**AUDIT OF SBA'S ADMINISTRATION**

**OF THE MBELDEF COSPONSORSHIP**

**AUDIT REPORT NUMBER 0-30**

**SEPTEMBER 30, 2000**

**This report may contain proprietary information subject to the
provisions of 18 USC 1905 and must not be released to the public or
another agency without permission of the Office of Inspector General.**

**AUDIT OF SBA'S ADMINISTRATION OF THE MBELDEF COSPONSORSHIP**

**[TABLE OF CONTENTS]{.underline}**

Page

SUMMARY i

INTRODUCTION

A.  Background 1

B.  Audit Objective and Scope 2

RESULTS OF AUDIT

1.  SBA Did Not Determine Its Authority to Disburse Funds

> to a Cosponsor 3

2.  SBA Did Not Adequately Safeguard the Government's

> Interests In This Cosponsorship 6

3.  SBA Lacked Controls Over Assuring Proper Expenditure of

> Appropriated Funds 11

4.  SBA Did Not Take Appropriate Action When Significant

> Problems Arose With the Cosponsorship Agreement 13

5.  SBA Did Not Ensure MBELDEF Provided All Invoices 15

APPENDIX

> A. Audit Report Distribution

![](media/image1.png){width="1.4513888888888888in"
height="1.3555555555555556in"}

U.S. Small Business Administration

Office of Inspector General

####### Washington, DC 20416

+-----------------------------------------------------------------------+
| ####### AUDIT REPORT                                                  |
+-----------------------------------------------------------------------+
| **Issue Date: September 30, 2000**                                    |
+-----------------------------------------------------------------------+
| **Number: 0-30**                                                      |
+-----------------------------------------------------------------------+

TO: Kerry L. Kirkland, Associate Deputy Administrator for

> Government Contracting & Minority Enterprise Development

John M. Bebris, Acting Associate Administrator for Business Initiatives

![](media/image2.png){width="1.35in" height="0.3173611111111111in"}
David R. Kohler, Deputy General Counsel

FROM: Robert G. Seabrooks, Assistant Inspector General

> for Auditing

SUBJECT: Audit of SBA's Administration of the MBELDEF Cosponsorship

Attached is a copy of the subject audit report. The report contains five
findings with seven recommendations. The findings in this report are the
conclusions of the Office of Inspector General's Auditing Division. The
findings and recommendations are subject to review and implementation of
corrective action in accordance with existing Agency procedures for
audit follow-up and resolution.

Please provide your management decision for each recommendation made to
you within 30 days from the date of this report using the attached SBA
Forms1824, Recommendation Action Sheet.

Any questions or discussion of the issues contained in the report should
be directed to Robert Hultberg, Director, Business Development Programs
Group, at (202) 205-7204.

Attachments

SUMMARY

The purpose of this audit was to determine whether SBA properly managed
its cosponsorship agreement with MBELDEF for its Small Disadvantaged
Business (SDB) program introduction and outreach tour. The SDB program
provides procurement benefits to small disadvantaged businesses bidding
on Federal contracts by giving them up to a 10 percent price preference
on their bids. While the SDB program started out as a self-certification
program, SBA began certifying SDBs in 1998. In September 1998, SBA
entered into a cosponsorship agreement with the Minority Business
Enterprise Legal Defense and Education Fund, Inc. (MBELDEF) to conduct a
nationwide tour to explain details of various programs, including the
SBA certification process.

We found that SBA did not take appropriate actions both before and after
signing the cosponsorship agreement (the cosponsorship), which committed
SBA to disburse up to \$900,000 in government funds to MBELDEF.
Deficiencies included:

-   Entering into the cosponsorship without determining SBA's authority
    to disburse government funds through cosponsorship agreements;

-   Entering into the cosponsorship without ensuring adequate safeguards
    over the Government's interests;

-   Lacking controls to assure appropriated funds were properly spent;

-   Failing to raise known significant problems with MBELDEF's handling
    of the cosponsorship to the appropriate levels; and

-   Failing to enforce the terms of the cosponsorship in reviewing
    MBELDEF claimed expenses.

SBA management officials provided comments to a draft of this report
during meetings. They also stated that they had insufficient time to
provide a full response. They agreed with five recommendations and
generally agreed with two recommendations. A summary of their comments
and our analysis are contained at the end of each finding.

INTRODUCTION

A.  BACKGROUND

    The Small Disadvantaged Business (SDB) program provides Federal
    procurement benefits to small disadvantaged businesses bidding on
    Federal contracts by giving them up to 10 percent price preference
    on their bids. Until 1998, companies self-certified that they were
    small and disadvantaged prior to bidding on federal contracts.
    However, after the Supreme Court's decision in *Adarand
    Constructors, Inc. v. Pena*, 515 U.S. 200 (1995), the Department of
    Justice (DOJ) evaluated all Federal procurement programs that used
    race-based criteria. Based on this review, DOJ recommended that
    small disadvantaged businesses be pre-certified by the government
    prior to receiving Federal contracts in order to withstand court
    challenges to the program.

    SBA established the Small Disadvantaged Business Certification and
    Eligibility Office within Government Contracting & Minority
    Enterprise Development (GC/MED) in 1998 to certify SDBs. Details of
    the new SBA certification process were explained in a nationwide
    tour of 2-day training sessions in 13 cities. On September 25, 1998,
    SBA entered into a cosponsorship agreement (Authorization No.
    98-6360-71) with the Minority Business Enterprise Legal Defense and
    Education Fund, Inc. (MBELDEF) to conduct the nationwide tour.
    According to Standard Operating Procedure (SOP) 90 75 2
    (cosponsorship SOP), a cosponsorship is an activity, event, or
    initiative that is planned or conducted jointly by SBA and one or
    more cosponsors, or promoted, publicized, or identified with SBA
    through use of the SBA Logo or Seal. The Office of Business
    Initiatives (BI) is responsible for overseeing cosponsorship
    agreements. A section of the Small Business Act (15 U.S.C. §
    637(b)(1)(A)) gives SBA statutory authority to enter into
    cosponsorships, in conjunction with other entities, for a wide
    variety of training and counseling programs to assist small
    business.

    MBELDEF was founded in 1980 as a non-profit organization dedicated
    to addressing issues affecting the class interests of minority
    business enterprises. It acted as a national, public interest law
    firm and membership organization.

    Under the terms of the cosponsorship agreement, MBELDEF was
    responsible for general administration as well as executing and
    overseeing various contracts for the program introduction and
    outreach tour. Activities included curriculum development,
    marketing, printing of workshop material, workshop logistics, and
    on-site services. Under the terms of this agreement, SBA was to pay
    MBELDEF up to \$900,000 (\$600,000 was to come from a pool of funds
    SBA received from other Federal agencies for certifying SDBs and the
    remaining \$300,000 was transferred from the Department of Defense
    specifically for this cosponsorship). SBA provided MBELDEF an
    initial advance of \$368,630. According to SBA officials, MBELDEF
    did not participate in the last 4 conferences, while MBELDEF
    acknowledged it had no significant role in the last 3 conferences.

    **B. AUDIT OBJECTIVE AND SCOPE**

The audit objective was to determine whether SBA properly managed the
cosponsorship agreement with MBELDEF for the SDB program introduction
and outreach tour. Our audit covered activities relating to the
cosponsorship agreement from August, 1998 through May, 1999. SBA
disbursed its last payment to MBELDEF on this cosponsorship on May 25,
1999.

We audited all available invoices for which MBELDEF received payment
under the cosponsorship agreement. We reviewed SBA and MBELDEF's records
supporting payments made to MBELDEF by SBA, the information SBA used to
reimburse MBELDEF, relevant documentation concerning this cosponsorship
agreement and other procurement methods, e.g., SBA's Standard Operating
Procedures on cosponsorship agreements, the Federal Acquisition
Regulation, the Federal Grant and Cooperative Agreement Act, OMB
Circulars, and legal opinions concerning cosponsorship agreements.
Additionally, we interviewed MBELDEF's President, MBELDEF's accountant
and SBA officials in the following offices: Business Initiatives (BI),
Government Contracting & Minority Enterprise Development (GC/MED),
General Counsel (OGC), and Administration.

MBELDEF did not provide all the requested documents, and SBA did not
maintain the necessary documentation for us to determine the total costs
expended by SBA for the cosponsorship. Therefore, we were unable to
satisfy ourselves with respect to the total amount for these items. We
were, however, able to address the audit objectives by identifying
problems with the management of the cosponsorship.

The fieldwork was conducted from May 22, 2000 to September 15, 2000. The
audit was conducted in accordance with Government Auditing Standards.

**RESULTS OF AUDIT**

Finding 1: SBA Did Not Determine Its Authority to Disburse Funds to a
Cosponsor

SBA disbursed funds through this cosponsorship without determining
whether it had the required authority and without incorporating the
requirements of Circular A-110, "Uniform Administrative Requirements for
Grants and Agreements with Institutions of Higher Education, Hospitals
and Other Non-Profit Organizations." Under generally accepted rules of
statutory construction, when a law is not clear, deference is given to
the implementing agency's interpretation of the law. The statutory
language giving SBA the authority to enter into cosponsorships does not
include specific language permitting SBA to disburse Federal funds
through a cosponsorship. OGC has not issued an opinion on whether SBA
has the authority to disburse funds to a non-government cosponsor
through a cosponsorship.

The statute, 15 U.S.C. § 637(b)(1)(A) provides that the Administration
is empowered to provide technical and managerial aids to small-business
concerns. These aids include cooperating with and advising institutions
and other Federal and State agencies and any other activities as are
deemed appropriate by the Administration. The statutory language on
cosponsorships, however, contains no express authorization for SBA to
use cosponsorships as a vehicle for spending appropriated funds.
According to Senate Report 98-438, which accompanied the Act,
cosponsored training is a highly leveraged program, utilizing minimum
budget funds from the Agency. Also, the Agency's cosponsorship Standard
Operating Procedure (SOP 90 75 2, dated August 7, 1995), does not
authorize SBA to disburse funds through a cosponsorship.

SBA's own internal documents contemplate that a contract, grant, or
cooperative agreement would be used when disbursing Federal funds in
conjunction with a cosponsorship. On June 8, 1988, SBA's General Counsel
issued a memorandum entitled "Procedures for Reviewing and Approving
Proposed Cosponsorship Activities." The memorandum (not a formal General
Counsel opinion) contains an enclosure entitled "Legal Issues Outline
for Cosponsorship Activities," and "identifies areas that should be
considered in assessing the appropriateness of proposed cosponsored
activities, and the manner in which they are proposed to be conducted."
Disbursing funds directly to a cosponsor for services is not one of the
enumerated methods in the memorandum for providing financial support to
a cosponsored activity. Instead, the memorandum asks, "What mechanism is
being used to disburse the funds, e.g., contract, grant or cooperative
agreement?" While we do not believe this administrative checklist
establishes or limits legal authority, it demonstrates that the
cosponsorship statute was not interpreted as containing a separate, new
grant of authority to SBA to disburse funds.

OMB Circular A-110 applies to all agreements between Federal agencies
and non-profit organizations, such as MBELDEF. Paragraph 5 states in
part, that: "Federal agencies responsible for awarding and administering
grants to and other agreements with organizations . . . shall adopt the
language in the Circular unless different provisions are required by
Federal statute or are approved by OMB." The Small Business Act does not
contain different provisions and we are unaware of OMB approval to
exempt SBA from these requirements. SBA did not adopt the language in
the Circular for the MBELDEF cosponsorship agreement.

SBA ultimately paid its cosponsor MBELDEF \$646,610 of the budgeted
\$900,000 in Federal funds under the authority of this cosponsorship
agreement.

**RECOMMENDATIONS**

We recommend that the:

1A. Deputy General Counsel issue an opinion regarding the legality of
SBA disbursing funds under a cosponsorship to a cosponsor absent of
using authorized contract, grant or cooperative agreement procedures;
and

1B. Associate Administrator for Business Initiatives insert a clause in
cosponsorship agreements where SBA is disbursing funds to the cosponsor
prohibiting disbursement unless and until he receives a signed legal
opinion stating that SBA has the authority to disburse funds to the
cosponsor.

***SBA Management's Comments***

Management officials agreed with the two recommendations contained in
this finding. They disagreed that OMB Circular A-110 is applicable to
this kind of agreement, but stated they "may elect" to incorporate
appropriate OMB Circular provisions into future cosponsorships. They
stated that SBA had used cosponsorships for many years to commit
resources either through cash outlays for postage expenses or dedication
of agency staff and non-cash resources. Finally, they commented that the
checklist contained in SBA's General Counsel memorandum merely listed
examples of funding mechanisms.

***OIG Evaluation of Management's Comments***

Management gave no reason why they believe that OMB Circular A-110 is
not applicable to this cosponsorship, and as such we have no reason to
change our conclusion on this matter. SBA signed a cosponsorship
**agreement** with MBELDEF, a **non-profit organization**, and as such,
OMB Circular A-110 "Uniform Administrative Requirements for Grants and
**Agreements** with Institutions of Higher Education, Hospitals and
Other **Non-Profit Organizations**" applies. (bold added). We do not
dispute that SBA had disbursed funds to cosponsors in the past. These
past actions, however, do not justify disbursing funds through a
cosponsorship agreement without determining whether it had the required
authority, especially since the statutory language giving SBA the
authority to enter into cosponsorships does not include specific
language permitting SBA to disburse Federal funds through a
cosponsorship. Lastly, the 1988 Checklist is not necessarily binding,
but in our view, it is evidence that SBA management did not historically
interpret the cosponsorship statute as constituting separate spending
authority.

**Finding 2: SBA Did Not Adequately Safeguard the Government's Interests
In This Cosponsorship**

SBA entered into a cosponsorship agreement to disburse up to \$900,000
to MBELDEF, without ensuring that the government's interests were
safeguarded. While the Federal Managers' Financial Integrity Act of 1982
(FMFIA) and OMB Circular A-123, "Management Accountability and Control"
both require SBA to take appropriate measures to ensure that funds are
safeguarded against waste, fraud, mismanagement or misappropriation, the
cosponsorship agreement did not include these safeguards and the
cosponsorship SOP did not require them either. MBELDEF ultimately did
not complete its responsibilities under the cosponsorship, and the
cosponsorship has ambiguities concerning SBA's legal recourse.

SBA agreed to pay MBELDEF up to \$900,000 in appropriated funds without
evaluating whether MBELDEF could do the tasks it agreed to, or making
provisions in the agreement to ensure that expenditures were reasonable
and performance by MBELDEF was adequate. When entering into the
cosponsorship, SBA did not first determine that:

-   MBELDEF was capable of completing its responsibilities under the
    cosponsorship;

-   MBELDEF had the financial resources within the organization to
    complete the cosponsorship; and

-   The government was paying a fair and reasonable price for what it
    was obtaining.

The cosponsorship did not include:

-   A requirement that SBA would pay MBELDEF only for allocable,
    allowable and reasonable expenses;

-   Penalties against MBELDEF should it not complete its
    responsibilities; and

-   Internal controls to account for the fees MBELDEF collected under
    the cosponsorship, which were to be used before SBA funds.

Additionally, the SBA program official responsible for the cosponsorship
was not trained to ensure that the expenditures and performance were
reasonable.

By excluding these safeguards, SBA did not adhere to FMFIA, OMB Circular
A-123, "Management Accountability and Control," or OMB Circular A-110.
FMFIA and OMB Circular A-123 require executive agencies to take the
appropriate measure to ensure that funds are safeguarded against waste,
fraud, mismanagement or misappropriation. OMB Circular A-110 contains
procedures to assure reasonable costs and proper accountability.

SBA entered into a cosponsorship because the ADA for GC/MED specifically
wanted MBELDEF to do the work. SBA determined that MBELDEF could not
qualify for a contract or grant but could qualify for a cosponsorship.
The cosponsorship SOP did not require the safeguards necessary to
protect spending government funds. While most of these safeguards would
have been incorporated into a contract or a 7(j) technical assistance
grant to MBELDEF, SBA officials stated MBELDEF could not have received
either of these for this project. According to an SBA official, SBA
could not award this to MBELDEF through a contract because MBELDEF did
not have expertise in logistical planning. SBA officials stated that SBA
could not award MBELDEF a 7(j) grant because of reprogramming
limitations that could not be overcome.

The following are examples of problems with the MBELDEF cosponsorship:

-   SBA had to complete MBELDEF's cosponsorship responsibilities because
    MBELDEF did not complete them. According to MBELDEF's President, SBA
    completed the last 3 presentations because MBELDEF did not have the
    funds needed to pay the vendors and speakers for the events. Had SBA
    checked MBELDEF's financial condition and past performance before
    awarding the cosponsorship, it would have been apparent that MBELDEF
    had financial limitations and poor performance. \[ FOIA Exemption 4
    \] Furthermore, MBELDEF's 1997 track record was poor. MBELDEF only
    completed 3 of the 5 studies it contracted to do as a subcontractor
    for a Federal Government award. Further, an SBA official stated that
    MBELDEF did not have expertise in logistical planning to receive
    this project as a contract.

```{=html}
<!-- -->
```
-   MBELDEF did not appear to use some of the Government's money in a
    prudent and reasonable manner, but the cosponsorship did not contain
    provisions for spending funds in a reasonable and prudent manner.
    Because the cosponsorship did not require the expenses to be
    reasonable, MBELDEF had no restrictions on the use of funds, and
    little incentive to be prudent or reasonable in incurring expenses.
    Potentially unreasonable charges[^1] included:

> \- \$74,114 in printing charges to one company for an average of
> \$9,624 per site. For one of the sites, another printing company only
> charged \$5,000 for a similar project, about one-half the average of
> the other company. The first company may have been charging higher
> prices for "rush" jobs. This would have occurred if MBELDEF did not
> provide the company the materials with enough lead-time. MBELDEF's
> accountant stated that MBELDEF used the first printing company because
> they did not require immediate payment.
>
> \- \$46,344 to pay for a project manager. The cosponsorship required
> MBELDEF to provide, at its own expense, a project officer and project
> director. The duties of all 3 individuals were not clear and may have
> overlapped. SBA paid for the project manager and MBELDEF failed to
> provide all the staff time promised for the project officer and
> project director.
>
> \- \$2,004 in long distance phone charges made from hotel rooms. Over
> a five-day period, an MBELDEF contractor charged \$322 or an average
> of over \$64 a day in long distance charges. Another contractor
> charged \$305 over a four-day period or an average of \$76 a day. Over
> a six-day period, a contractor charged \$417 in long distance charges,
> an average of more than \$69 a day. According to one of the hotels
> where these calls were made from, it charged a \$4.51 connection fee
> for each call and approximately \$4 a minute for long distance calls.
> Another hotel stated that it marked up long distance calls by 25 to 30
> percent. A calling card could be used for a \$.80 per call connection
> fee and \$.28 a minute for long distance calls. The President of
> MBELDEF stated that its employees had calling cards and agreed that it
> would have been reasonable to issue calling cards to their contractors
> as well.
>
> \- \$2,149 in computer rental fees. One of MBELDEF's consultants
> charged a \$40 daily rental fee for use of his laptop computer (the
> total charge for these one day rentals was \$1,640). An additional
> computer rental of \$509 was incurred at the Orlando workshop. SBA had
> laptop computers, one of which should have been made available for
> MBELDEF's use. Even if SBA could not provide use of a computer, SBA
> could have purchased one for less than the rental fees and still had
> the computer after completion of the cosponsorship. An SBA office
> purchased laptop computers in September 1999 at a base price of
> \$1,300 and \$1,750 with items such as the LAN card, a modem, port
> replicator, and carrying case. According to this office, laptops
> purchased in 1998 would have been essentially the same price.
>
> \- \$240 in Internet connection fees. A \$20 daily Internet connection
> fee was charged for each day of training. On average, 2 two-day
> workshops were held each month, for an estimated monthly Internet
> connection fee of \$80. An MBELDEF contractor informed the auditors
> that the Internet connection fee was charged to cover his monthly
> Internet connection fee. According to this contractor, his monthly
> Internet fee was \$20 for unlimited usage.
>
> \- \$383 in duplicate meal payments. MBELDEF consultants charged full
> per diem of \$40 a day for breakfast, lunch and dinner during the days
> when breakfast and lunch were served at the workshops.
>
> \- \$342 for upgraded hotel rooms. One individual stayed in a hotel
> room costing \$267.90 per day while other individuals at the same site
> paid \$153.90 per day.
>
> \- \$333 in travel expenses. An MBELDEF contractor made a site visit
> to Orlando on New Years Eve, arriving on December 31 and leaving
> January 1. According to an MBELDEF contractor, this trip was taken to
> determine if construction at the hotel would be completed in time for
> the February Orlando workshop. MBELDEF did not make prior site visits
> to any of the other hotels used for the presentations.

-   MBELDEF's President acknowledged that it did not provide the amount
    of in-kind contribution it agreed to provide. Because the
    cosponsorship did not contain any penalties should MBELDEF not carry
    out the terms of the cosponsorship, SBA has questionable recourse
    against MBELDEF.

```{=html}
<!-- -->
```
-   SBA could not determine the dollar value of the registration fees
    MBELDEF collected, even though MBELDEF was required to use these
    fees prior to receiving funds from SBA. An SBA official stated that
    SBA did not monitor or keep any records of the fees collected by
    MBELDEF, but relied on the information MBELDEF reported. This
    information may not be accurate. For example, an internal SBA e-mail
    correspondence stated that SBA collected \$4,230 in registration
    fees at the Cleveland conference and forwarded the amount to
    MBELDEF. However, MBELDEF reported that only \$760 in cash and
    checks were collected from the Cleveland conference. Also, there
    should have been credit card payments, but MBELDEF did not detail
    how much it collected in fees from credit cards from each site.
    Rather, it reported one lump sum total for credit card registration
    fees received from all the sites. SBA paid MBELDEF based on MBELDEF
    collecting only \$760 in Cleveland.

**RECOMMENDATIONS**

2A. We recommend that the Associate Administrator for Business
Initiatives incorporate safeguards, such as all provisions of applicable
OMB Circulars, into cosponsorships where SBA disburses funds to a
cosponsor. If OMB Circulars do not apply, we recommend that the
following provisions be included in these cosponsorships:

-   a determination that the cosponsor is capable of completing its
    portion of the agreement;

-   a determination that the cosponsor has the financial resources
    within the organization to complete the agreement;

-   a determination that the government is paying a fair and reasonable
    price for what is being provided;

-   the cosponsorship agreement includes appropriate accountability
    requirements and related cost principles, particularly, a
    requirement that SBA will only pay expenses that are allocable,
    allowable and reasonable;

-   the cosponsorship agreement includes terms to deal with
    non-compliance by the cosponsor; and

-   the cosponsorship includes a provision for internal controls to
    ensure that fees collected can be properly accounted for.

2B. We recommend that the Associate Administrator for Business
Initiatives (AA/BI) incorporate the requirement that the program
official responsible for managing the cosponsorship obtain appropriate
training.

***SBA Management's Comments***

Management officials generally agreed with recommendation 2A; but they
believed that the level of "due diligence" should depend upon the
circumstances. They agreed with recommendation 2B. They stated that: the
safeguards placed in this cosponsorship were reasonable based on what
they knew; they believed that MBELDEF could perform its
responsibilities; they have not concluded that they lack recourse should
MBELDEF be found in breach; and they reviewed invoices for
reasonableness and disallowed some costs. Furthermore, they stated that
there was no problem with a senior manager recommending a specific
entity for a cosponsorship and it was circumstances other than MBELDEF's
own qualifications, which discouraged issuing a grant or contract.

***OIG Evaluation of Management's Comments***

Regardless of what SBA knew or thought about MBELDEF, prior to
disbursing up to \$900,000 of Federal funds, SBA should have implemented
adequate safeguards, such as those normally found in a contract, grant,
or cooperative agreement, to ensure these funds were safeguarded against
waste and mismanagement. While SBA management has asserted that
reasonable safeguards were included in the cosponsorship, they did not
elaborate on what they were and how they protected SBA's interests. The
numerous problems associated with this cosponsorship demonstrate that
whatever safeguards existed were inadequate.

**Finding 3: SBA Lacked Controls Over Assuring Proper Expenditure of
Appropriated Funds**

During some of the conferences, as part of the agenda, luncheons and
other food were served to all attendees. In total, SBA and MBELDEF paid
at least \$213,815 for food and refreshments. The relevant statute, 31
U.S.C. Section 1345, states:

> Except as specifically provided by law, an appropriation may not be
> used for travel, transportation, and subsistence expenses for a
> meeting. This section does not prohibit -- (1) an agency from paying
> the expenses of an officer or employee of the United States Government
> carrying out an official duty; . . .

The Comptroller General has applied this prohibition in cases where
Government agencies have used appropriated funds for non-government
personnel to attend seminars and conferences. SBA did not have controls
to ensure that appropriated funds were precluded from paying for food of
non-government attendees. The cosponsorship agreement provided for the
collection of fees and the amount reported as collected was \$81,545. To
ensure that appropriated funds were not spent improperly, SBA and
MBELDEF needed to ensure that fees collected exceeded the related food
costs for non-government participants. This did not occur.

Further, when vendors were not getting paid by MBELDEF and invoices were
forwarded to the Office of Procurement and Grants Management (OPGM),
OPGM officials requested a legal opinion on whether appropriated funds
could be used to pay for food served to attendees of the SDB 12-City
Program. \[ FOIA Exemption 5

\] OPGM, with a previous understanding that SBA could not pay for food,
refused to pay for food expenses. GC&MED paid for the food by either
paying the cosponsor who, in turn, paid the vendors, or by paying the
vendors directly through a government purchase card.

####### RECOMMENDATION

3A. We recommend that the Associate Deputy Administrator of Government
Contracting & Minority Enterprise Development determine the pro rata
share of food costs for non-government attendees versus amount
collected. If the amount collected does not cover the cost of food
served to non-governmental employees, determine the remedies that SBA
must take.

***SBA Management's Comments***

Management officials stated that they needed more time to assess this
finding and make comments. They agreed with the recommendation.

***OIG Evaluation of Management's Comments***

This appears to be responsive.

Finding 4: SBA Did Not Take Appropriate Action When Significant Problems
Arose With the Cosponsorship Agreement

SBA did not follow its own policies and procedures for dealing with
performance problems on cosponsorships. As a result, SBA did not take
appropriate action when it became clear that there were significant
problems with completing the cosponsorship.

Though it was apparent that there were problems with MBELDEF's
performance on the cosponsorship, GC/MED did not elevate the problems to
the AA/BI for consideration. The cosponsorship SOP requires the
responsible program official to advise the AA/BI of any issues or
concerns regarding a specific cosponsorship. Upon being so notified, the
AA/BI may request the Oversight Committee to consider the issues or
concerns. Problems documented during the cosponsorship were:

-   MBELDEF did not have adequate resources to provide the amount of
    personal services required as the in-kind contribution in the
    cosponsorship agreement without a severe impact on MBELDEF,
    according to MBELDEF's President. MBELDEF's President informed SBA
    of this situation five days after the signing of the cosponsorship
    agreement in a September 30, 1998, memorandum to the Acting
    Associate Administrator for Small Disadvantaged Business
    Certification & Eligibility (Acting AA/SDB) and the AA/BI. Though
    the President of MBELDEF requested a modification to the
    cosponsorship, SBA did not modify it. According to MBELDEF and SBA
    officials, the ADA for GC/MED told MBELDEF that they would work this
    out later, though no action was ever formally taken.

-   Before the completion of the program introduction and outreach tour,
    the Deputy Associate Deputy Administrator for Government Contracting
    & Minority Enterprise Development (DADA for GC/MED) concluded that
    it appeared that MBELDEF did not have the capabilities to fulfill
    its responsibilities and recommended canceling the cosponsorship
    agreement. A March 12, 1999, memorandum from the DADA for GC/MED to
    the ADA for GC/MED, with a copy to the Acting AA/SDB, detailed the
    problems with MBELDEF's handling of the cosponsorship that caused
    him to come to those conclusions. These problems included average
    attendance for primary audience being 158 rather than the 400 that
    had been estimated, MBELDEF not developing a national database,
    MBELDEF not paying vendors, and MBELDEF not executing and providing
    oversight for a contract with a vendor for workshop logistics and
    related on-site services. At the time of this memo, the last 6
    program introduction and outreach tour conferences still had not yet
    been conducted.

-   A March 26, 1999 memorandum from the President of MBELDEF to the
    Acting AA/SDB detailed significant problems MBELDEF was having
    completing its cosponsorship responsibilities. With 4 conferences
    left to complete, MBELDEF complained that they had no funds to go
    forward, stating that various vendors would not do the work without
    advance payment. MBELDEF complained that SBA was withholding an
    advance and not processing past invoices.

    In practice, BI and the Oversight Committee have never used the
    cosponsorship SOP provisions for elevating performance problems with
    cosponsorships. According to the former AA/BI, the mechanism
    included in the cosponsorship SOP for the Oversight Committee to
    consider the problems with the cosponsorship is an unused procedure.
    If the Oversight Committee had reviewed this situation, they could
    have ensured that SBA took more appropriate action. The Oversight
    Committee could have overruled the ADA for GC/MED's decision to keep
    working with MBELDEF despite the significant problems, since the ADA
    for GC/MED reported to the Deputy Administrator, and the Deputy
    Administrator was an Oversight Committee member.

    RECOMMENDATION

4A. We recommend that the Associate Administrator for Business
Initiatives take the necessary steps to ensure compliance with the
requirement in SOP 90 75 2 that the responsible program officials report
cosponsorship performance problems to the Associate Administrator for
Business Initiatives.

***SBA Management's Comments***

Management officials disagreed with the finding although they generally
agreed with the recommendation. Although the cosponsorship oversight
committee was not notified when problems arose, management officials
responded that other senior SBA staff was involved. They stated that
they would clarify where the responsibility to oversee cosponsorship
performance problems should rest. Management officials also disagreed
that the only appropriate action was to terminate the cosponsorship
relationship.

***OIG Evaluation of Management's Comments***

Regarding their disagreement with the finding, the informal method that
was used by SBA management was not effective. In this instance, if the
SOP had been followed, the problems could have been resolved early in
the process.

Also, we did not state that the only appropriate action was to terminate
the cosponsorship relationship. We stated that neither the problems were
elevated nor the cosponsorship was canceled. To avoid confusion, we
clarified the sentence and deleted that portion of the statement from
the final report.

Finding 5: SBA Did Not Ensure MBELDEF Provided All Invoices

While the terms of the cosponsorship required MBELDEF to provide SBA
with invoices to justify expenditures, SBA paid MBELDEF for some claimed
expenses for which MBELDEF did not provide invoices. Of the approved
expenses totaling \$728,156 (\$646,610 paid by SBA and \$81,546 paid by
MBELDEF from attendee fees), SBA did not receive invoices for \$132,949,
or 18 percent of the total. SBA officials informally exempted MBELDEF
from submitting all invoices that were individually under \$1,000. These
invoices under \$1,000 totaled over \$31,000. We were advised that the
rationale used to exclude invoices under \$1,000 was that there were too
many individual items under \$1,000 to review. An SBA official also
approved payment and SBA paid MBELDEF for individual expenses exceeding
\$1,000 without obtaining invoices. One such expense was for over
\$77,000 (over 10 percent of the total expenses MBELDEF claimed). As a
result, SBA had no assurance that costs claimed were incurred or that
they related to the cosponsorship. A separate audit report is being
issued that recommends recovery of unjustified payments.

RECOMMENDATION

5A. We recommend that the Associate Deputy Administrator for Government
Contracting & Minority Enterprise Development (GC/MED) take steps to
ensure that GC/MED employees enforce the terms of cosponsorship
agreements for which they are the responsible program official.

***SBA Management's Comments***

Management officials stated that the decision to exempt invoices below
\$1,000 was a well-intentioned consensus decision made for practical
purposes. They believed that any larger missing invoices were due to
inadvertence, but they will look into the fact that some of these larger
invoices were not received. They understood that some of the paid
expenses were for MBELDEF salaries, so a typical third party invoice
would not be available. In the future, they stated that they will use
employees that are more experienced in reviewing and tracking
expenditures to better control and account for funds, and they will not
exempt small value invoices without a written procedure cleared by the
OIG.

[]{.mark}

***OIG Evaluation of Management's Comments***

Management's comments are responsive. The largest missing invoice, which
was for over \$77,000 was not due to inadvertence. An SBA official noted
that it was missing and recommended payment with the stipulation that
MBELDEF would submit the invoice later. To date, MBELDEF has not
submitted that invoice, though based on MBELDEF's accountant's oral
description of what the funds were for, we do not believe that it is a
justified expense. If the expenses were for MBELDEF salaries in excess
of the in-kind contribution, internal MBELDEF documentation would be
considered adequate for payment.

APPENDIX A

AUDIT REPORT DISTRIBUTION

[Recipient]{.underline} [Number of Copies]{.underline}

Administrator 1

Deputy Administrator 1

Deputy Associate Deputy Administrator for Government

Contracting & Minority Enterprise Development 1

Associate Administrator for Small Disadvantaged

Business Certification & Eligibility 1

Chief Financial Officer 1

Attn.: Jeffrey Brown

General Counsel 2

General Accounting Office 2

Agency Comments to Audit

Received After Final Audit Report Issued

![](media/image3.png){width="5.998611111111111in"
height="9.797222222222222in"}

![](media/image4.png){width="5.998611111111111in"
height="9.797222222222222in"}

![](media/image5.png){width="5.998611111111111in"
height="9.697222222222223in"}

![](media/image6.png){width="5.998611111111111in"
height="9.802083333333334in"}

[^1]: Lack of clear documentation on the purpose and basis for invoices
    made a full assessment difficult. Because SBA does not have a clear
    basis to obtain refunds, we did not assess the reasonableness of
    every expense paid. Had we done so, we believe other expenses would
    have been unreasonable.