On September 21, 2001, the OIG issued Audit Report 1-18, Independent Accountant’s Report on the Performance Audit of Farmington Casualty Company (Farmington). 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, which increased to $2 million on January 25, 2001. 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) Farmington 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) Farmington accurately calculated fees due the SBA and remitted them in a timely manner. The IPA obtained a universe of 20 bonds for which the SBA had paid claims from October 1, 1997, through September 30, 2000. The IPA judgmentally selected four bonds based on the largest claim amounts. The IPA selected an additional bond originally approved in Fiscal Year 20000 for underwriting review only. Thus, the total sample size was five bonds with claims (net of recoveries) totaling $1,142,809. This represented 71 percent of the $1,598,806 total claim payments (net of recoveries) per SBA’s Claim Payment History Reports.
The IPA found that Farmington correctly calculated and remitted fees to the SBA in a timely manner. The IPA also noted, however, that Farmington did not always comply with SBA regulations for underwriting bonds and processing claim payments. Specifically, Farmington did not maintain copies of invoices or other proof of claim to support claim payments for two of the five bonds tested. In addition, Farmington did not request and maintain status reports in its files for one of the five bonds tested, or notify the SBA of default for one bond in a timely manner as required by SBA regulations. Further, the IPA concluded that Farmington did not comply in all material aspects with SBA regulations, nor did it have procedures in place to ensure timely notification of default to the SBA. The IPA made three recommendations.