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 1-16: SBA’s Follow-Up on SBLC Examinations
On August 17, 2001, the OIG issued Audit Report 1-16, SBA’s Follow-Up on SBLC Examinations. In September 1998, the Small Business Administration (SBA) implemented a program to improve its oversight of the Small Business Lending Companies (SBLC) by requiring annual safety and soundness examinations of the 14 SBLCs that participate in the program. The Farm Credit Administration (FCA), under contract with the SBA, performed the first two annual examinations in FY 1999 and FY 2000.
The objective of our audit was to determine whether the actions taken by the SBA in response to the 14 FY 1999 examination reports were sufficient to assure that the SBLCs corrected problems identified in the examination reports. The SBA had taken several actions to improve its oversight of the examination process, however, additional actions were needed to fully ensure that timely corrective actions are taken by SBLCs in response to the FCA examinations.
The initial safety and soundness examinations performed in FY 1999 were intended to provide program oversight and assist the SBA in establishing standards for the SBLC program. Because this was the first time the SBLCs had been subject to the examination process, the SBA decided to delay following up on all but two of the examination findings and recommendations until the second round of examinations were performed during FY 2000. During the FY 2000 examination cycle, the SBA required the FCA to follow-up on the findings and recommendations from the FY 1999 examination. Based on a sample review of four SBLCs examination reports with a combined total of 30 findings and recommendations, the OIG determined that the SBLCs adequately addressed 11 of the findings and recommendations. The remaining 19 were either partially addressed or not addressed at all.
One reason the SBLCs did not take all the actions necessary to address the FY 1999 examinations reports was because there was little guidance available to the SBLCs as to what actions were required by the SBA. Most non-SBLC lenders subject to examination by financial institution regulators are required to have certain internal controls in place. However, the SBA is solely responsible for oversight of the SBLCs and had not established internal control standards for the SBLCs. Another reason was because the SBA did not require the SBLCs to provide a written plan of action in response to the FY 1999 examination reports.
During the FY 2000 examination cycle, the SBA began to issue notification letters to each SBLC advising them of what actions were needed to address the FY 2000 examination reports. As of January 23, 2001, notification letters had been issued to 8 of the 14 SBLCs and 6 responses had been received. The SBLCs that responded either did not fully respond or indicated they would not comply with about 80 percent of the findings and recommendations. The SBA did not pursue additional follow-up action beyond the initial responses from the SBLCs.
The OIG recommended that the Acting Associate Deputy Administrator for Capital Access: (1) formalize and implement follow-up procedures for the SBLC examination process to ensure that the examination findings and recommendations are adequately addressed by the SBLC in a timely manner, and (2) develop and promulgate internal control standards for the SBLC program similar to those required for non-SBLC lenders subject to financial institution regulators. The Office of Capital Access (OCA) generally agreed with the report findings but disagreed with the audit report regarding the risk created by not actively pursuing corrective actions on the SBLC examination findings. The OCA agreed to take action on the two audit recommendations.