SBA Agency Financial Report, Fiscal Year 2011

Summary

This is the U.S. Small Business Administration's Agency Financial Report for FY 2011. The message from the Administrator, dated November 15, 2011, says the SBA increased overall lending supported from $22.4 billion in FY 2010 to $30.5 billion in FY 2011, the highest ever SBA lending year in the 60-year history of the Agency. It also says the SBA responded to over 300 disasters, a record number. A highlights table (dollars in thousands) lists a loan portfolio of $99,203,933 and total assets of $16,882,801 for FY 2011. The report says the FY 2011 Annual Performance Report will be issued February 6, 2012, and the Summary of Performance and Financial Information released February 15, 2012.

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

Cite this document

“SBA Agency Financial Report, Fiscal Year 2011.” Original at legacy.sba.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/sba-agency-financial-report-fy-2011-agency-financial-report-fy-2011-0-f5502bcf3e/, SHA-256 9dd4828b5a287df99ed3a22e0f618e41f65614759b8e6348ee4705778a4dc47f.

Full text

ABOUT THIS FY 2011 HIGHLIGHTS
REPORT

The U.S. Small Business (Dollars in Thousands) FY 2008 FY 2009 FY 2010 FY 2011

Administration’s (SBA) Agency
Financial Report (AFR) for FY Loan Portfolio(1) $ 88,095,765 $ 90,451,263 $ 93,339,844 $ 99,203,933
2011 provides an overview
of the Agency’s financial and Regular FTE Employees 2,094 2,098 2,135 2,175
performance data to help
Disaster Employees 1,436 1,743 1,120 1,141
Congress, the President, and the
public assess SBA’s stewardship Total Employees 3,530 3,841 3,255 3,316
over the resources entrusted
to it. The AFR is the first in a Total Assets $ 12,448,215 $ 12,626,459 $ 15,230,476 $ 16,882,801
series of three annual financial Total Liabilities $ 12,114,085 $ 15,315,059 $ 16,765,021 $ 17,191,824
and performance reports for Total Net Position $ 344,130 $ (2,688,600) $ (1,534,545) $ (309,023)
federal agencies choosing to Total Net Cost of Operations $ 1,565,316 $ 5,995,716 $ 5,277,197 $ 3,460,562
produce a separate AFR. An Total Budgetary Resources $ 9,110,054 $ 12,337,055 $ 18,340,769 $ 19,277,292
Annual Performance Report
(APR), and a Summary of (1)
The total portfolio consists of guarantied loans outstanding, defaulted guarantied business loans receivable, direct disaster loans,
Performance and Financial and direct business loans receivable.
Information (SPFI) make up the
other two reports. The FY 2011
APR, included as part of the
FY 2013 Congressional Budget
Justification (CBJ), which is
the Agency’s budget request FOR MORE
to Congress, will be issued
February 6, 2012; and the FY InFORMATIOn
2011 SPFI, which brings together
in summary fashion the financial,
Information about SBA’s programs is available at: www.sba.gov
performance and budgetary
information presented in the SBA’s plans and reports are available at: www.sba.gov/performance
AFR and the CBJ/APR, is to be
Para información acerca de los programas de la SBA: www.sba.gov “Translate” “Select Language”
released February 15, 2012.
Requests for printed copies, or questions and comments regarding the content, presentation and
usefulness of this report are welcome and may be addressed to: performancereports@SBA.gov

Or, you may write to: Or, you may call:
U.S. Small Business Administration Timothy Gribben
Office of Performance Management Director, Office of Performance Management
and Chief Financial Officer (202) 205-6449
409 Third Street, S.W.
Washington, DC 20416

Message from the Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Management’s Discussion and Analysis
Primer of SBA’s Principal Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SBA by the Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SBA’s History and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Summary Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Analysis and Highlights of Financial Statements and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Highlights of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Analysis of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Operational Portfolio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Analysis of SBA’s Systems, Controls and Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Financial Management Systems Strategy 27
Internal Control Environment 27
Summary of Financial Statement Audit and Management Assurances 31
FMFIA and FFMIA Assurance Statement for FY 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Improper Payments Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Financial Reporting
Message from the Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Audit and Financial Management Advisory Committee’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Inspector General’s Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Independent Auditors’ Report on FY 2011 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
CFO Response to Draft Audit Report on FY 2011 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Other Accompanying Information
OIG Report on the Most Serious Management and Performance Challenges . . . . . . . . . . . . . . . . . . . 91
SBA Response to the OIG Report on Management and Performance Challenges . . . . . . . . . . . . . . . 109
Summary of OIG Audit Follow-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Appendices
Appendix 1 – Contact SBA: Useful Sites and Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Appendix 2 – Glossary of Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Attached cD – Supplementary Information
SI 1 – SBA Programs and Offices
SI 2 – Strategic Plan FY 2011-2016
SI 3 – Detail of OIG Audit Follow-up Activity

AGEncY FInAncIAL REPORT FY 2011
SBA’s Mission
The mission of the U.S. Small Business Administration 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.

Success Story Bringing Advanced Medical Care to Underserved Communities
Mobile Medical International Corporation, St. Johnsbury, Vermont

Rick Cochran had a dream – to bring advanced medical care to underserved
areas in the U.S. and around the globe. Bolstered by his dream, in the early
1980s he combined his experience working at an advanced medical equipment
provider with unshakable determination and founded Outpatient Services of
America, Inc., a consulting firm specializing in planning and developing ambu-
latory surgery centers. Recently, the Vermont manufacturer was named 2011
National Small Business Person of the Year by SBA Administrator Karen Mills.

By 1994, OSA had evolved into Mobile Medical International Corporation, manufacturing state-of-the-art
mobile healthcare units and military shelter systems for commercial, military, and emergency response appli-
cations worldwide. To date, MMIC has 22 mobile healthcare units in its commercial product line, as well as
Mobile Breast Care Centers, Mobile Intensive Care, Mobile Laboratory/Pharmacy, Mobile CT Scan/Dental/
Ophthalmology, Mobile Ophthalmology and Mobile Endoscopy Units.

Rick started MMIC with five employees working in the basement of his home in Walden, Vermont. Today,
with financing support from several SBA-guarantied loans, MMIC has a staff of 54. Gross revenues for 2010
amounted to $14 million, and net profits rose from $9,835 in 2008 to $1.68 million in 2010. Rick encourages
MMIC employees to participate in community events and frequently lends a hand either personally or through
a donation to ensure the success of worthy local charitable causes.

A GEncY
gency Fin
FInA nciI AL
Al Repo
REPORTt • FY
y 2011
MESSAGE FROM THE ADMINISTRATOR

Message from the Administrator
November 15, 2011

I am pleased to present the U.S. Small Business Administration’s (SBA) FY 2011 Agency
Financial Report. The SBA has chosen to produce the Agency Financial Report as an alter-
native to the consolidated Performance and Accountability Report (PAR).

The SBA is committed to helping America’s entrepreneurs and small business owners as
they build their businesses and create jobs. This report details SBA’s efforts in its mission
to 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
Agency continues to move forward with goals in areas such as access to capital, opportuni-
ties in government contracting, entrepreneurial development, and disaster assistance.

Key SBA accomplishments in FY 2011 include:

Record in SBA lending: The SBA increased overall lending supported from $22.4 billion in FY 2010 to $30.5 bil-
lion in FY 2011. This reflected the highest ever SBA lending year in the 60-year history of the Agency.

Record in growth capital program: Due to a reduction in licensing times and attraction of new funds in the Small
Business Investment Company program, the SBA supported nearly $2.6 billion in overall financings to “high-
growth” small businesses that drive net new job creation, a 63-percent increase from FY 2010.

Increase in small business contracting in the federal government: Through stronger efforts to coordinate and reach
out to other federal agencies, the SBA worked with government agencies to increase the percentage of contracts going
to small business from 21.9 percent (FY 2009) to 22.7 percent (FY 2010), just shy of the goal of 23 percent. (FY
2011 numbers are still coming in.)

Increase in entrepreneurial education resources: SBA’s grant-funded resource partners continued to experience high
demand for counseling and mentoring from entrepreneurs and small business owners, with over 1 million clients
served in FY 2011.

Optimized disaster assistance in record year: The SBA quickly responded to over 300 disasters, a record number of
SBA-declared disasters that included devastating tornadoes (Alabama and Missouri), floods (North Dakota), and hur-
ricanes (Irene). The SBA approved over $700 million in loans to businesses and homeowners. Turnaround time on
SBA disaster loan applications averaged less than 10 days.

I am pleased to provide an assurance that SBA’s financial and performance data in this report are reliable and
complete. SBA’s auditor issued an unqualified opinion on our FY 2011 financial statements. The auditor did
not note any material internal control weaknesses.

Sincerely,

Karen G. Mills
Administrator

Agency FinAnciAl RepoRt • Fy 2011
1
The Association of Government Accountants has awarded the U.S. SMALL BUSINESS ADMINISTRATION

The Certificate of Excellence
in Accountability Reporting

In recognition of SBA’s outstanding efforts in preparing its

Performance and Accountability Report
or
Agency Financial Report
for the fiscal years ended September 30, 2006, 2007, 2008, 2009, and 2010

Agency
Financ
Fiscal ial Re
Year 20 port
08

Helping
Small Bus
iness Sta
rt, Grow
and Suc
ceed

2006 2007 2008

2009 2010

AGEncY FInAncIAL REPORT FY 2011
2
Management’s
Discussion &
Analysis
ManageMent’s Discussion & analysis

Primer of SBA’s Principal Programs
Access to capital (www.sba.gov/financialassistance)

The SBA has a portfolio of $83.6 billion in the following programs:

7(a) Loan Guaranties — The SBA offers government guaranties on loans (up to $5 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 com-
mercial lending institutions. Loans can be guaranteed for a variety of general business purposes.

504 CDC Loan Guaranties — These are long-term, fixed-rate loans (up to $5.5 million) for major
assets such as real estate and heavy equipment. Loans are delivered by certified development compa-
nies (CDC) which are private, non-profit corporations. CDCs work with the SBA and private lenders
to provide the financing. The SBA guarantees a portion of these loans.

Microloans — These loans (up to $50,000) are designed for small businesses needing small scale
financing and technical assistance for start-up or expansion. They are delivered through intermediary
lenders, which are nonprofit community-based organizations with experience in lending and technical
assistance.

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.

Opportunities in contracting (www.sba.gov/contracting)

The SBA leads federal efforts to deliver 23 percent of contracts to small business through the following
programs:

Procurement Assistance to Small Businesses — Small business contracts represent the largest form
of direct monetary support for small business in the federal government. Within this goal are four
sub-goals:

8(a) Business Development — This program provides assistance to 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 — 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 competition only among small businesses owned and controlled by women.

Agency FinAnciAl RepoRt • Fy 2011
4
ManageMent’s Discussion & analysis

Access to counseling and Training (www.sba.gov/training)

The SBA and its 14,000 partners serve over 1 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. SBDCs deliver professional
counseling and training in key management areas to more than 600,000 clients annually.
Women’s Business Centers — WBCs provide counseling and training through 110 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.

SCORE — SCORE is a non-profit association comprised of over 12,000 volunteer business counsel-
ors that serve entrepreneurs with in-person mentoring and local training workshops. As the larg-
est volunteer business advisor network in the federal government, SCORE adapts its structure and
services to meet the needs of the small business.

Regional Innovation Clusters — SBA offices and resource partners help lead regional innovation and
jobs accelerator initiatives.

High-growth Small Businesses (www.sba.gov/inv and www.sba.gov/oit)

The SBA supports small businesses that drive net new job growth:

SBIR — The Small Business Innovation Research program is a highly competitive program that
stimulates high-tech innovation by reserving a specific percentage of federal R&D funds for small
business. SBIR protects the small business and enables it to compete on the same level as larger busi-
nesses. (www.sbir.gov)

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 invest-
ments in qualifying small businesses. (www.sba.gov/sbic)

Exporting — The SBA, through its staff, lending and resource partners, leads federal efforts to sup-
port small U.S. exporters through its international trade loans and counseling programs.
(www.sba.gov/exporting)

Disaster Assistance (www.sba.gov/disaster)

The SBA has a portfolio of $7.5 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 nonprofit organizations affected by disasters. It is the only form of SBA assistance not
limited to small businesses.

Agency FinAnciAl RepoRt • Fy 2011
5
Success Story Uniforms for the Troops!
Pentaq Manufacturing Corporation, Sabana Grande, Puerto Rico

Oscar Quiles cut his teeth in the military and occupational uniform manufactur-
ing business during almost a decade working for his family’s business, Caribbean
Needlepoint, Inc. In 2003, after gaining support from the Puerto Rico Industrial
Development Company, Quiles bought a company that was about to close, keeping all
50 employees on the payroll. In 2004, the company became Pentaq Manufacturing,
specializing in commercial military clothing, military uniforms and related products.
Today, the company has 160 employees and $3.2 million in revenues.

Pentaq is certified in the SBA’s 8(a) Business Development program and its clients
include the Department of Defense and the Coast Guard. The Department of
Defense awarded Pentaq a $3.2 million contract to manufacture uniforms and tents for U.S. troops, and the
company later produced universal uniforms that U.S. forces are now wearing in Afghanistan. The Coast Guard
and DoD recently awarded $17.7 million in contracts to Pentaq to manufacture coats, shirts, trousers, bed nets
and bags.

In October Oscar Quiles was named the National Minority Small Business Person of the Year by the SBA dur-
ing the 29th annual Minority Enterprise Development (MED) Week conference in Washington, D.C. “We are
honoring Oscar for his commitment to excellence in government contracting, for creating jobs and providing
work incentives for his employees, and for manufacturing uniforms and tents for our men and women in the
armed services, including the new universal uniforms our troops are now wearing in Afghanistan,” said SBA
Administrator Karen G. Mills. “Oscar’s story is a true testimony of all that small businesses do for our nation
and its economy.”

Did The answers you need start here. SBA Direct gives you information and
services based on your unique business needs. Find local resources,
you
explore your programs and services, and achieve your business goals.
know
For more information, go to www.sba.gov/sba-direct.
ManageMent’s Discussion & analysis

Executive Summary
The U.S. Small Business Administration’s (SBA) loans and loans to underserved communities,
efforts to assist entrepreneurs and small business through the introduction of key access-to-capital
owners are critical as the U.S. economy continues initiatives such as Community Advantage, a 7(a)
to recover and grow. Throughout America’s history, loan product, and others. Detailed analysis and
small businesses have played the leading role in job modeling played a key role in ensuring that such
creation. More than half of working Americans own efforts would help meet key policy goals while
or work for a small business and small businesses not adversely affecting financial performance.
are responsible for two out of every three net new Simultaneously, the SBA aggressively worked to
private sector jobs created over the past decade. streamline and simplify lending and other Agency
operations in order to improve financial perfor-
The SBA helps strengthen America’s economy by mance while better serving SBA’s partners and end
providing tools to help grow businesses and create customers, the most important of whom are entre-
jobs. These tools include access to capital; opportu- preneurs and small business owners.
nities in federal contracting; access to entrepreneur-
ial education and counseling; and disaster assistance
for business owners, homeowners, and renters. Financial Results
(in-depth analysis found in Analysis of Financial Results
FY 2011 was the first year of a five-year Strategic
section)
Plan focused on three overarching goals:
For FY 2011, SBA’s total budgetary resources, used
1. Growing businesses and creating jobs for staffing and operations and subsidy costs, were
2. Building an SBA that meets the needs of today’s $7.9 billion as well as nonbudgetary resources used
and tomorrow’s small businesses to purchase guarantied loans in default and to
3. Serving as the voice for small business make direct loans of $11.4 billion for loan financ-
ing. SBA’s guarantied portion of the outstanding
FY 2011 exhibited the highest ever SBA loan loan principal balance rose 8.7 percent in FY 2011
volume in the Agency’s history. The SBA exhaust- to $70 billion. The overall outstanding principal
ed virtually all of its loan authority in FY 2011 balance for loans made under SBA programs grew at
($24.5 billion in loans approved1 or $30.5 bil- 6.3 percent in FY 2011 to a new high of $99.2 bil-
lion in overall lending supported), attaining a 45 lion. Growth in SBA’s portion occurred primarily as
percent increase from FY 2010. Under the Small a result of the popularity of the Small Business Jobs
Business Jobs Act, over $10 billion was approved Act’s temporary higher guaranty limits (90 percent)
in the first quarter. Other drivers of lending vol- and fee reductions as well as its permanent provi-
ume included a larger number of new and return- sions for higher loan size limits. Purchase rates and
ing SBA lenders, higher loan limits of $5 million, amounts for guarantied loans dropped significantly
and increased size standards. in FY 2011, falling from $5 billion to $3.4 billion.
Notably, FY 2011 also reflected a record year for Small This encouraging trend is expected to continue in
Business Investment Companies, a zero subsidy guar- upcoming years as the country moves further into
anty debenture program targeted at high-growth firms. economic recovery. The credit program receivables
Nearly $2.6 billion in overall debenture financings were portion of the SBA portfolio declined from $9.1
supported, a 63 percent increase from FY 2010. billion to $8.4 billion in FY 2011. Direct disaster
loans accounted for $463 million of this decrease
In FY 2011, the Agency continued to identify and while an additional $256 million came from a net
fill critical gaps in the marketplace, such as smaller reduction from defaulted guarantied business loans.
There were not any major disbursements of new
1 “Loans approved” does not include the bank-approved portion (50%) of the 504 loans.
“Lending supported” does. direct disaster loans in FY 2011 resulting in the

Agency FinAnciAl RepoRt • Fy 2011
7
ManageMent’s Discussion & analysis

decrease in disaster loan receivables in FY 2011. Management Results
However, approvals of disaster loans increased to-
In addition, the SBA achieved significant successes
wards the end of FY 2011 due to the spring floods
across its four High Priority Performance Goals,
in North Dakota and the tornadoes in Alabama
which were effective for FY 2010 and FY 2011:
and Missouri which will impact the receivables for
FY 2012 when these loans are disbursed. 1. Increase number of active lenders 15 per-
cent above FY 2008 and FY 2009 average
to 3,000: The SBA exceeded this goal, draw-
Program Results ing 3,537 active bank, financial institution,
(in-depth analysis found in SBA’s Annual Performance and other approved lenders into its 7(a) loan
guaranty program.
Plan, to be released in February 2012)
2. Increase small business participation in
The SBA by the Numbers table (see following page)
federal government contracting to meet
reflects increases across nearly all Agency programs the statutory goal of 23 percent and reduce
in FY 2011. This includes: participation by ineligible firms: FY 2010
continued an upward trend to 22.7 percent.
y over 60,000 loans delivered to small businesses Final results for FY 2011 will not be available
through its top two programs – 7(a) and 504; until 3rd or 4th quarter FY 2012. However,
y increases across other capital access based on preliminary data, the SBA expects
to achieve its internal target for contracting,
programs, ranging from microloans that serve awarding 67.5 percent of all its contracts in FY
underserved businesses to small business 2011 to small businesses.
investment companies that target high-growth
3. Process 85 percent of home disaster loan
small businesses; applications within 14 days and 85 percent
y nearly $100 billion in federal contracts to small of business disaster loan applications within
businesses (projected); 18 days: SBA’s Office of Disaster Assistance
exceeded this goal with 98 percent for home
y service to over 1 million small businesses through and 99 percent for business applications within
SBA resource partners; and these processing windows.
y providing over $700 million in direct disaster 4. Improve the Small Business Innova-
loans to small businesses and homeowners. tion Research (SBIR) program: The SBA
consolidated SBIR opportunities across 11
federal agencies by launching an interactive
website for the program, www.SBIR.gov.
The SBA also established a performance
metric database for measures such as firm
commercialization rate.

What can SBA do for your small business? Meet the SBA 100. SBA 100
Did features one hundred businesses that have created at least 100 jobs
since receiving SBA assistance. The 100 companies are from across
you America and do business in a variety of industries, from manufacturing,
know to food and beverage, to shipping. Each business received SBA
support in the form of capital, counseling or investment before going
on to create at least 100 jobs. Please take a look and check out the
companies that together have created over 10,000 jobs since receiving
SBA assistance at www.sba.gov/sba-100.

Agency FinAnciAl RepoRt • Fy 2011
8
ManageMent’s Discussion & analysis

SBA By The numbers
(Dollars in Millions) FY 2008 FY 2009 FY 2010 FY 2011
Total Portfolio(1) Outstanding Principal Balance $ 88,096 $ 90,451 $ 93,340 $ 99,204
Capital (2)

7(a) Loans Dollars of Gross Loans Approved $ 12,671 $ 9,191 $ 12,407 $ 19,638
Numbers of Gross Loans Approved 69,434 41,289 47,000 53,706
504 Loans Dollars of Gross Loans Approved (3)
$ 5,290 $ 3,834 $ 4,433 $ 4,845
Number of Gross Loans Approved 8,883 6,608 7,833 7,983
Microloans Dollars of Gross Loans Approved for
$ 31 $ 35 $ 45 $ 47
Micro borrowers
Number of Gross Loans Approved for
2,682 2,727 3,795 3,991
Micro borrowers
Surety Bond Number of Bid and Final Bonds Guarantied 6,055 6,135 8,348 8,638

Contracting(4)
Prime Contracting Dollars of Annual Federal Contracts
$ 93,306 $ 96,834 $ 97,947 N/A
Awarded to Small Businesses
Prime Contracting (%)(5) Percentage of Federal Contracts
21.5% 21.9% 22.7% N/A
Awarded to Small Businesses
HUBZone Dollars of HUBZone Contracts $ 10,157 $ 12,413 $ 11,969 N/A
8(a) Program Dollars of 8(a) Contracts $ 16,173 $ 18,670 $ 18,466 N/A

Counseling and Training
SCORE Number of Small Businesses Assisted 360,559 380,357 407,240 356,837
SBDC Number of Small Businesses Assisted 558,487 583,770 589,352 557,698
WBC Number of Small Businesses Assisted 159,879 155,383 160,735 138,923

Disaster Assistance(1) (2)
Dollars of Gross Loans Approved $ 826 $ 1,130 $ 574 $ 739
Number of Gross Loans Approved 15,128 21,780 15,356 13,643

High-growth Small Businesses
SBIC Dollars of Gross Financings Invested
$ 2,427 $ 1,856 $ 2,047 $ 2,833
in Small Businesses(6)
Number of Small Businesses Financed 1,905 1,481 1,331 1,339

(1) The total portfolio consists of guarantied loans outstanding, defaulted guarantied business loans receivable, direct distaster loans, and direct business loans receivable.

(2) There are three basic ways to present loan data: 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 part of the chart because it is the only loan data that remains constant.
(3) Lending Supported for 504 loans includes the SBA share and third party loans that are made by commercial lenders as part of the funding package. In FY 2011 gross
approvals of $4.84 billion supported $10.9 billion in small business lending under the 504 Certified Development Company loan program.
(4) Federal agencies have not yet certified their FY 2011 data. The SBA expects to receive the FY 2011 certified data in the 3rd or 4th quarter of FY 2012.

(5) Currently, the federal goal is to give small businesses at least 23 percent of all government-wide contract dollars. The SBA negotiates the goals annually with each
federal agency on an individual basis.
(6) This reflects totals for alll SBICs, including those that are no longer approving new funds (i.e., participating securities and specialized SBICs) but that have funds still
actively investing.

Agency FinAnciAl RepoRt • Fy 2011
9
ManageMent’s Discussion & analysis

Management Information
The SBA plays a vital role in
SBA’s History and Organization enabling America’s entrepreneurs
and has stamped its mark on
In 1953, Congress created the U.S. Small Business
many small businesses that have
Administration to “aid, counsel, assist and protect, in-
grown to become household
sofar as is possible, the interests of small business con-
names and leaders in their fields.
cerns.” SBA’s headquarters is located in Washington,
These firms include Nike, Staples,
D.C. while its business products and services are
Apple, Federal Express, Hewlett
delivered with the help of field personnel and a vast
Packard, and a host of others.
network of private sector and nonprofit partners in
each U.S. state and territory. Major SBA offices fall
under one of three Agency-wide strategic goals, as
outlined in SBA’s long-term Strategic Plan: 2 port through the 8(a) program which complements
and builds upon the assistance provided by SBA
Strategic goal one — growing buSineSSeS resource partners.
and creating jobS
The Office of Capital Access assists small businesses in The Office of Disaster Assistance provides affordable,
obtaining capital via the 7(a), 504 and Microloan timely and accessible financial assistance to home-
programs through an extensive lending network. owners, renters and businesses following a disaster.
The Disaster loan program is the only form of SBA
The Office of Investments and Innovation assists assistance that is not limited to small businesses.
high-growth small businesses through the Small
Business Investment Company program, the The Office of International Trade enhances the ability
Small Business Innovation Research program, and of small businesses to export and compete in the
other tailored programs that drive innovation and global marketplace by facilitating access to capital,
competitiveness. providing technical assistance, ensuring the interests
of small business are considered and reflected in
The Office of Government Contracting and Business trade negotiations, and supporting and contributing
Development (GCBD) provides assistance to small to the U.S. government’s international commercial
businesses in competing for federal contracting op- and economic agenda.
portunities through the government-wide prime and
subcontracting programs. This includes HUBZone, Across all of these offices is a focus on reaching un-
8(a), women-owned and veteran-owned small busi- derserved communities, which is a particular focus
nesses. GCBD also sets size standards for small of the Office of Veterans Business Development, the
businesses which determine the size a business must Office of Native American Affairs, and the Center for
be to be considered a small business. Faith-Based and Neighborhood Partnerships.

The Office of Entrepreneurial Development provides Strategic goal two — building an Sba that
business counseling and training through its re- meetS the needS of today’S and tomorrow’S
source partner network composed of small business Small buSineSSeS
development centers, women’s business centers SBA’s management offices support Strategic Goal Two:
and SCORE, as well as through online training at
SBA’s website. In addition to coordinating con- The Office of Performance Management and the Chief
nections between SBA resource partners and local Financial Officer provides financial and performance
small business communities, SBA’s district offices data and information that is useful, relevant, timely
provide business development services and sup- and accurate and which assists the SBA and its
executive team in maximizing program performance
2 See CD - Supplementary Information. and accountability to taxpayers.

Agency FinAnciAl RepoRt • Fy 2011
10
ManageMent’s Discussion & analysis

The Office of Credit Risk Management focuses current, accurate data statistics on small business to
on mitigation of risk to taxpayers through ever- inform top level strategic decision-making.
improving risk management and oversight of SBA
lending programs. Interagency Collaboration — To ensure effective
delivery of programs and services, the SBA has
The Office of the Chief Information Officer provides made collaboration with other federal agencies a
information technology leadership, product ser- top priority. The SBA is the leading participant
vices, and operational support for the SBA in order in interagency collaborations that focus on small
to maximize internal efficiency and responsiveness business job creation including: access to capital;
to small businesses. entrepreneurial education; innovation; govern-
ment contracting; exporting; and entrepreneurship
The Office of Field Operations works as the front line among underserved communities including women,
operating team for the SBA. Most SBA programs minorities, veterans and others.
and services are executed when small businesses
connect with their regional, district and branch field Reducing Burdens — The SBA works across the
offices located in each state and territory. federal government to increase responsiveness to and
opportunities for small businesses while also reducing
The Office of Communications and Public Liaison regulatory burdens and excessive/unnecessary enforce-
communicates the Agency’s programs and priorities ment. The SBA fulfills these functions through an
to small businesses, their partners, and the public array of listening sessions and strategic partnerships as
at large by working with media outlets, developing well as the Office of the National Ombudsman, which
social media content, creating user-friendly online receives complaints and comments from small busi-
resources, crafting high quality marketing materials, nesses and acts as a “trouble shooter” between small
organizing events to gain feedback from small busi- businesses and federal agencies.
nesses, and coordinating strategic partnerships.
Statistics on Small Business — SBA’s policy analysts
Other offices include the Office of Management and are responsible for collecting data and statistics to
Administration, Congressional and Legislative Affairs, help evaluate existing policies and programs of the
the Office of General Counsel, the Office of Hearings and SBA. They translate economic, social and demo-
Appeals, the Office of Human Capital Management, and graphic trends that have an impact on small business
the Office of Equal Employment Opportunity. job creation into policy prescriptions that will allow
Strategic goal three — Serving aS the voice the Agency to be as proactive as possible in anticipat-
for Small buSineSS ing and addressing the needs of small business.
All of SBA’s management and program offices work to-
gether to support increasing interagency collaboration;
reducing burdens on small business; and, providing

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For more information, go to www.sba.gov/exportbusinessplanner.

Agency FinAnciAl RepoRt • Fy 2011
11
12

Office of the Administrator Office of Advocacy
(Administrator, Deputy Administrator, Chief of Staff)
Office of the Inspector General

Office of Office of Office of Investments Office of Gov’t Office of Field Office of Disaster
Capital Access Entrepreneurial and Innovation Contracting & Business Operations Assistance
Sba’S organiZation chart

Development Development
• Office of Financial • Small Business • Office of Regional
Assistance • Office of Small Business Innovation Research • Office of Business Administrators Office of Disaster
• Office of Surety Bond Development Centers Program Development • District Offices Planning
Guarantees • Office of Women’s • Small Business • Office of Gov’t
• Office of Risk & Credit Business Ownership Investment Companies Contracting
Risk Management • Office of • HUBZone Program Office of
• Microloans Entrepreneurship International Trade
• Office of Financial Education
Program Operations
ManageMent’s Discussion & analysis

Office of Office of Performance Office of Chief Office of Office of Native
Management & Management & Chief Information Officer General Counsel American Affairs
Administration Financial Officer
• Office of Chief
Agency FinAnciAl RepoRt • Fy 2011

• Office of Human Capital • Office of Performance Technology Officer
Management Management Congressional & Office of Veterans
• Office of Grants • Office of Internal Legislative Affairs Business Development
Management Controls
• Office of Administrative
Services
• Office of Executive Office of Center for Faith-Based
Secretariat Hearings & Appeals & Neighborhood
Partnerships

Office of Office of National
Equal Employment Ombudsman &
Opportunity & Civil Regulatory
Rights Compliance Enforcement Fairness

Office of
Communication &
Public Liaison
Regions, District Offices, Branch Offices,
Posts of Duty, and Alternate Work Sites
❖
Fairbanks AWS

Alsaka DO
★

(Juneau)
❖ Douglas AWS

Seattle DO
★

✙
Spokane Branch
Grand Forks AWS
❖
★ ★ Montana DO Bismarck AWS ❖ Bangor AWS
Portland DO ❖
★ Maine DO
★
❖ Billings AWS
North Dakota DO Vermont DO
❖ Portland AWS
★
★ New Hampshire DO
Veteran Centers ★ Syracuse DO
★ Minnesota DO ★ Springfield ★ Massachusetts DO
Boise DO Rapid City AWS ✙
Rochester Branch ❖ Branch ✙
❖ Albany AWS
South Dakota DO ★ Wisconsin- Wisconsin- ✙
★ Rhode Island DO
Call Center (EXECSEC) Wyoming DO Madison DO Milwaukee DO ★ ★Connecticut DO
★ ★ Michigan DO Buffalo
★ DO Elmira Branch
★
★ ✙ Melville Branch
Cedar Rapids Branch Harrisburg Branch ★ New York DO
Disaster Offices ✙ ★ ✙ New Jersey DO
Illinois DO ★
Sacramento DO Cleveland DO Pittsburgh DO ★ Philadelphia DO
❖ Reno AWS ★
★ ★ ★ ❖Sewell AWS
Nebraska DO Des Moines DO ★
Processing Centers Utah DO ★ ★ ★ Delaware DO
Indiana DO Columbus DO Baltimore DO
★ San Francisco DO ★ Springfield Branch ★ West ★
Kansas ✙ Virginia DO ★
Colorado DO City DO ✙ Washington Metro Area DO
❖ Hannibal AWS Cincinatti Branch ✙
★ ★ ❖
Fresno DO Charleston Branch ★
Columbia AWS St. ★ ★ Richmond DO
Nevada DO Louis Kentucky DO
★ Wichita DO DO
★ Springfield Branch
✙ ❖ Somerset AWS
❖ ❖ Cary AWS
Cape Girardeau AWS North Carolina DO
Fayetville AWS Jonesboro AWS ★ Tennessee DO ★
❖ ❖ Asheville AWS
✙ Guam Branch Los Angeles DO ★ ❖
Show Low AWS ❖ Memphis AWS ❖ Wilmington AWS
★ Santa Ana DO ★ Oklahoma DO
Agency FinAnciAl RepoRt • Fy 2011

❖ New Mexico DO Arkansas DO
★ ★ ★ ★South Carolina DO
★
San Diego DO Arizona DO ★ ❖Charleston AWS
Alabama DO Georgia DO
Tucson AWS ★ ★
Hawaii DO ★ ❖ Lubbock DO
★
Dallas/Ft. Worth DO ★
★ El Paso DO
Mississippi DO
Mobile AWS
✙ ★ North Florida DO
✙
Louisiana DO ★ Gulfport Branch
Houston DO
★
❖ Orlando AWS
★ Tampa AWS ❖
San Antonio DO ✙ Corpus Christi Branch
Puerto Rico and
★ District Office ❖ Fort Pierce AWS U.S. Virgin Islands DO
★
✙ Branch Office
★ South Florida DO
✢ Post of Duty ★ Harlingen/Lower Rio
Grande Valley DO
❖ Alternate Work Site
✢ St. Croix POD
04/29/2010
ManageMent’s Discussion & analysis

13
ManageMent’s Discussion & analysis

Summary Performance Information
H
The SBA identified four performance goals that reflect the high priorities of SBA leadership and the
Administration, and are critical to success in the strategic focus areas. These goals reflect the breadth and
depth of SBA’s commitment both to taxpayers and to the small business community. By actively pursuing
these goals, the SBA strengthened its national contributions to entrepreneurship, innovation, and competi-
tiveness. These were two-year goals measuring program efficacy for FY 2010 and FY 2011.

HigH PriOriTY PerFOrmAnCe gOAL #1 Expand access to HigH PriOriTY PerFOrmAnCe gOAL #2
capital by increasing the number of active SBA lending partners for Increase small business participation in federal
the 7(a) loan program to 3,000 by September 30, 2011, a 15 per- government contracting to meet the statutory
cent increase over the FY 2008 and FY 2009 average. The following goals and reduce participation by ineligible firms.
chart shows that the SBA exceeded the two year goal by 18 percent. The following chart shows that out of $432 billion
of government contracts, small businesses received
$98 billion or 22.7 percent of the federal goal. FY
2010 data show significant progress toward the 23
Achieved 3,537 Active Lenders
percent contracting goal.

FY 2010 + Achieved 3,061 in FY 2010
Achieved
476 More
FY 2010 Procurement Data
FY 2011 in FY 2011

2 Year Goal = 3,000 SB Other than
$97.95 B SB
(22.7%) $334.34 B

FY 2009
Achieved 2,771 With No Goal Goal = 23%

0 500 1,000 1,500 2,000 2,500 3,000 3,500

ACHIEVED GOAL SUBSTANTIALLY ACHIEVED

HigH PriOriTY PerFOrmAnCe gOAL #3 Process 85 percent HigH PriOriTY PerFOrmAnCe gOAL #4
of disaster loan applications for home and businesses within stan- Improve the Small Business Innovation Research
dard. The following chart shows that the SBA in FY 2010 and FY 2011, program (SBIR) by (1) deploying an improved data
unlike FY 2009, met and exceeded all disaster goals. collection and reporting system, including imple-
menting performance metrics, (2) implementing
more systematic monitoring for fraud, waste and
Goal = 85% abuse, and (3) improving commercialization from
existing program awards.
99%
EIDL 100% The SBIR is a high profile and highly effective program. It is
84% a catalyst for long-term job growth by providing opportunities
99% for innovative companies with high-growth potential and
Business 99% ensures that the nation’s small, high tech, innovative
81% businesses are a significant part of the federal government’s
research and development efforts. All milestones for this
98%
High Priority Performance Goal have been achieved on
Home 100%
94% target. The creation of these four performance indicators was
one of the milestones: (1) Commercialization Rate for SBIR
0% 20% 40% 60% 80% 100% Awardees (%); (2) Number of Patents; (3) Additional outside
Investment Received; and (4) Small Businesses Assisted in
FY 2011 Underserved Markets. These indicators are excellent first
FY 2010 steps to measuring and tracking the accomplishments of this
FY 2009
progressive cutting-edge program.

ACHIEVED GOAL ACHIEVED GOAL

Agency FinAnciAl RepoRt • Fy 2011
14
ManageMent’s Discussion & analysis

Performance information on Key Sba ProgramS
The following table presents key SBA FY 2011 performance data from Strategic Goal 1 - Growing businesses
and creating jobs. Although the SBA has three Strategic Goals, an analysis has determined that 98 percent of
all SBA costs are associated with Strategic Goal 1. Therefore, only Strategic Goal 1 performance indicators are
presented here. The presentation of the performance indicators is by Strategic Objectives which follows SBA’s
Strategic Plan adopted in FY 2011. Detailed performance information on all SBA programs will be presented,
and all variances explained, in the FY 2013 Congressional Budget Justification and FY 2011 Annual Performance
Report which will be submitted February 6, 2012.

Strategic Objective 1.1 – expand Access to capital through SBA’s extensive lending network.
Capital
Type of FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2011 FY 2011
Program Performance indicator(1)
indicator Actual Actual Actual Actual Target Actual Variance
7(a) and 504 Lending Supported ($ Billions)(1) Output $28.5 $24.6 $17.8 $22.4 $23.5 $30.5 30% g
7(a), 504, microloan,
Jobs Supported(2) Outcome 918,061 713,574 514,035 583,737 583,800 700,746 20%
and SBg g
(1) Lending Supported includes gross approvals in the 7(a) loan program, gross approvals in the 504 loan program, and third party loans that are made by commercial lenders as part of the 504 funding package.
(2) Job supported numbers are self-reported by the borrower and appear in the SBA loan application form. A filter was applied to reduce outliers and jobs associated with cancelled loans.

Strategic Objective 1.2 - ensure federal contracting goals are met or exceeded by collaborating across the federal government to expand
opportunities for small businesses and strengthen the integrity of the federal contracting certification process and data.
Contracting
Type of FY 2007 FY 2008 FY 2009 FY 2010 FY 2010 FY 2010
Program Performance indicator(3)
indicator Actual Actual Actual Target Actual Variance
Prime Percent of Federal Contract Dollars Awarded to Small
Outcome 22.0% 21.5% 21.9% 23.0% 22.7% -1%
Contracting Businesses Y
(3) The data supporting these indicators are not finalized until the 3rd or 4th quarter of the next year. Therefore, prior year numbers are reported.

Strategic Objective 1.3 - Strengthen SBA’s entrepreneurial education, counseling and training resources to help create new businesses and support
the needs of existing businesses by successfully focusing on core program resources and ensuring these resources are aligned with the needs of both
main Street and high-growth small businesses.
Counseling and Training
Type of FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2011 FY 2011
Program Performance indicator
indicator Actual Actual Actual Actual Target Actual Variance
SBDC, WBC, and
Small Businesses Assisted (#)(4) Output 1,083,904 1,078,925 1,119,510 1,157,327 N/A 1,053,458 N/A
SCOre
SBDC, WBC, and
Small Businesses Created (#) Outcome 9,031 14,400 14,201 15,831 14,200 15,181 7%
SCOre g
(4) SBDCs do not have a target for small businesses assisted.

Strategic Objective 1.4 - ensure that SBA’s disaster assistance resources for businesses, non-profit organizations, homeowners, and renters can be
deployed quickly, effectively and efficiently in order to preserve jobs and help return small businesses to operation.
Disaster Assistance
Type of FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2011 FY 2011
Program Performance indicator
indicator Actual Actual Actual Actual Target Actual Variance
Disaster Average Processing Days for Business Applications Output 11 11 14 10 18 10 44%
g
Disaster Average Processing Days for Home Applications Output 7 6 6 8 14 8 43% g
Disaster Customer Satisfaction Rate for Approvals (%) Outcome 66% 65% 72% 74% 71% 80% 13% g
Strategic Objective 1.5 – Strengthen SBA’s relevance to high-growth entrepreneurs and small businesses to more effectively drive innovation and job
creation through both the Agency’s existing programs as well as new initiatives.
High-growth Small Businesses
Type of FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2011 FY 2011
Program Performance indicator
indicator Actual Actual Actual Actual Target Actual Variance
SBiC Debentures Deployed by SBA ($ Millions) Output $708 $1,029 $788 $1,165 $1,352 $1,827 35%
g

The Actual result meets or exceeds The Actual result is within 10% or The Actual result is less than 90%
g target. Y
less of the target.
Y
of target.

Agency FinAnciAl RepoRt • Fy 2011
15
ManageMent’s Discussion & analysis

Analysis and Highlights of Financial Statements and Results
Highlights of Financial Results (September 2011)
(Dollars in Thousands)

At end of Fiscal Year FY 2011 FY 2010 % Change
COnDenSeD BALAnCe SHeeT DATA
Fund Balance with Treasury $ 8,469,322 $ 6,116,325 38.47%
Credit Program Receivables 8,354,739 9,076,679 -7.95%
All Other Assets 58,740 37,472 56.76%
Total Assets $ 16,882,801 $ 15,230,476 10.85%
Liability for Loan Guaranties 4,741,442 4,467,006 6.14%
Debt with Treasury 11,190,279 11,753,781 -4.79%
Downward Reestimate Payable to Treasury 911,765 130,993 596.04%
All Other Liabilities 348,338 413,241 -15.71%
Total Liabilities 17,191,824 16,765,021 2.55%
Unexpended Appropriations 1,537,185 2,295,070 -33.02%
Cumulative Results of Operations (1,846,208) (3,829,615) 51.79%
Total net Position (309,023) (1,534,545) 79.86%
Total Liabilities and net Position $ 16,882,801 $ 15,230,476 10.85%

For the Fiscal Year
STATemenT OF neT COST BY STrATegiC gOAL
Goal 1: Growing Businesses and Creating Jobs
Loan Subsidy Cost Including Reestimates $ 2,559,524 $ 4,402,085 -41.86%
All Other Costs Net of Revenue 744,627 771,611 -3.50%
Goal 2: Building an SBA that Meets the Needs of Today’s
6,132 5,343 14.77%
and Tomorrow’s Small Business
Goal 3: Serving as the Voice for Small Business 13,454 12,738 5.62%
Costs Not Assigned 136,825 85,420 60.18%
Total net Cost of Operations $ 3,460,562 $ 5,277,197 -34.42%

COnDenSeD STATemenT OF neT POSiTiOn
Beginning Cumulative Results of Operations $ (3,829,615) $ (4,672,104) 18.03%
Total Financing Sources 5,443,969 6,119,686 -11.04%
Less: Net Cost of Operations 3,460,562 5,277,197 -34.42%
ending Cumulative results (1,846,208) (3,829,615) 51.79%
Beginning Unexpended Appropriations 2,295,070 1,983,504 15.71%
Total Budgetary Financing Sources (757,885) 311,566 -343.25%
ending Unexpended Appropriations 1,537,185 2,295,070 -33.02%
ending net Position $ (309,023) $ (1,534,545) 79.86%

COnDenSeD STATemenT OF BUDgeTArY reSOUrCeS
Net Appropriations & Budget Authority Received, Budgetary $ 5,611,644 $ 6,554,119 -14.38%
Spending Authority from Offsetting Collections 8,768,637 8,218,384 6.70%
Unobligated Balances Forward 5,226,984 2,701,923 93.45%
Borrowing Authority 1,078,132 2,737,959 -60.62%
Other Budgetary Resources, Net (1,408,105) (1,871,616) -24.77%
Total Budgetary resources $ 19,277,292 $ 18,340,769 5.11%
Obligations Incurred, Budgetary $ 6,919,443 $ 6,598,610 4.86%
Obligations Incurred, Nonbudgetary 4,973,564 6,515,175 -23.66%
Unobligated Balances, Available and Unavailable 7,384,285 5,226,984 41.27%
Total Status of Budgetary resources $ 19,277,292 $ 18,340,769 5.11%

Agency FinAnciAl RepoRt • Fy 2011
16
ManageMent’s Discussion & analysis

Analysis of Financial Results sis. As a result, the definitions of the loan and
guaranty balances in the Portfolio Analysis section
The SBA prepares its financial statements as a
may differ somewhat from the balances used in
critical aspect of ensuring accountability and
this Analysis of Financial Results. For example, for
stewardship for the public resources with which it
the 7(a) program the total amount of guarantied
is entrusted. The financial statements are prepared
loans is used in the Portfolio Analysis, where only
in accordance with guidance issued by the Office
SBA’s guarantied portion is used in the Analysis
of Management and Budget pursuant to the Chief
of Financial Results, as it ties to balances in the
Financial Officers Act of 1990. While these state-
financial statements.
ments have been prepared from SBA’s books and
records in accordance with generally accepted ac- B
counting principles for federal entities and the for- Most of SBA’s available budgetary resources are
mats prescribed by OMB, they are in addition to devoted to its credit programs. For FY 2011 SBA’s
the financial reports used to monitor and control budgetary resources were $7.9 billion, and non-
budgetary resources, which are prepared from the budgetary resources in the loan financing funds
same books and records. The statements should be were $11.4 billion making total resources $19.3
read with the realization that they are a component billion. The apportioned budgetary resources are
of the U.S. Government, a sovereign entity. One the amounts available to enter into new obligations
implication of this is that the liabilities presented and to liquidate them. Budgetary resources are
herein cannot be liquidated without the enactment made up of new budget authority and unobligated
of appropriations, and ongoing operations are sub- balances of budget authority provided in previous
ject to the enactment of future appropriations. years. The loan financing funds are nonbudget-
ary accounts that record all the cash flow activity
This analysis is intended to help readers under-
resulting from post 1991 direct loans and loan
stand the Agency’s financial results, position and
guaranties. This activity in the financing account
condition as portrayed in the principal financial
is reported separately in the Budget of the United
statements and notes. It explains major changes
States Government and is excluded from the bud-
in assets, liabilities, costs, and budgetary resources;
get surplus/deficit totals.
includes comparisons of the current year to the
prior year; and discusses the relevance of particular The portion of the outstanding principal guar-
balances and amounts reflected in the principal anteed by the SBA as of September 30, 2011
financial statements and notes. This section also was $70 billion. This amount is up 8.66 percent
depicts trends via the use of charts and graphs to from the $64.4 billion guaranteed at September
further understanding of the financial condition 30, 2010, increasing the portfolio. New guaran-
and results of the Agency. The SBA is primarily a ties disbursed by SBA participating banks during
credit agency and therefore the trends and finan- FY 2011 were up 26.12 percent compared to FY
cial condition of credit program receivables and 2010 (see Note 6C in the financial statements for
reestimates are emphasized in this analysis. The further detail on loans disbursed and outstanding
Highlights of Financial Results table provides a at year-end). Chart I depicts the increase in guar-
condensed summary of the balances in the finan- antied loans disbursed during FY 2011 to a record
cial statements for the current and prior year and level. The American Recovery and Reinvestment
the percentage change. Act provided for SBA guarantied loans having
reduced fees and increased guaranty percentages.
The Operational Portfolio Analysis section in
On September 27, 2010, the President signed
this MD&A discusses in some detail the major
the Small Business Jobs Act of 2010 that pro-
trends impacting SBA’s portfolio of loan guaran-
vided $505 million of additional appropriations
ties and receivables. The purpose of this section is
to temporarily extend the Recovery Act fee relief
to provide an operational analysis of SBA’s credit
and guaranty percentage provisions. The Small
programs rather than a financial statement analy-

Agency FinAnciAl RepoRt • Fy 2011
17
ManageMent’s Discussion & analysis

Business Jobs Act also raised the CHArT i GUARANTIED LOANS DISBURSED
maximum loan amounts under sev-
eral SBA programs. For example,
for the 7(a) loan program the limit 18
increased from $2 million to $5 16
14
million. These efforts, combined

(in($billions)
Billions)
12
with SBA outreach to increase the 10
strength and number of SBA lend- 8
6
ers overall, resulted in $30.5 billion
4
of SBA lending support during FY 2
2011, an all-time record level for 0
SBA lending in the history of the FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011
Agency. This upward trend of guar-
antied loans disbursed (as a result
of increased loan approval volume)
since FY 2009 is reflected in Chart CHArT ii GUARANTIED LOANS DISBURSED MONTHLY
I. Chart II depicts the monthly
disbursements of guarantied loans 2.5
during FY 2011. As reflected in 2

($($Billions)
Billions)
the chart, there is an increase in
1.5
the beginning of FY 2011 and also
1
in September 2011. The funding
0.5
for fee relief and higher percentage
guaranties provided by the Small 0
t. v. c. n. . r. r. y n. l. g. p.
Business Jobs Act enhancements Oc No De Ja Fe b Ma Ap Ma Ju Ju Au Se
ended as the calendar year closed,
and therefore the highest volume FY 2011
of loans disbursed were in the early
part of 2011. Loans disbursed
continued at a high monthly pace in FY 2011, which was a decrease from FY 2010.
throughout the year, even after funds expired. As reflected in Chart III, the biggest changes in
the credit program receivables included a reduc-
SBA’s total portfolio of loan guaranties and tion in the direct disaster loans of $463 million
receivables continued to grow in FY 2011 due as well as a decrease in the purchased guaran-
primarily to increases in the record guarantied tied business loans of $258 million. The credit
loan approval volume as well as continued high program receivables decreased in direct disaster
purchases of guarantied business loans. The total loans because there were no major recent disasters
portfolio consists of guarantied loans outstanding, for which the SBA is currently disbursing new
purchased guarantied business loans receivable, loans. However, at the end of FY 2011 there was
direct disaster loans, microloans and other direct a significant increase in approvals of disaster loans
business loans receivable. (reflected in Note 6C, outstanding loan obliga-
tions Disaster loan program) that increased the
Credit program receivables for the SBA are
outstanding loan obligations from $217.5 million
comprised of business and disaster direct loans
to $427.2 million. This increase was due to the
and guarantied business loans purchased per the
flooding disasters in North Dakota, South Dakota
terms of SBA’s loan guaranty programs which are
and other parts of the country and also to the
offset by an allowance for subsidy. These credit
tornadoes in Alabama and Missouri. In FY 2012
program receivables were valued at $8.4 billion

Agency FinAnciAl RepoRt • Fy 2011
18
ManageMent’s Discussion & analysis

the SBA expects to see an increase CHArT iii TOTAL CREDIT PROGRAM RECEIvABLES
in the disbursement activity for
these loans and an increase in the 10
credit program receivables. The 8
credit program receivables for pur-

($ ($
Billions)
Billions)
chased guarantied loans, net of the 6
allowance, decreased because even 4
though the purchased business loans
receivable increased $448 million 2

(due to net increase in purchases 0
offset by collections and write offs) FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011
the allowance/offset against these Microloans, etc. Direct Disaster Loans
receivables increased $706 million. Guarantied Business Loans/Purchased Total Credit Program Receivables

As reflected in Chart IV, the
increase in purchased guarantied CHArT iV PURCHASES OF GUARANTIED LOANS
business loans receivable was due to
the continued effect of the econom-
ic recession. However, purchases 6
of SBA’s share of guarantied loans 5

($ Billions)
($ Billions)
decreased from $4.9 billion in FY 4
2010 to $3.4 billion in FY 2011, 3
reflecting an improvement in cur-
2
rent economic conditions. The SBA
1
expects this downward trend in pur-
chases to continue into FY 2012. 0
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

SBA’s assets and liabilities result
primarily from its credit program
activities. They consist of Fund F
Balance with Treasury, credit program receivables,
Assets
liabilities for loan guaranties, and Debt with
Treasury. SBA’s loans and guaranties are financed The SBA had total assets of $16.9 billion at the end
by a combination of subsidy appropriations, fees of FY 2011, up 10.9 percent from FY 2010. Assets
charged to lenders and borrowers, and borrowings increased primarily due to a $2.4 billion increase
from Treasury. Congress provides appropriations in the Fund Balance with Treasury partially off-
to cover the estimated long-term costs of SBA’s set by a $722 million decrease in Credit Program
disaster and direct business loans, while SBA’s Receivables. The Fund Balance with Treasury
guarantied business loan program costs are largely increased primarily in the Loan Guaranty Financing
financed through fees. These costs are defined as Fund ($2.9 billion). This increase consisted primar-
the net present value of the estimated cash out- ily of the collection of the prior year upward subsidy
flows and inflows associated with the loans. The reestimate as well as FY 2011 subsidy ($5.2 billion),
remaining portion of each new direct loan dis- collection of fees ($628 million), and collections
bursed is financed by borrowings from Treasury’s on loans of $1 billion. This increase was partially
Bureau of the Public Debt. Borrowings are repaid offset by purchases of guarantied loans in FY 2011
to Treasury as loans are repaid to the SBA. ($3.4 billion). The decrease in the Credit Program
Receivables is due to the reduction in the Direct
Disaster loans portfolio as well as the Purchased

Agency FinAnciAl RepoRt • Fy 2011
19
ManageMent’s Discussion & analysis

Guarantied Business Loans previously discussed. Per in future years and contributing to a downward
the provisions of the Federal Credit Reform Act of reestimate for FY 2011.
1990, credit program receivables are valued at the
Debt with Treasury decreased $563.5 million as
present value of expected future cash flows.
SBA’s repayments of borrowings were greater than
Liabilities the borrowings in FY 2011 (in FY 2010 the SBA
borrowed funds to cover purchases of defaulted
The SBA had total liabilities of $17.2 billion guarantied loans due to an unexpected surge in
at the end of FY 2011, up 2.6 percent from FY purchases as a result of the continued effect of the
2010. Liabilities consist primarily of the Liability economic recession). Please refer to Note 9.
for Loan Guaranties, Downward Reestimate
Payable to Treasury, and Debt with Treasury. The net Position
Liability for Loan Guaranties is defined as the
Net position, which is the sum of Unexpended
estimate of the net present value of the future
Appropriations and Cumulative Results of
amount the SBA will pay, net of fee collections, to
Operations, increased in FY 2011 to a $309 mil-
liquidate expected purchases of guarantied loans
lion credit. Cumulative Results of Operations is
under its guarantied loan programs. The Liability
the accumulated difference between expenditures
for Loan Guaranties increased $274.4 million
and financing sources since the inception of the
primarily due to the year-end reestimate as well
Agency. The loss shown as Cumulative Results of
as subsidy and fees collected (offset partially by
Operations decreased to $1.85 billion at the end
claim payments). There was a net upward re-
of FY 2011, from $3.83 billion in FY 2010 due
estimate of $1.8 billion for the loan guaranty
to a decrease in unfunded upward subsidy reesti-
programs at September 30, 2011. Reference the
mates in FY 2011 on the 7(a) loan guaranty, 504,
following Results of Operations section which
and the SBIC participating securities programs.
discusses the impact of the reestimates and the
These unfunded upward reestimate expenses do
chart in Note 6E of the financial statements
not yet have a financing source at year-end and
which reconciles this account.
are funded in the following year. They increase
The Downward Reestimate Payable to Treasury the loss that the SBA reports in the Cumulative
increased $780.8 million primarily due to the Results of Operations.
year-end accrual of the SBIC Participating
Unexpended Appropriations decreased $757.9
Securities downward reestimate. Reestimates are
million this year because the appropriations used
revisions of the subsidy cost estimate based on
were greater than the appropriations received in FY
information about the actual performance and/
2011. This is primarily due to funding in the Small
or estimated changes in future cash flows of the
Business Jobs Act on September 27, 2010 that pro-
cohort. A downward reestimate indicates that
vided $697.5 million of additional appropriations
too much subsidy had been paid to the financing
to the SBA. These funds were appropriated in FY
account and this will be returned to Treasury the
2010 but not disbursed until FY 2011, increasing
following year. The SBIC Participating Securities
FY 2010 Unexpended Appropriations balance.
downward reestimate was mostly due to lower
than projected purchases and higher than pro-
Results of Operations
jected recoveries during FY 2011, as well as a
decrease in projected purchases and an increase The Results of Operations primarily reflects the
in projected recoveries for the remaining years costs of SBA credit programs from subsidy ex-
within the cohorts. Lower than average purchases penses during the year for new loans and subsidy
during FY 2011 decreased the overall purchase reestimates at year-end. The credit subsidy cost is
curve, in turn decreasing purchase projections the net present value of expected cash inflows and
outflows over the life of a guarantied loan, or the

Agency FinAnciAl RepoRt • Fy 2011
20
ManageMent’s Discussion & analysis

difference between the net present CHArT V CREDIT PROGRAM SUBSIDY REESTIMATES
value of expected cash flows and
the face value of a direct loan. The 5
SBA receives appropriations an-
4
nually to fund its credit programs.

($($ Billions)
3
When loans are disbursed, the SBA
Billions)
2
records subsidy expense. In ac-
cordance with the Federal Credit 1

Reform Act, the subsidy costs are 0
reestimated annually. Reestimates -1
update original loan program cost FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011
Direct Disaster Loans Guarantied Business Loans
estimates to reflect actual experi-
Microloans, etc.
ence and changes in forecasts of
future cash flows. Increased re-
estimated costs are funded in the Similarly, the 504 CDC program had a net up-
following year by permanent indefinite authority, ward reestimate of $1,063.8 million. While the
while decreased costs are returned by the SBA to 2009 and 2010 cohorts performed better than
a Treasury general fund. During FY 2011, the expected in FY 2011, many earlier cohorts per-
net upward reestimated costs for the 7(a) and 504 formed worse. The majority of the reestimate was
programs decreased, and there was a change from due to updated model assumptions, which will
a net upward reestimate to a net downward in the allow for more accurate projections of future cash
SBIC participating security program compared to flows. These updated assumptions resulted in
FY 2010. Those decreases were the largest compo- increased purchase projections for the remaining
nents of the change (net decrease) in the Agency’s years within the cohorts. The remainder of the re-
net cost. Chart V reflects the decreases in the estimate was mostly due to higher than projected
reestimates for the Disaster direct programs as purchases in FY 2011, in particular for cohorts
well as the guarantied business loan program from 2006 and 2007.
FY 2010 to FY 2011.
The SBIC Participating Securities program had
While there were still significant upward reesti- a net downward reestimate of $757.5 million.
mates in both of those programs (composing the The reestimate was mostly due to lower than
majority of the FY 2011 Net Cost), the upward projected purchases and higher than projected
reestimates were less than in FY 2010. Strategic recoveries during FY 2011. The remaining rees-
Goal 1 includes significant upward reestimates in timate amount was due to a decrease in projected
the 7(a) loan guaranty program and the 504 CDC purchases and an increase in projected recover-
program, as well as a significant downward reesti- ies for the remaining years within the cohorts.
mate in the SBIC participating securities program. Poor economic conditions in recent years, as well
as SBA’s decision to liquidate poor performing
The 7(a) loan guaranty program, SBA’s flagship
SBICs in an expedited manner, caused an increase
and largest program, had a net upward reestimate
in purchases in FY 2009 and FY 2010 that led
in FY 2011 of $1,235.7 million. A significant
to upward reestimates in those years. The in-
portion of the reestimate is due to updated model
crease in purchases in FY 2009 and FY 2010 also
assumptions, which resulted in increased purchase
increased projections of purchases in future years.
projections for the remaining years within the
Furthermore, funds that were adversely impacted
cohorts. The remainder of the reestimate is due to
by the weak economy were liquidated during FY
the difference between the actual and forecasted
2009 and FY 2010, and fewer poor performers
performance during FY 2011.
were remaining during FY 2011. This caused

Agency FinAnciAl RepoRt • Fy 2011
21
ManageMent’s Discussion & analysis

purchases to be lower than project-
CHArT Vi APPROPRIATIONS RECEIvED
ed, contributing to the downward
reestimate for FY 2011.
7
Budgetary Resources
6
Total Budgetary Resources in-
creased $937 million from FY 2010 5
to FY 2011. This increase consists

($ Billions)
of increases in Spending Authority 4

($ Billions)
from Offsetting Collections and
Unobligated Balance Forward offset 3
by decreases in Appropriations
Received and Borrowing Authority. 2
Spending Authority increased $550
million from FY 2010 to FY 2011. 1
The increase in Spending Authority
is primarily in the loan guaranty 0
financing fund and is due to the in- FY 2007 FY 2008 FY 2009 FY 2010 FY 2011
crease in collection of fees and loan Disaster Loans Business Loans Salaries & Expenses

collections. In FY 2010 fees were
waived as part of the Recovery Act
to the Small Business Jobs Act of 2010 funding
and fee collections were low. In FY 2011, after
of $697 million that was received in FY 2010 and
the Jobs Act fee reductions ended in December
increased the budgetary resources in FY 2010.
2010, fee collections increased (and the guaranty
Chart VI depicts that the substantial decrease in
accounts receivables correspondingly increased).
Appropriations Received is for business loans due
Unobligated Balance Forward increased $2.5 bil-
to the passage of the Jobs Act in FY 2010.
lion from FY 2010 to FY 2011. The increase of
the Unobligated Balance Forward reflects that the Status of Budgetary Resources
ending unobligated balance of FY 2010 is higher
than the ending unobligated balance of FY 2009. Total Status of Budgetary Resources increased
The SBA received Jobs Act funding in September $937 million from FY 2010 to FY 2011. This
2010 and received funding for the FY 2009 sub- increase consisted of an increase in unobligated
sidy upward reestimates during FY 2010, resulting balance of $2.16 billion partially offset by a
in a higher ending unobligated balance at the end decrease in obligations incurred of $1.22 billion.
of FY 2010. Obligations decreased in the nonbudgetary financ-
ing funds $1.5 billion. This is primarily due to
Borrowing Authority decreased $1.7 billion from a decrease in default claims paid (purchases) of
FY 2010 to FY 2011. Borrowings were unusu- $1.6 billion in the loan guaranty financing fund
ally high in FY 2010 to fund high levels of default offset partially by an increase in obligations in the
claims in FY 2010 (consistent with higher amount disaster financing fund. The decrease of default
of purchases in FY 2010). This decrease in bor- claims is consistent with the drop in purchases of
rowing authority in FY 2011 is consistent with the defaulted loans in FY 2011. The increase in the
decrease in purchases and obligations incurred in obligations in the direct loan financing fund is due
the guaranty financing fund. primarily to the flooding disaster in North Dakota
in FY 2011 which resulted in an increase in ap-
Appropriations Received decreased $942 million
provals towards the end of FY 2011.
from FY 2010 to FY 2011. The decrease is due

Agency FinAnciAl RepoRt • Fy 2011
22
ManageMent’s Discussion & analysis

Unobligated balances at September CHArT Vii SBA OUTSTANDING LOAN PORTFOLIO
30, 2011 and 2010 are $7.4 billion OvER THE PAST 7 YEARS
and $5.2 billion which include $5.3
billion and $3 billion of unavailable 100 0.7
7.5
unobligated balances. These bal- 90 1.1
0.9 0.8
7.9 8.0
8.4
ances are unavailable because they 80
1.5
9.0
8.6
8.1
2.0 8.4
are unapportioned by OMB. The 70 2.9 6.8 8.5
26.6
3.6 8.4
SBA accumulates the majority of 8.2
25.5
60 7.9

($ Billions)
24.1
unobligated balances in its nonbud- 16.7
19.6
22.3

50
getary financing accounts ($6.4 bil- 14.1

40
lion in FY 2011 and $3.5 billion in
FY 2010) from reestimates that are 30
48.6 50.8 56.4
44.4 46.1 47.7
used primarily to pay default claims 20
43.2

in future years. 10
0
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011
Operational Portfolio
7(a) Regular 504 Regular SBIC Programs Disaster Other
Analysis
The SBA is the taxpayers’ custo-
Jobs Act Incentives Led to Record SBA Loan
dian of a small business loan portfolio of $99.2
Approval Volume
billion, as shown in Chart VII. This portfolio
of outstanding principal loan amounts includes As Chart VIII shows, loan volumes spiked con-
guarantied loans – 7(a), 504, and SBIC; direct di- siderably in FY 2011, with the $10.4 billion
saster loans; and microloans. SBA’s two flagship approved in the first quarter significantly raising
guaranty business loan programs, 7(a) and 504, the FY 2011 quarterly average to $6.1 billion.
have accounted for practically all growth of the The spike occurred as lenders took advantage of
portfolio size, $25.7 billion since FY 2005. They the Jobs Act enhanced loan provisions of a 90
currently comprise 84 percent of the portfolio. percent guaranty and reduced fees. While the
The direct disaster loan portfolio shrunk from higher guaranty and reduced fees ended when
a high of $9 billion in FY 2007 to the current the special subsidy ran out in the first quarter,
$7.5 billion, mostly due to the absence of another the Jobs Act also made some permanent changes
catastrophic disaster on the scale of Hurricane to SBA’s flagship loan programs.
Katrina in 2005. Much like the Recovery Act Most notably, the Jobs Act permanently raised
and its extensions drove loan growth in the port- the 7(a) and 504 limits from $2 million to $5
folio in FY 2009 and FY 2010, provisions in the million (up to $5.5 million for manufacturers in
Small Business Jobs Act of 2010 (signed into law the 504 loan program) and established alterna-
three days before FY 2011 began) drove growth tive size standards for the 7(a) and 504 loan pro-
in the portfolio over the past fiscal year. The 38.8 grams by which small businesses with less that
percent growth in the portfolio since 2005 amid a $15 million in net worth and $5 million in aver-
stagnation of conventional small business lending age net income would be eligible for a loan in
over the same time period3 implies that the SBA those programs. This alternative standard meant
has filled a gap in the small business lending mar- increased lending opportunities for the small
ketplace while achieving greater market penetra- business community. In FY 2011, nearly 1,500
tion among small business lenders. 7(a) loans totaling $4.6 billion were made that
utilized these higher limits. For the 504 pro-
3 www2.fdic.gov/qbp/timeseries/SmallBusiness&FarmLoans.xls FDIC data show
outstanding small business loans (<$1 million) of $665 billion in 2005 increasing gram, 300 loans totaling over $860 million were
to only $673 billion in June 2011.

Agency FinAnciAl RepoRt • Fy 2011
23
ManageMent’s Discussion & analysis

CHArT Viii QUARTERLY GROSS 7(A) AND 504 LOAN APPROvALS

($ Billions)
FY11 Average

($ Billions)
$6.1 B
6
FY05 Average FY06 Average FY07 Average
$5.1 B $5.1 B $5.2 B
FY08 Average
$4.5 B FY10 Average
$4.2 B
4 FY09 Average
$3.3 B

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 Q1 Q2 Q3 Q4

FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

made that are greater than could be
awarded previously. Also, the Jobs CHArT iX 7(A) LOAN APPROvALS BY LOAN SIZES
Act’s temporary maximum size in-
crease from $350,000 to $1 million 25

for quick turnaround SBA Express
loans yielded over 1,500 loans total- 20
ing more than $910 million.

($ Billions)
15
Loan Sizes and Access to capital
Overall, while the nation’s out-
10
standing small business loan
portfolio has declined 14 percent
since the peak in June 20084, SBA 5

guarantied loans have grown over
18 percent since FY 2008; premi- 0
ums for securitized bundles of SBA FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011
Loans under $150,000 Loans $150,000 to $350,000
guarantied loans in the secondary Loans $351,000 to $2 Million Loans Over $2 Million
market remain at record highs;
increasing number of lenders are
active in SBA programs; and, SBIC As seen in Chart IX, the SBA has generally seen
debentures garner record amounts. As SBA lend- increases across all loan size categories over the
ing levels continue to rebound to pre-recession past two years. While the Agency is pleased to
levels, the Agency will work through new pro- see increased overall loan volume as well as higher
grams to fill the gaps created in the marketplace. creditworthiness among its borrowers, a gap
still exists in smaller dollar small business loans.
Loans under $150,000, in particular, have not
4 www2.fdic.gov/qbp/timeseries/SmallBusiness&FarmLoans.xls
returned to pre-recession volumes. These smaller

Agency FinAnciAl RepoRt • Fy 2011
24
ManageMent’s Discussion & analysis

loans have been shown to dispro- CHArT X SENIOR LOAN OFFICERS REPORTING ON CREDIT
portionately help small businesses STANDARDS FOR SMALL BUSINESSES
in underserved markets, and the
SBA took several steps to start fill- 20%

Net
ing this gap in FY 2011. 10%

First, SBA’s High Priority Loosening 0%
-10%
Performance Goal to increase the
number of active lenders resulted -20%

in significantly more and stronger -30%

Net
partnerships among community -40%
lenders and credit unions which
Tightening -50%
are much more likely to make -60%
smaller-dollar loans. Through -70%
increased outreach efforts coupled
-80%
with the enhanced provisions in the
January
April
January
July April
October January
July April
October
July
October October January
April
January
April July July

Recovery Act and Jobs Act, over 2007 2008 2009 2010 2011
1,000 lenders who had not made an
SBA loan since 2007 came back to
SBA lending. mergers among large U.S. lenders has given
significant control to relatively few banks, provid-
Second, the SBA introduced two new 7(a) ing them greater leverage to establish uniformly
loan initiatives with streamlined applica- tight lending standards across the marketplace.
tions – Community Advantage and Small Loan One report found that the four largest U.S. banks
Advantage – to encourage current and prospec- in 2011 had been 37 separate banks back in the
tive SBA lenders to make more lower-dollar loans early 1990s6, and the Federal Reserve noted that
(under $250,000). So far, 53 lenders have partici- the top 10 largest banks in 2009 controlled over
pated in these programs, and significant efforts are 54 percent of assets.7
underway to increase this number in FY 2012.
SBIc Has Record Year
In addition, SBA’s Microloan program became
a stronger tool for low-dollar loans with a new Notable improvements have been made in the
maximum loan size of $50,000. In FY 2011, of SBIC program that are not reflected in Chart
the $46.5 million in microloans approved, 223 VII. Importantly, the SBA has wound down the
microloans totaling $10.5 million were made by participating securities function of SBIC in favor
leveraging this higher ceiling. of the debenture program. This lowers the risk
for the SBA and taxpayers because equity is not at
One cause for the decrease in volume of the stake and the guaranty only comes into play when
smallest 7(a) loans since FY 2007 is tighten- the SBIC has difficulty repaying the debenture to
ing of credit standards by banks following the the financing bank. The debenture portion of the
financial crisis. The Federal Reserve’s Quarterly SBIC portfolio has risen from 26 percent in FY
Senior Loan Officer Survey5 reveals the dramatic 2005 to 57 percent in FY 2011. A strong effort
tightening of credit standards for small businesses to reduce licensing times for SBICs, from 13.2
during the financial crisis as shown in Chart X. months in FY 2009 to 5.5 months in FY 2011,
Businesses with higher credit scores on average allowed 22 new debenture SBICs to be licensed
receive larger loans and larger banks typically lend and a record $2.59 billion in overall financings
to businesses with higher scores. Also, multiple
6 http://motherjones.com/politics/2010/01/bank-merger-history
5 www.federalreserve.gov/boarddocs/snloansurvey/201108/fullreport.pdf 7 www.federalreserve.gov/pubs/bulletin/2010/pdf/bankprofits10.pdf

Agency FinAnciAl RepoRt • Fy 2011
25
ManageMent’s Discussion & analysis

(including both SBA support and
private sector matching funds) to CHArT Xi SBIC DEBENTURE FINANCINGS TO SMALL BUSINESSES
small businesses in FY 2011 as seen
in Chart XI. The composition of 3.0
the SBIC portfolio will continue to
reflect a stronger emphasis on SBIC 2.5
debentures, and the overall size of

($ Billions)
the portfolio will likely increase. 2.0
This is critical because SBICs invest
1.5
in small businesses with high-
growth potential, and these busi-
1.0
nesses create a disproportionate
$1.3 $1.6 $2.6
number of new jobs.8 0.5

Absence of Major Disasters 0
Shrinks Portfolio FY 2006 - FY 2009 FY 2010 FY 2011
The direct disaster portfolio de-
creased six percent in FY 2011,
from $7.9 billion to $7.5 bil-
lion. This decline continues the CHArT Xii FY 2011 DISASTER OUTSTANDING PORTFOLIO
trend seen last year as repayments BY LOAN TYPE
from hurricanes Katrina, Rita, and
Wilma disaster loans significantly
outpaced any new loan disburse- World Trade Center
2%
ments for disasters in FY 2011. Business/Economic Injury
Unpaid principal from these hur-
ricanes fell 8.2 percent in FY 2011.
However, after five years these three 20%
storms still account for $4 billion
39% Katrina, Rita,
or, 54 percent, of the $7.5 billion Wilma Home
disaster portfolio as seen in Chart
Home 24%
XII. Disaster loans associated with
the top three FY 2011 disasters 15%

– spring floods in North Dakota
and the tornadoes in Alabama and
Missouri – led to approximately
Katrina, Rita,
4,600 approved loans totaling over
Wilma Business
$373 million. While Hurricane
Irene caused extensive damage along
the Eastern Seaboard in late August,
the costs will likely not show up in
SBA’s disaster portfolio until FY 2012.

8 www.brookings.edu/~/media/Files/Programs/ES/BPEA/2011_fall_bpea_pa-
pers/2011_fall_bpea_conference_hurst.pdf

Agency FinAnciAl RepoRt • Fy 2011
26
ManageMent’s Discussion & analysis

Analysis of SBA’s Systems, controls and Legal compliance
Financial Management Systems Core financial systems at the SBA are comprised of
three systems operated and managed by the Offices
Strategy
of the Chief Financial Officer, Capital Access, and
Financial management systems at the SBA are Chief Information Officer. The systems include:
designed to support effective internal control,
produce reliable, timely financial information, y Oracle Federal Financials – Recently upgraded
and ensure cost effective loan guaranty processing. to the most current release, this COTS package
Management remains focused on robust financial is used for budget execution and management
management systems that improve SBA’s ability to for administrative activity.
comply with laws and regulations, provide timely y Loan Systems – A series of SBA-built systems
and accurate data to support management analysis used to support the lifecycle of loan guaranty
and decision-making, enable the Agency to keep processing, loan program funds control,
pace with its lending partners, and effectively use management and accounting for loan activity,
automation to achieve operational efficiency. and a COTS package used for disaster loan
application processing.
As demonstrated throughout this Agency
Financial Report, the SBA seeks to comply with y Financial Management System (FMS) –
all federal financial management system require- An SBA-built system used to consolidate
ments and there have been no deficiencies identi- administrative and loan activity, manage
fied under FFMIA. cash and control funds, and provide financial
reporting.
The SBA is in the process of conducting a series
of incremental improvement projects designed to Problems associated with the aging of the SBA-
modernize the financial management systems to developed financial systems are being addressed
improve financial system controls, reduce sustain- as part of the modernization projects included in
ment costs, provide additional functionality for SBA’s financial systems strategy.
external lending partners, and prolong system
useful lives. These projects include the migra- Internal Control Environment
tion of the systems to more current technology
platforms and relocation to more modern data The SBA believes that maintaining integrity and
centers that provide expanded capability for con- accountability in all programs and operations
tinuity of operations. is critical for good government, demonstrates
responsible stewardship over assets and resources,
In addition to modernization of the financial ensures high quality, is a sign of responsible lead-
system platforms, the incremental improvement ership, ensures the effective delivery of services to
projects will also add missing functionality to the customers, and maximizes desired program out-
financial systems, building improved integration comes. The SBA has developed and implemented
between the systems, improving consistency of management, administrative and financial system
data, enhanced reporting capability, and improving controls to reasonably ensure that:
SBA’s automation of funds control for loan pro-
grams and loan subsidy. y programs and operations achieve intended
results efficiently and effectively;
When completed, the incremental improvement y resources are used in accordance with the
projects enhance SBA’s financial system controls mission of the Agency;
over lending programs and provide for improvement
y programs and resources are protected from
in accessibility to common information, financial
waste, fraud and mismanagement;
and budget management, and financial reporting.

Agency FinAnciAl RepoRt • Fy 2011
27
ManageMent’s Discussion & analysis

y program and operations activities are in items were relatively minor and none reached the
compliance with laws and regulations; and level of material weakness.
y reliable, complete and timely data are Given the size of its $99.2 billion loan portfo-
maintained and used for decision-making at lio, the SBA’s lender and loan monitoring and
all levels. review activities represent a critical component
The Federal Managers’ Financial Integrity Act of the Agency’s internal control framework. The
of 1982 requires federal agencies to conduct an Agency’s Office of Credit Risk Management
annual assessment of internal control and report rates lenders that disburse SBA-guarantied loans
the results to the President. The conclusion according to risk. This analysis allows the SBA
of the Administrator’s Annual FMFIA assur- to focus resources on those lenders that represent
ance statement is based on the self-assessment the most risk in terms of exposure and credit
of program managers, internal control reviews, quality. Larger lenders are subject to periodic
and audits and reviews done by the Government on-site reviews; other lenders are on a case-by-
Accountability Office and SBA’s Office of the case basis. The SBA also conducts reviews of
Inspector General. certified development companies, examinations
of small business investment companies, guaran-
The SBA continues to strengthen and improve tied loan purchase reviews and reviews of im-
the execution of its mission through the appli- proper payments for business and disaster loans
cation of sound internal controls. The Office and contracts.
of Internal Controls (OIC) is responsible for
overseeing the Requirements of the Office of legal comPliance
Management and Budget’s revised Circular No. The SBA’s independent auditor has identified one
A-123, Appendix A, Internal Control Over instance of non-compliance with applicable laws
Financial Reporting. The OIC conducted SBA’s and regulations as of September 30, 2011. Due
seventh annual assessment of internal control to ongoing system issues with the Agency’s legacy
over financial reporting to comply with this cir- mainframe information system, not all obligors
cular. The revised A-123 requires the managers on 7(a), 504 and disaster charged-off loans were
of federal agencies to take responsibility for as- referred to the Treasury Department for collec-
sessing internal controls over financial reporting. tion of debt as required by the Debt Collection
Improvement Act (DCIA). In FY 2010, a sepa-
The Senior Assessment Team (SAT), chaired by rate system error related to disaster loan referrals
the Chief Financial Officer and comprised of was identified as the cause of non-compliance
SBA managers from the major programs and with DCIA. A mitigation plan was implemented
support offices, directed this effort. The OIC that successfully resolved that issue; however, oth-
reviewed the key business processes impacting er system issues were identified in FY 2011. As
financial operations and the financial statements. a result, the SBA organized a DCIA Compliance
In addition, the SAT members reviewed some of Team made up of representatives from the
the business processes with no material impact Office of Capital Access, the Office of the Chief
on the financial statements, but which have some Financial Officer, and the Office of the Chief
potential for risk or exposure for the Agency. Information Officer who worked together to
identify and resolve each of the system problems.
Based on the evaluation of 15 business processes,
The SBA implemented improvements to support
the OIC identified a number of deficiencies in
the ongoing referral of all disaster loans as well
the internal control over financial reporting,
as co-borrowers and guarantors on all loans. The
including several in SBA’s key business areas.
DCIA Compliance Team will continue to review
However, the OIC determined that most of the
any issues affecting referrals and will make system

Agency FinAnciAl RepoRt • Fy 2011
28
ManageMent’s Discussion & analysis

adjustments as necessary during the imminent y Implement training, including COTR and
transition from the mainframe to a web-based program manager training and contracting
system to confirm the completeness and accuracy staff invoice training.
of referrals to Treasury. y Expand the Contract Management System
audit follow-uP and financial system two-way interfaces and
evaluate possible use of Treasury’s Integrated
SBA’s OIG conducts audits and reviews of the
Payments Platform (IPP) system.
Agency’s operations, and the Office of the Chief
Financial Officer works closely with SBA manage- y Develop a review checklist and review all
ment and the OIG to complete actions necessary active contract files to identify missing
to respond to OIG audits. The OCFO tracks documents and correct documentation errors.
the completion of these audit recommendations y Re-institute legal reviews and expanded legal
and posts the status of all open OIG recom- staff for contracting support in February 2011.
mendations on SBA’s Intranet for managers’ y Enhance training and the intake checklist for
information. In addition, the Agency’s financial invoices to better assess the acceptability of
and program-related internal control has im- invoices.
proved substantially over the years through the
y Revise standard operating policy and
remediation of audit recommendations made by
procedures for Acquisition function.
the Agency’s independent auditor in the annual
financial statements audit. Finally, the SBA also information SyStemS
considers and responds to recommendations from This year the SBA continued to have a significant
audits and reviews conducted by the GAO. deficiency in the information technology security
During FY 2011, the OCFO continued to controls, including contingency planning, secu-
strengthen its financial management team rity management, security access, segregation of
through communication on emerging issues and duties, and software configuration. The Agency
training activities. is sensitive to the need to protect SBA data and
plans to work diligently to improve both process
The SBA recognized that its acquisition func- and performance in this critical area. The follow-
tion was not meeting the Agency’s procurement ing steps to remediate findings pointed out in the
needs and was suffering from significant control Auditors’ Report are currently underway:
issues. Responding to this need and in partner-
ship with various stakeholders, SBA leadership y The Office of the CIO (OCIO) is identifying
initiated a re-organization of the procurement disaster recovery solutions that can enable a
office. This process culminated with the transfer reliable recovery in the event of an emergency.
of the procurement function from the Office of Periodic tests will be performed to assess SBAs
Management and Administration to the Office resiliency and capabilities against disasters.
of Chief Financial Officer in FY 2011. The y The SBA has invested in a leading
newly formed procurement team began identify- vulnerability scanning tool and is configuring
ing significant contracting issues, such as miss- it to prevent and detect inappropriate
ing documentation in the contract files and the activities. Problem areas are reported daily
receipt of valid invoices for expired contracts. with immediate remedial action taken when
The Improper Payment review result also revealed required.
that many contracts issued prior to FY 2011 were y The OCIO will communicate guidance
missing required documentation. The procure- Agency-wide to adequately separate key
ment division has taken the following steps to functions to avoid conflicts in duties as well as
improve the procurement process and strengthen
the internal controls:

Agency FinAnciAl RepoRt • Fy 2011
29
ManageMent’s Discussion & analysis

the adoption of security measures necessary to y The OCIO is establishing processes to
safeguard SBA assets and personnel. ensure all contractors undergo a consistent
y The OCIO will assist with establishing background investigation before gaining access
completeness, integrity and availability of data to sensitive SBA facilities and data.
in systems and security during transmission. y The SBA is determining policies, personnel
y The SBA is promulgating a new policy that and technologies to effectively account for,
blocks connection of non-SBA government manage and decommission assets throughout
equipment to the SBA infrastructure. the Agency.
y The OCIO selected a leading vendor to y The OCIO is updating policies and
provide periodic security training with the procedures aimed at providing incident
latest in security principles. response guidance. These documents will be
communicated to appropriate personnel and
y The OCIO is updating policies related to
training will be conducted to reinforce the
configuration and patch management as well
incident handling process.
as authorizing baseline configurations for
all technologies. Leading enterprise patch
management tools are in review to solidify the
patching function.

Did Green Government Opportunities is an SBA website that serves as a one-
stop destination for all things green in small business. Its purpose is to
you
provide a resource through which small businesses can gain access to
know green contracts, grants and partnerships with the Navy.

For more information, go to http://green.sba.gov/.

Agency FinAnciAl RepoRt • Fy 2011
30
ManageMent’s Discussion & analysis

Summary of Financial Statement Audit and Management Assurances
As required by OMB Circular A-136, Section II.5.6, the following summarizes SBA’s financial statement
audit and SBA’s Management Assurances:

Summary of financial Statement audit
Audit Opinion Unqualified
Restatement No

Material Weaknesses Beginning Balance New Resolved Consolidated Reassessed Ending Balance
Financial Reporting 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
Financial Reporting 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
Overall Substantial Compliance Yes Yes
1. System Requirements Yes
2. Accounting Standards Yes
3. USSGL at Transaction Level Yes

Agency FinAnciAl RepoRt • Fy 2011
31
ManageMent’s Discussion & analysis

FMFIA and FFMIA Assurance Statement for FY 2011
The Small Business Administration continued to strengthen its internal controls over its programs and
operations during FY 2011. Creating 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 is on course to achieve its internal control objectives.

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 assessment of internal controls over the effectiveness and efficiency of opera-
tions and compliance with applicable laws and regulations in accordance with OMB Circular A-123,
Management’s Responsibility for Internal Controls. Agency managers have issued assertions to the
Administrator as to the status of their FY 2011 internal controls, and these assertions are supported by
internal testing, checklists and other management reviews. Although Agency managers reported some
operating deficiencies, these were not of a material nature. Based on the results of this evaluation, I can
provide reasonable assurance that internal controls over operations and compliance with applicable laws
and regulations, as of September 30, 2011, were operating effectively and no material weaknesses were
identified in the design or operation of those internal controls.

In addition, the SBA conducted its assessment of the effectiveness of internal controls over financial
reporting, which includes safeguarding of assets and compliance with applicable laws and regulations, in
accordance with the requirements of Appendix A of OMB Circular A-123. Based on the results of this
evaluation, I can provide reasonable assurance that internal controls over financial reporting were operat-
ing effectively and no material weaknesses were identified in the design or operation of internal controls
over financial reporting.

Results from SBA’s improper payment testing revealed that several contracts issued prior to FY 2011
are missing certain required documentation. The SBA has taken steps to improve its internal control
processes in this area. In FY 2010, the Agency recognized that its acquisition function was not meeting
the Agency’s procurement needs. In response to this need, and in partnership with various stakeholders,
we initiated a re-organization of the procurement office. This process culminated with the transfer of the
procurement function from the Office of Management and Administration to the Office of Performance
Management and Chief Financial Officer in FY 2011. As a result of this re-alignment we have made
significant improvements in this area; however, resolving all the outstanding problems will require ad-
ditional time and resources. Nevertheless, we continue to move forward and strengthen internal controls
and processes.

SBA’s independent auditors issued an unqualified opinion on the Agency’s FY 2011 financial statements
for the seventh year in a row. However, our auditor identified one instance of non-compliance with ap-
plicable laws and regulations as of September 30, 2011. Specifically, due to ongoing system issues with
the Agency’s legacy mainframe information system, not all obligors on 7(a), 504 and disaster charged-
off loans were referred to the Department of Treasury for collection of debt as required by the Debt
Collection Improvement Act (DCIA). In FY 2010, a separate system error related to disaster loan refer-
rals was identified as the cause of non-compliance with DCIA. A mitigation plan was implemented that
successfully resolved that issue; however, other system issues were identified in FY 2011. As a result, the
SBA organized a DCIA Compliance Team, made up of representatives from the Office of Capital Access,
the Office of the Chief Financial Officer, and the Office of the Chief Information Officer, who worked
together to identify and resolve each of the system problems. The SBA has implemented improvements
to support the ongoing referral of defaulted disaster loans to Treasury as well as co-borrowers and guar-

Agency FinAnciAl RepoRt • Fy 2011
32
ManageMent’s Discussion & analysis

antors on all other loans. The DCIA Compliance Team will continue to review any issues affecting refer-
rals and will make system adjustments as necessary during the imminent transition from the mainframe
to a web-based system to confirm the completeness and accuracy of referrals to Treasury.

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 requirements, federal accounting standards, and the United States Government
Standard General Ledger. Based on the FFMIA criteria, the SBA provides reasonable assurance that its
financial management systems substantially comply with FFMIA for FY 2011.

Karen G. Mills
Administrator
November 15, 2011

Agency FinAnciAl RepoRt • Fy 2011
33
ManageMent’s Discussion & analysis

Improper Payments Summary Disaster Assistance program lending procedures
needs improvement.
The Improper Payment Information Act of 2002
(IPIA) requires that agencies: (1) review programs In FY 2010, the SBA recognized that its acquisi-
and identify those susceptible to significant improp- tion function was not meeting the Agency’s pro-
er payments; (2) report to Congress on the amount curement needs and was suffering from significant
and cause of improper payments; and (3) develop control issues. Responding to this need the SBA
approaches for reducing such payments. Appendix initiated a re-organization of the procurement
C to OMB Circular A-123, Management’s office. This process culminated with the transfer
Responsibility for Internal Controls, provides ad- of the procurement function from the Office of
ditional guidance on agency compliance with IPIA Management and Administration to the Office
requirements. On July 22, 2010, the President of Performance Management and Chief Financial
signed into law the Improper Payments Elimination Officer in FY 2011. The newly formed procure-
and Recovery Act (IPERA), which amends the ment office began identifying significant contract-
IPIA by providing alternative improper payments ing issues, and it was determined to conduct a
measurements, increasing the requirements for pilot review for improper payments. As a result,
corrective action plans, and expanding the scope of contracting was determined to be risk-susceptible
recapture auditing to include all types of payments under IPERA for FY 2011, and the SBA developed
and program activities with more than $1 million a statistical sampling methodology to test the ef-
in annual outlays, if cost-effective. Parts I and II of fectiveness of this measurement. Since this was the
Appendix C of the OMB circular were updated on first year that the SBA tested contracting payments,
April 14, 2011 to address the new requirements. In the Agency is continuing to identify the most ap-
addition, OMB Circular A-136 provides guidance propriate measurement process. The SBA will take
on the form and content of IPIA reporting to be in- lessons learned from the test in FY 2011 to refine
cluded in the Agency Financial Report. The SBA’s the measurement process and report improper pay-
improper payment program and reporting is subject ment estimates in the FY 2012 Agency Financial
to this guidance. Report. Moving forward, the SBA will not only
improve its improper payments measurement for
SBA’s four major credit programs are subject to im-
contracting over the coming year, but it will im-
proper payment reporting as required by the former
prove the business processes and controls currently
Section 57 of Circular A-11. The four programs
in place.
are the 7(a) Business Loan program, the Section
504 Certified Development Company (504) loan The 7(a) guaranty purchase operation includes
program, the Small Business Investment Company centers in Herndon, Virginia, Fresno, California,
(SBIC) program and the Disaster Assistance loan and Little Rock, Arkansas that are aligned within
program. SBA’s risk assessment of the 7(a), 504, the Office of Capital Access. The FY 2011 7(a)
and SBIC guaranty approval programs for im- guaranty purchase improper payment rate was
proper payment indicate a low level of risk due to determined to be 1.73 percent or $40.7 million
the internal controls applied over these programs. compared with last year’s improper payment rate
Improper payments in these guaranty approval of 1.87 percent. The 7(a) guaranty purchase
programs are extremely low or non-existent. The review contains a number of judgmental consider-
SBA considers the 7(a) guaranty purchase program ations concerning whether the originating lender
to have a medium risk of improper payments. exercised reasonable commercial care and pru-
The Disaster Assistance program has a low risk of dence in the execution, servicing and liquidation
loss, but improper payment reviews have found of the loan in accordance with SBA loan program
that compliance with the paperwork required in requirements; and whether or not the lender’s ac-

Agency FinAnciAl RepoRt • Fy 2011
34
ManageMent’s Discussion & analysis

tions or inactions have placed the SBA at finan- 12.1 percent. Furthermore, the majority of loans
cial risk or contributed materially to the loan made are collateralized and all such loans have to
default. The evaluation of the lender’s exercise of be repaid, and SBA’s loan servicing and liquidation
reasonable commercial lending practices is criti- operation attains maximum recovery. The reduced
cal and needs to be consistent with the lending improper payment rate in FY 2011 indicates an
practices exercised related to loans that did not improvement in adherence to the documentation
default. The exercise of SBA’s judgment in this requirements from the previous year; however, the
area is significant to the improper rate calculation rate did not decrease as rapidly as anticipated as
since over 85 percent of SBA 7(a) loans are ap- older loans have not all been fully disbursed and
proved by lenders using delegated authority where are therefore still subject to Improper Payment
they make the credit underwriting decisions. selection criteria. The disaster centers continue to
provide additional training to ensure that staff is
In accordance with OMB guidance, the SBA aware of all paperwork requirements. A dedicated
includes loan guaranty approvals issued during FY team continues to perform Quality Assurance
2011 in its Improper Payment program reporting reviews in addition to the Improper Payment re-
for its 7(a), 504 and SBIC programs. Although views which facilitates the identification of areas of
these guaranties have not yet resulted in federal concern and correction in a timely manner.
outlays, they could possibly in the future and
they are therefore included. Most frequently, the The Agency tested disbursement transactions and
reason for an improper payment in this category corresponding documentation related to contracts
would be the lack of appropriate eligibility or a for the period of April 1, 2010 to March 31, 2011.
non-compliance with lending procedures. The Given the selected timeframe, 99 percent of the
result of SBA’s testing for 7(a) and 504 guaran- contracts included for testing were awarded prior
ties issued in FY 2011 indicated a zero percent to FY 2011. In a validation of prior observations
improper payment rate for both guaranty approval by the new contracting office, the results from
programs. The SBIC program testing found few the Improper Payment testing revealed that many
administrative and documentation errors and the contracts issued prior to FY 2011 were missing
SBA is continuing to train fund managers and per- required documentation. Every payment related
form compliance checks on licensees to reduce the to a contract with some form of missing documen-
error rate. The improper payment rate for SBIC is tation could be considered an improper payment,
1.2 percent or $17.0 million when extrapolated. and therefore SBA’s improper payment rate could
reach 89 percent or $118.4 million. However, the
The Disaster Assistance program operation in- majority of these documentation errors did not re-
cludes a processing center in Fort Worth and op- sult in actual payment errors and the SBA received
eration centers in Atlanta and Sacramento, as well goods and services in exchange for contract pay-
as a Buffalo customer service center. The FY 2011 ments. An improper payment rate that considered
disaster improper payment rate was determined only payments made for incorrect amounts or not
to be 28.4 percent or $96.3 million compared to in strict compliance with contract terms (payment
34.2 percent reported last year. Disaster improper errors) would result in an improper payment rate
payments are generally the result of loan docu- of 3 percent or $4.5 million.
mentation errors and do not result in a disaster
victim receiving funds that they are not eligible This is the first year that improper payment test-
to receive. If the improper payment measure- ing was performed in the contracting area; there-
ment only reflected payments made to potentially fore, there is no historical data with which to com-
ineligible borrowers or in an incorrect payment pare the outcome of the FY 2011 review. SBA’s
amount, the improper payment rate would be procurement office has made immediate corrective

Agency FinAnciAl RepoRt • Fy 2011
35
ManageMent’s Discussion & analysis

actions. Specifically, it has provided extensive In summary, the SBA places a top priority on the detec-
training to staff throughout the Agency, established tion and remediation of improper payment occurrence.
a Quality Assurance Branch and has worked to The contracting activities, 7(a) guaranty approval and
correct problems in a timely manner as they are purchase, 504 guaranty approval, SBIC and Disaster
identified. Many of the payments in the improper Assistance loan programs now have staff that monitor
payment sample were associated with aged con- and review their operations for improper payments and
tracts and therefore evidence of the improvements are charged with implementing improvements that will
made will not be seen immediately. reduce the Agency’s improper payment rate.

Did SBA Lenders play a vital role in helping the SBA achieve its mission in
helping small businesses start and grow across the United States. In FY
you
2011, the SBA supported over $30 billion in lending to over 54,000 small
know businesses.

For more information, go to www.sba.gov/for-lenders.

Agency FinAnciAl RepoRt • Fy 2011
36
Financial
Reporting
Success Story An Engineering Focus on the Unique Needs of Urban Areas
Integrated Management Services, Jackson, Mississippi

Integrated Management Services was formed in 1996 by two visionaries who saw the
need for an engineering firm focused on the unique needs of urban areas. John D.
Calhoun and Rod L. Hill, both former employees of the city of Jackson, now operate a
thriving business that offers full-service consulting, engineering, technical, emergency
response, construction management and operations assistance to help public and
private clients improve their environment and infrastructure.

Today, IMS successfully manages construction projects with values exceeding $1 bil-
lion annually. IMS worked on multiple Gulf Coast rebuilding projects after Hurricane
Katrina and secured a $69,560 federal contract in 2010 from the U.S. Department
of the Army for general engineering services performed under the American Recovery
and Reinvestment Act. IMS received a $102,000 SBA-guarantied CAPLine line of credit in 1998 to sustain its early
growth, and participated in SBA’s 8(a) Business Development program to boost procurement opportunities.

The company has grown from a two-person firm in Jackson to a staff of 178 today with additional offices in
Greenville, Mississippi, Memphis, Tennessee., New Orleans, and Detroit. The firm recorded a phenomenal sales
growth of 908 percent during its first five years in operation.

The SBA Community site provides open, publicly accessible forums and
Did communication tools for small business owners to learn, share, and
you discuss practical solutions to everyday business problems with each
know other, industry experts, and experts at government agencies.

For more information, go to http://community.sba.gov/register.
Financial Repo rting

Message from the chief Financial Officer
November 15, 2011

I am pleased to submit the U.S. Small Business Administration’s Agency Financial Report for FY 2011. For
the fifth straight year the SBA has won the prestigious Certificate of Excellence in Accountability Reporting
award. This success is attributed to my staff, and I would like to thank them for their hard work and com-
mitment to reporting transparency and accountability.

An independent audit has earned the SBA an unqualified opinion with no material weaknesses. However,
our auditor identified one instance of non-compliance with applicable laws and regulations as of September
30, 2011. Due to ongoing system issues 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 have been imple-
mented to support the referral of loans and the SBA will make system adjustments as necessary to confirm
the completeness and accuracy of referrals to Treasury.

This year, the SBA reached an all-time record in small business lending, supporting over $30 billion in
lending to over 60,000 small businesses. The supported amount for 504 loans includes the SBA share and
third party loans that are made by commercial lenders as part of the funding package. The first quarter of
the year, at over $12 billion supported, was the most active single quarter ever for SBA-backed loans. The
unprecedented loan volume was prompted by critical provisions of the Small Business Jobs Act, which
allowed the SBA to raise loan guaranties in its 7(a) loan program and reduce fees in its 7(a) and 504 loan
programs. I am pleased to report that our financial management team once again expertly handled the
challenges associated with accounting for this historic loan volume.

SBA’s efforts to assist entrepreneurs and small business owners are especially critical as the U.S. economy
continues to recover and grow. Throughout America’s history, small businesses have played the leading
role in job creation. In fact, more than half of working Americans 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. The SBA plays a critical role in strengthening America’s economy by providing tools to help grow
businesses and create jobs. At the same time, the federal government is entering a period of renewed focus
on how to spend the taxpayers’ money most effectively and efficiently.

In June 2011, the President signed the Executive Order, Delivering an Efficient, Effective, and Accountable
Government, and OMB announced the White House’s Campaign to Cut Waste. As part of SBA’s efforts to
support this initiative, we revamped how the Agency processes outstanding receivables to speed the collection
of $25 million in outstanding debt. The changes we made in response to this challenge allowed us to deploy
our resources more effectively and to provide more thorough oversight of the collections process. To date, we
have collected $15 million, and we are on target to retire this delinquent debt by the close of FY 2012.

Recognizing the need to integrate budget and acquisition processes, the SBA transitioned the acquisition
function to the Office of Performance Management and Chief Financial Officer, with primary operations
being conducted in SBA’s Denver Finance Center. This transition has been possible only because of the
hard work and determination of Agency staff to improve operations. Throughout FY 2011, a realigned
Acquisition Division has made considerable progress toward standardizing and improving SBA’s procure-
ment process. As of October 1, the SBA met its overall FY 2011 small business contracting goal — at 67.5
percent, the highest percentage goal in the government for small business contracts — as well as all socio-
economic sub-goals.

Agency Financial Report • FY 2011
39
Financial Repo rtin g

In FY 2011, our Performance Management Office led an enhanced weekly, monthly and quarterly Agency-
wide performance reporting process to track progress against Agency goals, including the High Priority
Performance Goals. We also worked with our Office of Communication and Public Liaison to create a
performance portal on SBA’s redesigned website, www.sba.gov/performance, to provide the public with easy
access to the Agency’s performance and financial information.

To ensure that the SBA continues to have the resources necessary to help small businesses grow and create
jobs, we have begun to reassess our succession planning model. A substantial number of SBA career Senior
Executive Service and permanent General Schedule employees are fully eligible or will become eligible to
retire between FY 2011 and FY 2016. The Small Business Administration’s leadership team has identified
this as a High Risk Challenge that must be addressed. As of February 24, 2011, 48.4 percent of the full
time SBA GS employees are eligible to retire within five years. As a result, the Agency has taken steps to
address this challenge through Voluntary Early Retirement Authority and Voluntary Separation Incentive
Payment programs and succession planning to offset risk.

Finally, I want to thank the independent Audit and Financial Management Advisory Committee who, since
late FY 2004, has advised us in the financial reporting process and audit cycle, provided oversight of activi-
ties, and made recommendations for our financial statement footnotes and the AFR prior to publication.
We are proud to work with one of the few independent audit committees within the federal government
and appreciate the opportunity to have such an esteemed group of professionals advising us. I thank them
for their support and dedication to continued improvement.

Sincerely,

Jonathan I. Carver,
Associate Administrator for Performance Management
& Chief Financial Officer

Agency Financial Report • FY 2011
40
Financial Repo rting

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 respon-
sibility, 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 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 conformity of SBA’s audited financial statements with the U.S. generally accepted ac-
counting 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), including its financial statements, and provides comments to management who has primary
responsibility for the AFR. The Committee met four times during the year with respect to these respon-
sibilities on FY 2011 financial management and reporting. Two of the meetings were conducted by the
Committee via teleconference. 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 2011 AFR.

Edward J. Mazur
Chairman
Audit and Financial Management Advisory Committee

Agency Financial Report • FY 2011
41
Financial Repo rtin g

Inspector General’s Audit Report

Agency Financial Report • FY 2011
42
Financial Repo rting

Agency Financial Report • FY 2011
43
Financial Repo rtin g

Independent Auditor’s Report on FY 2011 Financial Statements

KPMG LLP
2001 M Street, NW
Washington, DC 20036-3389

Independent Auditors’ Report

Office of Inspector General,
U.S. Small Business Administration:

We have audited the accompanying consolidated balance sheets of the U.S. Small Business Administration
(SBA) as of September 30, 2011 and 2010, and the related consolidated statements of net cost and changes
in net position, and combined statements of budgetary resources (hereinafter referred to as “consolidated
financial statements”) for the years then ended. The objective of our audits was to express an opinion on
the fair presentation of these consolidated financial statements. In connection with our Fiscal Year (FY)
2011 audit, we also considered the SBA’s internal control over financial reporting and tested the SBA’s
compliance with certain provisions of applicable laws, regulations, contracts, and grant agreements that
could have a direct and material effect on these consolidated financial statements.

Summary
As stated in our opinion on the consolidated financial statements, we concluded that the SBA’s
consolidated financial statements as of and for the years ended September 30, 2011 and 2010, are presented
fairly, in all material respects, in conformity with U.S. generally accepted accounting principles.

Our consideration of internal control over financial reporting resulted in identifying certain deficiencies
that we consider to be significant deficiencies, as defined in the Internal Control Over Financial Reporting
Section of this report, as follows:

Improvement Needed in Information Technology Security Controls

We did not identify any deficiencies in internal control over financial reporting that we consider to be
material weaknesses as defined in the Internal Control Over Financial Reporting Section of this report.

The results of our tests of compliance with certain provisions of laws, regulations, contracts, and grant
agreements disclosed one instance of noncompliance and one other matter that are required to be reported
under Government Auditing Standards, issued by the Comptroller General of the United States, and Office
of Management and Budget (OMB) Bulletin No. 07-04, Audit Requirements for Federal Financial
Statements, as amended.

Noncompliance with the Debt Collection Improvement Act of 1996

The following sections discuss our opinion on the SBA’s consolidated financial statements; our
consideration of the SBA’s internal control over financial reporting; our tests of the SBA’s compliance
with certain provisions of applicable laws, regulations, contracts, and grant agreements; and management’s
and our responsibilities.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of the SBA as of September 30, 2011 and
2010, and the related consolidated statements of net cost and changes in net position, and the combined
statements of budgetary resources for the years then ended.

KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity.

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44
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U.S. Small Business Administration
November 14, 2011
Page 2 of 4

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the SBA as of September 30, 2011 and 2010, 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.

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.

The information in the Other Accompanying Information section is presented for purposes of additional
analysis and is not required as part of the consolidated financial statements. This information has not been
subjected to auditing procedures and, accordingly, we express no opinion on it.

Internal Control Over Financial Reporting
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.

Our consideration of 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 internal control
over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. In our
FY 2011 audit, we did not identify any deficiencies in internal control over financial reporting that we
consider to be material weaknesses, as defined above. However, we identified a deficiency in internal
control over financial reporting described in Exhibit I that we consider to be significant deficiency in
internal control over financial reporting. 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.

Exhibit II presents the status of the prior year significant deficiency.

We noted certain additional matters that we have reported to management of the SBA in a separate letter
dated November 14, 2011.

Compliance and Other Matters
The results of certain of our tests of compliance as 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 and one other matter that are required to be reported herein under
Government Auditing Standards or OMB Bulletin No. 07-04, and are described below.

Debt Collection Improvement Act of 1996 (DCIA). During our testwork over loan charge-offs, we noted
the SBA did not refer obligors to the U.S. Department of Treasury (Treasury) for offset or cross-servicing,
in accordance with DCIA. Specifically, we noted the SBA did not refer obligors (eligible principal
borrowers, co-borrowers, and/or guarantors) associated with 504 delinquent Disaster Assistance loans to
the Treasury for offset or cross-servicing at time of charge-off. We also noted in the 7(a), 504, and Disaster
programs more than 5,000 eligible co-borrowers and guarantors were not referred for offset or cross-

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45
Financial Repo rtin g

U.S. Small Business Administration
November 14, 2011
Page 3 of 4

servicing, in conjunction with the principal borrower at time of loan charge-off. In both conditions, the
obligors were not referred to the Treasury for collection during the period under review due to systemic
problems with the legacy mainframe system utilized by the SBA to facilitate the referral process.
Specifically, certain outdated system edits in the SBA’s referral protocol prevented certain loans in
charged-off status from being transferred to the Treasury for collection. Also, programmers in the Office of
the Chief Information Officer modified the system code (referral protocol) but did not test the program
changes during the development phase prior to implementing the changes in production. We noted during
the fourth quarter of FY 2011 that the Office of the Chief Information Officer was in the process of
implementing actions to address these deficiencies which led to the noncompliance with the DCIA. Exhibit
III presents the status of the prior year noncompliance finding, which was also related to DCIA.

The results of our other tests of compliance as described in the Responsibilities Section of this report,
exclusive of those referred to in FFMIA, disclosed no instances of noncompliance and one other matter that
is required to be reported herein under Government Auditing Standards or OMB Bulletin No. 07-04.

A matter has been identified that may be a violation of the Federal Acquisition Regulation documentation
retention requirements. This matter is currently under review by SBA management and the Office of
Inspector General. The outcome of this matter is not presently known.

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.

*******

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 the SBA.

Auditors’ Responsibilities. Our responsibility is to express an opinion on the FY 2011 and 2010
consolidated financial statements of the 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 the 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.

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46
Financial Repo rting

U.S. Small Business Administration
November 14, 2011
Page 4 of 4

In planning and performing our FY 2011 audit, we considered the SBA’s internal control over financial
reporting by obtaining an understanding of the 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, but not for the purpose of expressing an opinion on the effectiveness of the SBA’s internal
control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the
SBA’s internal control over financial reporting. We did not test all controls relevant to operating objectives
as broadly defined by the Federal Managers’ Financial Integrity Act of 1982.

As part of obtaining reasonable assurance about whether the SBA’s FY 2011 consolidated financial
statements are free of material misstatement, we performed tests of the 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
the preceding sentence, and we did not test compliance with all laws, regulations, contracts, and grant
agreements applicable to the 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 14, 2011

Agency Financial Report • FY 2011
47
Financial Repo rtin g

Exhibit I
U.S. Small Business Administration
Significant Deficiency

The significant deficiency identified for the year ended September 30, 2011, is summarized below:

Improvement Needed in Information Technology Security Controls

During the Fiscal Year (FY) 2010 financial statement audit, we identified 20 information technology (IT)
control findings and recommended many corresponding corrective actions. During the FY 2011 financial
statement audit, we found that the U.S. Small Business Administration (SBA) implemented corrective
actions to substantially remediate 10 of the 20 findings; however, we also identified 8 new IT control
findings. Therefore, SBA’s IT control environment continues to require improvement. The FY 2011 IT
control deficiencies fall within the control areas of security access, including configuration and patch
management, segregation of duties, and contingency planning. We are not providing details in this report
on the specific deficiencies due to sensitivity considerations, but we have provided the details in a separate
report to SBA management. Exhibit II of our report discloses the status of prior year IT findings.

Security Access Controls

Integral to an organization’s security program management efforts, system security access controls 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 FY 2011 SBA financial
statement audit follows:
• We identified several high- and medium-risk security vulnerabilities affecting various financial
systems. We provided the detailed vulnerabilities to SBA management.
• We identified weaknesses in network access controls and one financial system.
• SBA was unable to provide evidence that security incidents are analyzed, validated, and resolved.
• Physical access control procedures can be improved for a financial system hosted by an SBA service
provider. In addition, access to the service provider data center can be improved.
• Several users have unnecessary access to one SBA financial subsystem.
• User accounts are not reviewed in accordance with SBA policy for five of the seven systems we
reviewed.
• There are weak controls over the monitoring and review of audit logs for two of the seven systems we
reviewed.

Recommendation – Security Access Controls:

We recommend that the Chief Information Officer (CIO) coordinate with SBA program offices to:

1. Enhance security vulnerability management processes. Specifically, SBA should: (a) redistribute
procedures and train employees on the process for reviewing and mitigating security vulnerabilities,
(b) periodically monitor the existence of unnecessary services and protocols running on their servers
and network devices, (c) perform vulnerability assessments with administrative credentials and
penetration tests on all SBA offices from a centrally managed location with a standardized reporting

I-1

Agency Financial Report • FY 2011
48
Financial Repo rting

Exhibit I
U.S. Small Business Administration
Significant Deficiency

mechanism that allows for trending, on a regularly scheduled basis in accordance with National
Institute of Standards and Technology (NIST) guidance, (d) develop a more thorough approach to track
and mitigate configuration management vulnerabilities identified during monthly scans, and (e)
monitor security vulnerability reports for necessary or required configuration changes to their
environment.
2. Update the vulnerability assessment team (VAT) procedures, to include: (a) updating the VAT policies
and procedures in accordance with NIST, (b) performing technical reviews of the results for critical
issues that need immediate action and take timely corrective action, (c) executing procedures to
monitor the completion of the patch management deployment across the SBA enterprise, and (d)
prioritizing vulnerabilities as part of the ongoing continuous monitoring process.
3. Prevent users from anonymously connecting unauthorized devices by developing and implementing
procedures to ensure mandatory domain authentication for Internet Protocol (IP) address issuance.
4. Ensure users’ access rights are authorized prior to gaining access to financial systems.
5. Fully implement the SBA entity wide incident management and response program and ensure that
procedures are enforced.
6. Ensure that information systems hosted by third parties comply with SBA policy and NIST guidance.
7. Develop and implement procedures for user access reviews to ensure that proper access rights are set
for financial subsystems.
8. Oversee the review and validation of financial system accounts on a quarterly basis.
9. Implement a process to monitor the audit logs of all financial applications on a regular basis.

Segregation of Duties

The primary focus of an organization’s segregation of duties controls is to provide reasonable assurance
that incompatible duties are effectively segregated. Without such controls, there is a risk that unauthorized
changes could be implemented into the IT environment, and users may have access that is inappropriate for
their duties. As a result, the confidentiality, integrity, and availability of financial data are at risk of
possible loss, modification, or disclosure.
A summary of the segregation of duties control deficiencies we identified during the FY 2011 SBA
financial statement audit follows:

• An authorized user had conflicting access rights in a key financial system.
• Six users were authorized with rights as a database administrator (DBA) and system administrator to a
financial application hosted by a SBA service provider.

Recommendations – Segregation of Duties:

We recommend the CIO coordinate with the Chief Financial Officer (CFO) to:

10. Restrict access to software program libraries based on the principle of least privilege, and implement
compensating controls over actions where limited resources cause individuals to perform conflicting
job functions.
I-2

Agency Financial Report • FY 2011
49
Financial Repo rtin g

Exhibit I
U.S. Small Business Administration
Significant Deficiency

11. Ensure that DBA and system administrator access is restricted through role-based segregation of duties
and managed through an effective audit log review process.

Security Management
An entity-wide information security management program is the foundation of a security control structure
and a reflection of senior management’s commitment to addressing security risks. This security
management program should establish a framework and continuous cycle of activity for assessing risk,
developing and implementing effective security procedures, and monitoring the effectiveness of these
procedures. During the FY 2011 SBA financial statement audit, we found that a mandatory training
program for IT security personnel has not been implemented.
Recommendations – Security Management:

We recommend the CIO:

12. Develop a comprehensive security education and training program for all IT security personnel and a
method for monitoring the training program.

Software Configuration Management
The primary focus of an organization’s software configuration management process is to control the
software changes made to networks and systems. 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.

A summary of the configuration management deficiencies we identified during the FY 2011 SBA financial
statement audit follows:

• The configuration management process is not centralized, and the Enterprise Change Control Board
governance processes are not fully implemented across SBA.
• SBA personnel could not provide sufficient evidence to support software change authorizations for one
financial system.
• For one financial subsystem, loan charge-off software changes were not tested before being moved to
production, which impacted the SBA’s compliance with the Debt Collection Improvement Act of 1996
(DCIA). Note that these issues were reported as a noncompliance with the DCIA in the Compliance
and Other Matters section of our audit report.

Recommendations – Software Configuration Management:

We recommend the CIO:

13. Enforce an organization-wide configuration management process, to include policies and procedures
for maintaining documentation that supports testing and approvals of software changes.

We recommend the CIO coordinate with the CFO to:

I-3

Agency Financial Report • FY 2011
50
Financial Repo rting

Exhibit I
U.S. Small Business Administration
Significant Deficiency

14. Implement configuration management policies and procedures for document retention to include
supporting evidence to validate the authorization of operating system changes.

Contingency Planning
The focus of an organization’s contingency planning program should 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.

A summary of the contingency planning weaknesses we identified during the FY 2011 SBA financial
statement audit follows:

• Backup tapes necessary to restore system operations are not consistently rotated off-site for four of the
seven systems we reviewed.
• Comprehensive contingency and disaster recovery plans have not been developed, authorized, nor
tested for three of the seven systems reviewed. Additionally, we noted that two financial systems and
the Headquarters (HQ) Continuity of Operations Plan (COOP) were in place; however, the plans were
not tested on a semiannual basis as prescribed by SBA policy.

Recommendations – Contingency Planning:

We recommend the CIO:

15. Enforce existing SBA policies to rotate backups off-site.

We recommend the CIO coordinate with the CFO to:

16. Create, implement, and test system specific and the HQ COOP.

I-4

Agency Financial Report • FY 2011
51
Financial Repo rtin g

Exhibit II
U.S. Small Business Administration
Status of Prior Year Significant Deficiency

Fiscal Year 2010 Finding Fiscal Year 2011 Status of Finding

Improvement Needed in Information Technology (IT) During our review of SBA’s IT general and application
Security Controls controls, we noted some improvements made to
address prior year findings. However, control
deficiencies continue to exist.

Therefore, in Fiscal Year (FY) 2011, the issue is again
presented in Exhibit I. 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 the associated impact on the
consolidated financial statements.

II-1

Agency Financial Report • FY 2011
52
Financial Repo rting

Exhibit III
U.S. Small Business Administration
Status of Prior Year Noncompliance

Fiscal Year 2010 Finding Fiscal Year 2011 Status of Finding

Debt Collection Improvement Act of 1996 (DCIA) During our review over SBA’s compliance with the
DCIA, we noted improvements made in SBA’s
During our Fiscal Year (FY) 2010 audit, we noted the Treasury cross-servicing referral process. However,
agency was noncompliant with the DCIA. The during FY 2011, we noted instances of noncompliance
noncompliance was due to instances where SBA did related to timely referrals of loan charge-offs to
not refer a substantial number of charged-off disaster Treasury for offset and cross-servicing.
loans to Treasury for cross-servicing.
Therefore, in FY 2011, the issue is again presented in
the Compliance and Other Matters section of our
Independent Auditors’ Report.

III-1

Agency Financial Report • FY 2011
53
Financial Repo rtin g

Exhibit IV

CFO Response to Draft Audit Report on FY 2011 Financial Statements

DATE: November 14, 2011

TO: John Needham, Assistant IG for Auditing

FROM: Jonathan Carver, Chief Financial Officer

SUBJECT: Draft Audit Report on FY 2011 Financial Statements

The Small Business Administration is in receipt of the draft Independent Auditors’ Report from KPMG that
includes the auditor’s 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 delighted that the SBA has again received an unqualified audit opinion from the independent auditor
with no reported 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 auditors. Our core financial
reporting data and processes have improved substantially, 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. As the
auditor noted in its report on the 2011 financial statements, the SBA implemented corrective action this year
to substantially remediate 10 of the 20 prior year IT control findings. The auditor, however, identified 8 new
IT findings this year. The SBA will continue to improve the Agency’s IT security during the upcoming fiscal
year. The SBA will continue to track, monitor, and aggressively mitigate vulnerabilities in all Agency systems.
Furthermore, the SBA will continue its work to 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 in the non referral of delinquent and 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 auditor again found instances of charged off disaster loans and eligible business loan
co-borrowers and guarantors that were not referred to Treasury. Research by the SBA identified the systemic
issues that caused this finding and they were rectified this year. The SBA is working aggressively on this non
compliance issue to eliminate it in FY 2012.

During the audit, the auditor identified a potential non compliance with Federal Acquisition Regulation
requirements for document retention. The SBA had previously recognized the need for improvement to its
acquisition process and has taken action to reorganize and improve its processes concerning the acquisition of
goods and services. Furthermore, procurement actions during the current year have been conducted in accor-
dance with FAR requirements, including file documentation, and the SBA is now working to review and fully
document prior year procurement files.

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 recom-
mendations that will further enhance SBA’s financial management practices. We continue to be committed to
excellence in financial management and look forward to making more progress in the coming year.

Agency Financial Report • FY 2011
54
Financial Repo rting

Financial Statements and notes

The U.S. Small Business Administration prepares its financial statements as a critical aspect of ensuring ac-
countability 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 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 prin-
cipal financial statements and the quality of internal controls. The statements are used, along with other
financial reports, to monitor and control budgetary resources. 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 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 report-
ing 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 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 includes offsetting receipts in this statement for
the purpose of reconciling outlay information presented in 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 hu-
man capital.

Agency Financial Report • FY 2011
55
Financial Repo rtin g

U. S. Small Business Administration
Consolidated Balance Sheet
as of September 30, 2011 and 2010

(Dollars in Thousands)
2011 2010
ASSeTS
Intragovernmental Assets
Fund Balance with Treasury (Note 2) $ 8,469,322 $ 6,116,325
Accounts Receivable (Note 5) 406 –
Total Intragovernmental Assets 8,469,728 6,116,325

Assets - Public and Other
Cash (Note 3) 2,935 3,031
Accounts Receivable, Net (Note 5) 52,813 30,961
Credit Program Receivables and Related Foreclosed Property, Net (Note 6) 8,354,739 9,076,679
General Property and Equipment, Net (Note 7) 1,804 2,817
Advances 782 663
Total Assets - Public and Other 8,413,073 9,114,151
Total Assets $ 16,882,801 $ 15,230,476

LiABiLiTieS
Intragovernmental Liabilities
Interest Payable $ 1,347 $ 1,435
Debt (Note 9) 11,190,279 11,753,781
Net Assets of Liquidating Funds Due to Treasury (Note 10) 63,970 68,359
Downward Reestimate Payable to Treasury (Note 1, Note 13) 911,765 130,993
Other (Note 8, Note 11) 13,657 14,234
Total Intragovernmental Liabilities 12,181,018 11,968,802

Other Liabilities - Public
Accounts Payable (Note 1) 94,628 169,723
Accrued Grant Liability (Note 1) 76,000 62,576
Liability for Loan Guaranties (Note 6) 4,741,442 4,467,006
Federal Employees’ Compensation Act Actuarial Liability (Note 1, Note 8) 30,630 29,960
Surety Bond Guarantee Program Future Claims (Note 8) 20,385 19,539
Other (Note 8, Note 11) 47,721 47,415
Total Other Liabilities - Public 5,010,806 4,796,219
Total Liabilities 17,191,824 16,765,021

neT POSiTiOn
Unexpended Appropriations (Note 1) 1,537,185 2,295,070
Cumulative Results of Operations (Note 1) (1,846,208) (3,829,615)
Total net Position (309,023) (1,534,545)

Total Liabilities and net Position $ 16,882,801 $ 15,230,476

The accompanying notes are an integral part of these statements.

Agency Financial Report • FY 2011
56
Financial Repo rting

U. S. Small Business Administration
Consolidated Statement of Net Cost
For the years ended September 30, 2011 and 2010

(Dollars in Thousands)
2011 2010
STrATegiC gOAL 1:
growing Businesses and Creating Jobs
Gross Cost $ 4,000,361 $ 5,799,783
Less: Earned Revenue 696,210 626,087
net Cost of Strategic goal 1 3,304,151 5,173,696

STrATegiC gOAL 2:
Building an SBA that meets the needs of Today’s
and Tomorrow’s Small Businesses
Gross Cost 6,132 5,343
Total Program Cost of Strategic goal 2 6,132 5,343

STrATegiC gOAL 3:
Serving as the Voice for Small Business
Gross Cost 13,454 12,738
Total Program Cost of Strategic goal 3 13,454 12,738

COST nOT ASSigneD TO STrATegiC gOALS
Gross Cost 136,825 85,420
Total Program Cost not Assigned to Strategic goals 136,825 85,420

net Cost of Operations $ 3,460,562 $ 5,277,197

note 12, note 14
The accompanying notes are an integral part of these statements.

Agency Financial Report • FY 2011
57
Financial Repo rtin g

U. S. Small Business Administration
Consolidated Statement of Changes in Net Position
For the years ended September 30, 2011 and 2010

(Dollars in Thousands)
2011 2010

Beginning Cumulative results of Operations $ (3,829,615) $ (4,672,104)

Budgetary Financing Sources
Appropriations Used 6,353,577 6,231,677
Donations of Cash and Cash Equivalents 33 24

Other Financing Sources
Imputed Financing from Costs Absorbed by Others 26,749 32,765
Other - Cancelled Authority – (3)
Other - Current Year Liquidating Equity Activity (2,409) (760)
Other - Non-entity Activity (933,981) (144,017)
Total Financing Sources 5,443,969 6,119,686

Less: net Cost of Operations 3,460,562 5,277,197

ending Cumulative results of Operations $ (1,846,208) $ (3,829,615)

Beginning Unexpended Appropriations $ 2,295,070 $ 1,983,504

Budgetary Financing Sources
Appropriations Received 5,611,644 6,554,119
Rescissions (1,462) –
Adjustment - Cancelled Authority (10,120) (7,598)
Other Adjustments (4,370) (3,278)
Appropriations Used (6,353,577) (6,231,677)
Total Budgetary Financing Sources (757,885) 311,566

ending Unexpended Appropriations $ 1,537,185 $ 2,295,070

ending net Position $ (309,023) $ (1,534,545)

The accompanying notes are an integral part of these statements.

Agency Financial Report • FY 2011
58
Financial Repo rting

U. S. Small Business Administration
Combined Statement of Budgetary Resources
For the years ended September 30, 2011 and 2010

(Dollars in Thousands)
September 30, 2011
nonbudgetary
Budgetary Financing Total
BUDgeTArY reSOUrCeS
Unobligated Balance
Brought Forward October 1 $ 1,768,609 $ 3,458,375 $ 5,226,984
Recoveries of Prior Year Obligations 69,518 91,458 160,976

Budget Authority
Appropriations Received 5,611,644 – 5,611,644
Borrowing Authority – 1,078,132 1,078,132
Spending Authority from Offsetting Collections
Earned 384,449 8,384,188 8,768,637
Change in Unfilled Customer Orders 78,802 16,453 95,255
Total Budget Authority 6,074,895 9,478,773 15,553,668

Permanently Not Available (24,302) (1,640,034) (1,664,336)
Total Budgetary resources $ 7,888,720 $ 11,388,572 $ 19,277,292

STATUS OF BUDgeTArY reSOUrCeS
Obligations Incurred, Net
Direct $ 6,103,428 $ 4,973,564 $ 11,076,992
Reimbursable 816,015 – 816,015
Total Obligations Incurred, Net 6,919,443 4,973,564 11,893,007

Unobligated Balances, Available 271,885 1,845,919 2,117,804
Unobligated Balances, Not Available 697,392 4,569,089 5,266,481
Total Status of Budgetary resources $ 7,888,720 $ 11,388,572 $ 19,277,292

CHAnge in OBLigATeD BALAnCeS
Obligated Balance Brought Forward, Net October 1
Unpaid Obligations Brought Forward $ 676,054 $ 443,586 $ 1,119,640
Uncollected Customer Payments from Federal Sources Brought Forward – (230,303) (230,303)
Total Obligated Balance Brought Forward, Net 676,054 213,283 889,337

Obligations Incurred 6,919,443 4,973,564 11,893,007
Gross Outlays (6,778,868) (4,741,014) (11,519,882)
Recoveries of Prior Year Unpaid Obligations (69,518) (91,458) (160,976)
Change in Uncollected Customer Payments from Federal Sources – (16,453) (16,453)

Obligated Balance, Net, End of Period
Unpaid Obligations 747,111 584,678 1,331,789
Uncollected Customer Payments from Federal Sources – (246,756) (246,756)
Total Obligated Balance, net, end of Period $ 747,111 $ 337,922 $ 1,085,033

neT OUTLAYS
Gross Outlays $ 6,778,868 $ 4,741,014 $ 11,519,882
Offsetting Collections (463,253) (8,384,188) (8,847,441)
Net Outlays Before Offsetting Receipts 6,315,615 (3,643,174) 2,672,441
Offsetting Receipts (97) (153,211) (153,308)
net Outlays $ 6,315,518 $ (3,796,385) $ 2,519,133

note 15
The accompanying notes are an integral part of these statements.

Agency Financial Report • FY 2011
59
Financial Repo rtin g

U. S. Small Business Administration
Combined Statement of Budgetary Resources
For the years ended September 30, 2011 and 2010

(Dollars in Thousands)
September 30, 2010
nonbudgetary
Budgetary Financing Total
BUDgeTArY reSOUrCeS
Unobligated Balance
Brought Forward October 1 $ 1,506,612 $ 1,195,311 $ 2,701,923
Recoveries of Prior Year Obligations 53,179 81,604 134,783

Budget Authority
Appropriations Received 6,554,119 – 6,554,119
Borrowing Authority – 2,737,959 2,737,959
Spending Authority from Offsetting Collections
Earned 395,025 7,823,359 8,218,384
Change in Unfilled Customer Orders (116,593) (5,571) (122,164)
Total Budget Authority 6,832,551 10,555,747 17,388,298

Permanently Not Available (25,123) (1,859,112) (1,884,235)
Total Budgetary resources $ 8,367,219 $ 9,973,550 $ 18,340,769

STATUS OF BUDgeTArY reSOUrCeS
Obligations Incurred, Net
Direct $ 5,981,675 $ 6,515,175 $ 12,496,850
Reimbursable 616,935 – 616,935
Total Obligations Incurred, Net 6,598,610 6,515,175 13,113,785

Unobligated Balances, Available 215,473 2,060,909 2,276,382
Unobligated Balances, Not Available 1,553,136 1,397,466 2,950,602
Total Status of Budgetary resources $ 8,367,219 $ 9,973,550 $ 18,340,769

CHAnge in OBLigATeD BALAnCeS
Obligated Balance Brought Forward, Net October 1
Unpaid Obligations Brought Forward $ 613,478 $ 389,934 $ 1,003,412
Uncollected Customer Payments from Federal Sources Brought Forward – (235,874) (235,874)
Total Obligated Balance Brought Forward, Net 613,478 154,060 767,538

Obligations Incurred 6,598,610 6,515,175 13,113,785
Gross Outlays (6,482,855) (6,379,919) (12,862,774)
Recoveries of Prior Year Unpaid Obligations (53,179) (81,604) (134,783)
Change in Uncollected Customer Payments from Federal Sources – 5,571 5,571

Obligated Balance, Net, End of Period
Unpaid Obligations 676,054 443,586 1,119,640
Uncollected Customer Payments from Federal Sources – (230,303) (230,303)
Total Obligated Balance, net, end of Period $ 676,054 $ 213,283 $ 889,337

neT OUTLAYS
Gross Outlays $ 6,482,855 $ 6,379,919 $ 12,862,774
Offsetting Collections (278,430) (7,823,359) (8,101,789)
Net Outlays Before Offsetting Receipts 6,204,425 (1,443,440) 4,760,985
Offsetting Receipts (110) (77,891) (78,001)
net Outlays $ 6,204,315 $ (1,521,331) $ 4,682,984

note 15
The accompanying notes are an integral part of these statements.

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Financial Repo rting

Note 1 Significant Accounting Policies
Reporting Entity
The Small Business Act of 1953 created the Small Business Administration as an independent federal agen-
cy. SBA’s mission is to maintain and strengthen the nation’s economy by aiding, counseling, assisting and
protecting the interests of small businesses and to help businesses and families recover from natural 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. The statements are in addition
to other financial reports used to monitor and control budgetary resources. As a federal agency, the SBA can-
not 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 OMB, the Federal Accounting
Standards Advisory Board, and the Department of the Treasury. Under the accrual method of accounting, reve-
nues 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 propri-
etary accruals and facilitates compliance with legal constraints and controls over the use of federal funds.

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. Actual results may differ from those estimates and the dif-
ferences may be significant. The most significant differences between actual results and SBA’s 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 model-
ing techniques to reflect the most accurate credit program costs possible in its annual financial statements.

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
Department of 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 programs. The non-subsi-
dized 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 limits the dollar
amount of obligations that can be made for direct loans and loan guaranties in its annual appropriation bill. Similarly,
appropriations received for the long-term cost of loan guaranties are reserved when the guarantied loans are disbursed.

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

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Financial Repo rtin g

“program accounts” to account for appropriations in its credit programs and nonbudgetary “financing ac-
counts” 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 expendi-
tures. 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.

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 pro-
ceedings, actions, suits and claims will not materially affect the financial position or results of SBA’s operations.

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 inception of the
Agency. Unfunded expenses do not yet have a financing source and thus increase the loss the SBA reports as
Cumulative Results of Operations. The largest category of unfunded expenses at the SBA is year-end subsidy
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 undeliv-
ered 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.

Agency Financial Report • FY 2011
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Financial Repo rting

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 Treasury General accounts. SBA’s fund bal-
ances with the Treasury are available to make expenditures to liquidate allowable obligations, except for Non-

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Financial Repo rtin g

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 currently available for new obligations.
(Dollars in Thousands)

AS OF SePTemBer 30, 2011 2010
Appropriated Funds $ 1,641,312 $ 2,373,450
Financing Funds 6,752,927 3,671,657
Liquidating Funds 16,013 14,588
Revolving Fund 58,933 56,363
Trust Fund 133 263
Total entity Fund Balance with Treasury 8,469,318 6,116,321
non-entity Fund Balance 4 4
Total Fund Balance with Treasury $ 8,469,322 $ 6,116,325

Status of Fund Balance with Treasury
Unobligated Balance Available $ 2,117,804 $ 2,276,382
Unobligated Balance Unavailable 5,266,481 2,950,602
Obligated Balance Not Yet Disbursed 1,085,033 889,337
Nonbudgetary 4 4
Total Fund Balance with Treasury $ 8,469,322 $ 6,116,325

Unobligated balances become available when apportioned by the OMB for obligation in the current fiscal
year. Obligated balances not yet disbursed include unpaid obligations offset by uncollected customer pay-
ments from other federal government accounts. The unobligated and obligated balances are reflected on
the Statement of Budgetary Resources.

NOTE 3 cash
The SBA field offices deposit collections from borrowers in Treasury General Accounts at financial institutions
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 $2.9 million
and $3.0 million at September 30, 2011 and 2010.

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 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. Fiduciary balances may be on deposit with the Treasury or commercial banks.

SBA’s fiduciary activities include the Master Reserve Fund and Master Reserve Account, both administered
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 SBA policy entirely in Treasury
securities and repurchase agreements that are backed by Treasury securities. The MRF is an integral part of
the SBA’s 7(a) secondary market program. The MRF was authorized by the Small Business Secondary Market

Agency Financial Report • FY 2011
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Financial Repo rting

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 guaranty, to 7(a) secondary market investors. There was $17.6 billion and $15.5 billion of outstanding
SBA guarantied loan principal in the secondary market at September 30, 2011 and 2010.

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 a vehicle to re-
ceive, 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 second-
ary 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. There was $24.3 billion and $23.4 billion of
SBA guarantied 504 debentures outstanding in the secondary market at September 30, 2011 and 2010.

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, 2011 2010
Short Term Securities
Money Market Funds $ 10,086 $ 27,767
Treasury Bills 17,997 47,957
Repurchase Agreements 915,951 826,147
Total Short Term Securities 944,034 901,871

Long Term Securities
Treasury Notes Including Interest 1,833,113 1,724,565
Total Long Term Securities 1,833,113 1,724,565

net Assets $ 2,777,147 $ 2,626,436

reCOnCiLiATiOn OF FiDUCiArY ASSeTS
FOr THe YeArS enDing SePTemBer 30, 2011 2010
Beginning net Assets $ 2,626,436 $ 2,386,495
receipts
Earned Income 56,057 63,178
Contributions 7,913,304 7,808,155
Net Realized Gain (Loss) 2,503 3,097
Total receipts 7,971,864 7,874,430

Less Disbursements
Payments to Investors 7,821,153 7,634,350
Expenses – 139
Total Disbursements 7,821,153 7,634,489

ending net Assets $ 2,777,147 $ 2,626,436

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Financial Repo rtin 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 guaran-
tied 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 or unrecoverable amounts for Guaranty Fees
Receivable, Refunds and Other accounts receivable are not significant and no allowance is provided.
(Dollars in Thousands)

AS OF SePTemBer 30, 2011 2010
intragovernmental
Administrative Receivables $ 406 $ –
Total intragovernmental $ 406 $ –

Public
Guaranty Fees Receivable $ 37,108 $ 13,559
Refunds 146 18
Other 15,561 17,403
Total Public 52,815 30,980
Allowance For Loss (2) (19)
net Public $ 52,813 $ 30,961

NOTE 6 credit Program Receivables and Liability for Loan
Guaranties
A. Loan Program Descriptions and Cost Determinations
L
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.

M
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 Guarantied Small Business Investment Company Participating Securities
Business Guarantied America’s Recovery Capital Loan
Business Guarantied 504 First Mortgage Loan Pooling
Business Direct 7(m) Microloan
Business Direct Intermediary Lending Pilot Program

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.

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Financial Repo rting

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 payments on debentures issued by development 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 businesses. America’s Recovery Capital Loan program
was a temporary guaranty loan program authorized by the American Recovery and Reinvestment Act of 2009
(ARRA) until September 30, 2010. ARC loans are deferred payment loans of up to $35,000 available through
SBA’s 7(a) participating lenders. ARC loans are interest free to the borrower, 100 percent guarantied by the SBA
to the lender, and have no fees associated with them. The SBA will continue to service the ARC loan portfolio
until its maturity. The 504 First Mortgage Loan Pooling program was authorized by the American Recovery
and Reinvestment Act to provide liquidity to banks through the sale in the secondary market of SBA Guarantied
pools of bank loans related to the 504 CDC program so that the banks can make additional loans to small busi-
nesses. 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. The Intermediary Lending Pilot program was authorized
in the Small Business Jobs Act to provide $20 million of loans to Intermediaries for relending to small businesses
in economically distressed areas with a lack of credit availability to small business.

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 pres-
ent 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 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 out-
standing 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.

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 outstand-
ing 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 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. The advances are liquidated by receipt of the payments due from borrowers in these programs. To the
extent that borrower payments may not repay advances, balances that remain collectible are reported as credit program
receivables. Advances are also made to the Federal Financing Bank for loans guarantied under Section 503 of the
Small Business Act. 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 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

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67
Financial Repo rtin g

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 personal property acquired through foreclosure
on direct loans and defaulted loan guaranties. Properties acquired as a result of defaulted loans committed af-
ter 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 September 30, 2011 SBA’s foreclosed property was $39.9 million related to 72 loans.
The properties had been held for an average of 789 days. At September 30, 2010 foreclosed property was
$44.9 million related to 79 loans. The properties had been held for an average of 616 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 flow. The SBA estimates future cash flows for guarantied and direct loans using econom-
ic 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 qual-
ity 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:
y contractual terms of the loan or guaranty such as loan amount, interest rate, maturity and grace period;
y borrower characteristics;
y loan origination methods;
y economic indicators such as gross domestic product growth and unemployment rate;
y loan performance assumptions, for example: conditional purchase and prepayment rates and recovery rates; and
y 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 establishes 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 guar-
anties. The liability is estimated based on historical experience.

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Financial Repo rting

B. Credit Program Receivables and Related Foreclosure Property, Net
(Dollars in Thousands)
AS OF SePTemBer 30, 2011 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 14,810 $ 125,065 $ 139,875
Interest Receivable 1,907 997 2,904
Foreclosed Property 3,106 – 3,106
Allowance (1,824) (31,635) (33,459)
Total Direct Business Loans 17,999 94,427 112,426

Direct Disaster Loans
Disaster Loans Receivable 8,563 7,459,690 7,468,253
Interest Receivable 65 33,797 33,862
Foreclosed Property – 799 799
Allowance (1,042) (1,486,011) (1,487,053)
Total Direct Disaster Loans 7,586 6,008,275 6,015,861

Defaulted guarantied Business Loans & Other Loans receivable
Defaulted Guarantied Business Loans 39,829 8,285,473 8,325,302
Other Loans Receivable (see note below) – 502,332 502,332
Interest Receivable 794 71,489 72,283
Foreclosed Property 3,238 32,734 35,972
Allowance (21,278) (6,688,159) (6,709,437)
Total Defaulted guarantied Business Loans & Other Loans receivable 22,583 2,203,869 2,226,452

Total Credit Program receivables & related Foreclosed Property, net $ 8,354,739

AS OF SePTemBer 30, 2010 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 18,218 $ 120,151 $ 138,369
Interest Receivable 2,457 1,077 3,534
Foreclosed Property 3,104 – 3,104
Allowance (1,595) (30,646) (32,241)
Total Direct Business Loans 22,184 90,582 112,766

Direct Disaster Loans
Disaster Loans Receivable 10,643 7,931,998 7,942,641
Interest Receivable 73 12,191 12,264
Foreclosed Property – 658 658
Allowance (740) (1,475,666) (1,476,406)
Total Direct Disaster Loans 9,976 6,469,181 6,479,157

Defaulted guarantied Business Loans & Other Loans receivable
Defaulted Guarantied Business Loans 51,002 7,763,190 7,814,192
Other Loans Receivable (see note below) – 583,745 583,745
Interest Receivable 408 48,719 49,127
Foreclosed Property 3,281 37,910 41,191
Allowance (30,163) (5,973,336) (6,003,499)
Total Defaulted guarantied Business Loans & Other Loans receivable 24,528 2,460,228 2,484,756
Total Credit Program receivables & related Foreclosed Property, net $ 9,076,679

Note: Other Loans Receivable includes payments advanced by the SBA against future reimbursements in the SBIC and 504 guaranty programs.

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Financial Repo rtin g

C. Loans Disbursed and Outstanding Loan Obligations
(Dollars in Thousands)

DireCT LOAnS
new Loans Disbursed During the Year ending September 30, 2011 2010
Business Direct Loan Program $ 33,799 $ 31,620
Disaster Loan Program 312,050 387,058
Total Direct Loans Disbursed $ 345,849 $ 418,678

Outstanding Loan Obligations as of September 30, 2011 2010
Business Direct Loan Program $ 61,640 $ 41,547
Disaster Loan Program 427,244 217,463
Total Direct Loan Obligations $ 488,884 $ 259,010

gUArAnTieD LOAnS
new Loans Disbursed During the Year ending September 30, 2011 2010
Total Principal Disbursed at Face Value $ 19,647,608 $ 15,060,123
Total Principal Disbursed Guarantied by the SBA 16,584,726 13,150,441

Outstanding Loan Obligations as of September 30, 2011 2010
Business Guarantied Loan Programs $ 12,415,542 $ 10,081,005

Loans Outstanding as of September 30, 2011 2010
Total Principal Outstanding at Face Value $ 82,233,722 $ 76,247,818
Total Principal Outstanding Guarantied by the SBA 70,011,195 64,433,140

D. Subsidy Cost Allowance Balances
(Dollars in Thousands)

FOr THe YeArS enDing SePTemBer 30, 2011 2010
Post-1991 Business Direct and Purchased guarantied Loans
Beginning Balance of Allowance Account $ 6,003,982 $ 4,370,380
Current Year’s Subsidy (see 6G for breakdown by component) 5,128 3,671
Loans Written Off (2,224,182) (2,425,174)
Subsidy Amortization (1,980) (2,583)
Allowance Related to Guarantied Loans Purchased This Year 2,860,687 4,015,052
Miscellaneous Recoveries and Costs 72,139 41,835
Balance of Subsidy Allowance Account before Reestimates 6,715,774 6,003,181
Technical Assumptions/Default Reestimates 4,020 801
ending Balance of Allowance Account $ 6,719,794 $ 6,003,982

Post-1991 Disaster Direct Loans
Beginning Balance of Allowance Account $ 1,475,666 $ 1,597,336
Current Year’s Subsidy (see 6G for breakdown by component) 39,736 47,079
Loans Written Off (212,044) (303,284)
Subsidy Amortization (14,522) (64,274)
Miscellaneous Recoveries and Costs 41,529 37,516
Balance of Subsidy Allowance Account before Reestimates 1,330,365 1,314,373
Technical Assumptions/Default Reestimates 155,646 161,293
ending Balance of Allowance Account $ 1,486,011 $ 1,475,666

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E. Loan Guaranty Liability Balances
(Dollars in Thousands)

FOr THe YeArS enDing SePTemBer 30, 2011 2010
Pre-1992 Business Loan guaranties
Beginning Balance of Liability for Loan guaranties $ 574 $ 809
Adjustment to Expected Losses, Guaranties Outstanding (268) (235)
ending Balance of Liability for Loan guaranties 306 574

Post-1991 Business Loan guaranties
Beginning Balance of Liability for Loan guaranties 4,466,432 3,993,827
Current Year’s Subsidy (see 6G for breakdown by component) 553,814 574,260
Fees 632,922 394,739
Interest Accumulation Factor 111,290 (31,617)
Claim Payments to Lenders (3,418,876) (4,925,476)
Adjustment Due to Reestimate & Guarantied Loan Purchases 558,189 910,425
Miscellaneous Recoveries and Costs 36,185 (64,707)
Balance of Liability for Loan Guaranties before Reestimates 2,939,956 851,451
Technical Assumptions/Default Reestimates 1,801,180 3,614,981
ending Balance of Liability for Loan guaranties 4,741,136 4,466,432

Total ending Balance of Liability for Loan guaranties $ 4,741,442 $ 4,467,006

F. 2011 Subsidy Rates by Program and Component
Total
LOAn PrOgrAm Financing Default Other Fee
Subsidy
guaranty
7(a) 1.01% 0.00% 4.91% 0.00% -3.90%
7(a) (after 1/1/11) 0.97% 0.00% 4.88% 0.00% -3.91%
504 CDC 0.00% 0.00% 6.01% 0.35% -6.36%
Disaster Guaranty - Immediate 1.89% 0.00% 1.89% 0.00% 0.00%
SBIC Debentures 0.00% 0.00% 6.15% 0.04% -6.19%

Direct
Disaster 13.53% 8.76% 10.77% -6.00% 0.00%
Microloan 15.06% 6.17% 2.15% 6.74% 0.00%
ILP 30.58% 28.01% 2.57% 0.00% 0.00%

ArrA guaranty
504 First Mortgage Loan Pooling 0.00% 0.00% 1.28% 0.00% -1.28%

Jobs Act guaranty
7(a) 5.48% 0.00% 7.37% 0.00% -1.89%
504 CDC 2.18% 0.00% 6.01% 0.35% -4.18%
504 CDC - Debt Refinancing 0.00% 0.00% 7.78% 0.51% -8.29%
Dealer Floor Plan 0.02% 0.00% 0.15% 0.00% -0.13%

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. 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.

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G. Subsidy Expense by Component
(Dollars in Thousands)

FOr THe YeArS enDing SePTemBer 30, 2011 2010
Business Loan guaranties
Interest $ 7,395 $ 40,675
Defaults 993,474 757,709
Fees (454,961) (232,850)
Other 7,906 8,726
Subsidy Expense Before Reestimates and Loan Modifications 553,814 574,260
Reestimates 1,801,180 3,614,981
Total guarantied Business Loan Subsidy expense $ 2,354,994 $ 4,189,241

Business Direct Loans
Interest $ 2,663 $ 1,730
Defaults 692 410
Other 1,773 1,531
Subsidy Expense Before Reestimates 5,128 3,671
Reestimates 4,020 801
Total Business Direct Loan Subsidy expense $ 9,148 $ 4,472

Disaster Direct Loans
Interest $ 21,926 $ 22,663
Defaults 34,396 42,449
Other (16,586) (18,033)
Subsidy Expense Before Reestimates 39,736 47,079
Reestimates 155,646 161,293
Total Disaster Direct Loan Subsidy expense $ 195,382 $ 208,372

H. Administrative Expense
The SBA received appropriations to administer its credit programs, including the making, servicing and liqui-
dation of its loans and guaranties. Amounts expensed in the Statement of Net Cost are:
(Dollars in Thousands)

FOr THe YeArS enDing SePTemBer 30, 2011 2010
Disaster Direct Loan Programs $ 190,228 $ 203,716
Business Loan Programs 157,767 151,098
Total Administrative expense $ 347,995 $ 354,814

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

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Financial Repo rting

for FY 2011 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.

B
Net subsidy reestimates of business guaranty loan programs follows:
(Dollars in Thousands)

guarantied Loan Program Subsidy reestimates 2011 2010
7(a) $ 1,235,733 $ 1,504,397
7(a) - ARRA 115,495 (9,543)
7(a) - Jobs Act (42,042) –
Dealer Floor Plan (214) –
504 CDC 1,063,772 1,597,460
504 CDC - ARRA 209,379 156,312
504 CDC - Jobs Act 20,478 –
504 CDC - Debt Refinancing 2,221 –
504 First Mortgage Loan Pooling 5,054 –
SBIC Debentures 28,010 40,407
SBIC Participating Securities (757,505) 336,858
Secondary Market Guaranty Program (9,916) (8,208)
ARC - ARRA (66,210) –
All Other Guaranty Loan Programs (3,075) (2,702)
Total guarantied Loan Program Subsidy reestimates $ 1,801,180 $ 3,614,981

The 7(a) Loan Guaranty program, SBA’s flagship and largest program had a net upward reestimate in FY 2011
of $1,235.7 million. A significant portion of the reestimate is due to updated model assumptions, which
resulted in increased purchase projections for the remaining years within the cohorts. The remainder of the
reestimate is due to the difference between the actual and forecasted performance during FY 2011.

The 7(a) ARRA program had a net upward reestimate of $115.5 million, despite better than projected perfor-
mance in FY 2011. A significant portion of the reestimate is due to updated model assumptions that reflect
historical experience and the current economic environment, which resulted in increased purchase projec-
tions for the remaining years within the cohort. This includes loans funded in FY 2009 and FY 2010 by the
American Recovery and Reinvestment Act, as well as loans funded by several appropriations during FY 2010
that provided additional funds to continue the ARRA provisions.

The 7(a) Jobs Act cohort had a net downward reestimate of $42 million, due to slightly better performance
projections than originally estimated.

The Dealer Floor Plan program had a net downward reestimate of $0.2 million, due to better than projected
performance during FY 2011.

The 504 Certified Development Company program had a net upward reestimate of $1,063.8 million. While
the 2009 and 2010 cohorts performed better than expected in FY 2011, many earlier cohorts performed
worse. The majority of the reestimate was due to updated model assumptions, which will allow for more ac-
curate projections of future cash flows. These updated assumptions resulted in increased purchase projections
for the remaining years within the cohorts. The remainder of the reestimate was mostly due to higher than
projected purchases in FY 2011, in particular for cohorts 2006 and 2007.

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Financial Repo rtin g

The 504 ARRA program had a net upward reestimate of $209.4 million despite better than projected perfor-
mance in FY 2011. The reestimate was due in large part to updated model assumptions, which will allow for
more accurate projections of future cash flows. These methodology changes resulted in increased purchase
projections and decreased recovery projections for the remaining years within the cohorts.

The 504 Jobs Act cohort had a net upward reestimate of $20.5 million, in part due to worse than expected per-
formance in FY 2011. The majority of the reestimate was due to updated model assumptions and methodolo-
gies, which will allow for more accurate projections of future cash flows. These updated assumptions resulted in
increased purchase projections and decreased recovery projections for the remaining years within the cohorts.

The 504 Debt Refinancing program had a net upward reestimate of $2.2 million. The reestimate was due in
large part to updated model assumptions, which will allow for more accurate projections of future cash flows.
These updated assumptions resulted in increased purchase projections for the remaining years within the cohorts.

The 504 First Mortgage Loan Pooling program had a net upward reestimate of $5.1 million. The majority of
the reestimate was due to updated model assumptions and methodologies, which will allow for more accurate
projections of future cash flows. These methodology changes resulted in increased purchase projections and
decreased recovery projections for the remaining years within the cohorts.

The SBIC Debentures program had a net upward reestimate of $28 million. The reestimate was mostly due
to higher than projected purchases in the 2001 and 2002 cohorts during FY 2011 and a decrease in projected
recoveries for the remaining years within most cohorts.

The SBIC Participating Securities program had a net downward reestimate of $757.5 million. The reestimate
was mostly due to lower than projected purchases and higher than projected recoveries during FY 2011. The
remaining reestimate amount was due to a decrease in projected purchases and an increase in projected recoveries
for the remaining years within the cohorts. Poor economic conditions in recent years, as well as SBA’s decision
to liquidate poor performing SBICs in an expedited manner caused an increase in purchases in FY 2009 and
FY 2010 that led to upward reestimates in those years. The increase in purchases in FY 2009 and FY 2010 also
increased projections of purchases in future years. Furthermore, funds that were adversely impacted by the weak
economy were liquidated during FY 2009 and FY 2010, and fewer poor performers were remaining during FY
2011. This caused purchases to be lower than projected, contributing to the downward reestimate for FY 2011.

The Secondary Market Guaranty program had a net downward reestimate of $9.9 million. This downward reesti-
mate was due to a decrease in the projected interest rate paid to investors for the remaining years within the cohorts.

The America’s Recovery Capital program had a net downward reestimate of $66.2 million. This downward re-
estimate was mostly due to lower than projected purchases during FY 2010 and FY 2011 than were originally
projected at budget formulation.

Business Direct Loan Program Subsidy reestimates 2011 2010
7(m) Microloan $ (2,115) $ 487
7(m) Microloan - ARRA 2,004 973
SBIC Preferred Stock 4,189 (708)
All Other Direct Loan Programs (58) 49
Total Direct Loan Program Subsidy reestimates $ 4,020 $ 801

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Financial Repo rting

The 7(m) Direct Microloan program had a net downward reestimate of $2.1 million. Financial statement
reestimates for the Direct Microloan program are performed using 9 months of actual and 3 months of
projected performance data. The FY 2011 reestimate is mostly due to better performance during the fourth
quarter of FY 2010 than was projected.

The 7(m) Direct Microloan ARRA program had a net upward reestimate of $2 million. This reestimate is
partly due to the 2010 cohort, which was reestimated for the first time this year. For both the 2009 and
2010 cohorts, a decrease in the average interest rate charged to intermediary lenders caused actual interest
collected during FY 2011 as well as projected interest collections for the remaining years to decrease.

The SBIC Preferred Stock program had a net upward reestimate of $4.2 million. Financial statement reestimates
for the SBIC Preferred Stock program are performed using 9 months of actual and 3 months of projected per-
formance data. Approximately half of the FY 2011 reestimate is due to two loans in the 2005 cohort that were
projected to mature as of June 30, 2010, but that actually defaulted during the fourth quarter of FY 2010. These
defaults are reflected in the FY 2011 reestimate. The remaining reestimate amount is due to lower recoveries in
FY 2011 than were projected for three 1994 cohort loans that defaulted during FY 2010.

D
(Dollars in Thousands)

Disaster Direct Loan Program Subsidy reestimates 2011 2010
Disaster $ 155,646 $ 161,293
Total Disaster Direct Loan Program Subsidy reestimates $ 155,646 $ 161,293

The Disaster Assistance Loan program had a net upward reestimate of $155.6 million, primarily in the
2006 cohort. The 2006 cohort mostly consists of loans made in response to the Gulf Coast hurricanes of
2005. These loans currently account for 54 percent of the outstanding portfolio of direct Disaster loans.
The upward reestimate is largely the result of performance probabilities being updated with actual perfor-
mance during FY 2010 which resulted in an increase in projected defaults.

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 depreciated using the straight-line method over the useful life. The SBA expenses other
equipment items not meeting the capitalization criteria when purchased.

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. Other leasehold improvement expenditures 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 initial 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 or equipment 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.

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Financial Repo rtin g

Assets meeting the capitalization thresholds established at September 30, 2011 and 2010 are detailed below.
(Dollars in Thousands)
2011 2010
Equipment $ 1,787 $ 1,787
Accumulated Depreciation (1,394) (1,049)
Net 393 738

Leasehold Improvements - Construction in Progress – 315
Leasehold Improvements 1,811 1,496
Amortization of Leasehold Improvements (400) (249)
Net 1,411 1,562

Software in Use 30,546 30,545
Amortization of Software in Use (30,546) (30,028)
Net – 517
Total general Property and equipment, net $ 1,804 $ 2,817

NOTE 8 Liabilities not covered by Budgetary Resources
Liabilities not covered by budgetary resources are liabilities for which congressional action is needed before bud-
getary resources can be provided. These unfunded liabilities at September 30, 2011 and 2010 consisted of:
(Dollars in Thousands)
2011 2010
intragovernmental Liabilities - Other
Employment Taxes Payable $ 1,946 $ 2,091
Federal Employees’ Compensation Act Payable 5,850 5,865
Total intragovernmental Liabilities - Other 7,796 7,956

Federal employees’ Compensation Act Actuarial Liability 30,630 29,960
Surety Bond guarantee Program Future Claims 20,385 19,539

Other Liabilities
Prior Liens on Real Estate Payable 440 409
Accrued Unfunded Annual Leave 26,897 26,758
Total Other Liabilities 27,337 27,167

Total Liabilities not Covered by Budgetary resources $ 86,148 $ 84,622

The liability for Surety Bond Guarantees is an estimate of future claims in the SBG Program for guaranties
outstanding at year-end.

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.

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Financial Repo rting

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, 2011 and 2010 and resulting balances are:

I
(Dollars in Thousands)

Department of Treasury 2011 2010
Beginning Balance $ 11,751,594 $ 10,872,754
New Borrowing 347,617 1,578,644
Repayments (909,525) (699,804)
ending Balance $ 11,189,686 $ 11,751,594

Federal Financing Bank 2011 2010
Beginning Balance $ 2,187 $ 5,529
Repayments (1,552) (3,249)
Change in Interest Payable (42) (93)
ending Balance $ 593 $ 2,187

Total Debt $ 11,190,279 $ 11,753,781

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 Liquidating Funds for loans made prior to FY 1992. Subsequent to the issuance of its audited financial
statements each year, the SBA returns to the Treasury the portion of this balance that is considered to be the
unobligated balance for budgetary reporting at fiscal year-end.
(Dollars in Thousands)

AS OF SePTemBer 30, 2011 2010
Pollution Control Equipment Guaranty Fund $ 2,646 $ 3,996
Disaster Loan Fund 12,263 14,428
Business Loan and Investment Fund 49,061 49,935
Total Due Treasury $ 63,970 $ 68,359

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Financial Repo rtin g

NOTE 11 Other Liabilities
Other liabilities at September 30th were:
(Dollars in Thousands)
2011 2010
OTHer LiABiLiTieS - inTrAgOVernmenTAL
entity
Current
Employment Taxes Payable $ 4,496 $ 3,977
Advances from Other Agencies 1,282 2,086
Total Current 5,778 6,063
non-current
Employment Taxes Payable 1,946 2,091
Federal Employees’ Compensation Act Payable 5,850 5,865
Payable to Federal Financing Bank 76 209
Total non-current 7,872 8,165
Total entity 13,650 14,228
non-entity
Current
Payable to Treasury 7 6

Total Other Liabilities - intragovernmental $ 13,657 $ 14,234

OTHer LiABiLiTieS - PUBLiC
entity
Current
Accrued Funded Payroll and Benefits $ 20,133 $ 19,967
Accrued Unfunded Annual Leave 26,897 26,758
Suspense Accounts 247 275
Total Current 47,277 47,000
non-current
Prior Liens on Real Estate Payable 440 409
Total non-current 440 409
Total entity 47,717 47,409
non-entity
Current
Non-entity Current Payable 4 6
Total Other Liabilities - Public $ 47,721 $ 47,415

NOTE 12 Leases
The SBA leases all of its facilities from the General Services Administration. The SBA enters into an
Occupancy Agreement 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
2011 and 2010 facilities lease costs were $41.9 million and $42.4 million. Future lease payments shown
below assume a 3 percent inflation factor from the following years’ projected totals as estimated by GSA.
The downward trend after 2016 is due to the expiration of a number of leases.

Agency Financial Report • FY 2011
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Financial Repo rting

(Dollars in Thousands)
FUTUre FACiLiTieS OPerATing LeASe PAYmenTS
FY Lease Pmts
2012 $ 41,832
2013 43,086
2014 44,379
2015 45,710
2016 47,082
After 2016 41,202
Total $ 263,291

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 with the exception of one deposit
fund. 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 adjust-
ment that records a transfer out to the non-entity fund, a reduction of subsidy allowance or loan guaranty
liability, and an account payable to the non-entity fund. In the loan program funds the SBA records a re-
duction 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 gen-
eral fund is not eliminated and is reflected on the Balance Sheet as a liability line item.

(Dollars in Thousands)

2011 2010
entity
Financing Fund Payable $ (911,765) $ (130,993)

non-entity
Miscellaneous Receipts Fund Receivable 911,765 130,993
Downward Reestimate Payable to Treasury (911,765) (130,993)

Balance Sheet reported Payable $ (911,765) $ (130,993)

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79
Financial Repo rtin 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 major 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 revenues arise from exchange transactions, and are deducted from the full cost of SBA’s major stra-
tegic goals to arrive at net strategic goals costs. The SBA recognizes earned revenues 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
On September 20, 2010, the SBA updated its Strategic Plan for fiscal years 2011 to 2016. The new plan
contains three strategic goals and the FY 2011 Statement of Net Cost is configured according to the three
new strategic goals. As a result, the FY 2010 costs have been reconfigured to be comparable to the new
plan. The major change between FY 2010 and FY 2011 is that SBA’s disaster assistance costs, which used
to be mapped to a separate goal, are now included under Strategic Goal 1 – Growing Businesses and Creating
Jobs – along with other programs. In order to fully allocate program support and overhead costs per cost
accounting requirements, most of the costs associated with Strategic Goal 2 – Building an SBA that Meets
the Needs of Today’s and Tomorrow’s Small Businesses – are allocated to the other two strategic goals. The real-
located costs associated with Strategic Goal 2 in FY 2011 were $140.7 million and the comparable amount
in FY 2010 was $146.3 million. Costs Not Assigned to Strategic Goals on the Statement of Net Cost
includes costs of congressionally mandated grant programs, Automation under the Recovery Act, Drug Free
Workplace, and the Office of the Inspector General.

Intragovernmental Gross Cost is cost incurred by the SBA in exchange transactions with other federal agen-
cies. Gross Cost with the Public is cost incurred by the SBA in exchange transactions. Intragovernmental
Earned Revenue is revenue earned by the SBA in exchange transactions with other federal agencies. Earned
Revenue from the Public is revenue earned by the SBA in exchange transactions.

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 finan-
cial statements, and not to match the public and intragovernmental revenue with costs that are incurred to
produce public and intragovernmental revenue.

Agency Financial Report • FY 2011
80
Financial Repo rting

(Dollars in Thousands)
inTrAgOVernmenTAL COSTS AnD eXCHAnge reVenUe
FOr THe YeArS enDing SePTemBer 30, 2011 2010
STrATegiC gOAL 1:
growing Businesses and Creating Jobs
Intragovernmental Gross Cost $ 656,169 $ 721,083
Gross Cost with the Public 3,344,192 5,078,700
Total Strategic goal 1 gross Cost 4,000,361 5,799,783

Intragovernmental Earned Revenue 308,917 247,839
Earned Revenue from the Public 387,293 378,248
Total Strategic goal 1 earned revenue 696,210 626,087

STrATegiC gOAL 2:
Building an SBA that meets the needs of Today’s and Tomorrow’s Small
Businesses
Intragovernmental Gross Cost $ 1,159 $ 1,173
Gross Cost with the Public 4,973 4,170
Total Strategic goal 2 gross Cost 6,132 5,343

STrATegiC gOAL 3:
Serving as the Voice for Small Business
Intragovernmental Gross Cost $ 2,543 $ 2,797
Gross Cost with the Public 10,911 9,941
Total Strategic goal 3 gross Cost 13,454 12,738

Cost not Assigned to Strategic goals
Intragovernmental Gross Cost $ 25,861 $ 18,755
Gross Cost with the Public 110,964 66,665
Total gross Cost not Assigned to Strategic goals 136,825 85,420

net Cost of Operations $ 3,460,562 $ 5,277,197

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, 2011 and 2010. SBA’s total budget-
ary resources were $7.9 billion and $8.4 billion for the years ended September 30, 2011 and 2010.
Additionally, $11.4 billion and $10.0 billion of nonbudgetary resources including borrowing authority
and collections of loan principal, interest and fees in financing funds were reported for the years ended
September 30, 2011 and 2010.

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 obli-
gations made prior to FY 1992.

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81
Financial Repo rtin 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 Public Debt when funds needed to disburse
direct loans and purchase guarantied loans exceed subsidy costs and collections in the nonbudgetary loan
financing funds. In FY 2011 and FY 2010, the SBA received $1.1 billion and $2.7 billion of borrowing
authority from the OMB. 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 un-
invested 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 2011 and FY 2010, the SBA incurred $11.9 billion and $13.1 billion of direct and reimbursable
obligations of which $0.8 billion and $0.9 billion was apportioned in category A; $11.1 billion and $12.2
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, 2011 and 2010 are $7.4 billion and $5.2 billion which include
$5.3 billion and $3.0 billion of unavailable unobligated balances. These balances are unavailable primarily
because they are unapportioned by OMB. The SBA accumulates the majority of these unobligated balances
in its nonbudgetary financing accounts during the fiscal year ($6.4 billion in FY 2011 and $3.5 billion in
FY 2010) from reestimates that are used primarily to pay default claims in the following fiscal year. In ad-
dition, unobligated balances are accumulated in budgetary accounts from appropriations ($1.0 billion in
FY 2011 and $1.8 billion in FY 2010) that are used to finance SBA’s ongoing program operations.

Undelivered Orders
Undelivered orders for the periods ended September 30, 2011 and 2010 were $1.1 billion and $0.9 billion.

Differences between the Statement of Budgetary Resources
and the Budget of the U. S. Government
There was no material difference between the FY 2010 Statement of Budgetary Resources and the
President’s FY 2012 budget submission. The President’s Budget with actual numbers for FY 2013 has not
yet been published. The SBA expects no material differences between the President’s Budget “actual” col-
umn and the FY 2011 reported results when the budget becomes available in February 2012.

Agency Financial Report • FY 2011
82
Financial Repo rting

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 bud-
getary net obligations to the net cost of operations. The objective of this information is to categorize the
differences between budgetary and financial (proprietary) accounting.

Did In FY 2011, there were over 334 disasters declared in the U.S. The SBA
you Office of Disaster Assistance approved over 13,600 loans totaling over
$730 million to disaster victims across the U.S. and its territories.
know
For more information, go to www.sba.gov/disasterassistance.

Agency Financial Report • FY 2011
83
Financial Repo rtin g

conSolidated reconciliation of budgetary obligationS to net coSt
For the years ended September 30, 2011 and 2010
(Dollars in Thousands)
2011 2010
reSOUrCeS USeD TO FinAnCe ACTiViTieS
Budgetary resources Obligated
Obligations Incurred $ 11,893,007 $ 13,113,785
Less: Spending Authority from Offsetting Collections and Recoveries 9,024,868 8,231,003
Obligations Net of Offsetting Collections and Recoveries 2,868,139 4,882,782
Less: Offsetting Receipts 153,308 78,001
net Obligations 2,714,831 4,804,781
Other resources
Imputed Financing 26,749 32,765
Other Financing Sources (936,390) (144,780)
net Other resources Used to Finance Activities (909,641) (112,015)
Total resources Used to Finance Activities 1,805,190 4,692,766

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 (257,869) (74,812)
Resources that Fund Expenses Recognized in Prior Periods (3,796,986) (4,637,929)
Budgetary Offsetting Collections and Receipts that Do Not Affect Net Cost of Operations
Credit Program Collections 8,384,188 7,823,359
Offsetting Receipts 153,308 78,001
Resources that Finance the Acquisition of Assets or Liquidation of Liabilities (4,648,463) (6,406,831)
Other - Current Year Liquidating Equity Activity 2,409 760
Other Resources that Do Not Affect Net Cost of Operations 3 (15)
Total resources that Do not Finance net Cost of Operations (163,410) (3,217,467)
Total resources Used to Finance the net Cost of Operations 1,641,780 1,475,299

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 139 1,444
Upward Reestimates of Credit Subsidy Expense 1,816,761 3,796,430
Change in Revenue Receivable from Public 309 (249)
Provision for Losses on Estimated Guaranties 846 (1,278)
Change in Unfunded Employee Benefits 670 320
Total Components requiring or generating resources in Future Periods 1,818,725 3,796,667

Components not requiring or generating resources
Depreciation or Amortization 1,014 987
Change in Bad Debt Expense - Pre-1992 Loans (452) 3,721
Other (Income) Expenses Not Requiring Budgetary Resources (505) 523
Total Components not requiring or generating resources 57 5,231

Total Components of the net Cost of Operations that Will not
require or generate resources in the Current Period 1,818,782 3,801,898
net Cost of Operations $ 3,460,562 $ 5,277,197

Agency Financial Report • FY 2011
84
Financial Repo rting

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 bud-
getary 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, 2011 2010
Current Year Liabilities Not Covered By Budgetary Resources $ 86,148 $ 84,622
Less: Prior Year 84,622 84,893
Change in Liabilities Not Covered By Budgetary Resources 1,526 (271)
Upward Reestimates of Credit Subsidy Expense 1,816,761 3,796,430
Change in Revenue Receivable from Public 309 (249)
All Other 129 757
Components (of net Cost) generating resources in Future Periods
(Per reconciliation Above) $ 1,818,725 $ 3,796,667

NOTE 17 Significant Events
Recovery Act and Jobs Act
The President signed the American Recovery and Reinvestment Act on February 17, 2009. The ARRA provided
for SBA guarantied loans having reduced fees and increased guaranty percentages that continued into FY 2010. On
September 27, 2010, the President signed the Small Business Jobs Act of 2010 that provided $505 million of addi-
tional appropriations to fund 7(a) and 504 guarantied loans with the ARRA fee relief and guaranty percentage provi-
sions. This contributed to a substantial increase in first quarter FY 2011 guarantied loan volume that pushed yearly
7(a) volume close to the statutory limit of $17.5 billion. The Small Business Jobs Act of 2010 also raised the maxi-
mum loan amounts for the 7(a), 504 and Microloan programs, created a new Intermediary Lending Pilot program
and a new 504 Commercial Debt Refinancing program, and enhanced the Dealer Floor Plan program initiated by
the SBA during FY 2009. In total the Small Business Jobs Act, as well as the state of the U.S. economy, contributed
to $30.5 billion of SBA assistance during FY 2011 for all of its loan programs. This amount, which includes all the
non-guarantied amounts associated with SBA guarantied loans, is a record level.

Economic Conditions
The slow economic growth in FY 2011 led to higher than projected losses in this fiscal year. Continued projec-
tions of higher than average unemployment, coupled with the addition of performance data from the past year is
leading the subsidy models to project higher losses in future years than was projected last year. For the medium to
longer term, the Mid-Session Review of Economic Assumptions continue to show higher unemployment forecasts
as compared to last year’s forecasts, which increase projections for further defaults. These factors contributed to
the upward reestimate in the SBA loan programs (as discussed in Note 6I). Under the Federal Credit Reform
Act, upward reestimates are automatically covered by permanent indefinite budget authority. Such authority
provides the SBA resources to address losses incurred in its existing portfolio without further action by Congress.

Agency Financial Report • FY 2011
85
Financial Repo rtin g

Required Supplementary Information
combining Statement of budgetary reSourceS
For the year ended September 30, 2011

(Dollars in Thousands)
BLiF DLF SBgrF PCeCgF
nonbudgetary nonbudgetary
BUDgeTArY reSOUrCeS Budgetary Financing Budgetary Financing Budgetary Budgetary
Unobligated Balance
Brought Forward October 1 $ 649,087 $ 2,696,847 $ 809,405 $ 761,528 $ 56,256 $ 2,225
Recoveries of Prior Year Obligations 30,676 1,890 10,075 89,568 – –

Budget Authority
Appropriations Received 4,883,175 – 276,731 – – 2,000
Borrowing Authority – 89,832 – 988,300 – –
Spending Authority from Offsetting Collections
Earned 8,098 7,190,235 3,272 1,193,953 8,987 491
Change in Unfilled Customer Orders – (16,282) – 32,735 – –
Total Budget Authority 4,891,273 7,263,785 280,003 2,214,988 8,987 2,491
Permanently Not Available (6,541) (319,517) (4,543) (1,320,517) – (2,225)
Total Budgetary resources $ 5,564,495 $ 9,643,005 $ 1,094,940 $ 1,745,567 $ 65,243 $ 2,491

STATUS OF BUDgeTArY reSOUrCeS
Obligations Incurred, Net
Direct $ 5,220,666 $ 3,977,658 $ 312,409 $ 995,906 $ – $ –
Reimbursable 164,404 – 262,872 – 6,538 –
Total Obligations Incurred, Net 5,385,070 3,977,658 575,281 995,906 6,538 –

Unobligated Balances, Available 53,657 1,340,587 59,453 505,332 8,448 2,350
Unobligated Balances, Not Available 125,768 4,324,760 460,206 244,329 50,257 141
Total Status of Budgetary resources $ 5,564,495 $ 9,643,005 $ 1,094,940 $ 1,745,567 $ 65,243 $ 2,491

CHAnge in OBLigATeD BALAnCeS
Obligated Balance Brought Forward Net October 1
Unpaid Obligations Brought Forward $ 208,364 $ 224,257 $ 25,350 $ 219,329 $ 106 $ –
Uncollected Customer Payments from Federal
Sources Brought Forward – (205,442) – (24,861) – –
Total Obligated Balance Brought Forward, Net 208,364 18,815 25,350 194,468 106 –

Obligations Incurred 5,385,070 3,977,658 575,281 995,906 6,538 –
Gross Outlays (5,371,555) (4,044,740) (532,588) (696,274) (6,417) –
Recoveries of Prior Year Unpaid Obligations (30,676) (1,890) (10,075) (89,568) – –
Change in Uncollected Customer Payments from
Federal Sources – 16,282 – (32,735) – –
Obligated Balance, Net, End of Period
Unpaid Obligations 191,203 155,285 57,968 429,393 227 –
Uncollected Customer Payments from Federal
Sources – (189,160) – (57,596) – –
Total Obligated Balance, net, end of Period $ 191,203 $ (33,875) $ 57,968 $ 371,797 $ 227 $ 0

neT OUTLAYS
Gross Outlays $ 5,371,555 $ 4,044,740 $ 532,588 $ 696,274 $ 6,417 $ –
Offsetting Collections (8,098) (7,190,235) (3,272) (1,193,953) (8,987) (491)
Net Outlays Before Offsetting Receipts 5,363,457 (3,145,495) 529,316 (497,679) (2,570) (491)
Offsetting Receipts – (116,081) – (37,130) – –
net Outlays $ 5,363,457 $ (3,261,576) $ 529,316 $ (534,809) $ (2,570) $ (491)

Agency Financial Report • FY 2011
86
Financial Repo rting

combining Statement of budgetary reSourceS
For the year ended September 30, 2011

(Dollars in Thousands)
Se Oig BATF TOTAL TOTAL TOTAL
nonbudgetary
BUDgeTArY reSOUrCeS Budgetary Budgetary Budgetary Budgetary Financing
Unobligated Balance
Brought Forward October 1 $ 239,155 $ 12,239 $ 242 $ 1,768,609 $ 3,458,375 $ 5,226,984
Recoveries of Prior Year Obligations 28,266 482 19 69,518 91,458 160,976

Budget Authority
Appropriations Received 433,438 16,300 – 5,611,644 – 5,611,644
Borrowing Authority – – – – 1,078,132 1,078,132
Spending Authority from Offsetting Collections
Earned 362,518 1,050 33 384,449 8,384,188 8,768,637
Change in Unfilled Customer Orders 78,851 (49) – 78,802 16,453 95,255
Total Budget Authority 874,807 17,301 33 6,074,895 9,478,773 15,553,668
Permanently Not Available (10,906) (87) – (24,302) (1,640,034) (1,664,336)
Total Budgetary resources $ 1,131,322 $ 29,935 $ 294 $ 7,888,720 $ 11,388,572 $ 19,277,292

STATUS OF BUDgeTArY reSOUrCeS
Obligations Incurred, Net
Direct $ 551,147 $ 19,044 $ 162 $ 6,103,428 $ 4,973,564 $ 11,076,992
Reimbursable 381,265 936 – 816,015 – 816,015
Total Obligations Incurred, Net 932,412 19,980 162 6,919,443 4,973,564 11,893,007

Unobligated Balances, Available 143,330 4,538 109 271,885 1,845,919 2,117,804
Unobligated Balances, Not Available 55,580 5,417 23 697,392 4,569,089 5,266,481
Total Status of Budgetary resources $ 1,131,322 $ 29,935 $ 294 $ 7,888,720 $ 11,388,572 $ 19,277,292

CHAnge in OBLigATeD BALAnCeS
Obligated Balance Brought Forward Net October 1
Unpaid Obligations Brought Forward $ 439,273 $ 2,939 $ 22 $ 676,054 $ 443,586 $ 1,119,640
Uncollected Customer Payments from
Federal Sources Brought Forward – – – – (230,303) (230,303)
Total Obligated Balance Brought Forward, Net 439,273 2,939 22 676,054 213,283 889,337

Obligations Incurred 932,412 19,980 162 6,919,443 4,973,564 1,893,007

Gross Outlays (848,474) (19,671) (163) (6,778,868) (4,741,014)
(11,519,882)
Recoveries of Prior Year Unpaid Obligations (28,266) (482) (19) (69,518) (91,458) (160,976)
Change in Uncollected Customer Payments from
– – – – (16,453) (16,453)
Federal Sources
Obligated Balance, Net, End of Period
Unpaid Obligations 494,945 2,766 2 747,111 584,678 1,331,789
Uncollected Customer Payments from Federal
– – – – (246,756) (246,756)
Sources
Total Obligated Balance, net, end of Period $ 494,945 $ 2,766 $ 2 $ 747,111 $ 337,922 $ 1,085,033

neT OUTLAYS
Gross Outlays $ 848,474 $ 19,671 $ 163 $ 6,778,868 $ 4,741,014 $ 11,519,882
Offsetting Collections (441,370) (1,002) (33) (463,253) (8,384,188) (8,847,441)
Net Outlays Before Offsetting Receipts 407,104 18,669 130 6,315,615 (3,643,174) 2,672,441
Offsetting Receipts (97) – – (97) (153,211) (153,308)
net Outlays $ 407,007 $ 18,669 $ 130 $ 6,315,518 $ (3,796,385) $ 2,519,133

Agency Financial Report • FY 2011
87
Financial Repo rtin g

Required Supplementary Stewardship Information
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 maintaining or increasing national productive capacity. The definition
excludes education and training expenses for federal personnel.

Small Business Development Centers deliver management and technical assistance, economic development
and management training to existing and prospective small businesses through cooperative agreements with
colleges, universities and government organizations.

SCORE is a nonprofit organization that provides small business counseling and training under a grant from
the SBA. SCORE members are successful business men and women who volunteer their time to assist
aspiring entrepreneurs and small business owners. There are SCORE chapters in every state.

Women’s Business Centers provide quality counseling and training services primarily to women entrepre-
neurs in a number of locations around the U.S. and its territories.

All Other Training and Assistance Programs includes primarily small business training provided by a
counselor from a resource partner, district office, or SBA sponsor who delivers a structured program of
knowledge, information or experience on a business-related subject. The training lasts for one or more
hours and includes an agenda, attendee list, and a trainer evaluation. The session may be for an individual
or a class. Training is also available online on a number of subjects of interest to the small business person.
Other programs not separately detailed include Native American Outreach and Drug Free Work Place. As
additional years of data accumulate, the investments will be presented separately.

Performance results are discussed in the Management Discussion and Analysis section of SBA’s annual
Agency Financial Report in the Program Results section of the Executive Summary.

Significant Human Capital investments occur within the following programs:
For the Five Years Ending September 30, 2011
(Dollars in Thousands)
2011 2010 2009 2008 2007
Small Business Development Centers $ 123,097 $ 130,046 $ 116,909 $ 98,484 $ 99,748
SCORE 14,094 11,134 9,899 10,960 12,267
Women’s Business Centers 13,080 16,924 21,504 23,655 16,382
All Other Training and Assistance Programs 67,094 81,057 61,356 41,318 62,787

Total $ 217,365 $ 239,161 $ 209,668 $ 174,417 $ 191,184

Agency Financial Report • FY 2011
88
Other
Accompanying
Information
Success Story Home Grown Marketing of Dream Vacations
Media Marketing, Inc., St. Thomas, Virgin Islands

The U.S. territory of the Virgin Islands is a tourist’s dream vacation spot, and the
natural beauty of the islands is extolled in brochures and travel publications. In
2003, Rita Jones and Jennifer Sibilly decided it was time a tourist guide for the Virgin
Islands was published by a local firm. So, after more than a decade working together
at a publishing firm in St. Thomas, the duo decided to venture out and establish their
own business, Media Marketing, Inc., specializing in publishing guidebooks about
the Virgin Islands for visitors and locals alike.

With the assistance of the University of the Virgin Islands Small Business Development Center, Rita and Jennifer put
together a business plan which, in turn, helped them obtain an SBA-guarantied 7(a) loan to finance their project.

Today, Media Marketing generates $600,000 in annual sales and has grown to become the “go-to” publishing com-
pany for Virgin Islands tourism guides. Media Marketing, Inc. produces various publications every year, including
the Places to Explore, Places to Go, and Places to Eat maps, and Marine Guide, the only one of its kind in the Virgin
Islands and the official publication of the Virgin Islands Hotel and Tourism Association.

Did The America’s Best video series was produced under a co-sponsorship
agreement between SBA and ADP®. Through such partnerships the SBA
you
is able to provide the small business community with quality educational
know and motivational products, such as the America’s Best video series.

To watch the videos, please visit www.sba.gov/americasbest.
Other Accompanying Information

OIG Report on the Most Serious Management
and Performance challenges

U.S. SMALL BUSINESS ADMINISTRATION

OFFICE OF INSPECTOR GENERAL

Report No. 12-01

Fiscal Year 2012
Report on the Most Serious Management and
Performance Challenges
Facing the Small Business Administration

October 21, 2011

Agency Financial Report • FY 2011
91
Other Accompanying Information

U.S. SMALL BUSINESS ADMINISTRATION
OFFICE OF INSPECTOR GENERAL
WASHINGTON, D.C. 20416

October 21, 2011

MEMORANDUM

TO: Karen G. Mills
Administrator

FROM: Peggy E. Gustafson
Inspector General

SUBJECT: Fiscal Year 2012 Report on the Most Serious Management and
Performance Challenges Facing the Small Business Administration

In accordance with the Reports Consolidation Act of 2000, we are providing you with the Office
of Inspector General’s (OIG) Fiscal Year (FY) 2012 Report on the Most Serious Management
and Performance Challenges Facing the Small Business Administration (SBA). 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 SBA’s programs and operations. Our
analysis generally considers those accomplishments that SBA reported as of September 30, 2011.

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
either went up or down from the prior year. If a recommended action was added since last year’s
report, no color score has been 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, and 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

Agency Financial Report • FY 2011
92
Other Accompanying Information

the past four FYs (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 FY 2012 Most Serious Management and
Performance Challenges Facing SBA.

Table 1: Summary of the FY 2012 Most Serious Management and Performance Challenges Facing SBA.

Color Scores
Change from
Status at End of FY 2011
Prior Year
Challenge Green Yellow Orange Red Up Down
1 Small Business Contracting 1 2 1 1
2 IT Security 2 2 1
3 Human Capital 1 1 1
4 Loan Guaranty Purchase 1 1
5 Lender Oversight 4 2
6 8(a) BD Program 1 2 1 3
7 Loan Agent Fraud 2
Loan Management and
8 4
Accounting System
9 Improper Payments 3 3 3
TOTAL 4 11 15 2 5 6

We would like to thank 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 SBA’s
leadership team in addressing the agency’s Management Challenges.

Agency Financial Report • FY 2011
93
Other Accompanying Information

Agency Financial Report • FY 2011
94
Other Accompanying Information

Challenge 1. Procurement flaws allow large firms to obtain small business awards
and agencies to count contracts performed by large firms towards their small
business goals.

The Small Business Act establishes a government-wide goal that 23 percent of the total value of all prime
contract awards for each FY be awarded to small businesses. As the advocate for small business, SBA should
strive to ensure that only small firms obtain and perform small business awards and that procuring agencies
accurately report contracts awarded to small businesses when representing its progress in meeting small
business contracting goals.

OIG audits and other governmental studies have shown widespread misreporting by procuring agencies since
many contract awards that were reported as going 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 a governmental database prior to awarding contracts. SBA needs to ensure that
contracting personnel are adequately trained on small business procurement and are reviewing this database
prior to awarding contracts.

SBA also needs to address a loophole within General Services Administration (GSA) Multiple Awards
Schedule (MAS) contracts that contain multiple industrial codes. Currently, a company awarded such a
contract can identify itself as small on individual task orders awarded under that contract even though it does
not meet the size criteria for the applicable task. Thus, agencies may obtain small business credit for using a
firm classified as small, when the firm is not small for specific orders under the MAS contract.

SBA has made mixed progress on this challenge. In FY 2011, SBA progressed to a “Green” rating for its
efforts to develop a program to ensure that contracting personnel are reviewing contractor size certifications.
However, although they have been working on the development of training programs on small business
procurement for contracting personnel, updated courses have not been implemented. SBA also has committed
to improving the surveillance review process in response to an OIG audit to enhance its oversight of contract
awards and performance on set-aside contracts, but has yet to implement tangible changes. SBA also made
limited progress during FY 2011 in developing regulations to correct misapplication of industry codes on long-
term and multiple award set-aside contracts.

Challenge History Actions Accomplished (Green Status) during Past 4 FYs
Fiscal Year (FY) Issued: 2005 07-0 08-1 09-0 10-0
Status at end of
Recommended Actions for FY 2012
FY 2011
1. Develop and take steps to provide reasonable assurance that agencies are providing
adequate basic and continuing education training to contracting personnel on small Orange
business contracting procedures.
2. Revise the surveillance review process to ensure that they are conducted in a thorough and
New
consistent manner
3. Develop and implement a program that promotes accurate contractor certifications and
Green
ensures that contracting personnel review contractor certifications. (Previously action #2)
4. 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 Orange
show that the regulations are being followed. (Previously action #3)
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

Agency Financial Report • FY 2011
95
Other Accompanying Information

Challenge 2. Weaknesses in information systems security controls pose significant
risks to the agency.

The confidentiality, integrity, and availability of SBA’s information systems are vital to the continued
successful operation of the agency. While information technology (IT) can result in a number of benefits, such
as information being processed more quickly and communicated almost instantaneously, it can also increase
the risk of fraud, inappropriate disclosure of sensitive data, and disruption of critical operations and services.
SBA’s computer security program operates in a dynamic and highly decentralized environment and requires
management attention and resources as weaknesses are identified.

SBA improved in information system security in some critical areas during FY 2011. SBA updated
procedures disallowing users to connect unauthorized devices to the network and implemented network access
controls at SBA headquarters and has plans to extend network access controls to SBA field offices. The Chief
Information Security Officer instituted a review of all Plan of Action and Milestones (POA&M) for SBA IT
systems and began acquisition of an application to manage SBA’s IT systems.

To show further progress, SBA needs to address both known and newly reported information security issues.
For example, SBA needs to demonstrate a process that accomplishes timely mitigation of system risks that are
identified as “medium” and “high;” enforce an enterprise-wide configuration management process; and ensure
segregation of duties controls are in place and operating for all of its systems. SBA has improved in some
areas, however, the FY 2011 Financial Statement Audit has identified new weaknesses and findings and are
also anticipated for the FY 2011 Federal Information Security Management Act (FISMA) review.

Challenge History Actions Accomplished (Green Status) during Past 4 FYs
Fiscal Year (FY) Issued: 1999 07-2 08-2 09-0 10-0
Status at end of
Recommended Actions for FY 2012
FY 2011
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 POA&M accurately reports all computer security weaknesses and corrective actions. Yellow
5. The IT security management program is effective to address information security in
New
systems that support the operations and assets of the organization.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

Agency Financial Report • FY 2011
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Other Accompanying Information

Challenge 3. Effective human capital strategies are needed to enable SBA to carry out
its mission successfully and become a highperforming organization.

During the past decade, facing budget constraints at the same time that virtually of all its programs were
growing significantly, SBA restructured key agency operations, reengineered its largest loan programs, and
downsized personnel levels. While these actions transformed the way SBA does business, the agency has not
adequately analyzed priorities and allocated resources consistent with those priorities and its new business
processes. As a result, there is no assurance that sufficient resources—in terms of both numbers of staff and
the knowledge and skills possessed by the staff—are available and appropriately deployed to perform critical
functions.

A recent review by the U.S. Office of Personnel Management (OPM) identified weaknesses in SBA’s human
capital policies and practices that highlight the serious human capital challenges facing the agency. The
review found that SBA did not meet over 40 percent of expected outcomes across five Human Capital
Assessment and Accountability Framework (HCAAF) areas—Strategic Alignment, Leadership and
Knowledge Management, Results-Oriented Performance Culture, Talent Management, and Accountability.
OPM traced many of the problems to the absence of an OPM-approved human capital accountability system
and a lack of leadership and direction when it comes to the strategic management of human capital at SBA.
For example, the OPM found that SBA’s human capital policies and procedures were not aligned with the
organizational objectives and strategic goals in its FY 2011-2016 Strategic Plan. Further, there was no
evidence that SBA engaged in any recent agency-wide workforce planning or competency gap analyses to
estimate the staffing and skill levels needed to achieve the agency’s performance goals and mission.

The results of the Federal Human Capital Surveys—now called the Employee Viewpoint Survey (EVS)—also
have highlighted SBA’s serious human capital challenges. SBA has consistently ranked near the bottom on all
four human capital indices—Leadership and Knowledge Management, Results-Oriented Performance Culture,
Talent Management, and Job Satisfaction. While the agency showed some improvement in the 2011 EVS, it
still fell below the government wide average on the four human capital indices. In addition, SBA was 29 out
of 31 large agencies in the Partnership for Public Service’s 2010 “Best Places to Work” rankings (the 2011
rankings will be available in November 2011).

Challenge History Actions Accomplished (Green Status) during Past 4 FYs
Fiscal Year (FY) Issued: 2001
(Revised 2007) 07-0 08-0 09-0 10-0
Status at end of
Recommended Actions for FY 2012
FY 2011
1. Ensure the agency has an effective, comprehensive workforce and succession plan that
aligns talent needs and capabilities with SBA’s FY 2011-2016 Strategic Plan. SBA’s
workforce and succession planning goals should reflect the need to recruit and retain the Red
appropriate talent, and should establish appropriate metrics to gauge SBA’s success at
having the right people, in the right jobs, at the right time. (Previously action #3)
2. Ensure the Office of Human Capital Management (OHCM) is structured and equipped so
as to add value by delivering needed strategic support and services such as continuity
New
planning, talent management, organizational development, and strategic consulting to
implement the agency’s human capital plan and its mission.
3. Ensure that Human Capital Management Standard Operating Procedures (SOPs) are
updated and appropriately structured to support the agency’s long-term goals and New
objectives and government-wide Human Capital Management initiatives.
4. Take steps to correct problems identified in the 2010 EVS. Demonstrate improvement by
Yellow
increasing overall scores/agency rankings in the 2011 EVS. (Previously action #2)
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

Agency Financial Report • FY 2011
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Other Accompanying Information

Challenge 4. SBA needs to implement a quality assurance program in its loan centers.

The initial focus of this challenge was on improving deficiencies identified in SBA loan liquidation and
guaranty purchase processes. Over the last decade, the agency has made significant progress to improve these
processes at its loan centers, but a significant deficiency continues to exist in the area of quality assurance.

The Office of Financial Program Operations has made progress in developing a Quality Assurance Review
(QAR) 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. A QAR project guide has been developed and agreed upon by relevant parties within the Office of
Capital Access. The QAR program will assess the overall quality of the centers’ deliverables to provide
confidence to its stakeholders. SBA hired a quality control (QC) manager to oversee the development of the
program and identified a QC specialist for each center. Furthermore, a QC team was established and has
(1) identified existing processes and ranked the functions within the centers as high, moderate and low risk,
(2) identified and ranked critical areas that the centers will focus on for quality control, and (3) developed and
documented Quality Program Manuals for each center. The QC team has also developed and implemented
checklists for each critical center function and developed quality and risk element databases to be utilized for
quality metrics.

While SBA has made substantial progress in its development of a quality assurance program, additional work
remains before SBA can demonstrate that all elements of the program are being completed and followed. For
example, an ongoing audit found that the early default QAR checklist used at the National Guaranty Purchase
Center does not require an adequate review of lender compliance with material loan origination and closing
requirements including eligibility, creditworthiness, and use of loan proceeds. Prior OIG audits identified
material noncompliance in these areas, which resulted in improper payments and significant loss to SBA.
Therefore, a thorough review of eligibility, creditworthiness, and use of loan proceeds is critical to the quality
of the center’s deliverables and the integrity of the 7(a) loan program.

Challenge History Actions Accomplished (Green Status) during Past 4 FYs
Fiscal Year (FY) Issued: 2001 07-0 08-2 09-0 10-1
Status at end of
Recommended Action for FY 2012
FY 2011
1. Implement a Quality Assurance Program for all SBA loan centers. Yellow
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

Agency Financial Report • FY 2011
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Other Accompanying Information

Challenge 5. SBA needs to further strengthen its oversight of lending participants.

Since its inception in 1953, SBA has loaned or guaranteed billions of dollars to finance and spur investment in
small businesses. In fiscal year 2011, approximately 67 percent of the 7(a) loan dollars guaranteed by SBA
were made by lenders using delegated authorities with limited oversight. Prior OIG and GAO reports,
including an OIG report issued in May 2008 disclosed that (1) onsite lender examinations did not adequately
assess lender risk and were limited in scope, (2) reviews were not conducted of high-risk, medium sized
lenders, and (3) SBA did not take adequate risk mitigation measures to hold lenders accountable for their
performance. High-risk lenders account for approximately 35 percent of SBA’s 7(a) outstanding loan dollars
made by active lenders. The risks inherent in delegated lending require an effective oversight program to
(1) monitor lenders compliance with SBA policies and procedures, and (2) take corrective actions when a
material noncompliance is detected.

The agency has made significant progress in its oversight of lenders in its 7(a) and 504 loan programs since
this management challenge was created in 2001. For example, SBA expanded the scope of its oversight by
more than doubling the number of on-site reviews of large high-risk lenders. In September 2006, the agency
issued SOP 51 00, On-site Lender Reviews and Examinations, to guide the on-site review process. The agency
also modified its Lender Risk Rating System to further strengthen lender risk assessments. In October 2010,
SBA issued SOP 50 53, Lender Supervision and Enforcement, which established an oversight framework
including enforcement actions to be taken against lenders with unacceptable performance. SBA also recently
completed its risk management assessment and plans to (1) re-stratify its oversight activities to better target
high-risk lenders and Certified Development Companies (CDCs), (2) expand its assessment of risk, and (3) use
statistical samples so that onsite review results can be extrapolated to the lenders’ total portfolios.

Although the agency has made progress, it needs to demonstrate consistent adherence to its procedures and
ensure that corrective action plans effectively address material noncompliance and actually improves the
performance of high-risk lenders.

Actions Accomplished (Green Status) during Past 4 FYs
Challenge History
Fiscal Year (FY) Issued: 2001 07-7(a)-0 08-7(a)-2 09-7(a)-0 10-7(a)-0
07-504-1 08-504-2 09-504-0 10-504-0
Status at end of
Recommended Actions for FY 2012 FY 2011
7(a) 504
1. Expand the scope of lender oversight and improve the process for reviewing lenders
Yellow Yellow
and CDCs for compliance risks.
2. Implement guidance providing for effective oversight of lending programs. Yellow Yellow
3. Ensure that effective corrective actions are implemented, monitored, and result in
Orange Orange
improvement in the performance of participants with unacceptable performance.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

Agency Financial Report • FY 2011
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Other Accompanying Information

Challenge 6. The Section 8(a) Business Development program needs to be modified
so more firms receive business development assistance, standards for determining
economic disadvantage are justifiable, and SBA ensures that firms follow 8(a)
regulations when completing contracts.

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 agency 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.

SBA made progress in the past towards addressing issues raised by this management challenge that hinder the
agency’s ability to deliver an effective 8(a) program. This progress included increased training of relevant
SBA personnel, improvements in the agency’s ability to provide business development skills to program
participants, and taking steps to ensure that owners of 8(a) firms that were no longer economically
disadvantaged were removed from the program. However, during the past year it regressed. The BD Office
had developed a data base (the BD Assessment Tool) to track participant progress, but it has now concluded
that the system does not provide the best way to measure business success. Accordingly, SBA is planning to
award a contract shortly to develop and deploy a new system to provide SBA employees to monitor program
participants, which it expects to deploy by December 2012. SBA took a positive step by revising its
regulations in March 2011 to ensure that companies that are “business successes” are graduated out of the
program, and by working to update its SOP for the BD program to reflect these regulatory changes. The new
regulations also establish additional standards to address the definition of “economic disadvantage,” however,
the agency has not provided an economic analysis to justify these standards. A recent OIG audit also found
that the agency was not effectively performing surveillance reviews to determine whether contracting activities
complied with small business and 8(a) requirements. SBA needs to update the relevant SOP governing
surveillance reviews for the BD program.

Challenge History Actions Accomplished (Green Status) during Past 4 FYs
Fiscal Year (FY) Issued: 2003 07-1 08-1 09-1 10-0
Status at end of
Recommended Actions for FY 2012
FY 2011
1. Develop and implement a plan, including SOP provisions, which ensures that the 8(a) BD
program identifies and addresses the business development needs of program participants on Orange
an individualized basis.
2. Develop and implement Regulations and SOP provisions to ensure that participants are
Yellow
graduated once they reach the levels defined as business success.
3. Establish objective and reasonable criteria that effectively measures “economic
Red
disadvantage” and implement the new criteria.
4. On a regular basis, conduct surveillance reviews of procuring agencies to ensure they are
effectively monitoring and enforcing compliance with specified 8(a) BD regulations on the Orange
contracts they administer.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

Agency Financial Report • FY 2011
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Other Accompanying Information

Challenge 7. Effective tracking and enforcement would reduce financial losses from
loan agent fraud.

For more than a decade, OIG investigations have revealed a pattern of fraud in the 7(a) business loan guaranty
program by loan packagers and other for-fee agents. Fraudulent schemes have involved hundreds of millions
of dollars, yet SBA oversight of loan agents has been limited, putting taxpayer dollars at risk. The agency
could reduce this risk by establishing effective loan agent disclosure requirements, a database or equivalent
means to track loan agent involvement with its loans, and a more effective agent enforcement program.

Tracking Loan Agent Data. Over the years, in response to this Management Challenge, SBA has proposed
various methods of tracking loan agent activity. At one point, SBA proposed to revise its E-Tran system
(which collects loan data electronically from participating lenders) to collect loan agent information. The
agency later concluded that this approach was not feasible. At the end of FY 2007, SBA proposed a new
approach to integrate information from the Form 159 (which asks for information about loan agents) into the
Form 1502 electronic data collection process by SBA’s Fiscal and Transfer Agent (FTA). The OIG revised
recommended action #1 below, but SBA made no progress on it during FY 2008, in part due to a protest of the
award of the FTA contract. At the end of FY 2009, SBA presented a succinct plan for implementing the 1502
approach. However, during FY 2010, SBA again changed its position, and advised that it would capture the
data by having the Form 159 faxed to the FTA. At the end of FY 2010, SBA issued a notice with directions on
how this data was to be submitted. During FY 2011, the agency instructed lenders how to submit Form 159
data (including loan identification numbers) to the FTA, analyzed the data, and updated loan review guidance
so that the Office of Credit Risk Management (OCRM) could identify loan agent-related problems. Although
loan agent data does not appear in the Loan Accounting System (LAS), SBA officials stated that it could be
linked to LAS through a virtual database. It is not yet clear whether such a process would be user-friendly for
non-technical users. Finally, SBA issued the loan agent data collection requirement in an SOP effective
October 1, 2011.

Loan Agent Enforcement Procedures. In FY 2007, the agency made progress by issuing its Lender Oversight
SOP and by previously revising the guaranty purchase checklist (which lists the records that lenders need to
provide when requesting SBA to pay a guaranty) to include the submission of the Form 159. However, the
agency also needed to establish a more effective enforcement program to deter fraudulent loan agent activity.
Effective October 1, 2010, SBA issued a Lender Supervision and Enforcement SOP with provisions for loan
agent enforcement actions and a delegation of authority to the Director of OCRM. However, the agency
recently advised that this SOP needed to be revised to implement more effective procedures.

Challenge History Actions Accomplished (Green Status) during Past 4 FYs
Fiscal Year (FY) Issued: 2000 07-1 08-1 09-0- 10-0
Status at end of
Recommended Actions for FY 2012
FY 2011
1. Develop an effective method of disclosing and tracking loan agent involvement in SBA
business loan programs. Yellow
2. Implement procedures for enforcement actions against loan agents for improper and
fraudulent conduct. Yellow
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

Agency Financial Report • FY 2011
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Other Accompanying Information

Challenge 8. SBA needs to modernize its Loan Accounting System and migrate it off
the mainframe.

In November 2005, SBA initiated the Loan Management and Accounting System (LMAS) project to update
the agency’s Loan Accounting System and migrate it off of the mainframe. Previous OIG reports noted that
the system was close to the end of its expected useful life, relied on obsolete technology, contained major
security vulnerabilities that could not be addressed until the system was moved to a new operating platform,
and was costly to operate. Additionally, the OIG reported concerns about SBA’s management of the project;
the project’s noncompliance with the agency’s System Development Methodology (SDM) in key areas, which
impacts SBA’s ability to control project costs and quality; and the lack of an enterprise-wide or project-level
Quality Assurance (QA) function to ensure that LMAS deliverables met SBA’s requirements and quality
standards. Finally, the OIG reported that the LMAS QA contractor had not performed all of the activities
stipulated in its contract and that none of the issued LMAS task orders had undergone Independent Validation
and Verification (IV&V) testing.

In 2009, SBA contracted with McKinsey & Company to conduct a review of the LMAS project. This review
identified multiple weaknesses in SBA’s LMAS project management activities and recommended (1) focusing
on core mainframe legacy platform replacement, (2) strengthening project governance, (3) increasing project
team resources, (4) focusing on COTS capabilities while minimizing customization, and (5) improving vendor
management.

In 2010, OMB issued Memorandum 10-26, recommending that Federal agencies split large-scale
modernization efforts into smaller, simpler segments with clear deliverables. In response, SBA changed its
strategy for LMAS going forward to accelerate the migration of user interfaces from the mainframe legacy
platform to the agency’s current architecture, and convert batch COBOL systems from the mainframe to a
more current and platform-independent environment. SBA staffed its IT QA function and created a new SOP
to provide guidance for its IT QA program. However, to show further progress, SBA needs to implement its
QA/IV&V process that encompasses all of the requirements of its enterprise SDM, and provide sufficient
evidence that all LMAS work products undergo IV&V activities in accordance with the agency’s Enterprise
Quality Assurance Plan.

Challenge History Actions Accomplished (Green Status) during Past 4 FYs
Fiscal Year (FY) Issued: 2010 N/A N/A N/A 10-0
Status at end of
Recommended Actions for FY 2012
FY 2011
1. Migrate LAS to a new operating platform before the current mainframe contract expires in
Orange
2012.
2. Modify the LMAS QA/IV&V contract and establish an effective Quality Assurance (QA)
process which provides senior management independent assurance that LMAS Orange
development activities and related project deliverables meet SBA Quality standards.
3. Establish a process for reviewing and accepting LMAS deliverables that complies with
Orange
Systems Development Methodology requirements.
4. Implement a Quality Assurance process in LMAS in accordance with SBA’s Enterprise
Orange
Quality Assurance Plan.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

Agency Financial Report • FY 2011
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Other Accompanying Information

Challenge 9. SBA needs to accurately report, significantly reduce, and strengthen
efforts to recover improper payments in the Disaster and 7(a) loan programs.

OIG audits of SBA’s Disaster and 7(a) Loan programs determined that the improper payment rates reported for
these programs were significantly understated. 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. SBA also reported that the improper payment rate for 7(a)
purchases was 0.53 percent of FY 2008 program outlays, although the OIG estimated the rate to be 27 percent, or
approximately $234 million. SBA’s improper payment rates were understated because the agency did not
adequately review sampled loans, used flawed sampling methodologies, and did not accurately project review
findings for both programs. Additionally, the Office of Financial Assistance (OFA) inappropriately overturned
improper payments identified by reviewers.

OIG audits in prior years have also identified high percentages of disaster and business loans that were made to
borrowers who were ineligible, lacked repayment ability, or did not provide the required support for loan
disbursement. In 2009, we reported that over 30 percent of reviewed disaster loans were disbursed for properties
that were not the applicant’s primary residence and identified an estimated $30 million in improper loan guaranty
purchases in the 7(a) program. Furthermore, a recent OIG audit estimated that at least 1,196 7(a) Recovery Act
loans were not originated and closed in compliance with SBA requirements, resulting in at least $869.5 million
in inappropriate or unsupported loan approvals. SBA also has not aggressively pursued recovery of 7(a)
improper payments.

The Office of Capital Access (OCA) has taken actions to correct many of the deficiencies identified by the OIG.
For example, the agency has (1) acquired a statistician to ensure its sample selection and projection of results are
in compliance with Office of Management and Budget (OMB) requirements, (2) established a pilot program for
disputed denial, repair and improper payment decisions on 7(a) loans, and (3) developed and implemented a
corrective action plan. However, additional actions are needed to accurately report, significantly reduce, and
recover improper payments. OCA needs to incorporate into formal policy (1) the improper payment review
processes, (2) the denial, repair and improper payment dispute resolution process, and (3) the improper payment
recovery process. Furthermore, while OCA and the Office of Disaster Assistance (ODA) have acceptable
corrective action plans in place, they need to demonstrate that the corrective action plans are effective in
reducing improper payments in the 7(a) and Disaster Loan programs.

Challenge History Actions Accomplished (Green Status) during Past 4 FYs
Fiscal Year (FY) Issued: 2010 N/A N/A N/A N/A
Status at end of
Recommended Actions for FY 2012 FY 2011
Disaster 7(a)
1. Ensure that processes used to calculate the improper payment rate for disaster and 7(a) loans
Green Orange
are designed to effectively identify improper payments as defined by OMB Circular A-123.
2. Reassign responsibility for final approval of disputed denial, repair, and improper payment
N/A Orange
decisions from OFA to OCRM to ensure an adequate and timely resolution of disputes.
3. Develop and implement corrective action plans to reduce improper payments in the 7(a) and
Green Green
Disaster Loan programs. (Previously action #4)
4. Establish a process and time standards to expeditiously recover improper payments
N/A Orange
identified during agency reviews and OIG audits. (Previously action #5)
5. Demonstrate that corrective action plans are effective in reducing improper payments in the
New New
7(a) and Disaster Loan programs.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

Agency Financial Report • FY 2011
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Other Accompanying Information

Appendix: Relevant Reports

Most of the SBA OIG Reports listed can be found at http://www.sba.gov/office-of-inspector-general.

Challenge 1:

• SBA OIG, SBA’s Planning and Award of the Customer Relationship Management Contracts, ROM 10-16,
June 29, 2010.
• 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.
• SBA OIG, 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.
• GAO, Contract Management: Reporting of Small Business Contract Awards Does Not Reflect Current Business
Size, GAO-03-704T. 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. Fred C. Armendariz, 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.
• SBA OIG, Review of Selected Small Business Procurements, Report #5-16, March 8, 2005.
• SBA OIG, SBA Small Business Procurement Awards Are Not Always Going to Small Businesses, Report
#5-14, February 24, 2005.

Challenge 2:

• SBA OIG, Weaknesses Identified During the FY 2010 Federal Information Security Management Act Review,
Report 11-06, January, 28, 2011
• SBA OIG, Audit of SBA’s FY 2010 Financial Statements, Report 11-03, November 12, 2010
• SBA OIG, Audit of SBA’s FY 2009 Financial Statements, Report #10-04, November 13, 2009
• SBA OIG, SBA’s FY2008 Financial Statements, Report #9-03, November 14, 2008
• SBA OIG, Audit of SBA’s Financial Statements for FY 2006, Report #7-03, November 15, 2006
• SBA OIG, Audit of SBA’s Information System Controls for FY 2004, Report #5-12, February 24, 2005

Challenge 3:

• OPM, 2011 Federal Employee Viewpoint Survey
• Partnership for Public Service, Best Places to Work in the Federal Government 2010
• OPM, 2010 Federal Employee Viewpoint Survey
• SBA OIG, The Colorado District Office’s Servicing of 8(A) Business Development Program Participants,
Report #10-15, September 30, 2010
• SBA OIG, Adequacy of Procurement Staffing and Oversight of Contractors Supporting the Procurement
Function, ROM 10-13, April 9, 2010
• SBA OIG, SBA's Administration of the Microloan Program under the Recovery Act, ROM 10-10,
December 28, 2009
• Partnership for Public Service, Best Places to Work in the Federal Government 2009
• OPM, 2008 Federal Human Capital Survey

Agency Financial Report • FY 2011
104
Other Accompanying Information

• GAO, Agency Should Assess Resources Devoted to Contracting and Improve Several Processes in the 8(a)
Program, GAO-09-16, November 2008
• GAO, Opportunities Exist to Build on Leadership’s Efforts to Improve Agency Performance and Employee
Morale, GAO-08-995, September 2008
• SBA OIG, Non-Native Managers Secured Millions of Dollars from 8(a) Firms Owned by Alaska Native
Corporations through Unapproved Agreements that Jeopardize the Firms’ Program Eligibility, Report #8-14,
August 7, 2008
• GAO, Opportunities Exist to Improve Oversight of Women’s Business Centers and Coordination Among
SBA’s Business Assistance Programs, GAO-08-49, November 2007
• SBA OIG, Audit of Two 8(a) Sole-Source Contracts Awarded to Contractors in SBA’s Mentor
Protégé Program, Report #7-19, March 30, 2007
• SBA OIG, Management Advisory Report on the Transfer of Operations to the National Guaranty Purchase
Center, Report #4-39, August 31, 2004
• GAO, Small Business Administration: Progress Made, but Transformation Could Benefit from Practices
Emphasizing Transparency and Communication, GAO-04-76, October 2003
• GAO, Results Oriented Cultures: Implementation Steps to Assist Mergers and Organizational Transformations,
GAO-03-699, July 2003
• GAO, Small Business Administration: Workforce Transformation Plan is Evolving, GAO-02-931T, July 16,
2002
• SBA OIG, Modernizing Human Capital Management, Report #2-20, May 31, 2002
• GAO, Small Business Administration: Current Structure Presents Challenges for Service Delivery, GAO-02-17,
October 2001
• GAO, Small Business Administration: Steps Taken to Better Manage its Human Capital, but More Needs to be
Done, GAO/T-GGD/AIMD-00-256, July 20, 2000
• SBA OIG, A Framework for Considering the Centralization of SBA Functions, November 1996

Challenge 4:

• SBA OIG, Origination and Closing Deficiencies Identified In 7(a) Recovery Act Loan Approvals, Report
#11-07, September 30, 2011
• SBA OIG, Material Deficiencies Identified in Five 7(a) Recovery Act Loans Resulted in $2.7 Million of
Questioned Costs, Report #11-06, August 25, 2011
• SBA OIG, Banco Popular Did Not Adequately Assess Borrower Repayment Ability When Originating
Huntington Learning Center Franchise Loans, Report #11-16, July 13, 2011
• SBA OIG, Material Deficiencies Identified in Four 7(a) Recovery Act Loans Resulted in $3.2 Million of
Questioned Costs, Report #11-05, June 29, 2011
• SBA, OIG America’s Recovery Capital Loans Were Not Originated and Closed In Accordance With SBA’s
Policies and Procedures, Report #11-03, March 2, 2011
• SBA OIG, Material Deficiencies Identified in Early-Defaulted and Early-Problem Recovery Act Loans, #10-19,
September 24, 2010
• SBA OIG, SBA’s Management of the Backlog of Post-purchase Reviews at the National Guaranty Purchase
Center, #9-18, August 25, 2009
• SBA OIG, , The Small Business Administration’s Fiscal Year 2008 Improper Payment Rate for the 7(a)
Guaranty Loan Program #9-16, July 10, 2009
• SBA OIG, 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
• SBA OIG, Audit of the Liquidation Process at the National Guaranty Purchase Center, #9-08, January 30, 2009
• SBA OIG, Audit of Six SBA Guaranteed Loans, #8-18, September 8, 2008
• SBA OIG, Audit of Loan Classifications and Overpayments on Secondary Market Loans, #8-09, March 26,
2008
• SBA OIG, Audit of UPS Capital Business Credit’s Compliance with Selected 7(a) Lending Requirements,
#8-08, March 21, 2008

Agency Financial Report • FY 2011
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Other Accompanying Information

• SBA OIG, Audit of the Guarantee Purchase Process for Section 7(a) Loans at the National Guaranty Purchase
Center, Report #7-23, May 8, 2007
• SBA OIG, Audit of Deficiencies in OFA’s Purchase Review Process for Backlogged Loans,
Report #6-35, September 29, 2006
• SBA OIG, Survey of the Quality Assurance Review Process, Report #6-26, July 12, 2006
• SBA OIG, Audit of SBA’s Implementation of the Improper Payments Information Act, Report #6-25,
June 21, 2006
• SBA OIG, Management Advisory Report on the Transfer of Operations to the National Guaranty Purchase
Center, Report #4-39, August 31, 2004
• SBA OIG, Audit of the Guaranty Purchase Process, Report #3-15, March 17, 2003
• SBA OIG, Improvements are Needed in Small Business Lending Company Oversight Process,
Report #2-12, March 21, 2002
• GAO, Major Management Challenges and Program Risks, GAO-01-260, January 2001

Challenge 5:

• SBA OIG, SBA’s Oversight of SBA Supervised Lenders, Report #8-12, May 9, 2008
• SBA OIG, UPS Capital Compliance with Selected 7(a) Lending Requirements, Report #8-08, March 21, 2008
• GAO, Small Business Administration: Additional Measures Needed to Assess 7(a) Loan Program’s
Performance, GAO-07-769, July 13, 2007
• SBA OIG, SBA’s Oversight of Business Loan Center, LLC, Report #7-28, July 11,2007.
• SBA OIG, SBA’s Use of the Loan and Lender Monitoring System, Report #7-21, May 2, 2007.
• SBA OIG, Audit of the Office of Lender Oversight Corrective Action Process, Report #7-18, March 14, 2007.
• GAO, Small Business Administration: Improvements Made, But Loan Programs Face Ongoing Management
Challenges, GAO-06-605T, April 6, 2006
• SBA OIG, SBA’s Administration of the Supplemental Terrorist Activity Relief (STAR) Loan Program, Report
#6-09, December 23, 2005
• GAO, Small Business Administration: New Service for Lender Oversight Reflects Some Best Practices, But
Strategy for Use Lags Behind, GAO-04-610, June 8, 2004
• GAO, Continued Improvements Needed in Lender Oversight, Report #03-90, December 2002
• SBA OIG, Impact of Loan Splitting on Borrowers and SBA, Advisory Memorandum Report #2-31,
September 30, 2002
• SBA OIG, Improvements needed in SBLC Oversight, Advisory Memorandum Report, #2-12, March 20, 2002
• SBA OIG, Preferred Lender Oversight Program, Report #1-19, September 27, 2001
• SBA OIG, SBA Follow-up on SBLC Examinations, Report #1-16, August 17, 2001

Challenge 6:

• SBA OIG, Audit on the Effectiveness of the SBA’s Surveillance Review Process, Report # 11-11, March 31,
2011
• SBA OIG, Audit of Two 8(a) Sole –Source Contracts Awarded to Contractors in SBA’s Mentor Protégé
Program, Report #7-19, March 30, 2007
• SBA OIG, Audit of Monitoring Compliance with 8(a) Business Development Regulations During 8(a) Business
Development Contract Performance, Report #6-15, March 16, 2006
• SBA OIG, Business Development Provided by SBA’s 8(a) Business Development Program, Report #4-22,
June 2, 2004.
• SBA OIG, SACS/MEDCOR: Ineffective and Inefficient, Report #4-15, March 9, 2004
• SBA OIG, Section 8(a) Program Continuing Eligibility Reviews, Report #4-3-H-006-021, September 30, 1994

Agency Financial Report • FY 2011
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Other Accompanying Information

Challenge 7:

• SBA OIG, Applicant Character Verification in SBA’s Business Loan Program, Report #3-43, April 5, 2001
• SBA OIG, Summary Audit of Section 7(a) Loan Processing, Report #0-03, January 11, 2000
• SBA OIG, Loan Agents and the Section 7(a) Program, Report #98-03-01, March 31, 1998
• SBA OIG, Fraud Detection in SBA Programs, Report #97-11-01, November 24, 1997
• SBA OIG, Operation Cleansweep Memorandum, August 21, 1996

Challenge 8:

• SBA OIG, Adequacy of Quality Assurance Oversight of the Loan Management and Accounting System
Project, Report 10-14, September 13, 2010
• SBA OIG, Review of Allegations Concerning How the Loan Management and Accounting System
Modernization Project is Being Managed, Report #9-17 July 30, 2009
• SBA OIG, Planning for the Loan Management and Accounting System Modernization and Development Effort,
Report #8-13, May 14, 2008
• SBA OIG, SBA Needs to Implement a Viable Solution to its Loan Accounting System Migration Problem,
Report #5-29, September 20, 2005 – all recommendations closed
• GAO, Information Technology: Agencies Need to Improve the Accuracy and Reliability of Investment
Information, GAO-06-250, January 12, 2006.
• GAO, Major Management Challenges and Program Risks: Small Business Administration, GAO-03-116,
January 1, 2003
• GAO, 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
• GAO, 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:

• SBA OIG, Origination and Closing Deficiencies Identified In 7(a) Recovery Act Loan Approvals, Report
#11-07, September 30, 2011
• SBA OIG, Material Deficiencies Identified in Five 7(a) Recovery Act Loans Resulted in $2.7 Million of
Questioned Costs, Report #11-06, August 25, 2011
• SBA OIG, Banco Popular Did Not Adequately Assess Borrower Repayment Ability When Originating
Huntington Learning Center Franchise Loans, Report #11-16, July 13, 2011
• SBA OIG, Material Deficiencies Identified in Four 7(a) Recovery Act Loans Resulted in $3.2 Million of
Questioned Costs, Report #11-05, June 29, 2011
• SBA, OIG America’s Recovery Capital Loans Were Not Originated and Closed In Accordance With SBA’s
Policies and Procedures, Report #11-03, March 2, 2011
• SBA OIG, Material Deficiencies Identified in Early-Defaulted and Early-Problem Recovery Act Loans, Report
#10-19, September 24, 2010
• SBA OIG, SBA’s Management of the Backlog of Post-Purchase Reviews at the National Guaranty Purchase
Center, Report #9-18, August 25, 2009
• SBA OIG, The Small Business Administration’s Fiscal Year 2008 Improper Payment Rate for the 7(a)
Guaranty Loan Program, Report #9-16, July 10, 2009
• SBA OIG, Audit of Borrower Eligibility for Gulf Coast Disaster Loans, Report #9-09, March 31, 2009
• SBA OIG, The Small Business Administration’s Fiscal Year 2007 Improper Payment Rate for the Disaster
Loan Program, Report #9-10, March 26, 2009
• SBA OIG, Audit of the Liquidation Process at the National Guaranty Purchase Center, Report #9-08,
January 30, 2009

Agency Financial Report • FY 2011
107
Other Accompanying Information

• SBA OIG, The Use of Proceeds From Gulf Coast Disaster Loans, Report #9-06, January 15, 2009
• SBA OIG, Disaster Loss Verification Process, Report #8-15, June 17, 2008
• SBA OIG, Review of the Adequacy of Supporting Documentation for Disbursements, Report #8-07,
January 29, 2008
• SBA OIG, The Quality of Loans Processed Under the Expedited Disaster Loan Program, Report #7-34,
September 28, 2007
• SBA OIG, SBA’s Quality Assurance Reviews of Loss Verifications, Report #7-29, July 23, 2007
• SBA OIG, Securing Collateral for Disaster Loan Disbursements, Report #7-22, May 9, 2007

Agency Financial Report • FY 2011
108
Other Accompanying Information

SBA Response to the OIG Report on Management and
Performance challenges

Agency Financial Report • FY 2011
109
Other Accompanying Information

Summary of OIG Audit Follow-up
Throughout the year, the OIG conducts audits of SBA’s processes, procedures and programs, and makes rec-
ommendations 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 action plan, including a target date for comple-
tion. This recommendation is identified as having a “Management Decision.” When the corrective action
plan is implemented and the recommendation has been fully addressed, the recommendation 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 2011, there were 114 Final Actions resulting from 4 monetary and 110 non-monetary recom-
mendations. The status of the corrective actions is updated regularly and is available for review on the SBA
Intranet. The status of all audit recommendations is reconciled with the OIG to ensure actions are posted
promptly and accomplished in accordance with the agreed-upon target dates.

The following two tables depict SBA’s final action activity for FY 2011. Detailed information by report
number on final action with disallowed or questioned costs, funds put to better use, and status of corrective
action plans not implemented within one year can be found in Supplementary Information #3 that accom-
panies this Agency Financial Report.

TABLE 1 FINAL ACTION ON AUDIT RECOMMENDATIONS WITH DISALLOWED OR QUESTIONED COSTS
OCTOBER 1, 2010 – SEPTEMBER 30, 2011
Disallowed Costs (Rounded to
Number of Recommendations
Thousands)
A. Recommendations with management decisions on which final action 2 $2,780
had not been taken at the beginning of the period.
B. Recommendations on which management decisions were made 11 6,423
during the period.
C.Total recommendations pending final action during period. 13 $9,203
D. Recommendations on which final action was taken during the period.
1. Recoveries:
(a) Collections and Offsets 1 3
(b) Property
(c) Other
2. Write-Offs 1 269
3. Total 2 $272
E. Recommendations needing final action at the end of the period. 11 $8,931

Agency Financial Report • FY 2011
110
Other Accompanying Information

TABLE 2 FINAL ACTION ON AUDIT RECOMMENDATIONS WITH FUNDS PUT TO BETTER USE
OCTOBER 1, 2010 – SEPTEMBER 30, 2011
Number of Funds to be Put to Better Use
Recommendations (Rounded to Thousands)
A. Recommendations with management decisions on which final 3 $54,242
action had not been taken at the beginning of the period.
B. Recommendations on which management decisions were made 3 53,000
during the period.
C. Total recommendations pending final action during period. 6 $107,242
D. Recommendations on which final action was taken during the period.
1. Value of recommendations implemented (completed). 2 53,000
2. Value of recommendations that management concluded should
not or could not be implemented or completed.
3. Total 2 $53,000
E. Recommendations needing final action at the end of the period. 4 $54,242

Agency Financial Report • FY 2011
111
Other Accompanying Information

Improper Payments
As required by the Improper Payment Information The first three are loan guaranty programs and
Act of 2002 (IPIA) and as amended by the Disaster is a direct lending program.
Improper Payments Elimination and Recovery
Act of 2010 (IPERA) and OMB Circular A-123, Statistical Sampling
Management’s Responsibility for Internal Controls,
The statistical sampling process used in FY 2011 is
Appendix C, the SBA has reviewed all programs
practically unchanged from that used in FY 2010.
and activities for susceptibility to significant im-
proper payments as of FY 2011. 7(a) guaranty purchase statistical sampling
used Probability Proportional to Size (PPS) with
replacement in FY 2011. This method was used
Risk Assessment
because large loans in the sample can skew the
In FY 2011, the SBA conducted a qualitative or result. The sampling period was the 12 months
quantitative risk assessment for each of the fol- ended March 31, 2011. The sample was stratified
lowing programs or activities to determine the based on SBA service center, purchase process and
susceptibility to significant improper payments: early default. Using PPS, the SBA determined
contracting, 7(a) guaranty loans, disaster loans, the appropriate total sample size to be 303 loans
small business development centers, small business with aggregate purchase outlays of $123.5 mil-
investment companies, 504 certified development lion, and improper payments of $1.6 million
company loans, congressional grants, women’s were identified within the sample. Using the
business ownership grants, surety bond guaranties, Hansen-Hurwitz estimation method, the estimat-
and microloans. Based on OMB’s new IPERA ed improper payment rate for the 7(a) guaranty
implementation guidance in OMB Circular A-123, purchase population is 1.73 percent compared to
Appendix C released in April 2011, the SBA deter- a 1.87 percent rate last year.
mined that contracting had high risk factors likely
to contribute to improper payments, and the pro- 7(a) approval reviews also used PPS Sampling
gram was included in the improper payments re- with replacement for all loan guaranties approved
view for the first time because it did not previously during the 12 month period ended March 31,
meet the dollar threshold for inclusion. In compli- 2011. The approval population was divided into
ance with OMB guidance, the SBA has determined six strata based on the loan delivery method. The
that its contracting program is risk-susceptible, and SBA determined the appropriate total sample
the Agency will continue to identify the most ap- size to be 112 loans from the population. The
propriate improper payments measurement in the estimated improper payments rate for the annual
coming year. The SBA anticipates it can report an period ending March 31, 2011 was calculated
error rate for contracting in FY 2012. as 0 percent based on the aggregate net approval
amount of $130,057,688 on the approved loans
The SBA’s four major credit programs were in- sampled with no improper payments found.
cluded in the Improper Payments program as they
were previously identified in the former Section 57 504 CDC approval used PPS sampling with
of Circular A-11. replacement from all loan guaranties approved
during the 12 month period ended March 31,
1. 7(a) business loan guaranty approvals and
2011. The approval population was divided into
defaulted loan purchases
three strata based on the loan delivery method.
2. 504 certified development company guaranty The SBA determined the appropriate total sample
approvals
size to be 50 loans from the population. The
3. small business investment company financings estimated improper payments rate was calculated
4. disaster loans as 0 percent based on the aggregate net approval

Agency Financial Report • FY 2011
112
Other Accompanying Information

amount of $61,719,000 on the approved loans 2011 to refine the measurement process and re-
sampled with no improper payments found. port improper payment estimates in the FY 2012
Agency Financial Report. In the meantime, the
SBIC used a random sample of 95 SBIC financ- test in FY 2011 utilized statistical sampling using
ings by SBIC’s having SBA guarantied leverage PPS with replacement in FY 2011. The sam-
during the 12 month period ended March 31, pling period was the 12 months ended March 31,
2011. Improper payments were identified when 2011. The SBA determined the appropriate total
an SBIC examination (either regularly scheduled sample size to be 150 invoices with total outlays
or a special examination) found a discrepancy of $29,300,644.31. The scope of the review cov-
with SBIC program regulations in the sampled ers three areas: (1) invoice payment, (2) contract-
financings. The examinations identified two ing, and (3) invoice processing. Under this first
potential improper payments. One was a possible review, the estimated improper payment rate was
inappropriate prepayment restriction and the oth- determined to be 89 percent or $118,392,584.
er was a financing to a potential ineligible busi- The high rate of improper payments is generally
ness. The two financings constituted $2,258,333 the result of documentation errors, not due to
of the $185,758,518 in financings sampled, or 1.2 payment errors or non-receipt of goods or servic-
percent of the total. es. If the measurement reflected payments made
Disaster used PPS sampling with replacement in inaccurate amounts or non-compliance with
from all disbursed loans during the 12 months contract terms, the improper payment rate would
ended June 30, 2011 based on assumptions about be 3 percent or $4.5 million. As indicated, the
the likely prevalence and severity of improper SBA is taking the lessons learned from this first
payments. The SBA’s Quality Assurance Review test measurement and will be refining the mea-
(QAR) sample size was 494 disbursed disaster surement methodology, but it plans to report an
loans. The scope of the QAR covers three compli- error measurement for contracting in FY 2012.
ance areas: (1) basic eligibility; (2) adherence to
relevant laws, rules, regulations and standard oper-
Corrective Action
ating procedures; and, (3) creditworthiness. The The 7(a) guaranty purchase improper payments
review found a 28.4 percent improper payment program identifies and tracks the reasons for any
rate or $96,336,000 of the $339,630,000 in total improper payments discovered in the reviews, and
disbursements. The high rate of improper pay- then appropriate adjustments to the guaranty pur-
ments is generally the result of paperwork errors, chase process are made to reduce future errors.
not eligibility or creditworthiness errors. If the
measurement reflected payments made to poten- The root cause for all identified improper payments
tially ineligible borrowers or in an incorrect pay- for the 7(a) purchase program was Administrative
ment amount, the improper payment rate would and Documentation Errors; the error rate was 1.73
be 12.1 percent. percent for a total of $40.7 million. There was no
Authentication and Medical Necessity Errors nor
Contracting activities suggest a higher than ac- Verification Errors.
ceptable improper payments rate. In FY 2011,
the first year that contracting was determined to Improper payments arise from the failure of a pur-
be risk-susceptible under IPERA, the SBA devel- chase processor to identify material lender deficien-
oped a statistical sampling methodology to test cies in the handling of an SBA guarantied loan.
the effectiveness of this measurement. Since this Primary reasons for errors in purchases reviewed
was the first year that the SBA tested contracting this year were:
payments, the Agency is continuing to identify
y improper use of loan proceeds (not in accordance
the most appropriate measurement process. The
with loan authorization);
SBA will take lessons learned from the test in FY

Agency Financial Report • FY 2011
113
Other Accompanying Information

y failure to conduct timely site visit; improper payments in 7(a) loan processing and 504
y failure of lender to assure adequate technical loan originations because of multiple reviews that
assistance on Community Express loan; take place when a loan is being processed.
y failure of lender to perfect security interest in SBIC financings had only two potential errone-
collateral; ous payments. The minimal number of erro-
y failure to verify borrower financial information neous payments will continue due to rigorous
using IRS tax transcripts; program standards.
y inadequate credit scoring model for Community The root cause for all identified improper pay-
Express loan approvals; ments for the SBIC program was Administrative
y underpayment of interest to lender because and Documentation Errors; the error rate was 1.2
incorrect interest rate was used; and percent for a total of $17.0 million. There were no
y reimbursement of lender expenses that were not Authentication and Medical Necessity Errors nor
fully justified. Verification Errors.

Ongoing corrective action procedures followed for The following ongoing steps will further reduce
the 7(a) guaranty purchase process involve advising future improper payment rates:
the purchase processing team of improper pay- y Licensing standards require knowledgeable fund
ment determinations and clarification of the issues managers and this reduces the likelihood of
to avoid possible improper payments in the future program errors and fraud.
through a newly revised quality control (QC) pro-
y All fund managers must undergo training on
cess. A fully documented guaranty purchase proce-
SBIC regulations as a condition for receiving
dure handbook is updated periodically. Remedial
leverage. Therefore, almost all SBICs are very
actions taken by the QC team on an ongoing basis
knowledgeable service providers that have
include:
extensive experience in the program.
y identify and analyze error patterns; y Licensing includes extremely detailed
y communicate error patterns to the staff background checks on fund managers by both
processing purchases; the Office of the Inspector General and the
y review current policies and procedures to Federal Bureau of Investigation.
ensure that any error patterns are appropriately y Credit checks are performed on all potential
addressed in current guidance; fund managers as part of SBIC licensing.
y revise policies and procedures where necessary; y Licensees are audited on a periodic basis to
y issue guidance to the purchase staff on specific determine ongoing compliance with regulatory
issues; requirements.

y provide training; and Disaster improper payment rate was greater than
y supplement center resources where possible to projected. The increased rate does not reflect
ensure ongoing quality control procedures that greater risk in the portfolio but does indicate a
will identify any emerging patterns or potential need to adhere to the documentation require-
problem areas that might result in future ments of the Standard Operating Procedures.
improper payments, as well as take action to Over half the notations for improper payments
mitigate these potential problem areas. reflect paperwork that was not received or com-
pleted timely to meet the procedural require-
7(a) loan guaranty approvals and 504 CDC loan ments. If the measurement reflected payments
approvals had no improper payments. There ap- made to potentially ineligible borrowers or in an
pear to be sufficient safeguards in place to prevent incorrect amount, the improper payment rate

Agency Financial Report • FY 2011
114
Other Accompanying Information

would be 12.1 percent. In addition, the sample of electronic funds transfer is utilized to prevent
selected for review contained numerous disburse- lost and stolen checks.
ments for loans established prior to the current
reference period beginning July 2010, previous to Contracting has been identified as risk-suscepti-
the implementation of the corrective actions taken ble under IPERA. While the SBA is still develop-
to mitigate past errors. As these older loans are ing an improper payment methodology, actions
fully disbursed, it is anticipated the improper pay- are being taken to address improper payments in
ment rate will be reduced. this area.

The root cause for all identified improper SBA’s contracting activities were transferred to
payments for the Disaster program was the Acquisition Division in the Denver Finance
Administrative and Documentation Errors; the er- Center, Office of Performance Management and
ror rate was 28.4 percent for a total of $96.3 mil- Chief Financial Officer, in October 2010. Most
lion. There was no Authentication and Medical of the individual sampled invoices correspond to
Necessity Errors nor Verification Errors. contracts that were awarded prior to FY 2011,
which predates a number of actions already taken
The following ongoing steps will further reduce by the SBA to improve the quality of its staff, file
future Improper Payment rates: documentation, and data integrity.

y Additional training has been instituted to ensure The Acquisition Division has taken the following
that staff is aware of all paperwork requirements steps to reduce improper payments:
and waiver procedures when appropriate.
y Improving training by expanding COTR and
y A dedicated team that reports directly to SBA program manager training in many areas such
headquarters will complete the annual Improper as appropriate invoicing (December 2010 and
Payment review and continuously review the January 2011, respectively, and will be on-going).
work of the Production and Disbursement
Center. y Enhancing the Contract Management System
and financial system two-way interfaces and
y Areas of concern will be identified and corrected evaluated possible use of Treasury’s Integrated
in a timely manner. Payments Platform (IPP) system with a target
Disaster improper payments identified thru an- date of March 2012.
nual Quality Assurance Reviews indicate minimal y Developing a “Review Checklist” and
findings of unauthorized and/or ineligible loans. conducting a review of all active contract files
Disaster program internal controls include the to identify missing documents and correct
following: documentation errors with a target date of
January 2012.
y Disaster related damages are verified onsite by
SBA staff. The cost to repair and/or replace the y Re-instituting legal reviews and expanded legal
disaster damaged property is determined by SBA staff for contracting support in February 2011.
construction analysts. y Enhancing training and the intake checklist
y Disaster procedures include credit checks, for invoices to better assess the acceptability of
verification of income, verification of ownership invoices with a target date of December 2011.
and checks with FEMA to ensure that federal y Revise standard operating policy and
assistance is not duplicated during loan procedures for SBA Acquisition with a target
processing and disbursement of all disaster loans. date of June 2012.
y Every secured disaster loan is reviewed by disaster
staff attorneys for legal sufficiency and the use

Agency Financial Report • FY 2011
115
Other Accompanying Information

Improper Payment Reporting individual loan being reviewed. Improper pay-
ments have not been detected in these reviews
The table on this page presents SBA’s Improper in the recent past, due to the multiple reviews
Payment program results for FY 2011. that take place when a loan is being processed.
3. Continuous Quality Control reviews assess
the quality of the loan and loan documen-
Recapture of Improper Payments tation and include a review for potential
The existing reviews performed by SBA person- improper payments for targeted loans, such
nel are considered to be sufficient to identify and as those from “problem” lenders, high dollar
recapture overpayments. Due to the historical low loans, or those that experience early default.
The SBA’s Quality Control staff in the Office
error rates and the complex nature of the programs,
of Capital Access conducts the reviews and
further recapture audits would not be cost-effective. track the reasons for any improper payments
discovered in the reviews. As a result of the
7(a) guaranty purchase improper payments are root cause identification, appropriate adjust-
identified and recovered by three different sources: ments to the guaranty purchase process are
made to reduce future errors.
1. A random sample of loan purchases for 12
months ending March 31, validated by a Overpayments identified in any of the three reviews
contractor-statistician, is reviewed for potential listed are recovered from the lender as appropriate.
improper payments to lenders each year. The Portfolio management negotiates with the lender
results of this targeted review for potential
as to the lender’s liability. This is a case-by-case
improper payments are reported annually in
SBA’s Agency Financial Report. determination that varies substantially depending
on the circumstances of the loan making, servicing,
2. Improper payment approval reviews are
conducted by four loan officers who were not purchases and liquidation.
associated with the approval process for the

IMPrOPEr PAYMENT rEDUCTION OUTLOOk ($ IN MILLIONS)
FY11 FY11
FY101
1 1 1 1 1
FY10 FY10 FY11 FY11 FY11 FY12 FY12 FY12 FY13 FY13 FY13 FY14 FY14 FY14
Program $ Over- Underpay-
$ Outlays iP % iP $ $ Outlays iP % iP $ $ Outlays iP % iP $ $ Outlays iP % iP $ Outlays iP % iP
payments ments

7(a) Guaranty
2,392.20 1.87 44.8 2,355.60 1.73 40.7 40.7 0 2,300.00 1.4 32.2 2,200.00 1.3 28.6 2,100.00 1.3 27.3
Purchases1

7(a) Guaranty
11,638.70 0 0 5,327.80 0 0 0 0 16,000.00 0 0 16,500.00 0 0 17,000.00 0 0
Approvals1

CDC
Debentures2 4,500.20 0 0 4,375.30 0 0 0 0 5,500.00 0 0 6,000.00 0 0 6,500 0 0

CDC Loans
4,500.20 0 0 4,375.30 0 0 0 0 5,500.00 0 0 6,000.00 0 0 6,500 0 0
Guarantied1

SBIC
1,475.00 0.99 14.6 1,421 1.2 16.7 16.7 0 1,400.00 1.2 16.8 1,400.00 1.1 15.4 1,400.00 1 14
Guaranties3

Disaster Loan
Disbursements4 372.1 34.2 127.1 339.6 28.4 96.3 96.3 0 800 20 160 800 17 136 800 15 120

Contract
Disbursements4 N/A N/A N/A 133.4 N/A N/A N/A 0 130 N/A N/A 130 N/A N/A 130 N/A N/A

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
CDC Debentures and 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. The SBA has zero improper payments assumed for CDC debentures.
3. SBIC Guaranties include SBA guaranties of leverage extended to SBICs.
4. The SBA identified contract disbursements as susceptible to significant improper payments in FY 2011. This year the SBA conducted a test of these payments that examined invoice processing,
contracting, and invoice payment. Based on this year’s test results, the SBA will refine its measurement and plans to report a measurement in FY 2012.

Agency Financial Report • FY 2011
116
Other Accompanying Information

SBIC improper payments are identified through Contracting at SBA did not meet the require-
annual examinations performed by SBA personnel ments for reporting improper payments prior to
for leveraged SBICs. When an improper payment the Improper Payment Elimination and Recovery
is identified, the SBA sends a letter to the SBIC Act of July 2010; therefore, a systematic review for
with a recommendation for resolution and moni- improper payments was not established prior to
tors the issue until it is resolved. Because SBICs FY 2011. Due to the limited amount of outlays
obtain private financing from a number of sources, ($133.4 million for the improper payment scope pe-
including banks, pension funds, corporations, riod) the SBA has determined that recapture audits
and individuals and only supplement their private are not cost-effective.
investment capital with funds guaranteed by SBA, it
Overpayments Recaptured Outside of Payment
would be impossible to identify the amount invested
Recapture Audits are applicable only to Contracts
in a particular business that was provided solely or
and 7(a) Purchases as they are recoverable from
specifically by the SBA guarantee. In the rare occa-
vendors and lenders as appropriate. The Contract
sions an investment in an ineligible small business
overpayments that relate to cash payments made for
is identified, SBA requires the SBIC to divest itself
an inaccurate amount or not according to con-
from the small business recipient. In even rarer
tract terms which the SBA does not plan to ratify
instances, the SBIC might be found to be in default
through a legal process total $32,477; all other over
of its covenants and will be referred to SBA’s Office
payments were due to missing or incomplete docu-
of SBIC Liquidations where recovery efforts will be
mentation or can be ratified through legal review.
implemented. This has not been necessary for the
Contracts were reviewed for improper payments for
most part.
the first time this year and therefore FY 2010 in-
The current procedures are considered to be suffi- formation is not applicable. As FY 2011 is the first
cient to identify potential improper payments. For year recovery of overpayments has been requested,
the most part any identified improper payment is the 7(a) Purchases overpayments, which represent
easily rectified by simply changing the terms of the recoverable payments made to lenders, is not readily
financing. It would not be cost effective to use an available but will be in future years.
outside entity to conduct additional reviews,
as leveraged SBICs are already being reviewed Amount Amount Amount Amount Cumulative Cumulative
Source of
every 12 months and the historically low im- recovery
identified recovered identified recovered Amount Amount
FY 2011 FY 2011 FY 2010 FY 2010 identified recovered
proper payment rate would not support using
additional resources for additional payment Contract IP
32,477 ** N/A N/A 32,477 **
recovery audits. Review

Disaster improper payments are generally the 7(a) IP
Not Not
result of loan documentation errors and do Purchase $1.6 M ** $1.6 M **
Available Available
Review
not result in a disaster victim receiving funds
that they are not eligible to receive. Loan **The improper payment reviews were completed in September 2011 and the SBA is in the process of recovering
documentation legally obligates the recipient improper payments for the current year.

of a disaster loan to pay back the entire loan
amount whether or not the loan contains any
improper payments. Therefore, improper payments Accountability
are not recovered upon discovery but realized as the SBA’s Strategic Goal 2 is to build an SBA that meets
borrower makes each payment on the loan. Further, needs of today’s and tomorrow’s small businesses.
the majority of loans are collateralized which pro- Within that goal is Strategic Objective 2.1 which is
motes maximum recovery. Therefore, a PRA is not to strengthen SBA’s core programs and operations to
cost-effective for this direct loan program. ensure that they are high performing, effective, and
relevant to the needs of the small business com-

Agency Financial Report • FY 2011
117
Other Accompanying Information

munity. The SBA’s strategic goals are included in Quality Assurance Team is working with the
annual performance plans for all of its programs Disaster Credit Management System (DCMS)
as business objectives, and these business objec- development team to improve the Quality
tives are included in employee performance plans. Assurance process with a goal to minimize
SBA management monitors accomplishment of its future Improper Payments events as much
business objectives in its performance plan using as possible. Many of the business rules that
its performance management process, and action govern the programming of this system have
is taken when progress is not on target. Executive been designed to help improve the Quality
and management bonuses are based on the ac- Assurance process.
complishment of business objectives included in
employee annual performance plans. This manage- Contracting is supported by the PRISM Contract
ment process assures accountability of improper Management System which tracks and records
payment administration. acquisitions. Management of the PRISM and
financial systems falls within the CFO’s Office
of Financial Systems. The Acquisition Division
Information Systems and other plans to expand the two-way interface between
Infrastructure and Improper the PRISM and the financial systems and explore
Payments the possible use of Treasury’s Integrated Payments
Platform (IPP) system.
7(a) loan purchase is supported very well by
the Guaranty Purchase Tracking System. It
is continually updated to enhance the overall Statutory or Regulatory Barriers
integrity of the purchase process. The SBA does not have any statutory or regulatory
504 CDC software used by the Central barriers limiting improvement to its performance
Servicing Agent is owned by the SBA. on improper payments initiative.
Therefore the Agency has a higher level of
control over that software than would typi-
cally exist with contractor owned systems.
In addition the contractor provides audited
financial statements and a SAS 70 report to
verify its system.
SBIC financings are supported very well by a
data system that tracks exams, exam findings
and resolution of exam findings. All individu-
als are empowered to refer any case of suspect-
ed fraud to the Inspector General.
Disaster does have the information systems
and other infrastructure it needs to reduce
improper payments to targeted levels. Disaster
is engaged in an ongoing process of developing
and has already implemented an integrated,
electronic loan processing system to streamline,
enhance and improve the loan-making process.
This system will support workflow manage-
ment, electronic file management and docu-
ment generation functions. The newly formed

Agency Financial Report • FY 2011
118
Appendices
Success Story Grit, Perseverance, and Excellent Cakes!
Haydel’s Bakery, Jefferson, Louisiana

For three generations, Haydel’s bakery has been a symbol of New Orleans’ grit,
perseverance, and excellent cakes! The company started in 1959 when Lloyd Haydel,
took over the Sunny Flake Donut Shop. Six years later, Hurricane Betsy destroyed
the building, but Lloyd secured an SBA disaster loan and rebuilt on-site, renaming it
Haydel’s Sunny Flake Bakery. He hired some of the best bakers in the city and started
selling cakes and pastries. Soon, his sons David and Gary were learning the craft.

When Lloyd died suddenly in 1974, David and Gary expanded the business and by
the mid 1980s they where shipping their pastries nationwide. Their King Cakes,
a Mardi Gras favorite, were big hits, and Haydel’s continued growing, building a repu-
tation for quality service and fine pastries.

When Hurricane Katrina struck in 2005, the damage wasn’t severe and the bakery reopened in 29 days. David’s two
sons, David Jr. and Ryan, also contributed to Haydel’s continued expansion. Last September, they staged an event to
raise money for breast cancer research and nabbed the Guinness World Record by creating the largest King Cake in
the world, an 8,688-pound behemoth, which they wound around the Superdome and sold by the slice.

Did
The SBA has 10 regional offices, 68 district offices and 14 branch offices
you to provide quality services to the small businesses community.
know
For more information, go to www.sba.gov/about-offices-list/2.
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 below:

SBA INFORMATION
About SBA www.sba.gov/about-sba
SBA Direct www.sba.gov/sba-direct
SBA Strategic Plan www.sba.gov/about-sba-info/11572
SBA Performance, Budget & Planning www.sba.gov/performance
SBA’s Role in Small Business Advocacy www.sba.gov/advocacy
Inspector General www.sba.gov/oig
Small Business Jobs Act of 2010 www.sba.gov/jobsact

STARTING AND MANAGING A BUSINESS
What is a Small Business? www.sba.gov/content/am-i-small-business-concern
Thinking about starting a business? www.sba.gov/category/navigation-structure/
starting-managing-business/starting-business/
thinking-about-starting
Resources
SBA District Offices www.sba.gov/about-offices-list/2
Lender Resources www.sba.gov/lender_resources
Financing Growth www.sba.gov/content/financing-growth
Explore Exporting www.sba.gov/exporting

LOANS and GRANTS
Small Business Loans www.sba.gov/financialassistance
Bonds www.sba.gov/content/surety-bonds-explained
www.sba.gov/content/tax-exempt-bonds
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.bpn.gov/ccr/default.aspx

Agency Financial Report • FY 2011
121
Appendices

COUNSELING and TRAINING
Online Training www.sba.gov/training
SBDCs www.sba.gov/sbdc
Women’s Business Centers www.sba.gov/content/womens-business-centers
SCORE Counselors www.sba.gov/score
Veterans Outreach www.sba.gov/content/veterans-business-outreach-centers

DISASTER ASSISTANCE
Disaster Assistance www.sba.gov/disaster
Disaster Area Office Locations www.sba.gov/about-offices-list/4
Response Office Locations for a Go to www.sba.gov/content/current-disaster-declarations and
Declared Disaster then select the disaster/affected area in question
FEMA Information www.fema.gov

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
What do Apple Computer, Calloway Golf, and Staples have in common?
you They all received SBA assistance. Learn about the SBA Investment
know Division at www.sba.gov/inv.

Agency Financial Report • FY 2011
122
Appendices

Appendix 2 - Glossary of Acronyms and Abbreviations
(Available at: “FY 2011 Agency Financial Report“ www.sba.gov/performance)
504 504 Certified Development Loan ARC America’s Recovery Capital Loan
Program Program
Provides small businesses with long- A temporary guaranty loan program
term, fixed-rate financing for the pur- authorized by the American Recovery
chase of land, buildings and long-life and Reinvestment Act of 2009 .
capital equipment .
ARRA American Recovery and Reinvestment
7(a) 7(a) Loan Guaranty Program Act of 2009
SBA’s primary loan program . It provides Most often referred to as the Recovery
general loan financing for a wide variety Act in SBA documents .
of purposes .
BATF Business Assistance Trust Fund
8(a) 8(a) Business Development A trust fund in the U .S . Treasury
Program maintained to receive and account for
Assists firms owned and controlled by donations made by private entities for
socially and economically disadvantaged activities to assist small business .
individuals to enter and succeed in the BD Business Development
economic mainstream .
The Office of Business Development
7(m) The 7(m) Microloan Program uses SBA’s statutory authority to pro-
Provides small, short-term loans to vide business development and federal
small business concerns and certain contract support to small disadvantaged
types of not-for-profit child-care firms .
centers . BDMIS Business Development Management
A-123 Designation for OMB Circular on Information System
“Internal Control Systems .” It pre- The system that automates the certifica-
scribes policies and procedures to be tion and annual review process for the
followed by executive departments and 8(a) program .
agencies in establishing, maintaining,
evaluating, improving, and reporting on BLIF Business Loan and Investment Fund
internal controls in their program and Operated by the Treasury Department
administrative activities . to maintain the accounting records of
loans approved prior to 1992 .
AA Associate Administrator
CA Capital Access (See OCA)
AFMAC Audit and Financial Management
Advisory Committee CDC Certified Development Company
Assists the Administrator in overseeing Refers to the Section 504 Certified
SBA’s financial operations . Development Company debenture
program .
AFR Agency Financial Report
An annual report that presents a federal CFO Chief Financial Officer
agency’s audited financial statements . The CFO is responsible for the
financial leadership of the Agency .
APR Annual Performance Report This includes responsibility for all
An annual report that presents a federal Agency disbursements, management
agency’s progress in achieving the goals and coordination of Agency planning,
in its strategic plan and performance budgeting, analysis and accountability
budget . processes .

Agency Financial Report • FY 2011
123
Appendices

CFR Code of Federal Regulations DFP Dealer Floor Plan
The codification of the general and per- A small pilot program to make revolving
manent rules published in the Federal loans to retail dealerships including auto-
Register by the executive departments mobile dealers that began in July 2009 .
and agencies of the federal government .
DLF Disaster Loan Fund
CIO Chief Information Officer Assists eligible small businesses impact-
The CIO is responsible for the manage- ed by disasters .
ment of information technology for the
Agency, including the design, imple- ECCB Enterprise Change Control Board
mentation and continuing successful The ECCB is in charge of the admin-
operation(s) of information programs istration of the centralized network
and initiatives . accounts for the SBA .

CLA Office of Congressional and EEO Equal Employment Opportunity
Legislative Affairs
Assists in the development and enact- ELA Electronic Loan Application
ment of SBA legislative proposals and Simplifies the application process by
serves as the liaison for SBA’s commu- providing electronic loan applications .
nications on all legislative and congres-
sional activities . EVB Entrepreneurship Boot Camp for
Veterans With Disabilities
COOP Continuity of Operations Plan
A predetermined set of instructions FASAB Federal Accounting Standards
or procedures that describes how an Advisory Board
organization’s essential functions will be Promulgates accounting principles for
sustained for up to 30 days following federal government reporting entities .
a disaster and then return to normal
operations . FCRA Federal Credit Reform Act
A law enacted to provide a more real-
CRC Civil Rights Center
istic picture of the cost of U .S . govern-
Administers and enforces various federal ment direct loans and loan guaranties .
statutes, regulations and Executive Orders
that relate to nondiscrimination and equal FECA Federal Employees Compensation Act
opportunity . Provides compensation benefits to fed-
eral civilian employees for work-related
CY Current Year
injuries or illnesses and to their surviv-
ing dependents .
DAP Disaster Assistance Plan
Executive Order 13411 mandates that FEMA Federal Emergency Management
federal agencies create a single ap- Agency
plication that fulfills the information The agency that is tasked with respond-
requirements of all applicable federal ing to, planning for, recovering from and
disaster assistance programs . mitigating against disasters .
DCIA Debt Collection Improvement Act FERS Federal Employees’ Retirement
A federal law to maximize collec- System
tions of delinquent debts owed to the A three-tiered retirement plan for
government . federal employees hired after 1984,
composed of Social Security benefits, a
DCMS Disaster Credit Management System basic benefit plan, and contributions to
The electronic system used by the SBA a Thrift Savings Plan .
to process loan applications for all new
disaster declarations . FEVS Federal Employee Viewpoint Survey

Agency Financial Report • FY 2011
124
Appendices

FFMIA Federal Financial Management GPRA-Mod GPRA (Government Performance and
Improvement Act Results Act) Modernization Act of 2010
A law that requires each agency to Most often referred to as GRPA-Mod .
implement and maintain financial man-
agement systems that comply substan- GS General Schedule
tially with federal financial management
systems requirements, applicable federal GSA General Services Administration
accounting standards, and the United
States Standard General Ledger . GWAC Government-wide Acquisition
Contract
FHCS Federal Human Capital Survey
A survey administered by the Office of
Personel Management to measure fed- HUBZone Historically Underutilized Business
eral employees’ perceptions about how Zone
effectively agencies have managed their Program that encourages economic
workforces . development by the establishment of
federal contract award preferences for
FICA Federal Insurance Contributions Act small businesses located in historically
underutilized business zones .
FMFIA Federal Managers Financial Integrity Act
IP Improper Payments (See IPIA)
A law that primarily requires ongoing
evaluations and reports on the adequacy
of the internal accounting and admin- IPA Independent Public Accountant
istrative control systems of executive A firm or person, other than the agency’s
agencies . Inspector General, who meets the inde-
pendence standards specified in GSA,
FPDS Federal Procurement Data System and is engaged to perform the audit of a
federal agency or for other purposes .
FRIS Financial Reporting Information
IPIA Improper Payment Information Act
System
A federal law enacted in 2002 to iden-
SBA’s consolidated general ledger
tify and reduce erroneous payments
system .
in the government’s programs and
FTA Fiscal and Transfer Agent activities .
IT Information Technology
FY Fiscal Year Refers to matters concerned with the
The federal government fiscal year be- design, development, installation and
gins October 1 and ends the following implementation of information systems
September 30 . and applications .
GAO U.S. Government Accountability IV&V Independent Validation and
Office Verification
The audit, evaluation and investigative A review of SBA Office of Financial
arm of Congress . Analysis and Modeling Financial Models
for accuracy and proper functioning by
GC/BD Office of Government Contracting
an outside expert .
and Business Development
GC/BD works to create an environ- Jobs Act Small Business Jobs Act of 2010
ment for maximum participation by Most often referred to as the Jobs Act in
small, disadvantaged and women- SBA documents, may also be referred to
owned business in federal government as SBJA .
contract awards and large prime sub-
contract awards .
GDP Gross Domestic Product

Agency Financial Report • FY 2011
125
Appendices

LAS Loan Accounting System statistical data related to the U .S . busi-
SBA’s loan origination servicing and dis- ness economy .
bursement system .
NGPC National Guaranty Purchase Center
LLG Liability for Loan Guaranties SBA’s centralized loan guaranty pur-
Net present value of expected future chase processing center .
cash flows for outstanding guaranties .
NIST National Institute of Standards and
LMAS Loan Management and Accounting Technology
System An agency of the U .S . Department of
Financial management system that sup- Commerce .
ports loan accounting .
NPV Net Present Value
LMS Loan Monitoring System
Aids the SBA in managing its core loan NWBC National Women’s Business Council
guaranty programs and serves as one A bi-partisan federal advisory council
of the building blocks in the overall created to serve as an independent
systems modernization project . source of advice and policy recommen-
dations to the President, Congress, and
MAS Multiple Awards Schedule the SBA on economic issues of impor-
tance to women business owners .
MAX Budget Information System
OMB uses the MAX Budget OCA Office of Capital Access
Information System to collect, validate, The office responsible for small business
analyze, model and publish budget program loans, lender oversight, and
information . the surety bond program .

MD&A Management’s Discussion and OCPL Office of Communications and
Analysis Public Liaison
The MD&A is considered required SBA office that provides communica-
supplementary information for an tion for the Agency’s programs and
agency’s Annual Financial Report and is priorities to small businesses, their
designed to provide a high level over- partners, and the public at large .
view of the Agency .
OCRM Office of Credit Risk Management
MED Minority Enterprise Development SBA office that manages program credit
risk, monitors lender performance, and
MRA Master Reserve Account enforces lending program requirements .
SBA’s fiscal agent maintains this escrow ODA Office of Disaster Assistance
fund to facilitate the operation of the
SBA office that promotes economic
Certified Development Company
recovery in disaster ravaged areas . SBA
program .
disaster loans are the primary form of
MRF Master Reserve Fund federal assistance for non-farm, private
SBA’s fiscal and transfer agent main- sector disaster losses for individuals and
tains this reserve fund to facilitate the businesses .
operation of the 7(a) secondary market OED Office of Entrepreneurial
program . Development
NAICS North American Industry SBA office that provides business coun-
Classification System seling and training through its resource
NAICS is the standard used by federal partner network composed of small
statistical agencies in classifying busi- business development centers, women’s
ness establishments for the purpose of business centers and SCORE, as well
collecting, analyzing, and publishing

Agency Financial Report • FY 2011
126
Appendices

as through online training and related OIT Office of International Trade
resources through SBA’s website . SBA office that encourages small busi-
ness exports and assists small businesses
OFA Office of Financial Assistance seeking to export .
SBA office that administers various loan
programs to assist small businesses . OMB U. S. Office of Management and
Budget
OFO Office of Field Operations White House office that oversees prepa-
SBA office that represents field offices, ration of the federal budget and super-
including regional and district offices, at vises its administration in Executive
headquarters . Branch agencies .
OGC Office of General Counsel ONAA Office of Native American Affairs
Provides legal advice for senior manage- SBA office that coordinates Native
ment and legal support for all Agency American initiatives and develops poli-
programs, initiatives and administrative cies and procedures to ensure that SBA
responsibilities . assistance is made available to American
Indians, Native Alaskans, and Native
OGM Office of Grants Management
Hawaiians .
SBA office that awards and administers
all grants under SBA’s authorization and OPM U.S. Office of Personnel Management
appropriations, with the exception of The federal government’s human re-
the small business development centers sources agency .
and women’s business center grants
which are awarded and administered by ORACLE The accounting program used by SBA’s
respective program offices . Administrative Accounting Division .
OHA Office of Hearings and Appeals ORCA Online Representation and
SBA office that provides an indepen- Certification Application
dent, quasi-judicial appeal of certain An e-government initiative that was
SBA program decisions . designed to replace the paper-based rep-
resentations and certifications process .
OHCM Office of Human Capital
Management OVBD Office of Veterans Business
Supports the strategic management of Development
human capital in the accomplishment SBA office that works to enhance and
of the Agency’s mission . increase successful small business own-
ership by veterans .
OIC Office of Internal Control
Part of the SBA Office of the Chief PAR Performance and Accountability
Financial Officer, has the lead in mak- Report
ing sure managers can comply with Annual report that presents financial,
internal control standards . budgetary and performance informa-
tion to OMB, Congress and the public .
OIG Office of Inspector General
Conducts and supervises audits, inspec- PCECGF Pollution Control Equipment
tions and investigations relating to SBA Contract Guaranty Fund
programs and operations . Supports costs associated with the credit
portfolio of pre-October 1991 pollution
OII Office of Investments and Innovation control equipment loans and guaranties
Assists small businesses through the being liquidated by the SBA .
administration of the Small Business
Investment Company program and the PIA Privacy Impact Assessment
Small Business Innovation Research Part of the Privacy Impact Statement
program . from the Privacy Act .

Agency Financial Report • FY 2011
127
Appendices

PII Personally Identifiable Information SBDC Small Business Development Center
Any information that can identify a Program
person . Delivers management and technical
assistance, economic development and
PLP Preferred Lender Program management training to existing and
Covers certified or preferred lenders prospective small businesses through
that receive full delegation of lending cooperative agreements with univer-
authority . sities and colleges and government
organizations .
POA&M Plan of Action and Milestones
SBG Surety Bond Guarantee Program
PPS Probability Proportional to Size Provides guaranties, bid, performance
and payment bonds for contracts up
PY Prior Year to $2 million for eligible small busi-
nesses that cannot obtain surety bonds
through regular commercial channels .
QA Quality Assurance
Functions to assure that project deliv- SBGRF Surety Bond Guaranty Revolving
erables meet SBA’s requirements and Fund
quality standards . All the contractor and surety fees collected
by the SBA are deposited in the SBGRF
QAR Quality Assurance Review at the Treasury Department, which is used
to pay claims .
Recovery American Recovery and
Act Reinvestment Act of 2009 SBIC Small Business Investment Company
Most often referred to as the Recovery Provides long-term loans, debt-equity
Act in SBA documents, may also be investments and management assistance
referred to as ARRA . to small businesses, particularly during
their growth stages .
SAS Statement on Auditing Standards
Establishes standards and provides guid- SBIR Small Business Innovation Research
ance on the design and selection of an SBA office that supports scientific
audit sample and the evaluation of the excellence and technological innova-
sample results . tion through the investment of federal
research funds .
SAT Senior Assessment Team
SBLC Small Business Lending Company
SBA U.S. Small Business Administration Non-depository small business lending
companies listed by the SBA Office of
A federal agency of the Executive Branch
Capital Access .
whose mission is to aid, counsel and
protect the interests of small businesses SBPRA Small Business Paperwork Relief Act
and help families and businesses recover of 1992
from disasters .
SBA Express Provides selected lenders with a 50 per- SBREFA Small Business Regulatory
cent guaranty on their loans in exchange Enforcement Fairness Act
for the ability to primarily use their own SCORE A volunteer organization sponsored
application and documentation forms, by the SBA that offers counseling and
making it easier and faster for lenders to training for small business owners who
provide small business loans of $250,000 are starting, building or growing their
or less . businesses .

Agency Financial Report • FY 2011
128
Appendices

SDB Small Disadvantaged Business VBOC Veteran Business Outreach Center
Small business owned and controlled Provides outreach, counseling, train-
by individual(s) who are socially and ing and directed referral access to all
economically disadvantaged . SBA programs and services for veter-
ans, Reserve Component members,
SDM System Development Methodology Transition Assistance Program eligible
A software development methodology service members and their spouses .
or system development methodology
in software engineering is a framework V-WISE & Programs specifically targeting entrepre-
that is used to structure, plan, and Operation neurial development services to women
control the process of developing an Endure veterans and to Reserve Component
information system . and Grow members of the U .S . Military and their
families .
SES Senior Executive Service
WBC Women’s Business Center
SFFAS Statements of Federal Financial WBCs provide long-term training and
Accounting Standards counseling to women owning or man-
Agreed upon specific standards and aging a business, including financial,
concepts published in the Federal management, marketing and technical
Register . assistance, and procurement .
SOP Standard Operating Procedure
SOPs are the primary source of the
Agency’s internal control .
SOX Sarbanes-Oxley Act 2002
The law introduced major changes to
the regulations of financial practice and
corporate governance .
SSBIC Specialized Small Business
Investment Company
Provides equity capital, long-term loans,
debt-equity investments and manage-
ment assistance to socially or economi-
cally disadvantaged small businesses .
TOP Treasury Offset Program
A centralized debt collection program
developed by the Treasury Department’s
FMS to assist agencies in the collection
of delinquent debts owed to the federal
government .
VAT Vulnerability Assessment Team
Performs monthly scans of network-
attached devices to identify and remedy
network vulnerabilities .

Agency Financial Report • FY 2011
129
Success Story Native American, Woman-owned, 8(a) Making Good!
Exhibit Arts, LLC, Wichita, Kansasa

In 2000, Elizabeth and Vernon Harshfield combined her expertise in management and
marketing and his experience putting on events to form Exhibit Arts, LLC, a Native
American, woman-owned and 8(a) certified small business specializing in tradeshows
and promotional products. Although the company still offers those services, Exhibit
Arts has expanded to include administrative and professional staffing services and now
has 151 employees. The company also manages a diverse portfolio of contracts with
private sector companies and federal agencies such as the U.S. Army, U.S. Air Force,
the National Guard, the U.S. Navy and the General Services Administration.

With the help of an SBA-backed loan, Exhibit Arts was able to purchase its current
facility to support more federal contracting work. Exhibit Arts has successfully won contracts with notable household
names such as Amtrak, Cargill and Cessna. It is currently pursuing more contracts with other well-known compa-
nies, including Hallmark, Learjet and Walmart. The company subcontracts work to eight other small businesses and
always tries to have a reasonable representation of women-owned, small disadvantaged and service-disabled veteran-
owned small businesses on its projects, including The Bill Guy Technology Solutions Inc., recipient of SBA’s 2011
Kansas Small Business Person of the Year award.

Did Small businesses can learn how to participate in the federal contracting
you arena. Take a look at the SBA Office of Government Contracting and
know Business Development online training course for women and veteran
entrepreneurs at www.sba.gov/training/governmentcontracting.
A

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