SBA Agency Financial Report, Fiscal Year 2013

Summary

This is the U.S. Small Business Administration's Agency Financial Report for Fiscal Year 2013. The message from the Administrator is dated December 16, 2013. It says the auditors issued an unmodified opinion on the FY 2013 financial statements and did not note any material internal weaknesses, and that the SBA supported more than $29 billion in lending through its 7(a) and 504 loan programs, its third highest year of lending. It also says SBIC funds provided nearly $3.3 billion in growth capital. A highlights table (dollars in thousands) lists a loan portfolio of $106,775,561 and total assets of $13,846,170 for FY 2013.

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Full text

Agency
Financial
Report
Fiscal Year 2013

TH
Anniversary

Grow Serve

Build
ABOUT THIS REPORT FY 2013 HIGHLIGHTS

The U.S. Small Business (Dollars in Thousands) FY 2010 FY 2011 FY 2012 FY 2013
Administration’s (SBA) Agency
Financial Report (AFR) for Loan Portfolio(1) $ 93,339,844 $ 99,203,933 $ 102,630,652 $ 106,775,561
FY 2013 provides an overview
of the Agency’s financial and Regular FTE Employees 2,135 2,175 2,089 2,148
performance data to help Congress, 1,628
Disaster Employees 1,120 1,141 1,145
the President, and the public Total Employees 3,255 3,316 3,234 3,776
assess SBA’s stewardship over the
resources entrusted to it. The AFR Total Assets $ 15,230,476 $ 16,882,801 $ 14,014,855 $ 13,846,170
Total Liabilities $ 16,765,021 $ 17,191,824 $ 13,640,581 $ 12,462,316
is the first in a series of three annual
Total Net Position $ (1,534,545) $ (309,023) $ 374,274 $ 1,383,854
financial and performance reports
Total Net Cost of Operations $ 5,277,197 $ 3,460,562 $ 1,274,805 $ 524,086
for federal agencies choosing to
Total Budgetary Resources $ 18,340,769 $ 19,277,292 $ 14,400,162 $ 14,059,594
produce a separate AFR. An
Annual Performance Report (APR) The total portfolio consists of guarantied business loans outstanding, direct business loans, and direct disaster loans. The data includes all performing loans and defaulted loans that
(1)

have not been charged off.
and a Summary of Performance
and Financial Information (SPFI)
make up the other two reports.
The FY 2013 APR is included as
part of the FY 2015 Congressional
Budget Justification (CBJ), which
is the Agency’s budget request
to Congress. The FY 2013 SPFI FOR MORE INFORMATION
is a summary of the financial,
performance and budgetary
information presented in the AFR Information about SBA’s programs is available at: www.sba.gov
and the CBJ/APR. SBA’s plans and reports are available at: www.sba.gov/performance

Para información acerca de los programas de la SBA: www.sba.gov “Translate” “Select Language”

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 Deanna DeMott
Office of Performance Management Acting Director
and Chief Financial Officer Office of Performance Management
409 Third Street, S.W. (202) 205-6449
Washington, DC 20416

Message from the Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Management’s Discussion and Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Primer of SBA’s Principal Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SBA by the Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SBA’s History and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Analysis of SBA’s Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Agency Priority Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Summary of Key SBA Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Operational Portfolio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Analysis and Highlights of Financial Statements and Results . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Analysis of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Analysis of SBA’s Systems, Controls and Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Internal Control Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Financial Management Systems Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Management Assurances: FMFIA and FFMIA Assurance Statement for FY 2013 . . . . . . . . . . . . . 28
Improper Payments Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Message from the Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Audit and Financial Management Advisory Committee’s Report . . . . . . . . . . . . . . . . . . . . . . . . . 35
Inspector General’s Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Independent Auditors’ Report on FY 2013 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 38
CFO Response to Draft Audit Report on FY 2013 Financial Statements . . . . . . . . . . . . . . . . . 47
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Schedule of Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
OIG Report on the Most Serious Management and Performance Challenges . . . . . . . . . . . . . . . . . . 86
Summary of Financial Statement Audit and Management Assurances . . . . . . . . . . . . . . . . . . . . . 106
Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Appendices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Appendix 1 – Contact SBA: Useful Sites and Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Appendix 2 – Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Appendix 3 – OIG Audit Follow-up Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

AGENCY FINANCIAL REPORT • FY 2013
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.

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, 2010, 2011 and 2012

Agency
Financ
Fiscal ial Re
Year 20 port
08

Helping
Small Bus
iness Sta
rt, Grow
and Suc
ceed

2006 2007 2008

2009 2010 2011 2012
M ESSAG E FROM T H E ADMI NI STR ATOR

MESSAGE FROM THE ADMINISTRATOR December 16, 2013

I am proud to present the U.S. Small Business Administration’s Fiscal Year 2013 Agency Finan-
cial Report. This report details SBA’s financial and high-level program performance results and
provides transparency in SBA’s ongoing efforts towards seeking greater operational efficiencies
and improvements.

The support that the Agency offers to small businesses affects the growth and expansion of the
nation’s economy. The SBA ensures that America’s small businesses have the access and oppor-

tunities they need to start and grow their operations and create new jobs. In FY 2013 the SBA
continued to build on the Agency’s strong track record of providing entrepreneurs and small
businesses access to capital, increased opportunities in government contracting, entrepreneurial development and disaster
assistance.

I am pleased to provide an assurance that SBA’s financial and performance data in this report are reliable and complete.
SBA’s auditors issued an unmodified opinion on our FY 2013 financial statements and the auditors did not note any
material internal weaknesses.

Key SBA accomplishments in FY 2013
Third-Highest Year in SBA Lending: The SBA recorded its third highest year of SBA lending ever and built on its
FY 2011 and FY 2012 record-breaking years. In FY 2013, the SBA supported more than $29 billion in lending to
America’s small businesses through the Agency’s 7(a) and 504 loan programs. This marked the third consecutive year
of roughly $30 billion in lending despite the end of the popular and temporary 504 Refinancing loan program.

Fourth Consecutive Record Year in Growth Capital: The Small Business Investment Company (SBIC) Debenture pro-
gram had its fourth consecutive record-breaking year. Investment funds licensed as SBICs provided nearly $3.3 billion
in growth capital to small businesses, a 10 percent increase from FY 2012 and a 105 percent increase from FY 2010.
In FY 2013, the SBA licensed a record 34 SBIC funds and licensing times dropped over 53 percent from 14.6 months
in FY 2009 to 6.8 months in FY 2013. This helped the SBIC program execute a record of more than $2.1 billion in
commitments to its funds in 2013.

Increasing Contracting Opportunities for Small Business: The SBA continues to lead the effort across the federal
government to expand contracting opportunities for small businesses. Since January 2009, federal agencies awarded
small businesses more than $376.2 billion in federal contracts. This was a $48.1 billion increase over the four prior
years, even as the federal government reduced overall contract spending during those years. With expanding contract-
ing opportunities to small businesses, the SBA saw significant impact in key areas. In FY 2012 the federal government
also exceeded the goal for small business contracting from service-disabled veterans for the first time and more agencies
than ever achieved their prime contracting goals.

Enhanced Entrepreneurship Resources: The SBA supports an entrepreneurial ecosystem that provides training,
resources and management assistance to more than 1.2 million entrepreneurs and small businesses each year. In FY
2013, these efforts helped entrepreneurs acquire over $4.5 billion in capital infusion, start over 15,000 businesses, and
create and/or retain more than 68,000 jobs. In addition, the SBA built upon the initiatives from FY 2012 and contin-
ued its partnership with the AARP to counsel more than 100,000 entrepreneurs over the age of 50. The SBA contin-
ued its outreach to veterans through Boots to Business: From Service to Start-up, a program designed to help returning
service members transition into successful small business ownership. This coincided with SBA’s launch of the Veteran
Pledge Initiative, a commitment by top SBA lenders to collectively increase their lending activity to veterans by

AGENCY FINANCIAL REPORT • FY 2013 1
M E S S A G E FR OM TH E A DM I N I S TR ATO R

5 percent per year for the next 5 years. As a result, the SBA expects to assist an additional 2,000 veterans and increase
lending by $475 million over the next 5 years.

Effective Disaster Response to Hurricane Sandy: In FY 2013, the SBA, along with our federal partners, quickly
responded to the devastating impacts of Hurricane Sandy. To date the SBA has approved $2.4 billion in low-interest
disaster loans to 36,641 homeowners, renters, and businesses affected by Hurricane Sandy. In order to assist in re-
building small businesses post-Hurricane Sandy, the SBA expanded counseling, training, and technical assistance from
SBA’s resource partners: small business development centers, women’s business centers, and SCORE.

SBA services continue to be essential to American small businesses and their role in the nation’s economic growth. As we
look to the next fiscal year, we plan to build upon the FY 2013 accomplishments outlined here to ensure small businesses
continue to grow and create jobs.

Sincerely,

Jeanne Hulit
Acting Administrator

DID
YOU In FY 2013, the SBA supported more than $29 billion in lending to
KNOW America’s small businesses, providing critical access to the capital they
need to start and grow their businesses.

2 AGENCY FINANCIAL REPORT • FY 2013
Management’s
Discussion &
Analysis
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

PRIMER OF SBA’S PRINCIPAL PROGRAMS

Access to Capital (www.sba.gov/financialassistance)

TThe SBA has a total loan portfolio of $106.8 billion; $90.7 billion of that total is 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 commercial 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 companies (CDC) which are private,
non-profit corporations. CDCs work with the SBA and private lenders to provide the financing. The SBA guaran-
tees 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.

4 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

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

The SBA and its 19,000 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 manage-
ment areas to more than 600,000 clients annually.

Women’s Business Centers — WBCs provide counseling and training through 106 educational centers across the
nation. They provide services on a vast array of topics, from how to write a business plan to programs specifically for
veterans. Many WBCs provide multilingual services, and a number offer flexible hours allowing for mothers with
children to attend training classes.

Veterans Business Outreach Centers — SBA’s 15 VBOCs provide counseling and training services to veteran-
owned and service-disabled veteran-owned small businesses and entrepreneurs, along with Reserve Component
members starting new small businesses or expanding established small businesses.

SCORE — SCORE is a non-profit association comprised of over 12,000 volunteer business counselors that serve
entrepreneurs with in-person mentoring and local training workshops. As the largest 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 — RICs support small businesses by fostering a synergistic network of businesses,
university researchers, economic development experts, stakeholders and investors that work to develop and grow a
particular industry or related set of industries, while providing targeted matchmaking business training, counseling,
mentoring and other services.

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 busi-
ness and enables it to compete on the same level as larger businesses. (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 investments in qualifying small
businesses. (www.sba.gov/sbic)

Exporting — The SBA – through its staff, lending, and resource partners – leads federal efforts to support 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 $7.2 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 2013 5
SUCCESS STORY: Arizona Aviator Flies High as National
Small Business Person of the Year!
Guidance Aviation, Prescott, Arizona

Some entrepreneurs get their inspiration late in life, others like John Stonecipher
know from youth what they want and pursue it with life-long persistence and passion.

As a young boy growing up in Pasadena, California, John’s future was forged as
he watched police helicopters fly overhead. By eighteen, John was certified to fly.
By nineteen, with an instructor’s certificate in hand, he was teaching others the
intricacies of helicopter flight.

John is President and CEO of Guidance Aviation, the company he founded in 1998. The business took
residence at Prescott, Arizona’s Municipal Airport, and from there, John’s dream of creating a first rate, high
altitude flight school literally took off. The company’s progression is a testament to success. Characterized by
innovation and growth the school soon won FAA approvals, created alliances with the Yavapai Sheriff’s Office,
won approval from the U.S. Department of Veterans Affairs to train veterans and received accreditation with
Embry-Riddle University. Yavapai College has partnered with Guidance Aviation and offers an Associate of
Applied Science Professional Helicopter Pilot Degree.

Today Guidance Aviation has a staff of 55, fourteen aircraft and a waiting list of students ready to take flight
into their futures.

John Stonecipher was named 2013 National Small Business Person of the Year during SBA’s celebration of
National Small Business Week. He is a long-term client of the SBA SBDC at Yavapai College in Prescott.
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

EXECUTIVE SUMMARY
The U.S. Small Business Administration’s efforts to assist usage contributing to loan approvals totaling $2,796.5 bil-
entrepreneurs and small business owners are critical as the lion for all disaster activity in FY 2013.
U.S. economy continues to recover and grow. Throughout
history, small businesses have played a critical role in job The SBA continues to work with agencies across the
creation. Over the last two decades, small and new busi- government to expand small business contracting op-
nesses have been responsible for creating two out of every portunities. From January 2009 through September 30,
three net new jobs in the U.S. and today over half of all 2012, small businesses accessed more than $376.2 billion
working Americans own or work for a small business. dollars in federal contracts. (FY 2013 contracting numbers
continue to be collected and certified.)
The SBA is committed to ensuring that America’s small
businesses have the access and opportunities they need The SBA supports an entrepreneurial ecosystem that
to start and grow their operations and create new jobs. provides training, resources and management assistance to
These tools include access to capital; opportunities in more than 1.2 million entrepreneurs and small businesses
federal contracting; access to entrepreneurial education each year. In FY 2013 these efforts helped entrepreneurs
and counseling; and disaster assistance for business owners, start over 15,000 businesses, and create and/or retain more
homeowners, and renters. than 68,000 jobs.

Throughout FY 2013, the SBA relied on three strategic
goals to guide the Agency’s actions:
Financial Results
(in-depth analysis found in Analysis of Financial Results section)
1. Growing businesses and creating jobs
2. Building an SBA that meets the needs of today’s and For FY 2013, SBA’s total budgetary resources used for
tomorrow’s small businesses staffing and operations and subsidy costs were $4.2 billion
3. Serving as the voice for small business as well as $9.9 billion in nonbudgetary resources for loan
financing used to purchase guarantied loans in default
In FY 2013, the SBA built on its record breaking year, FY and to make direct loans. SBA’s guarantied portion of the
2012, with the third highest year of approvals, support- outstanding loan principal balance rose 6.3 percent in FY
ing nearly $30 billion1 in lending. The 504 loan program 2013, to $79.1 billion. New guaranties disbursed by SBA
had a high volume despite the expiration of the 504 Refi participating banks during FY 2013 were $17.7 billion, a
program. Overall, for FY 2013, the SBA supported more 10.7 percent increase compared to FY 2012. This caused
than $29.6 billion in lending to more than 47,000 com- the 6.3 percent increase in outstanding guaranties. Guar-
panies. antied loan purchases dropped again in FY 2013, falling
from $2.6 billion to $2.1 billion. This encouraging trend
FY 2013 reflected a fourth consecutive record break- is expected to continue in upcoming years as the nation
ing year for small business investment companies, a zero moves further into economic recovery. The credit program
subsidy guaranty debenture program underpinned by a receivables portion of the SBA portfolio continued to
portfolio of public-private partnerships investing in small, decline from $7.7 billion to $7.5 billion in FY 2013. A
and typically high growth, businesses in the U.S. About net reduction from defaulted guarantied business loans
$3.26 billion was invested in approximately 850 small accounted for this decrease. The decrease in guarantied
companies. Capital deployments increased 10.5 percent business loan receivables was because collections and
year-over-year and have nearly tripled in 5 years. charge-offs exceeded new guaranty purchases, even though
In FY 2013, the Agency responded to SBA’s third larg- this effect was partially offset by a $0.3 billion increase in
est disaster, Hurricane Sandy. The improvements to the the subsidy allowance for expected future losses.
electronic loan application (ELA) resulted in a 55 percent

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.

AGENCY FINANCIAL REPORT • FY 2013 7
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

Program Results percent to improve the efficiency, effectiveness, and level
of service in its business loan programs. The SBA met
(in-depth analysis found in SBA’s Annual Performance Plan, to be its 7(a) goal and exceeded its 504 goal by 1 percent.
released in February 2014)
2. Increase small business participation in government
The SBA by the Numbers table reflects strong performance contracting: Increase small business participation in
across all Agency programs in FY 2013. This includes: federal government contracting to meet the statutory
goals and reduce participation by ineligible firms.
• nearly 59,000 loans approved to small businesses FY 2013 contracting numbers will continue to be
through the 7(a), 504 and Microloan programs; collected and certified through the third quarter of
• increases across other capital access programs, such FY 2014. Therefore, FY 2012 numbers are reported
as Small Loan Advantage and CAPLines, due to per OMB Circular A-11. In FY 2012, small busi-
streamlining and simplification efforts that cut turn- nesses received $89.9 billion or 22.25 percent of
around times and opened them up to more lending the total $404 billion in government contracts. The
institutions; federal government’s statutory small business goal
• fourth consecutive record year in growth capital is 23 percent. The federal government substantially
by SBA’s Small Business Investment Company met its goal.
Debenture program that targets high-growth small 3. Process Disaster Assistance applications efficiently:
businesses; By September 30, 2013, increase the use of the Disaster
• $89.9 billion in federal contracts to small businesses Assistance electronic loan application (ELA) by 50 per-
(projected); cent. The FY 2011 baseline number was 26 percent
• service to over 1.2 million small businesses through so the goal was to achieve 39 percent by September
SBA resource partners; and 30, 2013. By the end of FY 2013, the SBA achieved
55 percent ELA usage, exceeding the FY 2013 target
• disaster loan approvals totaled $2,796.5 billion dol-
of 39 percent by 41 percent. The SBA greatly ex-
lars for all disaster activity in FY 2013 to businesses,
ceeded its goal.
homeowners and renters.
4. Expand access to long-term capital: From FY 2012
through September 30, 2013, commit at least $4.3
Management Results billion of capital via the Small Business Investment
The SBA achieved significant successes across its four Company (SBIC) program in order to facilitate access
Agency Priority Goals which were effective for FY 2012 to capital for high-growth companies and enhance job
and FY 2013: creation and retention by these companies. By the end
of FY 2013, the SBA committed $4.08 billion to
1. Process business loans as efficiently as possible: SBICs which was just 5 percent short of the goal.
By September 30, 2013, increase the use of paperless The SBA substantially achieved this goal.
processing in the 7(a) program from 72 percent to 90
percent and in the 504 program from 55 percent to 75

8 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

SBA BY THE NUMBERS
(Dollars in Millions)
FY 2010 FY 2011 FY 2012 FY 2013
Total Portfolio (1) Outstanding Principal Balance $ 93,340 $ 99,204 $ 102,631 $ 106,776
Capital (2)
7(a) Loans Dollars of Gross Loans Approved $ 12,407 $ 19,638 $ 15,153 $ 17,868
504 Loans Dollars of Gross Loans Approved $ 4,433 $ 4,845 $ 6,712 $ 5,227
Microloans Dollars of Gross Loans Approved to Microborrowers $ 47 $ 47 $ 45 $ 53
Surety Bond Number of Bid and Final Bonds Guaranteed 8,348 8,638 9,503 6,151

Contracting (3) (4)
Dollars of Annual Federal Contracts to SBs $ 97,947 $ 91,468 $ 89,923 NA
Prime Contracting
Percentage of Federal Contracts to SBs 22.66% 21.65% 22.3% NA
HUBZone Dollars of HUBZone Contracts $ 11,969 $ 9,915 $ 8,140 NA
8(a) Program Dollars of 8(a) Contracts $ 18,466 $ 16,678 $ 15,837 NA

Counseling and Training (5)
SBDC Number Clients Counseled and Trained 589,352 557,698 543,512 532,337
WBC Number Clients Counseled and Trained 160,735 138,923 136,951 133,765
SCORE Number Clients Counseled and Trained 407,240 356,837 458,773 345,902
Microloans Number Clients Counseled and Trained 15,180 15,964 15,892 19,368

Disaster
Disaster Assistance (2) (6) Dollars of Gross Loans Approved $ 574 $ 739 $ 690 $ 2,797

High-growth Small
Businesses
Dollars of SBA Debenture Leverage Committed to SBICs $ 1,165 $ 1,827 $ 1,924 $ 2,156
SBIC
Dollars of SBIC Debenture Capital to Small Businesses $ 1,587 $ 2,589 $ 2,950 $ 3,256

(1) The total portfolio consists of guarantied business loans outstanding, direct business loans, and direct disaster loans. The data include all performing loans and defaulted loans that have
not been charged off.
(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 cancella-
tions); and, Disbursed Loans (the amount that is actually given to the borrower). Gross Loans Approved is presented in the Capital and Disaster Assistance sections because it is the only loan
data that remain constant over time.
(3) FY 2013 contracting numbers will continue to be collected and certified through the third quater of FY 2014. Therefore, FY 2012 numbers are reported per OMB Circular A-11.
(4) The federal goal is to give small businesses at least 23 percent of all government-wide contract dollars. The SBA negotiates goals annually with each federal agency on an individual basis,
however the SBA has no authority to enforce other federal agencies’ contracting goals.
(5) For FY 2013, the SBA is reporting the more inclusive indicator “Number of Clients Counseled and Trained”. In FY 2012, the SBA reported only the clients trained.
(6) The significant increase in disaster loan approvals represents all disaster loan approvals in FY 2013, including Superstorm Sandy which was the third largest SBA disaster.

AGENCY FINANCIAL REPORT • FY 2013 9
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

SBA’S HISTORY AND ORGANIZATION
In 1953, Congress created the U.S. Small Business Admin- The Office of International Trade enhances the ability of
istration to “aid, counsel, assist and protect, insofar as is small businesses to export and compete in the global
possible, the interests of small business concerns.” SBA’s marketplace by facilitating access to capital, providing
headquarters is located in Washington, D.C. while its technical assistance, ensuring the interests of small busi-
business products and services are delivered with the help ness are considered and reflected in trade negotiations,
of field personnel and a vast network of private sector and and supporting and contributing to the U.S. government’s
nonprofit partners in each U.S. state and territory. Major international commercial and economic agenda.
SBA offices fall under one of three Agency-wide strategic
goals, as outlined in SBA’s long-term Strategic Plan: Across all of these offices is an emphasis on reaching
underserved communities, which is a particular focus of
the Office of Veterans Business Development, the Office of
STRATEGIC GOAL ONE — Growing Native American Affairs, and the Center for Faith-Based and
businesses and creating jobs Neighborhood Partnerships.

The Office of Capital Access assists small businesses in ob-
taining capital via the 7(a), 504 and Microloan programs STRATEGIC GOAL TWO — Building an
through an extensive lending network. SBA that meets the needs of today’s and
The Office of Investments and Innovation assists high-growth tomorrow’s small businesses
small businesses through the Small Business Invest- SBA’s management offices support Strategic Goal Two:
ment Company program, the Small Business Innovation
Research program, and other tailored programs that drive The Office of Performance Management and the Chief
innovation and competitiveness. Financial Officer provides financial and performance data
and information that is useful, relevant, timely and ac-
The Office of Government Contracting and Business Develop- curate and which assists the SBA and its executive team in
ment (GC/BD) provides assistance to small businesses in maximizing program performance and accountability to
competing for federal contracting opportunities through taxpayers.
the government-wide prime and subcontracting pro-
grams. This includes HUBZone, 8(a), women-owned and The Office of Credit Risk Management focuses on mitigation
veteran-owned small businesses. GC/BD also sets size of risk to taxpayers through ever-improving risk manage-
standards for small businesses which determine the size a ment and oversight of SBA lending programs.
business must be to be considered a small business.
The Office of the Chief Information Officer provides infor-
The Office of Entrepreneurial Development provides busi- mation technology leadership, product services, and opera-
ness counseling and training through its resource partner tional support for the SBA in order to maximize internal
network composed of small business development centers, efficiency and responsiveness to small businesses.
women’s business centers and SCORE, as well as through
online training at SBA’s website. In addition to coordinat- The Office of Field Operations works as the front-line oper-
ing connections between SBA resource partners and local ating team for the SBA. Most SBA programs and services
small business communities, SBA’s district offices provide are executed when small businesses connect with their
business development services and support through the regional, district and branch field offices located in each
8(a) program which complements and builds upon the state and territory.
assistance provided by SBA resource partners. The Office of Communications and Public Liaison com-
The Office of Disaster Assistance provides affordable, timely municates the Agency’s programs and priorities to small
and accessible financial assistance to homeowners, renters businesses, their partners, and the public at large by
and businesses following a disaster. The Disaster loan pro- working with media outlets, developing social media
gram is the only form of SBA assistance that is not limited content, creating user-friendly online resources, crafting
to small businesses. high quality marketing materials, organizing events to gain

10 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

feedback from small businesses, and coordinating strategic capital; entrepreneurial education; innovation; govern-
partnerships. ment contracting; exporting; and entrepreneurship among
underserved communities including women, minorities,
Other offices include the Office of Management and Ad- veterans and others.
ministration, Congressional and Legislative Affairs, the Office
of General Counsel, the Office of Hearings and Appeals, Reducing Burdens — The SBA works across the federal
the Office of Human Resources Solutions, and the Office of government to increase responsiveness to and opportuni-
Diversity, Inclusion and Civil Rights. ties for small businesses while also reducing regulatory
burdens and excessive/unnecessary enforcement. The
SBA fulfills these functions through an array of listening
STRATEGIC GOAL THREE — Serving as sessions and strategic partnerships as well as the Office of
the voice for small business the National Ombudsman, which receives complaints and
All of SBA’s management and program offices work comments from small businesses and acts as a “trouble
together to support increasing interagency collaboration; shooter” between small businesses and federal agencies.
reducing burdens on small business; and, providing cur- Statistics on Small Business — SBA’s policy analysts are re-
rent, accurate data statistics on small business to inform sponsible for collecting data and statistics to help evaluate
top level strategic decision-making. existing policies and programs of the SBA. They translate
Interagency Collaboration — To ensure effective delivery economic, social and demographic trends that have an
of programs and services, the SBA has made collabora- impact on small business job creation into policy prescrip-
tion with other federal agencies a top priority. The SBA is tions that allow the Agency to be as proactive as possible in
the leading participant in interagency collaborations that anticipating and addressing the needs of small business.
focus on small business job creation including: access to

SUCCESS STORY: Restoring Power
to Hurricane Victims
Delta Electric and Construction
Company, Christiansted, St. Croix,
U.S. Virgin Islands

Charles N. King Jr. is President of Delta Electric and Construction
Co., Inc. – a minority-owned, service-disabled veteran-owned, 8(a)
and HUBZone-certified firm that stands ready to restore electricity
to homes after hurricanes and provide general construction services
to customers. Mr. King performed apprenticeships as a mechanic
and electrician while still in high school and continued work as an electrician while serving in the U.S. Army.
In 1966, upon his return from the Army, King founded Delta Electric. In 1995, the company became Delta
Electric and Construction Company Inc., the same year Hurricane Marilyn hit the Virgin Islands.

Delta Electric and Construction Company Inc. is one of the longest operating businesses in St. Croix and has
served thousands of clients including the General Services Administration, the Virgin Islands National Guard,
the U.S. Coast Guard and the Department of Agriculture. The company has five employees and provides archi-
tectural services, building and civil engineering, masonry and excavation services.

The SBA Virgin Island Small Business Development Center counseled King during his initial expansion plans
for the company and advised him on opportunities for funding that were available. As a result of this counsel-
ling, King was able to secure a $50,000 SBA-backed loan for expansion.

Charles King is the SBA 2013 Virgin Islands Small Business Person of the Year.

AGENCY FINANCIAL REPORT • FY 2013 11
12
SBA ORGANIZATION CHART

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

Office of Office of Office of Investments Office of Government Office of Office of Disaster
Capital Access Entrepreneurial & Innovation Contracting & Business International Trade Assistance
Development Development
• Office of Financial • Small Business
Assistance • Office of Small Business Innovation Research • Office of Business
• Office of Surety Development Centers Program Development Office of Office of Native
Guarantees
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

• Office of Women’s • Small Business • Office of Government General Counsel American Affairs
• Office of Economic Business Ownership Investment Companies Contracting
Opportunity • Office of • HUBZone Program
• Office of Performance Entrepreneurship
& Systems Management Education
Office of Congressional Office of Veterans
• Office of Credit
Risk Management & Legislative Affairs Business Development
• Office of Financial
Program Operations
Office of Center for Faith-Based
Hearings & Appeals & Neighborhood
Partnerships

Office of Performance Office of Chief
Management & Chief Operating Officer Office of National
Office of Field Office of
Ombudsman &
AGENCY FINANCIAL REPORT • FY 2013

Financial Officer Operations Communication &
• Office of Chief
Regulatory
• Office of the Chief Public Liaison
• Office of Regional Information Officer Enforcement Fairness
Financial Officer Administrators
• Denver Finance Center • Office of Diversity, Inclusion
• District Offices
and Civil Rights
• Office of Performance
Management • Office of Disaster Planning
• Office of Internal & Risk Management
Controls • Office of Human Resources
Solutions
• Office of Grants Management
• Office of Administrative
Services
• Office of Executive Secretariat
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

SBA REGIONS AND FIELD OFFICES

AGENCY FINANCIAL REPORT • FY 2013 13
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

ANALYSIS OF SBA’S PERFORMANCE

Agency Priority Goals
The SBA identified four Agency Priority Goals that reflect priorities of SBA leadership and the Administration and are
critical to success in SBA’s strategic plan. These goals reflect the breadth and depth of SBA’s commitment both to taxpay-
ers and to the small business community. By actively pursuing these goals, the SBA can strengthen its national contribu-
tions to entrepreneurship, innovation, and competitiveness. These are two-year goals measuring program efficacy for FY
2012 and FY 2013.

Priority Goal #1: Process business loans as efficiently as possible. By September 30, 2013, increase the use of paperless
processing in the 7(a) program from 72 percent to 90 percent and in the 504 program from 55 percent to 75 percent to improve the efficiency,
effectiveness, and level of service in its business loan programs. The SBA exceeded its FY 2013 targets.

7(a) Goal is 90% in FY 2013 504 Goal is 75% in FY 2013
95% 80%
76%
90%
90% 75%

85%
70%

Percent Electronic Percent Electronic
80%
65%
75%
60%
70%

65% 55%

60% 50%
FY 2012 FY 2013 FY 2012 FY 2013
# of Electronic Apps # of Electronic Apps
# of Non-Electronic Apps # of Non-Electronic Apps
YTD % Electronic YTD % Electronic
ACHIEVED FY 2013 TARGET

Priority Goal #2: Maximize small business participation in government contracting. Maximize small business participation in federal
government contracting to meet the statutory goals and ensure program benefits flow to the intended recipients. The following chart for FY 2012
shows that out of $404 billion in government contracts, small businesses received $89.9 billion or 22.25 percent. The federal government
substantialy met its goal. (The data supporting the FY 2013 indicators are not finalized until the 3rd or 4th quarter of FY 2014. Therefore,
FY 2012 data is reported on as required by OMB Circular A-11.) This Goal for FY 2012/13 was also a Priority Goal for FY 2010/11.

Small Disadvantaged Bus. 8.00%

Women-Owned 4.00%
Small Bus. Other than Small Bus.
$89.92 B $314.26 B Goal: 5%
(22.25%) Service-Disabled
3.03%
Goal: 23% Veteran-Owned

HUBZone 2.01%

Goal: 3%
SUBSTANTIALLY ACHIEVED FY 2012 GOAL

14 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

Priority Goal #3: Process Disaster Assistance applications Priority Goal #4: Expand access to long-term capital.
efficiently. By September 30, 2013, increase the use of the From FY 2012 through September 30, 2013, commit at least
Disaster Assistance electronic loan application (ELA) by 50 $4.3 billion of capital via the Small Business Investment
percent. In FY 2011, 26 percent of applications were received Company program in order to facilitate access to capital for high
through the use of the ELA, so the goal is to increase that to growth companies and enhance job creation and retention by
39 percent. Increasing the number of paperless disaster loan these companies. In FY 2013, the SBA licensed a record 31
applications will improve the delivery of the Disaster loan program. SBIC funds and licensing times dropped over 53 percent from
Response time to the disaster victim will be reduced by the time 14.6 months in FY 2009 to 6.8 months in FY 2013. This helped
saved in not sending the application through the mail, and the the SBIC program execute a record of more than $2.1 billion in
integrity of the data used in the underwriting process will be commitments to its funds in 2013. The SBA missed the overall FY
improved as a result of not having to have staff input the data into 2012/2013 target by $220 million.
the system. The SBA exceeded its FY 2013 target.
Debenture Leverage Committed to SBICs
ODA Goal is 39% in FY 2013
60%
FY 2013 Goal is $4.3B
4,000 $220
55%
55%

$2,156 $4,080
50% 3,000

Percent Electronic
$ Millions
45%
2,000

40%
1,000 $1,924
35%
0
30% FY 2012 FY 2013 Total Goal
FY 2012 FY 2013
# of Electronic Apps
# of Non-Electronic Apps
YTD % Electronic
SUBSTANTIALLY ACHIEVED
ACHIEVED FY 2013 TARGET FY 2013 GOAL

DID
YOU Fortune 500 IT companies Symantec Corporation and QUALCOMM, Inc.
KNOW are members of SBA’s Small Business Innovation Research program Hall
of Fame. Both received SBA Small Business Innovation Research grant
funding to propel their companies’ success.

AGENCY FINANCIAL REPORT • FY 2013 15
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

Summary of Key SBA Programs
The following table presents key SBA FY 2013 performance data from Strategic Goal 1 - Growing businesses and
creating jobs. Although the SBA has three Strategic Goals, 82 percent of all SBA program costs are in Strategic Goal 1.
Therefore, only Strategic Goal 1 performance indicators are presented here. The presentation of the performance indica-
tors is by Strategic Objective, which follows SBA’s FY 2011-2016 Strategic Plan. Detailed performance information on
all SBA programs will be presented, and all variances explained, in the FY 2015 Congressional Budget Justification and
FY 2013 Annual Performance Report.

Strategic Objective 1.1 – Expand Access to capital through SBA’s extensive lending network.
Capital
Type of FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2013 FY 2013
Program Performance Indicator
Indicator Actual Actual Actual Actual Actual Actual Target Variance

7(a) and 504 Lending Supported ($ Billions)(1) Output $24.6 $17.8 $22.4 $30.5 $30.3 $29.6 $22.4 32%
G

7(a), 504,
Microloan, Jobs Supported(2) (#) Outcome 713,574 514,035 583,737 700,736 609,437 621,869 654,000 -5%
and SBG
Y
(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
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2012 FY 2012
Program Performance Indicator (3) Type
Actual Actual Actual Actual Actual Target Variance

Percent of Federal Contract Dollars
Prime Contracting Outcome 21.5% 21.9% 22.7% 21.7% 22.3% 23.0% -3%
Awarded to Small Businesses (%)
Y
(3) FY 2013 contracting numbers will continue to be collected and certified through the third quater of FY 2014. Therefore, FY 2012 numbers are reported per OMB Circular A-11.

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
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2013 FY 2013
Program Performance Indicator Type
Actual Actual Actual Actual Actual Actual Target Variance

Training Clients (#) Output 677,051 683,355 752,588 689,114 739,616 663,525 695,000 -5%
SBDC, WBC, Y
and SCORE
Counseling Clients (#) Outcome 401,874 436,425 404,739 364,344 399,620 348,519 N/T* N/A

N/T - Not Targeted - This indicator was introduced in FY 2013 and therefore was not goaled. It is presented for the historical perspective and to complete the picture for the Office of
Entrepreneurial Development performance activity. It will be goaled in FY 2014.

16 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

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
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2013 FY 2013
Program Performance Indicator Type
Actual Actual Actual Actual Actual Actual Target Variance

Customer Satisfaction Rate
Disaster Outcome 65% 72% 74% 80% 80% 81% 71% 14%
for Approvals (%) G
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 and new initiatives.

International Trade

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2013 FY 2013
Program Performance Indicator Type
Actual Actual Actual Actual Actual Actual Target Variance

International SME Exporters Assisted by USG
Trade
Output 3,167 1,393 1,326 1,346 1,283 1,388 1,349 3%
Finance Programs (#)
G

Investment and Innovation

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2013 FY 2013
Program Performance Indicator Type
Actual Actual Actual Actual Actual Actual Target Variance

SBA Debenture Leverage Committed to
SBIC Output $1,029 $788 $1,165 $1,827 $1,924 $2,156 $2,400 -10%
SBICs ($ in Millions)
Y

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.
R
of the target.

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cybersecurity-small-businesses.

AGENCY FINANCIAL REPORT • FY 2013 17
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

Operational Portfolio Analysis
CHART I MAKEUP OF SBA’S OUTSTANDING LOAN PORTFOLIO
The Small Business Administration is the
taxpayers’ custodian of a small business
120
loan portfolio of $106.8 billion. Dur-
$0.5
ing FY 2013, the portfolio grew by $4.2 $0.6
$0.7 $7.2
100 $0.8 $7.2
billion, or 4 percent; since existing loans $1.1 $0.9 $7.5 $8.5
$7.9 $7.8
are continually being paid off, this growth $1.5
$8.6 $8.4 $8.0
80 $8.1
means that there was a significant increase $9.0
$8.5
$8.4
$26.9
$26.9
$8.4 $26.6
in dollars loaned in FY 2013. Nearly two-
$25.5

($ Billions)
thirds of the FY 2013 growth in new loans 60 $22.3 $24.1
$19.6
to small businesses came from the Agency’s
three loan guaranty programs, 7(a), 504 40
$63.7
$56.4 $60.1
and SBIC debentures, which work with $48.6 $50.8
$46.1 $47.7
private financial institutions to provide 20
credit to small businesses. During the
period FY 2009 through FY 2013, nearly 0
all of the portfolio’s cumulative $18.6 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

billion growth came from these three SBA 7(a) 504 SBIC Programs Disaster All Other
programs. As a result, the share of these
three programs grew from 90 percent of
the portfolio in FY 2009 to 93 percent in
FY 2013 (see Chart I). Statutory Changes to SBA’s Loan Programs – Two changes
played a major role in the growth of SBA’s loan portfolio.
New Guarantied Loans First, a series of legislative events permanently increased
Three primary factors contributed to the loan guaranty SBA loan limits, temporarily lowered fees and increased
portfolio’s recent growth in outstanding balances: guaranties. These statutory changes increased SBA’s
capacity to supply greater credit to small businesses. The
Continuous Growth in the Economy – Real Gross Domes- American Recovery and Reinvestment Act of 2009 tem-
tic Production (RGDP) in the United States grew at an porarily lowered fees and raised guaranties for SBA’s 7(a)
average rate of 2.4 percent during 2010-2012. The first and 504 loan programs, among many other provisions.
three quarters of 2013 experienced a slight moderation Second, when the Recovery Act and the extensions ended
in RGDP growth, posting an average growth rate of 1.8 in Q4 FY 2010, the Small Business Jobs Act of 2010 made
percent. Although much of the weakness centered in the permanent the higher loan limits and upwardly revised size
first quarter of the year, economic activity continued to in- standards that determine what qualifies as a small business.
crease steadily, with the third quarter posting a 2.8 percent This in turn allowed the Agency to guarantee a greater
growth. This rise in RGDP increased revenues at small dollar volume of loans which for some borrowers came in
firms, which in turn increased their demand for credit. the form of larger loans (see Chart II). These same factors
also contributed to the improvement in the portfolio’s
Increase in Business Financial Stability – Corporate profits,
financial performance.
reaching record highs in FY 2013, are the primary factor
determining a business’s overall financial strength, includ-
New Direct Loans
ing its ability to incur more debt. Data indicate that
gains in corporate profits have been broadly distributed The growth in SBA’s gross lending approvals for the Disaster
across firms of all sizes, including small firms. The broadly Assistance program, grew $2.2 billion or 291 percent. The
distributed increases in corporate profits allowed existing large growth in disaster loans during FY 2013 can be
firms to borrow more. primarily attributed to loans extended to individuals and
businesses impacted by Superstorm Sandy. A detailed
review of the portfolio also indicates that the high volume
of loans made in FY 2006 ($11.7 billion), which included
Hurricanes Katrina, Rita and Wilma, represents more

18 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

than 38 percent of the number of active disaster loans for the 504 program likewise declined from the 5 percent
all of the following years combined. The SBA will continue recorded during February 2010 to 1.4 percent recorded
to make disaster loans an important tool for homeowners, during August 2013.
businesses and renters who may fall victim to a disaster.
Portfolio Performance – Charge-Offs
Portfolio Performance – Delinquencies As of the end of FY 2013, the charge-off rates for most
Delinquency rates (borrowers who are late on their pay- SBA primary loan programs, both guaranty and direct, are
ments) are a leading indicator of the Agency’s charge-off trending downward. A reduction in the rate of defaulted
rate (i.e. the rate of dollars spent to cover loans that loans across all loan vehicles is a major positive factor
defaulted). Thus, delinquency rates are a general indicator when assessing a diverse portfolio. The charge-off rates for
of the Agency’s, and thus taxpayers’, future liabilities for the major loan programs are profiled here:
these programs. This lowering of the delinquency rate (see
Chart III) is a positive indicator for the financial perfor- Charge-off rates for the 7(a) and Disaster loan programs
mance of any loan portfolio. experienced continuous declines from their 2009-2010
highs while the charge-off rate for the SBIC Debenture
Modest economic growth and strong profit performance program experienced a less pronounced downward trend.
during the past several years have reduced delinquency The charge-off rate for the 504 program experienced a
rates for all business loans, which have been steadily continuous rise from early 2008 to the end of 2012. This
declining since reaching cyclical peaks in the latter part is not surprising since the 504 program is an economic
of 2009. Delinquency rates for the Agency’s major loan development program with a commercial real estate
programs followed this national downward trend. Thus, focus. As such, recovery rates of defaulted 504 loans are
delinquency rates for the 7(a) program declined from the significantly impacted by the pricing trend in this sector.
3.9 percent recorded during January 2009 to 1.1 percent However, the latest data for FY 2013 indicates that the
recorded during August 2013. Delinquency rates for 504 charge-off rates have started to decline. A contrib-

CHART II QUARTERLY GROSS 7(A) AND 504 LOAN APPROVALS

redit
t
ct c ted s Ac
ry A : Job sted
cove pleme
n Y11 a u
12 : Re im Q1 F ing exh
Y09 n s ct
Q2 F rovisio dit fund ry A d
p
: Cre en cove e
Y09 z : Re xhaust
Q1 F rket fro Y10 e
10 ma Q4 F funding

($ Billions)
FY 2011 Average
FY 2013 Average
6 $6,120,752 FY 2012 Average
$5,773,857
$5,466,264
FY 2010 Average
$4,257,960
4
FY 2009 Average
$3,280,120

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

AGENCY FINANCIAL REPORT • FY 2013 19
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

uting factor to the decline is that real estate prices have Quarterly information on the status of SBA’s loan portfo-
been on the rise since the latter part of 2009, and as of lio, including outstanding balances and approvals by loan
August 2013 commercial real estate prices had recovered program and purchase rates, is available on SBA’s website
80 percent from the peak low levels recorded during 2007. at http://www.sba.gov/content/small-business-administration-
The charge-off rate for the SBIC Participating Securities sba-loan-program-performance.
program experienced a steady rise during the period from
2007-2012. Data for FY 2013 indicates that this upward
trend has also begun to reverse.

CHART III DELINQUENCY AND CHARGE-OFF RATES FOR THE 7(A) AND 504 PROGRAMS BY FISCAL YEAR

0.05
7(a) Program Declared
Recession
0.04

0.03

0.02

0.01

0.00
3 4 5 6 7 8 9 0 1 2 3
FY 200 FY 200 FY 200 FY 200 FY 200 FY 200 FY 200 FY 201 FY 201 FY 201 FY 201

7(a) Delinquency Rate 7(a) Past 12 Months Carge Off Rate

0.05
504 Program Declared
Recession
0.04

0.03

0.02

0.01

0.00
3
FY 201 FY 201
3 4 5 6 7 8 9 0
FY 200 FY 200 FY 200 FY 200 FY 200 FY 200 FY 200 FY 201 FY 201
1 2

504 Delinquency Rate 504 Past 12 Months Carge Off Rate

20 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

ANALYSIS AND HIGHLIGHTS OF FINANCIAL STATEMENTS AND RESULTS

Highlights of Financial Results (September 2013)
(Dollars in Thousands)

As of September 30, 2013 2012 % Change
CONDENSED BALANCE SHEET DATA
Fund Balance with Treasury $ 6,198,604 $ 6,273,663 -1.20%
Credit Program Receivables and Related Foreclosed Property, Net 7,534,448 7,654,295 -1.57%
All Other Assets 113,118 86,897 30.17%
Total Assets $ 13,846,170 $ 14,014,855 -1.20%
Debt 8,088,099 7,919,801 2.13%
Downward Reestimate Payable to Treasury 1,116,192 1,689,133 -33.92%
Liability for Loan Guaranties 2,987,263 3,725,951 -19.83%
All Other Liabilities 270,762 305,696 -11.43%
Total Liabilities 12,462,316 13,640,581 -8.64%
Unexpended Appropriations 1,753,736 1,281,279 36.87%
Cumulative Results of Operations (369,882) (907,005) 59.22%
Total Net Position 1,383,854 374,274 269.74%
Total Liabilities and Net Position $ 13,846,170 $ 14,014,855 -1.20%

For the years ended September 30,
2013 2012 % Change
STATEMENT OF NET COST BY STRATEGIC GOAL
Goal 1: Growing Businesses and Creating Jobs
Loan Subsidy Cost Including Reestimates $ (378,654) $ 350,577 -208.01%
All Other Costs Net of Revenue 806,728 828,869 -2.67%
Goal 2: Building an SBA that Meets the Needs of Today's
and Tomorrow's Small Businesses – 1,959 -100.00%
Goal 3: Serving as the Voice for Small Business 12,832 14,369 -10.70%
Costs Not Assigned 83,180 79,031 5.25%
Net Cost of Operations $ 524,086 $ 1,274,805 -58.89%

CONDENSED STATEMENT OF NET POSITION
Beginning Cumulative Results of Operations $ (907,005) $ (1,846,208) 50.87%
Total Financing Sources 1,061,209 2,214,008 -52.07%
Less: Net Cost of Operations (524,086) 1,274,805 -58.89%
Ending Cumulative Results of Operations $ (369,882) $ (907,005) 59.22%
Beginning Unexpended Appropriations $ 1,281,279 $ 1,537,185 -16.65%
Total Budgetary Financing Sources 472,457 (255,906) 284.62%
Ending Unexpended Appropriations $ 1,753,736 $ 1,281,279 36.87%
Ending Net Position $ 1,383,854 $ 374,274 269.74%

CONDENSED STATEMENT OF BUDGETARY RESOURCES
Unobligated Balance Brought Forward $ 5,632,368 $ 7,384,285 -23.72%
Other Budgetary Resources, Net (473,129) (1,938,161) 47.01%
Appropriations (discretionary and mandatory) 2,649,756 3,592,151 -26.23%
Borrowing Authority (discretionary and mandatory) 1,520,370 1,129,367 34.62%
Spending Authority from Offsetting Collections 4,730,229 4,232,520 24.85%
Total Budgetary Resources $ 14,059,594 $ 14,400,162 -2.37%
Obligations Incurred, Budgetary $ 2,882,329 $ 4,130,864 -30.22%
Obligations Incurred, Nonbudgetary 5,743,279 4,636,930 23.86%
Unobligated Balances, Available and Unavailable 5,433,986 5,632,368 -3.52%
Total Status of Budgetary Resources $ 14,059,594 $ 14,400,162 -2.37%

AGENCY FINANCIAL REPORT • FY 2013 21
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

Analysis of Financial Results years. The loan financing funds are nonbudgetary ac-
counts that record all the cash flow activity resulting from
The SBA prepares its financial statements as a critical as- post 1991 direct loans and loan guaranties. This activity
pect of ensuring the accountability and stewardship for the in the financing account is reported separately in the Bud-
public resources entrusted to it. The financial statements get of the United States Government and is excluded from
are prepared in accordance with guidance issued by the the budget surplus/deficit totals.
Office of Management and Budget pursuant to the Chief
Financial Officers Act of 1990. While these statements The portion of the outstanding principal guaranteed by
have been prepared from SBA’s books and records in ac- the SBA as of September 30, 2013 was $79.1 billion, an
cordance with generally accepted accounting principles for increase of 6.3 percent from the $74.4 billion guaranteed
federal entities and the formats prescribed by OMB, they at September 30, 2012 (see Note 6C in the financial state-
are in addition to the financial reports used to monitor ments). As shown in Chart I, new guaranties disbursed
and control budgetary resources, which are prepared from by SBA participating banks during FY 2013 were $17.7
the same books and records. The statements should be billion, a 10.7 percent increase compared to FY 2012. The
read with the realization that they are a component of the increase was largely from disbursements on loan approvals
U.S. Government, a sovereign entity. One implication made under the Small Business Jobs Act in the previous
of this is that the liabilities presented herein cannot be year that were disbursed in FY 2013. The increase in FY
liquidated without the enactment of appropriations, and 2013 disbursements caused the 6.3 percent increase in
ongoing operations are subject to the enactment of future outstanding guaranteed principal from the previous year.
appropriations.
Credit program receivables for the SBA are comprised of
This Analysis of Financial Results references numbers in business and disaster direct loans and defaulted business
the Highlights of Financial Results that was derived from loans purchased per the terms of SBA’s loan guaranty
the Financial Statements and Notes in this report. The programs which are offset by an allowance for subsidy. An
Operational Portfolio Analysis does not reference the allowance for the subsidy cost of the gross loan receivable
financial statements, but rather it provides an operational is recorded as a contra asset and the net asset is reported
analysis of SBA’s credit programs. As a result, the defini- on the Balance Sheet. The subsidy allowance is deter-
tions of the loan and guaranty balances in the Portfolio mined by modeling the projected future cash inflows and
Analysis section may differ somewhat from the balances outflows of SBA credit programs using discounted cash
used in this Analysis of Financial Results. For example, for flow methodology. Loan losses, the costs of loan servicing
the 7(a) program the total amount of guarantied loans is and loan interest rates are factors that affect the subsidy
used in the Portfolio Analysis, where only SBA’s guarantied allowance.
portion is used in the Analysis of Financial Results, as it
ties to balances in the financial statements. SBA credit program receivables were valued at $7.5
billion in FY 2013 which was a decrease of just $120
Background million from FY 2012. The biggest change in the credit
The SBA is a major federal credit agency
of the U.S. government. The SBA has
CHART I GUARANTIED LOANS DISBURSED
roughly 3,776 employees including
Disaster FTE employees. As a result
only $1.1 billion of SBA’s $14.1 billion 20
budgetary resources in FY 2013 were 16
for salaries and expenses, with the rest

($ Billions)
being to support SBA’s credit programs. 12
Budgetary resources when apportioned 8
by the Office of Management and Budget
are available to enter into new obliga- 4
tions and to liquidate them. Budgetary 0
resources are made up of new budget FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
authority and unobligated balances of
budget authority provided in previous

22 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

program receivables was a decrease in
defaulted guarantied business loans of CHART II PURCHASES OF GUARANTIED LOANS
$.2 billion. The amount of defaulted
guarantied loans decreased as collections 6
and charge-offs exceeded new guaranty
5
purchases, partially offset by a lower
subsidy allowance amount. This net 4

($ Billions)
decrease is attributable to an improved 3
economy in FY 2013. 2

As reflected in Chart II, guarantied 1
loan purchases decreased $.5 billion 0
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
in FY 2013. This is still a high level
compared the FY 2007 level, but the
decrease this year reflects the continuing
recovery after the economic recession.
Treasury. The Liability for Loan Guaranties is defined as
The decrease in purchases this year did contribute to a
the estimate of the net present value of the future amount
slight decrease in the outstanding guarantied business
the SBA will pay, net of fee collections, to liquidate expect-
loans receivable after including recoveries, expenses and
ed purchases of guarantied loans under its guarantied loan
charge-offs in the loans purchased portfolio.
programs. The Liability for Loan Guaranties decreased
SBA’s assets and liabilities consist primarily of Fund Bal- $0.7 billion due to the year-end downward reestimate of
ances with Treasury, credit program receivables, liabilities future costs for SBA’s guaranty portfolio. The downward
for loan guaranties, and debt with Treasury. SBA’s loans reestimate reflects the improvement in SBA’s portfolio and
and guaranties are financed by a combination of subsidy the economic recovery.
appropriations, fees charged to lenders and borrowers,
The Downward Reestimate Payable to Treasury decreased
and borrowings from the Treasury. Congress provides
$0.6 billion due to the smaller year-end accrual of the
appropriations to cover the estimated long-term costs of
downward reestimates for the 7(a) Recovery Act and 7(a)
SBA’s disaster loans. While SBA’s guarantied business loan
Jobs Act cohorts in FY 2013. More accurate FY 2013 cash
program costs are largely financed through fees, Recovery
flow projections and smaller changes to purchase projec-
and Jobs Act loans were augmented by appropriations.
tions for future years contributed to the smaller downward
Borrowings are repaid to the Treasury as loans are repaid to
reestimate for FY 2013 compared to FY 2012.
the SBA.
Debt with Treasury increased $0.2 billion to fund the
Financial Position increase in Disaster loan disbursements for Superstorm
Assets Sandy. Note 9 to the financial statements provides ad-
ditional detail on SBA debt with Treasury.
The SBA had total assets of $13.8 billion at the end of
FY 2013, down 1.2 percent from FY 2012. Total assets Net Position
decreased primarily due to a $120 million decrease in the
Credit Program Receivables and Related Foreclosed Prop- Cumulative Results of Operations is the accumulative
erty. This decrease was due to the amount of defaulted difference between expenditures and financing sources
guarantied loans decreasing as the result of collections and since the inception of the Agency. This negative balance
charge-offs exceeding new guaranty purchases. decreased $0.5 billion because unfunded upward subsidy
reestimates at year-end for the 504, and SBIC programs
Liabilities were less this year than last year. Upward subsidy reesti-
mates determined at year-end are funded in the following
The SBA had total liabilities of $12.5 billion at the end year when they are received. Unexpended appropria-
of FY 2013, down 8.6 percent from FY 2012. Liabilities tions increased $0.5 billion this year primarily because
consist primarily of the Liability for Loan Guaranties, the appropriations used were less than the appropriations
Downward Reestimate Payable to Treasury, and Debt with received in FY 2013 for disaster and administrative activ-

AGENCY FINANCIAL REPORT • FY 2013 23
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

ity. This affected Budgetary Financing Sources and the the financial statements in the Financial Reporting section
Ending Net Position. of this report.

Net Costs of Operations The SBIC Participating Securities and Debenture pro-
grams had an upward reestimate of $0.1 billion in FY
The Net Costs of Operations primarily reflects the costs
2013 that was due mostly to worse than projected loan
of SBA credit programs subsidy expenses during the year
performance. Additionally, loan performance contributed
for new loans and subsidy reestimates at year-end. The
to a projected increase in purchases and decreased projec-
credit subsidy cost is the net present value of expected
tions of recoveries, reimbursement of prioritized payments
cash inflows and outflows over the life of a guarantied
and annual fees for the remaining years within most of the
loan, or the difference between the net present value of
cohorts.
expected cash flows and the face value of a direct loan.
The SBA receives appropriations annually to fund its credit Budgetary Resources
programs. When loans are disbursed, the SBA records
subsidy expense. In accordance with the Federal Credit Total Budgetary Resources of $14.1 billion decreased $0.3
Reform Act, the subsidy costs are reestimated annually. billion in FY 2013. This decrease is the net result of previ-
Reestimates update original loan program cost estimates to ous year unused appropriations available this year and the
reflect actual experience and changes in forecasts of future other factors in the Highlights table and discussed here.
cash flows. Increased reestimated costs are funded in the Other Budgetary Resources, Net increased by $1.5 bil-
following year by permanent indefinite budget authority, lion in FY 2013. This increase is attributable to a smaller
while decreased costs are returned by the SBA to a Trea- repayment of borrowings from prior year balances in
sury general fund. FY 2013.

The upward reestimated costs for the SBIC and 504 guar- Appropriations (discretionary and mandatory) decreased
antied business programs decreased in FY 2013 resulting $0.9 billion in FY 2013. As shown in Chart IV the
in a net downward reestimate, and there was a decrease in decrease was the net of the decrease in the amount of ap-
the net downward reestimate in the 7(a) guaranty pro- propriations needed to fund SBA’s upward credit subsidy
gram that affected Strategic Goal 1 costs. Those subsidy reestimates, offset in part by increased FY 2013 Disaster
reestimates were the largest components of the change (net appropriations for the cost of Superstorm Sandy loans.
decrease) in the Agency’s net cost. Chart III reflects the Borrowing Authority increased $0.4 billion in FY 2013.
decreases in the subsidy reestimates for the Guarantied Disaster borrowing authority initially granted to the SBA
Business and Direct Disaster loan programs in FY 2013. was $3.6 billion, but the SBA returned $2.2 billion at
There was a significant downward reestimate in the 7(a) year-end FY 2013 as it was not needed to fund future
programs. This downward reestimate of $0.5 billion credit program operations.
was due mostly to lower than average purchases during
FY 2013 that decreased the overall
purchase curve, in turn decreasing
purchase projections in future years CHART III CREDIT PROGRAM SUBSIDY REESTIMATES
and contributing to the downward
reestimate for FY 2013. 5

The 504, 504 Recovery Act, and 504 4
Jobs Act programs had a downward 3

($ Billions)
reestimate of $0.3 billion due to better 2
than projected FY 2013 loan perfor- 1
mance. Purchases in the 504 Recovery 0
Act program represented only 43
-1
percent of the purchases projected FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
for FY 2013 by last year’s reestimate Direct Disaster Loans (Goal 1) Direct Business Loans (Goal 1)
model. Further detail on subsidy Guarantied Business Loans (Goal 1)

reestimates can be found in Note 6I to

24 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

Spending Authority from Offsetting Col-
lections increased $0.5 billion in FY 2013. CHART IV APPROPRIATIONS
Collections needed to repay borrowings
decreased in FY 2013, increasing the end-
8
ing balance. This was partially offset by the
decrease in FY 2013 collections received for 7
reduced year-end subsidy reestimates this
6
year.
5

($ Billions)
Status of Budgetary Resources
4
The Total Status of Budgetary Resources of
3
$14.1 billion decreased $0.3 billion in FY
2013. Budgetary obligations decreased by 2
$1.2 billion because subsidy reestimates de-
1
creased in FY 2013 for the guarantied busi-
ness programs. Nonbudgetary obligations 0
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
increased $1.1 billion due to the increase in
Disaster Loans Business Loans Salaries and Expenses
obligations in the disaster financing fund
due to Superstorm Sandy.

Unobligated balances at September 30,
2013 and 2012 were $5.4 billion and $5.6
billion which include $4.0 billion and $2.9
billion of unavailable unobligated balances. These balances
were unavailable because they were unapportioned by
OMB. The SBA accumulates the majority of unobligated
balances in its nonbudgetary financing accounts ($4.1
billion in FY 2013 and $4.8 billion in FY 2012) from
reestimates that are used primarily to pay default claims in
future years.

DID
YOU
KNOW In FY 2013 the SBA guaranteed bid and final bonds representing
$6.2 billion in contract value for America’s small businesses.

AGENCY FINANCIAL REPORT • FY 2013 25
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

ANALYSIS OF SBA’S SYSTEMS, CONTROLS AND LEGAL COMPLIANCE

Internal Control Environment several in SBA’s key business processes. Additional reviews
by SAT members covered some business processes that had
The SBA believes that maintaining integrity and account- no material impact on the financial statements, but did
ability in all programs and operations is critical for good present some potential for risk or exposure to the Agency.
government, demonstrates responsible stewardship over as- The SAT evaluated the review findings and determined
sets and resources, ensures high quality, is a sign of respon- that none reached the level of material weakness.
sible leadership, ensures the effective delivery of services
to customers, and maximizes desired program outcomes. Sequestration began March 1, 2013, requiring the SBA to
The SBA has developed and implemented management, make across-the-board budget cuts to each of its statutory
administrative and financial system controls to reasonably appropriation accounts for the remaining seven months
ensure that: of the fiscal year. SBA management developed strategies
to minimize the impact of the additional risks imposed
• programs and operations achieve intended results by the cuts and created or maintained sound controls as
efficiently and effectively; needed to facilitate the execution of its mission.
• resources are used in accordance with the mission of
the Agency; Last year’s review of internal controls in the procurement
function revealed that while considerable improvement
• programs and resources are protected from waste,
was made, more time and resources were required to
fraud, and mismanagement;
resolve all outstanding issues. The Agency took steps to
• program and operation activities are in compliance make further improvements in FY 2013 and the impact
with laws and regulations; and will be assessed in the FY 2014 review of procurement
• reliable, complete and timely data are maintained internal controls.
and used for decision-making at all levels.
This year, the SBA continued to have a significant deficien-
Each year, the SBA conducts an assessment of internal cy in information technology security controls, includ-
control as required by the Federal Managers’ Financial ing access controls and cyber-security. To address these
Integrity Act of 1982. The FMFIA also requires that the deficiencies, the SBA implemented software and hardware
assessment results be reported to the President and the improvements and entered into an interagency agreement
Congress in a statement of assurance. The SBA Admin- to more rapidly and thoroughly address cyber-security
istrator provides the statement of assurance based on the threats. The Agency has plans in place to take additional
self-assessment of program managers, internal control corrective action to further improve in these areas, with
reviews, and audits and reviews done by the Government a focus on improving identity management and access
Accountability Office and SBA’s Office of the Inspector controls in FY 2014 and FY 2015.
General.

In support of internal control assessments, the SBA’s Of- Financial Management Systems Strategy
fice of Internal Controls (OIC) oversees the requirements
Financial management systems at the SBA are designed
of the Office of Management and Budget’s revised Circular
to support effective internal control, produce reliable,
No. A-123, Appendix A, Internal Control Over Financial
timely financial information, and ensure cost effective loan
Reporting. During FY 2013, the OIC conducted SBA’s
guaranty processing. Management remains focused on
ninth annual assessment per OMB Circular No. A-123,
robust financial management systems that improve SBA’s
Appendix A. The SBA’s Senior Assessment Team (SAT),
ability to comply with laws and regulations, provide timely
chaired by the Chief Financial Officer and comprised
and accurate data to support management analysis and
of SBA managers from the major programs and support
decision-making, enable the Agency to keep pace with its
offices directed this effort. Key business processes impact-
lending partners, and effectively use automation to achieve
ing financial operations and the financial statements were
operational efficiency.
reviewed by OIC. Based on the evaluation of 11 business
processes, the OIC identified a number of deficiencies in
the internal control over financial reporting, including

26 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

As demonstrated throughout this Agency Financial The incremental improvement projects enhance SBA’s fi-
Report, the SBA seeks to comply with all federal financial nancial system controls over lending programs and provide
management system requirements and there have been no for improvement in accessibility to common information,
deficiencies identified under FFMIA. financial and budget management, and financial reporting.
Core financial systems at the SBA are comprised of three
The SBA completed a series of incremental improvement systems operated and managed by the offices of the Chief
projects designed to modernize the financial manage- Financial Officer, Capital Access, and Chief Information
ment systems to improve financial system controls, reduce Officer. The systems include:
sustainment costs, provide additional functionality for
external lending partners, and prolong system useful • Oracle Federal Financials – Upgraded to the most
lives. These projects include the migration of the systems current release, this COTS package is used for
to more current technology platforms and relocation to budget execution and management for administra-
modern data centers that provide expanded capability for tive activity.
continuity of operations. • Loan Systems – SBA-built systems used to sup-
port the lifecycle of loan guaranty processing, loan
In addition to modernization of the financial system
program funds control, management and account-
platforms, the incremental improvement projects added
ing for loan servicing and loan related expenses, and
missing functionality to the financial systems, building
a COTS package used for disaster loan application
improved integration between the systems, improving
processing.
consistency of data, enhanced reporting capability, and
improving SBA’s automation of funds control for loan • Financial Management System (FMS) – SBA-built
programs and loan subsidy. system used to consolidate administrative and loan
activity, manage cash and control funds, and pro-
vide financial reporting.

SUCCESS STORY: Rebuilding Communities
Amplify Gymnastics, LLC, Joplin Missouri

Kip Johnson, Paul Comstedt and Derek Hammeke, owners of
Amplify Gymnastics, are the recipients of the SBA 2013 Phoenix
Award for Outstanding Small Business Disaster Recovery. The award
recognizes individuals who display selflessness, ingenuity and tenacity
in the aftermath of a disaster, while contributing to the rebuilding of
their communities.

It was May 22, 2011, a few days before the grand opening of Amplify
Gymnastics. Co-owner Kip Johnson, his father and uncle stopped
by the gym to complete some last minute touches. Instead of painting, they narrowly escaped death when a
catastrophic tornado packing 250 mph winds whipped through Joplin. More than 20 percent of the city was
destroyed, and 160 people were killed. The two ton truck the men used as a makeshift storm shelter was tossed
20 feet from where it was parked. All that was left of the gym after the tornado hit was a concrete slab. Kip and
his partners, Paul Comstedt and Derek Hammeke, were faced with the daunting task of rebuilding the gym
they had envisioned as a place where local kids could get training for their bodies and mentoring for their lives.

The trio decided to move forward and got an SBA disaster loan for $256,100. The loan covered rebuilding
costs and operating expenses. In February 2012, Amplify held its grand opening with an enrollment of more
than 200 young athletes. Within a few months, 300 more had joined the gym, surpassing Amplify’s five-year
goal. The gym’s initial staff of 10 grew to 23, and the partners are planning an expansion.

Paul, Derek and Kip’s dream to help Joplin’s youth build memories of positive relationships and solid life les-
sons has inspired many.

AGENCY FINANCIAL REPORT • FY 2013 27
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

Management Assurances:
FMFIA and FFMIA Assurance Statement for FY 2013
The Small Business Administration continued to strengthen internal controls over its programs and operations during
FY 2013. Creating and sustaining a culture of responsibility and accountability while eliminating and preventing waste,
fraud and abuse is critical to meeting our mission at the SBA. I am pleased to report that the SBA continues to achieve
its internal control objectives.

A recent example of SBA’s commitment to internal control objectives occurred during the lapse of appropriations on
October 1, 2013. In response to this event, the SBA conducted an orderly shutdown of operations of all its offices with
the primary exception of Disaster Assistance. When the federal government passed appropriations and re-opened on
Thursday, October 17, 2013, the SBA restarted operations and successfully completed the closing of the FY 2013 finan-
cial records without sacrificing internal control practices.

SBA management is responsible for establishing and maintaining effective internal controls and financial management
systems that meet the objective of the Federal Managers Financial Integrity Act (FMFIA). The SBA conducted its as-
sessment of internal controls over the effectiveness and efficiency of operations and compliance with applicable laws and
regulations in accordance with OMB Circular No. A-123, Management’s Responsibility for Internal Controls. Agency
managers have issued assertions to me as to the status of their FY 2013 internal controls in their areas of responsibility.
These assertions are supported by internal testing, checklists and other management reviews. Although a few Agency
managers reported some operating deficiencies, these were not of a material nature. Based on the results of these evalua-
tions, I can provide reasonable assurance that internal controls over operations and compliance with applicable laws and
regulations, as of September 30, 2013, were operating effectively and no material weaknesses were identified in the design
or operation of those internal controls. Further, the Agency’s financial management systems conform to the principles,
standards, and related requirements prescribed by Section 4 of FMFIA.

The SBA conducted its assessment of the effectiveness of internal controls over financial reporting, which includes safe-
guarding of assets and compliance with applicable laws and regulations, in accordance with the requirements of Appendix
A of OMB Circular No. A-123. Based on the results of this evaluation, I can provide reasonable assurance that internal
control over financial reporting was operating effectively and no material weaknesses were identified in the design or
operation of internal control over financial reporting for FY 2013.

SBA’s independent auditor issued an unmodified opinion on the Agency’s FY 2013 financial statements for the ninth year
in a row. However, the auditor identified one instance of non-compliance with applicable laws and regulations as of Sep-
tember 30, 2013. Specifically, due to ongoing issues with the Agency’s legacy mainframe loan information system, not all
co-borrowers and guarantors on charged-off 7(a), 504 and disaster loans were referred to the Department of Treasury for
debt collection as required by the Debt Collection Improvement Act (DCIA).

The SBA has a DCIA Compliance Team made up of representatives from the Office of Capital Access, the Office of
the Chief Financial Officer, and the Office of the Chief Information Officer, who work together to identify and resolve
problems pertaining to the implementation of the DCIA. As a result of their efforts, the SBA has implemented improve-
ments to support the ongoing referral of defaulted loans, including referrals of co-borrowers and guarantors, to Treasury.
In FY 2013, the team conducted data analysis and instigated system corrections to resolve issues with loans rejected by
Treasury’s system in previous years. Despite these improvements, the underlying system issues will likely continue to be a
challenge for the Agency until the transition from the legacy mainframe to a web-based system is complete.

28 AGENCY FINANCIAL REPORT • FY 2013
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

The Federal Financial Management Improvement Act (FFMIA) requires federal agencies to implement and maintain
financial management systems that are in substantial compliance with federal financial management systems require-
ments, federal accounting standards, and the United States Standard General Ledger. Based on the FFMIA criteria, I can
provide reasonable assurance SBA’s financial management systems substantially comply with FFMIA for FY 2013.

Jeanne A. Hulit
Acting Administrator
December 16, 2013

DID
YOU The SBA approved more than 32,000 disaster loans totaling $2.4 billion
KNOW for victims of Superstorm Sandy. The 2012 storm was one of the costliest
hurricanes in U.S. history.

AGENCY FINANCIAL REPORT • FY 2013 29
M A N A G EMEN T ’ S D I S CU S S I O N & A N A LYSIS

Improper Payments Summary The SBA places a significant priority on the detection
and remediation of improper payment occurrence. The
The Improper Payments Information Act of 2002 (IPIA), Agency’s disbursement activities related to goods and
its amendments, and OMB Circular No. A-123, Appen- services, 7(a) loan guaranty approvals and purchases,
dix C, Management’s Responsibility for Internal Control: 504 CDC guaranty approvals, and Disaster direct loan
Requirements for Effective Measurement and Remediation programs now have staff that monitor and review for
of Improper Payment, require agencies to review all pro- improper payments and are charged with implementing
grams and activities, identify those that are susceptible to improvements that will continue to reduce the Agency’s
significant erroneous payments, and determine an annual improper payment rates. The Agency’s primary concern in
estimated amount of erroneous payments made in those its improper payment reporting stems from administrative
programs. Three of SBA’s four major credit programs, and documentation errors. The SBA continues to enhance
which were identified in the former section 57 of OMB and implement internal controls to reduce the risk for
Circular A-11, are subject to improper payment reporting: improper payments.
the 7(a) loan program, the Certified Development Com-
pany (504) loan program, and the Disaster loan program. In FY 2013 the SBA finalized its plan to identify a com-
The SBA includes loan guaranty approvals in its Improper prehensive, meaningful approach to implementing OMB’s
Payment program reporting for the 7(a) and 504 CDC Do Not Pay solution to reduce improper payments. As
loan programs as well as disbursements related to goods the SBA implements the phases of its plan, it continues
and services. A fourth major credit program, the Small to find ways to reduce the risk of improper payments.
Business Investment Company program, retained approval The Do Not Pay solution, specifically the enhanced data
from OMB for relief from reporting due to the low occur- analytics services, complements the Agency’s approach to
rence of improper payments as determined by several years establishing a sound program to prevent improper pay-
of review and the low probability for improper payments. ments.

DID
YOU From FY 2009 to FY 2012 the federal government awarded $376.2 billion
KNOW in contracting dollars to small businesses. This was a $48 billion
increase from the previous 3-year period, even as the federal government
has reduced contract spending.

30 AGENCY FINANCIAL REPORT • FY 2013
Financial
Reporting
SUCCESS STORY: Jewelry Designer for the First Lady
Creative Jewelry by Bridgeja,
New Orleans, Louisiana

Creative Jewelry by Bridgeja LLC was established in 2008 by Bridgeja
Baker, a young New Orleans entrepreneur. Unlike most successful start-
ups, however, this entrepreneur was only eleven years old! Before she even
began high school, Bridgeja was designing jewelry for men, women, and
children and quickly saw the opportunities for growth. She attracted the
attention of national chain stores and expanded to necklaces, earrings,
bracelets, cufflinks, lapel and tie pins, bookmarks and eyeglass holders, all of which are available through her
website.

Bridgeja designed a three piece pearl set for First Lady Michelle Obama and bookmarks for the President and
their two daughters. She received a letter of thanks from the First Lady’s Deputy Chief of Staff telling her she is
now a “jewelry designer for the First Lady.” Bridgeja’s success has allowed her to hire two part-time employees
and one seasonal worker.

Bridgeja is committed to giving back to her community. Each year she donates a percentage of her sales to
causes and organizations close to her heart, such as Children’s Hospital and the Louisiana SPCA. She also
wants to pass on what she has learned by conducting seminars on entrepreneurship for teens as well as classes
and workshops on jewelry creation and running a business. As a recipient of SBA’s SCORE counseling and
services, she has now become a mentor herself.

This year, Bridgeja Baker was named SBA’s 2013 Louisiana Young Entrepreneur of the Year. Bridgeja “would like
to encourage other young people to start preparing for their financial futures early.”
FINANCIAL R E PORTI NG

MESSAGE FROM THE CHIEF FINANCIAL OFFICER
December 16, 2013

I am pleased to submit the U.S. Small Business Administration’s (SBA) Agency Financial Report for FY 2013. For the
seventh straight year the SBA has won the CEAR (Certificate of Excellence in Accountability Reporting) award.

An independent audit has earned the SBA an unmodified and clean opinion with no material weaknesses. However, our
auditor identified one instance of non-compliance with applicable laws and regulations as of September 30, 2013. 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 implemented 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.

In the beginning of FY 2013, Budget and Acquisition managers met with each program office and developed Advanced
Acquisition Strategies to outline upcoming awards and budgetary needs. These sessions have been particularly important
for managers to navigate Continuing Resolution budgets that segment their annual allocations. SBA’s strategic planning
cycle has matured significantly throughout this collaborative process and communication with requesting program offices
has been greatly improved. The FY 2013 budget sequestration reductions have caused the SBA to examine every aspect
of its spending to do more with less and create efficiencies where possible. OCFO is committed to driving the agency to-
wards excellence in financial management by synchronizing budget, acquisition and performance information to provide
decision makers with the information they need to be effective.

In FY 2013, the SBA experienced its third highest volume ever of small business lending, supporting nearly $30 billion in
lending to over 47,000 small businesses. This level of lending supported is significant because it was achieved without the
additional incentives provided by the Small Business Jobs Act of 2010.

In addition to its normal operations, the CFO’s office continued to execute on two important process changes that began
in FY 2012 to improve Agency operations: the first is the President’s Do Not Pay initiative which is part of a comprehen-
sive solution to reducing improper payments. The SBA has continued to utilize the Department of Treasury’s Do Not
Pay portal to assess pre-award and pre-payment eligibility. In FY 2013, the SBA instituted an eligibility review process of
monthly disbursement transactions against the Excluded Parties List and Death Master File. The SBA has not encoun-
tered an ineligible match through this process since reporting began.

The second improvement is SBA’s implementation of the Prime Contractor Quick Pay initiative to ensure the timely
payment of invoices to prime contractors, which has resulted in significant process improvements. To decrease the wait-
ing time for internal invoice approvals, the accounting division developed a system of automatic email reminders sent to
Agency staff when their invoices become idle. I am proud to say that these process improvements by our Denver Finance
Center reduced SBA’s cumulative FY 2013 interest penalty payments to less than one thousand dollars. The SBA spent
97 percent less in annual invoice interest penalties in FY 2013 as compared to the prior fiscal year, primarily as a result of
Quick Pay’s success.

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.

AGENCY FINANCIAL REPORT • FY 2013 33
F I N A N C I A L R E PO RTI N G

By integrating the budget and acquisition process under the OCFO, managers are able to better plan and leverage the
financial management expertise of various stakeholders. Throughout 2013, a realigned Acquisition Division has made
considerable progress toward standardizing and improving SBA’s procurement process. As of October 1, the SBA met its
overall FY 2013 small business contracting goal – at 67 percent, the highest percentage goal in the government for small
business contracts – as well as all socio-economic sub-goals.

The SBA also continued its efforts to reduce agency-wide spending on non-disaster travel in FY 2013 to comply with
the President’s Campaign to Cut Waste. Financial managers set definitive spending caps for each non-disaster office and
made a concerted effort in FY 2013 to reduce travel across the board. Travel plan forecasts were collected from pro-
gram managers to identify the proposed type and cost of trips throughout the year. As a result, SBA’s non-disaster travel
spending was effectively reduced by 21 percent below the prior fiscal year’s total.

Finally, I want to recognize 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 financial management
activities, and made recommendations pertaining to our financial statement footnotes and the AFR prior to publication.
I thank them for their support and dedication to continued improvement.

Sincerely,

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

34 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

AUDIT AND FINANCIAL MANAGEMENT ADVISORY COMMITTEE’S REPORT
The Audit and Financial Management Advisory Committee (the Committee) assists the Administrator in overseeing
the U.S. Small Business Administration’s (SBA’s) financial operations. As part of that responsibility, the Committee
meets with Agency management, the Agency’s Inspector General, and its external auditors to review and discuss SBA’s
external financial audit coverage, the effectiveness of SBA’s internal controls over its financial operations, and its com-
pliance with certain laws and regulations that could materially impact SBA’s financial statements. SBA’s external audi-
tors are responsible for expressing an opinion on the conformity of SBA’s audited financial statements with the U.S.
generally accepted accounting principles. The Committee reviews the findings of the Inspector General and external
auditors, and SBA’s responses to those findings, to ensure that SBA’s plan for corrective action includes appropriate
and timely follow-up measures. In addition, the Committee reviews the draft Agency Financial Report (AFR), includ-
ing its financial statements, and provides comments to management who has primary responsibility for the AFR. The
Committee met four times during the year with respect to these responsibilities on FY 2013 financial management
and reporting. Two of the meetings were conducted via teleconference. During these sessions, the Committee met
with the Inspector General and external auditors without SBA management being present and discussed with the ex-
ternal 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 2013 AFR.

Edward J. Mazur
Chairman
Audit and Financial Management Advisory Committee

DID
YOU
In FY 2012 - FY 2013, the SBA supported $317 million in actual and
KNOW projected export sales through grants made to states under the STEP
(State, Trade and Export Promotion) program.

AGENCY FINANCIAL REPORT • FY 2013 35
F I N A N C I A L R E PO RTI N G

INSPECTOR GENERAL’S AUDIT REPORT

36 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

AGENCY FINANCIAL REPORT • FY 2013 37
F I N A N C I A L R E PO RTI N G

INDEPENDENT AUDITORS’ REPORT ON FY 2013 FINANCIAL STATEMENTS

KPMG LLP
Suite 12000
1801 K Street, NW
Washington, DC 20006

Independent Auditors’ Report

The Inspector General,
U.S. Small Business Administration:

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of the U.S. Small Business
Administration (SBA), which comprise the consolidated balance sheets as of September 30, 2013 and
2012, 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, and the related notes to the consolidated
financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with U.S. generally accepted accounting principles; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America; the standards applicable to financial audits contained in Government Auditing Standards issued
by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin
No. 14-02, Audit Requirements for Federal Financial Statements. Those standards and OMB Bulletin
No. 14-02 require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.

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

38 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

Small Business Administration
December 16, 2013
Page 2 of 4

Opinion on the Financial Statements

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the U.S. Small Business Administration as of September 30, 2013 and
2012, and its net costs, changes in net position, and budgetary resources for the years then ended in
accordance with U.S. generally accepted accounting principles.

Other Matters

Required Supplementary Information

U.S. generally accepted accounting principles require that the information in the Management’s Discussion
and Analysis, Required Supplementary Information, and Required Supplementary Stewardship
Information sections be presented to supplement the basic consolidated financial statements. Such
information, although not a part of the basic consolidated financial statements, is required by the Federal
Accounting Standards Advisory Board, who considers it to be an essential part of financial reporting for
placing the basic consolidated financial statements in an appropriate operational, economic, or historical
context. We have applied certain limited procedures to the required supplementary information in
accordance with auditing standards generally accepted in the United States of America, which consisted of
inquiries of management about the methods of preparing the information and comparing the information
for consistency with management’s responses to our inquiries, the basic consolidated financial statements,
and other knowledge we obtained during our audits of the basic consolidated financial statements. We do
not express an opinion or provide any assurance on the information because the limited procedures do not
provide us with sufficient evidence to express an opinion or provide any assurance.

Other Information

Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial
statements as a whole. The Message from the Administrator, Other Information, and the information on
pages 31 to 35 of the Agency Financial Report, is presented for purposes of additional analysis and is not a
required part of the basic consolidated financial statements. Such information has not been subjected to the
auditing procedures applied in the audit of the basic consolidated financial statements, and accordingly, we
do not express an opinion or provide any assurance on it.

Other Reporting Required by Government Auditing Standards
Internal Control Over Financial Reporting
In planning and performing our audit of the consolidated financial statements, we considered the SBA’s
internal control over financial reporting (internal control) to determine the audit procedures that are
appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial
statements, but not for the purpose of expressing an opinion on the effectiveness of the SBA’s internal
control. Accordingly, we do not express an opinion on the effectiveness of the SBA’s internal control. We
did not test all internal controls relevant to operating objectives as broadly defined by the Federal
Managers’ Financial Integrity Act of 1982.

A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or
detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination
of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of

AGENCY FINANCIAL REPORT • FY 2013 39
F I N A N C I A L R E PO RTI N G

Small Business Administration
December 16, 2013
Page 3 of 4

the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A
significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe
than a material weakness, yet important enough to merit attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the first paragraph of this
section and was not designed to identify all deficiencies in internal control that might be material
weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may
exist that were not identified. Given these limitations, during our audit, we did not identify any deficiencies
in internal control that we consider to be material weaknesses. However, we did identify a deficiency in
internal control, described in Exhibit I, related to information technology security controls, that we
consider to be a significant deficiency.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the SBA’s consolidated financial statements are
free from material misstatement, we performed tests of its compliance with certain provisions of laws,
regulations, contracts, and grant agreements, noncompliance with which could have a direct and material
effect on the determination of financial statement amounts, and certain provisions of other laws and
regulations specified in OMB Bulletin No. 14-02. However, providing an opinion on compliance with
those provisions was not an objective of our audit, and accordingly, we do not express such an opinion.
The results of our tests disclosed instances of noncompliance or other matters that are required to be
reported under Government Auditing Standards or OMB Bulletin No. 14-02, and which are described
below.

The Debt Collection Improvement Act of 1996 (DCIA). The DCIA assigns the U.S. Department of
Treasury (Treasury) the responsibility for collecting delinquent debts, Government-wide. The DCIA
requires federal agencies to transfer their nontax debt over 180 days delinquent to Treasury. During our
testwork over loan charge-offs, we noted the SBA did not refer obligors (eligible principal borrowers,
co-borrowers, and/or guarantors) to the Treasury for offset or cross-servicing at the time of charge-off, as
required by DCIA. Similar instances of noncompliance with the DCIA were reported in prior years. These
deficiencies were primarily the result of inadequate information technology controls. We recommend the
Associate Administrator, Office of Capital Access:

1. Conduct training to educate loan center staff on the proper steps to refer obligors to Treasury and
correct errors after the initial referral.

2. Reinforce the importance of retaining identifying information for all obligors.

3. Implement robust, quarterly monitoring reviews to identify and correct all charged-off loans where
the automatic referral did not occur.

For additional discussion of the information technology aspects of this finding, see Exhibit I.

We also performed tests of its compliance with certain provisions referred to in Section 803(a) of the
Federal Financial Management Improvement Act of 1996 (FFMIA). Providing an opinion on compliance
with FFMIA was not an objective of our audit, and accordingly, we do not express such an opinion. The
results of our tests of FFMIA disclosed no instances in which the SBA’s financial management systems did
not substantially comply with the (1) Federal financial management systems requirements, (2) applicable

40 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

Small Business Administration
December 16, 2013
Page 4 of 4

Federal accounting standards, and (3) the United States Government Standard General Ledger at the
transaction level.

SBA’s Response to Findings

The SBA’s response to the findings identified in our audit is described in Exhibit II. The SBA’s response
was not subjected to the auditing procedures applied in the audit of the consolidated financial statements
and, accordingly, we express no opinion on the response.

Purpose of the Other Reporting Required by Government Auditing Standards

The purpose of the communication described in the Other Reporting Required by Government Auditing
Standards section is solely to describe the scope of our testing of internal control and compliance and the
result of that testing, and not to provide an opinion on the effectiveness of the SBA’s internal control or
compliance. Accordingly, this communication is not suitable for any other purpose.

December 16, 2013

AGENCY FINANCIAL REPORT • FY 2013 41
F I N A N C I A L R E PO RTI N G

Exhibit I
U.S. Small Business Administration
Significant Deficiency

Improvement Needed in Information Technology Security Controls

During our Fiscal Year (FY) 2012 financial statement audit, we identified information technology (IT)
control findings and issued 19 recommendations for corrective actions. During the FY 2013 financial
statement audit, we found that the U.S. Small Business Administration (SBA) implemented corrective
actions on some of the findings noted; however, a number of conditions persisted in FY 2013 that reduced
SBA’s ability to effectively manage its information system risk. As a result, collectively, these conditions
present a significant deficiency in SBA’s internal control environment.

In an effort to provide additional clarity to SBA management with respect to the corrective actions
required, we enhanced our prior year recommendations where issues persisted in FY 2013, and issued
additional recommendations for the new control weaknesses identified. In the sections below, we
distinguish between recurring conditions and related recommendations, and those that were newly
identified in FY 2013. We have omitted some technical details from the conditions and recommendations
due to the sensitivity of the information. These details were communicated to management through Notices
of Findings and Recommendations (NFRs).

We have summarized the IT control deficiencies that we noted during the FY 2013 audit below, and have
organized them by the following general IT control objectives: logical and physical access controls,
application change management, system configuration management, and contingency planning.

Logical and Physical Access Controls

An integral part of the effectiveness of an organization’s security program management efforts should be to
ensure that logical and physical access controls provide reasonable assurance that IT resources, such as
data files, application programs, and IT-related facilities/equipment, are protected against unauthorized
modification, disclosure, loss, or impairment.

Our audit found that the following control deficiencies identified in the prior year persisted in FY 2013:
• User accounts to the network and some financial systems were not disabled or removed promptly
upon personnel termination.
• User accounts to the network and some financial systems were not recertified in accordance with
SBA policy.
• User accounts to one financial system and SBA’s network were not properly authorized.
• A process for consistently and effectively reviewing audit logs for the network and financial
systems was not implemented.
• A security incident response standard operating procedure had not been finalized.
• Responsibilities for approving, administering, and reviewing physical access to the Head Quarters
(HQ) data center had not been defined.
• Numerous high- and medium-risk security vulnerabilities were noted in the network and
infrastructure supporting certain financial systems.
• Port-based network security had not been implemented across SBA program offices.

I-1

42 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

Exhibit I
U.S. Small Business Administration
Significant Deficiency

In addition to the matters above, we noted the following additional control weaknesses during our FY 2013
audit:

• Remote access to SBA information systems was not configured and provisioned in accordance
with SBA policy.
• Network administrative rights were not properly restricted and security settings were not enforced
across all parts of the network.
Recommendations – Logical and Physical Access Controls:

We have issued the following recommendations to address the repeat control weaknesses listed in the
section above.

We recommend that the Chief Information Officer (CIO) coordinate with SBA program offices to1:

4. Improve SBA’s administration of logical system access by taking the following actions:
o Implement an effective off-boarding process and verify periodically that controls to remove
logical access for separated employees from SBA systems are implemented and operating as
designed;
o Establish a process for the identification and removal of separated contractors in order to help
ensure that access is timely removed upon contractor separation; and
o Remove access to the general support systems and major applications (including development
and test environments) timely when terminated employees and contractors are identified.
5. Implement procedures to ensure that user access, including user accounts and associated roles, is
reviewed on a periodic basis consistent with the nature and risk of the system, and any necessary
account modifications be performed when identified.
6. Implement and monitor procedures to ensure that access is appropriately granted to employees and
contractors, consistent with the conditions on their access forms after all approvals have been
obtained.
7. Enforce a network access security baseline(s) across the network, consistent with SBA security
policy, Office of Management and Budget directives, and United States Government Configuration
Baseline requirements.
8. Improve SBA’s information system logging and auditing program, by taking the following actions:
o Review and rationalize current audit and logging activities and capabilities to determine their
effectiveness in addressing risks to systems and data, and their ability to implement effective
and sustainable continuous monitoring;
o Implement and enforce consistent and effective creation of audit records, capturing of relevant
auditable events, auditing (i.e., manual or automated review of audit records) for specified

1
The recommendations listed in this exhibit were sequenced after the recommendations presented in the Independent
Auditors’ Report, to assist users of this report in tracking the number of recommendations presented.
I-2

AGENCY FINANCIAL REPORT • FY 2013 43
F I N A N C I A L R E PO RTI N G

Exhibit I
U.S. Small Business Administration
Significant Deficiency

events, and automated alerting on specified events across SBA’s infrastructure using a risk-
based approach; and
o Develop an agency-wide plan and schedule for implementation of the above recommendations.
9. Finalize, implement, and monitor its entity-wide Incident Response Policy or Standard Operating
Procedure.
10. Review the list of individuals with HQ data center access permissions periodically, to ensure that
only authorized personnel retain access to the HQ data center.
11. Implement port-based network access controls across SBA’s network.
12. Address the vulnerabilities noted during the FY 2013 audit, to be in compliance with SBA policy
and SBA Vulnerability Assessment Team (VAT) Internal Operating Procedures, Version 1.4. In
addition, implement procedures to ensure the consistent identification, tracking, and resolution of
security vulnerabilities across SBA’s workstations, servers, databases, network devices, and other
security relevant appliances.
To address the newly identified logical and physical access control weakness, we are issuing the following
recommendations.
We recommend that the CIO coordinate with SBA program offices to:

13. Grant elevated network privileges per business needs only and enforce the concept of least
privilege or implement mitigating controls to ensure that activities performed using privileged
network accounts (including service accounts) are properly monitored.
14. Improve SBA’s remote access program, by taking the following actions:
o Incorporate security requirements into the Teleworking SOP, to be consistent with NIST
800-46 Rev 1;
o Ensure employees acknowledge compliance with security requirements prior to establishing a
remote connection to SBA’s network when Teleworking or otherwise connecting remotely to
SBA systems; and
o Monitor compliance with the revised SOP 90.47.3 and the updated Teleworking SOP.
Application Change Management
The integrity of information processing is dependent on the controlled management of changes to the
software that controls the processing. Software change management is designed to reduce the risk of
unauthorized or erroneous changes of software. Our audit found the following control deficiencies:

• The change management process for some financial applications did not sufficiently reduce the
risk of an unauthorized change being made to the production environment. Specifically, the SBA
did not review or compare system code to ensure only authorized changes had been made, and the
audit log review process was not designed to detect unauthorized changes to application software.
• Detective controls to mitigate the risk of a known segregation of duties issue did not operate for the
full fiscal year.

I-3

44 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

Exhibit I
U.S. Small Business Administration
Significant Deficiency

• Required software changes for one financial subsystem were not implemented due to the ongoing
code migration project which impacted SBA’s compliance with the Debt Collection Improvement
Act of 1996 (DCIA) in that system. This issue was reported as a noncompliance matter in the
Compliance and Other Matters section of our audit report.

Recommendations – Application Change Management:
In our prior year report, we issued the following recommendation to address issues with respect to SBA’s
compliance with the DCIA. We are reissuing that recommendation to address the condition identified
above:
15. We recommend that the Associate Administrator, Office of Capital Access (OCA), in coordination
with the CIO, design and implement a combination of preventative and detective controls to
address the issues and related risks in the condition above, and ensure an auditable trail of software
changes is maintained to prevent and detect unauthorized changes to production programs.
In addition, we are issuing the following recommendations to address the additional application change
management conditions identified in FY 2013:
16. We recommend that the Chief Financial Officer (CFO) continues to perform the mitigating
controls implemented during FY 2013 to ensure that the risks associated with privileged access
remain mitigated.
17. We recommend that the Associate Administrator, OCA, in conjunction with the CIO continues to
review system protocols to determine if any other coding problems exist that may cause untimely
referral of loans, and address outstanding system protocol issues from prior years.
System Configuration Management

The primary focus of an organization’s system configuration management process should be to control the
security configuration of its infrastructure including servers, databases, network equipment, security
appliances, and security services. Without such controls, there is a risk that security features could be
inadvertently, or deliberately, omitted or turned off, introducing risk into the IT environment.

Our audit noted that the following prior year control deficiency persisted in FY 2013:

• Numerous high- and medium-risk configuration management vulnerabilities were noted in the
network and infrastructure supporting certain financial systems.
We also identified the following new control weakness as a result of our FY 2013 audit procedures:

• The SBA did not perform periodic, authenticated vulnerability scans for all financial systems.
Recommendations – System Configuration Management:

To address the repeat system configuration management condition above, we recommend that:

18. The CIO coordinate with SBA program offices to address the existing configuration management
vulnerabilities noted during our assessment to be in compliance with SBA policy and SBA
Vulnerability Assessment Team (VAT) Internal Operating Procedures, Version 1.4. In addition,
implement procedures to ensure the consistent implementation and monitoring of SBA approved
I-4

AGENCY FINANCIAL REPORT • FY 2013 45
F I N A N C I A L R E PO RTI N G

Exhibit I
U.S. Small Business Administration
Significant Deficiency

security configuration baselines across SBA’s workstations, servers, databases, network devices,
and other security relevant appliances.

In addition, we recommend that:

19. The CFO and the Associate Administrator, Office of Disaster Assistance, implement scans of
financial systems in its production environment using privileged access authorization.

Contingency Planning

The focus of an organization’s contingency planning program should be to provide reasonable assurance
that information resources are protected and the risk of unplanned interruptions is minimized. Without such
controls, there is a risk that data may be lost or that critical operations may not resume in a timely manner.

Our audit noted that the following prior year control deficiencies persisted in FY 2013:
• HQ backup tapes necessary to restore system operations were not rotated off-site in accordance
with SBA policy.
• An alternate processing site for some financial systems and related support infrastructure had not
been established.
Recommendations – Contingency Planning:
We recommend that the CIO:

20. Designs and implements procedures and controls to ensure HQ backup tapes are rotated on a
periodic basis in accordance with SBA policies and plans.
21. Designs and implements procedures, resources, and controls to ensure the timely recovery of
resources and systems hosted by SBA HQ.

I-5

46 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

Exhibit II

CFO Response to Draft Audit Report on FY 2013
Financial Statements

DATE: December 16, 2013

TO: Robert A. Westbrooks, Deputy Inspector General

FROM: Jonathan I. Carver, Chief Financial Officer

SUBJECT: Draft Audit Report on FY 2013 Financial Statements

The Small Business Administration has received 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 pleased that the SBA has again received an unmodified audit opinion from the independent auditor with no
material weaknesses. We believe these results accurately reflect the quality of the Agency’s financial statements and our
improved accounting, budgeting and reporting processes. As you know, the SBA has worked hard in past years to ad-
dress the findings from our independent auditor. Our core financial reporting data and processes have further improved,
and we are proud that the results of our efforts have been confirmed by the independent auditor.

The audit report includes a continuing significant deficiency in SBA’s information technology controls. The SBA will
continue to work on improvements in IT security. The SBA will track, monitor, and aggressively mitigate vulnerabilities
in all Agency systems. Furthermore, the SBA will clarify and strengthen detailed procedures required to ensure security
access controls are in place to protect SBA data from unauthorized modification, disclosure, and loss.

The auditor reported again this year that the SBA is not compliant with the Debt Collection Improvement Act of 1996
related to timely referral of charged-off loans to the Department of the Treasury for its tax refund offset and collection
programs. Although the SBA made improvements to correct systemic errors identified last year, the auditor again found
instances of charged-off loans where co-borrowers and guarantors were not referred to Treasury. The SBA is working on
procedures to correct this issue.

We appreciate all of your efforts and those of your colleagues in the Office of the Inspector General as well as those of
KPMG. The independent audit process continues to provide us with new insights and valuable recommendations that
will further enhance SBA’s financial management practices. We continue to be committed to excellence in financial man-
agement and look forward to making more progress in the coming year.

AGENCY FINANCIAL REPORT • FY 2013 47
F I N A N C I A L R E PO RTI N G

FINANCIAL STATEMENTS AND NOTES
The U.S. Small Business Administration prepares its financial statements as a critical aspect of ensuring accountability
and stewardship for the public resources entrusted to 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 perfor-
mance and allocate resources.

SBA’s management is responsible for the accuracy and propriety of the information contained in the principal financial
statements and the quality of internal controls. The SBA prepares these financial statements from its books and records
in accordance with generally accepted accounting principles in the United States as well as formats prescribed by the Of-
fice of Management and Budget.

The financial statements include the following reports:

The Consolidated Balance Sheet summarizes the assets, liabilities and net position by major category as of the reporting
date. Intragovernmental assets and liabilities resulting from transactions between federal agencies are presented separately
from assets and liabilities resulting from transactions with the public.

The Consolidated Statement of Net Cost shows, by strategic goal, the net cost of operations for the reporting period.
Net cost of operations consists of full program costs incurred by the SBA less the exchange revenues earned by those
programs.

The Consolidated Statement of Changes in Net Position presents SBA’s beginning and ending net position by two
components – Cumulative Results of Operations and Unexpended Appropriations. It summarizes the change in net
position by major transaction category. The ending balances of both components of net position are also reported on the
Balance Sheet.

The Combined Statement of Budgetary Resources provides information about funding and availability of budgetary
resources, and the status of those resources at the end of the reporting period. Data on the Combined Statement of Bud-
getary Resources is consistent with information reflected on the Report on Budget Execution and Budgetary Resources
(SF 133), with the one exception of offsetting receipts. Offsetting receipts offset budget authority and outlays at the
agency level in the Budget of the United States Government, but are not reflected in the SF 133. The SBA includes off-
setting receipts in this statement for the purpose of reconciling outlay information presented in the Budget of the United
States Government.

The Required Supplementary Information presents a Combining Statement of Budgetary Resources report by principal
functional area.

The Required Supplementary Stewardship Information provides information on SBA’s investment in human capital.

48 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

U. S. Small Business Administration
Consolidated Balance Sheet
as of September 30, 2013 and 2012

(Dollars in Thousands)
2013 2012
ASSETS
Intragovernmental Assets
Fund Balance with Treasury (Note 2) $ 6,198,604 $ 6,273,663
Advances (Note 1) 16,523 6,871
Total Intragovernmental Assets 6,215,127 6,280,534

Assets - Public and Other
Cash (Note 3) 3,976 5,485
Accounts Receivable, Net (Note 5) 84,097 72,423
Credit Program Receivables and Related Foreclosed Property, Net (Note 6) 7,534,448 7,654,295
General Property and Equipment, Net (Note 7) 6,173 2,118
Advances (Note 1) 2,349 –
Total Assets - Public and Other 7,631,043 7,734,321
Total Assets $ 13,846,170 $ 14,014,855

LIABILITIES
Intragovernmental Liabilities
Interest Payable $ 832 $ 4,928
Debt (Note 9) 8,088,099 7,919,801
Net Assets of Liquidating Funds Due to Treasury (Note 10) 41,698 52,200
Downward Reestimate Payable to Treasury (Note 1, Note 13) 1,116,192 1,689,133
Other (Note 8, Note 11) 9,652 12,678
Total Intragovernmental Liabilities 9,256,473 9,678,740

Other Liabilities - Public
Accounts Payable (Note 1) 45,972 42,614
Accrued Grant Liability (Note 1) 73,000 94,000
Liability for Loan Guaranties (Note 6) 2,987,263 3,725,951
Federal Employees’ Compensation Act Actuarial Liability (Note 1, Note 8) 33,703 31,591
Surety Bond Guarantee Program Future Claims (Note 8) 31,029 22,606
Other (Note 8, Note 11) 34,876 45,079
Total Other Liabilities - Public 3,205,843 3,961,841
Total Liabilities 12,462,316 13,640,581

NET POSITION
Unexpended Appropriations (Note 1) 1,753,736 1,281,279
Cumulative Results of Operations (Note 1) (369,882) (907,005)
Total Net Position 1,383,854 374,274

Total Liabilities and Net Position $ 13,846,170 $ 14,014,855

The accompanying notes are an integral part of these statements.

AGENCY FINANCIAL REPORT • FY 2013 49
F I N A N C I A L R E PO RTI N G

U. S. Small Business Administration
Consolidated Statement of Net Cost
For the years ended September 30, 2013 and 2012

(Dollars in Thousands)
2013 2012
STRATEGIC GOAL 1:
Growing Businesses and Creating Jobs
Gross Cost $ 1,042,669 $ 1,876,569
Less: Earned Revenue 614,595 697,123
Net Cost of Strategic Goal 1 428,074 1,179,446

STRATEGIC GOAL 2:
Building an SBA that Meets the Needs of Today’s
and Tomorrow’s Small Businesses
Gross Cost – 1,959
Total Program Cost of Strategic Goal 2 – 1,959

STRATEGIC GOAL 3:
Serving as the Voice for Small Business
Gross Cost 12,832 14,369
Total Program Cost of Strategic Goal 3 12,832 14,369

COST NOT ASSIGNED TO STRATEGIC GOALS
Gross Cost 83,180 79,031
Total Program Cost Not Assigned to Strategic Goals 83,180 79,031

Net Cost of Operations $ 524,086 $ 1,274,805

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

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50 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

U. S. Small Business Administration
Consolidated Statement of Changes in Net Position
For the years ended September 30, 2013 and 2012
(Dollars in Thousands)
2013 2012

Beginning Cumulative Results of Operations $ (907,005) $ (1,846,208)

Budgetary Financing Sources
Appropriations Used 2,169,146 3,840,682
Donations of Cash and Cash Equivalents 20 17

Other Financing Sources
Imputed Financing from Costs Absorbed by Others 19,955 20,453
Other - Cancelled Authority – (252)
Other - Current Year Liquidating Equity Activity (3,992) (1,207)
Other - Non-entity Activity (1,123,920) (1,645,685)
Total Financing Sources 1,061,209 2,214,008

Less: Net Cost of Operations 524,086 1,274,805

Ending Cumulative Results of Operations $ (369,882) $ (907,005)

Beginning Unexpended Appropriations $ 1,281,279 $ 1,537,185

Budgetary Financing Sources
Appropriations Received 2,745,037 3,592,151
Rescissions (95,281) –
Adjustment - Cancelled Authority (5,194) (7,028)
Other Adjustments (2,959) (347)
Appropriations Used (2,169,146) (3,840,682)
Total Budgetary Financing Sources 472,457 (255,906)

Ending Unexpended Appropriations $ 1,753,736 $ 1,281,279

Ending Net Position $ 1,383,854 $ 374,274

The accompanying notes are an integral part of these statements.

AGENCY FINANCIAL REPORT • FY 2013 51
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U. S. Small Business Administration
Combined Statement of Budgetary Resources
For the years ended September 30, 2013 and 2012
(Dollars in Thousands)
September 30, 2013
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 862,901 $ 4,769,467 $ $5,632,368
Recoveries of Prior Year Obligations 63,684 81,655 145,339
Other Changes in Unobligated Balance (22,648) (595,820) (618,468)
Unobligated Balance from Prior Year Budget Authority, net 903,937 4,255,302 5,159,239

Appropriations (discretionary and mandatory) 2,649,756 – 2,649,756
Borrowing Authority (discretionary and mandatory) – 1,520,370 1,520,370
Spending Authority from Offsetting Collections 625,835 4,104,394 4,730,229
Total Budgetary Resources $ 4,179,528 $ 9,880,066 $ 14,059,594

STATUS OF BUDGETARY RESOURCES
Obligations Incurred $ 2,882,329 $ 5,743,279 $ 8,625,608
Apportioned 594,338 854,066 1,448,404
Unapportioned 702,861 3,282,721 3,985,582
Total Unobligated Balance, end of year 1,297,199 4,136,787 5,433,986
Total Status of Budgetary Resources $ 4,179,528 $ 9,880,066 $ 14,059,594

CHANGE IN OBLIGATED BALANCE
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 619,996 $ 278,173 $ 898,169
Obligations Incurred 2,882,329 5,743,279 8,625,608
Gross Outlays (2,798,690) (5,238,267) (8,036,957)
Recoveries of Prior Year Unpaid Obligations (63,684) (81,655) (145,339)
Unpaid Obligations, end of year 639,951 701,530 1,341,481
Uncollected Payments:
Uncollected Payments, Federal Sources, brought forward, October 1 – (176,681) (176,681)
Change in Uncollected Payments, Federal Sources – (119,838) (119,838)
Uncollected Payments, Federal Sources, end of year – (296,519) (296,519)

Memorandum (non-add) entries:
Obligated Balance, start of year $ 619,996 $ 101,492 $ 721,488

Obligated Balance, end of year $ 639,951 $ 405,011 $ 1,044,962

BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross (discretionary and mandatory) $ 3,275,591 $ 5,624,764 $ 8,900,355
Actual Offsetting Collections (discretionary and mandatory) (625,895) (4,540,597) (5,166,492)
Change in Uncollected Customer Payments
from Federal Sources (discretionary and mandatory) – (119,838) (119,838)
Budget Authority, net (discretionary and mandatory) $ 2,649,696 $ 964,329 $ 3,614,025

Gross Outlays (discretionary and mandatory) $ 2,798,690 $ 5,238,267 $ 8,036,957
Actual Offsetting Collections (discretionary and mandatory) (625,895) (4,540,597) (5,166,492)
Net Outlays (discretionary and mandatory) 2,172,795 697,670 2,870,465
Less: Distributed Offsetting Receipts (118) (1,696,861) (1,696,979)
Agency Outlays, net (discretionary and mandatory) $ 2,172,677 $ (999,191) $ 1,173,486

Note 15

The accompanying notes are an integral part of these statements.

52 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

U. S. Small Business Administration
Combined Statement of Budgetary Resources
For the years ended September 30, 2013 and 2012
(Dollars in Thousands)
September 30, 2012
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 969,277 $ 6,415,008 $ 7,384,285
Recoveries of Prior Year Obligations 89,736 234,613 324,349
Other Changes in Unobligated Balance (20,608) (2,241,902) (2,262,510)
Unobligated Balance from Prior Year Budget Authority, net 1,038,405 4,407,719 5,446,124

Appropriations (discretionary and mandatory) 3,592,151 – 3,592,151
Borrowing Authority (discretionary and mandatory) – 1,129,367 1,129,367
Spending Authority from Offsetting Collections 363,209 3,869,311 4,232,520
Total Budgetary Resources $ 4,993,765 $ 9,406,397 $ 14,400,162

STATUS OF BUDGETARY RESOURCES
Obligations Incurred $ 4,130,864 $ 4,636,930 $ 8,767,794
Apportioned 221,119 2,491,404 2,712,523
Unapportioned 641,782 2,278,063 2,919,845
Total Unobligated Balance, end of year 862,901 4,769,467 5,632,368
Total Status of Budgetary Resources $ 4,993,765 $ $9,406,397 $ 14,400,162

CHANGE IN OBLIGATED BALANCE
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 747,111 $ 584,678 $ 1,331,789
Obligations Incurred 4,130,864 4,636,930 8,767,794
Gross Outlays (4,168,243) (4,708,822) (8,877,065)
Recoveries of Prior Year Unpaid Obligations (89,736) (234,613) (324,349)
Unpaid Obligations, end of year 619,996 278,173 898,169
Uncollected Payments:
Uncollected Payments, Federal Sources, brought forward, October 1 – (246,756) (246,756)
Change in Uncollected Payments, Federal Sources – 70,075 70,075
Uncollected Payments, Federal Sources, end of year – (176,681) (176,681)
Memorandum (non-add) entries:
Obligated Balance, start of year $ 747,111 $ 337,922 $ 1,085,033

Obligated Balance, end of year $ 619,996 $ 101,492 $ $721,488

BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross (discretionary and mandatory) $ 3,955,361 $ 4,998,678 $ 8,954,039
Actual Offsetting Collections (discretionary and mandatory) (363,722) (6,016,599) (6,380,321)
Change in Uncollected Customer Payments
from Federal Sources (discretionary and mandatory) – 70,075 70,075
Budget Authority, net (discretionary and mandatory) $ 3,591,639 $ (947,846) $ 2,643,793

Gross Outlays (discretionary and mandatory) $ 4,168,243 $ 4,708,822 $ 8,877,065
Actual Offsetting Collections (discretionary and mandatory) (363,722) (6,016,599) (6,380,321)
Net Outlays (discretionary and mandatory) 3,804,521 (1,307,777) 2,496,744
Less: Distributed Offsetting Receipts (51) (868,316) (868,367)
Agency Outlays, net (discretionary and mandatory) $ 3,804,470 $ (2,176,093) $ 1,628,377

Note 15

The accompanying notes are an integral part of these statements.

AGENCY FINANCIAL REPORT • FY 2013 53
F I N A N C I A L R E PO RTI N G

NOTE 1 SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity
The Small Business Act of 1953 created the Small Business Administration as an independent federal agency. SBA’s
mission is to maintain and strengthen the nation’s economy by enabling the establishment and vitality of small
businesses and by assisting in the economic recovery of communities after disasters. The SBA operates through the
execution of a congressionally approved budget that funds its programs.

Basis of Accounting and Presentation
The SBA prepares financial statements to report its financial position and results of its operations as required by
the Chief Financial Officers Act of 1990 and the Government Management Reform Act of 1994. The financial
statements are prepared from the Agency’s records in accordance with generally accepted accounting principles using
formats prescribed by the Office of Management and Budget. As a federal agency, the SBA cannot incur obligations
without authority from the Congress and an apportionment by the OMB.

These financial statements reflect transactions recorded on both a proprietary accrual accounting basis and a budgetary
obligation basis, in accordance with concepts and guidance provided by the OMB, the Federal Accounting Standards
Advisory Board, and the Department of the Treasury. Under the accrual method of accounting, revenues are recognized
when earned and expenses are recognized when incurred, without regard to receipt or payment of cash. Budgetary
accounting recognizes the legal commitment or obligation of funds in advance of the proprietary accruals and facilitates
compliance with legal constraints and controls over the use of federal funds.

The Federal Credit Reform Act of 1990 governs SBA’s accounting for direct loans and loan guaranties made in FY
1992 and thereafter. Under the FCRA, the liability for loan guaranties is determined as the summarized discounted
present value of the estimated future net cash inflows and outflows for each fiscal year’s cohort of guaranties. For
direct loans, the allowance is the current outstanding FCRA loans receivable balance less the discounted present value
of the estimated future net cash flows for all the loan cohorts. A cohort of loans receivable or guarantied loans is all
of the loans made in a given fiscal year. Increases to individual loans in a cohort that are made in a subsequent fiscal
year are accounted for in the subsequent year’s loan cohort. Cohort cash flows include loan repayments, recoveries on
defaulted guaranties and loan fees received by the SBA that are due from the lenders and borrowers when the loan is
made and during the life of the loan cohort, as well as expenditures by the SBA for defaulted guaranties, loan servicing
expenses and other required SBA expenditures. An initial allowance or liability for loan guaranties is established in
the original year of the loan cohort. The initial amount of the allowance and liability for each cohort is reestimated
annually at fiscal year-end, and the adjusted amount is included in SBA’s annual financial statements. Note 6 further
describes FCRA accounting.

Use of Estimates
SBA’s management makes assumptions and uses estimates to prepare the financial statements based upon the facts
that exist when the statements are prepared. Actual results may differ from those estimates and the differences 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 modeling techniques to reflect the most accurate credit
program costs possible in its annual financial statements.

54 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

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-subsidized
portion of each loan disbursement, financed initially under permanent indefinite authority to borrow funds from the
Treasury, is repaid from collections of loan fees, repayments and default recoveries. The Congress authorizes the dollar
amount of obligations that can be made for the cost of direct loans and loan guaranties and establishes the maximum
amount of loans the SBA can guarantee in its annual appropriation bill.

A permanent indefinite authority is available to fund any reestimated increase of subsidy costs that occurs after
the year in which a loan is disbursed. Reestimated reductions of subsidy costs are returned to the Treasury and are
unavailable to the SBA. As required by the Federal Credit Reform Act of 1990, the SBA uses budgetary “program
accounts” to account for appropriations in its credit programs and nonbudgetary “financing accounts” to account for
credit program cash flow. Estimates and reestimates of credit program subsidy expenses are recorded in SBA’s program
accounts. Financing accounts are used to account for Treasury borrowings, the collection of loan fees, repayments and
default recoveries, and the disbursement of loans and loan expenses.

Accounts Payable
Accounts Payable are amounts due to public entities that will be liquidated during the next operating cycle. Included in the
liability are payables to SBA lenders for their share of loan collections and to vendors for goods and services.

Accrued Grant Liability
Disbursements of grant funds are recognized as expenses at the time of disbursement. However, some grant recipients
incur expenditures prior to initiating a request for disbursement based on the nature of the expenditures. The
SBA accrues a liability for expenditures incurred by grantees prior to receiving grant funds for the expenditures.
The amount to be accrued is determined through an analysis of historic grant expenditures. The Small Business
Development Center program and several other grant programs are subject to this treatment.

Advances
The SBA has both intragovernmental advances and advances to the public. Intragovernmental advances are to the
National Business Center of the Department of the Interior for contracting assistance on work not yet performed.
Advances to the public represent prepaid grants to states for Hurricane Sandy relief.

Contingencies
The SBA is a party in various administrative proceedings, legal actions, environmental suits and claims brought against
the Agency. In the opinion of SBA’s management and legal counsel, the ultimate resolution of these proceedings,
actions, suits and claims will not materially affect the financial position or results of SBA’s operations.

Cumulative Results of Operations
The deficit in Cumulative Results of Operations, presented on the Balance Sheet and on the Statement of Changes in
Net Position, is the accumulated difference between expenses and financing sources since the inception of the Agency.
The deficits reported reflect timing differences between the recording of expenses and the recognition of resources.
Most of this timing difference results from subsidy reestimates which are funded in the following year.

AGENCY FINANCIAL REPORT • FY 2013 55
F I N A N C I A L R E PO RTI N G

Unexpended Appropriations
Unexpended Appropriations is the portion of SBA’s appropriations received which are either undelivered or
unobligated. Delivered orders result in expended appropriations and reduce the total reported as Unexpended
Appropriations. Undelivered orders are the amount of orders of goods or services which have not been actually or
constructively received.

Employee Benefits
Leave
A liability for employee annual leave is accrued as it is earned and reduced as leave is taken. Each year the balance
of accrued annual leave is adjusted to reflect current pay rates as well as forfeited “use or lose” leave. Amounts are
reported as unfunded to the extent current or prior year appropriations are not available to fund annual leave earned
but not taken. Sick leave and other types of non-vested leave are expensed as taken.

Employee Health and Life Insurance Benefits
SBA employees may choose to participate in the contributory Federal Employees Health Benefit and the Federal
Employees Group Life Insurance programs. The SBA matches a portion of the employee contributions to each
program. Such matching contributions are recognized as current operating expenses.

Employee Pension Benefits
SBA employees participate in either the Civil Service Retirement System or the Federal Employees Retirement System
and Social Security. These systems provide benefits upon retirement and in the event of death, disability or other
termination of employment and may also provide pre-retirement benefits. They may also include benefits to survivors
and their dependents, and they may contain early retirement or other special features. SBA’s contributions to both
retirement plans, as well as to the government-wide Federal Insurance Contribution Act, administered by the Social
Security Administration, are recognized on the Consolidated Statement of Net Cost as current operating expenses.

Federal employee benefits also include the Thrift Savings Plan. For FERS employees the SBA matches employee
contributions to the plan, subject to limitations. The matching contributions are recognized as current operating
expenses.

Imputed Financing Costs
The SBA recognizes the full cost of providing all employee benefits and future retirement benefits, including life
and health insurance, at the time employee services are rendered. Eligible retired SBA employees can continue to
participate in health and life insurance plans. The cost of these benefits is funded through Agency contributions,
employee compensation to the extent withheld from employee and retiree pay, from matching of employee
withholding for Thrift Savings Plan and FICA, and by the Office of Personnel Management which administers the
retirement programs for SBA employees.

The OPM calculates imputed costs as the actuarial present value of future benefits attributed to services rendered by
covered employees and eligible retired SBA employees during the accounting period, net of the amounts contributed
by employees, retirees and the Agency. The SBA recognizes these imputed costs in the Statement of Net Cost and
imputed financing in determining SBA’s net position.

Federal Employees’ Compensation Act
The Federal Employees’ Compensation Act provides income and medical cost protection to covered federal civilian
employees injured on the job and to beneficiaries of employees whose deaths are attributable to job-related injury
or disease. The FECA program is administered by the Department of Labor. Labor pays valid claims as they occur,
which are billed to the SBA annually and funded and paid approximately 15 months later. Labor also calculates
an estimated actuarial liability for future benefits based upon historical experience and other economic variables.

56 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

Projected annual benefit payments are then discounted to present value using the forecasted interest rates for 10-
year Treasury notes and bonds published by the OMB in its economic assumptions for the federal budget. The SBA
recognizes a current unfunded cost for the actual claims paid and the change in the FECA actuarial liability each year.

NOTE 2 FUND BALANCE WITH TREASURY
The Department of the Treasury processes cash receipts and disbursements on SBA’s behalf to pay liabilities and
finance loan program costs. Cash receipts are deposited into SBA’s account at the Treasury. SBA’s fund balances
with the Treasury are available to make expenditures to liquidate allowable obligations, except for the Non-entity
Fund Balance which is not available to the SBA to obligate or expend. Separate records are maintained for SBA’s
program, financing, liquidating 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, 2013 2012
Appropriated Funds $ 1,835,332 $ 1,398,400
Financing Funds 4,261,451 4,790,763
Liquidating Funds 28,338 22,896
Revolving Fund 73,343 61,457
Trust Fund 136 142
Total Entity Fund Balance with Treasury 6,198,600 6,273,658
Non-entity Fund Balance 4 5
Total Fund Balance with Treasury $ 6,198,604 $ 6,273,663

Status of Fund Balance with Treasury
Unobligated Balance Available $ 1,448,404 $ 2,712,523
Unobligated Balance Unavailable 3,985,582 2,919,845
Obligated Balance Not Yet Disbursed 1,044,962 721,488
Borrowing Authority Not Converted to Funds (280,348) (80,198)
Nonbudgetary 4 5
Total Fund Balance with Treasury $ 6,198,604 $ 6,273,663

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 payments 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 SBA’s account at the Treasury using an electronic deposit
system. At the end of the fiscal year, collections temporarily held by SBA field offices pending deposit are recorded as
Undeposited Collections - Cash in Transit and totaled $3.9 million and $5.5 million at September 30, 2013 and 2012.

AGENCY FINANCIAL REPORT • FY 2013 57
F I N A N C I A L R E PO RTI N G

NOTE 4 FIDUCIARY ACTIVITIES: MASTER RESERVE FUND
AND MASTER RESERVE ACCOUNT
Fiduciary activities are the receipt, management, protection, accounting, investment and disposition by the federal
government of cash or other assets in which non-federal entities have an ownership interest that the federal govern-
ment must uphold. Fiduciary cash and other assets are not assets of the government, and are not recognized on
SBA’s proprietary statements, but they are required to be disclosed in the notes to SBA’s financial statements. SBA’s
fiduciary balances are on deposit in commercial banks.

The Master Reserve Fund is a fiduciary activity administered by SBA’s fiscal agent, Colson Inc., a unit in the Bank
of New York Mellon. The balance in the MRF is invested according to SBA policy entirely in Treasury securities
and repurchase agreements that are backed by Treasury securities. The MRF is an integral part of SBA’s 7(a) sec-
ondary market program. The MRF was authorized by the Small Business Secondary Market Improvement Act of
1984 to facilitate the pooling of 7(a) guarantied loans that are purchased by secondary market investors. The 7(a)
secondary market program includes SBA’s guaranty of timely payment, as well as a default guaranty, to 7(a) second-
ary market investors. There was $20.5 billion and $19.2 billion of outstanding SBA guarantied 7(a) loan principal
in the secondary market at September 30, 2013 and 2012.

The Master Reserve Account is also an SBA fiduciary activity. The MRA is now administered for the SBA by Wells
Fargo after it assumed the responsibility from a previous agent in March 2013. The balance in the MRA is invested
entirely in Treasury securities. The MRA facilitates the operation of the 504 Certified Development Company sec-
ondary market program. The MRA was authorized by Section 505 of the Small Business Investment Act of 1958
as amended, as a vehicle to receive, temporarily hold and distribute 504 program cash flows. The MRA receives
monthly payments from the 504 borrowers and retains the payments until a semi-annual debenture payment is due
to the secondary market investors. The 504 secondary market program includes SBA’s guaranty of timely payment,
as well as a default guaranty, to 504 secondary market investors. There was $28.1 billion and $26.2 billion of SBA
guarantied 504 debentures outstanding in the secondary market at September 30, 2013 and 2012.

The composition of the combined MRF and MRA and a reconciliation of the changes in the assets are included in
the following table.

Master Reserve Fund and Master Reserve Account
(Dollars in Thousands)

FIDUCIARY ASSETS
AS OF SEPTEMBER 30, 2013 2012
Short Term Securities
Money Market Funds $ 714,419 $ 8,357
Repurchase Agreements 567,511 1,015,810
Total Short Term Securities 1,281,930 1,024,167

Long Term Securities
Treasury Notes Including Interest 2,087,658 1,958,378
Total Long Term Securities 2,087,658 1,958,378

Net Assets $ 3,369,588 $ 2,982,545

58 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

Master Reserve Fund and Master Reserve Account (continued)
(Dollars in Thousands)

RECONCILIATION OF FIDUCIARY ASSETS
FOR THE YEARS ENDING SEPTEMBER 30, 2013 2012
Beginning Net Assets $ 2,982,545 $ 2,777,147
Receipts
Earned Income 41,960 44,062
Contributions 11,524,209 7,968,441
Net Realized Gain (Loss) (1,366) 1,347
Total Receipts 11,564,803 8,013,850

Less Disbursements
Payments to Investors 11,177,760 7,808,452
Total Disbursements 11,177,760 7,808,452

Ending Net Assets $ 3,369,588 $ 2,982,545

NOTE 5 ACCOUNTS RECEIVABLE
Accounts receivable include amounts owed by the public for guaranty fees in SBA’s loan and surety bond programs,
refunds due from employees and others, as well as other amounts owed by lenders on guarantied loans purchased by the
SBA. An Allowance for Loss on uncollectible Surety Bond Guaranty fees is based on an aging of delinquent balances.
The uncollectible amount for refunds and loan guaranty fees is not significant and no allowance is provided. Amounts
over 180 days past due on guarantied loans purchased by the SBA are written off for financial reporting purposes.

(Dollars in Thousands)

AS OF SEPTEMBER 30, 2013 2012
Public
Guaranty Fees Receivable $ 78,355 $ 66,184
Refunds 77 271
Other 5,670 5,971
Total Public 84,102 72,426
Allowance For Loss (5) (3)
Net Public $ 84,097 $ 72,423

AGENCY FINANCIAL REPORT • FY 2013 59
F I N A N C I A L R E PO RTI N G

NOTE 6 CREDIT PROGRAM RECEIVABLES AND LIABILITY FOR LOAN
GUARANTIES
A. Loan Program Descriptions and Cost Determinations
Loan Program Descriptions
The SBA administers guarantied and direct loan programs that help small businesses obtain financing, and a direct loan
program that assists homeowners, renters and businesses to recover from disasters.

Major Direct Loan and Loan Guaranty Programs
Program group Program type Program
Disaster Direct Disaster Assistance Loans
Business Guarantied 7(a) Loan Guaranty
Business Guarantied 504 Certified Development Company
Business Guarantied 504 First Mortgage Loan Pooling
Business Guarantied 504 CDC - Debt Refinancing
Business Guarantied Small Business Investment Company Debentures
Business Direct 7(m) Microloan

SBA’s Disaster Assistance Loan program makes direct loans to disaster victims under four categories: (1) loans for homes
and personal property; (2) physical disaster loans to businesses of any size; (3) economic injury loans to small businesses
without credit available elsewhere; and (4) economic injury loans to eligible businesses affected by essential employees
called up to active duty in the military reserves. The maximum interest rate is 4 percent for loan applicants without
credit available elsewhere and 8 percent for applicants with credit available elsewhere.

SBA’s business loan programs include its flagship 7(a) Loan Guaranty program in which the SBA guarantees up to 90
percent of the principal amount of loans made by banks and other lending institutions to small businesses not able to
obtain credit elsewhere.

The Section 504 Certified Development Company program guarantees 100 percent of the principal and interest pay-
ments on debentures issued by development companies that make small business loans secured primarily by real estate.
The 504 First Mortgage Loan Pooling program was authorized by the American Recovery and Reinvestment Act of 2009
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 businesses. The 504 CDC - Debt Refinanc-
ing program that was authorized by the Small Business Jobs Act of 2010 supported small businesses ability to restructure
their collateralized debt.

The Small Business Investment Company Debentures program guarantees principal and interest payments on securities
issued by investment capital firms, which in turn make investments in small businesses.

The 7(m) Microloan program provides direct loans to nonprofit intermediaries, which use these funds to make loans up
to $50,000 to eligible small businesses.

Credit Program Receivables and Liability for Loan Guaranties
The Federal Credit Reform Act of 1990 governs direct loans made after FY 1991. FCRA loans are valued at the present
value of expected future cash flows, discounted at the interest rate of marketable Treasury securities. The subsidy allow-
ance represents the difference between the outstanding loans receivable balance and the net present value of the estimated
cash flows of the loans over their remaining term. The subsidy allowance is subtracted from the outstanding loans
receivable balance to obtain the net loans receivable balance. FCRA also governs loan guaranties made after FY 1991. A
liability for outstanding guaranties is included on SBA’s Balance Sheet. The liability is determined by calculating the

60 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

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 outstanding
guaranties is established based on historical experience. Guarantied loans purchased upon borrower default are estab-
lished as loan receivables with an allowance for losses based on historical loss experience.

The SBA advances payments semiannually to honor 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 bor-
rower payments may not repay advances, balances that remain collectible are reported as credit program receivables.

Subsidy Funding under Federal Credit Reform
FCRA requires that the credit subsidy costs of direct loans and loan guaranties be expensed in the year loans are dis-
bursed. The credit subsidy cost is the net present value of expected cash inflows and outflows over the life of a guarantied
loan, or the difference between the net present value of expected cash flows and the face value of a direct loan. The cost
expressed as a percentage of loans disbursed is termed the subsidy rate. The SBA receives appropriations annually to fund
its credit programs based on the subsidy rate that applies to the credit program level approved by Congress. The SBA
records subsidy expenses when loans are disbursed. In accordance with FCRA, subsidy costs are reestimated annually.

Interest Receivable
Interest receivable is comprised of accrued interest on loans receivable and purchased interest related to defaulted guar-
antied loans. Interest income is accrued at the contractual rate on the outstanding principal amount and is reduced by
the amount of interest income accrued on non-performing loans in excess of 90 days delinquent. Purchased interest is
carried at cost. A 100 percent loss allowance is established for all purchased interest on non-performing loans.

Foreclosed Property
Foreclosed property is comprised of real and business-related and personal property acquired through foreclosure on
direct loans and defaulted loan guaranties. Properties acquired as a result of defaulted loans committed after FY 1991
are shown at recoverable value which is adjusted to the present value of expected future cash flows for financial statement
presentation through the allowance for subsidy. Other foreclosed property is shown at the appraised value. At Sep-
tember 30, 2013, SBA’s foreclosed property was $47.3 million related to 84 loans. The properties had been held for an
average of 868 days. At September 30, 2012, foreclosed property was $45.6 million related to 78 loans. The properties
had been held for an average of 725 days.

Valuation Methodology for Post-1991 Direct Loans and Loan Guaranties
The value of direct and guarantied loans committed after FY 1991 is based on the net present value of their expected
future cash flows. The SBA estimates future cash flows for guarantied and direct loans using economic and financial
credit subsidy models. The SBA has developed a customized credit subsidy model for each of its major loan guaranty
and direct loan programs.

SBA’s models vary in the specific methodologies employed to forecast future program cash flows. In general, however,
models for all major credit programs use historical data as the basis for assumptions about future program performance
and then translate these assumptions into nominal cash flow estimates by applying rules about program structure.
Nominal cash flow forecasts are discounted using the Office of Management and Budget’s Credit Subsidy Calculator that
has both forecasted and actual Treasury interest rates.

Historical data is used as the basis for program performance assumptions. The historical data undergoes quality review
and analysis prior to its use in developing model assumptions.

AGENCY FINANCIAL REPORT • FY 2013 61
F I N A N C I A L R E PO RTI N G

Key input to the subsidy models varies by program. Input includes items such as:

• Contractual terms of the loan or guaranty such as loan amount, interest rate, maturity and grace period
• Borrower characteristics
• Loan origination methods
• Economic indicators such as gross domestic product growth and unemployment rate
• Loan performance assumptions, for example: conditional purchase and prepayment rates and recovery rates
• Loan fee rates

Valuation Methodology for Pre-1992 Direct Loans and Loan Guaranties
The SBA values pre-credit reform direct and defaulted guarantied loans by estimating an allowance for loan losses. This
allowance is offset against gross loan receivables to obtain SBA’s expected net collections from these assets. The SBA es-
tablishes a 100 percent allowance for pre-credit reform direct and guarantied loans that are past due more than 180 days.
A liability is also established for active pre-credit reform loan guaranties. The liability is estimated based on historical
experience.

SUCCESS STORY: Woman-Owned Bio Tech Firm
Exports Globally
ImmunoReagents, Inc.,
Raleigh, North Carolina

Dr. Ann Black started a one-woman biotech manufacturing facility
in an 800 square foot lab at North Carolina State University. She was
chief cook and bottle washer; she did everything. ImmunoReagents,
Inc. opened in 2005 and started with four products. It now offers
more than 2,000 products to a research and diagnostic marketplace
that extends to 22 countries in Europe and Asia. During 2012, the
company experienced a 240 percent increase in export sales growth.

Dr. Black has a doctorate in cell biology and anatomy and has worked in antibody production and purifica-
tion for more than 30 years. However, she realized she would need some help to sell her products globally.
The firm took advantage of different SBA programs to grow the business and enhance their export efforts.
She contacted the SBA Women’s Business Center in Durham and received help with business planning. She
worked with a counselor at the North Carolina Small Business and Technology Development Center where
she worked to create an export strategy, evaluate pricing and logistics. This helped ImmunoReagents become
more efficient when shipping internationally. Dr. Black used an SBA State Trade and Export Promotion
(STEP) grant to attend two international biotech conferences, including BioSpain, in Bilbao. She made
valuable connections and increased her distribution capacity. The North Carolina Department of Commerce
helped her to find which countries might be appropriate markets and answered questions about foreign
distributors. “Our export success is a direct result of working the excellent export resources from the federal
government and the State of North Carolina,” said Dr. Black.

In 2013, Dr. Black was selected as the SBA North Carolina Exporter of the Year.

62 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

B. Credit Program Receivables and Related Foreclosed Property, Net
(Dollars in Thousands)

AS OF SEPTEMBER 30, 2013 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 8,958 $ 162,725 $ 171,683
Interest Receivable 2,040 757 2,797
Foreclosed Property 3,108 – 3,108
Allowance (7,036) (17,831) (24,867)
Total Direct Business Loans 7,070 145,651 152,721

Direct Disaster Loans
Disaster Loans Receivable 5,226 7,171,812 7,177,038
Interest Receivable 223 34,581 34,804
Foreclosed Property – 1,690 1,690
Allowance (852) (1,345,560) (1,346,412)
Total Direct Disaster Loans 4,597 5,862,523 5,867,120

Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 9,264 7,674,923 7,684,187
Other Loans Receivable (see note below) – 326,765 326,765
Interest Receivable 580 115,425 116,005
Foreclosed Property 2,012 40,501 42,513
Allowance (10,555) (6,644,308) (6,654,863)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 1,301 1,513,306 1,514,607

Total Credit Program Receivables & Related Foreclosed Property, Net $ 7,534,448

AS OF SEPTEMBER 30, 2012 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 9,402 $ 142,536 $ 151,938
Interest Receivable 1,936 945 2,881
Foreclosed Property 3,107 – 3,107
Allowance (1,188) (34,197) (35,385)
Total Direct Business Loans 13,257 109,284 122,541

Direct Disaster Loans
Disaster Loans Receivable 6,634 7,174,910 7,181,544
Interest Receivable 45 34,733 34,778
Foreclosed Property – 1,498 1,498
Allowance (966) (1,403,968) (1,404,934)
Total Direct Disaster Loans 5,713 5,807,173 5,812,886

Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 26,529 8,079,439 8,105,968
Other Loans Receivable (see note below) – 443,904 443,904
Interest Receivable 747 87,968 88,715
Foreclosed Property 3,244 37,737 40,981
Allowance (20,227) (6,940,473) (6,960,700)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 10,293 1,708,575 1,718,868

Total Credit Program Receivables & Related Foreclosed Property, Net $ 7,654,295

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

AGENCY FINANCIAL REPORT • FY 2013 63
F I N A N C I A L R E PO RTI N G

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

DIRECT LOANS
New Loans Disbursed During the Year Ending September 30, 2013 2012
Business Direct Loan Program $ 42,305 $ 40,316
Disaster Loan Program 813,711 481,741
Total Direct Loans Disbursed $ 856,016 $ $522,057

Outstanding Loan Obligations as of September 30, 2013 2012
Business Direct Loan Program $ 54,568 $ 56,240
Disaster Loan Program 605,591 181,145
Total Direct Loan Obligations $ 660,159 $ $237,385

GUARANTIED LOANS
New Loans Disbursed During the Year Ending September 30, 2013 2012
Total Principal Disbursed at Face Value $ 21,660,417 $ 19,533,852
Total Principal Disbursed Guarantied by the SBA 17,703,965 15,993,888

Outstanding Loan Obligations as of September 30, 2013 2012
Business Guarantied Loan Programs $ 14,370,509 $ 13,988,806

Loans Outstanding as of September 30, 2013 2012
Total Principal Outstanding at Face Value $ 93,107,751 $ 87,433,714
Total Principal Outstanding Guarantied by the SBA 79,064,486 74,371,378

SBA’s guarantied loan servicing agent provides data to the SBA on the unpaid principal balance of guarantied loans within a precision of less than 1 percent
due to timing.

D. Subsidy Cost Allowance Balances
(Dollars in Thousands)

For the Years Ending September 30, 2013 2012
Post-1991 Business Direct and Purchased Guarantied Loans
Beginning Balance of Allowance Account $ 6,974,670 $ 6,719,794
Current Year’s Subsidy (see 6G for breakdown by component) 8,310 6,700
Loans Written Off (2,001,738) (2,173,585)
Subsidy Amortization (1,446) (2,223)
Allowance Related to Guarantied Loans Purchased This Year 1,538,325 2,337,586
Miscellaneous Recoveries and Costs 167,295 88,300
Balance of Subsidy Allowance Account before Reestimates 6,685,416 6,976,572
Technical Assumptions/Default Reestimates (23,277) (1,902)
Ending Balance of Allowance Account $ 6,662,139 $ 6,974,670

Post-1991 Disaster Direct Loans
Beginning Balance of Allowance Account $ 1,403,968 $ 1,486,011
Current Year’s Subsidy (see 6G for breakdown by component) 90,673 58,307
Loans Written Off (179,963) (169,471)
Subsidy Amortization (20,364) (26,784)
Miscellaneous Recoveries and Costs 53,314 47,303
Balance of Subsidy Allowance Account before Reestimates 1,347,628 1,395,366
Technical Assumptions/Default Reestimates (2,068) 8,602
Ending Balance of Allowance Account $ 1,345,560 $ 1,403,968

64 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

E. Liability for Loan Guaranties
(Dollars in Thousands)

For the Years Ending September 30, 2013 2012
Pre-1992 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties $ 109 $ 306
Adjustment to Expected Losses, Guaranties Outstanding (64) (197)
Ending Balance of Liability for Loan Guaranties 45 109

Post-1991 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties 3,725,842 4,741,136
Current Year’s Subsidy (see 6G for breakdown by component) 275,742 197,559
Fees 1,055,469 822,503
Interest Accumulation Factor 186,436 189,787
Claim Payments to Lenders (2,116,250) (2,567,534)
Adjustment Due to Reestimate & Guarantied Loan Purchases 577,925 229,948
Miscellaneous Recoveries and Costs 10,088 31,132
Balance of Liability for Loan Guaranties before Reestimates 3,715,252 3,644,531
Technical Assumptions/Default Reestimates (728,034) 81,311
Ending Balance of Liability for Loan Guaranties 2,987,218 3,725,842

Total Ending Balance of Liability for Loan Guaranties $ 2,987,263 $ 3,725,951

F. FY 2013 Subsidy Rates by Program and Component
LOAN PROGRAM Total Financing Default Other Fee
Subsidy
Guaranty
7(a) 1.64% 0.00% 6.01% 0.00% -4.37%
504 CDC 2.02% 0.00% 10.13% 0.78% -8.89%
SBIC Debentures 0.00% 0.00% 7.38% 0.13% -7.51%

Direct
Disaster 11.11% 3.28% 13.54% -5.71% 0.00%
Microloan 15.71% 5.18% 1.92% 8.61% 0.00%

The subsidy rates in Table F pertain only to loans obligated in the current year. These rates cannot be applied to the loans
disbursed during the current year to yield the subsidy expense because loans disbursed during the current year include
loans obligated in prior years. 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.

DID
YOU Since 2008, businesses participating in SBA’s Emerging Leaders program
have accessed $26 million in new financing, obtained $450 million
KNOW in government contracts, and over 60 percent of the businesses have
increased their revenue.

AGENCY FINANCIAL REPORT • FY 2013 65
F I N A N C I A L R E PO RTI N G

G. Subsidy Expense by Component
(Dollars in Thousands)

For the Years Ending September 30, 2013 2012
Business Loan Guaranties
Interest $ (44) $ 16
Defaults 1,493,312 835,394
Fees (1,250,050) (649,395)
Other 32,524 11,544
Subsidy Expense Before Reestimates and Loan Modifications 275,742 197,559
Reestimates (728,034) 81,311
Total Guarantied Business Loan Subsidy Expense $ (452,292) $ 278,870

Business Direct Loans
Interest $ 5,130 $ 3,440
Defaults 1,024 896
Other 2,156 2,364
Subsidy Expense Before Reestimates 8,310 6,700
Reestimates (23,277) (1,902)
Total Business Direct Loan Subsidy Expense $ (14,967) $ 4,798

Disaster Direct Loans
Interest $ 28,438 $ 29,503
Defaults 108,852 57,430
Other (46,617) (28,626)
Subsidy Expense Before Reestimates 90,673 58,307
Reestimates (2,068) 8,602
Total Disaster Direct Loan Subsidy Expense $ 88,605 $ 66,909

H. Administrative Expense
The SBA received appropriations to administer its credit programs, including the making, servicing and liquidation of its
loans and guaranties. Amounts expensed in the Statement of Net Cost are:

(Dollars in Thousands)

For the Years Ending September 30, 2013 2012
Disaster Direct Loan Programs $ 273,718 $ 189,704
Business Loan Programs 142,044 148,078
Total Administrative Expense $ 415,762 $ 337,782

I. Credit Program Subsidy Reestimates
Reestimates are performed annually, on a cohort-by-cohort basis. The purpose of reestimates is to update original
program cost estimates to reflect actual cash flow experience as well as changes in forecasts of future cash flows. Forecasts
of future cash flows are updated based on additional information about historical program performance, revised
expectations for future economic conditions, and enhancements to cash flow projection methods. Financial statement
reestimates were performed using a full year of performance data for FY 2013 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.

66 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

BUSINESS GUARANTIED LOAN PROGRAMS
Net subsidy reestimates of business guarantied loan programs for the years ending September 30, 2013 and 2012
are as follows:
(Dollars in Thousands)

Guarantied Loan Program Subsidy Reestimates 2013 2012
7(a) $ (391,029) $ (8,131)
7(a) - Recovery Act (44,930) (402,448)
7(a) - Jobs Act (78,740) (241,334)
Dealer Floor Plan (937) (871)
504 CDC (128,079) 357,707
504 CDC - Recovery Act (112,787) (24,712)
504 CDC - Jobs Act (29,298) 22,684
504 CDC - Debt Refinancing (1,308) 32,352
504 First Mortgage Loan Pooling - Recovery Act (4,924) 2,309
SBIC Debentures 31,577 (70,163)
SBIC Participating Securities 48,388 444,090
Secondary Market Guaranty Program 7,980 (12,376)
ARC - Recovery Act (22,434) (28,625)
All Other Guaranty Loan Programs (1,513) 10,829
Total Guarantied Loan Program Subsidy Reestimates $ (728,034) $ 81,311

The 7(a) Loan Guaranty program, SBA’s flagship and largest program had a net downward reestimate in FY 2013 of
$391.0 million. Cohorts 2010 through 2012 performed significantly better than projected in FY 2013, while loans in
cohorts 2002 through 2006 performed slightly worse than projected. Additionally, FY 2013 loan performance contrib-
uted to updated model assumptions, which resulted in decreased purchase projections. The remainder of the reestimate
was due to decreased loss projections for the 2013 cohort as compared to the original loss projections.

The 7(a) Recovery Act program had a net downward reestimate in FY 2013 of $44.9 million. A significant portion of
the reestimate is due to better than projected FY 2013 loan performance. Purchases in the 7(a) Recovery Act program
during FY 2013 were less than projected. Additionally, FY 2013 loan performance contributed to updated model as-
sumptions, which resulted in slightly decreased purchase projections for all 7(a) Recovery Act program cohorts.

The 7(a) Jobs Act cohort had a net downward reestimate in FY 2013 of $78.7 million. A significant portion of the rees-
timate is due to notably better than projected FY 2013 loan performance. Actual purchases in the 7(a) Jobs Act cohort
during FY 2013 were less than half of the purchases projected for FY 2013.

The Dealer Floor Plan program had a net downward reestimate of $0.9 million, due to better than projected perfor-
mance during FY 2013.

The 504 Certified Development Company program had a net downward reestimate of $128.1 million. The reestimate is
primarily due to better than projected FY 2013 loan performance across all cohorts except for the 2005 cohort. Al-
though some cohorts, most notably 2002 through 2006, had higher than expected purchases, these unexpected losses
were offset by higher than expected recoveries in all but the 2005 cohort. The remainder of the reestimate was due to
decreased loss projections for the 2013 cohort as compared to the original loss projections.

The 504 Recovery Act program had a net downward reestimate of $112.8 million. The reestimate is due to better than
projected FY 2013 loan performance. Actual purchases in the 504 Recovery Act program were less than half of the
purchases projected for FY 2013.

AGENCY FINANCIAL REPORT • FY 2013 67
F I N A N C I A L R E PO RTI N G

The 504 Jobs Act program had a net downward reestimate of $29.3 million. The reestimate is due to better than project-
ed FY 2013 loan performance. Actual purchases in the 504 Jobs Act program were less than a quarter of the purchases
projected for FY 2013.

The 504 Debt Refinancing program had a net downward reestimate of $1.3 million. For all cohorts of the 504 Debt
Refinancing program, actual purchases in FY 2013 were lower than projected.

The Section 504 First Mortgage Loan Pooling program had a net downward reestimate of $4.9 million. For all cohorts
of the Section 504 First Mortgage Loan Pooling program, actual purchases in FY 2013 were lower than projected.

The SBIC Debentures program had a net upward reestimate of $31.6 million. In general, the upward reestimate was due
to worse than projected loan performance in FY 2013, especially in the 2002 and 2008-2009 cohorts. Actual purchases
for these cohorts were larger and actual recoveries were lower in FY 2013 than projected. The 2003 and 2012 cohorts
had better than projected loan performance in FY 2013. In addition, the 2003 cohort’s actual recoveries and the 2012
cohort’s actual fee inflows were higher in FY 2013 than projected. Overall, the factors contributing to an upward reesti-
mate were larger than those contributing to a downward reestimate, resulting in a net upward reestimate.

The SBIC Participating Securities program had a net upward reestimate of $48.4 million. For the 2003 cohort, actual
purchases in FY 2013 were larger than projected. For the 2004 cohort, actual profit participation inflows and actual
reimbursement of prioritized payment inflows were lower than projected. Additionally, FY 2013 loan performance con-
tributed to updated model assumptions, which resulted in increased projections of purchases and decreased projections of
reimbursement of prioritized payment inflows for the 2004 cohort.

The Secondary Market Guaranty program had a net upward reestimate of $8.0 million. This upward reestimate was due
to a decrease in the projected interest income earned by Treasury securities invested in by the Master Reserve Fund.

The America’s Recovery Capital program had a net downward reestimate of $22.4 million. The majority of this rees-
timate is due to better than projected loan performance in FY 2013. The remainder of the reestimate is mostly due to
lower purchase projections, as a result of recent actual loan performance.

BUSINESS DIRECT LOAN PROGRAMS
Net subsidy reestimates for business direct loan programs follows:
(Dollars in Thousands)

Business Direct Loan Program Subsidy Reestimates 2013 2012
7(m) Microloan $ (17,653) $ (2,350)
7(m) Microloan - Recovery Act (4,719) 806
Intermediary Lending Pilot Program (1,148) –
SBIC Preferred Stock 289 (101)
All Other Direct Loan Programs (46) (257)
Total Direct Loan Program Subsidy Reestimates $ (23,277) $ (1,902)

The 7(m) Direct Microloan program had a net downward reestimate of $17.7 million. The reestimate was largely due
to updated methodologies for assumption curves which allow for more accurate projections of future cash flows. These
methodology changes resulted in increased projections of repayment cash flows for most cohorts.

The 7(m) Direct Microloan Recovery Act program had a downward reestimate of $4.7 million. The reestimate was largely
due to updated methodologies for assumption curves which allow for more accurate projections of future cash flows. These
methodology changes resulted in increased projections of repayment cash flows for the two Recovery Act cohorts.

68 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

The Intermediary Lending Pilot program had a net downward reestimate of $1.1million. The reestimate was largely due
to updated methodologies for assumption curves which allow for more accurate projections of future cash flows. These
methodology changes resulted in increased projections of repayment cash flows for the 2011 cohort.

DISASTER DIRECT LOAN PROGRAM
Net subsidy reestimates for the disaster direct loan programs follows:
(Dollars in Thousands)

Disaster Direct Loan Program Subsidy Reestimates 2013 2012
Disaster $ (2,068) $ 8,602
Total Disaster Direct Loan Program Subsidy Reestimates $ (2,068) $ 8,602

The Disaster Assistance program had a net downward reestimate of $2.1 million. Most post-2000 cohorts experienced down-
ward reestimates due to better than expected FY 2013 loan performance. The 2012 cohort experienced the largest downward
reestimate due to updated present value discount factors applied to projected cash flows. The 2013 cohort experienced the
largest upward reestimate due to the actual average borrower’s interest rate being lower than the original projected average
borrower’s interest rate.

NOTE 7 GENERAL PROPERTY AND EQUIPMENT, NET
The SBA capitalizes equipment with a cost of $50,000 or more per unit and a useful life of 2 years or more at full cost
and depreciates using the straight-line method over the useful life. The SBA expenses other equipment items not meet-
ing 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 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 amor-
tized 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.

DID The SBA partners with 16 organizations that serve as Veterans Business
YOU Outreach Centers to provide entrepreneurial development services such
KNOW as business training, counseling and mentoring to veterans.

For information, go to: www.sba.gov/content/
veterans-business-outreach-centers.

AGENCY FINANCIAL REPORT • FY 2013 69
F I N A N C I A L R E PO RTI N G

Assets meeting the capitalization thresholds at September 30, 2013 and 2012 are detailed below.
(Dollars in Thousands)

2013 2012
Equipment $ 2,675 $ 2,602
Accumulated Depreciation (2,183) (1,875)
Net 492 727

Leasehold Improvements 1,811 1,811
Amortization of Leasehold Improvements (702) (551)
Net 1,109 1,260

Software in Development 4,572 131
Software in Use 30,546 30,546
Amortization of Software in Use (30,546) (30,546)
Net 4,572 131

Total General Property and Equipment, Net $ 6,173 $ 2,118

NOTE 8 LIABILITIES NOT COVERED BY BUDGETARY RESOURCES
Liabilities not covered by budgetary resources are liabilities for which congressional action is needed before budgetary
resources can be provided. These unfunded liabilities at September 30, 2013 and 2012 consisted of:
(Dollars in Thousands)

2013 2012
Intragovernmental Liabilities - Other
Employment Taxes Payable $ 1,496 $ 1,815
Federal Employees’ Compensation Act Payable 5,854 5,808
Total Intragovernmental Liabilities - Other 7,350 7,623

Federal Employees’ Compensation Act Actuarial Liability 33,703 31,591

Surety Bond Guarantee Program Future Claims 31,029 22,606

Other Liabilities
Prior Liens on Real Estate Payable 59 59
Accrued Unfunded Annual Leave 26,871 25,758
Total Other Liabilities 26,930 25,817

Total Liabilities Not Covered by Budgetary Resources $ 99,012 $ 87,637

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

70 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

NOTE 9 DEBT
Borrowings payable to the Treasury result from loans provided by the Treasury to fund the portion of direct loans not
covered by subsidy appropriations and to fund the payment of downward subsidy reestimates and other credit program
disbursements (see Note 15). The SBA makes periodic principal repayments to the Treasury based on the analysis of its
cash balances and future disbursement needs.

Borrowings payable to the Federal Financing Bank are the result of its financing of SBA Section 503 Debentures issued
prior to 1988.

All debt is intragovernmental and covered by budgetary resources. Debt transactions for the periods ending September
30, 2013 and 2012 and resulting balances are:

INTRAGOVERNMENTAL DEBT
(Dollars in Thousands)

Department of Treasury 2013 2012
Beginning Balance $ 7,919,741 $ 11,189,686
New Borrowing 1,320,219 1,049,171
Repayments (1,151,861) (4,319,116)
Ending Balance $ 8,088,099 $ 7,919,741

Federal Financing Bank 2013 2012
Beginning Balance $ 60 $ 593
Repayments (58) (518)
Change in Interest Payable (2) (15)
Ending Balance $ – $ 60

Total Debt $ 8,088,099 $ 7,919,801

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 Liquidat-
ing 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, 2013 2012
Pollution Control Equipment Guaranty Fund $ 1,119 $ 2,125
Disaster Loan Fund 8,148 9,748
Business Loan and Investment Fund 32,431 40,327
Total Due Treasury $ 41,698 $ 52,200

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NOTE 11 OTHER LIABILITIES
Other liabilities at September 30th were:
(Dollars in Thousands)

2013 2012
OTHER LIABILITIES - INTRAGOVERNMENTAL
Entity
Current
Employment Taxes Payable $ 1,817 $ 4,380
Advances from Other Agencies 478 721
Total Current 2,295 5,101
Non-current
Employment Taxes Payable 1,496 1,815
Federal Employees’ Compensation Act Payable 5,854 5,808
Payable to Federal Financing Bank - (53)
Total Non-current 7,350 7,570
Total Entity 9,645 12,671
Non-entity
Current
Payable to Treasury 7 7
Total Other Liabilities - Intragovernmental $ 9,652 $ 12,678
OTHER LIABILITIES - PUBLIC
Entity
Current
Accrued Funded Payroll and Benefits $ 7,753 $ 19,017
Accrued Unfunded Annual Leave 26,871 25,758
Suspense Accounts 189 241
Total Current 34,813 45,016
Non-current
Prior Liens on Real Estate Payable 59 59
Total Non-current 59 59
Total Entity 34,872 45,075
Non-entity
Current
Non-entity Current Payable 4 4
Total Other Liabilities - Public $ 34,876 $ 45,079

NOTE 12 LEASES
The SBA leases all of its facilities from the General Services Administration. The SBA enters into an Occupancy Agree-
ment with GSA for each facility. GSA, in turn, leases commercial facilities or provides space in federal buildings. Agree-
ments for space in federal buildings can be vacated with 120 to 180 days notice. However, the SBA anticipates continu-
ing 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 2013 and 2012 facilities lease costs were $44.7 million and $47.2 million.
Future lease payments assume a 3 percent inflation factor from the following years’ projected totals as estimated by GSA,
as well as continued costs during the next 5 years as leases expire and new leases are added. Payments after 5 years reflect
only current leases that will still be in effect then, projected to the end of each lease term.

72 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

FUTURE FACILITIES OPERATING LEASE PAYMENTS
(Dollars in Thousands)

Fiscal Year Lease Payments
2014 $ 45,105
2015 46,458
2016 47,852
2017 49,288
2018 50,766
After 2018 49,502
Total $ 288,971

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 adjustment 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 reduction of loan subsidy expense and the associated impact on the net cost. The non-entity Treasury general
funds contain a corresponding account receivable in anticipation of the receipt of the downward reestimates in the
following year and a Downward Reestimate Payable to the Treasury.

For consolidated financial statement presentation, the SBA eliminates the payable to the non-entity fund and the non-
entity Treasury general fund receivable from the financing funds since both are included in SBA’s reporting entity. The
Downward Reestimate Payable to the Treasury in the non-entity Treasury general fund is not eliminated and is reflected
on the Balance Sheet as a liability line item.

(Dollars in Thousands)

As of September 30, 2013 2012
Entity
Financing Fund Payable $ (1,116,192) $ (1,689,133)

Non-entity
Miscellaneous Receipts Fund Receivable 1,116,192 1,689,133
Downward Reestimate Payable to Treasury (1,116,192) (1,689,133)
Balance Sheet Reported Payable $ (1,116,192) $ (1,689,133)

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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 revenue arises from exchange transactions and is deducted from the full cost of SBA’s major strategic goals to ar-
rive at net strategic goals costs. The SBA recognizes earned revenue when reimbursements are payable from other federal
agencies and the public as a result of costs incurred or services performed. A major source of earned revenue includes
interest earned on SBA’s outstanding Business and Disaster loan portfolios and interest earned on uninvested funds in the
credit reform financing accounts.

Reporting by Strategic Goal
The SBA reports costs consistent with its three strategic goals. Strategic Goal 2 costs are totally reallocated to Strategic
Goals 1 and 3 in FY 2013 as Strategic Goal 2 net costs are overhead support to program activities in Strategic Goals 1 and
3. FY 2012 costs in Strategic Goal 2 were to support Business USA, a federal data base of small business data, and there
were no Business USA net costs in FY 2013. Costs Not Assigned to Strategic Goals on the Statement of Net Cost includes
costs of congressionally mandated grant programs and the Office of the Inspector General. Congressionally mandated
programs are community enhancement projects that do not necessarily involve small business. The Office of the Inspector
General mission and funding is independent of the SBA’s.

Intragovernmental Gross Cost is incurred by the SBA in exchange transactions with other federal agencies, and Gross Cost
with the Public is incurred in exchange transactions with the Public. Intragovernmental Earned Revenue is earned by
the SBA in exchange transactions with other federal agencies, and Earned Revenue from the Public is earned in exchange
transactions with the public.

The classification as Intragovernmental Costs or Gross Cost with the Public relate to the source of goods and services
received by the SBA and not to the classification of related revenue. The classification of revenue or cost being defined
as “intragovernmental” or “public” is defined on a transaction by transaction basis. The purpose of this classification
is to enable the federal government to provide consolidated financial statements, and not to match the public and
intragovernmental revenue with costs that are incurred to produce public and intragovernmental revenue.

74 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

INTRAGOVERNMENTAL COSTS AND EXCHANGE REVENUE
(Dollars in Thousands)
For the years ended September 30, 2013 2012
STRATEGIC GOAL 1:
Growing Businesses and Creating Jobs
Intragovernmental Gross Cost $ 532,376 $ 596,821
Gross Cost with the Public 510,293 1,279,748
Total Strategic Goal 1 Gross Cost 1,042,669 1,876,569

Intragovernmental Earned Revenue 166,677 257,952
Earned Revenue from the Public 447,918 439,171
Total Strategic Goal 1 Earned Revenue 614,595 697,123

STRATEGIC GOAL 2:
Building an SBA that Meets the Needs of Today’s and Tomorrow’s
Small Businesses
Intragovernmental Gross Cost $ – $ 366
Gross Cost with the Public – 1,593
Total Strategic Goal 2 Gross Cost – 1,959

STRATEGIC GOAL 3:
Serving as the Voice for Small Business
Intragovernmental Gross Cost $ 2,613 $ 2,687
Gross Cost with the Public 10,219 11,682
Total Strategic Goal 3 Gross Cost 12,832 14,369

COST NOT ASSIGNED TO STRATEGIC GOALS
Intragovernmental Gross Cost $ 16,938 $ 14,778
Gross Cost with the Public 66,242 64,253
Total Gross Cost Not Assigned to Strategic Goals 83,180 79,031

Net Cost of Operations $ 524,086 $ 1,274,805

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, 2013 and 2012. SBA’s total budgetary resources were $4.2 billion and $5.0
billion for the years ended September 30, 2013 and 2012. Additionally, $9.9 billion and $9.4 billion of nonbudget-
ary resources including borrowing authority and collections of loan principal, interest and fees in financing funds were
reported for the years ended September 30, 2013 and 2012.

OMB Circular A-136 required a change in format for the Combined Statement of Budgetary Resources to better align
with the SF133 Report on Budget Execution and Budgetary Resources. The FY 2012 balances have been reclassified for
comparability as required by Circular A-136.

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 appropria-
tions 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

AGENCY FINANCIAL REPORT • FY 2013 75
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Financing Funds are used to account for credit program obligations made subsequent to FY 1991. Liquidating Funds are
used to account for credit program obligations made prior to FY 1992.

Decreases in projected subsidy costs in the Financing Funds are returned to the Treasury through SBA’s annual reestima-
tion process. The prior year’s ending unobligated balances in SBA’s Liquidating Funds are also transferred to the Treasury
annually.

Borrowing Authority and Terms of Borrowing
The SBA is authorized to borrow from the Treasury’s Bureau of the Fiscal Service when funds needed to disburse direct loans
and purchase guarantied loans exceed subsidy costs and collections in the nonbudgetary loan financing funds. In FY 2013
and FY 2012, the SBA received $1.5 billion and $1.1 billion of borrowing authority from the OMB. At the end of FY
2013, the SBA had $0.3 billion in borrowing authority carried over to fund direct loans and default claims to be disbursed
in the future. At the end of FY 2012, the SBA had $0.1 billion in available borrowing authority. The SBA pays interest to
the Treasury based on Treasury’s cost of funds. The rate at which interest is paid to the Treasury on the amounts borrowed
(or received from the Treasury on uninvested cash balances) in a loan financing fund for a particular cohort is a disburse-
ment-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 2013 and FY 2012, the SBA incurred $8.6 billion and $8.8 billion of direct and reimbursable obligations
of which $0.6 billion and $0.7 billion was apportioned in category A; $8.0 billion and $8.1 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, 2013 and 2012 are $5.4 billion and $5.6 billion which include $4.0 billion
and $2.9 billion of unavailable unobligated balances. These balances are unavailable primarily because they are unap-
portioned by the OMB. The SBA accumulates the majority of these unobligated balances in its nonbudgetary financ-
ing accounts during the fiscal year ($4.1 billion in FY 2013 and $4.8 billion in FY 2012) from reestimates that are used
primarily to pay default claims in the following fiscal year. In addition, unobligated balances are accumulated in budget-
ary accounts from appropriations ($1.3 billion in FY 2013 and $0.9 billion in FY 2012) that are used to finance SBA’s
ongoing program operations.

Undelivered Orders
Undelivered orders for the periods ended September 30, 2013 and 2012 were $1.2 billion and $0.7 billion.

Differences between the Statement of Budgetary Resources and the Budget of the U. S.
Government
There was no material difference between the FY 2012 Statement of Budgetary Resources and the President’s FY 2014
budget submission. The President’s Budget with actual numbers for FY 2015 has not yet been published. The SBA ex-
pects no material differences between the President’s Budget “actual” column and the FY 2013 reported results when the
budget becomes available in February 2014.

76 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

NOTE 16 RECONCILIATION OF BUDGETARY OBLIGATIONS
INCURRED TO NET COST OF OPERATIONS
The SBA presents the Statement of Net Cost using the accrual basis of accounting. This differs from the obligation-
based measurement of total resources supplied, both budgetary and from other sources, on the Statement of Budgetary
Resources.

The Federal Financial Accounting Standard No. 7 requires “a reconciliation of proprietary and budgetary information
in a way that helps users relate the two.” The focus of this presentation is to reconcile budgetary net obligations to the
net cost of operations. The objective of this information is to categorize the differences between budgetary and financial
(proprietary) accounting.

AGENCY FINANCIAL REPORT • FY 2013 77
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CONSOLIDATED RECONCILIATION OF BUDGETARY OBLIGATIONS TO NET COST

(Dollars in Thousands)

For the years ended September 30, 2013 2012
RESOURCES USED TO FINANCE ACTIVITIES
Budgetary Resources Obligated
Obligations Incurred $ 8,625,608 $ 8,767,794
Less: Spending Authority from Offsetting Collections and Recoveries 5,431,669 6,634,592
Obligations Net of Offsetting Collections and Recoveries 3,193,939 2,133,202
Less: Offsetting Receipts 1,696,979 868,367
Net Obligations 1,496,960 1,264,835
Other Resources
Imputed Financing 19,955 20,453
Other Financing Sources (1,127,912) (1,647,144)
Net Other Resources Used to Finance Activities (1,107,957) (1,626,691)
Total Resources Used to Finance Activities 389,003 (361,856)

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 (371,232) 325,086
Resources that Fund Expenses Recognized in Prior Periods (882,703) (1,817,256)
Budgetary Offsetting Collections and Receipts that Do Not Affect Net Cost of Operations
Credit Program Collections 4,540,597 6,016,599
Offsetting Receipts 1,696,979 868,367
Resources that Finance the Acquisition of Assets or Liquidation of Liabilities (5,224,054) (4,651,674)
Other - Current Year Liquidating Equity Activity 3,992 1,207
Other Resources that Do Not Affect Net Cost of Operations (27) 257
Total Resources that Do Not Finance Net Cost of Operations (236,448) 742,586

Total Resources Used to Finance the Net Cost of Operations 152,555 380,730

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 1,113 (1,139)
Upward Reestimates of Credit Subsidy Expense 362,329 882,560
Change in Revenue Receivable from Public (316) (306)
Provision for Losses on Estimated Guaranties 8,423 2,221
Change in Unfunded Employee Benefits 2,112 961
Total Components Requiring or Generating Resources in Future Periods 373,661 884,297

Components Not Requiring or Generating Resources
Depreciation or Amortization 459 632
Change in Bad Debt Expense - Pre-1992 Loans (2,582) 8,517
Other (Income) Expenses Not Requiring Budgetary Resources (7) 629
Total Components Not Requiring or Generating Resources (2,130) 9,778

Total Components of the Net Cost of Operations that Will Not
Require or Generate Resources in the Current Period 371,531 894,075
Net Cost of Operations $ 524,086 $ 1,274,805

78 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

Liabilities Not Covered by Budgetary Resources on the Balance Sheet (Note 8) differs from Components Requiring
or Generating Resources in Future Periods in this reconciliation primarily due to reestimated subsidy costs of loan
programs. The subsidy costs are shown in the Statement of Net Cost and are to be covered by budgetary resources but
these resources, while available under permanent and indefinite authority, were not provided by year-end. Additionally,
there will always be a difference for existing liabilities because the Reconciliation of Budgetary Obligations Incurred to
Net Cost of Operations reports only current year changes, not balances.

The following table details these differences:
(Dollars in Thousands)

As of September 30, 2013 2012
Current Year Liabilities Not Covered By Budgetary Resources $ 99,012 $ 87,637
Less: Prior Year 87,637 86,148
Change in Liabilities Not Covered By Budgetary Resources 11,375 1,489
Upward Reestimates of Credit Subsidy Expense 362,329 882,560
Change in Revenue Receivable from Public (316) (306)
All Other 273 554
Components (of Net Cost) Generating Resources in Future Periods
(Per Reconciliation Above) $ 373,661 $ 884,297

NOTE 17 SIGNIFICANT EVENT

Partial Government Shutdown
The SBA was affected by the partial government shutdown from October 1 through October 16, 2013. SBA’s Disaster
program plays a vital role in the aftermath of disasters and is funded entirely by no-year, continuing appropriations.
Therefore, it was not subject to the lapse in appropriations. However, the rest of the Agency discontinued operations,
including SBA’s business loan making operations in its 7(a), 504, SBIC and Microloan programs. During the lapse
in appropriations, the only personnel who worked were those funded by programs with continuing resources and a
minimal number of people to ensure continued operation of activities critical to the protection of government assets and
preservation of the financial system.

Although the shutdown disrupted SBA’s operations in the first quarter of FY 2014 and also delayed the production of
this report, the SBA does not expect the partial government shutdown to have a detrimental effect on SBA’s financial
position in future years. Once the lapse in appropriations ended, the SBA followed an orderly process to restart its pro-
grams and administrative activities and resume normal operations. The SBA will continue to fulfill its mission to serve
the nation’s small businesses.

AGENCY FINANCIAL REPORT • FY 2013 79
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REQUIRED SUPPLEMENTARY INFORMATION
Combining Statement of Budgetary Resources
For the year ended September 30, 2013 (unaudited) - See accompanying Auditors’ Report

(Dollars in Thousands) BLIF DLF SBGRF PCECGF

Nonbudgetary Nonbudgetary
Budgetary Financing Budgetary Financing Budgetary Budgetary

BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 227,224 $ 4,719,453 $ 447,753 $ 50,014 $ 61,427 $ 2,063
Recoveries of Prior Year Obligations 27,387 2,583 9,045 79,072 43 –
Other Changes in Unobligated Balance (11,377) (564,320) (4,036) (31,500) – (2,063)
Unobligated Balance from Prior Year Budget
243,234 4,157,716 452,762 97,586 61,470 –
Authority, net
Appropriations (discretionary and mandatory) 1,316,336 – 889,602 – – 1,000
Borrowing Authority (discretionary and mandatory) – 48,895 – 1,471,475 – –
Spending Authority from Offsetting Collections 19,259 3,505,534 1,854 598,860 16,556 119
Total Budgetary Resources $ 1,578,829 $ 7,712,145 $ 1,344,218 $ 2,167,921 $ 78,026 $ 1,119

STATUS OF BUDGETARY RESOURCES
Obligations Incurred $ 1,380,654 $ 4,092,033 $ 610,379 $ 1,651,246 $ 4,683 $ –
Apportioned 17,416 613,959 311,584 240,107 16,858 413
Unapportioned 180,759 3,006,153 422,255 276,568 56,485 706
Total Unobligated Balance, end of year 198,175 3,620,112 733,839 516,675 73,343 1,119
Total Status of Budgetary Resources $ 1,578,829 $ 7,712,145 $ 1,344,218 $ 2,167,921 $ 78,026 $ $1,119

CHANGE IN OBLIGATED BALANCES
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 160,921 $ 95,852 $ 20,879 $ 182,321 $ 30 $ –
Obligations Incurred 1,380,654 4,092,033 610,379 1,651,246 4,683 –

Gross Outlays (1,281,827) (4,091,355) (554,659) (1,146,912) (4,670) –

Recoveries of Prior Year Unpaid Obligations (27,387) (2,583) (9,045) (79,072) (43) –
Unpaid Obligations, end of year 232,361 93,947 67,554 607,583 – –
Uncollected Payments:
Uncollected Payments, Federal sources
brought forward, October 1 – (155,822) – (20,859) – –
Change in Uncollected Payments, Federal Sources – (73,080) – (46,758) – –
Uncollected Payments, Federal Sources, end of year – (228,902) – (67,617) – –
Memorandum (non-add) entries:
Obligated Balance, start of year $ 160,921 $ (59,970) $ 20,879 $ 161,462 $ 30 $ –
Obligated Balance, end of year $ 232,361 $ (134,955) $ 67,554 $ 539,966 $ – $ –

BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross
$ 1,335,595 $ 3,554,429 $ 891,456 $ 2,070,335 $ 16,556 $ 1,119
(discretionary and mandatory)
Actual Offsetting Collections
(19,319) (3,437,116) (1,854) (1,103,481) (16,556) (119)
(discretionary and mandatory)
Change in Uncollected Customer Payments
from Federal Sources
– (73,081) – (46,757) – –
(discretionary and mandatory)
Budget Authority, net
(discretionary and mandatory) $ 1,316,276 $ 44,232 $ 889,602 $ 920,097 $ – $ 1,000

Gross Outlays (discretionary and mandatory) $ 1,281,827 $ 4,091,355 $ 554,659 $ 1,146,912 $ 4,670 $ –
Actual Offsetting Collections
(19,319) (3,437,116) (1,854) (1,103,481) (16,556) (119)
(discretionary and mandatory)
Net Outlays (discretionary and mandatory) 1,262,508 654,239 552,805 43,431 (11,886) (119)
Less: Distributed Offsetting Receipts – (1,669,508) – (27,353) – –
Agency Outlays, net
(discretionary and mandatory) $ 1,262,508 $ (1,015,269) $ 552,805 $ 16,078 $ (11,886) $ (119)

80 AGENCY FINANCIAL REPORT • FY 2013
FINANCIAL R E PORTI NG

REQUIRED SUPPLEMENTARY INFORMATION
Combining Statement of Budgetary Resources
For the year ended September 30, 2013

(Dollars in Thousands) SE OIG ADVOCACY BATF TOTAL TOTAL

Nonbudgetary
Budgetary Budgetary Budgetary Budgetary Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 115,878 $ 7,735 $ 680 $ 141 $ 862,901 $ 4,769,467 $ 5,632,368
Recoveries of Prior Year Obligations 26,548 489 166 6 63,684 81,655 145,339

Other Changes in Unobligated Balance (4,969) (203) – – (22,648) (595,820) (618,468)
Unobligated Balance from Prior Year Budget
137,457 8,021 846 147 903,937 4,255,302 5,159,239
Authority, net
Appropriations (discretionary and mandatory) 414,518 19,657 8,643 – 2,649,756 – 2,649,756
Borrowing Authority (discretionary and mandatory) – – – – – 1,520,370 1,520,370
Spending Authority from Offsetting Collections 587,013 1,009 2 23 625,835 4,104,394 4,730,229
Total Budgetary Resources $ 1,138,988 $ 28,687 $ 9,491 $ 170 $ 4,179,528 $ 9,880,066 $ 14,059,594

STATUS OF BUDGETARY RESOURCES
Obligations Incurred $ 858,248 $ 19,514 $ 8,812 $ 39 $ 2,882,329 $ 5,743,279 $ 8,625,608
Apportioned 238,903 8,377 679 108 594,338 854,066 1,448,404
Unapportioned 41,837 796 – 23 702,861 3,282,721 3,985,582
Total Unobligated Balance, end of year 280,740 9,173 679 131 1,297,199 4,136,787 5,433,986
Total Status of Budgetary Resources $ 1,138,988 $ 28,687 $ 9,491 $ 170 $ 4,179,528 $ 9,880,066 $ 14,059,594

CHANGE IN OBLIGATED BALANCES
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 434,479 $ 2,363 $ 1,323 $ 1 $ 619,996 $ 278,173 $ 898,169
Obligations Incurred 858,248 19,514 8,812 39 2,882,329 5,743,279 8,625,608

Gross Outlays (928,622) (19,787) (9,096) (29) (2,798,690) (5,238,267) (8,036,957)

Recoveries of Prior Year Unpaid Obligations (26,548) (489) (166) (6) (63,684) (81,655) (145,339)
Unpaid Obligations, end of year 337,557 1,601 873 5 639,951 701,530 1,341,481
Uncollected Payments:
Uncollected Payments, Federal sources
brought forward, October 1 – – – – – (176,681) (176,681)

Change in Uncollected Payments, Federal Sources – – – – – (119,838) (119,838)
Uncollected Payments, Federal Sources, end of year – – – – – (296,519) (296,519)
Memorandum (non-add) entries:
Obligated Balance, start of year $ 434,479 $ 2,363 $ 1,323 $ 1 $ 619,996 $ 101,492 $ 721,488
Obligated Balance, end of year $ 337,557 $ 1,601 $ 873 $ 5 $ 639,951 $ 405,011 $ 1,044,962

BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross
$ 1,001,531 $ 20,666 $ 8,645 $ 23 $ 3,275,591 $ 5,624,764 $ 8,900,355
(discretionary and mandatory)
Actual Offsetting Collections
(587,013) (1,009) (2) (23) (625,895) (4,540,597) (5,166,492)
(discretionary and mandatory)
Change in Uncollected Customer Payments
from Federal Sources
– – – – – (119,838) (119,838)
(discretionary and mandatory)
Budget Authority, net
(discretionary and mandatory) $ 414,518 $ 19,657 $ 8,643 $ – $ 2,649,696 $ 964,329 $ 3,614,025

Gross Outlays (discretionary and mandatory) $ 928,622 $ 19,787 $ 9,096 $ 29 $ 2,798,690 $ 5,238,267 $ 8,036,957
Actual Offsetting Collections
(587,013) (1,009) (2) (23) (625,895) (4,540,597) (5,166,492)
(discretionary and mandatory)
Net Outlays (discretionary and mandatory) 341,609 18,778 9,094 6 2,172,795 697,670 2,870,465
Less: Distributed Offsetting Receipts (118) – – – (118) (1,696,861) (1,696,979)
Agency Outlays, net
(discretionary and mandatory) $ 341,491 $ 18,778 $ 9,094 $ 6 $ 2,172,677 $ (999,191) $ 1,173,486

AGENCY FINANCIAL REPORT • FY 2013 81
F I N A N C I A L R E PO RTI N G

REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION
(unaudited) - See accompanying Auditors’ Report

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 evi-
dence of maintaining or increasing national productive capacity. The definition excludes education and training expenses
for federal personnel.

Small Business Development Centers deliver an array of services to small businesses and prospective business owners
using an extensive network of lead centers and service delivery points. SBDCs deliver professional counseling and train-
ing in key management areas to small business clients throughout the U.S.

SCORE is a nonprofit association comprised of over 12,000 volunteer business counselors that serve entrepreneurs with
in-person mentoring and local training workshops. SCORE adapts its structure and services to meet the needs of specific
small businesses.

Women’s Business Centers provide counseling and training through educational centers across the nation. They provide
services on a variety of topics including how to write a business plan and specialized programs to meet specific customer
needs.

Microloan Program helps the smallest of small businesses become established and achieve success. Community-based
intermediary lenders provide business-based training and technical assistance to microbusinesses.

All Other Training and Assistance Programs includes 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 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 PRIME Technical
Assistance and the 7(j) program resources.

Performance results are provided in the Management Discussion and Analysis section of SBA’s annual Agency Financial
Report in “SBA by the Numbers” and “Summary of Key SBA Programs”.

Significant Human Capital investments occur within the following programs:

For the five years ended September 30, 2013
(Dollars in Thousands)
2013 2012 2011 2010 2009
Small Business Development Centers $ 93,981 $ 152,835 $ 123,097 $ 130,046 $ 116,909
SCORE 10,986 9,331 14,094 11,134 9,899
Women’s Business Centers 21,141 25,006 13,080 16,924 21,504
Microloan Technical Assistance 16,617 22,487 30,485 23,426 11,606
All Other Training and Assistance Programs 56,222 41,054 36,609 57,631 49,750

Total $ 198,947 $ 250,713 $ 217,365 $ 239,161 $ 209,668

82 AGENCY FINANCIAL REPORT • FY 2013
Other
Information
SUCCESS STORY: Blending Tradition with Gourmet
is Good for Family Business
Giovanni Food Company,
Syracuse, New York

Giovanni Food Company has been making delicious pasta sauces
since 1934 when the DeMent family opened their first Italian-style
restaurant. In the 1950s, the DeMents expanded into manufacturing
other tomato-based product lines. Second-generation owner Jack
DeMent led the company through its early growth and navigated the
certification process to make spaghetti sauce for the U.S. Department
of Agriculture’s Food for Kids and Needy Families program.

When Jack’s son Louis “Lou” DeMent joined the family business in 1997, the company’s sales were largely
dependent on USDA contracts. Lou turned his marketing efforts to private label customers and sales qua-
drupled, from under $2 million to more than $8 million. The unexpected death of Lou’s father in April 2007
thrust the 34-year old into a leadership position. Lou used SBA guarantied loans under both the 504 and 7(a)
loan programs to purchase a larger manufacturing plant and its food processing equipment, increasing capacity
to three modern production lines.

Giovanni Food Company has been successful by sticking with its traditional family recipe while developing
gourmet and organic brands in order to accommodate evolving customer preferences. Today, Giovanni prod-
ucts can be found on grocery and specialty store shelves across the continental U.S. and under private label in
Puerto Rico, Israel, Australia, Yemen, and Chile. Revenues have increased from $13.9 million in 2009 to more
than $23 million in 2012, and the number of employees has grown from 37 to 68.

For these extraordinary accomplishments, Lou DeMent was selected the SBA 2013 New York Small Business
Person of the Year.
OT H ER INF OR MATI ON

U. S. Small Business Administration
Schedule of Spending
For the year ended September 30, 2013 (unaudited)
(Dollars in Thousands)
Nonbudgetary
Budgetary Financing Total
What Money is Available to Spend?
Total Resources $ 4,179,528 $ 9,880,066 $ 14,059,594
Less Amount Available but Not Agreed to be Spent 594,338 854,066 1,448,404
Less Amount Not Available to be Spent 702,861 3,282,721 3,985,582
Total Amounts Agreed to be Spent $ 2,882,329 $ 5,743,279 $ 8,625,608

Nonbudgetary
Budgetary Financing Total
How was the Money Spent?
Salary & Benefits $ 482,517 $ – $ 482,517
Grants 172,650 – 172,650
Rents 46,046 – 46,046
Contracts 92,711 – 92,711
Travel 34,068 – 34,068
Other Administrative Expenses 47,706 – 47,706
Telecommunications 10,915 – 10,915
Surety Bonds Defaults 4,682 – 4,682
Business Loans 50,049 55,348 105,397
Business Loan Guarantees 1,330,606 4,036,685 5,367,291
Disaster Lending 610,379 1,651,246 2,261,625
Total Amounts Agreed to be Spent $ 2,882,329 $ 5,743,279 $ 8,625,608

Nonbudgetary
Budgetary Financing Total
Who did the Money go to?
Other Federal Agencies 573,660 2,059,960 2,633,620
Public Individuals and Organizations 2,308,669 3,683,319 5,991,988
Total Amounts Agreed to be Spent $ 2,882,329 $ 5,743,279 $ 8,625,608

The Schedule of Spending was developed to bridge the gap between budgetary accounting reports, such as the Statement of
Budgetary Resources, and the public’s desire for a transparent view of how federal money was spent. The SOS allows the
reader to review SBA’s spending in more understandable terms and also provides the public with a high level view of who
benefited from federal funds.

To obtain a more detailed view of SBA’s beneficiaries, the public can access general information about individual awards on
USASpending.gov. The data provided on the USAspending.gov website however does not include all spending information
provided in the SBR and SOS. For example, the SBA is primarily a federal credit agency and SBA’s nonbudgetary financing
items, which are related to the direct and guarantee loan guarantee programs, are not included on USAspending.gov.

AGENCY FINANCIAL REPORT • FY 2013 85
OT HE R I N FO R M ATI O N

OIG REPORT ON THE MOST SERIOUS MANAGEMENT
AND PERFORMANCE CHALLENGES

U.S. SMALL BUSINESS ADMINISTRATION

OFFICE OF INSPECTOR GENERAL

Report No. 14-01

Report on the Most Serious Management and
Performance Challenges
Facing the Small Business Administration
In Fiscal Year 2014

October 31, 2013

86 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

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

October 31, 2013

MEMORANDUM

TO: Jeanne Hulit
Acting Administrator

FROM: Peggy E. Gustafson
Inspector General

SUBJECT: Report on the Most Serious Management and Performance Challenges Facing the
Small Business Administration in Fiscal Year 2014

In accordance with the Reports Consolidation Act of 2000, we are providing you with the Office of
Inspector General’s (OIG) Report on the Most Serious Management and Performance Challenges
Facing the Small Business Administration (SBA) in Fiscal Year (FY) 2014.

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 reports, as
well as our general knowledge of SBA’s programs and operations. Our analysis generally considers
those accomplishments that the SBA reported as of September 30, 2013.

Within each Management Challenge, there are a series of “recommended actions” to resolve the
Challenge. Each recommended action is assigned a color “status” score. The scores are as follows:
Green for “Implemented,” Yellow for “Substantial Progress,” Orange for “Limited Progress,” and Red
for “No Progress.” An arrow in the color box indicates that the color score went up or down from the
prior year. If a recommended action was added since last year’s report, no color score 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, which remained Green
this year, have been moved up to the “history bar” above the recommended actions. The history bar
highlights any progress that the Agency has made on a Challenge over the past four fiscal years (or as
long as the Challenge has existed, if shorter) by showing the number of actions that have moved to
Green each year. The following table provides a summary of the Most Serious Management and
Performance Challenges Facing the SBA in FY 2014.

AGENCY FINANCIAL REPORT • FY 2013 87
OT HE R I N FO R M ATI O N

Table 1. Summary of the Most Serious Management and Performance Challenges Facing the
SBA in FY 2014.

Number Challenge Green Yellow Orange Red Up # Down#

1 Small Business Contracting 2 2

2 IT Security 1 2 1 1 1 1

3 Human Capital 1 3 3

4 Loan Guaranty Purchase 1

5 Lender Oversight 4 2 2

6 8(a) Business Development Program 1 1 1

7 Loan Agent Fraud 1

8 Loan Management and Accounting System 1 3 3

9 Improper Payments– 7(a) Program 1 5 4

10 Improper Payments-Disaster Loan Program 1

11 Acquisition Management 5

TOTAL 7 17 12 2 15 1

We would like to thank the SBA’s management and staff for their cooperation in providing us with
information needed to prepare this report. We look forward to continuing to work with the SBA’s
leadership team in addressing the Agency’s Management Challenges.

88 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

Contents

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

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

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

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

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

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 the SBA ensures that firms follow 8(a) regulations
when completing contracts

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

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

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

Challenge 10. The SBA Needs to Significantly Reduce Improper Payments in the Disaster Loan
Program

Challenge 11: The SBA Needs to Effectively Manage the Acquisition Program

Appendix: Relevant Reports

AGENCY FINANCIAL REPORT • FY 2013 89
OT HE R I N FO R M ATI O N

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.
Fiscal Year Issued: 2005

The Small Business Act established a government-wide goal that 23 percent of the total value of all prime
contract awards for each fiscal year (FY) be to small businesses. As the advocate for small business, the
SBA should strive to ensure that only small firms obtain and perform small business awards. Further, the
SBA should ensure that procuring agencies accurately report contracts awarded to small businesses when
representing its progress in meeting small business contracting goals.
Previous OIG audits and other governmental studies have shown widespread misreporting by procuring
agencies since many contract awards that were reported as having gone to small firms have actually been
performed by larger companies. While some contractors may misrepresent or erroneously calculate their
size, most of the incorrect reporting results from errors made by government contracting personnel,
including misapplication of small business contracting rules. In addition, contracting officers do not
always review the on-line certifications that contractors enter into a governmental database prior to
awarding contracts. The SBA needs to ensure that contracting personnel are adequately trained on small
business procurement and are reviewing this database prior to awarding contracts.
The SBA also needs to address a loophole within General Services Administration (GSA) Multiple
Awards Schedule (MAS) contracts, which contain numerous 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.
The SBA made considerable progress on this challenge. By the end of FY 2013, the SBA revised and
approved its Standard Operating Procedure to ensure consistency in conducting its surveillance reviews to
assess Federal agencies’ management of their small business programs and compliance with regulations
and applicable procedures. The SBA also revised its regulations requiring firms to meet size standards
for each specific order on multiple award contracts. Additionally, the SBA will submit this final rule on
the proper classification of orders to the Federal Acquisition Regulation (FAR) Council to implement in
the FAR.

Actions Accomplished (Green Status) During Past Four Fiscal Years 09-0 10-0 11-1 12-1

Recommended Actions for Fiscal Year 2014 Status at End of FY 2013

1. Revise the surveillance review process to ensure that they are conducted in a
Yellow
thorough and consistent manner
2. Issue regulations that require firms to meet the size standard for each specific
order they receive under a GSA schedule and Government-wide Acquisition
Yellow
Contract (GWAC) and show that the regulations are being followed. (Previously
action 3)

Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

90 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

Challenge 2. Weaknesses in information systems security controls pose significant risks to the
Agency.
Fiscal Year Issued: 1999

The SBA’s computer security program operates in a dynamic and highly decentralized environment and
requires management attention and resources as weaknesses are continually identified. The SBA
improved its Plan of Actions and Milestones (POA&M) in FY 2013. However, the SBA needs to
address long-standing security weaknesses identified in 29 open audit recommendations. These
recommendations are in the following areas:
 The SBA’s System Software controls have six open recommendations averaging 682 days past their
original target corrective action date. These recommendations highlight significant security
vulnerabilities including the need for establishing baseline configurations of SBA’s IT platforms,
establishing an effective configuration management program and timely patching of operating
systems, devices, and database management systems.
 The SBA’s Segregation of Duty controls have seven open recommendations averaging 555 days
past their original target corrective action date. These recommendations include restricting access
to system software, and an effective review of system and application logs.
 The SBA’s IT Security Management program has eleven recommendations averaging 414 days
past their original target corrective action date. Many of these vulnerabilities are statutory
requirements which if remediated would improve SBA’s IT Security oversight as well as improve
SBA’s compliance with FISMA guidance.
To show improvement in the above areas, SBA’s Office of Chief Information Officer, in conjunction
with SBA’s Program Offices, will need to implement tools and capabilities to provide effective
oversight and continuous monitoring of computer security controls.

Actions Accomplished (Green Status) During Past Four Fiscal Years 09-0 10-0 11-1 12-0

Recommended Actions for Fiscal Year 2014 Status at End of FY 2013

1. Access controls are in place and operating effectively, and contractors are not
granted system access until they have obtained the required background Yellow
investigations and/or security clearances.
2. System software controls are in place and operating effectively. Red

3. Segregation of duty controls are in place and operating effectively. Orange

4. The POA&M accurately reports all computer security weaknesses and corrective
Green
actions.
5. The IT security management program is effective to address information security
in systems that support the operations and assets of the organization. Yellow

Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

AGENCY FINANCIAL REPORT • FY 2013 91
OT HE R I N FO R M ATI O N

Challenge 3. Effective human capital strategies are needed to enable the SBA to carry out its
mission successfully and become a high-performing organization.
Fiscal Year Issued: 2001 Revised: 2007

The SBA has experienced downsizing, high turnover, reorganizations, and realignments over the last
several years which seriously impacted the level and scope of services that the Office of Human Capital
Management (OHCM) provided to the Agency. In October 2011, the U.S. Office of Personnel
Management (OPM) completed a review that identified weaknesses in the SBA’s human capital policies
and practices highlighting the serious human capital challenges facing the Agency. In late FY 2011,
OHCM was restructured and the Office of Human Resource Solutions (OHRS) was established. In
2012, the Agency began reshaping by recruiting new employees with the newly identified competency
sets and shifting full-time equivalent resources to meet the new priorities.
In FY 2013, OHRS took several positive steps to address and mitigate this management challenge as
reflected in the improved ratings below. For example, in May 2013, OHRS closed the 70 recommenda-
tions resulting from OPM’s FY 2011 review. It also completed an assessment of the core competencies
and has begun developing trainings focused on those competencies. Further, the agency established
several initiatives designed to recruit and develop future leaders. The SBA also issued its Leadership
Succession Plan for FYs 2013—2016.
In FY 2013, the SBA successfully implemented a process to ensure OHRS adds value to its customers,
primarily through the quarterly surveying of employees about OHRS’ delivery of needed strategic
support and services. Some of OHRS’ achievements were also recognized through nominations for
agency awards. Substantial progress was also made in FY 2013 to update Human Capital Standard
Operating Procedures.
In response to the human capital challenges identified by the Federal Employee Viewpoint Survey
(EVS), OHRS established the “SBA Way” initiative to increase employee engagement and foster
collaboration across the Agency, launched the Talent Management System to expand and more
effectively deliver training, and the Work Life Wellness program with a special emphasis on telework.

Actions Accomplished (Green Status) During Past Four Fiscal Years 09-0 10-0 11-0 12-0

Recommended Actions for Fiscal Year 2014 Status at the End of FY 2013
1. Ensure the Agency has an effective, comprehensive workforce and succession
plan that align talent needs and capabilities with SBA’s FY 2011-2016
Strategic Plan. The SBA’s workforce and succession planning goals should
Yellow
reflect the need to recruit and retain the 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.
2. Ensure the OHRS is structured and equipped so as to add value by delivering
needed strategic support and services such as continuity planning, talent
Green
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 are
updated and appropriately structured to support the Agency’s long-term goals Yellow
and objectives and government-wide Human Capital Management initiatives.
4. Take steps to correct problems identified in the 2010 EVS. Demonstrate
Yellow
improvement by increasing overall scores/Agency rankings in the 2011 EVS.

Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

92 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

Challenge 4. The SBA needs to implement a quality control program in its loan centers.
Fiscal Year Issued: 2007

The initial focus of this challenge was on improving deficiencies identified in the SBA’s 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 deficiency continues to exist in the area of
quality control.
The Office of Financial Program Operations (OFPO) has made significant progress in developing a
Quality Control (QC) program for all of its loan centers to verify and document compliance with the
loan process, from origination to close-out, and to identify where material deficiencies may exist so that
remedial action can be taken. A QC project guide has been developed and agreed upon by relevant
parties within the Office of Capital Access. The QC program will assess the overall quality of the
centers’ deliverables to provide confidence to its stakeholders. The SBA assigned a QC manager to
oversee the development of the program and established QC specialist positions for each center.
Furthermore, the SBA (1) developed and documented Quality Program Manuals and review checklists
for each center, (2) assessed center functions by risk to prioritize required QC reviews, (3) refined
feedback, training and reporting processes, and (4) developed new systems to improve the tracking of
quality control deficiencies and corrective actions.
While the SBA has made substantial progress in its development of a quality control program,
additional work remains before the SBA can demonstrate that all elements of the QC program are being
completed and that the program is effective at identifying and correcting material deficiencies. For
example, a audit of the SBA’s FY 2011 improper payment rate in the 7(a) loan guaranty purchase pro-
gram determined that improper payment reviews executed by the QC review teams did not detect a high
number of material improper payments. Further, an ongoing OIG evaluation of the quality control pro-
gram determined that centers were not performing required reviews and that corrective actions were not
being tracked as required. In order to demonstrate that the QC program has been fully implemented,
the SBA will need to provide results showing that required QC reviews are being completed and other
evidence showing the reviews are effective at identifying and correcting material deficiencies. The
SBA made progress during FY 2013 to improve these identified deficiencies.

Actions Accomplished (Green Status) During Past Four Fiscal Years 09-0 10-1 11--0 12-0

Recommended Actions for Fiscal Year 2014 Status at End of FY 2013

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 2013 93
OT HE R I N FO R M ATI O N

Challenge 5. The SBA needs to further strengthen its oversight of lending participants.
Fiscal Year Issued: 2001

Since its inception in 1953, the SBA has loaned or guaranteed billions of dollars to finance and spur in-
vestment in small businesses. In FY 2011, approximately 66 percent of loan dollars guaranteed by the
SBA were made using delegated authorities with limited oversight. Prior OIG and Government
Accountability Office reports disclosed weaknesses in the SBA’s oversight of its lending participants.
In a September 2012 audit report, the OIG found that during Agency onsite reviews, the SBA did not
always recognize the significance of lender weaknesses and determine the risks they posed to the
Agency. Additionally, the SBA did not link the risks associated with the weaknesses to the lenders’
corresponding risk ratings and assessments of operations. Further, the SBA did not require lenders to
correct performance problems that could have exposed the Agency to unacceptable levels of financial
risk. The risks inherent in delegated lending require an effective oversight program to (1) monitor
compliance with SBA policies and procedures, and (2) take corrective actions when a material
noncompliance is detected.
Since this management challenge was created in 2001, the SBA has made significant progress in its
oversight of lending participants. In FY 2013, the SBA (1) developed risk profiles and lender perfor-
mance thresholds, (2) developed a Select Analytical Review process to allow for virtual risk-based re-
views, (3) updated its lender risk rating model to better stratify and predict risk, and (4) conducted test
reviews under the new risk-based review protocol. These efforts have demonstrated that onsite reviews
are now conducted of the highest risk lending participants based on expanded selection criteria.
In FY 2013, the SBA also began improving its corrective action process. However, in order to fully
resolve this management challenge, the SBA must implement and demonstrate the effectiveness of the
process for monitoring and verifying lenders’ implementation of corrective actions.

Actions Accomplished (Green Status) During Past Four Fiscal Years 09 10 11 12
7a Program 0 0 0 1
504 Program 0 0 0 1

Status at Status at
End of End of
Recommended Actions for Fiscal Year 2014
FY 2013— FY 2013—
7a 504
1. Expand the scope of lender oversight and improve the process for reviewing
Green Green
lenders and Certified Development Companies.
2. Implement guidance providing for effective supervision and enforcement. Green Green
3. Monitor and verify implementation of corrective actions to ensure effective
Orange Orange
resolution prior to close-out.

Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

94 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

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 the SBA ensures that firms follow 8(a) regulations when completing contracts.
Fiscal Year Issued: 2003

The SBA’s 8(a) Business Development (BD) program was created to assist eligible small disadvantaged
business concerns to compete in the American economy through business development. Previously, the
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.
The SBA had made progress towards addressing issues that hinder the Agency’s ability to deliver an
effective 8(a) program. For example, the SBA expanded its ability to provide assistance to program
participants through its resource partners —Small Business Development Centers, SCORE, and
Procurement Technical Assistance Centers. Further, the SBA revised its regulations, effective March
2011, to ensure that companies that are “business successes” are graduated out of the program.
However, the Agency has not yet completed updating its standard operating procedure for the Business
Development program to reflect these regulatory changes. These revised 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. In December 2011, the SBA also awarded a
contract to develop and deploy a new Information Technology system by December 2012 to assist the
SBA in monitoring 8(a) program participants. However, the new system has not been deployed and its
delivery date and capabilities are undetermined at this time.

Actions Accomplished (Green Status) During Past Four Fiscal Years 09-0 10-0 11-0 12-0

Recommended Actions for Fiscal Year 2014 Status at End of FY 2013

1. Develop and implement a plan, including SOP provisions, which ensures that
the 8(a) BD program identifies and addresses the business development needs Orange
of program participants on an individualized basis.
2. Develop and implement Regulations and SOP provisions to ensure that
participants are graduated once they reach the levels defined as business Yellow
success.
3. Establish objective and reasonable criteria that effectively measures “economic
disadvantage” and implement the new criteria. Red

Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

AGENCY FINANCIAL REPORT • FY 2013 95
OT HE R I N FO R M ATI O N

Challenge 7. Effective tracking and enforcement would reduce financial losses from loan agent
fraud.
Fiscal Year Issued: 2000

For years, OIG investigations have revealed a pattern of fraud by loan packagers and other for-fee
agents in the 7(a) loan guaranty program. These schemes have involved hundreds of millions of
dollars, yet SBA’s oversight of loan agents has been limited, putting taxpayer dollars at risk. The
Agency could reduce this risk through effective loan agent disclosure requirements, a database or
equivalent means to track loan agent activity, updated regulations, new guidance for lenders, and a
registration system.
Tracking Loan Agent Data. In response to this Management Challenge, the SBA has proposed various
methods of tracking loan agent activity. The SBA eventually decided to capture the data by having
lenders fax a loan agent disclosure form (Form 159) to the SBA’s Fiscal and Transfer Agent (FTA) and
requiring the FTA to enter the data into a database accessible to the SBA. The Agency also began to
link Form 159 information with its loan data. Although there are some data problems, quality is
improving. Moreover, the new FTA contract is expected to emphasize data quality.
Updating Regulations. Critical features of any government enforcement program are effective
regulations and procedures. The SBA regulations governing enforcement actions against loan agents
were last revised in 1996 and are out of date. The SBA has advised that it is drafting new regulations.
Guidance Regarding Webpage. The Agency’s website now lists the names of loan agents and others
that have been named in SBA enforcement actions. However, the Agency has not provided guidance to
lenders to consult with this list in order to keep problematic loan agents from participating in the 7(a)
program. The SBA has stated that the issue will be resolved with the issuance of an SOP update.
Registration System. Although the SBA has developed a loan agent tracking system, this system is
hampered by loan agents not having been assigned unique identifiers. Thus, an agent suspended or
revoked by the SBA can easily change his or her business name or even personal name, and lenders
would not be able to verify the agent’s suspended or revoked status. Consequently, the SBA needs to
develop a system to assign a unique identifier to loan agents that participate in the 7(a) program.
According to the Agency, its Office of Credit Risk Management is exploring registration options. This
could include using an identifying number assigned by outside organizations such as the National
Mortgage Licensing System and requiring loan agents that are not part of this system to apply to the
SBA for a registration number.
Actions Accomplished (Green Status) During Past Four Fiscal Years 09-0 10-0 11-0 12-1

Recommended Actions for Fiscal Year 2014 Status at End of FY 2013
1. Develop an effective method of disclosing and tracking loan agent involvement
Yellow
in SBA business loan programs.
2. Update regulations (13 CFR Part 103) regarding loan agents to provide effective
enforcement procedures. New

3. Issue guidance that lenders must (1) review SBA’s webpage list of loan agents
that have been subject to an enforcement action and (2) refrain from doing
New
business with any agent appearing on the list during the time that an agent is
suspended or revoked from the 7(a) program.
4. Implement a loan agent registration system, including the issuance of a unique
identifying number for each agent. New

Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

96 AGENCY FINANCIAL REPORT • FY 2013
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Challenge 8. The SBA needs to modernize its Loan Accounting System and migrate it off the
mainframe.
Fiscal Year Issued: 2010

In November 2005, the 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. An OIG report in
2005 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.
In 2013, the SBA continued its implementation of web-based user interface screens and has reduced
processing individual transactions on the mainframe by 92 percent and moved these transactions to
SBA’s web-based IT infrastructure. The SBA also completed converting its COBOL computer code
for its nightly accounting update cycle into COBOL code, which can be processed on a more modern
platform. The SBA also has a Funds Control IIP, which is part of the LMAS effort.
Previous OIG and GAO reports on the LMAS identified concerns about SBA’s management of the
project and the project’s noncompliance with the agency’s System Development Methodology in key
areas that impacted SBA’s ability to control project costs and quality. The reports also addressed the
lack of an enterprise-wide or project-level Quality Assurance (QA) functions to ensure that LMAS de-
liverables met the SBA’s requirements and quality standards.
The SBA had hired a QA contractor in 2011; however; QA reports were not submitted to the LMAS
Executive Steering Committee until FY 2013. In 2012, the SBA hired an Independent Verification and
Validation (IV&V) entity to ensure that LMAS deliverables met SBA requirements and quality
standards. However, the SBA did not fully stand-up its IV&V effort until 2013. In both QA and
IV&V, improvement has been identified in both quantity and quality of deliverables to LMAS project
managers, as well as reports to the LMAS Executive Steering Committee.

Actions Accomplished (Green Status) During Past Four Fiscal Years N/A 10-0 11-0 12-0

Recommended Actions for Fiscal Year 2014 Status at End of FY 2013
1. Migrate the Loan Accounting System to a new operating platform before the
Yellow
current mainframe contract expires in 2013.
2. Modify the LMAS QA/IV&V contract and establish an effective QA process
which provides senior management independent assurance that LMAS develop- Orange
ment activities and related project deliverables meet SBA quality standards.
3. Establish a process for reviewing and accepting LMAS deliverables that
complies with QA and Systems Development Methodology requirements. This
Orange
includes hiring or fully staffing an IV&V entity to validate deliverable
acceptance.
4. Implement a QA process in LMAS in accordance with the SBA’s Enterprise
Orange
QA Plan.

Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

AGENCY FINANCIAL REPORT • FY 2013 97
OT HE R I N FO R M ATI O N

Challenge 9. The SBA needs to accurately report, significantly reduce, and strengthen efforts to
recover, improper payments in the 7(a) loan program.
Fiscal Year Issued: 2010
Previous OIG audits have determined that reported improper payment rates for 7(a) loan approvals and
purchases were significantly understated. In FY 2011, the SBA’s reported improper payment rate for 7(a)
purchases was 1.73 percent, or $40.7 million, when the rate could have been as high as 20 percent, or about
$472 million. Furthermore, in FY 2011, the SBA reported no improper payments for 7(a) loan approvals.
However, a FY 2011 OIG audit estimated that at least 1,196 Recovery Act 7(a) loans were not originated
and closed in compliance with SBA requirements, resulting in at least $869.5 million in inappropriate or
unsupported loan approvals. The SBA’s improper payment rates were understated because the Agency did
not adequately review loans, used flawed sampling methodologies, and did not accurately project review
findings.
Further, recent OIG audits have identified 7(a) loans that were ineligible, lacked repayment ability, or not
properly closed. In 2012, we reported that the limited reviews of lender underwriting performed during
guaranty purchase reviews were contrary to SBA procedures, resulting in improper payments. We also
reported that high-dollar early-defaulted loans were not reviewed with the scrutiny required to identify
improper payments. In 2013, we reported that the SBA made $4.6 million of improper payments on high-
dollar early-defaulted 7(a) loans.
The Office of Capital Access (OCA) has taken actions to correct many of these deficiencies. The OCA has
(1) formalized its improper payment sampling; (2) demonstrated that its review process is effective for 7(a)
loan approvals; (3) formalized its process to review disputed cases; (4) formalized the recovery process and
time standards for 7(a) purchases; and (5) developed appropriate corrective action plans for 7(a) loans.
However, additional actions are needed. The OCA needs to establish repayment ability review requirements
that are effective at identifying improper payments. Additionally, OCA needs to demonstrate that its
process over disputed cases is ensuring adequate and timely resolution. Finally, OCA needs to demonstrate
that it is adhering to recovery time standards and that corrective action plans for the 7(a) loan program are
effective.

Actions Accomplished (Green Status) During Past Four Fiscal Years 09 10 11 12
7a Loan Approvals N/A N/A 0 0

7a Loan Purchases 2N/A N/A 0 0

Status at End Status at End
Recommended Actions for Fiscal Year 2014 of FY 2013— of FY 2013—
Approvals Purchases
1. Ensure that processes used to calculate the improper payment rates for 7(a)
loan approvals and purchases are designed and implemented to effectively
Green Yellow
identify improper payments as defined by Office of Management and Budget
(OMB) Circular A-123.
2. Reassign responsibility for final approval of disputed denial, repair, and
improper payment decisions from the Office of Financial Assistance to the
N/A Yellow
Office of Credit Risk Management to ensure an adequate and timely
resolution of disputes.
3. Establish a process and time standards to expeditiously recover improper
N/A Yellow
payments identified during Agency reviews and OIG audits.
4. Demonstrate that corrective action plans are effective in reducing improper
Yellow Yellow
payments in the 7(a) loan program.
Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

98 AGENCY FINANCIAL REPORT • FY 2013
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Challenge 10. The SBA Needs to Significantly Reduce Improper Payments in the Disaster Loan
Program.
Fiscal Year Issued: 2012

Previous OIG audits of the SBA’s Disaster Loan program determined that the improper payment rates
reported for this program were significantly understated. The SBA estimated that improper payments in
the Disaster Loan program were about $4.5 million, or 0.55 percent of loans approved in FY 2007,
while the OIG reported that it was at least 46 percent, or approximately $1.5 billion. The SBA’s
improper payment rates were understated because the Agency did not adequately review sampled loans,
used flawed sampling methodologies, and did not accurately project review findings for the program.
Previously, Management Challenge 9 included both the Disaster Loan program and 7(a) program.
There were three recommended actions applicable to the Disaster Assistance Program. Of the three
recommended actions, one was implemented during FY 2010 and the two remaining actions were
implemented during FY 2011. One recommended action was to develop and implement a corrective
action plan to reduce improper payments. Although the Office of Disaster Assistance (ODA)
implemented the recommended action, the Agency has not achieved its reduction targets since
implementation. Specifically, the Agency missed its target goals of 16.7 percent for FY 2010,
20.0 percent for FY 2011, and 17.0 percent for FY 2012, instead reporting rates of 34.2 percent,
28.4 percent, and 17.9 percent, respectively.
At the end of FY 2011, a new recommended action was added requiring the SBA to demonstrate that
the corrective action plan is effective in reducing improper payments in the Disaster Assistance Pro-
gram.
The Agency has implemented an improved corrective action plan that specifically addresses root causes
and provides specific remedies, such as targeted training and inclusion of improper payments in
personal business commitment plans for employees. If properly implemented, we believe this course of
action should effectively reduce the improper payment rate in future years. The Agency’s internal
improper payment assessment for FY 2013 indicated a rate of 18.4 percent. This rate is higher than the
17 percent target rate necessary to achieve a rating of Green. Therefore, the color status for FY 2013 is
Yellow.

Actions Accomplished (Green Status) During Past Four Fiscal Years N/A N/A NEW 12-0

Recommended Actions for Fiscal Year 2014 Status at End of FY 2013

1. Demonstrate that corrective action plans are effective in reducing improper
payments in the Disaster Loan program. Yellow

Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

AGENCY FINANCIAL REPORT • FY 2013 99
OT HE R I N FO R M ATI O N

Challenge 11: The SBA Needs to Effectively Manage the Acquisition Program.
Fiscal Year Issued: 2013
In October 2010, the SBA realigned its acquisition program to address several significant deficiencies that
included compliance with laws and regulations, application of funding principles, contractor oversight, high staff
turnover, and measuring performance through validated metrics. Since that realignment, the SBA has taken steps
to improve the acquisition process, such as providing training to acquisition personnel, conducting annual
Advanced Acquisition Strategy planning, and using the Contract Review Board to inform acquisition decisions.
While the SBA has made limited progress, continuing challenges exist, including: (1) poorly defined requirements
(2) internal control deficiencies, (3) improper funding of contracts, (4) inadequate oversight and monitoring of
contractor performance, (5) high improper payments rate for contracting activities, and (6) an incomplete
acquisition standard operating procedure (SOP). For example, we identified instances where the SBA
inadequately planned and defined its requirements for the procurement of IT products and services. In addition,
while the SBA interfaced the contract management system, PRISM, with the financial system, JAAMS, users still
continue to experience system operations issues – exposing an internal control deficiency. The SBA also ratified
unauthorized commitments without determining whether unobligated funds were available when the unauthorized
commitment occurred, putting the SBA at risk for Anti-Deficiency Act violations. Moreover, the SBA continued
to inadequately monitor contract performance, which did not provide assurance that products and services were
delivered according to contract requirements. We also determined that the information presented in the SBA’s FY
2012 Agency Financial Report was inaccurate and the reported improper payment rate for FY 2012 disbursements
and contracting was incomplete. Furthermore, while the SBA updated its acquisition SOP, it does not include
procedures to use modular contracting for major system acquisitions or define post award contract administration
requirements, among other things.
Finally, while the SBA conducted an internal control review of its acquisition function consistent with OMB
Circular A-123, Appendix A, the Agency has not completed the acquisition assessment required in OMB’s
Memorandum for Chief Acquisition Officers: Conducting Acquisition Assessments under OMB Circular A-123,
May 21, 2008. This memorandum requires the use of a template to help agencies conduct a comprehensive and
standardized assessment. Use of the template further enables the SBA to leverage existing resources by
implementing an integrated management approach to internal control that focuses equally on the financial,
program, operational and administrative functional areas of the SBA, including acquisition .

Actions Accomplished (Green Status) During Past Four Fiscal Years N/A N/A N/A NEW

Recommended Actions for FY 2013 Status at end of FY 2013
1. Complete an assessment of the Agency’s acquisition activities using the OMB’s
Orange
Guidelines for Assessing the Acquisition Function.
2. Create and implement a comprehensive improvement plan — based on the
results of the acquisition function assessment — that has measurable goals,
Orange
objectives, prioritized actions and timeframes to address deficiencies identified
in the organizational alignment and leadership assessment area.
3. Create and implement a comprehensive improvement plan — based on the
results of the acquisition function assessment — that has measurable goals,
objectives, prioritized actions and timeframes to address deficiencies identified Orange
in the acquisition policies and processes assessment area (i.e. acquisition
management SOP).
4. Create and implement a comprehensive improvement plan — based on the
results of the acquisition function assessment — that has measurable goals,
Orange
objectives, prioritized actions and timeframes to address deficiencies identified
in the acquisition workforce assessment area.
5. Create and implement a comprehensive improvement plan — based on the
results of the acquisition function assessment — that has measurable goals,
Orange
objectives, prioritized actions and timeframes to address deficiencies identified
in the knowledge management and information systems assessment area.
Green - Implemented Yellow - Substantial Progress Orange - Limited Progress Red - No Progress

100 AGENCY FINANCIAL REPORT • FY 2013
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Appendix: Relevant Reports

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

Challenge 1:
 OIG, SBA’s Planning and Award of the Customer Relationship Management Contracts, ROM 10-16,
issued June 29, 2010.
 Interagency Task Force on Federal Contracting Opportunities for Small Businesses Report, issued
September 2010.
 SBA Advocacy, Analysis of Type of Business Coding for the Top 1,000 Contractors Receiving Small
Business Awards in FY 2002, issued December, 2004.
 The Center for Public Integrity, The Big Business of Small Business: Top defense contracting companies
reap the benefits meant for small businesses, issued September 29, 2004.
 The Center for Public Integrity, The Pentagon’s $200 Million Shingle: Defense data shows billions in
mistakes and mislabeled contracts, issued September 29, 2004.
 OIG, Audit of SBA's Administration of the Procurement Activities of Asset Sale Due Diligence Contracts
and Task Orders, Report 4-16, issued March 17, 2004, pp. 8-9.
 GAO, Contract Management: Reporting of Small Business Contract Awards Does Not Reflect Current
Busness Size, GAO-03-704T, issued 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. Armendáriz, Associate Deputy
Administrator, SBA, issued 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, issued May 7, 2003.
 OIG, Review of Selected Small Business Procurements, Report 5-16, issued March 8, 2005.
 OIG, SBA Small Business Procurement Awards Are Not Always Going to Small Businesses,
Report 5-14, issued February 24, 2005.

Challenge 2:
 OIG, Briefing Report for the FY 2012 Federal Information Security Management Act Review, Report 13-15,
issued March 29, 2013.
 OIG, Audit of SBA’s FY 2012 Financial Statements, Report 13-04, issued November 14, 2012.
 OIG, Weakness Identified During the FY 2011 Federal Information Security Management Act Review,
Report 12-15, issued July 16, 2012.
 OIG, Audit of SBA’s FY 2010 Financial Statements, Report 12-02, issued November 14, 2011.
 OIG, Weaknesses Identified During the FY 2010 Federal Information Security Management Act
Review, Report 11-06, issued January, 28, 2011.
 OIG, Audit of SBA’s FY 2010 Financial Statements, Report 11-03, issued November 12, 2010.

Challenge 3:
 OPM, 2012 Federal Employee Viewpoint Survey.
 OPM, 2011 Federal Employee Viewpoint Survey.
 Partnership for Public Service, Best Places to Work in the Federal Government 2011.
 OPM, 2010 Federal Employee Viewpoint Survey.
 Partnership for Public Service, Best Places to Work in the Federal Government 2010.
 Partnership for Public Service, Best Places to Work in the Federal Government 2009.
 OPM, 2008 Federal Human Capital Survey.
 OIG, The Colorado District Office’s Servicing of 8(A) Business Development Program Participants,
Report 10-15, issued September 30, 2010.

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 OIG, Adequacy of Procurement Staffing and Oversight of Contractors Supporting the Procurement Function,
ROM 10-13, issued April 9, 2010.
 GAO, Agency Should Assess Resources Devoted to Contracting and Improve Several Processes in the
8(a) Program, GAO-09-16, issued November 2008.
 GAO, Opportunities Exist to Build on Leadership’s Efforts to Improve Agency Performance and Employee
Morale, GAO-08-995, issued September 2008.
 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,
issued 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, issued November 2007.
 OIG, Audit of Two 8(a) Sole-Source Contracts Awarded to Contractors in SBA’s Mentor Protégé Program,
Report 7-19, issued March 30, 2007.

Challenge 4:
 OIG, Purchase Reviews Allowed $4.6 Million in Improper Payments on 7(a) Recovery Act Loans,
Report 13-16R, issued June 14, 2013.
 OIG, Evaluation of SBA’s Progress in Reducing Improper Payments in FY 2012, Report 13-13, issued
March 14, 2013.
 OIG, The Small Business Administration’s Improper Payment Rate for 7(a) Guaranty Purchases Remains
Significantly Understated, Report 13-07, issued November 15, 2012.
 OIG, A Detailed Repayment Ability Analysis is Needed on High-Dollar Early-Defaulted Loans to Prevent
Future Improper Payments, Report 12-18, issued August 16, 2012.
 OIG, High-Dollar Early-Defaulted Loans Require an Increased Degree of Scrutiny and Improved Quality
Control at the National Guaranty Purchase Center, Report 12-11R, issued March 23, 2012.
 OIG, SBA Generally Meets IPERA Reporting Guidance but Immediate Attention Is Needed to Prevent and
Reduce Improper Payments, Report 12-10, issued March 15, 2012.
 OIG, Origination and Closing Deficiencies Identified in 7(a) Recovery Act Loan Approvals, ROM 11-07,
issued September 30, 2011.
 OIG, Material Deficiencies Identified in Five 7(a) Recovery Act Loans Resulted in $2.7 Million of Questioned
Costs, ROM 11-06, issued August 25, 2011.
 OIG, Banco Popular Did Not Adequately Assess Borrower Repayment Ability When Originating Huntington
Learning Center Franchise Loans, Report 11-16, issued July 13, 2011.
 OIG, Material Deficiencies Identified in Four 7(a) Recovery Act Loans Resulted in $3.2 Million of
Questioned Costs, ROM 11-05, issued June 29, 2011.
 OIG, America’s Recovery Capital Loans Were Not Originated and Closed In Accordance With SBA’s Policies
and Procedures, ROM 11-03, issued March 2, 2011.
 OIG, Material Deficiencies Identified in Early-Defaulted and Early-Problem Recovery Act Loans,
ROM 10-19 , issued September 24, 2010.
 OIG, SBA’s Management of the Backlog of Post-purchase Reviews at the National Guaranty Purchase Center,
Report 9-18, issued August 25, 2009.
 OIG, The Small Business Administration’s Fiscal Year 2008 Improper Payment Rate for the 7(a) Guaranty
Loan Program, Report 9-16, issued July 10, 2009.
 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, issued
April 30, 2009.
 OIG, Audit of the Liquidation Process at the National Guaranty Purchase Center, Report 9-08, issued
January 30, 2009.
 OIG, Audit of Six SBA Guaranteed Loans, Report 8-18, issued September 8, 2008.
 OIG, Audit of Loan Classifications and Overpayments on Secondary Market Loans, Report 8-09, issued
March 26, 2008.

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 OIG, Audit of UPS Capital Business Credit’s Compliance with Selected 7(a) Lending Requirements,
Report 8-08, issued March 21, 2008.
 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.
 OIG, Audit of an SBA Guaranteed Loan, Report 7-17, issued March 12, 2007.
 OIG, Audit of an SBA Guaranteed Loan, Report 7-15, issued February 12, 2007.
 OIG, Audit of an SBA Guaranteed Loan, Report 7-10, issued January 16, 2007.
 OIG, Audit of an SBA Guaranteed Loan, Report 7-09, issued January 9, 2007.
 OIG, Audit of an SBA Guaranteed Loan, Report 7-07, issued December 29, 2006.
 OIG, Audit of an SBA Guaranteed Loan, Report 7-06, issued December 28, 2006.
 OIG, Audit of an SBA Guaranteed Loan, Report 7-05, issued December 20, 2006.
 OIG, Audit of an SBA Guaranteed Loan, Report 7-02, issued October 23, 2006.
 OIG, Audit of Deficiencies in OFA’s Purchase Review Process for Backlogged Loans, Report 6-35, issued
September 29, 2006.
 OIG, Survey of the Quality Assurance Review Process, Report 6-26, issued July 12, 2006.

Challenge 5:
 OIG, Addressing Performance Problems of High-Risk Lenders Remains a Challenge for the Small Business
Administration, Report 12-20R, issued September 28, 2012.
 OIG, SBA’s Oversight of SBA Supervised Lenders, Report 8-12, issued May 9, 2008.
 OIG, UPS Capital Compliance with Selected 7(a) Lending Requirements, Report 8-08, issued March 21,
2008.
 GAO, Small Business Administration: Additional Measures Needed to Assess 7(a) Loan Program’s
Performance, GAO-07-769, issued July 13, 2007.
 OIG, SBA’s Oversight of Business Loan Center, LLC, Report 7-28, issued July 11,2007.
 OIG, SBA’s Use of the Loan and Lender Monitoring System, Report 7-21, issued May 2, 2007.
 OIG, Audit of the Office of Lender Oversight Corrective Action Process, Report 7-18, issued March 14, 2007.
 GAO, Small Business Administration: Improvements Made, But Loan Programs Face Ongoing Management
Challenges, GAO-06-605T, issued April 6, 2006.
 OIG, SBA’s Administration of the Supplemental Terrorist Activity Relief (STAR) Loan Program, Report 6-09,
issued 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, issued June 8, 2004.
 GAO, Continued Improvements Needed in Lender Oversight, Report 03-90, issued December 2002.
 OIG, Impact of Loan Splitting on Borrowers and SBA, Advisory Memorandum Report 2-31, issued
September 30, 2002.
 OIG, Improvements needed in SBLC Oversight, Advisory Memorandum Report 2-12, issued March 20, 2002.
 OIG, Preferred Lender Oversight Program, Report 1-19, issued September 27, 2001.
 OIG, SBA Follow-up on SBLC Examinations, Report 1-16, issued August 17, 2001.

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

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

Challenge 8:
 OIG, The Small Business Administration’s Loan Management and Accounting System Incremental
Improvement Projects, Report 13-11, issued March 12, 2013.
 GAO, SBA Needs to Strengthen Oversight of Its Loan Management and Accounting System Modernization,
GAO-12-295, issued January 2012.
 OIG, Adequacy of Quality Assurance Oversight of the Loan Management and Accounting System Project,
Report 10-14, issued September 13, 2010.
 OIG, Review of Allegations Concerning How the Loan Management and Accounting System Modernization
Project is Being Managed, Report 9-17, issued July 30, 2009.
 OIG, Planning for the Loan Management and Accounting System Modernization and Development Effort,
Report 8-13, issued May 14, 2008.
 OIG, SBA Needs to Implement a Viable Solution to its Loan Accounting System Migration Problem,
Report 5-29, issued September 20, 2005.
 GAO, Information Technology: Agencies Need to Improve the Accuracy and Reliability of Investment
Information, GAO-06-250, issued January 12, 2006.
 GAO, Major Management Challenges and Program Risks: Small Business Administration, GAO-03-116,
issued 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, issued February 29, 2000.
 GAO, SBA Needs to Establish Policies and Procedures for Key IT Processes, Accounting and Information
Management Division, GAO/AIMD-00-170, issued May 31, 2000.

Challenge 9:
 OIG, Purchase Reviews Allowed $4.6 Million in Improper Payments on 7(a) Recovery Act Loans,
Report 13-16R, issued June 14, 2013.
 OIG, Evaluation of SBA’s Progress in Reducing Improper Payments in FY 2012, Report 13-13, issued
March 14, 2013.
 OIG, The Small Business Administration’s Improper Payment Rate for 7(a) Guaranty Purchases Remains
Significantly Understated, Report 13-07, issued November 15, 2012.
 OIG, A Detailed Repayment Ability Analysis is Needed on High-Dollar Early-Defaulted Loans to Prevent
Future Improper Payments, Report 12-18, issued August 16, 2012.
 OIG, High-Dollar Early-Defaulted Loans Require an Increased Degree of Scrutiny and Improved Quality
Control at the National Guaranty Purchase Center, Report 12-11R, issued March 23, 2012.
 OIG, SBA Generally Meets IPERA Reporting Guidance but Immediate Attention Is Needed to Prevent and
Reduce Improper Payments, Report 12-10, issued March 15, 2012.
 OIG, Origination and Closing Deficiencies Identified In 7(a) Recovery Act Loan Approvals,
ROM 11-07, issued September 30, 2011.
 OIG, Material Deficiencies Identified in Five 7(a) Recovery Act Loans Resulted in $2.7 Million of Questioned
Costs, ROM 11-06, issued August 25, 2011.
 OIG, Banco Popular Did Not Adequately Assess Borrower Repayment Ability When Originating Huntington
Learning Center Franchise Loans, Report 11-16, issued July 13, 2011.

104 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

 OIG, Material Deficiencies Identified in Four 7(a) Recovery Act Loans Resulted in $3.2 Million of Questioned
Costs, ROM 11-05, issued June 29, 2011.
 OIG America’s Recovery Capital Loans Were Not Originated and Closed In Accordance With SBA’s Policies
and Procedures, ROM 11-03, issued March 2, 2011.
 OIG, Material Deficiencies Identified in Early-Defaulted and Early-Problem Recovery Act Loans,
ROM 10-19, issued September 24, 2010.
 OIG, SBA’s Management of the Backlog of Post-Purchase Reviews at the National Guaranty Purchase
Center, Report 9-18, issued August 25, 2009.
 OIG, The Small Business Administration’s Fiscal Year 2008 Improper Payment Rate for the 7(a) Guaranty
Loan Program, Report 9-16, issued July 10, 2009.

Challenge 10:
 OIG, SBA Generally Meets IPERA Reporting Guidance but Immediate Attention Is Needed to Prevent and
Reduce Improper Payments, Report 12-10, issued March 15, 2013.
 OIG, Evaluation of SBA’s Progress in Reducing Improper Payments in FY 2012, Report 13-13, issued
March 14, 2013.

Challenge 11:
 OIG, The Small Business Administration’s Process Could Lead to Possible Anti-Deficiency Act Violations,
Report 12-22, issued September 28, 2012.
 OIG, The Small Business Administration’s Inappropriate Use of the Government Purchase Card for
Construction Purchases, Report 12-16, issued August 6, 2012.
 OIG, The SBA’s Improper Payment Review and Reporting for its Contracting Activities did not Comply with
IPERA and IPIA Requirements During FY 2011, Report 12-07, issued March 8, 2012.
 OIG, Small Business Administration’s Funding of Information Technology Contracts Awarded to Isika
Technologies, Inc., Report 11-14, issued June 2, 2011.
 OIG, SBA’s Procurement of Information Technology Hardware and Software through Isika Technologies,
Inc., Report 11-08, issued February 25, 2011.
 OIG, SBA’s Planning and Award of the Customer Relationship Management Contracts, ROM 10-16, issued
June 29, 2010.
 OIG, SBA’s Efforts to Improve the Quality of Acquisition Data in the Federal Procurement Data System,
Report 10-08, issued February 26, 2010.
 OIG, Adequacy of Procurement Staffing and Oversight of Contractors Supporting the Procurement Function,
ROM 10-13, issued April 9, 2010.
 OIG, Office of Business Operations Contracting Personnel Qualifications and Warrant Authority,
Report 9-14, issued July 6, 2009.
 OIG, The SBA FY 2012 Reported Improper Payment Rate for Disbursements and Contracting was Inaccurate
and Incomplete, Report 14-02, issued October 24, 2013.

DID
YOU In FY 2013, SBA small business development centers contributed to the
KNOW creation of 161 companies that are new to exporting and supported $3
billion in export sales.

AGENCY FINANCIAL REPORT • FY 2013 105
OT HE R I N FO R M ATI O N

SUMMARY OF FINANCIAL STATEMENT AUDIT AND MANAGEMENT
ASSURANCES
As required by OMB Circular A-136, Section II.5.7, the following summarizes SBA’s Financial Statement Audit and
Management Assurances:

Summary of Financial Statement Audit
Audit Opinion Unmodified
Restatement No

Material Weaknesses Beginning Balance New Resolved Consolidated Reassessed Ending Balance
None 0 0 N/A N/A N/A 0

Summary of Management Assurances
Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)
Statement of Assurance Unqualified

Material Weaknesses Beginning Balance New Resolved Consolidated Reassessed Ending Balance
None 0 0 N/A N/A N/A 0

Effectiveness of Internal Control over Operations (FMFIA § 2)
Statement of Assurance Unqualified

Material Weaknesses Beginning Balance New Resolved Consolidated Reassessed Ending Balance
None 0 0 N/A N/A N/A 0

Conformance with Financial Management System Requirements (FMFIA § 4)
Statement of Assurance Systems conform to financial management system requirements.

Non-Conformances Beginning Balance New Resolved Consolidated Reassessed Ending Balance
None 0 0 N/A N/A N/A 0

Conformance with Federal Financial Management Improvement Act (FFMIA)
Agency Auditor
1. System Requirements No noncompliance noted No noncompliance noted
2. Accounting Standards No noncompliance noted No noncompliance noted
3. USSGL at Transaction Level No noncompliance noted No noncompliance noted

106 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

IMPROPER PAYMENTS Disbursements for goods and services were identified as
risk susceptible in FY 2011 and have been subject to im-
proper payment review since FY 2012.
Improper Payments
As required by the Improper Payment Information Act Statistical Sampling and Corrective Actions
of 2002 (IPIA), its amendments, and OMB Circular No. To provide more clarity for the reader, this section is
A-123, Appendix C, Management’s Responsibility for organized by program/activities and provides statistical
Internal Control: Requirements for Effective Measurement sampling information coupled with corrective actions.
and Remediation of Improper Payments, the SBA re-
viewed all programs and activities identified as susceptible 7(a) Loan Guaranty Purchases
to significant improper payments. Significant improper
payments are defined as payments in any one program Statistical Sampling
that either exceed 2.5 percent of program payments and For 7(a) loan guaranty purchase reviews, the sample cases
$10 million annually or exceed $100 million regardless were chosen using Probability Proportional to Size (PPS)
of the improper payment percentage of the total program sampling with replacement methodology from all purchas-
payments. es approved during the 12-month period ending March
31, 2013. The purchase population was divided into two
Risk Assessment strata based on the following factors: (1) which servicing
office processed the purchase, and (2) was the loan an early
OMB Circular No. A-123 requires risk assessments at default, regardless of servicing office. The SBA deter-
least once every three years for programs not deemed risk mined the appropriate sample size to be 300 loans from
susceptible or if a program was subjected to a significant the population. The sample included aggregate purchase
change in legislation or funding level. During FY 2011, outlays of $165,102,565 and an absolute value of im-
following the passage of the Improper Payments Elimi- proper payments of $401,972. Using the Hansen-Hurwitz
nation and Recovery Act of 2010 (amended the IPIA), estimation method, the estimated improper payment rate
the SBA conducted risk assessments of all programs and for the 7(a) guaranty purchase population was calculated at
activities for susceptibility to improper payments. Since 1.15 percent.
no significant changes occurred to any SBA program or
activity during FY 2013, the SBA did not conduct any The 7(a) loan guaranty purchase reviews examined if the
new risk assessments. lender complied materially with the 7(a) loan program
requirements including statutory provisions, SBA regula-
The SBA reviews four programs/activities for improper tions, any agreement the lender executed with the SBA,
payments – three major credit programs and disburse- standard operating procedures, loan authorizations, and
ments for goods and services. The three major credit official SBA notices and forms applicable to the 7(a) loan
programs are: program. The reviews determined if the lender (1) origi-
nated the loan in a prudent and commercially reasonable
• 7(a) business loan program that includes guaranty
manner, (2) misrepresented or failed to disclose a material
purchases and guaranty approvals,
fact to the SBA, and/or (3) put the SBA’s financial interest
• 504 Certified Development Company loan guar- at risk.
anty approvals, and
• Disaster direct loan disbursements. Corrective Action

SBA’s major credit programs are reviewed for improper The root cause for all 7(a) loan guaranty purchase im-
payments as required by the former Section 57 of OMB proper payments were administrative and documentation
Circular No. A-11. A fourth major credit program, the errors. Improper payments generally arose when the
Small Business Investment Company program, retains ap- purchase processor failed to identify material lender defi-
proval from OMB for relief from reporting due to the low ciencies in the handling of an SBA guarantied loan. The
occurrence of improper payments determined by several primary reasons for errors in 7(a) purchases in FY 2013
years’ review and low probability for improper payments. included:

AGENCY FINANCIAL REPORT • FY 2013 107
OT HE R I N FO R M ATI O N

• ineligible loan structures; Using the Hansen-Hurwitz estimation method, the
• incorrect payment of interest to lender due to inter- estimated improper payment rate was calculated as 4.65
est calculation using an incorrect rate; and percent.
• reimbursement of lender expenses that were not The 7(a) loan guaranty approval reviews were conducted
fully justified. to examine if the lender complied materially with the 7(a)
loan program origination requirements including statu-
As a means to reduce and/or eliminate the occurrence
tory provisions, SBA regulations, any agreement the lender
of future improper payments, a Corrective Action Plan
executed with the SBA, standard operating procedures,
has been formalized for the 7(a) loan guaranty purchase
loan authorizations, and official SBA notices and forms ap-
centers. Specific corrective actions are determined based
plicable to the 7(a) loan program. The reviews determined
upon the primary reason for the error and are designed to
if the lender (1) originated the loan in a prudent and com-
remedy the error and ensure the error does not occur in the
mercially reasonable manner, (2) misrepresented or failed
future. Plans for improvement include:
to disclose a material fact to the SBA, and/or (3) put the
• external training for lenders to avoid ineligible loan SBA’s financial interest at risk.
structures;
• internal training for purchase processors to detect Corrective Action
ineligible loan structures, select the proper interest The root cause for all 7(a) loan guaranty approval improper
rate, and identify appropriate lender expenses; and payments were administrative and documentation errors.
• recovery of lender expenses that were not fully justi- Approximately 70 percent of the improper payments
fied. identified were associated with delegated lender approved
loans. The primary reasons for errors in 7(a) approvals in
Corrective actions are tracked at the loan level through FY 2013 include:
a centralized database. The Quality Control Specialist
in each loan center monitors errors from identification • ineligible loan structures;
through completion of the corrective action. Headquarters • improper use of loan proceeds (not in accordance
management provides oversight to ensure milestones are with loan authorization); and
met. • improper determination of loan eligibility by lenders
or SBA loan officers.
7(a) Loan Guaranty Approvals
As a means to reduce and/or eliminate the occurrence of
Statistical Sampling future improper payments, a Corrective Action Plan has
For 7(a) loan guaranty approval reviews, the sample been formalized for the 7(a) loan guaranty approval cen-
cases were chosen using PPS sampling with replacement ters. Specific corrective actions are determined based upon
methodology from all loan guaranties approved during the primary reason for the error with the purpose of both
the 12-month period ending March 31, 2013. The loan remedying the error and ensuring the error does not occur
sample consisted of delegated lender approved and non- in the future. Plans for improvement include:
delegated SBA approved loan guaranties. Loan guaran-
ties approved by the SBA are processed in the Standard • external training for lenders to avoid ineligible loan
7(a) Loan Guaranty Processing Center with locations in structures, ensure proper use of loan proceeds, and
Sacramento, California and Hazard, Kentucky. Lender accurately determine loan eligibility; and
approved guaranties are submitted using E-Tran Origina- • internal training for loan approvers to determine
tion, the SBA’s electronic loan processing system, allowing eligibility of loan and loan structures within SBA
delegated lenders to electronically submit Preferred Lender guidelines.
Program and SBAExpress loan approvals. The approval
Corrective actions are tracked at the loan level through
population was divided into two strata based on whether
a centralized database. The Quality Control Specialist
or not the loan was SBAExpress. The SBA determined the
for 7(a) loan guaranty approvals monitors errors from
appropriate sample size to be 287 loans from the popu-
identification through completion of the corrective action.
lation. The sample included net guaranty approvals of
$291,147,356 and improper payments of $16,263,287.

108 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

Headquarters management provides oversight to ensure Disaster Direct Loan Program
milestones are met.
Statistical Sampling
504 CDC Loan Guaranty Approvals The Office of Disaster Assistance performs a Quality
Assurance Review (QAR) of the approved disaster loan
Statistical Sampling
portfolio annually. A part of the QAR is to identify any
For 504 CDC loan approval reviews, the sample cases were deficiency that would result in an improper payment.
chosen using PPS sampling with replacement methodolo- The statistical software and methods used follow widely
gy from all loan guaranties approved during the 12-month accepted practices. The review population consisted of
period ending March 31, 2013. The loan guaranties were disaster loan disbursements made during the 12-month
approved at SBA’s Sacramento Loan Processing Center and period ending June 30, 2013 for 33,219 loans with total
closed at various SBA district offices, with servicing subse- disbursements of $659,046,000. A sample size of 500 was
quently handled by the Fresno Commercial Loan Servicing determined based on assumptions about the likely preva-
Center and the Little Rock Commercial Loan Servicing lence and severity of improper payments. The 500 sample
Center. The approval population was not stratified. The disbursements were randomly selected for the QAR and
SBA determined the appropriate total sample size to be yielded an improper payment rate of 18.4 percent. Based
180 loans from the population. The sample included net on the sample results, the estimated improper payments
approval outlays of $257,870,000 and one improper pay- were $121,056,000. The improper payment rate increased
ment of $456,400. Using the Hansen-Hurwitz estima- slightly, by 0.5 percent, from the FY 2012 rate.
tion method, the estimated improper payment rate was
calculated as 0.54 percent. The scope of ODA’s review covers three primary compli-
ance areas: (1) basic eligibility, (2) adherence to relevant
The 504 CDC loan approval reviews were conducted laws, rules, regulations and standard operating procedures
to examine if the lender complied materially with the and (3) credit worthiness.
program’s origination requirements including statutory
provisions, SBA regulations, any agreement the CDC ex- Corrective Action
ecuted with the SBA, standard operating procedures, loan
The root cause of improper payments for disaster direct
authorizations, and official SBA notices and forms appli-
loans were administrative and documentation errors. The
cable to the 504 CDC loan program. The reviews were to
processing and disbursement staff did not consistently fol-
determine if the CDC (1) originated the loan in a prudent
low the guidance provided in the SOP and policy memos.
and commercially reasonable manner, (2) misrepresented
Specifically, errors arose when:
or failed to disclose a material fact to the SBA, and/or (3)
put the SBA’s financial interest at risk. • loan officers failed to confirm the eligibility of non-
real property included in business loan files; and
Corrective Action
• loan officers failed to justify the economic injury
The root cause for the 504 CDC loan guaranty approval eligibility determinations.
improper payment was an administrative and documen-
tation error. The only error identified stemmed from As a result, ODA implemented the following corrective
a lender-approved loan that the SBA determined to be actions:
ineligible during improper payment testing. The SBA
• expanded training efforts to include one-on-one
and the lender agreed to cancel the loan as it had not been
training with the individuals identified in the audits
disbursed. The SBA provided guidance to the lender for
as either taking the action or approving the action
the specific error to prevent future occurrences, which was
that resulted in an improper payment;
documented in accordance with the center’s 504 CDC
loan guaranty approvals corrective action plan. • included the reduction of the improper payment
rate as part of the Personal Business Commitment
plans of all the processing and disbursement staff at
the Processing and Disbursement Center (PDC) in
Fort Worth, TX; and

AGENCY FINANCIAL REPORT • FY 2013 109
OT HE R I N FO R M ATI O N

• established a team at the PDC that reports directly It is important to note that the findings revealed no
to the center director for the express purpose of apparent significant overpayments or opportunities for
identifying and correcting potential improper pay- recapture. All payments corresponded to valid goods and
ments. services received. Payment accuracy issues related to SAM
account for 4.4 percent of the 11.6 percent improper
ODA disputes that the stated improper payment rate payment rate. SAM lacks vendor account history, so the
truly reflects the potential that disaster loans are disbursed vendor account registered at the time of payment could
to disaster victims that are not eligible under the disaster not be determined; only the registered account at the time
loan program. The improper payments consisted of 92 of testing for improper payments was confirmed. It is
disbursements out of the 500 disbursements reviewed. Of possible that some payments identified as erroneous were
the 92 considered to be improper payments, 42 were for disbursed to a registered account.
“paperwork” issues. The paperwork issues did not result in
a disaster loan borrower receiving any loan funds that they To prevent the administrative and documentation errors
were not eligible to receive or have any impact on SBA’s noted in the improper payment review, the SBA plans to
ability to collect on the disaster loans. complete the following corrective actions in the coming
year:
Disbursements for Goods and Services
• enhance on-going training and instruction to
Statistical Sampling include special emphasis on issues identified during
Disbursements for goods and services samples were chosen the FY 2013 review. Training will be tailored for
using PPS with replacement methodology for payments the three primary responsible parties: contracting
completed during the 12 months ending March 31, 2013. officers, contracting officer’s representatives, and
The total number of disbursements was 3,980 and the accounts payable staff. Training will include but
total dollar amount was $121,360,983. The SBA deter- not be limited to: the delineation of responsibilities
mined the appropriate sample size to be 250 invoices with of each party; steps to thoroughly review an invoice;
total outlays of $53,028,411. Based upon the sample and a review of the applicable guidelines about
results, the estimated FY 2013 disbursements for goods invoice receipt and payment; and
and services improper payment rate was 11.6 percent for a • explore the possibility of an interface between the
total of $14.1 million. SAM and the SBA financial system to ensure the
most current contractor payment information is
The scope of the review covered three areas: invoice ac- available at the time of payment.
curacy, compliance with contract terms, and accuracy of
invoice processing. Until an interface with SAM is developed, the SBA has
implemented manual procedures to verify SAM data and
Corrective Action has made updates to financial systems to prepare for an
interface with SAM. The manual procedures were applied
The root cause of improper payments in the disburse-
during the sample period; as such, the full benefit of the
ments for goods and services improper payment review
change was not realized in the sample results.
were administrative and documentation errors. While the
improper payment rate increased by 2.0 percent from the
FY 2012 rate of 9.6 percent, no new types of errors were Improper Payment Reporting
uncovered in the improper payment review. The types of
errors included: The table on the next page presents the summary of
SBA’s Improper Payment review results for FY 2013.
• inadequate comparison of the invoice to the con-
tract to verify period of performance, labor rates
Recapture of Improper Payments
and categories to ensure they agree; and
• payment accuracy issues where the financial system The SBA does not currently conduct recapture audits,
was not updated at the time of payment with cur- therefore tables 2-5 defined by OMB Circular No. A-136
rent vendor payment information from the System are not included in this report. Agency efforts to deter-
for Award Management (SAM). mine the effectiveness of recapturing improper payments
are discussed by program.

110 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

7(a) loan guaranty purchase improper payment reviews, the cancellation of the SBA guaranty, reduction in loan
Quality Control Reviews and OMB Circular A-123 Ap- guaranty percentage, or loan modification, as appropriate.
pendix A reviews have indicated that payment recapture This determination is made on a case-by-case basis, which
audits would be cost effective. The SBA has developed varies substantially depending on the circumstances of the
a robust Quality Control Review process and is explor- loan approval and lender authority.
ing the feasibility of expanding the scope of the reviews
to include payment recapture audits. This process would Disaster direct loans recapture audits would not be cost
require additional human resources, coordination of effective. The Office of Disaster Assistance made this de-
sampling techniques with a statistician, and a review termination after completing the second half of the 2013
process specific to identifying overpayments. The SBA’s Improper Payment audit. The audit was completed by the
quality control staff in the Office of Capital Access already Quality Assurance Review team located in the Processing
conducts continuous Quality Control Reviews to assess Disbursement Center. The team reviewed 250 disburse-
the quality of the loans and loan documentation and to ments as part of the audit. The review identified 64
identify potential improper payments. Overpayments disbursements as improper payments totaling $6,457,999.
identified through both the continuous review processes Pertaining to recovery of the 64 improper payments:
and annual improper payment reviews are recovered from • 28 of the disbursements, totaling $2,577,700 were
the lender as appropriate. The recovery determination is for paperwork issues and not subject to recovery;
made on a case-by-case basis, which varies substantially de-
pending on the circumstances of the loan approval, servic- • 25 of the disbursements, totaling $3,580,499
ing, purchase and/or liquidation processes. The amount were determined as not subject to recovery due to
identified for recapture during the 7(a) Loan Guaranty information received or analysis completed after the
Purchase improper payment review was $401,972. initial approval; and
• of the remaining erroneous 11 payments totaling
7(a) loan guaranty approval and 504 CDC loan $299,800, only $7,800 was identified for potential
approval are not subject to payment recapture audits as recovery.
no payment is made at the time of approval; payment is
made only if the lender requests that the SBA honor its The amount subject to recovery was 0.12 percent of the
guaranty. Improper payments identified through both sample. Therefore, the estimated amount of disaster loan
the annual improper payment and continuous Quality funds subject to recovery for the entire population in the
Control reviews are recovered from the lender through second half IP audit was $46,629. The second half IP

IMPROPER PAYMENT REDUCTION OUTLOOK ($ IN MILLIONS)
FY 20121 FY FY 2012 FY FY FY FY FY FY FY FY FY FY FY FY FY FY
Outlays $ 2012 IP $ 20131 2013 2013 2013 2013 20141 2014 2014 20151 2015 2015 20161 2016 2016
Program
IP % Outlays $ IP % IP $ Over- Under- Outlays IP % IP $ Outlays IP % IP $ Outlays IP % IP $
paid $ paid $ $ Est. $ Est. $ Est.
7(a) Guaranty
1,398.4 3.2 44.0 1,211.4 1.15 13.9 9.6 4.3 1,300.0 2.2 28.6 1,350.0 1.75 23.6 1,300.0 2.0 26.0
Purchases1

7(a) Guaranty
12,933.7 1.8 233.2 10,994.5 4.6 510.9 510.9 0.0 11,500.0 4.0 460.0 12,500.0 3.8 475.0 12,000.0 3.6 432.0
Approvals1,2

504 CDC
Guaranty 5,121.6 2.0 104.5 6,386.9 .54 34.4 34.4 0.0 6,700.0 1.3 87.1 7,100.0 1.2 85.2 7,500.0 1.1 82.5
Approvals1

Disaster Loan
509.1 17.9 91.0 659.0 18.4 121.1 121.1 0.0 800.0 15.0 120.0 800.0 13.0 104.0 800.0 10.0 80.0
Disbursements1

Contract
130.0 9.6 12.5 121.4 11.6 14.1 14.1 0.0 125.0 10.0 12.5 125.0 9.0 11.3 125.0 8.0 10.0
Disbursements

1. Outlays in this report represent the base amount of the program activity related to SBA improper payments; and this amount will differ from the amount reported as outlays in SBA’s President’s Budget submissions because they
include reestimates of subsidy cost, reimbursements to SBA administrative funds and other costs. Outlays for 7(a) Guaranty Purchases are the amount of disbursements for the purchase of defaulted guarantied loans. Outlays
for 7(a) Guaranty Approvals are the amount of new guaranty approvals by banks and other SBA lending partners. Outlays for 504 CDC Loans Guarantied are approvals irrespective of disbursement, net of approval increases,
decreases, reinstatements and cancellations for the current year. Outlay figures for Disaster are loan disbursements on current year approvals.
2. For 7(a) Guaranty Approvals, amounts reported are based on the guarantied amount only.

AGENCY FINANCIAL REPORT • FY 2013 111
OT HE R I N FO R M ATI O N

audit was completed using 2,891 hours of staff time and strengthen SBA’s core programs and operations to ensure
cost approximately $114,195. Based on the cost to audit that they are high performing, effective, and relevant to
versus the estimated dollars of recovery, it is clear that the needs of the small business community. SBA’s strategic
further expenditures for a separate recovery audit is not goals are included in annual performance plans for all of
cost effective. its programs as business objectives, which are included in
employee performance plans. SBA management monitors
Disbursements for goods and services recapture audits accomplishments of these business objectives and takes
would not be cost effective. The improper payment testing action when progress toward goal achievement is not on
required 830 labor hours at a cost of $51,700. Payments target. Executive and management bonuses are based on
identified during the improper payment review as eligible the accomplishment of business objectives included in
for recapture totaled $1,893; thus the cost of the review far employee annual performance plans. This management
exceeds the return. process helps assure accountability for improper payment
Overpayments Recaptured Outside of Payment reduction.
Recapture Audits are applicable only to 7(a) loan guar-
anty purchases or disbursements for goods and services as Information Systems and Other
payments made within these program areas are recoverable
Infrastructure
from lenders and vendors as appropriate. Overpayments
for disaster loans are collected through the normal loan 7(a) loan guaranty purchases are supported by the Guar-
repayment process if the overpayment was due to an SBA anty Purchase Tracking System. It is continually updated
error. Overpayments as a result of fraudulent actions of a to enhance the overall integrity of the purchase process.
borrower are immediately pursued. The amount identi-
fied for recapture during the 7(a) Loan Guaranty Purchase 7(a) loan guaranty approvals and 504 CDC loan guar-
improper payment review was $401,972. Cash disburse- anty approvals are supported by E-Tran, SBA’s electronic
ments related to goods and services made for an inaccurate loan processing/servicing system. The system provides in-
amount or not according to contract terms total $1,893. creased efficiency and decreased costs in the loan guaranty
origination and servicing processes. Both the SBA and
delegated lenders process applications through this system.
Accountability Lenders may also handle unilateral servicing actions.
The focus of SBA’s Strategic Goal 2 is to build an SBA that Disaster direct loan program has the information systems
meets needs of today’s and tomorrow’s small businesses. and other infrastructure it needs to reduce improper
Strategic Objective 2.1, with that goal, is designed to payments to targeted levels. For example, the Office of
Disaster Assistance has an integrated,
electronic loan processing system, the
OVERPAYMENTS RECAPTURED OUTSIDE OF PAYMENT RECAPTURE AUDITS ($ IN THOUSANDS) Disaster Credit Management System
(DCMS), to streamline, enhance and
Source of
Amount Amount Amount Amount Cumulative Cumulative improve the loan-making process. This
Identified Recovered Identified Recovered Amount Amount system supports workflow management,
Recovery
FY 2013 FY 2013 FY 2012 FY 2012 Identified Recovered
electronic file management and document
7(a) Loan
generation functions. Many of the busi-
Guaranty ness rules governing DCMS have been
402.0 195.8 5,078.4 604.7 7,080.1 903.5
Purchase IP designed to improve the quality assur-
Review1
ance process. In fact, the ODA Quality
Assurance Team works continually with
Contract IP
1.9 0.0 2.1 0.0 36.2 32.2 the DCMS development team to improve
Review2
the quality assurance process with a goal
1 Amount Identified for FY 2012 has been reduced by $1,383.9. Subsequent to FY 2012 reporting, the payment was determined to minimize future improper payments as
to be proper.
much as possible.
2. Amount Identified for FY 2012 has been reduced by $3.2. Subsequent to FY 2012 reporting, $2.4 was determined to be proper
and $0.8 represents several small overpayments for which recovery was determined not to be cost effective.

112 AGENCY FINANCIAL REPORT • FY 2013
OT H ER INF OR MATI ON

Disbursements for goods and services are supported Statutory or Regulatory Barriers
by the Oracle Federal Financial System. The contracting
process is supported by the PRISM Contract Management The SBA does not have any statutory or regulatory barriers
System, which tracks and records acquisitions. The SBA limiting improvement to its performance on the improper
Acquisition and Accounts Payable teams continue work payments initiative.
to improve interfaces between the contracting system,
financial system and external databases such as SAM to
streamline the acquisition process from start to finish.

SUCCESS STORY: “To Move Forward” is
Company’s Motto
Ishpi Information Technologies, Inc.,
Mount Pleasant, South Carolina

In September 2006, Noah Leask, a service-disabled U.S. Navy
veteran, started a cyber-defense business out of his home with his
wife Lisa, a former U.S. Naval officer.

Noah, a member of the Sault Ste. Marie Tribe of Chippewa Indians,
called the business ISHPI, which means “to move forward” in the

Chippewa language. The business supports U.S. counter-terrorism
efforts through information operations and intelligence support services. Clients include the U.S. Central
Command and the Department of Homeland Security.

In August 2007, ISHPI was accepted into the SBA’s 8(a) Business Development program. Seven months later the com-
pany received $261,000 in working capital through an SBA guarantied loan under the Patriot Express loan program.

By 2009, federal funding cuts brought ISHPI’s string of successes to a sudden standstill. Two major contracts
were cancelled forcing Noah to lay off 30 employees. Realizing that his company’s client acquisition methods
were inadequate, he assembled a new senior management team focused on diversifying ISHPI’s customer base.
With its renewed sales focus, ISHPI was able to win enough contracts to increase its revenue by more than 18
percent in 2011. A year later, ISHPI had 109 employees in four locations nationwide. Revenues surpassed $17
million, an increase of nearly 250 percent over 2011.

Noah Leask serves as the board chairman for the Tri-County Autism Puzzle Place Academy and is a member
of the Lowcountry Special Olympics and Unified Athletics committees. He is the recipient of the SBA 2013
South Carolina Small Business Person of the Year award.

AGENCY FINANCIAL REPORT • FY 2013 113
OT HE R I N FO R M ATI O N

SUCCESS STORY: Fast Growing Hispanic-owned
Firm Develops Sophisticated
Data Systems
Applied Technology Associates,
Albuquerque, New Mexico

Anthony Tenorio is the Chairman and CEO of Applied Technology
Associates (ATA), a company which supplies precision measurement,
sensing and controls devices to commercial and government clients.
Tenorio began his career at ATA in 1983, developing sophisticated
data systems that supported U.S. Air Force research projects. Under
his leadership as CEO and principal owner, ATA has become one of
America’s fastest-growing Hispanic-owned small businesses.

In growing ATA, Tenorio took advantage of a number of SBA tools
and resources including an SBA 504 loan and the SBA Small Business
Innovation Research (SBIR) program. He is also a graduate of SBA’s
8(a) Business Development program which is designed to help small,
disadvantaged businesses compete for federal contracts. In 2004, he
was SBA’s Prime Contractor of the Year.

Tenorio graduated from Estancia High School and earned degrees from Eastern New Mexico University and
the University of New Mexico. Among many civic contributions, he lent his expertise and leadership to the
Estancia School Board for many years where he helped upgrade infrastructure and improve academic programs.
During his tenure, both a new high school and a new elementary school were built.

Anthony Tenorio is the recipient of the SBA 2013 New Mexico Small Business Person of the Year award.

114 AGENCY FINANCIAL REPORT • FY 2013
Appendices
SUCCESS STORY: Working to Create Jobs
NaugaNeedles LLC, Louisville, Kentucky

“I got a Ph.D. not to get a job but to create jobs,” said Dr. Mehdi Yazdanpanah,
CEO and Founder of NaugaNeedles LLC, manufacturer of silver-gallium
nanoneedles – tiny needle-like rods with about 1/1,000th of the thickness of
a human hair. While pursuing his electrical engineering doctorate degree,
Dr. Yazdanpanah inadvertently discovered how to grow nanoneedles using
molten gallium droplets, silver metal film and an atomic force microscope.

Nanoneedles are used in biomedical applications, sensors and tools for semiconductor manufacturers.

With only $500 in his checking account, Dr. Yazdanpanah trademarked the product and formed his company,
NaugaNeedles, LLC in 2007. He used the funding he received from winning the prestigious Vogt Business
Plan award to purchase an exclusive license to the technology and become operational in 2009.

Since 2009, NaugaNeedles has received SBA Small Business Innovation Research Phase I and Phase II grants,
a Small Business Technology Transfer grant, and recently a SBA State Trade Export Promotion grant. The
company has six full-time and four part-time employees and consultants with more than $700,000 in revenues.
NaugaNeedles holds two U.S. patents with seven patents pending and exports to more than 17 countries in
North America, Europe and Asia.

Dr. Yazdanpanah is the SBA 2013 Kentucky Small Business Person of the Year.
APPE NDI C E S

APPENDIX 1 - CONTACT SBA: USEFUL SITES AND NUMBERS

The SBA home page is www.sba.gov. Information on SBA programs may be accessed from this site. Several of the more
frequently visited sites are listed here:

SBA INFORMATION
About SBA www.sba.gov/about-sba
SBA Direct www.sba.gov/sba-direct
SBA Strategic Plan www.sba.gov/AgencyStrategicPlan
SBA Performance, Budget & Planning www.sba.gov/performance
SBA Program Inventory www.sba.gov/sites/default/files/files/SBA%20Program%20Inventory.pdf

STARTING AND MANAGING A BUSINESS
What is a Small Business? www.sba.gov/content/am-i-small-business-concern
Thinking about starting a business? http://www.sba.gov/thinking-about-starting/
Resources
Local Assistance www.sba.gov/local-assistance
Lender Resources www.sba.gov/lender_resources
Financing Growth www.sba.gov/content/financing-growth
Explore Exporting www.sba.gov/exporting
Health Care www.sba.gov/healthcare

LOANS 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.sam.gov
Size Standards www.sba.gov/size

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

AGENCY FINANCIAL REPORT • FY 2013 117
AP P EN D I C ES

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

ADDITIONAL RESOURCES
Office of Advocacy www.sba.gov/advocacy
Office of the National Ombudsman www.sba.gov/ombudsman
Office of the Inspector General www.sba.gov/oig

Facebook: www.facebook.com/sbagov
Twitter: www.twitter.com/sbagov
YouTube: www.youtube.com/sba

SBA National Answer Desk (Toll Free) (800) 827-5722
Disaster Customer Service Center (Toll Free) (800) 659–2955

DID
YOU The SBA and AARP continue a strategic alliance to provide counseling
and training to Encore Entrepreneurs over the age of 50 who want
KNOW to start or grow a small business.

For information go to: www.sba.gov/encore.

118 AGENCY FINANCIAL REPORT • FY 2013
APPE NDI C E S

APPENDIX 2 - GLOSSARY
(Available at: www.sba.gov/performance, FY 2013 Agency Financial Report)

504 504 Certified Development Loan ARC America’s Recovery Capital Loan
Program Program
Provides small businesses with long-term, A temporary guaranty loan program
fixed-rate financing for the purchase authorized by the American Recovery and
of land, buildings and long-life capital Reinvestment Act of 2009.
equipment.
BATF Business Assistance Trust Fund
7(a) 7(a) Loan Guaranty Program A trust fund in the U.S. Treasury main-
SBA’s primary loan program. It provides tained to receive and account for donations
general loan financing for a wide variety of made by private entities for activities to
purposes. assist small business.

8(a) 8(a) Business Development Program BD Business Development
Assists firms owned and controlled by The Office of Business Development uses
socially and economically disadvantaged SBA’s statutory authority to provide busi-
individuals to enter and succeed in the ness development and federal contract sup-
economic mainstream. port to small disadvantaged firms.

7(m) 7(m) Microloan Program BLIF Business Loan and Investment Fund
Provides small, short-term loans to small Operated by the Treasury Department to
business concerns and certain types of not- maintain the accounting records of loans
for-profit child-care centers. approved prior to 1992.

A-123 Designation for OMB Circular on Internal CAPLine Part of the SBA 7(a) loan program which
Control Systems. It prescribes policies helps small businesses meet their short-term
and procedures to be followed by executive and cyclical working capital needs.
departments and agencies in establishing,
maintaining, evaluating, improving and CBJ Congressional Budget Justification
reporting on internal controls in their pro- A federal agency’s annual budget request to
gram and administrative activities. Congress.

AARP Association for the Advancement of CDC Certified Development Company
Retired Persons Refers to the Section 504 Certified
Development Company debenture
AFR Agency Financial Report, one of the program.
annual PAR reports.
CEAR Certificate of Excellence in
ANC Alaska Native Corporation Accountability Reporting
APR Annual Performance Report An award given by the Association of
Government Accountants.
Required by the Government Performance
and Results Act, it presents a federal CFO Chief Financial Officer
agency’s progress in achieving the goals in The CFO is responsible for the finan-
its strategic plan and performance budget. cial leadership of the Agency, including
responsibility for all Agency disbursements,
management and coordination of Agency
planning, budgeting, analysis and account-
ability processes.

AGENCY FINANCIAL REPORT • FY 2013 119
AP P EN D I C ES

CIO Chief Information Officer FFMIA Federal Financial Management
The CIO is responsible for the management Improvement Act
of information technology for the Agency, A law that requires each agency to imple-
including the design, implementation and ment and maintain financial management
continuing successful operation(s) of infor- systems that comply substantially with
mation programs and initiatives. federal financial management systems
requirements, applicable federal accounting
COBOL A computer programming language de- standards, and the USSGL.
signed for business applications.
FICA Federal Insurance Contributions Act
COOP Continuity of Operations Plan
A law requiring a deduction from paychecks
A predetermined set of instructions or pro- and income that goes toward the Social
cedures that describes how an organization’s Security program and Medicare.
essential functions will be sustained for up
to 30 days following a disaster and then FISMA Federal Information Security
return to normal operations. Management Act.

COTS Commercial Off-The-Shelf FMFIA Federal Managers Financial Integrity Act
Software or hardware products that are A law that primarily requires ongoing
ready-made and available for sale to the evaluations and reports on the adequacy
public. of the internal accounting and administra-
tive control systems of executive agencies.
CSAM Cyber Security Assessment and It also requires evaluations and reports on
Management the conformance of financial management
systems.
DCMS Disaster Credit Management System
The electronic system used to process FTA Fiscal Transfer Agent.
loan applications for all new disaster
declarations. FTE Full Time Equivalent
Indicates the workload of an employed per-
DLF Disaster Loan Fund son; an FTE of 1.0 means that the person
Assists eligible small businesses impacted by is equivalent to a full-time worker, while an
disasters. FTE of 0.5 signals that the worker is only
half-time.
FCRA Federal Credit Reform Act
A law enacted to provide a more realistic FY Fiscal Year
picture of the cost of U.S. government The federal government fiscal year be-
direct loans and loan guaranties. gins October 1 and ends the following
September 30.
FECA Federal Employees’ Compensation Act
Provides compensation benefits to fed- GAO U.S. Government Accountability Office
eral civilian employees for work-related The audit, evaluation and investigative arm
injuries or illnesses and to their surviving of Congress.
dependents.
GC/BD Office of Government Contracting and
FERS Federal Employees Retirement System Business Development
A three-tiered retirement plan for federal GC/BD works to create an environment for
employees hired after 1984, composed of maximum participation by small, disadvan-
Social Security benefits, a basic benefit plan, taged and women-owned business in federal
and contributions to a TSP. government contract awards and large
prime subcontract awards.

120 AGENCY FINANCIAL REPORT • FY 2013
APPE NDI C E S

GSA General Services Administration LAS Loan Accounting System
SBA’s loan origination servicing and dis-
GWAC Government-wide Acquisition Contract
bursement system.
High- Rapidly expanding small businesses that
LMAS Loan Management and Accounting
growth drive net new job growth. The SBA sup-
System
Small ports high-growth small businesses through
Financial management system that supports
Business its SBIR, SBIC and export programs,
loan accounting.
among others.
MAS The GSA Multiple Award Schedule
HUBZone Historically Underutilized Business Zone
Program that encourages economic devel- MD&A Management’s Discussion and Analysis
opment by the establishment of federal The MD&A is considered required supple-
contract award preferences for small busi- mentary information for federal financial
nesses located in historically underutilized statements and is designed to provide a high
business zones. level overview of the Agency.
IDIQ Indefinite-delivery indefinite-quantity MRA Master Reserve Account
IIP Incremental Improvement Project SBA’s fiscal agent maintains this escrow
fund to facilitate the operation of the
IP Internet Protocol Certified Development Company program.

IPIA Improper Payment Information Act MRF Master Reserve Fund
A federal law enacted in 2002 to identify SBA’s fiscal and transfer agent maintains
and reduce erroneous payments in the gov- this reserve fund to facilitate the operation
ernment’s programs and activities. of the 7(a) secondary market program.

IT Information Technology NAICS North American Industry Classification
Refers to matters concerned with the System.
design, development, installation and
NIST National Institute of Standards and
implementation of information systems and
Technology
applications.
An agency of the U.S. Department of
IV&V Independent Validation and Verification Commerce.
An IV&V review executes independent
OCA Office of Capital Access
procedures by a third party that are used
for checking that a model, product, The office responsible for small business
service or system meets requirements and loans, lender oversight and the surety bond
specifications and that it fulfills its intended program.
purpose. IV&V reviews of SBA’s Office of OCFO Office of the Chief Financial Officer.
Financial Analysis and Modeling financial
models are conducted to assure that they are OCRM Office of Credit Risk Management
accurate and properly functioning. SBA office that manages program credit
risk, monitors lender performance, and
JAAMS Joint Administrative Accounting
enforces lending program requirements.
Management System.
ODA Office of Disaster Assistance
Jobs Act Small Business Jobs Act of 2010
SBA office that promotes economic recov-
Most often referred to as the Jobs Act in
ery in disaster ravaged areas. SBA disaster
SBA documents, may also be referred to as
loans are the primary form of federal as-
SBJA.
sistance for non-farm, private sector disaster
losses for individuals and businesses.

AGENCY FINANCIAL REPORT • FY 2013 121
AP P EN D I C ES

OFA Office of Financial Assistance QA Quality Assurance
SBA office that administers various loan Functions to assure that project deliver-
programs to assist small businesses. ables meet SBA’s requirements and quality
standards.
OFAM Office of Financial Analysis and
Modeling QAR Quality Assurance Review.
An office in the SBA Office of Performance
SBA U.S. Small Business Administration
Management and Chief Financial Officer.
A federal agency of the Executive Branch
OFPO Office of Financial Program Operations. whose mission is to aid, counsel and pro-
tect the interests of small businesses and
OHRS SBA Office of Human Resources help families and businesses recover from
Solutions. disasters.
OIC Office of Internal Control SBAExpress Provides selected lenders with a 50 percent
Part of the SBA Office of the Chief guaranty on loans in exchange for the abil-
Financial Officer, has the lead in making ity to primarily use their own application
sure managers can comply with internal and documentation forms, making it easier
control standards. and faster for lenders to provide small busi-
ness loans of $250,000 or less .
OIG Office of Inspector General
Conducts and supervises audits, inspections SBDC Small Business Development Center
and investigations relating to SBA programs Program
and operations. Delivers management and technical assis-
tance, economic development and manage-
OMB U .S. Office of Management and Budget
ment training to existing and prospective
White House office that oversees prepara- small businesses through cooperative agree-
tion of the federal budget and supervises ments with universities and colleges and
its administration in Executive Branch government organizations.
agencies.
SBG Surety Bond Guarantee Program
OPM U.S. Office of Personnel Management
Provides guaranties, bid, performance and
The federal government’s human resources payment bonds for contracts up to $2 mil-
agency. lion for eligible small businesses that cannot
ORACLE The accounting program used by SBA’s obtain surety bonds through regular com-
Administrative Accounting Division. mercial channels.

PAR Performance and Accountability Report SBGRF Surety Bond Guaranty Revolving Fund
Annual report that presents financial, All the contractor and surety fees collected
budgetary and performance information to by the SBA are deposited in the SBGRF at
OMB, Congress and the public. the Treasury Department, which is used to
pay claims.
PCECGF Pollution Control Equipment Contract
Guaranty Fund SBIC Small Business Investment Company
Supports costs associated with the credit Provides long-term loans, debt-equity
portfolio of pre-October 1991 pollution investments and management assistance to
control equipment loans and guaranties be- small businesses, particularly during their
ing liquidated by the SBA. growth stages.

POA&M Plan of Action and Milestones. SBIR Small Business Innovation Research
SBA office that supports scientific excel-
PPS Probability Proportional to Size. lence and technological innovation through
the investment of federal research funds.

122 AGENCY FINANCIAL REPORT • FY 2013
APPE NDI C E S

SBJA Small Business Jobs Act of 2010 SPFI Summary of Performance and Financial
Most often referred to as the Jobs Act in Information
SBA documents. One of three annual financial and perfor-
mance reports required of federal agencies.
SBLC Small Business Lending Company
Non-depository small business lending STEP References State Trade and Export
companies listed by the SBA Office of Promotion program or grant.
Capital Access.
VAT Vulnerability Assessment Team
SCORE A volunteer organization sponsored by the Performs monthly scans of network-
SBA that offers counseling and training attached devices to identify and remedy
for small business owners who are starting, network vulnerabilities.
building or growing their businesses.
WBC Women’s Business Center
SDM System Development Methodology WBCs provide long-term training and
A software development methodology or counseling to women owning or managing
system development methodology in soft- a business, including financial, manage-
ware engineering is a framework that is used ment, marketing and technical assistance
to structure, plan, and control the process and procurement.
of developing an information system.

SOP Standard Operating Procedure
SOPs are the primary source of the Agency’s
internal control.

DID The Small Business Jobs Act of 2010 and the National Defense
YOU Authorization Act of 2013 include over 30 provisions related to

KNOW increasing small business access to federal contracting. Finalized rules
allow set-asides under multiple-award contracts, review and revision of
size standards, and removal of the dollar thresholds for women-owned
small business set-asides, among many more.

AGENCY FINANCIAL REPORT • FY 2013 123
AP P EN D I C ES

APPENDIX 3 – OIG AUDIT FOLLOW-UP ACTIVITY
Throughout the year, the OIG conducts audits of the SBA’s processes, procedures and programs, and makes recommen-
dations for improvement. Many of these recommendations are not material, relative to their dollar impact on the SBA’s
financial and administrative operation, but are beneficial to the 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 manage-
ment. When both SBA management and the OIG agree on the recommendation, SBA management develops a correc-
tive action plan, including a target date for completion. 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
2013, there were 119 Final Actions, resulting from 9 monetary and 110 non-monetary recommendations. The status of
the corrective actions is updated regularly and is available for review on the SBA Intranet.

The following tables depict the SBA’s final action activity for FY 2013 and the status of corrective action plans not imple-
mented within one year:

• Table I: Final Action on Audit Recommendations with Disallowed or Questioned Costs, with accompanying pages
describing the detail activity by report number.
• Table II: Final Action on Audit Recommendations with Funds Put to Better Use, with accompanying pages de-
scribing the detail activity by report number.
• Table III: Final Action on Audit Recommendations Not Completed with One Year.

TABLE I FINAL ACTION ON AUDIT RECOMMENDATIONS WITH DISALLOWED OR QUESTIONED COSTS
OCTOBER 1, 2012 – SEPTEMBER 30, 2013
Number of Disallowed Costs (Rounded
Recommendations to Thousands)
A. Recommendations with management decisions on which final action had not been taken 3 $4,371
at the beginning of the period.
B. Recommendations on which management decisions were made during the period. 7 $2,141
C.Total recommendations pending final action during period. 10 $6,512
D. Recommendations on which final action was taken during the period.
1. Recoveries:
(a) Collections and Offsets 5 $1,933
(b) Property
(c) Other 1 $1,022
2. Write-Offs 3 $3,545
3. Total 9 $6,500
E. Recommendations needing final action at the end of the period. 1 $12

Table I - Detail of Final Action Activity
Disallowed / Questioned Costs
Report # ROM 10-19, Assessment of 7(a) Early-Defaulted and Early-Problem Recovery Act Loans
Summary: The audit objectives were to determine (1) whether early-defaulted or early problem 7(a) Recovery Act loans
were originated and closed in accordance with SBA’s rules and regulations and commercially prudent lending standards,
and (2) if not, whether the noncompliance with SBA requirements or commercially prudent lending standards led to the

124 AGENCY FINANCIAL REPORT • FY 2013
APPE NDI C E S

loan problem, default, or unnecessary losses. The OIG identified $3,990,640 in questioned costs. The audit recom-
mended the Office of Capital Access flag loans not yet purchased to ensure that loan deficiencies are addressed at the time
of the purchase review and advise the OIG of any denials, repairs, withdrawals or cancellations of SBA’s guaranties made
as a result of the deficiencies. The recovery was determined to be $463,711.78.
Final Action: $463,711.78 collected / $3,526,928.22 written off

Report # ROM 11-05, Assessment of 7(a) Recovery Act Loans
Summary: The objective of the audit was to determine whether purchased 7(a) Recovery Act Loans were originated,
closed, and purchased in accordance with the SBA’s rules and regulations, and commercially prudent lending standards.
The audit recommended the Agency recover funds on four purchased loans. The amounts for two loans were collected in
a prior period; one was found not to warrant recovery; and the fourth was being disputed by the lender but was collected
in full during this fiscal year.
Final Action: $380,915.31 collected / $0.00 written off

Report #11-16, Audit of Banco Popular’s Assessment of Borrower’s Repayment Ability.
Summary: The objective of the audit was to respond to a complaint that the lender did not adequately assess borrower
repayment ability when originating Huntington Learning Center franchise loans. The audit recommended that the Of-
fice of Capital Access recover loan guaranties, less any recoveries, paid on ten defaulted loans and to improve data pertain-
ing to new franchise loans. The recovery was determined to be $1,074,225.
Final Action: $1,074,225 collected / $0.00 written off

Report # 12-12, Assessment of State Trade and Export Promotion (STEP) Program Grants
Summary: The audit discovered an award in the amount of $1,022,781 was made to an ineligible recipient and this
Advisory Memorandum was issued in order for immediate action to be taken. Funds had not been disbursed. In FY
2012, obligated funds were cancelled, thereby prohibiting future disbursements. All three recommendations for this
audit include questioned costs of $1,022,781, for the same award; two recommendations were resolved in FY2012 when
the funds were de-obligated for the ineligible recipient; the third recommendation was resolved in FY2013 for the same
amount when the grant funds were re-distributed to eligible recipients.
Final Action: $0.00 collected / $0.00 written off/$1,022,781 Grant re-distribution

Report # 13-07, Assessment of 7(a) Guaranty Purchases Improper Payment Rate
Summary: The objective of the audit was to determine whether SBA accurately estimated its FY2011 Improper Payment
Rate for 7(a) Loan Program purchases. The audit recommended recovery on six loans when it was determined that defi-
ciencies were not noted at the time of purchase. Two were collected in full; the Office of General Counsel recommended
SBA not seek recovery on two loans; and SBA is investigating the recovery of the two remaining loans.
Final Action: $14,072 collected / $17,744 written off

AGENCY FINANCIAL REPORT • FY 2013 125
AP P EN D I C ES

TABLE II FINAL ACTION ON AUDIT RECOMMENDATIONS WITH FUNDS PUT TO BETTER USE
OCTOBER 1, 2012 – SEPTEMBER 30, 2013
Number of Funds to be Put to Better Use
Recommendations (Rounded to Thousands)
A. Recommendations with management decisions on which final action had not been 2 $7,700
taken at the beginning of the period.
B. Recommendations on which management decisions were made during the period. 0 0

C. Total recommendations pending final action during period. 2 $7,700
D. Recommendations on which final action was taken during the period..
1. Value of recommendations implemented (completed). 1 $5,200
2. Value of recommendations that management concluded should
not or could not be implemented or completed.
3. Total 1 $5,200
E. Recommendations needing final action at the end of the period. 1 $2,500

Table II - Detail of Final Action Activity
Funds for Better Use
Report # 12-08, Assessment of Lender Loan Reporting Process
Summary: The objective of the audit was to determine the adequacy of SBA’s controls and oversight over the develop-
ment, security, and operation of certain information technology systems and processes performed by a contractor. The
audit recommended that SBA research and correct loans that have not been reported by the lender for a significant length
of time which could contribute to an estimated $5.2 million subsidy overstatement. SBA reported improvements in
lender loan reporting and stated that continued improvement will further reduce subsidy under/over statements in the
future.
Final Action: $5,200,000 implemented

Table III - Final Action on Audit Recommendations Not Completed Within 1 Year
October 1, 2012 – September 30, 2013
Report # 0-14, 7(a) Service Fee Collections
Program: OCFO
Date Issued: 03/30/2000
Management Decision Date: 08/22/2000
Explanation: The recommendation is to establish receivable accounts for 7(a) loan service fees. The purpose of this
recommendation is to assure the collection of servicing fees on SBA guarantied loans during the loan term. The new 7(a)
fiscal agent contract in January 2014 will include provisions to require the monitoring and collection of these service fees.
Once the new contract is fully operational it should achieve the purpose of this recommendation, and the service fee ac-
count receivable may not be necessary. As a result the anticipated completion date is now 9/30/14.

Report # 4-34, SBA’s Process for Complying With the FMFIA Reporting Requirements
Program: OCFO
Date Issued: 07/29/2004
Management Decision Date: 09/09/2004
Explanation: The two recommendations remaining open are to the Office of the Chief Financial Officer (OCFO) to
revise, clear and issue the draft SOP 00 02 3 and clearly define material weakness as it relates to SBA and at the different

126 AGENCY FINANCIAL REPORT • FY 2013
APPE NDI C E S

levels of management within the Agency. The current SOP was substantially rewritten in FY 2013; however, it was not
completed due to the Office of Management and Budget’s announcement that their guidance will be updated in FY 2014
to align with the GAO’s new guidance in the Green Book. The anticipated completion date is 9/30/14, dependent on
the issue date of OMB’s new guidance.

Report # 6-10, SBA’s FY 2005 Financial Statements Management Letter
Program: OCFO
Date Issued: 01/18/2006
Management Decision Date: 03/06/2006
Explanation: There is one open recommendation to the Office of the Chief Financial Officer to update the account-
ing SOP to include SBA’s policies and procedures to reflect the GL accounts and data field updated for each transaction.
The accounting pro forma on LAS transactions is available in “table format” in the CGL, but data field updates are not
shown. SBA will work with OCA to develop this documentation through an automated process. Work on this project
will not start until FY 2014 after the OCA/OCIO completion of the Loan Management and Accounting System project.
This audit recommendation is expected to have a final action by 09/30/2014.

Report # 6-34, Policies and Procedures for the SBAExpress and CommunityExpress Loan Programs
Program: OCA
Date Issued: 09/29/2006
Management Decision Date: 09/30/2009
Explanation: There are two open recommendations to the Office of Capital Access (OCA). 1) Promulgate regulations
to govern the SBAExpress Program to ensure the Agency has sufficient legal authority. 2) Promulgate regulations to ex-
empt the SBAExpress Program from existing regulations that conflict with the SBAExpress Program Guide. SBAExpress
guidance as a permanent program has been incorporated into the SOP 50-10 F. The SOP is the primary resource that
lenders rely upon to operationalize SBA loan programs; and therefore, lenders are fully aware of the policies and proce-
dures of the SBAExpress program.

Report # 8-12, Oversight of SBA Supervised Lenders
Program: OCA
Date Issued: 05/09/2008
Management Decision Date: 06/26/2008
Explanation: One recommendation remains open to the Office of Capital Access (OCA) to establish risk mitigation
goals applicable to each loan program and the entire lending portfolio. OCA will develop program level performance
benchmarks and risk mitigation goals for each 7(a) loan program and the entire 7(a) portfolio based on OCRM’s PARRiS
framework. The PARRiS assessment system is designed to measure the level of risk at the lender, program and portfolio
level. The program and portfolio risk mitigation goals will focus on Performance, Asset management and Regulatory
performance – utilizing the current metrics framework. Expected completion of this final action is 12/31/2014.

Report # 9-05, SBA’s FY 2008 Financial Statements - Management Letter
Program: OFA
Date Issued: 12/17/2008
Management Decision Date: 02/18/2009
Explanation: The two open recommendations are to the Office of Financial Assistance to reinforce the importance of
the collateral analysis in an updated SOP and ensure the revised Disaster Loan SOP identifies procedures related to the
disposition of collateral. OFPO issued a collateral release memorandum to staff in June 2011 reinforcing this informa-
tion. SOP 50 52 in final draft and is being prepared for Agency Clearance by the end of the calendar year. The final
action due date for this recommendation is 12/31/13.

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Report # 10-14, Audit of Quality Assurance Oversight of the Loan Management and Accounting System Project
Program: ODM
Date Issued: 09/13/2010
Management Decision Date: 06/13/2011
Explanation: The remaining recommendation for this audit is to the Office of the Administrator to require the LMAS
Quality Assurance plan to incorporate all the components required by the enterprise-wide QA plan. The ITQA SOP was
updated and SBA has demonstrated significant progress in implementing a quality assurance process by conducting QA
reviews. The expected final action is expected by September 2014.

Report # ROM 10-19, Audit of Early Defaulted and Early Problem Recovery Act Loans.
Program: CA
Date Issued: 09/24/2010
Management Decision Date: 06/29/2011
Explanation: The remaining recommendation on this audit is to the Office of Capital Access to require the lenders have
25 purchased loans to bring the loans into compliance or recover the $375,259 in paid guaranties. Twenty-four out of
25 loans have been resolved. The final loan is currently in the dispute resolution process and a decision is being reviewed
by the Office of Financial Assistance to ensure policy compliance. Once the review is completed, a determination on the
loan and potential repair will be instated.

Report #11-03, Audit of SBA’s FY 2010 Financial Statements.
Program: CIO
Date Issued: 11/12/2010
Management Decision Date: 06/01/2011
Explanation: The remaining open recommendation for this audit is to the Office of the Chief Information Officer to
enforce an organization-wide configuration management process. Configuration Management policy was developed
to incorporate enterprise change control. A centrally managed Agency-wide configuration management solution was
identified for procurement. OCIOI is working with OIG to close this recommendation. Final action is estimated to be
complete by 12/31/13.

Report #ROM 11-04, Audit of SBA’s Recovery Act Data on Public Websites.
Program: CFO
Date Issued: 3/22/11
Management Decision Date: 06/30/2012
Explanation: The six recommendations are to the Office of the Chief Financial Officer to determine if awards were
made or funds should be de-obligated on 66 purchase requisitions; to perform routine reconciliation of executed awards
to FPDS-NG.gov; to deploy an independent statistical verification and validation of all SBA transactions; to determine
if Recovery Act funds were used to fund 13 contracts; to develop a data quality plan; and to monitor contractor reported
information and prime contractor information for accuracy. The OCFO is researching data to resolve the contract
funding issues and is developing procedures to ensure data accuracy in the future. The independent verification and
validation of SBA transactions and the revision of the data quality plan have been implemented; follow-up with the OIG
should close these issues. Final actions for all recommendations are estimated to be 9/30/14.

Report # 11-06, Audit of FY2010 Federal Information Security Management Act Review
Program: CIO
Date Issued: 01/28/2011
Management Decision Date: 03/28/2011
Explanation: The eight recommendations are to the Office of the Chief Information officer to (1) require an updated list
of Major Systems and their interfaces; (2) manage, control, and monitor system interconnections throughout their lifecy-
cle; (3) develop configuration management policies and procedures; (4) develop and maintain a centralized inventory of

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all Agency hardware and software; (5) develop and document baseline configuration for each information system; and (6)
develop and test disaster recovery plans. Status for these recommendations include (1) A total count of all interconnec-
tions was completed and Interconnection Service Agreements (ISAs) for FISMA-reportable systems are being obtained.
Estimated completion of the final action is 9/30/14. (2) SOP 90 47 3, published 10/10/12, requires system owners to
manage system interconnections in accordance with NIST requirements. SBA personnel had one year to implement the
requirements of the SOP. OCIO is working with the OIG to close this recommendation. The final action completion
date is estimated to be 12/31/13. (3) Configuration Management policy is being developed to incorporate enterprise
change control. The final action completion date is estimated to be 9/30/13. (4) An enterprise-wide asset management
tool will be procured to centrally manage assets. The final action completion date is estimated to be 2/7/14. (5) A gap
analysis was conducted to determine which applications need to have a baseline established. A project is underway to
establish baselines for all systems agency hardware and software. Final action completion is estimated to be 9/30/14. (6)
For externally hosted moderate impact and high-impact systems, disaster recovery tests were performed. There currently
is no disaster recovery solution for internally-hosted systems and therefore only table top tests were performed. A solution
is being identified to meet the disaster recovery tests per NIST requirements. The final completion date is estimated to
be 9/30/14.

Report #11-07, Audit of Insurance Recovery Checks at the Disaster Loan Servicing Centers
Program: OFPO
Date Issued: 02/10/2011
Management Decision Date: 04/07/2011
Explanation: The recommendation is to the Office of Capital Access to revise the SOP to provide detailed instructions
for processing insurance recovery checks. OFPO developed and issued a duplication and benefits logic tree and narrative
to assist in the processing of insurance recovery checks. Additionally, SOP 50 52 in final draft and is being prepared for
Agency Clearance by the end of the calendar year. The final action due date for this recommendation is 12/31/13.

Report #11-10, Management Advisory Report on the Records Management and Documentation Process at the
Disaster Loan Servicing Centers.
Program: FPO
Date Issued: 03/29/2011
Management Decision Date: 06/20/2011
Explanation: The two recommendations are to the Office of Financial Programs to (1) develop record designation
requirements for all loan servicing documents and incorporate the guidance into SOP 50 52 and (2) to revise the SOP
to preserve the analyses performed to conduct all servicing actions. (1) Electronic recordkeeping guidelines internal desk
document was developed and issued to center personnel in February 2012. Additionally, SOP 50 52 in final draft and is
being prepared for Agency Clearance by the end of the calendar year. The final action due date for this recommendation
is 12/31/13. (2) A memorandum was issued to staff and has been reinforced with training. Additionally, SOP 50 52 in
final draft and is being prepared for Agency Clearance by the end of the calendar year. The final action due date for this
recommendation is 12/31/13.

Report #11-11, Audit of SBA’s Surveillance Review
Program: GC/BD
Date Issued: 03/31/2011
Management Decision Date: 07/08/2011
Explanation: The 12 recommendations are to the Office of Government Contracting and Business Development require
development or update to policies and procedures to include selection criteria, an effective monitoring process, resource
requests, instruction on completing checklist questions, monitoring the performance of work requirements and issu-
ance surveillance review reports. Revisions to Chapter 4, How Do I Perform a Surveillance Review? Include 8(a) specific
requirements, modification of rating categories, establishment of formal follow-up processes and update of interview
questions. SOP 60 02 8, Prime Contracts Program, was signed by the Administrator on 9/27/13 and all recommenda-
tions were resolved on 10/31/13.

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Report #11-14, Audit of Funding of Information Technology contracts Awarded to Isika Technologies, Inc.
Program: CFO
Date Issued: 06/02/2011
Management Decision Date: 12/11/2011
Explanation: The two remaining recommendations are to the Office of the Chief Financial Officer and require a review
of funding to ensure SBA did not violate the Anti-Deficiency Act during a Continuing Resolution in 2011 and a review
of SBA’s funding procedures. The OCFO is researching the funding issue to ensure funds were not inappropriately
obligated and will review written policies and procedures to ensure work is performed in compliance with the FAR. Final
action completion date is estimated to be 9/30/14.

Report #12-02, Audit of FY 2011 Financial Statement Audit
Program: OCIO
Date Issued: 11/14/11
Management Decision Date: 12/22/2011
Explanation: The six open recommendations are to the Office of the Chief Information Officer and require (1) coor-
dination with SBA program offices to enhance security vulnerability management processes; (2) prevent users from con-
necting unauthorized devices by implementing mandatory domain authentication for Internet Protocol address issuance;
(3) ensure that information systems hosted by third parties comply with SBA policy and NIST guidance; (4) Oversee the
review and validation of financial system accounts quarterly; (5) monitor the audit logs of all financial applications regu-
larly; and (6) create, implement, and test system specific and the HQ COOP. Resolution activities include (1) OCIO
hired contractors to assist in the security management process; estimated completion date is 9/30/14; (2) (3) The 802.1x
solution has been fully implemented and the OCIO is working with the OIG to close this recommendation. Estimated
completion date is 12/31/13. (4) Remediation activities are in process. Estimated completion date is 9/30/14. (5) A
project is underway to implement a centralized audit logging tool. Procedures will be developed to periodically review
system audit logs. Estimated completion date is 9/15/15. (6) Remediation activities are in process. Estimated comple-
tion date is 9/30/14.

Report #12-04, Audit of Annual Small Business Procurement Calculations
Program: GC/BD
Date Issued: 12/6/11
Management Decision Date: None
Explanation: The four recommendations are to the Office of Government Contracting and Business Development and
require (1) revision of the Goaling Guidelines for the Small Business Preference Programs to include overseas contracts in
the small business goaling baseline; (2) finalization of the draft memorandum dated January 25, 2008, Exemptions from
Goaling; revisions of the Goaling Guidelines based on OGC’s final opinion on the exemptions of goaling; and (4) notifi-
cation to GSA of any programming updates to the FPDS-NG resulting from changes to goaling guidance. In accordance
with the National Defense Authorization Act of 2013, the Chief Counsel for Advocacy of the Small Business Administra-
tion shall conduct an independent assessment of the small business procurement goals established in section 15(g) of the
Small Business Act. In addition, the Department of Defense is required to conduct an independent assessment of federal
procurement contracting performance of the Department of Defense. Because of the direct potential impact that these
two assessments would have on the Small Business Goaling Guidelines, GCBD will await their results before finalizing
revisions to the Small Business Goaling Guidelines.

Report #12-08, Audit of Lender Loan Reporting Process
Program: OCA
Date Issued: 2/23/12
Management Decision Date: 5/3/12
Explanation: The one remaining recommendation is to the Office of Capital Access and requires the collection of $2.5
million in secondary market late penalty fees. A plan of action to request on delinquent accounts regarding secondary

130 AGENCY FINANCIAL REPORT • FY 2013
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market late fees is finalized, along with the use of guaranty purchase offset. This will be communicated to the applicable
lenders no later than the November 2013 NAGGL conference. Full implementation of this plan of action is anticipated
no later than 11/30/13.

Report #12-10, Audit of FY 2011 7(a) Loan Improper Payment
Program: OCA
Date Issued: 3/15/12
Management Decision Date: 5/15/12 and 9/26/12
Explanation: The two remaining recommendations are to the Office of Capital Access and require that (1) loan officers
evaluate the creditworthiness of borrowers on early default loans during the purchase and improper payment review pro-
cesses; and (2) OCA conduct a cost/benefit analysis for payment recapture audits of 7(a) purchases. For (1) OCA made
improvements to the purchase checklist but OIG identified additional items. Estimated completion date is 1/31/14 to
add these items. For (2) it was determined that implementing a recapture audit process would benefit the agency, there-
fore, OFPO will be incorporating a continuous IPERA review process to current Quality Improvement Program review
process during FY2014, utilizing the center resources, especially those of the QIP team for the recapture audit function.

Report #12-11R, Audit of 7(a) Early Default Loans
Program: OCA
Date Issued: 3/23/12
Management Decision Date: 5/3/12 and 10/19/12
Explanation: The two remaining recommendations are to the Office of Capital Access and require that (1) a loan be
reviewed for potential recovery of $1,330,708 plus interest; and (2) trained loan specialists perform purchase reviews on
early defaulted loans above the purchase amount of $500,000. The loan in (1) is currently in review by portfolio man-
agement and undergoing the dispute resolution process. For (2) OFPO agreed to modify its process and will incorpo-
rate repayment ability guidance as indicated in the new issuance SOP 50-10 5F, effective January 1, 2014. The process
modification will take place by January 31, 2014. Concurrently, OFPO will determine if the funds are for better use and
provide the determination to OIG by March 31, 2014.

Report #12-13, Audit of FY 2011 Cash Gifts
Program: OGC
Date Issued: 3/30/12
Management Decision Date: 6/19/12
Explanation: The remaining recommendation is to the Office of General Counsel and recommends collaboration with
the Offices of Strategic Alliances and the Chief Financial Officer to issue SOP 90.53. OIG recommends four specific in-
clusions to SBA’s policies and procedures. The SOP was completed for review in November 2012; OGC is now evaluat-
ing the comments to ensure compliance with various laws and policies. Estimated completion date is 9/30/14.

Report #12-14, Audit of Disaster Loans in Liquidation
Program: OCA
Date Issued: 7/9/12
Management Decision Date: 9/25/12
Explanation: The four recommendations are to the Office of Capital Access and recommends that (1) specific actions
be taken for loans over 180 days delinquent that are secured by collateral; (2) immediately charge-off loans over 180
days delinquent not secured by collateral; (3) Update SOP’s to include Debt Collection Improvement Act and Treasury
Managing Federal Receivables Guide requirements; and (4) provide training on DCIA and Treasury’s guide. OCA is cur-
rently working with the Department of Treasury to develop a process for referring collateralized debt under a new Agency
Profile that will allow SBA to maintain compromise authority. Training in DCIA has been provided and will be again, in
addition to training provided by the Department of Treasury. Additionally, SOP 50 52, which provides DCIA guidance,
is in its final draft form. Estimated completion is 12/31/13.

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Report #12-15, Audit of FY 2011 Federal Information Security Management Act Review
Program: OCIO
Date Issued: 7/16/12
Management Decision Date: 8/16/12
Explanation: The three remaining recommendations are to the Office of the Chief Information Officer and require (1)
development of an overall strategy to implement OIG recommendations on FISMA security requirements; (2) perform
recertification reviews of agency general support systems or design compensating controls; and (3) continuously monitor
remote access audit logs for unauthorized activity. OCIO will (1) hold weekly meetings to prioritize and monitor reme-
diation progress on OIG recommendations and provide a report to the CIO; (2) perform recertification reviews for users
of the general support systems; and (3) implement a process to review VPN logs on an ongoing basis to timely identify
and mitigate unauthorized activity. Estimated completion date is 9/30/14.

Report #12-16, Audit of Government Purchase Card for Construction Purchases
Program: CFO
Date Issued: 8/6/12
Management Decision Date: 9/11/12
Explanation: The two recommendations are to the Office of the Chief Financial Officer and require that purchase
cardholders have current delegation letters that reflect limitations and approving officials and that training be provided by
OCFO on the proper use of government purchase cards to include the definition of construction. The OCFO has com-
pleted both actions and will work with the OIG to close these recommendations. Estimated completion date is 4/30/14.

Report #12-18, Audit of 7(a) Early Defaulted Loans
Program: OCA
Date Issued: 8/16/12
Management Decision Date: 11/5/12
Explanation: The three recommendations are to the Office of Capital Access and require (1) revision of the purchase
process to verify lender’s compliance with SBA’s repayment ability requirements; (2) training of purchase staff on repay-
ment ability requirements; and (3) perform a cost/benefit analysis for detailed reviews of early defaulted loans of less
than $500,000. OFPO agreed to modify the process and incorporate repayment ability guidance as indicated in the
SOP 50-10 5F, effective January 1, 2014. The estimated completion date is March 31, 2014. OFPO will also produce
a determination on the funds for better use calculation developed by the OIG. In addition, staff is being trained with a
completion date of 11/30/13. Further, a risk assessment is being performed with a completion date of 11/5/13.

Report #12-20R, Audit of High Risk Lenders
Program: OCA
Date Issued: 9/28/12
Management Decision Date: 11/16/12
Explanation: The remaining recommendation is to the Office of Capital Access and requires development of a follow-
up process to ensure lenders implement corrective actions. OCRM has been in continuous dialogue with the OIG and
other stakeholders through the PARRiS/SMART risk assessment development. As such, the development and imple-
mentation of the Corrective Action follow-up process is underway with an anticipated final action delivery of 2/28/14.

Report #12-22, Audit of SBA’s Ratification Process
Program: OCFO
Date Issued: 9/28/12
Management Decision Date: 10/12/12
Explanation: The two recommendations are to the Office of the Chief Financial Officer and require that a review of
previously ratified unauthorized commitments and remaining ratification actions for Anti-Deficiency Act violations. The
OCFO reviewed the ratified commitments and confirmed that no Anti-Deficiency violations occurred. The OCFO is
working with the OIG to close these recommendations. Anticipated completion date is 4/30/14.

132 AGENCY FINANCIAL REPORT • FY 2013
ACKNOWLEDGMENTS

This Agency Financial Report was produced with the energies and talents of the SBA staff. To these
individuals, the Office of Performance Management and the Chief Financial Officer would like to
offer sincere thanks and acknowledgement.

We would also like to acknowledge the Office of the Inspector General and KPMG LLP for the pro-
fessional manner in which they conducted the audit of the Fiscal Year 2013 Financial Statements.

We offer our special thanks to Innovative Consultants International and Corporate Visions, Inc. for
outstanding contributions to producing this report.

DID
YOU The SBA partners with private investors to capitalize professional-
managed investment funds known as small business investment
KNOW companies (SBICs) that finance small businesses. There are 300
licensed SBICs. For more information, see: www.sba.gov/category/
lender-navigation/sba-loan-programs/sbic-program-0.

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