Management Alert Serious Concerns About SBA.

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SBA    INSPECTOR          GENERAL             MANAGEMENT ALERT




      Serious Concerns About SBA’s Control Environment
        and the Tracking of Performance Results in the
          Shuttered Venue Operators Grant Program

                   REPORT NUMBER 21-13 | APRIL 7, 2021
                        Office of Inspector General
                        U.S. Small Business Administration

                                             MEMORANDUM
Date:           April 7, 2021
TO:             Isabella Casillas Guzman
                Administrator
FROM:           Hannibal “Mike” Ware
                Inspector General


SUBJECT:    Serious Concerns About SBA’s Control Environment and the Tracking of
Performance Results in the Shuttered Venue Operators Grant Program
The Office of Inspector General (OIG) is issuing this Management Alert regarding serious
concerns with the control environment and the tracking of performance results in the
Shuttered Venue Operators Grant (SVOG) program requiring immediate attention and
action.
Last April we issued a white paper 1 informing the SBA about the risk of Coronavirus
Disease 2019 (COVID-19) pandemic funds not being used for their intended purpose and
therefore not achieving entrepreneurial development program goals and objectives. SBA
should consider the risks and lessons learned as it implements a new program under a
compressed timeline providing disaster assistance grants to eligible small businesses
under the SVOG program. Expedited management action would improve SBA’s oversight of
the program and ensure it meets the intended results when administering this $16.25
billion grant program.

Background
Congress enacted the SVOG program on December 27, 2020 and provided $15 billion for
SBA to administer grants to shuttered venues as part of the Economic Aid to Hard-Hit Small
Businesses, Nonprofits, and Venues Act. 2 Congress provided an additional $1.25 billion in
1 SBA OIG Report 20-13, White Paper: Risk Awareness and Lessons Learned from Prior Audits of

Entrepreneurial Development Programs (April 23, 2020).

2 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, P.L. 116-260, Section

323, Division N, Title III (2020).




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funds through the American Rescue Plan Act on March 11, 2021, totaling $16.25 billion
authorized for the program. 3
The SVOG program provides grants to eligible entrepreneurs and entities, including venue
operators, theatrical producers, museum operators, talent representatives, and other art-
related specialties in the live arts and entertainment industry, which was hard hit during
the pandemic. These small businesses or entities are required to have been fully
operational as of February 29, 2020, had a significant reduction in revenue because of the
pandemic, and are either open or intending to reopen for business, among other eligibility
requirements established in the statute. 4
As part of SBA’s mission, the Office of Disaster Assistance (ODA) is responsible for
providing financial assistance to private and nonprofit businesses that suffered economic
hardship during a disaster. The Economic Aid Act authorizes the Associate Administrator of
ODA to coordinate and formulate policies for the SVOG. The applicant must submit a good
faith certification that the grant funds are being requested because of COVID-related
economic conditions and that the funds will be used to support the ongoing operations of
the individual or entity. The grants will be prioritized based on a revenue loss calculation
and are capped at $10 million. 5
The grant recipient may use the funds for payroll costs, rent, utility payments, mortgage
principal and interest, business debt principal and interest, covered worker protection,
independent contractors, other ordinary and necessary business expenses, and
administrative expenses. Prohibited expenses include real estate purchases, interest or
principal loan payments on loans originated after February 15, 2020, investments or re-
lending, political contributions or expenditures, or any other use as may be prohibited by
the Administrator.
The Economic Aid Act also requires increased oversight over these grants. This additional
oversight includes documentation to support the use of funds, employment record
retention for a 4-year period, and other supporting documentation for a 3-year period. 6
SBA announced that it will begin accepting and processing applications for the SVOG
program on April 8, 2021.

Identified Risks and Vulnerabilities
In light of having to plan the program under tight constraints, it is imperative that SBA
design the program in a way that provides for a balanced audit risk framework, consistent
3 American Rescue Plan Act of 2021, P.L. 117-2, Section 5005 (2021).


4 Economic Aid Act, Section 324(a)(1).


5 Economic Aid Act, Section 324(b).


6 Economic Aid Act, Section 324(e).




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application of federal regulations for grants management, clearly defined performance
goals, and adequate resources to effectively administer the program.

ODA’s Planned Framework for Disbursement and Audit Risk Factors

ODA considered risk factors such as the entity type, venue type, and dollar amounts
proposed. Table 1 outlines ODA’s payment schedule for SVOG recipients.

Table 1. ODA’s Planned Risk Assessment for the SVOG Program Grant Recipients

 Risk Level                  Award Amount                    Payment Schedule

 Low Risk                    Less than $1 million            Lump Sum or 2 payments

 Moderate Risk               Less than $1 million            2 payments

 Moderate Risk               $1 million to $10 million       2 or 3 payments

 High Risk                   $1 million to $10 million       3 or 4 payments

Source: OIG generated based on ODA disbursement schedule
In the Notice of Funding Opportunity, ODA estimates that SBA will receive 15,000
applications and that the average size of the award will be $1 million. In cases where
disbursements have multiple payments, the grantee will be required to submit
documentation to show how the funds were spent prior to receiving the next installment.
However, under the planned disbursement schedule, the majority of awards will be
categorized as low risk and as such, be disbursed in sweeping lump sum payments with
minimal requirements and expectations for post-award accountability.
The Economic Aid Act requires SBA to submit the policies and procedures used to conduct
oversight and audits of these grants, and the metrics used to determine which grants will
undergo audit. ODA based its audit plan on the risk level it established for the payment
distributions and financial reporting requirements for the grant recipients. With the
exception of auditing all grant recipients receiving $10 million, which is the maximum cap
for any single award, the plan would likely result in a minimal number of recipients subject
to an audit. Most notably at the low-risk level, ODA set a maximum number of 10 audits,
despite program officials’ estimates that the majority of the grant recipients would be in
the low-risk level. Based on this framework, ODA’s audit plan exposes billions of dollars to
potential misuse of funds because the bulk of grant funds will not be subject to a
reasonable degree of scrutiny.




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Consistent Notifications for Compliance Requirement Needed

In SBA’s Notice of Funding Opportunity published in the Federal Register on March 26,
2021, SBA cites 2 CFR 200 as the applicable regulation for this federal award. 7 Federal
regulations in 2 CFR 200 establish uniform administrative requirements, cost principles,
and audit requirements for federal awards to non-federal entities and stipulates federal
awarding agencies must not impose additional or inconsistent requirements.
However, as listed in beta.sam.gov, assistance listing Catalog of Federal Domestic
Assistance (CFDA) Number 59.075, last updated February 16, 2021, SBA provided the
following additional information under the policy requirements for the SVOG program:
          The Uniform Guidance primarily applies only to nonprofit entities that either state,
          local government, Indian tribes, institution of higher education (IHE), or a nonprofit
          organization that carries out a Federal award as a recipient or subrecipient. The
          Uniform Guidance at 2 CFR 200 will not apply to the majority of the SVO recipients.
          In such case that the recipient is a non-profit, the SBA will apply the requirements of
          2 CFR 200. If the awardee is a for-profit entity, subparts A through E are not
          required and will not be applied. SBA will, however, comply with any audit
          requirements in subpart F that apply to the for-profit community. 8
The conflicting information ODA provided to program applicants could misrepresent
accountability and transparency expectations for the grant recipients. Establishing
accurate criteria at the onset of the program is instrumental in setting expectations to
ensure that grant funds are only expended for allowable, allocable, and reasonable
expenses. Defining clear rules for accountability will assist in protecting federal grant funds
at every stage of the grant cycle.
Program officials told us that they plan to hold all grant recipients, regardless of the entity’s
business structure, accountable for complying with 2 CFR 200 where applicable and plan to
update the CDFA program listing. It is imperative that this change is made.
In addition, the American Rescue Plan provided supplemental funding to the SVOG
program that was included in the Economic Aid Act. On March 19, 2021, the Office of
Management and Budget (OMB) provided additional guidance for administering the
American Rescue Plan Act by issuing Memorandum M-21-20 - Promoting Public Trust in
the Federal Government through Effective Implementation of the American Rescue Plan
Act and Stewardship of the Taxpayer Resources. 9 The guidance emphasizes using 2 CFR
200 to the maximum extent possible to provide the highest integrity in financial assistance
management. The need for accountability and transparency in federal government
7
 Applications for New Awards; Shuttered Venue Operators Grants (SVOG), 86 Fed. Reg. 16270,
16270-16272 (March 26, 2021).
8
    Beta.sam.gov. (n.d.). Retrieved April 5, 2021.
9 Office of Management and Budget Memorandum, M-21-20, Promoting Public Trust in the Federal

Government through Effective Implementation of the American Rescue Plan Act and Stewardship of
the Taxpayer Resources, Washington, DC, 2021, p. 2.




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spending is critical in that the American Rescue Plan Act, Section 5005 added an additional
$1.25 billion to the original $15 billion in SVOG funding.

Defined Performance Goals Needed

On March 26, 2021, SBA announced the funding opportunity for the SVOG program in the
Federal Register, but it did not include performance goals for the program or establish
performance requirements for the recipients. Federal regulations require that federal
awards must include performance goals. 10 OMB stresses that grant programs should be
planned and designed with clear goals and objectives. Where appropriate, these goals
should include the public impact of the awarded funds. Reporting requirements must be
clearly documented. The agency must provide a standard against which non-federal entity
performance can be measured, such as the estimated number of jobs saved or created, tax
revenue generated, or entity operational status. Program officials told us that the
authorizing legislation for the program did not require SBA to establish performance
measures. Program officials explained they tried to meet the federal standards for grants
while also creating an aid distribution program.
While the Economic Aid Act did not specifically mandate that the SBA establish
performance goals, it did not exempt the agency from adhering to the requirements of 2
CFR 200. Without specific grantee performance reporting requirements, the stakeholders
will disburse $16.25 billion without knowing whether the program successfully made an
impact on the small businesses in the live arts and entertainment industry that were
impacted by the pandemic. This runs counter to recent revisions to 2 CFR 200, effective
November 12, 2020, that emphasized the need for performance goals to improve
stewardship of grant funds.

Adequate Resources to Effectively Administer the Program Needed

Approving and awarding federal funds is an inherently governmental function. According
to SBA’s federal assistance directive, only warranted grant officers can commit the agency
to enter into a federal assistance agreement, such as a grant, that obligate federal funds.
The federal assistance directive also specifies that the Director of the Office of Grants
Management appoints all grants management officers and makes decisions on the
respective warrant level based on the training, qualifications, and experience of the grants
officer. However, on March 10, 2021, the acting Chief Operating Officer waived the
standard experience, training, and certification requirements and the agency grants
training plan for administering all existing and future emergency grant programs related to
the impact of COVID-19. SBA established these requirements and the training plan to
address the systemic weaknesses OIG found in prior audits of SBA’s grants management. 11
Currently, the program office has one designated official and its staff are on temporary
detail. At this time, SBA has not formalized a plan for staffing this office relative to the
10 2 CFR § 200.210


11
     Economic Aid Act, Section 324(f)(1)(A), (B).



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volume of applications expected. The agency has also not defined the organizational
structure for administering the program.
SBA expects the majority of the awards made under this program to be $1 million or less.
Based on the current risk model, these awards would be disbursed as lump-sum advance
payments with minimal reporting requirements and agency oversight. It is important that
the application reviewing officials use careful scrutiny to review the applicants’ proposed
budgets to ensure funds will be used for allowable, allocable, and reasonable expenses. OIG
believes that SBA does not have the staff necessary to provide effective oversight over the
SVOG program. Insufficient oversight of the SVOG program increases the risk that funds
will be misspent, inadequately monitored, or improperly paid.

Conclusion
SBA should take immediate action to reduce or eliminate risks by strengthening existing
controls and implementing internal controls to address potential misuse of federal funds.
Strong controls will ensure the SVOG program can effectively help eligible small business
owners and entities that have suffered economic injury because of the COVID-19 pandemic.

Suggested Actions for SBA
To address serious concerns and potential deficiencies in internal controls of the Shuttered
Venue Operators Grant program, we suggest the Administrator:
   1. Reassess the audit risk plan to identify vulnerabilities, commensurate with the
      expected volume of applications and average award amount, to strengthen internal
      controls and reduce risk of misuse of federal funds.
   2. Clearly establish 2 CFR 200 criteria for the program to ensure compliance during
      the implementation and oversight phases.
   3. Implement required performance measures to determine the impact of program
      funds.
   4. Ensure sufficient resources are available to implement and oversee the SVOG
      program.

Disclaimer
We prepared this management alert to bring to SBA’s attention serious issues with the
SVOG program that were identified during our initial review of SBA’s implementation of the
program. We reviewed federal publications, regulations, and applicable guidance, as well as
SBA’s communications to the public regarding the program. We also met with ODA officials
to discuss the initial plans in rolling out the SVOG program.
Our ongoing review is being conducted in accordance with the Council of the Inspectors
General on Integrity and Efficiency’s (CIGIE) Quality Standards for Inspection and
Evaluation. We prepared this management alert in alignment with OIG’s quality control
standards and the CIGIE Quality Standards for Federal Offices of Inspector General, which
require that we conduct our work with integrity, objectivity, and independence.



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If you have any questions, please contact me or Andrea Deadwyler, Assistant Inspector
General for Audits, at (202) 205-6586.


cc:   Antwaun Griffin, Chief of Staff, Office of the Administrator
      Arthur Plews, Deputy Chief of Staff
      Peggy Delinois Hamilton, General Counsel
      James Rivera, Associate Administrator, Office of Disaster Assistance
      Barbara Carson, Deputy Associate Administrator, Office of Disaster Assistance
      Stephen Kong, Acting Chief Operating Officer, Office of the Administrator
      Tami Perriello, Chief Financial Officer
      Kenneth Etheridge, Acting Executive Director, Office of Executive Management,
             Installation and Support Services
      Martin Conrey, Attorney Advisor, Office of General Counsel
      Michael Simmons, Attorney Advisor, Office of General Counsel
      Rafaela Monchek, Director, Office of Continuous Operations and Risk Management
      Tonia Butler, Director, Office of Internal Controls




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