I wrote last year about concerns associated with the growing number of federal outsourcing contracts during the Bush administration and the government’s apparently lax oversight of those contracts.

Oversight appears to be an especially big issue for the Small Business Administration. The agency’s HUBZone program, which is supposed to award government contracts to SMBs in economically disadvantaged areas, is at the center of a controversy following the release of a Government Accounting Office report that highlighted a number of problems.

After determining six out of 10 of the Washington, D.C.-area companies it examined failed to meet the program’s goals but nonetheless were collectively awarded more than $100 million in HUBZone contracts, the GAO set up four fictitious SMBs. All were readily accepted into the HUBZone program, despite the fact that one listed a Starbucks outlet as its headquarters and another submitted forged documents to the SBA, according to a report on AllBusiness.

Problems were also discovered in a separate investigation by the Department of the Interior’s Office of Inspector General, which found that Fortune 500 companies like Home Depot and John Deere had wrongfully been awarded DOI contracts intended for SMBs. The DOI attributed the mistakes to “incorrect coding, data entry mistakes, or insufficient verification of business size” and said such errors accounted for $1.03 million, or 0.06 percent of the total $1.6 billion such contracts awarded in fiscal 2007.

Yet the American Small Business League believes the problem is much more widespread than the DOI’s report indicates. After reviewing the top 100 recipients of DOI small business contracts for fiscal years 2006 and 2007, the ABSL said that 22 large companies received more than $200 million in federal small business contracts in 2006 and 28 large companies got more than $230 million in such contracts in 2007.

Says ASBL President Lloyd Chapman:

The Bush administration has tried to convince us for six years now that the diversion of hundreds of billions of dollars in federal small business contracts to Fortune 500 firms is the result of ‘miscoding’ or random data entry errors. It is simply not believable that for over six years every time a contract is “miscoded” it just happens to inflate the Bush administration’s small business contracting statistics.

Source:  http://www.itbusinessedge.com/blogs/sbp/?p=315

“Faith-based contracting” doesn’t bring out the best in people. In those situations, “we sit back and hope and pray the company we’re doing business with isn’t ripping us off too badly,” said Bruce Causseaux, a senior-level specialist for forensic audits and special investigations at the Government Accountability Office.

Causseaux said the Small Business Administration appears to be taking that approach with its Historically Underutilized Business Zone program, which is designed to provide federal contracting opportunities to businesses in low-income areas.

During a recent investigation, GAO auditors found numerous examples of ineligible companies being accepted into the HUBZone program.

For example, they uncovered at least 10 small businesses in the Washington, D.C., metropolitan area that have been certified, but don’t belong in the HUBZone program. Since 2006, agencies have obligated more than $105 million to those firms for work as prime contractors on federal contracts, according to GAO.
Investigators also ran a sting operation in which they got SBA to certify four fake companies as HUBZone firms.

Beyond their concerns about companies cheating, GAO officials are alarmed that SBA doesn’t make more effort to verify applicants’ eligibility. Investigators used simple data-mining technology to uncover the 10 Washington companies.

“Any system that’s predicated on self-certified information with verification and validation is highly susceptible to fraud, particularly when millions — if not billions — of federal dollars are at stake,” Causseaux said.

Easy scams

To qualify for the program, a small business must certify that the office where the majority of its employees work is located in an SBA-designated HUBZone and that at least 35 percent of the firm’s employees live in a HUBZone.

But investigators said ineligible applicants can simply rent mailboxes or set up virtual offices in HUBZones, as GAO did for its investigation. For one of GAO’s fake companies, officials used the address of a Starbucks coffee shop.

“If SBA had performed a simple Internet search on the address, it would have been alerted to this fact,” said Gregory Kutz, managing director of forensic audits and special investigations at GAO.

After officials turned in the bogus companies’ applications for certification, SBA officials contacted them to resolve minor discrepancies. They asked no in-depth questions and didn’t check on the addresses. In as little as two weeks, SBA sent congratulatory letters approving the applications, according to GAO.

Jovita Carranza, SBA’s acting administrator, told the House Small Business Committee on July 17 that SBA officials discovered the problems earlier this year when they sought to answer a question from Congress.

Lawmakers had asked whether a specific area qualified as a HUBZone. Initially, the program’s managers said it did. Days later, after further review, they determined that the area did not qualify as a HUBZone. When senior managers attempted to determine how the mistake had occurred, Carranza said they discovered that the map of HUBZone-qualified areas hadn’t been updated in a year and half.
Causseaux and Kutz blamed SBA’s poor program management.

Carranza said a combination of factors led to the problems. Rather than visiting applicant offices and collecting information, as SBA rules require, agency employees relied on automated systems to gather information and paid little attention to details about the data. Managers also took self-certified information from applicants at face value, even though data was insufficient, she said.

She added that the program didn’t adequately verify and validate companies’ information, which allowed loopholes and ultim tely fraud.

Reforms will lead to suspensions and debarments, particularly for the 10 fraudulent companies in Washington, Carranza said.

Until recently, such deterrents were ineffective because no one was afraid of getting caught and facing prosecution, Causseaux said.

“In many cases, they said, ‘This is how the game is played,’ ” he said. “‘It’s easy to get in the program, there’s lots of money that’s out there, and no one is going to come after me.’”

“Until people start going to prison for violating the law, nothing is going to happen,” said Lloyd Chapman, president of the American Small Business League. “We have seen people commit willful and intentional felony contracting fraud, and yet no punishments have been levied against the offending parties.”

Carranza said she is requiring site visits for firms that have received HUBZone contracts. Officials also intend to make better use of tools such as Google Earth to check business locations. Also, SBA will institute suspension and debarment proceedings against firms that have intentionally lied about their status.

“We take very seriously the responsibility to ensure that the federal government’s contracting partners are trustworthy,” Carranza said. “Deterrence is more effective than detection, but deterrence only works when participants know there are serious consequences for malfeasance.”

To help fix the program, SBA hired more employees to assist in clearing the backlog of more than 4,000 HUBZone business recertifications by the end of fiscal 2008, she said.

SBA officials plan to issue an updated HUBZone map by Aug. 29. They also drafted an application processing manual, which gives instructions for collecting supporting documentation from applicants.
Rep. Nydia Velázquez (D-N.Y.), chairwoman of the Small Business Committee, noted that the House has passed legislation to require SBA to do more detailed checks on HUBZone applications.

The Small Business Contracting Program Improvements Act (H.R. 3867) would require on-site visits to a HUBZone-certified small business before it’s awarded a second contract. The House passed the bill in October, but the Senate has not acted on its version of the legislation.

Velázquez said entrepreneurs looking for an honest break into federal contracting have been pushed to the margin while countless unqualified companies have been awarded millions of dollars in government contracts.

“It’s tougher to get a library card than it is to get into the HUBZone program,” she said.  

WASHINGTON — Two government reports have uncovered millions of dollars in federal contracts that were supposed to go to small businesses but instead were awarded to companies that had not qualified or had obtained the contracts fraudulently.

In one report, the inspector general for the Interior Department found that contracts listed as going to small businesses went to a dozen Fortune 500 corporations, including the Xerox Corporation and the John Deere Company.

The report, based on a sampling of the department’s small business contract awards in fiscal years 2006 and 2007, uncovered no fraud but found that large businesses received the contracts because of data entry errors, incorrect data and failure by contracting officials to verify the actual size of the business.

The report also said that in several cases, corporations appeared to have misrepresented themselves as small businesses on the federal contractor data base.

Xerox and John Deere said they were moving to correct those errors, and Senator John F. Kerry, the Massachusetts Democrat who heads the Senate Committee on Small Business and Entrepreneurship, called for all federal agencies to audit their small business contracting practices.

The second report, by the Government Accountability Office, found that numerous private firms had tapped into the Small Business Administration’s set-aside program for small businesses in economically distressed areas by falsely claiming they were located in a Historically Underutilized Business Zone, or HUBZone.

Ten randomly selected companies in the Washington area, according to the agency, had set up virtual offices or rented mail boxes in poor communities solely to obtain a HUBZone business address. Over two years, those companies and others won more than $100 million in HUBZone contracts, according to the report presented to the House Committee on Small Business last week.

“You have to wonder about a system that lets individuals self-qualify for a program of this size,” said Nydia M. Velazquez, the New York Democrat who heads the committee.

In response, the S.B.A. released a statement that outlined the steps it planned to take to correct the problems and verify that companies are eligible.

Officials at the Interior Department said the inspector general’s report uncovered only $5.7 million in misdirected contracts. That was a small fraction of the agency’s overall small business contract awards, which totaled $1.39 billion in fiscal year 2006 and $1.6 billion in fiscal year 2007.

But Earl E. Devaney, the department’s inspector general, said what his audit team uncovered “was the tip of the iceberg” because it was based on a review of three-tenths of a percent of contracts from a cross-section of offices — ranging from Indian affairs to surface mining — in the huge department.

“These are not just clerical mistakes that can be tagged on two little clerks,” Mr. Devaney said. “This is not one single report, but our fourth in the contracting area.”

P. Lynn Scarlett, the Interior Department’s deputy secretary, said the department was “working to correct these issues.” Her office did not return further calls, and her statement was included in a response to the report by the S.B.A., which also monitors how well the federal government meets its small business contracting goals.

Congress has required that 23 percent of all federal contracts, which total more than $400 billion annually, be set aside for small businesses. Agencies are required to state whether they have met their annual contracting goals. But several inquiries, including one by the G.A.O. in 2003, have raised questions about the accuracy of the S.B.A.’s reporting.

The inspector general’s report “is the latest maddening evidence that big businesses are being handed federal contracts that should be going to small businesses,” Mr. Kerry said. He added that he would “be sending letters to every federal agency asking them to audit their small business contracts and report back to the committee.”

Steven C. Preston, the former administrator of the agency, adopted rules last year that small businesses recertify their size when they merge with a larger business or are at the five-year point in a contract.

The American Small Business League, a small business association, said the problems with small business contracts went far deeper than even the inspector general found. The league’s president, Lloyd Chapman, said large companies were getting the contracts not simply because of errors but because of “the intentional diversion of federal small business contract dollars to Fortune 500 firms.”

Two years ago, the Interior Department said it had awarded more than 55 percent of its contract dollars to small businesses. But the inspector general’s evaluation said that contracting officers acknowledged that some of the companies were not small and “were incorrectly coded as small.”

One of the companies cited, John Deere, won more than $617,000 in small business contracts from the Interior Department in 2006 and 2007. The company, with 52,000 employees and revenue nearing $23 billion last year, said that it was moving to correct the errors in the government database that listed it as having $2 million in annual revenue and under 500 employees. The government defines a small business as one with fewer than 500 employees.

“A marketing unit of Deere had correctly listed the number of employees in that small business unit on a government form, and this number has been used by government agencies to define the entire Deere enterprise as a small business,” said Ken Golden, a company spokesman.

The Interior Department report also found that contracting officers “failed to consistently check” the central contractors registry to determine the company’s true size.

A spokesman for Xerox, William McKee, said the company’s review of the central registry revealed “several errors where business size was entered incorrectly” from such agents, and said the company was going to correct the mistaken data.

“Xerox is not a small business, and has never attempted to portray itself as one,” he said.

Source:  http://www.nytimes.com