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 1-07: Independent Accountant’s Report on the Performance Audit of Indemnity Insurance Company of North America
On February 22, 2001, the OIG issued Audit Report 1-07, Independent Accountant’s Report on the Performance Audit of Indemnity Insurance Company of North America. 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) Indemnity Insurance Company of North America (Indemnity) 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 the universe of bonds for which the SBA had paid claims from October 1, 1996, through September 30, 1999. This universe contained three bonds, which were selected for review. The IPA also randomly selected one additional bond originally approved in Fiscal Year (FY) 1999 for underwriting review only. Thus, the total sample size was four bonds with claims that represented 100 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 Indemnity’s accounting records. The IPA also tested claims incurred under sample bonds from October 1, 1996, through September 30, 1999, by reviewing Indemnity’s supporting documentation in the claim files and accounting records. The IPA 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 obligee and 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 Indemnity correctly calculated fees; however, it did not remit all fees to the SBA in a timely manner. Also, Indemnity did not always comply with SBA regulations for underwriting and servicing bonds. Specifically, Indemnity did not maintain complete underwriting documentation for one bond and did not request and maintain status reports in its files for three of the four bonds tested, as required by SBA regulations. The IPA concluded that management and financial controls were adequate to protect assets and prevent errors and fraud, except as noted. The IPA also concluded that Indemnity did not comply in all material aspects with SBA regulations for retaining records and obtaining and maintaining status reports, nor did it have procedures in place to ensure its timely payment of surety fees due the SBA.