SBA Agency Financial Report, Fiscal Year 2018

Summary

The U.S. Small Business Administration's Agency Financial Report for FY 2018 gives an overview of the agency's financial and performance data for Congress, the President and the public. Its highlights table, in thousands of dollars, shows a principal program portfolio of $142,315,295, total assets of $16,988,497, total liabilities of $14,915,340 and total budgetary resources of $17,114,677 for FY 2018. Total employees rose to 5,489 in FY 2018 from 3,271 in FY 2017, with disaster FTE employees at 3,608. The contents list the Administrator's message, management's discussion and analysis, the Inspector General's audit report, the independent auditors' report and a payment integrity section. KPMG LLP audited the FY 2018 financial statements.

Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used

Cite this document

“SBA Agency Financial Report, Fiscal Year 2018.” Original at legacy.sba.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/sba-agency-financial-report-sba-fy-2018-afr-55ac77b66f/, SHA-256 d914d63f239955f1c289e34e8d40f5abbe7739bc954165ad9125580718461c0a.

Full text

ABOUT FY 2018 HIGHLIGHTS
THIS REPORTThe
U.S. Small Business (Dollars in Thousands) FY 2015 FY 2016 FY 2017 FY 2018
Administration’s Agency
Financial Report (AFR) for Principal Program Portfolio(1) $ 118,767,451 $ 124,118,505 $ 131,814,718 $ 142,315,295
FY 2018 provides an overview
Regular FTE Employees 1,947 1,950 1,960 1,881
of the Agency’s financial and
performance data to help Disaster FTE Employees 1,013 1,153 1,311 3,608
Congress, the President, and the Total Employees (2)
2,960 3,103 3,271 5,489
public assess SBA’s stewardship
over the resources entrusted Total Assets $ 12,020,867 $ 12,657,172 $ 13,215,919 $ 16,988,497
to it. The AFR is the first of Total Liabilities $ 10,682,837 $ 11,882,988 $ 11,703,589 $ 14,915,340
two required annual reports Total Net Position $ 1,338,030 $ 774,184 $ 1,512,330 $ 2,073,157
for federal agencies. The Total Net Cost of Operations $ (644,590) $ 339,477 $ 3,910 $ 621,675
FY 2018 Annual Performance
Total Budgetary Resources $ 10,296,788 $ 10,878,012 $ 12,243,154 $ 17,114,677
Report (APR) is the other
report and is part of the (1)
The total portfolio consists of guarantied business loans outstanding, guarantied debentures, direct business loans and direct disaster loans.
The data include all performing loans and defaulted loans that have not been charged-off.
FY 2020 Congressional Budget (2)
The total excludes employees in the Office of Advocacy and Office of Inspector General.
Justification (CBJ). The CBJ/APR
is scheduled for publication in
February 2019. The reports can
be found at: www.sba.gov/
performance.

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.management@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

This report is minimally 508-compliant and will be made 508-compliant by November 30, 2018.
TABLE OF CONTENTS
Message from the Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Management’s Discussion & Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SBA’s History, Goals, and Organization.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Primer of SBA’s Principal Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SBA by the Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Analysis of Performance Results.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Analysis of Performance and Agency Priority Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Evidence and Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Verification and Validation of Performance Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Operational Portfolio Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Forward Looking Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Analysis and Highlights of Financial Statements and Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Highlights of Financial Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Analysis of Financial Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Analysis of SBA’s Systems, Controls, and Legal Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Internal Control Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Financial Management Systems Strategy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Management Assurances: FMFIA and FFMIA Assurance Statement for FY 2018. . . . . . . . . . . . . . . . . . . . . . . 39

Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Message from the Chief Financial Officer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Audit and Financial Management Advisory Committee’s Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Inspector General’s Audit Report.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Independent Auditors’ Report on FY 2018 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
CFO Response to Draft Audit Report on FY 2018 Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Financial Statements and Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
OIG Report on the Most Serious Management and Performance Challenges.. . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Payment Integrity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Summary of Financial Statement Audit and Management Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Fraud Reduction Report.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Reduce the Footprint Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Civil Monetary Penalty Adjustment for Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
GONE Act Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

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

AGENCY FINANCIAL REPORT • FY 2018 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 2018 Agency Financial Report (AFR) provides financial and
performance information for the fiscal year beginning October 1, 2017 and ending September 30, 2018.
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 each 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 combined statement
of budgetary resources, and the required supplementary stewardship information provides a report on
stewardship investments in human capital.

Other Information
The Other Information section includes the Inspector General’s report on the Agency’s most serious management
and performance challenges along with recommended actions. Also included in this section is a summary of finan-
cial statement audit and management assurances.

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

ii AGENCY FINANCIAL REPORT • FY 2018
M ESSAG E FROM T H E ADM I NI STR ATOR

MESSAGE FROM THE ADMINISTRATOR
November 14, 2018

It is my honor to present the Small Business Administration’s FY 2018 Agency Financial
Report. This report highlights the SBA’s key accomplishments in helping entrepreneurs start,
grow, expand, and recover. The financial and performance data published in this report are
reliable, complete, and in accordance with the Office of Management and Budget Circulars
A-136 and A-11.

The SBA powers the American Dream. Small businesses are the engines of our economy —
driving innovation, creating jobs, and making our cities and towns vibrant places to live,
work, and raise a family. Since becoming Administrator in February 2017, I have met with more than 800 small business
owners from coast to coast, and I have visited more than 100 small businesses. They reflect the diversity of our economy
and the innovative spirit of America. Entrepreneurs who take a risk on launching or scaling a small business exhibit
confidence in their communities and faith in our economy. The SBA is proud to be their ally.

In FY 2018, the Agency launched an initiative called “SBA Reimagined.” This yearlong process of research and reflection
focused on improving outreach to small business owners and aspiring entrepreneurs who might not know about the
services the SBA provides. The new logo is the most visible sign of the reform, but its core is ensuring the entrepreneurs
we serve are at the center of our mission. Simply put, small businesses can confidently start, grow, expand or recover from
declared disasters with the assistance they get from the SBA.

The SBA is working to ensure that each of its 68 district offices is aligned with the vision, momentum, and outreach
of its headquarters in Washington, DC. We are one Agency. And we are working toward a shared goal of helping small
businesses succeed. As SBA Administrator, I have pledged to visit each of these district offices and hear directly from
staff about how they are working to advance the Agency and better serve its customers. As of today, I have visited 60,
and I am scheduled to have visited all 68 by the end of calendar 2018. I call this the Ignite Tour because I truly believe
this engagement will spark ideas and drive change. I have personally seen the dedication, energy, and initiative that SBA
employees commit to their jobs, supporting the Agency’s mission of advancing entrepreneurs and small businesses.

Capital is the lifeblood of any small business. The SBA works with approved lenders and community development
organizations to guarantee loans, mitigating their risks, and offering access to capital to those unable to obtain
conventional loans. In FY 2018, the SBA approved more than 66,000 loans in the 7(a) and 504 loan programs,
providing more than $30 billion to small businesses and supporting nearly 600,000 jobs.

Minority business owners received a record $9.7 billion in combined 7(a) and 504 lending, or 32 percent of the SBA’s
loan portfolio. The SBA’s 7(a) lending to women-owned businesses grew in total dollar and volume to $7.4 billion in FY
2018. Lending from the 504 program to women-owned businesses reached nearly $1.5 billion, a $420 million increase
over the previous fiscal year. Loans to veterans totaled nearly $1.1 billion for the 7(a) and 504 programs. The Small
Business Investment Company program, in which the SBA partners with private investors to finance small businesses
through professionally managed investment funds, supported more than 1,000 small businesses with $5.5 billion in
financing.

AGENCY FINANCIAL REPORT • FY 2018 1
MES S A G E FR O M T H E A D M I N I S TR ATO R

Entrepreneurship is a team effort, and the SBA ensures small business owners do not have to go it alone. The SBA’s 68
district offices, as well as Small Business Development Centers, Women’s Business Centers, Veterans Business Outreach
Centers, and SCORE chapters, offer free or low-cost programs to help entrepreneurs plan their business, research
market trends, expand their customer base, and secure funding. In FY 2018, more than 1 million small businesses took
advantage of counseling, mentoring, and training assistance through the SBA.

When a small business is ready to build its customer base, the SBA can help it qualify to market to the world’s largest
purchaser of good and services — the U.S. government. By statute, the federal government has a goal that 23 percent of
all contract dollars go to small businesses, and it has specific programs to ensure businesses owned by women and other
disadvantaged groups have access to these contracts. This spring, the SBA announced that the federal government met
the small business prime contracting goal for FY 2017, awarding 23.9 percent of its contracts, worth nearly $106 billion,
to small businesses.

The SBA helps businesses, nonprofits, homeowners, and renters prepare for, and recover from, disasters. From wildfires
in California to Hurricanes Florence in the Carolinas and Michael in Florida, declared disasters in FY 2018 upended
many communities. Many parts of the country continued to recover from the unprecedented damage of hurricanes
Harvey, Irma, and Maria during the previous year. Low-interest loans from the SBA have enabled borrowers to replace
or repair uninsured losses, whether through physical damage or economic injury. The SBA is working with FEMA and
other federal agencies as well as partners at the state and local levels to help make these areas’ economic recovery occur as
expediently as possible. During FY 2018, the SBA approved more than 140,000 disaster loans for nearly $7 billion.

It is my privilege to advocate on behalf of America’s 30 million small businesses as a member of President Trump’s
Cabinet. The SBA is committed to being a responsible steward of taxpayers’ dollars and the public’s trust. The
Agency is working to ensure the SBA functions as efficiently and effectively as possible, using modern technology and
streamlined operations to eliminate waste and redundancy. It is my duty to ensure the Agency continues to deliver the
support entrepreneurs need to succeed. As we look toward FY 2019 and beyond, the team of professionals at the SBA is
committed to building on that success.

Warm regards,

Linda E. McMahon
Administrator

2 AGENCY FINANCIAL REPORT • FY 2018
M ESSAG E FROM T H E ADM I NI STR ATOR

AGENCY FINANCIAL REPORT • FY 2018 3
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

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4 AGENCY FINANCIAL REPORT • FY 2018
MANAGEMENT’S
DISCUSSION &
ANALYSIS
DID e SBA provides mentorship, counseling,
and strategic advice to more than 1 million
YOU entrepreneurs and small business owners
annually through Small Business
KNOW? Development Centers, Women’s Business
Centers, Veterans Business Outreach
Centers, SCORE, the online SBA Learning
Center, and through 68 SBA district oﬁces.

Starting Business:
Small Business Person of the Year
Leverages SBA Resources

Landmark Pest Management
Schaumburg, Illinois
Rebecca Fyfe started her business in 2010 when she was 25
years old and became the youngest pest control company
CEO in the country. Landmark’s approach to pest control is
science-based featuring the most up-to-date methods,
including many that were developed through ﬁeld trials and
proprietary innovations. Since its establishment, her
company has prospered by growing from 18 to 70 full-time
employees with substantial gains in revenue. rough the
knowledge she acquired from an SBA Women’s Business
Center, Rebecca applied and was approved for an SBA 7(a)
loan that provided her with the capital she needed. In FY
2018, Landmark expanded service to neighboring areas in
Michigan, Indiana, and Missouri; and is exploring market
opportunities in California and New York. As a testament to
her accomplishments, the SBA named Rebecca the SBA
Small Business Person of the Year.
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

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

Mission Statement
Maintain and strengthen the nation's economy by enabling the establishment and vitality of small businesses and by
assisting in the economic recovery of communities after disasters.

Strategic Goal 1 Strategic Goal 2 Strategic Goal 3 Strategic Goal 4
Support small business Build healthy entrepreneurial Restore small businesses and Strengthen SBA’s ability to
revenue and job growth ecosystems and create business communities after disasters serve small businesses
friendly environments

1.1 Expand access to capital 2.1 Develop small 3.1 Deploy disaster assistance 4.1 Ensure effective and
1.2 Help small business businesses through effectively and efficiently efficient management of
exporters succeed in technical assistance Agency resources
global markets 2.2 Build healthy 4.2 Build a high-performing
1.3 Ensure federal contract entrepreneurial workforce
and innovation set-aside ecosystems 4.3 Implement enterprise-wide
goals are met and/or 2.3 Create a small business information system
exceeded friendly environment modernization and
cost-effective technology

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

AGENCY FINANCIAL REPORT • FY 2018 7
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

STRATEGIC GOAL TWO — Build healthy STRATEGIC GOAL FOUR — Strengthen
entrepreneurial ecosystems and create SBA’s ability to serve small businesses
business friendly environments Strategic Goal Four focuses on streamlining business
Strategic Goal Two focuses on business startups, growth, processes and decision-making at all levels to ensure
and expansion through technical assistance; SBA resource efficiency and effectiveness.
partners; and creating a business-friendly environment to The Office of Performance Management and the
reduce regulatory burdens. Chief Financial Officer leads the Agency’s performance
The Office of Government Contracting and Business management, program evaluation, financial management,
Development provides business development assistance to and acquisition management functions.
small businesses seeking federal contracts. This assistance The Office of Executive Management, Installations
includes the HUBZone, 8(a) business development, and Support Services supports resource and core
7(j) management and technical assistance, and All Small administrative functions, including grant management,
Mentor-Protégé programs. facilities, records management, and personnel security.
The Office of Entrepreneurial Development provides The Office of Human Resources Solutions provides
business advising, mentoring, and training assistance strategic human capital solutions to workforce issues and
through its resource partner network composed of small strives to create a work environment that attracts and
business development centers, women’s business centers, retains a talented and high-performing workforce.
SCORE, and through Entrepreneurship Education
programs. The Office of the Chief Information Officer provides
information technology leadership, product services, and
The Office of Veterans Business Development ensures operational support for the SBA in order to maximize
the applicability and usability of all the Agency’s small internal efficiency and responsiveness to small businesses.
business programs for veterans, service-disabled veterans,
reserve component members, and their dependents or Other offices that support the strategic goals and
survivors through veterans’ business outreach centers, objectives include the Office of Field Operations; Office
Boots to Business, and other grant programs. of Diversity, Inclusion, and Civil Rights; Office of
Communications and Public Liaison; National Women’s
The Office of the National Ombudsman works with Business Council; Office of Congressional and Legislative
all federal agencies that regulate small businesses to Affairs; Office of General Counsel; Office of Hearings
provide a means for businesses to comment on federal and Appeals; Office of Advocacy, and Office of Inspector
government enforcement activity. The SBA also maintains General.
a five-member Regulatory Fairness Board in each of the
ten regions to hold public hearings on small business
concerns.

STRATEGIC GOAL THREE — Restore small
businesses and communities after disasters
Strategic Goal Three focuses on helping restore
communities and return businesses to normal operations
through direct loans to repair, rebuild, and recover from
physical damage and economic losses.

The Office of Disaster Assistance provides affordable,
timely, and accessible financial assistance to homeowners,
renters, and businesses following a disaster. The Disaster
Loan program is the only form of SBA assistance that is
not limited to small businesses.

8 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

EXECUTIVE SUMMARY
America’s 30 million small businesses play a critical role in Performance Results
job creation and retention. During the last two decades,
small businesses have been responsible for creating two Capital: In FY 2018, SBA’s 7(a) loan program results
out of every three net new jobs. In turn, the U.S. Small mirrored last year’s approved loan levels of $25.4 billion.
Business Administration’s assistance to those firms and Additionally, the 504 loan program approved nearly $4.8
entrepreneurs helps drive a healthy economy. billion in loans, a 5 percent decrease from FY 2017. In
summary, through the 7(a) loan, 504 loan, and Microloan
The SBA employs a variety of methods to support programs, the SBA approved more than 71,000 loans
America’s small businesses. These methods include and provided more than $30.2 billion in lending to small
promoting access to capital, federal contracting, businesses. More than $5.5 billion was invested in 1,151
counseling, and disaster assistance. small businesses through the Small Business Investment
Company program.
Throughout FY 2018, four goals from the SBA’s FY 2018-
2022 Strategic Plan guided the Agency’s actions: Contracting: The SBA continued to partner with agencies
across the Federal Government to expand small business
1. Supporting small business revenue and job growth
contracting opportunities. From the beginning of FY 2013
2. Building healthy entrepreneurial ecosystems and through FY 2017, small businesses were awarded nearly
creating business friendly environments $471.0 billion in federal contracts (FY 2018 contracting
3. Restoring small businesses and communities after numbers continue to be collected and certified). The
disasters Federal Government continues to exceed its small
4. Strengthening SBA’s ability to serve small businesses disadvantaged and service-disabled, veteran-owned small
business goals but faces challenges with HUBZone and
The following sections highlight financial and women-owned small business goals.
performance results for the Agency, including the four
Agency Priority Goals. An in-depth analysis can be Counseling: The SBA provided mentoring, business
found in the Analysis of Financial Results and Analysis advice, and training assistance to more than 1 million
of Performance Results sections. The complete set of entrepreneurs and small businesses this year, which helped
performance results will be reported in the Annual them start and grow their businesses, and create or retain
Performance Report, released in February 2019. jobs. The Agency further strengthened the alignment of
performance metrics with its resource partners that will be
implemented in future grant agreements.
Financial Results
Disaster Assistance: Disaster loan applications and
For FY 2018, SBA’s total budgetary resources used for
approvals increased significantly, compared to the previous
staffing, operations, and loan subsidy costs were $2.8
year, due to flooding in the southeast and hurricanes
billion. Total nonbudgetary resources for loan financing
Harvey, Irma, and Maria. In FY 2018, the Agency worked
used to make direct loans and purchase guarantied loans in
on 284 active disaster assistance declarations and approved
default were $7.7 billion. SBA’s guarantied portion of the
more than 140,000 disaster loans totaling nearly $7.0
outstanding loan principal rose 6.1 percent in FY 2018 to
billion.
$105.6 billion. During FY 2018, new guaranties disbursed
by SBA participating banks were $23.0 billion, a 0.9
percent increase from last year, which resulted in the net Agency Priority Goals
6.1 percent increase in outstanding guaranties. In FY 2018,
The Government Performance and Results Act
purchases of defaulted guarantied loans decreased from
Modernization Act of 2010 requires federal agencies to
$1.0 billion last year to $0.9 billion. The loans receivable
establish a set of 2-year Agency Priority Goals that reflect
portion of the SBA credit program portfolio increased in
the highest priorities of agency leadership. The SBA has
FY 2018 from $6.4 billion to $8.7 billion. The spike in
established four APGs. The goals and outcomes from
loans receivable was caused primarily by the increase in new
fiscal year 2018 were as follows.
disaster direct loan disbursements made to assist disaster
survivors of hurricanes Harvey, Irma, and Maria.

AGENCY FINANCIAL REPORT • FY 2018 9
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

Expand capital to small businesses in socially and Deploy disaster assistance effectively and
economically disadvantaged urban (HUBZone) efficiently.
communities and rural areas. Goal: By September 30, 2019, increase the average
Goal: By September 30, 2019, increase the number of number of disaster loan applications processed from
loans by 5 percent from the FY 2017 baseline to small three to six applications per loan specialist per day.
businesses in socially and economically disadvantaged Outcome: The SBA modernized its disaster
urban communities and rural areas (FY 2017 information system and went live in May
baseline of 25,475 for 7(a) loans, 504 loans, and 2018. The new system and training of staff will
microloans). eventually double the number of applications
Outcome: The SBA increased small business access processed by a loan specialist each day. As a
to capital by providing 23,497 loans (7(a), 504, result, the SBA processed 337,722 disaster loan
and microloans), to rural and urban (HUBZone) applications in the second largest disaster season in
small businesses totaling more than $10.1 billion. SBA’s history from hurricanes Harvey, Irma, and
Through a strategy to train lender relation Maria with an average application rate of 4 loans
specialists in the district offices and develop new per specialist per day.
marketing materials, the SBA reached more lenders
with access to disadvantaged small businesses.
Cross-Agency Priority Goals
Maximize small business participation in The SBA also supports the government-wide federal
government contracting. Cross-Agency Priority Goals. The CAP goals are
Goal: By September 30, 2019, maximize the percent Presidential priorities and are complemented by other
of federal contracts by awarding at least 23 percent to cross-agency coordination and goal-setting efforts. The
small businesses. SBA serves as the co-lead for the Data, Accountability,
and Transparency CAP goal.
Outcome: The SBA will continue to collect and
certify FY 2018 contracting numbers through the Per the GPRA Modernization Act requirement to address
third quarter of FY 2019. The Federal Government Cross-Agency Priority Goals in the Agency strategic plan,
exceeded its FY 2017 target making 24.8 percent the annual performance plan, and the annual performance
of contracting dollars, worth $105.7 billion, report, please also refer to www.Performance.gov for
available to small businesses. The SBA provided more on the Agency’s contributions to those goals and
continuous outreach to other federal agencies to progress. A summary of each CAP goal follows:
ensure that the goal was exceeded.
IT Modernization: Build and maintain more
Increase federal contracts to more disadvantaged modern, secure, and resilient information technology
small businesses. (IT) to enhance mission delivery and productivity.
Data, Accountability, and Transparency: Leverage
Goal: By September 30, 2019, increase by 10
data as a strategic asset to grow the economy, increase
percent from the FY 2017 baseline the number
the effectiveness of the Federal Government, facilitate
of 8(a)-certified firms awarded federal contracts
oversight, and promote transparency.
(FY 2017 baseline of 3,421 small businesses).
Developing a Workforce for the 21st Century:
Outcome: The SBA instituted several process
Ensure effective and efficient mission achievement
improvements for the 8(a) Business Development
and improved service to America through enhanced
program and leveraged online tools like Certify.gov
alignment and strategic management of the Federal
to decrease processing time of 8(a) applications.
workforce.
Additionally, through additional training of
Business Opportunity Specialists in the field Improving Customer Experience: Transform the
offices, the SBA has shifted to higher-value work. customer experience by improving the usability and
As a result, 288 active 8(a)-certified firms received reliability of our Federal Government’s most critical
their first federal contract, achieving 85 percent of digital services.
the FY 2019 goal.

10 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

Sharing Quality Services: Deliver technology and Modernize Infrastructure Permitting: Improve
process improvements that will improve citizen the federal environmental review and authorization
services. process to enable infrastructure project sponsors to
Shifting from Low-Value to High-Value Work: start construction sooner, create jobs earlier, and fix
Eliminate low-value, unnecessary, and outdated our nation’s infrastructure faster while also ensuring
policies and requirements issued by central that a project’s potential impacts on environmental
management agencies. and community resources are considered and
managed throughout the planning process.
Category Management: Leverage common contracts
in order to buy common goods and services as an Security Clearance, Suitability, and Credentialing
enterprise. Reform: Advance security through a trusted
workforce; modern clearance process; secure,
Results-Oriented Accountability for Grants:
modern, and mission-capable information
Rebalance compliance efforts with a focus on results
technology; and continuous performance
for the American taxpayer.
improvement.
Getting Payments Right: Reduce the amount of
Lab-to-Market: Improve the transition of federally
cash lost to the taxpayer through incorrect payments.
funded innovations from the laboratory to the
Federal IT Spending Transparency: Improve marketplace by reducing the administrative and
business, financial, and acquisition outcomes. regulatory burdens for technology transfer and
Improve Management of Major Acquisitions: increasing private sector investment in later-stage
Successfully achieve at least two transformational R&D.
program goals over the coming year through
well-managed major acquisitions supporting a
transformative critical or high-risk mission priority.

AGENCY FINANCIAL REPORT • FY 2018 11
12

SBA Organization Chart

Office of Advocacy
Office of the Administrator
Office of Inspector General

Office of Veterans Office of Office of Government
Office of Disaster Office of Office of Investment Office of Field Office of
Business Entrepreneurial Contracting and
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

Assistance Capital Access and Innovation Operations International Trade
Development Development Business Development

Office of
Office of the Office of the Office of Office of Office of
Office of Hearings Office of National Performance Office of
Chief Operating Chief Information Communications Congressional and Intergovernmental
and Appeals Ombudsman Management and the General Counsel
Officer Officer and Public Liaison Legislative Affairs Affairs
Chief Financial Officer
AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

SBA Regions and Field Offices

AGENCY FINANCIAL REPORT • FY 2018 13
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

PRIMER OF SBA’S PRINCIPAL PROGRAMS

CAPITAL financing options to develop foreign markets, fund their
export transactions, and/or support business expansion
(www.sba.gov/financialassistance) due to exporting success. The SBA provides technical
The SBA has a business loan portfolio of $120.3 billion.1 assistance on trade finance and funding questions through
staff located in U.S. Export Assistance Centers.
7(a) Loan Program — The SBA offers government
guaranties on loans (up to $5 million) made by lenders to U.S. Export Assistance Centers — USEACs are staffed
help expand access to capital for business owners who face by the SBA, the Department of Commerce, and the
challenges in getting approved for financing. The SBA Export-Import Bank professionals. Together, their mission
guarantees a portion of 7(a) loans made and administered is to help small- and medium-sized businesses compete in
by commercial lending institutions. Loans can be today’s global marketplace by providing export marketing
guaranteed for a variety of general business purposes. and finance assistance.

504 Certified Development Company Loan Program State Trade Expansion Program — STEP provides
— The SBA works with CDCs, which are private grants to states to assist small businesses with the
nonprofit corporations, and private lenders to provide information and tools they need to succeed in export
long-term financing (up to $5.5 million) to support related activities. These activities include participation
investment in major assets, such as real estate and heavy in foreign trade missions, foreign market sales trips,
equipment. The SBA guarantees the CDC’s portion of international marketing campaigns, export trade shows,
these loans. and training workshops.

Microloan Program — The SBA provides loans to
nonprofit intermediary lenders, which are community- CONTRACTING
based organizations with experience in lending and (www.sba.gov/contracting)
providing technical assistance, that in turn make these The SBA leads federal efforts to deliver 23 percent of
loans (up to $50,000) to small businesses needing small- contracts to small businesses, which is inclusive of 5 percent
scale financing, and technical assistance for startup or set-asides for women-owned and small disadvantaged
expansion. businesses and 3 percent set-asides for HUBZone and service-
Small Business Investment Companies — SBICs are disabled veteran-owned small businesses.
privately-owned and managed investment funds that Procurement Assistance to Small Businesses — Small
use their capital plus funds borrowed, with an SBA business contracts represent the largest form of direct
guaranty (up to $150 million), to make equity and debt monetary support for small business in the Federal
investments in qualifying small businesses. Government. Within this goal are four subgoals:

EXPORTING Small Disadvantaged Businesses — This program
provides assistance through the 8(a) Business
(www.sba.gov/oit) Development program and set-aside contracting
The SBA provides loans to exporters and training assistance for businesses owned and controlled by socially
to small businesses. and economically disadvantaged individuals. Over
the course of 9 years, a firm is assisted in gaining
Export Loans — The SBA provides several types of resources to compete for federal contracts and for
export loans, including SBA Export Express loans (up contracts in the private sector.
to $500,000), Export Working Capital loans (up to $5
million), and International Trade loans (up to $5 million)
HUBZone Small Businesses — This program
provides sole-source and set-aside contracting
that provide small businesses with enhanced export
for firms located in designated economically
disadvantaged geographical areas.
1 The business loan portfolio consists of the following loan programs: 7(a),
504 loan, Microloan, ARC 506, Dealer Floor Plan, 504 First Lien, and 504
Refi.

14 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

Service-Disabled Veteran-Owned Small Businesses Veterans Business Outreach Centers — SBA’s 22
— This program allows federal agencies to set-aside VBOCs provide counseling and training services to
contracts for competition only among service- veteran-owned and service-disabled veteran-owned
disabled veteran-owned small businesses. small businesses and entrepreneurs, along with reserve
Women-Owned Small Businesses — This program component members who have an interest in either
allows federal agencies to set-aside certain contracts starting a new small business or expanding an established
for competition only among small businesses owned small business.
by women.
SCORE — SCORE is a nonprofit association comprised
Surety Bond Guarantee Program — A surety bond of nearly 11,000 volunteer business mentors that serve
guarantee is a type of contract that guarantees the entrepreneurs with in-person mentoring and local
performance of a contractor. If one party does not fulfill training workshops. As the largest volunteer business
its end of the bargain, then the SBG program provides mentor network in the federal government, SCORE
financial compensation to the other party. The SBA adapts its structure and services to meet the needs of small
guarantees bonds issued by a surety company in order to businesses.
encourage the surety company to provide bonds to small
Learning Center — The SBA Learning Center is an
businesses, up to $6.5 million for non-federal contracts
online portal that hosts a variety of self-paced online
and up to $10 million for federal contracts.
training courses, quick videos, web chats, and other
Small Business Innovation Research — The SBIR helpful tools to help small business owners explore and
program is a highly competitive funding agreement learn about many aspects of business ownership.
program that stimulates high-tech innovation by reserving
a specific percentage of federal research and development DISASTER ASSISTANCE
funds for small businesses. The SBIR program protects
(www.sba.gov/disaster)
the small business and enables it to compete on the same
level as larger businesses. The SBA has a portfolio of $9.0 billion in direct
disaster loans to businesses of all sizes, private nonprofit
organizations, homeowners, and renters.
ADVISING, MENTORING,
AND TRAINING Disaster Assistance — The SBA is the federal
government’s primary source of financing for the long-
(www.sba.gov/local-assistance)
term repair and rebuilding of disaster-damaged private
The SBA and its partners serve more than 1 million small property for homeowners, renters, businesses of all sizes,
business clients a year through the following programs. and private nonprofit organizations. It is the only form of
SBA assistance that is not limited to small businesses.
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 United States and the insular territories.

Women’s Business Centers — WBCs provide advising
and training through more than 115 nonprofit
educational centers across the nation. Many WBCs
provide multilingual services and a number offer flexible
hour allowing mothers with children to attend training
classes.

AGENCY FINANCIAL REPORT • FY 2018 15
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

SBA BY THE NUMBERS
(Dollars in Millions)
FY 2015 FY 2016 FY 2017 FY 2018
Principal Program Portfolio (1) Outstanding Principal Balance $ 118,767 $ 124,118 $ 131,815 $ 142,315
Capital (2)

7(a) Loans Dollars of Gross Loans Approved $ 23,584 $ 24,128 $ 25,447 $ 25,372
504 Loans Dollars of Gross Loans Approved $ 4,298 $ 4,740 $ 5,014 $ 4,754
Microloans Dollars of Gross Loans Approved to Microborrowers $ 51 $ 58 $ 68 $ 72
Small Business Investment Dollars of SBIC Debenture Financed to Small
$ 6,286 $ 5,992 $ 5,727 $ 5,503
Company (SBIC) Businesses

Exporting
Export Loans Dollars of Gross Loans Approved $ 1,454 $ 1,546 $ 1,872 $ 1,135

Contracting (3)
Small Business Prime Dollars of Contracts Awarded to Small Businesses
$ 90,702 $ 99,960 $ 105,660 N/A
Contracting
HUBZone Small Businesses Dollars of Contracts Awarded to HUBZone
$ 6,422 $ 6,864 $ 7,290 N/A
Small Businesses
Small Disadvantaged Dollars of Contracts Awarded to Disadvantaged
$ 35,430 $ 39,134 $ 40,247 N/A
Businesses Small Businesses
Women-Owned Small Dollars of Contracts Awarded to Women-Owned
$ 17,807 $ 19,670 $ 20,844 N/A
Businesses Small Businesses
Service-Disabled, Veteran- Dollars of Contracts Awarded to Service-Disabled,
$ 13,832 $ 16,337 $ 17,939 N/A
Owned Small Businesses Veteran-Owned Small Businesses
Surety Bonds Dollars of Bid and and Final Bonds Guaranteed $ 6,348 $ 5,658 $ 6,032 $ 6,490

Counseling and Training (4)
Small Business Development Number of Clients Advised and Trained
454,898 453,427 433,554 N/A
Centers (SBDCs)
Women's Business Centers Number of Clients Advised and Trained
140,716 145,415 140,628 N/A
(WBCs)
SCORE Number of Clients Mentored and Trained 349,539 433,394 646,260 N/A
Online Training Number of Clients Trained Online 154,132 187,162 206,172 N/A
Veteran's Business Outreach Number of Clients Advised and Trained
62,117 47,342 48,839 N/A
Centers (VBOCs)

Disaster Assistence
Disaster Assistance (2) Dollars of Gross Loans Approved $ 372 $ 1,407 $ 1,666 $ 7,001

(1) The total portfolio consists of guarantied business loans outstanding, guarantied debentures, direct business loans, and direct disaster loans. The data
include all performing loans and defaulted loans that have not been charged-off.
(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 2018 contracting numbers will continue to be collected and certified through the third quarter of FY 2019. Therefore, FY 2018 numbers are not yet
available.
(4) Resource partners may input data up to 45 days after the close of the fiscal year; therefore FY 2018 data will be provided in the FY 2020 Congressional
Budget Justification/FY 2018 Annual Performance Report to be published in February 2019.

16 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

ANALYSIS OF PERFORMANCE RESULTS

Analysis of Performance and Chart I: Cumulative Number and Dollar of Urban (HUBZone) and Rural
Agency Priority Goals Loans to Small Businesses

The following section presents key 30,000 12,000

Dollar of Loans ($ Millions)
FY 2018 performance data including 25,000 10,000

Number of Loans
the four FY 2018-2019 Agency Priority
Goals that are important to the success 20,000 8,000
of SBA’s mission. The presentation of the 15,000 6,000
data and analysis is organized by strategic
objective, which follows SBA’s FY 2018- 10,000 4,000
2022 Strategic Plan. Detailed information 5,000 2,000
on all SBA program performance data
will be presented, including explanations 0 0
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
of variances, in the FY 2018 Annual
Urban (HUBZone) Actual Rural Actual
Performance Report to be published in
Number Target Dollar ($Millions)
February 2019. When new goals have been
established in FY 2018 and no historical
data is available, the SBA has used monthly
or quarterly data to demonstrate trends. overall. Lenders, however, have been responsive to SBA’s
ongoing fee relief for lower-dollar loans and loan program
STRATEGIC OBJECTIVE 1.1: tools like Lender Match. Outreach to local lenders
Expand access to capital2 continues to be a challenge as fewer of them exist as a
result of bank mergers and acquisitions.
Priority Goal: By September 30, 2019, increase
the number of loans by 5 percent from the FY 2017 Performance Goal: Increase the number of jobs
baseline to small businesses in socially and economically supported through SBA capital assistance programs to
disadvantaged urban communities and rural areas 798,500 in FY 2018.
(FY 2017 baseline of 25,475 for 7(a) loans, 504 loans,
and microloans). Performance Analysis: The number of jobs supported
– jobs created and retained because of SBA intervention
Performance Analysis: SBA’s loan programs play a critical – is an important outcome measure of the effectiveness
role in providing access to capital for small businesses, of SBA’s programs. This measure tracks the number of
including entrepreneurs in socially and economically jobs supported through the 7(a), 504 loan, Microloan, and
disadvantaged urban communities and rural areas. To Small Business Investment Company (SBIC) programs.
support this strategy, the SBA has focused on training The number of jobs supported has decreased from the
its lender relations specialists in the district offices and prior year with more than 725,000 jobs reported in
lenders and partnering with the U.S. Department of FY 2018 (see Chart II). The decrease is attributed to the
Agriculture to increase rural outreach. The SBA met decline in number of 7(a) and 504 loans approved. As the
89 percent of its target by approving 23,497 loans (see economy continues to grow and other economic indicators
Chart I) totaling $10.1 billion. With unemployment strengthen, SBA lending often reduces as lenders support
at record lows, demand for SBA lending has decreased more private capital. The SBA will continue to reach
entrepreneurs with the greatest need who cannot access
credit elsewhere.
2 The information being provided is derived solely from Agency records
that are submitted by the Agency’s participant lenders engaged in making
SBA loans. This information is collected by the lenders from SBA loan
applicants who provide it on a voluntary basis. It is then forwarded by
the lenders to the SBA. Since the information is provided by the loan
applicants on a voluntary basis, it is not necessarily inclusive of all SBA
borrowers, nor can its accuracy be verified by the Agency. Accordingly, the
SBA cannot make any representation as to the completeness or accuracy of
the information provided.

AGENCY FINANCIAL REPORT • FY 2018 17
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

STRATEGIC OBJECTIVE 1.2: Chart II: 7(a), 504, Microloan, and SBIC Jobs Supported
Help small business exporters
succeed in global markets
1,000,000
Performance Goal: Increase the value of
small business export sales to $1.4 billion in 800,000

Jobs Supported
FY 2018.
600,000
Performance Analysis: Increasing access
to export financing, combined with trade 400,000
counseling and training, contributes to the
enhanced ability of current and future small 200,000
business exporters to succeed in the global
marketplace. This year, the SBA approved 0
987 export loans for $1.1 billion, which FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
contributed to $2.5 billion in export sales (see Actual Target
Chart III). The SBA trained and counseled
more than 13,000 small businesses on export
finance. In addition, the SBA partnered Chart III: Cumulative Value of Core Export Sales
with the U.S. Department of Commerce to
provide trade financing experts at domestic
and overseas trade shows. The State Trade 3,000,000

Export Sales ($ Thousands)
Expansion Program (STEP) provided $18
2,500,000
million in funding to 47 states making it
possible for small businesses to participate in 2,000,000
international trade shows and trade missions. 1,500,000

1,000,000
STRATEGIC OBJECTIVE 1.3:
Ensure federal contract and 500,000
innovation set-aside goals are met 0
and/or exceeded Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Priority Goal: By September 30, 2019,
Actual Target
maximize the percent of federal contract
dollars by awarding at least 23 percent to
small businesses.
Chart IV: Percent of Federal Contract Prime Dollars Awarded to Small
Businesses
Performance Analysis: By law, 23 percent
of federal prime contracting dollars are set- 30
aside for small businesses, which includes 5
percent of prime and subcontracts to small 25

Contract Dollars (Percent)
disadvantaged businesses and women-owned 20
small businesses, and 3 percent of prime and
15
subcontracts to HUBZone small businesses
and service-disabled veteran-owned small 10
businesses. For the fifth consecutive year,
5
in FY 2017 (the latest year of data available
due to the data certification process), 0
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
the Federal Government surpassed its
prime contracting goal by awarding small Actual Target
businesses nearly $106 billion, or 23.88
percent (see Chart IV) in contracting dollars.

18 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

The Federal Government surpassed Chart V: FY 2017 Percent of Federal Prime Contract Dollars Awarded
its goals for service-disabled veterans To Socio-Economic Small Businesses
(FY 2017 result was 4.1 percent) and
small disadvantaged businesses (FY 2017 10

result was 9.1 percent). Also, in FY 2017,

Contract Dollars (Percent)
8
women-owned small businesses were
awarded 4.7 percent of federal contracts, 6
and HUBZone small businesses were
awarded 1.7 percent of federal contracts 4
(see Chart V). To help meet these goals,
the SBA deployed a team of highly 2
trained and skilled professional analysts,
0
procurement center representatives,
Small Woman - Owned Service-Disabled HUBZone
industrial specialists for size protests, and Disadvantaged Veteran -Owned
certificate of competency and forestry Actual Target
management specialists to actively engage
staff across the Federal Government
to promote small business contracting Chart VI: Number of 8(a)-Certiﬁed Firms Awarded Federal Contracts
awards. The Federal Government
continues to face challenges meeting
the HUBZone goal; however, the SBA 4,000
finalized a program evaluation that 3,500

8(a)-Certiﬁed Firms
provides recommendations on ways 3,000
for agencies to successfully meet their
2,500
HUBZone target.
2,000

STRATEGIC OBJECTIVE 2.1: 1,500

Develop small businesses through 1,000
technical assistance 500
Priority Goal: By September 30, 2019, 0
Q1 Q2 Q3 Q4
increase by 10 percent from the FY 2017
baseline the number of 8(a)-certified Actual Target
small businesses awarded federal contracts
(FY 2017 baseline of 3,420 small
businesses). and implemented standardized training for its Business
Opportunity Specialists in its district offices to ensure
Performance Analysis: The 8(a) program helps socially consistent support of disadvantaged small business across
and economically disadvantaged entrepreneurs gain access the country. In prior years, small businesses had a difficult
to federal government contracts. The SBA collaborated time negotiating the lengthy 8(a) certification process
with other agencies’ Office of Small and Disadvantaged which has been streamlined. Through tools like www.
Business Utilization to provide training and share best Certify.SBA.gov, the SBA has achieved 85 percent of its
practices for small businesses to navigate the federal FY 2019 goal and exceeded its FY 2018 target of 3,591
acquisition process. In addition, the SBA has developed firms (see Chart VI).

AGENCY FINANCIAL REPORT • FY 2018 19
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

STRATEGIC OBJECTIVE 2.2: Chart VII: Small Business Entrepreneurs Advised, Mentored, and
Build healthy entrepreneurial Trained
ecosystems
Performance Goal: Increase the 1,600

Entrepreneurs ( Thousands)
number of entrepreneurs assisted 1,400
through partnerships, virtual resources, 1,200
and targeted outreach to 1,467,000 in 1,000
FY 2018. 800
600
Performance Analysis: The SBA
400
provided mentoring, business advice,
and training assistance to more than 1 200
million entrepreneurs and small business 0
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
owners in FY 2018 (see Chart VII).
Counseling/Advising and Mentoring Training
Resource partners may input data up to
Online Training Target
45 days after the close of the fiscal year,
and FY 2018 data will be made available
in the APR publication in February 2019. Chart VIII: Number of Outreach Events through Federal Agencies,
The SBA provided standardized training Trade Associations, and Resource Partners
for its Economic Development Specialists
in the district offices to increase support 140
for SBA resource partners. In addition,
120
the SBA developed new performance

Outreach Events
measures to better align the coordination 100

and improve accountability among 80
the national program in headquarters, 60
district offices in the field, and resource 40
partners. The SBA continued sustaining
20
and growing the Boots to Business
0
entrepreneurship training track in
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
partnership with the U.S. Department
of Defense’s (DoD) Transition Assistance Actual Target
Program, where nearly 12,500 veterans,
service members, and military spouses
benefited from entrepreneurship services. small businesses they regulate to provide a confidential
and impartial channel for small businesses to comment
STRATEGIC OBJECTIVE 2.3: on enforcement activities, audits, on-site inspections,
Create a small business friendly environment compliance assistance, or other types of issues. The
SBA raised awareness of its products and services
Performance Goal: Increase the number of outreach
through direct outreach to small business owners and
events to 100 through partnerships with federal agencies,
entrepreneurs, and established relationships with trade
trade associations, and resource partners to reduce
association leaders, resource partners, and other federal
regulatory burdens on small businesses in FY 2018.
agencies. In FY 2018, the National Ombudsman
Performance Analysis: SBA’s Office of the National completed 118 events exceeding the target by 18 percent
Ombudsman worked with federal agencies and the (see Chart VIII).

20 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

STRATEGIC OBJECTIVE 3.1: process, including the application, final decision, and
Deploy disaster assistance effectively and closing of the loan. The SBA had a customer satisfaction
efficiently rate of 73 percent, which is above the target of 71 percent
Priority Goal: By September 30, 2019, increase the (see Chart X). The satisfaction rate is a result of several
average number of disaster loan applications processed factors, including improvements to the application
from three to six applications per loan specialist per day. process and upgrades to the Disaster Loan Assistance
Portal. In addition, the development of the www.
Performance Analysis: To increase the speed of DisasterAssistance.gov website made disaster assistance
processing for disaster loan applications, the SBA responsive, consistent, and easy for disaster survivors to
modernized its Disaster Credit Management System find resources. The significant decrease from FY 2017 is
in May 2018. DCMS 2.0 streamlined or eliminated attributable to the volume of applications from hurricanes
institutional processes and has helped loan specialists Harvey, Irma, and Maria, which is the second largest
process applications quicker for disaster survivors (see disaster season in SBA’s history.
Chart IX). With the new technology,
SBA processed 337,633 disaster loan
Chart IX: Average Number of Loan Applications Processed Per Loan
applications for more than $7.0 billion,
Specialist Per Day
which increased the average number
of loan applications processed to 4 5
applications per loan specialist per day
meeting the FY 2018 midpoint target 4
of 4 applications per loan specialist per

Loan Applications
day. Given the surge of applications in 3
the first part of the fiscal year as a result
of hurricanes Harvey, Irma, and Maria, 2

the SBA onboarded more than 5,000
employees, which later tapered with fewer 1
disaster loan applications. In addition, the
SBA revised its SOP and has trained its 0
Q1 Q2 Q3 Q4
loan specialists in the new system, which
Actual Target
will help the SBA continue to increase the
number of loan applications processed

Performance Goal: Increase the customer Chart X: Customer Satisfaction Rate for Disaster Loan Approvals
satisfaction rate for disaster loan approvals
to 71 percent in FY 2018. 90

Customer Satisfaction Rate (Percent)
80
Performance Analysis: The SBA tracks
70
customer satisfaction for its disaster
assistance program through an annual 60
survey that uses the American Customer 50
Satisfaction Index methodology. The 40
index summarizes key points in the loan 30
20
10
0
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
Actual Target

AGENCY FINANCIAL REPORT • FY 2018 21
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

STRATEGIC OBJECTIVE 4.1: Chart XI: Small Business Utilization Rate
Ensure effective and efficient
management of Agency resources.
100
Performance Goal: Increase the small

Utilization Rate (Percent)
business contract utilization rate to 73 80
percent in FY 2018.
60
Performance Analysis: The SBA met
its small business utilization goal by 40
awarding 78.7 percent of contracts in
FY 2018 totaling $144.6 million to small 20
businesses (see Chart XI), and exceeded
its sub-goals for women-owned, small 0
disadvantaged, HUBZone, and service- FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
disabled veteran-owned small businesses. Actual Target
The SBA, which has the highest small
business contracting goal in the Federal
Government, exceeded the small business Chart XII: Federal Employee Viewpoint Survey Job Satisfaction Rate
utilization rate by maintaining a default
Agency position of awarding contracts
to small businesses and only resorting 80

Job Satisfaction Rate (Percent)
to large vendors when all small business 70
options were exhausted. 60
50
STRATEGIC OBJECTIVE 4.2: 40
Build a high-performing workforce
30
Performance Goal: Increase SBA
20
employee satisfaction scores through the
10
Federal Employee Viewpoint Survey to 67
percent by FY 2018. 0
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
Performance Analysis: SBA’s Federal Actual Target
Employee Survey employee engagement
index score increased to 68 percent in
FY 2018 from 67 percent in FY 2017
(see Chart XII). SBA’s response rate of 74 percent, one
of the highest in the Federal Government, received high
marks in employee engagement, satisfaction, and positive
feelings toward the Agency accomplishing its mission.
Through core training and professional development
activities and enhanced collaboration, more employees felt
engaged, which shows in the data. Furthermore, higher
engagement scores increase employee retention, which in
turn reduces hiring and training costs.

22 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

STRATEGIC OBJECTIVE 4.3: Evidence and Evaluation
Implement enterprise-wide information system
modernization and cost-effective technology The SBA continues to expand the availability and use
of evidence and evaluation to understand and make
Performance Goal: Increase IT cost savings/avoidance
decisions about SBA programs and operations. In
through the streamlining of contracting, category
FY 2018, the SBA completed program evaluations
management, and Cloud computing to $10.5 million in
for the Community Advantage Pilot, HUBZone, and
FY 2018.
Boots to Business programs. SBA’s program managers
Performance Analysis: In FY 2018, the SBA made will be able to use the results of these evaluations to
significant progress in technology modernization through inform management decisions, and to identify areas
the adoption of cloud-based solutions and consolidating where further evidence is needed, to improve outcomes
duplicative hardware, software, and services. In addition, for small businesses. SBA’s leadership uses evidence
through innovation and testing pilots and prototypes, in its quarterly deep dives (performance reviews) and
the SBA has achieved cost-savings of $11.9 million by strategic objective reviews and has woven evidence
creating greater opportunities to leverage new technology. into the development of its Strategic Plan, Annual
The SBA Office of Chief Information Officer partnered Performance Plan, and Annual Performance Report.
with the Office of Disaster Assistance to support
In FY 2018, the Agency created an enterprise learning
technology requirements for the addition of more than
agenda (ELA) with a set of key research and evaluation
5,000 employees to respond to hurricanes Harvey, Irma,
questions for each strategic goal. The ELA, developed
and Maria. The SBA configured a Virtual Desktop Cloud
in partnership with each program office, identifies
that enabled employees to work from home, which
areas where evaluation would provide insights about
reduced the facility footprint and contributed to cost
program effectiveness, progress toward outcomes, or
avoidance (see Chart XIII).
test pilot initiatives. Based on questions in the ELA,
the SBA initiated four new centralized
program evaluations for the following
Chart XIII: Cumulative Dollars of IT Cost Savings / Avoidance programs: Surety Bond Guarantee,
Small Business Investment Company,
7(j) Online Technical Assistance for
12
8(a) Certified Firms, and Federal and

Cost Savings/Avoidance ($ Millions)
10 State Technology (FAST) Grants. The
SBA continued to increase staff capacity
8
and knowledge of program evaluation
6 though its Performance and Evaluation
Community of Practice and updated
4 its Program Evaluation Framework and
2 Guidelines. The SBA plans to initiate
new program evaluations yearly to
0 continue building a suite of evidence
Q1 Q2 Q3 Q4
that will better inform decisions. The
Actuals Target SBA will publish evaluation results
on its website to support transparency
and incorporate findings into its
performance management framework.

AGENCY FINANCIAL REPORT • FY 2018 23
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

Verification and Validation of independently generated data with the data reported
by the program offices. These activities verify the data
Performance Data
and the underlying processes used for reporting.
Managing for results and integrating performance, Responding to data limitations. SBA performance
financial, and budgetary information require valid, analysts work with program offices to identify data
reliable, and high-quality performance measures and data. limitations and specify the necessary steps to improve
Improving data quality continues to be a priority for the data. In addition, some program offices rely on data
SBA. SBA’s performance analysts work with program office provided by third-party resource partners, who are
leads across the Agency to acquire high-quality data. In responsible for collecting, storing, and reporting
addition to using output data internally from its systems, data to the SBA. The program offices have internal
the SBA relies on data from resource partners, other processes for working closely with their resource
federal agencies, and other government entities to assess its partners to ensure that data is correctly reported.
accomplishments and effectiveness. The SBA vigorously
pursues the following strategies to ensure data quality:
Operational Portfolio Analysis
Ensuring the validity of performance measures and
data. The SBA conducts an annual performance The Operational Portfolio Analysis provides information
measure review to assess the validity of its measures on SBA’s credit programs and does not reference the
and underlying data. SBA’s performance analysts financial statements. The SBA is the taxpayers’ custodian
meet with each office for in-depth discussions about of small business loan guaranties and direct loans
proposed externally reported measures. The meetings portfolio of more than $142 billion.3 During FY 2018,
help determine whether the proposed measures the portfolio grew by $10.5 billion, or 8 percent. Since
and underlying data are useful for demonstrating a most existing loans are continually being paid, this
program office’s success, which is defined by the goals growth implies that SBA’s lending during FY 2018 was
and objectives identified in the Agency’s FY 2018- significantly greater than the $10.5 billion reflected
2022 Strategic Plan. in the portfolio growth. By program, the Agency’s
7(a) loan portfolio expanded by $6.2 billion, the 504
Fostering organizational commitment and capacity loan portfolio increased by $0.3 billion, and the SBIC
for data quality. The SBA issues a monthly
portfolio grew by $1.2 billion. The Agency’s disaster
executive performance dashboard to apprise
loan portfolio increased by $2.8 billion, while all other
senior management on progress. The Agency
portfolios declined by $0.1 billion. (see Chart XIV).
also holds quarterly performance
review meetings with the Deputy
Administrator, Chief of Staff, Chart XIV: Makeup of SBA’s Outstanding Loan Portfolio

Performance Improvement Officer,
and program offices. At these 160
meetings, the Agency’s leadership

Outstanding Loans ($ Billions)
140
reinforces its commitment to the
120
performance metrics and works
directly with the program offices to 100
identify best practices and mitigate 80
challenges. Annually, each Associate
60
Administrator must certify their
40
program office’s performance data
before it is externally reported and 20
published online. 0
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
Assessing the quality of existing data.
7(a) 504 SBIC Disaster All Other
SBA’s performance analysts work
with program office staff to reconcile
data by creating independent 3 The total portfolio consists of guarantied business loans outstanding,
guarantied debentures, direct business loans, and direct disaster loans. The
performance reports and analyses, and comparing the data include all performing loans and defaulted loans that have not been
charged-off.

24 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

NEW GUARANTIED LOANS Chart XV: Quarterly Gross 7(a) and 504 Loan Approvals
The quarterly average loan volume
decreased slightly in FY 2018 with 10
an average of $7.5 billion. Chart 9 Average Average
Average
XV demonstrates the growth in loan

Loan Approvals ($ Billions)
Average 7.6 7.5
8 7.2
7.0
approvals since FY 2013, particularly the Average Average
7
increase between fiscal years 2014 and 5.9 5.9
6
2015.
5
SBA loans approved per capita by state 4
can be derived by combining SBA 7(a) 3
and 504 business loan approval data with 2
publicly available Census population 1
totals. Per capita SBA lending provides
4 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
a look at the states where SBA lending is FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
proportionally higher after accounting for
the population distribution. Chart XVI
displays per capita SBA lending by state At least three main factors contributed to the loan
for FY 2017, FY 2018 and a comparison of the two guaranty portfolio’s recent growth:
fiscal years to highlight recent trends. In discrete annual
per capita terms, the state of Utah (FY 2018 value of Continuous Growth in the Economy — Real Gross
$194/person) is the single highest state across both fiscal Domestic Product in the United States grew at an
years. For the FY 2018 state rankings, Colorado ($157/ average quarterly rate of 2.3 percent during 2015-2018
person) is the second highest state per capita and Georgia Quarter 2.5 This increase in RGDP supports increased
($132/person) is the highest state along the eastern revenues and profits at small and large firms, which in
seaboard. When looking at the comparison of state per turn increases their demand for credit.
capita differences between the two fiscal years, Louisiana
(69%), Alaska (49%) and Delaware (38%) recorded the Increase in Business Financial Stability — As the economy
three highest increases. Despite Louisiana (25th), Alaska continues to grow, several factors continue to influence
(48th) and Delaware’s (45th) small populations relative to demand and increases in revenues. First, inflation remains
other states, an increasing per capita value indicates that low (on average 2.1 percent in 2017),6 which keeps
SBA lending to these areas is growing faster than other the cost of consumer goods and services affordable.
similarly-sized areas. Second, the dollar continued to maintain its strength
in international exchange markets during 2017-2018,7
which also supports the stability of U.S. prices. Finally,
the unemployment rate has continued below 5 percent at
pre-recession levels, which boosts consumer confidence
and spending.8

5 U.S. Department of Commerce, Bureau of Economic Analysis: www.bea.
gov/newsreleases/glance.htm.
6 U.S. Department of Labor, Bureau of Labor Statistics: www.bls.gov/cpi/
home.htm.
7 Financial Deposit Insurance Corporation: www.macrotrends.net/1329/
us-dollar-index-historical-chart.
4 U.S. Department of Commerce, Census Bureau: https://www.census.gov/ 8 U.S. Department of Labor, Bureau of Labor Statistics: data.bls.gov/
data/tables/2017/demo/popest/state-total.html. timeseries/LNS14000000.

AGENCY FINANCIAL REPORT • FY 2018 25
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

Chart XVI: SBA Business Loans per Capita, by State – FY 2018, 2017, and FY 2017 vs.
FY 2018

2018 SBA Lending Per Capita by US State

AK HI

2018 Per Capita SBA Loans Approved
15.0 195.0

2017 SBA Lending Per Capita by US State

AK HI

2017 Per Capita SBA Loans Approved
15.0 195.0

2017 v 2018 % Change in SBA Lending Per Capita by US State

AK HI

2018 v 2017 Change
-0.700 0.700

26 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

Market for Small Business Lending —
Chart XVII: Outstanding Commercial Loans to Small vs. Nonsmall
According to data from the Federal Businesses
Deposit Insurance Corporation, the total
market for business loans has increased 3,500

Outstanding Loans ($ Billions)
during 2013-2017 by 28 percent ($726
3,000
billion). However, 94 percent ($679
billion) of this increase is accounted for 2,500
by loans to nonsmall businesses,9 while 2,000
total small business loans increased by
1,500
over $47 billion. This means the ratio
of small business loans compared to the 1,000
total bank market decreased (see Chart 500
XVII). Furthermore, there has been a
0
trend in the banking industry toward CY 2013 CY 2014 CY 2015 CY 2016 CY 2017
consolidation, which is reflected in the
Small Business Loans Nonsmall Business Loans
reduction of commercial banks between
the 2013-2017 period by 17 percent. This
makes SBA’s guarantee products even Chart XVIII: Monthly Gross Disaster Assistance Loan Approvals
more critical for growing small businesses
that may be denied credit in the private
loan market. 1,600

Loan Approvals ($ Millions)
1,400
NEW DIRECT LOANS
1,200
In FY 2018, SBA’s annual lending for
1,000
the Disaster Assistance program is
over $7 billion due to the response to 800
hurricanes Harvey, Irma, and Maria 600
(HIM). The HIM hurricanes caused 400
significant physical damage to Texas, 200
Louisiana, Florida, Puerto Rico, and
0
the U.S. Virgin Islands. The magnitude Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept
of FY 2018’s disaster loan activity is FY 2016 FY 2017 FY 2018
apparent in the 320% increase of loan
approvals above the FY 2017 total of
$1.7 billion. Chart XVIII illustrates the
relative increase of disaster loans in FY 2018 by month,
compared to the prior two fiscal years.

Most of the outstanding balance of the Disaster
Assistance loan portfolio is comprised of lending from
FY 2006 (hurricanes Katrina, Rita, and Wilma) and
FY 2013 (hurricane Sandy). The SBA will continue
to make disaster loans an important recovery tool for
businesses, homeowners, and renters who survive a
disaster.

9 Nonsmall businesses are firms that have more than 500 employees.

AGENCY FINANCIAL REPORT • FY 2018 27
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

PORTFOLIO PERFORMANCE — Chart XIX: Delinquency and Charge-Off Rates for the 7(a) and 504 Loan
DELINQUENCIES Programs by Fiscal Year
Delinquency rates (i.e., borrowers who
are late on their payments) are a leading 7(a) Loans
5
indicator of the Agency’s charge-off rate
(i.e., the rate of dollars spent to cover loans 4

Rate (Percent)
that defaulted). Thus, delinquency rates
are a general indicator of the Agency’s 3
and taxpayers’ future liabilities for these
programs. A declining delinquency rate (see 2
Chart XIX) is a positive indicator for the
1
financial performance of any loan portfolio. NBER Declared
Recession
Strong economic growth, strong profit 0

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
performance, and tighter lending standards
by financial institutions during the past
several years have reduced delinquency 7(a) Delinquency Rate 7(a) Past 12 Months Charge-Off Rate
rates for all business loans, which have been
504 Loans
steadily declining since reaching cyclical 6
NBER Declared
peaks in the latter part of 2009. A declining Recession
5
national unemployment rate, down from a
peak rate of 10 percent in October 2009, 4

Rate (Percent)
signals a generally improving environment
3
for small businesses. Delinquency rates for
the Agency’s major loan programs followed 2
this national downward trend. Delinquency
1
rates for the 7(a) loan program declined from
the 3.8 percent peak in January 2009 to 0.7 0

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
percent in September 2018. Delinquency
rates for the 504 loan program likewise
declined from the 5 percent peak in February 504 Delinquency Rate 504 Past 12 Months Charge-Off Rate
2010 to 0.8 percent in September 2018.
The 12-month charge-off rate for the 504 loan program
PORTFOLIO PERFORMANCE —
experienced a continuous increase from FY 2008 to the
CHARGE-OFFS
early part of FY 2013, peaking at 4.4 percent during
The 12-month charge-off rate for the 7(a) loan program January 2013, but then recorded a pronounced decline
experienced a pronounced decline during the FY 2010- thereafter, dropping to 0.4 percent during September 2018.
2013 period, declining from 4.3 percent during the fourth This trend is not surprising, since the 504 loan program is
quarter of 2010 to 1.2 percent in the third quarter of an economic development program with a commercial real
2013. However, the rate experienced a noticeable increase estate focus. As such, recovery rates of defaulted 504 loans
thereafter, until decreasing in September 2018 to 0.7 percent are, with some noticeable time lag, significantly impacted
(see Chart XIX). The 7(a) loans not sold on the secondary by the pricing trend in this sector. Real estate prices have
market become a charge-off only after all efforts to recover a been on the rise since the latter part of 2009 and, as of
delinquent balance have been exhausted, such as liquidating 2018, commercial real estate prices are increasing.
the underlying collateral. The latent rise of the 7(a) charge-
off rate in 2013 is attributable to recession-era loans that Quarterly information on the status of SBA’s loan
were charged-off after efforts to recover delinquent balances portfolio, including outstanding balances and approvals
had been exhausted. Now that this effort to charge-off by loan program and purchase rates, is available on SBA’s
the recession-era loans is complete, the charge-off rate is website at www.sba.gov/performance.
mirroring the delinquency rate for FY 2018.

28 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

FORWARD LOOKING ANALYSIS
The SBA maintains and strengthens the nation’s economy demands. While unemployment continues to decrease,
by helping small businesses start, grow, expand, and a greater percentage of rural America does not have the
recover. The Agency will ensure that it can adapt to a same access to labor markets. Small businesses must
changing environment and deliver programs that meet be able to recruit and retain top talent, and often face
the needs of America’s entrepreneurs. The following challenges finding the right candidates for the job.
areas serve as both challenges and opportunities that will The SBA will continue to expand its programs and
factor into SBA’s strategies for delivering on its outcomes services in rural areas through enhanced partnerships
and using taxpayer resources efficiently. The Agency with the U.S. Department of Agriculture. The SBA will
will continue to review these factors as it implements its also look for new ways to strengthen opportunities to
programs to ensure optimal performance. support an educated and skilled workforce.

Technology Disasters
Technology has evolved so that entrepreneurs have greater A natural disaster can destroy lives, businesses, and
access to markets and more capabilities to start and communities in little time. While the SBA has many
expand their businesses. However, not all entrepreneurs capabilities to respond to hurricanes, tornados, forest
have access to adequate markets and face challenges fires, and floods, the growing threat and number of
connecting to resources. The SBA will continue adapting these occurrences remain a serious concern. This year,
and developing new platforms to reach entrepreneurs Hurricane Florence left billions of dollars in damage in
in emerging markets. Virtual training platforms and North Carolina and South Carolina while Hurricane
online tools will allow the SBA to reach more customers. Lane left more than four feet of rain in Hawaii. Small
Through modernization efforts like Certify.gov and businesses must adapt by up-front planning. Disaster
the DCMS 2.0, the SBA can process applications more preparedness is a key component of SBA’s Disaster
expeditiously and electronically. Greater advancements in Assistance program and has helped many small businesses
technology will continue to develop and shape how small prepare for the unexpected. The SBA continues to
businesses operate and how the Agency responds. modernize and respond to these growing threats through
updated technology and streamlining its ability to
onboard staff in shorter periods of time.
Markets
As the economy continues to grow and diversify, small
SBA’s Workforce
businesses must be nimble to these changes and learn how
to adapt to new markets. With an ever-expanding global As a growing percentage of Agency employees become
economy, small businesses will need to look toward new retirement eligible, the SBA continues to search for ways
markets and determine how to reach new consumers of to recruit and retain the best talent. Competition with
goods and services. Only 1 percent of small businesses industry and other agencies is strong and retention is
export in the global market, which poses an excellent challenging. The Agency has identified mission critical
opportunity for expansion. In the domestic market, interest occupations and developed workforce plans to address
rates continue to increase, which will shape access to capital. gaps. At the same time, the Agency seeks to ensure that its
The Agency will continue to depend on lenders, including workforce is representative of the public it serves and that
banks, credit unions, and community development financial it can effectively communicate with, and meet the needs
institutions. However, more than 3,000 lenders have left of, entrepreneurs and small business owners. The SBA has
the market since 2002. With fewer lenders, small businesses developed and aligned training for its field staff to ensure
must adapt and find new ways to access capital. that they have the tools to help small businesses succeed.
By providing SBA employees with the tools and resources
they need, the Agency will be able to more adequately
Employment deliver effective resources to America’s small businesses.
The U.S. workforce continues to transform as
industries modernize with new technology and market

AGENCY FINANCIAL REPORT • FY 2018 29
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

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

At End of Fiscal Year 2018 2017 % Change
CONDENSED BALANCE SHEET DATA
Fund Balance with Treasury $ 8,137,946 $ 6,719,641 21.11%
Credit Program Receivables and Related Foreclosed Property, Net 8,727,792 6,359,969 37.23%
All Other Assets 122,759 136,309 -9.94%
Total Assets $ 16,988,497 $ 13,215,919 28.55%
Debt 11,212,607 7,693,059 45.75%
Downward Reestimate Payable to Treasury 797,694 1,215,102 -34.35%
Liability for Loan Guaranties 2,662,786 2,556,368 4.16%
All Other Liabilities 242,253 239,060 1.34%
Total Liabilities 14,915,340 11,703,589 27.44%
Unexpended Appropriations 2,341,412 1,653,684 41.59%
Cumulative Results of Operations (268,255) (141,354) -89.78%
Total Net Position 2,073,157 1,512,330 37.08%
Total Liabilities and Net Position $ 16,988,497 $ 13,215,919 28.55%

For the Fiscal Year 2018 2017 % Change
STATEMENT OF NET COST BY STRATEGIC GOAL
Goal 1: Support Small Business Revenue and Job Growth
Loan Subsidy Cost Including Reestimates $ (1,089,432) $ (905,203) -20.35%
All Other Costs Net of Revenue 173,997 437,753 -60.25%
Goal 2: Build Healthy Entrepreneurial Ecosystems and Create Business
Friendly Environments 253,497 86,286 193.79%
Goal 3: Restore Small Businesses and Communities after Disasters
and Tomorrow’s Small Business
Loan Subsidy Cost Including Reestimates 492,668 5,788 8411.89%
All Other Costs Net of Revenue 591,777 319,959 84.95%
Goal 4: Strengthen SBA’s Ability to Serve Small Businesses 176,416 36,678 380.99%
Costs Not Assigned 22,752 22,649 0.45%
Net Cost of Operations $ 621,675 $ 3,910 15799.62%

CONDENSED STATEMENT OF CHANGES IN NET POSITION
Beginning Unexpended Appropriations $ 1,653,684 $ 1,425,883 15.98%
Total Budgetary Financing Sources 687,728 227,801 201.90%
Ending Unexpended Appropriations $ 2,341,412 $ 1,653,684 41.59%
Beginning Cumulative Results of Operations (141,354) (651,699) 78.31%
Total Financing Sources 494,774 514,255 -3.79%
Less: Net Cost of Operations 621,675 3,910 15799.62%
Ending Cumulative Results of Operations $ (268,255) $ (141,354) -89.78%
Ending Net Position $ 2,073,157 $ 1,512,330 37.08%

CONDENSED STATEMENT OF BUDGETARY RESOURCES
Unobligated Balance Brought Forward $ 5,875,912 $ 4,966,556 18.31%
Other Budgetary Resources, Net 143,643 (123,924) 215.91%
Appropriations (discretionary and mandatory) 2,499,538 1,933,824 29.25%
Borrowing Authority (discretionary and mandatory) 4,239,563 1,548,576 173.77%
Spending Authority from Offsetting Collections 4,356,021 3,918,122 11.18%
Total Budgetary Resources $ 17,114,677 $ 12,243,154 39.79%
Obligations Incurred, Budgetary $ 2,768,911 $ 2,333,955 18.64%
Obligations Incurred, Nonbudgetary 7,677,795 4,033,287 90.36%
Unobligated Balances, Available and Unavailable 6,667,971 5,875,912 13.48%
Total Status of Budgetary Resources $ 17,114,677 $ 12,243,154 39.79%

30 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

Analysis of Financial Results in the Budget of the United States Government and are
excluded from the budget surplus/deficit totals.
The principal financial statements have been prepared to
report the financial position and results of operations of the The FCRA governs SBA’s accounting for direct loans and
entity, pursuant to the requirements of 31 U.S.C. 3515(b). loan guaranties made in FY 1992 and thereafter. Under
While the statements have been prepared from the books FCRA, direct loans outstanding are reported net of an
and records of the entity in accordance with GAAP for allowance using the present value of forecasted cash flows
federal entities, and the formats prescribed by the OMB, in subsidy models that are OMB-approved.
the statements are in addition to the financial reports used
to monitor and control budgetary resources, which are A Liability for Loan Guaranties is also reported using
prepared from the same books and records. The statements subsidy models with forecasted cash flows from user fees
should be read with the realization that they are for a and defaulted guarantied loans. The direct loan allowance
component of the U.S. Government, a sovereign entity. and loan guaranty liability for each loan program cohort
is adjusted annually under FCRA through the subsidy
This Analysis of Financial Results references numbers in the model reestimate process. SBA’s FCRA accounting is
Highlights of Financial Results that were derived from the discussed further below in this section and in Notes 1 and
Financial Statements and Notes in this report. As a result, 6.A in the financial statements.
the definitions of the loan and guaranty balances used in
this Analysis of Financial Results may differ somewhat from The credit subsidy cost is the net present value of
the balances in the Operational Portfolio Analysis section. expected cash inflows and outflows over the life of a
For example, for the 7(a) program, the total amount of guarantied loan or the difference between the net present
guarantied loans is used in the Portfolio Analysis, but value of expected cash flows and the face value of a direct
only SBA’s guarantied portion is used in the Analysis of loan. The SBA receives budget authority annually to
Financial Results because it ties to balances in the financial fund its credit programs. When loans are disbursed, the
statements. SBA records subsidy expense for non-zero subsidy loan
programs.
BACKGROUND In accordance with the FCRA, the subsidy costs are
The SBA is a major federal credit agency of the U.S. reestimated annually. Reestimates update original loan
Government. The SBA had 5,489 full-time employees at program cost estimates to reflect actual experience and
the end of FY 2018, including disaster FTE employees. changes in forecasts of future cash flows for each annual
As a result, only $1.5 billion of SBA’s $17.1 billion cohort of loans. An upward reestimate occurs when
budgetary resources in FY 2018 were for salaries and the present value of expected cash outflows exceeds the
expenses, with the rest supporting SBA’s credit programs. present value of expected cash inflows. A downward
When apportioned by the OMB, budgetary resources are reestimate occurs when the present value of expected
available to enter into new obligations and to liquidate cash inflows exceeds the present value of expected cash
them. Budgetary resources are made up of new budget outflows.
authority and unobligated balances of budget authority
provided in previous years. The loan financing funds Increased reestimated costs are funded in the following
record all the cash flow activity resulting from post-1991 year by permanent indefinite budget authority, while
direct loans and loan guaranties, and are not budgetary decreased costs are returned by the SBA to a Treasury
costs. The financing accounts are reported separately general fund.

AGENCY FINANCIAL REPORT • FY 2018 31
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

The portion of the outstanding principal guaranteed by levels as collections and charge-offs exceeded new
the SBA was $105.6 billion as of September 30, 2018, an guaranty purchases, partially offset by a lower subsidy
increase of 6.1 percent from the $99.5 billion guaranteed allowance amount. The amount of direct disaster loans
as of September 30, 2017 (see Note 6.C in the financial increased as collections and charge-offs were exceeded
statements). As shown in Chart XX, new guaranties by hurricanes Harvey, Irma, and Maria loans, offset by a
disbursed by SBA participating banks during FY 2018 larger subsidy allowance amount.
were $23.0 billion, a 0.9 percent increase compared to the
FY 2017 figure of $22.8 billion. The $0.2 billion increase As reflected in Chart XXI, guarantied loan purchases
resulted from a $0.1 billion decrease in 504 Certified decreased $0.1 billion in FY 2018 to $0.9 billion. The
Development Company loans, a $0.2 billion increase in decrease in purchases this year contributed to the net
7(a) loans, and a $0.1 billion increase in SBIC Debentures decrease in the outstanding guarantied business loans
in FY 2018. This net increase in FY 2018 guaranty receivable.
disbursements and reduction in purchases
of guarantied loans contributed to the 6.1
Chart XX: Guarantied Loans Disbursed
percent increase in outstanding guarantied
principal mentioned above.
25
Credit program receivables for the SBA

Guarantied Loans ($ Billions)
are comprised of business and disaster
20
direct loans and defaulted business loans
purchased per the terms of SBA’s loan
15
guaranty programs, which are offset
by an allowance for the subsidy. The
10
allowance for the subsidy cost of the gross
loans receivable is recorded as a contra
5
asset, and the net asset is reported on the
Balance Sheet. The subsidy allowance is
0
determined by modeling the projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
future cash inflows and outflows of
SBA credit programs using discounted
cash flow methodology. The subsidy
Chart XXI: Purchases of Guarantied Loans
allowance for each loan program cohort
is reestimated annually. Increases are
funded by Treasury, while decreases are
returned to Treasury by the Agency. Loan 3

Guarantied Loans ($ Billions)
losses, the costs of loan servicing, and loan
interest rates are factors that affect the
subsidy allowance. 2

SBA credit program receivables were
valued at $8.7 billion in FY 2018, 1
which was an increase of $2.3 billion
from FY 2017. The change in the credit
program receivables resulted from 0
an increase of $2.4 billion in direct FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
disaster loans. The amount of defaulted
guarantied loans remained at the 2017

32 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

FINANCIAL POSITION The Downward Reestimate Payable to Treasury decreased
$0.4 billion mainly due to the change in the year-end
Assets
accrual of reestimates that resulted from lower than
The SBA had total assets of $17.0 billion at the end of projected purchases in FY 2018 for some cohorts in the
FY 2018, up 28.6 percent from FY 2017. Total assets 7(a) and 504 loan programs, and higher than expected
increased primarily due to a $2.3 billion increase in Credit recoveries for the 504 loan program. Better than projected
Program Receivables and Related Foreclosed Property, loan performance and higher than expected recoveries
plus a $1.4 billion increase in the Fund Balance with across most cohorts were the primary reasons for the
Treasury. The increase in Credit Program Receivables and downward reestimate in FY 2018.
Related Foreclosed Property was primarily due to the net
increase in direct disaster loan disbursements in response Net Position
to hurricanes Harvey, Irma and Maria. The increase in
Cumulative Results of Operations is the accumulative
the Fund Balance with Treasury was due primarily to an
difference between expenditures and financing sources
increase in appropriations and borrowings received to fund
since the inception of the Agency. This negative balance
the disbursement of disaster loans as well as associated
increased $127 million because unfunded upward subsidy
administrative costs.
reestimates at year-end primarily for the 7(a) and Disaster
programs were greater for FY 2018 compared to FY 2017.
Liabilities
Upward subsidy reestimates determined at year-end are
The SBA had total liabilities of $14.9 billion at the end of funded in the following year when they are received.
FY 2018, up 27.4 percent from FY 2017. Liabilities consist Unexpended Appropriations increased $0.7 billion
primarily of the Debt with Treasury, Liability for Loan this year primarily because the amount of appropriations
Guaranties, and Downward Reestimate Payable to Treasury. used was not greater than the appropriations received
in FY 2018 for business, disaster, and administrative
Debt with Treasury increased $3.5 billion due to the new
activities. This affected Budgetary Financing Sources and
borrowings with Treasury in FY 2018, as a result of direct
the Ending Net Position.
loan disbursements to survivors of hurricanes Harvey,
Irma and Maria. Note 9 in the financial statements
NET COSTS OF OPERATIONS
provides additional detail on SBA’s Debt with Treasury.
The Net Costs of Operations primarily reflects the costs
The Liability for Loan Guaranties is the estimate of the of SBA credit programs subsidy expenses during the year
net present value of the future amount the SBA will pay, for new loans and subsidy reestimates at year-end.
net of fee collections, to liquidate expected purchases
The primary driver to the $0.6 billion increase in net
of guarantied loans under its guarantied loan programs.
cost is largely attributable to Goal 3, which had an
The Liability for Loan Guaranties for each loan program
overall $0.8 billion increase. The increase attributed to
cohort is reestimated annually. Increases are funded
a $0.5 billion increase in loan subsidy costs, including
by Treasury while the Agency returns to Treasury the
reestimates combined with an increase of $0.3 billion in
decreases. The Liability for Loan Guaranties increased
other nonsubsidy related costs. These increased costs are
$0.1 billion due to the net of downward reestimates of
primarily due to the response to hurricanes Harvey, Irma
future costs for SBA’s guaranty portfolio, guarantied loan
and Maria.
purchases, and the collection of fees.

AGENCY FINANCIAL REPORT • FY 2018 33
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

Net downward reestimates for the business loan Chart XXII: Credit Program Subsidy Reestimates
programs were only slightly larger in FY 2018
than last year due to an increase in the amount
of upward reestimates, which affected Strategic 1

Subsidy Reestimates ($ Billions)
Goal 1 costs. Chart XXII reflects the change in
the net subsidy reestimates for the guarantied
0
business and direct disaster loan programs in
FY 2018.
-1
The net downward reestimate of $0.4 billion
in the 7(a) programs was mostly attributable to
-2
lower than average purchases during FY 2018
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
that decreased the overall purchase curve, which
decreased purchase projections in future years, Direct Disaster Loans (Strategic Goal 3)
Direct Business Loans (Strategic Goal 1)
and contributed to the downward reestimate
Guarantied Business Loans (Strategic Goal 1)
for FY 2018.

The 504 Loan, 504 Recovery Act, and 504 Jobs
Chart XXIII: Appropriations Received
Act programs had a net downward reestimate
of $0.4 billion due to better than projected
loan performance and recoveries. Further detail 3
on subsidy reestimates can be found in Note

Appropriations ($ Billions)
6.I of the financial statements in the Financial
Reporting section of this report. 2

The SBIC Participating Securities and
Debenture programs had a net downward
1
reestimate of $0.2 billion in FY 2018 that was
mostly attributable to actual default purchases
that were lower than projected in FY 2018.
0
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
BUDGETARY RESOURCES
Disaster Loans Business Loans Salaries and Expenses
Total Budgetary Resources of $17.1 billion
increased $4.9 billion in FY 2018. This increase
is primarily the net result of a large increase in Appropriations (discretionary and mandatory) increased
borrowing authority, unobligated balances brought $0.6 billion in FY 2018. As shown in Chart XXIII,
forward, appropriations and spending authority from the increase was the net effect of the decrease in the
offsetting collections this year, as well as the other factors amount of appropriations needed to fund SBA’s upward
shown in the Highlights table and following discussion. credit subsidy reestimates and offset by an increase in
Other Budgetary Resources, Net increased by $0.3 billion appropriations for subsidy and loan administrative
in FY 2018. This change attributed to a significant expenses to fund the Agency’s disaster program in
decrease in the amount of debt repaid from balances FY 2018.
carried forward in FY 2018 offset by a decrease in prior
year recoveries.

34 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

Borrowing Authority increased $2.7 billion in FY 2018 STATUS OF BUDGETARY RESOURCES
due to an increase in borrowing needed to cover disaster The Total Status of Budgetary Resources increased $4.9
loan disbursements related to hurricanes Harvey, Irma billion in FY 2018 to $17.1 billion. Nonbudgetary
and Maria. Borrowing authority initially granted to the obligations increased by $3.6 billion, mainly resulting
SBA was $8.7 billion, but the SBA withdrew $4.5 billion from the increases in direct loan obligations for disaster
at year-end FY 2018, as the excess authority was not loan making combined with larger downward subsidy
needed to fund future credit program operations. reestimates paid to Treasury in the business loan guarantee
program. Budgetary obligations increased $0.4 billion
Spending Authority from Offsetting Collections increased
largely in part due to increased subsidy obligations for
$0.4 billion in FY 2018. This increase is attributable
disaster loan making combined with increases in Salaries
to a larger amount of collections in the Salaries and
and Expenses. This was offset by a decrease in the upward
Expenses fund combined with a higher amount of subsidy
subsidy reestimate in FY 2018 for the business loan
collected in the disaster program. This is offset by a
guaranty program.
reduction of subsidy collected in the guarantee program
and a reduction in the repayment of borrowings from Unobligated balances as of September 30, 2018 and
current year authority in FY 2018. Reduced subsidy 2017 were $6.7 billion and $5.9 billion, which included
in the guarantee program was a result of lower upward $3.9 billion and $4.2 billion of unavailable unobligated
reestimates in FY 2018. balances. These balances were unavailable because they
were unapportioned by the OMB. The SBA accumulates
the majority of unobligated balances in its nonbudgetary
financing accounts ($4.7 billion in FY 2018 and
$4.6 billion in FY 2017) from subsidy estimates and
reestimates that are used primarily to pay default claims in
future years

AGENCY FINANCIAL REPORT • FY 2018 35
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

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

Internal Control Environment based on the five components and 17 principles of
internal control framework prescribed in GAO’s Standards
The SBA believes that maintaining integrity and for Internal Control in the Federal Government, known as
accountability in all programs and operations is critical for the Green Book.
good government. The ability to demonstrate consistent
responsible stewardship over assets and resources is a sign The Senior Assessment Team (SAT) had been
of responsible leadership. SBA’s commitment to integrity overseeing the assessments of internal controls over
and ethical values, along with an effective system of financial reporting conducted by the OIC and directing
internal controls, ensures that every employee remains compliance with the requirements of OMB Circular
dedicated to the efficient delivery of services to customers A-123, Appendix A, Internal Control Over Financial
and maximizes desired program outcomes. The SBA has Reporting. During the first quarter of FY 2018, the SAT
developed and implemented management, administrative, continued to meet monthly to approve the processes and
and financial system controls to reasonably ensure that: systems selected for this year’s internal control assessments
and to discuss the progress of these assessments. In
Programs and operations achieve intended results June of this year, the Administrator established a
efficiently and effectively; Senior Management Council (SMC) to ensure that the
Resources are used in accordance with the mission of Agency has an effective system of internal control as
the Agency; required by OMB Circular A-123 and to carry out more
Programs and resources are protected from waste, comprehensive internal control oversight including the
fraud, and mismanagement; responsibilities formerly assigned to the SAT. The SAT
was formally disbanded when the SMC was created. The
Program and operation activities are in compliance SMC, chaired by the Deputy Chief Financial Officer,
with laws and regulations; and
and comprised of SBA senior leaders from the major
Reliable, complete, and timely data are maintained program and support offices, is responsible for overseeing
and used for decision-making at all levels. management’s design, implementation, and operation of
the internal control system. The SMC evaluates the results
Each office within the SBA implements or maintains
of internal control assessments and guides management’s
effective internal controls over operations, reporting,
effort to remediate the identified control deficiencies
and compliance to achieve programmatic goals. Each
or weaknesses. The SMC meets to discuss the progress
year, the SBA conducts an assessment of internal
on implementation of corrective actions and other
control as required by the Federal Managers’ Financial
emerging internal control matters. Furthermore, the SMC
Integrity Act (FMFIA) of 1982 in accordance with the
recommends to the SBA Enterprise Risk Management
Office of Management and Budget (OMB)’s Circular
Board which significant deficiencies are deemed to be
A-123, Management’s Responsibility for Enterprise Risk
material weaknesses, and therefore, should be reported in
Management and Internal Control. The FMFIA requires
the Administrator’s annual statement of assurance.
that agencies report the assessment results to the
President and Congress in a statement of assurance. The While the OIC continued to perform the assessments
SBA Administrator provides this required statement related to the objective of internal control over financial
of assurance based on the self-assessment of program reporting in FY 2018, it will refine its internal control
managers, internal control reviews, and audits and reviews program in FY 2019 to be better aligned with the revised
done by the Government Accountability Office (GAO) OMB Circular A-123, Appendix A, Management of
and SBA’s Office of the Inspector General (OIG). Reporting and Data Integrity Risk, issued June 6, 2018.
The OIC documents the process and key controls,
SBA’s Office of Internal Controls (OIC) provides training
evaluates and tests the design and effectiveness of
and tools, including checklists designed specifically
controls, and presents the results to the responsible
for program support offices and district offices, to
management. Each office is responsible for developing
aid management in assessing and documenting the
and implementing corrective actions for any reported
effectiveness of internal controls within their respective
deficiencies. Based on the evaluation of business processes
area of responsibility. These assessments are performed

36 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

in FY 2018, the OIC identified a number of deficiencies Financial Management Systems Strategy
in the internal control over financial reporting, including
several in the SBA’s key business processes. The SMC Financial management systems at the SBA are designed to
evaluated the review findings and determined that none support effective internal controls, produce reliable and
reached the level of material weakness. timely financial information, and ensure cost-effective
loan guaranty processing. Management remains focused
The SBA Enterprise Risk Management Board continued on robust financial management systems that support
to oversee and guide SBA’s enterprise risk management SBA’s ability to comply with laws and regulations. SBA
effort. The Board is chaired by the Deputy Administrator systems must also provide timely and accurate data to
or, in his/her absence, chaired by the Chief of Staff, and support management analysis and decision-making,
comprised of senior leaders from major SBA programs enable the Agency to keep pace with its lending partners,
and support offices. During FY 2018, the Board and effectively use automation to achieve operational
completed its annual validation process of the enterprise efficiency. As demonstrated throughout the FY 2018
risk profile, which outlined the top risks facing the Agency Financial Report, the SBA seeks to comply with
Agency. The Board continues to review the risk profile all federal financial management system requirements,
periodically and ensures that it is accurate and up-to-date. including the Federal Financial Management
Improvement Act of 199610 that requires compliance of
The SBA continued to have a significant deficiency in the Agency’s financial management systems with federal
information technology security controls, including financial management systems requirements, applicable
access controls and change controls. In FY 2018, the federal accounting standards, and the U.S. Standard
SBA continued strengthening the overall security posture General Ledger at the transaction level.
of agency information technology systems and achieved
several key milestones in the areas of cybersecurity The SBA has continued to build on incremental
governance, risk management, continuous monitoring, improvement projects designed to modernize the financial
access control, event logging, and audit response by management system environment, improve financial
completing the following actions: system controls, reduce sustainment costs, provide
additional functionality for external lending partners,
The SBA created its first cybersecurity strategy, and improve system reliability. After migrating the
which establishes the direction and priorities for Agency’s systems to a state-of-the-art data center, with
cybersecurity across the Agency and introduces system redundancy and disaster recovery capabilities
cybersecurity services to achieve enterprise visibility that allow for continuity of operations, the SBA has
and protection. focused on reducing costs and leveraging technology
The SBA updated its IT Security Policy in advancements to optimize infrastructure in accordance
September 2017 and formalized the procedures for with the Data Center Optimization Initiative established
implementing the National Institutes of Standards in OMB Memorandum M-16-19. In FY 2018, the
and Technology (NIST) and Risk Management SBA commenced the pursuit of a Financial System
Framework. Cloud Strategy with the goal of reducing infrastructure
The SBA updated the IT Security acquisition maintenance costs and enhancing the user experience.
requirements for all outsourced IT systems and
services.

The above steps established clear and consistent baseline 10 The purpose of the Federal Financial Management Improvement Act of
1996 is to advance federal financial management by ensuring that federal
processes and requirements across the enterprise. As a financial management systems provide accurate, reliable, and timely
result, the SBA was able to close about 80 percent of open financial management information to the government’s managers. Core
components include applying uniform accounting standards across the
OIG Federal Information Security Modernization Act federal government; full disclosure of all federal programs and activity;
(FISMA) audit findings during FY 2018. 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 www.whitehouse.gov/sites/whitehouse.gov/files/omb/
memoranda/2009/m09-06.pdf)

AGENCY FINANCIAL REPORT • FY 2018 37
MA N A G EMEN T ’ S D I S CU S S I O N & A N A LYS I S

In FY 2018, SBA’s Chief Data Officer, in collaboration achievements in implementing the DATA Act and data
with the program offices, developed a Data Quality Plan visualization via USASpending.gov.
for spending and award data transmitted under the DATA
Act. The Plan contributed to the closing of multiple IG The SBA has taken steps to enhance SBA’s financial
recommendations and was selected to be included in system controls over lending programs and provide for
the government-wide DATA Act Playbook. The Plan improvement in accessibility to common information,
follows an enterprise risk framework in accordance with financial and budget management, and financial
GAO’s Green Book, and provides multiple data references reporting. SBA’s tightly integrated financial systems allow
including a source document to the DATA Act reporting the Agency to respond quickly to both internal and
crosswalk, data element definitions, and underlying external financial information inquiries and requirements.
values. The Plan documents the control environment and Core financial systems at the SBA are comprised of three
validation processes, defines roles and responsibilities, and systems operated and managed by the Office of the Chief
establishes a monthly certification process for offices that Financial Officer and the Office of Capital Access. The
enter award data to assert to the quality of data entered systems include:
into source systems for the previous month.
Oracle Federal Financials – In the first quarter of
In FY 2018, the SBA strengthened the interface between FY 2018, the SBA upgraded to the most current
the contracts and grants awarding system with the release for the Joint Administrative Accounting
financial system, which resulted in a significant decrease Management System, the system for managing
to the DATA Act Warning message rate. The rate funding and expenditure of the Agency’s
decreased from 0.33 percent in FY 2017 Quarter 4 to administrative funds.
an average warning message rate of 0.04% for the first
three quarters of 2018 (FY 2018 Quarter 4 will not be Loan Systems — SBA-built systems support the
reported until November 2019). The SBA also created lifecycle of loan guarantee processing, loan program
a reconciliation process that replicates the DATA Act funds control, management and accounting for loan
Broker validation process to identify transactions likely to servicing, and loan-related expenses.
result in a DATA Act warning message. Financial Management System — An SBA-built
system used to consolidate administrative and
As a result of SBA’s work on the DATA Act, the loan activity, manage cash and control funds, and
Association of Government Accountants (AGA) National provide financial reporting.
Awards Committee selected the SBA as the recipient
of the 2018 Government Transparency Award for our

38 AGENCY FINANCIAL REPORT • FY 2018
M ANAG EM ENT ’S DISCUSSION & ANALYSI S

Management Assurances: FMFIA and FFMIA Assurance Statement for FY 2018
The Small Business Administration continued to strengthen internal controls over its programs and operations during
FY 2018. 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, and that the SBA’s independent auditor issued an unmodified opinion on the Agency’s
FY 2018 financial statements for the 14th year in a row.

SBA’s management is responsible for managing risks, and maintaining effective internal controls and financial
management systems to meet the objectives of Sections 2 and 4 of the Federal Managers Financial Integrity Act
(FMFIA). The SBA conducted its assessment of internal controls in accordance with OMB Circular No. A-123,
Management’s Responsibility for Enterprise Risk Management and Internal Control. Agency managers have issued assertions
to me as to the status of the FY 2018 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 the Agency managers’ assessments and noting the control deficiency identified by the external
auditors, I can provide reasonable assurance that internal controls over operations, reporting, and compliance with
applicable laws and regulations, as of September 30, 2018, were operating effectively; and no material weaknesses were
identified in the design or operation of those internal controls. Furthermore, the Agency’s financial management systems
conform to the principles, standards, and related requirements prescribed by Section 4 of FMFIA.

The Federal Financial Management Improvement Act (FFMIA) requires federal agencies to implement and maintain
financial management systems that are in substantial compliance with federal financial management systems
requirements, federal accounting standards, and the United States Standard General Ledger. Based on the FFMIA
criteria, I can provide reasonable assurance that SBA’s financial management systems substantially comply with FFMIA
for FY 2018.

Linda E. McMahon
Administrator
November 14, 2018

AGENCY FINANCIAL REPORT • FY 2018 39
FIN A N C I A L R E P O RTI N G

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40 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL REPORTING
FIN A N C I A L R E P O RTI N G

MESSAGE FROM THE CHIEF FINANCIAL OFFICER
November 14, 2018

I am pleased to report that the SBA received an unmodified audit opinion on its financial
statements, which means that the statements and financial operations present fairly the
financial position as of September 30, 2018. I am also honored to issue SBA’s FY 2018
Agency Financial Report with Administrator McMahon who serves not only as a champion
for America’s small businesses, but an exemplary steward of federal resources who ensures
that the Agency is operating as effectively, efficiently, and accountable as possible.

The auditors did not report any material weaknesses, but they identified one significant
deficiency that remains from last year. The SBA made improvements this year in information
technology security controls and the auditors found no deficiencies with controls over financial systems. However,
the SBA must implement further enhancements to system controls to address logical access and system configuration
management to effectively manage information system risks. To address this challenge, the Chief Information Officer will
coordinate with program offices to implement stronger policies and controls over information systems.

Despite this challenge, this year the SBA made significant progress in key areas, including evidence-based decision
making in financial and performance management. Of particular note, the SBA has co-led the President’s Cross-Agency
Priority Goal to leverage data as a strategic asset in partnership with the U.S. Department of Commerce and U.S.
Office of Management and Budget. Bringing evidence into the decision-making process is a critical component of good
government. The SBA has integrated quality evidence into its decisions for resources, policies, and strategies. With better
information, SBA program managers are able to more effectively plan, improve services, increase efficiencies, and achieve
a greater return on investment.

For our efforts to improve transparency in financial management, the SBA received the Association of Government
Accountants “Government Transparency Award” for implementing the Digital Accountability and Transparency Act
(DATA Act) and data visualization via USASpending.gov. The SBA focused on improving data quality and analyzing
DATA Act submission data to help management make informed decisions. The SBA also updated its Data Quality Plan
to include roles and responsibilities, data element mapping from source to submission, and data quality monitoring
procedures in accordance with the DATA Act playbook and Data Quality Plan guidance.

For program evaluation, the SBA updated its framework and guidelines to provide program managers with information
on how to establish research questions and develop rigorous research methods. The framework governs program
evaluation activities and includes standards for each of the program offices. The SBA also developed and published its
first Enterprise Learning Agenda, which serves as a blueprint for future evaluations, and completed three centralized
program evaluations to support improvements. The SBA will track the implementation of recommendations and has
recently begun four new evaluations that leverage administrative data. For more information, please visit the program
evaluation page located at www.sba.gov/performance.

42 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

In the field of performance management, SBA senior leadership has brought together program and field office managers
to align metrics and focus on outcomes. The SBA established a field alignment working group to integrate capital,
government contracting, and entrepreneurial development programs with the activities in our 68 district offices. These
efforts have greatly expanded engagement and supported the development of new goals to drive decision making. As an
example, the SBA leveraged one of its FY 2018-2019 Agency Priority Goals to improve access to capital to entrepreneurs
in disadvantaged urban and rural markets. Field staff now have uniform goals to promote outreach and support lending,
which contributes to the Agency-wide goal.

Additionally, I would be remiss to note that for the 12th consecutive year, the Association of Government Accountants
recognized the SBA with the prestigious Certificate of Excellence in Accountability Reporting award, which commends
high quality reporting for accountability and transparency. This award is made to agencies following a thorough and
independent review against established standards for presentation. Finally, the SBA received the best-in-class award for
best overall quality — editorial excellence — for the FY 2017 Agency Financial Report. For more information on our
progress, I invite you to listen to my video presentation which can be accessed at youtu.be/AlWnaAujYfs.

I want to thank our Audit Financial Management Advisory Committee for their thoughtful comments and critiques.
This report reflects the dedication of SBA employees not only in financial and performance management, but also across
the Agency. Through our employees, the SBA strives to achieve a mission focused on helping America’s small businesses
start, grow, expand, and recover.

Sincerely,

Tim Gribben
Chief Financial Officer and
Associate Administrator for Performance Management

AGENCY FINANCIAL REPORT • FY 2018 43
FIN A N C I A L R E P O RTI N G

AUDIT AND FINANCIAL MANAGEMENT
ADVISORY COMMITTEE’S REPORT
November 14, 2018

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

The Committee met during 2018 with respect to these responsibilities on FY 2018 financial management and
reporting. These meetings included representatives from SBA management, the Inspector General’s office, and the
external auditors. The Committee also had the opportunity to meet with the auditors and the Inspector General’s
staff without SBA management present. These meetings provided for required discussion under 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 included in the FY 2018 Agency Financial Report.

The Committee extends thanks to SBA management, the Inspector General, and KPMG for their candid discussion
and cooperation in fulfilling our advisory responsibilities.

Tami Perriello
Chairpman
Audit and Financial Management Advisory Committee

44 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

INSPECTOR GENERAL’S AUDIT REPORT

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

Final Report Transmittal
Report Number: 19-03

DATE: November 14, 2018

TO: Linda E. McMahon
Administrator

FROM: Hannibal “Mike” Ware
Inspector General

SUBJECT: Independent Auditors’ Report on SBA’s FY 2018 Financial Statements

We contracted with the independent certified public accounting firm KPMG LLP (KPMG) to audit
the U.S. Small Business Administration’s (SBA’s) consolidated financial statements for fiscal year
(FY) 2018, ending September 30, 2018. 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. 19-01, Audit Requirements
for Federal Financial Statements; 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 2018. Specifically, KPMG reported that

• the financial statements were fairly presented, in all material respects, in accordance with
U.S. generally accepted accounting principles;
• there were no material weaknesses in internal control;
• there were no instances in which SBA’s financial management systems did not substantially
comply with the Federal Financial Management Improvement Act of 1996 (FFMIA); and
• there is 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 Attachment 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.
In connection with the contract, we reviewed KPMG’s report and related documentation and
inquired of its representatives. Our review, as differentiated from an audit of the financial
statements in accordance with U.S. generally accepted government auditing standards, was not
intended to enable us to express—and we do not express—opinions on SBA’s financial statements
or internal control over financial reporting or conclusions on whether SBA’s financial management
systems substantially complied with the three FFMIA requirements, or on compliance with laws
and other matters. KPMG is responsible for the attached auditors’ report dated November 14, 2018,
and the conclusions expressed therein. However, our review disclosed no instances where KPMG
did not comply, in all material respects, with U.S. generally accepted government auditing
standards.

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FIN A N C I A L R E P O RTI 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 Attachment II of this report.

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

cc: Pradeep Belur, Chief of Staff
Timothy Gribben, Chief Financial Officer and Associate Administrator for
Performance Management
Maria Roat, Chief Information Officer
Christopher M. Pilkerton, General Counsel
Martin Conrey, Attorney Advisor, Legislation and Appropriations
LaNae Twite, Director, Office of Internal Controls
Michael Simmons, Attorney Advisor

Attachment

46 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

INDEPENDENT AUDITORS’ REPORT ON FY 2018 FINANCIAL STATEMENTS

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

Independent Auditors’ Report

Inspector General
U.S. Small Business Administration

Administrator
U.S. Small Business Administration

Report on the Financial Statements
We have audited the accompanying consolidated financial statements of the United States (U.S.) Small
Business Administration (SBA), which comprise the consolidated balance sheets as of September 30, 2018
and 2017, 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
SBA 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 U.S., 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 the Office of Management and Budget (OMB)
Bulletin No. 19-01, Audit Requirements for Federal Financial Statements. Those standards and OMB Bulletin
No. 19-01 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
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, 2018 and 2017, and its net

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

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FIN A N C I A L R E P O RTI N G

costs, changes in net position, and budgetary resources for the years then ended in accordance with
U.S. generally accepted accounting principles.

Other Matters
Interactive Data
SBA management has elected to reference to information on websites or other forms of interactive data outside
the U.S. Small Business Administration’s FY 2018 Agency Financial Report to provide additional information for
the users of its financial statements. Such information is not a required part of the basic consolidated financial
statements or supplementary information required by the Federal Accounting Standards Advisory Board. The
information on these websites or the other interactive data has not been subjected to any of our auditing
procedures, and accordingly we do not express an opinion or provide any assurance on it.

Required Supplementary Information
U.S. generally accepted accounting principles require that the information in the Management’s Discussion and
Analysis, 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 U.S., 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, Message from the Chief Financial Officer,
Appendices, and the Audit and Financial Management Advisory Committee’s Report in the U.S. Small Business
Administration’s FY 2018 Agency Financial Report are presented for purposes of additional analysis and are
not a required part of the basic consolidated financial statements. Such information has not been subjected to
the 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, 2018, 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

48 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

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 identified the following deficiency in internal control, described
in Attachment I that we consider to be a significant deficiency:

Improvement Needed in Information Technology Security Controls

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 did not disclose any instances of noncompliance or other matters that are required to be reported
under Government Auditing Standards or OMB Bulletin No. 19-01.

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
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
U.S. Government Standard General Ledger at the transaction level.

SBA’s Response to Findings

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

Purpose of the Other Reporting Required by Government Auditing Standards

The purpose of the communication described in the Other Reporting Required by Government Auditing
Standards section is solely to describe the scope of our testing of internal control and compliance and the
results 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, DC
November 14, 2018

AGENCY FINANCIAL REPORT • FY 2018 49
FIN A N C I A L R E P O RTI N G

Attachment I

Significant Deficiency

Improvement Needed in Information Technology Security Controls

During the fiscal year (FY) 2018 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 2018 that limited SBA’s ability to effectively manage its information system risks. Collectively,
these conditions increase the risk of unauthorized use, modification, or destruction of financial data, which may
impact the integrity of information used to prepare the financial statements. As a result, the 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 2018, 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 2018. 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 (SP) 800-53 Revision 4,
Security and Privacy Controls for Federal Information Systems and Organizations
 Federal Information Processing Standards Publication (FIPS) 200, Minimum Security Requirements for
Federal Information and Information Systems
 SBA Standard Operating Procedure (SOP) 90 47 4, SBA Information Technology Security Policy

We have summarized the IT control deficiencies that we noted during the FY 2018 audit below, and have
organized them by the following general IT control objectives: logical access controls, and system configuration
management.

Logical Access Controls

An integral part of the effectiveness of an organization’s security program management efforts should be to
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 years persisted in FY 2018:
 User accounts were not recertified in accordance with SBA policy.
 The employee exit clearance and contractor offboarding processes were not documented to ensure that
access to SBA’s systems was timely removed upon separation.
Our audit identified the following new control deficiencies in FY 2018:
 Audit logs do not include sufficient detail to identify the security events that were reviewed or the staff
that performed the review.
 Segregation of duties for certain system administrators that have access to the server need improvement.
 The principle of “least privilege” for user/service accounts with administrator privileges was not enforced.

50 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

Recommendations – Logical Access Controls

We have issued the following recommendations to address the repeat and new control deficiencies listed in the
section above.

We recommend that the Administrator require the Chief Information Officer (CIO) to:

1. Implement a process to formally document and communicate recertification reviews to Office of the Chief
Information Officer (OCIO) management.
2. Consider creating an Agencywide working group to provide effective oversight and solutions to address
the entitywide conditions cited and implement streamlined, efficient and effective user access “best
practices” currently used by the private sector and other Federal agencies.
3. Develop and document procedures over the separation process that identify the roles and responsibilities
for each office.
4. Create a process to identify separated contractors from their respective program office/Contracting
Officer, centrally track and monitor for contractor separations, and communicate contractor separations to
stakeholders that are required for the timely removal of logical access.
5. Implement a more strict policy for account suspension after inactivity to account for SBA employees who
may have not have been removed via the manual account removal process.
6. Continue to enhance and strengthen the audit logging and review controls to specify which events were
reviewed, who performed the review, and whether issues were identified, escalated, and resolved.
7. Develop procedures that enforce segregation of duties and implement mitigating controls to help ensure
that personnel performing security functions, such as system administrators, are restricted from using
administrative privileges to modify audit records and configurations on the centralized audit log server.

System Configuration Management

An integral part of the effectiveness of an organization’s security program management efforts should be to
ensure that application change management controls provide reasonable assurance that program changes
implemented to the applications are appropriate and authorized.

Our audit noted that although improvements have been made, the following new control deficiency exists in FY
2018:

 Certain changes to the system did not have sufficiently tracked and maintained documentation to
provide traceability of the type of change and the approver.

Recommendations – System Configuration Management
To address the system configuration management condition above, we recommend that the Administrator
require the Associate Administrator for the Office of Capital Access (OCA) to:

8. Strengthen change management controls in order to maintain sufficient documentation regarding the
details of authorized changes and their approvals.

9. Implement a compensating control to retain the data of those with ‘Approver’ and ‘Requestor’ privileges
within the Change Control Board SharePoint tool. This data must be maintained in SharePoint after
personnel with those privileges have left the Agency in order to maintain the integrity of the tool.

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FIN A N C I A L R E P O RTI N G

Attachment II

CFO Response to Draft Audit Report on
FY 2018 Financial Statements

DATE: November 14, 2018

TO: Hannibal M. Ware, Inspector General

FROM: Timothy Gribben, Chief Financial Officer and
Associate Administrator for Performance Management

SUBJECT: FY 2018 Financial Statement Audit

The Small Business Administration has reviewed the draft Independent Auditors’ Report from
KPMG that includes the auditors’ opinion on the financial statements and its review of the
Agency’s internal control over financial reporting and compliance with laws and regulations.
The independent audit of the Agency’s financial statements and related processes is a core
component of SBA’s financial management program.

We are pleased that the SBA has again received an unmodified audit opinion with no material
weaknesses from the independent auditor. We believe these results accurately reflect the quality
of the Agency’s financial statements and our continued efforts to further improve our
accounting, budgeting, and reporting processes. The SBA has diligently worked in past years to
address findings from our independent auditor.

The audit report includes a continuing significant deficiency in SBA’s information technology
security controls. The SBA appreciates the recommendations from the auditors, and we look
forward to working with you to continue to improve financial management in our Agency. To
address outstanding recommendations the Office of the Chief Information Officer (OCIO)
increased governance and oversight, stabilized and modernized SBA’s network and systems,
addressed security deficiencies, and improved SBA’s cybersecurity posture. In FY 2018, OCIO
closed a significant number of long-term security findings by implementing new security
controls and processes. Also, in FY 2018, OCIO was chosen by OMB and DHS to demonstrate
the use of advanced cloud cybersecurity tools to protect a federal agency. That pilot was
successful, and the results will be integrated into OMB cybersecurity policy. The SBA will
continue to pursue additional policies and enhanced monitoring activities to address deficiencies
in logical access controls and system configuration management.

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

52 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

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
performance and allocate resources.

SBA’s management is responsible for the accuracy and propriety of the information contained in the principal financial
statements and the quality of internal controls. The SBA prepares these financial statements from its 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 addition to the financial reports used to monitor and control budgetary resources, which are prepared from the
same books and records. These statements should be read with the realization that they are a component of the U.S.
Government, a sovereign entity.

The financial statements include the following reports:

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

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

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

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

The Notes to the Financial Statements provide information to explain the basis of the accounting and presentation
used to prepare the statements and 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.

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FIN A N C I A L R E P O RTI N G

U.S. Small Business Administration
Consolidated Balance Sheet
As of September 30, 2018 and 2017

(Dollars in Thousands)
2018 2017
ASSETS
Intragovernmental Assets
Fund Balance with Treasury (Note 2) $ 8,137,946 $ 6,719,641
Advances (Note 1) 22,331 33,451
Total Intragovernmental Assets 8,160,277 6,753,092

Assets - Public and Other
Cash (Note 3) 2,130 1,376
Accounts Receivable, Net (Note 5) 93,523 100,874
Credit Program Receivables and Related Foreclosed Property, Net (Note 6) 8,727,792 6,359,969
General Property and Equipment, Net (Note 7) 354 505
Advances (Note 1) 4,421 103
Total Assets - Public and Other 8,828,220 6,462,827
Total Assets $ 16,988,497 $ 13,215,919

LIABILITIES
Intragovernmental Liabilities
Accounts Payable (Note 1) $ 6,000 $ 2,462
Debt (Note 9) 11,212,607 7,693,059
Net Assets of Liquidating Funds Due to Treasury (Note 10) 4,518 4,939
Downward Reestimate Payable to Treasury (Note 1, Note 13) 797,694 1,215,102
Other (Note 11) 15,592 13,892
Total Intragovernmental Liabilities 12,036,411 8,929,454

Other Liabilities - Public
Accounts Payable (Note 1) 19,882 20,728
Accrued Grant Liability (Note 1) 68,687 75,890
Liability for Loan Guaranties (Note 6) 2,662,786 2,556,368
Federal Employees' Compensation Act Actuarial Liability (Note 1, Note 8) 34,854 34,889
Surety Bond Guarantee Program Future Claims (Note 8) 49,609 44,942
Other (Note 11) 43,111 41,318
Total Other Liabilities - Public 2,878,929 2,774,135
Total Liabilities 14,915,340 11,703,589

NET POSITION
Unexpended Appropriations (Note 1) 2,341,412 1,653,684
Cumulative Results of Operations (Note 1) (268,255) (141,354)
Total Net Position 2,073,157 1,512,330

Total Liabilities and Net Position $ 16,988,497 $ $13,215,919

The accompanying notes are an integral part of these statements.

54 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

U.S. Small Business Administration
Consolidated Statement of Net Cost
For the Years Ended September 30, 2018 and 2017

(Dollars in Thousands)
2018 2017
STRATEGIC GOAL 1:
Support Small Business Revenue and Job Growth
Gross Cost $ (704,345) $ (275,336)
Less: Earned Revenue 211,090 192,114
Net Cost of Strategic Goal 1 (915,435) (467,450)

STRATEGIC GOAL 2:
Build Healthy Entrepreneurial Ecosystems and
Create Business Friendly Environments
Gross Cost 253,497 86,286
Net Cost of Strategic Goal 2 253,497 86,286

STRATEGIC GOAL 3:
Restore Small Businesses and Communities after Disasters
Gross Cost 1,398,258 574,122
Less: Earned Revenue 313,813 248,375
Net Cost of Strategic Goal 3 1,084,445 325,747

STRATEGIC GOAL 4:
Strengthen SBA’s Ability to Serve Small Businesses
Gross Cost 176,416 36,678
Net Cost of Strategic Goal 4 176,416 36,678

COST NOT ASSIGNED TO STRATEGIC GOALS
Gross Cost 22,752 22,649
Net Cost Not Assigned to Strategic Goals 22,752 22,649

Net Cost of Operations $ 621,675 $ 3,910

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

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FIN A N C I A L R E P O RTI N G

U.S. Small Business Administration
Consolidated Statement of Changes in Net Position
For the Years Ended September 30, 2018 and 2017
(Dollars in Thousands)
2018 2017

Beginning Unexpended Appropriations $ 1,653,684 $ 1,425,883

Budgetary Financing Sources
Appropriations Received 2,504,824 1,989,933
Rescissions (2,600) (55,000)
Adjustment - Cancelled Authority (11,582) (34,647)
Return of Unrequired Liquidating Fund Appropriation (2,686) (1,109)
Other Adjustments 5 (497)
Appropriations Used (1,800,233) (1,670,879)
Total Budgetary Financing Sources 687,728 227,801

Ending Unexpended Appropriations $ 2,341,412 $ 1,653,684

Beginning Cumulative Results of Operations $ (141,354) $ (651,699)

Budgetary Financing Sources
Appropriations Used 1,800,233 1,670,879
Donations of Cash and Cash Equivalents 2 105

Other Financing Sources
Imputed Financing from Costs Absorbed by Others 25,428 12,162
Other - Current Year Liquidating Equity Activity (3,991) 7,463
Other - Non-entity Activity (1,326,898) (1,176,354)
Total Financing Sources 494,774 514,255
Less: Net Cost of Operations 621,675 3,910
Net Change (126,901) 510,345

Ending Cumulative Results of Operations $ (268,255) $ (141,354)

Ending Net Position $ 2,073,157 $ 1,512,330

The accompanying notes are an integral part of these statements.

56 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

U.S. Small Business Administration
Combined Statement of Budgetary Resources
For the Years Ended September 30, 2018 and 2017
(Dollars in Thousands)
September 30, 2018
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority,
$ 1,412,891 $ 4,606,664 $ 6,019,555
net (discretionary and mandatory)

Appropriations (discretionary and mandatory) 2,499,538 – 2,499,538
Borrowing Authority (discretionary and mandatory) – 4,239,563 4,239,563
Spending Authority from Offsetting Collections 811,012 3,545,009 4,356,021
Total Budgetary Resources $ 4,723,441 $ 12,391,236 $ 17,114,677

Memorandum (non-add) entries:

Net adjustments to unobligated balance brought forward, Oct. 1 89,540 54,103 143,643

STATUS OF BUDGETARY RESOURCES
New Obligations and Upward Adjustments (total) $ 2,768,911 $ 7,677,795 $ 10,446,706
Unobligated Balance, end of year:
Apportioned, unexpired accounts 1,154,820 1,568,448 2,723,268
Unapportioned, unexpired accounts 749,494 3,144,993 3,894,487
Unexpired Unobligated Balance, end of year 1,904,314 4,713,441 6,617,755
Expired Unobligated Balance, end of year 50,216 – 50,216
Unobligated Balance, end of year (total) 1,954,530 4,713,441 6,667,971
Total Status of Budgetary Resources $ 4,723,441 $ 12,391,236 $ 17,114,677

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 1,790,480 $ 2,794,727 $ 4,585,207
Distributed Offsetting Receipts 229 (1,744,306) (1,744,077)
Agency Outlays, net (discretionary and mandatory) $ 1,790,709 $ 1,050,421 $ 2,841,130

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

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FIN A N C I A L R E P O RTI N G

U.S. Small Business Administration
Combined Statement of Budgetary Resources
For the Years Ended September 30, 2018 and 2017
(Dollars in Thousands)
September 30, 2017
Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority,
$ 1,146,127 $ 3,696,505 $ 4,842,632
net (discretionary and mandatory)

Appropriations (discretionary and mandatory) 1,933,824 – 1,933,824
Borrowing Authority (discretionary and mandatory) – 1,548,576 1,548,576
Spending Authority from Offsetting Collections 577,355 3,340,767 3,918,122
Total Budgetary Resources $ 3,657,306 $ 8,585,848 $ 12,243,154

Memorandum (non-add) entries:
Net adjustments to unobligated balance brought forward, Oct. 1 68,126 (192,050) (123,924)

STATUS OF BUDGETARY RESOURCES
New Obligations and Upward Adjustments (total) $ 2,333,955 $ 4,033,287 $ 6,367,242
Unobligated Balance, end of year:
Apportioned, unexpired accounts 491,684 1,135,296 1,626,980
Unapportioned, unexpired accounts 785,159 3,417,265 4,202,424
Unexpired Unobligated Balance, end of year 1,276,843 4,552,561 5,829,404
Expired Unobligated Balance, end of year 46,508 – 46,508
Total Unobligated Balance, end of year 1,323,351 4,552,561 5,875,912
Total Status of Budgetary Resources $ 3,657,306 $ 8,585,848 $ 12,243,154

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 1,639,090 $ (533,912) $ 1,105,178
Distributed Offsetting Receipts (129) (1,201,066) (1,201,195)
Agency Outlays, net (discretionary and mandatory) $ 1,638,961 $ (1,734,978) $ (96,017)

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

58 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

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 FCRA.
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.

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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 Fiscal Service for the remaining nonsubsidized portion of the loans. The Congress may provide
one year, multi-year, or no year appropriations to cover the estimated long-term costs of the loan programs. The
nonsubsidized portion of each loan disbursement, financed initially under permanent indefinite authority to borrow
funds from the Treasury, is repaid from collections of loan fees, repayments, and default recoveries. The Congress
authorizes the dollar amount of obligations that can be made for the cost of direct loans and loan guaranties, and
establishes the maximum amount of loans the SBA can guarantee in its annual Appropriation Act.

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

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 vendors for goods and services.

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

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. The likelihood of loss to
the SBA ranges from remote to a reasonably possible amount of $3.0 million.

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 which are funded in the following year.

60 AGENCY FINANCIAL REPORT • FY 2018
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Unexpended Appropriations
Unexpended Appropriations is the portion of SBA’s appropriations received, which are either undelivered or unobligated.
Delivered orders result in expended appropriations and reduce the total reported as Unexpended Appropriations.
Undelivered orders are the amount of orders of goods or services, which have not been actually or constructively received.

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

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

Employee Benefits

LEAVE
A liability for employee annual leave is accrued as it is earned and reduced as leave is taken. Each year the balance of
accrued annual leave is adjusted to reflect current pay rates as well as forfeited “use or lose” leave. Annual leave earned
but not taken, within established limits, is funded from future financing sources. Sick leave and other types of nonvested
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 provide pre-retirement benefits. They may also include benefits to survivors and
their dependents and 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

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contributions to the extent withheld from employee and retiree pay, from matching of employee withholding for the
Thrift Savings Plan and FICA, and by the Office of Personnel Management, which administers the retirement programs
for SBA employees.

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

FEDERAL EMPLOYEES’ COMPENSATION ACT
The Federal Employees’ Compensation Act provides income and medical cost protection to covered federal civilian
employees injured on the job and to beneficiaries of employees whose deaths are attributable to job-related injury or
disease. The FECA program is administered by the Department of Labor.

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

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,
suspense/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, 2018 2017
Appropriated Funds $ 2,436,393 $ 1,747,177
Financing Funds 5,601,996 4,877,175
Liquidating Funds 1,229 2,870
Revolving Fund 97,835 92,235
Trust Fund 166 273
Total Entity Fund Balance with Treasury 8,137,619 6,719,730
Budget Clearing Account Balance 327 (89)
Total Fund Balance with Treasury $ 8,137,946 $ 6,719,641

Status of Fund Balance with Treasury
Apportioned, unexpired accounts $ 2,723,268 $ 1,626,980
Unapportioned, unexpired accounts 3,894,487 4,202,424
Obligated Balance Not Yet Disbursed 1,692,976 1,254,164
Expired Unobligated Balance 50,216 46,508
Borrowing Authority Not Converted to Funds (223,328) (410,346)
Nonbudgetary 327 (89)
Total Fund Balance with Treasury $ 8,137,946 $ 6,719,641

62 AGENCY FINANCIAL REPORT • FY 2018
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Unobligated balances become available when OMB approves SBA’s request to apportion funds for obligation in the
current fiscal year. Obligated balances not yet disbursed include unpaid obligations offset by uncollected customer
payments from other federal government accounts. The unobligated and obligated balances are reflected on the
Statement of Budgetary Resources.

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 $2.1 million and $1.4 million as of September 30, 2018 and 2017.

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

The Master Reserve Fund is a fiduciary activity administered by SBA’s fiscal transfer agent, Colson Services Corp., a subsidiary of
the Bank of New York Mellon. The balance in the MRF is invested, according to SBA policy, entirely in Treasury securities and
repurchase agreements that are backed by Treasury securities. The MRF is an integral part of SBA’s 7(a) secondary market program.
The MRF was authorized by the Small Business Secondary Market Improvement Act of 1984 to facilitate the pooling of 7(a)
guarantied loans that are purchased by secondary market investors. The MRF receives monthly payments from SBA guarantied
borrowers, and disburses monthly to 7(a) secondary market pool investors based on a schedule of amounts due. The 7(a) secondary
market program includes SBA’s guaranty of timely payment, as well as a default guaranty, to 7(a) secondary market investors. The
MRF supports $33.4 billion and $32.4 billion of outstanding SBA guarantied 7(a) loan principal in the secondary market as of
September 30, 2018 and 2017.

The Master Reserve Account is an SBA fiduciary activity that is administered for the SBA by PwC. The balance in the MRA is
invested entirely in Treasury securities. The MRA facilitates the operation of the 504 Certified Development Company secondary
market program. The MRA was authorized by Section 505 of the Small Business Investment Act of 1958, as amended, as a vehicle
to receive, temporarily hold, and distribute 504 program cash flows. The MRA receives monthly payments from 504 borrowers,
and retains the payments until a semi-annual debenture payment is due to secondary market investors. The 504 secondary market
program includes SBA’s guaranty of timely payment, as well as a default guaranty, to 504 secondary market investors. The MRA
supports $26.7 billion and $26.4 billion of SBA guarantied 504 debentures outstanding in the secondary market as of September
30, 2018 and 2017.

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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, 2018 2017
MRF MRA Total MRF MRA Total
Short Term Securities
Money Market Funds $ 20,836 $ 673,079 $ 693,915 $ 17,080 $ 686,925 $ 704,005
Treasury Bills 44,930 – 44,930 891,776 – 891,776
Repurchase Agreements 643,006 – 643,006 458,897 – 458,897
Total Cash and Short Term Securities 708,772 673,079 1,381,851 1,367,753 686,925 2,054,678

Long Term Securities
Treasury Notes/Bonds Including Interest 2,750,655 – 2,750,655 2,888,112 – 2,888,112
Total Long Term Securities 2,750,655 – 2,750,655 2,888,112 – 2,888,112

Net Assets $ 3,459,427 $ 673,079 $ 4,132,506 $ 4,255,865 $ 686,925 $ 4,942,790

RECONCILIATION OF FIDUCIARY ASSETS
For the Years Ended
September 30, 2018 2017
MRF MRA Total MRF MRA Total
Beginning Net Assets $ 4,255,865 $ 686,925 $ 4,942,790 $ 3,608,051 $ 730,806 $ 4,338,857
Receipts
Earned Income 58,480 12,168 70,648 33,646 4,856 38,502
Contributions 7,706,535 14,898,852 22,605,387 6,482,967 16,314,573 22,797,540
Net Realized Gain (Loss) 6,890 – 6,890 3,821 – 3,821
Total Receipts 7,771,905 14,911,020 22,682,925 6,520,434 16,319,429 22,839,863

Less Disbursements
Payments to Investors 8,568,343 14,924,866 23,493,209 5,872,620 16,363,310 22,235,930
Total Disbursements 8,568,343 14,924,866 23,493,209 5,872,620 16,363,310 22,235,930

Ending Net Assets $ 3,459,427 $ 673,079 $ 4,132,506 $ 4,255,865 $ 686,925 $ 4,942,790

64 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

NOTE 5 ACCOUNTS RECEIVABLE
Accounts receivable include amounts owed by the public for guaranty fees in SBA’s loan and surety bond programs,
refunds due from employees and others, as well as other amounts owed by lenders for guarantied loan purchases that
lack the required documents. An Allowance for Loss on uncollectible Surety Bond 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, 2018 2017
Public
Guaranty Fees Receivable $ 75,434 $ 83,414
Refunds 1,427 805
Other 17,317 17,054
Total Public 94,178 101,273
Allowance For Loss (655) (399)
Net Public $ 93,523 $ 100,874

NOTE 6 CREDIT PROGRAM RECEIVABLES AND LIABILITY FOR LOAN
GUARANTIES
A. Loan Program Descriptions and Accounting
LOAN PROGRAM DESCRIPTIONS
The SBA provides guaranties that help eligible small businesses obtain loans from participating lenders and licensed
small business investment companies to make investments in qualifying small businesses. The SBA also makes loans to
microloan intermediaries and provides direct loans that assist homeowners, renters, businesses of all sizes, and private
nonprofit organizations recover from disasters.

MAJOR DIRECT LOAN AND LOAN GUARANTY PROGRAMS
Program group Program type Program
Disaster Direct Disaster Assistance Loans
Business Guarantied 7(a) Loan Guarantee
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 survivors under four categories: (1) physical
disaster loans to repair or replace damaged homes and personal property; (2) physical disaster loans to businesses of any
size; (3) economic injury disaster loans to eligible small businesses and nonprofit organizations without credit available
elsewhere; and (4) economic injury loans to eligible small businesses affected by essential employees called up to active
duty in the military reserves. The maximum interest rate is 4 percent for loan applicants without credit available
elsewhere and 8 percent for applicants with credit available elsewhere.

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

The 504 Certified Development Company program guarantees 100 percent of the principal and interest payments on
debentures issued by development companies for loans to eligible small businesses secured by real estate or equipment.

The Small Business Investment Company program guarantees principal and interest payments on debentures issued by
small business investment companies, which in turn make investments in qualifying small businesses.

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

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. However, models for all
major credit programs generally use historical data as the basis for assumptions about future program performance and
then translate these assumptions into nominal cash flow estimates by applying rules about program structure. Nominal
cash flow forecasts are discounted using OMB’s Credit Subsidy Calculator that has both forecasted and actual Treasury
interest rates.

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

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

Contractual terms of the loan or guaranty such as loan amount, interest rate, maturity and grace periods
Borrower characteristics
Loan origination methods
Economic indicators such as gross domestic product growth and unemployment rate
Loan performance assumptions, for example: conditional purchase and prepayment rates and recovery rates
Loan fee 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 disbursed.
The credit subsidy cost is the net present value of expected cash inflows and outflows over the life of a guarantied loan, or
the difference between the net present value of expected cash flows and the face value of a direct loan. The cost expressed as
a percentage of loans disbursed is termed the subsidy rate. The SBA receives appropriations to fund its credit programs based
on the subsidy rate that applies to the credit program level approved by Congress. The SBA records subsidy expenses when
loans are disbursed. In accordance with FCRA, subsidy costs are reestimated annually.

66 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

CREDIT PROGRAM RECEIVABLES AND RELATED FORECLOSED PROPERTY, NET
FCRA governs direct loans made after FY 1991. FCRA direct loans are valued at the present value of expected future
cash flows discounted at the interest rate of marketable Treasury securities. The subsidy allowance represents the
difference between the outstanding loans receivable balance and the net present value of the estimated cash flows of the
loans over their remaining term. The subsidy allowance is subtracted from the outstanding loans receivable balance to
obtain the net loans receivable balance.

Guarantied loans purchased by the SBA upon borrower default are established as loans receivable and are valued in a
similar manner as direct loans under FCRA.

Direct loans and defaulted guaranties made prior to FCRA are valued at the current receivable balance net of an
allowance for uncollectible amounts calculated using historical loss experience.

The SBA advances payments semiannually to honor SBA’s timely payment requirement of principal and interest due
for debentures in SBA’s 504 Certified Development Company and Small Business Investment Company programs. The
advances are liquidated by receipt of the payments due from borrowers in these programs. Advance balances are reported
as Other Loans Receivable.

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

Foreclosed property is comprised of real and personal property acquired through foreclosure on direct loans and
defaulted loan guaranties. Properties acquired as a result of defaulted loans committed after FY 1991 are shown at
recoverable value, which is adjusted to the present value of expected future cash flows for financial statement presentation
through the allowance for subsidy. Other foreclosed property is shown at the appraised value. At September 30, 2018
SBA’s foreclosed property was $20.7 million related to 67 loans. The properties had been held for an average of 904 days.
At September 30, 2017 foreclosed property was $17.5 million related to 86 loans. The properties had been held for an
average of 1,292 days.

VALUATION METHODOLOGY FOR THE LIABILITY FOR LOAN GUARANTIES UNDER FCRA
FCRA also governs loan guaranties made after FY 1991. A liability for outstanding guaranties is included on SBA’s Balance
Sheet. The liability for guarantied loans committed after FY 1991 is based on the net present value of their expected future
cash flows, including guaranty fee inflows and the net cash outflows of defaulted guarantied loans purchased by the SBA.

VALUATION METHODOLOGY FOR PRE-FCRA LIABILITY FOR LOAN GUARANTIES
The SBA values pre-credit reform direct and defaulted guarantied loans by estimating an allowance for loan losses.
This allowance is offset against gross loan receivables to obtain SBA’s expected net collections from these assets. The
SBA establishes a 100 percent allowance for pre-credit reform direct and guarantied loans that are past due more
than 180 days. 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, 2018 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 961 $ 190,963 $ 191,924
Interest Receivable 2,607 389 2,996
Foreclosed Property 2,606 – 2,606
Allowance (5,124) (20,504) (25,628)
Total Direct Business Loans 1,050 170,848 171,898

Direct Disaster Loans
Disaster Loans Receivable 878 8,994,698 8,995,576
Interest Receivable 147 64,027 64,174
Foreclosed Property – 2,697 2,697
Allowance (166) (1,325,326) (1,325,492)
Total Direct Disaster Loans 859 7,736,096 7,736,955

Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 30 3,123,087 3,123,117
Other Loans Receivable (see note below) – 78,859 78,859
Interest Receivable 249 25,975 26,224
Foreclosed Property 1,868 13,504 15,372
Allowance (1,782) (2,422,851) (2,424,633)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 365 818,574 818,939

Total Credit Program Receivables & Related Foreclosed Property, Net $ 8,727,792

As of September 30, 2017 Pre-1992 Loans Post-1991 Loans Total
Direct Business Loans
Business Loans Receivable $ 1,037 $ 183,856 $ 184,893
Interest Receivable 2,536 315 2,851
Foreclosed Property 3,114 – 3,114
Allowance (5,544) (13,343) (18,887)
Total Direct Business Loans 1,143 170,828 171,971

Direct Disaster Loans
Disaster Loans Receivable 1,424 6,160,916 6,162,340
Interest Receivable 147 30,531 30,678
Foreclosed Property – 3,104 3,104
Allowance (187) (899,235) (899,422)
Total Direct Disaster Loans 1,384 5,295,316 5,296,700

Defaulted Guarantied Business Loans & Other Loans Receivable
Defaulted Guarantied Business Loans 2,251 3,482,179 3,484,430
Other Loans Receivable (see note below) – 189,796 189,796
Interest Receivable 664 38,073 38,737
Foreclosed Property 1,868 9,427 11,295
Allowance (3,966) (2,828,994) (2,832,960)
Total Defaulted Guarantied Business Loans & Other Loans Receivable 817 890,481 891,298

Total Credit Program Receivables & Related Foreclosed Property, Net $ 6,359,969

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

68 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

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

DIRECT LOANS
New Loans Disbursed During the Year Ended September 30, 2018 2017
Business Direct Loan Program $ 37,724 $ 41,231
Disaster Loan Program 3,590,561 886,275
Total Direct Loans Disbursed $ 3,628,285 $ 927,506

Outstanding Loan Obligations as of September 30, 2018 2017
Business Direct Loan Program $ 37,772 $ 41,835
Disaster Loan Program 1,203,018 803,049
Total Direct Loan Obligations $ 1,240,790 $ 844,884

GUARANTIED LOANS
New Loans Disbursed During the Year Ended September 30, 2018 2017
Total Principal Disbursed at Face Value $ 29,269,593 $ 28,992,380
Total Principal Disbursed Guarantied by the SBA 23,028,188 22,812,816

Outstanding Loan Obligations as of September 30, 2018 2017
Business Guarantied Loan Programs $ 16,741,515 $ 16,756,254

Loans Outstanding as of September 30, 2018 2017
Total Principal Outstanding at Face Value (see note below) $ 128,765,704 $ 121,005,886
Total Principal Outstanding Guarantied by the SBA (see note below) 105,574,381 99,512,501
Note: 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, 2018 2017
Post-1991 Business Direct and Purchased Guarantied Loans
Beginning Balance of Allowance Account $ 2,842,337 $ 3,312,218
Current Year's Subsidy (see 6.G for breakdown by component) 3,407 3,971
Loans Written Off (831,015) (971,719)
Subsidy Amortization (2,626) (2,364)
Allowance Related to Guarantied Loans Purchased This Year 277,050 314,131
Miscellaneous Recoveries and Costs 153,179 187,293
Balance of Subsidy Allowance Account before Reestimates 2,442,332 2,843,530
Technical Assumptions/Default Reestimates 1,023 (1,193)
Ending Balance of Allowance Account $ 2,443,355 $ 2,842,337

Post-1991 Disaster Direct Loans
Beginning Balance of Allowance Account $ 899,235 $ 939,342
Current Year's Subsidy (see 6.G for breakdown by component) 456,849 119,660
Loans Written Off (108,281) (97,691)
Subsidy Amortization (13,097) (12,872)
Miscellaneous Recoveries and Costs 54,801 64,668
Balance of Subsidy Allowance Account before Reestimates 1,289,507 1,013,107
Technical Assumptions/Default Reestimates 35,819 (113,872)
Ending Balance of Allowance Account $ 1,325,326 $ 899,235

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FIN A N C I A L R E P O RTI N G

E. Liability for Loan Guaranties
(Dollars in Thousands)

For the Years Ended September 30, 2018 2017
Pre-1992 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties $ 8 $ 7
Adjustment to Expected Losses, Guaranties Outstanding (7) 1
Ending Balance of Liability for Loan Guaranties 1 8

Post-1991 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties 2,556,360 2,371,498
Current Year's Subsidy (see 6.G for breakdown by component) 2,338 10,608
Fees 1,378,849 1,350,243
Interest Accumulation Factor 79,454 77,457
Claim Payments to Lenders (988,670) (1,016,981)
Adjustment Due to Reestimate & Guarantied Loan Purchases 711,620 702,850
Miscellaneous Recoveries and Costs 19,034 (20,726)
Balance of Liability for Loan Guaranties before Reestimates 3,758,985 3,474,949
Technical Assumptions/Default Reestimates (1,096,200) (918,589)
Ending Balance of Liability for Loan Guaranties 2,662,785 2,556,360

Total Ending Balance of Liability for Loan Guaranties $ 2,662,786 $ 2,556,368

F. 2018 Subsidy Rates by Program and Component
Total
Loan Program Subsidy Financing Default Other Fee
Guaranty
7(a) 0.00% 0.00% 4.49% 0.00% -4.49%
504 CDC 0.00% 0.00% 5.67% 0.51% -6.18%
504 Refi 0.00% 0.00% 5.88% 0.52% -6.40%
SBIC Debentures 0.00% 0.00% 4.70% 0.07% -4.77%

Direct
Disaster 12.54% 3.45% 13.00% -3.91% 0.00%
Microloan 8.91% 7.06% 2.29% -0.44% 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 Note 6.G result from the disbursement of loans obligated in
the current year as well as in prior years, and include reestimates.

70 AGENCY FINANCIAL REPORT • FY 2018
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G. Subsidy Expense by Component
(Dollars in Thousands)

For the Years Ended September 30, 2018 2017
Business Loan Guaranties
Defaults $ 23,202 $ 100,099
Fees (22,888) (98,224)
Other 2,024 8,733
Subsidy Expense Before Reestimates and Loan Modifications 2,338 10,608
Reestimates (1,096,200) (918,589)
Total Guarantied Business Loan Subsidy Expense $ (1,093,862) $ (907,981)

Business Direct Loans
Interest $ 2,727 $ 3,078
Defaults 829 803
Other (149) 90
Subsidy Expense Before Reestimates 3,407 3,971
Reestimates 1,023 (1,193)
Total Business Direct Loan Subsidy Expense $ 4,430 $ 2,778

Disaster Direct Loans
Interest $ 131,525 $ 38,772
Defaults 467,879 119,543
Other (142,555) (38,655)
Subsidy Expense Before Reestimates 456,849 119,660
Reestimates 35,819 (113,872)
Total Disaster Direct Loan Subsidy Expense $ 492,668 $ 5,788

H. Administrative Expense
The SBA received appropriations to administer its credit programs, including the making, servicing and liquidation of
its loans and guaranties. The increase in disaster loan administrative expense is due to additional funding and disaster
activity, a response associated with hurricanes Harvey, Irma and Maria. Amounts expensed in the Statement of Net Cost
are shown in the following table.

(Dollars in Thousands)

For the Years Ended September 30, 2018 2017
Disaster Direct Loan Programs $ 544,590 $ 225,814
Business Loan Programs 152,828 152,629
Total Administrative Expense $ 697,418 $ 378,443

AGENCY FINANCIAL REPORT • FY 2018 71
FIN A N C I A L R E P O RTI N G

I. Credit Program Subsidy Reestimates
Reestimates are performed annually on a cohort-by-cohort basis. The purpose of reestimates is to update original program
cost estimates to reflect actual cash flow experience as well as changes in forecasts of future cash flows. Forecasts of future
cash flows are updated based on additional information about historical program performance, revised expectations for
future economic conditions, and enhancements to cash flow projection methods. Financial statement reestimates were
performed using a full year of FY 2018 performance data for SBA’s large loan programs and 9 months of actual and 3
months of projected performance data for the Secondary Market Guarantee, Microloan, and the small loan programs.

BUSINESS GUARANTIED LOAN PROGRAMS
Net subsidy reestimates for the business guarantied loan programs are shown in the following table.

(Dollars in Thousands)

For the Years Ended September 30, 2018 2017
7(a) $ (430,734) $ (297,874)
7(a) - Recovery Act 6,616 2,595
7(a) - Jobs Act 180 5,507
504 CDC (411,673) (375,851)
504 CDC - Recovery Act (10,590) (14,874)
504 CDC - Jobs Act (3,588) (4,904)
504 CDC - Debt Refinancing (19,198) (22,336)
504 First Mortgage Loan Pooling - Recovery Act (4,326) 3,881
SBIC Debentures (109,542) (133,545)
SBIC Participating Securities (96,413) (90,473)
Secondary Market Guarantee Program (6,541) 2,757
ARC - Recovery Act (584) (646)
All Other Guaranty Loan Programs (9,807) 7,174
Total Guarantied Loan Program Subsidy Reestimates $ (1,096,200) $ (918,589)

The 7(a) Loan Guarantee program, SBA’s flagship and largest program, had a net downward reestimate in FY 2018 of
$430.7 million. The reestimate is primarily due to lower actual losses in FY 2018 in cohorts 2014 through 2017. Part
of the reestimate is also due to lower projected losses in FY 2019 and beyond for cohorts 2014 through 2017 due to
updated economic assumptions.

The 7(a) Recovery Act program had a net upward reestimate of $6.6 million. The reestimate is primarily due to higher
projected losses.

The 7(a) Jobs Act program had a net upward reestimate of $0.2 million. The reestimate is primarily due to higher
projected losses that are mostly offset by lower actual losses in FY 2018.

The 504 Certified Development Company program had a net downward reestimate of $411.7 million. The reestimate
is primarily due to better than expected FY 2018 loan performance. Although some cohorts had higher than expected
purchases, they were offset by higher than expected recoveries. Part of the reestimate is also due to decreased loss
projections for cohorts 2004 through 2017 due to updated economic assumptions.

The 504 Recovery Act program had a net downward reestimate of $10.6 million. The reestimate is mostly due
to better than expected FY 2018 loan performance. Actual losses in the 504 Recovery Act program were less than
projected losses.

72 AGENCY FINANCIAL REPORT • FY 2018
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The 504 Jobs Act program had a net downward reestimate of $3.6 million. The reestimate is mostly due to better than
expected FY 2018 loan performance. Actual losses in the 504 Jobs Act program were less than projected losses.

The 504 Debt Refinancing program had a net downward reestimate of $19.2 million. The reestimate is mostly due
to better than expected FY 2018 loan performance. Actual purchases in the 504 Debt Refinancing program were less
than those projected, while actual recoveries were more than those projected.

The Section 504 First Mortgage Loan Pooling program had a net downward reestimate of $4.3 million. The
downward reestimate is due to higher than expected recoveries in FY 2018 for the 2011 and 2012 cohorts.

The SBIC Debentures program had a net downward reestimate of $109.5 million. The lead drivers of the downward
reestimate were lower than expected purchases in FY 2018 for all cohorts with outstanding leverage and higher than
expected recoveries for cohorts 2008 and 2009. The better than anticipated performance in the SBIC Debentures
program in FY 2018 was partially offset by higher projected purchases for cohorts 2008 through 2013 over the next
five years.

The SBIC Participating Securities program had a net downward reestimate of $96.4 million. The downward
reestimate is due to higher than expected recoveries and profit participation cash inflows. The higher than expected
recoveries and profit participation cash inflows were partially offset by higher than expected purchases for the 2004
cohort.

The Secondary Market Guarantee program had a net downward reestimate of $6.5 million. The downward reestimate
is due primarily to lower projected costs for pools issued in FY 2018, in part due to methodological enhancements and
compositional changes to FY 2018 issued pools.

The America’s Recovery Capital program had a net downward reestimate of $0.6 million. The majority of this
reestimate is due to higher than expected recoveries in FY 2018 for both cohorts.

All Other Guaranty Loan Programs include the New Market Venture Capital program that had a net downward
reestimate of $9.8 million. The downward reestimate was driven by higher than expected recoveries in FY 2018 and
updates to projections of future recoveries on repurchased NMVC debentures.

BUSINESS DIRECT LOAN PROGRAMS
Net subsidy reestimates for the business direct loan programs are shown in the following table.

(Dollars in Thousands)

For the Years Ended September 30, 2018 2017
7(m) Microloan $ 1,675 $ (121)
7(m) Microloan - Recovery Act (379) (225)
Intermediary Lending Pilot Program (270) (841)
All Other Direct Loan Programs (3) (6)
Total Direct Loan Program Subsidy Reestimates $ 1,023 $ (1,193)

The 7(m) Direct Microloan program had an upward reestimate of $1.7 million. The 2015 through 2017 cohorts were key
drivers of the upward reestimate in FY 2018 as actual loan repayments lagged the forecasted principal and interest amounts
for these cohorts. In addition, the net impact of prepayments in FY 2018 was lower than forecasted as recent cohort’s
prepaid principal at a lower rate in FY 2018.

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FIN A N C I A L R E P O RTI N G

The 7(m) Direct Microloan Recovery Act program had a net downward reestimate of $0.4 million. The downward
reestimate in FY 2018 is attributed to lower than anticipated defaults for both program cohorts and increased prepayment
activity in the 2010 cohort.

The Intermediary Lending Pilot program had a net downward reestimate of $0.3 million. There was an influx of
prepayments in FY 2018 for the 2012 cohort and recoveries exceeded the prior year forecast. Both factors contributed to the
downward reestimate in the program in FY 2018.

DISASTER DIRECT LOAN PROGRAM
Net subsidy reestimates for the disaster direct loan programs are shown in the following table.

(Dollars in Thousands)

For the Years Ended September 30, 2018 2017
Disaster $ 35,819 $ (113,872)
Total Disaster Direct Loan Program Subsidy Reestimates $ 35,819 $ (113,872)

The Disaster Assistance program had a net upward reestimate of $35.8 million. While most cohorts experienced
a downward reestimate as a result of better than expected performance in FY 2018 and revised performance
assumptions, this was offset by an upward reestimate for the 2018 cohort. The upward reestimate for the 2018 cohort
was due to a lower actual average borrower’s interest rate than originally projected.

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

Leasehold improvements with modifications of $50,000 or more, and a useful life of 2 years or more, are capitalized
and amortized using the straight-line method over the useful life of the improvement or the lease term, whichever is
shorter. 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 2 years. Capitalized software costs
include all direct and indirect costs incurred, including overhead to develop the software. Software for internal use
is amortized using the straight-line method over its useful life, not to exceed 5 years. Amortization begins when the
software is put into production. The costs of enhancements are capitalized when it is more likely than not that the
enhancements will result in significant additional capabilities. Costs that do not meet the capitalization criteria are
expensed when incurred.

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

(Dollars in Thousands)

As of September 30, 2018 2017
Leasehold Improvements $ 1,811 $ 1,811
Amortization of Leasehold Improvements (1,457) (1,306)
Net 354 505

Total General Property and Equipment, Net $ 354 $ 505

74 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

NOTE 8 LIABILITIES NOT COVERED BY BUDGETARY RESOURCES
These unfunded liabilities consisted of the following categories, as shown in the following table.

(Dollars in Thousands)

As of September 30, 2018 2017
Intragovernmental Liabilities - Other
Employment Taxes Payable $ 3,080 $ 1,903
Federal Employees' Compensation Act Payable 5,897 6,337
Total Intragovernmental Liabilities - Other 8,977 8,240

Federal Employees' Compensation Act Actuarial Liability 34,854 34,889

Surety Bond Guarantee Program Future Claims 49,609 44,942

Other Liabilities
Prior Liens on Real Estate Payable 59 59
Accrued Unfunded Annual Leave 29,110 26,452
Total Other Liabilities 29,169 26,511
Total Liabilities Not Covered by Budgetary Resources $ 122,609 $ 114,582
Total Liabilities Covered by Budgetary Resources 14,792,334 11,588,940
Total Liabilities Not Requiring Budgetary Resources 397 67

Total Liabilities $ 14,915,340 $ 11,703,589

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

NOTE 9 DEBT
Borrowings payable to the Treasury result from loans provided by the Treasury to fund the portion of direct loans
not covered by subsidy appropriations, the payment of downward subsidy reestimates, and other credit program
disbursements (see Note 15). The increase in new borrowings in FY 2018 over 2017 was primarily driven by loan
disbursements to survivors of hurricanes Harvey, Irma and Maria. The SBA makes periodic principal repayments to the
Treasury based on the analysis of its cash balances and future disbursement needs.

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

INTRAGOVERNMENTAL DEBT
(Dollars in Thousands)

As of September 30, 2018 2017
Beginning Balance $ $7,693,059 $ 8,019,526
New Borrowing 4,426,583 1,138,230
Repayments (907,035) (1,464,697)
Ending Balance $ 11,212,607 $ 7,693,059

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FIN A N C I A L R E P O RTI N G

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

(Dollars in Thousands)
As of September 30, 2018 2017
Disaster Loan Fund $ 861 $ 1,384
Business Loan and Investment Fund 3,657 3,555
Total Due To Treasury $ 4,518 $ 4,939

NOTE 11 OTHER LIABILITIES
Other liabilities are shown in the following table.

(Dollars in Thousands)

As of September 30, 2018 2017
OTHER LIABILITIES - INTRAGOVERNMENTAL
Entity
Current
Employment Taxes Payable $ 5,926 $ 3,704
Advances from Other Agencies 683 1,942
Total Current 6,609 5,646
Non-current
Employment Taxes Payable 3,080 1,903
Federal Employees’ Compensation Act Payable 5,897 6,337
Total Non-current 8,977 8,240
Total Entity 15,586 13,886
Non-entity
Current
Payable to Treasury 6 6
Total Other Liabilities - Intragovernmental $ 15,592 $ 13,892
OTHER LIABILITIES - PUBLIC
Entity
Current
Accrued Funded Payroll and Benefits $ $13,505 $ 14,740
Accrued Unfunded Annual Leave 29,110 26,452
Other Liabilities 40 –
Suspense Accounts 397 67
Total Current 43,052 41,259
Non-current
Prior Liens on Real Estate Payable 59 59
Total Non-current 59 59
Total Entity 43,111 41,318
Total Other Liabilities - Public $ 43,111 $ 41,318

76 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

NOTE 12 LEASES
The SBA leases all of its facilities from the General Services Administration. The SBA enters into an Occupancy Agreement
with the GSA for each facility. The GSA, in turn, leases commercial facilities or provides space in federal buildings.
Agreements for space in federal buildings can be vacated with 120 to 180 days’ notice. However, the SBA anticipates
continuing the same or similar facilities leases in the future. These leases with the GSA are operating leases, and are expensed
in the Statement of Net Cost when incurred. In both FY 2018 and FY 2017, historical facilities lease costs were $48.0
million. Future lease payments are based on FY 2019 GSA base year estimates. Projections after the base year assume a 3
percent inflation factor. Payments after 5 years reflect only current leases that will still be in effect, projected to the end of
each lease term.

FUTURE FACILITIES OPERATING LEASE PAYMENTS
(Dollars in Thousands)

Fiscal Year Lease Projections
2019 $ 49,261
2020 50,739
2021 52,261
2022 53,829
2023 55,444
After 2023 40,724
Total $ 302,258

NOTE 13 NON-ENTITY REPORTING
Non-entity Assets are assets held by the SBA but not available to the SBA. The primary non-entity asset is for SBA’s
downward subsidy reestimates in its loan programs. Because the loan programs are discretionary, the downward reestimates
are not available to the SBA and they are returned to the Treasury in the fiscal year following the accrual of the reestimates.
During the year, these general fund accounts contain SBA’s prior year reestimates. At year-end, the funds are swept by the
Treasury. Also at year-end, the SBA accrues the current year’s reestimates, including downward reestimates as applicable. For
the downward reestimates in the loan financing funds, the SBA records an accrual adjustment that records a transfer out to
the non-entity fund, a reduction of subsidy allowance or loan guaranty liability, and an account payable to the non-entity
fund. In the loan program funds, the SBA records a reduction of loan subsidy expense and the associated impact on the net
cost. The non-entity Treasury general funds contain a corresponding account receivable in anticipation of the receipt of the
downward reestimates in the following year and a Downward Reestimate Payable to the Treasury.

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

(Dollars in Thousands)

As of September 30, 2018 2017
Entity
Financing Fund Payable $ (797,694) $ (1,215,102)

Non-entity
Miscellaneous Receipts Fund Receivable 797,694 1,215,102
Downward Reestimate Payable to Treasury (797,694) (1,215,102)
Balance Sheet Reported Payable $ (797,694) $ (1,215,102)

AGENCY FINANCIAL REPORT • FY 2018 77
FIN A N C I A L R E P O RTI N G

NOTE 14 CONSOLIDATED STATEMENT OF NET COST
Federal cost accounting standards require the SBA to report operating costs by strategic goal activity. Full costs include
all direct and indirect costs for a strategic goal. Full costs are reduced by exchange (earned) revenues to arrive at the 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 four strategic goals on a full cost allocation basis. The SBA issued its
FY 2018-2022 Strategic Plan this year, and FY 2017 costs have been reclassified to be comparable to the new strategic plan
architecture. Strategic Goal 1 (Support Small Business Revenue and Job Growth) includes expanding access to capital for
small businesses through SBA’s loan and other assistance programs, research set-asides for innovative entrepreneurship,
and the small business contracting set-aside program. Strategic Goal 2 (Build Healthy Entrepreneurial Ecosystems and
Create Business Friendly Environments) works to develop small businesses through technical assistance provided through
SBA’s resource partner network, online learning, and other specialized assistance programs like 8(a) Business Development,
7(j) Management and Technical Assistance, and All Small Mentor-Protégé. It also includes SBA’s efforts to create a small
business friendly environment. Strategic Goal 3 (Restore Small Businesses and Communities after Disasters) includes
disaster preparedness and direct disaster loans. Strategic Goal 4 (Strengthen SBA’s Ability to Serve Small Businesses)
ensures effective and efficient management of Agency resources. Agency administrative overhead costs are fully allocated
to the programs in Strategic Goals 1, 2, 3, and 4. The Management’s Discussion and Analysis section of SBA’s annual
Agency Financial Report includes additional detail on SBA’s strategic goals. Costs Not Assigned to Strategic Goals are costs
associated with the Office of the Inspector General. The OIG’s mission and funding is a separate and independent part of
the SBA and is therefore not assigned.

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

The classification as Intragovernmental 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.

78 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

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

INTRAGOVERNMENTAL COSTS AND EXCHANGE REVENUE
(Dollars in Thousands)

For the Years Ended September 30, 2018 2017

STRATEGIC GOAL 1:
Support Small Business Revenue and Job Growth
Intragovernmental Gross Cost $ 117,805 $ 192,043
Gross Cost with the Public (822,150) (467,379)
Total Strategic Goal 1 Gross Cost (704,345) (275,336)

Intragovernmental Earned Revenue 92,478 97,743
Earned Revenue from the Public 118,612 94,371
Total Strategic Goal 1 Earned Revenue 211,090 192,114

STRATEGIC GOAL 2:
Build Healthy Entreprenuerial Ecosystems and Create Business Friendly Environments
Intragovernmental Gross Cost $ 57,010 $ 23,109
Gross Cost with the Public 196,487 63,177
Total Strategic Goal 2 Gross Cost 253,497 86,286

STRATEGIC GOAL 3:
Restore Small Businesses and Communities after Disasters
Intragovernmental Gross Cost $ 446,982 $ 334,168
Gross Cost with the Public 951,276 239,954
Total Strategic Goal 3 Gross Cost 1,398,258 574,122

Intragovernmental Earned Revenue 96,217 60,714
Earned Revenue from the Public 217,596 187,661
Total Strategic Goal 3 Earned Revenue 313,813 248,375

STRATEGIC GOAL 4:
Strengthen SBA’s Ability to Serve Small Businesses
Intragovernmental Gross Cost $ 39,675 $ 9,823
Gross Cost with the Public 136,741 26,855
Total Strategic Goal 4 Gross Cost 176,416 36,678

COST NOT ASSIGNED TO STRATEGIC GOALS
Intragovernmental Gross Cost $ 5,117 $ 6,066
Gross Cost with the Public 17,635 16,583
Total Gross Cost Not Assigned to Strategic Goals 22,752 22,649

Net Cost of Operations $ 621,675 $ 3,910

AGENCY FINANCIAL REPORT • FY 2018 79
FIN A N C I A L R E P O RTI N G

NOTE 15 STATEMENT OF BUDGETARY RESOURCES
The Statement of Budgetary Resources presents information about total budgetary resources available to the SBA and
the status of those resources as of September 30, 2018 and 2017. SBA’s total budgetary resources were $4.7 billion and
$3.7 billion for the fiscal years ended September 30, 2018 and 2017. Additionally, $12.4 billion and $8.6 billion of
nonbudgetary resources (including borrowing authority and collections of loan principal, interest, and fees in financing
funds) were reported for the fiscal years ended September 30, 2018 and 2017.

Permanent Indefinite Appropriations
The SBA receives permanent indefinite appropriations annually to fund increases in the projected subsidy costs of loan
programs, as determined by the reestimation process required by the FCRA. The appropriations are received initially in
the SBA Program Funds, and then transferred to the Financing Funds, where they are used to fund obligations. SBA’s
Liquidating Funds also receive permanent indefinite appropriations to fund obligations. The Financing Funds are used
to account for credit program obligations made subsequent to FY 1991. Liquidating Funds are used to account for credit
program obligations made prior to FY 1992.

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

Borrowing Authority and Terms of Borrowing
The SBA is authorized to borrow from the Treasury’s Bureau of 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 2018 and FY 2017, the SBA received $4.2 billion and $1.5 billion of borrowing authority from the OMB. The
increased borrowing in FY 2018 was primarily driven by loan disbursements to survivors of hurricanes Harvey, Irma and
Maria. At the end of FY 2018 and FY 2017, the SBA had $0.2 billion and $0.4 billion in borrowing authority carried
over to fund direct loans and default claims to be disbursed in the future. The SBA pays interest to the Treasury based
on Treasury’s cost of funds. The rate at which interest is paid to the Treasury on the amounts borrowed (or received from
the Treasury on uninvested cash balances) in a loan financing fund for a particular cohort is a disbursement-weighted
average discount rate for cohorts prior to FY 2001 and a single effective rate for cohorts beginning with FY 2001. The
SBA calculates and repays borrowings not needed for working capital at mid-year and at year-end for prior year cohorts.
The SBA uses the loan principal, interest, and fees collected from the borrowers in its loan financing funds to repay its
Treasury borrowings. The repayment maturity dates for borrowings from the Treasury are based on the loan maturities
used in the subsidy calculation. The maturities range from 16 years for direct business loans, 25 years for guarantied
business loans, and 30 years for disaster loans.

Apportionment Categories of Obligations Incurred
During FY 2018 and FY 2017, the SBA incurred $10.4 billion and $6.4 billion of direct and reimbursable obligations, of
which $0.4 billion and $0.5 billion were apportioned in category A, and $10.0 billion and $5.9 billion were apportioned
in category B. Category A apportionments are restricted by quarter and program, while category B apportionments are
restricted by purpose and program.

80 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

Unobligated Balances
Unobligated balances at September 30, 2018 and 2017 are $6.7 billion and $5.9 billion, which include $3.9 billion and
$4.2 billion of unavailable unobligated balances. These balances are unavailable primarily because they are unapportioned
by the OMB. The SBA accumulates the majority of the unobligated balances in its nonbudgetary financing accounts
during the fiscal year ($4.7 billion in FY 2018 and $4.6 billion in FY 2017) from fees and subsidy to fund default claims
in future years. In addition, unobligated balances are accumulated in budgetary accounts from appropriations ($2.0
billion in FY 2018 and $1.3 billion in FY 2017) 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 consist of goods or services ordered and obligated which the SBA has not received. This includes any
orders that have been paid in advance, but for which delivery or performance has not yet occurred. Total undelivered
orders for the periods ended September 30, 2018 and 2017 were $2.3 billion and $1.7 billion. Unpaid undelivered
orders for the periods ended September 30, 2018 and 2017 were $1.8 billion and $1.3 billion. Paid undelivered orders
for the periods ended September 30, 2018 and 2017 were $0.5 billion and $0.4 billion. For FY 2018, total undelivered
orders of $2.3 billion consist of $2.2 billion non-federal and $0.1 billion federal.

Differences between the Statement of Budgetary Resources and the Budget of the U.S.
Government
There was no material difference between the FY 2017 Statement of Budgetary Resources and the President’s FY 2019
budget submission. The President’s FY 2020 Budget with actual numbers for FY 2018 has not yet been published. The
SBA expects no material differences between the President’s Budget “actual” column and the FY 2018 reported results
when the budget becomes available in February 2019.

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

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

AGENCY FINANCIAL REPORT • FY 2018 81
FIN A N C I A L R E P O RTI N G

CONSOLIDATED RECONCILIATION OF BUDGETARY OBLIGATIONS TO NET COST

(Dollars in Thousands)

For the Years Ended September 30, 2018 2017

RESOURCES USED TO FINANCE ACTIVITIES
Budgetary Resources Obligated
Obligations Incurred $ 10,446,706 $ 6,367,242
Less: Spending Authority from Offsetting Collections and Recoveries 5,422,687 5,296,461
Obligations Net of Offsetting Collections and Recoveries 5,024,019 1,070,781
Less: Offsetting Receipts 1,744,077 1,201,195
Net Obligations 3,279,942 (130,414)

Other Resources
Imputed Financing 25,428 12,162
Other Financing Sources (1,330,889) (1,168,891)
Net Other Resources Used to Finance Activities (1,305,461) (1,156,729)
Total Resources Used to Finance Activities 1,974,481 (1,287,143)

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 (436,749) 47,183
Resources that Fund Expenses Recognized in Prior Periods (149,461) (655,332)
Budgetary Offsetting Collections and Receipts that Do Not Affect Net Cost of Operations
Credit Program Collections 4,098,709 4,156,180
Offsetting Receipts 1,744,077 1,201,195
Resources that Finance the Acquisition of Assets or Liquidation of Liabilities (6,893,607) (3,615,895)
Other - Current Year Liquidating Equity Activity 3,991 (7,463)
Other Resources that Do Not Affect Net Cost of Operations (84) 174
Total Resources that Do Not Finance Net Cost of Operations (1,633,124) 1,126,042

Total Resources Used to Finance the Net Cost of Operations 341,357 (161,101)

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 2,658 653
Upward Reestimates of Credit Subsidy Expense 275,387 148,831
Change in Revenue Receivable from Public 277 8,871
Provision for Losses on Estimated Guaranties 4,667 1,513
Change in Unfunded Employee Benefits 702 3,579
Total Components Requiring or Generating Resources in Future Periods 283,691 163,447

Components Not Requiring or Generating Resources
Depreciation or Amortization 151 320
Change in Bad Debt Expense - Pre-1992 Loans (3,420) 827
Other (Income) Expenses Not Requiring Budgetary Resources (104) 417

Total Components Not Requiring or Generating Resources (3,373) 1,564

Total Components of the Net Cost of Operations that Will Not
Require or Generate Resources in the Current Period 280,318 165,011
Net Cost of Operations $ 621,675 $ 3,910

82 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

Liabilities Not Covered by Budgetary Resources on the Balance Sheet (Note 8) differs from Components Requiring
or Generating Resources in Future Periods in this reconciliation primarily due to reestimated subsidy costs of loan
programs. The subsidy costs are shown in the Statement of Net Cost and are to be covered by budgetary resources; 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, 2018 2017
Current Year Liabilities Not Covered By Budgetary Resources $ 122,609 $ 114,582
Less: Prior Year 114,582 108,838
Change in Liabilities Not Covered By Budgetary Resources 8,027 5,744
Upward Reestimates of Credit Subsidy Expense 275,387 148,831
Change in Revenue Receivable from Public 277 8,871
All Other – 1
Components (of Net Cost) Generating Resources in Future Periods
(Per Reconciliation Above) $ 283,691 $ 163,447

NOTE 17 SIGNIFICANT EVENTS
In September and October 2018, hurricanes Florence and Michael struck the continental United States. When disaster
strikes the United States, SBA’s loans are often the sole form of federal credit assistance for damage incurred by non-farm,
private-sector homeowners, renters, and businesses.

At fiscal year-end, the SBA is uncertain as to the full future effect of the two hurricanes. The SBA has granted deferments to
SBA-serviced disaster and business loan borrowers in the Florence disaster-declared areas, and has encouraged 7(a) lenders,
Certified Development Companies, 504 third-party lenders, and Microlenders to provide similar deferment relief. The
SBA has provided similar relief in past disasters and no adverse impact is expected from this relief. However, the SBA could
experience future variations in performance of existing disaster and business loan portfolios as businesses in the affected areas
strive to recover.

The SBA has begun to increase its rate of administrative spending as it conducts its disaster response. This spending is
consistent with the Agency’s experience responding to prior disasters and primarily takes the form of increased expenditures
for travel and temporary personnel. In addition, the SBA has arranged for the reassignment of existing disaster and non-
disaster staff to assist in the disaster affected areas.

The provisions of the FCRA govern the valuation of SBA’s portfolio of existing business and disaster loans as well as the
determination of the appropriate subsidy rate for the disaster loans that the SBA will approve in response to hurricanes
Florence and Michael. The FCRA provides permanent indefinite authority for reestimates of subsidy cost for existing
loans, to the extent necessary. Any initiatives that would change program terms or conditions for existing or new loans
would require additional appropriations to fund subsidy costs before implementation. Therefore, any additional significant
expenses associated with the hurricanes will be covered by additional appropriations and would not have an adverse impact
on SBA’s financial condition.

AGENCY FINANCIAL REPORT • FY 2018 83
FIN A N C I A L R E P O RTI N G

REQUIRED SUPPLEMENTARY INFORMATION
COMBINING STATEMENT OF BUDGETARY RESOURCES
For the Year Ended September 30, 2018 (Unaudited)

(Dollars in Thousands) BLIF DLF SBGRF
Nonbudgetary Nonbudgetary
Budgetary Financing Budgetary Financing Budgetary
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority,
$ 77,830 $ 4,223,215 $ 742,387 $ 383,449 $ 94,070
net (discretionary and mandatory)
Appropriations (discretionary and mandatory) 285,873 – 1,662,045 – –
Borrowing Authority (discretionary and mandatory) – 289,829 – 3,949,734 –
Spending Authority from Offsetting Collections – 2,596,538 1 948,471 20,981
Total Budgetary Resources $ 363,703 $ 7,109,582 $ 2,404,433 $ 5,281,654 $ 115,051

Memorandum (non-add) entries:
Net adjustments to unobligated balance brought forward, Oct. 1 10,621 (205,626) 54,880 259,729 2,123

STATUS OF BUDGETARY RESOURCES
New Obligations and Upward Adjustments (total) $ 285,632 $ 2,850,262 $ 1,178,834 $ 4,827,533 $ 17,598
Unobligated Balance, end of year:
Apportioned, unexpired accounts 241 1,114,761 638,319 453,687 15,402
Unapportioned, unexpired accounts 77,830 3,144,559 587,280 434 82,051
Unexpired Unobligated Balance, end of year 78,071 4,259,320 1,225,599 454,121 97,453
Expired Unobligated Balance, end of year – – – – –
Unobligated Balance, end of year (total) 78,071 4,259,320 1,225,599 454,121 97,453
Total Status of Budgetary Resources $ 363,703 $ 7,109,582 $ 2,404,433 $ 5,281,654 $ 115,051

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 285,940 $ 208,579 $ 1,086,542 $ 2,586,148 $ (5,599)
Distributed Offsetting Receipts – (1,617,899) – (126,407) –
Agency Outlays, net (discretionary and mandatory) $ 285,940 $ (1,409,320) $ 1,086,542 $ 2,459,741 $ (5,599)

(Dollars in Thousands) SE OIG ADVOCACY EDP BATF TOTAL TOTAL
Nonbudgetary
Budgetary Budgetary Budgetary Budgetary Budgetary Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority,
$ 429,619 $ 11,660 $ 2,119 $ 54,933 $ 273 $ 1,412,891 $ 4,606,664 $ 6,019,555
net (discretionary and mandatory)
Appropriations (discretionary and mandatory) 268,500 26,900 9,120 247,100 – 2,499,538 - 2,499,538
Borrowing Authority (discretionary and mandatory) – – – – – – 4,239,563 4,239,563
Spending Authority from Offsetting Collections 790,029 – – – 1 811,012 3,545,009 4,356,021
Total Budgetary Resources $ 1,488,148 $ 38,560 $ 11,239 $ 302,033 $ 274 $ 4,723,441 $ 12,391,236 $ 17,114,677

Memorandum (non-add) entries:
Net adjustments to unobligated balance brought
9,770 (996) 146 12,996 – 89,540 54,103 143,643
forward, Oct. 1

STATUS OF BUDGETARY RESOURCES
New Obligations and Upward Adjustments (total) $ 1,003,672 $ 21,797 $ 9,345 $ 251,925 $ 108 $ 2,768,911 $ 7,677,795 $ 10,446,706
Unobligated Balance, end of year:
Apportioned, unexpired accounts 456,783 9,362 1,877 32,672 164 1,154,820 1,568,448 2,723,268
Unapportioned, unexpired accounts 2,314 – 17 – 2 749,494 3,144,993 3,894,487
Unexpired Unobligated Balance, end of year 459,097 9,362 1,894 32,672 166 1,904,314 4,713,441 6,617,755
Expired Unobligated Balance, end of year 25,379 7,401 – 17,436 – 50,216 – 50,216
Unobligated Balance, End of Year (total) 484,476 16,763 1,894 50,108 166 1,954,530 4,713,441 6,667,971
Total Status of Budgetary Resources $ 1,488,148 $ 38,560 $ 11,239 $ 302,033 $ 274 $ 4,723,441 $ 12,391,236 $ 17,114,677

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 169,658 $ 21,777 $ 9,758 $ 222,298 $ 106 $ 1,790,480 $ 2,794,727 $ 4,585,207
Distributed Offsetting Receipts 229 – – – – 229 (1,744,306) (1,744,077)
Agency Outlays, net (discretionary and mandatory) $ 169,887 $ 21,777 $ 9,758 $ 222,298 $ 106 $ 1,790,709 $ 1,050,421 $ 2,841,130

84 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

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

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

SCORE is a nonprofit 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 nonprofit
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
intermediary 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,
which delivers 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.

Entrepreneurship Education includes a variety of educational online tools to promote active learning for aspiring
entrepreneurs and small businesses. The SBA also provides high-growth small businesses and opportunity to strengthen
and enhance their local entrepreneurial ecosystem through intensive, cohort-based business education programs.

All Other Training and 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.”

AGENCY FINANCIAL REPORT • FY 2018 85
FIN A N C I A L R E P O RTI N G

Significant Human Capital investments occur within the following programs:

(Unaudited)
(Dollars in Thousands)

For the Five Years Ended September 30, 2018 2017 2016 2015 2014

Small Business Development Centers $ 110,400 $ 118,839 $ 94,196 $ 89,225 $ 154,400
SCORE 16,038 11,737 2,749 19,615 5,758
Women’s Business Centers 23,995 24,300 17,135 18,658 24,842
Microloan Technical Assistance 28,595 23,658 28,864 19,216 21,552
SBA's Consulting and Training Programs 22,005 22,191 52,871 51,510 54,620
Veterans Outreach 18,151 22,924 22,999 27,031 13,244
Entrepreneurship Education 10,568 24,758 19,976 18,499 9,131
All Other Training and Assistance Programs 12,184 8,620 16,402 9,010 12,832

Total $ 241,936 $ 257,027 $ 255,192 $ 252,764 $ 296,379

86 AGENCY FINANCIAL REPORT • FY 2018
FINANCIAL R E PORTI NG

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AGENCY FINANCIAL REPORT • FY 2018 87
O TH ER I N FO R MAT I O N

For the ﬁth consecutive year, in FY 2017, the
DID federal government exceeded the 23 percent

YOU small business contracting goal, purchasing
$105.7 billion in goods and services from
KNOW? small businesses through prime contract
procurements. is represented 23.88
percent of all eligible federal spend and
supported over 584,000 jobs in the American
economy.

Growing Business:
SBA Resources Help Contractors
Realize Dreams

Hensel Phelps Construction Company
Greeley, Colorado
For more than 80 years the Hensel Phelps Construction
Company has been in business. e business ofers a full
range of construction services combined with the latest
technology and world-class cratsmanship. Brad Lewis,
Corporate Director of Supplier Diversity, regularly relies on
SBA’s Small Business Development Centers and
Procurement Technical Assistance Centers to advertise
subcontracting opportunities. ese partnerships increase
supplier diversity and have helped their business grow
revenue. Last year, Hensel Phelps awarded 71 percent of
subcontracts totaling $147 million to small businesses, of
which $52 million went to small disadvantaged, $72 million
to women-owned, $35 million to HUBZone, and $38 million
to service-disabled veteran-owned small businesses.

88 AGENCY FINANCIAL REPORT • FY 2018
OTHER INFORMATION
DID
e SBA’s 7(a) and 504 loan programs continued to
promote outreach through further training of its

YOU
Lender Relation Specialists located in the district
oﬁces. e 7(a) loan program supported $25.4
billion in approved dollars for over 60,000 loans
KNOW? while the 504 loan program supported $4.8 billion in
approved dollars for over 5,800 loans in FY 2018.
is level of program activity demonstrated that
access to capital through conventional sources
remains a challenge for America’s small business.

Expanding Business:
International Trade Is Key

Evans Capacitor Company
East Providence, Rhode Island

David Evans and Charles Dewey co-founded Evans
Capacitor Company in 1996 to pursue technological
inventions. eir business, based in Rhode Island, develops
and manufactures high-energy, high-power density
capacitors. Capacitors store energy and then, when needed,
release that energy in a burst – like your camera battery
releasing stored energy when you use the lash to take a
picture. ey now deliver capacitors to more than 100
customers annually, including Lockheed Martin Missiles and
Fire Control for the U.S. Army’s Apache attack helicopter. To
expand their business market, they participated in SBA State
Trade Export Promotion program events to gain an
international presence. rough trade shows and
advertising, they have expanded their customer base to
Canada and the United Kingdom.
OT H ER INFOR MATI ON

OIG REPORT ON THE MOST SERIOUS MANAGEMENT
AND PERFORMANCE CHALLENGES

REPORT ON THE MOST SERIOUS
REPORT ON THE
MANAGEMENT ANDMPERFORMANCE
OST SERIOUS
M ANAGEMENT
CHALLENGES AND
FACING P SMALL
THE ERFORMANCE
BUSINESS
CHALLENGES IN FIN
ADMINISTRATION YEAR
FISCAL
ISCAL 2018
YEAR 2019

October 14, 2017 REPORT NUMBER 17-02

AGENCY FINANCIAL REPORT • FY 2018 91
O TH ER I N FO R MAT I O N

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

Memorandum
Management Challenges
Final Report Transmittal
Report Number: 19-01
DATE: October 12, 2017
DATE: October 11, 2018
TO: Linda E. McMahon
TO: Administrator
Linda E. McMahon
Administrator
FROM: Hannibal "Mike" Ware
FROM: Acting Inspector
Hannibal General
“Mike” Ware
Inspector General
SUBJECT: Report on the Most Serious Management and Performance Challenges Facing
the Small
SUBJECT: Report Business
on the MostAdministration in Fiscal
Serious Management Year 2018Challenges Facing the Small
and Performance
Business Administration in Fiscal Year 2019
In accordance with the Reports Consolidation Act of 2000, we are providing you with the Office of
Inspector General’s (OIG’s) Report on the Most Serious Management and Performance Challenges
Facing the Smallwith
In accordance Business Administration
the Reports in Act
Consolidation Fiscal Year we
of 2000, 2018. The overall
are providing goalthe
you with is Office
to focus attention on
of Inspector
significant
General’sissues withthethe
Report on objective
Most Serious of working and
Management with Agency
Performance managers
ChallengestoFacing
enhance the Business
the Small effectiveness of
the Small Business
Administration Administration’s
in Fiscal Year (SBA’s)
(FY) 2019. The programs
overall and
goal is to operations.
focus attention onWe have issues
significantprepared similar
with the
reports since fiscal year (FY) 2000.
objective of working with Agency managers to enhance the effectiveness of the Small Business Administration’s
(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
Within each management challenge is a series of recommended actions to enhance the effectiveness of Agency
of Agency programs and operations. Each recommended action is assigned a color score to indicate
programs and operations. Each recommended action is assigned a color score to indicate its status. The scores
its status. The scores are as follows: green for “implemented,” yellow for “substantial progress,”
are as follows: green for “implemented,” yellow for “substantial progress,” orange for “limited progress,” and red
orange for “limited progress,” and red for “no progress.” If a recommended action was added since
last for “no progress.” If a recommended action was added since last year’s report, no color score was assigned, and
year’s report, no color score was assigned, and the recommended action has been designated as
the recommended action has been designated as “new.” Actions that were scored green last year, and remained
“new.” Actions that were scored green last year, and remained green this year, have been moved up
green
to the this year,
“history haveabove
bar” been moved up to the “history
the recommended bar” above
actions. Thethe recommended
history actions. The
bar highlights anyhistory
progressbar that the
highlights any progress that the Agency has made on a challenge over the past four fiscal
Agency has made on a challenge over the past 4 fiscal years (or as long as the challenge has existed, years (or as long as if
the challenge
shorter) has existed,
by showing if shorter)ofbyactions
the number showingthat
the number of actions
have moved that have
to green moved
each year.to green each year.an
In addition, Inarrow
addition,
in the an arrow
color box in the color
indicates that box
the indicates that the
color score wentcolor
upscore went up
or down or down
from from the
the prior year.prior year.

The following table provides a summary of the most serious management and performance challenges facing
The SBA
following table provides a summary of the most serious management and performance
in FY 2019.
challenges facing SBA in FY 2018.

92 AGENCY FINANCIAL REPORT • FY 2018
OT H ER INFOR MATI ON

Summary of the Most Serious Management and Performance Challenges
Facing SBA in FY 2019

Color Scores
Status at End of FY 2018 Change from Prior Year
Challenge Green Yellow Orange Red Up á Down 
1 Small Business Contracting 2
2 IT Leadership 6 1
3 Human Capital 1
4 SBA Loan Program Risk Management and Oversight 3a 1 3
5 8(a) Business Development Program 3 3
6 Ensuring Quality Deliverables and Reducing Improper
2 2
Payments at SBA Loan Operation Centers
7 Disaster Assistance Program 1 3 1 1 1
8 Acquisition Management
TOTAL 6 16 1 10 1
a For challenge 4 recommendation 2, 7(a) was rated green, while 504 was rated yellow. For simplicity, it is reflected as green in this table.

Significant changes to this year’s management challenges include the removal of the acquisition management challenge
and inclusion of a new grant management oversight challenge. SBA made substantial improvements to its acquisition
program to address the challenges that we identified. SBA’s increased its oversight of the acquisition program, updated its
policies and procedures, and implemented a requirement for management to conduct annual reviews of the acquisition
process controls. As a result, we are not including the acquisition program as a serious challenge for the agency.

We added a new challenge regarding SBA’s grant management oversight. In FY 2018, SBA administered over $247
million in grants and cooperative agreements to its resource partners and other nonfederal entities to provide technical
assistance and training programs to develop small businesses. Office of Inspector General audits have identified
significant systemic deficiencies in SBA’s grant management, including inaccurate financial and performance information,
ineffective grantee and program oversight, and inefficient decentralized grant management functions.

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 most serious management and performance challenges.

AGENCY FINANCIAL REPORT • FY 2018 93
O TH ER I N FO R MAT I O N

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

The Small Business Act established a governmentwide goal that 23 percent of all prime contracts be awarded to small
businesses each fiscal year. In its annual Small Business Goaling Report, the Small Business Administration (SBA) has
reported since fiscal year (FY) 2013 that the federal government met or exceeded its goal of awarding 23 percent of
federal contracting dollars to small businesses. However, SBA excludes certain procurements, such as those awarded by
the Department of Defense (DoD) for overseas work, from the small business goaling baseline. These exclusions lead
to overstatement of small business goaling achievements. In addition, over the years, Congress has expressed concerns
about the accuracy of the report. These concerns have been substantiated by Office of Inspector General (OIG) and
Government Accountability Office (GAO) audits, which identified widespread misreporting by procuring agencies,
since contract awards reported as having gone to small firms have been substantially performed by larger companies.
Specifically, in certain circumstances such as long-term contracts (durations of more than five years), if a firm’s status as
a small business changes and it is no longer small or in an SBA preference program, SBA’s regulations allow those firms
to be counted as small businesses. As a result, agencies continue to receive credit towards achieving their small business
procurement goals for long-term contracts awarded to firms that are either no longer small or in SBA’s preference
programs. Furthermore, SBA has not implemented a certification process for the Women-Owned Small Business
(WOSB) Federal Contracting Program, which can also affect the accuracy of the goaling achievements.

As the advocate for small business, SBA must strive to ensure that only eligible small firms obtain and perform small
business awards. Since the goaling achievements SBA reports do not portray federal contract awards made only to small
businesses, SBA should ensure transparency with regard to the contracting dollars to businesses that are not small.
Further, SBA should ensure that procuring agencies clearly and accurately report contracts awarded to and performed
by small businesses when representing their progress in meeting small business contracting goals. Without accurate and
transparent data, SBA cannot reliably measure the federal government’s small business procurement goal achievements,
which weakens the ability of Congress and other federal policymakers to determine whether the government is
maximizing contracting opportunities for small businesses.

Exclusions from the Small Business Goaling Report Impact the Overall Prime Contract Goal
SBA revised its goaling guidelines in FY 2018 to include in the goaling baseline the following four prior exclusions:
Utilities, Resale, American Institute of Taiwan, and Non-Appropriated Agencies. However, SBA’s guidelines continue to
exclude certain types of contracts from the overall dollar baseline used to calculate achievement of small business goals.
For example, the goaling guidelines exclude DoD contracts that were both awarded and performed abroad and those
performed entirely abroad. While the National Defense Authorization Act for FY 2017 authorized DoD to remove
certain contracts from its procurement baseline when reporting DoD-specific requirements, the congressional mandate
does not exclude these categories of prime contracts from the governmentwide goal of 23 percent.

These exclusions, which are not mandated by the Small Business Act, weaken the ability of Congress and other federal
policymakers to determine whether the government is maximizing contracting opportunities for small business awards
and participation and meeting small business goals. By excluding certain types of contracts from the goaling baseline,
SBA overstates the federal government small business goal achievements. This is evidenced in the General Services
Administration FY 2017 Goaling Without Exclusions Report, which reported small business contract expenditure data
without goaling exclusions applied, resulting in a small business procurement goal achievement of 21.5 percent—2.3
percent lower than the 23.8 percent reported by SBA. SBA should include the appropriate universe of federal
procurement opportunities into the goaling guidelines baseline to ensure policymakers and other interested parties receive
the most accurate and transparent picture of small business participation in federal contracting.

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Agencies Receive Goaling Credit for Ineligible Firms, Firms No Longer in the 8(a) or
HUBZone Programs, or Firms that are No Longer Small
Through our audit work, we continue to identify federal agencies that may have received credit towards their small
business goals because procuring agency contracting officers incorrectly reported ineligible firms as either certified in the
8(a) or HUBZone programs in Federal Procurement Data System – Next Generation. In a September 2014 audit report,
(Report 14-18) we identified over $400 million in FY 2013 contract actions that may have been awarded to ineligible
firms. In a September 2018 audit report, (Report 18-22), we also identified that SBA did not consistently detect
ineligible firms in the 8(a) program and did not always act to remove firms it determined were no longer eligible for
the program. We found that 20 of 25 firms we reviewed should have been removed from the 8(a) program. These firms
received $126.8 million in new 8(a) set-aside contract obligations in FY 2017 at the expense of eligible disadvantaged
firms. The amount of dollars SBA reports to Congress and the public as being performed by 8(a) and HUBZone firms in
the Small Business Goaling Report is significantly impacted by the inclusion of contract actions performed by ineligible
program participants. SBA needs to strengthen its oversight to ensure only eligible firms participate in these preference
contract programs.

Further, in Report 14-18, we found that over $1.5 billion dollars in FY 2013 contract actions were included towards
small business contacting goals, even though the firms were no longer in the 8(a) Business Development or HUBZone
programs. Through additional analytics, we also determined that of approximately $3.1 billion in contracts awarded to
the top 100 individually owned firms in the 8(a) program in FY 2016, approximately $1.5 billion was awarded to firms
no longer in the program.

SBA revised its regulations in 2004 to permit procuring agencies to claim small disadvantaged business and HUBZone
goaling credit on certain contract actions, even after firms have left the program. SBA added these regulations in order to
codify the existing “practice” of the agencies to include these firms even though they were no longer in a SBA preference
program. Additionally, in 2006, SBA revised its regulations to address small business size status representations and
reporting for long-term Federal contracts. These changes allow procuring agencies to receive credit for an award to a small
business throughout the life of the contract, based on the size status of the firm at the time of the offer for 8(a), and at the
time of application and award for HUBZone. Therefore, in cases where a small business grows to be other than small, the
procuring agency may exercise options and still count the award as an award to a small business.

Although procuring agencies can award these long-term contracts, OIG contends that more transparent reporting of
those awards is necessary to aid stakeholders and portray a true picture of the small business goaling achievements. While
the regulations allow procuring agencies to receive credit for firms no longer in SBA preference programs, or are other
than small, by including those contracts in the reported small business goals, SBA cannot accurately reflect or measure
true program impact. SBA should consider enhancing its Small Business Goaling Report to be more transparent and
accurately reflect small business participation by specifying the amount awarded under long-term small business contracts
to firms that have since left the program, or are other than small.

Women-Owned Small Business Federal Contracting Program Susceptible to Abuse
SBA’s Women-Owned Small Business (WOSB) Program provides greater access to federal contracting opportunities
to WOSBs and economically-disadvantaged WOSBs that meet the program’s requirements. Both OIG and GAO have
reported weaknesses in SBA’s controls that would ensure only eligible firms receive WOSB Program set-aside contracts.
While SBA stated it examines a sample of firms for eligibility and has conducted a compliance review of all four SBA-
approved third-party certifiers, these processes and procedures have not yet been formalized.

The National Defense Authorization Act for FY 2015 granted contracting officers the authority to award sole-source
awards to firms in the WOSB Program and required firms to be certified by a federal agency, a State government, SBA’s
Administrator, or a national certifying entity approved by the Administrator. However, SBA implemented the sole-source
authority provision first without a certification program. OIG considers allowing sole-source contracting authority in the

AGENCY FINANCIAL REPORT • FY 2018 95
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WOSB Program, without implementing the contemporaneously required certification program, inconsistent with SBA’s
statutory authorization. In a June 2018 audit report (Report 18-18), OIG identified that due to SBA’s implementation
of sole-source authority without a certification program, contracting officers at various federal agencies made sole-
source awards without having the necessary documentation to determine eligibility. This implementation resulted in the
awarding of approximately $52.2 million to potentially ineligible firms. SBA should continue to make progress toward
addressing this shortcoming by ensuring timely completion of the remaining steps involved in the creation of a Final
Rule for and implementation of a certification process for the WOSB Program. Because SBA still has not implemented a
certification process for the WOSB Program as required, firms continue to self-certify, exposing the WOSB Program to
potential fraud and abuse, as well as overstating SBA WOSB contracting goals.

Number of Actions Accomplished (Green Status)
During Last 4 Fiscal Years 2014: 1 2015: 0 2016: 1 2017: 0
(Challenge first reported in FY 2005)
Status at end
Recommended Actions for FY 2019
of FY 2018
1. Strengthen controls to ensure the accuracy of the federal government’s annual small business procurement goals achievements reported in
Yellow
the Small Business Goaling Report.
2. Implement a certification process for WOSB Program. Yellow

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

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Challenge 2: SBA Needs to Continue to Improve Information Technology Controls to
Address Operational Risks

During the past year, the Office of the Chief Information Officer (OCIO) enhanced its deployment of information
technology (IT) controls and implemented most of the key components of the Federal Information Technology
Acquisition Reform Act (FITARA). OCIO also made improvements in several security areas in the Federal Information
Security Modernization Act (FISMA) criteria, including access controls, continuous monitoring, and configuration
management. Notwithstanding these improvements, our assessments showed opportunities for improved or more
complete deployment of required policies, procedures, and strategies. These areas include human resource planning, user
training, contingency planning, and risk management.

OCIO Made Progress in Deploying FITARA Criteria
FITARA was enacted in December 2014. The goal of this legislation was to realize long-term cost savings through
improved IT risk management, transparency, and more effective IT investment oversight. During this past year,
OCIO incorporated many of the FITARA requirements, by improving its IT governance structure. Some examples
include requiring program offices to engage with the Architectural Review Board for IT investments, updating system
development methodology guidance to include cloud migration and Agile, and ensuring that the Business Technology
Investment Council reviews performance management baselines. The Agency maintains that it has fully deployed all
major process and procedures required by FITARA, and we will monitor these areas this coming year to determine
whether critical controls are fully implemented.

Long-Standing Weaknesses in IT Security Controls Are Being Addressed
Our evaluations of SBA’s systems and networks indicate that significant effort has been expended to formalize and
document policies, procedures, and strategies. During this fiscal year, the Agency closed 35, or approximately 69 percent,
of its outstanding IT recommendations, including recommendations dating back to 2011.

However, outstanding IT security vulnerabilities remain. Our evaluations utilizing the Financial Information Systems
Audit Control Manual showed that the Agency had a significant deficiency in IT security controls and was assessed as
“not effective” against criteria established by FY 2017 Inspector General FISMA Reporting Metrics. There are open
recommendations in the areas of continuous monitoring, risk management, incident response, identify and access
management and data rights management. OCIO should continue to focus on timely remediation of these vulnerabilities
as SBA, like most federal agencies, continues to experience external cybersecurity threats.

Number of Actions Accomplished (Green Status)
During Last 4 Fiscal Years 2015: 0 2016: 0 2017: 0 2018: 0
(Challenge first reported in FY 1999, revised in FY 2016)
Status at end
Recommended Actions for FY 2019
of FY 2018
1. Establish an OCIO human resource planning process that allows full deployment of FITARA. Yellow
2. The OCIO performs independent oversight of IT investments consistent with guidance. Yellow
3. The OCIO facilitates enterprise architecture and demonstrates accountability for IT investments. Yellow
4. The OCIO establishes and implements information security and continuous monitoring practices, and contractor systems policies and
Yellow
standards to ensure ongoing effectiveness of information systems.
5. The OCIO maintains effective risk management, contingency planning, and incident response practices to minimize vulnerabilities. Yellow á
6. The OCIO establishes configuration management and identity and access management controls and procedures. Yellow

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

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O TH ER I N FO R MAT I O N

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

Over a decade ago, we identified human capital management as a top challenge for SBA. Since that time, SBA made
substantial progress to address this long-standing challenge. Specifically, SBA developed and implemented plans that
aligned talent needs and capabilities with its strategic plan. The Agency also implemented strategic workforce and
succession plans to identify competency gaps, strengthen its leadership capacity, and address the challenges of its
aging workforce. Nonetheless, according to GAO, agencies need to do further work to fully use workforce analytics to
evaluate actions taken to demonstrate progress in closing the competency gaps. According to GAO, mission critical skill
gaps within the federal workforce pose a high risk to the nation. Long-term fiscal pressures and the changing nature
of the workforce, compounded with a potential wave of employee retirements, could produce gaps in leadership and
institutional knowledge.11

SBA continues to make progress in addressing our recommendation to update its human capital management policies. In
March 2018, SBA issued an Employment Development Program policy; however, two policies are still outstanding. OIG
reiterates the need to establish timeframes to update and implement policies in support of the agency’s long-term goals
and objectives for human capital management.

SBA identified 50 percent of its employees in mission critical occupations and senior positions as being eligible to
retire by 2020.12 As a result, OIG plans in FY 2019 to assess the effectiveness of SBA’s actions to mitigate its workforce
challenge risk. OIG also plans to evaluate the Agency’s use of workforce analytics to evaluate its progress in closing its
competency gaps.

Number of Actions Accomplished (Green Status) During Last 4 Fiscal Years
2014: 0 2015: 1 2016: 0 2017: 1
(Challenge first reported in FY 2001, revised FY 2007)
Status at end
Recommended Actions for FY 2019
of FY 2018
1. Ensure that human capital management SOPs are updated and appropriately structured to support the Agency’s long-term goals and
Yellow
objectives and governmentwide human capital management initiatives.

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

11 GAO, High-Risk Series: Progress on Many High Risk Areas While Substantial Efforts Needed on Others, GAO-17-317, dated February 2017.
12 SBA Strategic Workforce Plan FY 2017–2020.

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

SBA’s Office of Credit Risk Management (OCRM) manages credit risk for a nearly $132 billion loan portfolio originated
by lenders and certified development companies that have various degrees of expertise regarding SBA loan program
requirements. The majority of SBA loans are originated by lenders with delegated approval authority, resulting in limited
SBA oversight and quality control reviews until a default occurs. Many lenders rely on the services of “for-fee” and other
third-party agents to assist in the origination, closing, servicing, and liquidation of SBA loans.

Previous OIG audits identified that SBA did not recognize significant lender weaknesses, develop an effective portfolio
risk management program, or effectively identify and track third-party agent involvement in its 7(a) and 504 loan
portfolios. Since the audits, SBA has significantly improved its oversight of lenders and made progress in implementing a
portfolio risk management program. However, SBA made limited progress in identifying and tracking third-party agents.

While SBA improved its oversight of lenders and the risk management program, SBA needs to show that the portfolio
risk management program is used to support risk-based decisions and implement additional controls to mitigate risks.
Moreover, SBA needs to develop an effective method for tracking loan agents and update regulations on loan agents.

SBA Improved Oversight of Lending Participants
The risks inherent in delegated lending require an effective oversight program to monitor compliance with SBA
policies and procedures and take corrective actions when a material noncompliance is detected. However, in a prior
audit, OIG found that SBA did not always recognize the significance of lender weaknesses or determine the risks that
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.

From FY 2013 to FY 2017, SBA improved its oversight of lending participants. For example, SBA developed risk
profiles and lender performance thresholds, developed a select analytical review process to allow for virtual risk-based
reviews, updated its lender risk rating model to better stratify and predict risk, and conducted test reviews under the
new risk-based review protocol. Additionally, OCRM revised its review methodologies for 7(a) and 504 program lenders
and engaged contractor support to expand on its corrective action follow-up process. Further, SBA monitored and
verified implementation of corrective actions to ensure effective resolution prior to closeout which represented the full
implementation of recommendation 1 in FY 2017. In FY 2018, OCRM continued to demonstrate that it monitored and
verified implementation of corrective actions.

SBA Improved Portfolio Risk Management Program
A prior OIG report noted 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. Our
analysis showed 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. The pilot had been dominated by two lenders
employing questionable credit practices and charging higher interest rates that ultimately led to SBA ending the program.

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O TH ER I N FO R MAT I O N

Since that time, SBA has made substantial progress in demonstrating that information from the portfolio risk
management program is used to support risk-based decisions and implementing additional controls to mitigate risks in
SBA loan programs. Specifically, in FY 2016 SBA established performance measures and risk mitigation goals applicable
to each loan program and the entire lending portfolio. OCRM also 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. In FY 2017, SBA began an ongoing study of lender compliance with
SBA loan status reporting. SBA identified deficiencies with the reporting and subsequently issued Information Notice
5000-1945, reminding lenders of the reporting requirements. Lastly, in FY 2018, SBA analyzed areas of identified risk
including assessing the impact of hurricane deferments on 7(a) portfolio performance, accommodations concentration in
the 7(a) portfolio, and an evaluation of the Community Advantage Program. Based on these analyses, SBA determined
that the hurricane deferments would not have a significant impact on the ability to continue to operate at a zero subsidy,
accommodations concentrations warrant continued monitoring, and that changes are necessary to the Community
Advantage Program.

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 meetings. SBA will need to continue to demonstrate during FY 2019 that information from this program is
used to support risk-based decisions and implement additional controls to mitigate risks.

Increased Risk Introduced by Loan Agents
Prior OIG audits and investigations identified that SBA did not have a way to effectively identify and track loan
agent involvement in its 7(a) and 504 loan portfolios and had 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 FY 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 increasing the risk of default. Despite the prevalence of fraud in its loan portfolios, SBA’s
oversight of loan agents has been limited.

However, SBA has made substantial progress in developing effective methods to disclose and track loan agent activities on
7(a) program loans. Specifically, SBA requires lenders to provide a loan agent disclosure form (Form 159) to SBA’s fiscal
and transfer agent (FTA). Additionally, the FTA must 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. While SBA has implemented
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, SBA will likely need to make further modifications to this
process. In 2016, SBA issued a notice to lenders reiterating its requirements for loan agent disclosures and submission of
the Form 159 to its FTA.

Additionally, in response to OIG concerns that SBA loan agent enforcement regulations are outdated, SBA prepared
the Final Rule for Agent Revocation and Suspension Procedures, which was submitted to and approved by the SBA
Administrator. However, due to the Presidential Executive Order on Reducing Regulation and Controlling Regulatory
Costs, SBA does not intend to submit the final regulation to the Office of Management and Budget (OMB). SBA has
indicated that the additional regulation is no longer necessary to provide effective enforcement procedures for loan agents
because those effective enforcement procedures already exist in the SOP. Based on our review, we have determined that
SBA’s existing regulations and enforcement procedures would likely be sufficient.

In response to our loan agent report, SBA stated that it would explore the feasibility of implementing a registration
system. Subsequently, SBA determined that the optimal way to gather information is the enhanced Form 159 that is
required to be submitted electronically. The enhanced Form 159 was recently approved by OMB and will be rolled out

100 AGENCY FINANCIAL REPORT • FY 2018
OT H ER INFOR MATI ON

with official notification and lender training. In addition to the enhanced Form 159, SBA’s upcoming FTA contract will
require the FTA to develop application and follow-up controls over lender submissions, to ensure that critical fields on
each form are completed. SBA expects the enhanced controls to be fully implemented during FY 2019. In FY 2018,
OIG removed one action (previously number five) from this challenge because recommended action number three fully
addresses the intent of both recommended actions and aligns with the ongoing process improvements.

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 2015 report, the number of SBA-approved LSP agreements has reached almost 2,500, due in part to SBA’s
effort to better control access by LSPs to its systems. Specifically, SBA assigns an identifying number for all LSPs that
access SBA systems and records all SBA-approved LSP agreements. This trend has enabled OCRM to develop initial
performance metrics on LSP performance, but oversight is still limited. This audit also noted that several 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) 2014 2015 2016 2017
During Past 4 Fiscal Years 7(a) loans: 0 7(a) loans: 1 7(a) loans: 0 7(a) loans: 1
(Challenge first reported in FY 2001) 504 loans: 0 504 loans: 1 504 loans: 0 504 loans: 1
Status at end of FY 2018
Recommended Actions for FY 2019
7(a) 504
1. Monitor and verify implementation of corrective actions to ensure effective resolution prior to closeout. Green Green
2. Demonstrate that information from the portfolio risk management program is used to support risk-based decisions and
Green á Yellow
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 Yellow 
4. Update regulations (13 CFR Part 103) regarding loan agents to provide effective enforcement procedures. Green á Green á

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

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O TH ER I N FO R MAT I O N

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 Into the Program, and Standards for
Determining Economic Disadvantage Are Justifiable

SBA’s 8(a) Business Development Program was created to provide business development assistance to eligible small
disadvantaged businesses seeking to compete in the American economy. A major benefit of the 8(a) program is that
8(a) firms can receive sole source, as well as set-aside, competitive federal contracts 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
it is providing effective business development assistance to 8(a) firms and that only eligible firms are admitted into
and remain in the program. Additionally, SBA faces the challenge of developing objective and reasonable criteria for
determining at which point socially disadvantaged individuals are deemed economically disadvantaged.

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 also has taken steps to ensure
business opportunity specialists assess program participants’ business development needs during site visits. Furthermore,
during FY 2018, SBA implemented additional measures for business opportunities specialists to use to assess 8(a) firms’
development for those firms participating in the 8(a) mentor-protégé program.

Despite these improvements, SBA has not fully implemented an IT system that, among other functionalities, it had
designed to aid its monitoring efforts to track 8(a) participants’ business development. SBA had made previous attempts
to revamp its IT systems for monitoring 8(a) firms that have been unsuccessful. SBA is now taking a more comprehensive
approach to service delivery through Certify.sba.gov, which is broader in scope than just the 8(a) program and includes
the WOSB, HUBZone, and mentor-protégé programs. To date, SBA implemented limited functionality for the 8(a)
program. According to program officials, although the system is not fully operational, they have gained efficiencies by
collapsing the functionality of two previous systems they were using to manage the program—E-8(a) and the Business
Development Management Information System. As of September 2018, SBA had spent over $24 million on this system,
and it plans to continue implementing functionalities for the 8(a) program through FY 2020

Streamlined Application Process May Expose the 8(a) Program to a Higher Fraud Risk
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. Consequently, in FY 2016, 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
streamlined application process. However, as of April 2018, SBA reported the 8(a) program includes 4,903 firms, which
is a decline of nearly seven percent over the 5,260 firms reported participating in the program as of March 2017.

According to SBA officials, the streamlined application process is less burdensome for firms applying to the 8(a) program.
As part of this modified process, various documents previously used to determine an applicant’s eligibility to participate
in the 8(a) program would no longer be requested or would be required in a modified version. However, shortening the
review process by eliminating documents may erode core safeguards that prevented questionable firms from entering
the 8(a) program. Furthermore, in FY 2016, we initially reported that SBA did not fully document that 30 of 48 firms
were eligible for the 8(a) program. As a result, it was not clear whether these 30 firms should have been approved into
the 8(a) program (Report 16-13). At the request of SBA’s former Deputy Administrator, we conducted a follow-on audit
to determine whether SBA resolved eligibility concerns for the 30 firms. We determined that SBA resolved eligibility
concerns for 20 of the 30 firms that we reviewed. However, we continued to question the eligibility of 10 of the 30

102 AGENCY FINANCIAL REPORT • FY 2018
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firms (Report 17-15). Based on the audit, SBA agreed to add additional controls to the process; however, it has not
implemented any corrective actions during FY 2018.

SBA is responsible for the integrity of the 8(a) program. We urge SBA to ensure that only eligible firms are admitted into
and remain in the program, and that the documentation supporting 8(a) program application approvals is maintained
in a method ensuring clear eligibility of the applicant. A lack of documentation clearly demonstrating eligibility of
applicants or a lack of due diligence by SBA program managers can present evidentiary challenges when pursuing fraud
against SBA and its program participants.

Deficiencies in Continuing Eligibility Processes Expose the 8(a) Program to a Higher Risk of
Fraud
While SBA continues to consider corrective actions to improve safeguards throughout the initial 8(a) eligibility review
process, SBA also needs to implement corrective actions to improve its continuing eligibility review process. In FY 2018,
we reported that SBA’s oversight was insufficient to ensure that 8(a) Business Development Program participants met
continuing eligibility requirements (Report 18-22). We found SBA did not consistently identify ineligible firms in the
8(a) program and did not always act to remove firms it determined were no longer eligible for the program. In addition,
SBA did not perform required continuing eligibility reviews when it received specific and credible complaints regarding
firms’ eligibility and did not log all complaints. We found that 20 of 25 firms we reviewed should have been removed
from the 8(a) program. These firms received $126.8 million in new 8(a) set-aside contract obligations in FY 2017 at the
expense of eligible disadvantaged firms. Until SBA makes improvements to ensure it delivers an effective 8(a) program,
8(a) firms that are ineligible will continue to compete with and receive federal awards that were intended to develop
disadvantaged small businesses.

SBA Dollar Threshold for Economic Disadvantage Not Justified
In March 2011, SBA revised its regulations and established additional standards to address the definition of “economic
disadvantage” as an individual with a net worth of less than $250,000. In FY 2018, a contractor completed a study to
assist SBA in defining or establishing criteria for determining what constitutes “economic disadvantage.” According
to Agency officials, the study concluded that individuals with an adjusted net worth of $375,000 should constitute
“economically disadvantaged.” Based on the results of the study, the Agency is drafting a proposed rule to address
increasing the “economic disadvantage” adjusted net worth.

OIG contends that the Agency should develop objective and reasonable criteria for determining the threshold where
socially disadvantaged individuals face economic disadvantage due to diminished credit and capital opportunities.

Number of Actions Accomplished (Green Status) During Past 4 Fiscal Years
2014: 0 2015: 0 2016: 0 2017: 2
(Challenge first reported in FY 2003)
Status at end
Recommended Actions for FY 2019
of FY 2018
1. Establish objective and reasonable criteria that effectively measure “economic disadvantage” and implement the new criteria. Yellow 
2. Augment and Implement controls that ensure only eligible firms are admitted into the 8(a) program. Yellow 
3. Develop and implement a system to assist program officials in monitoring participants’ progress in the 8(a) Business Development Program
Yellow 
and providing business development needs on an individualized basis.
4. Measure 8(a) Business Development Program participant’s progress on achieving its individualized business development goals and assess
New
program effectiveness.
5. Implement controls to detect ineligible firms in the 8(a) program during the continuing eligibility reviews, effectively address complaints received
New
regarding 8(a) firms, and remove ineligible firms from the 8(a) program timely.

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

AGENCY FINANCIAL REPORT • FY 2018 103
O TH ER I N FO R MAT I O N

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

In FY 2017, the dollar amount of SBA’s 7(a) loan approvals reached a record high of $25.4 billion. Most of these loans are
made by lenders with delegated approval authority. 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 2017, the amount of loans sold on the secondary market totaled approximately $9.4 billion.

Previous OIG audits noted that quality control activities were not being performed at the Centers in accordance with SBA’s
overall Quality Control and Center specific guidance. Also, SBA management emphasized quantity over quality for 7(a) loan
origination reviews, and loan specialists were not provided adequate guidance or training. In addition, OIG 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.

Since the audits, the Office of Capital Access (OCA) improved the quality control program for its loan centers and took
actions to accurately report and reduce improper payments. Also, OCA modified the structure of a key loan center to allow for
appropriate supervision and revised production standards for loan specialists. Further, OCA hired additional staff at the Loan
Guaranty Processing Center, developed training related to corrective actions, and revised its loan review process.

While OCA made substantial improvements, OCA needs to continue to provide evidence that the developed corrective action
plans are effective in reducing improper payments. OCA will also need to demonstrate that its loan centers are staffed with
qualified resources that are appropriately trained and supervised.

SBA Improved Its Quality Control Program to Ensure Timely Implementation of Corrective
Actions
OCA has made significant progress in developing and implementing a quality control program for all of its loan centers to
verify and document compliance with the loan process, from origination to closeout. Additionally, OCA has taken actions to
accurately report and reduce improper payments in SBA’s 7(a) Loan Program. Specifically, OCA has formalized its improper
payment sampling, demonstrated that its improper payments review process is effective for 7(a) loan approvals, and formalized
the recovery process and time standards for 7(a) purchases. In addition, OCA developed corrective action plans for 7(a)
loans, established repayment ability review requirements that are effective at identifying improper payments, revised improper
payment review checklists, and demonstrated recovery from lenders in a timely manner during FY 2016.

In FY 2017, OCA developed enhanced improper payments reporting to monitor root causes and identify operational risk.
These reports inform management on training opportunities and improvements needed in policies and procedures. Further,
the quality control team recommended policy changes in the SOP 50 10 rewrite to reduce improper payments. In FY 2018,
preliminary estimates from the Agency’s statistician indicate that they met their published improper payment reduction target
for 7(a) guaranty purchases.

OCA needs to continue to demonstrate in FY 2019 that the developed corrective action plans are effective in reducing
improper payments.

SBA Improved Staffing, Training, and Supervision at the Loan Approval Center
Program management’s 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. In addition, SBA processing centers often must meet
high demands for production with limited resources, resulting in inventory backlogs and a focus on production activities. For

104 AGENCY FINANCIAL REPORT • FY 2018
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example, a prior OIG report noted that SBA management emphasized quantity over quality for 7(a) loan origination reviews
at the Loan Guaranty Processing Center (LGPC) and that loan specialists were not provided adequate guidance or training to
conduct their 7(a) loan review activities. SBA addressed our recommendations to revise production standards, improve internal
guidance, develop a training plan, and allocate resources to ensure risk is mitigated and quality is emphasized. In doing so, SBA
modified the structure of the LGPC to allow for appropriate supervision. Additionally, the center revised production standards
for loan specialists related to screen outs. SBA will need to continue to demonstrate that the LGPC is appropriately staffed with
qualified resources that are appropriately trained and supervised.

SBA Implemented Corrective Actions to Reduce Improper Payments
As noted above, OCA has taken actions to accurately report and reduce improper payments in SBA’s 7(a) Loan Program.
However, OIG audits have identified 7(a) loans that were ineligible, lacked repayment ability, or were not properly closed,
resulting in improper payments. These improper payments occurred in part because SBA did not adequately review the related
loans.

OIG reviews high-risk loans purchased by SBA to determine whether lenders materially complied with SBA requirements
and to identify suspicious activity. As of September 2018 (Report 18-26), under the OIG’s High Risk 7(a) Loan Review
Program, we reviewed 27 loans with purchase amounts totaling almost $23.2 million. We have recommended recoveries on
11 loans totaling more than $8.5 million. In addition, we identified suspicious activity on five loans totaling nearly $4 million,
resulting in formal referrals to our Investigations Division. Our reviews also have identified concerns with change of ownership
transactions and SBA’s review of improper payments. We recommended that SBA evaluate the time loan specialists must review
complex early-defaulted loans. In response to this recommendation, OCA modified the production standards to allow loan
specialists more time to review complex early defaulted loans. In addition, OCA made improvements to its review of loans by
providing training to loan specialists and updating the loan review checklist.

In FY 2018, OCA continually assessed the inventory and production levels at the loan centers to ensure the appropriateness
of staffing. For example, OCA monitors the loan inventory and reallocates staff as necessary to meet the demand and ensures
that all purchase reviews are being completed in a timely manner. While OCA is working to backfill vacancies at the National
Guaranty Purchase Center (NGPC), the reallocation of staff has allowed the NGPC to continue to meet the demands. In
addition, the quality control team conducts ongoing analyses of loan review decisions to determine root causes of deficiencies
and develop corrective actions. NGPC management and quality control staff provides targeted training to Center staff based on
these analyses.

OCA needs to continue to demonstrate in FY 2019 that the loan centers are appropriately staffed and that the additional time
allotted to loan specialists on complex early-defaulted loans is sufficient to identify complex improper payments.

Actions Accomplished (Green Status) 2014 2015 2016 2017
During Past 4 Fiscal Years 7(a) Approvals: 1 7(a) Approvals: 0 7(a) Approvals: 0 7(a) Approvals: 0
(Challenge first reported FY 2010) 7(a) Purchases: 1 7(a) Purchases: 1 7(a) Purchases: 0 7(a) Purchases: 1
Status at end
Recommended Actions for FY 2019 of FY 2018
7(a) Approvals 7(a) Purchases
1. Demonstrate that corrective action plans are effective in reducing improper payments in the 7(a) Loan Program. Green á Green á
2. Ensure that centers are appropriately staffed with qualified resources that are appropriately trained and supervised
Green á Green á
and 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

AGENCY FINANCIAL REPORT • FY 2018 105
O TH ER I N FO R MAT I O N

Challenge 7: SBA’s Disaster Assistance Program Must Balance Competing Priorities to
Deliver Timely Assistance and Reduce Improper Payments

The disaster loan programs play 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 2017 year-end disaster
assistance loan portfolio balance was $6.2 billion. SBA must balance the priority of delivering timely assistance to disaster
survivors in the immediate aftermath of a devastating life event against the need to ensure program integrity.

In FY 2008, following Hurricane Katrina, new private sector disaster loan programs were statutorily authorized and
were intended to assist in disbursing funds quickly and effectively. SBA has not fully implemented these programs.
The authorizing legislation required SBA to implement guaranteed disaster loan programs in partnership with private
lenders. In FY 2018, two of the programs had their unobligated funding canceled, and SBA is now requesting the same
for the two other programs in FY 2019. After that, SBA plans to seek congressional support for the cessation of program
authority for all four programs. The ability to provide low-interest disaster loans in a timely manner is necessary to help
small businesses and homeowners recover from a declared disaster, which is a key tenet of SBA’s mission—to assist in the
economic recovery of communities after disasters. In October2017, SBA announced the implementation of the Express
Bridge Loan Pilot Program. The pilot program provides a streamlined approach to quickly get emergency financial relief
of up to $25,000 to small businesses in presidentially declared disaster areas. The pilot program is scheduled to run for
three years from October 16, 2017, through September 20, 2020; however as of August 17, 2018, SBA has not approved
or disbursed any loans under this program.

We also are concerned that SBA does not sufficiently 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, taxes, and loan
payments. Loans to borrowers with high debt burdens are more likely to default. On September 6, 2017, ODA increased
MAFD to 75 percent for all income levels without the need to provide justification.

Finally, disaster loans are vulnerable to improper payments, fraud, and default because loan transactions are often
expedited to provide quick relief to disaster survivors. SBA is continually challenged to maintain a low improper payment
rate in this program. Lending personnel hired in connection with a disaster declaration may lack sufficient experience,
and the volume of loan applications may overwhelm SBA’s resources and its ability to exercise careful oversight of lending
transactions. SBA had an increase in its reported improper payment rate from prior years, because of the need to mobilize
a new workforce to respond to large-scale disasters. For example, in response to Hurricanes Harvey, Irma, and Maria,
ODA increased trained staff from 800 to its peak of 5,094 on December 13, 2017. ODA increased trained staff at all five
of its centers in response to the three hurricanes.

Private Lender Programs Intended to Quickly Disburse Disaster Funds Not Implemented
Following Hurricane Katrina, congressional representatives expressed concern that SBA did not effectively develop and
use programmatic innovations intended to assist in disbursing funds quickly and effectively. The Small Business Disaster
Response and Loan Improvements Act of 2008 required SBA to establish three new guaranteed disaster programs
using private sector lenders—Expedited Disaster Assistance Program (EDAP), the Private Disaster Assistance Program
(PDAP), and the Immediate Disaster Assistance Program (IDAP). Together, these programs are collectively known as the
“Guaranteed Disaster Assistance Programs.”

While SBA established regulations and procedures to deliver IDAP, it did not do so for the EDAP and PDAP. SBA
notified Congress that it had sought advance public comment on proposed rulemaking and received limited responses,
most which were opposed to their implementation. SBA also reported that its partner lenders chose not to participate.
Therefore, SBA is in the process of seeking rescission of these three programs. As SBA requested, the Appropriations Act
of 2018 included permanent cancelation of $2.6 million in unobligated funding for IDAP and EDAP. SBA has requested
rescission of the remaining PDAP program in its FY 2019 Congressional Budget Justification. SBA officials expect that

106 AGENCY FINANCIAL REPORT • FY 2018
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Congress will follow the precedent set last year and permanently cancel PDAP in the Appropriations Act of 2019. After
that, SBA plans to seek congressional support for cessation of program authority for all three guaranteed disaster loan
programs. OIG notes that GAO has closed all audit recommendations related to these programs.

SBA indicated that it has improved its disaster assistance delivery channel and is now better equipped to provide more
timely disaster assistance. The Agency also indicated that its larger unsecured disaster loan limit, now at $25,000, allows
more funds to be disbursed quickly following a disaster.

Express Recovery Opportunity Loan Program Not Implemented
The RISE After Disaster Act, enacted November 25, 2015, introduced the Express Recovery Opportunity Loan Program
that was intended to leverage private sector resources to quickly provide up to $150,000 loans to disaster survivors. The
Act required SBA to promulgate regulations for this loan program within 270 days, which was not done.

In FY 2017, SBA studied this proposed program and concluded that it duplicates the existing SBA Express Loan
Program, and cannot be delivered as designed without subsidy costs, which puts the entire SBA Express Loan Program
at risk due to an extended eligibility period. SBA determined that this program could not be delivered at zero subsidy
with the fee structure that was enacted. SBA also believes that the proposed five-year disaster eligibility period will cause
lenders to shift ordinary Express loans to Recovery Express loans due to the higher guarantee rate, exposing SBA to
greater risk and endangering the program. SBA requested rescission of the program in its FY 2019 Congressional Budget
Justification and has deferred creation of program regulations. SBA plans to seek congressional support for cessation of
this program.

On October 16, 2017 SBA announced the implementation of the Express Bridge Loan Pilot Program. The pilot program
adopts some of the objectives included in the RISE Express Recovery Opportunity Loan Program, without duplicating
or endangering the existing SBA program. It provided a streamlined approach to quickly get emergency financial relief
of up to $25,000 to small businesses in presidentially declared disaster areas. This is in the form of expedited guaranteed
bridge loan financing for disaster-related purposes, while small businesses apply for and await long term financing. SBA is
running the pilot program for three years from October 16, 2017, through September 20, 2020. As of August 17, 2018,
SBA has not approved or disbursed any loans under the pilot program.

Increased Maximum Acceptable Fixed Debt Threshold May Limit Borrower’s Ability to Repay
Disaster Loans
SBA uses the fixed debt method to determine disaster home loan affordability. This method assumes that there is a
debt threshold, known as the maximum acceptable fixed debt (MAFD) beyond which loans become unaffordable and
likely to default. Prior to November 2012, there were two MAFD tiers: 36 percent for incomes below $25,000 and 40
percent for incomes above $25,000. A November 2012 policy memorandum increased the number of tiers and raised
MAFD to 50 percent for incomes of $60,000 and above. The policy memorandum, later incorporated into SOP 50 30
8, also diminished the level of authorization required to approve loans that do not conform to the established MAFD
percentages. The provisions of policy memorandum have since been incorporated into SOP 50 30 8, Disaster Assistance,
issued in July 2015.

On September 6, 2017, ODA issued Memo 17-22, New Credit Model Pilot, effective for all disasters declared on or after
August 25, 2017. The memo provides increasing MAFD to 75 percent for all income levels without the need to provide
justification, increasing the thresholds for RAPID loan processing to credit score of 670 and income of at least $50,000,
and increasing the auto-decline threshold from a credit score of 539 to 569. ODA asserted in the FY 2017 Annual
Financial Report that the increase in MAFD was warranted based on 24 months of working closely with a third-party
consulting firm. According to ODA, the firm validated that increased MAFD percentage limits will have an insignificant
impact on the loan portfolio’s loss rate. On May 31, 2018, ODA issued SOP 50 30 9, which has incorporated the
provisions of Memo 17-22.

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O TH ER I N FO R MAT I O N

ODA believes that credit score is more of an indicator of charge-off likelihood than any other factor. Further, the data
supports decreasing emphasis on debt to income (DTI) as it relates to the ODA decision-making process. It is for this
reason that ODA now considers credit score and income as the primary factors to determine repayment ability. When
ODA is unable to make a decision based on these factors, ODA will use a DTI calculation, allowing up to 75 percent.
OIG recently commenced an audit to assess ODA’s MAFD and determine its potential impact on the charge-off rate.

Reserve Staff Require Training to Sustain Productivity During Mobilization
During large-scale disasters such as Hurricanes Sandy and Harvey, SBA must bring on new loan officers and loss verifiers
to match the volume of loan applications and prevent processing backlogs that delay the delivery of disaster assistance.
In response to Hurricanes Harvey, Irma, and Maria, ODA increased trained staff from 800 to its peak of 5,094 on
December 13, 2017. This included the Processing and Disbursement Center, which increased staff by more than
700, Field Operations Centers East and West combined increased by more than 360, the Damage Verification Center
increased by more than 200, and the Customer Service Center increased by more than 130. ODA trained over 1,000
loan processing staff and 600 loss verifiers to mobilize in response to the hurricanes. In addition, ODA deployed 1,500
field personnel and staffed more than 443 disaster centers in response to the three hurricanes.

On May 31, 2018, ODA completed an After Action Report for Hurricanes Harvey, Irma, and Maria, which identified
successes, challenges, and action items. As a result, ODA launched a cross-functional Training Plan Development Team that
is developing core training modules, as well as online and automated tutorials. In FY 2019 SBA should monitor its results
and refine its training approach, if needed, depending on the results of the Hurricanes Harvey and Irma disaster cycles.

Improper Payment Rate Remains Above IPERA Significance Threshold
SBA’s improper payment rate for the Disaster Direct Loan Program disbursements increased from 5.32 ($18.4 million)
in FY 2016 to 13.65 percent ($123.38 million) in FY 2017, The Agency asserted the rate increase was anticipated due to
larger disaster volume and less experienced staff. OMB Memorandum M-15-2 requires agencies to identify the reasons
their programs or activities are at risk in developing their corrective action plan. Furthermore, it states that, for programs
susceptible to significant improper payments, agencies should identify the root causes of the improper payments, and
implement appropriate, robust corrective actions to prevent and reduce the related improper payments. To reduce
disaster loan improper payments, 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. While SBA
has made progress in reducing improper payments in the disaster loan programs, our ongoing audit work indicates that
further improvements are needed. In FY 2019, SBA needs to continue to meet its improper payment reduction targets.

Actions Accomplished (Green Status) During Past 4 Fiscal Years
2014: 0 2015: 0 2016: 0 2017: 0
(Challenge first reported FY 2015)
Status at end of
Recommended Actions for FY 2019
FY 2018
OCA
1. Promulgate regulations for the new guaranteed disaster loan programs mandated by Congress in 2008
Yellow
OCA
2. Promulgate regulations for the Express Recovery Opportunity loan program provided by the RISE After Disaster Act.
Yellow

3. Demonstrate that the Agency has adequately trained loan processing staff that can be quickly mobilized in the event of a disaster and refine its ODA
training approach, if needed, depending on the results of the Hurricanes Harvey, Irma, and Maria disaster loan cycles. Green á
ODA
4. Strengthen internal controls to minimize the risk of charge-offs associated with the increased MAFD threshold.
Yellow

5. Reduce the improper payment rate to meet the reduction targets in FY 2018, in accordance with the FY 2017 Agency Financial Report to ODA
comply with the Improper Payments Elimination and Recovery Improvement Act of 2012. Orange 

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

108 AGENCY FINANCIAL REPORT • FY 2018
OT H ER INFOR MATI ON

Challenge 8: SBA Needs Robust Oversight of Its Grant Management

In FY 2018, SBA administered over $247 million in grants and cooperative agreements to its resource partners and
other nonfederal entities to provide technical assistance and training programs to develop small businesses. With recent
governmentwide emphasis on grant management reform, it is SBA’s responsibility to develop processes and policies to
ensure its grant programs effectively and efficiently accomplish program objectives. However, OIG reviews of SBA’s grant
programs continue to identify significant systemic deficiencies in SBA’s grant management. Specifically, we identified
systemic issues with SBA’s accuracy of grant data for both financial and performance reporting, ineffective oversight, and
inadequate standard operating procedures.

Data Accuracy Concerns
SBA’s issues with grant program data quality affects SBA’s ability to report timely, complete, and accurate information
as required by the Digital Accountability and Transparency Act of 2014. In a management advisory memorandum
(Report 18-15), we reported on the material weakness identified by an independent accounting firm pertaining to SBA’s
controls over the accuracy of data reported on USASpending.gov. Overall, the firm reported a 32 percent error rate for
the transactions it reviewed, including procurement, grants, and disaster business loans. However, of the 72 randomly
selected grant transactions, the firm found 64, or 89 percent, had inaccuracies reported in USASpending.gov. Further, in
its own internal A-123 review on the grant management process used by the Office of Grant Management, the Agency
component responsible for administering most of SBA’s grants, SBA’s internal auditors found that 100 percent of the
sampled transactions contained inaccuracies. Without accurate reporting in USASpending.gov, policymakers and the
public cannot effectively track federal spending.

Inadequate Oversight of Grant Recipient’s Use of Federal Funds and Grant Program
Performance
As stewards of taxpayer funds, SBA needs to make substantial improvements to its grant management processes and
procedures to ensure the funds are used for allocable, allowable, and reasonable expenditures. We identified systemic
issues with SBA’s oversight of grant recipients’ use of federal funds. These included SBA not enforcing financial reporting
requirements, not detecting grant recipient budget reallocations, using weak financial review procedures, and missing
supporting documentation. Further, SBA did not have adequate controls to ensure it completes grant closeouts in
accordance with federal regulations, recently brought to the forefront for federal grant management with recent reporting
requirements in Grants Oversight and New Efficiency Act. Without more robust review procedures, SBA’s programs are
at risk of funds not being used for their intended purpose.

Further, recent OIG reviews of SBA’s grant programs continue to identify significant weaknesses within SBA’s oversight
of its grant program performance. Specifically, we’ve found that SBA did not ensure that performance data was accurate
or complete, that recipients provided sufficient supporting documentation for its reported performance, that it enforced
performance reporting requirements, and that it performed comprehensive review procedures. Without accurate and
complete performance reporting and comprehensive reviews of performance reports, SBA risks its grant programs not
achieving the intended results. Moreover, OIG consistently reports that SBA did not ensure that performance measures
adhered to Government Performance and Results Modernization Act of 2010. Further, without outcome-based
measurements, SBA cannot determine whether the program achieved its intended impact.

Organizational Structure Challenges
SBA’s decentralized grant management function further perpetuates the inefficiencies found in SBA’s grant management
process. Currently, SBA has three offices that award, monitor, and close out grants. These offices use separate policies
and procedures to manage Agency grants. Though the three offices all perform the same responsibilities, there is no
overarching office or official responsible for ensuring that the various grant-making components adhere to federal

AGENCY FINANCIAL REPORT • FY 2018 109
O TH ER I N FO R MAT I O N

laws and regulations, grant officers are adequately trained, or that process and procedures used to award and monitor
grants are efficient and effective. Because the grant management function is not aligned under a centralized office,
implementing corrective measures to minimize the impact of the systemic issues and sustaining the corrective actions
continues to be a challenge for SBA. In recognizing common issues throughout its grants programs, SBA management
should collaborate to foster agency wide improvements to ensure federal funds are used for its intended purposes and that
its programs achieve intended results.

Planned Improvements
The Office of Grants Management officials acknowledged that there are systemic issues within its grant management
processes and plan to address these issues by implementing a new grant management system, implementing policies
to establish an overarching oversight function for all of SBA’s grants, establishing new training requirements for
grants officers, and focusing resources on closing out grants to comply with Grants Oversight and New Efficiency Act
requirements.

New Challenge for FY 2019 2014: N/A 2015: N/A 2016: N/A 2017: N/A
Status at end
Recommended Actions for FY 2019
of FY 2018
1. Conduct an overall evaluation of its grant management organizational structure with an emphasis on centralizing the oversight of these
New
programs in order to reduce and ultimately eliminate systemic issues for maximum program success.
2. Implement a system to effectively manage and monitor grant awards, to include a process for ensuring the data submitted to USASpending.
New
gov complies with DATA Act requirements.
3. Update grant management policies and procedures to ensure grant officers enforce grant recipients comply with financial and
performance requirements, verify that reported information is accurate and complete, and ensure applicants’ proposals include plans to New
measure performance in a way that will help SBA achieve program outcomes.
4. Establish training requirements for all grants officers and program personnel responsible for monitoring grant recipients performance
to enforce compliance with SBA’s established procedures for grant management and best practices for administering grant awards and New
monitoring performance. The training should address the systemic issues we identified in this summary report.

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

110 AGENCY FINANCIAL REPORT • FY 2018
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PAYMENT INTEGRITY
As required by the Improper Payment Information Act At the beginning of FY 2016 the OMB designated
of 2002 (IPIA), as amended, and OMB Circular No. the 7(a) Loan Guaranty Approvals program as a high-
123, Appendix C, Requirements for Payment Integrity priority program based on the estimated improper
Improvement, the SBA reviews programs identified as payments of $848 million in FY 2015, which exceeded
susceptible to improper payments. the OMB’s high-priority threshold of $750 million.
In both FY 2016 and FY 2017, the improper payment
Improper payment reviews are a multi-layered process amount fell below the threshold and in FY 2018 OMB
that start with a risk assessment. If an assessment approved a rescission of the designation of high-priority
indicates a program is susceptible to improper payments, for this program.
then testing is performed using a statistically valid
sampling technique. Based upon the testing results, a The Additional Supplemental Appropriations for
corrective action plan is determined for the types of Disaster Relief Requirements Act, 2017 outlined
errors uncovered. If a significant amount of recoverable reporting requirements for disaster relief funds provided
dollars is found, the SBA considers the appropriateness to certain agencies including the SBA in response to
of performing a recapture audit. hurricanes Harvey, Irma and Maria. The Act deemed all
supplemental funds in response to those hurricanes as
The detection and remediation of improper payments susceptible to significant improper payments regardless
is a priority for the Agency. SBA staff monitor and of risk assessment results; therefore agencies are required
review for improper payments and are charged to report an improper payment estimate for the funds.
with implementing improvements that will reduce The SBA received the first of two supplemental funds
improper payment rates. The SBA also continually in September 2017 for the Disaster direct loan program
seeks opportunities to enhance and implement internal and administrative expenses of disbursements of goods
controls to reduce the risk for improper payments. and services, payroll, purchase cards, and travel related
to the Disaster direct loan program. The second of the
The SBA reviewed five programs and activities that are
supplemental funds was received in February 2018. In
deemed susceptible to significant improper payments
order to have a full year of activity to test for improper
that included three major credit programs as mandated
payments (from September 2017 through August 2018),
by OMB, and disbursements for goods and services. The
SBA will begin its additional reporting of Disaster
three major credit programs are:
administrative funds of payroll, travel and purchase cards
7(a) business loan program that includes guaranty in FY 2019.
purchases and guaranty approvals;
The next sections discuss SBA efforts and results
504 certified development company (CDC) loan related to improper payment assessments and reviews.
guaranty approvals; and More detailed information on improper payments and
Disaster direct loan disbursements. information previously reported in the AFR that is not
included in the FY 2018 AFR can be found at https://
paymentaccuracy.gov/.

AGENCY FINANCIAL REPORT • FY 2018 111
O TH ER I N FO R MAT I O N

Parts I and VII - Payment Reporting and Statistical Sampling

Payment Reporting
Table 1 presents a summary of SBA’s improper payment review results and reduction outlook. There is no improper
payment made by the recipients of Federal money under SBA programs as the SBA does not have an intermediary.

TABLE 1: Improper Payment Reporting and Reduction Outlook (Dollars in Millions)

FY 2017 FY 2018 FY 2019
Program Outlays 1
IP IP Outlays1
IP IP Over-paid Under-paid Over-paid Under-paid Outlays 1
IP IP
$ % $ $ % $ % % $ $ $ % $

7(a) Guaranty
655.56 4.32 28.35 689.2 3.22 22.18 2.55 0.67 17.57 4.61 653.16 3.12 20.38
Purchases1, 2
7(a) Guaranty
18,115.96 1.29 233.87 18,746.77 2.77 519.40 2.77 0.00 519.40 0.00 20,146.85 2.67 537.92
Approvals1,2,3
504 CDC Guaranty
4,947.60 1.20 59.16 4,583.91 2.58 118.14 2.58 0.00 118.14 0.00 4,736.71 2.48 117.47
Approvals1, 2
Disaster Loan
903.88 13.65 123.38 3,080.23 8.91 274.41 8.68 0.23 267.23 7.18 2,000.00 8.02 160.40
Disbursements1, 4
Disbursements for
110.21 4.99 5.49 120.34 1.88 2.26 1.84 0.04 2.22 0.04 125.44 1.78 2.23
Goods and Services2

Total5 24,733.21 1.82 450.25 27,220.45 3.44 936.39 3.40 0.04 924.56 11.83 27,662.16 3.03 838.40

1 Outlays in this report represent the base amount of the program activity related to SBA improper payments. This amount will differ from the amount reported as outlays in SBA’s President’s
Budget submissions because that report includes 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 loan guaranty approvals are irrespective of disbursement, net of approval increases, decreases, reinstatements and cancellations for the current year. Outlay figures
for Disaster loan disbursements for current year approvals.
2 Outlay projections do not match the President’s Budget as the timeframe is not the fiscal year. Outlays are estimated by taking the average growth rate in outlays for the previous three years and
applying it to the current level of outlays to project future year outlays.
3 For 7(a) loan guaranty approvals, amounts reported are based on the guarantied amount only.
4 Outlay projections do not match the President’s Budget as the timeframe is not the fiscal year. FY 2019 loan approvals are based on actual FY 2018 Quarter 4 loan disbursements ($620M), and
projected quarterly loan approvals for the remaining FY 2019 due to additional major 2018 hurricane disasters (Hurricanes Florence and Michael).
5 Total improper payment estimates and improper payment percentages do not represent a true statistical estimate for the Agency.

Table 2 presents a summary of the root causes of SBA’s improper payments.

TABLE 2: Improper Payment Root Cause Categories by Program Matrix (Dollars In Millions)
7(a) Guaranty 7(a) Guaranty 504 CDC Guaranty Disaster Direct Loan Disbursements for
Purchases Approvals Approvals Disbursements Goods and Services
Reason for Improper Payment
Over Under Over Under Over Under Over Under Over Under
payment payment payment payment payment payment payment payment payment payment
Program Design or Structural Issue
Inability to Authenticate Eligibility 519.40 118.14 136.52 7.18
Death Data
Financial Data
Failure to Verify: Excluded Party Data
Prisoner Data
Other Eligibility Data
Federal Agency 17.57 4.61 130.71 267.23 7.18
Administrative/
Process Error State or Local Agency
Made by:
Other Party
Medical Necessity
Insufficient Documentation to Determine 0.66
Total Estimated Improper Payments 17.57 4.61 519.40 0.00 118.14 0.00 267.23 7.18 2.22 0.04

112 AGENCY FINANCIAL REPORT • FY 2018
OT H ER INFOR MATI ON

To provide more clarity for the reader, this section is Lender collection had not been fully exhausted;
organized by the five programs subjected to review for Change of ownership did not comply with policy
improper payments and provides statistical sampling requirements;
information and review results coupled with corrective
The debt being refinanced with loan proceeds were
actions.
not eligible for refinance;

7(A) LOAN GUARANTY PURCHASES Lender failed to record/perfect the lien required by
the Loan Authorization on the property required to
Statistical Sampling be taken as collateral for the loan, and that failure
Using Probability Proportional to Size sampling with caused a material loss on the loan;
replacement, the 7(a) purchase sample cases were chosen Reimbursement of lender expenses were not fully
from all purchases approved during the 12-month period justified or ineligible;
ending March 31, 2018. The purchase population was Ineligible use of proceeds with working capital being
divided into four strata based on the following factors: distributed to the Eligible Passive Company;
1) whether the loan was considered an early default,
regardless of servicing office, and 2) which servicing office
Incorrect payment of interest due to miscalculation
of days owed; and
processed the purchase among three locations. The SBA
determined the appropriate total sample size to be 220 Inaccurate interest rate
loans from the population. The sample included aggregate
As a means to reduce and/or eliminate the occurrence
purchase outlays of $182,091,737 and an absolute value
of future improper payments, a Corrective Action Plan
of improper payments of $5,572,880 within the sample.
has been formalized for the 7(a) loan guaranty purchase
Using the Hansen-Hurwitz estimation method, the
centers. Specific corrective actions are determined based
estimated improper payment rate for the 7(a) guaranty
upon the primary reason for the error with the purpose of
purchase population was calculated as 3.22 percent. This
both remedying the error and ensuring the error does not
represents a decrease from the 4.32 percent reported in
occur in the future. Plans for improvement include:
FY 2017. The decrease is primarily due to continuous
training of the purchase processors, reviewers and Internal training for purchase processors, reviewers
approvers as well as the Quality Control program review. and approvers to determine proper exhaustion of
lender collection; proper determination of change
The 7(a) loan guaranty purchase reviews were conducted
of ownership requirements, proper determination of
to examine if the lender complied materially with the
debt refinance debt eligibility, proper determination
7(a) loan program origination requirements including
of lien perfection appropriate lender expenses, the
statutory provisions, SBA regulations, any agreement
appropriate number of days interest owed, and the
the lender executed with the SBA, standard operating
proper interest rate;
procedures, loan authorizations, and official SBA notices
and forms applicable to the 7(a) loan program. The Recovery of lender expenses that were not fully
reviews were to determine if the lender (1) originated, justified and deemed ineligible.
serviced, and liquidated the loan in a prudent and
The corrective actions are currently underway. Similar
commercially reasonable manner, (2) misrepresented or
to the corrective action performed in FY 2018, internal
failed to disclose a material fact to the SBA, and/or (3)
feedback was provided to center staff regarding the
put the SBA’s financial interest at risk.
specific loan level deficiency upon detection. The Center
experienced an upsurge of purchase recommenders that
Corrective Action were new in their role; this feedback and internal training
The root cause for all 7(a) loan guaranty purchase has been specifically designed to prevent future errors.
improper payments were administrative/process errors The internal training will be provided by the end of the
made by the Agency. Improper payments generally arose first quarter of FY 2019.
when new purchase processors failed to identify material
lender deficiencies in the handling of an SBA guaranteed Corrective actions are tracked at the loan level through a
loan and made administrative errors in the purchasing centralized database. The Quality Control Specialists for
process. The primary reasons for purchase errors included: the 7(a) guaranty purchase centers monitor errors from

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identification through completion of the corrective action. requirements. The primary reasons for 7(a) approval
Headquarters management provides oversight to ensure errors in FY 2018 included:
milestones are met. All improper payments identified as a
result of the FY 2018 IPERIA reviews have been resolved Collateral policy requirements were not satisfied;
through obtaining additional documentation, collection Borrowing business type did not meet policy
of funds from the lender, or reimbursement to the lender. requirements;
Corrective actions were generally completed at the loan Proper determination of debt refinance debt
level within 60 days with all actions taken by the end of eligibility were not met;
the fiscal year.
Lender did not comply with policies prohibiting the
use of an SBA guarantee loan to reduce its risk of
7(A) LOAN GUARANTY APPROVALS potential losses;
Statistical Sampling Policy requirements governing prior loss to the
Using PPS sampling with replacement, the 7(a) approval government were not satisfied; and
sample cases were chosen from all loan guaranties Lack of appropriate documentation for eligibility
approved during the 12-month period ending March verification.
31, 2018. The approval population was divided into two
strata based on whether the loan was SBA Express or not. As a means to reduce and/or eliminate the occurrence
The SBA determined the appropriate total sample size to of future improper payments, a Corrective Action Plan
be 206 loans from the population. The sample included has been formalized for the 7(a) loan guaranty approval
net guaranteed approvals of $262,061,488 and improper centers. Specific corrective actions are determined
payments of $6,463,665 within the sample. Using the based upon the primary reason for the error with the
Hansen-Hurwitz estimation method, the estimated purpose of both remedying the error and ensuring
improper payments rate for the 7(a) Loan Guaranty the error does not occur in the future. Plans for
Approvals was calculated as 2.77 percent. This represents improvement include:
an increase from the FY 2017 rate of 1.29. The increase is
Collaborating with the Office of Credit Risk
primarily due to delegated lenders not providing sufficient
Management to ensure specific lender deficiencies
documentation for eligibility verification and policy
are monitored and incorporated into Risk Based
requirements not being met.
Reviews;
The 7(a) loan guaranty approval reviews were conducted Internal training for approval processors, reviewers
to examine if the lender complied materially with the and approvers to determine proper debt refinance
7(a) loan program origination requirements including eligibility;
statutory provisions, SBA regulations, any agreement External training for lenders on obtaining and
the lender executed with the SBA, standard operating analyzing appropriate documentation prior to loan
procedures, loan authorizations, and official SBA notices approval, application of collateral requirement policy,
and forms applicable to the 7(a) loan program. The policy requirements governing eligible/ineligible
reviews were to determine if the lender (1) originated the business types, application of lender preference policy
loan in a prudent and commercially reasonable manner, requirements, and policy requirement governing
(2) misrepresented or failed to disclose a material fact to prior loss to the government.
the SBA, and/or (3) put SBA’s financial interest at risk.
The corrective actions are currently underway. OFPO
Corrective Action intends to share the loan level and lender deficiencies
identified during the reviews with OCRM in October
Approximately 80 percent of all 7(a) loan guarantee
2018, and will continue its efforts to ensure lender
approvals are performed by lenders with delegated
deficiencies are monitored and incorporated into lenders’
authority; these lenders were responsible for all but one
Risk Based Reviews. External training will be provided by
identified improper payment approvals in FY 2018.
the end of the first quarter of FY 2019.
The most prevalent root cause stemmed from the
delegated lenders’ failure to authenticate borrowers’ Specific corrective actions on loans reviewed are tracked at
eligibility at origination in compliance with loan program the loan level through a centralized database. The Quality

114 AGENCY FINANCIAL REPORT • FY 2018
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Control Specialist for 7(a) loan guaranty approvals Policy requirements of obtaining appropriate loan
monitors errors from identification through completion of guarantees were not met.
the corrective action. Headquarters management provides
oversight to ensure milestones are met. All improper As a means to reduce and/or eliminate the occurrence
payments identified as a result of the FY 2018 IPERIA of future improper payments, a Corrective Action Plan
reviews have been resolved through obtaining additional has been formalized for the 504 approval center. Specific
documentation, loan modification, or cancellation of corrective actions are determined based upon the primary
the loan guaranty. Corrective actions were generally reason for the error with the purpose of both remedying
completed at the loan level within 60 days with all actions the error and ensuring the error does not occur in the
taken by the end of the fiscal year. future. Plans for improvement include:

Collaborating with the Office of Credit Risk
504 CDC LOAN GUARANTY APPROVALS Management to ensure specific lender deficiencies
Statistical Sampling are monitored and incorporated into Risk Based
Reviews;
Using PPS sampling with replacement, the 504 CDC
approval sample cases were chosen from all loan Internal training for approval processors, reviewers
guaranties approved during the 12-month period ending and approvers to ensure appropriate documentation
March 31, 2017. The approval population was not is obtained and analyzed prior to loan approval; and
stratified. The SBA determined the appropriate total External training for lenders to ensure appropriate
sample size to be 194 loans from the population. The documentation is obtained and analyzed prior to loan
sample included net approval outlays of $344,968,000 approval and to ensure that proper loan guarantees
and improper payments of $5,939,000 within the are obtained.
sample. Using the Hansen-Hurwitz estimation method,
the estimated improper payments rate for the 504 CDC The corrective actions are currently underway. OFPO
loan guaranty approvals was calculated as 2.58 percent. intends to share the loan level and lender deficiencies
This represents an increase from the FY 2017 rate of 1.20 identified during the reviews with OCRM in October
percent which was primarily due to CDC’s not providing 2018, and will continue its efforts to ensure CDC
appropriate documentation for loan eligibility. deficiencies are monitored and incorporated into lenders’
Risk Based Reviews. External training will be provided by
The 504 CDC loan approval reviews were conducted the end of the first quarter of FY 2019.
to examine if the lender complied materially with the
program’s origination requirements including statutory Specific corrective actions on loans reviewed are tracked at
provisions, SBA regulations, any agreement the CDC the loan level through a centralized database. The Quality
executed with the SBA, standard operating procedures, Control Specialist for 504 approvals monitors errors from
loan authorizations, and official SBA notices and forms identification through completion of the corrective action.
applicable to the 504 CDC loan program. The reviews Headquarters management provides oversight to ensure
were to determine if the CDC (1) originated the loan milestones are met. All improper payments identified
in a prudent and commercially reasonable manner, (2) as a result of the FY 2018 IPERIA reviews have been
misrepresented or failed to disclose a material fact to the resolved through obtaining additional documentation
SBA, and/or (3) put SBA’s financial interest at risk. and reduction and cancellation of the loan guaranty.
Corrective actions were generally completed at the loan
Corrective Action level within 60 days with all actions taken by the end of
the fiscal year.
The most prevalent root cause stemmed from the
CDC’s failure to authenticate borrowers’ eligibility DISASTER DIRECT LOAN PROGRAM
at origination in compliance with loan program
requirements. The primary reasons for 504 approval Statistical Sampling
errors in FY 2018 included: The Office of Disaster Assistance performs a Quality
Assurance Review of the approved loan portfolio annually.
Lack of appropriate documentation for eligibility
A part of the QAR is to identify any deficiency that
verification; and
would result in an improper payment. The scope of the

AGENCY FINANCIAL REPORT • FY 2018 115
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ODA’s review covers three primary compliance areas: DISBURSEMENTS FOR GOODS AND SERVICES
(1) basic eligibility; (2) adherence to relevant laws, rules,
Statistical Sampling
regulations, and standard operating procedures; and
(3) credit worthiness. The statistical methodology used Disbursements for goods and services samples were
followed widely accepted practices and was approved chosen using PPS with replacement methodology from
by the Office of Management and Budget in 2012. The payments completed during the 12 months ending March
review population consisted of disaster loan disbursements 31, 2018. The total number of disbursements was 3,387
made during the 12-month period ending June 30, and the total dollar amount was $120,340,599. The
2018, with total disbursements of $3,080,233,914. A SBA determined the appropriate sample size to be 207
sample of 1,315 payments was selected for testing which unique invoices having total outlays of $44,574,392. The
yielded a weighted estimated improper payment rate of scope of the review covered three areas: invoice accuracy,
8.91 percent. Based on the sample results, the estimated compliance with contract terms, and accuracy of invoice
amount of improper payments was $274,408,945. The processing. Based upon the sample results, the estimated
decrease from the FY 2017 rate of 13.65 percent can be FY 2018 disbursements for goods and services improper
attributed to a focus on evaluating what makes a payment payment rate is 1.88 percent for an estimated total of
improper and improving controls over the underwriting $2,260,963. This represents a reduction in the improper
and disbursement process. payment rate and dollars over the last fiscal year, which
reported a rate of 4.99 percent and $5 million. The
Corrective Action primary reason for the reduction was the implementation
of an internal control program which enhanced the
In FY 2018, the most prevalent root cause for the
quality of contract documentation and provided a more
Disaster direct loan improper payments stemmed
thorough review process of invoices prior to payment.
from administrative and documentation errors. The
lack of insurance documentation continues to have a
Corrective Action
significant impact on the elimination and reduction
of errors. ODA plans to focus its resources to expand The improper payment amount of $2,260,963 does not
and intensify corrective actions to prevent this type of exceed the $10 million threshold for reporting a corrective
improper payment by: action plan.

Employing the professional training staff from
the Office of Disaster Strategic Engagement and Part II - Recapture of Improper Payments
Effectiveness to assist in the creation of effective Reporting
insurance review training materials and assist
the trainers in the Accounts Department in the Payment Recovery Effort
presentation of training materials; Agency efforts to recapture improper payments are
Requiring all training materials be reviewed and discussed by program.
approved by SBA headquarters;
Expanding training efforts to include one-on-one 7(A) LOAN PROGRAM PURCHASES
training with Lead Case Managers; and Overpayments identified in the improper payments
Including specific results-driven performance reviews are recaptured from the lender. The Quality
elements tied to reducing the improper payment Control staff tracks and collects any monetary
rate in the FY 2019 performance plans for the overpayment. Refer to Part I above for corrective action
Director and Deputy Director of the Processing and plans to prevent future improper payments.
Disbursement Center, Assistant Center Director for
Application Processing and Assistant Center Director 7(A) LOAN PROGRAM APPROVALS AND 504
for Accounts. LOAN GUARANTY APPROVALS
Overpayments recaptured outside of payment recapture
The corrective actions will be monitored on a bi-weekly audits are not applicable to 7(a) loan guaranty approval
basis by the Deputy Associate Administrator for Disaster and 504 CDC loan approval as no payment is made at the
Assistance. time of approval. Improper payments identified through

116 AGENCY FINANCIAL REPORT • FY 2018
OT H ER INFOR MATI ON

both the annual improper payment and continuous Financing Guarantee Program (SBIC), the Surety Bond
quality control reviews are remediated through the Guarantee Program, and Grants, which included all
cancellation of the SBA guaranty, reduction in loan grant programs. The analysis described the program, the
guaranty percentage, or loan modification, as appropriate. controls over financial disbursements, and the size of the
This determination is made on a case-by-case basis, which program and concluded for each program that recapture
varies substantially depending on the circumstances of the audits would not be cost effective due to low error rates,
loan approval and lender authority. complexity of the program, or limited amount of outlays.
A subsequent cost analysis for the 7(a) loan guarantee
DISASTER DIRECT LOAN PROGRAM purchase program was submitted to OMB on September
Overpayments are the result of the borrower receiving 13, 2017, to include the results of a payment recapture
both a SBA loan and insurance payments or other benefits audit performed in 2015 which again concluded that such
received as a result of the disaster. If the duplication of an audit is not cost effective.
benefit is recognized prior to the final disbursement, the
The specific justification and analysis are discussed by
loan amount is modified to reflect a lower amount and
program.
no repayment is required. If the duplication of benefit
is identified after the final disbursement of the loan, 7(a) loan guaranty purchase improper payment reviews,
then the borrower is given 30 days to provide evidence continuous Quality Control Reviews, and OMB Circular
to prove that the disaster loan was not over-disbursed. A-123 Appendix A reviews in FY 2014 warranted a
For example, the borrower can provide documentation reconsideration of the cost effectiveness of a payment
demonstrating that insurance funds received did not recapture audit. In FY 2015, the SBA performed a
duplicate the disaster loan purpose. If the borrower payment recapture audit for the 7(a) Loan Guarantee
has not provided the appropriate evidence within the Purchase program and the results revealed that the cost
30-day period a demand is made for the over-disbursed of labor hours for performing and reporting the payment
funds. Collection efforts continue at the Disaster loan recapture audit exceeded the actual overpayments
servicing centers, but if these efforts fail, the borrower identified. This was reported in the FY 2015 AFR with
will still be liable for the over-disbursed amount in the the statement that no additional payment recapture
form of monthly payments in accordance with the loan audits would be performed. In September 2017 the
agreement. Thus, any actual loss, if any, is the cost of SBA submitted a cost analysis to OMB and the OIG to
funds related to the over disbursement. support this decision.

DISBURSEMENTS FOR GOODS AND 7(a) loan guaranty approval and 504 CDC loan
SERVICES approval are not subject to payment recapture audits as
The SBA thoroughly analyzed the condition of each no payment is made at the time of approval.
improper payment identified during the improper
Disaster direct loans recapture audits would not be
payment review of the disbursements for goods and
cost effective as improper payments are generally the
services and issued demand letters for repayment or credit
result of loan documentation errors; such errors rarely,
on future invoices from the responsible vendors to recoup
if ever result in a disaster survivor receiving funds for
the overpayments as applicable. The SBA will continue to
which they are not eligible. Improper payments are not
monitor internal controls in place to further reduce the
recovered upon discovery but realized as the borrower
improper payment rate.
makes each payment on the loan. Further, the majority
of loans are collateralized which promotes maximum
Payment Recapture Audits
recovery. Less often than documentation errors, is the
On September 15, 2011, the SBA submitted a Payment identification of duplication of benefit, which occurs
Recapture Audit Cost-Effective Analysis to the Office of when a borrower receives insurance or another benefit
Management and Budget. The analysis discussed the 7(a) related to the disaster in addition to the SBA loan.
Business Loan Guarantee Program, the 504 Certified Twelve ineligible disbursements were identified, in the
Development Company Loan Guarantee Program, the amount of $123,200. The improper payment audit
Disaster Direct Loan Program, Disbursements for Goods was completed using 11,520 hours of staff time at an
and Services, the Small Business Investment Company approximate labor cost of $599,040. Based on the cost

AGENCY FINANCIAL REPORT • FY 2018 117
O TH ER I N FO R MAT I O N

to audit versus the estimated dollars of recovery, it is Part IV - Statutory or Regulatory Barriers
clear that further expenditures for a separate recovery
audit is not cost effective. The SBA does not have any statutory or regulatory
barriers limiting improvement to its performance on the
Disbursements for goods and services services recapture improper payments initiative.
audits would not be cost effective. The improper payment
testing required 343 labor hours at a cost of $23,370.37.
Payments identified during the improper payment review
Part V – Accountability
as eligible for recapture totaled $1,424.14; thus the cost of The focus of SBA’s Strategic Goal 4 is to strengthen SBA’s
the review exceeds the return. ability to service small businesses. Strategic Objective 4.1
is designed to ensure effective and efficient management
Table 3 presents a summary of Improper Payment
of Agency resources, including improving processes for
Recaptures without Audit Programs.
managing fraud, waste, and abuse. SBA’s strategic goals
are included in annual performance plans for all of its
TABLE 3: Improper Payment Recaptures without audit programs as business objectives and these are also included
programs ($ in millions) in employee performance plans. SBA management
Overpayments Recaptured Outside of Payments monitors accomplishments of these business objectives
Recapture Audits and takes action when progress toward goal achievement
Program or Amount Amount
Source
is not on target. Executive and management bonuses
Activity Identified $ Recaptured $ are based on the accomplishment of business objectives
7(a) Guaranty Statistical samples included in employee annual performance plans. This
4.89 1.24
Purchase1 conducted under IPIA
management process helps assure accountability for the
Disaster Loan Statistical samples reduction of improper payments.
0.12 0.00
Disbursements2 conducted under IPIA
Disbursemtents
Statistical samples
for Goods and 0.0014 0.0008
conducted under IPIA Part VI – Information Systems and Other
Services1
Infrastructure
Total 5.011 1.241
1 Period of review is for the 12-month period-ending March 31, 2018. 7(a) loan guaranty purchases are supported by the
2 Period of review is for the 12-month period-ending June 30, 2018. Guaranty Purchase Tracking System. It is continually
updated to enhance the overall integrity of the purchase
process. Resources as they relate to human capital are
Part III - Agency Improvement of Payment currently adequate.
Accuracy with the Do Not Pay Initiative
7(a) loan guaranty approvals have adequate internal
The SBA has implemented the Do Not Pay Initiative and controls and are supported by E-Tran, SBA’s electronic
incorporated the use of the DNP post payment services loan processing/servicing system. Both the SBA and
using the data source Death Master File. The agency has delegated lenders process applications through the system
also implemented limited use of the online portal for and lenders may also handle unilateral servicing actions
processing of manual 7(a) loan applications as part of electronically. The system provides increased efficiency
pre-award eligibility and will be implementing pre-award and decreased costs in the loan guaranty origination
eligibility for the Surety Bond Guarantee program. The and servicing processes. The loan programs are also
SBA is working to enhance its use of the DNP data supported by SBA One, an automated lending platform
sources by exploring an interface with SBA systems to to streamline the lending process. Resources as they relate
identify ineligible recipients at the time of pre-award in to human capital are currently adequate.
lieu of manually entering requests for information as is
Disaster direct loan program has the information
done currently.
systems and other infrastructure it needs to reduce
improper payments to targeted levels. For example,

118 AGENCY FINANCIAL REPORT • FY 2018
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the Office Disaster Assistance has an integrated, Part VIII – Risk Assessments
electronic loan processing system, the Disaster Credit
Management System, to streamline, enhance and OMB Circular No. A-123, Appendix C, requires risk
improve the loan-making process. This system supports assessments at least once every three years for programs
workflow management, electronic file management and not deemed susceptible to significant improper
document generation functions. Many of the business payments, or earlier if a low risk program was subjected
rules governing DCMS have been designed to improve to a significant change in legislation or funding level.
the quality assurance process. In fact, the ODA quality Significant improper payments are defined as gross annual
assurance team works continually with the DCMS improper payments exceeding (1) both 1.5 percent of
development team to improve the quality assurance program outlays and $10,000,000, or (2) $100,000,000.
process with a goal to minimize future improper The SBA last conducted risk assessments for all programs
payments as much as possible. The Disaster direct loan and activities, including payments made to employees,
program has adequate human capital to maintain its for susceptibility to improper payments in FY 2017. The
internal controls. risk assessments did not identify any additional programs
as susceptible to improper payments. Since no significant
changes occurred to any SBA program or activity
Part VII – Sampling and Estimation during FY 2018, the SBA did not conduct any new risk
assessments.
To provide more clarity for the reader, the Sampling
and Estimation section was coupled with the Payment
Reporting information in Part I, organized by the five
programs subjected to review for improper payments.

AGENCY FINANCIAL REPORT • FY 2018 119
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SUMMARY OF FINANCIAL STATEMENT AUDIT AND MANAGEMENT
ASSURANCES
As required by OMB Circular A-136, Section II.4.4, 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

120 AGENCY FINANCIAL REPORT • FY 2018
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FRAUD REDUCTION REPORT
The Fraud Reduction and Data Analytics Act of 2015 (OCORM), Office of the Chief Financial Officer
(FRDAA) mandates that agencies take steps to improve (OCFO), Office of General Counsel (OGC), and Office
their financial and administrative controls and procedures of the Inspector General (OIG). SBA’s Administrator
to assess and mitigate fraud risks, and to improve their communicated her commitment to integrity and ethical
development and use of data analytics for identifying, behavior during this workshop. The SBA documented
preventing, and responding to fraud, including improper and discussed key programs that are highly susceptible
payments. to fraud. The Agency is developing response plans to
mitigate these risks and identifying personnel to lead
The GAO issued the Framework for Managing Fraud fraud efforts in these program areas. The SBA has
Risks in Federal Programs to assist agency efforts to meet incorporated GAO’s Green Book Principle 8, Assess
the requirements of FRDAA and OMB Circular A-123, Fraud Risk, into its Procedural Notice, which requires
Management’s Responsibility for Enterprise Risk Management management to consider fraud in its risk assessment
(ERM) and Internal Control. The framework consists of process. During SBA’s monthly Enterprise Risk
four components related to: changing culture, assessing Management Board meetings, senior leaders can discuss
fraud risk, implementing controls, and evaluating fraud various risks, including fraud. Finally, the OCORM,
risk management activities. To date, the SBA has made which leads ERM efforts, discusses fraud during its
progress in each component. routine risk advisory work. As SBA matures its fraud risk
management process, the Agency will continue to apply
The SBA held its first fraud risk management workshop,
best practices and refer to helpful resources, such as the
which was a joint effort led by officials in the Office
recently issued Antifraud Playbook.
of Continuous Operations and Risk Management

AGENCY FINANCIAL REPORT • FY 2018 121
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REDUCE THE FOOTPRINT REPORT

Reduce the Footprint Policy Baseline Comparison Within the SBA, effective real property asset management
begins with an accurate inventory that is verified and
Change
FY 2015 2017
Baseline (CY-2)
(FY 2015 Baseline - validated on a continual basis to ensure real-time data
2017 (CY-2))
is available for timely and quality decision making. As a
Square Footage fully-leased agency, close coordination between GSA and
1.277* 1.228 0.049
(SF in Millions)
the SBA is required regarding cyclical lease expirations,
Reporting of O&M costs – Owned and direct lease space requests related to program activities and missions,
buildings
security assessments, and facility-related deficiencies and
FY 2015 2017 Change emergencies. The SBA maintains an ongoing verification
Reported Cost (CY-2) (FY 2015 - 2017 (CY-2))
and validation process to assess the Agency’s lease holdings
Operation and
Maintenance Costs $0 $0 $0
and ensure functionally appropriate right-sizing using
($ in Millions) appropriate space design standards.
The SBA only occupies buildings that are leased by the U.S. General Services
Administration and subject to occupancy agreements between the GSA and the SBA. The SBA is pragmatically moving to reduce leased
*SBA’s FY 2017 Agency Financial Report reported FY 2015 actual square footage for holdings by 1 percent annually, where possible, by
FY 2015 baseline.
adopting federal space standards at all locations. The SBA
will make every effort to consolidate, co-locate, and share
According to Section 3 of Office of Management and
resources, wherever functional requirements align with an
Budget Memorandum M-12-12 as amended, “Promoting
emphasis on occupying federal space. For example, the
Efficient Spending to Support Agency Operations” and
SBA is establishing standard office floor plans across its
OMB Management Procedures Memorandum 2013-03
lease holdings to provide the Agency with a strategic view
“Reduce the Footprint” policy directs that all CFO Act
of space management so that when leases are due to expire,
entities must set annual targets to reduce the total square
future managers will understand the right requirements.
footage of domestic office and warehouse inventory
compared to the FY 2015 baseline.

CIVIL MONETARY PENALTY ADJUSTMENT FOR INFLATION
The Federal Civil Penalties Inflation Adjustment Act Pursuant to the Act, the SBA reviewed each of the
of 1990 (Act), as amended, requires agencies to make penalty amounts under its statutes and adjusted them for
regular and consistent inflationary adjustments of civil inflation when required under the law. The SBA applied
monetary penalties to maintain their deterrent effect. a prescribed formula from the Act for calculating the
A civil monetary penalty is defined as any penalty, fine, penalty.
or other sanction that is for a specific monetary amount
as provided by federal law or has a maximum amount The following table reflects the authorities imposing the
provided for by federal law; and is assessed or enforced penalties, the basis for imposing the penalties, the year the
by an agency pursuant to federal law; and is assessed or penalties were authorized, the current penalty levels, the
enforced pursuant to an administrative proceeding or a program offices responsible for imposing the penalties, and
civil action in the federal courts. To improve compliance the citation for the most recent publication of the penalty
with the Act, and in response to multiple audits and updates.
recommendations, agencies must report the most recent
inflationary adjustments to civil monetary penalties to
ensure penalty adjustments are both timely and accurate.

122 AGENCY FINANCIAL REPORT • FY 2018
OT H ER INFOR MATI ON

SBA Federal Civil Penalties
Latest Year of Current
Penalty Year Adjustment Penalty Level Sub-Agency/ Location for Penalty
Statutory Authority
(Name or Description) Enacted (via Statute ($ Amount Bureau/Unit Update Details
or Regulation) or Range)
Failing to File Report Office of 83 Federal Register
Small Business Investment Act,
Timely for a Small Business 1966 2018 $259 Investment and 7361
15 USC 687(g)
Investment Company Innovation (February 21, 2018)
Failing to File Report Timely 83 Federal Register
Small Business Investment Act, Office of Capital
for a Small Business Lending 2004 2018 $6,460 7361
15 USC 650(j) Access
Company (February 21, 2018)
Small Business Act, 15 USC 634(b)(6) 83 Federal Register
Administrative Remedies for
and Program Fraud Civil Remedies Act 1986 2018 $11,181 Multiple offices 7361
False Statements and Claims
31 USC 3802(d) (February 21, 2018)
Small Business Act, 15 USC 634(b)(6) $19,639 83 Federal Register
Penalty for Violation of
and Program Fraud Civil Remedies Act 1990 2018 to Multiple offices 7361
Lobbying Restrictions
31 USC 1352 $196,387 (February 21, 2018)

GRANTS OVERSIGHT AND NEW EFFICIENCY (GONE) ACT REPORT
The Grants Oversight and New Efficiency Act was passed extended in the grants management system. In addition,
by the Congress with a goal of closing expired grants. program management elements may directly impact the
The GONE Act requires the Office of Management and effective financial management of grants. For example,
Budget, in coordination with the U.S. Department of program managers may sometimes not alert the grants
Health and Human Services, to submit to the Congress management officer that the award has been prepared and
and HHS a report that provides a status on an agency’s ready to close. The SBA is taking steps to address these
grants. challenges. Finally, SBA established a tiger team within
the Office of Grants Management to address closeout of
The SBA Office of Grants Management has established older awards and work to be current within the provisions
an internal team to evaluate and reduce the number of of the ACT
expired grants that are not closed. The team reviews
applicable administrative actions and required paperwork The following table summarizes GONE Act data
to ensure that procedures are followed. The team reviews
for prompt payment of allowable costs, immediate refund Category 2–3 years >3–5 years > 5 years
by the recipient of any unexpended funds, submission of Number of Grants/
final financial and program reports, proper disposition Cooperative
369 236 0
of property acquired because of the award, and any Agreements with Zero
Dollar Balances
outstanding audits.
Number of Grants/
SBA grants must be closed in a grants administration Cooperative
423 167 1
Agreements with
system and a financial system. However, the two
Undisbursed Balances
systems often do not interface and as a result requires
multiple manual input. As a challenge, the financial Total Amount
of Undisbursed $39,745,951.40 $5,817,022.81 $44,669.78
management system may show that a grant award has Balances
expired when, in fact, the performance end date has been

AGENCY FINANCIAL REPORT • FY 2018 123
A PPEN D I C ES

DID Since 1953, the SBA has approved more
than 2 million disaster loans for over $63
YOU billion to businesses of all sizes, private
nonproﬁt organizations, homeowners, and
KNOW? renters. In FY 2018, through recovery
eforts to help disaster survivors from
hurricanes Harvey, Irma, and Maria, the
SBA approved nearly $7 billion in loans.

Recovering Business:
Bakery Owners Wins SBA
Phoenix Award

ree Brothers Bakery
Houston, Texas
ree Brothers Bakery was established on May 8, 1949 in
Houston exactly four years ater brothers Sigmund, Sol, and
Max were liberated from a Nazi concentration camp. In the
years since opening, the business has survived four loods, a
ﬁre, and two hurricanes. However, Hurricane Harvey hit the
Houston area as Janice Jucker, marketing and business
manager, and Bobby Jucker, an award-winning pastry chef,
were preparing to ﬁll orders for Rosh Hashanah celebrations.
e store was inundated with ﬁve feet of water, and loss of
inventory and down time cost them $1 million. To recover,
they received an SBA disaster loan that allowed them to
purchase new equipment and supplies and even hire extra
employees to help during the holiday season. eir business
opened just 17 days ater the storm, and six weeks later they
were able to return to normal operations. For their resilience
in the atermath of disaster, they received the distinguished
SBA Phoenix Award.

124 AGENCY FINANCIAL REPORT • FY 2018
APPENDICES
DID Small businesses create nearly two of out
three new American jobs with nearly 59
YOU million Americans owning or working

KNOW?
for small businesses. Millions of middle
class families depend on SBA’s ability to
facilitate access to capital, counseling,
and contracting opportunities.

Recovering Business:
Phoenix Award for Outstanding
Small Business Disaster Recovery

Forest Lake Drapery & Upholstery Fabric Center
Columbia, South Carolina
Forest Lake Fabrics is a retail store that has served South
Carolina, North Carolina, and Georgia since 1964. e
business was ground zero for a storm that dumped 18 inches
of rain in less than 24 hours. Ater the lood, owners Michael
and Ginger Marsha returned to a scene of widespread
destruction. e force of the lood blew a 20-foot hole in the
back of the building. Bolts of expensive fabric were washed
downstream, the building was nearly destroyed, and the
store’s entire inventory, valued at about $1 million, was
ruined. Michael and Ginger were smart about rebuilding.
e couple used their cash reserves to keep seven employees
on the payroll, and secured an SBA disaster loan to rebuild
the property, replace inventory, and install storm shields to
protect the property from future loods. In the year following
their post-disaster reopening, Forest Lake Fabrics saw
back-to-back months of record sales.
APPE NDI C E S

APPENDIX 1—CONTACT SBA: USEFUL WEBSITES AND NUMBERS
The SBA home page is www.sba.gov. Information on SBA programs may be accessed from this website. Several of the
more frequently visited websites are listed here:

SBA and Business Information
About the SBA www.sba.gov/aboutsba
SBA Performance, Budget & Finances www.sba.gov/performance
Small Business USA www.usa.gov/business
Local Assistance www.sba.gov/local-assistance
Qualifying as a Small Business www.sba.gov/content/am-i-small-business-concern
Starting a Business? www.sba.gov/thinking-about-starting

Capital
Small Business Loans & Grants www.sba.gov/financialassistance
Lender Resources www.sba.gov/lender_resources
Export Products www.sba.gov/exporting
Fund Your Business www.sba.gov/business-guide/plan/fund-your-business

Contracting
Government Contracting www.sba.gov/contracting
Register as a Contractor www.sam.gov
Contracting Certifications https://certify.sba.gov
Surety Bonds www.sba.gov/content/surety-bonds-explained

Counseling
SBA Learning Center www.sba.gov/training
Small Business Development Centers www.sba.gov/sbdc
Women’s Business Centers www.sba.gov/tools/local-assistance/wbc
SCORE www.sba.gov/score
Veterans Business Outreach Centers www.sba.gov/tools/local-assistance/vboc

Disaster Assistance
Disaster Assistance www.sba.gov/disaster
Disaster Center Office Locations www.sba.gov/about-offices-list/4

SBA Information
SBA 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/sba
SBA blog www.sba.gov/blogs
Instagram https://www.instagram.com/sbagov/

AGENCY FINANCIAL REPORT • FY 2018 127
A PPEN D I C ES

APPENDIX 2—GLOSSARY

504 Loan 504 Certified Development Loan Program APG Agency Priority Goal
The 504 loan program provides small GPRAMA requires federal agencies to
businesses with long-term, fixed-rate establish a set of 2-year APGs that reflect the
financing for the purchase of land, buildings, highest priorities of agency leadership.
and long-life capital equipment.
APR Annual Performance Report
7(a) 7(a) Loan Guarantee Program
The APR is required by the Government
The 7(a) loan program is SBA’s primary loan Performance and Results Act and presents
program; it provides general loan financing a federal agency’s progress in achieving the
for a wide variety of purposes. goals in its strategic plan and performance
7(j) 7(j) Management and Technical Assistance budget.
Program ARC 506 America’s Recovery Capital Loan Program
The 7(j) loan program provides specialized ARC 506 loans are part of the 2009
assistance to underserved small businesses. American Recovery and Reinvestment
Act Section 6 that provides loans up to
7(m) 7(m) Microloan Program
$35,000 for short-term relief to businesses
The microloan loan program provides small, experiencing immediate financial hardship.
short-term loans to small businesses and
certain types of nonprofit child care centers. ARC
Recovery Act The American Recovery and Reinvestment
8(a) 8(a) Business Development Program Act of 2009 (ARRA)
The 8(a) program assists firms owned and A stimulus package enacted by the 111th
controlled by socially and economically U.S. Congress and signed into law by
disadvantaged individuals to enter and President Barack Obama in February 2009.
succeed in the economic mainstream.
BATF Business Assistance Trust Fund
A-123 Designation for OMB Circular on Internal
BATF is a trust fund in the U.S. Department
Control Systems
of the Treasury maintained to receive and
The A-123 guidance prescribes policies account for donations made by private
and procedures to be followed by executive entities for activities to assist small businesses.
departments and agencies in establishing,
maintaining, evaluating, improving, and BLIF Business Loan and Investment Fund
reporting on internal controls in their BLIF is a fund operated by the U.S.
program and administrative activities. Department of the Treasury to maintain the
accounting records of loans approved prior
A&A Assessment and Authorization
to 1992.
The A&A process describes the end to end
process for ensuring new VA information CAP Goals Cross-Agency Priority Goals
systems adhere to and are in compliance with CAP Goals are a limited number
Federal Information Security Management of Presidential priority areas where
Act (FISMA). implementation requires active collaboration
among multiple agencies.
AFR Agency Financial Report
The AFR is an annual report that provides to CBJ Congressional Budget Justification
OMB, Congress, and the public, an overview The CBJ is a federal agency’s annual budget
of the Agency’s financial and performance request to Congress.
data.
CDC Certified Development Company
AGA Association of Government Accountants CDCs are nonprofit corporations, certified
AGA is the member organization for and regulated by the SBA, that work with
government financial management participating lenders to provide financing to
professionals. small businesses.

128 AGENCY FINANCIAL REPORT • FY 2018
APPE NDI C E S

CEAR Certificate of Excellence in Accountability DTI Debt-to-Income
Reporting DTI ratio is derived by dividing your
CEAR is awarded to agencies that are monthly debt payments by your monthly
considered to have excellent Agency Financial gross income.
Reports.
EDAP Expedited Disaster Assistance Program
CFO Chief Financial Officer EDAP was established to provide guarantied
The CFO is the financial leader of the disaster loans using private sector lenders.
OCFO, whose duties include overseeing all
Agency disbursements, management, and EDP Entrepreneurial Development Program
coordination of Agency planning, budgeting, The EDP account reports entrepreneurial
analysis, and accountability processes. development expenses.

CY Calendar Year ELA Enterprise Learning Agenda
A period of a year beginning and ending with The ELA is a plan that aligns with the
the dates that are conventionally accepted Agency’s strategic goals to identify where
as marking the beginning and end of a evaluations could provide insights about
numbered year. program effectiveness.

DATA Act The Digital Accountability and ERM Enterprise Risk Management
Transparency Act of 2014 The ERM provides a framework to manage
The DATA Act is a law that aims to make risks and seize opportunities related to the
information on federal expenditures more achievement of their objectives.
easily accessible and transparent.
FAST Federal and State Technology (FAST)
DCMS Disaster Credit Management System Grants
DCMS is the electronic system used to One year funding opportunity for
process loan applications for all new disaster organizations to help increase the number of
declarations. SBIR and STTR proposals.

DHS Department of Homeland Security FCRA Federal Credit Reform Act
DHS’s mission is to secure the nation from FCRA is a law enacted to provide a
threats. more realistic picture of the cost of U.S.
Government direct loans and loan guaranties.
DLF Disaster Loan Fund
DLF assists eligible small businesses impacted FECA Federal Employees’ Compensation Act
by disasters. FECA provides compensation benefits
to federal civilian employees and to their
DNP Do Not Pay Initiative surviving dependents for work-related
DNP was established by IPERIA to support injuries or illnesses.
federal agencies with their efforts to prevent
and detect improper payments. FEMA Federal Emergency Management Agency
The primary purpose of FEMA is to
DO District Office coordinate the response to a disaster that has
SBA’s District Offices are responsible for the occurred in the United States.
delivery of SBA’s many programs and services
throughout the country. FERS Federal Employees Retirement System
FERS is a three-tiered retirement plan
DoD Department of Defense for federal employees hired after 1984,
The DoD is a federal agency charged with composed of Social Security benefits, a basic
coordinating national security and the armed benefit plan, and contributions to a Thrift
services. Savings Plan.
DOL Department of Labor
DOL’s mission is to foster, promote, and
develop the welfare of the wage earners, job
seekers, and retirees of the United States;
improve working conditions; advance
opportunities for profitable employment; and
assure work-related benefits and rights.

AGENCY FINANCIAL REPORT • FY 2018 129
A PPEN D I C ES

FFMIA Federal Financial Management FTA Fiscal Transfer Agent
Improvement Act The FTA is the SBA agent tasked with the
FFMIA is a law that requires each agency responsibility to administer each SBA Pool
to implement and maintain financial or Individual Certificate. This maintains
management systems that comply a registry of Registered Holders and other
substantially with federal financial information as the SBA requires.
management system requirements, applicable
federal accounting standards, and the United FTE Full-Time Equivalent
States Standard General Ledger. FTE indicates the workload of an employed
person. An FTE of 1.0 means that the person
FICA Federal Insurance Contributions Act is equivalent to a full-time worker while an
FICA is a federal payroll (or employment) tax FTE of 0.5 means that the worker is only
imposed on both employees and employers half-time.
to fund Social Security and Medicare federal
programs that provide benefits for retirees, FY Fiscal Year
disabled people, and children of deceased The Federal Government fiscal year begins
workers. October 1 and ends the following September
30.
FIPS Federal Information Processing Standards
FIPS publications are federal government GAAP Generally Accepted Accounting Principles
requirements for cybersecurity. GAAP is the standard framework of
guidelines for financial accounting generally
FISMA Federal Information Security Management known as accounting standards or standard
Act accounting practice.
FISMA is a law that defines a comprehensive
framework to protect government GAO U.S. Government Accountability Office
information, operations, and assets against GAO is an independent, nonpartisan agency
natural or man-made threats. that investigates how the federal government
spends taxpayer dollars and reports their
FITARA Federal Information Technology findings to Congress.
Acquisition Reform Act
FITARA is legislation to improve the GCBD Office of Government Contracting and
acquisition and management of federal Business Development
information technology assets. GCBD works to create an environment
for maximum participation by small,
FMFIA Federal Managers Financial Integrity Act disadvantaged, and women-owned businesses
FMFIA is a law that primarily requires in federal government contract awards and
ongoing evaluations and reports on the large prime subcontract awards.
adequacy of the internal accounting and
administrative control systems of executive GONE Act Grants Oversight and New Efficiency Act
agencies. It also requires evaluations and The goal of the GONE Act is to close out
reports on the conformance of financial expired grants.
management systems.
GPRAMA Government Performance and Results Act
FPDS-NG Federal Procurement Data System – Next (GPRA) Modernization Act of 2010
Generation The GPRAMA modernizes the federal
FPDS-NG is a single source for U.S. government’s performance management
government-wide procurement data. framework, retaining and amplifying some
aspects of the Government Performance
FRDAA Fraud Reduction and Data Analytics Act and Results Act (GPRA) of 1993 while also
of 2015 addressing some of its weaknesses.
To improve Federal agency financial and
administrative controls and procedures GSA General Services Administration
to assess and mitigate fraud risks, and to GSA is a federal agency of the Executive
improve Federal agencies’ development Branch whose mission is to deliver the best
and use of data analytics for the purpose of value real estate, acquisition, and technology
identifying, preventing, and responding to services to government agencies.
fraud, including improper payments.

130 AGENCY FINANCIAL REPORT • FY 2018
APPE NDI C E S

HHS U.S. Department of Health and Human MAFD Maximum Accepted Fixed Debt
Services MAFD are standards used to calculate the
The goal of HHS is to protect the health of risk of loan approvals.
all Americans and provide essential human
services. MRA Master Reserve Account
SBA’s fiscal agent maintains this escrow fund
HIM Harvey, Irma and Maria to facilitate the operation of the Certified
The HIM hurricanes caused significant Development Company program.
physical damage to Texas, Louisiana, Florida,
Puerto Rico, and the U.S. Virgin Islands. MRF Master Reserve Fund
SBA’s fiscal and transfer agent maintains this
HUBZone Historically Underutilized Business Zone reserve fund to facilitate the operation of the
HUBZone is an SBA program that 7(a) secondary market program.
encourages economic development by the
establishment of federal contract award NBER National Bureau of Economic Research
preferences for small businesses located in A private, nonprofit, nonpartisan
historically underutilized business zones. organization dedicated to conducting
economic research and providing findings
IDAP Immediate Disaster Assistance Program to academics, public policy makers, and
IDAP is a guaranteed disaster loan program business professionals.
for small businesses that have suffered
physical damage or economic injury due to a NGPC National Guaranty Purchase Center
Declared Disaster. The NGPC, located in Herndon, Virginia,
was created to centralize SBA’s 7(a) loan
IPERA Improper Payments Elimination and guaranty purchase function into a single
Recovery Act national location.
IPERA requires that agencies examine
the risk of, and feasibility of, recapturing NIST National Institute of Standards and
improper payments in all programs and Technology
activities. NIST is a measurement standards laboratory,
and a non-regulatory agency of the U.S.
IPERIA Improper Payments Elimination and Department of Commerce. Its mission
Recovery Improvement Act of 2012 is to promote innovation and industrial
IPERIA is an act to intensify efforts to competitiveness.
identify, prevent, and recover payment
error, waste, fraud, and abuse within federal NMVC New Markets Venture Capital
spending. NMVC program is designed to promote
economic development and the creation of
IPIA Improper Payment Information Act wealth and job opportunities in low-income
IPIA is a federal law enacted in 2002 to geographic areas by addressing the unmet
identify and reduce erroneous payments in equity investments needs of small businesses
the government’s programs and activities. located in those areas.
IT Information Technology OBD Office of Business Development
IT refers to matters concerned with the OBD assists small, disadvantaged businesses
design, development, installation, and to gain access to federal and private
implementation of information systems and procurement markets.
applications.
OCA Office of Capital Access
LGPC Loan Guarantee Processing Center OCA is responsible for small business loans,
The 7(a) LGPC has two physical locations lender oversight, and the Surety Bond
(one in Hazard, Kentucky, and one in Guarantee program.
Citrus Heights, California) that are linked
technologically into one process for efficiency OCFO Office of the Chief Financial Officer
and optimal staff utilization. OCFO is responsible for the financial
leadership of the Agency, including all
LSP Lender Service Provider Agency disbursements, management, and
An LSP carries out functions in originating, coordination of Agency planning, budgeting,
dispersing, servicing, or liquating a specific analysis, and accountability processes.
SBA business loan or loan portfolio for
compensation from the lender.

AGENCY FINANCIAL REPORT • FY 2018 131
A PPEN D I C ES

OCIO Office of the Chief Information Officer PDAP Private Disaster Assistance Program
OCIO is responsible for the management PDAPs help residents, businesses,
of information technology for the Agency, organizations and communities recover from
including the design, implementation, natural disasters.
and continuing successful operation(s) of
information programs and initiatives. PPS Probability Proportional to Size
PPS is a method of sampling that takes
OCORM The Office of Continuous Operations and the varying size of each item within the
Risk Management population into account when selecting the
OCORM ensures enterprise-wide disaster audit sample.
planning, readiness, and implementation of
ERM best practices for the SBA. QAR Quality Assurance Review
QAR is a review to identify any deficiencies,
OCRM Office of Credit Risk Management to include improper payments.
OCRM manages program credit risk,
monitors lender performance, and enforces R&D Research and Development
lending program requirements. R&D refers to the work a business conducts
for the innovation, introduction and
ODA Office of Disaster Assistance improvement of its products and procedures.
ODA is SBA’s office that promotes economic
recovery in disaster-ravaged areas. Disaster RGDP Real Gross Domestic Product
loans are the Agency’s primary form of RGDP is an inflation-adjusted measure that
federal assistance for non-farm, private sector reflects the value of all goods and services
disaster losses for individuals and businesses. produced in a given year, expressed in base-
year prices.
OED Office of Entrepreneurial Development
OED is the SBA office that oversees a RISE Recovery Improvements for Small Entities
network of programs and services that After Disaster Act of 2015
support the training and counseling needs of This law amends the Small Business Act
small businesses. to authorize a small business, homeowner,
nonprofit entity, or renter that was located
OFPO Office of Financial Program Operations within a declared major disaster area during
OFPO leads the financial services industry in Superstorm Sandy in 2012 to apply for a
quality products and services to SBA partners Small Business Administration (SBA) loan.
and customers, and protects the integrity of
SBA programs. SAT Senior Assessment Team
SBA’s SAT is chaired by the Chief Financial
OGC Office of General Counsel Officer and comprised of SBA managers
OGC provides comprehensive legal services from the major programs and support offices
to the Administrator and all Agency offices. to oversee the assessment of internal controls
for financial reporting performed by the
OIC Office of Internal Controls Office of Internal Controls.
OIC, an office within the Office of the Chief
Financial Officer, has the lead in ensuring SBA U.S. Small Business Administration
managers comply with internal control The SBA is the federal agency of the
standards. Executive Branch whose mission is to
maintain and strengthen the nation’s
OIG Office of Inspector General economy by enabling the establishment and
OIG conducts and supervises audits, vitality of small businesses and by assisting in
inspections, and investigations relating to the economic recovery of communities after
SBA programs and operations. disasters.
OMB U.S. Office of Management and Budget SBDC Small Business Development Center
OMB is the White House office that oversees SBDCs provide management and technical
preparation of the federal budget and assistance, economic development, and
supervises its administration in Executive management training to existing and
Branch agencies. prospective small businesses through
cooperative agreements with universities and
OPM U.S. Office of Personnel Management colleges and government organizations.
OPM is the federal government’s human
resources agency.

132 AGENCY FINANCIAL REPORT • FY 2018
APPE NDI C E S

SBG Surety Bond Guarantee STEP State Trade Expansion Program
The SBG program provides guaranties, STEP is a program to make matching fund
bid, performance, and payment bonds for awards to states to help small businesses enter
contracts up to $2.0 million for eligible small and succeed in the international marketplace.
businesses that cannot obtain surety bonds
through regular commercial channels. USEAC U.S. Export Assistance Center
USEACs are located nationwide and help
SBGRF Surety Bond Guaranty Revolving Fund firms grow internationally by assisting in
All the contractor and surety fees collected by developing a plan of action with solutions
the SBA are deposited in the SBGRF at the tailored to their needs.
U.S. Department of the Treasury, which is
used to pay claims. USSGL The United States Standard General
Ledger
SBIC Small Business Investment Company USSGL provides a uniform chart of accounts
An SBIC provides long-term loans, debt- and technical guidance for standardizing
equity investments, and management federal agency accounting.
assistance to small businesses, particularly
during their growth stages. VBOC Veterans Business Outreach Center
VBOCs provide entrepreneurial development
SBIR Small Business Innovation Research services such as business training, counseling
The SBIR is a highly competitive SBA and mentoring, and referrals for eligible
program that encourages domestic small veterans owning or considering starting a
businesses to engage in federal research/ small business.
research and development that has the
potential for commercialization. WBC Women’s Business Center
WBCs provide long-term training and
SBLC Small Business Lending Company advising to women who own or manage a
SBLCs are non-depository small business business, including financial, management,
lending companies listed by the SBA Office marketing, and technical assistance and
of Capital Access. procurement.
SMC Senior Management Council WOSB Women-Owned Small Businesses
SMC was established by the Administrator The WOSB program allows federal agencies
to ensure the SBA has an effective system of to set aside certain contracts for competition
internal control. only among small businesses owned and
controlled by women.
SOP Standard Operating Procedure
An SOP is the primary source of the Agency’s
internal control.

AGENCY FINANCIAL REPORT • FY 2018 133
A PPEN D I C ES

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 that includes 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 2018, there were 117 Final Actions, resulting from 13 monetary and 104 non-monetary recommendations.

The following tables depict the SBA’s Final Action activity for FY 2018 and the status of corrective action plans not
implemented within one year:

Table I: Final Action on Audit Recommendations with Disallowed or Questioned Costs.
Table II: Final Action on Audit Recommendations with Funds Put to Better Use.
Table III: Final Action on Audit Recommendations Not Completed within One Year.

TABLE I: Final Action on Audit Recommendations with Disallowed or Questioned Costs
October 1, 2017 – September 30, 2018

Number of Disallowed Costs
Recommendations (Rounded to Thousands)
A. Recommendations with management decisions on which final action had not been
5 $3,070
taken at the beginning of the period.
B. Recommendations on which management decisions were made during the period. 27 $324,990
C. Total recommendations pending final action during period. 32 $328,060
D. Recommendations on which final action was taken during the period.
1. Recoveries:
(a) Collections and Offsets 7.5 $2,848
(b) Property
(c) Other 4 $3,200
2. Write-Offs 1.5 $166
3. Total 13 $6,214
E. Recommendations needing final action at the end of the period. 19 $321,846

134 AGENCY FINANCIAL REPORT • FY 2018
APPE NDI C E S

TABLE II: Final Action on Audit Recommendations with Funds Put to Better Use
October 1, 2017 – September 30, 2018

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
0 $0
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. 0 $0
D. Recommendations on which final action was taken during the period
1. Value of recommendations implemented (completed). 0 $0
2. Value of recommendations that management concluded should not or could not be
implemented or completed.
3. Total 0 $0
E. Recommendations needing final action at the end of the period. 0 $0

TABLE III: Final Action on Audit Recommendations Not Completed within One Year
As of September 30, 2018

Report #12-04, Audit of Annual Small Business Procurement Calculations
Program: GCBD
Date Issued: 12/06/11
Management Decision Date: 09/23/15
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. GCBD and the OIG are
working together to come to an agreement for resolution on all of the recommendations. If an agreement cannot be reached, the matter will
be referred to the Audit Follow-up Official for resolution. Estimated completion date is 12/31/18.

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 made to the Office of Business Development 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. GCBD and the OIG were unable to reach an agreement on any of the
recommendations, and all were referred to the Audit Follow-up Official for resolution in 2018. Estimated completion date is 12/31/18.

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AGENCY FINANCIAL REPORT • FY 2018 135
A PPEN D I C ES

TABLE III: Final Action on Audit Recommendations Not Completed within One Year
As of September 30, 2018

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 made to the Office of the Business Development require that SOP 80 05 3 be revised to: (1)
extend time for annual reviews, subjecting firms to termination if the information is not provided; and (2) allow the SBA to place an 8(a)
firm in a “decision pending” category during the additional period. GCBD and the OIG were unable to reach an agreement on any of the
recommendations and all were referred to the Audit Follow-up Official for resolution in 2018. Estimated completion date is 12/31/18.

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 one remaining recommendation requires the Office of the Chief Information Officer improve Security Authorization
Packages and retain all documentation. Resolution activity includes reviewing and correcting each system Assessment and Authorization
(A&A) package as they are scheduled for re-assessment. Estimated completion date is 12/31/18.

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 one remaining recommendation requires the Chief Information Officer to ensure general support systems and major
applications have valid and up-to-date authorizations to operate (ATO) while those systems are in production. Resolution activities include
ensuring an Assessment and Authorization (A&A) package is completed for each IT system. Estimated completion date is 12/31/18.

Report # 15-16, Audit of Oversight of Loan Agents
Program: OCA
Date Issued: 9/25/15
Management Decision Date: 7/6/18 and 9/20/18
Explanation: The three remaining recommendations require OCA to: 1) develop benchmarks for contractor performance and controls to
ensure integrity of the Form 159 database; 2) implement a process to uniquely identify loan agents; and 3) develop a method for CDCs to
electronically report loan agent compensation. Agreement was recently reached between the program office and the OIG as to the resolution
of the recommendations. Estimated completion dates are 7/31/19 for the first one and 12/31/18 for the other two recommendations.

Report # 16-10, Audit of FY 2015 Federal Information Security Act Review
Program: OCIO
Date Issued: 3/10/16
Management Decision Date: 3/10/16
Explanation: The one remaining recommendation requires that information system contingency plans are tested and consisted with NIST
guidance. Resolution activities include coordination with all program offices to ensure that all FISMA systems perform annual contingency
plan tests. Estimated completion date is 12/31/18.

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136 AGENCY FINANCIAL REPORT • FY 2018
APPE NDI C E S

TABLE III: Final Action on Audit Recommendations Not Completed within One Year
As of September 30, 2018

Report # 16-13, Audit of SBA’s 8(a) Business Development Program Eligibility
Program: GCBD
Date Issued: 4/7/16
Management Decision Date: 4/7/16
Explanation: The one remaining recommendation requires GCBD management to clearly document justifications for approving or denying
applicants into the 8(a) program. GCBD will revise its Standard Operating Procedure guidance; recommendation will be closed upon
publication. Estimated completion date is 9/31/19.

Report # 17-09, New York Small Business Development Center’s Phase 2 Disaster Technical Assistance Grant
Program: OED
Date Issued: 3/31/17
Management Decision Date: 3/13/18
Explanation: The two remaining recommendations require OED to recover funds that were not applicable to the Hurricane Sandy technical
assistance grant. Funds were recovered and these recommendations were closed on 10/9/18.

Report # 17-10, The SCORE Association’s Disaster Technical Assistance Grant
Program: OED
Date Issued: 3/31/17
Management Decision Date: 4/5/17 and 3/2/18
Explanation: The three remaining recommendations require OED to: 1) develop and implement policies and procedures to ensure four
specific administrative requirements as outlined in the report; 2) recover funds for unsupported management and consulting expenses;
and 3) develop and implement policies and procedures to ensure SCORE provides quarterly financial and performance reports, and that
disaster grant awards are separated from SCORE’s core award for separate reporting and monitoring purposes. OED revised its Standard
Operating Procedures guidance to include policies and procedures to resolve recommendations one and three and once published, the
recommendations will be closed. OED issued a demand letter on 8/27/18 to recover funds and the recommendation will be closed upon
receipt of funds. Estimated completion is 12/31/18 for all recommendations.

Report # 17-14, FY2016 Federal Information Security Modernization Act (FISMA) Review
Program: OCIO
Date Issued: 6/15/17
Management Decision Date: 6/13/17
Explanation: The two remaining recommendations require the Chief Information Officer to 1) establish policies and procedures regarding
data exfiltration and to implement a data exfiltration program across the agency; and 2) established trusted internet connection security
controls to ensure all agency traffic, including mobile and cloud, are routed through defined and secure access points. Resolution for the
first recommendation is dependent on the Agency’s Windows 10 deployment and has an estimated completion date of 3/31/19. SBA is
awaiting updated guidance from the Office of Management and Budget before proceeding to resolve the second recommendation. Estimated
completion date is 1/31/19.

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AGENCY FINANCIAL REPORT • FY 2018 137
A PPEN D I C ES

TABLE III: Final Action on Audit Recommendations Not Completed within One Year
As of September 30, 2018

Report # 17-15, Reassessment of Eligibility Requirements for 30 Firms in SBA’s 8(a) Business Development Program
Program: GCBD
Date Issued: 7/17/17
Management Decision Date: 7/18/17
Explanation: The three remaining recommendations require GCBD to: 1) conduct eligibility reviews for ten firms identified with unresolved
eligibility concerns; 2) develop specific measurements to monitor the performance and compliance of applicants admitted to the program
in which there was a discrepancy between the approver and the reviewer; and 3) adjust eligibility criteria, as necessary, based on the
information collected in resolving recommendation. The GCBD is working with the OIG to come to an agreement on the recommendations’
resolutions. Estimated completion date: 9/30/19.

Report # 17-19, Microloan Program
Program: OCA
Date Issued: 9/28/17
Management Decision Date: 1/4/18
Explanation: The two remaining recommendations to OCA require: 1) continued efforts to improve the information system to effectively
monitor the program’s compliance, performance, and integrity; and 2) update the reporting system manual to reflect current technology
capabilities. Resolution activities include replacing the current system with Microsoft Dynamics and developing a system manual. Estimated
completion date is 9/30/19.

138 AGENCY FINANCIAL REPORT • FY 2018
ACKNOWLEDGEMENTS
This Agency Financial Report was produced with the energies and talents of the SBA staff. To all these
dedicated individuals listed below, and those not listed, the Office of Performance Management and the Chief
Financial Officer would like to offer sincere thanks and acknowledgement.

Melissa Atwood Krzysztof Fizyta Andrea Peoples
Lola Bailey Leslie Godsey Trevor Postlethwaite
Tolu Bamwo Linda Grabe Janette Porter
Cassandra Barnes Timothy Gribben Steve Ramey
Rory Berges Blake Hoing Nathaniel Reboja
Rachel Beasley Scott Holland Dorrice Roth
Brittany Borg Janine Hoke Marjorie Rudinsky
Jason Bossie Emily Knickerbocker AnnMarie Schaef
Kay Chae Terell Lasane Charles Senseney
Martin Conrey Luan Loerch-Wilson Deron Smallwood
Sean Crean Maureen Moore-Velluci Scott Stilmar
Jeffrey Davis Mathew Pascarella LaNae Twite
Tamara Dollarhite Tony Paul Yvonne Walters
Kate Duffy Mike Peterson Donna Wood

We would also like to acknowledge the Office of Inspector General and KPMG LLP for their professionalism
while conducting the audit of the Fiscal Year 2018 Financial Statements. We offer our special thanks to TSC
Enterprise LLC, and Corporate Visions, Inc. for contributions in producing this report.

CERTIFICATE OF EXCELLENCE IN ACCOUNTABILITY REPORTING
For the past 12 years, FY 2006 to FY 2017, 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 and the U.S. Office of Management and Budget. The award
recognizes high-quality Performance and Accountability Reports and Agency
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 four CEAR Special/Best-in-class
awards:

2017 — Best Overall Quality (Editorial Excellence/Well Written)
2016 — Presentation of Performance
2015 — Presentation of Forward Looking Information
2013 — Inspector General’s Summary of Management and Performance Challenges
2011 — Improper Payments Elimination and Recovery Act Detail
Office of Performance Management
and the Chief Financial Officer
409 Third Street, S.W.
Washington, DC 20416

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