On February 28, 2001, the OIG issued the Independent Public Accountant or IPA’sreport in Audit Report 1-08: Audit of SBA’s FY 2000 Financial Statements. The IPA concluded that the financial statements presented fairly, in all material respects, the financial position of the SBA as of September 30, 2000 and 1999, and its net cost, changes in net positions, budgetary resources, and financing for the year then ended. The section on SBA’s internal control structure identifies reportable conditions related to the financial reporting process and the agency-wide security program. The section on compliance with laws and regulations disclosed no instances in which SBA’s financial management systems did not substantially comply with the requirements of the Federal Financial Management Improvement Act of 1996. The IPA found other management and internal control issues that were communicated in a separate management letter.
On December 20, 2002, the IPA notified the SBA that the financial statements for FY 2000 and 2001 should no longer be relied on because of the possibility that material adjustment may be necessary for disaster loans sold, disaster loan subsidy expense, and other directly related accounts and footnotes corresponding with SBA’s disaster loan program, and that revised financial statements and audit reports would be issued upon completion (subject to SBA investigation).
Specifically, in a January 6, 2003 letter to the Committee on Small Business and Entrepreneurship, the SBA reported that consistency and precision in SBA’s methods for valuing its disaster loans sold through the asset sales program, and those that are retained in the Agency’s loan portfolio are at issue. The SBA followed available guidance in developing its costs models, and validated that the models were consistent and satisfactory prior to beginning the sales program. However, over time, the results demonstrated inconsistencies between the model used to determine the “value to government” for sale purposes and the model required for measuring the program’s budget and accounting cost under the Federal Credit Reform Act. In particular, the model used for disaster loan sales had shown substantial gain while the model used for budgeting purposes had shown a loss. Further, the models appeared to lack the precision needed for accurately valuing the impact of the asset sales on the disaster loan portfolio. However, it is important to note that SBA’s FY 2000 and 2001 financial statements both disclose the accounting book losses associated with the disaster loan sales.