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.