SBA Agency Financial Report, Fiscal Year 2016

Summary

This report is the SBA Agency Financial Report for FY 2016, the first of two annual reports for federal agencies. Its highlights table (dollars in thousands) gives FY 2016 figures: a loan portfolio of $124,118,505, total assets of $12,657,172 and total employees of 3,102, with FY 2013 to FY 2015 for comparison. The FY 2016 Annual Performance Report is the other report and is part of the FY 2018 Congressional Budget Justification, scheduled for publication in spring 2017. A closing page says the SBA had received the Certificate of Excellence in Accountability Reporting for FY 2006 to FY 2015, and credits the Office of the Inspector General and KPMG LLP for the audit of the Fiscal Year 2016 Financial Statements.

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“SBA Agency Financial Report, Fiscal Year 2016.” Original at legacy.sba.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/sba-agency-financial-report-sba-2016-afr-3b37d038fb/, SHA-256 49144ba959b8d4d539ad0cd0a8fc8db9632f014e4c63d12cbedb8c1e723b6ac3.

Full text

ABOUT THIS REPORT FY 2016 HIGHLIGHTS

The U.S. Small Business
(Dollars in Thousands) FY 2013 FY 2014 FY 2015 FY 2016
Administration’s Agency Financial
Report (AFR) for FY 2016 provides
Loan Portfolio(1) $ 109,757,990 $ 114,450,173 $ 118,767,451 $ 124,118,505
an overview of the Agency’s
financial and performance data to
help Congress, the President, and Regular FTE Employees 2,148 2,137 1,966 1,940
the public assess SBA’s stewardship Disaster FTE Employees 1,628 991 991 1,162
over the resources entrusted to it. Total Employees(2) 3,776 3,128 2,957 3,102
The AFR is the first of two annual
reports for federal agencies. The FY Total Assets $ 13,846,170 $ 13,184,251 $ 12,020,867 $ 12,657,172
2016 Annual Performance Report Total Liabilities $ 12,462,316 $ 11,695,803 $ 10,682,837 $ 11,882,988
(APR) is the other report and is part Total Net Position $ 1,383,854 $ 1,488,448 $ 1,338,030 $ 774,184
of the FY 2018 Congressional Budget Total Net Cost of Operations $ 524,086 $ (466,394) $ (644,590) $ 339,477
Justification (CBJ). The CBJ/APR is Total Budgetary Resources $ 14,059,594 $ 10,826,659 $ 10,296,788 $ 10,878,012
scheduled for publication in spring
(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
of 2017. The reports can be found at and defaulted loans that have not been charged-off.
www.sba.gov/performance. (2)
The total excludes employees in the Offices of Advocacy or Inspector General.

ABOUT THE COVER
The cover includes photos that represent
SBA clients in the pharmaceutical,
restaurant, and construction industries.
FOR MORE INFORMATION

Information about SBA’s programs is available at: www.sba.gov
SBA’s plans and reports are available at: www.sba.gov/performance

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

Questions and comments regarding the content, presentation and usefulness of this report are
welcome and may be addressed to: performance@SBA.gov

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

Message from the Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Management’s Discussion and Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SBA’s History, Goals, and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Primer of SBA’s Principal Programs.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SBA by the Numbers.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Analysis of Performance Results.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Analysis of Performance and Agency Priority Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Verification and Validation of Performance Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Operational Portfolio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Forward Looking Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Analysis and Highlights of Financial Statements and Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Highlights of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Analysis of Financial Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Analysis of SBA’s Systems, Controls, and Legal Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Internal Control Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Financial Management Systems Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Management Assurances: FMFIA and FFMIA Assurance Statement for FY 2016.. . . . . . . . . . . . . . . . . . . . . 34
Improper Payments Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Message from the Chief Financial Officer.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Audit and Financial Management Advisory Committee’s Report.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Inspector General’s Audit Report.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Independent Auditors’ Report on FY 2016 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
CFO Response to Draft Audit Report on FY 2016 Financial Statements .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Financial Statements and Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Schedule of Spending.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
OIG Report on the Most Serious Management and Performance Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Summary of Financial Statement Audit and Management Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Freeze the Footprint Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Civil Monetary Penalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Appendices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Appendix 1 – Contact SBA: Useful Sites and Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Appendix 2 – Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Appendix 3 – OIG Audit Follow-up Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

AGENCY FINANCIAL REPORT • FY 2016 i
SBA’S MISSION
Maintain and strengthen the nation’s economy by enabling the establishment and vitality of small businesses
and by assisting in the economic recovery of communities after disasters.

HOW THIS REPORT IS ORGANIZED
The U.S. Small Business Administration’s FY 2016 Agency Financial Report (AFR) provides financial and
performance information for the fiscal year beginning October 1, 2015 and ending September 30, 2016.
This report presents SBA’s operations, accomplishments, and challenges. Following a message from the SBA
Administrator are four principal sections: Management’s Discussion and Analysis, Financial Reporting,
Other Information, and Appendices. “Did You Know?” facts about the SBA appear throughout the report
and are accompanied by a “Success Story” highlighting a small business entrepreneur.

Management’s Discussion and Analysis
The Management’s Discussion and Analysis section provides a report of the Agency’s overall financial position,
program performance, and results of operations. It presents SBA’s history, organization, and principal programs.
This section highlights financial results and analysis; performance results and analysis; and analysis of systems,
controls, and legal compliance.

Financial Reporting
The Financial Reporting section provides a detailed report of SBA’s finances. It includes the message from
the Chief Financial Officer, the Audit and Financial Management Advisory Committee’s report, the audit
transmittal memorandum from the Inspector General, the independent auditors’ report, and the audited
financial statements and notes. The required supplementary information provides a combining statement of
budgetary resources, and the required supplementary stewardship information provides a report on stewardship
investments in human capital.

Other Information
The Other Information section includes a schedule of spending and the Inspector General’s report on the Agency’s
most serious management and performance challenges along with recommended actions. Also included in this
section is a summary of financial statement audit and management assurances, and a detailed report on improper
payments.

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 • FY 2016
ME SSAG E FRO M TH E A D M INIS T RATOR

MESSAGE FROM THE ADMINISTRATOR November 14, 2016

I am pleased to present the U.S. Small Business Administration’s FY 2016 Agency
Financial Report.

When I was sworn in as SBA Administrator in 2014, I set an agency-wide goal to make
the SBA “Smart, Bold, and Accessible” with smarter systems, bolder steps into new
markets, and programs that are more accessible to entrepreneurs in every corner of our
nation. This report helps highlight the areas where we’ve made great strides in nurturing
America’s entrepreneurial spirit and supporting our nation’s small businesses, the greatest
job-creating engine for our economy.

In the pages to follow, we have outlined our key accomplishments in the areas of capital, contracts, and counseling with
data that is reliable and complete as supported by our auditors’ unmodified opinion of our FY 2016 financial statements.

We saw historic progress in our efforts to fill small business lending gaps, particularly to entrepreneurs from underserved
communities. Overall, the SBA approved more than 70,000 loans through our 7(a) and 504 loan programs, at a record total
of $28.9 billion, which supported nearly 694,000 jobs across the country, an increase of 30 percent in the past four years.

Our flagship 7(a) lending program operated with zero taxpayer subsidy — instead, fees were used to cover our costs. We
did this while continuing, for the third year in a row, to zero out fees for 7(a) loans of $150,000 or less, allowing us to
boost loan approvals to women, African-Americans, Hispanics, Asian-Americans, veterans, and business owners in urban
and rural areas.

In high-growth financing, our Small Business Investment Company (SBIC) Debenture program, considered the largest
fund of funds, also continued on a trajectory of record growth. Our SBIC licensees provided more than $5.5 billion in
financings to more than 1,100 small businesses helping to sustain nearly 112,000 jobs. And with final approval of the
family of fund limit increase, from $225 million to $350 million, our funds have room to grow. For new and prospective
SBIC program participants, we reduced licensing times significantly.

We released the results of a ground-breaking study commissioned with the Library of Congress that measures our
SBIC program’s impact in diverse communities. The research found that SBIC funds are more likely to have women
in leadership positions as compared to the private sector and that diverse investor groups are more likely to invest in
companies with diverse representation.

With our work increasing access to capital, the SBA also achieved important milestones promoting greater federal
contracting opportunities for small businesses. For the third consecutive year, in FY 2015, the federal government
surpassed its statutory prime contracting goal and achieved its highest level yet of small business contracting dollars at
25.75 percent of the federal spend, or $90.7 billion, an increase of $800 million in four years. And for the first time ever,
we met the 5 percent statutory goal for contracts awarded to women-owned small businesses.

In addition, we doubled our goal for small disadvantaged businesses, reaching 10 percent and streamlined our 8(a)
program — reducing the processing time to approximately 90 days. We also expanded our Mentor-Protégé Program to
help all small businesses better compete for government contracts.

AGENCY FINANCIAL REPORT • FY 2016 1
From my very first days in office, I have prioritized the need to modernize SBA operations. In FY 2016, we made
great inroads — updating our lending partner platforms by bringing advances such as automation, digital signatures,
and online matchmaking to the entrepreneurs we serve. These enhancements have encouraged lenders to reach more
entrepreneurs from underrepresented communities. At the same time, technology allows us to exercise the vigilant
oversight required to manage risk most effectively.

We helped small businesses access the technology they need to compete in our global economy by launching the Small
Business Technology Coalition in partnership with some of the world’s most iconic technology companies. Through this
effort, we provided an unprecedented collection of educational and training resources to help entrepreneurs connect to
customers, scale, and conduct business safely anywhere in the world.

More than 1.1 million entrepreneurs took advantage of SBA’s mentoring, business advice, and training assistance. Online
and in-person, in dozens of languages, our nation’s small businesses received advice and guidance on export business
plans, government contracting, manufacturing assistance, and much more.

Our business counseling made an especially big impact in the veteran community. Our Boots to Business Program,
V-WISE Program, and Veterans Business Outreach Centers continue to help more veterans each year. We continued our
increases in 7(a) loans to veterans and surpassed our contracting goal for service-disabled veterans.

Finally, the SBA reaffirmed its commitment to aid Americans in their hours of greatest need by continuing to improve
and streamline our disaster assistance programs. The SBA approved more than 25,000 disaster loans totaling more than
$1.4 billion and worked 289 active declarations across the country, including the late-summer storms in Louisiana, our
largest disaster response since Superstorm Sandy hit in 2012, nearly doubling our disaster loans over the past five years.

We made significant progress automating and streamlining our application, approval, and distribution processes —
shaving weeks off the time it takes for homeowners, renters, and small business owners to get the help they need to
rebuild. These improvements help ensure that those first, crucial funds get into the hands of homeowners and business
owners more quickly.

The comprehensive services we provide to America’s small businesses have continued to be an important driver of our
nation’s economic growth. In FY 2017, the SBA will build upon these accomplishments so more small businesses can
expand, create jobs, and help America’s economy thrive.

Sincerely,

Maria Contreras-Sweet
Administrator

2 AGENCY FINANCIAL REPORT • FY 2016
Management’s
Discussion &
Analysis
CAPITAL The growth in SBA’s 7(a) and 504 loan programs indicates
DID the continued outreach and streamlining of program delivery. The 7(a)
YOU program showed impressive gains in comparison to FY 2015, with over
KNOW 64,000 loans totaling $24.1 billion — an increase of 2 percent in number
of loans and 2 percent in total dollars. The 504 program saw an increase
in FY 2016, with $4.7 billion in approvals. This level of program activity
demonstrates that access to capital through conventional sources remains
a challenge for America’s small businesses.

SUCCESS Dynamic Duo is SBA Small Business
Persons of the Year
STORY Equator Coffees and Teas Inc.
San Rafael, California

Helen Russell and Brooke McDonnell founded Equator Coffees & Teas
Inc. 20 years ago just as the specialty coffee industry began heating up. They
initially launched two coffee bars named Europa in San Francisco, but after
Brooke became frustrated with the lack of information regarding farms, farmers, climate, and the coffee’s origin, the
duo bought an Italian roaster using funds from the sale of Brooke’s mother’s wedding ring. They roasted coffee in her
garage, and Equator Coffees & Teas was born in 1995.

As their needs changed and their business grew, Helen and Brooke purchased their own roasting plant using an SBA
504 loan. Equator now has 90 employees and 350 wholesale customers including the renowned French Laundry
restaurant in California, cafes at LinkedIn, micro-kitchens at Google, and three retail stores in Northern California
with two more on the way.
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

SBA’S HISTORY, GOALS, AND ORGANIZATION
In 1953, Congress created the U.S. Small Business Administration to “aid, counsel, assist and protect, insofar as is
possible, the interests of small business concerns.” SBA’s headquarters is located in Washington, D.C., while its business
products and services are delivered with the help of field personnel and a network of private sector and non-profit partners
in each U.S. state and territory. Major SBA offices fall under one of three Agency-wide strategic goals, as outlined in SBA’s
FY 2014-2018 Strategic Plan:

SBA 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.

Strategic Goal 1 Strategic Goal 2 Strategic Goal 3
Growing businesses and Serving as the voice Building an SBA that meets the needs of
creating jobs for small business today’s and tomorrow’s small businesses

1.1 Expand access to capital 2.1 Ensure inclusive entrepreneurship 3.1 Strengthen, streamline,
1.2 Ensure federal contracting goals are met 2.2 Provide useful information through and simplify program
or exceeded digital and in-person outreach operations
1.3 Strengthen entrepreneurial ecosystems 2.3 Foster a small business-friendly 3.2 Invest in SBA’s employees
1.4 Enhance the ability of exporters to succeed environment by reducing unfair 3.3 Mitigate risk to taxpayers
in global markets regulatory burdens and improve oversight
across programs
1.5 Fuel high-growth small businesses and
start-ups to drive innovation
1.6 Ensure disaster assistance can be deployed
quickly, effectively, and efficiently

business development centers, women’s business centers,
STRATEGIC GOAL ONE — Growing SCORE, and through the Regional Innovation Clusters,
businesses and creating jobs Entrepreneurship Education, SBA Learning Center, and
Emerging Leaders programs. In addition, SBA’s district
Strategic Goal One focuses on business formation, job offices support coordination between SBA resource
growth, and economic expansion through capital, partners and local small business communities.
contracting, entrepreneurship, exporting, innovation,
and disaster assistance. The Office of Government Contracting and Business Development
The Office of Capital Access assists small businesses in provides assistance to small businesses in competing for federal
obtaining capital via the 7(a), 504, and Microloan programs, contracting opportunities through the government-wide prime
and bonds through the Surety Bond Guarantee program. and subcontracting programs. This includes HUBZone, 8(a)
business development, 7(j) technical assistance, women-owned
The Office of Disaster Assistance provides affordable, timely, and veteran-owned small businesses, and the Office of
and accessible financial assistance to homeowners, renters, Mentor-Protégé. The office also sets size standards for small
and businesses following a disaster. The Disaster Loan businesses, which determine the size a business must be to be
program is the only form of SBA assistance that is not considered a small business.
limited to small businesses. Disaster funding is deployed
quickly, effectively, and efficiently in order to preserve jobs The Office of International Trade enhances the ability of small
and help return small businesses back to operation. businesses to export and compete in the global marketplace
by facilitating access to capital, providing technical assis-
The Office of Entrepreneurial Development provides tance, ensuring the consideration of small business interests
business advising, mentoring, and training assistance in trade negotiations, and contributing to the U.S. govern-
through its resource partner network composed of small ment’s international commercial and economic agenda.

AGENCY FINANCIAL REPORT • FY 2016 5
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

The Office of Investments and Innovation assists high-growth veterans’ business outreach centers, the Boots to Business
small businesses through the Small Business Investment program, Entrepreneurship Boot Camp for veterans with
Company, Small Business Innovation Research, Small disabilities, and partnerships with other federal agencies
Business Technology Transfer, and other tailored programs and non-profit organizations.
that drive innovation and competitiveness.
The National Women’s Business Council is a nonpartisan
federal government council created to serve as an
STRATEGIC GOAL TWO — Serving as independent source of advice and policy recommendations
the voice for small business to the President, Congress, and the SBA Administrator on
issues of economic importance to women business owners.
Strategic Goal Two focuses on underserved communities
and outreach to ensure that all small businesses receive
equal representation in the marketplace. SBA’s Office of STRATEGIC GOAL THREE — Building
Capital Access, Office of Entrepreneurial Development, an SBA that meets the needs of today’s
and Office of Government Contracting and Business
and tomorrow’s small businesses
Development (all defined under Strategic Goal One) each
have programs that support underserved communities. SBA’s management offices primarily support Strategic
Goal Three. Each program office, discussed in Strategic
The Office of Communications and Public Liaison com-
Goals One and Two, maintains a key role ensuring that
municates the Agency’s programs and priorities to small
the Agency mitigates risk in its programs.
businesses, their partners, and the public at large by working
with media outlets, developing social media content, creating The Office of the Chief Information Officer provides
user-friendly online resources, crafting high quality market- information technology leadership, product services, and
ing materials, organizing events to gain feedback from small operational support for the SBA in order to maximize
businesses, and coordinating strategic partnerships. internal efficiency and responsiveness to small businesses.
The Office of Field Operations is the SBA’s front-line operating The Office of Credit Risk Management focuses on
team. Most SBA programs and services are executed when mitigation of risk to taxpayers through ever-improving risk
small businesses connect with their regional, district, and management and oversight of SBA lending programs.
branch offices, which are located in each state and territory.
The Office of Diversity, Inclusion, and Civil Rights serves
The Office of the National Ombudsman works with all a diverse workforce by maintaining an inclusive culture
federal agencies that regulate small businesses to provide and ensuring equal access and equitable treatment
a means for businesses to comment on federal government regarding employment and entrepreneurial endeavors.
enforcement activity. This includes audits, on-site
inspections, compliance assistance efforts, and other The Office of Human Resources Solutions provides strategic
enforcement efforts. The office also maintains a human capital solutions to workforce issues and strives
five-member Regulatory Fairness Board in each of SBA’s to create a work environment that attracts and retains a
ten regions to hold public hearings on small talented and high-performing workforce.
business concerns.
The Office of Performance Management and Chief Financial
The Office of Intergovernmental Affairs facilitates continuous Officer provides Agency performance management, financial,
and bilateral communications between the SBA and and acquisition oversight. The office is responsible for Agency
state and local governments, American Indian, Alaska disbursements, management, and coordination of Agency
Native, Native Hawaiian tribal governments, and planning, budgeting, analysis, and accountability process.
insular governments.
Other support offices include the Office of Congressional
The Office of Veterans Business Development eensures and Legislative Affairs, Office of General Counsel, and Office
applicability, and usability of all Administration small of Hearings and Appeals.
business programs for veterans, service-disabled veterans,
reserve component members, and their dependents or
survivors. The office accomplishes its work through

6 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

EXECUTIVE SUMMARY
America’s 28 million small businesses play a critical role in liquidation and charge-off of existing defaulted guaranties,
job creation and retention. During the last two decades, a decrease in new disaster direct loan disbursements, and a
small businesses have been responsible for creating two decrease in collections on existing disaster loans.
out of every three net new jobs. In turn, the U.S. Small
Business Administration’s assistance to those firms and
entrepreneurs help drive a healthy economy.
Performance Results
Capital: In FY 2016, the dollar amount of SBA’s 7(a) loan
The SBA employs a variety of methods to support program increased by 2 percent, leading to a record year
America’s small businesses. These methods include of approvals. Additionally, the 504 loan program exceeded
promoting access to capital; federal contracting; advising, its FY 2016 target with 4.7 billion in loan approvals.
mentoring, and training; and disaster assistance. In all, through the 7(a) loan, 504 loan, and microloan
Throughout FY 2016, three goals from the SBA’s FY programs, the SBA approved more than 74,000 loans and
2014-2018 Strategic Plan guided the Agency’s actions: provided nearly $29 billion in lending to small businesses.

1. Growing businesses and creating jobs More than $5.5 billion in debenture capital was invested
in small businesses through the Small Business Investment
2. Serving as the voice for small business
Companies program. SBIC is a zero subsidy guaranty deben-
3. Building an SBA that meets the needs of today’s and ture program underpinned by a portfolio of public-private
tomorrow’s small businesses partnerships investing in small and typically high-growth
businesses. Capital deployments have increased 70 percent
The following sections highlight financial and perfor-
since FY 2013.
mance results for the Agency, including the three Agency
Priority Goals and federal Cross-Agency Priority Goals. Contracts: The SBA continues to work with agencies across
An in-depth analysis can be found in the Analysis of the federal government to expand small business contract-
Financial Results and Analysis of Performance Results ing opportunities. From the beginning of FY 2011 through
sections. The complete set of performance results will be FY 2015, small businesses accessed nearly $447 billion in
reported in the Annual Performance Report to be released federal contracts (FY 2016 contracting numbers continue
in the spring of 2017. to be collected and certified).

Counseling: The SBA provides mentoring, business
Financial Results advice, and training assistance to more than 1.1 million
For FY 2016, SBA’s total budgetary resources used for entrepreneurs and small businesses each year. In FY 2016,
staffing, operations, and subsidy costs were $1.7 billion, these efforts helped entrepreneurs start businesses and
and SBA’s total nonbudgetary resources for loan financing create or retain jobs.
used to purchase guarantied loans in default and to make
direct loans were $4.2 billion. SBA’s guarantied portion Disaster Assistance: Disaster loan applications and
approvals rose to the highest level of the past ten years with
of the outstanding loan principal rose 6.1 percent in FY
the exception of FY 2013, which included the third largest
2016, to $93.8 billion. New guaranties disbursed by SBA
disaster, Hurricane Sandy. In FY 2016, the Agency worked
participating banks during FY 2016 were $21.3 billion, a
on 289 active disaster declarations and approved more than
7.7 percent increase this year that resulted in the net 6.1
25,000 disaster loans totaling more than $1.4 billion.
percent increase in outstanding guaranties. Purchases of
defaulted guarantied loans dropped again, falling from $1.1
billion last year to $0.8 billion this year. This encouraging Agency Priority Goals and Outcomes
trend is expected to continue in upcoming years as the
nation moves further into economic recovery. The loan The Government Performance and Results Modernization
receivables portion of the SBA credit program portfolio Act of 2010 requires federal agencies to establish a set of
continued to decline from $6.5 billion to $6.2 billion two-year APGs that reflect the highest priorities of agency
in FY 2016. The drop in loan receivables was caused by leadership. The SBA has established three APGs. The goals
the decrease in purchases of defaulted guaranties, the and outcomes from this fiscal year are as follows:

AGENCY FINANCIAL REPORT • FY 2016 7
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

• Increase active lender participation. • Cybersecurity: Improve cybersecurity performance
• Goal: By September 30, 2017, expand access through ongoing awareness of information
to capital for small businesses by increasing the security, vulnerabilities, and threats impacting the
number of active lenders in SBA’s 7(a) loan operating information environment, ensuring that
program from 2,244 (FY 2014) to 2,500. only authorized users have access to resources and
information; and the implementation of technologies
• Outcome: The SBA increased small business
and processes that reduce the risk of malware.
access to capital by adding new and returning
lenders to the 7(a) loan program. While the • Customer Service: Deliver world-class customer
Agency missed its FY 2016 target by 18 percent, service to citizens by making it faster and easier for
lenders provided more than $24 billion in loans individuals and businesses to complete transactions
to small businesses. and have a positive experience with government.
• Maximize small business participation in government • Smarter IT Delivery: Improve outcomes and
contracting. customer satisfaction with federal services
through smarter IT delivery and stronger agency
• Goal: Through September 30, 2017, maximize
accountability for success.
small business participation in federal government
contracting to meet the statutory goal of 23 percent, • Strategic Sourcing: Expand the use of high-quality,
ensure subgoals are met, and reduce participation high-value strategic sourcing solutions through this
by ineligible firms. goal in order to improve the government’s buying
• Outcome: The SBA will continue to collect power and reduce contract duplication.
and certify FY 2016 contracting numbers • Benchmark and Improve Mission-Support
through the third quarter of FY 2017. The Operations: Improve administrative efficiency and
Agency exceeded its FY 2015 target with the increase the adoption of effective management
federal government, making 25.75 percent of practices by establishing cost and quality benchmarks
contracting dollars available to small businesses. of mission-support operations and giving agency
• Support more disadvantaged small businesses. decision-makers better data to compare options,
• Goal: By September 30, 2017, support more allocate resources, and improve processes.
disadvantaged small businesses by increasing the • Open Data: Fuel entrepreneurship and innovation
number of approved 8(a) certification applications and improve government efficiency and effectiveness
by 5 percent each fiscal year. by unlocking the value of government data and
• Outcome: Through streamlining the application adopting management approaches that promote
process, the SBA exceeded its target by 152 interoperability and openness of this data.
percent and has successfully recruited new • Lab to Market: Increase the economic impact of
8(a) small businesses to the program. More federally funded research and development by
economically and social disadvantaged small accelerating and improving the transfer of new
businesses qualify for federal contract set asides. technologies from the laboratory to the commercial
marketplace.
Cross-Agency Priority Goals
• People and Culture: Innovate by unlocking the full
The SBA also participates in many of the government- potential of the workforce of today and building the
wide federal Cross-Agency Priority goals. The CAP goals workforce needed for tomorrow.
are Presidential priorities and are complemented by other
cross-agency coordination and goal-setting efforts. A brief
description of the CAP goals to which the SBA
contributes follows.

• Job Creating Investment: Improve federal
investment tools and resources, while also increasing
interagency coordination to encourage job growth
through foreign investment.

8 AGENCY FINANCIAL REPORT • FY 2016
SBA ORGANIZATION CHART

Office of Advocacy
Office of the Administrator

Office of the Inspector General

Office of Disaster Office of Veterans Office of Office of Government Office of Office of Investment Office of Field Office of
Assistance Business Entrepreneurial Contracting and Capital Access and Innovation Operations International Trade
Development Development Business • Office of Financial • Office of SBIC • 10 Regional
Development Assistance Operations Administrators
• Office of Small • Office of Surety • Office of SBIC • 68 District Offices
Business • Office of Business Guarantees Liquidation
Development Centers Development • Office of Economic • Office of
• Office of Women’s • Office of Government Opportunity Examinations
Business Ownership Contracting • Office of Performance • Office of Program
• Office of • Office of HUBZone and Systems Development
Entrepreneurship Program Management • Office of Licensing
Education • Office of Policy, • Office of Credit Risk and Program
Planning, and Liaison Management Standards
• Office of Mentor- • Office of Financial • Office of Innovation
Protégé Program Operations and Technology

Office of Hearings Office of National Office of Office of Office of Office of Office of Office of
and Appeals Ombudsman Performance Chief Operating Communications Congressional and General Counsel Intergovernmental
Management and Officer and Public Liaison Legislative Affairs Affairs
the Chief Financial • Office of the Chief • Office of Native
Officer Information Officer American Affairs
• Office of the Chief • Office of Diversity,
Financial Officer Inclusion, and Civil
AGENCY FINANCIAL REPORT • FY 2016

• Office of Performance Rights
Management • Office of Disaster
• Office of Internal Planning and Risk
Controls Management
• Denver Finance • Office of Human
Center Resources Solutions
• Office of Grants
Management
• Office of
Administrative
Services
• Office of Executive
Secretariat
• Office of Personnel
Security
• Office of the Chief
Digital Officer

9
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

SBA REGIONS AND FIELD OFFICES

10 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

PRIMER OF SBA’S PRINCIPAL PROGRAMS

CAPITAL (www.sba.gov/financialassistance)
The SBA has a total business loan portfolio of $106.9 billion.1

7(a) Loan Guaranties — The SBA offers government guaranties on loans (up to $5.0 million) made by commercial
lenders to help expand access to capital for business owners who face challenges in getting approved for financing. The
SBA guarantees a portion of 7(a) loans made and administered by commercial lending institutions. Loans can be
guaranteed for a variety of general business purposes.
504 CDC Loan Guaranties — These long-term, fixed-rate loans (up to $5.5 million) support investment in major assets
such as real estate and heavy equipment. Loans are delivered by certified development companies, which are private,
non-profit corporations. CDCs work with the SBA and private lenders to provide the financing. The SBA guarantees the
CDC’s portion of these loans.
Microloans — The SBA provides loans to non-profit intermediary lenders, which are community-based organizations
with experience in lending and technical assistance, that in turn make these loans (up to $50,000) to small businesses
needing small-scale financing and technical assistance for start-up or expansion.
Surety Bond Guarantees — A surety bond guarantee is a type of contract that guarantees the performance of a contractor.
If one party does not fulfill its end of the bargain, then the SBG provides financial compensation to the other party. The SBA
guarantees bonds issued by a surety company in order to encourage the surety company to provide bonds to small businesses.

CONTRACTING (www.sba.gov/contracting)
The SBA leads federal efforts to deliver 23 percent of contracts to small businesses, which is inclusive of 5 percent set-asides for
women-owned and small, disadvantaged/8(a) businesses and 3 percent set-asides for HUBZone and service-disabled veteran
small businesses.

Procurement Assistance to Small Businesses — Small business contracts represent the largest form of direct monetary
support for small business in the federal government. Within this goal are four sub-goals:
Small Disadvantaged Businesses — This program provides assistance through 8(a) Business Development and set-aside
contracting for businesses owned and controlled by socially and economically disadvantaged individuals. Over the course of
nine years, a firm is assisted in gaining resources to compete for federal contracts and for contracts in the private sector.
HUBZone Small Businesses — This program provides sole-source and set-aside contracting for firms located in
economically disadvantaged geographical areas.
Service-Disabled Veteran-Owned Small Businesses — This program allows federal agencies to set-aside contracts
for competition only among service-disabled veteran-owned small businesses.
Women-Owned Small Businesses — This program allows federal agencies to set-aside certain contracts for
competition only among small businesses owned by women.

ADVISING, MENTORING, AND TRAINING (www.sba.gov/local-assistance)
The SBA and its partners serve over 1 million small business clients a year through the following programs.

Small Business Development Centers — SBDCs deliver an array of services to small businesses and prospective
business owners using an extensive network of 63 lead centers managing more than 900 service delivery points
throughout the U.S. and the insular territories.

1 The total portfolio of $124.1 billion consists of all performing loans and defaulted loans that have not been charged off, including guarantied business loans
outstanding, guarantied debentures, direct business loans and direct disaster loans, ARC 506, Dealer Floor Plan, 504 First Lien, and 504 Refi.

AGENCY FINANCIAL REPORT • FY 2016 11
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

Women’s Business Centers — WBCs provide advising and training through more than 100 non-profit
educational centers across the nation. Many WBCs provide multilingual services, and a number offer flexible
hours allowing for mothers with children to attend training classes.
Veterans Business Outreach Centers — SBA’s 20 VBOCs provide counseling and training services to veteran-owned
and service-disabled veteran-owned small businesses and entrepreneurs, along with reserve component members
starting new small businesses or expanding established small businesses.
SCORE — SCORE is a non-profit association comprised of nearly 11,000 volunteer business mentors that serve
entrepreneurs with in-person mentoring and local training workshops. As the largest volunteer business mentor
network in the federal government, SCORE adapts its structure and services to meet the needs of the small business.

EXPORTING (www.sba.gov/oit)
The SBA provides loans to exporters and training assistance to small businesses.

Export Loans — The SBA provides several types of export loans, including SBA Export Express loans (up to
$500,000), Export Working Capital loans (up to $5.0 million), and International Trade loans (up to $5.0 million)
that provide small businesses with enhanced export financing options to develop foreign markets, fund their export
transactions, and/or support business expansion due to exporting success. The SBA provides technical assistance on
trade finance and funding questions through staff located in U.S. Export Assistance Centers.
U.S. Export Assistance Centers — USEACs are staffed by professionals from the SBA, the Department of
Commerce, and the Export-Import Bank. Together, their mission is to help small- and medium-sized businesses
compete in today’s global marketplace by providing export marketing and finance assistance.

HIGH-GROWTH SMALL BUSINESSES (www.sba.gov/sbic)
The SBA supports high-growth investments through a portfolio of $11 billion in outstanding leverage.

Small Business Investment Companies — SBICs are privately owned and managed investment funds that use
their capital plus funds borrowed with an SBA guaranty to make equity and debt investments in qualifying
small businesses.
Small Business Innovation Research — The SBIR program is a highly competitive funding agreement
program that stimulates high-tech innovation by reserving a specific percentage of federal research and
development funds for small business. SBIR protects the small business and enables it to compete on the same level
as larger businesses.

DISASTER ASSISTANCE (www.sba.gov/disaster)
The SBA has a portfolio of $6 billion in direct disaster loans to businesses of all sizes, private non-profit organizations,
homeowners, and renters.

Disaster Assistance — The SBA is the federal government’s primary source of financing for the long-term repair
and rebuilding of disaster-damaged private property for homeowners, renters, businesses of all sizes, and private
non-profit organizations. It is the only form of SBA assistance that is not limited to small businesses.

12 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

SBA BY THE NUMBERS
(Dollars in Millions)
FY 2013 FY 2014 FY 2015 FY 2016
Total Program Portfolio (1) Outstanding Principal Balance $ 109,758 $ 114,434 $ 118,767 $ 124,118
Capital (2)
7(a) Loans Dollars of Gross Loans Approved $ 17,868 $ 19,191 $ 23,584 $ 24,128
504 Loans Dollars of Gross Loans Approved $ 5,227 $ 4,199 $ 4,298 $ 4,740
Microloans Dollars of Gross Loans Approved to Microborrowers $ 53 $ 54 $ 51 $ 58
Surety Bonds Dollars of Bid and Final Bonds Guaranteed $ 6,150 $ 6,413 $ 6,348 $ 5,658

Contracting (3)
Prime Contracting Dollars of Contracts Awarded to Small Businesses $ 83,143 $ 91,682 $ 90,702 N/A
HUBZone Small Dollars of Contracts Awarded to HUBZone
$ 6,245 $ 7,000 $ 6,422 N/A
Businesses Small Businesses
Small Disadvantaged Dollars of Contracts Awarded to Disadvantaged
$ 30,616 $ 34,700 $ 35,430 N/A
Businesses Small Businesses
Women-Owned Small Dollars of Contracts Awarded to Women-Owned
$ 15,365 $ 17,200 $ 17,807 N/A
Businesses Small Businesses
Service-Disabled, Veteran- Dollars of Contracts to Awarded to Service-Disabled,
$ 12,023 $ 13,500 $ 13,832 N/A
Owned Small Businesses Veteran-Owned Small Businesses

Advising, Mentoring,
and Training (4)
Small Business Number of Clients Advised and Trained
Development Centers 532,377 485,487 454,898 447,397
(SBDCs)
Women's Business Number of Clients Advised and Trained
133,765 140,037 140,716 145,728
Centers (WBCs)
SCORE Number of Clients Mentored and Trained 345,902 442,374 349,539 437,090
Online Training Number of Clients Trained Online 150,355 182,002 139,719 187,162
Veteran's Business Number of Clients Advised and Trained 34,664 52,621 40,024 47,842
Outreach Centers (VBOCs) (5)

Exporting
Export Loans Dollars of Gross Loans Approved $ 1,191 $ 1,341 $ 1,454 $ 1,546

High-growth Small
Businesses

Small Business Investment Dollars of SBA Debenture Leverage Committed to SBICs $ 2,156 $ 2,549 $ 2,553 $ 2,514
Company (SBIC) Dollars of SBIC Debenture Capital to Small Businesses $ 3,256 $ 5,465 $ 6,286 $ 5,529

Disaster
Disaster Assistance (2) (6) Dollars of Gross Loans Approved $ 2,797 $ 332 $ 372 $ 1,407

(1) The total portfolio consists of guarantied business loans outstanding, direct business loans, and direct disaster loans. The data include all performing loans and defaulted loans that have
not been charged-off.
(2) The SBA tracks loan data in three ways: Gross Loans Approved (the total loans approved); Net Loans Approved (gross loans approved plus any loan increases minus any cancellations);
and Disbursed Loans (the amount that is actually given to the borrower). Gross Loans Approved is presented in the Capital and Disaster Assistance sections because it is the only loan data
that remain constant over time.
(3) FY 2016 contracting numbers will continue to be collected and certified through the third quarter of FY 2017. Therefore, FY 2016 numbers are reported per OMB Circular A-11.
(4) Resource partners may input data up to 45 days after the close of the fiscal year.
(5) Historical data has been updated using a revised methodology.
(6) The significant increase in FY 2013 disaster loan approvals is attributable to Hurricane Sandy, and in FY 2016, the increase in loan approvals is attributable to the flooding in Louisiana,
South Carolina, Texas, and West Virginia.

AGENCY FINANCIAL REPORT • FY 2016 13
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

ANALYSIS OF PERFORMANCE RESULTS

Analysis of Performance and of active lenders in SBA’s 7(a) loan program from 2,244
(FY 2014) to 2,500.
Agency Priority Goals
The following section presents key SBA FY 2016 perfor- Performance Analysis: New and returning lenders
mance data, including the three FY 2016–2017 Agency are a major component of SBA’s lending portfolio and are
Priority Goals identified by SBA leadership that are critical essential to growth in the number of loans approved and
to the success of SBA’s mission. While the Agency Priority small businesses assisted. Attaining a high volume of active
Goals are two-year goals, the FY 2016 results are measured lenders from one fiscal year to the next creates a consis-
against FY 2016 targets. More in-depth information about tent pipeline of SBA loans for small businesses. The SBA
SBA’s Agency Priority Goals and the federal Cross-Agency accomplished 85 percent of its FY 2016 target (2,400 active
Priority Goals is located at https://www.performance.gov. lenders) (see Chart I). These lenders made loans totaling
$24.1 billion. The number of active lenders recruited slowed
The presentation of the performance data and analysis is in the fourth quarter. A key challenge is the consolidation of
organized by strategic objective, which follows SBA’s FY lenders through mergers and acquisitions, which has been a
2014–2018 Strategic Plan. The following measures and continuing trend for several years. Additional outreach will
analysis represent SBA’s three strategic goals. Detailed perfor- be conducted to increase the number of active lenders. The
mance information on all SBA programs will be presented, lending community, however, has been responsive to SBA’s
and all variances will be explained, in the FY 2016 Annual strategy of fee relief for lower-dollar loans and loan program
Performance Report to be published in the spring of 2017 improvements, and the SBA has been actively recruiting
with the FY 2018 Congressional Budget Justification. credit unions to join the 7(a) loan program.

STRATEGIC OBJECTIVE 1.1: Expand Performance Goal: Support 711,400 jobs through
access to capital through SBA’s extensive capital assistance programs in FY 2016.
lending network.
Performance Analysis: The number of jobs supported
Priority Goal: By September 30, 2017, expand access is an important outcome measure of the effectiveness of SBA
to capital for small businesses by increasing the number financing. The measure tracks the number of jobs supported
through the 7(a), 504, Microloan, and Surety Bond

CHART I CUMULATIVE NUMBER OF 7(a) ACTIVE LENDERS

2,500

2,000
1,976 2,017 2,045
1,926
1,860
1,792
1,708
1,500 1,588

Lenders
1,461
1,348

1,000 1,095

795
500

0
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Sum of Lenders FY 2016 Target

14 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

CHART II 7(a), 504, MICROLOAN, AND SURETY BOND CHART III PERCENT OF FEDERAL PRIME CONTRACT
GUARANTEE JOBS SUPPORTED DOLLARS AWARDED TO SMALL BUSINESSES

800,000 30

25 25.0% 25.8%
728,820 735,360
600,000 23.4%

Percent of Contract Dollars
615,364 22.3%

Number of Jobs
621,869 20 21.7%
609,437

400,000 15

10
200,000
5

0 0
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Actuals Target Actuals Target

Guarantee programs. In FY 2016, the SBA supported small businesses and 3 percent of prime and subcontracts
735,360 jobs, thereby exceeding its target (see Chart II). to HUBZone small businesses and service-disabled
veteran-owned small businesses (see Chart III). In FY 2015
STRATEGIC OBJECTIVE 1.2: Ensure federal (the latest year of data available), the federal government
contracting goals are met and/or exceeded by surpassed its prime contracting goal; small businesses were
collaborating across the federal government awarded $90.7 billion in contracting dollars. Performance in
to expand opportunities for small businesses all the small business prime contracting and socio-economic
and strengthen the integrity of the federal categories showed significant improvement. The SBA
contracting certification process and data. surpassed its goals for service-disabled veterans (FY 2015
result was 3.93 percent) and small disadvantaged businesses
Priority Goal: Through September 30, 2017, maximize (FY 2015 result was 10.06 percent) due in part to the
small business participation in federal government successful Mentor-Protégé program that fosters relationships
contracting to meet the statutory goal of 23 percent, ensure between successful firms and disadvantaged small businesses.
subgoals are met, and reduce participation by ineligible firms. The number of small business contracting dollars going to
women-owned small businesses increased from 4.68 percent
Performance Analysis: By law, 23 percent of federal
in FY 2014 to 5.06 percent in FY 2015. Although HUBZone
government prime contracting dollars are set-aside for small
continues to recruit new firms, the portfolio has not recovered
businesses, which includes 5 percent of prime and subcon-
from the loss of firms due to re-designation of areas from the
tracts to small disadvantaged businesses and women-owned
2010 census (see Chart IV). Also, the SBA worked with the

CHART IV FY 2015 DISADVANTAGED SMALL BUSINESS GOALS

Service-Disabled
Small Disadvantaged Business 10.06% 3.93%
Veteran-Owned

Women-Owned 5.06% HUBZone 1.82%

Goal: 5% Goal: 3%

AGENCY FINANCIAL REPORT • FY 2016 15
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

Office of Federal Procurement Policy to integrate small
business data quality reviews (anomaly reports) into each CHART V NUMBER OF 8(a) APPROVED APPLICATIONS
agency’s contracting processes and procedures. The SBA
developed potential anomaly reports for the top 10 agencies
1,000
that either have small business award dollars that have
been issued to what appear to be large businesses, missing 911

NAICS codes, or missing officer’s size selection data. 800

Approved Applications
Priority Goal: By September 30, 2017, support 600
more disadvantaged small businesses by increasing the 568

number of approved 8(a) certification applications by
5 percent each fiscal year. 400 419 391

Performance Analysis: The 8(a) program helps 200
socially and economically disadvantaged entrepreneurs
gain access to federal government contracting opportu-
0
nities. In prior years, small businesses had a difficult time FY 2013 FY 2014 FY 2015 FY 2016
negotiating the lengthy 8(a) certification process. Through Actuals Target
streamlining the application process, the SBA exceeded the
target of 600 applications by 152 percent and has
successfully recruited new firms to the program (see Chart
V). The SBA established this Agency Priority Goal in FY made available in the APR publication in spring 2017.
2016 and has provided historical data for context; therefore, While the SCORE program experienced a 38 percent
no prior targets had been established. increase in the number of clients served from FY 2015
to FY 2016, the Small Business Development Center
STRATEGIC OBJECTIVE 1.3: and Women’s Business Center programs experienced a
Strengthen entrepreneurial
ecosystems2 through a variety
of strategic partnerships to CHART VI SMALL BUSINESS ENTREPRENEURS ADVISED,
provide tailored training, MENTORED, AND TRAINED
mentoring, and counseling
services that support
entrepreneurs during every
phase of their business growth. 1,500,000

Performance Goal: Reach 1.38 million 220,596

Small Business Entrepreneurs
1,200,000 182,002
clients with online and in-person advising, 187,162
150,355
mentoring, and training in FY 2016. 139,719
900,000
Performance Analysis: The SBA
784,151 688,998 725,341 624,513 723,717
accomplished 83 percent of its perfor- 600,000
mance target for advising, mentoring,
and training assistance (see Chart VI). 300,000
443,699 357,710 395,178 360,664 354,340
Resource partners may input data up
to 45 days after the close of the fiscal
0
year, and this information will be FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

2 The entrepreneurial ecosystem refers to external Counseling/Advising and Mentoring Training
elements which contribute to the likelihood that
a small business will be successful. This ecosystem Online Training Target
includes access to markets, capital, technical
support, personnel, suppliers, and infrastructure.
The SBA addresses these needs through a variety of
strategic partnerships with its resource partners.

16 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

20 and 14 percent decrease, respectively, in the number in the global marketplace. The SBA assisted 1,550
of clients advised and trained. The reduction in the small businesses in export financing, which exceeded
number of entrepreneurs receiving service is a result of the target of 1,520 small businesses by 2 percent (see
greater specialization and time dedicated to a smaller Chart VII). This year, the SBA supported fewer export
number of participants who visit a center multiple loans, which may be attributable to the growing value
times. To improve performance, the SBA Online of the U.S. dollar. A strong U.S. dollar means that it is
Learning Center developed and refined courses spe- more expensive for other countries to buy U.S. goods
cializing in Cybersecurity, Marketing, Accounting, and and services. To mitigate this issue in the future, the
Human Resources to meet the needs of our nation’s SBA is working with other federal export partners to
entrepreneurs. Also, the SBDC program expanded support better trade agreements to promote U.S. small
outreach for exporters and veterans, the WBC program businesses and entrepreneurs.
implemented a streamlined grant process to allow
greater time for delivering services, and the SCORE STRATEGIC OBJECTIVE 1.5: Fuel high-growth
program began offering assistance online. entrepreneurship, innovation, and job creation
by providing the tools small businesses need to
STRATEGIC OBJECTIVE 1.4: Enhance the start and grow their businesses.
ability of current and future small business
Performance Goal: Issue $2.5 billion in debenture
exporters to succeed in global markets by
leverage to small business investment companies (SBIC)
expanding access to financing, counseling,
in FY 2016.
training, and other export tools.
Performance Goal: Expand small business access to Performance Analysis: SBICs provide long-term
export financing by increasing the number of small busi- loans and equity capital to small businesses. The SBICs
ness exporters receiving financing to 1,520 in FY 2016. are privately owned and managed investment funds that
are licensed and regulated by the SBA. In FY 2016, the
Performance Analysis: Increasing access to SBA exceeded its target for committing $2.5 billion in
export financing, combined with trade counseling and debenture leverage to SBICs. These debentures allowed
training, contributes to the enhanced ability of current SBICs to invest more than $5.5 billion dollars in more
and future U.S. small business exporters to succeed than 1,100 small businesses (see Chart VIII). At the

CHART VII CUMULATIVE NUMBER OF SMALL BUSINESS EXPORTERS ASSISTED

1,600
1,550
1,400 1,513

1,346 1,388 1,392
1,200 1,283

Small Businesses
1,000

800

600

400

200

0
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Actuals Target

600
AGENCY FINANCIAL REPORT • FY 2016 17
500 547
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

same time that commitments for
debenture leverage were increasing, CHART VIII CUMULATIVE SBIC DEBENTURE LEVERAGE COMMITTED
the SBA licensed 21 new SBICs with
an average time to license of 3,000
5.96 months.
2,500
STRATEGIC OBJECTIVE 1.6:
2,549 2,533 2,514
Ensure that SBA’s disaster
2,156
assistance resources for 2,000

$ Billions
1,924
businesses, non-profit
organizations, homeowners, 1,500
and renters can be deployed
quickly, effectively, and 1,000
efficiently in order to preserve
jobs and help return small 500
businesses to operation.
Performance Goal: Ensure the 0
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
customer satisfaction rate for disaster
loan approvals is 71 percent in FY 2016. Actuals Target

Performance Analysis: The SBA
tracks customer satisfaction through an annual survey Performance Analysis: Underserved communities
that uses the American Customer Satisfaction Index. often have difficulty accessing capital and federal con-
The index synthesizes key points in the loan process, tracts. For capital assistance programs, including 7(a),
including the application, final decision, and closing of 504, and Microloans, the SBA assisted 34,081 under-
the loan. The SBA had a customer satisfaction rate of 84 served small businesses — exceeding the FY 2016 target
percent, which is 18 percent above the 71
percent target (see Chart IX). The high
satisfaction rate is partly attributable to
completing development and imple- CHART IX CUSTOMER SATISFACTION RATE FOR DISASTER
menting the first two phases of the LOAN APPROVALS
Disaster Loan Assistance Portal that
allows applicants to access online general 100
questions, check the status of their
applications, and receive notifications.
80 84%
80% 81% 80% 80%
STRATEGIC OBJECTIVE 2.1:

Satisfaction Rate (Percent)
Ensure inclusive
60
entrepreneurship by expanding
access and opportunity to small
businesses and entrepreneurs 40
in communities where market
gaps remain.
20
Performance Goal: Assist 32,250
underserved small businesses through
capital assistance programs in FY 2016. 0
FY 2012 FY 2013 FY 2014 FY 2015 FY 2015

Actuals Target

18 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

by 6 percent (see Chart X). The elimi-
CHART X SMALL BUSINESSES IN UNDERSERVED MARKETS
nation of the fees on small dollar loans
($150,000 or less) was extended to FY ASSISTED BY 7(a), 504, AND MICROLOANS
2016, contributing to the increase in num-
ber of small businesses assisted. Also, the
streamlined application process that uses 40,000
credit scores instead of a personal cash flow 35,000
35,014 35,819
history analysis has greatly incentivized
30,000 34,081
new lenders and made the loan application

Small Businesses
33,449 33,458

process more efficient. 25,000

STRATEGIC OBJECTIVE 2.2: 20,000

Provide timely, instructive, and 15,000
useful information to the small
10,000
business community through SBA’s
extensive digital and in person 5,000

outreach efforts. 0
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Performance Goal: Reach 2.3 million Actuals Target
average monthly SBA.gov site visits
in FY 2016.

Performance Analysis: In FY 2016,
SBA.gov averaged 2.1 million monthly site
visits. This number is lower than the 2.2 million visitors
Performance Analysis: SBA’s Office of the National
in FY 2015 and below the 2.3 million target for visits
Ombudsman works with federal agencies and the small
(see Chart XI). While the SBA monitors this data using
businesses they regulate to provide a confidential,
cookies, more site visitors used a Do Not Track feature
impartial channel for small businesses to comment
that the SBA chose to respect, which caused the numbers
to decline. To serve the one in four website
visitors who access the website from a mobile
device, the SBA launched the first phase of CHART XI NUMBER OF AVERAGE MONTHLY SBA.GOV
its mobile site in FY 2016. The Agency SITE VISITS
continued to promote its Spanish language
site by developing new content to reach a
more diverse small business community. 3,000,000

STRATEGIC OBJECTIVE 2.3: 2,500,000 2,440,223

Monthly Average Site Visits
2,245,979
Foster a small business-friendly 2,159,850
2,094,429
environment by encouraging 2,000,000

federal agency awareness about
1,500,000 1,439,750
the impact of unfair regulatory
enforcement and compliance
1,000,000
efforts and reducing burdens
on small business. 500,000
Performance Goal: Maintain Regional
Regulatory Fairness Board membership at 0
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
85 percent or better in FY 2016. Actuals Target

AGENCY FINANCIAL REPORT • FY 2016 19
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

XIII) and exceeded its sub-goals for women-
CHART XII BOARD MEMBERSHIP RATE
owned, small disadvantaged, HUBZones, and
service-disabled veteran-owned small busi-
nesses. Although final performance numbers
100 are not yet certified or official for FY 2016, the
96% SBA reached its small business utilization goal
80 of 72.75 percent, as well as each of the small

Membership Rate (Percent)
80%
74% 74% 76%
business utilization rate sub-goals for contract
60
awards. The SBA exceeded the small busi-
ness utilization rate by maintaining a default
Agency position of awarding contracts to small
40
businesses and only resorting to large vendors
when all small business options were exhausted.
20
STRATEGIC OBJECTIVE 3.2:
0
Invest in the Agency’s employee
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 recruitment, hiring, training, work-
Actuals Target life programs, and performance
management so staff is engaged
to more effectively serve small
businesses.
on enforcement activities, audits, on-site inspections,
compliance assistance, or other types of communication. Performance Goal: Ensure that the average time to
SBA’s Regional Regulatory Fairness Board reviews federal hire will be less than 100 days in FY 2016.
regulations impacting small businesses and provides
Performance Analysis: In FY 2016, the SBA contin-
advice to the SBA National Ombudsman. The SBA has
ued to improve operational efficiencies which positively
had difficulty recruiting candidates, which has led to a 76
impacted the Agency’s average number of days to hire.
percent membership on the Regulatory Fairness Boards,
The SBA exceeded its target of 100 days by 2 percentage
11 percent below its target of 85 percent (see Chart
XII). In order to recruit new members and to
reduce the time required through the vetting
CHART XIII SBA SMALL BUSINESS UTILIZATION RATE
process, the SBA made revisions to the process
in FY 2016 and expects to recruit more mem-
bers in FY 2017.
80
STRATEGIC OBJECTIVE 3.1:
Streamline, simplify, and strengthen 70
67% 71% 72% 77% 78%
SBA’s core programs and operations

Utilization Rate (Percent)
60
to ensure that they are high
50
performing, effective, and relevant
to the needs of the small business 40

community. 30

Performance Goal: Award 72.75 percent of 20
SBA contracts to small businesses in FY 2016.
10
Performance Analysis: The SBA met its 0
small business utilization goal by awarding FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

78.2 percent of contracts (in FY 2015) totaling Actuals Target

$113.9 million to small businesses (see Chart

20 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

points (see Chart XIV). Fewer days to hire
CHART XIV AVERAGE NUMBER OF DAYS TO HIRE
ensures SBA’s competitiveness in recruitment
efforts and ability to hire highly qualified
individuals. Achievement of this goal is due
to on-going enhancements to the “HR Stat 160
2.0” initiative. The system supports recruit- 154 154
ment e-tools (USA Staffing and USAJobs) that
further streamline recruitment decisions and 120
onboarding of new SBA employees.
97 98
STRATEGIC OBJECTIVE 3.3: Mitigate Days 80 85
risk to taxpayers and improve
oversight across SBA programs.
40
Performance Goal: Perform 335 analytical
credit reviews; review 100 percent of 8(a), 10
percent of HUBZone firms; and conduct 65 0
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
financial reviews of entrepreneurial develop-
ment resource partners in FY 2016. Actuals Target

Performance Analysis: The SBA con-
tinued efforts to further mitigate risk this
year. Regarding lender oversight, the Agency
performed 368 analytical risk-based credit reviews,
which provided oversight of loan performance,
credit scores, and compliance with SBA loan
program requirements (see Chart XV). The CHART XV NUMBER OF ANALYTICAL RISK-BASED CREDIT
Agency conducted 69 financial examinations of REVIEWS OF LENDERS
entrepreneurial development resource partners
to review the accuracy in reporting and ensure
finances were used properly. After the reviews, 400
the SBA provided face-to-face feedback and
training on issues and shared best practices. The 378 368
SBA exceeded its HUBZone and 8(a) reviews 300

Credit Reviews
targets and ensured staff received training in
order to provide small businesses with a better
200
understanding of program eligibility require- 204 219
ments and compliance reviews.
100

0
FY 2013 FY 2014 FY 2015 FY 2016
Actuals Target

AGENCY FINANCIAL REPORT • FY 2016 21
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

Verification and Validation of • Assessing the quality of existing data. SBA’s
performance analysts work with a program
Performance Data
office’s staff to reconcile data by creating
Managing for results and integrating performance, finan- independent performance reports and analyses
cial, and budgetary information require valid, reliable, and and comparing the independently generated
high-quality performance measures and data. Improving data with the data reported by the program
data quality continues to be a priority for the SBA. SBA offices. These activities verify the data and the
performance analysts work with program office leads across underlying processes used for reporting.
the Agency to acquire high-quality data. In addition to using • Responding to data limitations. SBA performance
output data internally from its systems, the SBA relies on analysts work with program offices to identify
data from resource partners, other federal agencies, and other data limitations and specify the necessary steps to
government entities to assess its accomplishments and effec- improve data. In addition, some program offices
tiveness. The SBA vigorously pursues the following strategies rely on data provided by third-party resource
to ensure data quality: partners, who are responsible for collecting,
storing, and reporting data to the SBA. The
• Ensuring the validity of performance measures and
program offices have internal processes for
data. The SBA conducts an annual performance
working closely with their resource partners to
measure review to assess the validity of its measures
ensure that data is correctly reported.
and underlying data. SBA’s performance analysts
meet with each office for in-depth discussions
about proposed externally reported measures. The Operational Portfolio Analysis
meetings help determine whether the proposed
measures and underlying data are useful for The Operational Portfolio Analysis provides information
demonstrating a program office’s success, which is on SBA’s credit programs and does not reference
defined by the goals and objectives identified in the the financial statements. The SBA is the taxpayers’
Agency’s FY 2014-2018 Strategic Plan. custodian of a small business loan guaranties and direct
loans portfolio of $124.1 billion. During FY 2016,
• Fostering organizational commitment and capacity
the portfolio grew by $5.3 billion, or 4.5 percent.
for data quality. The SBA issues a monthly
Since existing loans are continually being paid, this
executive performance dashboard to apprise senior
growth implies that SBA’s lending during FY 2016 was
management on progress and holds quarterly
significantly greater than the $5.3 billion reflected in
performance review meetings with the Deputy
the portfolio growth. By program, the Agency’s 7(a)
Administrator, Chief of Staff, Performance
loan portfolio expanded by $5.8 billion, the 504 loan
Improvement Officer, and program offices. At
portfolio contracted by $0.7 billion, and the SBIC
these meetings, the Agency leadership reinforces
portfolio grew by $1.15 billion. The Agency’s Disaster
its commitment to the performance metrics and
loan and All Other portfolios declined $0.3 billion and
works directly with the program offices to identify
$0.5 billion, respectively. From FY 2010 through FY
best practices and mitigate challenges. Annually,
2016, all of the portfolio’s cumulative $30.6 billion
each Associate Administrator must certify
growth came from 7(a), 504, and SBIC programs
their program office’s performance data before
(see Chart XVI).
it is externally reported and published at
https://www.sba.gov/performance/VV-fy2017.

22 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

Chart XVII demonstrates the growth in
CHART XVI MAKEUP OF SBA’S OUTSTANDING LOAN PORTFOLIO loan portfolio since FY 2011. Note that
the spike in Quarter 1 of FY 2011 is the
140 result of the Small Business Jobs Act of
$2.4 2010 that permanently increased loan
120 $3.3 $2.9
$3.6 $6.3
$6.0 limits and increased the size standards
$11.2
$1.2
$2.5
$7.2
$6.8
$10.0 that determine what qualifies as
100 $7.2 $9.0
$1.1 $7.5 $8.5 a small business.
$7.8 $25.8
$7.9 $8.0 $26.5
80 $27.2
$8.1
$26.9
$26.9 NEW DIRECT LOANS
$26.6
$25.5 In FY 2016, SBA’s annual lending
$ Billions
60
for the Disaster Assistance program
40 $78.8 exceeded $1.4 billion due to an
$63.7 $68.2 $73.0
$50.8 $56.4 $60.1 increase in active disaster declarations
20 stemming from the major flooding
in Louisiana, South Carolina, Texas,
0 and West Virginia. However, the total
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Disaster Assistance loan portfolio
7(a) 504 SBIC Disaster All Other shrank by $0.3 billion due to collec-
tions. A large portion of the outstand-
ing balance of the Disaster Assistance
loan portfolio is comprised of lending
from FY 2006 (Hurricanes Katrina,
NEW GUARANTIED LOANS Rita, and Wilma) and FY 2013 (Hur-
At least two main factors contributed to the loan guaranty ricane Sandy). The SBA will continue to make disaster
portfolio’s recent growth: loans an important recovery tool for businesses, home-
owners, and renters who survive a disaster.
Continuous Growth in the Economy — Real Gross Domestic
Production (RGDP) in the United States grew at an PORTFOLIO PERFORMANCE —
average annual rate of 2.3 percent during 2014-2016. An DELINQUENCIES
increase in RGDP supports increased revenues and profits
Delinquency rates (i.e., borrowers who are late on
at firms, small and large, which in turn increase their
their payments) are a leading indicator of the Agency’s
demand for credit.
charge-off rate (i.e., the rate of dollars spent to cover
Increase in Business Financial Stability — As the economy loans that defaulted). Thus, delinquency rates are a
continues to grow, several factors continue to influence general indicator of the Agency’s and taxpayers’ future
demand and increases in revenues. First, inflation liabilities for these programs. A declining delinquency
continues to decrease, which reduces the cost of consumer rate (see Chart XVIII) is a positive indicator for the
goods and services. Second, the dollar continues to grow financial performance of any loan portfolio.
in strength which supports a reduction in prices of U.S.
Modest economic growth, strong profit performance, and
goods. Finally, the unemployment rate decline to
tighter lending standards by financial institutions during
pre-recession levels boosts consumer spending.
the past several years have reduced delinquency rates for

AGENCY FINANCIAL REPORT • FY 2016 23
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

CHART XVII QUARTERLY GROSS 7(a) AND 504 LOAN APPROVALS

12 s Act
1: Job
Q1 FY1 exhausted Note: Fiscal year-end spikes in Q4
g
fundin
lending activity for the last five fiscal years.
10

8
FY 2016 Average
FY 2015 Average $7,216,477

$ Billions
$6,970,450
FY 2011 Average
FY 2013 Average FY 2014 Average
6 $6,120,752 FY 2012 Average
$5,773,857 $5,847,495
$5,466,264

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

all business loans, which have been steadily declining The twelve-month charge-off rate for the 7(a) loan
since reaching cyclical peaks in the latter part of 2009. program experienced a pronounced decline during
A declining national unemployment rate, off a peak rate the FY 2010-2013 period, declining from 4.3 percent
of 10 percent in October of 2009, signals a generally during the fourth quarter of 2010 to 1.2 percent in the
improving environment for small businesses. Delinquency third quarter of 2013, but then experienced a noticeable
rates for the Agency’s major loan programs followed this increase thereafter, posting a 3.1 percent rate in July
national downward trend. Delinquency rates for the 7(a) of 2016 (see Chart XVIII). The 7(a) loans that are not
loan program declined from the peak 3.8 percent recorded sold on the secondary market become a charge-off only
during January 2009 to 0.7 percent recorded during after all efforts to recover a delinquent balance have
July 2016. Delinquency rates for the 504 loan program been exhausted, such as liquidating the underlying
likewise declined from the 5 percent peak recorded during collateral. The latent rise of the 7(a) charge-off rate
February 2010 to 0.8 percent recorded during July 2016. starting in 2013 is attributable to recession-era loans
that are now being charged-off after efforts to recover
PORTFOLIO PERFORMANCE — delinquent balances have been exhausted.
CHARGE-OFFS
The twelve-month charge-off rate for the 504 loan pro-
During FY 2015 and FY 2016 the charge-off rates of gram experienced a continuous increase from FY 2008
the Agency’s major loan guaranty programs posted to the early part of FY 2013, peaking at 4.4 percent
diverging paths with the charge-off rates for the 7(a) during January 2013, but then recorded a pronounced
loan program recording noticeable increases while the decline thereafter, dropping to 0.9 percent during July
charge-off rates of its 504 program experienced a con- of 2016. This trend is not surprising since the 504 loan
tinued downward trend. program is an economic development program with
a commercial real estate focus. As such, recovery rates

24 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

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

5
7(a) Loans NBER
Declared
Recession
4

Rate (Percent)
3

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

7(a) Delinquency Rate 7(a) Past 12 Months Charge-Off Rate

5
504 Loans NBER
Declared
Recession
4

Rate (Percent)
2

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

504 Delinquency Rate 504 Past 12 Months Charge-Off Rate

of defaulted 504 loans are, with some noticeable time percent in FY 2012, but then registered a pronounced
lag, significantly impacted by the pricing trend in this drop thereafter, posting a 0.2 percent during FY 2016.
sector. Real estate prices have been on the rise since
the latter part of 2009, and as of 2016 commercial real Quarterly information on the status of SBA’s loan port-
estate prices are increasing to pre-recessionary levels. folio, including outstanding balances and approvals by
loan program and purchase rates, is available on SBA’s
The recent charge-off rate for the SBIC debenture pro- website at http://www.sba.gov/performance.
gram has fluctuated in a narrow band, reaching a high
of 1.5 percent during FY 2011 and a low of 0.1 percent
during FY 2016. The charge-off rate for the SBIC
participating securities program experienced a steady
increase between FY 2008 to FY 2012, peaking at 12

AGENCY FINANCIAL REPORT • FY 2016 25
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

Forward Looking Analysis and shape how small businesses operate and how the
Agency responds.
The SBA is committed to maintaining and strengthen-
ing the nation’s economy through the growth of small AN EVOLVING WORKFORCE
businesses. While much work has been done to support
The SBA workforce continues to age and enter a period
America’s small businesses since the creation of the
where the majority of its employees have reached retire-
SBA in 1953, the Agency is committed to ensuring it
ment eligibility. As baby boomers retire, the Agency
can adapt to a changing environment. The following
continues to search for ways to recruit and retain the
areas present the greatest insights into how the Agency
best talent. Competition with industry and other agen-
shapes its programs and responds to entrepreneurs and
cies is strong, and retention of new employees can be
small business owners.
challenging. The Agency is identifying critical mission
AN EVER-CHANGING ECONOMY areas and developing workforce plans to ensure that
it understands where gaps exist. At the same time, the
A small business often feels the first impacts of a Agency seeks to ensure that its workforce is represen-
slowing economy. High unemployment, low wages, tative of the public it serves and that it can effectively
inflation, and regulatory uncertainty all determine communicate with entrepreneurs and small business
whether or not entrepreneurs will invest their time owners in meeting their needs.
and resources into a new venture. Without large
reserves of capital like many corporations, a small THREATS FROM DISASTERS
business can be shuttered within months during
A natural disaster can destroy lives, businesses, and
economic decline. To meet these needs, the SBA plays
communities in little time. While the SBA has many
a key role in supporting access to capital. As many
capabilities to respond to hurricanes, tornados, forest
lenders closed their doors during the Great Recession,
fires, and floods, the growing threat and numbers of
the SBA stepped into the market with alternatives
these occurrences remain a serious concern, particularly
to traditional financing. The Agency will continue
with a changing climate. To this end, small businesses
to depend on lenders to issue capital. However, the
must adapt by planning in advance where to produce
decline in the number of banks and credit unions
and sell goods and services. Disaster preparedness is a
is a concern. As fewer lenders remain in operation,
key component of SBA’s disaster assistance program
small businesses must become more nimble in finding
and has helped many small businesses prepare for the
capital, and the SBA must provide this support in an
unexpected. Among these growing threats, the SBA
ever-changing economy.
must be more nimble while simultaneously responding
ADVANCEMENTS IN TECHNOLOGY to multiple, large-scale disasters.

It would have been unimaginable 30 years ago to To address these areas and continue enhancing
obtain a loan from a bank in New York, submit a customer service to small businesses, the Agency
patent for a new idea to Washington, and then develop has instituted processes to help mitigate and
and sell that product to an emerging market outside improve performance.
the United States all while working from one’s home
in West Virginia. Today, technology has evolved to
the point where entrepreneurs have greater access to
markets and more capabilities to start and expand
their businesses. Therefore, the SBA must be aware of
these technological advancements to better commu-
nicate and share successes for entrepreneurs across the
country. The SBA needs to develop more online tools
and adapt Agency processes to the twenty-first century.
The Agency continues to make progress on this front
through new tools like SBAOne and LINC (Leveraging
Information and Networks to access Capital). Greater
advancement in technology will continue to develop

26 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

ANALYSIS AND HIGHLIGHTS OF FINANCIAL STATEMENTS AND RESULTS

Highlights of Financial Results (As of September 30)
(Dollars in Thousands)

At End of Fiscal Year 2016 2015 % Change
CONDENSED BALANCE SHEET DATA
Fund Balance with Treasury $ 6,255,936 $ 5,365,418 16.60%
Credit Program Receivables and Related Foreclosed Property, Net 6,182,889 6,502,745 -4.92%
All Other Assets 218,347 152,704 42.99%
Total Assets $ 12,657,172 $ 12,020,867 5.29%
Debt 8,019,526 7,175,344 11.77%
Downward Reestimate Payable to Treasury 1,239,814 1,600,653 -22.54%
Liability for Loan Guaranties 2,371,505 1,661,516 42.73%
All Other Liabilities 252,143 245,324 2.78%
Total Liabilities 11,882,988 10,682,837 11.23%
Unexpended Appropriations 1,425,883 1,600,847 -10.93%
Cumulative Results of Operations (651,699) (262,817) -147.97%
Total Net Position 774,184 1,338,030 -42.14%
Total Liabilities and Net Position $ 12,657,172 $ 12,020,867 5.29%

For the Fiscal Year
2016 2015 % Change
STATEMENT OF NET COST BY STRATEGIC GOAL
Goal 1: Growing Businesses and Creating Jobs
Loan Subsidy Cost Including Reestimates $ (547,531) $ (1,414,341) 61.29%
All Other Costs Net of Revenue 687,711 584,841 17.59%
Goal 2: Serving as the Voice for Small Business 123,151 109,638 12.33%
Goal 3: Building an SBA that Meets the Needs of Today’s
and Tomorrow’s Small Business 41,326 40,427 2.22%
Costs Not Assigned 34,820 34,845 -0.07%
Net Cost of Operations $ 339,477 $ (644,590) 152.67%

CONDENSED STATEMENT OF CHANGES IN NET POSITION
Beginning Cumulative Results of Operations $ (262,817) $ (204,356) -28.61%
Total Financing Sources (49,405) (703,051) 92.97%
Less: Net Cost of Operations 339,477 (644,590) 152.67%
Ending Cumulative Results of Operations $ (651,699) $ (262,817) -147.97%
Beginning Unexpended Appropriations 1,600,847 1,692,804 -5.43%
Total Budgetary Financing Sources (174,964) (91,957) -90.27%
Ending Unexpended Appropriations $ 1,425,883 $ 1,600,847 -10.93%
Ending Net Position $ 774,184 $ 1,338,030 -42.14%

CONDENSED STATEMENT OF BUDGETARY RESOURCES
Unobligated Balance Brought Forward $ 4,978,665 $ 5,712,247 -12.84%
Other Budgetary Resources, Net 6,238 (24,961) 124.99%
Appropriations (discretionary and mandatory) 1,144,588 1,147,282 -0.23%
Borrowing Authority (discretionary and mandatory) 1,610,202 550,948 192.26%
Spending Authority from Offsetting Collections 3,138,319 2,911,272 7.80%
Total Budgetary Resources $ 10,878,012 $ 10,296,788 5.64%
Obligations Incurred, Budgetary $ 1,700,731 $ 1,535,235 10.78%
Obligations Incurred, Nonbudgetary 4,210,725 3,782,888 11.31%
Unobligated Balances, Available and Unavailable 4,966,556 4,978,665 -0.24%
Total Status of Budgetary Resources $ 10,878,012 $ 10,296,788 5.64%

AGENCY FINANCIAL REPORT • FY 2016 27
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

Analysis of Financial Results direct loans outstanding are reported net of an allowance
developed using the present value of forecasted cash flows
The principal financial statements have been prepared to in subsidy models that are approved by the Office of
report the financial position and results of operations of Management and Budget. A Liability for Loan Guaranties
the entity, pursuant to the requirements of 31 U.S.C. 3515 is reported also using subsidy models with forecasted cash
(b). While the statements have been prepared from the flows from user fees and defaulted guarantied loans. The
books and records of the entity in accordance with GAAP direct loan allowance and loan guaranty liability for each
for federal entities and the formats prescribed by OMB, loan program cohort is adjusted annually under FCRA
the statements are in addition to the financial reports used through the subsidy model reestimate process. The SBA’s
to monitor and control budgetary resources, which are FCRA accounting is discussed further below in this
prepared from the same books and records. The statements section and in Notes 1 and 6A in the financial statements.
should be read with the realization that they are for a com-
ponent of the U.S. Government, a sovereign entity. The credit subsidy cost is the net present value of expected
cash inflows and outflows over the life of a guarantied
This Analysis of Financial Results references numbers in loan, or the difference between the net present value of
the Highlights of Financial Results that were derived from expected cash flows and the face value of a direct loan.
the Financial Statements and Notes in this report. As a The SBA receives budget authority annually to fund its
result, the definitions of the loan and guaranty balances credit programs. When loans are disbursed, the SBA
used in this Analysis of Financial Results may differ records subsidy expense for non-zero subsidy loan pro-
somewhat from the balances in the Operational Portfolio grams. In accordance with the Federal Credit Reform Act,
Analysis section. For example, for the 7(a) program the the subsidy costs are reestimated annually. Reestimates
total amount of guarantied loans is used in the Portfolio update original loan program cost estimates to reflect
Analysis, but only SBA’s guarantied portion is used in the actual experience and changes in forecasts of future cash
Analysis of Financial Results because it ties to balances in flows for each annual cohort of loans. Increased reesti-
the financial statements. mated costs are funded in the following year by perma-
nent indefinite budget authority, while decreased costs are
BACKGROUND returned by the SBA to a Treasury general fund.
The SBA is a major federal credit agency of the U.S.
Government. The SBA had roughly 3,102 employees The portion of the outstanding principal guaranteed by
including Disaster FTE employees at FYE 2016. As a the SBA as of September 30, 2016, was $93.8 billion, an
result only $0.9 billion of SBA’s $10.9 billion budgetary increase of 6.1 percent from the $88.3 billion guaranteed
resources in FY 2016 were for salaries and expenses, with at September 30, 2015 (see Note 6C in the financial state-
the rest supporting SBA’s credit programs. Budgetary ments). As shown in Chart XIX new guaranties disbursed
resources when apportioned by the Office of Management by SBA participating banks during FY 2016 were $21.3
and Budget are available to enter into new obligations and billion, a 7.7 percent increase compared to the FY 2015
to liquidate them. Budgetary resources are made up of figure of $19.8 billion. The $1.5 billion increase resulted
new budget authority and unobligated from a $0.1 billion increase in 504 Development
balances of budget authority provided in
previous years. The loan financing funds CHART XIX GUARANTIED LOANS DISBURSED
record all the cash flow activity resulting
from post 1991 direct loans and loan
guaranties, and are not budgetary costs. 25
The financing accounts are reported
20
separately in the Budget of the United
States Government and are excluded 15

$ Billions
from the budget surplus/deficit totals. 10

The Federal Credit Reform Act of 1990 5
governs SBA’s accounting for direct
0
loans and loan guaranties made in FY FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

1992 and thereafter. Under FCRA

28 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

Company loans, a $1.5 billion increase
in 7(a) loans, and a $0.1 billion CHART XX PURCHASES OF GUARANTIED LOANS
decrease in SBIC Debentures in FY
2016. This net increase in FY 2016
6
guaranty disbursements and a reduc-
5
tion in purchases of guarantied loans
contributed to the 6.1 percent increase 4

$ Billions
in outstanding guaranteed principal 3
mentioned above. 2
1
Credit program receivables for the SBA
are comprised of business and disaster 0
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
direct loans and defaulted business
loans purchased per the terms of SBA’s
loan guaranty programs which are
offset by an allowance for subsidy. The FINANCIAL POSITION
allowance for the subsidy cost of the gross loan receivable
Assets
is recorded as a contra asset and the net asset is reported
on the Balance Sheet. The subsidy allowance is deter- The SBA had total assets of $12.7 billion at the end of FY
mined by modeling the projected future cash inflows and 2016, up 5.3 percent from FY 2015. Total assets increased
outflows of SBA credit programs using discounted cash primarily due to an $890.5 million increase in the Fund
flow methodology. The subsidy allowance for each loan Balance with Treasury, which was partly offset by a $319.9
program cohort is reestimated annually, and increases million decrease in Credit Program Receivables and related
are funded by Treasury while decreases are refunded to Foreclosed Property. The increase in the FBWT was due
Treasury by the Agency. Loan losses, the costs of loan primarily to increased borrowing needed to fund the
servicing, and loan interest rates are factors that affect the disbursement of disaster loans. The decrease in Credit Pro-
subsidy allowance. gram Receivables and Related Foreclosed Property was due
to the net decrease in the amount of defaulted guarantied
SBA credit program receivables were valued at $6.2 billion loans that resulted from collections and charge-offs exceed-
in FY 2016 which was a decrease of $0.3 billion from ing new guaranty purchases, as well as the net decrease
FY 2015. The change in the credit program receivables in the amount of direct disaster loans as collections and
resulted from a decrease in defaulted guarantied business charge-offs exceeded new loans.
loans of $0.2 billion and a decrease in direct disaster loans
of $0.1 billion. The amount of defaulted guarantied loans Liabilities
decreased as collections and charge-offs exceeded new
The SBA had total liabilities of $11.9 billion at the end
guaranty purchases, partially offset by a lower subsidy
of FY 2016, up 11.2 percent from FY 2015. Liabilities
allowance amount. This net decrease is attributable to
consist primarily of the Liability for Loan Guaranties,
an economy that continued to improve in FY 2016. The
Downward Reestimate Payable to Treasury, and Debt
amount of direct disaster loans decreased as collections
with Treasury.
and charge-offs exceeded new loans, partially offset by a
lower subsidy allowance amount. The Liability for Loan Guaranties is the estimate of the
net present value of the future amount the SBA will pay,
As reflected in Chart XX, guarantied loan purchases
net of fee collections, to liquidate expected purchases
decreased $0.3 billion in FY 2016 to $0.8 billion. The
of guarantied loans under its guarantied loan programs.
decrease reflects the continuing recovery after the eco-
The Liability for Loan Guaranties for each loan program
nomic recession. The decrease in purchases this year partly
cohort is reestimated annually, and increases are funded
contributed to the decrease in the outstanding guaran-
by Treasury while decreases are refunded to Treasury by
tied business loans receivable after including recoveries,
the Agency. The Liability for Loan Guaranties increased
expenses, and charge-offs in the loans purchased portfolio.
$0.7 billion due to a smaller net downward reestimate of
future costs for SBA’s guaranty portfolio. The downward

AGENCY FINANCIAL REPORT • FY 2016 29
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

reestimate reflects the improvement in SBA’s portfolio and than offset the increases in upward reestimates, which
the economic recovery. affected Strategic Goal 1 costs. Those subsidy reestimates
were the largest components of the change (net increase)
The Downward Reestimate Payable to Treasury decreased in the Agency’s net cost. Chart XXI reflects the change in
$0.4 billion due largely to the change in the year-end the net subsidy reestimates for the Guarantied Business and
accrual of reestimates resulting from higher than projected Direct Disaster loan programs in FY 2016.
purchases in 2016 for some cohorts in the 7(a) and 504
programs and an upward reestimate due to improved The net downward reestimate in the 7(a) programs of
controls over reconciliation processes required by the SBA $0.1 billion was due mostly to lower than average purchases
of its Fiscal Transfer Agent in the Secondary Market Guaranty during FY 2016 that decreased the overall purchase curve,
Program. Better than projected loan performance which decreased purchase projections in future years and
and higher than expected recoveries across most cohorts contributed to the downward reestimate for FY 2016.
was the primary reason for the downward reestimate
in FY 2016. The 504, 504 Recovery Act, and 504 Jobs Act programs
had a significant net downward reestimate of $0.7 billion
Debt with Treasury increased $0.8 billion due to the due to better than projected FY 2015 loan performance.
increase in Disaster loan disbursements in FY 2016, as Further detail on subsidy reestimates can be found in Note
well as an increase in borrowing needed to cover cash 6I to the financial statements in the Financial Reporting
shortfalls in the guarantied loan programs. Note 9 to the section of this report.
financial statements provides additional detail on SBA
debt with Treasury. The SBIC Participating Securities and Debenture pro-
grams had a net downward reestimate of $0.2 billion in
Net Position FY 2016 that was due mostly to better than projected
loan performance. Actual recoveries were higher than
Cumulative Results of Operations is the accumulative projected, and actual default purchases were lower than
difference between expenditures and financing sources projected in FY 2016.
since the inception of the Agency. This negative balance
increased $389 million because unfunded upward subsidy The Secondary Market Guaranty program had a significant
reestimates at year-end for almost every program were net upward reestimate of $0.5 billion. The upward
more this year than last year. Upward subsidy reestimates reestimate for FY 2016 was larger than expected due to
determined at year-end are funded in the following year improved controls over reconciliation processes required
when they are received. Total Financing Sources are by SBA of its Fiscal Transfer Agent. When implemented
negative because the downward reestimates payable to the in FY 2016, the reconciliation process reduced the cash
Treasury exceeded the amounts the SBA received from balance available to cover future MRF liabilities.
other sources. Unexpended Appropriations decreased
$175 million this year primarily because the
amount of appropriations used was
greater than the appropriations received
in FY 2015 for business, disaster, and CHART XXI CREDIT PROGRAM SUBSIDY REESTIMATES
administrative activity. This affected
Budgetary Financing Sources and the 5
Ending Net Position. 4
3
NET COSTS OF OPERATIONS
$ Billions
2
The Net Costs of Operations primarily 1
reflects the costs of SBA credit programs 0
subsidy expenses during the year for new -1
loans and subsidy reestimates at year-end. -2
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Direct Disaster Loans (Strategic Goal 1) Direct Business Loans (Strategic Goal 1)
Net downward reestimates were smaller
Guarantied Business Loans (Strategic Goal 1)
in FY 2016 than last year, but they more

30 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

BUDGETARY RESOURCES
CHART XXII APPROPRIATIONS RECEIVED
Total Budgetary Resources of $10.9 billion
increased $0.6 billion in FY 2016. This
increase is primarily the net result of a large 6
increase in borrowing authority this year and $0.43

the other factors in the Highlights table and 5

discussed here. Other Budgetary Resources,
4
Net increased by $31 million in FY 2016. $4.90

$ Billions
This change is attributable to a small increase $0.44
3
in prior year recoveries, and a decrease in the
$0.44
amount of cancelled authority. $2.87
2
$1.32
Appropriations (discretionary and manda-
1 $0.47
tory) decreased $3 million in FY 2016. As $0.51 $0.53
$0.57 $0.42
shown in Chart XXII the decrease was the $0.28 $0.28
$0.89
$0.22
$0.42
$0.20
$0.23
0
combination of the increase in the amount FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
of appropriations needed to fund SBA’s Disaster Loans Business Loans Salaries and Expenses
upward credit subsidy reestimates, as well as a
reduction in the need for subsidy to fund the
Agency’s major loan programs in FY 2016.
increased by $0.2 billion in large part due to the disaster
Borrowing Authority increased $1 billion in FY 2016 loan making in FY 2016. Nonbudgetary obligations
due to an increase in borrowing needed to cover disaster increased $0.4 billion due to the increase in obligations
loan making and cash shortfalls in the guarantied loan related to financing disaster loans, offset with decreases in
programs. Borrowing authority initially granted to the downward reestimates and purchases of guarantied loans.
SBA was $2.2 billion, but the SBA withdrew $0.6 billion
at year-end FY 2016 as it was not needed to fund future Unobligated balances at September 30, 2016, and
credit program operations. September 30, 2015, were $5.0 billion and $5.0
billion, which include $3.0 billion and $3.5 billion of
Spending Authority from Offsetting Collections increased unavailable unobligated balances. These balances were
$0.2 billion in FY 2016. This increase is attributable to unavailable because they were unapportioned by OMB.
larger net collections in the disaster assistance program. The SBA accumulates the majority of unobligated
A significantly higher amount of loan repayments were balances in its nonbudgetary financing accounts ($3.9
collected, and the repayment of borrowings was decreased billion in FY 2016 and $3.7 billion in FY 2015) from
in FY 2016, thus resulting in a lower ending balance. subsidy estimates and reestimates that are used primarily
to pay default claims in future years.
STATUS OF BUDGETARY RESOURCES
The Total Status of Budgetary Resources of $10.9 billion
increased $0.6 billion in FY 2016. Budgetary obligations

AGENCY FINANCIAL REPORT • FY 2016 31
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

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

Internal Control Environment designed specifically for program support and district
offices, to aid management in evaluating and document-
The SBA believes that maintaining integrity and account- ing the adequacy of internal controls within their area of
ability in all programs and operations is critical for responsibility. This year, the OIC enhanced its training
good government. The ability to demonstrate consistent program and the checklists to incorporate the five compo-
responsible stewardship over assets and resources is a sign nents and 17 principles of internal control as prescribed
of responsible leadership. SBA’s commitment to integrity in GAO’s Green Book.
and ethical values with an effective system of internal con-
trols ensures that every employee remains dedicated to the In support of internal control assessments, the OIC
efficient delivery of services to customers and maximizes oversees the requirements of the OMB Circular No.
desired program outcomes. The SBA has developed and A-123, Appendix A, Internal Control Over Financial
implemented management, administrative, and financial Reporting. The Senior Assessment Team, chaired by the
system controls to reasonably ensure that: Chief Financial Officer and comprised of SBA managers
from the major programs and support offices directed
• Programs and operations achieve intended results compliance with the circular. The SAT employed a risk-
efficiently and effectively; based approach in the selection of processes and systems
for a more robust internal control evaluation. Addi-
• Resources are used in accordance with the mission
tional reviews requested by SAT members covered some
of the Agency;
business processes that had no material impact on the
• Programs and resources are protected from waste, financial statements, but did present some potential for
fraud, and mismanagement; risk or exposure to the Agency. The OIC documented the
process and key controls, evaluated and tested the design
• Program and operation activities are in compliance and effectiveness of controls, and presented the results
with laws and regulations; and to the SAT. Each office is responsible for developing and
implementing corrective actions for any reported deficien-
• Reliable, complete, and timely data are maintained
cies. Based on the evaluation of business processes in FY
and used for decision-making at all levels.
2016, the OIC identified a number of deficiencies in the
Each office within the SBA implements internal con- internal control over financial reporting reviews, includ-
trols to achieve programmatic goals as well as controls ing several in the SBA’s key business processes. The SAT
over operations, reporting, and compliance. Each year, evaluated the review findings and determined that none
the SBA conducts an assessment of internal control as reached the level of material weakness.
required by the Federal Managers’ Financial Integrity Act
The SBA Enterprise Risk Management Board continued
of 1982. During FY 2016, the SBA expanded the scope
to oversee and guide SBA’s enterprise risk management
of the internal control assessments in accordance with
efforts. The Board consolidated, assessed, and prioritized
the Office of Management and Budget’s revised Circular
enterprise level risks and conducted deep dive assessments
A-123, Management’s Responsibility for Enterprise Risk
on high impact risks. The Board continues to advise the
Management and Internal Control, and the Government
Administrator on risk matters.
Accountability Office’s Standards for Internal Control in
the Federal Government, known as the Green Book. The While the SBA continued to have a significant deficiency
FMFIA requires that the assessment results be reported to in information technology security controls, including
the President and Congress in a statement of assurance. access controls and change controls. The Agency is
The SBA Administrator provides the statement of assur- sensitive to the need to protect SBA data and has worked
ance based on the self-assessment of program managers, diligently to improve both process and performance in
internal control reviews, and audits and reviews done this critical area and as a result, it was noted that enor-
by the GAO and SBA’s Office of the Inspector General. mous improvements were made in their Vulnerability
SBA’s Office of Internal Controls provides training on Management and Remediation process in FY 2016.
assessing internal controls and tools, including checklists The Agency plans to take additional corrective action to

32 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

further improve in these areas, with a focus on improving fail-over for disaster recovery. The SBA has migrated all
access controls and change controls. financial systems to an environment with multiple levels
of physical and logistical security with metrics to monitor
In FY 2016, SBA management identified a control response times and system availability.
weakness related to data used as inputs to the credit
subsidy model for the Secondary Market Guaranty In addition to modernization of the financial system
program. While SBA’s auditors classified it as a significant platforms, the incremental improvement projects added
deficiency because it occurred during the fiscal year, the missing functionality to the financial systems, building
SBA required its Fiscal Transfer Agent to implement an improved integration between the systems, improving
improved reconciliation procedure that is a permanent consistency of data, enhanced reporting capability, and
control, which fixed the issue. improving SBA’s automation of funds control for loan
programs and loan subsidy.

Financial Management Systems The incremental improvement projects enhance SBA’s
Strategy financial system controls over lending programs and pro-
vide for improvement in accessibility to common infor-
Financial management systems at the SBA are designed mation, financial and budget management, and financial
to support effective internal control, produce reliable, reporting. SBA’s tightly integrated financial systems allow
timely financial information, and ensure cost effective the Agency to respond quickly to both internal and exter-
loan guaranty processing. Management remains focused nal financial information inquiries and requirements. The
on robust financial management systems that improve SBA has completed most steps in its DATA Act implemen-
SBA’s ability to comply with laws and regulations, provide tation plan and has successfully submitted all files to the
timely and accurate data to support management analysis production Broker and passed its validation steps.
and decision-making, enable the Agency to keep pace
with its lending partners, and effectively use automation Core financial systems at the SBA are comprised of three
to achieve operational efficiency. systems operated and managed by the Office of the Chief
Financial Officer and the Office of Capital Access. The
As demonstrated throughout the FY 2016 Agency Financial systems include:
Report, the SBA seeks to comply with all federal financial
management system requirements, and no deficiencies • Oracle Federal Financials — The SBA has begun
have been identified under the Federal Financial Management planning to upgrade to the most current release
Improvement Act of 1996.3 for budget execution and management for
administrative activity.
The SBA completed a series of incremental improvement
• Loan Systems — SBA-built systems support the
projects designed to modernize the financial management
lifecycle of loan guaranty processing, loan program
systems to improve financial system controls, reduce
funds control, management and accounting for
sustainment costs, provide additional functionality for
loan servicing, and loan related expenses.
external lending partners, and prolong system useful
lives. These projects include the migration of the systems • Financial Management System — The FMS is
to more current technology platforms and relocation to an SBA-built system used to consolidate
state-of-the-art data centers that provide expanded capa- administrative and loan activity, manage cash and
bility for continuity of operations, including automatic control funds, and provide financial reporting.

3 The purpose of the Federal Financial Management Improvement Act of
1996 is to advance federal financial management by ensuring that federal
financial management systems provide accurate, reliable, and timely finan-
cial management information to the government’s managers. Core com-
ponents include applying uniform accounting standards across the federal
government; full disclosure of all federal programs and activity; increasing
the accountability, creditability, performance, productivity, and efficiency
of federal financial management; establishing financial systems to control
the cost of federal government; and increasing the capability of agencies to
monitor budget execution by comparing spending to results of activities.
Compliance with the FFMIA provides the basis for the continuing use
of reliable financial management information by program managers, the
President, Congress, and the public. (Office of Management and Budget,
http://www.whitehouse.gov/omb/financial_ffs_ffmia)

AGENCY FINANCIAL REPORT • FY 2016 33
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

Management Assurances:
FMFIA and FFMIA Assurance Statement for FY 2016
The Small Business Administration continued to strengthen internal controls over its programs and operations during
FY 2016. 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.

SBA management is responsible for managing risks and maintaining effective internal controls and financial management
systems to meet the objectives of Section 2 and 4 of the Federal Managers Financial Integrity Act. The SBA conducted its
assessment of 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 their FY 2016
internal controls in their areas of responsibility. These assertions are supported by internal testing, checklists, and other
management reviews. Although a few Agency managers reported some operating deficiencies, these were not of a
material nature. Based on the results of these assessments, I can provide reasonable assurance that internal controls over
operations, reporting, and compliance with applicable laws and regulations, as of September 30, 2016, were operating
effectively, and no material weaknesses were identified in the design or operation of those internal controls. Further, the
Agency’s financial management systems conform to the principles, standards, and related requirements prescribed by
Section 4 of FMFIA.

The SBA conducted its assessment of the effectiveness of internal controls over financial reporting, which includes safe-
guarding of assets and compliance with applicable laws and regulations, in accordance with the requirements of Appendix
A of OMB Circular No. A-123. Based on the results of this evaluation, I can provide reasonable assurance that internal
control over financial reporting was operating effectively and no material weaknesses were identified in the design or
operation of internal control over financial reporting for FY 2016.

SBA’s independent auditor issued an unmodified opinion on the Agency’s FY 2016 financial statements for the twelfth
year in a row. After many years of non-compliance, we were able to achieve substantial compliance with the Debt
Collection Improvement Act of 1996 this year as a result of the Agency’s continuing efforts to identify and resolve
problems in referring all co-borrowers and guarantors on charged off loans to the Department of Treasury.

In FY 2016, the improper payment rate for the 7(a) Guaranty Purchases program increased from 0.9 percent to 2.32
percent this year and as a result it did not meet the annual reduction target of 1 percent that was published in the FY
2015 AFR. An enhanced test plan was the main reason for the increase while administrative and process errors were
the primary causes for the improper payments. The Office of Capital Access has formalized a corrective action plan for
the loan guaranty purchase centers to reduce the occurrence of future improper payments. In addition, the improper
payment rate for disbursements for goods and services related to contracts decreased from 13.52 percent reported in FY
2015 to 10.35 percent this year, but because it exceeded the 10 percent threshold, it was still not in compliance under the
IPERIA guidance. A majority of the errors found were related to contract documentation discrepancies for valid goods
and services with the estimated total recapture less than $11 thousand. All goods and services were received, and no fraud
was detected during the review. The Deputy Chief Financial Officer and the Director of the Denver Finance Center are
aggressively implementing a corrective action plan to enhance their internal controls over improper payments.

34 AGENCY FINANCIAL REPORT • FY 2016
MA N AG E ME NT’ S D I SCUSSI ON & AN ALYS IS

The Federal Financial Management Improvement Act 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 SBA’s financial management systems substantially comply with FFMIA for FY 2016.

In compliance with OMB Circular A-11, Section 51.3, the Chief Information Officer and the Associate Administrator
for Performance Management and the Chief Financial Officer have provided a signed statement that attests:

• The SBA Chief Information Officer reviewed and approved the major IT investments portion of the SBA
budget request;

• The SBA Chief Information Officer had a significant role in reviewing planned IT support for major program
objectives and significant increases and decreases in IT resources; and

• The SBA IT portfolio includes appropriate estimates of all IT resources included in the budget request.

Maria Contreras-Sweet
Administrator
November 14, 2016

AGENCY FINANCIAL REPORT • FY 2016 35
M A N AGE ME N T ’S D I S C US S I ON & AN ALYSI S

Improper Payments Summary actions to reduce and prevent future improper payments
through streamlining and simplifying the lending process
Improved financial performance through the reduction as well as improving the quality of the documentation.
of improper payments continues to be a key financial As a result, this program’s estimated improper payment
management focus of the federal government. SBA amount for FY 2016 has been significantly reduced
management continually develops strategies to reduce and no longer exceeds the threshold for a
improper payments for responsible stewardship high priority program.
of public assets.
The detection and remediation of improper payments is a
The Improper Payments Information Act of 2002, or priority for the Agency. SBA staff monitor and review for
IPIA, as amended, and as implemented by the Office improper payments and are charged with implementing
of Management and Budget in Circular No. A-123, improvements that will reduce improper payment rates.
Appendix C, Requirements for Effective Measurement The SBA also continually seeks opportunities to enhance
and Remediation of Improper Payments, requires and implement internal controls to reduce the risk for
SBA management to review programs and activities improper payments.
to identify those that are susceptible to significant
erroneous payments and estimate annually the amount The Agency’s primary concern in its improper payment
of erroneous payments made in those programs deemed reporting stems from administrative and documentation
risk susceptible. SBA management performs testing to errors, which are caused by the absence or completeness
estimate the rates and amounts of improper payments, of supporting documentation necessary to verify the
establishes improper payment reduction targets in accuracy and validity of a payment. Detailed information
accordance with OMB guidance, and develops and concerning the SBA’s improper payment reviews and its
implements corrective actions. efforts to reduce improper payments is presented in the
Other Information section of this report.
The SBA has nine programs and activities that are subject
to improper payment reporting: the 7(a) loan program
(approvals and purchases), the Certified Development
Company (504) loan program (approvals), the Disaster
Direct loan program, disbursements related to goods
and services, and those programs or activities receiving
Hurricane Sandy Disaster Relief funds, which include
grant programs and disaster related administrative
expenses of payroll, purchase cards, and travel.

At the beginning of FY 2016, the 7(a) Guaranty
Approvals Program was deemed to be a high-priority
program for improper payment reporting purposes by
OMB based on the estimated improper payment amount
reported in the FY 2015 Annual Financial Report. SBA
management diligently worked to meet the additional
requirements for high-risk programs and took several

36 AGENCY FINANCIAL REPORT • FY 2016
Financial
Reporting
F I N A N C I A L RE P O RT I N G

MESSAGE FROM THE CHIEF FINANCIAL OFFICER
November 14, 2016

I am pleased to submit SBA’s FY 2016 Agency Financial Report. An independent audit has earned the SBA an unmodified
opinion with no material weaknesses. This report means that the consolidated financial statements present fairly, in all
material respects, the financial position of the SBA as of September 30, 2016.

The audit report continued to identify issues with SBA’s information technology security. While improvements to
the financial management systems continue to be made, the framework governing SBA’s information technology
infrastructure continues to need additional controls over logical access, configuration management, and contingency
planning. The SBA made significant investment to improve the agency’s infrastructure, but many of these changes were
not in effect during the entire period under audit. The auditor did note that improvements were made, and the SBA
intends to continue efforts to resolve the remaining issues.

During the year, SBA management identified differences in data inputs to the Secondary Market Guaranty model that
were significant in amount and could not be attributed to timing of securities purchased in the Master Reserve Fund. In
pursuing reconciliation between the Fiscal Transfer Agent and the Trustee accounts, the difference between available cash
and investments was identified and corrected. As a result, SBA’s current year reestimate for the program is higher than
expected and reflects an adjustment that likely developed over prior years. The model inputs and the financial statements
for FY 2016 reflect correct amounts, and at fiscal year-end, controls are in place to prevent future problems with this
data. To prevent any future discrepancies between available cash and investments in the future, the SBA now requires
daily reconciliations between the trustee and fiscal agent accounts at a detailed level, and in accordance with auditor
recommendations, we will be establishing a precision level and documentation methodology to ensure the controls
continue to be effective.

Despite these challenges, the SBA achieved significant accomplishments in several areas of financial management:

• Completed development of the files and tools to comply with the DATA Act; SBA is one of the first
agencies to be fully ready six months before the required due date

• Developed policy statements on unliquidated obligations, procurement cards, and acquisition
to clarify responsibilities and comply with new laws and regulations

• Established a stronger quality assurance function and developed better analytical tools to help
identify instances of non-compliance for procurement and travel cards

• Deployed new budget planning and execution systems to provide better insight and controls over use
of available funds

• Established a program evaluation function to better assess Agency programs

• Demonstrated substantial progress by addressing deficiencies identified in our assessment
of the acquisition function

The SBA continued to work toward achievement of its priority and strategic goals as documented in its FY 2014-2018
Strategic Plan. The plan includes three strategic goals that focus on job growth and creation, small business advocacy, and
effective internal management and risk mitigation. These strategic goals guide the Agency’s resource and management
decisions. Each strategic goal contains objectives that are directly tied to performance from the individual level to
Agency-wide. This framework is essential to ensure that the SBA continues to play a key role in strengthening America’s
economy by providing tools to help grow businesses and create jobs.

38 AGENCY FINANCIAL REPORT • FY 2016
FI N A N CI A L REPORT IN G

For the tenth year in a row, the SBA won the prestigious Certificate of Excellence in Accountability Reporting (CEAR)
award, which recognizes high-quality reporting in all aspects of accountability and transparency. Presented by the
Association of Government Accountants, this award is made to agencies following a rigorous, independent review against
established standards for presentation. Additionally, the SBA received a special CEAR Best-In-Class award for its forward
looking analysis.

I want to extend sincere thanks and recognize the independent Audit and Financial Management Advisory Committee
who have provided advice and recommendations to improve our financial reporting. Since 2004 their input has been an
invaluable part of our efforts for continuous improvement.

SBA’s efforts to assist entrepreneurs and small business owners are especially critical to a healthy economy. As highlighted
through the Administrator’s priorities, the SBA continues to make use of smarter systems, take bolder steps into new
markets, and ensure that SBA programs are accessible to all entrepreneurs. The SBA strives to achieve a mission focused
on the success of the small businesses that continue to build the American economy. My office is proud to be a part of
this effort.

Sincerely,

Tami Perriello
Associate Administrator for Performance Management
and Chief Financial Officer

AGENCY FINANCIAL REPORT • FY 2016 39
F I N A N C I A L RE P O RT I N G

AUDIT AND FINANCIAL MANAGEMENT ADVISORY
COMMITTEE’S REPORT
November 14, 2016

The Audit and Financial Management Advisory Committee (the Committee) assists the Administrator in overseeing
the U.S. Small Business Administration’s (SBA’s) financial operations. As part of that responsibility, the Committee
meets with Agency management, the Agency’s Inspector General, and its external auditors to review and discuss
SBA’s external financial audit coverage, the effectiveness of SBA’s internal controls over its financial operations, and
its compliance with certain laws and regulations that could materially impact SBA’s financial statements. SBA’s
external auditors are responsible for expressing an opinion on the conformity of SBA’s audited financial statements
with the U.S. generally accepted accounting principles. The Committee reviews the findings of the Inspector General
and external auditors, and SBA’s responses to those findings, to ensure that SBA’s plan for corrective action includes
appropriate and timely follow-up measures. In addition, the Committee reviews the draft Agency Financial Report
(AFR), including its financial statements, and provides comments to management who has primary responsibility
for the AFR.

The Committee met informally twice during 2016 by telecom with respect to these responsibilities on FY 2016 financial
management and reporting. During the meetings the Committee met with the Inspector General and external auditors
without SBA management being present and discussed with the external auditors the matters that are required to be
discussed by generally accepted auditing standards. Nothing came to our attention as a result of these discussions to
indicate changes were needed to the financial statements and notes thereto that are included in the FY 2016 AFR.

The SBA will be recruiting additional AFMAC members in 2017 to replace retired members and to
augment the committee.

Joseph Kull
Chairman
Audit and Financial Management Advisory Committe

40 AGENCY FINANCIAL REPORT • FY 2016
FI N A N CI A L REPORT IN G

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

Final Report Transmittal
Report Number: 17-03

DATE: November 14, 2016

TO: Maria Contreras-Sweet
Administrator, Small Business Administration

Tami Perriello
Associate Administrator for Performance Management and
Chief Financial Officer, Small Business Administration

FROM: Hannibal M. Ware
Deputy Inspector General

SUBJECT: Independent Auditors’ Report on SBA’s FY 2016 Financial Statements

We contracted with the independent certified public accounting firm KPMG LLP (KPMG) to audit the
U.S. Small Business Administration’s (SBA) consolidated financial statements for fiscal year (FY)
2016, ending September 30, 2016. This audit is an annual requirement of the Chief Financial
Officers’ Act of 1990, and was conducted in accordance with Generally Accepted Government Auditing
Standards; the Office of Management and Budget Bulletin No. 15-02, Audit Requirements for Federal
Financial Statements, as amended; and the U.S. Government Accountability Office’s Financial Audit
Manual and Federal Information System Controls Audit Manual.

The attached independent auditors’ report presents an unmodified opinion on SBA’s consolidated
financial statements for FY 2016. Specifically, KPMG reported that:

• The financial statements were fairly presented in all material aspects in conformity with U.S.
generally accepted accounting principles.
• There were no material weaknesses in internal control.
• There is a significant deficiency related to controls over the completeness and accuracy of
data for SBA’s Secondary Market Guarantee credit reform model; and
• There is also a significant deficiency related to SBA’s information technology security
controls, which has been identified in the past.

Details regarding KPMG’s conclusions are included in Exhibit I to this report. Within 30 days of this
report, KPMG expects to issue a separate letter to SBA management regarding other, less significant
matters that came to its attention during the audit.

We reviewed a copy of KPMG’s report and related documentation and made necessary inquiries of
their respective representatives. Our review was not intended to enable us to express—and we do
not express—an opinion on SBA’s financial statements, KPMG’s conclusions about the effectiveness
of internal controls, or its conclusions about SBA’s compliance with laws and regulations. However,
our review disclosed no instances where KPMG did not comply, in all material respects, with
Generally Accepted Government Auditing Standards.

AGENCY FINANCIAL REPORT • FY 2016 41
F I N A N C I A L RE P O RT I N G

We provided a draft of KPMG’s report to SBA’s Chief Financial Officer, who concurred with its
findings and recommendations and agreed to implement the recommendations. The Chief Financial
Officer’s comments are attached as Exhibit II to this report.

We appreciate the cooperation and assistance of SBA and KPMG. Should you or your staff have any
questions, please contact me at (202) 205-6586 or Jeffrey R. Brindle, Director of the Information
Technology and Financial Management Group at (202) 205-7490.

cc: Nick Maduros, Chief of Staff
Melvin F. Williams, Jr., General Counsel
Martin Conrey, Attorney Advisor, Legislation and Appropriations
LaNae Twite, Director, Office of Internal Controls

Attachment

42 AGENCY FINANCIAL REPORT • FY 2016
FI N A N CI A L REPORT IN G

INDEPENDENT AUDITORS’ REPORT ON FY 2016 FINANCIAL STATEMENTS

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

Independent Auditors’ Report

Inspector General
United States Small Business Administration:

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of the U.S. Small Business
Administration (SBA), which comprise the consolidated balance sheets as of September 30, 2016 and 2015,
and the related consolidated statements of net cost, and changes in net position, and combined statements of
budgetary resources for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

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

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America,
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. 15-02, Audit Requirements for Federal Financial Statements. Those standards and
OMB Bulletin No. 15-02 require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.

Opinion on the Financial Statements

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the U.S. Small Business Administration as of September 30, 2016 and 2015, and its net
costs, changes in net position, and budgetary resources for the years then ended in accordance with U.S.
generally accepted accounting principles.

KPMG LLP is a Delaware limited liability partnership and the U.S. member
firm of the KPMG network of independent member firms affiliated with
AGENCY
KPMG International FINANCIAL
Cooperative (“KPMG REPORT
International”), a Swiss • FY 2016
entity. 43
F I N A N C I A L RE P O RT I N G

Other Matters
Required Supplementary Information
U.S. generally accepted accounting principles require that the information in the Management’s Discussion and
Analysis, Required Supplementary Information, and Required Supplementary Stewardship Information sections
be presented to supplement the basic consolidated financial statements. Such information, although not a part
of the basic consolidated financial statements, is required by the Federal Accounting Standards Advisory Board
who considers it to be an essential part of financial reporting for placing the basic consolidated financial
statements in an appropriate operational, economic, or historical context. We have applied certain limited
procedures to the required supplementary information in accordance with auditing standards generally
accepted in the United States of America, which consisted of inquiries of management about the methods of
preparing the information and comparing the information for consistency with management’s responses to our
inquiries, the basic consolidated financial statements, and other knowledge we obtained during our audits of the
basic consolidated financial statements. We do not express an opinion or provide any assurance on the
information because the limited procedures do not provide us with sufficient evidence to express an opinion or
provide any assurance.
Other Information
Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements
as a whole. The Message from the Administrator, Other Information and information on pages 37 to 40 is
presented for purposes of additional analysis and is not a required part of the basic consolidated financial
statements. Such information has not been subjected to the auditing procedures applied in the audits of the
basic consolidated financial statements, and accordingly, we do not express an opinion or provide any
assurance on it.
Other Reporting Required by Government Auditing Standards
Internal Control Over Financial Reporting
In planning and performing our audit of the consolidated financial statements as of and for the year ended
September 30, 2016, we considered SBA’s internal control over financial reporting (internal control) to
determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our
opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the
effectiveness of 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.
A deficiency in internal control exists when the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to prevent, or detect and correct,
misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in
internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial
statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet
important enough to merit attention by those charged with governance.
Our consideration of internal control was for the limited purpose described in the first paragraph of this section
and was not designed to identify all deficiencies in internal control that might be material weaknesses or
significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that have not
been identified. Given these limitations, during our audit we did not identify any deficiencies in internal control
that we consider to be material weaknesses. We did identify certain deficiencies in internal control, described in
Exhibit I that we consider to be significant deficiencies:
(1) Improvement Needed in Controls over the Completeness and Accuracy of Secondary Market
Guarantee Model Data, and
(2) Improvement Needed in Information Technology Security Controls

44 AGENCY FINANCIAL REPORT • FY 2016
FI N A N CI A L REPORT IN G

Compliance and Other Matters

As part of obtaining reasonable assurance about whether SBA’s consolidated financial statements are free
from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations,
contracts, and grant agreements, noncompliance with which could have a direct and material effect on the
determination of financial statement amounts. 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 of compliance disclosed no instances of noncompliance or other matters that are required to be
reported herein under Government Auditing Standards or OMB Bulletin No. 15-02.

We also performed tests of its compliance with certain provisions referred to in Section 803(a) of the Federal
Financial Management Improvement Act of 1996 (FFMIA). Providing an opinion on compliance with FFMIA was
not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests of
FFMIA disclosed no instances in which SBA’s financial management systems did not substantially comply with
(1) Federal financial management systems requirements, (2) applicable Federal accounting standards, and (3)
the United States Government Standard General Ledger at the transaction level.

SBA’s Responses to Findings

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

Purpose of the Other Reporting Required by Government Auditing Standards

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

Washington, D.C.
November 14, 2016

AGENCY FINANCIAL REPORT • FY 2016 45
F I N A N C I A L RE P O RT I N G

Exhibit I
U.S. Small Business Administration
Significant Deficiencies

(1) Improvement Needed in Controls over the Completeness and Accuracy of Secondary Market
Guarantee Model Data

During FY 2016, the U.S. Small Business Administration (SBA) management identified a significant error for an
account balance in one of the data files, provided by a fiscal transfer agent (FTA), which is used as an input for
the Secondary Market Guarantee year-end financial statement subsidy reestimate calculation. The error related
to securities erroneously included in the FTA data file (meant to comprise of cash available) that were already
included in a second reestimate data input file prepared by SBA based on trustee information. Ultimately, this
error occurred because SBA did not perform complete reconciliations between the two datasets. Neither SBA
management nor the FTA has been able to identify which securities or transactions the duplication relates to,
but determined the error was not the result of normal cut-off or timing differences. Furthermore, we believe that
a similar reconciliation difference existed in prior periods. This matter was corrected prior to the end of FY
2016, and as such, the Liability for Loan Guaranty balance as of September 30, 2016, is fairly presented.
However, the FY 2016 Statement of Net Cost, while presented fairly, includes costs associated with the error
that should have been recorded in the prior year.

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

• U.S. Government Accountability Office’s, Standards for Internal Control in the Federal Government,
Section OV4.01, Service Organizations
• Federal Financial Accounting and Auditing Technical Release 6, Preparing Estimates for Direct Loans
and Loan Guarantee Subsidies, paragraph 35
• Office of Management and Budget (OMB) Circular No. A-129, Policies for Federal Credit Programs and
Non-Tax Receivables, Section III.B.1.b.iii, Outsourcing Programmatic Functions to Contractors
Recommendations:

To enhance the existing reconciliation controls and documentation related to the Secondary Market Guarantee
reestimate process, we recommend the Director of the Office of Financial Analysis and Modeling:

1. Establish and document the precision level used for evaluating reconciling differences to timely prevent
and/or detect material misstatements.
2. Document the assessment of any differences identified during the performance of this reconciliation control
at each phase of the reestimate process and the potential impact on the financial statements, using the
established level of precision.

46 AGENCY FINANCIAL REPORT • FY 2016
FI N A N CI A L REPORT IN G

Exhibit I
U.S. Small Business Administration
Significant Deficiencies

(2) Improvement Needed in Information Technology Security Controls

During the FY 2016 financial statement audit, we found that SBA continued to implement corrective actions on
some of the prior year information technology (IT) findings; however, a number of conditions persisted in FY
2016 that limited SBA’s ability to effectively manage its information system risks. As a result, collectively, these
conditions continue to present a significant deficiency in SBA’s internal control environment.

In an effort to provide additional clarity to SBA management with respect to the corrective actions required, we
enhanced our prior year recommendations where issues persisted in FY 2016, and issued additional
recommendations for the new control deficiencies identified. In the sections below, we distinguish between
recurring conditions and related recommendations, and those that were newly identified in FY 2016. 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
throughout the audit.

The following criteria were considered with respect to the matter described in the preceding paragraph:
• National Institute of Standards and Technology (NIST) Special Publication 800-53, Security and
Privacy Controls for Federal Information Systems and Organizations, (Revision 4)
• Federal Information Processing Standards (FIPS) Publication 200, Minimum Security Requirements for
Federal Information and Information Systems
• SBA Standard Operating Procedure (SOP) 90 47 3, Information System Security Program
We have summarized the IT control deficiencies that we noted during the FY 2016 audit below, and have
organized them by the following general IT control objectives: logical access controls, system configuration
management, and contingency planning.

Logical Access Controls

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

Our audit found that the following control deficiencies identified in prior year(s) persisted in FY 2016:
• Account authorization processes were not implemented in accordance with SBA policy.
• User accounts were not recertified in accordance with SBA policy.
• The principle of “least privilege” for user/service accounts with administrator privileges was not
enforced.
• The employee exit clearance and contractor off-boarding processes were not standardized to ensure
that access to SBA’s systems was timely removed upon separation.
• Processes for consistently and effectively reviewing audit logs were not implemented.
Our audit identified the following new control deficiency in FY 2016:
• Segregation of duties was not enforced for one system.

AGENCY FINANCIAL REPORT • FY 2016 47
F I N A N C I A L RE P O RT I N G

Exhibit I
U.S. Small Business Administration
Significant Deficiencies

Recommendations – Logical Access Controls:

To address the repeat and new control deficiencies listed in the section above, we recommend that the Chief
Information Officer (CIO) coordinate with SBA program offices to:

3. Implement and monitor procedures to ensure that access is appropriately granted to employees and
contractors, consistent with the conditions on their access forms after all approvals have been obtained.
4. Improve SBA’s access recertification processes by taking the following actions:
o Implement procedures to ensure that user access, including user accounts and associated roles, is
reviewed on a periodic basis consistent with the nature and risk of the system, and any necessary
account modifications are performed when identified;
o Implement effective procedures to ensure that accounts are independently reviewed for
appropriateness in accordance with SBA policy.
5. Grant elevated privileges per business needs only, and enforce the concept of least privilege or implement
mitigating controls to ensure that activities performed using privileged accounts (including service accounts)
are properly monitored.
6. Improve SBA’s administration of logical system access by taking the following actions:
o Implement an effective off-boarding process, and periodically verify that controls to remove logical
access for separated employees are implemented and operating as designed;
o Establish a process for the identification and removal of separated contractors to help ensure that
logical access is timely removed upon contractor separation; and
o Timely remove access to general support systems and major applications (including development
and test environments) when employees and contractors are terminated.
7. Improve SBA’s information system logging and auditing program, by taking the following actions:
o Review and rationalize current audit and logging activities and capabilities to determine their
effectiveness in addressing risks to systems and data;
o Implement and enforce consistent and effective creation of audit records, capturing relevant
auditable events, auditing (i.e., manual or automated review of audit records) for specified events,
and automated alerting on specified events across SBA’s infrastructure using a risk-based
approach; and
o Retain sufficient evidence of the audit log review.
8. Enforce segregation of duties policies and procedures or implement mitigating controls in order to minimize
the risk of unauthorized activity and other relevant security events.

System Configuration Management

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

48 AGENCY FINANCIAL REPORT • FY 2016
FI N A N CI A L REPORT IN G

Exhibit I
U.S. Small Business Administration
Significant Deficiencies

Our audit noted that although improvements have been made, the following prior year control deficiency
persisted in FY 2016:

• Numerous critical, high and medium-risk configuration and patch management vulnerabilities were
noted in certain systems.
Recommendation – System Configuration Management:

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

9. CIO coordinate with SBA program offices to address the existing configuration and patch management
vulnerabilities noted during our assessment to be in compliance with SBA policies. In addition, implement
procedures to ensure the consistent implementation and monitoring of SBA approved security configuration
baselines across SBA’s workstations, servers, databases, network devices, and other security relevant
appliances.

Contingency Planning

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

Our audit noted that the following prior year control deficiencies persisted in FY 2016:
• Incremental or full backups for one of the systems were not retained in accordance with SBA policies.
Recommendation – Contingency Planning:
To address the repeat contingency planning conditions above, we recommend that the:

10. CIO coordinate with SBA program offices to ensure that incremental and full backups for all systems,
including related support infrastructure, are configured and retained in accordance with SBA policies.

AGENCY FINANCIAL REPORT • FY 2016 49
F I N A N C I A L RE P O RT I N G

F I N A N CIAL R E P O RTIN G Exhibit II

CFO Response to Draft
CFO Response AuditAudit
to Draft Report on FY
Report on2016 Financial
FY 2016 Statements
Financial Statements
DATE:
DATE: November 14, 2016
November 14, 2016

TO: TO: Hannibal M. Ware,
Hannibal DeputyDeputy
M. Ware, Inspector General
Inspector General

FROM:
FROM: Tami Tami
Perriello, Associate
Perriello, Administrator
Associate for for
Administrator
Performance Management and Chief Financial
Performance Management and Chief Officer
Financial Officer

SUBJECT:Draft Audit
SUBJECT: DraftReport
Audit on
Report
FY on FY 2016
2016 Financial
Financial Statements
Statements

The Small The Small Business
Business Administration
Administration has received
has received theIndependent
the draft draft Independent Auditors’
Auditors’ Report
Report fromfrom
KPMGKPMG thatthat includes
includes thethe
auditors’ opinion on the financial statements and its review of the Agency’s internal control over financial reporting andand
auditors’ opinion on the financial statements and its review of the Agency’s internal control over financial reporting
compliance with laws and regulations. The independent audit of the Agency’s financial statements and related processes
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.
is a core component of SBA’s financial management program.
We are pleased that the SBA has again received an unmodified audit opinion with no material weaknesses from the
We are pleased that the SBA has again received an unmodified audit opinion with no material weaknesses from the
independent auditor. We believe these results accurately reflect the quality of the Agency’s financial statements and our
independent auditor. We believe these results accurately reflect the quality of the Agency’s financial statements and our
continuous improvements in accounting, budgeting and reporting processes. We are proud that the results of our efforts
continuous improvements in accounting, budgeting and reporting processes. We are proud that the results of our efforts
have been confirmed.
have been confirmed.
The audit report includes a continuing significant deficiency in SBA’s information technology controls. The SBA
The auditinvested
report heavily
includesover
a the
continuing significant
past year to improvedeficiency
controls in
overSBA’s informationtechnology
the information technology controls. The
environment andSBA
will continue
invested to
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work on past year in
improvements toIT
improve controls
security, overinthe
specifically information
logical technology
access controls, environment
configuration and will and
management, continue
to work on improvements
contingency in IT security, specifically in logical access controls, configuration management, and
planning.
contingency planning.
The SBA reported to the auditor that significant differences between balances of available cash and investments existed
The SBAin data inputs
reported to the
to the Secondary
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question, and timing, constituted a significant deficiency in internal control which is reported for this fiscal year. in
question,SBA
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reconcile for this
daily to
program. In accordance with the auditor’s recommendations, we will be establishing a precision
the trustee account. We believe our controls are effective and will prevent future differences in model data inputs for this level and documentation
methodology to ensure that the controls continue to be effective.
program. In accordance with the auditor’s recommendations, we will be establishing a precision level and documentation
methodology to ensureyour
We appreciate thatefforts
the controls
and thosecontinue
of yourtocolleagues
be effective.
in the Office of the Inspector General, as well as those of KPMG.
The independent audit process continues to provide us with new insights and valuable recommendations that will further
We appreciate your efforts and those of your colleagues in the Office of the Inspector General, as well as those of KPMG.
enhance SBA’s financial management practices. We remain committed to excellence in financial management and look
The independent
forward toaudit process
making morecontinues
progress intothe
provide us year.
coming with new insights and valuable recommendations that will further
enhance SBA’s financial management practices. We remain committed to excellence in financial management and look
forward to making more progress in the coming year.

50 AGENCY FINANCIAL REPORT • FY 2016
48 AGENCY FINANCIAL REPORT • FY 2016
FI N A N CI A L REPORT IN G

FINANCIAL STATEMENTS AND NOTES
The U.S. Small Business Administration prepares its financial statements as a critical aspect of ensuring accountability
and stewardship for the public resources entrusted to the SBA. Preparation of these statements is also an important part
of SBA’s financial management goal of providing accurate and reliable information that may be used to assess perfor-
mance and allocate resources.

SBA’s management is responsible for the accuracy and propriety of the information contained in the principal financial
statements and the quality of internal controls. The SBA prepares these financial statements from its books and records in
accordance with generally accepted accounting principles in the United States as well as formats prescribed by the Office
of Management and Budget. While these statements have been prepared from SBA’s books and records in accordance
with generally accepted accounting principles for federal entities and the formats prescribed by OMB, they are in addi-
tion to the financial reports used to monitor and control budgetary resources, which are prepared from the same books
and 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 Bud-
getary Resources is consistent with information reflected on the Report on Budget Execution and Budgetary Resources (SF
133), with the one exception of offsetting receipts. Offsetting receipts offset budget authority and outlays at the agency level
in the Budget of the United States Government, but are not reflected in the SF 133. The SBA includes offsetting receipts in
this statement for the purpose of reconciling outlay information presented in the Budget of the United States Government.

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

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

The Required Supplementary Stewardship Information provides information on SBA’s investment in human capital
that supports the increase or maintenance of national economic productivity capacity through education and
training programs.

AGENCY FINANCIAL REPORT • FY 2016 51
F I N A N C I A L RE P O RT I N G

U. S. Small Business Administration
Consolidated Balance Sheet
As of September 30, 2016 and 2015

(Dollars in Thousands)
2016 2015
ASSETS
Intragovernmental Assets
Fund Balance with Treasury (Note 2) $ 6,255,936 $ 5,365,418
Accounts Receivable (Note 5) – 30
Advances (Note 1) 54,300 46,166
Total Intragovernmental Assets 6,310,236 5,411,614

Assets - Public and Other
Cash (Note 3) 1,767 1,164
Accounts Receivable, Net (Note 5) 161,312 98,206
Credit Program Receivables and Related Foreclosed Property, Net (Note 6) 6,182,889 6,502,745
General Property and Equipment, Net (Note 7) 825 2,562
Advances (Note 1) 143 4,576
Total Assets - Public and Other 6,346,936 6,609,253
Total Assets $ 12,657,172 $ 12,020,867

LIABILITIES
Intragovernmental Liabilities
Interest Payable $ 446 $ 620
Debt (Note 9) 8,019,526 7,175,344
Net Assets of Liquidating Funds Due to Treasury (Note 10) 14,824 13,818
Downward Reestimate Payable to Treasury (Note 1, Note 13) 1,239,814 1,600,653
Other (Note 11) 12,599 10,147
Total Intragovernmental Liabilities 9,287,209 8,800,582

Other Liabilities - Public
Accounts Payable (Note 1) 27,028 33,540
Accrued Grant Liability (Note 1) 80,000 76,000
Liability for Loan Guaranties (Note 6) 2,371,505 1,661,516
Federal Employees’ Compensation Act Actuarial Liability (Note 1, Note 8) 32,676 31,691
Surety Bond Guarantee Program Future Claims (Note 8) 43,430 43,679
Other (Note 11) 41,140 35,829
Total Other Liabilities - Public 2,595,779 1,882,255
Total Liabilities 11,882,988 10,682,837

NET POSITION
Unexpended Appropriations (Note 1) 1,425,883 1,600,847
Cumulative Results of Operations (Note 1) (651,699) (262,817)
Total Net Position 774,184 1,338,030

Total Liabilities and Net Position $ 12,657,172 $ 12,020,867

The accompanying notes are an integral part of these statements.

52 AGENCY FINANCIAL REPORT • FY 2016
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U. S. Small Business Administration
Consolidated Statement of Net Cost
For the Years Ended September 30, 2016 and 2015

(Dollars in Thousands)
2016 2015
STRATEGIC GOAL 1:
Growing Businesses and Creating Jobs
Gross Cost $ 597,683 $ (365,676)
Less: Earned Revenue 457,503 463,824
Net Cost of Strategic Goal 1 140,180 (829,500)

STRATEGIC GOAL 2:
Serving as the Voice for Small Business
Gross Cost 123,151 109,638
Net Cost of Strategic Goal 2 123,151 109,638

STRATEGIC GOAL 3:
Building an SBA that Meets the Needs of Today’s
and Tomorrow’s Small Businesses
Gross Cost 41,326 40,427
Net Cost of Strategic Goal 3 41,326 40,427

COST NOT ASSIGNED TO STRATEGIC GOALS
Gross Cost 34,820 34,845
Net Cost Not Assigned to Strategic Goals 34,820 34,845

Net Cost of Operations $ 339,477 $ (644,590)

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

AGENCY FINANCIAL REPORT • FY 2016 53
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U. S. Small Business Administration
Consolidated Statement of Changes in Net Position
For the Years Ended September 30, 2016 and 2015
(Dollars in Thousands)
2016 2015

Beginning Cumulative Results of Operations $ (262,817) $ (204,356)

Budgetary Financing Sources
Appropriations Used 1,227,401 1,122,290
Donations of Cash and Cash Equivalents 10 66

Other Financing Sources
Imputed Financing from Costs Absorbed by Others 18,158 16,050
Other - Current Year Liquidating Equity Activity (4,639) (12,736)
Other - Non-entity Activity (1,290,335) (1,828,721)
Total Financing Sources (49,405) (703,051)

Less: Net Cost of Operations 339,477 (644,590)

Ending Cumulative Results of Operations $ (651,699) $ (262,817)

Beginning Unexpended Appropriations $ 1,600,847 $ 1,692,804

Budgetary Financing Sources
Appropriations Received 1,147,487 1,150,247
Adjustment - Cancelled Authority (91,615) (116,492)
Return of Unrequired Liquidating Fund Appropriation (2,899) (2,965)
Other Adjustments (536) (457)
Appropriations Used (1,227,401) (1,122,290)
Total Budgetary Financing Sources (174,964) (91,957)

Ending Unexpended Appropriations $ 1,425,883 $ 1,600,847

Ending Net Position $ 774,184 $ 1,338,030

The accompanying notes are an integral part of these statements.

54 AGENCY FINANCIAL REPORT • FY 2016
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U. S. Small Business Administration
Combined Statement of Budgetary Resources
For the Years Ended September 30, 2016 and 2015
(Dollars in Thousands)
September 30, 2016
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 1,286,459 $ 3,692,206 $ 4,978,665
Recoveries of Prior Year Obligations 55,640 47,959 103,599
Other Changes in Unobligated Balance (86,861) (10,500) (97,361)
Unobligated Balance from Prior Year Budget Authority, net 1,255,238 3,729,665 4,984,903

Appropriations (discretionary and mandatory) 1,144,588 - 1,144,588
Borrowing Authority (discretionary and mandatory) – 1,610,202 1,610,202
Spending Authority from Offsetting Collections 378,906 2,759,413 3,138,319
Total Budgetary Resources $ 2,778,732 $ 8,099,280 $ 10,878,012

STATUS OF BUDGETARY RESOURCES
New obligations and upward adjustments (total) $ 1,700,731 $ 4,210,725 $ 5,911,456
Unobligated Balance, end of year:
Apportioned, unexpired accounts 299,478 1,690,457 1,989,935
Unapportioned, unexpired accounts 722,884 2,198,098 2,920,982
Unexpired unobligated balance, end of year 1,022,362 3,888,555 4,910,917
Expired unobligated balance, end of year 55,639 - 55,639
Unobligated Balance, end of year (total) 1,078,001 3,888,555 4,966,556
Total Status of Budgetary Resources $ 2,778,732 $ 8,099,280 $ 10,878,012

CHANGE IN OBLIGATED BALANCE
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 457,460 $ 200,981 $ 658,441
New obligations and upward adjustments 1,700,731 4,210,725 5,911,456
Gross Outlays (1,595,165) (3,437,536) (5,032,701)
Recoveries of Prior Year Unpaid Obligations (55,640) (47,959) (103,599)
Unpaid Obligations, end of year 507,386 926,211 1,433,597
Uncollected Payments:
Uncollected Payments, Federal Sources, brought forward, October 1 – (95,175) (95,175)
Change in Uncollected Payments, Federal Sources – (49,861) (49,861)
Uncollected Payments, Federal Sources, end of year – (145,036) (145,036)

Memorandum (non-add) entries:
Obligated Balance, start of year $ 457,460 $ 105,806 $ 563,266

Obligated Balance, end of year $ 507,386 $ 781,175 $ 1,288,561

BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross (discretionary and mandatory) $ 1,523,494 $ 4,369,615 $ 5,893,109
Actual Offsetting Collections (discretionary and mandatory) (387,827) (3,641,970) (4,029,797)
Change in Uncollected Customer Payments
from Federal Sources (discretionary and mandatory) – (49,861) (49,861)
Recoveries of prior year paid obligations (discretionary and mandatory) 4,753 – 4,753
Budget Authority, net (discretionary and mandatory) $ 1,140,420 $ 677,784 $ 1,818,204

Gross Outlays (discretionary and mandatory) $ 1,595,165 $ 3,437,536 $ 5,032,701
Actual Offsetting Collections (discretionary and mandatory) (387,827) (3,641,970) (4,029,797)
Net Outlays (discretionary and mandatory) 1,207,338 (204,434) 1,002,904
Distributed Offsetting Receipts 742 (1,651,174) (1,650,432)
Agency Outlays, net (discretionary and mandatory) $ 1,208,080 $ (1,855,608) $ (647,528)

Note 15

The accompanying notes are an integral part of these statements.

AGENCY FINANCIAL REPORT • FY 2016 55
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U. S. Small Business Administration
Combined Statement of Budgetary Resources
For the Years Ended September 30, 2016 and 2015
(Dollars in Thousands)
September 30, 2015
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 1,363,051 $ 4,349,196 $ 5,712,247
Recoveries of Prior Year Obligations 49,028 43,253 92,281
Other Changes in Unobligated Balance (116,492) (750) (117,242)
Unobligated Balance from Prior Year Budget Authority, net 1,295,587 4,391,699 5,687,286

Appropriations (discretionary and mandatory) 1,147,282 – 1,147,282
Borrowing Authority (discretionary and mandatory) – 550,948 550,948
Spending Authority from Offsetting Collections 378,825 2,532,447 2,911,272
Total Budgetary Resources $ 2,821,694 $ 7,475,094 $ 10,296,788

STATUS OF BUDGETARY RESOURCES
New obligations and upward adjustments (total) $ 1,535,235 $ 3,782,888 $ 5,318,123
Unobligated Balance, end of year:
Apportioned, unexpired accounts 390,580 1,081,724 1,472,304
Unapportioned, unexpired accounts 774,096 2,610,482 3,384,578
Unexpired unobligated balance, end of year 1,164,676 3,692,206 4,856,882
Expired unobligated balance, end of year 121,783 - 121,783
Total Unobligated Balance, end of year 1,286,459 3,692,206 4,978,665
Total Status of Budgetary Resources $ 2,821,694 $ 7,475,094 $ 10,296,788

CHANGE IN OBLIGATED BALANCE
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 485,198 $ 245,561 $ 730,759
New obligations and upward adjustments (total) 1,535,235 3,782,888 5,318,123
Gross Outlays (1,513,945) (3,784,215) (5,298,160)
Recoveries of Prior Year Unpaid Obligations (49,028) (43,253) (92,281)
Unpaid Obligations, end of year 457,460 200,981 658,441
Uncollected Payments:
Uncollected Payments, Federal Sources, brought forward, October 1 - (143,009) (143,009)
Change in Uncollected Payments, Federal Sources - 47,834 47,834
Uncollected Payments, Federal Sources, end of year - (95,175) (95,175)

Memorandum (non-add) entries:
Obligated Balance, start of year $ 485,198 $ 102,552 $ 587,750

Obligated Balance, end of year $ 457,460 $ 105,806 $ 563,266

BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross (discretionary and mandatory) $ 1,526,107 $ 3,083,395 $ 4,609,502
Actual Offsetting Collections (discretionary and mandatory) (388,340) (3,725,160) (4,113,500)
Change in Uncollected Customer Payments
from Federal Sources (discretionary and mandatory) - 47,834 47,834
Recoveries of prior year paid obligations (discretionary and mandatory) - - -
Budget Authority, net (discretionary and mandatory) $ 1,137,767 $ (593,931) $ 543,836

Gross Outlays (discretionary and mandatory) $ 1,513,945 $ 3,784,215 $ 5,298,160
Actual Offsetting Collections (discretionary and mandatory) (388,340) (3,725,160) (4,113,500)
Net Outlays (discretionary and mandatory) 1,125,605 59,055 1,184,660
Distributed Offsetting Receipts (6,364) (1,865,351) (1,871,715)
Agency Outlays, net (discretionary and mandatory) $ 1,119,241 $ (1,806,296) $ (687,055)

Note 15

The accompanying notes are an integral part of these statements.

56 AGENCY FINANCIAL REPORT • FY 2016
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NOTE 1 SIGNIFICANT ACCOUNTING POLICIES

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

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

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

The Federal Credit Reform Act of 1990 governs SBA’s accounting for direct loans and loan guaranties made in FY
1992 and thereafter. Under the FCRA, the liability for loan guaranties is determined as the summarized discounted
present value of the estimated future net cash inflows and outflows for each fiscal year’s cohort of guaranties. For direct
loans, the allowance is the current outstanding FCRA loans receivable balance less the discounted present value of the
estimated future net cash flows for all the loan cohorts. A cohort of loans receivable or guarantied loans is all of the
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 also uses economic assumptions provided by the Office of
Management and Budget in preparing the estimates. Actual results may differ from those assumptions and estimates,
and the differences may be significant. The most significant differences between actual results and these estimates may
occur in the valuation of credit program receivables and liabilities for loan guaranties under guidelines in the Federal
Credit Reform Act of 1990. The SBA recognizes the sensitivity of credit reform modeling to slight changes in some
model assumptions and therefore continually reviews its model factors and statistical modeling techniques to reflect
the most accurate credit program costs possible in its annual financial statements.

AGENCY FINANCIAL REPORT • FY 2016 57
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Budgets and Budgetary Accounting for Loan Programs
SBA’s loan disbursements are financed by appropriations for long-term loan subsidy cost and borrowings from the
Treasury’s Bureau of the Fiscal Service for the remaining non-subsidized portion of the loans. 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. 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 Federal Credit Reform Act of 1990, the SBA uses budgetary “program
accounts” to account for appropriations in its credit programs and nonbudgetary “financing accounts” to account for
credit program cash flow. Estimates and reestimates of credit program subsidy expenses are recorded in SBA’s program
accounts. Financing accounts are used to account for Treasury borrowings, the collection of loan fees, repayments, and
default recoveries, and the disbursement of loans and loan expenses.

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

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

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

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
deficits reported reflect timing differences between the recording of expenses and the recognition of resources. Most of
this timing difference results from subsidy reestimates that are funded in the following year.

58 AGENCY FINANCIAL REPORT • FY 2016
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Unexpended Appropriations
Unexpended Appropriations is the portion of SBA’s appropriations received that 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 that 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.

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. Amounts are
reported as unfunded to the extent current or prior year appropriations are not available to fund annual leave earned
but not taken. Sick leave and other types of non-vested leave are expensed as taken.

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

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

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

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

AGENCY FINANCIAL REPORT • FY 2016 59
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The OPM calculates imputed costs as the actuarial present value of future benefits attributed to services rendered by covered
employees and eligible retired SBA employees during the accounting period, net of the amounts contributed by employees,
retirees, and the Agency. The SBA recognizes these imputed costs in the Statement of Net Cost and imputed financing in
determining SBA’s net position.

FEDERAL EMPLOYEES’ COMPENSATION ACT
The Federal Employees’ Compensation Act provides income and medical cost protection to covered federal civilian
employees injured on the job and to beneficiaries of employees whose deaths are attributable to job-related injury or
disease. The FECA program is administered by the Department of Labor. Labor pays valid claims as they occur, which
are billed to the SBA annually and funded and paid approximately 15 months later. Labor also calculates an estimated
actuarial liability for future benefits based upon historical experience and other economic variables. Projected annual
benefit payments are then discounted to present value using the forecasted interest rates for 10-year Treasury notes
and bonds published by the OMB in its economic assumptions for the federal budget. The SBA recognizes a current
unfunded cost for the actual claims paid and the change in the FECA actuarial liability each year.

NOTE 2 FUND BALANCE WITH TREASURY
The Department of the Treasury processes cash receipts and disbursements on SBA’s behalf to pay liabilities and finance
loan program costs. Cash receipts are deposited into SBA’s account at the Treasury. SBA’s fund balances with the Treasury
are available to make expenditures to liquidate allowable obligations, except for the Non-entity Fund Balance which is not
available to the SBA to obligate or expend. Separate records are maintained for SBA’s program, financing, liquidating, sus-
pense/budget clearing accounts, and other accounts. Fund balances at the Treasury include expired year amounts, which are
unavailable for obligation, as well as amounts currently available for new obligations.

(Dollars in Thousands)

As of September 30, 2016 2015
Appropriated Funds $ 1,495,657 $ 1,657,534
Financing Funds 4,669,731 3,621,114
Liquidating Funds 786 918
Revolving Fund 88,735 85,257
Trust Fund 208 209
Total Entity Fund Balance with Treasury 6,255,117 5,365,032
Budget Clearing Account Balance 819 386
Total Fund Balance with Treasury $ 6,255,936 $ 5,365,418

Status of Fund Balance with Treasury
Apportioned, unexpired accounts $ 1,989,935 $ 1,472,304
Unapportioned, unexpired accounts 2,920,982 3,384,578
Obligated Balance Not Yet Disbursed 1,288,561 563,266
Expired Unobligated Balance 55,639 121,783
Borrowing Authority Not Converted to Funds - (176,899)
Nonbudgetary 819 386
Total Fund Balance with Treasury $ 6,255,936 $ 5,365,418

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

60 AGENCY FINANCIAL REPORT • FY 2016
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NOTE 3 CASH
The SBA field offices deposit collections from borrowers in SBA’s account at the Treasury using an electronic deposit
system. At the end of the fiscal year, collections temporarily held by SBA field offices pending deposit are recorded as
Undeposited Collections - Cash in Transit and totaled $1.8 million and $1.2 million at September 30, 2016, and 2015.

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. Fidu-
ciary cash and other assets are not assets of the government, and are not recognized on SBA’s proprietary statements, but they are
required to be disclosed in the notes to SBA’s financial statements. SBA’s fiduciary balances are on deposit in commercial banks.

The Master Reserve Fund is a fiduciary activity administered by SBA’s fiscal agent, Colson Services Corp., a subsidiary of the
Bank of New York Mellon. The balance in the MRF is invested according to SBA policy entirely in Treasury securities and repur-
chase agreements that are backed by Treasury securities. The MRF is an integral part of SBA’s 7(a) secondary market program.
The MRF was authorized by the Small Business Secondary Market Improvement Act of 1984 to facilitate the pooling of 7(a)
guarantied loans that are purchased by secondary market investors. The 7(a) secondary market program includes SBA’s guaranty
of timely payment, as well as a default guaranty, to 7(a) secondary market investors. The MRF supports $28.2 billion and $25.2
billion of outstanding SBA guarantied 7(a) loan principal in the secondary market at September 30, 2016, and 2015.

The Master Reserve Account is an SBA fiduciary activity that is administered for the SBA by Wells Fargo. The balance in the
MRA is invested entirely in Treasury securities. The MRA facilitates the operation of the 504 Development Company second-
ary market program. The MRA was authorized by Section 505 of the Small Business Investment Act of 1958 as amended, as a
vehicle to receive, temporarily hold and distribute 504 program cash flows. The MRA receives monthly payments from the 504
borrowers and retains the payments until a semi-annual debenture payment is due to the secondary market investors. The 504
secondary market program includes SBA’s guaranty of timely payment, as well as a default guaranty, to 504 secondary market
investors. The MRA supports $26.7 billion and $27.7 billion of SBA guarantied 504 debentures outstanding in the secondary
market at September 30, 2016, and 2015.

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

MASTER RESERVE FUND AND MASTER RESERVE ACCOUNT
(Dollars in Thousands)

FIDUCIARY ASSETS
As of September 30, 2016 2015
MRF MRA Total MRF MRA Total
Cash $ 12,466 $ – $ 12,466 $ 2,338 $ – $ 2,338
Short Term Securities
Money Market Funds - 730,806 730,806 5,866 722,814 728,680
Treasury Bills 973,602 – 973,602 719,705 – 719,705
Repurchase Agreements 486,995 – 486,995 201,800 – 201,800
Total Cash and Short Term Securities 1,473,063 730,806 2,203,869 929,709 722,814 1,652,523

Long Term Securities
Treasury Notes Including Interest 2,134,988 – 2,134,988 2,235,855 – 2,235,855
Total Long Term Securities 2,134,988 – 2,134,988 2,235,855 – 2,235,855

Net Assets $ 3,608,051 $ 730,806 $ 4,338,857 $ 3,165,564 $ 722,814 $ 3,888,378

AGENCY FINANCIAL REPORT • FY 2016 61
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MASTER RESERVE FUND AND MASTER RESERVE ACCOUNT
(Dollars in Thousands)

RECONCILIATION OF FIDUCIARY ASSETS
For the Years Ended September 30, 2016 2015
MRF MRA Total MRF MRA Total
Beginning Net Assets $ 3,165,564 $ 722,814 $ 3,888,378 $ 2,863,721 $ 636,789 $ 3,500,510
Receipts
Earned Income 29,214 1,115 30,329 30,661 98 30,759
Contributions 5,317,512 16,743,968 22,061,480 5,024,260 16,627,797 21,652,057
Net Realized Gain (Loss) 822 - 822 (3,435) – (3,435)
Total Receipts 5,347,548 16,745,083 22,092,631 5,051,486 16,627,895 21,679,381

Less Disbursements
Payments to Investors 4,905,061 16,737,091 21,642,152 4,749,643 16,541,870 21,291,513
Total Disbursements 4,905,061 16,737,091 21,642,152 4,749,643 16,541,870 21,291,513

Ending Net Assets $ 3,608,051 $ 730,806 $ 4,338,857 $ 3,165,564 $ 722,814 $ 3,888,378

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

(Dollars in Thousands)

As of September 30, 2016 2015
Intragovernmental
Administrative Receivables $ – $ 30
Total Intragovernmental $ – $ 30

Public
Guaranty Fees Receivable $ 78,982 $ 92,221
Refunds 776 545
Other 81,576 5,493
Total Public 161,334 98,259
Allowance For Loss (22) (53)
Net Public $ 161,312 $ 98,206

Accounts Receivable - Other increased due to a policy change whereby SBA now books a receivable when the lender fails
to provide required documentation for the purchase of defaulted loans by the required time frame.

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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 small businesses obtain bank loans and licensed companies to make investments
in qualifying small businesses. The SBA also makes loans to microloan intermediaries and provides a direct loan program
that assists homeowners, renters, and businesses to recover from disasters.

MAJOR DIRECT LOAN AND LOAN GUARANTY PROGRAMS
Program group Program type Program
Disaster Direct Disaster Assistance Loans
Business Guarantied 7(a) Loan Guaranty
Business Guarantied 504 Certified Development Company
Business Guarantied Small Business Investment Company Debentures
Business Direct 7(m) Microloan

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

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

The Section 504 Certified Development Company program guarantees 100 percent of the principal and interest pay-
ments on debentures issued by development companies that make small business loans secured primarily by real estate.

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

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

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 guaranty 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. Nom-
inal cash flow forecasts are discounted using the Office of Management and Budget’s Credit Subsidy Calculator that has
both forecasted and actual Treasury interest rates.

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

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

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

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

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 differ-
ence 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 allow-
ance 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 Section 504 Certified Development Company and Small Business Investment Company programs.
The advances are liquidated by receipt of the payments due from borrowers in these programs. Advance balances are
reported as Other Loans Receivable.

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

Foreclosed property is comprised of real and business-related and personal property acquired through foreclosure on
direct loans and defaulted loan guaranties. Properties acquired as a result of defaulted loans committed after FY 1991 are
shown at recoverable value which is adjusted to the present value of expected future cash flows for financial statement
presentation through the allowance for subsidy. Other foreclosed property is shown at the appraised value. At September
30, 2016, SBA’s foreclosed property was $24.2 million related to 86 loans. The properties had been held for an average of
1,187 days. At September 30, 2015, foreclosed property was $30.4 million related to 87 loans. The properties had been
held for an average of 1,106 days.

64 AGENCY FINANCIAL REPORT • FY 2016
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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 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 allow-
ance is offset against gross loan receivables to obtain SBA’s expected net collections from these assets. The SBA establishes a
100 percent allowance for pre-credit reform direct and guarantied loans that are past due more than 180 days. A liability is also
established for active pre-credit reform loan guaranties. The liability is estimated based on historical experience.

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

As of September 30, 2016 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 2,011 $ 173,528 $ 175,539
Interest Receivable 2,745 405 3,150
Foreclosed Property 3,113 – 3,113
Allowance (4,687) (13,128) (17,815)
Total Direct Business Loans 3,182 160,805 163,987

Direct Disaster Loans
Disaster Loans Receivable 1,931 5,992,848 5,994,779
Interest Receivable 196 34,337 34,533
Foreclosed Property – 1,874 1,874
Allowance (203) (939,342) (939,545)
Total Direct Disaster Loans 1,924 5,089,717 5,091,641

Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 1,512 3,941,186 3,942,698
Other Loans Receivable (see note below) – 222,318 222,318
Interest Receivable 9,042 37,845 46,887
Foreclosed Property 1,868 17,303 19,171
Allowance (4,723) (3,299,090) (3,303,813)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 7,699 919,562 927,261

Total Credit Program Receivables & Related Foreclosed Property, Net $ 6,182,889

As of September 30, 2015 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 5,631 $ 167,569 $ 173,200
Interest Receivable 2,277 528 2,805
Foreclosed Property 3,110 – 3,110
Allowance (6,672) (11,562) (18,234)
Total Direct Business Loans 4,346 156,535 160,881

Direct Disaster Loans
Disaster Loans Receivable 2,907 6,314,459 6,317,366
Interest Receivable 145 32,947 33,092
Foreclosed Property – 1,601 1,601
Allowance (555) (1,087,238) (1,087,793)
Total Direct Disaster Loans 2,497 5,261,769 5,264,266

Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 5,634 5,492,503 5,498,137
Other Loans Receivable (see note below) – 226,571 226,571
Interest Receivable 6,698 73,858 80,556
Foreclosed Property 2,019 23,628 25,647
Allowance (8,691) (4,744,622) (4,753,313)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 5,660 1,071,938 1,077,598

Total Credit Program Receivables & Related Foreclosed Property, Net $ 6,502,745

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

66 AGENCY FINANCIAL REPORT • FY 2016
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C. Loans Disbursed and Outstanding Loan Obligations
(Dollars in Thousands)

DIRECT LOANS
New Loans Disbursed During the Year Ended September 30, 2016 2015
Business Direct Loan Program $ 33,594 $ 25,917
Disaster Loan Program 401,121 294,066
Total Direct Loans Disbursed $ 434,715 $ 319,983

Outstanding Loan Obligations as of September 30, 2016 2015
Business Direct Loan Program $ 42,839 $ 43,991
Disaster Loan Program 851,495 116,667
Total Direct Loan Obligations $ 894,334 $ 160,658

GUARANTIED LOANS
New Loans Disbursed During the Year Ended September 30, 2016 2015
Total Principal Disbursed at Face Value $ 26,971,386 $ 24,933,967
Total Principal Disbursed Guarantied by the SBA 21,294,900 19,775,428

Outstanding Loan Obligations as of September 30, 2016 2015
Business Guarantied Loan Programs $ 16,766,201 $ 16,070,177

Loans Outstanding as of September 30, 2016 2015
Total Principal Outstanding at Face Value $ 113,113,553 $ 105,662,573
Total Principal Outstanding Guarantied by the SBA 93,764,878 88,337,969

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

D. Subsidy Cost Allowance Balances
(Dollars in Thousands)

For the Years Ended September 30, 2016 2015
Post-1991 Business Direct and Purchased Guarantied Loans
Beginning Balance of Allowance Account $ 4,756,184 $ 6,174,526
Current Year's Subsidy (see 6G for breakdown by component) 4,000 4,068
Loans Written Off (1,927,638) (2,110,027)
Subsidy Amortization (2,208) (2,207)
Allowance Related to Guarantied Loans Purchased This Year 182,476 404,131
Miscellaneous Recoveries and Costs 299,146 286,654
Balance of Subsidy Allowance Account before Reestimates 3,311,960 4,757,145
Technical Assumptions/Default Reestimates 258 (961)
Ending Balance of Allowance Account $ 3,312,218 $ 4,756,184

Post-1991 Disaster Direct Loans
Beginning Balance of Allowance Account $ 1,087,238 $ 1,230,152
Current Year's Subsidy (see 6G for breakdown by component) 48,397 33,908
Loans Written Off (111,340) (118,547)
Subsidy Amortization (4,987) (6,621)
Miscellaneous Recoveries and Costs 77,684 66,110
Balance of Subsidy Allowance Account before Reestimates 1,096,992 1,205,002
Technical Assumptions/Default Reestimates (157,650) (117,764)
Ending Balance of Allowance Account $ 939,342 $ 1,087,238

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E. Liability for Loan Guaranties
(Dollars in Thousands)

For the Years Ended September 30, 2016 2015
Pre-1992 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties $ 14 $ 70
Adjustment to Expected Losses, Guaranties Outstanding (7) (56)
Ending Balance of Liability for Loan Guaranties 7 14

Post-1991 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties 1,661,502 2,044,439
Current Year's Subsidy (see 6G for breakdown by component) 26,292 55,102
Fees 1,247,356 1,219,836
Interest Accumulation Factor 76,294 91,231
Claim Payments to Lenders (847,342) (1,126,127)
Adjustment Due to Reestimate & Guarantied Loan Purchases 664,866 721,995
Miscellaneous Recoveries and Costs 11,358 43,720
Balance of Liability for Loan Guaranties before Reestimates 2,840,326 3,050,196
Technical Assumptions/Default Reestimates (468,828) (1,388,694)
Ending Balance of Liability for Loan Guaranties 2,371,498 1,661,502

Total Ending Balance of Liability for Loan Guaranties $ 2,371,505 $ 1,661,516

F. 2016 Subsidy Rates by Program and Component
LOAN PROGRAM Total Financing Default Other Fee
Subsidy
Guaranty
7(a) 0.00% 0.00% 4.21% 0.00% -4.21%
504 CDC 0.00% 0.00% 7.32% 0.73% -8.05%
504 Refi 0.00% 0.00% 7.62% 0.72% -8.34%
SBIC Debentures 0.00% 0.00% 6.68% 0.08% -6.76%

Direct
Disaster 12.10% 2.56% 13.64% -4.10% 0.00%
Microloan 8.87% 7.41% 1.60% -0.14% 0.00%

The subsidy rates in Table F pertain only to loans obligated in the current year. These rates cannot be applied to the loans
disbursed during the current year to yield the subsidy expense because loans disbursed during the current year include
loans obligated in prior years. Subsidy expenses reported in Table G result from the disbursement of loans obligated in
the current year as well as in prior years, and include reestimates.

68 AGENCY FINANCIAL REPORT • FY 2016
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G. Subsidy Expense by Component
(Dollars in Thousands)

For the Years Ended September 30, 2016 2015
Business Loan Guaranties
Interest $ - $ 2
Defaults 228,080 509,812
Fees (221,728) (483,888)
Other 19,940 29,176
Subsidy Expense Before Reestimates and Loan Modifications 26,292 55,102
Reestimates (468,828) (1,388,694)
Total Guarantied Business Loan Subsidy Expense $ (442,536) $ (1,333,592)

Business Direct Loans
Interest $ 2,585 $ 2,126
Defaults 693 544
Other 722 1,398
Subsidy Expense Before Reestimates 4,000 4,068
Reestimates 258 (961)
Total Business Direct Loan Subsidy Expense $ 4,258 $ 3,107

Disaster Direct Loans
Interest $ 10,943 $ 9,435
Defaults 54,571 39,804
Other (17,117) (15,331)
Subsidy Expense Before Reestimates 48,397 33,908
Reestimates (157,650) (117,764)
Total Disaster Direct Loan Subsidy Expense $ (109,253) $ (83,856)

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

(Dollars in Thousands)

For the Years Ended September 30, 2016 2015
Disaster Direct Loan Programs $ 212,265 $ 172,624
Business Loan Programs 151,692 146,778
Total Administrative Expense $ 363,957 $ 319,402

I. Credit Program Subsidy Reestimates
Reestimates are performed annually, on a cohort-by-cohort basis. The purpose of reestimates is to update original
program cost estimates to reflect actual cash flow experience as well as changes in forecasts of future cash flows. Forecasts
of future cash flows are updated based on additional information about historical program performance, revised
expectations for future economic conditions, and enhancements to cash flow projection methods. Financial statement
reestimates were performed using a full year of performance data for FY 2016 for SBA’s large loan programs and with
nine months of actual and three months of projected performance data for the Secondary Market Guaranty, Microloan,
and the small loan programs.

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F I N A N C I A L RE P O RT I N G

BUSINESS GUARANTIED LOAN PROGRAMS
Net subsidy reestimates for the business guarantied loan programs follows:
(Dollars in Thousands)

For the Years Ended September 30, 2016 2015
7(a) $ (163,406) $ (268,899)
7(a) - Recovery Act 19,218 46,109
7(a) - Jobs Act 10,184 (8,605)
Dealer Floor Plan (167) (450)
504 CDC (617,004) (795,992)
504 CDC - Recovery Act (46,505) (105,987)
504 CDC - Jobs Act (10,369) (25,946)
504 CDC - Debt Refinancing (24,683) (72,831)
504 First Mortgage Loan Pooling - Recovery Act 3,686 (7,254)
SBIC Debentures (156,544) (154,625)
SBIC Participating Securities (40,499) (76,888)
Secondary Market Guaranty Program 546,107 84,477
ARC - Recovery Act (1,387) (8,877)
All Other Guaranty Loan Programs 12,541 7,074
Total Guarantied Loan Program Subsidy Reestimates $ (468,828) $ (1,388,694)

The 7(a) Loan Guaranty program, SBA’s flagship and largest program had a net downward reestimate in FY 2016 of
$163.4 million. The reestimate is primarily due to lower than expected purchases in cohorts 2011 through 2016,
partially offset by lower than expected recoveries in cohorts 2013 through 2015. Cohorts 2007 through 2010
experienced higher than projected purchases in FY2016, which were offset by higher than expected recoveries for those
cohorts. The FY 2016 cohort experienced a slight upward reestimate due to increased loss projections as compared
to the original loss projections.

The 7(a) Recovery Act program had a net upward reestimate in FY 2016 of $19.2 million. The reestimate is primarily
due to higher than expected purchases in FY 2016, partially offset by higher than expected recoveries. FY 2016 loan
performance contributed to updated model assumptions, which resulted in decreased recovery projections.

The 7(a) Jobs Act cohort had a net upward reestimate in FY 2016 of $10.2 million. The reestimate is due to higher than
expected purchases and lower than expected recoveries in FY 2016. FY 2016 loan performance contributed to updated
model assumptions, which resulted in decreased recovery projections.

The Dealer Floor Plan program had a net downward reestimate of $0.2 million due to better than projected performance
during FY 2016.

The 504 Certified Development Company program had a net downward reestimate of $617.0 million. The reestimate
is primarily due to better than projected FY 2016 loan performance across all but one cohort. Although some cohorts
had higher than expected purchases, these higher than expected losses were offset by higher than expected recoveries. FY
2016 loan performance contributed to updated model assumptions which resulted in decreased purchase and increased
recovery rate projections. The remainder of the reestimate was due to decreased loss projections for the 2016 cohort as
compared to the original loss projections.

The 504 Recovery Act program had a net downward reestimate of $46.5 million. The reestimate is mostly due to better
than projected FY 2016 loan performance. Actual purchases in the 504 Recovery Act program were less than half of the
purchases projected for FY 2016.

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The 504 Jobs Act program had a net downward reestimate of $10.4 million. The reestimate is mostly due to better than
projected FY 2016 loan performance. Actual purchases in the 504 Jobs Act program were less than half the purchases
projected for FY 2016.

The 504 Debt Refinancing program had a net downward reestimate of $24.7 million. The reestimate is mostly due to
better than projected FY 2016 loan performance. Actual purchases in the 504 Debt Refinancing program were less than
projected for both cohorts, while actual recoveries were more than projected for both cohorts. The FY 2016 loan perfor-
mance contributed to revised assumptions which resulted in decreased purchase and increased recovery rate projections.
Newly reauthorized in FY 2016, this amount includes a downward reestimate of $0.2 million for the 2016 cohort reflect-
ing decreased loss projections compared to the original loss projections.

The Section 504 First Mortgage Loan Pooling program had a net upward reestimate of $3.7 million. The majority of
the reestimate is due to lower than projected recoveries in FY 2016. Faster than projected repayment of principal also
contributed to a reduction in projected on-going fee revenue.

The SBIC Debentures program had a net downward reestimate of $156.5 million. The primary driver of the reestimate
was better than projected loan performance in FY 2016. No new purchases were recorded in FY 2016 for any cohort,
while actual recoveries were greater than projected, specifically in the 2003 and 2009 cohorts. Additionally, updated
performance expectation of the 2016 cohort contributed to the downward reestimate.

The SBIC Participating Securities program had a net downward reestimate of $40.5 million. The downward reestimate
was due to better-than-expected loan performance in FY 2016, particularly for the 2004 cohort. The main driver of the
downward reestimate was lower purchases and higher recoveries than projected in FY 2016. The better-than-projected
recoveries and purchases were partially offset by lower reimbursements of prioritized payments in FY 2016.

The Secondary Market Guaranty program had a net upward reestimate of $546.1 million. The upward reestimate was
larger than expected in part due to reconciliation procedures instituted in FY 2016 related to the available cash positions
between the trustee and fiscal agent accounts. The reconciliation procedures between fiscal agent and trustee, while mate-
rially reconciled in total, reduced the cash available balance category to cover future MRF liabilities and in turn resulted
in an upward reestimate.

The America’s Recovery Capital program had a net downward reestimate of $1.4 million. The majority of this reestimate
is due to lower than projected purchases and higher than expected recoveries in FY 2016 for both cohorts.

The New Market Venture Capital program had a net upward reestimate of $12.5 million. The upward reestimate was
driven by higher purchases than expected in FY 2016 with no additional forecasted recoveries.

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

For the Years Ended September 30, 2016 2015
7(m) Microloan $ 224 $ (542)
7(m) Microloan - Recovery Act 82 1,491
Intermediary Lending Pilot Program (41) (1,885)
All Other Direct Loan Programs (7) (25)
Total Direct Loan Program Subsidy Reestimates $ 258 $ (961)

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The 7(m) Direct Microloan program had a net upward reestimate of $0.2 million. The upward reestimate is partially due
to higher projected purchases and lower recoveries in the current year. These projections are partially offset by an increase in
projected prepayments.

The 7(m) Direct Microloan Recovery Act program had a net upward reestimate of $0.1 million. The upward reestimate is
primarily due to a decrease in projected recoveries in future years for both cohorts. This is partially offset by a decrease in
projected defaults.

The Intermediary Lending Pilot program had a net downward reestimate of $0.04 million. The slightly downward
reestimate was primarily due to lower projected defaults for future years for both the 2011 and 2012 cohorts. The lower
projected defaults were partially offset by lower projected recoveries.

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

For the Years Ended September 30, 2016 2015
Disaster $ (157,650) $ (117,764)
Total Disaster Direct Loan Program Subsidy Reestimates $ (157,650) $ (117,764)

The Disaster Assistance program had a net downward reestimate of $157.7 million. Most Disaster cohorts (except
for the 2015 and the 2016 regular cohorts) experienced downward reestimates as a result of better than expected
performance in FY 2016 and revised performance assumptions. The 2015 cohort experienced a downward reesti-
mate due to updated present value factors applied to projected cash flows, as well as revised performance assump-
tions. The 2016 cohort is the only cohort that experienced an upward reestimate. The reestimate is due to the
actual average borrower’s interest rate being lower than the original projected average borrower’s interest rate.

NOTE 7 GENERAL PROPERTY AND EQUIPMENT, NET
The SBA capitalizes equipment with a cost of $50,000 or more per unit and a useful life of 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 $50,000 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 $250,000 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 inter-
nal 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.

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Assets meeting the capitalization thresholds are detailed below.
(Dollars in Thousands)

As of September 30, 2016 2015
Equipment $ 2,675 $ 2,675
Accumulated Depreciation (2,675) (2,663)
Net - 12

Leasehold Improvements 1,811 1,811
Amortization of Leasehold Improvements (1,079) (1,004)
Net 732 807

Software in Use 35,863 35,863
Amortization of Software in Use (35,770) (34,120)
Net 93 1,743

Total General Property and Equipment, Net $ 825 $ 2,562

NOTE 8 LIABILITIES NOT COVERED BY BUDGETARY RESOURCES
These unfunded liabilities consisted of:
(Dollars in Thousands)

As of September 30, 2016 2015
Intragovernmental Liabilities - Other
Employment Taxes Payable $ 294 $ 320
Federal Employees' Compensation Act Payable 6,580 6,403
Total Intragovernmental Liabilities - Other 6,874 6,723

Federal Employees' Compensation Act Actuarial Liability 32,676 31,691

Surety Bond Guarantee Program Future Claims 43,430 43,679

Other Liabilities
Prior Liens on Real Estate Payable 59 59
Accrued Unfunded Annual Leave 25,799 24,976
Total Other Liabilities 25,858 25,035

Total Liabilities Not Covered by Budgetary Resources $ 108,838 $ 107,128

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

AGENCY FINANCIAL REPORT • FY 2016 73
F I N A N C I A L RE P O RT I N G

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

All debt is intragovernmental and covered by budgetary resources. Debt transactions and resulting balances are:

INTRAGOVERNMENTAL DEBT
(Dollars in Thousands)

As of September 30, 2016 2015
Beginning Balance $ 7,175,344 $ 7,756,100
New Borrowing 1,787,103 564,871
Repayments (942,921) (1,145,627)
Ending Balance $ 8,019,526 $ 7,175,344

NOTE 10 NET ASSETS OF LIQUIDATING FUNDS DUE TO TREASURY
Net Assets of Liquidating Funds Due to the Treasury is the residual of the book value of assets less liabilities in the
Liquidating Funds for loans made prior to FY 1992. The FY 2016 and FY 2015 balances include the transfer of the
unobligated balance to the Treasury at September 30.

(Dollars in Thousands)

As of September 30, 2016 2015
Disaster Loan Fund $ 1,924 $ 2,497
Business Loan and Investment Fund 12,900 11,321
Total Due Treasury $ 14,824 $ 13,818

74 AGENCY FINANCIAL REPORT • FY 2016
FI N A N CI A L REPORT IN G

NOTE 11 OTHER LIABILITIES
Other liabilities were:
(Dollars in Thousands)

As of September 30, 2016 2015
OTHER LIABILITIES - INTRAGOVERNMENTAL
Entity
Current
Employment Taxes Payable $ 3,530 $ 2,486
Advances from Other Agencies 2,189 932
Total Current 5,719 3,418
Non-current
Employment Taxes Payable 294 320
Federal Employees’ Compensation Act Payable 6,580 6,403
Total Non-current 6,874 6,723
Total Entity 12,593 10,141
Non-entity
Current
Payable to Treasury 6 6
Total Other Liabilities - Intragovernmental $ 12,599 $ 10,147
OTHER LIABILITIES - PUBLIC
Entity
Current
Accrued Funded Payroll and Benefits $ 14,291 $ 9,261
Accrued Unfunded Annual Leave 25,799 24,976
Other Liabilities 83 955
Suspense Accounts 908 578
Total Current 41,081 35,770
Non-current
Prior Liens on Real Estate Payable 59 59
Total Non-current 59 59
Total Entity 41,140 35,829
Total Other Liabilities - Public $ 41,140 $ 35,829

NOTE 12 LEASES
The SBA leases all of its facilities from the General Services Administration. The SBA enters into an Occupancy Agreement
with GSA for each facility. GSA, in turn, leases commercial facilities or provides space in federal buildings. Agreements
for space in federal buildings can be vacated with 120 to 180 days notice. However, the SBA anticipates continuing the
same or similar facilities leases in the future. These leases with GSA are operating leases and are expensed in the Statement
of Net Cost when incurred. FY 2016 and 2015 facilities lease costs were $45.0 million and $44.9 million. Future lease
payments shown here assume a 3 percent inflation factor from the following years’ projected totals as estimated by GSA,
as well as continued costs during the next five years as leases expire and new leases are added. Payments after five years
reflect only current leases that will still be in effect then, projected to the end of each lease term.

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FUTURE FACILITIES OPERATING LEASE PAYMENTS
(Dollars in Thousands)

Fiscal Year Lease Payments
2017 $ 46,275
2018 47,663
2019 49,093
2020 50,565
2021 52,082
After 2021 20,704
Total $ 266,382

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 reesti-
mates 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 because 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, 2016 2015
Entity
Financing Fund Payable $ (1,239,814) $ (1,600,653)

Non-entity
Miscellaneous Receipts Fund Receivable 1,239,814 1,600,653
Downward Reestimate Payable to Treasury (1,239,814) (1,600,653)
Balance Sheet Reported Payable $ (1,239,814) $ (1,600,653)

76 AGENCY FINANCIAL REPORT • FY 2016
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NOTE 14 CONSOLIDATED STATEMENT OF NET COST
Federal cost accounting standards require the SBA to report operating costs by strategic goal activity. Full costs include
all direct and indirect costs for a strategic goal. Full costs are reduced by exchange (earned) revenues to arrive at net
operating cost.

Operating Cost
The full and net operating costs of SBA’s major strategic goals are presented in the Consolidated Statement of Net Cost.
Full costs are comprised of all direct costs for the strategic goals and those indirect costs which can be reasonably assigned
or allocated to the strategic goals, including employee pension and other retirement benefit costs paid by the OPM and
charged to the SBA.

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

Reporting by Strategic Goal
The SBA reports net costs consistent with its three strategic goals on a full cost allocation basis. Strategic Goal 1 (Growing
Businesses and Creating Jobs) includes SBA’s loan, disaster and other assistance programs, and STEP grants. Strategic Goal
2 (Serving as the Voice for Small Business) includes small business advocacy and programs to promote entrepreneurship in
economic sectors and communities where market gaps remain. Strategic Goal 3 (Building an SBA that Meets the Needs of
Today’s and Tomorrow’s Small Businesses) contains lender oversight costs. Agency administrative overhead costs are fully
allocated to the programs in Strategic Goals 1, 2, and 3. The Management’s Discussion and Analysis section of SBA’s annual
Agency Financial Report includes additional detail on SBA’s strategic goals. Costs Not Assigned to Strategic Goals include
the Office of the Inspector General and grants made under congressionally mandated programs. The Office of the Inspector
General’s mission and funding is a separate, independent part of the SBA and is therefore not assigned. Congressional
mandated grants do not necessarily involve small business and are also not assigned.

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

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

SBA’s Gross Cost with the Public in Strategic Goal 1 is largely determined by estimates and reestimates of its credit program
costs (See Note 6I). Downward reestimates of these costs caused the credit to Gross Cost with the Public in FY 2015.

AGENCY FINANCIAL REPORT • FY 2016 77
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INTRAGOVERNMENTAL COSTS AND EXCHANGE REVENUE
(Dollars in Thousands)
For the Years Ended September 30, 2016 2015
STRATEGIC GOAL 1:
Growing Businesses and Creating Jobs
Intragovernmental Gross Cost $ 497,377 $ 461,443
Gross Cost with the Public 100,306 (827,119)
Total Strategic Goal 1 Gross Cost 597,683 (365,676)

Intragovernmental Earned Revenue 136,824 109,099
Earned Revenue from the Public 320,679 354,725
Total Strategic Goal 1 Earned Revenue 457,503 463,824

STRATEGIC GOAL 2:
Serving as the Voice for Small Business
Intragovernmental Gross Cost $ 30,378 $ 27,432
Gross Cost with the Public 92,773 82,206
Total Strategic Goal 2 Gross Cost 123,151 109,638

STRATEGIC GOAL 3:
Building an SBA that Meets the Needs of Today’s and Tomorrow’s
Small Businesses
Intragovernmental Gross Cost $ 10,194 $ 10,115
Gross Cost with the Public 31,132 30,312
Total Strategic Goal 3 Gross Cost 41,326 40,427

COST NOT ASSIGNED TO STRATEGIC GOALS
Intragovernmental Gross Cost $ 8,589 $ 8,718
Gross Cost with the Public 26,231 26,127
Total Gross Cost Not Assigned to Strategic Goals 34,820 34,845

Net Cost of Operations $ 339,477 $ (644,590)

NOTE 15 COMBINED STATEMENT OF BUDGETARY RESOURCES
The Combined Statement of Budgetary Resources presents information about total budgetary resources available to the
SBA and the status of those resources as of September 30, 2016, and 2015. SBA’s total budgetary resources were $2.8
billion and $2.8 billion for the years ended September 30, 2016, and 2015. Additionally, $8.1 billion and $7.5 billion
of nonbudgetary resources including borrowing authority and collections of loan principal, interest and fees in financing
funds were reported for the years ended September 30, 2016, and 2015.

OMB Circular A-136 required a change in format for the Combined Statement of Budgetary Resources. The FY 2015
balances have been reclassified for comparability as required by Circular A-136.

Permanent Indefinite Appropriations
The SBA receives permanent indefinite appropriations annually to fund increases in the projected subsidy costs of
loan programs as determined by the reestimation process required by the Federal Credit Reform Act of 1990. The
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

78 AGENCY FINANCIAL REPORT • FY 2016
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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 2016 and FY 2015, the SBA received $1.6 billion and $0.6 billion of borrowing authority from OMB. At the end
of FY 2016, the SBA had no borrowing authority carried over to fund direct loans and default claims to be disbursed
in the future. At the end of FY 2015, the SBA had $0.2 billion in available borrowing authority. The SBA pays interest
to the Treasury based on Treasury’s cost of funds. The rate at which interest is paid to the Treasury on the amounts
borrowed (or received from the Treasury on uninvested cash balances) in a loan financing fund for a particular cohort
is a disbursement-weighted average discount rate for cohorts prior to FY 2001 and a single effective rate for cohorts
beginning with FY 2001. The SBA calculates and repays borrowings not needed for working capital at midyear 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 the borrowing from the Treasury
are based on the loan maturities used in the subsidy calculation. The maturities range from 16 years for Direct Business
loans, 25 years for Guarantied Business loans, and 30 years for Disaster loans.

Apportionment Categories of Obligations Incurred
During FY 2016 and FY 2015, the SBA incurred $5.911 billion and $5.318 billion of direct and reimbursable obliga-
tions of which $0.016 billion and $0.020 billion were apportioned in category A; $5.895 billion and $5.298 billion were
apportioned in category B. Category A apportionments are restricted by quarter and program, category B apportion-
ments are restricted by purpose and program.

Unobligated Balances
Unobligated balances at September 30, 2016, and September 30, 2015, are $5.0 billion and $5.0 billion, which include
$3.0 billion and $3.5 billion of unavailable unobligated balances. These balances are unavailable primarily because they
are unapportioned by the OMB. The SBA accumulates the majority of these unobligated balances in its nonbudgetary
financing accounts during the fiscal year ($3.9 billion in FY 2016 and $3.7 billion in FY 2015) from reestimates that
are used primarily to pay default claims in the following fiscal year. In addition, unobligated balances are accumulated in
budgetary accounts from appropriations ($1.1 billion in FY 2016 and $1.3 billion in FY 2015) that are used to finance
SBA’s ongoing program operations. The SBA requests OMB apportionments as needed, and after OMB approval,
apportioned amounts are available for obligation.

Undelivered Orders
Undelivered orders are obligations that have not yet been disbursed by the SBA. Undelivered orders for the periods ended
September 30, 2016, and 2015 were $1.3 billion and $0.5 billion.

AGENCY FINANCIAL REPORT • FY 2016 79
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Differences between the Statement of Budgetary Resources and the Budget of the
U.S. Government
There was no material difference between the FY 2015 Statement of Budgetary Resources and the President’s FY 2017
budget submission. The President’s FY 2018 Budget with actual numbers for FY 2016 has not yet been published. The
SBA expects no material differences between the President’s Budget “actual” column and the FY 2016 reported results
when the budget becomes available in February 2017.

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

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

80 AGENCY FINANCIAL REPORT • FY 2016
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CONSOLIDATED RECONCILIATION OF BUDGETARY OBLIGATIONS TO NET COST
(Dollars in Thousands)

For the Years Ended September 30, 2016 2015
RESOURCES USED TO FINANCE ACTIVITIES
Budgetary Resources Obligated
Obligations Incurred $ 5,911,456 $ 5,318,123
Less: Spending Authority from Offsetting Collections and Recoveries 4,183,257 4,157,947
Obligations Net of Offsetting Collections and Recoveries 1,728,199 1,160,176
Less: Offsetting Receipts 1,650,432 1,871,715
Net Obligations 77,767 (711,539)
Other Resources
Imputed Financing 18,158 16,050
Other Financing Sources (1,294,974) (1,841,457)
Net Other Resources Used to Finance Activities (1,276,816) (1,825,407)
Total Resources Used to Finance Activities (1,199,049) (2,536,946)

RESOURCES THAT DO NOT FINANCE NET COST OF OPERATIONS
(Increase) Decrease in Budgetary Resources Obligated for Goods, Services,
and Benefits Ordered But Not Yet Provided (725,222) (6,803)
Resources that Fund Expenses Recognized in Prior Periods (263,873) (201,087)
Budgetary Offsetting Collections and Receipts that Do Not Affect Net Cost of Operations
Credit Program Collections 3,641,970 3,725,160
Offsetting Receipts 1,650,432 1,871,715
Resources that Finance the Acquisition of Assets or Liquidation of Liabilities (3,430,648) (3,771,717)
Other - Current Year Liquidating Equity Activity 4,639 12,736
Other Resources that Do Not Affect Net Cost of Operations (95) 72
Total Resources that Do Not Finance Net Cost of Operations 877,203 1,630,076

Total Resources Used to Finance the Net Cost of Operations (321,846) (906,870)

COMPONENTS OF THE NET COST OF OPERATIONS THAT WILL NOT
REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD
Components Requiring or Generating Resources in Future Periods
Change in Annual Leave Liability 823 (1,385)
Change in Contingent Liability - (464)
Upward Reestimates of Credit Subsidy Expense 655,303 263,633
Change in Revenue Receivable from Public (3,012) (5,627)
Provision for Losses on Estimated Guaranties (249) 7,880
Change in Unfunded Employee Benefits 1,136 (3,775)
Total Components Requiring or Generating Resources in Future Periods 654,001 260,262

Components Not Requiring or Generating Resources
Depreciation or Amortization 1,737 2,104
Change in Bad Debt Expense - Pre-1992 Loans 5,525 24
Other (Income) Expenses Not Requiring Budgetary Resources 60 (110)
Total Components Not Requiring or Generating Resources 7,322 2,018

Total Components of the Net Cost of Operations that Will Not
Require or Generate Resources in the Current Period 661,323 262,280
Net Cost of Operations $ 339,477 $ (644,590)

AGENCY FINANCIAL REPORT • FY 2016 81
F I N A N C I A L RE P O RT I N G

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

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

As of September 30, 2016 2015
Current Year Liabilities Not Covered By Budgetary Resources $ 108,838 $ 107,128
Less: Prior Year 107,128 104,408
Change in Liabilities Not Covered By Budgetary Resources 1,710 2,720
Upward Reestimates of Credit Subsidy Expense 655,303 263,633
Change in Revenue Receivable from Public (3,012) (5,627)
All Other - (464)
Components (of Net Cost) Generating Resources in Future Periods
(Per Reconciliation Above) $ 654,001 $ 260,262

82 AGENCY FINANCIAL REPORT • FY 2016
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REQUIRED SUPPLEMENTARY INFORMATION
COMBINING STATEMENT OF BUDGETARY RESOURCES
For the Year Ended September 30, 2016 (Unaudited)

(Dollars in Thousands) BLIF DLF SBGRF

Nonbudgetary Nonbudgetary
Budgetary Financing Budgetary Financing Budgetary

BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 175,747 $ 3,421,284 $ 705,557 $ 270,922 $ 85,253
Recoveries of Prior Year Obligations 12,015 2,558 5,492 45,401 -
Other Changes in Unobligated Balance (71,579) (10,500) - - 3,170
Unobligated Balance from Prior Year Budget
116,183 3,413,342 711,049 316,323 88,423
Authority, net
Appropriations (discretionary and mandatory) 419,782 - 196,686 - -
Borrowing Authority (discretionary and mandatory) - 185,298 - 1,424,904 -
Spending Authority from Offsetting Collections (1) 2,515,319 - 244,094 16,527
Total Budgetary Resources $ 535,964 $ 6,113,959 $ 907,735 $ 1,985,321 $ 104,950

STATUS OF BUDGETARY RESOURCES
New obligations and upward adjustments (total) $ 419,781 $ 2,636,862 $ 339,630 $ 1,573,863 $ 16,602
Unobligated Balance, end of year:
Apportioned, unexpired accounts - 1,285,986 44,959 404,471 3,103
Unapportioned, unexpired accounts 114,411 2,191,111 523,146 6,987 85,245
Unexpired unobligated balance, end of year 114,411 3,477,097 568,105 411,458 88,348
Expired unobligated balance, end of year 1,772 - - - -
Total Unobligated Balance, end of year 116,183 3,477,097 568,105 411,458 88,348
Total Status of Budgetary Resources $ 535,964 $ 6,113,959 $ 907,735 $ 1,985,321 $ 104,950

CHANGE IN OBLIGATED BALANCES
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 81,919 $ 82,753 $ 13,876 $ 118,228 $ 4
New obligations and upward adjustments 419,781 2,636,862 339,630 1,573,863 16,602
Gross Outlays (447,042) (2,646,884) (245,144) (790,652) (16,218)
Recoveries of Prior Year Unpaid Obligations (12,015) (2,558) (5,492) (45,401) –
Unpaid Obligations, end of year 42,643 70,173 102,870 856,038 388
Uncollected Payments:
Uncollected Payments, Federal sources
brought forward, October 1 – (81,129) – (14,046) –
Change in Uncollected Payments, Federal Sources – 39,193 – (89,054) –
Uncollected Payments, Federal Sources, end of year – (41,936) – (103,100) –
Memorandum (non-add) entries:
Obligated Balance, start of year $ 81,919 $ 1,624 $ 13,876 $ 104,182 $ 4
Obligated Balance, end of year $ 42,643 $ 28,237 $ 102,870 $ 752,938 $ 388

BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross (discretionary and mandatory) $ 419,781 $ 2,700,617 $ 196,686 $ 1,668,998 $ 16,527
Actual Offsetting Collections
(3,463) (2,632,340) (1,159) (1,009,630) (19,697)
(discretionary and mandatory)
Change in Uncollected Customer Payments
from Federal Sources
– 39,193 – (89,054) –
(discretionary and mandatory)
Recoveries of prior year paid obligations
453 – – – 3,170
(discretionary and mandatory)
Budget Authority, net
(discretionary and mandatory) $ 416,771 $ 107,470 $ 195,527 $ 570,314 $ –

Gross Outlays (discretionary and mandatory) $ 447,042 $ 2,646,884 $ 245,144 $ 790,652 $ 16,218
Actual Offsetting Collections
(3,463) (2,632,340) (1,159) (1,009,630) (19,697)
(discretionary and mandatory)
Net Outlays (discretionary and mandatory) 443,579 14,544 243,985 (218,978) (3,479)
Distributed Offsetting Receipts – (1,527,841) – (123,333) –
Agency Outlays, net (discretionary and mandatory) $ 443,579 $ (1,513,297) $ 243,985 $ (342,311) $ (3,479)

AGENCY FINANCIAL REPORT • FY 2016 83
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REQUIRED SUPPLEMENTARY INFORMATION (continued)
COMBINING STATEMENT OF BUDGETARY RESOURCES
For the Year Ended September 30, 2016 (Unaudited)

(Dollars in Thousands) SE OIG ADVOCACY EDP BATF TOTAL TOTAL

Nonbudgetary
Budgetary Budgetary Budgetary Budgetary Budgetary Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance Brought Forward, October 1 $ 296,119 $ 11,615 $ 690 $ 11,273 $ 205 $ 1,286,459 $ 3,692,206 $ 4,978,665
Recoveries of Prior Year Obligations 32,372 117 104 5,540 – 55,640 47,959 103,599

Other Changes in Unobligated Balance (18,358) (104) – 10 – (86,861) (10,500) (97,361)
Unobligated Balance from Prior Year Budget
310,133 11,628 794 16,823 205 1,255,238 3,729,665 4,984,903
Authority, net
Appropriations (discretionary and mandatory) 266,300 19,900 9,120 232,800 – 1,144,588 – 1,144,588
Borrowing Authority (discretionary and mandatory) – – – – – – 1,610,202 1,610,202
Spending Authority from Offsetting Collections 359,769 1,001 – 1,600 10 378,906 2,759,413 3,138,319
Total Budgetary Resources $ 936,202 $ 32,529 $ 9,914 $ 251,223 $ 215 $ 2,778,732 $ 8,099,280 $ 10,878,012

STATUS OF BUDGETARY RESOURCES
New obligations and upward adjustments (total) $ 658,660 $ 20,034 $ 9,158 $ 236,827 $ 39 $ 1,700,731 $ 4,210,725 $ 5,911,456
Unobligated Balance, end of year:
Apportioned, unexpired accounts 234,261 6,660 756 9,563 176 299,478 1,690,457 1,989,935
Unapportioned, unexpired accounts 82 – – – – 722,884 2,198,098 2,920,982
Unexpired unobligated balance, end of year 234,343 6,660 756 9,563 176 1,022,362 3,888,555 4,910,917
Expired unobligated balance, end of year 43,199 5,835 – 4,833 – 55,639 – 55,639
Total Unobligated Balance, end of year 277,542 12,495 756 14,396 176 1,078,001 3,888,555 4,966,556
Total Status of Budgetary Resources $ 936,202 $ 32,529 $ 9,914 $ 251,223 $ 215 $ 2,778,732 $ 8,099,280 $ 10,878,012

CHANGE IN OBLIGATED BALANCES
Unpaid Obligations:
Unpaid Obligations, Brought Forward, October 1 $ 174,040 $ 2,567 $ 1,662 $ 183,388 $ 4 $ 457,460 $ 200,981 $ 658,441
New obligations and upward adjustments 658,660 20,034 9,158 236,827 39 1,700,731 4,210,725 5,911,456
Gross Outlays (647,055) (19,668) (9,099) (210,928) (11) (1,595,165) (3,437,536) (5,032,701)
Recoveries of Prior Year Unpaid Obligations (32,372) (117) (104) (5,540) - (55,640) (47,959) (103,599)
Unpaid Obligations, end of year 153,273 2,816 1,617 203,747 32 507,386 926,211 1,433,597
Uncollected Payments:
Uncollected Payments, Federal sources
brought forward, October 1 – – – – – – (95,175) (95,175)

Change in Uncollected Payments, Federal Sources – – – – – – (49,861) (49,861)
Uncollected Payments, Federal Sources, end of year – – – – – – (145,036) (145,036)
Memorandum (non-add) entries:
Obligated Balance, start of year $ 174,040 $ 2,567 $ 1,662 $ 183,388 $ 4 $ 457,460 $ 105,806 $ 563,266
Obligated Balance, end of year $ 153,273 $ 2,816 $ 1,617 $ 203,747 $ 32 $ 507,386 $ 781,175 $ 1,288,561

BUDGET AUTHORITY AND OUTLAYS, NET
Budget Authority, gross (discretionary and mandatory) $ 626,069 $ 20,901 $ 9,120 $ 234,400 $ 10 $ 1,523,494 $ 4,369,615 $ 5,893,109

Actual Offsetting Collections
(360,881) (1,007) – (1,610) (10) (387,827) (3,641,970) (4,029,797)
(discretionary and mandatory)
Change in Uncollected Customer Payments
from Federal Sources
– – – – – – (49,861) (49,861)
(discretionary and mandatory)
Recoveries of prior year paid obligations
1,113 7 – 10 – 4,753 – 4,753
(discretionary and mandatory)
Budget Authority, net
(discretionary and mandatory) $ 266,301 $ 19,901 $ 9,120 $ 232,800 $ – $ 1,140,420 $ 677,784 $ 1,818,204

Gross Outlays (discretionary and mandatory) $ 647,055 $ 19,668 $ 9,099 $ 210,928 $ 11 $ 1,595,165 $ 3,437,536 $ 5,032,701
Actual Offsetting Collections
(360,881) (1,007) – (1,610) (10) (387,827) (3,641,970) (4,029,797)
(discretionary and mandatory)
Net Outlays (discretionary and mandatory) 286,174 18,661 9,099 209,318 1 1,207,338 (204,434) 1,002,904
Distributed Offsetting Receipts 742 – – – – 742 (1,651,174) (1,650,432)
Agency Outlays, net (discretionary and mandatory) $ 286,916 $ 18,661 $ 9,099 $ 209,318 $ 1 $ 1,208,080 $ (1,855,608) $ (647,528)

84 AGENCY FINANCIAL REPORT • FY 2016
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REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION
STEWARDSHIP INVESTMENTS IN HUMAN CAPITAL
(Unaudited)
Human Capital investments are expenses included in net cost for education and training programs that are intended to increase
or maintain national economic productive capacity and that produce outputs and outcomes that provide evidence of maintain-
ing or increasing national productive capacity. The definition excludes education and training expenses for federal personnel.

Small Business Development Centers deliver an array of services to small businesses and prospective business owners using an extensive
network of lead centers and outreach locations. SBDCs deliver professional business advising and training in key management areas to small
business clients throughout the U.S. that generates business revenue, creates and retains jobs, and enhances local and regional economies.

SCORE is a non-profit association comprised of over 11,000 volunteer business mentors that serve entrepreneurs with
in-person mentoring, local training workshops, and online resources. SCORE adapts its structure and services to meet the
needs of specific small businesses.

Women’s Business Centers provide advising and training primarily to women entrepreneurs through over 100 non-profit
educational centers across the nation. Many of the training courses focus on business and financial planning that help women
entrepreneurs gain financial literacy. They also provide direct advising to clients and help them access loans, federal contracts,
and exporting opportunities.

Microloan Program helps the smallest of small businesses become established and achieve success. Community-based interme-
diary lenders provide business-based training and technical assistance to microbusinesses. The program is an important source
of training assistance for low-income, women, veteran, and minority entrepreneurs.

SBA’s Consulting and Training Programs includes SBA’s work to develop or expand consulting and training programs focused
on key areas, including underserved markets, procurement, exports, and emerging and expanding technological sectors. These
small business advising and training programs are provided by or facilitated through an SBA district office for the delivery of
a structured program providing knowledge, information, or experience on a business-related subject. Training is available on a
number of subjects of interest to a small business person and may be delivered to an individual, a class, or online.

Veterans Outreach includes comprehensive outreach through veterans business outreach centers and technical assistance and training to
transitioning veterans that are interested in starting a new or growing an existing business through programs such as Boots-to-Business,
Veteran Women Igniting the Spirit of Entrepreneurship, and Entrepreneurship Boot Camp for Veterans with Disabilities. Consistent with
the new strategic plan, this item was broken out in FY 2014 (previously it was included in All Other Training and Assistance Programs).

All Other Assistance Programs not separately detailed include PRIME Technical Assistance, Native American Outreach, and
the 7(j) program.

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

Significant Human Capital investments occur within the following programs:

(Dollars in Thousands)

For the Five Years Ended September 30, 2016 2015 2014 2013 2012

Small Business Development Centers $ 94,196 $ 89,225 $ 154,400 $ 93,427 $ 152,835
SCORE 2,749 19,615 5,758 10,894 9,331
Women’s Business Centers 17,135 18,658 24,842 21,049 25,006
Microloan Technical Assistance 28,864 19,216 21,552 16,525 22,487
SBA's Consulting and Training Programs 52,871 51,510 54,620 44,313 28,365
Veterans Outreach 22,999 27,031 13,244 – –
All Other Training and Assistance Programs 16,402 9,010 12,832 6,924 12,689

Total $ 235,216 $ 234,265 $ 287,248 $ 193,132 $ 250,713

AGENCY FINANCIAL REPORT • FY 2016 85
DID
YOU JOBS CREATED Two out of three net new jobs in America are created
KNOW by small businesses. Millions of middle class families are working for
small businesses that depend on the SBA’s ability to facilitate access to
capital, counseling, and contracting opportunities.

SUCCESS Creating Jobs and Expanding Business
are Key to Entrepreneurship
STORY Bailey’s Restaurants
St. Louis, Missouri

David Bailey decided to pursue a career in the restaurant business shortly after
graduating from St. Louis University. Ensuring he could do it his way, he took the
entrepreneurial route with help from the SBA.

Early in his career, David immersed himself in every aspect of the business from cooking to catering. He worked 80
hours a week in management and catering for two other restaurants to — as he puts it — “train [his] mind and body
for the physical and mental rigors of ownership.”

From 2004 when he opened his first venture with loans from family members, much has changed in David’s life
and career. He has opened six distinctive restaurants and a catering company that have created a total of 325 jobs
in the inner city of St. Louis. In 2013, he launched his most ambitious project with a $3 million SBA-backed
loan, expanding Bailey’s Restaurants. This project added 50 new jobs to the St. Louis economy and propelled the
company’s revenues to more than $10 million by 2014.
Other
Information
DID CONTRACTING For the third consecutive year, in FY 2015, the federal
YOU government exceeded the 23 percent small business contracting goal,
KNOW purchasing $90.7 billion in goods and services from small businesses
through prime contract procurements. This represents 25.75 percent of
all eligible federal spend and supports more than 537,000 jobs in the
American economy.

SUCCESS 8(a) Graduate Firm of the Year
Action Facilities Management Inc.
STORY Morgantown, West Virginia

Since founding Action Facilities Management Inc. in her basement in 2001,
Diane Lewis-Jackson has successfully grown her company to be a premier
government and commercial contractor. The company specializes in site
management, security services, maintenance and janitorial, equipment operations, consulting, staffing solutions, and
project management. AFM has grown from two employees to more than 250 employees in nine states.

Diane has excelled in having taken several SBA training courses and is a graduate of SBA’s 8(a) Business
Development Program. Since then, she has garnered an impressive list of clients including: the Departments of
Defense, Energy, Homeland Security, State, Labor, the Federal Protective Service, the Centers for Disease Control
and Prevention, the U.S. Library of Congress, U.S. Mine Safety Health Administration, and U.S. Defense
Logistics Agency. She has also been awarded the West Virginia 2013 Small Business Person of the Year and the
2010 Minority Small Business of the Year.
OTH E R I NF ORMATION

U. S. Small Business Administration
Combined Schedule of Spending
For the Years Ended September 30, 2016 and September 30, 2015 (Unaudited)
(Dollars in Thousands)
2016 2015

Non- Non-
budgetary budgetary
Budgetary Financing Total Budgetary Financing Total
What Money is Available to Spend?
Total Resources $ 2,778,732 $ 8,099,280 $ 10,878,012 $ 2,821,694 $ 7,475,094 $ 10,296,788
Less Amount Not Approved for Spending by SBA 355,117 1,690,457 2,045,574 512,363 1,081,724 1,594,087
Less Amount Approved for Spending by OMB 722,884 2,198,098 2,920,982 774,096 2,610,482 3,384,578
Total Amounts Agreed to be Spent $ 1,700,731 $ 4,210,725 $ 5,911,456 $ 1,535,235 $ 3,782,888 $ 5,318,123

Non- Non-
budgetary budgetary
Budgetary Financing Total Budgetary Financing Total
How was the Money Spent /Issued?
Salary & Benefits $ 423,997 $ – $ 423,997 $ 391,177 $ – $ 391,177
Grants 214,123 – 214,123 195,892 – 195,892
Rent 45,849 – 45,849 45,434 – 45,434
Contracts 124,980 – 124,980 104,337 – 104,337
Travel 25,806 – 25,806 13,712 – 13,712
Other Administrative Expenses 77,527 – 77,527 99,704 – 99,704
Telecommunications 12,435 – 12,435 11,047 – 11,047
Surety Bonds Defaults 16,603 – 16,603 13,799 – 13,799
Business Loans 52,824 43,084 95,908 46,586 54,799 101,385
Business Loan Guarantees 366,958 2,593,779 2,960,737 354,996 3,148,898 3,503,894
Disaster Lending 339,629 1,573,862 1,913,491 258,551 579,191 837,742
Total Amounts Agreed to be Spent $ 1,700,731 $ 4,210,725 $ 5,911,456 $ 1,535,235 $ 3,782,888 $ 5,318,123

Non- Non-
budgetary budgetary
Budgetary Financing Total Budgetary Financing Total
Who did the Money go to?
Other Federal Agencies $ 346,678 $ 1,971,239 $ 2,317,917 $ 340,201 $ 2,172,935 $ 2,513,136
Public Individuals and Organizations 1,354,053 2,239,486 3,593,539 1,195,034 1,609,953 2,804,987
Total Amounts Agreed to be Spent $ 1,700,731 $ 4,210,725 $ 5,911,456 $ 1,535,235 $ 3,782,888 $ 5,318,123

The Combined Schedule of Spending (SOS) was developed to bridge the gap between budgetary accounting reports, such as
the Combined Statement of Budgetary Resources (SBR), and the public’s desire for a transparent view of how federal money
was spent. The SOS allows the reader to review SBA’s spending in more understandable terms and also provides the public
with a high level view of who benefited from federal funds. Payments to Other Federal Agencies include rent to the General
Service Administration and Downward Subsidy Reestimates payable to the Treasury. Subsidy reestimates are discussed in
Note 6A of the Consolidated Financial Statements.

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

AGENCY FINANCIAL REPORT • FY 2016 89
OT H E R I NF OR M AT I ON

OIG REPORT ON THE MOST SERIOUS MANAGEMENT
AND PERFORMANCE CHALLENGES

REPORT ON THE MOST SERIOUS
MANAGEMENT AND PERFORMANCE
CHALLENGES IN FISCAL YEAR 2017

October 14, 2016 REPORT NUMBER 17-02

90 AGENCY FINANCIAL REPORT • FY 2016
OTH E R I NF ORMATION

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

Memorandum
Management Challenges

DATE: October 14, 2016

TO: Maria Contreras-Sweet
Administrator

FROM: Peggy E. Gustafson
Inspector General

SUBJECT: Report on the Most Serious Management and Performance Challenges Facing the
Small Business Administration in Fiscal Year 2017

In accordance with the Reports Consolidation Act of 2000, we are providing you with the Office of
Inspector General’s (OIG) Report on the Most Serious Management and Performance Challenges
Facing the Small Business Administration (SBA) in Fiscal Year (FY) 2017. The overall goal is to focus
attention on significant issues with the objective of working with Agency managers to enhance the
effectiveness of SBA’s programs and operations. We have prepared similar reports since FY 2000.

Within each management challenge is a series of recommended actions to enhance the effectiveness
of agency programs and operations. Each recommended action is assigned a color score to indicate
its status. The scores are as follows: green for “implemented,” yellow for “substantial progress,”
orange for “limited progress,” and red for “no progress.” If a recommended action was added since
last year’s report, no color score was assigned, and the recommended action has been designated as
“new.” Actions that were scored green last year, which remained green this year, have been moved
up to the “history bar” above the recommended actions. The history bar highlights any progress
that the Agency has made on a challenge over the past 4 fiscal years (or as long as the challenge has
existed, if shorter) by showing the number of actions that have moved to green each year. In
addition, an arrow in the color box indicates that the color score went up or down from the prior
year.

The following table provides a summary of the most serious management and performance
challenges facing SBA in FY 2017.

AGENCY FINANCIAL REPORT • FY 2016 91
OT H E R I NF OR M AT I ON

Table 1. Summary of the Most Serious Management and Performance Challenges
Facing the SBA in FY 2017
Color Scores
Status at End of FY 2016 Change from Prior Year
Challenge Green Yellow Orange Red Up á Down â
1 Small Business Contracting 1 1 2 1
2 IT Leadership 3
3 Human Capital 2
4 SBA Loan Program Risk Management and Oversight 5 1
5 8(a) Business Development Program 2 1 2
6 Ensuring Quality Deliverables and Reducing Improper
3
Payments at SBA Loan Operation Centers
7 Disaster Loan program 2 1
8 Acquisition Management 4 4
TOTAL 1 19 7 1 7 0

Significant changes to this year’s Management Challenges report involve information technology (IT) leadership
(Challenge 2), human capital strategies (Challenge 3), loan program risk management and oversight (Challenge 4),
and ensuring quality deliverables and reducing improper payments at SBA loan operation centers (Challenge 6).

Last year, we reported that SBA needed to address long-standing IT security weaknesses (Challenge 2). This year, we
realigned the discussion to include our concerns regarding SBA leadership in overseeing and addressing IT investments
and security risks. Since 2005, SBA has had 8 Chief Information Officer’s (CIO). Prior to the recent appointment of
the new CIO, the position had been vacant since July 2015; thereby, adversely affecting the ability of SBA to make
lasting improvements in its IT investments and security in multiple areas.

As noted in a Government Accountability Office’s (GAO) report, Leadership Attention Needed to Overcome Management Challenges
(September 22, 2015), the reason SBA has not mitigated many longstanding management challenges is, in part, due to the lack of
sustained priority attention over time and frequent turnover of leadership. Although SBA has made some progress in recent years
to address challenges in the area of human capital management (Challenge 3), longstanding recommendations to develop a
workforce plan and update guidance have not been implemented. Further, SBA’s human capital challenges continued when it lost
its provisional certification for its SES performance appraisal system because it did not timely submit its recertification request to
the Office of Personnel Management (OPM). In 2012 and again in 2014, SBA conducted Voluntary Early Retirement
Authority/Voluntary Separation Incentive Payment (VERA/VSIP) programs to address the pending retirement wave and create
vacancies that could then be filled with employees with needed skills. However, SBA conducted its VERA/VSIP programs before
having an agency-wide competency skills gap assessment and a workforce plan, which risked the opportunity to reshape the
agency through the VERA/VSIP efforts. As a result of concerns about how the 2014 VERA/VSIP program was implemented, in
FY 2016, OIG began a review of SBA’s 2014 VERA/VSIP program. Our review will be completed in FY 2017.

This year, we also consolidated previously reported challenges on lender oversight (previously Challenge 4) and loan agent fraud
(previously Challenge 6) into a challenge on loan program risk management and oversight, which is the responsibility of SBA’s
Office of Credit Risk Management (OCRM). With limited resources, OCRM manages credit risk for a nearly $120 billion loan
portfolio originated by over 2,400 active lenders and Certified Development Companies (CDCs) that have various degrees of
expertise regarding SBA loan program requirements. Further compounding this challenge, the majority of SBA loans are originated
by lenders with delegated approval authority, resulting in limited SBA review until a default occurs. Many of these lenders also rely
on the services of “for-fee” and other third party agents to assist in the origination, closing, servicing and liquidation of SBA loans.

Previous management challenge reports noted SBA’s progress in implementing a quality control program for all of its loan centers.
While SBA made progress in implementing a quality control program, further improvements are needed for SBA to continue to
demonstrate that all elements of the program are being completed and that the program is effective at identifying and correcting
material deficiencies. As a result, we realigned Challenge 6 to ensure that SBA reduces improper payments by delivering timely
SBA loan approval, servicing, and purchase decisions while ensuring they meet reasonable standards for quality and accuracy.

92 AGENCY FINANCIAL REPORT • FY 2016
OTH E R I NF ORMATION

The management challenge process is an important tool that we hope will assist the Agency in prioritizing its efforts to
improve program performance and enhance its operations. We look forward to continuing to work with SBA’s leadership
team in addressing the Agency’s management challenges.

TABLE OF CONTENTS

Challenge 1. Weaknesses in Small Business Contracting Programs and Inaccurate Procurement Data Undermine
the Reliability of Contracting Goals Achievements

Challenge 2. SBA’s IT Leadership Capabilities Need Strengthening to Address Operational Risks and Challenges

Challenge 3. SBA Needs Effective Human Capital Strategies to Carry Out its Mission Successfully and Become
a High-Performing Organization

Challenge 4. SBA Needs to Improve its Risk Management and Oversight Practices to Ensure its Loan Programs
Operate Effectively and Continue to Benefit Small Businesses

Challenge 5. SBA Needs to Ensure that the Section 8(a) Business Development Program Identifies and Addresses
the Needs of Program Participants, Only Eligible Firms are Admitted in the Program, and Standards
for Determining Economic Disadvantage are Justifiable

Challenge 6. SBA Can Improve its Loan Programs by Ensuring Quality Deliverables and Reducing Improper
Payments at SBA Loan Operation Centers

Challenge 7. Disaster Assistance Must Balance Competing Priorities to Deliver Timely Assistance and Reduce
Improper Payments

Challenge 8: SBA Needs to Effectively Manage Its Acquisition Program

AGENCY FINANCIAL REPORT • FY 2016 93
OT H E R I NF OR M AT I ON

Challenge 1. Weaknesses in Small Business Contracting Programs and Inaccurate
Procurement Data Undermine the Reliability of Contracting Goals Achievements

The Small Business Act established a Government-wide goal that 23 percent of all prime contracts be awarded to small businesses
each fiscal year. SBA has reported since FY 2013 that the Federal Government met or exceeded its goal of awarding 23 percent of
Federal contracting dollars to small businesses. As the advocate for small business, SBA should strive to ensure that only eligible
small firms obtain and perform small business awards. Further, SBA should ensure that procuring agencies accurately report
contracts awarded to small businesses when representing their progress in meeting small business contracting goals. However,
over the years, Congress has expressed concerns about the accuracy of the Small Business Goaling Report. These concerns have
been substantiated by OIG audits and other Government studies that have shown widespread misreporting by procuring
agencies, since many contract awards that were reported as having gone to small firms have actually been substantially performed
by larger companies. Awards made to ineligible firms impact procurement opportunities for small businesses and damage SBA’s
credibility in reporting accurate small business contracting goals achievements. While some contractors may misrepresent or
erroneously calculate their size, the incorrect reporting also results from errors made by Government contracting personnel,
including the misapplication of small business contracting rules. Without reliable data, SBA cannot accurately measure the
Federal Government’s small business procurement goals achievements, which in turn weakens the ability of Congress and other
Federal policy makers to determine whether the Government is maximizing contracting opportunities for small businesses.

Agencies Receive Goaling Credit for Firms No Longer in the 8(a) or HUBZone Programs
In OIG Report 14-18, we identified over $400 million in FY 2013 contract actions that may have been awarded to ineligible
firms. We also found that over $1.5 billion dollars in FY 2013 contract actions were included towards small business contacting
goals, even though these firms were no longer in the 8(a) Business Development or Historically Underutilized Business Zone
(HUBZone) Programs. SBA regulations permit procuring agencies to claim small disadvantaged business and HUBZone goaling
credit on certain contract actions, even after firms have left the program. In our opinion, the amount of dollars that SBA reports
to Congress and the public as being performed by 8(a) and HUBZone firms in the Small Business Goaling Report is overstated
by including contract actions performed by former program participants. Further, in Report 13-03, we identified weaknesses in
the 8(a) Mentor Protégé Program that could also allow procuring agencies to include in their small business goal achievements
contracts awarded to small businesses in which large businesses perform most of the work. In addressing deficiencies identified in
these reports, SBA corrected weaknesses within its small business information systems that impact the accuracy of goaling data.

Women Owned Small Business Federal Contracting Program Susceptible to Abuse
SBA’s Women-Owned Small Business Federal Contract Program (WOSBP) provides greater access to Federal contracting oppor-
tunities to women-owned small businesses (WOSBs) and economically-disadvantaged WOSB that meet the WOSBP require-
ments. OIG and GAO have both reported weaknesses in SBA’s controls that would ensure only eligible firms receive WOSBP
set-aside contracts. The National Defense Authorization Acts (NDAA) for FYs 2013 and 2015 made major programmatic changes
to WOSBP. Specifically, the NDAA for 2013 removed previously existing contract caps on set-aside awards for which WOSB and
economically-disadvantaged WOSB firms were able to compete. The NDAA for 2015 granted contracting officers the authority
to award sole-source awards to firms in WOSBP and required firms to be certified by a Federal agency, a State government, the
Administrator, or a national certifying entity approved by the Administrator. However, SBA implemented the sole-source authority
provision first without a certification program. We believe allowing sole source contracting authority in WOSBP, without
implementing the contemporaneously required certification program, is inconsistent with SBA’s statutory authorization and
exposes the program to abuse. The importance of a certification program is illustrated by SBA’s results of the eligibility reviews it
recently completed of 25 firms we identified as potentially ineligible (Report 15-10). These firms had previously self-certified into
the WOSBP using the existing regulations to enter the program. After conducting the reviews, SBA determined that 40 percent
of the firms were ineligible. Absent a certification program, the Government is more likely to award WOSBP contracts to
ineligible firms. SBA is still evaluating a path forward for implementing a certification program for the WOSBP.

SBA Retained High Size Standards Contrary to its Own Analysis
SBA uses the North American Industry Classification System (NAICS) as the basis for its size standards. For the most part, size
standards are based on the number of employees or average annual receipts of a firm and represent the largest size that a business

94 AGENCY FINANCIAL REPORT • FY 2016
OTH E R I NF ORMATION

(including its subsidiaries and affiliates) may be to qualify as a small business for Federal contracting programs. Over OIG objec-
tion, SBA did not reduce size standards when the Agency’s own analysis indicated it was appropriate to do so. Because SBA has
not adhered to its own analysis, small businesses will need to compete against larger concerns within certain NAICS codes. Within
those NAICS codes, the benefits intended for small business contractors may instead go to larger concerns. Similarly, small
businesses will compete against larger concerns within those NAICS codes so that the goaling numbers may be further distorted.

Increased Resources and an Improved Surveillance Review Process Gives SBA More Visibility into
Federal Agencies Compliance with Small Business Programs
SBA performs surveillance reviews to assess Federal contracting agencies’ compliance with small business programs’ requirements
and to verify that agencies are properly measuring their small business goal achievements. Over the past few years, SBA has taken
several steps to strengthen its surveillance review procedures, practices and execution. For instance, it implemented a new Standard
Operating Procedure (SOP) to ensure consistency in conducting its surveillance reviews and it increased the number of Procurement
Center Representatives, allowing it to conduct more surveillance reviews. According to SBA officials, during the last three years it
has conducted over 100 surveillance reviews using the new SOP, and it continues to improve its surveillance review process. SBA
progressed to a “Green” rating for its efforts to ensure that the reviews are conducted in a thorough and consistent manner.

SBA’s Continued Collaboration with Federal Agencies Improves Quality of Procurement Data
SBA relies on Federal agencies to implement its programs and maximize procurement opportunities for small businesses.
SBA is ultimately responsible for ensuring that small businesses receive a fair and equitable opportunity to participate in
Federal contracts. As such, SBA needs to continue to collaborate with other agencies to improve procurement data accuracy
supporting small business contracting goals. As part of its ongoing efforts to improve the quality of procurement data on
small business contract awards, SBA notifies Federal agencies throughout the year of data quality issues it has identified
giving those agencies another opportunity to review and correct the data, if required. SBA is also working with Federal
agencies procurement personnel to provide them the tools to facilitate the review of data, implement improvements to
procurement systems, and conduct training to improve data accuracy. For example, to assist agencies in improving pro-
curement data quality, SBA worked with the Office of Federal Procurement Policy to integrate small business data quality
reviews (anomaly reports) into routine agencies’ processes and procedures. In addition, for the FY 2015 small business
goaling data, SBA developed potential anomaly reports for the top 10 agencies that either have small business award dollars
that have been issued to what appear to be large businesses, missing NAICS codes, or missing contracting officer’s size
selection data.

SBA Needs the Full Range of Federal Program Enforcement Tools to Address Fraud
The Program Fraud Civil Remedies Act (PFCRA) of 1986 was enacted to address smaller dollar value frauds. To this
end, the Agency should modify its PFCRA regulations so that SBA can pursue any small business contracting program
violations, subject to the PFCRA’s jurisdictional limits, under that statute. SBA is the most logical Federal agency to
litigate PFCRA cases involving false claims and statements regarding Small Business Act contracting programs submitted
to multiple agencies. SBA has started preliminary discussions about implementing this change, but has not yet promul-
gated a rule. Independent of the PFCRA changes, SBA is in the process of raising its PFCRA penalty level, along with
several other civil penalties, as mandated by the Federal Civil Penalties Inflation Adjustment Improvements Act of 2015.

Number of Actions Accomplished (Green Status) During Last Four Fiscal
2012: 1 2013: 0 2014: 1 2015: 0
Years (Challenge first reported in FY 2005)
Status at end
Recommended Actions for FY 2017
of FY 2016
1. Strengthen controls to ensure the accuracy of the Federal Government’s annual small business procurement goals achievements reported
Yellow
in the Small Business Goaling Report
2. Implement a certification process for WOSBP. Orange
3. Revise the surveillance review process to ensure that they are conducted in a thorough and consistent manner. Green á
4. Revise SBA’s Program Fraud Civil Remedies Act regulations so that SBA can pursue violations of its Federal contracting programs and
Orange
demonstrate a capacity for taking enforcement actions under that statute.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

AGENCY FINANCIAL REPORT • FY 2016 95
OT H E R I NF OR M AT I ON

Challenge 2. SBA’s IT Leadership Capabilities Need Strengthening to Address
Operational Risks and Challenges

This challenge focuses on the Office of Chief Information Officer (OCIO) improving its leadership roles in overseeing
and addressing information technology (IT) investments and security risks. The OCIO is responsible for implementing
leadership guidance outlined in the Clinger–Cohen Act, Federal Information Technology Acquisition Reform Act
(FITARA), and IT Security criteria. In 1996, Congress enacted the Clinger–Cohen Act to reform and improve the way
Federal agencies acquire and manage IT resources. The Clinger–Cohen Act identifies the Chief Information Officer
(CIO) as having primary responsibility for overseeing IT investments. Recently, the National Defense Authorization Act
(NDAA) for FY 2015 implemented FITARA to strengthen reforms and establish effective IT leadership within each agency.
FITARA requires the CIO to play a critical leadership role in driving reforms to help control system development risks,
better manage technology spending, and achieve measurable improvements in agency performance. The CIO must ensure
Federal IT security is deployed in SBA’s highly decentralized and dynamic IT environment.

SBA Faces Long-Term Challenges in Implementing Improvements in IT Investment Oversight as Required by FITARA
Full deployment of FITARA and IT security standards requires organizational alignment and appropriate management
of resources within the Agency. As noted in a Government Accountability Office’s (GAO) report, Leadership Attention
Needed to Overcome Management Challenges (September 22, 2015), since 2005, SBA has had 8 CIOs. Prior to the recent
appointment of the new CIO, the position had been vacant since July 2015; thereby, adversely affecting the ability of
SBA to make lasting improvements in its IT investments and security in multiple areas. The CIO’s departure frequently
results in turnover in other key IT positions. For example, during the past year, SBA installed new leadership personnel
in information security, network operations, and telecommunications positions. Continuity in these positions is critical
to ensuring open vulnerabilities are corrected, operational issues are quickly resolved, current guidance adopted and
implemented, and IT expenditures (maintenance and capital investment) are vetted and monitored.

GAO and OIG evaluations of IT investment and security practices indicate controls mandated in FITARA and the
related common baseline guidance have not been fully deployed. For example, our recent evaluation of the Office 365
migration (Report 16-16) indicated the lack of IT investment controls, such as system development methodology,
modular project phases, baseline controls, and TechStat sessions.

In addition, under the current SBA organization structure, there appears to be dual or overlapping accountability in the
CIO’s role for IT investment oversight. Currently, a Chief Digital Officer (CDO), who heads a digital services team, reports
directly to the Chief Operating Officer (COO), while the CIO reports administratively to the COO’s Deputy Chief
Operating Officer. The CDO stated role is to transform the Agency’s existing technology using the right mix of modern
technology development and management approaches. This role may be duplicative and potentially in conflict with the
role of the CIO who is responsible for recommending modification, termination, or pause of IT projects or initiatives.
The OCIO is also accountable for ensuring applicable security guidance is implemented throughout a project’s lifecycle.

Long Standing Weaknesses in IT Security Controls Require Sustained Management Attention and
Infrastructure Investments
Recent Government security breaches have heightened the importance of continuously monitoring network and software
applications against outside threats. Our evaluations of SBA’s systems and networks indicate improvement in configuration
management. This improvement reflects an IT control enhancement program initiated by the Agency. Notwithstanding
these efforts, OIG evaluations further indicate significant outstanding vulnerabilities remain. The results of our annual
evaluations of SBA’s systems and networks indicate there are currently 39 open recommendations, some dating back to
fiscal year 2011. Many are indicative of enterprise wide vulnerabilities or risks requiring infrastructure investment or
more effective monitoring of contractor hosted systems. These general control areas include:

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• Information security and continuous monitoring that requires validation of compliance with security requirements
through auditing, periodic reviews, and implementing continuous monitoring strategies.
• Risk management that monitors the selection, implementation, and assessment of security controls, and the
related formal authorization to operate both internal and hosted systems.
• Configuration management and identity and access management controls that document and manage baselines,
establish a comprehensive personally identifiable information data loss prevention program, and require full
implementation of system access procedures.
To show significant improvement in these areas, SBA’s OCIO, in conjunction with SBA’s various program offices, will
need to make sustained investments in enterprise infrastructure, networks, software and human resources. Outlined
below are 3 new improvement areas integral to implementing FITARA guidance. In addition, progress in 3 previously
identified critical IT security areas (FY 2015 Management Challenge 2 Weaknesses in Information Systems’ Security Controls
Pose Significant Risks to the Agency) are consolidated and summarized.

Number of Actions Accomplished (Green Status) During Last Four Fiscal
2012: 0 2013: 1 2014: 0 2015: 0
Years (Challenge first reported in FY 1999, revised FY 2016)
Status at end
Recommended Actions for FY 2017
of FY 2016
1. Establish an OCIO Human Resource Planning process that allows full deployment of FITARA. New
2. The OCIO performs independent oversight of IT investments consistent with guidance. New
3. The OCIO facilitates enterprise architecture and demonstrates accountability for IT investments. New
4. The OCIO establishes and implements Information Security and Continuous Monitoring practices, policies and standards to ensure
Orange
ongoing effectiveness of information systems.
5. The OCIO maintains effective risk management practices to minimize vulnerabilities. Orange
6. The OCIO establishes Configuration Management and Identity and Access Management controls and procedures. Orange
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

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Challenge 3. SBA Needs Effective Human Capital Strategies to Carry Out its
Mission Successfully and Become a High-Performing Organization

Since it reorganized in 2004, SBA’s workforce has faced an ongoing skill gap between the competency mix of employees
who had been hired for one mission and the competency mix needed to accomplish a new mission. Although SBA has
made progress in recent years to address challenges in the area of human capital management, recommendations to
develop a workforce plan and update guidance — both of which OIG believes are necessary to becoming a
high-performing organization — have not yet been implemented. Further, SBA’s human capital challenges continued
when it lost its provisional certification in 2015 because it did not timely submit its recertification request to the
Office of Personnel Management (OPM). In FY 2015, GAO reported that the reason SBA has not mitigated this and
other management challenges is, in part, due to the lack of sustained priority attention over time and frequent turnover
of leadership.

SBA Made Significant Progress Toward Completing its Workforce Plan but Whether it Will Address
Adequately Long-standing Skills Gaps is Unknown
After almost a decade of simultaneous budget constraints and program growth, SBA took action to restructure key
agency operations. However, it had not adequately analyzed priorities and as a result, there was no assurance that
sufficient resources in terms of both numbers of staff and the knowledge and skills possessed by staff were available and
appropriately deployed to perform critical functions. Some skills gaps were identified by SBA for its mission critical
occupations in 2011 and 2013, but an agency-wide competency and skills gap assessment had not been completed since
2006. In 2012 and again in 2014, SBA conducted Voluntary Early Retirement Authority/Voluntary Separation
Incentive Payment (VERA/VSIP) programs to address the pending retirement wave and create vacancies that could then
be filled with employees with needed skills. OPM authorized up to 300 employees for each program, but only about
180 in 2012 and 150 in 2014 took advantage of the programs. Since this resulted in fewer vacancies than anticipated,
SBA did not gain the flexibility it expected to address the gaps in skills that it had identified.

After working with contractors throughout FYs 2015 and 2016 OHRS now anticipates finalizing its workforce plan
by early FY 2017. According to an OHRS official, the workforce plan will include an analysis of the workforce with a
particular focus on its mission critical occupations, strategies for building on Agency strengths and addressing challenges,
and metrics to track progress. Further, the workforce plan will support the goals and objectives laid out in SBA’s
Strategic Plan. OIG will not have the opportunity to review the workforce plan before its statutory reporting deadline
for this management challenges report. According to GAO, when SBA conducted its VERA/VSIP programs before
having a current agency-wide competency skills gap assessment and a workforce plan, SBA risked the opportunity to
reshape the agency through these efforts. As a result of concerns about how the 2014 VERA/VSIP program was
implemented, in FY 2016, OIG began a review of SBA’s 2014 VERA/VSIP program. Our review will be completed
in FY 2017.

SBA Made Progress to Update Human Capital SOPs and Guidance
In FY 2016, OHRS made significant progress in updating and establishing standard operating procedures (SOP) for
human capital management as recommended by OIG in this long-standing management challenge. OHRS published
its Performance Management and Appraisal System and its Delegated Examining SOPs. Further, it advanced four other
critical SOPs into the final stages of the clearance process. It is possible, however, that these pending SOPs will not be
finalized during the pending election and possible leadership transition.

SBA Regains its OPM Provisional Certification of its SES Appraisal System
The Office of Personnel Management (OPM) grants provisional or full certification to agencies with appraisal systems
that meet certain criteria. Specifically, OPM grants a 1-year provisional certification when an agency has designed, but
not yet fully implemented or applied, an appraisal system for its senior executive, and a 2-year, or full certification, when

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the appraisal system is designed and applied. The maximum pay a senior level executive employee may earn depends on
whether an agency has a performance appraisal system certified by OPM.

In addition to long-standing human capital challenges, in August 2015, SBA lost its provisional certification for its
SES performance appraisal system because it did not timely submit its recertification request to OPM. Although SBA
regained its provisional certification in July 2016, this occurrence emphasized the continued need for effective human
capital strategies to successfully carry out its mission. The loss of the Senior Executive Service (SES) performance
appraisal system certification impacted individuals paid on the SES pay schedule as described in our August 2016 Review
of SBA’s Practices for Senior Executive Service Initial Pay Setting (Report 16-20). In our review, we determined that SBA set
initial pay higher than allowed for 4 out of 10 SES employees reviewed. This occurred because SBA personnel were not
familiar with certain Federal laws and regulations that govern SES pay settings. STOPSTOP

Number of Actions Accomplished (Green Status) During Last Four Fiscal
2012: 0 2013: 1 2014: 0 2015: 1
Years (Challenge first reported in FY 2001, revised FY 2007)
Status at end
Recommended Actions for FY 2017
of FY 2016
1. Ensure the Agency has an effective, comprehensive workforce and succession plan that aligns talent needs and capabilities with SBA’s FY
2011-2016 strategic plan. SBA’s workforce and succession planning goals should reflect the need to recruit and retain the appropriate Yellow
talent, and should establish appropriate metrics to gauge SBA’s success at having the right people, in the right jobs, at the right time.
2. Ensure that human capital management SOPs are updated and appropriately structured to support the Agency’s long-term goals and
Yellow
objectives and Government-wide human capital management initiatives. (Previously recommended action #3)
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

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Challenge 4. SBA Needs to Improve its Risk Management and Oversight Practices to
Ensure its Loan Programs Operate Effectively and Continue to Benefit Small Businesses

With limited resources, SBA’s Office of Credit Risk Management (OCRM) manages credit risk for a nearly $120 billion
loan portfolio originated by over 2,400 active lenders and Certified Development Companies (CDCs) that have various
degrees of expertise regarding SBA loan program requirements. Further compounding this challenge, the majority of SBA
loans are originated by lenders with delegated approval authority, resulting in limited SBA review until a default occurs.
Many of these lenders also rely on the services of “for-fee” and other third party agents to assist in the
origination, closing, servicing and liquidation of SBA loans.

SBA Improved Oversight of Lending Participants
The risks inherent in delegated lending require an effective oversight program to (1) monitor compliance with SBA
policies and procedures, and (2) take corrective actions when a material noncompliance is detected. However, in a
September 2012 audit report (Report 12-20R), OIG found that SBA did not always recognize the significance of lender
weaknesses or determine the risks lender weaknesses posed to the Agency during its onsite reviews. The report also found
that SBA did not link the risks associated with the weaknesses to the lenders’ corresponding risk ratings and assessments
of operations. Further, SBA did not require lenders to correct performance problems that could have exposed SBA to
unacceptable levels of financial risk.

Since the time of the audit, SBA has made substantial progress in its oversight of lending participants. In FY 2013, SBA
(1) developed risk profiles and lender performance thresholds, (2) developed a select analytical review process to allow for
virtual risk-based reviews, (3) updated its lender risk rating model to better stratify and predict risk, and (4) conducted
test reviews under the new risk-based review protocol. These efforts have demonstrated that onsite reviews are now
conducted on the highest-risk lending participants based on expanded selection criteria. During FYs 2014 and 2015,
OCRM revised its review methodologies for 7(a) and 504 program lenders, engaged contractor support to expand on its
corrective action follow-up process, and planned to conduct 170 corrective action reviews between 7(a) and 504 lenders.
During FY 2015, OCRM stated that it successfully reviewed 147 corrective action follow-up assessments and issued its
FY 2016 Risk Management Plan.

SBA Improved Portfolio Risk Management Program
A July 2013 OIG report (Report 13-17) found that SBA traditionally focused on loan approval volume and loss rates to
evaluate overall program performance with risk being assessed at the lender level. As a result, SBA had not developed an
effective portfolio risk management program that monitored portfolio segments to identify risk based on default statistics.
We determined that SBA continued to guarantee loans to high-risk franchises and industries without monitoring risks, and
where necessary, implementing controls to mitigate those risks. OIG reports have also found that SBA did not establish
measures to evaluate the performance of pilot loan programs or evaluate performance when performance measures were
established. For example, SBA’s Community Express loan program was maintained as a pilot program for over 10 years
without SBA performing an evaluation of the program. By 2010, the program had been dominated by two lenders
employing questionable credit practices and charging higher interest rates that ultimately led to SBA ending the program.

Since that time, SBA has made significant progress in implementing a portfolio risk management program for its loan
programs. Further, in 2016 SBA established performance measures and risk mitigation goals applicable to each loan
program and the entire lending portfolio. SBA maintains that the current program tracks performance to support risk-
based decisions at the portfolio, sub-program and lender level, and that identified risk issues are presented to SBA executive
leadership at Lender Oversight Committee (LOC) meetings. In FY 2016, OCRM conducted portfolio analyses of problem
lenders with heavy concentrations in SBA 7(a) lending and sales on the secondary market. In response, OCRM proposed
actions to mitigate SBA exposure on the secondary market. SBA will need to continue to demonstrate during FY 2017 that
information from this program is used to support risk based decisions and implement additional controls to mitigate risks.

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Increased Risk Introduced by Loan Agents
Prior OIG audits and investigations have identified that SBA does not have a way to effectively identify and track loan
agent involvement in its 7(a) and 504 loan portfolios, does not adequately list suspended loan agents to prevent their
involvement in the program, and has outdated enforcement regulations. Additionally, OIG investigations have revealed
a pattern of fraud by loan packagers and other for-fee agents in the 7(a) Loan Program, involving hundreds of millions
of dollars. Since 2005, OIG has investigated at least 22 cases with confirmed loan agent fraud totaling at least $335
million. Further, OIG has determined that loan agents were involved in approximately 15 percent of all 7(a) loans and
resulted in increased risk of default. Yet SBA’s oversight of loan agents has been limited, putting program dollars at risk.

In response to this challenge, SBA has made limited progress. To track loan agent activity on 7(a) program loans, SBA
decided to have lenders fax a loan agent disclosure form (Form 159) to SBA’s fiscal and transfer agent (FTA) and require
the FTA to enter the data into a database accessible to SBA. SBA also began linking 7(a) loan Form 159 information
with its loan data. However, a September 2015 OIG report on SBA’s loan agent oversight (Report 15-16) identified
significant issues in the data quality on the Form 159. SBA will likely need to make further modifications to this process.
The FTA is testing an automated Form 159 within the SBA One system, an automated lending platform that assists
lenders with everything from determining loan eligibility through closing their loan. Additionally, in response to OIG
concerns that SBA loan agent enforcement regulations are outdated, SBA published proposed revised regulations and is
preparing to provide final submission to the Office of Management and Budget (OMB). Recently, SBA issued a notice
to lenders reiterating its requirements for loan agent disclosures and submission of the Form 159 to its FTA.

OIG maintains that SBA also needs to develop a system to assign a unique identifier to loan agents that participate in
the 7(a) Program. Otherwise, suspended agents could circumvent SBA by simply changing their name and continuing to
participate in the program. In response to our loan agents report, SBA stated it will explore the feasibility of implementing
a registration system. To date, no solutions have been implemented.

In addition, a March 2015 audit (Report 15-06) noted that the outsourcing of traditional lender functions to Lender Service
Providers (LSPs), a type of loan agent, has significantly increased in recent years. Specifically, in 2014 over 770 lenders—or
approximately 28 percent of the active 7(a) lenders—had an approved agreement with at least one LSP. Additionally, SBA
loan portfolios associated with the three largest LSPs exceeded that of many of the top 100 active SBA 7(a) Program lenders.
Since our report, the number of SBA approved LSP agreements has reached over 1,700, due in part to SBA’s effort to better
control access by loan agents to its systems. This trend has enabled OCRM to develop initial performance metrics on loan
agent performance, but oversight is still limited. This audit also noted that a number of referrals regarding improper loan
agent activities had not been acted upon by OCRM. In response, OCRM developed and now maintains a tracking system
on referrals. As loan agent involvement in the 7(a) Program continues to increase, it will become especially important for
SBA to have oversight tools in place to identify and track loan agent involvement in this sizeable program.

Number of Actions Accomplished (Green Status) 2012 2013 2014 2015
During Last Four Fiscal Years 7(a) loans: 1 7(a) loans: 2 7(a) loans: 0 7(a) loans: 1
(Challenge first reported in FY 2001) 504 loans: 1 504 loans: 2 504 loans: 0 504 loans: 1

Status at end of FY 2016
Recommended Actions for FY 2017
7(a) 504

1. Monitor and verify implementation of corrective actions to ensure effective resolution prior to close-out. Yellow Yellow
2. Demonstrate that information from the portfolio risk management program is used to support risk based decisions and
New New
implement additional controls to mitigate risks in SBA loan programs.
3. Develop an effective method of disclosing and tracking loan agent involvement in SBA business loan programs. Yellow New
4. Update regulations (13 CFR Part 103) regarding loan agents to provide effective enforcement procedures. Yellow Yellow
5. Implement a loan agent registration system, including the issuance of a unique identifying number for each agent. Orange New
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

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Challenge 5. SBA Needs to Ensure that the Section 8(a) Business Development Program
Identifies and Addresses the Needs of Program Participants, Only Eligible Firms are Admitted
in the Program, and Standards for Determining Economic Disadvantage are Justifiable

SBA’s 8(a) 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 so that small businesses do not need to compete with large
businesses that may have an industry advantage. SBA’s challenge has been to ensure that 8(a) guidance, controls, and
practices truly prepare participating firms for a competitive market. In the past, SBA had not placed adequate emphasis
on business development to enhance the ability of 8(a) firms to compete and did not adequately ensure that only 8(a)
firms with economically disadvantaged owners in need of business development participated in the program.

SBA Continues to Address its Ability to Deliver an Effective 8(a) Program
SBA has made its assistance more readily available to program participants by using resource partners such as small
business development centers, SCORE, and procurement technical assistance centers. SBA has also taken steps to ensure
business opportunity specialists assess program participants’ business development needs during site visits. Additionally, in
September 2016, SBA finalized its 8(a) Program SOP to reflect the March 2011 regulatory changes. Although we provided
comments to a draft version of the SOP, we did not have an opportunity to review the final SOP before publishing this
report. We are currently reviewing the SOP to verify that the SOP reflects the regulatory changes. However, monitoring
efforts to track participants’ progress have made limited progress. For example, although SBA awarded a $1.9 million
contract in December 2011 to develop and deploy a new IT system to assist in monitoring 8(a) Program participants, in
2014 SBA decided not to deploy this new system. Instead, SBA is now developing and implementing another IT system.

Streamlined Application Process May Expose the 8(a) Program to a Higher Risk of Fraud
Since 2010, there had been a steady decline in the number of firms participating in the 8(a) Program from about 7,000 in
2010 to about 4,900 as of August 2016. During the past year, SBA leadership developed an aggressive growth plan to increase
the number of participants in the 8(a) Program by five percent over the previous year through a pilot streamlined application
process. According to SBA officials, it is trying to make the application process less burdensome for firms applying to the
8(a) Program. As part of the streamlined application 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. Federal prosecutors have told OIG that it would be difficult for them to describe SBA,
the procuring agency, or honest 8(a) competitors as fraud victims when SBA is perceived not to have exercised proper due
diligence in admitting firms’ in the 8(a) Program. Although SBA’s efforts to increase the participation in the 8(a) Program
is commendable, SBA still needs to ensure that only eligible firms are admitted into the program, and the documentation
supporting 8(a) Program application approvals is maintained in a method ensuring clear eligibility of the applicant.

SBA Dollar Threshold for Economic Disadvantage Not Justified
In March 2011, SBA revised its regulations to ensure that companies deemed “business successes” graduate from the
program, rather than allowing them to remain in the program and receive 8(a) contracts, which caused fewer companies
to receive the majority of 8(a) contract dollars and many to receive none. These regulations also established additional
standards to address the definition of “economic disadvantage.” Although the March 2011 regulations establish the
threshold for “economic disadvantage,” we have concerns that SBA’s standards for determining economic disadvantage
are not justified or objective because they are not based on economic analysis.

Agency officials stated that the comments they received to the revised regulations served as an adequate proxy to
objectively and reasonably determine effective measures for economic disadvantage, and were not aware of any reliable
sources of data to determine economic disadvantage. OIG contends that public comment, while valuable, cannot replace

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the expert and independent analysis Congress entrusted SBA to provide when implementing this program.
Absent independent analysis of what constitutes economic disadvantage, SBA is not in a strong position to
assess public comments.

In 2014, SBA hired an economist to study an alternative to using personal net worth, income, and total assets as
the criteria for entering and remaining in the 8(a) Program. However, SBA concluded that the study results were
inconclusive and decided not to make any changes to the current criteria. Additionally, the latest draft 8(a) Program
SOP excludes equity in a primary residence from the calculation of an individual’s net worth. This exclusion serves as a
loophole allowing affluent business owners to shelter wealth in personal real estate, while taking advantage of a program
designed to help the socially and economically disadvantaged. Thus, an individual can actually have substantial personal
assets (due to an expensive primary residence), but a fairly low net worth.

Number of Actions Accomplished (Green Status) During Past Four Fiscal
2012: 0 2013: 0 2014: 0 2015: 0
Years (Challenge first reported in FY 2003)
Status at end
Recommended Actions for FY 2017
of FY 2016
1. Develop and implement a plan, including SOP provisions, which ensures that the 8(a) Business Development Program identifies and
Yellow á
addresses program participants’ business development needs on an individualized basis.
2. Update and issue the 8(a) Business Development SOP to reflect the March 2011 regulatory changes. Yellow á
3. Establish objective and reasonable criteria that effectively measure “economic disadvantage,” and implement the new criteria. Red
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

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Challenge 6. SBA Can Improve its Loan Programs by Ensuring Quality
Deliverables and Reducing Improper Payments at SBA Loan Operation Centers

In FY 2015, the dollar amount of SBA’s 7(a) loans approvals reached record highs of $23.6 billion. Additionally, the
average amount of 7(a) loans have increased by over 50 percent in the last five years. The majority of these loans are
made by lenders with delegated approval authority. Oftentimes, the only opportunity for SBA to review a lenders
compliance with SBA requirements is in the event of loan default. When a loan goes into default, SBA will conduct 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 performs a review of the lenders actions after payment is made. Pursuing recovery from
a lender on sold loans is generally a more difficult task for SBA. In FY 2015, the amount of loans sold on the secondary
market reached record highs of $8.5 billion.

Inadequate Staffing, Training, and Supervision Have Resulted in Material Underwriting Deficiencies
and Improper Payments
The need to deliver timely SBA loan approval, servicing, and purchase decisions while ensuring they meet reasonable
standards for quality and accuracy is often a difficult balance for program management. For example, a 2014 report
(Report 14-13) noted that SBA management emphasized quantity over quality for 7(a) loan origination reviews and that
loan specialists were not provided adequate guidance or training to conduct their 7(a) loan review activities. This resulted
in loans that had eligibility and material underwriting deficiencies and eventual losses to SBA. Further, SBA processing
centers often have to meet high demands for production with limited resources, resulting in inventory backlogs and a
focus on production activities. We noted that a decrease in the number of staff assigned to loan reviews, increase in loan
size and complexity, additional center responsibilities and inadequate supervision have also contributed to inappropriate
loan decisions, resulting in improper payments. 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 loans. Additionally, in 2008 SBA did not accurately report improper
payment rates for its programs because it used flawed sampling methodologies and did not accurately project review
findings. In FY 2016, OIG initiated a review of the accuracy of SBA’s FY 2015 7(a) loan guaranty purchases improper
payment rate that will be completed in FY 2017.

OIG reviews high risk loans purchased by SBA to determine whether lenders’ materially complied with SBA
requirements or identify suspicious activity. Results to date have found that both SBA purchase and quality control
operations continue to miss material lender underwriting deficiencies resulting in improper payments. Specifically, we
have recommended recoveries of nearly $5 million on six loans. While previous audits have noted that the application
of increased scrutiny was necessary on high dollar loans that default early, further improvements are needed for SBA to
ensure that the risk of improper payments on these loans are sufficiently mitigated. For example, the 7(a) loans we review
are often complex and require additional time and research to validate the appropriateness of lender actions. We observed
that in some cases, SBA loan specialists questioned lenders on material compliance issues; however, these loan specialists
ultimately accepted explanations and documentation from lenders that did not cure the deficiencies. We noted loan
specialists are generally required to complete loan file reviews within six hours. However, we believe that SBA should
evaluate the time National Guaranty Purchase Center loan specialists have to review complex early-defaulted loans.

SBA Improved Quality Control Program, but Improvements are Needed to Ensure Timely
Implementation of Corrective Actions
SBA’s Office of Capital Access (OCA) has made significant progress in developing and implementing a quality control
(QC) program for all of its loan centers to verify and document compliance with the loan process, from origination to
close-out. Additionally, OCA has taken actions to accurately report and reduce improper payments in SBA’s 7(a) Loan
Program. OCA has (1) formalized its improper payment sampling, (2) demonstrated that its review process is effective

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for 7(a) loan approvals, (3) formalized its process to review disputed cases, (4) formalized the recovery process and time
standards for 7(a) purchases, (5) developed corrective action plans for 7(a) loans, (6) established repayment ability review
requirements that are effective at identifying improper payments, (7) revised improper payment review checklists, and (8)
demonstrated recovery from lenders in a timely manner during FY 2015.

During FY 2016, SBA issued letters to Congressional committees and the Office of Management and Budget regarding its
programs, including the 7(a) program, that were not in compliance with the Improper Payments Elimination and Recovery
Improvement Act of 2012 reporting requirements and its plans for correction. Additionally, in order to improve timeliness,
OCA revised its dispute resolution process and established a committee of senior leaders that meets regularly to discuss
disputed cases and reach consensus. Nevertheless, OCA still needs to demonstrate that its process over disputed cases
ensures adequate and timely resolution, corrective action plans are effective in reducing improper payments, and centers
provide quality products and are appropriately staffed with qualified resources that are appropriately trained and supervised.

Number of Actions Accomplished (Green Status) 2013 2014 2015
During Last Four Fiscal Years 2012: 0 7(a) Approvals: 1 7(a) Approvals: 1 7(a) Approvals: 0
(Challenge first reported in FY 2010) 7(a) Purchases: 0 7(a) Purchases: 1 7(a) Purchases: 1
Status at end
Recommended Actions for FY 2017 of FY 2016
7(a) Approvals 7(a) Purchases
1. Reassign responsibility for final approval of disputed denial, repair, and improper payment decisions from the Office N/A Yellow
of Financial Assistance (OFA) to the Office of Credit Risk Management (OCRM) to ensure an adequate and timely
resolution of disputes.
2. Demonstrate that corrective action plans are effective in reducing improper payments in the 7(a) Loan Program. Yellow Yellow
3. Ensure that centers are appropriately staffed with qualified resources that are appropriately trained and supervised and
New N New ew
that the quality of Center resource deliverables is appropriately balanced against their production requirements.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

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Challenge 7. Disaster Assistance Must Balance Competing Priorities to Deliver
Timely Assistance and Reduce Improper Payments

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 non-profit organizations. SBA’s FY 2015 year-end disaster
assistance loan portfolio balance was $6.3 billion. Each year, SBA approves hundreds of millions in disaster assistance
loans. Prior audits performed by OIG and GAO have found that because SBA had not taken sufficient steps to prepare
for large-scale disasters, such as properly preparing and training a new workforce for high application volumes, the
program has often been unable to provide timely assistance in the aftermath of major disasters. Unfortunately, the need
to disburse such loans quickly poses many challenges and may create opportunities for dishonest applicants to commit fraud.

In FY 2015, the Disaster Loan Program’s improper payment rate decreased to 8.13 percent from the 12 percent
reported in FY 2014. However, it remains above the threshold for significant improper payments defined by the
Improper Payments Elimination and Recovery Act (IPERA) of 2012. Also, we remain concerned that SBA does not
limit the proportion of a borrower’s gross income that may be relied on to service debt, potentially leaving borrowers
with insufficient income to cover living expenses and taxes. In addition, SBA did not effectively implement statutory
provisions intended to assist in disbursing funds quickly and effectively.

Lastly, the Recovery Improvements for Small Entities (RISE) After Disaster Act of 2015 extended the period for
Hurricane Sandy survivors to apply for disaster assistance, increasing the difficulty of loan eligibility determinations due
to the lapse in time since the disaster occurred in October 2012. The Act also mandated a new private lender disaster
loan program. Historically, SBA has faced challenges standing up private lender disaster programs and has been unable
to implement statutory private sector disaster loan programs in the past.

Disaster Loans Vulnerable to Fraud
SBA’s disaster loans are vulnerable to fraud and losses because (1) loan transactions are often expedited in order to
provide quick relief to disaster survivors, (2) lending personnel hired in connection with a disaster declaration may lack
sufficient training or experience, and (3) the volume of loan applications may overwhelm SBA’s resources and its ability
to exercise careful oversight of lending transactions.

SBA’s Disaster Processing and Disbursement Center (PDC) identified and denied fraudulent and improper disaster
assistance for secondary residences by reviewing key source documents, such as tax transcripts and insurance policies.
Most of the Hurricane Sandy loan fraud allegations investigated by OIG included false eligibility declarations, misuse of
proceeds, and submission of false invoices or other false statements. Fraud can occur when a property owner attempts to
represent their secondary residence, such as a vacation home, as their primary residence. OIG has worked closely with
state and Federal agencies to address residence eligibility fraud and has observed that SBA appears to have been more
effective in detecting fraudulent and ineligible disaster assistance applications for secondary residences than other Federal
disaster response agencies.

Improper Payment Rate Remains Above IPERA Significance Threshold
The year-end subsidy cost allowance balance for the Disaster Loan Program, while on a downward trend, was $1.09
billion, or 17.3 percent, of the $6.3 billion Disaster Direct Loans Receivable balance. This means that SBA is estimating
over $1 billion in net losses on its current disaster loan portfolio. While in FY 2015, the program’s improper payment
rate decreased to 8.13 percent from the 12 percent reported in FY 2014, it remains above the threshold for significant
improper payments defined by IPERA ($10 million and 1.5 percent of program outlays)—Improper payments were
$24.6 million of the $302 million in program outlays in FY 2015. To reduce disaster loan improper payments, SBA’s
Office of Disaster Assistance (ODA) should strengthen controls related to verification and documentation of loan
eligibility, insurance coverage, and other program requirements that have been identified as the most prevalent errors in
the program. If properly addressed, SBA can effectively reduce the improper payment rate in future years.

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Maximum Allowable Fixed Debt May be Exceeded, Limiting Borrower’s Ability to Repay Disaster Loans
SBA’s Disaster Assistance loan officers work diligently to provide eligible disaster survivors with the maximum available
financial assistance on attractive terms. On occasion, in order to facilitate widespread program delivery of disaster
home loan benefits, SBA exceeds its normal home loan debt-to-income lending parameters, potentially straining and/
or limiting the borrowers’ ability to repay the disaster loans. SBA’s Disaster Assistance home loan rules do not specify
an upper limit to the proportion of a borrower’s gross income that may be relied upon to service debt. Allocating too
much of the borrower’s income for debt servicing could result in the borrower having insufficient income to cover
unavoidable living expenses, such as health insurance, utility bills, and taxes. This practice also results in defaulted loans
and additional financial distress to disaster survivors.

In the past, the maximum allowable fixed debt (MAFD), the proportion of a borrower’s income that can be safely
allocated for home loan debt repayment was generally capped at 40 percent; higher income proportions allocated for
debt repayment were considered unaffordable. The revised Disaster Assistance SOP issued in 2015 implemented a tiered
approach to the maximum income allocation for home loan debt service ranging from 36 percent for incomes below
$25,000 to 50 percent for incomes of above $60,000. These limits may be exceeded with supervisory approval, but the
SOP does not establish an upper threshold to income allocated for home loan debt service under this provision. While
SBA’s Disaster Assistance SOP does provide a formula for determining the minimal amount of income reserved for living
expenses and taxes when evaluating disaster business loan guarantors’ repayment ability, the disaster home loan program
rules do not include a similar required reserve of income to meet necessary living expenses.

An August 2016 report (Report 16-18) on early-defaulted Hurricane Sandy loans found that loans to borrowers that did
not otherwise have repayment ability were approved by allocating high proportions of borrower income to service debt.
Home loans with higher than normal debt service ratios given to borrowers with low incomes and poor credit histories
appeared especially vulnerable to default. SBA should determine when the borrower’s proposed debt service ratio creates
an unacceptable financial burden to the disaster survivor and to train its loan officers to safeguard loan affordability.

Statutory Provisions Intended to Quickly Disburse Disaster Funds not Implemented
In the wake of disasters like Hurricane Sandy, congressional representatives expressed concern that SBA did not
effectively develop and utilize programmatic innovations intended to assist in disbursing funds quickly and effectively.
For instance, SBA did not implement statutory provisions of the Immediate Disaster Assistance Program (IDAP),
Economic Injury Disaster Assistance Program (EDAP), and the Private Disaster Assistance Programs (PDAP), collectively
known as the “Guaranteed Disaster Assistance Programs” mandated by Congress in 2008. These provisions were enacted
with the expectation that they would allow SBA to provide expedited disaster loans in partnership with private sector lenders.

In July 2016, SBA prepared a memorandum to notify Congress of the work that management performed to address
these provisions. Ultimately, SBA stated that it sought advance public comment on proposed rulemaking for these loan
programs and received limited public responses, the majority of which were opposed to implementing the three loan
programs. The objections were based on the cost of program participation under the current pricing structure and the
lender’s lack of infrastructure to deliver loans that meet SBA standards (such as evaluating eligibility and duplication of
benefits); loan terms that include longer maturities than conventional lending practices; the high cost of providing these
loans; inadequate collateral security; and their lack of expertise in the home loan sector. Lenders were also concerned
that loan guarantees would be denied due to improper eligibility determinations. In its memorandum to Congress, SBA
stated that it has improved its disaster assistance delivery channel and is now better equipped to provide more timely
disaster assistance. According to SBA, loan processing times now average 8 days, with 94 percent of loan disbursements
made within 5 days of closing. SBA has also raised the limits for unsecured disaster loans to $25,000, which allows a
greater amount of money to be disbursed quickly following a disaster.

Recovery Improvements for Small Entities (RISE) After Disaster Act Introduces New Risks
The RISE After Disaster Act, enacted November 25, 2015, introduced new initiatives that may pose additional risks
and difficulties for SBA’s loan programs. First, the Act directed SBA to make disaster loans available to Hurricane Sandy
survivors for a 1-year period following its enactment—over 3 years after the disaster. Because of the significant time

AGENCY FINANCIAL REPORT • FY 2016 107
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elapsed, SBA may have difficulty verifying whether physical losses and economic injury were attributable to Hurricane
Sandy, potentially resulting in ineligible recipients receiving loans. We are currently performing an audit of eligibility
controls for applications approved during the RISE After Disaster Act extended eligibility period. Second, the Act
introduced a new program—the Express Recovery Opportunity Loan Program, which provides loans up to $150,000
to disaster survivors from private lenders. Given that SBA has not yet implemented the Guaranteed Disaster Assistance
Programs authorized in 2008, SBA is likely to experience difficulties implementing this new program as well.

Progress in Meeting this Challenge and Emerging Issues
SBA’s Office of Capital Access (OCA) has not yet implemented pilots of the Guaranteed Disaster Loan Programs, but
has sought public comment on the proposed program rules and informed Congress of the outcome. In FY 2016, the
RISE After Disaster Act established a new private lender disaster loan program — the Express Recovery Opportunity
loan program and required SBA to promulgate regulations for the loan program within 270 days. SBA has not yet
promulgated regulations for this program; therefore, we have included a new recommendation for OCA to do so in
this management challenge.

ODA has made progress in ensuring that its workforce is fully trained. ODA has trained its core staff on its SOP and IT
system revisions, but ODA stated that it has not been cost effective to provide training to its reserve staff since they are
not often mobilized. An emerging issue discussed above is the latitude given loan processing personnel to determine how
much of a borrowers income to allocate for debt service. We have included a new recommendation in this challenge for
ODA to develop policies that limit borrower debt burdens to appropriate levels and train loan processing personnel on
the application of those policies in order to safeguard loan affordability.

Finally, ODA has reported substantial progress in reducing its improper payment rate, achieving a rate of 8.13 percent in
2015, and a reduction of almost four percentage points since 2014. In FY 2016, OIG initiated a review of the accuracy
of SBA’s FY 2015 disaster loan improper payment rate.

Number of Actions Accomplished (Green Status)
2012: N/A 2013: N/A 2014: N/A 2015: N/A
During Past Four Fiscal Years (Challenge first reported in FY 2015)
Status at end of
Recommended Actions for FY 2017
FY 2016
1. Implement pilot programs of the new guaranteed disaster programs mandated by Congress in 2008. OCA
Orange
2. Promulgate regulations for the Express Recovery Opportunity loan program provided by the RISE After Disaster Act. OCA
New
3. Demonstrate that the Agency has adequately trained loan processing resources that can be quickly mobilized in the event of a disaster. ODA
Yellow
4. Establish policies that limit borrower debt burdens to affordable levels and train loan processing personnel in the application of those policies. ODA
New
5. Reduce the improper payment rate to 7.29 percent or lower in FY 2016, in accordance with the reduction targets established in the FY ODA
2015 Agency Financial Report.
Yellow
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

108 AGENCY FINANCIAL REPORT • FY 2016
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Challenge 8. SBA Needs to Effectively Manage Its Acquisition Program

Annually, SBA spends over $100 million on contracts for goods and services required for the Agency to meet its
mission. With decreasing budgets, it is essential that SBA manages its acquisition program in an efficient, effective,
and accountable manner in order to ensure the Agency obtains quality goods and services on time and at a fair
price. Prior OIG audits have identified instances where SBA was unable to obtain required goods and services in an
efficient, effective, and accountable manner. For example, SBA inadequately planned its requirements for procuring IT
products and services. SBA also did not comply with Federal regulations when determining whether using interagency
acquisitions was the best procurement approach. Additionally, its acquisition SOP does not include procedures on the
use of modular contracting for major system acquisitions.

Since this challenge has been reported, SBA has made concerted efforts to monitor the acquisition program and has
made improvements by providing training to acquisition personnel, conducting annual advanced strategic acquisition
planning, and using the Contract Review Board for making acquisition decisions. Although SBA’s improper payment
rate for contract disbursements increased for FY 2015 due to administrative and documentation errors, SBA developed
a detailed corrective action plan and addressed the root causes of the improper payments. Additionally, SBA’s initiatives
to interface the contract management system with the financial systems, for the most part, improved user operability
of the invoice payment process. In FY 2016, SBA developed an improvement plan to address deficiencies identified
in its assessment of the acquisition function. Based on its planned actions, SBA demonstrated substantial progress in
addressing the four interrelated areas that are essential for an efficient, effective, and accountable acquisition process.
SBA drafted a revised acquisition SOP that is currently under review. When the SOP is issued, it will significantly
improve the acquisition function’s policies and procedures. Additionally, SBA implemented strategic human capital
planning tools to develop training plans and identify future staffing requirements to enhance its acquisition workforce.
SBA also has added end-users to the planning team when developing acquisition information system enhancements to
improve system functionality and encourage user adoption and plans to include current information on the acquisition
division’s website for better knowledge management within the acquisition function.

Further, Agency management plans to improve the organization alignment and leadership assessment area by developing
a guide to doing business with the acquisition division to clarify the roles and responsibilities of all stakeholders in the
acquisition process. SBA also plans for this guide to promote enterprising relationships between the acquisition division
and program offices to strengthen the acquisition function strategically within the organization.

In addition to the improvements SBA completed during FY 2016, SBA’s planned actions such as: issuing a new SOP,
hiring a Senior Procurement Executive, and continuing to implement the improvement plan should improve internal
control deficiencies within its acquisition program.

Number of Actions Accomplished (Green Status)
2012: N/A
During Last Four Fiscal Years 2013: 0 2014: 0 2015: 1
(New)
(Challenge first reported in FY 2013)
Status at end of
Recommended Actions for FY 2017
FY 2016
1. Create and implement a comprehensive improvement plan—based on the results of the acquisition function assessment—that has
measurable goals, objectives, prioritized actions, and timeframes to address deficiencies identified in the organizational alignment and Yellow á
leadership assessment area.
2. Create and implement a comprehensive improvement plan—based on the results of the acquisition function assessment—that has
measurable goals, objectives, prioritized actions, and timeframes to address deficiencies identified in the acquisition policies and processes Yellow á
assessment area (i.e., acquisition management SOP).
3. Create and implement a comprehensive improvement plan—based on the results of the acquisition function assessment—that has
measurable goals, objectives, prioritized actions, and timeframes to address deficiencies identified in the acquisition workforce assessment Yellow á
area.
4. Create and implement a comprehensive improvement plan—based on the results of the acquisition function assessment—that has
measurable goals, objectives, prioritized actions, and timeframes to address deficiencies identified in the knowledge management and Yellow á
information systems assessment area.
Green-Implemented Yellow-Substantial Progress Orange-Limited Progress Red-No Progress

AGENCY FINANCIAL REPORT • FY 2016 109
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SUMMARY OF FINANCIAL STATEMENT AUDIT AND MANAGEMENT
ASSURANCES
As required by OMB Circular A-136, Section II.5.7, the following summarizes SBA’s Financial Statement Audit and
Management Assurances:

SUMMARY OF FINANCIAL STATEMENT AUDIT
Audit Opinion Unmodified
Restatement No

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

SUMMARY OF MANAGEMENT ASSURANCES
Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)
Statement of Assurance Unmodified

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

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

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

Conformance with Financial Management System Requirements (FMFIA § 4)
Statement of Assurance 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

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 No lack of compliance noted
2. Applicable Federal Accounting Standards No lack of compliance noted No lack of compliance noted
3. USSGL at Transaction Level No lack of compliance noted No lack of compliance noted

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IMPROPER PAYMENTS
As required by the Improper Payment Information Act Part I - Risk Assessments
of 2002, as amended, and OMB Circular No. 123,
Appendix C, Management’s Responsibility for Internal OMB Circular No. A-123, Appendix C requires
Control: Requirements for Effective Estimation and risk assessments at least once every three years for
Re-mediation of Improper Payments, the SBA reviews programs not deemed risk susceptible or if a program
programs identified as susceptible to improper payments. was subjected to a significant change in legislation or
funding level. The SBA last conducted risk assessments
Improper payment reviews are a multi-layered process that for all programs and activities, including payments made
starts with a risk assessment. If an assessment indicates a to employees, for susceptibility to improper payments
program is susceptible to improper payments, then testing in FY 2014. The risk assessments did not identify
is performed using a statistically valid sampling technique. any additional programs as susceptible to improper
Based upon the testing results, a corrective action plan payments. Since no significant changes occurred to any
is determined for the types of errors uncovered. If a SBA program or activity during FY 2016, the SBA did
significant amount of recoverable dollars is found, the not conduct any new risk assessments.
SBA considers the appropriateness of performing a
recapture audit.
Parts II and V - Statistical Sampling and
The Disaster Relief Appropriations Act, 2013, provided Corrective Actions
funding for disaster assistance relief in response to
Hurricane Sandy to certain agencies including the SBA. To provide more clarity for the reader, this section is
The Act deemed all Hurricane Sandy funds as susceptible organized by the nine programs subjected to review for
to significant improper payments and regardless of risk improper payments and provides statistical sampling
assessment results, mandated that agencies report an information coupled with corrective actions.
improper payment estimate for the funds. The SBA
received Hurricane Sandy Disaster Relief funds for 7(A) LOAN GUARANTY PURCHASES
the Disaster direct loan and grant programs as well as
Statistical Sampling
administrative expenses related to the Disaster direct loan
program. Improper payment assessments of the relevant Using Probability Proportional to Size sampling with
grant programs and payments to Federal employees replacement, the 7(a) purchase sample cases were chosen
did not determine them to be susceptible to improper from all purchases approved during the 12-month period
payments; however, the SBA conducted improper ending March 31, 2016. The purchase population was
payment reviews and is reporting the results to comply divided into four strata based on the following factors: 1)
with the Disaster Relief Appropriations Act, 2013. whether the loan was considered an early default, regardless
of servicing office, and 2) which servicing office processed
The SBA reviewed nine programs and activities for the purchase among three locations. The SBA determined
improper payments — three major credit programs as the appropriate total sample size to be 188 loans from
mandated by OMB, disbursements for goods and services, the population. The sample included aggregate purchase
and HSDR funds for grants, payroll, travel, and purchase outlays of $110,269,572 and an absolute value of improper
cards. The three major credit programs are: payments of $7,031,342 within the sample. Using the
Hansen-Hurwitz estimation method, the estimated
• 7(a) business loan program that includes guaranty improper payment rate for the 7(a) guaranty purchase
purchases and guaranty approvals; population was calculated as 2.32 percent. An enhanced
• 504 certified development company loan guaranty test plan was the main reason for the increase from 0.9
approvals; and percent in FY 2015. SBA received approval from OMB to
• Disaster direct loan disbursements. implement the sampling methodology and estimation plan
described above for FY 2016 on September 16, 2016.
The next sections discuss SBA efforts and results related to
improper payment assessments and reviews.

AGENCY FINANCIAL REPORT • FY 2016 111
OT H E R I NF OR M AT I ON

The 7(a) loan guaranty purchase reviews were conducted 2016, and will continue its efforts to ensure lender
to examine if the lender complied materially with the deficiencies are monitored and incorporated into lenders’
7(a) loan program origination requirements including Risk Based Reviews. Internal feedback was provided to
statutory provisions, SBA regulations, any agreement center staff regarding the specific loan level deficiency
the lender executed with the SBA, standard operating upon detection; internal training will be provided by the
procedures, loan authorizations, and official SBA notices end of the second quarter of FY 2017.
and forms applicable to the 7(a) loan program. The reviews
were to determine if the lender (1) originated, serviced, Corrective actions are tracked at the loan level through a
and liquidated the loan in a prudent and commercially centralized database. The Quality Control Specialists for
reasonable manner, (2) misrepresented or failed to disclose a the 7(a) guaranty purchase centers monitor errors from
material fact to the SBA, and/or (3) put the SBA’s financial identification through completion of the corrective action.
interest at risk. Headquarters management provides oversight to ensure
milestones are met. All improper payments identified
Corrective Action as a result of the FY 2016 IPERIA reviews have been
addressed through obtaining additional documentation,
The root causes for all 7(a) loan guaranty purchase collection of funds from the lender, or reimbursement to
improper payments were administrative or process errors the lender. Corrective actions were generally completed at
made by the Agency. Improper payments generally arose the loan level within 60 days with all actions taken by the
when the purchase processor failed to identify material end of the fiscal year.
lender deficiencies in the handling of an SBA guaranteed
loan. The primary reasons for 7(a) purchase errors in 7(A) LOAN GUARANTY APPROVALS
FY 2016 included:
Statistical Sampling
• Incorrect payment of interest due to miscalculation
Using PPS sampling with replacement, the 7(a) approval
of days owed;
sample cases were chosen from all loan guaranties
• Incorrect transcript of account due to misapplication approved during the 12-month period ending March 31,
of payments; and 2016. The loan guaranties were approved through the
• Reimbursement of lender expenses that were not SBA’s loan processing centers, consisting of the Standard
fully justified. 7(a) Loan Guaranty Processing Center with dual locations
in Sacramento, California, and Hazard, Kentucky. The
As a means to reduce and/or eliminate the occurrence approval population was divided into two strata based
of future improper payments, a Corrective Action Plan on whether the loan was SBA Express or not. The SBA
has been formalized for the 7(a) loan guaranty purchase determined the appropriate total sample size to be 242
centers. Specific corrective actions are determined based loans from the population. The sample included net
upon the primary reason for the error with the purpose of
guaranteed approvals of $266,199,175 and improper
both remedying the error and ensuring the error does not
payments of $4,075,970 within the sample. Using the
occur in the future. Plans for improvement include:
Hansen-Hurwitz estimation method, the estimated
• Collaborating with the Office of Credit Risk improper payments rate for the 7(a) Loan Guaranty
Management to ensure specific lender deficiencies Approvals was calculated as 0.96 percent. The reason for
are monitored and incorporated into Risk the significant drop from the FY 2015 rate of 5.59 percent
Based Reviews; is three-fold: 1) there were no large loan approvals
identified as improper which is not typical in our testing;
• Internal training for purchase processors on how to
2) during the testing for FY 2015 we identified improper
determine the appropriate number of days interest
payments that we later discovered were not the case.
owed, select the proper interest rate, and identify
Delegated lenders do not submit loan packages to SBA
appropriate lender expenses; and
unless the loan is selected for improper payment testing
• Recovery of lender expenses that were not or the loan is in default. SBA requested but did not
fully justified. consistently receive complete packages for delegated loans
that were included in the improper payment sample. Due
The corrective actions are currently underway. The Office
to this perceived lack of documentation, SBA concluded
of Financial Program Operations intends to share the
that there were improper payments. However, it was later
loan level and lender deficiencies with OCRM in October
determined that lenders often had the documents at the

112 AGENCY FINANCIAL REPORT • FY 2016
OTH E R I NF ORMATION

time of approval, they simply did not submit all of them The corrective actions are currently underway. OFPO
so no improper payment existed; and 3) there is a better intends to share the loan level and lender deficiencies
understanding by lenders of the approval process through identified during the IPERIA reviews with OCRM in
education and training in FY 2016, and as a result, October 2016, and will continue its efforts to ensure
the required documentation is being more consistently lender deficiencies are monitored and incorporated into
obtained at the time of approval. SBA received approval lenders’ Risk Based Reviews. External training will be
from OMB to implement the sampling methodology provided by the end of the second quarter of FY 2017.
and estimation plan described above for FY 2016 on Furthermore, with the 7(a) loan guaranty approval
September 16, 2016. program’s recent designation as a High Priority Program
by OMB, OFPO is leveraging existing reviews performed
The 7(a) loan guaranty approval reviews were conducted by the Quality Control Program as a means to prevent
to examine if the lender complied materially with the the occurrence of future improper payments. All loans
7(a) loan program origination requirements including approved by the center in the amount of $3 million or
statutory provisions, SBA regulations, any agreement greater undergo a robust review by the QC Program prior
the lender executed with the SBA, standard operating to loan approval similar to what is performed during the
procedures, loan authorizations, and official SBA notices IPERIA review process. Deficiencies identified during this
and forms applicable to the 7(a) loan program. The process must be corrected prior to loan approval and the
reviews were to determine if the lender (1) originated the disbursement of funds. Feedback regarding the deficiency
loan in a prudent and commercially reasonable manner, is provided to the loan officer and lender, as necessary,
(2) misrepresented or failed to disclose a material fact to at the time of detection; further, any trends identified
the SBA, and/or (3) put the SBA’s financial interest at risk. regarding a specific action or root cause are discussed
with management to determine if additional training
Corrective Action is necessary or if there is an opportunity for a policy or
In FY 2016, the most prevalent root cause for 7(a) process change.
loan approval improper payments stemmed from the
Corrective actions are tracked at the loan level through
participating lenders’ inability to authenticate the
a centralized database. The Quality Control Specialist
borrower’s eligibility at origination. Improper payments
for 7(a) loan guaranty approvals monitors errors from
generally arose when the participating lender failed to
identification through completion of the corrective action.
comply with loan program requirements. The primary
Headquarters management provides oversight to ensure
reasons for 7(a) approval errors in FY 2016 included:
milestones are met. All improper payments identified
• Missing or inadequate loan documentation; as a result of the FY 2016 IPERIA reviews have been
• Loan authorization errors; and addressed through obtaining additional documentation,
loan modification, or cancellation of the loan guaranty.
• Incorrect loan structure.
Corrective actions were generally completed at the loan
As a means to reduce and/or eliminate the occurrence level within 60 days with all actions taken by the end of
of future improper payments, a Corrective Action Plan the fiscal year.
has been formalized for the 7(a) loan guaranty approval
centers. Specific corrective actions are determined based 504 CDC LOAN GUARANTY APPROVALS
upon the primary reason for the error with the purpose of Statistical Sampling
both remedying the error and ensuring the error does not
occur in the future. Plans for improvement include: Using PPS sampling with replacement, the 504 CDC
loan approval sample cases were chosen from all loan
• Collaborating with OCRM to ensure specific guaranties approved during the 12-month period ending
lender deficiencies are monitored and incorporated March 31, 2016. The loan guaranties were approved at
into Risk Based Reviews; and the SBA’s Sacramento Loan Processing Center and closed
• External training for lenders to avoid ineligible loan at various SBA district offices, with servicing subsequently
structures and ensure appropriate documentation handled by the Fresno, California, Commercial Loan
is obtained and analyzed prior to loan approval, Servicing Center and the Little Rock, Arkansas,
specifically relating to the SBA Loan Authorization Commercial Loan Servicing Center. The approval
and Form 1919. population was not stratified. The SBA determined the
appropriate total sample size to be 167 loans from the

AGENCY FINANCIAL REPORT • FY 2016 113
OT H E R I NF OR M AT I ON

population. The sample included net approval outlays of The aforementioned corrective actions to ensure errors do not
$300,363,000 and improper payments of $3,757,962 continue to occur are currently underway. OFPO intends to
within the sample. Using the Hansen-Hurwitz estimation share the loan level and lender deficiencies identified during
method, the estimated improper payments rate for the the IPERIA reviews with OCRM in October 2016, and will
504 CDC loan guaranty approvals was calculated as continue its efforts to ensure lender deficiencies are monitored
2.60 percent. The SBA received approval from OMB to and incorporated into lender’s Risk Based Reviews. External
implement the sampling methodology and estimation plan and internal training will be provided by the end of the second
described above for FY 2016 on September 16, 2016. quarter of FY 2017.

The 504 CDC loan approval reviews were conducted Corrective actions are tracked at the loan level through
to examine if the lender complied materially with the a centralized database. The Quality Control Specialist
program’s origination requirements including statutory for 504 loan guaranty approvals monitors errors from
provisions, SBA regulations, any agreement the CDC identification through completion of the corrective action.
executed with the SBA, standard operating procedures, Headquarters management provides oversight to ensure
loan authorizations, and official SBA notices and forms milestones are met. All improper payments identified as a
applicable to the 504 CDC loan program. The reviews result of the FY 2016 IPERIA reviews have been addressed
were to determine if the CDC (1) originated the loan through obtaining additional documentation or processing
in a prudent and commercially reasonable manner, (2) a loan modification. Corrective actions were generally
misrepresented or failed to disclose a material fact to the completed at the loan level within 60 days with all actions
SBA, and/or (3) put the SBA’s financial interest at risk. taken by the end of the fiscal year.

Corrective Action DISASTER DIRECT LOAN PROGRAM
In FY 2016, the most prevalent root cause for 504 approval Statistical Sampling
improper payments stemmed from the CDC’s failure to verify
The Office of Disaster Assistance performs a Quality
eligibility data. Improper payments generally arose when
Assurance Review of the approved loan portfolio annually.
the participating CDC failed to comply with loan program
A part of the QAR is to identify any deficiency that would
requirements. The primary reasons for 504 approval errors in
result in an improper payment. The statistical methodology
FY 2016 included:
used followed widely accepted practices and was approved
• Lack of substantiating financial documents; and by the Office of Management and Budget in 2012. In FY
• Inadequate affiliate and size standard analysis. 2016, the samples were selected quarterly rather than semi-
annually as done in previous years. The review population
As a means to reduce and/or eliminate the occurrence of consisted of disaster loan disbursements, including HSDR
future improper payments, a Corrective Action Plan has been funds, made during the 12-month period ending June 30,
formalized for the 504 loan approval center. Specific corrective 2016, with total disbursements of $344,910,443. A sample
actions are determined based upon the primary reason for the of 350 payments was selected for which testing yielded a
error with the purpose of both remedying the immediate error weighted estimated improper payment rate of 5.32 percent.
and ensuring the error does not occur in the future. Plans to Based on the sample results, the estimated amount of
ensure reduction targets are met include: improper payments was $18,349,236.

• Collaborating with the OCRM to ensure specific The scope of the ODA’s review covers three primary
lender deficiencies are monitored and incorporated compliance areas: (1) basic eligibility; (2) adherence to
into Risk Based Reviews; relevant laws, rules, regulations, and standard operating
• External training for the CDCs focusing on procedures; and (3) credit worthiness.
substantiating financial documents including
analysis, affiliate and size standard analysis, and Corrective Action
accurately determining loan eligibility; and In FY 2016, the most prevalent root cause for the Disaster
• Internal training for loan approvers focusing on direct loan program improper payments stemmed from
calculating a borrower’s repayment ability, and administrative and documentation errors. As indicated
affiliate and size standard analysis. by the reduced improper payment rate from FY 2015,
the loan processing and disbursement staff performed

114 AGENCY FINANCIAL REPORT • FY 2016
OTH E R I NF ORMATION

better at following the guidance provided in the standard corresponded to valid goods and services received. The
operating procedures and policy memos. However, on types of errors included:
some loans, the specific errors generally arose when:
• Lack of review of contract documents prior to
• Case managers and attorneys did not confirm issuance;
insurance coverage for the proper dates and the • Inadequate comparison of the invoice to the
state specific type of coverage, which accounts for contract to verify period of performance, terms, or
approximately 26 percent of all improper payments labor rates, and categories to ensure they agree; and
in this program;
• Payment accuracy issues where the financial system
• Disbursements were made to parties that were was not updated at the time of payment with
ineligible for disaster loan assistance; and current vendor payment information from the
• Underpayments incorrectly lowered borrowers’ loan System for Award Management.
amount eligibility.
To prevent the administrative and documentation
As a result, the ODA plans to perform the following errors noted in the improper payment review, the SBA
corrective actions: completed the following corrective actions:

• Review by Disaster Assistance headquarters of • Developed a checklist in February 2016 to
training materials on the various types of insurance strengthen both pre-award and post-award
coverages to ensure continued reduction of the verification processes and distributed it to
improper payment rate; and all contracting officers, contracting officer
• Development of tables for the various types representatives, and payment processors; and
of insurance coverages by states with detailed • Implemented an automated interface between the
coverages by the major insurers. financial system and SAM in January 2016.

DISBURSEMENTS FOR GOODS AND HURRICANE SANDY DISASTER RELIEF
SERVICES GRANTS

Statistical Sampling Statistical Sampling
Disbursements for goods and services samples were chosen The HSDR grant population for disbursements completed
using PPS with replacement methodology from payments during the 12-month period ending March 31, 2016,
completed during the 12-month period ending March consisted of 38 disbursements for the total dollar amount
31, 2016. The total number of disbursements was 2,838, of $5,567,094.22. It was determined that it was not
and the total dollar amount was $112,434,585. The cost effective to contract with a statistician to select a
SBA determined the appropriate sample size to be 277 sample so for this reason, 100 percent of the HSDR grant
unique invoices having total outlays of $56,144,052.38. disbursements were reviewed for improper payments. The
Based upon the sample results, the estimated FY 2016 100 percent test of disbursements will continue in future
disbursements for goods and services improper payment years until the funds are fully expended. Based upon the
rate is 10.35 percent for an estimated total of $11,641,750. test results, the estimated FY 2016 improper payment rate
Although this exceeds the 10 percent threshold for was 0.074 percent for a total of $4,132.
compliance, this represents a reduction in the improper
payment rate and dollars over the last fiscal year, which Corrective Action
reported a rate of 13.52 percent and $14 million. The improper payment rate of 0.007 percent and $4,132
The scope of the review covered three areas: (1) invoice does not exceed the 1.5 percent, nor the $10 million
accuracy, (2) compliance with contract terms, and (3) threshold for reporting a corrective action plan.
accuracy of invoice processing.

Corrective Action
In FY 2016, the root cause of the improper payments was
administrative and documentation errors. All payments

AGENCY FINANCIAL REPORT • FY 2016 115
OT H E R I NF OR M AT I ON

HURRICANE SANDY DISASTER RELIEF HURRICANE SANDY DISASTER RELIEF
ADMINISTRATIVE EXPENSES – PAYROLL ADMINISTRATIVE EXPENSES – PURCHASE
CARDS
Statistical Sampling
The HSDR payroll administrative expense samples were Statistical Sampling
chosen using PPS with replacement methodology from There were 464 HSDR purchase card administrative
payments completed during the 12-month period ending expense transactions during the 12-month period ending
February 28, 2015. The administrative expenses were February 28, 2015, which totaled $154,305.61. The
inadvertently not reported in FY 2014 so expenses from administrative expenses were inadvertently not reported in
March 1, 2014, to February 28, 2015, are being reported FY 2014 so expenses from March 1, 2014, to February 28,
in FY 2016; subsequent HSDR administrative expenses 2015, are being reported in FY 2016; subsequent HSDR
will be reported in future years. The total dollar amount administrative expenses will be reported in future years.
expended was $27,107,108. The SBA determined the After assessing the cost of a statistician’s services to select a
appropriate sample size to be 104 line items having total sample and evaluating the small volume of disbursements,
outlays of $430,133. Based upon the sample results, the it was determined that it was not cost effective to contract
estimated FY 2016 improper payment rate was with a statistician to select a sample. For this reason, 100
0.24 percent for a total of $66,238.53. percent of the HSDR purchase card disbursements were
tested for improper payments. The 100 percent test of
Corrective Action disbursements will continue in future years until the funds
The improper payment rate of 0.24 percent and are fully expended. Based upon the test results, the estimated
$66,238.53 does not exceed the 1.5 percent and FY 2016 improper payment rate was 0.61 percent for a total
$10 million threshold for reporting a corrective of $943.51.
action plan.
Corrective Action
HURRICANE SANDY DISASTER RELIEF The improper payment rate of 0.61 percent and $943.51
ADMINISTRATIVE EXPENSES – TRAVEL does not exceed the 1.5 percent and $10 million threshold
for reporting a corrective action plan.
Statistical Sampling
The HSDR travel administrative expense samples were
chosen using PPS with replacement methodology from Part III - Improper Payment Reporting
payments completed during the 12-month period ending Table 1 presents a summary of SBA’s improper payment
February 28, 2015. The administrative expenses were review results and reduction outlook.
inadvertently not reported in FY 2014 so expenses from
March 1, 2014, to February 28, 2015, are being reported HIGH PRIORITY PROGRAM—7(A) LOAN
in FY 2016; subsequent HSDR administrative expenses GUARANTY APPROVALS
will be reported in future years. The travel population
In FY 2015, OMB designated the 7(a) loan guaranty
was divided into three strata based on the following
approvals program a high priority program due to the
factors: reimbursements to employees for travel; payments
program’s reported improper payments of $848 million,
associated with centrally billed accounts; and travel related
which exceeds OMB’s high priority threshold of $750
relocation expenses. There were 180 expenditures with
million. Since this designation, the SBA has worked with
a total dollar amount of $269,495.44. Using the PPS
OMB to implement all applicable high priority program
approach, the SBA determined the appropriate sample
requirements.
size to be 79 disbursements having total outlays of
$178,804. Based upon the sample results, the estimated The most recent significant action that the Agency is
FY2016 improper payment rate was 0.059 percent for a pursuing to prevent and reduce improper payments is
total of $159.46. encouraging SBA lenders to enroll and utilize the SBA’s
new tool, SBA One, which was released in March 2015.
Corrective Action SBA One is designed to streamline and simplify the 7(a)
The improper payment rate of 0.059 percent and $159.46 lending process by creating a single portal addressing
does not exceed the 1.5 percent and $10 million threshold loan eligibility, underwriting, closing, loan modification,
for reporting a corrective action plan. servicing, and guaranty purchase. Furthermore, the
tool is designed to automate document uploads, form

116 AGENCY FINANCIAL REPORT • FY 2016
OTH E R I NF ORMATION

generation, credit scoring, and electronic signatures. It applications returned due to errors, awaiting signatures,
promotes a Guided Path including numerous validations missing documents, as well as loan approvals; it also
and additional requests for inputs on behalf of the lenders notifies lenders of required actions at various stages,
as a means to ensure all required loan documents are important dates, and upcoming events. Thus, the
completed in compliance with the SBA’s loan program implementation and use of this tool by SBA lenders
requirements. It also contains built-in features to alert will facilitate loan eligibility and lender compliance
lenders throughout the loan approval process of any throughout the loan approval process.

TABLE 1 IMPROPER PAYMENT REDUCTION OUTLOOK ($ IN MILLIONS)
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
Program Outlays 1
Outlays 1
Over- Under-
IP % IP $ IP % IP $ Outlays1 $ IP %5 IP $ Outlays1 $ IP %5 IP $ Outlays1 $ IP %5 IP $
$ $ paid $ paid $

7(a) Guaranty
880.16 0.9 7.91 576.92 2.32 13.37 9.88 3.49 459.49 1.66 7.61 379.39 1.56 5.92 288.03 1.46 4.21
Purchases1, 2
7(a) Guaranty
15,160.48 5.59 848.08 17,457.04 0.96 166.77 166.77 0.00 20,428.35 3.90 796.71 24,602.02 3.80 934.88 28,915.56 3.70 1,069.88
Approvals1,2,3,4
504 CDC
Guaranty 4,189.53 3.78 158.20 4,594.81 2.60 119.59 119.59 0.00 4,179.66 2.49 104.07 4,072.15 2.39 97.32 4,045.90 2.29 92.65
Approvals1,2
Disaster Loan
302.28 8.13 24.57 344.91 5.32 18.36 16.04 2.32 634.38 4.78 30.32 453.05 4.3 19.48 453.05 3.87 17.53
Disbursements1,5
Disbursements
for Goods and 105.44 13.52 14.26 112.43 10.35 11.64 11.64 0.001 107.69 10.25 11.04 107.69 10.15 10.93 107.69 10.05 10.82
Services2
Hurricane Sandy
Disaster Relief 4.3 3.02 0.13 5.57 0.074 0.004 0.004 0.00 2.50 0.06 0.002 0.00 N/A N/A 0.00 N/A N/A
Grants6
Hurricane Sandy
Disaster Relief
136.74 0.30 0.41 27.11 0.24 0.066 0.058 0.008 0.25 1.00 0.0025 0.00 N/A N/A 0.00 N/A N/A
Administrative
Funds - Payroll6,7,8
Hurricane Sandy
Disaster Relief
10.12 0.12 0.012 0.27 0.06 0.0002 0.00 0.0002 0.15 1.00 0.0015 0.00 N/A N/A 0.00 N/A N/A
Administrative
Funds - Travel6,7,8
Hurricane Sandy
Disaster Relief
Administrative 0.51 1.00 0.005 0.15 0.61 0.0009 0.0009 0.00 0.00 N/A N/A 0.00 N/A N/A 0.00 N/A N/A
Funds - Purchase
Cards6,7
Total9,10
20,789.56 5.07 1,053.58 23,119.21 1.43 329.80 323.98 5.82 25,812.47 3.68 949.76 29,614.30 3.61 1,068.53 33,810.23 3.53 1,195.09

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. Outlay figures for Disaster 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 in outlays for the previous three years and applying it to the current
level of outlays to project outlays in future years.
3 For 7(a) loan guaranty approvals, amounts reported are based on the guarantied amount only.
4 The FY 2017 improper payment target for 7(a) Guaranty Approvals is calculated using the arithmetic mean of the previous three year’s improper payment rates. SBA determined that
the FY 2016 improper payment rate was an anomaly because there were no large loans identified as improper in the FY 2016 testing, which is not typical.
5 Outlay projections do not match the President’s Budget as timeframe is not FY. Outlays estimated based on the prior five years disbursement rate of 43 percent and applying it to estimated annual
loan approvals. FY 2017 loan approvals based on actual 4th quarter 2016 disbursements of $875.3M and estimated $600M for the rest of the year.
6 Outlay projections based on remaining estimated balance of Hurricane Sandy Disaster Relief funds.
7 Data reported is for period March 1, 2014, through February 28, 2015, due to inadvertent lack of reporting in FY 2014.
8 The improper payment rate for Hurricane Disaster Relief Administration funds is projected to be 1 percent for its last year of funding, which is acceptable to the Agency.
9 Total improper payment estimates and improper payment percentages do not represent a true statistical estimate for the Agency.
10 Total does not include Hurricane Sandy Disaster Relief Indirect Expenses of $9.5 million; SBA recorded funds with “regular” indirect administrative Disaster program funds as was allowed
by appropriation law. Improper payments for Hurricane Sandy Disaster Relief direct funds for administrative expenses of payroll, travel and purchase cards were reported above.

AGENCY FINANCIAL REPORT • FY 2016 117
OT H E R I NF OR M AT I ON

The supplemental measure for the 7(a) loan guaranty Part VI – Internal Control Over
approval program is based on the number of loans
Payments
submitted to utilize the SBA One tool. The measure for
this program, as of March 31, 2016, was 579 loans; the The SBA is committed to establishing, maintaining, and
FY 2016 target was identified as 2,538 loans. OFPO’s monitoring internal controls over improper payments.
proposed supplemental measures, as described above, Reducing improper payments is a top management prior-
were submitted to OMB on April 28, 2016, and approved ity and has been included in management and staff indi-
on October 17, 2016. As of September 2016, a total of vidual performance goals in recent years. Responsibilities
2,977 loans were submitted using SBA One’s Guided are clearly defined and individuals are held accountable as
Path, surpassing the Agency’s FY 2016 target. appropriate for their role in the process.

Each office has established adequate internal controls to
Part IV - Improper Payment Root Cause mitigate the risks identified. The processes for all loan
Categories programs and contracts with vendors include a compre-
hensive eligibility review, which includes such activities
Table 2 presents a summary of the root causes of SBA’s as checking Treasury’s Do Not Pay portal or other system
improper payments. (e.g., the Credit Alert Verification Reporting System or
CAIVRS), verifying income, confirming small business
Part V – Corrective Actions classification, and in the case of Disaster direct loans,
conducting on-site visits to determine the cost of repair
To provide more clarity for the reader, the Corrective or replacement of the damaged property. Other require-
Actions section was coupled with the statistical sampling ments for specific loan programs and specific contracts
information in Part II, organized by the nine programs are also reviewed prior to approval. All disbursements
subjected to review for improper payments. are approved using the “Rule of Two,” meaning that
two people review and approve the disbursement at the

TABLE 2 IMPROPER PAYMENT ROOT CAUSE CATEGORIES BY PROGRAM MATRIX ($ IN MILLIONS)
7(a) Guaranty 7(a) Guaranty 504 CDC Disaster Disbursements Hurricane HSDR HSDR HSDR
Purchases Approvals Guaranty
Direct Loan for Good and Sandy Disaster Administrative Administrative Administrative
Approvals
Disbursements Services (HSDR) Relief Expense - Expense - Expense -
Reason for Improper Payment Grants Payroll Travel Purchase Card
Over Under Over Under Over Under Over Under Over Under Over Under Over Under Over Under Over Under
payment payment payment payment payment payment payment payment payment payment payment payment payment payment payment payment payment payment
Program Design or Structural
Issue
Inability to Authenticate
166.77 119.59 6.26 2.32
Eligibility
Death Data
Financial Data
Excluded
Failure to Party Data
Verify:
Prisoner Data

Other
Eligibility Data

Federal
9.88 3.49 11.42 0.001 0.058 0.008 0.0002
Agency
Administrative/
Process Error State or Local
Made by: Agency
Other party
Medical Necessity
Insufficient Documentation to
Determine 0.22 0.004 0.0009

Other Eligibility Data1 9.78
Total Estimated Improper
Payments 9.88 3.49 166.77 119.59 16.04 2.32 11.64 0.001 0.004 0.058 0.008 0.0002 0.0009

1 This category consists of lack of documents to support ODA’s policies concerning: a) insurance - $4,900,204; b) contractors compliance - $1,067,572;
c) titling/mortgage issues - $2,097,631; and d) miscellaneous - $1,711,555.

118 AGENCY FINANCIAL REPORT • FY 2016
OTH E R I NF ORMATION

office level; the disbursements are reviewed again in the ensure that they are high performing, effective, and rele-
Administrative Accounting office using the “Rule of vant to the needs of the small business community. SBA’s
Two.” Finally, all disbursements are batched and processed strategic goals are included in annual performance plans
through Treasury’s Do Not Pay portal at the time for all of its programs as business objectives and these
of payment. are also included in employee performance plans. SBA
management monitors accomplishments of these business
SBA management has established controls throughout objectives and takes action when progress toward goal
both the loan and contracting processes and is responsible achievement is not on target. Executive and management
for training staff to perform the manual controls effec- bonuses are based on the accomplishment of business
tively and to communicate any change to the programs objectives included in employee annual performance
or controls timely. Due to the different levels of staff plans. This management process helps assure accountabil-
knowledge and skills in performing controls, the 7(a) ity for the reduction of improper payments.
Guaranty Approval, 7(a) Guaranty Purchase, 504 CDC
Guaranty Approval, and the Disaster loan centers have
established robust QC programs to monitor the quality Part VIII - Information Systems and
of loan approvals, purchases, and disbursements and to Other Infrastructure
provide feedback to management. High risk loans, based
on specific characteristics such as dollar value, loan type, 7(a) loan guaranty purchases are supported by the
and loan delegation, are reviewed prior to any funds being Guaranty Purchase Tracking System. It is continually
disbursed, or in the case of guaranties, committed to the updated to enhance the overall integrity of the purchase
lender. Reviews are documented in databases, which pro- process. Resources as they relate to human capital are
vide timely information to management, such as types of currently adequate; however, the 7(a) guaranty purchase
errors, corrective actions taken or planned, and areas that program would benefit from additional staffing resources.
may require additional training. 7(a) loan guaranty approvals and 504 CDC loan
SBA management believes adequate controls are in guaranty approvals has adequate internal controls and
place and are generally working effectively; however, it are supported by E-Tran, SBA’s electronic loan processing/
appears that the SBA needs to enhance its documenta- servicing system. Both the SBA and delegated lenders
tion procedures to evidence payments are proper. Per the process applications through the system and lenders may
definition provided in OMB Circular A-123, Appendix also handle unilateral servicing actions electronically. The
C, if an agency’s review is unable
to discern whether a payment was
TABLE 3 STATUS OF INTERNAL CONTROLS
proper as a result of insufficient or
lack of documentation, this payment
Disbursements
must be considered as an improper Internal Control 7(a) Guaranty 7(a) Guaranty 504 CDC Disaster Loan
for Goods and
Standards Purchases Approvals Approvals Disbursements
payment. Lack of proper and/or Services
accurate documentation appears to
be the predominant reason for most Control
4 4 4 4 4
Environment
improper payments at the SBA.

Table 3 reflects managements’ assess- Risk Assessment 3 3 3 2 3

ment of internal controls in their
Control Activities 3 3 3 3 3
respective offices.
Information &
3 3 3 2 3
Part VII – Accountability Communication

The focus of SBA’s Strategic Goal 3 Monitoring 4 4 4 3 3
is to build the SBA that meets the
needs of today’s and tomorrow’s 4 = Sufficient controls are in place to prevent improper payments.

small businesses. Strategic Objective 3 = Controls are in place to prevent improper payments, but there is room for improvement.

3.1 is designed to strengthen SBA’s 2 = Minimal controls are in place to prevent improper payments.

core programs and operations to 1 = Controls are not in place to prevent improper payments.

AGENCY FINANCIAL REPORT • FY 2016 119
OT H E R I NF OR M AT I ON

system provides increased efficiency and decreased costs Part X - Recapture of Improper
in the loan guaranty origination and servicing processes.
Payments
The loan programs are also supported by SBA One, an
automated lending platform to streamline the lending On September 15, 2011, the SBA submitted a Payment
process Resources as they relate to human capital are Recapture Audit Cost-Effective Analysis to the Office
currently adequate; however, the 7(a) guaranty approval of Management and Budget. The analysis discussed the
and 504 guaranty approval programs would benefit from 7(a) Business Loan Guaranty Program, the 504 Certified
additional staffing resources. Development Company Loan Guaranty Program, the
Disaster Direct Loan Program, Contracts/Acquisition
Disaster direct loan program has the information (now reported as Disbursements for Goods and Services),
systems and other infrastructure it needs to reduce the Small Business Investment Company Financing
improper payments to targeted levels. For example, Guaranty Program, the Surety Bond Guaranty Program,
the Office Disaster Assistance has an integrated, and Grants, which included all grant programs. The
electronic loan processing system, the Disaster Credit analysis described the program, the controls over financial
Management System, to streamline, enhance, and disbursements, and the size of the program and concluded
improve the loan-making process. This system supports for each program that recapture audits would not be cost
workflow management, electronic file management, and effective due to low error rates, complexity of the pro-
document generation functions. Many of the business gram, or limited amount of outlays. For the latter three
rules governing DCMS have been designed to improve listed programs, assessments in 2014 further supported
the quality assurance process. In fact, the ODA quality the lack of cost-effectiveness of recapture audits by iden-
assurance team works continually with the DCMS tifying that the programs are not susceptible to improper
development team to improve the quality assurance payments.
process with a goal to minimize future improper payments
as much as possible. The Disaster direct loan program has Agency efforts to recapture improper payments are dis-
adequate human capital to maintain its internal controls. cussed by program.

Disbursements for goods and services are handled by 7(a) loan guaranty purchase improper payment reviews,
the Oracle Federal Financial System. PRISM, a contract Quality Control Reviews, and OMB Circular A-123
management system, is used to process SBA’s acquisitions. Appendix A reviews indicated in FY 2015 that the SBA
The SBA acquisition and accounts payable teams continue would continue to perform payment recapture audits
work to improve interfaces between PRISM, the financial as part of its Quality Control Program but would not
system, and external databases to streamline the acquisi- formally report the process in subsequent years due to
tion process from start to finish. An automated interface the improvements seen in the program and its improper
between SAM and the financial system was implemented payment rate. Despite the minor increase to the program’s
in January 2016 to improve payment accuracy. The reported improper payment rate in FY 2016, the rate is
effectiveness of internal controls will need to be enhanced still at an acceptable level to the Agency. The SBA intends
to reduce improper payments; human capital resources to continue performing the recapture audits as part of its
are adequate, but the Acquisition Division and Office of QC Program in FY 2017, but again, will not be formally
Chief Financial Officer would benefit from additional reporting the audit process and results in FY 2017.
staffing resources.
7(a) loan guaranty approval and 504 CDC loan
approval are not subject to payment recapture audits as
Part IX - Statutory or Regulatory no payment is made at the time of approval; payment is
Barriers made only if the lender requests that the SBA honor its
guaranty. Improper payments identified through both
The SBA does not have any statutory or regulatory the annual improper payment and continuous quality
barriers limiting improvement to its performance on the control reviews are recovered from the lender through
improper payments initiative. the cancellation of the SBA guaranty, reduction in loan
guaranty percentage, or loan modification, as appropriate.
This determination is made on a case-by-case basis, which
varies substantially depending on the circumstances of the
loan approval and lender authority.

120 AGENCY FINANCIAL REPORT • FY 2016
OTH E R I NF ORMATION

Disaster direct loans recapture audits would not be cost this program area are recoverable from lenders as appro-
effective as improper payments are generally the result of priate. Recoverable payments include those identified
loan documentation errors and do not result in a disaster during the improper payment review in the amount of
victim receiving funds for which they are not eligible. $7,030,972 and those identified through OIG audits in
Improper payments are not recovered upon discovery the amount of $4,982,358 for a total of $12,013,330. All
but realized as the borrower makes each payment on overpayments identified as part of the improper payment
the loan. Further, the majority of loans are collateral- audit have been recaptured; those identified through OIG
ized which promotes maximum recovery. Only one audits have been recaptured in the amount of $1,066,666.
ineligible disbursement was identified, in the amount of The remaining recommendations and related funds are
$110,000. The improper payment audit was completed still being reviewed by the Office of Financial Program
using 4,400 hours of staff time at an approximate labor Operations to determine the appropriate corrective action.
cost of $185,850. Based on the cost to audit versus the Cash disbursements related to goods and services made
estimated dollars of recovery of $110,000, it is clear that for an inaccurate amount or not according to contract
further expenditures for a separate recovery audit is not terms total $10,366.72, none of which has been recap-
cost effective. tured this year.

Disbursements for goods and services recapture audits Table 4 provides a summary of the overpayments estab-
would not be cost effective. The improper payment testing lished and recovered outside recapture audit programs.
required 685.5 labor hours at a cost of $40,348.76.
Payments identified during the improper payment review Table 5 — Disposition of Funds Recaptured Through
as eligible for recapture totaled $10,366.72; thus, the cost Payment Recapture Audits and Table 6 — Aging of
of the review exceeds the return. Outstanding Overpayments Identified in the Payment
Recapture Audits are not applicable to the SBA and are
Hurricane Sandy disaster relief grants would not benefit therefore not included.
from a recapture audit. The overpayments identified were
from administrative errors and these payments are not
eligible for recapture.
Part XI – Additional Comments
None.
Overpayments recaptured outside of payment recap-
ture audits for SBA credit programs are applicable only
to 7(a) loan guaranty purchases, as payments made within

TABLE 4 IMPROPER PAYMENT RECAPTURES WITH AND WITHOUT AUDIT PROGRAMS ($ IN MILLIONS)

Overpayments
Recaptured outside of
Overpayments Recaptured through Payment Recapture Audits
Payment Recapture
Audits
Loans Total
CY + 1 CY + 2
Amount Amount CY Recapture Amount Amount Amount Amount
Program or Activity Recapture Recapture Rate
Identified Recaptured Rate Identified Recaptured Identified Recaptured
Rate Target Target

7(a) Guaranty Purchase1 12.01 8.10

Disbursements for Goods and Services1 0.01 0.00

TOTAL 12.02 8.10

1 Period of review is for the 12-month period ending March 31, 2016.

AGENCY FINANCIAL REPORT • FY 2016 121
OT H E R I NF OR M AT I ON

Part XII – Agency Reduction of – Restricted for eligibility checks in the processing of 7(a)
business loan program applications at the Standard 7(a)
Improper Payments with the Do Not
Loan Guaranty Processing Center. This has improved the
Pay Initiative process for determining eligibility. There are current plans
The SBA has implemented the Do Not Pay Initiative to expand the use of DNP database for eligibility checks
and subjects its disbursements to comparison against to the 504 loan program.
the Death Master File and SAM Exclusion Records – The 7(a) loan guaranty purchase process now requires
Restricted at the time of payment. The comparison the SBA to complete a CAIVRS search prior to guaranty
between SBA and DNP data is completed on a daily basis purchase. The 7(a) loan guaranty approvals and 504 CDC
using current disbursement data. SBA staff manually loan guaranty approval processes require lenders and the
review and adjudicate the findings of the data matches, SBA, depending on loan delegation, to review CAIVRS
with the majority of matches received from the DMF. and Debt Check during the loan approval process.
The FY 2016 DNP process examined SBA disbursements
between October 2015 and August 2016. September In FY 2017, the SBA will continue to incorporate CAIVRS
2016 data was not available from DNP at the time and Debt Check into its review processes, as well as the
of this report. DNP portal, but it does not have the capacity to monitor the
impact of funds not issued to a participating lender or CDC.
Table 7 summarizes the results of the Do Not Pay
Initiative in preventing improper payments.
FREEZE THE FOOTPRINT REPORT
The improper payments were not directly caused by a
failure to use the DNP database but rather a failure to
Section 3 of the Office of Management and Budget
review internal databases that had identified the borrower
Memorandum M-12-12 “Promoting Efficient Spending
as deceased. While this condition still exists in FY 2016,
to Support Agency Operations” and OMB Management
the SBA has taken steps to mitigate the failure with new
Procedures Memorandum 2013-02 “Freeze the Footprint”
manual internal controls. During FY 2016, the SBA
direct that all Chief Financial Officers Act agencies shall
provided the Disaster Service Centers with access to the
not increase the total square footage of their domestic
DNP portal in order to manually verify the status of a
office and warehouse inventory compared to the FY 2012
borrower prior to issuing a refund for an overpayment
baseline. Progress in meeting the “Freeze the Footprint”
on a paid-in-full loan. The Office of Disaster Assistance
policy is based on an annual evaluation of an agency’s
is working with the Treasury Department to establish a
total office and warehouse square footage.
process to access the DMF, the Excluded Parties List, and
Debt Check during the eligibility review stage of loan Since the establishment of OMB Memorandum M-12-12,
processing so that records will be searched both at the the SBA has successfully reduced its real estate footprint.
time of application and at the time of disbursement in the The SBA had a baseline of 1.375 million square feet of
batch file review. space in FY 2012. In FY 2015, the SBA had 1.363 million
square feet of space. In FY 2015, the SBA reduced the
The SBA has incorporated the use of the DNP databases
footprint from the 2012 baseline but added space since FY
DMF, Debt Check Database and SAM Exclusion Records

TABLE 7 RESULTS OF THE DO NOT PAY INITIATIVE IN PREVENTING IMPROPER PAYMENTS ($ IN MILLIONS)

Number (#) of Dollars ($) of
Number (#) of Dollars $ of
potential improper potential improper
payts reviewed payments Number (#) of Dollars ($) of
payments payments
for possible reviewed payments payments
reviewed and reviewed and
improper for improper stopped stopped
determined determined
payments payments
accurate accurate

Reviews with the Do Not Pay
219,346 1,616.14 0 0.00 31 0.36
databases

Reviews with databases not
0 0.00 0 0 .00 0 0.00
listed in IPERIA as Do Not Pay

122 AGENCY FINANCIAL REPORT • FY 2016
OTH E R I NF ORMATION

2014 in Washington, D.C., and Federal Way, Washington. CIVIL MONETARY PENALTY
In Washington, D.C., the renovation of the main facility
and the transfer of staff to the Patriots Plaza building ADJUSTMENT FOR INFLATION
increased the square footage; however, staff has been
The Federal Civil Penalties Inflation Adjustment Act of
transferred back to their original facility, which resulted
1990, as amended, requires agencies to make regular and
in a reduction of the square footage in FY 2016.
consistent inflationary adjustments of civil monetary
The following table summarizes SBA data: 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
FREEZE THE FOOTPRINT BASELINE COMPARISON
by federal law or has a maximum amount provided for
FY 2015 Change (FY 2012 by federal law; and is assessed or enforced by an agency
FY 2012
Actuals Baseline-2015 pursuant to federal law; and is assessed or enforced
Baseline
(CY - 1) (CY-1)) pursuant to an administrative proceeding or a civil action
in the federal courts. To improve compliance with the Act,
Square Footage
1.375 1.363 0.012 and in response to multiple audits and recommendations,
(SF in Millions)
agencies must report the most recent inflationary
adjustments to civil monetary penalties to ensure penalty
Reporting of O&M Costs – Owned and adjustments are both timely and accurate. Pursuant to the
Act, the SBA reviewed each of the penalty amounts under
Direct Lease Buildings its statutes and penalty amounts for inflation when required
The SBA only occupies buildings that are leased by the under the law. The SBA applied a prescribed formula from
U.S. General Services Administration and subject to the Act for calculating the penalty.
occupancy agreements between the GSA and the SBA.
The following table reflects the authorities imposing the
These agreements are explicitly excluded from reporting in
penalties, the civil penalties, the adjustment years, the
this section per OMB Circular A-136.
current penalty levels, the offices of the program, and the
locations for the penalty updates.

SBA FEDERAL CIVIL PENALTIES

Latest Year of Current
Location for
Penalty Year Adjustment Penalty Level Sub-Agency/
Statutory Penalty Update
(Name or Description) Enacted (via Statute or ($ Amount Bureau/Unit
Details
Regulation) or Range)

Failing to File Report Office of Federal Register 81
Small Business Investment Act,
Timely for a Small Business 1966 2016 $250 Investment and (19 May 2016):
15 USC 687(g)
Investment Company (SBIC) Innovation 31489-31492.
Failing to File Report Timely Federal Register 81
Small Business Investment Act, Office of Capital
for a Small Business Lending 2004 2016 $6,229 (19 May 2016):
15 USC 650(j) Access
Company (SBLC) 31489-31492.
Small Business Act,
Federal Register 81
15 USC 634(b)(6) and Administrative Remedies for
1986 2016 $10,781 Multiple offices (19 May 2016):
Program Fraud Civil Remedies Act False Statements and Claims
31489-31492.
31 USC 3802(d)

Small Business Act,
Federal Register 81
15 USC 634(b)(6) and Penalty for Violation of $17,816 to
1990 2016 Multiple offices (19 May 2016):
Program Fraud Civil Remedies Act Lobbying Restrictions $178,156
31489-31492.
31 USC 1352

AGENCY FINANCIAL REPORT • FY 2016 123
DID
YOU COUNSELING SBA provides mentorship, counseling, and strategic
KNOW advice to more than one million small business owners annually through
SBA’s Small Business Development Centers, Women’s Business Centers,
Veterans Business Outreach Centers, and 68 district offices.

SUCCESS SBA National Exporter of the Year
Endoscopy Replacement Parts Inc.
STORY Newberry, Florida

David Peter Bello Sr. founded Endoscopy Replacements Parts Inc. in 1977
after working for years for his father’s manufacturing business. David Sr.
realized that in the Newberry, Florida, area several companies performing
endoscope repair could benefit from a reliable supply of endoscope repair and replacement products.

ERPI started with four employees, but by venturing into exporting its products, the company grew rapidly. By 2005,
ERPI increased its inventory to more than 2,000 lines and tripled its staff. Today, ERPI exports to several dozen
countries from Canada to China, Malaysia, and Kazakhstan.

ERPI participated in an Export Marketing Plan program at the Small Business Development Center at University
of Northern Florida in Jacksonville and received a $3,000 grant to offset the cost of plan development, a thoroughly
researched foreign market analysis, a customized action plan, and recommended target markets.
Appendices
DID
YOU DISASTER Since 1953, the SBA has approved more than two million
KNOW disaster loans for over $55 billion to businesses of all sizes, private non-
profit organizations, homeowners and renters.

SUCCESS Phoenix Award for Outstanding Small
Business Disaster Recovery
STORY Majestic Vending and Services Inc.
Staten Island, New York

Majestic Vending and Services Inc. began as a single gumball machine at a construction
site in 1994. The grit and determination of owners Maryann and Stephen Piazza
made it possible for the business to succeed. The company provides vending, office
coffee services, and bottled water delivery to the New York City area.

On October 29, 2012, Hurricane Sandy’s ferocious winds toppled a tree, which crashed into the chimney of
Majestic’s warehouse, causing parts of the ceiling to collapse. Inventory, equipment, furniture, and office supplies
were destroyed. Repair costs were estimated at around $80,000, but the insurance company wanted to settle for just
$1,000. After a two-year mediation the settlement was increased to $32,700 — still not enough to cover repair costs.

The Piazzas turned to the SBA and were approved for a disaster loan of $59,600. The loan gave them the capital
needed to move forward with repairs, debris removal, and inventory and machine replacement. Maryann never closed
the business, kept her customers, and did not lay off a single employee.
APPENDICES

APPENDIX 1 - CONTACT SBA: USEFUL SITES AND NUMBERS

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

SBA INFORMATION
About SBA www.sba.gov/about-sba
SBA Performance, Budget and Planning www.sba.gov/performance
Business USA http://business.usa.gov/

STARTING AND MANAGING A BUSINESS
How to Start a Business www.sba.gov/starting-business/how-start-business
Local Assistance www.sba.gov/local-assistance
Lender Resources www.sba.gov/for-lenders
Managing a Business www.sba.gov/managing-business/
Health Care www.sba.gov/healthcare
Small Business Loans www.sba.gov/loans-grants/see-what-sba-offers/

CONTRACTING
Government Contracting www.sba.gov/contracting
Register as a Contractor www.sam.gov

ADVISING, MENTORING, AND TRAINING
SBA Learning Center www.sba.gov/training
Small Business Development Centers www.sba.gov/sbdc
Women’s Business Centers www.sba.gov/offices/headquarters/wbo
SCORE Business Mentors www.sba.gov/score
Veterans Outreach www.sba.gov/tools/local-assistance/vboc

DISASTER ASSISTANCE
Disaster Assistance www.sba.gov/disaster
Disaster Area Office Locations www.sba.gov/about-offices-list/4
FEMA Information www.fema.gov

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

SBA INFORMATION
SSBA National Answer Desk (800) 827-5722 (Toll Free)
Disaster Assistance Customer Service Center (800) 659-2955 (Toll Free)
Facebook www.facebook.com/sbagov
Twitter www.twitter.com/sbagov/
YouTube www.youtube.com/sbagov
SBA blog www.sba.gov/blogs/

AGENCY FINANCIAL REPORT • FY 2016 127
AP P E ND I C E S

APPENDIX 2 - GLOSSARY
Available at: www.sba.gov/performance, FY 2016 Agency Financial Report

504 504 Certified Development Loan APG Agency Priority Goal
Program The Government Performance and Results
The 504 loan program provides small Modernization Act of 2010 requires federal
businesses with long-term, fixed-rate agencies to establish a set of two-year APGs
financing for the purchase of land, that reflect the highest priorities of agency
buildings, and long-life capital equipment. leadership.

7(a) 7(a) Loan Guaranty Program APR Annual Performance Report
The 7(a) loan program is SBA’s primary The APR is required by the Government
loan program; it provides general loan Performance and Results Act and presents a
financing for a wide variety of purposes. federal agency’s progress in achieving the goals
in its strategic plan and performance budget.
7(j) The 7(j) Management and Technical
Assistance Program BATF Business Assistance Trust Fund
The 7(j) loan program provides specialized The BATF is a trust fund in the U.S.
assistance to underserved small businesses. Treasury maintained to receive and account
for donations made by private entities for
7(m) The 7(m) Microloan Program activities to assist small business.
The microloan loan program provides
small, short-term loans to small business BLIF Business Loan and Investment Fund
concerns and certain types of non-profit BLIF is a fund operated by the U.S.
child care centers. Department of the Treasury to maintain
the accounting records of loans approved
8(a) 8(a) Business Development Program prior to 1992.
The 8(a) loan program assists firms
owned and controlled by socially and CAIVRS Credit Alert Verification Reporting System
economically disadvantaged individuals CAIVRS is a system used to determine if
to enter and succeed in the economic a loan applicant has any federal debt that
mainstream. is currently in default or foreclosure or has
had a claim paid by the reporting agency
A-123 Designation for OMB Circular on within the last three years.
Internal Control Systems
The A-123 guidance prescribes policies CAP Goals Cross-Agency Priority Goals
and procedures to be followed by executive The SBA participates in many of the
departments and agencies in establishing, government-wide federal Cross-Agency
maintaining, evaluating, improving, and Priority Goals. CAP Goals are Presidential
reporting on internal controls in their priorities. They are identified in areas
program and administrative activities. where increased cross-agency coordination
on outcome-focused areas is likely to
AFR Agency Financial Report improve progress.
The AFR is an annual report that provides
to OMB, Congress, and the public, an CBJ Congressional Budget Justification
overview of the Agency’s financial and The CBJ is a federal agency’s annual budget
performance data. request to Congress.

128 AGENCY FINANCIAL REPORT • FY 2016
APPENDICES

CDC Certified Development Company EDP Entrepreneurial Development Program
CDCs are non-profit corporations, The account EDP reports entrepreneurial
certified and regulated by the SBA, that development expenses.
work with participating lenders to provide
financing to small businesses. FCRA Federal Credit Reform Act
FCRA is a law enacted to provide a
CDFI Community Development Financial more realistic picture of the cost of U.S.
Institution government direct loans and
A CDFI provides credit and financial loan guaranties.
services to underserved markets and
populations. FECA Federal Employees’ Compensation Act
FECA provides compensation benefits
CEAR Certificate of Excellence in to federal civilian employees and to their
Accountability Reporting surviving dependents for work-related
Agencies that participate in the CEAR injuries or illnesses.
program with reports that are considered
excellent are awarded the Certificate of FERS Federal Employees Retirement System
Excellence in Accountability Reporting. FERS is a three-tiered retirement plan
for federal employees hired after 1984,
CFO Chief Financial Officer composed of Social Security benefits, a
The CFO is the financial leader of the basic benefit plan, and contributions to a
OCFO, whose duties include overseeing all Thrift Savings Plan.
Agency disbursements, management, and
coordination of Agency planning, budgeting, FFMIA Federal Financial Management
analysis, and accountability processes. Improvement Act
FFMIA is a law that requires each agency
DCIA Debt Collection Improvement Act of 1996 to implement and maintain financial
DCIA provides federal agencies with management systems that comply
new and enhanced delinquent debt substantially with federal financial
collection tools. management systems requirements,
applicable federal accounting standards,
DCMS Disaster Credit Management System and the United States Standard
DCMS is the electronic system used General Ledger.
to process loan applications for all new
disaster declarations. FITARA Federal Information Technology
Acquisition Reform Act
DLF Disaster Loan Fund The purpose of this legislation is to
DLF assists eligible small businesses improve the acquisition and management
impacted by disasters. of federal information technology assets.
DMF Death Master File FMFIA Federal Managers Financial Integrity Act
DMF is an electronic database that FMFIA is a law that primarily requires
contains records of deceased individuals. ongoing evaluations and reports on the
adequacy of the internal accounting and
DNP Do Not Pay Initiative
administrative control systems of executive
DNP was established by the Improper agencies. It also requires evaluations and
Payments Elimination and Recovery reports on the conformance of financial
Improvement Act (IPERIA) of 2012 to management systems.
support federal agencies with their efforts
to prevent and detect improper payments.

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FTA Fiscal Transfer Agent HUBZone Historically Underutilized Business Zone
The FTA is the SBA agent tasked with the HUBZone is an SBA program that
responsibility to administer each SBA Pool encourages economic development by the
or Individual Certificate. This maintains establishment of federal contract award
a registry of Registered Holders and other preferences for small businesses located in
information as the SBA requires. historically underutilized business zones.

FTE Full Time Equivalent IIP Incremental Improvement Project
FTE indicates the workload of an IIP refers to information technology
employed person. An FTE of 1.0 means projects intended to upgrade existing
that the person is equivalent to a full-time financial software and application modules
worker while an FTE of 0.5 means that the in SBA’s Loan Accounting System.
worker is only half-time.
IPERA Improper Payments Elimination and
FY Fiscal Year Recovery Act
The federal government fiscal year The law requires that agencies examine the risk
begins October 1 and ends the following of, and feasibility of recapturing, improper
September 30. payments in all programs and activities.

GAAP Generally Accepted Accounting IPERIA Improper Payments Elimination and
Principles Recovery Improvement Act of 2012
GAAP is the standard framework of IPERIA is an act to intensify efforts to identify,
guidelines for financial accounting prevent, and recover payment error, waste,
generally known as accounting standards fraud, and abuse within federal spending.
or standard accounting practice.
IPIA Improper Payment Information Act
GAO U.S. Government Accountability Office IPIA is a federal law enacted in 2002 to
GAO is an independent, nonpartisan identify and reduce erroneous payments in
agency that investigates how the federal the government’s programs and activities.
government spends taxpayer dollars and
reports their findings to Congress. ISCM Information Security Continuous
Monitoring
GCBD Office of Government Contracting and An ISCM is a strategy designed to provide
Business Development a roadmap that focuses on a near-real-time
GCBD works to create an environment approach to SBA risk remediation, operational
for maximum participation by small, awareness, and long-term risk management.
disadvantaged, and women-owned
businesses in federal government contract IT Information Technology
awards and large prime subcontract awards. IT refers to matters concerned with the
design, development, installation, and
GSA General Services Administration implementation of information systems
GSA is a federal agency of the Executive and applications.
Branch whose mission is to deliver the best
value real estate, acquisition, and technology IV&V Independent Validation and Verification
services to government agencies. An IV&V review executes independent
procedures by a third party that are used
HSDR Hurricane Sandy Disaster Relief for checking that a model, product,
A program funding real estate repairs, service, or system meets requirements and
reconstruction, inventory equipment specifications and that it fulfills its intended
and working capital for small businesses purpose. IV&V reviews of SBA’s Office of
and non-profits for damages as a result of Financial Analysis and Modeling financial
Hurricane Sandy. models are conducted to assure that they are
accurate and properly functioning.

130 AGENCY FINANCIAL REPORT • FY 2016
APPENDICES

LMAS Loan Management and Accounting OCIO Office of the Chief Information Officer
System OCIO is responsible for the management
LMAS is the financial management system of information technology for the Agency,
that supports loan accounting. including the design, implementation,
and continuing successful operation(s) of
LSP Lender Service Provider information programs and initiatives.
An agent who carries out functions in
originating, disbursing, servicing, or OCPL Office of Communications and Public
liquidating a specific SBA business loan Liaison
or loan portfolio for compensation from OCPL communicates the SBA’s programs
the lender. and priorities to small businesses, resource
partners, and the public at large through
MRA Master Reserve Account media outlets.
SBA’s fiscal agent maintains this escrow fund
to facilitate the operation of the Certified OCRM Office of Credit Risk Management
Development Company program. OCRM manages program credit risk,
monitors lender performance, and enforces
MRF Master Reserve Fund lending program requirements.
SBA’s fiscal and transfer agent maintains
this reserve fund to facilitate the operation ODA Office of Disaster Assistance
of the 7(a) secondary market program. ODA is SBA’s office that promotes
economic recovery in disaster ravaged
NBER National Bureau of Economic Research areas. Disaster loans are the Agency’s
A private, non-profit, non-partisan primary form of federal assistance for
organization dedicated to conducting non-farm, private sector disaster losses for
economic research and provides findings individuals and businesses.
to academics, public policy makers, and
business professionals. OED Office of Entrepreneurial Development
OED is the SBA office that oversees a
NDAA National Defense Authorization Act network of programs and services that
United States federal law specifying the support the training and counseling needs
budget and expenditures of the United of small businesses.
States Department of Defense.
OFA Office of Financial Assistance
OBD Office of Business Development OFA is the SBA office that administers
OBD assists small, disadvantaged various loan programs to assist small
businesses gain access to federal and private businesses.
procurement markets.
OFO Office of Field Operations
OCA Office of Capital Access OFO is the SBA’s front-line operating
OCA is responsible for small business loans, team organized with regional, district,
lender oversight, and the surety bond program. and branch offices located in each state
and territory.
OCFO Office of the Chief Financial Officer
OCFO is responsible for the financial OFPO Office of Financial Program Operations
leadership of the Agency, including all OFPO leads the financial services industry
Agency disbursements, management, and in quality products and services to SBA
coordination of Agency planning, budgeting, partners and customers, and protects the
analysis, and accountability processes. integrity of SBA programs.

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OGC Office of the General Counsel QA and QC Quality Assurance and Quality Control
OGC provides comprehensive legal services QA and QC are functions to assure
to the Administrator and all Agency offices. that project deliverables meet SBA’s
requirements and quality standards.
OHRS Office of Human Resources Solutions
OHRS develops and provides innovative QAR Quality Assurance Review
human capital strategies. The office advises QAR is a review to identify any deficiencies
SBA management with respect to selecting, to include improper payments.
developing, and managing a high quality,
productive workforce. RGDP Real Gross Domestic Product
RGDP is an inflation-adjusted measure
OIC Office of Internal Controls that reflects the value of all goods and
OIC, an office within the Office of the services produced in a given year, expressed
Chief Financial Officer, has the lead in in base-year prices.
ensuring managers comply with internal
control standards. RISE Recovery Improvements for Small
Entities After Disaster Act of 2015
OIG Office of Inspector General This bill amends the Small Business Act
OIG conducts and supervises audits, to authorize a small business, homeowner,
inspections, and investigations relating to non-profit entity, or renter that was located
SBA programs and operations. within a declared major disaster area during
Superstorm Sandy in 2012 to apply for a
OMB U .S. Office of Management and Budget Small Business Administration (SBA) loan.
OMB is the White House office that
oversees preparation of the federal budget SAM System for Award Management
and supervises its administration in SAM is the federal government system that
Executive Branch agencies. tracks grant awards.

OPM U.S. Office of Personnel Management SAT Senior Assessment Team
OPM is the federal government’s human SBA’s SAT is chaired by the Chief Financial
resources agency. Officer and comprised of SBA managers
from the major programs and support
OPM&CFO Office of Performance Management and offices to oversee the assessment of internal
the Chief Financial Officer controls for financial reporting performed
The office conducts and promotes effective by the Office of Internal Controls.
performance and financial management
activities for the SBA including SBA U.S. Small Business Administration
performance reports, budget, credit The SBA is the federal agency of the Executive
subsidy, financial operations, financial Branch whose mission is to maintain and
systems, internal controls, and acquisitions. strengthen the nation’s economy by enabling
the establishment and vitality of small
PFCRA Program Fraud Civil Remedies Act of businesses and by assisting in the economic
1986 recovery of communities after disasters.
A statute that provides an administrative
remedy to executive branch agencies SBDC Small Business Development Center
related to false, fictitious, or fraudulent SBDCs provide management and technical
claims and statements. assistance, economic development, and
management training to existing and
PPS Probability Proportional to Size prospective small businesses through
A method of sampling that takes the varying cooperative agreements with universities and
size of each item within the population into colleges and government organizations.
account when selecting the audit sample.

132 AGENCY FINANCIAL REPORT • FY 2016
APPENDICES

SBG Surety Bond Guarantee STEP State Trade and Export Promotion
The SBG program provides guaranties, Program or Grant
bid, performance, and payment bonds STEP is a pilot export initiative to make
for contracts up to $2.0 million for matching fund awards to states to help
eligible small businesses that cannot small businesses enter and succeed in the
obtain surety bonds through regular international marketplace.
commercial channels.
VBOC Veterans Business Outreach Center
SBGRF Surety Bond Guaranty Revolving Fund VBOCs provide entrepreneurial
All the contractor and surety fees collected development services such as business
by the SBA are deposited in the SBGRF training, counseling and mentoring, and
at the U.S. Department of the Treasury, referrals for eligible veterans owning or
which is used to pay claims. considering starting a small business.

SBIC Small Business Investment Company V-WISE Veteran Women Igniting the Spirit of
An SBIC provides long-term loans, debt- Entrepreneurship
equity investments, and management VWISE is an entrepreneurial training
assistance to small businesses, particularly program for female veterans of all service
during their growth stages. eras and branches with a passion for and
interest in either starting a new small
SBIR Small Business Innovation Research business or growing an existing one.
The SBIR is a highly competitive SBA
program that encourages domestic small WBC Women’s Business Center
businesses to engage in federal research/ WBCs provide long-term training and
research and development (R/R&D) that advising to women who own or manage a
has the potential for commercialization. business, including financial, management,
marketing, and technical assistance and
SBLC Small Business Lending Company procurement.
SBLCs are non-depository small business
lending companies listed by the SBA WOSB Women-Owned Small Businesses
Office of Capital Access. The WOSB program allows federal
agencies to set aside certain contracts for
SBR Statement of Budgetary Resources competition only among small businesses
The SBR is a financial statement that owned and controlled by women.
summarizes the flow of funds in and out
of the SBA including funds received, funds WOSBP Women-Owned Small Business Federal
obligated, and funds dispersed. Contracting Program
The WOSB Federal Contracting Program
SE Salaries and Expenses was implemented in February 2011 with the
The account Salaries and Expenses reports goal of expanding the number of industries
salaries and administrative costs. where WOSB were able to compete for
business with the federal government.
SOP Standard Operating Procedure
An SOP is the primary source of the
Agency’s internal control.

SOS Schedule of Spending
The SOS presents an overview of how
and where agencies are spending (i.e.,
obligating) money for the reporting period.

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AP P E ND I C E S

APPENDIX 3 – OIG AUDIT FOLLOW-UP ACTIVITY
Throughout the year, the Office of Inspector General conducts audits of 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 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
2016 there were 86 Final Actions, resulting from 9 monetary and 77 non-monetary recommendations. The status of the
corrective actions is updated regularly and is available for review on the SBA Intranet.

The following tables depict the SBA’s Final Action activity for FY 2016 and the status of corrective action plans not
implemented within one year:

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

TABLE I FINAL ACTION ON AUDIT RECOMMENDATIONS WITH DISALLOWED OR QUESTIONED COSTS
OCTOBER 1, 2015 – SEPTEMBER 30, 2016
Number of Disallowed Costs
Recommendations (Rounded to Thousands)
A. Recommendations with management decisions on which final action had not been 10 $4,787
taken at the beginning of the period.
B. Recommendations on which management decisions were made during the period. 6 $3,208
C. Total recommendations pending final action during period. 16 $7,995
D. Recommendations on which final action was taken during the period.
1. Recoveries:
(a) Collections and Offsets 1 $207
(b) Property
(c) Other 5.5 $2,134
2. Write-Offs 1.5 $893
3. Total 8 $3,234
E. Recommendations needing final action at the end of the period. 8 $4,761

134 AGENCY FINANCIAL REPORT • FY 2016
APPENDICES

TABLE II FINAL ACTION ON AUDIT RECOMMENDATIONS WITH FUNDS PUT TO BETTER USE
OCTOBER 1, 2015 – SEPTEMBER 30, 2016
Number of Funds to be Put to Better Use
Recommendations (Rounded to Thousands)
A. Recommendations with management decisions on which final action had not been 1 $33
taken at the beginning of the period.
B. Recommendations on which management decisions were made during the period. 0 $0
C. Total recommendations pending final action during period. 1 $33
D. Recommendations on which final action was taken during the period.
1. Value of recommendations implemented (completed): 1 $33
2. Value of recommendations that management concluded should not or could not be
implemented or completed
3. Total 1 $33
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, 2016

Report #11-06, Audit of FY 2010 Federal Information Security Management Act Review
Program: OCIO
Date Issued: 01/28/2011
Management Decision Date: 03/28/2011
Explanation: The one remaining recommendation is to develop and document baseline configuration for each
information system. The Office of the Chief Information Officer has implemented this recommendation and will
submit the closure package to the OIG by 11/30/2016.

Report #11-14, Audit of Funding of Information Technology Contracts Awarded to Isika Technologies Inc.
Program: OCFO
Date Issued: 06/02/2011
Management Decision Date: 12/11/2011
Explanation: The one remaining recommendation to the Office of the Chief Financial Officer is a review of SBA’s
funding procedures. The OCFO has updated the Acquisitions Standard Operating Procedures and management is
reviewing written policies and procedures to ensure work is performed in compliance with the FAR. Final action
completion date is estimated to be 12/31/16.

Report #12-02, Audit of FY 2011 Financial Statements
Program: OCIO
Date Issued: 11/14/11
Management Decision Date: 12/22/2011
Explanation: The three remaining recommendations are to the Office of the Chief Information Officer and require 1)
coordination with SBA program offices to enhance security vulnerability management processes; 2) oversight of the review
and validation of financial system accounts quarterly; and 3) implementation of configuration management policies and
procedures for document retention for operating system changes. The status of each recommendation is 1) the OCIO
has coordinated with other program offices to enhance security vulnerability management process and will submit
documentation to close the recommendation by 11/30/16; 2) the OCIO has requested systems owners complete bi-annual
account reviews but full implementation is delayed as not all program offices have complied and the OCIO does not have
authority to enforce compliance. The OCIO believes compliance can be achieved by 12/31/16; and 3) An Enterprise
Configuration Management Framework Standard Operating Procedure was proposed; however, due to lack of resources and
funding constraints, no activities are planned. The OCIO indicates closure may occur by 6/1/17 depending on resources.

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Report #12-04, Audit of Annual Small Business Procurement Calculations
Program: GCBD
Date Issued: 12/6/11
Management Decision Date: 9/23/15
Explanation: The four remaining recommendations are to the Office of Government Contracting and Business Development
and require 1) revision of the Goaling Guidelines for the Small Business Preference Programs to include contracts awarded
and/or performed overseas; 2) revision of the Goaling Guidelines based on the Office of the General Counsel’s final
opinion on the exemptions from goaling; 3) notification of the GSA, Federal Procurement Data Center, of any necessary
programming updates to the FPDS-NG resulting from the changes to goaling guidance; and 4) revision of Goaling
Guidelines in the federal register notifying participating agencies of any changes. The GCBD revised the Goaling Guidelines
and have placed them into clearance; estimated completion date is 12/31/16. The GSA will be notified of any changes.

Report #12-15, Audit of FY 2011 Federal Information Security Management Act Review
Program: OCIO
Date Issued: 7/16/12
Management Decision Date: 8/16/12
Explanation: The two remaining recommendations are to the Office of the Chief Information Officer and require 1)
perform recertification reviews of agency general support systems or design compensating controls; and 2) continuously
monitor remote access audit logs for unauthorized activity. The OCIO performs account reviews semi-annually in
accordance with SOP 90-47-3 and will document procedures for account authorization, creation, and periodic access
reviews that include privileged accounts. The OCIO is receiving manual remote access logs weekly and is looking to
automate the process. Estimated completion date is 9/30/17.

Report #13-01, Audit of SBA’s Section 8(a) Program’s Use of Internal Revenue Service Tax Verification Form
4506T
Program: OBD
Date Issued: 10/4/12
Management Decision Date: 3/11/13
Explanation: The four recommendations are to the Office of Business Development and require changes to SOP 80
05 A to ensure 1) completion of Form 4506T and prompt submission; 2) completion of Form 4506T prior to the
start of the annual review and prompt submission; 3) suspension of the firm if tax returns submitted to 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. The OBD has removed the requirement to collect IRS Form 4506T in the final Mentor-Protégé program
regulation and will submit documentation to close the recommendations. Estimated completion date is 12/31/16.

Report #13-03, Audit of Mentor-Protégé Joint Ventures
Program: GCBD
Date Issued: 10/23/12
Management Decision Date: 1/24/13
Explanation: The three remaining recommendations are to the Office of the Government Contracting and Business
Development and require a review of the Mentor-Protégé program to 1) develop specific measurements to evaluate the
benefits of joint venture agreements; 2) assess risk of the program; and 3) verify information submitted by 8(a) firms
as part of the annual review. Resolution activities include 1) development of metrics and tracking system to measure
benefits of Mentor-Protégé and Joint Venture relationships; 2) development of risk assessment procedures; and 3)
demonstration of capacity assessment. Estimated completion date is 9/30/17.

136 AGENCY FINANCIAL REPORT • FY 2016
APPENDICES

Report #13-04, Audit of SBA’s FY 2012 Financial Statements
Program: OCIO
Date Issued: 11/14/12
Management Decision Date: 3/8/13
Explanation: The one remaining recommendation is to the Office of the Chief Information Officer and requires
procedures to ensure system access is removed for terminated/transferred users in a timely manner. The OCIO
is coordinating with the Office of Human Resources Solutions and program offices to redesign and improve the
separation process to ensure timely removal of system access. Estimated completion date is 3/31/17.

Report #13-06i, Audit of SBA’s Section 8(a) Annual Review
Program: OBD
Date Issued: 11/13/12
Management Decision Date: 3/11/13
Explanation: The two recommendations are to the Office of the Business Development and require that SOP 80 05
3 be revised to extend time for annual reviews, subject firms to termination if information is not provided, and allow
the SBA to place an 8(a) firm in a “decision pending” category during the additional period. Further discussion with
the OIG in 2016 resulted in a determination that the provision does not need to be changed. The OBD will submit
documentation to close the recommendations. Estimated completion date is 12/31/16.

Report #13-08, Audit of SBA’s 8(a) Information Technology Contracts
Program: OCFO
Date Issued: 12/3/12
Management Decision Date: 1/18/13
Explanation: The six remaining recommendations are to the Office of the Chief Financial Officer and require 1)
demonstration of proficiency in price analysis; 2) retention of records used to establish price; 3) verification of
price analysis procedures; 4) enhance internal controls in response to any weaknesses identified in OMB Circular
A-123 Acquisition Assessment; 5) update payment processing internal controls; and 6) provide a list of approvers
to payment personnel. Resolution activities include 1) training has been provided to current contracting officers
on price analysis; procedures will be documented in a revised Standard Operating Procedure which is under
management review; 2) documents are retained, and retention requirements will be incorporated in the revised
SOP; 3) price analysis procedures to be documented in the revised SOP; 4) an acquisition assessment to comply
with OMB Circular A-123 was conducted, and the draft report is under review; internal controls will be enhanced if
any weaknesses are identified in the assessment; 5) payment processing controls are in place and will be documented
in the revised SOP; and 6) providing a list of approvers to payment personnel will be addressed in the revised SOP.
Estimated completion date is 1/31/17.

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AP P E ND I C E S

Report # 13-21, Audit of SBA’s Enterprise-Wide Controls over Co-Sponsored Activities
Program: OCPL, OFO, and OGC
Date Issued: 9/26/13
Management Decision Date: 1/23/14 and N/A
Explanation: Six remaining recommendations include four to the Office of Communications and Public Liaison
that require 1) a co-sponsorship agreement update to include all specific roles and responsibilities for fiscal agents and
other accountable parties; 2) establishment of controls to ensure all activities are properly closed out and all documents
are obtained; 3) periodic reviews of co-sponsorship files; and 4) training for staff. Resolution activities include 1)
the OCPL and the Office of the General Counsel have drafted a revised SOP with significantly expanded coverage
of the roles and responsibilities of fiscal agents and other cosponsors. SOP 90 75 was approved and signed by the
Administrator. The OCPL and OGC are working together to issue new revisions to the co-sponsorship template to
reflect policies set forth in the new SOP; 2) exploration of technology to collect co-sponsorship information and track
agreements; 3) the OCPL staff conduct periodic reviews of headquarter and field co-sponsorship files for completeness
and compliance. OCPL management is reviewing strategies to provide additional outreach oversight via a new team
member; and 4) providing training focused on roles and responsibilities of fiscal agents. Estimated completion date
is 12/31/16. One recommendation is to the OGC and requires the revision of SOP 90 75 3 to include specific
procedures on the disposition of excess funds that remain after co-sponsored activities. The SOP has been issued, and
the OGC is working with the OIG to close this recommendation. Estimated completion date for all recommendations
is 11/30/16.

Report # 14-03, Audit of HUBZone Certifications
Program: GCBD
Date Issued: 11/19/2013
Management Decision Date: 11/14/2013
Explanation: The two open recommendations to the Office of Government Contracting and Business Development
that require 1) an update to the HUBZone guidance based on the current certification process; and 2) a review of
the HUBZone certification process to identify potential improvements to meet deadlines established by regulation.
Resolution activities include 1) updating and publishing HUBZone Standard Operating Procedures; and 2) amending
the certification process so that actions are completed within an average of 90 days from the date the application is
electronically verified. Estimated completion date is 9/30/17.

Report # 14-04, Audit of SBA’s FY 2013 Financial Statements
Program: OCIO
Date Issued: 12/16/13
Management Decision Date: 4/9/14
Explanation: The remaining four recommendations require the Office of the Chief Information Officer 1) implement
procedures to periodically review user access; 2) enforce a network security baseline across the network; 3) improve
information system logging and auditing program; and 4) grant elevated network privileges based on business need
only and monitor privileged network accounts. Resolution activities include 1) documentation of procedures for
account authorization, creation, and periodic access reviews; 2) the OCIO has enforced a security baseline across the
LAN/WAN and the supporting evidence is being generated to close this recommendation; 3) the OCIO deployed
Splunk to provide robust logging and auditing capabilities on the LAN/WAN but experienced lack of resources to
review logs, and there is no automated system to produce the logs. OCIO cannot keep Splunk resource in place to
complete; and 4) the OCIO has deployed a segregation of duties matrix to prevent issuance of excessive privileged
network accounts; a policy is being developed for communication to program offices before implementation is
complete. Estimated completion date for all recommendations is 6/30/17.

138 AGENCY FINANCIAL REPORT • FY 2016
APPENDICES

Report # 14-08, Audit of Quality Control at Loan Operation Centers
Program: OCA
Date Issued: 1/17/14
Management Decision Date: 1/17/14
Explanation: The one remaining recommendation requires the Office of Capital Access, Office of Credit Risk
Management, to establish and implement a plan to conduct quality assurance activities at SBA loan operation centers.
The OCRM has conducted its quality assurance reviews of the loan centers and is preparing its report. Estimated
completion is 11/30/16.

Report # 14-12, FY2013 Federal Information Security Management Act Review
Program: OCIO
Date Issued: 4/30/14
Management Decision Date: 4/30/14
Explanation: The three remaining recommendations require the Office of the Chief Information Officer 1) implement
Personal Identification Verification, or PIV, card logical access to all SBA systems; 2) improve Security Authorization
Packages and retain all documentation; and 3) upgrade remote access solution to time-out after 30 minutes of
inactivity. Resolution activities include 1) workstation PIV enforcement across the agency was implemented in April
2016; additional research is being conducted to address the outstanding ongoing issues; 2) a risk assessment analysis
was conducted in 2016 and a risk management plan was developed; in 2017, the OCIO will work to mitigate risks
the program offices face when implementing security requirements; and 3) one remote access (Citrix) is configured to
time-out after 30 minutes of inactivity. The new AT&T Global network client will enforce use of the PIV card and will
also enforce disconnection after periods of inactivity. Estimated completion date for all recommendations is 6/1/17.

Report # 14-15, Audit of Non-Manufacturer Rules Waiver Program
Program: GCBD
Date Issued: 8/14/14
Management Decision Date: 8/11/14
Explanation: The two remaining recommendations require the Office of Government Contracting and Business
Development to publish a Standard Operating Procedure for the Non-Manufacturer Rules Waiver Program and
establish procedures to ensure all data and memorandums are complete, accurate, and up-to-date. The GCBD is
developing an SOP for the Non-Manufacturer Rules Waiver Program which will include procedures for maintaining
file documentation. Estimated completion date is 9/30/17.

Report # 14-17, Audit of 2013 and 2014 Cash Gifts
Program: OCPL
Date Issued: 8/27/14
Management Decision Date: 8/27/14
Explanation: The one remaining recommendation requires the Office of Communications and Public Liaison
to establish controls to ensure cash gifts from co-sponsored activities are documented and properly closed out. A
tracking system was recently created to capture all data related to outreach, which will assist in properly closing out
co-sponsored events and activities. Estimated completion date is 12/31/16.

AGENCY FINANCIAL REPORT • FY 2016 139
AP P E ND I C E S

Report # 14-19, Audit of the District of Columbia Small Business Development Center
Program: SBDC
Date Issued: 9/29/14
Management Decision Date: 9/29/14
Explanation: The two remaining recommendations require the Office of the Small Business Development Centers
to 1) update their Standard Operating Procedures to address statutory and regulatory changes and to establish
corresponding internal controls; and 2) implement Lead Center controls to exclude excess sub-recipient costs when
computing indirect costs. The SOP will be updated after the completion of the update to the Regulations, which is
in clearance. The SOP will include statutory and regulatory changes. The enhancement of controls over indirect cost
computation will be documented in a specific SOP. Estimated completion date for both recommendations is 12/31/16.

Report # 14-21, Audit of LMAS Incremental Improvement Projects
Program: OCIO
Date Issued: 9/30/14
Management Decision Date: 9/25/14
Explanation: The one remaining recommendation requires the Chief Information Officer to modify its Enterprise
Architecture Roadmap to include all provisions of the LMAS IIPs. The planned action is to incorporate the LMAS
architecture and new capability requirements plan once it is received from the Office of Capital Access into the
enterprise architecture. Estimated completion date is 6/1/17.

Report # 15-02, Audit of SBA’s FY 2014 Financial Statements
Program: OCIO
Date Issued: 11/17/14
Management Decision Date: 3/2/15
Explanation: The three remaining recommendations requires the Chief Information Officer to 1) improve the remote
access program to ensure employees acknowledge compliance with security requirements and that compliance is
monitored; 2) ensure that passwords meet SBA standards for strength and complexity; and 3) coordinate with the
OCFO, OCA, and ODA to ensure the full back-up of financial systems are retained in accordance with SBA policies.
Resolution activities include 1) updating the Rules of Behavior for employees and developing an automated process to
deny connectivity to the SBA network if non-compliance is detected with an estimated completion date of 9/30/17; 2)
password requirements have been updated for all users to meet SBA standards and documentation will be submitted
to the OIG for closure of this recommendation by 12/31/16; and 3) Phase 1 of the implementation plan to ensure
back-up files are retained has been achieved with Phase 2 to include remaining servers to be completed by 6/30/17.

Report # 15-04, Audit of SBA’s FY 2014 Financial Statements — Management Letter
Program: OHRS
Date Issued: 12/15/14
Management Decision Date: 3/30/15
Explanation: The three remaining recommendations require the Chief Human Capital Officer to 1) reinforce policies
and procedures regarding time and attendance reports; 2) continue periodic quality assurance reviews to ensure
time and attendance records are properly certified and dated; and 3) develop and implement enforcement actions
for multiple instances of non-compliance. Resolution activities include 1) provided training on time and attendance
record requirements to timekeepers and supervisors and reinforced guidance via conference calls and other agency
meetings; 2) an in-house Quality Assurance process will be established upon selection of a new payroll supervisor with
an estimated completion date of 11/30/16; and 3) a monthly non-compliance report will be developed and shared with
senior executives; non-compliance will be addressed in accordance with Performance and Disciplinary SOPs. Estimated
completion date is 9/30/17.

140 AGENCY FINANCIAL REPORT • FY 2016
APPENDICES

Report # 15-07, Audit of SBA’s FY 2014 Federal Information Security Management Act
Program: OCIO
Date Issued: 3/13/15
Management Decision Date: 3/3/15
Explanation: The four remaining recommendations require the Chief Information Officer to 1) implement
the information security continuous monitoring, or ISCM, program requirements; 2) implement two-factor
authentication for public-facing internet applications; 3) ensure general support systems and major applications have
valid and up-to-date authorizations to operate (ATO) while those systems are in production; and 4) ensure data stored
on enterprise servers are backed up monthly and retained for one year. Resolution activities include 1) the SBA ISCM
Policy document is in executive review; 2) evaluation of an identify and access management solution that covers both
internal and external facing applications; 3) implementation of a risk management plan which generated a baseline
to ensure all SBA systems meet or exceed guidelines; and 4) data is backed up monthly and stored in accordance with
records management policy; documentation will be submitted to the OIG to close this recommendation. Estimated
completion date for all recommendations is by 9/30/17.

Report # 15-09, Audit of High Risk 7(a) Loan Review Program
Program: OCA
Date Issued: 3/20/15
Management Decision Date: 3/23/15
Explanation: The two remaining recommendations require that two lenders bring high-risk loans into compliance by
seeking recovery of $900,175 and $471,905, respectively. The OCA entered into the dispute process for one loan, and
the OGC provided support; documentation will be submitted to the OIG for closure of the recommendation. The
OCA is currently in settlement negotiations with the lender on the second loan. Estimated date for completion for
both recommendations is 9/30/17.

Report # 15-10, Audit of High-Risk 7(a) Loan Review Program
Program: GCBD
Date Issued: 5/14/15
Management Decision Date: 5/18/15
Explanation: The five recommendations require the GCBD to 1) provide updated training and outreach to the
contracting community on set-aside requirements; 2) provide additional training to women-owned small business
firms on repository and documentation requirements; 3) revise the self-certification forms to include the name of the
individual who in control of the day-to-day operations; 4) revise the SBA financial form for women-owned businesses
to ensure it properly provides financial information in accordance with the program requirements; and 5) perform
eligibility examinations on firms listed in the report as potentially ineligible. The GCBD has fulfilled each of the five
recommendations and will work with the OIG to close these recommendations by 12/31/16.

Report # 15-11, Audit of FY 2014 Improper Payments Elimination and Recovery Act
Program: OED
Date Issued: 5/15/15
Management Decision Date: 5/15/15
Explanation: The one remaining recommendation requires the Associate Administrator for Entrepreneurial
Development to recover $168,000 of unallowable indirect costs from SCORE. The OED is working with SCORE to
resolve this issue. Estimated completion date is 10/31/16.

AGENCY FINANCIAL REPORT • FY 2016 141
AP P E ND I C E S

Report # 15-12, Audit of Separation Controls and Procedures
Program: OCIO and OCFO
Date Issued: 5/26/15
Management Decision Date: 5/4/15
Explanation: Two of the three remaining recommendations require the Chief Information Officer to 1) ensure
network oversight includes enabled network accounts which have never been accessed; and 2) clarify e-mail access
policies as defined in SOP 90 49 1. The third recommendation requires the Chief Acquisition Officer revise guidance
to require the contracting officer representative to monitor contractor status and reinforce responsibilities for
contractor separation. Resolution activities include 1) OCIO documentation of procedures for account authorization
and creation, including requesting and granting elevated privilege account access and performing user access reviews;
estimated completion date 9/30/17; 2) the OCIO revised SOP 90 49 1 and will create a procedure document to
handle requests for third-party access to email accounts. Estimated completion date 12/31/16; and 3) a revised
Acquisition SOP includes separation responsibilities for contracting officer representatives. Recommendation will be
closed upon issuance of SOP. Estimated completion date 12/31/16.

Report # 15-15, Audit of Disaster Technical Assistance Grants
Program: OED
Date Issued: 7/31/15
Management Decision Date: 8/3/15
Explanation: The two remaining recommendations require 1) a closeout report for Sandy technical assistance grants;
and 2) recovery of $16,965 in expenses not included in one SBDC’s budget or brings the expense into compliance. The
closeout report is delayed as Sandy grants were extended through September 30; however, the Office of Entrepreneurial
Development will prepare the closeout report by 10/31/16. The OED is in the conflict resolution process with the
OIG for the recovery of expenses. Estimated completion date is 10/31/16.

Report # 15-16, Audit of Oversight of Loan Agents
Program: OCA
Date Issued: 9/25/15
Management Decision Date: 1/7/16
Explanation: The eight remaining recommendations require 1) development of procedures for the regular monitoring
of SBA Form 159 data to identify concerning trends or risk patterns; 2) development of performance metrics for
loan agents that, if exceeded, would trigger closer SBA examination; 3) development of procedures for reporting any
concerning trends or suspected fraudulent activity of loan agents to Agency management and the OIG;
4) determination of the feasibility of a report to provide lenders with information on loan agents and their
performance; 5) development of benchmarks for contractor performance and controls to ensure integrity of
the Form 159 database; 6) a review of Form 159 database to identify and correct errors; 7) implementation of
a process to uniquely identify loan agents; and 8) development of a method for CDCs to electronically report loan
agent compensation. Recommendations 1-4, 7, and 9 were either completed or implemented, and the documentation
to support the closure activity was submitted to the OIG. Estimated completion date is 10/31/16. Agreement has not
been reached between the program office and the OIG as to the resolution of recommendations 6 and 8.

142 AGENCY FINANCIAL REPORT • FY 2016
ACKNOWLEDGMENTS
This Agency Financial Report was produced with the energies and talents of the SBA staff. To all these ded-
icated individuals listed below, as well as those not listed, the Office of Performance Management and the
Chief Financial Officer would like to offer sincere thanks and acknowledgement.

Melissa Atwood Linda Grabe Mike Peterson
Rory Berges Timothy Gribben Janette Porter
Jason Bossie Joseph Henry Steve Ramey
Charles Brinkley Blake Hoing Nathaniel Reboja
Kay Chae Addison Huber Ann Marie Schaef
Amber Chaudhry Ryan Korn Charles Senseney
Martin Conrey John Kushman Deron Smallwood
Alejandro Contreras Lala Lunstrum Scott Stilmar
Jeff Davis Terell Lasane Emilie Surrusco
Tamara Dollarhite Luan Loerch-Wilson Yolanda Swift
Dennis Donaldson Robert Montgomery LaNae Twite
Natalie Duncan Maureen Moore-Vellucci Yvonne Walters
Alan Escobar Mathew Pascarella Kelly Wilcox
Amy Garcia Tami Perriello Donna Wood
Leslie Godsey
We would also like to acknowledge the Office of the Inspector General and KPMG LLP for the professional
manner in which they conducted the audit of the Fiscal Year 2016 Financial Statements. We offer our special
thanks to Circuit Media and Corporate Visions, Inc. for outstanding contributions in producing this report.

CERTIFICATE OF EXCELLENCE IN ACCOUNTABILITY REPORTING
For the past 10 years, FY 2006 to FY 2015, 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 three CEAR Special/Best-in-class
awards:

2015 — Presentation of Forward Looking Information
2013 — Inspector General’s Summary of Management and Performance Challenges
2011 — Improper Payments Elimination and Recovery Act Detail

AGENCY FINANCIAL REPORT • FY 2016 143
Office of Performance Management
and Chief Financial Officer
409 Third Street, S.W.
Washington, DC 20416

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