Audit Report 1-02: Independent Accountant’s Report on the Performance Audit of American Contractors Indemnity Company
On December 27, 2000, the OIG issued Audit Report 1-02, Independent Accountant’s Report on the Performance Audit of American Contractors Indemnity Company. 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. 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) American Contractors 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) fees due the SBA were accurately calculated and remitted in a timely manner.
The IPA obtained a universe of 15 bonds for which the SBA had paid claims from October 1, 1996, through September 30, 1999. The IPA judgmentally selected two sample bonds based on the largest claim amounts. The IPA selected two other bonds originally approved in Fiscal Year 1998 with claims activity. Further, the IPA randomly selected two bonds originally approved in FY 1999 for underwriting review, only. The total sample size was six bonds with claims (net of recoveries) totaling $858,171. This represented 87 percent of the $989,628 total claim payments (net of recoveries) per SBA’s Claim Payment History Reports. The IPA tested sample bonds for compliance with SBA regulations for underwriting and fees by reviewing underwriting files and American Contractors’ accounting records.
The IPA found that American Contractors correctly calculated and remitted fees to the SBA in a timely manner. The IPA also noted, however, that American Contractors did not always comply with SBA regulations for underwriting bonds and processing claim payments. Specifically, American Contractors did not maintain complete underwriting documentation for two bonds or notify the SBA of default for three bonds, in a timely manner, as required by SBA regulations. The OIG issued two findings and two recommendations.