10-04 – Audit of SBA’s FY 2009 Financial Statements

To: Jonathan 1. Carver

Chief Financial Officer

From: Debra S. Ritt

Assistant Inspector General for Auditing

Subject: Audit of SBA's FY 2009 Financial Statements

Pursuant to the CbiefFinancial Officer's Act of 1990, attached is a copy of the Independent Auditors' Report issued by KPMG LLP on the Small Business Administration's financial statements for the fiscal year ended September 30, 2009. The audit was perfonned under a contract with the Office of Inspector General (OIG) and in accordance with Generally Accepted Government Auditing Standards; Office of Management and Budget's (OMB) Bulletin 07-04, Audit Requirements for Federal Financial Statements, as amended; the Government Accountability Office (GAO)/President's Council on Integrity and Efficiency (pCIE) Financial Audit Manual; and GAO's Federal Information System Controls Audit Manual. The KPMG report concluded that SBA's consolidated financial statements presented fairly in all material respects, the financial position of SBA as of and for the years ended.

September 30, 2009 and 2008. It also presented fairly, in all material respects, SBA's net costs, changes in net position, and combined statements of budgetary resources for the years then ended.

With respect to internal controls, KPMG reported a material weakness over financial reporting, and continued to report a significant deficiency related to Information Technology security controls. Details regarding the matters that led to the auditor's conclusion on internal controls are further discussed in Exhibits I and n of the Independent Auditors' Report. KPMG's test for compliance with certain laws, regulations, contracts and grant agreements detennined that the Agency did not fully comply with the Debt Collection Improvement Act of 1996 because SBA did not consistently follow Treasury guidelines for referring delinquent debts for collection. Details regarding the auditor's conclusion are included in the "Compliance and Other Matters" section of the Independent Auditors' Report. The auditors did not report any other instances or matters regarding noncompliance. We provided a draft ofKPMG's report to SBA's Chief Financial Officer (CFO), who concurred with its findings and recommendations and agreed to implement the recommendati~ns. The CFO is delighted that SBA has again received an unqualified audit opinion ~d believes these results accurately reflect the quality of the Agency's financial statements and its improved accounting, budgeting and reporting processes. We reviewed a copy of KPMG's report and related documentation and made necessary inquiries of their respective representatives. Our review was not intended to enable us to express, and we do not express, an opinion on the SBA's financial statements, KPMG's conclusions about the effectiveness ofinterna1 control, or its conclusions about SBA's compliance with laws and regulations. However, our review disclosed no instances where KPMG did not comply, in all material respects, with Generally Accepted Government Auditing Standards.

We appreciate the cooperation and assistance of SBA and KPMG. Should you or your staff have any questions, please contact me at (202) 205-[ ex 2] or Jeffrey R. Brindle, Director, Information Tecbnology and Financial Management Group at (202) 205-[ ex 2]

Attachment

KPMG LLP

2001 M Street: NW

Washington, DC 20036

Independent Auditors' Report

U.S Small Business Administration:

We have audited the accompanying consolidated balance sheets of the u.s. Small Business Administration (SBA) as of September 30,2009 and 2008, and the related consolidated statements of net cost and changes in net position, and combined statements of budgetary resources (hereinafter referred to as "consolidated financial statements") for the years then ended. The objective of our audits was to express an opinion on the fair presentation of these consolidated financial statements. In connection with our fiscal year 2009 audit, we also considered SBA' s internal control over financial reporting and tested SBA' s compliance with certain provisions of applicable laws, regulations, contracts, and grant agreements that could have a direct and material effect on these consolidated financial statements.

Summary

As stated in our opinion on the consolidated financial statements, we concluded that SBA's consolidated financial statements as of and for the years ended September 30, 2009 and 2008, are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles. Our opinion emphasized SBA's implementation of Statement of Federal Financial Accounting Standards (SFF AS) No. 31, Accountingfor Fiduciary Activities.

Our consideration of internal control over financial reporting resulted in identifYing a certain deficiency that we consider to be a material weakness, item number 1, and other deficiencies that we consider to be a significant deficiency, item number 2, as follows:

Improvement Needed in Internal Controls over Financial Reporting

Improvement Needed in Information Technology (IT) Security Controls

The results of our tests of compliance with certain provisions of laws, regulations, contracts, and grant agreements disclosed one instance of noncompliance that is required to be reported herein under Government Auditing Standards and Office of Management and Budget (OMB) Bulletin No. 07-04, Audit Requirements for Federal Financial Statements, as amended.

Noncompliance with the Debt Collection Improvement Act

The following sections discuss our opinion on the SBA's consolidated financial statements; our consideration of the SBA's internal control over financial reporting; our tests of SBA's compliance with certain provisions of applicable laws, regulations, contracts, and grant agreements; and management's and our responsibilities.

Opinion On the Financial Statements

We have audited the accompanying consolidated balance sheets of SBA as of September 30, 2009 and 2008 and the related consolidated statements of net cost and changes in net position, and the combined statements of budgetary resources for the years then ended.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SBA as of September 30, 2009 and 2008 and its net costs, changes in net position, and budgetary resources for the years then ended, in conformity with u.S. generally accepted accounting principles.

As stated in Note 4 to the financial statements, SBA implemented the requirements of SFF AS No. 31 in fiscal year 2009. The information in the Management's Discussion and Analysis, Required Supplementary Information, and Required Supplementary Stewardship Information sections is not a required part of the consolidated financial statements, but is supplementary information required by u.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of this information. However, we did not audit this information and, accordingly, we express no opinion on it.

Internal Control Over Financial Reporting

Our consideration of the internal control over financial reporting was for the limited purpose described in the Responsibilities section of this report and was not designed to identify all deficiencies in the internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis.

In our fiscal year 2009 audit, we identified a deficiency in internal control over financial reporting that we consider a material weakness, as described in Exhibit I, and other deficiencies that we consider to be a significant deficiency, as described in Exhibit II. Exhibit III presents the status of the prior year significant deficiency.

We noted certain additional matters that we have reported to management of SBA in a separate letter dated November 13, 2009.

Compliance and Other Matters

The results of our tests of compliance described in the Responsibilities section of this report, exclusive of those referred to in the Federal Financial Management Improvement Act of 1996 (FFMIA), disclosed one instance of noncompliance that is required to be reported herein under Government Auditing Standards or OMB Bulletin No. 07-04.

As stated in its Federal Managers' Financial Integrity Act (FMFIA) Assurance Statement, SBA management reported the agency was noncompliant with the Debt Collection Improvement Act in fiscal year 2009 due to instances where it did not refer a substantial number of charged off loans to Treasury for offset and cross servicing. The results of our tests of FFMIA disclosed no instances in which SBA' s financial management systems did not substantially comply with the: (1) Federal financial management systems requirements; (2) applicable Federal accounting standards; and (3) the U.S. Standard General Ledger at the transaction level.

Responsibilities

Management's Responsibilities. Management is responsible for the consolidated financial statements; establishing and maintaining effective internal control; and complying with laws, regulations, contracts, and grant agreements applicable to SBA.

Auditors' Responsibilities. Our responsibility is to express an opinion on the fiscal year 2009 and 2008 consolidated financial statements of SBA based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; and OMB Bulletin No. 07-04. Those standards and OMB Bulletin No. 07-04, require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of SBA' s internal control over financial reporting.

Accordingly, we express no such opinion.

An audit also includes:

Examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements;

Assessing the accounting principles used and significant estimates made by management; and

Evaluating the overall consolidated financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In planning and performing our fiscal year 2009 audit, we considered SBA's internal control over financial reporting by obtaining an understanding of SBA's internal control, determining whether internal controls had been placed in operation, assessing control risk, and performing tests of controls as a basis for designing our auditing procedures for the purpose of expressing our opinion on the consolidated financial statements. We did not test all controls relevant to operating objectives, as broadly defined by the FMFIA.

The objective of our audit was not to express an opinion on the effectiveness of SBA's internal control over ,financial reporting. Accordingly, we do not express an opinion on the effectiveness of SBA's internal control over financial reporting. As part of obtaining reasonable assurance about whether SBA's fiscal year 2009 consolidated financial statements are free of material misstatement, we performed tests of SBA's compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of the consolidated financial statement amounts, and certain provisions of other laws and regulations specified in OMB Bulletin No. 07-04, including the provisions referred to in Section 803(a) of FFMIA. We limited our tests of compliance to the provisions described in the preceding sentence, and we did not test compliance with all laws, regulations, contracts, and grant agreements applicable to SBA. However, providing an opinion on compliance with laws, regulations, contracts, and grant agreements was not an objective of our audit and, accordingly, we do not express such an opinion.

SBA's response to the findings identified in our audit is presented in Exhibit IV. We did not audit SBA's response and, accordingly, we express no opinion on it.

This report is intended solely for the information and use of SBA's management, SBA's Office of Inspector General, OMB, the U.S. Government Accountability Office, and the U.S. Congress and is not intended to be and should not be used by anyone other than these specified parties.

/s/ KPMG

November 13, 2009

For the report's Exhibits, please see the attached document.