SBA Agency Financial Report, Fiscal Year 2020

Summary

This is the U.S. Small Business Administration's Agency Financial Report for fiscal year 2020, the first of two required annual reports for federal agencies. A highlights table (dollars in thousands) lists a principal program portfolio of $835,987,031, total assets of $897,533,990 and total budgetary resources of $1,518,667,904 for FY 2020, against a portfolio of $143,516,446 for FY 2019. The FY 2020 Annual Performance Report is described as the other report, scheduled for publication in February 2021. The contents include a Summary of COVID-19 Financial Impacts. The report also states that the SBA received the Certificate of Excellence in Accountability Reporting for FY 2006 to FY 2019.

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Cite this document

“SBA Agency Financial Report, Fiscal Year 2020.” Original at legacy.sba.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/sba-agency-financial-report-fy20-sba-afr-508-1-11-21-3d9244d596/, SHA-256 0e6982333f547c6f73dc2d07d3932c6b785c825c7c7bbd43993fbf55630384ca.

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SMALL BUSINESS
ADMINISTRATION

AGENCY
FINANCIAL
REPORT
2020
FISCAL YEAR

start grow

expand recover
ABOUT THIS
REPORT FY 2020 HIGHLIGHTS
The U.S. Small Business
Administration’s Agency (Dollars in Thousands) FY 2017 FY 2018 FY 2019 FY 2020
Financial Report (AFR) for
Principal Program Portfolio(1) $ 131,814,718 $ 142,315,295 $ 143,516,446 $ 835,987,031
FY 2020 provides an overview
of the Agency’s financial and Total Assets $ 13,215,919 $ 16,988,497 $ 16,718,652 $ 897,533,990
performance data to help
Total Liabilities $ 11,703,589 $ 14,915,340 $ 15,085,044 $ 718,056,018
Congress, the President,
Total Net Position $ 1,512,330 $ 2,073,157 $ 1,633,608 $ 179,477,972
and the public assess the
Total Net Cost of Operations $ 3,910 $ 621,675 $ 136,526 $ 554,231,547
SBA’s stewardship over the
resources entrusted to it. The Total Budgetary Resources $ 12,243,154 $ 17,114,677 $ 12,342,598 $ 1,518,667,904
AFR is the first of two required (1) The total portfolio consists of guarantied business loans outstanding, guarantied debentures, direct business loans and direct disaster
loans. The data include all performing loans and defaulted loans that have not been charged off.
annual reports for federal
agencies. The FY 2020 Annual
Performance Report (APR) is
the other report and is part of
the FY 2022 Congressional
Justification (CJ). The CJ/APR FOR MORE INFORMATION
is scheduled for publication
in February 2021. The reports Information about the SBA’s programs is available at:
can be found at: www.sba.gov
www.sba.gov/performance.
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”
ON THE COVER
The pictures presented on Questions and comments regarding the content, presentation and usefulness
of this report are welcome and may be addressed to:
the front cover represent SBA
performance.management@sba.gov
success stories. Their stories
can be found on the following
pages of this report. From top Or, you may write to: Or, you may call:
left to bottom right, Timothy
U.S. SMALL BUSINESS JASON BOSSIE, Director
Porter (page 4), Brian ADMINISTRATION Office of Program Performance,
Geisel (page 36), Charissa Office of Performance Management Analysis, and Evaluation
Rubey (page 114), Kelsey and the Chief Financial Officer (202) 205-6449
Raymond (page 4), Anton 409 Third Street, S.W.
Bizzell (page 114), Vera Hall Washington, DC 20416

(page 36), and Terry and Hope
Bourque (page 170). Follow us on:

www.facebook.com/sbagov www.twitter.com/sbagov

www.youtube.com/sba
TABLE OF CONTENTS

MESSAGE FROM THE ADMINISTRATOR 1

MANAGEMENT’S DISCUSSION AND ANALYSIS 3
The SBA’s History, Goals, and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Primer of the SBA’s Principal Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Summary of COVID-19 Financial Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Analysis of Performance Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Analysis of Performance and Agency Priority Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Evidence and Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Verification and Validation of Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Operational Portfolio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Forward Looking Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Analysis and Highlights of Financial Statements and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Highlights of Financial Results (as of September 30) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Analysis of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Analysis of SBA’s Systems, Controls, and Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Internal Control Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Financial Management Systems Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Management Assurances: FMFIA and FFMIA Assurance Statement for FY 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . 34

FINANCIAL REPORTING (UNAUDITED) 35
Message from the Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Inspector General’s Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Independent Auditors’ Report on FY 2020 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
CFO Response to Audit Report on FY 2020 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Financial Statements and Notes (Fiscal Year 2020 Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

OTHER INFORMATION (UNAUDITED) 113
Report on the Top Management and Performance Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Agency’s Response to the OIG Top Management and Performance Challenges Facing The Small
Business Administration in Fiscal Year 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Payment Integrity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Summary of Financial Statement Audit and Management Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Fraud Reduction Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Grants Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Civil Monetary Penalty Adjustment for Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

APPENDICES 169
Appendix 1 – Contact SBA: Useful Website and Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Appendix 2 – Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Appendix 3 – OIG Audit Follow-Up Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 i
S B A’ S
MISSION HOW THIS REPORT IS ORGANIZED
Maintain and
strengthen the nation’s The U.S. Small Business Administration’s FY 2020 Agency Financial Report (AFR)
provides financial and performance information for the fiscal year beginning October
economy by enabling 1, 2019 and ending September 30, 2020. This report presents the SBA’s operations,
the establishment accomplishments, and challenges. Following a message from the SBA Administrator are
and vitality of small four principal sections: Management’s Discussion and Analysis, Financial Reporting,
Other Information, and Appendices. “Success Stories” appear throughout the report
businesses and
highlighting a small business entrepreneur.
by assisting in the
economic recovery Management’s Discussion and Analysis
of communities after The Management’s Discussion and Analysis section provides a report of the Agency’s
disasters. overall financial position, program performance, and results of operations. It presents
the SBA’s history, organization, and principal programs. This section highlights
financial results and analysis; performance results and analysis; and analysis of systems,
controls, and legal compliance.

Financial Reporting
The Financial Reporting section provides a detailed report of the SBA’s finances.
It includes the message from the Chief Financial Officer, the audit transmittal
memorandum from the Inspector General, the Independent Auditors’ report, and
the financial statements and notes. The required supplementary information provides
a combined statement of budgetary resources, and the required supplementary
stewardship information provides a report on stewardship investments in human
capital.

Other Information
The Other Information section includes the Inspector General’s report on the Agency’s
top management and performance challenges along with recommended actions. This
section also includes a summary of the financial statement audit and management
assurances.

Appendices
The Appendices provide supporting information—a contact list of useful websites and
telephone numbers, a glossary, and a detailed report on audit follow-up activity.

ii AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MESSAGE FROM THE ADMINISTRATOR

MESSAGE FROM THE ADMINISTRATOR
December 18, 2020

After what has emerged as the most extraordinary year in the Agency’s 67-year history, I am
pleased to present the U.S. Small Business Administration’s FY 2020 Agency Financial Report.

This year’s report highlights the SBA’s key achievements in helping our nation’s entrepreneurs
recover from an unprecedented global pandemic and a number of natural disasters, while
continuing to help small businesses start, grow, and expand. The financial and performance
data published in this report are reliable, complete, and in accordance with the U.S. Office of
JOVITA CARRANZA
Management and Budget Circulars A-136 and A-11.

The SBA made significant progress to expeditiously implement the Coronavirus Aid, Relief, and Economic Security Act
(CARES Act) of 2020 and subsequent legislation, comprised of nearly $1 trillion in Agency economic assistance programs, to
stabilize the nation’s economy. While the SBA established new, major programs in short time, the SBA’s independent auditor
has issued a disclaimer of opinion and identified material weaknesses in internal controls over financial reporting due to lack
of sufficient documentation and controls in the year of implementation. Although the agency communicated its disagreement
with some of the analysis and conclusions drawn by the auditors, the recommendations to address the material weaknesses will
be considered by management and addressed accordingly.

America’s resilient small business owners and entrepreneurs are driving our current economic recovery. Responsible for
employing half the private sector workforce and creating two-thirds of all net new jobs, our nation’s small businesses have
contributed significantly to the great economic comeback we are experiencing.

In FY 2020, SBA approved more loans—by both value and volume—than it has in all of the years combined since the Agency
was founded in 1953. To help the small business sector stay viable during the economic shutdowns, the SBA, in coordination
with the Treasury Department, launched the Paycheck Protection Program. In just over four months, the program approved
more than $525 billion in forgivable loans to more than five million small businesses and nonprofits.

I have had the privilege of traveling all across the country, meeting with numerous and diverse small businesses, and I have
seen firsthand how they have successfully adapted to a changing economic environment. Small businesses are uplifting their
communities and providing hope during a difficult time for our country. I am proud of the work our Agency and resource
partners do to support them.

The SBA continues to be focused on ensuring that each of the Agency’s 68 district offices are aligned with the vision,
momentum, and outreach of its headquarters in Washington, D.C. We are committed to speaking with one voice and working
together to meet the mission of helping small businesses thrive and succeed.

As the SBA Administrator, I have personally seen the dedication, energy, and initiative that our employees bring to their jobs—
especially this year, as small business recovery has been so critical. We are fortunate to have so many tremendous public servants
working for the Agency. Their dedication to the SBA’s mission is remarkable.

Since I was sworn in as SBA Administrator, I have prioritized helping underserved entrepreneurs—including women,
minorities, veterans, and military spouses. Access to capital is a vital aspect of economic development. At the SBA, we work
with approved lenders and community development organizations to guarantee loans to small businesses that are unable to
obtain credit in the conventional lending marketplace. In FY 2020, the SBA approved more than 49,000 loans in the 7(a) and
504 loan programs, providing more than $28 billion to small businesses and supporting over half a million American jobs in
the process.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 1
MESSAGE FROM THE ADMINISTRATOR

Minority business owners received $7.5 billion in combined 7(a) and 504 lending, or 27 percent of the SBA’s loan portfolio.
The SBA’s 7(a) lending to women-owned businesses was nearly $2.7 billion in FY 2020. Lending from the 504 loan program
to women-owned businesses was over $522 million. Lenders reported that loans to veterans totaled nearly $835 million for the
7(a) and 504 programs. The Small Business Investment Company program, in which the SBA partners with private investors
to finance small businesses through professionally managed investment funds, supported over 1,000 small businesses with
approximately $4.9 billion in financing.

Additionally, the SBA’s microloan program, which offers loans up to $50,000, achieved another record-breaking year,
underscoring our commitment to helping the small businesses and start-ups that need assistance.

Entrepreneurship is a team effort, and the SBA ensures that our nation’s small business owners have the resources to tackle the
challenges they face every day. These efforts are powered by our district offices and strong resource partner network made up of
Small Business Development Centers, Women’s Business Centers, Veterans Business Outreach Centers, and SCORE chapters.

Our combined SBA network offers free or low-cost programs to help entrepreneurs plan their business, research market trends,
expand their customer base, and secure funding. In FY 2020, hundreds of thousands of American small businesses took
advantage of counseling, mentoring, and training assistance through the SBA network.

Thanks to the SBA’s efforts, federal agencies collectively exceeded the federal small business contracting goal for FY 2019,
the latest year of data available, by awarding nearly 26 percent of federal contracts to small businesses totaling nearly
$130 billion—an over $9 billion increase from the previous fiscal year. This achievement marks the seventh consecutive year in
a row that the Federal Government has exceeded this goal. Women-owned small businesses achieved their highest amount of
eligible contracting dollars ever at $25 billion—exceeding the 5 percent federal goal for only the second time in history.

When disaster strikes, the SBA joins with our federal partners to respond by helping businesses, nonprofits, homeowners, and
renters recover from declared disaster events. Low-interest loans from the SBA have enabled borrowers to replace or repair
uninsured losses, whether through physical damage or economic injury. The SBA is working with federal, state, and local
partners to continually improve the disaster response and ensure we are assisting the economic recovery as expediently as
possible.

Disaster loan activity in response to natural disasters, such as hurricanes, fires, and floods, in FY 2020 was below normal as
compared to recent years. The SBA approved just under 11,000 disaster loans for $582.6 million. However, for the first time in
Agency history, the SBA had the statutory authority to respond to a pandemic. During FY 2020, the SBA approved 3.6 million
Economic Injury Disaster Loans (EIDL COVID) for $194 billion. Additionally, SBA approved 5.8 million EIDL advance
grants for $20 billion. The amount of disaster funds provided through the EIDL COVID program is more than three times
the amount of disaster loan funds approved for all disasters combined since the SBA was created in 1953.

American entrepreneurs are in a league of their own, and it is the honor of a lifetime to serve as their advocate in President
Donald Trump’s Cabinet. In this Administration, small businesses are front-and-center, and the SBA remains committed to
being a responsible steward of taxpayer dollars and the public’s trust.

The SBA is working to ensure that we are functioning as efficiently and effectively as possible for America’s entrepreneurs while
using modern technology and streamlined operations to eliminate waste and redundancy. As we look toward FY 2021 and a
new decade of possibilities, the SBA is devoted to delivering results and the best possible service to America’s small businesses.

Sincerely,

Jovita Carranza
Administrator

2 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S
DISCUSSION
A N D A N A LY S I S

start grow

expand recover
TOP RECOGNITION
top recognition
T I M O T H Y
P O R T E R grow
SUCCESS STORY

2020 SMALL BUSINESS GROW
PERSON OF THE YEAR

Appddiction Studio, LLC, K E L S E Y
San Antonio, TX R AYM O N D
SUCCESS STORY
TIMOTHY PORTER, an Army veteran with a passion
for technology and information technology (IT), taught
himself to develop mobile applications, and in 2011 Influence & Co.
he formed Appddiction Studio, LLC. Timothy received Columbia, MO
his initial start-up assistance and guidance from the
local Procurement Technical Assistance Center and KELSEY RAYMOND co-founded Influence & Co. right
received support and assistance from SBA’s Small out of college. She started with only a 6 percent share
Business Development Center at the University of the business. From the beginning, her drive was to
of Texas at San Antonio. The San Antonio based be the majority owner of the company. In her quest
company is part of SBA’s 8(a) Business Development to achieve this goal, she has published 270 articles,
Program and a Service-Disabled Veteran-Owned achieved 107,000 social media shares, and built a
Small Business with a national presence. It provides social reach of 153 million — all this in addition to
premier and innovative IT transformations by successfully leading the company to rapid success.
successfully implementing state of the art agile
framework and methodologies. One of the challenges Kelsey faced was financial
and this is where SBA was able to assist her. When
In 2016, the company received an SBA loan that Kelsey first started negotiations with former majority
was paid in full within two years. From 2017 to 2018, owner about buying out his 94 percent share of the
the company experienced a 254 percent increase business, she wasn’t sure how she would get the
in revenue due to the successful procurement of capital. They ultimately agreed on a purchase price
contracts for software development and project of $4.3 million. To finance the buy, she researched
management through the Department of Defense SBA loan processes and interviewed eight different
(DoD). Appddiction Studio has established itself as banks before she decided to apply for a $4.1 million
the go-to small business for DoD to support new and 7(a) loan with American Bank of Missouri. The loan
existing enterprise transformations for DoD clients enabled her to reach her goal of total ownership and
and was highlighted on the USA Network television she hasn’t looked back since.
channel as one of their USA Character Unite Award
winners for developing an award-winning anti-bully
mobile application for use in K-12 schools.

start
expand
grow

recover

4 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

THE SBA’S HISTORY, GOALS, AND ORGANIZATION
In 1953, Congress created the SBA to aid, counsel, assist, and protect the interests of small business. As the nation’s only
go-to resource and voice for small businesses, the SBA provides programs and services that help small businesses confidently
start, grow, expand, or recover. The SBA is backed by the strength of the federal government and is the only cabinet-level
federal agency fully dedicated to small business. The SBA’s headquarters is located in Washington, D.C., while its business
products and services are delivered through field personnel and a network of private sector and nonprofit partners in every
U.S. state and territory. Major SBA offices fall under one of four Agency-wide strategic goals as outlined in SBA’s FY 2018-
2022 Strategic Plan:

MISSION STATEMENT
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.

GOAL 1 GOAL 2 GOAL 3 GOAL 4
Support small business Build healthy entrepreneurial Restore small businesses and Strengthen SBA’s ability to
revenue and job growth ecosystems and create communities after disasters serve small businesses
business friendly environments
1.1 Expand access to 3.1 Deploy disaster 4.1 Ensure effective and
capital 2.1 Develop small assistance effectively efficient management of
1.2 Help small business businesses through and efficiently Agency resources
exporters succeed in technical assistance 4.2 Build a high-performing
global markets 2.2 Build healthy entrepre- workforce
1.3 Ensure federal contract neurial ecosystems 4.3 Implement
and innovation 2.3 Create a small business enterprise-wide
set-aside goals are met friendly environment information system
and/or exceeded modernization and
cost-effective technology

STRATEGIC GOAL ONE The Office of International Trade enhances the ability
Support small business revenue and job growth of small businesses to export and compete in the global
marketplace by facilitating access to capital, providing
Strategic Goal One focuses on business formation, technical assistance, ensuring the consideration of small
job growth, and economic expansion through capital, business interests in trade negotiations, and contributing
contracting, exporting, and innovation. to the U.S. government’s international commercial and
economic agenda.
The Office of Capital Access assists small businesses with
obtaining capital via the 7(a), 504, and Microloan programs, The Office of Government Contracting and Business
and bonds through the Surety Bond Guarantee program. Development assists small businesses in competing for federal
contracting opportunities through the government-wide
The Office of Investments and Innovation assists small prime and subcontracting programs. The office also sets size
businesses through initiatives such as the Small Business standards for small businesses, which determine the size a
Investment Company, Small Business Innovation Research, business must be to be considered a small business.
Small Business Technology Transfer, and other tailored
programs that drive innovation and competitiveness.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 5
MANAGEMENT’S DISCUSSION AND ANALYSIS

STRATEGIC GOAL TWO STRATEGIC GOAL THREE
Build healthy entrepreneurial ecosystems and Restore small businesses and communities after
create business friendly environments disasters

Strategic Goal Two focuses on business startups, growth, Strategic Goal Three focuses on helping restore communities
and expansion through technical assistance, SBA resource and return businesses to normal operations through direct
partners, and creating a business-friendly environment to loans to repair, rebuild, and recover from physical damage
reduce regulatory burdens. and economic losses.

The Office of Government Contracting and Business The Office of Disaster Assistance provides affordable, timely,
Development provides business development assistance to and accessible financial assistance to homeowners, renters,
small businesses seeking federal contracts. This assistance and businesses following a disaster. The Disaster Loan
includes the HUBZone, 8(a) business development, program is the only form of SBA assistance that is not
7(j) management and technical assistance, and All Small limited to small businesses.
Mentor-Protégé programs.

The Office of Entrepreneurial Development provides STRATEGIC GOAL FOUR
business advising, mentoring, and training assistance Strengthen SBA’s ability to serve small businesses
through its resource partner network composed of small
business development centers, women’s business centers,
and SCORE, and through Entrepreneurship Education Strategic Goal Four focuses on streamlining business
programs. processes and decision-making at all levels to ensure
efficiency and effectiveness.
The Office of Veterans Business Development ensures the
applicability and usability of all the Agency’s small business The Office of Performance Management and the Chief
programs for veterans, service-disabled veterans, reserve Financial Officer leads the Agency’s performance
component members, and their dependents or survivors management, program evaluation, financial management,
through veterans’ business outreach centers, Boots to and acquisition management functions.
Business, and other grant programs.
The Office of Executive Management, Installations and
The Office of the National Ombudsman works with all Support Services supports resource and core administrative
federal agencies that regulate small businesses to provide a functions, including grant management, facilities, records
means for businesses to comment on federal government management, and personnel security.
enforcement activity. The SBA also maintains a five-member
The Office of Human Resources Solutions provides strategic
Regulatory Fairness Board in each of the 10 regions to hold
human capital solutions to workforce issues and strives
public hearings on small business concerns.
to create a work environment that attracts and retains a
talented and high-performing workforce.

The Office of the Chief Information Officer provides
information technology leadership, product services, and
operational support for the SBA in order to maximize
internal efficiency and responsiveness to small businesses.

Other offices that support the strategic goals and objectives
include the Office of Field Operations; Office of Diversity,
Inclusion, and Civil Rights; Office of Communications and
Public Liaison; Office of Congressional and Legislative Affairs;
Office of General Counsel; and Office of Hearings and Appeals.

6 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

EXECUTIVE SUMMARY
America’s 30 million small businesses play a critical role in Act. In FY 2020, purchases of defaulted guarantied loans
job creation and retention. During the last two decades, decreased from $1.5 billion last year to $1.2 billion. The
small businesses have been responsible for creating two out loans receivable portion of the SBA credit program portfolio
of every three net new jobs. In turn, the U.S. Small Business increased in FY 2020 from $9.5 billion to $183.0 billion.
Administration’s assistance to those firms and entrepreneurs The spike in loans receivable was caused by the increase
helps drive a healthy economy. in new disaster direct loan disbursements associated with
CARES Act funded loans.
The SBA employs a variety of methods to support America’s
small businesses. These methods include promoting access to
capital, federal contracting, counseling, and disaster assistance. Performance Results
Capital: In FY 2020, the SBA approved $29 billion or more
Throughout FY 2020, four goals from the SBA’s FY 2018-
than 51,300 loans to small businesses. The SBA supported
2022 Strategic Plan guided the Agency’s actions:
nearly $6 billion in 504 loans, an increase of nearly $818
1. Supporting small business revenue and job growth million from FY 2019. The SBA invested more than $4.8
billion in 1,063 small businesses through the Small Business
2. Building healthy entrepreneurial ecosystems and creating
business friendly environments Investment Company program.

3. Restoring small businesses and communities after Contracting: The SBA continued to partner with agencies
disasters across the Federal Government to expand small business
4. Strengthening SBA’s ability to serve small businesses contracting opportunities. From FY 2015 through FY 2019,
small businesses were awarded more than $500 billion in
The following sections highlight financial and performance federal contracts (FY 2020 contracting numbers continue
results for the Agency, including the four Agency Priority to be collected and certified). The Federal Government
Goals. An in-depth analysis can be found in the Analysis continues to exceed its small disadvantaged and service-
of Financial Results and Analysis of Performance Results disabled, veteran-owned small business goals but faces
sections. The complete set of performance results will be challenges with HUBZone and women-owned small
reported in the Annual Performance Report, released in business goals.
February 2021.
Counseling: The SBA provided mentoring, business advice,
and training assistance to nearly 750,000 entrepreneurs
Financial Results and small businesses this year, which helped them start and
For FY 2020, the SBA’s total budgetary resources used for grow their businesses, and create or retain jobs. The Agency
staffing, operations, and loan subsidy costs were $590.2 further strengthened the alignment of performance metrics
billion. Total nonbudgetary resources for loan financing with its resource partners that will be implemented in future
used to make direct loans and purchase guarantied loans in grant agreements.
default were $228.8 billion. The SBA’s guarantied portion
of the outstanding loan principal rose $515.9 billion in Disaster Assistance: Disaster loan applications and
FY 2020 to $621.7 billion. During FY 2020, new guaranties approvals increased significantly compared to FY 2019 with
disbursed by SBA participating banks were $538.0 billion, the ability of the SBA to provide disaster relief to every
a $516.8 billion increase from last year. The increase in the state and territory during the COVID-19 pandemic. At the
SBA’s guarantied portion of outstanding loan principal and end of FY 2020, the Agency is working 275 active disaster
new guaranties disbursed is a direct result of the Paycheck assistance declarations and approved disaster loans totaling
Protection Program (PPP) created under the CARES over $195 billion during the fiscal year.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 7
MANAGEMENT’S DISCUSSION AND ANALYSIS

Agency Priority Goals lenders on export products. The SBA is awaiting its
grant data for the State Trade Expansion Program
The Government Performance and Results Act (STEP) before finalizing its end-of-year results for
Modernization Act of 2010 requires federal agencies to this year, which will be made available in the FY 2020
establish a set of two-year Agency Priority Goals that reflect Annual Performance Report to be published in
the highest priorities of agency leadership. The SBA has February 2021.
established three APGs. Additional information for each
of the APGs action plans and progress here: https://www.
performance.gov/SBA/APG_sba_1.html. The goals and Cross-Agency Priority Goals
outcomes from FY 2020 were as follows: The SBA also supports each of the government-wide
federal Cross-Agency Priority Goals. The CAP goals are
Increase Access to Capital for Small Businesses
through Enhancements in Web-Based Technology.
Presidential priorities and are complemented by other
cross-agency coordination and goal-setting efforts. The
Goal: By September 30, 2021, increase the number of lender SBA serves as the co-lead for the Data, Accountability, and
and small business connections by 8 percent (FY 2019 Transparency CAP goal.
baseline of 80,000) from baseline through enhanced web-
based technology platforms. Per the GPRA Modernization Act requirement to address
Outcome: The SBA supported 197,961 lender match Cross-Agency Priority Goals in the Agency strategic plan,
connections in FY 2020, which exceeds this year’s the annual performance plan, and the annual performance
goal. The SBA has been able to upgrade its system and report, please also refer to www.Performance.gov for more
conduct outreach to trade groups and field staff to on the Agency’s contributions to those goals and progress. A
expand outreach on this important tool to help increase summary of each CAP goal follows:
access to capital. IT Modernization: Build and maintain more modern,
secure, and resilient information technology (IT) to
Maximize small business participation in government enhance mission delivery and productivity.
contracting.
Data, Accountability, and Transparency: Leverage
Goal: By September 30, 2021, maximize the percent of data as a strategic asset to grow the economy, increase
federal contracts by awarding at least 23 percent to small the effectiveness of the Federal Government, facilitate
businesses oversight, and promote transparency.
Outcome: The Federal Government continued to exceed Developing a Workforce for the 21st Century: Ensure
its small business contracting goal and made significant effective and efficient mission achievement and improved
progress on its small disadvantaged small business service to America through enhanced alignment and
contracting goals. The SBA provided support through strategic management of the Federal workforce.
several mechanisms in the field and through the Small
Business Procurement Advisory Council to increase Improving Customer Experience: Transform the
awareness of the importance of small businesses in the customer experience by improving the usability and
federal marketplace. reliability of our Federal Government’s most critical
digital services.
Help Small Business Exporters Succeed in Global Sharing Quality Services: Deliver technology and
Markets Goal. process improvements that will improve citizen services.
Goal: By September 30, 2021, increase the value of small Shifting from Low-Value to High-Value Work:
business export sales to $4.7 billion in FY 2021 (FY 2018 Eliminate low-value, unnecessary, and outdated policies
baseline of $3.1 billion). and requirements issued by central management agencies.
Outcome: The SBA has been able to support several Category Management: Leverage common contracts to
billion dollars in export loans and provide counseling buy common goods and services as an enterprise.
and training to thousands of small businesses and

8 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

Results-Oriented Accountability for Grants: Rebalance
compliance efforts with a focus on results for the
American taxpayer.
Getting Payments Right: Reduce the amount of cash lost
to the taxpayer through incorrect payments.
Federal IT Spending Transparency: Improve business,
financial, and acquisition outcomes.
Frictionless Acquisition: Deliver commercial items at
the same speed as the marketplace and manage customers’
delivery expectations by breaking down barriers to entry
using modern business practices and technologies.
Modernize Infrastructure Permitting: Improve the
Federal environmental review and authorization process to
enable infrastructure project sponsors to start construction
sooner, create jobs earlier, and fix our Nation’s
infrastructure faster while also ensuring that a project’s
potential impacts on environmental and community
resources are considered and managed throughout the
planning process.
Security Clearance, Suitability, and Credentialing
Reform: Advance security through a trusted workforce;
modern clearance process; secure, modern, and mission-
capable information technology; and continuous
performance improvement.
Lab-to-Market: Improve the transition of federally
funded innovations from the laboratory to the
marketplace by reducing the administrative and regulatory
burdens for technology transfer and increasing private
sector investment in later-stage R&D.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 9
10

SBA Organization Chart

Office of Advocacy
OFFICE OF
THE ADMINISTRATOR
Office of Inspector General
MANAGEMENT’S DISCUSSION AND ANALYSIS

Office of Office of Office of Office of Government Office of Office of Office of Office of
Disaster Veterans Business Entrepreneurial Contracting and Office of Investment Field International the National
Business Capital Access
AGENCY FiNANCiAL REPORT FISCAL YEAR 2020

Assistance Development Development and Innovation Operations Trade Ombudsman
Development

Office of Office of
Performance Executive Office of Office of
Office of Office of Office of the Office of Office of Office of
Management Management, Continuous Diversity,
Hearings Human Resources Chief Information Communications Congressional and General Counsel
and the Chief Installations, and Operations and Inclusion, and
and Appeals Solutions Officer and Public Liaison Legislative Affairs
Financial Officer Support Services Risk Management Civil Rights
MANAGEMENT’S DISCUSSION AND ANALYSIS
SBA Regions and Field Offices
AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 11
MANAGEMENT’S DISCUSSION AND ANALYSIS

PRIMER OF THE SBA’S PRINCIPAL PROGRAMS

Capital State Trade Expansion Program — STEP provides grants
7(a) Loans — The SBA offers government guaranties on to states to assist small businesses with the information
loans (up to $5 million) made by lenders to help expand and tools they need to succeed in export related activities.
access to capital for business owners who face challenges These activities include participation in foreign trade
getting approved for financing. The SBA guaranties a missions, foreign market sales trips, international marketing
portion of 7(a) loans made and administered by commercial campaigns, export trade shows, and training workshops.
lending institutions. Loans can be guarantied for a variety of
general business purposes. Contracting and Innovation
504 Certified Development Company Loans — The SBA Procurement Assistance to Small Businesses — Small
works with CDCs, which are private nonprofit corporations, business contracts represent the largest form of direct
and private lenders to provide long-term financing (up to monetary support for small business in the Federal
$5.5 million) to support investment in major assets, such Government. Within this goal are four subgoals:
as real estate and heavy equipment. The SBA guaranties the Small Disadvantaged Businesses — This program
CDC’s portion of these loans. provides assistance through the 8(a) Business
Development program and set-aside contracting for
Microloans — The SBA provides loans to nonprofit
businesses owned and controlled by socially- and
intermediary lenders, which are community-based
economically-disadvantaged individuals. Over the course
organizations with experience in lending and providing
of nine years, a firm is assisted in gaining resources to
technical assistance, that in turn make these loans (up to
compete for federal contracts and for contracts in the
$50,000) to small businesses needing small-scale financing
private sector.
and technical assistance for startup or expansion.
HUBZone Small Businesses — This program provides
Small Business Investment Companies — SBICs are sole-source and set-aside contracting for firms located
privately-owned and managed investment funds that use in designated economically disadvantaged geographical
their capital plus funds borrowed, with an SBA guaranty (up areas.
to $175 million), to make equity and debt investments in
Service-Disabled Veteran-Owned Small
qualifying small businesses.
Businesses — This program allows federal agencies to
set aside contracts for competition only among service-
Exporting disabled veteran-owned small businesses.
Export Loans — The SBA provides several types of Women-Owned Small Businesses — This program
export loans, including SBA Export Express loans (up allows federal agencies to set aside certain contracts for
to $500,000), Export Working Capital loans (up to $5 competition only among small businesses owned by
million), and International Trade loans (up to $5 million) women.
that provide small businesses with enhanced export
financing options to develop foreign markets, fund their Surety Bond Guarantees — A surety bond is a type of
export transactions, and/or support business expansion due contract that guarantees the performance of a contractor.
to exporting success. If one party does not fulfill its end of the bargain, then
the SBG program provides financial compensation to the
U.S. Export Assistance Centers — USEACs are staffed other party. The SBA guarantees bonds issued by a surety
by SBA, Department of Commerce, and Export-Import company in order to encourage the surety company to
Bank professionals. Together, their mission is to help small- provide bonds to small businesses, up to $6.5 million for
and medium-sized businesses compete in today’s global non-federal contracts and up to $10 million for federal
marketplace by providing export marketing and finance contracts.
assistance.

12 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

Small Business Innovation Research — The SBIR SCORE — SCORE is a nonprofit association comprising
program stimulates high-tech innovation by reserving a nearly 11,000 volunteer business mentors that serve
specific percentage of federal research and development entrepreneurs with in-person mentoring and local training
funds for small businesses. workshops. As the largest volunteer business mentor
network in the Federal Government, SCORE adapts its
Small Business Technology Transfer — The STTR structure and services to meet the needs of small businesses.
program reserves a specific percentage of federal research
and development funding to award to small business and Learning Center — The SBA Learning Center is an online
nonprofit research institution partners. portal that hosts a variety of self-paced online training
courses, quick videos, web chats, and other helpful tools
to assist small business owners to explore and learn about
Advising, Mentoring, and Training business ownership.
Small Business Development Centers — SBDCs deliver
an array of services to small businesses and prospective
business owners using an extensive network of 63 lead Disaster Assistance
centers managing more than 900 service delivery points Disaster Assistance — The SBA is the Federal
throughout the United States and the insular territories. Government’s primary source of financing for the long-
term repair and rebuilding of disaster-damaged private
Women’s Business Centers — WBCs provide advising property for homeowners, renters, businesses of all sizes, and
and training through more than 110 nonprofit educational private nonprofit organizations. It is the only form of SBA
centers across the nation. Many WBCs provide multilingual assistance that is not limited to small businesses.
services, and a number offer flexible hours allowing mothers
with children to attend training classes. Paycheck Protection Program — The CARES Act
established this loan of up to $10 million designed to
Boots to Business — B2B is an entrepreneurial education provide a direct incentive for small businesses to keep their
and training program offered by the SBA as part of the workers on the payroll. The loan may be fully forgiven if the
Department of Defense Transition Assistance Program funds are used for payroll costs, interest on mortgages, rent,
(TAP). The course provides an overview of entrepreneurship and utilities.
and applicable business ownership fundamentals. Active
Duty Service members (including National Guard and EIDL COVID Loans and Advance Grants — The CARES
Reserve), veterans of all eras, and spouses are eligible to Act modified the existing EIDL program within the Disaster
participate. Assistance program and created the Advance grant. In
response to the COVID-19 pandemic, small businesses
Native American Outreach — The program supports owners, including agricultural cooperatives and nonprofit
American Indians, Alaska Natives, and Native Hawaiians organizations, in all U.S. states, Washington, D.C., and
seeking to create, develop, and expand small businesses. It territories can apply for Economic Injury Disaster Loans
engages in outreach, technical assistance, and education, that must be repaid. EIDL Advance provided grants with
formulates and administers training programs, and EIDL loans. The amount of the grant was determined
coordinates entrepreneurial development opportunities by the number of employees indicated on the EIDL
through co-sponsorship agreements with entities and other application: $1,000 per employee, up to a maximum of
federal agencies. $10,000.
Veterans Business Outreach Centers — The SBA’s 22
VBOCs provide counseling and training services to veteran-
owned and service-disabled veteran-owned small businesses
and entrepreneurs, along with reserve component members
who have an interest in either starting a new small business
or expanding an established small business.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 13
MANAGEMENT’S DISCUSSION AND ANALYSIS

SUMMARY OF COVID-19 FINANCIAL IMPACTS

The SBA’s FY 2020 financial and performance position must more than 3.6 million EIDL COVID loans totaling
be explained in the context of the COVID-19 pandemic $194 billion, which represented more than all combined
and subsequent stimulus legislation to mitigate its impact. prior disaster assistance lending supported in the Agency’s
In March 2020, the substantial growth in COVID-19 history. The SBA provided nearly 5.8 million EIDL
cases created a national health emergency, which severely Advance grants up to $10,000 per applicant and reached its
disrupted the national economy. To mitigate the economic $20 billion EIDL Advance grant cap on July 11, 2020.
impact from business closures as a result of lockdowns across
the country, Congress passed and the President signed into The SBA also received $192 million in two-year funds for
law the Coronavirus Aid, Relief, and Economic Security Act the Small Business Development Centers (SBDCs) Program
(CARES Act), which authorized new programs for the SBA. with $0.4 million in funds remaining and $48 billion for
The CARES Act, and subsequent legislation, provided the the Women’s Business Centers (WBCs) Program with
SBA with nearly $752 billion—the largest outlay of capital $1.5 million in funds remaining. Both programs provide
in the Agency’s history. These programs have saved millions counseling and training assistance to small businesses.
of jobs and helped small businesses avert bankruptcies. More The SBA also received $25 million in grants to develop an
information can be found in the financial statements in online platform that provides small businesses with access
Note 17: COVID-19 Activity. to a consolidation of COVID-19 related information and
resources from multiple federal agencies with $6.4 million
Through the Paycheck Protection Program (PPP), a newly in funds remaining. These platforms have helped tens of
established forgivable loan program, the SBA guaranteed thousands of entrepreneurs access resources to help with
5.2 million PPP loans totaling $525 billion through 5,460 their recovery.
lenders. The SBA processed 14 years’ worth of loans in the
first 14 days of the PPP program, and reached the smallest The SBA received nearly $3.4 billion in administrative
businesses with an average loan of $101,000. The program funds in order to implement the program established via
expired on August 8, 2020 with nearly $138 billion in PPP the CARES Act and corresponding legislation, to prevent,
loan subsidy remaining. prepare for, and respond to COVID-19. The SBA has $1.6
billion available to support administrative expenses through
The SBA also supported $7.8 billion in debt relief to FY 2021.
7(a) loan, 504 loan, and Microloan borrowers by paying
principal, interest, and fees on existing loans, which offset The addition of CARES Act funds has substantially
financial strain on small businesses. With $17 billion made impacted the FY 2020 financial position of the Agency
available to use by September 30, 2021, the SBA maintains with an increase of total assets by $880.8 billion compared
nearly $9.2 billion in funds to cover additional debt relief. to FY 2019 total assets of $16.7 billion. Total liabilities in
FY 2020 were $718.1 billion compared to FY 2019 total
The SBA also received $50 billion in loan subsidy for liabilities of $15.1 billion. As such, the SBA’s net position
disaster assistance loans to remain until expended, which and net cost of operations has substantially changed
provided $367.1 billion in loan authority. The Agency compared to FY 2019. Total budgetary resources increased
approved disaster declarations under new authority for all from $12.3 billion in FY 2019 to $1.5 trillion in FY 2020.
U.S. states and territories, which allowed small businesses More information of the financial impacts can be found in
to apply for Economic Injury Disaster Loans (EIDL) and the Analysis of Financial Results section.
newly established EIDL Advance grants. The SBA approved

14 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

ANALYSIS OF PERFORMANCE RESULTS

Analysis of Performance and business’s local county. In FY 2020, the SBA surpassed its
Agency Priority Goals first-year goal by supporting 197,961 matches (see Chart I).
The SBA has implemented system upgrades and tailored
The following section presents key FY 2020 performance outreach through national associations and field offices to
data including for the three FY 2020-2021 Agency Priority increase awareness of this tool.
Goals that are important to the success of the SBA’s mission.
The presentation is organized by strategic objective, which Performance Goal: Support 796,500 jobs through capital
follows the SBA’s FY 2018-2022 Strategic Plan. Detailed assistance programs in FY 2020.
information on all SBA program performance data will
be presented, including explanations of variances, in Performance Analysis:1 The number of jobs
the FY 2020 Annual Performance Report to be published supported—jobs created and retained—is an important
in February 2021. Where the SBA established goals in outcome measure of the effectiveness of the SBA’s programs.
FY 2019, the SBA has displayed two years’ worth of data. This measure tracks the number of jobs supported through
All other goals include trend data for six years. the 7(a) loan, 504 loan, Microloan, and Small Business
Investment Company (SBIC) programs. The number of
jobs supported has decreased from the prior year due to
STRATEGIC OBJECTIVE 1.1 improvements in the economy and the subsequent impacts
Expand access to capital of the COVID-19 pandemic. However, SBA capital
programs supported more than 644,000 jobs in FY 2020
Priority Goal: By September 30, 2021, increase the number (see Chart II). The largest decrease can be attributed to the
of lender and small business connections by 8 percent from decline in the number of 7(a) loans. However, with lower
baseline through enhanced web-based technology platforms interest rates, the 504 loans continued to grow. SBA lenders
(FY 2019 baseline = 80,000). provided substantial support to help small businesses recover
through the Paycheck Protection Program, which began
Performance Analysis: The SBA seeks to increase access to in April 2020. More information on this program can be
capital by matching small businesses and lenders through found in the section on the COVID-19 pandemic.
Lender Match—a free online referral tool that connects
small business borrowers with participating SBA lenders.
From its inception in 2015, and through FY 2020, Lender
CHART I: Annual Number of Lender and Small Business
Match has connected more than 420,000 lenders and
Connections
borrowers from nearly 6.5 million inquiries. As the number
of brick-and-mortar lenders decline, and with fewer lenders

Number of Lender Match Connections
200,000
located in geographically isolated areas, Lender Match
provides a geographically neutral solution where small
150,000
business borrowers compete for the best financing option,
leveling the playing field for small businesses searching for
100,000
financing that may not be locally available. Prospective
borrowers apply online, and the information is forwarded
50,000
to participating SBA lenders that operate within the small
0
FY 2020 FY 2021
Actual Target

1 The information provided is derived solely from Agency records that are submitted by the Agency’s participant lenders engaged in making SBA loans. This information
is collected by the lenders from SBA loan applicants who provide it on a voluntary basis. It is then forwarded by the lenders to the SBA. Since the information is
provided by the loan applicants on a voluntary basis, it is not necessarily inclusive of all SBA borrowers, nor can its accuracy be verified by the Agency. Accordingly, the
SBA cannot make any representation as to the completeness or accuracy of the information provided. The SBA is working with the U.S. Bureau of the Census to better
report job creation and retention data.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 15
MANAGEMENT’S DISCUSSION AND ANALYSIS

ability of small businesses to export, which may be reflected
CHART II: 7(a), 504 loan, Microloan, and Small Business
in performance results in FY 2021. The SBA trained and
Investment Company Jobs Supported
counseled nearly 3,000 small businesses on export finance,
1,000,000
facilitated training for Small Business Development Center
counselors, and continued to represent small business

Number of Jobs Supported
interests in trade discussions, including the recently enacted
750,000
U.S.-Mexico-Canada Agreement. The Agency will monitor
and identify ways to help existing small businesses expand
500,000
and new small businesses enter international markets.
250,000

STRATEGIC OBJECTIVE 1.3
0
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Ensure federal contract and innovation set-
aside goals are met and/or exceeded
Actual Target

Priority Goal: By September 30, 2021, maximize the
percent of federal contracts by exceeding the 23 percent
CHART III: Cumulative Value of Export Sales awarded to small businesses.

$4,000,000
Performance Analysis: By law, 23 percent of federal prime

Export Sales ($ Thousands)
contracting dollars are set aside for small businesses, which
$3,000,000
includes 5 percent of prime and subcontracts to small
disadvantaged businesses and women-owned small businesses
and 3 percent of prime and subcontracts to HUBZone
$2,000,000
small businesses and service-disabled veteran-owned small
businesses. For the seventh consecutive year, in FY 2019
$1,000,000
(the latest year of data available due to the data certification
process), the Federal Government surpassed its prime
$0
FY 2019 FY 2020 contracting goal by awarding small businesses more than
Actual Target
$129 billion or 25.58 percent in contracting dollars (see
Chart IV). The Federal Government surpassed its goals for
service-disabled veterans (FY 2019 result of 4.3 percent),
women-owned small businesses (FY 2019 result of 5 percent)
STRATEGIC OBJECTIVE 1.2
and small disadvantaged businesses (FY 2019 result of
Help small business exporters succeed in
10.1 percent). The Federal Government did not meet its
global markets
goal for HUBZone small businesses (FY 2019 result of
2.2 percent) (see Chart V).
Priority Goal: By September 30, 2021, increase the value
of SBA’s small business export sales to $4.7 billion (FY 2018 To help meet these goals, the SBA deployed a team
baseline = $3.1 billion). of highly trained and skilled professional analysts,
procurement representatives (PRCs), industrial specialists
Performance Analysis: Increasing access to export financing
for size protests (ISS), and certificate of competency and
and export trade counseling and training enhances the
forestry management specialists to actively engage staff
ability of small business exporters to succeed in the global
across the Federal Government to promote small business
marketplace. Collectively, the SBA supported nearly $3.2
contracting awards. The Federal Government continues
billion in small business export sales with more than 300
to face challenges meeting the HUBZone goal; however,
core export loans for nearly $600 million in FY 20202 (see
the program has implemented new regulations to spur
Chart III). While not all data are available to assess annual
interest in the program. The SBA will continue to monitor
progress, the SBA anticipates meeting this year’s goal in
and promote these programs in order to ensure more
spite of the impacts of the COVID-19 pandemic on the
participation of small businesses in this market.

2 The SBA will update these results with FY 2020 STEP data in the Annual Performance Report (APR) to be published in February 2021 as the program currently
experiences a data lag of two quarters.

16 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

CHART IV: Percent of Federal Prime Contract Dollars STRATEGIC OBJECTIVE 2.1
Awarded to Small Businesses Develop small businesses through technical
assistance
30

Percent of Small Business
Performance Goal: Assist 24,500 small businesses through
25
business development programs in FY 2020.
20
Performance Analysis: Through the 8(a) Business

Contract Dollars
15
Development, HUBZone, 7(j) Technical Assistance, and
10 All Small Mentor-Protégé programs, the Agency supported
5 more than 25,000 small businesses. The SBA continued to
implement operational and programmatic changes to the
0
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 HUBZone Program resulting from two rule changes that
Actual Target took effect in 2020. The Agency continued to streamline the
8(a) application and annual review processes and evaluate
its other business development programs. In addition, the
CHART V: Percent of Federal Prime Contract Dollars SBA finalized its regulations to consolidate all federal small
Awarded to Disadvantaged Small Business Goals business mentor-protégé programs to streamline delivery
10 to small businesses. In addition, the All Small Mentor-
Protégé Program has helped establish more than 1,000

Contract Dollars (Percnetage)
8 mentor-protégé agreements, which have helped more small
businesses seeking to enter the federal contracting market.
6
(see Chart VI).
4

2 STRATEGIC OBJECTIVE 2.2
Build healthy entrepreneurial ecosystems
0
Small Women- Service-Disabled HUBZone
Disadvantaged Owned Veteran-Owned
Performance Goal: Assist 835,000 entrepreneurs through
Actual Target
partnerships, virtual resources, and targeted outreach in
FY 2020.
CHART VI: Small Businesses Assisted Through Business
Performance Analysis: The SBA provided mentoring,
Development Programs
business advice, and training assistance to nearly 750,000
35,000
entrepreneurs and small business owners in FY 2020 (data
as of June 30, 2020). Resource partners may input data up
30,000

Small Business Assisted
to 45 days after the close of the fiscal year, and final data will
25,000
be made available in the APR publication in February 2021.
20,000 In FY 2020, the SBA implemented a new methodology for
15,000 the entrepreneurial ecosystem performance goal to exclude
10,000 duplicate entries. With this new methodology, historical
5,000 data prior to FY 2019 are not available for comparison. The
SBA continued to sustain and grow the Boots to Business
0
FY 2019 FY 2020 (B2B) entrepreneurship training track in partnership
Actual Target with the U.S. Department of Defense’s (DoD) Transition
Assistance Program (TAP), where more than 21,000
veterans, service members, and military spouses benefited
from entrepreneurship services.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 17
MANAGEMENT’S DISCUSSION AND ANALYSIS

STRATEGIC OBJECTIVE 2.3 CHART VII: Number of Outreach Events Through Federal
Create a small business friendly environment Agencies, Trade Associations, and Resource Partners

Performance Goal: Conduct 50 outreach events through 160
partnerships with federal agencies, trade associations, and 140

Outreach Events
resource partners to reduce regulatory burdens on small 120
businesses in FY 2020. 100
80
Performance Analysis: The SBA’s Office of the National 60
Ombudsman worked with federal agencies and the 40
small businesses they regulate to provide a confidential 20
and impartial channel for small businesses to comment 0
on enforcement activities, audits, on-site inspections, FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

compliance assistance, or other types of issues. The SBA Actual Target
raised awareness of its products and services through direct
outreach to small business owners and entrepreneurs, and
established relationships with trade association leaders, CHART VIII: Customer Satisfaction Rate for Disaster
resource partners, and other federal agencies. In FY 2020, Loan Approvals
the National Ombudsman completed 41 events, falling
90
short of its target as it refocused outreach events to be
80

Customer Satisfaction Rate
more direct and concentrated in addition to the impacts 70
of the COVID-19 pandemic on in-person events (see 60
Chart VII). The SBA will continue to identify ways to reach 50
more stakeholders as the Agency adapts to the changing 40

(Percentage)
environment because of the pandemic. 30
20
10

STRATEGIC OBJECTIVE 3.1 0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Deploy disaster assistance effectively and
efficiently Actual Target

Performance Goal: Achieve a 77 percent customer
satisfaction rate for disaster loan approvals in FY 2020. STRATEGIC OBJECTIVE 4.1
Ensure effective and efficient management of
Performance Analysis: The SBA tracks customer satisfac- Agency resources
tion for its disaster assistance program through an annual
survey that uses the American Customer Satisfaction Performance Goal: Maintain the customer satisfaction rate
Index methodology. The index summarizes key points in of financial management services for the SBA’s employees at
the loan process, including the application, final decision, 4.0 (5-point scale) in FY 2020.
and closing of the loan. In FY 2020, the SBA achieved a
customer satisfaction rate of 78 percent—exceeding the Performance Analysis: The SBA exceeded its customer
target of 77 percent (see Chart VIII). The satisfaction rate satisfaction goal for its financial management services to SBA
is a result of several factors, including improvements to employees by achieving an average score of 4.6 on a 5-point
the application process and upgrades to the Disaster Loan scale (see Chart IX). The SBA developed the customer
Assistance Portal. In addition, the development of the satisfaction baseline in FY 2018. A score of four or higher
www.DisasterAssistance.gov website made disaster assis- indicates superior satisfaction with financial and performance
tance responsive, consistent, and easy for disaster survivors management services. Through additional outreach and
to find resources. publication of the survey, the SBA reached more internal
stakeholders to raise awareness. After presentations and
other service delivery, respondents often receive a link to the

18 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

survey to express their opinion. The SBA will continue to
CHART IX: Customer Satisfaction Rate for Financial
monitor its customer satisfaction score in order to improve
Management Services
service delivery to its program managers and staff who deliver
5
services to the small business community.

Customer Satisfaction Rate
4
STRATEGIC OBJECTIVE 4.2
3
Build a high-performing workforce

(5-Point Scale)
2
Performance Goal: Achieve a 68 percent SBA employee
1 satisfaction score through the Federal Employee Viewpoint
Survey in FY 2020.
0
FY 2018 FY 2019 FY 2020
Performance Analysis: The SBA achieved a high Federal
Actual Target
Employee Survey (FEVS) employee satisfaction score in
recent years with an increase to 70 percent in FY 2019 from
68 percent in FY 2018 (see Chart X). Data are not yet
CHART X: Federal Employee Viewpoint Survey Job
Satisfaction Rate available for FY 2020 as the FEVS survey was delayed from
June to October, and results will be updated when available.
80 In FY 2019, the SBA’s response rate of 69.2 percent was
70 especially positive. Through core training and professional

Customer Satisfaction Rate
60 development activities and enhanced collaboration, more
50 employees felt satisfied, which is reflected in the data.
40 Furthermore, higher satisfaction scores increase employee

(Percentage)
30 retention, which in turn reduces hiring and training costs. The
20 SBA anticipates similar scores in FY 2020 given the continued
10 success of key programs and activities for its employees.
0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Actual Target STRATEGIC OBJECTIVE 4.3
Implement enterprise-wide information
system modernization and cost-effective
CHART XI: Cumulative Dollars of IT Cost Savings/ technology
Avoidance
Performance Goal: Achieve $14 million in IT cost savings/
16 avoidance through the streamlining of contracting, category
14 management, and cloud computing in FY 2020.

Cost Savings/Avoidance
12
10 Performance Analysis: In FY 2020, the SBA made
8 significant progress in technology modernization by
adopting cloud-based solutions and consolidating

($ Millions)
6
4 duplicative hardware, software, and services. In addition,
2 through innovation and testing pilots and prototypes,
0 the SBA has achieved cost-savings by creating greater
FY 2018 FY 2019 FY 2020
opportunities to leverage new technology. In FY 2020,
Actual Target such cost savings and avoidance totaled $14.5 million,
exceeding the target by $500,000 (see Chart XI). The SBA
will continue to monitor IT projects and identify ways to
achieve further cost savings on behalf of the taxpayer.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 19
MANAGEMENT’S DISCUSSION AND ANALYSIS

Evidence and Evaluation Verification and Validation of
The SBA continues to expand the availability and use Performance Data
of evidence and evaluation to understand and make Managing for results and integrating performance, financial,
decisions about SBA programs and operations. To support and budgetary information requires valid, reliable, and
implementation of the Foundations for Evidence-based high-quality performance measures and data. Improving
Policymaking Act (Evidence Act), the SBA appointed a data quality continues to be a priority for the SBA. The
Chief Data Officer, Evaluation Officer, and Statistical SBA’s performance analysts work with program office leads
Official. The Agency also established a data governance across the Agency to acquire high-quality data. In addition
board and began to identify ways to assess and increase staff to using output data internally from its systems, the SBA
capacity in this field. relies on data from resource partners, other federal agencies,
and other government entities to assess its accomplishments
In FY 2020, the SBA oversaw program evaluations for the
and effectiveness. The SBA vigorously pursues the following
State Trade Expansion Program (STEP), Small Business
strategies to ensure data quality:
Investment Company (SBIC), Field Operations customer
experience, Acquisition Management, All Small Mentor- Ensuring the validity of performance measures and data. The
Protégé program (ASMPP), and Surety Bond Guarantees. SBA conducts an annual performance measure review to
Additionally, the SBA entered into an agreement with the assess the validity of its measures and underlying data.
U.S. Bureau of the Census to assess the impact of various The SBA’s performance analysts meet with each office for
SBA programs using administrative data. SBA program in-depth discussions about proposed externally reported
managers will be able to use the results of these evaluations measures. The meetings help determine whether the
to inform management decisions, identify areas where proposed measures and underlying data are useful for
further evidence is needed, and improve outcomes for demonstrating a program office’s success, which is defined
small businesses. The SBA’s leadership uses evidence in its by the goals and objectives identified in the Agency’s
quarterly deep dives (performance reviews) and has woven FY 2018-2022 Strategic Plan.
evidence into the development of its Strategic Plan, Annual Fostering organizational commitment and capacity for data
Performance Plan, and Annual Performance Report. quality. The SBA issues a monthly executive performance
dashboard to apprise senior management on progress.
The Agency updated its FY 2018-FY 2022 Enterprise
The Agency also holds quarterly performance review
Learning Agenda (ELA) which refined key research and
meetings with the Deputy Administrator, Chief of
evaluation questions for each strategic goal and provided
Staff, Performance Improvement Officer, and program
updates on the Agency’s evidence building activities. The
offices. At these meetings, the Agency’s leadership
ELA, developed in partnership with each program office,
reinforces its commitment to the performance metrics
identifies areas where evaluation could provide insights
and works directly with the program offices to identify
about program effectiveness, progress toward outcomes, or
best practices and mitigate challenges. Annually, each
test pilot initiatives. To address questions in the ELA, the
Associate Administrator must certify their program office’s
SBA initiated new program evaluations for Microloans,
performance data before it is externally reported and
Human Capital Planning, Disaster Loan Mitigation,
published online.
Women-Owned Small Business (WOSB) Certification, and
Small Business Procurement. The results of these evaluations Assessing the quality of existing data. The SBA’s
were published in the SBA’s first Annual Evaluation Plan. performance analysts work with program office staff
to reconcile data by creating independent performance
The SBA continued to increase staff capacity and knowledge reports and analyses and comparing the independently
of program evaluation though its Evidence and Evaluation generated data with the data reported by the program
Community of Practice. The SBA plans to initiate new offices. These activities verify the data and the underlying
program evaluations yearly to continue building a suite processes used for reporting.
of evidence that will better inform decisions. The SBA
Responding to data limitations. The SBA’s performance
will publish evaluation results on its website to support
analysts work with program offices to identify data
transparency and incorporate findings into its performance
limitations and specify the necessary steps to improve
management framework.
data. In addition, some program offices rely on data

20 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

provided by third-party resource partners, who are
responsible for collecting, storing, and reporting data to CHART XII: Makeup of SBA’s Outstanding Loan Portfolio
the SBA. The program offices have internal processes for
working closely with their resource partners to ensure that 900

Outstanding Loans ($ Billions)
800
data are correctly reported.
700
600
Operational Portfolio Analysis 500
400
The Operational Portfolio Analysis provides information
300
on the SBA’s credit programs and does not reference the
200
financial statements. The SBA is the taxpayers’ custodian of
100
small business loan guaranties and manages a direct loans 0
portfolio of more than $835.9 billion.3 During FY 2020, the FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

portfolio grew by $692.5 billion, or 483 percent. The largest 7(a) PPP 504
SBIC Disaster All Other
increase came through the introduction of the Paycheck
Protection Program (PPP), a new loan program authorized
through the Coronavirus Aid, Relief and Economic Security CHART XIII: Quarterly Gross 7(a) and 504 Loan
Act (CARES Act) in response to the COVID-19 pandemic. Approvals
By program, PPP added $513.2 billion to the portfolio,
10 Average
the SBA’s 7(a) loan portfolio expanded by $2.2 billion, the 9 Average
Average Average Average
7.094
7.615 7.532 7.034
504 loan portfolio increased by $1.4 billion, and the SBIC 7.216
8
portfolio decreased slightly by $75.6 million. The Agency’s 7

Loan Approvals
disaster loan portfolio increased by $175.8 billion, chiefly 6
5
attributable to growth in the Economic Injury Disaster
($ Billions)
4
Loans (EIDL) program, while all other portfolios increased 3
slightly by $7.6 million. (see Chart XII). 2
1
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
New Guarantied Loans FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
The quarterly average loan volume decreased slightly Quarterly Gross 7(a) and 504 Loan Approvals Average
in FY 2020 with an average of $7.1 billion. Chart XIII
demonstrates the trend in loan approvals since FY 2016.

At least three main factors contributed to the loan guaranty Changes in Market Volatility — Inflation continues to
portfolio’s recent changes: remain low (on average 2.2 percent in 2019),5 which keeps
the cost of consumer goods and services affordable. In
Continuous Growth in the Economy — Real Gross addition, the dollar continued to maintain its strength in
Domestic Product in the United States contracted in international exchange markets through the end of 2019,6
the first two quarters of 2020 due to the COVID-19 which also supports the stability of U.S. prices. While the
pandemic by a combined 36.4 percent.4 In reaction to this unemployment rate has surged to a peak of 14.7 in April
unprecedented economic crisis, Congress passed the CARES 2020 before decreasing to 7.9 by the end of September
Act which provided significant funding for both the PPP 2020, the CARES Act programs helped to stabilize markets
and EIDL loan programs. These two programs account for in FY 2020.7
most of the SBA’s portfolio growth in FY 2020.

3 The total portfolio consists of guarantied business loans outstanding, guarantied debentures, direct business loans, and direct disaster loans. The data include all
performing loans and defaulted loans that have not been charged-off.
4 U.S. Department of Commerce, Bureau of Economic Analysis: www.bea.gov/newsreleases/glance.htm.
5 U.S. Department of Labor, Bureau of Labor Statistics: www.bls.gov/cpi/home.htm.
6 Federal Deposit Insurance Corporation: www.macrotrends.net/1329/us-dollar-index-historical-chart.
7 U.S. Department of Labor, Bureau of Labor Statistics: data.bls.gov/timeseries/LNS14000000.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 21
MANAGEMENT’S DISCUSSION AND ANALYSIS

Market for Small Business Lending — According to data
CHART XIV: Outstanding Commercial Loans to Small vs.
from the Federal Deposit Insurance Corporation, the total
Nonsmall Businesses
market for business loans increased between 2014–2019
by 30 percent ($836 billion). However, 93 percent ($781 4,000
billion) of this increase is accounted for by loans to nonsmall 3,500

Outstanding Loans ($ Billions)
2,796 2,886
businesses,8 whereas total small business loans increased by 3,000 2,476
2,601
2,303
nearly $55 billion. This means the ratio of small business 2,500 2,105
loans compared with the total bank market decreased (see 2,000
Chart XIV). Furthermore, there has been a trend in the 1,500
banking industry toward consolidation, which is reflected 1,000
in the reduction of commercial banks between 2014–2019 500 666 680 689 699 712 721
by 19 percent.9 This makes the SBA’s guaranty products 0
even more critical for growing small businesses that may be CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019

denied credit in the private loan market. Small Business Loans Nonsmall Business Loans

New Direct Loans CHART XV: Monthly Gross Disaster Assistance Loan
In FY 2020, the SBA’s annual lending for the Disaster Approvals
Assistance loan program grew by an unprecedented
80,000
$195.7 billion. FY 2020 disaster loan activity increased by
70,000

Outstanding Loans ($ Billions)
8,736 percent compared with the FY 2019 total of $2.2
60,000
billion. Disaster lending in FY 2020 has exceeded all prior
50,000
SBA disaster lending combined as a result of the COVID-19
40,000
pandemic. Chart XV illustrates the relative size of disaster
30,000
loans in FY 2020 by month, compared with the prior two
20,000
fiscal years.
10,000
Aside from the EIDL loans of FY 2020, most of the 0
Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept
Disaster Assistance loan portfolio outstanding balance
comprises lending from FY 2006 (hurricanes Katrina, Rita, FY 2018 FY 2019 FY 2020

and Wilma), FY 2013 (hurricane Sandy), and FY 2018
(hurricanes Harvey, Irma, and Maria). The SBA will
continue to make disaster loans an important recovery
tool for businesses, homeowners, and renters that survive a
disaster.

8 Nonsmall businesses are firms that have more than 500 employees.
9 https://www.fdic.gov/bank/statistical/stats/

22 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

Portfolio Performance — Delinquencies CHART XVI: Delinquency and Charge-Off Rates for the
Delinquency rates (i.e., borrowers who are late on their 7(a) and 504 Loan Programs by Fiscal Year
payments) are a leading indicator of the Agency’s charge-
5.0%
off rate (i.e., the rate of dollars spent to cover loans that 7(a) Loans

Delinquency Rate (Percentage)
defaulted). Thus, delinquency rates are a general indicator
4.0%
of the Agency’s and taxpayers’ future liabilities for these
programs. A declining delinquency rate (see Chart XVI) is a 3.0%
positive indicator for the financial performance of any loan
portfolio. 2.0%

Strong economic growth, strong profit performance, and 1.0% NBER Declared
Recession Ends
tighter lending standards by financial institutions during
0.0%
the past several years have reduced delinquency rates for
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
all business loans, which have been steadily declining
since reaching cyclical peaks in the latter part of 2009. 7(a) Delinquency Rate 7(a) Past 12 Months Charge-Off Rate
Delinquency rates for the Agency’s major loan programs
followed this national downward trend. Delinquency rates 6.0%
504 Loans

Delinquency Rate (Percentage)
for the 7(a) loan program declined from the 3.8 percent 5.0%
peak in January 2009 to 0.3 percent in July 2020.
Delinquency rates for the 504 loan program likewise 4.0%

declined from the 5 percent peak in February 2010 to 3.0%
0.02 percent in July 2020. The CARES Act provided debt
2.0%
relief to current borrowers of 7(a) and 504 loans, which
means that the SBA has paid the principal and interest on 1.0% NBER Declared
Recession Ends
existing loans. This action has led to a delinquency rate of
0.0%
near 0 percent in the last six months of FY 2020.
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

504 Delinquency Rate 504 Past 12 Months Charge-Off Rate
Portfolio Performance — Charge-Offs
The 12-month charge-off rate for the 7(a) loan program
sharply declined during the FY 2010-2013 period, falling
The 12-month charge-off rate for the 504 loan program
from 4.3 percent during the fourth quarter of 2010 to
continuously increased from FY 2008 to FY 2013, peaking
1.2 percent in the third quarter of 2013. However, the
at 4.4 percent in January 2013, but dropping to 0.3 percent
rate increased thereafter, until decreasing in July 2020 to
in July 2020. This trend is not surprising, since the 504
0.5 percent (see Chart XVI). The 7(a) loans not sold on the
loan program is an economic development program with
secondary market become a charge-off only after all efforts
a commercial real estate focus. As such, recovery rates of
to recover a delinquent balance have been exhausted, such
defaulted 504 loans are, with some noticeable time lag,
as liquidating the underlying collateral. The latent rise of
significantly impacted by the pricing trend in this sector.
the 7(a) charge-off rate in 2013 is attributable to recession-
era loans that were charged-off after efforts to recover Quarterly information on the status of the SBA’s loan
delinquent balances had been exhausted. Now that this portfolio, including outstanding balances and approvals by
effort to charge-off the recession-era loans is complete, the loan program and purchase rates, is available on the SBA’s
charge-off rate mirrors the delinquency rate in FY 2020. website at www.sba.gov/performance.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 23
MANAGEMENT’S DISCUSSION AND ANALYSIS

FORWARD LOOKING ANALYSIS

The SBA maintains and strengthens the nation’s economy Changing Business Markets
by helping small businesses start, grow, expand, and recover. In March 2020, the global and U.S. economies experienced
The Agency will ensure that it can adapt to a changing one of the worst economic shocks since the 1930s. Small
environment and deliver programs that meet the needs of businesses and American households struggled to adapt
America’s entrepreneurs. The following areas serve as both to the unprecedented restrictions caused by the COVID-
challenges and opportunities that will factor into the SBA’s 19 pandemic. As the economy strives to recover, small
strategies for delivering on its outcomes and using taxpayer businesses must be nimble to these changes and learn to
resources efficiently. The Agency will continue to review adapt to new markets. With an ever-expanding global
these factors as it implements its programs to ensure optimal economy, businesses will need to look toward new markets
performance. and determine how to reach new consumers. Only 1 percent
of small businesses export in the global market, which poses
Global Pandemic and Business an excellent opportunity for expansion. In the domestic
Adaptation market, interest rates will shape access to capital. The Agency
Small businesses have made many rapid changes in will continue to depend on lenders, including banks, credit
production, delivery mode, and operations in response unions, and community development financial institutions.
to the COVID-19 pandemic. Partnerships among small
businesses have promoted the sharing and bundling of Employment and Labor Market
goods and services for sale while delivery service apps have Transformation
become more common. Some adaptations could lead to The U.S. workforce continues to transform as industries
long-term changes, such as the maintenance of curbside modernize with new technology and market demands. While
and delivery services, increased rental of equipment, and unemployment continues to fluctuate, a large percentage of
online streaming. U.S. cities and states are providing rural America does not have the same access to labor markets
funding for innovations, ensuring access to personal as urban areas. Small businesses must recruit and retain top
protecting equipment, and exploring mortgage or eviction talent and often face challenges finding the right candidates
moratoriums. The pandemic poses challenges to small for the job. The SBA will continue to expand its programs
businesses in underserved markets, and the SBA will and services in rural areas through enhanced partnerships
continue to seek ways to support this changing landscape. with the U.S. Department of Agriculture.

Technology and Automation Increasing Natural Disasters
Technology has evolved so that entrepreneurs have greater A natural disaster can destroy lives, businesses, and
access to markets and more capabilities to start and expand communities. This year’s series of natural disasters spans
their businesses. However, not all entrepreneurs have access from the active Atlantic hurricane season—the second most
to adequate markets, and some face challenges connecting to active season in recorded history—to the numerous wildfires
resources. The SBA will continue adapting and developing that crippled communities in the western states. While the
new platforms to reach entrepreneurs in emerging markets. SBA has programs that can respond to hurricanes, tornados,
Virtual training platforms and online tools will allow forest fires, and floods, the growing threat and number
the SBA to reach more customers. Business partnerships of these occurrences remains a serious concern. Disaster
with viable technology companies are the new norm, and preparedness is a key component of the SBA’s Disaster
small businesses are adjusting to new business models. Assistance program and has helped many small businesses
Technological advancements will continue to shape how prepare for the unexpected. The SBA continues to modernize
small businesses operate and how the Agency responds to and respond to these threats through updating technology
the ever-changing environment. and streamlining its ability to onboard staff quickly.

24 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

A Changing Federal Workforce
As a growing percentage of Agency employees become
retirement eligible, the SBA continues to search for ways
to recruit and retain the best talent. Competition with
private industry and other agencies is strong and retention
is challenging. The Agency has identified mission critical
occupations and developed workforce plans to address
gaps. At the same time, the Agency seeks to ensure that its
workforce is representative of the public it serves and that
it can effectively communicate with, and meet the needs
of, entrepreneurs and small business owners. The SBA has
developed and aligned training for its field staff to ensure
that they have the tools to help small businesses succeed. By
providing SBA employees with the tools and resources they
need, the Agency will be able to better deliver resources to
America’s small businesses.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 25
MANAGEMENT’S DISCUSSION AND ANALYSIS

ANALYSIS AND HIGHLIGHTS OF FINANCIAL
STATEMENTS AND RESULTS
Highlights of Financial Results (as of September 30)
(Dollars in Thousands)

At End of Fiscal Year 2020 2019 $ Change
CONDENSED BALANCE SHEET DATA
Fund Balance with Treasury $ 714,400,127 $ 7,036,675 $ 707,363,452
Credit Program Receivables and Related Foreclosed Property, Net 182,936,949 9,493,680 173,443,269
All Other Assets 196,914 188,297 8,617
Total Assets $ 897,533,990 $ 16,718,652 $ 880,815,338
Debt 176,173,660 11,810,241 164,363,419
Downward Reestimate Payable to Treasury 28,541,393 1,028,472 27,512,921
Liability for Loan Guaranties 512,712,498 2,000,420 510,712,078
All Other Liabilities 628,467 245,911 382,556
Total Liabilities 718,056,018 15,085,044 702,970,974
Unexpended Appropriations 183,460,572 1,779,472 181,681,100
Cumulative Results of Operations (3,982,600) (145,864) (3,836,736)
Total Net Position 179,477,972 1,633,608 177,844,364
Total Liabilities and Net Position $ 897,533,990 $ 16,718,652 $ 880,815,338

For the Fiscal Year 2020 2019 $ Change
STATEMENT OF NET COST BY STRATEGIC GOAL
Goal 1: Support Small Business Revenue and Job Growth
Loan Subsidy Cost Including Reestimates $ 526,808,679 $ (981,405) $ 527,790,084
All Other Costs Net of Revenue (1,543) 209,960 (211,503)
Goal 2: Build Healthy Entrepreneurial Ecosystems and Create Business Friendly Environments 27,523 310,490 (282,967)
Goal 3: Restore Small Businesses and Communities after Disasters
Loan Subsidy Cost Including Reestimates 5,398,238 94,998 5,303,240
All Other Costs Net of Revenue 21,984,153 329,768 21,654,385
Goal 4: Strengthen SBA’s Ability to Serve Small Businesses 11,976 147,190 (135,214)
Costs Not Assigned 2,521 25,525 (23,004)
Net Cost of Operations $ 554,231,547 $ 136,526 $ 554,095,021

CONDENSED STATEMENT OF NET POSITION
Beginning Unexpended Appropriations $ 1,779,472 $ 2,341,412 $ (561,940)
Total Budgetary Financing Sources 181,681,100 (561,940) 182,243,040
Ending Unexpended Appropriations $ 183,460,572 $ 1,779,472 $ 181,681,100
Beginning Cumulative Results of Operations $ (145,864) $ (268,255) $ 122,391
Total Financing Sources 550,394,811 258,917 550,135,894
Less: Net Cost of Operations 554,231,547 136,526 554,095,021
Ending Cumulative Results of Operations $ (3,982,600) $ (145,864) $ (3,836,736)
Ending Net Position $ 179,477,972 $ 1,633,608 $ 177,844,364

CONDENSED STATEMENT OF BUDGETARY RESOURCES
Unobligated Balance Brought Forward $ 5,892,067 $ 6,667,971 $ (775,903)
Other Budgetary Resources, Net (591,758) (341,751) (250,008)
Appropriations (discretionary and mandatory) 762,173,214 879,605 761,293,609
Borrowing Authority (discretionary and mandatory) 167,267,294 2,231,792 165,035,502
Spending Authority from Offsetting Collections 583,927,087 2,904,981 581,022,106
Total Budgetary Resources $ 1,518,667,904 $ 12,342,598 $ 1,506,325,306
Obligations Incurred, Budgetary $ 590,232,922 $ 1,655,874 $ 588,577,048
Obligations Incurred, Nonbudgetary 228,773,726 4,794,658 223,979,068
Unobligated Balances, Available and Unavailable 699,661,256 5,892,066 693,769,190
Total Status of Budgetary Resources $ 1,518,667,904 $ 12,342,598 $ 1,506,325,306

26 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

Analysis of Financial Results Background
The principal financial statements have been prepared to The SBA is a major federal credit reform agency of the
report the financial position and results of operations of the U.S. Government. Only $4.2 billion of the SBA’s $1.5
entity, pursuant to the requirements of 31 U.S.C. 3515(b). trillion budgetary resources in FY 2020 were for salaries
While the statements have been prepared from the records and expenses, with the rest supporting the SBA’s credit
of the entity in accordance with GAAP for federal entities, programs. When apportioned by the OMB, budgetary
and the formats prescribed by the OMB, the statements resources are available to enter into new obligations and
are in addition to the financial reports used to monitor to liquidate them. Budgetary resources are made up of
and control budgetary resources, which are prepared from new budget authority and unobligated balances of budget
the same records. The statements should be read with authority provided in previous years. The loan financing
the realization that they are for a component of the U.S. funds record all the cash flow activity resulting from post-
Government, a sovereign entity. 1991 direct loans and loan guaranties and are not budgetary
costs. The financing accounts are reported separately in the
This Analysis of Financial Results references numbers in the Budget of the United States Government and are excluded
Highlights of Financial Results that were derived from the from the budget surplus/deficit totals.
Financial Statements and Notes in this report. As a result,
the definitions of the loan and guaranty balances used in The Federal Credit Reform Act (FCRA) governs the SBA’s
this Analysis of Financial Results may differ somewhat from accounting for direct loans and loan guaranties made
the balances in the Operational Portfolio Analysis section. in FY 1992 and thereafter. Under FCRA, direct loans
For example, for the 7(a) loan program, the total amount of outstanding are reported net of an allowance using the
guarantied loans is used in the Portfolio Analysis, but only present value of forecasted cash flows in subsidy models that
SBA’s guarantied portion is used in the Analysis of Financial are OMB-approved.
Results because it ties to balances in the financial statements.
A Liability for Loan Guaranties is also reported using
In March 2020, the Coronavirus Aid, Relief, and Economic subsidy models with forecasted cash flows from user fees
Security Act (the CARES Act P.L. 116-136) was enacted and defaulted guarantied loans. The direct loan allowance
to provide emergency and immediate national economic and loan guaranty liability for each loan program cohort
relief and assistance across the American economy, including is adjusted annually under FCRA through the subsidy
to small businesses, workers, families, and the healthcare model reestimate process. The SBA’s FCRA accounting is
system, to alleviate the severe economic hardships and discussed further in this section and in Notes 1 and 6.A of
public health threat created by the 2019 Novel Coronavirus the financial statements.
pandemic. The Paycheck Protection Program (PPP) was
The credit subsidy cost is the net present value of expected
established by the CARES Act and is a loan guaranty
cash inflows and outflows over the life of a guarantied
program designed to provide a direct incentive for small
loan or the difference between the net present value of
businesses to retain employees by providing loan forgiveness
expected cash flows and the face value of a direct loan. The
for amounts used for eligible expenses for payroll and
SBA receives budget authority annually to fund its credit
benefit costs, interest on mortgages, rent, and utilities. The
programs. When loans are disbursed, the SBA records
Debt Relief program was also established by the CARES
subsidy expense for non-zero subsidy loan programs.
Act. As part of the coronavirus debt relief efforts, the SBA
pays six months of principal, interest, and any associated In accordance with the FCRA, the subsidy costs are
fees that borrowers owe for all current 7(a) loans, 504 reestimated annually. Reestimates update original loan
loans, and Microloans in regular servicing status. Lastly, program cost estimates to reflect actual experience and
in response to the pandemic, small business owners were changes in forecasts of future cash flows for each annual
eligible to apply for an Economic Injury Disaster Loan cohort of loans. An upward reestimate occurs when the
(EIDL) of which up to $10,000 could be advanced as a present value of expected cash outflows exceeds the present
grant to provide economic relief to businesses experiencing value of expected cash inflows. A downward reestimate
a temporary loss of revenue. This loan advance will not have occurs when the present value of expected cash inflows
to be repaid. The CARES Act is discussed further in Note exceeds the present value of expected cash outflows.
17 of the financial statements.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 27
MANAGEMENT’S DISCUSSION AND ANALYSIS

Increased reestimated costs are funded in the following year
by permanent indefinite budget authority, while decreased CHART XVII: Guarantied Loans Disbursed
costs are returned by the SBA to a Treasury general fund.

The portion of the outstanding principal guaranteed by $600

the SBA was $621.7 billion as of September 30, 2020, $500
an increase of $515.9 billion from the $105.8 billion
$400
guaranteed as of September 30, 2019 (see Note 6.C in

($ Billions)
the financial statements). As shown in Chart XVII, new $300
guaranties disbursed by SBA participating banks during
$200
FY 2020 were $538.0 billion, a $516.8 billion increase
compared to the FY 2019 figure of $21.2 billion. This $100
net $516.8 billion increase resulted from a $517.0 billion
$0
increase in PPP loans as a result of the CARES Act FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
combined with a $1.7 billion increase in 504 loans offset by
a decrease of $1.9 billion in 7(a) loans. This net increase in
FY 2020 guaranty disbursements contributed to the $515.9
CHART XVIII: Purchases of Guarantied Loans
billion increase in outstanding guarantied principal.

Credit program receivables for the SBA comprise business 2.0
and disaster direct loans and defaulted business loans
purchased per the terms of the SBA’s loan guaranty 1.5
programs, which are offset by an allowance for the subsidy.

($ Billions)
The allowance for the subsidy cost of the gross loans 1.0
receivable is recorded as a contra asset, and the net asset
is reported on the balance sheet. The subsidy allowance is
0.5
determined by modeling the projected future cash inflows
and outflows of SBA credit programs using discounted cash
0.0
flow methodology. The subsidy allowance for each loan FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
program cohort is reestimated annually. Increases are funded
by Treasury, while decreases are returned to Treasury by the
Agency. Loan losses, the costs of loan servicing, and loan
interest rates are factors that affect the subsidy allowance.
Financial Position
SBA credit program receivables were valued at $182.9 Assets
billion in FY 2020, an increase of $173.4 billion from The SBA had total assets of $897.5 billion at the end of
FY 2019. The change in the credit program receivables FY 2020, up $880.8 billion from FY 2019. Total assets
resulted from an increase of $173.1 billion in direct increased due to a $707.4 billion increase in Fund Balance
disaster loans as a direct result CARES Act funded loans. with Treasury combined with a $173.4 billion increase
The amount of defaulted guarantied loans increased by in Credit Program Receivables and Related Foreclosed
$0.3 billion as collections and charge-offs fell behind new Property. The increase in Fund Balance with Treasury is a
guaranty purchases. As reflected in Chart XVIII, guarantied result of CARES Act funding received in FY 2020 and is
loan purchases decreased $0.2 billion in FY 2020 to primarily associated with PPP subsidies, unused disaster
$1.2 billion. borrowings, and appropriations for administrative funding.
The increase in Credit Program Receivables and Related
Foreclosed Property was primarily due to the net increase in
direct disaster loan disbursements as a result of CARES Act
funded loans.

28 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

Liabilities used in FY 2020 for business, disaster, and administrative
The SBA had total liabilities of $718.1 billion at the end activities. This affected Budgetary Financing Sources and
of FY 2020, up $703.0 billion from FY 2019. Liabilities the Ending Net Position.
consist primarily of the Debt with Treasury, Liability for
Loan Guaranties, and Downward Reestimate Payable to Net Costs of Operations
Treasury.
The Net Costs of Operations primarily reflects the costs of
Debt with Treasury increased $164.4 billion in FY 2020 SBA credit programs subsidy expenses during the year for
due to net borrowing activity needed to cover disaster loan new loans and subsidy reestimates at year-end.
programs as a direct result of the CARES Act. Note 9 in
The primary driver of the $554.1 billion increase in net
the financial statements provides additional detail on SBA’s
cost is largely attributable to Goal 1, which had an overall
Debt with Treasury.
$527.6 billion increase. The increase is attributable to a
The Liability for Loan Guaranties is the estimate of the $527.8 billion increase in loan subsidy costs, including
net present value of the future amount the SBA will pay, reestimates combined with a decrease of $0.2 billion in
net of fee collections, to liquidate expected purchases of other non-subsidy related costs. These increased costs
guarantied loans under its guarantied loan programs. The in FY 2020 are attributable to the PPP and Debt Relief
Liability for Loan Guaranties for each loan program cohort programs under the CARES Act.
is reestimated annually. Increases are funded by Treasury
Net downward reestimates for the business loan programs
while the Agency returns the decreases to Treasury. The
were higher in FY 2020 than last year despite an increase in
Liability for Loan Guaranties increased $510.7 billion
the amount of upward reestimates, which affected Strategic
primarily due to an increase in current year subsidy, loan
Goal 1 costs. Chart XIX reflects the change in the net
modifications, interest accumulation factor offset by an
subsidy reestimates for the guarantied business and direct
increase in miscellaneous recoveries and costs as well as
disaster loan programs in FY 2020. The PPP program had
subsidy reestimates. These large fluxes are a direct result of
a net downward reestimate of $7.2 billion for FY 2020.
the CARES Act, PPP, and Debt Relief programs. Note 6.E
The majority of the reestimate amount is attributed to the
in the financial statements provides additional detail.
updates to the discount rate for the 2020 PPP cohort.
The Downward Reestimate Payable to Treasury increased
The overall increase in net cost is also driven by a $27.0
$27.5 billion in FY 2020. The increase was a direct result of
billion dollar increase in Goal 3. This increase is attributable
the Disaster Assistance program, which had a net downward
to a $21.7 billion increase in all other costs combined with
reestimate of $18.9 billion. This was the result of updates to
a $5.3 billion increase in loan subsidy costs. The increase
the discount rate, which resulted in reduced borrowing costs
for FY 2020 lending. In addition, there was a net downward
reestimate of $7.2 billion for PPP as a result of updates
CHART XIX: Credit Program Subsidy Reestimates
to the discount rate for the 2020 cohort. Note 6.I in the
financial statements provides additional detail.
0.000
0.036
0.001
1
0.001
0
Net Position -1 -0.118
-0.158
-0.114 -0.093
-0.001 -0.469 0.001 -0.002
Cumulative Results of Operations is the accumulative -2 -0.919 -1.100 -0.984
-1.389
difference between expenditures and financing sources since -3

($ Billions)
-4
the inception of the Agency. This negative balance increased
-5
-19.000
$3.8 billion primarily because unfunded upward subsidy
-6
reestimates at year-end for the 7(a) loan, 504 loan and -5.700

disaster loan programs were higher for FY 2020 compared -19
with FY 2019. Upward subsidy reestimates determined -20
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
at year-end are funded in the following year when they
are received. Unexpended Appropriations increased Direct Disaster Loans (Strategic Goal 3)

$181.7 billion this year primarily because the amount of Direct Business Loans (Strategic Goal 1)
Guarantied Business Loans (Strategic Goal 1)
appropriations received was greater than the appropriations

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 29
MANAGEMENT’S DISCUSSION AND ANALYSIS

in all other costs is a result of the FY 2020 CARES Act Status of Budgetary Resources
related Disaster Advance grant program. The increase in
The Total Status of Budgetary Resources increased
loan subsidy is a result of increased subsidy costs associated
$12.3 billion in FY 2019 to $1.5 trillion in FY 2020.
with CARES Act funded loans offset by a net downward
Nonbudgetary obligations increased by $224.0 billion,
reestimate. The Disaster Assistance program had a net
mainly resulting from the increases in direct loan obligations
downward reestimate of $18.9 billion. The downward
for disaster loan making, PPP fees paid to banks, interest
reestimate is a result of updates to the discount rate which
due to Treasury on debt, and Debt Relief Payments as a
results in reduced borrowing costs for FY 2020 lending.
result of the CARES Act. Budgetary obligations increased
Further detail on subsidy reestimates can be found in Note
$588.6 billion, largely due to increased subsidy obligations
6.I of the financial statements in the Financial Reporting
for the business subsidy associated with the PPP program as
section of this report.
well as an increase in disaster loan making as a result of the
CARES Act.
Budgetary Resources
Unobligated balances as of September 30, 2020 and 2019
For FY 2020, Total Budgetary Resources increased from
were $699.7 billion and $5.9 billion, respectively, which
$12.3 billion in FY 2019 to $1.5 trillion in FY 2020. This
included $9.6 billion and $4.1 billion of unavailable
increase was primarily due to the result of an increase in
unobligated balances, respectively. These balances were
appropriations, borrowing authority, and spending authority
unavailable because they were unapportioned by the OMB.
from offsetting collections as well as other factors shown in
The SBA accumulates the majority of unobligated balances
the Highlights table and following discussion.
in its nonbudgetary financing accounts ($525.3 billion
Appropriations (discretionary and mandatory) increased in FY 2020 and $4.4 billion in FY 2019) from subsidy
$761.3 billion in FY 2020 as a result of the appropriations estimates and reestimates that are used primarily to pay
to fund CARES Act programs. Borrowing Authority default claims in future years. The unobligated balances
increased $165.0 billion in FY 2020 due to an increase in in the nonbudgetary accounts in FY 2020 are directly
borrowing needed to cover disaster loan making. Borrowing attributable to the CARES Act PPP program and will be
authority initially granted to the SBA was $335.0 billion used to make future forgiveness and default payments.
in FY 2020. The SBA withdrew $126.5 billion at year-end
FY 2020, as the excess authority was not needed to fund
future credit program operations.

Spending Authority from Offsetting Collections increased
$581.0 billion in FY 2020. This increase is primarily
attributable to an increase in the amount of subsidy
collected in both the business and disaster programs as well
as an increase in the amount of collections in the Salaries
and Expenses fund as a direct result of CARES Act funding.

30 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

ANALYSIS OF SBA’S SYSTEMS, CONTROLS, AND LEGAL
COMPLIANCE

Internal Control Environment assessments are performed based on the five components
The SBA believes that maintaining integrity and and 17 principles of internal control framework prescribed
accountability in all programs and operations is critical for in GAO’s Standards for Internal Control in the Federal
good government, and demonstrating consistent responsible Government known as the Green Book.
stewardship over assets and resources is a sign of responsible The SBA Senior Management Council (SMC) was
leadership. The SBA’s commitment to integrity, ethical established to oversee the Agency’s internal control system.
values, and an effective system of internal controls helps The SMC is chaired by the Deputy Chief Financial Officer
to ensure that every employee remains dedicated to the and comprises SBA managers from the major program
efficient delivery of services to customers and maximizes offices to provide oversight in the timely planning and
desired program outcomes. Accordingly, the SBA has execution of internal control assessments. The SMC chair
developed and implemented management, administrative, met with the Enterprise Risk Management Board to discuss
and financial system controls to reasonably ensure that: any material information that needed to be considered for
programs and operations achieve intended results the Administrator’s annual statement of assurance.
efficiently and effectively;
The OIC continued to perform internal control over
resources are used in accordance with the mission of the financial reporting assessments in FY 2020, adjusting the
Agency; scope of the reviews to better align with the OMB Circular
programs and resources are protected from waste, fraud, No. A-123, Appendix A, Management of Reporting and Data
and mismanagement; Integrity Risk, published in 2018. To meet the requirement
of the revised guidance, the SBA conducted a pilot and
program and operation activities are in compliance with
laws and regulations; and completed its first internal control assessment over reporting
(ICOR). Results were reported and shared with the SMC.
reliable, complete, and timely data are maintained and For FY 2021, the SBA will explore pursuing additional
used for decision-making at all levels. resources to mature the ICOR assessment process.
Each office within the SBA implements or maintains The OIC is also working to evolve its existing internal
effective internal controls over operations, reporting, and control assessment program by adopting a risk-based
compliance to achieve programmatic goals. Each year, the approach to select the processes and systems for assessments
SBA conducts an assessment of internal control as required and building connections with the ERM program by
by the Federal Managers’ Financial Integrity Act (FMFIA) providing valuable information to support the SBA’s risk
of 1982 in accordance with the Office of Management profile. Assessments include documenting the process
and Budget (OMB)’s Circular No. A-123, Management’s and key controls, evaluating and testing the design and
Responsibility for Enterprise Risk Management and Internal effectiveness of controls, and presenting the results to
Control. The FMFIA requires that the assessment results be management. Data quality testing is incorporated into each
reported to the President and Congress in a statement of assessment as appropriate. Each office is responsible for
assurance. The SBA Administrator provides the statement of developing and implementing corrective actions for any
assurance based on the self-assessment of program managers, reported deficiencies.
internal control reviews, and audits and reviews done by the
Government Accountability Office (GAO) and the SBA’s In FY 2020, the OIC developed an annual assessment plan
Office of the Inspector General (OIG). but revised the schedule due to the COVID-19 pandemic,
resulting in adding additional assessments to monitor and
The SBA’s Office of Internal Controls (OIC) provides ensure compliance with the Coronavirus Aid, Relief, and
training and tools, including checklists designed specifically Economic Security (CARES) Act regulations. OIC initiated
for program offices and district offices, to aid management several CARES Act assessments that will continue in
in assessing and documenting the effectiveness of internal FY 2021. Based on the evaluation of business processes in
controls within their respective area of responsibility. These FY 2020, the OIC identified a number of deficiencies in the

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 31
MANAGEMENT’S DISCUSSION AND ANALYSIS

internal control over financial reporting, including several Financial Management Systems
in the SBA’s key business processes. The SMC evaluated the
review findings and determined that none of them reached
Strategy
the level of material weakness. The SBA’s financial management systems are designed to
support effective internal controls, produce reliable and
The Agency made progress in FY 2020 in several timely financial information, and ensure cost-effective
Enterprise Risk Management (ERM) areas related to loan guaranty processing. Management remains focused
governance, processes, and culture. Specifically, the Agency on robust financial management systems that support
(1) developed and approved a risk appetite statement, the SBA’s ability to comply with laws and regulations.
(2) created a structured approach to conducting the risk SBA systems must also provide timely and accurate data
profile annual validation process, (3) completed its first to support management analysis and decision-making,
emerging risk interim assessment (COVID-19 pandemic), enable the Agency to keep pace with its lending partners,
and (4) increased discussions and training related to fraud and effectively use automation to achieve operational
risk. In achieving these milestones, the SBA Enterprise Risk efficiency. As demonstrated throughout the FY 2020 Agency
Management Board continued to oversee the SBA’s ERM Financial Report, the SBA seeks to comply with all federal
implementation efforts. The governance of the SBA ERM financial management system requirements, including the
Board, led by the Office of Continuous Operations and Risk Federal Financial Management Improvement Act of 1996,
Management (OCORM), provided the Agency a stronger which requires that the Agency’s financial management
mechanism for ensuring prioritization of enterprise-wide systems comply with federal financial management systems
risks. The Board meets monthly and is chaired by the requirements, applicable federal accounting standards, and
Deputy Administrator and/or Chief of Staff, and comprises the U.S. Standard General Ledger at the transaction level.10
senior leaders from major programs offices.
The SBA has continued to build on incremental
The SBA further operationalized its cybersecurity strategy improvement projects designed to modernize the financial
during this fiscal year, establishing direction and priorities management system environment, improve financial system
for cybersecurity across the Agency. The SBA continued controls, reduce sustainment costs, provide additional
in its implementation and maturation of Enterprise functionality for external lending partners, and improve
Cybersecurity Services (ECS), with the goal of full visibility, system reliability. In FY 2020, the SBA played a key role
consistency of process, rapid response, and resiliency. Focus in the implementation of the CARES Act, which contains
areas included expansion of Cyber Threat Intelligence emergency relief resources for America’s small businesses.
(CTI), increased adoption of strong authentication, SBA systems processed a historic volume of transactions this
continued migration to cloud-based solutions, and emphasis fiscal year:
on continuous monitoring.
The SBA processed more than 14 years’ worth of loans
The SBA continued maturing a robust, adaptable, and through the Paycheck Protection Program (PPP) in less
cost-effective cybersecurity program, strengthening the than 14 days.
overall security posture of Agency information technology Prior to PPP, the SBA’s largest year in lending was $30
systems during the SBA’s CARES Act implementation billion, but SBA financial systems processed $50 billion
and COVID-19 response. The SBA realized significant in a single day in FY 2020.
cost savings and cost avoidance through integration of
Agency systems into its enterprise cybersecurity services
General ledger line item transactions increased from
11 million in FY 2019 to more than 262 million in
by eliminating duplicative and unnecessary tools. Finally,
FY 2020.
the SBA tailored its Risk Management Framework control
baseline, eliminating redundant controls, as a leap towards Payment volumes increased from 250,000 in FY 2019
its Ongoing Authorization goals. to 17.5 million in FY 2020.

10 The Federal Financial Management Improvement Act of 1996 promotes more effective federal financial management by ensuring that financial management systems
provide accurate, reliable, and timely financial management information to the government’s managers. Compliance with the FFMIA provides the basis for the
continuing use of reliable financial management information by program managers, the President, Congress, and the public.

32 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS

The SBA has taken steps to enhance its financial system
controls over lending programs and improve accessibility to
common information, financial and budget management,
and financial reporting. The SBA’s tightly integrated
financial systems allow the Agency to respond quickly to
both internal and external financial information inquiries
and requirements.

The Office of Performance Management and the Chief
Financial Officer and the Office of Capital Access oversee
the following three core financial management systems:
Oracle Federal Financials — This system, the most
current release in its implementation of the Joint
Administrative Accounting Management System
(JAAMS), supports the SBA’s funding and expenditure
of administrative funds.
Loan Systems — This SBA-built system supports the
lifecycle of loan guarantee processing, loan program
funds control, management and accounting for loan
servicing, and loan-related expenses.
Financial Management System — This SBA-built system
consolidates administrative and loan activity, manages
cash and control funds, and supports financial reporting.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 33
MANAGEMENT’S DISCUSSION AND ANALYSIS

Management Assurances: FMFIA and FFMIA Assurance
Statement for FY 2020
The Small Business Administration continued to strengthen internal controls over its programs and operations during FY
2020. 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; however, the SBA’s independent auditor has issued a disclaimed opinion on the Agency’s FY 2020 financial
statements and is reporting material weaknesses in internal controls. The SBA did not concur on the independent auditors’
material weaknesses. Our responses, as communicated to KPMG during the audit, detail our concerns with the analysis and
conclusions drawn by the auditors.

SBA’s management is responsible for managing risks and maintaining effective internal controls and financial management
systems to meet the objectives of Sections 2 and 4 of the Federal Managers Financial Integrity Act (FMFIA). The SBA
conducted its assessment of risk and internal controls in accordance with OMB Circular No. A-123, Management’s
Responsibility for Enterprise Risk Management and Internal Control. Agency managers have issued assertions to me as to the
status of the FY 2020 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 operating deficiencies, they were not of
a material nature.

Based on the results of the Agency managers’ assessments, I can provide reasonable assurance that internal controls over
operations, reporting, and compliance with applicable laws and regulations, as of September 30, 2020, were operating
effectively. Furthermore, the Agency’s financial management systems conform to the principles, standards, and related
requirements prescribed by Section 4 of FMFIA.

The Federal Financial Management Improvement Act (FFMIA) requires federal agencies to implement and maintain financial
management systems that are in substantial compliance with federal financial management systems requirements, federal
accounting standards, and the United States Standard General Ledger. Based on the FFMIA criteria, I can provide reasonable
assurance that SBA’s financial management systems substantially comply with FFMIA for FY 2020.

Jovita Carranza
Administrator
December 18, 2020

34 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
F I N A N C I A L
REPORTING
(FISCAL YEAR 2020 UNAUDITED)

start grow

expand recover
expand

EXPAND

V E R A start
H A L L
SUCCESS STORY
START

WOMAN-OWNED,
8(A) AND B R I A N
HUBZONE-CERTIFIED G E I S E L
COMPANY PROVIDING INNOVATIVE
CONSTRUCTION EXPERTISE SUCCESS STORY

Innovative Performance
Construction Co. LLC. SBA’S SMALL
BUSINESS PROGRAM
Fayette, MS IN ACTION

VERA D. HALL, Managing Member and Principal Geisel Software
of Innovative Performance Construction (IPC) Worcester, MA
LLC, a woman-owned, 8(a) and HUBZone-certified
construction firm, never imagined that the construction After starting a career in software writing, BRIAN
projects that she worked on in her vocational GEISEL discovered his passion for helping others
education classes in college and painting homes for solve problems, which led him to start Geisel Software
extra money would lead to a successful business out of a 200 square-foot studio in 2011. In 2016,
with more than 20 employees. Vera has more than Brian began scaling his company by hiring a full-
11 years of construction, construction management, time developer and a salesperson. After a period of
project management and contracting experience. She stagnant growth, the company began taking on larger
started IPC from her kitchen table and now oversees projects and new clients, since then growing to 16
the day to day management of the firm which led to employees and increasing revenues over 300 percent
its expansion to a second location in Hinds County, during the last three years.
Mississippi.
In 2018, Brian completed the SBA Emerging
IPC has received assistance from the SBA’s Surety Leaders training program and implemented several
Bond Guarantee Program and 7(j) Management and business development strategies soon after. He
Technical Assistance Program under the SBA’s 8(a) started a relationship with the local Procurement
Business Development Program. IPC has gone from Technical Assistance Center and the Small Business
having zero federal contracts to receiving one contract Development Center, and later prepared several
per year and now has multiple federal contracts. Vera Small Business Innovation Research proposals. Brian
is a graduate of the SBA’s Emerging Leaders Program has also taken out SBA loans to grow the business
and has maintained a stellar reputation in the and hire more employees. Geisel Software has
construction industry. Some of IPC’s clients include landed contracts with the U.S. Army, the Department
Vera’s alma mater, Alcorn State University, as well as of Veterans Affairs, the U.S. Air Force, and NASA.
Jackson State University, the Department of Interior,
the National Oceanic Atmospheric Administration,
Jackson Municipal Airport Authority, and East Central
Community College.

expand
grow
recover
36 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

MESSAGE FROM THE CHIEF FINANCIAL OFFICER
December 18, 2020

I am honored to issue the SBA’s FY 2020 Agency Financial Report as of September 30, 2020.
The Agency developed its financial statements in accordance with U.S. Office of Management
and Budget guidance and within Generally Accepted Accounting Principles. As a result of the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020 and subsequent
legislation, the U.S. Office of Management and Budget granted the SBA an extension in the
delivery of this report.

TAMI PERRIELLO As a result of the establishment of new, major programs executed in record time to stabilize
the nation’s economy, the SBA’s independent auditor has issued a disclaimer of opinion and
identified material weaknesses in internal controls. These material weaknesses cover accounting
and reporting for programs implemented under the CARES Act and related legislation; evaluation and monitoring of service
organization controls; and entity level controls. The SBA did not concur on the independent auditors’ material weaknesses
and believes that the financial statements and related disclosures are materially correct.

We do recognize that significant events occurring after fiscal year end but not completed before the date of this report, such
as processing forgiveness applications under the PPP program and loan file reviews, may result in necessary adjustments
to estimates for subsidy costs recorded in FY 2020. These adjustments are part of the normal Federal Credit Reform Act
(FCRA) process for updating original subsidy cost estimates. FCRA requires estimation of lifetime expected subsidy costs at
program implementation and does provide for annual adjustment to original subsidy cost estimates in future periods as new
information becomes available.

In the case of the PPP program, the estimate includes components for forgiveness as well as purchase of the guaranty and
other costs. For the expanded direct loan program for EIDL COVID, the estimate includes losses for uncollectible amounts
along with other costs. Due to the high volume, dollar amount and unique conditions in these programs there is greater
uncertainty about the reestimates that will resolve over time.

We further recognize that documentation of the processes and controls over these two CARES Act programs was not
sufficiently well developed in the year of program implementation to support the financial statement audit. The SBA is
working diligently to complete its reviews and to correct any shortcomings for future audits.

This year has been especially challenging for the Agency and America’s small businesses due to the COVID-19 pandemic.
With new programs to implement with the passage of the CARES Act and subsequent legislation, the SBA has risen to the
challenge to help support America’s small businesses by infusing nearly $1 trillion into the economy through the Paycheck
Protection Program, Economic Injury Disaster Loans, debt relief, and grant programs. These programs have helped protect
tens of millions of American jobs while small businesses and communities adapt to this changing environment.

Within days of Congress passing and the President signing this economic relief package, the SBA established new processes
and transformed existing systems to accommodate the influx of funds. The SBA, which historically has processed $30 billion
in annual lending, processed nearly $50 billion in a single day in FY 2020. The Agency aggressively worked to ensure that
loans and grants were distributed timely to provide economic relief to every part of this country. The SBA successfully
executed the programs under pandemic conditions and in record time, but more work remains in the management of loan
servicing and forgiveness that will continue throughout FY 2021 and beyond. This effort will require continuous financial
oversight to ensure the effective use of taxpayer funds.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 37
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

The Agency will continue to help small businesses survive the pandemic and become more resilient for the future. In support
of that effort, the SBA will continue to strengthen its management of programs and operations and will embark on the
development of its FY 2022-2026 Strategic Plan with a focus on how the Agency can continue to adapt to the changing needs
of small businesses. With renewed attention on data and evidence, the SBA will continue to deliver on programs and policies
that have the greatest impacts—reaching more small businesses—with special attention on entrepreneurs in underserved
markets. This endeavor will require prudent attention to the continued collaboration between financial management and
performance management, and I look forward to sharing those continued successes next year.

Additionally, I am proud of the SBA for winning its 14th Association of Government Accountants Certificate of Excellence
in Accountability Reporting award this year. This award, made to agencies following a thorough and independent review, has
been a tremendous honor and reflects the dedication of SBA employees to transparency, accountability, and a mission to help
America’s small businesses.

Sincerely,

Tami Perriello
Associate Administrator for Performance and Planning
and Chief Financial Officer

38 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

INSPECTOR GENERAL’S AUDIT REPORT

U.S. Small Business Administration
Office of Inspector General
Washington, D.C. 20416

DATE: December 18, 2020

TO: Jovita Carranza
Administrator

FROM: Hannibal “Mike” Ware
Inspector General

SUBJECT: Independent Auditors’ Report on SBA’s FY 2020 Financial Statements

I am pleased to present the attached independent auditors’ report on the U.S. Small Business Administration’s (SBA’s)
consolidated financial statements for fiscal years 2020 and 2019, as required annually by the Chief Financial Officers Act of
1990, as amended.

We contracted with the independent certified public accounting firm KPMG LLP to conduct an audit of the SBA’s
consolidated financial statements for the fiscal years ended September 30, 2020, and September 30, 2019. KPMG was
engaged to conduct the audit in accordance with U.S. generally accepted auditing standards. The audit also complied with the
applicable standards for financial audits in Government Auditing Standards issued by the Comptroller General of the United
States and Office of Management and Budget Bulletin No. 19-03, Audit Requirements for Federal Financial Statements.

In the report, KPMG auditors found significant matters for which they were unable to obtain sufficient, appropriate audit
evidence to provide a basis for an audit opinion on SBA’s consolidated financial statements for the year ended September
30, 2020. Accordingly, KPMG issued a disclaimer of opinion on the consolidated financial statements as of and for the
year ended September 30, 2020. The following paragraph describes the basis for the disclaimer of opinion related to the
implementation of new programs under the Coronavirus Aid, Relief, and Economic Security Act of 2020 and related
legislation, most notably the Paycheck Protection Program and the expanded Economic Injury Disaster Loan program.

SBA was unable to provide adequate evidential matter in support of a significant number of transactions and account balances
related to these programs because of inadequate processes and controls. As a result, KPMG was unable to determine whether
any adjustments might have been necessary with respect to Credit Program Receivables and Related Foreclosed Property,
Downward Reestimate Payable to Treasury, Liability for Loan Guarantees, and the related elements in the consolidated
statements of net cost and changes in net position, the combined statement of budgetary resources, and related notes to the
consolidated financial statements.

SBA’s 2019 consolidated financial statements present fairly, in all material respects, the financial position of the SBA as of
September 30, 2019.

However, for the year ended September 30, 2020, KPMG identified seven material weaknesses, two significant deficiencies in
internal controls over financial reporting, and two instances of reportable noncompliance with provisions of applicable laws,
regulations, contracts, and grant agreements. Details of KPMG’s conclusions about the material weaknesses and significant
deficiencies are described in attachments I and II of this report. Instances of noncompliance or other matters required to be
reported under Government Auditing Standards or OMB Bulletin No. 19-03 are described in attachment III.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 39
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

We reviewed KPMG’s report and related documentation and inquired of its representatives. Our review, as differentiated
from an audit of the financial statements in accordance with U.S. generally accepted government auditing standards, was not
intended to enable us to express—and we do not express—opinions on SBA’s financial statements or internal control over
financial reporting or conclusions on SBA’s compliance with applicable laws and other matters.

KPMG is responsible for the attached auditors’ report dated December 18, 2020, and the conclusions expressed. However,
the OIG provides negative assurance of this audit. Our oversight protocols include evaluation of major work products,
attendance at critical meetings, review of significant findings and examination of related evidential matter. Our review
disclosed no instances where KPMG did not comply in all material respects with U.S. generally accepted government
auditing standards.

We provided a draft of KPMG’s audit report to SBA’s Chief Financial Officer, who did not agree with five material weaknesses
included in the report under “Accounting and Reporting for Programs Implemented Under the CARES Act and Related
Legislation” and “Entity Level Controls.” The Chief Financial Officer partially agreed with the remaining two material
weaknesses, grouped in the report under “Evaluation and Monitoring of Service Organization Controls.”

SBA’s responses, as communicated to KPMG during the audit, detail the agency’s concerns with the analysis and conclusions
drawn by KPMG. The Chief Financial Officer’s response is included in attachment IV, and KPMG’s response to the Chief
Financial Officer’s response is included in attachment V of this report.

We appreciate the cooperation and assistance of SBA and KPMG during the audit. Should you or your staff have any
questions, please contact me or Andrea Deadwyler, Assistant Inspector General for Audits, at (202) 205-6586.

cc: William Manger, Chief of Staff and Associate Administrator, Office of Capital Access
Christopher Gray, Deputy Chief of Staff
Stephen Kong, Acting Chief Operating Officer
Patricia Gibson, Senior Advisor
Tami Perriello, Chief Financial Officer
Brittany Biles, General Counsel
Martin Conrey, Attorney Advisor, Legislation and Appropriations
Tonia Butler, Director, Office of Internal Controls
Rafaela Monchek, Director, Office of Continuous Operations and Risk Management

Attachment

40 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING

INDEPENDENT AUDITORS’ REPORT ON FY 2020 FINANCIAL
STATEMENTS

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

Independent Auditors’ Report

Inspector General
U.S. Small Business Administration

Administrator
U.S. Small Business Administration

Report on the Financial Statements
We have audited the accompanying consolidated financial statements of the United States (U.S.) Small
Business Administration (SBA), which comprise the consolidated balance sheet as of September 30, 2019, and
the related consolidated statements of net cost and changes in net position, and combined statement of
budgetary resources for the year then ended, and the related notes to the consolidated financial statements.
Further, we were engaged to audit the accompanying consolidated financial statements of the SBA, which
comprise the consolidated balance sheet as of September 30, 2020, and the related consolidated statements of
net cost and changes in net position, and combined statement of budgetary resources for the year 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.
Except as explained in the Basis for Disclaimer of Opinion paragraph, we conducted our audits in accordance
with auditing standards generally accepted in the United States of America, in accordance with the standards
applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of
the United States, and in accordance with Office of Management and Budget (OMB) Bulletin No. 19-03, Audit
Requirements for Federal Financial Statements. Those standards 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 on the 2019 consolidated financial statements.

KPMG LLP, a Delaware limited liability partnership and a member firm of
the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 41
FINANCIAL REPORTING

Basis for Disclaimer of Opinion
During fiscal year 2020, the Coronavirus Aid, Relief, and Economic Security Act of 2020 and related legislation
authorized funding for SBA to implement the Paycheck Protection Program and the expanded Economic Injury
Disaster Loan program. SBA was unable to provide adequate evidential matter in support of a significant
number of transactions and account balances related to these programs due to inadequate processes and
controls. As a result of these matters, we were unable to determine whether any adjustments might have been
necessary with respect to Credit Program Receivables and Related Foreclosed Property, Downward
Reestimate Payable to Treasury, Liability for Loan Guarantees, and the related elements in the consolidated
statements of net cost and changes in net position, the combined statement of budgetary resources, and
related notes to the consolidated financial statements.

Disclaimer of Opinion on the Fiscal Year 2020 Financial Statements
Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, we have
not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the
consolidated financial statements as of and for the year ended September 30, 2020. Accordingly, we do not
express an opinion on these consolidated financial statements.

Opinion on the Fiscal Year 2019 Financial Statements
In our opinion, the 2019 consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the United States Small Business Administration as of September 30, 2019,
and its net costs, changes in net position, and budgetary resources for the year then ended in accordance with
U.S. generally accepted accounting principles.

Other Matters
Interactive Data
Management has elected to reference to information on websites or other forms of interactive data outside the
U.S. Small Business Administration’s Agency Financial Report for FY 2020 to provide additional information for
the users of its financial statements. Such information is not a required part of the basic consolidated financial
statements or supplementary information required by the Federal Accounting Standards Advisory Board. The
information on these websites or the other interactive data has not been subjected to any of our auditing
procedures, and accordingly we do not express an opinion or provide any assurance on it.

Required Supplementary Information
U.S. generally accepted accounting principles require that the information in the Management’s Discussion and
Analysis and Required Supplementary 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 were unable to apply certain limited procedures to such information in
accordance with auditing standards generally accepted in the United States of America because of the
significance of the matters described in the Basis for Disclaimer of Opinion paragraph. We do not express an
opinion or provide any assurance on the information.

Other Information
We were engaged to audit the basic consolidated financial statements as a whole. The Table of Contents, How
this Report is Organized, Message from the Administrator, Message from the Chief Financial Officer, Other
Information, and the Appendices in the U.S. Small Business Administration’s Agency Financial Report for FY
2020 are presented for purposes of additional analysis and are not a required part of the basic consolidated
financial statements. Such information has not been subjected to the procedures applied in our engagement to
audit the basic consolidated financial statements, and accordingly, we do not express an opinion or provide any
assurance on it.

42 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING

Other Reporting Required by Government Auditing Standards
Internal Control over Financial Reporting
In connection with our engagement to audit the consolidated financial statements as of and for the year ended
September 30, 2020, we considered SBA’s internal control over financial reporting (internal control) as a basis
for designing 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
SBA’s internal control. Accordingly, we do not express an opinion on the effectiveness of 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.

Our consideration of internal control was for the limited purpose described in the preceding paragraph 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 have not been
identified. However, as described in the accompanying Attachments I and II, we did identify certain deficiencies
in internal control that we consider to be material weaknesses and significant deficiencies.

A deficiency in internal control exists when the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to prevent, or detect and correct,
misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in
internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial
statements will not be prevented, or detected and corrected, on a timely basis. We consider the deficiencies
described in Attachment I to be material weaknesses.

SBA management did not report these material weaknesses in its Management Assurances: FMFIA and
FFMIA Assurance Statement for FY 2020, included in the Management’s Discussion and Analysis section of
the FY 2020 Agency Financial Report.

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. We
consider the deficiencies described in Attachment II, to be significant deficiencies.

Compliance and Other Matters
In connection with our engagement to audit SBA’s consolidated financial statements as of and for the year
ended September 30, 2020, 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
financial statements. 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 an instance
of noncompliance or other matters that are required to be reported under Government Auditing Standards or
OMB Bulletin No. 19-03 and which are described in Attachment III. Additionally, if the scope of our work had
been sufficient to enable us to express an opinion on the basic fiscal year 2020 consolidated financial
statements, other instances of noncompliance or other matters may have been identified and reported herein.

We also performed tests of SBA’s 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 disclosed instances, described in Attachment III, in which SBA’s financial management systems did
not substantially comply with (1) Federal financial management systems requirements and (2) applicable
Federal accounting standards. The results of our tests disclosed no instances in which SBA’s financial
management systems did not substantially comply with the United States Standard General Ledger at the
transaction level. Additionally, if the scope of our work had been sufficient to enable us to express an opinion
on the basic fiscal year 2020 consolidated financial statements, other instances of substantial noncompliance
with FFMIA may have been identified and reported herein.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 43
FINANCIAL REPORTING

SBA’s Response to Findings
SBA’s response to the findings identified in our engagement is described in Attachment IV. SBA’s response
was not subjected to the procedures applied in the engagement to audit the consolidated financial statements
and, accordingly, we express no opinion on the response.

Our response to SBA’s response is included in Attachment V.

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
results of that testing, and not to provide an opinion on the effectiveness of the SBA’s internal control or
compliance. Accordingly, this communication is not suitable for any other purpose.

Washington, DC
December 18, 2020

44 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING

Attachment I

U.S. Small Business Administration

Material Weaknesses

The following deficiencies are considered to be material weaknesses in internal controls over financial
reporting.

1. Approval of PPP Loan Guarantees

2. Reporting of PPP Loan Guarantees

3. Subsidy Reestimate of PPP Loan Guarantees

4. Approval of COVID-19 EIDLs and Grants

5. Service Organization Used for COVID-19 EIDLs and Grants

6. Service Organizations Used for Loan Guarantee Programs

7. Entity Level Controls

For purposes of presentation and as described below, material weaknesses (1) through (4) are grouped into (A)
Accounting and Reporting for Programs Implemented under the Coronavirus Aid, Relief, and Economic
Security Act of 2020 (CARES Act) and Related Legislation; material weakness (5) and (6) are grouped into (B)
Evaluation and Monitoring of Service Organization Controls; and material weakness (7) is under (C) Entity
Level Controls.

A. Accounting and Reporting for Programs Implemented under the CARES Act and Related Legislation

On March 27, 2020, Congress passed the CARES Act to provide emergency assistance in response to
the extensive effects of the public health and economic crisis arising from the Coronavirus Disease 2019
(COVID-19) pandemic. This law was followed by the Paycheck Protection Program and Health Care
Enhancement Act passed by Congress on April 24, 2020. The largest component of these laws was the
Paycheck Protection Program (PPP), which provided funding of $670 billion. The PPP is a loan guarantee
program whereby third-party lenders issue loans that are fully guaranteed by SBA. In addition, the two rounds
of legislation provided a total funding of $20 billion for COVID-19 Economic Injury Disaster Loan (EIDL) grants
and an additional $50 billion of funding for SBA to issue up to approximately $367 billion in COVID-19 EIDLs.
COVID-19 EIDLs are direct loans that SBA issues to eligible borrowers. These laws from this point forward
are collectively referred to as the CARES Act and related legislation.

1. Approval of PPP Loan Guarantees

Due to the volume of loans being processed as a result of the PPP, the Office of Capital Access
developed a one-time process to accept bulk loan files from lenders. The lenders sent batch files to the
Office of Capital Access and direct uploads of PPP loans were made in SBA’s loan repository system. As
of August 8, 2020 (expiration of the program), SBA had approved over 5.2 million loan guarantees for an
approximate total of $525 billion.

Management did not adequately design and implement controls to ensure PPP loan guarantees were
accurate to enable the fair presentation of the Liability for Loan Guarantees and related elements in the
fiscal year 2020 consolidated financial statements. Specifically, management identified approved loans
disbursed by its third-party lenders that, in numerous cases, were not accurate and potentially not in
conformance with the CARES Act and related legislation. In addition, there were over 2 million approved
PPP loan guarantees (with an approximate total value of $189 billion) flagged by management within the
loan repository system that are potentially not in conformance with the CARES Act and related legislation.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 45
FINANCIAL REPORTING

The loans were flagged for one or more of 35 reasons (e.g., Business in Operation After February 15,
2020; Mismatch of Taxpayer Identification Number/Employer Identification Number/Social Security
Number; Criminal Record; Mismatch of Individual or Company Entity Name; Aggregate Data Mismatch;
Potential Multiple Data Universal Numbering System Issue; or Inactive Business).

The deficiencies were caused by an inadequate entity wide control environment to implement processes and
procedures to account for new and expanded programs under the CARES Act and related legislation with
sufficiently designed, implemented, and effectively operating controls.

The following criteria were considered with respect to the matters described in the preceding paragraphs:

• The Government Accountability Office’s (GAO’s) Standards for Internal Control in the Federal
Government (“Green Book”), Principle 3, Establish Structure, Responsibility, and Authority; and
Principle 10, Design Control Activities

• Office of Management and Budget (OMB) Circular No. A-123, Management’s Responsibility for
Enterprise Risk Management and Internal Control

The deficiencies noted above may result in material misstatements to the Liability for Loan Guarantees,
Downward Reestimate Payable to Treasury line items, and related elements in the consolidated financial
statements.

Recommendations – Approval of PPP Loan Guarantees

We recommend the Administrator coordinate with the Associate Administrator of Office of Capital Access
to:

1. Finalize the review plan and execute the loan review process for all loans in the PPP portfolio
to determine whether loans were or not in conformance with the CARES Act and related
legislation.

2. Determine the impact on the outstanding guarantee and eligibility for forgiveness of loans
determined to be not in conformance with the CARES Act and related legislation.

3. Implement adequate controls to prevent loans from being approved that are potentially not in
conformance with the legislation and program terms.

4. Develop and enforce a policy that requires the adequate training and monitoring of PPP
lenders to execute their responsibilities in the loan origination process.

We also recommend the Administrator coordinate with the Chief Financial Officer to:

5. Assess the accounting considerations, including the impact on the consolidated financial
statements, from the results of the loan review process for PPP loans and record any
necessary adjustments for loans determined to not be in conformance with the CARES Act
and related legislation.

2. Reporting of PPP Loan Guarantees

As part of the PPP, lenders must report any PPP loans that have been fully disbursed or cancelled to SBA
through the SBA Form 1502 (1502 report) or the loan repository system. SBA records the Liability for
Loan Guarantee and related accounting entries once the lender reports the loan disbursement. Lenders
were required to electronically submit the 1502 report to SBA by the latter of (1) May 29, 2020 or (2) 10
calendar days after disbursement or cancellation of a PPP loan. After reporting the initial disbursement,
lenders are responsible for reporting on the status of each loan by submitting a monthly 1502 report until
the lender notifies SBA that the loan has been paid in full. Through the 1502 reporting process, the
outstanding loan principal balance and ultimately the liability for loan guarantees balances are updated.

46 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING

The portfolio of PPP loans with an outstanding loan principal balance is also used as an input into the
subsidy estimation cash flow models.

Management did not adequately design and implement controls to determine that the status of PPP loan
guarantees was complete and accurate to enable the fair presentation of the Liability for Loan Guarantees
and related elements in the consolidated financial statements. Specifically, management did not have
processes and controls in place to review the status of PPP loans where:

• 1502 reports have not been submitted.

• 1502 reports may have been submitted incorrectly.

• 1502 reports were not processed.

As of September 30, 2020, SBA reported approximately $6 billion of PPP loans approved but not
disbursed due to unreported or unprocessed 1502 reports from lenders. In addition, there were over
896,000 errors from 1502 reports that were not reviewed or processed to update the outstanding loan
principal balance. The affected PPP loans comprised of 63 distinct 1502 report error codes (e.g., PPP
loans must be fully disbursed; Loan is in inactive status; Invalid Guarantee Service Status Code;
Outstanding balance plus Total Amount Undisbursed cannot exceed Loan Approval Amount; Outstanding
Balance must be less than or equal to Current Loan Approval Amount).

The deficiencies were caused by an inadequate entity wide control environment to implement processes, and
procedures to account for new and expanded programs under the CARES Act and related legislation with
sufficiently designed, implemented, and effectively operating controls.

The following criteria were considered with respect to the matters described in the preceding paragraphs:

• GAO’s Green Book, Principle 3, Establish Structure, Responsibility, and Authority; and Principle 10,
Design Control Activities

• OMB Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and
Internal Control

Recommendations – Reporting of PPP Loan Guarantees

We recommend the Administrator coordinate with the Associate Administrator of Office of Capital Access
to:

6. Identify and review PPP loans with incomplete or inaccurate 1502 reports.

7. Determine and update the loan repository system with correct PPP loan related balances.

8. Develop and enforce a policy that requires the adequate training and monitoring of lenders to
execute their responsibilities in the PPP loan servicing process.

9. Develop and enforce a policy to monitor incomplete or inaccurate PPP 1502 reports on an
ongoing basis.

We also recommend the Administrator coordinate with the Chief Financial Officer to:

10. Assess the accounting considerations, including the impact on the consolidated financial

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 47
FINANCIAL REPORTING

statements, from the results of the loan review process for PPP loans and record any
necessary adjustments for loans determined to not be in conformance with the CARES Act
and related legislation.

3. Subsidy Reestimate of PPP Loan Guarantees

PPP loans can be forgiven up to the full principal amount of the loan plus any accrued interest if certain
criteria are met by the borrower. In general, if the borrower uses 60 percent of the loan amount on payroll
costs, the full principal amount of the loan plus any accrued interest can be forgiven. As of September 30,
2020, SBA had received over 128,000 (or approximately 2.5% of total loan guarantees approved)
forgiveness applications from lenders. SBA began remitting forgiveness payments to lenders on October
2, 2020.

Statement of Federal Financial Accounting Standards (SFFAS) No. 2, Accounting for Direct Loans and
Loan Guarantees, requires that loan guarantees committed after September 30, 1991, be recorded on a
present value basis consistent with the intent of the Federal Credit Reform Act of 1990. As such, SBA
developed an estimation methodology to reestimate the future net cash inflows and outflows for the P PP
loan portfolio as of September 30, 2020.

Management did not adequately design and implement controls over the review of the data inputs and
assumptions used in the subsidy reestimate to determine that the portfolio of PPP loans was complete
and accurate. Specifically, management did not consider and document the effects on the reestimate
methodology for more than:

• 2 million approved PPP loan guarantees with a total approximate value of $189 billion that are
flagged as potentially not in conformance with the CARES Act and related legislation, which
may affect the accuracy of such loan guarantees, within the loan repository system.
Management did not evaluate and document the impact of these loan guarantees on the key
assumptions such as the Forgiveness Rate and Forgiveness Curve, and on the methodology
of the overall PPP loan portfolio.

• 896,000 errors in 1502 reports that were not reviewed or processed to update the outstanding
loan principal balance. This includes 1502 reports that were not submitted, submitted
incorrectly, or did not process due to an error.

In addition, management did not adequately design and implement controls to verify the completeness
and accuracy of relevant loan characteristics that are used in the development of key assumptions.
Specifically, the North American Industry Classification System code is the data attribute used for each
loan to develop key assumptions related to loan forgiveness. However, the code was not a field included
on the borrower’s application form and the reestimate methodology relies on this data attribute being
accurately reported by lenders.

Additionally, management did not adequately design and implement controls over the development and
support of the Forgiveness Rate assumption. The methodology did not include documentation regarding
how the Forgiveness Rates for the ‘High’ and ‘Very High’ Risk Group categories were determined.
Further, management did not consider and document the availability of actual loan forgiveness
applications received from the lenders to address the potential existence of disconfirming evidence related
to the assumption.

The following criteria were considered with respect to the matter described in the preceding paragraphs:

48 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING

• GAO’s Green Book, Principle 3, Establish Structure, Responsibility, and Authority; Principle 10,
Design Control Activities; and Principle 13, Use Quality Information

• OMB Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and
Internal Control

• Federal Accounting Standards Advisory Board (FASAB) Technical Release 6, Preparing Estimates
for Direct Loan and Loan Guarantee Subsidies under the Federal Credit Reform Act –
Amendments to Technical Release No. 3 Preparing and Auditing Direct Loan and Loan Guarantee
Subsidies under the Federal Credit Reform Act

The deficiencies noted above may result in a material misstatement to the Liability for Loan Guarantees
and Downward Reestimate Payable to Treasury line items, and the related elements in the consolidated
financial statements.

Recommendations – Subsidy Reestimate of PPP Loan Guarantees

We recommend the Administrator coordinate with the Chief Financial Officer to:

11. Document the development of significant assumptions used in the PPP reestimate, including
the consideration of the most recent, best available data to address the potential existence of
disconfirming evidence.

12. Accumulate relevant, complete, and accurate data to develop and support the PPP
reestimate.

13. Design and implement review and approval controls of the PPP reestimate by appropriate levels
of management, including review of sources of relevant data inputs, development of assumptions,
and reasonableness of assumptions and resulting estimates.

4. Approval of COVID-19 EIDLs and Grants

The authority to lend up to $367 billion in COVID-19 EIDLs and $20 billion in COVID-19 EIDL emergency
advance grants represents more disaster loan funding than all of the previous years combined in SBA’s
history. To receive, review, and process applications for COVID-19 EIDLs and grants, SBA contracted with a
service organization to create a portal for borrowers and grant recipients to submit applications. The portal
intakes and processes applications, and it supports the disaster assistance loan officer’s decisions of
whether to approve or reject an application.

Applicants are subjected to certain identity, fraud, and credit checks within the portal. For COVID-19 EIDLs and
grants, the portal may perform an automatic approval function for borrowers and grant recipients based on the
data elements entered. If no further research is required by a loan officer, the application is sent directly to a
supervisory loan officer for approval and obligation. If an automatic approval is not performed, the portal
provides alerts for the loan officer to address before a loan or grant can be routed to the senior loan officer for
review, approval, and obligation of funds.

Management did not adequately design and implement controls to ensure approved COVID-19 EIDLs and
grants were provided to eligible borrowers and accurately recorded. Specifically, SBA approved and disbursed
EIDLs and grants in the following instances:

• More than one COVID-19 EIDL or grant was approved and disbursed to the same borrower;

• Loans and grants were issued to borrowers with inaccurate or invalid Tax Identification
Numbers, Employee Identification Numbers, or Social Security Numbers;

• Loans were issued that management flagged to be potentially fraudulent; and

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 49
FINANCIAL REPORTING

• Loans were issued to borrowers that management flagged because the borrowers were excluded
from doing business with the government.

For loans approved as of September 30, 2020, there were a total of over 6,000 approved and disbursed
COVID-19 EIDLs (with a total value of over $212 million) flagged within the loan repository system that were
issued to potentially ineligible borrowers.

In addition, management noted as part of an improper payment review that adequate controls were not
designed and implemented to determine that fraud alerts raised by the portal related to applications submitted
by borrowers were sufficiently addressed before loans were approved. The fraud alerts noted include: Large
number of applications with other lenders; Suspicious online behavior; Fraud alert detected on credit report;
Owner/client information failed validation; Owner/client information failed online identity verification; or Fraud
found on related deals. Management also noted instances where the applicant indicated the business was a
franchise or indicated a potential issue with their character that management had not adequately addressed in
accordance with its procedures.

Management did not have adequate procedures and controls implemented to address certain alerts within the
portal. Specifically, the portal Reference Guide does not have adequate procedures to address the following
alerts: Public records search did not find business; Bank account or routing number could not be verified; and
Bank account could not be confirmed to be associated with the business.

The following criteria were considered with respect to the matter described in the preceding paragraphs:

• GAO’s Green Book, Principle 3, Establish Structure, Responsibility, and Authority; and Principle 10,
Design Control Activities

• OMB Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and
Internal Control

The deficiencies noted above may result in a material misstatement of the Credit Program Receivables
and Related Foreclosed Property, Net and Downward Reestimate Payable to Treasury line items, and
related elements in the consolidated financial statements.

Recommendations – Approval of COVID-19 EIDLs and Grants

We recommend the Administrator coordinate with the Associate Administrator of Office of Disaster
Assistance to:

14. Perform a thorough review of the COVID-19 EIDLs and grants portfolio and determine which
transactions were made to ineligible recipients and not in conformance with the CARES Act
and related legislation.

15. Implement controls that prevent or detect loans from being approved that are not in
conformance with the related legislation and program’s eligibility terms.

16. Update the Reference Guide to require a more thorough review to clear certain alerts and
enforce the actions recommended by the Reference Guide to adequately address and mitigate
the alerts prior to loan approval.

17. Provide training of loan officers and supervisory loan officers to execute their responsibilities in
accordance with established guidance and standard operating procedures.

We also recommend the Administrator coordinate with the Chief Financial Officer to:

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18. Assess the accounting considerations, including the impact on the consolidated financial
statements, from the results of the loan review process for PPP and record any necessary
adjustments for loans determined not to be in conformance with the CARES Act and related
legislation.

B. Evaluation and Monitoring of Service Organization Controls

Management did not adequately design and implement internal controls with respect to the evaluation and
monitoring of service organization controls. Adequate controls were not implemented related to the
evaluation and monitoring of the service organization controls used to process COVID-19 EIDLs and
emergency advance grants and for the service organization controls used for SBA loan guarantee
programs.

5. Service Organization Used for COVID-19 EIDLs and Grants

SBA contracted with a service organization to develop and use a portal for COVID-19 EIDL and grant
processing. The portal intakes and processes applications, and it supports the disaster assistance loan
officer’s decisions of whether to approve or reject an application. Approved loan applications are ultimately
disbursed as COVID-19 EIDLs or grants, which are a part of the consolidated financial statements. As part
of processing, the portal transmits application data to various external databases and sources to perform
numerous fraud and validation checks, among which include the duplicate application check, business
owner identity check, and bank account verification.

Management did not obtain reasonable assurance on the operating effectiveness of internal controls in
the service organization’s control environment relevant to the processing of SBA’s COVID-19 EIDL
transactions, which do not enable the fair presentation of the Credit Program Receivables and Related
Foreclosed Property line item and related elements in the consolidated financial statements. The relevant
control environment at the service organization includes the operation of the portal and the application
controls within the portal. In addition, the relevant control environment includes the data transmissions
over the Internet between the portal and various third-party organizations.

In addition, management did not provide evidence of adequate monitoring activities performed over the
relevant internal control environment at the service organization, such as obtaining and reviewing an
attestation report on the design, implementation, and operating effectiveness of controls at the service
organization. Management also did not provide evidence whether adequate user entity controls that are
designed, implemented, and operating effectively to complement the service organization’s controls.
Management’s assessment of internal controls over financial reporting is not complete without the sufficient
consideration of existing and non-existing controls at relevant service organizations and the effectiveness of
those controls.

The deficiencies were caused by an inadequate entity wide control environment to implement the provisions of
the CARES Act and related legislation with sufficiently designed and implemented controls resulting from the
urgent need to provide financial assistance to the public. In addition, management did not hold the service
organization accountable for the assigned internal control responsibilities by obtaining reasonable assurance
on the operating effectiveness of internal controls in the service organization’s control environment (e.g.,
requiring a service organization control (SOC) 1 Type 2 report for the control environment relevant to the
processing of SBA’s COVID-19 EIDL transactions).

The following criteria were considered with respect to the matters described in the preceding paragraphs:

• GAO’s Green Book, Section 4, Additional Considerations: Service Organizations; Principle 5,
Enforce Accountability; Principle 10, Design Control Activities; and Principle 16, Perform Monitoring
Activities

• OMB Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and
Internal Control

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The deficiencies noted above prevented SBA from obtaining an understanding of relevant service
organization controls and any weaknesses that increase risks of misstatements in the Credit Program
Receivables and Related Foreclosed Property line item and related elements in the consolidated financial
statements and potential noncompliance with provisions of laws or regulations.

Recommendations – Service Organization Used for COVID-19 EIDLs and Grants

We recommend the Administrator coordinate with the Associate Administrator of Office of Disaster
Assistance to:

19. Develop and implement a policy requiring new service organizations to provide a SOC 1 report
over the control environment that is relevant and significant to the processing and recording of
SBA’s transactions. If a SOC 1 report cannot be obtained, identify and evaluate relevant
controls at the service organizations that have an impact on SBA’s internal controls over
financial reporting.

20. Assess the risk posed by the service organization’s control environment and obtain sufficient
assurance over the operating effectiveness of relevant and significant controls to determine
the integrity of transactions processed on behalf of and recorded by SBA. If a SOC 1 report is
obtained for the relevant control environment at the service organization, determine and
document the following:

• SOC 1 report is sufficiently scoped to cover transaction processing and related control
activities performed by the service organization on behalf of SBA (e.g., that services, business
applications and other information technology, service organization departments and locations,
control objectives and activities, and other aspects of scope that are relevant to SBA’s internal
controls over financial reporting are included in the scope of SOC 1 reports).

• All exceptions noted in the SOC 1 report – not just those described in the independent service
auditor’s report – are evaluated to determine applicability to SBA’s internal controls over
financial reporting, the potential impact to SBA’s financial statements, and mitigating controls
other considerations made during their risk assessment.

• All complementary user entity controls described in the SOC 1 reports are evaluated using
current information and with consideration to their applicability to SBA’s internal controls over
financial reporting.

• Evaluation procedures include an assessment of whether complementary user entity controls
and other SBA-performed controls were tested and found effective and, if they are not, the
impact of such deficiencies on SBA’s internal controls over financial reporting.

• All complementary subservice organization controls described in SOC 1 reports are evaluated
to determine whether they provided services and performed controls considered relevant to
SBA’s internal controls over financial reporting and, if relevant subservice organizations were
identified, an evaluation is performed to obtain an understanding of the subservice
organization(s) and their controls.

• SOC 1 reports cover the appropriate period or corresponding gap letters provide sufficient
coverage to assess impacts on SBA’s internal controls over financial reporting.

6. Service Organizations Used for Loan Guarantee Programs

The use of service organizations is integral to the servicing and reporting of SBA’s loan guarantee
programs. To facilitate the collection of the 1502 reports from lenders, SBA uses a contracted fiscal transfer
agent to collect the 7(a) and PPP loan data from lenders. The loan data collected from 7(a) Program and
PPP lenders affect the Liability for Loan Guarantees line item and related elements in the consolidated

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financial statements. The fiscal transfer agent also sells loans into the secondary market. SBA guarantees
the timely payment, as well as a default guarantee, to 7(a) secondary market investors. The payments are
made from the Master Reserve Fund that is administered by the fiscal transfer agent. SBA discloses the
balances in the Master Reserve Fund in the notes to the financial statements. For the 504 program, SBA
uses a financial service provider to support the central servicing agent. The financial service provider
manages the day-to-day operations of the program including funding and servicing loans and managing
associated payouts to third-party investors.

Management’s evaluations of SOC 1 reports over the fiscal transfer agent and the financial service provider
were not sufficient or properly documented to aid in management’s assessment of internal controls over
financial reporting and do not enable the fair presentation of the Liability for Loan Guarantees line item and
related elements in the consolidated financial statements. Specifically, management did not:

1. Determine the potential impact of control deficiencies on internal controls over financial reporting and
implement compensating mitigating controls for such deficiencies.

2. Evaluate and address the complementary user entity controls identified within the SOC 1 reports.

3. Evaluate relevant subservice organizations such as the fiscal transfer agent’s information technology
infrastructure support provider.

4. Obtain bridge letters that cover the appropriate gap period to provide sufficient coverage to assess
impacts on SBA’s internal controls over financial reporting.

The deficiencies were caused by inadequate policies and procedures in place to evaluate SOC 1 reports.
Specifically, management did not sufficiently review the fiscal transfer agent and financial service provider
SOC 1 reports because management did not consider and document all relevant aspects of the SOC 1 reports
and its impact on the consolidated financial statements.

The following criteria were considered with respect to the matters described in the preceding paragraphs:

• GAO’s Green Book, Section 4, Additional Considerations: Service Organizations

• OMB Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and
Internal Control

The deficiencies noted above increased the risk that management does not make key observations
regarding the sufficiency of coverage provided by SOC 1 reports and the results that are relevant to SBA’s
internal controls over financial reporting. This in turn could result in a failure to identify and obtain an
understanding of relevant service organization controls and weaknesses that increase risks of
misstatements in the Liability for Loan Guarantees and related elements in the consolidated financial
statements.

Recommendations – Service Organizations Used for SBA Loan Guarantee Programs

We recommend the Administrator coordinate with the Associate Administrator of Office of Capital Access
to enhance management’s review and evaluation of SOC 1 reports for the fiscal transfer agent and
financial service provider to include their performance and documentation of the following:

21. Consideration of all exceptions noted in the SOC 1 reports and determination of the
applicability to SBA’s internal controls over financial reporting. Management should determine
the potential impact on internal controls over financial reporting and if mitigating controls exist.

22. Evaluation of each complementary user entity control identified within the SOC 1 reports.
Management should determine that complementary user entity controls have been appropriately
designed and implemented and are operating effectively.

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23. Evaluation of the SOC 1 reports for all relevant subservice organizations to include an
understanding of its role, their controls, and its effect on SBA’s processes.

24. Assessment of SOC 1 reports to determine whether coverage was provided for the entire
fiscal year. Management should determine the time period covered by the report, assess the
significance of the gap, and obtain bridge letters for reports that do not extend through
September 30 to provide sufficient coverage to assess impacts on SBA’s internal controls over
financial reporting.

C. Entity Level Controls

The urgent need to implement the CARES Act and related legislation presented a number of challenges for
management which resulted in a deficiency in entity level controls.

7. Entity Level Controls

Management did not properly design and implement entity level controls to establish an internal control system
that produces reliable and accurate financial reporting. The significance of the internal control matters indicated
several entity level control categories. We noted the following conditions.

Control Environment: Management did not fully design and implement an effective control environment. For
example, the following matters were noted:

1. There was not sufficient prioritization for individuals to fulfill their internal control responsibilities. The
rapid response and execution of the CARES Act and related legislation was the primary objective, and
not the implementation or maintenance of an effective internal control system.
2. Management did not assess control considerations over significant service organizations and their
impact on financial reporting.
3. There was not adequate training of disaster assistance staff involved in the review of COVID-19 EIDL
transactions resulting in inadequate documentation of how fraud alerts raised by the new custom-built
portal were addressed prior to loan approval.
4. There was not sufficient training of the lenders that have delegated authority to originate, approve,
disburse, and service PPP loans.
5. There was not adequate documentation of the internal control system and processes related to the
implementation of the CARES Act and related legislation.

Risk Assessment: Management did not design and implement an effective risk assessment process. For
example, the following matters were noted:

6. The initial risk assessment prepared was not properly amended after the enactment of the CARES Act
and related legislation.

7. Management did not identify risks from the implementation of new and expanded programs under the
CARES Act and related legislation that could significantly impact SBA’s internal control system and the
ability to achieve financial reporting objectives.

Control Activities: Management did not have effective control activities. For example, the following matters were
noted:

8. Established processes and control protocols were not followed due to the volume of new users or
required urgency leading to general information technology control deficiencies.

9. Existing systems did not have the capability to implement the PPP and COVID-19 EIDLs and grants in
accordance with the CARES Act and related legislation.

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10. To allow PPP loans to process in the loan repository system, certain edit checks were changed without
evidence of testing or review and approval of such changes.

Information and Communication: Management did not have effective information and communication
processes. For example, the following matters were noted:

11. There was not timely communication of necessary, quality information to achieve reporting objectives
internally within the agency.

12. External information received was not evaluated against the characteristics of quality information.

Monitoring: Management did not design and implement effective monitoring processes. Specifically, the
following matters were noted:

13. There was not an adequate monitoring plan developed and implemented for lenders participating in the
PPP program.

14. There was not effective monitoring of the effectiveness of internal control over processes performed by
service organizations.

The deficiencies were primarily caused by the prioritization and the urgent need to implement the provisions of
the CARES Act and related legislation as quickly and efficiently as possible over internal control processes.
Further, these deficiencies were primarily caused by the inherent challenges with the implementation of a new
program that does not have any historical precedence. In the case of PPP, the challenges included
implementing a program with evolving and complex guidance, inadequate systems to implement such large-
scale programs, and an insufficient number of personnel to assist in the implementation of the CARES Act and
related legislation. Finally, these deficiencies were primarily caused by the lack of prioritization to achieve
internal control responsibilities, such as in the areas of information technology and monitoring of service
organizations.

The following criteria were considered with respect to the matter described in the preceding paragraphs:

• GAO’s Green Book, Principle 3, Establish Structure, Responsibility, and Authority; Principle 4,
Demonstrate Commitment to Competence; Principle 5, Enforce Accountability; Principle 6, Define
Objectives and Risk Tolerances; Principle 7, Identify, Analyze, and Respond to Risks; Principle 9,
Identify, Analyze, and Respond to Change; Principle 10, Design Control Activities; Principle 11,
Design Activities for the Information System; Principle 12, Implement Control Activities; Principle
13, Use of Quality Information; Principle 14, Communicate Internally; Principle 15, Communicate
Externally; and Principle 16, Perform Monitoring Activities

• OMB Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and
Internal Control

As a result of the deficiencies noted above, PPP loans were approved that were not in conformance with the
CARES Act and related legislation, risks that impacted the materially significant financial statement line items
were not considered, the Office of Chief Financial Officer did not adequately consider the impact of the flagged
PPP loans and the 1502 report errors on the relevant financial reporting processes, and PPP and COVID-19
EIDL transactions were approved and in certain cases disbursed to potentially ineligible entities. Without the
proper level of entity level controls in place and operating effectively, there is an increased risk that a material
misstatement in the consolidated financial statements and noncompliance with the relevant laws and
regulations would not be prevented or detected and timely corrected.

Recommendations – Entity Level Controls

We recommend the Administrator to coordinate with the Chief Financial Officer to:

25. Assign and hold accountable individuals responsible for overseeing management’s design,

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implementation, and operation of SBA’s internal control system.

26. Document the internal control system and processes related to the implementation of the
CARES Act and related legislation.

27. Perform and document a thorough risk assessment at the financial statement assertion level
to identify process level risks and assess the effectiveness of key process level controls to
respond to the risks.

28. Develop and implement monitoring controls to ensure implementation of an effective internal
control environment.

29. Recruit additional qualified personnel, implement a formal training program, and train
appropriate SBA personnel and contractors on internal control matters that affect financial
reporting and compliance with relevant laws and regulations.

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Attachment II

U.S. Small Business Administration

Significant Deficiencies

The following deficiencies are considered to be significant deficiencies in internal controls over financial
reporting.

1. Payments for Covered Loans under Section 1112 of the CARES Act

2. General Information Technology Controls

1. Payments for Covered Loans under Section 1112 of the CARES Act

Section 1112 of the CARES Act appropriated $17 billion for SBA to make 6 months of payments on loans
in good standing on behalf of borrowers in existing 7(a), 504, or Microloan programs. These loans in good
standing are referred to as covered loans. For the 7(a) and 504 programs, the minimum payments of
these loans were made directly to lenders and applied to the borrower’s outstanding balance. Covered
loans that were already under deferment would receive 6 months of paym ent beginning with the first
payment due after the deferral period. Loans initiated within 6 months after the enactment of the
legislation (by September 27, 2020) will also receive a full 6 months of loan payments by SBA.

Management did not adequately design and implement controls to determine that payments made to lenders
for covered loans under Section 1112 of the CARES Act were accurate, reviewed, and approved prior to
payment to enable the fair presentation of the Liability for Loan Guarantees. Specifically, management did
not have a documented process and sufficient controls in place to substantiate the accuracy of the
payments made to lenders.

The deficiency was caused by an inadequate entity wide control environment to implement processes, and
procedures to account for new and expanded programs under the CARES Act and related legislation with
sufficiently designed, implemented, and effectively operating controls.

The following criteria were considered with respect to the matter described in the preceding paragraphs:

• GAO’s Green Book, Principle 3, Establish Structure, Responsibility, and Authority; and Principle 10,
Design Control Activities

• Section 1112 of the CARES Act

The deficiency noted above may result in misstatements of the Liability for Loan Guarantees line item and
related elements in the consolidated financial statements. In addition, the deficiency noted above may result
in a potential noncompliance with the CARES Act.

Recommendations – Payments for Covered Loans under Section 1112 of the CARES Act

We recommend the Administrator coordinate with the Associate Administrator of Office of Capital Access
to:

30. Update and enforce the existing Procedural Notice 5000-20049 to require the adequate review
and approval of Section 1112 payments made to lenders and to determine that the necessary
documentation is maintained to substantiate the payment amount.

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2. General Information Technology Controls

Management had several control deficiencies that limited SBA’s ability to effectively manage its information
system risks. Collectively, these conditions increase the risk of unauthorized use, modification, or destruction of
financial data, which may impact the integrity of information used to prepare the financial statements.

In the sections below, we have omitted some technical details from the conditions and recommendations due to
the sensitivity of the information. These details were communicated to management in notices of findings and
recommendations.

The following criteria were considered with respect to the matter described in the preceding paragraph:

• GAO’s Green Book, Principle 5, Enforce Accountability; Principle 11, Design Activities for the
Information System; Principle 12, Implement Control Activities; and Principle 16, Perform
Monitoring Activities

• National Institute of Standards and Technology (NIST) Special Publication (SP) 800-53, Revision 4,
Security and Privacy Controls for Federal Information Systems and Organizations

• Federal Information Processing Standards Publication (FIPS) 200, Minimum Security Requirements
for Federal Information and Information Systems

• SBA Standard Operating Procedure (SOP) 90 47 5, Cybersecurity and Privacy Policy

• SBA System Configuration Management Plan

• SBA System Access Management Plan

We have summarized the information technology control deficiencies by the following general information
technology control objectives: logical access controls and system configuration management.

Logical Access Controls

An integral part of the effectiveness of an organization’s security program management efforts should be to
determine that logical access controls provide reasonable assurance that information technology resources,
such as data files, application programs, and information technology-related facilities and equipment, are
protected against unauthorized modification, disclosure, loss, or impairment. Management did not always follow
established policy and procedures for the account management, authorization, and recertification processes.

Recommendations – Logical Access Controls

We recommend the Administrator coordinate with the Chief Information Officer to:

31. Review the automated portion of their account management process to determine what
caused the process to create multiple accounts for individual users.

32. Update and test the account management process to ensure that multiple accounts will not be
created when changes are applied to the production environment.

We also recommend the Administrator coordinate with the Associate Administrator of Office of Capital Access
to:

33. Validate that new users identified in the notification of findings and recommendations are
assigned appropriate access to SBA’s information system and the supporting environment.

34. Periodically train personnel who are responsible for the approval and provisioning of accounts
to emphasize the importance of documenting and approving user access requests prior to and

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provisioning access to SBA’s information systems and their supporting environments.

In addition, we recommend the Administrator coordinate with the Associate Administrator of Office of Disaster
Assistance to:

35. Analyze and validate the users identified in the notification of findings and recommendations
were granted appropriate access.

36. Periodically train personnel who are responsible for the approval and provisioning of accounts
to emphasize the importance of documenting and approving user access requests prior to and
provisioning access to SBA’s information systems and their supporting environments.

37. Validate the accounts that are to be reviewed and recertified are performed by the appropriate
or designated personnel before performing the existing recertification process.

System Configuration Management

An integral part of the effectiveness of an organization’s security program management efforts should be to
determine that application change management controls provide reasonable assurance that program changes
implemented to the applications are appropriate and authorized. Management did not maintain supporting
evidence to show patches to a database and an operating system were tested before being pushed to the
production environment. In addition, management migrated application changes into the production
environment without appropriate approval.

Recommendations – System Configuration Management

We recommend the Administrator coordinate with the Associate Administrator of Office of Capital Access to:

38. Validate that the patches applied to the database and operating system are appropriately
implemented and do not negatively affect the performance of the application.

39. Periodically train personnel involved with the implementation of database and operating
system patches to follow the requirements of the patch management process in accordance
with existing policies.

40. Design and implement a quality check process to ensure that approvals for application
changes are timely and accurate prior to migrating changes into the production environment.

41. Periodically train personnel involved with the review and approval of application changes to
follow the requirements of the application change management process in accordance with
existing policy.

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Attachment III

U.S. Small Business Administration

Compliance and Other Matters

A. Federal Managers’ Financial Integrity Act of 1982 (FMFIA)

Management performed an internal control assessment as required under the FMFIA; however, management’s
assessment did not substantially comply with FMFIA and the related OMB Circular No. A-123 requirements.
Specifically, management did not:

1. Sufficiently identify or define risks related to new programs established by the CARES Act and related
legislation.

2. Perform, document, or demonstrate that they completed an internal control over financial reporting
evaluation regarding these new programs.

3. Fully evaluate and consider the risks and controls of significant service organizations.

4. Report the material weaknesses identified in Attachment I – Material Weaknesses.

Management did not substantially meet FMFIA requirements due to the urgent need to implement the
provisions of the CARES Act and related legislation as quickly and efficiently as possible, the lack of historical
precedence, and other inherent challenges faced in implementing and expanding programs. In addition,
management did not consider all FMFIA and OMB Circular No. A-123 requirements when performing their
evaluation over internal controls.

The following criteria were considered with respect to the matter described in the preceding paragraphs:

• Section 2 of FMFIA

• OMB Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and
Internal Control

Management did not substantially comply with FMFIA and the related OMB Circular No. A-123
requirements, which may lead to not identifying the appropriate risks and key controls, and not detecting
internal control or compliance deficiencies. The risk of not detecting and correcting control deficiencies could
result in misstatements to the consolidated financial statements.

Recommendations – FMFIA

We recommend the Administrator coordinate with the Chief Financial Officer to:

42. Update the enterprise risk management approach over the evaluation of internal controls to ensure
it includes all significant programs, key processes, and other material line items on the
consolidated financial statements.

43. Perform and document the internal control evaluation performed over all programs. This should
include entity level controls, manual controls, general information technology controls, and system
application controls covering key financial statement line items and risks.

44. Work with service providers to assess service organization risks and controls and monitor the
service providers to determine that they properly design, implement and effectively operate controls
impacting SBA’s control environment.

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B. Federal Financial Management Improvement Act of 1996 (FFMIA)

Management did not establish and maintain financial management systems that substantially comply with the
following FFMIA requirements:

1. Federal Financial Management Systems Requirements. As discussed in Attachment I – Material
Weaknesses, control deficiencies over transactions arising from the implementation of the CARES Act
and related legislation do not enable reliable and accurate financial reporting and do not ensure
budgetary resources are safeguarded against waste, loss, and misuse. In addition, the deficiencies
may not support compliance objectives related to ensuring financial transactions are in conformance
with the CARES Act and related legislation are achieved.

In addition, as discussed in Attachment II – Significant Deficiencies, management did not implement
sufficient general information technology controls for SBA systems critical to financial reporting.
Sufficient and effective general information technology controls were not implemented to protect the
financial accounting and reporting data.

2. Federal Accounting Standards. The deficiencies identified and reported in Attachment I – Material
Weaknesses, provide an indication that SBA’s financial management systems were substantially non-
compliant with Federal accounting standards.

Management did not substantially meet FFMIA requirements because of the reasons discussed in Attachment I
– Material Weaknesses and Attachment II – Significant Deficiencies and due to an inadequate entity wide
control environment to implement the provisions of the CARES Act and related legislation with sufficiently
designed and implemented controls.

The following criteria were considered with respect to the matter described in the preceding paragraphs:

• Section 803(a) of FFMIA

• GAO’s Green Book, Section 2, Establishing an Effective Internal Control System

• Appendix D to OMB Circular No. A-123, Compliance with the Federal Financial Management
Improvement Act of 1996

Management did not substantially comply with FFMIA increasing the risk that transactions are incorrectly
recorded to the general ledger, impacting the completeness, existence, and accuracy of the balances in
the consolidated financial statements.

Recommendations – FFMIA

We recommend the Administrator coordinate with the Chief Financial Officer to:

45. Address the control deficiencies over transactions arising from the implementation of the
CARES Act and related legislation by working with the Office of Capital Access and the Office
of Disaster Assistance to implement the recommendations in Attachment I – Material
Weaknesses.

We also recommend the Administrator coordinate with the Chief Information Officer to:

46. Address the deficiencies in general information technology controls for SBA systems critical to
financial reporting by working with the relevant system owners to implement the
recommendations in Attachment II – Significant Deficiencies.

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Attachment IV

CFO Response to Audit Report on
FY 2020 Financial Statements

DATE: December 18, 2020
TO: Hannibal M. Ware, Inspector General
FROM: Tami Perriello, Associate Administrator for Performance and Planning
and Chief Financial Officer
SUBJECT: FY 2020 Financial Statement Audit

The Small Business Administration has reviewed the Independent Auditors’ Report from KPMG that includes the
auditors’ disclaimer of 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, and we are
disappointed by this outcome.
The FY 2020 Agency Financial Report includes the programs funded under the CARES Act and subsequent
legislation, which provided funding for new and expanded loan programs. The scope and scale of these programs
and the speed with which the SBA responded were unprecedented in its history. The largest CARES Act loan
programs executed by the SBA are governed by the Federal Credit Reform Act (FCRA), which requires estimation
of lifetime expected subsidy costs at program implementation and does provide for annual adjustment to original
subsidy cost estimates in future periods. The SBA believes the FY 2020 presentation of financial information is
materially correct.
We recognize that documentation of the processes and controls over two CARES Act programs, the Paycheck
Protection Program (PPP) and EIDL-COVID Program, was not sufficiently detailed to support the financial
statement audit. The SBA fully supports the requirements for auditability of its financial statements and
understands its obligations for providing accountability and transparency. The SBA is working diligently to
complete its reviews and to correct these shortcomings for future audits.
The auditors identified material weaknesses related to the internal controls over seven areas related to the execution
and reporting for the PPP and EIDL-COVID programs. The SBA has reviewed the identified material weaknesses
and does not agree with five weaknesses included in the report under Accounting and Reporting for Programs Implemented
under the CARES Act and Related Legislation and Entity Level Controls. The SBA partially agrees with two others,
grouped in the audit report under Evaluation and Monitoring of Service Organization Controls. Our responses, as
communicated to KPMG during the audit, detail our concerns with the analysis and conclusions drawn by the
auditors.
We appreciate 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 directly support our efforts to further enhance the SBA's financial management practices. We remain
committed to excellence in financial management and look forward to making more progress in the coming year.

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Attachment V

Auditors’ Response to Management’s Response

We acknowledge SBA management’s response to our Independent Auditors’ Report, presented in Attachment
IV, and commend their commitment to financial management and the accountability for and transparency of
their programs. SBA management did not agree with the five material weaknesses included in our report under
Accounting and Reporting for Programs Implemented under the CARES Act and Related Legislation and Entity
Level Controls. We evaluated the validity of management’s responses communicated to us during the
engagement and have determined that the material weaknesses in internal control over financial reporting are
appropriate.

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FINANCIAL STATEMENTS AND NOTES
(FISCAL YEAR 2020 UNAUDITED)
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 performance and allocate
resources.

SBA’s management is responsible for the accuracy and propriety of the information contained in the principal financial
statements and the quality of internal controls. The SBA prepares these financial statements from its records in accordance
with generally accepted accounting principles in the United States as well as formats prescribed by the Office of Management
and Budget. While these statements have been prepared from SBA’s records in accordance with generally accepted accounting
principles for federal entities and the formats prescribed by the OMB, they are in addition to the financial reports used to
monitor and control budgetary resources, which are prepared from the same records. The statements should be read with the
realization that they are a component of the U.S. Government, a sovereign entity.

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 Budgetary
Resources is consistent with information reflected on the Report on Budget Execution and Budgetary Resources (SF 133),
with the one exception of offsetting receipts. Offsetting receipts offset budget authority and outlays at the agency level in the
Budget of the United States Government but are not reflected in the SF 133. The SBA includes offsetting receipts in this
statement for the purpose of reconciling outlay information presented in the Budget of the United States Government.

Based on updated guidance in OMB Circular A-136, a new line titled “Disbursements, net” has been added to the SBR. Net
disbursements are derived by reducing gross disbursements by actual offsetting collections. This line applies only to credit
financing accounts.

The Notes to the Financial Statements provide information to explain the basis of the accounting and presentation used
to prepare the statements and to explain specific items in the statements. They also provide information to support how
particular accounts have been valued and computed.

FY 2020 OMB Circular A-136 guidance changes the presentation of the reconciliation of net cost to net outlays from
FY 2019 (Note 16). The FY 2019 presentation has been updated to reflect the change in guidance. Net cost should be
reconciled to net outlays, which should exclude financing account activity. As shown on the SBR, net outlays represent net
budgetary outlays and do not include net disbursements of credit financing accounts.

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

64 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

U.S. SMALL BUSINESS ADMINISTRATION
CONSOLIDATED BALANCE SHEET
As of September 30, 2020 and 2019

(Dollars in Thousands)

Balance Sheet Items 2020 (Unaudited) 2019
ASSETS
Intragovernmental Assets
Fund Balance with Treasury (Note 2) $ 714,400,127 $ 7,036,675
Advances (Note 1) 2,301 18,476
Total Intragovernmental Assets 714,402,428 7,055,151

Assets - Public
Cash (Note 3) 10,572 3,030
Accounts Receivable, Net (Note 5) 112,082 163,827
Credit Program Receivables and Related Foreclosed Property, Net (Note 6) 182,936,949 9,493,680
General Property and Equipment, Net (Note 7) 27,503 203
Advances (Note 1) 44,456 2,761
Total Assets - Public 183,131,562 9,663,501
Total Assets $ 897,533,990 $ 16,718,652

LIABILITIES
Intragovernmental Liabilities
Accounts Payable (Note 1) $ 14,905 $ 4,816
Debt (Note 9) 176,173,660 11,810,241
Net Assets of Liquidating Funds Due to Treasury (Note 10) 15,922 8,732
Downward Reestimate Payable to Treasury (Note 1, Note 13) 28,541,393 1,028,472
Other (Note 11) 16,370 16,481
Total Intragovernmental Liabilities 204,762,250 12,868,742

Liabilities - Public
Accounts Payable (Note 1) 337,528 14,130
Accrued Grant Liability (Note 1) 66,496 66,502
Liability for Loan Guaranties (Note 6) 512,712,498 2,000,420
Federal Employees' Compensation Act Actuarial Liability (Note 1, Note 8) 30,576 28,794
Surety Bond Guarantee Program Future Claims (Note 8) 60,060 57,255
Other (Note 11) 86,610 49,201
Total Liabilities - Public 513,293,768 2,216,302
Total Liabilities 718,056,018 15,085,044

NET POSITION
Unexpended Appropriations (Note 1) 183,460,572 1,779,472
Cumulative Results of Operations (Note 1) (3,982,600) (145,864)
Total Net Position 179,477,972 1,633,608

Total Liabilities and Net Position $ 897,533,990 $ 16,718,652

The accompanying notes are an integral part of these statements.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 65
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

U.S. SMALL BUSINESS ADMINISTRATION
CONSOLIDATED STATEMENT OF NET COST
For the Years Ended September 30, 2020 and 2019

(Dollars in Thousands)

Goal Items 2020 (Unaudited) 2019
STRATEGIC GOAL 1:
Support Small Business Revenue and Job Growth

Gross Cost $ 534,872,629 $ (559,864)
Less: Earned Revenue 8,065,493 211,581
Net Cost of Strategic Goal 1 526,807,136 (771,445)

STRATEGIC GOAL 2:
Build Healthy Entrepreneurial Ecosystems and
Create Business Friendly Environments

Gross Cost 27,523 310,490
Net Cost of Strategic Goal 2 27,523 310,490

STRATEGIC GOAL 3:
Restore Small Businesses and Communities after Disasters

Gross Cost 34,993,696 757,683
Less: Earned Revenue 7,611,305 332,917
Net Cost of Strategic Goal 3 27,382,391 424,766

STRATEGIC GOAL 4:
Strengthen SBA’s Ability to Serve Small Businesses

Gross Cost 11,976 147,190
Net Cost of Strategic Goal 4 11,976 147,190

COST NOT ASSIGNED TO STRATEGIC GOALS

Gross Cost 2,521 25,525
Net Cost Not Assigned to Strategic Goals 2,521 25,525

Net Cost of Operations $ 554,231,547 $ 136,526

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

66 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

U.S. SMALL BUSINESS ADMINISTRATION
CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION
For the Years Ended September 30, 2020 and 2019

(Dollars in Thousands)
2020 (Unaudited) 2019
Net Position Items

Beginning Unexpended Appropriations $ 1,779,472 $ 2,341,412

Budgetary Financing Sources
Appropriations Received 762,191,631 932,917
Rescissions (16,369) (50,000)
Adjustment - Cancelled Authority (11,135) (21,640)
Return of Unrequired Liquidating Fund Appropriation (2,048) (3,312)
Other Adjustments (197) (253)
Appropriations Used (580,480,782) (1,419,652)
Total Budgetary Financing Sources 181,681,100 (561,940)

Ending Unexpended Appropriations $ 183,460,572 $ 1,779,472

Beginning Cumulative Results of Operations $ (145,864) $ (268,255)

Budgetary Financing Sources
Transfers-Out Without Reimbursement (57,862) –
Appropriations Used 580,480,782 1,419,652
Other - Current Year Liquidating Equity Activity (9,406) (6,324)
Donations of Cash and Cash Equivalents 12 112

Other Financing Sources
Transfers-In Without Reimbursement 57,862 –
Imputed Financing from Costs Absorbed by Others 19,508 21,503
Other - Non-entity Activity (30,096,085) (1,176,026)
Total Financing Sources 550,394,811 258,917
Less: Net Cost of Operations 554,231,547 136,526
Net Change (3,836,736) 122,391

Ending Cumulative Results of Operations $ (3,982,600) $ (145,864)

Ending Net Position $ 179,477,972 $ 1,633,608

The accompanying notes are an integral part of these statements.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 67
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

U.S. SMALL BUSINESS ADMINISTRATION
COMBINED STATEMENT OF BUDGETARY RESOURCES
For the Years Ended September 30, 2020 and 2019

(Dollars in Thousands)
September 30, 2020 (Unaudited)

Budgetary Resource Items Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority,
$ 1,529,176 $ 3,771,133 $ 5,300,309
net (discretionary and mandatory)

Appropriations (discretionary and mandatory) 762,084,837 88,377 762,173,214
Borrowing Authority (discretionary and mandatory) – 167,267,294 167,267,294
Spending Authority from Offsetting Collections 957,307 582,969,780 583,927,087
Total Budgetary Resources $ 764,571,320 $ 754,096,584 $ 1,518,667,904

STATUS OF BUDGETARY RESOURCES
New Obligations and Upward Adjustments (total) $ 590,232,922 $ 228,773,726 $ 819,006,648
Unobligated Balance, end of year:
Apportioned, unexpired accounts 174,209,293 515,801,872 690,011,165
Unapportioned, unexpired accounts 77,908 9,520,986 9,598,894
Unexpired Unobligated Balance, end of year 174,287,201 525,322,858 699,610,059
Expired Unobligated Balance, end of year 51,197 – 51,197
Unobligated Balance, end of year (total) 174,338,398 525,322,858 699,661,256
Total Status of Budgetary Resources $ 764,571,320 $ 754,096,584 $ 1,518,667,904

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 579,936,314 $ 579,936,314
Distributed Offsetting Receipts (2,523,844) (2,523,844)
Agency Outlays, net (discretionary and mandatory) $ 577,412,470 $ 577,412,470
Disbursements, net (total) (mandatory) $ (360,836,171)

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

68 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

U.S. SMALL BUSINESS ADMINISTRATION
COMBINED STATEMENT OF BUDGETARY RESOURCES
For the Years Ended September 30, 2020 and 2019

(Dollars in Thousands)
September 30, 2019
Budgetary Resource Items Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority,
$ 2,035,305 $ 4,290,915 $ 6,326,220
net (discretionary and mandatory)

Appropriations (discretionary and mandatory) 879,605 – 879,605
Borrowing Authority (discretionary and mandatory) – 2,231,792 2,231,792
Spending Authority from Offsetting Collections 207,470 2,697,511 2,904,981
Total Budgetary Resources $ 3,122,380 $ 9,220,218 $ 12,342,598

Nonbudgetary
STATUS OF BUDGETARY RESOURCES Budgetary Financing Total

New Obligations and Upward Adjustments (total) $ 1,655,874 $ 4,794,658 $ 6,450,532
Unobligated Balance, end of year:
Apportioned, unexpired accounts 393,225 1,401,684 1,794,909
Unapportioned, unexpired accounts 1,024,370 3,023,876 4,048,246
Unexpired Unobligated Balance, end of year 1,417,595 4,425,560 5,843,155
Expired Unobligated Balance, end of year 48,911 – 48,911
Unobligated Balance, end of year (total) 1,466,506 4,425,560 5,892,066
Total Status of Budgetary Resources $ 3,122,380 $ 9,220,218 $ 12,342,598

Nonbudgetary
OUTLAYS, NET Budgetary Financing Total

Net Outlays (discretionary and mandatory) $ 1,402,893 $ 1,402,893
Distributed Offsetting Receipts (946,587) (946,587)
Agency Outlays, net (discretionary and mandatory) $ 456,306 $ 456,306
Disbursements, net (total) (mandatory) $ 1,152,612

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

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 69
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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.

The SBA is a component of the U.S Government. For this reason, some of the assets and liabilities reported by the entity may
be eliminated for Government-wide reporting because they are offset by assets and liabilities of another U.S. Government
entity. These financial statements should be read with the realization that they are for a component of the U.S. Government, a
sovereign entity.

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 the direct loans obligated, or loan
guaranties committed, in a given fiscal year. Increases to individual loans in a cohort that are made in a subsequent fiscal year
are accounted for in the subsequent year’s loan cohort. Cohort cash flows include loan repayments, recoveries on defaulted
guaranties and loan fees received by the SBA that are due from the lenders and borrowers when the loan is made and during
the life of the loan cohort, as well as expenditures by the SBA for defaulted guaranties, loan servicing expenses, and other
required SBA expenditures. An initial allowance or liability for loan guaranties is established in the original year of the loan
cohort. The initial amount of the allowance and liability for each cohort is reestimated annually at fiscal year-end, and the
adjusted amount is included in SBA’s annual financial statements. Note 6 further describes FCRA accounting.

Use of Estimates
SBA’s management makes assumptions and uses estimates to prepare the financial statements based upon the facts that exist
when the statements are prepared. The SBA typically uses economic assumptions provided by the Office of Management
and Budget in preparing the estimates. However, in FY 2020, the OMB did not prepare the Mid-Session Review Economic
assumptions. The SBA selected Moody’s Analytics to meet this requirement as it provides a single source for all assumptions
and has been used at other agencies for components of their credit models. Actual results may differ from those assumptions
and estimates. The most significant differences between actual results and these estimates may occur in the valuation of
credit program receivables and liabilities for loan guaranties under guidelines in FCRA. The SBA recognizes the sensitivity of

70 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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.

Budgets and Budgetary Accounting for Loan Programs
SBA’s loan disbursements are financed by appropriations for long-term loan subsidy cost and borrowings from the Treasury’s
Bureau of the Fiscal Service for the remaining nonsubsidized 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 Act.

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 FCRA, 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.

As a component of the Government-wide reporting entity, the SBA is subject to the Federal budget process, which involves
appropriations that are provided annually and appropriations that are provided on a permanent basis. The financial
transactions that are supported by budgetary resources, which include appropriations, are generally the same transactions
reflected in agency and the Government-wide financial reports.

SBA’s budgetary resources reflect past congressional action and enable the entity to incur budgetary obligations, but they do
not reflect assets to the Government as a whole. Budgetary obligations are legal obligations for goods, services, or amounts
to be paid based on statutory provisions. After budgetary obligations are incurred, the Treasury will make disbursements
certified by the SBA to liquidate the budgetary obligations and finance those disbursements in the same way it finances all
disbursements, which, is to borrow from the public if there is a budget deficit.

Advances
The SBA has both intragovernmental advances and advances to the public. Intragovernmental advances are primarily to the
Interior Business Center of the Department of the Interior for contracting assistance on work not yet performed. Advances to
the public represent prepaid grants to counseling and training partners.

Accounts Payable
Accounts Payable are amounts 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 accrual 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.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 71
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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 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 amounts 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.

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.

Other Financing Sources
The Statement of Changes in Net Position contains a line item under Other Financing Sources titled Other - Non-entity
Activity. This amount is the offset to non-entity collections to the general fund of the Treasury for downward subsidy
reestimates that are payable to the Treasury under Federal Credit Reform requirements.

Classified Activities
Accounting standards require all reporting entities to disclose that accounting standards allow certain presentations and
disclosures to be modified, if needed, to prevent the disclosure of classified information.

Fiduciary Activities
Fiduciary activities are the receipt, management, protection, accounting, investment, and disposition by the Federal
Government of cash or other assets in which non-federal entities have an ownership interest that the Federal Government
must uphold. Fiduciary cash and other assets are not assets of the government, and are not recognized on SBA’s proprietary
statements, but they are required to be disclosed in the notes to SBA’s financial statements. SBA’s fiduciary balances are on
deposit in commercial banks. SBA’s fiduciary activities are discussed in Note 4.

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. Annual leave earned but not taken,
within established limits, is funded from future financing sources. Sick leave and other types of non-vested leave are expensed
as taken.

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

72 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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.

The DOL pays valid claims as they occur, which are billed to the SBA annually and funded and paid approximately 15
months later. The DOL also calculates an estimated actuarial liability for future benefits based upon historical experience and
other economic variables. Projected annual benefit payments are then discounted to present value using the forecasted interest
rates for 10-year Treasury notes and bonds published by the OMB in its economic assumptions for the federal budget. The
SBA recognizes a current unfunded cost for the actual claims paid and the change in the FECA actuarial liability each year.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 73
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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. Records are maintained for SBA’s program, financing, liquidating, suspense/budget
clearing accounts, and other accounts at the fund level. Fund balances at the Treasury include expired year amounts, which
are unavailable for obligation, as well as amounts currently available for new obligations.

FBWT is an asset to the SBA, but not to the Government as a whole, as it is a liability of the General Fund. The amounts
represent commitments by the Government to provide resources for programs, but they do not represent net assets to the
Government as a whole. When disbursements are made, the Treasury finances those disbursements in the same way it finances
all other disbursements, which is to borrow from the public if there is a budget deficit, and to use current receipts if there is a
budget surplus.

(Dollars in Thousands)

As of September 30, 2020 (Unaudited) 2019
Appropriated Funds $ 184,019,803 $ 1,886,997
Financing Funds 530,277,121 5,047,017
Liquidating Funds 475 652
Revolving Fund 102,855 100,464
Trust Fund 175 221
Total Entity Fund Balance with Treasury 714,400,429 7,035,351
Budget Clearing Account Balance (302) 1,324
Total Fund Balance with Treasury $ 714,400,127 $ 7,036,675

Status of Fund Balance with Treasury
Apportioned, unexpired accounts $ 690,011,165 $ 1,794,909
Unapportioned, unexpired accounts 9,598,894 4,048,246
Obligated Balance Not Yet Disbursed 15,659,061 1,143,285
Expired Unobligated Balance 51,197 48,911
Borrowing Authority Not Converted to Funds (919,888) -
Nonbudgetary (302) 1,324
Total Fund Balance with Treasury $ 714,400,127 $ 7,036,675

Unobligated balances become available when OMB approves SBA’s request to apportion funds for obligation in the current
fiscal year. Obligated balances not yet disbursed include unpaid obligations offset by uncollected customer payments from other
federal government accounts. The unobligated and obligated balances are reflected on the Statement of Budgetary Resources.

The increase in fund balance is attributed to CARES Act funding received in FY 2020.

74 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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 $10.6 million and $3.0 million as of September 30, 2020 and 2019.

Note 4 Fiduciary Activities: Master Reserve Fund
and Master Reserve Account
Fiduciary activities are the receipt, management, protection, accounting, investment, and disposition by the federal
government of cash or other assets in which non-federal entities have an ownership interest that the federal government
must uphold. Fiduciary cash and other assets are not assets of the government, and are not recognized on SBA’s proprietary
statements, but 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 transfer agent, Colson Services Corp., a subsidiary
of the Bank of New York Mellon. The balance in the MRF is invested, according to SBA policy, entirely in Treasury securities
and repurchase agreements that are backed by Treasury securities. The MRF is an integral part of SBA’s 7(a) secondary
market program. The MRF was authorized by the Small Business Secondary Market Improvement Act of 1984 to facilitate
the pooling of 7(a) guarantied loans that are purchased by secondary market investors. The MRF receives monthly payments
from SBA guarantied borrowers and disburses monthly to 7(a) secondary market pool investors based on a schedule of
amounts due. In FY 2020, the MRF also received $386 million in transfers from the SBA to support select cohort available
balances, which have absorbed an increase in distributions of prepaid principal to pool certificate holders. In FY 2019, the
MRF received a $380 million transfer to support select cohorts. The 7(a) secondary market program includes SBA’s guaranty
of timely payment, as well as a default guaranty, to 7(a) secondary market investors. The MRF supports $33.7 billion and
$33.9 billion of outstanding SBA guarantied 7(a) secondary market pool principal as of September 30, 2020 and 2019.

The Master Reserve Account is an SBA fiduciary activity that is administered for the SBA by PwC. The balance in the MRA
is invested entirely in Treasury securities. The MRA facilitates the operation of the 504 Certified Development Company
secondary market program. The MRA was authorized by Section 505 of the Small Business Investment Act of 1958 as
amended, as a vehicle to receive, temporarily hold, and distribute 504 program cash flows. The MRA receives monthly
payments from 504 borrowers and retains the payments until a semi-annual debenture payment is due to secondary market
investors. The 504 secondary market program includes SBA’s guaranty of timely payment, as well as a default guaranty, to
504 secondary market investors. The MRA supports $28.0 billion and $26.5 billion of SBA guarantied 504 debentures
outstanding in the secondary market as of September 30, 2020 and 2019.

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

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 75
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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

FIDUCIARY ASSETS
As of September 30, 2020 (Unaudited) 2019
MRF MRA Total MRF MRA Total
Cash $ 2,475 $ - $ 2,475 $ 3,060 $ - $ 3,060
Short Term Securities
Money Market Funds 23,965 542,818 566,783 30,084 722,797 752,881
Treasury Bills 29,977 - 29,977 179,222 - 179,222
Repurchase Agreements 359,108 - 359,108 510,101 - 510,101
Total Cash and Short Term Securities 415,525 542,818 958,343 722,467 722,797 1,445,264

Long Term Securities
Treasury Notes/Bonds Including Interest 1,655,943 - 1,655,943 2,317,380 - 2,317,380
Total Long Term Securities 1,655,943 - 1,655,943 2,317,380 - 2,317,380

Net Assets $ 2,071,468 $ 542,818 $ 2,614,286 $ 3,039,847 $ 722,797 $ 3,762,644

RECONCILIATION OF FIDUCIARY ASSETS
For the Years Ended September 30, 2020 (Unaudited) 2019
MRF MRA Total MRF MRA Total

Beginning Net Assets $ 3,039,847 $ 722,797 $ 3,762,644 $ 3,459,427 $ 673,079 $ 4,132,506
Receipts
Earned Income 41,283 8,894 50,177 63,004 19,566 82,570
Contributions 8,274,728 14,882,369 23,157,097 9,501,440 14,522,564 24,024,004
Net Realized Gain (Loss) 9,222 - 9,222 3,015 - 3,015
Total Receipts 8,325,233 14,891,263 23,216,496 9,567,459 14,542,130 24,109,589

Less Disbursements
Payments to Investors 9,293,612 15,071,242 24,364,854 9,987,039 14,492,412 24,479,451
Total Disbursements 9,293,612 15,071,242 24,364,854 9,987,039 14,492,412 24,479,451

Ending Net Assets $ 2,071,468 $ 542,818 $ 2,614,286 $ 3,039,847 $ 722,797 $ 3,762,644

76 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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 for guarantied loan purchases that lack the required
documents. 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. The amount
shown in “Other” consists primarily of receivables due from lenders and guaranty purchase repairs.

(Dollars in Thousands)

As of September 30, 2020 (Unaudited) 2019
Public
Guaranty Fees Receivable $ 74,243 $ 78,631
Refunds 1,253 1,002
Other 37,321 84,820
Total Public 112,817 164,453
Allowance For Loss (735) (626)
Net Public $ 112,082 $ 163,827

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 77
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Note 6 Credit Program Receivables and Liability for Loan
Guaranties

A. Loan Program Descriptions and Accounting
Loan Program Descriptions
The SBA provides guaranties that help eligible small businesses obtain loans from participating lenders and licensed small
business investment companies to make investments in qualifying small businesses. The SBA also makes loans to microloan
intermediaries and provides direct loans that assist homeowners, renters, businesses of all sizes, and private nonprofit
organizations recover from disasters.

Major Direct Loan and Loan Guaranty Programs
Program group Program type Program
Disaster Direct Disaster Assistance Loans
Business Guarantied 7(a) Loan Guaranty
Business Guarantied 504 Certified Development Company
Business Guarantied Small Business Investment Company Debentures
Business Direct 7(m) Microloan

In March 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was enacted to provide emergency
and immediate national economic relief and assistance across the American economy, including to small businesses, workers,
families, and the healthcare system, to alleviate the severe economic hardships and public health threat created by the 2019
Novel Coronavirus pandemic.

The CARES Act expanded SBA’s disaster and 7(a) lending programs and requires the SBA to make six months of borrower
payments for 7(a), 504 and Microloan borrowers in regular servicing.

SBA’s Disaster Assistance Loan program makes direct loans to disaster survivors under four categories: (1) physical disaster
loans to repair or replace damaged homes and personal property; (2) physical disaster loans to businesses of any size; (3)
economic injury disaster loans to eligible small businesses and nonprofit organizations without credit available elsewhere; and
(4) economic injury loans to eligible small 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. The SBA offers low-interest economic injury disaster loans for working capital to
small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19). These EIDL loans may
be used to pay fixed debts, payroll, accounts payable and other bills that cannot be paid because of the disaster’s impact. The
interest rate is 3.75 percent for small businesses. The interest rate for non-profits is 2.75 percent.

SBA’s business loan programs include its flagship 7(a) Loan Guaranty program in which the SBA guaranties up to 90 percent
of the amount of loans made by participating banks and other lending institutions to eligible small businesses not able to
obtain credit elsewhere. The CARES Act added the Paycheck Protection Program in the 7(a) loan program which is designed
to provide a direct incentive for small businesses to keep their workers on the payroll. The loan will be fully forgiven if the
funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 60 percent of
the forgiven amount must have been used for payroll). Loans issued prior to June 5, 2020, have a maturity of two years while
those issued after have a maturity of five years. All loans have an interest rate of 1 percent. The CARES Act also provides debt
relief for 7(a) borrowers. The SBA will pay six months of principal, interest, and any associated fees owed by current 7(a)
borrowers with loans in regular servicing status as well as new 7(a) loans disbursed prior to September 27, 2020. Borrowers do
not apply for this assistance; it is automatically provided.

78 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

The 504 Certified Development Company program guarantees 100 percent of the principal and interest payments on
debentures issued by development companies for loans to eligible small businesses secured by real estate or equipment. The
CARES Act provides debt relief for 504 borrowers. The SBA will pay six months of principal, interest, and any fees owed
by current borrowers who are in regular servicing status as well as new 504 loans disbursed prior to September 27, 2020.
Borrowers do not apply for this assistance; it is automatically provided.

The Small Business Investment Company program guarantees principal and interest payments on debentures issued by small
business investment companies, which in turn make investments in qualifying 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. The CARES Act provides debt relief for Microloan borrowers. The SBA will pay
six months of principal, interest, and any fees owed by current borrowers who are in regular servicing status as well as new
Microloan loans disbursed prior to September 27, 2020. Borrowers do not apply for this assistance; it is automatically
provided.

Credit Subsidy Modeling
The SBA estimates future cash flows for direct and guarantied loans using economic and financial credit subsidy models.
These estimated cash flows are used to develop the subsidy funding required under the Federal Credit Reform Act of 1990.
The SBA has developed a customized credit subsidy model for each of its major 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 OMB’s Credit Subsidy Calculator that has both forecasted and actual Treasury interest
rates.

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

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

Contractual terms of the loan or guaranty such as loan amount, interest rate, maturity, and grace periods
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 rate

Subsidy Funding under the Federal Credit Reform Act
FCRA requires that the credit subsidy costs of direct loans and loan guaranties be expensed in the year loans are disbursed.
The credit subsidy cost is the net present value of expected cash inflows and outflows over the life of a guarantied loan, or
the difference between the net present value of expected cash flows and the face value of a direct loan. The cost expressed as a
percentage of loans disbursed is termed the subsidy rate. The SBA receives appropriations 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.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 79
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Credit Program Receivables and Related Foreclosed Property, Net
FCRA governs direct loans made after FY 1991. FCRA direct loans are valued at the present value of expected future cash
flows discounted at the interest rate of marketable Treasury securities. The subsidy allowance 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.

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 and defaulted guaranties made prior to FCRA are valued at the current receivable balance net of an allowance for
uncollectible amounts calculated using 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 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. Advance balances are reported as Other
Loans Receivable.

Interest receivable is comprised of accrued interest on loans receivable and purchased interest related to defaulted guarantied
loans. Interest income is accrued at the contractual rate on the outstanding principal amount and is reduced by the amount of
interest income accrued on nonperforming loans in excess of 90 days delinquent. SBA’s purchase of accrued interest is limited
to 120 days on the defaulted guaranty unless the loan has been sold in the secondary market. Purchased interest is carried at
cost, and an allowance is established for amounts in excess of 90 days delinquent.

Foreclosed property is comprised of real 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 September 30, 2020 the SBA’s foreclosed property
was $39.4 million related to 84 loans. The properties had been held for an average of 1,340 days. At September 30, 2019
foreclosed property was $24.7 million related to 83 loans. The properties had been held for an average of 1,275 days.

Valuation Methodology for the Liability for Loan Guaranties under FCRA
FCRA also governs loan guaranties made after FY 1991. A liability for outstanding guaranties is included on SBA’s Balance
Sheet. The liability for guarantied loans committed after FY 1991 is based on the net present value of their expected future
cash flows, including guaranty fee inflows and the net cash outflows of defaulted guarantied loans purchased by the SBA.

Valuation Methodology for Pre-FCRA Liability for Loan Guaranties
The SBA values pre-credit reform direct and defaulted guarantied loans by estimating an allowance for loan losses. This
allowance is offset against gross loan receivables to obtain SBA’s expected net collections from these assets. The SBA establishes
a 100 percent allowance for pre-credit reform direct and guarantied loans that are past due more than 180 days.

80 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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

As of September 30, 2020 (Unaudited) Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 1,236 $ 217,150 $ 218,386
Interest Receivable - 809 809
Foreclosed Property 2,609 - 2,609
Allowance (1,072) (30,928) (32,000)
Total Direct Business Loans 2,773 187,031 189,804

Direct Disaster Loans
Disaster Loans Receivable 374 185,279,828 185,280,202
Interest Receivable 163 1,760,193 1,760,356
Foreclosed Property - 3,496 3,496
Allowance (150) (5,641,474) (5,641,624)
Total Direct Disaster Loans 387 181,402,043 181,402,430

Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 1,071 3,440,378 3,441,449
Other Loans Receivable (see note below) - 61,975 61,975
Interest Receivable - 23,347 23,347
Foreclosed Property 1,894 31,398 33,292
Allowance (842) (2,214,506) (2,215,348)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 2,123 1,342,592 1,344,715

Total Credit Program Receivables & Related Foreclosed Property, Net $ 182,936,949

Note: The increase in post-1991 Disaster Loans Receivable is to CARES Act funded loans.

(Dollars in Thousands)

As of September 30, 2019 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 6,736 $ 191,712 $ 198,448
Interest Receivable - 550 550
Foreclosed Property 2,608 - 2,608
Allowance (6,719) (19,501) (26,220)
Total Direct Business Loans 2,625 172,761 175,386

Direct Disaster Loans
Disaster Loans Receivable 523 9,568,423 9,568,946
Interest Receivable 154 42,071 42,225
Foreclosed Property - 3,715 3,715
Allowance (126) (1,265,374) (1,265,500)
Total Direct Disaster Loans 551 8,348,835 8,349,386

Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 3,823 3,269,080 3,272,903
Other Loans Receivable (see note below) - 76,758 76,758
Interest Receivable - 26,820 26,820
Foreclosed Property 1,894 16,489 18,383
Allowance (3,259) (2,422,697) (2,425,956)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 2,458 966,450 968,908

Total Credit Program Receivables & Related Foreclosed Property, Net $ 9,493,680

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

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 81
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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

DIRECT LOANS
New Loans Disbursed During the Year Ended September 30, 2020 (Unaudited) 2019
Business Direct Loan Program $ 53,167 $ 35,263
Disaster Loan Program 178,455,632 1,518,101
Total Direct Loans Disbursed $ 178,508,799 $ 1,553,364

Outstanding Loan Obligations as of September 30, 2020 2019
Business Direct Loan Program $ 41,703 $ 42,191
Disaster Loan Program 13,808,399 636,888
Total Direct Loan Obligations $ 13,850,102 $ 679,079

GUARANTIED LOANS
New Loans Disbursed During the Year Ended September 30, 2020 2019
Total Principal Disbursed at Face Value $ 542,948,707 $ 26,790,570
Total Principal Disbursed Guarantied by the SBA 537,999,418 21,188,429

Outstanding Loan Obligations as of September 30, 2020 2019
Business Guarantied Loan Programs $ 22,270,996 $ 15,845,258

Loans Outstanding as of September 30, 2020 2019
Total Principal Outstanding at Face Value $ 646,028,326 $ 129,717,116
Total Principal Outstanding Guarantied by the SBA 621,677,390 105,827,203

New Loans Disbursed and Outstanding Loan Obligations under Direct Loans for the Disaster Loan Program increased due to
CARES Act loans. The increases in Business Guarantied Loan Programs are due to the CARES Act PPP program.

82 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

D. Subsidy Cost Allowance Balances
(Dollars in Thousands)

For the Years Ended September 30, 2020 (Unaudited) 2019
Post-1991 Business Direct and Purchased Guarantied Loans
Beginning Balance of Allowance Account $ 2,442,198 $ 2,443,355
Current Year's Subsidy (see 6.G for breakdown by component) 4,788 3,136
Loan Modifications 27,100 -
Loans Written Off (573,108) (864,737)
Subsidy Amortization (2,513) (2,558)
Allowance Related to Guarantied Loans Purchased This Year 259,140 736,242
Miscellaneous Recoveries and Costs 73,801 128,364
Balance of Subsidy Allowance Account before Reestimates 2,231,406 2,443,802
Components of Subsidy Reestimates
Technical Assumptions/Default Reestimates 14,029 155
Interest Rate Reestimates (1) (1,759)
Total of the above Components of Subsidy Reestimates 14,028 (1,604)
Ending Balance of Allowance Account $ 2,245,434 $ 2,442,198

Post-1991 Disaster Direct Loans
Beginning Balance of Allowance Account $ 1,265,374 $ 1,325,326
Current Year's Subsidy (see 6.G for breakdown by component) 24,303,168 188,230
Loans Written Off (143,539) (197,254)
Subsidy Amortization (939,321) (14,700)
Miscellaneous Recoveries and Costs 60,722 57,004
Balance of Subsidy Allowance Account before Reestimates 24,546,404 1,358,606
Components of Subsidy Reestimates
Technical Assumptions/Default Reestimates (14,982,028) (66,004)
Interest Rate Reestimates (3,922,902) (27,228)
Total of the above Components of Subsidy Reestimates (18,904,930) (93,232)
Ending Balance of Allowance Account $ 5,641,474 $ 1,265,374

For Business Direct and Purchased Guarantied Loans, a Loan Modification was required for the CARES Act Debt Relief
program.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 83
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

E. Liability for Loan Guaranties
(Dollars in Thousands)

For the Years Ended September 30, 2020 (Unaudited) 2019
Pre-1992 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties $ - $ 1
Adjustment to Expected Losses, Guaranties Outstanding - (1)
Ending Balance of Liability for Loan Guaranties - -

Post-1991 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties 2,000,420 2,662,785
Current Year's Subsidy (see 6.G for breakdown by component) 525,917,920 668
Loan Modifications 6,561,276 -
Fees 1,329,264 1,325,782
Interest Accumulation Factor 7,870,800 68,076
Claim Payments to Lenders (1,216,741) (1,495,093)
Adjustment Due to Reestimate & Guarantied Loan Purchases 957,601 758,851
Miscellaneous Recoveries and Costs (24,991,609) (337,044)
Balance of Liability for Loan Guaranties before Reestimates 518,428,931 2,984,025
Components of Subsidy Reestimates
Technical Assumptions/Default Reestimates (7,836,726) (963,302)
Interest Rate Reestimates 2,120,293 (20,303)
Total of the above Components of Subsidy Reestimates (5,716,433) (983,605)
Ending Balance of Liability for Loan Guaranties 512,712,498 2,000,420

Total Ending Balance of Liability for Loan Guaranties $ 512,712,498 $ 2,000,420

For Business Loan Guaranties, a Loan Modification was required for the CARES Act Debt Relief and PPP programs.

The increase in the Interest Accumulation Factor is interest earned on uninvested funds for PPP.

The large flux showing on the “Miscellaneous Recoveries and Costs” line is comprised of $17.9 billion from PPP processing
and $6.6 billion debt relief expense.

F. 2020 Subsidy Rates by Program and Component

Total
Loan Program Subsidy Financing Default Other Fee
Guaranty
7(a) 0.33% 0.00% 4.75% 0.00% -4.42%
504 CDC 0.00% 0.00% 4.11% 0.42% -4.53%
504 Refi 0.00% 0.00% 4.13% 0.43% -4.56%
SBIC Debentures 0.00% 0.00% 4.57% 0.06% -4.63%
Paycheck Protection Program (PPP) 101.72% 0.00% 6.51% 90.96% 4.25%

Direct
Disaster 13.62% 7.58% 10.35% -4.31% 0.00%
Microloan 9.29% 7.27% 2.29% -0.27% 0.00%

84 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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 Note 6.G result from the disbursement of loans obligated in the current
year as well as in prior years and include reestimates.

G. Subsidy Expense by Component
(Dollars in Thousands)

For the Years Ended September 30, 2020 (Unaudited) 2019
Business Loan Guaranties
Defaults $ 34,275,918 $ 5,696
Fees 21,394,301 (5,556)
Other 470,247,701 528
Subsidy Expense Before Reestimates and Loan Modifications 525,917,920 668
Loan Modifications 6,561,276 -
Reestimates (5,716,433) (983,605)
Total Guarantied Business Loan Subsidy Expense $ 526,762,763 $ (982,937)

Business Direct Loans
Interest $ 3,732 $ 2,469
Defaults 1,219 803
Other (163) (136)
Subsidy Expense Before Reestimates 4,788 3,136
Loan Modifications 27,100 -
Reestimates 14,028 (1,604)
Total Business Direct Loan Subsidy Expense $ 45,916 $ 1,532

Disaster Direct Loans
Interest $ 13,514,459 $ 44,700
Defaults 18,477,601 194,774
Other (7,688,892) (51,244)
Subsidy Expense Before Reestimates 24,303,168 188,230
Reestimates (18,904,930) (93,232)
Total Disaster Direct Loan Subsidy Expense $ 5,398,238 $ 94,998

The increase in FY 2020 Business Loan Guaranties and Disaster Direct Loan dollars resulted from the CARES Act program
activity. “Business Loan Guaranties - Other” includes subsidy expense associated with PPP loan forgiveness. See note 17 for
further information.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 85
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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 shown in the following table. The increase in
FY 2020 disaster funding is a result of increased funding received under the CARES Act.

(Dollars in Thousands)

For the Years Ended September 30, 2020 (Unaudited) 2019
Disaster Direct Loan Programs $ 828,082 $ 333,058
Business Loan Programs 155,612 155,349
Total Administrative Expense $ 983,694 $ 488,407

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 FY 2020 performance data for SBA’s large loan programs and nine months of actual and three months of
projected performance data for the Secondary Market Guaranty, Microloan, and the small loan programs.

Business Guarantied Loan Programs
Net subsidy reestimates for the business guarantied loan programs are shown in the following table.

(Dollars in Thousands)

For the Years Ended September 30, 2020 (Unaudited) 2019
7(a) $ 996,234 $ (245,591)
7(a) - Recovery Act (6,471) 4,982
7(a) - Jobs Act (4,018) 2,011
504 CDC 581,462 (338,453)
504 CDC - Recovery Act (10,671) (14,670)
504 CDC - Jobs Act (853) (6,833)
504 CDC - Debt Refinancing (46,889) (20,425)
504 First Mortgage Loan Pooling - Recovery Act 255 (2,871)
SBIC Debentures 60,611 (202,875)
SBIC Participating Securities (52,335) (56,467)
Secondary Market Guaranty Program (34,679) (100,648)
Paycheck Protection Program (7,204,524) -
ARC - Recovery Act (367) (444)
All Other Guaranty Loan Programs 5,812 (1,321)
Total Guarantied Loan Program Subsidy Reestimates $ (5,716,433) $ (983,605)

The 7(a) Loan Guaranty program, SBA’s flagship program had a net upward reestimate of $996.2 million in FY 2020.
The reestimate is mostly due to higher projected losses in FY 2021 and beyond for cohorts 2015 through 2019 due to
updated economic assumptions. The reestimate is partially offset by a downward reestimate in the 2020 cohort due to lower
than projected disbursements for the cohort, resulting in lower cash outflows for Section 1112 debt relief payments than
originally estimated.

86 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

The 7(a) Recovery Act program had a net downward reestimate of $6.5 million. The reestimate is mostly due to lower than
estimated Section 1112 debt relief payments and is partially offset by higher projected losses in FY 2021 and beyond due to
updated economic assumptions.

The 7(a) Jobs Act cohort had a net downward reestimate of $4.0 million. The reestimate is mostly due to lower than
estimated Section 1112 debt relief payments and is partially offset by higher projected losses in FY 2021 and beyond due to
updated economic assumptions.

The 504 Certified Development Company program had a net upward reestimate of $581.5 million. The reestimate is
mostly due to higher projected losses in FY 2021 and beyond for the 2010 through 2019 cohorts due to updated economic
assumptions. The reestimate is partially offset by higher than projected recoveries in FY 2020 and increases to projected
recoveries in FY 2021 and beyond contributing to a combined downward reestimate for the 1992 through 2009 cohorts.
The upward reestimate is also partially offset for the 2020 cohort due to lower than projected disbursements for the cohort,
resulting in lower cash outflows for Section 1112 debt relief payments than originally estimated.

The 504 Recovery Act program had a net downward reestimate of $10.7 million. The reestimate is primarily due to higher
than projected recoveries in FY 2020 and increases to projected recoveries in FY 2021 and beyond. The reestimate is partially
offset by higher projected purchases in FY 2021 and beyond due to updated economic assumptions.

The 504 Jobs Act program had a net downward reestimate of $0.9 million. The reestimate is primarily due to higher than
projected recoveries in FY 2020 and increases to projected recoveries in FY 2021 and beyond. The reestimate is partially offset
by higher projected purchases in FY 2021 and beyond due to updated economic assumptions.

The 504 Debt Refinancing program had a net downward reestimate of $46.9 million. The reestimate is primarily due
to lower than projected disbursements for the 2020 cohort, resulting in lower cash outflows for Section 1112 debt relief
payments than originally estimated. This is partially offset by higher projected losses in FY 2021 and beyond due to updated
economic assumptions.

The Section 504 First Mortgage Loan Pooling program had a net upward reestimate of $0.3 million. The upward reestimate
is primarily due to higher than projected advances in FY 2020 which offset higher than projected recoveries in FY 2020.

The SBIC Debentures program had a net upward reestimate of $60.6 million. The upward reestimate is primarily driven by
lower than projected recoveries in FY 2020 and higher than projected losses in FY 2021 and beyond due to updated loan
performance and economic assumptions.

The SBIC Participating Securities program had a net downward reestimate of $52.3 million. The reestimate is primarily due
to higher than projected recoveries in FY 2020.

The Secondary Market Guaranty program had a net downward reestimate of $34.7 million. The downward reestimate
is primarily driven by updated economic assumptions. The updated assumptions resulted in a narrower spread between
projected pool coupon rates and rates of return on MRF investments, resulting in a larger reduction in MRF liabilities
relative to MRF earnings. The net reestimate was negative for most of the pre-2018 cohorts, which have higher levels of prior
accumulated amortization excess, and therefore these cohorts benefitted the most from the narrower projected spread.

The Paycheck Protection Program, authorized in the CARES Act, had a net downward reestimate of $7.2 billion in FY 2020.
The majority of the reestimate amount is attributed to updates to the discount rate for the 2020 PPP cohort. The updated
discount rate is 225 basis points lower than the budget formulation discount rate which leads to a large downward adjustment
in financing account interest earnings in FY 2020. A portion of the reestimate is also attributed to lower than anticipated
origination fee outflows to participating lenders as well as several smaller factors that differed from the original cost estimate
for the program. There were no loan forgiveness payment outflows processed in FY 2020.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 87
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

The America’s Recovery Capital program had a net downward reestimate of $0.4 million. The reestimate is primarily due to
higher than projected recoveries and lower than expected interest and default payments in FY 2020.

All Other Guaranty Loan programs includes the SBIC New Market Venture Capital program that had a net upward
reestimate of $5.8 million. The upward reestimate was driven by lower than projected recoveries in FY 2020.

Business Direct Loan Programs
Net subsidy reestimates for the business direct loan programs are shown in the following table.

(Dollars in Thousands)

For the Years Ended September 30, 2020 (Unaudited) 2019
7(m) Microloan $ 13,937 $ (1,113)
7(m) Microloan - Recovery Act 47 (539)
Intermediary Lending Pilot Program 49 125
All Other Direct Loan Programs (5) (77)
Total Direct Loan Program Subsidy Reestimates $ 14,028 $ (1,604)

The 7(m) Direct Microloan program had a net upward reestimate of $13.9 million. The upward reestimate is due to lower
than projected loan repayments in FY 2020. In addition, disbursements in the Microloan program in FY 2020 were higher
than anticipated resulting in higher cash outflows for Section 1112 debt relief payments than originally estimated.

The 7(m) Direct Microloan Recovery Act program had a net upward reestimate of $0.05 million. The reestimate is primarily
due to lower than projected loan repayments in FY 2020.

The Intermediary Lending Pilot program had a net upward reestimate of $0.05 million. The reestimate is primarily due to
lower than projected net cash inflows in FY 2020.

Disaster Direct Loan Program
Net subsidy reestimates for the disaster direct loan programs are shown in the following table.

(Dollars in Thousands)

For the Years Ended September 30, 2020 (Unaudited) 2019
Disaster $ (18,904,930) $ (93,232)
Total Disaster Direct Loan Program Subsidy Reestimates $ (18,904,930) $ (93,232)

The Disaster Assistance program had a net downward reestimate of $18.9 billion. The downward reestimate is a result of
updates to the discount rate which results in reduced borrowing costs for FY 2020 lending. The FY 2020 cohort discount
rate declined from a formulated rate of 3.54 percent to 1.21 percent for Disaster Regular loans and 1.22 percent for COVID-
funded loans. Due to the high volume of EIDL COVID loans at a fixed 3.75 percent interest rate, the financing surplus
offsets higher than formulated defaults for these cohorts. The downward reestimate for the 2020 cohort for COVID-funded
loans is $18.2 billion and the downward reestimate for the 2020 cohort for regular funded loans is $693.9 million.

88 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Note 7 General Property and Equipment, Net
The SBA capitalizes equipment with a cost of $100,000 or more per unit, and a useful life of two years or more, at full
cost and depreciates using the straight-line method over the useful life. The SBA expenses equipment not meeting the
capitalization criteria.

Leasehold improvements with modifications of $200,000 or more and a useful life of two years or more are capitalized and
amortized using the straight-line method over the useful life of the improvement or the lease term, whichever is shorter.
Leasehold improvements not meeting the capitalization criteria are expensed.

Software intended for internal use, whether internally developed, contractor developed, or purchased is capitalized at cost
if the unit acquisition cost is $500,000 or more and service life is at least two years. Capitalized software costs include all
direct and indirect costs incurred, including overhead to develop the software. Software for internal use is amortized using
the straight-line method over its useful life, not to exceed five years. Amortization begins when the software is put into
production. The costs of enhancements are capitalized when it is more likely than not that the enhancements will result in
significant additional capabilities. Costs that do not meet the capitalization criteria are expensed when incurred.

Assets meeting the capitalization thresholds are detailed in the following table.

(Dollars in Thousands)

As of September 30, 2020 (Unaudited) 2019
Leasehold Improvements $ 1,811 $ 1,811
Amortization of Leasehold Improvements (1,759) (1,608)
Net 52 203

Software in Development 27,451 -
Net 27,451 -

Total General Property and Equipment, Net $ 27,503 $ 203

The increase in Software in Development for FY 2020 is for the development of BETA.Certify.Gov.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 89
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Note 8 Liabilities Not Covered by Budgetary Resources
These liabilities consisted of the following categories, as shown in the table.

(Dollars in Thousands)

As of September 30, 2020 (Unaudited) 2019
Intragovernmental Liabilities - Other
Employment Taxes Payable $ 905 $ 5,232
Federal Employees' Compensation Act Payable 5,548 5,724
Total Intragovernmental Liabilities - Other 6,453 10,956

Federal Employees' Compensation Act Actuarial Liability 30,576 28,794

Surety Bond Guarantee Program Future Claims 60,060 57,255

Other Liabilities
Accrued Unfunded Annual Leave 39,064 29,081
Total Other Liabilities 39,064 29,081
Total Liabilities Not Covered by Budgetary Resources 136,153 126,086
Total Liabilities Covered by Budgetary Resources 717,920,066 14,957,535
Total Liabilities Not Requiring Budgetary Resources (201) 1,423
Total Liabilities $ 718,056,018 $ 15,085,044

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

The increase in Total Liabilities Covered by Budgetary Resources results from CARES Act Program activity and is attributable
mostly to the amounts shown on the Balance Sheet lines: Debt, Downward Reestimate Payable to Treasury, and Liability for
Loan Guaranties.

90 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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.

All debt is intragovernmental and covered by budgetary resources. Debt transactions and resulting balances are shown in the
following table.

Intragovernmental Debt
(Dollars in Thousands)

As of September 30, 2020 (Unaudited) 2019
Beginning Balance $ 11,810,241 $ 11,212,607
New Borrowing 207,461,405 2,231,792
Repayments (43,097,986) (1,634,158)
Ending Balance $ 176,173,660 $ 11,810,241

The FY 2020 increases in New Borrowings and Repayments are due to the borrowing activity related to disaster loan making
under the CARES Act.

Note 10 Net Assets of Liquidating Funds Due to Treasury
Unobligated balances of liquidating funds are transferred to the Treasury general fund at the end of the fiscal year. Net Assets
of Liquidating Funds Due to Treasury is the residual of the book value of assets less liabilities in the Liquidating Funds for
loans made prior to FY 1992 that is not yet available for transfer.

(Dollars in Thousands)

As of September 30, 2020 (Unaudited) 2019
Disaster Loan Fund $ 387 $ 552
Business Loan and Investment Fund 15,535 8,180
Total Due to Treasury $ 15,922 $ 8,732

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 91
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Note 11 Other Liabilities
Other liabilities are shown in the following table.

(Dollars in Thousands)

As of September 30, 2020 (Unaudited) 2019
OTHER LIABILITIES - INTRAGOVERNMENTAL
Entity
Current
Employment Taxes Payable $ 7,739 $ 3,792
Advances from Other Agencies 2,172 1,727
Total Current 9,911 5,519
Non-current
Employment Taxes Payable 905 5,232
Federal Employees’ Compensation Act Payable 5,548 5,724
Total Non-current 6,453 10,956
Total Entity 16,364 16,475
Non-entity
Current
Payable to Treasury 6 6
Total Other Liabilities - Intragovernmental $ 16,370 $ 16,481

OTHER LIABILITIES - PUBLIC
Entity
Current
Accrued Funded Payroll and Benefits $ 47,747 $ 18,657
Accrued Unfunded Annual Leave 39,064 29,081
Other Liabilities - 40
Suspense Accounts (201) 1,423
Total Current 86,610 49,201
Total Entity 86,610 49,201
Total Other Liabilities - Public $ 86,610 $ 49,201

Accrued Funded Payroll and Benefits increased due to additional staffing to manage CARES Act programs.

92 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Note 12 Leases
The SBA leases all of its facilities from the General Services Administration. The SBA enters into an Occupancy Agreement
with the GSA for each facility. The GSA, in turn, leases commercial facilities or provides space in federal buildings. Agreements
for space in federal buildings can be vacated with 120 to 180 days’ notice. However, the SBA anticipates continuing the same
or similar facilities leases in the future. These federal leases with the GSA are operating leases and are expensed in the Statement
of Net Cost when incurred. FY 2020 and FY 2019 historical facilities lease costs were $48.0 million and $48.0 million. Future
lease payments are based on FY 2021 GSA base year estimates. Projections after the base year assume a 3 percent inflation
factor. Payments after five years reflect only current leases that will still be in effect, projected to the end of each lease term. Lease
Projections after 2025 increased due to the increase in the total number of Occupancy Agreements still in effect until 2036.

Future Facilities Operating Lease Payments
(Dollars in Thousands)

Fiscal Year Lease Projections
2021 $ 49,471
2022 50,955
2023 52,484
2024 54,058
2025 55,680
After 2025 65,613
Total $ 328,261

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 93
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Note 13 Non-entity Reporting
Non-entity Assets are assets held by the SBA but not available to the SBA. The primary non-entity asset is for SBA’s
downward subsidy reestimates in its loan programs. Because the loan programs are discretionary, the downward reestimates
are not available to the SBA and they are returned to the Treasury in the fiscal year following the accrual of the reestimates.
During the year, these general fund accounts contain SBA’s prior year reestimates. At year-end, the funds are swept by the
Treasury. Also, at year-end the SBA accrues the current year’s reestimates, including downward reestimates as applicable. For
the downward reestimates in the loan financing funds, the SBA records an accrual adjustment that records a transfer out to
the non-entity fund, a reduction of subsidy allowance or loan 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, 2020 (Unaudited) 2019
Entity
Financing Fund Payable $ (28,541,393) $ (1,028,472)

Non-entity
Miscellaneous Receipts Fund Receivable 28,541,393 1,028,472
Downward Reestimate Payable to Treasury (28,541,393) (1,028,472)

Balance Sheet Reported Payable $ (28,541,393) $ (1,028,472)

See note 6.I for information on the Downward Reestimate Payable.

94 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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 comprise 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 arrive
at net strategic goals costs. The SBA recognizes earned revenue when reimbursements are payable from other federal agencies
and the public as a result of costs incurred or services performed. A major source of earned revenue includes interest earned
on SBA’s outstanding business and disaster loan portfolios, and interest earned on uninvested funds in the credit reform
financing accounts.

Reporting by Strategic Goal
The SBA reports net costs consistent with its four strategic goals on a full cost allocation basis. Strategic Goal 1 (Support
Small Business Revenue and Job Growth) includes expanding access to capital for small businesses through SBA’s loan and
other assistance programs, research set-asides for innovative entrepreneurship, and the small business contracting set-aside
program. Strategic Goal 2 (Build Healthy Entrepreneurial Ecosystems and Create Business Friendly Environments) works
to develop small businesses through technical assistance provided through SBA’s resource partner network, online learning,
and other specialized assistance programs like 8(a) Business Development, 7(j) Management and Technical Assistance, and
All Small Mentor-Protégé. It also includes SBA’s efforts to create a small business friendly environment. Strategic Goal 3
(Restore Small Businesses and Communities after Disasters) includes disaster preparedness and direct disaster loans. Strategic
Goal 4 (Strengthen SBA’s Ability to Serve Small Businesses) ensures effective and efficient management of Agency resources.
Agency administrative overhead costs are fully allocated to the programs in Strategic Goals 1, 2, 3, and 4. The Management’s
Discussion and Analysis section of SBA’s annual Agency Financial Report includes additional detail on SBA’s strategic goals.
Costs Not Assigned to Strategic Goals are costs associated with the Office of the Inspector General. The OIG’s mission and
funding are a separate and independent part of the SBA and is therefore not assigned.

Intragovernmental Gross Cost is incurred by the SBA in exchange transactions with other federal agencies. 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. Earned Revenue from the Public is earned in exchange transactions with the
public. The General Services Administration and the Treasury are SBA’s primary intragovernmental trading partners.

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

SBA’s Gross Cost with the Public in Strategic Goals 1 and 3 is largely determined by estimates and reestimates of its credit
program costs (See Note 6.I).

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 95
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Gross Cost and Exchange Revenue
(Dollars in Thousands)

For the Years Ended September 30, 2020 (Unaudited) 2019
STRATEGIC GOAL 1:
Support Small Business Revenue and Job Growth
Intragovernmental Gross Cost $ 76,153 $ 122,576
Gross Cost with the Public 534,796,476 (682,440)
Total Strategic Goal 1 Gross Cost 534,872,629 (559,864)

Intragovernmental Earned Revenue 7,916,787 92,156
Earned Revenue from the Public 148,706 119,425
Total Strategic Goal 1 Earned Revenue 8,065,493 211,581

STRATEGIC GOAL 2:
Build Healthy Entrepreneurial Ecosystems and Create Business Friendly Environments
Intragovernmental Gross Cost $ 3,582 $ 73,069
Gross Cost with the Public 23,941 237,421
Total Strategic Goal 2 Gross Cost 27,523 310,490

STRATEGIC GOAL 3:
Restore Small Businesses and Communities after Disasters
Intragovernmental Gross Cost $ 7,875,157 $ 410,525
Gross Cost with the Public 27,118,539 347,158
Total Strategic Goal 3 Gross Cost 34,993,696 757,683

Intragovernmental Earned Revenue 4,709,665 81,592
Earned Revenue from the Public 2,901,640 251,325
Total Strategic Goal 3 Earned Revenue 7,611,305 332,917

STRATEGIC GOAL 4:
Strengthen SBA’s Ability to Serve Small Businesses
Intragovernmental Gross Cost $ 1,559 $ 34,639
Gross Cost with the Public 10,417 112,551
Total Strategic Goal 4 Gross Cost 11,976 147,190

COST NOT ASSIGNED TO STRATEGIC GOALS
Intragovernmental Gross Cost $ 328 $ 6,007
Gross Cost with the Public 2,193 19,518
Total Gross Cost Not Assigned to Strategic Goals 2,521 25,525

Net Cost of Operations $ 554,231,547 $ 136,526

The increase in Gross Cost with the Public in Strategic Goals 1 and 3 result from the CARES Act program activity.

The increase in Intragovernmental Earned Revenue in Strategic Goal 1 and 3 result from increased interest earned on
uninvested funds from Treasury resulting from the CARES Act program activity.

The increase in Intragovernmental Gross Cost in Strategic Goal 3 resulted from increased interest expense on debt with
Treasury resulting from the CARES Act program activity.

96 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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, 2020 and 2019. SBA’s budgetary resources were $764.6 billion and $3.1 billion
for the fiscal years ended September 30, 2020 and 2019. Additionally, $754.1 billion and $9.2 billion of nonbudgetary
resources (including borrowing authority and collections of loan principal, interest, and fees in financing funds) were reported
for the fiscal years ended September 30, 2020 and 2019.

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 FCRA. The appropriations are received initially in the
SBA Program Funds, and then transferred to the Financing Funds, where they are used to fund obligations. SBA’s Liquidating
Funds also receive permanent indefinite appropriations to fund obligations. The Financing Funds are used to account
for credit program obligations made subsequent to FY 1991. Liquidating Funds are used to account for credit program
obligations made prior to FY 1992.

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

Borrowing Authority and Terms of Borrowing
The SBA is authorized to borrow from the Treasury’s Bureau of the Fiscal Service when funds needed to disburse direct loans
and purchase guarantied loans exceed subsidy costs and collections in the nonbudgetary loan financing funds. In FY 2020 and
FY 2019, the SBA received $167.3 billion and $2.2 billion of borrowing authority from the OMB. At the end of FY 2020,
the SBA had $0.9 billion borrowing authority carried over to fund direct loans and default claims to be disbursed in the
future. The SBA pays interest to the Treasury based on Treasury’s cost of funds. The rate at which interest is paid to the
Treasury on the amounts borrowed (or received from the Treasury on uninvested cash balances) in a loan financing fund for a
particular cohort is a disbursement-weighted average discount rate for cohorts prior to FY 2001 and a single effective rate for
cohorts beginning with FY 2001. The SBA calculates and repays borrowings not needed for working capital at mid-year and
at year-end 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 borrowings 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 2020 and FY 2019, the SBA incurred $819.0 billion and $6.4 billion of direct and reimbursable obligations,
of which $819.0 billion and $6.4 billion were apportioned in category B (amounts apportioned in category A are
immaterial when rounded to billions). Category A apportionments are restricted by quarter and program, while category B
apportionments are restricted by purpose and program.

Unobligated Balances
Unobligated balances at September 30, 2020 and 2019 are $699.7 billion and $5.9 billion, which include $9.7 billion and
$4.1 billion of unavailable unobligated balances. These balances are unavailable primarily because they are unapportioned
by the OMB. The SBA accumulates the majority of the unobligated balances in its nonbudgetary financing accounts during
the fiscal year ($525.3 billion in FY 2020 and $4.4 billion in FY 2019) from fees and subsidy to fund forgivenes and default
claims in future years. In addition, unobligated balances are accumulated in budgetary accounts from appropriations ($174.3
billion in FY 2020 and $1.5 billion in FY 2019) that are used to finance SBA’s ongoing program operations. The SBA
requests OMB apportionments as needed, and after OMB approval, apportioned amounts are available for obligation.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 97
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Undelivered Orders
Undelivered orders consist of goods or services ordered and obligated which the SBA has not received. This includes any
orders that have been paid in advance, but for which delivery or performance has not yet occurred. Total undelivered orders
for the periods ended September 30, 2020 and 2019 were $23.7 billion and $1.3 billion. Unpaid undelivered orders for the
periods ended September 30, 2020 and 2019 were $23.5 billion and $1.1 billion. Paid undelivered orders for the periods
ended September 30, 2020 and 2019 were $0.2 billion and $0.2 billion. For FY 2020 total undelivered orders consisted of
$21.8 billion non-federal and $1.9 billion federal. For FY 2019 total undelivered orders consisted of $1.0 billion non-federal
and $0.3 billion federal..

Differences between the Statement of Budgetary Resources and the
Budget of the U.S. Government
There was no material difference between the FY 2019 Statement of Budgetary Resources and the President’s FY 2021 budget
submission. The President’s FY 2022 Budget with actual numbers for FY 2020 has not yet been published. The SBA expects
no material differences between the President’s Budget “actual” column and the FY 2020 reported results when the budget
becomes available in February 2021.

98 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Note 16 Reconciliation of Net Operating Cost and Net
Budgetary Outlays
Statement of Federal Financial Accounting Standards 53 amends requirements for a reconciliation between budgetary and
financial accounting information established by SFFAS 7. SFFAS 53 provides for the budget and accrual reconciliation to
replace the statement of financing. The BAR explains the relationship between the entity’s net outlays on a budgetary basis
and the net cost of operations during the reporting period.

Budgetary accounting is used for planning and control purposes and relates to both the receipt and use of cash. Financial
accounting is intended to provide a picture of the government’s financial operations and financial position and presents
information on an accrual basis. The accrual basis includes information about costs arising from the consumption of assets
and the incurrence of liabilities. The reconciliation of net outlays presented on a budgetary basis, and the net cost, presented
on an accrual basis, provides an explanation of the relations between budgetary and financial accounting information. The
reconciliation serves not only to identify costs paid for in the past and those that will be paid in the future, but also to assure
integrity between budgetary and financial accounting. The analysis illustrates this reconciliation by listing the key differences
between net cost and net outlays.

FY 2020 A-136 guidance changes the presentation of the reconciliation of net cost to net outlays from FY 2019. The
FY 2019 presentation has been updated to reflect the change in guidance. Net cost should be reconciled to net outlays, which
should exclude financing account activity. As shown on the SBR, net outlays represent net budgetary outlays and do not
include net disbursements of credit financing accounts.

Reestimate expense is recorded at the end of the fiscal year and funded in the following fiscal year. SBA’s annual reestimate
process updates program costs based upon actual cash flow experience and forecasts of future cash flow. As a part of the
reestimate process there is an adjustment for the President’s Budget where expenses for downward adjustments are recorded
in the budgetary program funds and the outlays are from financing funds creating a difference between budgetary outlays and
net cost. Additional discussion of reestimates is in Note 6.I and referenced throughout Note 6.

Changes in assets recognize the timing differences between the recognition of income and the receipt of funds. These are
primarily non-federal advances.

Changes in liabilities recognize the timing difference between the recording and payment of expenses. These are related to
disbursements in transit for the new EIDL grants.

Other financing sources include SBA’s imputed cost for retirement benefits. This is an expense for the Agency that is funded
by the OPM.

Components of budget outlays that are not part of net operating cost include disbursements and receipts that are not a
revenue or expense. Included in this category is the effect of the reversal of the unfunded expense recorded in FY 2019 for the
end of year upward reestimate.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 99
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Budget and Accrual Reconciliation
(Dollars in Thousands)

For the Year Ended September 30, 2020 (Unaudited) Federal Non-federal Total 2020

Net Operating Cost (SNC) $ (4,669,673) $ 558,901,220 $ 554,231,547

Components of Net Operating Cost Not Part of the Budgetary Outlays

General Property, plant and equipment depreciation expense - 27,300 27,300

Year-end credit reform subsidy re-estimates 24,337,896 - 24,337,896
President’s Budget adjustment to downward re-estimates 230,406 - 230,406
Paycheck Protection Program downward modification 1,266,424 - 1,266,424
President’s Budget adjustment to upward re-estimates 39,034 - 39,034
Modification Adjustment Transfer (MAT), net (30,515) (30,515)

Increase/(decrease) in assets not affecting Budget Outlays:
Accounts and Taxes Receivable, net 186 186
Advances (16,175) 41,695 25,520
Loans Receivable, net - (356) (356)
Other assets - 7,542 7,542

(Increase)/decrease in liabilities not affecting Budget Outlays:
Accounts Payable (10,090) (245,946) (256,036)
Accrued Grant Liability - 46 46
FECA Actuarial Liability - (1,782) (1,782)
Surety Bond Guarantee Program Future Claims - (2,805) (2,805)
Other Liabilities 111 (39,075) (38,964)

Other Financing Sources:
Imputed Cost (19,508) - (19,508)

Total Components of Net Operating Cost Not Part of the Budget Outlays $ 25,828,098 $ (243,710) $ 25,584,388

Components of the Budget Outlays That Are Not Part of Net Operating Cost
Other Financing Sources:
Donation of Cash and Cash Equivalents (12) (12)

Effect of prior year credit reform subsidy re-estimates 120,391 - 120,391

Total Components of the Budget Outlays That Are Not Part of Net Operating Cost $ 120,391 $ (12) $ 120,379

Other Reconciling Items
Distributed Offsetting Receipts (2,523,844) (2,523,844)

Total Other Reconciling Items $ - $ (2,523,844) $ (2,523,844)

Total Net Outlays $ 577,412,470

Budgetary Agency Outlays, net (SBR)
Budgetary Agency Outlays, net $ 577,412,470

100 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Budget and Accrual Reconciliation (continued)
(Dollars in Thousands)

For the Year Ended September 30, 2019 Federal Non-federal Total 2019

Net Operating Cost (SNC) $ 473,068 $ (336,542) $ 136,526

Components of Net Operating Cost Not Part of the Budgetary Outlays

General Property, plant and equipment depreciation expense - (151) (151)

Year-end credit reform subsidy re-estimates 869,047 - 869,047
President’s Budget adjustment to downward re-estimates 147,554 - 147,554
President’s Budget adjustment to upward re-estimates 61,839 - 61,839

Increase/(decrease) in assets not affecting Budget Outlays:
Accounts and Taxes Receivable, net - 1,113 1,113
Advances (3,855) (1,660) (5,515)
Loans Receivable, net - 3,359 3,359
Other assets - 900 900

(Increase)/decrease in liabilities not affecting Budget Outlays:
Accounts Payable 1,186 541 1,727
Accrued Grant Liability - 2,185 2,185
Liability for Loan Guaranties - 1 1
FECA Actuarial Liability - 6,060 6,060
Surety Bond Guarantee Program Future Claims - (7,645) (7,645)
Other Liabilities (888) (5,152) (6,040)

Other Financing Sources:
Imputed Cost (21,503) - (21,503)

Total Components of Net Operating Cost Not Part of the Budget Outlays $ 1,053,380 $ (449) $ 1,052,931

Components of the Budget Outlays That Are Not Part of Net Operating Cost
Other Financing Sources:
Donation of Cash and Cash Equivalents - (112) (112)

Effect of prior year credit reform subsidy re-estimates 213,548 - 213,548

Total Components of the Budget Outlays That Are Not Part of Net Operating Cost $ 213,548 $ (112) $ 213,436

Other Reconciling Items
Distributed Offsetting Receipts - (946,587) (946,587)

Total Other Reconciling Items $ - $ (946,587) $ (946,587)

Total Net Outlays $ 456,306

Budgetary Agency Outlays, net (SBR)
Budgetary Agency Outlays, net $ 456,306

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 101
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Note 17 COVID-19 Activity
In March 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act P.L. 116-136)) was enacted to provide
emergency and immediate national economic relief and assistance across the American economy, including to small businesses,
workers, families, and the healthcare system, to alleviate the severe economic hardships and public health threat created by the
2019 Novel Coronavirus pandemic. The CARES Act was subsequently modified in legislation in April, June, and July 2020 to
add funding and adjust programs for continued pandemic response. Agency disaster declarations were announced for all states
and six territories of the United States, enabling existing disaster response programs to respond to the pandemic.

Following are the individual programs enacted at the SBA.

Subsidy for Paycheck Protection Program
The Paycheck Protection Program (PPP) was established by the CARES Act and subsequently modified to add funding,
change program features, and extend the period for loan commitments to August 8, 2020. The PPP is a loan guaranty
program designed to provide a direct incentive for small businesses to retain employees by providing loan forgiveness for
amounts used for eligible expenses for payroll and benefit costs, interest on mortgages, rent, and utilities incurred between
February 15, 2020 and December 31, 2020. The program is implemented by the Small Business Administration in
coordination with the Department of the Treasury.

PPP lending authority at the FY 2020 subsidy rate is $659.0 billion. The CARES Act originally combined PPP lending
authority with the 7(a) program authority. Subsequent legislation separated the lending authority of the two programs.

PL 116-136 section 1107 appropriated $349.0 billion for subsidy (loan level – $343.1 billion).

PL 116-139 amended PL 116-136 section 1107(a)(1) to $670.3 billion in appropriations for subsidy and section 1102(b)(1)
to $659.0 billion in loan authority.

Funds impacted are 073X4149 (Business Loan Investment Fund – Gty Credit Reform), and since the funds are set to expire
on September 30, 2021 a new fund symbol, 073 20/211154 (Business Loan Investment Fund – Program (CARES)) was
created for this purpose.

This program impacts the following lines on the financial statements.

Balance Sheet:
Fund Balance with Treasury
Downward Reestimate Payable to Treasury
Accounts Payable (public)
Liability for Loan Guaranties
Unexpended Appropriations
Net Cost:
Strategic Goal 1 Gross Cost
Strategic Goal 1 Earned Revenue
Net Position:
Appropriations Received
Appropriations Used
Other – Non-entity Activity

102 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Statement of Budgetary Resources:
Appropriations
Spending Authority from Offsetting Collections
New Obligations & Upward Adjustments
Apportioned, Unexpired
Unapportioned, unexpired
Net Outlays
Distributed Offsetting Receipts
Footnotes 2, 6, 8, 13, 14, 15 and 16 are impacted.

CARES Act Debt Relief
As part of the coronavirus debt relief efforts, the SBA pays six months of principal, interest, and any associated fees that
borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans
disbursed prior to September 27, 2020. This relief is not available for PPP loans or EIDL. Borrowers need not apply for this
assistance as it will be automatically provided.

P.L. 116-136, Sec 1107, Sec 1112 appropriated $17.0 billion in funds that are to remain available until September 30, 2021.
A new fund symbol was created for this purpose, 073 20/211154.

Of the $17.0 billion appropriation, $7.8 billion was obligated for a cost modification to make loan payments on behalf of
borrowers. Under FCRA, recalculation of subsidy resulted in an upward Modification Adjustment Transfer (MAT) across the
cohorts of the three loan programs of $88.3 million of appropriations transferred to the Financing funds and a downward
MAT resulting in the amount of $57.9 million transferred from the Financing Fund to the general fund.

The following fund symbols are impacted by the Cares Act Debt Relief.

Fund Symbol Fund Name Programs
073X4148 Business Loan Investment Fund - Direct Credit Reform Microloans
073X4149 Business Loan Investment Fund - Gty Credit Reform 504, 7(a), SMG
073X4279 Business Loan Investment Fund - Direct Recovery Act Microloans
073X4280 Business Loan Investment Fund - Gty Recovery Act 504, 7(a), SMG
0732814 Other Payments of Investments and Recoveries
073 20/211154 Business Loan Investment Fund - Program (CARES)

This program impacts the following lines on the financial statements.

Balance Sheet:
Fund Balance with Treasury
Credit Program Receivables and Related Foreclosed Property, Net
Debt
Downward Reestimate Payable to Treasury
Liability for Loan Guaranties
Unexpended Appropriations

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 103
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Net Cost:
Strategic Goal 1 Gross Cost
Strategic Goal 1 Earned Revenue
Net Position:
Appropriations Received
Appropriations Used
Transfers-Out Without Reimbursement
Transfers-In Without Reimbursement
Other – Non-Entity Activity
Other Adjustments
Statement of Budgetary Resources:
Appropriations
Borrowing Authority
Spending Authority from Offsetting Collections
New Obligations & Upward Adjustments
Apportioned, Unexpired
Net Outlays
Distributed Offsetting Receipts
Footnotes 2, 6, 8, 9, 13, 14, 15 and 16 are impacted.

Economic Injury Disaster Loan Emergency Advance (EIDL) Grants
In response to the Coronavirus (COVID-19) pandemic, small business owners in all U.S. states, Washington, DC, and
territories were eligible to apply for an Economic Injury Disaster Loan of which up to $10,000 could be advanced as a grant
to provide economic relief to businesses experiencing a temporary loss of revenue. This loan advance will not have to be
repaid. Recipients do not have to be approved for a loan to receive the advance, but the amount of the loan advance will be
deducted from total loan eligibility in the calculation of Economic Injury. The SBA began processing EIDL grants in early
April 2020 from Economic Injury Disaster Loan and EIDL Advance applications to qualified small businesses and U.S.
agricultural businesses.

P.L. 116-136, Sec 1107, Sec 1110 and P.L 116-139, Division B Title II appropriated $10.0 billion each for a program total of
$20.0 billion, in administrative funds 073 20/210500 and 073X0500.

This program impacts the following lines on the financial statements.

Balance Sheet:
Fund Balance with Treasury
Accounts Payable (public)
Unexpended Appropriations
Net Cost:
Strategic Goal 3 Gross Cost

104 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Net Position:
Appropriations Received
Appropriations Used
Ending Unexpended Appropriations
Statement of Budgetary Resources:
Appropriations
New Obligations & Upward Adjustments
Apportioned, Unexpired
Net Outlays
Footnotes 2, 8, 14, 15 and 16 are impacted.

Subsidy for Coronavirus Disaster Assistance Loans
Based on Agency disaster declarations, SBA offered disaster designated states and territories low-interest federal disaster loans
for working capital to small businesses suffering substantial economic injury as a result of COVID-19 under P.L 116-139,
Division B Title II.

This act provided an additional $50.0 billion in loan subsidy to remain available until expended for the “Disaster Loans
Program Account” for the cost of direct loans authorized by section 7(b) of the Small Business Act. For FY 2020, this subsidy
provided loan authority of $367.1 billion.

Funds impacted are 073X1152 (Disaster Program Fund) and 073X4150 (Disaster Loan Fund - Direct Credit Reform).

This program impacts the following lines on the financial statements.

Balance Sheet:
Fund Balance with Treasury
Credit Program Receivables and Related Foreclosed Property, Net
Debt
Downward Reestimate Payable to Treasury
Accounts Payable (Public)
Unexpended Appropriations
Net Cost:
Strategic Goal 3 Gross Cost
Strategic Goal 3 Earned Revenue
Net Position:
Appropriations Received
Appropriations Used
Other – Non-Entity Activity

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 105
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Statement of Budgetary Resources:
Appropriations
Borrowing Authority
Spending Authority from Offsetting Collections
New Obligations & Upward Adjustments
Apportioned, Unexpired
Net Outlays
Footnotes 2, 6, 8, 9, 13, 14, 15 and 16 are impacted.

Salaries and Expenses Administrative Funding
Public Law P.L. 116-136, Sec 1107 and P.L. 116-139, Division B Title II provided $2.8 billion in support for administrative
expenses of SBA headquarters and field offices for CARES Act program implementation, as well as to prevent, prepare for,
and respond to COVID-19.

Disaster Administrative Funding
Public Law P.L. 116-123, Title II and P.L. 116-136, Title V provided $582.0 million in support for the administrative
expenses to carry out the Economic Injury Disaster Loan program in response to COVID-19.

Entrepreneurial Assistance - Small Business Development Centers
This is a grant program to provide management counseling, training, and technical assistance to the small business
community through a network of Small Business Development Centers under P.L. 116-136, Sec 1103, Sec 1107.

Entrepreneurial Assistance - Women’s Business Ownership Assistance
This is a grant program to fund private, nonprofit organizations to assist, through training and counseling, small business
concerns owned and controlled by women, and to remove, in so far as possible, the discriminatory barriers that are
encountered by women in accessing capital and promoting their businesses under P.L. 116-136, Sec 1103, Sec 1107.

Entrepreneurial Assistance - Centralized HUB FOR COVID-19
This is a grant program to establish an online platform that provides small businesses with access to a consolidation of
COVID-19 related information and resources from multiple federal agencies that incorporates an online training program to
educate SBA’s resource partners under P.L. 116-136, Sec 1103, Sec 1107.

Office of the Inspector General
Public Law P.L. 116-136, Sec 1107 is to perform the necessary audit oversight of CARES Act related loans and activities.

Amounts related to CARES Act programs are shown in the following table.

106 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

(Dollars in Thousands)

Budgetary Resources
Resources Budgetary Obligations Available beyond
Fund Symbol Description Available Resources Used Incurred FY 2020
073X1152 CARES Act EIDL Loan $ 50,000,000 $ 25,101,240 $ 25,101,240 $ 24,898,760
CARES Act Admin 582,000 582,000 582,000 -
073 20/210500 EIDL Grants 10,000,000 9,991,520 9,991,520 8,480
073X0500 EIDL Grants 10,000,000 9,965,795 9,965,795 34,205
073 20/211154 Sect 1102 PPP 670,334,800 532,324,952 532,324,952 138,009,848
Sect 1112 Debt Relief 7,824,286 7,824,286 7,824,286 -
073 20/210100 CARES Act 2,775,000 1,131,407 1,131,407 1,643,593
073 20/210400 CARES Act 265,000 256,674 256,674 8,326
073 20/240200 CARES Act 25,000 16 16 24,984
Note: Carryover resources beyond FY 2020 include PPP funds that can no longer be obligated without further legislation as program authority ended on August 8, 2020.

Note 18 Reclassification of Balance Sheet, Statement of Net
Cost, and Statement of Changes in Net Position for
FR Compilation Process
To prepare the Financial Report of the U.S. Government (FR), the Department of the Treasury requires agencies to
submit an adjusted trial balance, which is a listing of amounts by U.S. Standard General Ledger account that appear in
the financial statements. Treasury uses the trial balance information reported in the Governmentwide Treasury Account
Symbol Adjusted Trial Balance System (GTAS) to develop a Reclassified Balance Sheet, Reclassified Statement of Net
Cost, and a Reclassified Statement of Changes in Net Position for each agency, which are accessed using GTAS. Treasury
eliminates all intragovernmental balances from the reclassified statements and aggregates lines with the same title to develop
the FR statements. This note shows SBA’s financial statements and SBA’s reclassified statements prior to elimination of
intragovernmental balances and prior to aggregation of repeated FR line items.

The term “intragovernmental” is used in this note to refer to amounts that result from other components of the Federal
Government.

The term “non-Federal” is used in this note to refer to Federal Government amounts that result from transactions with
non-Federal entities. These include transactions with individuals, businesses, non-profit entities, and State, local, and foreign
governments.

The SBA has no funds from dedicated collections.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 107
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Reclassification of Financial Statements
(Dollars in Thousands)
FY 2020 SBA Balance Sheet (Unaudited) Line Items Used to Prepare FY 2020 Government-Wide Balance Sheet
ASSETS ASSETS
Intragovernmental Assets Intragovernmental Assets
Fund Balance with Treasury (Note 2) $ 714,400,127 $ 714,400,127 Fund Balance with Treasury
Advances (Note 1) 2,301 2,301 Advances to Others and Prepayments
Total Intragovernmental Assets 714,402,428 714,402,428 Total Intragovernmental Assets
Assets - Public and Other With the Public
Cash (Note 3) 10,572 10,572 Cash and Other Monetary Assets
Accounts Receivable, Net (Note 5) 112,082 112,082 Accounts Receivable, Net
Credit Program Receivables and Related Foreclosed
Property, Net (Note 6) 182,936,949 182,936,949 Direct Loans and Loan Guarantees Receivables, Net
General Property and Equipment, Net (Note 7) 27,503 27,503 General Property, Plant and Equipment, Net
Advances (Note 1) 44,456 44,456 Other Assets
Total Assets - Public and Other 183,131,562 183,131,562 Total With the Public
Total Assets $ 897,533,990 $ 897,533,990 Total Assets

LIABILITIES LIABILITIES
Intragovernmental Liabilities Intragovernmental Liabilities
Accounts Payable
Accounts Payable (Note 1) $ 14,905 $ 15,922 Accounts Payable - Capital Transfers
10,803 Benefit Program Contributions Payable
14,745 Accounts Payable
41,470 Total Reclassified Accounts Payable
Debt Associated with Loans
160 Interest Payable - Loans and not Otherwise Classified
Debt (Note 9) 176,173,660 176,173,660 Loans Payable
Net Assets of Liquidating Funds Due to Treasury (Note 10) 15,922 176,173,820 Total Reclassified Debt Associated with Loans
Other Liabilities
2,172 Advances From Others and Deferred Credits
3,389 Other Liabilities (w/o Reciprocals)
Downward Reestimate Payable to Treasury (Note 1, Liability to the General Fund of the United States
Note 13) 28,541,393 28,541,399 Government for Custodial and Other Non-Entity Assets
Other (Note 11) 16,370 28,546,960 Total Reclassified Other
Total Intragovernmental Liabilities 204,762,250 204,762,250 Total Intragovernmental Liabilities

Other Liabilities - Public With the Public
Accounts Payable (Note 1) 337,528 337,528 Accounts Payable
Accrued Grant Liability (Note 1) 66,496 70,386 Federal Employee and Veteran Benefits Payable
Liability for Loan Guaranties (Note 6) 512,712,498 512,712,497 Loan Guarantee Liability
Federal Employees’ Compensation Act Actuarial Liability
(Note 1, Note 8) 30,576
Surety Bond Guarantee Program Future Claims (Note 8) 60,060
Other (Note 11) 86,610 173,357 Other Liabilities
Total Other Liabilities - Public 513,293,768 513,293,768 Total With the Public
Total Liabilities 718,056,018 718,056,018 Total Liabilities

NET POSITION NET POSITION
Unexpended Appropriations (Note 1) 183,460,572 183,460,575 Unexpended Appropriations - All Other Funds
Cumulative Results of Operations (Note 1) (3,982,600) (3,982,603) Cumulative Results of Operations - All Other Funds
Total Net Position 179,477,972 179,477,972 Total Net Position

Total Liabilities and Net Position $ 897,533,990 $ 897,533,990 Total Liabilities and Net Position

108 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Reclassification of Financial Statements (continued)
(Dollars in Thousands)

Line Items Used to Prepare FY 2020 Government-Wide
FY 2020 SBA Statement of Net Cost (Unaudited) Statement of Net Cost
STRATEGIC GOAL 1:
Support Small Business Revenue and Job Growth Non-Federal Cost
Gross Cost $ 534,872,629 $ 561,951,565 Non-Federal Gross Cost
Less: Earned Revenue 8,065,493 561,951,565 Total Non-Federal Cost
Net Cost of Strategic Goal 1 526,807,136

STRATEGIC GOAL 2: Intragovernmental Gross Cost
Build Healthy Entrepreneurial Ecosystems and Create 87,649 Benefit Program Cost
Business Friendly Environments 19,508 Imputed Cost
Gross Cost 27,523 127,721 Buy/Sell Cost
Net Cost of Strategic Goal 2 27,523 7,683,340 Borrowing and Other Interest Expense
38,562 Other Expenses (w/o Reciprocals)
STRATEGIC GOAL 3:
Restore Small Businesses and Communities after Disasters 7,956,780 Total Intragovernmental Gross Cost
Gross Cost 34,993,696
Less: Earned Revenue 7,611,305 569,908,345 Total Reclassified Gross Cost
Net Cost of Strategic Goal 3 27,382,391
3,050,346 Non-federal Earned Revenue
STRATEGIC GOAL 4:
Strengthen SBA’s Ability to Serve Small Businesses Intragovernmental Earned Revenue
Gross Cost 11,976 2,280 Buy/Sell Revenue
Net Cost of Strategic Goal 4 11,976 12,624,172 Borrowing and Other Interest Revenue
12,626,452 Total Intragovernmental Earned Revenue
COST NOT ASSIGNED TO STRATEGIC GOALS
Gross Cost 2,521
Net Cost Not Assigned to Strategic Goals 2,521 15,676,798 Total Reclassified Earned Revenue

Net Cost of Operations $ 554,231,547 $ 554,231,547 Net Cost

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 109
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

Reclassification of Financial Statements (continued)
(Dollars in Thousands)

Line Items Used to Prepare FY 2020 Government-Wide
FY 2020 SBA Statement of Changes in Net Position (Unaudited) Statement of Changes in Net Position
Beginning Unexpended Appropriations $ 1,779,472 $ 1,633,608 Net Position, Beginning of Period
1,633,608 Net Position, Beginning of Period - Adjusted
Budgetary Financing Sources
Appropriations Received 762,191,631 Non-Federal Non-Exchange Revenue
Rescissions (16,369) 179 Other Taxes and Receipts
Adjustment - Cancelled Authority (11,135) 179 Total Non-Federal Non-Exchange Revenue
Return of Unrequired Liquidating Fund Appropriation (2,048)
Other Adjustments (197)
Appropriations Used (580,480,782) Budgetary Financing Sources
Total Budgetary Financing Sources 181,681,100 Appropriations Received as adjusted (recissions and other
762,161,885 adjustments)
(580,480,782) Appropriations Used
Ending Unexpended Appropriations $ 183,460,572 580,480,782 Appropriations Expended
Non-Expenditure Transfers-In of Unexpended Appropriations
7,922 and Financing Sources
Non-Expenditure Transfers-Out of Unexpended Appropriations
Beginning Cumulative Results of Operations $ (145,864) (17,328) and Financing Sources
Budgetary Financing Sources 762,152,479 Total Budgetary Financing Sources
Transfers-Out Without Reimbursement (57,862)
Appropriations Used 580,480,782
Other - Current Year Liquidating Equity Activity (9,406) Other Financing Sources
Donations of Cash and Cash Equivalents 12 19,508 Imputed Financing Sources
Non-Entity Collections Transferred to the General Fund of the
Other Financing Sources (2,583,334) U.S. Government
Accrual for Non-Entity Amounts to be Collected and
Transfers-In Without Reimbursement 57,862 (27,512,921) Transferred to the General Fund of the U.S. Government
Imputed Financing from Costs Absorbed by Others 19,508 (30,076,747) Total Other Financing Sources
Other - Non-entity Activity (30,096,085)
Total Financing Sources 550,394,811
Less: Net Cost of Operations 554,231,547 554,231,547 Net Cost of Operations
Net Change (3,836,736)
Ending Cumulative Results of Operations $ (3,982,600)

Ending Net Position $ 179,477,972 $ 179,477,972 Ending Net Position

110 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

REQUIRED SUPPLEMENTARY INFORMATION

COMBINING STATEMENT OF BUDGETARY RESOURCES
For the Year Ended September 30, 2020 (Unaudited)

(Dollars in Thousands) BLIF DLF SBGRF
Nonbudgetary Nonbudgetary
Budgetary Financing Budgetary Financing Budgetary
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority,
net (discretionary and mandatory) $ 34,331 $ 3,483,890 $ 1,145,094 $ 287,243 $ 103,289
Appropriations (discretionary and mandatory) 687,632,294 88,377 50,825,367 - -
Borrowing Authority (discretionary and mandatory) - 508,227 - 166,759,067 -
Spending Authority from Offsetting Collections (1) 550,177,478 (1) 32,792,302 17,795
Total Budgetary Resources $ 687,666,624 $ 554,257,972 $ 51,970,460 $ 199,838,612 $ 121,084

STATUS OF BUDGETARY RESOURCES
New Obligations and Upward Adjustments (total) $ 540,432,281 $ 29,068,091 $ 26,963,907 $ 199,705,635 $ 18,339
Unobligated Balance, end of year:
Apportioned, unexpired accounts 147,234,343 515,755,469 25,001,878 46,403 31,782
Unapportioned, unexpired accounts - 9,434,412 4,675 86,574 70,963
Unexpired Unobligated Balance, end of year 147,234,343 525,189,881 25,006,553 132,977 102,745
Expired Unobligated Balance, end of year - - - - -
Unobligated Balance, end of year (total) 147,234,343 525,189,881 25,006,553 132,977 102,745
Total Status of Budgetary Resources $ 687,666,624 $ 554,257,972 $ 51,970,460 $ 199,838,612 $ 121,084

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 533,954,609 $ 25,128,056 $ (2,391)
Distributed Offsetting Receipts (2,365,907) (159,396) -
Agency Outlays, net (discretionary and mandatory) $ 531,588,702 $ 24,968,660 $ (2,391)
Disbursements, net (total) (mandatory) $ (515,012,906) $ 154,176,735

(Dollars in Thousands)
SE OIG ADVOCACY EDP EIDL WCF BATF TOTAL TOTAL
Nonbudgetary
Budgetary Budgetary Budgetary Budgetary Budgetary Budgetary Budgetary Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget
Authority, net (discretionary and mandatory) $ 175,962 $ 12,872 $ 743 $ 50,721 $ - $ 6,000 $ 164 $ 1,529,176 $ 3,771,133 $ 5,300,309

Appropriations (discretionary and
mandatory) 3,037,234 46,900 9,120 526,000 20,000,000 7,922 - 762,084,837 88,377 762,173,214
Borrowing Authority (discretionary and
mandatory) - - - - - - - - 167,267,294 167,267,294
Spending Authority from Offsetting
Collections 937,903 1,600 - (2) - - 13 957,307 582,969,780 583,927,087
Total Budgetary Resources $ 4,151,099 $ 61,372 $ 9,863 $ 576,719 $ 20,000,000 $ 13,922 $ 177 $ 764,571,320 $ 754,096,584 $ 1,518,667,904

STATUS OF BUDGETARY RESOURCES
New Obligations and Upward Adjustments
(total) $ 2,309,263 $ 24,161 $ 9,306 $ 513,914 $ 19,957,315 $ 4,433 $ 3 $ 590,232,922 $ 228,773,726 $ 819,006,648
Unobligated Balance, end of year:
Apportioned, unexpired accounts 1,815,179 32,765 557 40,441 42,685 9,489 174 174,209,293 515,801,872 690,011,165
Unapportioned, unexpired accounts 2,270 - - - - - - 77,908 9,520,986 9,598,894
Unexpired Unobligated Balance, end of year 1,817,449 32,765 557 40,441 42,685 9,489 174 174,287,201 525,322,858 699,610,059
Expired Unobligated Balance, end of year 24,387 4,446 - 22,364 - - - 51,197 - 51,197
Unobligated Balance, end of year (total) 1,841,836 37,211 557 62,805 42,685 9,489 174 174,338,398 525,322,858 699,661,256
Total Status of Budgetary Resources $ 4,151,099 $ 61,372 $ 9,863 $ 576,719 $ 20,000,000 $ 13,922 $ 177 $ 764,571,320 $ 754,096,584 $ 1,518,667,904

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 840,322 $ 21,749 $ 9,283 $ 271,489 $ 19,711,360 $ 1,791 $ 46 $ 579,936,314 $ 579,936,314
Distributed Offsetting Receipts 1,459 - - - - - - (2,523,844) (2,523,844)
Agency Outlays, net (discretionary and
mandatory) $ 841,781 $ 21,749 $ 9,283 $ 271,489 $ 19,711,360 $ 1,791 $ 46 $ 577,412,470 $ 577,412,470
$ (360,836,171)

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 111
FINANCIAL REPORTING (FISCAL YEAR 2020 UNAUDITED)

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112 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
O T H E R
I N FO R M AT I O N
( U N A U D I T E D )

start grow

expand recover
grow
START & GROW

CHARISSA & DAVE
GROW
R U B E Y
SUCCESS STORY
A N T O N
BIZZELL
Dakota Micro, Inc.
Cayuga, ND SUCCESS STORY

CHARISSA AND DAVE RUBEY relocated from MINORITY-OWNED
Southern California to North Dakota in 1994 to take FIRM IMPACTS
over the family farm. A few years later, Dave suffered MENTAL HEALTH
a slipped disk in his neck. He wore a neck brace, and
not being able to turn his head made operating farm The Bizzell Group, LLC
equipment impossible. Lanham, MD

Unable to find a camera system that was small, DR. ANTON BIZZELL led efforts to reduce the impact
durable, and flexible enough to allow him to operate of prescription opiates and alcoholism while at the
farm equipment efficiently, Dave decided to use his U.S. Department of Health and Human Services
engineering background to build one and created the Substance Abuse and Mental Health Service
AgCam system. Dakota Micro Inc. was incorporated Administration. After working at a consulting firm, in
in 2002 and manufactures sturdy camera systems 2010 he established The Bizzell Group. The company,
and surveillance equipment for agricultural, public along with a cadre of 15 experts, provides health
works, and military applications. The company grew services solutions, research, communication and
as Dave developed more camera systems with outreach support, technical assistance, and training,
Charissa leading the company as the CEO. She took with the goal of providing customized, innovation
advantage of SBA resources—SCORE Mentors, solutions that will help communities nationwide
an SBA loan, the Women’s Business Center, and develop healthy and secure environments.
the U.S. Export Assistance Center—to expand the
business. The Bizzell Group is 8(a) certified, and their clients
include the Departments of Labor, Health and Human
Today the company, still located on the family Services, Defense, Energy, Transportation, and the
farm, has grown to include a 10,000 square-foot United States Agency for International Development,
manufacturing facility that serves a global market with among others. In 2018 and 2019, the Washington
more than 40 dealers on five continents and employs Business Journal ranked The Bizzell Group among
18 people in their rural community. the area’s fastest growing companies. In 2017, The
Bizzell Group was recognized by Inc. Magazine as
the third-fastest growing Black-owned business in the
nation. Sales increased from $8.4 million in 2016 to
$16.5 million in 2018. The company has grown from
start a small space in Dr. Bizzell’s basement to two offices
in suburban Maryland, an office in Atlanta, Georgia, a
staff of 100 working in nine U.S. states.

grow

expand recover

114 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
OTHER INFORMATION (UNAUDITED)

REPORT ON THE TOP MANAGEMENT AND
PERFORMANCE CHALLENGES

Top Management and
Performance Challenges Facing
the Small Business Administration
in Fiscal Year 2021

October 2020
Office of Inspector General

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 115
OTHER INFORMATION (UNAUDITED)

CONTENTS

Message from the Inspector General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Challenges Not Failings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Changes to This Year’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Color Coding to Indicate Progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Table 1. Color-Code Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Table 2. Top Management and Performance Challenges Facing SBA in FY 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Challenge 1: SBA’s Economic Relief Programs Are Susceptible to Significant Fraud Risks and Vulnerabilities. . . . 122
Paycheck Protection Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Why This Is a Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Issue: Paycheck Protection Program Susceptible to Abuse and Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Issue: Paycheck Protection Program Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Businesses Exceeding Maximum Loan Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Borrowers on Do Not Pay Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Businesses that Exceeded Maximum Size Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Taxpayer Identification Number Registered after February 15, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Issue: Paycheck Protection Program Data Reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Underserved Market Data Was Incomplete. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Economic Injury COVID 19 Disaster Loan Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Why This Is a Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Issue: Potentially Fraudulent COVID-19 Economic Injury Disaster Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Challenge 2: Inaccurate Procurement Data and Eligibility Concerns in Small Business Contracting
Programs Undermine the Reliability of Contracting Goal Achievements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Why This Is a Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Issue: Agencies Receive Credit for Ineligible Firms or Firms No Longer in the 8(a) or HUBZone Programs . . . . . . 127
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Issue: Women-Owned Small Business Federal Contracting Program Susceptible to Abuse . . . . . . . . . . . . . . . . . 128
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Challenge 3: SBA Needs to Improve Oversight of IT Investments and Security Risks . . . . . . . . . . . . . . . . . . . . . . . . 130
Why This Is a Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Issue: SBA’s New IT Investment Controls Need Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Issue: Additional Progress Needed on Security Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

Challenge 4: SBA Risk Management and Oversight Practices Need Improvement to Ensure the
Integrity of Loan Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Why This Is a Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Issue: SBA’s Oversight of High-Risk Lending Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Issue: Increased Risk Introduced by Loan Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

116 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
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Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Issue: Increased Risk Introduced by Lender Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

Challenge 5: SBA’s Management and Monitoring of Section 8(a) Business Development Program
Needs Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Why This Is a Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Issue: SBA Continues to Address Its Ability to Develop Firms in the 8(a) Program and Measure Results . . . . . . . 135
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Issue: Streamlined Application Process May Expose the 8(a) Program to Higher Fraud Risk . . . . . . . . . . . . . . . . . 136
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Issue: Continuing Eligibility Processes Expose the 8(a) Program to Higher Fraud Risk . . . . . . . . . . . . . . . . . . . . . . 136
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Issue: SBA Dollar Threshold for Economic Disadvantage Should Be Based on Verifiable Data . . . . . . . . . . . . . . . 137
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

Challenge 6: Identification of Improper Payments in SBA’s Loan Programs Remains a Challenge . . . . . . . . . . . . . . 139
Why This Is a Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Issue: Improvements Needed to Ensure High-Risk 7(a) Loan Reviews Reduce the Risk of Losses . . . . . . . . . . . . 139
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

Challenge 7: SBA’s Disaster Assistance Program Must Balance Competing Priorities to Deliver
Prompt Assistance but Prevent Potential Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Why This Is a Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Issue: Reserve Staff Need Training to Sustain Productivity During Mobilization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Issue: Improper Payment Quality Assurance Process Needs Strengthening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Issue: Inadequate Verification of Cause and Extent of Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Challenge 8: SBA Needs Robust Grants Management Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Why This Is a Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Issue: SBA’s Grants Management System Needs Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Agency Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

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OTHER INFORMATION (UNAUDITED)

MESSAGE FROM THE
INSPECTOR GENERAL

I am pleased to present the Office of Inspector General Report on the Top Management and
Performance Challenges Facing the Small Business Administration for fiscal year (FY) 2021, as
required by the Reports Consolidation Act of 2000.

This year has presented tremendous challenges to SBA, the likes of which the agency has never
encountered in its history. The devastating impact of Coronavirus Disease 2019 (COVID-19)
on our nation and small businesses catapulted SBA into the spotlight as the primary agency
responsible for providing nationwide assistance to small businesses.

This report discusses several challenges and issues, many of which we have discussed in
previous reports. Managing COVID-19 stimulus is the greatest overall challenge facing SBA
HANNIBAL “MIKE” WARE currently. This crucial new challenge is exacerbated by persisting management and performance
challenges best described as systemic. Pandemic response has, in many instances, magnified the
challenging systemic issues in SBA’s mission-related work.

Overall, the agency has made progress addressing this year’s list of management challenges.
We believe that progress is in large part attributable to the agency’s concerted effort to address
outstanding internal control recommendations that are reflected in many component challenge
corrective action areas.

However, our audits and investigations continue to find the agency facing significant risks in
loan program oversight and controls,
oversight of statutory programs to promote small business development and government
contracting, and
deploying information technology and related cybersecurity controls.

Challenges Not Failings
Identification of an issue as a top challenge does not necessarily denote significant deficiencies
or lack of attention on SBA’s part. All but one of these challenges are longstanding, inherently
difficult, and may likely continue to be challenges in the coming years. Resolving the challenges
will require consistent, focused attention from agency management and ongoing engagement
with Congress, the public, and other stakeholders.

It is also important to note that the top challenges are not listed in order of importance
or magnitude, except for the COVID-19 challenge, which we address first in this report. We
view all eight challenges as critically important to SBA operations in the upcoming year.

Hannibal “Mike” Ware
Inspector General

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OTHER INFORMATION (UNAUDITED)

Changes to This Year’s Report
We have made some significant changes in this year’s report, as follows:
We added a new challenge (Challenge 1) related to the impact of the COVID 19 pandemic on SBA programs and
operations.
We present challenges in a new format to include a discussion of each challenge and underlying issues, agency progress
in meeting the challenge, and work remaining for the agency to reduce or eliminate the challenge.
We eliminated recommendations for each challenge. In previous reports, each management challenge was followed
by a series of recommended actions to enhance the effectiveness of agency programs and operations. Each recommended
action was assigned a color score to indicate its status. Instead, in this year’s report, we color-code issues underlying each
challenge, shown in Table B.
We removed the human capital management challenge (formerly Challenge 3). SBA has made substantial
improvements to its human capital strategies to address the challenges we identified. SBA developed and implemented
plans that aligned talent needs and capability with its strategic plan. It also implemented strategic workforce and
succession plans to identify competency gaps, strengthen leadership capacity, and address the challenges of its aging
workforce.

SBA continues to make progress in addressing our recommendation to update its human capital management policies. In
FY 2020, SBA updated and implemented 11 human capital management policies. SBA also improved communication of the
new policies through outreach efforts.
We removed the challenge on SBA’s exclusions for determining governmentwide federal contracting goal-setting
guidelines, referred to as “goaling” (previously included in Challenge 2). Over the last several years, SBA has amended
its goaling guidelines and since FY 2013, the agency has been adding previously excluded contracts back to the goaling
equation.

SBA has also improved transparency of the exclusions on its website by adding a link to the FY 2018 guidelines. OIG
maintains the Small Business Act requires SBA to use the value of all prime contracts to determine governmentwide small
business procurement goals and achievements; excluding prime contracts for governmentwide goals and reports does not meet
the law. However, because of SBA’s new transparency in disclosing how it calculates goal percentages, we no longer believe this
issue is a serious management challenge.
We removed the challenge on SBA’s portfolio risk management system (previously included in Challenge 4). From
FY 2016 to FY 2020, SBA made significant improvements to ensure the portfolio risk management program supported
risk-based decisions and implemented additional controls to reduce risks in SBA loan programs. Specifically, SBA
established performance measures and risk mitigation goals for each loan program and the entire lending portfolio.
We removed the challenge on SBA’s quality control program to reduce improper payments (previously included in
Challenge 6). Over the last several years, SBA developed enhanced improper payment reporting to monitor root causes,
identify operational risk, and create corrective action plans.

From FY 2018 to FY 2020, SBA provided a comprehensive metric report documenting the effectiveness of corrective
actions to mitigate improper payments and an assessment of the improper payment process. The agency also required
additional controls to ensure proper scrutiny is applied in testing plans and checklists. SBA has confirmed that the quality
control function continues to make policy recommendations to the Office of Financial Assistance and lender referrals to the
Office of Credit Risk Management on matters that could potentially cause improper payments.

Table 2 lists the management challenges and issues associated with each that we discuss in this report.

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OTHER INFORMATION (UNAUDITED)

Color Coding to Indicate Progress
As in previous years, this report uses a color scheme as a visual indicator of the agency’s progress in confronting the issues that
make a particular function a top management challenge. We include a color meter indicator with the issues we describe for
each challenge to show whether SBA has made progress (see Table 1). The exception in this year’s report is Challenge 1.

We have not color-coded the issues the agency is confronting with the COVID-19 loan programs because the situation creates
a new reporting element. In this report, we describe the issues and problems we have found so far. But it would be unfair to
judge progress when the agency is diligently working to fulfill the economic goals of the laws passed in March.

TABLE 1. Color-Code Definitions

Color Definition Color indicator

Green Issue Resolved or Appropriately Reduced

Yellow Substantial Progress

Orange Moderate or Limited Progress

Red No Progress

The management challenges report is an important tool to help the agency prioritize its work to improve program
performance and enhance operations. These challenges will guide OIG work in the coming year. We look forward to
continuing to work with SBA’s leadership team to address the agency’s top management and performance challenges.

120 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
OTHER INFORMATION (UNAUDITED)

TABLE 2. Top Management and Performance Challenges Facing SBA in FY 2021

Challenge Issues
Challenge 1 Paycheck Protection Program Susceptible to Abuse and Fraud
SBA’s Economic Relief Programs Are Susceptible to
Paycheck Protection Program Eligibility
Significant Fraud Risks and Vulnerabilities
Paycheck Protection Program Data Reliability

Potentially Fraudulent COVID-19 Economic Injury Disaster Loans

Challenge 2 Agencies Receive Credit for Ineligible Firms or Firms No Longer in the 8(a) or
Inaccurate Procurement Data and Eligibility Concerns in the Small Business HUBZone Programs
Contracting Programs Undermine the Reliability of Contracting Goal
Women-Owned Small Business Federal Contracting Program Susceptible to
Achievements
Abuse

Challenge 3 SBA’s New IT Investment Controls Need Improvement
SBA Needs to Improve Oversight of IT Investment and Reduce IT Security Risks
Additional Progress Needed on Security Controls

Challenge 4 SBA’s Oversight of High-Risk Lending Participants
SBA Risk Management and Oversight Practices Need Improvement to Ensure the
Increased Risk Introduced by Loan Agents
Integrity of Loan Programs
Increased Risk Introduced by Lender Service Providers

Challenge 5 SBA Continues to Address Its Ability to Develop Firms in the 8(a) Program and
SBA Needs to Administer the Section 8(a) Business Development Program Measure Results
Effectively
Streamlined Application Process May Expose the 8(a) Program to Higher Fraud
Risk

Deficiencies in Continuing Eligibility Processes Expose the 8(a) Program to
Higher Fraud Risk

SBA Dollar Threshold for Economic Disadvantage Should Be Based on Verifiable
Data

Challenge 6
Identification of Improper Payments in SBA’s Loan Programs Remains a Improvements Needed to Ensure High Risk 7(a) Loan Reviews Reduce the Risk
Challenge of Losses

Challenge 7 Reserve Staff Need Training to Sustain Productivity During Mobilization
SBA’s Disaster Assistance Program Must Balance Competing Priorities to Deliver
Improper Payment Quality Assurance Process Needs Strengthening
Prompt Assistance but Prevent Potential Fraud
Inadequate Verification of Cause and Extent of Damages

Challenge 8
SBA Needs Robust Grants Management Oversight SBA’s Grants Management System Needs Improvement

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OTHER INFORMATION (UNAUDITED)

CHALLENGE 1
SBA’s Economic Relief Programs Are Susceptible to Significant Fraud Risks and
Vulnerabilities
Paycheck Protection Program

Why This Is a Challenge
More than 30 million small businesses in the United States have been negatively aﬀected by COVID-19. The President signed
the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27, 2020, to provide economic relief to
our nation.

Under the CARES Act, the Small Business Administration (SBA) fully guarantees relief loans for eligible small businesses,
individuals and nonprofit organizations that can be forgiven if loan proceeds were used as the Act requires. Eligible expenses
include payroll, rent, utility payments, and other limited uses. The CARES Act appropriated $349 billion for the SBA
Paycheck Protection Program (PPP) under the 7(a) small business lending program.

In early April 2020, SBA launched the $349 billion PPP in collaboration with the U.S. Department of the Treasury. On April
24, 2020, Congress appropriated an additional $321 billion for PPP through the Paycheck Protection Program and Health
Care Enhancement Act, bringing the total for the program to $670 billion. The deadline for PPP borrowers to apply for a
loan was originally June 30, 2020, however Congress passed legislation that extended the expiration of the program until
August 8, 2020.

As of August 8, 2020, SBA had processed 5.2 million guaranteed loans, totaling $525 billion through 5,460 private lenders,
far more than all of SBA’s combined lending under the 7(a) program from 1990 to 2019. From fiscal years (FYs) 2000-2019,
SBA made about 1.2 million 7(a) loans totaling $333 billion. On average, SBA made about 62,000 loans a year totaling
about $16.7 billion.

SBA moved quickly to establish the new nationwide program but eased controls required in its lending programs to do so,
increasing the risk of rampant fraud.

Issue: Paycheck Protection Program Susceptible to Abuse and Fraud
Our preliminary investigative oversight revealed strong indicators of widespread potential abuse
and fraud in the PPP. Since the PPP began, OIG has had a major increase in reports of suspected
fraud. These reports of suspected fraud have come from various sources, including OIG Hotline
complaints, contacts from financial institutions, and other law enforcement agencies, and we have
launched numerous investigations based on these reports.

Examples of suspicious activities and suspected PPP fraud include:
False statements on applications
Fraudulent supporting documents (such as payroll and tax forms)
Accounts established using stolen identities
Corporate identity theft
Inflation of payroll
Misuse of proceeds
Unqualified borrowers
Businesses created after PPP was in effect
Lender fraud

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OIG received more than 77,000 Hotline complaints of potential fraud by the end of September and the numbers continue to
rise. Complaints of potential fraud or scams include the following:
Loan applicants fraudulently have stated they own a business but do not
Business owners have received funds but did not use it for their business
Business owners have laid off employees to reduce their employment numbers and qualify for a PPP loan
Business owners have refused to allow employees to return to work, telling them to continue unemployment assistance
People on the web have offered to prepare fraudulent applications for a fee
OIG has identified trends that indicate widespread fraudulent activity in the program in the high volume of complaints.
These trends match the arrests and ongoing investigations our agents and other government agencies are pursuing. As of
August 28, 2020, the Justice Department had filed 39 PPP fraud cases, charging 56 defendants. Defendants are charged with
bilking taxpayers out of tens of millions of dollars.

SBA’s engagement with financial institutions to immediately identify disbursements that may have been obtained fraudulently
could reduce or prevent additional losses because associated loan forgiveness will still be in process, and the loan forgiveness
process could trigger another round of suspected fraud activity. Strong controls will help reduce or eliminate fraud risk and
enhance program integrity for the PPP and similar programs enacted in the future.

Agency Progress
As of October 1, 2020, SBA had not initiated loan reviews other than the automated loan reviews conducted by the
application system or forgiven any loans because agency management had not finalized loan review and forgiveness processes.
Agency management told us they could not share details until the processes were finalized. Without details of the loan review
and loan forgiveness processes, we could not adequately assess the agency’s ongoing progress.

SBA’s plans and actions to reduce fraud risks and prevent further losses will determine how this challenge will be rated in the
future. Our investigations into suspected fraud and suspicious activities continue. We have an ongoing review of duplicate
loans made under the PPP. We anticipate future audit work on PPP loan eligibility, loan forgiveness, and lender activities, and
we will continue to monitor agency actions to assess and reduce fraud risk and address vulnerabilities in the PPP.

Issue: Paycheck Protection Program Eligibility
OIG’s ongoing inspection of SBA’s implementation of the PPP and coordination with the
Treasury Department have revealed systemic issues. Our preliminary results found indications of
deficiencies with internal controls related to eligibility of borrowers. Our ongoing review of SBA’s
implementation of PPP has identified thousands of loans erroneously provided to potentially
ineligible borrowers.

For example, SBA inappropriately approved loans for businesses that
exceeded maximum loan amounts for the number of employees,
were in the government’s Do Not Pay database,
exceeded the maximum size allowed, and
obtained a Taxpayer Identification Number (TIN) after the program began in February 2020.
Approving loans for ineligible borrowers reduces the amount of critical program capital available to eligible borrowers. We
expect to issue final reports addressing PPP eligibility in early FY 2021.

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Businesses Exceeding Maximum Loan Amounts
We found tens of thousands of approved and disbursed loans were made to borrowers for amounts that exceeded the
maximum allowed based on the number of employees and compensation rates as defined in the CARES Act.

Borrowers on Do Not Pay Database
We coordinated with the Treasury Department to compare TIN and name data provided in SBA data files against Do Not
Pay debt, exclusions, and death data sources. We found tens of thousands of loans that matched a Do Not Pay data source
record indicating potential loan ineligibility.

The Treasury Department Do Not Pay system helps agencies fulfill the obligation to deny federal loans, loan insurance, and
loan guarantees to businesses delinquent on federal debts and obligations. To be eligible to receive PPP funds, a business must
not have any current federal debarments or suspensions, and the applicant must not have delinquent federal loans or have
defaulted on any federal loans in the last 7 years. The OIG will issue a report early in FY 2021 providing the final results of
this analysis.

Businesses that Exceeded Maximum Size Standards
Under the CARES Act, an eligible business cannot exceed the greater of 500 employees or the SBA size standard for number
of employees in the industry, if applicable. We found hundreds of businesses obtained PPP loans that may have been
erroneously approved. These businesses exceeded both 500 employees and the applicable employee-based size standard for the
business industry

Taxpayer Identification Number Registered after February 15, 2020
The CARES Act requires that businesses must have been in operation before February 15, 2020, to be eligible for a PPP loan.
We found thousands of businesses obtained PPP loans with TINs that were not registered until after that date. The businesses
would have been ineligible for PPP loans because they likely did not meet the CARES Act eligibility requirement of being in
operation before February 15.

Agency Progress
To confront this new challenge, agency management is reassessing existing controls and developing additional controls to
ensure only eligible recipients receive loans. According to agency management, these additional controls will address various
processes, including loan reviews and loan forgiveness.

SBA has established a PPP loan forgiveness platform and began accepting loan forgiveness applications on August 10, 2020.
SBA also hired new staff and contractors to assist with loan reviews and loan forgiveness. However, as noted earlier, as of
October 1, 2020, SBA had not finalized loan review and loan forgiveness processes, forgiven any loans, or initiated loan
reviews other than the automated reviews conducted by the application system.

Swift management action to identify and review potentially ineligible loans could prevent improper payments to lenders
because the associated loan forgiveness may still be in process. As we complete current reviews and do future audit work,
SBA’s plans and actions to reduce and prevent improper payments will determine how we will rate this challenge in the future.

Issue: Paycheck Protection Program Data Reliability
OIG’s ongoing inspection of SBA’s implementation of the PPP has found that the data SBA
publicly reported as well as the loan-level PPP data was inaccurate and incomplete. Job statistics
were inaccurate and incomplete, industry classification codes were incomplete, loan disbursement
dates were inaccurate, and underserved market data was incomplete. Without accurate and complete
data, SBA cannot reliably and accurately inform SBA management and Congress about program

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effectiveness and measures needed to inform program decisions. We plan to issue final reports addressing PPP data reliability
in early FY 2021.

Underserved Market Data Was Incomplete
In our flash report of May 8, 2020, we found that SBA’s demographic information for underserved markets for PPP
borrowers was incomplete. SBA’s borrower application for PPP did not include standard SBA fields to request demographic
information.

Agency Progress
On May 15, 2020, SBA issued the initial PPP loan forgiveness application, which included an optional page to submit
borrower demographic information. We have an ongoing audit of duplicate loans made under the PPP and anticipate future
audit work to review PPP loan eligibility, loan forgiveness, and lender activities, and we will continue to monitor agency
actions to enhance data reliability.

Economic Injury COVID 19 Disaster Loan Program

Why This Is a Challenge
In FY 2020, the CARES Act and the Paycheck Protection Program and Healthcare Enhancement Act provided $366 billion
for disaster assistance and $20 billion for emergency advance grants for eligible entities.

SBA’s initial response to implement the COVID-19 EIDL program made billions of dollars of capital available to provide
prompt economic relief to businesses affected by COVID-19. To expedite the process, SBA “lowered the guardrails” or relaxed
internal controls, which significantly increased the risk of program fraud. The unprecedented demand for COVID-19 EIDLs
and the equally unprecedented challenges SBA had in responding to this pandemic combined with lowered controls put
significant stress on existing controls.

SBA had approved 2.2 million disaster loans for $66.7 billion in its entire history since 1953. By contrast, between March
and the end of July this year, SBA had received more than 14 million COVID-19 Economic Injury Disaster Loan (EIDL)
applications and approved 3.2 million loans totaling $169.3 billion.

During large-scale disasters such as COVID-19, SBA must bring on new loan officers to match the volume of loan
applications and prevent processing backlogs that delay the delivery of disaster assistance. In its COVID-19 response, SBA
increased its permanent and temporary trained staff size to more than 9,000, which was more than any other previous
disaster. SBA also outsourced loan processing to a subcontractor.

Issue: Potentially Fraudulent COVID-19 Economic Injury Disaster Loans
From the beginning of the COVID-19 EIDL program until September 30, 2020, OIG received
more than 77,000 Hotline complaints, most of them alleging fraudulent activity, and thousands of
complaints from banks about potentially fraudulent activity. OIG has steadily received hundreds
of additional complaints per day. OIG has launched numerous investigations into this fraudulent
activity. In addition, our ongoing inspection of SBA’s initial disaster assistance response to
COVID-19 has identified suspicious activity.

We found several serious problems, including significant evidence that SBA approved billions in potentially fraudulent loans to
applicants who changed the bank account number to pay out the loan to a different number than that listed on the
original loan application;
applicants using the same Internet Protocol (IP) address, the same email address, the same bank accounts, or businesses
listed at the same addresses; and

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ineligible businesses that registered an Employer Identification Number after the cutoff date of January 31, 2020.
Potentially Fraudulent Loans to Accounts that Differed from the Original Bank Accounts Listed on Applications. SBA had
approved billions in COVID-19 EIDLs to applicants who later changed the bank account number to pay out the loan to a
different number. For these applications, additional funds were disbursed in advance grants. Although there are reasons an
applicant might need to change a bank account number during the loan process, the number of applicants who changed
their bank account numbers or accounts to an entirely different bank before loan disbursements is concerning.

Potentially Fraudulent Loans Made to Applicants Using Duplicate Information. We found SBA had approved more than
one loan to applicants who used the same IP addresses, email addresses, business addresses, or bank accounts. There are some
legitimate reasons for individual occurrences of applicants using the same addresses or accounts to apply for loans. Multiple
occurrences, however, are a strong indication of fraud.

Potentially Fraudulent Loans Made to Ineligible Entities. We found that SBA approved millions in COVID-19 EIDLs and
advance grants to potentially ineligible entities. In our July 2020 Management Alert, we warned SBA that we had found
approximately $250 million in approved loans to ineligible entities.

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CHALLENGE 2
Inaccurate Procurement Data and Eligibility Concerns in Small Business Contracting
Programs Undermine the Reliability of Contracting Goal Achievements

Why This Is a Challenge
The Small Business Act has established a governmentwide goal that 23 percent of all prime contracts be awarded to small
businesses each fiscal year. Since FY 2013, the Small Business Administration (SBA) has reported that the federal government
met or exceeded its goal of awarding 23 percent of federal contracting dollars to small businesses in its annual Small Business
Goaling Report.

However, over the years, Congress has expressed concerns about the accuracy of the report. These concerns have been
substantiated by OIG and Government Accountability Office (GAO) audits, which identified widespread misreporting
by agencies, because contract awards reported as having gone to small firms have been substantially performed by larger
companies.

As the advocate for small business, SBA must strive to ensure that only eligible small firms obtain and perform small business
awards. Because SBA’s goal setting, or “goaling” achievement reports do not portray federal contract dollars awarded only to
small businesses, SBA reduces the ability of Congress and other federal policymakers to determine whether the government is
maximizing contracting opportunities for small businesses.

Issue: Agencies Receive Credit for Ineligible Firms or Firms No Longer in the 8(a) or HUBZone
Programs
OIG audits continue to identify federal agencies that may have erroneously received credit towards
their small business goals for small, disadvantaged businesses because of inaccurate reporting of the
award data.

Agency contracting officers have incorrectly reported ineligible firms as certified either in the 8(a)
or HUBZone programs in the Federal Procurement Data System – Next Generation. The Office of
Inspector General of the General Services Administration recently found $89 million in procurements erroneously recorded as
small business in the Federal Procurement Data System–Next Generation.1

OIG audits continue to find that SBA did not consistently detect ineligible firms in its preference contract programs. In a
September 2018 audit report (Report 18-22), we found SBA did not consistently detect ineligible firms in the 8(a) program
and did not always act to remove firms it determined were no longer eligible for the program. We found that 20 of the 25
firms we reviewed should have been removed from the 8(a) program. These firms received $126.8 million in new 8(a) set-
aside contract obligations in FY 2017 at the expense of eligible disadvantaged firms.

In a March 2019 report (Report 19-08), we also found that SBA did not ensure that only eligible firms entered the HUBZone
program; 3 of the 15 firms reviewed did not meet eligibility requirements. These firms received $589,000 in HUBZone
contract obligations at the expense of eligible firms.

In 2020, SBA changed the requirements for HUBZone employee residency eligibility. An employee no longer needs to be a
current HUBZone resident to count toward the residency requirement. Instead, an employee counts as a HUBZone resident
throughout that employee’s unbroken tenure with the company, as long as that employee lived in a HUBZone when first used
for certification purposes and remained in the residence for 180 days afterward.

HUBZone businesses could theoretically have no employees (zero) currently residing in the HUBZone but continue to
be qualified under this rule. Consequently, the government’s ability to argue the employee residency requirements for

1 General Services Administration OIG Report Number A170121/Q/6/P20006, The Federal Acquisition Service’s Reporting of Small Business Procurements Contained
Significant Inaccuracies (September 14, 2020). General Services Administration OIG Report Number A170121/Q/6/P20006, The Federal Acquisition Service’s
Reporting of Small Business Procurements Contained Significant Inaccuracies (September 14, 2020).

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enforcement purposes is significantly weakened. Allowing continued certification of concerns without current HUBZone
residents and no requirement that the company hire such residents in the future, appears inconsistent with the agency’s
legislative authorization for this program.

In FY 2020, SBA removed regulations allowing for protests of a firm’s Small Disadvantaged Business status. Protest and review
processes protect program integrity. This process is important because of the volume of transactions SBA reports each year as
part of the governmentwide goal achievements that are not 8(a) Small Disadvantaged Business. As of September 2020, SBA’s
Dynamic Small Business Search database included 152,986 firms self-certifying as small, disadvantaged businesses.

The amount of dollars SBA reports to Congress and the public as being performed by 8(a) and HUBZone firms in the Small
Business Goaling Report is inflated by the inclusion of contract actions performed by ineligible program participants. SBA
needs to strengthen its oversight to ensure only eligible firms participate in these preference contract programs.

Agency Progress
SBA has made substantial progress in implementing controls to detect ineligible firms in the 8(a) and HUBZone programs.
In FY 2020, SBA updated its HUBZone policy directives for the current certification process to standardize analysis
and oversight and trained staff on the guidance. SBA also implemented procedures to ensure program officials justified
recommendations to admit firms applying to the 8(a) program and that tracked complaints about firms’ eligibility to
participate in the 8(a) program.

More transparent reporting of awards to firms that grow beyond the definition of “small” after award is necessary to show a
true picture of the small business goal achievements.

Issue: Women-Owned Small Business Federal Contracting Program Susceptible to Abuse
SBA’s Women-Owned Small Business (WOSB) program is intended to give those companies that
meet the program’s requirements greater access to federal contracting opportunities. Both OIG and
GAO have reported weaknesses in SBA’s controls that are supposed to ensure only eligible firms
receive WOSB program set-aside contracts.

SBA officials have said the agency examines a sample of firms for eligibility and has conducted a compliance review of all four
SBA-approved third-party certifiers. However, these processes and procedures have not yet been formalized.

The National Defense Authorization Act in FY 2015 granted contracting officers the authority to award sole-source awards to
firms in the WOSB program and required firms to be certified by a federal agency, a state government, SBA’s Administrator,
or a national certifying entity approved by the Administrator. However, SBA implemented the sole-source authority provision
first without a certification program.

OIG considers allowing sole-source contracting authority in the WOSB program without implementing the
contemporaneously required certification program to be inconsistent with the statutory authorization. In a June 2018 audit
report (Report 18-18), OIG found contracting officers at various federal agencies made sole-source awards without having the
necessary documentation to determine eligibility because of SBA’s implemented sole-source authority without a certification
program. The change resulted in approximately $52.2 million awarded to potentially ineligible firms.

Agency Progress
SBA has made substantial progress toward addressing this challenge by establishing a certification process for the WOSB
program and issuing a final rule. In May 2020, SBA published the WOSB certification final rule outlining new WOSB
certification requirements and roles and responsibilities of SBA and third-party certifiers. SBA added language in its third-
party certifier agreement to increase oversight of the certifiers, require additional reporting metrics, and include a review of
the third-party certifier determination methodologies.

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SBA incorporated a prescreening process to ensure that firms submit complete applications and initiated a phased approach
to certifying firms in Beta.Certify.SBA.gov. The first phase began July 2020 when WOSB firms (including economically
disadvantaged WOSBs) began submitting application documentation self-certifying that the firm meets program
requirements. The second phase was planned to begin in October 2020 and involves SBA analysts making eligibility
determinations.

Because SBA still has not implemented a certification process for the WOSB program as required, firms continue to self-
certify, exposing the WOSB program to potential fraud and abuse, as well as overstating SBA WOSB contracting goals.

SBA’s plans to begin making decisions on firm eligibility to participate in the program should result in agency compliance
with the statutory authorization that required firms to be certified by the SBA’s Administrator, among others.

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CHALLENGE 3
SBA Needs to Improve Oversight of IT Investments and Security Risks

Why This Is a Challenge
The agency must continually improve its capabilities to provide program assistance to small businesses. IT security and
systems oversight represent growing challenges to provide this assistance. New IT investments are needed to improve the
portal interfaces for small businesses.

New portal systems must address concurrent issues such as significant transaction growth and IT security controls. SBA’s
systems are meeting these needs by placing a growing reliance on cloud and other third-party providers. At the same time,
SBA must develop internal applications to meet changing program requirements and growing program demand.

Our previous audit work indicates SBA needs to continuously monitor internal and third-party computer systems to protect
information and preserve data integrity. Application software must be properly maintained to prevent security vulnerabilities,
and contingency planning to handle multiple types of threats is needed. Effective IT investment controls must be established
to ensure IT investments meet identified functional requirements, projected schedules, and estimated costs.

Our current audit work seeks to gain an understanding of security incidents such as the data exposure that occurred during
the EIDL loan program.

Issue: SBA’s New IT Investment Controls Need Improvement
Growth in program requirements and increasing transaction volumes requires SBA make significant
investments in its IT systems. SBA’s most significant IT investment during the past 5 years has been
development of its Certify system, which was intended to improve small business access to SBA’s
contracting and assistance programs.

During our recent review, we identified a need for improved planning and performance oversight throughout this project. As
a result, Certify.gov did not meet its original goal of improving SBA’s small business certification process, and the $30 million
investment has not yielded the intended results.

In the future, SBA plans to migrate to another platform to address Certify’ s limitations. However, until SBA addresses these
oversight weaknesses, identified through several investment control recommendations, there is a continued risk of repeating
past project shortcomings.

SBA has begun moving to a new application platform to address Certify’ s weaknesses. Certify was envisioned to be the single
gateway to all of SBA’s contracting programs and a vehicle to improve small business participation in federal contracts.

Certification program changes such as those mandated for the Women-Owned Small Business Program requires Certify’
s functionality to be expanded to address new program requirements, streamline the certification process and improve
productivity.

The system was also supposed to provide management views of in-progress applications, automate repetitive tasks, and
make document review straightforward to help the agency identify fraud, waste, and abuse. We plan to monitor the Certify
investment to ensure necessary functionality is added and federal guidance followed for major future IT investments.

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Issue: Additional Progress Needed on Security Controls
Inspectors General are required by the Federal Information Security Modernization Act’s (FISMA)
to assess the effectiveness of information security programs on a maturity model spectrum and assess
security capability in eight domains. The current benchmark for an effective program within the
context of the maturity model is Level 4, Managed and Measurable.

Our most recent evaluation indicated SBA has achieved Level 4 for incident response but is at level 2 “Defined” or level 3
“Consistently Implemented” in the remaining seven areas. Consequently, SBA is at an overall level of “not effective.” At the
same time, however, significant progress is being made towards an “effective” level as outlined in the FISMA metrics.

Agency Progress
SBA has made significant progress on policies to implement information security continuous monitoring activities and ensure
controls are tested on a regular basis by internal and external testers. In addition, the agency has implemented encryption for
data at rest and in transit and has established a policy for responding to data breaches.

However, we continue to find problems with information security continuous monitoring and data protection. These areas
include establishing security baselines for systems, ensuring vulnerabilities identified are corrected promptly, and establishing
metrics to document the effectiveness of data protection efforts.

SBA officials also have made significant progress in risk management by communicating agency risks to appropriate personnel
and maintaining processes to identify risks that may affect the agency in the future. SBA is also working to ensure backups are
completed and contingency plans are up to date.

We continue to find challenges in risk management and contingency, however. These areas include improving oversight of
plans of actions and milestones, maintaining up-to-date software and hardware inventories, and ensuring security controls
for agency systems and third-party systems are assessed for effectiveness. In addition, SBA has made significant improvement
in access control, implementing an agency-wide policy for user access, proper approvals for new users, and using two-factor
authentication. In configuration management, SBA is using automation to ensure systems are properly configured and
secured.

Challenges remain in the areas of user access configurations, applying patches in a timely manner, documenting departures
from system baselines, and documenting proper permissions for new users.

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CHALLENGE 4
SBA Risk Management and Oversight Practices Need Improvement to Ensure the
Integrity of Loan Programs

Why This Is a Challenge
SBA’s Office of Credit Risk Management (OCRM) manages credit risk for a loan portfolio of more than $744 billion.
However, those loans are originated by lenders and certified development companies that have various degrees of expertise in
SBA loan program requirements.

Most traditional 7(a) and 504 SBA loans are originated by lenders with delegated approval authority, resulting in limited SBA
oversight and quality control reviews until a default occurs. Many lenders rely on the services of fee-based and other third-
party agents to help originate, close, service, and liquidate SBA loans.

Previous OIG audits have shown that SBA did not recognize significant lender weaknesses. In response, SBA initiated actions
to address identified issues with its oversight of lenders, and implemented all our audit recommendations before FY 2019.
However, although SBA took action to address previous concerns about lender oversight, an OIG FY 2020 audit of SBA’s
oversight of high-risk lenders identified additional internal control weaknesses in lender oversight.

Consequently, we have added a new issue related to SBA’s oversight of high-risk lenders. SBA has planned several actions to
address recommendations made in the 2020 audit that should continue to improve SBA’s oversight of lenders in the 7(a)
program.

Additionally, many lenders rely on the services of fee-based and other third-party agents to help originate, close, service,
and liquidate SBA loans. Previous OIG audits have shown that SBA did not effectively identify and track third-party agent
involvement in its 7(a) and 504 loan portfolios. SBA has made substantial progress in identifying and tracking third-party
agents.

Issue: SBA’s Oversight of High-Risk Lending Participants
The risks inherent in delegated lending require effective oversight to monitor compliance
with SBA policies and procedures and take corrective actions when material noncompliance is
detected. However, OIG’s audit of SBA’s oversight of high-risk lenders found that OCRM did
not always effectively oversee high-risk lenders to identify and mitigate risks (Report 20-03,
November 12, 2019).

SBA did not always conduct planned high-risk lender reviews, recommend appropriate and consistent risk mitigation actions
for the deficiencies identified during the oversight reviews of high-risk lenders, or communicate loan deficiencies noted during
high-risk lender reviews to SBA approval and purchase loan centers.

Agency Progress
In FY 2020, SBA issued a final rule to implement the Small Business 7(a) Lending Oversight Reform Act of 2018. The
regulations include SBA’s informal enforcement actions for 7(a) lenders, authority to impose civil monetary penalties on all
7(a) lenders, and an updated definition of “credit elsewhere.”

SBA also realigned the OCRM organizational structure to provide greater management depth and consistency for its review
teams and added additional resources to the review teams for effective oversight.

OCRM also implemented quarterly meetings to assess high-risk lender review results and developed a communications
protocol that documents deficiencies identified during loan file reviews. OCRM plans to issue updated standard operating
procedures in FY 2021. The agency is also developing a database to manage the oversight of high-risk lenders that will be
implemented during FY 2021.

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Issue: Increased Risk Introduced by Loan Agents
Previous OIG audits and investigations have shown SBA could not effectively identify and
track loan agent involvement in its 7(a) and 504 loan portfolios and had outdated enforcement
regulations. OIG investigations have also revealed a pattern of fraud by loan packagers and other
fee-based agents in the 7(a) loan program, involving hundreds of millions of dollars.

Over the course of a decade, OIG investigated at least 22 cases with confirmed loan agent fraud, totaling approximately
$335 million (Report 15-16, September 25, 2015). The audit determined that loan agents were involved in approximately
15 percent of all 7(a) loans increasing the risk of default. SBA has indicated the percentage decreased to approximately
7 percent in FY 2020. Despite the prevalence of fraud in its loan portfolios, SBA’s oversight of loan agents was limited.

SBA implemented a process that requires lenders to provide a loan agent disclosure form (Form 159) to SBA’s fiscal-and-
transfer agent for 7(a) loans. The fiscal-and-transfer agent must enter the data into a database accessible to SBA. SBA also
began linking 7(a) loan Form 159 information with its loan data. In the report on SBA’s loan agent oversight (Report 15-16),
we identified significant issues in the data quality of Form 159. Additionally, the report found that SBA had not implemented
tracking Form 159 in the 504-loan program.

Agency Progress
In response to our report on SBA’s oversight of loan agents, SBA stated that it would explore the feasibility of implementing
a registration system for the 7(a) loan program (Report 15-16). SBA determined the best way to gather information on loan
agents was by improving Form 159. The enhanced Form 159 was approved by the Office of Management and Budget and
rolled out with official notification and lender training.

In FY 2019, SBA also implemented an effective method of disclosing and tracking loan agent involvement in the 504-loan
program. SBA requires 504 lenders to electronically submit Form 159 directly into SBA’s electronic lending system.

In addition, SBA has awarded a new Fiscal Transfer Agent contract. The contract requires the Fiscal Transfer Agent to develop
application and follow-up controls over 7(a) lender submissions to ensure critical fields on each form are completed. The
migration phase is in process, and SBA expects the enhanced controls to be fully implemented in FY 2021.

Because loan agent involvement in the 7(a) program is significant, it is important for SBA to have oversight tools in place to
identify and track loan agent involvement in this sizeable program. SBA also needs to effectively mitigate the risk introduced
by high-risk loan agents. OIG will continue to monitor SBA’s oversight of loan agents and conduct audits and reviews as
necessary.

Issue: Increased Risk Introduced by Lender Service Providers
In 2019, five former officers and employees at one of the largest lender service providers were
charged for their alleged roles in a 13-year conspiracy to defraud SBA in connection with programs
to guarantee loans made to small businesses.

The officers allegedly fraudulently obtained guarantees for loans SBA deemed ineligible. The officers
hid signs of ineligibility from the SBA by misrepresenting the use of SBA loan proceeds and unlawfully diverting previously
denied loan applications into expedited approval channels. The officers originated dozens of loans, totaling more than $10
million in disbursements, that were not eligible for SBA guarantees.

SBA has had to contend with the issue of risks introduced by lender service providers for some time. In a March 2015 audit
(Report 15-06), we noted that the outsourcing of traditional lender functions to lender service providers, a type of loan agent,
had significantly increased. Since then, the number of SBA-approved lender-service-provider agreements has grown significantly,
reaching almost 2,900, in part because of SBA’s effort to better control access to its systems by lender service providers.

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SBA assigns an identifying number for all lender service providers that access SBA systems and records all SBA-approved
agreements. Use of the identification number has made it possible for OCRM to develop initial metrics on provider
participation in SBA’s 7(a) program, but oversight is still limited. SBA’s loan agent performance analysis does not combine
lender service provider loan-level information to identify high-risk lender service providers.

Agency Progress
In response to our report on SBA’s oversight of lender service providers, SBA implemented a method to track lender service
provider involvement at the loan level. However, this information was not aggregated to evaluate performance.

In FY 2020, SBA worked with a contractor to develop performance analysis for lender service provider portfolios to identify
any high-risk lender service providers. SBA plans to complete and implement the enhancement in FY 2021.

As lender service provider involvement in the 7(a) program continues to increase, it will be especially important for SBA to
evaluate lender service provider performance and effectively mitigate the risk introduced by high-risk lender service providers.
OIG will continue to monitor SBA’s oversight of lender service providers and conduct audits and reviews as necessary.

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CHALLENGE 5
SBA’s Management and Monitoring of Section 8(a) Business Development Program
Needs Improvement

Why This Is a Challenge
SBA’s 8(a) Business Development Program was created to provide business development assistance to eligible small,
disadvantaged businesses seeking to compete in the American economy. A major benefit of the 8(a) program is that 8(a)
firms can receive sole source, as well as set-aside, competitive federal contracts, which means small businesses do not have to
compete against large businesses that may have an industry advantage.

SBA’s challenge has been to ensure that it is providing effective business development assistance to 8(a) firms and that only
eligible firms are admitted into and remain in the program. Additionally, SBA faces the challenge of developing objective and
reasonable criteria for determining at which point socially disadvantaged individuals are deemed economically disadvantaged.

Issue: SBA Continues to Address Its Ability to Develop Firms in the 8(a) Program and Measure
Results
In the past, SBA has adequately emphasized business development to enhance the ability of 8(a)
firms to compete for federal contacts. SBA has made assistance more readily available to program
participants by using resource partners, such as small business development centers, the SCORE
Association (formerly known as the Service Corps of Retired Executives), and procurement technical
assistance centers to offer individualized development assistance.

SBA also has taken steps to ensure business opportunity specialists assess program participants’ business development needs
during site visits. During FY 2018, SBA implemented additional measures for business opportunity specialists to use to assess
development of firms in the 8(a) mentor-protégé program.

However, despite these improvements, SBA has not fully established an IT system to perform regular performance monitoring
and reporting for 8(a) participants to assure compliance with their business plans. Without an effective IT system to monitor
8(a) participant progress in meeting individualized business development goals, SBA may not be able to consistently
determine whether 8(a) participants have demonstrated the ability to compete in the marketplace without 8(a) assistance.

SBA has unsuccessfully attempted to revamp its IT systems for monitoring 8(a) firms. SBA has partially implemented an IT
system, Certify.SBA.gov, that was intended to be a comprehensive approach to service delivery for all of SBA’s contracting
programs.

However, the system in place only handles certification management and does not offer many of the key essential
search, analytical, and reporting tools it was supposed to have. SBA already plans to develop a new IT system to replace
Certify.SBA.gov.

Agency Progress
SBA has decided to stop development on the current Certify.gov platform and redevelop it as an exclusive certification
management system. After spending more than $30 million, SBA’s initial attempt to implement Certify faced serious
developmental challenges and was scheduled to be decommissioned at the end of FY 2020.

SBA plans to develop a separate system to monitor 8(a) participants’ business development outside of Certify.gov, SBA created
a manual workaround for business opportunity specialists to assess the 8(a) participant’s individual business development
during the annual review and input results in a Microsoft Excel spreadsheet. This file is retained in the firm’s Certify.gov
case file, which lacks reporting functionality. Currently, SBA has no system to assist program officials in monitoring 8(a)
participants’ business development to assess the effectiveness of the program.

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In 2019, SBA formed a team to develop a solution to help program officials monitor 8(a) participants’ busines development
and assess the program effectiveness. The team has defined business development activities and identified performance
measures to assess outcomes. The team continues to explore technology solutions to capture the business development and
performance outcomes. Currently, SBA’s system for monitoring 8(a) participants development on an individualized basis is
limited to Excel files in the case files for the individual firm.

Issue: Streamlined Application Process May Expose the 8(a) Program to Higher Fraud Risk
For 6 years, there was a steady decline in the number of firms participating in the 8(a) program,
from about 7,000 in 2010 to about 4,900 in August 2016. In FY 2016, SBA leadership developed
an aggressive growth plan to increase the number of participants in the 8(a) program by 5 percent
over the previous year through a streamlined application process. However, as of August 2020, SBA
reports the 8(a) program now includes only 4,486 firms.

According to SBA officials, the streamlined application process is less burdensome for firms applying to the 8(a) program. As
part of this modified process, various documents previously used to determine an applicant’s eligibility to participate in the
8(a) program would no longer be requested or would be required in a modified version.

However, shortening the review process by eliminating documents may erode core safeguards that prevented questionable
firms from entering the 8(a) program. At the request of SBA’s former Deputy Administrator, we conducted a follow-on audit
to a report issued in FY 2016 (Report 16-13) to determine whether SBA resolved eligibility concerns for the 30 sample firms
in our audit. We determined that SBA resolved eligibility concerns for 20 of the 30 firms that we reviewed. We questioned the
eligibility of 10 firms (Report 17-15).

Agency Progress
We verified that SBA added controls to the application review process and has implemented corrective actions during
FY 2019. SBA updated its 8(a) program policies and procedures to include a statement of difference in the review notes of
each application when a final application decision differed from a lower level reviewer recommendation. SBA also updated its
policies and procedures to require Business Opportunity Specialists to submit a request to the Internal Revenue Service for
the tax transcripts to verify the 8(a) applicant’s financial information.

Although SBA updated its internal policies and procedures, these are guidelines and not mandatory. SBA should finalize
the corresponding regulations to require the use of tax transcripts to verify applicant financial information as a program
requirement.

Issue: Continuing Eligibility Processes Expose the 8(a) Program to Higher Fraud Risk
In FY 2018, we reported that SBA’s oversight was insufficient to ensure that 8(a) Business
Development Program participants met continuing eligibility requirements (Report 18-22). We
found SBA did not consistently identify ineligible firms in the 8(a) program and did not always act
to remove firms it determined were no longer eligible for the program.

In addition, SBA did not perform required continuing eligibility reviews when it received specific and credible complaints
regarding firms’ eligibility and did not log all complaints.

Agency Progress
SBA has updated its 8(a) program policies and procedures governing the 8(a) continuing eligibility review process and
evaluation standards, as well as the process for removing firms deemed ineligible for program assistance and submitted its
draft revised policies and procedures for review.

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SBA implemented the BD Hotline Complaints Tracker as the official system to track complaints about firms’ continuing
eligibility for the 8(a) program and the actions taken to address them. Since beginning to use the tracker in FY 2019, SBA has
identified two firms as high risk, determined ineligible, and terminated from the program.

Issue: SBA Dollar Threshold for Economic Disadvantage Should Be Based on Verifiable Data
The Small Business Act requires that participants be socially and economically disadvantaged.
The Act defines economic disadvantage as diminished capital and credit opportunities compared
to owners of similar businesses that are not disadvantaged. SBA, however, has not adequately
determined what constitutes diminished capital and credit opportunities.

Section 8(a)(6)(A) of the Small Business Act states, “In determining the degree of diminished credit and capital opportunities,
the Administration shall consider, but not be limited to, the assets and net worth of such socially disadvantaged individual[s].”
According to SBA regulations, when considering diminished capital and credit opportunities, SBA is to review such factors as
personal income, personal net worth, and the fair market value of all assets. SBA is also to compare the financial condition of
the company with other small businesses in the same primary industry classification.

Although SBA does review several factors when determining economic disadvantage, it relies primarily on the net worth
of the individual. Net worth by itself, however, does not show whether an individual has diminished capital and credit
opportunities.

In 2020, SBA published a rule to establish economic disadvantage net worth of $750,000 program. Before this year, SBA
regulations allowed individuals with a net worth of up to $250,000 for initial eligibility and $750,000 to remain in the
program and be classified as economically disadvantaged.

Agency Progress
In March 2011, SBA revised its regulations and established additional standards to address the definition of “economic
disadvantage” to be a net worth of less than $250,000. In FY 2018, SBA hired a contractor to do a study to help the agency
establish criteria defining economic disadvantage and set individual net worth thresholds.

The study developed three potential methodologies to set the threshold for economic disadvantage. Depending on the
methodology chosen, the financial threshold ranged between $400,000 and $1.2 million, without adjustments for home and
business equity.

The contractor’s study recommended SBA use the methodology that concluded that individuals with an adjusted net worth
of $375,000 ($1.1 million without adjustments) should be considered economically disadvantaged. However, SBA did not
adopt the $375,000 net worth standard because the agency did not consider economic disadvantage to be the deciding factor
of continuing eligibility for the program.

In May 2019, SBA published a proposed rule to address increasing the economic disadvantage by adopting the $750,000 net
worth continuing eligibility standard for all determinations. SBA requested comments to the proposed rule on whether the
$375,000 or $750,000 net worth standard should be used for the 8(a) program. SBA also requested comments on whether
SBA should decrease the economically disadvantaged Women-Owned Small Business net worth standard from $750,000 to
the lower $375,000 net worth standard supported by the study.

SBA considered the 146 comments that supported the $750,000 adjusted net worth standard to be a diverse set of
perspectives, which represented a balance in the public’s review of the final rule. However, most of the comments opposed
SBA decreasing the economically disadvantaged WOSB $750,000 adjusted net worth standard to the lower $375,000.

SBA concluded that the $375,000 net worth standard related to entry into the 8(a) program as opposed to participation
in the free enterprise system as an economically disadvantaged business owner. In 2020, SBA published its final rule for

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economic disadvantage to adopt a $750,000 net worth threshold for initial and continuing eligibility in the 8(a) program,
which aligned the 8(a) net worth threshold with other SBA preference contracting programs with economic disadvantaged
considerations.

Instead of adopting the $375,000 net worth standard for establishing economic disadvantage as the study had found through
empirical research, SBA relied on the $750,000 adjusted net worth that it had established for its other preference contracting
programs.

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CHALLENGE 6
Identification of Improper Payments in SBA’s Loan Programs Remains a Challenge

Why This Is a Challenge
In FY 2019, the dollar amount of SBA’s 7(a) loan approvals totaled $23.6 billion. Most of these loans were made by lenders
with delegated approval authority. When a loan goes into default, SBA conducts a review of the lender’s actions on the loan to
determine whether it is appropriate to pay the lender the guaranty, which SBA refers to as a “guaranty purchase.”

For loans sold on the secondary market, SBA is obligated to purchase the guarantee from the investor and review the lender’s
actions after payment is made. Pursuing recovery from a lender on sold loans is generally a more difficult task for SBA.

In FY 2014, OIG established a High-Risk 7(a) Loan Review Program to evaluate lender compliance with SBA requirements
for high-dollar, early defaulted 7(a) loans. High-dollar, early defaulted loans are loans of $500,000 or more that default within
the first 18 months of initial disbursement. During FY 2019, OIG identified material lender noncompliance in five of the
eight loans reviewed, totaling approximately $8.7 million in questioned costs.

This year, because of OIG’s priority focus on the Paycheck Protection Program, we only completed one assessment of a high-
dollar, early defaulted 7 (a) loan for FY 2020. That review identified material lender noncompliance, resulting in more than
$2 million in questioned costs (Report 20-18, August 25, 2020).

Although SBA completed purchase and quality control reviews on all the loans, the agency did not identify or fully address
the material deficiencies noted in the subsequent OIG review.

Issue: Improvements Needed to Ensure High-Risk 7(a) Loan Reviews Reduce the Risk of Losses
OIG audits have identified 7(a) loans that were ineligible, lacked repayment ability, or were not
properly closed, resulting in improper payments. These improper payments occurred in part because
SBA did not adequately review the related loans.

The OIG High-Risk 7(a) Loan Review Program uses an internal scoring system to prioritize loans
for review based on known risk attributes. This evaluation includes a review of high-risk loans
purchased by SBA to determine whether lenders materially complied with SBA requirements and to
identify suspicious activity.

Since FY 2014, we have recommended recoveries on 17 loans totaling more than $19.3 million under this program.
In addition, we identified suspicious activity on 5 loans totaling nearly $4 million, resulting in formal referrals to our
Investigations Division.

Our reviews have consistently identified issues regarding eligibility, repayment ability, size standards, franchise agreements,
business valuations, appraisals, equity injection, and debt refinance. The program also identified concerns with change of
ownership transactions and SBA’s identification of improper payments.

Agency Progress
SBA modified production standards to allow loan specialists more time to review complex early defaulted loans. In addition,
the agency improved its review of loans by providing training to loan specialists and updating the loan review checklist.

In FY 2020, SBA evaluated its purchase process and quality control reviews for 7(a) guaranteed loans to determine why the
loan center reviews did not identify or correct lenders’ noncompliance with SBA requirements, as noted in OIG reports.

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CHALLENGE 7
SBA’s Disaster Assistance Program Must Balance Competing Priorities to Deliver
Prompt Assistance but Prevent Potential Fraud

Why This Is a Challenge
The disaster loan program plays a vital role in the aftermath of disasters by providing long-term, low-interest loans to affected
homeowners, renters, businesses of all sizes, and nonprofit organizations. SBA must continually balance the priority of quickly
assisting disaster survivors in the immediate aftermath of a devastating life event against the need to ensure program integrity.

During large-scale disasters such as COVID-19, SBA must bring on new loan officers to match the volume of loan applications
and prevent processing backlogs that delay the delivery of disaster assistance. To respond to the COVID-19 pandemic, SBA
increased its permanent and temporary trained staff size to more than 9,000, which was more than any other previous disaster.
It has been a challenge for SBA to bring on significant numbers of staff and provide them with the proper level of training.

In our September 2019 report (Report 19-23), SBA’s Audit of Desktop Loss Verification, we found the desktop loss
verification process helped SBA meet its timeliness goals for disaster applications, but controls needed strengthening to reduce
the risk of fraud and ensure program integrity. SBA did not always validate the cause and extent of damages and repair and
replacement costs before disbursing loan funds and relied on reports from the Federal Emergency Management Agency that
did not contain pertinent information needed to validate the reported damages and losses in the initial loss verification.

Loan files also did not contain sufficient documentation to support loan-making decisions. Without adequate loss
verification, loans could be made to individuals who do not qualify for the loan or do not have damages that justify the
amount of the loan.

Issue: Reserve Staff Need Training to Sustain Productivity During Mobilization
SBA has had this challenge for several years but has made progress in reducing risks. However, the
magnitude of the COVID-19 pandemic required SBA to rapidly increase trained staff to historic
levels. The number of personnel needed to address this pandemic was almost twice the previous
historic high in numbers of total staff. And the agency had to develop the needed training to address
the new criteria for COVID-19 disaster loans.

In response to Hurricanes Harvey, Irma, and Maria, SBA’s Office of Disaster Assistance increased its trained staff from 800
to more than 5,000 employees in December 2017. By contrast, in response to the COVID-19 pandemic, SBA increased its
permanent and temporary staff size to more than 9,000 employees to handle the unprecedented volume of applications and
prevent processing backlogs that delay the delivery of disaster assistance.

SBA outsourced EIDL processing to a subcontractor. However, the process to approve or decline COVID-19 EIDLs was left
to SBA staff. Suddenly, SBA had to train both the existing staff and all the newly hired employees the new system to approve
or decline loan applications.

Agency Progress
Although SBA is continuing to face this challenge, it is slightly different requiring the training of staff to the new COVID-
19 EIDL criteria. SBA had previously addressed OIGs recommendations and based on their progress the recommendations
were closed. However, the staff training issue was still included in last year’s Management Challenges report. In FY 2020, the
COVID-19 pandemic reignited the need to train and mobilize the largest number of new employees ever.

In 2018, SBA published an “after action” report reviewing its successes, challenges, and action items from the response to
hurricanes Harvey, Irma, and Maria. SBA then launched a cross-functional training plan development team to develop core

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training modules, as well as online and automated tutorials. A similar after-action report for the response to COVID-19 will
help SBA to determine if employees were sufficiently trained to accurately process loans and make appropriate loan decisions.

Issue: Improper Payment Quality Assurance Process Needs Strengthening
SBA received a historic number of loan applications in FY 2020. In our ongoing work, we have
found a significant number of potentially fraudulent loans, which will increase the improper
payment testing and put pressure on the current improper payment process.

The deadline to apply for COVID-19 EIDLs is December 31, 2020. SBA will continue to process
loan applications submitted before the deadline after that date, as well as continuing to provide
other disaster relief, situations that could easily result in improper payments.

In February 2020, we reported on weaknesses we found in the improper payment quality assurance process. We found that
the improper payments appeal process effectively assessed improper payments, but the initial review process was inefficient.

Agency Progress
SBA has acted on this new issue to reduce or eliminate the number of improper payments being made on COVID-19 loans.
We will continue to monitor agency actions to ensure policies are clear and comprehensive and staff is adequately trained to
effectively identify improper payments.

Issue: Inadequate Verification of Cause and Extent of Damages
A critical part of the disaster lending process is evaluating the cause and extent of property damages,
which provides SBA the information necessary to establish eligibility for disaster loan funds. In
2019, we reported on the desktop loss verification process (Report 19-23).

In the past, loss verifiers conducted on-site inspections to assess damages. But in January 2017
in response to the increased number of digital applications, SBA implemented the desktop loss
verification process to expedite assistance to disaster survivors.

The desktop loss verification process uses a two-pronged approach: an initial desktop loss verification and a post desktop
review. The initial desktop loss verification is used to estimate the cost of repairs. After the initial desktop loss verification,
SBA requires a post-desktop review to validate the total damage estimates obtained from the initial desktop loss verification.

However, SBA did not always validate the cause and extent of damages and repair and replacement costs before disbursing
loan funds. SBA relied on Federal Emergency Management Agency reports that did not contain information needed to
validate damages and losses reported in the initial loss verification, and loan files did not contain sufficient documentation to
support loan-making decisions.

As a result, SBA disbursed 36,869, or 50 percent, of the 73,313 loans included in our scope, totaling $594,286,878 without
validating damages and losses. We recommended SBA strengthen controls to reduce the risk of fraud and ensure program
integrity for the loss verification process.

Agency Progress
The agency has made substantial progress to strengthen controls to reduce the risk of fraud and ensure program integrity. In
FY 2020, the agency updated its policies and controls to prevent loan disbursement before a post-desktop review. The agency
also stopped using Federal Emergency Management Agency reports to conduct post-desktop review and confirmed all post-
desktop reviews will be performed onsite.

The agency also updated its policy and now requires loss verifiers to provide documentation to support conclusions of post-
desktop review. We will continue to monitor agency actions to strengthen controls to reduce the risk of fraud and ensure
program integrity.

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CHALLENGE 8
SBA Needs Robust Grants Management Oversight

Why This Is a Challenge
In FY 2020, SBA had $261 million to administer grants and cooperative agreements to resource partners and other
nonfederal entities for technical assistance and training programs to develop small businesses. This amount doubled in March
2020 when Congress increased the funds available to provide additional technical assistance to small businesses affected by the
COVID-19 pandemic.

With recent governmentwide emphasis on grants management reform, and a priority initiative to modernize the government
in the President’s Management Agenda of 2018, it is SBA’s responsibility to maximize the value of its grant funding to ensure
its grant programs effectively and efficiently accomplish program objectives. In OIG’s review of past audit findings (Report
19-02), we identified systemic issues with SBA’s accuracy of grant data for both financial and performance reporting and
ineffective oversight. We have continued to find grant management deficiencies in recent reviews of SBA grant programs.

Issue: SBA’s Grants Management System Needs Improvement
During FY 2020, most of SBA’s technical assistance programs used the federal Procurement Request
Information System Management, or PRISM, to award and report on grants. The PRISM system
requires substantial manual data entry, which is prone to human errors.

In March 2018, we issued a Management Advisory memorandum (Report 18-15) on material
weaknesses identified by an independent accounting firm in SBA’s controls over the accuracy of data
reported in USASpending.gov.

In SBA’s internal A-123 review on the grant management process, SBA’s internal auditors found that 100 percent of the
sampled transactions included inaccuracies. These data inaccuracies inhibit policymakers’ and the public’s ability to effectively
track federal spending. Errors also affect the agency’s ability to report complete and accurate information on time, as required
by the Digital Accountability and Transparency Act of 2014.

Agency Progress
SBA has made substantial progress to modernize its grants management system. In FY 2019, SBA approved funding totaling
$2.5 million over 5 years to implement Grantsolutions.gov.

SBA management believes the investment will help the agency
improve funding management, awarding of grants, processing payments, and close-outs;
enhance ability to develop accurate performance metrics reporting;
reduce compliance violations; and
increase auditability, accountability, and transparency.
In 2019, SBA entered into an interagency agreement with the U.S. Department of Health and Human Services to provide
transition analysis, infrastructure setup, and training services to launch Grantsolutions.gov.

SBA has incrementally transitioned its grant programs to the new Grantsolution.gov system. In FY 2020, several of SBA’s
program offices have adopted SBA’s new grants management system. For each program, officials must ensure the system is
customized to meet the program’s needs.

SBA has also worked to integrate the financial system with Grantsolution.gov. SBA continues to make progress
implementing the system despite competing priorities in managing the CARES Act programs. SBA plans to fully implement
the system for all grant programs in 2021. The full implementation of Grantsolution.gov will improve SBA’s compliance,
oversight, and management of its grant programs.

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AGENCY’S RESPONSE TO THE OIG TOP MANAGEMENT AND
PERFORMANCE CHALLENGES FACING THE SMALL BUSINESS
ADMINISTRATION IN FISCAL YEAR 2021
OFFICE OF THE ADMINISTRATOR

U.S. Small Business Administration
Washington, D.C. 20416

Agency’s Response to the OIG Top Management and Performance
Challenges Facing The Small Business Administration in Fiscal Year 2021
On behalf of the Agency, we thank the Office of the Inspector General (OIG) for its efforts to identify the top management
and performance challenges facing the U.S. Small Business Administration (SBA). The OIG’s investigation and analysis
provide important insight into the threats and challenges to our enterprise objectives. We believe the SBA’s substantial
progress can be attributed in no small measure to our continued communication, collaboration, and coordination with the
OIG leadership and staff.

Our offices remain dedicated to continuing SBA’s efforts to address existing Management Challenges. The insights of the
2021 Management Challenges Report (Report) have been shared throughout SBA so that our leadership at every level can
better evaluate risks and effectively prioritize resources and oversight efforts.

The challenges brought on by the COVID-19 pandemic has tested the resolve and capabilities of the entire Agency. SBA has
effectively delivered economic assistance to tens of millions of small business owners who collectively serve as the bedrock
of our Nation’s economy. Economic Injury Disaster Loans and Advances (“EIDL Program”) and the Paycheck Protection
Program (PPP) have been a critical part of that relief. Considering the unprecedented circumstances, SBA has served
small businesses as efficiently and effectively as possible, while being responsible stewards of taxpayer funds. SBA is deeply
committed to managing the risk of waste, fraud, and abuse in these and all other SBA programs.

In this letter, SBA has identified the Agency’s concerns already shared with the OIG prior to the publication of the Report’s
final version. In addition, information the OIG gathered through its most recent audits did not inform OIG’s assessment of
Agency progress on several of the Management Challenges, resulting in further inaccurate perceptions of potential fraud.

We request OIG’s careful review and consideration of these areas as we move forward in addressing the challenges during
FY 2021 and appreciate SBA’s ongoing collaboration with OIG.

Sincerely,

Jovita Carranza
Administrator

Attached: Discussion of Select 2021 Management Challenge Concerns

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Discussion of select 2021 ManageMent challenge concerns

Challenge 1 - SBA’s Economic Relief Programs Are Susceptible to Significant Fraud Risks and
Vulnerabilities (Office of Capital Access and Office of Disaster Assistance)

Issue: Paycheck Protection Program (PPP)

Concern:
SBA disagrees with the language in this statement, “SBA moved quickly to establish the new nationwide program but eased
controls required in its lending programs to do so, increasing the risk of rampant fraud.”

Discussion:
SBA, in consultation with the United States Department of the Treasury (Treasury), has worked to ensure the PPP program’s
effectiveness since the PPP’s inception. This is reflected in the speed with which SBA and Treasury enabled millions of small
businesses to have critical capital access, and support tens of millions of employees. SBA and Treasury have also worked
with leading private sector subject matter experts to design and implement robust loan forgiveness and review procedures
to protect and mitigate against fraud, waste, and abuse, and have continually adjusted PPP to ensure the integrity of this
emergency program. The positive results of these efforts are reflected in the robust borrower certifications in the application
form, which subject borrowers to severe penalties for incorrect or false eligibility certifications which are in place to divert
fraud.

If SBA determines a borrower made an eligibility certification that was incorrect or lacked an adequate basis, SBA may seek
repayment of the PPP loan, and the borrower may be ineligible for loan forgiveness. Further, in the event SBA determines
that a borrower made a knowingly false certification on an application for a loan, SBA may refer the borrower for appropriate
civil or criminal penalties. Further, the loan application and loan forgiveness applications impose stringent requirements on
borrowers and lenders to support applications with documentation and maintain those documents for potential audits.2

OIG’s assertions regarding the PPP do not appear to be a result of an audit, but rather a result of an informal review. In
general, given the stage of OIG’s review of the PPP, we believe OIG’s assertions regarding the PPP should have been more
circumspect in the Report.

Issue: Paycheck Protection Program (PPP) Eligibility and Issue: Paycheck Protection Program Data
Reliability

Concern:
OIG’s analysis in this Management Challenge included fundamentally inaccurate presumptions about data sources used to
conduct their investigation, resulting in erroneous conclusions.

Discussion:
OIG used an incorrect formula to calculate maximum loan amounts by not incorporating EIDL refinances. OIG mistakenly
relied on original amounts of loans, which did not reflect the subsequent loan reductions conducted by June 30, 2020. This
resulted in the OIG’s analysis evaluating loan amounts inflated above the actual, adjusted loan amounts and did not exclude

2 See Sec 1106(f ) of the CARES Act; IFR #1, III.2.q.; IFR #3, III.1.g.; IFR on Forgiveness (IFR #14); IFR on Loan Reviews (IFR #15), III,1.c and III.2.b.; SBA
Form 2484 (lender retention requirements); SBA Form 3508 Instructions, p. 6 – 7 (Borrower retention requirements); SBA Form 3508EZ Instructions, p. 4 (Borrower
retention requirements).

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loans that were canceled entirely. Also, OIG’s analysis inaccurately indicates that disbursements of loan funds predated loans’
approval, which was not the case. SBA has provided evidence to OIG to verify these errors.

Issue: Potentially Fraudulent COVID-19 Economic Injury Disaster Loans

Concern:
The Agency response to OIG Report 20-16 refutes the assertion of “potential fraud” as a basis for this new Management
Challenge. The report states: “To expedite the process, SBA ‘lowered the guardrails’ or relaxed internal controls, which
significantly increased the risk of program fraud.” This statement is misleading and fails to acknowledge that SBA
implemented the COVID-19 EIDL program per the CARES Act and in the process has taken measures to address fraud risk
in the program.

Discussion:
SBA recommended the OIG amend their statement for accuracy, and state: “SBA implemented the COVID-19 EIDL
program per the CARES Act which relaxed critical internal controls, such as the requirement for applicants to provide a
federal tax return.”

Concern:
The OIG inaccurately asserted that: “We found several serious problems, including significant evidence that SBA approved
billions in potentially fraudulent loans to…” This statement is categorically inaccurate because the findings the OIG cited
as indicators of fraud are not categorically consistent or reliable indicators of potential fraud. Also, the statement “Although
there may be some legitimate reasons for individual occurrences, multiple occurrences signal a strong indication of fraud” is
false and misleading.

Data and supporting information provided by the Agency in response to OIG Report 20-16 demonstrated that the
underlying basis for asserting the extent and severity of the “potential fraud” are not grounded in the data provided.
Unfortunately, the data provided in this audit conducted in parallel to the Management Challenge review was not considered
in the development of this Management Challenge.

Discussion:
In their examination, the OIG did not look at individual loans within their sample. Instead, the OIG searched for
commonalities and grouped the loans into “buckets” that reflected the common attributes they inaccurately describe as
reliable indicators of potential fraud. While there may be some instances in which fraud may be correlated with these
indicators, a more thorough review of the data and supporting information SBA provided, OIG would have seen a far more
complex behavior pattern that occurred through legitimate business needs. As an example, multiple loans from the same I.P.
address signals a strong indication of an accountant, attorney, or financial advisor completing applications for their portfolio
of clients, versus the assumption of fraud.

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Challenge 2 - Inaccurate Procurement Data and Eligibility Concerns in Small Business Contracting
Programs Undermine the Reliability of Contracting Goal Achievements (Office of Government
Contracting and Business Development)

Concern:
The Report states that the OIG and GAO have “over the years” substantiated widespread misreporting by agencies in the
annual Small Business Goaling Report. OIG does not include any supporting footnote or citation to the Report’s OIG
references.

Discussion:
The OIG cites Reports 18-22 (September 2018), and 19-08 (March 2019), which take issue with a potential that “larger
companies have substantially performed contract awards reported as having gone to small firms.” The only example of that
inaccurate reporting of data is presented in the GSA OIG report that OIG referenced.3 By including this GSA OIG report
as shown, OIG fails to provide the context needed to portray the GSA OIG findings accurately, most notably that GSA and
GSA OIG acknowledged the Federal Procurement Data System Next Generation (FPDS-NG) system limitations, and the
FAR Rule 2014-002 that allows for FPDS-NG to be updated to assign multiple NAICS codes to a contract.

From the GSA response, “Due to FPDS-NG system limitations, the NAICS code assigned and prepopulated cannot be
changed. Those system limitations mandate that NAICS codes propagate from the parent IDV. FPDS-NG does not allow
for more than one NAICS code to be assigned to a contract.” The GSA OIG acknowledges FPDS-NG system limitations
related to four FAS task order contracts with incorrect NAICS codes. OIG Reports 18-22 and 19-08 did not have findings on
large companies performing work that had gone to small firms. Additionally, Reports 18-22 and 19-08 did not have findings
related to incorrect NAICS codes.

Finally, per FAR Rule 2014-002, published February 27, 2020, and GSA’s response to the GSA OIG report, “FPDS-NG will
be updated to allow for the assignment of multiple NAICS codes to a contract and will enable an order to designate a NAICS
code and corresponding size standard that matches a NAICS code and corresponding size standard awarded under the IDV
contract” (FAR 19.102(b)(3)).4 SBA does not control this system, and continued reference to incorrect reporting in this
respect is misleading. The FAR rule was published in February 2020, which should have afforded the OIG opportunity to
review and accurately include these program advancements in the 2021 Management Challenge Report.

Issue: Agencies Receive Credit for Ineligible Firms or Firms No Longer in the 8(a) or HUBZone
Programs

Concern:
The OIG states, “The amount of dollars SBA reports to Congress and the public as being performed by 8(a) and HUBZone
firms in the Small Business Goaling Report is inflated by the inclusion of contract actions performed by ineligible program
participants.” The sentence on its face is accurate; however, the samples were selected judgmentally in both referenced OIG
reports. OIG attempts to extrapolate findings from the small sample to the entirety of the contracting population to support
its assertions related to goaling inaccuracies for HUBZone and 8(a). Such an extrapolation lacks sufficient evidence to suggest
that the issues the OIG highlights are reflected in a more statistically representative sample of Program participants. The
access to and the integrity of the HUBZone Program has in fact been improved with the recent changes made to the Program
by SBA.

Discussion:
The purpose of the HUBZone Program is to provide Federal contracting assistance for qualified small business concerns
located in historically underutilized business zones to increase employment opportunities, investment, and economic

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development in those areas. (FAR 19.1301(b)). SBA proposed these regulations to reduce barriers to entry and participation,
which is directly in line with the spirit and intent of the Program. Concurrently, to maintain Program integrity, SBA also
updated the continuing eligibility requirements to require all firms to undergo annual, rather than the previously required
triennial, recertification, with a documentation review taking place every three years. This change is an increase of Program
oversight.

In the Report, the OIG asserts that changes made to regulations for HUBZone are not in line with the Program’s intent,
and that it affects the government’s ability to enforce the residency requirement. The analysis OIG presents does not include
context regarding SBA’s reasoning for the change or internal controls and oversight currently in place to monitor the impact
of the provision, which was provided in the rulemaking. OIG also does not reference any empirical evidence that this
regulation change would adversely affect a firm’s attempts to maintain compliance.

Concern:
OIG states, “More transparent reporting of awards to firms that grow beyond the definition of “small” after the award is
necessary to show a true picture of the small business goal achievements.” OIG does not provide any supporting information
that validates this assertion.

Discussion:
This language asserts, without evidence, an issue of how to define small firms awarded multi-year contracts and grow
to be other than small in the years after the initial award. SBA regulations clearly outline when contract level re-
representation is required. Contracting officers have discretionary authority to request new size certifications for a task order
(13 CFR 121.404(a)(1)(iii)). However, they are permitted to rely on the contract level representation made, per the size
standard in effect at the time of representation, that corresponds to the NAICS code assigned to the contract. Contract level
re-representation is also explicitly required in three circumstances: 1) within 30 days after execution of a novation agreement,
2) within 30 days after a merger or acquisition of the contractor, and 3) no more than 120 days prior to the end of the fifth
year of the contract (13 CFR 121.404(g)).

The Contracting Scorecard Grading Methodology references the appropriate regulations regarding multi-year contracts and
how they are reported. To aid in transparency, in future years SBA plans to update the comment section of the Small Business
Procurement Scorecard to refer to the Contracting Scorecard Grading Methodology. It should also be noted that, as mentioned in
the GSA OIG report, FPDS-NG currently has systems limitations related to reporting. SBA does not have the authority to
address these limitations directly.

Concern:
The OIG overstates the issue with reported goaling.

Discussion:
In recent years, the OIG audits of the HUBZone Program did not accurately reflect a statistically representative sample
of program participants and this resulted in an overstatement of its issue with the extent of agencies who receive credit for
ineligible firms and the over $41 billion in contracts for 8(a) and over $11 billion for HUBZone. OIG’s extrapolation of its
sampling method is flawed, in that for the closure of the corresponding report recommendations for both audits, the total
actually disallowed was less than 1% is of the total contracts awarded in the Programs during the period scoped in the audit.

In Report 18-22, OIG selected a small, judgmental sample of 15 firms with the highest contract dollar amount for FY 2016,
totaling $461 million. This sample was substantively inconsistent with the rest of the participants in the 8(a) Program with
set-aside contract obligations awarded to individually-owned firms in FY 2016 was $11.6 billion. With the closure of the
corresponding report recommendations, OIG agreed that only approximately $3.9 million would be disallowed. The total
actual disallowed is 0.759% of the sample and 0.032% of the total of all 8(a) dollars awarded in FY 2016.

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In Report 19-08, SBA OIG selected a judgmentally stratified sample of 15 firms from April 2017 to March 2018, totaling
$29.4 million. During the same period, the universe of HUBZone contracts awarded to firms certified into the HUBZone
Program was approximately $47.42 million. With the closure of the corresponding report recommendation, OIG agreed that
only $29,712 would be disallowed for one firm that did not respond to SBA’s request for additional information. The total
actual disallowed amount is 0.099% of the sample and 0.061% of the total dollars in HUBZone contracts awarded during
the period.

SBA does not believe this issue should rise to the level of one of the most significant Management Challenges facing
the Agency, when considered with the improvements to the management and oversight of both the HUBZone and 8(a)
Programs, which are correctly recognized and mentioned in Challenge 2 under Agency Progress.

Challenge 4 - SBA Risk Management and Oversight Practices Need Improvement to Ensure the
Integrity of Loan Programs (Office of Capital Access)

Concern:
The OIG report inaccurately states, “Most traditional 7(a) and 504 SBA loans are originated by lenders with the delegated
approval authority, resulting in limited SBA oversight and quality control reviews until a default occurs. Many lenders rely on
the services of fee-based and other third-party agents to help originate, close, service, and liquidate SBA loans.”

Discussion:
Whether they have a primary federal regulator or are regulated by the SBA, lenders with delegated approval authority undergo
regular risk-based or safety and soundness reviews. If these reviews find that they are not compliant with SBA requirements,
the delegated authority can be suspended either voluntarily or through increased supervision or enforcement.

Additionally, based on Office of Credit Risk Management’s (OCRM’s) analysis of the portfolio, the term “many” is not
accurate. Approximately 160 lenders have used agents over the past three years to generate a minimum of $5 million in
originations. The majority of lenders who utilize either agents or Lender Service Providers (LSPs) to assist them in their SBA
loan operation do so because they are small lenders that are new to the Program. These lenders rely on experienced agents or
LSPs to help them originate loans that comply with SBA requirements. It is important to note that OCRM’s mission is to
work closely with lenders who rely on agents to assist in obtaining and packaging applications to ensure that they are actively
managing these relationships and monitoring the performance of referred loans in their portfolio. SBA holds the lenders
accountable, as it does not have direct authority over third parties who assist lenders with their SBA lending operations.

Issue: SBA’s Oversight of High-Risk Lending Participants

Concern:
OIG’s audit of SBA’s oversight of high-risk lenders found that OCRM did not always effectively oversee high-risk lenders to
identify and mitigate risks.

Discussion:
SBA submitted audit closure submission materials for 4 of the 6 audit recommendations for the audit cited in this
Management Challenge (20-03). With the information provided to close these recommendations already submitted to the
OIG, there should be a substantial acknowledgment that OCRM has made considerable progress in strengthening its risk
management framework and reviewing methodologies to identify and mitigate lender risk.

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Issue: Increased Risk Introduced by Loan Agents

Concern:
Based on OCRM’s analysis of loan agent activity, the 15% referenced here by OIG is not accurate.

Discussion:
Based on SBA data, in FY 2020, the percentage of loan agent involvement in 7(a) disbursements is 7.4%.

Challenge 5 - SBA’s Management and Monitoring of Section 8(a) Business Development Program
Needs Improvement (Office of Government Contracting and Business Development)

Issue: SBA Continues to Address Its Ability to Develop Firms in the 8(a) Program and Measure Results

Concern:
The OIG has misrepresented the complexity and context of this issue by stating, “SBA has not fully established an I.T. system
to perform regular performance monitoring and reporting for 8(a) participants to assure compliance with their business plans.
Without an effective I.T. system to monitor 8(a) participant progress in meeting individualized business development goals,
SBA may not be able to consistently determine whether 8(a) participants have demonstrated the ability to compete in the
marketplace without 8(a) assistance.”

Concern:
OIG strongly implies that incomplete delivery of Certify’s historic business requirements equates to failure to appropriately
monitor and report on 8(a) participant performance against business plans, as well as an inability for SBA to evaluate
participants’ competitiveness in the federal marketplace without business development assistance. Management does not
agree.

Discussion:
In August 2019, SBA re-baselined the business requirements for Certify.sba.gov. The re-baselined requirements address
automation and digitization of the certification management process for SBA’s business development and set-aside contracting
programs. Thus, Certify’s state of development is appropriately no longer tied to requirements of the past which concerned
8(a) program efficacy, and 8(a) firm participant development support, or measurement of either.

In October 2019, SBA’s 8(a) Program and its Office of Field Operations partnered to establish a Business Assistance Tool
for use by SBA staff in the field and Headquarters to perform regular performance monitoring of participant firms. This
initiative has been productive and procedural notice development to formally implement this tool is underway after a brief
pause in 2019 to prioritize provision of relief options to Program participants affected by COVID-19.

Issue: Streamlined Application Process May Expose the 8(a) Program to Higher Fraud Risk

Concern:
The OIG asserts, without evidence, a higher risk of fraud. OIG’s direction to SBA to require the use of tax transcripts to
verify applicant financial information as a program requirement ignores the current limitations related to obtaining this
information from the Internal Revenue Service (IRS).

The OIG also fails to include critical context on the now-closed report recommendations from Reports 16-13 and 17-15. For
Report 17-15, the firms’ final eligibility determinations were agreed to by OIG that only 2 of the 10 firms were determined

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OTHER INFORMATION (UNAUDITED)

to be ineligible with $0 disallowed. With the closure of the corresponding report recommendations at $0 disallowed, it is an
exaggeration to elevate this issue to a Management Challenge level.

Discussion:
In 2016, SBA removed the requirement that all 8(a) Program applicants must submit a signed IRS Form 4506T, Request for
Copy or Transcript of Tax Form. 81 FR 48558, 48569 (July 25, 2016). At that time, SBA agreed with a commenter to the
proposed rule that questioned the need for every applicant to submit IRS Form 4506T. Because SBA’s regulations allow for
the request of additional documents deemed necessary to determine eligibility, SBA has the authority to request a particular
firm to submit IRS Form 4506T when appropriate. SBA reasoned that with this existing authority the requirement could be
eliminated for all applicants. The application process would benefit from this streamlining, without leading to an increase of
applicant fraud.

However, in response to continued concerns raised by SBA’s OIG, SBA proposed to amend SBA’s regulations
(13 CFR § 124.203) to reinstate the requirement that every applicant to the 8(a) Program submit IRS Form 4506T (or, when
available, IRS Form 4506C). After reviewing comments received from the public on the proposed rule, SBA determined that
neither Form is a viable option for independent personal income verification purposes at this time.

On July 1, 2019, the IRS removed the third-party mailing option from Form 4506T after IRS determined that this delivery
method presents a risk to sensitive taxpayer information. As a result, the IRS will no longer send tax return transcripts
directly to SBA; instead, transcripts must be mailed to the taxpayer’s address of record. Because of the improper chain of
custody, the Agency no longer believes this form is an effective tool for independent income verification.

SBA’s understanding is that the IRS is currently developing a successor form or Program through which SBA and other
Federal agencies may directly receive a taxpayer’s tax return information for income verification purposes. As such, the final
rule that SBA recently published provides that each individual claiming disadvantaged status must authorize SBA to request
and receive tax return information directly from the IRS, if such authorization is required. 85 FR 66146. SBA believes that
this required authorization will help to maintain the integrity of the Program. However, without this authorization, SBA is
still able to verify the appropriate eligibility information of applicants. OIG’s assertion that a streamlined application process
may lead to increased fraud continues to be unsubstantiated.

Issue: SBA Dollar Threshold for Economic Disadvantage Should Be Based on Verifiable Data

Concern:
The OIG report inaccurately states that “[i]nstead of adopting the $375,000 net worth standard for establishing economic
disadvantage as the study had found through empirical research, SBA relied on the $750,000 adjusted net worth that it had
established for its other preference contracting programs.” SBA disagrees with this characterization of the study.

OIG does not clearly state why their concerns with 8(a) economic disadvantage net worth amount being in line with
other preference contracting programs is problematic. The Report acknowledges SBA reviews several factors but presents a
mischaracterization that SBA “relies primarily” on net worth and that the data SBA uses is not “verifiable.” According to the
regulations, SBA can and does review personal income, personal net worth, and fair market value of all assets.

Discussion:
SBA conducted the independent study in response to OIG and constituent concerns about the validity of the prior size
standard. The study was thorough and considered a wide range of issues related to small business access to contract
opportunities and the acquisitions’ regulatory environment complexities. The study did not conclude, as the OIG suggests,
that a net worth standard of $375,000 was the only supportable net worth standard. Instead, the study concluded that the

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OTHER INFORMATION (UNAUDITED)

available data support an economic disadvantage threshold between $375,000 and $1.2 million. This range reflects the
complexity of establishing a threshold that considers the ability of disadvantaged business owners to compete in the free
enterprise system, as well as those individuals’ access to credit and capital. The $750,000 standard is within that range and is
entirely supported by the study.

Challenge 7 - SBA’s Disaster Assistance Program Must Balance Competing Priorities to Deliver
Prompt Assistance but Prevent Potential Fraud (Office of Disaster Assistance)

Issue: Reserve Staff Need Training to Sustain Productivity During Mobilization

Concern:
This should be indicated as a “new” issue. The description of the issue inadequately describes the fundamental training
shortfall or how it is substantive enough to be elevated as an issue to a Management Challenge level.

Discussion:
While the topic was referenced in the OIG’s FY 2020 Management Challenges Report, the reference was only invoked in that
Report to inform that the related recommendation was closed in the preceding year (2019). This issue was not referenced
as an ongoing issue in FY 2020. Therefore, introducing the issue in this Report makes it a fundamentally new issue, so it
should be marked accordingly.

Additionally, the OIG has offered no supporting evidence that training for reserve staff is an issue. The description is severely
lacking any detail and only describes that staffing increases were necessarily much higher for COVID-19 than what SBA did
for the 2017 Hurricane Season. There is also an oblique reference to the fact that staff learned a new system for processing
applications that was fundamentally unique from traditional processing for EIDL loan applications in order to be compliant
with CARES Act requirements. Still, the OIG does not explain why this was a shortfall that must be addressed as an issue
under a Management Challenge.

Issue: Improper Payment Quality Assurance Process Needs Strengthening

Concern:
The OIG included a factually inaccurate and misleading statement, “In FY 2020, SBA disaster relief for COVID-19 was at
historic levels. SBA will continue to make COVID-19 EIDLs until December 31, 2020, as well as continuing to provide
other disaster relief.”

Discussion:
The scheduled application deadline for COVID-19 EIDL is December 31, 2020, but SBA will continue to approve loans
after that date that were submitted before the deadline, subject to the availability of appropriated funding. SBA will also
continue to consider reconsiderations submitted after the application deadline but before the 6-month period closes following
the initial decline decision. Applicants can also submit an appeal up to 30 days after a decline decision for a reconsideration.
We can also consider requests to increase loans after the application deadline. SBA uses these program flexibilities regularly
for the disaster loan program, which also extends to COVID-19 EIDL loans.

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Issue: Inadequate Verification of Cause and Extent of Damages

Concern:
The OIG mischaracterized the issue by stating that, “Verifying staff gathers and evaluates information through telephone
interviews with applicants and third-party information, such as tax assessors’ websites, Google Earth, and Zillow.”

Discussion:
As described in the Report, this reflects an outdated process used in 2017 when the desktop verification was first launched.
The process has since changed significantly, as described in OIG’s documentation to close recommendations from Audit
Report 19-23.

Concern:
The OIG inaccurately asserted that “SBA inappropriately relied on Federal Emergency Management Agency (FEMA) reports
that did not contain pertinent information needed to validate damages and losses reported in the initial loss verification, and
loan files did not contain sufficient documentation to support loan-making decisions.”

Discussion:
It was not “inappropriate” to use FEMA housing inspection reports. The information included in those reports is useful
in supporting SBA disaster assistance deployment, but it does not supplant the independent verification of losses. SBA also
disagreed with the OIG’s use of this language in Audit Report 19-23. SBA has since implemented a simpler solution to
resume onsite inspections as the post desktop report instead of using third party data to augment information received by
FEMA and minimize the impact on the disaster survivor.

Concern:
The OIG mischaracterized the topic by stating that, “As a result, SBA disbursed 36,869, or 50 percent, of the 73,313
loans included in our scope, totaling $594,286,878, without validating the cause, extent, or cost of damages. There was no
assurance that disaster loans were only provided to individuals impacted by hurricanes Harvey, Irma, or Maria.”

Discussion:
SBA always validated the damages referenced. In some instances, the post-desktop review was completed 1-2 days after the
disbursement. But in all cases, the damages were validated. It is also inaccurate to state there were no assurances that funds
went to people with damage when the OIG’s analysis found zero cases of loans being provided to borrowers that did not
have damage. The recommendations that SBA agreed to implement were only about the post-desktop review timing and
eliminating the workaround to improve third party inspection reports for SBA’s use.

Challenge 8 - SBA Needs Robust Grants Management Oversight (Office of Executive Management
Installation and Support Services)

Issue: SBA’s Grants Management System Needs Improvement

Concern:
The OIG inaccurately stated that PRISM is used “…to award and report on grants.”

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Discussion:
PRISM does not “report” on grants as it has no direct capability to perform this function. An accurate correction should say
that PRISM is used “…to award and report financial transactions on grants.” This clarification is factually and technically
accurate.

Concern:
The OIG presented a misleading statement with, “SBA has also worked to integrate the financial system with
Grantsolutions.gov.”

Discussion:
Financial integration of the grant management system provided by Grantsolutions.gov is an option for SBA, which is
still being evaluated. Identifying it as a component of the grant management system’s full implementation as part of this
Management Challenge is inaccurate. It was not identified as part of the Management Challenge and did not affect its full
implementation.

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OTHER INFORMATION (UNAUDITED)

PAYMENT INTEGRITY

As required by the Improper Payment Information Act of 2002 (IPIA), as amended, and OMB Circular No. 123, Appendix C,
Requirements for Payment Integrity Improvement, the SBA reviews programs identified as susceptible to improper payments.

Improper payment reviews are a multi-layered process that start with a risk assessment. If an assessment indicates a program
is susceptible to improper payments, then testing is performed using a statistically valid sampling technique. Based upon the
testing results, a corrective action plan is developed to prevent and remediate the types of errors uncovered. If testing finds a
significant amount of recoverable dollars, the SBA considers the appropriateness of performing a recapture audit.

The detection and remediation of improper payments is a priority for the Agency. SBA staff monitor and review for improper
payments and are charged with implementing improvements that will reduce improper payment rates. The SBA also
continually seeks opportunities to enhance and implement internal controls to reduce the risk for improper payments.

The SBA received supplemental funds to cover the costs of disaster direct loans, including administrative expenses related
to Hurricanes Harvey, Irma, and Maria disaster relief efforts. The Additional Supplemental Appropriations for Disaster
Relief Requirements Act, 2017, as amended, deemed all programs and activities expending more than $10 million of the
supplemental funds in response to those hurricanes in any one fiscal year to be susceptible to significant improper payments
regardless of risk assessment results, and it required agencies receiving supplemental disaster relief funds to produce and report
an improper payment estimate for the funds. The SBA identified outlays in excess of $10 million in a 12-month period
for the administrative expenses of payroll and travel and conducted improper payment reviews to comply with the Act in
FY 2020, in addition to the disaster direct loan program that is already reporting an improper payment estimate.

The SBA reviewed six programs and activities that are deemed susceptible to significant improper payments that included
three major credit programs as mandated by OMB and disbursement of supplemental disaster relief funds for payroll and
travel. The three major credit programs are:
The 7(a) business loan program, which includes guaranty purchases and guaranty approvals;
504 certified development company (CDC) loan guaranty approvals; and
Disaster direct loan disbursements.
Additionally, the SBA conducted a total of nine risk assessments on programs and activities to determine the susceptibility of
these programs and activities to improper payments, as required by OMB Circular No. A-123, Appendix C. This Circular
requires risk assessments to be completed at least once every three years for programs not deemed susceptible to significant
improper payments, or earlier if a low risk program was subjected to a significant change in legislation or funding level.
Significant improper payments are defined as gross annual improper payments exceeding (1) both 1.5 percent of program
outlays and $10,000,000, or (2) $100,000,000. The risk assessments did not identify any additional programs as susceptible
to improper payments.

The next sections discuss SBA efforts and results related to improper payment assessments and reviews. More detailed
information on improper payments and information previously reported in the AFR that is not included in the FY 2020 AFR
can be found at https://paymentaccuracy.gov/.

154 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
Payment Reporting
Table 1 presents a summary of the SBA’s improper payment review results and reduction outlook. There is no improper payment made by the recipients of Federal
money under SBA programs as the SBA does not have an intermediary.

TABLE 1: Improper Payment Reporting and Reduction Outlook (Dollars In Millions)
FY 2020 Monetary FY 2020 Monetary Loss
FY 2019 FY 2020 Summary FY 2020 Breakdown FY 2021
Loss Control
Monetary Monetary
Program Mon- Non-
Proper Improper Proper Improper Over- Under- Unknown Over- Under- Unknown Loss Within Loss Outside
Outlays1 IP IP Outlays1 etary Monetary Outlays1 IP IP
Payment Payment Payment Payment payments payments payments payments payments payment Agency Agency
$ % $ $ Loss Loss $ % $
% % $ $ % % % $ $ $ Control Control
$ $
$ $
7(a) Guaranty
866.02 3.62 31.36 1,266.82 94.49 5.51 1,197.00 69.82 4.23 1.28 – 53.62 16.20 – 53.62 16.20 53.62 – 1,592.26 5.41 86.14
Purchases1,2
7(a) Guaranty
16,713.74 2.15 358.65 15,728.29 97.94 2.06 15,405.06 323.23 2.06 – – 323.23 – – 323.23 – – 323.23 15,033.17 1.96 294.65
Approvals1,2,3
504 CDC
Guaranty 4,784.30 0.56 26.65 5,683.35 96.19 3.81 5,466.82 216.53 3.81 – – 216.53 – – 216.53 – – 216.53 5,983.00 3.71 221.97
Approvals1,2
Disaster Loan
Disburse- 1,635.93 6.30 103.06 790.69 88.02 11.98 695.94 94.75 1.96 10.02 – 15.53 79.22 – 15.53 79.22 15.53 – 210,000.00 9.99 20,979.00
ments1,4,5
Supplemental
Disaster Relief
334.20 0.10 0.33 198.01 100.00 0.00 198.01 0.00 0.00 – – 0.00 – – 0.00 – 0.00 – 302.91 1.00 3.03
Administrative
Funds - Payroll6
Supplemental
Disaster Relief
79.12 2.87 2.27 26.33 99.87 0.13 26.29 0.04 0.13 0.00 – 0.04 0.00 – 0.04 0.00 0.04 – 0.09 1.00 0.00
Administrative
Funds - Travel6

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
Total7 24,413.31 522.32 23,693.49 22,989.12 704.37 – 608.95 95.42 – 608.95 95.42 69.19 539.76 232,911.43 21,584.79
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) loan guaranty purchases are the amount of disbursements for the purchase of defaulted guarantied loans. Outlays for 7(a) loan 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. Outlays for disaster loans are loan disbursements on current year approvals.
2 Outlay projections do not match the President’s Budget as timeframe is not FY. Outlays estimated by taking the average growth rate in outlays for the previous three years and applying it to the current level of outlays to project outlays in future year.
3 For 7(a) loan guaranty approvals, amounts reported are based on the guarantied amount only.
4 The reporting period for disaster loan disbursements is from April 1 through March 31.
5 Outlay projection does not match the President’s Budget as timeframe is not FY. FY 2021 loan approvals are based on actual FY 2020 Quarters 3 and 4 loan disbursements, and projected quarterly loan approvals for the remaining FY 2021.
6 The improper payment rate for disaster administrative payroll and disaster administrative travel expenses are projected to be 1 percent, which is acceptable to the Agency.

OTHER INFORMATION (UNAUDITED)
7 Total improper payment estimates and improper payment percentages do not represent a true statistical estimate for the Agency.

155
OTHER INFORMATION (UNAUDITED)
156

Table 2 presents a summary of the root causes of the SBA’s improper payments.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
TABLE 2: Improper Payment Root Cause Categories By Program Matrix (Dollars In Millions)
Supplemental Disaster Supplemental Disaster
504 CDC Guaranty Disaster Direct Loan
7(a) Guaranty Purchases 7(a) Guaranty Approvals Relief Administrative Relief Administrative
Approvals Disbursements
Reason for Improper Payment Funds - Payroll Funds - Travel

Over Under Over Under Over Under Over Under Over Under Over Under
Payments Payments Payments Payments Payments Payments Payments Payments Payments Payments Payments Payments

Program Design or Structural Issue
Inability to Access Data
Inability to Authenticate Eligibility
Data needed Does Not Exist
Death Data
Financial Data 323.23 216.52 2.00 21.81
Failure to Verify: Excluded Party Data
Prisoner Data
Other Eligibility Data (explain)
Federal Agency 53.62 16.20 13.54 57.41 0.00 0.04 0.00
Administrative/Process Error Made by: State or Local Agency
Other Party
Medical Necessity
Insufficient Documentation to Determine
Other Reason (explain)
Total Estimated Improper Payments 53.62 16.20 323.23 0.00 216.52 0.00 15.54 79.22 0.00 0.00 0.04 0.00
OTHER INFORMATION (UNAUDITED)

7(a) Loan Guaranty Purchases Corrective Action
The root cause for all 7(a) loan guaranty purchase improper
Statistical Sampling payments were administrative/process errors made by
The 7(a) loan guaranty purchase reviews sample cases the Agency. Improper payments generally arose when
were chosen using Probability Proportional to Size (PPS) new purchase processors failed to identify material lender
sampling with replacement from all purchases approved deficiencies in the handling of an SBA guaranteed loan and
during the 12-month period ending March 31, 2020. made administrative errors in the purchasing process. The
The purchase population was divided into four strata primary reasons for purchase errors included:
based on the following factors: (1) which servicing office
processed the purchase, and (2) whether the loan was
Denial of guaranty purchases was incorrect and not
properly justified;
considered an early default, regardless of servicing office.
The SBA determined the appropriate total sample size to Ineligible purchase due to requirements of the
be 210 loans from the population. The sample included International Trade Loan Program not being met;
aggregate purchase outlays of $215,763,662 and an absolute The debt refinanced with loan proceeds were not
value of improper payments of $18,536,970 within the eligible for refinance;
sample. Using the Hansen-Hurwitz estimation method,
the estimated improper payment rate for the 7(a) guaranty Ineligible purchases due to lack of supporting
documentation;
purchase population is 5.51 percent for the annual period
ending March 31, 2020. This represents a slight increase Inaccurate interest rate;
from 3.62 percent reported in FY 2019. The increase was Reimbursement of lender expenses were not fully
due to better evident identification by the Quality Control justified or ineligible;
department.
Lender incorrectly processed approval under the
The FY 2020 improper payment rate estimate of 5.51 Preferred Lender Program;
percent for this program is greater than the target Ineligible use of proceeds; and
reduction rate of 3.52 percent published in the FY 2019
AFR. SBA sampling method is a statistically valid and Lender failed to record/perfect the lien required by
the Loan Authorization on the property required to be
rigorous plan, with a 95 percent confidence interval, plus
taken as collateral for the loan, and that failure caused a
a 3 percent margin of error, the upper and lower bounds
material loss on the loan.
of the confidence interval. Because the lower bound of
its confidence interval, of 2.65 percent, is lower than the As a means to reduce and/or eliminate the occurrence of
reduction target rate of 3.52 percent, in accordance with future improper payments, a Corrective Action Plan has
OMB Memorandum 18-20, the 7(a) loan guaranty purchase been formalized for the 7(a) loan guaranty purchase centers.
program is considered to have met the reduction target. Specific corrective actions are determined based upon the
primary reason for the error and ensuring the error does not
The 7(a) loan guaranty purchase reviews were conducted
occur in the future. Plans for improvement include:
to determine whether lenders complied materially with
the 7(a) loan program origination requirements including Internal training for purchase processors, reviewers,
statutory provisions, SBA regulations, any agreement and approvers to determine proper recommendation of
the lender executed with the SBA, standard operating guarantee purchase denial, determining proper interest
procedures, loan authorizations, and official SBA notices rates, proper determination of internal trade loan
and forms applicable to the 7(a) loan program. The reviews program and Preferred Lender Program requirements,
were to determine if the lender (1) originated, serviced, proper determination of debt refinance, proper
and liquidated the loan in a prudent and commercially determination of lien perfection, and determining
reasonable manner, (2) misrepresented or failed to disclose a appropriate lender expenses.
material fact to the SBA, and/or (3) put the SBA’s financial Recovery of lender expenses that were not fully justified
interest at risk. and deemed ineligible.

The corrective actions are currently underway. Similar to
corrective actions performed in FY 2019, internal feedback

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 157
OTHER INFORMATION (UNAUDITED)

was provided to center staff regarding the specific loan level to have met the reduction target as the lower bound for
deficiency upon detection. its confidence interval under the sampling methodology
which meets the 95 percent confidence level, plus or minus
In response to one of the Agency’s Management Challenges, 3 percent margin of error guidance, is 0.12 percent and is
the Purchase Centers and Quality Control conducted an lower than the reduction target of 2.05 percent.
evaluation of the purchase process to identify the causes for
material lender noncompliance. This evaluation, along with The 7(a) loan guaranty approval reviews were conducted
internal training, has been designed to enhance Quality to determine whether lenders complied materially with
Control staff ability to identify issues and to recommend the 7(a) loan program origination requirements including
procedural changes. The internal training is expected to be statutory provisions, SBA regulations, any agreement the
completed by the end of third quarter of FY 2021. lender executed with SBA, standard operating procedures,
loan authorizations, and official SBA notices and form
Corrective actions are tracked at the loan level through a applicable to the 7(a) loan program. The reviews were
centralized database. The two Quality Control Specialists conducted in order to determine if lenders (1) originated the
for the 7(a) guaranty purchase centers monitor errors from loan in a prudent and commercially reasonable manner, (2)
identification through completion of the corrective action. mispresented or failed to disclose a material fact to the SBA,
Headquarters management provides oversight to ensure and/or (3) put the SBA’s financial interest at risk.
milestones are met. All improper payments identified as a
result of the FY 2020 IPERIA reviews have been resolved
through obtaining additional documentation, referral Corrective Action
for denial review, collection of funds from the lender, Approximately 80 percent of all 7(a) loan guarantee
or reimbursement to the lender. Corrective actions were approvals are performed by lenders with delegated authority
generally completed at the loan level within 60 days with all to evaluate, process, close, and disburse 7(a) loans; these
actions taken by the end of the fiscal year. lenders were responsible for all identified improper payment
approvals in FY 2020. The most prevalent root cause
stemmed from the delegated lenders’ failure to authenticate
7(a) Loan Guaranty Approvals borrowers’ eligibility in compliance with loan program
Statistical Sampling requirements. The primary reasons for 7(a) approval errors
in FY 2020 included:
For 7(a) approval reviews, the sample cases were chosen
using PPS sampling with replacement from all loan Change of ownership policy requirements were not
guaranties approved during the 12-month period ending satisfied;
March 31, 2020. The approval population was divided Incorrect loan structure;
into two strata based on whether the loan was SBA Express
Affiliation rules were not met;
or not. The SBA determined the appropriate total sample
size to be 204 loans from the population. The sample Business valuation policy requirements were not met;
included net guaranteed approvals of $274,437,605 and Cash injection policy requirements were not met; and
improper payments of $6,167,345 within the sample. Using
the Hansen-Hurwitz estimation method, the estimated Lack of appropriate documentation for eligibility
verification.
improper payments rate for the annual period ending March
31, 2020 was calculated as 2.06 percent. This represents As a means to reduce and/or eliminate the occurrence of
a decrease from the FY 2019 rate of 2.15 percent. The future improper payments, a Corrective Action Plan has
decrease is primarily due to the corrective action plan that been formalized for the 7(a) loan guaranty approval centers.
was in place since FY 2019 that focused on external training Specific corrective actions are determined based upon the
for lenders. primary reason for the error with the purpose of both
remedying the error and ensuring the error does not occur
For 7(a) loan guaranty approval reviews, the FY 2020
in the future. Plans for improvement include:
improper payment rate estimate of 2.06 percent is greater
than the target reduction rate of 2.05 percent published in Collaborating with the Office of Credit Risk
the FY 2019 AFR. However, in accordance with OMB-18- Management (OCRM) to ensure that specific lender
20, the 7(a) loan guaranty approval program is considered

158 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
OTHER INFORMATION (UNAUDITED)

deficiencies are monitored and incorporated into Risk The increase was primarily due to CDC’s not providing
Based Reviews; appropriate documentation for loan eligibility.
Collaborating with the Office of Financial Assistance The FY 2020 improper payment rate estimate of 3.81
(OFA) to ensure that associated deficiencies are percent for this program is greater than the target
incorporated into any policy, regulatory, or standard reduction rate of 2.04 percent published in the FY 2019
operating procedure rewrite or update; and AFR. SBA’s sampling method is a statistically valid and
External training for lenders on policy requirements rigorous plan, with a 95 percent confidence interval, plus
governing change of ownership, requirements governing a 3 percent margin of error, the upper and lower bounds
cash injection, application of collateral, policy of the confidence interval. Because the lower bound of
requirements governing loan structure, and appropriate its confidence interval, of 1.14 percent, is lower than the
documentation to determine loan program eligibility. reduction target rate of 2.04 percent, in accordance with
OMB Memorandum 18-20, the 504 loan guaranty approval
The corrective actions are currently underway. The Office of program is considered to have met the reduction target.
Financial Program Operations (OFPO) will share the loan
level and lender deficiencies identified during the reviews The 504 CDC approval reviews were conducted to
with OCRM and OFA in the first quarter FY 2021 and will determine whether CDCs complied materially with the
continue its efforts through the fiscal year to ensure lender program’s origination requirements, including statutory
deficiencies are monitored and incorporated into OCRM’s provisions, SBA regulations, any agreement the CDC
Risk Based Reviews and OFA’s policy rewrites and updates. executed with the SBA, standard operating procedures,
loan authorizations, and official SBA notices and forms
Corrective actions for specific loans are tracked at the loan applicable to the 504 loan program. The reviews were
level through a centralized database. The Quality Control to determine whether CDCs (1) originated the loan
Specialist for 7(a) loan guaranty approvals monitors errors in a prudent and commercially reasonable manner, (2)
from identification through completion of the corrective misrepresented or failed to disclose a material fact to the
actions. OFPO management headquarters provides SBA, and/or (3) put the SBA’s financial interest at risk.
oversight to ensure milestones are met. All improper
payment identified as a result of the FY 2020 IPERA reviews
have been resolved through a reduction or cancellation Corrective Action
of the loan guaranty. Corrective actions were generally The most prevalent root cause stemmed from the CDC’s
completed without having to refer the loan for further failure to authenticate borrower’s eligibility at origination in
review. Corrective actions are initiated within 120 days and compliance with loan program requirements. The primary
all corrective actions are taken within the fiscal year. reasons for 504 approval errors in FY 2020 included:
Lack of appropriate documentation for eligibility
504 CDC Loan Guaranty Approvals verification; and
Eligible Passive Company did not comply with policy
Statistical Sampling requirements
For 504 CDC approval reviews, the sample cases were
selected using PPS sampling with replacement from all loan As a means to reduce and/or eliminate the occurrence
guaranties approved during the 12-month period ended of future improper payments, a Corrective Action Plan
March 31, 2020. The approval population was not stratified. has been formalized for the 504 approval center. Specific
The SBA determined the appropriate total sample size to corrective actions are determined based upon the primary
be 191 loans from the population. The sample included net reason for the error with the purpose of both remedying the
approval outlays of $266,661,000 and improper payments error and ensuring the error does not occur in the future.
of $7,243,000 within the sample. Using the Hansen- Plans for improvement include:
Hurwitz estimation method, the estimated improper Collaborating with the Office of Credit Risk
payments rate for the annual period ending March 31, 2020 Management to ensure specific lender deficiencies are
was calculated as 3.81 percent. This represents an increase monitored and incorporated into Risk Based Reviews;
from the FY 2019 rate of 0.56 percent and an increase and External training for lenders to ensure appropriate
from the established reduction target of 2.04 percent. documentation is obtained and analyzed prior to loan

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OTHER INFORMATION (UNAUDITED)

approval and to ensure that Eligible Passive Company Corrective Action
policy requirements are met.
In FY 2020, the most prevalent root cause for the disaster
The corrective actions are currently underway. OFPO direct loan improper payments stemmed from process and
intends to share the loan level and lender deficiencies documentation errors. Approximately 65 percent of the
identified during the reviews with OCRM in the first improper payments was made because the loan processing
quarter of FY 2021 and will continue its efforts to ensure and disbursement staff did not consistently follow the
CDC deficiencies are monitored and incorporated into guidance provided in the standard operating procedure
lenders’ Risk Based Reviews. External training will be to verify eligibility data. The remaining 35 percent of the
provided by the end of the second quarter of FY 2021. improper payments was due to documentation errors. While
the improper payments resulting from the longstanding
Specific corrective actions on loans reviewed are tracked at issue concerning insurance documentation was reduced,
the loan level through a centralized database. The Quality one other documentation error was also found. The types of
Control Specialist for 504 approvals monitors errors from process and documentation errors included:
identification through completion of the corrective action.
Lack of justification for repayment ability that met SBA
Headquarters management provides oversight to ensure
guidelines,
milestones are met. All improper payments identified
as a result of the FY 2021 IPERIA reviews have been Failure to document estimated total project cost,
resolved through obtaining additional documentation, loan Failure to perform adequate follow-up on borrower’s
modification, and reduction and cancellation of the loan credit report,
guaranty. Corrective actions were generally completed at the
loan level within 180 days with all actions taken by the end
Disbursement made in excess of eligible loan amount
due to duplication of benefits,
of the fiscal year.
Lack of insurance documentation, and
Disaster Direct Loan Program Failure to obtain properly executed closing documents.
To prevent these errors noted in the improper payment
Statistical Sampling
review, the SBA plans to perform the following corrective
The Office of Disaster Assistance (ODA) performs a
actions:
Quality Assurance Review (QAR) of the approved loan
portfolio annually. A part of the QAR is to identify any Including specific results-driven performance elements
deficiency that would result in an improper payment. The tied to reducing the improper payment rate in the
scope of the ODA’s review covers three primary compliance FY 2021 performance plans for the Director and
areas: (1) basic eligibility; (2) adherence to relevant laws, Deputy Director of the Processing and Disbursement
rules, regulations, and standard operating procedures; and Center, Assistant Center Director for Application
(3) credit worthiness. The statistical methodology used Processing and Assistant Center Director for Accounts
followed widely accepted practices and was approved by the Continuing to employ the professional training staff
Office of Management and Budget in 2012. For FY 2020, from the Office of Disaster Strategic Engagement
the reporting period covered April 1st through March and Effectiveness to assist in the creation of effective
31st. The review population consisted of disaster loan insurance review and other training materials and
disbursements made during the 12-month period ending assist the trainers in the Accounts Department in the
March 31, 2020, with total disbursements of approximately presentation of training materials;
$790,688,565. A sample of 518 payments were selected
Requiring all training materials be reviewed and
for testing which yielded a weighted estimated improper
approved by SBA headquarters;
payment rate of 11.98 percent. Based on the sample
results, the estimated amount of improper payments was Expanding training efforts to include one-on-one
approximately $94,753,828. The increase from the FY 2019 training with Application Processing Team Leads; and
rate of 6.30 percent can be attributed to an increase in non-
monetary process and documentation errors.

160 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
OTHER INFORMATION (UNAUDITED)

Requiring all departments performing any form of September 30, 2019. There were 18,814 expenditures with
quality assurance/control checks to report their findings a total dollar amount of approximately $26,329,651. Using
monthly inclusive of: the PPS approach, the SBA determined the appropriate
· The specific loan data, sample size to be 130 line items having total outlays of
approximately $800,306. Based upon the sample results, the
- loan numbers estimate FY 2020 improper payment rate was 0.13 percent
- amounts for a total of approximately $35,515.
- issues uncovered
· Tracking and resolution of uncovered issues Corrective Action
The improper payment rate of 0.13 percent and $35,515
· Provide monthly summary report to the Quality
does not exceed the 1.5 percent and $10 million threshold
Control Supervisor
for reporting a corrective action plan.
Conduct monthly improper payment meetings
that includes all teams responsible for ODA quality
Payment Recovery Effort
assurance/control. Meeting should have a written agenda
and meeting minutes to capture the development. Agency efforts to recapture improper payments are discussed
by program or activity.
The corrective actions will be monitored on a monthly
basis by the Deputy Associate Administrator for Disaster
Assistance. 7(a) Loan Program Purchases
Overpayments identified in the improper payments reviews
are recaptured from the lender. The Quality Control staff
Supplemental Disaster Relief tracks and collects any monetary overpayment. Refer to
Administrative Funds - Payroll Part I above for corrective action plans to prevent future
improper payments.
Statistical Sampling
The disaster relief payroll administrative expense samples
were chosen using PPS with replacement methodology 7(a) Loan Program Approvals and
from payments completed during the 12 months ending 504 Loan Guaranty Approvals
September 30, 2019. The total dollar amount expended was Overpayments recaptured outside of payment recapture
$198,009,844.74. The SBA determined the appropriate audits are not applicable to 7(a) loan guaranty approval and
sample size to be 45 line items having total outlays of 504 loan approval as no payment is made at the time of
$289,399.36. Based upon the sample results, the estimated approval. Improper payments identified through both the
FY 2020 improper payment rate was 0.00 percent for a total annual improper payment and continuous quality control
of $714.86. reviews are remediated through the cancellation of the
SBA guaranty, or loan modification, as appropriate. This
Corrective Action determination is made on a case-by-case basis, which varies
The improper payment rate of 0.00 percent and $714.86 substantially depending on the circumstances of the loan
does not exceed the 1.5 percent and $10 million threshold approval and lender authority.
for reporting a corrective action plan.
Disaster Direct Loan Program
Supplemental Disaster Relief Overpayments are the result of the borrower receiving both
Administrative Funds - Travel an SBA loan and insurance payments or other benefits
as a result of the disaster. If the duplication of benefit is
Statistical Sampling recognized prior to the final disbursement, the loan amount
The disaster relief travel administrative expense samples is modified to reflect a lower amount and no repayment is
were chosen using PPS with replacement methodology required. If the duplication of benefit is identified after the
from payments completed during the 12 months ending final disbursement of the loan, then the borrower is given 30

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 161
OTHER INFORMATION (UNAUDITED)

days to provide evidence to prove that the disaster loan was Disbursements for Goods and Services, the Small Business
not over-disbursed. For example, the borrower can provide Investment Company Program, the Surety Bond Guaranty
documentation demonstrating that insurance funds received Program, and Grants, which included all grant programs.
did not duplicate the disaster loan purpose. If the borrower The analysis described the program, the controls over
has not provided the appropriate evidence within the 30-day financial disbursements, and the size of the program and
period, a demand is made for the over-disbursed funds. concluded for each program that recapture audits would
Collection efforts continue at the disaster loan servicing not be cost effective due to low error rates, complexity of
centers, but if these efforts fail, the borrower will still be the program, or limited amount of outlays. A subsequent
liable for the over-disbursed amount in the form of monthly cost analysis for the 7(a) loan guaranty purchase program
payments in accordance with the loan agreement. Thus, was submitted to OMB on September 13, 2017, to include
any actual loss, if any, is the cost of funds related to the over the results of a payment recapture audit performed in
disbursement. 2015 which again concluded that such an audit is not cost
effective.

Supplemental Disaster Relief The specific justification and analysis are discussed by
Administrative Funds – Payroll and program.
Travel
7(a) loan guaranty purchase improper payment reviews,
For supplemental disaster relief payroll expenses, the total continuous Quality Control Reviews, and OMB Circular
improper payment was only $0.48, which appeared to be A-123 Appendix A reviews in FY 2014 warranted a
the result of rounding. The SBA determined that further reconsideration of the cost effectiveness of a payment
examination or recovery effort for such a trivial amount recapture audit for the 7(a) Loan Guaranty Purchase
is not deemed necessary. For supplemental disaster relief program. As a result, in FY 2015, the SBA performed a
travel expenses, a significant amount of the identified payment recapture audit, and the results revealed that
overpayment resulted from travel expenses with no the cost of labor hours for performing and reporting the
supporting documentation or travel expenses claimed over payment recapture audit exceeded the actual overpayments
allowable per diem. These errors should have been detected identified. This was reported in the FY 2015 AFR with the
during the approval process, but the manual paper-based statement that no additional payment recapture audits would
voucher process and the high volume of the transactions be performed. In September 2017, the SBA submitted a cost
hindered the effective review prior to payment. This issue analysis to OMB and the OIG to support this decision.
should be eliminated in the future as the disaster loan
program moved from a paper-based system to an electronic 7(a) loan guaranty approval and 504 CDC loan approval
travel reimbursement system with the implementation are not subject to payment recapture audits as no payment is
of Concur Travel on July 29, 2019. The SBA will initiate made at the time of approval.
recovery actions on the identified improper payments for
Disaster direct loans recapture audits would not be cost
repayment or credit on future travel voucher reimbursements
effective. Improper payments due to loan documentation
from the responsible individuals as applicable. All of the
errors do not result in a disaster survivor receiving funds
improper payments found have had or will have full travel
for which they are not eligible; therefore, these improper
reconciliations performed; most have already been completed
payments are not eligible for recovery. The FY 2020
and the employees and the appropriate Centers notified. For
improper payment review identified 23 ineligible
any reconciliations not performed yet, the SBA will complete
disbursements totaling $1,689,400. Twenty-two of these
them and notify the employee/Center regarding the findings.
disbursements were improper because of errors made by the
SBA during loan processing by not following SBA policy
Payment Recapture Audits to determine and document eligibility. The remaining one
On September 15, 2011, the SBA submitted a Payment disbursement was ineligible because the disaster damaged
Recapture Audit Cost-Effective Analysis to the Office of property was not the borrower’s primary residence. Given
Management and Budget. The analysis discussed the 7(a) that the most errors were made by the SBA, any attempt to
Loan Program, the 504 Certified Development Company recoup money from these borrowers would most likely result
Loan Program, the Disaster Direct Loan Program, in litigation, which may not be favorable to the Agency.
Additionally, borrowers often will not have the resources

162 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
OTHER INFORMATION (UNAUDITED)

to pay off the loans. As of October 1, 2020, all 23 loans eligibility for the Surety Bond Guarantee program. The SBA
are being paid as agreed and $564,738 has been already is working to enhance its use of the DNP data sources by
recovered through regular monthly payments. The improper exploring an interface with SBA systems to identify ineligible
payment audit was completed using 4,080 hours of staff time recipients at the time of pre-award in lieu of manually
at an approximate labor cost of $533,125. In consideration entering requests for information as is done currently.
of the cost to audit, strong possibility of litigation for
recovery, and uncertainty over the borrower’s ability to repay
the loan with a lump-sum payment, further expenditures for
Information Systems and Other
a separate recovery audit is not cost effective. Infrastructure
7(a) loan guaranty purchases are supported by the
Supplemental Disaster relief administrative payroll Guaranty Purchase Tracking System. It is continually
expenses recapture audits would not be cost effective. The updated to enhance the overall integrity of the purchase
improper payment testing required approximately 40 labor process. Resources as they relate to human capital are
hours at a cost of approximately $2,000. No payment was currently adequate.
identified as eligible for recapture during the improper
payment review; thus the cost of the review exceeds the 7(a) loan guaranty approvals and 504 CDC loan
return. guaranty approvals have adequate internal controls and are
supported by E-Tran, the SBA’s electronic loan processing/
Supplemental Disaster relief administrative travel servicing system. Both the SBA and delegated lenders
expenses recapture audits would not be cost effective. ODA process applications through the system and lenders may
approximated that it would cost $454,000 to complete also handle unilateral servicing actions electronically. The
the travel audits. Payments identified during the improper system provides increased efficiency and decreased costs
payment review as eligible for recapture totaled approximately in the loan guaranty origination and servicing processes.
$926; thus the cost of the review exceeds the return. The loan programs are also supported by SBA One, an
Table 3 presents a summary of Improper Payment automated lending platform, which helps to streamline the
Recaptured without Audit Programs. lending process. Resources as they relate to human capital
are currently adequate.
TABLE 3: Improper Payment Recaptures without
Audit Programs (Dollars in Millions)
Disaster direct loan program has the information systems
and other infrastructure it needs to reduce improper
Overpayments Recaptured outside of
Payment Recapture Audits payments to targeted levels. For example, the Office of
Program or
Activity Amount Amount Amount Disaster Assistance has an integrated, electronic loan
Identified Recaptured Recaptured Source processing system, the Disaster Credit Management System
$ $ %
(DCMS), to streamline, enhance and improve the loan-
Statistical samples
7(a) Guaranty making process. This system supports workflow management,
12.76 0.99 7.76 conducted under
Purchase1
IPIA electronic file management and document generation
TOTAL 12.76 0.99 7.76 functions. Many of the business rules governing DCMS
1 Period of review is for the 12-month period ending March 31, 2020. have been designed to improve the quality assurance process
by incorporating internal controls policy measures. In fact,
the ODA quality assurance team works continually with the
Agency Improvement of Payment DCMS development team to improve the quality assurance
Accuracy with the Do Not Pay process with a goal to minimize future improper payments
as much as possible. The Disaster direct loan program has
Initiative
adequate human capital to maintain its internal controls.
The SBA has implemented the Do Not Pay (DNP) Initiative
and incorporated the use of the DNP post payment services
using the data source Death Master File. The Agency
has also implemented limited use of the online portal for
processing of manual 7(a) loan applications as part of
pre-award eligibility and will be implementing a pre-award

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OTHER INFORMATION (UNAUDITED)

SUMMARY OF FINANCIAL STATEMENT AUDIT AND
MANAGEMENT ASSURANCES

As required by OMB Circular A-136, Section II.4.4, the following summarizes the SBA’s Financial Statement Audit and
Management Assurances:

Summary of Financial Statement Audit
Audit Opinion Disclaimer
Restatement No

Material Weaknesses Beginning Balance New Resolved Consolidated Reassessed Ending Balance
Risk Assessment for Internal Control over Financial Reporting 1 0 1 N/A N/A 0
Approval of PPP Loan Guarantees 0 1 N/A N/A 1
Reporting of PPP Loan Guarantees 0 1 N/A N/A 1
Subsidy Reestimate of PPP Loan Guarantees 0 1 N/A N/A 1
Approval of COVID-19 EIDLs and Grants 0 1 N/A N/A 1
Service Organization Used for COVID-19 EIDLs and Grants 0 1 N/A N/A 1
Service Organizations Used for Loan Guarantee Programs 0 1 N/A N/A 1
Entity Level Controls 0 1 N/A N/A 1
Total Material Weaknesses 1 7 1 N/A N/A 7

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

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

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

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

Conformance with Financial Management System Requirements (FMFIA § 4)
Statement of Assurance Federal 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
Total Non-conformances 0 0 N/A N/A N/A 0

Compliance with Section 803(a) of the Federal Financial Management Improvement Act (FFMIA)
Agency Auditor
1. Federal Financial Management System Requirements No lack of compliance noted Lack of compliance noted
2. Applicable Federal Accounting Standards No lack of compliance noted Lack of compliance noted
3. USSGL at Transaction Level No lack of compliance noted No lack of compliance noted

164 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
OTHER INFORMATION (UNAUDITED)

FRAUD REDUCTION REPORT

The Fraud Reduction and Data Analytics Act of 2015 Additionally, the Agency also looks at programmatic risks
(FRDAA) mandates that agencies take steps to improve of improper payments and vulnerabilities to fraud during
their financial and administrative controls and procedures the improper payment review process. As mentioned in the
to assess and mitigate fraud risks, and to improve their Payment Integrity section of the AFR, the Agency conducts
development and use of data analytics for identifying, risk assessments on the Agency’s programs and activities.
preventing, and responding to fraud, including improper This year, nine risk assessments were conducted on SBA
payments. Each agency is required to report its progress in programs and activities—to include contracts, microloans,
implementing: (1) the financial and administrative controls, payroll, travel, STEP grants, as well as other SBA programs.
(2) the fraud risk principle in the GAO Standards for One of the considerations in the risk assessment is the
Internal Control in the Federal Government (Green Book), susceptibility of fraud at the program level, and whether
and (3) management of fraud risk in accordance with OMB programs and activities have a process in place to identify
Circular A-123. and report on fraud. Of the nine programs assessed, none
of the programs identified any significant vulnerabilities to
In accordance with the Payment Integrity Information Act fraud.
of 2019, the Agency has made progress in implementing
financial and administrative controls relating to fraud and The SBA initiated specific collaborative actions to address
improper payments. Specifically, the Agency’s Enterprise fraud risk in the Coronavirus Aid, Relief, and Economic
Risk Management Board conducted its annual risk profile Security (CARES) Act, Paycheck Protection Program (PPP),
validation process which included a discussion of key and Economic Injury Disaster Loan (EIDL) programs. The
programs that are highly susceptible to fraud. The SBA Agency, in coordination with the Department of Justice
is developing response plans to manage any critical fraud (DOJ), reviewed various loan data sets including from the
risks identified through this process. The Agency’s Fraud DOJ, General Services Administration, Federal Bureau
Risk Management Council (Fraud Council), created in of Investigation, Internal Revenue Service, and lending
FY 2019, held several meetings throughout FY 2020 to institutions. A joint SBA, Secret Service, and Financial
reinforce and increase awareness and support of program Crimes Enforcement Network (FinCEN) alert relating to
fraud risk mitigation. The Agency developed and evaluated PPP and EIDL loans was issued to depositary institutions
tools to assess fraud risk for possible agency-wide use and and peer-to-peer payment platforms to inform them of
held program-specific fraud risk management workshops. the need to verify suspicious deposits and withdrawals. To
The Agency received quarterly OIG fraud reports and combat entities fraudulently representing that they were
supported the identification and prosecution of fraud cases authorized to process PPP or EIDL loans, the SBA initiated
and regularly reported on ongoing fraud activity to the a joint effort with the Federal Trade Commission to expedite
Fraud Council to share high level summary understanding the filing of litigation to prevent harm to borrowers.
of ongoing fraud identification, trends, investigation, and For additional information related to Inspector General
prosecution efforts. activities, please visit: https://www.sba.gov/about-sba/
oversight-advocacy/office-inspector-general.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 165
OTHER INFORMATION (UNAUDITED)

REAL PROPERTY

Within the SBA, effective real property asset management space requests related to program activities and missions,
begins with an accurate inventory that is verified and security assessments, and facility-related deficiencies and
validated on a continual basis to ensure real-time data emergencies. More information on the SBA’s real property
is available for timely and quality decision-making. As a can be found at www.performance.gov/real-property-
fully-leased agency, close coordination between GSA and metrics/.
the SBA is required regarding cyclical lease expirations,

GRANTS PROGRAMS

Category 2-3 Years 3-5 Years More than 5 Years
Number of Grants/Cooperative Agreements with Zero Dollar Balances 47 203 14
Number of Grants/Cooperative Agreements with Undisbursed Balances 0 0 0
Total Amount of Undisbursed Balances $0 $0 $0

The SBA Office of Grants Management assembled a team
to close-out older grants and ensure all program offices
properly close-out grants in compliance with 2 C.F.R. 200,
Uniform Administrative Requirements, Cost Principles, And
Audit Requirements For Federal Awards.

166 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
OTHER INFORMATION (UNAUDITED)

CIVIL MONETARY PENALTY ADJUSTMENT FOR INFLATION

The Federal Civil Penalties Inflation Adjustment Act of 1990 (Act), as amended, requires agencies to make regular and
consistent inflationary adjustments of civil monetary penalties to maintain their deterrent effect. A civil monetary penalty
is defined as any penalty, fine, or other sanction that is for a specific monetary amount as provided by federal law or has a
maximum amount provided for by federal law, is assessed or enforced by an agency pursuant to federal law, and is assessed or
enforced pursuant to an administrative proceeding or a civil action in the federal courts. To improve compliance with the Act
and in response to multiple audits and recommendations, agencies must report the most recent inflationary adjustments to
civil monetary penalties to ensure penalty adjustments are both timely and accurate. Pursuant to the Act, the SBA reviewed
each of the penalty amounts under its statutes and adjusted them for inflation when required under the law. The SBA applied
a prescribed formula from the Act for calculating the penalty.

The following table reflects the authorities imposing the penalties, the basis for imposing the penalties, the year the penalties
were authorized, the current penalty levels, the program offices responsible for imposing the penalties, and the citation for the
most recent publication of the penalty updates.

SBA Federal Civil Penalties
Current Penalty
Latest Year of Level
Penalty (Name or Year Adjustment (via ($ Amount or Sub-Agency/ Location for Penalty
Statutory Authority Description) Enacted Statute or Regulation) Range) Bureau/Unit Update Details
Failing to File Report
Office of
Small Business Investment Timely for a Small 85 Federal Register 13725
1966 2020 $271 Investment and
Act, 15 USC 687g Business Investment (March 10, 2020)
Innovation
Company (SBIC)
Failing to File Report
Small Business Act, 15 Timely for a Small Office of Capital 85 Federal Register 13725
2004 2020 $6,740
USC 650(j)(1) Business Lending Access (March 10, 2020)
Company (SBLC)
Small Business Act,
15 USC 634(b)(6) and Administrative Remedies
85 Federal Register 13725
Program Fraud Civil for False Statements and 1986 2020 $11,665 Multiple offices
(March 10, 2020)
Remedies Act 31 USC Claims
3802(d)
Small Business Act,
15 USC 634(b)(6) $20,489
Penalty for Violation of 85 Federal Register 13725
and Program Fraud 1990 2020 to Multiple offices
Lobbying Restrictions (March 10, 2020)
Civil Remedies Act 31 $204892
USC 1352

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 167
OTHER INFORMATION (UNAUDITED)

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168 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
APPENDICES

start grow

expand recover
recover

RECOVER

TE R RY & HOPE
BOURQUE
SUCCESS STORY

2020 PHOENIX AWARD
FOR OUTSTANDING
SMALL BUSINESS DISASTER RECOVERY

TLR Homes
Vidor, TX

TERRY AND HOPE BOURQUE’s recovery story is a tale of tenacity.
The couple was in the business of selling manufactured homes in
Vidor, a town near Beaumont, Texas. TLR Homes’ entire inventory,
which included 28 new mobile homes staged for sale, as well as their
office and storage buildings, was destroyed in the flooding caused by
Hurricane Harvey in August 2017.

Terry undertook a recovery strategy that included disposing of destroyed
inventory and salvaging those that could be sold. He created a
makeshift office, negotiated with his bank to restructure his credit line
and worked with suppliers to get commitments for future inventory. He
adjusted his marketing and sales strategy to save money and used new
technology to reach a larger clientele.

By February 2018, Terry had grown sales and proved that the recovery
of his business was sustainable. TLR Homes further cut costs by
relocating to a new location and making changes to the way they
showcase their inventory. In March 2018, Terry was approved for a
$1 million SBA loan for TLR Homes, which he used to purchase more
mobile homes. This boosted the business toward long-term recovery
and success.

start
grow

expand
recover

170 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
APPENDICES

APPENDIX 1 – CONTACT SBA: USEFUL WEBSITE AND
NUMBERS

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

SBA and Business Information
About the SBA www.sba.gov/aboutsba
SBA Performance, Budget & Finances www.sba.gov/performance
Small Business USA www.usa.gov/business
Local Assistance www.sba.gov/local-assistance
Qualifying as a Small Business www.sba.gov/content/am-i-small-business-concern
Starting a business? www.sba.gov/thinking-about-starting
Capital
Small Business Loans & Grants www.sba.gov/financialassistance
Lender Resources www.sba.gov/lender_resources
Surety Bonds www.sba.gov/content/surety-bonds-explained
Export Products www.sba.gov/exporting
Fund Your Business www.sba.gov/business-guide/plan/fund-your-business
Contracting
Government Contracting www.sba.gov/contracting
Register as a Contractor www.sam.gov
Contracting Certifications https://certify.sba.gov/
Counseling
SBA Learning Center www.sba.gov/training
Small Business Development Centers www.sba.gov/tools/local-assistance/sbdc
Women’s Business Centers www.sba.gov/tools/local-assistance/wbc
SCORE www.sba.gov/tools/local-assistance/score
Veterans Business Outreach Centers www.sba.gov/tools/local-assistance/vboc
Disaster Assistance
Disaster Assistance www.sba.gov/disaster
Disaster Center Office Locations www.sba.gov/about-offices-list/4

Coronavirus (COVID-19): www.sba.gov/page/coronavirus-covid-19-small-business-guidance-
Small Business Guidance & Loan Resources loan-resources
SBA Information
SBA National Answer Desk (Toll Free) (800) 827-5722
Disaster Assistance Customer Service Center (Toll Free) (800) 659-2955
Facebook https://www.facebook.com/SBAgov
Twitter https://www.twitter.com/sbagov
YouTube https://www.youtube.com/sba
Blogs https://www.sba.gov/blogs
Instagram https://www.instagram.com/sbagov/

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 171
APPENDICES

APPENDIX 2 – GLOSSARY

504 Loan 504 Certified Development Loan Program B2B Boots to Business
The 504 loan program provides small businesses An entrepreneurial education and training
with long-term, fixed-rate financing for the program offered by the U.S. Small Business
purchase of land, buildings, and long-life capital Administration as part of the Department of
equipment. Defense Transition Assistance Program.
7(a) 7(a) Loan Guaranty Program BATF Business Assistance Trust Fund
The 7(a) loan program is the SBA’s primary loan A revolving trust fund in which all donated funds
program; it provides general loan financing for a are to be deposited
wide variety of purposes.
BLIF Business Loan and Investment Fund
7(j) 7(j) Management and Technical Assistance The BLIF assists eligible small businesses through
Program various loan programs
The 7(j) program provides specialized assistance to
underserved small businesses. CAP Goals Cross-Agency Priority Goals
CAP Goals are a limited number of Presidential
7(m) 7(m) Microloan Program priority areas where implementation requires
The microloan program provides small, short- active collaboration among multiple agencies.
term loans to small businesses and certain types of
nonprofit childcare centers. CARES Act Coronavirus, Aid, Relief and Economic Security
Act
8(a) 8(a) Business Development Program A $2.2 trillion economic stimulus bill passed
The 8(a) program assists firms owned and in response to the economic fallout of the
controlled by socially and economically COVID-19 pandemic in the United States.
disadvantaged individuals compete for federal
contracts. CJ Congressional Justification
The CJ is a federal agency’s annual budget request
A-123 Designation for OMB Circular on Internal to Congress.
Control Systems
The A-123 guidance prescribes policies and CDC Certified Development Company
procedures to be followed by federal agencies in CDCs are nonprofit corporations, certified and
establishing, maintaining, evaluating, improving, regulated by the SBA, that work with participating
and reporting on internal controls in their lenders to provide financing to small businesses.
program and administrative activities.
CEAR Certificate of Excellence in Accountability
AA Associate Administrator Reporting
An Associate Administrator is a senior leadership The CEAR is awarded to federal agencies that
position responsible for major SBA programs are considered to have excellent Agency Financial
Reports.
AFR Agency Financial Report
The AFR is an annual report that provides to CFO Chief Financial Officer
OMB, Congress, and the public an overview of The CFO is the financial leader whose duties
the Agency’s financial and performance data. include overseeing all Agency disbursements,
management and coordination of Agency
AGA Association of Government Accountants planning, budgeting, analysis, and accountability
The AGA is the member organization for processes.
government financial management professionals.
COVID-19 Coronavirus Disease 2019
APG Agency Priority Goal Highly contagious respiratory disease caused by
GPRAMA requires federal agencies to establish the SARS-CoV-2 virus.
a set of 2-year APGs that reflect the highest
priorities of agency leadership. CTI Cyber Threat Intelligence
Information an organization uses to understand
APR Annual Performance Report the cyber threats that have, will, or are currently
The APR is required by the Government targeting the organization.
Performance and Results Act and presents a federal
agency’s progress in achieving the goals in its DATA Act The Digital Accountability and Transparency
strategic plan and performance budget. Act
The DATA Act is a law that aims to make

172 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
APPENDICES

information on federal expenditures more easily FBO FedBizOps
accessible and transparent. FBO is the Federal Government’s website that
posts all federal procurement opportunities with a
DCMS Disaster Credit Management System
value over $25,000.
DCMS is the electronic system used to process
loan applications for all new disaster declarations. FCRA Federal Credit Reform Act
The FCRA is a law enacted to provide a more
DLF Disaster Loan Fund
realistic picture of the cost of U.S. Government
The DLF assists eligible small businesses impacted direct loans and loan guaranties.
by disasters.
FEMA Federal Emergency Management Agency
DNP Do Not Pay Initiative
The primary purpose of FEMA is to coordinate
The DNP was established by IPERIA to support the response to a disaster that has occurred in the
federal agencies with their efforts to prevent and United States.
detect improper payments.
FEVS Federal Employee Viewpoint Survey
DO District Office
An OPM survey administered to federal employees
The SBA’s District Offices are responsible for the that measures perceptions of whether, and to
delivery of the SBA’s many programs and services what extent, conditions characteristic of successful
throughout the country. organizations are present in their agencies.
DoD Department of Defense FFMIA Federal Financial Management Improvement
The DOD is the federal agency charged with Act
coordinating national security and the armed FFMIA is a law that requires each federal agency
services. to implement and maintain financial management
DTI Debt-to-Income systems that comply substantially with federal
financial management system requirements,
DTI ratio is derived by dividing monthly debt
applicable federal accounting standards and the
payments by monthly gross income
United States Standard General Ledger.
EDAP Expedited Disaster Assistance Loan Program
FISMA Federal Information Security Management Act
The EDAP is a loan guarantied by SBA for up to
FISMA is a law that defines a comprehensive
$150,000.
framework to protect government information,
EDP Entrepreneurial Development Program operations, and assets against natural or man-made
The EDP account reports entrepreneurial threats.
development expenses. FITARA Federal Information Technology Acquisition
ECS Enterprise Cybersecurity Services Reform Act
Cybersecurity strategies designed to safeguard data FITARA is legislation to improve the acquisition
as it travels between distant wireless devices and and management of federal information
onto cloud servers. technology assets.

EIDL Economic Injury Disaster Loan FMFIA Federal Managers Financial Integrity Act
A grant to provide economic relief to businesses FMFIA is a law that primarily requires ongoing
experiencing a temporary loss of revenue due to evaluations and reports on the adequacy of the
the COVID-19 pandemic internal accounting and administrative control
systems of executive agencies. It also requires
ELA Enterprise Learning Agenda evaluations and reports on the conformance of
The ELA is a plan that aligns with the Agency’s financial management systems.
strategic goals to identify where evaluations could
provide insights about program effectiveness. FR Financial Report of the U.S. Government
A record of the United States government’s
ERM Enterprise Risk Management financial activities.
The ERM provides a framework to manage risks
and seize opportunities related to the achievement FRDAA Fraud Reduction and Data Analytics Act
of their objectives. FRDAA is a law to improve federal agency
financial and administrative controls and
FAST Federal and State Technology (FAST) Grants procedures to assess and mitigate fraud risks, and
One year funding opportunity to help increase the to improve federal agencies’ development and use
number of SBIR and STTR proposals. of data analytics for the purpose of identifying,

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 173
APPENDICES

preventing, and responding to fraud, including HUBZone Historically Underutilized Business Zone
improper payments. HUBZone is an SBA program that encourages
economic development by the establishment
FTE Full-Time Equivalent
of federal contract award preferences for small
FTE indicates the workload of an employed businesses located in historically underutilized
person. An FTE of 1.0 means that the person is business zones.
equivalent to a full-time worker while an FTE of
0.5 means that the worker is only half-time. ICOR Internal Control Assessment Over Reporting
A reporting methodology that manages assets
FY Fiscal Year
(including data), improves data quality, and
The Federal Government fiscal year begins reduces compliance-oriented burdens shifting
October 1 and ends the following September 30. activities to support attaining high quality data.
GAAP Generally Accepted Accounting Principles IDAP Immediate Disaster Assistance Program
GAAP is the standard framework of guidelines IDAP is a guaranteed disaster loan program
for financial accounting generally known as for small businesses that have suffered physical
accounting standards or standard accounting damage or economic injury to a Declared Disaster.
practice.
IPERA Improper Payments Elimination and Recovery
GAO U.S. Government Accountability Office Act
The GAO is an independent, nonpartisan agency IPERA requires that agencies examine the risk of,
that investigates how the federal government and feasibility of, recapturing improper payments
spends taxpayer dollars and reports their findings in all programs and activities.
to Congress.
IPERIA Improper Payments Elimination and Recovery
GONE Act Grants Oversight and New Efficiency Act Improvement Act
A law that requires federal agencies close expired IPERIA is an act to intensify efforts to identify,
grants. prevent, and recover payment error, waste, fraud,
GPRAMA Government Performance and Results Act and abuse within federal spending.
(GPRA) Modernization Act IPIA Improper Payment Information Act
The GPRAMA modernizes the federal The IPIA is a law enacted in 2002 to identify and
government’s performance management reduce erroneous payments in the government’s
framework, retaining and amplifying some aspects programs and activities.
of the Government Performance and Results Act
(GPRA) of 1993 while also addressing some of its ISS Industrial Specialists for Size
weaknesses. Specialists who perform size determinations for
protests
GSA General Services Administration
The GSA is a federal agency of the Executive IT Information Technology
Branch whose mission is to deliver the best value IT refers to matters concerned with the design,
real estate, acquisition, and technology services to development, installation, and implementation of
government agencies. information systems and applications.
GTAS Governmentwide Treasury Account JAAMS Joint Administrative Accounting Management
Symbol Adjusted Trial Balance System: A system System
used by government entities to provide proprietary Also known as the Oracle Administrative
financial reporting information and information Accounting System, JAAMS is a financial
about budget execution to the Department of the management system used to keep records of the
Treasury. SBA’s administrative funding and expenditures.
HHS U.S. Department of Health and Human LGPC Loan Guarantee Processing Center
Services The 7(a) LGPC has two physical locations (one
The goal of HHS is to protect the health of all in Hazard, Kentucky and one in Citrus Heights,
Americans and provide essential human services. California) that are linked technologically into one
process for efficiency and optimal staff utilization.
HIM Hurricanes Harvey, Irma, and Maria
The HIM Hurricanes caused significant physical LSP Lender Service Provider
damage to Texas, Louisiana, Florida, Puerto Rico, An LSP carries out functions in originating,
and the U.S. Virgin Islands. dispersing, servicing, or liquidating a specific SBA

174 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
APPENDICES

business loan or loan portfolio for compensation disaster losses for individuals and businesses.
from the lender.
OFA Office of Financial Assistance
MAFD Maximum Accepted Fixed Debt
OFPO Office of Financial Program Operations
MAFD are standards used to calculate the risk of
loan approvals. The OFPO leads the financial services industry
in quality products and services to SBA partners
MAT Modification Adjustment Transfer and customers and protects the integrity of SBA
A transfer made between the financing account programs.
and the general fund.
OGC Office of General Counsel
MRA Master Reserve Account The OGC provides comprehensive legal services
The SBA’s fiscal agent maintains this escrow to the Administrator and all Agency offices.
fund to facilitate the operation of the Certified
OGCBD Office of General Contracting and Business
Development Company program.
Development
MRF Master Reserve Fund The Office of Government Contracting &
The SBA’s fiscal and transfer agent maintains this Business Development works to create an
reserve fund to facilitate the operation of the 7(a) environment for maximum participation by small,
secondary market program. disadvantaged, and woman-owned businesses
in federal government contract awards and large
OBD Office of Business Development prime subcontract awards.
The OBD assists small, disadvantaged businesses
to gain access to federal and private procurement OIC Office of Internal Controls
markets. The OIC ensures managers comply with internal
control standards.
OCA Office of Capital Access
The OCA is responsible for small business loans, OIG Office of Inspector General
lender oversight, and the Surety Bond Guaranty The OIG conducts and supervises audits,
program. inspections, and investigations relating to SBA
programs and operations.
OCFO Office of the Chief Financial Officer
The OCFO is responsible for the financial OMB U.S. Office of Management and Budget
leadership of the Agency, including all The OMB is the White House office that oversees
disbursements, management, and coordination of preparation of the federal budget and supervises its
planning, budgeting, analysis, and accountability administration in Executive Branch agencies.
processes.
OPM U.S. Office of Personnel Management
OCIO Office of the Chief Information Officer The OPM is the Federal Government’s human
The OCIO is responsible for the management of resources agency.
information technology for the Agency, including
OPSM Office of Performance and Systems
the design, implementation, and continuing
Management
successful operation(s) of information programs
and initiatives. The OPSM manages the Capital Access Financial
System (CAFS), Lender Loan Management
OCRM Office of Credit Risk Management System (LLMS), Central Servicing Agent system,
The OCRM manages program credit risk, and Fiscal Transfer Agent system.
monitors lender performance, and enforces
OSDBU Office of Small Disadvantaged Business
lending program requirements.
Utilization
OCORM Office of Continuous Operations and Risk OSDBU’s located within each federal agency
Management enable small disadvantaged businesses to gain
OCORM ensures enterprise-wide disaster access to economic opportunity through federal
planning, readiness, and implementation of ERM contracts.
best practices for the SBA.
PPP Paycheck Protection Program
ODA Office of Disaster Assistance A loan designed to provide a direct incentive for
The ODA is the SBA’s office that promotes small businesses to keep their workers on the
economic recovery in disaster-ravaged areas. payroll.
Disaster loans are the Agency’s primary form of
federal assistance for non-farm, private sector

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APPENDICES

PPS Probability Proportional to Size Access.
PPS is a method of sampling that takes the varying
SE Salaries and Expense
size of each item within the population into
account when selecting the audit sample. Operating expenses of the agency.

QAR Quality Assurance Review SMC Senior Management Council
The QAR is a review to identify any deficiencies, SMC was established by the Administrator to
to include improper payments. ensure the SBA had an effective system of internal
controls.
RISE Recovery Improvements for Small Entities After
Disaster Act SOP Standard Operating Procedure
This law amends the Small Business Act to An SOP is the primary source of the Agency’s
authorize a small business, homeowner, nonprofit internal control.
entity, or renter that was located within a declared STEP State Trade Expansion Program
major disaster area during Superstorm Sandy in
STEP is a program that makes matching fund
2012 to apply for an SBA loan.
awards to states to help small businesses enter and
SBA U.S. Small Business Administration succeed in the internal marketplace.
The SBA is the federal agency whose mission is TAP Transition Assistance Program
to maintain and strengthen the nation’s economy
A collaborative program between federal agencies
by enabling the establishment and vitality of
to assist active duty service members’ transition
small businesses and by assisting in the economic
to civilian life through access to employment
recovery of communities after disasters.
workshops and other services.
SBDC Small Business Development Center
USEAC U.S. Export Assistance Center
SBDCs provide management and technical
USEACs are located nationwide and help firms
assistance, economic development, and
grow internationally by assisting in developing
management training to existing and prospective
a plan of action with solutions tailored to their
small businesses through cooperative agreements
needs.
with universities and colleges and government
organizations. USSGL The United States Standard General Ledger
SBG Surety Bond Guarantee USSGL provides a uniform chart of accounts and
technical guidance for standardizing federal agency
The SBG program provides guaranties, bid,
accounting.
performance, and payment bonds for contracts
up to $2 million for eligible small businesses VBOC Veterans Business Outreach Center
that cannot obtain surety bonds through regular VBOCs provide entrepreneurial development
commercial channels. services such as business training, counseling,
SBGRF Surety Bond Guaranty Revolving Fund and mentoring, and referrals for eligible veterans
owning or considering starting a small business.
All the contractor and surety fees collected by
the SBA are deposited in the SBGRF at the U.S. WBC Women’s Business Center
Department of the Treasury, which is used to pay WBCs provide long-term training and advising to
claims. women who own or manage a business, including
SBIC Small Business Investment Company financial, management, marketing, and technical
assistance and procurement.
An SBIC provides long-term loans, debt-equity
investments, and management assistance to small WCF Working Capital Fund
businesses, particularly during their growth stages. Fund for IT modernization efforts
SBIR Small Business Innovation Research WOSB Women-Owned Small Businesses
The SBIR is a highly competitive SBA program The WOSB program allows federal agencies to set
that encourages domestic small businesses aside certain contracts for competition only among
to engage in federal research/research and small businesses owned and controlled by women.
development that has the potential for
commercialization. WOSBP Women-Owned Small Business Federal
Contracting Program
SBLC Small Business Lending Company The WOSB Federal Contracting Program
SBLCs are non-depository small business lending supports women-owned small businesses
companies listed by the SBA Office of Capital competing for federal contracts.

176 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
APPENDICES

APPENDIX 3 – OIG AUDIT FOLLOW-UP ACTIVITY

Throughout the year, the Office of Inspector General conducts audits of the SBA’s processes, procedures, and programs,
and makes recommendations for improvement. Many of these recommendations are not material, relative to their dollar
impact on SBA’s financial and administrative operation, but are beneficial to 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 management. When both SBA management and the OIG agree on the recommendation, SBA management develops a
corrective 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 2020
there were 89 Final Actions, resulting from two monetary and 87 non-monetary recommendations.

The following tables depict the SBA’s Final Action activity for FY 2020 and the status of corrective action plans not
implemented within one year:
Table I: Final Action on Audit Recommendations with Disallowed or Questioned Costs.
Table II: Final Action on Audit Recommendations with Funds Put to Better Use.
Table III: Final Action on Audit Recommendations Not Completed within One Year.

TABLE I: Final Action on Audit Recommendations with Disallowed or Questioned Costs
October 1, 2019 – September 30, 2020
Number of
Column 1 Recommendations Disallowed Costs
A. Recommendations with management decisions on which final action had not been taken at the 18 $236,761,518
beginning of the period.
B. Recommendations on which management decisions were made during the period. 4 $64,796,672
C. Total recommendations pending final action during period. 22 $301,558,190
D. Recommendations on which final action was taken during the period.
1. Recoveries:
(a) Collections and Offsets 2 $363,460
(b) Property
(c) Other
2. Write-Offs 1 $29,712
3. Total 3 $393,172
E. Recommendations needing final action at the end of the period. 19 $301,165,018

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 177
APPENDICES

TABLE II: Final Action on Audit Recommendations with Funds Put to Better Use
October 1, 2019 – September 30, 2020
Number of Funds to be Put to
Recommendations Better Use
A. Recommendations with management decisions on which final action had not been taken at the 0 $0
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. 0 $0
D. Recommendations on which final action was taken during the period.
1. Value of recommendations implemented (completed). 0 $0
2. Value of recommendations that management concluded should not or could not be implemented or 0
completed.
3. Total 0 $0
E. Recommendations needing final action at the end of the period. 0 $0

Table III: Final Action on Audit Recommendations Not Completed within One Year
As of September 30, 2020

Report #13-01, Audit of SBA’s Section 8(a) Program’s Use of Internal Revenue Service Tax Verification Form 4506T
Program: OGCBD
Date Issued: 10/4/12
Management Decision Date: 3/11/13
Explanation: The four recommendations are to the Office of Government Contracting and Business Development (OGCBD) and require changes to SOP 80 05
A to ensure (1) completion of Form 4506T and prompt submission; (2) completion of Form 4506T prior to the start of the annual review and prompt submission;
(3) suspension of the firm if tax returns submitted to the SBA do not agree with those submitted to the IRS; and (4) comparison of IRS transcripts with the tax return
and advise the OIG of discrepancies. Throughout FY 2020, OGC and GCBD were in contact with the SBA liaison at IRS to explore alternative forms or programs that
would give SBA personal income information for 8(a) applicants and Participants. The IRS has recently eliminated the option to deliver tax transcripts to third-party
recipients (i.e., SBA) under the 4506-T, which has caused several federal agencies to contact IRS for alternatives. The IRS liaison does not have an estimate on
when, and if, an alternative will be available. GCBD has provided extensive status updates to the OIG and has exhausted the available alternatives with IRS. This
recommendation will require SBA Senior Leadership and OIG to develop alternatives to address this open recommendation.

Report #13-06i, Audit of SBA’s Section 8(a) Annual Review
Program: OGCBD
Date Issued: 11/13/12
Management Decision Date: 3/11/13
Explanation: The two recommendations are to the OGCBD and require that SOP 80 05 3 be revised to extend time for annual reviews, subject firms to termination
if information is not provided, and allow the SBA to place an 8(a) firm in a “decision pending” category during the additional period. OGCBD proposed, and OIG
accepted, management actions, in FY 2020. The management actions required an update to the 8(a) SOP which was submitted for Agency clearance in May 2020.
The OIG reviewed the SOP in August and the Office of Business Development will submit a request to close this recommendation to the OIG as soon as the SOP is
signed by the SBA Administrator.

Report # 15-16, Audit of Oversight of Loan Agents
Program: OCA
Date Issued: 9/25/15
Management Decision Date: 9/20/18
Explanation: OIG’s only remaining recommendation requires the Office of Capital Access (OCA) to develop benchmarks for contractor performance and require the
Fiscal Transfer Agent (FTA) to implement appropriate application controls and follow-up procedures with lenders to ensure integrity of the Form 159 database. SBA’s
response: The FTA contract was awarded in May 2020 and the FTA transition and migration effort between the incumbent and new FTA is in implementation. The
estimated completion time is 07/31/2021.

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APPENDICES

Report # 17-19, Audit of SBA’s Microloan Program
Program: OCA
Date Issued: 9/28/17
Management Decision Date: 1/4/18
Explanation: OIG’s remaining two recommendations require (1) continued efforts to improve the information system to effectively monitor the program’s compliance,
performance, and integrity; and (2) update the reporting system manual to reflect current technology capabilities. SBA’s response: The system’s portion is currently in
the process of migrating the microloan underwriting and review process of local databases to an agency system. The estimated completion time is 06/30/2021.

Report # 18-03, FY 2017 Financial Statement Audit
Program: OCA
Date Issued: 11/14/17
Management Decision Date: 1/10/18
Explanation: OIG’s only remaining recommendation requires the OCA to monitor and perform procedures over the service organization’s attestation report regarding
user control considerations on an annual basis. SBA’s response: The FTA contract was awarded in May 2020 and the FTA transition and migration effort between the
incumbent and new FTA is in implementation. The estimated completion time is 03/31/2021.

Report # 18-07, Accuracy of the FY 2015 7(a) Loan Guaranty Purchase Improper Payments Rate
Program: OCA
Date Issued: 12/11/17
Management Decision Date: 1/3/18
Questioned Cost: $1,903,213
Explanation: OIG’s only remaining recommendation requires that the lender bring a loan into compliance or that the Office of Financial Program Operations (OFPO)
seek recovery of the guaranty paid by SBA. Complex legal and financial issues have delayed the resolution of this issue. SBA’s response: The OFPO has been granted
an extension from OIG to allow collection on the guaranty. A supplemental package of information was provided to OIG 8/31/2020. Estimated completion date is
12/21/2020.

Report # 18-13, Evaluation of SBA 7(a) Loans Made to Poultry Farmers
Program: OCA
Date Issued: 3/6/18
Management Decision Date: 3/1/18
Explanation: OIG’s only remaining recommendation requires the Office of Financial Assistance (OFA) to review the arrangements between integrators and
growers under the revised regulations and establish and implement controls, such as supplemental guidance, to ensure SBA loan specialists and lenders make
appropriate affiliation determinations. SBA’s response: SBA originally published a proposed rule on 9/28/18 to clarify affiliation rules for the business loan programs.
IFR pub. 2/10/20 (85 FR 7622). SBA/COO approved the request to close on 03/18/20. On 03/27/20 CARES Act rescinded the IFR in its entirety. SBA is publishing
the rescission rule at this time and will review and consider how to proceed. The estimated completion time is 03/31/2021.

Report # 18-18, Audit of SBA’s Women-Owned Small Business Federal Contracting Program
Program: OGCBD
Date Issued: 6/20/18
Management Decision Date: 9/28/18
Explanation: The one remaining recommendation requires the OGCBD to implement a Women-Owned Small Business (WOSB) Federal Contracting Program
certification process as required by the National Defense Authorization Act for FY 2015. As noted in the OIG’s recent “Report on the Most Serious Management and
Performance Challenges Facing the Small Business Administration in Fiscal Year 2020,” the OGCBD made substantial progress in FY 2019 toward implementing a
WOSB certification program. This year, the OGCBD closed three recommendations from this report. For the remaining open recommendation, the WOSB program final
rule was published in May 2020. The effective date of the WOSB certification program is 08/15/2020. OGCBD will submit a request to close the recommendation
following the implementation of the WOSB certification program.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 179
APPENDICES

Report # 18-21, Audit of High Risk 7(a) Loans
Program: OCA
Date Issued: 8/15/18
Management Decision Date: 8/7/18
Questioned Costs: $799,159 and $552,406
Explanation: OIG’s remaining two recommendations require two lenders to bring the loans into compliance or that the OFPO seek recovery of the guaranty paid
by SBA. Complex legal and financial issues have delayed the resolution of this issue. SBA’s response: The OFPO has been granted an extension from OIG to allow
collection on the guaranty. Supplemental package of information provided to OIG 8/31/2020. Estimated completion date for both recommendations is 12/21/2020.

Report # 18-22, Audit of SBA’s of 8(a) Continuing Eligibility Process
Program: OGCBD
Date Issued: 9/7/18
Management Decision Date: 9/7/18
Explanation: The five remaining recommendations require the OGCBD to (1) revise its current process to ensure that it accurately identifies all high risk firms to
receive continuing eligibility reviews from the Office of Certification and Eligibility, (2) establish and implement clear policies and procedures for evaluating 8(a)
continuing eligibility, (3) develop and implement an oversight plan to ensure completion of continuing eligibility reviews of all 8(a) firms and monitor the quality of the
reviews and eliminate duplication between OCE and OFO, (4) establish and implement policies and detailed procedures consistent with 13 CFR 124.11(c), and (5) to
establish and implement clear policies and procedures that include timelines for sending Notices of Intent to Terminate and to Graduate Early firms after eligibility
issues are first identified. To address the open recommendations, OGCBD updated the 8(a) SOP, which was submitted for Agency clearance in May 2020. The OIG
reviewed the SOP in August and the Office of Business Development will submit requests to close the recommendations to the OIG as soon as the SOP is signed by
the SBA Administrator. Concurrently, OGCBD is providing the OIG additional information regarding remaining recommendations.

Report # 18-23, Audit of a High Risk 7(a) Loan
Program: OCA
Date Issued: 9/13/18
Management Decision Date: 9/20/18
Questioned Costs: $448,287 and $855,116
Explanation: OIG’s remaining two recommendations require two lenders to bring the loans into compliance or that the OFPO seek recovery of the guaranty paid by
SBA. Complex legal and financial issues have delayed the resolution of the issues. The OFPO has been granted an extension from the OIG to allow collection on the
guaranties. OGC opinions were received on 9/18/2020. Estimated completion dates are 12/21/2020 for both recommendations.

Report # 19-06, SBA’s District Offices’ Customer Service
Program: OFO
Date Issued: 12/19/18
Management Decision Date: 12/19/18
Explanation: One remaining recommendation requires the OFO to coordinate with the OCPL to revise SOP 90 75 4, Outreach Activities, to clarify the expectation for
using SBA Form 20, Outreach Survey, and establish a process to collect and analyze customer feedback. This year, the OFO closed three recommendations from this
report. With the SOP open for revisions, many other, less time sensitive, but still important changes were and are being made to the document to improve efficiency
or clarify operations. This has led to multiple drafts and ongoing discussions to clarify issues—at times bringing up new issues which must be clarified. In addition,
the head of OSA, who was managing the changes, transferred to a new role mid-process, and a new Director of OSA was hired; that along with COVID-19 and delays
in NSBW has caused additional delays in finalizing the documents. The SBA expects to complete the last revisions to the draft and finalize all clearances before the
end of 2020.

180 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
APPENDICES

Report # 19-08, SBA’s HUBZone Certification Process
Program: OGCBD
Date Issued: 3/28/19
Management Decision Date: 3/29/19
Explanation: One remaining recommendation requires the OGCBD to implement a plan to mitigate IT issues affecting the HUBZone certification process. This year,
the OGCBD closed four recommendations from this report. For the remaining recommendation, OGCBD, OCIO and OCFO are conducting a strategic review of the
Certify investment and will provide an updated timeline for HUBZone functionality by January 1, 2021. The systems currently used by HUBZone will be sustained until
a new platform is delivered.

Report # 19-14, SBA’s Cash Contribution and Gifts
Program: OCPL
Date Issued: 6/19/19
Management Decision Date: 6/26/19
Explanation: Two remaining recommendations require (1) OCPL develop and implement controls to oversee and monitor excess cash held by the fiscal agent for
recurring activities, such as NSBW, on behalf of SBA and incorporate controls into SOP 90 75 4, including review of bank statements and (2) Associate Administer
(AA) of OCPL implement a process to ensure that responsibilities stipulated in the NSBW co-sponsorship agreement are aligned with requirements in SOP 90 75 4.
The OIG report which initiated the update and revision of the OCPL/OSA Outreach SOP ensured that OSA addressed the issues of concern raised in the audit, but it
also, inadvertently, led to much larger revisions to the document. With the SOP open for revisions, many other, less time sensitive, but still important changes were
and are being made to the document to improve efficiency or clarify operations within OSA. This has led to multiple drafts and ongoing discussions to clarify issues—
at times bringing up new issues which must be clarified. In addition, the head of OSA, who was managing the changes, transferred to a new role mid-process, and a
new Director of OSA was hired; that along with COVID-19 and delays in NSBW has caused additional delays in finalizing the documents. The SBA expect to complete
the last revisions to the draft and finalize all clearances before the end of 2020.

Report # 19-15 7(a), High Risk Loan
Program: OFPO
Date Issued: 7/10/19
Management Decision Date: 7/11/19
Questioned Costs: $3,000,297
Explanation: OIG’s remaining recommendation requires the lender to bring the loan into compliance or, if not possible, seek recovery of $3,000,297 plus interest
on the guaranty paid by SBA. SBA’s response: This year, the OFPO closed one recommendation from this report. OGC opinion for the remaining loan was received on
9/18/2020. Estimated completion date is 12/21/2020.

Report # 19-16, 7(a) High Risk Loan
Program: OFPO
Date Issued: 8/14/19
Management Decision Date: 8/15/19
Questioned Costs: $1,367,417 and $691,715
Explanation: OIG’s remaining two recommendations require (1) the lender to bring the loan into compliance or, if not possible, seek recovery of $1,367,417 plus
interest on the guaranty paid by SBA and (2) lender to bring the loan into compliance or, if not possible, seek recovery of $691,715 plus interest on the guaranty paid
by SBA. SBA’s response: OGC opinion received on 9/18/2020 for one of the two loans. Estimated completion date is 12/21/2020 for both recommendations.

AGENCY FiNANCiAL REPORT FISCAL YEAR 2020 181
APPENDICES

Report # 19-17, SBA’s All Small Mentor-Protégé Program
Program: OGCBD
Date Issued: 9/17/19
Management Decision Date: 9/17/19
Explanation: Four remaining recommendations require (1) the AA of GCBD to develop and implement application review and annual evaluation procedures to ensure
mentors are qualified, including implementing mandatory use of the mentor certification form, (2) the AA of GCBD to develop and implement procedures to ensure
quality and consistency in application reviews and annual evaluations, including maintaining adequate documentation, (3) the AA of GCBD to prioritize staff resources
to ensure application reviews and annual evaluations are conducted in accordance with regulatory and program requirements and (4) the AA of GCBD to ensure
that certify.SBA.gov has the functionality needed for program officials to conduct application reviews and annual evaluations. The Office of Business Development
placed a revised ASMPP SOP, which addresses open recommendations 1 and 2 in Agency clearance and will incorporate OIG feedback when received. The estimated
completion date is 3/31/2021 for recommendation 3 and 4 and 8/31/2021 for recommendation 1 and 2.

Report # 19-18, SBA’s Suspension and Debarment Process
Program: OCA
Date Issued: 9/18/19
Management Decision Date: 11/13/19
Questioned Costs: $2,900,000
Explanation: OIG’s only remaining recommendation requires that the AA of OCA rescind the SBA loan guaranty of the $2.9 million loan and assess the lender’s
eligibility for continued participation in the SBA lending program. SBA’s response: This year, the OCA closed five recommendations from this report. Estimated
completion date is 12/31/2020.

Report # 19-19, 7(a) High Risk Loan
Program: OCA
Date Issued: 9/19/2019
Management Decision Date: 9/16/19
Questioned Costs: $1,267,223
Explanation: OIG’s only remaining recommendation requires that the lender bring the loan into compliance or, if not possible, seek recovery of $1,267,223 plus
interest on the guaranty paid by SBA. SBA’s response: OGC opinion received on 9/18/2020. Estimated completion date is 3/31/2021.

Report # 19-23, Desktop Loss Verification Process
Program: ODA
Date Issued: 9/26/2019
Management Decision Date: 9/25/19
Questioned Costs: $2,524,400
Explanation: One remaining recommendation requires that ODA implement controls to require loss verifiers to provide sufficient documentation to support their post
desktop review conclusions regarding the validity of the initial desktop verification and their assessment. This year, the ODA closed three recommendations from this
report. The recommendation is being reviewed by the OIG for closure as of 9/30/2020.

182 AGENCY FiNANCiAL REPORT FISCAL YEAR 2020
ACKNOWLEDGMENTS
This Agency Financial Report was produced with the energies and talents of the SBA staff. To all these dedicated
individuals listed below, and those not listed, the Office of Performance Management and the Chief Financial Officer
would like to offer sincere thanks and acknowledgment.

Melissa Atwood Jeffrey Davis Maureen Moore-Vellucci Marjorie Rudinsky
Anne Barnes Krzysztof Fizyta Mathew Pascarella AnnMarie Schaef
Rachel Beasley Leslie Godsey Tony Paul Michael Simmons
Dorothy Bell Kathleen Graber Andrea Peoples Deron Smallwood
Rory Berges Blake Hoing Tami Perriello Scott Stilmar
Brittany Borg Scott Holland Mike Peterson Zahid Syed
Jason Bossie Natalie Kiser Janette Porter Yvonne Walters
Tonia Butler Emily Knickerbocker Trevor Postlethwaite Lucine Willis
Martin Conrey Prasad Kotiswaran Steve Ramey Hellen Wong
Sean Crean Stephanie Kroll Nathaniel Reboja

We would also like to acknowledge the Office of Inspector General and KPMG LLP for their professionalism while
conducting the audit of the Fiscal Year 2020 Financial Statements. We offer our special thanks to Schatz Publishing
Group and Omnidigital Studio, Inc. for contributions in producing this report.

CE RT IFICAT E O F EXC E L L E N C E
I N A C C O U N TA B I L I T Y R E P O R T I N G

For the past 14 years, FY 2006 to FY 2019, the U.S. Small Business Administration is proud to have
received the prestigious Certificate of Excellence in Accountability Reporting award from the Association of
Government Accountants for its Agency Financial Report. The CEAR program was established by the AGA
in conjunction with the Chief Financial Officers Council. The award recognizes high-quality Performance and
Accountability Reports and Annual Financial Reports that effectively illustrate
and assess financial and program performance, accomplishments and
challenges, and cost and accountability.

The SBA is also the proud recipient of six CEAR Special/Best-in-class awards:

2018 — Presentation of Financial Statements Highlights and Results

2017 — Best Overall Quality (Editorial Excellence/Well Written)

2016 — Presentation of Performance
AGENCY
2015 — Presentation of Forward Looking Information FINANCIAL
REPORT
FISCA L YEAR 2019

2013 — Inspector General’s Summary of Management and
Performance Challenges
we make

2011 — Improper Payments Elimination and Recovery Act Detail SMAL L BUSI NESS
our busin ess
OFFICE OF PERFORMANCE MANAGEMENT
AND THE CHIEF FINANCIAL OFFICER

409 Third Street, S.W.
Washington, DC 20416

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