On August 11, 2004, the OIG issued Audit Memorandum Report 4-37, Survey of Risk Management by Industry Code. The SBA is authorized under Section 7(a) of the Small Business Act to provide financial assistance to small businesses in the form of Government guaranteed loans. To be eligible for the Section 7(a) loan program, an applicant must be a small business. Small businesses are entities that meet the size standards for their industries as designated by the applicable industry codes contained in the Code of Federal Regulations.
In October 2000, the SBA adopted the North American Industry Classification System (NAICS) codes into its table of small business size standards. The lender for each loan reports the NAICS codes or previously used Standard Industry Classification (SIC) codes and other data to the SBA. The SBA maintains this information in its loan accounting system database. The database also contains information about each loan’s status, such as whether the loan is current, paid-in-full or charged off, the borrower’s gender and ethnicity, the lender, the use of proceeds, and the responsible district office. The data can be sorted and analyzed to identify trends and other details about the loan portfolio. The objective of the OIG’s survey was to determine if SBA’s procedures identify and control the level of financial risk posed by loans made under each SIC and NAICS code.
The OIG concluded that, at the time of review, the SBA did not have procedures to routinely identify and control the level of financial risk by industry code, and that this type of analysis would be beneficial. Further, SBA personnel could not provide evidence that they routinely identified and analyzed financial risk by industry code. The OIG believes that analyzing dollars at risk by industry code is an appropriate tool to identify trends and potential problem areas deserving management’s review.