Major Management Challenges and Program Risks: Small Business
Administration (Letter Report, 01/01/2001, GAO/GAO-01-260).

This report, part of GAO's high risk series, discusses the major
management challenges and program risks facing the Small Business
Administration (SBA). SBA has taken steps to address several challenges
that affect its ability to provide quality service. However, numerous
weaknesses remain that must be addressed. For example, SBA needs to
strengthen its oversight of its lending partners to decrease the
potential for waste, fraud, and abuse. SBA must also focus its 8(a)
business development program on issues that concern 8(a) small
businesses, such as obtaining government contracts. Additionally, SBA
should revise its disaster loan processing procedures so that claims are
processed in a timely manner.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-260
     TITLE:  Major Management Challenges and Program Risks: Small
	     Business Administration
      DATE:  01/01/2001
   SUBJECT:  Claims processing
	     Internal controls
	     Financial management
	     Lending institutions
	     Small business loans
	     Risk management
	     Accountability
	     Emergency loans
	     Public administration
IDENTIFIER:  SBA 8(a) Program
	     SBA 7(a) Loan Program
	     SBA Disaster Loan Program
	     High Risk Series 2001
	     GAO High Risk Program

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GAO-01-260

Performance and Accountability Series

January 2001 Major Management Challenges and Program Risks

Small Business Administration

GAO- 01- 260

Letter 3 Overview 6 Major

12 Performance and Accountability Challenges

Related GAO 32

Products Performance

34 and Accountability Series

Lett er

January 2001 The President of the Senate The Speaker of the House of
Representatives

This report addresses the major performance and accountability challenges
facing the Small Business Administration (SBA) as it seeks to aid, counsel,
assist, and protect the interests of the nation's small businesses and help
businesses and families recover from natural disasters. It includes a
summary of actions that SBA has taken and that are under way to address
these challenges. It also outlines further actions that GAO believes are
needed. This analysis should help the new Congress and administration carry
out their responsibilities and improve government for the benefit of the
American people.

This report is part of a special series, first issued in January 1999,
entitled the Performance and Accountability Series: Major Management
Challenges

and Program Risks. In that series, GAO advised the Congress that it planned
to reassess the methodologies and criteria used to determine which federal
government operations and functions should be highlighted and which should
be designated as “high risk.” GAO completed the assessment,
considered comments provided on a publicly available exposure draft, and
published its guidance document, Determining Performance and Accountability
Challenges and High Risks (GAO- 01- 159SP), in

November 2000. The full 2001 Performance and Accountability Series contains
separate reports on 21 agencies-- covering each cabinet department, most
major independent agencies,

and the U. S. Postal Service. The series also includes a

governmentwide perspective on performance and management challenges across
the federal government. As a companion volume to this series, GAO is issuing
an update on those government operations and programs

that its work identified as “high risk” because of either their
greater vulnerabilities to waste, fraud, abuse, and mismanagement or major
challenges associated with their economy, efficiency, or effectiveness.
David M. Walker Comptroller General of the United States

Overview The Small Business Administration (SBA) is responsible for aiding,
counseling, assisting, and protecting the interests of the nation's small
businesses and for helping businesses and families recover from natural
disasters. SBA is also a financial institution with significant commitments
and exposure. As of September 30, 2000,

SBA's total portfolio was about $52 billion, including $45 billion in direct
and guaranteed small business loans and other guarantees and $7 billion in
disaster loans. Since its inception, SBA has, among other things, made 1.1
million small business loans and has approved 1. 4

million disaster loans to individual homeowners, renters, and businesses of
all sizes. At the same time, SBA is confronting several major performance
and accountability challenges that affect its ability to efficiently deliver
services. To its credit, SBA is taking steps to address these challenges.
However, many of SBA's planned improvements hinge on its multi- million
dollar, three- phase systems modernization effort. At this

point, it is too early to tell whether the systems modernization effort will
help resolve SBA's performance and accountability challenges.

Continue to improve oversight of SBA's lending partners to correct oversight
weaknesses

? Focus the 8( a) program on helping firms obtain contracts to increase
procurement opportunities

? Streamline and automate disaster loan processing to improve timeliness

? Strengthen human capital, information technology, budget, and financial
management practices to help modernize SBA

Improve Oversight of SBA's oversight of its lending partners has become more
SBA's Lending important over the last decade as SBA has shifted more
Partners loan making and servicing responsibilities to private sector
lenders. Private sector lenders are given authority to determine eligibility
and to approve loans

without prior SBA approval for over 70 percent of loans in SBA's largest
lending program, the $9. 5 billion 7( a) guaranteed lending program.
However, in 1998, we found that SBA lacked a coordinated lender oversight
program. For example, SBA's operating procedures for the 7( a) program
required on- site reviews of lenders, but SBA had not consistently reviewed
lenders to ensure that they were complying with its 7( a) loan policies and

procedures. The lack of review increased the potential for program abuse and
raised financial risks to the agency. We recommended that SBA ensure that
the required 7( a) lender oversight reviews are conducted and establish
organizational responsibilities and a mechanism for ensuring that
information on the lender

review process is collected, reported, and analyzed. SBA recognizes the need
to improve its oversight of lenders and has, among other things, embarked on
a systems modernization program to permit better data collection, lender
oversight, and risk management and has begun regular reviews of lenders.

Focus the 8( a) In the case of SBA's 8( a) business development program,
Program on Contract we reported that most contract dollars continue to go to
Assistance

relatively few firms, assistance provided through the program needs to be
refocused, and the program's information system does not support the
program's mission. For example, in fiscal year 1998, 209 of the 6, 000 firms
in the program-- less than 4 percent-- received 50 percent of the 8( a)
contract dollars, effectively limiting the developmental opportunities
available to other firms in the program. In addition, we found that almost
all firms joined the program to obtain 8( a) contracts, wanted SBA to
provide contracting

assistance, and were more satisfied with the program if they received a
contract. In providing assistance, we found that SBA had emphasized business
management skills rather than providing contracting assistance. SBA's
information system for the 8( a) program does not meet the information needs
of headquarters or district officials and SBA remains unable to track the
training and assistance it provides to 8( a) firms. We recommended that SBA
take several actions aimed at better meeting the purpose of the program, and
the

needs and expectations of the firms in the program, and improving SBA's
ability to determine how well the program is working. SBA concurred with our
recommendations, and has initiated some changes. However, the information
systems changes that are needed will not take place until the final phase of
SBA's

agencywide systems modernization effort. SBA intends to begin planning
activities for this phase of the modernization in 2002.

Streamline Disaster SBA also needs to continue its efforts to streamline and
Loan Processing

modernize its disaster loan processing if it is to consistently provide
timely assistance to disaster victims. Because its disaster- related
workload varies so much over time, SBA needs to be able to quickly expand
its loan processing capabilities, including hiring and training damage
inspectors, loan officers, and other staff to provide consistent timely
assistance. While SBA processed 91 percent of loan applications within its
standard of 21 days in fiscal year 2000, performance in other years has been
highly variable. Our examination of SBA loan processing statistics for
fiscal years 1997-

2000 showed, on average, that (1) SBA was able to process loans for homes
and personal property more quickly than loans to businesses, and (2) loan
volume did not impact processing time. SBA officials said that because
business loans are more complicated than home loans they often take longer
to process, but loan processing times in general are lengthened by SBA's
paperwork- intensive process. In June 2000, SBA began using an expedited
system that streamlines processing of certain home and personal property
loans. As part of its agencywide modernization efforts, SBA is in the midst
of a larger project to reengineer loan processing overall, including
increased use of automation, but as

with the rest of SBA's systems modernization effort, significant work
remains to be done. Modernize SBA As SBA continues to modernize itself, our
work shows

that SBA needs to identify and address human capital, 1 information
technology, and budgetary and financial accountability challenges that have
agencywide 1 SBA's human capital concerns can be seen as part of a broader
pattern of human capital shortcomings that have eroded mission capabilities
across the federal government. See our High Risk Series: An Update (GAO- 01-
263, Jan. 2001) for a discussion of human capital as a newly

designated governmentwide high- risk area.

implications. Although SBA has begun to take steps for better managing its
human capital activities, such as undertaking various workforce planning
activities and realigning and deploying some staff, our work shows that more
needs to be done. SBA needs to (1) complete its efforts to identify the
knowledge, skills, abilities, and other characteristics that its employees
will need to perform successfully in SBA's new business

environment; (2) estimate the number of employees with those skills who will
be needed; (3) develop a succession plan for senior leaders; and (4) ensure
that employees receive adequate training to do their jobs well. Absent
addressing these issues, SBA's attempt to redesign its business processes
and transform its workforce is potentially at risk. SBA also recognizes the
limitations of its current information system and has embarked on an
agencywide systems modernization initiative, but our work has shown that SBA
needs policies and procedures to control key information technology
processes. To improve SBA's information systems management, we recommended
that SBA

establish policies and procedures for managing information technology and
define and implement processes in the areas of investment management,
information technology architecture, software development and acquisition,
information security, and

information technology human capital management. SBA said that efforts are
underway to address our recommendations and has stated that it is committed
to improving its information technology management practices. SBA's lack of
integrated budget, accounting, and

performance information systems hinders the use of spending and performance
information to address performance issues. As a result, SBA cannot track its
spending by agency goal and managers must create their own spreadsheets to
reconcile actual to planned spending. SBA is developing an activity- based
accounting structure to link costs to activities, outputs

and goals. SBA also plans to begin implementing an integrated budget,
accounting, and performance information system beginning in October 2001,
but has not yet determined how it will use the performance information
capabilities of the new system. While SBA has made major strides in
improving its

financial management, as evidenced by its unqualified audit opinion on its
fiscal year 1999 financial statements, the agency still faces major
challenges to achieving financial accountability. Two material internal
control weaknesses were identified in SBA's fiscal year 1999 financial
statement audit: (1) SBA's financial reporting process did not ensure that
its financial statements were free of material misstatements and (2) general
computer control weaknesses in SBA's information systems meant that SBA
could not ensure that unauthorized activities,

such as the modification of data or software, would be prevented or
detected. SBA hopes to resolve these challenges through the second phase of
its systems modernization effort, scheduled for completion in fiscal year
2003. It is too soon to tell whether the modernization will resolve SBA's
noncompliance.

Major Performance and Accountability Challenges

SBA was created almost 50 years ago to help ensure a strong and vibrant
small business sector. SBA, along with other federal agencies, also helps
businesses and

families recover from natural disasters. As a voice for small business, SBA
represents the nation's millions of small businesses that collectively
employ 53 percent of the private nonfarm workforce. SBA provides small

businesses with access to credit, primarily by guaranteeing loans through
its 7( a) program. SBA also administers the 8( a) business development
program, which is designed to assist small disadvantaged businesses in
obtaining federal contracts. SBA provides entrepreneurial assistance through
partnerships with private entities that offer small business counseling and

technical assistance. SBA also makes loans to businesses and families trying
to rebuild in the aftermath of a disaster. SBA's mission of helping the
nation's small businesses to succeed, as well as its role as a financial
entity with a total loan and loan guarantee portfolio of about $52 billion,
makes its performance and accountability challenges important to the nation
as a whole.

As with other agencies and departments, problems that we have found at the
SBA agencywide level in specific areas such as human capital and information
technology, are also found at the program level and contribute to SBA's
difficulties in effectively meeting its mission. SBA's solution to many of
its current problems hinges on its information systems modernization effort.
It is too soon to tell how much the modernization effort will help solve
these problems.

Continued Oversight SBA's need to oversee its lending partners has become
Improvements of more important over the last decade as SBA has shifted SBA's
Small Business

more loan- making and servicing responsibilities to Lending Partners Are
private sector lenders. For the 7( a) program, SBA's Key to Mitigating

largest lending program and its primary vehicle for Risk to the Agency

providing small businesses with access to credit, SBA used to review the
creditworthiness of each loan applicant and participate in the servicing and
liquidation of each loan that went into default. However, as SBA's workforce
has decreased and its loan portfolio has increased, SBA has sought to
modernize its operations by relying more on the private sector. Private
sector lenders are given authority to determine eligibility and approve
loans without previous SBA approval for over 70 percent of the 7( a) loans.
As part of its July 31, 1999, business process reengineering study, a
private firm hired by SBA

reported that SBA did not have a coordinated lender oversight system. 1
Although a number of processes were in place, not all were consistently
administered throughout the organization. The study stated that SBA required
that the field offices review lenders, but there was no method of tracking
the review process or the

number of reviews completed. In addition, a majority of the lenders were not
required to renew their lending authority within a given time frame because
their right to participate did not expire. The lack of review increased the
potential for program abuse and raised SBA's program risk, according to the
study. 1 Business Process Reengineering of the Office of Capital Access/
Financial Assistance Loan Monitoring Programs; Booz, Allen &

Hamilton (July 31, 1999).

In our 1998 review, we found that few reviews of lenders had been conducted.
Despite operating procedures requiring periodic reviews, about 96 percent of
the lenders had not been reviewed in the prior 5 years1993 through 1997in
the five district offices we visited. In addition, we found that SBA's
Inspector Generalwho is required to conduct periodic audits of Small
Business

Lending Companies under SBA regulationhad conducted audits at only 3 of the
12 Small Business Lending Companies that were operating as preferred lenders
at that time. 2 Without such systematic oversight, SBA could not ensure that
participating lenders were complying with its loan standards, thereby
mitigating risks to the agency. In addition, SBA did not have clear

organizational responsibilities and mechanisms in place to ensure that
information on the lender review process was collected, reported, and
analyzed. Without such information, SBA could not measure and monitor the
impact of its oversight of lenders' compliance with its loan policies and
procedures. In 1998, we recommended that the Administrator of SBA ensure
that the required 7( a) lender oversight reviews are conducted and establish
organizational responsibilities and a mechanism for ensuring that
information on the lender review process is collected, reported, and
analyzed. We also recommended that the Administrator develop and

implement a mechanism to satisfy its supervision and examination function
for Small Business Lending Companies. In response to our recommendations,
SBA has begun regular reviews of lenders, and created an Office of Lender
Oversight. As of March 2000, SBA had completed two annual compliance reviews
of its

preferred lenders and had begun implementing a review 2 Small Business
Lending Companies are nondepository institutions licensed by SBA that are
not subject to state or federal supervision or examination other than
oversight conducted by SBA.

program for other lenders. SBA has also contracted with the Farm Credit
Administration for safety and soundness examinations of Small Business
Lending Companies. In addition, SBA created and is in the process of
staffing an Office of Lender Oversight. SBA has also embarked on the
creation of a loan monitoring system as part of the first phase of its
overall systems modernization. The purpose of the loan monitoring system is
to permit better data collection, analysis and evaluation of loans, and
lender and program performance. In April 2000, we provided SBA with a list
of 13 recommendations to help SBA complete the eight planning actions
mandated for its loan monitoring system and to strengthen SBA's information
technology practices. In general, the recommendations covered the

completion of work for planning actions and the implementation of key
functions, such as quality assurance and system security, to effectively
manage the development of the system. SBA is in the process of implementing
each of these recommendations. Key Contacts Thomas J. McCool, Managing
Director

Financial Markets and Community Investment (202) 512- 8678 mccoolt@ gao. gov
Joel C. Willemssen, Managing Director

Information Technology (202) 512- 6408 willemssenj@ gao. gov SBA Could
Better As we reported in July 2000, firms' access to 8( a) Focus Its 8( a)

contracts- long considered the program's biggest Program to Help benefit-
remains a problem. A long- standing concern Firms Obtain cited in our
previous reports and those of the SBA Contracts

Inspector General is that relatively few firms receive most of the 8( a)
contracts, effectively limiting the developmental opportunities available to
other firms in

the program. For example, in fiscal year 1998, although there were over
6,000 firms in the program, 209 firms received 50 percent of the 8( a)
contract dollars and over 3, 000 firms did not receive any contracts.
Although SBA acknowledges this problem and has made some changes to the
program to address it, SBA officials said that because of differences in
firms' skills and experiences and other factors, it is reasonable that not
all 8( a) firms

receive contracts from the program. In addition, SBA relies on other federal
agencies to make the contract awards, and federal procuring officials are
confronted with the competing objectives of accomplishing their agencies'
missions at a reasonable cost and achieving the 8( a) program's business
development goals.

Yet, our survey of 1,200 8( a) firms 3 showed that SBA needs to refocus the
assistance it provides to firms in the program from business management
training to federal contract proposal and marketing strategies. As shown in
figure 1, our survey demonstrates that almost all of the firms joined the
program to obtain 8( a) contracts and wanted SBA to provide contracting
assistance. We found that 8( a) firms were more satisfied with the program
if they had received a contract. One reason that firms did not place a high
priority on learning to manage a business was because a large majority of
the firms had owners with over 10 years' experience in managing a business.
In addition, the firms themselves were not new; over half the firms we
surveyed had been in business 5 years or more before joining the program. We
found that firms that have owners with less management experience are not as

likely to obtain 8( a) contracts as firms with more experienced owners. Yet,
we found no significant 3 We surveyed 1,200 firms randomly selected from
SBA's database of 5,432 active firms. The survey response rate was 71
percent and the results can be generalized to the entire population of
active 8( a) firms as of September 30, 1999.

relationship between the amount of time a firm has been in business before
joining the program and success in obtaining a contract. In providing
assistance, we found that SBA had emphasized business management skills
rather than providing contracting assistance and had not targeted its
business management skill training to firms with owners having less
management experience.

Figure 1: Major Reasons That Firms Joined the 8( a) Program

Obtain 8( a) contracts

86%

Broaden customer base to the federal government

80%

Overcome barriers of discrimination

69%

Increase net income

68%

Improve chances of obtaining contracts outside of the 8( a) program

48%

Make it easier to be awarded state and local contracts

39%

Have access to training offered to 8( a) firms

34%

Improve access to credit/ financing

33%

Learn more about managing a business

22%

0 10 20 30 40 50 60 70 80 90 100 Percent Source: GAO survey.

In addition, in our July 2000 report, we found that SBA's 8( a) information
system, while intended to be a comprehensive tool enabling SBA to monitor
the program, does not meet the information needs of headquarters or district
officials. Potentially useful information, such as the amount of training
and

assistance provided for participating firms, is not captured as part of
SBA's information- gathering process. This limits SBA's ability to assess
whether its efforts had an impact on the ultimate performance goal of
creating commercially viable and stable firms. The system is so difficult to
use that most of the district offices we visited

had devised other methods- including maintaining redundant local systems- to
obtain the information they needed in a timely fashion. Although program
officials have recognized the need to update the system since 1996 and have
planned update efforts, none of them resulted in substantial progress in
improving the information system. The primary reason for this,

according to program officials, is that leadership changes have contributed
to an environment in which progress on the information system has
languished. During the 4- year period from March 1996 to March 2000, the
office under which the program is managed has been led by five different
Associate Deputy Administrators. SBA plans to update the 8( a) information
system as part of the final phase of its agencywide systems modernization
effort. Planning for this phase is scheduled to begin in 2002. In the
meantime, SBA has begun to develop a strategic information technology plan
for the 8( a) program that combines and updates recommendations from the
agency's earlier business process reengineering studies.

We recommended that SBA take several actions aimed at better meeting the
purpose of the program, and the needs and expectations of the firms in the
program, and improving SBA's ability to determine how well the program is
working. These included instructing district offices to place their highest
priority on helping inform

firms about contracting opportunities; periodically performing a nationwide
survey of 8( a) firms to obtain measurable program data; and designing an
integrated 8( a) information system. SBA concurred with our recommendations
and is in the process of implementing them. For example, SBA is developing
district office goals for fiscal year 2001 to encourage the offices to help
more 8( a) firms obtain contracts. However, implementation of a number of
our recommendations will not occur until the final phase of SBA's system's
modernization initiative. SBA expects to begin planning activities for this
phase of the modernization in 2002. Key Contact Thomas J. McCool, Managing
Director

Financial Markets and Community Investment (202) 512- 8678 mccoolt@ gao. gov
Modernization May

SBA's efforts to streamline and modernize its disaster Improve SBA's loan
processing may help it to consistently provide Disaster Loan timely
assistance to disaster victims. SBA is one of

Processing many federal agencies responsible for assisting disaster
Timeliness

victims. SBA's Office of Disaster Assistance makes loans directly to (1)
households to repair or replace damaged homes and personal property, and (2)
businesses to recover from both disaster- caused physical damages and

economic losses. The Disaster Loan Program is SBA's largest direct loan
program and the agency's only assistance that is not limited to small
businesses. At the end of fiscal year 1999, SBA had almost $7 billion in
disaster loans in its portfolio. In fiscal year 1999, SBA made 29, 000 loans
to rebuild homes and 7,400 loans to rebuild businesses.

Disasters are inherently unpredictable; therefore, the need for SBA disaster
assistance is unpredictable as well. SBA faces a significant challenge in
its

responsibility to provide consistent and timely assistance to households and
businesses recovering from disasters. Because its disaster- related workload
varies so much over time, SBA needs to be able to quickly expand its loan
processing capabilities, including hiring and training damage inspectors,
loan officers, and other staff to respond to the times when it is handling
many applications for assistance at once.

Figure 2, shows the number of disaster loan applications that SBA processed
per month in fiscal years 1999 and 2000. 4

4 The SBA statistics used in this report include only approved and denied
loan applications. These figures do not include withdrawn applications i.
e., those in which an applicant chose not to complete the application
process.

Figure 2: Disaster Loans Processed in Fiscal Years 1999 and 2000, by Month

25,000 Number of loans

20,000 15,000 10,000

5,000 0

October November

December Janurary

February March

April May

June July

August Sepember

October November

December January

February March

April May

June July

August Sepember

1998 1999 2000 Month and year

Source: GAO analysis of SBA data for approved and denied loan applications.

One of SBA's standards for disaster response timeliness is that the agency
should establish a field presence within 3 days of a disaster declaration.
This generally entails placing SBA staff in the Disaster Recovery

Centers and Disaster Field Offices opened by the Federal Emergency
Management Agency. 5 These SBA staff help provide information about disaster
recovery assistance by briefing the media and state and local officials,
taking calls from people seeking information about SBA loans, and providing
assistance with loan applications. SBA reported that it met its 3- day field

presence standard 100 percent of the time during fiscal years 1999 and 2000.
SBA officials attribute their success in meeting this standard to close
coordination with the Federal Emergency Management Agency. Federal Emergency
Management Agency officials in both headquarters and the field told us that
coordination

between their agency and SBA is very good. In addition, emergency management
officials we contacted in California, Colorado, New Mexico, Texas, Utah, and
West Virginia also believed that SBA response to disasters in their states
had been timely and effective. A second SBA timeliness standard is to
process loan applications within 21 days of receipt. 6 An SBA official said
that it has been difficult to set a goal for the percentage of loans it will
process within its 21- day standard. SBA's goal was originally set based on

performance during the previous year and was then adjusted as performance
changed. For example, because SBA processed almost 90 percent of its loans
within 21 days in 1997, the initial goal was set at 90 5 The Federal
Emergency Management Agency has the lead

responsibility for the federal response to disasters. 6 Processing loan
applications includes inspecting physical damages to ensure that only
disaster- caused damages are to be repaired or replaced, determining
applicants' creditworthiness, and making the loan approval decision.

percent. When SBA's success dropped to 77 percent in fiscal year 1998 and 64
percent in fiscal year 1999, the goal was reduced to 70 percent. However,
the goal was increased to 80 percent in SBA's strategic plan for fiscal
years 2001 through 2006 because of indications that fiscal year 2000
performance had improved. In fiscal year 2000, SBA met its 21- day
processing standard 91 percent of the time. Table 1 shows timeliness
statistics

for fiscal years 1997 through 2000.

Table 1: SBA Disaster Assistance Loan Processing Times, Fiscal Years 1997
2000 Percentage of loans Number of loans

Average processing meeting 21- day

Fiscal year processed time (days) standard

1997 91,929 12.6 89.8

1998 62,259 15.6 76.6

1999 79,301 22.0 63.6

2000 50,360 13.0 91.4

Four year average, 70,962 15.9 79.9

fiscal years 1997- 2000 Source: GAO analysis of SBA data for approved and
denied loan applications.

We analyzed SBA loan processing data to determine what factors may have
affected loan processing times. We found three factors that appeared to
influence processing time, while a fourth did not: ? As loan amount
increases, loan processing time tends to increase. During fiscal years 1997
through 2000, the average processing time increased consistently as loan
dollar amount increased. ? Business loans took longer to process on average
than home and personal property loans.

? Approved loans took somewhat longer to process on average than denied
loans. ? The volume of loans an office processed did not appear to influence
timeliness. Our analysis of SBA's monthly loan processing data showed no
relationship between the number of loans processed in a given month and the
average number of days it took to process the loans.

SBA officials told us that some of these processing time differences can be
explained by variations in the steps that have to be followed for different
loan applications. For example, on average, it takes longer to approve a
loan than to deny one because processing stops as soon as the denial
decision is made by SBA, while approved loans have processing steps
remaining. Also, business

loans often take longer to process than home and personal property loans
because loan officers making business credit decisions have to consider
additional factors for businesses. According to SBA, this may also explain,
in part, the longer average times for higher dollar value loans, because
business loans tend to be for larger amounts. SBA officials acknowledged,
however, that loan processing times are also lengthened by a
paperworkintensive process. For example, loss verification inspectors make
their inspection reports on paper documents that they have to carry back to
a Disaster Field Office for processing. In contrast, inspectors from

the Federal Emergency Management Agency use a transmittable, electronic form
on hand- held computers. Also, few of the steps followed by SBA loan
officers are automated, according to area office officials, and this lack of
automation increases processing times.

SBA has efforts under way to speed up its loan processing. In June 2000, the
agency implemented a streamlined process for approving original home and

personal property loans of $25,000 or less. An area office official told us
that this process is much faster than the standard process, with 1- day loan
approval decisions possible for loan applications that include all of their
documentation. SBA is also engaged in an examination of loan processing in
general, with the goal of creating automated processes for home and business
loans. SBA needs to meet this goal of modernizing its loan processing if it
is to consistently meet its timeliness goals. However, as with the rest of
SBA's system modernization effort, significant work remains before SBA is
ready to implement a new loan processing system. SBA has also used a
customer survey, in part, to

identify and address loan processing problems. We noted, however, that this
survey only included successful loan applicants. Future surveys would be
more useful if they were to include applicants whose loans were denied. Key
Contact Thomas J. McCool, Managing Director

Financial Markets and Community Investment (202) 512- 8678 mccoolt@ gao. gov
Human Capital, SBA has developed a vision of a “modernized SBA,”

Information increasing opportunities for small businesses, but more
Technology, and needs to be done in the human capital, information Budget
and Financial technology, budget and financial management areas.
Accountability Need SBA has communicated its vision in its various strategic
to Be Strengthened planning documents prepared in accordance with the

Government Performance and Results Act of 1993. As we reported in September
2000, once an organization has defined and communicated its vision, the
organization should design a framework of human capital policies, programs,
and practices to steer the organization toward achieving that vision. In the
past few years, as SBA's business approach has been changing, the agency has
begun to take steps for better

managing its human capital activities, including activities in workforce
planning, leadership, talent, and performance culture, to meet this
challenge. For example, recognizing that in some geographic areas it had too
many or too few employees or employees that lacked specific knowledge or
skills, SBA contracted for

the development of a staffing and resource model to realign and deploy its
current district office staff. Using the results of the model, SBA recently
initiated a relocation and reassignment program to fill vacancies. We
reported in July 2000, that more remained to be done in the human capital
area at SBA. Absent addressing these issues, SBA's attempt to redesign its
business

processes and transform its workforce is potentially at risk. For example,
SBA had not used its staffing model to project future staffing requirements
because it lacked information on the average time it took to perform certain
tasks. As a result, the agency's realignment efforts were limited to
allocating staff to accomplish the current workload. In addition, SBA may
not have the appropriate complement of leaders it will need because it had
not performed succession planning. SBA was

also faced with the challenge of improving on 1999 survey results which
indicated that fewer SBA employees believed they had received adequate
training to perform their jobs than did employees in 14 departments and 8
independent agencies included in the

survey. As of October 2000, SBA said that it has initiated several
succession planning efforts. For example, SBA had identified a group of 7
District Director candidates and was training them, was selecting candidates
for its Senior Executive Service candidate development program, and had
decided to support 10 Presidential Management Interns. SBA had also
requested additional

training funds and had developed a training curriculum for reengineered
business practices that will be targeted widely to over 1,000 field and
headquarters staff. Sustained attention to these issues will be important as
SBA continues to implement its new business processes

and realign its human capital policies and practices to support those new
processes. Although SBA plans to improve its key information technology
processes, at the time of our May 2000 review many of SBA's policies and
procedures for managing information technology were in draft form or not yet
developed and current practices did not generally adhere to accepted
industry standards. Specifically, SBA had not yet established policies to
manage information technology investments and human capital. Although
standards and procedures to support new software development were being
adopted, information technology guidance on software acquisition was
obsolete. Procedures for maintaining SBA's agencywide information technology
architecture and for implementing information security policies were in
draft form and incomplete. Investment management

activities were limited largely to reviewing information technology
proposals and architecture- related activities were performed without a
defined process. Human capital management activities were limited to a
noninformation technology specific training needs survey, and a human
capital assessment had not been performed to identify short- and long- term
information

technology knowledge and skills requirements. Software development and
acquisition practices were predominantly ad hoc. Security assessments had
not been performed periodically on all mission- critical systems, and
security training had not been provided to employees and contractor staff.

Without established information technology management policies and defined
processes, SBA cannot ensure that consistent selection criteria are used to
compare project proposals, effective guidance is provided to efforts to
migrate systems and make them interoperable, key activities are consistently
performed when project managers are faced with time constraints or limited
funding, the knowledge and skills needed to

support its information technology management mission are identified, and
critical information and assets are protected from inappropriate use. To
improve SBA's information systems management, we have made a number of
recommendations that SBA has agreed with. SBA has stated that efforts are
underway to address

them and has stated that it is committed to improving its information
technology management practices. SBA has made some progress in integrating
performance management into its budget formulation

and initial resource allocation processes, but the agency has not tracked
spending according to goals because budget and accounting systems are
aligned with SBA's organizational structure rather than by strategic goal.
For its fiscal year 2001 budget request, SBA took steps to link its budget
formulation and performance

management processes. Yet, no clear link exists between past performance and
requested funding levels for fiscal year 2001. Furthermore, although SBA
reviewed the resources needed to maintain existing programs in fiscal year
2001, this review did not take into account planned fiscal year 2000
spending that was not likely to recur in fiscal year 2001. After allocating
funds for personnelwhich make up about 75 percent of SBA's operating
costsand other relatively fixed expenses, such as rent, SBA structured the
initial allocation of fiscal year 2000 funding for “other operating
expenses” around achieving agency goals.

This process is not used for subsequent allocations arising from unforeseen
expenditures and changes in planned obligations. SBA lacks such a structure
to address changing priorities during the fiscal year.

SBA's use of spending and performance information to ensure results is
hampered because financial systems are not aligned with agency goals. For
fiscal year 2001, SBA has begun using activity- based costing software to
link costs to activities, outputs, and goals. SBA officials said they
anticipate using this information to compare

unit costs of loan activities within the agency. In addition SBA's financial
and related systems are not integrated or user friendly and, as a result,
program- level financial managers create their own spreadsheets to reconcile
actual to planned spending. To improve integration of its financial and
performance information systems and reporting, SBA plans to begin
implementing an integrated system beginning in October 2001. However, SBA
has not yet determined how it will use the performance information
capabilities of the new system.

While SBA has made major strides in improving its financial management, as
evidenced by its unqualified audit opinion on its fiscal year 1999 financial
statements,

the agency still faces major challenges before it can fully achieve
financial accountability. Two material internal control weaknesses were
identified in SBA's fiscal year 1999 financial statement audit: (1) SBA's
financial reporting process did not ensure that its financial statements
were free of material misstatements and (2) general computer control
weaknesses in SBA's information systems meant that SBA could not ensure that
unauthorized activities, such as the modification of data or software, would
be prevented or detected. SBA's

lack of an integrated general ledger for recording its transactions during
the year contributed to the deficiencies in SBA's financial reporting
process. SBA

used three separate accounting systems to record various types of
transactions. In addition, SBA relied on multiple, nonintegrated
spreadsheets as well as complex and error- prone manual processes for
recording financial data. This resulted in an overly complex process for
preparing financial statements and a lack of assurance about the reliability
of data. In addition, SBA lacked comprehensive plans and procedures for
preparing its financial statements. Although SBA took significant, positive
steps in fiscal year 1999 toward improving the general computer controls
over its financial

management systems, the results of the audit showed that significant
deficiencies continued to exist. SBA's auditors found deficiencies in all
six of the general computer control categories that are included in the
audit process. For example, 11 percent of active users' accounts in SBA
systems were for employees and contractor personnel no longer employed by
the agency.

These user accounts were not inactivated promptly upon termination or
transfer of an employee. General computer controls have an impact on the
overall effectiveness and security of computer operations rather than on
specific computer applications. In addition, they create the environment in
which application systems and controls operate. SBA's control

weaknesses increased the risk of unauthorized access to data and software,
and reduced assurance that the unauthorized activities would be prevented or
detected. The deficiencies in SBA's financial reporting process, coupled
with its general computer control deficiencies, resulted in SBA's lack of
substantial compliance with the Federal Financial Management Improvement Act
of 1996 (FFMIA). FFMIA is a measure of an agency's

ability to incorporate into its financial management system accounting
standards and reporting objectives established for the federal government,
so that all assets, liabilities, revenues, expenses, and the full costs of
programs and activities can be consistently and accurately recorded,
monitored, and uniformly reported. Substantial noncompliance with FFMIA
indicates that

agency financial management systems do not routinely provide reliable,
useful, and timely financial information to manage on a day- to- day basis.
SBA's overall strategy to resolve its FFMIA noncompliance hinges on its

systems modernization effort. Preliminary planning for the second phase of
this project, which will address FFMIA noncompliance, started in fiscal year
1998. It is too soon to tell whether the system modernization effort will
resolve SBA's noncompliance.

Key Contacts Linda Calbom, Director Financial Management and Assurance (202)
512- 9508 calboml@ gao. gov Carlotta Joyner, Director

Strategic Issues (202) 512- 7002 joynerc@ gao. gov Paul Posner, Managing
Director

Strategic Issues (202) 512- 9573 posnerp@ gao. gov Joel C. Willemssen,
Managing Director

Information Technology (202) 512- 6408 willemssenj@ gao. gov

Related GAO Products Oversight of SBA's

Small Business Administration: 7( a) Program's General Lending Partners
Characteristics and Summary of Issues (GAO/ RCED- 00- 158R, May 26, 2000).

SBA Loan Monitoring System: Substantial Progress Yet Key Risks and
Challenges Remain (GAO/ AIMD- 00- 124, Apr. 25, 2000). Small Business
Administration: Few Reviews of Guaranteed Lenders Have Been Conducted (GAO/
GGD- 98- 85, June 11, 1998).

Focus of the 8( a) Small Business: SBA Could Better Focus Its 8( a) Program

Program to Help Firms Obtain Contracts (GAO/ RCED- 00- 196, July 20, 2000).
Small Business: SBA's 8( a) Information System Is Flawed and Does Not
Support the Program's Mission (GAO/ RCED- 00- 197, July 19, 2000).

Small Business: Status of SBA's 8( a) Minority Business Development Program
(GAO/ T- RCED- 96- 259, Sept. 18, 1996).

Small Business: Status of SBA's 8( a) Minority Business Development Program
(GAO/ T- RCED- 95- 149, Apr. 4, 1995).

Small Business: SBA Cannot Assess the Success of Its Minority Business
Development Program (GAO/ T- RCED- 94- 278, July 27, 1994).

Small Business: Problems Continue With SBA's Minority Business Development
Program (GAO/ RCED- 93- 145, Sept. 17, 1993).

Small Business: Problems in Restructuring SBA's Minority Business
Development Program (GAO/ RCED- 92- 68, Jan. 31, 1992).

Human capital, Human Capital: A Self- Assessment Checklist for Agency

Information Leaders (GAO/ OCG- 00- 14G, Sept. 2000).

Technology, Budget, and

Financial Management: Status of Financial Management Financial Issues at the
Small Business Administration

Management (GAO/ AIMD- 00- 263, Aug. 29, 2000).

Practices Small Business Administration: Steps Taken to Better Manage Its
Human Capital, but More Needs to Be Done (GAO/ T- GGD/ AIMD- 00- 256, July
20, 2000). Observations on the Small Business Administration's Fiscal Year
1999 Performance Report and Fiscal Year 2001 Performance Plan (GAO/ RCED-
00- 207R, June 30,

2000). Information Technology Management: SBA Needs to Establish Policies
and Procedures for Key IT Processes (GAO/ AIMD- 00- 170, May 31, 2000).

Performance and Accountability Series

Major Management Challenges and Program Risks: A Governmentwide Perspective
(GAO- 01- 241)

Major Management Challenges and Program Risks: Department of Agriculture
(GAO- 01- 242)

Major Management Challenges and Program Risks: Department of Commerce (GAO-
01- 243)

Major Management Challenges and Program Risks: Department of Defense (GAO-
01- 244)

Major Management Challenges and Program Risks: Department of Education (GAO-
01- 245)

Major Management Challenges and Program Risks: Department of Energy (GAO-
01- 246)

Major Management Challenges and Program Risks: Department of Health and
Human Services (GAO- 01- 247)

Major Management Challenges and Program Risks: Department of Housing and
Urban Development (GAO- 01- 248)

Major Management Challenges and Program Risks: Department of the Interior
(GAO- 01- 249)

Major Management Challenges and Program Risks: Department of Justice (GAO-
01- 250)

Major Management Challenges and Program Risks: Department of Labor (GAO- 01-
251)

Major Management Challenges and Program Risks: Department of State (GAO- 01-
252)

Major Management Challenges and Program Risks: Department of Transportation
(GAO- 01- 253)

Major Management Challenges and Program Risks: Department of the Treasury
(GAO- 01- 254)

Major Management Challenges and Program Risks: Department of Veterans
Affairs (GAO- 01- 255)

Major Management Challenges and Program Risks: Agency for International
Development (GAO- 01- 256)

Major Management Challenges and Program Risks: Environmental Protection
Agency (GAO- 01- 257)

Major Management Challenges and Program Risks: National Aeronautics and
Space Administration (GAO- 01- 258)

Major Management Challenges and Program Risks: Nuclear Regulatory Commission
(GAO- 01- 259)

Major Management Challenges and Program Risks: Small Business Administration
(GAO- 01- 260)

Major Management Challenges and Program Risks: Social Security
Administration (GAO- 01- 261)

Major Management Challenges and Program Risks: U. S. Postal Service (GAO-
01- 262)

High- Risk Series: An Update (GAO- 01- 263)

GAO United States General Accounting Office

Page 1 GAO- 01- 260 SBA Challenges

Contents

Page 2 GAO- 01- 260 SBA Challenges

Comptroller General of the United States

Page 3 GAO- 01- 260 SBA Challenges United States General Accounting Office

Washington, D. C. 20548

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Overview Page 7 GAO- 01- 260 SBA Challenges

Overview Page 8 GAO- 01- 260 SBA Challenges

Overview Page 9 GAO- 01- 260 SBA Challenges

Overview Page 10 GAO- 01- 260 SBA Challenges

Overview Page 11 GAO- 01- 260 SBA Challenges

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Major Performance and Accountability Challenges Page 13 GAO- 01- 260 SBA
Challenges

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Challenges

Major Performance and Accountability Challenges Page 15 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 16 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 17 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 18 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 19 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 20 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 21 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 22 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 23 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 24 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 25 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 26 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 27 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 28 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 29 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 30 GAO- 01- 260 SBA
Challenges

Major Performance and Accountability Challenges Page 31 GAO- 01- 260 SBA
Challenges

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Related GAO Products Page 33 GAO- 01- 260 SBA Challenges

Page 34 GAO- 01- 260 SBA Challenges

Performance and Accountability Series

Page 35 GAO- 01- 260 SBA Challenges

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