Alaska is the nation's final frontier, but when it comes to a special loan program for Native American small businesses, the "wild frontier" may be a more apt description.

Over a five-year period, a Small Business Administration loan program specifically tailored for native Alaskans mushroomed in size by more than 277 percent to $1 billion annually with virtually no SBA oversight, according to a new Government Accountability Office (GAO) report.

As a result, more than 77 of the contracts were awarded without competitive bidding. Contractors often changed the terms and loan amounts without the SBA's knowledge and often farmed out work to subcontractors in violation of SBA rules.

"One [SBA] contracting officer commented that he would be 'laughed out of the office' if he brought up the compliance issue as a reason for terminating the contract," the GAO report stated.

In written comments, the SBA claimed that concerns raised in the report were "subjective" and based on isolated anecdotes. "We strongly disagree with SBA's characterization of our report," the GAO countered.

Advocates say they are frustrated by loopholes, errors and fraud that allow access by big businesses.

Responding to a request from Sen. Barbara Boxer (D-Calif.), the Justice Department is examining whether large companies are improperly obtaining government contracts that are supposed to be set aside for small businesses.

After receiving a letter in late September from Boxer, the U.S. attorney's office in Washington assigned a lawyer to determine whether a formal investigation is warranted.

"In some matters, we decide right off the bat that this is not something that falls into our purview," said Channing Phillips, a spokesman for the U.S. attorney's office. "The fact that it's been assigned should suggest that it's more than just a cursory review."

Boxer sent her letter after hearing concerns raised by a small-business advocate who heads a computer resellers group.

"With small businesses in California facing a difficult business environment, it is important that government contracts set aside for small businesses be made available to small businesses," said Boxer in the letter. She asked the U.S. attorney's office to determine whether "certain companies have falsely claimed to qualify as small businesses and won government contracts in violation of law."

Under federal law, a firm can face "severe criminal penalties for knowingly misrepresenting" small-business status in connection with procurement programs, an SBA attorney said.

Small businesses have long complained that loopholes in federal law, sloppy government record keeping and, in some cases, outright fraud result in large corporations getting millions of dollars in federal contracts that Congress meant to go to small businesses.

Updating the Small Business Act, Congress in 1997 decided that federal agencies should strive to spend at least 23% of all federal procurement dollars with small businesses. But large firms often find ways to qualify for those set-asides.

By most any yardstick, Buhrmann Co. would count as a large company. One of the world's leading suppliers of office products, the Amsterdam-based corporation employs 26,000 people in 28 countries and had 2001 revenue of about $10 billion.

Yet in the eyes of the U.S. government, Buhrmann subsidiary ASAP Software can declare itself a small business and win federal contracts accordingly.

"Our employee count is what qualifies us" as a small business, said Harry Zoberman, senior vice president of operations and marketing ASAP Software. The Buffalo Grove, Ill., unit of Buhrmann has 300 employees in the U.S. and an additional 200 workers around the world.

Though the rules can vary, many government contracts consider a company with 500 or fewer employees to be small.

Another company, GovConnection Inc., is listed on a federal database of small companies even though it is a subsidiary of Merrimack, N.H.-based PC Connection Inc.

GovConnection has about 180 employees. But its parent is a holding company with more than 1,300 employees and $1.18 billion in 2001 sales. Nearly $170 million came from federal contracts to GovConnection, the company said.

The Small Business Administration, which determines whether a business is small, sent a letter in July 2001 to PC Connection, saying the company and its wholly owned subsidiary, GovConnection, were too big to be included in the agency's database of small businesses seeking federal contracts.

But as of last week, GovConnection still was listed in the SBA database as a small firm. Gary Sorkin, president of GovConnection, said he did not know why the SBA listing was still there.

Randi Lynn Beach/For The Times

The firm also retains its "small" status with the federal General Services Administration, which acts as a centralized government purchasing organization.

Under GSA rules, a firm awarded a government contract when it is small can retain that status for the life of the accord, no matter how large the company grows in the meantime.

Lloyd Chapman, who heads the Micro Computer Industry Suppliers Assn., the trade group that alerted Boxer to the issue, says the situation is absurd.

"I can't think of anything that's more unfair than forcing legitimate small business to compete with some of the largest companies in the world," said Chapman, who added that his employer, a Novato, Calif.-based computer reseller, recently lost a $50,000-contract to GovConnection. "You're cheating the legitimate small businesses out of the opportunity that Congress meant for them to have."

In response to critics, the GSA plans to require firms to recertify that they are still small when their contracts come up for renewal, which at the most is every five years. Failure to do so could lead to exclusion from federal contracting, according to Boyd Rutherford, the GSA's associate administrator for the office of enterprise development.

Rutherford said the Office of Management and Budget is looking at enacting similar changes for all federal agencies.

"When a lot of these programs were set up, they did not envision some of the long-term contracts that we have now," he said.

Even with the increased government scrutiny of the problem, Chapman is skeptical that any substantive change will come soon. He has been trying to prompt reforms, he said, for 17 years.

"It's heartbreaking to watch a legitimate small business go down the tubes trying to compete against these international companies and these Fortune 500 companies," Chapman said. "This is not sour grapes. This is a system that needs to be changed."

Buried in the laundry list of misconduct claims against the General Services Administration is further evidence of what at least one federal official and one trade group call a critical problem for small employers: improper contracting that diverts government spending to large corporations instead of small businesses.

The GSA inspector general’s report, which blasts the agency for excessive spending on clowns, mind readers and lavish parties during a training conference just outside Las Vegas, claims that officials awarded a $58,808 contract to a large audio and visual services firm when federal regulations require contracts of such size be reserved for small businesses.

The inspector general also said the agency violated federal rules by neglecting to publish a solicitation for the contract on the government’s list of Federal Business Opportunities and by providing Royal Productions with a competing bidder’s quote — thus allowing the company to present a winning offer. Subsequently, the agency paid roughly double what the contract outlined for the company’s employees’ hotel rooms, according to the report.

While the scandal alleges a wide range of misconduct, the contracting accusations shed light on a problem that some say has been crippling the nation’s small businesses for more than a decade.

“The diversion of small business contracts to large corporations has gone on for a dozen years and the only thing the government has done in response is remove the transparency,” Lloyd Chapman, president of the American Small Business League, said in an interview, later adding that the procurement review system available to the public has become increasingly difficult to use in recent years.

The federal government has a stated goal of awarding 23 percent of contract dollars every year to small businesses. However, Chapman pointed to his group’s recent analysis of government data that showed that 72 of the 100 companies receiving the highest amount of federal small business contracts in 2011 were firms that exceeded the Small Business Administration’s size standards for small companies.

“Any time you take a sample of what the federal government is doing, and anytime you take a look at small business contracting in almost any federal agency, what you find is money going to the biggest companies in the world,” he said.

Back in October, the SBA’s inspector general published a report acknowledging that small business contracting was the agency’s most serious management and performance challenge. Specifically, the report stated that “procurement flaws allow large firms to obtain small business awards and agencies to count contracts performed by large firms towards their small business goals.”

But the SBA says the Obama Administration has taken steps to bring more contracting opportunities to small businesses, noting that the president created an inter-agency task force charged with increasing their share of government work and signed the Small Business Jobs Act, which agency officials say levels the playing field for small companies competing for federal contracts.

“These initiatives have made a real difference,” SBA Deputy Administrator Marie Johns wrote on the agency’s blog. “The number of contracts going to small businesses has steadily risen in the last two years,” she wrote, noting that the government nearly hit its goal of 23-percent small business contracting goal last year.

When Congress returns from recess in two weeks, the public buildings subpanel of the House Transportation and Infrastructure Committee plans to conduct a full hearing on the claims of wasteful spending against the GSA, according to Committee Chairman Rep. John Mica (R-Fla.), who said “the Las Vegas fiasco is just the tip of the iceberg.”

source: http://www.washingtonpost.com/blogs/on-small-business/post/gsa-scandal-sheds-light-on-small-business-contracting-fraud/2012/04/03/gIQApQZhtS_blog.html

Follow On Small Business and J.D. Harrison .  

By J.D. Harrison  |  05:09 PM ET, 04/03/2012

After we read that venture capitalists, angel investors, and the like want the federal government to give venture-backed businesses the ability to tap small business-specific seed-money funds, tax credits, R&D dollars, and even loans (presumably the Small Business Administration's 7(a) program?), our first instinct was to check Lloyd Chapman's stomping grounds at his American Small Business League and the Huffington Post to see if he'd responded with a furious denunciation of venture capital's nefarious lobbying efforts. Surprisingly, he has not--yet (nor is he quoted in the article). But we won't be shocked if we see an angry retort from him in the coming days. The prospect of venture capital-backed companies taking money away from other small businesses is practically designed to push his buttons.

The piece does quote small-business advocates saying what we suspect Chapman would: that expanding these programs to equity-backed companies would, in the article's words, "divert attention from those that really need help." And it does mention a tense dynamic that Chapman has not been shy about raising: the fact that Obama's pick to head the SBA, Karen G. Mills, who was confirmed at the beginning of the month, has a background in venture capital.

In fact, we can almost picture Chapman's veins bulging upon reading the quote the article gets from an SBA spokesperson: "I think certainly [Mills is] going to look and make sure the SBA is working as effectively as possible to help small businesses, and that includes high-impact small businesses," he told the Journal, using what appears to be a euphemism for equity-backed small companies.

We're going to be more open-minded on this one than Chapman would be (it is Chapman's job to be closed-minded when it comes to this sort of thing). We wouldn't necessarily be averse to governmental aid for venture-backed small businesses; every other industry is getting a bailout, so why shouldn't they, too? However, any such efforts need to happen in a way that does not deny small, non-equity-backed businesses one cent of money they should get. Should any proposal mess with that, we will join Chapman in his inevitable crusade against it.

Source:  http://bizbox.slate.com/blog/2009/04/help_on_the_way_for_venturebac.php