SBA Improperly Spent Millions, Audit Reveals

An audit of the Small Business Administration’s program to certify the minority status of federal contractors revealed Friday that nearly half its spending may have been improper, a finding that could seriously damage the already-troubled minority business program.

The misappropriated funds went in part to build offices and buy equipment never used by the program and to fund other SBA activities already covered by the agency’s budget, according to the audit by the Office of Inspector General.

The program was designed to certify disadvantaged businesses so they can qualify for minority contracting benefits through other federal agencies. The SBA spent $22 million from 19 federal agencies on the nascent program over the last two years, but it has certified only about 3,100 companies nationwide--a tenth of the number it anticipated.

Auditors examined a sample of $13.2 million and found $6.2 million suspect, indicating that the program has not only fallen far short of its goals but misused public funds in the process.

SBA officials said the agency worked closely with investigators and has implemented financial controls to prevent future problems. The SBA plans to repay the federal agencies out of its general budget by the end of the month, said James C. Ballentine, SBA associate deputy administrator for government contracting and minority enterprise development.

The money was mistakenly spent on other minority business programs, as well as on excessive equipment and staff, Ballentine acknowledged.

“When we started up, we should have used some funds a little more carefully,” he said. “While you don’t want mistakes to be made, they happen, and you put the corrective actions in place and move forward.”

The certification initiative was designed to weed out potential fraud in federal minority contracting programs, which until last year allowed companies to self-certify as disadvantaged by checking a box on a form. But problems that have plagued the program since its inception appear to have hurt minority businesses rather than helped by discouraging them from participating.

Word of the audit’s findings was expected to further damage the program’s credibility.

“The agency seems to think these funds are a honey pot they can dip into to sweeten other programs,” Sen. Christopher S. Bond (R-Mo.), chairman of the Senate Committee on Small Business, said in a statement Friday.

“If taxpayers ever want to see how a government agency can look the other way while tax money is being used for everything but its intended purpose, all they have to do is read this report,” said Bond, a frequent SBA critic.

The program was funded out of the budgets of 19 federal agencies in proportion to the outside contracting they do--the bulk of it from the Department of Defense.

Many of those agencies balked at the idea of paying for the program in the first place. The audit findings will discourage them from funding it in the future and could hurt small business development programs overall by casting a shadow over the way they are managed, said an official at one major agency.

“I know how tight financial controls are here. I don’t even know how they could get away with misspending that much,” he said. “That means nobody’s watching the store. . . . I do not enjoy all the criticism that this agency is going to receive because of this. To have them constantly dumped on as a joke piece ultimately affects small business program people [at our agency] trying to carry out their jobs.”

According to the findings, the SBA spent $3 million building offices, purchasing equipment and hiring staff that were not used for the Small Disadvantaged Business (SDB) certification program, in part because the agency grossly overestimated participation.

Some of it went instead to other SBA programs under Ballentine’s management, funding staff positions, computers, fax machines, cellular phones and other equipment as well as training unrelated to the program.

More than $500,000 was spent on construction of new offices at the agency’s headquarters in Washington and on a conference room not used for the program, the review showed.

The audit found that $3 million of the program funding was clearly improper, while an additional $3.2 million was suspect because the SBA could not document it as being used for the SDB program. Furthermore, a $410,000 construction project was canceled by the SBA during the audit after auditors questioned it as unrelated to the SDB program.

Auditors have instructed the SBA to review all the SDB funds and repay agencies for the misappropriated costs, adjust their staff levels and sell off excess furniture.

The SDB certification program was born as part of sweeping changes in federal contracting benefits for so-called disadvantaged businesses, the bulk of them minority entrepreneurs.

In response to a 1995 Supreme Court ruling, the Clinton administration has done away with set-asides for disadvantaged businesses, replacing them with a complex system of price credits in industries where minorities have been traditionally underrepresented.

At the same time, the administration also instructed the SBA to implement a certification program to ensure that only truly disadvantaged businesses receive credits. The SBA was selected to develop the program because it already runs a contracting program for such businesses and verifies their status through a review of financial and other documentation.

Under the new rules, federal agencies and prime contractors can count only contract dollars of SBA-certified companies toward federal minority contracting goals. The benefits to the small businesses, however, vary from industry to industry and in some cases amount to nothing.

Many minority entrepreneurs have opted not to pursue certification, balking at the cost and privacy intrusion. Others remain unaware of the changes, despite SBA efforts to get the word out.

Anticipating the audit’s release, SBA Administrator Aida Alvarez issued a statement to federal agencies Thursday saying the funds would be returned “at no cost to taxpayers.”

She indicated that the financial irregularities were reported to her by the agency’s own CFO and that she promptly ordered a review of all SDB expenditures.

However, sources familiar with the investigation said an agency whistle-blower reported the problems directly to the Office of Inspector General. The SBA has come under scrutiny in recent years for ineffective management in certain programs.