Peggy E. (Peg) Gustafson was sworn in as the Inspector General of the U.S. Small Business Administration on October 2, 2009. Ms. Gustafson previously served as General Counsel to Senator Claire...
Audit Report 6-32: Economically Disadvantaged Status of an 8(a) Program Participant’s Owner
On September 25, 2006, the OIG issued Audit Report 6-32, Economically Disadvantaged Status of an 8(a) Program Participant’s Owner. The OIG received an anonymous complaint regarding a participant in the 8(a) Business Development Program. The complainant stated that the participant company received an unfair share of 8(a) contract awards from the Small Business Administration (SBA). While researching this complaint, the OIG determined that the company’s owner was the future beneficiary of a trust.
The OIG determined that the company’s owner was the future recipient of a trust, of which the SBA was unaware when making the initial and continuing 8(a) eligibility determinations for the company. The trust has provided the owner with capital and the company with credit. Despite the fact that capital and credit opportunities are available to the owner, the trust is not considered an asset since the company’s owner does not have direct access to the funds most of the time. Further, the owner’s economic disadvantage status will change when he receives one-eighth of the value of the trust.
The OIG determined that excluding contingent assets when determining access to capital and credit could undermine the integrity of the program. Specifically, companies owned by individuals who have indirect access to capital and credit can be eligible for the 8(a) program because SBA regulations do not address owners who are in this situation. While the access is indirect, in this case it provided actual capital and credit to the owner and the company. As a result, the company received the benefit of participating in the 8(a) program, although the company and its owner had access to capital and credit. Consequently, this company was eligible to receive 8(a) contracts that could have gone to other 8(a) companies that do not have this competitive advantage. The OIG made three recommendations, in particular, that the Associate Administrator for Business determine whether contingent assets such as trusts should be considered when assessing economic disadvantage and whether any regulation changes on this are needed.