Small Business Administration:

Better Oversight of SBIC Programs Could Reduce Federal Losses

T-RCED-95-285: Published: Sep 28, 1995. Publicly Released: Sep 28, 1995.

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Pursuant to a congressional request, GAO reviewed the Small Business Administration's (SBA) actions and initiatives to improve the recovery of federal funds from the liquidation of small business investment companies (SBIC) and specialized small business investment companies (SSBIC), focusing on: (1) weaknesses in SBA oversight and management; (2) SBA implementation of the stock repurchase program; and (3) the placement of the examination function. GAO noted that: (1) recent SBA actions and legislative changes may help reduce future program losses, since licensed firms must demonstrate their experience in the area they plan to invest, have more private capital, and have SBA as its main creditor; (2) weaknesses in SBA oversight and management continue to place federal funds at risk; (3) periodic examinations help identify violations that often go uncorrected from one examination cycle to the next; (4) SBA expects to lose $304.4 million from the 189 firms currently in liquidation; (5) SBA does not have a strategy to target its oversight efforts or ensure more accurate asset valuation; (6) twenty-one SSBIC have completed a stock repurchase and SBA has received $17.7 million from its initial investment of $50.3 million in the firms; and (7) although there are no indications of efforts to restrict or influence examinations, the organizational placement of the examination function may impede SBA ability to pursue corrective actions.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matter for Congressional Consideration

    Matter: To ensure the independence of examinations and avoid potential conflicts-of-interest in resolving disputed examination findings, Congress may want to consider directing the Administrator, SBA, to move the Office of Examinations out of the Investment Division and have it report to the Associate Deputy Administrator for Economic Development.

    Status: Closed - Not Implemented

    Comments: Counsel for the House Small Business Committee stated that no action has been taken on this matter for consideration and action is not likely to occur in the future.

    Recommendations for Executive Action

    Recommendation: The Administrator, SBA, should postpone further repurchases under the Three Percent Preferred Stock Repurchase Program until a review of the program, including an evaluation of costs and benefits, is completed to determine whether this is the best use of federal funds to help small businesses.

    Agency Affected: Small Business Administration

    Status: Closed - Not Implemented

    Comments: SBA does not intend to postpone further repurchases under the Three Percent Stock Repurchase Program unless it is directed by Congress or the Administration. SBA maintains it is the intent of Congress that this program continue in its present form until it is directed otherwise.

    Recommendation: The Administrator, SBA, should direct the Associate Administrator for Investment to expedite the design and implementation of a system that will help them routinely analyze the asset valuations in the recently developed licensee investment database to detect problems of potential asset overvaluation, such as duplications by names of owners or addresses where the same collateral may be used.

    Agency Affected: Small Business Administration

    Status: Closed - Implemented

    Comments: SBA responded to this recommendation in an April 9, 1997, letter from the Associate Administrator for Investments to the Chairman, House Committee on Government Reform and Oversight, affirming that it has created a database, keyed by tax identification numbers of the small business concern issuers, of SBIC portfolio securities identifying the licensees holding the investment, the form of investment and its cost and value. As a result, Office of SBIC Operations analysts are able to automatically query the database for matches with a licensee's entire portfolio or for individual investments. In addition, a schedule is generated periodically of all investments held by two or more licensees to identify inconsistencies.

    Recommendation: The Administrator, SBA, should direct the Associate Administrator for Investment to expedite the design and implementation of a system that will help them routinely analyze the asset valuations in the recently developed licensee investment database to detect problems of potential asset overvaluation, such as deviations in valuation by type and amount of small business investments.

    Agency Affected: Small Business Administration

    Status: Closed - Not Implemented

    Comments: SBA has an internal system to detect problems of potential asset overvaluation, such as patterns in valuation by type and amount of small business investments. This system is based on valuation policies, regulations, and procedures that are already in place. Because of the subjective nature of SBIC and SSBIC assets, SBA officials do not believe this process can be fully automated, but must be dependent on internal controls and certification by the respective SBICs and SSBICs.

    Recommendation: The Administrator, SBA, should direct the Associate Administrator for Investment to expedite the design and implementation of a system that will help them routinely analyze the asset valuations in the recently developed licensee investment database to detect problems of potential asset overvaluation, such as patterns in valuation by type and amount of small business investments.

    Agency Affected: Small Business Administration

    Status: Closed - Not Implemented

    Comments: SBA has an internal system for detecting problems of potential asset valuation, such as deviations in valuation by type and amount of small business investments. This system is based on valuation policies, regulations, and procedures that are already in place. Because of the subjective nature of SBIC and SSBIC assets, SBA officials do not believe this process can be fully automated, but must be dependent on internal controls and certification by the respective SBICs and SSBICs.

    Recommendation: The Administrator, SBA, should direct the Associate Administrator for Investment to expedite the design and implementation of a system that will help them routinely analyze the asset valuations in the recently developed licensee investment database to detect problems of potential asset overvaluation, such as inconsistencies in the valuation of small businesses that have loans from more than one SBIC or SSBIC.

    Agency Affected: Small Business Administration

    Status: Closed - Implemented

    Comments: SBA responded to this recommendation in an April 9, 1997, letter from the Associate Administrator for Investments to the Chairman, House Committee on Government Reform and Oversight, affirming that it has created a database, keyed by tax identification numbers of the small business concern issuers, of all Small Business Investment Company (SBIC) portfolio securities identifying the licensees holding the investment, the form of investment and its cost and value. As a result, Office of SBIC Operations analysts are able to automatically query the database for matches with a licensee's entire portfolio or for individual investments. In addition, a schedule is generated periodically of all investments held by two or more licensees to identify inconsistencies.

    Recommendation: To ensure rigorous pursuit of corrective actions, improve oversight of SBIC and SSBIC, and minimize the loss of SBA investment, the Administrator, SBA, should direct the Associate Administrator for Investment to give the Office of Examinations responsibility for tracking actions taken to correct problems identified during examinations of SBIC and SSBIC.

    Agency Affected: Small Business Administration

    Status: Closed - Implemented

    Comments: SBA officials believe that their overall strategy of categorizing the various regulatory violations based on their potential risk and establishing an oversight committee to monitor the resolution of various regulatory violations will, in fact, accomplish the intent of this recommendation. No further action is planned.

    Recommendation: To ensure rigorous pursuit of corrective actions, improve oversight of SBIC and SSBIC, and minimize the loss of SBA investment, the Administrator, SBA, should direct the Associate Administrator for Investment to develop an overall strategy to better target oversight resources on SBIC and SSBIC that commit repeated or egregious violations and on those investments that pose the greatest risk of loss to the government. This strategy should include a risk-based assessment of SBA investments and, at a minimum, specify: (1) time frames for SBIC and SSBIC to correct financial and regulatory violations; (2) actions that will be taken if violations are not corrected; and (3) procedures for promptly placing severely impaired firms under liquidation.

    Agency Affected: Small Business Administration

    Status: Closed - Implemented

    Comments: SBA instituted a process to prioritize scheduling of SBIC examinations to better target its resources on higher-risk SBICs and SSBICs. SBA will schedule watch list companies annually, new licensees within 1 year of licensing, leveraged licensees annually, non-leveraged SBICs at least every 2 years, and non-leveraged SBICs with no recent category I violations every 2 years. In addition, two categories of regulatory violations have been established in order to better target resources to the more egregious violations, with Category I violations being more serious. SBA established an SBIC Licensing and Oversight Committee to monitor the status and ensure timely resolution of outstanding violations. The Committee includes the Deputy Administrator, the General Counsel, the Deputy General Counsel, the Associate Deputy Administrator for Economic Development, the Associate Administrator for Investments, the Director of the Office of SBIC Operations, and the Inspector General.

    Recommendation: The Administrator, SBA, should postpone further repurchases under the Three Percent Preferred Stock Repurchase Program until the findings are reported to the House and Senate Small Business Committees.

    Agency Affected: Small Business Administration

    Status: Closed - Not Implemented

    Comments: SBA does not intend to postpone further repurchases under the Three Percent Stock Repurchase Program unless it is directed by Congress or the Administration. SBA maintains it is the intent of Congress that this program continue in its present form until it is directed otherwise.

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