United States. Congress. House. Committee on Small.

The abuses in the SBA's 8(a) Procurement Program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, December 13, 1995 online

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graduation only when it has substantially achieved the targets, objectives, and goals set forth in its
business plan, and has demonstrated the ability to compete in the marketplace without further



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assistance under the 8(a) Program. These broad subjective criteria make it difficult to measure and
to apply in support of a recommendation to graduate a specific firm.

Also, a firm may be recommended for termination from the program when it is determined
that good cause exists to take this action. Examples of good cause generally include a firm's failure
to continue to maintain its eligibility for program participation, and failure to comply with specific
administrative/reporting requirements. The process and procedures for termination are quite specific
and lengthy and make it difficult to terminate companies. It is important to note, however, that
during the past eighteen months, 334 firms have been terminated from the program. This compares
with the prior four years when a tota 1 of only 150 firms had been terminated from the program.

Success of Firms Completing the Program

As indicated earlier, firms that participate in the 8(a) Program are not fundamentally different
from other small businesses — some will succeed, while others may not. There are many factors that
influence the relative level of success that a firm will attain. The training, experience and support
that 8(a) firms receive from the SBA help to minimize the many obstacles that developing firms
encounter. The opportunity to negotiate contracts in a controlled market setting, under the 8(a)
Program reduces the risk of failure and serves as an excellent training and business development
tool While the 8(a) Program provides opportunity and assistance necessary for participating firms
to become competitive, it does not guarantee contracts or success.



Measurement of business success and linkage of such success to specific causal factors are
ambiguous at best. However, it is worthy to note that implicit in an 8(a) firm's completion of a nine
year program term is a survival rate that substantially exceeds the average longevity of small
businesses in general.

Each year, pursuant to PL. 100-656. SBA reports indicia of "success" for businesses that
exited the program during the preceding three years. In FY 1994. SBA reported that of 964 firms
exiting the program between October I. 1992. and September 30. 1994. 436 of the subject firms
reported total revenues of $3.6 billion, and an average per-firm revenue of $8.3 million. These firms
provided employment to approximately 35.600 individuals, and paid approximately $60 million in
taxes, which is almost three times the operating budget of SBA's Minority Enterprise Development
Program. Also noteworthy is the fact that many of these firms have now developed the capability
to compete in the Federal market system as experienced, responsible contractors. The inclusion of
these firms in this market has the effect of increasing both the overall number and quality of
prospective Federal contractors.

GENERAL ACCOUNTING OFFICE REPORT ENTITLED
"8(A) IS VULNERABLE TO PROGRAM AND CONTRACTOR ABUSE"

The GAO recently reviewed two former 8(a) firms concerning questionable practices

involved in their application and participation in the 8(a) Program. The GAO specifically questioned

(a) whether the two firms. I-NET. Inc.. (I-NET) and Technical and Management Services

Corporation (TAMSCO) were owned and controlled by socially and economically disadvantaged



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individuals, as defined by 8(a) Program regulations, and (b) the propriety of certain contract awards
to the two firms.

SBA has carefully reviewed the case files of these two firms and agree in part with the GAO
report. SBA is aware of and concerned with the GAO's findings. SBA's regulations are adequate to
deal with this situation, but can be further defined. It is important to note that neither I-NET nor
TAMSCO now participate in the 8(a) program.

I-NET

SBA has reviewed the original files on I-NET and believes that SBA's initial eligibility
review was consistent with program policy, that field staft reviewed the material carefully, and that
the decision to recommend participation in the 8(a) Program was in compliance with the regulations.
Since the regulations do not require proof of citizenship. SBA officials who reviewed the application
were unaware that the applicant was not a citizen at the time of submission and review. SBA relies
on the applicant to provide truthful information. While SBA's review of 8(a) companies is stringent,
staff members are not trained as investigators, but as analysts. The information identified in the GAO
and IG reports reflected problems that were not known to SBA at the time of its review. Had the
rev icw indicated that the firm had made false statements, this matter would have been immediately
forwarded to SBA's IG for full investigation. This is SBA's current policy.

The GAO also found that SBA failed to recognize that I-NET had submitted financial
statements that excluded revenues from the firm's total sales. These exclusions permitted I-NET to



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receive contracts for which it was not eligible. SBA regulations concerning representation of
company size are clear and. in fact, are the cornerstone of all SBA programs. The firm's financial
submissions to the SBA were misleading as they excluded certain revenue items. Further, the firm
improperly self-certified as a smail business in submitting a number of contract proposals. The
district office failed to catch the misleading financial statements, and to properly evaluate and verify
the company's representations concerning its size. Having been made aware of these
misrepresentations by the IG. the district office has notified procuring agencies that these awards
were erroneously awarded, and has recommended that options not be exercised. SBA has also
directed all District Offices to conduct annual reviews for their entire portfolio and to give special
emphasis to each firms' financial statements and corporate tax returns.

With regard to I-NET's graduation from the program, SBA initiated proceedings on
September 28. 1992. and the firm agreed to graduate on June 16. 1994. A question may be raised as
to why the process took so long. From a business standpoint, there is no incentive to graduate from
the program. This highlights the need to strengthen the SBA regulations concerning the evaluation
and processing of companies for early graduation.

SBA's regulations make it difficult to make a case that a company should be graduated
because the criteria allows a firm to argue that it is not yet able to work outside the program. In the
matter involving I-NET. although the district office recommended graduation, the effective date of
the action was delayed by cumbersome processing procedures and lack of rigorous evaluation
criteria. Corollary delays in processing occurred because information submitted by the concern was



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not provided in a timely manner and material requested was often incomplete. In general, earlv
graduation or termination of firms from the program is a lengthy procedure, according substantial
due process to the firms.

A large issue in this matter was the award of contracts during the graduation process. As long
as a participant that is being processed for graduation is in compliance with program requirements,
business development assistance, including the award of contracts, is available to the firm until a
final determination is made on the graduation action. Therefore, during the period that the graduation
was being processed. I-NET was allowed to self market and receive the contract awards that were
referenced in the GAO Report.

Another issue raised in the GAO report is I-NET's proposed transfer of ownership which
SBA initially reviewed as a transaction that would cause the firm to relinquish control to outside
investors. GAO questioned whether the proposed transfer constituted a relinquishment of ownership
or control which would cause I-NET"s 8(a) contracts to be terminated for convenience under 1 5
U.S.C. 637(a)(21 ). absent a waiver by the Administrator. 1-NET notified SBA that it intended to sell
a minority ownership interest to several private investors and that the remaining stock held by the
majority owner would be subject to certain restrictions. The firm believed that the individual upon
whom I-NET's eligibility for the 8(a) Program was based would not relinquish ownership or control
of I-NET. and therefore, that the termination for convenience/waiver provisions of 15 U.S.C.
637(a)(21) did not apply. Conversely. I-NET argued that if SBA ruled that there was such a



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relinquishment of ownership or control, it would be eligible for a waiver of contract termination
pursuant to 15 U.S.C. 637(a)(21 ).

SBA's Office of General Counsel is analyzing the I-NET transfer, and is discussing those
issues with I-NET and its legal representatives. As the transaction was first structured. SBA's Office
of General Counsel believed that the individual upon whom 1-NET's 8(a) eligibility was based
would relinquish control, and that a waiver was necessary to overcome the termination for
convenience requirement. I-NET attempted to overcome the concerns of the Office of General
Counsel by attempting to restructure the transaction and just recently provided new documentation
to SBA's Office of General Counsel for review. The review will determine whether ownership or
control is relinquished under the proposed restructured transaction, and if so. whether the transaction
meets the legal requirements for a waiver. ■

TAMSCO

In terms of the eligibility review of this firm and I-NET. it is difficult now to second guess
the determinations that were made by program staff over ten years ago. However, SBA's review
indicates the following: District and Regional Offices recommended decline of the application for
technical reasons. This recommendation was overturned by the Headquarters Eligibility Specialist
and the firm was approved by the AA/MSB&COD who. by law. has final approval authority. The
approval of the firm failed to properly address a flaw in the firm's corporate structure, which may
have given the 49% owner of the firm equal authority on the board of directors, resulting in negative
control. This technical error was easily correctable by the applicant. With this exception, it appears



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that the application was processed according to Agency regulations and standard operating
procedures. This case represents a processing oversight, but does not represent an abuse of the
program.

The report also found that TAMSCO received a sole-source 8(a) contract that should have
been awarded competitively through the program. In this case, the GAO reported that a U.S. Coast
Guard contracting official, in an effort to direct the award of this contract to TAMSCO. changed the
SIC Code designation and minimum contract value in order to circumvent SBA program regulations.

The GAO report was critical of the contracting agency for directing a noncompetitive
contract that exceeded the competitive threshold established by law to the firm. A review of SBA's
records revealed that the requirement was offered to the 8(a) Program in accordance with SBA
regulations. There was no reason to second guess the contracting agency regarding the
appropriateness of the selected contract type. SBA believed that it had the right to rely upon the
certification of a United States Government Contracting Officer, who offered a contract to the 8(a)
Program, to ensure that it was in compliance with applicable laws and regulations. It appears that
in this instance, the IDIQ contracting mechanism was used to bypass regulations, the statutory
requirements for 8(a) competition .

GAO criticized SBA regarding the application of competitive thresholds to IDIQ type
contracts because it allowed agencies to circumvent competition requirements. Abuse of competitive
thresholds through use of IDIQ contracts is an issue that has been addressed. On June 7. 1995, SBA



21-817 - 96 - 4



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published a regulation that required the competitive threshold of $3 million for services and $5
million for manufacturing to be applied to the total government estimate, including all options for
all government contracts, including IDIQ's.

The GAO reported that this firm received at least 22 contract awards within 2 weeks of its
graduation from the 8(a) Program totaling at least $63 million. The report was critical of the fact that
1 3 of the awards were IDIQ contracts from a number of government agencies. There is no regulatory
prohibition against 8(a) contract awards, even during the week prior to graduation. Firms that are
in compliance with 8(a) eligibility requirements, including but not limited to size requirements and
business activity targets or remedial measures, can receive contracts under the program right up to
the time of program term completion.

A review of the firm's business file revealed that the firm was not in compliance with its
competitive business activity targets, but it was in compliance with its remedial measures. (Remedial
measures range from requiring a firm to obtain management and technical assistance to reducing
or eliminating sole source requirements.) Consequently, the firm was eligible for the contract
awards.

I

However. SBA should have taken more stringent measures when it became evident that
compliance with its remedial action plan would not ultimately bring the firm into compliance with
its business activity targets. This case clearly demonstrates that existing regulations need extensive
review with respect to firm compliance with business activity targets. SBA needs to provide



95



guidance to promote consistency with the application of the regulation and compliance with the
intent of the law.

Recognition of some of the past problems in reviewing program applications has lead to
improvement in the overall quality of the process. SBA has provided program certification and
eligibility staff training in analysis of financial information and application documentation. This will
reduce the opportunity for approval of ineligible applications based on submission of misrepresented
data. To ensure that only eligible firms receive contract awards under the program, and that business
development goals are truly met. SBA has improved our review process, and mandated that all firms
be reviewed annually, with particular emphasis placed on monitoring attainment of competitive
business developmental goals. Further. SBA has accelerated the processing of termination and
graduation actions to remove firms as soon as they are found to be ineligible. To preclude
circumvention of competitive thresholds. SBA has published regulations closing the IDIQ
"loophole." Also. SBA has established internal field office goals to increase the number of firms
receiving contracts annually. Taken together, these and similar measures should ensure that only
eligible firms enter the program and receive contracts, and that such contracts are more equitably
distributed among program participants.

The SBA believes that the issues identified in the recent GAO report are not typical of
todays 8(a) Program. However, the fact that these problems occurred, and others cited in earlier
GAO and IG reports, have caused SBA to examine the program and propose steps to prevent them
from recurring. The statutory authority for the program is complex. Nonetheless, as referenced



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elsewhere in this testimony. SBA plans to take broad regulatory' and administrative measures to
increase the integrity of the program, make it more efficient, and minimize the potential for abuse.

MED PROGRAM ACCOMPLISHMENTS

SBA has successfully addressed concerns raised by past GAO and IG reports. These reports
have identified weaknesses in the overall administration and management of the 8(a) Program. First.
SBA"s inability to develop an effective and accurate management information system has been cited
repeatedly as a deficiency that has prevented the agency from properly managing and evaluating the
MED Program. Second. SBA's failure to process program applications in a timely manner has been
cited as a management problem that has caused the agency to consistently not meet statutory
provisions. Third, the agency's failure to conduct comprehensive annual reviews of all portfolio
firms has been identified as a deficiency which affects continuing program eligibility. Fourth. SBA's
failure to terminate firms that are no longer eligible to participate in the program has been noted in
the past.

Application Processing

In the last 18 months. SBA has made significant headway in meeting the 90-day statutory
time frame for processing 8(a) applications. Currently, the average processing time for initial
applications is 93 days. Over the last three years, the average processing time has been reduced from
208 days to the current level. Presently, the average processing time for reconsiderations is 46 days.
Over the last three years, the average processing time has been reduced from 164 days to this level.



97



Within the next three months, all applications will be processed in accordance with the
aforementioned statutory time frame.

Management Information Systems

Another criticism of SB A by GAO and the IG is SBA"s failure to properly plan, develop, and
implement an automated information system that allows the agency to collect, assess, and evaluate
information regarding MED's programmatic performance. In August of 1994, SB A adopted a plan
to complete automation of the MED program. Pursuant to this plan, in 1 995 the agency implemented
the Servicing and Contracts System/Minority Enterprise Development Central Office Repository.

The system is up and running in Headquarters and all field offices. It is a comprehensive tool
that will enable SBA to monitor assistance provided, contracts awarded, business development
progress, and compliance with statutory and regulatory requirements; and to measure program
performance and accomplishment. Through this system SBA will be able to measure program
effectiveness and identify program vulnerabilities before they become problems.

Annual Portfolio Reviews

Completion of an annual review for each program participant is essential in determining
achievement of business objectives: identifying firm market, management, and financial weaknesses:
and recommending effective business development strategies. Based upon internal management
control reviews, as well as the aforementioned IG and GAO reports. SBA identified failure to
conduct annual business plan reviews of program participants as a program flaw to be corrected.



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To address this matter, last year, all districts were assigned a goal to complete an annual
review for every company in their portfolios. As a result of this goaling initiative. 84% of all
portfolio firms were reviewed during FY 1995. as compared to 57% in FY 1994. This goal is being
carried forward for FY 1996, and it is fully expected that reviews will be completed for all 8(a)
firms. To make this process more efficient and the resulting data more accurate, the form used to
complete the review has been redesigned and will be incorporated into the information system for
automatic generation. During FY 1996, SBA expects to implement more objective criteria for
graduation and/or termination of firms from the program.

Termination of Ineligible Firms

To maintain program integrity, and pursue realistic business development objectives with
limited resources and limited contracting opportunities, it is important that companies determined
to be ineligible for continued program participation be expeditiously removed from the program. The
SBA has moved aggressively toward accomplishing this objective. In the past eighteen months. SBA
processed over 334 termination actions. It should be noted that during this period. SBA processed
more termination actions than it had processed in all prior years, cumulatively. In total. 484 firms
have been removed from the program for reasons of non-compliance since October 1 . 1 988.

CONCLUSION

Over the many years, SBA's 8(a) Program has done much to assist disadvantaged
entrepreneurs, and to bring the benefits of diversity — creativity and innovation - to the American
economy. For this reason, the 8(a) Program has enjoyed bipartisan support and as previously noted.



99

even' President from Lyndon Johnson to William Clinton have supported the Program. It has spurred
creation of businesses in all industrial sectors, fostered formation of capital, and increased access to
credit. Further, it has provided increased employment opportunities in communities throughout the
Nation. Yet, we are sensitive to the need for change. Therefore, we are committed to managing the
8(a) Program in a manner that will ensure that its benefits are available on a truly equitable basis,
and that confidence in the integrity of program is warranted.

This concludes my testimony. I will be happy to answer any questions you may have.



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Testimony of

Karen S. Lee
Deputy Inspector General

U.S. Small Business Administration




'*/stV



Before

The Committee on Small Business
United States House of Representatives

December 13, 1995



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Good morning, Madam Chair and Members of the Committee. I am Karen S.
Lee, Deputy Inspector General of the Small Business Administration. Mr. Peter
McClintock, Assistant Inspector General for Auditing, and Mr. Stephen Marica,
Assistant Inspector General for Investigations, are with me this morning.

As requested. I will discuss audit and investigative work undertaken by the Office
of Inspector General (OIG) and a recent related General Accounting Office (GAO)
report, concerning SBA's Minority Enterprise Development Program (otherwise known
as the 8(a) program), especially as they relate to documented problems in the 8(a)
program. I will also address the specific points and questions included in your letter of
invitation to testify.

I am pleased to have the opportunity to address needed improvements to the
8(a) program. While the OIG has increased its auditing of the 8(a) program in the past
five years, our limited coverage of the program reflects our lack of resources. Our
detailed knowledge of the 8(a) program's operations is not as extensive as we would
like it to be and there are certain aspects and operations of the program that have
never been audited, so our experience is constrained in that respect. We are, however,
familiar with the overall goals of the program, and also have a fairly good base of
knowledge of past and present 8(a) program fraud and abuse derived from the criminal



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investigation activities of the OIG. My testimony is based on the accumulated
knowledge of the office, as derived from both our audit and investigative activities. I will
also draw on certain statistics obtained from the Agency's 8(a) information system.
Given these caveats, I will discuss what I believe to be some of the major current issues
facing the 8(a) program.

Before discussing the results of our audit work, I would like to point out that the
amount of time spent in investigations of 8(a) program fraud has dropped approximately
40% in the past three years. This reduction is due primarily to a significant reduction in
OIG agents resulting from budgetary constraints and a significant increase in the
number of cases in the disaster and business loan programs, a priority of the Inspector
General. Other reasons for the decline in 8(a) program fraud include the heightened
level of deterrence generated by media coverage of our successful prosecution of 8(a)
cases, the success of our fraud awareness training provided to SBA employees and
program participants and, in some measure, to the reforms that were incorporated in
the 1988 amendments.

Fraud has not been eliminated and still remains a problem, however. Despite
our reduced resource commitment to the 8(a) program over the previous three years,
we have still closed 40 criminal investigations which have resulted in 26 indictments, 25
convictions, and approximately $60 million in financial recoveries through court-ordered
restitution, fines, and other savings. Our current inventory includes 19 active cases
involving 63 subjects and over $126 million in potential loss to the government or



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illegally obtained contracts. Due to resources shortages, we have also referred 31
cases to other Federal law enforcement agencies.

Employee corruption has been a serious problem in the 8(a) program. Since


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Online LibraryUnited States. Congress. House. Committee on SmallThe abuses in the SBA's 8(a) Procurement Program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, December 13, 1995 → online text (page 9 of 20)