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United States Government Accountability Office: 


Before the Committee on Small Business and Entrepreneurship, U.S. 

For Release on Delivery: 
Expected at 10:00 a.m. EST:
Thursday, March 3, 2011: 

8(a) Program: 

The Importance of Effective Fraud Prevention Controls: 

Statement of Gregory D. Kutz, Director:
Forensic Audits and Investigative Service: 


Madam Chair, Ranking Member Snowe, and Members of the Committee: 

Thank you for the opportunity to discuss the results of our prior 
investigation of the Small Business Administration's (SBA) 8(a) 
Business Development Program. SBA's 8(a) program, named for a section 
of the Small Business Act, is a development program created to help 
small, disadvantaged businesses compete in the American economy and 
access the federal procurement market. To participate in the program, 
a firm must be certified as meeting several criteria, including: be a 
small business as defined by SBA; be unconditionally owned and 
controlled by one or more socially and economically disadvantaged 
individuals who are of good character and citizens of the United 
States; and show potential for success. Upon certification, firms can 
obtain federal contracts without competing fully and openly for the 
work. For example, agencies are permitted to enter into sole-source 
contracts after soliciting and negotiating with only one 8(a) company. 
They also can participate in restricted competitions for federal 
contracts, known as set-asides, open to only 8(a) companies. In March 
2010, GAO issued two companion reports on the 8(a) program, one 
focused on internal control procedures and processes that SBA has 
implemented to ensure that only eligible firms participate in the 
program and one focused on fraud prevention.[Footnote 1] My testimony 
today is based on the latter report, and addresses three issues: (1) 
whether ineligible firms were participating in the 8(a) program, (2) 
the results of our proactive testing of the application process, and 
(3) strengths and weaknesses in SBA's fraud prevention system. 

To determine whether firms were participating in the 8(a) program 
through potentially fraudulent misrepresentation, we used a risk-based 
approach to identify firms that exhibited signs that they were not 
qualified for the program. We also reviewed allegations of fraud and 
abuse sent to our e-mail address established to receive reports about 
small business contracting programs. For the firms we selected for 
further investigation, we reviewed documentation available from SBA in 
the firms' official 8(a) files maintained in district offices. We 
conducted both announced and unannounced site visits and interviewed 
firm employees and executives. The selection of the 14 firms we 
investigated was not representative and the findings from these 14 
cases cannot be projected beyond those cases. To proactively test 
whether SBA's 8(a) application process and controls were sufficient to 
prevent ineligible firms from entering into the program, we 
established four bogus businesses and submitted falsified applications 
and supporting documentation to SBA. To determine what strengths and 
weaknesses, if any, existed in SBA's fraud prevention system, we made 
observations based on our case studies and proactive testing. 
Furthermore, we compared controls in place at the time of our review 
of the 8(a) program to a fraud-prevention model we developed and 
utilized in prior small business contracting investigations. A full 
description of our scope and methodology is included in appendix I of 
our report.[Footnote 2] We also requested an update from SBA on any 
actions that it had taken on our recommendations. We did not validate 
any representations made by SBA. 

We conducted our audit work and investigation from October 2008 
through January 2010 in accordance with U.S. generally accepted 
government auditing standards. Those standards require that we plan 
and perform the audit to obtain sufficient, appropriate evidence to 
provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our 
objectives. We performed our investigative work in accordance with the 
standards prescribed by the Council of the Inspectors General on 
Integrity and Efficiency (CIGIE). 

My testimony today summarizes our findings on each of the three issues 
discussed in our report. Specifically, we found that: 

* Ineligible firms are participating in the 8(a) program. We 
identified 14 firms that received set-aside or sole-source 8(a) 
contracts worth $325 million through fraud or abuse. These 14 firms 
received another $1.2 billion in other federal obligations since 
entering the 8(a) program, including $17 million in awards through the 
American Recovery and Reinvestment Act of 2009.[Footnote 3] We found 
evidence that showed that officials at 13 of these firms 
misrepresented their eligibility for the program to fraudulently 
acquire or maintain 8(a) status and obtain federal contracts awarded 
with limited or no competition. Examples include underreporting 
adjusted net worth and serving as a "pass-through" for non-8(a) 
companies. In the case of a pass-through, an 8(a) firm receives the 
sole-source or set-aside contract, but contrary to program 
requirements, work is performed and managed by a non-8(a) company. We 
also determined that SBA staff responsible for annually assessing firm 
eligibility allowed 3 firms to remain in the 8(a) program and receive 
contracts despite clear evidence provided by company officials during 
annual reviews that showed they were no longer eligible. For example, 
SBA allowed a firm to remain certified even though the president 
reported a salary which substantially exceeded the threshold. 
Permitting ineligible firms to obtain 8(a) contracts undermines the 
intent of the program and deprives qualified firms from receiving 
targeted contracting opportunities. A description of all 14 case 
studies is included in Table 1 of our report.[Footnote 4] Subsequent 
to issuing this report, we referred all 14 cases to SBA and the 
agency's Office of Inspector General. 

* SBA's application process has both strengths and weaknesses. SBA had 
certain strengths in its 8(a) application process that allowed the 
agency to correctly determine that three of the four bogus firms from 
our proactive testing were not eligible for the 8(a) program. We also 
identified vulnerabilities that demonstrate weaknesses ineligible 
firms could exploit to fraudulently receive program certification. In 
the first of our three unsuccessful applications, SBA stated that it 
denied our application because the firm lacked the financial capacity 
to perform 8(a) contracts. For the other two cases, SBA raised 
concerns about our eligibility based on the presidents' adjusted net 
worth. The agency also questioned control of one of these firms. SBA 
provided us with such thorough comments that we determined we could 
not overcome the deficiencies and eligibility issues identified in 
both applications, so we abandoned them. However, we obtained 8(a) 
certification for one bogus firm using fabricated documentation and 
fictitious owner information. We consider this a vulnerability because 
unscrupulous firms could do the same to create front companies and 
funnel 8(a) contracts to themselves, circumventing eligibility 
requirements. A description of the scenarios and outcomes for all four 
bogus firm applications is included in our report.[Footnote 5] 

* SBA's fraud prevention system has both strengths and weaknesses. The 
14 case studies of ineligible firms discussed above and the 
certification of a bogus firm show that weaknesses exist in SBA's 
controls for preventing, detecting, monitoring, and investigating 
fraud and abuse in the 8(a) program. Fraud prevention requires a 
system of controls which, in their aggregate, minimize the likelihood 
of fraud occurring while maximizing the possibility of detecting any 
fraudulent activity that may transpire. Fraud prevention systems set 
forth what actions constitute fraudulent conduct and specifically 
spell out who in the organization handles fraud matters under varying 
circumstances. A well-designed fraud prevention system should consist 
of three crucial elements: (1) upfront preventive controls, (2) 
detection and monitoring, and (3) investigations and prosecutions. For 
the 8(a) program this would mean effective (1) front-end controls at 
the application stage, (2) fraud detection and monitoring of firms 
already in the program, and (3) the aggressive prosecution or 
suspension and debarment of individuals committing fraud. In our 
report we describe specific strengths and weaknesses that we 
identified during the course of our review. For example, a strength we 
identified was SBA's use of certain third-party sources, such as Dun 
and Bradstreet and the Credit Bureaus, to verify some information 
about our bogus firm that was certified for the program. Nevertheless, 
these controls did not allow SBA to identify the fake documents we 
submitted. We also reported that based on our limited review there was 
indication that SBA staff responsible for assessing firms' continued 
eligibility did not always follow established program criteria during 
the annual review process. As mentioned previously, some of the 14 
firms were determined to be ineligible after our investigators 
confirmed information that was concealed from SBA by firm presidents. 
In other cases, our review of SBA's files clearly indicated that these 
firms were not eligible for the 8(a) program, yet SBA failed to 
terminate or graduate these firms from the program. 

The consequences of these control weaknesses are substantial: in just 
the 14 cases we investigated for this report, over $325 million in 
sole-source and set-aside 8(a) contracts went to ineligible firms that 
manipulated the current system. To a substantial degree, the steps we 
took to investigate these firms could be part of an effective fraud 
prevention program. Victims of the fraud and abuse in this program are 
legitimate economically and socially disadvantaged small businesses. 
To address the vulnerabilities we identified, our report provided six 
recommendations to improve SBA's ability to screen and monitor fraud 
and abuse within the 8(a) program. SBA agreed with five 
recommendations and stated that it would evaluate our sixth 
recommendation related to how family members' assets are included in 
the assets of the 8(a) participant based upon the comments received as 
a result of the proposed 8(a) rule change.[Footnote 6] Although SBA 
needs time to implement these changes, and we have not done a 
comprehensive follow-up on their actions, SBA has taken action on some 
recommendations, while according to SBA, implementation of others is 
in progress. For example, SBA enacted final regulation changes on 
February 14, 2011 which address three recommendations relating to firm 
eligibility requirements. The regulations provide more clarification 
on factors that determine economic disadvantage as it relates to total 
assets, gross income, retirement accounts and a spouse of an 8(a) 
company owner when determining the owner's ability to access capital 
and credit. These changes take effect on March 14, 2011. In addition, 
SBA officials told us that they have been evaluating the use of third-
party data systems to verify firm information when conducting initial 
certification reviews. SBA officials also stated that they have 
provided forensic accounting training to all SBA staff responsible for 
conducting these initial certification reviews, and the agency plans 
to expand this training in fiscal year 2011 to all SBA field staff 
responsible for annual reviews. SBA officials also stated that they 
will revise the program's standard operating procedures to reflect the 
regulatory changes, to increase certain reporting requirements and to 
provide more detailed and concrete guidance on initiating suspensions 
and debarments. In addition, according to SBA, the agency has taken 
steps to terminate some of the firms identified in our report, and has 
referred other cases to the SBA Office of Inspector General. 

Madam Chair, and Ranking Member Snowe, this concludes my statement. I 
would be pleased to respond to any questions you or other Members of 
the Committee may have. 

Contacts and Acknowledgments: 

For additional information about this testimony, please contact 
Gregory D. Kutz at (202) 512-6722 or Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this statement. 

[End of section] 


[1] GAO, Small Business Administration: Steps Have Been Taken to 
Improve Administration of the 8(a) Program, but Key Controls for 
Continued Eligibility Need Strengthening, [hyperlink,], (Washington, D.C. Mar. 30, 
2010) and GAO, 8(a) Program: Fourteen Ineligible Firms Received 
$325 Million in Sole-Source and Set-Aside Contracts, [hyperlink,] (Washington, D.C.: Mar. 30, 

[2] GAO, 8(a) Program: Fourteen Ineligible Firms Received $325 Million 
in Sole-Source and Set-Aside Contracts, [hyperlink,] (Washington, D.C.: Mar. 30, 

[3] This $1.2 billion includes both non-8(a) awards, as well as 8(a) 
awards that these firms were eligible to receive. 

[4] GAO, 8(a) Program: Fourteen Ineligible Firms Received $325 Million 
in Sole-Source and Set-Aside Contracts, [hyperlink,] (Washington, D.C.: Mar. 30, 

[5] GAO, 8(a) Program: Fourteen Ineligible Firms Received $325 Million 
in Sole-Source and Set-Aside Contracts, [hyperlink,] (Washington, D.C.: Mar. 30, 

[6] Our companion report on the 8(a) program's internal controls also 
contained six recommendations to SBA that included providing more 
guidance to help ensure staff more consistently follow procedures, 
reassessing certain staff workload distribution, and developing more 
standard processes for documenting and analyzing certain program data. 
SBA agreed with each of the six recommendations. See, GAO, Small 
Business Administration: Steps Have Been Taken to Improve 
Administration of the 8(a) Program, but Key Controls for Continued 
Eligibility Need Strengthening, [hyperlink,], (Washington, D.C. Mar. 30, 

[End of section] 

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