SBA Agency Financial Report FY 2009 — Financial Reporting: Message from the Chief Financial Officer
Summary
This part of the SBA's Agency Financial Report FY 2009 opens with the Chief Financial Officer's message, dated November 15, 2009 and signed by Jonathan I. Carver, which says an independent audit earned the SBA an unqualified opinion, with one material weakness in the alignment entry for defaulted loan guaranties. It includes the report of the Audit and Financial Management Advisory Committee, signed by Edward J. Mazur as Chairman, which says the Committee met three times during the year. KPMG LLP's independent auditors' report discusses a material weakness on internal controls over financial reporting, a significant deficiency on information technology security controls, and noncompliance with the Debt Collection Improvement Act. A note states foreclosed property of $41.7 million related to 80 loans at September 30, 2009.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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“SBA Agency Financial Report FY 2009 — Financial Reporting: Message from the Chief Financial Officer.”
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M ANAGE MENT’ S DISC U SSION & AN ALYS I S
Agency Financial Report FY 2009
32
F I N A N C I A L R E P O RT I N G
Message from the Chief Financial Officer
November 15, 2009
In compliance with the Reports Consolidation Act, I am pleased to submit the U.S. Small Business
Administration’s Agency Financial Report for FY 2009.
FY 2009 was a challenging year for the SBA. In February, Congress passed the American Reinvestment
and Recovery Act, and the SBA was responsible for assisting with the stabilization of the U.S. economy.
This responsibility introduced new financial management and reporting challenges as the SBA rushed to
provide a quick response to the economic downturn. The SBA tracked both its regular appropriations
dollars and its Recovery Act funding to provide accountable, transparent reports to the President, the
Congress, and the public. To develop tracking process and tools for the Recovery Act, the SBA engaged
its employees and promoted internal cross-collaboration and innovation.
Despite these demanding circumstances, an independent audit has earned the SBA an unqualified
opinion, with one material weakness, while improving the quality of the financial processes, data, and
statements. The material weakness finding was in the development and review of the alignment entry
which adjusts the net receivables for defaulted loan guaranties and liability for loan guaranties to their
net present value. This error was immediately corrected and the SBA is instituting a process to ensure
that this does not recur.
SBA’s credit subsidy reestimate and Recovery Act models and processes demonstrate the application of
high quality financial analysis to the unique current economic climate. All of our reestimates and qual-
ity assurance reviews were completed on time and SBA’s numerous reviews and the auditor’s review of
the subsidy estimates yielded only a few findings and concerns which we were able to address in a timely
manner.
In financial management and reporting, the SBA managed two key initiatives this year. First, the SBA
engineered and expanded its financial processes and analysis to include implementation of the Recovery
Act. All of SBA’s existing financial systems and processes had to be augmented, and new tools had to be
developed to meet the Executive Branch’s high standard for monitoring and reporting.
Second, the SBA continued to make progress on the development of its LMAS project, which will
re-engineer SBA’s loan management accounting systems and align them with our lender oversight and
customer service systems. In FY 2009, the SBA completed the project blueprints and proof of concept,
purchased the necessary Oracle licenses, and finalized the project plans. The implementation phase
began in October 2009.
Since late FY 2004, the SBA has had an independent Audit and Financial Management Advisory
Committee. During FY 2009, the committee was highly engaged in the financial reporting process
and audit cycle, providing advice and counsel and making recommendations for our financial statement
footnotes and reporting on the Recovery Act. We are proud to have one of the few independent audit
committees within the government and appreciate the opportunity to have such an esteemed group of
professionals advising us. We appreciate their support and dedication to our continued improvement.
Agency Financial Report FY 2009
33
FIN AN C IAL RE PORTI N G
The SBA is actively participating in the Office of Management and Budget’s High Priority Goals initia-
tive, which is expected to shape the new administration’s agenda. The SBA has submitted its goals for
review and is in the process of developing teams to implement OMB’s recommendations.
The SBA also continued to make important strides in budget and performance integration. Because of
Recovery Act projects and cross-collaboration, budget and performance staff have developed stronger
relationships and a deeper understanding of how they can promote efficiency and performance at the
Agency. Together, these offices are developing a new Operational Plan template for headquarters. The
template more closely aligns spending with results. In another result of this close relationship, the SBA
is laying the groundwork for the development of its new Agency strategic plan, which will be completed
in FY 2010.
Finally, the SBA continued to garner value from improved internal control reviews and process analyses.
Engaging program office staff to understand the requirements and to take advantage of the opportuni-
ties associated with internal controls continues to be a primary office objective. The SBA continued to
pursue the development of a strong risk management culture.
In summary, FY 2009 was a rewarding year that posed many challenges in financial management.
Achieving an unqualified opinion has been our objective since the SBA lost its prior unqualified opin-
ion. Now that we have achieved our goal and met the challenges set by the Recovery Act, we will con-
centrate our efforts on maintaining our high quality financial management processes and on expanding
the quality and use of our financial data for decision making.
Thank you for your interest in our FY 2009 Agency Financial Report.
Jonathan I. Carver
Chief Financial Officer
Agency Financial Report FY 2009
34
F I N A N C I A L R E P O RT I N G
Audit and Financial Management Advisory Committee’s Report
The Audit and Financial Management Advisory Committee assists the Administrator in overseeing the
U.S. Small Business Administration’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 finan-
cial operations, and its compliance with certain laws and regulations that could materially impact SBA’s
financial statements. SBA’s external auditors are responsible for expressing an opinion on the confor-
mity 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, including its financial
statements, and provides comments to management who has primary responsibility for the AFR. The
Committee met three times during the year with respect to these responsibilities on FY 2009 financial
management and reporting. During these sessions, 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 2009 AFR.
Edward J. Mazur
Chairman
Audit and Financial Management Advisory Committee
Agency Financial Report FY 2009
35
FIN AN C IAL RE PORTI N G
Inspector General’s Audit Report
Agency Financial Report FY 2009
36
F I N A N C I A L R E P O RT I N G
Agency Financial Report FY 2009
37
FIN AN C IAL RE PORTI N G
Independent Auditors’ Report on FY 2009 Financial Statements
KPMG LLP
2001 M Street, NW
KPMG LLP DC 20036
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2001 M Street, NW
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KPMG LLP
2001 M Street, NW
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Agency Financial Report FY 2009
38 statements of budgetary resources for the years then ended.
KPMG LLP, a U.S. limited liability partnership, is the U.S.
member firm of KPMG International, a Swiss cooperative.
F I N A N C I A L R E P O RT I N G
U.S. Small Business Administration
November 13, 2009
Page 2 of 4
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of SBA as of September 30, 2009 and 2008 and its net costs, changes in net
position, and budgetary resources for the years then ended, in conformity with U.S. generally accepted
accounting principles.
As stated in Note 4 to the financial statements, SBA implemented the requirements of SFFAS No. 31 in
fiscal year 2009.
The information in the Management’s Discussion and Analysis, Required Supplementary Information, and
Required Supplementary Stewardship Information sections is not a required part of the consolidated
financial statements, but is supplementary information required by U.S. generally accepted accounting
principles. We have applied certain limited procedures, which consisted principally of inquiries of
management regarding the methods of measurement and presentation of this information. However, we did
not audit this information and, accordingly, we express no opinion on it.
Internal Control Over Financial Reporting
Our consideration of the internal control over financial reporting was for the limited purpose described in
the Responsibilities section of this report and was not designed to identify all deficiencies in the internal
control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses.
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 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. A material weakness is a deficiency, or
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.
In our fiscal year 2009 audit, we identified a deficiency in internal control over financial reporting that we
consider a material weakness, as described in Exhibit I, and other deficiencies that we consider to be a
significant deficiency, as described in Exhibit II. Exhibit III presents the status of the prior year significant
deficiency.
We noted certain additional matters that we have reported to management of SBA in a separate letter dated
November 13, 2009.
Compliance and Other Matters
The results of our tests of compliance described in the Responsibilities section of this report, exclusive of
those referred to in the Federal Financial Management Improvement Act of 1996 (FFMIA), disclosed one
instance of noncompliance that is required to be reported herein under Government Auditing Standards or
OMB Bulletin No. 07-04.
As stated in its Federal Managers’ Financial Integrity Act (FMFIA) Assurance Statement, SBA
management reported the agency was noncompliant with the Debt Collection Improvement Act in fiscal
year 2009 due to instances where it did not refer a substantial number of charged off loans to Treasury for
offset and cross servicing.
Agency Financial Report FY 2009
39
FIN AN C IAL RE PORTI N G
U.S. Small Business Administration
November 13, 2009
Page 3 of 4
The results of our tests of FFMIA disclosed no instances in which 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 U.S. Standard General Ledger at the transaction
level.
*******
Responsibilities
Management’s Responsibilities. Management is responsible for the consolidated financial statements;
establishing and maintaining effective internal control; and complying with laws, regulations, contracts,
and grant agreements applicable to SBA.
Auditors’ Responsibilities. Our responsibility is to express an opinion on the fiscal year 2009 and 2008
consolidated financial statements of SBA 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 OMB Bulletin No. 07-04. Those standards and OMB Bulletin No. 07-04, require that we plan
and perform the audits to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of SBA’s internal control over financial reporting.
Accordingly, we express no such opinion.
An audit also includes:
• Examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements;
• Assessing the accounting principles used and significant estimates made by management; and
• Evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In planning and performing our fiscal year 2009 audit, we considered SBA’s internal control over financial
reporting by obtaining an understanding of SBA’s internal control, determining whether internal controls
had been placed in operation, assessing control risk, and performing tests of controls as a basis for
designing our auditing procedures for the purpose of expressing our opinion on the consolidated financial
statements. We did not test all controls relevant to operating objectives, as broadly defined by the FMFIA.
The objective of our audit was not to express an opinion on the effectiveness of SBA’s internal control
over financial reporting. Accordingly, we do not express an opinion on the effectiveness of SBA’s internal
control over financial reporting.
As part of obtaining reasonable assurance about whether SBA’s fiscal year 2009 consolidated financial
statements are free of material misstatement, we performed tests of SBA’s 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 the consolidated financial statement amounts, and certain
provisions of other laws and regulations specified in OMB Bulletin No. 07-04, including the provisions
referred to in Section 803(a) of FFMIA. We limited our tests of compliance to the provisions described in
Agency Financial Report FY 2009
40
F I N A N C I A L R E P O RT I N G
U.S. Small Business Administration
November 13, 2009
Page 4 of 4
the preceding sentence, and we did not test compliance with all laws, regulations, contracts, and grant
agreements applicable to SBA. However, providing an opinion on compliance with laws, regulations,
contracts, and grant agreements was not an objective of our audit and, accordingly, we do not express such
an opinion.
______________________________
SBA’s response to the findings identified in our audit is presented in Exhibit IV. We did not audit SBA’s
response and, accordingly, we express no opinion on it.
This report is intended solely for the information and use of SBA’s management, SBA’s Office of
Inspector General, OMB, the U.S. Government Accountability Office, and the U.S. Congress and is not
intended to be and should not be used by anyone other than these specified parties.
November 13, 2009
Agency Financial Report FY 2009
41
FIN AN C IAL RE PORTI N G
Exhibit I
U.S. Small Business Administration
Material Weakness
Introduction
Exhibit I herein describes the material weakness and Exhibit II describes the control deficiencies, which
collectively resulted in a significant deficiency, for the year ended September 30, 2009, and our
recommendations. The status of the prior year significant deficiency is reported in Exhibit III, and SBA
management’s response is presented in Exhibit IV.
Material Weakness
The material weakness we identified for the year ended September 30, 2009, is summarized below.
(1) Improvement Needed Surrounding Controls Over the Financial Reporting Process
SBA has various reconciliation and data quality improvement procedures between and within its various
systems and departments to ensure that the agency’s financial statements are reasonable and fairly
presented. The purpose of these procedures is to improve the overall quality of the data SBA uses
internally to monitor operations and loan portfolio performance as well as to periodically report to its
various stakeholders, such as the U.S. Department of Treasury and the Office of Management and Budget
(OMB). However, these procedures need to be strengthened to improve the quality and accuracy of the
quarterly and year-end financial reporting process.
SBA did not timely identify a $346.6 million overstatement in its financial statements concerning its
liability for loan guaranties and defaulted loan guaranty receivable balances. The error was due to a lack of
effective process controls over SBA’s Return on Assets (ROA) calculation. The ROA calculation is used to
record an alignment entry which adjusts the net defaulted loan guaranty receivable and the liability for loan
guaranty balances to net present value (NPV) in accordance with Statement of Federal Financial
Accounting Standards (SFFAS) No. 2, Accounting for Direct Loans and Loan Guarantees. One of the
main inputs of this calculation is the NPVs generated by the Credit Subsidy Calculator 2 (CSC2). For
cohorts reestimated using projected disbursements SBA did not properly reduce the NPV amounts on a
prorata basis to reflect the NPV based on actual disbursements to date.
Additionally, we noted that the ROA adjusting entry was improperly posted before all loan guaranty
transactions were posted to the general ledger. As a result, the defaulted loan guaranty and liability for loan
guaranty balances were overstated by $32.7 million.
The lack of process controls resulted in cumulative misstatements totaling $379.3 million related to the
defaulted loan guaranties and liability for loan guaranty balances at September 30, 2009. SBA
subsequently recalculated the alignment entry and reposted the transactions to correct the balances in error.
OMB Circular A-123, Management’s Responsibility for Internal Controls, states: “management is
responsible for establishing and maintaining internal control to achieve the objectives of effective and
efficient operations, reliable financial reporting, and compliance with applicable laws and regulations.
Management shall consistently apply the internal control standards to meet each of the internal control
objectives and to assess internal control effectiveness.”
I-1
Agency Financial Report FY 2009
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F I N A N C I A L R E P O RT I N G
Exhibit I
U.S. Small Business Administration
Material Weakness
Recommendations
We recommend that the Chief Financial Officer:
1. Implement a reconciliation procedure in which a staff member traces and agrees the NPV in the ROA
calculation to the outputs generated by the CSC2 prior to posting the alignment entry in the general
ledger.
2. Develop policies and procedures to ensure the ROA alignment entry is made after all credit reform loan
guaranty activity has been posted to the general ledger.
3. Enhance SBA’s procedures related to its in-depth analysis of the valuation of the liability for loan
guaranties and defaulted loan guaranty receivable balances to ensure the balances are properly
presented at the NPV in accordance with SFFAS No. 2.
I-2
Agency Financial Report FY 2009
43
FIN AN C IAL RE PORTI N G
Exhibit II
U.S. Small Business Administration
Significant Deficiency
The significant deficiency identified for the year ended September 30, 2009, is summarized below:
(2) Improvement Needed in Information Technology (IT) Security Controls
During fiscal year 2009, we noted that SBA made progress in several areas in its efforts to address prior
year IT internal control deficiencies. Despite these improvements, we also noted that deficiencies
continued to exist in the areas of security access controls, software program changes, patch management,
and end-user computing.
Security Access Controls
Integral to an organization’s security program management efforts, technical security access controls for
systems and applications should 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.
A summary of the security access control deficiencies we identified during the fiscal year 2009 SBA
financial statement audit follows:
• We noted several [FO1A Exemption 2] vulnerabilities, with [FO1A Exemption 2] hosted by SBA’s
[FO1A Exemption 2] service provider. Details are not provided in this report due to their sensitivity,
but have been provided to SBA management. Many of these issues were tracked by the internal
[FO1A Exemption 2] support team; however, the issues were not appropriately tracked and
prioritized by the Plan of Action and Milestones (POA&M) in which the Office of Chief Information
Officer (OCIO) provides oversight and management.
• We noted security vulnerabilities with [FO1A Exemption 2] hosted in the [FO1A Exemption 2]. Details
are not provided in this report due to their sensitivity, but have been provided to SBA management.
Although we noted improvement in this area since fiscal year 2008, consistent and periodic completion
of vulnerability scans would have helped SBA reduce the number of vulnerabilities.
• We identified access control weaknesses through our technical vulnerability testwork
[FO1A Exemption 2].
• Validation of physical access to the data center at [FO1A Exemption 2] is not performed in accordance
with SBA Standard Operating Procedure (SOP) 90-47.2, Automated Information Systems Security
Program, which requires that a listing of authorized personnel for SBA computer facilities (e.g., server
rooms) be maintained, and access be revalidated at least quarterly. In addition, we noted that visitor
logs at [FO1A Exemption 2] were not fully completed.
• OCIO management was unable to provide reasonable assurance that electronic media is sufficiently
sanitized prior to disposal, in accordance with SOP 90-47.2. The SOP requires that (1) media must be
sanitized prior to disposal by using one of the three approved methods: overwriting, degaussing, or
destruction, and (2) a log of who completed the sanitation action must be maintained.
• OCIO management was unable to provide reasonable assurance that user access to the [FO1A Exemption 2]
system was appropriately authorized and approved, in accordance with National Institute of Standards and
II-1
Agency Financial Report FY 2009
44
F I N A N C I A L R E P O RT I N G
Exhibit II
U.S. Small Business Administration
Significant Deficiency
Technology (NIST) Special Publication 800-53, Recommended Security Controls for Federal
Information Systems, Section AC-2.
• OCIO management does not enforce a process for monitoring, reviewing, and signing-off on the audit
logs [FO1A Exemption 2].
.
The majority of the above issues are consistent with findings identified by the Office of Inspector General
(OIG) in past years. In fact, the OIG has identified IT security as a significant SBA management challenge
since at least fiscal year 2000.
Recommendations – Security Access Controls:
We recommend that the Chief Information Officer (CIO) coordinate with SBA program offices to:
4. Improve the vulnerability tracking and monitoring process to include unresolved [FO1A Exemption 2]
vulnerabilities in the [FO1A Exemption 2] POA&M.
5. [FO1A Exemption 2]
6. Develop a more thorough approach to track and mitigate patch management and configuration
management vulnerabilities identified during [FO1A Exemption 2] scans.
7. Prevent users from [FO1A Exemption 2] by developing and implementing procedures for
ensuring mandatory [FO1A Exemption 2].
8. Implement controls to comply with SOP 90-47.2 regarding the validation of [FO1A Exemption 2] to
the data center.
9. Implement procedures to control the process for requesting and granting access to the [FO1A Exemption 2]
system, and implement procedures to retain the appropriate approval evidence for tracking and validation.
10. Implement a process to monitor the audit logs of all [FO1A Exemption 2] on a regular basis.
Software Program Changes
The primary focus of an organization’s software change controls (which also encompasses patch
management and configuration management efforts) is on controlling the software changes made to
systems and applications in operation. Without such controls, there is a risk that security features could be
inadvertently or deliberately omitted or turned off, or that processing irregularities or malicious code could
be introduced into the IT environment.
II-2
Agency Financial Report FY 2009
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FIN AN C IAL RE PORTI N G
Exhibit II
U.S. Small Business Administration
Significant Deficiency
A summary of the software program change control deficiencies we identified during the fiscal year 2009
SBA financial statement audit follow:
• An agency-wide change control process has not been implemented, and the Enterprise Change Control
Board (ECCB) charter is in draft form. In fiscal year 2008, the Office of the Chief Information Officer
(OCIO) stated that the ECCB charter would be implemented and that it would adhere to the IT
Infrastructure Library.
• The OCIO was unable to provide evidence that (1) testing and approvals were performed for six of
eight selected LAN\WAN operating system changes, (2) testing and approvals were performed for
eight of eight selected Financial Reporting Information System (FRIS) operating system changes, and
(3) the listing of JAAMS operating system changes was complete and accurate.
• The OCIO was unable to provide evidence that changes to the LAN/WAN were appropriately tracked,
approved, and implemented for the selected sample of seven application changes.
• Change controls to management LAN/WAN emergency changes were not sufficient. The OCIO was
unable to provide testing results and approvals for two of the three selected emergency changes.
• The Office of the Chief Financial Officer (OCFO) was unable to provide evidence that the software
change requests were consistently completed for JAAMS and the FRIS.
• The OCIO was unable to provide evidence that baseline configurations for LAS were updated in a
timely manner. Documented baseline configurations enable the process of tracking and controlling
software changes, especially as system security settings are changed.
Recommendations – Software Program Changes:
We recommend the CIO:
11. Oversee the development of a finalized ECCB charter that is supported by a promulgated SOP.
12. Implement procedures for documenting operating system, software, and emergency change testing
results, testing approvals, and final approvals. Specifically, such procedures and controls need to be
applied for the LAN\WAN.
We recommend the CFO:
13. Implement a process to capture all change requests for JAAMS.
14. Ensure consistent application of procedures for documenting operating system change testing results,
testing approvals, and final approvals. Specifically, such procedures and controls need to be applied for
the FRIS.
II-3
Agency Financial Report FY 2009
46
F I N A N C I A L R E P O RT I N G
Exhibit II
U.S. Small Business Administration
Significant Deficiency
End-user Computing
End-user computing tools/programs (e.g., spreadsheets and other user-developed programs) present the
need for a unique set of general control procedures within an organization. By its nature, end-user
computing brings the development and processing of information systems closer to the user. End-user
computing capabilities typically include access to any end-user developed programs or objects, such as
spreadsheets that contain critical data/information. Critical data/information could include personally
identifiable information (PII) and financial data. While this environment may not typically be subjected to
the same level of rigor and structure as an IT general controls environment, policies and procedures in this
area are important to the overall IT environment. During our follow-up on this prior year deficiency, we
noted that the policy and procedure has been drafted, but, had yet to be finalized, approved, and
implemented in the SBA environment.
Recommendations – End-user Computing:
15. We recommend the Senior Policy Analyst in the Office of the Administrator coordinate with program
offices using end-user programs containing sensitive data, such as PII and financial data, to implement
end-user computing procedures in accordance with the guidance provided by the OCIO.
II-4
Agency Financial Report FY 2009
47
FIN AN C IAL RE PORTI N G
Exhibit III
U.S. Small Business Administration
Status of Prior Year Significant Deficiency
Fiscal Year 2008 Finding Fiscal Year 2009 Status of Finding
1. Improvement needed in management information During our review of SBA’s information technology
technology security controls (IT) general and application controls, we noted
improvements in remote access authorizations, security
vulnerabilities over Disaster Credit Management
System, sanitization over sensitive media, and user
account recertification for the Loan Accounting
System and the LAN/WAN. However, we continued to
identify opportunities for SBA to improve its internal
controls. The control deficiencies that continue to exist
are in the following areas: security access controls,
software program changes, and end-user computing.
This year, we also noted weaknesses in port security
and the monitoring of system audit logs.
Therefore, in fiscal year 2009, the presentation of the
issue was modified to reflect current year operations,
and we continue to report a significant deficiency in
internal controls as it relates to IT systems and their
impact on the consolidated financial statements. See
Exhibit I for additional information.
III-1
Agency Financial Report FY 2009
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F I N A N C I A L R E P O RT I N G
CFO Response to Draft Audit Report on FY 2009 Financial Statements
Agency Financial Report FY 2009
49
FIN AN C IAL RE PORTI N G
Agency Financial Report FY 2009
50
F I N A N C I A L R E 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
the accountability and stewardship for the public resources entrusted to the SBA. Preparation of these
statements is also an important part of SBA’s financial management goal of providing accurate and reli-
able 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 statements are, in addition to other
financial reports, used to monitor and control budgetary resources. The SBA prepares these financial
statements from its books and records in accordance with the accounting principles generally accepted in
the United States for federal entities and the formats prescribed by the Office of Management and Budget.
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 com-
ponents 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 Budgetary 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 included offsetting receipts in this
statement for the purpose of reconciling outlay information presented to the Budget of the United
States Government.
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.
Agency Financial Report FY 2009
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FIN AN C IAL RE PORTI N G
U. S. Small Business Administration
Consolidated Balance Sheet
as of September 30, 2009 and 2008
(Dollars in Thousands)
2009 2008
ASSETS
Intragovernmental Assets
Fund Balance with Treasury (Note 2) $ 3,469,465 $ 3,880,755
Total Intragovernmental Assets 3,469,465 3,880,755
Assets - Public and Other
Cash (Note 3) 2,662 3,972
Accounts Receivable, Net (Note 5) 16,081 34,528
Credit Program Receivables and Related Foreclosed Property, Net (Note 6) 9,128,496 8,522,941
General Property and Equipment, Net (Note 7) 8,535 4,417
Advances 1,220 1,602
Total Assets - Public and Other 9,156,994 8,567,460
Total Assets $ 12,626,459 $ 12,448,215
LIABILITIES
Intragovernmental Liabilities
Interest Payable $ 2,143 $ 3,430
Debt (Note 9) 10,878,283 9,473,227
Net Assets of Liquidating Funds Due to Treasury (Note 10) 78,584 104,789
Downward Reestimate Payable to Treasury (Note 1, Note 13) 64,875 466,887
Other (Note 8, Note 11) 16,062 19,554
Total Intragovernmental Liabilities 11,039,947 10,067,887
Other Liabilities - Public
Accounts Payable (Note 1) 129,807 69,184
Accrued Grant Liability (Note 1) 59,000 60,000
Liability for Loan Guaranties (Note 6) 3,994,636 1,825,551
Federal Employee Compensation Act Actuarial Liability (Note 1, Note 8) 29,640 27,061
Surety Bond Guarantee Program Future Claims (Note 8) 20,817 24,764
Other (Note 8, Note 11) 41,212 39,638
Total Other Liabilities - Public 4,275,112 2,046,198
Total Liabilities 15,315,059 12,114,085
NET POSITION
Unexpended Appropriations (Note 1) 1,983,504 1,696,866
Cumulative Results of Operations (Note 1) (4,672,104) (1,362,736)
Total Net Position (2,688,600) 334,130
Total Liabilities and Net Position $ 12,626,459 $ 12,448,215
The accompanying notes are an integral part of these statements.
Agency Financial Report FY 2009
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F I N A N C I A L R E P O RT I N G
U. S. Small Business Administration
Consolidated Statement of Net Cost
For the years ended September 30, 2009 and 2008
(Dollars in Thousands)
2009 2008
Strategic Goal 1:
Expand America’s Ownership Society, Particularly in Underserved Markets
Gross Cost $ 5,409,931 $ 995,731
Less: Earned Revenue 166,343 149,322
Net Cost of Strategic Goal 1 5,243,588 846,409
Strategic Goal 2:
Provide Timely Financial Assistance to Homeowners, Renters,
Nonprofit Organizations and Businesses Affected by Disaster
Gross Cost 1,081,232 1,053,030
Less: Earned Revenue 405,904 468,168
Net Cost of Strategic Goal 2 675,328 584,862
Strategic Goal 3:
Improve Economic Environment for Small Business
Gross Cost 14,506 14,114
Net Cost of Strategic Goal 3 14,506 14,114
Cost Not Assigned to Strategic Goals
Gross Cost 62,294 119,931
Net Cost Not Assigned to Strategic Goals 62,294 119,931
Net Cost of Operations $ 5,995,716 $ 1,565,316
Note 12, Note 14
The accompanying notes are an integral part of these statements.
Agency Financial Report FY 2009
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FIN AN C IAL RE PORTI N G
U. S. Small Business Administration
Consolidated Statement of Changes in Net Position
For the years ended September 30, 2009 and 2008
(Dollars in Thousands)
2009 2008
Beginning Cumulative Results of Operations $ (1,362,736) $ (571,343)
Budgetary Financing Sources
Appropriations Used 2,748,961 1,317,809
Donations of Cash and Cash Equivalents 25 –
Other Financing Sources
Imputed Financing from Costs Absorbed by Others 25,549 24,014
Other - Current Year Liquidating Equity Activity (863) (4,502)
Other - Non-entity Activity (87,324) (563,398)
Total Financing Sources 2,686,348 773,923
Less: Net Cost of Operations 5,995,716 1,565,316
Ending Cumulative Results of Operations $ (4,672,104) $ (1,362,736)
Beginning Unexpended Appropriations $ 1,696,866 $ 974,211
Budgetary Financing Sources
Appropriations Received 3,050,068 2,060,201
Appropriations Transferred In 2,953 –
Adjustment - Cancelled Authority (11,777) (8,446)
Other Adjustments (5,645) (11,291)
Appropriations Used (2,748,961) (1,317,809)
Total Budgetary Financing Sources 286,638 722,655
Ending Unexpended Appropriations $ 1,983,504 $ 1,696,866
Ending Net Position $ (2,688,600) $ 334,130
The accompanying notes are an integral part of these statements.
Agency Financial Report FY 2009
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F I N A N C I A L R E P O RT I N G
U. S. Small Business Administration
Combined Statement of Budgetary Resources
For the years ended September 30, 2009 and 2008
(Dollars in Thousands)
September 30, 2009
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance
Brought Forward October 1 $ 1,429,754 $ 1,547,065 $ 2,976,819
Recoveries of Prior Year Obligations 64,639 220,652 285,291
Budget Authority
Appropriations Received 3,050,068 – 3,050,068
Borrowing Authority – 3,455,566 3,455,566
Spending Authority from Offsetting Collections
Earned 429,412 4,042,183 4,471,595
Change in Unfilled Customer Orders 32,755 157,011 189,766
Total Budget Authority 3,512,235 7,654,760 11,166,995
Nonexpenditure Transfers, Net
Budget Authority 2,953 – 2,953
Permanently Not Available (49,302) (2,045,701) (2,095,003)
Total Budgetary Resources $ 4,960,279 $ 7,376,776 $ 12,337,055
STATUS OF BUDGETARY RESOURCES
Obligations Incurred, Net
Direct $ 2,602,745 $ 6,181,465 $ 8,784,210
Reimbursable 850,922 – 850,922
Total Obligations Incurred, Net 3,453,667 6,181,465 9,635,132
Unobligated Balances, Available 537,389 889,666 1,427,055
Unobligated Balances, Not Available 969,223 305,645 1,274,868
Total Status of Budgetary Resources $ 4,960,279 $ 7,376,776 $ 12,337,055
CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward, Net October 1
Unpaid Obligations Brought Forward $ 421,630 $ 561,165 $ 982,795
Uncollected Customer Payments from Federal Sources Brought Forward – (78,863) (78,863)
Total Obligated Balance Brought Forward, Net 421,630 482,302 903,932
Obligations Incurred 3,453,667 6,181,465 9,635,132
Gross Outlays (3,197,180) (6,132,044) (9,329,224)
Recoveries of Prior Year Unpaid Obligations (64,639) (220,652) (285,291)
Change in Uncollected Customer Payments from Federal Sources – (157,011) (157,011)
Obligated Balance, Net, End of Period
Unpaid Obligations 613,478 389,934 1,003,412
Uncollected Customer Payments from Federal Sources – (235,874) (235,874)
Total Obligated Balance, Net, End of Period $ 613,478 $ 154,060 $ 767,538
Net Outlays
Gross Outlays $ 3,197,180 $ 6,132,044 $ 9,329,224
Offsetting Collections (462,167) (4,042,183) (4,504,350)
Net Outlays Before Offsetting Receipts 2,735,013 2,089,861 4,824,874
Offsetting Receipts (59) (489,336) (489,395)
Net Outlays $ 2,734,954 $ 1,600,525 $ 4,335,479
Note 15
The accompanying notes are an integral part of these statements.
Agency Financial Report FY 2009
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FIN AN C IAL RE PORTI N G
U. S. Small Business Administration
Combined Statement of Budgetary Resources
For the years ended September 30, 2009 and 2008
(Dollars in Thousands)
September 30, 2008
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance
Brought Forward October 1 $ 622,764 $ 4,678,380 $ 5,301,144
Recoveries of Prior Year Obligations 101,875 476,638 578,513
Budget Authority
Appropriations Received 2,060,201 – 2,060,201
Borrowing Authority – 1,346,805 1,346,805
Spending Authority from Offsetting Collections
Earned 399,344 3,558,120 3,957,464
Change in Unfilled Customer Orders (103,640) (98,469) (202,109)
Total Budget Authority 2,355,905 4,806,456 7,162,361
Nonexpenditure Transfers, Net
Budget Authority – – –
Permanently Not Available (62,668) (3,869,296) (3,931,964)
Total Budgetary Resources $ 3,017,876 $ 6,092,178 $ 9,110,054
STATUS OF BUDGETARY RESOURCES
Obligations Incurred, Net
Direct $ 973,991 $ 4,545,113 $ 5,519,104
Reimbursable 614,131 – 614,131
Total Obligations Incurred, Net 1,588,122 4,545,113 6,133,235
Unobligated Balances, Available 210,390 1,152,426 1,362,816
Unobligated Balances, Not Available 1,219,364 394,639 1,614,003
Total Status of Budgetary Resources $ 3,017,876 $ 6,092,178 $ 9,110,054
CHANGE IN OBLIGATED BALANCES
Obligated Balance Brought Forward, Net October 1
Unpaid Obligations Brought Forward $ 501,180 $ 1,090,147 $ 1,591,327
Uncollected Customer Payments from Federal Sources Brought Forward – (177,332) (177,332)
Total Obligated Balance Brought Forward, Net 501,180 912,815 1,413,995
Obligations Incurred 1,588,122 4,545,113 6,133,235
Gross Outlays (1,565,797) (4,597,457) (6,163,254)
Recoveries of Prior Year Unpaid Obligations (101,875) (476,638) (578,513)
Change in Uncollected Customer Payments from Federal Sources – 98,469 98,469
Obligated Balance, Net, End of Period
Unpaid Obligations 421,630 561,165 982,795
Uncollected Customer Payments from Federal Sources – (78,863) (78,863)
Total Obligated Balance, Net, End of Period $ 421,630 $ 482,302 $ 903,932
Net Outlays
Gross Outlays $ 1,565,797 $ 4,597,457 $ 6,163,254
Offsetting Collections (295,703) (3,558,120) (3,853,823)
Net Outlays Before Offsetting Receipts 1,270,094 1,039,337 2,309,431
Offsetting Receipts (240) (742,338) (742,578)
Net Outlays $ 1,269,854 $ 296,999 $ 1,566,853
Note 15
The accompanying notes are an integral part of these statements.
Agency Financial Report FY 2009
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F I N A N C I A L R E P O RT I N G
Note 1. Significant Accounting Policies
(Dollars in Thousands, except as noted)
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 aiding, counseling, assist-
ing and protecting the interests of small businesses and to help businesses and families recover from
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 reporting 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 ac-
cepted accounting principles in the United States of America and the formats prescribed by the Office of
Management and Budget. The statements are in addition to other financial reports used to monitor and
control budgetary resources. 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 in-
curred, without regard to receipt or payment of cash. Budgetary accounting recognizes the legal obliga-
tion or restriction of funds in advance of the proprietary accruals and facilitates compliance with legal
constraints and controls over the use of federal funds.
Beginning in FY 2009, fiduciary activities are required by SFFAS 31 to be disclosed in the notes to the
financial statements. Fiduciary assets are not assets of the SBA and are not recognized on the Balance
Sheet. SBA’s fiduciary activities include the Master Reserve Fund and Master Reserve Account. See
Note 4 for disclosure of the SBA’s fiduciary activities.
Use of Estimates
SBA’s management makes assumptions and estimates to prepare the financial statements based upon the
facts that exist when the statements are prepared. Actual results may differ from those estimates and the
differences may be significant. The most significant differences between actual results and SBA’s esti-
mates may occur in the valuation of credit program receivables and liabilities for loan guaranties under
the Federal Credit Reform Act of 1990 guidelines. The SBA recognizes the sensitivity of credit reform
modeling to slight changes in some model assumptions and uses continual review of model factors,
statistical modeling and annual reestimates to reflect the most accurate cost of the credit programs to the
U. S. government.
Agency Financial Report FY 2009
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FIN AN C IAL RE PORTI N G
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 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 pro-
grams. The non-subsidized portion of each loan disbursement, financed initially under permanent in-
definite authority to borrow funds from the Treasury, is repaid from collections of loan fees, repayments
and default recoveries. The Congress limits the dollar amount of obligations that can be made for direct
loans and loan guaranties in its annual appropriation bill.
A permanent indefinite authority is available to fund any reestimated increase of subsidy costs that oc-
curs 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 the Treasury borrowings and the collection of loan fees, repayments, default recover-
ies and disbursement of loans.
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 lender banks for the bank 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 subjected to this treatment.
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 resolu-
tion of these proceedings, actions, suits and claims will not materially affect the financial position or re-
sults of SBA’s operations. The likelihood of loss to the SBA ranges from remote to a reasonably possible
amount of $1.2 million, and the likelihood of loss on one action has not been determined where the loss
amount could exceed $1.2 million. These activities will be monitored and recognized if a loss becomes
probable.
Cumulative Results of Operations
Cumulative Results of Operations, presented on the Balance Sheet and on the Statement of Changes in
Net Position, is the accumulated difference between expenditures and financing sources since the incep-
tion of the Agency. Unfunded expenses do not yet have a financing source and thus increase the
Agency Financial Report FY 2009
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F I N A N C I A L R E P O RT I N G
loss the SBA reports as Cumulative Results of Operations. The largest category of unfunded expenses at
the SBA is year-end reestimates which are funded in the following year. The majority of the Cumulative
Results of Operations reported results from these unfunded reestimates.
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.
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 Benefit and
the Federal Employees Group Life Insurance Programs. The SBA matches a portion of the employee
contributions to each program. 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 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 is funded through Agency contribu-
tions, 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 the imputed
Agency Financial Report FY 2009
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FIN AN C IAL RE PORTI N G
costs as current operating expense in the Statement of Net Cost and as a part of net cost funded by an
imputed financing source included in determining SBA’s net position.
Federal Employees Compensation Act
The Federal Employees Compensation Act provides income and medical cost protection to covered fed-
eral civilian employees injured on the job and to beneficiaries of employees whose deaths are attributable to
job-related injury 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 his-
torical 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 liabili-
ties and finance loan program costs. SBA’s cash receipts are deposited to accounts at the Treasury. SBA’s
fund balances with the Treasury are available to make expenditures to liquidate allowable obligations,
except for 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 and other accounts. Fund balances at
the Treasury include expired year amounts, which are unavailable for obligation, as well as amounts cur-
rently available for new obligations.
(Dollars in Thousands)
AS OF September 30, 2009 2008
Appropriated Funds $ 2,052,859 $ 1,781,718
Financing Funds 1,349,371 2,029,367
Liquidating Funds 17,527 38,394
Revolving Fund 49,415 30,994
Trust Fund 289 278
Total Entity Fund Balance with Treasury 3,469,461 3,880,751
Non-entity Fund Balance 4 4
Total Fund Balance with Treasury $ $3,469,465 $ $3,880,755
Status of Fund Balance with Treasury
Unobligated Balance Available $ $1,427,055 $ $1,362,816
Unobligated Balance Unavailable 1,274,868 1,614,003
Obligated Balance Not Yet Disbursed 767,538 903,932
Non Budgetary 4 4
Total Fund Balance with Treasury $ $3,469,465 $ $3,880,755
Agency Financial Report FY 2009
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Unobligated balances become available when apportioned by the OMB for obligation in the current fis-
cal 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 reflect-
ed on the Statement of Budgetary Resources.
Note 3. Cash
The SBA field offices deposit collections from borrowers in Treasury General Accounts at financial insti-
tutions for credit to SBA’s account at the Treasury. 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 total $2.6 million and $ 3.9 million at September 30, 2009 and 2008.
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 government must uphold. Fiduciary cash and other assets are not assets of the govern-
ment, and are not recognized on SBA’s proprietary statements, but they are required to be disclosed
in the notes to SBA’s financial statements. Fiduciary balances may be on deposit with the Treasury or
commercial banks. Beginning in FY 2009, federal agencies are required to comply with SFFAS 31
(Accounting for Fiduciary Activities) and the note disclosure guidance in OMB Circular A-136, Note
40.
The SFFAS 31 requires schedules disclosing the status of fiduciary net assets and activity for the
reporting period. The SBA has disclosed these schedules for the Master Reserve Fund in prior years’
reporting (in advance of the SFFAS 31 requirement) and is adding the Master Reserve Account
information in FY 2009 in compliance with the new standard. In accordance with federal guidelines the
SBA has not restated FY 2008 fiduciary activities.
SBA’s fiduciary activities include the Master Reserve Fund and Master Reserve Account both admin-
istered by SBA’s fiscal agent, Colson Inc. The MRF and MRA are maintained in commercial bank
accounts (not the Treasury). The balances in the MRF and MRA are invested according to the 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
the SBA’s guaranty of timely payment, as well as a default guaranty, to 7(a) secondary market investors.
The program encompassed $14.7 billion and $14.9 billion of outstanding trust certificate principal at
September 30, 2009 and 2008.
The MRA facilitates the operation of the 504 development company secondary market program. The
MRA was authorized by Section 505 of the Small Business Investment Act of 1958 as a vehicle to re-
ceive, temporarily hold and distribute 504 program cash flows. The MRA receives monthly payments
Agency Financial Report FY 2009
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FIN AN C IAL RE PORTI N G
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 pay-
ment, as well as a default guaranty, to 504 secondary market investors. The program encompassed $23.0
billion and $21.8 billion of debentures outstanding at September 30, 2009 and 2008.
The composition of the MRF and MRA and a reconciliation of the changes in the assets are included in
the following table:
(Dollars in Thousands)
FIduciary Assets
As of September 30, 2009 2008
Short Term Securities
Money Market Funds $ 27,473 $ 9,300
Treasury Bills 47,979 193,354
Repurchase Agreements 667,766 222,078
Total Short Term Securities 743,218 424,732
Long Term Securities
Treasury Notes Including Interest 1,643,277 1,467,158
Total Long Term Securities 1,643,277 1,467,158
Net Assets $ 2,386,495 $ 1,891,890
Reconciliation of Fiduciary Assets
For the Years Ending September 30, 2009 2008
Beginning Net Assets $ 2,370,628 $ 1,881,933
Receipts
Earned Income 65,219 72,757
Contributions 7,250,815 4,396,830
Net Realized Gain (Loss) (109) 4,204
Total Receipts 7,315,925 4,473,791
Less Disbursements
Payments to Investors 7,298,452 4,461,084
Expenses 1,606 2,750
Total Disbursements 7,300,058 4,463,834
Ending Net Assets $ 2,386,495 $ 1,891,890
Agency Financial Report FY 2009
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F I N A N C I A L R E P O RT I N G
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 analysis of delinquent balance aging. The uncollectible or unrecoverable amounts for
Guaranty Fees Receivable, Refunds and Other accounts receivable are not significant and no allowance
is provided.
The American Recovery and Reinvestment Act of 2009 temporarily eliminated certain loan guaranty
fees after February 17, 2009, which substantially reduced the outstanding Guaranty Fees Receivable at
year end. Also, the Allowance for Loss decreased in FY 2009 as uncollectible surety bond guaranty fees
were written off.
(Dollars in Thousands)
As of September 30, 2009 2008
Public
Guaranty Fees Receivable $ 1,474 $ 21,620
Refunds 229 4,486
Other 14,461 11,284
Total Public 16,164 37,390
Allowance For Loss (83) (2,862)
Net Public $ 16,081 $ 34,528
Note 6. Credit Program Receivables and
Liability for Loan Guaranties
A. Loan Program Descriptions and Cost Determinations
Loan Program Descriptions
The SBA administers guarantied and direct loan programs that help small businesses obtain financing,
and 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 America’s Recovery Capital Loan
Business Direct 7(m) Microloan
Business Guarantied 504 Certified Development Company
Business Guarantied Small Business Investment Company Debenture
Business Guarantied Small Business Investment Company Participating Securities
Business Guarantied Secondary Market Guaranty
Agency Financial Report FY 2009
63
FIN AN C IAL RE PORTI N G
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 four percent for home loan applicants without credit available elsewhere and
eight percent for applicants with credit available elsewhere.
SBA’s business loan programs include its flagship 7(a) Loan Guaranty Program in which the SBA guar-
antees 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 payments on debentures issued by devel-
opment companies that make small business loans secured primarily by real estate. The Small Business
Investment Company Debentures and Participating Securities programs guarantee principal and interest
payments on securities issued by investment capital firms, which in turn make investments in small busi-
ness. The 7(m) Microloan program provides direct loans to nonprofit intermediaries, which use these
funds to make loans up to $35,000 to eligible small businesses. See Note 4 for further discussion of the
secondary market guaranty. American’s Recovery Capital Loan program is a new temporary guarantied
loan program authorized by the American Recovery and Reinvestment Act of 2009 (ARRA or Recovery
Act). ARC Loans are deferred payment loans of up to $35,000 available through SBA’s 7(a) participat-
ing lenders. ARC Loans are interest free to the borrower, 100 percent guaranteed by the SBA to the
lender, and have no fees associated with them.
Credit Program Receivables and Liabilities 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 allowance account represents the difference between the outstanding
loans receivables 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 loan receivables 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 loan receivables and are valued in a similar manner as
direct loans under FCRA.
Direct loans made prior to FCRA are recorded at cost with an allowance for uncollectible amounts cal-
culated 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 established as loan receivables with an allowance for losses based
on historical loss experience.
The SBA advances payments semiannually to the Federal Financing Bank for loans guarantied under
Section 503 of the Small Business Act. The advances are liquidated by receipt of the installment pay-
ments on loans made by state and local development companies. To the extent that those installments
may not repay advances, balances from development companies that remain collectible are reported as
credit program receivables.
Agency Financial Report FY 2009
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F I N A N C I A L R E P O RT I N G
Advances are similarly made to honor SBA’s timely payment requirement of principal and interest due
for debentures in SBA’s Section 504 Certified Development Company and Small Business Investment
Company programs. These advances are also 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 disbursed. 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 approved 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. Then, when loans are disbursed, the
SBA records subsidy expense. In accordance with FCRA, subsidy costs are reestimated annually.
FCRA also requires that changes made to Agency loan programs that affect the costs of outstanding
loans or guaranties be treated as a “modification” under credit reform guidelines. A modification is a
government action that differs from actions assumed in the baseline estimate of cash flows in the budget,
and changes the estimated cost of an outstanding direct loan or an outstanding loan guaranty. A modifi-
cation requires a government action (either new legislation or administrative action). The SBA recorded
cost modification of $13.2 million in the 7(a) and 504 programs reflecting fees paid between February
17th and March 15th that were refunded back to the borrowers in accordance with the passage of the
American Recovery and Reinvestment Act legislation.
Interest Receivable
Interest receivable is comprised of accrued interest on loans receivable and purchased interest related to
defaulted guarantied loans. Interest income is accrued at the contractual rate on the outstanding princi-
pal 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 made prior to FY 1992.
Foreclosed Property
Foreclosed property is comprised of real and business-related property acquired through foreclosure on
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. SBA’s foreclosed property inventory increased during FY 2009 due to
the economic conditions. At September 30, 2009 SBA’s foreclosed property was $41.7 million related
to 80 loans. The properties had been held for an average of 1,266 days. At September 30, 2008 fore-
closed property was $24.3 million related to 71 loans. The properties had been held for an average of
1,076 days.
Valuation Methodology for Post-1991 Direct Loans and Loan Guaranties
Direct and guarantied loans committed after FY 1991 are based on the net present value of their expect-
ed future cash flow. 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.
Agency Financial Report FY 2009
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