Peggy E. (Peg) Gustafson was sworn in as SBA Inspector General on October 2, 2009. Ms. Gustafson previously served as General Counsel to Senator Claire McCaskill (D-MO), where she advised the...
Audit Report 1-04: Independent Accountant’s Report on the Performance Audit of National American Insurance Company
On January 22, 2001, the OIG issued Audit Report 1-04, Independent Accountant’s Report on the Performance Audit of National American Insurance Company. The purpose of the SBA’s Surety Bond Guarantee Program (SBG) is to assist small, emerging, and minority construction contractors. The SBA indemnifies surety companies from potential losses by providing a Government guarantee on bonds issued to such contractors. The SBA guarantees up to 90 percent for contracts not exceeding $1.25 million. The SBA’s Office of Surety Guarantees (OSG) administers the SBG Program.
An Independent Public Accountant (IPA) conducted this audit on behalf of the OIG. The purpose of the audit was to determine if: (1) National complied with policies and procedures — including SBA’s policies and standards generally accepted by the surety industry—in issuing SBA guaranteed bonds; (2) claims and expenses submitted to the SBA were allowable, allocable, and reasonable, and (3) fees due the SBA were accurately calculated and remitted in a timely manner.
The IPA obtained a universe of six bonds for which the SBA had paid claims from October 1, 1996, through September 30, 1999. The IPA judgmentally selected two sample bonds based on the largest claim amounts. In addition, the IPA selected one bond with claims activity originally approved in Fiscal Year (FY) 1997. The IPA also selected an additional bond approved in FY 1999 for underwriting review only. Thus, the total sample size was four bonds with claims (net of recoveries) representing 97 percent of the total claim payments (net of recoveries) per SBA’s claim Payment History Reports.
The IPA tested sample bonds for compliance with SBA regulations for underwriting and fees by reviewing underwriting files and National’s accounting records. The IPA also tested claims incurred under sample bonds from October 1, 1996, through September 30, 1999, by reviewing National’s supporting documentation in the claim files and accounting records. The IPA also obtained a list of all SBA-guaranteed final bonds from October 1, 1996, through September 30, 1999, and identified contractors with total bonds exceeding $1.25 million for contracts with the same bond issue dates within several months. The IPA then reviewed project descriptions to determine if the bonds were for a single project divided into more than one contract.
The IPA found that National correctly calculated and remitted fees to the SBA in a timely manner. The IPA, however, noted that National did not always comply with SBA regulations for underwriting bonds and processing claim payments. Specifically, National did not notify the SBA of a default for one bond in a timely manner or maintain complete underwriting documentation for another bond, as required by SBA regulations. The IPA concluded that management and financial controls were adequate to protect assets and prevent errors and fraud. The IPA concluded, however, that National did not comply in all material respects with SBA regulations. The IPA issued two findings and made three recommendations.