SBA Agency Financial Report for FY 2014
Summary
The SBA's Agency Financial Report for FY 2014 covers the fiscal year beginning October 1, 2013 and ending September 30, 2014. Its highlights table (dollars in thousands) lists a loan portfolio of $114,450,173 and total assets of $13,184,251 for FY 2014. The Message from the Administrator, signed off under SBA Administrator Maria Contreras-Sweet and dated November 17, 2014, says the auditors issued an unmodified opinion on the FY 2014 financial statements and found no material weaknesses, and that the SBA supported nearly $29 billion in lending through its 7(a) and 504 loan programs. The contents list Management's Discussion and Analysis, Financial Reporting, Other Information and three appendices.
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ABOUT THIS REPORT FY 2014 HIGHLIGHTS
The U.S. Small Business
(Dollars in Thousands) FY 2011 FY 2012 FY 2013 FY 2014
Administration’s Agency Financial
Report (AFR) for FY 2014 provides an
Loan Portfolio(1) $ 99,704,179 $ 104,442,586 $ 109,757,990 $ 114,450,173
overview of the Agency’s financial and
performance data to help Congress,
the President, and the public assess Regular FTE Employees 2,175 2,089 2,148 2,137
SBA’s stewardship over the resources Disaster FTE Employees 1,141 1,145 1,628 991
entrusted to it. The AFR is the first Total Employees(2) 3,316 3,234 3,776 3,128
in a series of three annual financial
and performance reports for federal Total Assets $ 16,882,801 $ 14,014,855 $ 13,846,170 $ 13,184,251
agencies choosing to produce a separate Total Liabilities $ 17,191,824 $ 13,640,581 $ 12,462,316 $ 11,695,803
AFR. An Annual Performance Report Total Net Position $ (309,023) $ 374,274 $ 1,383,854 $ 1,488,448
(APR) and a Summary of Performance Total Net Cost of Operations $ 3,460,562 $ 1,274,805 $ 524,086 $ (466,394)
and Financial Information (SPFI) Total Budgetary Resources $ 19,277,292 $ 14,400,162 $ 14,059,594 $ 10,826,659
make up the other two reports. The
(1)
The total portfolio consists of guarantied business loans outstanding, direct business loans, and direct disaster loans. The data include all performing loans and defaulted loans that
FY 2014 APR is included as part of have not been charged off. In previous Agency Financial Reports, SBA has not included ARC 506, Dealer Floor Plan, 504 First Lien, and 504 Refi in the portfolio total. The SBA has
the FY 2016 Congressional Budget updated the data for FY 2011-2014 to include these programs in the totals.
Justification (CBJ), which is the (2)
The total does not include employees in the Offices of Advocacy or Inspector General.
Agency’s budget request to Congress.
The FY 2014 SPFI is a summary of the
financial, performance, and budgetary
information presented in the AFR and
the CBJ/APR. Both the SPFI and the
CBJ/APR are scheduled for publication
in February 2015. All three reports can
be found at www.sba.gov/performance.
FOR MORE INFORMATION
Information about SBA’s programs is available at: www.sba.gov
ABOUT THE COVER SBA’s plans and reports are available at: www.sba.gov/performance
The cover is a photo montage of small Para información acerca de los programas de la SBA: www.sba.gov “Translate” “Select Language”
business winners that represents the
Questions and comments regarding the content, presentation and usefulness of this report are
Agency’s commitment to provide small
welcome and may be addressed to: performancereports@SBA.gov
businesses and entrepreneurs with the
resources they need to continue growing
America’s economy. Those featured,
Or, you may write to: Or, you may call:
include: (top right) Amy Trelenberg
and Megan Healy, ShopMamie, U.S. Small Business Administration Jason Bossie
Wilmington, Delaware; (middle right) Office of Performance Management Director
Sandra and Arthur Johnson, Short Stop and Chief Financial Officer Office of Performance Management
409 Third Street, S.W. (202) 205-6449
Food Truck, Point Wentworth, Georgia;
Washington, DC 20416
(middle left) Jusak Bernhard and Jeff
Manley, Tail Spin Pet Supply, Savannah,
Georgia; (bottom left), Tom Frainier,
Follow us on: www.facebook.com/sbagov, on www.twitter.com/sbagov and www.youtube.com/sba
Semifreddi’s Bakery, Kensington,
California.
TABLE OF CONTENTS
Message from the Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Management’s Discussion and Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Primer of SBA’s Principal Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SBA by the Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SBA’s History and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Analysis of Performance Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Analysis of Performance and Agency Priority Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Operational Portfolio Analysis and Future Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Analysis and Highlights of Financial Statements and Results . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Highlights of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Analysis of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Analysis of SBA’s Systems, Controls and Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Internal Control Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Financial Management Systems Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Management Assurances: FMFIA and FFMIA Assurance Statement for FY 2014 . . . . . . . . . . . . . 32
Improper Payments Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Message from the Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Audit and Financial Management Advisory Committee’s Report . . . . . . . . . . . . . . . . . . . . . . . . 39
Inspector General’s Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Independent Auditors’ Report on FY 2014 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 42
CFO Response to Draft Audit Report on FY 2014 Financial Statements . . . . . . . . . . . . . . . . . 51
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Schedule of Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
OIG Report on the Most Serious Management and Performance Challenges . . . . . . . . . . . . . . . . . . 90
Summary of Financial Statement Audit and Management Assurances . . . . . . . . . . . . . . . . . . . . . 111
Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Freeze the Footprint Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Appendices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Appendix 1 – Contact SBA: Useful Sites and Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Appendix 2 – Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Appendix 3 – OIG Audit Follow-up Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
AGENCY FINANCIAL REPORT • FY 2014
SBA’S MISSION
Maintain and strengthen the nation’s economy by enabling the establishment and vitality of small businesses
and by assisting in the economic recovery of communities after disasters.
How this Report is Organized
The U.S. Small Business Administration’s FY 2014 Agency Financial Report (AFR) provides financial and perfor-
mance information for the fiscal year beginning October 1, 2013 and ending September 30, 2014. This report
presents SBA’s operations, accomplishments, and challenges. It begins with a message from SBA Administrator
Maria Contreras-Sweet, followed by three principal sections — Management’s Discussion and Analysis, Financial
Reporting, Other Information — and Appendices. “Success Stories” that highlight small business entrepreneurs
appear throughout the report, along with interesting “Did You Know?” facts about the SBA and its work.
Management’s Discussion and Analysis
The Management’s Discussion and Analysis section provides a report of the Agency’s overall financial position,
program performance, and results of operations. It presents SBA’s history, organization, and principal programs.
This section highlights financial results and analysis; performance results and analysis; and analysis of systems,
controls, and legal compliance.
Financial Reporting
The Financial Reporting section provides a detailed report of SBA’s finances. It includes the audit transmittal
memorandum from the Inspector General, the independent auditors’ report, and the audited financial statements
and notes. The required supplementary information provides a combining statement of budgetary resources,
and the required supplementary stewardship information provides a report on stewardship investments in human
capital.
Other Information
The Other Information section includes a schedule of spending and the Inspector General’s report on the Agency’s
most serious management and performance challenges along with recommended actions. Also included in this
section is a summary of financial statement audit and management assurances, a report on SBA’s environmental
footprint, and a detailed report on improper payments.
Appendices
The Appendices provide supporting information — a contact list of useful web sites and telephone numbers; a
glossary; and a detailed report on audit follow-up activity.
ME SSAG E FRO M TH E A D M INIS T RATOR
MESSAGE FROM THE ADMINISTRATOR November 17, 2014
I am proud to present the U.S. Small Business Administration’s Fiscal Year 2014 Agency
Financial Report. This report details SBA’s financial and high-level program performance
results and provides transparency in SBA’s ongoing efforts to provide meaningful assistance
to America’s small business entrepreneurs.
The SBA facilitates access to capital, counseling, contracting opportunities, and disaster
assistance to promote, support, and grow the nation’s 28 million small businesses, which
create two out of three net new private sector jobs in our economy. In fiscal year 2014, the
SBA rebranded its offerings as part of an Agency-wide outreach campaign that is “Smart,
Bold, and Accessible.” We harnessed new technology to increase access to capital, and we
broadened our scope to reach more entrepreneurs from traditionally underserved neighborhoods and demographics.
SBA financial and performance data in this report are reliable and complete. Our auditors issued an unmodified opinion
on our FY 2014 financial statements and found no material weaknesses.
In the pages to follow, we have highlighted some of our key accomplishments during the fiscal year. In FY 2014, the SBA
supported nearly $29 billion in lending through our 7(a) and 504 loan programs. These loans supported nearly 600,000
jobs across the country. The SBA did not receive a credit subsidy appropriation for the 7(a) loan program and relied on
fees and a small amount of carryover subsidy to cover all the costs of our most popular credit offering. We accomplished
this despite zeroing out fees for 7(a) loans of $150,000 or less last October to boost loan approvals to women, minorities,
veterans, and business owners in distressed urban and rural areas.
In FY 2014, we made significant progress in our ongoing efforts to modernize the Agency’s capital access programs.
Our goal is to move toward 100 percent electronic submission of loan applications; 95 percent of loans were submitted
electronically this year. In July, we implemented a predictive credit scoring model on smaller dollar loans ($350,000 or
less) that combines a borrower’s personal and business credit scores to create an underwriting system that promotes more
equitable distribution of capital and speeds our response time on 7(a) loan applications. We also substantially advanced
our work to fully automate the 7(a) lending application through the SBA One initiative.
The Small Business Investment Company (SBIC) Debenture program had another record year of growth. Investment
funds licensed as SBICs provided nearly $5.5 billion in capital to small businesses, a 60 percent increase over last fiscal
year. In FY 2014, the SBA licensed 30 new SBIC funds, and licensing times averaged 7.4 months. This helped the SBIC
program execute more than $2.5 billion in commitments – an Agency record.
The SBA also reached an important milestone in our efforts to promote greater federal contracting opportunities for small
businesses. In FY 2013, for the first time in eight years, the federal government surpassed its statutory prime contracting
goal, and the Agency met its priority goal by awarding more than 23 percent of federal prime contracts to small
businesses. Since FY 2011, federal agencies have awarded more than $264 billion in federal contracts to small firms.
This achievement came despite the fact that overall federal contract spending has been reduced over the past several years.
In FY 2013, the federal government also exceeded its small business contracting goals for businesses owned by service-
disabled veterans (3.4 percent) and businesses considered socially or economically disadvantaged (8.6 percent).
The SBA provides mentoring, business advice, and training assistance to more than 1.2 million entrepreneurs and small
businesses each year. These efforts help entrepreneurs create viable business plans; acquire capital; start businesses; and
gain access to federal, corporate, and international supply chains. This year, we recognized the 50th anniversary of our
resource partner, SCORE, whose 11,000 volunteer business mentors have provided high quality counseling to more than
10 million small business owners over the life of the program.
AGENCY FINANCIAL REPORT • FY 2014 1
M E S SAGE FRO M T H E AD M I N I S T R ATOR
The SBA has also made significant strides in serving our veteran entrepreneurs. In FY 2014, the SBA trained more than
15,000 transitioning service members at 165 military installations nationwide through our Boots to Business program.
This program, coupled with veterans loan advantage, provides the needed support to our hardworking military service
members interested in starting their own business.
In FY 2014, the SBA approved more than 6,000 disaster loans totaling $332 million and worked 192 active declarations
across the country. While our disaster assistance loan volume was down from the previous year, we continued to make
strides in processing payments more quickly and efficiently. The SBA exceeded its priority goal for disaster loan applica-
tions returned, with a return rate of 69 percent. This higher application return rate means a greater number of disaster
survivors received SBA’s assistance in rebuilding or recovering from an economic injury. We also made process improve-
ments by adding multiple points for disaster survivors to apply for SBA loans.
SBA services continue to be a vital resource for small businesses and an important driver of America’s economic growth.
In FY 2015, we plan to build upon these accomplishments to help more small businesses expand, create jobs, and help
America advance on its path to a full and robust economic recovery.
Sincerely,
Maria Contreras-Sweet
Administrator
2 AGENCY FINANCIAL REPORT • FY 2014
Management’s
Discussion &
Analysis
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
PRIMER OF SBA’S PRINCIPAL PROGRAMS
CAPITAL (www.sba.gov/financialassistance)
The SBA has a total business loan portfolio of $98.7 billion.
7(a) Loan Guaranties — The SBA offers government guaranties on loans (up to $5.0 million) made by commercial
lenders to help expand access to capital for business owners who face challenges in getting approved for financing.
The SBA guarantees a portion of 7(a) loans made and administered by commercial lending institutions. Loans can
be guaranteed for a variety of general business purposes.
504 CDC Loan Guaranties — These long-term, fixed-rate loans (up to $5.5 million) support investment in major
assets such as real estate and heavy equipment. Loans are delivered by certified development companies (CDC)
which are private, non-profit corporations. CDCs work with the SBA and private lenders to provide the financing.
The SBA guarantees the CDC’s portion of these loans.
Microloans — The SBA provides loans to non-profit intermediary lenders, which are community-based organiza-
tions with experience in lending and technical assistance, that in turn make these loans (up to $50,000) to small
businesses needing small-scale financing and technical assistance for start-up or expansion.
Surety Bonds — A surety bond is a type of insurance that guarantees performance of a contract. If one party does
not fulfill its end of the bargain, then the surety bond provides financial compensation to the other party. The SBA
guarantees bonds issued by a surety company in order to encourage the surety company to provide bonds to small
businesses.
CONTRACTING (www.sba.gov/contracting)
The SBA leads federal efforts to deliver 23 percent of contracts to small businesses, 5 percent to women-owned and small
disadvantaged/8(a) businesses, and 3 percent to HUBZone and service-disabled veteran small businesses.
Procurement Assistance to Small Businesses — Small business contracts represent the largest form of direct mon-
etary support for small business in the federal government. Within this goal are four sub-goals:
Small Disadvantaged Businesses— This program provides assistance through 8(a) Business Development and a
set-aside contracting for businesses owned and controlled by socially and economically disadvantaged individuals.
Over the course of nine years, a firm is assisted in gaining resources to compete for federal contracts as well as in the
private sector.
HUBZone Small Businesses — This program provides sole-source and set-aside contracting for firms located in
economically disadvantaged geographical areas.
Service-Disabled Veteran-Owned Small Businesses — This program allows federal agencies to set-aside contracts
for competition only among service-disabled veteran-owned small businesses.
Women-Owned Small Businesses — This program allows federal agencies to set-aside certain contracts for compe-
tition only among small businesses owned and controlled by women.
4 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
ADVISING, MENTORING, AND TRAINING (www.sba.gov/local-assistance)
The SBA and its partners serve over 1.2 million small business clients a year through the following programs.
Small Business Development Centers — SBDCs deliver an array of services to small businesses and prospective
business owners using an extensive network of 63 lead centers managing more than 900 service delivery points
throughout the U.S. and the insular territories.
Women’s Business Centers — WBCs provide counseling and training through over 100 non-profit educational
centers across the nation. They provide services on a vast array of topics, from how to write a business plan to
programs specifically for veterans. Many WBCs provide multilingual services, and a number offer flexible hours
allowing for mothers with children to attend training classes.
Veterans Business Outreach Centers — SBA’s 15 VBOCs provide counseling and training services to veteran-
owned and service-disabled veteran-owned small businesses and entrepreneurs, along with Reserve Component
members starting new small businesses or expanding established small businesses.
SCORE — SCORE is a non-profit association comprised of over 11,000 volunteer business mentors that serve
entrepreneurs with in-person mentoring and local training workshops. As the largest volunteer business mentor
network in the federal government, SCORE adapts its structure and services to meet the needs of the small business.
EXPORTING (www.sba.gov/oit)
The SBA provides export loans and training assistance to small businesses.
Export Loans — The SBA provides several different types of export loans, including SBA Export Express loans (up
to $500,000), Export Working Capital loans (up to $5.0 million), and International Trade loans (up to $5.0 mil-
lion) that provide small businesses with enhanced export financing options for their export transactions. The SBA
provides technical assistance on export loans through U.S. Export Assistance Centers.
U.S. Export Assistance Centers — USEACs are staffed by professionals from the SBA, Department of Commerce
and the Export-Import Bank. Together, their mission is to help small and medium-sized businesses compete in
today’s global marketplace by providing export assistance.
HIGH-GROWTH SMALL BUSINESSES (www.sba.gov/inv)
The SBA supports high-growth investments through a portfolio of $9 billion in debenture leverage.
SBIC — Small Business Investment Companies are privately owned and managed investment funds that use their own
capital plus funds borrowed with an SBA guaranty to make equity and debt investments in qualifying small businesses.
SBIR — The Small Business Innovation Research program is a highly competitive funding agreement program that
stimulates high-tech innovation by reserving a specific percentage of federal research and development funds for
small business. SBIR protects the small business and enables it to compete on the same level as larger businesses.
DISASTER ASSISTANCE (www.sba.gov/disaster)
The SBA has a portfolio of $6.8 billion in direct disaster loans to businesses, homeowners, and renters.
Disaster — The SBA is the federal government’s primary source of financing for the long-term repair and rebuilding
of disaster-damaged private property for homeowners, renters, businesses of all sizes, and private non-profit
organizations. It is the only form of SBA assistance not limited to small businesses.
AGENCY FINANCIAL REPORT • FY 2014 5
SUCCESS STORY: Small Business Persons of the Year
Experience the Smell of Success
Pacifica, Portland, Oregon
Born with an entrepreneurial spirit, William (Billy) Taylor, CEO of Pacifica,
got his start working for his grandparents on one of the first commercial
marionberry farms in the world. Brook Ann Harvey-Taylor, President of
Pacifica, became fascinated with the magical world of scents when, as a teen, she
picked up a copy of author Tom Robbins’ novel Jitterbug Perfume.
Billy’s entrepreneurial spirit and Brook’s creative vision joined forces. The duo
borrowed a little money from family and started making candles in 1997. By
2008, Pacifica had reached $12 million in sales, but a change in distribution channels brought about a downturn
that forced Billy and Brook to seek financing to reposition the brand and keep ownership of the firm. Through a
$150,000 express line of credit and a $1.18 million SBA 7(a) loan, followed by a $500,000 SBA CAPLine, Billy and
Brook secured the money they needed without compromising their ownership or vision. A bold change in the line of
products from home fragrances to beauty and perfume products has Pacifica on a growth path to more than double
revenue over a five-year span.
Since 2010, Pacifica has consistently added employees, ending 2013 with 110 employees and a 33 percent increase in
sales over 2012.
Billy Taylor and Brook Harvey-Taylor are SBA’s 2014 Small Business Persons of the Year.
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
EXECUTIVE SUMMARY
The U.S. Small Business Administration’s efforts to assist couraging trend is expected to continue in upcoming years
entrepreneurs and small business owners are critical to a as the nation moves further into economic recovery. The
healthy economy. Small businesses play a critical role in loan receivables portion of the SBA credit program portfo-
job creation and retention. Over the last two decades, lio continued to decline from $7.5 billion to $6.9 billion
small and new businesses have been responsible for creat- in FY 2014. The drop in loan receivables was caused by
ing two out of every three net new jobs, and today over the decrease in purchases of defaulted guaranties, the liq-
half of all working Americans own or work for one of uidation and charge-off of existing defaulted guaranties, a
America’s 28.0 million small businesses. decrease in new disaster direct loan disbursements, as well
as collections on existing disaster loans.
The SBA is committed to ensuring that America’s small
businesses have the access and opportunities they need to
start and grow their operations and create new jobs. These Performance Results
tools include access to capital; opportunities in federal In FY 2014, SBA’s 7(a) loan program had its second
contracting; access to entrepreneurial advising, mentoring, highest year of approvals, and together with the 504 loan
and training assistance; and disaster assistance for business program, supported nearly $29.0 billion in lending. The
owners, homeowners, and renters. 504 loan program declined from FY 2013 but the counter-
Throughout FY 2014, the SBA relied on the three strategic balancing growth in the 7(a) program led the SBA to a net
goals identified in its FY 2014-2018 Strategic Plan to guide increase of gross approvals over the prior year. Overall, the
the Agency’s actions: SBA approved nearly 58,000 loans that supported more
than 51,000 companies.
1. Growing businesses and creating jobs
FY 2014 reflected a fifth consecutive year of growth for
2. Serving as the voice for small business
small business investment companies, a zero subsidy guar-
3. Building an SBA that meets the needs of today’s and anty debenture program underpinned by a portfolio of
tomorrow’s small businesses public-private partnerships investing in small and typically
high-growth businesses. About $5.5 billion was invested
The following sections highlight financial and performance
in 1,085 small businesses. Capital deployments increased
results for the Agency, including the four Agency Priority
60 percent year-over-year and have more than tripled in
Goals and Federal Cross-Agency Priority (CAP) Goals.
six years.
In-depth analysis can be found in the Analysis of Financial
Results and Analysis of Performance Results sections. The The SBA continues to work with agencies across the
complete set of performance results will be reported in the government to expand small business contracting opportu-
Annual Performance Report to be released in February nities. From the beginning of FY 2011 through FY 2013,
2015. small businesses accessed more than $264.5 billion dollars
in federal contracts. (FY 2014 contracting numbers con-
Financial Results tinue to be collected and certified.)
For FY 2014, SBA’s total budgetary resources used for The SBA provides mentoring, business advice, and train-
staffing, operations, and subsidy costs were $3.0 billion ing assistance to more than 1.2 million entrepreneurs
as well as $7.8 billion in nonbudgetary resources for loan and small businesses each year. In FY 2014, these efforts
financing used to purchase guarantied loans in default helped entrepreneurs start over 14,000 businesses, and cre-
and to make direct loans. SBA’s guarantied portion of ate and/or retain more than 70,000 jobs.
the outstanding loan principal rose 5.6 percent in FY
Disaster loan applications and approvals declined com-
2014, to $83.5 billion. New guaranties disbursed by SBA
pared to the prior year, which experienced the third
participating banks during FY 2014 were $18.0 billion, a
largest disaster, Hurricane Sandy. In FY 2014, the Agency
1.7 percent increase this year that contributed to the 5.6
worked on 192 active disaster declarations and approved
percent increase in outstanding guaranties. Purchases of
over 6,000 disasters totaling $332 million.
defaulted guarantied loans dropped again, falling from
$2.0 billion last year to $1.4 billion this year. This en-
AGENCY FINANCIAL REPORT • FY 2014 7
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
Agency Priority Goals description of the CAP goals to which the SBA contributes
follows.
The Government Performance and Results Modernization
Act of 2010 (GPRA) requires federal agencies to establish • Job Creating Investment: This goal aims to improve
a set of two-year Agency Priority Goals (APGs) that reflect federal investment tools and resources, while also
the highest priorities of agency leadership. The SBA has increasing interagency coordination to encourage
established four outcome-focused APGs. foreign direct investment, spurring job growth.
• Increase active lender participation. Expand access • Cybersecurity: Under this goal, agencies must
to capital by adding 325 new and returning lenders improve cybersecurity performance through ongoing
to SBA’s flagship 7(a) loan program each year in FY awareness of information security, vulnerabilities, and
2014-2015. The SBA increased small business access threats impacting the operating information environ-
to capital by adding new and returning lenders to the ment, ensuring that only authorized users have access
7(a) program. While the Agency missed its FY 2014 to resources and information; and the implementa-
target by 5 percent, 308 new lenders provided nearly tion of technologies and processes that reduce the risk
$317 million in new loans to small businesses. of malware.
• Maximize small business participation in government • Customer Service: This goal aims to deliver world-class
contracting. Maximize small business participation in customer service to citizens by making it faster and
federal government contracting to meet the statutory goals easier for individuals and businesses to complete transac-
and reduce participation by ineligible firms. FY 2014 tions and have a positive experience with government.
contracting numbers will continue to be collected and • Smarter IT Delivery: This goal aims to improve out-
certified through the third quarter of FY 2015. The comes and customer satisfaction with federal services
Agency did exceed its FY 2013 target with the federal through smarter IT delivery and stronger agency
government making 23.4 percent of contracting dol- accountability for success.
lars available to small businesses.
• Strategic Sourcing: Agencies will expand the use of
• Expand the base of lenders for small business high-quality, high-value strategic sourcing solutions
exporters. Expand small business access to export through this goal in order to improve the government’s
financing by increasing the number of lenders to provid- buying power and reduce contract duplication.
ing export financing solutions to 555 and the number of
• Benchmark and Improve Mission-Support Opera-
small business exporters receiving financing through SBA
tions: This goal will improve administrative efficiency
loan programs to 1,480 by FY 2015. The SBA met 98
and increase the adoption of effective management
percent (513 lenders) of its FY 2014 export lender
practices by establishing cost and quality benchmarks
goal, and the SBA met 98 percent (1,392 small busi-
of mission-support operations and giving agency
nesses assisted) of its small business assisted goal.
decision-makers better data to compare options, al-
• Increase the disaster loan application rate. By locate resources, and improve processes.
September 30, 2015, increase the return rate for disaster
• Open Data: Through this goal, agencies will fuel
survivor applications by 10 percentage points (24 percent
entrepreneurship and innovation and improve gov-
to 34 percent return rate). The SBA increased its ap-
ernment efficiency and effectiveness by unlocking the
plication return rate to ensure that disaster assistance
value of government data and adopting management
resources for businesses, non-profit organizations,
approaches that promote interoperability and open-
homeowners, and renters are deployed quickly, effec-
ness of this data.
tively, and efficiently. This year, the SBA had a return
rate of 69 percent due to process improvements and • Lab to Market: This goal aims to increase the eco-
improving customer service touch points. nomic impact of federally funded research and devel-
opment by accelerating and improving the transfer of
Cross-Agency Priority Goals new technologies from the laboratory to the commer-
cial marketplace.
The SBA also participates in many of the government-wide
• People and Culture: This goal aims to innovate by
Federal Cross-Agency Priority (CAP) goals. The CAP goals
unlocking the full potential of the workforce of today
are Presidential priorities, and are complemented by other
and building the workforce needed for tomorrow.
cross-agency coordination and goal-setting efforts. A brief
8 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
SBA BY THE NUMBERS
(Dollars in Millions)
FY 2011 FY 2012 FY 2013 FY 2014
Total Portfolio (1) Outstanding Principal Balance $ 99,704 $ 104,443 $ 109,758 $ 114,450
Capital (2)
7(a) Loans Dollars of Gross Loans Approved $ 19,638 $ 15,153 $ 17,868 $ 19,191
504 Loans Dollars of Gross Loans Approved $ 4,845 $ 6,712 $ 5,227 $ 4,199
Microloans Dollars of Gross Loans Approved to Microborrowers $ 47 $ 45 $ 53 $ 54
Surety Bond Dollars of Bid and Final Bonds Guaranteed $ 3,660 $ 3,920 $ 6,150 $ 6,413
Contracting (3)
Prime Contracting Dollars of Contracts Awarded to Small Businesses $ 91,468 $ 89,923 $ 83,143 N/A
HUBZone Small Dollars of Contracts Awarded to HUBZone
$ 9,915 $ 8,140 $ 6,245 N/A
Businesses Small Businesses
Small Disadvantaged Dollars of Contracts Awarded to Disadvantaged
$ 32,412 $ 32,334 $ 30,616 N/A
Businesses Small Businesses
Women-Owned Small Dollars of Contracts Awarded to Women-Owned
$ 16,807 $ 16,180 $ 15,365 N/A
Businesses Small Businesses
Service-Disabled Veteran- Dollars of Contracts to Awarded to Service-Disabled
$ 11,206 $ 12,256 $ 12,023 N/A
Owned Small Businesses Veteran-Owned Small Businesses
Advising, Mentoring,
and Training (4)
Small Business Number of Clients Advised and Trained
Development Centers 557,698 543,512 532,377 485,013
(SBDCs)
Women's Business Number of Clients Advised and Trained
138,923 136,951 133,765 140,039
Centers (WBCs)
SCORE Number of Clients Mentored and Trained 356,837 458,773 345,902 442,374
SBA Learning Center Number of Clients Trained Online 234,000 220,596 150,355 182,000
Veteran's Business Number of Clients Advised and Trained 63,908 88,614 73,062 75,393
Outreach Centers (VBOCs)
Exporting
Export Loans Dollars of Gross Loans Approved $ 925 $ 926 $ 1,191 $ 1,341
High-growth Small
Businesses
Dollars of SBA Debenture Leverage Committed to SBICs $ 1,827 $ 1,924 $ 2,156 $ 2,549
SBIC
Dollars of SBIC Debenture Capital to Small Businesses $ 2,589 $ 2,950 $ 3,256 $ 5,465
Disaster
Disaster Assistance (2) (5) Dollars of Gross Loans Approved $ 739 $ 690 $ 2,797 $ 332
(1) The total portfolio consists of guarantied business loans outstanding, direct business loans, and direct disaster loans. The data include all performing loans and defaulted loans that have
not been charged off. In previous Agency Financial Reports, the SBA has not included ARC 506, Dealer Floor Plan, 504 First Lien, and 504 Refi in the portfolio total. The SBA has updated the
data for FY 2011-2014 to include these programs in the totals.
(2) The SBA tracks loan data in three ways: Gross Loans Approved (the total loans approved); Net Loans Approved (gross loans approved plus any loan increases minus any cancellations);
and Disbursed Loans (the amount that is actually given to the borrower). Gross Loans Approved is presented in the Capital and Disaster Assistance sections because it is the only loan data
that remain constant over time.
(3) FY 2014 contracting numbers will continue to be collected and certified through the third quarter of FY 2015. Therefore, FY 2013 numbers are reported per OMB Circular A-11.
(4) Counseling is now referred to as “advising” and “mentoring.” The way these numbers are calculated has not changed. Data was pulled at November 14, 2014 for FY 2014; resource
partners may input data up to 45 days after the close of the fiscal year.
(5) The significant increase in FY 2013 disaster loan approvals is attributable to Hurricane Sandy.
AGENCY FINANCIAL REPORT • FY 2014 9
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
SBA’S HISTORY AND ORGANIZATION
In 1953, Congress created the U.S. Small Business Admin- The Office of International Trade enhances the ability of
istration to “aid, counsel, assist and protect, insofar as is small businesses to export and compete in the global
possible, the interests of small business concerns.” SBA’s marketplace by facilitating access to capital, providing
headquarters is located in Washington, D.C. while its technical assistance, ensuring the interests of small busi-
business products and services are delivered with the help ness are considered and reflected in trade negotiations,
of field personnel and a vast network of private sector and and supporting and contributing to the U.S. government’s
non-profit partners in each U.S. state and territory. Major international commercial and economic agenda.
SBA offices fall under one of three Agency-wide strategic
goals, as outlined in SBA’s FY 2014-2018 Strategic Plan: The Office of Investments and Innovation assists high-growth
small businesses through the Small Business Investment
Company, Small Business Innovation Research, Small
STRATEGIC GOAL ONE — Growing Business Technology Transfer, and other tailored programs
businesses and creating jobs that drive innovation and competitiveness.
The Office of Capital Access assists small businesses in
obtaining capital via the 7(a), 504, and Microloan pro- STRATEGIC GOAL TWO — Serving as
grams through an extensive lending network and bonding the voice for small business
through the Surety Bond Guarantee program.
Strategic Goal Two focuses on underserved communities
The Office of Disaster Assistance provides affordable, timely, and outreach to ensure that all small businesses receive
and accessible financial assistance to homeowners, renters, equal representation in the marketplace. SBA’s Office of
and businesses following a disaster. The Disaster loan pro- Capital Access, Office of Entrepreneurial Development,
gram is the only form of SBA assistance that is not limited and Office of Government Contracting and Business
to small businesses. Development (all defined under Strategic Goal One) each
have programs that support underserved communities.
The Office of Entrepreneurial Development provides business
advising, mentoring, and training assistance through its The Office of Communications and Public Liaison com-
resource partner network composed of small business municates the Agency’s programs and priorities to small
development centers, women’s business centers, and businesses, their partners, and the public at large by
SCORE, as well as through the Regional Innovation working with media outlets, developing social media
Clusters, Entrepreneurship Education, SBA Learning content, creating user-friendly online resources, crafting
Center, and Emerging Leaders programs. In addition, high quality marketing materials, organizing events to gain
SBA’s district offices support coordination between SBA feedback from small businesses, and coordinating strategic
resource partners and local small business communities. partnerships.
The Office of Government Contracting and Business Develop- The Office of Faith-Based and Neighborhood Partnerships
ment provides assistance to small businesses competing for works to expand the reach and impact of SBA’s programs
federal contracting opportunities through the government- in underserved communities and promote economic
wide prime and subcontracting programs. This includes growth and community development through outreach,
HUBZone, 8(a) business development, 7(j) technical programming, coordination, and strategic partnerships.
assistance, women-owned, and veteran-owned small busi-
nesses. The office also sets size standards for small busi- The Office of Field Operations works as the front-line oper-
nesses, which determine the size a business must be to be ating team for the SBA. Most SBA programs and services
considered a small business. are executed when small businesses connect with their
regional, district, and branch offices located in each state
and territory.
10 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
The Office of the National Ombudsman works with all STRATEGIC GOAL THREE — Building
federal agencies that regulate small businesses to provide a
an SBA that meets the needs of today’s
means for businesses to comment on Agency enforcement
activity, including audits, on-site inspections, compliance and tomorrow’s small businesses
assistance efforts, or other enforcement activity. The office
SBA’s management offices primarily support Strategic Goal
also maintains a five-member Regulatory Fairness Board in
Three. Each program office, discussed in Strategic Goals
each of SBA’s ten regions to hold public hearings on small
1 and 2, maintains a key role ensuring that the Agency
business concerns.
mitigates risk in its programs.
The Office of Native American Affairs ensures that American
The Office of the Chief Information Officer provides infor-
Indians, Native Alaskans, and Native Hawaiians seeking to
mation technology leadership, product services, and opera-
create, develop, and expand small businesses have full ac-
tional support for the SBA in order to maximize internal
cess to the necessary business development and expansion
efficiency and responsiveness to small businesses.
tools available through the Agency’s entrepreneurial devel-
opment, lending, and procurement programs. The office The Office of Credit Risk Management focuses on mitigation
works in coordination with other SBA offices to assist in of risk to taxpayers through ever-improving risk manage-
formulating policies and engaging in outreach, technical ment and oversight of SBA lending programs.
assistance, and education opportunities with other federal
agencies. The Office of Diversity, Inclusion, and Civil Rights serves a
diverse workforce by maintaining an inclusive culture and
The Office of Veterans Business Development ensures avail- ensuring equal access and equitable treatment regarding
ability, applicability, and usability of all Administration employment and entrepreneurial endeavors.
small business programs for veterans, service-disabled vet-
erans, Reserve Component members, and their dependents The Office of Human Resources Solutions provides strategic
or survivors. The office accomplishes its work through human capital solutions to workforce issues and strives
veterans business outreach centers, the Boots to Business to create a work environment that attracts and retains a
program, Entrepreneurship Boot Camp for veterans with talented and high-performing workforce.
disabilities, and partnerships with other federal and non-
The Office of Performance Management and Chief Financial
profit agencies.
Officer provides Agency performance management, finan-
The National Women’s Business Council is a nonpartisan cial, and acquisition oversight. The office is responsible for
federal government council created to serve as an indepen- Agency disbursements, management, and coordination of
dent source of advice and policy recommendations to the Agency planning, budgeting, analysis, and accountability
President, Congress, and SBA Administrator on issues of processes.
economic importance to women business owners.
Other support offices include the Office of Congressional
and Legislative Affairs, Office of General Counsel, and Office
of Hearings and Appeals.
AGENCY FINANCIAL REPORT • FY 2014 11
12
SBA ORGANIZATION CHART
Office of the Administrator Office of Advocacy
(Administrator, Deputy Administrator,
Chief of Staff, Chief Operating Officer)
Office of the Inspector General
Office of Office of Office of Investments Office of Government Office of Office of Disaster
Capital Access Entrepreneurial and Innovation Contracting and Business International Trade Assistance
Development Development
• Office of Financial • Small Business
Assistance • Office of Small Business Innovation Research • Office of Business
• Office of Surety Development Centers Program Development Office of Office of Native
Guarantees • Office of Women’s • Small Business • Office of Government General Counsel American Affairs
• Office of Economic Business Ownership Investment Companies Contracting
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
Opportunity • Office of • Office of HUBZone
• Office of Performance and Entrepreneurship Program
Systems Management Education • Office of Policy, Planning, Office of Congressional Office of Veterans
• Office of Credit and Liaison
Risk Management and Legislative Affairs Business Development
• Office of Financial
Program Operations
Office of Office of Faith-Based
Hearings and Appeals and Neighborhood
Partnerships
Office of Performance Office of Field Office of
Management and Chief Operations Chief Operating Officer Office of
AGENCY FINANCIAL REPORT • FY 2014
Financial Officer Communication and Office of National
• Office of Regional • Office of Chief Ombudsman
• Office of the Chief Public Liaison
Administrators Information Officer
Financial Officer • District Offices
• Denver Finance Center • Office of Diversity, Inclusion
and Civil Rights
• Office of Performance
Management • Office of Disaster Planning
and Risk Management
• Office of Internal
Controls • Office of Human Resources
Solutions
• Office of Grants Management
• Office of Administrative
Services
• Office of Executive Secretariat
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
SBA REGIONS AND FIELD OFFICES
AGENCY FINANCIAL REPORT • FY 2014 13
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
ANALYSIS OF PERFORMANCE RESULTS
Analysis of Performance Performance Analysis: New and returning lenders are
a major component of SBA’s lending portfolio and are
and Agency Priority Goals essential to growth in the quantity of loans approved and
The following section presents key SBA FY 2014 perfor- small businesses assisted. Attaining a high volume of new
mance data, including the four FY 2014-2015 Agency and returning lenders from one fiscal year to the next cre-
Priority Goals identified by SBA leadership that are critical ates a consistent pipeline of SBA loans for small businesses.
to the success of SBA’s mission. While the Agency Priority The SBA accomplished 95 percent of its FY 2014 target
Goals are two-year goals, the FY 2014 results are measured (308 new lenders) (see Chart I). These new and return-
against FY 2014 targets. ing lenders made 684 loans totaling $317.0 million. The
number of new and returning lenders recruited slowed in
The presentation of the performance data and analysis is the fourth quarter. However, the lending community has
by strategic objective, which follows SBA’s FY 2014-2018 been responsive to SBA’s strategy of fee relief for lower-
Strategic Plan. The following measures and analysis repre- dollar loans and loan program improvements.
sent SBA’s three strategic goals. Note that not all strategic
objectives are highlighted in the analysis. Detailed perfor- Performance Goal: Support 674,850 jobs through capital
mance information on all SBA programs will be presented, assistance programs in FY 2014.
and all variances explained, in the FY 2016 Congressional
Performance Analysis: The number of jobs supported is
Budget Justification and FY 2014 Annual Performance
an important outcome measure of the effectiveness of SBA
Report to be published in February 2015.
financing. The measure tracks the number of jobs sup-
STRATEGIC OBJECTIVE 1.1: Expand access ported through the 7(a), 504, Microloan, and Surety Bond
Guarantee programs. In FY 2014, the SBA supported
to capital through SBA’s extensive lending
615,364 jobs, which is 9 percent below the target (see
network.
Chart II). Part of the decline is attributable to fewer 504
Priority Goal: Expand access to capital by adding 325 loans. While the Agency did not meet its target, contin-
new or returning lenders to SBA’s flagship 7(a) loan pro- ued streamlining of the loan process and ensuring effective
gram in FY 2014 and FY 2015.
CHART I CUMULATIVE NUMBER OF 7(a) NEW OR RETURNING LENDERS
350
300 308
287
250 271
254
229
200
Lenders
201
150 163
127
100 104
77
50
39
14
0
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Sum of Lenders FY 2014 Target
14 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
businesses and service-disabled veteran-
CHART II 7(a), 504, MICROLOAN, AND SURETY BOND GUARANTEE owned small businesses (see Chart III).
JOBS SUPPORTED In FY 2013, the federal government
surpassed its prime contracting goal;
800,000 small businesses were awarded $83.0 bil-
lion in contracting dollars. The goal for
700,736
service-disabled veterans was surpassed
600,000 (FY 2013 result was 3.4 percent) for the
621,869 615,364 second time, and small disadvantaged
583,737 609,437 businesses exceeded the goal (FY 2013
Jobs
514,035
result was 8.6 percent) due in part to the
400,000 successful Mentor-Protégé program that
fosters relationships between successful
firms and disadvantaged small businesses.
200,000 The removal of statutory limitations on
the dollar amount of contracts that can
be set aside for women-owned small
businesses contributed to the increase of
0 women-owned small business contract-
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
ing dollars; the result was an increase
Actuals Targets from 4 percent in FY 2012 to 4.3
percent in FY 2013. Although HUB-
Zone continues to recruit new firms, the
certified development companies should have a positive portfolio has not recovered from the loss
impact on future results. of firms due to re-designation of areas from the 2010 census
(see Chart IV). FY 2014 contracting numbers will con-
STRATEGIC OBJECTIVE 1.2: Ensure tinue to be collected and certified through the third quarter
federal contracting goals are met and/ of FY 2015. Therefore, FY 2013 numbers are reported per
or exceeded by collaborating across the OMB Circular A-11.
federal government to expand
opportunities for small
businesses and strengthen CHART III PERCENT OF FEDERAL PRIME CONTRACT DOLLARS
the integrity of the federal AWARDED TO SMALL BUSINESSES
contracting certification process
and data. 25
Priority Goal: Maximize small busi- 23.4%
22.7% 22.3%
ness participation in federal government 20 21.9% 21.7%
Percent of Contract Dollars
contracting to meet the statutory goals
and reduce participation by ineligible
15
firms.
Performance Analysis: Small busi- 10
nesses receive a 23 percent set-aside of
federal government prime contracting
dollars, including 5 percent of prime 5
and subcontracts to small disadvantaged
businesses and women-owned small 0
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
businesses, and 3 percent of prime
Actuals Targets
and subcontracts to HUBZone small
AGENCY FINANCIAL REPORT • FY 2014 15
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
CHART IV FY 2013 SMALL BUSINESS FEDERAL CONTRACT PARTICIPATION
Small Disadvantaged Bus. 8.61%
Women-Owned 4.32%
Small Bus. Other than Small Bus.
$83.14 B $272.27 B Goal: 5%
(23.39%) Service-Disabled
3.38%
Goal: 23% Veteran-Owned
HUBZone 1.76%
Goal: 3%
STRATEGIC OBJECTIVE 1.3: Strengthen To improve performance, the SBA Online Learning
entrepreneurial ecosystems through a variety Center was revamped by creating specialized content for
of strategic partnerships to provide tailored women, veteran, encore, and youth entrepreneurs along
training, mentoring, and counseling services with translation of popular courses to Spanish. Also, the
that support entrepreneurs during every phase SBDC program expanded outreach for exporters and
veterans, the WBC program implemented a streamlined
of their business growth.
grant process to allow greater time for delivering services,
Performance Goal: Reach 1.2 million clients with online and the SCORE program began offering assistance online.
and in-person advising, mentoring, and training in FY
2014.
Performance Analysis: The SBA
accomplished 96 percent of its perfor- CHART V SMALL BUSINESS ENTREPRENEURS ADVISED,
mance target for advising, mentoring, MENTORED, AND TRAINED
and training assistance (see Chart V)
and exceed its advising and mentoring
2,000,000
2000000
target by 1.7 percent. Data was pulled
at November 14, 2014 for FY 2014;
resource partners may input data up 612,000
Small Business Entrepreneurs
480,000
to 45 days after the close of the fiscal 1,500,000
1500000
year. While the SCORE and Women’s 220,596
Business Center (WBC) programs 234,000
182,000
experienced a 28 and 5 percent increase 752,588 150,355
1000000 683,355
1,000,000 683,114 739,616
688,239
respectively in the number of clients 663,525
served from FY 2013 to FY 2014, the
Small Business Development Center
(SBDC) program had a 9 percent de- 500000
500,000
crease in the number of clients advised 436,425 404,739 399,620
364,344 348,519 379,187
and trained. While the SCORE pro-
gram relies on volunteers to provide as- 0
sistance, the SBDC and WBC programs FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
have been more impacted by stagnant Advising and Mentoring Actuals Training Actuals
budgets and sequestration. Online Training Targets
16 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
STRATEGIC OBJECTIVE 1.4: Enhance the Performance Analysis: Increasing access to export
ability of current and future small business financing, combined with trade counseling and training,
exporters to succeed in global markets by contributes to the enhanced ability of current and future
expanding access to financing, counseling, U.S. small business exporters to succeed in the global mar-
training, and other export tools. ketplace. The SBA accomplished 98 percent (513 lenders)
of its FY 2014 export lender target and 98 percent (1,392
Priority Goal: Expand small business access to export small businesses) of its small businesses assisted target (see
financing by increasing the number of lenders providing Charts VI and VII). Throughout the year, these numbers
export financing solutions to 555 and the number of small continued to track upwards as anticipated. Although
business exporters receiving financing through SBA loan existing lenders financed additional loans to exporters, the
programs to 1,480 by FY 2015. recruitment rate of new lenders in the fourth quarter de-
CHART VI CUMULATIVE NUMBER OF SMALL BUSINESSES ASSISTED
1,500
1,392
1,200 1,234
Small Businesses
1,041
900
826
711
600 623
534
439
300 356
283
173
61
0
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Sum of Small Businesses FY 2014 Target
CHART VII CUMULATIVE NUMBER OF EXPORT LENDERS
600
500 513
458
400
408
Lenders
350
300 327
248 271
200 216
194
164
100 115
51
0
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Sum of Lenders FY 2014 Target
AGENCY FINANCIAL REPORT • FY 2014 17
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
clined. The primary challenge is related
to export counselor staffing shortages CHART VIII CUMULATIVE SBIC DEBENTURE LEVERAGE COMMITTED
across the country at U.S Export As-
sistance Centers. 3,000
STRATEGIC OBJECTIVE 1.5:
Fuel high-growth 2,500
2,549
entrepreneurship, innovation,
and job creation by providing 2,000 2,156
$ Billions
the tools small businesses 1,827 1,924
need to start and grow their 1,500
businesses.
Performance Goal: Issue $2.5 billion in 1,000 1,165
debenture leverage to small business in-
788
vestment companies (SBICs) in FY 2014. 500
Performance Analysis: SBICs provide
long-term loans and equity capital to 0
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
small businesses. The SBICs are pri-
vately owned and managed investment Actuals Targets
funds that are licensed and regulated by
the SBA. In FY 2014, SBICs were able
to raise the private capital required to re- loan application return rate, going from 24 percent in FY
ceive federal leverage at an earlier than expected rate. This 2013 to 69 percent in FY 2014. SBA’s new process for
caused an increase of 2 percent over the expected financing issuing applications in Stafford Act declarations has not
target of $2.5 billion (see Chart VIII). At the same time only helped to increase the application return rate but
that debenture leverage was increasing, the SBA continued has improved customer service by adding multiple points
to license 30 new SBICs with an average licensing time of for disaster survivors to apply for an SBA loan. The SBA
7.6 months. also implemented two new regulatory changes (increased
collateral requirement, and modified loan approval process
STRATEGIC OBJECTIVE 1.6: Ensure that SBA’s using credit scores) which resulted from SBA’s member-
disaster assistance resources for businesses, ship in the Hurricane Sandy Rebuilding Task Force. These
non-profit organizations, homeowners, and efforts have helped increase the speed of disaster loans and
renters can be deployed quickly, effectively, improved customer service.
and efficiently in order to preserve jobs and
Performance Goal: Ensure the customer satisfaction rate
help return small businesses to operation. for disaster loan approvals is 71 percent in FY 2014.
Priority Goal: By September 30, 2015, increase the return
rate for disaster survivor applications by 10 percentage Performance Analysis: The SBA tracks customer satisfac-
points (24 percent to 34 percent return rate). tion through an annual survey that uses the American
Customer Satisfaction Index. The index synthesizes key
Performance Analysis: Increasing the application return points in the loan process, including the application, staff,
rate also ensures that SBA’s disaster assistance resources for final decision, and closing of the loan. The SBA had a cus-
businesses, non-profit organizations, homeowners, and tomer satisfaction rate of 80 percent this year – above the
renters are deployed quickly, effectively, and efficiently in 71 percent target (see Chart X). The high satisfaction rate
order to preserve jobs and help return small businesses is attributable in part to the increased speed of processing
to operation. As a result of implementing a new process disaster applications. For example, the electronic loan ap-
for issuing applications to disaster survivors, the SBA plication rate increased to 79 percent in FY 2014, tripling
exceeded its target by 37 percent this year (see Chart IX). the rate from FY 2011.
Each quarter, the SBA successfully increased the disaster
18 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
CHART IX RETURN RATE FOR DISASTER SURVIVOR APPLICATIONS
100
89% 90%
80
80%
Return Rate (Percent)
69%
60 62% 62%
59% 60%
54%
47%
40
20
0
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Monthly Average Rate FY 2014 Target
CHART X CUSTOMER SATISFACTION RATE FOR DISASTER
LOAN APPROVALS
100
80
Satisfaction Rate (Percent)
80% 81% 80%
72% 72% 74%
60
40
20
0
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Actuals Targets
AGENCY FINANCIAL REPORT • FY 2014 19
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
STRATEGIC OBJECTIVE 2.1:
CHART XI SMALL BUSINESSES IN UNDERSERVED MARKETS
Ensure inclusive entrepreneurship
ASSISTED BY 7(a), 504, AND MICROLOANS
by expanding access and
opportunity to small businesses and
40,000
entrepreneurs in communities where
36,936
market gaps remain. 35,000
35,014
Performance Goal: Assist 31,550 under- 30,000 34,115
Small Businesses
30,866 33,449 33,458
served small businesses through capital
assistance programs and 14,475 underserved 25,000
small businesses through contracting pro-
20,000
grams.
15,000
Performance Analysis: Underserved com-
munities – including women, low-income, 10,000
minority, and veteran entrepreneurs – often
5,000
have difficulty accessing capital and federal
contracts. For capital assistance programs, 0
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
including 7(a), 504, and Microloans, the SBA
assisted 38,547 underserved small businesses Actuals Targets
– exceeding the FY 2013 result by 15 percent
(see Chart XI). The elimination of the fees
on small dollar loans ($150,000 or less)
has attributed to the increase in number of
CHART XII SMALL BUSINESSES IN UNDERSERVED MARKETS
small businesses assisted. Also, the stream-
lined application process that uses credit ASSISTED BY 8(a) AND HUBZONES
scores instead of a personal cash flow history
analysis has greatly incentivized new lenders 20,000
and made the loan application process more
efficient.
15,000
Small Businesses
14,847 15,260
For contracting programs, including 8(a)
and HUBZone, the SBA assisted 13,029 13,615 13,158 13,029
underserved small businesses (see Chart XII).
10,000
While the results are similar to FY 2013, the 9,555
decline of 38 percent from FY 2010 to FY
2014 is due to redesignation of HUBZone
areas from the 2010 census. The SBA contin- 5,000
ues to recruit new firms and conduct outreach
and training to expand the HUBZone
portfolio. Proposed regulations to expand the 0
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
successful Mentor-Protégé program under the
Actuals Targets
8(a) program to other underserved markets
will support more small businesses in FY
2015.
20 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
STRATEGIC OBJECTIVE 3.1:
CHART XIII SBA SMALL BUSINESS UTILIZATION RATE
Streamline, simplify, and strengthen
SBA’s core programs and operations
to ensure that they are high 80
performing, effective, and relevant 70
to the needs of the small business
Utilization Rate (Percent)
community. 60 65% 67% 67% 71% 72%
Performance Goal: Award 68 percent of SBA 50
contracts to small businesses in FY 2014.
40
Performance Analysis: The SBA met its small
business utilization goal by awarding 72 percent 30
of contracts (in FY 2013) totalling $76.8 mil-
lion to small businesses (see Chart XIII) and 20
far exceeded its sub-goals for women-owned,
10
small disadvantaged, and small service-disabled
veteran-owned businesses. Although final 0
performance numbers are not yet certified or FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
official for FY 2014, the SBA reached its small Actuals Targets
business utilization goal of 68 percent, as well as
each of the small business utilization rate sub-
goals for contract awards. The SBA was able
to exceed the small business utilization rate by
maintaining a default Agency position of award- CHART XIV AVERAGE NUMBER OF DAYS TO HIRE
ing contracts to small business concerns and
only resorting to large vendors when all small 160
business options were exhausted.
154 154
STRATEGIC OBJECTIVE 3.2: Invest in
120
the Agency’s employee recruitment,
hiring, training, work-life programs,
97 112
and performance management so Days 80
staff is engaged to more effectively 85
76
serve small businesses.
Performance Goal: Ensure that the average time 40
to hire will be less than 100 days in FY 2014.
Performance Analysis: In FY 2014, the SBA
lowered its average number of days to hire 0
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
by 45 percent from FY 2013 and exceeded Actuals Targets
its FY 2014 target of 100 days by 15 percent
(see Chart XIV). Fewer days to hire ensures
SBA’s competitiveness in recruitment efforts
and ability to hire highly qualified individuals.
description updates to streamline recruitment decisions for
Achievement of this goal is due to efforts initiated under
both managers and staff in the Office of Human Resources
“HR Stat 2.0.” The initiative includes strategic redesign
Solutions.
efforts such as reviewing existing business processes, deter-
mining future workforce needs, and performing position
AGENCY FINANCIAL REPORT • FY 2014 21
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
Operational Portfolio Analysis ter RGDP posting a 4.6 percent annual growth rate. This
rise in RGDP increased revenues and profits at all firms,
and Future Projections
small and large, which in turn increased their demand for
The Small Business Administration is the taxpayers’ cus- credit.
todian of a small business loan guaranties and direct loans
portfolio of $114.5 billion. During FY 2014, the portfolio Increase in Business Financial Stability – Corporate profits,
grew by $4.7 billion, or 4.3 percent. Since existing loans reaching record highs in FY 2013, are the primary factor
are continually being paid, this growth implies that SBA’s determining a business’s overall financial strength, includ-
lending during FY 2014 was significantly greater than the ing its ability to incur more debt. Data indicate that
$4.7 billion reflected in the portfolio growth. The Agency’s gains in corporate profits have been broadly distributed
7(a) portfolio expanded by $4.5 billion, and thus accounted across firms of all sizes, including small firms. The broadly
for the vast majority of the overall portfolio’s growth. SBA’s distributed increases in corporate profits allowed existing
504 portfolio expanded by $0.3 billion, and its SBIC firms to increase their borrowing.
portfolio grew by $0.5 billion. The Agency’s Disaster and Statutory Changes to SBA’s Loan Programs – Two changes
All Other portfolios declined $0.4 billion and $0.2 billion, played a major role in the growth of SBA’s loan portfolio.
respectively. From FY 2008 through FY 2014, nearly all (99 First, a series of legislative events permanently increased
percent), of the portfolio’s cumulative $26.3 billion growth SBA loan limits and temporarily lowered fees and in-
came from 7(a), 504 and SBIC programs (see Chart XV). creased guaranties. These statutory changes increased
SBA’s capacity to supply greater credit to small businesses.
New Guarantied Loans
The American Recovery and Reinvestment Act of 2009
Three primary factors contributed to the loan guaranty temporarily lowered fees and raised guaranties for SBA’s
portfolio’s recent growth in outstanding balances: 7(a) and 504 loan programs, among many other provi-
sions. Second, when the Recovery Act and the extensions
Continuous Growth in the Economy – Real Gross Domes-
ended in Q4 FY 2010, the Small Business Jobs Act of
tic Production (RGDP) in the United States grew at an
2010 made permanent the higher loan limits and up-
average annual rate of 2.2 percent during 2012-2014. The
wardly revised size standards that determine what qualifies
first half of 2014 experienced a volatile but still positive
as a small business. This in turn allowed the Agency to
economic environment, with first quarter RGDP posting a
guarantee a greater dollar volume of loans which for some
negative 2.1 percent annual growth rate, and second quar-
borrowers came in the form of larger loans
(see Chart XVI). These same factors
also contributed to the improvement in
CHART XV MAKEUP OF SBA’S OUTSTANDING LOAN PORTFOLIO the portfolio’s financial performance.
120
New Direct Loans
$3.3
$3.5
$2.6 $6.8 In FY 2014, SBA’s gross lending approv-
$1.2 $7.2
100 $1.1 $7.2 $9.0 als for the Disaster Assistance program
$1.0 $7.5 $8.5
$1.1
$7.9 $8.0
$7.8 grew $332 million due to loans extended
$8.6 $8.4 $27.2
80 $8.1 to businesses and individuals impacted
$8.4 $26.9
$8.5 $26.9 by flooding in Colorado, Florida, and
$26.6
$25.5 Illinois. A detailed review of the portfolio
$ Billions
60 $22.3 $24.1
indicates the high volume in FY 2006
40 ($11.7 billion), which included Hur-
$63.7 $68.2 ricanes Katrina, Rita, and Wilma along
$56.4 $60.1
$48.6 $50.8
$47.7 with an additional high volume in FY
20
2013 ($2.8 billion), which included
Hurricane Sandy, represents nearly 55
0
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 percent of the portfolio’s outstanding
direct disaster loans. The SBA will con-
7(a) 504 SBIC Disaster All Other
tinue to make disaster loans an impor-
22 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
CHART XVI QUARTERLY GROSS 7(a) AND 504 LOAN APPROVALS
redit
ct c ted
ry A n
cove pleme
t
s Ac
12 : Re im : Job
Y11 xhauste
d
Y09 s Note: Fiscal year-end spikes in Q4
n Q1 F
Q2 F rovisio g e lending activity for the last three fiscal years.
dit fund
in
: Cre en
p ct
ry A d
Y09 z cove
Q1 F rket fro
e
: Re xhaust
Y10 e
10 ma Q4 F funding
8
FY 2011 Average
$ Billions
$6,120,752 FY 2014 Average
6 FY 2012 Average
FY 2013 Average
$5,847,495
$5,773,857
$5,466,264
FY 2010 Average
4 $4,257,960
FY 2009 Average
$3,280,120
2
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
tant recovery tool for businesses, homeowners, and renters the Agency’s major loan programs followed this national
who survive a disaster. downward trend. Delinquency rates for the 7(a) loan
program declined from the 3.9 percent recorded during
Portfolio Performance – Delinquencies January 2009 to 1 percent recorded during July 2014.
Delinquency rates (borrowers who are late on their pay- Delinquency rates for the 504 program likewise declined
ments) are a leading indicator of the Agency’s charge-off from the 5 percent recorded during February 2010 to 1
rate (i.e. the rate of dollars spent to cover loans that percent recorded during July 2014.
defaulted). Thus, delinquency rates are a general indicator
of the Agency’s and taxpayers’ future liabilities for these Portfolio Performance – Charge-Offs
programs. A declining delinquency rate (see Chart XVII) At the end of FY 2014, the charge-off rates for most SBA
is a positive indicator for the financial performance of any primary loan programs, both guaranty and direct, are
loan portfolio. trending downward. A reduction in the charge-off rate
across the bulk of the Agency’s loan vehicles is a major
Modest economic growth, strong profit performance, and positive factor for its diverse portfolio. The charge-off rates
tighter lending standards by financial institutions dur- for the major loan programs are profiled here.
ing the past several years have reduced delinquency rates
for all business loans, which have been steadily declining Charge-off rates for the 7(a) program experienced a
since reaching cyclical peaks in the latter part of 2009. A pronounced decline during the FY 2010-2013 period,
declining national unemployment rate, off of a peak of declining from 4.3 percent during the fourth quarter of
10 percent in October of 2009, is a sign of a generally 2010 to 1.1 percent in the fourth quarter of 2013, but
improving environment for small businesses. For those then experiencing a minor uptick thereafter, posting a 1.7
businesses that survived the recession, the improved hiring percent rate in July of 2014 (see Chart XVII).
is a signal of business expansion and an increase in the
local demand for goods and services, improving businesses’ The charge-off rate for the 504 program experienced a
ability to repay debt obligations. Delinquency rates for continuous rise from the latter part of FY 2008 to the early
AGENCY FINANCIAL REPORT • FY 2014 23
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
part of FY 2013, peaking at 4.4 during January 2013, but percent during FY 2011 and a low of 0.26 percent during
then recorded a pronounced decline thereafter, dropping FY 2014. The charge-off rate for the SBIC participating
to 1.5 percent during July of 2014. This is not surprising securities program experienced a steady rise during FY
since the 504 program is an economic development pro- 2008-FY 2013, peaking at 10 percent in FY 2013, but
gram with a commercial real estate focus. As such, recov- then registered a pronounced drop during FY 2014 to
ery rates of defaulted 504 loans are, with some noticeable 0.26 percent.
time lag, significantly impacted by the pricing trend in this
sector. Real estate prices have been on the rise since the Quarterly information on the status of SBA’s loan portfo-
latter part of 2009, and as of August 2014 commercial real lio, including outstanding balances and approvals by loan
estate prices are at about 94 percent from the peak levels program and purchase rates, is available on SBA’s website
recorded during 2007. at http://www.sba.gov/performance/loan.
The recent charge-off rate for the SBIC debenture program
has fluctuated in a narrow band, reaching a high of 1.2
CHART XVII DELINQUENCY AND CHARGE-OFF RATES FOR THE 7(a) AND 504 PROGRAMS BY FISCAL YEAR
5
7(a) Program Declared
Recession
4
Rate (Percent)
3
2
1
0
FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
7(a) Delinquency Rate 7(a) Past 12 Months Charge Off Rate
5
Declared
Recession
504 Program
4
3
Rate (Percent)
2
1
0
FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
504 Delinquency Rate 504 Past 12 Months Charge Off Rate
24 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
ANALYSIS AND HIGHLIGHTS OF FINANCIAL STATEMENTS AND RESULTS
Highlights of Financial Results
(Dollars in Thousands)
As of September 30, 2014 2013 % Change
CONDENSED BALANCE SHEET DATA
Fund Balance with Treasury $ 6,110,111 $ 6,198,604 -1.43%
Credit Program Receivables and Related Foreclosed Property, Net 6,946,903 7,534,448 -7.80%
All Other Assets 127,237 113,118 12.48%
Total Assets $ 13,184,251 $ 13,846,170 -4.78%
Debt 7,756,100 8,088,099 -4.10%
Downward Reestimate Payable to Treasury 1,637,283 1,116,192 46.68%
Liability for Loan Guaranties 2,044,509 2,987,263 -31.56%
All Other Liabilities 257,911 270,762 -4.75%
Total Liabilities 11,695,803 12,462,316 -6.15%
Unexpended Appropriations 1,692,804 1,753,736 -3.47%
Cumulative Results of Operations (204,356 ) (369,882 ) 44.75%
Total Net Position 1,488,448 1,383,854 7.56%
Total Liabilities and Net Position $ 13,184,251 $ 13,846,170 -4.78%
For the Fiscal Year
2014 2013 % Change
STATEMENT OF NET COST BY STRATEGIC GOAL
Goal 1: Growing Businesses and Creating Jobs
Loan Subsidy Cost Including Reestimates $ (1,267,469) $ (378,654) -234.73%
All Other Costs Net of Revenue 648,483 766,109 -15.35%
Goal 2: Serving as the Voice for Small Business 109,488 92,964 17.77%
Goal 3: Building an SBA that Meets the Needs of Today’s
and Tomorrow’s Small Businesses 25,830 5,908 337.20%
Costs Not Assigned 17,274 37,759 -54.25%
Net Cost of Operations $ (466,394) $ 524,086 -188.99%
CONDENSED STATEMENT OF NET POSITION
Beginning Cumulative Results of Operations $ (369,882) $ (907,005) 59.22%
Total Financing Sources (300,868) 1,061,209 -128.35%
Less: Net Cost of Operations (466,394) 524,086 -188.99%
Ending Cumulative Results of Operations $ (204,356) $ (369,882) 44.75%
Beginning Unexpended Appropriations $ 1,753,736 $ 1,281,279 36.87%
Total Budgetary Financing Sources (60,932) 472,457 -112.90%
Ending Unexpended Appropriations $ 1,692,804 $ 1,753,736 -3.47%
Ending Net Position $ 1,488,448 $ 1,383,854 7.56%
CONDENSED STATEMENT OF BUDGETARY RESOURCES
Unobligated Balance Brought Forward $ 5,433,986 $ 5,632,368 -3.52%
Other Budgetary Resources, Net (577,710) (473,129) -22.10%
Appropriations (discretionary and mandatory) 1,274,707 2,649,756 -51.89%
Borrowing Authority (discretionary and mandatory) 762,945 1,520,370 -49.82%
Spending Authority from Offsetting Collections 3,932,731 4,730,229 -16.86%
Total Budgetary Resources $ 10,826,659 $ 14,059,594 -22.99%
Obligations Incurred, Budgetary $ 1,661,198 $ 2,882,329 -42.37%
Obligations Incurred, Nonbudgetary 3,453,214 5,743,279 -39.87%
Unobligated Balances, Available and Unavailable 5,712,247 5,433,986 5.12%
Total Status of Budgetary Resources $ 10,826,659 $ 14,059,594 -22.99%
AGENCY FINANCIAL REPORT • FY 2014 25
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
Analysis of Financial Results ed balances of budget authority provided in previous years.
The loan financing funds record all the cash flow activity
The SBA prepares its financial statements as a critical as- resulting from post 1991 direct loans and loan guaran-
pect of ensuring the accountability and stewardship for the ties, and are not budgetary costs. The financing accounts
public resources entrusted to it. The financial statements are reported separately in the Budget of the United States
are prepared in accordance with guidance issued by the Government and are excluded from the budget surplus/
Office of Management and Budget pursuant to the Chief deficit totals.
Financial Officers Act of 1990. While these statements
have been prepared from SBA’s books and records in ac- The Federal Credit Reform Act of 1990 governs SBA’s ac-
cordance with generally accepted accounting principles for counting for direct loans and loan guaranties made in FY
federal entities and the formats prescribed by OMB, they 1992 and thereafter. Under FCRA direct loans outstand-
are in addition to the financial reports used to monitor ing are reported net of an allowance developed using the
and control budgetary resources, which are prepared from present value of forecasted cash flows in subsidy models
the same books and records. The statements should be that are approved by the Office of Management and Bud-
read with the realization that they are a component of the get. A Liability for Loan Guaranties is reported also using
U.S. government, a sovereign entity. One implication subsidy models with forecasted cash flows from user fees
of this is that the liabilities presented herein cannot be and defaulted guarantied loans. SBA’s FCRA accounting
liquidated without the enactment of appropriations, and is discussed further in this section and in Notes 1 and 6A
ongoing operations are subject to the enactment of future in the financial statements.
appropriations.
The portion of the outstanding principal guarantied by
This Analysis of Financial Results references numbers in the SBA as of September 30, 2014 was $83.5 billion, an
the Highlights of Financial Results that was derived from increase of 5.6 percent from the $79.1 billion guarantied
the Financial Statements and Notes in this report. The at September 30, 2013 (see Note 6C in the financial
Operational Portfolio Analysis does not reference the statements). As shown in Chart XVIII, new guaranties
financial statements, but rather it provides an operational disbursed by SBA participating banks during FY 2014
analysis of SBA’s credit programs. As a result, the defini- were $18.0 billion, a 1.7 percent increase compared to the
tions of the loan and guaranty balances in the Portfolio FY 2013 figure of $17.7 billion. The $0.3 billion increase
Analysis section may differ somewhat from the balances resulted from a $1.5 billion decrease in 504 Development
used in this Analysis of Financial Results. For example, for Company Recovery Act loans, a $1.5 billion increase in
the 7(a) program the total amount of guarantied loans is 7(a) loans, a $0.4 billion increase in SBIC Debentures,
used in the Portfolio Analysis, where only SBA’s guarantied and a net $0.1 billion decrease in other loan programs in
portion is used in the Analysis of Financial Results, as it FY 2014. The increase in FY 2014 disbursements and a
ties to balances in the financial statements. reduction in purchases of guarantied loans contributed to
the 5.6 percent increase in outstanding guarantied princi-
Background pal from the previous year.
The SBA is a major federal credit agency
of the U.S. Government. The SBA had
3,128 employees including Disaster Full CHART XVIII GUARANTIED LOANS DISBURSED
Time Equivalent employees in FY 2014.
As a result only $0.9 billion of SBA’s
20
$10.8 billion budgetary resources in
FY 2014 were for salaries and expenses, 16
with the rest supporting SBA’s credit
12
$ Billions
programs. Budgetary resources when
apportioned by the Office of Manage- 8
ment and Budget are available to enter
4
into new obligations and to liquidate
them. Budgetary resources are made up 0
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
of new budget authority and unobligat-
26 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
Credit program receivables for the SBA
CHART XIX PURCHASES OF GUARANTIED LOANS
are comprised of business and disaster
direct loans and defaulted business
loans purchased per the terms of SBA’s 6
loan guaranty programs which are offset 5
by an allowance for subsidy. An allow-
4
ance for the subsidy cost of the gross
$ Billions
3
loan receivable is recorded as a contra
asset and the net asset is reported on the 2
Balance Sheet. The subsidy allowance is 1
determined by modeling the projected 0
future cash inflows and outflows of SBA FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
credit programs using discounted cash
flow methodology. Loan losses, the
costs of loan servicing, and loan interest Liabilities
rates are factors that affect the subsidy allowance.
The SBA had total liabilities of $11.7 billion at the end
SBA credit program receivables were valued at $6.9 billion of FY 2014, down 6.2 percent from FY 2013. Liabilities
in FY 2014 which was a decrease of $0.6 billion from consist primarily of the Liability for Loan Guaranties,
FY 2013. The change in the credit program receivables Downward Reestimate Payable to Treasury, and Debt with
resulted from a decrease in defaulted guarantied busi- Treasury. The Liability for Loan Guaranties is the estimate
ness loans of $0.3 billion and a decrease in direct disaster of the net present value of the future amount the SBA will
loans of $0.3 billion. The amount of defaulted guarantied pay, net of fee collections, to liquidate expected purchases
loans decreased as collections and charge-offs exceeded of guarantied loans under its guarantied loan programs.
new guaranty purchases, partially offset by a lower subsidy The Liability for Loan Guaranties decreased $0.9 billion
allowance amount. This net decrease is attributable to an due to the year-end downward reestimate of future costs
improved economy in FY 2014. The amount of direct for SBA’s guaranty portfolio. The downward reestimate
disaster loans decreased as collections and charge-offs reflects the improvement in SBA’s portfolio and the eco-
exceeded new loans, partially offset by a lower subsidy al- nomic recovery.
lowance amount.
The Downward Reestimate Payable to Treasury increased
As reflected in Chart XIX, guarantied loan purchases $0.5 billion due to the larger year-end accrual of the
decreased $0.6 billion in FY 2014. The decrease this year downward reestimates for the 504 program cohorts in FY
reflects the continuing recovery after the economic reces- 2014. Better than projected FY 2014 loan performance
sion. The decrease in purchases this year did contribute in across all cohorts was the primary reason for the larger
part to the decrease in the outstanding guarantied business downward reestimate for FY 2014 compared to FY 2013.
loans receivable after including recoveries, expenses, and
Debt with Treasury decreased $0.3 billion due to the
charge-offs in the loans purchased portfolio.
decrease in disaster loan disbursements in FY 2014. Note
Financial Position 9 to the financial statements provides additional detail on
SBA debt with Treasury.
Assets
The SBA had total assets of $13.2 billion at the end of Net Position
FY 2014, down 4.8 percent from FY 2013. Total assets Cumulative Results of Operations is the accumulative
decreased primarily due to a $588.0 million decrease in difference between expenditures and financing sources
Credit Program Receivables and Related Foreclosed Prop- since the inception of the Agency. This negative balance
erty. This decrease was due to the amount of defaulted decreased $0.2 billion because unfunded upward subsidy
guarantied loans decreasing as the result of collections and reestimates at year-end for almost every program were less
charge-offs exceeding new guaranty purchases, as well as this year than last year. Upward subsidy reestimates deter-
the amount of direct disaster loans decreasing as collec- mined at year-end are funded in the following year when
tions and charge-offs exceeded new loans. they are received.
AGENCY FINANCIAL REPORT • FY 2014 27
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
Unexpended appropriations decreased $61.0 million The SBIC Participating Securities and Debenture pro-
this year primarily because the amount of appropriations grams had a downward reestimate of $0.1 billion in FY
received was significantly less than the appropriations 2014 that was due mostly to better than projected loan
received in FY 2013 for business, disaster, and administra- performance. Actual recoveries were higher than project-
tive activity. This affected Budgetary Financing Sources ed, and actual default purchases were lower than projected
and the Ending Net Position. in FY 2014. The FY 2014 loan performance contributed
to updated model assumptions, which resulted in de-
Net Costs of Operations creased cash outflow projections.
The Net Costs of Operations primarily reflects the costs
of SBA credit programs subsidy expenses during the year Budgetary Resources
for new loans and subsidy reestimates at year-end. The Total Budgetary Resources of $10.8 billion decreased $3.2
credit subsidy cost is the net present value of expected billion in FY 2014. This decrease is the net result of previ-
cash inflows and outflows over the life of a guarantied ous year unused appropriations available this year and the
loan, or the difference between the net present value of other factors in the Highlights table and discussed here.
expected cash flows and the face value of a direct loan. Other Budgetary Resources, Net decreased by $0.1 billion
The SBA receives appropriations annually to fund its credit in FY 2014. This decrease is attributable to a larger repay-
programs. When loans are disbursed, the SBA records ment of borrowings from prior year balances, offset with a
subsidy expense. In accordance with the Federal Credit large increase in prior year recoveries in FY 2014.
Reform Act, the subsidy costs are reestimated annually.
Reestimates update original loan program cost estimates to Appropriations (discretionary and mandatory) de-
reflect actual experience and changes in forecasts of future creased $1.4 billion in FY 2014. As shown in Chart
cash flows. Increased reestimated costs are funded in the XXI the decrease was the combination of the decrease
following year by permanent indefinite budget authority, in the amount of appropriations needed to fund SBA’s
while decreased costs are returned by the SBA to the U.S. upward credit subsidy reestimates, as well as a reduction
Treasury. in the need for subsidy to fund the Agency’s major loan
programs in FY 2014.
The reestimated costs for almost every program decreased
in FY 2014 resulting in a net downward reestimate which Borrowing Authority decreased $0.8 billion in FY 2014.
affected Strategic Goal 1 costs. Those subsidy reestimates Disaster borrowing authority initially granted to the SBA
were the largest components of the change (net decrease) was $1.0 billion, but the SBA withdrew $0.8 billion at
in the Agency’s net cost. Chart XX reflects the decreases year-end FY 2014 as it was not needed to fund future
in the subsidy reestimates for the Guarantied Business and credit program operations.
Direct Disaster loan programs in FY 2014.
There was a downward reestimate in the 7(a) programs.
The downward reestimate of $0.4
billion was due mostly to lower than
average purchases during FY 2014 that CHART XX CREDIT PROGRAM SUBSIDY REESTIMATES
decreased the overall purchase curve,
in turn decreasing purchase projections 5
in future years and contributing to the 4
downward reestimate for FY 2014. 3
$ Billions
2
The Recovery Act, and 504 Jobs Act
1
programs had a significant downward
0
reestimate of $0.8 billion due to better
-1
than projected FY 2014 loan perfor-
-2
mance. Further detail on subsidy rees- FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
timates can be found in Note 6I to the Direct Disaster Loans Direct Business Loans Guarantied Business Loans
financial statements in the Financial
Reporting section of this report.
28 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
Spending Authority from Offsetting Col-
lections decreased $0.8 billion in FY 2014. CHART XXI APPROPRIATIONS
Lower current year collections were used to
repay borrowings in FY 2014, tending to
8
increase the ending balance. This was offset
by a significant decrease in FY 2014 collec- 7 $0.32
tions received for subsidy, as well as reduced 6 $0.65 $0.28
year-end subsidy reestimates this year.
$5.58 $0.43
5
$ Billions
Status of Budgetary Resources $4.90
4 $0.28
The Total Status of Budgetary Resources $0.19 $0.44
3
of $10.8 billion decreased $3.2 billion in $0.57 $2.87
FY 2014. Budgetary obligations decreased 2 $2.29
$0.89
by $1.2 billion in part because subsidy $0.44 $0.23
1 $0.47
reestimates decreased in FY 2014 for the $1.32
$0.57
guarantied business programs, and because 0
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
the subsidy rates for SBA’s loan programs
Disaster Loans Salaries and Expenses Business Loans
decreased in FY 2014. Nonbudgetary
obligations decreased $2.3 billion due to the
decrease in obligations related to financing
fund reestimates, loan making, and purchases of guaran-
tied loans.
Unobligated balances at September 30, 2014 and 2013
were $5.7 billion and $5.4 billion which include $3.7
billion and $4.0 billion of unavailable unobligated
balances. These balances were unavailable because they
were unapportioned by OMB. The SBA accumulates
the majority of unobligated balances in its nonbudgetary
financing accounts ($4.3 billion in FY 2014 and
$4.1 billion in FY 2013) from subsidy estimates and
reestimates that are used primarily to pay default claims
in future years.
DID
YOU SBA 7(a) lending reached almost 52,044 loans for more than $19 billion,
KNOW surpassing FY 2013 by 12.18 percent in number of loans and 7.4 percent
in dollar amount.
AGENCY FINANCIAL REPORT • FY 2014 29
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
ANALYSIS OF SBA’S SYSTEMS, CONTROLS AND LEGAL
COMPLIANCE
Internal Control Environment and support offices directed compliance with the circular.
Key business processes impacting financial operations and
The SBA believes that maintaining integrity and ac- the financial statements were reviewed by OIC. Based on
countability in all programs and operations is critical for the evaluation of 15 business processes, the OIC identi-
good government. The ability to demonstrate consistent fied a number of deficiencies in the internal control over
responsible stewardship over assets and resources is a sign financial reporting, including several in SBA’s key business
of responsible leadership. SBA’s commitment to integrity processes. Additional reviews by SAT members covered
and ethical values with an effective system of internal con- some business processes that had no material impact on
trols ensures that every employee remains dedicated to the the financial statements, but did present some potential
efficient delivery of services to customers and maximizes for risk or exposure to the Agency. The SAT evaluated
desired program outcomes. The SBA has developed and the review findings and determined that none reached the
implemented management, administrative, and financial level of material weakness.
system controls to reasonably ensure that:
Starting the fiscal year with the federal government
• programs and operations achieve intended results shutdown followed by continued budgetary restrictions,
efficiently and effectively; the SBA adopted pro-active budgetary measures to ensure
• resources are used in accordance with the mission of mission coverage. SBA management developed strategies
the Agency; to minimize risks while maintaining sound controls.
• programs and resources are protected from waste,
This year, the SBA continued to have a significant deficien-
fraud, and mismanagement;
cy in information technology security controls, to include
• program and operation activities are in compliance access controls and identity management. A significant
with laws and regulations; and deficiency is a deficiency, or a combination of deficien-
• reliable, complete, and timely data are maintained cies, in internal control over financial reporting that is less
and used for decision-making at all levels. severe than a material weakness, yet important enough to
merit attention by those responsible for oversight of the
Each year, the SBA conducts an assessment of internal company’s financial reporting. To address these deficien-
control as required by the Federal Managers’ Financial cies, the SBA obtained professional IT products and
Integrity Act of 1982. The FMFIA also requires that the services that are being utilized to facilitate process im-
assessment results be reported to the President and the provements and for operational upgrades needed to correct
Congress in a statement of assurance. The SBA Admin- the deficiencies. The Agency has plans in place to take
istrator provides the statement of assurance based on the additional corrective action to further improve these areas
self-assessment of program managers, internal control in FY 2015.
reviews, and audits and reviews done by the Government
Accountability Office, and SBA’s Office of the Inspec- The SBA took additional actions that focused on imple-
tor General. During FY 2014, SBA’s Office of Internal menting an Information Security Continuous Monitor-
Controls (OIC) developed a self-assessment checklist to ing (ISCM) strategy. SBA’s preliminary ISCM strategy is
specifically assist district office management in document- designed to provide a roadmap that focuses on a near-real-
ing the adequacy of controls within their area of responsi- time approach to SBA risk remediation, operational aware-
bility. Other offices continued to use a checklist developed ness, and long-term risk management. The SBA ISCM
in the past that is periodically updated to reflect current goals and objectives include, but are not limited to:
SBA control systems.
• implementing new operational IT capabilities in
In support of internal control assessments, the OIC over- the areas of cybersecurity, network operations, and
sees the requirements of the Office of Management and Helpdesk activities;
Budget’s revised Circular No. A-123, Appendix A, Internal • improving SBA’s IT risk posture and enable the SBA
Control Over Financial Reporting. SBA’s Senior Assess- to operate within a known and defined risk toler-
ment Team (SAT), chaired by the Chief Financial Officer ance threshold by integrating System Development
and comprised of SBA managers from the major programs Life Cycle (SDLC) processes with current vulner-
30 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
ability data and assignment of risk. (e.g., Technical to more current technology platforms and relocation to
Review Board, Architecture Review Board, Change modern data centers that provide expanded capability for
Control Boards, etc.); continuity of operations.
• streamline SDLC activities by automating tasks
In addition to modernization of the financial system
to support Security Assessment and Authorization
platforms, the incremental improvement projects added
workflow requirements in order to reduce impacts
missing functionality to the financial systems, building
on system owners;
improved integration between the systems, improving
• enable staff to effectively manage SBA’s IT systems consistency of data, enhanced reporting capability, and
in near-real-time and respond to information system improving SBA’s automation of funds control for loan
threats; and programs and loan subsidy.
• incorporate real-time vulnerability data with SBA’s
operational data to support more informed IT risk The incremental improvement projects enhance SBA’s fi-
based decisions. nancial system controls over lending programs and provide
for improvement in accessibility to common information,
financial and budget management, and financial reporting.
Financial Management Systems Core financial systems at the SBA are comprised of three
Strategy systems operated and managed by the offices of the Chief
Financial Officer and Capital Access. The systems include:
Financial management systems at the SBA are designed
to support effective internal control, produce reliable, • Oracle Federal Financials – Upgraded to the most
timely financial information, and ensure cost effective loan current release, this Commercial Off-The-Shelf
guaranty processing. Management remains focused on (COTS) package is used for budget execution and
robust financial management systems that improve SBA’s management for administrative activity.
ability to comply with laws and regulations, provide timely • Loan Systems – SBA-built systems used to support
and accurate data to support management analysis and the lifecycle of loan guaranty processing, loan pro-
decision-making, enable the Agency to keep pace with its gram funds control, management and accounting
lending partners, and effectively use automation to achieve for loan servicing and loan related expenses.
operational efficiency.
• Financial Management System (FMS) – SBA-built
As demonstrated throughout this Agency Financial system used to consolidate administrative and loan
Report, the SBA seeks to comply with all federal financial activity, manage cash and control funds, and pro-
management system requirements and there have been no vide financial reporting.
deficiencies identified under the Federal Financial Manage-
ment Improvement Act of 1996.1
The SBA completed a series of incremental improvement
projects designed to modernize the financial manage-
ment systems to improve financial system controls, reduce
sustainment costs, provide additional functionality for
external lending partners, and prolong system useful
lives. These projects include the migration of the systems
1 The purpose of the Federal Financial Management Improvement Act of 1996
(FFMIA) is to advance federal financial management by ensuring that federal
financial management systems provide accurate, reliable and timely financial
management information to the government’s managers. Core components
include applying uniform accounting standards across the federal government;
full disclosure of all federal programs and activity; increasing the accountabil-
ity, creditability, performance, productivity and efficiency of federal financial
management; establishing financial systems to control the cost of federal gov-
ernment; and increasing the capability of agencies to monitor budget execution
by comparing spending to results of activities. Compliance with the FFMIA
provides the basis for the continuing use of reliable financial management
information by program managers, and by the President, the Congress, and the
public. (Office of Management and Budget, http://www.whitehouse.gov/omb/
financial_ffs_ffmia).
AGENCY FINANCIAL REPORT • FY 2014 31
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
Management Assurances:
FMFIA and FFMIA Assurance Statement for FY 2014
The Small Business Administration continued to strengthen internal controls over its programs and operations during
FY 2014. Creating and sustaining a culture of responsibility and accountability while eliminating and preventing waste,
fraud, and abuse is critical to meeting our mission at the SBA. I am pleased to report that the SBA continues to achieve
its internal control objectives.
An example of SBA’s commitment to internal control objectives occurred during the lapse of appropriations on October
1, 2013. In response to this event, the SBA conducted an orderly shutdown of operations of all its offices with the pri-
mary exception of Disaster Assistance. When the federal government passed appropriations and re-opened on Thursday,
October 17, 2013, the SBA restarted operations and successfully continued with its mission objectives without sacrificing
internal control practices.
SBA management is responsible for establishing and maintaining effective internal controls and financial management
systems that meet the objective of the Federal Managers Financial Integrity Act (FMFIA). The SBA conducted its as-
sessment of internal controls over the effectiveness and efficiency of operations and compliance with applicable laws and
regulations in accordance with OMB Circular No. A-123, Management’s Responsibility for Internal Controls. Agency
managers have issued assertions to me as to the status of their FY 2014 internal controls in their areas of responsibility.
These assertions are supported by internal testing, checklists, and other management reviews. Although a few Agency
managers reported some operating deficiencies, these were not of a material nature. Based on the results of these evalua-
tions, I can provide reasonable assurance that internal controls over operations and compliance with applicable laws and
regulations, as of September 30, 2014, were operating effectively and no material weaknesses were identified in the design
or operation of those internal controls. Further, the Agency’s financial management systems conform to the principles,
standards, and related requirements prescribed by Section 4 of FMFIA.
The SBA conducted its assessment of the effectiveness of internal controls over financial reporting, which includes safe-
guarding of assets and compliance with applicable laws and regulations, in accordance with the requirements of Appendix
A of OMB Circular No. A-123. Based on the results of this evaluation, I can provide reasonable assurance that internal
control over financial reporting was operating effectively and no material weaknesses were identified in the design or
operation of internal control over financial reporting for FY 2014.
SBA’s independent auditor issued an unmodified opinion on the Agency’s FY 2014 financial statements for the tenth year
in a row. However, the auditor identified one instance of non-compliance with applicable laws and regulations as of Sep-
tember 30, 2014. Specifically, due to ongoing issues with the Agency’s legacy mainframe loan information system, not all
co-borrowers and guarantors on charged-off 7(a), 504 and disaster loans were referred to the Department of Treasury for
debt collection as required by the Debt Collection Improvement Act (DCIA).
The SBA has a DCIA Compliance Team made up of representatives from the Office of Capital Access and the Office of
the Chief Financial Officer, who work together to identify and resolve problems pertaining to the implementation of the
DCIA. As a result of their efforts, the SBA has implemented improvements to support the ongoing referral of defaulted
loans, including referrals of co-borrowers and guarantors, to Treasury. In FY 2014, the team conducted data analysis and
instigated system corrections to resolve issues with loans rejected by Treasury’s system in previous years. Despite these
improvements, the underlying system issues will likely continue to be a challenge for the Agency until the transition from
the legacy mainframe to a web-based system is complete.
32 AGENCY FINANCIAL REPORT • FY 2014
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
The Federal Financial Management Improvement Act (FFMIA) requires federal agencies to implement and maintain
financial management systems that are in substantial compliance with federal financial management systems require-
ments, federal accounting standards, and the United States Standard General Ledger. Based on the FFMIA criteria, I can
provide reasonable assurance SBA’s financial management systems substantially comply with FFMIA for FY 2014.
Maria Contreras-Sweet
Administrator
November 17, 2014
SUCCESS STORY: Completing a Good Job on Time
Quality First Cleaning Contractors,
Fort Riley, Kansas
When Byong Lee started working as a custodial shift manager for a maintenance
company at Fort Riley, Kansas in 1982, she had dreams of running her own
business. Now, more than 30 years later, she successfully manages multiple federal
and commercial contracts in Kansas and Missouri as owner of Quality First Cleaning
Contractors.
A native of South Korea, Lee started Quality First Cleaning Contractors in 1999. She
instills in her employees the pride that comes from completing a good job on time.
“I learned this philosophy over the 30 plus years of work in the custodial industry. I
believe that pride comes from providing the best possible service to my customers
and will yield a long-term relationship with them.” Lee strives to make sure her
bid proposals are priced competitively and that she includes the labor and materials
necessary to do a good job that is completed on time.
Lee applied for and was accepted into SBA’s 8(a) business development program. She
credits the program with helping her take the business to the next level. She also
became HUBZone certified and was awarded a custodial/cleaning contract for the U.S.
Army Reserve Center in Wichita before graduating from the 8(a) program. Since then,
Quality First Cleaning Contractors has filled service contracts for custodial services for
several facilities in Fort Riley, state and local governments, private sector companies, and the Social and Rehabilitation
Services building in Junction City, Kansas.
AGENCY FINANCIAL REPORT • FY 2014 33
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S
Improper Payments Summary ceived Hurricane Sandy Disaster Relief funds. The Small
Business Investment Company program, a major credit
The Improper Payments Information Act of 2002 (IPIA), program, retained approval from OMB for relief from
its amendments, and OMB Circular No. A-123, Appen- reporting due to the low occurrence of improper payments
dix C, Management’s Responsibility for Internal Control: as determined by several years of review and the continued
Requirements for Effective Measurement and Remedia- low probability for improper payments as determined by
tion of Improper Payment, requires agencies to review all the 2014 risk assessment.
programs and activities, identify those that are susceptible
to significant erroneous payments, and estimate annu- The detection and remediation of improper payments is a
ally the amount of erroneous payments made in those priority for the Agency. SBA staff monitor and review for
programs. The Circular requires risk assessments at least improper payments and are charged with implementing
once every three years to determine a program’s suscep- improvements that will reduce improper payment rates.
tibility to improper payments, so the SBA performed 11 The SBA also continually seeks opportunities to enhance
risk assessments during FY 2014 due to the expiration of and implement internal controls to reduce the risk for
the three-year cycle. The SBA also conducted 3 new risk improper payments.
assessments to comply with the Improper Payment Elimi-
nation and Recovery Improvement Act of 2010, which The Agency’s primary concern in its improper payment
requires the assessment of payments to employees. The reporting stems from administrative and documenta-
risk assessments did not identify any additional programs tion errors which are caused by the absence of support-
as susceptible to improper payments. ing documentation necessary to verify the accuracy of a
payment or errors caused by incorrect inputting, classify-
The SBA has five programs and activities that are subject ing, or processing of applications or payments. Detailed
to improper payment reporting: the 7(a) loan program, information concerning SBA’s improper payment reviews
the Certified Development Company (504) loan program, and its efforts to reduce improper payments is presented in
the Disaster loan program, disbursements related to goods the Other Information section.
and services, and new in 2014, grant programs that re-
DID
YOU The SBA proudly recognizes SCORE on its 50th anniversary. With a
KNOW network of 320 chapters and 11,000 volunteer mentors, SCORE has served
more than 10 million entrepreneurs and small business owners, providing
mentoring, counseling, and coaching sessions.
34 AGENCY FINANCIAL REPORT • FY 2014
Financial
Reporting
SUCCESS STORY: Family Business Blends Old World
Tastes with New World Innovation
Anita’s Mexican Food Corporation,
San Bernardino, California
Anita’s Mexican Food Corporation is a wholesale food manufacturer and co-packer.
The company’s origins date back to 1958 when patriarch Mauro Robles came
from Mexico, earned citizenship, and sought to create new products that respected
Old World tastes and traditions. Co-owners Ricardo Robles, Pablo “Rene”
Robles, and Jackie Robles are SBA’s 2014 California Small Business Persons of the
Year. They were nominated in recognition of their accomplishments in growing
revenues, 112 percent over the past three years, and increasing employment by
129 positions.
What began as a flour tortilla manufacturer grew to become a major flour- and
corn-based food manufacturing wholesaler and co-packer with more than 1,000
different products under eight trademarks. It specializes in tortilla and snack
foods distributed nationally and internationally to Canada, South Korea, New
Zealand, and throughout South America. Anita’s Mexican Food Corporation
was the first company to introduce organic corn tortilla chips in various types of organic corn. After a national firm
flooded the market, the business innovated to become the first company in the organic, GMO-free, and gluten-free
corn tortilla chip market. The company also operates a flour tortilla manufacturing facility in East Los Angeles, one
of the largest employers in its area that produces more than 1.5 million tortillas a day.
Through 504 loan financing, the business completed a project that totaled over $9.7 million for real estate,
improvements, and equipment.
FI N A N CI A L REPORT IN G
MESSAGE FROM THE CHIEF FINANCIAL OFFICER
November 17, 2014
I am pleased to submit the U.S. Small Business Administration’s (SBA) Agency Financial Report for fiscal year 2014. An
independent audit has earned the SBA an unmodified opinion with no material weaknesses.
The auditor identified one instance of non-compliance with applicable laws and regulations as of September 30, 2014.
Due to ongoing technology challenges with the Agency’s legacy mainframe information system, not all co-borrowers and
guarantors and disaster charged-off loans were referred to the Treasury for cross-servicing collection of debt as required by
the Debt Collection Improvement Act. Improvements in technology and processes continue to be implemented to sup-
port compliance on the referral of loans, and the SBA will make system modifications in accordance with an Agency plan
to resolve the completeness and accuracy of referrals to Treasury.
Improvements continue to be made in the integration and operation of the Acquisition Division. In FY 2014, CFO
staff met with each program office to develop an advanced acquisition strategy that coordinates procurement actions
and budgetary requirements. These sessions proved particularly important to assist managers in navigating the FY 2014
continuing resolution budgets that segmented annual budgetary allocations. The SBA’s acquisition planning has ma-
tured significantly through this collaborative process, and communication with program offices has greatly improved. By
integrating the budget and acquisition process, program managers are better able to plan and execute. Throughout 2014,
SBA’s Acquisition Division has made considerable progress toward standardizing and improving SBA’s procurement pro-
cess. The SBA exceeded its overall FY 2014 small business contracting goal of 68 percent– the highest percentage goal in
the government for small business contracts – as well as all socio-economic sub-goals. The SBA also received a procure-
ment scorecard grade of “A” for the Agency’s FY 2013 acquisition achievements.
The CFO’s office also made great strides in the reduction of improper payments for disbursement for goods and services
in FY 2014. The improper payment rate dropped by more than 3 percent to the current year rate of 8.4 percent. This
year’s rate brings the Agency below the mandatory compliance level.
A major challenge to SBA operations was the federal civilian government shutdown early in the fiscal year. SBA executed
contingency operation plans to facilitate a smooth transition from one fiscal year to the next with a limited group of
excepted employees. Despite this initial setback, the CFO’s office continued to drive the Agency towards excellence in
resource management by synchronizing budget, acquisition, and performance information to provide decision makers
with the information they need to effectively execute Agency programs.
Another major process improvement has been SBA’s implementation of the Quick Pay initiative to ensure the timely
payment of invoices to prime contractors. I am proud to say that these process improvements resulted in more than $110
million in accelerated payments to SBA contractors during the June 2013 to July 2014 period.
The SBA continued its efforts to reduce Agency-wide spending on non-disaster travel in FY 2014 to comply with the Presi-
dent’s Campaign to Cut Waste. Travel spending caps were set for each office, placing priority on mandatory and compliance
trips. Through careful planning and management, the Agency was able to stay within its mandated travel cap.
This year, the SBA published its FY 2014-2018 Strategic Plan to guide the Agency over the next five years. The plan
includes three strategic goals that focus on job growth and creation, small business advocacy, and effective internal
management and risk mitigation. The strategic goals help guide the Agency‘s resource and management decisions. Each
strategic goal contains objectives which are directly tied to performance both at the individual level and Agency-wide.
This framework is essential to ensure that the SBA continues to play a key role in strengthening America’s economy by
providing tools to help grow businesses and create jobs.
AGENCY FINANCIAL REPORT • FY 2014 37
F I N A N C I A L RE P O RT I N G
For the eighth straight year the SBA has won the Certificate of Excellence in Accountability Reporting (CEAR) award.
This award, presented by the Association of Government Accountants, is made to federal agencies following a rigorous,
independent review against established standards for presentation. The award recognizes high-quality agency financial
and performance reports that effectively illustrate and assess financial and program performance, accomplishments and
challenges, cost and accountability. CFO Managers and staff work diligently to provide meaningful and high quality
reporting information on behalf of the Agency, and the CEAR award is recognition of their efforts.
I also want to recognize the independent Audit and Financial Management Advisory Committee who, since 2004, has
advised us in the financial reporting process and audit cycle, and made recommendations pertaining to our financial
statement footnotes and the AFR prior to publication. I thank them for their support and dedication to continued
improvement.
SBA’s efforts to assist entrepreneurs and small business owners are especially critical to a healthy economy. Throughout
America’s history, small businesses have played the leading role in job creation. In fact, more than half of working Ameri-
cans own or work for a small business and small businesses are responsible for two out of every three net new private
sector jobs created over the past decade. My office is proud to be a part of this effort.
Sincerely,
Tami Perriello
Associate Administrator for Performance Management
and Chief Financial Officer (Acting)
38 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
AUDIT AND FINANCIAL MANAGEMENT ADVISORY COMMITTEE’S
REPORT
The Audit and Financial Management Advisory Committee (the Committee) assists the Administrator in overseeing
the U.S. Small Business Administration’s (SBA’s) financial operations. As part of that responsibility, the Committee
meets with Agency management, the Agency’s Inspector General, and its external auditors to review and discuss SBA’s
external financial audit coverage, the effectiveness of SBA’s internal controls over its financial operations, and its com-
pliance with certain laws and regulations that could materially impact SBA’s financial statements. SBA’s external audi-
tors are responsible for expressing an opinion on the conformity of SBA’s audited financial statements with the U.S.
generally accepted accounting principles. The Committee reviews the findings of the Inspector General and external
auditors, and SBA’s responses to those findings, to ensure that SBA’s plan for corrective action includes appropriate
and timely follow-up measures. In addition, the Committee reviews the draft Agency Financial Report (AFR), includ-
ing its financial statements, and provides comments to management who has primary responsibility for the AFR. The
Committee met formally once during the year and once via telecom with respect to these responsibilities on FY 2014
financial management and reporting. During the formal meeting the Committee met with the Inspector General and
external auditors without SBA management being present and discussed with the external auditors the matters that are
required to be discussed by generally accepted auditing standards. Nothing came to our attention as a result of these
discussions to indicate changes were needed to the financial statements and notes thereto that are included in the FY
2014 AFR.
Edward J. Mazur
Chairman
Audit and Financial Management Advisory Committee
AGENCY FINANCIAL REPORT • FY 2014 39
F I N A N C I A L RE P O RT I N G
INSPECTOR GENERAL’S AUDIT REPORT
40 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
AGENCY FINANCIAL REPORT • FY 2014 41
F I N A N C I A L RE P O RT I N G
INDEPENDENT AUDITORS’ REPORT ON FY 2014 FINANCIAL STATEMENTS
KPMG LLP
Suite 12000
1801 K Street, NW
Washington, DC 20006
Independent Auditors’ Report
Inspector General
United States Small Business Administration:
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of the U.S. Small Business
Administration (SBA), which comprise the consolidated balance sheets as of September 30, 2014 and
2013, and the related consolidated statements of net cost, and changes in net position, and combined
statements of budgetary resources for the years then ended, and the related notes to the consolidated
financial statements.
Management’s Responsibility for the Financial Statements
The SBA’s management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with U.S. generally accepted accounting principles; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material misstatement, whether due to
fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America; the standards applicable to financial audits contained in Government Auditing Standards issued
by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin
No. 14-02, Audit Requirements for Federal Financial Statements. Those standards and OMB Bulletin
No. 14-02, require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity.
42 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
Opinion on the Financial Statements
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the U.S. Small Business Administration as of September 30, 2014 and
2013, and its net costs, changes in net position, and budgetary resources for the years then ended in
accordance with U.S. generally accepted accounting principles.
Other Matters
Required Supplementary Information
U.S. generally accepted accounting principles require that the information in the Management’s Discussion
and Analysis, Required Supplementary Information, and Required Supplementary Stewardship
Information sections be presented to supplement the basic consolidated financial statements. Such
information, although not a part of the basic consolidated financial statements, is required by the Federal
Accounting Standards Advisory Board who considers it to be an essential part of financial reporting for
placing the basic consolidated financial statements in an appropriate operational, economic, or historical
context. We have applied certain limited procedures to the required supplementary information in
accordance with auditing standards generally accepted in the United States of America, which consisted of
inquiries of management about the methods of preparing the information and comparing the information
for consistency with management’s responses to our inquiries, the basic consolidated financial statements,
and other knowledge we obtained during our audits of the basic consolidated financial statements. We do
not express an opinion or provide any assurance on the information because the limited procedures do not
provide us with sufficient evidence to express an opinion or provide any assurance.
Other Information
Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial
statements as a whole. The Message from the Administrator, Other Information, and the information on
pages 35 to 39 of the Agency Financial Report, are presented for purposes of additional analysis and are
not a required part of the basic consolidated financial statements. Such information has not been subjected
to the auditing procedures applied in the audit of the basic consolidated financial statements, and
accordingly, we do not express an opinion or provide any assurance on it.
Other Reporting Required by Government Auditing Standards
Internal Control Over Financial Reporting
In planning and performing our audit of the consolidated financial statements as of and for the year ended
September 30, 2014, we considered the SBA’s internal control over financial reporting (internal control) to
determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our
opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the
effectiveness of the SBA’s internal control. Accordingly, we do not express an opinion on the effectiveness
of the SBA’s internal control. We did not test all internal controls relevant to operating objectives as
broadly defined by the Federal Managers’ Financial Integrity Act of 1982.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or
detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination
of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of
the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A
significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe
than a material weakness, yet important enough to merit attention by those charged with governance.
AGENCY FINANCIAL REPORT • FY 2014 43
F I N A N C I A L RE P O RT I N G
Our consideration of internal control was for the limited purpose described in the first paragraph of this
section and was not designed to identify all deficiencies in internal control that might be material
weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may
exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies
in internal control that we consider to be material weaknesses. However, we did identify a combination of
certain deficiencies in internal control, described in Exhibit I, that we consider to be a significant
deficiency.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether SBA’s consolidated financial statements are free
from material misstatement, we performed tests of its compliance with certain provisions of laws,
regulations, contracts, and grant agreements, noncompliance with which could have a direct and material
effect on the determination of financial statement amounts, and certain provisions of other laws and
regulations specified in OMB Bulletin No. 14-02. However, providing an opinion on compliance with
those provisions was not an objective of our audit, and accordingly, we do not express such an opinion.
The results of our tests disclosed instances of noncompliance or other matters that are required to be
reported under Government Auditing Standards or OMB Bulletin No. 14-02. Specifically, our audit results
noted a noncompliance with the Debt Collection Improvement Act of 1996. Further details of the
noncompliance are described in Exhibit II.
We also performed tests of its compliance with certain provisions referred to in Section 803(a) of the
Federal Financial Management Improvement Act of 1996 (FFMIA). Providing an opinion on compliance
with FFMIA was not an objective of our audit, and accordingly, we do not express such an opinion. The
results of our tests of FFMIA disclosed no instances in which the SBA’s financial management systems did
not substantially comply with the (1) Federal financial management systems requirements, (2) applicable
Federal accounting standards, and (3) the United States Government Standard General Ledger at the
transaction level.
SBA’s Response(s) to Findings
The SBA’s response to the findings identified in our audit is described in the accompanying Exhibit III.
The SBA’s response was not subjected to the auditing procedures applied in the audit of the consolidated
financial statements and, accordingly, we express no opinion on the response.
Purpose of the Other Reporting Required by Government Auditing Standards
The purpose of the communication described in the Other Reporting Required by Government Auditing
Standards section is solely to describe the scope of our testing of internal control and compliance and the
result of that testing, and not to provide an opinion on the effectiveness of the SBA’s internal control or
compliance. Accordingly, this communication is not suitable for any other purpose.
Washington, DC
November 17, 2014
44 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
Exhibit I
U.S. Small Business Administration
Significant Deficiency
Improvement Needed in Information Technology Security Controls
During the FY 2014 financial statement audit, we found that the U.S. Small Business Administration
(SBA) implemented corrective actions on some of the prior year findings; however, a number of conditions
persisted in FY 2014 that reduced SBA’s ability to effectively manage its information system risk. As a
result, collectively, these conditions present a significant deficiency in SBA’s internal control environment.
In an effort to provide additional clarity to SBA management with respect to the corrective actions
required, we enhanced our prior year recommendations where issues persisted in FY 2014, and issued
additional recommendations for the new control deficiencies identified. In the sections below, we
distinguish between recurring conditions and related recommendations, and those that were newly
identified in FY 2014. We have omitted some technical details from the conditions and recommendations
due to the sensitivity of the information. These details were communicated to management through Notices
of Findings and Recommendations throughout the audit.
We have summarized the Information Technology (IT) control deficiencies that we noted during the FY
2014 audit below, and have organized them by the following general IT control objectives: logical and
physical access controls, application change management, system configuration management, and
contingency planning.
Logical and Physical Access Controls
An integral part of the effectiveness of an organization’s security program management efforts should be to
ensure that logical and physical access controls provide reasonable assurance that IT resources, such as
data files, application programs, and IT-related facilities/equipment, are protected against unauthorized
modification, disclosure, loss, or impairment.
Our audit found that the following control deficiencies identified in the prior year(s) persisted in FY 2014:
• User accounts to the network and some financial systems were not properly authorized.
• User accounts to the network and some financial systems were not recertified in accordance with
SBA policy.
• The principle of “least privilege” for user/service accounts with network administrator privileges
was not enforced.
• User accounts to the network and some financial systems were not disabled or removed promptly
upon personnel termination.
• The employee exit clearance and contractor off-boarding processes were not standardized to ensure
that access to SBA’s network and financial systems was timely removed upon separation.
• Security settings for the network were not enforced for all organizational units.
• Processes for consistently and effectively reviewing audit logs for the network and financial
systems were not implemented.
• A process for approving, administering, and reviewing physical access to the Headquarters (HQ)
Data Center had not been defined.
I-1
AGENCY FINANCIAL REPORT • FY 2014 45
F I N A N C I A L RE P O RT I N G
Exhibit I
U.S. Small Business Administration
Significant Deficiency
• Remote access to SBA information systems was not configured and provisioned in accordance
with SBA policy.
In addition to the matters above, we noted the following additional control deficiency during our FY 2014
audit:
• Known password for the network did not meet SBA standards for password strength and
complexity.
Recommendations – Logical and Physical Access Controls:
We have issued the following recommendations to address the repeat control deficiencies listed in the
section above.
We recommend that the Chief Information Officer (CIO) coordinate with SBA program offices to:
1. Implement and monitor procedures to ensure that access is appropriately granted to employees and
contractors, consistent with the conditions on their access forms after all approvals have been
obtained.
2. Implement procedures to ensure that user access, including user accounts and associated roles, is
reviewed on a periodic basis consistent with the nature and risk of the system, and any necessary
account modifications be performed when identified. In addition, implement the principle of “least
privilege” for user and service accounts.
3. Grant elevated network privileges per business needs only and enforce the concept of least
privilege or implement mitigating controls to ensure that activities performed using privileged
network accounts (including service accounts) are properly monitored.
4. Improve SBA’s administration of logical system access by taking the following actions:
o Implement an effective off-boarding process and verify periodically that controls to remove
logical access for separated employees from SBA systems are implemented and operating as
designed;
o Establish a process for the identification and removal of separated contractors in order to help
ensure that access is timely removed upon contractor separation; and
o Remove access to the general support systems and major applications (including development
and test environments) timely when employees and contractors are terminated.
5. Enforce a network access security baseline(s) across the network that is consistent with SBA’s
security policy, Office of Management and Budget directives, and United States Government
Configuration Baseline requirements.
6. Improve SBA’s information system logging and auditing program, by taking the following actions:
o Review and rationalize current audit and logging activities and capabilities to determine their
effectiveness in addressing risks to systems and data;
o Implement and enforce consistent and effective creation of audit records, capturing of relevant
auditable events, auditing (i.e., manual or automated review of audit records) for specified
I-2
46 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
Exhibit I
U.S. Small Business Administration
Significant Deficiency
events, and automated alerting on specified events across SBA’s infrastructure using a risk-
based approach;
o Retain evidence of the audit log review; and
o Develop an agency-wide plan and schedule for implementation of the above recommendations.
7. Establish a process to review the list of individuals with HQ data center access permissions
periodically, to ensure that only authorized personnel retain access to the HQ data center.
8. Improve SBA’s remote access program by taking the following actions:
o Ensure employees acknowledge compliance with security requirements prior to establishing a
remote connection to SBA’s network when teleworking or otherwise connecting remotely to
SBA systems; and
o Monitor compliance with Standard Operating Procedure (SOP) 90.47.3, Information System
Security Program and the updated Teleworking SOP.
To address the newly identified logical and physical access control weakness:
We recommend that the CIO:
9. Ensure that sensitive passwords meet SBA standards for password strength and complexity.
Application Change Management
The integrity of information processing is dependent on the controlled management of changes to the
software that controls the processing. Software change management is designed to reduce the risk of
unauthorized or erroneous changes of software. Our audit found the following control deficiencies remain,
that were identified in a prior year:
• The change management process for some financial applications did not sufficiently reduce the
risk of an unauthorized change being made to the production environment. Specifically, the SBA
did not review or compare system code to ensure only authorized changes had been made, and the
audit log review process was not designed to detect unauthorized changes to application software.
• Segregation of duties were not enforced for one financial application. Additionally, detective
controls to mitigate the risk of known segregation of duties issues for two financial applications
did not operate for the full fiscal year.
• Required software changes for one financial subsystem were not implemented due to the ongoing
code migration project which impacted SBA’s compliance with the Debt Collection Improvement
Act of 1996 in that system. This issue was reported as a noncompliance matter in the “Compliance
and Other Matters” section of our audit report.
I-3
AGENCY FINANCIAL REPORT • FY 2014 47
F I N A N C I A L RE P O RT I N G
Exhibit I
U.S. Small Business Administration
Significant Deficiency
Recommendations – Application Change Management:
We have issued the following recommendations to address the repeat control deficiencies listed in the
section above, we recommend that the:
10. Associate Administrator of Capital Access (OCA), in coordination with the CIO, design and
implement a combination of preventative and detective controls to address the issues and related
risks in the condition above, and ensure an auditable trail of software changes is maintained to
prevent and detect unauthorized changes to production programs.
11. Associate Administrator of Disaster Assistance (ODA) and Chief Financial Officer enforce
segregation of duties for privileged users or perform mitigating controls to ensure that the risks
associated with privileged access remain mitigated.
12. Associate Administrator of the OCA, in conjunction with the CIO, continue to review system
protocols to determine if any other coding problems exist that may cause untimely referral of
loans, and address outstanding system protocol issues from prior years.
System Configuration Management
The primary focus of an organization’s system configuration management process should be to control the
security configuration of its infrastructure including servers, databases, network equipment, security
appliances, and security services. Without such controls, there is a risk that security features could be
inadvertently, or deliberately, omitted or turned off, introducing risk into the IT environment.
Our audit noted that the following prior year control deficiency persisted in FY 2014:
• Numerous high- and medium-risk configuration and patch management vulnerabilities were noted
in the network and infrastructure supporting certain financial systems.
Recommendations – System Configuration Management:
To address the repeat system configuration management condition above, we recommend that:
13. The CIO coordinate with SBA program offices to address the existing configuration and patch
management vulnerabilities noted during our assessment to be in compliance with SBA policy and
SBA Vulnerability Assessment Team (VAT) Internal Operating Procedures, Version 1.0. In
addition, implement procedures to ensure the consistent implementation and monitoring of SBA
approved security configuration baselines across SBA’s workstations, servers, databases, network
devices, and other security relevant appliances.
Contingency Planning
The focus of an organization’s contingency planning program should be to provide reasonable assurance
that information resources are protected and the risk of unplanned interruptions is minimized. Without such
controls, there is a risk that data may be lost or that critical operations may not resume in a timely manner.
Our audit noted that the following prior year control deficiencies persisted in FY 2014:
• An alternate processing site for some financial systems and related support infrastructure had not
been established.
I-4
48 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
Exhibit I
U.S. Small Business Administration
Significant Deficiency
In addition to the matter above, we noted the following additional control deficiency during our FY 2014
audit:
• Full backups for some of the financial systems and related support infrastructure were not retained
in accordance with SOP 90.47.3.
Recommendations – Contingency Planning:
To address the repeat contingency planning condition above, we recommend that the CIO:
14. Design and implement procedures, resources, and controls to ensure the timely recovery of
resources and systems in the event of a disaster or unexpected event.
To address the newly identified contingency planning control weakness, we recommend that the CFO, CIO
and Associate Administrator of OCA:
15. Ensure that full backups for financial systems and related support infrastructure are retained in
accordance with SBA policies.
I-5
AGENCY FINANCIAL REPORT • FY 2014 49
F I N A N C I A L RE P O RT I N G
Exhibit II
U.S. Small Business Administration
Compliance and Other Matters
Noncompliance with the Debt Collection Improvement Act of 1996
The Debt Collection Improvement Act of 1996 (DCIA) assigns the U.S. Department of Treasury (Treasury)
the responsibility for collecting delinquent debts, Government-wide. The DCIA requires Federal agencies
to transfer their nontax debt over 180 days delinquent to the Treasury. During our testwork over loan
charge-offs, we noted the SBA did not refer obligors (i.e., eligible principal borrowers, co-borrowers,
and/or guarantors) to the Treasury for offset or cross-servicing at the time of charge-off, as required by the
DCIA. Similar instances of noncompliance with the DCIA were reported in prior years. The SBA’s
noncompliance with the DCIA was the result of both manual errors and deficiencies in information
technology controls. For additional discussion of the information technology aspects of this finding, see
Exhibit I.
We recommend the Associate Administrator of the Office of Capital Access:
16. Conduct training to educate loan center staff on the proper steps to refer obligors to the Treasury
and correct errors after the initial referral.
17. Reinforce the importance of retaining identifying information for all obligors.
II-1
50 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
Exhibit III
CFO Response to Draft Audit Report on FY 2014 Financial
Statements
DATE: November 17, 2014
TO: Troy Meyer, Assistant Inspector General for Auditing
FROM: Tami Perriello, Associate Administrator for Performance Management
and Chief Financial Officer (Acting)
SUBJECT: Draft Audit Report on FY 2014 Financial Statements
The Small Business Administration has received the draft Independent Auditors’ Report from KPMG that includes the
auditors’ opinion on the financial statements and its review of the Agency’s internal control over financial reporting and
compliance with laws and regulations. The independent audit of the Agency’s financial statements and related processes is
a core component of SBA’s financial management program.
We are pleased that the SBA has again received an unmodified audit opinion from the independent auditor with no
material weaknesses. We believe these results accurately reflect the quality of the Agency’s financial statements and our
improved accounting, budgeting and reporting processes. As you know, the SBA has worked hard in past years to address
the findings from our independent auditor. Our core financial reporting data and processes have further improved, and
we are proud that the results of our efforts have been confirmed by the independent auditor.
The audit report includes a continuing significant deficiency in SBA’s information technology controls. The SBA will
continue to work on improvements in IT security. The SBA will track, monitor, and mitigate vulnerabilities in Agency
systems. Furthermore, the SBA will clarify and strengthen detailed procedures required to ensure security access controls
are in place to protect SBA data from unauthorized modification, disclosure, and loss.
The auditor reported again this year that the SBA is not compliant with the Debt Collection Improvement Act of 1996
related to timely referral of charged-off loans to the Department of the Treasury for its tax refund offset and collection
programs. Although the SBA made improvements to correct systemic errors identified last year, the auditors again found
instances of charged-off loans where co-borrowers and guarantors were not referred to Treasury. The SBA is working on
procedures to correct this issue.
We appreciate all of your efforts and those of your colleagues in the Office of the Inspector General as well as those of
KPMG. The independent audit process continues to provide us with new insights and valuable recommendations that
will further enhance SBA’s financial management practices. We continue to be committed to excellence in financial man-
agement and look forward to making more progress in the coming year.
AGENCY FINANCIAL REPORT • FY 2014 51
F I N A N C I A L RE P O RT I N G
FINANCIAL STATEMENTS AND NOTES
The U.S. Small Business Administration prepares its financial statements as a critical aspect of ensuring accountability
and stewardship for the public resources entrusted to it. Preparation of these statements is also an important part of
SBA’s financial management goal of providing accurate and reliable information that may be used to assess performance
and allocate resources.
SBA’s management is responsible for the accuracy and propriety of the information contained in the principal financial
statements and the quality of internal controls. The SBA prepares these financial statements from its books and records
in accordance with generally accepted accounting principles in the United States as well as formats prescribed by the
Office of Management and Budget.
The financial statements include the following reports.
The Consolidated Balance Sheet summarizes the assets, liabilities, and net position by major category as of the reporting
date. Intragovernmental assets and liabilities resulting from transactions between federal agencies are presented separately
from assets and liabilities resulting from transactions with the public.
The Consolidated Statement of Net Cost shows, by strategic goal, the net cost of operations for the reporting period.
Net cost of operations consists of full program costs incurred by the SBA less the exchange revenues earned by those
programs.
The Consolidated Statement of Changes in Net Position presents SBA’s beginning and ending net position by two
components – Cumulative Results of Operations and Unexpended Appropriations. It summarizes the change in net
position by major transaction category. The ending balances of both components of net position are also reported on the
Balance Sheet.
The Combined Statement of Budgetary Resources provides information about funding and availability of budgetary
resources, and the status of those resources at the end of the reporting period. Data on the Combined Statement of Bud-
getary Resources is consistent with information reflected on the Report on Budget Execution and Budgetary Resources
(SF 133), with the one exception of offsetting receipts. Offsetting receipts offset budget authority and outlays at the
agency level in the Budget of the United States Government, but are not reflected in the SF 133. The SBA includes off-
setting receipts in this statement for the purpose of reconciling outlay information presented in the Budget of the United
States Government.
The Notes to the Financial Statements provide information to explain the basis of the accounting and presentation used
to prepare the statements and to explain specific items in the statements. They also provide information to support how
particular accounts have been valued and computed.
The Required Supplementary Information presents a Combining Statement of Budgetary Resources report by principal
functional area.
The Required Supplementary Stewardship Information provides information on SBA’s investment in human capital
that supports the increase or maintenance of national economic productivity capacity through education and training
programs.
52 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
U. S. Small Business Administration
Consolidated Balance Sheet
as of September 30, 2014 and 2013
(Dollars in Thousands)
2014 2013
ASSETS
Intragovernmental Assets
Fund Balance with Treasury (Note 2) $ 6,110,111 $ 6,198,604
Advances (Note 1) 28,173 16,523
Total Intragovernmental Assets 6,138,284 6,215,127
Assets - Public and Other
Cash (Note 3) 1,264 3,976
Accounts Receivable, Net (Note 5) 83,816 84,097
Credit Program Receivables and Related Foreclosed Property, Net (Note 6) 6,946,903 7,534,448
General Property and Equipment, Net (Note 7) 4,729 6,173
Advances (Note 1) 9,255 2,349
Total Assets - Public and Other 7,045,967 7,631,043
Total Assets $ 13,184,251 $ 13,846,170
LIABILITIES
Intragovernmental Liabilities
Interest Payable $ 864 $ 832
Debt (Note 9) 7,756,100 8,088,099
Net Assets of Liquidating Funds Due to Treasury (Note 10) 10,140 41,698
Downward Reestimate Payable to Treasury (Note 1, Note 13) 1,637,283 1,116,192
Other (Note 8, Note 11) 9,984 9,652
Total Intragovernmental Liabilities 9,414,371 9,256,473
Other Liabilities - Public
Accounts Payable (Note 1) 47,707 45,972
Accrued Grant Liability (Note 1) 77,000 73,000
Liability for Loan Guaranties (Note 6) 2,044,509 2,987,263
Federal Employees’ Compensation Act Actuarial Liability (Note 1, Note 8) 34,627 33,703
Surety Bond Guarantee Program Future Claims (Note 8) 35,799 31,029
Other (Note 8, Note 11) 41,790 34,876
Total Other Liabilities - Public 2,281,432 3,205,843
Total Liabilities 11,695,803 12,462,316
NET POSITION
Unexpended Appropriations (Note 1) 1,692,804 1,753,736
Cumulative Results of Operations (Note 1) (204,356) (369,882)
Total Net Position 1,488,448 1,383,854
Total Liabilities and Net Position $ 13,184,251 $ 13,846,170
The accompanying notes are an integral part of these statements.
AGENCY FINANCIAL REPORT • FY 2014 53
F I N A N C I A L RE P O RT I N G
U. S. Small Business Administration
Consolidated Statement of Net Cost
For the years ended September 30, 2014 and 2013
(Dollars in Thousands)
2014 2013
STRATEGIC GOAL 1:
Growing Businesses and Creating Jobs
Gross Cost $ (107,258) $ 1,002,050
Less: Earned Revenue 511,728 614,595
Net Cost of Strategic Goal 1 (618,986) 387,455
STRATEGIC GOAL 2:
Serving as the Voice for Small Business
Gross Cost 109,488 92,964
Total Program Cost of Strategic Goal 2 109,488 92,964
STRATEGIC GOAL 3:
Building an SBA that Meets the Needs of Today’s
and Tomorrow’s Small Businesses
Gross Cost 25,830 5,908
Total Program Cost of Strategic Goal 3 25,830 5,908
COST NOT ASSIGNED TO STRATEGIC GOALS
Gross Cost 17,274 37,759
Total Program Cost Not Assigned to Strategic Goals 17,274 37,759
Net Cost of Operations $ (466,394) $ 524,086
Note 14
The accompanying notes are an integral part of these statements.
DID For the first time in eight years, the federal government met the 23 percent
YOU small business contracting goal, purchasing $83 billion in goods and
services from small businesses through prime contracting procurements
KNOW totaling 23.39 percent.
For more information visit:
http://www.sba.gov/content/small-business-procurement-scorecards-0.
54 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
U. S. Small Business Administration
Consolidated Statement of Changes in Net Position
For the years ended September 30, 2014 and 2013
(Dollars in Thousands)
2014 2013
Beginning Cumulative Results of Operations $ (369,882) $ (907,005)
Budgetary Financing Sources
Appropriations Used 1,325,564 2,169,146
Donations of Cash and Cash Equivalents 40 20
Other Financing Sources
Imputed Financing from Costs Absorbed by Others 21,893 19,955
Other - Current Year Liquidating Equity Activity (3,218) (3,992)
Other - Non-entity Activity (1,645,147) (1,123,920)
Total Financing Sources (300,868) 1,061,209
Less: Net Cost of Operations (466,394) 524,086
Ending Cumulative Results of Operations $ (204,356) $ (369,882)
Beginning Unexpended Appropriations $ 1,753,736 $ 1,281,279
Budgetary Financing Sources
Appropriations Received 1,278,241 2,745,037
Rescissions – (95,281)
Adjustment - Cancelled Authority (9,434) (5,194)
Return of Unrequired Liquidating Fund Appropriation (3,534) –
Other Adjustments (641) (2,959)
Appropriations Used (1,325,564) (2,169,146)
Total Budgetary Financing Sources (60,932) 472,457
Ending Unexpended Appropriations $ 1,692,804 $ 1,753,736
Ending Net Position $ 1,488,448 $ 1,383,854
The accompanying notes are an integral part of these statements.
AGENCY FINANCIAL REPORT • FY 2014 55
F I N A N C I A L RE P O RT I N G
U. S. Small Business Administration
Combined Statement of Budgetary Resources
For the years ended September 30, 2014 and 2013
(Dollars in Thousands)
September 30, 2014
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 1,297,199 $ 4,136,787 $ 5,433,986
Recoveries of Prior Year Obligations 105,039 317,098 422,137
Other Changes in Unobligated Balance (34,053) (965,794) (999,847)
Unobligated Balance from Prior Year Budget Authority, net 1,368,185 3,488,091 4,856,276
Appropriations (discretionary and mandatory) 1,274,707 – 1,274,707
Borrowing Authority (discretionary and mandatory) – 762,945 762,945
Spending Authority from Offsetting Collections 381,357 3,551,374 3,932,731
Total Budgetary Resources $ 3,024,249 $ 7,802,410 $ 10,826,659
STATUS OF BUDGETARY RESOURCES
Obligations Incurred $ 1,661,198 $ 3,453,214 $ 5,114,412
Unobligated Balance, end of year:
Apportioned 398,548 1,586,238 1,984,786
Unapportioned 964,503 2,762,958 3,727,461
Total Unobligated Balance, end of year 1,363,051 4,349,196 5,712,247
Total Status of Budgetary Resources $ 3,024,249 $ 7,802,410 $ 10,826,659
CHANGE IN OBLIGATED BALANCE
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 639,951 $ 701,530 $ 1,341,481
Obligations Incurred 1,661,198 3,453,214 5,114,412
Gross Outlays (1,710,912) (3,592,085) (5,302,997)
Recoveries of Prior Year Unpaid Obligations (105,039) (317,098) (422,137)
Unpaid Obligations, end of year 485,198 245,561 730,759
Uncollected Payments:
Uncollected Payments, Federal Sources, brought forward, October 1 – (296,519) (296,519)
Change in Uncollected Payments, Federal Sources – 153,510 153,510
Uncollected Payments, Federal Sources, end of year – (143,009) (143,009)
Memorandum (non-add) entries:
Obligated Balance, start of year $ 639,951 $ 405,011 $ 1,044,962
Obligated Balance, end of year $ 485,198 $ 102,552 $ 587,750
BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross (discretionary and mandatory) $ 1,656,064 $ 4,314,319 $ 5,970,383
Actual Offsetting Collections (discretionary and mandatory) (392,155) (3,923,558) (4,315,713)
Change in Uncollected Customer Payments
from Federal Sources (discretionary and mandatory) – 153,510 153,510
Budget Authority, net (discretionary and mandatory) $ 1,263,909 $ 544,271 $ 1,808,180
Gross Outlays (discretionary and mandatory) $ 1,710,912 $ 3,592,085 $ 5,302,997
Actual Offsetting Collections (discretionary and mandatory) (392,155) (3,923,558) (4,315,713)
Net Outlays (discretionary and mandatory) 1,318,757 (331,473) 987,284
Distributed Offsetting Receipts 900 (1,124,055) (1,123,155)
Agency Outlays, net (discretionary and mandatory) $ 1,319,657 $ (1,455,528) $ (135,871)
Note 15
The accompanying notes are an integral part of these statements.
56 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
U. S. Small Business Administration
Combined Statement of Budgetary Resources (continued)
For the years ended September 30, 2014 and 2013
(Dollars in Thousands)
September 30, 2013
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 862,901 $ 4,769,467 $ $5,632,368
Recoveries of Prior Year Obligations 63,684 81,655 145,339
Other Changes in Unobligated Balance (22,648) (595,820) (618,468)
Unobligated Balance from Prior Year Budget Authority, net 903,937 4,255,302 5,159,239
Appropriations (discretionary and mandatory) 2,649,756 – 2,649,756
Borrowing Authority (discretionary and mandatory) – 1,520,370 1,520,370
Spending Authority from Offsetting Collections 625,835 4,104,394 4,730,229
Total Budgetary Resources $ 4,179,528 $ 9,880,066 $ 14,059,594
STATUS OF BUDGETARY RESOURCES
Obligations Incurred $ 2,882,329 $ 5,743,279 $ 8,625,608
Unobligated Balance, end of year:
Apportioned 594,338 854,066 1,448,404
Unapportioned 702,861 3,282,721 3,985,582
Total Unobligated Balance, end of year 1,297,199 4,136,787 5,433,986
Total Status of Budgetary Resources $ 4,179,528 $ 9,880,066 $ 14,059,594
CHANGE IN OBLIGATED BALANCE
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 619,996 $ 278,173 $ 898,169
Obligations Incurred 2,882,329 5,743,279 8,625,608
Gross Outlays (2,798,690) (5,238,267) (8,036,957)
Recoveries of Prior Year Unpaid Obligations (63,684) (81,655) (145,339)
Unpaid Obligations, end of year 639,951 701,530 1,341,481
Uncollected Payments:
Uncollected Payments, Federal Sources, brought forward, October 1 – (176,681) (176,681)
Change in Uncollected Payments, Federal Sources – (119,838) (119,838)
Uncollected Payments, Federal Sources, end of year – (296,519) (296,519)
Memorandum (non-add) entries:
Obligated Balance, start of year $ 619,996 $ 101,492 $ 721,488
Obligated Balance, end of year $ 639,951 $ 405,011 $ 1,044,962
BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross (discretionary and mandatory) $ 3,275,591 $ 5,624,764 $ 8,900,355
Actual Offsetting Collections (discretionary and mandatory) (625,895) (4,540,597) (5,166,492)
Change in Uncollected Customer Payments
from Federal Sources (discretionary and mandatory) – (119,838) (119,838)
Budget Authority, net (discretionary and mandatory) $ 2,649,696 $ 964,329 $ 3,614,025
Gross Outlays (discretionary and mandatory) $ 2,798,690 $ 5,238,267 $ 8,036,957
Actual Offsetting Collections (discretionary and mandatory) (625,895) (4,540,597) (5,166,492)
Net Outlays (discretionary and mandatory) 2,172,795 697,670 2,870,465
Distributed Offsetting Receipts (118) (1,696,861) (1,696,979)
Agency Outlays, net (discretionary and mandatory) $ 2,172,677 $ (999,191) $ 1,173,486
Note 15
The accompanying notes are an integral part of these statements.
AGENCY FINANCIAL REPORT • FY 2014 57
F I N A N C I A L RE P O RT I N G
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity
The Small Business Act of 1953 created the Small Business Administration as an independent federal agency. SBA’s
mission is to maintain and strengthen the nation’s economy by enabling the establishment and vitality of small
businesses and by assisting in the economic recovery of communities after disasters. The SBA operates through the
execution of a congressionally approved budget that funds its programs.
Basis of Accounting and Presentation
The SBA prepares financial statements to report its financial position and results of its operations as required by
the Chief Financial Officers Act of 1990 and the Government Management Reform Act of 1994. The financial
statements are prepared from the Agency’s records in accordance with generally accepted accounting principles using
formats prescribed by the Office of Management and Budget. As a federal agency, the SBA cannot incur obligations
without authority from the Congress and an apportionment by the OMB.
These financial statements reflect transactions recorded on both a proprietary accrual accounting basis and a budgetary
obligation basis, in accordance with concepts and guidance provided by the OMB, the Federal Accounting Standards
Advisory Board, and the Department of the Treasury. Under the accrual method of accounting, revenues are
recognized when earned and expenses are recognized when incurred, without regard to receipt or payment of cash.
Budgetary accounting recognizes the legal commitment or obligation of funds in advance of the proprietary accruals
and facilitates compliance with legal constraints and controls over the use of federal funds.
The Federal Credit Reform Act of 1990 governs SBA’s accounting for direct loans and loan guaranties made in FY 1992
and thereafter. Under the FCRA, the liability for loan guaranties is determined as the summarized discounted present
value of the estimated future net cash inflows and outflows for each fiscal year’s cohort of guaranties. For direct loans,
the allowance is the current outstanding FCRA loans receivable balance less the discounted present value of the estimated
future net cash flows for all the loan cohorts. A cohort of loans receivable or guarantied loans is all of the loans made in
a given fiscal year. Increases to individual loans in a cohort that are made in a subsequent fiscal year are accounted for in
the subsequent year’s loan cohort. Cohort cash flows include loan repayments, recoveries on defaulted guaranties, and
loan fees received by the SBA that are due from the lenders and borrowers when the loan is made and during the life of
the loan cohort, as well as expenditures by the SBA for defaulted guaranties, loan servicing expenses, and other required
SBA expenditures. An initial allowance or liability for loan guaranties is established in the original year of the loan
cohort. The initial amount of the allowance and liability for each cohort is reestimated annually at fiscal year-end, and
the adjusted amount is included in SBA’s annual financial statements. Note 6 further describes FCRA accounting.
Use of Estimates
SBA’s management makes assumptions and uses estimates to prepare the financial statements based upon the facts
that exist when the statements are prepared. The SBA also uses economic assumptions provided by the Office of
Management and Budget in preparing the estimates. Actual results may differ from those assumptions and estimates
and the differences may be significant. The most significant differences between actual results and these estimates may
occur in the valuation of credit program receivables and liabilities for loan guaranties under guidelines in the Federal
Credit Reform Act of 1990. The SBA recognizes the sensitivity of credit reform modeling to slight changes in some
model assumptions and therefore continually reviews its model factors and statistical modeling techniques to reflect
the most accurate credit program costs possible in its annual financial statements.
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Budgets and Budgetary Accounting for Loan Programs
SBA’s loan disbursements are financed by appropriations for long-term loan subsidy cost and borrowings from the
Treasury’s Bureau of the Fiscal Service for the remaining non-subsidized portion of the loans. The Congress may
provide one year, multi-year, or no year appropriations to cover the estimated long-term costs of the loan programs.
The non-subsidized portion of each loan disbursement, financed initially under permanent indefinite authority to
borrow funds from the Treasury, is repaid from collections of loan fees, repayments, and default recoveries. The
Congress authorizes the dollar amount of obligations that can be made for the cost of direct loans and loan guaranties
and establishes the maximum amount of loans the SBA can guarantee in its annual appropriation bill.
A permanent indefinite authority is available to fund any reestimated increase of subsidy costs that occurs after
the year in which a loan is disbursed. Reestimated reductions of subsidy costs are returned to the Treasury and are
unavailable to the SBA. As required by the Federal Credit Reform Act of 1990, the SBA uses budgetary “program
accounts” to account for appropriations in its credit programs and nonbudgetary “financing accounts” to account for
credit program cash flow. Estimates and reestimates of credit program subsidy expenses are recorded in SBA’s program
accounts. Financing accounts are used to account for Treasury borrowings, the collection of loan fees, repayments and
default recoveries, and the disbursement of loans and loan expenses.
Accounts Payable
Accounts Payable are amounts due to public entities that will be liquidated during the next operating cycle. Included
in the liability are payables to SBA lenders for their share of loan collections and to vendors for goods and services.
Accrued Grant Liability
Disbursements of grant funds are recognized as expenses at the time of disbursement. However, some grant recipients
incur expenditures prior to initiating a request for disbursement based on the nature of the expenditures. The
SBA accrues a liability for expenditures incurred by grantees prior to receiving grant funds for the expenditures.
The amount to be accrued is determined through an analysis of historic grant expenditures. The Small Business
Development Center program and several other grant programs are subject to this treatment.
Advances
The SBA has both intragovernmental advances and advances to the public. Intragovernmental advances are to the
Interior Business Center of the Department of the Interior, for contracting assistance on work not yet performed.
Advances to the public represent prepaid grants to counseling and training partners.
Contingencies
The SBA is a party in various administrative proceedings, legal actions, environmental suits and claims brought against
the Agency. In the opinion of SBA’s management and legal counsel, the ultimate resolution of these proceedings,
actions, suits, and claims will not materially affect the financial position or results of SBA’s operations.
Cumulative Results of Operations
The deficit in Cumulative Results of Operations, presented on the Balance Sheet and on the Statement of Changes in
Net Position, is the accumulated difference between expenses and financing sources since the inception of the Agency.
The deficits reported reflect timing differences between the recording of expenses and the recognition of resources.
Most of this timing difference results from subsidy reestimates which are funded in the following year.
AGENCY FINANCIAL REPORT • FY 2014 59
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Unexpended Appropriations
Unexpended Appropriations is the portion of SBA’s appropriations received which are either undelivered or unobligated.
Delivered orders result in expended appropriations and reduce the total reported as Unexpended Appropriations.
Undelivered orders are the amount of orders of goods or services which have not been actually or constructively received.
Reclassifications
As discussed in Note 14, certain FY 2013 financial statement line items have been reclassified to conform with the
current year presentation. The reclassifications had no material effect on total assets, liabilities, net position, or net
cost of operations as previously reported.
Employee Benefits
Leave
A liability for employee annual leave is accrued as it is earned and reduced as leave is taken. Each year the balance
of accrued annual leave is adjusted to reflect current pay rates as well as forfeited “use or lose” leave. Amounts are
reported as unfunded to the extent current or prior year appropriations are not available to fund annual leave earned
but not taken. Sick leave and other types of non-vested leave are expensed as taken.
Employee Health and Life Insurance Benefits
SBA employees may choose to participate in the contributory Federal Employees Health Benefits and the Federal
Employees Group Life Insurance programs. The SBA matches a portion of the employee contributions to each
program. Such matching contributions are recognized as current operating expenses.
Employee Pension Benefits
SBA employees participate in either the Civil Service Retirement System or the Federal Employees Retirement System
and Social Security. These systems provide benefits upon retirement and in the event of death, disability or other
termination of employment and may also provide pre-retirement benefits. They may also include benefits to survivors
and their dependents, and they may contain early retirement or other special features. SBA’s contributions to both
retirement plans, as well as to the government-wide Federal Insurance Contribution Act, administered by the Social
Security Administration, are recognized on the Consolidated Statement of Net Cost as current operating expenses.
Federal employee benefits also include the Thrift Savings Plan. For FERS employees the SBA matches employee
contributions to the plan, subject to limitations. The matching contributions are recognized as current operating expenses.
Imputed Financing Costs
The SBA recognizes the full cost of providing all employee benefits and future retirement benefits, including life and health
insurance, at the time employee services are rendered. Eligible retired SBA employees can continue to participate in health
and life insurance plans. The cost of these benefits is funded through Agency contributions, employee compensation to the
extent withheld from employee and retiree pay, from matching of employee withholding for Thrift Savings Plan and FICA,
and by the Office of Personnel Management which administers the retirement programs for SBA employees.
The OPM calculates imputed costs as the actuarial present value of future benefits attributed to services rendered by
covered employees and eligible retired SBA employees during the accounting period, net of the amounts contributed
by employees, retirees, and the Agency. The SBA recognizes these imputed costs in the Statement of Net Cost and
imputed financing in determining SBA’s net position.
Federal Employees’ Compensation Act
The Federal Employees’ Compensation Act provides income and medical cost protection to covered federal civilian
employees injured on the job and to beneficiaries of employees whose deaths are attributable to job-related injury
60 AGENCY FINANCIAL REPORT • FY 2014
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or disease. The FECA program is administered by the Department of Labor. Labor pays valid claims as they occur,
which are billed to the SBA annually and funded and paid approximately 15 months later. Labor also calculates
an estimated actuarial liability for future benefits based upon historical experience and other economic variables.
Projected annual benefit payments are then discounted to present value using the forecasted interest rates for 10-
year Treasury notes and bonds published by the OMB in its economic assumptions for the federal budget. The SBA
recognizes a current unfunded cost for the actual claims paid and the change in the FECA actuarial liability each year.
NOTE 2 FUND BALANCE WITH TREASURY
The Department of the Treasury processes cash receipts and disbursements on SBA’s behalf to pay liabilities and finance
loan program costs. Cash receipts are deposited into SBA’s account at the Treasury. SBA’s fund balances with the Treasury
are available to make expenditures to liquidate allowable obligations, except for the Non-entity Fund Balance which is not
available to the SBA to obligate or expend. Separate records are maintained for SBA’s program, financing, liquidating, sus-
pense/budget clearing accounts and other accounts. Fund balances at the Treasury include expired year amounts, which are
unavailable for obligation, as well as amounts currently available for new obligations.
(Dollars in Thousands)
As of September 30, 2014 2013
Appropriated Funds $ 1,766,183 $ 1,835,332
Financing Funds 4,260,921 4,261,451
Liquidating Funds 1,124 28,338
Revolving Fund 80,779 73,343
Trust Fund 162 136
Total Entity Fund Balance with Treasury 6,109,169 6,198,600
Non-entity Fund Balance – 4
Budget Clearing Account Balance 942 –
Total Fund Balance with Treasury $ 6,110,111 $ 6,198,604
Status of Fund Balance with Treasury
Unobligated Balance Available $ 1,984,786 $ 1,448,404
Unobligated Balance Unavailable 3,727,461 3,985,582
Obligated Balance Not Yet Disbursed 587,750 1,044,962
Borrowing Authority Not Converted to Funds (190,828) (280,348)
Nonbudgetary 942 4
Total Fund Balance with Treasury $ 6,110,111 $ 6,198,604
Unobligated balances become available when OMB approves SBA’s request to apportion funds for obligation in the
current fiscal year. Obligated balances not yet disbursed include unpaid obligations offset by uncollected customer
payments from other federal government accounts. The unobligated and obligated balances are reflected on the State-
ment of Budgetary Resources.
NOTE 3 CASH
The SBA field offices deposit collections from borrowers in SBA’s account at the Treasury using an electronic deposit
system. At the end of the fiscal year, collections temporarily held by SBA field offices pending deposit are recorded as
Undeposited Collections – Cash in Transit and totaled $1.3 million and $3.9 million at September 30, 2014 and 2013.
AGENCY FINANCIAL REPORT • FY 2014 61
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NOTE 4 FIDUCIARY ACTIVITIES: MASTER RESERVE FUND
AND MASTER RESERVE ACCOUNT
Fiduciary activities are the receipt, management, protection, accounting, investment and disposition by the federal
government of cash or other assets in which non-federal entities have an ownership interest that the federal govern-
ment must uphold. Fiduciary cash and other assets are not assets of the government, and are not recognized on
SBA’s proprietary statements, but they are required to be disclosed in the notes to SBA’s financial statements. SBA’s
fiduciary balances are on deposit in commercial banks.
The Master Reserve Fund is a fiduciary activity administered by SBA’s fiscal agent, Colson Services Corp., a sub-
sidiary of the Bank of New York Mellon. The balance in the MRF is invested according to SBA policy entirely
in Treasury securities and repurchase agreements that are backed by Treasury securities. The MRF is an integral
part of SBA’s 7(a) secondary market program. The MRF was authorized by the Small Business Secondary Market
Improvement Act of 1984 to facilitate the pooling of 7(a) guarantied loans that are purchased by secondary market
investors. The 7(a) secondary market program includes SBA’s guaranty of timely payment, as well as a default guar-
anty, to 7(a) secondary market investors. The MRF supports $22.5 billion and $20.5 billion of outstanding SBA
guarantied 7(a) loan principal in the secondary market at September 30, 2014 and 2013.
The Master Reserve Account is an SBA fiduciary activity that is administered for the SBA by Wells Fargo. The balance in
the MRA is invested entirely in Treasury securities. The MRA facilitates the operation of the 504 Certified Development
Company secondary market program. The MRA was authorized by Section 505 of the Small Business Investment Act
of 1958 as amended, as a vehicle to receive, temporarily hold, and distribute 504 program cash flows. The MRA receives
monthly payments from the 504 borrowers, and retains the payments until a semi-annual debenture payment is due to
the secondary market investors. The 504 secondary market program includes SBA’s guaranty of timely payment, as well
as a default guaranty, to 504 secondary market investors. The MRA supports $28.4 billion and $28.1 billion of SBA
guarantied 504 debentures outstanding in the secondary market at September 30, 2014 and 2013.
The composition of the MRF and MRA and a reconciliation of the changes in the assets are included in the following table.
Master Reserve Fund and Master Reserve Account
(Dollars in Thousands)
FIDUCIARY ASSETS
As of September 30, 2014 2013
MRF MRA Total MRF MRA Total
Cash $ 44,994 $ – $ 44,994 $ – $ – $ –
Short Term Securities
Money Market Funds 76,758 636,789 713,547 13,659 700,760 714,419
Treasury Bills 404,924 – 404,924 – – –
Repurchase Agreements 223,892 – 223,892 567,511 – 567,511
Total Cash and Short Term Securities 750,568 636,789 1,387,357 581,170 700,760 1,281,930
Long Term Securities
Treasury Notes Including Interest 2,113,153 – 2,113,153 2,087,658 – 2,087,658
Total Long Term Securities 2,113,153 – 2,113,153 2,087,658 – 2,087,658
Net Assets $ 2,863,721 $ 636,789 $ 3,500,510 $ 2,668,828 $ 700,760 $ 3,369,588
62 AGENCY FINANCIAL REPORT • FY 2014
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Master Reserve Fund and Master Reserve Account
(Dollars in Thousands)
RECONCILIATION OF FIDUCIARY ASSETS
For the Years Ending September 30, 2014 2013
MRF MRA Total MRF MRA Total
Beginning Net Assets $ 2,668,828 $ 700,760 $ 3,369,588 $ 2,464,331 $ 518,214 $ 2,982,545
Receipts
Earned Income 33,616 106 33,722 41,352 608 41,960
Contributions 4,011,870 13,483,031 17,494,901 3,574,020 7,950,189 11,524,209
Net Realized Gain (Loss) (4,239) – (4,239) (1,366) – (1,366)
Total Receipts 4,041,247 13,483,137 17,524,384 3,614,006 7,950,797 11,564,803
Less Disbursements
Payments to Investors 3,846,354 13,547,108 17,393,462 3,409,509 7,768,251 11,177,760
Total Disbursements 3,846,354 13,547,108 17,393,462 3,409,509 7,768,251 11,177,760
Ending Net Assets $ 2,863,721 $ 636,789 $ 3,500,510 $ 2,668,828 $ 700,760 $ 3,369,588
NOTE 5 ACCOUNTS RECEIVABLE
Accounts receivable include amounts owed by the public for guaranty fees in SBA’s loan and surety bond programs,
refunds due from employees and others, as well as other amounts owed by lenders on guarantied loans purchased by the
SBA. An Allowance for Loss on uncollectible Surety Bond Guaranty fees is based on an aging of delinquent balances.
The uncollectible amount for refunds and loan guaranty fees is not significant and no allowance is provided. Amounts
over 180 days past due on guarantied loans purchased by the SBA are written off for financial reporting purposes.
(Dollars in Thousands)
As of September 30, 2014 2013
Public
Guaranty Fees Receivable $ 77,510 $ 78,355
Refunds 437 77
Other 5,899 5,670
Total Public 83,846 84,102
Allowance For Loss (30) (5)
Net Public $ 83,816 $ 84,097
AGENCY FINANCIAL REPORT • FY 2014 63
F I N A N C I A L RE P O RT I N G
NOTE 6 CREDIT PROGRAM RECEIVABLES AND LIABILITY FOR
LOAN GUARANTIES
A. Loan Program Descriptions and Cost Determinations
Loan Program Descriptions
The SBA provides guaranties that help small businesses obtain bank loans and licensed companies to make investments
in qualifying small businesses. The SBA also makes loans to microloan intermediaries and provides a direct loan program
that assists homeowners, renters, and businesses to recover from disasters.
Major Direct Loan and Loan Guaranty Programs
Program group Program type Program
Disaster Direct Disaster Assistance Loans
Business Guarantied 7(a) Loan Guaranty
Business Guarantied 504 Certified Development Company
Business Guarantied Small Business Investment Company Debentures
Business Direct 7(m) Microloan
SBA’s Disaster Assistance loan program makes direct loans to disaster victims under four categories: (1) loans for homes
and personal property; (2) physical disaster loans to businesses of any size; (3) economic injury loans to small businesses
without credit available elsewhere; and (4) economic injury loans to eligible businesses affected by essential employees
called up to active duty in the military reserves. The maximum interest rate is 4 percent for loan applicants without
credit available elsewhere and 8 percent for applicants with credit available elsewhere.
SBA’s business loan programs include its flagship 7(a) Loan Guaranty program in which the SBA guarantees up to 90
percent of the principal amount of loans made by banks and other lending institutions to small businesses not able to
obtain credit elsewhere.
The Section 504 Certified Development Company program guarantees 100 percent of the principal and interest pay-
ments on debentures issued by development companies that make small business loans secured primarily by real estate.
The Small Business Investment Company Debentures program guarantees principal and interest payments on securities
issued by investment capital firms, which in turn make investments in small businesses.
The 7(m) Microloan program provides direct loans to nonprofit intermediaries, which use these funds to make loans up
to $50,000 to eligible small businesses.
Credit Program Receivables and Liability for Loan Guaranties
The Federal Credit Reform Act of 1990 governs direct loans made after FY 1991. FCRA loans are valued at the present
value of expected future cash flows, discounted at the interest rate of marketable Treasury securities. The subsidy allow-
ance represents the difference between the outstanding loans receivable balance and the net present value of the estimated
cash flows of the loans over their remaining term. The subsidy allowance is subtracted from the outstanding loans
receivable balance to obtain the net loans receivable balance. FCRA also governs loan guaranties made after FY 1991.
A liability for outstanding guaranties is included on SBA’s Balance Sheet. The liability is determined by calculating the
net present value of expected future cash flows for outstanding guaranties in a manner similar to that used to determine
the subsidy allowance for direct loans. Guarantied loans purchased by the SBA upon borrower default are established as
loans receivable and are valued in a similar manner as direct loans under FCRA.
64 AGENCY FINANCIAL REPORT • FY 2014
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Direct loans made prior to FCRA are recorded at cost with an allowance for uncollectible amounts calculated using
historical loss experience. For loan guaranties made prior to FCRA, a liability for expected future losses on outstanding
guaranties is established based on historical experience. Guarantied loans purchased upon borrower default are estab-
lished as loan receivables with an allowance for losses based on historical loss experience.
The SBA advances payments semiannually to honor its timely payment requirement of principal and interest due for
debentures in SBA’s Section 504 Certified Development Company and Small Business Investment Company programs.
The advances are liquidated by receipt of the payments due from borrowers in these programs. To the extent that bor-
rower payments may not repay advances, balances that remain collectible are reported as credit program receivables.
Subsidy Funding under Federal Credit Reform
FCRA requires that the credit subsidy costs of direct loans and loan guaranties be expensed in the year loans are dis-
bursed. The credit subsidy cost is the net present value of expected cash inflows and outflows over the life of a guarantied
loan, or the difference between the net present value of expected cash flows and the face value of a direct loan. The cost
expressed as a percentage of loans disbursed is termed the subsidy rate. The SBA receives appropriations annually to fund
its credit programs based on the subsidy rate that applies to the credit program level approved by Congress. The SBA
records subsidy expenses when loans are disbursed. In accordance with FCRA, subsidy costs are reestimated annually.
Interest Receivable
Interest receivable is comprised of accrued interest on loans receivable and purchased interest related to defaulted guar-
antied loans. Interest income is accrued at the contractual rate on the outstanding principal amount and is reduced by
the amount of interest income accrued on non-performing loans in excess of 90 days delinquent. Purchased interest is
carried at cost. A 100 percent loss allowance is established for all purchased interest on non-performing loans.
Foreclosed Property
Foreclosed property is comprised of real and business-related and personal property acquired through foreclosure on
direct loans and defaulted loan guaranties. Properties acquired as a result of defaulted loans committed after FY 1991
are shown at recoverable value which is adjusted to the present value of expected future cash flows for financial statement
presentation through the allowance for subsidy. Other foreclosed property is shown at the appraised value. At Sep-
tember 30, 2014 SBA’s foreclosed property was $43.0 million related to 93 loans. The properties had been held for an
average of 860 days. At September 30, 2013 foreclosed property was $47.3 million related to 84 loans. The properties
had been held for an average of 868 days.
Valuation Methodology for Post-1991 Direct Loans and Loan Guaranties
The value of direct and guarantied loans committed after FY 1991 is based on the net present value of their expected
future cash flows. The SBA estimates future cash flows for guarantied and direct loans using economic and financial
credit subsidy models. The SBA has developed a customized credit subsidy model for each of its major loan guaranty
and direct loan programs.
SBA’s models vary in the specific methodologies employed to forecast future program cash flows. In general, however,
models for all major credit programs use historical data as the basis for assumptions about future program performance
and then translate these assumptions into nominal cash flow estimates by applying rules about program structure.
Nominal cash flow forecasts are discounted using the Office of Management and Budget’s Credit Subsidy Calculator that
has both forecasted and actual Treasury interest rates.
Historical data is used as the basis for program performance assumptions. The historical data undergoes quality review
and analysis prior to its use in developing model assumptions.
Key input to the subsidy models varies by program. Input includes items such as:
• Contractual terms of the loan or guaranty such as loan amount, interest rate, maturity and grace period
AGENCY FINANCIAL REPORT • FY 2014 65
F I N A N C I A L RE P O RT I N G
• Borrower characteristics
• Loan origination methods
• Economic indicators such as gross domestic product growth and unemployment rate
• Loan performance assumptions, for example: conditional purchase and prepayment rates and recovery rates
• Loan fee rates
Valuation Methodology for Pre-1992 Direct Loans and Loan Guaranties
The SBA values pre-credit reform direct and defaulted guarantied loans by estimating an allowance for loan losses. This
allowance is offset against gross loan receivables to obtain SBA’s expected net collections from these assets. The SBA es-
tablishes a 100 percent allowance for pre-credit reform direct and guarantied loans that are past due more than 180 days.
A liability is also established for active pre-credit reform loan guaranties. The liability is estimated based on historical
experience.
SUCCESS STORY: Babies’ Comfort is Smart Business
Baby Elephant Ears Inc., Cambridge, Minnesota
Alicia Overby, SBA’s 2014 Exporter of the Year, is the founder and creator of Baby
Elephant Ears, a small firm specializing in manufacturing, marketing, and exporting
supportive pillows and other comfort accessories for babies. Out of sheer necessity,
Alicia first had the idea for the product in 2008. In nine months, Baby Elephant Ears
was launched. In five years, the company was selling its products at more than 850
locations in the U.S. and over a dozen countries.
Transitioning from home-based to thriving international business was not easy, but
Alicia’s commitment and hard work, coupled with SBDC assistance and two SBA loans, paid handsomely. Baby
Elephant Ears also benefitted from the SBA STEP pilot program, which offers grants to states to promote export
activities.
Alicia is heavily involved in sharing with other businesses and the community at large. Baby Elephant Ears “pays
it forward” by mentoring other small business owners. The company also donates products lo local charities and
donated 500 pieces to a local missions trip to Guatemala. From a business that was originally financed with a loan
against her husband’s 401K, Baby Elephant Ears boasts sales of more than $1.3 million annually.
66 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
B. Credit Program Receivables and Related Foreclosed Property, Net
(Dollars in Thousands)
As of September 30, 2014 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 5,727 $ 166,658 $ 172,385
Interest Receivable 2,142 683 2,825
Foreclosed Property 3,109 – 3,109
Allowance (8,268) (10,253) (18,521)
Total Direct Business Loans 2,710 157,088 159,798
Direct Disaster Loans
Disaster Loans Receivable 3,707 6,761,361 6,765,068
Interest Receivable 140 33,462 33,602
Foreclosed Property – 2,409 2,409
Allowance (548) (1,230,152) (1,230,700)
Total Direct Disaster Loans 3,299 5,567,080 5,570,379
Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 8,436 6,984,380 6,992,816
Other Loans Receivable (see note below) – 284,795 284,795
Interest Receivable 656 73,688 74,344
Foreclosed Property 2,070 35,381 37,451
Allowance (8,407) (6,164,273) (6,172,680)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 2,755 1,213,971 1,216,726
Total Credit Program Receivables & Related Foreclosed Property, Net $ 6,946,903
As of September 30, 2013 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 8,958 $ 162,725 $ 171,683
Interest Receivable 2,040 757 2,797
Foreclosed Property 3,108 – 3,108
Allowance (7,036) (17,831) (24,867)
Total Direct Business Loans 7,070 145,651 152,721
Direct Disaster Loans
Disaster Loans Receivable 5,226 7,171,812 7,177,038
Interest Receivable 223 34,581 34,804
Foreclosed Property – 1,690 1,690
Allowance (852) (1,345,560) (1,346,412)
Total Direct Disaster Loans 4,597 5,862,523 5,867,120
Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 9,264 7,674,923 7,684,187
Other Loans Receivable (see note below) – 326,765 326,765
Interest Receivable 580 115,425 116,005
Foreclosed Property 2,012 40,501 42,513
Allowance (10,555) (6,644,308) (6,654,863)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 1,301 1,513,306 1,514,607
Total Credit Program Receivables & Related Foreclosed Property, Net $ 7,534,448
Note: Other Loans Receivable includes payments advanced by the SBA against future reimbursements in the SBIC and 504 Guaranty programs.
AGENCY FINANCIAL REPORT • FY 2014 67
F I N A N C I A L RE P O RT I N G
C. Loans Disbursed and Outstanding Loan Obligations
(Dollars in Thousands)
DIRECT LOANS
New Loans Disbursed During the Year Ending September 30, 2014 2013
Business Direct Loan Program $ 36,410 $ 42,305
Disaster Loan Program 438,375 813,711
Total Direct Loans Disbursed $ 474,785 $ 856,016
Outstanding Loan Obligations as of September 30, 2014 2013
Business Direct Loan Program $ 40,669 $ 54,568
Disaster Loan Program 156,158 605,591
Total Direct Loan Obligations $ 196,827 $ 660,159
GUARANTIED LOANS
New Loans Disbursed During the Year Ending September 30, 2014 2013
Total Principal Disbursed at Face Value $ 22,453,725 $ 21,660,417
Total Principal Disbursed Guarantied by the SBA 18,001,119 17,703,965
Outstanding Loan Obligations as of September 30, 2014 2013
Business Guarantied Loan Programs $ 14,548,472 $ 14,370,509
Loans Outstanding as of September 30, 2014 2013
Total Principal Outstanding at Face Value $ 99,013,624 $ 93,107,751
Total Principal Outstanding Guarantied by the SBA 83,505,973 79,064,486
SBA’s guarantied loan servicing agent provides data to the SBA on the unpaid principal balance of guarantied loans within a precision of less than 1 percent
due to timing.
D. Subsidy Cost Allowance Balances
(Dollars in Thousands)
For the Years Ending September 30, 2014 2013
Post-1991 Business Direct and Purchased Guarantied Loans
Beginning Balance of Allowance Account $ 6,662,139 $ 6,974,670
Current Year's Subsidy (see 6G for breakdown by component) 6,557 8,310
Loans Written Off (1,446,655) (2,001,738)
Subsidy Amortization (2,343) (1,446)
Allowance Related to Guarantied Loans Purchased This Year 820,625 1,538,325
Miscellaneous Recoveries and Costs 140,817 167,295
Balance of Subsidy Allowance Account before Reestimates 6,181,140 6,685,416
Technical Assumptions/Default Reestimates (6,614) (23,277)
Ending Balance of Allowance Account $ 6,174,526 $ 6,662,139
Post-1991 Disaster Direct Loans
Beginning Balance of Allowance Account $ 1,345,560 $ 1,403,968
Current Year's Subsidy (see 6G for breakdown by component) 44,394 90,673
Loans Written Off (208,657) (179,963)
Subsidy Amortization (12,096) (20,364)
Miscellaneous Recoveries and Costs 54,388 53,314
Balance of Subsidy Allowance Account before Reestimates 1,223,589 1,347,628
Technical Assumptions/Default Reestimates 6,563 (2,068)
Ending Balance of Allowance Account $ 1,230,152 $ 1,345,560
68 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
E. Liability for Loan Guaranties
(Dollars in Thousands)
For the Years Ending September 30, 2014 2013
Pre-1992 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties $ 45 $ 109
Adjustment to Expected Losses, Guaranties Outstanding 25 (64)
Ending Balance of Liability for Loan Guaranties 70 45
Post-1991 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties 2,987,218 3,725,842
Current Year's Subsidy (see 6G for breakdown by component) 143,867 275,742
Fees 1,099,290 1,055,469
Interest Accumulation Factor 108,690 186,436
Claim Payments to Lenders (1,470,965) (2,116,250)
Adjustment Due to Reestimate & Guarantied Loan Purchases 650,340 577,925
Miscellaneous Recoveries and Costs (11,765) 10,088
Balance of Liability for Loan Guaranties before Reestimates 3,506,675 3,715,252
Technical Assumptions/Default Reestimates (1,462,236) (728,034)
Ending Balance of Liability for Loan Guaranties 2,044,439 2,987,218
Total Ending Balance of Liability for Loan Guaranties $ 2,044,509 $ 2,987,263
F. FY 2014 Subsidy Rates by Program and Component
LOAN PROGRAM Total Financing Default Other Fee
Subsidy
Guaranty
7(a) (10-1-13 to 12-31-13) 0.00% 0.00% 3.98% 0.00% -3.98%
7(a) (1-1-14 to 9-30-14) 0.01% 0.00% 3.98% 0.00% -3.97%
504 CDC 1.71% 0.00% 8.91% 0.97% -8.17%
SBIC Debentures 0.00% 0.00% 5.07% 0.12% -5.19%
Direct
Disaster (10-1-13 to 4-24-14) 8.48% -2.52% 15.10% -4.10% 0.00%
Disaster (4-25-14 to 9-30-14) 8.53% -2.52% 15.16% -4.11% 0.00%
Microloan 18.64% 8.19% 1.88% 8.57% 0.00%
The subsidy rates in Table F pertain only to loans obligated in the current year. These rates cannot be applied to the
loans disbursed during the current year to yield the subsidy expense because loans disbursed during the current year
include loans obligated in prior years. In FY 2014, the subsidy rate for the 7(a) loan program was adjusted due to the in-
troduction of fee relief for loans under $150,000 and the subsidy rate for the Disaster loan program was adjusted due to a
change in collateral requirements. Subsidy expenses reported in Table G result from the disbursement of loans obligated
in the current year as well as in prior years, and include reestimates.
AGENCY FINANCIAL REPORT • FY 2014 69
F I N A N C I A L RE P O RT I N G
G. Subsidy Expense by Component
(Dollars in Thousands)
For the Years Ending September 30, 2014 2013
Business Loan Guaranties
Interest $ 39 $ (44)
Defaults 971,685 1,493,312
Fees (857,676) (1,250,050)
Other 29,819 32,524
Subsidy Expense Before Reestimates and Loan Modifications 143,867 275,742
Reestimates (1,462,236) (728,034)
Total Guarantied Business Loan Subsidy Expense $ (1,318,369) $ (452,292)
Business Direct Loans
Interest $ 3,227 $ 5,130
Defaults 758 1,024
Other 2,572 2,156
Subsidy Expense Before Reestimates 6,557 8,310
Reestimates (6,614) (23,277)
Total Business Direct Loan Subsidy Expense $ (57) $ (14,967)
Disaster Direct Loans
Interest $ 4,964 $ 28,438
Defaults 61,760 108,852
Other (22,330) (46,617)
Subsidy Expense Before Reestimates 44,394 90,673
Reestimates 6,563 (2,068)
Total Disaster Direct Loan Subsidy Expense $ 50,957 $ 88,605
H. Administrative Expense
The SBA received appropriations to administer its credit programs, including the making, servicing, and liquidation of its
loans and guaranties. Amounts expensed in the Statement of Net Cost are:
(Dollars in Thousands)
For the Years Ending September 30, 2014 2013
Disaster Direct Loan Programs $ 177,469 $ 273,718
Business Loan Programs 151,282 142,044
Total Administrative Expense $ 328,751 $ 415,762
I. Credit Program Subsidy Reestimates
Reestimates are performed annually, on a cohort-by-cohort basis. The purpose of reestimates is to update original
program cost estimates to reflect actual cash flow experience as well as changes in forecasts of future cash flows. Forecasts
of future cash flows are updated based on additional information about historical program performance, revised
expectations for future economic conditions, and enhancements to cash flow projection methods. Financial statement
reestimates were performed using a full year of performance data for FY 2014 for SBA’s large loan programs and with
nine months of actual and three months of projected performance data for the Secondary Market Guaranty and the small
loan programs.
70 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
BUSINESS GUARANTIED LOAN PROGRAMS
Net subsidy reestimates for the business guarantied loan programs follows.
(Dollars in Thousands)
For the Years Ending September 30, 2014 2013
7(a) $ (327,206) $ (391,029)
7(a) - Recovery Act 398 (44,930)
7(a) - Jobs Act (54,904) (78,740)
Dealer Floor Plan (1,866) (937)
504 CDC (619,688) (128,079)
504 CDC - Recovery Act (120,036) (112,787)
504 CDC - Jobs Act (33,148) (29,298)
504 CDC - Debt Refinancing (87,334) (1,308)
504 First Mortgage Loan Pooling - Recovery Act 1,726 (4,924)
SBIC Debentures (53,499) 31,577
SBIC Participating Securities (96,055) 48,388
Secondary Market Guaranty Program (61,915) 7,980
ARC - Recovery Act (15,131) (22,434)
All Other Guaranty Loan Programs 6,422 (1,513)
Total Guarantied Loan Program Subsidy Reestimates $ (1,462,236) $ (728,034)
The 7(a) Loan Guaranty program, SBA’s flagship and largest program had a net downward reestimate in FY 2014 of
$327.2 million. The reestimate is primarily due to better than expected loan performance in cohorts 2011 through
2014, offsetting worse than expected loan performance in cohorts 2005 through 2010. Strong loan performance was
driven by lower than projected purchases in cohorts 2011 through 2014. Actual purchases for these cohorts were less
than half of the purchases projected during FY 2014. The remainder of the reestimate is due to decreased loss projection
for the 2014 cohort as compared to the original loss projections.
The 7(a) Recovery Act program had a net upward reestimate in FY 2014 of $0.4 million. Lower than expected purchases
in FY 2014 were offset by lower than expected recoveries. Additionally, FY 2014 loan performance contributed to up-
dated model assumptions, which resulted in decreased recovery projections.
The 7(a) Jobs Act cohort had a net downward reestimate in FY 2014 of $54.9 million. A significant portion of the
reestimate is due to significantly better than projected FY 2014 loan performance. Actual purchases in the 7(a) Jobs Act
cohort during FY 2014 were less than half of the purchases projected for FY 2014.
The Dealer Floor Plan program had a net downward reestimate of $1.9 million due to better than projected performance
during FY 2014 and a technical adjustment to the treatment of the revolving lines of credit in accordance with changes
in the guidance presented in OMB Circular A-11.
The 504 Certified Development Company program had a net downward reestimate of $619.7 million. The reestimate
is primarily due to better than projected FY 2014 loan performance across all cohorts. Although some cohorts had
higher than expected purchases, these unexpected losses were offset by higher than expected recoveries in all cohorts. The
remainder of the reestimate was due to decreased loss projections for the 2014 cohort as compared to the original loss
projections.
The 504 Recovery Act program had a net downward reestimate of $120 million. The reestimate is due to better than
projected FY 2014 loan performance. Actual purchases in the 504 Recovery Act program were less than a quarter of the
purchases projected for FY 2014.
AGENCY FINANCIAL REPORT • FY 2014 71
F I N A N C I A L RE P O RT I N G
The 504 Jobs Act program had a net downward reestimate of $33.1 million. The reestimate is due to better than
projected FY 2014 loan performance. Actual purchases in the 504 Jobs Act program were less than a quarter of the
purchases projected for FY 2014.
The 504 Debt Refinancing program had a net downward reestimate of $87.3 million. The reestimate is due to better
than projected FY 2014 loan performance. Actual purchases in the 504 Debt Refinancing program were less than a
quarter of the purchases projected for FY 2014.
The Section 504 First Mortgage Loan Pooling program had a net upward reestimate of $1.7 million. Lower than
projected purchases in all three cohorts in FY 2014 were offset by lower than expected recoveries. Additionally, FY 2014
loan performance contributed to updated model assumptions, which resulted in decreased recovery projections.
The SBIC Debentures program had a net downward reestimate of $53.5 million. The primary driver of the reestimate
was better than projected loan performance in FY 2014. Actual purchases were less than projected for FY 2014.
Additionally, FY 2014 loan performance contributed to updated model assumptions, which resulted in decreased cash
outflow projections.
The SBIC Participating Securities program had a net downward reestimate of $96.1 million. The downward reestimate
was due to better than expected loan performance in FY 2014, particularly for the 2001-2004 cohorts. Actual recoveries
were higher than projected and actual purchases were lower than projected in FY 2014. This was partially offset by lower
actual reimbursements of prioritized payments than projected in FY 2014.
The Secondary Market Guaranty program had a net downward reestimate of $61.9 million. This downward reestimate
was driven mainly by updating the forecasted pool balances in the Master Reserve Fund with the actual balances. The
actual MRF balances were higher than previously projected, resulting in lower cash outflows to cover future SMG pool
obligations.
The America’s Recovery Capital program had a net downward reestimate of $15.1 million. The majority of this rees-
timate is due to better than projected loan performance in FY 2014. The remainder of the reestimate is mostly due to
lower purchase projections in future years as a result of recent actual loan performance.
BUSINESS DIRECT LOAN PROGRAMS
Net subsidy reestimates for business direct loan programs follows.
(Dollars in Thousands)
For the Years Ending September 30, 2014 2013
7(m) Microloan $ (3,412) $ (17,653)
7(m) Microloan - Recovery Act (1,030) (4,719)
Intermediary Lending Pilot Program (73) (1,148)
SBIC Preferred Stock (2,095) 289
All Other Direct Loan Programs (4) (46)
Total Direct Loan Program Subsidy Reestimates $ (6,614) $ (23,277)
The 7(m) Direct Microloan program had a net downward reestimate of $3.4 million. The downward reestimate is due
partly to decreased projected losses in future years, especially for cohorts 2001, 2004-2005, 2007-2008, and 2011-2012.
Additionally, increases in actual interest collected during FY 2014 and projected interest collections for all remaining years of
most cohorts factored into the downward reestimate.
72 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
The 7(m) Direct Microloan Recovery Act program had a net downward reestimate of $1.0 million. The downward
reestimate is primarily due to decreased projected losses in future years, especially in the 2010 cohort.
The Intermediary Lending Pilot program had a modest net downward reestimate of $0.1 million. For both the 2011 and
2012 cohorts, an increase in actual interest collected during FY 2014 and projected interest collections for all remaining
years slightly offset increases in loss projections related to loan performance to generate the modest net downward
reestimate.
DISASTER DIRECT LOAN PROGRAM
Net subsidy reestimates for the disaster direct loan programs follows:
(Dollars in Thousands)
For the Years Ending September 30, 2014 2013
Disaster $ 6,563 $ (2,068)
Total Disaster Direct Loan Program Subsidy Reestimates $ 6,563 $ (2,068)
The Disaster Assistance program had a net upward reestimate of $6.6 million. The 2006 and 2014 cohorts experienced the
largest upward reestimates, while the 2007 and 2013 cohorts experienced the largest downward reestimates. The upward
reestimate for the 2006 cohort was due to worse than expected performance in FY 2014 and due to updated projections of
future performance, while the upward reestimate for the 2014 cohort was due to the actual average borrower’s interest rate
being lower than the original projected average borrower’s interest rate. The downward reestimate for the 2007 cohort was
due to better than expected performance in FY 2014, while the downward reestimate for the 2013 cohort was due to updated
present value discount factors applied to projected cash flows.
NOTE 7 GENERAL PROPERTY AND EQUIPMENT, NET
The SBA capitalizes equipment with a cost of $50,000 or more per unit and a useful life of 2 years or more at full cost
and depreciates using the straight-line method over the useful life. The SBA expenses equipment not meeting the capital-
ization criteria.
Leasehold improvements with modifications of $50,000 or more and a useful life of 2 years or more are capitalized and
amortized using the straight-line method over the useful life of the improvement or the lease term, whichever is shorter.
Leasehold improvements not meeting the capitalization criteria are expensed.
Software intended for internal use, whether internally developed, contractor developed, or purchased, is capitalized at
cost if the unit acquisition cost is $250,000 or more and service life is at least 2 years. Capitalized software costs include
all direct and indirect costs incurred, including overhead to develop the software. Software for internal use is amortized
using the straight-line method over its useful life, not to exceed 5 years. Amortization begins when the software is put
into production. The costs of enhancements are capitalized when it is more likely than not that the enhancements will
result in significant additional capabilities. Costs that do not meet the capitalization criteria are expensed when incurred.
AGENCY FINANCIAL REPORT • FY 2014 73
F I N A N C I A L RE P O RT I N G
Assets meeting the capitalization thresholds are detailed here.
(Dollars in Thousands)
As of September 30, 2014 2013
Equipment $ 2,675 $ 2,675
Accumulated Depreciation (2,491) (2,183)
Net 184 492
Leasehold Improvements 1,811 1,811
Amortization of Leasehold Improvements (853) (702)
Net 958 1,109
Software in Development – 4,572
Software in Use 35,926 30,546
Amortization of Software in Use (32,339) (30,546)
Net 3,587 4,572
Total General Property and Equipment, Net $ 4,729 $ 6,173
NOTE 8 LIABILITIES NOT COVERED BY BUDGETARY RESOURCES
Liabilities not covered by budgetary resources are liabilities for which congressional action is needed before budgetary
resources can be provided. These unfunded liabilities consisted of:
(Dollars in Thousands)
As of September 30, 2014 2013
Intragovernmental Liabilities - Other
Employment Taxes Payable $ 1,536 $ 1,496
Federal Employees’ Compensation Act Payable 6,026 5,854
Total Intragovernmental Liabilities - Other 7,562 7,350
Federal Employees’ Compensation Act Actuarial Liability 34,627 33,703
Surety Bond Guarantee Program Future Claims 35,799 31,029
Other Liabilities
Prior Liens on Real Estate Payable 59 59
Accrued Unfunded Annual Leave 26,361 26,871
Total Other Liabilities 26,420 26,930
Total Liabilities Not Covered by Budgetary Resources $ 104,408 $ 99,012
The liability for Surety Bond Guarantees is an estimate of future claims in the SBG program for guaranties outstanding
at year-end.
74 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
NOTE 9 DEBT
Borrowings payable to the Treasury result from loans provided by the Treasury to fund the portion of direct loans not
covered by subsidy appropriations and to fund the payment of downward subsidy reestimates and other credit program
disbursements (see Note 15). The SBA makes periodic principal repayments to the Treasury based on the analysis of its
cash balances and future disbursement needs.
Borrowings payable to the Federal Financing Bank are the result of its financing of SBA Section 503 Debentures issued
prior to 1988.
All debt is intragovernmental and covered by budgetary resources. Debt transactions for the periods ending September
30, 2014 and 2013 and resulting balances are:
INTRAGOVERNMENTAL DEBT
(Dollars in Thousands)
As of September 30, 2014 2013
Department of Treasury
$ 8,088,099 $ 7,919,741
Beginning Balance
New Borrowing 852,468 1,320,219
Repayments (1,184,467) (1,151,861)
Ending Balance $ 7,756,100 $ 8,088,099
Federal Financing Bank
Beginning Balance $ – $ 60
Repayments – (58)
Change in Interest Payable – (2)
Ending Balance $ – $ –
Total Debt $ 7,756,100 $ $8,088,099
NOTE 10 NET ASSETS OF LIQUIDATING FUNDS DUE TO TREASURY
Net Assets of Liquidating Funds Due to Treasury is the residual of the book value of assets less liabilities in the Liqui-
dating Funds for loans made prior to FY 1992. The FY 2013 balance includes the unobligated balance for budgetary
reporting that was transferred to the Treasury in early FY 2014. In FY 2014, the SBA developed procedures to transfer
the unobligated balance at September 30 instead of in the following fiscal year.
(Dollars in Thousands)
As of September 30, 2014 2013
Pollution Control Equipment Guaranty Fund $ – $ 1,119
Disaster Loan Fund 3,297 8,148
Business Loan and Investment Fund 6,843 32,431
Total Due Treasury $ 10,140 $ 41,698
AGENCY FINANCIAL REPORT • FY 2014 75
F I N A N C I A L RE P O RT I N G
NOTE 11 OTHER LIABILITIES
Other liabilities were:
(Dollars in Thousands)
As of September 30, 2014 2013
OTHER LIABILITIES - INTRAGOVERNMENTAL
Entity
Current
Employment Taxes Payable $ 2,084 $ 1,817
Advances from Other Agencies 332 478
Total Current 2,416 2,295
Non-current
Employment Taxes Payable 1,536 1,496
Federal Employees’ Compensation Act Payable 6,026 5,854
Total Non-current 7,562 7,350
Total Entity 9,978 9,645
Non-entity
Current
Payable to Treasury 6 7
Total Other Liabilities - Intragovernmental $ 9,984 $ 9,652
OTHER LIABILITIES - PUBLIC
Entity
Current
Accrued Funded Payroll and Benefits $ 13,778 $ 7,753
Accrued Unfunded Annual Leave 26,361 26,871
Contingent Liability 464 –
Suspense Accounts 1,128 189
Total Current 41,731 34,813
Non-current
Prior Liens on Real Estate Payable 59 59
Total Non-current 59 59
Total Entity 41,790 34,872
Non-entity
Current
Non-entity Current Payable – 4
Total Other Liabilities - Public $ 41,790 $ 34,876
NOTE 12 LEASES
The SBA leases all of its facilities from the General Services Administration. The SBA enters into an Occupancy Agree-
ment with GSA for each facility. GSA, in turn, leases commercial facilities or provides space in federal buildings.
Agreements for space in federal buildings can be vacated with 120 to 180 days notice. However, the SBA anticipates
continuing the same or similar facilities leases in the future. These leases with GSA are operating leases and are expensed
in the Statement of Net Cost when incurred. FY 2014 and 2013 facilities lease costs were $45.1 million and $44.7 mil-
lion. Future lease payments shown here assume a 3 percent inflation factor from the following years’ projected totals as
estimated by GSA, as well as continued costs during the next 5 years as leases expire and new leases are added. Payments
after 5 years reflect only current leases that will still be in effect then, projected to the end of each lease term.
76 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
FUTURE FACILITIES OPERATING LEASE PAYMENTS
(Dollars in Thousands)
Fiscal Year Lease Payments
2015 $ 44,846
2016 46,191
2017 47,577
2018 49,004
2019 50,474
After 2019 36,186
Total $ 274,278
NOTE 13 NON-ENTITY REPORTING
Non-entity Assets are assets held by the SBA but not available to the SBA. The primary non-entity asset is for SBA’s
downward subsidy reestimates in its loan programs. Because the loan programs are discretionary, the downward
reestimates are not available to the SBA and they are returned to the Treasury in the fiscal year following the accrual of
the reestimates. During the year, these general fund accounts contain SBA’s prior year reestimates. At year-end, the
funds are swept by the Treasury. Also at year-end, the SBA accrues the current year’s reestimates, including downward
reestimates as applicable. For the downward reestimates, in the loan financing funds, the SBA records an accrual
adjustment that records a transfer out to the non-entity fund, a reduction of subsidy allowance or loan guarantee liability,
and an account payable to the non-entity fund. In the loan program funds the SBA records a reduction of loan subsidy
expense and the associated impact on the net cost. The non-entity Treasury general funds contain a corresponding
account receivable in anticipation of the receipt of the downward reestimates in the following year and a Downward
Reestimate Payable to the Treasury.
For consolidated financial statement presentation, the SBA eliminates the payable to the non-entity fund and the
non-entity Treasury general fund receivable from the financing funds; since both are included in SBA’s reporting entity.
The Downward Reestimate Payable to the Treasury in the non-entity Treasury general fund is not eliminated and is
reflected on the Balance Sheet as a liability line item.
(Dollars in Thousands)
As of September 30, 2014 2013
Entity
Financing Fund Payable $ (1,637,283) $ (1,116,192)
Non-entity
Miscellaneous Receipts Fund Receivable 1,637,283 1,116,192
Downward Reestimate Payable to Treasury (1,637,283) (1,116,192)
Balance Sheet Reported Payable $ (1,637,283) $ (1,116,192)
AGENCY FINANCIAL REPORT • FY 2014 77
F I N A N C I A L RE P O RT I N G
NOTE 14 CONSOLIDATED STATEMENT OF NET COST
Federal cost accounting standards require the SBA to report operating costs by strategic goal activity. Full costs include all
direct and indirect costs for a strategic goal. Full costs are reduced by exchange (earned) revenues to arrive at net operating
cost.
Operating Cost
The full and net operating costs of SBA’s strategic goals are presented in the Consolidated Statement of Net Cost. Full
costs are comprised of all direct costs for the strategic goals and those indirect costs which can be reasonably assigned
or allocated to the strategic goals, including employee pension and other retirement benefit costs paid by the OPM and
charged to the SBA.
Earned Revenue
Earned revenue arises from exchange transactions, and is deducted from the full cost of SBA’s strategic goals to arrive at net
strategic goals costs. The SBA recognizes earned revenue when reimbursements are payable from other federal agencies and
the public, as a result of costs incurred or services performed. A major source of earned revenue includes interest earned
on SBA’s outstanding Business and Disaster loan portfolios and interest earned on uninvested funds in the credit reform
financing accounts.
Reporting by Strategic Goal
The SBA reports net costs consistent with its three strategic goals on a full cost allocation basis. The SBA issued its FY 2014-
2018 Strategic Plan this year, and FY 2013 costs have been reclassified to be comparable to the new strategic goal architecture.
Strategic Goal 1 (Growing Businesses and Creating Jobs) includes SBA’s loan, disaster, and other assistance programs, and
now includes STEP grants that were excluded in the previous strategic plan. Strategic Goal 2 (Serving as the Voice for Small
Business) is similar to the previous Strategic Goal 3 that includes small business advocacy, and now includes programs to
promote entrepreneurship in economic sectors and communities where market gaps remain that were in the previous Strategic
Goal 1. Strategic Goal 3 (Building an SBA that Meets the Needs of Today’s and Tomorrow’s Small Businesses) is similar to
the previous Strategic Goal 2 and now includes lender oversight costs that were in the previous Strategic Goal 1. Agency
administrative overhead costs are fully allocated to the programs in Strategic Goals 1, 2, and 3. The Management’s Discussion
and Analysis section of SBA’s annual Agency Financial Report includes additional detail on SBA’s strategic goals. Costs Not
Assigned to Strategic Goals include the Office of the Inspector General and grants made under congressionally mandated
programs. The Office of the Inspector General’s mission and funding is independent of SBA’s and is therefore excluded.
Congressional mandated grants do not necessarily involve small business and are also excluded.
Intragovernmental Gross Cost is incurred by the SBA in exchange transactions with other federal agencies, and Gross Cost
with the Public is incurred in exchange transactions with the Public. Intragovernmental Earned Revenue is earned by
the SBA in exchange transactions with other federal agencies, and Earned Revenue from the Public is earned in exchange
transactions with the Public. The General Services Administration and the Treasury Department are SBA’s primary
Intragovernmental trading partners.
The classification as Intragovernmental Costs or Gross Cost with the Public relate to the source of goods and services
received by the SBA and not to the classification of related revenue. The classification of revenue or cost being defined
as “intragovernmental” or “public” is defined on a transaction by transaction basis. The purpose of this classification
is to enable the federal government to provide consolidated financial statements, and not to match the public and
intragovernmental revenue with costs that are incurred to produce public and intragovernmental revenue.
SBA’s Gross Cost with the Public in Strategic Goal 1 is largely determined by estimates and reestimates of its credit program
costs (See Note 6I). Downward reestimates of these costs caused the credit to Gross Cost with the Public in FY 2014.
78 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
INTRAGOVERNMENTAL COSTS AND EXCHANGE REVENUE
(Dollars in Thousands)
For the Years Ended September 30, 2014 2013
STRATEGIC GOAL 1:
Growing Businesses and Creating Jobs
Intragovernmental Gross Cost $ 506,417 $ 524,105
Gross Cost with the Public (613,675) 477,945
Total Strategic Goal 1 Gross Cost (107,258) 1,002,050
Intragovernmental Earned Revenue 138,871 166,677
Earned Revenue from the Public 372,857 447,918
Total Strategic Goal 1 Earned Revenue 511,728 614,595
STRATEGIC GOAL 2:
Serving as the Voice for Small Business
Intragovernmental Gross Cost $ 26,178 $ 18,930
Gross Cost with the Public 83,310 74,034
Total Strategic Goal 2 Gross Cost 109,488 92,964
STRATEGIC GOAL 3:
Building an SBA that Meets the Needs of Today’s and Tomorrow’s
Small Businesses
Intragovernmental Gross Cost $ 6,176 $ 1,203
Gross Cost with the Public 19,654 4,705
Total Strategic Goal 3 Gross Cost 25,830 5,908
COST NOT ASSIGNED TO STRATEGIC GOALS
Intragovernmental Gross Cost $ 4,130 $ 7,689
Gross Cost with the Public 13,144 30,070
Total Gross Cost Not Assigned to Strategic Goals 17,274 37,759
Net Cost of Operations $ (466,394) $ 524,086
NOTE 15 STATEMENT OF BUDGETARY RESOURCES
The Statement of Budgetary Resources presents information about total budgetary resources available to the SBA and the
status of those resources as of September 30, 2014 and 2013. SBA’s total budgetary resources were $3.0 billion and $4.2
billion for the years ended September 30, 2014 and 2013. Additionally, $7.8 billion and $9.9 billion of nonbudget-
ary resources including borrowing authority and collections of loan principal, interest and fees in financing funds were
reported for the years ended September 30, 2014 and 2013.
Permanent Indefinite Appropriations
The SBA receives permanent indefinite appropriations annually to fund increases in the projected subsidy costs of
loan programs as determined by the reestimation process required by the Federal Credit Reform Act of 1990. The
appropriations are received initially in the SBA Program Funds and then transferred to the Financing Funds where
they are used to fund obligations. SBA’s Liquidating Funds also receive permanent indefinite appropriations to fund
obligations. The Financing Funds are used to account for credit program obligations made subsequent to FY 1991.
Liquidating Funds are used to account for credit program obligations made prior to FY 1992.
AGENCY FINANCIAL REPORT • FY 2014 79
F I N A N C I A L RE P O RT I N G
Decreases in projected subsidy costs in the Financing Funds are returned to the Treasury through SBA’s annual
reestimation process. The prior year’s ending unobligated balances in SBA’s Liquidating Funds are also transferred to
the Treasury annually.
Borrowing Authority and Terms of Borrowing
The SBA is authorized to borrow from the Treasury’s Bureau of the Fiscal Service when funds needed to disburse direct
loans and purchase guarantied loans exceed subsidy costs and collections in the nonbudgetary loan financing funds. In
FY 2014 and FY 2013, the SBA received $0.8 billion and $1.5 billion of borrowing authority from the OMB. At the
end of FY 2014, the SBA had $0.2 billion in borrowing authority carried over to fund direct loans and default claims
to be disbursed in the future. At the end of FY 2013, the SBA had $0.3 billion in available borrowing authority. The
SBA pays interest to the Treasury based on Treasury’s cost of funds. The rate at which interest is paid to the Treasury
on the amounts borrowed (or received from the Treasury on uninvested cash balances) in a loan financing fund for a
particular cohort is a disbursement-weighted average discount rate for cohorts prior to FY 2001 and a single effective
rate for cohorts beginning with FY 2001. The SBA calculates and repays borrowings not needed for working capital at
midyear for prior year cohorts. The SBA uses the loan principal, interest and fees collected from the borrowers in its loan
financing funds to repay its Treasury borrowings. The repayment maturity dates for the borrowing from the Treasury
are based on the loan maturities used in the subsidy calculation. The maturities range from 16 years for Direct Business
loans, 25 years for Guarantied Business loans and 30 years for Disaster loans.
Apportionment Categories of Obligations Incurred
During FY 2014 and FY 2013, the SBA incurred $5.1 billion and $8.6 billion of direct and reimbursable obligations
of which $0.0 billion and $0.6 billion was apportioned in category A; $5.1 billion and $8.0 billion was apportioned in
category B. Category A apportionments are restricted by quarter and program; category B apportionments are restricted
by purpose and program.
Unobligated Balances
Unobligated balances at September 30, 2014 and 2013 are $5.7 billion and $5.4 billion which include $3.7 billion
and $4.0 billion of unavailable unobligated balances. These balances are unavailable primarily because they are
unapportioned by the OMB. The SBA accumulates the majority of these unobligated balances in its nonbudgetary
financing accounts during the fiscal year ($4.3 billion in FY 2014 and $4.1 billion in FY 2013) from reestimates that are
used primarily to pay default claims in the following fiscal year. In addition, unobligated balances are accumulated in
budgetary accounts from appropriations ($1.4 billion in FY 2014 and $1.3 billion in FY 2013) that are used to finance
SBA’s ongoing program operations. The SBA requests OMB apportionments as needed, and after OMB approval,
apportioned amounts are available for obligation.
Undelivered Orders
Undelivered orders are obligations that have not yet been disbursed by the SBA. Undelivered orders for the periods
ended September 30, 2014 and 2013 were $0.6 billion and $1.2 billion.
Differences between the Statement of Budgetary Resources and the Budget of the
U. S. Government
There was no material difference between the FY 2013 Statement of Budgetary Resources and the President’s FY 2015
budget submission. The President’s Budget with actual numbers for FY 2016 has not yet been published. The SBA ex-
pects no material differences between the President’s Budget “actual” column and the FY 2014 reported results when the
budget becomes available in February 2015.
80 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
NOTE 16 RECONCILIATION OF BUDGETARY OBLIGATIONS
INCURRED TO NET COST OF OPERATIONS
The SBA presents the Statement of Net Cost using the accrual basis of accounting. This differs from the obligation-
based measurement of total resources supplied, both budgetary and from other sources, on the Statement of Budgetary
Resources.
The Federal Financial Accounting Standard No. 7 requires “a reconciliation of proprietary and budgetary information
in a way that helps users relate the two.” The focus of this presentation is to reconcile budgetary net obligations to the
net cost of operations. The objective of this information is to categorize the differences between budgetary and financial
(proprietary) accounting.
SUCCESS STORY: Bold Ideas and Customer Focus
Pay Off
Myers-Seth Pump, Jacksonville, Florida
Teresa Myers, an immigrant from Vietnam, is CEO of Myers-Seth Pump (MSP), a
company that manufactures pumps and dewatering equipment throughout the United
States and abroad. She and her husband, Douglas Myers, jointly own and operate the
14-year-old company.
MSP has faced its share of challenges. As a manufacturer of industrial and construction
pumps for mining and construction industries, MSP was impacted by the economic
crisis of 2009. Teresa Myers navigated through the recession by adding a pump rental
division, providing training opportunities for her employees, and expanding the company’s outreach to other
industries, such as the oil and gas industry, and international markets. Another challenge was a set of fires that
occurred onsite at their facility. The fires occurred during MSP’s busiest production season, but the company was
able to continue with very little interruption. In fact, most of MSP’s customers were not even aware that they had a
major fire. MSP also increased its revenue by almost 20 percent when it started exporting pumps overseas.
Teresa attributes her success to hard work, customer focus, and to the training she received as part of SBA’s Emerging
Leaders program. “Participating in the Emerging Leaders program gave me the most in-depth knowledge on how
to effectively run a small business. I learned about structuring the business, profitability, planning, creating exit
strategies, and scaling my business,” she said. Teresa Myers also participated in SBA resource partner training and
development programs through the Jacksonville Women’s Business Center and the Small Business Development
Center at the University of North Florida.
AGENCY FINANCIAL REPORT • FY 2014 81
F I N A N C I A L RE P O RT I N G
CONSOLIDATED RECONCILIATION OF BUDGETARY OBLIGATIONS TO NET COST
(Dollars in Thousands)
For the Years Ended September 30, 2014 2013
RESOURCES USED TO FINANCE ACTIVITIES
Budgetary Resources Obligated
Obligations Incurred $ 5,114,412 $ 8,625,608
Less: Spending Authority from Offsetting Collections and Recoveries 4,584,340 5,431,669
Obligations Net of Offsetting Collections and Recoveries 530,072 3,193,939
Less: Offsetting Receipts 1,123,155 1,696,979
Net Obligations (593,083) 1,496,960
Other Resources
Imputed Financing 21,893 19,955
Other Financing Sources (1,648,365) (1,127,912)
Net Other Resources Used to Finance Activities (1,626,472) (1,107,957)
Total Resources Used to Finance Activities (2,219,555) 389,003
RESOURCES THAT DO NOT FINANCE NET COST OF OPERATIONS
(Increase) Decrease in Budgetary Resources Obligated for Goods, Services,
and Benefits Ordered But Not Yet Provided 450,569 (371,232)
Resources that Fund Expenses Recognized in Prior Periods (362,689) (882,703)
Budgetary Offsetting Collections and Receipts that Do Not Affect Net Cost of Operations
Credit Program Collections 3,923,558 4,540,597
Offsetting Receipts 1,123,155 1,696,979
Resources that Finance the Acquisition of Assets or Liquidation of Liabilities (3,591,420) (5,224,054)
Other - Current Year Liquidating Equity Activity 3,218 3,992
Other Resources that Do Not Affect Net Cost of Operations 38 (27)
Total Resources that Do Not Finance Net Cost of Operations 1,546,429 (236,448)
Total Resources Used to Finance the Net Cost of Operations (673,126) 152,555
COMPONENTS OF THE NET COST OF OPERATIONS THAT WILL NOT
REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD
Components Requiring or Generating Resources in Future Periods
Change in Annual Leave Liability (510) 1,113
Change in Contingent Liability 464 –
Upward Reestimates of Credit Subsidy Expense 200,923 362,329
Change in Revenue Receivable from Public (65) (316)
Provision for Losses on Estimated Guaranties 4,795 8,423
Change in Unfunded Employee Benefits 1,136 2,112
Total Components Requiring or Generating Resources in Future Periods 206,743 373,661
Components Not Requiring or Generating Resources
Depreciation or Amortization 2,252 459
Change in Bad Debt Expense - Pre-1992 Loans (2,057) (2,582)
Other (Income) Expenses Not Requiring Budgetary Resources (206) (7)
Total Components Not Requiring or Generating Resources (11) (2,130)
Total Components of the Net Cost of Operations that Will Not
Require or Generate Resources in the Current Period 206,732 371,531
Net Cost of Operations $ (466,394) $ 524,086
82 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
Liabilities Not Covered by Budgetary Resources on the Balance Sheet (Note 8) differs from Components Requiring
or Generating Resources in Future Periods in this reconciliation primarily due to reestimated subsidy costs of loan
programs. The subsidy costs are shown in the Statement of Net Cost and are to be covered by budgetary resources but
these resources, while available under permanent and indefinite authority, were not provided by year-end. Additionally,
there will always be a difference for existing liabilities because the Reconciliation of Budgetary Obligations Incurred to
Net Cost of Operations reports only current year changes, not balances.
The following table details these differences:
(Dollars in Thousands)
As of September 30, 2014 2013
Current Year Liabilities Not Covered By Budgetary Resources $ 104,408 $ 99,012
Less: Prior Year 99,012 87,637
Change in Liabilities Not Covered By Budgetary Resources 5,396 11,375
Upward Reestimates of Credit Subsidy Expense 200,923 362,329
Change in Revenue Receivable from Public (65) (316)
All Other 489 273
Components (of Net Cost) Generating Resources in Future Periods
(Per Reconciliation Above) $ 206,743 $ 373,661
SUCCESS STORY: Back in Business After Disaster Hits
Pachanga, Inc. d/b/a FIKA, New York, New York
FIKA, which means “coffee break” in Swedish, was the name Lars Akerlund gave to
each of the five specialty coffee and chocolate cafés he opened in New York beginning
in 2006. He was preparing for the New York Chocolate Show in October 2012 when
Hurricane Sandy nearly destroyed his Manhattan location and a new place under
construction in Tribeca. Flood waters poured into the basement and rose up to four
feet on the first floor, destroying all the equipment and thousands of dollars of specially
made treats for the chocolate show. Years of hard work were ruined in
a matter of minutes, leaving Akerlund with uninsured losses in excess
of half a million dollars.
Akerlund received an SBA disaster loan, and with the support of local
customers and caring neighbors he started the rebuilding process. In
February, he was able to open the new chocolate factory in Tribeca,
and two months later the Manhattan location reopened.
Akerlund received the SBA’s 2014 Phoenix Award for Outstanding
Small Business Disaster Recovery. The Phoenix Award is presented
to business owners, public officials, and volunteers who display
selflessness, ingenuity, and tenacity in the aftermath of a disaster, while contributing to the rebuilding of their
communities. “The Phoenix Award acknowledges their heroic efforts and is a symbol of appreciation for their
contributions to the economic recovery of their communities,” said SBA Administrator Maria Contreras-Sweet.
“SBA Disaster Assistance saved us,” said Akerlund. “I was so impressed by SBA. Everyone was so incredible.”
AGENCY FINANCIAL REPORT • FY 2014 83
F I N A N C I A L RE P O RT I N G
REQUIRED SUPPLEMENTARY INFORMATION
Combining Statement of Budgetary Resources
For the year ended September 30, 2014 (unaudited)
(Dollars in Thousands) BLIF DLF SBGRF PCECGF
Nonbudgetary Nonbudgetary
Budgetary Financing Budgetary Financing Budgetary Budgetary
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 198,175 $ 3,620,112 $ 733,839 $ 516,675 $ 73,343 $ 1,119
Recoveries of Prior Year Obligations 29,898 3,954 34,815 313,144 55 –
Other Changes in Unobligated Balance (19,965) (136,244) (3,552) (829,550) – (1,119)
Unobligated Balance from Prior Year Budget
208,108 3,487,822 765,102 269 73,398 –
Authority, net
Appropriations (discretionary and mandatory) 570,219 – 230,573 – – –
Borrowing Authority (discretionary and mandatory) – 534,107 – 228,838 – –
Spending Authority from Offsetting Collections 17 2,668,615 1 882,759 18,624 –
Total Budgetary Resources $ 778,344 $ 6,690,544 $ 995,676 $ 1,111,866 $ 92,022 $ –
STATUS OF BUDGETARY RESOURCES
Obligations Incurred $ 538,257 $ 2,825,064 $ 257,294 $ 628,150 $ 11,272 $ –
Unobligated Balance, end of year:
Apportioned 55,049 1,161,522 72,826 424,716 19,439 –
Unapportioned 185,038 2,703,958 665,556 59,000 61,311 –
Total Unobligated Balance, end of year 240,087 3,865,480 738,382 483,716 80,750 –
Total Status of Budgetary Resources $ 778,344 $ 6,690,544 $ 995,676 $ 1,111,866 $ 92,022 $ –
CHANGE IN OBLIGATED BALANCES
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 232,361 $ 93,947 $ 67,554 $ 607,583 $ – $ –
Obligations Incurred 538,257 2,825,064 257,294 628,150 11,272 –
Gross Outlays (611,942) (2,827,468) (274,985) (764,617) (11,188) –
Recoveries of Prior Year Unpaid Obligations (29,898) (3,954) (34,815) (313,144) (55) –
Unpaid Obligations, end of year 128,778 87,589 15,048 157,972 29 –
Uncollected Payments:
Uncollected Payments, Federal sources
brought forward, October 1 – (228,902) – (67,617) – –
Change in Uncollected Payments, Federal Sources – 101,021 – 52,489 – –
Uncollected Payments, Federal Sources, end of year – (127,881) – (15,128) – –
Memorandum (non-add) entries:
Obligated Balance, start of year $ 232,361 $ (134,955) $ 67,554 $ 539,966 $ – $ –
Obligated Balance, end of year $ 128,778 $ (40,292) $ 15,048 $ 142,844 $ 29 $ –
BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross
$ 570,236 $ 3,202,722 $ 230,574 $ 1,111,597 $ 18,624 $ –
(discretionary and mandatory)
Actual Offsetting Collections
(8,207) (2,872,311) (2,183) (1,051,247) (18,624) (425)
(discretionary and mandatory)
Change in Uncollected Customer Payments
from Federal Sources
– 101,021 – 52,489 – –
(discretionary and mandatory)
Budget Authority, net
(discretionary and mandatory) $ 562,029 $ 431,432 $ 228,391 $ 112,839 $ – $ (425)
Gross Outlays (discretionary and mandatory) $ 611,942 $ 2,827,468 $ 274,985 $ 764,617 $ 11,188 $ –
Actual Offsetting Collections
(8,207) (2,872,311) (2,183) (1,051,247) (18,624) (425)
(discretionary and mandatory)
Net Outlays (discretionary and mandatory) 603,735 (44,843) 272,802 (286,630) (7,436) (425)
Distributed Offsetting Receipts – (1,083,609) – (40,446) – –
Agency Outlays, net
(discretionary and mandatory) $ 603,735 $ (1,128,452) $ 272,802 $ (327,076) $ (7,436) $ (425)
See Accompanying Auditors’ Report.
84 AGENCY FINANCIAL REPORT • FY 2014
FI N A N CI A L REPORT IN G
REQUIRED SUPPLEMENTARY INFORMATION (continued)
Combining Statement of Budgetary Resources
For the year ended September 30, 2014
(Dollars in Thousands) SE OIG ADVOCACY EDP BATF TOTAL TOTAL
Nonbudgetary
Budgetary Budgetary Budgetary Budgetary Budgetary Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 280,740 $ 9,173 $ 679 $ – $ 131 $ 1,297,199 $ 4,136,787 $ 5,433,986
Recoveries of Prior Year Obligations 40,122 134 15 – – 105,039 317,098 422,137
Other Changes in Unobligated Balance (9,195) (222) – – – (34,053) (965,794) (999,847)
Unobligated Balance from Prior Year Budget
311,667 9,085 694 – 131 1,368,185 3,488,091 4,856,276
Authority, net
Appropriations (discretionary and mandatory) 249,500 19,000 8,750 196,665 – 1,274,707 – 1,274,707
Borrowing Authority (discretionary and mandatory) – – – – – – 762,945 762,945
Spending Authority from Offsetting Collections 361,672 1,001 1 – 41 381,357 3,551,374 3,932,731
Total Budgetary Resources $ 922,839 $ 29,086 $ 9,445 $ 196,665 $ 172 $ 3,024,249 $ 7,802,410 $ 10,826,659
STATUS OF BUDGETARY RESOURCES
Obligations Incurred $ 635,606 $ 17,854 $ 8,628 $ 192,274 $ 13 $ 1,661,198 $ 3,453,214 $ 5,114,412
Unobligated Balance, end of year:
Apportioned 236,415 9,456 817 4,391 155 398,548 1,586,238 1,984,786
Unapportioned 50,818 1,776 – – 4 964,503 2,762,958 3,727,461
Total Unobligated Balance, end of year 287,233 11,232 817 4,391 159 1,363,051 4,349,196 5,712,247
Total Status of Budgetary Resources $ 922,839 $ 29,086 $ 9,445 $ 196,665 $ 172 $ 3,024,249 $ 7,802,410 $ 10,826,659
CHANGE IN OBLIGATED BALANCES
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 337,557 $ 1,601 $ 873 $ – $ 5 $ 639,951 $ 701,530 $ 1,341,481
Obligations Incurred 635,606 17,854 8,628 192,274 13 1,661,198 3,453,214 5,114,412
Gross Outlays (731,508) (17,372) (8,580) (55,323) (14) (1,710,912) (3,592,085) (5,302,997)
Recoveries of Prior Year Unpaid Obligations (40,122) (134) (15) – – (105,039) (317,098) (422,137)
Unpaid Obligations, end of year 201,533 1,949 906 136,951 4 485,198 245,561 730,759
Uncollected Payments:
Uncollected Payments, Federal sources
brought forward, October 1 – – – – – – (296,519) (296,519)
Change in Uncollected Payments, Federal Sources – – – – – – 153,510 153,510
Uncollected Payments, Federal Sources, end of year – – – – – – (143,009) (143,009)
Memorandum (non-add) entries:
Obligated Balance, start of year $ 337,557 $ 1,601 $ 873 $ – $ 5 $ 639,951 $ 405,011 $ 1,044,962
Obligated Balance, end of year $ 201,533 $ 1,949 $ 906 $ 136,951 $ 4 $ 485,198 $ 102,552 $ 587,750
BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross
$ 611,172 $ 20,001 $ 8,751 $ 196,665 $ 41 $ 1,656,064 $ 4,314,319 $ 5,970,383
(discretionary and mandatory)
Actual Offsetting Collections
(361,673) (1,001) (2) – (40) (392,155) (3,923,558) (4,315,713)
(discretionary and mandatory)
Change in Uncollected Customer Payments
from Federal Sources
– – – – – – 153,510 153,510
(discretionary and mandatory)
Budget Authority, net
(discretionary and mandatory) $ 249,499 $ 19,000 $ 8,749 $ 196,665 $ 1 $ 1,263,909 $ 544,271 $ 1,808,180
Gross Outlays (discretionary and mandatory) $ 731,508 $ 17,372 $ 8,580 $ 55,323 $ 14 $ 1,710,912 $ 3,592,085 $ 5,302,997
Actual Offsetting Collections
(361,673) (1,001) (2) – (40) (392,155) (3,923,558) (4,315,713)
(discretionary and mandatory)
Net Outlays (discretionary and mandatory) 369,835 16,371 8,578 55,323 (26) 1,318,757 (331,473) 987,284
Distributed Offsetting Receipts 900 – – – – 900 (1,124,055) (1,123,155)
Agency Outlays, net
(discretionary and mandatory) $ 370,735 $ 16,371 $ 8,578 $ 55,323 $ (26) $ 1,319,657 $ (1,455,528) $ (135,871)
AGENCY FINANCIAL REPORT • FY 2014 85
F I N A N C I A L RE P O RT I N G
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION
(Unaudited)
Stewardship Investments in Human Capital
Human Capital investments are expenses included in net cost for education and training programs that are intended to increase
or maintain national economic productive capacity and that produce outputs and outcomes that provide evidence of maintain-
ing or increasing national productive capacity. The definition excludes education and training expenses for federal personnel.
Small Business Development Centers deliver an array of services to small businesses and prospective business owners using an
extensive network of lead centers and outreach locations. SBDCs deliver professional business advice and training assistance in
key management areas to small business clients throughout the U.S. that generates business revenue, creates and retains jobs,
and enhances local and regional economies.
SCORE is a nonprofit association comprised of over 11,000 volunteer mentors and business advice counselors that serve entre-
preneurs with in-person mentoring, local training workshops, and online resources. SCORE adapts its structure and services to
meet the needs of specific small businesses.
Women’s Business Centers provide business advice and training assistance primarily to women entrepreneurs through over 100
non-profit educational centers across the nation. Many of the training courses focus on business and financial planning that
help women entrepreneurs gain financial literacy. They also provide direct business advice to clients and help them access loans,
federal contracts, and exporting opportunities.
Microloan Technical Assistance helps the smallest of small businesses become established and achieve success. Community-
based intermediary lenders provide business-based training and technical assistance to microbusinesses. The program is an
important source of training assistance for low-income, women, veteran, and minority entrepreneurs.
SBA’s Consulting and Training Programs includes SBA’s work to develop or expand business advice and training assistance
programs focused on key areas, including underserved markets, procurement, exports, and emerging and expanding technological
sectors. These small business counseling and training programs are provided by or facilitated through an SBA district office for
the delivery of a structured program providing knowledge, information or experience on a business-related subject. Training is
available on a number of subjects of interest to a small business person and may be delivered to an individual, a class, or online.
Veterans Outreach includes comprehensive outreach through veterans business outreach centers and technical assistance and training
to transitioning veterans that are interested in starting a new or growing an existing business through programs such as Boots-to-
Business, Veteran Women Igniting the Spirit of Entrepreneurship, and Entrepreneurship Boot Camp for Veterans with Disabilities.
All Other Training and Assistance Programs not separately detailed include PRIME Technical Assistance, Native American
Outreach and the 7(j) program.
Performance results are provided in the Management’s Discussion and Analysis section of SBA’s Agency Financial Report in
“SBA by the Numbers” and “Summary of Key SBA Programs”.
Significant Human Capital investments occur within the following programs:
(Dollars in Thousands)
For the Five Years Ended September 30, 2014 2013 2012 2011 2010
Small Business Development Centers $ 154,400 $ 93,427 $ 152,835 $ 123,097 $ 130,046
SCORE 5,758 10,894 9,331 14,094 11,134
Women’s Business Centers 24,842 21,049 25,006 13,080 16,924
Microloan Technical Assistance 21,552 16,525 22,487 30,485 23,426
SBA's Consulting and Training Programs 54,620 44,313 28,365 28,006 20,576
Veterans Outreach 13,244 – – – –
All Other Training and Assistance Programs 12,832 6,924 12,689 8,603 37,055
Total $ 287,248 $ 193,132 $ 250,713 $ 217,365 $ 239,161
Note: FY 2013 amounts above differ from the published year-end FY 2013 amounts due to the change in the net cost allocations (see Note 14).
86 AGENCY FINANCIAL REPORT • FY 2014
Other
Information
SUCCESS STORY: Making Jobs
Accessible to
Vets
Knight Solutions,
Leesburg, Virginia
Kevin L Knight, President and CEO of Knight
Solutions, is SBA’s 2014 Virginia Small Business
Person of the Year. A military man, Knight was forced
to retire when a training accident injured his eyes by
detaching his retinas. His career path was forever changed, but during the healing process, he developed a vision of
what he wanted to do for the rest of his life.
With mentoring from the Fairfax County Small Business Development Center and a $50,000 SBA Patriot Express
loan, Kevin started Knight Solutions. The company is an 8(a) certified and service-disabled veteran-owned Virginia-
based small business with mostly veteran employees. Knight Solutions provides renovation, operation, and facility
maintenance at national cemeteries throughout the country. The firm’s 2012 revenue was $16.3 million, a spike of
1,400 percent in three years.
Before starting his business in 2005, Kevin Knight contacted the Department of Veterans Affairs and learned there
were more than 100 national cemeteries that needed help. He saw an opportunity to build a business servicing those
cemeteries. While Knight Solutions initially started out just doing landscaping, Kevin’s vision was to take veterans
who have seen action, bring them home, and give them a sense of ownership and responsibility.
OTH E R I NF ORMATION
U. S. Small Business Administration
Schedule of Spending
For the Years Ended September 30, 2014 and 2013 (Unaudited)
(Dollars in Thousands)
2014 2013
Non- Non-
budgetary budgetary
Budgetary Financing Total Budgetary Financing Total
What Money is Available to Spend?
Total Resources $ 3,024,249 $ 7,802,410 $ 10,826,659 $ 4,179,528 $ 9,880,066 $ 14,059,594
Less Amount Available but Not Agreed to be Spent 398,548 1,586,238 1,984,786 594,338 854,066 1,448,404
Less Amount Not Available to be Spent 964,503 2,762,958 3,727,461 702,861 3,282,721 3,985,582
Total Amounts Agreed to be Spent $ 1,661,198 $ 3,453,214 $ 5,114,412 $ 2,882,329 $ 5,743,279 $ 8,625,608
Non- Non-
budgetary budgetary
Budgetary Financing Total Budgetary Financing Total
How was the Money Spent?
Salary & Benefits $ 410,302 $ – $ 410,302 $ 482,517 $ – $ 482,517
Grants 177,934 – 177,934 172,650 – 172,650
Rents 45,461 – 45,461 46,046 – 46,046
Contracts 116,398 – 116,398 92,711 – 92,711
Travel 10,305 – 10,305 34,068 – 34,068
Other Administrative Expenses 84,049 – 84,049 47,706 – 47,706
Telecommunications 9,926 – 9,926 10,915 – 10,915
Surety Bonds Defaults 11,273 – 11,273 4,682 – 4,682
Business Loans 50,356 55,156 105,512 50,049 55,348 105,397
Business Loan Guarantees 487,900 2,769,909 3,257,809 1,330,606 4,036,685 5,367,291
Disaster Lending 257,294 628,149 885,443 610,379 1,651,246 2,261,625
Total Amounts Agreed to be Spent $ 1,661,198 $ 3,453,214 $ 5,114,412 $ 2,882,329 $ 5,743,279 $ 8,625,608
Non- Non-
budgetary budgetary
Budgetary Financing Total Budgetary Financing Total
Who did the Money go to?
Other Federal Agencies $ 355,061 $ 1,469,413 $ 1,824,474 $ 573,660 $ 2,059,960 $ 2,633,620
Public Individuals and Organizations 1,306,137 1,983,801 3,289,938 2,308,669 3,683,319 5,991,988
Total Amounts Agreed to be Spent $ 1,661,198 $ 3,453,214 $ 5,114,412 $ 2,882,329 $ 5,743,279 $ 8,625,608
The Schedule of Spending was developed to bridge the gap between budgetary accounting reports, such as the Statement of
Budgetary Resources, and the public’s desire for a transparent view of how federal money was spent. The SOS allows the
reader to review SBA’s spending in more understandable terms and also provides the public with a high level view of who
benefited from federal funds.
To obtain a more detailed view of SBA’s beneficiaries, the public can access general information about individual awards on
USASpending.gov. The data provided on the USAspending.gov website however does not include all spending information
provided in the SBR and SOS. For example, SBA is primarily a federal credit agency and SBA’s nonbudgetary financing
items, which are related to the direct and guarantee loan guarantee programs, are not included on USAspending.gov.
AGENCY FINANCIAL REPORT • FY 2014 89
OT H E R I NF OR M AT I ON
OIG REPORT ON THE MOST SERIOUS MANAGEMENT
AND PERFORMANCE CHALLENGES
Report on the Most Serious
Management and Performance Challenges
Facing the Small Business Administration
In Fiscal Year 2015
October 17, 2014 REPORT NUMBER 15-01
90 AGENCY FINANCIAL REPORT • FY 2014
OTH E R I NF ORMATION
U.S. Small Business Administration
Office of Inspector General
Washington, D.C. 20416
MEMORANDUM
MANAGEMENT CHALLENGES
DATE: October 17, 2014
TO: Maria Contreras-Sweet
Administrator
FROM: Peggy E. Gustafson
Inspector General
SUBJECT: Report on the Most Serious Management and Performance Challenges Facing the Small
Business Administration in Fiscal Year 2015
In accordance with the Reports Consolidation Act of 2000, we are providing you with the Office of
Inspector General’s (OIG) Report on the Most Serious Management and Performance Challenges Facing
the Small Business Administration (SBA) in Fiscal Year (FY) 2015.
This report represents our current assessment of Agency programs and/or activities that pose significant
risks, including those that are particularly vulnerable to fraud, waste, error, mismanagement, or
inefficiencies. The Challenges are not presented in order of priority, as we believe that all are critical
management or performance issues.
Our report is based on specific OIG, Government Accountability Office (GAO), and other official reports,
as well as our general knowledge of the SBA’s programs and operations. Our analysis generally
considers those accomplishments that the SBA reported as of September 30, 2014.
Within each Management Challenge, there are a series of “recommended actions” to resolve the
Challenge. Each recommended action is assigned a color “status” score. The scores are as follows:
green for “implemented,” yellow for “substantial progress,” orange for “limited progress,” and red for “no
progress.” An arrow in the color box indicates that the color score went up or down from the prior year.
If a recommended action was added since last year’s report, no color score was assigned, and the
recommended action has been designated as “new.”
As part of the OIG’s continuing evaluation of the Management Challenges, certain Challenges have been
updated or revised. In addition, actions that were scored green last year, which remained green this year,
have been moved up to the “history bar” above the recommended actions. The history bar highlights any
progress that the Agency has made on a Challenge over the past four fiscal years (or as long as the
Challenge has existed, if shorter) by showing the number of actions that have moved to green each year.
The following table provides a summary of the Most Serious Management and Performance Challenges
Facing the SBA in FY 2015.
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Table 1. Summary of the Most Serious Management and Performance Challenges Facing the SBA
in FY 2015
Color Scores
Change from
Status at End of FY 2014
Prior Year
Challenge Green Yellow Orange Red Up # Down $
1 Small Business Contracting 1 1 1
2 IT Security 3 2 1 1
3 Human Capital 3
4 Loan Guaranty Purchase 1 1
5 Lender Oversight 2 2
8(a) Business Development
6 2 1 1
Program
7 Loan Agent Fraud 1 2
Loan Management and
8 4 3
Accounting System
Improper Payments –
9 2 4 1
7(a) program
Improper Payments –
10 1 1
Disaster Loan program
11 Acquisition Management 5
TOTAL 5 18 11 1 10 2
We would like to thank the SBA’s management and staff for their cooperation in providing us with
information needed to prepare this report. We look forward to continuing to work with the SBA’s
leadership team in addressing the Agency’s Management Challenges.
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Challenge 1. Procurement flaws allow large firms to obtain small business awards,
and allow agencies to count contracts performed by large firms towards their small
business goals.
The Small Business Act established a Government-wide goal that 23 percent of the total value of all prime
contracts be awarded to small businesses each fiscal year. As the advocate for small business, the SBA should
strive to ensure that only small firms obtain and perform small business awards. Further, the SBA should
ensure that procuring agencies accurately report contracts awarded to small businesses when representing their
progress in meeting small business contracting goals.
In September 2014, we issued a report that identified over $400 million in FY 2013 contract actions that may
have been awarded to ineligible firms. We also identified over $1.5 billion dollars in contract actions for
which the firms were in the 8(a) or HUBZone programs at the time of contract award, but were no longer in
these programs in FY 2013. Previous OIG audits and other Government studies have shown widespread
misreporting by procuring agencies, since many contract awards that were reported as having gone to small
firms have actually been performed by larger companies. While some contractors may misrepresent or
erroneously calculate their size, most of the incorrect reporting results from errors made by Government
contracting personnel, including misapplication of small business contracting rules. In addition, contracting
officers do not always review the on-line certifications that contractors enter into Government databases prior
to awarding contracts. The SBA should ensure that procuring agencies accurately report contracts awarded to
small businesses when representing their progress in meeting small business contracting goals, and that
contracting personnel are reviewing on-line certifications prior to awarding contracts.
The SBA revised its regulations to require firms to meet the size standard for each specific order to address a
loophole within General Services Administration Multiple Awards Schedule (MAS) contracts, which contain
multiple industrial codes that determine the size of the company. Previously, a company awarded an MAS
contract could identify itself as a small business on individual task orders awarded under that contract, even
though it did not meet the size criteria for the applicable task. Thus, agencies received small business credit
for using a firm classified as small, when the firm was not small for specific orders under the MAS contract.
In addition, the SBA submitted a final rule to the Federal Acquisition Regulations (FAR) Council to
implement the changes made to its regulations in the FAR. The SBA also updated its standard operating
procedure (SOP) to ensure consistency in conducting its surveillance reviews to assess Federal agencies’
management of their small business programs and compliance with regulations and applicable procedures.
While the SBA has made substantial progress on this challenge, we are working with the Agency to verify that
the surveillance reviews were conducted in a thorough and consistent manner.
Number of Actions Accomplished (Green
Status) During Last Four Fiscal Years 2010: 0 2011: 1 2012: 1 2013: 0
(Challenge first reported in FY 2005)
Status at end of
Recommended Actions for FY 2015
FY 2014
1. Revise the surveillance review process to ensure that they are conducted in a thorough
Yellow
and consistent manner. (Previously action 2)
2. Issue regulations that require firms to meet the size standard for each specific order they
receive under a GSA schedule and Government-wide Acquisition Contract (GWAC) and Green#
show that the regulations are being followed. (Previously action 3)
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress
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Challenge 2. Weaknesses in information systems security controls pose significant
risks to the Agency.
The SBA’s computer security program operates in a dynamic and highly decentralized environment, and
requires management attention and resources as weaknesses are continually identified. The SBA has
shown progress in establishing an entity-wide incident management and response program, and has
improved network port security access controls. However, the SBA still needs to address long-standing
security weaknesses identified in 35 open information technology (IT) audit recommendations in the
following areas:
• The SBA’s system software controls have 6 open recommendations averaging more than 700
days past their original target corrective action date. These recommendations highlight
significant security vulnerabilities, including establishing baseline configurations of the SBA’s IT
platforms; establishing an effective configuration management program; and patching operating
systems, devices, and database management systems in a timely manner.
• The SBA’s segregation of duty controls have 13 open recommendations averaging more than 500
days past their original target corrective action date. These recommendations include restricting
access to system software, and effectively reviewing system and application logs.
• The SBA’s IT security management program has 11 recommendations averaging more than 500
days past their original target corrective action date. Many of these vulnerabilities are statutory
requirements which, if remediated, would improve the SBA’s IT security oversight as well as
improve the SBA’s compliance with guidance provided in the Federal Information Security
Management Act of 2002 (FISMA).
To show improvement in the above areas, the SBA’s Office of the Chief Information Officer, in
conjunction with the SBA’s program offices, will need to implement tools and capabilities to provide
effective oversight and continuously monitor computer security controls.
Number of Actions Accomplished (Green
Status) During Last Four Fiscal Years 2010: 0 2011: 1 2012: 0 2013: 1
(Challenge first reported in FY 1999)
Status at end of
Recommended Actions for FY 2015
FY 2014
1. Access controls are in place and operating effectively, and contractors are not granted
system access until they have obtained the required background investigations and/or Yellow
security clearances.
2. System software controls are in place and operating effectively. Orange#
3. Segregation of duty controls are in place and operating effectively. Orange
4. The plan of action and milestones accurately reports all computer security weaknesses and
Yellow$
corrective actions.
5. The IT security management program is effective to address information security in
systems that support the operations and assets of the organization. Yellow
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress
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Challenge 3. The SBA needs effective human capital strategies to carry out its
mission successfully and become a high-performing organization.
The Office of Human Resource Solutions has taken significant steps toward addressing this management
challenge, including ensuring an effective, comprehensive workforce and succession plan that aligns
talent needs and capabilities with the Agency’s 2011-2016 strategic plan. For example, in FY 2012, the
SBA initiated a leadership development program designed to recruit and develop future leaders. In
FY 2013, the SBA developed Agency-wide core competencies and training focused on those
competencies, and issued a leadership succession plan. The SBA also launched its learning management
system in FY 2014. Reported next steps include thoroughly reviewing work processes to ensure cross-
functional understanding of SBA products and services and new required skills that reflect the Agency’s
mission and organizational priorities. In order to complete this recommended action, the SBA’s
workforce and succession planning goals should establish appropriate metrics to gauge its success at
having the right people, in the right jobs, at the right time.
The SBA has also made substantial progress to update and establish standard operating procedures for
human capital management. This recommended action was intended to encourage the Agency to update
and establish critical procedures in support of its long-term goals and objectives and Government-wide
human capital management initiatives. The Agency continues to make progress in this area. In FY 2014,
the Agency issued SOPs for telecommuting, compensatory time for travel, and addressing domestic
violence—all previously identified as agency priorities prior to FY 2014.
In accordance with the Office of Management and Budget (OMB) FY 2012 budget guidance, agencies are
tasked with directing resources toward areas most needing improvement, as identified in the Employee
Viewpoint Survey. The SBA established the “SBA Way” initiative to increase employee engagement and
foster collaboration across the Agency. Charters outlining membership and responsibilities for the
Executive Steering Committee and Action Planning Committee and subcommittees were finalized, and a
process for soliciting and vetting suggestions from SBA employees regarding organizational
improvement was established. Members were active throughout FY 2014 with plans to launch an
employee training survey and employee recognition initiative in FY 2015.
Number of Actions Accomplished (Green Status)
During Last Four Fiscal Years
2010: 0 2011: 0 2012: 0 2013: 1
(Challenge first reported in FY 2001, revised FY
2007)
Status at end
Recommended Actions for FY 2015
of FY 2014
1. Ensure the Agency has an effective, comprehensive workforce and succession plan that
aligns talent needs and capabilities with the SBA’s FY 2011-2016 strategic plan. The
SBA’s workforce and succession planning goals should reflect the need to recruit and retain Yellow
the appropriate talent, and should establish appropriate metrics to gauge the SBA’s success
at having the right people, in the right jobs, at the right time.
2. Ensure that human capital management SOPs are updated and appropriately structured to
support the Agency’s long-term goals and objectives and Government-wide human capital Yellow
management initiatives. (Previously recommended action #3)
3. Demonstrate sustained progress toward a high-performing, employee-driven culture through
activity and effort as prioritized by the SBA’s employee engagement initiative for two
Yellow
consecutive years (end of FY 2015) (Previously recommended action #4 – modified in
February 2014).
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress
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Challenge 4. The SBA needs to implement a quality control program in its loan
centers.
The Office of Financial Program Operations (OFPO) has made significant progress in developing and
implementing a quality control (QC) program for all of its loan centers to verify and document
compliance with the loan process, from origination to close-out, and to identify where material
deficiencies may exist so that remedial action can be taken. Relevant parties within the Office of Capital
Access have developed and agreed upon a QC project guide. The QC program will assess the overall
quality of loan centers’ deliverables to provide confidence to stakeholders. The SBA assigned a QC
manager to oversee the development of the program and established QC specialist positions for each
center. Furthermore, the SBA (1) developed and documented quality program manuals and review
checklists for each center; (2) assessed center functions by risk to prioritize required QC reviews;
(3) refined feedback, training and reporting processes; and (4) developed new systems to improve the
tracking of quality control deficiencies and corrective actions.
While the SBA has made significant progress in implementing a QC program, further improvement is
needed for the SBA to continue to demonstrate that all elements of the QC program are being completed,
and that the program remains effective at identifying and correcting material deficiencies. For example,
an FY 2014 OIG evaluation of the QC program determined that loan centers were not performing
required reviews over significant loan center operations, and were not tracking corrective actions, as
required. This report included two key recommendations to improve the QC program managed by the
OFPO. The OFPO made significant progress during FY 2014 to address these remaining areas of
weakness within the QC program. Additionally, QC reports submitted to the OIG at the end of the fiscal
year continued to show that SBA loan centers did not always achieve the required levels of review.
Finally, our reviews of the SBA’s QC plans noted inconsistent coverage of loan center operations, which
we brought to the SBA’s attention.
In order to maintain a status of “implemented” for this challenge, the SBA must continue to demonstrate
that the QC program is operating effectively. The OIG will continue to monitor the QC program during
FY 2015 to verify that: (1) required QC reviews are being completed, (2) QC activities provide adequate
coverage over loan center operations, and (3) QC reviews are effective at identifying and correcting
material deficiencies.
Number of Actions Accomplished (Green
Status) During Last Four Fiscal Years 2010: 1 2011: 0 2012: 0 2013: 0
(Challenge first reported in FY 2007)
Recommended Actions for FY 2015 Status at end of
FY 2014
1. Implement a quality control program for all SBA loan centers. Green#
Green-Implemented Yellow-Substantial progress Orange-Limited Progress Red-No progress
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Challenge 5. The SBA needs to further strengthen its oversight of lending
participants.
Prior OIG and GAO reports disclosed weaknesses in the SBA’s oversight of the lenders that participate in
its programs. In a September 2012 audit report, the OIG found that the SBA did not always recognize the
significance of lender weaknesses or determine the risks they posed to the Agency during its onsite
reviews. Additionally, the SBA did not link the risks associated with the weaknesses to the lenders’
corresponding risk ratings and assessments of operations. Further, the SBA did not require lenders to
correct performance problems that could have exposed the SBA to unacceptable levels of financial risk.
The risks inherent in delegated lending require an effective oversight program to (1) monitor compliance
with SBA policies and procedures, and (2) take corrective actions when a material noncompliance is
detected.
Since this management challenge was first issued in 2001, the SBA has made significant progress in its
oversight of lending participants. In FY 2013, the SBA (1) developed risk profiles and lender
performance thresholds, (2) developed a select analytical review process to allow for virtual risk-based
reviews, (3) updated its lender risk rating model to better stratify and predict risk, and (4) conducted test
reviews under the new risk-based review protocol. These efforts have demonstrated that onsite reviews
are now conducted on the highest-risk lending participants based on expanded selection criteria. In FY
2014, the SBA improved its monitoring and verification of corrective actions by lenders by: (1)
developing corrective action assessment procedures, (2) finalizing a system to facilitate the corrective
action process, and (3) populating the system with lender oversight results requiring corrective action.
However, in order to fully resolve this management challenge, the SBA must demonstrate the
effectiveness of the process for monitoring and verifying lenders’ implementation of corrective actions.
Number of Actions Accomplished (Green Status) 2010: 0 2011: 0 2012 2013
During Past Four Fiscal Years 7(a) loans: 1 7(a) loans: 2
(Challenge first reported in FY 2001) 504 loans: 1 504 loans: 2
Status at end of
Recommended Actions for FY 2015 FY 2014
7(a) 504
1. Monitor and verify implementation of corrective actions to ensure effective
Yellow Yellow
resolution prior to close-out. (Previously Recommended Action #3)
Green-Implemented Yellow-Substantial progress Orange-Limited Progress Red-No progress
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Challenge 6. The SBA needs to modify the Section 8(a) Business Development
Program so more firms receive business development assistance, standards for
determining economic disadvantage are justifiable, and the SBA ensures that
firms follow 8(a) regulations when completing contracts.
The SBA’s 8(a) Business Development (BD) Program was created to assist eligible small disadvantaged
business concerns to compete in the American economy through business development. Previously, the
SBA did not place adequate emphasis on business development to enhance the ability of 8(a) firms to
compete, and did not adequately ensure that only 8(a) firms with economically disadvantaged owners in
need of business development remained in the program. Companies that were “business successes” were
allowed to remain in the program and continue to receive 8(a) contracts, causing fewer companies to
receive most of the 8(a) contract dollars and many to receive none.
The SBA has made progress towards addressing issues that hinder its ability to deliver an effective 8(a)
BD Program. For example, the SBA expanded its ability to provide assistance to program participants
through its resource partners—small business development centers, service corps of retired executives,
and procurement technical assistance centers. In addition, the SBA has taken steps to ensure business
opportunity specialists assess program participants’ business development needs during site visits. The
SBA also revised its regulations, effective March 2011, to ensure that companies deemed “business
successes” graduate from the program. These regulations also establish additional standards to address
the definition of “economic disadvantage.” Agency officials stated that the rule-making process served as
an adequate proxy to objectively and reasonably determine effective measures for economic
disadvantage, and were not aware of any reliable sources of data to determine economic disadvantage.
However, for the second consecutive year, the SBA has not completed updating its SOP for the 8(a) BD
Program to reflect the March 2011 regulatory changes. In addition, we continue to maintain that the
SBA’s standards for determining economic disadvantage are not justified or objective based on the
absence of economic analysis. In December 2011, the SBA awarded a contract to develop and deploy a
new IT system by December 2012 to assist the SBA in monitoring 8(a) program participants. However,
the new system has not been deployed, and its delivery date and capabilities are undetermined at this
time.
Number of Actions Accomplished (Green Status)
During Past Four Fiscal Years 2010: 0 2011: 0 2012: 0 2013: 0
(Challenge first reported in FY 2003)
Status at end of
Recommended Actions for FY 2015
FY 2014
1. Develop and implement a plan, including SOP provisions, which ensures that the 8(a) BD
Program identifies and addresses program participants’ business development needs on an Orange
individualized basis.
2. Develop and implement regulations and SOP provisions to ensure that participants
Orange
graduate once they reach the levels defined as “business success.”
3. Establish objective and reasonable criteria that effectively measure “economic
Red
disadvantage,” and implement the new criteria.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress
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Challenge 7. Effective tracking and enforcement would reduce financial losses
from loan agent fraud.
For years, OIG investigations have revealed a pattern of fraud by loan packagers and other for-fee agents
in the 7(a) Loan Program involving hundreds of millions of dollars. Yet the SBA’s oversight of loan
agents has been limited, putting taxpayer dollars at risk. The Agency could reduce this risk through
effective loan agent disclosure requirements, a database or equivalent means to track loan agent activity,
updated regulations, new guidance for lenders, and a registration system.
Tracking Loan Agent Data. In response to this Challenge, the SBA has proposed various methods of
tracking loan agent activity. The SBA eventually decided to have lenders fax a loan agent disclosure
form (Form 159) to the SBA’s fiscal and transfer agent (FTA) and require the FTA to enter the data into a
database accessible to the SBA. The SBA also began to link Form 159 information with its loan data.
Despite some data problems, quality is improving. Moreover, the FTA is testing an automated Form 159.
Updating Regulations. Any Government enforcement program requires effective regulations and
procedures. In response to OIG concerns that the SBA loan agent enforcement regulations are outdated,
the SBA drafted revised regulations that the OMB is reviewing.
Notice of SBA Enforcement Actions. Lenders need to ensure that agents involved with their loans have
not been subject to enforcement action by the SBA. The SBA now lists the names of loan agents and
others named in SBA enforcement actions on its website, and updated an SOP in FY 2014 to instruct
lenders to consult this list to avoid problematic loan agents.
Registration System. The SBA needs to develop a system to assign a unique identifier to loan agents
that participate in the 7(a) program. Without these identifiers, the SBA cannot effectively track loan
agents to ensure suspended agents do not simply change their name and continue participating in the
program. The SBA has not committed to implementing a registration system, and is waiting for the OIG
to complete an audit on loan agents. As such, the OIG has not assigned a color to this action.
Number of Actions Accomplished (Green Status)
During Past Four Fiscal Years 2010: 0 2011: 0 2012: 1 2013: 0
(Challenge first reported in FY 2000)
Recommended Actions for FY 2015 Status at end of
FY 2014
1. Develop an effective method of disclosing and tracking loan agent involvement in SBA
business loan programs. Yellow
2. Update regulations (13 CFR Part 103) regarding loan agents to provide effective
enforcement procedures. Orange
3. Issue guidance that lenders must (1) review the SBA’s webpage list of loan agents that
have been subject to an enforcement action and (2) refrain from doing business with any
Orange
agent appearing on the list during the time that an agent is suspended or revoked from the
7(a) program.
4. Implement a loan agent registration system, including the issuance of a unique identifying
number for each agent. New
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress
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Challenge 8. The SBA needs to modernize its Loan Accounting System and
migrate it off the mainframe.
The Loan Accounting System is the core system of record used to account for the SBA’s $106.8 billion
loan portfolio. In November 2005, the SBA initiated the loan management accounting system (LMAS)
project. Since 2010, the LMAS modernization effort has been structured into multiple components or
incremental improvement projects (IIPs). This project has been reviewed by GAO and was the subject of
a Congressional hearing in 2012.1 The SBA has issued reports to Congress regarding project progress,
with the most recent issued in March 2014.
In September 2014, the OIG issued a report assessing project progress and oversight controls. We
reported that the SBA needs to improve its management oversight of the individual LMAS Incremental
Improvement Projects (IIP) and ensure management actions comply with the SBA’s SOPs.
The LMAS project team is working on the Transition to Production Planning IIP. This IIP is critical to
the overall success of the LMAS project because its completion is needed to move all of the SBA’s
financial data from an outdated mainframe environment to a new, server-based operating platform.
Current plans call for the full completion of the mainframe migration by December 2014 and project
completion by February 2015. The SBA also anticipates that the LMAS IIPs’ cost will not exceed its
revised FY 2010 project estimate of $97.3 million.
Number of Actions Accomplished (Green Status)
During Past Four Fiscal Years 2010: 0 2011: 0 2012: 0 2013: 0
(Challenge first reported FY 2010)
Recommended Actions for FY 2015 Status at end f
FY 2014
1. Migrate LMAS to a new operating platform before the current mainframe contract expires in
2015. Yellow
2. Modify the LMAS quality assurance/independent verification and validation (IV&V)
contract and establish an effective quality assurance (QA) process which provides senior
management independent assurance that LMAS development activities and related project Yellow#
deliverables meet SBA quality standards.
3. Establish a process for reviewing and accepting LMAS deliverables that complies with
quality assurance and systems development methodology requirements. This includes hiring Yellow#
or fully staffing an IV&V entity to validate deliverable acceptance.
4. Implement a quality assurance process in LMAS in accordance with the SBA’s Enterprise
QA Plan. Yellow#
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress
1
Report
GAO-‐12-‐295,
SBA
Needs
to
Strengthen
Oversight
of
Its
Loan
Management
and
Accounting
System
Modernization
issued
January
2012.
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Challenge 9. The SBA needs to accurately report, significantly reduce, and
strengthen efforts to recover improper payments in the 7(a) Loan Program.
Previous OIG audits have determined that reported improper payment rates for 7(a) loan approvals and
purchases were significantly understated because the SBA did not adequately review loans, used flawed
sampling methodologies, and did not accurately project review findings. In FY 2011, the SBA’s reported
improper payment rate for 7(a) purchases was 1.73 percent, or $40.7 million, when the rate could have
been as high as 20 percent, or about $472 million. Furthermore, in FY 2011, the SBA reported no
improper payments for 7(a) loan approvals.
However, an FY 2011 OIG audit estimated that at least 1,196 Recovery Act 7(a) loans were not
originated and closed in compliance with SBA requirements, resulting in at least $869.5 million in
inappropriate or unsupported loan approvals.
Further, recent OIG audits have identified 7(a) loans that were ineligible, lacked repayment ability, or
were not properly closed. In 2012, we reported that the limited reviews of lender underwriting performed
during guaranty purchase reviews were contrary to SBA procedures, resulting in improper payments. We
also reported that high-dollar, early-defaulted loans were not reviewed with the scrutiny required to
identify improper payments. In 2013, we reported that the SBA made $4.6 million of improper payments
on high-dollar early-defaulted 7(a) loans. In 2014, we reported that six SBA approved loans with material
underwriting deficiencies defaulted, resulting in $4.8 million in unnecessary losses.
The Office of Capital Access (OCA) has taken actions to correct many of these deficiencies. The OCA
has (1) formalized its improper payment sampling; (2) demonstrated that its review process is effective
for 7(a) loan approvals; (3) formalized its process to review disputed cases; (4) formalized the recovery
process and time standards for 7(a) purchases; (5) developed appropriate corrective action plans for 7(a)
loans; and (6) established repayment ability review requirements that are effective at identifying improper
payments. However, additional actions are needed. The OCA needs to demonstrate that its process over
disputed cases is ensuring adequate and timely resolution. Additionally, the OCA needs to demonstrate
that it is adhering to recovery time standards and that corrective action plans for the 7(a) loan program are
effective.
Actions Accomplished (Green 2013
Status) During Past Four Fiscal 2010: 0 2011: 0 2012: 0 7(a) approvals: 1
Years 7(a) Purchases: 0
(Challenge first reported FY 2010)
Status at end of FY 2014
Recommended Actions for FY 2015
7(a) Approvals 7(a) Purchases
1. Ensure that processes for 7(a) loan approvals and purchases are
designed and implemented to effectively identify improper payments Green Green#
as defined by OMB Circular A-123.
2. Reassign responsibility for final approval of disputed denial, repair,
and improper payment decisions from the Office of Financial
N/A Yellow
Assistance (OFA) to the Office of Credit Risk Management (OCRM)
to ensure an adequate and timely resolution of disputes.
3. Establish a process and time standards to expeditiously recover
N/A Yellow
improper payments identified during Agency reviews and OIG audits.
4. Demonstrate that corrective action plans are effective in reducing
improper payments in the 7(a) Loan Program. Yellow Yellow
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress
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Challenge 10. The SBA Needs to Significantly Reduce Improper Payments in the
Disaster Loan Program.
Previous OIG audits of the SBA’s Disaster Loan program determined that the improper payment rates
reported for this program were significantly understated. The SBA estimated that improper payments in
the Disaster Loan program were about $4.5 million, or 0.55 percent of loans approved in FY 2007, while
the OIG reported that it was at least 46 percent, or approximately $1.5 billion. The SBA’s improper
payment rates were understated because the SBA did not adequately review sampled loans, used flawed
sampling methodologies, and did not accurately project review findings for the program.
Previously, Management Challenge 9 included both the Disaster Loan program and 7(a) program. There
were three recommended actions applicable to the Disaster Assistance Program. Of the three
recommended actions, one was implemented during FY 2010 and the two remaining actions were
implemented during FY 2011. One recommended action was to develop and implement a corrective
action plan to reduce improper payments. Although the Office of Disaster Assistance (ODA)
implemented the recommended action, the SBA has not achieved its reduction targets since
implementation. Specifically, the Agency missed its target goals of 16.7 percent for FY 2010, 20.0
percent for FY 2011, and 17.0 percent for FY 2012, instead reporting rates of 34.2 percent, 28.4 percent,
and 17.9 percent, respectively.
At the end of FY 2011, a new recommended action was added requiring the SBA to demonstrate that the
corrective action plan is effective in reducing improper payments in the Disaster Assistance Program.
The Agency has implemented an improved corrective action plan that specifically addresses root causes
and provides specific remedies, such as targeted training and inclusion of improper payments in personal
business commitment plans for employees. If properly implemented, we believe this course of action
should effectively reduce the improper payment rate in future years. The SBA’s internal improper
payment assessment for FY 2014 indicated a rate of 12 percent. This rate is lower than the 17 percent
target rate necessary to achieve a green rating. Therefore, the color status for FY 2014 is green.
Actions Accomplished (Green Status)
During Past Four Fiscal Years 2010: N/A 2011: N/A (New) 2012: 0 2013: 0
(Challenge first reported FY 2012)
Status at end
Recommended Actions for FY 2015
of FY 2014
1. Demonstrate that corrective action plans are effective in reducing improper payments in the Green#
Disaster Loan program.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress
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Challenge 11: The SBA Needs to Effectively Manage the Acquisition Program
The SBA has taken steps to improve the acquisition process by providing training to acquisition
personnel, conducting acquisition planning, and using the Contract Review Board for making acquisition
decisions. While the SBA has made limited progress, challenges exist, including: (1) poorly defined
requirements, (2) internal control deficiencies, (3) inadequate oversight of contractor performance,
(4) high improper payments rate, and (5) an incomplete acquisition SOP.
We identified instances where the SBA inadequately planned and defined its requirements for the
procurement of IT products and services. While the SBA interfaced the contract management system
with the financial system, users continue to experience system operations issues. The SBA also continued
to inadequately monitor contract performance, which does not ensure that products and services are
delivered according to contract requirements. Additionally, the SBA reported an increase in the improper
payment rate for disbursements of goods and services from 9.6 percent in FY 2012 to 11.6 percent in FY
2013. Further, its acquisition SOP does not include procedures to use modular contracting for major
system acquisitions, the use of interagency acquisitions, or define post award contract administration
requirements.
In July 2014, the Office of the Chief Financial Officer (OCFO) awarded a contract to perform an
assessment of its acquisition function required in the OMB’s memorandum for Chief Acquisition
Officers: Conducting Acquisition Assessments under OMB Circular A-123, May 21, 2008.
Actions Accomplished (Green
Status) During Past Four Fiscal
2010: N/A 2011: N/A 2012: N/A (New) 2013: 0
Years
(Challenge first reported FY 2013)
Status at end
Recommended Actions for FY 2015
of FY 2014
1. Complete an assessment of the Agency’s acquisition activities using the OMB’s Guidelines
Orange
for Assessing the Acquisition Function.
2. Create and implement a comprehensive improvement plan—based on the results of the
acquisition function assessment—that has measurable goals, objectives, prioritized actions
Orange
and timeframes to address deficiencies identified in the organizational alignment and
leadership assessment area.
3. Create and implement a comprehensive improvement plan—based on the results of the
acquisition function assessment—that has measurable goals, objectives, prioritized actions
Orange
and timeframes to address deficiencies identified in the acquisition policies and processes
assessment area (i.e. acquisition management SOP).
4. Create and implement a comprehensive improvement plan—based on the results of the
acquisition function assessment—that has measurable goals, objectives, prioritized actions
Orange
and timeframes to address deficiencies identified in the acquisition workforce assessment
area.
5. Create and implement a comprehensive improvement plan—based on the results of the
acquisition function assessment—that has measurable goals, objectives, prioritized actions
Orange
and timeframes to address deficiencies identified in the knowledge management and
information systems assessment area.
Green-Implemented Yellow-Substantial progress Orange-Limited Progress Red-No progress
AGENCY FINANCIAL REPORT • FY 2014 103
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Appendix: Relevant Reports
Most of the SBA OIG Reports listed can be found at http://www.sba.gov/office-of-inspector-general.
Challenge 1
Small Business Administration Office of Inspector General
• Agencies are Overstating Small Disadvantaged Business and HUBZone Goaling Credit by
Including Contracts Performed by Ineligible Firms, Report 14-18 (September 24, 2014).
• Opportunities Exist for the SBA to Improve the Monitoring of Non-Manufacturer Rule Waivers and
Determine the Impact on Small Businesses, Report 14-15 (August 14, 2014).
• A Non-Manufacturer Rule Waiver Allowed an 8(a) Recovery Act Contract to Bypass Established
Small Business Requirements, Report 12-19 (September 4, 2012).
• SBA’s Planning and Award of the Customer Relationship Management Contracts, ROM 10-16
(June 29, 2010).
• Review of Selected Small Business Procurements, Report 5-16 (March 8, 2005).
• SBA Small Business Procurement Awards Are Not Always Going to Small Businesses, Report 5-14
(February 24, 2005).
• Audit of SBA's Administration of the Procurement Activities of Asset Sale Due Diligence Contracts
and Task Orders, Report 4-16 (March 17, 2004). pp. 8-9.
Government Accountability Office
• Contract Management: Reporting of Small Business Contract Awards Does Not Reflect Current
Business Size, GAO-03-704T (May 7, 2003).
The Small Business Committee
• The Small Business Committee, U.S. House of Representatives Hearing, Are Big Businesses
Being Awarded Contracts Intended for Small Businesses? Testimony of Mr. Fred C.
Armendáriz, Associate Deputy Administrator, SBA, (May 7, 2003).
• The Small Business Committee, U.S. House of Representatives Hearing, Are Big Businesses
Being Awarded Contracts Intended for Small Businesses? Testimony of Mr. Felipe Mendoza,
Associate Administrator, Office of Small Business Utilization, U.S. General Services
Administration, (May 7, 2003).
Other
• Interagency Task Force on Federal Contracting Opportunities for Small Businesses Report
(September 2010).
• SBA Advocacy, Analysis of Type of Business Coding for the Top 1,000 Contractors Receiving
Small Business Awards in FY 2002 (December, 2004).
• The Center for Public Integrity, The Big Business of Small Business: Top defense contracting
companies reap the benefits meant for small businesses (September 29, 2004).
• The Center for Public Integrity, The Pentagon’s $200 Million Shingle: Defense data shows billions
in mistakes and mislabeled contracts (September 29, 2004).
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Challenge 2
Small Business Administration Office of Inspector General
• Weaknesses Identified During the FY 2013 Federal Information Security Management Act Review,
Report 14-12 (April 30, 2014).
• Independent Auditors’ Report on the SBA’s FY 2013 Financial Statements, Report 14-04
(December 16, 2013).
• Audit of SBA’s FY 2012 Financial Statements, Report 13-04 (November 14, 2012).
• Weaknesses Identified During the FY 2011 Federal Information Security Management Act Review,
Report 12-15 (July 16, 2012).
• Audit of SBA’s FY 2011 Financial Statements, Report 12-02 (November 14, 2011).
• Weaknesses Identified During the FY 2010 Federal Information Security Management Act Review,
Report 11-06 (January, 28, 2011).
• Audit of SBA’s FY 2010 Financial Statements, Report 11-03 (November 12, 2010).
• Audit of SBA’s FY 2009 Financial Statements, Report 10-04 (November 13, 2009).
• SBA’s FY2008 Financial Statements, Report 9-03 (November 14, 2008).
• Audit of SBA’s Financial Statements for FY 2006, Report 7-03 (November 15, 2006).
• Audit of SBA’s Information System Controls for FY 2004, Report 5-12 (February 24, 2005).
Challenge 3
Small Business Administration Office of Inspector General
• Significant Opportunities Exist to Improve the Management of the 7(a) Loan Guaranty Approval
Process, Report 14-13 (June 6, 2014).
• The Colorado District Office’s Servicing of 8(A) Business Development Program Participants,
Report 10-15 (September 30, 2010).
• Adequacy of Procurement Staffing and Oversight of Contractors Supporting the Procurement
Function, ROM 10-13 (April 9, 2010).
Government Accountability Office
• GAO, Office of Advocacy Needs to Improve Controls over Research, Regulatory, and Workforce
Planning Activities, GAO-14-525 (July 22, 2014).
• Federal Workforce - Human Capital Management Challenges and the Path to Reform, GAO-14-
723T (July 15, 2014).
Office of Personnel Management
• 2010 Federal Employee Viewpoint Survey.
• 2011 Federal Employee Viewpoint Survey.
Partnership for Public Service
• Best Places to Work in the Federal Government 2011.
• Best Places to Work in the Federal Government 2010.
Challenge 4
Small Business Administration Office of Inspector General
• Improvement is Needed to Ensure Effective Quality Control at Loan Operation Centers, Report 14-
08 (January 17, 2014).
• A Detailed Repayment Ability Analysis is Needed on High-Dollar Early-Defaulted Loans to Prevent
Future Improper Payments, Report 12-18 (August 16, 2012).
• High-Dollar Early-Defaulted Loans Require an Increased Degree of Scrutiny and Improved
Quality Control at the National Guaranty Purchase Center, Report 12-11R (March 23, 2012).
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• SBA Generally Meets IPERA Reporting Guidance but Immediate Attention Is Needed to Prevent
and Reduce Improper Payments, Report 12-10 (March 15, 2012).
• Origination and Closing Deficiencies Identified In 7(a) Recovery Act Loan Approvals, ROM 11-07
(September 30, 2011).
• Material Deficiencies Identified in Five 7(a) Recovery Act Loans Resulted in $2.7 Million of
Questioned Costs, ROM 11-06 (August 25, 2011).
• Banco Popular Did Not Adequately Assess Borrower Repayment Ability When Originating
Huntington Learning Center Franchise Loans, Report 11-16 (July 13, 2011).
• Material Deficiencies Identified in Four 7(a) Recovery Act Loans Resulted in $3.2 Million of
Questioned Costs, ROM 11-05 (June 29, 2011).
• America’s Recovery Capital Loans Were Not Originated and Closed In Accordance With SBA’s
Policies and Procedures, ROM 11-03 (March 2, 2011).
• Material Deficiencies Identified in Early-Defaulted and Early-Problem Recovery Act Loans,
ROM 10-19 (September 24, 2010).
• SBA’s Management of the Backlog of Post-purchase Reviews at the National Guaranty Purchase
Center, Report 9-18 (August 25, 2009).
• The Small Business Administration’s Fiscal Year 2008 Improper Payment Rate for the 7(a)
Guaranty Loan Program, Report 9-16 (July 10, 2009).
• Review of Key Unresolved OIG Audit Recommendations in Program Areas Funded by the
American Recovery and Reinvestment Act and Related Activities Need to Safeguard Funds, ROM
09-1
(April 30, 2009).
• Audit of the Liquidation Process at the National Guaranty Purchase Center, Report 9-08
(January 30, 2009).
• Audit of Six SBA Guaranteed Loans, Report 8-18 (September 8, 2008).
• Audit of Loan Classifications and Overpayments on Secondary Market Loans, Report 8-09
(March 26, 2008).
• Audit of UPS Capital Business Credit’s Compliance with Selected 7(a) Lending Requirements,
Report 8-08 (March 21, 2008).
• Audit of the Guarantee Purchase Process for Section 7(a) Loans at the National Guaranty
Purchase Center, Report 7-23 (May 8, 2007).
• Audit of Deficiencies in OFA’s Purchase Review Process for Backlogged Loans, Report 6-35
(September 29, 2006).
• Survey of the Quality Assurance Review Process, Report 6-26 (July 12, 2006).
• Management Advisory Report on the Transfer of Operations to the National Guaranty Purchase
Center, Report 4-39 (August 31, 2004).
Government Accountability Office
• Major Management Challenges and Program Risks, GAO-01-260 (January 2001).
Challenge 5
Small Business Administration Office of Inspector General
• The SBA’s Portfolio Risk Management Program Can be Strengthened, Report 13-17 (July 2, 2013).
• Addressing Performance Problems of High-Risk Lenders Remains a Challenge for the Small
Business Administration, Report 12-20R (September 28, 2012).
• SBA’s Oversight of SBA Supervised Lenders, Report 8-12 (May 9, 2008).
• UPS Capital Compliance with Selected 7(a) Lending Requirements, Report 8-08 (March 21, 2008).
• SBA’s Oversight of Business Loan Center, LLC, Report 7-28 (July 11, 2007).
• SBA’s Use of the Loan and Lender Monitoring System, Report 7-21 (May 2, 2007).
• Audit of the Office of Lender Oversight Corrective Action Process, Report 7-18 (March 14, 2007).
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• SBA’s Administration of the Supplemental Terrorist Activity Relief (STAR) Loan Program, Report
6-09 (December 23, 2005).
• Impact of Loan Splitting on Borrowers and SBA, Advisory Memorandum Report 2-31
(September 30, 2002).
• Improvements needed in SBLC Oversight, Advisory Memorandum Report 2-12 (March 20, 2002).
• Preferred Lender Oversight Program, Report 1-19 (September 27, 2001).
• SBA Follow-up on SBLC Examinations, Report 1-16 (August 17, 2001).
Government Accountability Office
• Actions Needed to Improve the Usefulness of the Agency’s Lender Risk Rating System, GAO-10-53
(December 7, 2009).
• Small Business Administration: Additional Measures Needed to Assess 7(a) Loan Program’s
Performance, GAO-07-769 (July 13, 2007).
• Small Business Administration: Improvements Made, But Loan Programs Face Ongoing
Management Challenges, GAO-06-605T (April 6, 2006).
• Small Business Administration: New Service for Lender Oversight Reflects Some Best Practices,
But Strategy for Use Lags Behind, GAO-04-610 (June 8, 2004).
• Continued Improvements Needed in Lender Oversight, Report 03-90 (December 2002).
Challenge 6
Small Business Administration Office of Inspector General
• The SBA Did Not Follow Regulations and Guidance in the Acquisition of the OneTrack System,
Report 14-10 (February 12, 2014).
• Audit on the Effectiveness of the SBA’s Surveillance Review Process, Report 11-11
(March 31, 2011).
• Audit of Two 8(a) Sole –Source Contracts Awarded to Contractors in SBA’s Mentor Protégé
Program, Report 7-19 (March 30, 2007).
• Audit of Monitoring Compliance with 8(a) Business Development Regulations During 8(a) Business
Development Contract Performance, Report 6-15 (March 16, 2006).
• Business Development Provided by SBA’s 8(a) Business Development Program, Report 4-22
(June 2, 2004).
• SACS/MEDCOR: Ineffective and Inefficient, Report 4-15 (March 9, 2004).
• Section 8(a) Program Continuing Eligibility Reviews, Report 4-3-H-006-021 (September 30, 1994).
Challenge 7
Small Business Administration Office of Inspector General
• Applicant Character Verification in SBA’s Business Loan Program, Report 3-43 (April 5, 2001).
• Summary Audit of Section 7(a) Loan Processing, Report 0-03 (January 11, 2000).
• Loan Agents and the Section 7(a) Program, Report 98-03-01 (March 31, 1998).
• Fraud Detection in SBA Programs, Report 97-11-01 (November 24, 1997).
• Operation Clean sweep, Memorandum (August 21, 1996).
Challenge 8
Small Business Administration Office of Inspector General
• Review of the LMAS Incremental Improvement Projects, Report 14-21 (September 30, 2014).
• The SBA’s Loan Management and Accounting System – Incremental Improvement Projects,
Report 13-11 (March 12, 2013).
• Adequacy of Quality Assurance Oversight of the Loan Management and Accounting System
Project, Report 10-14 (September 13, 2010).
• Review of Allegations Concerning How the Loan Management and Accounting System
Modernization Project is Being Managed, Report 9-17 (July 30, 2009).
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• Planning for the Loan Management and Accounting System Modernization and Development
Effort, Report 8-13 (May 14, 2008).
• SBA Needs to Implement a Viable Solution to its Loan Accounting System Migration Problem,
Report 5-29 (September 20, 2005).
Government Accountability Office
• SBA Needs to Strengthen Oversight of Its Loan Management and Accounting System
Modernization, GAO-12-295 (January 25, 2012).
• Information Technology: Agencies Need to Improve the Accuracy and Reliability of Investment
Information, GAO-06-250 (January 12, 2006).
• Major Management Challenges and Program Risks: Small Business Administration, GAO-03-116
(January 1, 2003).
• SBA Loan Monitoring System: Substantial Progress Yet Key Risks and Challenges Remain,
Testimony of Joel C. Willemssen, Director, Civil Agencies Information Systems Accounting and
Information Management Division, Before the Subcommittee on Government Programs Statement
Committee on Small Business, House of Representatives, GAO/T-AIMD-00-113, (February 29,
2000).
• SBA Needs to Establish Policies and Procedures for Key IT Processes, Accounting and Information
Management Division, GAO/AIMD-00-170 (May 31, 2000).
Challenge 9
Small Business Administration Office of Inspector General
• Significant Opportunities Exist to Improve the Management of the 7(a) Loan Guaranty Approval
Process, Report 14-13 (June 6, 2014).
• Purchase Reviews Allowed $3.1 Million in Improper Payments on 7(a) Recovery Act Loans,
Report 14-09 (January 29, 2014).
• The Small Business Administration’s Improper Payment Rate for 7(a) Guaranty Purchases
Remains Significantly Underestimated, Report 13-07 (November 15, 2012).
• A Detailed Repayment Ability Analysis is Needed on High-Dollar Early-Defaulted Loans to Prevent
Future Improper Payments, Report 12-18 (August 16, 2012).
• High-Dollar Early-Defaulted Loans Require an Increased Degree of Scrutiny and Improved
Quality Control at the National Guaranty Purchase Center, Report 12-11R (March 23, 2012).
• SBA Generally Meets IPERA Reporting Guidance but Immediate Attention Is Needed to Prevent
and Reduce Improper Payments, Report 12-10 (March 15, 2012).
• SBA OIG, Origination and Closing Deficiencies Identified In 7(a) Recovery Act Loan Approvals,
ROM 11-07 (September 30, 2011).
• Material Deficiencies Identified in Five 7(a) Recovery Act Loans Resulted in $2.7 Million of
Questioned Costs, ROM 11-06 (August 25, 2011).
• Banco Popular Did Not Adequately Assess Borrower Repayment Ability When Originating
Huntington Learning Center Franchise Loans, Report 11-16 (July 13, 2011).
• Material Deficiencies Identified in Four 7(a) Recovery Act Loans Resulted in $3.2 Million of
Questioned Costs, ROM 11-05 (June 29, 2011).
• America’s Recovery Capital Loans Were Not Originated and Closed In Accordance With SBA’s
Policies and Procedures, ROM 11-03 (March 2, 2011).
• Material Deficiencies Identified in Early-Defaulted and Early-Problem Recovery Act Loans,
ROM 10-19 (September 24, 2010).
• SBA’s Management of the Backlog of Post-Purchase Reviews at the National Guaranty Purchase
Center, Report 9-18 (August 25, 2009).
• The Small Business Administration’s Fiscal Year 2008 Improper Payment Rate for the 7(a)
Guaranty Loan Program, Report 9-16 (July 10, 2009).
• Audit of Borrower Eligibility for Gulf Coast Disaster Loans, Report 9-09 (March 31, 2009).
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• The Small Business Administration’s Fiscal Year 2007 Improper Payment Rate for the Disaster
Loan Program, Report 9-10 (March 26, 2009).
• Audit of the Liquidation Process at the National Guaranty Purchase Center, Report 9-08
(January 30, 2009).
• The Use of Proceeds From Gulf Coast Disaster Loans, Report 9-06 (January 15, 2009).
• Disaster Loss Verification Process, Report 8-15 (June 17, 2008).
• Review of the Adequacy of Supporting Documentation for Disbursements, Report 8-07
(January 29, 2008).
• The Quality of Loans Processed Under the Expedited Disaster Loan Program, Report 7-34
(September 28, 2007).
• SBA’s Quality Assurance Reviews of Loss Verifications, Report 7-29 (July 23, 2007).
• Securing Collateral for Disaster Loan Disbursements, Report 7-22 (May 9, 2007).
Challenge 10
Small Business Administration Office of Inspector General
• Origination and Closing Deficiencies Identified In 7(a) Recovery Act Loan Approvals, ROM 11-07
(September 30, 2011).
Challenge 11
Small Business Administration Office of Inspector General
• SBA’s Progress in complying with the Improper Payments Elimination and Recovery Act,
Report 14-11 (April 10, 2014).
• The SBA Did Not Follow Federal Regulations and Guidance in the Acquisition of the OneTrack
System, Report 14-10 (February 12, 2014).
• The Small Business Administration’s Process Could Lead to Possible Anti-Deficiency Act
Violations, Report 12-22 (September 28, 2012).
• The Small Business Administration’s Inappropriate Use of the Government Purchase Card for
Construction Purchases, Report 12-16 (August 6, 2012).
• The SBA’s Improper Payment Review and Reporting for its Contracting Activities did not Comply
with IPERA and IPIA Requirements During FY 2011, Report 12-07 (March 8, 2012).
• Small Business Administration’s Funding of Information Technology Contracts Awarded to Isika
Technologies, Inc., Report 11-14 (June 2, 2011).
• SBA’s Procurement of Information Technology Hardware and Software through Isika
Technologies, Inc., Report 11-08 (February 25, 2011).
• SBA’s Planning and Award of the Customer Relationship Management Contracts, ROM 10-16
(June 29, 2010).
• Adequacy of Procurement Staffing and Oversight of Contractors Supporting the Procurement
Function, ROM 10-13 (April 9, 2010).
• SBA’s Efforts to Improve the Quality of Acquisition Data in the Federal Procurement Data System,
Report 10-08 (February 26, 2010).
• Office of Business Operations Contracting Personnel Qualifications and Warrant Authority,
Report 9-14 (July 6, 2009).
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SUCCESS STORY: Handmade Cannoli are Golden
Golden Cannoli Shells Company, Inc.,
Chelsea, Massachusetts
In 1970, after working at various bakeries in Boston’s North End, cousins
Francesco Bono and Angelo Bresciani secured a storefront and started
their first bakery. Success followed for the Argentine immigrants, and
soon they were able to open a second bakery. Instead of paying a vendor,
the pair decided to start making their own cannoli shells and fillings.
That’s how the 2014 Massachusetts Small Business of the Year, Golden
Cannoli, Inc. came to be.
Golden Cannoli has received national recognition for their handmade cannoli and fillings. The company’s second
generation owners, Valerie Bono, Maria Malloy, Eric Bresciani, and Edwin Bresciani received an SBA Express
Loan which was used for equipment upgrades, and they secured an SBA 504 loan to buy a 30,000 square-foot
manufacturing facility. Maria joined SBA’s Emerging Leaders Initiative/e200 program in Boston to develop a
growth plan for the business. Each owner now works with a SCORE counselor to develop strategies to manage and
restructure the business to run at maximum productivity.
With continued growth and development – 38 percent in 2013 – Golden Cannoli increased its staff from 12 in 2012
to 41 full time employees. The increase in sales is the result of staff training and new product development.
Golden Cannoli also gives back to the community. The company makes regular contributions to local schools,
hospitals, and charitable organizations.
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SUMMARY OF FINANCIAL STATEMENT AUDIT AND MANAGEMENT
ASSURANCES
As required by OMB Circular A-136, Section II.5.7, the following summarizes SBA’s Financial Statement Audit and
Management Assurances:
Summary of Financial Statement Audit
Audit Opinion Unmodified
Restatement No
Material Weaknesses Beginning Balance New Resolved Consolidated Reassessed Ending Balance
None 0 0 N/A N/A N/A 0
Summary of Management Assurances
Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)
Statement of Assurance Unqualified
Material Weaknesses Beginning Balance New Resolved Consolidated Reassessed Ending Balance
None 0 0 N/A N/A N/A 0
Effectiveness of Internal Control over Operations (FMFIA § 2)
Statement of Assurance Unqualified
Material Weaknesses Beginning Balance New Resolved Consolidated Reassessed Ending Balance
None 0 0 N/A N/A N/A 0
Conformance with Financial Management System Requirements (FMFIA § 4)
Statement of Assurance Systems conform to financial management system requirements.
Non-Conformances Beginning Balance New Resolved Consolidated Reassessed Ending Balance
None 0 0 N/A N/A N/A 0
Conformance with Federal Financial Management Improvement Act (FFMIA)
Agency Auditor
1. System Requirements No lack of substantial compliance noted No lack of substantial compliance noted
2. Accounting Standards No lack of substantial compliance noted No lack of substantial compliance noted
3. USSGL at Transaction Level No lack of substantial compliance noted No lack of substantial compliance noted
AGENCY FINANCIAL REPORT • FY 2014 111
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IMPROPER PAYMENTS however, the SBA conducted an improper payment review
and is reporting the results to comply with the Disaster
As required by the Improper Payment Information Act Relief Appropriations Act, 2013.
of 2002 (IPIA), its amendments, and OMB Circular No. The next sections discuss SBA efforts and results related to
A-123, Appendix C, Management’s Responsibility for Inter- improper payment assessments and reviews.
nal Control: Requirements for Effective Estimation and Re-
mediation of Improper Payments, the SBA reviews programs
identified as susceptible to improper payments. Risk Assessments
Improper payment reviews are a multi-layered process that OMB Circular No. A-123, Appendix C requires risk as-
starts with a risk assessment. If an assessment indicates a sessments at least once every three years for programs not
program is susceptible to improper payments, then testing deemed risk susceptible or if a program was subjected to a
is performed using a statistically valid sampling technique. significant change in legislation or funding level. The SBA
Based upon the testing results, a corrective action plan is conducted 14 risk assessments for the FY 2014 review: 11
determined for the types of errors uncovered. If a signifi- upon the expiration of the three-year assessment period
cant amount of recoverable dollars is found, the SBA con- and 3 to comply with the Improper Payment Elimination
siders the appropriateness of performing a recapture audit. and Recovery Improvement Act of 2012 which requires
the assessment of payments to employees. The risk as-
The Disaster Relief Appropriations Act, 2013 provided sessments did not identify any additional programs as
funding for disaster relief in response to Hurricane Sandy susceptible to improper payments.
to certain agencies including the SBA. Agencies were
required to ensure the funds were used for their intended
purpose. The Act deemed all Hurricane Sandy funds as
Statistical Sampling and Corrective
susceptible to significant improper payments and regard- Actions
less of risk assessment results, mandated that agencies To provide more clarity for the reader, this section is orga-
report an improper payment estimate for the funds. nized by the five programs subjected to review for improp-
The SBA reviewed five programs and activities for improp- er payments and provides statistical sampling information
er payments – three major credit programs as mandated by coupled with corrective actions.
OMB, disbursements for goods and services, and Hur-
7(a) Loan Guaranty Purchases
ricane Sandy Disaster Relief (HSDR) funds. The three
major credit programs are: Statistical Sampling
• 7(a) business loan program that includes guaranty Using Probability Proportional to Size (PPS) sampling
purchases and guaranty approvals; with replacement, the 7(a) purchase sample cases were
• 504 certified development company loan guaranty chosen from all purchases approved during the 12 month
approvals; and period ending March 31, 2014. The purchase population
was divided into four strata based on the following factors:
• Disaster direct loan disbursements.
which of three servicing offices processed the purchase
A fourth major credit program, the Small Business Invest- and if the loan was considered an early default, regard-
ment Company (SBIC) program, retains approval from less of servicing office. Using the PPS approach, the SBA
OMB for relief from reporting due to the low occurrence determined the appropriate total sample size to be 236
of improper payments determined by several years’ review loans from the population. The sample included aggregate
and low probability for improper payments. purchase outlays of $109,883,193 and an absolute value of
improper payments of $804,586 within the sample. Using
Disbursements for goods and services were identified as the Hansen-Hurwitz estimation method, the estimated
risk susceptible in FY 2011 and have been subject to im- improper payment rate for the 7(a) guaranty purchase
proper payment review since FY 2012. In mid FY 2013, population is 1.33 percent.
the SBA received HSDR funds for the Disaster Direct loan
and grant programs. An assessment of the grant funds did The 7(a) loan guaranty purchase reviews were conducted to
not find the relevant grant programs to be risk susceptible; examine if the lender complied materially with the 7(a) loan
112 AGENCY FINANCIAL REPORT • FY 2014
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program origination requirements including statutory provi- 7(a) Loan Guaranty Approvals
sions, SBA regulations, any agreement the lender executed
with the SBA, standard operating procedures, loan autho- Statistical Sampling
rizations, and official SBA notices and forms applicable to Using PPS sampling with replacement, the 7(a) approval
the 7(a) loan program. The reviews were to determine if the sample cases were chosen from all loan guaranties approved
lender (1) originated, serviced, and liquidated the loan in a during the 12 month period ending March 31, 2014. The
prudent and commercially reasonable manner; (2) misrepre- loan guaranties were approved through SBA’s loan process-
sented or failed to disclose a material fact to the SBA; and/or ing centers, consisting of the Standard 7(a) Loan Guaranty
(3) put SBA’s financial interest at risk. Processing Center with dual locations in Sacramento,
California and Hazard, Kentucky; and the Sacramento
Corrective Action Loan Processing Center, which handles PLP and SBAEx-
The root cause for all 7(a) loan guaranty purchase im- press loan approvals. The approval population was divided
proper payments were administrative and documenta- into two strata based on whether the loan was SBAExpress
tion errors. Improper payments generally arose when or not. The SBA determined the appropriate total sample
the purchase processor failed to identify material lender size to be 123 loans from the population. The sample
deficiencies in the handling of an SBA guarantied loan. included net guarantied approvals of $124,826,715 and
The primary reasons for 7(a) purchase errors in FY 2014 improper payments of $6,582,040 within the sample. Us-
included: ing the Hansen-Hurwitz estimation method, the estimated
improper payments rate was calculated as 5.15 percent.
• ineligible loan structures;
The 7(a) loan guaranty approval reviews were conducted
• misapplication of liquidation proceeds;
to examine if the lender complied materially with the 7(a)
• incorrect payment of interest to lender due to inter- loan program origination requirements including statu-
est calculation using an incorrect rate; and tory provisions, SBA regulations, any agreement the lender
• reimbursement of lender expenses that were not executed with the SBA, standard operating procedures,
fully justified. loan authorizations, and official SBA notices and forms
applicable to the 7(a) loan program. The reviews were to
As a means to reduce and/or eliminate the occurrence of determine if the lender (1) originated the loan in a prudent
future improper payments, a Corrective Action Plan has and commercially reasonable manner; (2) misrepresented
been formalized for the 7(a) loan guaranty purchase cen- or failed to disclose a material fact to the SBA; and/or (3)
ters. Specific corrective actions are determined based upon put SBA’s financial interest at risk.
the primary reason for the error with the purpose of both
remedying the error and ensuring the error does not occur Corrective Action
in the future. Plans for improvement include:
In FY 2014, the most prevalent root cause for 7(a) loan
• external training for lenders to avoid ineligible loan approval improper payments stemmed from administra-
structures; tive or process errors made by the participating lender at
• internal training for purchase processors to detect origination. Improper payments generally arose when the
ineligible loan structures, select the proper interest participating lender failed to comply with loan program
rate, and identify appropriate lender expenses; and requirements. The primary reasons for 7(a) approval errors
in FY 2014 included:
• recovery of lender expenses that were not fully justified.
• ineligible loan structures;
Corrective actions are tracked at the loan level through a
centralized database. The quality control specialist in each • lack of repayment ability; and
loan center monitors errors from identification through • improper determination of eligibility by lenders or
completion of the corrective action. Headquarters man- SBA loan officers.
agement provides oversight to ensure milestones are met.
As a means to reduce and/or eliminate the occurrence of
future improper payments, a Corrective Action Plan has
been formalized for the 7(a) loan guaranty approval cen-
ters. Specific corrective actions are determined based upon
AGENCY FINANCIAL REPORT • FY 2014 113
OT H E R I NF OR M AT I ON
the primary reason for the error with the purpose of both Corrective Action
remedying the error and ensuring the error does not occur In FY 2014, the most prevalent root cause for 504 ap-
in the future. Plans for improvement include: proval improper payments stemmed from administra-
• external training for lenders to avoid ineligible loan tive or process errors made by the participating lender at
structures, ensure proper use of loan proceeds, and origination. Improper payments generally arose when the
accurately determine loan eligibility; participating lender failed to comply with loan program
requirement. The primary reasons for 504 approval errors
• internal training for loan approvers to determine
in FY 2014 included:
eligibility of loan and loan structures within SBA
guidelines; and • ineligible loan structures; and
• internal training for loan approvers to calculate a • lack of repayment ability.
borrower’s repayment ability.
As a means to reduce and/or eliminate the occurrence of
Corrective actions are tracked at the loan level through future improper payments, a Corrective Action Plan has
a centralized database. The Quality Control Specialist been formalized for the 504 loan approval center. Specific
for 7(a) loan guaranty approvals monitors errors from corrective actions are determined based upon the primary
identification through completion of the corrective action. reason for the error with the purpose of both remedying
Headquarters management provides oversight to ensure the error and ensuring the error does not occur in the
milestones are met. future. Plans for improvement include:
504 CDC Loan Guaranty Approvals • external training for lenders to avoid ineligible loan
structures, ensure proper use of loan proceeds, and
Statistical Sampling accurately determine loan eligibility;
Using PPS sampling with replacement, the 504 CDC loan • internal training for loan approvers to calculate a
approval sample cases were chosen from all loan guaranties borrower’s repayment ability; and
approved during the 12-month period ending March 31, • enhanced internal quality control reviews to test
2014. The loan guaranties were approved at SBA’s Sacra- 504 pre-closing servicing actions.
mento Loan Processing Center and closed at various SBA
district offices, with servicing subsequently handled by Corrective actions are tracked at the loan level through
the Fresno, California Commercial Loan Servicing Center a centralized database. The quality control specialist
and the Little Rock, Arkansas Commercial Loan Servicing for 504 loan guaranty approvals monitors errors from
Center. The approval population was not stratified. The identification through completion of the corrective action.
SBA determined the appropriate total sample size to be Headquarters management provides oversight to ensure
183 loans from the population. The sample included net milestones are met.
approval outlays of $249,600,000 and improper payments
of $2,298,052 within the sample. Using the Hansen-Hur- Disaster Direct Loan Program
witz estimation method, the estimated improper payments
rate was calculated as 1.09 percent. Statistical Sampling
The Office of Disaster Assistance performs a Quality
The 504 CDC loan approval reviews were conducted Assurance Review (QAR) of the approved loan portfolio
to examine if the lender complied materially with the annually. A part of the QAR is to identify any deficiency
program’s origination requirements including statutory that would result in an improper payment. The statisti-
provisions, SBA regulations, any agreement the CDC ex- cal software and methods used follow widely accepted
ecuted with the SBA, standard operating procedures, loan practices. The review population consisted of disaster
authorizations, and official SBA notices and forms appli- loan disbursements, including HSDR funds, made during
cable to the 504 CDC loan program. The reviews were to the 12-month period ending June 30, 2014 with total
determine if the CDC (1) originated the loan in a prudent disbursements of $585,610,353. A sample of 500 pay-
and commercially reasonable manner; (2) misrepresented ments was selected for which testing yielded a weighted
or failed to disclose a material fact to the SBA; and/or (3) estimated improper payment rate of 12 percent. Based
put SBA’s financial interest at risk. on the sample results, the estimated amount of improper
114 AGENCY FINANCIAL REPORT • FY 2014
OTH E R I NF ORMATION
payments was $70,160,890. This represents a substantial sues did not result in a disaster loan borrower receiving any
reduction in the improper payment rate and dollars over loan funds that they were not eligible to receive or have
the last fiscal year from 18.4 percent and $121 million. any impact on SBA’s ability to collect on the disaster loans.
The remaining 18 improper payments represent loan dis-
The scope of ODA’s review covers three primary compli- bursements for loans that were ineligible for disaster loan
ance areas: (1) basic eligibility; (2) adherence to relevant assistance or overpayments resulting from a duplication of
laws, rules, regulations, and standard operating procedures; borrowers’ insurance proceeds.
and (3) credit worthiness.
Disbursements for Goods and Services
Corrective Action
Statistical Sampling
In FY 2014, the most prevalent root cause for Disaster
Direct Loan program improper payments stemmed from Disbursements for goods and services samples were chosen
administrative and documentation errors. The loan pro- using PPS with replacement methodology from payments
cessing and disbursement staff did not consistently follow completed during the 12 months ending March 31, 2014.
the guidance provided in the SOP and policy memos. The total number of disbursements was 3,470, and the
Specifically, errors arose when: total dollar amount was $92,576,166. The SBA deter-
mined the appropriate sample size to be 248 invoices hav-
• case managers and attorneys did not confirm insur- ing total outlays of $48,196,963. Based upon the sample
ance coverage was for the proper dates and type of results, the estimated FY 2014 disbursements for goods
coverage; and services improper payment rate was 8.46 percent for
• disbursements were made to parties that were ineli- an estimated total of $7,832,981. SBA corrective actions
gible for disaster loan assistance; and yielded improvement from last year’s estimated improper
• loan disbursements duplicated borrowers’ insurance payments for disbursements for good and services with
proceeds or similar recovery. the rate being reduced by more than 3 percent from 11.6
percent and the dollars cut nearly in half from $14.1 mil-
As a result, ODA plans the following corrective actions: lion last year.
• intense training for the disbursement staff (case The scope of the review covered three areas: invoice ac-
managers and attorneys) at the Processing and curacy, compliance with contract terms, and accuracy of
Disbursement Center in Fort Worth, Texas on what invoice processing.
is deemed acceptable documentation for the various
types of insurance coverage; Corrective Action
• implement a second independent review to verify In FY 2014, the root cause of the improper payments was
that the proper insurance coverage is in effect for administrative and documentation errors. All payments
loans over a specified amount; and corresponded to valid goods and services received. While
• in March 2014 a change was made to the Disaster reductions to improper payments were achieved, errors
Credit Management System to assist in preventing a identified in previous improper payment reviews remain.
disbursement on loans where the existing checklists The types of errors included:
illustrate an expired insurance policy.
• inadequate comparison of the invoice to the
ODA disputes that the stated improper payment rate truly contract to verify period of performance, terms, or
reflects the potential that disaster loans are disbursed to labor rates and categories to ensure they agree; and
disaster victims that are not eligible under the Disaster • payment accuracy issues where the financial system
loan program. The improper payments consisted of 79 was not updated at the time of payment with cur-
disbursements out of the 500 disbursements reviewed. Of rent vendor payment information from the System
the 79 considered to be improper payments, 61 were for for Award Management (SAM).
“paperwork” issues. An example of a disbursement consid-
ered “improper” due to a paperwork issue would be when To prevent the administrative and documentation errors
the loan lacks documentation of a current insurance policy noted in the improper payment review, the SBA has com-
in place at the time of disbursement. The paperwork is- pleted or will complete the following corrective actions:
AGENCY FINANCIAL REPORT • FY 2014 115
OT H E R I NF OR M AT I ON
• provided training in Spring 2014; are now required to provide evidence that the ac-
• conduct refresher training in FY 2015; and count registered in HHS matches the account that
is registered in SAM.
• develop the interface between the financial system
and SAM during the 2015 fiscal year; continue • Prior to issuing awards, SAM is verified by SBA staff
manual procedures until the interface between the to ensure that the correct account associated with
financial system and SAM is developed. the grant is registered in HHS; and
• Prior to disbursement, SBA staff verify the SAM ac-
Hurricane Sandy Disaster Relief Grants counts and HHS accounts for those grants that are
paid using the HHS Payment Management System.
Statistical Sampling
Hurricane Sandy Disaster Relief grants samples were cho-
sen using PPS with replacement methodology for disburse- Improper Payment Reporting
ments completed during the 12 months ending March 31, The following sections and tables present a summary of
2014. The grant population consisted of 42 disbursements SBA’s Improper Payment review results and outlook, and a
for the total dollar amount of $5,478,126.76. The SBA matrix of the reasons for improper payments.
determined the appropriate sample size to be 19 invoices
with total outlays of $5,034,016. Based upon the sample
results, the estimated FY 2014 improper payment rate was Recapture of Improper Payments
3 percent for a total of $165,642. The SBA does not currently conduct recapture audits,
therefore tables 2 through 5 defined by OMB Circular No.
Corrective Action A-136 are not included in this report. Agency efforts to
The root cause of improper payments in the HSDR grants recapture improper payments are discussed by program.
improper payment review was an administrative and docu-
7(a) loan guaranty purchase improper payment reviews,
mentation error related to one grant. The review revealed
Quality Control Reviews and OMB Circular A-123 Ap-
no apparent overpayments or opportunities for recapture.
pendix A reviews have indicated that payment recapture
As this is a new grant program, the estimated 3 percent is
audits would be cost effective. The SBA has developed
the base year error rate. The error was:
a robust Quality Control Review process and will be
• a payment accuracy issue where the vendor payment expanding the scope of the reviews to include payment re-
information used in the Health and Human Ser- capture audits in FY 2015. This process requires addition-
vices (HHS) Payment Management System did not al human resources, a review process specific to identifying
correspond to the current vendor payment informa- overpayments, and may require coordination of sampling
tion in the System for Award Management. techniques with a statistician. The SBA’s quality control
staff in the Office of Capital Access already conducts
In the particular case, the vendor had established accounts continuous Quality Control Reviews to assess the qual-
for each of its federal grants to ensure that federal funds ity of the loans and loan documentation and to identify
were not comingled with other funds. While the vendor potential improper payments. Overpayments identified
had properly registered the account with the HHS Payment through both the continuous review processes and annual
Management System, it had not updated SAM to include improper payment reviews are recovered from the lender
the account specific to the SBA grant. Upon SBA’s request, as appropriate. The recovery determination is made on a
the vendor added the account to SAM. To prevent payment case-by-case basis, which varies substantially depending on
accuracy concerns in the future, the SBA has completed or the circumstances of the loan approval, servicing, purchase
will complete the following corrective actions. and/or liquidation processes. The SBA will use this robust
process for purposes of the recapture audit process and
• Enhance the SBA application and notice of award
reporting.
instructions to include special emphasis on issues
identified during the FY 2014 review. Grantees are 7(a) loan guaranty approval and 504 CDC loan
provided with instructions to ensure that payment approval are not subject to payment recapture audits as
accounts are properly registered both in SAM and no payment is made at the time of approval; payment is
the HHS Payment Management System. Grantees made only if the lender requests that the SBA honor its
116 AGENCY FINANCIAL REPORT • FY 2014
OTH E R I NF ORMATION
MATRIX OF IMPROPER PAYMENT CATEGORIES BY PROGRAM ($ IN MILLIONS)
7(a) Guaranty 7(a) Guaranty
504 CDC Disaster Disbursements Hurricane Sandy
Purchases Approvals
Guaranty Direct Loan for Good and Disaster Relief
Reason for Improper Payment Approvals Disbursements Services Grants
Over Under Over Under Over Under Over Under Over Under Over Under
payment payment payment payment payment payment payment payment payment payment payment payment
Program Design or Structural Issue
Inability to Authenticate Eligibility 3.51 6.73
Death Data
Financial Data 107.67 24.98
Failure to Verify: Excluded Party Data
Prisoner Data
Other Eligibility Data1 1.25
Federal Agency 2.68 1.67 107.67 0.30 4.35 0.30 0.17
Administrative/Process
State or Local Agency
Error Made by:
389.67 24.98
Medical Necessity
Insufficient Documentation to Determine 3.59 3.18
Other Reason2 61.88
Total Estimated Improper Payments 9.78 1.67 605.01 0.00 49.96 0.00 70.16 0.00 7.53 0.30 0.17 0.00
1. Duplicated disaster recovery benefits not properly deducted from eligible disaster loss.
2. This category consists of lack of documents to support ODA’s policies concerning: a) insurance - $46,765,253, b) contractors’ compliance - $3,967,663, c) building permits - $2,476,800, d) titling/mortgage issues - $2,289,036,
e) disbursement - $3,585,097, and f) miscellaneous - $2,799,580.
guaranty. Improper payments identified through both This determination is made on a case-by-case basis, which
the annual improper payment and continuous Quality varies substantially depending on the circumstances of the
Control reviews are recovered from the lender through loan approval and lender authority.
the cancellation of the SBA guaranty, reduction in loan
guaranty percentage, or loan modification, as appropriate. Disaster direct loans recapture audits would not be cost
effective. The Office of Disaster Assistance made this de-
IMPROPER PAYMENT REDUCTION OUTLOOK ($ IN MILLIONS)
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Program Outlays1 Over- Under- Outlays1 Outlays1
Outlays1 $ IP % IP $ IP % IP $ IP % IP $ $ Est. IP % IP $ IP % IP $
$ paid $ paid $ $ Est. $ Est.
7(a) Guaranty
1,211.4 1.15 13.9 858.6 1.33 11.4 9.7 1.7 1,000.0 1.4 14.0 1,100.0 1.3 14.3 1,000.0 1.4 14.0
Purchases1
7(a) Guaranty
10,994.5 4.6 510.9 11,741.1 5.15 605.0 605.0 0.0 12,000.0 4.9 588.0 12,500.0 5.0 625.0 13,000.0 4.9 637.0
Approvals1,2
504 CDC
Guaranty 6,386.9 0.54 34.4 4,571.5 1.09 49.9 49.9 0.0 5,200.0 1.2 62.4 5,700.0 1.1 62.7 6,000.0 1.1 66.0
Approvals
Disaster Loan
659.0 18.4 121.1 585.6 12.0 70.2 70.2 0.0 800.0 9.9 79.2 800.0 9.5 76.0 800.0 9.3 74.4
Disbursements1
Disbursements
for Goods and 121.4 11.6 14.1 92.6 8.46 7.8 7.5 0.3 115.0 8.0 9.2 115.0 7.5 8.6 115.0 7.0 8.1
Services
Hurricane
Sandy Disaster N/A N/A N/A 5.5 3.0 0.17 0.17 0.0 7.9 2.5 0.18 5.6 2.0 0.11 0.0 N/A N/A
Relief Grants
1. Outlays in this report represent the base amount of the program activity related to SBA improper payments; and this amount will differ from the amount reported as outlays in SBA’s President’s Budget submissions because they include reestimates
of subsidy cost, reimbursements to SBA administrative funds and other costs. Outlays for 7(a) Guaranty Purchases are the amount of disbursements for the purchase of defaulted guarantied loans. Outlays for 7(a) Guaranty Approvals are the
amount of new guaranty approvals by banks and other SBA lending partners. Outlays for 504 CDC Loans Guarantied are approvals irrespective of disbursement, net of approval increases, decreases, reinstatements and cancellations for the current
year. Outlay figures for Disaster are loan disbursements on current year approvals.
2. For 7(a) Guaranty Approvals, amounts reported are based on the guarantied amount only.
AGENCY FINANCIAL REPORT • FY 2014 117
OT H E R I NF OR M AT I ON
termination after completing the 2014 Improper Payment Hurricane Sandy Disaster Relief grants would not
audit. The audit was completed by the Quality Assurance benefit from a recapture audit. As noted previously, the
Review team located in the Processing and Disbursement improper payment review did not reveal any apparent
Center under the supervision of the Director of Program overpayments, so no opportunities for recapture were
Policy and Evaluation in Washington, DC. The team uncovered.
reviewed 500 disbursements of which 79 disbursements in
73 loan files were identified as improper payments. The Overpayments Recaptured Outside of Payment Recap-
dollar value of the 79 disbursements was $9,976,850. ture Audits for SBA credit programs are applicable only to
Pertaining to recovery of the 79 improper payments: 7(a) Loan Guaranty Purchases as payments made within
this program area are recoverable from lenders as appropri-
• 61 of the disbursements, totaling $8,842,200 were ate. The amount identified for recapture during the 7(a)
for paperwork issues and not subject to recovery; Loan Guaranty Purchase improper payment review in
• 5 of the disbursements, totaling $894,969 were de- FY 2013 was $401,972, which was later reduced as two
termined as not subject to recovery due to informa- previously reported improper payments, totaling $166,969
tion received or analysis completed after the initial were determined to be proper. The amount identified
approval; and for recapture during the 7(a) Loan Guaranty Purchase
improper payment review in FY 2014 was $804,585, of
• of the remaining erroneous 13 payments totaling
which, $524,029 has since been recovered. Cash disburse-
$239,681, only $14,955 are likely to be identified
ments related to goods and services made for an inaccurate
for recovery.
amount or not according to contract terms total $26,482
The amount subject to recovery is 0.014 percent of the of which $25,608 has been recaptured.
sample. Therefore, the estimated total amount of disaster
loan funds subject to recovery for the entire population Accountability
was $81,986. The improper payment audit was completed
The focus of SBA’s Strategic Goal 3 is to build an SBA that
using 4,400 hours of staff time and cost approximately
meets the needs of today’s and tomorrow’s small busi-
$185,850. Based on the cost to audit versus the estimated
nesses. Strategic Objective 3.1 is designed to strengthen
dollars of recovery, it is clear that further expenditures for a
SBA’s core programs and operations to ensure that they
separate recovery audit is not cost effective.
are high performing, effective, and relevant to the needs
Disbursements for goods and services recapture au- of the small business community. SBA’s strategic goals
dits would not be cost effective. The improper payment are included in annual performance plans for all of its
testing required 479 labor hours at a cost of $30,500. Pay- programs as business objectives, which are included in
ments identified during the improper payment review as employee performance plans. SBA management monitors
eligible for recapture totaled $26,482; thus the cost of the accomplishments of these business objectives and takes
review exceeds the return. action when progress toward goal achievement is not on
target. Executive and management bonuses
are based on the accomplishment of business
OVERPAYMENTS RECAPTURED OUTSIDE OF PAYMENT RECAPTURE AUDITS ($ IN THOUSANDS) objectives included in employee annual per-
formance plans. This management process
Amount Amount Amount Amount Cumulative Cumulative helps assure accountability for improper
Source of
Identified Recovered Identified Recovered Amount Amount
Recovery
FY 2014 FY 2014 FY 2013 FY 2013 Identified Recovered
payment reduction.
7(a) Loan
Guaranty
Information Systems and
805.0 524.0 235.0 195.8 7,718.0 1,482.6
Purchase IP Other Infrastructure
Review1
7(a) loan guaranty purchases are supported
Contract IP
26.5 25.6 1.9 0.0 62.7 57.8 by the Guaranty Purchase Tracking System.
Review
It is continually updated to enhance the
overall integrity of the purchase process.
1 Amount Identified for FY 2012 has been reduced by $167.0. Subsequent to FY 2012 reporting, the payment was determined to
be proper.
118 AGENCY FINANCIAL REPORT • FY 2014
OTH E R I NF ORMATION
7(a) loan guaranty approvals and 504 CDC loan guar- the grants process through the integration of PRISM and
anty approvals are supported by E-Tran, SBA’s electronic Oracle.
loan processing/servicing system. Both the SBA and
delegated lenders process applications through the system
and lenders may also handle unilateral servicing actions
Statutory or Regulatory Barriers
electronically. The system provides increased efficiency The SBA does not have any statutory or regulatory barriers
and decreased costs in the loan guaranty origination and limiting improvement to its performance on the improper
servicing processes. payments initiative.
Disaster direct loan program has the information systems
and other infrastructure it needs to reduce improper pay- Reduction of Improper Payments with
ments to targeted levels. For example, the Office Disaster the Do Not Pay Initiative
Assistance has an integrated, electronic loan processing sys-
tem, the Disaster Credit Management System (DCMS), to The SBA has implemented the Do Not Pay (DNP)
streamline, enhance and improve the loan-making process. Initiative and subjects its disbursements to comparison
This system supports workflow management, electronic against the Death Master File (DMF) and SAM, which
file management and document generation functions. includes the Excluded Parties List System. The comparison
Many of the business rules governing DCMS have been between SBA and DNP data is completed on a monthly
designed to improve the quality assurance process. In basis, using disbursement data two months in arrears. SBA
fact, the ODA Quality Assurance Team works continually staff manually review and adjudicate the findings of the
with the DCMS development team to improve the quality data matches, with the majority of matches received from
assurance process with a goal to minimize future improper DNP being false-positives. Since implementing DNP,
payments as much as possible. SBA’s adjudication process has identified less than 10
actual matches against the DMF with one determined to
Disbursements for goods and services are handled by the be improper. The FY 2014 DNP process examined SBA
Oracle Federal Financial System. PRISM, a contract man- disbursements between August 2013 and July 2014. Using
agement system, is used to process SBA’s acquisitions. The the DNP database has not impacted improper payments as
SBA Acquisition and Accounts Payable teams continue evidenced in the table below.
work to improve interfaces between PRISM, the financial
system and external databases, such as SAM, to streamline
the acquisition process from start to finish.
Hurricane Sandy Disaster Relief grants are supported by
the Oracle Federal Financial System, the PRISM Contract
Management System, and the Health and Human Services
Payment Management System. These systems provide
the adequate infrastructure to track grant obligations and
payments. SBA continues to look at ways to streamline
DO NOT PAY STATISTICS
# of payments $ of payments # of improper $ of improper
# of payments $ of payments
reviewed for reviewed for payments reviewed payments reviewed
stopped stopped
improper payments improper payments and not stopped and not stopped
Reviews with the
220,125 $1,030,523,896 0 $0 1 $674
DMF only
Reviews with SAM
220,125 $1,030,523,896 0 $0 0 $0
/ EPLS
AGENCY FINANCIAL REPORT • FY 2014 119
OT H E R I NF OR M AT I ON
FREEZE THE FOOTPRINT REPORT
Section 3 of the Office of Management and Budget The SBA is updating its facilities Standard Operating
Memorandum (OMB) M-1212, Promoting Efficient Procedure to reflect new space standards which are being
Spending to Support Agency Operations, directs that all established for all offices across the Agency. In addition,
Chief Financial Officers (CFO) Act Executive Branch de- during FY 2015 the SBA plans to conduct a usage study
partments and agencies shall not increase the total square of a sample of the Agency’s leased space that will inform
footage of their domestic office and warehouse inventory the new space standards. The Facility Management Team
compared to the FY 2012 baseline. This is the “Freeze the members and space management specialists will be direct-
Footprint” policy. ed to closely apply these standards to new projects. In the
future, deviation from the standard may only be approved
On an annual basis, an agency shall not increase the size by the Chief Operating Officer or a designated alternate.
of its domestic real estate inventory, measured in square Currently, the SBA is also reviewing every Occupancy
footage, for space predominately used for offices and ware- Agreement up for renewal to identify any unneeded space.
houses. Progress in meeting the “Freeze the Footprint” Moreover, when available and appropriate, the SBA makes
policy is based on an annual evaluation of an agency’s total every attempt to consolidate and/or co-locate offices and
office and warehouse square functions and to co-locate with other agencies. These
efforts have been successful to date and the Agency has
Following is the SBA annual report:
eliminated approximately 63,000 square feet of real estate
since FY 2012.
FREEZE THE FOOTPRINT BASELINE COMPARISON
Change
FY 2012
Unit FY 2013 Actuals (FY 2012 –
Baseline
FY 2013)
Square Footage
1.375 1.352 0.023
(SF in Millions)
Reporting of O&M Costs – Owned and
Direct Lease Buildings
The SBA only occupies buildings that are leased by GSA
and subject to Occupancy Agreements between GSA and
SBA which are explicitly excluded from reporting in the
Circular.
DID
YOU The SBA awarded $8 million in State Trade and Export Promotion (STEP)
KNOW cooperative agreements in the third round of STEP assistance. This round
is expected to increase the number of small business exporters and grow
the volume of U.S. exports by an estimated $120 million.
120 AGENCY FINANCIAL REPORT • FY 2014
Appendices
SUCCESS STORY: Loyal Customers Provide Business Base
Tammy’s Tack & Western Wear,
Fort Pierre, South Dakota
Tammy Jean Tolton grew up on a farm on the Cheyenne River Sioux Reservation.
After two of their children were diagnosed with autism, Tammy and her husband were
faced with overwhelming financial and medical challenges. They moved to Ft. Pierre
where Tammy began to help a friend in her western store. She loved helping customers
with their unique requests and doing all she could to ensure that the store provided the
best service possible.
When a business deal to buy the store fell apart, Tammy was faced with wondering what to do next. Her loyal
customers gave her the solution: start her own store and they would follow. Tammy wondered how she could do this
with minimum inventory, maximum customer support, and limited funding. That is what brought her to an SBA
Small Business Development Center.
Tammy had already set so many things in motion, her dream became a reality. Inventory was ordered based on loyal
vendor relationships who took the orders on trust. Rent space was secured, and the landlord began renovating based
on his respect for Tammy and her reputation in the community.
A Cheyenne River Sioux Tribe Community Development Financial Institution (CDFI) and a Crow Creek CDFI
were available for funding. As Tammy was a tribal member of the Eagle Butte Community, she was also eligible for
that funding. Tammy spent weeks meeting with loan officers, taking required prequalifying courses, and developing
a business plan with the Small Business Development Center. On opening day she finished stocking shelves and
arranging product, and at 9:00 a.m. the doors opened. “I have a stellar business plan and Tammy’s Tack & Western
Wear LLC could not have done this alone,” she said.
APPENDICES
APPENDIX 1 - CONTACT SBA: USEFUL SITES AND NUMBERS
The SBA home page is www.sba.gov. Information on SBA programs may be accessed from this site. Several of the more
frequently visited sites are listed here:
SBA INFORMATION
About SBA www.sba.gov/about-sba
SBA Performance, Budget and Planning www.sba.gov/performance
SBA Strategic Plan www.sba.gov/AgencyStrategicPlan
Business USA http://business.usa.gov/
STARTING AND MANAGING A BUSINESS
What is a Small Business? www.sba.gov/content/am-i-small-business-concern
Thinking about starting a business? http://www.sba.gov/thinking-about-starting/
Resources
Local Assistance www.sba.gov/local-assistance
Lender Resources www.sba.gov/lender_resources
Financing Growth www.sba.gov/content/financing-growth
Explore Exporting www.sba.gov/exporting
Health Care www.sba.gov/healthcare
LOANS, GRANTS and FUNDING
Small Business Loans www.sba.gov/financialassistance
Surety Bonds www.sba.gov/content/surety-bonds-explained
Tax Exempt Bonds www.sba.gov/content/tax-exempt-bonds
Venture Capital www.sba.gov/content/venture-capital#
Grants www.sba.gov/content/facts-about-government-grants
CONTRACTING
Government Contracting www.sba.gov/contracting
Contracting Opportunities www.sba.gov/contracting-opportunities
Register as a Contractor www.sam.gov
Size Standards www.sba.gov/size
ADVISING, MENTORING, and TRAINING
SBA Learning Center www.sba.gov/training
Small Business Development Centers www.sba.gov/sbdc
Women’s Business Centers www.sba.gov/content/womens-business-centers
SCORE Business Mentors www.sba.gov/score
Veterans Outreach www.sba.gov/content/veterans-business-outreach-centers
AGENCY FINANCIAL REPORT • FY 2014 123
AP P E ND I C E S
DISASTER ASSISTANCE
Disaster Assistance www.sba.gov/disaster
Disaster Area Office Locations www.sba.gov/about-offices-list/4
Response Office Locations for a Declared Go to www.sba.gov/content/current-disaster-declarations and then select
Disaster the disaster/affected area in question
FEMA Information www.fema.gov
ADDITIONAL RESOURCES
Office of Advocacy www.sba.gov/advocacy
Office of the National Ombudsman www.sba.gov/ombudsman
Office of the Inspector General www.sba.gov/oig
Facebook: www.facebook.com/sbagov
Twitter: www.twitter.com/sbagov
YouTube: www.youtube.com/sba
SBA National Answer Desk (Toll Free) (800) 827-5722
Disaster Customer Service Center (Toll Free) (800) 659–2955
DID
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124 AGENCY FINANCIAL REPORT • FY 2014
APPENDICES
APPENDIX 2 - GLOSSARY
(Available at: www.sba.gov/performance, FY 2014 Agency Financial Report)
504 504 Certified Development Loan made by private entities for activities to
Program. assist small business.
Provides small businesses with long-term,
BD Business Development.
fixed-rate financing for the purchase of
land, buildings, and long-life capital The Office of Business Development uses
equipment. SBA’s statutory authority to provide busi-
ness development and federal contract sup-
7(a) 7(a) Loan Guaranty Program. port to small disadvantaged firms.
SBA’s primary loan program, provides
BLIF Business Loan and Investment Fund.
general loan financing for a wide variety of
purposes. Fund operated by the U.S. Department of
the Treasury to maintain the accounting
8(a) 8(a) Business Development Program. records of loans approved prior to 1992.
Assists firms owned and controlled by
CAPLine Part of the SBA 7(a) loan program which
socially and economically disadvantaged
helps small businesses meet their short-term
individuals to enter and succeed in the
and cyclical working capital needs.
economic mainstream.
CBJ Congressional Budget Justification.
7(m) 7(m) Microloan Program.
A federal agency’s annual budget request to
Provides small, short-term loans to small
Congress.
business concerns and certain types of non-
profit child-care centers. CDC Certified Development Company.
A-123 Designation for OMB Circular on Refers to the Section 504 Certified
Internal Control Systems. Development Company debenture
program.
It prescribes policies and procedures to be
followed by executive departments and CFO Chief Financial Officer.
agencies in establishing, maintaining, evalu- The CFO is responsible for the finan-
ating, improving, and reporting on internal cial leadership of the Agency, including
controls in their program and administra- responsibility for all Agency disbursements,
tive activities. management, and coordination of Agency
AARP Association for the Advancement of planning, budgeting, analysis, and account-
Retired Persons. ability processes.
AFR Agency Financial Report. One of the CIO Chief Information Officer.
annual PAR reports. The CIO is responsible for the management
of information technology for the Agency,
APR Annual Performance Report. including the design, implementation, and
Required by the Government Performance continuing successful operation(s) of infor-
and Results Act, it presents a federal mation programs and initiatives.
agency’s progress in achieving the goals in
its strategic plan and performance budget. COBOL Common Business-Oriented Language.
A computer programming language de-
BATF Business Assistance Trust Fund. signed for business applications.
A trust fund in the U.S. Treasury main-
tained to receive and account for donations
AGENCY FINANCIAL REPORT • FY 2014 125
AP P E ND I C E S
COTS Commercial Off-The-Shelf. FISMA Federal Information Security
Software or hardware products that are Management Act.
ready-made and available for sale to the A law that defines a comprehensive frame-
public. work to protect government information,
operations, and assets against natural or
CSAM Cyber Security Assessment and man-made threats.
Management.
FMFIA Federal Managers Financial Integrity Act.
DCIA Debt Collection Improvement Act.
A law that primarily requires ongoing
DCMS Disaster Credit Management System. evaluations and reports on the adequacy
of the internal accounting and administra-
The electronic system used to process
tive control systems of executive agencies.
loan applications for all new disaster
It also requires evaluations and reports on
declarations.
the conformance of financial management
DLF Disaster Loan Fund. systems.
Assists eligible small businesses impacted by
FTA The SBA Fiscal Transfer Agent is the agent
disasters.
tasked with the responsibility to administer
ELA Electronic Loan Application. each SBA Pool or Individual Certificate.
It is to maintain a registry of Registered
FCRA Federal Credit Reform Act. Holders and other information as the SBA
A law enacted to provide a more realistic requires.
picture of the cost of U.S. government
direct loans and loan guaranties. FTE Full Time Equivalent.
Indicates the workload of an employed per-
FECA Federal Employees’ Compensation Act. son; an FTE of 1.0 means that the person
Provides compensation benefits to federal is equivalent to a full-time worker, while an
civilian employees and to their surviving FTE of 0.5 signals that the worker is only
dependents for work-related injuries or half-time.
illnesses.
FY Fiscal Year.
FERS Federal Employees Retirement System. The federal government fiscal year be-
A three-tiered retirement plan for federal gins October 1 and ends the following
employees hired after 1984, composed of September 30.
Social Security benefits, a basic benefit plan,
and contributions to a TSP. GAO U.S. Government Accountability Office.
The audit, evaluation, and investigative arm
FFMIA Federal Financial Management of Congress.
Improvement Act.
A law that requires each agency to imple- GC/BD Office of Government Contracting and
ment and maintain financial management Business Development.
systems that comply substantially with Works to create an environment for maxi-
federal financial management systems mum participation by small, disadvantaged,
requirements, applicable federal accounting and women-owned business in federal gov-
standards, and the USSGL. ernment contract awards and large prime
subcontract awards.
FICA Federal Insurance Contributions Act.
A law requiring a deduction from paychecks GSA General Services Administration.
and income that goes toward the Social A federal agency of the Executive Branch
Security program and Medicare. whose mission is to deliver the best value
in real estate, acquisition, and technology
services to government and the American
people.
126 AGENCY FINANCIAL REPORT • FY 2014
APPENDICES
HUBZone Historically Underutilized Business Zone. MAS The GSA Multiple Award Schedule.
SBA program that encourages economic
MD&A Management’s Discussion and Analysis.
development by the establishment of federal
contract award preferences for small busi- The MD&A is required supplementary
nesses located in historically underutilized information for federal financial statements
business zones. and is designed to provide a high level over-
view of the Agency.
IIP Incremental Improvement Project.
MRA Master Reserve Account.
Information technology projects intended
to upgrade existing financial software SBA’s fiscal agent maintains this escrow
and application modules in SBA’s Loan fund to facilitate the operation of the
Accounting System. Certified Development Company program.
IPIA Improper Payment Information Act. MRF Master Reserve Fund.
A federal law enacted in 2002 to identify SBA’s fiscal and transfer agent maintains
and reduce erroneous payments in the gov- this reserve fund to facilitate the operation
ernment’s programs and activities. of the 7(a) secondary market program.
IT Information Technology. NAICS North American Industry Classification
System.
Refers to matters concerned with the
design, development, installation, and NIST National Institute of Standards and
implementation of information systems and Technology.
applications.
An agency of the U.S. Department of
IV&V Independent Validation and Verification. Commerce.
An IV&V review executes independent OCA Office of Capital Access.
procedures by a third party that are used The SBA office responsible for small busi-
for checking that a model, product, ness loans, lender oversight, and the surety
service, or system meets requirements and bond program.
specifications and that it fulfills its intended
purpose. IV&V reviews of SBA’s Office of OCFO Office of the Chief Financial Officer.
Financial Analysis and Modeling financial Responsible for the financial leadership of
models are conducted to assure that they are the Agency, including all Agency disburse-
accurate and properly functioning. ments, management, and coordination of
Agency planning, budgeting, analysis, and
JAAMS Joint Administrative Accounting
accountability processes.
Management System.
OCRM Office of Credit Risk Management.
Jobs Act Small Business Jobs Act of 2010.
SBA office that manages program credit
Most often referred to as the Jobs Act in
risk, monitors lender performance, and
SBA documents, may also be referred to as
enforces lending program requirements.
SBJA.
ODA Office of Disaster Assistance.
LAS Loan Accounting System.
SBA office that promotes economic recov-
SBA’s loan origination servicing and dis-
ery in disaster ravaged areas. SBA disaster
bursement system.
loans are the primary form of federal as-
LMAS Loan Management and Accounting sistance for non-farm, private sector disaster
System. losses for individuals and businesses.
Financial management system that supports OFA Office of Financial Assistance.
loan accounting.
SBA office that administers various loan
programs to assist small businesses.
AGENCY FINANCIAL REPORT • FY 2014 127
AP P E ND I C E S
OFPO Office of Financial Program Operations. PCECGF Pollution Control Equipment Contract
Leads the financial services industry in qual- Guaranty Fund.
ity products and services to SBA partners Supports costs associated with the credit
and customers, and to protect the integrity portfolio of pre-October 1991 pollution
of SBA programs. control equipment loans and guaranties be-
ing liquidated by the SBA.
OHRS Office of Human Resources Solutions.
Develops and provides innovative human POA&M Plan of Action and Milestones.
capital strategies. The office advises SBA
PPS Probability Proportional to Size.
management with respect to selecting,
developing, and managing a high quality, QA Quality Assurance.
productive workforce. Functions to assure that project deliver-
OIC Office of Internal Controls. ables meet SBA’s requirements and quality
standards.
Office within the Office of the Chief
Financial Officer that has the lead in ensur- QAR Quality Assurance Review.
ing managers comply with internal control
standards. RGDP Real Gross Domestic Production.
OIG Office of Inspector General. SAM System for Award Management.
Conducts and supervises audits, inspec- The federal government system that tracks
tions, and investigations relating to SBA grant awards.
programs and operations.
SBA U.S. Small Business Administration.
OMB U .S. Office of Management and Budget. A federal agency of the Executive Branch
White House office that oversees prepara- whose mission is to maintain and strength-
tion of the federal budget and supervises en the nation’s economy by enabling the es-
its administration in Executive Branch tablishment and vitality of small businesses
agencies. and by assisting in the economic recovery of
communities after disasters.
OPM U.S. Office of Personnel Management.
The federal government’s human resources SBAExpress Provides selected lenders with a 50 percent
agency. guaranty on loans in exchange for the abil-
ity to primarily use their own application
OPM&CFO Office of Performance Management and and documentation forms, making it easier
Chief Financial Officer. and faster for lenders to provide small busi-
Conducts and promotes effective financial ness loans of $350,000 or less.
management activities for the SBA includ-
ing budget, credit subsidy, financial opera- SBDC Small Business Development Center
tions, financial systems, internal controls, program.
and acquisitions. SBDCs provide management and techni-
cal assistance, economic development,
ORACLE The accounting program used by SBA’s and management training to existing and
Administrative Accounting Division. prospective small businesses through co-
operative agreements with universities and
PAR Performance and Accountability Report.
colleges and government organizations.
Annual report that presents financial,
budgetary, and performance information to SBG Surety Bond Guarantee program.
OMB, Congress, and the public. Provides guaranties, bid, performance, and
payment bonds for contracts up to $2.0
million for eligible small businesses that
cannot obtain surety bonds through regular
commercial channels.
128 AGENCY FINANCIAL REPORT • FY 2014
APPENDICES
SBGRF Surety Bond Guaranty Revolving Fund. SOP Standard Operating Procedure.
All the contractor and surety fees collected SOPs are the primary source of the Agency’s
by the SBA are deposited in the SBGRF at internal control.
the U.S. Department of the Treasury, which
is used to pay claims. SPFI Summary of Performance and Financial
Information.
SBIC Small Business Investment Company. One of three annual financial and perfor-
Provides long-term loans, debt-equity mance reports required of federal agencies.
investments, and management assistance to
small businesses, particularly during their STEP State Trade and Export Promotion pro-
growth stages. gram or grant.
A pilot export initiative to make matching-
SBIR Small Business Innovation Research fund awards to states to help small business-
program. es enter and succeed in the international
A highly competitive SBA program that marketplace.
encourages domestic small businesses to
engage in federal research/Research and STTR Small Business Technology Transfer
Development (R/R&D) that has the poten- Program.
tial for commercialization. Expands funding opportunities in the fed-
eral innovation research and development
SBJA Small Business Jobs Act of 2010. arena.
Most often referred to as the Jobs Act in
SBA documents. VAT Vulnerability Assessment Team.
Performs monthly scans of network-
SBLC Small Business Lending Company. attached devices to identify and remedy
Non-depository small business lending network vulnerabilities.
companies listed by the SBA Office of
Capital Access. WBC Women’s Business Center program.
WBCs provide long-term training and
SCORE A volunteer organization sponsored by the advising to women who own or manage a
SBA that offers mentoring and training business, including financial, management,
for small business owners who are starting, marketing, and technical assistance and
building, or growing their businesses. procurement.
SME Refers to small and medium-sized
enterprises.
DID
A new Spanish language online course for young entrepreneurs –
YOU Entrepreneurs: An Essential Guide to Starting Your Own Business – is a
KNOW free, self-paced course that gives an overview of basic business principals.
For more information visit: http://www.sba.gov/tools/sba-learning-center/
training/j-venes-emprendedores-young-entrepreneurs-spanish
AGENCY FINANCIAL REPORT • FY 2014 129
AP P E ND I C E S
APPENDIX 3 – OIG AUDIT FOLLOW-UP ACTIVITY
Throughout the year, the OIG conducts audits of SBA’s processes, procedures, and programs, and makes recommen-
dations for improvement. Many of these recommendations are not material, relative to their dollar impact on SBA’s
financial and administrative operation, but are beneficial to SBA’s management. If SBA management disagrees with an
OIG recommendation, the OIG may revise the recommendation or refer the issue to a higher level of SBA management.
When both SBA management and the OIG agree on the recommendation, SBA management develops a corrective ac-
tion plan, including a target date for completion. This recommendation is identified as having a “Management Deci-
sion.” When the corrective action plan is implemented and the recommendation has been fully addressed, the recom-
mendation is identified as having a “Final Action.”
The OCFO maintains a database to track the recommendations through to the conclusion, or Final Action. During FY
2014, there were 92 Final Actions resulting from four monetary and 88 non-monetary recommendations. The status of
the corrective actions is updated regularly and is available for review on the SBA Intranet.
The following tables depict SBA’s final action activity for FY 2014 and the status of corrective action plans not imple-
mented within one year:
• Table I: Final Action on Audit Recommendations with Disallowed or Questioned Costs, with accompanying pages
describing the detail activity by report number.
• Table II: Final Action on Audit Recommendations with Funds Put to Better Use, with accompanying pages de-
scribing the detail activity by report number.
• Table III: Final Action on Audit Recommendations Not Completed within One Year.
TABLE I FINAL ACTION ON AUDIT RECOMMENDATIONS WITH DISALLOWED / QUESTIONED COSTS
OCTOBER 1, 2013 – SEPTEMBER 30, 2014
Number of Disallowed Costs
Recommendations (Rounded to Thousands)
A. Recommendations with management decisions on which final action had not been taken 1 $12
at the beginning of the period.
B. Recommendations on which management decisions were made during the period. 20 $56,482
C.Total recommendations pending final action during period. 21 $56,494
D. Recommendations on which final action was taken during the period.
1. Recoveries:
(a) Collections and Offsets 1 $570
(b) Property
(c) Other 1 $311
2. Write-Offs
3. Total 2 $881
E. Recommendations needing final action at the end of the period. 19 $55,613
Table I - Detail of Final Action Activity
Disallowed / Questioned Costs
Report # 13-16R, Purchase Reviews Allowed $4.6 Million in Improper Payments on 7(a) Recovery Act Loans
Summary: The audit objective was to determine if the SBA is mitigating its risk of loss, specifically, whether the SBA
is ensuring that 7(a) Recovery Act loans were originated, closed, liquidated, and purchased in accordance with SBA’s
policies and procedures and prudent lending standards. The OIG identified questioned costs for six loans, one of which
was $310,637. The audit recommended that the SBA seek recovery from the bank for the guarantied amount paid. The
130 AGENCY FINANCIAL REPORT • FY 2014
APPENDICES
Office of Financial Program Operations, the Office of Credit Risk Management, and the Office of Financial Assistance
submitted their opinion to the OIG that the purchase of this loan did not constitute an improper payment and each
recommended not to seek recovery. The OIG accepted their opinion and no recovery was sought.
Final Action: $310,637 not collected (Other)
Report # 14-09, Purchase Reviews Allowed $3.1 Million in Improper Payments on 7(a) Recovery Act Loans
Summary: The audit was a second in a series of ongoing audits of purchased 7(a) Recovery Act Loans. The audit objec-
tive was to determine if the SBA is mitigating its risk of loss, specifically, whether the SBA is ensuring that 7(a) Recov-
ery Act loans were originated, closed, liquidated, and purchased in accordance with SBA’s policies and procedures and
prudent lending standards. The OIG identified questioned costs for three loans, one of which was $897,091. The audit
recommended that the SBA seek recovery from the bank for the guarantied amount paid less any amounts received from
liquidation. The amount collected was $570,763.15.
Final Action: $570,763.15 collected / $0.00 written off
TABLE II FINAL ACTION ON AUDIT RECOMMENDATIONS WITH FUNDS PUT TO BETTER USE
OCTOBER 1, 2013 – SEPTEMBER 30, 2014
Number of Funds to be Put to Better Use
Recommendations (Rounded to Thousands)
A. Recommendations with management decisions on which final action had not been 1 $2,500
taken at the beginning of the period. .
B. Recommendations on which management decisions were made during the period. 1 $43,000
C. Total recommendations pending final action during period. 2 $45,500
D. Recommendations on which final action was taken during the period..
1. Value of recommendations implemented (completed). 1.5 $43,800
2. Value of recommendations that management concluded should .5 $1,700
not or could not be implemented or completed.
3. Total 2 $45,500
E. Recommendations needing final action at the end of the period. 0 $0
Funds for Better Use
Report # 12-08, Assessment of Lender Loan Reporting Process
Summary: The objective of the audit was to determine the adequacy of SBA’s controls and oversight over the develop-
ment, security, and operation of certain information technology systems and processes performed by a contractor. The
audit recommended that SBA collect $2.5 million in secondary market late penalty fees by either billing lenders or offset-
ting against any guarantee purchase amounts. SBA researched and collected fees of $815,217.
Final Action: $815,217 implemented; $1,684,783 not implemented
Report #12-18, Audit of 7(a) Early Defaulted Loans
Summary: The objective of the audit was to determine why adequate reviews of repayment ability were not being per-
formed and the amount of federal funds that could be saved if the SBA thoroughly reviewed repayment ability during the
guaranty purchase review of early defaulted loans. One of the three recommendations required a revision of the purchase
process to verify lender’s compliance with SBA’s repayment ability requirements and estimated a cost savings of $43 mil-
lion. OFPO agreed to modify the process and incorporate repayment ability guidance as indicated in the SOP 50-10 5F,
effective January 1, 2014.
Final Action: $43 million implemented; $0 not implemente
AGENCY FINANCIAL REPORT • FY 2014 131
AP P E ND I C E S
October 1, 2013 – September 30, 2014
Report # 4-34, SBA’s Process for Complying With the FMFIA Reporting Requirements
Program: OCFO
Date Issued: 07/29/2004
Management Decision Date: 09/09/2004
Explanation: The two recommendations remaining open are to the Office of the Chief Financial Officer (OCFO) to
revise, clear and issue the draft SOP 00 02 3 and clearly define material weakness as it relates to SBA and at the different
levels of management within the Agency. The SOP was substantially rewritten in FY 2013 and a draft was completed in
FY 2014; however, it was not submitted for clearance due to the Office of Management and Budget’s announcement that
their guidance will be updated in FY 2015 to align with the GAO’s new guidance in the Green Book. The anticipated
completion date is 9/30/15, dependent on the issue date of OMB’s new guidance.
Report # 6-10, SBA’s FY 2005 Financial Statements Management Letter
Program: OCFO
Date Issued: 01/18/2006
Management Decision Date: 03/06/2006
Explanation: There is one open recommendation to the Office of the Chief Financial Officer to update the accounting
SOP to include SBA’s policies and procedures to reflect the GL accounts and data field updated for each transaction.
The accounting pro forma on LAS transactions is available in “table format” in the CGL, but data field updates are not
shown. OCFO is working on a project to document the loan program accounting procedures in the Denver Finance
Center. The accounting pro forms for loan accounting system transactions will be included in this project. This audit
recommendation is expected to have a final action by 09/30/2015.
Report # 8-12, Oversight of SBA Supervised Lenders
Program: OCA
Date Issued: 05/09/2008
Management Decision Date: 06/26/2008
Explanation: One recommendation remains open to the Office of Capital Access (OCA) to establish risk mitigation
goals applicable to each loan program and the entire lending portfolio. OCA will develop program level performance
benchmarks and risk mitigation goals for each 7(a) loan program and the entire 7(a) portfolio based on OCRM’s PARRiS
framework. The PARRiS assessment system is designed to measure the level of risk at the lender, program and portfolio
level. The program and portfolio risk mitigation goals will focus on Performance, Asset management and Regulatory
performance – utilizing the current metrics framework. Expected completion of this final action is 12/31/2014.
Report # 9-05, SBA’s FY 2008 Financial Statements - Management Letter
Program: OFA
Date Issued: 12/17/2008
Management Decision Date: 02/18/2009
Explanation: The two open recommendations are to the Office of Financial Assistance to reinforce the importance of the
collateral analysis in an updated SOP and ensure the revised Disaster Loan SOP identifies procedures related to the dis-
position of collateral. OFPO issued a collateral release memorandum to staff in June 2011 reinforcing this information.
Additionally, SOP 50 52 in final draft and is being prepared for Agency Clearance by the end of the calendar year 2014.
The final action due date for this recommendation is 12/31/14.
132 AGENCY FINANCIAL REPORT • FY 2014
APPENDICES
Report # 10-14, Audit of Quality Assurance Oversight of the Loan Management and Accounting System Project
Program: ODM
Date Issued: 09/13/2010
Management Decision Date: 06/13/2011
Explanation: The remaining recommendation for this audit is to the Office of the Administrator to require the LMAS
Quality Assurance plan to incorporate all the components required by the enterprise-wide QA plan. The ITQA SOP was
updated and SBA has demonstrated significant progress in implementing a quality assurance process by conducting QA
reviews. The expected final action is expected by September 2015.
Report #ROM 11-04, Audit of SBA’s Recovery Act Data on Public Websites.
Program: CFO
Date Issued: 3/22/11
Management Decision Date: 06/30/2012
Explanation: The six recommendations are to the Office of the Chief Financial Officer to determine if awards were made
or funds should be de-obligated on 66 purchase requisitions; to perform routine reconciliation of executed awards to
FPDS-NG.gov; to deploy an independent statistical verification and validation of all SBA transactions; to determine if
Recovery Act funds were used to fund 13 contracts; to develop a data quality plan; and to monitor contractor reported
information and prime contractor information for accuracy. The OCFO is researching data to resolve the contract
funding issues and is developing procedures to ensure data accuracy in the future. The independent verification and
validation of SBA transactions and the revision of the data quality plan have been implemented; follow-up with the OIG
should close these issues. Final actions for all recommendations are estimated to be 9/30/15.
Report # 11-06, Audit of FY2010 Federal Information Security Management Act Review
Program: CIO
Date Issued: 01/28/2011
Management Decision Date: 03/28/2011
Explanation: The four remaining recommendations are to the Office of the Chief Information officer to (1) require an
updated list of Major Systems and their interfaces; (2) manage, control, and monitor system interconnections throughout
their lifecycle; (3) develop and maintain a centralized inventory of all Agency hardware and software; (4) develop and
document baseline configuration for each information system. Status for these recommendations include: (1) and (2) A
project is underway to document interfaces and establish Interconnection Service Agreements (ISAs) for FISMA systems.
Estimated completion of the final action is 6/30/15. (3) An Asset Management policy is in the process of being final-
ized. Agency hardware and software assets are now tracked using BigFix and Software Usage Analysis (SUA). A closure
package is under review for submission to the OIG. The final action completion date is estimated to be 12/31/14. (4)
Baselines have been developed for LAN/WAN components. OCIO servers are in the process of being baselined. Base-
lines are needed for all agency systems. Final action completion is estimated to be 12/31/14.
Report #11-07, Audit of Insurance Recovery Checks at the Disaster Loan Servicing Centers
Program: OFPO
Date Issued: 02/10/2011
Management Decision Date: 04/07/2011
Explanation: The recommendation is to the Office of Capital Access to revise the SOP to provide detailed instructions
for processing insurance recovery checks. OFPO developed and issued a duplication and benefits logic tree and narrative
to assist in the processing of insurance recovery checks. Additionally, SOP 50 52 in final draft and is being prepared for
Agency Clearance by the end of the calendar year. The final action due date for this recommendation is 12/31/14.
AGENCY FINANCIAL REPORT • FY 2014 133
AP P E ND I C E S
Report #11-10, Management Advisory Report on the Records Management and Documentation Process at the
Disaster Loan Servicing Centers.
Program: FPO
Date Issued: 03/29/2011
Management Decision Date: 06/20/2011
Explanation: The two recommendations are to the Office of Financial Programs to (1) develop record designation require-
ments for all loan servicing documents and incorporate the guidance into SOP 50 52 and (2) to revise the SOP to preserve the
analyses performed to conduct all servicing actions. (1) Electronic recordkeeping guidelines internal desk document was devel-
oped and issued to center personnel in February 2012. Additionally, SOP 50 52 in final draft and is being prepared for Agency
Clearance by the end of the calendar year. The final action due date for this recommendation is 12/31/14. (2) A memoran-
dum was issued to staff and has been reinforced with training. Additionally, SOP 50 52 in final draft and is being prepared for
Agency Clearance by the end of the calendar year. The final action due date for this recommendation is 12/31/14.
Report #11-14, Audit of Funding of Information Technology Contracts Awarded to Isika Technologies, Inc.
Program: CFO
Date Issued: 06/02/2011
Management Decision Date: 12/11/2011
Explanation: The two remaining recommendations are to the Office of the Chief Financial Officer and require a review
of funding to ensure SBA did not violate the Anti-Deficiency Act during a Continuing Resolution in 2011 and a review
of SBA’s funding procedures. The OCFO is researching the funding issue to ensure funds were not inappropriately
obligated and will review written policies and procedures to ensure work is performed in compliance with the FAR. Final
action completion date is estimated to be 9/30/15.
Report #12-02, Audit of FY 2011 Financial Statements
Program: OCIO
Date Issued: 11/14/11
Management Decision Date: 12/22/2011
Explanation: The five open recommendations are to the Office of the Chief Information Officer and require (1) coor-
dination with SBA program offices to enhance security vulnerability management processes; (2) ensure that information
systems hosted by third parties comply with SBA policy and NIST guidance; (3) Oversee the review and validation of
financial system accounts quarterly; (4) monitor the audit logs of all financial applications regularly; and (5) implement
configuration management policies and procedures for document retention for operating system changes. Resolution
activities include (1) OCIO is developing a more thorough approach to track and mitigate configuration manage-
ment vulnerabilities identified during monthly scans, and will monitor security vulnerability reports for necessary or
required configuration changes to the environment. Estimated completion date is 2/28/18. (2) OGC has provided
some statements of work that have an IT component in them for security language review. OCIO is seeking all procure-
ment contracts to affect change. Estimated completion date is 9/30/17. (3) SOP 90-47-3 requires that account reviews
should be done semi-annually. OCFO has been providing OCIO with account review checklist semi-annually. For the
OCIO, there currently is not an authoritative source available to perform quarterly reviews. Estimated completion date
is 6/30/15. (4) OCIO purchased a tool and will install it to regularly monitor audit logs. Estimated completion date is
9/30/15. (5) SBA currently follows the operating procedures outlined in the ECCB charger IAW SOP 90 42 0. OCIO
will work the OIG to close this recommendation. Estimated completion date is 9/15/15.
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APPENDICES
Report #12-04, Audit of Annual Small Business Procurement Calculations
Program: GC/BD
Date Issued: 12/6/11
Management Decision Date: None
Explanation: The four recommendations are to the Office of Government Contracting and Business Development and require
(1) revision of the Goaling Guidelines for the Small Business Preference Programs to include overseas contracts in the small
business goaling baseline; (2) finalization of the draft memorandum dated January 25, 2008, Exemptions from Goaling; revi-
sions of the Goaling Guidelines based on OGC’s final opinion on the exemptions of goaling; and (4) notification to GSA of any
programming updates to the FPDS-NG resulting from changes to goaling guidance. In accordance with the National Defense
Authorization Act of 2013, the Chief Counsel for Advocacy of the Small Business Administration shall conduct an independent
assessment of the small business procurement goals established in section 15(g) of the Small Business Act. In addition, the De-
partment of Defense is required to conduct an independent assessment of federal procurement contracting performance of the
Department of Defense. Because of the direct potential impact that these two assessments would have on the Small Business
Goaling Guidelines, GCBD will await their results before finalizing revisions to the Small Business Goaling Guidelines.
Report #12-14, Audit of Disaster Loans in Liquidation
Program: OCA
Date Issued: 7/9/12
Management Decision Date: 9/25/12
Explanation: The three remaining recommendations are to the Office of Capital Access and recommends that (1) specific
actions be taken for loans over 180 days delinquent that are secured by collateral; (2) immediately charge-off loans over
180 days delinquent not secured by collateral; and (3) Update SOP’s to include Debt Collection Improvement Act
and Treasury Managing Federal Receivables Guide requirements. Resolution activities include (1) creating procedures
to identify the feasibility of foreclosure. OFPO is also creating a report to identify loans that will be charged-off when
foreclosure on the collateral is not feasible. Estimated completion date is 3/24/15; (2) generating a report to identify
disaster loans in liquidation status that are delinquent over 180 days and not secured or exempt from referral to Treasury.
Estimated completion date is 3/24/15; and (3) SOP 50 52, which provides DCIA guidance, is in its final draft form.
Estimated completion is 12/31/14.
Report #12-15, Audit of FY 2011 Federal Information Security Management Act Review
Program: OCIO
Date Issued: 7/16/12
Management Decision Date: 8/16/12
Explanation: The three remaining recommendations are to the Office of the Chief Information Officer and require (1)
development of an overall strategy to implement OIG recommendations on FISMA security requirements; (2) perform
recertification reviews of agency general support systems or design compensating controls; and (3) continuously monitor
remote access audit logs for unauthorized activity. OCIO will (1) hold weekly meetings to prioritize and monitor reme-
diation progress on OIG recommendations and provide a report to the CIO. Estimated completion date is 9/30/15; (2)
OCIO does not have an authoritative source available to perform recertification reviews for users of the general support
systems; information is received from ODA and OCFO semi-annually; the intake process will need revision. Estimated
completion date is 6/30/15; and (3) OCIO purchased a tool and once installed, will monitor remote access audit logs for
unauthorized activity. Estimated completion date is 9/30/15.
AGENCY FINANCIAL REPORT • FY 2014 135
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Report #12-16, Audit of Government Purchase Card for Construction Purchases
Program: CFO
Date Issued: 8/6/12
Management Decision Date: 9/11/12
Explanation: The two recommendations are to the Office of the Chief Financial Officer and require that purchase
cardholders have current delegation letters that reflect limitations and approving officials and that training be provided by
OCFO on the proper use of government purchase cards to include the definition of construction. The OCFO has com-
pleted both actions and will work with the OIG to close these recommendations. Estimated completion date is 4/30/15.
Report #12-18, Audit of 7(a) Early Defaulted Loans
Program: OCA
Date Issued: 8/16/12
Management Decision Date: 11/5/12
Explanation: The one remaining recommendation requires the Office of Capital Access to perform a cost/benefit analysis
for detailed reviews of early defaulted loans of less than $500,000. OFPO will review past data to identify root causes for
low dollar, early default loans and provide a risk assessment. Estimated completion date is 9/30/15.
Report #12-22, Audit of SBA’s Ratification Process
Program: OCFO
Date Issued: 9/28/12
Management Decision Date: 10/12/12
Explanation: The one remaining recommendation is to the Office of the Chief Financial Officer and requires that a
review of ratification actions for Anti-Deficiency Act violations. The OCFO reviewed the ratified commitments and
confirmed that no Anti-Deficiency violations occurred. The OCFO is working with the OIG to close these recommen-
dations. Anticipated completion date is 4/30/15.
Report #13-01, Audit of SBA’s Section 8(a) Program’s use of Internal Revenue Service Tax Verification Form 4506T
Program: OBD
Date Issued: 10/4/12
Management Decision Date: 3/11/13
Explanation: The four recommendations are to the Office of Business Development and require changes to SOP 80 05
A to ensure (1) completion of Form 4506T and prompt submission; (2) completion of Form 4506T prior to the start of
the annual review and prompt submission; (3) suspension of the firm if tax returns submitted to SBA do not agree with
those submitted to the IRS; and (4) comparison of IRS transcripts with the tax return and advise OIG of discrepancies.
The BD will incorporate all recommendations with the SOP 80 05 3 revision. Estimated completion date is 9/30/15.
Report #13-03, Audit of Mentor Protégé Joint Ventures
Program: GCBD
Date Issued: 10/23/12
Management Decision Date: 1/24/13
Explanation: The ten remaining recommendations are to the Office of the Government Contracting and Business
Development and require a review of the Mentor-Protégé Program to (1) develop specific measurements to evaluate the
benefits of joint venture agreements; (2) assess risk of the program; (3) verify information submitted by 8(a) firms as part
of the annual review; (4) conduct site visits of 8(a) firms as part of the annual review; (5) collect quarterly or semiannual
contract status updates as part of the annual review; (6) collect work performance reports as part of the annual review; (7)
conduct a joint venture closeout evaluation as part of the annual review; (8) maintain complete data on 8(a) firms while
deploying a new information system; (9) maintain joint venture arrangement data; and (10) interface data system with
136 AGENCY FINANCIAL REPORT • FY 2014
APPENDICES
other systems. Resolution activities include (1) development of metrics to measure benefits of Mentor-Protégé and Joint
Venture relationships; (2) development of risk assessment procedures; (3) through (7) enhancement of annual review
procedures; and (8) through (10) implementation of One-Track CMS system to collect and maintain up-to-date data.
Estimated completion date is 9/30/15.
Report #13-04, Audit of SBA’s FY 2012 Financial Statements
Program: OCIO
Date Issued: 11/14/12
Management Decision Date: 3/8/13
Explanation: The 11 remaining recommendations are to the Office of the Chief Information Officer and require (1)
enhancement of security vulnerability management processes; (2) that information systems hosted by SBA comply with
SBA policy and NIST guidance; (3) new system users are required to change their password upon first log-in; (4) system
access is removed for terminated/transferred users; (5) enforce procedures for user access approvals; (6) oversee valida-
tion of financial system accounts; (7) monitor financial system audit logs; (8) there is a segregation of duties between
the database and system administrators’ accesses; (9) enforce an organization-wide configuration management process;
(10) include document retention for operating system changes in policies and procedures; and (11) conduct a Business
Impact Analysis, implement contingency plans, and establish an alternate processing site. Resolution activities include
(1) OCIO purchased a tool to enhance security management and will implement a review process once installed; OCIO
has worked with ODA and OCFO to address security management. Estimated completion date 12/31/14; (2) OGC has
provided some statements of work that have an IT component in them for security language review. OCIO is seeking
all procurement contracts. Estimated completion date is 9/30/17; (3) all passwords for new users are random, unique
and are required to be changed after initial log-on. OCIO will work with OIG to close this recommendation; Estimated
completion date is 12/31/14; (4) coordination with OHRS to receive separation, new hires and job change reports every
two weeks; ODA has a tool to identify separated personnel daily to remove access; OCFO has been using a separation list
to remove access from OCFO systems and they conduct semi-annual account verifications. Estimated completion date
is 12/31/14; (5) LAN/WAN access is documented through SBA Form 1228 process; OCIO is coordinating with OHRS
to receive new hires and job change reports in addition to separation reports to disable accounts. Estimated completion
date is 12/31/14; (6) OCFO has been providing OCIO with account review checklists semi-annually, which is required
in SOP 90 47 3. OCIO will work with the OIG to close this recommendation. Estimated completion date is 6/30/15;
(7) OCIO purchased a tool and after installation will monitor financial system audit logs. OCFO purchased Qradar for
log reduction and notification. Estimated completion date is 9/30/15; (8) OCFO purchased Qradar for log reduction
and notification. OCIO will work with OIG to close this recommendation. Estimated completion date is 12/31/14; (9)
SBA currently following the operating procedures outlined in the ECCB charger IAQ SOP 90 42 0. OCIO will work
with the OIG to close this recommendation. Estimated completion date is 12/31/14; (10) OCIO has implemented
Tripwire for configuration management. OCFO uses Sharepoint and Bugzilla to record change request and approv-
als. OCIO will work with the OIG to close this recommendation. Estimated completion date is 12/31/14; and (11)
Business Impact Analysis have been conducted; the alternate processing site is being addressed by the move of OCIO
and OCA infrastructures to SAVVIS in Sterling, VA. The recommendation will remain open until the move is complete.
Estimated completion date is 3/30/17.
Report #13-06i, Audit of SBA’s Section 8(a) Annual Review
Program: BD
Date Issued: 11/13/12
Management Decision Date: 3/11/13
Explanation: The two recommendations are to the Office of the Business Development and require that SOP 80 05 3
be revised to extend time for annual reviews, subject firms to termination if information is not provided, and allow SBA
to place an 8(a) firm in a “decision pending” category during the additional period. Resolution will be achieved with the
update of the SOP. Estimated completion date is 9/30/15.
AGENCY FINANCIAL REPORT • FY 2014 137
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Report #13-07, Audit of SBA’s 7(a) Guaranty Purchases Improper Payments
Program: OCA
Date Issued: 11/15/12
Management Decision Date: 11/4/13
Explanation: The three remaining recommendations are to the Office of the Capital Access and require (1) monitoring
the effectiveness of the improper payment checklist; (2) seek recovery of $1,106,116, less subsequent liquidation recov-
eries from a lender; and (3) seek recovery of $714,444, less liquidation recoveries form a lender. Resolution activities
include (1) creation of monthly reports to analyze deficiency trends over a six month period. The process is documented
in program guides which have been updated. Estimated completion date is 10/15/14; (2) file review by the Dispute
Resolution Committee. Estimated completion date is 2/16/15; and (3) submission of the file to the Deputy Administra-
tor for a decision as OCA does not agree with the finding. Estimated completion date is 9/30/15.
Report #13-08, Audit of SBA’s 8(a) Information Technology Contracts
Program: OCFO
Date Issued: 12/3/12
Management Decision Date: 1/18/13
Explanation: The 13 remaining recommendations are to the Office of the Chief Financial Officer and require (1) and (2)
referral of two vendors to the Suspension and Debarment Official to take debarment action; (3) implement procedures
to determine if prospective contractors are “responsible” prior to awarding a contract; (4) demonstration of proficiency in
price analysis; (5) retention of records used to establish price; (6) verification of price analysis procedures; (7) perform an
assessment in compliance with Conducting Acquisition Assessments under OMB Circular A-123; (8) enhance internal
controls in response to any weaknesses identified in the assessment; (9) update payment processing internal controls;
(10) recover $12,073 for a duplicate payment from a vendor; (11) provide a list of approvers to payment personnel; (12)
implement attachment of a receiving report to each invoice; and (13) implement an automatic interface between systems
to tie payments to a contract number instead of purchase order numbers. Resolution activities include (1) and (2) refer-
ral to OGC’s Suspension and Debarment official; (3) procedures are in place to determine if prospective contractors are
“responsible”; procedures will be documented in a revised SOP; (4) current contracting officers are proficient in price
analysis; procedures will be documented in a revised SOP; (5) documents are retained; procedures will be documented
in a revised SOP; (6) price analysis procedures will be documented in the revised SOP; (7) an acquisition assessment to
comply with OMB Circular A-123 is currently being conducted; (8) internal controls will be enhanced if any weaknesses
are identified in the assessment; (9) payment processing controls are in place and will be documented in the revised SOP;
(10) demand was made to the vendor for $12,073; (11) an automated payment process was implemented in December
2011 that limits invoice review to authorized approvers; this process will be documented in the revised SOP; (12) a pro-
cess for receipts will be included in the revised SOP; and (13) an interface has been established between systems to ensure
the contract number and purchase order number are the same. Estimated completion date is 9/30/15.
Report #13-09 SBA’s FY 2012 Financial Statements – Management Letter
Program: OCFO and OHRS
Date Issued: 12/12/12
Management Decision Date: 2/7/13
Explanation: The eight remaining recommendations include one to the Office of the Chief Financial Officer and seven
to the Office of Human Resource Solutions and require (1) the OCFO to develop and implement an SOP for initiat-
ing, monitoring and closing obligations; (2) the CHCO to reinforce policies and procedures for time and attendance
reports; (3) the CHCO to perform quality assessment reviews of time and attendance reports; (4) the CHCO to provide
training on an employee’s checklist; (5) the CHCO to encourage an employee’s separation process to begin two weeks
prior to departure; (6) the OHRS staff to review checklists for completion and acceptance; (7) the CHCO to implement
administrative actions for SBA officials who do not adhere to separation policies; and (8) the CHCO to ensure checklists
are received timely and submitted to Payroll for processing. Resolution activities include (1) the OCFO has initiated
138 AGENCY FINANCIAL REPORT • FY 2014
APPENDICES
a project to update the SOP for obligations; estimated completion date is 3/31/15; (2) OHRS will provide training to
managers and continue to conduct ad hoc audits of time and attendance records; (3) OHRS will continue to conduct
ad hoc audits and anticipates performing at least four quality assurance reviews each quarter; (4) OHRS will provide
training on the completion and acceptance of the SBA Form 78, Separations Checklist, and will publish and Information
Notice; (5) OHRS will discuss the importance of beginning the separation process early during the training of managers
and supervisors; (6) OHRS will perform ad hoc reviews of completed checklists and provide refresher training as needed;
OHRS will also create an Internal Operating Procedures document that will include separation checklist procedures; (7)
OHRS will create a Separations Checklist Non-Compliance memo that includes a description of the non-compliance
issue, recommended corrective action and the SBA’s official acknowledgement and corrective actions and take appropriate
action if a program office receives three or more notices with a fiscal year; and (8) OHRS will create an Internal Operat-
ing Procedures document that will include SBA’s retention schedule and procedures for processing separation checklists.
Estimated completion date is 9/30/15.
Report #13-11 Audit of SBA’s Loan Management and Accounting System – Incremental Improvements Projects
Program: OCIO
Date Issued: 3/12/13
Management Decision Date: 9/12/13
Explanation: The two remaining recommendations are to the Office of the Chief Information Officer and to the Office
of Capital Access and require (1) adoption of a new incremental improvement project under LMAS to facilitate the
transfer of data to a new COBOL code; and (2) implementation of an Independent Verification and Validation program
for LMAS. Resolution activities include (1) OCA has set up IIP --Migrate COBOL code into a Production UNIX
Environment. OCA will develop an incremental improvement project to migrate the COBOL code to a production
environment. There will be two phases: 1. To migrate the code and run in parallel with the Unisys mainframe environ-
ment. 2. After stakeholder approval, become the agency’s only batch loan accounting system. Estimated completion date
is 2/15/2015; and (2) an IV&V process is fully implemented for LMAS; the scope of this recommendation was expanded
to require full implementation of an IV&V for all SBA development projects. Estimated completion date is 9/30/15.
Report # 13-12, Audit of Contracting Practices to Reconfigure Space
Program: OCFO
Date Issued: 3/26/13
Management Decision Date: N/A
Explanation: One remaining recommendation to the Office of the Chief Financial Officer to direct a contracting officer
to review all invoices related to space reconfiguration in the Office of International Trade and make a determination if
all work was performed. Resolution activities include reviewing all invoices and confirming the work was performed.
Estimated completion date is 3/31/15.
Report # 13-14, Audit of 417 Unauthorized Commitments
Program: OCFO
Date Issued: 3/28/13
Management Decision Date: N/A
Explanation: Three remaining recommendations to the Office of the Chief Financial Officer require (1) determina-
tion if administrative or legal actions against employees making unauthorized commitments are feasible; (2) Incorpora-
tion of COR Acceptance Letter and FAR into COR’s annual performance assessment; and (3) provide annual training
to employees on managing contracts to avoid unauthorized commitments. Resolution activities include (1) exploring
actions against employees making unauthorized commitments with OGC and the union; (2) working with OHRS to
incorporate COR requirements in the annual performance assessment for CORS; and (3) providing annual training to
employees on managing contracts. Estimated completion date is 9/30/15.
AGENCY FINANCIAL REPORT • FY 2014 139
AP P E ND I C E S
Report # 13-16R, Audit of SBA’s 7(a) Guaranty Purchase of Recovery Act Loans Improper Payments
Program: OCA
Date Issued: 6/14/13
Management Decision Date 3/28/14
Explanation: Five remaining recommendations to the Office of the Capital Access require (1) recovery of $1,425,427
from a lender; (2) recovery of $669,963 from a lender; (3) recovery of $967,869 from a lender; (4) recovery from a
lender of $555,368 from a lender; (5) recovery of $680,900 from a lender. All five files for the audit are in the dispute
resolution process. Estimated completion date is 3/31/15.
Report # 13-17, Audit of SBA’s Portfolio Risk Management Program
Program: OCA
Date Issued: 6/14/13
Management Decision Date 9/30/13
Explanation: Two remaining recommendations to the Office of Capital Access require (1) use of portfolio risk manage-
ment program data to support risk-based decisions in its loan programs; and (2) implementation of additional controls
to mitigate identified risks where necessary. Resolution activities include (1) conducting a set of risk based portfolio
analyses. Estimated completion date 3/30/15; and (2) enhancing or adding additional controls as necessary. Estimated
completion date is 6/30/15.
Report # 13-18, Audit of SBA’s Defaulted Disaster Loans
Program: OCA
Date Issued: 9/27/13
Management Decision Date 3/31/14
Explanation: Eight recommendations to the Office of Capital Access require (1) transfer of all eligible charged-off loans
to Treasury for cross-servicing; (2) transfer of all eligible charge-off loans to Treasury, including those with unliquidated
collateral; (3) transfer of all legally enforceable debts already charged-off to Treasury for cross-servicing; (4) transfer of
all debtors associated with charged-off debts to Treasury; (5) transfer of loans in litigation after charge-off to Treasury if
litigation is dismissed; (6) security agreements be tracked and renewed as needed; (7) offer-in compromise settlements
to be in compliance with SBA’s SOP; (8) publish a mission statement, update the SOP, establish a performance manage-
ment process for the disaster loan liquidation center. Resolution activities include (1) creation of management controls
to ensure all eligible charge-off loans are transferred to Treasury. Estimated completion date is 3/24/15; (2) creation
of management controls to ensure loans with unliquidated real estate collateral are transferred to Treasury. Estimated
completion date is 3/27/15; (3) creation of management controls to ensure debtors with legally enforceable debts already
charged off are transferred to Treasury. Estimated completion date is 3/27/15; (4) creation of management controls to
ensure debtors associated with charged-off legally enforceable debts are transferred to Treasury. Estimated completion
date is 3/27/15; (5) documentation of workout process for delinquent debt. Estimated completion date is 3/30/15; (6)
development of management controls to ensure processes address security agreements. Estimated completion date is
12/31/14; (7) Revision of SOP 50-52 that will include offer-in-compromise authorizations. Estimated completion date
is 3/30/15; and (8) Revision of SOP 50-52 to reflect current processes. Estimated completion date is 12/31/14.
Report # 13-21, Audit of SBA’s Enterprise-Wide Controls over Co-Sponsored Activities
Program: OCPL, OFO, and OGC
Date Issued: 9/26/13
Management Decision Date 1/23/14 and N/A
Explanation: Seven remaining recommendations include four to the Office of Communications and Public Liaison that
require (1) co-sponsorship agreement update to include all specific roles and responsibilities for fiscal agents and other
accountable parties; (2) establishment of controls to ensure all activities are properly closed out and all documents are ob-
140 AGENCY FINANCIAL REPORT • FY 2014
APPENDICES
tained; (3) periodic reviews of co-sponsorship files; and (4) training for staff. Resolution activities include (1) creation of
supplemental guidance for fiscal agents in lieu of agreement update as explanations and examples can be provided; (2) ex-
ploration of technology to collect co-sponsorship information and track agreements; (3) exploration of partnership with
OGC to work together on file review; and (4) providing training focused on roles and responsibilities of fiscal agents.
Estimated completion date is 12/12/14. Two recommendations to the Office of Field Operations require (5) disposal of
funds remaining from two conferences in accordance with SOP 90 75 3; and (6) performance of periodic quality service
reviews. Resolution activities include (5) review and disposal of funds remaining on conference in accordance with SOP
90 75 3; and (6) inclusion of co-sponsored activities in the already existing Field Accountability Reviews. Estimated
completion date is 9/30/15. One recommendation is to the Office of General Counsel and requires (7) revision of SOP
90 75 3 to include specific procedures on the disposition of excess funds that remain after co-sponsored activities. Reso-
lution activities include (7) OGC, in consultation with other SBA headquarters and field personnel, recently concluded
a comprehensive review of the co-sponsorship process, including how to effectively control and manage co-sponsorship
funds. Lessons learned from this review are currently being incorporated into revisions to SOP 90 75 3, Outreach Activi-
ties. The revised SOP will include specific instructions on the disposition of excess co-sponsorship funds and is expected
to be implemented in FY 2015.
Report # 13-22, Improved Examination Quality Can Strengthen SBA’s Oversight of Small Business Investment
Companies
Program: OII
Date Issued: 09/30/2013
Management Decision Date: 12/16/2013
Explanation: The three open recommendations are to the Office of Investment & Innovation require (1) Create and
execute a plan to improve the internal operations of the examination function. Plan should include quality driven goals,
performance indicators and better communication. (2) Update and improve existing examination checklist to better align
with and reference SOP guidance for examinations, ensure focus on Category One violations, and ensure consistency
across the three SBIC examination offices. (3) Assess the costs of the examination function and prepare cost-benefit
analysis for several funding options, including a potential increase in examination fees in order to improve training
and technology and cover other examination costs. Resolution activities include (1) OII management disagrees with
this recommendation and will submit the opinion to the OIG for follow up to close the issue; (2) OII has assessed the
recommendation and has taken action regarding an increase in examination fees, the action is currently in clearance, after
which it will be provided to the OIG for follow up to close the issue; (3) The checklist has been reviewed and updated
and will be submitted to the IG for follow up to close the issue. Final actions for all recommendations are estimated to be
10/31/14.
DID
YOU The Women’s Business Center program is celebrating 25 years. The first
KNOW four awards were made in 1989, and today there are 107 WBCs across the
country. Over 1.7 million clients have received training, counseling, and
mentoring from WBCs.
AGENCY FINANCIAL REPORT • FY 2014 141
ACKNOWLEDGMENTS
This Agency Financial Report was produced with the energies and talents of the SBA staff. To these
individuals, the Office of Performance Management and the Chief Financial Officer would like to
offer sincere thanks and acknowledgement.
We would also like to acknowledge the Office of the Inspector General and KPMG LLP for the
professional manner in which they conducted the audit of the Fiscal Year 2014 Financial Statements.
We offer our special thanks to Innovative Consultants International and Corporate Visions, Inc. for
outstanding contributions to producing this report.
CERTIFICATE OF EXCELLENCE IN ACCOUNTABILITY REPORTING
For the past eight years, FY 2006 to FY 2013, the U.S.
Small Business Administration is proud to have received
the prestigious Certificate of Excellence in Accountability
Reporting (CEAR) award from the Association of Government
Accountants (AGA) for its Agency Financial Report (AFR).
The CEAR program was established by the AGA
in conjunction with the Chief Financial Officers Council.
The award recognizes high-quality Performance and
Accountability Reports and Annual Financial Reports
that effectively illustrate and assess financial and program
performance, accomplishments and challenges, cost and
accountability.
DID Government contracts offer significant opportunities for small businesses,
YOU but selling to the government requires a very different approach than
selling to the commercial sector. The SBA has created a series of
KNOW free online courses to help prospective and existing small businesses
understand the basics of contracting with government agencies.
For more information visit: http://www.sba.gov/gcclassroom.
Office of Performance Management
and Chief Financial Officer
409 Third Street, S.W.
Washington, DC 20146
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