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11-05 - Audit of SBA's FY 2010 Financial Statements Management Letter

Date Issued: 
Wednesday, December 15, 2010
Report Number: 
11-05

Memorandum

U.S. Small Business Administration
Office Inspector General

To: Jonathan L. Carver
Chief Financial Officer
/s/ Original Signed

From: Peter McClintock Deputy Inspector General

Subject: Audit of SBA's FY 2010 Financial Statements -Management Letter Report No. 11-05

Attached is the Management Letter issued by KPMG LLP that identifies matters that came to its attention during the audit of SBA's FY 2010 financial statements. The audit was performed under a contract with the Office of Inspector General (OIG) and in accordance with Generally Accepted Government Auditing Standards; Office of Management and Budget's (OMB) Bulletin No. 07-04, Audit Requirements for Federal Financial Statements, as amended; the Government Accountability Office (GAO) President's Council on Integrity and Efficiency (PCIE) Financial Audit Manual; and GAO's Federal Information System Controls Audit Manual.

KPMG addressed recommendations to the Associate Administrators for the Office of Disaster Assistance, and Office of Management and Administration; Chief Human Capital Officer; Directors for the Office of Financial Assistance, Office of Financial Program Operations, Office of Portfolio Management, and Office of Credit Risk Management; and to you. We provided a draft of KPMG's report to each of these officials or their designees, who concurred with the findings relative to their respective areas. The officials or designees agreed to implement the recommendations or have already taken action to address the underlying conditions.

Should you or your staff have any questions, please contact Jeffrey R. Brindle, Director, lnformation Technology and Financial Management Group at (202) 205-[FOIAex. 2].

KPMG LLP
2001 M Street, NW
Washington, DC 20036-3389

MANAGEMENT LETTER

December 15,2010

CONFIDENTIAL

Office of the Inspector General,
U.S. Small Business Administration, and
Administrator of the SBA:

We have audited the consolidated financial statements of the U.S. Small Business Administration (SBA) for the year ended September 30, 2010, and have issued our report thereon dated November 12, 2010. In planning and performing our audit of the financial statements of SBA, we considered internal control in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements. An audit does not include examining the effectiveness of internal control and does not provide assurance on internal control. We have not considered internal control since the date of our report.

During our audit, we noted certain matters involving internal control and other operational matters that are presented for your consideration. These comments and recommendations, all of which have been discussed with the appropriate members of management, are intended to improve internal control or result in other operating efficiencies and are presented in Exhibit I. The status of prior year comments is presented in Exhibit II.

Our audit procedures are designed primarily to enable us to form an opinion on the fmancial statements and, therefore, may not bring to light all weaknesses in policies or procedures that may exist. We aim, however, to use our knowledge of SBA gained during our work to make comments and suggestions that we hope will be useful to you.

We would be pleased to discuss these comments and recommendations with you at any time. This report is intended solely for the information and use of the Office of the Inspector

General, management, and others within the organization and is not intended to be, and should not be, used by anyone other than these specified parties.

U.S. SMALL BUSINESS ADMINISTRATION
Management Letter Comments FY 2010

LACK OF EFFECTIVE REVIEWS OVER OPEN OBLIGATIONS

Conditions:

During our walkthrough of SBA' s quarterly review of open obligations, we noted the following:

1. Of the 29 SBA Open Obligations Reports to be tested (100% of the population), 7 Open Obligation Reports (24%) were not received by the Office of Planning and Budget (OPB).

2. For the 22 Open Obligation Reports tested for the first quarter of FY 2010:

  • Six reports did not annotate the current status of each Undelivered Order (UDO).

  • Four reports contained comments that did not clearly address the validity of each UDO listed.

  • Two office supervisors' did not certify the completeness and accuracy of the reports.

3. Obligation #9205030C2009 was marked as "finally closed" per the program office, but was not closed in Oracle.

4. For those Open Obligation Reports received from the program offices, a standardized "cut-off date" for submissions was not used.

Criteria:

Office of Management and Budget (OMB) Circular A-123 , Management's Responsibility for Internal Control, Section II, Standards, states: "Monitoring the effectiveness of internal control should occur in the normal course of business. In addition, periodic reviews, reconciliations or comparisons of data should be included as part of the regular assigned duties of personne1. Periodic assessments should be integrated as part of management's continuous monitoring of internal control, which should be ingrained in the agency's operations."

The Office of the Law Revision Counsel, U.S. House of Representative, citation 31 USC Sec. 1554, Audit, control and reporting, states: "(b) (1) After the close of each fiscal year, the head of each agency shall submit to the President and the Secretary of the Treasury a report regarding the unliquidated obligations, unobligated balances, canceled balances, and adjustments made to appropriation accounts of that agency during the completed fiscal year ... (c) The head of each agency shall establish internal controls to assure that an adequate review of obligated balances is performed to support the certification required by section 11 08(c) of this title."

SBA Information Notice 2000-775, 'Final' Close a/Open Obligation, states: "The Office of Planning and Budget requires a copy of your open obligations report, annotated with the current status of each open item. A 'comments' column should be added to these reports after you have exported them to MS Excel. During FY 2010, the reports will be due to OPB on:

  • March 12, 2010

  • June 4, 2010

  • September 3, 2010"

Cause:

While properly designed, the current SBA procedures for performing quarterly reviews of open obligations were not properly executed to timely identify the status or validity of open obligations in a consistent manner.

Effect:

The conditions noted above increase the risk of a misstatement in the undelivered order balances reported in the financial statements.

Recommendations:

We recommend the Chief Financial Officer enhance existing internal control over the quarterly review process to include the following:

1. Continue to educate all SBA program offices regarding the open obligation review process to ensure information is submitted in a timely and consistent manner, that offices are proactive in addressing invalid or expired UDOs, that office supervisors certify the validity of the UDOs, and that the comments field on the report clearly indicate the validity ofthe UDOs.

2. Continue to monitor Headquarter controls over the program office's open obligations quarterly review process. This will ensure compliance with stated policies and procedures.

Management's Response:

SBA management concurs with the findings and recommendations.

INSUFFICIENT DOCUMENTATION AND UNTIMELY DEOBLIGATION OF UNDELIVERED ORDERS

Conditions:

We tested a sample of 65 UDOs as of September 30, 2010 and identified the following:

1. One instance where SBA did not provide documentation to support a $99,500.49 UDO.

2. Five instances where the budget period had expired per the contract award and SBA was unable to provide documentation supporting the 5 UDOs totaling $ 230,114.29.

Criteria:

OMB Circular A-123 , Section I, Introduction, defines management controls as "the organization, policies and procedures used by agencies to reasonably ensure that: (i) programs achieve their intended results;
(ii) resources are used consistent with agency mission; (iii) programs and resources are protected from waste, fraud, and mismanagement; (iv) laws and regulations are followed; and (v) reliable and timely information is obtained, maintained, reported and used for decision making."
United States Code (U.S.c.) Title 31 , Section 1501 , Documentary Evidence Requirement for Government Obligations, states the following:

(a) An amount shall be recorded as an obligation of the United States Government only when supported by documentary evidence of

(1) A binding agreement between an agency and another person (including an agency) that is

(A) in writing, in a way and form, and for a purpose authorized by law; and

(B) executed before the end of the period of availability for obligation of the appropriation or fund used for specific goods to be delivered, real property to be bought or leased, or work or service to be provided;

Cause:

The issues noted above are indicative of a lack of management/supervisory review to ensure the existence and accuracy of the financial information recorded.

Effects:

Due to a lack of supporting documentation, the UDO balance at September 30, 2010 is overstated by a known error of $329,614.78, and obligations were not deobligated in a timely manner. In addition, the conditions noted above increase the risk of further misstatement in the UDO balance reported in the financial statements.

Recommendations:

We recommend the Chief Financial Officer:

3. Research and resolve the issues identified above; specifically, obtain sufficient documentation to support the UDO or modify contracts to deobligate undisbursed funds for which the period of availability for disbursement has expired.

4. Reiterate to the appropriate personnel the importance of consistently following up on quarterly obligation review results to determine whether the remaining UDO balances are valid or should be deobligated.

Management's Response:

SBA management concurs with the findings and recommendations.

LACK OF DOCUMENTATION FOR EMPLOYEE COST ALLOCATION SURVEYS

Condition:

As part of our Statement of Net Cost methodology testwork performed, we found that SBA was unable to provide the supporting cost allocation survey for 3 out of27 employees included in our sample.

Criteria:

SBA Procedural Notice 2000-776, FY 201 0 Cost Allocation Survey "Supervisors are required to ensure that all of their employees complete the survey and must review their employee's survey responses. After completing the survey, all employees must provide their immediate supervisor with a printed copy of their survey responses. After the supervisor signs the printed survey, the employee must "submit" the survey. "

Cause:

The Washington District Office did not retain a copy of the net cost allocation survey for the three employees.

Effect:

SBA cannot be assured that it is disclosing accurate and meaningful costs associated with outputs and outcomes of its programs and activities.

Recommendation:

We recommend the Chief Financial Officer work with the Washington District Office Director to:

5. Reinforce the importance of retaining copies of each approved employee cost allocation survey.

Management's Response:

SBA management concurs with the finding and recommendation.

INADEQUATE CONTROLS OVER THE 1502 ERROR PROCESS

Condition:

While performing testwork over the Colson 1502 reporting process, we noted a backlog of errors that were not remediated timely. We determined these errors were not material to the financial statements. However, we noted there is no reconciliation between Colson's and SBA's error population. Specifically, Colson identified 27,924 errors in its Lender Exception Report dated April 2010, while SBA identified 48,040 errors for that same period. The additional 20,116 errors were not submitted to Colson for investigation and correction. The errors referenced above relate to characteristics of active loans in SBA's portfolio that have missing, incorrect, or invalid data elements.

Criteria:

OMB Circular No. A-123, Section II, Standards, states the following: "E. Monitoring Monitoring the effectiveness of internal control should occur in the normal course of business. In addition, periodic reviews, reconciliations or comparisons of data should be included as part of the regular assigned duties of personnel. Periodic assessments should be integrated as part of management's continuous monitoring of internal control, which should be ingrained in the agency's operations."

Cause:

According to SBA staff, the discrepancy with the error count is the result of two different sets of edit checks performed by Colson and SBA systems. Due to higher priority matters internal to Colson, it has not synchronized its edit checks with those of SBA to ensure that all errors are identified prior to submitting loan data to SBA. SBA staff is currently working with Colson to resolve this issue.

Effect:

Because Colson's edit checks for processing 1502 data are not synchronized with those used by SBA's systems, all 1502 errors considered relevant by SBA are not reported by Colson. Consequently, the loans receivable balance in SBA's financial statements may be misstated.

Recommendation:

We recommend the Office of Financial Assistance Director continue to work with Colson to:

6. Implement consistent edit checks so that a meaningful monthly comparison and reconciliation can be made between the errors identified by Colson and those identified by SBA.

Management's Response:

SBA management concurs with the finding and recommendation.

NONCOMPLIANCE WITH THE DEBT COLLECTION IMPROVEMENT ACT (DCIA) OF 1996

Conditions:

During our testwork over Direct and Guaranty loan charge-offs at the Commercial Loan Servicing Center in Fresno, CA (CLSC), and the E1 Paso Disaster Loan Servicing Center (EPDLSC) in EL Paso, TX, we noted the following charged-off loans were recommended for referral to Treasury for debt collection but were not referred:

CLSC testwork over guaranty loan charge-offs:

1. Loan [FOIA ex. 4] -According to the 327, Modification or Administrative Action Form, all liquidation efforts were complete, a workout was not feasible, and no litigation or bankruptcy existed. Therefore, the loan should have been referred to Treasury for servicing.

EPDLSC testwork over direct loan charge-offs:

2. Loan [FOIA ex. 6, 7C]-SBA did not refer all borrowers to Treasury for servicing. Both the 327 Action Form and the Disaster Credit Management System (DCMS) indicated that there was only a single borrower on the loan. However, the Loan Authorization Agreement included a coborrower and was signed by two individuals.

3. For the following eight loans, SBA had not referred the borrowers to Treasury for servicing:

Loan Number

Days Awaiting Referral at the Time of Review

1. [FOIA ex. 6, 7C]

319

2. [FOIA ex. 6, 7C]

310

3. [FOIA ex. 6, 7C]

296

4. [FOIA ex. 6, 7C]

285

5. [FOIA ex. 6, 7C]

284

6. [FOIA ex. 6, 7C] 250
7. [FOIA ex. 6, 7C] 220
8. [FOIA ex. 6, 7C] 185

Criteria:

DCJA, Title 31 , Section 3711 , Collection and Compromise, states the following:
"(g)(1) If a nontax debt or claim owed to the United States has been delinquent for a period of 180 days
(A) the head of the executive, judicial, or legislative agency that administers the program that gave rise to the debt or claim shall transfer the debt or claim to the Secretary of the Treasury; and
(B) upon such transfer the Secretary of the Treasury shall take appropriate action to collect or terminate collection actions on the debt or claim."
SBA Procedural Notice 5000-619, Treasury Debt Collection, states the following:

(2) Treasury Servicing

What accounts does SBA send to Treasury for servicing? SBA sends only charged-off accounts that are still legally enforceable. Since Treasury is authorized to retain a percentage (up to 28 percent) of any collections received by it or any of its contractors on loans transferred for servicing, it is important that SBA obtain all significant collections prior to charge-off to maximize recovery for the Agency.

How will the transfer process work? Once a loan is charged-off, DFC will send a notice to eligible obligors advising that their indebtedness will be sent to Treasury for collection after 60 days. Their accounts will be transferred to Treasury following this 60-day period through an automated monthly process.

Causes:

The conditions occurred due to a lack of adequate loan officer review of the 327 Action Form and supporting loan documentation (i.e., Loan Authorization Agreement, DCMS, etc.), and an outdated system programming logic prohibiting the automatic referral of charged-off loans to Treasury for servlcmg.

Effect:

In response to condition 3 above, SBA researched all loans charged-off at its Servicing Centers during FY 2010 to quantify the number of loans in the portfolio that were not referred to Treasury for servicing. Through its research, SBA identified 473 Disaster loans that were charged-off during that period, but were not referred to Treasury for servicing (to include the EPDLSC loans above). Out of the 473 loans identified, 334 loans had an executed due process notice associated with it, but a certain characteristic of the loan prevented the automatic referral to Treasury (e.g. , "delinquency date is out of range").

SBA management was unable to determine the problem that prevented the remaining 139 charged-off loans from being referred to Treasury. Because these loans were not timely referred to Treasury for servicing, $11 ,262,087 of SBA's outstanding loan principle balance is at risk of recovery due to obligor's or guarantor's defaulting on the loans.
As a result of the issues identified above, SBA is not in compliance with the DClA, which requires loans that have been delinquent for a period of 180 days to be referred to Treasury for servicing. We have reported this instance of noncompliance with laws and regulations in our combined Independent Auditors' Report, dated November 12, 2010.

Recommendation:

We recommend the Office of Financial Program Operations (OFPO) Director:

7. Reinforce the importance of properly reviewing the 327 Action Form and Loan Authorizations Agreements when entering loan data in the LAUD screen for referral to ensure the referrals are proper, complete, and timely.
We recommend that the Office of Portfolio Management (OPM) Director work with the Chief Information Officer (CIO) to:

8. Conduct an in-depth analysis ofthe existing Treasury referral protocol to identify and correct the program coding that is preventing the 139 charged-off loans from being automatically referred.

9. Implement interim, quarterly monitoring reviews to identify all charged-off loans where the automatic referral did not occur.

10. Update the system's program logic to ensure that qualifying loans with executed due process notices will be automatically referred.

11. Perform an analysis of loans charged-off in prior years to identify and correct any DCIA noncompliance issues noted.

Management's Response:

SBA management concurs with the findings and recommendations.

INCONSISTENT REVIEW OF CHARGED-OFF LOANS IN WORKOUT STATUS

Condition:

As a result of our testwork performed over direct loan charge-offs at the EPDLSC and at our request, SBA performed an analysis of all disaster loans that were charged-off during FY 2010 and identified 838 loans that were charged-off yet remained in "workout" status. Based on its analysis, we were told the 838 loans needed to be assessed further to determine if the current status was warranted; however, it appeared from SBA's analysis some of the loans should have been referred to Treasury for servicing.

Criteria:

Standard Operating Procedure (SOP) 50 52 (1), Consumer Loan Servicing and Collections for Disaster Home Loans -Charge-Off Procedures, states the following:
"1. SBA Policy Regarding Charge-Off Accounts.
"SBA's policy is to be diligent and thorough in its collection of debt and to promptly chargeoff
all uncollectible accounts. The charge-off status will more accurately reflect the status of the individual account and the Agency's entire portfolio.
"b. Removing a Loan from 'In Litigation'
"An account can be returned to servicing by use of a 327 Action Form, when the situation that classified a loan as 'in liquidation' has been resolved or has been restructured or reamortized
by: (1) A workout plan; ...Once the loan is returned to servicing, it should be monitored to ensure any agreements reached in liquidation are kept."

Cause:

SBA did not deploy a consistent methodology to review loans in workout status nor did they monitor loans in workout status to ensure that agreements reached were still applicable.

Effect:

Inconsistent review procedures to monitor loans in workouts status will delay loans from being timely referred to Treasury for servicing, thus limiting management's ability to recover funds from obligor's and/or guarantors. Furthermore, this delay will negatively impact the referral process for charged-off loans and increase the risk that SBA may be noncompliant with DCIA.

Recommendations:

We recommend the OFPO Director in conjunction with the OPM Director:

12. Regularly monitor loans coded as workouts to ensure any agreements reached in liquidation are kept.

13. Provide monthly reports of charged-off loans with status code 99 (workout) to the Disaster Center directors to provide a means to periodically review the status of charged-off loans.

14. Implement a semiannual review procedure for loans in workout status to begin 180 days following charge-off and thereafter. This review should be performed to ensure that loans for which a workout is not feasible are promptly referred to Treasury for servicing, as appropriate.

15. Complete a review of the 838 loans coded workout to determine if the borrower(s) have consistently complied with the terms of the workout agreement. If it is determined that the borrower(s) have not complied with the terms of the workout agreement, update the status code to refer those to Treasury for servicing.

Management's Response:

SBA management concurs with the findings and recommendations.

NONCOMPLIANCE WITH SOP 50 52 LOAN LIQUIDATION AND ACQUIRED PROPERTY UNTIMELY GUARANTY CHARGE-OFFS

Condition:

During our guaranty loan purchases and charge-offs testwork at the CLSC, we noted an extended time period between purchase and charge-off for the following five items:

Loan Number

Site Location

Days Awaiting Charge-Off at the Time of Review

Amount

[FOIA ex. 4]

Fresno

430

$4,926.61

[FOIA ex. 4]

Fresno

375

$4,176.72

[FOIA ex. 4]

Fresno

231

$42,743.04

[FOIA ex. 4]

Fresno

220

$17,482.08

[FOIA ex. 4]

Fresno

192

$24,537.82

Total

$93,866.27

 

Criteria:

DCJA, Title 31 , Section 3711 , Collection and Compromise, states the following

(b) The purposes of this section are the following:
(1) To maximize collections of delinquent debts owed to the Government by ensuring quick action to enforce recovery of debts [emphasis added} and the use of all appropriate collection tools.

Per SOP 50 51 2A, Loan Liquidation and Acquired Property, Chapter 18:

1. SBA Policy Regarding Charge-Off Accounts. SBA's policy is to be diligent and thorough in its collection of debt and to promptly charge-off all uncollectible accounts [emphasis added}. The charge-off status will more accurately reflect the status of the individual account and the Agency's entire portfolio.

Cause:

According to Fresno site office management, the majority of the exceptions noted above were caused by the transfer of a large portfolio of loans awaiting charge-off from district offices. Between October 2009 and February 2010, the Fresno site office was still in the process of eliminating this backlog.

Effect:

Untimely delays in charging off loan guaranties will result in inaccurate reporting of loan balances in the fmancial statements. Once charged-off, SBA records a loss for the net amount of the loan balance and removes the loan receivable balance at time of purchase. Additionally, a delayed charge-off impedes the ability of Treasury to fully pursue recovery for delinquent loans.

Recommendation:

We recommend the OFPO Director:

16. Continue to allocate resources as required to timely address charge-offs.

Management's Response:

SBA management concurs with the findings and recommendations.

LACK OF APPROVING OFFICIAL REVIEW AT TIME OF GUARANTY LOAN CHARGE-OFF

Conditions:

During our testwork over guaranty loan charge-offs at the CLSC and the National Guaranty Purchase Center (NGPC) in Herndon VA, respectively, we noted:

1. A lack of approving official review in the Guaranty Purchase Tracking System (GPTS) and on the charge-off SBA Form 327 for loan [FOIA ex. 4]
2. A lack of approving official signature on the post-purchase SBA paper Form 327 prior to charge-off for loan [FOIA ex. 4]

Criteria:

SOP 50 51 2A, Loan Liquidation & Acquired Property, Chapter 3, "Correspondence, Reports, and Control Systems":

"3) What is SBA Form 327, Modification or Administrative Action? The term "Modification or Administrative Action" refers to an action to modify the authorization or other actions which are necessary to help the borrower respond to a business growth opportunity or to respond to a problem. It also refers to actions that SBA may take that would affect the loan (e.g., change the status of loan from regular servicing to "in-liquidation," to transfer the loan from one lender to another, etc.).
All 327 actions require approval under the rule of two authority. "[emphasis added]
SOP 50 50 4, Loan Servicing, Chapter 2

E. What is the Rule of Two approval process? All servicing actions taken under delegated authority must reflect the recommendation(s) of the recommending official who initiated the action and approval by an approving official [e.g., using SBA 327, Liquidation Litigation Tracking System (LLTS) screens, etc.]. Both officials must be certified under the delegation of authority to take the action. This process is called the "Rule of Two."
SOP 50 51 2B, Loan Liquidation and Acquired Property and Lines of Successions, Chapter 13

4. Timely Processing Where SBA has purchased the guaranteed portion of a loan from the secondary market, financial and legal staff must always complete the post-purchase review prior to inclusion of a loan in an asset sale or prior to charge-off, preferably within 90 days ofpurchase.

Cause:

Site personnel failed to retain the final approval documentation to support the review and approval of the post-purchase review and charge-off transactions.

Effect:

Lack of approval documentation of the post-purchase review or guaranty loan charge-off increases the risk of improper charge-offs being performed and recorded in the general ledger. Furthermore, improper charge-off procedures may limit SBA's recovery on delinquent loans from collateral or through litigation.

Recommendations:

We recommend the OFPO Director:

17. Reinforce the importance of a thorough review of all 327 actions by SBA personnel (e.g. , issuance of a memorandum, training).

18. Perform periodic (quarterly) quality assurance reviews of 327 charge-off actions to ensure all appropriate personnel have signed the form.

Management's Response:

SBA management concurs with the findings and recommendations.

NONCOMPLIANCE WITH SOP 50 51 2A, LOAN LIQUIDATION AND ACQUIRED PROPERTY MISSING DOCUMENTATION WITHIN LOAN FILES

Conditions:

During our testwork at the SBA servicing centers, we noted the following instances where acquired property site visit documentation was not maintained in accordance with SBA SOPs.

CLSC -testwork over guaranty loan charge-offs:
1) Site Visit Report
For loan [FOIA ex. 4] a site visit report detailing the condition status of the property was not included within the loan file or reviewed at time of purchase. Site visits are to be performed by the lender within 60 days of default and a report completed by SBA should be reviewed prior to purchase.
2) SBA Form 327
We noted that SBA personnel did not document essential loan information including remaining loan balance, date of default, and interest rate on the SBA Form 327 before approving the loan for purchase for loan numbers [FOIA ex. 4] , [FOIA ex. 4], [FOIA ex. 4], and [FOIA ex. 4]
NGPC -testwork over guaranty loan purchases:
3) Lender Wrap-up Report
For loan numbers [FOIA ex. 4] and [FOIA ex. 4] , SBA personnel did not obtain a Lender Wrap-up Report or other documentation sufficient to support the lender's actions and results in regards to liquidation efforts prior to charge-off.

EPDLSC -testwork over direct loan charge-offs:

4) Final Demand Letter
We were unable to view in the CLCS Chron display information indicating that the final demand letter had been sent to the borrower and/or guarantors for loan numbers [FOIA ex. 6, 7C] [FOIA ex. 6, 7CJ, and [FOIA ex. 6, 7C]
5) Credit Bureau Reports
For 55 of 84 loan files reviewed, we were unable to review the credit bureau report. A credit bureau report is utilized to identify resources that could be used to pay down loan debt and to ensure the borrower is properly referred to Treasury at time of charge-off.

Criteria:

SOP 50 51 2(A), Loan Liquidation and Acquired Property -Chapter 8, "Lender-Serviced Liquidation"
8b. Site Visits -"Lender Serviced Loans" Lenders must make site visits and prepare a comprehensive and detailed report containing an inventory of assets and an assessment of their condition. This action must be performed within 60 days of an unremedied default of payment; or as soon as possible after default if there are assets of significant value that could be removed or depleted.

SOP 50 51 2(A), Loan Liquidation and Acquired Property -Chapter 10, "Special Programs" p) When must the lender provide a "wrap-up report?" i) The lender must provide SBA with a wrap-up report documenting the lender's actions and results.
(1) When the lender determines that the loan will not be fully repaid after all worthwhile collateral has been liquidated; and
(2) No further recoveries are anticipated within a reasonable period of time, (see Appendix 18, "Final Wrap Up Report" checklist).

SOP 50 51 2, Loan Liquidation and Acquired Property -Chapter 3, "Correspondence, Reports, and Control Systems:
What is SBA Form 327, Modification or Administrative Action?
a. SBA Form 327.
SBA 327, "Modification or administrative action" is available as a preprinted form or online from SBA computer software. The report must contain all the essential information pertinent to the issue being considered, such as status of the loan, collateral, guarantors, and comments of the recommending official originating the report.

SOP 50 51 2(A), Loan Liquidation and Acquired Property -Chapter 12, "Guidelines for Personal Guaranties"
6) When Must You Send a Demand for Payment in Full to All Guarantors?
You must send it when the note has been accelerated, when the approving official has determined that any of the "automatic in liquidation" situations exist, when liquidation action has been authorized, and consult with counsel.

SOP 50 51 2(A), Loan Liquidation and Acquired Property -Chapter 18, "Charge-off Procedures" 17) What Financial Information Is Needed on Debtor? You must have current credit information on each obligor to support a charge-off, (i.e., Dun and Bradstreet, Equifax, or Credit Bureau Report).

Causes:

SBA personnel did not perform an adequate review of the loan files to ensure compliance with SOP requirements. Additionally, the E1 Paso personnel stated that while a credit report is always obtained and reviewed prior to charge-off; it is not always maintained in the loan file.

Effect:

The exceptions noted above increase the risk that invalid purchases and charge-offs will be made and recorded in the system. In addition, there is a risk that the Agency will not maximize its collection efforts.

Recommendations:

We recommend the OFPO Director:

19. Reinforces, through the issuance of memorandum, the importance of a site visit for each loan prior to purchase, fully completing the 327 Action Form, and adequately documenting borrower/guarantor demand letter disbursements.

20. Ensures all staff members are accurately completing the Guaranty Charge-off Checklist and verifying the wrap-up report or other relevant documentation is retained prior to charge-off.

21. Reinforces, through the issuance of memorandum, the review of credit bureau reports prior to charge-off, and the retention of these reports either in electronic or physical format.

Management's Response:

SBA management concurs with the findings and recommendations.

IMPROPER PAYMENT -INCORRECT AMOUNT OF INTEREST PAID AT TIME OF GUARANTY PURCHASE

Conditions:

During our testwork over guaranty loan purchases and charge-offs at the CLSC and the NGPC, we identified the following deficiencies, which resulted in improper interest payments when the loan guaranty was purchased:

1. Based on our review of the loan note, SBA used an incorrect interest rate to calculate the interest owed to the lender, resulting in the following underpayment/overpayments:

Loan Number                      Site Location                      Underpayment Amount                Overpayment Amount
[FOIA ex. 4]                          Herndon                                                                                         $2,178.17
[FOIA ex. 4]                          Fresno                                                                                             $877.84
[FOIA ex. 4]                         Herndon                                       $(616.56)
[FOIA ex. 4]                          Fresno                                                                                             $102.74
Total                                                                                         $(616.56)                                     $3,158.75

2. SBA used the incorrect number of days to calculate interest owed to the lender, resulting in the following underpayments/overpayments:

Loan Number                    Site Location                          Underpayment Amount                   Overpayment Amount
[FOIA ex. 4]                         Herndon                                      $(14,408.69)
[FOIA ex. 4]                          Fresno                                           $(64.09)
[FOIA ex. 4]                         Herndon                                                                                                   $193.26
Total                                                                                        $(14,472.78)                                        $193.26

3. SBA utilized the incorrect principal balance to calculate the interest owed to the lender, resulting in the below underpayment:

Loan Number                  Site Location                          Underpayment Amount
[FOIA ex. 4]                       Herndon                                      $(3,698.61 )

Criteria:

Improper Payments Information Act of2002 states the following:

  • IMPROPER PAYMENT -The term' 'improper payment" -(A) means any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements;

SOP 50 51 2, Loan Liquidation & Acquired Property, Chapter 2, "Regulations and Other Authorities," Subpart 13

  • When SBA purchases the guaranteed portion of a fixed interest loan, the rate of interest remains as stated in the note. On loans with a fluctuating interest rate, the interest rate that the Borrower owes will be at the rate in effect at the time of the earliest uncured payment default, or the rate in effect at the time of purchase (where no default has occurred).

SOP 50 51 2, Loan Liquidation & Acquired Property, Chapter 2, "Regulations and Other Authorities," Subpart 14

  • If the Lender submits a complete purchase request to SBA within 120 days of the earliest uncured payment default, SBA will pay accrued interest to the Lender from the last interest paid-to-date up to the date of payment. Ifthe Lender requests SBA to purchase after 120 days from the date of the earliest uncured payment default date, SBA will pay only

120 days of interest. For LowDoc loans, the interest paid to the Lender will be governed by the Supplemental Guarantee Agreement.

Cause:

The approving official did not adequately review and compare supporting documentation in the loan file prior to approving the purchase amount in the Guaranty Purchase Tracking System GPTS and on the SBA Form 327.

Effect:

Due to the deficiencies noted above, SBA made overpayments totaling $3,352.01 and underpayments totaling $18,787.95.

Recommendation:

We recommend the OFPO Director:

22. Reinforces, to approving officials, the importance of a thorough review and reconciliation of the interest payment information within GPTS, on the SBA Form 327, and in the supporting documentation (i.e., the note) in the loan file to ensure agreement at time of purchase.

Management's Response:

SBA management concurs with the findings and recommendation.

IMPROPER PAYMENT -INCORRECT BILLING TO LENDERS AT CHARGE-OFF

Conditions:

While performing our testwork over guaranty loan charge-offs at the NGPC, we identified the following:

Due to inaccurate data reflected in the GPTS for loan [FOIA ex. 4] and [FOIA ex. 4] SBA erroneously billed the lenders $234,489.92 and $50,855.02 (purchase amounts), respectively, prior to charge-off.

Criteria:

OMB Circular No. A-123 , Section II, Standards, states, "Transactions should be promptly recorded, properly classified, and accounted for in order to prepare timely accounts and reliable fmancial and other reports. The documentation for transaction, management controls, and other significant events must be clear and readily available for examination."
U.S. Department of Treasury's Managing Federal Receivables -A Guide for Managing Loans and Administrative Debt, Chapter 4, states, "Accurate and complete documentation is critical to providing proper servicing of debt, pursuing collection of delinquent debt, and in the case of guaranteed loans, processing claim payments."
SOP 50 50 4, Loan Servicing, Chapter 10, "Miscellaneous Issues Regarding Participation Loans":
(2) Cancellation, Termination, and Expiration of an SBA Guaranty: Voluntary Cancellation by Lender
(1) Upon written notice to SBA, a lender may request that SBA terminate or cancel the guaranty on any of its SBA loans provided:
(a) The SBA has not purchased the loan.
(b) The loan is not paid in full; and
(c) The lender has not assigned or transferred the loan to another party (e.g. , a lender cannot cancel a guaranty for a loan sold in the secondary market since the loan is assigned to a registered holder).

Causes:

The errors were attributed to inconsistent and inaccurate data in GPTS. In addition, the fmal approving official did not adequately review and compare documentation supporting the loan balance in GPTS prior to approving the charge-off amount in GPTS and on SBA Form 327.

Effect:

As a result, SBA's loans receivable balance was overstated by $285,345.

Recommendations:

We recommend the OFPO Director:

23. Notify the lenders of the improper billing and correct the outstanding receivables for these two loan balances in the Loan Accounting System.

24. Reinforce the importance of the approving official's thorough review and reconciliation of information in GPTS, SBA Form 327, and supporting documentation in the loan file, to ensure they are in agreement at time of charge-off.

Management's Response:

SBA management concurs with the finding and recommendations.

LACK OF SEGREGATION OF DUTIES IN THE SACRAMENTO LOAN PROCESSING FOXPRO SYSTEM

Condition:

During our walkthrough at the Sacramento Loan Processing Center, we noted a lack of segregation of duties within the FoxPro loan processing system. Specifically, we noted that the system does not prevent Supervisory Loan Specialists (SLS) from adhering to the "Rule of Two" requirement for approval as the first reviewer can also access and perform the functions of the second reviewer. Further, the same SLS can also approve and fund the loan without the second SLS reviewer ever performing a review.

Criteria:

Government Accountability Office (GAO) Standards for Internal Control in the Federal Government

  • Segregation of Duties: "Key duties and responsibilities need to be divided or segregated among different people to reduce the risk of error or fraud. This should include separating the responsibilities for authorizing transactions, processing and recording them, reviewing the transactions, and handling any related assets. No one individual should control all key aspects of a transaction or event."

SOP 50 104, Loan Processing, Subpart A:

  • The Rule of Two: "A loan may be approved or declined, on the basis of two concurring opinions of personnel who are appropriately trained, subject to statutory and administrative authority."

Cause:

There is a lack of segregation of duties in the design of the access levels within FoxPro, which permits certain personnel to recommend for approval and approve loan applications within the system.

Effect:

A lack of segregation of duties controls increases the risk of invalid and/or incorrect loan approvals being recorded in the system.

Recommendation:

We recommend the OFPO Director:

25. Review and modify the system access configurations in FoxPro to prohibit individuals from both recommending approval and approving loan applications.

Management's Response:

SBA management concurs with the finding and recommendation.

IMPROVEMENT NEEDED IN THE 7(A) LENDER OVERSIGHT PROCESS

Conditions:

During our review of SBA's 7(a) Lender Oversight activities, we noted the following:

1.The Office of Credit Risk Management (OCRM) did not adequately follow-up on required corrective action for one of the seven lenders assessed as "Less than Acceptable with Corrective Actions Required" in its SBA on-site, risk-based review. On November 10, 2009, OCRM staff notified the lender of its risk-based review results, requested a response to the findings, and required corrective actions within 30 days. However, the lender did not respond within the required time line. Also, OCRM was unable to provide us documented correspondence with the lender that took place until March 5, 2010. At that time, OCRM notified the lender in writing that it had changed the response due date to April 5 , 2010. Although OCRM told us they contacted the lender by phone and e-mail. no documented evidence of the lender's response or further OCRM follow-up actions existed at the time of our audit.

2. OCRM staff that performed six on-site reviews did not substantially follow SBA procedures for conducting on-site, risk-based reviews. Specifically, these reviews were carried out with a modified, limited scope and did not address portfolio performance, SBA management and operations, or compliance with laws, rules, and SBA loan program requirements.

Criteria:

SOP 51 00, On-Site Lender Reviews/Examinations, Chapter 2, "Risk-Based Lender Reviews and Examinations," states the following:

"SBA Lenders in the assessment category of 'Less than Acceptable with Corrective Actions Required' are operating an SBA lending program with serious deficiencies and/or represent significant financial risk to SBA.
"Immediate Corrective Action by the SBA Lender will be required to address identified deficiencies. SBA will consider appropriate enforcement actions to address the situation including suspension and/or removal from the SBA loan program. Communication with the SBA Lender is frequent with the SBA Lender receiving close monitoring by SBA until the situation is resolved to SBA 's satisfaction.
"On-site risk-based lender reviews for most 7(a) lenders and CDCs assess the SBA Lender's SBA lending operations in terms of (i) portfolio performance, (ii) SBA management and operations,
(iii) credit administration practices and (iv) compliance with laws, rules, the SOPs and SBA Loan Program Requirements."

Causes:

The lender case file rotated among various OCRM staff due to territorial shifts and an extended leave of absence due to illness. Therefore, a primary point of contact was not consistently available to monitor the lender's response to the finding and its corrective action plan. As a result of the lender's unresponsiveness, SBA scheduled another risk-based review for this lender in 2010.

Also, a modified, limited scope review was performed for these six lending institutions due to OCRM's limited resources. The contract for the performance of on-site reviews was originally awarded to a contractor on September 28, 2009. However, due to delays in the procurement process, OCRM did not have the planned resources available to perform the on-site review until April 14, 2010, when the contract was awarded. Given the delay, OCRM utilized its internal resources to perform a targeted, abbreviated review of these six lenders to obtain some level of assurance regarding the quality of SBA lending practices.

Effect:

The assessment of "Less than Acceptable with Corrective Actions Required" is an indication that the administration of a lender's 7(a) loan program has weaknesses of such a magnitude, or multiple and/or significant patterns of deficiencies, that its operations are negatively impacted. Without close monitoring to ensure timely corrective actions are taken by SBA lenders that meet SBA's satisfaction, the Agency may be exposed to an unacceptable level of financial risk. Also, by not adhering to SOP 51 00 requirements when conducting on-site, risk-based lender reviews, the effectiveness of SBA's lender oversight process could be compromised.

Recommendations:

We recommend the OCRM Director:

26. Establish a management-level oversight procedure to ensure OCRM staff is closely monitoring and communicating with lenders timely in order to address outstanding issues requiring corrective action.

27. Ensure risk-based reviews are completed in accordance with all review components identified in SOP 5100.

Management's Response:

SBA management concurs with the findings and recommendations.

IMPROVEMENT NEEDED IN THE DUPLICATION OF BENEFITS PROCESS

Conditions:

The following deficiencies were identified during our testwork at the Ft. Worth Disaster Loan Processing & Disbursement Center over the Duplication of Benefits (DOB) process:

Lack of Remittance Follow-up

1) For 2 of 85 loans reviewed, SBA had not received or followed up on the outstanding remittance requests.
DOB Calculated Incorrectly

2) For loan [FOIAex. 6, 7Chhe loan officer incorrectly input $60,697 instead of $70,816 as the Verified Total Loss when completing the DOB worksheet.

3) For loan [FOIA ex. 6, 7Chhe loan officer did not consider a recovery from an Iowa grant in the amount of $24,999 while preparing the DOB worksheet.

Criteria:

GAO Standards for Internal Control in the Federal Government: "Transactions should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions [emphasis added]. This applies to the entire process or life cycle of a transaction or event from the initiation and authorization through its final classification in summary records. In addition, control activities help to ensure that all transactions are completely and accurately recorded."

SOP 50 30 6, Disaster Assistance Program, Chapter 5, Section 44, "Determination of Amount of Physical Loan Eligibility":

(a) Definitions.

1) The SBA verified tota110ss is the amount reported by the verifier without regard to program limits
(c) Deductions from the SBA Verified Total Loss By Statue, eligibility for SBA disaster loans is limited to underinsured or uncompensated losses. You must deduct insurance or any other compensation received or anticipated (from any source) for damage to eligible property to determine the amount of uncompensated physica110ss. You do not deduct any insurance or other compensation received for purposed other than loss or damage to eligible property. (This undup1icated compensation is available to the applicant to apply toward repair of ineligible property or other purposes.) Deductions from the SBA verified tota110ss can originate from:

1) Other Disaster Relief Organizations.

Causes:

SBA does not have procedures in place to ensure timely and consistent follow-up regarding remittances due from a borrower or applicable state. Additionally, the loan officers did not use due diligence when preparing the DOB worksheets, and errors that should have been identified during the review and approval process were not detected and corrected.

Effect:

The lack of well-defined follow-up procedures increases the potential for delays in collecting funds related to duplicate benefits paid to the borrower or the applicable state. SBA collected $2,621 from the State ofIowa in error, thus limiting the financial assistance for disaster victims. We noted that SBA has contacted the borrower to arrange for a full refund. For loan [FOIA ex. 6, 7CJthe total remittance required for the DOB was understated by $24,999.

Recommendations:

We recommend the Associate Administrator for Disaster Assistance:

28. Develop and implement follow-up procedures related to outstanding remittances to ensure that all duplicative benefit amounts are recuperated.

29. Reinforce the importance of a thorough review by approving officials of the DOB worksheet to ensure the correct remittance is calculated.

Management's Response:

SBA management concurs with the findings and recommendations.

IMPROVEMENT NEEDED OVER TIME & ATTENDANCE (T&A) PAYROLL CONTROLS

Conditions:

During our walkthrough of SBA's payroll control processes in the HubZone Program Office, we noted the following:

1. A lack of segregation of duties in which a T &A clerk was responsible for both entering and certifying employees' T&A as a result of the employees' not entering in their own T&A through the Employee Personal Page.

2. One instance where a System for Time and Attendance Reporting (STAR) payroll report was not approved by a supervisor.

3. One instance where the annual leave and sick leave hours reported by the National Finance Center (NFC) did not agree to the annual and sick leave hours recorded in the STAR Web system. For those differences identified during our walkthrough, we requested evidence (e.g., leave audits) of measures taken to correct the balances. However, we found that leave errors were not corrected in the period in which they were reported by the NFC and remained in error for three pay periods.

Criteria:

GAO Standards for Internal Control in the Federal Government, states, "Key duties and responsibilities need to be divided or segregated among different people to reduce the risk of error or fraud. This should include separating the responsibilities for authorizing transactions, processing and recording them, reviewing the transactions, and handling any related assets. No one individual should control all key aspects of a transaction or event."

GAO Standards for Internal Control in the Federal Government states, "Transactions should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. This applies to the entire process or life cycle of a transaction or event from the initiation and authorization through its final classification in summary records. In addition, control activities help to ensure that all transactions are completely and accurately recorded."
SOP 36 00, Attendance and Leave, states, "Supervisors are responsible for ensuring that all employees under their supervision have worked the proper number of hours for the work schedule selected before signing individual Time and Attendance Reports."

The SBA's Manager Toolkit states, "Ensure all STAR T&A Reports are signed by the timekeeper, employee, and supervisor. .. ensure timekeepers do not transmit T &A before all the proper signatures are obtained. "

Cause:

There is a lack of supervisory oversight of the T &A process related to the authorization of payroll transactions and performance of leave audits to ensure the accuracy of the T &A data.

Effect:

There is an increased risk of financial statement misstatement related to payroll expense and accrued liabilities.

Recommendations:

We recommend the Chief Human Capital Officer (CHCO) work with the Director of the HubZone Program Office to:

30. Emphasize to all supervisors and timekeepers the importance of adhering to SBA policies and procedures.

31. Develop and implement controls to more effectively monitor the execution of its policies and procedures, particularly related to the authorization of payroll transactions and the performance of leave audits, to ensure that they are being followed (e.g., develop policies that require quarterly audits of leave discrepancies).

Management's Response:

SBA management concurs with the findings and recommendations.

IMPROVEMENT NEEDED TO ENSURE STANDARD OPERATING PROCEDURES ARE CURRENT

Condition:

In fiscal years 2008 and 2009, we issued findings which noted that SOP 00 08D (2), Organizational Structure, was not up-to-date and did not accurately document the current organizational structure (titles and functions, organizational charts, and responsibility/authorities) of SBA officials. SBA management concurred with this fmding in FY 2009 and agreed to take corrective actions to review and update the organization-specific portions ofthe SOP by September 30, 2009.

As part of our testwork over entity level controls during FY 2010, we re-examined the status of the SOP. We noted a draft version of the SOP for organizational structure that clearly defines the current functions and responsibilities of SBA officials and delineates the chain of command within the Agency exists, but the draft version of the SOP has not been finalized as of May 13, 2010. While SBA made some changes to the SOP, these were relatively minor and more revisions need to be completed to fully update this document to reflect the current organizational structure.

Criteria:

OMB Circular A-123, appendix A, Internal Control over Financial Reporting states, "A factor affecting the control environment is the agency's organizational structure. It provides management's framework for planning, directing, and controlling operations to achieve agency objectives. A good internal control environment requires that the agency's organizational structure clearly define key areas of authority and responsibility and establish appropriate lines of reporting."

SOP 00 08 D, Organizational Structure, states, "The AAlHCM will revise this SOP (title changes, functional statements, organizational charts etc.), update the organizational structure data in the personnel and payroll data system, and request that the Office of Administration prepares Agency and Federal Register notifications (if required)."

Cause:

The Office of Human Capital Management (OHCM) communicated to us that during FY 2009 and continuing through FY 2010, OHCM is experiencing critical management turnover, to include a newly appointed CHCO and Deputy CHCO, as well as staff shortages. Further, OHCM management states that while they agreed to the prior year recommendations, in actuality, the process of updating the SOP to reflect the organization's current structure is unrealistic and inefficient given the frequency in which organizational changes occur in the Agency and the amount of time required updating SOPs.

Effect:

The lack of a documented organizational structure that clearly defines the functions and responsibilities of SBA officials and delineates the chain of command within the Agency can negatively impact SBA's overall control environment, thus affecting the Agency's capabilities to adequately provide operational and fmancia1 reporting oversight.

Recommendation:

We recommend the CHCO:

32. Revise the current methodology to maintain and periodically update SBA's organizational structure, functional statements, and charts. Further, the revised methodology should be documented in the SOP.

Management's Response:

SBA management concurs with the finding and recommendation.

IMPROVEMENT NEEDED IN THE EMPLOYEE SEPARATION PROCESS

Conditions:

While SBA continues to show improvement in its human resource processes, during our review of internal control over SBA's employee separation process, we noted the following:

1. Of 30 items included in our test work sample, the OHCM was unable to locate 3 SBA Form 78, "Separation Checklist Form" (Checklists).

2. Of the 27 Checklists that were provided to us, 25 were not properly completed in accordance with the instructions provided on the Form 78. The departing employees' supervisors did not detect this upon their final review and certification of the Checklist. For example, clearances were not obtained signifying the return to the Agency of chargeable items such as travel credit cards and wireless devices.

3. Additionally, of the 30 SF-50, Notification of Personnel Action forms , in our sample, 10 forms did not have proper authorization. Specifically, the signature/authentication (electronic signature) of the approving official did not appear on the SF-50.

Criteria:

OMB Circular A-123 , Section IV, Documentation, requires that documentation for internal control, all transactions, and other significant events be readily available for examination.
SOP 0013-5 , Personal Property Management Program, Chapter 2 states: "Ensure that all SBA property is returned when an employee leaves SBA. Field Office Heads should indicate compliance by signing and dating SBA Form 78, "Separation Checklist." Headquarters Division Chiefs should initial SBA Form 78 and forward it to the FMB (Facilities Management Branch) for concurrence on the following items: Identification iFascard, Property/Equipment and Office/Furniture-Keys. Once you have obtained all required clearances, forward to the Office of the Chief Human Capital Officer."

Office of Personnel Management's (OPM), The Guide to Processing Personnel Actions, Chapter 4 states: "Requesting and Documenting Personnel Actions," states, "No personnel action can be made effective prior to the date on which the appointing officer approved the action. That approval is documented by the appointing officer's pen and ink signature or by an authentication, approved by the Office of Personnel Management, in block 50 of the Standard Form 50, or in Part C-2 of the Standard Form 52. By approving an action, the appointing officer certifies that the action meets all legal and regulatory requirements and, in the case of appointments and position change actions, that the position to which the employee is being assigned has been established and properly classified.

Cause:

Supervisors did not perform adequate quality assurance reviews of the Checklists prior to certifying on the form that it had been properly and fully completed.
In regards to the lack of approvals on the SF-50, SBA officials explained that there was a system malfunction that occurred which prevented the approving official's electronic signature from appearing on the SF-50.

Effect:

The Separation Checklist is used to terminate system access rights including e-mail, VPN/Token, LAN account, IT security and documentation that equipment items such as laptop computers and wireless devices were returned. Without proper completion and certification of the Checklist, there is an increased risk that an employee will not be properly removed from SBA systems after termination. Additionally, there is an increased risk that government assets assigned to the employee will not be returned to the Agency.
Without an approving official's signature/authentication on the SF-50, personnel actions are not certified to have met all legal and regulatory requirements in accordance with OPM guidance. As such, there is an increased risk that invalid or unlawful personnel actions may occur and not be detected.

Recommendations:

We recommend the CHCO:

33. Reinforce through management training the importance of properly and fully completing the Separation Checklist.

34. Take action to ensure the system malfunction that prevented the SF-50 from being properly signed or authenticated is corrected.

Management's Response:

SBA management concurs with the findings and recommendations.

LACK OF CONTROL OVER THE RETENTION OF DELEGATION OF AUTHORITY AND LINE OF SUCCESSION MEMORANDA

Condition:

As part of our review of SBA's entity level control environment, we requested SBA's Office of Administrative Services (OAS) to provide us with the delegations of authority and line of succession memoranda for five field office directors. OAS was unable to provide documentation for any of the items requested.

Criteria:

Implementation Guide for OMB Circular A-123 , appendix A, Internal Control over Financial Reporting, states the following in regards to the importance of delegation in the control environment:

"The [control] environment is also affected by the manner in which the agency delegates authority and responsibility throughout the organization. This delegation covers authority and responsibility for operating activities, reporting relationships, and authorization protocols."
SOP 00-01-2, Delegations of Authority and Lines of Successions, Chapter 1, "Introduction to Delegations of Authority and Lines of Succession," states:
"What are the Responsibilities of the Office of Administrative Services?

OAS is responsible for the following:
a. Forwarding the Administrator's line of succession designation to the Federal Register for publication;
b. Issuing an SBA Information Notice to all employees announcing the Administrator's line of succession designation;
c. Maintaining the permanent official file of all line of succession memos and formal delegations of authority; ... " [emphasis added]
SOP 00-01-2, Delegations of Authority and Lines of Successions, Chapter 2, "Delegations of Authority," states the following in regards to the delegation of authority creation and retention process:
"If you are a Headquarters official delegating an authority to a field office position, you must use the formal 606 process and obtain the appropriate clearances to do so. All original and final 606s creating delegations must be forwarded to OAS. OAS maintains the official record of all delegations of authority. " [emphasis added]
SOP 00-01-2, Delegations of Authority and Lines of Successions, Chapter 3, "Line of Successions," states the following in regards to the line of successions:
"d. Field Office Heads. If you are a field office head, prepare a memo designating two employees by name and title to act, in succession, on your behalf when you are absent. Review your line of succession memo at least once a year and send an updated version to OAS whenever a change occurs. Distribute the memo as follows:
(1) Original to OAS; [emphasis added]
(2) Copy on file in originating field office;
(3) Copy to each of the two designees;
(4) Copy to the Office of Field Operations"

Cause:

The field office directors selected for review did not prepare and submit the delegation of authority or line of succession memoranda to ~AS. In addition, OAS did not follow-up to ensure these documents were received.

Effect:

Without proper and effective controls over delegation and succession planning, SBA runs the risk of jeopardizing the control environment by not having the right personnel, with the required delegated authority, to act on behalf of Agency personnel who are unavailable or unable to perform their assigned duties.

Recommendations:

We recommend the Associate Administrator for Management and Administration:

35. Obtain the delegation of authority and line of succession memoranda from the five field office directors in the sample.

36. Perform a review of all delegation of authority and line of succession memoranda currently maintained in the OAS permanent files to ensure that delegations for all offices are on file.

37. Identify all offices that have not submitted the memoranda, and work with those personnel to obtain the missing documents.

38. Consider developing an annual review process to ensure all delegation of authority and line of succession memoranda are up-to-date and appropriately maintained by ~AS.

Management's Response:

SBA management concurs with the findings and recommendations.

Exhibit II

U.S. Small Business Administration Status of Prior Year Comments FY 2010

                                                                                                                                                                  

Fiscal Year 2009 Comments

Fiscal Year 2010 Status

 

Management Letter

 

Lack of management review over service organization Statement on Auditing Standards (SAS) No. 70, Service Organizations, Type II Procedures.

Resolved

Lack of management reVIew of SBA Form 78, Separation Checklist

Revised and repeated in Exhibit 1, page 27, under the following heading:
- Improvement Needed in the Employee Separation Process

Noncompliance with SOP 50 52, Loan Liquidation and Acquired Property Untimely
guaranty chargeoffs

Revised and repeated in Exhibit 1, page 1O, under the following heading:
- Noncompliance with SOP 50 52, Loan Liquidation and Acquired Property Untimely Guaranty Charge-Offs

Lack of borrower request or 14-day letter prior to loan cancellation or reduction.

Resolved

Noncompliance with SOP 50 51 2a, Loan Liquidation and Acquired Property -Missing documentation within loan files

Revised and repeated in Exhibit 1, page 13, under the following heading:
- Noncompliance with SOP 50 51 2a, Loan Liquidation and Acquired Property Missing documentation within loan files.

Improper payment -Overpayment of interest at time of guarantee purchase

Revised and repeated in Exhibit 1, page 16, under the following heading:
- Improper Payment Incorrect Amount of Interest Paid at Time of Guaranty Purchase

Lack of approving official review of guaranty loan charge off

Revised and repeated in Exhibit 1, page 16, under the following heading:
- Lack of Approving Official Review at Time of Guaranty Loan Charge-off

Noncompliance with SOP 50 51 2(a), Loan Liquidation and Acquired Property -Unfulfilled documentation requirements by lender (Herndon)

Revised and repeated in Exhibit 1, page 13, under the following heading:
- Noncompliance with SOP 50 51 2a, Loan Liquidation and Acquired Property Missing documentation within loan files

Lack of sufficient quarterly review and untimely de obligation of undelivered orders

Revised and repeated in Exhibit 1, pages 1-3, under the following headings:
- Lack of Effective Reviews over Open Obligations
- Insufficient Documentation and Untimely Deobligation of Undelivered Orders

Improvements needed in the approval of payroll and personnel actions

Revised and repeated in Exhibit 1, page 24, under the following heading:
- Improvement Needed over Time and Attendance Payroll Controls

Improvement needed to ensure SOPs are current

Revised and repeated in Exhibit 1, page 25, under the following heading:
- Improvement Needed to Ensure Standard Operating Procedures Are Current

Lack of documentation for employee cost allocation survey and incorrect data provided in survey results

Revised and repeated in Exhibit 1, page 4, under the following heading:
- Lack of Documentation for Employee Cost Allocation Surveys

Weak controls exist over background investigations

Resolved

Inadequate document retention for alternate processing contracts

Resolved

Training for information technology (IT) security personnel is inadequate

Revised and repeated in Exhibit 1 of the Audit Report, page 1-1, under the following heading:
- Improvement Needed in Information Technology (IT) Security Controls

Inadequate documentation to support a Section 504 debt refinancing approval

Resolved

Enhancements needed in the processing of ARRA payroll

Resolved

Lack of control to ensure ARRA payroll is complete and accurate

Resolved

Lack of review of outstanding preferred surety bonds (PSB) bid bonds

Resolved