SBA Agency Financial Report, Fiscal Year 2019

Summary

This is the SBA Agency Financial Report for fiscal year 2019, the first of two required annual reports for federal agencies. A highlights table (dollars in thousands) shows FY 2019 amounts of $143,516,446 for the principal program portfolio, $16,718,652 for total assets and 3,943 for total employees. The FY 2019 Annual Performance Report is the other report, part of the FY 2021 Congressional Justification, with publication scheduled for February 2020. Closing pages record the Certificate of Excellence in Accountability Reporting for FY 2006 to FY 2018 and six Special/Best-in-class awards, and acknowledge the Office of Inspector General and KPMG LLP for the audit.

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 2019.” Original at legacy.sba.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/sba-agency-financial-report-sba-fy-2019-afr-508-9deeb9916e/, SHA-256 7b91f3329e69d1dbd0859dd9f60f327a8159260ceb13553ff0569ad31f4af466.

Full text

AGENCY
FINANCIAL
REPORT
FISCAL YEAR 2019

we make
SMALL BUSINESS
our business
ABOUT THIS REPORT
The U.S. Small Business Administration’s
Agency Financial Report (AFR) for
FY 2019 provides an overview of the FY 2019 HIGHLIGHTS
Agency’s financial and performance data
to help Congress, the President, and the (Dollars in Thousands) FY 2016 FY 2017 FY 2018 FY 2019
public assess the SBA’s stewardship
Principal Program Portfolio(1) $ 124,118,505 $ 131,814,718 $ 142,315,295 $ 143,516,446
over the resources entrusted to it. The
AFR is the first of two required annual
Regular FTE Employees 1,950 1,960 1,881 1,888
reports for federal agencies. The FY 2019
Annual Performance Report (APR) is the Disaster FTE Employees 1,153 1,311 3,608 2,055
other report and is part of the FY 2021 Total Employees (2)
3,103 3,271 5,489 3,943
Congressional Justification (CJ). The
CJ/APR is scheduled for publication in Total Assets $ 12,657,172 $ 13,215,919 $ 16,988,497 $ 16,718,652
February 2020. The reports can be found Total Liabilities $ 11,882,988 $ 11,703,589 $ 14,915,340 $ 15,085,044
at: www.sba.gov/performance. Total Net Position $ 774,184 $ 1,512,330 $ 2,073,157 $ 1,633,608
Total Net Cost of Operations $ 339,477 $ 3,910 $ 621,675 $ 136,526

Total Budgetary Resources $ 10,878,012 $ 12,243,154 $ 17,114,677 $ 12,342,598

(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 total excludes employees in the Offices of Advocacy and Office of Inspector General.

FOR MORE INFORMATION
Information about the 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 JASON BOSSIE
ADMINISTRATION Director
Office of Performance Management Office of Program Performance,
and the Chief Financial Officer Analysis, and Evaluation
409 Third Street, S.W. (202) 205-6449
Washington, DC 20416

www.facebook.com/sbagov www.twitter.com/sbagov www.youtube.com/sba
TABLE OF CONTENTS

MESSAGE FROM THE ACTING ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

MANAGEMENT’S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The SBA’s History, Goals, and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Primer of the SBA’s Principal Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Analysis of Performance Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Analysis of Performance and Agency Priority Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Evidence and Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Verification and Validation of Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Operational Portfolio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Forward Looking Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Analysis and Highlights of Financial Statements and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Highlights of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Analysis of Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Analysis of SBA’s Systems, Controls, and Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Internal Control Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Financial Management Systems Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Management Assurances: FMFIA and FFMIA Assurance Statement for FY 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

FINANCIAL REPORTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Message from the Acting Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Inspector General’s Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Independent Auditors’ Report on FY 2019 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
CFO Response to Audit Report on FY 2019 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

OTHER INFORMATION (UNAUDITED) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
OIG Report on the Most Serious Management and Performance Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Agency’s Response to the OIG Most Serious Management and Performance Challenges Facing
The Small Business Administration In Fiscal Year 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Payment Integrity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Summary of Financial Statement Audit and Management Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Fraud Reduction Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Reduce the Footprint Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Civil Monetary Penalty Adjustment for Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

APPENDICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Appendix 1 – Contact SBA: Useful Websites and Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Appendix 2 – Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Appendix 3 – OIG Audit Follow-up Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

AGENCY FINANCIAL REPORT  FY 2019
 i
SBA’S MISSION
HOW THIS REPORT IS ORGANIZED
Maintain and strengthen the
nation’s economy by enabling the The U.S. Small Business Administration’s FY 2019 Agency Financial
Report (AFR) provides financial and performance information for the fiscal
establishment and vitality of small
year beginning October 1, 2018 and ending September 30, 2019. This
businesses and by assisting report presents the SBA’s operations, accomplishments, and challenges.
in the economic recovery of Following a message from the SBA Administrator are four principal sections:
Management’s Discussion and Analysis, Financial Reporting, Other
communities after disasters.
Information, and Appendices. “Success Stories” appear throughout the report
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 the SBA’s history, organization, and principal
programs. This section highlights financial results and analysis; performance
results and analysis; and analysis of systems, controls, and legal compliance.

Financial Reporting
The Financial Reporting section provides a detailed report of the SBA’s
finances. It includes the message from the Chief Financial Officer, the audit
transmittal memorandum from the Inspector General, the Independent
Auditors’ report, and the 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. This section also includes a summary of the financial
statement audit and management assurances.

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

ii AGENCY FINANCIAL REPORT  FY 2019

MESSAGE FRO M THE AD MIN IS T R ATO R

MESSAGE FROM THE ACTING ADMINISTRATOR
November 15, 2019

It is my honor and privilege to present the U.S. Small Business Administration’s FY 2019
Agency Financial Report.

This year’s report highlights the SBA’s key achievements in helping our nation’s
entrepreneurs start, grow, expand, or recover in the event of a disaster. 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.

America’s small business owners and entrepreneurs are the drivers of economic growth across our country. Our nation’s
small businesses often spur innovations that inspire entire new industries, as well as create and support millions of jobs.
Additionally, owning a small business offers individuals a chance to pursue their dream career.

Since becoming SBA’s Acting Administrator in April of 2019, I have had the opportunity to meet with many incredible small
business owners. These business leaders uplift their communities and are a major reason why we have a record number of
Americans working today. I am proud of the work our Agency and resource partners do to support them.

In FY 2019, the SBA continued to build upon the success of former Administrator Linda McMahon’s “SBA Reimagined”
and “Ignite Tour” initiatives focused on making the Agency more unified, efficient, and effective. As an Agency, we remain
committed to improving outreach to small business owners and aspiring entrepreneurs who may not know about the services
the SBA provides.

The SBA continues to be focused on ensuring that each of the Agency’s 68 District Offices are aligned with the vision,
momentum, and outreach of its headquarters in Washington, D.C. We are committed to speaking with one voice and
dedicated toward a shared goal of helping small businesses thrive and succeed.

As the SBA Acting Administrator, I have personally seen the dedication, energy, and initiative that our employees commit
to their jobs. We are fortunate to have so many tremendous public servants working for the Agency, and their dedication to
supporting the SBA’s mission of advancing entrepreneurs and small businesses is remarkable.

Access to capital is a vital aspect of economic development. At the SBA, we work with approved lenders and community
development organizations to guarantee loans to small businesses that are unable to obtain credit in the conventional lending
marketplace. In FY 2019, the SBA approved more than 58,000 loans in the 7(a) and 504 loan programs, providing more than
$28 billion to small businesses and supporting approximately 550,000 American jobs in the process.

Minority business owners received $8.8 billion in combined 7(a) and 504 lending, or 31 percent of the SBA’s loan portfolio.
The SBA’s 7(a) lending to women-owned businesses was nearly $6.6 billion in FY 2019. Lending from the 504 loan program
to women-owned businesses was over $1.5 billion. Loans to veterans totaled nearly $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 nearly 1,200 small businesses with $5.9 billion in
financing.

Entrepreneurship is truly a team effort, and the SBA ensures that our nation’s small business owners have the resources to
tackle the challenges that they face every day. These efforts are powered by our district offices and strong resource partner
network made up of Small Business Development Centers, Women’s Business Centers, Veterans Business Outreach Centers,
and SCORE chapters. Our combined SBA network offers free or low-cost programs to help entrepreneurs plan their business,
research market trends, expand their customer base, and secure funding. In FY 2019, hundreds of thousands of American
small businesses took advantage of counseling, mentoring, and training assistance through the SBA network.

AGENCY FINANCIAL REPORT  FY 2019
 1
ME SSAG E F RO M TH E A DM I NI S TRATOR

Thanks to the SBA’s efforts, federal agencies collectively exceeded the federal small business contracting goal by awarding
more than 25 percent of federal contracts to small businesses totaling $120.8 billion – a significant increase of nearly $15
billion from the previous fiscal year. This achievement marks the sixth consecutive year in a row that the Federal Government
has exceeded this goal.

When disaster strikes, the SBA joins with our federal partners to respond by helping businesses, nonprofits, homeowners,
and renters prepare for, and recover from declared disaster events. Hurricane Florence in North Carolina and South Carolina
and Hurricane Michael in Florida occurred near the end of FY 2018; however, loan approval activity continued through
the beginning of FY 2019. The SBA approved nearly $459 million in disaster loan assistance for Hurricane Florence and
nearly $698 million for Hurricane Michael. In response to the 2018 wildfires in California, the SBA also approved over $427
million in disaster loan assistance. Low-interest loans from the SBA have enabled borrowers to replace or repair uninsured
losses, whether through physical damage or economic injury. The SBA is working with federal, state, and local partners to
continually improve the disaster response and ensure we are assisting the economic recovery as expediently as possible. During
FY 2019, the SBA approved more than 42,300 disaster loans for over $2.2 billion.

American entrepreneurs are the best in the world, and it is my privilege to serve as their advocate across the nation and as a
member of President Trump’s Cabinet. The SBA remains committed to being a responsible steward of taxpayer dollars and
the public’s trust.

The SBA is working to ensure that we are functioning as efficiently and effectively as possible for America’s entrepreneurs
while using modern technology and streamlined operations to eliminate waste and redundancy. As we look toward FY 2020
and a new decade of possibilities, the SBA is devoted to delivering results and the best possible service to America’s small
businesses.

Sincerely,

Christopher M. Pilkerton
Acting Administrator

2 AGENCY FINANCIAL REPORT  FY 2019

MANAGEMENT’S
DISCUSSION
AND ANALYSIS
SUCCESS STORY

START
AND GROW:
Family-owned Business
Uses SBA Support to
Succeed

Reynolds Welding and Fabrication
Windsor, CT

Reynolds Welding and Fabrication, LLC is a family-owned and operated
business in Connecticut started by Jerado Reynolds in 2005 and later
joined by his wife, Joyce, in 2015. The business specializes in structural
steel cutting and welding work. A master welder, Jerado learned the
trade from his uncle and earned certification from the American Welding
Society. Tragedy struck when the Reynolds’ eldest son, Dwayne, died
in a car accident. He played an integral role in the family business, and
recovering from the loss proved difficult for both the family and their
business operations. Nevertheless, they continued to persevere.

When business operations reached full capacity in 2017, an SBA 504 loan
helped them purchase a new building to meet growing demand and plan
for future growth. Additionally, Joyce Reynolds continued to receive small
business training and counseling from the SBA’s Women’s Business
Center. The business began with 3 employees and now employs more
than 15 people who work on constructing stairs, rails, structural beams,
and columns throughout New England.
MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

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

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

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

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

AGENCY FINANCIAL REPORT  FY 2019
 5
MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

STRATEGIC GOAL TWO — Build healthy STRATEGIC GOAL THREE — Restore small
entrepreneurial ecosystems and create business businesses and communities after disasters
friendly environments
Strategic Goal Three focuses on helping restore communities
Strategic Goal Two focuses on business startups, growth, and return businesses to normal operations through direct
and expansion through technical assistance, SBA resource loans to repair, rebuild, and recover from physical damage
partners, and creating a business-friendly environment to and economic losses.
reduce regulatory burdens.
The Office of Disaster Assistance provides affordable, timely,
The Office of Government Contracting and Business and accessible financial assistance to homeowners, renters,
Development provides business development assistance to and businesses following a disaster. The Disaster Loan
small businesses seeking federal contracts. This assistance program is the only form of SBA assistance that is not
includes the HUBZone, 8(a) business development, limited to small businesses.
7(j) management and technical assistance, and All Small
Mentor-Protégé programs.
STRATEGIC GOAL FOUR — Strengthen SBA’s
The Office of Entrepreneurial Development provides business
ability to serve small businesses
advising, mentoring, and training assistance through its
resource partner network composed of Small Business
Development Centers, Women’s Business Centers, and Strategic Goal Four focuses on streamlining business
SCORE, and through Entrepreneurship Education processes and decision-making at all levels to ensure
programs. efficiency and effectiveness.

The Office of Veterans Business Development ensures the The Office of Performance Management and the Chief
applicability and usability of all the Agency’s small business Financial Officer leads the Agency’s performance
programs for veterans, service-disabled veterans, reserve management, program evaluation, financial management,
component members, and their dependents or survivors and acquisition management functions.
through Veterans’ Business Outreach Centers, Boots to
The Office of Executive Management, Installations and
Business, and other grant programs.
Support Services supports resource and core administrative
The Office of the National Ombudsman works with all functions, including grant management, facilities, records
federal agencies that regulate small businesses to provide a management, and personnel security.
means for businesses to comment on federal government
enforcement activity. The SBA also maintains a 5-member The Office of Human Resources Solutions provides strategic
Regulatory Fairness Board in each of the 10 regions to hold human capital solutions to workforce issues and strives
public hearings on small business concerns. to create a work environment that attracts and retains a
talented and high-performing workforce.

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

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

6 AGENCY FINANCIAL REPORT  FY 2019

MAN AGEMEN T’S DISC USSIO N & ANA LYSI 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,
Capital: In FY 2019, the SBA approved $28.2 billion in
small businesses have been responsible for creating two out
loans and more than 63,500 loans to small businesses. The
of every three net new jobs. In turn, the U.S. Small Business
SBA supported nearly $5 billion in 504 loans, an increase
Administration’s assistance to those firms and entrepreneurs
of nearly $205 million from FY 2018. Nearly $5.9 billion
helps drive a healthy economy.
was invested in 1,191 small businesses through the Small
The SBA employs a variety of methods to support America’s Business Investment Company program.
small businesses. These methods include promoting access
Contracting: The SBA continued to partner with agencies
to capital, federal contracting, counseling, and disaster
across the Federal Government to expand small business
assistance.
contracting opportunities. From FY 2014 through FY 2018,
Throughout FY 2019, four goals from the SBA’s FY 2018- small businesses were awarded nearly $510 billion in federal
2022 Strategic Plan guided the Agency’s actions: contracts (FY 2019 contracting numbers continue to be
collected and certified). The Federal Government continues
1. Supporting small business revenue and job growth to exceed its small disadvantaged and service-disabled,
2. Building healthy entrepreneurial ecosystems and creating veteran-owned small business goals but faces challenges with
business friendly environments HUBZone and women-owned small business goals.
3. Restoring small businesses and communities after
Counseling: The SBA provided mentoring, business advice,
disasters
and training assistance to nearly half a million entrepreneurs
4. Strengthening SBA’s ability to serve small businesses and small businesses this year, which helped them start and
grow their businesses, and create or retain jobs. The Agency
The following sections highlight financial and performance
further strengthened the alignment of performance metrics
results for the Agency, including the four Agency Priority
with its resource partners that will be implemented in future
Goals. An in-depth analysis can be found in the Analysis
grant agreements.
of Financial Results and Analysis of Performance Results
sections. The complete set of performance results will be Disaster Assistance: Disaster loan applications and approvals
reported in the Annual Performance Report, released in decreased significantly compared to FY 2018, given the
February 2020. significant disaster response last year due to Hurricanes Harvey,
Irma, and Maria. In FY 2019, the Agency worked on 280
active disaster assistance declarations and approved disaster
Financial Results loans totaling over $2.2 billion.
For FY 2019, the SBA’s total budgetary resources used
for staffing, operations, and loan subsidy costs were $1.7
billion. Total nonbudgetary resources for loan financing Agency Priority Goals
used to make direct loans and purchase guarantied loans The Government Performance and Results Act
in default were $4.8 billion. The SBA’s guarantied portion Modernization Act of 2010 requires federal agencies to
of the outstanding loan principal rose 0.2 percent in establish a set of two-year Agency Priority Goals that
FY 2019 to $105.8 billion. During FY 2019, new guaranties reflect the highest priorities of agency leadership. The SBA
disbursed by SBA participating lenders were $21.2 billion, has established four APGs. The goals and outcomes from
an 8 percent decrease from last year, which resulted in a net FY 2019 were as follows:
0.2 percent increase in outstanding guaranties. In FY 2019,
purchases of defaulted guarantied loans increased from $0.9 Expand capital to small businesses in socially and
billion last year to $1.5 billion. The loans receivable portion economically disadvantaged urban communities and
of the SBA credit program portfolio increased in FY 2019 rural areas.
from $8.7 billion to $9.5 billion.
Goal: By September 30, 2019, increase the number of loans
by 5 percent from the FY 2017 baseline to small businesses in

AGENCY FINANCIAL REPORT  FY 2019
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MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

socially and economically disadvantaged urban communities new system and staff training has led to the doubling of
and rural areas (FY 2017 baseline of 25,475 for 7(a) loans, the number of applications processed by a loan specialist
504 loans, and microloans). each day during periods of high loan application volume.
Outcome: The SBA supported small business access The lower number of disaster loan applications in
to capital by providing 20,650 loans (7(a), 504, and FY 2019 will prevent the SBA from meeting its goal;
microloans), to rural and urban HUBZone small however, the SBA lowered the average number of days to
businesses totaling nearly $9.4 billion. Through a strategy process disaster loan applications by approximately half
to train lender relation specialists in the district offices the time in a two-year period.
and develop new marketing materials, the SBA reached
lenders with access to disadvantaged small businesses and
is working to increase credit union participation. Cross-Agency Priority Goals
The SBA also supports the government-wide federal Cross-
Maximize small business participation in government Agency Priority Goals. The CAP goals are Presidential
contracting. priorities and are complemented by other cross-agency
coordination and goal-setting efforts. The SBA serves as the
Goal: By September 30, 2019, maximize the percent of
co-lead for the Data, Accountability, and Transparency CAP
federal contracts by awarding at least 23 percent to small
goal.
businesses.
Outcome: The SBA will continue to collect and certify Per the GPRA Modernization Act requirement to address
FY 2019 contracting numbers through the third quarter Cross-Agency Priority Goals in the Agency strategic plan,
of FY 2020. The Federal Government exceeded its the annual performance plan, and the annual performance
FY 2018 target making 25.05 percent of contracting report, please also refer to www.Performance.gov for more
dollars, worth $121 billion, available to small businesses. on the Agency’s contributions to those goals and progress. A
The SBA provided continuous outreach to other federal summary of each CAP goal follows:
agencies to ensure that the goal was exceeded.
IT Modernization: Build and maintain more modern,
secure, and resilient information technology (IT) to
Increase federal contracts to more disadvantaged
enhance mission delivery and productivity.
small businesses.
Data, Accountability, and Transparency: Leverage
Goal: By September 30, 2019, increase by 10 percent from
data as a strategic asset to grow the economy, increase
the FY 2017 baseline the number of 8(a)-certified firms
the effectiveness of the Federal Government, facilitate
awarded federal contracts (FY 2017 baseline of 3,421
oversight, and promote transparency.
small businesses).
Developing a Workforce for the 21st Century: Ensure
Outcome: The SBA instituted several process effective and efficient mission achievement and improved
improvements for the 8(a) Business Development service to America through enhanced alignment and
program and leveraged new online tools like strategic management of the Federal workforce.
Certify.sba.gov to decrease processing time of 8(a)
Improving Customer Experience: Transform the
applications. Through additional training of Business
customer experience by improving the usability and
Opportunity Specialists in the district offices, the SBA has
reliability of our Federal Government’s most critical
shifted to higher-value work, and 450 active 8(a)-certified
digital services.
firms received their first federal contract, exceeding the
FY 2019 goal. Sharing Quality Services: Deliver technology and
process improvements that will improve citizen services.
Deploy disaster assistance effectively and efficiently. Shifting from Low-Value to High-Value Work:
Goal: By September 30, 2019, increase the average Eliminate low-value, unnecessary, and outdated policies
number of disaster loan applications processed from three to and requirements issued by central management agencies.
six applications per loan specialist per day. Category Management: Leverage common contracts to
buy common goods and services as an enterprise.
Outcome: The SBA modernized its disaster credit
management system, which went live in May 2018. The

8 AGENCY FINANCIAL REPORT  FY 2019
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MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

Results-Oriented Accountability for Grants: Rebalance
compliance efforts with a focus on results for the
American taxpayer.
Getting Payments Right: Reduce the amount of cash lost
to the taxpayer through incorrect payments.
Federal IT Spending Transparency: Improve business,
financial, and acquisition outcomes.
Improve Management of Major Acquisitions:
Successfully achieve at least two transformational program
goals over the coming year through well-managed major
acquisitions supporting a transformative critical or high-
risk mission priority.
Modernize Infrastructure Permitting: Improve the
Federal environmental review and authorization process to
enable infrastructure project sponsors to start construction
sooner, create jobs earlier, and fix our Nation’s
infrastructure faster while also ensuring that a project’s
potential impacts on environmental and community
resources are considered and managed throughout the
planning process.
Security Clearance, Suitability, and Credentialing
Reform: Advance security through a trusted workforce;
modern clearance process; secure, modern, and mission-
capable information technology; and continuous
performance improvement.
Lab-to-Market: Improve the transition of federally
funded innovations from the laboratory to the
marketplace by reducing the administrative and regulatory
burdens for technology transfer and increasing private
sector investment in later-stage R&D.

AGENCY FINANCIAL REPORT  FY 2019
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10

MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S
SBA Organization Chart

Office of Advocacy
Office of the Administrator
Office of Inspector General

AGENCY FINANCIAL REPORT
Office of Veterans Office of Office of Government
Office of Disaster Office of Office of Office of Field Office of Office of the
Business Entrepreneurial Contracting and
Assistance Capital Access Investment Operations International Trade National
Development Development Business
and Innovation Ombudsman
Development

 FY 2019
Office of


Performance Office of Executive Office of the Office of Office of Office of Office of
Office of Hearings Office of Human Office of
Management and Management, Continuous Diversity,
Resources Chief Information Communications Congressional and General Counsel
and Appeals the Installations, and Operations and Inclusion, and
Solutions Officer and Public Liaison Legislative Affairs
Chief Financial Support Services Risk Management Civil Rights
Officer
MAN AGEMEN T’S DISC USSIO N & ANA LYSI S
SBA
SBARegions
Regionsand
andField
FieldOffices
Offices
AGENCY FINANCIAL REPORT  FY 2019
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MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

PRIMER OF THE SBA’S PRINCIPAL PROGRAMS

CAPITAL (www.sba.gov/financialassistance) State Trade Expansion Program — STEP provides grants
to states to assist small businesses with the information and
7(a) Loans — The SBA offers government guaranties on
tools they need to succeed in export related activities. These
loans (up to $5 million) made by lenders to help expand
activities include participation in foreign trade missions,
access to capital for business owners who face challenges
foreign market sales trips, international marketing campaigns,
getting approved for financing. The SBA guaranties a
export trade shows, and training workshops.
portion of 7(a) loans made and administered by commercial
lending institutions. Loans can be guarantied for a variety of

CONTRACTING AND INNOVATION
general business purposes.

504 Certified Development Company Loans — The SBA (www.sba.gov/contracting)
works with CDCs, which are private nonprofit corporations, Procurement Assistance to Small Businesses — Small
and private lenders to provide long-term financing (up to business contracts represent the largest form of direct
$5.5 million) to support investment in major assets, such monetary support for small business in the Federal
as real estate and heavy equipment. The SBA guaranties the Government. Within this goal are four subgoals:
CDC’s portion of these loans.
Small Disadvantaged Businesses — This program
Microloans — The SBA provides loans to nonprofit provides assistance through the 8(a) Business
intermediary lenders, which are community-based Development program and set-aside contracting for
organizations with experience in lending and providing businesses owned and controlled by socially- and
technical assistance, that in turn make these loans (up to economically-disadvantaged individuals. Over the
$50,000) to small businesses needing small-scale financing, course of 9 years, a firm is assisted in gaining resources
and technical assistance for startup or expansion. to compete for federal contracts and for contracts in the
Small Business Investment Companies — SBICs are private sector.
privately-owned and managed investment funds that use HUBZone Small Businesses — This program provides
their capital plus funds borrowed, with an SBA guaranty (up sole-source and set-aside contracting for firms located
to $150 million), to make equity and debt investments in in designated economically disadvantaged geographical
qualifying small businesses. areas.
Service-Disabled Veteran-Owned Small Businesses
— This program allows federal agencies to set aside
EXPORTING (www.sba.gov/oit) contracts for competition only among service-disabled
Export Loans — The SBA provides several types of veteran-owned small businesses.
export loans, including SBA Export Express loans (up
Women-Owned Small Businesses — This program
to $500,000), Export Working Capital loans (up to $5
allows federal agencies to set aside certain contracts for
million), and International Trade loans (up to $5 million)
competition only among small businesses owned by
that provide small businesses with enhanced export
women.
financing options to develop foreign markets, fund their
export transactions, and/or support business expansion due Surety Bond Guarantees — A surety bond is a type of
to exporting success. contract that guarantees the performance of a contractor. If
one party does not fulfill its end of the bargain, then the SBG
U.S. Export Assistance Centers — USEACs are program provides financial compensation to the other party.
generally staffed by professionals from SBA, Department The SBA guarantees bonds issued by a surety company in
of Commerce, and Export-Import Bank. Together, their order to encourage the surety company to provide bonds to
mission is to help small- and medium-sized businesses small businesses, up to $6.5 million for non-federal contracts
compete in today’s global marketplace by providing export and up to $10 million for federal contracts.
marketing and finance assistance.

12 AGENCY FINANCIAL REPORT  FY 2019
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MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

Small Business Innovation Research — The SBIR Veterans Business Outreach Centers — The SBA’s 22
program stimulates high-tech innovation by reserving a VBOCs provide counseling and training services to veteran-
specific percentage of federal research and development owned and service-disabled veteran-owned small businesses
funds for small businesses. and entrepreneurs, along with reserve component members
who have an interest in either starting a new small business
Small Business Technology Transfer — The STTR or expanding an established small business.
program reserves a specific percentage of federal research
and development funding to award to small business and SCORE — SCORE is a nonprofit association comprising
nonprofit research institution partners. nearly 11,000 volunteer business mentors that serve
entrepreneurs with in-person mentoring and local training
workshops. As the largest volunteer business mentor
ADVISING, MENTORING, AND TRAINING network in the Federal Government, SCORE adapts its
(www.sba.gov/local-assistance) structure and services to meet the needs of small businesses.
Small Business Development Centers — SBDCs deliver Learning Center — The SBA Learning Center is an online
an array of services to small businesses and prospective portal that hosts a variety of self-paced online training
business owners using an extensive network of 63 lead courses, quick videos, web chats, and other helpful tools to
centers managing more than 900 service delivery points assist small business owners to explore and learn about many
throughout the United States and the insular territories. aspects of business ownership.
Women’s Business Centers — WBCs provide advising
DISASTER ASSISTANCE
and training through more than 110 nonprofit educational
centers across the nation. Many WBCs provide multilingual
services, and a number offer flexible hours allowing mothers (www.sba.gov/disaster)
with children to attend training classes. Disaster Assistance — The SBA is the Federal
Government’s primary source of financing for the long-term
Boots to Business — B2B is an entrepreneurial education repair and rebuilding of disaster-damaged private property
and training program offered by the SBA as part of the for homeowners, renters, businesses of all sizes, and private
Department of Defense Transition Assistance Program nonprofit organizations. It is the only form of SBA assistance
(TAP). The course provides an overview of entrepreneurship that is not limited to small businesses.
and applicable business ownership fundamentals. Active
Duty Service members (including National Guard and
Reserve), veterans of all eras, and spouses are eligible to
participate.

Native American Outreach — The program supports
American Indians, Alaska Natives, and Native Hawaiians
seeking to create, develop, and expand small businesses. It
engages in outreach, technical assistance and education,
formulates and administers training programs, and
coordinates entrepreneurial development opportunities
through co-sponsorship agreements with entities and other
federal agencies.

AGENCY FINANCIAL REPORT  FY 2019
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MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

ANALYSIS OF PERFORMANCE RESULTS

Analysis of Performance and Agency local lenders continues to be a challenge as fewer of them

Priority Goals
exist due to bank mergers and acquisitions.

The following section presents key FY 2019 performance Performance Goal: Increase the number of jobs supported
data including the four FY 2018-2019 Agency Priority through SBA capital assistance programs to 790,500 in
Goals that are important to the success of the SBA’s mission. FY 2019.
The presentation of the data and analysis is organized by
Performance Analysis: The number of jobs supported —
strategic objective, which follows the SBA’s FY 2018-2022
jobs created and retained because of SBA intervention — is
Strategic Plan. Detailed information on all SBA program
an important outcome measure of the effectiveness of the
performance data will be presented, including explanations
SBA’s programs. This measure tracks the number of jobs
of variances, in the FY 2019 Annual Performance Report to
supported through the 7(a), 504 loan, Microloan, and
be published in February 2020. Where SBA established
Small Business Investment Company (SBIC) programs.
goals in FY 2018, the SBA has displayed two years’ worth
The number of jobs supported has decreased from the prior
of data. All other goals include trend data from FY 2014
year with more than 667,000 jobs reported in FY 2019
through FY 2019.
(see Chart II). The decrease is attributed to the decline

Strategic Objective 1.1: Expand access
CHART I: Cumulative Number of Urban (HUBZone) and
to capital1 Rural Loans to Small Businesses

Priority Goal: By September 30, 2019, increase the number 25,000
of loans by 5 percent from the FY 2017 baseline to small

Number of Loans
businesses in socially and economically disadvantaged urban 20,000
communities and rural areas (FY 2017 baseline of 25,475
for 7(a) loans, 504 loans, and microloans). 15,000

Performance Analysis: The SBA’s loan programs play 10,000

a critical role in providing access to capital for small
5,000
businesses, including entrepreneurs in socially and
0
economically disadvantaged urban communities and rural FY 2018 FY 2019

areas. To support this strategy, the SBA has focused on Urban (HUBZone) Actual Rural Actual
partnering with the U.S. Department of Agriculture to
increase rural outreach and training its lenders and lender
relations specialists in the district offices. The SBA met 77 CHART II: 7(a), 504 loan, Microloan, and Small Business
percent of its target by approving 20,650 loans (see Chart Investment Company Jobs Supported
I) totaling nearly $9.4 billion. With a strong economy,
demand for SBA lending has decreased as traditional credit 1,000,000

Number of Jobs (Thousands)
markets have expanded. Lenders, however, have been 800,000
responsive to new tools like Lender Match. Outreach to
600,000

1 The information being provided above is derived solely from Agency records
400,000
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 200,000
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 0
accuracy be verified by the Agency. Accordingly, the SBA cannot make any
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
representation as to the completeness or accuracy of the information provided.
The SBA is working with the Census Bureau to better report job creation and Actual Target
retention data.

14 AGENCY FINANCIAL REPORT  FY 2019
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MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

in the number of 7(a) loans. As the economy grows and $121 billion, or 25.05 percent (see Chart IV) in contracting
other economic indicators strengthen, SBA lending often dollars. The Federal Government surpassed its goals for
decreases as lenders support more private capital. The SBA service-disabled veterans (FY 2018 result was 4.3 percent)
will continue to reach entrepreneurs with the greatest need and small disadvantaged businesses (FY 2018 result was
who cannot access credit elsewhere. 9.7 percent). Also, in FY 2018, women-owned small
businesses were awarded 4.8 percent of federal contracts,
and HUBZone small businesses were awarded 2.1 percent
Strategic Objective 1.2: Help small of federal contracts (see Chart V). To help meet these goals,
business exporters succeed in global the SBA deployed a team of highly trained and skilled
markets professional analysts, procurement center representatives
(PCRs), industrial specialists for size protests (ISS), and
Performance Goal: Increase the value of small business certificate of competency and forestry management
export sales to $3.1 billion in FY 2019. specialists to actively engage staff across the Federal
Government to promote small business contracting awards.
Performance Analysis: Increasing access to export The Federal Government continues to face challenges
financing, combined with trade counseling and training, meeting the HUBZone goal. The SBA has finalized a
contributes to the enhanced ability of small business program evaluation that provided recommendations on ways
exporters to succeed in the global marketplace. This year, to recruit and retain more HUBZone small businesses. As a
the SBA approved 890 export loans totaling more than result, the SBA has revised its regulations and is conducting
$1 billion. The State Trade Expansion Program (STEP)
provided $18 million in grants to 47 states making it
possible for small businesses to participate in international CHART III: Cumulative Value of Export Sales
trade shows and trade missions. Collectively, the SBA
supported over $2.9 billion in export sales (the last two
quarters of STEP data are undergoing collection)2 (see

Export Sales ($ Thousands)
3,500,000
Chart III). The SBA trained and counseled 10,800 small 3,000,000
businesses on export finance. In addition, the SBA partnered 2,500,000
with the U.S. Department of Commerce to provide trade 2,000,000
financing experts at domestic and overseas trade shows. 1,500,000
1,000,000

Strategic Objective 1.3: Ensure federal 500,000

contract and innovation set-aside goals 0
FY 2018 FY 2019

are met and/or exceeded Actual Target

Priority Goal: By September 30, 2019, maximize the
percent of federal contract dollars by awarding at least 23 CHART IV: Percent of Federal Prime Contract Dollars
percent to small businesses. Awarded to Small Businesses

Performance Analysis: By law, 23 percent of federal 30

Percent of Small Business
prime contracting dollars are set aside for small businesses,
25
which includes 5 percent of prime and subcontracts to
small disadvantaged businesses and women-owned small 20

businesses and 3 percent of prime and subcontracts to 15

Contract Dollars
HUBZone small businesses and service-disabled veteran- 10
owned small businesses. For the sixth consecutive year, in
5
FY 2018 (the latest year of data available due to the data
certification process), the Federal Government surpassed its 0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
prime contracting goal by awarding small businesses nearly
Actual Target
2 The SBA will update STEP data for FY 2019 in the APR to be published in
February 2020.

AGENCY FINANCIAL REPORT  FY 2019
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MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

CHART V: Percent of Federal Prime Contract Dollars CHART VI: Number of 8(a)-Certified Firms Awarded
Awarded to Disadvantaged Small Business Goals Federal Contracts

8(a) Certified Firms (Hundreds)
10 4,500

Contract Dollars (Percent)
4,000
8
3,500
3,000
6
2,500
4 2,000
1,500
2 1,000
500
0
Small Service-Disabled 0
Woman-Owned HUBZone FY 2018 FY 2019
Disadvantaged Veteran-Owned

Actual Target Actual Target

a follow-on evaluation to develop additional evidence to targeted outreach. FY 2019 is a baseline year for this new
support performance improvements. performance goal.

Performance Analysis: The SBA provided mentoring,
Strategic Objective 2.1: Develop small business advice, and training assistance to more than
businesses through technical assistance 550,000 entrepreneurs and small business owners in
FY 2019. In FY 2019, the SBA implemented a new
Priority Goal: By September 30, 2019, increase by calculating methodology for the entrepreneurial ecosystem
10 percent from the FY 2017 baseline the number of performance goal to create a single set of metrics to
8(a)-certified small businesses awarded federal contracts highlight progress towards outcomes. Due to this new
(FY 2017 baseline of 3,420 small businesses). methodology, historical data prior to FY 2019 are not
available for comparison. The SBA continued sustaining
Performance Analysis: The 8(a) program helps socially and and growing the Boots to Business (B2B) entrepreneurship
economically disadvantaged entrepreneurs gain access to training track in partnership with the U.S. Department
Federal Government contracts. The SBA collaborated with of Defense’s (DoD) Transition Assistance Program (TAP),
other federal agencies’ Office of Small and Disadvantaged where nearly 16,500 veterans, service members, and military
Business Utilization (OSDBU) to provide training and share spouses benefited from entrepreneurship services.
best practices for small businesses to navigate the federal
acquisition process. In addition, the SBA has developed
and implemented standardized training for its Business Strategic Objective 2.3: Create a small
Opportunity Specialists in its district offices to ensure business friendly environment
consistent support of disadvantaged small businesses across
the country. In prior years, small businesses had a difficult Performance Goal: Increase the number of outreach events
time negotiating the lengthy 8(a) certification process. to 100 through partnerships with federal agencies, trade
Through new tools like Certify.SBA.gov, the SBA has associations, and resource partners to reduce regulatory
exceeded its FY 2019 goal of 3,760 firms and achieved burdens on small businesses in FY 2019.
3,871 8(a) firms with contract awards (see Chart VI).
Performance Analysis: The SBA’s Office of the National
Ombudsman worked with federal agencies and the
Strategic Objective 2.2: Build healthy small businesses they regulate to provide a confidential
entrepreneurial ecosystems and impartial channel for small businesses to comment
on enforcement activities, audits, on-site inspections,
Performance Goal: Increase the number of entrepreneurs compliance assistance, or other types of issues. The SBA
assisted through partnerships, virtual resources, and raised awareness of its products and services through direct
outreach to small business owners and entrepreneurs, and

16 AGENCY FINANCIAL REPORT  FY 2019
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MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

established relationships with trade association leaders,
CHART VII: Number of Outreach Events Through Federal
resource partners, and other federal agencies. In FY 2019,
Agencies, Trade Associations, and Resource Partners
the National Ombudsman completed 45 events as it
refocused outreach to be more direct and concentrated (see
Chart VII). 160
140

Outreach Events
120

Strategic Objective 3.1: Deploy disaster 100
80
assistance effectively and efficiently 60
40
Priority Goal: By September 30, 2019, increase the average 20
number of disaster loan applications processed from three to 0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
six applications per loan specialist per day.
Actual Target
Performance Analysis: To increase the speed of processing
for disaster loan applications, the SBA modernized its
Disaster Credit Management System (DCMS) in May CHART VIII: Average Number of Loan Applications
2018. DCMS streamlined or eliminated institutional Processed Per Loan Specialist Per Day
processes and has helped loan specialists process applications
more quickly for disaster survivors. In FY 2019, SBA 7
processed over 95,600 disaster loan applications for more 6
than $2.2 billion, which is significantly lower than the

Loan Applications
5
prior year given the FY 2018 surge of applications due to
4
Hurricanes Harvey, Irma, and Maria. The SBA will not
3
meet its priority goal because of the reduced number of
disaster loan applications in FY 2019 (see Chart VIII), but 2

the average number of days to process these disaster loans in 1
FY 2019 was cut in half compared to FY 2018, from nearly 0
FY 2018 FY 2019
18 days to just under 9 days per application.
Actual Target
Performance Goal: Increase the customer satisfaction rate
for disaster loan approvals to 77 percent in FY 2019.
CHART IX: Customer Satisfaction Rate for Disaster Loan
Performance Analysis: The SBA tracks customer Approvals
satisfaction for its disaster assistance program through an
annual survey that uses the American Customer Satisfaction 90

Customer Satisfaction Rate
Index methodology. The index summarizes key points in the 80
loan process, including the application, final decision, and 70
60
closing of the loan. The SBA had a customer satisfaction
50
rate of 82 percent, which is above the target of 77 percent

(Percentage)
40
(see Chart IX). The satisfaction rate is a result of several
30
factors, including improvements to the application process 20
and upgrades to the Disaster Loan Assistance Portal. In 10
addition, the development of the www.DisasterAssistance. 0
gov website made disaster assistance responsive, consistent, FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

and easy for disaster survivors to find resources. Actual Target

AGENCY FINANCIAL REPORT  FY 2019
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MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

Strategic Objective 4.1: Ensure effective CHART X: Customer Satisfaction Rate for Financial
and efficient management of Agency Management Services
resources
5

Customer Satisfaction Rate
Performance Goal: Increase the customer satisfaction rate
4
of financial management services for the SBA’s employees to
4.0. 3

Performance Analysis: The SBA exceeded its customer 2
satisfaction goal for its financial management services
to SBA employees, achieving an average score of 4.4 on 1

a 5-point scale (see Chart X). The SBA developed the 0
customer satisfaction baseline in FY 2018. A score of four FY 2018 FY 2019

or higher indicates superior satisfaction with financial and Actual Target
performance management services.

CHART XI: Federal Employee Viewpoint Survey Job
Strategic Objective 4.2: Build a high- Satisfaction Rate
performing workforce 80
70

Job Satisfaction Rate
Performance Goal: Increase SBA employee satisfaction
60
scores through the Federal Employee Viewpoint Survey to
50
67 percent by FY 2019.
40

(Percentage)
Performance Analysis: The SBA achieved its highest 30

Federal Employee Survey (FEVS) employee engagement 20

index score in recent years with an increase to 70 percent in 10

FY 2019 from 68 percent in FY 2018 (see Chart XI). The 0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
SBA’s response rate of 69.2 percent was especially positive.
Actual Target
Through core training and professional development
activities and enhanced collaboration, more employees
felt engaged, which show in the data. Furthermore, higher
engagement scores increase employee retention, which in duplicative hardware, software, and services. In addition,
turn reduces hiring and training costs. through innovation and testing pilots and prototypes,
the SBA has achieved cost-savings by creating greater
opportunities to leverage new technology. For example, the
Strategic Objective 4.3: Implement SBA Office of the Chief Information Officer partnered with
enterprise-wide information system the Office of Disaster Assistance to leverage Skype (Voice
modernization and cost-effective and Video Collaboration Software) for online training in
technology lieu of on-site training, resulting in significant travel costs
reduction for 100 Loss Verifiers. By FY 2019, such cost
Performance Goal: Increase IT cost savings/avoidance savings and avoidance totaled $13.7 million (see Chart XII)
through the streamlining of contracting, category exceeding its target by nearly $3 million.
management, and Cloud computing to $10.8 million in
FY 2019.

Performance Analysis: In FY 2019, the SBA made
significant progress in technology modernization by
adopting cloud-based solutions and consolidating

18 AGENCY FINANCIAL REPORT  FY 2019
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MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

rural investments, field customer experience, acquisition
CHART XII: Cumulative Dollars of IT Cost Savings/
management, and the All Small Mentor-Protégé program
Avoidance
(ASMPP). Additionally, the SBA entered into an agreement
with the U.S. Census Bureau to assess the impact of 7(a)
16
and 504 loans using administrative data.

Cost Savings/Avoidance
14
12 The SBA continued to increase staff capacity and knowledge
10 of program evaluation though its Evidence and Evaluation
8
Community of Practice and updated the Agency’s

($ Millions)
6
Framework and Guidelines for Program Evaluation at the US
4
Small Business Administration. The SBA plans to initiate
2
new program evaluations yearly to continue building a
0
FY 2018 FY 2019 suite of evidence that will better inform decisions. The SBA
Actual Target will publish evaluation results on its website to support
transparency and incorporate findings into its performance
management framework.

Evidence and Evaluation Verification and Validation of Performance
Data
The SBA continues to expand the availability and use
of evidence and evaluation to understand and make
decisions about SBA programs and operations. To support Managing for results and integrating performance, financial,
implementation of the Foundations for Evidence-based and budgetary information requires valid, reliable, and
Policymaking Act, the SBA appointed a Chief Data Officer, high-quality performance measures and data. Improving
Evaluation Officer, and statistical official. The Agency will data quality continues to be a priority for the SBA. The
establish a data governance board and identify ways to SBA’s performance analysts work with program office leads
enhance staff capacity in this field. across the Agency to acquire high-quality data. In addition
to using output data internally from its systems, the SBA
In FY 2019, the SBA oversaw program evaluations for relies on data from resource partners, other federal agencies,
the Small Business Investment Companies (SBIC), 7(j) and other government entities to assess its accomplishments
Online Technical Assistance, HUBZone, Federal and and effectiveness. The SBA vigorously pursues the following
State Technology (FAST), and the Surety Bond Guarantee strategies to ensure data quality:
programs. SBA program managers will be able to use the
results of these evaluations to inform management decisions, Ensuring the validity of performance measures and
identify areas where further evidence is needed, and improve data. The SBA conducts an annual performance
outcomes for small businesses. The SBA’s leadership uses measure review to assess the validity of its measures
evidence in its quarterly deep dives (performance reviews) and underlying data. The SBA’s performance analysts
and strategic objective reviews and has woven evidence into meet with each office for in-depth discussions about
the development of its Strategic Plan, Annual Performance proposed externally reported measures. The meetings
Plan, and Annual Performance Report. help determine whether the proposed measures and
underlying data are useful for demonstrating a program
The Agency updated its FY 2018-FY 2022 Enterprise office’s success, which is defined by the goals and
Learning Agenda (ELA) which refined key research and objectives identified in the Agency’s FY 2018-2022
evaluation questions for each strategic goal and provided Strategic Plan.
updates on the Agency’s evidence building activities. The
Fostering organizational commitment and capacity
ELA, developed in partnership with each program office,
for data quality. The SBA issues a monthly
identifies areas where evaluation would provide insights
executive performance dashboard to apprise senior
about program effectiveness, progress toward outcomes,
management on progress. The Agency also holds
or test pilot initiatives. Based on questions in the ELA, the
quarterly performance review meetings with the
SBA initiated five new centralized program evaluations
Deputy Administrator, Chief of Staff, Performance
for the State Trade Expansion Program (STEP), SBIC
Improvement Officer, and program offices. At these

AGENCY FINANCIAL REPORT  FY 2019
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MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

meetings, the Agency’s leadership reinforces its At least three main factors contributed to the loan guaranty
commitment to the performance metrics and works portfolio’s recent growth:
directly with the program offices to identify best
practices and mitigate challenges. Annually, each Continuous Growth in the Economy — Real Gross Domestic
Associate Administrator must certify their program Product in the United States grew at an average quarterly
office’s performance data before it is externally reported rate of 2.4 percent between 2016 to 2019 Quarter 2.4 This
and published online. increase in RGDP supports increased revenues and profits at
small and large firms, which in turn increases their demand
Assessing the quality of existing data. The SBA’s for credit.
performance analysts work with program office staff
to reconcile data by creating independent performance Increase in Business Financial Stability — As the economy
reports and analyses and comparing the independently continues to grow, several factors continue to influence
generated data with the data reported by the program demand and increases in revenues. First, inflation remains
offices. These activities verify the data and the low (on average 2.1 percent in 2018),5 which keeps the cost
underlying processes used for reporting.
Responding to data limitations. The SBA’s performance
analysts work with program offices to identify data CHART XIII: Makeup of SBA’s Outstanding Loan
Portfolio
limitations and specify the necessary steps to improve
data. In addition, some program offices rely on data 160

Outstanding Loans ($ Billions)
provided by third-party resource partners, who are 140
responsible for collecting, storing, and reporting data 120
to the SBA. The program offices have internal processes 100
for working closely with their resource partners to
80
ensure that data are correctly reported.
60
40

Operational Portfolio Analysis 20
0
The Operational Portfolio Analysis provides information FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
on the SBA’s credit programs and does not reference the 7(a) 504 SBIC Disaster All Other
financial statements. The SBA is the taxpayers’ custodian of
small business loan guaranties and manages a direct loans
portfolio of more than $143.5 billion.3 During FY 2019, the CHART XIV: Quarterly Gross 7(a) and 504 Loan
portfolio grew by $1.2 billion, or 0.8 percent. By program, Approvals
the Agency’s 7(a) loan portfolio expanded by $2.7 billion, 10 Average
7.03
the 504 loan portfolio decreased slightly by $0.1 billion, and 9 Average Average Average

Loan Approvals ($ Billions)
Average 7.22 7.62 7.53
the SBIC portfolio decreased by $1.8 billion. The Agency’s 8 5.85 Average
6.97
disaster loan portfolio increased by $0.6 billion, while all 7
other portfolios declined by $0.2 billion (see Chart XIII). 6
5
4
New Guarantied Loans 3
2
The quarterly average loan volume decreased slightly 1
in FY 2019 with an average of $7 billion. Chart XIV 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
demonstrates the growth in loan approvals since FY 2014,
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
particularly the increase between fiscal years 2014 and 2015.

3 The total portfolio consists of guarantied business loans outstanding, guarantied debentures, direct business loans, and direct disaster loans. The data include all
performing loans and defaulted loans that have not been charged-off.
4 U.S. Department of Commerce, Bureau of Economic Analysis: www.bea.gov/newsreleases/glance.htm.
5 U.S. Department of Labor, Bureau of Labor Statistics: www.bls.gov/cpi/home.htm.

20 AGENCY FINANCIAL REPORT  FY 2019
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MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

of consumer goods and services affordable. Second, the
CHART XV: Outstanding Commercial Loans to Small vs.
dollar continued to maintain its strength in international
Nonsmall Businesses
exchange markets during 2018-2019,6 which also supports
the stability of U.S. prices. Finally, the unemployment rate
4,000

Outstanding Loans ($ Billions)
has continued below 4 percent at pre-recession levels, which
3,500
boosts consumer confidence and spending.7
3,000

Market for Small Business Lending — According to data 2,500

from the Federal Deposit Insurance Corporation, the total 2,000

market for business loans increased between 2014-2018 1,500
1,000
by 27 percent ($738 billion). However, 94 percent ($692
billion) of this increase is accounted for by loans to nonsmall 500

businesses,8 whereas total small business loans increased by 0
CY 2014 CY 2015 CY 2016 CY 2017 CY 2018
nearly $46 billion. This means the ratio of small business
Small Business Loans Nonsmall Business Loans
loans compared with the total bank market decreased (see
Chart XV). Furthermore, there has been a trend in the
banking industry toward consolidation, which is reflected CHART XVI: Monthly Gross Disaster Assistance Loan
in the reduction of commercial banks between 2014-2018 Approvals
by 16 percent. This makes the SBA’s guaranty products
even more critical for growing small businesses that may be 1,800

Loan Approvals ($ Millions)
denied credit in the private loan market. 1,600
1,400
1,200
New Direct Loans 1,000
800
In FY 2019, the SBA’s annual lending for the Disaster
600
Assistance program is $2.2 billion. The magnitude of
400
FY 2019’s disaster loan activity is down 68% compared with
200
FY 2018’s total of $7 billion. FY 2018’s lending total was 0
largely driven by the SBA’s response to Hurricanes Harvey, Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept

Irma and Maria (HIM). Chart XVI illustrates the relative FY 2017 FY 2018 FY 2019
size of disaster loans in FY 2019 by month, compared with
the prior two fiscal years.

Most of the Disaster Assistance loan portfolio outstanding
balance comprises lending from FY 2006 (Hurricanes
Katrina, Rita, and Wilma), FY 2013 (Hurricane Sandy),
and FY 2018 (HIM Hurricanes). The SBA will continue
to make disaster loans an important recovery tool for
businesses, homeowners, and renters that survive a disaster.

6 Financial Deposit Insurance Corporation: www.macrotrends.net/1329/us-
dollar-index-historical-chart.
7 U.S. Department of Labor, Bureau of Labor Statistics: data.bls.gov/
timeseries/LNS14000000.
8 Nonsmall businesses are firms that have more than 500 employees.

AGENCY FINANCIAL REPORT  FY 2019
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MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

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

Delinquency Rate (Percentage)
5
defaulted). Thus, delinquency rates are a general indicator
of the Agency’s and taxpayers’ future liabilities for these 4

programs. A declining delinquency rate (see Chart XVII) is
3
a positive indicator for the financial performance of any loan
portfolio. 2

Strong economic growth, strong profit performance, and 1
NBER Declared
Recession Ends
tighter lending standards by financial institutions during
0
the past several years have reduced delinquency rates for
all business loans, which have been steadily declining FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

since reaching cyclical peaks in the latter part of 2009. 7(a) Delinquency Rate 7(a) Past 12 Months Charge-Off Rate
Delinquency rates for the Agency’s major loan programs
followed this national downward trend. Delinquency 504 Loans

Delinquency Rate (Percentage)
6
rates for the 7(a) loan program declined from the 3.8 NBER Declared
5 Recession Ends
percent peak in January 2009 to 0.8 percent in July 2019.
Delinquency rates for the 504 loan program likewise 4
declined from the 5 percent peak in February 2010 to 0.7 3
percent in July 2019.
2

1
Portfolio Performance — Charge-Offs 0

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
The 12-month charge-off rate for the 7(a) loan program
sharply declined during the FY 2010-2013 period, falling
from 4.3 percent during the fourth quarter of 2010 to 1.2 504 Delinquency Rate 504 Past 12 Months Charge-Off Rate

percent in the third quarter of 2013. However, the rate
increased thereafter, until decreasing in July 2019 to 1
percent (see Chart XVII). The 7(a) loans not sold on the
secondary market become a charge-off only after all efforts loan program is an economic development program with
to recover a delinquent balance have been exhausted, such a commercial real estate focus. As such, recovery rates of
as liquidating the underlying collateral. The latent rise of defaulted 504 loans are, with some noticeable time lag,
the 7(a) charge-off rate in 2013 is attributable to recession- significantly impacted by the pricing trend in this sector.
era loans that were charged-off after efforts to recover Real estate prices have increasing since 2009 and, as of
delinquent balances had been exhausted. Now that this 2019, commercial real estate prices are increasing.
effort to charge-off the recession-era loans is complete, the
charge-off rate mirrors the delinquency rate for FY 2019. Quarterly information on the status of the SBA’s loan
portfolio, including outstanding balances and approvals by
The 12-month charge-off rate for the 504 loan program loan program and purchase rates, is available on the SBA’s
continuously increased from FY 2008 to FY 2013, peaking website at www.sba.gov/performance.
at 4.4 percent in January 2013, but dropping to 0.3 percent
in July 2019. This trend is not surprising, since the 504

22 AGENCY FINANCIAL REPORT  FY 2019
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MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

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

Technology
strengthen a more educated and skilled workforce.

Technology has evolved so that entrepreneurs have greater
access to markets and more capabilities to start and Disasters
expand their businesses. However, not all entrepreneurs
A natural disaster can destroy lives, businesses, and
have access to adequate markets, and some face challenges
communities in little time. While the SBA has many
connecting to resources. The SBA will continue adapting
capabilities to respond to hurricanes, tornadoes, forest
and developing new platforms to reach entrepreneurs in
fires, and floods, the growing threat and number of these
emerging markets. Virtual training platforms and online
occurrences remains a serious concern. Disaster preparedness
tools will allow the SBA to reach more customers. Through
is a key component of the SBA’s Disaster Assistance program
modernization efforts like Certify.SBA.gov and the Disaster
and has helped many small businesses prepare for the
Credit Management System (DCMS) 2.0, the SBA can
unexpected. The SBA continues to modernize and respond
process applications faster and electronically. Technological
to these growing threats through updating technology and
advancements will continue to shape how small businesses
streamlining its ability to onboard staff in shorter periods of
operate and how the Agency responds.
time.

Markets SBA’s Workforce
As the economy continues to grow and diversify, small
As a growing percentage of Agency employees become
businesses must be nimble to these changes and learn to
retirement eligible, the SBA continues to search for ways
adapt to new markets. With an ever-expanding global
to recruit and retain the best talent. Competition with
economy, small businesses will need to look toward new
private industry and other agencies is strong and retention
markets and determine how to reach new consumers. Only
is challenging. The Agency has identified mission critical
1 percent of small businesses export in the global market,
occupations and developed workforce plans to address
which poses an excellent opportunity for expansion. In the
gaps. At the same time, the Agency seeks to ensure that its
domestic market, interest rates will shape access to capital.
workforce is representative of the public it serves and that
The Agency will continue to depend on lenders, including
it can effectively communicate with, and meet the needs
banks, credit unions, and community development financial
of, entrepreneurs and small business owners. The SBA has
institutions. More than 3,000 lenders have left the market
developed and aligned training for its field staff to ensure
since 2002. With fewer lenders, small businesses must adapt
that they have the tools to help small businesses succeed. By
and find new ways to access capital.
providing SBA employees with the tools and resources they
need, the Agency will be able to better deliver resources to
America’s small businesses.

AGENCY FINANCIAL REPORT  FY 2019
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MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI 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 Item 2019 2018 % Change
CONDENSED BALANCE SHEET DATA
Fund Balance with Treasury $ 7,036,675 $ 8,137,946 -13.53%
Credit Program Receivables and Related Foreclosed Property, Net 9,493,680 8,727,792 8.78%
All Other Assets 188,297 122,759 53.39%
Total Assets $ 16,718,652 $ 16,988,497 -1.59%
Debt 11,810,241 11,212,607 5.33%
Downward Reestimate Payable to Treasury 1,028,472 797,694 28.93%
Liability for Loan Guaranties 2,000,420 2,662,786 -24.87%
All Other Liabilities 245,911 242,253 1.51%
Total Liabilities 15,085,044 14,915,340 1.14%
Unexpended Appropriations 1,779,472 2,341,412 -24.00%
Cumulative Results of Operations (145,864) (268,255) 45.62%
Total Net Position 1,633,608 2,073,157 -21.20%
Total Liabilities and Net Position $ 16,718,652 $ 16,988,497 -1.59%
Item
For the Fiscal Year 2019 2018 % Change
STATEMENT OF NET COST BY STRATEGIC GOAL
Goal 1: Support Small Business Revenue and Job Growth
Loan Subsidy Cost Including Reestimates $ (981,405) $ (1,089,432) 9.92%
All Other Costs Net of Revenue 209,960 173,997 20.67%
Goal 2: Build Healthy Entrepreneurial Ecosystems and Create Business Friendly Environments 310,490 253,497 22.48%
Goal 3: Restore Small Businesses and Communities after Disasters
and Tomorrow’s Small Business
Loan Subsidy Cost Including Reestimates 94,998 492,668 -80.72%
All Other Costs Net of Revenue 329,768 591,777 -44.27%
Goal 4: Strengthen SBA’s Ability to Serve Small Businesses 147,190 176,416 -16.57%
Costs Not Assigned 25,525 22,752 12.19%
Net Cost of Operations $ 136,526 $ 621,675 -78.04%

CONDENSED STATEMENT OF CHANGES IN NET POSITION
Beginning Unexpended Appropriations $ 2,341,412 $ 1,653,684 41.59%
Total Budgetary Financing Sources (561,940) 687,728 -181.71%
Ending Unexpended Appropriations $ 1,779,472 $ 2,341,412 -24.00%
Beginning Cumulative Results of Operations (268,255) (141,354) -89.78%
Total Financing Sources 258,917 494,774 -47.67%
Less: Net Cost of Operations 136,526 621,675 -78.04%
Ending Cumulative Results of Operations $ (145,864) $ (268,255) 45.62%
Ending Net Position $ 1,633,608 $ 2,073,157 -21.20%

CONDENSED STATEMENT OF BUDGETARY RESOURCES
Unobligated Balance Brought Forward $ 6,667,971 $ 5,875,912 13.48%
Other Budgetary Resources, Net (341,751) 143,643 -337.92%
Appropriations (discretionary and mandatory) 879,605 2,499,538 -64.81%
Borrowing Authority (discretionary and mandatory) 2,231,792 4,239,563 -47.36%
Spending Authority from Offsetting Collections 2,904,981 4,356,021 -33.31%
Total Budgetary Resources $ 12,342,598 $ 17,114,677 -27.88%
Obligations Incurred, Budgetary $ 1,655,874 $ 2,768,911 -40.20%
Obligations Incurred, Nonbudgetary 4,794,658 7,677,795 -37.55%
Unobligated Balances, Available and Unavailable 5,892,066 6,667,971 -11.64%
Total Status of Budgetary Resources $ 12,342,598 $ 17,114,677 -27.88%

24 AGENCY FINANCIAL REPORT  FY 2019
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MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

Analysis of Financial Results
and defaulted guarantied loans. The direct loan allowance
and loan guaranty liability for each loan program cohort
The principal financial statements have been prepared to is adjusted annually under FCRA through the subsidy
report the financial position and results of operations of the model reestimate process. The SBA’s FCRA accounting is
entity, pursuant to the requirements of 31 U.S.C. 3515(b). discussed further in this section and in Notes 1 and 6.A of
While the statements have been prepared from the records the financial statements.
of the entity in accordance with GAAP for federal entities,
and the formats prescribed by the OMB, the statements The credit subsidy cost is the net present value of expected
are in addition to the financial reports used to monitor cash inflows and outflows over the life of a guarantied
and control budgetary resources, which are prepared from loan or the difference between the net present value of
the same records. The statements should be read with expected cash flows and the face value of a direct loan. The
the realization that they are for a component of the U.S. SBA receives budget authority annually to fund its credit
Government, a sovereign entity. programs. When loans are disbursed, the SBA records
subsidy expense for non-zero subsidy loan programs.
This Analysis of Financial Results references numbers in the
Highlights of Financial Results that were derived from the In accordance with the FCRA, the subsidy costs are
Financial Statements and Notes in this report. As a result, reestimated annually. Reestimates update original loan
the definitions of the loan and guaranty balances used in program cost estimates to reflect actual experience and
this Analysis of Financial Results may differ somewhat from changes in forecasts of future cash flows for each annual
the balances in the Operational Portfolio Analysis section. cohort of loans. An upward reestimate occurs when the
For example, for the 7(a) program, the total amount of present value of expected cash outflows exceeds the present
guarantied loans is used in the Portfolio Analysis, but only value of expected cash inflows. A downward reestimate
SBA’s guarantied portion is used in the Analysis of Financial occurs when the present value of expected cash inflows
Results because it ties to balances in the financial statements. exceeds the present value of expected cash outflows.

Increased reestimated costs are funded in the following year
Background by permanent indefinite budget authority, while decreased
The SBA is a major federal credit reform agency of the costs are returned by the SBA to a Treasury general fund.
U.S. Government. Only $1.0 billion of the SBA’s $12.3 The portion of the outstanding principal guaranteed by
billion budgetary resources in FY 2019 were for salaries the SBA was $105.8 billion as of September 30, 2019, an
and expenses, with the rest supporting the SBA’s credit increase of 0.2 percent from the $105.6 billion guaranteed
programs. When apportioned by the OMB, budgetary as of September 30, 2018 (see Note 6.C in the financial
resources are available to enter into new obligations and statements). As shown in Chart XVIII, new guaranties
to liquidate them. Budgetary resources are made up of disbursed by SBA participating banks during FY 2019
new budget authority and unobligated balances of budget
authority provided in previous years. The loan financing
funds record all the cash flow activity resulting from post-
1991 direct loans and loan guaranties and are not budgetary CHART XVIII: Guarantied Loans Disbursed
costs. The financing accounts are reported separately in the
Budget of the United States Government and are excluded
25
from the budget surplus/deficit totals.

Guarantied Loans ($ Billions)
20
The Federal Credit Reform Act (FCRA) governs the SBA’s
accounting for direct loans and loan guaranties made 15
in FY 1992 and thereafter. Under FCRA, direct loans
outstanding are reported net of an allowance using the 10
present value of forecasted cash flows in subsidy models that
are OMB-approved. 5

A Liability for Loan Guaranties is also reported using 0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
subsidy models with forecasted cash flows from user fees

AGENCY FINANCIAL REPORT  FY 2019
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MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

were $21.2 billion, an 8 percent decrease compared to
the FY 2018 figure of $23.0 billion. This net $1.8 billion CHART XIX: Purchases of Guarantied Loans
decrease resulted from a $1.7 billion decrease in 7(a) loans
and a $0.1 billion decrease in SBIC Debentures in FY 2019.
This net decrease in FY 2019 guaranty disbursements and 3

Guarantied Loans ($ Billions)
increase in purchases of guarantied loans contributed to the
0.2 percent increase in outstanding guarantied principal
2
mentioned above.

Credit program receivables for the SBA are comprised of
business and disaster direct loans and defaulted business 1

loans purchased per the terms of the SBA’s loan guaranty
programs, which are offset by an allowance for the subsidy.
The allowance for the subsidy cost of the gross loans 0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
receivable is recorded as a contra asset, and the net asset is
reported on the Balance Sheet. The subsidy allowance is
determined by modeling the projected future cash inflows
and outflows of SBA credit programs using discounted cash Financial Position
flow methodology. The subsidy allowance for each loan
program cohort is reestimated annually. Increases are funded Assets
by Treasury, while decreases are returned to Treasury by the The SBA had total assets of $16.7 billion at the end of
Agency. Loan losses, the costs of loan servicing, and loan FY 2019, down 1.6 percent from FY 2018. Total assets
interest rates are factors that affect the subsidy allowance. decreased due to a $0.8 billion increase in Credit Program
Receivables and Related Foreclosed Property offset with a
SBA credit program receivables were valued at $9.5 billion
$1.1 billion decrease in the Fund Balance with Treasury.
in FY 2019, an increase of $0.8 billion from FY 2018. The
The increase in Credit Program Receivables and Related
change in the credit program receivables resulted from an
Foreclosed Property was primarily due to the net increase
increase of $0.6 billion in direct disaster loans. The amount
in direct disaster loan disbursements. The decrease in Fund
of defaulted guarantied loans decreased by $0.1 billion
Balance with Treasury was due primarily to a decrease
as collections and charge-offs fell behind new guaranty
in appropriations and borrowings received to fund the
purchases. The amount of direct disaster loans increased as
disbursement of disaster loans, an increase in the repayment
collections and charge-offs were exceeded by disbursements
of borrowings, as well as a large transfer to the Master
of disaster loans and increased by a slightly lower subsidy
Reserve Fund (MRF).
allowance amount.

As reflected in Chart XIX, guarantied loan purchases Liabilities
increased $0.5 billion in FY 2019 to $1.4 billion. The The SBA had total liabilities of $15.1 billion at the end of
increase in purchases this year contributed to the net FY 2019, up 1.1 percent from FY 2018. Liabilities consist
increase in the outstanding guarantied business loans primarily of the Debt with Treasury, Liability for Loan
receivable. Guaranties, and Downward Reestimate Payable to Treasury.

Debt with Treasury increased $0.6 billion in FY 2019 due
to net borrowing activity needed to cover disaster loan
programs. Note 9 in the financial statements provides
additional detail on SBA’s Debt with Treasury.

The Liability for Loan Guaranties is the estimate of the net
present value of the future amount the SBA will pay, net of
fee collections, to liquidate expected purchases of guarantied
loans under its guarantied loan programs. The Liability
for Loan Guaranties for each loan program cohort is

26 AGENCY FINANCIAL REPORT  FY 2019

MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

reestimated annually. Increases are funded by Treasury while
the Agency returns the decreases to Treasury. The Liability CHART XX: Credit Program Subsidy Reestimates
for Loan Guaranties decreased $0.7 billion due to the net
of downward reestimates of future costs for SBA’s guaranty

Subsidy Reestimates ($ Billions)
1
portfolio, guarantied loan purchases, and the collection of
fees.
0
The Downward Reestimate Payable to Treasury increased
$0.2 billion in FY 2019. This increase was mainly due -1
to a change in the year-end accrual of reestimates that
resulted from lower than projected purchases and higher
-2
than projected recoveries for some cohorts in the 7(a) and FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
SBIC loan programs. Additionally, better than projected Direct Disaster Loans (Strategic Goal 3)
performance and updated performance assumptions for the Direct Business Loans (Strategic Goal 1)
Disaster program and revised economic assumptions for the Guarantied Business Loans (Strategic Goal 1)

SMG program led to the increase in the reestimate.

Net Position affected Strategic Goal 1 costs. Chart XX reflects the change
Cumulative Results of Operations is the accumulative in the net subsidy reestimates for the guarantied business
difference between expenditures and financing sources since and direct disaster loan programs in FY 2019.
the inception of the Agency. This negative balance decreased
The net downward reestimate of $0.2 billion in the 7(a)
$0.1 billion because unfunded upward subsidy reestimates
programs was partially due to higher than projected
at year-end primarily for the 7(a) and Disaster programs
recoveries in FY 2019. The reestimate was also partially due
were lower for FY 2019 compared with FY 2018, combined
to lower projected losses in FY 2020 and beyond for cohorts
with lower Disaster administrative expenses. Upward
2015 through 2018 due to updated economic assumptions.
subsidy reestimates determined at year-end are funded in
the following year when they are received. Unexpended The 504 Loan, 504 Recovery Act, and 504 Jobs Act
Appropriations decreased $0.6 billion this year primarily programs had a net downward reestimate of $0.4 billion due
because the amount of appropriations used was greater than to better than projected loan performance and recoveries.
the appropriations received in FY 2019 for business, disaster,
and administrative activities. This affected Budgetary The SBIC Participating Securities and Debenture programs
Financing Sources and the Ending Net Position. had a net downward reestimate of $0.3 billion in FY 2019
that was mostly attributable to actual default purchases that
were lower than projected for FY 2019.
Net Costs of Operations
Further detail on subsidy reestimates can be found in Note
The Net Costs of Operations primarily reflects the costs of
6.I of the financial statements in the Financial Reporting
SBA credit programs subsidy expenses during the year for
section of this report.
new loans and subsidy reestimates at year-end.

The primary driver of the $0.5 billion decrease in net cost
Budgetary Resources
is largely attributable to Goal 3, which had an overall $0.7
billion decrease. The decrease is attributable to a $0.4 For FY 2019, Total Budgetary Resources of $12.3 billion
billion decrease in loan subsidy costs, including reestimates decreased $4.8 billion. This decrease was primarily due
combined with a decrease of $0.3 billion in other to the net result of a decrease in borrowing authority,
nonsubsidy related costs. These decreased costs in FY 2019 appropriations, and spending authority from offsetting
are primarily due to the FY 2018 response to Hurricanes collections as well as other factors shown in the Highlights
Harvey, Irma and Maria. table and following discussion. Other Budgetary Resources,
Net decreased by $0.5 billion in FY 2019. This change is
Net downward reestimates for the business loan programs attributed to an increase in the amount of debt repaid from
were slightly lower in FY 2019 than last year despite a
decrease in the amount of upward reestimates, which

AGENCY FINANCIAL REPORT  FY 2019
 27
MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

balances carried forward in FY 2019 as well as an increase in
prior year recoveries. CHART XXI: Appropriations Received

Appropriations (discretionary and mandatory) decreased
$1.6 billion in FY 2019. As shown in Chart XXI, the net 3

Appropriations ($ Billions)
decrease was the net effect of an increase in the amount
of appropriations needed to fund the SBA’s upward credit
2
subsidy reestimates offset by a decrease in appropriations
for subsidy and loan administrative expenses to fund the
Agency’s disaster program in FY 2019. 1

Borrowing Authority decreased $2.0 billion in FY 2019
due to a decrease in borrowing needed to cover disaster 0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
loan making. Borrowing authority initially granted to the
Disaster Loans Business Loans Salaries and Expenses
SBA was $3.2 billion in FY 2019. The SBA withdrew $1.0
billion at year-end FY 2019, as the excess authority was not
needed to fund future credit program operations.

Spending Authority from Offsetting Collections decreased
$1.5 billion in FY 2019. This decrease is attributable to
both a decrease in the amount of collections in the Salaries
and Expenses fund and the amount of subsidy collected in
both the disaster and business programs. This is offset by
an increase in repayment of borrowings from current year
authority in FY 2019.

Status of Budgetary Resources
The Total Status of Budgetary Resources decreased $4.8
billion in FY 2019 to $12.3 billion. Nonbudgetary
obligations decreased by $2.9 billion, mainly resulting
from the decreases in direct loan obligations for disaster
loan making combined with lower downward subsidy
reestimates paid to Treasury in the business loan guarantee
program. Budgetary obligations decreased $1.1 billion
largely in part due to decreased subsidy obligations for
disaster loan making combined with decreases in Salaries
and Expenses. This was offset by a decrease in the upward
subsidy reestimate in FY 2019 for the business loan guaranty
program.

Unobligated balances as of September 30, 2019 and
2018 were $5.9 billion and $6.7 billion, which included
$4.1 billion and $3.9 billion of unavailable unobligated
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 ($4.4 billion in FY 2019 and $4.7 billion
in FY 2018) from subsidy estimates and reestimates that are
used primarily to pay default claims in future years.

28 AGENCY FINANCIAL REPORT  FY 2019

MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

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

Internal Control Environment and 17 principles of internal control framework prescribed
in GAO’s Standards for Internal Control in the Federal
The SBA believes that maintaining integrity and
Government, known as the Green Book.
accountability in all programs and operations is critical for
good government, and demonstrating consistent responsible The SBA Senior Management Council (SMC) assesses
stewardship over assets and resources is a sign of responsible and monitors deficiencies in internal control in accordance
leadership. SBA’s commitment to integrity, ethical values with OMB Circular No. A-123. The SMC, chaired by the
and an effective system of internal controls helps to ensure Deputy Chief Financial Officer and comprised of SBA
that every employee remains dedicated to the efficient managers from the major program and support offices,
delivery of services to customers and maximizes desired ensures management’s effort to remediate significant control
program outcomes. Accordingly, the SBA has developed and deficiencies or weaknesses and recommends to the SBA
implemented management, administrative, and financial Enterprise Risk Management Board which significant
system controls to reasonably ensure that: deficiencies are deemed to be material weaknesses for the
programs and operations achieve intended results Administrator’s annual statement of assurance.
efficiently and effectively;
The OIC continued to perform internal control over
resources are used in accordance with the mission of the financial reporting assessments in FY 2019, adjusting the
Agency; scope of the reviews to better align with the OMB Circular
programs and resources are protected from waste, fraud, No. A-123, Appendix A, Management of Reporting and Data
and mismanagement; Integrity Risk, published in 2018. The OIC is also working
to evolve its existing internal control assessment program by
program and operation activities are in compliance with
adopting a risk-based approach to select the processes and
laws and regulations; and
systems for assessments and building connections with the
reliable, complete, and timely data are maintained and SBA’s risk profile. Assessments include documenting the
used for decision-making at all levels. process and key controls, evaluating and testing the design
and effectiveness of controls, and presenting the results to
Each office within the SBA implements or maintains
management. Data quality testing was incorporated into
effective internal controls over operations, reporting, and
each assessment as appropriate. Each office is responsible
compliance to achieve programmatic goals. Each year, the
for developing and implementing corrective actions for any
SBA conducts an assessment of internal control as required
reported deficiencies. Based on the evaluation of business
by the Federal Managers’ Financial Integrity Act (FMFIA)
processes in FY 2019, the OIC identified a number of
of 1982 in accordance with the Office of Management
deficiencies in the internal control over financial reporting,
and Budget (OMB)’s Circular No. A-123, Management’s
including several in the SBA’s key business processes. The
Responsibility for Enterprise Risk Management and Internal
SMC evaluated the review findings and determined that non
Control. The FMFIA requires that the assessment results be
reached the level of material weakness.
reported to the President and Congress in a statement of
assurance. The SBA Administrator provides the statement of The SBA Enterprise Risk Management Board continued to
assurance based on the self-assessment of program managers, oversee SBA’s enterprise risk management implementation
internal control reviews, and audits and reviews done by the efforts led by the Office of Continuous Operations and Risk
Government Accountability Office (GAO) and SBA’s Office Management (OCORM). The Board is currently chaired by
of the Inspector General (OIG). the Acting Administrator and is comprised of senior leaders
from major programs and support offices. During FY 2019,
SBA’s Office of Internal Controls (OIC) provides training and
the Board completed its annual validation of the enterprise
tools, including checklists designed specifically for program
risk profile and directed efforts to mature its ERM capability
support offices and district offices, to aid management in
in areas such as risk identification, training, risk appetite,
assessing and documenting the effectiveness of internal
and fraud risk management.
controls within their respective area of responsibility. These
assessments are performed based on the five components

AGENCY FINANCIAL REPORT  FY 2019
 29
MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

Financial Management Systems Strategy
During FY 2019 the SBA made significant progress in
addressing significant deficiencies in information technology
security controls, including access controls and change The SBA’s financial management systems are designed to
controls. The SBA continued to build a robust, adaptable, support effective internal controls, produce reliable and
and cost-effective cybersecurity program thus strengthening timely financial information, and ensure cost-effective
the overall security posture of agency information loan guaranty processing. Management remains focused
technology systems and achieved several key milestones in on robust financial management systems that support
the areas of cybersecurity governance, risk management, the SBA’s ability to comply with laws and regulations.
continuous monitoring, access control, event logging, and SBA systems must also provide timely and accurate data
audit response. to support management analysis and decision-making,
enable the Agency to keep pace with its lending partners,
The SBA, through developing and publishing its and effectively use automation to achieve operational
FY 2019 Cybersecurity Operational Plan, further efficiency. As demonstrated throughout the FY 2019 Agency
operationalized its cybersecurity strategy, which Financial Report, the SBA seeks to comply with all federal
establishes the direction and priorities for cybersecurity financial management system requirements, including the
across the Agency. Federal Financial Management Improvement Act of 1996,
The SBA realized significant cost savings and cost which requires that the Agency’s financial management
avoidance through integration of agency systems systems comply with federal financial management systems
into its enterprise cybersecurity services and achieved requirements, applicable federal accounting standards, and
enterprise visibility and protection. the U.S. Standard General Ledger at the transaction level.9

The SBA modernized its and the federal government’s The SBA has continued to build on incremental
approach to continuous monitoring through its Cloud improvement projects designed to modernize the financial
Continuous Diagnostic and Monitoring pilot program. management system environment, improve financial system
The SBA updated its IT Security and Privacy Policy controls, reduce sustainment costs, provide additional
and formalized the procedures for implementing the functionality for external lending partners, and improve
National Institutes of Standards and Technology Risk system reliability. In FY 2019, the SBA was one of three
Management Framework. agencies that reviewed Quality Service Management
Office (QSMO) proposals for Financial Management,
The above steps established clear and consistent baseline Cybersecurity, and Human Resources Transaction Services.
processes and requirements across the enterprise. As a In support of OMB Memorandum M-19-16, the SBA will
result, the SBA was able to close all open OIG Federal ensure all future modernization initiatives align with the
Information Security Modernization Act audit findings and effort to drive innovation, standardization, and automation.
meet the target for 7 of 10 key cybersecurity performance In FY 2019, the SBA began work with the U.S. Department
metrics outlined in the Cross Agency Priority Goals during of Health and Human Services (HHS) Grants Solutions
FY 2019, which represents a significant increase from 2 office to move the administration of SBA grant programs to
performance metrics met in FY 2018. their shared service to begin in FY 2020.

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

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

30 AGENCY FINANCIAL REPORT  FY 2019

MAN AGEMEN T’S DISC USSIO N & ANA LYSI S

The Office of Performance Management and the Chief
Financial Officer and the Office of Capital Access oversee
the following three core financial management systems:

Oracle Federal Financials —This system, the most
current release in its implementation of the Joint
Administrative Accounting Management System
(JAAMS), supports the SBA’s funding and expenditure
of administrative funds.
Loan Systems — This SBA-built system supports the
lifecycle of loan guaranty processing, loan program
funds control, management and accounting for loan
servicing, and loan-related expenses.
Financial Management System — This SBA-built
system consolidates administrative and loan activity,
manages cash and control funds, and supports financial
reporting.

AGENCY FINANCIAL REPORT  FY 2019
 31
MANAG E ME NT ’ S DI S CU SSI ON & A NA LYSI S

Management Assurances: FMFIA and FFMIA Assurance Statement for FY 2019
The Small Business Administration continued to strengthen internal controls over its programs and operations during
FY 2019. 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 Agency’s independent auditor issued an unmodified opinion on the SBA’s FY 2019 financial
statements for the 15th year in a row.

SBA 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. Based on the results of the assessment, the SBA can provide
reasonable assurance that internal controls over operations, reporting, and compliance with applicable laws and regulations
were operating effectively as of September 30, 2019. Further, the Agency’s financial management systems conform to the
principles, standards, and related requirements prescribed by Section 4 of FMFIA.

The independent auditor did report an exception in SBA internal control procedures, issuing a material weakness related to
the risk assessment process for internal control over financial reporting. The auditor reported that sufficient risk assessments
were not performed or adequately documented to demonstrate management’s consideration of key risks in the following
three areas: application and implementation of the new accounting standard for the Budget and Accrual Reconciliation
(BAR) footnote, evaluation of Service Organization Control (SOC) 1 reports of two external service organizations, and
documentation of risk assessments performed for planning of internal control reviews. The auditor classified the combination
of these issues as a material weakness.

SBA management evaluated the auditors’ findings and concluded that they did not reach the level of material weakness for the
Agency’s statement of assurance. Particularly, the SBA does not agree with the Auditors’ assessment on the implementation
of the new accounting standard. An SBA accountant was actively involved in the development of this standard as a member
of the Federal Accounting Standards Advisory Board (FASAB) BAR Task Force. After the standard was published, the SBA
diligently evaluated the applicability of the standard by working closely with the Treasury Working Group formed to create
the crosswalk to be used by federal agencies in the creation of the BAR footnote. The Working Group validated the crosswalk
using SBA’s financial statement data before it was provided to the 24 agencies subject to the Chief Financial Officers Act.
Subsequently, the SBA developed the BAR footnote based upon its interpretation of the standard and the implementation
guidance provided by the Working Group. Furthermore, the SBA collaborated with other federal agencies affected by the
Federal Credit Reform Act in developing the BAR footnote to ensure consistency across the Federal Government. Therefore,
the SBA believes that it performed its due diligence in the implementation of the new accounting standard for the BAR.
In addition, although not formally documented, the SBA did conduct the other risk management activities related to the
evaluation of service organization controls and planning of internal control reviews. The SBA will take additional steps,
including policy changes, formalization of the SOC 1 report review process, and implementation of the updated risk
assessment procedures, to improve its internal control over financial reporting and to address the audit findings in FY 2020.

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, the SBA can provide
reasonable assurance that the Agency’s financial management systems substantially comply with FFMIA for FY 2019.

Christopher M. Pilkerton
Acting Administrator
November 15, 2019

32 AGENCY FINANCIAL REPORT  FY 2019

FINANCIAL
REPORTING
SUCCESS STORY

START:
SBA Resource Partners
Help Underserved
Business Expand
Operations

Tipping Point Solutions, Inc.
Centennial, CO

With more than 28 years of experience, Rick Schmidt started Tipping
Point Solutions (TPS), Inc. in 2011 as a multimedia eLearning company
that specializes in designing and developing interactive training
solutions. Rick has developed a highly respected company as a Native
American, service-disabled veteran-owned and SBA 8(a)-certified small
disadvantaged business with 34 full-time employees.

In addition, Tipping Point Media, the film production arm of TPS, provides
media services to numerous commercial and federal customers. Rick is a
2018 graduate of the SBA’s Emerging Leaders program, and has set TPS
apart by offering training products that provide an immersive learning
experience. The company also received support from a Procurement
Technical Assistance Center and a Small Business Development Center.
TPS has grown rapidly by expanding business operations in Arizona
and increasing its workforce. In 2018, TPS doubled the size of its office
complex and opened a renovated 3,600 square-foot field office in
Sault Ste. Marie, Michigan.
FIN AN C IAL REPO RT I NG

MESSAGE FROM THE ACTING
CHIEF FINANCIAL OFFICER
November 15, 2019

I am pleased to report that the SBA received an unmodified audit opinion on its
financial statements, affirming that the statements and financial operations present fairly
the financial position as of September 30, 2019. I am also honored to issue the SBA’s
FY 2019 Agency Financial Report with Acting Administrator Pilkerton, who serves as
a champion for the Agency and America’s small businesses and ensures the Agency is
operating as effectively as possible.

The auditors identified a material weakness related to the risk assessment process for internal control over financial reporting.
However, SBA management evaluated the Auditors’ findings and concluded that they did not reach the level of material
weakness for the Agency’s statement of assurance. The SBA participated in the FASAB task force on the development of the
standard. Subsequently, the SBA assisted the U.S. Department of Treasury’s working group in the development of the BAR
crosswalk requirements in which SBA’s financial statement data was utilized. The resulting template was provided to 24 CFO
Act agencies. The SBA also collaborated with other agencies affected by the Federal Credit Reform Act (FCRA) in developing
the BAR footnote to ensure consistency across the Federal Government. The SBA reiterates that it has proper internal controls
over financial reporting and has been a leader in FCRA accounting within the Federal Government. In addition, although not
formally documented, the SBA did conduct the other risk management activities referenced in the audit findings. The SBA will
take the necessary steps to improve its internal control over financial reporting and to address the audit findings in FY 2020.

The auditors identified a significant deficiency related to information technology security controls and a significant deficiency
related to the controls between the Disaster Credit Management System and the electronic loan repository system. The SBA
will work to address the significant deficiency related to IT security controls through its Chief Information Officer and the
significant deficiency with the Disaster Credit Management System through its Associate Administrator for Disaster Assistance.

This year the SBA has taken significant steps to improve its use of data analytics to support mission delivery. As co-lead
for the President’s Federal Data Strategy, the SBA has been building an environment that uses evidence to understand and
improve program outcomes. The SBA recently completed an evaluation of its 7(j) management and technical assistance
program by leveraging administrative program data, federal procurement data, and budgetary data to further understand the
impacts on small business contract awards. The results have proven promising and have provided us with greater evidence
to support decision making. In addition, the SBA recently completed a process evaluation of its Small Business Investment
Company examination process and used the results to strengthen program management and oversight.

This year the SBA designated a Chief Data Officer and Evaluation Officer in support of the Foundations for Evidence-Based
Policymaking Act. The SBA expanded its enterprise learning agenda with more research, established the structure of its data
governance board, began identifying priority datasets, and developed plans to enhance staff data skills. The SBA received
the President’s Gears of Government award for its work on DATA Act implementation and evidence-building. This award
demonstrates the SBA’s innovative spirit and movement toward more analytic, evidence-based approaches to improve mission
delivery for America’s small businesses.

The SBA also enhanced financial management through the development of a single system, which integrates acquisition
management, budget formulation, and budget execution. The new system helps SBA program managers better plan and oversee
contracts, interagency agreements, purchase cards, grants, travel, reimbursable work agreements, and payroll through a single
platform. These enhancements will help the SBA more efficiently answer questions and ensure optimal financial management.

AGENCY FINANCIAL REPORT  FY 2019
 35
F INA NC IA L R E PORTI NG

Additionally, I am proud of the SBA for winning its 13th Association of Government Accountants Certificate of Excellence
in Accountability Reporting award this past spring. This award, made to agencies following a thorough and independent
review, has been a tremendous honor and reflects the dedication of SBA employees in exemplary financial and performance
management.

Sincerely,

Dorrice C. Roth
Acting Chief Financial Officer and
Associate Administrator for Performance Management

36 AGENCY FINANCIAL REPORT  FY 2019

FIN AN C IAL REPO RT I NG

INSPECTOR GENERAL’S AUDIT REPORT

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

Final Report Transmittal
Report Number: 20-04

DATE: November 15, 2019

TO: Christopher M. Pilkerton
Acting Administrator and General Counsel

FROM: Hannibal “Mike” Ware
Inspector General

SUBJECT: Independent Auditors’ Report on SBA’s FY 2019 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 as of and for the fiscal year ended September 30, 2019. This
audit is an annual requirement of the Chief Financial Officers Act of 1990, as amended, and was conducted in accordance
with generally accepted government auditing standards; the Office of Management and Budget Bulletin No. 19-03, 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
fiscal year 2019. 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 instances in which SBA’s financial management systems did not substantially comply with the Federal
Financial Management Improvement Act of 1996 (FFMIA);

• there is one material weakness related to internal control over financial reporting where improvement is needed in
SBA’s risk assessment processes;

• there is a significant deficiency related to disaster loan processing controls; and

• there is also a significant deficiency related to SBA’s information technology security controls, which has been
identified in the past.

Details regarding KPMG’s conclusions are included in attachments I and II 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.

AGENCY FINANCIAL REPORT  FY 2019
 37
F INA NC IA L R E PORTI NG

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 15, 2019, 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.

We provided a draft of KPMG’s report to SBA’s Acting Chief Financial Officer, who generally concurred with its findings
and recommendations and agreed to implement the recommendations. The Acting Chief Financial Officer’s comments are
attached as attachment III 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: Dorrice Roth, Acting Financial Officer and Associate Administrator for
Performance Management
Maria Roat, Chief Information Officer
James Rivera, Associate Administrator, Disaster Assistance
Martin Conrey, Attorney Advisor, Legislation and Appropriations
Kyong Chae, Auditor, Office of Internal Controls
Michael Simmons, Attorney Advisor

Attachment

38 AGENCY FINANCIAL REPORT  FY 2019

FIN AN C IAL REPO RT I NG

INDEPENDENT AUDITORS’ REPORT ON FY 2019 FINANCIAL STATEMENTS

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

Independent Auditors’ Report

Inspector General
U.S. Small Business Administration

Acting 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, 2019
and 2018, and the related consolidated statements of net cost, and changes in net position, and combined
statements of budgetary resources for the years then ended, and the related notes to the consolidated financial
statements.

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

Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America,
in accordance with the standards applicable to financial audits contained in Government Auditing Standards
issued by the Comptroller General of the United States, and in accordance with Office of Management and
Budget (OMB) Bulletin No. 19-03, Audit Requirements for Federal Financial Statements. Those standards and
OMB Bulletin No. 19-03 require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.

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

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

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

U.S. Small Business
Administration
AGENCY FINANCIAL REPORT  FY 2019
 39
F INA NC IA L R E PORTI NG

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, 2019 and 2018, and its net
costs, changes in net position, and budgetary resources for the years then ended in accordance with
U.S. generally accepted accounting principles.

Other Matters
Interactive Data
Management has elected to reference to information on websites or other forms of interactive data outside the
U.S. Small Business Administration’s FY 2019 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 United States of America, which consisted of inquiries of management about the methods of
preparing the information and comparing the information for consistency with management’s responses to our
inquiries, the basic consolidated financial statements, and other knowledge we obtained during our audits of the
basic consolidated financial statements. We do not express an opinion or provide any assurance on the
information because the limited procedures do not provide us with sufficient evidence to express an opinion or
provide any assurance.

Other Information
Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements
as a whole. The Message from the Acting Administrator, Management’s Discussion & Analysis, Other
Information, Message from the Acting Chief Financial Officer, and the Appendices in the U.S. Small Business
Administration’s FY 2019 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 fiscal year ended
September 30, 2019, 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.

40 AGENCY FINANCIAL REPORT  FY 2019

FIN AN C IAL REPO RT I NG

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

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

SBA management did not report the material weakness related to the risk assessment process for internal
controls over financial reporting in its Management Assurances: FMFIA and FFMIA Assurance Statement for
FY 2019, included in the Management’s Discussion and Analysis section of the accompanying FY 2019 Agency
Financial Report.

A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe
than a material weakness, yet important enough to merit attention by those charged with governance. We
consider the deficiencies described in Attachment II to be significant deficiencies.

Compliance and Other Matters
As part of obtaining reasonable assurance about whether the SBA’s consolidated financial statements as of
and for the fiscal year ended September 30, 2019 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 disclosed no instances of
noncompliance or other matters that are required to be reported under Government Auditing Standards or OMB
Bulletin No. 19-03.

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

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

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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 15, 2019

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Attachment I

U.S. Small Business Administration

Material Weakness

Risk Assessment

During fiscal year (FY) 2019, we noted that management did not perform an adequate risk assessment to
identify, assess, and address relevant risks that could prevent the fair presentation of the consolidated financial
statements to be free from material misstatement and be in accordance with U.S. generally accepted
accounting principles. We further noted several internal control matters that highlighted the need for SBA
management to improve their risk assessment process, particularly in relation to the evaluation of service
organization controls and preparation of the financial statement disclosure related to the budget and accrual
reconciliation. These matters are considered to be a material weakness in internal control.

Improvements Needed in the Agency’s Risk Assessment Process

In FY 2019, SBA represented that a risk assessment related to internal controls was performed prior to initiating
their annual testing in accordance with the Office and Management and Budget (OMB) Circular No. A-123,
Management’s Responsibility for Enterprise Risk Management and Internal Control. However, the risk
assessment was performed through informal management discussions and was not documented. As such,
SBA was not able to demonstrate that a comprehensive risk identification and assessment process was
performed to provide reasonable assurance that all significant reporting risks were identified, tested, or
appropriately addressed. In addition, SBA did not calculate a materiality threshold to use in determining the
sufficient level of internal control activities needed to manage risk related to reporting objectives.

The conditions noted were primarily caused by two main factors. First, we were informed that the FY 2019 risk
assessment process was not formally documented due to an anticipated update to integrate the FY 2020 risk
assessment procedures with the enterprise risk management processes. Second, based on interpretation of
the updated Appendix A to OMB Circular No. A-123, Management of Reporting and Data Integrity Risk,
management did not believe a materiality threshold was required.

Without performing a comprehensive risk identification and assessment process, management did not have
reasonable assurance that all significant reporting risks were identified, tested, and appropriately addressed. In
addition, by not implementing the guidance in OMB Circular No. A-123 and the updated Appendix A, SBA
increases the risk of potential noncompliance with the Federal Managers’ Financial Integrity Act (FMFIA).

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

 The Government Accountability Office’s (GAO’s) Standards for Internal Control in the Federal
Government (“Green Book”), Principle 7, Identify, Analyze, and Respond to Risks; Principle 8,
Assess Fraud Risk; and Principle 9, Identify, Analyze, and Respond to Change

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

 Section 3512 (c) and (d) of Title 31 of the United States Code (commonly known as FMFIA)

FMFIA provides the statutory basis for management’s responsibility for, and assessment of, internal controls.
OMB Circular No. A-123 provides a methodology for agency management to assess, document, and report on
internal controls over reporting and is guidance to help implement the requirements of FMFIA. The Circular

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contains specific guidance requiring agencies to annually identify and assess risk as part of the agency’s risk
profile. As part of this process, management should determine materiality thresholds to ensure the level of
internal control activities needed to provide reasonable assurance for reporting objectives. Management should
also determine the risks for which the application of formal internal control activities is the appropriate
response.

Recommendations:

We recommend that the Acting Administrator direct the Acting Chief Financial Officer to:

1. Integrate the Office of Chief Financial Officer (OCFO)’s risk identification and assessment process
with its enterprise risk management processes.

2. Ensure management personnel document their interpretation with respect to applicability of
requirements (e.g., such as the need to determine a materiality threshold in the risk assessment
process).

3. Formally document a comprehensive risk assessment process every year, including the
determination of materiality thresholds, as applicable under the requirements.

Improvements Needed in the Evaluation of Service Organization Controls

Deficiencies in the risk assessment process, as noted above, could limit management’s ability to identify,
analyze, and respond to significant changes impacting operations, systems and financial reporting. Specifically,
during FY 2019, SBA migrated a system to the cloud using an external cloud service provider. In addition,
during the prior year, SBA implemented a new loan origination system which utilizes a different external service
provider. Both systems are significant IT environments for SBA’s financial reporting. As part of its risk
assessment process, SBA could not demonstrate the process used to adequately identify and assess the risks
related to financial reporting for these changes to the relevant IT environments affected by the use of service
organizations.

The process that SBA followed with respect to assessing the operations at the service organizations, in this
instance, was limited to obtaining assurance for the design, implementation, and operation of relevant controls
at the service organizations by obtaining a Service Organization Control (SOC) 1 Type 2 report. However, we
noted that management’s evaluations of the SOC 1 reports were not sufficiently documented or considered in
management’s assessment of Internal Controls over Financial Reporting (ICOFR) under OMB Circular No. A-
123. For example, management’s assessment of the SOC 1 Type 2 reports did not:

 Identify instances in which the SOC 1 reports lack sufficient information or did not cover aspects of
service organization business processes and controls considered relevant to SBA’s ICOFR
 Include consideration of all exceptions noted in the SOC 1 reports, to determine applicability to
SBA’s ICOFR, the potential impact to SBA’s financial statements, and mitigating controls or other
considerations made during their risk assessment
 Evaluate SBA’s implementation and perform testing over the design and operating effectiveness of
the complementary user entity controls (CUECs) identified in the SOC 1 reports
 Evaluate the complementary subservice organization controls (CSOCs) identified with the SOC 1
reports
 Consider an assessment of bridge letters for the period between the report dates and September
30, 2019, to determine whether coverage was provided for the entire year.

In addition, we noted that one of the service organization’s SOC 1 report contained a qualification in the opinion
related to the design of controls in one of the objectives. SBA did not document the consideration of the
qualification and its applicability to SBA’s ICOFR, potential impact to SBA’s financial statements, and whether
there were any mitigating controls.

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The deficiencies noted above were caused by the lack of a documented policy/procedure requiring the
evaluation of relevant SOC 1 reports for service organizations, in support of SBA’s ICOFR evaluation. As a
result, SBA’s annual assessment of internal controls was incomplete because it did not consider all relevant
aspects of the SOC 1 reports during its evaluation of ICOFR. The conditions noted above increase the risk that
management fails to make key observations regarding the sufficiency of coverage provided by SOC 1 reports
and the results that are relevant to SBA’s ICOFR. This in turn could result in a failure to identify and obtain an
understanding of relevant service organization controls and weaknesses that increase internal control risks that
could affect the integrity of SBA’s financial statements. Thus, management’s assessment of ICOFR is not
complete without the sufficient consideration of the adequacy and effectiveness of controls at relevant service
organizations.

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

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

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

The Green Book states that management should identify the risks related to the entity and its objectives,
including its service organizations, and design control activities to address the identified risks. In addition, OMB
Circular No. A-123 states that for service organizations considered significant to the achievement of internal
control objectives for reporting, management needs to consider the services provided by the service
organization during its risk assessment process.

Recommendation:

We recommend the Acting Administrator require the Chief Information Officer to work with the relevant program
offices to:
4. Develop, document, and implement procedures outlining the SOC 1 report evaluation process for
relevant service organizations, to ensure reviews are performed in accordance with OMB and GAO
guidance. The reviews should document the following considerations:

 SOC 1 reports are sufficiently scoped to address transaction processing and related control activities
performed by service organizations on behalf of SBA (e.g., that services, business applications and
other information technology, service organization departments and locations, control objectives and
activities, and other aspects of scope that are relevant to SBA’s ICOFR are included in the scope of
SOC 1 reports).
 All exceptions noted in the SOC 1 reports – not just those described in the independent service
auditors’ report – are evaluated to determine applicability to SBA’s ICOFR, the potential impact to
SBA’s financial statements, and mitigating controls other considerations made during the risk
assessment.
 All CUECs described in the SOC 1 reports are evaluated using current information and with
consideration to their applicability to SBA’s ICOFR.
 Evaluation procedures include an assessment of whether CUECs and other SBA-performed controls
were tested on a frequency determined by SBA, and found effective and, if they are not, the impact
of such deficiencies on SBA’s ICOFR.
 All CSOCs described in SOC 1 reports are evaluated to determine whether they provided services
and performed controls considered relevant to SBA’s ICOFR and, if relevant subservice
organizations were identified, an evaluation is performed to obtain an understanding of the
subservice organization(s) and their controls.
 SOC 1 reports are evaluated to determine whether:
 The reporting periods and corresponding bridge letters provide sufficient coverage to
assess impacts on SBA’s ICOFR.

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 Any matters require additional follow-up by SBA.

Improvements Needed in the Budget and Accrual Reconciliation (BAR) Disclosure

The deficiencies noted above relating to the risk assessment process prevented management from identifying,
analyzing, and responding to risks arising from significant changes in financial reporting requirements in FY
2019, such as the implementation of a new accounting standard. Specifically, we noted deficiencies in controls
over the preparation and review of the BAR disclosure.

The Statement of Federal Financial Accounting Standards (SFFAS) 53: Budget and Accrual Reconciliation:
Amending SFFAS 7, and 24, and Rescinding SFFAS 22, is effective for periods beginning after September 30,
2018. The standard requires a budget and accrual reconciliation between budgetary and financial accounting
information to be presented in a footnote that replaces the previous reconciliation of net cost of operations to
budget footnote. The BAR explains the relationship between the entity's net outlays on a budgetary basis and
the net cost of operations during the reporting period. The BAR will start with the net cost of operations and will
be adjusted by components of net cost that are not part of net outlays, components of net outlays that are not
part of net cost, and other temporary timing differences, which reflect some special adjustments.

During our initial test work over Note 16, Reconciliation of Net Operating Cost and Net Budgetary Outlays, for
the 4th quarter financial statements in SBA’s FY 2019 Agency Financial Report (AFR), we identified the
following deficiencies:
 Omission of significant balances from the Components of Net Outlays that are Not Part of Net
Operating Cost section, including the Effect of the Prior Year Credit Reform Subsidy Reestimates,
the Changes in Loans Receivable Before Allowance, the Other Changes in Liability for Loan
Guaranties, the Cash Transfer to the Master Reserve Fund, and the Effect of Current Year
Downward President's Budget Reestimate Transferred to the General Fund Receipt Account lines;
 Inaccurate balances in the Other Changes in Allowance Before Reestimates and the Other
Changes in Liability for Loan Guaranties Before Reestimates lines due to the inclusion of balances
that do not belong in the respective category, such as double counting the effect of the current year
reestimate and inclusion of components not part of the Net Cost;
 Inaccurate calculation and presentation of the change in Accounts Receivable and Accounts Payable
lines;
 Exclusion of the effect of elimination entries between SBA funds;
 Inaccurate captions of section headers and positive and negative signs on balances; and
 Exclusion of the required narrative explaining the purpose, nature, and line items of the reconciliation.

These deficiencies were caused by the lack of a sufficient process to identify and address risks related to the
applicability and implementation of new accounting standards and the identification of processes and controls
to mitigate such risks. More specifically, there were no specific internal controls over financial reporting to
demonstrate how management considered the impact of SBA’s transactions and balances in the BAR note,
whereby a risk of material misstatement due to error and/or omissions could have been reasonably mitigated.
Also, the deficiencies resulted in significant inaccuracies and incomplete presentation of the BAR note until
adjusted through our audit. In addition, without performing and documenting a comprehensive analysis of the
applicability and implementation of accounting standards, SBA increases the risk of material misstatements or
omissions to the consolidated financial statements that would not be in accordance with generally accepted
accounting principles.

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

 SFFAS 53, Paragraph 2, sub-paragraph 82, and Paragraph 5, including sub-paragraphs 96-100

 GAO’s Green Book, Section 1, Fundamentals Concepts of Internal Control

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

Recommendations:

We recommend the Acting Administrator require the Acting Chief Financial Officer to:

5. Formally document a comprehensive risk assessment process, including the consideration of the
applicability and implementation of new accounting standards.

6. Implement adequate internal controls to prevent or detect and correct material misstatements to
the financial statements and footnotes.

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Attachment II

U.S. Small Business Administration

Significant Deficiencies

Improvement Needed in Disaster Loan Processing Controls

During the FY 2019 financial statement audit, we identified one disaster loan for which the interest rate per the
borrower’s modified loan authorization and agreement did not agree to SBA’s records within its loan processing
and repository system. Specifically, the identified loan was originally obligated at a specified interest rate, then
subsequently approved for a lower rate several months later. The modified interest rate was evidenced by a
signed loan modification that reduced the interest rate. The loan was then subsequently disbursed; however,
there was no documentation supporting the updated interest rate within the system. This ultimately resulted in
an overstatement of the loans receivable and interest revenue balances in SBA’s financial statements, and the
borrower was overcharged.

The deficiency was caused by the Office of Disaster Assistance’s (ODA’s) lack of a policy/procedure that would
require the consistent and timely generation of documentary evidence to support the establishment and
modification of loan obligations and related terms in the system. Furthermore, ODA does not have adequate
controls to ensure changes to loan terms subsequent to loan obligation are consistently processed within the
system. As such, incorrect loan information in the system may lead to under or overcharges to SBA borrowers.
As a result of this deficiency, ODA performed an analysis to further determine the impact of this condition on
their disaster loan portfolio. ODA determined that 273 other loans had a similar condition as noted above.

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

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

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

Recommendations:

We recommend the Acting Administrator require the Associate Administrator for ODA to:

7. Develop and enforce a policy/procedure that requires the consistent and timely generation of
documentary evidence to support the establishment and modification of loan terms subsequent to
loan obligation and ensure it is readily available.

8. Implement adequate controls to ensure changes to loan terms subsequent to loan obligation are
consistently and timely processed within the loan processing and repository system.

Improvement Needed in Information Technology Security Controls

During the FY 2019 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
2019 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.

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In an effort to provide additional clarity and emphasis to SBA management with respect to the corrective
actions required, we continued to provide prior year recommendations where issues persisted in FY 2019 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 2019. 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, Information Technology Security Policy

We have summarized the IT control deficiencies that we noted during the FY 2019 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 2019:
 For majority of FY 2019, the employee exit clearance and contractor off-boarding processes were
not documented to ensure that access to SBA’s systems was removed in a timely manner upon
separation.
 Audit logs do not include sufficient detail to identify the security events that were reviewed.
Our audit identified the following new control deficiencies in FY 2019:
 Segregation of duties issues for certain developers that also have access to migrate code exist.
 User access forms were not accurately completed to document the appropriate privileges needed by
certain users.
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:

9. Consider creating an Agency-wide working group to provide effective oversight and solutions to
address the entity-wide conditions cited and implement streamlined, efficient and effective user
access “best practices” currently used by the private sector and other Federal agencies.
10. Develop and document procedures over the separation process that identify the roles and
responsibilities for each office.

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11. 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.
12. Implement a stricter policy for account suspension after inactivity to account for SBA employees
who may not have been removed via the manual account removal process.
13. 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.
14. Implement segregation of duties and implement mitigating controls to help ensure that personnel
with the ability to the develop code, are restricted from migrating code into the production
environment.
15. Train personnel who are responsible for the provisioning of accounts to grant access in compliance
with SBA policy and procedures.
16. Evaluate and redesign user access forms to remove any redundant or unnecessary data fields.

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
2019:

 A patch to an operating system was pushed to the production environment before it was tested.

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

17. Periodically train personnel involved with the implementation of operating system patches to follow
the requirements of the patch management process in accordance with SBA and OCA policy.

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CFO RESPONSE TO AUDIT REPORT ON FY 2019 FINANCIAL STATEMENTS
Attachment III

CFO Response to Audit Report on
FY 2019 Financial Statements

DATE: November 15, 2019

TO: Hannibal M. Ware, Inspector General

FROM: Dorrice C. Roth, Acting Chief Financial Officer and
Administrator for Performance Management

SUBJECT: FY 2019 Financial Statement Audit

The Small Business Administration has reviewed the 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 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 budgeting, accounting, and reporting processes.

The auditors identified a material weakness related to the risk assessment process for internal control over
financial reporting in the following three areas: evaluation of Service Organization Control (SOC) 1 Reports
of two external service organizations, documentation of risk assessments performed for planning of internal
control reviews application, and implementation of the new accounting standard for the Budget and Accrual
Reconciliation (BAR) footnote.

The SBA does not agree with the assessment on the implementation of the new accounting standard and the
subsequent classification of the combined audit findings as a material weakness. The SBA participated in the
FASAB task force on the development of the standard. Subsequently, the SBA assisted the U.S. Department
of Treasury’s working group in the development of the BAR crosswalk requirements in which SBA’s financial
statement data was utilized. The resulting template was utilized by 24 CFO Act agencies. The SBA also
collaborated with other agencies affected by the Federal Credit Reform Act (FCRA) in developing the BAR
footnote to ensure consistency across the Federal Government. The SBA reiterates that it has proper internal
controls over financial reporting and has been a leader in FCRA accounting within the Federal Government.
The SBA will formalize the SOC 1 report review process and will document the internal control risk
assessment process.

The auditors identified a significant deficiency related to information technology security controls, and a
significant deficiency related to the controls between the Disaster Credit Management System and the
electronic loan repository system. The SBA will work to address the significant deficiency related to IT
security controls through its Chief Information Officer and the significant deficiency with the Disaster Credit
Management System through its Associate Administrator for Disaster Assistance.

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

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Attachment IV

Auditors’ Response to Management’s Response

We appreciate SBA management’s response to our report, presented in Attachment III, recognize their
commitment to accountability and transparency, and acknowledge management’s efforts. We note that
management does not concur with the classification of the Budget and Accrual Reconciliation (BAR) issue
presented in Attachment I as a component of the material weakness.

SBA management initially presented the BAR footnote that was prepared based on their interpretation of
the new accounting standard using the BAR crosswalk which was developed by the Treasury Working
Group, as referenced in management’s response. The crosswalk states at the top: “This crosswalk serves
as a guide and is NOT all inclusive. While it presents the most common scenarios, agencies should use
their discretionary and professional judgement for agency specific cases when preparing the reconciliation.”
In addition, there are lines within the crosswalk that state no account mapping is available. These lines are
significant for SBA’s Credit Reform activity. Furthermore, it is important to recognize that the crosswalk
guide is a less authoritative source for generally accepted accounting principles as defined in the SFFAS
34, The Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards
Issued by the Financial Accounting Standards Board, than the FASAB standards.

Therefore, we assessed the BAR footnote against the requirements of SFFAS 53, Budget and Accrual
Reconciliation, and noted material misstatements, as described in Attachment I. The material
misstatements were subsequently corrected by SBA management in the accompanying FY 2019
consolidated financial statements. As a result of the material misstatements that we identified during our
audit, we assessed the control deficiency as a material weakness, which by definition indicates that there
is a reasonable possibility that a material misstatement of the entity’s financial statements (which include
footnote disclosures) will not be prevented, or detected and corrected, on a timely basis.

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

The financial statements include the following reports.

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

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

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

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

Based on updated guidance in OMB Circular A-136, the SBA now records all distributed offsetting receipts as budgetary.

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

OMB Circular A-136 required a change in format to Note 16. This new note implements SFFAS 53, Budget and Accrual
Reconciliation, and replaces the statement of financing note. As stated in SFFAS 53, in the initial year of implementation, the
disclosure requirements applicable to prior reporting periods are not required for comparative presentations.

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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U.S. SMALL BUSINESS ADMINISTRATION
Consolidated Balance Sheet
As of September 30, 2019 and 2018

(Dollars in Thousands)

Item 2019 2018
ASSETS
Intragovernmental Assets
Fund Balance with Treasury (Note 2) $ 7,036,675 $ 8,137,946
Advances (Note 1) 18,476 22,331
Total Intragovernmental Assets 7,055,151 8,160,277

Assets - Public and Other
Cash (Note 3) 3,030 2,130
Accounts Receivable, Net (Note 5) 163,827 93,523
Credit Program Receivables and Related Foreclosed Property, Net (Note 6) 9,493,680 8,727,792
General Property and Equipment, Net (Note 7) 203 354
Advances (Note 1) 2,761 4,421
Total Assets - Public and Other 9,663,501 8,828,220
Total Assets $ 16,718,652 $ 16,988,497

LIABILITIES
Intragovernmental Liabilities
Accounts Payable (Note 1) $ 4,816 $ 6,000
Debt (Note 9) 11,810,241 11,212,607
Net Assets of Liquidating Funds Due to Treasury (Note 10) 8,732 4,518
Downward Reestimate Payable to Treasury (Note 1, Note 13) 1,028,472 797,694
Other (Note 11) 16,481 15,592
Total Intragovernmental Liabilities 12,868,742 12,036,411

Other Liabilities - Public
Accounts Payable (Note 1) 14,130 19,882
Accrued Grant Liability (Note 1) 66,502 68,687
Liability for Loan Guaranties (Note 6) 2,000,420 2,662,786
Federal Employees' Compensation Act Actuarial Liability (Note 1, Note 8) 28,794 34,854
Surety Bond Guarantee Program Future Claims (Note 8) 57,255 49,609
Other (Note 11) 49,201 43,111
Total Other Liabilities - Public 2,216,302 2,878,929
Total Liabilities 15,085,044 14,915,340

NET POSITION
Unexpended Appropriations (Note 1) 1,779,472 2,341,412
Cumulative Results of Operations (Note 1) (145,864) (268,255)
Total Net Position 1,633,608 2,073,157

Total Liabilities and Net Position $ 16,718,652 $ 16,988,497

The accompanying notes are an integral part of these statements.

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U.S. SMALL BUSINESS ADMINISTRATION
Consolidated Statement of Net Cost
For the Years Ended September 30, 2019 and 2018

(Dollars in Thousands)

Item 2019 2018
STRATEGIC GOAL 1:
Support Small Business Revenue and Job Growth
Gross Cost $ (559,864) $ (704,345)
Less: Earned Revenue 211,581 211,090
Net Cost of Strategic Goal 1 (771,445) (915,435)

STRATEGIC GOAL 2:
Build Healthy Entrepreneurial Ecosystems and
Create Business Friendly Environments
Gross Cost 310,490 253,497
Net Cost of Strategic Goal 2 310,490 253,497

STRATEGIC GOAL 3:
Restore Small Businesses and Communities after Disasters
Gross Cost 757,683 1,398,258
Less: Earned Revenue 332,917 313,813
Net Cost of Strategic Goal 3 424,766 1,084,445

STRATEGIC GOAL 4:
Strengthen SBA’s Ability to Serve Small Businesses
Gross Cost 147,190 176,416
Net Cost of Strategic Goal 4 147,190 176,416

COST NOT ASSIGNED TO STRATEGIC GOALS
Gross Cost 25,525 22,752
Net Cost Not Assigned to Strategic Goals 25,525 22,752

Net Cost of Operations $ 136,526 $ 621,675

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

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U.S. SMALL BUSINESS ADMINISTRATION
Consolidated Statement of Changes in Net Position
For the Years Ended September 30, 2019 and 2018
(Dollars in Thousands)
2019 2018
Item

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

Budgetary Financing Sources
Appropriations Received 932,917 2,504,824
Rescissions (50,000) (2,600)
Adjustment - Cancelled Authority (21,640) (11,582)
Return of Unrequired Liquidating Fund Appropriation (3,312) (2,686)
Other Adjustments (253) 5
Appropriations Used (1,419,652) (1,800,233)
Total Budgetary Financing Sources (561,940) 687,728

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

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

Budgetary Financing Sources
Appropriations Used 1,419,652 1,800,233
Donations of Cash and Cash Equivalents 112 2

Other Financing Sources
Imputed Financing from Costs Absorbed by Others 21,503 25,428
Other - Current Year Liquidating Equity Activity (6,324) (3,991)
Other - Non-entity Activity (1,176,026) (1,326,898)
Total Financing Sources 258,917 494,774
Less: Net Cost of Operations 136,526 621,675
Net Change 122,391 (126,901)

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

Ending Net Position $ 1,633,608 $ 2,073,157

The accompanying notes are an integral part of these statements.

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U.S. SMALL BUSINESS ADMINISTRATION
Combined Statement of Budgetary Resources
For the Years Ended September 30, 2019 and 2018
(Dollars in Thousands)
September 30, 2019
Item Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority, net (discretionary and mandatory) $ 2,035,305 $ 4,290,915 $ 6,326,220

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

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

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 1,402,893 $ 1,152,612 $ 2,555,505
Distributed Offsetting Receipts (946,587) - (946,587)
Agency Outlays, net (discretionary and mandatory) $ 456,306 $ 1,152,612 $ 1,608,918

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

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U.S. SMALL BUSINESS ADMINISTRATION
Combined Statement of Budgetary Resources
For the Years Ended September 30, 2019 and 2018
(Dollars in Thousands)
September 30, 2018
Item Nonbudgetary
Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority, net (discretionary and mandatory) $ 1,412,891 $ 4,606,664 $ 6,019,555

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

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
Total Unobligated Balance, end of year 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 (1,744,077) - (1,744,077)
Agency Outlays, net (discretionary and mandatory) $ 46,403 $ 2,794,727 $ 2,841,130

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

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NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity
The Small Business Act of 1953 created the Small Business Administration as an independent federal agency. SBA’s
mission is to maintain and strengthen the nation’s economy by enabling the establishment and vitality of small businesses
and by assisting in the economic recovery of communities after disasters. The SBA operates through the execution of a
congressionally approved budget that funds its programs.

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

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

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

Budgets and Budgetary Accounting for Loan Programs
SBA’s loan disbursements are financed by appropriations for long-term loan subsidy cost and borrowings from the Treasury’s
Bureau of the Fiscal Service for the remaining nonsubsidized portion of the loans. The Congress may provide one-year, multi-

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

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

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

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

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

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

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

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

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

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

Employee Benefits
Leave
A liability for employee annual leave is accrued as it is earned and reduced as leave is taken. Each year the balance of accrued
annual leave is adjusted to reflect current pay rates as well as forfeited “use or lose” leave. Annual leave earned but not taken,
within established limits, is funded from future financing sources. Sick leave and other types of non-vested leave are expensed
as taken.

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

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

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

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

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

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

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

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, 2019 2018
Appropriated Funds $ 1,886,997 $ 2,436,393
Financing Funds 5,047,017 5,601,996
Liquidating Funds 652 1,229
Revolving Fund 100,464 97,835
Trust Fund 221 166
Total Entity Fund Balance with Treasury 7,035,351 8,137,619
Budget Clearing Account Balance 1,324 327
Total Fund Balance with Treasury $ 7,036,675 $ 8,137,946

Status of Fund Balance with Treasury
Apportioned, unexpired accounts $ 1,794,909 $ 2,723,268
Unapportioned, unexpired accounts 4,048,246 3,894,487
Obligated Balance Not Yet Disbursed 1,143,285 1,692,976
Expired Unobligated Balance 48,911 50,216
Borrowing Authority Not Converted to Funds - (223,328)
Nonbudgetary 1,324 327
Total Fund Balance with Treasury $ 7,036,675 $ 8,137,946

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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 $3.0 million and $2.1 million as of September 30, 2019 and 2018.

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

The Master Reserve Fund is a fiduciary activity administered by SBA’s fiscal transfer agent, Colson Services Corp., a subsidiary
of the Bank of New York Mellon. The balance in the MRF is invested, according to SBA policy, entirely in Treasury securities
and repurchase agreements that are backed by Treasury securities. The MRF is an integral part of SBA’s 7(a) secondary
market program. The MRF was authorized by the Small Business Secondary Market Improvement Act of 1984 to facilitate
the pooling of 7(a) guarantied loans that are purchased by secondary market investors. The MRF receives monthly payments
from SBA guarantied borrowers and disburses monthly to 7(a) secondary market pool investors based on a schedule of
amounts due. In FY 2019, the MRF also received a $380 million transfer from the SBA to support select cohort available
balances, which have absorbed an increase in distributions of prepaid principal to pool certificate holders. 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 $33.9 billion and $33.4 billion of outstanding SBA guarantied 7(a) secondary market pool principal as of
September 30, 2019 and 2018.

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 $26.5 billion and $26.7 billion of SBA guarantied 504 debentures
outstanding in the secondary market as of September 30, 2019 and 2018.

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

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

FIDUCIARY ASSETS
As of September 30, 2019 2018
MRF MRA Total MRF MRA Total
Cash $ 3,060 $ - $ 3,060 $ - $ - $ -
Short Term Securities
Money Market Funds 30,084 722,797 752,881 20,836 673,079 693,915
Treasury Bills 179,222 - 179,222 44,930 - 44,930
Repurchase Agreements 510,101 - 510,101 643,006 - 643,006
Total Cash and Short Term Securities 722,467 722,797 1,445,264 708,772 673,079 1,381,851

Long Term Securities
Treasury Notes/Bonds Including Interest 2,317,380 - 2,317,380 2,750,655 - 2,750,655
Total Long Term Securities 2,317,380 - 2,317,380 2,750,655 - 2,750,655

Net Assets $ 3,039,847 $ 722,797 $ 3,762,644 $ 3,459,427 $ 673,079 $ 4,132,506

RECONCILIATION OF FIDUCIARY ASSETS
For the Years Ended
September 30, 2019 2018
MRF MRA Total MRF MRA Total
Beginning Net Assets $ 3,459,427 $ 673,079 $ 4,132,506 $ 4,255,865 $ 686,925 $ 4,942,790
Receipts
Earned Income 63,004 19,566 82,570 58,480 12,168 70,648
Contributions 9,501,440 14,522,564 24,024,004 7,706,535 14,898,852 22,605,387
Net Realized Gain (Loss) 3,015 - 3,015 6,890 - 6,890
Total Receipts 9,567,459 14,542,130 24,109,589 7,771,905 14,911,020 22,682,925

Less Disbursements
Payments to Investors 9,987,039 14,492,412 24,479,451 8,568,343 14,924,866 23,493,209
Total Disbursements 9,987,039 14,492,412 24,479,451 8,568,343 14,924,866 23,493,209

Ending Net Assets $ 3,039,847 $ 722,797 $ 3,762,644 $ 3,459,427 $ 673,079 $ 4,132,506

Note: Contributions for FY 2019 shown for the MRF include a $380 million cash transfer from the SBA (Note 6.E).

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

(Dollars in Thousands)

As of September 30, 2019 2018
Public
Guaranty Fees Receivable $ 78,631 $ 75,434
Refunds 1,002 1,427
Other 84,820 17,317
Total Public 164,453 94,178
Allowance For Loss (626) (655)
Net Public $ 163,827 $ 93,523

Accounts Receivable - Other increased due to fourth quarter activity related to the booking of miscellaneous receivables due
from lenders for the purchase of defaulted loans. As stated above, only amounts over 180 days past due on guarantied loans
purchased by the SBA are written off for financial reporting purposes. This increase in activity created balances that were well
within the 180 day write off period.

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

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

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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.

SBA’s business loan programs include its flagship 7(a) Loan Guaranty 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 programs.

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

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

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

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

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the subsidy rate that applies to the credit program level approved by Congress. The SBA records subsidy expenses when loans are
disbursed. In accordance with FCRA, subsidy costs are reestimated annually.

Credit Program Receivables and Related Foreclosed Property, Net
FCRA governs direct loans made after FY 1991. FCRA direct loans are valued at the present value of expected future cash
flows discounted at the interest rate of marketable Treasury securities. The subsidy allowance represents the 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, 2019 SBA’s foreclosed property
was $24.7 million related to 83 loans. The properties had been held for an average of 1,275 days. At September 30, 2018
foreclosed property was $20.7 million related to 67 loans. The properties had been held for an average of 904 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.

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

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

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

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

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

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

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

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

DIRECT LOANS
New Loans Disbursed During the Year Ended September 30, 2019 2018
Business Direct Loan Program $ 35,263 $ 37,724
Disaster Loan Program 1,518,101 3,590,561
Total Direct Loans Disbursed $ 1,553,364 $ 3,628,285

Outstanding Loan Obligations as of September 30, 2019 2018
Business Direct Loan Program $ 42,191 $ 37,772
Disaster Loan Program 636,888 1,203,018
Total Direct Loan Obligations $ 679,079 $ 1,240,790

GUARANTIED LOANS
New Loans Disbursed During the Year Ended September 30, 2019 2018
Total Principal Disbursed at Face Value $ 26,790,570 $ 29,269,593
Total Principal Disbursed Guarantied by the SBA 21,188,429 23,028,188

Outstanding Loan Obligations as of September 30, 2019 2018
Business Guarantied Loan Programs $ 15,845,258 $ 16,741,515

Loans Outstanding as of September 30, 2019 2018
Total Principal Outstanding at Face Value (see note below) $ 129,717,116 $ 128,765,704
Total Principal Outstanding Guarantied by the SBA (see note below) 105,827,203 105,574,381
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, 2019 2018
Post-1991 Business Direct and Purchased Guarantied Loans
Beginning Balance of Allowance Account $ 2,443,355 $ 2,842,337
Current Year's Subsidy (see 6.G for breakdown by component) 3,136 3,407
Loans Written Off (864,737) (831,015)
Subsidy Amortization (2,558) (2,626)
Allowance Related to Guarantied Loans Purchased This Year 736,242 277,050
Miscellaneous Recoveries and Costs 128,364 153,179
Balance of Subsidy Allowance Account before Reestimates 2,443,802 2,442,332
Technical Assumptions/Default Reestimates (1,604) 1,023
Ending Balance of Allowance Account $ 2,442,198 $ 2,443,355

Note: The Business Direct reestimate includes an Interest Rate Reestimate of ($1,759) thousand for FY 2019 and $307 thousand for FY 2018.

Post-1991 Disaster Direct Loans 2019 2018
Beginning Balance of Allowance Account $ 1,325,326 $ 899,235
Current Year's Subsidy (see 6.G for breakdown by component) 188,230 456,849
Loans Written Off (197,254) (108,281)
Subsidy Amortization (14,700) (13,097)
Miscellaneous Recoveries and Costs 57,004 54,801
Balance of Subsidy Allowance Account before Reestimates 1,358,606 1,289,507
Technical Assumptions/Default Reestimates (93,232) 35,819
Ending Balance of Allowance Account $ 1,265,374 $ 1,325,326

Note: The Disaster Direct reestimate includes an Interest Rate Reestimate of ($27,228) thousand for FY 2019 and ($34,794) thousand for FY 2018.

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E. Liability for Loan Guaranties
(Dollars in Thousands)

For the Years Ended September 30, 2019 2018
Pre-1992 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties $ 1 $ 8
Adjustment to Expected Losses, Guaranties Outstanding (1) (7)
Ending Balance of Liability for Loan Guaranties - 1

Post-1991 Business Loan Guaranties
Beginning Balance of Liability for Loan Guaranties 2,662,785 2,556,360
Current Year's Subsidy (see 6.G for breakdown by component) 668 2,338
Fees 1,325,782 1,378,849
Interest Accumulation Factor 68,076 79,454
Claim Payments to Lenders (1,495,093) (988,670)
Adjustment Due to Reestimate & Guarantied Loan Purchases 758,851 711,620
Miscellaneous Recoveries and Costs (337,044) 19,034
Balance of Liability for Loan Guaranties before Reestimates 2,984,025 3,758,985
Technical Assumptions/Default Reestimates (983,605) (1,096,200)
Ending Balance of Liability for Loan Guaranties 2,000,420 2,662,785

Total Ending Balance of Liability for Loan Guaranties $ 2,000,420 $ 2,662,786

Note: The Business Loan Guaranties reestimate includes an Interest Rate Reestimate of ($20,303) thousand for FY 2019 and ($3,386) thousand for FY 2018. Also, the large flux showing
on the “Miscellaneous Recoveries and Costs” line is primarily attributable to the transfer of $380 million to the MRF (Note 4).

F. 2019 Subsidy Rates by Program and Component
Total
Loan Program Subsidy Financing Default Other Fee
Guaranty
7(a) 0.00% 0.00% 4.34% 0.00% -4.34%
504 CDC 0.00% 0.00% 4.41% 0.46% -4.87%
504 Refi 0.00% 0.00% 4.51% 0.47% -4.98%
SBIC Debentures 0.00% 0.00% 3.50% 0.06% -3.56%

Direct
Disaster 12.29% 2.56% 12.74% -3.01% 0.00%
Microloan 8.77% 6.76% 2.31% -0.30% 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.

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G. Subsidy Expense by Component
(Dollars in Thousands)

For the Years Ended September 30, 2019 2018
Business Loan Guaranties
Defaults $ 5,696 $ 23,202
Fees (5,556) (22,888)
Other 528 2,024
Subsidy Expense Before Reestimates and Loan Modifications 668 2,338
Reestimates (983,605) (1,096,200)
Total Guarantied Business Loan Subsidy Expense $ (982,937) $ (1,093,862)

Business Direct Loans
Interest $ 2,469 $ 2,727
Defaults 803 829
Other (136) (149)
Subsidy Expense Before Reestimates 3,136 3,407
Reestimates (1,604) 1,023
Total Business Direct Loan Subsidy Expense $ 1,532 $ 4,430

Disaster Direct Loans
Interest $ 44,700 $ 131,525
Defaults 194,774 467,879
Other (51,244) (142,555)
Subsidy Expense Before Reestimates 188,230 456,849
Reestimates (93,232) 35,819
Total Disaster Direct Loan Subsidy Expense $ 94,998 $ 492,668

H. Administrative Expense
The SBA received appropriations to administer its credit programs, including the making, servicing and liquidation of its
loans and guaranties. The decrease in disaster loan administrative expense is due to additional funding and disaster activity in
FY 2018. Amounts expensed in the Statement of Net Cost are shown in the following table.

(Dollars in Thousands)

For the Years Ended September 30, 2019 2018
Disaster Direct Loan Programs $ 333,058 $ 544,590
Business Loan Programs 155,349 152,828
Total Administrative Expense $ 488,407 $ 697,418

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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 2019 performance data for SBA’s large loan programs and 9 months of actual and 3 months of
projected performance data for the Secondary Market Guaranty, Microloan, and the small loan programs.

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

(Dollars in Thousands)

For the Years Ended September 30, 2019 2018
7(a) $ (245,591) $ (430,734)
7(a) - Recovery Act 4,982 6,616
7(a) - Jobs Act 2,011 180
504 CDC (338,453) (411,673)
504 CDC - Recovery Act (14,670) (10,590)
504 CDC - Jobs Act (6,833) (3,588)
504 CDC - Debt Refinancing (20,425) (19,198)
504 First Mortgage Loan Pooling - Recovery Act (2,871) (4,326)
SBIC Debentures (202,875) (109,542)
SBIC Participating Securities (56,467) (96,413)
Secondary Market Guaranty Program (100,648) (6,541)
ARC - Recovery Act (444) (584)
All Other Guaranty Loan Programs (1,321) (9,807)
Total Guarantied Loan Program Subsidy Reestimates $ (983,605) $ (1,096,200)

The 7(a) Loan Guaranty program, SBA’s flagship and largest program, had a net downward reestimate in FY 2019 of
$245.6 million. The reestimate is partially due to higher than projected recoveries in FY 2019. The reestimate is also
partially due to lower projected losses in FY 2020 and beyond for cohorts 2015 through 2018 due to updated economic
assumptions. The updated economic assumptions project further economic strengthening.

The 7(a) Recovery Act program had a net upward reestimate of $5.0 million. The reestimate is partially due to higher than
projected losses in FY 2019 and partially due to higher projected losses in FY 2020 and beyond.

The 7(a) Jobs Act cohort had a net upward reestimate of $2.0 million. The reestimate is partially due to higher than projected
losses in FY 2019 and partially due to higher projected losses in FY 2020 and beyond.

The 504 Certified Development Company program had a net downward reestimate of $338.5 million. The reestimate is
primarily due to better than projected FY 2019 loan performance. Actual defaults were less than projected for FY 2019, while
actual recoveries were significantly higher. The program also realized larger fee revenue than projected for FY 2019. Part of
the reestimate is due to an increase in recovery projections in FY 2020 and beyond, but this is partially offset by increased
projections of defaults.

The 504 Recovery Act program had a net downward reestimate of $14.7 million. The reestimate is primarily due to lower
than projected losses in FY 2019.

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The 504 Jobs Act program had a net downward reestimate of $6.8 million. The reestimate is primarily due to lower than
projected losses in FY 2019.

The 504 Debt Refinancing program had a net downward reestimate of $20.4 million. The reestimate is primarily due to
better than projected FY 2019 loan performance. Actual purchases in the 504 Debt Refinancing program were less than those
projected.

The Section 504 First Mortgage Loan Pooling program had a net downward reestimate of $2.9 million. The downward
reestimate is primarily due to higher than projected recoveries in FY 2019 and expectations for fewer projected loan
prepayments which contributes to an increase in expected fee collections.

The SBIC Debentures program had a net downward reestimate of $202.9 million. The SBA updated the credit subsidy
model for the SBIC Debentures program in FY 2019. The new econometric model considers past loan performance as well as
variables that historically have been correlated with SBIC performance. For example, changes in the national unemployment
rate are predictive in forecasting SBIC program defaults. The downward reestimate is primarily driven by lower than projected
defaults in FY 2019 and a decrease in projected losses for cohorts with outstanding debenture leverage nearing maturity.

The SBIC Participating Securities program had a net downward reestimate of $56.5 million. The reestimate is primarily due
to higher than projected recoveries and profit participation cash inflows in FY 2019.

The Secondary Market Guaranty program had a net downward reestimate of $100.6 million. The reestimate for cohorts 2004
- 2018 is driven by updated economic assumptions and higher than projected loan terminations in FY 2019. The downward
reestimate for the 2019 cohort is due to compositional differences between actual pools issued in FY 2019 and those assumed
when the cohort was formulated.

The America’s Recovery Capital program had a net downward reestimate of $0.4 million. The reestimate is primarily due to
higher than projected recoveries in FY 2019.

All Other Guaranty Loan programs include the New Market Venture Capital program that had a net downward reestimate
of $1.3 million. The downward reestimate was driven by 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, 2019 2018
7(m) Microloan $ (1,113) $ 1,675
7(m) Microloan - Recovery Act (539) (379)
Intermediary Lending Pilot Program 125 (270)
All Other Direct Loan Programs (77) (3)
Total Direct Loan Program Subsidy Reestimates $ (1,604) $ 1,023

The 7(m) Direct Microloan program had a downward reestimate of $1.1 million. The reestimate is primarily due to higher
than projected loan repayments in FY 2019.

The 7(m) Direct Microloan Recovery Act program had a net downward reestimate of $0.5 million. The reestimate is
primarily due to lower than projected defaults in FY 2019.

The Intermediary Lending Pilot program had a net upward reestimate of $0.1 million. The reestimate is primarily due to lower
than projected net cash inflows in FY 2019.

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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, 2019 2018
Disaster $ (93,232) $ 35,819
Total Disaster Direct Loan Program Subsidy Reestimates $ (93,232) $ 35,819

The Disaster Assistance program had a net downward reestimate of $93.2 million. Most cohorts experienced a downward
reestimate due to enhancements in recovery projection methodology, better than projected performance in FY 2019,
and updated performance assumptions. The enhancements to the recovery methodology include an added functionality
to project recoveries on loans that were already charged off by the time of reestimate. The back testing of the change
(including it in the prior year’s reestimate model) shows an improvement in the accuracy of recoveries forecast for
FY 2019. The upward reestimate for the 2018 cohort was due to worse than projected performance in FY 2019. The
upward reestimate for the 2019 cohort was due to a lower actual average borrower’s interest rate than was 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, 2019 2018
Leasehold Improvements $ 1,811 $ 1,811
Amortization of Leasehold Improvements (1,608) (1,457)
Net 203 354

Total General Property and Equipment, Net $ 203 $ 354

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

(Dollars in Thousands)

As of September 30, 2019 2018
Intragovernmental Liabilities - Other
Employment Taxes Payable $ 5,232 $ 3,080
Federal Employees' Compensation Act Payable 5,724 5,897
Total Intragovernmental Liabilities - Other 10,956 8,977

Federal Employees' Compensation Act Actuarial Liability 28,794 34,854

Surety Bond Guarantee Program Future Claims 57,255 49,609

Other Liabilities
Prior Liens on Real Estate Payable - 59
Accrued Unfunded Annual Leave 29,081 29,110
Total Other Liabilities 29,081 29,169
Total Liabilities Not Covered by Budgetary Resources 126,086 122,609
Total Liabilities Covered by Budgetary Resources 14,957,535 14,792,334
Total Liabilities Not Requiring Budgetary Resources 1,423 397

Total Liabilities $ 15,085,044 $ 14,915,340

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

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

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, 2019 2018
Beginning Balance $ 11,212,607 $ 7,693,059
New Borrowing 2,231,792 4,426,583
Repayments (1,634,158) (907,035)
Ending Balance $ 11,810,241 $ 11,212,607

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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, 2019 2018
Disaster Loan Fund $ 552 $ 861
Business Loan and Investment Fund 8,180 3,657
Total Due To Treasury $ 8,732 $ 4,518

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

(Dollars in Thousands)

As of September 30, 2019 2018
OTHER LIABILITIES - INTRAGOVERNMENTAL
Entity
Current
Employment Taxes Payable $ 3,792 $ 5,926
Advances from Other Agencies 1,727 683
Total Current 5,519 6,609
Non-current
Employment Taxes Payable 5,232 3,080
Federal Employees’ Compensation Act Payable 5,724 5,897
Total Non-current 10,956 8,977
Total Entity 16,475 15,586
Non-entity
Current
Payable to Treasury 6 6
Total Other Liabilities - Intragovernmental $ 16,481 $ 15,592
OTHER LIABILITIES - PUBLIC
Entity
Current
Accrued Funded Payroll and Benefits $ 18,657 $ 13,505
Accrued Unfunded Annual Leave 29,081 29,110
Other Liabilities 40 40
Suspense Accounts 1,423 397
Total Current 49,201 43,052
Non-current
Prior Liens on Real Estate Payable - 59
Total Non-current - 59
Total Entity 49,201 43,111
Total Other Liabilities - Public $ 49,201 $ 43,111

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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. FY 2019 and 2018 historical facilities lease costs were $48.0 million and $48.0 million. Future lease payments
are based on FY 2020 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. Lease Projections after 2024
increased due to the increase in the total number of Occupancy Agreements still in effect until 2034.

Future Facilities Operating Lease Payments
(Dollars in Thousands)

Fiscal Year Lease Projections
2020 $ 48,612
2021 50,070
2022 51,572
2023 53,120
2024 54,713
After 2024 66,864
Total $ 324,951

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, 2019 2018
Entity
Financing Fund Payable $ (1,028,472) $ (797,694)

Non-entity
Miscellaneous Receipts Fund Receivable 1,028,472 797,694
Downward Reestimate Payable to Treasury (1,028,472) (797,694)
Balance Sheet Reported Payable $ (1,028,472) $ (797,694)

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

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

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

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

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

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

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

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Intragovernmental Gross Cost and Exchange Revenue
(Dollars in Thousands)

For the Years Ended September 30, 2019 2018

STRATEGIC GOAL 1:
Support Small Business Revenue and Job Growth
Intragovernmental Gross Cost $ 122,576 $ 117,805
Gross Cost with the Public (682,440) (822,150)
Total Strategic Goal 1 Gross Cost (559,864) (704,345)

Intragovernmental Earned Revenue 92,156 92,478
Earned Revenue from the Public 119,425 118,612
Total Strategic Goal 1 Earned Revenue 211,581 211,090

STRATEGIC GOAL 2:
Build Healthy Entrepreneurial Ecosystems and Create Business Friendly Environments
Intragovernmental Gross Cost $ 73,069 $ 57,010
Gross Cost with the Public 237,421 196,487
Total Strategic Goal 2 Gross Cost 310,490 253,497

STRATEGIC GOAL 3:
Restore Small Businesses and Communities after Disasters
Intragovernmental Gross Cost $ 410,525 $ 446,982
Gross Cost with the Public 347,158 951,276
Total Strategic Goal 3 Gross Cost 757,683 1,398,258

Intragovernmental Earned Revenue 81,592 96,217
Earned Revenue from the Public 251,325 217,596
Total Strategic Goal 3 Earned Revenue 332,917 313,813

STRATEGIC GOAL 4:
Strengthen SBA’s Ability to Serve Small Businesses
Intragovernmental Gross Cost $ 34,639 $ 39,675
Gross Cost with the Public 112,551 136,741
Total Strategic Goal 4 Gross Cost 147,190 176,416

COST NOT ASSIGNED TO STRATEGIC GOALS
Intragovernmental Gross Cost $ 6,007 $ 5,117
Gross Cost with the Public 19,518 17,635
Total Gross Cost Not Assigned to Strategic Goals 25,525 22,752

Net Cost of Operations $ 136,526 $ 621,675

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, 2019 and 2018. SBA’s budgetary resources were $3.1 billion and $4.7 billion for
the fiscal years ended September 30, 2019 and 2018. Additionally, $9.2 billion and $12.4 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, 2019 and 2018.

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

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

Borrowing Authority and Terms of Borrowing
The SBA is authorized to borrow from the Treasury’s Bureau of the Fiscal Service when funds needed to disburse direct loans
and purchase guarantied loans exceed subsidy costs and collections in the nonbudgetary loan financing funds. In FY 2019
and FY 2018, the SBA received $2.2 billion and $4.2 billion of borrowing authority from the OMB. At the end of FY 2019,
the SBA had no borrowing authority carried over. However, at the end of FY 2018, the SBA had $0.2 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 2019 and FY 2018, the SBA incurred $6.4 billion and $10.4 billion of direct and reimbursable obligations, of
which $0.0 billion and $0.4 billion were apportioned in category A, and $6.4 billion and $10.0 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.

Unobligated Balances
Unobligated balances at September 30, 2019 and 2018 are $5.9 billion and $6.7 billion, which include $4.1 billion and $3.9
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 ($4.4 billion in FY 2019 and $4.7 billion in FY 2018) from fees and subsidy to fund default claims in future years.
In addition, unobligated balances are accumulated in budgetary accounts from appropriations ($1.5 billion in FY 2019 and
$2.0 billion in FY 2018) 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, 2019 and 2018 were $1.3 billion and $2.3 billion. Unpaid undelivered orders for the
periods ended September 30, 2019 and 2018 were $1.1 billion and $1.8 billion. Paid undelivered orders for the periods
ended September 30, 2019 and 2018 were $0.2 billion and $0.5 billion. For FY 2019 total undelivered orders consist of

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$1.0 billion non-federal and $0.3 billion federal. For FY 2018 total undelivered orders 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 2018 Statement of Budgetary Resources and the President’s FY 2020 budget
submission. The President’s FY 2021 Budget with actual numbers for FY 2019 has not yet been published. The SBA expects
no material differences between the President’s Budget “actual” column and the FY 2019 reported results when the budget
becomes available in February 2020.

NOTE 16 RECONCILIATION OF NET OPERATING COST AND
NET OUTLAYS
Statement of Federal Financial Accounting Standards 53 amends requirements for a reconciliation between budgetary and
financial accounting information established by SFFAS 7. SFFAS 53 provides for the budget and accrual reconciliation to
replace the statement of financing. The BAR explains the relationship between the entity’s net outlays on a budgetary basis
and the net cost of operations during the reporting period.

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

As noted in SFFAS 53, in the initial year of implementation, the disclosure requirements applicable to prior reporting periods
are not required for comparative presentations.

Reestimate expense is recorded at the end of the fiscal year and funded in the following fiscal year. SBA’s annual reestimate
process updates program costs based upon actual cash flow experience and forecasts of future cash flow. Additional discussion
of reestimates is in Note 6.I and referenced throughout Note 6.

Changes in assets recognize the timing differences between the recognition of income and the receipt of funds. A major
component of changes in assets is related to changes in the subsidy allowance before reestimates. The portion of the change in
subsidy allowance include changes in the allowance related to current year subsidy, receipts, costs, and subsidy amortization. For
additional information see Note 6.D.

Changes in liabilities recognize the timing difference between the recording and payment of expenses. A component of changes
in liabilities unique to credit agencies is the change in other loan guaranties before reestimate, which includes the current year
subsidy, interest accumulation factor, and miscellaneous receipts, excluding the transfer to MRF, which is separately stated. For
additional information see Note 6.G.

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

Components of budget outlays that are not part of net operating cost include disbursements and receipts that are not a revenue
or expense. The major components included in this section are financing fund outlays that do not contribute to net cost.
Included in this category is the effect of the downward reestimate to Treasury from the prior year which was expensed in the

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prior year and disbursed during the current fiscal year. The change in loan receivable before allowance represents the receipts
and disbursements that impact loan balances that are not expenses or revenue. Other changes in liability for loan guaranties
are the outlays for payments to lenders and fees collected as discussed in Note 6.E. The transfer to the MRF is discussed in
Note 4 and 6.E. The effect of the current year downward reestimate transferred to GFR account represents the adjustment to
the reestimate associated with the President’s Budget expensed and funded during the current year. Additional information is
included in the detail displayed in Note 6.B, 6.D and 6.E. The transfer to the MRF is discussed further in Note 4.

Budget and Accrual Reconciliation
(Dollars in Thousands)

For the Year Ended September 30, 2019 Intragov Public Total

Net Operating Cost $ 473,069 $ (336,540) $ 136,529
Components of Net Operating Cost Not Part of the Net Outlays
Property, plant and equipment depreciation - (151) (151)
Year-end credit reform subsidy reestimates - 1,078,441 1,078,441

Increase/(decrease) in assets:
Accounts Receivable - 70,274 70,274
Other Changes in Allowance Before Reestimates - (359,476) (359,476)
Other assets (3,855) (759) (4,614)

(Increase)/decrease in liabilities not affecting Net Outlays:
Accounts Payable 139 5,752 5,891
Salaries and Benefits 2,134 (5,152) (3,018)
Other Changes in Liability for Loan Guaranties Before Reestimates - (111,700) (111,700)
Other Liabilities (1,978) 660 (1,318)

Other Financing Sources:
Federal employee retirement benefit costs paid by OPM and imputed to Agency (21,503) - (21,503)
Total Components of Net Operating Cost Not Part of the Net Outlays (25,063) 677,889 652,826

Components of the Net Outlays That Are Not Part of Net Operating Cost
Effect of Prior Year Reestimate Paid to General Fund Receipt (GFR) Account 797,694 - 797,694
Changes in Loans Receivable Before Allowance - 274,709 274,709
Other Changes in Liability for Loan Guaranties - 169,311 169,311
Cash Transfer to the Master Reserve Fund - 380,000 380,000
Effect of Current Year Downward President's Budget Reestimate Transferred to GFR Account 147,554 - 147,554
Other - (3,118) (3,118)
Total Components of the Net Outlays That Are Not Part of Net Operating Cost $ 945,248 $ 820,902 $ 1,766,150

Net Outlays Before Distributed Offsetting Receipts $ 1,393,254 $ 1,162,251 2,555,505
Distributed Offsetting Receipts (946,587)
Net Outlays $ 1,608,918

Related Amounts on the Statement of Budgetary Resources
Net Outlays (discretionary and mandatory) 2,555,505
Distributed Offsetting Receipts (946,587)
Agency Outlays, net (discretionary and mandatory) $ 1,608,918

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NOTE 17 RECLASSIFICATION OF BALANCE SHEET, STATEMENT OF NET
COST, AND STATEMENT OF CHANGES IN NET POSITION FOR FR
COMPILATION PROCESS
To prepare the Financial Report of the U.S. Government, the Department of the Treasury requires agencies to submit an
adjusted trial balance, which is a listing of amounts by U.S. Standard General Ledger account that appear in the financial
statements. Treasury uses the trial balance information reported in the Governmentwide Treasury Account Symbol Adjusted
Trial Balance System to develop a Reclassified Balance Sheet, Reclassified Statement of Net Cost, and a Reclassified Statement
of Changes in Net Position for each agency, which are accessed using GTAS. Treasury eliminates all intragovernmental
balances from the reclassified statements and aggregates lines with the same title to develop the FR statements. This note
shows SBA’s financial statements and SBA’s reclassified statements prior to elimination of intragovernmental balances and
prior to aggregation of repeated FR line items.

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

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Reclassification of Financial Statements
(Dollars in Thousands)

FY 2019 SBA Balance Sheet Line Items Used to Prepare FY 2019 Government-Wide Balance Sheet

ASSETS 1. ASSETS

Intragovernmental Assets 3. Federal
Fund Balance with Treasury (Note 2) $ 7,036,675 $ 7,036,675 3.1 Fund Balance with Treasury (RC40)
Advances (Note 1) 18,476 18,476 3.10 Advances to Others and Prepayments (RC23)
Total Intragovernmental Assets 7,055,151 7,055,151 3.14 Total Federal Assets

Assets - Public and Other 2. Non-Federal
Cash (Note 3) 3,030 3,030 2.1 Cash and Other Monetary Assets
Accounts Receivable, Net (Note 5) 163,827 163,827 2.2 Accounts and Taxes Receivable
Credit Program Receivables and Related Foreclosed
Property, Net (Note 6) 9,493,680 9,493,680 2.3 Loans Receivable
General Property and Equipment, Net (Note 7) 203 203 2.5 Property, Plant and Equipment
Advances (Note 1) 2,761 2,761 2.8 Other Assets
Total Assets - Public and Other 9,663,501 9,663,501 2.9 Total Non-Federal Assets
Total Assets $ 16,718,652 $ 16,718,652 4. Total Assets

LIABILITIES 5. LIABILITIES
Intragovernmental Liabilities
Accounts Payable (Note 1) $ 4,816 $ 4,435 7. Federal
8,732 7.1 Accounts Payable (RC22)
381 7.2 Accounts Payable - Capital Transfers (RC12)
7.5 Interest Payable - Loans and Otherwise not
Debt (Note 9) 11,810,241 11,810,241 Classified (RC04)
Net Assets of Liquidating Funds Due to Treasury (Note 10) 8,732 13,710 7.6 Loans Payable (RC17)
1,727 7.8 Benefit Programs Contributions Payable (RC21)
7.9 Advances From Others and Deferred Credits (RC23)
Downward Reestimate Payable to Treasury (Note 1, 7.10 Liability to the General Fund of the U.S. Government
1,028,472 1,028,478
Note 13) for Custodial and Other Non-Entity (RC46)
Other (Note 11) 16,481 1,038 7.12 Other Liabilities (Without Reciprocals) (RC29)/1
Total Intragovernmental Liabilities 12,868,742 12,868,742 7.15 Total Federal Liabilities

Other Liabilities - Public 6. Non-Federal
Accounts Payable (Note 1) 14,130 14,130 6.1 Accounts Payable
Accrued Grant Liability (Note 1) 66,502 29,358 6.3 Federal Employee and Veteran Benefits Payable
Liability for Loan Guaranties (Note 6) 2,000,420 2,000,419 6.6 Loan Guarantee Liabilities
Federal Employees’ Compensation Act Actuarial Liability
(Note 1, Note 8) 28,794
Surety Bond Guarantee Program Future Claims (Note 8) 57,255
Other (Note 11) 49,201 172,395 6.9 Other Liabilities
Total Other Liabilities - Public 2,216,302 2,216,302 6.10 Total Non-Federal Liabilities
Total Liabilities 15,085,044 15,085,044 8. Total Liabilities

NET POSITION 9. NET POSITION
Unexpended Appropriations (Note 1) 1,779,472 1,779,473 9.2A Unexpended Appropriations
Cumulative Results of Operations (Note 1) (145,864) (145,865) 9.2B Cumulative Results of Operations
Total Net Position 1,633,608 1,633,608 10. Total Net Position

Total Liabilities and Net Position $ 16,718,652 $ 16,718,652 11. Total Liabilities and Net Position

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

Line Items Used to Prepare FY 2019 Government-Wide
FY 2019 SBA Statement of Net Cost
Statement of Net Cost
STRATEGIC GOAL 1:
Support Small Business Revenue and Job Growth 1. Gross Cost
Gross Cost $ (559,864) $ 34,207 2. Non-Federal Gross Cost
Less: Earned Revenue 211,581 34,207 6. Total Non-Federal Gross Cost
Net Cost of Strategic Goal 1 (771,445)

STRATEGIC GOAL 2: 7. Federal Gross Cost
Build Healthy Entrepreneurial Ecosystems and Create 90,021 7.1 Benefit Program Costs (RC26)
Business Friendly Environments 21,503 7.2 Imputed Cost (RC25)
Gross Cost 310,490 107,383 7.3 Buy / sell Cost (RC24)
Net Cost of Strategic Goal 2 310,490 400,625 7.6 Borrowing and Other Interest Expense (RC05)
27,284 7.8 Other Expenses (without Reciprocals) (RC29)
STRATEGIC GOAL 3:
Restore Small Businesses and Communities after Disasters
Gross Cost 757,683 646,816 8. Federal Gross Cost
Less: Earned Revenue 332,917
Net Cost of Strategic Goal 3 424,766 681,023 9. Total Gross Cost

STRATEGIC GOAL 4: 10. Earned Revenue
Strengthen SBA’s Ability to Serve Small Businesses 370,749 11. Non-Federal Earned Revenue
Gross Cost 147,190 12. Federal Earned Revenue
Net Cost of Strategic Goal 4 147,190 1,258 12.2 Buy/Sell Revenues (RC24)
172,490 12.5 Borrowing and other interest revenue (RC05)
COST NOT ASSIGNED TO STRATEGIC GOALS 173,748 13. Total Federal Earned Revenue
Gross Cost 25,525
Net Cost Not Assigned to Strategic Goals 25,525 544,497 14. Total Earned Revenue

Net Cost of Operations $ 136,526 $ 136,526 15. Net Cost of Operations

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Reclassification of Financial Statements
(Dollars in Thousands)

Line Items Used to Prepare FY 2019 Government-Wide
FY 2019 SBA Statement of Changes in Net Position Statement of Changes in Net Position

Beginning Unexpended Appropriations $ 2,341,412 $ 2,073,156 1. Net Position, beginning of period
2,073,156 4. Net Position, beginning of period - adjusted
Budgetary Financing Sources
Appropriations Received 932,917
5. Non-Federal Non-Exchange Revenue
Rescissions (50,000) 454 5.7 Other Taxes and Receipts
Adjustment - Cancelled Authority (21,640) 454 5.9 Total Non-Federal Non-Exchange Revenue
Return of Unrequired Liquidating Fund Appropriation (3,312)
Other Adjustments (253) 7. Budgetary Financing Sources
7.1 Appropriations Received as adjusted (rescissions
Appropriations Used (1,419,652) 857,713 and other adjustments) (RC41)
Total Budgetary Financing Sources (561,940) (1,419,652) 7.2 Appropriations Used (RC39)
1,419,652 7.3 Appropriations expended (RC38)
7.6 Non-Expenditure Transfers-In of Unexpended
Ending Unexpended Appropriations $ 1,779,472 6,000 Appropriations and Financing Sources (RC08)

7.7 Non-Expenditure Transfers-Out of Unexpended
(12,324) Appropriations and Financing Sources (RC08)
851,389 7.20 Total Budgetary Financing Sources

Beginning Cumulative Results of Operations $ (268,255)
Budgetary Financing Sources 8. Other Financing Sources
Appropriations Used 1,419,652 21,503 8.3 Imputed Financing Sources (RC25)
Donations of Cash and Cash Equivalents 112 8.4 Non-Entity Collections Transferred to the General
(945,590) Fund of the U.S. Government (RC44)
8.5 Accrual for Non-Entity Amounts to be Collected
and Transferred to the General Fund of the U.S.
Other Financing Sources (230,778) Government (RC48)
Other Financing from Costs Absorbed by Others 21,503 (1,154,865) 8.11 Total Other Financing Sources
Other - Current Year Liquidating Equity Activity (6,324)
Other - Non-entity Activity (1,176,026)

Total Financing Sources 258,917
Less: Net Cost of Operations 136,526
Net Change 122,391

Ending Cumulative Results of Operations $ (145,864) 136,526 9. Net Cost of Operations

Ending Net Position $ 1,633,608 $ 1,633,608 10. Ending Net Position

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REQUIRED SUPPLEMENTARY INFORMATION
COMBINING STATEMENT OF BUDGETARY RESOURCES
For the Year Ended September 30, 2019 (Unaudited)
(Dollars in Thousands) BLIF DLF SBGRF
Nonbudgetary Nonbudgetary
Item Budgetary Financing Budgetary Financing Budgetary
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority,
$ 83,873 $ 4,058,429 $ 1,282,638 $ 232,486 $ 101,167
net (discretionary and mandatory)
Appropriations (discretionary and mandatory) 194,314 - 139,071 - -
Borrowing Authority (discretionary and mandatory) - 296,688 - 1,935,104 -
Spending Authority from Offsetting Collections - 2,237,190 - 460,321 18,219
Total Budgetary Resources $ 278,187 $ 6,592,307 $ 1,421,709 $ 2,627,911 $ 119,386

STATUS OF BUDGETARY RESOURCES
New Obligations and Upward Adjustments (total) $ 244,301 $ 2,943,213 $ 311,847 $ 1,851,445 $ 19,066
Unobligated Balance, end of year:
Apportioned, unexpired accounts 13 625,218 214,359 776,466 15,021
Unapportioned, unexpired accounts 33,873 3,023,876 895,503 - 85,299
Unexpired Unobligated Balance, end of year 33,886 3,649,094 1,109,862 776,466 100,320
Expired Unobligated Balance, end of year - - - - -
Unobligated Balance, end of year (total) 33,886 3,649,094 1,109,862 776,466 100,320
Total Status of Budgetary Resources $ 278,187 $ 6,592,307 $ 1,421,709 $ 2,627,911 $ 119,386

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 242,090 $ 664,727 $ 326,785 $ 487,885 $ (2,630)
Distributed Offsetting Receipts (852,053) - (93,195) - -
Agency Outlays, net (discretionary and mandatory) $ (609,963) $ 664,727 $ 233,590 $ 487,885 $ (2,630)

(Dollars in Thousands) SE OIG ADVOCACY EDP BATF TOTAL TOTAL
Nonbudgetary
Item Budgetary Budgetary Budgetary Budgetary Budgetary Budgetary Financing Total
BUDGETARY RESOURCES
Unobligated Balance from Prior Year Budget Authority,
$ 496,323 $ 14,169 $ 2,266 $ 54,703 $ 166 $ 2,035,305 $ 4,290,915 $ 6,326,220
net (discretionary and mandatory)
Appropriations (discretionary and mandatory) 267,500 21,900 9,120 247,700 - 879,605 - 879,605
Borrowing Authority (discretionary and mandatory) - - - - - - 2,231,792 2,231,792
Spending Authority from Offsetting Collections 188,140 1,000 - - 111 207,470 2,697,511 2,904,981
Total Budgetary Resources $ 951,963 $ 37,069 $ 11,386 $ 302,403 $ 277 $ 3,122,380 $ 9,220,218 $ 12,342,598

STATUS OF BUDGETARY RESOURCES
New Obligations and Upward Adjustments (total) $ 793,722 $ 22,936 $ 10,697 $ 253,192 $ 113 $ 1,655,874 $ 4,794,658 $ 6,450,532
Unobligated Balance, end of year:
Apportioned, unexpired accounts 126,104 9,285 689 27,590 164 393,225 1,401,684 1,794,909
Unapportioned, unexpired accounts 9,694 - - 1 - 1,024,370 3,023,876 4,048,246
Unexpired Unobligated Balance, end of year 135,798 9,285 689 27,591 164 1,417,595 4,425,560 5,843,155
Expired Unobligated Balance, end of year 22,443 4,848 - 21,620 - 48,911 - 48,911
Unobligated Balance, End of Year (total) 158,241 14,133 689 49,211 164 1,466,506 4,425,560 5,892,066
Total Status of Budgetary Resources $ 951,963 $ 37,069 $ 11,386 $ 302,403 $ 277 $ 3,122,380 $ 9,220,218 $ 12,342,598

OUTLAYS, NET
Net Outlays (discretionary and mandatory) $ 574,079 $ 21,151 $ 10,094 $ 231,379 $ (55) $ 1,402,893 $ 1,152,612 $ 2,555,505
Distributed Offsetting Receipts (1,339) - - - - (946,587) - (946,587)
Agency Outlays, net (discretionary and mandatory) $ 572,740 $ 21,151 $ 10,094 $ 231,379 $ (55) $ 456,306 $ 1,152,612 $ 1,608,918

See accompanying auditors’ report.

AGENCY FINANCIAL REPORT  FY 2019
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F INA NC IA L 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.

See accompanying auditors’ report.

88 AGENCY FINANCIAL REPORT  FY 2019

FIN AN C IAL REPO RT I NG

Significant Human Capital investments occur within the following programs.

(Unaudited)
(Dollars in Thousands)

For the Five Years Ended September 30, 2019 2018 2017 2016 2015

Small Business Development Centers $ 129,929 $ 110,400 $ 118,839 $ 94,196 $ 89,225
SCORE 15,169 16,038 11,737 2,749 19,615
Women’s Business Centers 24,375 23,995 24,300 17,135 18,658
Microloan Technical Assistance 25,944 28,595 23,658 28,864 19,216
SBA's Consulting and Training Programs 34,941 22,005 22,191 52,871 51,510
Veterans Outreach 16,110 18,151 22,924 22,999 27,031
Entrepreneurship Education 18,307 10,568 24,758 19,976 18,499
All Other Training and Assistance Programs 10,879 12,184 8,620 16,402 9,010

Total $ 275,654 $ 241,936 $ 257,027 $ 255,192 $ 252,764

See accompanying auditors’ report.

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90 AGENCY FINANCIAL REPORT  FY 2019

OTHER
INFORMATION
(Unaudited)
SUCCESS STORY

EXPAND:
Global Multimillion
Dollar Enterprise Is
SBA Small Business
Persons of the Year

Superstition Meadery
Prescott, AZ

Jeff and Jennifer Herbert founded Superstition Meadery in 2012, and
produced 300 gallons of mead and cider in a 20 square-foot space in its
first year of production. With the SBA’s assistance, the company’s home-
based brewing has expanded into a multimillion-dollar enterprise. Within
2 years, demand for Superstition’s mead and cider products pushed the
company into a 2,500 square-foot space, which they outgrew in 6 months
while producing 6,800 gallons of mead and cider.

Superstition Meadery uses Arizona honey and ingredients sourced from
around the world, including Tahitian vanilla and Moroccan saffron, and
sells nearly 30,000 gallons annually. The owners received counseling
from their local Small Business Development Center and have taken two
SBA loans to support continued domestic and international expansion to
five countries. The company’s sales grew from $724,000 in 2015 to $1.9
million in 2017, and the company expanded its staff from 9 to 20. The
Herberts, founding members of the American Mead Makers Association,
have traveled around the world hosting pairing events and pouring at
craft beverage festivals.
OTHER IN FO RMATIO N (Una udi t e d)

OIG REPORT ON THE MOST SERIOUS MANAGEMENT AND PERFORMANCE
CHALLENGES

REPORT ON THE MOST SERIOUS
MANAGEMENT AND PERFORMANCE
CHALLENGES FACING THE
SMALL BUSINESS ADMINISTRATION
IN FISCAL YEAR 2020

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OT H E R INF O R M ATI ON ( Unaud i t e d)

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

Final Report Transmittal
Report Number: 20-01

DATE: October 11, 2019

TO: Christopher M. Pilkerton
Acting Administrator and General Counsel

FROM: Hannibal “Mike” Ware
Inspector General

SUBJECT: Report on the Most Serious Management and Performance Challenges Facing the Small Business
Administration in Fiscal Year 2020

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 Small Business Administration in
Fiscal Year (FY) 2020. The overall goal is to focus attention on significant issues with the 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 of Agency programs
and operations. Each recommended action is assigned a color score to indicate its status. The scores are as follows: green for
“implemented,” yellow for “substantial progress,” orange for “limited progress,” and red for “no progress.” If a recommended
action was added since last year’s report, no color score was assigned, and the recommended action has been designated as
“new.” Actions that were scored green last year, and remained green this year, have been moved up to the “history bar” above
the recommended actions. The history bar highlights any progress that the Agency has made on a challenge over the past 4
fiscal years (or as long as the challenge has existed, if shorter) by showing the number of actions that have moved to green
each year. In addition, an arrow in the color box indicates that the color score went up or down from the prior year.

The following table provides a summary of the most serious management and performance challenges facing SBA in
FY 2020.

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Summary of the Most Serious Management and Performance Challenges
Facing SBA in FY 2020
Color Scores
Status at End of FY 2019 Change from Prior Year
Challenge Green Yellow Orange Red Up á Down 
1 Small Business Contracting 2
2 IT Leadership 1 5 1
3 Human Capital 1 1
4 SBA Loan Program Risk Management and Oversight 2* 1
5 8(a) Business Development Program 3 2 2
6 Ensuring Quality Deliverables and Reducing Improper Payments
1
at SBA Loan Operation Centers
7 Disaster Assistance Program 1 3 1
8 Grant Management Oversight 3 1
TOTAL 9 14 2 4 2
* For challenge 4 recommendation 1, 7(a) was rated green, while 504 was rated yellow. For challenge 4 recommendation 2, 7(a) was rated yellow, while 504 was rated green. For
simplicity, they are reflected as green in this table.

Overall the Agency made progress addressing this year’s management challenges. We believe this progress is in large part
attributable to the Agency’s concerted effort to address outstanding internal control recommendations that are reflected in
many component challenge corrective action areas. As a result, the above table identifies 23 of 25 challenge areas as “fully
implemented” or having shown “substantial progress.” Notwithstanding these efforts, our audits and investigations continue
to find the Agency facing significant risks in loan program oversight and controls, oversight of its statutory programs to
promote small business development and government contracting, and deploying information technology and related
cybersecurity controls.

For example, an ongoing OIG audit identified additional significant issues regarding internal control weaknesses for lender
oversight. The audit report has been issued to SBA in draft and includes recommendations to address internal control
weaknesses and SBA’s oversight of lenders. We anticipate receiving SBA’s comments and issuing the final report at the end of
October 2019.

In summary, 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.

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OT H E R INF O R M ATI ON ( Unaud i t e d)

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 contracts, such as those awarded under the Javits–Wagner–O’Day
Act, UNICOR, and some Department of Defense contracts from the small business goaling baseline. SBA asserts that these
exclusions should not be considered when calculating the overall 23 percent small business procurement goaling achievement.
SBA provides a goaling memorandum each year that identifies the excluded contracting actions and SBA’s rationale for each
exclusion. While SBA has taken steps to increase transparency in its reporting, these exclusions lead to overstatement of small
business goaling achievements. OIG disagrees with SBA’s underlying interpretation of the Small Business Act pertaining to
the exclusions and asserts that SBA must include the total value of all prime contract awards for each fiscal year in the goaling
baseline.

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. If a firm’s status as a small business changes after award and it is no longer
small or in an SBA preference program, SBA’s regulations allow dollars awarded to that firm to be counted as dollars to small
business. As a result, agencies continue to receive credit towards achieving their small business procurement goals for some
contracts awarded to firms that are either no longer small or in SBA’s preference programs. Furthermore, SBA still has not
implemented a certification process for the Women-Owned Small Business (WOSB) 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 dollars awarded only to small
businesses, SBA should continue to ensure transparency regarding the contracting dollars to businesses that are no longer
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. SBA should also include the
value of all prime contracts when calculating the governmentwide small business goaling achievements. By excluding certain
contract dollars from the goaling achievements report, SBA 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
Over the last several years, SBA has amended its goaling guidelines and removed many exclusions that existed prior to
FY 2013. Further, SBA recently eliminated all exclusions related to contracting actions with nonappropriated funds. In April
2019, SBA added language to its goaling website, which provides a link to the FY 2018 goaling guidelines and explains prime
contract awards excluded from the goaling. While this addition aids in the transparency of the exclusions, OIG maintains that
the Small Business Act does not provide for excluding prime contract awards when calculating governmentwide small business
achievements. Additionally, by continuing to exclude certain types of contracts from the goaling baseline, SBA overstates
the federal government small business goal achievements on a percentage basis. We further maintain that exclusions weaken
the ability of Congress and other federal policymakers to determine whether the government is maximizing contracting
opportunities for small business awards and participation in meeting small business goals. This is evidenced in the General
Services Administration FY 2018 Goaling Without Exclusions Report, which reported small business contract expenditure
data without goaling exclusions applied, resulting in a small business procurement goal achievement of 22.4 percent—2.6
percent lower than the 25 percent reported by SBA. SBA has made strides in transparency by adding more information to

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OTHER IN FO RMATIO N (Una udi t e d)

its goaling website and, according to SBA officials, by including new language to its draft FY 2018 Remediation Actions and
Analysis Report to Congress. However, OIG disagrees with SBA’s underlying interpretation of the Small Business Act. OIG
asserts that the statutory language for SBA to report on all small business contracts means the 23 percent goal calculation
should not consider any exclusions. By excluding certain contracts, SBA’s reports are not an accurate reflection of the
percentage of small business participation accomplished. OIG further continues to emphasize that 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.

AGENCIES RECEIVE GOALING CREDIT FOR INELIGIBLE FIRMS, FIRMS NO LONGER IN THE 8(A) OR HUBZONE
PROGRAMS, OR FIRMS THAT ARE NO LONGER SMALL
OIG audits continue to identify federal agencies that may have received credit towards their small business goals for small
disadvantaged businesses (e.g., those firms certified in the 8(a) program), and for Historically Underutilized Business Zone
(HUBZone) firms, 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 Report 1418, we identified
that more than $1.5 billion dollars in FY 2013 contract actions were included towards small business contracting goals, even
though the firms were no longer in the 8(a) 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. Similarly, in a September 2018 audit report
(Report 18-22), we 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-aide contract obligations in
FY 2017 at the expense of eligible disadvantaged firms. In a March 2019 report (Report 19-08), we also found that SBA did
not ensure that only eligible firms entered the HUBZone program. We found that 2 of 15 firms we reviewed did not meet the
principal office eligibility requirement and 1 of 15 firms did not meet the HUBZone employee residency requirement. These
firms received $589,000 in HUBZone contract obligations at the expense of eligible 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 affected 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.

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 grown to be no longer small or have left the program. SBA
added these regulations to codify the existing “practice” of the agencies to include these firms even though they were no longer
in an SBA preference program or were no longer small. Additionally, in 2006, SBA revised its regulations to address small
business size status representations and reporting for long-term federal contracts.10 Since 2013, SBA has made additional
changes to allow procuring agencies to receive credit for dollars awarded to a small business for the first 5 years of a long-term
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. A firm is required to recertify its small status before the end of the fifth year. If the firm is no longer small when it
recertifies, the awarding agency must immediately revise all applicable federal contract databases to reflect the new size status
and will not receive credit for the additional years. Therefore, in cases where a small business grows to be other than small
within 5 years, the procuring agency may exercise options and still count the award as an award to a small business.

OIG contends that more transparent reporting of those awards to firms that grow to be other than small after award is
necessary to portray a true picture of the small business goaling achievements. While the regulations allow procuring agencies
to receive credit for dollars awarded to firms no longer in SBA preference programs, or that are other than small, by including
those contract obligations in the reported small business goals, SBA cannot accurately reflect or measure true program impact.
SBA has included additional information in its Small Business Goaling Report to be more transparent; however, it should still

10 SBA defines long-term contracts as “contracts with durations greater than 5 years (including options), including all existing long-term contracts, Multiagency contracts,
Governmentwide Acquisition Contracts, and Multiple Award Contracts.” 13 CFR 121.1004(a)(3).

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OT H E R INF O R M ATI ON ( Unaud i t e d)

consider accurately reflecting 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 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 that 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
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 has made 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. SBA published a proposed rule in May 2019 to amend its WOSB program
regulations and is currently reviewing the public comments it received at the close of the comment period in July 2019.
SBA officials stated they were exploring the use of contractors to conduct prescreening in advance of the final rule, which is
estimated for June 2020. SBA officials also plan to implement part of the WOSB certification process using certify.SBA.gov.
However, this system has limited functionality, and SBA did not make progress in enhancing it for the WOSB certification
process in FY 2019. As noted below in Challenge 5, as of August 2019, SBA had spent more than $27 million on this system.
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 2015: 0 2016: 1 2017: 0 2018: 0
(Challenge first reported in FY 2005)
Status at end
Recommended Actions for FY 2020
of FY 2019
1. Strengthen controls in SBA preference programs to detect ineligible firms and remove those firms timely to ensure the accuracy of the federal
Yellow
government’s annual small business procurement goals achievements reported in 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: Information Technology Controls Need Improvement to Address
Cybersecurity Risks

Annually, OIG monitors the effectiveness of the Agency’s Information Technology (IT) controls and related cybersecurity
processes against control frameworks established by statutory federal guidance, the Federal Information Systems Controls
Audit Manual (FISCAM), and the Federal Information Security Modernization Act (FISMA). During the past year, OIG’s
independent public accountant found the Agency had a significant deficiency in IT security controls and the OIG assessed
the Agency as “not effective” against criteria established by FY 2018 Inspector General FISMA Reporting Metrics.

Notwithstanding these assessments, the Office of the Chief Information Officer (OCIO) improved its deployment of IT
controls through resolution of outstanding OIG recommendations. OCIO also made improvements in several security areas
including access controls, continuous monitoring, and configuration management.

OCIO MADE PROGRESS IN DEPLOYING FITARA CRITERIA
The goal of the Federal IT Acquisition Reform Act (FITARA) was to realize long-term cost savings through improved IT
risk management, transparency, and more effective IT investment oversight. During this past year, OCIO implemented a
human resource planning process to include competency and workforce plans around IT requirements. These efforts resulted
in OCIO fulfilling all FITARA workforce development standards. As a result of these efforts, OIG has assessed the FITARA
human resource planning requirements as implemented.

In the areas of IT investment oversight and accountability, we identified three areas for improvement. We recommended that
OCIO develop a process for capturing performance goal estimates and actual cost savings/avoidance for IT initiatives. We also
recommended that cloud migration decisions require approved business cases through SBA’s IT governance boards. Moreover,
we recommended system owners and contract officers ensure cloud services contracts specify system interoperability,
portability, and data ownership. OCIO stated they have implemented controls in these three areas, and we will validate
progress in future reviews.

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, we made 35 new recommendations in IT security control areas.
OCIO initiated corrective actions that resulted in 44 recommendation being resolved. This effort included 10 from prior
fiscal years dating back to 2014. In summary, OCIO demonstrated progress; however, we continue to identify critical control
issues in areas such as audit logging, network vulnerability management, access controls, and segregation of duties.

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 2020
of FY 2019
1. Establish an OCIO human resource planning process that allows full deployment of FITARA. Green á
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 standards to
Yellow
ensure ongoing effectiveness of information systems.
5. The OCIO maintains effective risk management, contingency planning, and incident response practices to minimize vulnerabilities. Yellow
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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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 The Office
of Personnel Management (OPM), in a recent May 2019 evaluation of SBA’s human capital operations, noted that SBA
should regularly assess the effectiveness of human capital strategies and workforce plans on addressing gaps and surpluses and
use the assessments to adjust strategies and plans.12 As a result, as noted in the previous year’s management challenge, OIG
is currently planning 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.

SBA HAS MADE PROGRESS TO UPDATE HUMAN CAPITAL MANAGEMENT POLICIES
SBA has made significant progress in addressing our recommendation to update its human capital management policies.
In addition to updating the policies identified by OIG, SBA also responded to numerous regulatory changes initiated by
the White House and OPM resulting in the update of the Telework and the Discipline and Adverse Actions policy and the
development of guidance for weather and safety leave provisions. The Agency made the decision to revise the Employment
standard operating procedure (SOP) by migrating the sections into separate policies. This decision resulted in the creation of
11 distinct human capital management policies. Since 2009, the Agency has updated and implemented the 11 policies.

Number of Actions Accomplished (Green Status) During Last 4 Fiscal Years
2015: 1 2016: 0 2017: 1 2018: 0
(Challenge first reported in FY 2001, revised FY 2007)
Status at end
Recommended Actions for FY 2020
of FY 2019
1. Ensure that human capital management SOPs are updated and appropriately structured to support the Agency’s long-term goals and objectives and
Green á
governmentwide human capital management initiatives.

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

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

SBA’s Office of Credit Risk Management (OCRM) manages credit risk for a $120 billion loan portfolio originated by lenders
and certified development companies that have various degrees of expertise regarding SBA loan program requirements. Most
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 liquidating 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 initiated actions to address identified issues with its oversight of lenders and made progress in
implementing a portfolio risk management program. Also, SBA made substantial progress in identifying and tracking third-
party agents.

While SBA took actions to address previous concerns regarding its oversight of lenders, an ongoing OIG audit identified
additional significant issues regarding internal control weaknesses for lender oversight. The OIG expects to issue this audit at
the end of October 2019 with recommendations to improve SBA’s oversight of lenders. Additionally, SBA needs to continue
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 further enhance its tracking of loan agents within the 7(a) program.

SBA’S 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 2018, SBA took actions to address identified issues with its oversight of lending participants. For
example, SBA developed risk profiles and lender performance thresholds, developed an 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.

However, an ongoing audit found additional significant matters regarding SBA’s oversight of lenders. The draft audit report
has been sent to SBA, and we anticipate issuing the final at the end of October 2019, recommending actions to address the
internal control weaknesses and improve SBA’s oversight of lenders.

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.

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From FY 2016 to FY 2018, SBA made substantial progress in demonstrating that information from the portfolio risk
management program was used to support risk-based decisions, and implementing additional controls to mitigate risks
in SBA loan programs. Specifically, 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. SBA also performed an evaluation of the Community Advantage Pilot Program. Based
on this analysis, SBA determined that changes were necessary to improve the performance of the Community Advantage
Pilot Program. In FY 2019, SBA conducted extensive analyses on 7(a) and 504 loan program performance, which included
franchise and industry concentrations and various loan characteristics. Based on these analyses, the 7(a) loan portfolio and
504 loans greater than $2 million were beginning to show signs of declining performance. However, SBA deemed that no
action was required apart from continued monitoring of the portfolio performance.

SBA maintains that the current program tracks performance to support risk-based decisions at the portfolio, subprogram,
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 2020 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
approximately $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
was limited.

SBA implemented a process that requires lenders to provide a loan agent disclosure form (Form 159) to SBA’s fiscal and
transfer agent (FTA) for 7(a) loans. 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. Additionally, the report
found that SBA had not implemented tracking of the Form 159 in the 504 loan program.

In response to our loan agent report, SBA stated that it would explore the feasibility of implementing a registration system for
the 7(a) program. Subsequently, SBA determined that the optimal way to gather information is the enhanced Form 159. The
enhanced Form 159 was approved by OMB and rolled out 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
7(a) lender submissions, to ensure that critical fields on each form are completed. SBA expects the enhanced controls to be
fully implemented during FY 2020.

In FY 2019, SBA also implemented an effective method of disclosing and tracking loan agent involvement within the 504
loan program. Specifically, SBA requires 504 lenders to electronically submit Form 159 directly into SBA’s electronic lending
platform. Additionally, SBA provided training to lenders during 2019 on the enhanced Form 159.

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, more than
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.

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Since our 2015 report, the number of SBA-approved LSP agreements has reached almost 2,900, 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 metrics on LSP
participation in SBA’s 7(a) program, but oversight is still limited. Specifically, the SBA loan agent performance analysis does
not aggregate LSP loan level information in order to identify high risk LSPs. 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 sizable program.

Number of Actions Accomplished (Green Status) 2015 2016 2017 2018
During Past 4 Fiscal Years 7(a) loans: 1 7(a) loans: 0 7(a) loans: 1 7(a) loans: 2
(Challenge first reported in FY 2001) 504 loans: 1 504 loans: 0 504 loans: 1 504 loans: 1
Status at end of FY 2019
Recommended Actions for FY 2020
7(a) 504
1. Demonstrate that information from the portfolio risk management program is used to support risk-based decisions and implement
Green Yellow
additional controls to mitigate risks in SBA loan programs.
2. Develop an effective method of disclosing and tracking loan agent involvement in SBA business loan programs. Yellow Green á
3. Enhance the analysis of loan agents to monitor and identify high-risk LSPs New New

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

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Challenge 5: SBA Needs to Ensure That the Section 8(a) Business
Development Program Identifies and Addresses the Needs of
Program Participants, Only Eligible Firms Are Admitted 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. During FY 2018, SBA
implemented additional measures for business opportunities specialists 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 initially designed to aid its monitoring efforts to track 8(a) participants’ business
development. SBA made previous attempts to revamp its IT systems for monitoring 8(a) firms that have been unsuccessful.
SBA’s most recent attempt to implement an IT system, certify.SBA.gov, is intended to be a more comprehensive approach
to service delivery and broader in scope than just the 8(a) program. It includes the WOSB, HUBZone, and mentor-protégé
programs. 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.

Since last fiscal year, SBA did not make progress in enhancing the functionality of certify.SBA.gov for the 8(a) program.
As of August 2019, SBA had spent more than $27 million on this system. Program officials stated that the initial goal was
to integrate 8(a) business development functions into the certify.SBA.gov platform; however, their strategy changed. In
FY 2019, SBA decided to only use certify.SBA.gov as the certification management system and plans to develop a separate
system to monitor 8(a) participants’ business development outside of certify.SBA.gov. In lieu of an IT system, SBA created
a manual workaround for business opportunity specialists to assess the 8(a) participant’s individual business development
during the annual review and input results in an Excel spreadsheet. This file is retained in the firms certify.SBA.gov case file,
which lacks reporting functionality. Currently, SBA has no system to assist program officials in monitoring 8(a) participants’
business development to assess the effectiveness of the program. To address this, SBA formed a Tiger Team to develop a
solution in 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 5 percent over the previous year through a streamlined application
process. Despite the changes to the application process, the program continues to experience a decline in firms participating
in the program. As of August 2019, SBA reported the 8(a) program included 4,450 firms, which is a decline of about 10
percent over the 4,903 firms reported participating in the program as of April 2018.

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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. For example, SBA no longer required
that applicants submit an Internal Revenue Service tax verification form, information about the applicant firm’s business
structure, and information on tax liens, judgments, or lawsuits. However, shortening the review process by eliminating
documents may erode core safeguards that prevented questionable firms from entering the 8(a) program. At the request
of SBA’s former Deputy Administrator, we conducted a follow-on audit to a report issued in FY 2016 (Report 16-13) to
determine whether SBA resolved eligibility concerns for the 30 firms. We determined that SBA resolved eligibility concerns
for 20 of the 30 firms that we reviewed. However, we questioned the eligibility of 10 of the 30 firms (Report 17-15). Based
on the audit, SBA updated its 8(a) program SOP to reinstate the requirement that applicants submit the Internal Revenue
Service tax verification form. Additionally, SBA added a requirement to include a statement of difference in the review notes
of each application when a final decision to approve or deny a firm’s admittance into the program differs from the lower-level
reviewer’s recommendation.

While the updates to the SOP demonstrate substantial progress in mitigating the risk of ineligible firms being admitted to
the program, SBA currently does not have a fully functional information system to assist them in monitoring whether these
procedures are operating effectively. SBA is responsible for the integrity of the 8(a) program, and it should 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 FRAUD RISK
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. SBA drafted updates to its 8(a) program SOP governing the 8(a) continuing eligibility review process and evaluation
standards, as well as the process for removing firms deemed ineligible for program assistance. SBA has submitted its draft SOP
for review and expects a final SOP to be implemented early in FY 2020. Until SBA makes improvements and implements
corrective actions 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.” However, SBA concluded that the $375,000 net worth standard may not be appropriate because it did not
consider “economic disadvantage” as an element of continuing eligibility. Therefore, SBA published a proposed rule in May
2019 to address increasing the “economic disadvantage” to adopt the $750,000 net worth continuing eligibility standard
for all economically disadvantaged determinations. SBA has requested comments to the proposed rule on whether the
$375,000 or $750,000 net worth standard should be used and plans to use those to determine the definition of “economic
disadvantage.” OIG contends that SBA should develop objective and reasonable criteria based on quantitative research and

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finalize and implement that 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
2015: 0 2016: 0 2017: 2 2018: 0
(Challenge first reported in FY 2003)
Status at end
Recommended Actions for FY 2020
of FY 2019
1. Establish objective and reasonable criteria that effectively measure “economic disadvantage” and implement the new criteria. Orange 
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 and
Orange 
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 program
Yellow
effectiveness.
5. Implement controls to detect ineligible firms in the 8(a) program during the continuing eligibility reviews, effectively address complaints received
Yellow
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

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

In FY 2018, the dollar amount of SBA’s 7(a) loan approvals reached $25.4 billion. Most of these loans are made by lenders
with delegated approval authority. When a loan goes into default, SBA conducts a review of the lender’s actions on the loan to
determine whether it is appropriate to pay the lender the guaranty, which SBA refers to as a “guaranty purchase.” For loans sold
on the secondary market, SBA is obligated to purchase the guarantee from the investor and 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.

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. 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. While OCA
made substantial improvements, OCA needs to continue to provide evidence that the developed corrective action plans are
effective in reducing improper payments.

OIG established a High Risk 7(a) Loan Review Program to evaluate lender compliance with SBA requirements for high-
dollar/early-defaulted 7(a) loans (loans approved for $500,000 or more that defaulted within the first 18 months of initial
disbursement). During FY 2019, OIG identified material lender noncompliance in five of the eight loans reviewed, totaling
approximately $8.7 million in questioned costs. Although OCA staff completed purchase and quality control reviews on these
eight loans, they did not identify or fully address the material deficiencies noted in the subsequent OIG review. Therefore,
OCA needs to assess its purchase and quality control reviews to determine why the reviews did not identify or mitigate the
lenders’ noncompliance with SBA requirements.

SBA IMPROVED ITS QUALITY CONTROL PROGRAM TO REDUCE IMPROPER PAYMENTS
OCA has made significant progress in developing and implementing a quality control program for all 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) 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 enhanced improper
payments reporting to monitor root causes, identify operational risk, and create corrective action plans for 7(a) loans.
Corrective actions included conducting training, collaborating with OCRM, and collecting funds from lenders.

For the FY 2018 improper payments evaluation, OIG found that SBA did not meet its reduction targets for 7(a) loan guaranty
approvals for 2 consecutive years. However, preliminary FY 2019 estimates from the Agency’s statistician indicate that they met
their published improper payment reduction target for 7(a) loan guaranty approvals. FY 2019 preliminary results for 7(a) loan
guaranty purchases indicate that SBA did not meet their published reduction target. However, the dollar value of estimated
improper payments decreased. OIG did not validate SBA’s preliminary improper payment estimates. OCA needs to continue
to demonstrate in FY 2020 that the developed corrective action plans are effective to reduce improper payments.

IMPROVEMENTS NEEDED TO ENSURE QUALITY DELIVERABLES AND MITIGATE LOSS
As noted above, OCA has taken actions to accurately report and reduce improper payments in SBA’s 7(a) 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.

In FY 2014, OIG established its High Risk 7(a) Loan Review Program to evaluate lender noncompliance with SBA’s
requirements. OIG uses an internal scoring system to prioritize loans for review based on known risk attributes. This
evaluation includes a review of high-risk loans purchased by SBA to determine whether lenders materially complied with SBA

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requirements and to identify suspicious activity. As of September 2018 (Report 18-26), under OIG’s High Risk 7(a) Loan
Review Program, we’d reviewed 27 loans with purchase amounts totaling almost $23.2 million. We 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.

Also, this program identified concerns with change of ownership transactions and SBA’s identification 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.

During FY 2019 (Report 19-22), OIG identified material lender noncompliance in five of the eight loans reviewed, totaling
approximately $8.7 million in questioned costs. Lenders did not provide adequate documentation to support that the
borrowers met requirements related to eligibility, repayment ability, size standards, franchise agreements, business valuations,
appraisals, equity injection, and debt refinance. OCA staff completed purchase and quality control reviews on these eight
loans. However, these reviews did not identify or fully address the material deficiencies noted in the subsequent OIG reviews.

OCA needs to evaluate its purchase and quality control reviews to determine why the reviews did not identify or mitigate the
lenders’ noncompliance with SBA requirements.

Actions Accomplished (Green Status) 2015 2016 2017 2018
During Past 4 Fiscal Years 7(a) Approvals: 0 7(a) Approvals: 0 7(a) Approvals: 0 7(a) Approvals: 2
(Challenge first reported FY 2010) 7(a) Purchases: 1 7(a) Purchases: 0 7(a) Purchases: 1 7(a) Purchases: 2
Status at end
Recommended Actions for FY 2020 of FY 2019
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 Green
2. Conduct an evaluation to determine why material lender noncompliance was not identified or mitigated during
purchase and quality control reviews on recently reported high-dollar/early-defaulted loans and implement any necessary N/A New
improvements to mitigate risks.

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

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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 nonprofit organizations. SBA’s FY 2018 year-end disaster assistance loan
portfolio balance was $9.6 billion. SBA must continually 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 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 all these programs due to lack of
interest by private lenders. In October 2017, 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 was scheduled to run for 3 years, from October 16,
2017, through September 20, 2020.

We also remain 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.

Additionally, disaster loans are vulnerable to improper payments, fraud, and default because loan transactions are often
expedited to provide quick relief to disaster survivors. We noted in 2018 that lending personnel hired in connection with a
disaster declaration may lack sufficient experience. SBA has made progress in this area. In response to Hurricanes Harvey,
Irma, and Maria, Office of Disaster Assistance (ODA) increased trained staff from 800 to its peak of 5,094 in December
2017. They conducted after-action reports to identify successes, challenges, and strategic improvements. To address the
improvements needed, ODA provided targeted training to 3,655 lending personnel. ODA asserts that the focused training
allowed them to reduce the FY 2018 improper payment rate from the FY 2017 rate, despite the increased staff size. Therefore,
we do not have any recommendations regarding training for lending personnel. However, continued diligence in this area is
necessary to ensure improved integrity and trust in the federal payment system.

Finally, while the desktop loss verification process contributed to SBA meeting its timeliness goals for disaster applications,
controls needed strengthening to mitigate the risk of fraud and ensure program integrity. Specifically, SBA did not always
validate the cause and extent of damages and repair and replacement costs prior to disbursing loan funds, relied on reports
from the Federal Emergency Management Agency (FEMA) that did not contain pertinent information needed to validate
damages and losses reported in the initial loss verification, and loan files did not contain sufficient documentation to support
loan-making decisions. Without an adequate loss verification, loans could be made to individuals that do not qualify for the
loan or do not have damages that justify the amount of the loan.

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—the 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 officials
planned to use IDAP as a guide to develop EDAP and PDAP, and until the challenges with IDAP were resolved, it did not
plan to implement these two programs. SBA notified Congress that it had sought advance public comment on proposed

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rulemaking for IDAP and received limited responses, most of which were opposed to their implementation. SBA also
reported that its partner lenders chose not to participate. Therefore, SBA sought to cancel program funds and rescission of
programs in their entirety. As SBA requested in the Appropriations Act of 2018, Congress cancelled the funds appropriated
in the Consolidated Appropriation Act of 2018 for IDAP, EDAP, and Appropriations Act of 2019 repealed the statutory
authority of EDAP. SBA has requested rescission of the remaining IDAP and PDAP program in its FY 2020 Congressional
Budget Justification. SBA officials expect that Congress will follow the precedent set last year and permanently cancel IDAP
and PDAP in the Appropriations Act of 2020. After that, SBA plans to seek congressional support for cessation of program
authority for these two 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 5-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 again requested
repeal in the FY 2020 Congressional Budget Justification. Therefore, SBA 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 3 years from October 16, 2017, through September 20, 2020. As of August 13, 2019, SBA has approved or
disbursed only two loans for $25,000 each 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: (1) 36 percent for incomes below $25,000 and (2) 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 in July 2015,
also diminished the level of authorization required to approve loans that do not conform to the established MAFD percentages.

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 increased the acceptable MAFD to 75 percent for all income levels without the need to provide
justification. On May 31, 2018, ODA issued SOP 50 30 9, which incorporated the MAFD provisions of Memo 17-22.

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ODA believes that credit score is more of an indicator of default likelihood than any other factor. Further, ODA believes
the data supports decreasing emphasis on debt to income (DTI) when ODA is making loan decisions. 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 decide based on these factors, it will use a DTI calculation, allowing up to 75 percent, without justification based
on compensating factors. In comparison, it should be noted that Fannie Mae and Freddie Mac allow DTI ratios as high as
45 percent for manually underwritten loans and up to 50 percent on desktop underwritten loans with strong compensating
factors on a home mortgage.

Despite ODA’s assertion that they can aid an additional 10 percent of disaster loan applicants through the decreased emphasis
on DTI/MAFD, it comes at a significant risk. In FY 2018, ODA stated that nearly 22 months have passed since the increase
in the MAFD threshold and it has found a minimal impact on the portfolio charge-off rate. However, we have noticed that
the data for FY 2019 indicates an increase in the charge-off rate of 3.84 percent, a 27 percent increase over the 3.01 percent
for FY 2018. We believe the full effect of this policy change cannot be determined until the loans approved subsequent to the
policy change have had sufficient time to perform, which is around FYs 2020 and 2021.

Additionally, ODA’s policy change contributed to a significant increase in the percentage of approved borrowers with MAFD
over 50 percent, increasing from 18.2 percent in FY 2013 to 28.9 percent in FY 2018. We also noted that the occurrence
of Hurricanes Harvey, Irma, and Maria created a large increase in the volume of loans approved and disbursed to applicants
with MAFD between 50 percent and 75 percent during the latter part of FY 2017 and all of FY 2018. Specifically, the dollars
disbursed to borrowers with MAFD over 50 percent in FY 2018 was $823.2 million, which more than doubled the $390.8
million disbursed to borrowers with MAFD over 50 percent in the 5 previous FYs combined. In 2018, we began an audit of
SBA’s reliance on the increased MAFD and its effect on the default rate; however, we terminated the project in 2019, as many
of the loans had not had time to mature. Therefore, we were unable to assess the effect of the policy change on the default
rate. We plan to perform a review of this policy change on the default rate once the loans have had sufficient time to perform.

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 more than 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.

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IMPROPER PAYMENT RATE WAS REDUCED TO COMPLIANT LEVEL
In FY 2018, SBA’s improper payment rate for the disaster loan disbursements decreased from a reported rate of 13.65 percent
($123.38 million) in FY 2017 to 8.91 percent ($274.4 million). SBA determined this decrease was due in part to a greater
focus on what makes a payment improper and improving controls over the underwriting and disbursement process. However,
we noted that ODA eased controls for one of the root causes attributed to the reported rate being above the acceptable
threshold for FY 2017. One cause of the higher improper payment rate during the FY 2017 reporting period was the lack of
appropriate justifications for disbursements to borrowers who may not have repayment ability based on a MAFD percentage
exceeding SBA’s recommended limit. During September 2017, SBA increased the allowable threshold for justifications of
loan repayment ability from the standard 40 percent to 75 percent. Additionally, ODA diminished the level of authorization
required to approve loans that do not conform to the established MAFD percentages. To effectively reduce disaster loan
improper payment rate, ODA should strengthen and implement new controls as opposed to lessening the requirements. SBA
should expand corrective actions to proper and complete documentation prior to disbursement in order to significantly lower
improper payment rate in FY 2019. We are currently conducting an audit of the improper payment quality control process.

INADEQUATE VERIFICATION OF CAUSE AND EXTENT OF DAMAGES
The desktop loss verification process uses a two-pronged approach: an initial desktop loss verification and a post desktop
review. The initial desktop loss verification is used to estimate the cost of repairs. Information is gathered and evaluated
through telephonic interviews with applicants in conjunction with third-party information, such as tax assessors’ websites,
Google Earth, and Zillow. Following the initial desktop loss verification, SBA requires a post desktop review to validate the
total damage estimates obtained from the initial desktop loss verification.

A critical part of the disaster loan-making process is evaluating the cause and extent of property damages, which provides SBA
the information necessary to make appropriate decisions when establishing eligibility for disaster loan funds. In the past, loss
verifiers conducted damage assessments solely through on-site inspections. On January 31, 2017, ODA issued Memo 17-06,
Desktop Verifications. After increased use of electronic loan applications, SBA implemented the desktop loss verification
process to expedite assistance to disaster survivors. The desktop loss verification process contributed to SBA meeting its
timeliness goals for processing disaster loan applications for Hurricanes Harvey, Irma, and Maria.

However, controls needed strengthening to mitigate the risk of fraud and ensure program integrity for the loss verification
process. Specifically, SBA did not always validate the cause and extent of damages and repair and replacement costs prior
to disbursing loan funds. Further, SBA inappropriately relied on FEMA reports that did not contain pertinent information
needed to validate damages and losses reported in the initial loss verification, and loan files did not contain sufficient
documentation to support loan-making decisions.

As a result, SBA disbursed 36,869 of the 73,313, or 50 percent, loans included in our scope, totaling $594,286,878 of $1.4
billion, without validating the cause, extent, or cost of damages, and there was no assurance that disaster loans were only
provided to individuals impacted by Hurricanes Harvey, Irma, or Maria.

We provided four recommendations to strengthen controls to mitigate the risk of fraud and ensure program integrity.
Management agreed with two recommendations and partially agreed with the other two. Management plans to explore
substitutes to the post desktop review and ensure they contain the appropriate information needed to support the damages
estimated during the initial desktop loss verification. Further, management stated that it will implement additional controls
to require loss verifiers to provide documentation that sufficiently supports the post desktop review conclusions. We will
continue to work with management to seek resolution for the remaining two recommendations.

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Actions Accomplished (Green Status) During Past 4 Fiscal Years
2015: 0 2016: 0 2017: 1 2018: 0
(Challenge first reported FY 2015)
Status at end of
Recommended Actions for FY 2020
FY 2019
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
OCA
3. Strengthen internal controls to minimize the risk of charge-offs associated with the increased MAFD threshold.
Yellow

4. Reduce the improper payment rate to meet the reduction targets in FY 2019 in accordance with the FY 2018 Agency Financial Report to comply with the ODA
Improper Payments Elimination and Recovery Improvement Act of 2012. Green á
ODA
5. Strengthen internal controls to mitigate the risk of fraud and ensure program integrity for the loss verification process.
New

Green Implemented Yellow Substantial Progress Orange Limited Progress Red No Progress

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Challenge 8: SBA Needs Robust Oversight of Its Grant Management

In FY 2020, SBA budgeted $180 million to administer grants and cooperative agreements to its resource partners and
other non-federal entities to provide technical assistance and training programs to develop small businesses. With recent
governmentwide emphasis on grants management reform, and a priority initiative to modernize the government in the
President’s Management Agenda of 2018, it is SBA’s responsibility to maximize the value of its grant funding to ensure its
grant programs effectively and efficiently accomplish program objectives. In OIG’s review of past audit findings (Report
19-02), we identified systemic issues with SBA’s accuracy of grant data for both financial and performance reporting,
ineffective oversight, and inadequate standard operating procedures. We continue to identify grant management deficiencies
in our recent reviews of SBA grant programs.

SBA HAS MADE PROGRESS TO ADDRESS ITS GRANTS MANAGEMENT ISSUES
In FY 2019 SBA conducted an analysis of SBA’s organizational structure and determined that SBA needed to centralize its
oversight of its grant management. Further, SBA took action to identify, develop, and implement training for all personnel
responsible for grants management. On September 24, 2019, the Agency issued its revised SOP for grants management to
standardize policies for compliance, management, and administration of all grants awarded by SBA and to apply to all offices
within SBA with grant-awarding authority. The SOP, among other things, established the Office of Grants Management as
the authority for oversight and compliance of grant policy for the Agency, clarified roles and responsibilities for personnel
responsible for grants management, defined warrant authority and training requirements for grants personnel, and established
plans and timeframes for incorporating other grant-related policies and procedures into one centralized directive. While the
Agency has addressed three of OIG’s recommended corrective actions, the Agency needs to continue its efforts to implement
the grants management system to enforce compliance and improve oversight and management of the grants program.
Without this system, SBA has limited ability to assess the effectiveness of the recently implemented corrective actions.

GRANTS MANAGEMENT SYSTEM
SBA continues to rely on its current grant management system to report on its grant programs. The current system requires
substantial manual data inputs that are prone to errors. In March 2018 we issued a management advisory memorandum
(Report 18-15), in which we reported on material weaknesses identified by an independent accounting firm regarding SBA’s
controls over the accuracy of data reported in USASpending.gov. Further, in its own internal A-123 review on the grant
management process, SBA’s internal auditors found that 100 percent of the sampled transactions contained inaccuracies.
These data inaccuracies inhibit policymaker’s and the public’s ability to effectively track federal spending and affects
the Agency’s ability to report timely, complete, and accurate information as required by the Digital Accountability and
Transparency Act (DATA) of 2014.

To modernize its grants management system, during FY 2019, SBA approved funding totaling $2.5 million (over 5 years) to
implement grant solutions. SBA believes the investment would help the Agency to
improve funding management, awarding of grants, processing payments, and closeouts;
enhance ability to develop accurate performance metrics reporting;
reduce compliance violations; and
increase auditability, accountability, and transparency.
SBA is currently in the initial stages of transitioning to the system. In 2019, the Agency entered into an interagency
agreement with the Office of Health and Human Services to provide transition analysis, infrastructure setup, and training
services. The Agency plans to fully implement the system by October 2020.

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Number of Actions Accomplished (Green Status) During Past 4 Fiscal Years
2015: N/A 2016: N/A 2017: N/A 2018: N/A
(Challenge first reported in FY 2018)
Status at end
Recommended Actions for FY 2020
of FY 2019
1. Conduct an overall evaluation of its grant management organizational structure with an emphasis on centralizing the oversight of these programs in
Green
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.gov
Yellow
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 measure performance in Green
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 monitoring Green
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

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AGENCY’S RESPONSE TO THE OIG MOST SERIOUS MANAGEMENT
AND PERFORMANCE CHALLENGES FACING THE SMALL BUSINESS
ADMINISTRATION IN FISCAL YEAR 2020
On behalf of the Agency, we thank the Office of the Inspector General (OIG) for its efforts to identify the top management
and performance challenges confronting the U.S. Small Business Administration (SBA) now and in the near future. The
OIG’s investigation and analysis provide important insight into the threats and challenges facing our enterprise objectives.

We believe the substantial progress the SBA made on 23 of 25 recommendations that were outstanding in FY 2019 can be
attributed in no small measure to our continued communication, collaboration, and coordination with the OIG leadership
and staff. Our program, strategic, and support offices remain dedicated to continuing SBA’s efforts to address existing
management challenges, and the insights of this report will be shared throughout the Agency so that our leadership at every
level can better evaluate the risks and effectively prioritize resources and oversight efforts.

The SBA is dedicated to continuing our concerted efforts to effectively address audit recommendations. The SBA’s Office of
the Chief Information Officer’s closure of all 45 assigned recommendations in this past fiscal year reflects this commitment to
improve programmatic and operational integrity.

The nation’s small businesses and taxpayers rely on the SBA to overcome obstacles to enhancing entrepreneurial opportunities
for all Americans. We are committed to addressing these challenges and adapting to a continuously evolving operating
environment. We look forward to our continued collaboration with the OIG as we endeavor to innovate, institutionalize
continuous improvement, and facilitate strategic collaboration with our stakeholders.

Sincerely,

Christopher M. Pilkerton
Acting Administrator
November 15, 2019

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PAYMENT INTEGRITY
As required by the Improper Payment Information Act funds. The SBA identified outlays in excess of $10 million
of 2002 (IPIA), as amended, and OMB Circular No. in a 12-month period for the administrative expenses
123, Appendix C, Requirements for Payment Integrity of payroll and travel and conducted improper payment
Improvement, the SBA reviews programs identified as reviews to comply with the Act in FY 2019 in addition to
susceptible to improper payments. the disaster direct loan program that is already reporting an
improper payment estimate.
Improper payment reviews are a multi-layered process that
start with a risk assessment. If an assessment indicates a In FY 2019, OMB granted the SBA relief from reporting
program is susceptible to improper payments, then testing on disbursements for goods and services, including
is performed using a statistically valid sampling technique. disbursements associated with the supplemental disaster
Based upon the testing results, a corrective action plan is relief funds, as the SBA successfully demonstrated the low
developed to prevent and remediate the types of errors occurrence of improper payments in this activity for at least
uncovered. If a significant amount of recoverable dollars is 2 consecutive years. Disbursements of supplemental disaster
found, the SBA considers the appropriateness of performing relief funds for goods and services were included in the
a recapture audit. FY 2018 review and reporting.

The detection and remediation of improper payments is a The SBA reviewed six programs and activities that are
priority for the Agency. SBA staff monitor and review for deemed susceptible to significant improper payments that
improper payments and are charged with implementing included three major credit programs as mandated by OMB,
improvements that will reduce improper payment rates. The and disbursement of supplemental disaster relief funds for
SBA also continually seeks opportunities to enhance and payroll and travel. The three major credit programs are:
implement internal controls to reduce the risk for improper
payments. 7(a) business loan program that includes guaranty
purchases and guaranty approvals;
The SBA received supplemental funds in September 504 certified development company (CDC) loan
2017 and February 2018 to cover the costs of disaster guaranty approvals; and
direct loans, including administrative expenses related to
Hurricanes Harvey, Irma and Maria disaster relief efforts. Disaster direct loan disbursements.
The Additional Supplemental Appropriations for Disaster The next sections discuss SBA efforts and results related to
Relief Requirements Act, 2017, as amended, deemed all improper payment assessments and reviews. More detailed
programs and activities expending more than $10 million of information on improper payments and information
the supplemental funds in response to those hurricanes in previously reported in the AFR that is not included in the
any one fiscal year to be susceptible to significant improper FY 2019 AFR can be found at https://paymentaccuracy.
payments, regardless of risk assessment results and required gov/.
agencies receiving supplemental disaster relief funds to
produce and report an improper payment estimate for the

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118
Payment Reporting

Parts I and VII – Payment Reporting and Statistical Sampling
OT H E R INF O R M ATI ON ( Unaud i t e d)
Table 1 presents a summary of the SBA’s improper payment review results and reduction outlook. There is no improper payment made by the recipients of
Federal money under SBA programs as the SBA does not have an intermediary.

TABLE 1: Improper Payment Reporting and Reduction Outlook ($ In Millions)
FY 2018 FY 2019 Summary FY 2019 Breakdown FY 2019 Monetary Loss FY 2020
Non-
Program Proper Improper Proper Improper Over- Under- Unknown Over- Under- Unknown Monetary
Outlays1 IP IP Outlays1 Monetary Outlays1 IP IP
Payment Payment Payment Payment payments payments payments payments payments payment Loss
$ % $ $ Loss $ % $
% % $ $ % % % $ $ $ $
$
7(a) Guaranty
689.20 3.22 22.18 866.02 96.38 3.62 834.66 31.36 2.29 1.33 – 19.87 11.49 – 31.36 – 994.26 3.52 35.00
Purchases1,2
7(a) Guaranty
18,746.77 2.77 519.40 16,713.74 97.85 2.15 16,355.09 358.65 2.15 – – 358.65 – – – 358.65 16,513.84 2.05 338.53
Approvals1,2,3
504 CDC Guaranty
4,583.91 2.58 118.14 4,784.30 99.44 0.56 4,757.65 26.65 0.56 – – 26.65 – – – 26.65 4,859.24 2.04 99.13
Approvals1,2,4

AGENCY FINANCIAL REPORT
Disaster Loan
3,080.23 8.91 274.41 1,635.93 93.70 6.30 1,532.87 103.06 2.78 1.33 2.19 45.43 21.73 35.90 45.43 21.73 1,000.00 5.67 56.70
Disbursements1,5,6
Supplemental
Disaster Relief
N/A N/A N/A 334.20 99.90 0.10 333.87 0.33 0.10 – – 0.33 – – 0.33 – 195.76 1.00 1.96
Administrative
Funds - Payroll7,8
Supplemental
Disaster Relief
N/A N/A N/A 79.12 97.13 2.87 76.85 2.27 2.62 0.04 0.21 2.07 0.03 0.17 2.07 0.03 28.21 2.77 0.78
Administrative
Funds - Travel7
Total9 27,100.11 3.45 934.13 24,413.31 97.86 2.14 23,890.99 522.32 1.86 0.14 0.15 453.00 33.25 36.07 79.19 407.06 23,591.31 2.26 532.10

 FY 2019

1 Outlays in this report represent the base amount of the program activity related to SBA improper payments; and this amount will differ from the amount reported as outlays in SBA’s President’s Budget submissions because they include reestimates of subsidy cost, reim-
bursements to SBA administrative funds and other costs. Outlays for 7(a) loan guaranty purchases are the amount of disbursements for the purchase of defaulted guarantied loans. Outlays for 7(a) loan guaranty approvals are the amount of new guaranty approvals by banks
and other SBA lending partners. Outlays for 504 CDC loans guarantied are approvals irrespective of disbursement, net of approval increases, decreases, reinstatements and cancellations for the current year. Outlays for disaster loans are loan disbursements on current year
approvals.
2 Outlay projections do not match the President’s Budget as timeframe is not FY. Outlays estimated by taking the average growth rate in outlays for the previous three years and applying it to the current level of outlays to project outlays in future year.
3 For 7(a) loan guaranty approvals, amounts reported are based on the guarantied amount only.
4 The FY 2020 improper payment target for 504 CDC Guaranty Approvals is calculated using the arithmetic mean of the previous five year’s improper payment rates. The SBA determined that the FY 2019 improper payment rate was an anomaly, because most errors were
associated with one particular loan in the sample, which is not typical.
5 Starting FY 2019, the reporting period for disaster loan has changed from 7/1 - 6/30 to 4/1 - 3/31. For FY 2019, the reporting period was from 7/1/18 through 3/31/19 since the first three months were tested in FY 2018.
6 Outlay projection does not match the President’s Budget as timeframe is not FY. FY 2020 loan approvals are based on actual FY 2019 Quarters 3 and 4 loan disbursements totaling approximately $500M, and projected quarterly loan approvals for the remaining FY 2020.
7 Outlay projections do not match the President’s Budget as timeframe is not FY. Outlays are based on actual disaster loan administrative expenses disbursed between 9/1/18 and 8/30/19.
8 The improper payment rate for disaster administrative payroll expenses is projected to be 1 percent, which is acceptable to the Agency.
9 Total improper payment estimates and improper payment percentages do not represent a true statistical estimate for the Agency.
Table 2 presents a summary of the root causes of the SBA’s improper payments.

TABLE 2: Improper Payment Root Cause Categories By Program Matrix ($ In Millions)
Supplemental Disaster
7(a) Guaranty 7(a) Guaranty 504 CDC Guaranty Supplemental Disaster Relief
Disaster Direct Loan Disbursements Relief Administrative
Purchases Approvals Approvals Administrative Funds - Travel
Reason for Improper Payment Funds - Payroll

Over Under Over Under Over Under Over Under Unknown Over Under Over Under Unknown
Payments Payments Payments Payments Payments Payments Payments Payments Payments Payments Payments Payments

Program Design or Structural Issue
Inability to Authenticate Inability to Access Data 358.65 26.65
Eligibility
Data needed Does Not Exist
Failure to Verify: Death Data
Financial Data 38.77
Excluded Party Data
Prisoner Data
Other Eligibility Data (explain)

AGENCY FINANCIAL REPORT
Administrative/Process Federal Agency 19.87 11.49 6.66 21.73 0.33 2.07 0.03
Error Made by:
State or Local Agency
Other Party
Medical Necessity
Insufficient Documentation to Determine 35.90 0.17
Other Reason (explain)
Total Estimated Improper Payments 19.87 11.49 358.65 0.00 26.65 0.00 45.43 21.73 35.90 0.33 0.00 2.07 0.03 0.17

 FY 2019


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119
OT H E R INF O R M ATI ON ( Unaud i t e d)

To provide more clarity for the reader, this section is made administrative errors in the purchasing process. The
organized by the six programs and activities subjected primary reasons for purchase errors included:
to review for improper payments and provides statistical
sampling information and review results coupled with Denial of guaranty purchases was incorrect and not
corrective actions. properly justified;
Inaccurate interest rate;
7(a) Loan Guaranty Purchases Reimbursement of lender expenses were not fully
justified or were ineligible;
Statistical Sampling Lender collection had not been fully exhausted;
The 7(a) purchase sample cases were selected using
Probability Proportional to Size (PPS) sampling with
Change of ownership policy requirements were not
met;
replacement from all purchases approved during the
12-month period ending March 31, 2019. The purchase The debt being refinanced with loan proceeds were not
population was divided into four strata based on the eligible for refinance;
following factors: 1) whether the loan was considered an Lender failed to record/perfect the lien, as required by
early default, regardless of servicing office, and 2) which the Loan Authorization, on the property required to be
servicing office processed the purchase among three taken as collateral for the loan, and that failure caused a
locations. The SBA determined the appropriate total sample material loss on the loan;
size to be 217 loans from the population. The sample
included aggregate purchase outlays of $162,997,608 and an Ineligible use of proceeds with working capital being
absolute value of improper payments of $4,956,358 within distributed to the Eligible Passive Company; and
the sample. Using the Hansen-Hurwitz estimation method, Incorrect payment of interest due to miscalculation of
the estimated improper payment rate for the 7(a) guaranty days owed.
purchase population was calculated as 3.62 percent. This
represents a slight increase from the 3.22 percent reported in As a means to reduce and/or eliminate the occurrence
FY 2018, which was primarily attributed to a high number of future improper payments, a Corrective Action Plan
of new processors who joined the Purchase Centers within has been formalized for the 7(a) loan guaranty purchase
the fiscal year. centers. Specific corrective actions are determined based
upon the primary reason for the error with the goal of both
The 7(a) loan guaranty purchase reviews were conducted remedying the error and ensuring the error does not occur
to examine if the lender complied materially with the in the future. Plans for improvement include:
7(a) loan program origination requirements including
statutory provisions, SBA regulations, any agreement Internal training for purchase processors, reviewers and
the lender executed with the SBA, standard operating approvers to determine proper recommendation of
procedures, loan authorizations, and official SBA notices guaranty purchase denial, accurate interest rates, proper
and forms applicable to the 7(a) loan program. The reviews exhaustion of lender collection, proper determination
were to determine if the lender (1) originated, serviced, of change of ownership requirements, proper
and liquidated the loan in a prudent and commercially determination of debt refinance, proper determination
reasonable manner, (2) misrepresented or failed to disclose a of lien perfection, appropriate lender expense, and the
material fact to the SBA, and/or (3) put the SBA’s financial appropriate number of days interest owned.
interest at risk. Recovery of lender expenses that were not fully justified
and deemed ineligible.
Corrective Action
The corrective actions are currently underway. Internal
The root cause for all 7(a) loan guaranty purchase improper
feedback was provided to center staff regarding the specific
payments were administrative/process errors made by
loan level deficiency upon detection. The center experienced
the Agency. Improper payments generally arose when
an upsurge of purchase recommenders who were new in
new purchase processors failed to identify material lender
their role; this feedback and internal training has been
deficiencies in the handling of an SBA guarantied loan and
specifically designed to prevent future errors. The internal

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training will be provided by the end of the second quarter of Corrective Action
FY 2020. Approximately 80 percent of all 7(a) loan guaranty
approvals are performed by lenders with delegated authority
Corrective actions are tracked at the loan level through a
to evaluate, process, close, and disburse 7(a) loans; these
centralized database. The Quality Control Specialists for
lenders were responsible for all improper payment approvals
the 7(a) guaranty purchase centers monitor errors from
identified in FY 2019. The most prevalent root cause
identification through completion of the corrective action.
stemmed from the delegated lenders’ failure to authenticate
Headquarters management provides oversight to ensure
borrowers’ eligibility in compliance with loan program
milestones are met. All improper payments identified as a
requirements. The primary reasons for 7(a) approval errors
result of the FY 2019 IPERIA reviews have been resolved
in FY 2019 included:
through obtaining additional documentation, referral
for denial review, collection of funds from the lender, Change of ownership policy requirements were not
or reimbursement to the lender. Corrective actions were satisfied;
generally completed at the loan level within 60 days with all Cash injection policy requirements were not satisfied;
actions taken by the end of the fiscal year.
Collateral policy requirements were not satisfied;
Incorrect loan structure;
7(a) Loan Guaranty Approvals
Policy requirements governing prior loss to the
Statistical Sampling government were not satisfied; and
The 7(a) approval sample cases were selected using PPS Lack of appropriate documentation for eligibility
sampling with replacement from all loan guaranties verification.
approved during the 12-month period ending March
31, 2019. The approval population was divided into two As a means to reduce and/or eliminate the occurrence
strata based on whether the loan was SBA Express or not. of future improper payments, a Corrective Action Plan
The SBA determined the appropriate total sample size to has been formalized for the 7(a) loan guaranty approval
be 205 loans from the population. The sample included centers. Specific corrective actions are determined based
net guarantied approvals of $285,014,030 and improper upon the primary reason for the error with the goal of both
payments of $4,972,450 within the sample. Using the remedying the error and ensuring the error does not occur
Hansen-Hurwitz estimation method, the estimated in the future. Plans for improvement include:
improper payments rate for the 7(a) Loan Guaranty Collaborating with the Office of Credit Risk
Approvals was calculated as 2.15 percent. This represents Management (OCRM) to ensure that specific lender
a decrease from the FY 2018 rate of 2.77. The decrease is deficiencies are monitored and incorporated into Risk
primarily due to the continuous training of the approval Based Reviews;
processors, reviewers, and approvers as well as the external
Collaborating with the Office of Financial Assistance
training for lenders.
(OFA) to ensure that associated deficiencies are
The 7(a) loan guaranty approval reviews were conducted incorporated into the policy, regulatory, or standard
to examine if the lender complied materially with the 7(a) operating procedure rewrite or update as appropriate;
loan program origination requirements including statutory Collaborating with the Office of Performance and
provisions, SBA regulations, any agreement the lender Systems and Management (OPSM) to ensure that
executed with the SBA, standard operating procedures, adequate information system support is provided in
loan authorizations, and official SBA notices and forms addressing deficiencies identified through the improper
applicable to the 7(a) loan program. The reviews were to payment review; and
determine if the lender (1) originated the loan in a prudent
External training for lenders to ensure that policy
and commercially reasonable manner, (2) misrepresented or
requirements governing change of ownership, cash
failed to disclose a material fact to the SBA, and/or (3) put
injection, collateral, and loan structure are met
the SBA’s financial interest at risk.
satisfactorily, and to ensure appropriate documentation
is obtained to determine loan program eligibility.

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The corrective actions are currently underway. The Office CDC (1) originated the loan in a prudent and commercially
of Financial Program Operations (OFPO) has shared the reasonable manner, (2) misrepresented or failed to disclose a
loan level and lender deficiencies identified during the material fact to the SBA, and/or (3) put the SBA’s financial
FY 2019 reviews with the OCRM and the OFA during the interest at risk.
review process and will continue its efforts to ensure lender
deficiencies are monitored and incorporated into lenders’ Corrective Action
Risk Based Reviews, the OFA’s policy rewrites and updates, The improper payment rate of 0.56 percent and $5,133,437
and the OPSM’s information system updates. External does not exceed the 1.5 percent and $10 million threshold
training will be provided in coordination with other lender for reporting a corrective action plan.
events during FY 2020.

Specific corrective actions on loans reviewed are tracked Disaster Direct Loan Program
at the loan level through a centralized database. The
Quality Control Specialist for 7(a) loan guaranty approvals Statistical Sampling
monitors errors from identification through completion of The Office of Disaster Assistance (ODA) performs a
the corrective action. Headquarters management provides Quality Assurance Review (QAR) of the approved loan
oversight to ensure milestones are met. All improper portfolio annually. A part of the QAR is to identify any
payments identified as a result of the FY 2019 IPERIA deficiency that would result in an improper payment. The
reviews have been resolved through loan modification or scope of the ODA’s review covers three primary compliance
cancellation of the loan guaranty. In general, corrective areas: (1) basic eligibility, (2) adherence to relevant laws,
actions were completed without having to refer the loans rules, regulations, and standard operating procedures, and
for further review to resolve differences with the lenders. (3) credit worthiness. The statistical methodology used
Corrective Actions are initiated within 120 days with all followed widely accepted practices and was approved by the
actions taken by the end of the fiscal year. Office of Management and Budget in 2012. This year, the
SBA changed the 12-month reporting period for the disaster
direct loan program from July 1st through June 30th to
504 CDC Loan Guaranty Approvals April 1st through March 31st to align with the reporting
Statistical Sampling period for the rest of SBA programs, and this change was
approved by OMB in April 2019. The reporting period for
The 504 CDC approval sample cases were selected using
FY 2019 was reduced to 9-months covering July 1, 2018,
PPS sampling with replacement from all loan guaranties
through March 31, 2019, as the first three months were
approved during the 12-month period ending March 31,
tested in FY 2018. Starting FY 2020, the reporting period
2019. The approval population was not stratified. The SBA
will cover the 12 months. The review population consisted
determined the appropriate total sample size to be 192 loans
of disaster loan disbursements made during the 9-month
from the population. The sample included net approval
period ending March 31, 2019, with total disbursements
outlays of $314,659,000 and improper payments of
of $1,635,933,566. A sample of 450 payments was selected
$5,133,437 within the sample. Using the Hansen-Hurwitz
for testing which yielded a weighted estimated improper
estimation method, the estimated improper payments rate
payment rate of 6.30 percent. Based on the sample
for the 504 CDC loan guaranty approvals was calculated as
results, the estimated amount of improper payments was
0.56 percent. This represents a substantial decrease from the
$103,055,979. The decrease from the FY 2018 rate of 8.91
FY 2018 rate of 2.58 percent. The decrease is primarily due
percent can be attributed to a focus on evaluating what
to internal training for reviewers and approvers, as well as,
makes a payment improper and improving controls over the
external training for Certified Development Companies.
underwriting and disbursement process.
The 504 CDC loan approval reviews were conducted to
examine if the lender complied materially with the program’s Corrective Action
origination requirements including statutory provisions, In FY 2019, the most prevalent root cause for the disaster
SBA regulations, any agreement the CDC executed with the direct loan improper payments stemmed from process
SBA, standard operating procedures, loan authorizations, and documentation errors. Approximately 65% of the
and official SBA notices and forms applicable to the 504 improper payments were made because the loan processing
CDC loan program. The reviews were to determine if the and disbursement staff did not consistently follow the

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guidance provided in the standard operating procedure to Supplemental Disaster Relief
verify eligibility data. The remaining 35% of the improper
payments were due to documentation errors. While the
Administrative Funds - Payroll
improper payments resulting from the longstanding issue Statistical Sampling
concerning insurance documentation was reduced, one
The disaster relief payroll administrative expense samples
other documentation error was also found. The types of
were chosen using PPS with replacement methodology
process and documentation errors included:
from payments completed during the 12 months ending
Lack of justification for repayment ability that did not August 31, 2018. The total dollar amount expended was
meet SBA guidelines; $334,204,070. The SBA determined the appropriate sample
Failure to document estimated total project cost; size to be 65 line items having total outlays of $270,496.
Based upon the sample results, the estimated FY 2019
Failure to perform adequate follow-up on borrower’s improper payment rate was 0.10 percent for a total of
credit report; $327,587.
Disbursement made in excess of eligible loan amount
due to duplication of benefits; Corrective Action
Lack of insurance documentation; and The improper payment rate of 0.10 percent and $327,587
does not exceed the 1.5 percent and $10 million threshold
Failure to obtain properly executed closing documents.
for reporting a corrective action plan.
To prevent these errors noted in the improper payment
review, the SBA plans to perform the following corrective
Supplemental Disaster Relief
actions:
Administrative Funds - Travel
Continuing to employ the professional training staff
from the Office of Disaster Strategic Engagement Statistical Sampling
and Effectiveness to assist in the creation of effective The disaster relief travel administrative expense samples
insurance review and other training materials and were chosen using PPS with replacement methodology from
assist the trainers in the Accounts Department in the payments completed during the 12 months ending August
presentation of training materials; 31, 2018. There were 43,346 expenditures with a total
Requiring all training materials be reviewed and dollar amount of $79,125,163. Using the PPS approach, the
approved by SBA headquarters; SBA determined the appropriate sample size to be 250 line
items having total outlays of $4,241,448. Based upon the
Expanding training efforts to include one-on-one
sample results, the estimate FY 2019 improper payment rate
training with Application Processing Team Leads; and
was 2.87 percent for a total of $2,268,640.
Including specific results-driven performance elements
tied to reducing the improper payment rate in the Corrective Action
FY 2020 performance plans for the Director and The improper payment amount of $2,268,640 does not
Deputy Director of the Processing and Disbursement exceed the $10 million threshold for reporting a corrective
Center, Assistant Center Director for Application action plan.
Processing, and Assistant Center Director for Accounts.

The corrective actions will be monitored on a monthly
basis by the Deputy Associate Administrator for Disaster
Assistance.

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Supplemental Disaster Relief Administrative Funds
Part II – Recapture of Improper Payments – Payroll and Travel
Reporting The SBA thoroughly analyzed the condition of each
improper payment identified during the improper payment
Payment Recovery Effort review of the supplemental disaster relief payroll and
Agency efforts to recapture improper payments are discussed travel expenses. For payroll expenses, the total improper
by program or activity. payment was only $0.1, which appeared to be the result
of rounding errors. The SBA determined that further
7(a) Loan Program Purchases examination or recovery effort for such a trivial amount
Overpayments identified in the improper payments reviews is not deemed necessary. For travel expenses, a significant
are recaptured from the lender. The Quality Control staff amount of the identified overpayment resulted from travel
tracks and collects any monetary overpayment. Refer to expenses reimbursed more than once because duplicate
Part I above for corrective action plans to prevent future travel vouchers were submitted. These errors should
improper payments. have been detected during the approval process, but the
manual paper-based voucher process and the high volume
of the transactions hindered the effective review prior to
7(a) Loan Program Approvals and 504 Loan
payment. This issue should be eliminated in the future as
Guaranty Approvals
the disaster loan program moved from a paper-based system
Overpayments recaptured outside of payment recapture
to an electronic travel reimbursement system with the
audits are not applicable to 7(a) loan guaranty approval
implementation of Concur Travel on July 29, 2019. The
and 504 CDC loan approval as no payment is made at the
SBA will initiate recovery actions on the identified improper
time of approval. Improper payments identified through
payments for repayment or credit on future travel voucher
both the annual improper payment and continuous quality
reimbursements from the responsible individuals as
control reviews are remediated through the cancellation of
applicable. All of the improper payments found have had
the SBA guaranty, reduction in loan guaranty percentage,
or will have full travel reconciliations performed, most
or loan modification, as appropriate. This determination is
have already been completed and the employees and the
made on a case-by-case basis, which varies depending on the
appropriate Centers notified. For any reconciliations not
circumstances of the loan approval and lender authority.
performed yet, the SBA will complete them and notify the
employee/Center regarding the findings.
Disaster Direct Loan Program
Overpayments are the result of the borrower receiving both
an SBA loan and insurance payments or other benefits Payment Recapture Audits
as a result of the disaster. If the duplication of benefit is On September 15, 2011, the SBA submitted a Payment
recognized prior to the final disbursement, the loan amount Recapture Audit Cost-Effective Analysis to the Office of
is modified to reflect a lower amount and no repayment is Management and Budget. The analysis discussed the
required. If the duplication of benefit is identified after the 7(a) Business Loan Guaranty Program, the 504 Certified
final disbursement of the loan, then the borrower is given 30 Development Company Loan Guaranty Program, the
days to provide evidence to prove that the disaster loan was Disaster Direct Loan Program, Disbursements for Goods
not over-disbursed. For example, the borrower can provide and Services, the Small Business Investment Company
documentation demonstrating that insurance funds received Financing Guaranty Program, the Surety Bond Guaranty
did not duplicate the disaster loan purpose. If the borrower Program, and Grants, which included all grant programs.
has not provided the appropriate evidence within the 30-day The analysis described the program, the controls over
period, a demand is made for the over-disbursed funds. financial disbursements, and the size of the program and
Collection efforts continue at the Disaster loan servicing concluded for each program that recapture audits would
centers, but if these efforts fail, the borrower will still be not be cost effective due to low error rates, complexity of
liable for the over-disbursed amount in the form of monthly the program, or limited amount of outlays. A subsequent
payments in accordance with the loan agreement. Thus, cost analysis for the 7(a) loan guaranty purchase program
any actual loss, if any, is the cost of funds related to the over was submitted to OMB on September 13, 2017, to include
disbursement. the results of a payment recapture audit performed in

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2015, which again concluded that such an audit is not cost improper payment audit was completed using 4,080 hours
effective. of staff time at an approximate labor cost of $516,394.
In consideration of the cost to audit, strong possibility of
The specific justification and analysis are discussed by litigation for recovery, and uncertainty over the borrower’s
program. ability to repay the loan with a lump-sum payment, further
expenditures for a separate recovery audit is not cost
7(a) loan guaranty purchase improper payment reviews,
effective.
continuous Quality Control Reviews, and OMB Circular
A-123 Appendix A reviews in FY 2014 warranted a Supplemental Disaster relief administrative payroll
reconsideration of the cost effectiveness of a payment expenses recapture audits would not be cost effective. The
recapture audit for the 7(a) Loan Guaranty Purchase improper payment testing required 477 labor hours at a
program. As a result, in FY 2015, the SBA performed a cost of $31,538. No payment was identified as eligible for
payment recapture audit, and the results revealed that recapture during the improper payment review; thus, the
the cost of labor hours for performing and reporting the cost of the review exceeds the return.
payment recapture audit exceeded the actual overpayments
identified. This was reported in the FY 2015 AFR with Supplemental Disaster relief administrative travel
the statement that no additional payment recapture audits expenses recapture audits would not be cost effective. The
would be performed. In September 2017 the SBA submitted improper payment testing required 783 labor hours at a
a cost analysis to OMB and the OIG to support this cost of $34,465. Payments identified during the improper
decision. payment review as eligible for recapture totaled $17,264;
thus, the cost of the review exceeds the return.
7(a) loan guaranty approval and 504 CDC loan approval
are not subject to payment recapture audits as no payment is Table 3 presents a summary of Improper Payment
made at the time of approval. Recaptures without Audit Programs.

Disaster direct loans recapture audits would not be cost TABLE 3: Improper Payment Recaptures without Audit
effective. Improper payments due to loan documentation Programs ($ in Millions)
errors do not result in a disaster survivor receiving funds Overpayments Recaptured outside of Payment Recapture
Audits
for which they are not eligible; therefore, these improper Program or
Activity Amount Amount Amount
payments are not eligible for recovery. The FY 2019 Identified Recaptured Recaptured Source
improper payment review identified 23 ineligible $ $ %

disbursements totaling $1,689,400. Twenty-two of these 7(a) Guaranty
Statistical samples
4.96 3.26 65.73 conducted under
disbursements were improper because of errors made by the Purchase1
IPIA
SBA during loan processing by not following SBA policy Statistical samples
Disaster Loan
to determine and document eligibility. The remaining one Disbursements2
1.69 0.56 33.14 conducted under
IPIA
disbursement was ineligible because the disaster damaged
Supplemental
property was not the borrower’s primary residence. Given Disaster Relief
Statistical samples
0.02 – – conducted under
that the most errors were made by the SBA, any attempt Administrative
IPIA
Funds - Travel3
to recoup money from these borrowers would most likely
TOTAL 6.67 3.82 57.27
result in litigation, which may not be favorable to the
1 Period of review is for the 12-month period ending March 31, 2019.
Agency. Additionally, borrowers often will not have the
2 Period of review is for the 9-month period ending March 31, 2019.
resources to pay off the loans. As of October 1, 2019, all 3 Period of review is for the 12-month period ending August 31, 2018.
23 loans are being paid as agreed and $564,738 has been
already recovered through regular monthly payments. The

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Part III – Agency Improvement of Payment Part VI - Information Systems and Other
Accuracy with the Do Not Pay Initiative Infrastructure
The SBA has implemented the Do Not Pay Initiative and 7(a) loan guaranty purchases are supported by the
incorporated the use of the DNP post payment services Guaranty Purchase Tracking System. It is continually
using the data source Death Master File. The Agency updated to enhance the overall integrity of the purchase
has also implemented limited use of the online portal for process. Resources as they relate to human capital are
processing of manual 7(a) loan applications and the Surety currently adequate.
Bond Guarantee program as part of pre-award eligibility.
We are in the process of implementing a pilot program 7(a) loan guaranty approvals and 504 CDC loan
in collaboration with the Bureau of the Fiscal Service to guaranty approvals have adequate internal controls and are
establish the Application Programming Interface between supported by E-Tran, the SBA’s electronic loan processing/
the SBA system and DNP services for the 504 CDC loan servicing system. Both the SBA and delegated lenders
program to identify ineligible recipients at the time of pre- process applications through the system and lenders may
award in lieu of manually entering requests for information. also handle unilateral servicing actions electronically. The
Upon successful implementation, the SBA will explore ways system provides increased efficiency and decreased costs
to expand such capability to other programs including the in the loan guaranty origination and servicing processes.
7(a) loan program to replace the current manual search of The loan programs are also supported by SBA One, an
the DNP online portal. The Bureau of the Fiscal Service automated lending platform, which helps to streamline the
is finalizing the FY 2018 Agency Insight Report (AIR) lending process. Resources as they relate to human capital
for the SBA, which will provide a high-level overview of are currently adequate.
key findings and insights derived from analysis of SBA Disaster direct loan program has the information
payment data. The SBA will use the AIR to verify existing systems and other infrastructure it needs to reduce
procedures focused on preventing improper payments are improper payments to targeted levels. For example, the
working effectively and to identify opportunities to further Office of Disaster Assistance has an integrated electronic
strengthen its effort to address improper payments. loan processing system, the Disaster Credit Management
System (DCMS), to streamline, enhance and improve
the loan-making process. This system supports workflow
Part IV – Statutory or Regulatory Barriers management, electronic file management and document
The SBA does not have any statutory or regulatory barriers generation functions. Many of the business rules governing
limiting improvement to its performance on the improper DCMS have been designed to improve the quality assurance
payments initiative. process. In fact, the ODA quality assurance team works
continually with the DCMS development team to improve
the quality assurance process with a goal to minimize future
Part V – Accountability improper payments as much as possible. The Disaster direct
The focus of SBA’s Strategic Goal 4 is to strengthen the loan program has adequate human capital to maintain its
SBA’s ability to service small businesses. Strategic Objective internal controls.
4.1 is designed to ensure effective and efficient management
of Agency resources, including improving processes for
managing fraud, waste, and abuse. The SBA’s strategic Part VII – Sampling and Estimation
goals are included in annual performance plans for all of its To provide more clarity for the reader, the Sampling and
programs as business objectives and these are also included Estimation section was coupled with the Payment Reporting
in employee performance plans. SBA management monitors information in Part I, organized by the six programs
accomplishments of these business objectives and takes subjected to review for improper payments.
action when progress toward goal achievement is not on
target. Executive and management bonuses are based on the
accomplishment of business objectives included in employee
annual performance plans. This management process helps
assure accountability for the reduction of improper payments.

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Part VIII – Risk Assessments
OMB Circular No. A-123, Appendix C, requires risk
assessments at least once every 3 years for programs not
deemed susceptible to significant improper payments, or
earlier if a low risk program was subjected to a significant
change in legislation or funding level. Significant improper
payments are defined as gross annual improper payments
exceeding (1) both 1.5 percent of program outlays and
$10,000,000, or (2) $100,000,000. The SBA last conducted
risk assessments for all programs and activities, including
payments made to employees, for susceptibility to improper
payments in FY 2017. The risk assessments did not
identify any additional programs as susceptible to improper
payments. Since no significant changes occurred to any
SBA program or activity during FY 2019, the SBA did not
conduct any new risk assessments.

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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. While the audit results reported one material weakness, the SBA determined that this issue was not
deemed to be a material weakness for Management Assurances.

Summary of Financial Statement Audit
Audit Opinion Unmodified
Restatement No

Material Weaknesses Beginning Balance New Resolved Consolidated Reassessed Ending Balance
Risk Assessment for Internal
0 1 0 0 0 1
Control over Financial Reporting
Total Material Weaknesses 0 1 0 0 0 1

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)
Item Agency Auditor
1. Federal Financial Management System Requirements No lack of compliance noted No lack of compliance noted
2. Applicable Federal Accounting Standards No lack of compliance noted No lack of compliance noted
3. USSGL at Transaction Level No lack of compliance noted No lack of compliance noted

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FRAUD REDUCTION REPORT
The Fraud Reduction and Data Analytics Act of 2015 assess potential fraud vulnerabilities. In addition, the
(FRDAA) mandates that agencies take steps to improve Agency established a data sharing agreement with its
their financial and administrative controls and procedures Office of Inspector General (OIG). The OIG provides
to assess and mitigate fraud risks, and to improve their quarterly fraud data reports to the SBA senior counsel
development and use of data analytics for identifying, to ensure that important fraud-related information is
preventing, and responding to fraud, including improper appropriately disseminated within the Agency. The
payments. Each agency is required to report its progress in SBA is creating a fraud risk database for its loan and
implementing: (1) the financial and administrative controls, contracting programs. The information collected in this
(2) the fraud risk principle in the GAO Standards for database will be reviewed to identify fraud risk schemes
Internal Control in the Federal Government (Green Book), and, when determined to be significant, mitigate fraud
and (3) the management of fraud risk in accordance with risks.
OMB Circular A-123. In September 2019, the SBA established the Fraud Risk
The Agency reports the following progress: Management Council (Fraud Council) composed of
senior management officials to assist in the oversight
To address financial and administrative controls, the and coordination of agency-wide management of fraud
Agency is identifying fraud risks and associated inherent risk. As the SBA’s fraud risk management matures,
risks, compensating controls, and actions to further the SBA intends for the Fraud Council to become an
reduce risk. The Agency accomplishes this objective important asset for helping the Agency further develop
by performing internal control reviews, documenting its enterprise-wide fraud risk management process and
new and changing processes, and preparing for its to further integrate that process within its enterprise
external financial statement audit. To support fraud risk risk management framework.
principles in the Green Book, the Agency continues to SBA program managers have a shared responsibility
train staff on the five components and 17 principles, in preventing, detecting, and responding to potential
which includes principle no. 8 — assess fraud risk fraud and have ownership and responsibility for
during the annual Federal Managers Financial Integrity managing fraud. To support fraud risk management,
Act (FMFIA) information sessions. the Agency continues to determine the best approach to
The SBA has identified a senior counsel from the Office implement an enterprise-wide fraud risk management
of General Counsel to be its FRDAA coordinator framework to address fraud risk. The SBA’s Enterprise
who has begun to conduct program-specific anti- Risk Management Board considered fraud risks when
fraud workshops and training to help ensure uniform updating its enterprise risk profile, and the Office
awareness and implementation of anti-fraud best of Continuous Operations and Risk Management
practices, especially certain Antifraud Playbook plays (OCORM) provided agency-wide training on fraud
designed to help create a culture to combat fraud and risk assessments.

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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
FY 2015 2018 Change (FY 2015
Baseline (CY-3) Baseline - 2018 (CY-3)) validated on a continual basis to ensure real-time data
is available for timely and quality decision making. As a
Square Footage
(SF in Millions)
1.297* 1.304 0.027 fully-leased agency, close coordination between GSA and
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 Change
Reported 2018 (FY 2015 - 2018
emergencies. Currently, SBA inventory is above the FY 2015
Cost (CY-3) (CY-3)) baseline due to space acquired to assist in the response to
Operation and the 2017 hurricane events. The SBA maintains an ongoing
Maintenance Costs $0 $0 $0 verification and validation process to assess the Agency’s
($ in Millions) lease holdings and ensure functionally appropriate right-
The SBA only occupies buildings that are leased by the U.S. General Services Administration sizing using appropriate space design standards.
and subject to occupancy agreements between the GSA and the SBA.
* The SBA’s FY 2017 Agency Financial Report reported FY 2015 actual square footage for The SBA is pragmatically moving to reduce leased holdings
FY 2015 baseline.
by 1 percent annually to a goal of 170 Useable Square
Footage (USF) per property, where possible, by adopting
According to Section 3 of Office of Management and federal space standards at all locations. The SBA will make
Budget Memorandum M-12-12 (Promoting Efficient every effort to consolidate, co-locate, and share resources,
Spending to Support Agency Operations) and OMB wherever functional requirements align with an emphasis on
Management Procedures Memorandum 2013-03, (Reduce occupying federal space. For example, the SBA is instituting
the Footprint Policy), implementing guidance directs that all standard office floor plans across its lease holdings to provide
CFO Act entities must set annual targets to reduce the total the Agency with a strategic view of space management so
square footage of domestic office and warehouse inventory that when leases are due to expire, future managers will
compared with the FY 2015 baseline. understand how their leases align with Agency goals.

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

SBA Federal Civil Penalties

Latest Year of Current
Adjustment Penalty Level Location for
Penalty (Name or Year (via Statute or ($ Amount or Sub-Agency/ Penalty Update
Statutory Authority Description) Enacted Regulation) Range) Bureau/ Unit Details
Failing to File Report Office of
Small Business Investment Act, 15 84 Federal Register
Timely for a Small Business 1966 2019 $266 Investment and
USC 687g 12060 (April 1, 2019)
Investment Company (SBIC) Innovation
Failing to File Report
Small Business Act, 15 USC Office of Capital 84 Federal Register
Timely for a Small Business 2004 2019 $6,623
650(j)(1) Access 12060 (April 1, 2019)
Lending Company (SBLC)
Small Business Act, 15 USC Administrative Remedies
84 Federal Register
634(b)(6) and Program Fraud Civil for False Statements and 1986 2019 $11,463 Multiple offices
12060 (April 1, 2019)
Remedies Act 31 USC 3802(d) Claims
Small Business Act, 15 USC $20,134 84 Federal Register
Penalty for Violation of
634(b)(6) and Program Fraud Civil 1990 2019 to Multiple offices 12060-12061
Lobbying Restrictions
Remedies Act 31 USC 1352 $201,340 (April 1, 2019)

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APPENDICES
SUCCESS STORY

GROW:
SUCCESS STORY
Woman-owned,
Native American RECOVER:
8(a) Certified Phoenix
Firm Secures Award for
Government Outstanding
Contracts Small Business
Disaster
Recovery
Sundance Consulting
Pocatello, ID
Cheeseburger Baby
September Myres is the owner and Chief Executive
Officer of Sundance Consulting, which she started Miami Beach, FL
in 2005. The company is a woman-owned, Native
Stephanie Vitori started her career as a delivery
American-owned, 8(a)-certified small business
driver in 2001. After learning about company
development firm. The business plays a vital
operations from the ground up, she bought the
role in improving the environment and promoting
business in 2004 and employed a small staff.
conservation on public and tribal lands. Sundance
Stephanie built a thriving eatery that grew to 20
Consulting has grown to more than 60 employees
employees, 2 food trucks, and an annual revenue
operating in the environmental consulting,
of $800,000.
remediation, and records management sectors.
The firm operates seven offices across the country.
In the 15 years Stephanie has owned Cheeseburger
Baby, the Florida burger business has endured
Sundance Consulting has secured numerous U.S.
recessions, hurricanes, and competition from
Department of Defense (DoD) contracts to improve
corporate franchises. Hurricane Irma nearly
Native American lands adversely affected by past
brought the business to an end as it destroyed
DoD activities. The SBA 8(a) Business Development
the marquee sign, air conditioning units, freezers,
Program helped the company better compete in
cooking equipment, and a food truck. The
the marketplace, and the 8(a) certification opened
company lost 30 percent of sales, and property
the door to government contracts that help them
damage reached $150,000. Stephanie applied
solve environmental concerns for the U.S. Army
for and received an SBA disaster assistance
Corps of Engineers, U.S. Forest Service, U.S.
loan to cover working capital needs and repair
National Park Service, U.S. Department of Energy,
costs. The Small Business Development Center
and the U.S. Bureau of Land Management.
at Florida International University helped her
restructure her financial operations and develop
a business continuity plan to return Cheeseburger
Baby to the same level of operations before the
hurricane.
APPE ND I CE 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
Surety Bonds www.sba.gov/content/surety-bonds-explained
Export Products www.sba.gov/exporting
Fund Your Business www.sba.gov/business-guide/plan/fund-your-business

Contracting

Government Contracting www.sba.gov/contracting
Register as a Contractor www.sam.gov
Contracting Certifications https://certify.sba.gov/

Counseling

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

Disaster Assistance

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

SBA Information

SBA National Answer Desk (800) 827-5722 (Toll Free)
Disaster Assistance Customer Service center (800) 659-2955 (Toll Free)
Facebook https://www.facebook.com/sbagov
Twitter https://www.twitter.com/sbagov
YouTube https://www.youtube.com/sba
SBA Blog https://www.sba.gov/blogs
Instagram https://www.instagram.com/sbagov/

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APPENDIX 2 – GLOSSARY
504 Loan 504 Certified Development Loan Program CAP Goals Cross-Agency Priority Goals
The 504 loan program provides small CAP Goals are a limited number of Presidential
businesses with long-term, fixed-rate financing priority areas where implementation requires
for the purchase of land, buildings, and long- active collaboration among multiple agencies.
life capital equipment.
CY Calendar Year
7(a) 7(a) Loan Guaranty Program A period of a year beginning and ending with
The 7(a) loan program is the SBA’s primary the dates that are conventionally accepted as
loan program; it provides general loan financing marking the beginning and end of a numbered
for a wide variety of purposes. year.
7(j) 7(j) Management and Technical Assistance CBJ Congressional Budget Justification
Program The CBJ is a federal agency’s annual budget
The 7(j) program provides specialized assistance request to Congress.
to underserved small businesses.
CDC Certified Development Company
7(m) 7(m) Microloan Program CDCs are nonprofit corporations, certified
The microloan program provides small, short- and regulated by the SBA, that work with
term loans to small businesses and certain types participating lenders to provide financing to
of nonprofit childcare centers. small businesses.
8(a) 8(a) Business Development Program CEAR Certificate of Excellence in Accountability
The 8(a) program assists firms owned and Reporting
controlled by socially and economically The CEAR is awarded to federal agencies
disadvantaged individuals compete for federal that are considered to have excellent Agency
contracts. Financial Reports.
A-123 Designation for OMB Circular on Internal CFO Chief Financial Officer
Control Systems The CFO is the financial leader whose
The A-123 guidance prescribes policies and duties include overseeing all Agency
procedures to be followed by federal agencies disbursements, management and coordination
in establishing, maintaining, evaluating, of Agency planning, budgeting, analysis and
improving, and reporting on internal controls accountability processes.
in their program and administrative activities.
DATA Act The Digital Accountability and Transparency
AFR Agency Financial Report Act
The AFR is an annual report that provides to The DATA Act is a law that aims to make
OMB, Congress, and the public an overview of information on federal expenditures more easily
the Agency’s financial and performance data. accessible and transparent.
AGA Association of Government Accountants DCMS Disaster Credit Management System
The AGA is the member organization DCMS is the electronic system used to
for government financial management process loan applications for all new disaster
professionals. declarations.
APG Agency Priority Goal DHS Department of Homeland Security
GPRAMA requires federal agencies to establish DHS’s mission is to secure the nation from
a set of 2-year APGs that reflect the highest threats.
priorities of agency leadership.
DLF Disaster Loan Fund
APR Annual Performance Report The DLF assists eligible small businesses
The APR is required by the Government impacted by disasters.
Performance and Results Act and presents a
federal agency’s progress in achieving the goals DNP Do Not Pay Initiative
in its strategic plan and performance budget. The DNP was established by IPERIA to
support federal agencies with their efforts to
prevent and detect improper payments.

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DO District Office FFMIA Federal Financial Management Improvement
The SBA’s District Offices are responsible for Act
the delivery of the SBA’s many programs and FFMIA is a law that requires each federal
services throughout the country. agency to implement and maintain financial
management systems that comply substantially
DoD Department of Defense with federal financial management system
The DoD is the federal agency charged with requirements, applicable federal accounting
coordinating national security and the armed standards and the United States Standard
services. General Ledger.
DTI Debt-to-Income FICA Federal Insurance Contributions Act
DTI ratio is derived by dividing monthly debt FICA is a federal payroll (or employment) tax
payments by monthly gross income imposed on both employees and employers
to fund Social Security and Medicare federal
EDAP Expedited Disaster Assistance Loan Program
programs that provide benefits for retirees,
The EDAP is a loan guarantied by SBA for up disabled people, and children of deceased
to $150,000. workers.
EDP Entrepreneurial Development Program FISMA Federal Information Security Management
The EDP account reports entrepreneurial Act
development expenses. FISMA is a law that defines a comprehensive
ELA Enterprise Learning Agenda framework to protect government information,
The ELA is a plan that aligns with the Agency’s operations, and assets against natural or man-
strategic goals to identify where evaluations made threats.
could provide insights about program FITARA Federal Information Technology Acquisition
effectiveness. Reform Act
ERM Enterprise Risk Management FITARA is legislation to improve the
The ERM provides a framework to manage acquisition and management of federal
risks and seize opportunities related to the information technology assets.
achievement of their objectives. FMFIA Federal Managers Financial Integrity Act
FAST Federal and State Technology (FAST) Grants FMFIA is a law that primarily requires ongoing
One year funding opportunity to help increase evaluations and reports on the adequacy of the
the number of SBIR and STTR proposals. internal accounting and administrative control
systems of executive agencies. It also requires
FBO FedBizOps evaluations and reports on the conformance of
FBO is the Federal Government’s website that financial management systems.
posts all federal procurement opportunities with
FPDS-NG Federal Procurement Data System – Next
a value over $25,000.
Generation
FCRA Federal Credit Reform Act FPDS-NG is a single source for U.S.
The FCRA is a law enacted to provide a more government-wide procurement data.
realistic picture of the cost of U.S. Government
FRDAA Fraud Reduction and Data Analytics Act
direct loans and loan guaranties.
FRDAA is a law to improve federal agency
FEMA Federal Emergency Management Agency financial and administrative controls and
The primary purpose of FEMA is to coordinate procedures to assess and mitigate fraud risks,
the response to a disaster that has occurred in and to improve federal agencies’ development
the United States. and use of data analytics for the purpose of
identifying, preventing, and responding to
FEVS Federal Employee Viewpoint Survey fraud, including improper payments.
An OPM survey administered to federal
employees that measures perceptions of FTA Fiscal Transfer Agent
whether, and to what extent, conditions The FTA is the SBA agent tasked with the
characteristic of successful organizations are responsibility to administer each SBA Pool or
present in their agencies. Individual Certificate. This maintains a registry
of Registered Holders and other information as
the SBA requires.

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FTE Full-Time Equivalent IDAP Immediate Disaster Assistance Program
FTE indicates the workload of an employed IDAP is a guaranteed disaster loan program
person. An FTE of 1.0 means that the person is for small businesses that have suffered physical
equivalent to a full-time worker while an FTE damage or economic injury to a Declared
of 0.5 means that the worker is only half-time. Disaster.
FY Fiscal Year IPERA Improper Payments Elimination and
The Federal Government fiscal year begins Recovery Act
October 1 and ends the following September IPERA requires that agencies examine the risk
30. of, and feasibility of, recapturing improper
payments in all programs and activities.
GAAP Generally Accepted Accounting Principles
GAAP is the standard framework of guidelines IPERIA Improper Payments Elimination and
for financial accounting generally known as Recovery Improvement Act
accounting standards or standard accounting IPERIA is an act to intensify efforts to identify,
practice. prevent, and recover payment error, waste,
fraud, and abuse within federal spending.
GAO U.S. Government Accountability Office
The GAO is an independent, nonpartisan IPIA Improper Payment Information Act
agency that investigates how the federal The IPIA is a law enacted in 2002 to identify
government spends taxpayer dollars and reports and reduce erroneous payments in the
their findings to Congress. government’s programs and activities.
GONE Act Grants Oversight and New Efficiency Act IT Information Technology
A law that requires federal agencies close IT refers to matters concerned with the design,
expired grants. development, installation, and implementation
of information systems and applications.
GPRAMA Government Performance and Results Act
(GPRA) Modernization Act JAAMS Joint Administrative Accounting
The GPRAMA modernizes the federal Management System
government’s performance management Also known as the Oracle Administrative
framework, retaining and amplifying some Accounting System, JAAMS is a financial
aspects of the Government Performance management system used to keep records of the
and Results Act (GPRA) of 1993 while also SBA’s administrative funding and expenditures.
addressing some of its weaknesses.
LGPC Loan Guarantee Processing Center
GSA General Services Administration The 7(a) LGPC has two physical locations
The GSA is a federal agency of the Executive (one in Hazard, Kentucky and one in
Branch whose mission is to deliver the best Citrus Heights, California) that are linked
value real estate, acquisition, and technology technologically into one process for efficiency
services to government agencies. and optimal staff utilization.
HHS U.S. Department of Health and Human LSP Lender Service Provider
Services An LSP carries out functions in originating,
The goal of HHS is to protect the health of dispersing, servicing, or liquidating a specific
all Americans and provide essential human SBA business loan or loan portfolio for
services. compensation from the lender.
HIM Hurricanes Harvey, Irma, and Maria MAFD Maximum Accepted Fixed Debt
The HIM Hurricanes caused significant MAFD are standards used to calculate the risk
physical damage to Texas, Louisiana, Florida, of loan approvals.
Puerto Rico, and the U.S. Virgin Islands.
MRA Master Reserve Account
HUBZone Historically Underutilized Business Zone The SBA’s fiscal agent maintains this escrow
HUBZone is an SBA program that encourages fund to facilitate the operation of the Certified
economic development by the establishment Development Company program.
of federal contract award preferences for small
businesses located in historically underutilized MRF Master Reserve Fund
business zones. The SBA’s fiscal and transfer agent maintains
this reserve fund to facilitate the operation of
the 7(a) secondary market program.

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NAICS North American Industry Classification ODA Office of Disaster Assistance
System The ODA is the SBA’s office that promotes
NAICS is the standard used by federal agencies economic recovery in disaster-ravaged areas.
in classifying business establishments for the Disaster loans are the Agency’s primary form of
purpose of collecting, analyzing, and publishing federal assistance for non-farm, private sector
statistical data related to the U.S. business disaster losses for individuals and businesses.
economy.
OFPO Office of Financial Program Operations
NIST National Institute of Standards and The OFPO leads the financial services industry
Technology in quality products and services to SBA partners
The NIST is a measurement standards and customers and protects the integrity of SBA
laboratory, and a non-regulatory agency of the programs.
U.S. Department of Commerce. Its mission
is to promote innovation and industrial OGC Office of General Counsel
competitiveness. The OGC provides comprehensive legal
services to the Administrator and all Agency
NVMC New Markets Venture Capital offices.
The NMVC program is designed to promote
economic development and the creation of OGCBD Office of General Contracting and Business
wealth and job opportunities in low-income Development
geographic areas by addressing the unmet The Office of Government Contracting &
equity investment needs of small business Business Development works to create an
located in those areas. environment for maximum participation by
small, disadvantaged, and woman-owned
OBD Office of Business Development businesses in federal government contract
The OBD assists small, disadvantaged awards and large prime subcontract awards.
businesses to gain access to federal and private
procurement markets. OIC Office of Internal Controls
The OIC ensures managers comply with
OCA Office of Capital Access internal control standards.
The OCA is responsible for small business
loans, lender oversight, and the Surety Bond OIG Office of Inspector General
Guaranty program. The OIG conducts and supervises audits,
inspections, and investigations relating to SBA
OCFO Office of the Chief Financial Officer programs and operations.
The OCFO is responsible for the financial
leadership of the Agency, including all OMB U.S. Office of Management and Budget
disbursements, management, and coordination The OMB is the White House office that
of planning, budgeting, analysis, and oversees preparation of the federal budget
accountability processes. and supervises its administration in Executive
Branch agencies.
OCIO Office of the Chief Information Officer
The OCIO is responsible for the management OPM U.S. Office of Personnel Management
of information technology for the Agency, The OPM is the Federal Government’s human
including the design, implementation, resources agency.
and continuing successful operation(s) of
OPSM Office of Performance and Systems
information programs and initiatives.
Management
OCRM Office of Credit Risk Management The OPSM manages the Capital Access
The OCRM manages program credit risk, Financial System (CAFS), Lender Loan
monitors lender performance, and enforces Management System (LLMS), Central
lending program requirements. Servicing Agent system, and Fiscal Transfer
Agent system.
OCORM Office of Continuous Operations and Risk
Management OSDBU Office of Small Disadvantaged Business
OCORM ensures enterprise-wide disaster Utilization
planning, readiness, and implementation of OSDBU’s located within each federal agency
ERM best practices for the SBA. enable small disadvantaged businesses to gain
access to economic opportunity through federal
contracts.

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PDAP Private Disaster Assistance Program SBG Surety Bond Guarantee
PDAPs help residents, businesses, organizations The SBG program provides guaranties, bid,
and communities recover from natural disasters. performance, and payment bonds for contracts
up to $2 million for eligible small businesses
PPS Probability Proportional to Size that cannot obtain surety bonds through regular
PPS is a method of sampling that takes the commercial channels.
varying size of each item within the population
into account when selecting the audit sample. SBGRF Surety Bond Guaranty Revolving Fund
All the contractor and surety fees collected by
QAR Quality Assurance Review the SBA are deposited in the SBGRF at the
The QAR is a review to identify any U.S. Department of the Treasury, which is used
deficiencies, to include improper payments. to pay claims.
QSMO Quality Service Management Office SBIC Small Business Investment Company
QSMOs are federal agencies that provide shared An SBIC provides long-term loans, debt-equity
services to other federal agencies. investments, and management assistance to
small businesses, particularly during their
RGDP Real Gross Domestic Product
growth stages.
The RGDP is an inflation-adjusted measure
that reflects the value of all goods and services SBIR Small Business Innovation Research
produced in a given year, expressed in base-year The SBIR is a highly competitive SBA program
prices. that encourages domestic small businesses
to engage in federal research/research and
RISE Recovery Improvements for Small Entities
development that has the potential for
After Disaster Act
commercialization.
This law amends the Small Business Act
to authorize a small business, homeowner, SBLC Small Business Lending Company
nonprofit entity, or renter that was located SBLCs are non-depository small business
within a declared major disaster area during lending companies listed by the SBA Office of
Superstorm Sandy in 2012 to apply for an SBA Capital Access.
loan.
SMC Senior Management Council
SAT Senior Assessment Team SMC was established by the Administrator
The SBA’s SAT is chaired by the Chief Financial to ensure the SBA had an effective system of
Officer and is comprised of SBA managers from internal controls.
the programs offices to oversee the assessment
of internal controls for financial reporting SOP Standard Operating Procedure
performed by the Office of Internal Controls. An SOP is the primary source of the Agency’s
internal control.
SBA U.S. Small Business Administration
The SBA is the federal agency whose mission STEP State Trade Expansion Program
is to maintain and strengthen the nation’s STEP is a program that makes matching fund
economy by enabling the establishment and awards to states to help small businesses enter
vitality of small businesses and by assisting in and succeed in the internal marketplace.
the economic recovery of communities after
disasters. TAP Transition Assistance Program
A collaborative program between federal
SBDC Small Business Development Center agencies to assist active duty service members’
SBDCs provide management and technical transition to civilian life through access to
assistance, economic development, and employment workshops and other services.
management training to existing and
prospective small businesses through USEAC U.S. Export Assistance Center
cooperative agreements with universities and USEACs are located nationwide and help firms
colleges and government organizations. grow internationally by assisting in developing
a plan of action with solutions tailored to their
needs.
USSGL The United States Standard General Ledger
USSGL provides a uniform chart of accounts
and technical guidance for standardizing federal
agency accounting.

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VBOC Veterans Business Outreach Center
VBOCs provide entrepreneurial development
services such as business training, counseling
and mentoring, and referrals for eligible
veterans owning or considering starting a small
business.
WBC Women’s Business Center
WBCs provide long-term training and advising
to women who own or manage a business,
including financial, management, marketing,
and technical assistance and procurement.
WOSB Women-Owned Small Businesses
The WOSB program allows federal agencies to
set aside certain contracts for competition only
among small businesses owned and controlled
by women.
WOSBP Women-Owned Small Business Federal
Contracting Program
The WOSB Federal Contracting Program
supports women-owned small businesses
competing for federal contracts.

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APPENDIX 3 – OIG AUDIT FOLLOW-UP ACTIVITY
Throughout the year, the Office of Inspector General conducts audits of the SBA’s processes, procedures, and programs
and makes recommendations for improvement. Many of these recommendations are not material, relative to their dollar
impact on the SBA’s financial and administrative operation but are beneficial to SBA management. If SBA management
disagrees with an OIG recommendation, the OIG may revise the recommendation or refer the issue to a higher level of
SBA management. When both SBA management and the OIG agree on the recommendation, SBA management develops a
corrective action plan, including a target date for completion. This recommendation is identified as having a “Management
Decision.” When the corrective action plan is implemented and the recommendation has been fully addressed, the
recommendation is identified as having a “Final Action.”

The OCFO maintains a database to track the recommendations to conclusion or Final Action. In FY 2019, there were 99
Final Actions resulting from 12 monetary and 87 non-monetary recommendations.

The following tables depict the SBA’s Final Action activity for FY 2019 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, 2018 – September 30, 2019
Number of Disallowed Costs
Recommendations (Rounded to Thousands)
A. Recommendations with management decisions on which final action had not been taken at the beginning
19 $321,846
of the period.
B. Recommendations on which management decisions were made during the period. 11 $14,833
C. Total recommendations pending final action during period. 30 $336,679
D. Recommendations on which final action was taken during the period.

1. Recoveries:

(a) Collections and Offsets 5 $408
(b) Property
(c) Other 4 $80,691
2. Write-Offs 3 $18,818
3. Total 12 $99,917
E. Recommendations needing final action at the end of the period. 18 $236,762

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TABLE II: Final Action on Audit Recommendations with Funds Put to Better Use
October 1, 2018 – September 30, 2019
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 taken at the
0 $0
beginning of the period.
B. Recommendations on which management decisions were made during the period. 0 $0
C. Total recommendations pending final action during period. 0 $0
D. Recommendations on which final action was taken during the period.
1. Value of recommendations implemented (completed). 0 $0
2. Value of recommendations that management concluded should not or could not be
implemented or 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, 2019

Report #13-01, Audit of SBA’s Section 8(a) Program’s Use of Internal Revenue Service Tax Verification Form 4506T
Program: OGCBD
Date Issued: 10/4/12
Management Decision Date: 3/11/13
Explanation: The four recommendations to the Office of Government Contracting and Business Development (OGCBD) 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 advising
the OIG of discrepancies. The OGCBD 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 FY 2018. These recommendations were evaluated under the audit resolution process and the Audit Follow-up Official rendered decisions for
each of the remaining open recommendations in FY 2019. The OIG reevaluated the recommendations and provided the proposed management actions to the Office
of Continuous Operation and Risk Management (OCORM) and the OGCBD on September 26, 2019. The OGCBD is developing a response for the OIG’s consideration.
The estimated completion date will be determined once management decisions are made.

Report #13-06i, Audit of SBA’s Section 8(a) Annual Review
Program: OGCBD
Date Issued: 11/13/12
Management Decision Date: 3/11/13
Explanation: The two recommendations to OGCBD require that SOP 80 05 3 be revised to extend time for annual reviews, subject firms to termination if information
is not provided, and allow the SBA to place an 8(a) firm in a “decision pending” category during the additional period. The OGCBD and the OIG were unable to reach
an agreement on the recommendations and were referred to the Audit Follow-up Official for resolution in FY 2018. These recommendations were evaluated under the
audit resolution process, and the Audit Follow-up Official rendered decisions for each of the remaining open recommendations in FY 2019. The OIG reevaluated the
recommendations and provided the proposed management actions to the OCORM and the OGCBD on September 26, 2019. The OGCBD is developing a response for
the OIG’s consideration. The estimated completion date will be determined once management decisions are made.

Report # 15-16, Audit of Oversight of Loan Agents
Program: OCA
Date Issued: 9/25/15
Management Decision Date: 9/20/18
Explanation: The one remaining recommendation requires the Office of Capital Access (OCA) to develop benchmarks for contractor performance and requires
the Fiscal Transfer Agent (FTA) to implement appropriate application controls and follow-up procedures with lenders to ensure integrity of the Form 159 database.
The implementation of the resolution actions was delayed due to the ongoing evaluation process for the FTA contract solicitation. The estimated completion date is
1/31/20.

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TABLE III: Final Action on Audit Recommendations Not Completed within One Year
As of September 30, 2019

Report # 17-19, Audit of SBA’s Microloan Program
Program: OCA
Date Issued: 9/28/17
Management Decision Date: 1/4/18
Questioned Cost: $137,199,806
Explanation: The two remaining recommendations to the OCA require 1) continued efforts to improve the information system to effectively monitor the program’s
compliance, performance, and integrity; and 2) updates to the reporting system manual to reflect current technology capabilities. Final action has been delayed as it
requires development of detailed requirements on system enhancements, which include outreach to external and internal microlending stakeholders. In addition, the
implementation of integrating microlending oversight into the Office of Credit Risk Management infrastructure takes more than a segregated approach to microloan
performance oversight. These system and oversight enhancements are anticipated to elevate microlending to the same successful platforms as 7(a) and 504 loan
programs. The estimated completion date is 3/31/20.

Report # 18-03, FY 2017 Financial Statement Audit
Program: OCA
Date Issued: 11/14/17
Management Decision Date: 1/10/18
Explanation: The one remaining recommendation requires the OCA to monitor and perform procedures over the service organization’s attestation report regarding
user control considerations on an annual basis. The implementation of the assessment process was delayed due to the ongoing evaluation process for the FTA contract
solicitation. The estimated completion date is 3/31/20.

Report # 18-07, Accuracy of the FY 2015 7(a) Loan Guaranty Purchase Improper Payments Rate
Program: OCA
Date Issued: 12/11/17
Management Decision Date: 1/3/18
Questioned Cost: $1,903,213
Explanation: The one remaining recommendation requires that a lender bring a loan into compliance or that the Office of Financial Program Operations (OFPO) seek
recovery of the guaranty paid by the SBA. Complex legal and financial issues have delayed the resolution of this issue. The OFPO has been granted an extension from
the OIG to allow collection on the guaranty. The estimated completion date is 11/30/19.

Report # 18-13, Evaluation of SBA 7(a) Loans Made to Poultry Farmers
Program: OCA
Date Issued: 3/6/18
Management Decision Date: 3/1/18
Explanation: The one remaining recommendation requires the Office of Financial Assistance to review the arrangements between integrators and growers under the
revised regulations and establish and implement controls, such as supplemental guidance, to ensure SBA loan specialists and lenders make appropriate affiliation
determinations. The SBA published a proposed rule titled, “Express Loan Program; Affiliation Standards,” in the Federal Register for public comment on September 28,
2018, which included proposals to modify regulations to clarify the meaning of affiliation in the context of contractual relationships. The SBA reviewed and considered
comments and drafted the final rule. As a significant rule, the OMB is currently reviewing the draft final rule. Once the final rule is published, this recommendation will be
closed. The estimated completion date is 3/30/20.

144 AGENCY FINANCIAL REPORT  FY 2019

APPE ND I CE S

TABLE III: Final Action on Audit Recommendations Not Completed within One Year
As of September 30, 2019

Report # 18-18, Audit of SBA’s Women-Owned Small Business Federal Contracting Program
Program: OGCBD
Date Issued: 6/20/18
Management Decision Date: 9/28/18
Explanation: The three remaining recommendations require the OGCBD to 1) implement a Women-Owned Small Business (WOSB) Federal Contracting Program
certification process as required by the National Defense Authorization Act for FY 2015, 2) conduct quarterly reviews of Federal Procurement Data System – Next
Generation (FPDS-NG) data from program set-aside contracts to ensure federal agencies’ contracting officers used the appropriate NAICS codes and take the
necessary actions with identified exceptions, and 3) in coordination with the Office of Federal Procurement Policy and General Services Administration (GSA),
strengthen controls in the FPDS-NG to prevent federal agencies’ contracting officers from using ineligible NAICS codes. As noted in the OIG’s recent “Report on
the Most Serious Management and Performance Challenges Facing the Small Business Administration in Fiscal Year 2020,” the OGCBD made substantial progress
in FY 2019 toward implementing a WOSB certification program. This year, the OGCBD closed two recommendations from this report. For the remaining open
recommendations, the OGCBD has consulted with the OIG on the infeasibility of leveraging FPDS-NG for the purpose of preventing contracting officers from using
ineligible NAICS. Rather, the system where such a notice may be effective is FedBizOps (FBO). The SBA consulted with the GSA multiple times in FY 2019 to request
and enact a change in FBO. The GSA has reported that FBO is undergoing significant modification and the change will not be implemented until the update is
complete. Concurrently, the OGCBD focused on appropriate NAICS code usage by conducting analysis of WOSB awards made to identify the number of ineligible
NAICS codes used by federal agencies and provided ongoing training about WOSB NAICS usage during surveillance reviews. The estimated implementation date of
the WOSB certification program is 6/30/20.

Report # 18-21, Audit of High Risk 7(a) Loans
Program: OCA
Date Issued: 8/15/18
Management Decision Date: 8/7/18
Questioned Costs: $799,159 and $552,406
Explanation: The two remaining recommendations require two lenders to bring the loans into compliance or that the OFPO seek recovery of the guaranty paid by the
SBA. Complex legal and financial issues have delayed the resolution of the issues. The OFPO has been granted an extension from the OIG to allow collection on the
guaranties. The estimated completion dates are 11/30/19 for both recommendations.

Report # 18-22, Audit of SBA’s of 8(a) Continuing Eligibility Process
Program: OGCBD
Date Issued: 9/7/18
Management Decision Date: 9/7/18
Explanation: The four remaining recommendations require the OGCBD to 1) develop and implement a centralized process to track and document all adverse actions
and voluntary withdrawals from the 8(a) program, from recommendation through resolution, 2) conduct continuing eligibility reviews for the active 8(a) firms identified
as ineligible and take timely action to remove firms found to be ineligible, 3) develop a robust system for tracking complaints regarding firms’ continuing eligibility for
the 8(a) program and tracking actions taken to address the complaint, and 4) conduct continuing eligibility reviews, including assessing the allegations in the 77 OIG
Hotline complaints for active 8(a) program firms and take action to remove ineligible firms from the program. In FY 2019, the 8(a) program made substantial progress
in addressing the remaining open recommendations from this report. The OGCBD closed two recommendations from this report. The OGCBD submitted a request for
closure to the OIG for three additional recommendations in September and October 2019. The estimated completion date for the last remaining recommendation is
12/30/19.

Report # 18-23, Audit of a High Risk 7(a) Loan
Program: OCA
Date Issued: 9/13/18
Management Decision Date: 9/20/18
Questioned Costs: $448,287 and $855,116
Explanation: The two remaining recommendations require two lenders to bring the loans into compliance or that the OFPO seek recovery of the guaranty paid by the
SBA. Complex legal and financial issues have delayed the resolution of these issues. The OFPO has been granted an extension from the OIG to allow collection on the
guaranties. The estimated completion dates are 11/30/19 for both recommendations.

AGENCY FINANCIAL REPORT  FY 2019
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A P P E ND I C E S

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146 AGENCY FINANCIAL REPORT  FY 2019

ACKNOWLEDGMENTS
This Agency Financial Report was produced with the energies and talents of the SBA staff. To all these
dedicated individuals listed below, and those not listed, the Office of Performance Management and the Chief
Financial Officer would like to offer sincere thanks and acknowledgment.

Melissa Atwood Leslie Godsey Andrea Peoples
Lola Bailey Linda Grabe Trevor Postlethwaite
Tolu Bamwo Kathleen Graber Janette Porter
Rory Berges Blake Hoing Steve Ramey
Rachel Beasley Scott Holland Nathaniel Reboja
Brittany Borg Emily Knickerbocker Dorrice Roth
Jason Bossie Prasad Kotiswaran Marjorie Rudinsky
Kay Chae Charu Krishnan AnnMarie Schaef
Martin Conrey Stephanie Kroll Charles Senseney
Sean Crean Terell Lasane Michael Simmons
Jeffrey Davis Maureen Moore-Vellucci Deron Smallwood
Tamara Dollarhite Mathew Pascarella Scott Stilmar
Kate Duffy Tony Paul Yvonne Walters
Krzysztof Fizyta 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 2019 Financial Statements. We offer our special thanks to Schatz
Publishing Group and Omnidigital Studio, Inc. for contributions in producing this report.

CERTIFICATE OF EXCELLENCE IN
ACCOUNTABILITY REPORTING
For the past 13 years, FY 2006 to FY 2018, the U.S. Small
Business Administration is proud to have received the
prestigious Certificate of Excellence in Accountability
Reporting award from the Association of Government
Accountants for its Agency Financial Report. The CEAR
program was established by the AGA in conjunction with the
Chief Financial Officers Council. The award recognizes high-
quality Performance and Accountability Reports and Annual
Financial Reports that effectively illustrate and assess
financial and program performance, accomplishments and
challenges, and cost and accountability.

The SBA is also the proud recipient of six CEAR Special/Best-in-class awards:
2018 — Presentation of Financial Statements Highlights and Results
2017 — Best Overall Quality (Editorial Excellence/Well Written)
2016 — Presentation of Performance
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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