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Improve Administration of the 8(a) Program, but Key Controls for 
Continued Eligibility Need Strengthening' which was released on 
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Report to the Chairwoman, Committee on Small Business, House of 
Representatives: 

United States Government Accountability Office: 
GAO: 

March 2010: 

Small Business Administration: 

Steps Have Been Taken to Improve Administration of the 8(a) Program, 
but Key Controls for Continued Eligibility Need Strengthening: 

GAO-10-353: 

GAO Highlights: 

Highlights of GAO-10-353, a report to the Chairwoman, Committee on 
Small Business, House of Representatives. 

Why GAO Did This Study: 

The Small Business Administration’s (SBA) 8(a) program helps eligible 
socially and economically disadvantaged small businesses compete in 
the economy by providing business development activities, such as 
counseling and technical assistance, and providing opportunities to 
obtain federal contracts on a set-aside basis. GAO was asked to review 
SBA’s internal control procedures for determining 8(a) eligibility. 
Specifically, we (1) evaluated the procedures and processes that SBA 
has implemented to ensure that only eligible firms participate in the 
8(a) program, and (2) assessed the extent to which SBA uses external 
mechanisms such as complaint information in helping to ensure that 
only eligible firms participate. To address these objectives, GAO 
reviewed SBA guidance and prior reports, interviewed SBA officials, 
and conducted site visits and file reviews of 123 randomly sampled 
8(a) firms covering the most recent 2 years of annual reviews at five 
SBA locations. 

What GAO Found: 

SBA relies primarily on its annual review of 8(a) firms to ensure 
their continued eligibility in the program, but inconsistencies and 
weaknesses in annual review procedures limit program oversight. GAO’s 
review of a random sample of 8(a) firms identified an estimated 55 
percent in which SBA staff failed to complete required annual review 
procedures intended to assess fundamental eligibility criteria, such 
as being economically disadvantaged (see table). Multiple factors 
appear to have contributed to the inconsistencies identified, 
including the lack of specific criteria in SBA’s current regulations 
and procedures that relate to some eligibility requirements such as 
determining whether firms exceed program thresholds for industry size 
averages, personal compensation, and personal asset limits. As a 
result, firms that may have outgrown the program continued to receive 
8(a) program benefits. For example, GAO estimated that 17 percent of 
the firms we reviewed had exceeded one or more eligibility criteria 
for 2 consecutive years, but were recommended by SBA for retention. 
SBA has taken steps to clarify some, but not all, of these rules in 
recent proposed rule changes. SBA is required by statute to perform 
annual reviews on 100 percent of 8(a) firms but staff spent 
significant amounts of time trying to obtain annual review documents 
from firms—especially firms that did not have 8(a) contracts—which 
affected the timeliness of reviews. GAO identified a significant 
number of instances in which firms failed to submit annual review 
documents as required but still were recommended for retention. The 
Business Development Specialists’ (BDS) dual role of advocacy for and 
monitoring of the firms may have contributed in part to the retention 
of ineligible firms. SBA has been addressing some data integrity and 
compatibility issues by enhancing its primary electronic system for 
annual review information. Finally, SBA did not maintain an accurate 
inventory of 8(a) Mentor-Protégé Program participant data, which 
limited the agency’s ability to monitor these firms. 

SBA’s program offices did not maintain comprehensive data on or have a 
system in place to track complaints on the eligibility of firms 
participating in the 8(a) program. District staff were not aware of 
the types and frequency of complaints across the agency. As a result, 
SBA staff lacked information that could be used with other information 
to help identify issues relating to program integrity and help improve 
the effectiveness of SBA oversight. Although complaint data are not a 
primary mechanism to ensure program eligibility, continuous monitoring 
is a key component in detecting and deterring fraud. 

Table: Estimated Percentage of Time That SBA Did Not Complete Selected 
Annual Review Procedures Relating to 8(a) Eligibility: 

Requirement not met: Taking action when a firms exceeded industry 
averages for economic success by notifying firms that exceeded four of 
seven industry averages for 1 year (intended to make firms aware they 
may be subject to early graduation); 
Estimated percentage: 26%. 

Requirement not met: Taking action when a firms exceeded industry 
averages for economic success by graduating or explaining retention of 
firms that exceeded four of seven industry trends for 2 consecutive 
years; 
Estimated percentage: 4%. 

Requirement not met: Taking action when a firms exceeded industry 
averages for economic success by reviewing net worth or graduating 
firms in which individuals exceeded adjusted net worth limitations; 
Estimated percentage: 7%. 

Requirement not met: Taking action when a firms exceeded industry 
averages for economic success by performing required eligibility 
reviews due to a change in the firms’ ownership; 
Estimated percentage: 4%. 

Requirement not met: Taking action when a firms exceeded industry 
averages for economic success by completing required annual reviews; 
Estimated percentage: 2%. 

Source: GAO analysis of a random sample of 123 8(a) firms. 

[End of table] 

What GAO Recommends: 

GAO makes six recommendations to SBA that include providing more 
guidance to help ensure staff more consistently follow procedures, 
reassessing BDSs’ workload distribution, and developing more standard 
processes for documenting and analyzing certain program data. In 
responding to a draft of this report, SBA agreed with each of the six 
recommendations and stated that some corrective measures have already 
been implemented and additional actions are planned to be implemented 
in the near future. 

View [hyperlink, http://www.gao.gov/products/GAO-10-353] or key 
components. For more information, contact William B. Shear at (202) 
512-8678 or shearw@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

While SBA Has Made Improvements to Its 8(a) Annual Reviews, Internal 
Control Weaknesses and Other Challenges Limit Program Oversight: 

SBA Lacks a Formal Mechanism to Collect and Analyze Complaint Data 
Related to 8(a) Eligibility: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Small Business Administration: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Key Eligibility Requirements for 8(a) Program Participation: 

Table 2: Estimated Percentage of Time That SBA Did Not Complete 
Selected Annual Review Procedures Relating to 8(a) Eligibility: 

Table 3: Number of Terminations and Voluntary Withdrawals from the 
8(a) Program, 2005-2008: 

Table 4: Total Number of Files and Sample Sizes at Five Selected 
District Offices: 

Table 5: 95 Percent Confidence Intervals for Statistical Sample 
Estimates in Table 2: 

Abbreviations: 

BDMIS: Business Development Management Information System: 

BDS: Business Development Specialist: 

DCI: data collection instrument: 

FPDS-NG: Federal Procurement Data System-Next Generation: 

IRS: Internal Revenue Service: 

NAICS: North American Industry Classification System: 

OBD: Office of Business Development: 

OFO: Office of Field Operations: 

OHA: Office of Hearing and Appeals: 

OIG: Office of Inspector General: 

SBA: Small Business Administration: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

March 30, 2010: 

The Honorable Nydia M. Velázquez: 
Chairwoman: 
Committee on Small Business: 
House of Representatives: 

Dear Madam Chairwoman: 

In fiscal year 2008, the federal government awarded $93.3 billion in 
contracts to small businesses. The Small Business Administration (SBA) 
plays an important role in ensuring that small businesses gain access 
to federal contracting opportunities. Section 8(a) of the Small 
Business Act is intended to help small businesses owned by socially 
and economically disadvantaged individuals compete in the economy by 
providing business development activities, such as counseling and 
technical assistance, and providing access to federal contracting 
opportunities. The 8(a) program does not guarantee that participating 
firms will obtain federal contracts, but the firms are eligible for 
competitive (for which only 8(a) firms can compete) and sole-source 
(for which awards are made without competition) federal contracts when 
certain requirements are met.[Footnote 1] As of fiscal year 2008, 
approximately 9,460 firms were in the program. 

However, we and others have identified oversight weaknesses in SBA 
controls that are intended to help ensure that only eligible small 
businesses gain access to federal contracting opportunities. For 
example, in congressional hearings on SBA's Historically Underserved 
Business Zone (HUBZone) Program that you held on July 17, 2008, we 
highlighted fraud and eligibility control weaknesses in the program 
that allowed the participation of fictitious and ineligible firms. 
[Footnote 2] In a November 2008 report on the 8(a) program, we noted 
that SBA faced several challenges in its overall administration of the 
8(a) program, including competing demands on a limited number of 
staff. For example, the amount of time staff spent on statutorily 
mandated annual reviews of all 8(a) firms diminished the amount of 
time they could devote to business development activities.[Footnote 3] 
Our recommendations to SBA included assessing the workloads of 
business development specialists (BDS) to ensure they could carry out 
their responsibilities and improving processes to terminate firms. SBA 
agreed with these recommendations in its written comments on the 
report. 

You asked us to review SBA's internal control procedures for 
determining 8(a) eligibility, including mentor-protégé arrangements 
(which provide technical and management assistance as well as 
assistance in performing federal contracts as a prime contractor 
through joint-venture arrangements). Specifically, we (1) evaluated 
the procedures and processes that SBA has implemented to ensure that 
only eligible firms remain in the 8(a) program, and (2) assessed the 
extent to which SBA uses external mechanisms, such as complaints by 
other 8(a) firms, to help ensure that only eligible firms participate. 

To address these objectives, we reviewed applicable statutes and the 
legislative history of the 8(a) program, SBA's regulations and 
guidance for administering the program, our previous reports, and 
studies of the program conducted by SBA, the SBA Inspector General, 
and external organizations. To assess SBA's compliance with its 
eligibility review procedures, we visited 5 of the 68 SBA districts 
and reviewed files of 123 randomly sampled 8(a) firms and an 
additional 13 8(a) firms that had mentor-protégé agreements.[Footnote 
4] For each firm, we reviewed the most recent 2 years of annual 
reviews for the period 2007-2009, and any existing mentor-protégé 
agreements, related documents, and correspondence. We developed a data 
collection instrument to collect key annual review information from 
each file, including SBA documentation and evidence supporting 
eligibility criteria such as financial disadvantage. We selected SBA 
districts based on the size of their 8(a) portfolios of firms with 
contracts and for geographic diversity. These 5 districts represented 
29 percent (or 672) of all active fiscal year 2008 8(a) firms with 
contracts and 37 percent (or about $2 billion) of contracting 
obligation dollars. The results of the interviews and sample results 
cannot be generalized to all 68 district offices; however, the results 
of our file review sample can be generalized to all files managed by 
the 5 district offices we included in our review. We also interviewed 
SBA officials in the Office of Business Development, Division of 
Program Certification and Eligibility, and district staff to discuss 
their procedures for determining initial and continuing eligibility, 
oversight efforts, technical assistance offered, and mechanisms to 
help identify ineligible firms in the program. Appendix I discusses 
our scope and methodology in further detail. 

We conducted our work in Boston, Massachusetts; Denver, Colorado; San 
Antonio, Texas; San Francisco, California; and Washington, D.C., 
between May 2009 and March 2010 in accordance with 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 audit 
objectives. 

Background: 

A firm must meet several initial eligibility requirements to qualify 
for the 8(a) program (a process known as certification), and then meet 
other requirements to continue participation. In general, a concern 
meets the basic requirements for admission to the program if it is a 
small business that is unconditionally owned and controlled by one or 
more socially and economically disadvantaged individuals who are of 
good character and U.S. citizens, and which demonstrates the potential 
for success. Table 1 summarizes the key requirements. 

Table 1: Key Eligibility Requirements for 8(a) Program Participation: 

General requirement: Socially disadvantaged individual; 
General description[A]: Socially disadvantaged individuals are those 
who have been subjected to racial or ethnic prejudice or cultural bias 
because of their identity as members of a group and without regard to 
their individual qualities. Members of designated groups are entitled 
to a rebuttable presumption of social disadvantage; other individuals 
must prove they are socially disadvantaged by a preponderance of the 
evidence.[B]. 

General requirement: Economically disadvantaged individual; 
General description[A]: Economically disadvantaged individuals are 
socially disadvantaged individuals whose ability to compete in the 
free enterprise system has been impaired because of diminished capital 
and credit opportunities as compared with others in the same or 
similar business area who are not socially disadvantaged. SBA 
considers various factors, including adjusted net worth, that for 
initial eligibility must be less than $250,000, and for continued 
eligibility must be less than $750,000. 

General requirement: Ownership; 
General description[A]: 8(a) applicants concerns or participants must 
be at least 51 percent unconditionally and directly owned by one or 
more socially and economically disadvantaged individuals who are U.S. 
citizens. 

General requirement: Control; 
General description[A]: 8(a) applicants or participants must be 
controlled by one or more socially and economically disadvantaged 
individuals; control includes both strategic policy setting and day-to-
day management and administration of business opportunities, and a 
participant's management and daily operations must also be conducted 
by one or more disadvantaged individuals. 

General requirement: Small business; 
General description[A]: The firm must qualify as a small business 
concern as defined by SBA's size standards, based on the North 
American Industry Classification System code. This includes 
affiliations. 

General requirement: Good character; 
General description[A]: The applicant or participant and all of its 
principals must have good character. SBA considers such things as 
criminal conduct and violations of SBA regulations. Debarred or 
suspended concerns are ineligible. 

General requirement: Potential for success; 
General description[A]: The applicant or participant must possess 
reasonable prospects for success in competing in the private sector. 
Specifically, applicants or participants must show that they have been 
in the primary industry for 2 years as of date of application by 
showing revenues on 2 years of tax returns. This requirement may be 
waived if the firm shows revenues and adequate business management and 
technical expertise. Other requirements include demonstrating 
financial capability, technical expertise, contract success, and 
contract support for the industry of applicant or participant. 

General requirement: U.S. citizenship; 
General description[A]: Applicant or participant must be a U.S. 
citizen. Individuals born outside the United States must show proof of 
citizenship through a U.S. passport or naturalization papers. 

Source: GAO. 

[A] Does not include tribal firms, Alaskan Native Corporations, Native 
Hawaiian Organizations, or Community Development Corporation-owned 
firms. 

[B] Designated groups include (1) Black Americans, (2) Hispanic 
Americans, (3) Native Americans, and (4) Asian Pacific Americans. 

[End of table] 

Participation in the 8(a) program lasts 9 years, and once it is 
completed, a firm and the individual cannot reapply. The 9-year 
program tenure is divided into two stages--a developmental stage 
covering years 1 through 4, and a transitional stage covering years 5 
through 9. During the transitional years, firms are required to meet 
certain activity targets for non-8(a) contracts to ensure they do not 
develop an unreasonable reliance on the program. Additionally, firms 
in the 8(a) program are eligible to receive sole-source and 
competitively awarded set-aside federal contracts.[Footnote 5] 

As part of the 8(a) program, SBA developed the Mentor-Protégé Program, 
in which experienced firms mentor 8(a) firms to enhance the 
capabilities of the protégé, provide various forms of business 
developmental assistance, and improve the protégé's ability to 
successfully compete for contracts.[Footnote 6] To qualify initially 
as a protégé, an 8(a) firm must meet one of three conditions: (1) be 
in the developmental stage of the 8(a) program, or (2) never have 
received an 8(a) contract, or (3) be of a size that is less than half 
the size standard corresponding to its primary standard industry code. 
The mentor and protégé enter into a written agreement that sets forth 
the protégé's needs and details the assistance the mentor commits to 
provide to address those needs. SBA must review and approve the 
initial agreement and annually evaluate specific mentor-protégé 
requirements. 

SBA's 8(a) program is delivered collaboratively by two departments of 
SBA. The Office of Business Development (OBD) is responsible for 
policy formation and the certifications of 8(a) applications, approval 
of mentor-protégé applications, as well as the approval of existing 
8(a) firms that are exiting the program (early graduations, approval 
of changes of ownership, approval of voluntary withdrawals, approval 
of terminations, and suspensions). OBD is also responsible for the 
virtual training and relevant policy briefings provided to SBA staff 
across the country responsible for executing the 8(a) program on an 
ongoing basis throughout the year. The Office of Field Operations 
(OFO) is responsible for supporting the business development 
specialists, tasked with executing the 8(a) program, who are located 
in 68 district offices across the country. Selected BDSs will have 
8(a) firms assigned to them. The BDSs work directly with 8(a) firms to 
help prepare business plans; provide technical assistance; review 
continuing eligibility; coordinate with resource partners that provide 
counseling, training, loans, and other assistance to small businesses; 
and coordinate additional assistance and training for firms through 
another SBA program.[Footnote 7] BDS staff also conduct annual reviews 
of the firms' progress in implementing business plans and analyze 
firms' year-end financial statements, income tax returns, and records 
of contracting activity for certain compliance requirements, including 
program eligibility. The purpose of the annual reviews is to determine 
if firms continue to meet eligibility requirements and to identify 
business development needs. SBA long has been required by statute to 
complete annual reviews of all firms.[Footnote 8] As of fiscal year 
2008, SBA had 182.5 full-time-equivalent BDS staff. 

While SBA Has Made Improvements to Its 8(a) Annual Reviews, Internal 
Control Weaknesses and Other Challenges Limit Program Oversight: 

SBA relies primarily on its annual reviews of 8(a) firms to ensure the 
continued eligibility of firms enrolled in the program, but we 
observed inconsistencies and weaknesses in annual review procedures 
related to determining continued eligibility for the program. For 
example, we found that SBA did not consistently notify or graduate 
8(a) firms that exceeded industry averages for economic success or 
graduate firms that exceeded the net worth threshold of $750,000. The 
lack of specific criteria in the current regulations and procedures 
may have contributed to the inconsistencies that we observed, and SBA 
has taken steps to clarify some, but not all, of these requirements in 
a recent proposed rule change. Although BDSs have been challenged to 
perform all their responsibilities--in particular the statutory 
requirement to perform annual reviews on 100 percent of 8(a) firms--
SBA has not yet assessed its workload to ensure it could carry out its 
responsibilities as we recommended in our 2008 report.[Footnote 9] SBA 
recently has implemented new procedures intended to streamline 
terminations that may address some of these inconsistencies that we 
identified with the lack of termination actions taken against firms 
that did not submit annual review documents as required. Finally, we 
found that SBA did not maintain an accurate inventory of Mentor-
Protégé Program participants and did not document some annual 
oversight activities of these firms. As a result of these 
inconsistencies and weaknesses, there is increased potential that 
firms that no longer meet SBA 8(a) continuing eligibility requirements 
could be allowed to continue in the program and receive 8(a) contracts. 

SBA's Staff Did Not Follow Required Annual Review Procedures Related 
to Continuing Program Eligibility in about Half of the Files We 
Reviewed: 

In a substantial number of cases we reviewed, SBA staff failed to 
complete required annual review procedures intended to assess 
fundamental eligibility conditions, such as the firm's net worth, used 
to determine if participants continue to meet the criteria for being 
economically disadvantaged. SBA may terminate firms found to be 
ineligible based on several conditions, including failure to submit 
required documentation for the annual review process or failure to 
maintain ownership and control by a disadvantaged individual. SBA may 
also graduate firms that have successfully completed the program by 
substantially achieving the targets, objectives, and goals in their 
business plans prior to the expiration of their program terms, and 
demonstrated their ability to compete in the marketplace without 
assistance from the program, or where one or more of the disadvantaged 
owners no longer are economically disadvantaged (a process known as 
early graduation). Criteria used to determine continuing eligibility 
and associated conditions such as economic disadvantage include 
factors such as personal assets, income, and net worth, while criteria 
used to determine if a firm successfully met targets and objectives 
include exceeding industry averages for economic success and owners 
making excessive withdrawals of company funds or other assets. 

We selected a random sample of files from each of the five district 
offices we visited to determine if district offices' practices for 
monitoring 8(a) firms were consistent with requirements in 
regulations, policies, and procedures.[Footnote 10] Specifically, we 
estimated that for the five district offices, SBA failed to complete 
one or more annual required review procedures 55 percent of the time. 
[Footnote 11] Our estimates were based on a statistical sample of 123 
annual review files from a population of 672 files. Of the 123 files 
sampled, we identified 67 instances where SBA failed to complete one 
or more annual review procedures related to eligibility determinations 
(a 55 percent rate). We tested seven specific annual review 
requirements relating to continuing eligibility: (1) notifying 8(a) 
firms that they had exceeded industry averages for economic success, 
(2) reviewing or graduating 8(a) firms or providing an explanation for 
retention if they had exceeded industry averages for 2 consecutive 
years, (3) reviewing net worth or graduating firms in which 
individuals exceeded the net worth threshold of $750,000, (4) 
performing eligibility reviews when required for such cases as a 
change in the firm's ownership, (5) completing the required annual 
reviews, (6) obtaining required supervisory reviews (and signatures), 
and (7) imposing remedial actions or obtaining waivers for firms not 
meeting business activity targets. Table 2 shows information on the 
extent to which SBA did not complete these annual review requirements. 

Table 2: Estimated Percentage of Time That SBA Did Not Complete 
Selected Annual Review Procedures Relating to 8(a) Eligibility: 

Requirement not met: Taking action when a firm exceeded industry 
averages for economic success by notifying firms that exceeded four of 
seven industry averages for 1 year; 
Estimated percentage: 26%. 

Requirement not met: Taking action when a firm exceeded industry 
averages for economic success by graduating or explaining retention of 
firms that exceeded four of seven industry averages for 2 consecutive 
years; 
Estimated percentage: 4%. 

Requirement not met: Reviewing net worth or graduating firms in which 
individuals exceeded adjusted net worth limitations; 
Estimated percentage: 7%. 

Requirement not met: Performing required eligibility reviews because 
of a change in the firms' ownership; 
Estimated percentage: 4%. 

Requirement not met: Completing required annual reviews; 
Estimated percentage: 2%. 

Requirement not met: Documenting supervisory reviews; 
Estimated percentage: 23%. 

Requirement not met: Imposing remedial actions or obtaining waivers 
for firms not meeting business activity targets; 
Estimated percentage: 10%. 

Source: GAO. 

Note: These estimates are based upon a random sample. See table 5 in 
appendix I for the associated 95 percent confidence intervals. 

[End of table] 

* Exceeding industry averages: Officials from two of the five district 
offices told us that while the guidance requires notifying 8(a) firms 
when they have exceeded industry averages for economic success, in 
practice the districts have been using discretion in notifying the 
firm after the first year in which this condition occurs. SBA 
procedures identify exceeding industry averages as a criterion for 
considering that the firm has met its goals and therefore may no 
longer be economically disadvantaged. The notification is intended to 
make participants aware that they may be subject to early graduation 
proceedings if they exceed industry averages for 2 consecutive years. 
SBA procedures state that if the firm exceeds industry averages for 2 
consecutive years, the participant no longer can be considered 
economically disadvantaged unless the BDS provides evidence that early 
graduation is not warranted because of compelling reasons. Officials 
from these district offices explained that they did not follow these 
procedures, even though they were required, because they did not think 
that exceeding industry averages always indicated that participants no 
longer were economically disadvantaged. The level of staff knowledge 
about calculations for industry averages and the way in which staff 
entered the calculations into information systems also may have 
contributed to failures to meet this requirement. One district office 
told us it was not clear how the ratios were calculated. We also found 
errors in the calculations of industry averages at another district 
office. As we discuss in more detail later in the report, the industry 
ratio calculations require the BDS to manually enter data into a 
template that will then calculate the ratio of the firm's performance 
against that of industry. As shown in table 2, we estimate that staff 
failed to complete this requirement in about 26 percent of the cases 
in which a notification letter was required, and in about 4 percent of 
cases in which industry averages were exceeded for 2 consecutive 
years.[Footnote 12] 

* Reviewing net worth or graduating firms in which individuals 
exceeded adjusted net worth limitations: One of the clearest 
indicators of economic disadvantage that SBA uses is the net worth 
requirement. The regulations specifically state that for continued 
eligibility after admission into the program, adjusted net worth must 
be less than $750,000. Our file review shows that SBA retained an 
estimated 7 percent of the firms we sampled, in which there was no 
evidence that staff reviewed the firms' net worth, or retained firms 
in the program despite their exceeding the net worth limits.[Footnote 
13] Similarly, in our companion report investigating the potential for 
8(a) program fraud and abuse, we identified cases in which SBA's files 
clearly indicated that the firms were not eligible for the 8(a) 
program, yet SBA staff failed to terminate or graduate the firms from 
the program.[Footnote 14] Later in this report we discuss different 
factors that may have contributed to the retention of firms that 
clearly appeared to be no longer eligible, including the BDSs' dual 
role of advocacy for and monitoring of the firms and workload 
constraints. 

* Completing eligibility reviews: We estimated that about 4 percent of 
our file sample contained no evidence that SBA staff had performed a 
separate required eligibility review.[Footnote 15] Eligibility reviews 
are required in cases in which the BDS has reason to question a 
participant's eligibility, including a change in the firm's ownership 
(the factor we used for our analysis).[Footnote 16] Eligibility 
reviews are critical because they could uncover program participants 
that no longer met control and ownership eligibility requirements. 
Representatives from one district office we visited explained that 
these reviews were a low priority compared with other 
responsibilities, such as completing annual reviews and initial 
certifications. 

* Completing annual reviews: Although SBA is statutorily required to 
perform annual reviews of 100 percent of 8(a) firms, we estimated that 
in about 2 percent of our sample, the files contained no evidence that 
SBA had performed the annual reviews.[Footnote 17] For example, in two 
cases, a district office had no record on file that annual reviews had 
been performed, and in three other cases it had bundled 2 years of 
reviews because of a change in the internal deadline for completing 
annual reviews (it skipped an annual review). Our sample of 123 files 
included only firms that received contracts. As a result, SBA could be 
unaware that a potentially ineligible firm had received contracts 
because it had not performed an annual review. 

We also identified a few instances in which SBA failed to follow 
procedural requirements related to the annual reviews, including not 
consistently documenting supervisory reviews in one district and 
failing to take remedial actions for firms not meeting their business 
activity targets. 

* Documenting supervisory reviews: One district office did not always 
have the required supervisory signatures on the BDSs' annual review 
recommendations.[Footnote 18] Of the 64 files that we sampled in that 
district, 20 lacked evidence of supervisory review signatures. That 
is, it appeared that only a BDS recommended a firm's retention or 
dismissal from the program. Overall, we estimated that SBA did not 
meet this requirement for about 23 percent of the files in the five 
district offices.[Footnote 19] The noncompliance rate in this district 
may be attributable to the large size of its 8(a) portfolio--about 20 
percent of all active fiscal year 2008 8(a) firms. According to 
district officials, the office also had competing priorities, such as 
the need to review applications for the Mentor-Protégé Program. 
[Footnote 20] Nevertheless, SBA officials were not properly monitoring 
their staff in these cases. Without the quality controls intended by 
the supervisory reviews, SBA has limited assurances that the annual 
reviews are fulfilling their intended purpose. 

* Imposing remedial actions or obtaining waivers for firms not meeting 
business activity targets: In about 10 percent of the files we 
reviewed, district offices did not submit required documentation of 
remedial actions or a waiver when a firm in the transitional phase of 
the program did not meet its business activity targets.[Footnote 21] 
The remedial action is intended as an incentive for firms to obtain 
non-8(a) contracts so that they will be prepared to compete in the 
marketplace without the assistance of the 8(a) program upon 
graduation. Firms are required to achieve their targets or otherwise 
are not eligible to receive 8(a) sole-source contracts. By not 
notifying firms and setting up a remedial plan when required, the 
BDSs' actions did not appear to be consistent with a key business 
development activity intended to help firms develop and exit from the 
program. Furthermore, SBA could be providing opportunities for 
potentially ineligible firms to receive sole-source contracts. 

Although SBA Has Proposed Changes to Its Regulations to Improve 
Eligibility Determinations, It Still Lacks Specific Guidance for Some 
Criteria: 

Our file review results and interviews with district office officials 
identified numerous instances in which staff did not consistently 
apply objective standards relating to eligibility determinations. SBA 
lacks specific criteria in its current regulations and procedures that 
relate to some of the eligibility requirements such as determining 
whether a firm should be graduated from the program when it exceeds 
size standards, industry averages (such as total assets, net sales, 
working capital, or pretax profit), limits for personal compensation 
and assets, and excessive withdrawals. Furthermore, SBA guidance 
directs staff to rely on Office of Hearings and Appeals (OHA) 
decisions to use as thresholds for eligibility criteria, such as total 
assets and total compensation, in order to make eligibility 
determinations. However, as we noted in our related investigation, 
agency staff did not follow case law consistently.[Footnote 22] 

More specifically, we estimate that 17 percent of the firms had 
exceeded one or more eligibility criteria for 2 consecutive years, 
indicating that the firms may have been outgrowing the program, but 
were recommended by SBA for retention.[Footnote 23] Although each 
criterion in and of itself may not be a determinant for early 
graduation based on the current regulations, each is an important 
factor in determining if these firms continue to meet eligibility 
requirements and if they should remain in the program. SBA considers 
the totality of circumstances to determine whether a firm has met its 
goals and objectives and should be recommended for early graduation. 

* In two cases in one district office, firms had exceeded both average 
compensation limits and the limits for excessive withdrawals for 2 
consecutive years, and still were recommended for retention. The 
District Director and staff at the district office agreed that the two 
cases were red flags and that the firms should have been recommended 
for early graduation or termination. 

* In another example, at a different district office, one firm that, 
over its 8-year tenure in the 8(a) program. had exceeded (1) industry 
averages for 5 years (in 2 of these years, the firm could have been 
considered for early graduation because it exceeded industry averages 
for 2 consecutive years), (2) compensation limits by having an average 
salary of more than $200,000 for 2 years, (3) the size standard for 
its primary North American Industry Classification System code, (4) 
and made excessive withdrawals in 1 year, but in each year was 
recommended for retention. This firm had more than $16 million in 
contracts by its sixth year in the program.[Footnote 24] 

We also found inconsistencies in the use of third-party sources to 
verify firm-reported data. For instance, two districts told us they 
reviewed third-party sources such as Internal Revenue Service (IRS) 
tax transcripts, debarments, and bank information such as withdrawals 
more routinely as part of their annual review, while two other 
districts told us they had not performed any third-party verification. 
At least in part, these inconsistencies can be attributed to lack of 
specific guidance or criteria regarding the need for third-party 
verification. Overall, the regulations state that SBA may terminate a 
firm on the basis of discovering false information, but contain few 
specific requirements to consult third-party sources for continuing 
eligibility. For example, participants must submit the IRS 4506-T 
transcript request form as part of the annual review requirements, 
which allows SBA to request tax return information. Additionally, the 
regulations suggest that staff should consult the federal list of 
debarred and suspended firms, since such firms are ineligible for 
admission to the 8(a) program. However, we found little evidence of 
regulatory requirements to obtain other third-party verifications. As 
noted in our report on the potential for 8(a) program fraud and abuse, 
validating data against other government or third-party sources is a 
fraud preventive control meant to keep ineligible firms from entering 
the program.[Footnote 25] However, we found that SBA relied heavily on 
self-reported information from the firms during the initial 
certification and annual reviews, with limited data validation 
performed after the firms had entered the program. Additionally, in 
that report we make a recommendation to assess the feasibility of 
using additional third-party data sources and site visits, based on 
random or risk-based criteria, to allow more independent verification 
of firm-reported data. 

SBA recently proposed changes to its Small Business Size and 8(a) 
Business Development Regulations to address technical issues as well 
as make more substantive changes resulting from its experience in 
implementing the current regulations.[Footnote 26] The agency last 
updated most of these regulations in 1998. According to a senior SBA 
official, these changes are intended to help SBA administer the 
program more effectively. The proposed rules would introduce more 
detailed guidance and allow for less staff judgment, particularly for 
the standards that appeared to be associated with the inconsistencies 
in the annual review procedures in our review of 8(a) case files. For 
example, the proposed regulations define more specific thresholds for 
considering an individual's personal assets and compensation, and 
whether a firm has exceeded size standards. However, the proposed 
regulations do not introduce more specific requirements relating to 
exceeding industry averages, and would increase staff flexibility to 
make judgments relating to excessive withdrawals. Furthermore, the 
proposed rule changes do not address under what circumstances or to 
what extent staff should verify firm-reported information with third- 
party sources. According to SBA, the proposed rules attempt to address 
areas where the current regulations needed more clarity to ensure 
consistency with SBA policy as well as areas where the current 
regulations may unreasonably restrict participants. For example, the 
proposed rule changes allow for flexibility in judgment regarding 
excessive withdrawals because SBA believes that it is important that 
SBA look at the totality of the circumstances in determining whether 
to include a specific amount as a withdrawal in an effort to prevent 
some firms from circumventing excessive withdrawal limitations. 
However, the lack of specific criteria in the current regulations and 
procedures reduces assurances that the BDSs are making consistent and 
objective determinations about 8(a) firms' continued eligibility in 
the program. 

SBA Has Not Assessed BDS Workload, a Significant Portion of Which Is 
Devoted to Annual Reviews, a Fact That Limits Other 8(a) Activities: 

BDSs devote significant time and resources to complying with the 
statutory requirement to perform annual reviews on 100 percent of 8(a) 
firms, a fact that affects the time and resources they can devote to 
other 8(a) activities. Monitoring the firms' continuing eligibility 
for the 8(a) program is just one of many responsibilities of the BDS. 
The BDS also has an advocacy role--maintaining an ongoing 
responsibility to assist the participant in developing the business to 
the fullest extent possible. This includes striving to increase both 
the dollar value and the percentage of 8(a) contracts through 
communication of procurement activities, training, and counseling. SBA 
guidance requires the BDS to be the primary provider in helping firms 
develop business plans, seek loans, and receive counseling on 
finances, marketing, and management practices. 

Officials in all five of the district offices we visited indicated 
that they met the 100 percent annual review goal for fiscal year 2008 
but stated it was a time-and resource-intensive process. For example, 
district staff estimated that the annual review process consumed from 
about 40 to 70 percent of their time. BDSs in the district offices 
told us their individual portfolios ranged from about 30 to 140 firms, 
depending on their experience level. Three districts noted that BDS 
turnover resulted in newer staff initially taking more time to process 
reviews and having smaller portfolios while they were learning their 
job. One of the districts told us that all available staff in the 
district office, including staff not assigned to the 8(a) program, had 
to assist in completing and processing annual reviews in order to meet 
the review goal. District office staff also told us that they spent a 
significant amount of time and resources following up with 8(a) firms 
to have them submit required documentation such as tax and business 
financial information, which also slowed the review process.[Footnote 
27] District offices indicated that firms that did not have contracts 
were especially prone to submitting documents late because annual 
reviews were not a priority for them.[Footnote 28] These delays, in 
turn, reduced the amount of time that the BDSs had to spend on firms 
that exhibited a high risk of misrepresentation or noncompliance with 
8(a) eligibility requirements--monitoring necessary for effective 
program oversight. 

Furthermore, in our November 2008 report we noted that demands of the 
annual review process and resource constraints affected SBA's ability 
to conduct other program activities.[Footnote 29] For this report, 
some districts noted that the annual review goal affected their 
ability to perform site visits; follow up on issues that warranted 
more attention, such as red flags identified in the prior year's 
annual review; and conduct other core business development activities. 
For instance, the frequency of site visits varied in the five offices 
we visited. One district office told us that staff were able to 
conduct site visits for all firms, but another district conducted site 
visits for about half of its firms, and the remaining districts 
performed site visits on a limited basis, citing circumstances such as 
a firm transferring into the district or confirming that a firm was 
operating at a bona fide place of business. Another district stated 
that staff do not have time to follow up on red flags such as concerns 
identified in prior annual reviews because of the emphasis on meeting 
the annual review goal. Another district also told us that meeting the 
100 percent annual review goal has limited the district's ability to 
get out and educate agencies and firms. This included providing 
outreach and awareness training. Finally, another district told us the 
annual reviews have affected its ability to provide developmental 
assistance and services to address the 8(a) firm's needs. The 
officials also stated that it was hard to develop working 
relationships with the firms because of the amount of work reports, 
projects, and other duties assigned. 

Although BDSs have been challenged to perform all their 
responsibilities, SBA has not yet assessed their workload to ensure 
they could carry out their responsibilities, as we recommended in our 
2008 report.[Footnote 30] As we reported, SBA did recognize 
specifically that staffing constraints affected its ability to perform 
annual reviews. For example, according to its 2006 Performance and 
Accountability Report, a main contributing factor in the agency's 
inability to complete annual reviews of all 8(a) firms was a lack of 
staff resources in the district offices. However, since our previous 
work in 2008, the emphasis on meeting annual review compliance 
requirements has strained staff capacity to conduct other core 
activities for the 8(a) program. 

By not assessing BDS workloads, SBA may be bypassing opportunities to 
better support the mission of the 8(a) program--that is, to develop 
and prepare small disadvantaged firms for procurement and other 
business opportunities. In addition, the lack of time to follow up on 
issues of concern identified in prior-year reviews also undermines 
SBA's ability to carry out its monitoring responsibilities. 

Noncompliant Firms Remain in the 8(a) Program, although Termination 
Rates Have Increased and New Procedures Should Streamline the 
Termination Process: 

On the basis of our file review, we observed instances in which firms 
were not compliant with 8(a) continuing eligibility requirements 
related to document submission, but remained in the program. Failure 
to submit documentation as required is the primary source of 
noncompliance in the 8(a) program, and is listed in the regulations as 
an example of good cause for termination.[Footnote 31] Our file review 
showed that business development staff frequently accepted incomplete, 
incorrect, and late documentation from firms and in many cases 
recommended the noncompliant firms for retention. 

Most Firms Submitted Documents Late, but Few Were Terminated for This 
Cause: 

Of the 123 firms we tested, 61 percent were noncompliant because of 
failures to submit documents as required, but staff recommended 3 
percent for termination.[Footnote 32] According to the regulations and 
procedures, unless participants are also suspended in conjunction with 
termination proceedings, 8(a) firms remain eligible to receive program 
benefits and to compete for contracts during termination proceedings, 
a fact that affords them the opportunity for notice and an opportunity 
to appeal a termination decision.[Footnote 33] 

During interviews with district office staff, SBA officials 
acknowledged that some firms took more time than allowed to submit 
documents. One district office official stated that some firms did not 
take deadlines seriously and would delay the annual review process. 
District staff estimated that despite a 30-day deadline, most firms 
submitted documents within 30 to 45 days and in some cases, up to 60 
days after their anniversary date. As mentioned earlier, our file 
review of 123 firms showed that 49 percent submitted late 
documentation. In one case, a firm failed to provide documents on time 
and SBA staff waited 4 months before recommending the firm for 
termination. After receiving the letter of intent to terminate, the 
firm took another 2 months to submit the requested documents. SBA then 
reinstated the firm after a total of 6 months' delinquency. In another 
case, a firm failed to submit financial information, and business 
development staff sent the letter of intent to terminate shortly after 
the firm's deadline passed. SBA waited another 6 months for the firm 
to submit the required documentation, which turned out to be 
incomplete, but upon receipt SBA chose to reinstate the firm. The next 
year, the firm submitted a personal financial statement identical to 
the previous year's (including dates), but SBA did not take action. 

Advocacy Role of BDSs May Contribute to Decisions to Retain Firms: 

As previously discussed, the BDS's role as an advocate for 8(a) firms 
may have contributed to a reluctance to terminate firms even if the 
BDSs had a basis for doing so. Staff in one district office explained 
they worked with firms before initiating the termination process, in 
an attempt to avoid termination and to achieve the program mission of 
preparing disadvantaged firms to compete in the market. Similarly, as 
noted in our companion report, SBA staff responsible for annually 
assessing the eligibility of participants were not actively looking 
for fraud and abuse in the program--and in some cases, staff supported 
firms despite eligibility concerns that we raised.[Footnote 34] 
Furthermore, our file review provides examples of reluctance to 
terminate noncompliant firms. 

* An 8(a) firm sent an unsigned annual update form 3 months after its 
deadline. One month later, SBA recommended retention pending receipt 
of the firm's remaining documents, such as the personal financial 
statement and tax returns required to demonstrate economic 
disadvantage. More than 2 months later, the firm provided partial 
financial documentation. Although SBA's recommendation to retain the 
firm was based on expecting to eventually receive the firm's remaining 
documents, these required documents still were outstanding at the time 
of our file review--which occurred approximately 1.5 years after the 
initial annual review deadline. As a result, it is unknown whether the 
firm was eligible to continue participating in the 8(a) program 
because SBA did not have the needed information to fully assess the 
financially disadvantaged status of the firm. 

* We also have observed instances in which the BDS recommended 
termination but higher levels of management retained the noncompliant 
firms in the program. For example, one firm did not submit any annual 
review documentation and the BDS subsequently recommended it for 
termination. SBA headquarters disagreed with the determination and 
chose to retain the firm. However, there was no documentation in the 
file to explain the basis for this decision. 

The Overall Trend in Recent Years Showed an Increase in Terminations: 

In contrast to these cases, there has been an overall upward trend of 
firms exiting the 8(a) program through termination or voluntary 
withdrawal. According to headquarters officials, this trend is a 
result of the agency's emphasis in recent years on fully meeting its 
statutory requirements to conduct annual reviews of all firms. By 
requesting the annual update from the firm in anticipation of 
completing the annual review, business development staff provide the 
firms an opportunity to demonstrate basic program compliance. 

Table 3 shows exit data trends over the past several years. The most 
recent data indicate a sharp increase in overall terminations and 
voluntary withdrawals from the 8(a) program. For example, from 2007 to 
2008, the number of terminations increased more than threefold. Firms 
are given the option to withdraw from the program when faced with 
termination proceedings. SBA headquarters officials explained that 
some firms prefer a withdrawal instead of a termination on their 
record, and that the increase in annual reviews also increased this 
opportunity. 

Table 3: Number of Terminations and Voluntary Withdrawals from the 
8(a) Program, 2005-2008: 

Number of 8(a) firms; 
Fiscal year: 2005: 9,470; 
Fiscal year: 2006: 9,667; 
Fiscal year: 2007: 9,423; 
Fiscal year: 2008: 9,462. 

Number of terminations; 
Fiscal year: 2005: 130; 
Fiscal year: 2006: 318; 
Fiscal year: 2007: 143; 
Fiscal year: 2008: 537. 

Percentage terminated; 
Fiscal year: 2005: 1; 
Fiscal year: 2006: 3; 
Fiscal year: 2007: 2; 
Fiscal year: 2008: 6. 

Number of voluntary withdrawals; 
Fiscal year: 2005: 98; 
Fiscal year: 2006: 95; 
Fiscal year: 2007: 149; 
Fiscal year: 2008: 228. 

Percentage of voluntary withdrawals; 
Fiscal year: 2005: 1; 
Fiscal year: 2006: 1; 
Fiscal year: 2007: 2; 
Fiscal year: 2008: 2. 

Source: SBA. Percentages calculated by GAO and rounded to the nearest 
whole number. 

[End of table] 

SBA Has Streamlined Termination Procedures, but Has Not Provided 
Additional Guidance on Conditions That Would Warrant Termination: 

Effective September 2009, SBA revised its 8(a) program procedures to 
shorten the termination process and improve internal controls. The 
procedural change shortens the termination process by 30 days to 135 
days.[Footnote 35] While this falls short of the 75-day reduction SBA 
officials planned at the time of our November 2008 report, it may 
succeed in removing more ineligible firms from the program.[Footnote 
36] It remains to be seen what effect this time reduction will have on 
termination as an eligibility control. 

To create the 30-day reduction in the termination procedure, SBA gave 
the district offices responsibility for sending letters of intent to 
terminate directly to the firms. Previously, district offices had to 
submit termination information to headquarters before an intent letter 
could be mailed. Because of this change, the district office primarily 
will be in charge of handling new documents the firm submits after 
receiving the intent letter. By giving the district offices direct 
responsibility for tracking documentation and communicating with the 
firm during this phase, SBA intends the process to be more streamlined 
and straightforward. 

While the new procedures reaffirm that firms may be terminated for 
good cause (as outlined in the program regulations), they provide no 
additional discussion of what factors or conditions would warrant 
termination.[Footnote 37] The 8(a) regulations to which the program 
procedures refer do provide examples of "good cause," including a 
"pattern of failure" to make required submissions in a timely manner. 
[Footnote 38] However, they provide no examples or criteria for staff 
to use in determining what constitutes a pattern of failure. The lack 
of guidance may have contributed to staff decisions to retain or 
reinstate noncompliant firms. 

SBA Plans to Address Compatibility and Functionality Issues in the 
8(a) Program's Management Information System to Improve the Efficiency 
of Annual Reviews: 

Issues such as data integration, compatibility, and functionality 
associated with SBA's Business Development Management Information 
System (BDMIS) for the 8(a) program present challenges that affect 
effective program management. The agency has been planning to address 
some data integrity and compatibility issues with BDMIS and E-8(a), a 
database that provides business status and business contract activity 
for each participant in the 8(a) program. District office officials 
indicated that information discrepancies existed between the two 
systems and required dual data entry of some firm information. SBA 
officials stated they were reconciling the information in E-8(a) and 
BDMIS to address discrepancies. Additionally, the officials explained 
that some information had to be entered separately into the two 
systems but that they were moving toward a single data feed. The 
officials expected this change to occur by the end of the third 
quarter of fiscal year 2010. 

As of October 2008, BDMIS was operational in all district offices, 
allowing 8(a) participants to submit their annual review data 
electronically and the BDSs to review the documentation 
electronically. District staff identified benefits and challenges with 
the implementation of the online annual review process in BDMIS. For 
example, one district told us that learning the BDMIS system was 
challenging initially for some 8(a) participants and depended on 
participants' skills and abilities to enter information into the 
system. Another district noted that a calculator that assesses a 
firm's performance in its respective industry was a positive addition 
to the BDMIS system, allowing the BDS to move through reviews more 
quickly and efficiently. But the BDS still had to enter firm financial 
data manually into the calculator, a fact that could increase the 
likelihood for data entry errors. (The industry ratio calculations 
require the BDS to manually enter data into a template that calculates 
the ratio between the firm's performance and that of industry.) For 
example, at one district we visited, we observed BDS staff manually 
entering industry performance ratios. District staff also told us that 
BDMIS's functionality has been limited because the system did not 
allow staff to access complete firm information, such as contract and 
historical information, and develop reports. Some district offices 
also told us that the BDSs' overall workload has not improved and that 
BDSs spend a significant amount of their time following up with 8(a) 
firms to submit relevant annual review documents. Despite these 
challenges, district staff with whom we spoke said BDMIS has been 
helping to achieve better organization and tracking and anticipated 
that when fully operational, it could save time and increase 
transparency. 

SBA officials also told us that they have been planning to upgrade 
BDMIS, which currently is operating in its first version. SBA expects 
to complete three upgrades by the end of the fiscal year 2010. As part 
of the upgrades, SBA plans to integrate an existing federal database, 
the Federal Procurement Data System-Next Generation, that contains 
contracting information that could help SBA staff to verify firms' 
contracting information and enable district staff to run reports on 
their 8(a) firms. District staff told us they rely on the 8(a) firm 
and federal agencies to provide contract information that is used in 
the annual review to determine a firm's ratio of 8(a) and non-8(a) 
contracts. As the firm matures, the goal for 8(a) firms is to increase 
the amount of non-8(a) contract work and decrease reliance on 8(a) 
contracts. However, one district explained that contract information 
such as contracts pending and awarded is recorded in E8(a) but the 
information is not complete because it does not contain obligation 
data. 

SBA's planned system upgrades could improve the efficiency of annual 
reviews, particularly because they would likely address duplicative 
data entry, make more information readily available to staff, and 
decrease the amount of time spent on annual reviews. However, it is 
too early to tell whether these changes, once implemented and fully 
operational, would achieve their intended purposes. 

SBA Did Not Have an Accurate Inventory of Mentor-Protégé Firms and Did 
Not Follow Important Procedures to Properly Monitor the Program: 

SBA did not maintain an accurate list of Mentor-Protégé Program 
participants. Specifically, the headquarters office has had difficulty 
verifying which firms actively participate in the program. An SBA 
headquarters official responsible for the program stated that staff 
added firms to a working list based on agreements once they were 
approved at headquarters. However, this list is not systematically 
updated when mentor-protégé agreements are extended or dissolved, 
which occurs at the district office level instead of at headquarters. 
While the list constituted the agency's only central participation 
roster for the program, officials stated it was not meant to be used 
as an eligibility control. Most district offices that we visited kept 
their own lists, which occasionally were used to verify the 
headquarters list. One district office we visited did not compile a 
list of its mentor-protégé participants, but instead relied on 
individual program files and the list from headquarters for 
information. When we followed up with other district offices, we found 
contradictory or inconsistent data in comparison with those of 
headquarters. For example, the headquarters list showed two active 
mentor-protégé agreements for a district office that stated it had no 
active participants. 

Because there is no list of active mentor-protégé agreements, SBA may 
not be able to properly monitor 8(a) protégé firms that submit 
agreements with more than one mentor, or mentors that submit 
agreements with more than one 8(a) protégé. Currently, mentors may 
have more than one protégé if specially approved by SBA. At least 28 
mentor firms appeared to have more than one protégé firm, but SBA was 
unable to confirm whether 5 of these mentors were authorized to do so. 
SBA has proposed new regulations that would limit mentor firms to a 
maximum of 3 protégé firms at a time.[Footnote 39] SBA also has 
proposed changes to the regulations that would allow protégé firms to 
have more than 1 mentor under limited circumstances.[Footnote 40] To 
date, the regulations have prohibited protégé firms from having more 
than one mentor at a time.[Footnote 41] However, we identified 12 
protégé firms that appeared to have 2 mentors at the same time. SBA 
indicated that some of these relationships had been dissolved, but 
these firms remained on its list of approved mentor-protégé 
agreements. The current lack of data limits the agency's ability to 
fully monitor the Mentor-Protégé Program. As a result, unauthorized 
partnerships could receive 8(a) set-aside contracts. 

Maintaining an accurate list of firms participating in SBA's Mentor- 
Protégé Program is an important control mechanism to ensure 
participation only by eligible firms and that the agency has relevant 
and reliable information for management. Monitoring eligibility for 
the Mentor-Protégé Program is especially important because 
participants were more successful in earning proceeds from federal 
contracts in fiscal year 2008 than the larger pool of 8(a) firms. 
[Footnote 42] Mentor-protégé participants averaged $4.1 million in 
sales compared with $2.4 million for other 8(a) firms. As a group, 
these participants earned $638 million in fiscal year 2008. 

In addition to finding high-level data inconsistencies, including 
unverifiable participation lists and mentors and protégés with 
multiple agreements, we found cases in which SBA failed to properly 
document analysis and monitoring of the Mentor-Protégé Program. As 
part of our file review across five district offices, we tested 20 
8(a) firms with mentor-protégé agreements. We focused on initial 
agreement information, annual updates, and recommendations. Our file 
review results showed that SBA staff failed to comply with certain 
initial review and annual review procedures for participants in 6 of 
the 20 mentor-protégé cases that we reviewed. These procedures include 
providing a written eligibility analysis and ensuring a signed 
supervisory review of the BDS's recommendation. In our interviews with 
district office officials, we also found that Mentor-Protégé 
eligibility information had not been incorporated into BDMIS. District 
offices were not able to integrate initial approval recommendations 
and annual review monitoring with the firm's general 8(a) eligibility 
information held electronically in BDMIS. As a result of the lack of 
documentation and the data limitations discussed above, SBA has not 
been able to properly oversee this program. 

SBA Lacks a Formal Mechanism to Collect and Analyze Complaint Data 
Related to 8(a) Eligibility: 

SBA can receive information and complaints from other 8(a) firms, 
disgruntled 8(a) employees, and anonymous sources, but SBA does not 
maintain comprehensive data about complaints such as allegations that 
certain 8(a) firms may not comply with eligibility requirements. 
[Footnote 43] Although complaint information is not the primary 
mechanism for ensuring continuing program eligibility, it can be an 
additional tool for identifying fraud or wrongdoing. As we noted in 
our other GAO investigative report on the 8(a) program, detection and 
monitoring are crucial elements in a well-designed fraud prevention 
system.[Footnote 44] Complaints and other allegations regarding the 
eligibility of firms in the program can serve as red flags for SBA 
staff to take additional steps to ensure that firms continue to meet 
program requirements. 

District office officials told us that complaints received at the 
district receive an initial review (to determine if they warrant 
follow-up), which may include follow-up with other agencies and the 
specific firm to gather more information. SBA's standard operating 
procedures instruct staff to refer to SBA's Office of Inspector 
General (OIG) any possible criminal violations and other wrongdoing 
involving SBA programs, such as knowingly making or using a statement 
or document that is false, fictitious, or fraudulent. If warranted, 
complaints are to be referred to SBA's OIG for possible investigation. 
One district told us that the district counsel reviews the evidence, 
and if the case has merit, the information is referred to the SBA OIG 
for further investigation. Two other districts told us the BDS will 
seek more information by checking with the contracting agency involved 
regarding the nature of the complaint or contacting the 8(a) firm for 
clarification before making a referral to OIG. 

However, because district staff do not collect and maintain 
comprehensive complaint information involving 8(a) firms, staff are 
not aware of the types and frequency of complaints across the agency, 
including potential eligibility concerns. Specifically, none of the 
five districts that we visited were able to provide us with a list of 
complaints or allegations that they received over the past year 
regarding the potential ineligibility of 8(a) firms in their 
districts. While OIG maintains general complaint information such as 
the name of the 8(a) firm and type of complaint, a senior OIG official 
told us that 8(a) complaints involving a single company generally did 
not rank high in priority for a review because of resource limitations 
and other priorities but that it might be considered in the OIG's work-
planning effort. OIG officials explained that the OIG ultimately also 
could refer a case to the U.S. Attorney for prosecution, but that the 
threshold for prosecutions was high and many cases did not meet that 
threshold. 

As a result, it appears that complaint data involving 8(a) firms are 
not being utilized to the full extent as a means to identify potential 
areas of concern such as program eligibility issues. Without a 
standard process for collecting and analyzing complaints, SBA staff--
and the agency as a whole--lack information that could be used to help 
identify issues relating to program integrity and help improve the 
effectiveness of SBA oversight. 

Conclusions: 

SBA's 8(a) program provides opportunities for participating firms to 
collectively receive billions of dollars in federal contracts on a 
competitive or noncompetitive basis. As a result, it is critical that 
SBA's annual reviews of 8(a) firms are performed effectively to help 
ensure that only eligible firms are allowed to continue to participate 
in and benefit from the program. However, our file review at five 
district offices found inconsistencies in the annual review policies 
and procedures followed by SBA staff related to program eligibility. 
This suggests a need for greater monitoring by SBA and potentially a 
need for more guidance and training to ensure greater consistency in 
the performance of required annual review procedures. 

Furthermore, the lack of specific criteria in the current regulations 
related to eligibility determinants such as size standards and 
industry averages and the dual roles of the BDSs--providing oversight 
and being an advocate for the firm--may have contributed to the 
variation in annual review practices we observed. By clarifying 
guidance, further detailing or expanding procedures, and emphasizing 
the importance of quality controls, SBA could help eliminate 
ambiguities, improve the quality of reviews, and provide clearer 
criteria against which to judge eligibility and ensure that only 
intended recipients benefit from program participation. 

Workload constraints of BDS staff may have been a contributing factor 
to the inconsistencies and deficiencies identified in our review of 
annual review files in the five districts that we visited. While the 
annual review process is central to ensuring program integrity, SBA's 
statutory requirement to conduct annual reviews of 100 percent of 8(a) 
firms also is time-and resource-intensive. The workload demands 
associated with the annual review process likely have affected the 
quality of these reviews as well as detracted from the time staff have 
been able to devote to other core 8(a) program responsibilities, 
ranging from technical assistance to mentoring. As we previously 
recommended and continue to believe, an assessment of the BDS workload 
could help ensure the BDSs can carry out their responsibilities and 
determine what mechanisms can be used to prioritize or redistribute 
their workload. Such an assessment also would be helpful in assessing 
the multiple roles and responsibilities of BDS staff, including ways 
to mitigate the conflicting roles of business development, and 
ensuring that only eligible firms are allowed to participate in the 
program. In a fiscally challenged environment and with workload 
constraints as a constant, it is important that the agency review 
staff and resource allocations and identify process efficiencies 
wherever possible. 

Changes that SBA recently made to termination procedures, coupled with 
the increase in terminations overall, may help to alleviate workload 
constraints for district office staff. As we noted in our November 
2008 report, the inefficient termination process consumed scarce SBA 
resources and may have affected business development activities. 
District staff could take advantage of the revised, more efficient 
termination process to minimize time spent waiting for documents from 
firms and free up time for business development and other activities. 
However, SBA retained some firms that repeatedly did not submit 
required documentation for annual reviews. By monitoring the 
implementation of regulations relating to documentation requirements, 
SBA could help staff more readily identify firms for termination, 
reduce the time staff spent "chasing" documentation, and help improve 
the timeliness of annual reviews. Additionally, by providing specific 
examples in the regulations or procedures of what is considered to be 
a pattern of failure, staff would be able to better justify 
termination decisions. 

The agency also faces a number of challenges in effectively monitoring 
and managing the Mentor-Protégé Program, which is an important subset 
of the 8(a) program. For example, SBA headquarters and district 
offices could not agree or provide current and basic information on 
the total number of mentor-protégé agreements. Maintaining accurate 
information on participants is a basic and important control mechanism 
to monitor 8(a) protégé firms that submit agreements with more than 
one mentor, or mentors that submit agreements with more than one 8(a) 
protégé. By developing a centralized process to collect and maintain 
information on program participants, SBA would have a critical tool 
necessary to properly monitor and oversee the program. 

Finally, SBA also has an opportunity to develop another tool that 
could enhance its oversight of the 8(a) program. Currently, SBA lacks 
comprehensive data on complaints involving 8(a) firms because it does 
not systematically collect and analyze information on the nature of 
the complaints and their disposition. Although complaint data are not 
a primary mechanism to ensure program eligibility, continual 
monitoring is a key component in detecting and deterring fraud. By 
developing an agencywide process for documenting and analyzing 
complaints, SBA would have an information resource that could be used 
with other efforts to provide reasonable assurance that only eligible 
firms are participating in the program. 

Recommendations for Executive Action: 

To improve the monitoring of and procedures used in assessing the 
continuing eligibility of firms to participate in and benefit from the 
8(a) program, we recommend that the Administrator of SBA take the 
following six actions: 

* To help ensure greater consistency in carrying out annual review 
procedures and improve the overall quality of these reviews, we 
recommend that the SBA Administrator monitor, and provide additional 
guidance and training to, district offices on the procedures used to 
determine continuing eligibility, including: 

- taking appropriate action when firms exceed four of seven industry 
size averages, including notifying firms the first year and enforcing 
procedures relating to early graduation of firms that exceed industry 
averages for 2 consecutive years; 

- obtaining appropriate supervisory signatures to finalize annual 
review decisions; 

- submitting remedial action or a waiver for firms in the transition 
phase that did not meet business activity targets; 

- graduating firms that exceed the net worth threshold of $750,000; 

- performing timely eligibility reviews in required cases; and: 

- completing required annual reviews. 

* To help reduce inconsistencies between districts and BDS staff in 
annual review procedures requiring judgment, we recommend that SBA 
review its existing 8(a) program regulations and its proposed changes 
with the intent of providing additional criteria and examples for 
staff when assessing key areas of program eligibility and determining 
whether a firm should be graduated from the program when it exceeds 
size standards, industry averages (such as total assets, net sales, 
working capital, or pretax profit), and limits for personal 
compensation and assets, and excessive withdrawals. 

* To help address competing demands on 8(a) resources, SBA should 
assess the workload of business development specialists to ensure that 
they can carry out all their responsibilities. As part of this 
assessment, SBA should review the roles and responsibilities of the 
BDSs to minimize or mitigate to the extent possible the potentially 
conflicting roles of advocacy for firms in the program with the 
responsibility of ensuring that only eligible firms are allowed to 
continue to participate in the program. In addition, SBA should review 
the size of the 8(a) portfolio for all business development 
specialists and, if necessary, determine what mechanisms should be 
used to prioritize or redistribute their workload. 

* To reduce the practice of retaining firms that fail to submit annual 
review documentation as required, SBA should monitor the 
implementation of regulations relating to termination to see if they 
are achieving their purpose or whether business development staff need 
further guidance in interpreting the regulations. SBA should consider 
providing specific examples of what might be considered a pattern of 
failure to submit documentation as required. 

* To better manage and monitor participation in the Mentor-Protégé 
Program, including compliance with the number of allowable mentor and 
protégé firms, SBA should develop a centralized process to collect and 
maintain up-to-date and accurate data on 8(a) firms participating in 
the Mentor-Protégé Program. SBA should consider incorporating 
information on Mentor-Protégé approvals, extensions, and dissolutions 
in existing electronic data systems used for the annual review process. 

* To more fully utilize and leverage third-party complaints to 
identify potentially ineligible firms participating in the 8(a) 
program, design and implement a standard process for documenting and 
analyzing complaint data. 

Agency Comments and Our Evaluation: 

We requested SBA's comments on a draft of this report, and SBA's 
Associate Administrator of the Office of Government Contracting and 
Business Development provided written comments that are presented in 
appendix II. SBA agreed with each of the six recommendations and 
stated that some corrective measures have already been implemented and 
additional actions are planned to be implemented in the near future. 
For example, SBA stated it has implemented a comprehensive training 
curriculum, revised guidance for annual review procedures, and will 
provide additional examples that will assist staff in assessing key 
areas in making annual review determinations. SBA also indicated that 
it had begun to develop a routine centralized process to collect and 
maintain accurate data related to the Mentor-Protégé Program. Finally, 
SBA stated that it plans to assess BDS workload and develop a central 
repository for third-party complaints. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to other interested congressional committees and the Administrator of 
the Small Business Administration. The report will also be available 
at no charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your office have any questions about this report, please 
contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in appendix III. 

Sincerely yours, 

Signed by: 

William B. Shear: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Scope and Methodology: 

Our objectives were to (1) evaluate the procedures and processes that 
the Small Business Administration (SBA) has implemented to ensure that 
only eligible firms remain in the 8(a) program, and (2) assess the 
extent to which SBA used external mechanisms, such as complaints by 
other 8(a) firms, to help ensure that only eligible firms participate 
in the program. 

To evaluate the procedures and processes that SBA has implemented to 
help to ensure that only eligible firms participate in the 8(a) 
program, we reviewed applicable statutes and the legislative history 
of the 8(a) program, SBA's regulations and guidance for administering 
the program, our previous reports, and studies of the program 
conducted by SBA, SBA's Office of Inspector General (OIG), and 
external organizations. Additionally, we randomly sampled files for 
review at 5 selected district offices to assess SBA's compliance with 
its eligibility review procedures for the 8(a) and Mentor-Protégé 
programs.[Footnote 45] We selected the 5 district offices based on the 
high dollar value of contract obligations in these districts and 
geographic diversity.[Footnote 46] Our sample population included 
firms that were active in the 8(a) program in fiscal year 2008 and had 
8(a) contracts in fiscal year 2008. We identified these firms by using 
SBA's list of active fiscal year 2008 8(a) firms and matching these 
data to the Federal Procurement Data System-Next Generation (FPDS-NG) 
to determine which of those firms had obligations. For our review, we 
excluded those firms that joined the program during calendar year 
2008, because these firms would not yet have been in the program long 
enough to have an annual review on file.[Footnote 47] We also excluded 
Alaska Native Corporations, tribally owned, Native Hawaiian 
Organization-owned, other Native American-owned, and Community 
Development Corporation-owned firms because of the different 8(a) 
eligibility requirements applied to these entities. The results of our 
sample are generalizable only to the 5 district offices. We randomly 
sampled 123 8(a) firms from our population, and an additional 13 8(a) 
firms that had mentor-protégé agreements, which we judgmentally 
selected from SBA's list of Mentor-Protégé firms as of September 2009. 
[Footnote 48] For each firm, we reviewed its most recent 2 years of 
annual reviews for the period 2007-2009, and any existing mentor-
protégé agreements, related documents, and correspondence. We 
developed a data collection instrument (DCI) to collect key annual 
review data from each file. The DCI was pretested in 2 district 
offices and modified based on these tests. We also analyzed mentor-
protégé data to identify protégé firms that may have multiple mentors, 
which are against regulation, and mentor firms that may have multiple 
protégés, which is allowable only when specially authorized by SBA. To 
identify these cases, we sorted the data by firm name and searched for 
duplicate matches. A total of 672 firms met our study criteria and are 
shown in table 4. 

Table 4: Total Number of Files and Sample Sizes at Five Selected 
District Offices: 

SBA field office: Washington, D.C.; 
Number of files: 479; 
Sample size: 64. 

SBA field office: Denver; 
Number of files: 70; 
Sample size: 14. 

SBA field office: San Antonio; 
Number of files: 56; 
Sample size: 15. 

SBA field office: Massachusetts; 
Number of files: 27; 
Sample size: 15. 

SBA field office: San Francisco; 
Number of files: 40; 
Sample size: 15. 

SBA field office: Total; 
Number of files: 672; 
Sample size: 123. 

Source: GAO. 

[End of table] 

We randomly selected the indicated number of cases within each 
regional office. We treated this as a stratified random sample and 
weighted the sample cases accordingly for our analysis. Our estimates 
are statistically representative for all files maintained in these 5 
SBA regional offices. 

Because we treated our file review as a stratified random sample, we 
assumed our sample was only one of a large number that could have been 
drawn. Because each sample could have provided different estimates, we 
expressed our confidence in the precision of our particular sample's 
results as a 95 percent confidence interval. This is the interval that 
would contain the actual population value for 95 percent of the 
samples we could have drawn. As a result, we are 95 percent confident 
that each of the confidence intervals based on the file review 
includes the true values in the sample population. The 95 percent 
confidence intervals for each of the estimates are summarized in table 
5. 

Table 5: 95 Percent Confidence Intervals for Statistical Sample 
Estimates in Table 2: 

Requirement not met: Taking action when a firms exceeded industry 
averages by notifying firms that exceeded four of seven industry 
averages for 1 year; 
Estimated percentage: 26%; 
Lower endpoint of 95 percent confidence interval: 19%; 
Upper endpoint of 95 percent confidence interval: 35%. 

Requirement not met: Taking action when a firms exceeded industry 
averages by graduating or explaining retention of firms that exceeded 
four of seven industry averages for 2 consecutive years; 
Estimated percentage: 4%; 
Lower endpoint of 95 percent confidence interval: 1%; 
Upper endpoint of 95 percent confidence interval: 9%. 

Requirement not met: Taking action when a firms exceeded industry 
averages by reviewing net worth or graduating firms in which 
individuals exceeded adjusted net worth limitations; 
Estimated percentage: 7%; 
Lower endpoint of 95 percent confidence interval: 3%; 
Upper endpoint of 95 percent confidence interval: 13%. 

Requirement not met: Taking action when a firms exceeded industry 
averages by performing required eligibility reviews; 
Estimated percentage: 4%; 
Lower endpoint of 95 percent confidence interval: 1%; 
Upper endpoint of 95 percent confidence interval: 9%. 

Requirement not met: Taking action when a firms exceeded industry 
averages by completing required annual reviews; 
Estimated percentage: 2%; 
Lower endpoint of 95 percent confidence interval: 1%; 
Upper endpoint of 95 percent confidence interval: 7%. 

Requirement not met: Taking action when a firms exceeded industry 
averages by documenting supervisory reviews; 
Estimated percentage: 23%; 
Lower endpoint of 95 percent confidence interval: 15%; 
Upper endpoint of 95 percent confidence interval: 31%. 

Requirement not met: Taking action when a firms exceeded industry 
averages by imposing remedial actions or obtaining waivers for firms 
not meeting business activity targets; 
Estimated percentage: 10%; 
Lower endpoint of 95 percent confidence interval: 5%; 
Upper endpoint of 95 percent confidence interval: 17%. 

Source: GAO. 

[End of table] 

We performed appropriate data reliability procedures for our sample 
testing at the 5 district offices and analysis of inappropriate mentor-
protégé relationships. We compared SBA data with data from other 
sources such as FPDS-NG and the Central Contractor Registry, performed 
electronic testing, reviewed related documentation and internal 
controls, and performed interviews with knowledgeable agency 
officials. We determined that the data were sufficient to perform our 
sample testing and project our results to the 5 district offices in 
our population of 8(a) firms. We also determined through these methods 
that data relating to mentor-protégé participants were sufficient to 
report on descriptive statistics of mentor-protégé firms with 
contracts. The discrepancies we found in the general list of mentor-
protégé participants are documented within the report. 

To assess the extent that external mechanisms exist, such as 
complaints by other 8(a) firms, to help ensure that only eligible 
firms participate, we interviewed agency and SBA Office of Inspector 
General officials, and we reviewed SBA OIG complaint data. We also 
interviewed officials in SBA's Office of Business Development, 
Division of Program Certification and Eligibility, and district office 
staff to discuss their procedures for determining initial and 
continuing eligibility, oversight efforts, technical assistance 
offered, and mechanisms to help identify ineligible firms in the 
program. 

We conducted our work in Boston, Massachusetts; Denver, Colorado; San 
Antonio, Texas; San Francisco, California; and Washington, D.C., 
between May 2009 and March 2010 in accordance with 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 audit 
objectives. 

[End of section] 

Appendix II: Comments from the Small Business Administration: 

U.S. Small Business Administration: 
Washington, D.C. 20116: 

March 10, 2010: 

Mr. William B. Shear: 
Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Shear: 

The U.S. Small Business Administration (SBA) is pleased to provide a 
response addressing the issues outlined in your draft Government 
Accountability Office (GAO) Report Number: GA0-10-353, entitled, 
"Steps Have Been Taken to Improve Administration of the 8(a) Program, 
but Key Controls for Continued Eligibility Need Strengthening.” 

Background: 

As you are aware, the SBA's 8(a) Business Development (BD) program 
seeks to foster the business growth and development of firms deemed 
socially and economically disadvantaged and offers a number of 
programmatic benefits which include advocacy support, management, 
technical, financial, and procurement assistance. While there is a 
continual need to implement policy and procedural guidance to ensure 
proper internal controls, oversight, monitoring and compliance, SBA is 
encouraged by the significant strides that the agency has already made 
along these lines. 

SBA also recognizes that there are weaknesses and areas that require 
immediate action and implementation of corrective measures. Since the 
timeframe in which this GAO audit was conducted, the Office of 
Business Development (OBD) has already implemented (or will implement) 
corrective measures that will address all of the recommendations 
outlined in this GAO Report. 

One significant step toward addressing many of these weaknesses 
occurred in October 2009, when SBA announced in the Federal Register 
proposed regulatory revisions aimed at strengthening opportunities for 
disadvantaged small businesses to benefit from its 8(a) BD program. 
The proposed 8(a) regulation changes are the result of the first 
comprehensive review of the 8(a) BD program in a number of years. The 
rules cover a variety of areas of the program, ranging from providing 
further clarification on determining economic disadvantage to 
requirements on Joint Ventures and the Mentor-Protégé program. The 
public comment period was extended to January 28, 2010, in an effort 
to obtain comments from our broad customer base as well as other 
stakeholders. 

The 8(a) BD program has a proven track record as an effective program 
for helping socially and economically disadvantaged small businesses 
gain access to training and contracting opportunities to help them 
grow, create jobs and ultimately succeed in the marketplace upon 
leaving the program. We believe that the proposed rule changes build 
on that foundation of success, and will strengthen the program and 
maximize its benefits for eligible small businesses. 

The OBD, in conjunction with the Office of Field Operations, will be 
conducting an extensive National Training Conference in June 2010 that 
will include all of the Business Development (BD) personnel from our 
68 district offices. This National Training Conference will emphasize 
all aspects of continuing eligibility for 8(a) BD participants.
The following is SBA's response to the six recommendations made by GAO 
regarding SBA's need to improve the monitoring of and procedures used 
in assessing the continuing eligibility of firms to participate and 
benefit from the 8(a) program. Some of the responses include 
corrective measures already implemented and actions that are planned 
to be implemented in the near future. 

GAO's Recommendations For Executive Action: 

Recommendation 1: 

To help ensure greater consistency in carrying out annual review 
procedures and improve the overall quality of these reviews, we 
recommend that the SBA Administrator should monitor, and provide 
additional guidance and training to district offices on the procedures 
used to determine continuing eligibility, including: 

* taking appropriate action when firms exceed four of the seven 
industry size averages, including notifying firms the first year and 
enforcing procedures relating to early graduation of firms that exceed 
industry averages for 2 consecutive years; 

* obtaining appropriate supervisory signatures to finalize annual 
review decisions; 

* submitting remedial action or waiver for firms in the transition 
phase that did not meet business activity targets; 

* graduating firms that exceeded the net worth threshold of 5750,000; 

* performing timely eligibility reviews in required cases; and; 

* completing required annual reviews. 

SBA's Response To Recommendation 1: 

SBA agrees with the recommendation and has already begun implementing 
corrective measures. 

In an effort to ensure consistency and improve the overall quality of 
annual reviews, the OBD has implemented a comprehensive Training 
Curriculum that consists of training sessions (utilizing Ready Talk 
conferencing) for BD personnel on a variety of programmatic issues and 
topics. This training (which is recorded and archived on a share 
portal for access by BD personnel) covered the following aspects of 
the annual review process: 

* an outline of the steps involved in the annual review process; 

* procedures related to conducting a "Personal Asset Test" to include 
reviewing and analyzing financial statements; 

* the importance of financial analysis in determining business trends 
and other growth indicators; 

* excessive withdrawals of an individual 8(a) participant or an 8(a) 
firm calculating a disadvantaged individuals average two year income 
for S Corporations, Partnerships and LLC's. 

OBD revised and issued Chapter 5 "Participant Review Process" of the 
8(a) BD program Standard Operation Procedure 80 05 3 (SOP) to provide 
guidance regarding the process for obtaining appropriate supervisory 
signatures to finalize annual review decisions; conducting eligibility 
reviews, where appropriate, and the process for recommending firms for 
early graduation, where appropriate. 

The OBD conducted a training sessions for all BD personnel on October 
15 and 22, 2009, solely on newly issued Chapter 10 of the 8(a) BD 
program SOP shortly after its release. 

In addition, the OBD has issued the following procedural and policy 
guidance to ensure uniformity as it relates to annual review 
processing: 

* SBA Information Notice (issued 5/15/09), "8(a) Business Development 
Program Application and Continuing Eligibility Processing" 

* SBA Procedural Notice (issued 11/18/08), "Oversight of 8(a) Program 
Participants" 

We will evaluate the guidance outlined in the newly revised Chapter 10 
(Leaving the 8(a) Business Development Program) of the 8(a) SOP 
concerning procedures related to early graduation of firms that exceed 
industry averages for two consecutive years and take appropriate 
action, where necessary. 

Recommendation 2: 

To help reduce inconsistencies between districts and BDS staff in 
annual review procedures requiring judgment, we recommend that SBA 
review its existing 8(a) program regulations and its proposed changes 
with the intent of providing additional criteria and examples for 
staff when assessing key areas of program eligibility and determining 
whether a firm should be graduated from the program when it exceeds 
size standards, industry averages (such as total assets, net sales, 
working capital, pre-tax profit), and limits for personal compensation 
and assets, and excessive withdrawals. 

SBA'S Response To Recommendation 2: SBA agrees with this recommendation.
We will continue to conduct training on this topic as well as revise 
the applicable sections of the 8(a) BD SOP to provide examples that 
will assist staff in assessing key areas and making determinations — 
after analyzing a myriad of factors that include taking into 
consideration that the 8(a) Program is a business development program 
as to whether or not early graduation is appropriate. 

Recommendation 3: 

To help address competing demands on 8(a) resources, SBA should assess 
the workload of business development specialists to ensure that they 
can carry out all their responsibilities. As part of this assessment, 
SBA should review the roles and responsibilities of the BDS to 
minimize or mitigate to the extent possible the potentially 
conflicting roles of advocacy for firms in the program with the 
responsibility of ensuring that only eligible firms are allowed to 
continue to participate in the program, In addition, SBA should review 
the size of the 8(a) portfolio for all business development 
specialists and, if necessary, determine what mechanisms should be 
used to prioritize or redistribute their workload. 

SBA's Response To Recommendation 3: 

SBA agrees with this recommendation. 

SBA's OFO will assess the workload of BDSs to review roles and 
responsibilities and evaluate staffing levels. 

A key component of SBA's mission is advocacy support on behalf() of 
small businesses. To that end, 8(a) BD program participants are small 
businesses first and foremost, who happen to have an additional tool 
(8(a) certification) to increase their competitive viability in the 
Federal marketplace. These 8(a) BD program participants often require 
advocacy support as well as individual business counseling assistance. 
The BDS is the primary individual responsible for servicing an 8(a)130 
program participant during its nine year term and as such, cultivates 
a business and professional relationship with that 8(a) BD program 
participant. There are often occasions where the BDS works with the 
8(a) BD program participant to recommend technical assistance and as a 
result of that technical assistance, the participant (who may not have 
met its business activity target) will be able to obtain a non-8(a) 
contract award and; thereby meet the required business activity 
target. Because the 8(a) BD program is a business development program, 
the BDS must evaluate and assess the totality of the circumstance and 
in some cases, make a judgment call. 

Recommendation 4: 

To reduce the practice of retaining firms that fail to submit annual 
review documentation as required, SBA should monitor the 
implementation of regulations relating to termination to see if they 
are achieving their purpose or whether business development staff 
needs further guidance in interpreting the regulations. SBA should 
consider providing specific examples of what might be considered a 
pattern of failure to submit documentation as required. 

SBA's Response To Recommendation 4: 

SBA agrees with this recommendation. 

SBA will continue to conduct training on the annual review and 
termination actions reinforcing the requirements of the regulations 
and the guidance provided in Chapters 5 and 10 of the 8(a) SOP whereby 
a pattern of failure (repeated failures to respond to SBA's requests 
for required submissions or responses in a timely manner) is 
established. 

Recommendation 5: 

To better manage and monitor participation in the Mentor-Protegé 
Program, including compliance with the number of allowable mentors and 
protege firms, SBA should develop a centralized process to collect and 
maintain up-to-date and accurate data on 8(a) firms participating in 
the Mentor-Protégé Program. 

SBA's Response To Recommendation 5: 

SBA agrees with this recommendation. 

The OBD has already begun to develop a routine centralized process to 
collect and maintain accurate data related to 8(a) BD program 
participants in the Mentor-Protégé Program. We are developing a 
Procedural Notice that will be issued to the BD field staff outlining 
this process. 

Recommendation 6: 

To more fully utilize and leverage third-party complaints to identify 
potentially ineligible firms participating in the 8(a) program, design 
and implement a standard process for documenting and analyzing 
complaint data. 

SBA's Response To Recommendation 6: 

SBA agrees with this recommendation. 

We will work with the Office of General Counsel to develop a central 
repository for third-party complaints that will be accessible on the 
agency's homepage to provide a centralized location for such 
complaints. SBA will then maintain this data for follow-up and 
appropriate action, as necessary. 

Again, thank you for the opportunity to provide comments on this draft 
GAO Report. My staff and I look forward to working with you in 
resolving the issues outlined in this draft GAO Report as we seek to 
strengthen the SBA's 8(a) BD program. 

If you have additional questions or comments, please contact me 
directly. 

Signed by: 

Joseph G. Jordan: 
Associate Administrator: 
Office of Government Contracting and Business Development: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

William B. Shear, (202) 512-8678 or shearw@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Harry Medina (Assistant 
Director), Carl Barden, Tania Calhoun, Janet Fong, Cindy Gilbert, 
Julia Kennon, Amy Moran Lowe, Barbara Roesmann, Verginie Tarpinian, 
and William Woods made key contributions to this report. 

[End of section] 

Footnotes: 

[1] Section 8(a) authorizes SBA to enter into contracts with 
government agencies and to, in turn, contract with qualified 8(a) 
firms for the performance of its requirements. SBA enters into 
partnership agreements with government agencies that delegate its 
contracting functions to the agencies and establish the basic 
procedures for expediting the award of 8(a) contract requirements. 

[2] GAO, HUBZone Program: SBA's Control Weaknesses Exposed the 
Government to Fraud and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-08-964T] (Washington, D.C.: July 17, 
2008), and Small Business Administration: Additional Actions Are 
Needed to Certify and Monitor HUBZone Businesses and Assess Program 
Results, [hyperlink, http://www.gao.gov/products/GAO-08-975T] 
(Washington, D.C.: July 17, 2008). In the HUBZone program, certain 
small businesses located in economically distressed communities 
(Historically Underutilized Business Zones) may be eligible for set-
aside and sole-source contracts. 

[3] GAO, Small Business Administration: Agency Should Assess Resources 
Devoted to Contracting and Improve Several Processes in the 8(a) 
Program, [hyperlink, http://www.gao.gov/products/GAO-09-16] 
(Washington, D.C.: Nov. 21, 2008). 

[4] In addition to the 13 8(a) firms with mentor-protégé arrangements, 
another 7 firms in our sample of 123 had mentor-protégé agreements on 
file. 

[5] Competitively awarded contracts can be set aside for 8(a) firms if 
there is a reasonable expectation that at least two 8(a) firms will 
submit offers and the award can be made at a fair price. Sole-source 
contracts can be awarded when the dollar thresholds are $5.5 million 
or less for acquisitions involving manufacturing and $3.5 million or 
less for all other acquisitions. 

[6] Under the program, the mentor and protégé may operate a joint 
venture as a small business for any government contract. 

[7] Through the 7(j) Management and Technical Assistance Program, SBA 
provides qualifying businesses with counseling and training in the 
areas of financing, business development, management, accounting, 
bookkeeping, marketing, and other small business operating concerns. 
The 7(j) program by its terms applies to 8(a) firms. 

[8] Pub. L. No. 100-656, §209, 102 Stat. 3853, 3863 (1988), codified 
at 15 U.S.C. §637 (a)(6)(B). The requirement to complete annual 
reviews of all program participants, along with other provisions in 
the law, was intended to prevent ineligible firms from participating 
in the program. 

[9] [hyperlink, http://www.gao.gov/products/GAO-09-16]. 

[10] Criteria for our selection of five district offices (Boston, 
Massachusetts; Denver, Colorado; San Antonio, Texas; San Francisco, 
California; and Washington, D.C.) included the dollar amount of 
contract obligations in the districts and geographic diversity. See 
appendix I for more information on our scope and methodology. 

[11] Because these estimates are based on a probability sample, they 
are subject to sampling error. The 95 percent confidence interval for 
SBA not complying with one or more annual review procedures is (46, 
64) percent of all the cases in the five offices. 

[12] The corresponding 95 percent confidence intervals for these 
estimates are (19, 35) and (1, 9). 

[13] The 95 percent confidence interval for this estimate is (3, 13). 

[14] GAO, 8(a) Program: Fourteen Ineligible Firms Received $325 
Million in Sole Source and Set-aside Contracts, [hyperlink, 
http://www.gao.gov/products/GAO-10-425] (Washington, D.C.: March 30, 
2010). 

[15] The 95 percent confidence interval for this estimate is (1, 9). 

[16] Upon receipt of specific and credible information alleging that a 
participant no longer meets the eligibility requirements for continued 
program eligibility, SBA will review the concern's eligibility for 
continued participation in the program. As part of an annual review, 
each participant must certify that it meets the eligibility 
requirements and that there have been no changed circumstances that 
could adversely affect its eligibility, and may be required to submit 
supporting documentation. 

[17] The 95 percent confidence interval for this estimate is (1, 7). 

[18] We identified one case in another district office without the 
required supervisory signature. 

[19] The 95 percent confidence interval for this estimate is (15, 31). 

[20] Applications to the Mentor-Protégé Program are time-sensitive and 
therefore are prioritized above annual reviews. We discuss additional 
workload constraints in greater detail later in this report. 

[21] The business activity targets require a certain ratio of revenues 
from 8(a) versus non-8(a) contracts, depending on how many years the 
firm has been in the program. The 95 percent confidence interval for 
this estimate is (5, 17). 

[22] [hyperlink, http://www.gao.gov/products/GAO-10-425]. 

[23] The 95 percent confidence interval for this estimate is (11, 25). 

[24] This includes both 8(a) and non-8(a) contracts. 

[25] [hyperlink, http://www.gao.gov/products/GAO-10-425]. 

[26] SBA, Small Business Size Regulations; 8(a) Business Development/ 
Small Disadvantaged Business Status Determinations, 74 Fed. Reg. 55694 
(proposed Oct. 28, 2009) (to be codified at 13 C.F.R. pts. 121 and 
124). The public comment period for the proposed regulations ended on 
January 28, 2010, and, according to an SBA official, the regulations 
are expected to be finalized by the end of fiscal year 2010. 

[27] Annual review documents are due each year, 30 days after a firm's 
certification date, and BDSs are required to complete the review 
within 30 days after receiving all required documentation. However, 
our file review of 123 8(a) firms found about 49 percent of the firms 
submitted documentation late. The corresponding 95 percent confidence 
interval for this estimate is (40, 57). 

[28] About 50 percent of the firms listed on the 8(a) participant list 
for fiscal year 2008 had active contracts, which include any contract 
having a modification in fiscal year 2008 even if those modifications 
were non-monetary. 

[29] [hyperlink, http://www.gao.gov/products/GAO-09-16]. 

[30] [hyperlink, http://www.gao.gov/products/GAO-09-16]. 

[31] According to 8(a) regulations, SBA may, but is not required to, 
terminate a firm for good cause, one example of which is a "pattern of 
failure" to make required submissions in a timely manner. 13 C.F.R. § 
124.303(a)(7). 

[32] The corresponding 95 percent confidence intervals for these 
estimates are (52, 69) and (1, 8), respectively. 

[33] SBA may suspend a participant when it is determined that 
suspension is needed to protect the interests of the federal 
government, such as cases in which information showing a clear lack of 
program eligibility or conduct indicating a lack of business integrity 
exists. This includes cases in which the firm or one of its principals 
submitted false statements to the government, including false 
information in its 8(a) application. The criteria that make an 8(a) 
firm eligible for termination are not the same as the causes for 
suspension. See 13 C.F.R. § 124.303 and Federal Acquisition Regulation 
§ 9.407-2. 

[34] [hyperlink, http://www.gao.gov/products/GAO-10-425]. 

[35] Effective from September 2009, termination proceedings may last 
approximately 135 days from the firm's anniversary date, including the 
time the firm is allowed to appeal its case to OHA. 

[36] [hyperlink, http://www.gao.gov/products/GAO-09-16]. 

[37] SBA Standard Operating Procedures 80 05 3B, effective September 
22, 2009. 

[38] 13 C.F.R. § 124.303(a)(7). 

[39] SBA, Small Business Size Regulations; 8(a) Business Development/ 
Small Disadvantaged Business Status Determinations, 74 Fed. Reg. 
55694, 55707 (proposed Oct. 28, 2009) (to be codified at 13 C.F.R Pt. 
121 and 124). 

[40] 74 Fed. Reg. 55694, 55708. 

[41] 13 C.F.R. § 124.520(c)(3). 

[42] Excludes Alaska Native Corporations, Native Hawaiian 
Organizations, tribally owned firms, and firms owned by Community 
Development Corporations. 

[43] SBA officials stated that there was a great deal of "self- 
policing" in the program, since firms were aware of which competitor 
has received contracts. 

[44] [hyperlink, http://www.gao.gov/products/GAO-10-425]. 

[45] The 8(a) program is managed from 68 district offices, each one 
containing the paper documents we wanted to evaluate. Because our 
compliance review required a site visit to a district office to review 
the file documents for a particular firm, we narrowed the scope of our 
review down to 5 district offices: Washington, D.C., San Antonio, 
Denver, Massachusetts, and San Francisco SBA district offices. 

[46] The 5 districts we selected represented 29 percent (or 672) of 
all active fiscal year 2008 8(a) firms with contracts and 37 percent 
(or about $2 billion) of the contracting obligation dollars. 

[47] SBA is required by statute to conduct annual reviews to monitor 
continuing eligibility of 8(a) firms. These reviews begin 1 year after 
the firm's certification date. 

[48] In addition to the 13 8(a) firms with mentor-protégé 
arrangements, another 7 firms in our sample of 123 had mentor-protégé 
agreements on file. 

[End of section] 

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