NEW YORK (CBS.MW) -- For small business advocates, an explosive new report by the General Accounting Office merely confirms what they've long known: The government process for awarding contracts to small businesses is hugely flawed.

What the report doesn't answer is whether bureaucratic indifference and sloth, or outright fraud, have caused the breakdown.

Lloyd Chapman, president and founder of the Microcomputer Industry Suppliers Association, thinks plenty of evidence exists to suggest both. His group, which focuses on issues affecting small information-technology businesses, has been investigating government contracting and what it's discovered is not a pretty picture.

" An alarming percentage of government small business contracts and subcontracts is awarded to large businesses in the United States and several large firms in Europe," Chapman told the House Committee on Small Business last week.

" When a large business is discovered misrepresenting itself as a small business, the blame is always placed on out-of-date information, not on the large business," he said. "No company, no individual and no agency is ever responsible for these failings."

The federal government has long had policies in place to encourage small businesses to compete for federal contracts. To level the playing field with large, multi-national companies, the government adopted an elaborate set of rules and regulations.

Chief among them, at least 23 percent of all federal contracts must be set aside for small businesses.

To aid in that goal, the Small Business Administration maintains a computer database of small businesses known as the Procurement Marketing and Access Network or PRO-Net for short. PRO-Net is supposed to be a resource for other government agencies seeking small contractors, but it's riddled with errors, small business advocates claim.

SBA's culpability

Although the SBA is charged with assisting small businesses in the contracting process, Chapman and others say it's clearly part of the problem.

" The SBA's small business database is littered with the names of many of the largest firms in the world," he said. "One Dutch firm with 26,000 employees received over $60 million dollars in small business contracts in 2001."

The new GAO report seems to confirm the association's misgivings.
Of the 49,366 firms listed in the Federal Procurement Data System as receiving small business contracts in fiscal 2001, more than 5,000 - just about 10% -- failed to meet the definition of a small business.

That error alone calls into question about $13.8 billion in federal contracts, which may have been incorrectly reported as benefiting small businesses, according to the committee.

The GAO found that federal bureaucrats awarded hundreds of contracts based on erroneous data in the SBA's PRO-Net system and the Defense Department's Central Contractor Registration (CCR) system.

Chapman maintains that favoritism toward large companies is far from an accident. To the contrary, he said the trend is the direct result of a "very well-orchestrated pattern of policies, regulations and legal interpretations" over the past 15 years.

" I have to wonder why some of the most successful companies in the world with some of the best lawyers always seem to misunderstand federal contracting law in a manner that allows them to receive millions of dollars in federal funding," he told the committee.

Last August, his group began providing information on possible small business misrepresentation to the GAO, the SBA's Inspector General and the U.S. Attorney's office in Washington, he says. The SBA removed 19 companies from its database as a result of the association's findings, and more recently claimed that 540 other firms also had been excised.

Getting off easy

The federal Small Business Act makes such misrepresentation a serious crime that includes as punishment cancellation of contracts, debarment from federal work, fines of up to $500,000 and up to 10 years in prison.

Yet no firm has ever been penalized. What's more, in letters from its attorneys the SBA acknowledged that it had refused to notify agencies and prime contractors that the firms have been removed, Chapman said.

In all likelihood they are still doing business with the government, he added.
Another problem is a huge amount of confusion over the way the SBA defines a small business. In 1986, the government increased the definition from 100 employees to 500 employees.

The five-fold increase failed to take into account that what constitutes a small business may vary from industry to industry.

In the information technology industry, for example, the average firm has 15 employees. Yet the SBA standard forces them to compete with firms that are 3,300% larger, Chapman noted.

While the SBA's employee threshold varies from industry to industry based on NAIC codes, that's both a blessing and a curse. When a firm exceeds the employee number in one business, it merely reclassifies itself in an industry with a higher threshold.

Federal procurement law is also riddled with exemptions, exceptions and broad interpretations that also tilt the playing field in favor of large businesses, critics claim.

No friend in the White House

What's ironic, of course, is the fact that succeeding administrations right up to the present one have always claimed to champion small business.

Last year, President Bush unveiled his own agenda for small business that made several proposals to increase the access to federal contracting.

The Office of Management and Budget is currently developing a strategy to unbundle federal contracts, which should help small businesses.

In February, the OMB also announced its intention to require government agencies to obtain annual certifications from contractors regarding their small business status. The SBA also has proposed a requiring annual certification.

More rules, however, may not address the real problem: dishonest businesses and slothful bureaucrats.