Audit Probing How SBA Spent Certification Program Funds

The Office of Inspector General is auditing the Small Business Administration’s minority-certification program to determine how nearly $22 million collected from other federal agencies was spent over the last two years.

SBA officials declined to comment on the audit of the program, which has been plagued by a low response rate from the small businesses it targets.

In the past, minority entrepreneurs contracting with federal agencies “self-certified” as disadvantaged by checking a box on a form. But since last fall they must receive formal certification for their contract dollars to be counted toward federal minority-contracting goals.

The SBA is administering the program for all federal agencies that contract with outside firms. It pays for it by collecting funds from other agencies in proportion to their percentage of total federal contracting dollars.

David Gray, counsel to the inspector general at SBA, declined to state the reason for the audit, but said the office is “doing an audit of how the agency has spent funds in the small- and disadvantaged-business program. . . . We [are] focused on the funds that were received by other federal agencies, how they were spent and whether they were properly appropriated.”

A Defense Department official said the agency did not request the audit but is nevertheless concerned about the low response rate because it contributed by far the greatest amount, $14 million.

“Do we have some fundamental flaws in the estimation?” asked Robert Neal, director for the Defense Department’s office of small- and disadvantaged- business utilization. “Is there something wrong with the way the program is constructed that is deterring folks from participating? Or is there something in this whole process that we’re missing that we should have picked up when we put the program together?”

The Office of Inspector General is an independent office created by law within the SBA and other federal agencies to investigate agency programs, detect and prevent waste and fraud, and promote efficiency.

The Small Disadvantaged Business certification program was born as part of sweeping changes in federal contracting benefits granted to so-called disadvantaged businesses, the bulk of them minority entrepreneurs. In response to a 1995 Supreme Court ruling, the federal administration has done away with set-asides for disadvantaged businesses, replacing them with a complex system of price credits that are only available to disadvantaged businesses in industries in which they have been traditionally underrepresented.

At the same time, the administration also instructed the SBA to implement a certification program to ensure that only truly disadvantaged businesses are receiving the credits. The SBA was selected to develop the program because it already runs a contracting program for such businesses and verifies their status through a review of financial and other documentation.

Under the new rules, federal agencies and prime contractors can only count contract dollars of SBA-certified companies toward federal minority contracting goals, so they are encouraging certification. The benefits to the small businesses, however, vary from industry to industry and in some cases amount to nothing.

Many minority entrepreneurs have opted not to pursue certification, balking at the cost and privacy intrusion. Others remain unaware of the changes, despite SBA efforts to get the word out. The program was scheduled to take effect Jan. 1, 1999, but because only 400 businesses had applied by then, the date was pushed to July, then to October.

The SBA had initially anticipated more than 30,000 applicants, but so far only about 3,000 firms have come forward, in addition to about 5,000 grandfathered in under the SBA’s existing minority contracting program.

SBA spokeswoman Debra Silimeo declined to comment on the audit, but said the bulk of the money collected from 19 other federal agencies has been spent on staffing, new facilities, employee training, marketing and outreach. SBA officials from Washington have conducted 40 training workshops around the country to get the word out and eight more are planned.

“We have to find ways to get information to these folks,” Silimeo said. “That’s a lot of work. It takes people.” Silimeo also stressed that “it would have been a lot more expensive for all the agencies to set up their own programs.”

The agency hired about 75 people to implement the program but plans to pare that work force by a third because of the low response, she said.

To boost the number of certified firms, the agency in November entered into an agreement with the Transportation Department, which has separate certification requirements for disadvantaged contractors. Under that agreement, there will be some reciprocity between the certification programs so that entrepreneurs who qualify under one can be certified under the other with minimal paperwork, SBA spokesman DJ Caulfield said.

The SBA is exploring similar reciprocity agreements with other agencies, Caulfield said.