[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
SBA MANAGEMENT AND PERFORMANCE
CHALLENGES: THE INSPECTOR GENERAL'S
PERSPECTIVE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MARCH 16, 2016
__________
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Small Business Committee Document Number 114-049
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Emily Murphy, Deputy Staff Director for Policy
Jan Oliver, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Steve Chabot................................................ 1
Hon. Nydia Velazquez............................................. 2
WITNESS
Hon. Peggy E. Gustafson, Inspector General, United States Small
Business Administration, Washington, DC........................ 3
APPENDIX
Prepared Statement:
Hon. Peggy E. Gustafson, Inspector General, United States
Small Business Administration, Washington, DC.............. 21
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
SBA MANAGEMENT AND PERFORMANCE CHALLENGES: THE INSPECTOR GENERAL'S
PERSPECTIVE
----------
WEDNESDAY, MARCH 16, 2016
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 11:00 a.m., in Room
2360, Rayburn House Office Building. Hon. Steve Chabot
[chairman of the Committee] presiding.
Present: Representatives Chabot, Hanna, Huelskamp, Curbelo,
Hardy, Kelly, Velazquez, Meng, Clarke, and Adams.
Chairman CHABOT. Good morning. The Committee will come to
order.
I would like to welcome back before the Committee the
Inspector General of the Small Business Administration, the
Honorable Peggy Gustafson. Over the past few weeks, the
Committee, along with its Subcommittees, has held a series of
hearings in response to a report by the Government
Accountability Office, the GAO, regarding management
deficiencies within the Small Business Administration. The GAO
noted that many of the challenges identified in its report were
first identified by the SBA's Office of the Inspector General.
Today, we will hear Inspector General Gustafson's unique
perspective on the management of the SBA, as well as her
insight into ways in which the SBA may more effectively and
more efficiently assist small businesses.
I was troubled by the findings made in the GAO's report,
and I think most of the members of this Committee were as well.
What was particularly disturbing was just how many of the
challenges identified in the report had already been identified
by the Inspector General and were known by the SBA. In fact,
reports and audits compiled by the Inspector General reveal
that some of the most serious management challenges affecting
the SBA were first highlighted over a decade ago. As these
issues have gone unresolved, SBA programs have remained
vulnerable to waste, fraud, and abuse, which undermines the
agency's mission to support America's small businesses.
It is clear that the Inspector General plays a critical
role in ensuring effective management of the SBA. By conducting
audits to identify program mismanagement, by investigating
fraud or other wrongdoing, or by recommending changes to
increase the efficiency of SBA operations, she has provided
independent and objective reviews of agency actions.
Now the SBA, under the watchful eye of this Committee, must
act. By clarifying the specific areas in which improvement is
needed and highlighting possible paths forward for the agency,
the insights offered by the Inspector General are invaluable as
the Committee continues to work with the SBA to develop
meaningful solutions to its management and performance
challenges.
I would like to thank you, Ms. Gustafson, for coming today,
and we look forward to your testimony. I would now like to
yield to the ranking member, Ms. Velazquez, for her opening
remarks.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. And welcome.
Today we are holding the last in a series of oversight
hearings this committee has undertaken over the past 2 months.
It is only fitting that we culminate by examining the work of
the Office of Inspector General and seek their input on ways to
improve the agency. The OIG is an independent office tasked
with auditing, investigating, and making recommendations to SBA
that help the agency fulfill its mission. The OIG plays a
critical role protecting the taxpayers' investment in SBA.
In 2015, the OIG helped recover or save over $134 million.
Every year, the OIG is tasked with informing this committee of
SBA's top management challenges. This report not only helps
with our oversight responsibilities, but also provides SBA with
recommendations to address the challenges that are identified.
Unfortunately, many of those issues are very longstanding
problems, some going as far back as 1999.
One area of serious concern is small business contracting.
The OIG again identified several shortcomings in SBA oversight
and data collection, and in turn, the reliability of the
reporting of small business contracting goals. Furthermore,
both the IG and GAO have recently reported weaknesses in SBA
internal controls that ensure only eligible firms receive
contracts set aside for the women-owned small business federal
contracting program.
Congress has given SBA the tools to address many of these
problems, yet they remain unimplemented, and that is
unacceptable. I look forward to hearing from the IG on ways SBA
can improve the reporting on small business data and compliance
with the small business minority and women-owned contracting
goals. Another outstanding issue is the lack of oversight in
the SBA-7 lending program. Though the agency has made progress,
the IG continues to find fraud, waste, and abuse, particularly
when loan agents are involved. The IG has recommended SBA
assign unique identifiers to loan agents as a way to root out
bad actors. I hope to explore this option during today's
hearing and determine how we can better protect the American
taxpayers.
Additionally, multiple IG audits have uncovered millions in
improper payments made under the 7(a) loan program.
Particularly troubling to me is the IG's finding that SBA is
not adhering to its own practices and procedures when reviewing
high dollar, early default loans. As the size of the agency's
portfolio increases, SBA must be more diligent in overseeing
the 7(a) approval and purchase processes to minimize risk or we
may need to reexamine the size of loans SBA can make.
Finally, weaknesses in the administration of disaster loan
programs continue to drag on at the agency. I cannot stress
enough that this committee, the GAO, and the IG have all
identified issues with disaster loan processing and we have
implored the agency to implement the alternative loan programs
enacted almost nearly 10 years ago.
I know Administrator Contreras Sweet has prioritized
improving the Disaster Loan program, and I am hopeful the
increased scrutiny of the administrator's changes as a result
of the IG adding this program to the list of management
challenges will lead to its overall improvement. I am confident
that we can use the IG's expertise and insight to explore ways
for SBA to improve the delivery of small business contracting
lending and entrepreneurial development resources.
I look forward to hearing the IG's recommendations and
working with you, Ms. Gustafson, to improve the SBA. I want to
thank you for your presence here today, and I yield back. Thank
you, Mr. Chairman.
Chairman CHABOT. Thank you very much. The gentlelady yields
back.
I will now take a moment to go over our timing rules here,
which with one panel member are pretty easy. We operate by the
5-minute rule which we stick to, and we would ask you to stay
within that if at all possible. There is a lighting system. The
green light will be on for 4 minutes. The yellow light will
come on for a minute to let you know that you have got about a
minute to go, and the red light will come on. If you need a
little more time since you are our sole witness that is okay. I
ask Committee members if they have opening statements prepared
to submit them for the record.
We are now pleased to welcome back to the Committee
Inspector General Peggy Gustafson, who has served as the SBA's
Inspector General since 2009. We very much appreciate you being
with us, and you are recognized for 5 minutes.
STATEMENT OF THE HONORABLE PEGGY E. GUSTAFSON, INSPECTOR
GENERAL, UNITED STATES SMALL BUSINESS ADMINISTRATION
Ms. GUSTAFSON. Chairman Chabot, Ranking Member Velazquez,
and distinguished members of the Committee, thank you very much
for the opportunity to be here today and for your continued
support of the work of the Office of Inspector General. I am
extremely proud to represent the dedicated men and women of our
office, and I am very happy to come and talk to you about their
work today.
As you have noted, as an independent office, the Office of
Inspector General conducts and supervises reviews and
investigations relating to SBA programs and supporting
operations. We seek to detect and prevent waste, fraud, and
abuse and try to promote economy, efficiency, and effectiveness
in the programs of the Small Business Administration.
During the last fiscal year 2015, we achieved nearly $134
million in recoveries and savings, which is more than a sixfold
return on investment to the American taxpayer. We issued 17
reports containing 80 recommendations for improving the SBA's
operations and reducing fraud and the necessary losses. In
addition, our criminal investigators, their investigations
resulted in 52 indictments or informations and 57 convictions.
While SBA's programs are essential to strengthening
America's economy, this agency does face a number of challenges
in carrying out its mission, including fraudulent schemes
affecting all SBA programs, losses from defaulted loans,
procurement frauds that allow large firms to obtain small
business awards, excessive improper payments, and some pretty
significant information technology management concerns.
In October of 2015, we released our latest report on the
most serious management challenge and performance challenges
facing the SBA. Based on the agency's efforts, SBA did
demonstrate positive progress in resolving recommendations
associated with five of the identified challenges. However,
they remained at status quo on four of the challenges and
demonstrated no progress on one recommendation in an area
related to information technology.
Now, clearly these results I would say paint a mixed
picture relative to SBA's commitment to addressing these
challenges in earnest and their ability to overcome these
challenges. As you have heard in your series of recent hearings
held by the Committee, they face many serious concerns, SBA
does, even beyond, of course, those designated as top
management challenges. GAO did document some of these in
September 2015 report, and I was certainly pleased to note that
GAO cited the work products of this office as a basis for a lot
of their findings in that report. It is nice to have one
oversight give props to another. We appreciated that.
So for your information, SBA currently has 144 open OIG
recommendations pertaining to reviews conducted in recent years
and not so recent years across SBA programs.
I want to note that I do share the overarching concern
expressed by GAO before this Committee in January. It would be
irresponsible for me to not be concerned about the fact that
SBA has not resolved many of these longstanding management
challenges and that part of this reason may be due to a lack of
sustained priority attention given to these challenges over
time.
Having said that, I think it also has to be acknowledged
that SBA has shown that with a sustained, committed effort over
time, they can achieve successful results in these challenges.
For example, they moved to green and the very large challenge
related to their LMAS IT system. So I think that really shows
that these are challenges that with the right effort can really
be conquered and met.
The agency needs to strive for excellence in carrying out
their programs. The agency leaders look to--it is essential
that they look to and address the root cause of these problems
evidenced by these recurring findings in these reports, and
also pay attention to surveys, such as the Federal Viewpoint
Survey mentioned in the GAO reports that where the SBA
workforce does continue to express some dissatisfaction with
the management.
The challenge of long-term organizational transformation in
areas of these, such as human capital and IT, they are hard
challenges but they are not insurmountable with sustained
attention by competent managers. I think that sustained
leadership absolutely is necessary and that the SBA needs to
try to close some of the revolving door on some of these key
positions. For example, the CIO, the position of CIO that I
know has been a source of concern and discussion within the
SBA. There really needs to be an effort to work on having
sustained leadership in positions like that.
I am positive that everybody in the room agrees that
America's small businesses and the taxpayer, they deserve no
less than the SBA performing at its highest levels at all
times. And for all those reasons, I really want to thank you
for the opportunity to speak with you today, and I very much
look forward to answering your questions.
Chairman CHABOT. Thank you very much. We appreciate your
time here, and now we will recognize some questions. I will
recognize myself for 5 minutes for that purpose. You are right,
we do owe the small businesses all across the country the best
that we can provide and the best that the SBA can provide. You
indicated their record as mixed, and mixed is not good enough.
So they do need to do better, and also questions here is part
of that process.
My first question would actually be, last week your office
released a report in which you identified a number of
weaknesses in the SBA's management information security.
Specifically, you found that the SBA is not sufficiently
tracking security incidences, nor is it properly reporting them
to the United States Computer Emergency Readiness Team. Your
office made a similar finding last year looking at the SBA's
2014 fiscal year. Could you expand upon that and address that
issue and what you found?
Ms. GUSTAFSON. Yes. Thank you, Chairman.
The report that we are talking about, of course, is the
annual FISMA, Federal Information Security, okay, FISMA report.
You are right; one of the most concerning things about that
report is in addition to 5 new recommendations in our report, 2
of which the SBA was able to close in the course of our audit
work, there were 31 recommendations that had been carried over
from previous years, which is just an exceptionally large
number of IT--we are talking about IT vulnerabilities, IT
system issues. The ones that you are talking about, there were
definite concerns about, again, instances not being reported
timely, happening again. Information security is an excellent
area where, again, it is clear that SBA, like every agency, has
to always evidence a strong commitment to never, ever taking
their eye off the ball on the state of information security and
the state of their IT security. You will note that in their
report, some of the issues that they talked about as far as the
incidents not being centrally reported, not being reported in
time, they even mentioned the idea of there has been a lot of
turnover in the IT area. There are things that are happening
where they almost dropped the ball. That is, of course,
unacceptable. I think that FISMA, again, which was looking at
how they did in fiscal year 2015, is a concerning report. I
think it goes to show a perfect area where the agency needs to
show leadership from the very top, saying this is not going to
be acceptable. We are going to dedicate whatever resources it
requires and address these issues.
I will say that, you know, I know that the Deputy
Administrator, Mr. Kramer, has taken this on as something that
is important to him. In the middle of FISMA, there is also that
cybersprint exercise where actually SBA did better. That was an
exercise that all of the Federal Government went through after
the OPM breach and things like that.
Chairman CHABOT. Well, if I could just maybe--I have
limited time.
Ms. GUSTAFSON. Sure. I am sorry.
Chairman CHABOT. I have 2 minutes to go. That is okay. You
know, and I think the point is, and the important thing is they
have a lot of sensitive information----
Ms. GUSTAFSON. Right.
Chairman CHABOT.--from a lot of small businesses all across
the country.
Ms. GUSTAFSON. Right.
Chairman CHABOT. Bad actors are trying to get access to
this information for all kinds of nefarious purposes. You know,
we know that the Russians and the North Koreans and the
Iranians and others want access to this, so the government has
to do a better job.
Ms. GUSTAFSON. Absolutely.
Chairman CHABOT. The government has been hacked time and
time again.
Ms. GUSTAFSON. Absolutely.
Chairman CHABOT. I assume you agree with everything----
Ms. GUSTAFSON. I agree. I was hacked twice in the OPM
audit. Do you know what I mean? I mean, in the OPM breach, so I
think we all feel that. You are right, there is a lot of
sensitive information related to businesses and individuals.
Chairman CHABOT. Thank you. Let me follow up, also. Your
reports have identified weaknesses in the SBA's incident
reporting. Yet, in their most recent budget justification, the
SBA claims to have had 100 percent success rate in timely
reporting incidences during that time. Is there a way to
explain how the SBA is making this claim? If the SBA is going
to claim success in the face of failure, how can we be sure
that they will actually address and resolve their management
challenges?
Ms. GUSTAFSON. Well, it would be hard for me to--and
obviously, I cannot answer that question on behalf of the
agency. I would note a couple of things. One is we are looking
at a very specific time period when we are looking at FISMA
where we did note that there were incidents not being reported.
I would further note that the agency agreed with our findings
in FISMA and actually had no quarrel with anything. So to the
extent that there may be a disconnect on why one and not the
other, I have to respectfully request that I think you may need
to ask them because all I know is that they agreed with us.
Chairman CHABOT. We will.
Ms. GUSTAFSON. Yes.
Chairman CHABOT. Thank you. My time is about to expire, so
rather than trample on somebody else's time, I am going to
yield back. I will now recognize the ranking member, Ms.
Velazquez, for 5 minutes.
Ms. VELAZQUEZ. Thank you. Your office has repeatedly
recommended that SBA should implement a women-owned small
business certification program in tandem with the sole source
authority granted in the 2015 NDAA. However, the agency moved
forward with only the sole source provision. Can you discuss
the risk that this poses to the integrity of the program?
Ms. GUSTAFSON. Yes, Ranking Member Velazquez. Thank you.
I would point out two things that did cause us grave
concern about that. One was quite simply, the sole source
authority was provided for that program in the very same
legislative vehicle that directed SBA to institute a
certification program for women-owned small businesses. On a
very basic level, we believed that they should be done at the
same time because Congress seemed to be telling SBA ``we think
we should change this in the program but also do this.'' That
was a concern to us, especially given our work early on in the
WOSB program where there was self-certification being happened
very early on when we took a sample, and when we looked to see
what documents were behind the self-certification of some of
these businesses that were supposed to be uploaded in that
website to show why these businesses that are supposed to be in
the program, they simply were not there. That seems to evidence
a weakness in a self-certification program that was of concern
to Congress, and yet, here you are doing sole source, which is
a much faster way of getting contracts out. There is more money
flowing out the door, and yet the safeguard that Congress has
asked for has not happened yet. It is a source of great concern
for us, and I appreciate Congress' continued attention to that.
Ms. VELAZQUEZ. Thank you. So my understanding is that SBA
recently asked for comments on an Advanced Notice of Public
Rulemaking for what a certification could look like for the
women's program. Has your office made any recommendation as to
what the agency should do to prevent fraud and abuse when
implementing a certification program?
Ms. GUSTAFSON. I have the same understanding as you that
this has been set out and sought comment. I know that we have
done prior work in some of these self-certification programs
and these certification programs that I think should always be
a lesson for SBA when a new program, such as WOSB, comes in. I
think that there are lessons to be learned from the HUBZone
program, for example, that talked about those certifications.
Those are out there and, of course, they are known to SBA,
because those are recommended directly to SBA. Whether we have
made formal comments on the WOSB, I do not believe so. I do not
think that we have. But certainly, we are there to help. We are
there to give opinions. If they have further questions, I would
be happy to meet with them. And I certainly----
Ms. VELAZQUEZ. I am just afraid that they will use that as
an excuse saying that they are waiting for you to provide the
comments they requested.
Ms. GUSTAFSON. We are always happy to give them any
comments that they ever want, Ranking Member Velazquez.
Ms. VELAZQUEZ. Thank you. For years, OIG investigations
have revealed a pattern of fraud by loan packagers in the 7(a)
Loan program. Your office has recommended implementation of a
registration system, including the issuance of a unique
identifying number for each agent. However, the SBA has made
only limited progress in implementing this recommendation. Can
you explain how the implementation of a loan agent registration
system will reduce fraud in the 7(a) program?
Ms. GUSTAFSON. Yes. Thank you very much for your question.
Loan agents are outside parties that help package the documents
that are used for getting a loan through. What our
investigators have found and have brought forward, and it has
been a management challenge for a very long time, is if there
is a loan agent out there who is falsifying documents and
knowingly committing fraud, they are not doing it one time.
That is what they do. What has been a source of frustration for
us for years is at first there was absolutely no way to know,
here I have Loan Agent Jones and I know he is a fraud. Can you
tell me what other loans has he worked on? We have been for
years saying you have got to find a way to have a system where
we can look up Loan Agent Jones and see what other loans there
are, not only to detect patterns, but absolutely to detect the
amounts of fraud.
Ms. VELAZQUEZ. What is the reason for SBA not to----
Ms. GUSTAFSON. There have been----
Ms. VELAZQUEZ.--implement this recommendation?
Ms. GUSTAFSON. I apologize for interrupting. There have
been several reasons. At one point, and they have evolved as
they have tried to make progress, to be fair on the challenge.
There were technology challenges. They wanted to do some
updating of the databases. They did not want to, and believe
that they cannot use Social Security numbers, which is fine,
which is why we are suggesting you do not need a social. Make
up a number. Just have a certain one. So I think that they are
getting closer. I think they have now acknowledge that they
need to have a searchable database that cannot just be that if
I am Peggy Gustafson for one, but Peggy Elizabeth Gustafson for
another, it will not get a match and stuff like that. So I----
Chairman CHABOT. The gentle----
Ms. GUSTAFSON. I am sorry.
Chairman CHABOT. You can complete your thought.
Ms. GUSTAFSON. No, I think that I am pleased that they are
working with us finally on this because for a while there was
no progress, but absolutely, it is time to have a central
system. And the lenders agree. I really do not think there is
any question about that.
Ms. VELAZQUEZ. Very good. Thank you.
Chairman CHABOT. Thank you very much. The gentlelady's time
is expired.
The gentleman from Mississippi, Mr. Kelly, is recognized
for 5 minutes.
Mr. KELLY. Thank you, Mr. Chairman, and thank you,
Inspector General, for being here.
Your testimony is not the first time we have heard of the
problems of large businesses receiving contracts that were
supposed to be reserved for small businesses. And as you know,
this Committee is taking steps to address this concern. We have
increased penalties, including liquidated damages imposed on
companies for perpetrating fraud. We required companies to
recertify their status as small upon a merger or novation of a
contract. We have met with the GSA to require the new version
of the government's procurement data system accurately classify
small and large businesses. Just this past January, we marked
up legislation requiring the SBA to report separately on
companies who have outgrown their size status. The Committee
has given the SBA tools to ensure that large businesses are not
receiving small business contracts. Do you have any explanation
on why the SBA is not using the tools provided to them by
Congress?
Ms. GUSTAFSON. I do not know, Representative Kelly, that it
is a question of not using the tools. I think it is more a
question of that this is just a very big issue involving a lot
of money and there are so many kind of different aspects to
this issue that there is not one good fix.
Now, some of the things you mentioned I think should be
tremendously helpful. The idea of recertification in the
instance of a merge innovation should really change some of
these things because when a small company is bought by a big
company, now to have to be certified is a big deal. I think
that those are all very positive steps. I think that we are
talking about 23 percent of Federal contracting. We are talking
about billions and billions and billions of dollars. Where
there is money, there is going to be fraud. I think that--I do
not know that SBA is not using them. I think that we are quite
frankly at a moment in time when time is going to tell very
soon whether this is having an impact. These are things that
this Committee has advocated for and given in the relatively
recent past. These are changes. It is hard to change IT systems
and things like that. But I think that they are going to be
crucial to kind of addressing those issues. So I think that is,
to be fair, a better way of putting it. Some of them should be
very impactful and should help on this.
Mr. KELLY. Going back to your earlier opening statement,
one of the things that is important is for leadership to
prioritize and to set goals and to have suspenses and
deadlines. In our answer, I am going to ask you another
question, but I also want you to comment. Do you think that the
leadership in SBA is properly prioritizing and properly setting
standards and focusing on the right thing? Because in my
experience as both a district attorney and as a commander in
the military, our followers focus on those things which we
check up on or those things which we prioritize. If we are
looking at them, they fix them. If we are not and they just
give it lip service, they do not. Do you think that they are
setting the correct priorities?
Ms. GUSTAFSON. I think that you are exactly right; that
change is only going to happen when they are setting the
correct priorities. I think, as I noted in my statement, when
they do that, change happens, and I think that is why LMAS
happened. I think that on some of these management challenges,
what they have done in the recent past is they have gone to
program officials and say, you own this challenge, and so if we
do not make progress on this challenge, I am going to want to
know why. You are absolutely right. Without that, change
probably does not happen.
Now, whether in the big picture, where their priorities are
is exactly right, I think it is a bigger question. I think that
sometimes SBA--and I have talked about this before--suffers
from the fact that as hard as it is an advocacy organization, I
think it often feels pressure to get the loans out the door,
get the numbers up for 8(a). While those are lofty and
important goals, they always need to be mindful that the right
people and businesses have to be getting those goals. So it is
an art really on applying the right type of pressure.
Mr. KELLY. Right. When you referred companies for
suspension or debarment or to the Department of Justice for
prosecution using the liquidated damages provision, what has
been the response from the SBA and the Department of Justice?
Ms. GUSTAFSON. I think that SBA has been incredibly
receptive to our suspension and debarment referrals, up to and
including taking a lot of credit for it, which is fair, because
in the end they do the suspensions and debarments, so I am
happy to share the credit and things like that. We do find a
receptive audience for them because we work very hard to give
them a package that allows for a suspension or disbarment.
The same thing with the Department of Justice. In my
experience in the past 6 years, I have found, I think, a
stronger appetite, especially in the procurement area, for
assistant U.S. attorneys to take these cases. I think there has
been progress made in defining damages which makes them more
attractive to a prosecutor. We certainly do our best to give
them the case all pretty and wrapped up and ready to go. And I
think the will is there on both parts.
Chairman CHABOT. The gentleman's time has expired. Thank
you, gentleman.
The gentlelady from New York, Ms. Clarke, is recognized for
5 minutes.
Ms. CLARKE. I thank you, Mr. Chairman, and I thank our
ranking member. I would also like to thank our distinguished
witness, The Honorable Peggy Gustafson.
Ms. CLARKE. Ms. Gustafson, is it imperative that the Small
Business Administration accurately report the contracts awarded
to small businesses? I am raising this because I think it is
impossible to know where to focus our efforts in meeting small
business contracting goals when we are possibly dealing with
inaccurate procurement data. Can you speak about how the SBA
plans to mitigate this issue of inaccuracy in goaling data?
Ms. GUSTAFSON. I think that, Representative Clarke, you are
alluding to an incredibly crucial point, which is it makes no
sense to tout a goal and to tout having reached the goal if in
the end you cannot really have confidence in the numbers behind
that goal. I do think that there has been a body of work by my
office and by GAO that has called into question whether there
can be complete confidence in those goaling numbers. I think it
is a complicated issue because when you start getting into
goals and the reporting, often the reporting begins with the
procurement agency doing the right coding and putting it into
the system, and SBA ends up doing kind of a capping of, you
know, we are adding those up. I acknowledge that that is a
challenge, but I do think that it is important that SBA take a
hard look and really be not skeptical but question the numbers
just so that they can reach a confidence level that really is
representing small businesses; that when you talk about the
billions of dollars and save 25 percent, that you can look at
the American public and say, I am telling you that 25 percent
of that money, that money is going to small businesses who is
performing that work.
I do think that for various reasons, both in inadequacy of
data systems, data errors, which seem to always be one way and
not the other, which is it is coded small when it should have
been coded large, you do not see the opposite happening. I
think with some of the very complex rules related to what
Representative Kelly referred to, which is companies that
graduate out of the program, that get big, that get bought,
that is a whole lot of details that get lost when it is just
about the numbers. I think what is crucial is that the number
really be delved into by those of us, myself included, GAO,
Committees such as yours, and really what you think that number
means, SBA. Explain to us why Northrop Grumman might be on
there. Let's talk about that. I think it is important to shine
a light. But the work after that gets very complex. Without
holding feet to the fire, both the SBA and the procuring
agencies, there is too big an incentive to really meet those
numbers. There is a huge incentive to meet those numbers. That
is often at the cost of making sure that you can tell the
taxpayers that those numbers are right.
Ms. CLARKE. Very well. I hope that you will continue to
encourage them to sort of drill down.
Ms. GUSTAFSON. Absolutely.
Ms. CLARKE. As we will as well.
As you are aware, collaboration between the SBA and other
Federal agencies is so critical to the mission that small
businesses can fairly compete for Federal contracts. How can
the SBA improve its collaboration with other Federal agencies
so that small businesses are treated fairly in contracting
practice? Which steps are the SBA already taking to do so?
Ms. GUSTAFSON. When you look at our management challenges,
especially when you look at them historically, there has always
been a challenge related to small business, to the contracting
goals and things like that. One of the things that I think SBA
is to be commended for is that we really tried to push them to
say, look--and I think this is a government-wide issue--you
cannot say your responsibility ends at the door to the
procuring agency because these are difficult programs that you
know better than anybody else. The problem becomes to diffuse
if you are going to say, well, that is a DOD contract or that
is an Air Force contract or an EPA contract. And I think that
they have taken some steps in that as far as training, as far
as going to the colleges. I do not mean the colleges, but the
acquisition courses that teach acquisition because it is a very
confusing area and say, hey, let's have a small business
section and let's talk about that. I think that that is
progress on their part, and I think they need to continue to do
that and really continue to own the responsibility for ensuring
the integrity of those programs. Because of SBA does not own
them, nobody is going to.
Ms. CLARKE. I thank you for your answers this morning, and
I yield back, Mr. Chairman.
Chairman CHABOT. Thank you. The gentlelady yields back.
The gentleman from New York, Mr. Hanna, who is the chairman
of the Subcommittee on Contracting and Workforce, is recognized
for 5 minutes.
Mr. HANNA. A couple of quick things. You are doing a great
job, incidentally. It is wonderful to hear you speak.
The 22 cases, $333 million, can you describe to me what
that looks like in the real world? How that can even happen?
Why should someone have to be prosecuted criminally to
eliminate them from a loan organization that is designed to
help people? You know, there is a national group. Frankly, we
would like to have the cap raised from the $21 billion I think
it is today, even higher. It is hard to justify or it is going
to be more difficult with this kind of fraud. But should it be
necessary to have somebody prosecuted criminally in order to
get them debarred?
Ms. GUSTAFSON. Absolutely not. Absolutely not. I mean, the
easiest way to debar somebody is to wait for a conviction, and
then it is easy because you can debar them with no question.
But the law has always provided for what we would call, and you
are well aware, of fact-based debarment or suspension. I do not
think it necessary takes a criminal prosecution, especially
because in these programs it is a very sophisticated type of
person who knows how to take advantage and defraud these
programs because they are confusing. You need to know how to
take advantage of the system. All it really takes is--I do not
think it takes somebody behind bars, but I think you need to
hit them in their pocketbook. I think debarment is often a very
easy way to do that.
Mr. HANNA. The next question is, if it is that easy, why is
it that you need to be the person to identify this? That you
need to be the person, the organization, actually, to see that
this is done? If I were running the SBA and I had credible
suspicions----
Ms. GUSTAFSON. Right.
Mr. HANNA. Go ahead. You know where I am going.
Ms. GUSTAFSON. Oh, no, no, no, no. I think the quick answer
to your question is it does not have to be me. I mean, they
certainly have the enforcement authority and ability and that.
Mr. HANNA. Okay, so the question is, is there a cultural
problem?
Ms. GUSTAFSON. I do think, first off, I think government-
wide, just in my experience as an IG and speaking to other IGs,
I think government-wide there had been a cultural problem of,
especially on the suspension and disbarment front, of trying to
touch that if you did not have a conviction. I think the
Federal Government, and there was a task force that was
created, I think they are doing better government-wide on doing
that, led by some much more aggressive agencies. EPA was
actually pretty aggressive about S&D, as was the Air Force.
They had some pretty strong suspension and debarment officials
who were out there really doing that type of work, which is
always easier to follow somebody who does it first because then
you know how to do it. I think SBA has that capability.
I will say that as I previously mentioned, but I absolutely
think it is true, I think it is sometimes hard for SBA to put
their enforcement hat on. I really do. I think it is because it
really--I think they somehow feel it is at odds with their
advocacy element, which I personally do not understand but I am
not an agency official in that way. Just because any time
somebody is getting, be it a loan or a contract that are not
supposed to, some legitimate small business is getting hurt. I
firmly believe that the honest participants in these programs,
be it the small businesses getting the contracts or the
lenders, they would be happy to see these bad actors get out of
there.
I do think that it is unfortunate that a lot of times the
enforcement angle has not been given the same priority as the
advocacy angle. Anecdotally, I think they are better about it,
and I think one of the reasons is--I wish it was because of me,
maybe it is--but I also think it is because of you. I think it
is because of Congress, because nothing, nothing is more
impactful, quite frankly, than hauling an agency official up
here.
Mr. HANNA. Well, you seem pretty scary to me.
Ms. GUSTAFSON. Do I?
Mr. HANNA. So is there something that you might advise this
Committee to do to kind of open that opportunity for them or
reinforce--they should not have to go through this to get to
that point.
Ms. GUSTAFSON. Right. I think that the best thing that
Congress can possibly do is to never let the agency forget that
you are there. I do not think they forget that you are there,
but I think that as somebody noted before, unless they think
you are anybody--it is a rational actor kind of thing--unless
they are worried that this is what you are paying attention to,
they are going to worry about the other stuff. In addition to
the series of hearings, which I think really has been
impactful, at least certainly right now in the short term,
there are other things that you can do that would not be as
onerous for you all as hearings. You do not have to call me up
all the time or anything like that, but I think just kind of
holding their feet to the fire. I think it pays off immense
dividends, be it a letter or briefings or things like that in
addition to this. They will not forget that.
Mr. HANNA. Thank you, Chairman. I yield back.
Chairman CHABOT. Thank you. The gentleman from New York's
time is expired.
Another member from New York, Ms. Meng, who is the ranking
member of the Agriculture, Energy, and Trade Subcommittee. I
think 80 or 90 percent of the people that have asked questions
other than the chairman himself are from New York are here
today.
Chairman CHABOT. The gentlelady is recognized for 5
minutes.
Ms. MENG. Thank you, Mr. Chairman, and to our ranking
member. Thank you to our witness for being here today and all
the great work that you are doing.
In your testimony you identify weak oversight and lack of
regulatory clarity as among the reasons that under the 8(a)
mentor protege program larger companies can end up benefitting
more from the program than minority-owned small businesses,
which is contrary to the aims of the program and the SBA Act.
What resources does the SBA need to strengthen oversight of
this program? Can existing loopholes in the regulation be
closed? I also want to find out if anything more can be done
through outreach and education to enable some of these small
businesses to better protect themselves.
Ms. GUSTAFSON. I cannot address the resource issue because
I think that is really more appropriate for the agency. I do
not know if they feel like they have enough resources or they
do not on that. Our Mentor-Protege audit is at least a couple
of years old now, but it did evidence a source of concern,
especially in the joint venture area because the Mentor-Protege
Joint Venture will count for small business credit, will count
towards the small business goal. So it is really crucial that
the requirements of that program and the limits and things like
that be met.
I think you are right. There is always an education
component because, again, it is not an excuse, but those regs
are no fun to read and they are complicated. I think that,
similar to what I noted before, I think SBA needs to continue
their education component because they really are the best ones
to educate the procuring agencies and things like that on what
the issues are. So I think it is a tremendous tool if used
correctly. If Mentor-Protege Joint Ventures are not used
correctly, they become kind of almost a passthrough where not
only are there credit being given for things being done by
small businesses, or pardon me, by large businesses, but I
think even just as tragically, the small businesses are not
getting the development experience that the whole Mentor-
Protege program is meant to do which is to say you have this
mentor and we are going to show you how to do it. When that
program is not running the way it should, they are not
developing the way that Congress has anticipated that they
would be developed.
That is kind of the attention that I think needs to remain
and I do not really have an update in all candor on Mentor-
Protege since then, but I am hopeful that the agency has
followed through on some of that. I cannot remember off the top
of my head.
Ms. MENG. On the same program, in 2011, the SBA revised its
regulations for this program and established additional
standards to address the definition of economic disadvantage.
In your report you indicate concern that the additional
standards are not justified or objective. Can you explain your
concerns as well as your recommendation for improving the
standards?
Ms. GUSTAFSON. The definition of economic disadvantage has
been if you are aware of our color coding that we use for
management challenges currently, which is red, orange, yellow,
and green, like a stop sign but with orange in there. It has
been at red because we believe there is no progress. And it is,
quite frankly, a place where the agency has just completely
disagreed with us. We firmly believe, and we think it is
crucial, that there be an economic analysis done to try to
figure out what economic disadvantage means in terms of
numbers. I mean, we do not think that the agency has performed
or contracted out to get that robust economic advantage.
I think it is crucial because if you are not defining
economic disadvantage based on a competent and strictly done
economic analysis, then how can you be sure that only the right
people are getting into the program? If you are letting people
in who are not economically disadvantaged, again, not only are
the wrong people getting contracts, but, quite frankly, they
are at an advantage because they are probably more wealthy,
they may be more sophisticated, have more assets. It really
puts the truly academically disadvantaged behind the 8-ball to
even benefit from the program.
I have been here now for two administrators. They do not
agree with me on this, and they do not agree before me and
before the first administrator, they do not agree with us on
this. But I think it is something that really needs to be--it
is an important enough issue that we have kept it at red. It is
in the management challenges, and we think it is crucial to
really be again. These programs are not worthwhile if you are
not benefiting the right people. Because they are expensive
programs, very often the Federal Government pays a premium on
some of these contracts if you believe that full and fair and
open competition would be maybe cheaper for the government, and
so you need to benefit the right people. Without starting with
the right definitions, I do not think you are going to do that.
Chairman CHABOT. The gentlelady's time has expired. Thank
you very much.
The gentleman from Nevada, Mr. Hardy, who is the chairman
of the Subcommittee on Investigations, Oversight, and
Regulations, is recognized for 5 minutes.
Mr. HARDY. Thank you for being here.
Ms. GUSTAFSON. Thank you.
Mr. HARDY. As a small business guy myself, hearing some of
the things that have happened with the SBA, I know they are
trying to do a good job but I continue to hear these issues
over and over again, and it gives me a lot of angst as a small
business person myself. I truly believe overall the SBA is
trying to do a good job.
I am going to ask you a question that has to do with your
office. I believe you are the head of that office, are you not?
Ms. GUSTAFSON. Yes.
Mr. HARDY. When you put people into place, do they know
their responsibility?
Ms. GUSTAFSON. I believe so.
Mr. HARDY. Do you assure that they are fulfilling their
responsibility?
Ms. GUSTAFSON. Well, all of my employees are career
government employees who have to be, who have to fit the
qualifications that we have for the positions, and then are
managed. I have certainly made it a priority to make sure that
we are managing the employees so that they are doing the right
thing. So we provide the training that they need. Our auditors
have to go through continuing CPE, which is like CLE for
lawyers.
Mr. HARDY. Thank you. I think you know where I am headed
with this.
Ms. GUSTAFSON. Yeah.
Mr. HARDY. You have issued dozens of recommendations, and
with these recommendations, do you feel like they are being
implemented in the expeditious manner that they should be? Or
does it seem like it is taking too long? I have only been here
a year, a little over a year now, and I know this has been
going on before I got here. Is this happening in a manner that
you perceive should be happening if you were managing this
department?
Ms. GUSTAFSON. Representative, clearly, no. In my opening
statement I referred to 144 open recommendations, and some of
those date back to at least 2011. There are some that--so we
are talking about some 5 years old, 4 years old, 3 years old,
and that is a source of frustration. It can be frustrating at
times as the IG because we cannot make them do anything. So we
report the recommendations and we keep them there.
I will tell you that as IG even, I have emphasized to my
staff that it is also on us. Do you know what I mean? It is
kind of like we have said a couple of times but I think it is
crucial, it has to be a priority and it kind of has to be
mentioned and I think that certainly my head of audits has made
it a priority as well to let our auditors know as well, hey,
where are those recommendations? Where do they stand? There is
no point in making a recommendation if nobody----
Mr. HARDY. I think that is my point, is if we make
recommendations and people do not follow them, something has to
change. This culture has to change. You brought it up yourself.
You believe it is a culture, and I believe it is a culture. I
think it is what is happening in the Federal Government in a
lot of cases. I do not know what caused it but we need to fix
it and I do not know how to get to that point. I guess that is
what we are asking.
With improper payments, do we really need to tell the SBA
that they need to accurately report these? I mean, do we really
need to do that?
Ms. GUSTAFSON. Well, I think you could extrapolate that to
the whole government. I think the emphasis on the Improper
Payments Act has been much higher in the last several years
after some improvements to the act and stuff like that, and I
think it would be fair to ask, does it really take an act of
Congress to make the agencies care about improper payments? The
answer sometimes is yes, because sometimes while they are
running their programs and getting their stuff done, it is
hard. The stuff in the mirror, the stuff in the rearview mirror
sometimes gets left behind. I do think that the Federal
Government as a whole has made progress because of the Improper
Payments Act and because of the attention paid to it. And SBA
to a certain extent, too. But they started with no processes on
some of this. So we are at a stage now, after 4 years or so, of
these improper payments reports of where on some of these
programs, okay, now they have the processes and now we, as the
IG, are going to wait to see what they have instituted now that
what they have been told to do are working. I cannot defend the
inaction for that, but I am grateful for acts like that because
I do think some progress has been made.
Mr. HARDY. Well, I appreciate what your office is doing,
but you really need to help us because I truly believe the SBA
is one of those economic drivers for this nation, and this
nation is hurting economically. The small businesses are our
economic driver overall. We need to get this thing functioning
in the proper manner and we need your help to make sure that we
continue to push. We need to continue to do our job, but it is
becoming very frustrating that this engine is not getting
moving. So thank you.
Ms. GUSTAFSON. Thank you.
Chairman CHABOT. The gentleman's time is expired.
The gentleman from Kansas, Mr. Huelskamp, who is chairman
of the Economic Growth, Tax, and Capital Access Committee, is
recognized for 5 minutes.
Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate the
topic of this hearing, and I am looking for some
accountability, and I appreciate your work on that.
I want to follow up on the issue of improper payments. I
think in multiple reports your office found that SBA is
currently understating its improper payment rate. Can you
describe that more fully for the Committee, or at least
summarize what is in your report and whether we have seen any
steps at the SBA to fix this problem?
Ms. GUSTAFSON. Again, absolutely. As I noted, it has been a
process over the last several years. Starting with the first
time that agencies were required to report improper payments,
that year we actually went and did our own analysis. You may
recall, and again, it certainly is in my tenure, I think it was
2011, we vastly disagreed where those numbers were. It was
inconceivable how far apart the agency was from the IG on that.
We very quickly got into the weeds on some of this. Was it a
sampling error? Things like that, and projection and stuff like
that. The process as we have gone forward, and as the
management challenges have noted, is that we have really tried
to hold their feet to the fire to institute the type of quality
assurance reviews and the more stringent look at high dollar,
early default loans which are often an indicator that there may
be something wrong with the origination of those loans. That
really did require SBA to kind of start some processes that
were not there and dedicate some resources that really had not
been dedicated.
I think when you look at the Management Challenges report,
to be fair to SBA, we have seen progress. There has been
absolute upward movement in a positive way instituting some of
those processes and getting those in place. As I noted before,
when you look at our report of last October, which was our most
recent Management Challenges report, the next step is for us to
be shown that the processes are now working and they are being
used the way they are supposed to be used and that they are
working. The numbers that SBA has reported and the loan
programs have been the largest numbers, and especially the
Disaster Loan Program, which started at a very, very high
number, they have gone down extraordinarily in the last several
years. Now, I will tell you that----
Mr. HUELSKAMP. But at the beginning, if I might interrupt,
at the beginning, though, they were denying those high rates,
so I did not follow----
Ms. GUSTAFSON. They were. They were. And I am sorry. At one
of them they were indicating that they did not think there was
an improper payment rate. I forget if it was 7(a) or if it was
disaster. It was one of them where they said we do not think
there are any improper payments. That is not the case anymore.
They have started reporting rates and our most recent and
proper payments reviews which come out in the spring--our
latest one will come out within the next couple of months--it
is either April or May--have shown that they have followed the
act and instituted the processes that are in there. Again, I--
--
Mr. HUELSKAMP. But at the beginning, when you came in, you
were using SBA data or did you go back and pull more
information separately?
Ms. GUSTAFSON. Oh, no. We were doing SBA data and trying to
use the same sample. It got to questions of--and of course,
because we are talking about projections, I know that in some
of the early work it was just a matter of disagreeing over a
couple of loans that caused them to have an incredibly low rate
and then to cause us to have what we felt was a more
reasonable, and not excessively high but a higher rate, and
that was several years ago under Administrator Mills' tenure. I
was pleased because the end result of that--and of course, that
always takes a while and that is after the numbers have been
reported and stuff, and everybody has kind of moved on because
the rates are there--they ended up agreeing with us and
adjusting. I remember getting into a fight with them over are
you going to go back and change the report? We will put it in a
little footnote. You know what I mean. But whenever they agree
with us, however begrudgingly, I think that that is good.
Mr. HUELSKAMP. Do you think that is at the administrator
level? What about kind of the upper midlevel management, the
folks that likely a year from now will still be there even
though a new administrator? Have they somehow agreed with you
all's assessment and the actual data mining that it takes to
generate this type of rate and understanding of it?
Ms. GUSTAFSON. We do believe that, and that is where the
work is done, of course, is at the centers and at that program
level. If they had not come around there would not have been
movement on the challenges. We think that they are there. The
latest rate in disaster is down to under 10 percent. What is
interesting about that is it started at about 28 percent. What
is interesting about that is that causes them to be in
compliance with IPRO, which is the act, which is good, but last
year it was at 12 percent. That is a big jump or decline or
whatever you do when you go from 12 to 8 percent.
Mr. HUELSKAMP. What is the penalty for noncompliance?
Ms. GUSTAFSON. You have to start instituting processes and
devoting resources. There are financial penalties after a
certain extent in that you can only----
Mr. HUELSKAMP. No, for SBA, if they do not reach----
Ms. GUSTAFSON. No, that is what it is. The act begins to
require you to, you know, it kind of takes away your ability to
spend money in certain ways because you have to devote certain
amounts of money to those processes and things like that. It
was good that they went to 8.5 percent. It was a pretty crucial
number.
Mr. HUELSKAMP. Well, thank you. Chairman, I am out of time.
I yield back. Thank you.
Chairman CHABOT. Thank you. The gentleman's time has
expired. Thank you.
I would now like to yield up to 5 minutes to the gentlelady
who has a few more questions.
Ms. VELAZQUEZ. I just have one more question. This is an
area that I have been deeply engaged in since 2005, when
Hurricane Katrina struck, and we saw the poor response from
SBA, particularly in terms of the disaster lending program and
the processing times. As a result of that, we passed
legislation in this committee that provided tools for SBA to be
ready for the next disaster. We saw what happened during Sandy.
Processing times took over 40 days and the decline rate was
extremely high, to the point where I introduced legislation
that the president signed into law, reopening for the first
time in its history the Disaster Loan program, and the fact
that tens of millions of dollars has been already disbursed
shows that the need is still there.
My question to you is, since then the SBA has improved its
response during recent disasters with loan processing times of
less than 13 days; however, these events have not been of the
magnitude of Superstorm Sandy or Hurricane Katrina, both of
which resulted in significant delays. What level of confidence
do you have that SBA will be able to respond as quickly as it
has to another large catastrophe?
Ms. GUSTAFSON. I think the best way to describe my
confidence level is probably mixed. I think that the pressure
that was put on and the attention that was paid to the
inadequate response times and processing times in Sandy surely
got the attention of the agency. I know that you have paid a
great deal of attention. I am sure you have met with Mr. Rivera
on that. You did that report that I thought was extraordinarily
helpful about the processing times and things like that.
I do think that in a way, again, when the agency knows that
this is something that they have to be laser focused on, they
will be laser focused on it. I think that certainly that is
going to be a number one priority for wherever the next big
disaster, a Sandy or a Katrina or something like that. That is
going to be a huge priority. But the challenge is going to be,
and I know that you are keenly aware of this, is one of the
things that affected the processing times in Sandy was the kind
of new programs that they were trying to institute. In an
ironic twist, the things that they were instituting that
involved--they were supposed to expedite some of the processes
both in IDOL and in some of the smaller home loans--because
there is a learning curve there, because of whatever reason,
that did not help. It showed, and we did a report that showed
that that did not really help. That remains a concern for me.
If there is going to be this kind of learning curve in the
initial response to disaster, especially in the context of the
programs that I know that you have talked about and that we
have talked about in our management challenges that have yet to
be instituted, the third-party lender programs and things like
that that Congress had told SBA to use, I believe, in 2008, I
think. So my fear is, I guess, if this time they are really
going to do that, that is going to be good except for is that
going to again cause a learning curve or a lag in the beginning
and we find ourselves exactly where it is?
I hate to quote yourself back to you, but I think this may
have been in your report. If so, I apologize for parroting back
to you, but SBA needs to not be so reactionary. As long as they
continue to be reactionary and trying to do that, I think they
are always going to be a little bit behind the curve on that.
In the disaster area, that has such dire consequences because,
again, that means that the people who have just been
devastated, their business or their homes, are not going to get
the type of service that Congress, and certainly SBA, wants
them to get.
Ms. VELAZQUEZ. Thank you. Thank you.
Chairman CHABOT. Thank you. The gentlelady yields back.
I would like to note, as chair of this Committee and having
worked with the gentlelady from New York, just to acknowledge
how determined and how fiercely she has fought for her
constituents in the matter of the devastation that was wreaked
upon them by Hurricane Sandy, and they were challenged, many of
them. Some were bureaucratic challenges. The SBA and others
made it very difficult for people to rebuild, and she fought
time and time again consistently, never gave up, and has not
given up to this day, so I want to publicly recognize that. And
they say we are never bipartisan in Congress, right?
Ms. VELAZQUEZ. Thank you, Mr. Chairman. With your help, it
was a bipartisan effort, and we have to make sure the agency is
ready because there will be another diaster.
Ms. GUSTAFSON. Right.
Ms. VELAZQUEZ. We cannot go back to them and say, I
understand your pain, but we are not ready to provide the
assistance that you need in a timely basis. Many of these
businesses have to shut down their doors if they do not get the
assistance they need in the next four weeks after a disaster
strikes, and that is unacceptable.
Chairman CHABOT. Absolutely. We want to thank the Inspector
General for appearing before this Committee today, and we also
want to thank her for all the work that her office does and
continues to do highlighting the management and performance
challenges within the SBA, the Small Business Administration.
Moving forward, this Committee will remain committed to working
together with the SBA to ensure that these challenges are
addressed and that the agency is able to provide effective and
efficient assistance to America's small businesses, and that is
what this Committee is all about, working in a bipartisan
manner to improve the lot of small businesses in this country.
All members will have 5 legislative days to submit
questions or to supplement their remarks. If there is no
further business to come before this Committee, we are
adjourned. Thank you.
Whereupon, at 12:06 p.m., the Committee hearing was
adjourned.
A P P E N D I X
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Introduction
Chairman Chabot, Ranking Member Velazquez, and
distinguished members of the Committee, thank you for the
opportunity to discuss our oversight activities of the U.S.
Small Business Administration (SBA or Agency).
The Office of Inspector General (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. During FY 2015, OIG
achieved nearly $134 million in monetary recoveries and
savings--a more than a six-fold return on investment relative
to our FY 2015 operating budget--and made 80 recommendations
for improving SBA's operations and reducing fraud and
unnecessary losses in the Agency's programs.
OIG's Role
OIG promotes economy, efficiency, and effectiveness in
Government operations and helps detect and deter fraud, waste,
abuse, and mismanagement. The stated purpose of the Inspector
General Act of 1978, as amended (IG Act), is to create an
independent and objective unit within specified agencies to
combat fraud and abuse in the programs. To this end, my office
is responsible for conducting audits and investigations of the
programs and operations, and undertaking other activities, such
as inspections and evaluations, to promote economy, efficiency
and effectiveness in its programs. Importantly, as IG, I am
charged with keeping the Administrator and Congress fully and
currently informed about problems and deficiencies in the
Agency. The IG Act contains a variety of statutory guarantees
of OIG independence, designed to ensure the objectivity of OIG
work and to safeguard against efforts to compromise that
objectivity or hinder OIG operations. It is these guarantees of
independence that make statutory IGs unique.
The IG Act affords my office the authority to mount a
multi-disciplinary approach to Agency oversight. We have a
broad statutory mandate to conduct audits and investigations
relating to the programs and operations of the agency and to
conduct other activities for the purpose of promoting economy
and efficiency in the administration of the agency. Within this
broad mandate, I am given full discretion to undertake those
audits and investigations that are ``necessary or desirable.''
OIG audits are conducted in accordance with Federal audit
standards established by the Comptroller General, and other
reviews generally are conducted in accordance with standards
established by the Council of the Inspectors General for
Integrity and Efficiency (CIGIE). In addition, we coordinate
with the Government Accountability Office (GAO) to avoid
duplicating Federal audits. We also establish criteria to
ensure that the non-Federal auditors (typically, CPA firms) OIG
utilizes comply with Federal audit standards.
OIG investigations are conducted in accordance with the
CIGIE Quality Standards for Investigations and Federal law. In
conducting investigations, whenever the IG has reason to
believe that Federal criminal law has been violated, the IG
must promptly report that evidence directly to the Department
of Justice, without prior clearance by Agency officials outside
OIG.
Top Management Challenges Facing SBA
We have aligned our resources to focus on the areas of
highest risk within SBA, especially those programs with
identified, systemic concerns. In accordance with the Reports
Consolidation Act of 2000, OIG released its Report on the Most
Serious Management and Performance Challenges Facing the Small
Business Administration in FY 2016 in October 2015 and has
prepared similar reports since FY 2000. 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. Its overall goal is to focus attention on
significant issues in order to work with Agency managers to
enhance the effectiveness of SBA's programs and operations. The
report highlights top management challenges facing SBA, which
are listed below:
> Weaknesses in Small Business Contracting Programs
and Inaccurate Procurement Data Undermine the
Reliability of Contracting Goals Achievements
> Weaknesses in Information Systems' Security
Controls Pose Significant Risks to the Agency
> SBA Needs Effective Human Capital Strategies to
Carry Out its Mission Successfully and Become a High-
Performing Organization
> SBA Needs to Further Strengthen its Oversight of
Lending Participants
> SBA Needs to Modify the Section 8(a) Business
Development Program So More Firms Receive Business
Development Assistance, Standards for Determining
Economic Disadvantage are Justifiable, and Firms Follow
8(a) Regulations When Completing Contracts
> Effective Tracking and Enforcement Would Reduce
Financial Losses from Loan Agent Fraud
> SBA Needs to Modernize its Loan Accounting System
and Migrate it Off the Mainframe
> SBA Needs to Accurately Report, Significantly
Reduce, and Strengthen Efforts to Recover Improper
Payments in the 7(a) Loan Program
> Disaster Assistance Must Balance Competing
Priorities to Deliver Timely Assistance and Reduce
Improper Payments
> SBA Needs to Effectively Manage Its Acquisition
Program
The management challenges report is driven by SBA's current
needs and based on not only our understanding of SBA's programs
and operations but also recent OIG, GAO, and other reports.
Accordingly, the challenges we present each year may change
based on the Agency's risks, as well as the actions that have--
or have not--taken to remedy past weaknesses.
For example, this year, OIG expanded its challenge
regarding small business contracting (Challenge 1). SBA is
responsible for managing and overseeing the small business
procurement process throughout the Federal Government. Last
year, we reported that procurement flaws allow large firms to
obtain small business awards and allow agencies to count
contracts performed by large firms towards their small business
goals. While large firms continue to receive contracts that are
counted towards small business goals, we have realigned the
discussion to include our concerns regarding weaknesses in
small business contracting programs, the reliability of data
used to calculate contracting goal achievements, and
unnecessary restrictions on SBA using fraud remedies.
In addition, we added a new challenge regarding SBA's
Disaster Assistance Program (Challenge 9). SBA's disaster
assistance helps people and businesses recover from disasters
by providing loans to homeowners, renters, and businesses.
However, there is an inherent risk of non-repayment for
disaster loans because these loans repair or replace existing
property, which means that loan recipients are incurring
additional debt to maintain existing assets. In carrying out
its mission, SBA must balance competing priorities to deliver
timely assistance and reduce the risk of fraud and default.
We also removed the challenge pertaining to SBA's
implementation of a quality control program in its loan centers
(previously Challenge 4), since the Agency has made progress in
implementing a quality control program for all of its loan
centers. This program is designed to verify and document
compliance with the loan process, from origination to close-
out, and to identify where material deficiencies exist so that
the Agency can take remedial action. However, SBA needs to
demonstrate that the program is effective at identifying and
correcting material deficiencies. We will continue to monitor
SBA's quality control program during FY 2016 to verify that
reviews are completed and effective at identifying and
correcting material deficiencies.
The management challenge process is an important tool that
we believe assists the Agency in prioritizing its efforts to
improve program performance and enhance its operations. A
summary chart of depicting the status of top management
challenges is below:
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Risk Assessment
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. While SBA's programs are essential to strengthening
America's economy, the Agency faces a number of challenges in
carrying out its mission. These include fraudulent schemes
affecting SBA programs, significant losses from defaulted
loans, procurement flaws that allow large firms to obtain small
business awards, improper payments, and information technology
(IT) management concerns. OIG plays a critical role in
addressing these and other challenges by conducting audits to
identify wasteful expenditures and program mismanagement,
investigating fraud and other wrongdoing, and taking other
actions to deter and detect waste, fraud, abuse, and
inefficiencies in SBA programs and operations. As you have
heard in recent hearings before this Committee, OIG works
closely with GAO to provide oversight of SBA's programs and
operations and to promote integrity and efficiency.
Risks Due to Limited Oversight and Controls in SBA's
Lending Programs
SBA faces a heightened risk of losses and improper payments
due to expedited loan processing initiatives and its
considerable reliance on outside financial institutions, over
which the Agency has not always exercised adequate oversight.
The Agency's business loan programs include the Section 7(a)
Loan Program, in which SBA partially guarantees loans to small
businesses made by its lending partners. The majority of loans
made under the Section 7(a) Loan Program undergo little or no
review by SBA prior to loan approval because the Agency has
delegated most of the credit decisions to lenders originating
these loans.
Audits of early defaulted loans and improper payments
continue to note a number of lender errors in originating
loans, resulting in undue risk and loss to the program. In
addition, OIG reviews have detected vulnerabilities in SBA's
Standard Operating Procedure (SOP) for the Section 7(a) Loan
Program. These vulnerabilities include a provision that allows
financing of large amounts of intangible assets, including
goodwill, in change-of-ownership transactions where the entire
equity injection can be provided in the form of seller take-
back financing. Further, OIG has identified management
challenges relating to the Agency's quality control process at
the loan servicing centers and the National Guaranty Purchase
Center, efforts to prevent loan agent fraud in the Section 7(a)
Loan Program, and improper payments under the Section 7(a) Loan
Program. Finally, a recent OIG audit (Report 15-06) highlighted
that the outsourcing of traditional lender functions in SBA
lending programs to third-party agents has significantly
increased, further impacting SBA's ability to maintain
appropriate oversight.
Numerous OIG criminal investigations have identified fraud
by borrowers, loan agents, lenders, and other participants in
SBA business loan programs. Since 2005, OIG has investigated at
least 22 cases with confirmed loan agent fraud totaling at
least $335 million. Criminals fraudulently obtain--or induce
others to obtain--SBA-guaranteed loans through a variety of
techniques. These include submitting fraudulent documents,
making fictitious asset claims, manipulating property values,
using loan proceeds contrary to the terms of the loans, and
failing to disclose debts or prior criminal records. The result
is a greater chance of financial loss to the Agency and its
lenders. In addition, higher loan limits in recent years are
likely to attract additional attention by criminals and
increase the consequences of improper lending decisions.
Through the Disaster Loan Program, SBA makes direct loans
to homeowners and businesses harmed by disasters to fund repair
or replacement of damaged property and to businesses to provide
needed working capital. This program is vulnerable to fraud and
unnecessary losses because (1) loan transactions are often
expedited in order to provide quick relief to disaster victims,
(2) lending personnel hired in connection with a disaster
declaration may lack sufficient training or experience, and (3)
the volume of loan applications may overwhelm SBA's resources
and its ability to exercise careful oversight of lending
transactions.
OIG reviews of SBA loan processing activities have
disclosed significant problems in making, servicing, and
liquidating disaster loans. For example, expedited processes
implemented to reduce Hurricane Sandy application backlogs were
not effective in reducing loan approval cycle times. Further,
insufficient training and internal controls resulted in
incorrect economic injury disaster loan amount determinations
(Report 15-13). In a separate audit, we found that principals'
incomes are relied upon as a source to repay disaster business
loans without sufficient consideration and analysis of the
impact on the principals' ability to pay living expenses,
placing the loans at a higher risk of default (Report 15-05).
In addition, OIG investigations have led to numerous
convictions of disaster loan borrowers for making fraudulent
statements to obtain loans or misusing loan proceeds.
Risks Affecting SBA's Oversight of Contracts for Small and
Disadvantaged Businesses
The Small Business Act directs SBA to promote the award of
Federal contracts to small businesses and firms owned by
disadvantaged individuals such as minorities, service-disabled
veterans, women, firms from areas of low economic activity, and
others. Under a statutory goal, the Government directs
approximately 23 percent of Federal procurement funds to these
programs. For FY 2014--the latest year for which information is
available--SBA reported that small and disadvantaged firms were
awarded $91.1 billion Government-wide in prime contracting
assistance. However, OIG audits and investigations have
identified numerous instances where firms that were neither
``small'' nor ``disadvantaged'' have improperly obtained
contracts under SBA contracting programs. For example, a joint
investigation with other agencies resulted in the president of
a Colorado firm pleading guilty to conspiracy in connection
with his concealment of millions of dollars in assets and
income in order to maintain the company's 8(a) status. This led
to the wrongful award of over $17 million in 8(a) contracts to
the firm. In addition, GAO has issued a series of reports
documenting that ineligible companies had been admitted to SBA
contracting assistance programs and were seeking set-aside
contracts. These improprieties have resulted from a variety of
factors, including fraud by company managers, excessive control
over small or disadvantaged firms by large companies or non-
disadvantaged individuals, SBA's and federal procurement
personnel's weak oversight, and regulatory ambiguities and
loopholes. OIG has issued management challenges recommending
corrective actions to promote integrity in small business
contract awards and oversight of the Section 8(a) Business
Development Program.
Risks Associated with SBA's Information Security Controls
and Other Operations
SBA's IT systems play a vital role in managing the Agency's
operations and programs, including a loan portfolio that is
approaching $120 billion. However, OIG audits and other reviews
have identified serious shortcomings in SBA's information
systems and related security controls. SBA has not fully
implemented adequate oversight of its IT systems, has not
established an effective process to remediate security
vulnerabilities, and has not developed an effective process to
upgrade IT capabilities. Consequently, OIG has issued
management challenges recommending corrective actions in SBA's
IT security and acquisition processes.
Risks Associated with SBA's Oversight and Controls of
Grants for Entrepreneurial Development
SBA provides training, mentoring, and counseling services
to small businesses through a variety of strategic
partnerships. In its FY 2016 budget submission, SBA requested
$206 million in grant funding to support these training and
assistance programs. SBA's Office of Entrepreneurial
Development (OED) oversees a network of programs and services
that support the training and counseling needs of small
business. OED manages and leverages three major resources:
small business development centers (SBDCs), SCORE, and women
business centers (WBCs). Although each resource program's goals
and target audiences may vary, they share a common mission: to
provide business advice, mentoring, and training to small
businesses and entrepreneurs. The SBDC program is the largest
grant program in the Agency's portfolio. OIG has identified
problems with co-mingling SBDC grant funds with private-
enterprise contributions and accounting for required matching
funds. Some SBDCs are also co-located with WBCs, which makes it
difficult to determine what services are associated with each
grant program. In addition, having two grant programs
delivering similar services increases the risk of duplicating
services and contributes to government waste. A recent OIG
review determined that SBA's internal controls did not detect
that an SBDC failed to meet matching requirements for grant
funding and other critical grant requirements (Report 14-19).
In addition, for grants awarded under the Disaster Relief
Appropriations Act of 2013, OIG found that SBA did not enhance
its internal controls to ensure program goals were achieved and
expenditures were allowable (Report 15-15).
Risks Associated with SBA's Acquisition Program
SBA spends approximately $120 million annually to acquire
goods and services to assist in carrying out its mission. OIG
has identified common risks in SBA's acquisition program,
primarily inadequate acquisition planning, poorly defined
requirements, internal control deficiencies, an incomplete
acquisition policy, and inadequate oversight that contributed
to ineffective or inefficient results and increases costs. A
recent OIG review determined that SBA personnel did not
adequately plan for contracts and inconsistently evaluated
vendor quotes while performing a best value determination. In
addition, SBA did not establish effective controls to manage
the Agency's use of assisted acquisitions (Report 16-05). An
OIG investigation recently found an improper relationship
between an SBA employee and the president of an 8(a) and
Historically Underutilized Business Zone (HUBZone) business
regarding the award of an SBA contract, resulting in the
employee's removal from his position. Additionally, in FY 2015,
SBA reported an estimated improper payment rate of 13.52
percent for disbursements for goods and services, which is a
significant increase from the FY 2014 estimated improper
payment rate of 8.46 percent. OIG has issued a management
challenge recommending corrective actions in SBA's acquisition
process.
OIG Oversight Activities
Through audits and other reviews, OIG provides independent
oversight of critical aspects of SBA's programs and operations
to improve the Agency's efficiency and effectiveness. An
important aspect of this work is identifying and following up
on SBA's major management and performance challenges, as
required by the Reports Consolidation Act. OIG also supports
SBA's mission by detecting, investigating, and deterring fraud
and other wrongdoing in the Agency's programs and operations.
OIG serves as a Government-wide training resource for small
business fraud and enforcement issues. These activities help to
ensure that SBA employees, loan applicants, and program
participants possess a high level of integrity. This is
critical to properly administrating SBA programs because it
helps ensure that the Agency's resources are utilized by those
who deserve and need them most.
FY 2015 Accomplishments
During FY 2015, OIG issued 17 reports containing 80
recommendations for improving SBA's operations and reducing
fraud and unnecessary losses in the Agency's programs. In
addition, OIG investigations resulted in 52 indictments/
informations and 57 convictions. We made 74 debarment referrals
to SBA. OIG also conducted training and outreach sessions on
topics related to fraud in Government lending and contracting
programs, providing 28 presentations for more than 1,067
attendees, including SBA and other Government employees,
lending officials, and law enforcement representatives. Topics
included types of fraud, fraud indicators and trends, how to
report suspicious activity that may be fraudulent, suspension
and debarment, the Program Fraud Civil Remedies Act, and other
topics related to deterring and detecting fraud in Government
lending and contracting programs. Overall, OIG achieved
monetary recoveries and savings of nearly $134 million from
recommendations that funds be put to better use agreed to by
management, disallowed costs agreed to by management, court
ordered and other investigative recoveries and fines, loans or
contracts not made as a result of investigations, and name
checks.
Conclusion
SBA OIG continues to focus on the most critical risks
facing 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. We also will continue to
partner with the Agency to ensure that taxpayer and small
business interests are protected and served well by reviewing
proposed regulations and initiatives, pursuing debarment and
administrative enforcement actions, and providing fraud
awareness briefings. 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 SBA.
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