On December 7, 2000, the OIG issued Advisory Report A1-01, FY 1999 Cost Allocation Study. The Small Disadvantaged Business (SDB) Program provides federal procurement benefits to small disadvantaged businesses bidding on federal contracts by giving them up to a 10 percent price preference on their bids. In 1998, the SBA began certifying that small disadvantaged businesses met specific social, economic, ownership, and control eligibility criteria.
Under the authority of the Economy Act, various federal agencies reimbursed the SBA for its actual costs to certify these companies. The SBA developed its first Cost Allocation Study for FY 1997 and made incremental improvements in its FY 1998 and FY 1999 models. The SBA used the study to determine all costs, both direct and indirect, for each cost object. For FY 1999, the Cost Allocation Study results were used to allocate SBA’s recorded obligations to cost objects based on how resources were consumed within the Agency. The SBA incorporated the SDB program in the Cost Allocation Study in FY 1999. In addition, starting with the FY 1999 Cost Allocation Study, the SBA surveyed employees in headquarters and field offices to accumulate cost data on employees’ activities, capturing cost data based on where employees actually worked rather than to the program code to which they were assigned.
The objective of this review was to test and validate the accuracy of the results of SBA’s FY 1999 Cost Allocation Study, as it related to the SDB Program. To conduct this audit, the OIG performed a limited review of SBA’s Fiscal Year (FY) 1999 Activity Based Costing Study (Cost Allocation Study) as it related to the SDB Certification program, in response to a request from the agency to justify FY 1998 and FY 1999 overhead rates. The request was as a result of an OIG audit finding from Audit Report 00-19, The Audit of Small Disadvantaged Business Certification Program Obligations and Expenditures. In that report, the OIG found that the SBA charged $2.8 million in overhead to SDB funds for FYs 1998 and 1999 based on unsupported percentages.
The OIG found that the FY 1999 Cost Allocation Study overstated SDB certification expenses by $3.9 million. Additionally, since the Cost Allocation Study was based on obligations, which included un-liquidated balances on closed obligations, the model did not show actual SDB expenditures, even though the Economy Act requires the SBA to determine the actual cost of the SDB program. Lastly, the SBA did not clearly document the model, as required by the Office of Management and Budget Circular A-127, Financial Management Systems. The OIG issued two findings and made two recommendations.