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Performance and Accountability Series:

January 2003:

Major Management Challenges and Program Risks:

Small Business Administration:


A Glance at the Agency Covered in This Report:

The Small Business Administration’s (SBA) mission is to maintain and 

strengthen the nation’s economy by aiding, counseling, assisting, and 

protecting the interests of the nation’s small businesses. SBA seeks 

to achieve its mission by:

* providing access to credit for small businesses, primarily by 

guaranteeing bank loans through its 7(a) program;

* helping businesses and households recover from disasters by providing 

loans directly;

* ensuring that a fair proportion of government purchases and sales, 

contracts and subcontracts are placed with small businesses;

* offering assistance to entrepreneurs through partnerships with 

entities that offer small businesses counseling and technical 


*administering the 8(a) program, which is designed to help small 

disadvantaged businesses obtain federal contracts.

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This Series:

This report is part of a special GAO series, first issued in 1999 and 

updated in 2001, entitled the Performance and Accountability Series: 

Major Management Challenges and Program Risks. The 2003 Performance and 

Accountability Series contains separate reports covering each cabinet 

department, most major independent agencies, and the U.S. Postal 

The series also includes a governmentwide perspective on transforming 

way the government does business in order to meet 21st century 

and address long-term fiscal needs. The companion 2003 High-Risk 

An Update identifies areas at high risk due to either their greater 

vulnerabilities to waste, fraud, abuse, and mismanagement or major 

challenges associated with their economy, efficiency, or effectiveness. 

A list of all of the reports in this series is included at the end of

this report.

GAO Highlights:

Highlights of GAO-03-116, a report to Congress included as part of 

Performance and Accountability Series:

Why GAO Did This Study:

GAO’s 2001 report on major challenges at the Small Business 

(SBA) addressed lender oversight, the 8(a) program for small 

businesses, disaster loan processing, and other issues.  The 

GAO presents in this report is intended to help sustain congressional 

attention and SBA’s focus on addressing these challenges.  This report 

part of a special series of reports on governmentwide and agency-


What GAO Found:

SBA has addressed some of the specific performance and management 

challenges that we previously identified.  For example, SBA has 

appropriate elements for an effective lender oversight program but has 

been slow to incorporate all of them.  Other challenges continue.

* Improving lender oversight.  SBA has made progress in developing its 

lender oversight program but conducts only a cursory review of lenders’ 

processes, not a qualitative assessment of decisions on borrowers’ 

creditworthiness and eligibility.  SBA also does not routinely analyze 

lenders’ SBA loan portfolios to assess the financial risk to SBA.

* Developing better disaster assistance performance measures.  SBA 

exceeded its timeliness goals, but the measures used provided 

information.  For example, in measuring customer satisfaction, SBA uses 

the results of its survey of successful disaster loan applicants; 

unsuccessful applicants are not surveyed.

* Strengthening human capital management.  SBA’s current organizational 

structure continues to have weaknesses, such as complex, overlapping 

relationships among offices, which contributes to its challenges in 

delivering services to small businesses.  SBA has a draft 5-year plan 

to restructure its workforce and streamline its operations.

* Ensuring improvement in information technology.  SBA has made some 

progress in establishing policies and defining processes in information 

technology investment management but still needs policies for software 

development and acquisition, and in other areas. 

* Improving budget and financial accountability.  SBA continues to have 

difficulties producing complete, accurate, and timely financial 

statements.  SBA incorrectly calculated the accounting losses on loan 

sales and did not perform key analyses to determine the overall 

financial impact of the sales. These errors and lack of key analyses 

also mean that congressional decision-makers are not receiving accurate 

financial data to make informed decisions about SBA’s budget and 



Transmittal Letter:

Major Performance and Accountability Challenges:

GAO Contacts:

Related GAO Products:

Performance and Accountability and High-Risk Series:

This is a work of the U.S. Government and is not subject to copyright 

protection in the United States. It may be reproduced and distributed 

in its entirety without further permission from GAO. It may contain 

copyrighted graphics, images or other materials. Permission from the 

copyright holder may be necessary should you wish to reproduce 

copyrighted materials separately from GAO’s product.

January 2003:

The President of the Senate

The Speaker of the House of Representatives:

This report addresses the major management challenges facing the Small 

Business Administration (SBA) as it seeks to maintain and strengthen 

the nation’s economy by aiding, counseling, assisting, and protecting 

the interests of the nation’s small businesses and by helping 

businesses and individuals recover from disasters. It includes a 

summary of actions that SBA has already taken and that are under way to 

address these challenges and outlines further actions that GAO believes 

are needed.

This analysis should help the new Congress and administration carry out 

their responsibilities and improve government for the benefit of the 

American people. For additional information about this report, please 

contact Thomas J. McCool, Managing Director, Financial Markets and 

Community Investment, at (202) 512-8678 or

Signed by David M.Walker:

David M. Walker

Comptroller General

of the United States:

[End of section]

Major Performance and Accountability Challenges:

In our January 2001 report on major management challenges and program 

risks at the Small Business Administration (SBA),[Footnote 1] we 

addressed four issues. First, we noted that SBA needed to improve its 

oversight of its lending partners, including the need to develop a data 

system for monitoring its guaranteed loans and lending partners. This 

challenge has become increasingly important as SBA pursues its policy 

of delegating credit decisions to lenders. Second, we described how 

SBA’s program to provide business development and federal contract 

support to small disadvantaged businesses (the 8(a) program) needs to 

be refocused to more effectively assist firms in obtaining contracts. 

SBA’s ability to assess the effectiveness of this program was limited 

by a lack of information on the views and needs of 8(a) customers and 

an inadequate information system. Third, we addressed SBA’s ongoing 

efforts to streamline and modernize disaster loans processing. We 

reported that SBA’s data showed improvements in the timeliness of loan 

processing but noted that the agency needed to get more input from loan 

applicants and to further automate its loan processing procedures. 

Finally, we described how SBA’s overall performance in human capital 

management, information technology, and budgetary and financial 

accountability needed to be strengthened.

Changes since January 2001 in the economic health and security of our 

nation have heightened the significance of how SBA performs. Stresses 

in the economy can result in a tightening of available credit and SBA 

guaranteed loans, technical assistance, and counseling provided to 

businesses in partnership with private entities may be in higher demand 

during economic downturns. The September 11, 2001, terrorist attacks 

brought additional challenges to SBA in providing assistance in the 

wake of the largest disaster since the 1994 Northridge earthquake. In 

addition, the need for assistance extended nationwide, not just in the 

immediate areas of the attacks. SBA, working with Congress, adapted its 

disaster loan program to address the unique circumstances presented by 

the September 11 attacks.

All of the 2001 performance and accountability challenges remain, 

although SBA has made some progress in addressing them. For example, 

although SBA now performs reviews of more of its preferred lending 

partners, the reviews--and SBA’s oversight program in general--do not 

address key issues, such as borrowers’ creditworthiness and eligibility 

or the financial risk lenders’ SBA portfolios pose to SBA. The tragedy 

of September 11 challenged SBA’s disaster loan program, but with 

congressional input, SBA modified some of its standard policies and 

procedures to expedite and broaden its response to affected businesses. 

In July 2002, SBA’s new leadership team announced a 5-year workforce 

transformation plan, in part, on the basis of the need for change 

identified in our work.[Footnote 2] Further, SBA has made some progress 

in addressing our recommendations for improving its information 

technology management capabilities, but more remains to be done before 

the agency can effectively acquire and manage the information 

technology resources it needs. Finally, SBA has improved its financial 

reporting process for fiscal year 2001 but continues to have problems 

producing complete, accurate, and timely financial statements. This 

report discusses these ongoing challenges at SBA and the agency’s 

efforts to address them.

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SBA Needs to Continue Improving Its Oversight of Its Preferred Lenders:

Lender oversight has become increasingly important as SBA, in its role 

of providing credit or access to credit for small businesses, continues 

to delegate loan approval authority to lending partners that make SBA-

guaranteed loans to small businesses. SBA’s largest business loan 

program, 7(a), is intended to serve small businesses that cannot obtain 

credit elsewhere. Under this program, SBA provides loan guarantees of 

up to 85 percent of the loan value. In fiscal year 2001, approximately 

500 preferred lenders approved $5.3 billion of the approximately $9.9 

billion in 7(a) loans granted. These lenders, which have full authority 

to make 7(a) loans without prior SBA approval, are primarily banks but 

also include Small Business Lending Companies (SBLC) licensed by SBA. 

Currently, 12 of the 14 SBLCs are preferred lenders; they account for 

19 percent of 7(a) lending dollar volume.

SBA has shared oversight responsibility for the private preferred 

lenders in its 7(a) program and complete responsibility for overseeing 

SBLCs. Because private lenders have federal bank regulators, such as 

the Office of the Comptroller of the Currency, that oversee their 

overall financial safety and soundness, SBA’s oversight focuses on the 

lenders’ SBA loan portfolios (including risk-management strategies) and 

compliance with program requirements. SBLCs, however, have no 

regulators other than SBA, which is therefore responsible for examining 

their financial condition as well as their portfolios and compliance 

with 7(a) policies and procedures.

Since our June 1998 report on SBA’s lender oversight in general and our 

November 2000 report on SBLC oversight,[Footnote 3] SBA has made 

progress in developing a program to oversee its preferred lenders. The 

agency has built oversight capabilities, identifying appropriate 

elements for an effective program, initiating a safety and soundness 

examination program for SBLCs, and reviewing more preferred lenders 

more often, but it has been slow in fully implementing other changes. 

These include routine analyses of risk in lenders’ SBA loan portfolios, 

further developing safety and soundness examinations of SBLCs, 

performing more substantive compliance reviews, consolidating 

responsibilities for oversight within the agency, and establishing an 

effective information technology system for monitoring loans. SBA’s 

Office of the Inspector General (OIG) has also noted SBA’s progress in 

addressing the challenge of improving lender oversight.[Footnote 4]

SBA has not taken two important steps to address risk-management issues 

related to lenders’ SBA loan portfolios. First, it does not routinely 

analyze the financial risk lenders’ SBA loan portfolios pose to SBA; 

second, its current reviews are not designed to evaluate decisions on 

borrowers’ eligibility. However, in its strategic plan and in public 

statements by senior officials, SBA has said that risk-management 

issues have assumed a higher priority since SBA moved from direct 

lending to guaranteeing loans made by lending partners.

SBA has contracted with a federal regulator to conduct safety and 

soundness examinations of SBLCs and advise the agency on ways to 

improve oversight. But the agency still has not developed specific 

policies and procedures that require SBLCs to address any weaknesses or 

unsafe and unsound conditions identified during examinations as we 

recommended in 2000. In our December 2002 report on preferred lender 

oversight,[Footnote 5] we recommended that SBA adopt regulations that 

define its authority to take supervisory actions against all preferred 

lenders, including SBLCs, and specify the conditions under which the 

actions would take place. SBA replied that it is working diligently to 

address the concerns we raised on this issue.

Although reviews of preferred lenders serve as SBA’s primary control 

mechanism for ensuring compliance with the agency’s credit and 

eligibility standards, we found that the current review process 

involves a cursory examination of loan files rather than a qualitative 

assessment of lenders’ decisions on borrowers’ creditworthiness and 

eligibility for the program. The Small Business Act states that “no 

financial assistance shall be extended if the applicant can obtain 

credit elsewhere.”[Footnote 6] In addition, we found that the “credit 

elsewhere” standard--a test to determine whether the borrower can 

obtain credit without the SBA guarantee--is broad, making a meaningful 

assessment of lenders’ decisions difficult. In light of these findings, 

our 2002 report on preferred lender oversight recommended that SBA 

develop specific criteria to apply to the credit elsewhere standard and 

perform qualitative assessments of lenders’ performance and lending 

decisions. In addition, we recommended that SBA incorporate strategies 

in its review process to adequately measure the financial risk lenders 

pose to SBA. SBA responded that it was considering approaches for 

additional methods to assess the financial risk lenders pose and allow 

for qualitative assessments of its lenders but disagreed with our 

recommendation that they develop specific criteria to apply to the 

credit elsewhere standard. We analyzed applicable law, regulations, and 

SBA procedures that discuss the credit elsewhere standard in reaching 

our conclusion that the standard is broad, making a meaningful 

assessment of lenders’ decisions difficult. We continue to believe that 

SBA should develop specific criteria to apply the credit elsewhere 

standard in a meaningful way.

SBA has made lending partner oversight an agency priority. However, SBA 

does not coordinate this oversight through a single, independent 

organizational unit with a clearly defined mission, responsibilities, 

and lines of authority and does not appear to have the staff required 

to support it. For example, rather than having one office carry out the 

lender oversight functions, SBA uses two different offices within SBA’s 

Office of Capital Access--the Office of Lender Oversight and Office of 

Financial Assistance--as shown in figure 1. The Office of Lender 

Oversight was established in fiscal year 1999 to oversee SBA’s lending 

partners. The Office of Financial Assistance is responsible for 

promoting the 7(a) loan program and encouraging lender participation. 

Moreover, the lender oversight may not be conducted independently since 

the Office of Capital Access is also responsible for promoting the 

agency’s lending program. Locating lender oversight functions in the 

same office that promotes and implements SBA’s lending programs 

presents a possible conflict of interest. Lastly, staff in the Office 

of Lender Oversight attributed delays in completing oversight tasks to 

limited staff resources. For example, sometimes, SBA did not provide 

final reports to lenders until several months after the lender reviews 

or SBLC examinations were completed.[Footnote 7] SBA had no requirement 

for timely issuance of these reports until recently. A draft policy 

calls for delivery to lenders within 90 days of completion.

Figure 1: Preferred Lender Oversight Responsibilities within the Office 

of Capital Access:

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

In past work analyzing organizational alignment and workload 

issues,[Footnote 8] we have described the importance of (1) tying 

organizational alignment to a clear and comprehensive mission statement 

and strategic plan and 

(2) providing adequate resources to accomplish the mission. We found 

that SBA’s Office of Lender Oversight does not currently meet these 

criteria. Therefore, we recommended in our December 2002 report that 

SBA separate the lender oversight function from the Office of Capital 

Access and establish clear authority and guidance on the successor 

office’s program independence, responsibilities, and staffing. SBA 

appeared to disagree with this recommendation but did not respond to it 

specifically. In written comments on our report on lender oversight, 

SBA emphasized that the senior executives heading the Office of Lender 

Oversight and the Office of Financial Assistance report independently 

to the head of the Office of Capital Access. We continue to maintain 

that the current structural alignment and overlapping responsibilities 

of the oversight functions within the two offices hinder effective 

oversight and present the appearance of a conflict, given the 

promotional and programmatic responsibilities involved.

SBA continues to work toward creating a loan monitoring system (LMS) 

that will permit better data collection, analysis and evaluation of 

loans, and lender and program oversight. We are continuing to monitor 

SBA’s progress on this system acquisition effort. In April 

2000,[Footnote 9] we recommended eight steps to help SBA complete 

planning actions mandated for the LMS, including completing the 

analyses of benefits and cost of alternatives for each business process 

identified through SBA’s business reengineering effort, completing the 

definition of specific data quality standards, and developing an 

acquisition strategy that ensures a sound justification exists for 

pursuing custom-developed functions. In response, SBA stated that it 

had completed, initiated, or planned actions for each recommended step. 

After SBA efforts to develop the LMS experienced cost increases and 

schedule delays, congressional appropriations committees, in early 

2001, asked SBA to develop project and spending plans before spending 

any additional funds. In June 2002, SBA adopted a new approach for the 

LMS project that is characterized as more achievable and less risky 

than the previous approach. This new approach incorporates modernizing 

the existing loan-related system as individual components, rather than 

building LMS as a single comprehensive system, and building the lender 

oversight component as soon as possible.

As a first step in this new approach, in September 2002, SBA awarded a 

contract for consulting expertise to assist in managing the overall LMS 

project and addressing mandated planning steps. SBA also plans to award 

another contract to assist with the development and implementation of a 

lender oversight system. We are continuing to monitor SBA’s progress.

8(a) Program Improvements Are Under Way, but Access to Contracting Has 

Not Increased:

SBA’s business development and contracting program for socially and 

economically disadvantaged small businesses is known as the 8(a) 

program. Businesses certified to participate in the program are 

eligible to receive contracts that federal agencies set aside for 8(a) 

firms and technical assistance and management training from SBA. In 

fiscal year 2001, almost 7,000 firms participated in the program and 

8(a) firms received about $6.3 billion in federal contracts--about 3 

percent of total federal procurement. Since January 2001, SBA has begun 

to implement short-and long-term strategies to address problems in the 

8(a) program. However, recent data suggest that only a few firms 

continue to receive the bulk of 8(a) funding and that the volume of 

federal procurement funding awarded to 8(a) firms has not increased.

In our July 2000 report,[Footnote 10] we found, on the basis of a 

survey of 1,200 8(a) firms, that almost all of the firms joined the 

program to obtain 8(a) contracts and wanted SBA to provide contracting 

assistance. Yet we found that relatively few firms received most of the 

8(a) contracts, effectively limiting the developmental opportunities 

available to other firms in the program. As a result of our findings 

and our review of SBA’s 2001 performance plan, we recommended that SBA 

take several actions to better meet the purpose of the program, meet 

the needs and expectations of the firms in the program, and improve the 

agency’s ability to determine how well the program is working. These 

actions included instructing district offices to place their highest 

priority on helping inform firms about contracting opportunities, 

periodically performing a nationwide survey of 8(a) firms to obtain 

measurable program data, providing a method for collecting data on each 

firm’s training needs, and revising the program’s success measure to 

more meaningfully assess the program’s impact. SBA concurred with our 


SBA has fully implemented one of our four recommendations. SBA revised 

the program success measure used in the 2001 performance plan. For the 

2002 and 2003 performance plans, SBA returned to a measure that it had 

used previously--the percentage of 8(a) firms that remain viable 3 

years after graduating from the 9-year program. An SBA official noted, 

however, that this measure has limitations. SBA is trying to develop a 

more effective measure to assess the needs of the 8(a) firms and the 

program’s success. In September 2001, SBA agreed with its Inspector 

General’s recommendations to improve performance measurement for the 

8(a) program by the end of fiscal year 2002. According to staff from 

SBA’s CFO, SBA had implemented in December 2002 a tracking system to 

follow firms that are terminated from the 8(a) program, which was one 

of the four recommendations.

In addition, SBA has made progress toward implementing the remaining 

recommendations. SBA has begun instructing district offices to 

prioritize informing firms about contracting opportunities. For 

example, its goals for district offices for fiscal year 2001 included 

obtaining contracts for 5 percent of the 8(a) firms that had been in 

the program for 2 years or more that did not already have contracts. 

The district offices also were expected to conduct one procurement 

training course specifically for 8(a) firms and to inform all 8(a) 

firms that the course was mandatory. For fiscal year 2002, the 8(a) 

contracting goal was increased to 10 percent, while the procurement 

training goal was eliminated. SBA officials indicated that the district 

offices met the contracting goal for fiscal year 2002. SBA officials 

also indicated that initial efforts had been made to conduct a 

nationwide survey of 8(a) firms and to collect data on each firm’s 

training needs. A draft survey was developed, but agency officials 

indicated that the survey was not finalized due to a lack of funding. 

SBA did pilot test a software application to identify a firm’s training 

needs, and it plans to incorporate this capability into its information 


We also reported in July 2000 that SBA’s 8(a) information system, which 

was intended to be a comprehensive monitoring tool, did not meet the 

information technology needs of either headquarters or district 

officials. Although program officials have recognized the need to 

update the system since 1996 and have planned updates, the system has 

not been substantially improved. SBA officials cited frequent 

leadership changes at SBA in the late 1990s as the proximate cause of 

these failures. We recommended that SBA design an integrated 8(a) 

information system, and SBA concurred. SBA has developed a strategic 

information technology plan for the 8(a) program that includes an 

integrated system. However, according an SBA official, implementing the 

entire plan will require between $5 and $7 million and will take at 

least 5 years.

The 8(a) program is also affected by Executive Order 13170, Increasing 

Opportunities and Access for Disadvantaged Businesses, issued in 

October 2000. This order mandates nondiscrimination in federal 

procurement opportunities for small disadvantaged businesses, 

including 8(a) firms, and requires affirmative action to include these 

businesses in federal contracting. The order placed several 

requirements on all executive departments and agencies with procurement 

authority and gave certain agencies, such as OMB and SBA, additional 

responsibilities. For instance, each agency was to develop a 

comprehensive long-term plan to implement the order and submit the plan 

to OMB within 90 days. OMB’s responsibilities included reviewing each 

comprehensive plan and reporting to the President on the sufficiency of 

the plans. SBA’s responsibilities included establishing 8(a) 

contracting goals with each agency, reviewing agencies’ use of contract 

bundling,[Footnote 11] and ensuring that each department’s goals and 

procurement performances were publicly available.

Some progress has been made in implementing the order. According to an 

OMB official, as of September 2002, several departments and agencies 

had submitted comprehensive plans, but OMB had not assessed the plans 

and had not submitted a report to the President. SBA officials reported 

that they have recommended 8(a) contracting goals for each of the 

agencies, conducted mid-year evaluation of agencies’ achievements, and 

notified the agencies’ of their performance. SBA also conducted a 

review of contract bundling during fiscal year 2001 and issued a report 

to Congress. Lastly, contract performance reports for fiscal years 2000 

and 2001 are now available to the public on the SBA Web site.[Footnote 


In addition to responding to our recommendations and the executive 

order, SBA has undertaken other initiatives to improve the 8(a) 

program. For example, according to SBA officials, SBA has begun trying 

to expedite the 8(a) award process by enabling federal agencies to work 

directly with the 8(a) firms. Specifically, SBA has limited its role by 

passing on to the procuring agency many of the contract procurement 

functions under a partnership agreement. As of July 2002, SBA had 29 

partnership agreements with other federal agencies. In addition, in 

January 2002, according to SBA officials, a working group was formed to 

reexamine the entire 8(a) program and refocus the program on achieving 

its statutory intent. As part of this effort, the working group is 

examining such issues as business owners’ motivation for participating 

in the 8(a) program and automating the monitoring process. The working 

group is exploring both regulatory and statutory strategies to achieve 

its program goals. As of mid-September 2002, the working group was 

soliciting comments from SBA staff but had not submitted its report to 

SBA management for review.

Despite these efforts, the SBA Inspector General reported in January 

2002 that the 8(a) program continues to face three serious management 

challenges: (1) increasing 8(a) firms’ access to business development 

and federal contracts; (2) defining clearer standards to determine 

“economic disadvantage,” a criteria firms must meet to participate in 

the program; and (3) clarifying rules to deter 8(a) firms from passing 

through procurement activity to non-8(a) firms.[Footnote 13] The 

Inspector General indicated that SBA had made no measurable progress 

during fiscal year 2001 in addressing these challenges. For example, 

access to 8(a) funding and the volume of federal procurement funding 

awarded to 8(a) firms had not increased nationally. We reported that in 

1998 about 3 percent of the firms in the 8(a) program received half the 

dollar value of all 8(a) contract dollars. About half the firms did not 

receive any contracts.[Footnote 14] SBA’s Inspector General reported 

similar results for fiscal year 2000.[Footnote 15] Moreover, federal 

procurement data indicate that between fiscal years 1998 and 2001 the 

percentage of total federal contract funding awarded to 8(a) firms 

declined from 3.6 to 2.9 percent. This trend is in keeping with the 

recent decline in the proportion of federal procurement awarded to 

small businesses.[Footnote 16] At a congressional hearing in February 

2002,[Footnote 17] SBA attributed the decline in 8(a) contracting to 

several factors, including government credit card purchases, federal 

supply schedule contracts, and contract bundling.

SBA Provided Loans to Individuals and Small Businesses Affected by the 

September 11, 2001, Attacks:

SBA’s Office of Disaster Assistance makes loans directly to households 

to repair or replace damaged homes and personal property and help 

businesses recover from both physical damage and substantial economic 

losses. SBA’s primary objective when responding to disasters is to 

offer victims quality, timely, easy-to-access, and cost-effective loans 

to rebuild their homes and businesses.

Since September 11, 2001, SBA has faced the unique challenge of 

providing loans to restore homes and businesses across the country that 

were affected by the terrorist attacks. In just over 1 year following 

the attacks, SBA approved almost 9,700 home and business loans totaling 

about $966 million in loan funds to victims of the attacks. Small 

businesses in those areas of New York and Virginia that were officially 

declared disaster areas were eligible to apply for both an Economic 

Injury Disaster Loan (EIDL) and a physical disaster loan to help fund 

repairs to business property. Certain small businesses nationwide that 

were affected by the attacks were eligible to apply for an expanded 

EIDL program, and those affected by the loss of employees who were 

called up as reserve military personnel could apply for the military 

EIDL program. Home and business owners in the federally declared 

disaster areas received just under half of the disbursed loans; the 

remainder went to eligible businesses nationwide (see fig. 2).

Figure 2: Geographic Distribution of September 11 Related Loan Amounts 

Disbursed as of September 30, 2002:

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Note: GAO analysis of SBA data.

SBA data suggest that, overall, the agency processed loans related to 

September 11 faster than it processed loans in response to previous 

disasters. For example, SBA processed loans to small businesses 

affected by the attacks in about 13 days on average, compared with 

about 16 days on average for other business disaster loans during 

fiscal year 2001. The faster processing may be attributed, in part, to 

the unique characteristics of the attacks and complaints from small 

business applicants that prompted SBA and Congress to adapt the loan 

program for September 11 victims.

SBA’s response commenced immediately after the terrorist attacks 

occurred, when SBA disaster officials established communication with 

the Federal Emergency Management Agency (FEMA) and state emergency 

management officials. By the afternoon of September 11, officials from 

SBA’s Niagara Falls area office had arrived in lower Manhattan to begin 

coordinating the agency’s recovery efforts with the overall federal 

response. SBA officials were meeting with disaster victims by 

September 13.

In the immediate aftermath of the attacks in New York City, local 

communications and travel were disrupted. SBA employed two strategies 

in September 2001 to make it more convenient for victims to apply for 

SBA loans. First, SBA sent agency officials door-to-door to provide 

loan applications to businesses. Second, SBA began training officials 

from other SBA programs with offices in New York, such as the Small 

Business Development Centers (SBDC), thereby enabling victims to go to 

other locations in New York to receive disaster loan applications and 

assistance. Eventually, over 40 SBA locations were available to assist 


In the weeks and months following the terrorist attacks, small business 

owners complained to Congress about SBA’s disaster loan program. Small 

business owners’ complaints involved issues such as (1) the effect of 

the attacks on small businesses nationwide, (2) SBA’s communication 

with applicants with low English proficiency, (3) size standards for 

small businesses, (4) loan terms and underwriting criteria, and (5) the 

time required to receive loan approval. These complaints prompted SBA 

and Congress to modify the loan program for September 11 victims.

Small businesses complained that eligibility for SBA loans was limited 

to firms located within the declared disaster areas, yet the September 

11 terrorist attacks had caused economic injury to small businesses 

nationwide. Small business owners, representing aviation-related, 

travel, and tourism industries from across the nation, reported 

significant losses in revenue as a result of the attacks, which forced 

these owners to furlough and/or terminate numerous jobs. These small 

businesses identified SBA as a potential source of assistance to help 

them recover from the economic injury caused by the attacks.

In response to these concerns, in October 2001, SBA made economic 

injury disaster loans available to small businesses nationwide. SBA’s 

expanded EIDL program enabled businesses outside of the declared 

disaster areas to apply for loans to meet ordinary and necessary 

operating expenses that they were unable to meet, due to the attacks or 

related action taken by the federal government between September 11 and 

October 22, 2001.

Small businesses complained that the application process was 

particularly confusing and time-consuming for applicants with low 

English proficiency. To address these concerns, SBA printed 

informational packets in languages such as Spanish and Chinese; 

provided SBA centers with staff who could speak Arabic, Croatian, 

Mandarin Chinese, and Spanish; and was prepared to send employees with 

additional language capabilities to application sites. In response to 

complaints from businesses adversely affected by the terrorist attacks 

that existing size standards--SBA’s official guidelines for determining 

whether a firm constituted a small business--were overly restrictive, 

in February 2002, SBA retroactively applied the recent inflation-

adjusted size standards to all September 11 economic injury loan 

applicants. In addition, in March 2002, SBA increased the threshold 

specifically for travel agencies adversely affected by the attacks from 

$1 million to $3 million in annual revenues.

Small businesses affected by the terrorist attacks also complained that 

SBA’s underwriting criteria for disaster loans were too restrictive. 

For example, two small business owners testified that SBA withdrew 

their applications because the owners would not put their homes up for 

collateral. The business owners argued that it was too risky to put 

their homes up for collateral, especially since the survival of their 

businesses was uncertain. A New York SBDC official questioned the 

appropriateness of SBA’s disaster loan underwriting criteria for high-

cost areas. He stated that SBA should consider the location of the 

businesses affected by the attacks--New York City--where some factors 

relating to the high cost of doing business fall outside of the norms.

Although SBA approved millions in loans, 52 percent of the loan 

applications related to September 11 were withdrawn or declined. SBA 

stated that the agency made every effort to approve each application by 

applying more lenient credit standards than private lenders.[Footnote 

18] However, to minimize costs and losses, SBA officials stated they 

had to adhere to their credit standards. According to SBA, the most 

common reason for declining September 11 loan applications was the 

applicant’s inability to repay the loan. SBA officials stand by their 

decisions not to approve loans that ultimately would result in the loss 

of a victim’s home or business. In addition, we note that such loans 

would also result in losses to the government.

Finally, applicants complained that it took too long for SBA to approve 

loan applications. SBA responded to these complaints by implementing 

procedures in October 2001 to expedite two stages of the process--loan 

processing and loan disbursements. To expedite loan processing, loan 

officers calculated economic injury loan amounts on the basis of the 

applicant’s monthly gross margin instead of calculating loan amounts 

using extensive economic analysis. To expedite the disbursement 

process, SBA reduced the amount of documentation needed for amounts of 

up to $50,000.

Despite SBA’s efforts to be responsive to the needs of small businesses 

affected by the terrorist attacks, business owners asserted that SBA’s 

existing disaster program did not have the authority to provide 

adequate loans to small businesses within the declared disaster areas. 

In January 2002, Congress enacted Public Law 107-117. In addition to 


$150 million in supplemental appropriations, the public law made 

several changes in the disaster loan program, specifically for small 

businesses affected by the September 11attacks. The changes included 

raising the maximum loan amount from $1.5 to $10 million and deferring 

payments and interest accrual for 2 years.

SBA officials believe that many of the complaints about the disaster 

program result from a clear difference between victims’ expectations of 

SBA’s disaster program and what the program really offers. For example, 

when some victims are told they can receive “assistance” from SBA, they 

assume that this assistance is in the form of grants instead of loans. 

For this reason, SBA officials believe it is important to have a close 

relationship with the media and public officials so that disaster 

victims receive accurate information about the nature of SBA 


While it is too early to assess the outcome of SBA’s lending related to 

September 11, SBA has exceeded all of its process-oriented goals in 

responding to this disaster. For example, while SBA aims to establish 

field presence within 3 days of a disaster declaration, SBA officials 

indicated that they were on site making preparations to serve disaster 

victims the same day the terrorist attacks occurred. Also, although 

SBA’s goal is to process 80 percent of disaster loans within 21 days, 

the agency processed September 11-related loans in an average of about 

13 days. In addition, SBA exceeded its goal of making 95 percent of 

initial disbursements 5 days after receipt of closing documents, 

ordering initial disbursements in 2 days, on average. Although SBA 

exceeded all of its timeliness goals in responding to the September 11 

terrorist attacks, we have some concerns about the measures and goals 

that SBA uses to assess its performance in providing disaster 


Disaster Loan Program Performance Measures Are of Limited Use:

In our June 2001 report,[Footnote 19] we reviewed SBA’s 2000 

performance report, which described its performance for fiscal year 

1999, and the 2002 performance plan that described its future program 

goals. We observed that SBA needed to improve the quality of the 

measures that it uses to assess its performance and improve its 

performance plan for the disaster loan program. Specifically, we found 

that SBA used inconsistent and subjective measures, and that the 

document used to report program performance to Congress lacked key 

information that would have provided a more accurate picture of both 

the performance measures and the results.

Since the June 2001 report, SBA has not significantly improved either 

its performance measures or the performance plan. We found that two of 

the measures SBA uses to assess performance describe only one aspect of 

the loan application and disbursement processes. Moreover, these 

measures do not capture the notable progress the program has made in 

improving its loan processing--progress that ultimately affects 

disaster loan applicants and borrowers.

SBA currently uses six measures to assess performance--three to assess 

outputs and three to assess outcomes. The measures that assess the 

outputs of SBA’s service to disaster victims are (1) establishing a 

field presence within 3 days of a disaster declaration, (2) processing 

loan applications within 21 days of receiving them, and (3) ordering 

initial loan disbursements within 5 days of receiving the closing 

documents. Officials from SBA’s disaster area offices who manage SBA’s 

disaster assistance teams questioned whether these measures are 

appropriate indicators of timely service to disaster victims. For 

example, one area office official characterized the 3-day field 

presence measure as artificial and suggested that it does not drive the 

agency to improve its performance. SBA has met this measure 100 percent 

of the time since fiscal year 1998. Officials from area offices 

indicated that planning, interagency coordination, and technology have 

enabled them to have SBA staff on site and preparing to assist disaster 

victims within 1 day of a disaster declaration. According to area 

office staff, delays in establishing a field presence generally occur 

because SBA is waiting for decisions from state officials.

Several area office officials also questioned the appropriateness of 

the second measure, which required in fiscal year 2000 that SBA process 

70 percent of its loan applications within 21 days of receiving them. 

In fiscal year 2001, the target was increased to 80 percent. One 

official suggested that providing timely assistance does not always 

mean providing assistance in the shortest amount of time. Rather, 

providing timely assistance depends on the needs of disaster victims. 

Moreover, SBA exceeded this goal for fiscal years 2001 and 2002. SBA 

data indicate that in fiscal year 2002, the agency was able to process 

home loans in about 10 days, on average, and the more complex business 

loans were processed in about 13 days.

SBA has made several improvements to expedite loan processing. For 

example, SBA implemented the Disaster Personnel Reserve Corps in order 

to have trained personnel available to assist in responding to 

disasters. One field office official thought that the availability of 

the reserve corps had helped the office attain the 21-day processing 

goal for fiscal year 2001. In addition, SBA has declined loans with 

poor credit scores immediately, saving the staff time that might have 

been spent appraising property for these loans.

In 2002, SBA began reporting data on the third output measure--ordering 

initial disbursements within 5 days of receiving closing documents. Yet 

area office staff also question the appropriateness of this measure. 

Before 2002, SBA had an internal goal of ordering disbursements within 

3 days of receiving closing documents. According to officials, when SBA 

included this measure in the performance plan, the disbursement target 

was increased to 5 days. Because agency officials are used to being 

subject to the stricter 3-day standard, they indicated that the 5-day 

standard can be met with ease. One area office piloted an expedited 

disbursement process for disbursing loans of between $25,000 and 


SBA uses the next three measures to assess outcomes, or effects, of SBA 

lending on disaster victims: (1) number of homes restored to 

predisaster condition, (2) number of businesses restored to predisaster 

condition, and (3) customer satisfaction. The principal limitation of 

SBA’s measures is that they only account for a portion of the outcomes. 

For example, SBA reports on the number of home and business loans 

approved as proxy measures for the number of homes and businesses 

restored to predisaster condition. But SBA staff explained that even 

when loans are approved, borrowers might cancel the loan or reduce the 

amount of the loan to avoid using their home as collateral. Thus, this 

proxy measure likely overestimates the number of homes and businesses 

restored. SBA recognizes that these proxy measures are inadequate and 

is in the process of identifying more accurate ones.

To measure customer satisfaction, SBA uses the results of its survey of 

successful loan applicants. Yet, every disaster area office director 

indicated that all disaster victims are SBA customers and that a 

broader population should be surveyed. In 2001, the SBA Inspector 

General and we made the same suggestion to SBA. As we indicated then, 

the current survey method is likely to produce positively skewed 

responses. However, headquarters officials were resistant to surveying 

those who were denied loans because they presumed the applicants’ 

responses would be negative. SBA does not currently plan to expand its 

fiscal year 2002 survey to a sample of all loan applicants.

Like other federal agencies, SBA described its long-term performance 

goals and associated measures, previously described, in its annual 

strategic plan for fiscal years 2001 to 2006 and will provide annual 

reports detailing its progress in meeting these goals. However, in our 

2001 report, we found that the fiscal year 2000 performance report for 

the disaster loan program had several limitations, such as inadequate 

explanations and inconsistent or subjective information. Recent 

performance plans have similar limitations. For instance, the 2003 

performance plan does not explain why the strategic goal for the 

disaster program was changed. In the 2002 plan, SBA defined its 

performance goal as “helping families and businesses recover from 

disasters.” In the 2003 plan, that goal has become “streamlining 

disaster lending”--a shift in focus from an outcome to an SBA process. 

OMB does not recommend, in its guidance, the approach SBA adopts in its 

2003 plan.

In addition, the 2002 and 2003 plans do not explain the linkages 

between program strategies and achieving performance goals for disaster 

lending, and do not explain how the performance measures and goals were 

developed. These omissions make it difficult to understand how and if 

SBA expects to improve or sustain its loan processing performance.

The performance plans contain incomplete or inaccurate information on 

some performance indicators. For example, despite Office of Management 

and Budget (OMB) and SBA guidance, validation and verification 

information on field presence and loan processing measures is omitted, 

making it difficult to assess the quality of performance data. In 

addition, the 2003 performance plan indicates that data on the number 

of homes restored to predisaster condition are based on on-site 

inspections of homes. However, SBA officials indicated that the actual 

source of data for homes restored to predisaster condition is the 

number of original home loans approved.

In our January 2003 report, we recommended that SBA develop a better 

performance plan for the Disaster Loan Program.[Footnote 20] 

Specifically, the plan needs to include more outcome measures and 

assess more significant outputs. In addition, we recommended that SBA 

revise and expand its research to improve its current measures and 

evaluate program impact. To develop these measures, SBA should conduct 

research, such as surveying its field staff and loan applicants, to 

identify both the direct and indirect benefits that disaster victims 

receive by participating in the program. SBA officials generally agreed 

with our recommendations.

Strategic Human Capital Management Needs to Be Strengthened:

SBA continues to implement some changes in its strategic human capital 

management[Footnote 21] and to develop approaches to streamlining its 

operations, but this critical area still needs to be strengthened. 

Since we issued our June 2001 status of management challenges report 

and an October 2001 report on SBA’s organizational structure,[Footnote 

22] SBA has continued to build on its vision for modernizing the agency 

by developing a 5-year workforce transformation plan designed to 

transform the agency and its workforce “to meet the modern demands of 

small business.”:

We reported in October 2001 that SBA’s current organizational structure 

had weaknesses that contributed to the challenges it faced in 

delivering services to the small business community. Our 2002 review of 

lender oversight, previously discussed in this report, and the loan 

asset sales program also substantiated these weaknesses.[Footnote 23] 

Organizational alignment can be an important factor in determining an 

agency’s efficiency and ability to administer its programs. By 

organizational alignment, we mean the integration of organizational 

components, activities, core processes, and resources to support 

efficient and effective achievement of outcomes. Specifically, we found 

that ineffective lines of communication, confusion over the mission of 

district offices, complicated and overlapping organizational 

relationships, and a field structure that did not consistently match 

mission requirements combined to impede staff efforts to deliver 

services effectively.

Figure 3 illustrates SBA’s complex, overlapping organizational 

relationships, particularly between field and headquarters units. 

Senior officials said that although some of these complex 

organizational relationships stem from legislative requirements such as 

specified reporting relationships, past realignment efforts that 

changed how SBA performed its functions while leaving aspects of the 

previous structure intact have also played a part.

Figure 3: Organizational Relationships among SBA Headquarters and 

Regions, Districts, and Other Field Units:

[See PDF for image] - graphic text:

[End of figure] - graphic text:


GAO analysis of SBA organization.

This figure refers to the following SBA offices: Office of Field 

Operations (OFO), Office of Government Contracting/Business 

Development (GC/BD), Office of the General Counsel (OGC), and 

Government Contracting Area Offices (GC Areas). This figure also uses 

the term “storefronts” to characterize Small Business Development 

Centers, Business Information Centers, Women’s Business Centers, and 

other such locations where the public accesses SBA programs.

For example, the district offices have a direct relationship not only 

with both the Office of Field Operations and a regional office, but 

also with the headquarters offices managing their programs. District 

staff working on SBA loan programs report to their district management, 

while loan processing and servicing center staff report directly to the 

Office of Capital Access in headquarters. However, staff from district 

office loan programs sometimes need to work with the loan processing 

and servicing centers to get information or expedite loans for lenders 

in their district. Because loan processing and servicing centers report 

directly to the Office of Capital Access, requests that are directed to 

the centers may go from the district through the Office of Capital 

Access then back to the centers, complicating efforts to process and 

service loans quickly and efficiently. SBA district officials told us 

that these multiple lines of communication with the district offices 

have resulted in conflicting or redundant requests and difficulty 

communicating priorities. SBA’s Inspector General found similar 

communication problems within SBA.[Footnote 24]

We also found confusion about the primary role of SBA’s district 

offices. Headquarters executives said that the main customer of the 

district offices was the small business community. However, district 

office officials told us that their primary clients were the lenders 

that they worked with, that is, encouraging the lenders to make more 

SBA guaranteed loans, providing support, and conducting oversight 

reviews. SBA headquarters executives said that the role of the district 

office had been in transition since the agency had begun centralizing 

lending activities. But district office officials noted that they were 

still responsible for interacting closely with lenders, especially 

small lenders, and have a role in servicing problem loans and 

liquidating defaulted loans.

SBA continues to deal with the problem of getting properly trained 

people into the right places, especially the districts, to manage the 

7(a) and 8(a) programs. SBA officials said that 7(a) staff had seen 

their roles change from loan processing to overseeing financial 

institutions, and that 8(a) Business Opportunity Specialists were 

facing a similar change from monitoring program compliance to acting as 

business development coaches. Likewise, our review of the role of SBA’s 

Commercial Market Representatives--staff who promote small business 

subcontracting--found that although SBA had changed what these 

representatives did, it had not strategically planned these changes or 

assessed their collective impact.[Footnote 25] We recommended that SBA 

strategically assess, evaluate, and plan the role of these staff. SBA 

agreed that it needed to rethink the market representatives’ role and 

develop outcome and impact measures to better assess their 

effectiveness. In addition, SBA’s 5-year workforce transformation plan 

addresses the need to inventory the skills of all SBA employees and 

provide professional development opportunities as needed.

Since 1999, SBA has been selling its disaster assistance and defaulted 

business loans to reduce the amount of debt it services so that the 

agency could realign employees to focus more on serving small 

businesses. However, the role of loan asset sales in facilitating a 

realignment of SBA’s workforce may be less than initially expected. In 

our January 2003 report[Footnote 26] on SBA’s loan asset sales, we 

found that although loan servicing workloads have been reduced, the 

reduction has not yet translated into moving employees out of servicing 

positions and into more mission-critical positions. Some of the 

benefits SBA had expected may not materialize or SBA may have 

overstated them. Furthermore, some district office officials were 

doubtful that the loan sales would significantly reduce their role in 

servicing and liquidating business loans, since most of the loans SBA 

has sold were from the disaster assistance program. We recommended that 

SBA more thoroughly analyze the benefits and other effects of loan 

asset sales on agency operations. In commenting on our draft report, 

SBA did not specifically respond to this recommendation. SBA’s 5-year 

workforce transformation plan acknowledged the need to provide 

professional development opportunities for any employees affected by 

realigning resources due to the asset sales or other changes.

According to the administration’s executive branch management scorecard 

report for SBA,[Footnote 27] SBA recognizes the need to restructure but 

made little progress in doing so during fiscal year 2001. The 5-year 

workforce transformation plan recognizes SBA’s need to restructure its 

workforce, privatize noncore functions, adjust incentives and goals, 

and streamline its headquarters’ operations. SBA’s leaders have 

acknowledged the major elements we have identified that underpin a 

successful workforce transformation--strategic planning; strategic 

human capital management; senior leadership and accountability; 

alignment of activities, processes, and resources to support mission 

achievement; and internal and external collaboration.[Footnote 28] They 

plan to use these elements to guide the agency as it pursues workforce 


SBA Has Made Some Progress in Improving Its Information Technology, but 

More Remains to Be Done:

In May 2000,[Footnote 29] we reported that SBA had not established 

policies and defined processes in a number of critical information 

technology (IT) areas, including IT investment management, IT 

architecture, software development and acquisition, information 

systems security, and human capital management. As a result, SBA could 

not ensure that it was effectively selecting and controlling its IT 

investment management, ensuring its systems are compatible and would 

meet agency needs, performing essential software development and 

acquisition activities, protecting critical information and assets from 

inappropriate use, and identifying the knowledge and skills needed to 

support its IT management mission. We made a number of recommendations 

in that report to improve SBA’s IT management capabilities. SBA has 

made progress on some of our recommendations, such as setting a target 

date for the implementation of architecture maintenance procedures. 

However, SBA has not provided evidence that it has completed actions to 

implement significant portions of all the recommendations made in May 

2000. Therefore, the agency cannot ensure that policies and practices 

are in place to effectively acquire and manage its IT resources. We 

will continue to monitor SBA’s progress in addressing weaknesses in 

each of these critical IT areas.

In the investment management area, we recommended that SBA adopt 

policies and procedures for selecting, controlling, and evaluating its 

IT investments. Since we made our recommendations, SBA has initiated 

efforts to select and control its major IT investments--including 

prioritizing projects for investment and tracking some projects’ 

progress on cost and schedule milestones. However, SBA has more to do 

to complete its selection and control processes--such as developing a 

standardized cost-benefit methodology and implementing control 

procedures for major IT projects. SBA has not initiated 

postimplementation reviews.

To ensure that its systems were compatible and met agency needs in the 

IT architecture area, we recommended that SBA create a process for 

developing its architecture and establish policies and procedures for 

maintaining its architecture to ensure the compatibility of its systems 

and software. SBA has not yet implemented policies and procedures for 

architecture development and maintenance. However, SBA officials 

reported that they expect to have a maintenance policy in place by 

February 2003.

In the software development and acquisition area, we recommended that 

SBA establish and enforce an agencywide systems development methodology 

as well as policies and procedures for software acquisition and 

development. Since we made those recommendations, SBA has established 

its systems development methodology but has not yet established 

policies and procedures for software development and acquisition.

In the area of information systems security, we made a series of 

recommendations to improve SBA’s ability to identify, address, and 

manage security risks. Since we made our recommendations, SBA has 

established policy and procedures for information systems security, 

made progress in ensuring the security of 38 of its most sensitive 

computer systems, and developed computer security awareness training. 

However, in January 2002, SBA’s Inspector General raised concerns about 

agencywide security management, systems access controls, and computer 

security testing.[Footnote 30]

In the human capital management area, we recommended that SBA undertake 

a series of steps to identify its information technology knowledge and 

skills requirements, assess its current information technology skills, 

and develop strategies to acquire and maintain information technology 

skills. Since we made our recommendations, SBA has completed a 

technical skills assessment for IT staff, but is still in the early 

stages of examining its workforce needs. In addition, according to its 

fiscal year 2003 performance plan, SBA intends to collect and maintain 

data on IT skills requirements and staff IT skills.

Challenges Still Exist to Achieving Budgetary and Financial 


SBA faces major challenges before it can achieve financial 

accountability. Most notably, it needs to address problems in 

accounting for and reporting its loan asset sales and the subsidy 

allowance account. These problems have impacted past and could impact 

future subsidy cost estimates and the opinions on SBA’s financial 

statements. SBA also continues to experience problems with its overall 

financial reporting process.

In our recently issued report on SBA’s loan asset sale 

program,[Footnote 31] we reviewed SBA’s budgeting and accounting for 

loan sales and found that SBA incorrectly calculated the accounting 

losses on the loan sales and lacked reliable financial data to 

determine the overall financial impact of the sales. Further, because 

SBA did not analyze the effect of loan sales on its remaining 

portfolio, its reestimates of loan program costs for the budget and 

financial statements may contain significant errors. In addition, SBA 

could not explain significant declines in its loss allowance account 

for disaster loans. Until SBA corrects these errors and determines the 

cause of the precipitous decline in the loss allowance account, SBA’s 

financial statements cannot be relied upon. Further, the reliability of 

current and future subsidy cost estimates will remain unknown. These 

errors and the lack of key analyses also mean that congressional 

decision-makers are not receiving accurate financial data to make 

informed decisions about SBA’s budget and the level of appropriations 

the agency should receive. We recommended that, before conducting 

additional loan asset sales, SBA correct the accounting and budgeting 

errors and misstatements. SBA generally agreed with our overall 

findings and recommendations, especially the need to better assess the 

financial impact of SBA’s loan sales program. SBA also stated that it 

is actively engaging a contractor to help resolve the accounting and 

budgetary issues and has worked extensively with its independent 

auditors to identify causes and options for resolving the issues we 

identified. Furthermore, we recommended that the Inspector General, in 

conjunction with SBA’s independent auditors, assess the impact of any 

identified errors in the financial statements and determine whether 

previously issued audit opinions for fiscal years 2000 and 2001 need to 

be revised. The Inspector General and SBA’s independent auditors agreed 

with our findings and informed us in December 2002 that SBA’s 

independent auditors plan to withdraw their unqualified audit opinion 

on the fiscal years 2000 and 2001 financial statements and issue 

disclaimers of opinion. The independent auditors have stated that their 

audit opinions for 2000 and 2001 should no longer be relied upon 

because they may be materially incorrect due to the errors identified 

in our report on SBA’s loan asset sales program.

In addition to problems in accounting for loan sales and the subsidy 

allowance, SBA’s overall financial reporting process remained a 

material internal control weakness in fiscal year 2001. Documentation 

of the financial reporting process and procedures improved; however, 

the independent public accountant reported that the overall process 

worsened. For example, SBA did not deliver its financial statements to 

the independent public accountants performing the fiscal year 2001 

audit by the originally scheduled dates. SBA provided revised dates 

extending delivery of financial statements and supporting documentation 

by 11 to 21 days. When finally delivered, the financial statements 

contained numerous errors and misclassifications. For example, nearly 

$350 million in gross costs were reported under the wrong line item on 

the Statement of Net Cost, and $1.1 billion of offsetting receipts were 

excluded from the Statement of Financing when the correct amount had 

already been reported on the Statement of Budgetary Resources. Neither 

SBA’s process for preparing the financial statements nor its quality 

assurance process identified these errors before the statements were 

submitted to the auditors.

The deficiencies in SBA’s financial reporting process meant that the 

agency did not substantially comply with the Federal Financial 

Management Improvement Act of 1996 (FFMIA). FFMIA is a measure of an 

agency’s ability to incorporate into its financial management system 

accounting standards and reporting objectives established for the 

federal government, so that all assets, liabilities, revenues, 

expenses, and the full costs of programs and activities can be 

consistently and accurately recorded, monitored, and uniformly 

reported. Substantial noncompliance with FFMIA indicates that SBA’s 

financial management systems do not routinely provide reliable, useful, 

timely, and consistent information to fulfill its responsibility of 

being accountable to the public and of providing timely financial 

information to manage on a day-to-day basis.

In August 2001, we reported that, on a cumulative basis since 1992, SBA 

had overestimated the defaults on the 7(a) General Business Loan 

Program by approximately $2 billion and had overestimated recoveries by 

approximately $450 million.[Footnote 32] Because cash flow modeling is 

both complex and imprecise, agencies generally revise their estimates 

annually. SBA’s modeling approach used a higher default rate than 

recent experience because they included more years of historical data 

to smooth out fluctuations in economic conditions from year to year. 

This practice provides a cushion in the event of an unexpected economic 

downturn. Since this time, SBA proposed several changes in the default 

estimation methodology and has recently completed work on a 

sophisticated econometric modeling approach to address this issue.

[End of section]

GAO Contacts:

Subject covered in this report: Improving lender oversight; ; 

Improvements needed in 8(a) program; ; Response to individuals and 

small businesses affected by September 11, 2001; ; Developing better 

disaster assistance performance measures; ; Strategic human capital 

management needs to be strengthened; Contact person: Davi M. 

D’Agostino, Director; Financial Markets and Community Investment; (202) 


Subject covered in this report: Progress in information technology, but 

challenges still exist; Contact person: Linda Koontz, Director; 

Information Management Issues; (202) 512-6240;

Subject covered in this report: Challenges to achieving budgetary and 

financial accountability; Contact person: Susan Irving, Director; 

Federal Budget Issues; (202) 512-9142;; ; Linda M. 

Calbom, Director; Financial Management and Assurance; (202) 512-8341;

Subject covered in this report: Other useful contacts:; ; Acquisition 

management; Contact person: ; ; David E. Cooper, Director; Acquisition 

and Sourcing Management; (202) 512-4125;

[End of section]

Related GAO Products:

Improving Oversight:

Small Business Administration: Progress Made but Improvements Needed in 

Lender Oversight. GAO-03-90. Washington, D.C.: December 9, 2002.

Small Business Administration: Actions Needed to Strengthen Small 

Business Lending Company Oversight. GAO-01-192. Washington, D.C.: 

November 17, 2000.

U.S. General Accounting Office, Small Business Administration: Few 

Reviews of Guaranteed Lenders Have Been Conducted, GAO/GGD-98-85. 

Washington, D.C.: June 11, 1998.

8(a) Program:

Small Business: SBA Could Better Focus Its 8(a) Program to Help Firms 

Obtain Contracts. GAO/RCED-00-196. Washington, D.C.: July 20, 2000.

Small Business: SBA’s 8( a) Information System Is Flawed and Does Not 

Support the Program’s Mission. GAO/RCED-00-197. Washington, D.C.: July 

19, 2000.

Disaster Loan Program:

Small Business Administration: Response to September 11 Victims and 

Performance Measures for Disaster Lending. GAO-03-385. Washington, 

D.C.: January 29, 2003.

September 11: Small Business Assistance in Lower Manhattan in Response 

to the Terrorist Attacks. GAO-03-88. Washington, D.C.: November 1, 


Strengthening Human Capital Management:

Small Business Administration: Workforce Transformation Plan Is 

Evolving. GAO-02-931T. Washington, D.C.: July 16, 2002.

Small Business Administration: Current Structure Presents Challenges 

for Service Delivery. GAO-02-17. Washington, D.C.: October 26, 2001.

Small Business Administration: Status of Achieving Key Outcomes and 

Addressing Major Management Challenges. GAO-01-792. Washington, D.C.: 

June 22, 2001.

Some Progress in Improving Information Technology, but More Remains to 

Be Done:

Loan Monitoring System: SBA Needs to Evaluate Use of Software.

GAO-02-188. Washington, D.C.: November 30, 2001.

Information Technology Management: SBA Needs to Establish Policies and 

Procedures for Key IT Processes. GAO/AIMD-00-170. Washington, D.C.: May 

31, 2000.

Challenges to Achieving Budgetary and Financial Accountability:

Small Business Administration: Accounting Anomalies and Limited 

Operational Data Make Results of Loan Sales Uncertain. GAO-03-87. 

Washington, D.C.: January 3, 2003.

Small Business Administration: Section 7(a) General Business Loans 

Credit Subsidy Estimates. GAO-01-1095R. Washington, D.C.: August 21, 


Other Issues:

Small Business Administration: The Commercial Marketing Representative 

Role Needs to Be Strategically Planned and Assessed. GAO-03-54. 

Washington, D.C.: November 1, 2002.

Small Business: Status of Small Disadvantaged Business Certifications. 

GAO-01-273. Washington, D.C.: January 19, 2001.

Small Business: Trends in Federal Procurement in the 1990s.

GAO-01-119. Washington, D.C.: January 18, 2001.

Small Business: Limited Information Available on Contract Bundling’s 

Extent and Effects. GAO/GGD-00-82. Washington, D.C.: March 31, 2000.

[End of section]

Performance and Accountability and High-Risk Series:

Major Management Challenges and Program Risks: A Governmentwide 

Perspective. GAO-03-95.

Major Management Challenges and Program Risks: Department of 

Agriculture. GAO-03-96.

Major Management Challenges and Program Risks: Department of Commerce. 


Major Management Challenges and Program Risks: Department of Defense. 


Major Management Challenges and Program Risks: Department of Education. 


Major Management Challenges and Program Risks: Department of Energy. 


Major Management Challenges and Program Risks: Department of Health and 

Human Services. GAO-03-101.

Major Management Challenges and Program Risks: Department of Homeland 

Security. GAO-03-102.

Major Management Challenges and Program Risks: Department of Housing 

and Urban Development. GAO-03-103.

Major Management Challenges and Program Risks: Department of the 

Interior. GAO-03-104.

Major Management Challenges and Program Risks: Department of Justice. 


Major Management Challenges and Program Risks: Department of Labor. 


Major Management Challenges and Program Risks: Department of State. 


Major Management Challenges and Program Risks: Department of 

Transportation. GAO-03-108.

Major Management Challenges and Program Risks: Department of the 

Treasury. GAO-03-109.

Major Management Challenges and Program Risks: Department of Veterans 

Affairs. GAO-03-110.

Major Management Challenges and Program Risks: U.S. Agency for 

International Development. GAO-03-111.

Major Management Challenges and Program Risks: Environmental Protection 

Agency. GAO-03-112.

Major Management Challenges and Program Risks: Federal Emergency 

Management Agency. GAO-03-113.

Major Management Challenges and Program Risks: National Aeronautics and 

Space Administration. GAO-03-114.

Major Management Challenges and Program Risks: Office of Personnel 

Management. GAO-03-115.

Major Management Challenges and Program Risks: Small Business 

Administration. GAO-03-116.

Major Management Challenges and Program Risks: Social Security 

Administration. GAO-03-117.

Major Management Challenges and Program Risks: U.S. Postal Service. 


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

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

High-Risk Series: Protecting Information Systems Supporting the Federal 

Government and the Nation’s Critical Infrastructures. GAO-03-121.

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


[1] U.S. General Accounting Office, Major Management Challenges and 

Program Risks: Small Business Administration, GAO-01-260 (Washington, 

D.C.: January 2001).

[2] Lloyd A. Blanchard, Chief Operation Officer, U.S. Small Business 

Administration, statement before the Subcommittee on Workforce, 

Empowerment and Government Programs, Committee on Small Business, U.S. 

House of Representatives, July 16, 2002.

[3] U.S. General Accounting Office, Small Business Administration: Few 

Reviews of Guaranteed Lenders Have Been Conducted, GAO/GGD-98-85 

(Washington, D.C.: June 11, 1998) and Small Business Administration: 

Actions Needed to Strengthen Small Business Lending Company Oversight, 

GAO-01-192 (Washington, D.C.: Nov. 17, 2000).

[4] U.S. Small Business Administration, Office of the Inspector 

General, FY 2002 Agency Management Challenges (Jan. 16, 2002).

[5] U.S. General Accounting Office, Small Business Administration: 

Progress Made but Improvements Needed in Lender Oversight, GAO-03-90 

(Washington, D.C.: Dec. 9, 2002).

[6] 15 U.S.C. section 636(a).

[7] SBA’s OIG also identified as a problem the untimely issuance of 

SBLC examination reports. See U.S. Small Business Administration, 

Office of the Inspector General, Improvements Are Needed in the Small 

Business Lending Company Oversight Process, Report Number 2-12 (Mar. 

20, 2002).

[8] U.S. General Accounting Office, Small Business Administration: 

Current Structure Presents Challenges for Service Delivery, GAO-02-17 

(Washington, D.C.: Oct. 26, 2001).

[9] U.S. General Accounting Office, SBA Monitoring System: Substantial 

Progress Yet Key Risks and Challenges Remain, GAO/AIMD-00-124 

(Washington, D.C.: Apr. 25, 2000).

[10] U.S. General Accounting Office, Small Business: SBA Could Better 

Focus Its 8(a) Program to Help Firms Obtain Contracts, GAO/RCED-00-196 

(Washington, D.C.: July 20, 2000).

[11] Contract bundling is the consolidation of two or more procurement 

requirements for goods or services previously provided or performed 

under separate, smaller contracts into a solicitation of offers for a 

single contract that is likely to be unsuitable for award to a small 

business. For more information on contract bundling, see U.S. General 

Accounting Office, Small Businesses: Limited Information Available on 

Contract Bundling’s Extent and Effects, GAO/GGD-00-82 (Washington, 

D.C.: Mar. 31, 2000).

[12] SBA’s Web site is

[13] U.S. Small Business Administration, Office of the Inspector 

General, FY 2002 Update of the Most Serious Management Challenges (Jan. 

16, 2002).

[14] GAO/RCED-00-196.

[15] U.S. Small Business Administration, Office of the Inspector 

General, Most Serious Management Challenges (Jan. 16, 2002).

[16] U.S. General Accounting Office, Small Business: Trends in Federal 

Procurement in the 1990s, GAO-01-119 (Washington, D.C.: Jan. 18, 2001).

[17] The President’s Proposed Budget for the Small Business 

Administration Fiscal Year 2003, hearing before the Committee on Small 

Business, U.S. House of Representatives, Serial No. 107-43, February 

13, 2002.

[18] SBA provides loans to the owners of homes and businesses who have 

no credit available elsewhere at a maximum rate of 4 percent annual 

interest for up to 30 years. For physical damage to homes or businesses 

whose owners have credit available elsewhere, SBA provides loans at a 

maximum rate of 8 percent for up to 5 years.

[19] U.S. General Accounting Office, Small Business Administration: 

Status of Achieving Key Outcomes and Addressing Major Management 

Challenges, GAO-01-792 (Washington, D.C.: June 22, 2001).

[20] U.S. General Accounting Office, Small Business Administration: 

Response to September 11 Victims and Performance Measures for Disaster 

Lending, GAO-03-385 (Washington, D.C.: Jan. 29, 2003).

[21] Key elements of modern strategic human capital management include 

strategic human capital planning and organizational alignment; 

leadership continuity and succession planning; acquiring and deploying 

staff whose size, skills, and deployment meet agency needs; and 

creating results-oriented organizational cultures.

[22] GAO-01-792 and GAO-02-17.

[23] GAO-03-90 and U.S. General Accounting Office, Small Business 

Administration: Accounting Anomalies and Limited Operational Data Make 

Results of Loan Sales Uncertain, GAO-03-87 (Washington, D.C.: Jan. 3, 


[24] U.S. Small Business Administration, Office of the Inspector 

General, Advisory Memorandum: Report on the Results of SBA Management 

Challenge Discussion Groups, #01-04-01 (Apr. 4, 2001).

[25] U.S. General Accounting Office, Small Business Administration: The 

Commercial Marketing Representative Role Needs to Be Strategically 

Planned and Assessed, GAO-03-54 (Washington, D.C.: Nov. 1, 2002).

[26] GAO-03-87.

[27] The Executive Branch Management Scorecard is a grading system used 

by the administration to grade agencies’ efforts at executing 

management improvements in the areas of human capital, competitive 

sourcing, financial management, e-government, and budget/performance 


[28] U.S. General Accounting Office, Management Reform: Elements of 

Successful Improvement Initiatives, GAO/T-GGD-00-26 (Washington, D.C.: 

Oct. 15, 1999) and Executive Guide: Effectively Implementing the 

Government Performance and Results Act, GAO/GGD-96-118 (Washington, 

D.C.: June 1996).

[29] U.S. General Accounting Office, SBA Needs to Establish Policies 

and Procedures for Key IT Processes, GAO/AIMD-00-170 (Washington, D.C.: 

May 31, 2000).

[30] U.S. Small Business Administration, Office of the Inspector 

General, Most Serious Management Challenges (Jan. 16, 2002).

[31] GAO-03-87.

[32] U.S. General Accounting Office, Small Business Administration: 

Section 7(a) General Business Loans Credit Subsidy Estimates, GAO-01-

1095R (Washington, D.C.: Aug. 21, 2001).

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