A report released last week by the Government Accountability Office found that the Small Business Administration has inadequate measures for preventing fraud and abuse by firms seeking government contracts through the agency's programs (PDF). The weak oversight resulted in $325 million in contracts being awarded to firms that should have been ineligible, according to the report.
Firms applying for certification in the SBA's 8(a) program must have owners who are socially and economically disadvantaged, with a net worth below a certain level. The GAO found that some business owners underreported their assets or misrepresented their ethnicity to the SBA in order to qualify. One firm was an IT consulting company whose president also owns a "$2.5 million house on a private island in Miami, FL, a $450,000 yacht, and a $200,000 Lamborghini." That firm received $12.6 million in contracts from the Departments of Agriculture, Interior, Transportation and Veterans Affairs.
The Government Accountability Office even created fictitious firms and submitted those applications to the SBA for certification in the 8(a) program. One of those bogus firms, according to the report, received certification after a five-month review. While the agency did request that the bogus firm "submit substantial documentation," it did not do enough independent verification to find out that the information submitted was false and that the firm did not actually exist.
"SBA staff responsible for annually assessing the eligibility of participants were not actively looking for fraud and abuse in the program," according to the report. Even when problems are discovered, the agency lacks "consistent enforcement strategy or any real consequences for fraud and abuse."
This is certainly not the first time the SBA has come under fire for letting fraud or abuse slip through. Problems have persisted, with contractors gaming the system through "pass-through" arrangements, in which money is awarded to a contractor in the program and then funneled through to ineligible contractors. As we reported last fall, the Defense Department is investigating whether firms that received more than $700 million in contracts were all controlled by the same businessmen. Despite the investigation, six of those firms went on to receive 112 stimulus projects, worth nearly $30 million. Last fall, the GAO also found fraud in the agency's program for small businesses owned by service-disabled veterans.
The Small Business Administration, in response to the latest report, agreed to implement several reforms, promising to re-evaluate current fraud detection tools and "re-emphasize the requirement to conduct unannounced site visits" in determining program eligibility.