On January 30, 2004, the issued the Independent Public Accountant or IPA’s findings in Audit Report 4-10, Audit of SBA’s FY 2003 Financial Statements. The IPA disclaimed an opinion on the FY 2003 and the restated FY 2002 financial statements. The IPA noted that the scope of their examination was limited because the SBA was late in completing development and testing of certain credit program subsidy models, completing its credit program subsidy re-estimates, and preparing its financial statements. As a result, the auditors were unable to apply all necessary auditing procedures or dispose of reservations identified during their work, which prevented them from expressing an opinion on the financial statements. In addition to the scope limitation, the auditors expressed reservations regarding (1) the secondary market guarantee subsidy cost and liability, (2) credit programs receivables in guaranteed loan programs, (3) restated gain or loss on asset sales, (4) footnote disclosures, (5) liabilities for loan guarantees and credit program receivables and related foreclosed property, net, (6) adjustment to interest expense on borrowing, net, and (7) Small business Investment Company Participating Securities re-estimates.
The IPA’s report on internal control discusses three matters considered reportable conditions, two of which the auditors considered material weaknesses. Auditors noted the two material weaknesses in the following areas: (1) SBA’s credit reform controls, and (2) SBA’s financial management and reporting controls. The reportable condition noted that SBA’s information system controls continue to contain areas for improvement. These reportable conditions are further described in the IPA’s report on internal control.
The IPA’s report on compliance with laws and regulations disclosed that the SBA was not in substantial compliance with the Federal Financial management Improvement Act (FFMIA) because: (1) SBA’s financial management systems did not substantially comply with FFMIA; (2) the SBA is not in substantial compliance with federal accounting standards; and (3) the SBA is not in substantial compliance with the United States Standard General ledger at the transaction level. The auditors also noted instances of noncompliance with the Prompt Payment Act and noted limitations on the scope of their examination, which prevented them from completing their testing of SBA’s compliance with the Anti-Deficiency Act. The Chief Financial Officer generally agreed with the auditor’s findings.