SBA Administrator Hector Barreto said there is no widespread fraud by large businesses claiming to be small in order to receive set-aside contracts.

A study for SBA's Office of Advocacy found that at least $2 billion in contract awards credited to small businesses in 2002 actually went to large businesses or other entities such as nonprofits and universities. (SAA, 1/7)

Under questioning before the House Small Business Committee Feb. 10, Barreto cited two primary reasons for the erroneous reporting: a company was small when it received a contract, but outgrew its size standard during the life of the contract; or the small company was acquired by a large one.

"Those are the reasons, not that there are large businesses on a wholesale basis that are misrepresenting their size and taking contracts away from small business," he said.

"You are being dishonest," retorted the committee's ranking Democrat, Rep. Nydia Velazquez (NY).

Chairman Donald Manzullo (R-IL) cut her off, banging his gavel and saying, "You don't call the administrator dishonest."

The Advocacy study followed a larger one released last fall by the Center for Public Integrity, a watchdog group. It found that more than half of the top 100 defense contractors received contracts with small-business designations over the last six years. (SAA, 10/8/04) The Government Accountability Office reported similar findings in 2003.

The mistaken reporting of contract awards artificially inflates small businesses' share of the federal market. According to the Advocacy study, the contracts awarded to large firms but credited to small ones accounted for 4% of all small-business awards in 2002.

The ranking Democrat on the Senate Small Business Committee, Sen. John Kerry (D-MA), has called for an audit of small-business procurement records for other years.

Federal acquisition officials have blamed the errors on loopholes like those cited by Barreto and on data-entry errors in the Federal Procurement Data System, the official source of procurement statistics.

But Lloyd Chapman, president of the American Small Business League in Petaluma, CA, insists that some large companies are fraudulently claiming small-business status. Chapman has asked a San Francisco federal court to order the Office of Advocacy to release the original draft of its study, which he says contains allegations of fraud that were dropped from the final version.

SBA says it has already moved to close one of the loopholes by requiring a company to recertify its small-business eligibility on all its contracts if it merges or is acquired. The recertification does not affect the status of the contract, but allows the agency to determine whether the contract should still be counted toward small business goals.

Small-business groups are taking aim at the SBA for failing to ensure procurement opportunities. Two lawsuits were filed late last year arguing that the SBA has refused to implement a congressionally dictated women's procurement set-aside program and to release an internal study showing widespread fraud in procurement programs.

The U.S. Women's Chamber of Commerce filed a complaint in the U.S. District Court to force the SBA to implement the Women's Procurement Program. It was included in the SBA's 2000 reauthorization passed by Congress and told the SBA to set aside contracts for businesses in industries underrepresented by women-owned businesses. "We have heard from thousands of members that their ability to gain access to contracts has been harmed by the delay in implementing this mandate," says Margot Dorfman, CEO for the Women's Chamber.

The SBA's Raul Cisneros points to an agency press release stating that women-owned businesses received $1.5 billion more in federal prime contracts in fiscal 2003 than in 2002. That came to 2.98 percent of all federal contract dollars. But Dorfman says that Congress set a goal 10 years ago of 5 percent, which has never been reached. That failure prompted Congress to pass the 2000 amendment.

It's not just women who are complaining, though. The American Small Business League (ASBL) says the SBA is illegally withholding an internal report that shows the lib set-aside program is rife with fraud. "We believe that the SBA covering up the problem by keeping the report under wraps," says ASBL president Lloyd Chapman. The ASBL law-suit attempts to overturn the SBA's rejection of a Freedom of Information Act request on details of the study.

Cisneros argues the report sought by ASBL is only a draft. It has not been finalized, he says, so it can't be released.

STEPHEN BARLAS is a freelance business reporter who covers the Washington beat for 15 magazines.

Small-business advocates have suspected for awhile that some contracting dollars intended for small firms go to large companies. Now, they have the evidence to prove it.

Small Business Administration officials have released a 2004 report showing that $2 billion of the $50.8 billion earmarked for small businesses in fiscal 2002 did not get to them.

The study, conducted by Eagle Eye Publishers, found that of the top 1,000 small businesses receiving federal contracts in 2002, 44 were actually not small businesses. Thirty-nine were large businesses, while five were nonprofit organizations, government entities or other organizations.

The SBA study comes on the heels of an earlier report from the Center for Public Integrity that showed about 30 percent of the contracting money that supposedly went to small firms through Defense Department contracts during a six-year period ended up in the coffers of large companies. The SBA study has caught the attention of agency officials and members of Congress.

"We now have hard data and not just anecdotes from across federal agencies," said Thomas Sullivan, chief counsel at SBA's Office of Advocacy. "What's needed is more transparency in the contracting system and timely public access to user-friendly procurement data so that mistakes and other problems can quickly be corrected."

The report's authors refrain from suggesting that large companies are intentionally defrauding the government by taking small-business contracts. However, they discuss loopholes in the small-business rules – some of which have since been closed or tightened – that allowed companies to continue operating as small firms for some time after larger companies acquired them or they outgrew their small status.

"We were very careful not to point any fingers," said Chad Moutray, chief economist at the Office of Advocacy. "That's not the job of this office. As far as we're concerned, no one did anything wrong."

Rep. Nydia Velazquez (D-N.Y.), ranking Democrat on the Small Business Committee, said the SBA report shows that small businesses are not getting the full benefit of programs designed to aid them.

"The [Office of] Advocacy report only confirms what Democrats on the Small Business Committee have been saying," she said. "Federal agencies are taking credit for awarding small businesses with contracts when, in fact, they were going to large businesses. Opportunities [for small businesses] are dropping, and the federal government has no credible ability to monitor the level of federal contracting dollars going to small businesses."

The need for accurate small-business data goes beyond simply ensuring that the small firms get a fair deal, said procurement lawyer David Nadler, a partner at Dickstein Shapiro Morin & Oshinsky. "It also misleads Congress," he said. "Congress makes appropriations based on that information."

Small businesses suffer

Although the $2 billion figure that Eagle Eye analysts reported may not seem like much when compared to the total of $50 billion, it could mean a lot to small companies, said some small-business owners.

"In real dollars, that's a lot of jobs and a lot of opportunity that's being missed," said John Moliere, president of a small business called Standard Communications.

Simple miscoding is not the worst problem that small businesses face, he added. Too often, agency officials choosing prime contractors or primes looking for subcontractors see the government's small-business goals as a nuisance.

"They use our capability, they check off the box, and they go forward and ignore small business in general," Moliere said. Although situations such as that do not qualify as miscoded expenditures, they still limit chances for small businesses to succeed, he said.

Lloyd Chapman, president of the American Small Business League, said he believes many large companies are guilty of fraud, and the report SBA officials released ignores the issue. Chapman's group has filed a lawsuit demanding that SBA officials release more information.

The results shown in the report were not surprising, he said. "I've always known this," he said. "I've been telling people this for a decade. Now, there's irrefutable proof that we've been right. It's going to help convince Congress and the media."

SBA officials are wrong to assume that cases of sidetracked small-business contracting funds are honest mistakes, Chapman said. "It's ridiculous for the SBA to stick their head in the sand and try to pretend," he said. "I think that's irresponsible and not policing the situation. In fact, I would say they're encouraging it."

He said no new laws are needed, but officials must enforce existing laws, including the elements of the Small Business Act that set penalties for companies misrepresenting themselves as small businesses.

"The law is dependent on the integrity of the administration," he said. "Small business should not have to look at legal remedies, but we're having to do that."

Study limited in scope

Paul Murphy, president of Eagle Eye, said his analysts were not always able to determine how a particular transaction was coded incorrectly. In many cases, former small businesses acquired by larger firms carry the name of the larger firm.

In such cases, "we couldn't tell if it was a company they bought and renamed, or if it got miscoded from the start," he said. "The data doesn't reveal that level of insight."

His letter to the
Honorable Harold Damelin, Inspector general of the SBA
Kerry's complete letter (pdf document)

His letter to the
Honorable Hector V. Barreto, Administrator of the SBA
Kerry's complete letter (pdf document)