
recommended actions under Management Challenge #6 and three of 
the recommended actions under Management Challenge #8. 
Specifically, Management Challenge #6--The Section 8(a) 
Business Development program needs to be modified so more firms 
receive business development assistance, standards for 
determine economic disadvantage are justifiable, and the SBA 
ensures that firms follow 8(a) regulations when completing 
contracts--remains at a rating of Red or no progress. 
Management Challenge #8--SBA needs to modernize its Loan 
Accounting System and migrate it off the mainframe--was 
downgraded from a rating of Orange, or limited progress, to a 
rating of Red, or no progress.

    The progress on most Management Challenges was notable. The 
effort made by Agency staff and leadership throughout FY 2012 
on the recommended actions demonstrated commitment to improving 
the Agency's programs and operations. The Agency's efforts are 
reflected in the overall elevation of Management Challenge 
ratings.

                               CONCLUSION

    The SBA OIG continues to focus on the most critical risks 
facing the SBA. Our resources are directed at key SBA programs 
and operations, to include financial assistance, government 
contracting and business development, financial management and 
information technology, disaster assistance, Agency management 
challenges, and security operations. Using a risk-based 
approach, we believe our reviews and investigations and ensuing 
recommendations for corrective action will result in greater 
effectiveness and efficiency of SBA programs and operations. We 
value our relationship with this Committee, and with the 
Congress at large, and look forward to working together to 
address identified risks and the most pressing issues facing 
the SBA.

                                 
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