This is the accessible text file for GAO report number GAO-12-152R entitled 'Service-Disabled Veteran-Owned Small Business Program: Additional Improvements to Fraud Prevention Controls Are Needed' which was released on November 30, 2011. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. GAO-12-152R: October 26, 2011: The Honorable Marlin A. Stutzman: Chairman: The Honorable Bruce L. Braley: Ranking Member: Subcommittee on Economic Opportunity: Committee on Veterans' Affairs: House of Representatives: The Honorable Bill Johnson: Chairman: The Honorable Joe Donnelly: Ranking Member: Subcommittee on Oversight and Investigations: Committee on Veterans' Affairs: House of Representatives: Subject: Service-Disabled Veteran-Owned Small Business Program: Additional Improvements to Fraud Prevention Controls Are Needed: This report formally transmits the briefing held with your staff on October 20, 2011 in response to a request from your subcommittees to evaluate the design of the Department of Veterans Affairs (VA) fraud prevention controls within the Service-Disabled Veteran-Owned Small Business (SDVOSB) verification program instituted in response to Public Law 111-275. (See enclosure for the briefing slides.) This work is part of our ongoing audit of the SDVOSB program governmentwide, which, in part, assesses the design of the three areas of a fraud prevention framework including preventive controls, detection and monitoring controls, and investigations and prosecutions. We will report the results of the larger audit at a later date. To conduct this work, we reviewed VA materials, including verification process guidelines, internal control policies, and Office of Inspector General (OIG) report, and interviewed VA officials. With the exception of undercover tests to assess initial screening controls of VA's verification process, we did not test the effectiveness of VA's fraud prevention controls or attempt to project the extent of fraud and abuse. In summary, VA's fraud prevention controls for the SDVOSB program have improved since Public Law 111-275 was enacted including steps taken since your July 28, 2011 hearing; however, further enhancements would help to reduce the program's vulnerability to fraud, waste, and abuse. VA has made progress in implementing a valid verification program with preventive controls to deter ineligible firms from attempting to become verified. VA enhanced deterrents and developed controls to identify firms in its VetBiz database that did not meet SDVOSB eligibility requirements, resulting, according to VA, in over 1,800 ineligible firms being denied SDVOSB verification. However, even with the control enhancements, program weaknesses and vulnerabilities remain. While improvements in preventive controls have been significant, progress has been limited in the areas of detection and monitoring and investigations and prosecutions. VA's monitoring and detection efforts, which now include status protests and announced site visits, lacked periodic compliance reviews and formal processes for unannounced site visits. Moreover, while VA established a debarment committee and is conducting ongoing investigations of suspicious firms, it does not yet have specific criteria in place to implement legislation requiring debarment actions for firms that misrepresent their SDVOSB eligibility. Thus there has been limited actual debarment action against firms found to have misrepresented their SDVOSB status. To address identified vulnerabilities, we recommend that VA take 13 actions in the three areas of the fraud prevention framework-- preventive controls, detection and monitoring, and investigations and prosecutions--to provide reasonable assurance that the contracting opportunities meant for our nation's service-disabled veteran entrepreneurs make it to the intended beneficiaries. Our recommendations are on pages 26 to 28 of the enclosure. In commenting orally on a draft of this briefing provided to VA on October 13, 2011, VA's Executive Director of Small and Veteran Business Programs generally concurred with our recommendations. The Executive Director noted a number of significant additional actions planned and taken since the time of our site visits and in response to our ongoing discussions of our findings during the course of our work which, according to VA, address many of the identified vulnerabilities. For example, VA stated that it had formalized many processes related to referral of cases to OIG and debarment officials, and formalized processes for unannounced site visits to high-risk firms. VA also outlined actions that if substantiated by GAO, should address many of our recommendations. As part of our ongoing work, we will attempt to validate actions taken by VA to improve the design of its controls. A summary of VA's oral comments are included on pages 29 to 33 of the enclosure. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of this briefing until 30 days from the report date. At that time, we will send copies to the Secretary of Veterans Affairs, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at [hyperlink, http://www.gao.gov]. If you or your staff have questions concerning this report, please contact me at (202) 512-6722 or kutzg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Gregory D. Kutz: Director: Forensic Audits and Investigative Service: Enclosure: [End of section] Briefing for the Subcommittees on Economic Opportunity and Oversight and Investigations, Committee on Veterans' Affairs, House of Representatives: Service-Disabled Veteran-Owned Small Business Program: Additional Improvements to Fraud Prevention Controls Are Needed: October 20, 2011: Contents: * Introduction: * Objective: * Scope and Methodology: * Background: GAO's Fraud Prevention Framework: * Summary: Program Improvements and Vulnerabilities: * Conclusions: * Recommendations for Executive Action: * Agency Comments and Our Evaluation: * Related GAO Products: Introduction: The SDVOSB Program: * Provides federal contracting opportunities for qualified firms. * Awarded $10.8 billion in federal contracts governmentwide in fiscal year 2010, according to the Small Business Administration (SBA). * Awarded $3.2 billion in Veterans Affairs (VA) contracts in fiscal year 2010. * Includes more than15,000 self-certified Service-Disabled Veteran- Owned Small Businesses (SDVOSB) in Central Contractor Registration (CCR). * Includes more than 5,000 verified firms in VA's VetBiz Vendor Information Pages as of October 2011 2006 Legislation: * The Veterans Benefits, Heath Care, and Information Technology Act of 2006 (P.L. 109-461) required VA to: - Maintain a database of SDVOSBs and Veteran-Owned Small Businesses (VOSB); - Use SDVOSB and VOSB set-aside and sole-source award authority only for SDVOSB and VOSB firms listed in the database; - Debar for a reasonable period of time, as determined by VA, firms that misrepresent SDVOSB and VOSB status. Prior GAO Work[A]: * Ineligible firms received about $100 million in SDVOSB contracts because of a lack of effective fraud prevention program (October 2009 - May 2010): - Other than for VA's, no governmentwide controls to validate a firm's eligibility; - No validation of self-certified information; - The absence of continued monitoring of firm eligibility; - Ineffective process of investigations and prosecutions; * VA made limited progress enacting an effective verification program (May 2010): - In fiscal year 2009, according to VA, 25 percent of the contracts VA awarded using veteran preference authorities went to verified businesses; - As of May 2010, VA had verified about 2,900 businesses--14 percent of businesses in its mandated database of VOSBs and SDVOSBs; - Weaknesses in VA's verification program included files missing required information, files missing explanations of how staff determined that control and ownership requirements had been met, and no guidance for referring cases of misrepresentation for investigation and enforcement actions. [A] See Related GAO products at the end of this briefing. VA Office of Inspector General Report[B]: * Evaluated VA's oversight of VOSB and SDVOSB programs under verification processes required by P.L. 109-461; * Found that VA awarded ineligible firms at least 1,400 contracts worth $500 million a year; * Projected that VA will award $2.5 billion to ineligible firms from 2011 through 2015 without strengthening oversight and verification; * Recommended comprehensive program controls to help VA effectively administer the programs and meet federal and VA regulations. [B] VA Office of Inspector General, Office of Audits and Evaluations, Department of Veteran Affairs: Audit of Veteran-Owned and Service- Disabled Veteran-Owned Small Business Programs, Office of Audits and Evaluations, 10-02436-234 (July 25, 2011). Recent Legislation: * The Veterans Small Business Verification Act (section 104 of P.L. 111-275) required VA to: - Verify firm eligibility; - Request additional documentation substantiating veteran ownership and control of a firm. * The Small Business Jobs Act of 2010 (P.L. 111-240) facilitates prosecution of firms that willfully seek and receive small business awards through misrepresentation of their status, including SDVOSBs. [End of Introduction] Objective: GAO was asked to evaluate the design of VA's fraud prevention controls within the SDVSOB verification program, including recent VetBiz verification efforts, instituted in response to P.L. 111-275 Scope and Methodology: * Reviewed applicable materials: - GAO, Internal Control: Standards for Internal Control in the Federal Government, [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: November 1999); - GAO, Service-Disabled Veteran-Owned Small Business Program: Fraud Prevention Controls Needed to Improve Program Integrity, [hyperlink, http://www.gao.gov/products/GAO-10-740T] (Washington, D.C.: May 24, 2010); - Information provided by VA in response to recommendations in GAO, Department of Veterans Affairs: Agency Has Exceeded Contracting Goals for Veteran-Owned Small Businesses, but It Faces Challenges with Its Verification Program, [hyperlink, http://www.gao.gov/products/GA0-10-458] (Washington, D.C.: May 28, 2010); * Reviewed VA's Verification Process Guidelines; * Interviewed VA officials in July 2011 and reviewed related documents; * Reviewed selected VA internal control policies; * Reviewed recent VA Inspector General (01G) report; * Conducted undercover tests to assess initial screening controls of an individual's service-disabled veteran status within VA's verification process. * Our assessment is part of an ongoing review of fraud prevention controls for the entire SDVOSB program. This briefing focuses on the design of VA's SDVOSB verification controls within its Center for Veterans Enterprise (CVE) office. With the exception of undercover tests to assess initial screening controls, we did not test the effectiveness of VA's fraud prevention controls or attempt to project the extent of fraud and abuse. * We conducted this performance audit from July 2011 to October 2011 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: GAO's Fraud Prevention Framework: Refer to PDF for image: illustration] Lessons learned influence future use of preventive controls: Potential fraud, waste, and abuse: Preventive controls applied; Potential fraud, waste, and abuse (smaller amount): Detection and monitoring; Potential fraud (smaller amount): Investigation and prosecutions. [End of figure] The fraud prevention framework provides an overview of how preventive controls would help screen out ineligible firms, and how monitoring controls and prosecutions can help further minimize the extent to which a program is vulnerable to fraud as described in previous GAO work, [hyperlink, http://www.gao.gov/products/GAO-10-740T]. Summary: Program Improvements and Vulnerabilities: * VA's fraud prevention controls for the SDVOSB program have improved since P.L. 111-275 was enacted, but further enhancements could do more to reduce the program's vulnerability in three areas: - Preventive controls; - Detection and monitoring; - Investigation and prosecution. We are making recommendations to improve fraud prevention controls in the areas of prevention, detection and monitoring, and investigations. In response to our findings and recommendations, VA generally concurred with our recommendations. In addition, VA outlined actions recently taken and planned in the future that, if substantiated, should address many of our identified vulnerabilities and related recommendations for improvement. Preventive Controls: Criteria: Preventive controls are a key element of GAO's fraud prevention framework and Standards for Internal Control in the Federal Government. These controls limit unauthorized access to program resources through front-end controls to prevent ineligible firms from being verified for program participation. Such controls include the following: * Competent personnel assigned to eligibility reviews; * Training on fraud awareness and prevention; * Verification of self reported information; * Coordination between agencies with key pieces of information. Once contracts are awarded to ineligible contractors, recovery is uncertain and eligible firms lose the opportunity to receive the contract. Preventive Controls: Deterrents Enhanced: VA enhanced deterrents to ineligible firms becoming verified through VetBiz after P.L. 111-275: * Established verification guidelines; * Hired more CVE staff to conduct initial file reviews and site visits; * Created a quality control team to inspect a subset of initial file examination decisions; * Developed a risk assessment model for examining applications; * Updated data systems to reduce manual data entries; * Verified service-disabled veteran status in VA's systems: - Allowed VA to prevent two fictitious ineligible SDVOSB applications submitted by GAO from being verified; * Conducted announced site visits at high-risk firms before approval; * Searched exact names for company and principal owners in the Excluded Parties List System (EPLS); * According to VA, denied over 1,800 firms under new verification guidelines. Preventive Controls: Vulnerabilities Remain: Even with enhancements, program weakness and vulnerabilities remain: * No evaluation of CVE staff experience to assess whether appropriate personnel are available to perform application reviews; * No fraud awareness training for CVE staff and VA contracting officials; * No VetBiz training for VA contracting officials to provide reasonable assurance that SDVOSB contracts are awarded only to verified firms; * No checks for minority partners in EPLS searches; * No procedures for reusing information on SDVOSB firms and related parties that had applied for VetBiz verification but failed to pass the verification process to prevent individuals and fraudulent companies from repeated attempts at breaching VA controls; * No formalized process for selecting high-risk companies for unannounced site visits; * No mechanism for validating information with Internal Revenue Service (IRS) records to assess integrity of self-reported information; * No formal procedures and criteria for referring cases to VA OIG for further investigation, including those of applicants who appear to be acting fraudulently, withdraw their application after being informed of site visits or further scrutiny, or misrepresent their SDVOSB status; * No sharing or publishing status protest decisions; * No request for denied companies to reassess their self-certified SDVOSB status in CCR; * No formalized procedures for considering prior SBA status protest decisions when evaluating SDVOSB applications. Detection and Monitoring: Criteria: Detection and monitoring activities are discussed in GAO's Standards for Internal Control in the Federal Government. These activities must involve active and continual monitoring to encourage continued compliance with program guidelines and continued firm eligibility. Methods of fraud and abuse identified during monitoring can be used to prevent future fraud and abuse. Specific detection and monitoring guidelines for the SDVOSB program include: * Periodic reviews of SDVOSB firm program eligibility; * Data mining of contracts to determine compliance with North American Industry Classification System (NAICS) size standards; * Data mining of contract awards to identify suspicious contract awards compared to firms' types of business; * Unannounced site visits to contract performance locations and discussions with VA contracting officials. Detection and Monitoring: Controls Enhanced: VA developed some controls that may help identify firms in the VetBiz- verified database that do not meet SDVOSB eligibility requirements: * Reverification initiative designed to review previously verified SDVOSB firms under new P.L. 111-275 controls; * Protest process allows interested parties to protest firm status; * Random announced site visits of verified SDVOSB firms are conducted. Detection and Monitoring: Vulnerabilities Remain: Even with enhanced controls, certain weaknesses and vulnerabilities remain because of VA's focus on initial eligibility verification: * No periodic reviews of monitoring firm's compliance with NAICS size standards; * No contact with contracting officials to determine whether required percentage of work on SDVOSB contracts was performed; * No systematic data mining of existing contract awards for review and possible further inspection; * No formalized process for selecting companies for unannounced site visits to contract performance locations and interviews with contracting officials; * No formalized process for selecting verified companies for unannounced site visits to determine if the verification process is effective. Investigations and Prosecutions: Criteria: Investigations and prosecutions are the final elements of a comprehensive fraud prevention framework. Those elements use the lessons learned from investigations and prosecutions to strengthen controls earlier in the process and improve the overall fraud prevention framework. The Veterans Benefits, Health Care, and Information Technology Act of 2006 requires that any business determined to have misrepresented its status as an SDVOSB shall be debarred from contracting for a reasonable period of time. The Small Business Jobs Act of 2010 facilitates prosecution of companies that willfully seek and receive small business awards through misrepresentation of their status, including SDVOSBs. GAO's fraud prevention framework and Standards for Internal Controls in the Federal Government encourage agencies to respond to identified abuse by: * Referring serious matters to appropriate officials; * Maximizing the deterrent value of successful prosecutions and debarments. Investigations and Prosecutions: Debarments and Investigations Initiated: Some actions have been taken to debar firms violating SDVOSB program requirements, which should protect the government's interest and help discourage ineligible firms from abusing the SDVOSB program. These include: * Institution of VA Debarment Committee in September 2010, established to debar firms violating SDVOSB regulations; * As of October 2011, one debarment of a firm and related individuals that have misrepresented their status as an SDVSOB as required, for a reasonable period of time, by P.L. 109-461; * Several other debarment actions pending or currently being litigated; * Approximately 70 referrals by CVE officials to VA OIG of potentially fraudulent actions taken by firms receiving SDVOSB contracts; * Ongoing investigations of suspicious SDVOSB firms. Investigations and Prosecutions: Vulnerabilities Remain: Even with enhanced actions to debar ineligible firms, certain weaknesses and vulnerabilities identified in the investigation and prosecution controls include: * Minimal actual debarment of firms and related individuals for misrepresentation of eligibility; * No specific criteria or guidelines documenting how VA is implementing debarments for a reasonable period of time for misrepresentations as required by P.L. 109-461; * No specific procedures for referring companies to the Debarment Committee and VA OIG from CVE; * No specific procedures outlining the Debarment Committee's decision process; * No policies for terminating contracts with ineligible firms (decisions are made on case-by-case basis); * No advertising of suspensions, debarments, or prosecutions of firms misrepresenting themselves as SDVOSBs to deter future fraud. Conclusions: VA has made progress in implementing a valid verification program to deter ineligible firms from attempting to become verified and receiving SDVSOB contracts rather than eligible firms. However, additional opportunities exist to make improvements, particularly in monitoring, detection, investigations and prosecutions. VA does not have a process in place to implement specific legislation requiring debarment actions for firms that misrepresent their eligibility for the SDVOSB program, and VA has had limited success to date in pursuing debarment actions against firms found to have misrepresented their eligibility for the program. With a comprehensive framework in place, VA can be more confident that the billions of dollars meant to provide VA contracting opportunities to our nation's service-disabled veteran entrepreneurs make it to the intended beneficiaries. Recommendations for Executive Action: To minimize the risk of fraud and abuse within VA's SDVOSB program, we recommend that the Secretary of Veterans Affairs take the following 13 actions in three areas: * Improve VA's preventive controls to provide reasonable assurance that only eligible firms gain access to the VetBiz database. For Example: - Provide regular fraud awareness training to CVE and VA contracting personnel; - Provide additional guidance and training to the VA contracting personnel on the use of the VetBiz website so that SDVOSB contracts are only awarded to verified firms; - Establish formal procedures for VA staff to refer suspicious applications to the OIG and provide guidance on what type of cases to refer to the OIG; - Explore the feasibility of validating applicants' information with third parties, for example, requesting consent from SDVOSB applicants to validate tax information with the IRS to assess the accuracy of the information provided; - Formalize a process for conducting unannounced site visits to firms identified as high risk during the verification process. * Strengthen VA's detection and monitoring controls on verified SDVOSB firms. For Example: - Develop and implement procedures for conducting unannounced site visits to contract performance locations and interviews with contracting officials to better assess whether verified companies comply with program rules after verification; - Develop and implement a process for unannounced site visits to verified companies' offices to obtain greater effectiveness and consistency in the verification program; - Develop procedures for risk-based periodic reviews of verified firms receiving contracts to assess compliance with NAICS size standards and SDVOSB program rules. * Strengthen VA's investigative and prosecutorial actions for firms violating SDVOSB program laws and regulations. For Example: - Develop and implement specific processes and criteria for the Debarment Committee on compliance with the requirement in P.L. 109461 to debar, for a reasonable period of time, firms and related parties that misrepresent their SDVOSB status; - Develop and implement specific procedures and criteria for staff to make referrals to VA's Debarment Committee and VA's OIG as a result of misrepresentations identified during initial verification and periodic reviews; - Develop specific guidelines outlining the Debarment Committee's decision process to debar firms that misrepresent their SDVOSB status; - Develop procedures on removing SDVOSB contracts from ineligible firms; - Formalize procedures to advertise debarments and prosecutions. Agency Comments and Our Evaluation: We requested comments on a draft of this product from the Secretary of Veterans Affairs. On October 13, 2011, VA's Executive Director of Small and Veteran Business Programs provided us with comments. VA generally concurred with our recommendations and noted a number of significant actions planned and/or taken since the time of our site visits and development of our findings which, according to VA, address many of the identified vulnerabilities. As part of this review, we have not substantiated actions reported by VA, but we plan to review the status of each reported action as part of our ongoing work. According to VA officials, VA has recently made improvements of VA's preventive controls. For Example: * Certified Fraud Examiner training is now required of CVE staff and most contractors assisting with application evaluation. Additionally, approximately 500 contracting officials have received VetBiz training; * VA established formal procedures to refer to the VA OIG SDVOSB applicants that provide a false statement or withheld material information; * VA established a process for checking minority owner information in EPLS; * VA established protocol for high risk applicants to automatically receive an unannounced site visit. According to VA officials, VA has recently strengthened the agency's monitoring and detection of verified SDVOSB firms. For Example: * Announced site visits by VA officials assisted by contractors to determine percentage of work completed on SDVOSB contracts; * Unannounced visits to verified companies either randomly, or during the course of a high risk SDVOSB's reverification assessment; * Evaluation of firms applying for VetBiz verification for compliance of NAICS codes, and consideration of NAICS size standards for contracts by VA contracting officials. According to VA officials, VA recently strengthened the investigative and prosecutorial actions for firms violating SDVOSB program laws and regulations. For example: * Created guidelines for CVE staff to refer firms misrepresenting their status to the Debarment Committee and VA 01G. Instructions for referrals made from outside CVE made public on Debarment Committee's website; * Formalized Debarment Committee's processes, criteria, and decision process and made information publicly available; * Published firm and associate names proposed for debarment or currently debarred on the Debarment Committee's website and released information to the acquisition community. VA officials stated that progress is being made regarding investigations and prosecutions, however: * Resource constraints on the Debarment Committee limit the number of actions that may be taken due to the timeliness of the due process considerations; * The Debarment Committee has been established for only 13 months and the due process considerations take considerable time; * VA focuses investigative and debarment activities on willfully misrepresenting firms. Appendix: Related GAO Products: Service-Disabled Veteran-Owned Small Business Program: Preliminary Information on Actions Taken by Agencies to Address Fraud and Abuse and Remaining Vulnerabilities. [hyperlink, http://www.gao.gov/products/GAO-11-589T]. Washington, D.C.: July 28, 2011. Department of Veterans Affairs: Agency Has Exceeded Contracting Goals for Veteran-Owned Small Businesses, but It Faces Challenges with Its Verification Program. [hyperlink, http://www.gao.gov/products/GA0-10-458]. Washington, D.C.: May 28, 2010. Service-Disabled Veteran-Owned Small Business Program: Fraud Prevention Controls Needed to Improve Program Integrity. [hyperlink, http://www.gao.gov/products/GAO-10-740T]. Washington, D.C.: May 24, 2010. Service-Disabled Veteran-Owned Small Business Program: Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts. [hyperlink, http://www.gao.gov/products/GAO-10-306T]. Washington, D.C.: December 16, 2009. Service-Disabled Veteran-Owned Small Business Program: Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts. [hyperlink, http://www.gao.gov/products/GAO-10-255T]. Washington, D.C.: November 19, 2009. Service-Disabled Veteran-Owned Small Business Program: Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts. [hyperlink, http://www.gao.gov/products/GA0-10-108]. Washington, D.C.: October 23, 2009. 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