On March 23, 2004, the OIG issued the Independent Public Accountant or IPA’s management letter in Audit Report 4-17, Audit of SBA’s FY 2003 Financial Statements: Management Letter. The management letter includes information related to non-reportable findings discovered during the Audit of SBA’s FY 2003 financial statements. The IPA noted several areas, which were reported in the FY 2002 report, that were repeated in this report because the conditions continue to exist. For example: (1) foreclosed property records and valuation; (2) lack of allotment detail in the general ledger; (3) other areas for improvement, administrative costs and accountable property; (4) non-fiduciary intra-governmental reconciliations; and (5) funds control over administrative costs. The management letter issued by the IPA also noted new items or weaknesses in the areas of: (1) disaster area office travel authorizations; (2) disaster area office centrally billed account; (3) loan servicing center shipping costs; (4) valuation of interest receivable balances for financial reporting; (5) surety bond guarantee liability estimate documentation; (6) modification adjustment transfer entries for loan guarantee programs; (7) completeness of performance data reporting; (8) recording of master Reserve fund cash held outside of Treasury; (9) inappropriate augmentation of appropriations involving methods of payment of contractors; (10) documentation of disaster loan subsidy re-estimate model; and (11) documentation of secondary market guarantee model. The IPA identified 16 issues, and issued 16 multi-part recommendations.
Regarding issue #3, “Other Areas for Improvement, Administrative Costs,” the IPA noted that the SBA could improve its supervisory review and approval of administrative transactions. The IPA noted that during their review of Administrative Transactions: (1) 3/135 tested vender payment invoices lacked approving signatures; and (2) 3/15 tested credit card statements lacked signature evidencing supervisory review. For the review of accountable property tracking: (1) of the 46 items tested, nine could not be located in SBA’s office locations; (2) six were not located where the accountability property system suggested; (3) eleven items that met SBA’s criteria for accountable property tracking were not tracked in SBA’s accountable property system.
Isue #5, funds Control Over Administrative Costs, the IPA identified several payment issues and Oracle processing deficiencies that occurred because: (1) the Oracle System will process payments in excess of obligations as long as the payments do not exceed the initial obligations by ten percent; (2) direct-pay invoices are processed without establishing a related obligation in Oracle; and (3) SBA’s ad-hoc process to post an upward adjustment of prior year obligations results in undelivered orders with debit balances at the transactional level (i.e. purchase order number), however; the general ledger account balance is not misstated. Collectively, these factors could indicate insufficient funds control.
Issue #8, related to shipping costs, identified concerns that the existing process for obligations in the Oracle ledger resulted in the untimely obligation of funds. Delays in recording valid obligations and processing invoices resulted in the SBA: (1) incurring costs before funds were obligated; (2) having a heightened risk of violating provisions of the Antideficiency Act since valid obligations were not recorded in a timely manner; and (3) unnecessarily incurring prompt payment Act interest charges because invoices were not paid in a timely manner due to lack of obligated funds.
Issue #9, “Valuation of Interest Receivable Balances for Financial Reporting” is related to the IPA’s discovery that the SBA’s valuation of outstanding prioritized payments related to defaulted SBICs overstated financial statement line items – Credit Program Receivables and Related Foreclosed Property and Liability for Loan Guarantees by $27 million in FY 2002 and $10 million in FY 2003. Specifically, upon purchase of defaulted Small business Investment Company (SBIC) participating securities, the SBA transfers related outstanding prioritized payments from one account to another, for the amount of accrued interest receivable that is delinquent more than 90 days. This methodology resulted in the reporting of an estimated collectible value of approximately 50 percent and 30 percent of outstanding prioritized payments related to SBICs that defaulted in FY 2002 and 2003. Supporting analysis by the Office of Liquidation, however, indicated an eventual 100 percent charge-off of these purchased prioritized payments. Future recoveries on purchased prioritized payments were unlikely since recoveries can only be realized after outstanding purchased leverage owed to the SBA and amounts owed to independent investors are fully reimbursed. Thus, the allowance account should fully offset the defaulted prioritized payments recorded.