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entitled 'Export-Import Bank: Changes Would Improve the Reliability of 
Reporting on Small Business Financing' which was released on March 3, 
2006. 

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Report to the Chairman, Committee on Small Business, House of 
Representatives: 

March 2006: 

Export-Import Bank: 

Changes Would Improve the Reliability of Reporting on Small Business 
Financing: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-351]: 

GAO Highlights: 

Highlights of GAO-06-351, a report to the Chairman, Committee on Small 
Business, House of Representatives: 

Why GAO Did This Study: 

The Export-Import Bank (Ex-Im) provides loans, loan guarantees, and 
insurance to support U.S. exports. Its level of support for small 
business has been a long-standing issue of congressional interest. Most 
recently in 2002, Congress increased the proportion of financing Ex-Im 
must make available for small business to 20 percent. 

GAO examined legal and policy issues related to Ex-Imís small business 
financing. Specifically, GAO (1) analyzes Ex-Imís methodology for 
calculating its direct support of small business and the reliability of 
Ex-Imís data used in the methodology and (2) describes Ex-Imís legal 
interpretation of its obligations under the statutory 20 percent small 
business mandate. 

What GAO Found: 

While Ex-Im generally classifies companiesí small business status 
correctly, weaknesses in its data systems and data limit its ability to 
accurately determine its small business financing. Ex-Im uses a 
combination of direct counts and estimates to calculate its small 
business financing, based on the authorized value of individual 
transactions. For most transactions, Ex-Im can identify the exporter 
and thus bases its determination of the small business financing share 
on whether the exporter qualifies as a small business. For other 
transactions, Ex-Im cannot identify the exporter at the time it 
authorizes the transaction and estimates the small business share based 
on shipment patterns in an earlier period. GAO determined that Ex-Im 
generally classifies companiesí small business status correctly. 
However, GAO identified weaknesses in Ex-Imís process for calculating 
its small business support. For transactions where Ex-Im can identify 
the exporter, GAO found internal control weaknesses such as Ex-Imís 
data systems containing conflicting records for the same company. For 
transactions where Ex-Im cannot identify the exporter when it 
authorizes the transaction, a weakness is not including a large value 
of shipments in its calculations. GAO also determined that Ex-Imís 
reporting on the number of transactionsóas opposed to the value of 
transactionsóthat directly benefit small business includes transactions 
that do not benefit small business. 

Weaknesses in Ex-Imís Process For Calculating Its Small Business 
Financing: 

[See PDF for image] 

[End of figure] 

Prior to the enactment of credit reform legislation, Ex-Im interpreted 
the mandate as requiring it to make available for financing small 
business exports an amount equal to 10 percent of the aggregate 
principal amount of loans, guarantees and insurance specified by 
Congress for that fiscal year. Given changes in law including federal 
credit reform and the removal of specific financing authority limits, 
Ex-Im currently interprets its statutory small business financing 
mandate as requiring it to attempt to ensure that 20 percent of the 
authorized value of its transactions during a year directly benefits 
small business. 

What GAO Recommends: 

GAO recommends that the Chairman of the Export-Import Bank take steps 
to improve the reliability of Ex-Imís reporting on its direct support 
for small business. 

Ex-Im commented that the review helped reaffirm its methodology and 
identify areas where it can improve its efficiency. Ex-Im generally 
concurred with GAOís recommendations and identified several actions it 
is taking or will take that address them. 

www.gao.gov/cgi-bin/getrpt?GAO-06-351. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Loren Yager at (202) 512-
4347 or YagerL@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Ex-Im Generally Classifies Companies' Small Business Status Correctly, 
but Weaknesses Limit Its Ability to Accurately Measure Small Business 
Financing: 

Ex-Im's Interpretation of the Small Business Financing Mandate: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Information on Ex-Im's Monitoring and Tracking of Its 
Small Business Financing: 

Appendix III: Information on How Ex-Im Estimates Its Indirect Support 
of Small Business: 

Appendix IV: Comments from the Export-Import Bank: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: Ex-Im's Reported Fiscal Year 2004 Financing, by Type of 
Transaction: 

Figure 2: Ex-Im's Reported Proportion of Financing Directly Benefiting 
Small Business: 

Figure 3: Ex-Im's Methodology for Calculating Its Direct Support of 
Small Business: 

Figure 4: Ex-Im's Reported Amount of Fiscal Year 2004 Transactions 
Directly Benefiting Small Business: 

Abbreviations: 

CGF: Credit Guarantee Facility: 

D&B: Dun and Bradstreet: 

Ex-Im: Export-Import Bank of the United States: 

NAICS: North American Industry Classification System: 

SBA: Small Business Administration: 

SIC: Standard Industrial Classification: 

Letter March 3, 2006: 

The Honorable Donald A. Manzullo: 
Chairman: 
Committee on Small Business: 
House of Representatives: 

Dear Mr. Chairman: 

The Export-Import Bank's (Ex-Im) level of support for small businesses 
has been an issue of long-standing congressional interest. Since the 
1980s, Congress has required that Ex-Im, which provides loans, loan 
guarantees, and insurance to finance U.S. exports, make available a 
specified percentage of its export financing for small businesses. Over 
time, there has been considerable debate regarding what this percentage 
should be and what should be included in its calculation. In 2002, 
Congress established several new requirements for Ex-Im relating to 
small business, including increasing from 10 to 20 percent the 
proportion of Ex-Im's aggregate loan, guarantee, and insurance 
authority that must be made available for the direct benefit of small 
businesses. Although Ex-Im consistently reported providing more than 10 
percent of the value of its authorized transactions to small business 
through 2002, it has not reported providing 20 percent in any year 
since then. 

Following your request, and given the broad interest in promoting 
exports by small businesses and the upcoming reauthorization of Ex-Im's 
authorizing legislation, we examined legal and policy issues related to 
Ex-Im's small business financing. Specifically, this report (1) 
analyzes Ex-Im's methodology for calculating its direct support of 
small business and the reliability of Ex-Im's data used in the 
methodology and (2) describes Ex-Im's legal interpretation of its 
obligations under the 20 percent small business mandate. In addition, 
this report includes information on Ex-Im's efforts to monitor and 
track its small business financing (see app. II) and how Ex-Im 
estimates the share of its financing that indirectly supports small 
business (see app. III). 

To analyze Ex-Im's methodology for calculating its direct support for 
small business and the reliability of the data used in the calculation, 
we reviewed Ex-Im documentation regarding the calculation, analyzed 
data on Ex-Im transactions from fiscal years 2004 and 2005, and 
interviewed knowledgeable Ex-Im staff. We also drew a random 
probability sample of 300 of the 2,755 companies receiving Ex-Im 
financing in fiscal years 2004 or 2005 to determine whether companies' 
small business status was classified correctly. To describe Ex-Im's 
legal interpretation of its statutory small business financing mandate, 
we reviewed the statutory obligations under the provision and its 
legislative history, reviewed other relevant legal documents, and 
interviewed Ex-Im legal staff regarding their interpretation. For a 
more detailed explanation of our objectives, scope, and methodology, 
see appendix I. We conducted our work from June 2005 to January 2006 in 
accordance with generally accepted government auditing standards. 

Results in Brief: 

While Ex-Im generally classified companies' small business status 
correctly, weaknesses in its data systems and data limit Ex-Im's 
ability to accurately determine its small business financing amounts 
and share. Ex-Im measures its small business financing share based on 
the level of financing that it authorizes for various types of 
transactions, using a combination of direct counts and estimates. For 
most types of transactions, Ex-Im can identify the exporter when it 
authorizes the transaction and calculates its small business financing 
based on whether the exporter qualifies as a small business under the 
Small Business Administration's definition. For other transactions, the 
exporter is not known at the time Ex-Im authorizes the transaction, so 
it estimates the amount of small business support for these 
transactions based on data regarding previous shipments under these 
types of transactions. We determined that Ex-Im generally classifies 
companies' small business status correctly. We identified weaknesses in 
Ex-Im's process for determining its small business support for both its 
calculations based on direct counts and calculations based on 
estimates. For transactions where the exporter is known, internal 
control weaknesses in Ex-Im data systems, including updating records on 
companies in one data system, but not another, limit Ex-Im's ability to 
accurately measure its small business financing. For transactions where 
the exporter is not known at the time Ex-Im authorizes the transaction, 
we identified weaknesses in Ex-Im's estimation process such as not 
including a large value of shipments in its calculations. Finally, Ex- 
Im's legislatively-mandated reporting on the number--as opposed to the 
value--of transactions directly benefiting small business includes 
transactions that do not benefit small businesses. 

Prior to the enactment of credit reform legislation, Ex-Im interpreted 
the mandate as requiring it to make available for financing small 
business exports an amount equal to 10 percent of the aggregate 
principal amount of loans, guarantees and insurance specified by 
Congress for that fiscal year. Given changes in law over time, Ex-Im 
currently interprets the statutory small business mandate as requiring 
it to attempt to ensure that 20 percent of the authorized value of its 
annual transactions directly benefits small business. Ex-Im officials 
justify their interpretation of the small business financing 
requirement based on the mandate's legislative history, the demand- 
driven nature of Ex-Im's operations, and the broader context of Ex-Im's 
authorizing legislation. Since the mandate was enacted, federal credit 
reform legislation in the 1990s changed how credit agencies, including 
Ex-Im, budget and account for the cost of their credit programs. This 
change coincided with the removal of the aggregate loan authority 
limits in annual appropriations acts on the amount of financing Ex-Im 
could provide each year, which affects how Ex-Im implements the small 
business financing requirement. 

In this report, we recommend that the Chairman of the Export-Import 
Bank take steps to improve the reliability of Ex-Im's reporting on its 
direct support for small business. We provided a draft of this report 
to Ex-Im. Ex-Im commented that the review helped reaffirm its 
methodology and identify areas where it can improve its efficiency. It 
generally concurred with our recommendations and identified several 
actions it is taking or will take that address them. Ex-Im also stated 
its view that it had a sound methodology for counting the number of 
transactions benefiting small business. 

Background: 

Established in 1934, Ex-Im operates as an independent agency of the 
U.S. government and is the official export credit agency of the United 
States under the authority of the Export-Import Bank Act of 1945, as 
amended.[Footnote 1] Ex-Im's mission is to assist U.S. companies to 
create and maintain American jobs by financing exports of goods and 
services and filling gaps in the availability of commercial financing 
for creditworthy export transactions. It also helps American exporters 
meet government-supported financing competition from other countries so 
that American exporters can compete for overseas business on the basis 
of price, performance, and service. Its authorizing legislation 
requires Ex-Im not to compete with commercial lenders. 

To accomplish its mission, Ex-Im offers a variety of financing 
instruments, including loan guarantees and direct loans for buyer 
financing; export credit insurance; and working capital guarantees for 
pre-export financing.[Footnote 2] Under its loan guarantee program, Ex- 
Im agrees to guarantee loans made by other lenders to help buyers in 
other countries obtain financing to purchase U.S. exports.[Footnote 3] 
Ex-Im also provides export credit insurance to protect U.S. exporters 
against nonpayment by their customers. It provides this insurance 
either directly to exporters, or to banks which in turn finance U.S. 
exporters.[Footnote 4] In addition, Ex-Im provides working capital 
guarantees to U.S. companies that would like to export but need funds 
to produce or market their goods or services for export. 

After it receives an application for financing from a U.S. exporter, 
bank, or foreign buyer, Ex-Im determines whether the applicant meets 
certain eligibility requirements. After Ex-Im approves or "authorizes" 
the transaction, it issues the loan, loan guarantee, or insurance 
policy. The amount actually exported or shipped as a result of the 
transaction may differ from the authorized value of the transaction. 
For example, for bank-held insurance policies, the total value of the 
policies authorized during the year often exceeds the amount shipped 
under these policies. 

Figure 1 shows Ex-Im's reported fiscal year 2004 financing, by type of 
transaction. Ex-Im reported authorizing more than $13 billion in loans, 
guarantees, and export insurance in fiscal year 2004. Of this amount, 
Ex-Im reported that more than $2.2 billion, about 17 percent, directly 
supported U.S. small businesses. 

Figure 1: Ex-Im's Reported Fiscal Year 2004 Financing, by Type of 
Transaction: 

[See PDF for image] 

[End of figure] 

Congress has demonstrated its interest in Ex-Im's supporting small 
business by, among other things, requiring that Ex-Im make available a 
specified portion of its financing for small business. In 1983, 
Congress required Ex-Im to make available for fiscal year 1986 and 
thereafter not less than 10 percent of its aggregate loan, guarantee, 
and insurance authority for financing exports by small 
businesses.[Footnote 5] In 2002, Congress increased the percentage, 
requiring that Ex-Im "shall make available, from the aggregate loan, 
guarantee, and insurance authority available to it, an amount to 
finance exports directly by small business concerns. . .which shall be 
not less than 20 percent of such authority for each fiscal 
year."[Footnote 6] Figure 2 shows the proportion of its total financing 
that Ex-Im has reported directly benefits small business. Ex-Im is also 
required to report annually (1) the number of its transactions that 
directly benefit small business and (2) an estimate of the number of 
small businesses Ex-Im indirectly supports as suppliers to companies 
receiving Ex-Im financing.[Footnote 7] 

Figure 2: Ex-Im's Reported Proportion of Financing Directly Benefiting 
Small Business: 

[See PDF for image] 

[End of figure] 

Ex-Im uses the Small Business Administration (SBA) methodology to 
determine whether a company qualifies as a small business. SBA uses 
"size standards" to identify the largest a company can be and still 
qualify as a small business. SBA's size standards vary by industry, as 
defined by the North American Industry Classification System 
(NAICS),[Footnote 8] which replaced the Standard Industrial 
Classification (SIC) system, and are typically expressed in either 
millions of dollars or number of employees, reflecting average annual 
receipts or average employment of a firm. 

To apply the size standards, Ex-Im obtains company information through 
its application process. Ex-Im also subscribes to Dun and Bradstreet 
(D&B), a commercial information vendor, which provides information 
about companies, including sales and employment data and SIC codes. Ex- 
Im uses the SIC codes provided by D&B to obtain the corresponding NAICS 
codes through the SBA Web site. 

The Federal Credit Reform Act of 1990 affects how Ex-Im budgets for and 
reports on its various credit programs. It requires that Ex-Im (and 
other government credit agencies) obtain budget authority to cover the 
cost to the government of new or modified loans and loan guarantees. 
Prior to credit reform, Congress annually provided budget authority for 
the face value of authorized loans and the value of defaulted 
guarantees. Credit reform requires agencies to estimate the cost to the 
government, over the life of the credit, of the financing they provide. 
Broadly speaking, this cost represents net losses to the government on 
a present value basis. By focusing on the cost to the government, 
credit reform allows policy makers to compare the costs of credit 
programs with each other and with noncredit programs in making budget 
decisions. 

Ex-Im's financial statements are audited annually by an independent 
accounting firm, which does not examine Ex-Im's reporting on the 
calculation of its small business financing share. The auditor reviews 
the financial information involved in the year's transactions but does 
not review whether the figure reported for the small business financing 
share is accurate. Ex-Im has received unqualified or "clean" opinions 
on its financial statements for the past several years. 

Ex-Im Generally Classifies Companies' Small Business Status Correctly, 
but Weaknesses Limit Its Ability to Accurately Measure Small Business 
Financing: 

While Ex-Im generally classifies companies' small business status 
correctly, weaknesses in its data systems and data limit Ex-Im's 
ability to accurately determine its small business financing amounts 
and share. Ex-Im bases its estimate of the small business share of its 
financing on authorized values for various types of transactions. Ex- 
Im's methodology for calculating its small business financing is based 
on directly counting the value of small business financing for 
transactions where the exporter can be identified and estimating the 
small business value of transactions where the exporter cannot be 
identified at the time Ex-Im authorizes the transaction. While we found 
that Ex-Im generally classifies companies' small business status 
correctly, we identified several weaknesses in Ex-Im's process for 
calculating its small business support. For transactions where the 
exporter can be identified, internal control weaknesses in Ex-Im's data 
systems affect the reliability of Ex-Im's analysis of the value of its 
small business financing. For transactions where the exporter cannot be 
identified at the time Ex-Im authorizes the transaction, weaknesses in 
Ex-Im's system for estimating small business financing also limit Ex- 
Im's ability to accurately measure and report on the amount of small 
business financing. In addition, in its required reporting on the 
number--as opposed to the value--of transactions benefiting small 
business, Ex-Im includes transactions which do not directly benefit 
small business. 

Ex-Im's Overall Calculation of Small Business Financing Is Based on the 
Authorized Value of Transactions; Specific Calculations Vary by Type of 
Transaction: 

Ex-Im calculates the small business share of its total financing during 
a year by dividing the value of authorized transactions directly 
benefiting small businesses by the total value of all transactions 
authorized. For some types of transactions, the amount of money 
authorized may be significantly different from the amount of financing 
that the exporters actually utilize. For most transactions, Ex-Im can 
identify the exporter at the time the transaction is authorized and, in 
those cases, it bases its calculation on whether the exporter qualifies 
as a small business under the SBA definition. About one-quarter of the 
time, such as in cases where Ex-Im provides an insurance policy to a 
bank, which in turn finances exports, Ex-Im cannot, when it approves 
the transaction, identify the company that will be the exporter. In 
these cases, Ex-Im estimates the share of the financing benefiting 
small business based on data regarding previous shipments under those 
types of transactions. 

To determine the value of the small business share of its financing 
authorized during a year, Ex-Im adds the value of small business 
financing for the types of transactions where the exporter can be 
identified at the time of authorization and the estimated small 
business value of the types of transactions where the exporter cannot 
be identified at that time. To determine the portion of financing 
directly supporting small business, Ex-Im divides this total by the 
total dollar value of all transactions authorized. According to Ex-Im 
officials, they have used this general methodology for calculating the 
small business portion since the late 1980s. (See fig. 3.) 

For transactions where the exporter can be identified, Ex-Im bases its 
calculation on actual data on the value of the transaction and the 
participants. For most of these transactions, Ex-Im generally counts 
100 percent of the value of the transaction as benefiting small 
business if the exporter is a small business. For medium-and long-term 
loans and guarantees, only the amounts associated with small business 
suppliers to small business exporters are counted as directly 
supporting small business. Ex-Im officials noted that by not including 
the value of a transaction associated with a nonsmall business 
supplier, the small business share is reduced. They said this indicates 
Ex-Im's desire to not overrepresent its direct support of small 
business. When the exporter is not a small business, none of the value 
of the transaction is counted as directly supporting small business. 

Figure 3: Ex-Im's Methodology for Calculating Its Direct Support of 
Small Business: 

[See PDF for image] 

[End of figure] 

For transactions where the exporter is not known at the time Ex-Im 
authorizes the transaction, Ex-Im estimates the small business share 
based on data on the size of companies making shipments under these 
types of transactions for a previous period.[Footnote 9] To make these 
estimates, Ex-Im analyzes data on exports under each type of 
transaction and determines whether each exporter is small, nonsmall, or 
unknown. For each type of transaction, Ex-Im estimates the percentage 
of the value of shipments by small businesses. Ex-Im divides the value 
of shipments made by small business exporters by the sum of the 
shipments by small and nonsmall business exporters. (Shipments by 
companies of unknown size are excluded from the calculation.) Ex-Im 
applies this percentage to the value of the entire year's authorized 
transactions of this type, resulting in its estimate of the value of 
direct support for small business from that transaction type. 

In some cases, these estimates of the small business share of 
authorized transactions can differ significantly from the small 
business amounts actually shipped under the authorizations. For 
example, in 2005 Ex-Im authorized a $10 million short-term insurance 
policy under which no shipments have been reported. In contrast, in 
2005 Ex-Im also authorized a $50 million short-term insurance policy 
where shipments under the policy exceeded $87 million for a 6-month 
period (or $174 million on an annualized basis). A 2004 authorization 
for Iraq provides another example. In February 2004 Ex-Im issued a $250 
million short-term bank-held insurance policy involving Iraq. Using the 
methodology described above, Ex-Im estimated that 21 percent of the 
value of bank-held insurance, overall, would directly benefit small 
business, and thus credited approximately $53 million of this 
authorization for Iraq to its accounting of small business 
financing.[Footnote 10] According to Ex-Im officials, companies have 
just begun making shipments under this policy. 

Figure 4 shows Ex-Im's reported small business share of each type of 
transaction for fiscal year 2004. 

Figure 4: Ex-Im's Reported Amount of Fiscal Year 2004 Transactions 
Directly Benefiting Small Business: 

[See PDF for image] 

[End of figure] 

Ex-Im Generally Classifies Companies' Small Business Status Correctly: 

Ex-Im's classification of companies' small business status is generally 
correct, based on our review of independent data and Ex-Im's paper 
transaction files. Based on our review of Ex-Im's electronic databases 
and D&B data on companies' sales and employment, we estimate that, 83 
percent of the time, Ex-Im's small business designation[Footnote 11] 
matches the designation based on D&B data. Based on a review of Ex-Im's 
official paper transaction files in instances where Ex-Im's small 
business designation differed from the designation indicated by D&B, we 
determined that Ex-Im's designation was justified in most instances, 
although we observed a significant number of errors related to loans 
and guarantees. 

Comparison of Ex-Im's Small Business Designation with Designation Based 
on D&B Data: 

Based on our review of a statistical sample of 300 companies, we 
estimate that for those companies for which we were able to obtain 
credible matching data from D&B, 83 percent[Footnote 12] of the time Ex-
Im's small business designation in its electronic database matched the 
designation indicated by D&B company data.[Footnote 13] We estimate 
that there is credible D&B matching data for 90 percent of the 
companies in the Ex-Im database.[Footnote 14] Our analysis shows that, 
where Ex-Im's small business designation differed from the designation 
indicated by D&B data, Ex-Im almost always identified a company that 
appears to qualify as a small business as a nonsmall business. Ex-Im 
officials stated that these results reflect their practice of being 
conservative in identifying companies as small businesses. Because the 
value of individual transactions can vary significantly, these results 
do not necessarily mean that Ex-Im undercounted the value of its small 
business financing. 

The frequency of differences in companies' small business designation 
in Ex-Im's data and our analysis of D&B data varied based on the type 
of transaction examined. For companies involved in nonbank-held 
insurance and working capital transactions, we estimate that 10 and 11 
percent, respectively, of Ex-Im's small business designations in its 
electronic data systems differ from the small business designation 
resulting from applying the SBA methodology to D&B data.[Footnote 15] 
For medium-and long-term loans and guarantees, which account for about 
half of the value of total transactions but only about 2 percent of the 
value of small business transactions, we estimate that 50 percent of Ex-
Im's small business designations differ from the small business 
designation resulting from applying the SBA methodology to D&B 
data.[Footnote 16] 

Ex-Im's Basis for Categorizing Some Companies Differently Than 
Designation Based on D&B Data: 

According to our review of Ex-Im's official paper records, Ex-Im's 
small business designations are generally justified when they differ 
from designations based on D&B data. We reviewed Ex-Im's paper records 
for 90 percent of the companies where we observed differences between 
Ex-Im's small business designation in its electronic database and the 
designation based on D&B data. We determined that Ex-Im's designation 
was justified in the majority of instances. However, we found a large 
number of errors regarding companies involved in loans and guarantees. 
With respect to insurance or working capital transactions, we 
determined that, for 18 of the 19 companies involved in these 
transactions, documentation in Ex-Im's paper files supported its small 
business designation in the paper and electronic files.[Footnote 17] In 
some of these instances, we determined that Ex-Im's designation was 
correct because the company receiving Ex-Im financing was the 
subsidiary of a larger company that did not qualify as a small 
business, thus disqualifying the subsidiary from being considered a 
small business. In other instances, other information in the paper 
transaction files supported Ex-Im's designation of the company's small 
business status. For about half of the companies involved in loans and 
guarantees, however, Ex-Im's small business designation in the paper 
file differed from the designation in the electronic database. In these 
cases, Ex-Im's paper files and our analysis identified the companies as 
small businesses, but Ex-Im's electronic files used to calculate its 
small business financing identified them as nonsmall businesses. Thus, 
none of these errors caused Ex-Im to inappropriately take "credit" for 
small business financing. 

Weaknesses Exist in Ex-Im's Process for Calculating Its Small Business 
Financing: 

We identified weaknesses in Ex-Im's process for calculating its small 
business financing, ranging from internal control weaknesses that may 
affect only a few transactions a year to more significant weaknesses in 
Ex-Im's system for estimating about one-third of its small business 
support. For transactions where the exporter is known, we found 
weaknesses related to internal controls in Ex-Im's data systems. For 
transactions where the exporter is not known at the time Ex-Im 
authorizes the transaction, we identified weaknesses such as analyzing 
shipments equaling a small portion of the authorized value of 
transactions, excluding a large share of exports, and misclassifying 
companies' small business status for the purpose of estimating small 
business shares based on shipments in previous periods. We did not 
determine the cumulative effect of these weaknesses on Ex-Im's overall 
calculation of its small business support. 

Internal Control Weaknesses Exist in Ex-Im's Data Systems Used to 
Calculate Ex-Im's Small Business Financing: 

Two internal control weaknesses exist in Ex-Im data systems used to 
calculate and report on Ex-Im's small business financing. Three 
databases are relevant to Ex-Im's small business financing calculation-
-two store information on companies involved in the transactions, and a 
third integrates information from these databases and performs the 
actual calculation. 

First, Ex-Im's electronic data systems used to calculate its small 
business support do not contain complete or up-to-date information on 
companies' small business status. As a result, to obtain the most 
current information for these companies, Ex-Im officials must identify 
and locate their paper transaction files. As discussed above, while Ex- 
Im's paper files generally supported its small business designation, we 
found a significant number of discrepancies between Ex-Im's paper and 
electronic files. We found that Ex-Im's electronic data systems had no 
small business designation for 350 (or 66 percent) of the 531 companies 
we examined that had received medium-or long-term loans or guarantees. 
According to Ex-Im officials, if a company's small business designation 
is left blank, they do not credit any part of the transaction as 
benefiting small business. Ex-Im also does not consistently maintain 
the latest information in the databases. Ex-Im officials told us they 
had not performed a general update of the company records since 
September 2004.[Footnote 18] 

Second, Ex-Im's data systems sometimes contain conflicting information 
for the same company. Ex-Im maintains information about insurance 
transactions and participants in one data system and information about 
loans and guarantee transactions and participants in another data 
system. According to Ex-Im, updating information in a company's record 
(including its small business designation) in one database does not 
update the company's record in the other database. As a result, the two 
databases can, and in some cases do, have conflicting information about 
the same company. Our analysis identified 34 companies[Footnote 19] 
involved in about 180 transactions that were treated as small 
businesses in some transactions and as nonsmall businesses in other 
transactions. 

Weaknesses Exist in Ex-Im's System for Estimating Small Business 
Financing When the Exporter Is Not Immediately Knowable: 

We found weaknesses in Ex-Im's system for developing estimates of small 
business financing where the exporter is not known at the time Ex-Im 
authorizes the transaction, which applied to about one-third of Ex-Im's 
total small business financing for fiscal year 2004. These weaknesses 
are a function of Ex-Im's methodology, which focuses on the authorized 
value of transactions, and Ex-Im's implementation of its methodology. 

First, Ex-Im's estimates may not accurately reflect the amount of small 
business financing under bank-held insurance policies because of large 
differences between the amounts authorized and actually shipped under 
these policies. For both fiscal years 2004 and 2005, the value of 
shipments under bank-held insurance policies was a fraction of the 
total authorized value of the bank-held insurance policies. For 
example, according to Ex-Im records, they authorized $3.4 billion of 
bank-held insurance transactions for fiscal year 2004, but there were 
only $280 million in shipments under bank-held insurance policies in 
the first 6 months of the fiscal year. Ex-Im applied its estimate of 
the small business share of transactions, based on these shipments, to 
the $3.4 billion of bank-held insurance policies it authorized during 
the year, and determined that about $720 million of the authorized 
value of bank-held insurance policies during the year directly 
benefited small business. Thus, this method results in estimates of 
small business shares for the authorized value of these types of 
transactions that are based on a very small share (about 8 percent) of 
the total authorized value. Ex-Im officials stated that the difference 
between amounts authorized and amounts actually shipped can be very 
large because banks sometimes want as much flexibility as possible in 
the amount of insurance they can provide and request that Ex-Im 
authorize large policies. Ex-Im officials acknowledge that, as a 
result, the total authorized value of bank-held insurance transactions 
can be significantly greater than the value of shipments under these 
policies. 

Second, Ex-Im classifies the small business status of a significant 
portion of the companies making shipments as "unknown" and excludes 
them from its calculation of the estimate of its small business 
support. For the $280 million of shipments under bank-held insurance 
discussed above, an Ex-Im official reviewed the data and classified 
about $128 million (or nearly half) as shipments by companies whose 
small business status was "unknown." It then excluded these shipments 
from its calculation of total shipments. 

For credit guarantee facilities, which account for about 1 percent of 
Ex-Im's small business financing, Ex-Im's system for calculating its 
small business share led to errors. Specifically, Ex-Im relies on an 
automated system, which classifies a company's small business status as 
"unknown" unless it finds an exact match in Ex-Im's company records, 
for identifying the small business status of companies shipping under 
these policies. Within the companies classified as "unknown" are some 
clearly large, easily recognized companies. No Ex-Im official reviews 
the results of these automated classifications, so these companies are 
not included in the calculation. Ex-Im officials stated that, since 
credit guarantee facilities account for such a small portion of Ex-Im's 
overall small business financing, errors in its estimation of the small 
business share of these transactions would not materially affect Ex- 
Im's reporting on its total small business financing. 

Third, as is the case with calculations when the exporter is known, Ex- 
Im, at times, inconsistently identifies the small business status of 
the same company in its estimates when the exporter is not known at the 
time Ex-Im authorizes the transaction. For example, in comparing Ex- 
Im's classification of companies' small business status in its separate 
analyses of shipments under bank-held insurance and credit guarantee 
facilities, we found that Ex-Im inconsistently coded the small business 
status of a company exporting solar turbines. In one analysis, Ex-Im 
designated the company as a nonsmall business, but in another analysis 
Ex-Im designated the company's small business status as "unknown" and 
excluded it from its calculation. Excluding this company increased Ex- 
Im's estimate of small business support for one type of transaction for 
the year. 

Ex-Im's Reporting on the Number of Transactions Directly Benefiting 
Small Business Includes Transactions That Do Not Benefit Small 
Business: 

Ex-Im is also statutorily required to report on the number of its 
authorized transactions that directly benefit small business; we found 
that Ex-Im's reported tally includes some transactions that do not 
benefit small business. In recent years, Ex-Im has frequently reported 
that about 85 percent of its authorized transactions directly benefit 
small business. For instance, in fiscal year 2004, it reported that 
2,572 (or 83 percent) of its authorized transactions directly supported 
small businesses. This count was based on counting all six credit 
guarantee facilities and 698 bank-held insurance policies as directly 
benefiting small business. While many of these transactions may 
directly benefit small business, they do not all directly benefit small 
business, as evidenced by the fact that Ex-Im's own estimate showed 
that about 20 percent of the value of bank-held insurance policies 
directly benefited small business. 

Ex-Im's Interpretation of the Small Business Financing Mandate: 

Prior to the enactment of credit reform legislation, Ex-Im interpreted 
the mandate as requiring it to make available for financing small 
business exports an amount equal to the legislatively established 
percent of the aggregate principal amount of loans, guarantees and 
insurance specified by Congress for that fiscal year. Given changes in 
law over time, Ex-Im currently interprets the small business financing 
mandate as requiring Ex-Im to attempt to ensure that 20 percent of the 
value of its transactions is provided directly to small business. As a 
result of credit reform legislation and related changes in law, Ex-Im 
cannot precisely determine at the beginning of the year its "aggregate 
loan, guarantee, and insurance authority available," for the purpose of 
setting aside a certain percentage of that authority for small 
business, as originally intended under the requirement. 

Ex-Im's Current Interpretation of the Mandate: 

Given the changes in law over time, Ex-Im's current interpretation of 
the small business financing mandate is that it must attempt to ensure 
that 20 percent of the value of all the transactions Ex-Im authorizes 
during a year directly benefits small business. Ex-Im's approach for 
implementing the requirement is to divide the dollar value of 
authorized transactions directly benefiting small business by the 
authorized dollar value of all transactions, as described above, and 
monitor this proportion throughout the year, aiming to reach 20 
percent. 

According to Ex-Im's officials, this approach is consistent with (1) 
congressional intent in establishing the small business requirement, 
(2) the demand-driven nature of Ex-Im's operations, and (3) the broader 
mandate of Ex-Im's authorizing legislation. First, Ex-Im's General 
Counsel stated that, in establishing the requirement, Congress 
generally intended to ensure that a specified percentage of Ex-Im's 
loan, guarantee, and insurance authority be available for small 
businesses.[Footnote 20] At the time the requirement was created, 
Congress exercised control over Ex-Im's financing by establishing 
specific dollar limitations (in annual appropriations acts) on the 
value of transactions Ex-Im could approve during the year. Thus, 
according to Ex-Im, doing the calculation on the basis of the 
authorized value of transactions is reasonable based on the legislative 
history of the provision. 

Second, Ex-Im officials stated that Ex-Im interprets and implements the 
small business requirement in the broader context of Ex-Im's operation 
as a demand-driven institution that provides financing to U.S. 
exporters who apply for Ex-Im financing. Because of the demand-driven 
nature of its business, Ex-Im has limited control over how much 
financing U.S. exporters apply for each year or, consequently, how much 
financing it provides during the year. Third, Ex-Im also implements the 
small business financing requirement in the broader context of Ex-Im's 
other legislative mandates to support U.S. exports and increase 
domestic employment. Moreover, Ex-Im officials stated that, under Ex- 
Im's approach to implementing the requirement, it has never had to turn 
down a small business transaction due to a lack of funds. 

Changes in Law Have Occurred Since Original Enactment of the 
Requirement: 

Circumstances have changed since the small business financing 
requirement was enacted that have affected how Ex-Im implements it. 
Specifically, the removal of a direct congressional cap on annual Ex-Im 
financing and enactment of the Federal Credit Reform Act of 1990 
changed how Congress exercised control over Ex-Im's financing 
activities.[Footnote 21] Prior to credit reform, Ex-Im interpreted the 
mandate as requiring it to make available for financing small business 
exports an amount equal to 10 percent of the aggregate principal amount 
of loans, guarantees and insurance specified by Congress for that 
fiscal year. Following the implementation of credit reform, the 
authority available, or the amount of financing Ex-Im can provide 
during a year, is determined by the amount of subsidy appropriation Ex- 
Im receives from Congress and the estimated subsidy cost to the 
government of each transaction.[Footnote 22] Some transactions do not 
require a subsidy (or even make money), so the subsidy appropriation 
covers the expected total net losses of all transactions during the 
year. Thus, for the same amount of subsidy appropriation, Ex-Im could 
provide different amounts of total financing depending on the 
characteristics of the transactions it authorizes. It could authorize 
relatively few large, but risky transactions, or it could authorize 
many smaller, less risky transactions. 

At the time the small business financing requirement was enacted, 
Congress had historically specified in annual appropriations acts the 
total principal amount of loans and guarantees that Ex-Im could 
provide. Ex-Im could then make available for financing small business 
exports an amount equal to the required percentage, regardless of the 
actual budget authority utilized by Ex-Im by the end of the year. In 
these circumstances, Ex-Im could easily determine how much financing it 
needed to make available for small business to satisfy the 
requirement.[Footnote 23] However, in 1994 (and subsequent years), 
Congress did not specify any limitation on the total principal amount 
of loans, guarantees, and insurance that Ex-Im could provide during the 
year. As a result, Ex-Im no longer has a specific, pre-determined, 
amount from which it could calculate the required percentage to be made 
available for small business financing. 

Conclusions: 

While Ex-Im generally classifies companies' small business status 
correctly, we identified several areas for improvement related to the 
processes and data it uses to determine and report on its support of 
small business. We observed a variety of weaknesses related to Ex-Im's 
calculation of its small business support, ranging from data system 
weaknesses that may affect only a few transactions per year to 
shortcomings in Ex-Im's system for estimating about one-third of its 
small business financing annually. While we did not determine whether 
these weaknesses result in Ex-Im overstating or understating the value 
of its small business financing, improvements are needed to address 
internal control weaknesses and improve the reliability of Ex-Im's 
reporting on its small business financing. With more reliable data and 
data systems, Ex-Im could more effectively and accurately report to 
Congress regarding the number of its transactions that directly benefit 
small business and their progress toward meeting the 20 percent small 
business financing mandate. 

Recommendations for Executive Action: 

To improve the reliability of Ex-Im Bank reporting on its direct 
support for small business we recommend that the Chairman of the Export-
Import Bank take the following four steps: 

* improve the completeness, accuracy, and consistency of the data Ex-Im 
maintains on its customers, especially with regard to their small 
business status; 

* improve the system for estimating the value and proportion of direct 
small business support for those transactions where the exporter is not 
known at the time Ex-Im authorizes the transaction; 

* more accurately determine and clearly report the number of 
transactions that directly benefit small business; and: 

* have its external auditor audit Ex-Im's annual legislatively-mandated 
reporting of its direct support for small business as a part of its 
review of Ex-Im's compliance with laws and regulations. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Export-Import Bank of the 
United States. Ex-Im commented that the review helped reaffirm its 
methodology and identify areas where it can improve its efficiency. It 
generally concurred with our recommendations and identified several 
actions it is taking or will take that address them. Ex-Im stated that 
a new on-line application system that it is implementing will include 
updating electronic participant records and that it is strengthening 
its internal controls regarding small business status. Ex-Im also 
stated that its new on-line system will improve its information base 
regarding small business designations when the exporter is not known at 
the time of authorization. Ex-Im further stated that it is arranging 
for an independent audit of its direct small business reporting. With 
respect to its reporting on the number of its transactions directly 
supporting small business, Ex-Im stated its view that it has a sound 
methodology for counting transactions made available for the direct 
support of small business exporters. We believe greater clarity is 
needed in Ex-Im's reporting of this measure. Ex-Im's official comments 
are reprinted in appendix IV. 

We are sending copies of this report to the Chairman of the Export- 
Import Bank, appropriate congressional committees, and other interested 
parties. We will also make copies available to others upon request. In 
addition, the report will be available at no charge on the GAO Web site 
at [Hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-4347 or [Hyperlink, YagerL@gao.gov]. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix V. 

Sincerely yours, 

Signed by: 

Loren Yager: 
Director, International Affairs and Trade: 

[End of section] 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

The Chairman of the House Committee on Small Business requested that we 
review legal and policy issues related to the Export-Import Bank's (Ex- 
Im) support for small business. This report (1) analyzes Ex-Im's 
methodology for calculating its direct support of small business and 
the reliability of Ex-Im's data used in the methodology and (2) 
describes Ex-Im's legal interpretation of its requirement under the 
statutory 20 percent small business mandate. In addition, it includes 
information on Ex-Im's efforts to monitor and track its small business 
financing (see app. II) and how Ex-Im estimates the share of its 
financing that indirectly supports small business (see app. III). 

To analyze Ex-Im's methodology for calculating its direct support for 
small business and the reliability of the data used in the calculation, 
we interviewed knowledgeable Ex-Im staff, reviewed Ex-Im documentation 
regarding the calculation, and analyzed data on Ex-Im transactions and 
participants from fiscal years 2004 and 2005. To review the operation 
of Ex-Im data systems involved in the calculation of small business 
financing, we interviewed knowledgeable Ex-Im officials and staff from 
Ex-Im's external auditor (Deloitte & Touche), reviewed annual audit 
reports of Ex-Im's financial statements, viewed a demonstration of the 
data systems, and obtained detailed and summary data related to 
transactions from fiscal years 2004 and 2005. We performed basic 
electronic tests of the data's reliability, including determining 
whether the data fell within the expected time periods, contained the 
types of transactions we expected, and were generally comparable to Ex- 
Im's summary data from its Annual Reports. On this basis, we determined 
that the data were sufficiently reliable for our use in further 
analysis. We then identified the individual companies involved in Ex-Im 
transactions and analyzed data on companies' industry classifications 
(Standard Industrial Classification [SIC]), number of employees, and 
annual revenues. We also reviewed Ex-Im's electronic records for 
companies receiving financing in fiscal years 2004 and 2005 to identify 
whether there were any instances where Ex-Im's small business 
designation for the same company differed in the insurance and loan and 
guarantee databases. We identified the Small Business Administration's 
(SBA) "size standard" for each company based on the SIC code in Ex-Im's 
electronic records and applied the SBA methodology to Ex-Im's 
electronic company records to determine how frequently Ex-Im's decision 
regarding companies' small business status was supported by the data in 
Ex-Im's databases. 

To test whether Ex-Im's classification of companies' small business 
status is accurate, we drew a stratified random probability sample of 
300 companies from a population of 2,755 companies receiving Ex-Im 
financing[Footnote 24] in fiscal years 2004 or 2005, stratified by type 
of transaction. We developed our list of 2,755 companies from a 
transaction-level data set provided to us by Ex-Im by identifying all 
unique company identification numbers and then checking to ensure that 
there was no repetition of company names across the identification 
numbers. We stratified the population into three types of transactions: 
loans and guarantees, nonbank-held insurance, and working capital 
guarantees. We obtained data regarding the sampled companies' industry 
classification, employment, and revenues from a commercial information 
vendor, Dun and Bradstreet (D&B), which Ex-Im also uses to update its 
company records.[Footnote 25] We obtained 269 credible matches based on 
searches either for each company's DUNS number or name. We then applied 
the SBA "size standards" to the Dun and Bradstreet data for these 
companies to determine whether they qualify as small businesses. We 
then compared these results to Ex-Im's small business designation for 
each company. Three potential limitations could affect this analysis: 
(1) the D&B data may be inaccurate or outdated, (2) companies' small 
business status may have changed between the time Ex-Im authorized the 
transaction (2004 or 2005) and when we obtained the D&B data (December 
2005), and (3) Ex-Im's small business designation may have been based 
on data not available to D&B. 

With our probability sample, each member of the study population had a 
nonzero probability of being included and that probability could be 
computed for any member. Each sample company was subsequently weighted 
in the analysis to account statistically for all the companies in the 
population, including those who were not selected. Most estimates 
provided in this report apply only to the subset of companies for which 
we were able to obtain enough credible matching information in the D&B 
data to determine a classification into small or nonsmall. 

Because we followed a probability procedure based on random selections, 
our sample is only one of a large number of samples that we might have 
drawn. Since each sample could have provided different estimates, we 
express our confidence in the precision of our particular sample's 
results as 95 percent confidence intervals (e.g., plus or minus 7 
percentage points). These are intervals that would contain the actual 
population values for 95 percent of the samples we could have drawn. As 
a result, we are 95 percent confident that each of the confidence 
intervals in this report will include the true values in the study 
population. 

We also reviewed a selection of the 61 companies identified from our 
statistical sample for which Ex-Im's small business designation did not 
match the designation based on applying the SBA methodology to the D&B 
data. This selection included companies involved in medium-and long- 
term loans and guarantees, working capital transactions, and nonbank- 
held insurance transactions. For these companies, we reviewed Ex-Im's 
paper transaction files to (1) identify whether Ex-Im designated the 
company as a small business and (2) determine what supporting 
documentation existed regarding Ex-Im's designation. 

To determine the reliability of Ex-Im's estimates of small business 
financing when the exporter is not known at the time of the 
transaction, we interviewed Ex-Im staff and analyzed Ex-Im's data for 
fiscal years 2004 and 2005. Our review of the data included verifying 
Ex-Im's calculation, comparing Ex-Im's classification of companies' 
small business status in different Ex-Im data sets, and reviewing the 
names of companies to identify obvious classification errors. We also 
compared the value of the shipments in these analyses with the value of 
these types of transactions as reported in Ex-Im's Annual Reports. 

To describe Ex-Im's legal interpretation of its statutory small 
business financing mandate, we reviewed the statutory provision and its 
legislative history, reviewed other relevant legal documents, and 
interviewed Ex-Im legal staff, including the Acting General Counsel, 
regarding their interpretation. 

To review Ex-Im's efforts to monitor and track its small business 
financing, we obtained Ex-Im reports and interviewed Ex-Im staff. 

To examine how Ex-Im estimates the share of its financing that 
indirectly supports small business, we obtained documents detailing Ex- 
Im's estimates and interviewed Ex-Im staff regarding the methodology 
for developing the estimates. 

We conducted our work from June 2005 to January 2006 in accordance with 
generally accepted government auditing standards. 

[End of section] 

Appendix II: Information on Ex-Im's Monitoring and Tracking of Its 
Small Business Financing: 

The Export-Import Bank (Ex-Im) monitors and tracks the proportion of 
its financing that directly benefits small business, and thus its 
progress toward meeting the small business financing requirement, using 
reports produced by electronic databases maintained by Ex-Im staff. One 
tool is a standard report generated by an electronic Ex-Im database 
that details the number, amount, and proportion of Ex-Im transactions 
that directly benefit small business. In addition, Ex-Im's Office of 
the Chief Financial Officer produces a monthly financial report that 
compiles a variety of data, including the amount and proportion of Ex- 
Im's financing that directly benefits small business. 

Ex-Im Uses Electronic Databases to Produce Up-to-Date Data on Small 
Business Financing: 

Ex-Im uses a "canned" report produced by an Ex-Im database that pulls 
information from multiple other Ex-Im databases. This database 
integrates information, including data relating to specific 
transactions and information related to the companies participating in 
each transaction. Ex-Im officials told us this database is updated each 
night. The report breaks down Ex-Im's financing for the year-to-date 
into five categories of transactions--medium-and long-term loans and 
guarantees, credit guarantee facilities, working capital, bank-held 
insurance, and nonblank-held insurance. For each category, the report 
includes summary data on the number, amount, and proportion of Ex-Im 
transactions that directly benefit small business for the year-to- 
date.[Footnote 26] 

Ex-Im's Monthly Financial Reports Compare Its Small Business Financing 
to the Legislative Mandate: 

Ex-Im also monitors and tracks its small business financing in a 
monthly financial report produced by the Office of the Chief Financial 
Officer. According to the Chief Financial Officer, this report is a key 
management tool and contains data on a variety of issues relevant to Ex-
Im management, including small business financing. Specifically with 
regard to small business, it includes data on the dollar value of 
transactions authorized that directly benefit small business and the 
percentage this represents of total transactions. The report indicates 
that the "Small Business Target" is 20 percent and measures Ex-Im's 
actual performance against this "target." 

[End of section] 

Appendix III: Information on How Ex-Im Estimates Its Indirect Support 
of Small Business: 

The Export-Import Bank's (Ex-Im) authorizing legislation requires it to 
estimate its indirect support of small business. To meet this 
requirement, Ex-Im analyzes a subset of transactions and uses multiple 
sources of information to develop its estimate. 

Ex-Im's Authorizing Legislation Requires It to Estimate Its Indirect 
Support of Small Business: 

Ex-Im's authorizing legislation[Footnote 27] requires it to estimate 
its indirect support for small business. Specifically, it requires Ex- 
Im to "estimate on the basis of an annual survey or tabulation the 
number of entities that are suppliers of users of Ex-Im and that are 
small business concerns." Ex-Im then reports this information in its 
Annual Report. Ex-Im officials emphasized that (in contrast to the 
legislative requirement related to Ex-Im's direct support of small 
business) this requirement only necessitates Ex-Im report an estimate 
of its indirect support of small business rather than a precise 
calculation. They further noted that the requirement provides 
significant leeway regarding how to gather and report this information. 
For instance, they said that since the requirement refers to a "survey 
or tabulation" they infer that Congress intended for Ex-Im to rely on 
its customers to provide estimates to Ex-Im. 

Ex-Im's Rationale and Methodology for Estimating Its Indirect Support 
of Small Business: 

Resource considerations were the key factor in Ex-Im's rationale for 
developing a methodology to estimate its indirect support of small 
business. Ex-Im officials said they did not want to devote a 
significant amount of resources to developing the information because, 
regardless of the amount of resources expended, it would still only be 
an estimate. Similarly, Ex-Im recognized that it would rely on its 
customers to provide information to develop the estimate and wanted to 
minimize the burden on the customers. 

To establish a methodology, Ex-Im officials decided to examine a subset 
of Ex-Im transactions, based on the term (i.e., short-term, medium- 
term, or long-term) of the financing. Ex-Im considered analyzing the 
indirect support for small business from all the short-term 
transactions for the year. However, there are a large number (about 
1,900 in fiscal year 2004) of these transactions, so analyzing them all 
would require a significant amount of resources. Additionally, a high 
percentage of short-term transactions directly benefit small business, 
so an analysis of these transactions would yield an unrealistically low 
amount of indirect support for small business. Ex-Im also considered 
analyzing medium-term transactions, but since there are a large number 
of such transactions (about 700 in fiscal year 2004), such an analysis 
would still take a significant amount of resources. Therefore, Ex-Im 
decided to analyze the indirect small business support resulting from 
its long-term transactions. Ex-Im officials told us that analyzing long-
term transactions is appropriate because (1) there are a small number 
of such transactions each year (42 in fiscal year 2004), (2) the 
analysis would yield a "well-rounded" view of Ex-Im's total support for 
small business when combined with its data on its direct support of 
small business, and (3) long-term transactions account for a 
significant share of the value of Ex-Im's financing each year ($7.3 
billion, or nearly half of the value of all transactions for fiscal 
year 2004). 

Ex-Im officials said they have been estimating Ex-Im's indirect support 
of small business since the 1980s and use three sources of information 
to develop their estimate. These three sources of information are the 
following: 

* Information directly from the primary exporter: Some of Ex-Im's 
customers compile and provide data directly to Ex-Im regarding their 
small business suppliers. According to Ex-Im officials, this happens 
most frequently when the company is a large and well-established 
company and collects a significant amount of information from its 
suppliers. For instance, Boeing (a frequent Ex-Im customer) maintains a 
variety of data on its suppliers and subcontractors and reports this 
information to Ex-Im. According to Ex-Im, it based its estimate of 
indirect support of small business solely on information directly from 
the primary exporter for 19 of 42 long-term transactions for fiscal 
year 2004. 

* Ex-Im analysis of the exporter's list of subcontractors or sub- 
suppliers: For each long-term transaction, Ex-Im customers must submit 
a list of major contractors. The Ex-Im official assigned to the 
transaction reviews this list and, among other things, identifies which 
of the companies on the list is a small business by checking data on 
each company's sales and employment in the Dun and Bradstreet database. 
According to Ex-Im, it based its estimate of indirect support of small 
business solely on its analysis of the exporter's list of major 
contractors for 5 of 42 transactions for fiscal year 2004. 

* Ex-Im officials' judgment: Ex-Im officials sometimes must use their 
judgment to estimate the amount of indirect support for small business 
associated with a transaction. According to Ex-Im officials, the Ex-Im 
official assigned to the transaction can use his or her knowledge of 
the exporter (including any past history of its indirect support of 
small business), industry (including industry benchmarks regarding 
small business contracting), and the specific details of the 
transaction. According to Ex-Im, it based its estimate of indirect 
support of small business solely on an Ex-Im officials' judgment for 10 
of 42 transactions for fiscal year 2004. 

According to Ex-Im, for some transactions, it estimates the amount of 
indirect support for small business using a combination of sources of 
information. For example, for fiscal year 2004, Ex-Im estimated the 
indirect support of small business for four transactions based on a 
combination of information directly from the primary exporter and Ex- 
Im's analysis of the exporter's list of subcontractors or subsuppliers. 
For four other transactions in fiscal year 2004, Ex-Im estimated the 
indirect support for small business based on a combination of Ex-Im's 
analysis of the exporter's list of subcontractors or subsuppliers and 
an Ex-Im official's judgment. 

[End of section] 

Appendix IV: Comments from the Export-Import Bank: 

EXPORT-IMPORT BANK OF THE UNITED STATES: 

JAMES H. LAMBRIGHT: 
CHAIRMAN AND PRESIDENT (ACTING): 

February 22, 2006: 

Loren Yager: 
Director, International Affairs and Trade: 
U.S. Government Accountability Office: 
Washington, D.C. 20548: 

Dear Mr. Yager: 

Thank you for providing the Export-Import Bank of the United States 
("Ex-Im Bank") with the opportunity to comment on GAO's February 6, 
2006 draft report. 

We are pleased that GAO has concluded that Ex-Im Bank "generally 
classifies small business status correctly." As we have conveyed to 
your team throughout the course of this review, Ex-Im Bank has a 
transparent and reliable methodology for determining our customers' 
small business status and reporting our direct support for small 
business. 

Ex-Im Bank very much appreciates GAO's cooperative approach to the 
small business review. This has been a very positive exercise for Ex-Im 
Bank, both in terms of reaffirming our methodology and from the 
perspective of identifying areas in which Ex-Im Bank can improve the 
efficiency with which we determine and report our direct small business 
support. 

The following are Ex-Im Bank's responses to GAO's recommendations: 

1. "Improving the completeness, accuracy and consistency of the data Ex-
Im maintains on its customers, especially with regard to their small 
business status." 

In conjunction with the introduction of our Ex-Im Online platform, Ex- 
Im Bank is in the process of updating electronic participant records 
for FY 2006. Complete data on all exporters will be entered into the 
electronic participant file, including name, address, sales, number of 
employees, and SIC code. Ex-Im Bank is also strengthening our internal 
controls to require dual signoff when determining small business status 
of our customers. 

2. "Improving the system for estimating the value and proportion of 
direct small business support for those transactions where the exporter 
is not known at the time Ex-Im authorizes the transactions." 

Ex-Im Online will have a direct feed from Dun and Bradstreet, which 
will result in the Bank receiving timely updates of participant file 
data. This increases the base of information to support the small 
business authorizations for the transactions where the exporter is not 
known at the time of authorization. If the systemic review does not 
result in classification of an exporter's status, then Ex-Im Bank will 
manually review and input the appropriate status into the participant 
file. This should result in a refined ratio to be applied to the CGF 
and Bank-Held authorizations. 

3. "Accurately determining the number of transactions that directly 
benefit small business." 

Ex-Im Bank has a sound methodology for counting transactions that are 
made available for the direct benefit of small business exporters. 
Historically, the actual number of direct small business transactions 
attributable to credit guarantee facilities and bank-held insurance 
policies has exceeded the number of authorizations. 

4. "Having its external auditor audit Ex-Im Bank's annual legislatively-
mandated reporting of its direct support for small business as a part 
of its review of Ex-Im Bank's compliance with laws and regulations." 

We are arranging for an independent external audit of Ex-Im Bank's 
direct small business reporting starting with FY 2006. 

Ex-Im Bank is prepared to work with Congress in our upcoming 
reauthorization to make changes that, consistent with Ex-Im Bank's 
broad mission and resources, position the Bank to maximize support for 
U.S. small business exports. 

Sincerely, 

Signed by James H. Lambright: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Loren Yager (202) 512-4347: 

Staff Acknowledgments: 

In addition to the individual named above, Celia Thomas (Assistant 
Director), Jason Bair, Eugene Beye, David Dornisch, Ernie Jackson, and 
Bill Tuceling made key contributions to this report. Joe Carney, Carlos 
Diz, and Etana Finkler also provided editorial, technical, and graphics 
support. 

(320361): 

FOOTNOTES 

[1] 12 U.S.C. 635 et seq. 

[2] Ex-Im also provides a small number of direct loans, which are 
primarily used to offer concessionary financing to U.S. exporters to 
match concessionary financing by other countries' export credit 
agencies. For additional information regarding Ex-Im products, see Ex- 
Im's official Web site at http://www.exim.gov. 

[3] One specific type of loan guarantee is a credit guarantee facility. 
Credit guarantee facilities are lines of credit between a bank or 
corporation in the United States and a foreign bank (or occasionally a 
large foreign buyer). Ex-Im Bank guarantees the repayment of the 
foreign bank's obligations. The foreign bank then makes credit 
available to the end user of the U.S. exports and takes the repayment 
risk of that local company. 

[4] For the bank-held insurance policies, Ex-Im authorizes the policy 
for the bank, which does not know at the time it applies for the 
financing which exporters will eventually use the export credit 
insurance. 

[5] Pub. L. No. 98-181. The law provided for this percentage to 
increase from 6 percent in fiscal year 1984 to 10 percent in 1986 and 
thereafter. 

[6] Pub. L. No. 107-189. 

[7] 12 U.S.C. 635g. 

[8] NAICS was developed jointly by the United States, Canada, and 
Mexico to provide comparability in statistics about business activity 
across North America. 

[9] For bank-held insurance policies, Ex-Im analyzes data on shipments 
during a 6-month period. For credit guarantee facilities, Ex-Im 
analyzes data on shipments from the previous year. 

[10] Our review of Ex-Im's shipment data for the first 6 months of 2004 
and 2005 identified one company that exported products using Ex-Im 
financing through the bank that received this financing. That company 
made four shipments totaling approximately $20 million during these two 
6-month periods, and is classified in Ex-Im's records as a nonsmall 
business. We did not identify any shipments by small businesses under 
this policy. 

[11] The term "small business designation" refers to the decision 
regarding whether or not a company qualifies as a small business. 

[12] We are 95 percent confident that the percentage of cases where Ex- 
Im's small business designation differs from the designation that would 
result from applying the SBA methodology to D&B data ranges from 13 and 
22 percent. This estimate and the estimates for specific transaction 
types below apply only to the portion of companies for which we were 
able to obtain D&B data. For more on our sampling methodology, see 
appendix 1. 

[13] We also reviewed 1,831 cases where Ex-Im's electronic data system 
had enough information to apply the SBA definition, and we found that 
Ex-Im's small business designation was not supported by Ex-Im's data on 
sales and employees in 191 instances, or just over 10 percent of the 
time. In the majority (157) of these cases, the SBA methodology would 
have classified the companies as small businesses, but Ex-Im had 
designated the companies as nonsmall businesses. 

[14] We are 95 percent confident that the percentage of companies in 
the Ex-Im database for which there is credible matching D&B data ranges 
from 86 percent to 93 percent. 

[15] The 95 percent confidence interval for these estimates ranges from 
5 to 18 and 5 to 19 percent, respectively. 

[16] The 95 percent confidence interval surrounding this estimate 
ranges from 40 to 60 percent. 

[17] For one of these 19 companies, Ex-Im's designation of the 
company's small business status was incorrect based on data in the 
paper file. 

[18] Ex-Im officials said they are updating companies' records in 
advance of the conversion to a new data system. 

[19] This is out of about 3,000 companies that received Ex-Im financing 
in fiscal years 2004 or 2005. 

[20] The legislative history of the 1983 provision creating the small 
business financing requirement focused on providing a specific 
percentage of the value of Ex-Im's transactions to small business. See 
H. Conf. Rep. No. 107-487, 107th Cong., 2ND Sess. (2002); H. Rep. No. 
107-292, 107th Cong., 1st Sess. 

[21] Pub. L. No. 101-508. 

[22] The estimated cost of a transaction is the net present value of 
the estimated payments by the government (e.g., loan disbursements) 
minus the estimated payments to the government (e.g., loan repayments 
and fees). 

[23] For example, for fiscal year 1993, Congress imposed a limitation 
of $15.5 billion on "gross obligations for the principal amount of 
direct loans, and tied-aid grants, and total loan principal, any part 
of which is to be guaranteed, including insurance" that Ex-Im could 
authorize during the fiscal year. Accordingly, Ex-Im interpreted the 
small business financing requirement (10 percent at the time) as 
requiring it to make available 10 percent of $15.5 billion, or $1.55 
billion, for loans, guarantees, and insurance for small business. 

[24] For this analysis, we excluded companies involved in only bank- 
held insurance or credit guarantee facility transactions because the 
amount of small business credit Ex-Im takes for these transactions does 
not depend on the small business status of the company that obtains the 
financing. 

[25] We did not review the reliability of D&B's data. 

[26] The database calculates the share of the value of transactions 
directly benefiting small business in the same manner as was discussed 
earlier in this report. 

[27] 12 U.S.C. 635g(d). 

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