Reports Find Errors and Fraud in Small Business Administration Contracts
By Elizabeth Olson
New York Times
July 24, 2008
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.