SBA Faces Credibility Gap Over SMB Contracting
By Keith Girard
July 24, 2008
Capitol Hill’s two top lawmakers on small business have lashed out at President Bush for lapses at the Small Business Administration that exposed the agency to widespread fraud. The reaction was the latest fallout from two reports released over the past two weeks revealing startling shortcomings in the SBA’s oversight of government contracts.
Mismanagement of small business contracting programs has been a sore spot at the SBA for more than five years. Over that time, numerous reports have revealed that billions of dollars a year end up in the hands of large well known corporations. But the SBA has tended to minimize or deny the problem. Outgoing administrator Steven Preston even called it a myth. The latest reports, however, show a clear credibility gap at the agency.
The SBA compounded lawmakers’ frustrations -- and its own embarrassment -- when it issued a press release July 10 dismissing the findings of one report, only to issue a "clarification" later the same day, acknowledging the report’s conclusions. "Sorry for the confusion, folks, but our calculations were based on an incorrect assumption, and we wanted to fix it," SBA spokesman Mike Stamler wrote when he distributed the revised release.
The Democrats’ remarks came at the opening of a committee hearing last Thursday (July 17) into the SBA’s troubled HUBZone program. The hearing focused on a new Government Accountability Office (GAO) investigation that found widespread lapses in SBA monitoring and accountability, leaving the program vulnerable to fraud. Allbusiness.com was one of the first news organizations to reveal the investigation’s findings.
"During the past eight years, the Bush administration has missed every single one of its small business goals. In 2005 alone, entrepreneurs lost $4.5 billion in contracting opportunities," said House Small Business Committee Chairman Nadia Velazquez said in an uncharacteristically harsh statement,
In the Senate, Small Business committee Chairman John Kerry, D-Mass., was equally critical of the administration. "This latest report adds to the pile of evidence that the administration has failed to conduct adequate oversight of small business programs," he said.
The program is supposed to provide contract opportunities to companies that locate in economically distressed areas and employ local residents. But the GAO found that six of the 10 Washington, D.C., area companies it examined failed to meet goals. Yet collectively, they had received more than $100 million in federal HUBZone contracts.
To test the SBA’s oversight, the GAO set up four fictitious companies and easily won program certification for all of them. One of the companies listed a local Starbucks coffee shop as its headquarters. In one instance, the GAO submitted forged documents to meet program requirements. The SBA accepted them without question and never conducted follow-ups or site visits on any of the companies.
The GAO report came on the heels of yet another investigation into small business programs by the federal Department of Interior. The agency’s Office of Inspector General found that some of the nation’s top Fortune 500 companies, from Home Depot and John Deere to Weyerhaeuser and Waste Management, had raked in millions of dollars in DOI small business contracts over the past two years.
The report identified just $1.03 million in misdirected contracts and placed a large part of the blame on contracting officers who "consistently" failed to verify business size. The agency’s reaction to the report was all too typical of the Bush administration’s arrogance and dismissive attitude when it comes to shortcomings at the SBA.
Deputy Secretary of the Interior Lynn Scarlett noted that the amount identified in the report totaled just 0.06 percent of the $1.6 billion in Interior small business contracts for fiscal 2007. She attributed the discrepancy to "incorrect coding, data entry mistakes or insufficient verification of business size." In short, she blamed it on clerical errors.
The SBA also tried to minimize the findings. The DOI investigation it said, found only "a miniscule percentage of contracts held by large businesses have been miscoded by contracting officers as having been awarded to small businesses."
"It is also useful to note that the DOI office responsible for identifying waste, fraud and abuse reported none,” added Acting SBA Administrator Jovita Carranza in the same release.
Both statements mis-characterized the nature of the report. Interior’s OIG investigation was only intended to examine a sampling of contracts, not all small business contracts, and it was not conducted to ferret out fraud.
In response to the Interior Department report, the American Small Business League (ASBL) reviewed the top 100 recipients of Interior Department small business contracts for FY2006 and FY2007. It examination was based on data collected by Fedmine.us, which has direct access to federal contract information. ASBL Founder and President Lloyd Chapman has been a long-time critic of lax SBA contracting oversight.
The ASBL said it found that 22 large firms -- mostly Fortune 500 companies -- had received more than $200 million in federal small business contracts in 2006. The following year, 28 large firms received more than $230 million in small business contracts. The awards constituted 26.55 percent of all contract actions awarded to the top 100 for 2007, it noted.
Among the companies receiving small business contracts, a number were obviously ineligible, said Chapman. They included Booz Allen Hamilton, Sprint Communications Company, Perot Systems Government Services and Hewlett Packard Co. among others.
"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," Chapman said.
The administration is in the process of seeking Senate confirmation for a new Small Business administrator. It has nominated Santanu "Sandy" K. Baruah, a career government bureaucrat who currently serves as Assistant Secretary for Economic Development at the Department of Commerce. He takes over from Steve Preston, who has been nominated Secretary of the Department of Housing and Urban Development.
Baruah has never run a company, and his r?sum? suggests limited experience with small businesses, but he does understand government. In order to be confirmed, the Senate should require him to pledge that he will address the SBA’s long-standing contract problems within the first 30 days of taking office. He should also pledge to close the SBA’s "credibility gap," which has grown significantly under the Bush administration and only gotten worse under outgoing administrator Preston.