GAO

United States General Accounting Office

Report to the Chairman, Committee on

Small Business, U. S. Senate

August 2000 FINANCIAL

MANAGEMENT

Status of Financial

Management Issues at

the Small Business

Administration

GAO/AIMD-00-263

Page 1 GAO/AIMD-00-263 Financial Management at SBA

United States General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-284835 Letr

August 29, 2000

The Honorable Christopher S. Bond

Chairman, Committee on Small Business

United States Senate

Dear Mr. Chairman:

You asked that we assist you in your monitoring and oversight efforts by

performing a body of work that would provide you with an assessment of

the Small Business Administration’s (SBA) ability to effectively achieve its

mission of serving the small business sector of the economy and helping

businesses and families recover from disasters. Your request identified

several programmatic and operational areas you wished us to review in

that regard, including financial management at SBA.

Despite receiving an unqualified audit opinion on its fiscal year 1999

financial statements, SBA faces several challenges before it will be able to

provide useful, relevant, reliable day-to-day financial information to

support ongoing management and accountability. To address your

concerns about the status of financial management at SBA, this report

provides information on the following questions:

1. What useful information can Congress obtain from SBA’s fiscal year

1999 financial statements?

2. What were the major internal control deficiencies identified in SBA’s

fiscal year 1999 financial statement audit and what are the major causes

and implications of these deficiencies?

3. What are the ramifications of SBA’s lack of substantial compliance with

the requirements of the Federal Financial Management Improvement

Act of 1996 (FFMIA)?1

1

FFMIA requires auditors for each of the 24 major departments and agencies named in the

Chief Financial Officers (CFO) Act to include in the audit report on the agencies’ annual

financial statements information to indicate whether the agencies’ financial management

systems comply substantially with three requirements: (1) federal financial management

systems requirements, (2) applicable federal accounting standards, and (3) the U.S.

Government Standard General Ledger (SGL) at the transaction level.
B-284835

Page 2 GAO/AIMD-00-263 Financial Management at SBA

Results in Brief SBA’s unqualified audit opinion on its fiscal year 1999 financial statements

means that the information contained in those statements is fairly stated

and therefore can be used as a tool for congressional oversight of the

agency. Among other things, properly prepared and audited financial

statements that include information on the status of budgetary resources,

obligations, and outlays help provide some assurance of the reliability of

numbers reported in the President’s Budget as actual amounts. These

actual amounts show how the resources provided were spent and can be

helpful in evaluating the need for future funding. For a credit agency such

as SBA, in which 75 percent of total appropriations for fiscal year 1999

related to credit programs, the audit of financial statements is essential to

assessing the reliability of the estimated cost of credit programs and can

provide additional information that can be used by decisionmakers to

supplement credit cost information included in the budget. In addition, the

financial statements provide valuable information on SBA’s activities and,

ultimately, in conjunction with measurements of the agency’s outputs, will

provide the means to address the agency’s performance in terms of what

the taxpayers got for their money.

Despite receiving an unqualified opinion, SBA faces major challenges

before it can fully achieve financial accountability. There were two material

internal control weaknesses identified in SBA’s fiscal year 1999 financial

statement audit: (1) SBA’s financial reporting process did not ensure that its

financial statements would be free of material misstatements and

(2) general computer control weaknesses in SBA’s information systems did

not ensure that unauthorized activities, such as the modification of data or

software, would be prevented or detected.

SBA’s lack of an integrated general ledger for recording its transactions

during the year contributed to the deficiencies in SBA’s financial reporting

process. SBA used three separate accounting systems to record various

types of transactions. In addition, SBA relied on multiple, nonintegrated

spreadsheets as well as complex and error-prone manual processes for

recording financial data. This resulted in an overly complex process for

preparing financial statements and a lack of assurance about the reliability

of the data. In addition, SBA lacked comprehensive plans and procedures

for preparing its financial statements. Therefore, an extensive amount of

manual processing and significant adjustments to the financial statements

were required to enable SBA to achieve an unqualified opinion. SBA is

currently undertaking steps to address the identified weakness in the

financial reporting process.
B-284835

Page 3 GAO/AIMD-00-263 Financial Management at SBA

Although SBA took significant, positive steps in fiscal year 1999 toward

improving the general computer controls2 over its information systems, the

results of the audit showed that significant security deficiencies continued

to exist in its information systems. SBA’s auditors found deficiencies in all

six of the general computer control categories that are included in the audit

process. General computer controls have an impact on the overall

effectiveness and security of computer operations rather than specific

computer applications. In addition, they create the environment in which

application systems and controls operate. SBA’s control weaknesses

increased the risk of unauthorized modification of data and software and

reduced assurance that the unauthorized activities would be prevented or

detected.

The deficiencies in SBA’s financial reporting process, coupled with its

general computer control deficiencies, resulted in SBA’s lack of substantial

compliance with FFMIA. FFMIA is a measure of an agency’s ability to

incorporate into its financial management systems the accounting

standards and reporting objectives established for the federal government,

so that all assets, liabilities, revenues, expenses, and the full costs of

programs and activities can be consistently and accurately recorded,

monitored, and uniformly reported. Substantial noncompliance with

FFMIA is one of the factors that indicate that agency financial management

systems do not routinely provide reliable, useful, and timely financial

information to manage on a day-to-day basis. SBA agreed with the auditor’s

findings of noncompliance with FFMIA and developed a remediation plan

which the Office of Management and Budget (OMB) has approved.

SBA’s overall strategy to resolve all FFMIA noncompliance hinges on its

Systems Modernization Initiative (SMI). This initiative is a three-phase,

long-range, comprehensive, overall systems modernization program that

will replace and modernize SBA’s current financial systems. Phase I focuses

on systems for lender monitoring and oversight, Phase II on financial

management systems and disaster loan processing, and Phase III on

2

General computer controls are the policies, procedures, and technical controls that apply

to all or a large segment of an entity’s information systems and help ensure their proper

operation. GAO has issued the Federal Information System Controls Audit Manual

(FISCAM) to provide guidance to auditors in reviewing general computer controls. The

FISCAM identifies six major categories of general computer controls: (1) entitywide

security program planning and management, (2) access controls, (3) application software

development and program change controls, (4) system software controls, (5) segregation of

duties controls, and (6) service continuity controls.
B-284835

Page 4 GAO/AIMD-00-263 Financial Management at SBA

information technology infrastructure improvements and additional

application support systems.

Phase II will be the primary project that addresses FFMIA noncompliance.

Preliminary planning for Phase II started in late fiscal year 1998. Many of

SBA’s policies and procedures for managing information technology are

currently in the early stages of development or not yet developed. Thus, it

is too early to tell whether SBA’s system modernization effort will resolve

SBA’s noncompliance.

SBA’s achievement of a clean audit opinion is an important milestone along

the road to financial accountability. However, until SBA improves financial

reporting and information system controls, it will not be in a position to

provide reliable, timely information on a day-to-day basis, an ultimate goal

of financial management initiatives in the federal government.

Implementation of a fully integrated financial management system is key to

these improvements. However, SBA has several steps it needs to take to be

in a position to effectively undertake such an effort.

Background

Laws and Standards That

Guide the Preparation of

Financial Statements

The Chief Financial Officers (CFO) Act of 1990 laid the legislative

foundation for requiring federal agencies to provide taxpayers, Congress,

and agency program managers with reliable financial information through

audited financial statements. In addition to requiring annual audited

financial statements, the CFO Act sets expectations for agencies to build

effective financial management organizations and systems and to routinely

produce sound cost and operating performance information throughout the

year. Additionally, the Government Performance and Results Act of 1993

(GPRA) requires agencies to establish missions, goals, and performance

measures for assessing the effectiveness and efficiency of agency programs

and services.

Under the CFO Act some of the government’s 24 major agencies, including

SBA, started preparing annual financial statements, beginning with those
B-284835

Page 5 GAO/AIMD-00-263 Financial Management at SBA

for fiscal year 1991.3 The agency financial statements are subjected to

independent audit. These audits (1) determine the reliability of financial

information reported, (2) provide information on the adequacy of systems

and controls used to ensure accurate financial reports and safeguard

assets, and (3) report on agencies’ compliance with laws and regulations.

In an effort to improve the integrity of financial information reported by

federal agencies, in 1990 the OMB, the Department of the Treasury

(Treasury), and GAO established the Federal Accounting Standards

Advisory Board (FASAB) to develop accounting standards for the federal

government. In 1999, the American Institute of Certified Public

Accountants recognized the standards developed by FASAB as being

generally accepted accounting principles (GAAP) for the federal

government.

Because SBA is a credit agency, it has been required to estimate the cost of

its loan programs in accordance with the Federal Credit Reform Act of 1990

(FCRA)4 and FASAB’s accounting standard for credit reform, Statement of

Federal Financial Accounting Standards (SFFAS) No. 2, Accounting for

Direct Loans and Loan Guarantees, as amended, since fiscal years 1992 and

1994, respectively. The FASAB standard established guidance for

estimating the cost of direct and guaranteed loan programs, as well as for

recording direct loans and the liability for loan guarantees for financial

reporting purposes. SFFAS No. 2 states that actual and expected costs of

federal credit programs should be fully recognized in both budgetary and

financial reporting. To accomplish this, agencies first predict or estimate

the future performance of direct and guaranteed loans when preparing

their annual budgets. The data used for these budgetary estimates are

generally updated after the fiscal year-end to reflect any changes in loan

performance since the budget was prepared as well as any expected

changes in future loan performance. This reestimated data is then used in

financial reporting in calculating the allowance for subsidy on direct loans,

the liability for loan guarantees, and the net cost of the program. In the

3

Under the CFO Act as expanded in 1994, beginning with fiscal year 1996 all of the

government’s 24 major agencies are required to prepare annual financial statements.

4

FCRA changed the budgetary treatment of credit programs so that their costs could be

compared more appropriately with each other and with other federal spending. FCRA

requires that the agencies have budget authority in advance to cover the program’s cost to

the government. The agencies are required to estimate the cost of extending or guaranteeing

credit over the life of the loan.
B-284835

Page 6 GAO/AIMD-00-263 Financial Management at SBA

financial statements, the actual and expected costs of direct loans

disbursed and guaranteed loans committed as part of a credit program are

recorded as “Program Cost” on SBA’s Statement of Net Costs.

How Audit Opinions Are

Determined

In an audit of an agency’s basic financial statements, the auditor must

consider the results of all audit procedures to determine whether an

opinion can be expressed on the fairness of the information presented and,

if so, what type of opinion. In this regard, there are four possibilities:

Table 1: Types of Audit Opinions

While unqualified audit opinions are essential to providing an annual public

scorecard, they do not guarantee that agencies have the financial systems

needed to dependably produce reliable financial information. Modern

systems and good internal controls are essential to reach the end goal of

useful, relevant, reliable day-to-day financial information to support

ongoing management and accountability.

Type of audit opinion What it means

Unqualified opinion • Basic statements and the accompanying

notes are fairly stated in accordance with

GAAP.

Qualified opinion • Overall the financial statements are fairly

stated.

• However, one of the following conditions

exist for one or more major accounts:

1. limitation on audit scope

2. failure to follow GAAP

3. uncertainty over whether certain

information was fairly presented.

Disclaimer of opinion • The auditor is unable to obtain satisfaction

that the financial statements are fairly

presented and does not express an

opinion.

• Possible causes:

1. severe limitation on the audit scope

2. material uncertainties about amounts

or outcomes.

Adverse • Financial statements are materially

misstated and do not fairly present

financial position.
B-284835

Page 7 GAO/AIMD-00-263 Financial Management at SBA

Internal Control Over

Financial Information

The study and evaluation of the system of internal control over financial

reporting are important to the auditor and are specifically included as part

of the financial statement audit under generally accepted auditing

standards. GAO’s Standards for Internal Control in the Federal

Government5 defines internal control as an integral component of an

agency’s management that provides reasonable assurance that the

following objectives are being achieved: (1) effectiveness and efficiency of

operations, (2) reliability of financial reporting, and (3) compliance with

applicable laws and regulations. Internal control serves as the first line of

defense in safeguarding assets and in preventing and detecting errors and

fraud. As federal policymakers and program managers continually seek to

better achieve agencies’ missions and program results, they seek ways to

improve accountability. A key factor in achieving these outcomes and

minimizing operational problems is the implementation of appropriate

internal control.

Internal control over financial information is evaluated during the audit,

and professional auditing standards require the auditor to communicate to

the agency any condition that represents a significant deficiency in internal

controls − referred to as a reportable condition.6 A material internal control

weakness is a reportable condition that does not reduce to a relatively low

level the risk that errors, fraud, or noncompliance involving significant

amounts may occur and not be detected in a timely manner by employees

in the normal course of performing their assigned functions.

Scope and

Methodology

To assess financial management issues at SBA, we reviewed reports

prepared by SBA’s Independent Public Accountant (IPA) under the

direction of SBA’s Office of Inspector General (OIG) concerning (1) SBA’s

fiscal year 1999 financial statement audit, (2) SBA’s financial reporting

system performance, and (3) SBA’s information system security. We

coordinated with representatives and analyzed workpapers and documents

from the independent auditor relating to these reports. In addition, we met

5

Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1,

Nov. 1999)

6

A reportable condition is a significant deficiency in the design or operation of internal

controls that could adversely affect the organization’s ability to provide reasonable

assurance on the reliability of its financial reporting, performance reporting, and

compliance with laws and regulations.
B-284835

Page 8 GAO/AIMD-00-263 Financial Management at SBA

with officials from SBA’s Office of the CFO and OIG to obtain more

information about issues raised in the reports and to gain a better

understanding of the audit work performed and its results. We assessed

SBA’s financial management systems and financial reporting with regard to

the agency’s adherence to federal standards including the CFO Act; GPRA;

FFMIA; OMB Circular No. A-127, Financial Management Systems; OMB

Bulletin 97-01, Form and Content of Agency Financial Statements; FASAB

Statements of Federal Financial Accounting Concepts and Statements of

Federal Financial Accounting Standards; and GAO’s Federal Information

System Controls Audit Manual (FISCAM).

To determine the extent that SBA’s financial statements provide some

assurance over the amounts reported in the President’s Budget, we

compared budgetary figures in SBA’s financial statements with

corresponding accounts in the President’s Budget and identified any

significant differences. For the two largest credit programs, we determined

whether the cash flow models and assumptions used to estimate the cost of

SBA’s loan programs for financial statement purposes were also used to

calculate SBA’s budget estimate.

To identify useful information in SBA’s fiscal year 1999 financial statements,

we reviewed applicable accounting standards and described what type of

information is included in each of the financial statements and the

accompanying notes and how that information could be useful to Congress.

To assess the status of SBA’s noncompliance with FFMIA, we obtained and

reviewed information about the current status of SBA’s remediation plan to

resolve its noncompliance with FFMIA.

Our work was conducted in Washington, D.C., from March to June 2000 in

accordance with generally accepted government auditing standards. We

requested written comments on a draft of this report from the

Administrator of Small Business or her designee. The Chief Financial

Officer provided us with written comments that are reprinted in appendix

II and discussed in the “Agency Comments” section of this report.
B-284835

Page 9 GAO/AIMD-00-263 Financial Management at SBA

SBA’s Financial

Statements Are a

Valuable Tool for

Congressional

Oversight

SBA’s unqualified audit opinion on its fiscal year 1999 financial statements

means that the information contained in those statements is fairly stated

and, therefore, can be used as a tool for congressional oversight of the

agency. Among other things, properly prepared and audited financial

statements that include information on the status of budgetary resources,

obligations, and outlays help provide some assurance on the reliability of

numbers that are reported in the President’s Budget as actual amounts.

These actual amounts show how the resources provided were spent and

can be helpful in evaluating the need for future funding. For a credit

agency, such as SBA, where 75 percent of its total appropriations for fiscal

year 1999 related to credit programs, the audit of its financial statements is

essential for assessing the reliability of the estimated cost of credit

programs and can provide additional information on the cost of credit

programs that can be used to supplement credit cost information included

in the budget. Additionally, the financial statements provide valuable

information on SBA’s activities and, ultimately, in conjunction with

measurements of the agency’s outputs will provide the means to address

the agency’s performance in terms of what the taxpayers got for their

money. In addition to the discussion that follows, in appendix I, we have

reproduced portions of SBA’s financial statements and explained the

information that can be obtained about SBA’s operations from each

component of the financial statements.

Testing the Reliability of

Budgetary Amounts

Assurances over the reliability of SBA’s actual amounts included in the

President’s Budget are provided through the Statement of Budgetary

Resources (SBR). The SBR provides information on the status of budgetary

resources at the fiscal year-end and the obligations and outlays during the

year. Preparation of the SBR requires agencies to reconcile obligations

recorded in budgetary records with their cash outlays.

Because SBA’s SBR was subjected to the rigors of a financial audit and

received an unqualified opinion, information contained in SBA’s SBR

provides useful information for congressional oversight. For example, the

outlay information in SBA’s SBR is the same as the outlay amounts reported

in the President’s Budget. Certain other amounts reported in SBA’s SBR

differ from actual amounts reported in the President’s Budget. The

identified differences were generally due to timing or other justifiable
B-284835

Page 10 GAO/AIMD-00-263 Financial Management at SBA

reasons.7 Notwithstanding these differences, the audit provides some level

of assurance over the actual amounts presented in the President’s Budget.

Reliable reports of actual amounts reported in the President’s Budget are

important not only for demonstrating accountability over resources

provided, but also for assisting in evaluating the amount of funding needed

in the future. By providing some assurance that funds were spent for the

purposes for which they were appropriated, the audit helps

decisionmakers know how much was actually spent on a particular

program during the fiscal year. In addition, since obligated and unobligated

balances are reviewed as part of a financial statement audit, the audit can

help determine whether obligated funds are properly recorded and whether

there has been a buildup of unobligated balances. These, plus other

relevant factors, can contribute to decisions about the appropriate

amounts of funding for an agency’s programs in the future.

In addition to the assurance it provides over actual amounts in the

President’s Budget, the audit’s validation of SBA’s compliance with credit

reform in preparing its financial statements provides some additional

assurance on the reliability of budgeted amounts for credit program cost

estimates. This is particularly important at SBA, because such a significant

portion of SBA’s total appropriations relate to credit programs. When

FASAB developed accounting standards for loan programs, it recognized

that financial accounting should support the budget and that accounting

standards for credit reform should be consistent with budgeting under

credit reform. This mirroring helps provide for integrity in the budget

process through the financial statement audit. As part of the fiscal year

1999 SBA financial statement audit, the cash flow models and assumptions

used to estimate the cost of SBA’s loan programs were reviewed by the

auditors and found to be reasonable. Assuming that these same models

were used for budgetary purposes, the results of the financial statement

audit can be extended to the budget process.

7

Because the President’s Budget and the SBR are prepared using separate reporting systems

and the President’s Budget is required to be submitted several months before the SBR,

differences in the amounts reported often occur.
B-284835

Page 11 GAO/AIMD-00-263 Financial Management at SBA

To determine whether SBA used the same cash flow models to calculate its

fiscal year 20018 budget estimates, we compared the cash flow assumptions

in the budget estimate to the assumptions in the financial statement

estimate for the two largest credit programs [Disaster Loan Program and

7(a) General Business Loan Program] at SBA. Although we found some

differences between the cash flow assumptions in the budget model and

the audited assumptions in the financial statement model, these differences

had little or no budgetary impact. This general consistency between the

budget and financial statement model helps provide assurance to Congress

that the loan program cost estimates included in the fiscal year 2001

President’s Budget are reasonable.

Since SBA is a large federal lender, providing reasonable credit program

cost estimates based on reliable data is critical to effective program

stewardship and accountability. Because economic and other conditions

that affect loan programs can change rapidly, SBA and other federal credit

agencies are required to update or “reestimate” loan program costs

periodically for differences between (1) estimated loan performance and

related cost and (2) the actual program cost recorded in the accounting

records, as well as for expected changes in future economic performance.

Because of the timing of the preparation and audit of these reestimates,

SBA’s fiscal year 1999 reestimates were included in the financial statements

but not in the actual amounts in the budget. Thus, the financial statements

included additional information on the cost of credit programs that can be

used by decisionmakers to supplement credit cost information included in

the budget.

When the loan program costs were updated for fiscal year 1999, SBA’s

revised estimate showed the programs costing less than previously

anticipated for direct loans and guaranteed loans. This is referred to as a

downward reestimate. The downward reestimates, which relate to all

previously disbursed and committed loans and which are disclosed in the

notes to SBA’s financial statements, totaled $360 million. The notes show

that the downward reestimates of loan program cost for prior years more

than offset the subsidy expense recognized for the current year

8

Because the President’s Budget is prepared 2 years in advance, the fiscal year 2001 budget

estimates of loan program costs were prepared during the same time period as the fiscal

year 1999 financial statement estimates of loan program costs, generally using the same

data.
B-284835

Page 12 GAO/AIMD-00-263 Financial Management at SBA

disbursements.9 SBA’s downward reestimates were primarily the result of

changes in economic activity and program performance as well as

refinements in the credit subsidy modeling process. Over time as agencies

improve their ability to forecast costs through better modeling and more

and better historical data, it is anticipated that the variability in the subsidy

rate will diminish. However, some level of variability will continue to exist.

Focusing on Key Activities

of the Fiscal Year

In addition to helping provide assurance over certain amounts in the

President’s Budget, SBA’s audited financial statements provide useful

information on the agency’s activities during the fiscal year. For example,

SBA held a pilot loan sale in fiscal year 1999. The notes inform the reader

that SBA expects to sell the majority of its loan portfolio within the next 3

or 4 years.

According to the information in SBA’s notes, SBA’s fiscal year 2001 budget

request for subsidy costs did not include the results of the pilot sale.

However, the notes do let the reader know that the effect of the pilot sale,

as well as the other sales planned, will be factored into the calculations of

SBA’s subsidy costs for the fiscal year 2002 budget request.10 Thus, since the

amount of money SBA receives for its loans from the loan sales will most

likely continue to differ from the amount SBA expected to receive by

holding and servicing the loans, inclusion of the effect of the loan sales in

the 2002 budget request can be expected to affect future subsidy costs.

Whether future subsidy costs increase or decrease will depend on the

actual cash SBA ultimately ends up receiving on these loan sales.

Reliable Cost Information

Will Help Assess Agency

Performance

In the 1990s Congress and the federal government laid out a statutory and

management framework that provides the foundation for strengthening

government management and accountability. GPRA requires agencies to

establish missions, goals, and performance measures for assessing the

effectiveness and efficiency of agency programs and services. Previously,

the CFO Act had established a structure for more businesslike management

9

For a more detailed discussion of the costs of SBA’s loan programs, see appendix I.

10Subsequent to the issuance of the fiscal year 1999 financial statements, SBA’s asset sales

schedule changed. As a result, SBA officials stated that the results of the pilot sale and the

one sale currently planned for fiscal year 2000 do not provide the predictive data or

reliability needed to include the results of the sale in the subsidy calculation for its budget

request.
B-284835

Page 13 GAO/AIMD-00-263 Financial Management at SBA

and reporting of the government’s finances. The effective implementation

of the statutory framework, although important, is not an end in itself.

Rather, the implementation of the framework is the means to an

end—improved federal performance through enhanced agency and

congressional decision-making and oversight.

The first step towards this goal is to have reliable cost information. SBA

has achieved, by virtue of its unqualified opinion, basic accountability over

the fiscal year end amounts reported in its financial statements. The next

step will be to link financial information to performance measures. For

example, one of SBA’s performance goals is to increase opportunities for

small business success. A number of performance indicators, such as

increasing the numbers of business loans approved and increasing the

number of start-up businesses, are associated with this goal. Ultimately,

SBA should be able to determine not only if the goal was achieved but also

the cost associated with achievement of the goal. Certain of SBA’s

performance indicators, such as the default rate on its loans, are currently

reviewed for reasonableness as part of the financial statement audit. Once

SBA has fully developed the ability to link costs to outcomes, taxpayers can

be better apprised of what they receive for their money.

Despite Unqualified

Opinion, SBA’s Audit

Report Discloses

Significant Financial

Management

Deficiencies

Although SBA has realized an important objective in obtaining a timely,

unqualified opinion on its financial statements, financial accountability

goes well beyond an unqualified opinion. The key to financial

accountability is to improve internal controls and underlying financial and

management information systems to the point where timely, accurate, and

useful information is generated on an ongoing basis, not just at the end of

the fiscal year. Strong financial management systems and internal control

are essential to ensure the end goal of useful, relevant, reliable day-to-day

financial information to support ongoing management and accountability.

SBA’s auditors identified two material internal control deficiencies that

indicated that SBA had yet to fully achieve financial accountability:

(1) SBA’s financial reporting process did not ensure that its financial

statements would be free of material misstatements and (2) general

computer control weaknesses in SBA’s information systems did not ensure

that unauthorized activities, such as the modification of data or software,

would be prevented or detected. Because of these weaknesses, an

extensive amount of manual processing and significant adjustments to the

financial statements were required.
B-284835

Page 14 GAO/AIMD-00-263 Financial Management at SBA

Weakness in the Financial

Reporting Process

SBA’s financial reporting system did not ensure that SBA’s financial

management activities were consistently and accurately recorded, and

timely and uniformly reported. Specifically, SBA did not have a single

integrated general ledger. Rather, it relied heavily on complex, error prone

manual processes and lacked comprehensive plans and procedures for

preparing financial statements. Without changing its current processes,

SBA will continue to experience difficulties in preparing timely, accurate

financial information. SBA is currently undertaking steps to address the

identified weaknesses in the financial reporting process.

OMB Circular A-127 requires that each federal agency have an integrated

financial management system designed to provide for effective and

efficient interrelationships between software, hardware, and personnel.

Ideally, each transaction would be entered into a financial management

system once, and all records and reports would accurately reflect the

impact of the transaction. This was not the case at SBA because it did not

have an integrated general ledger system but instead used three separate

accounting systems to record transactions. Consequently, transactions had

to be entered into more than one system in order to prepare financial

statements. For example, a loan disbursement would be entered into the

loan accounting system when the loan was disbursed. Summarized

transactions from the loan accounting system would also be manually

entered onto an Excel spreadsheet to reflect the impact on budgetary

accounting. In addition, the general ledger balances affected by the loan

disbursement transaction would be rekeyed several times into various

spreadsheets prior to the preparation of the financial statements.

FFMIA, as well as OMB Circular A-127, requires agencies to comply with

the U.S. Government Standard General Ledger (SGL) 11 at the transaction

level. Although SBA’s system did not follow the SGL, SBA had developed a

crosswalk to it. In order to prepare its consolidated trial balances, SBA

combined data from all of its funds.12 However, SBA’s chart of accounts was

not consistent among funds. This inconsistency resulted in the need for

conversion and data manipulation in the preparation of the consolidated

11The SGL provides a standard chart of accounts that agencies are to use in their financial

statements.

12SBA’s financial statements involve funds in seven categories: salary and expenses, surety

bond guarantees, disaster loans, business loans, the Business Assistance Trust Fund, the

Pollution Control Equipment Fund Liquidating Account, and the Office of the Inspector

General.
B-284835

Page 15 GAO/AIMD-00-263 Financial Management at SBA

trial balances. The inconsistency stems from the fact that although

progress has resulted in a number of SBA’s funds using SGL-based

accounts, the remaining funds do not. The additional manipulation of the

data not only took time but also increased the likelihood of error in the

consolidated trial balances.

Because of its multiple systems for recording financial data and its

extensive manual recording, SBA’s process for preparing its financial

statements was overly complex. It also lacked sufficiently detailed

documentation of these complex procedures. For example, SBA’s budget

office used a system to monitor the budget authority for new loans. This

system, however, was not completely linked with the accounting system.

Therefore, SBA had developed a separate process to include the activity for

loans made in prior years when determining budgetary account balances.

For fiscal year 1999, SBA updated and maintained more than 50

spreadsheets, each containing over 150,000 cells of data, to determine the

budgetary account balances for its loan programs. The complex processes

that SBA had developed were cumbersome, labor intensive, and heavily

reliant on manual keying and rekeying of data and account balances, which

increased the risk of errors.

Additionally, during fiscal year 1999, SBA moved its primary financial

reporting responsibilities from Washington, D. C., to Denver, Colorado.

Fiscal year 1999 was the first year that Denver staff was given

responsibility for preparing the financial statements. This change created

challenges since SBA’s financial reporting process was complex and the

procedures for preparation of its financial statements were not sufficiently

detailed. Also, SBA held its first loan asset sale in fiscal year 1999 and this,

combined with the accounting complexities of the sale, affected the

financial statement preparation.

All of these factors led to the identification of problems in SBA’s financial

reporting process during the fiscal year 1999 audit. Therefore, in

conjunction with the audit process, SBA made numerous adjustments to

the year-end financial statements. These adjustments were necessary to

remedy problems identified by the auditors such as amounts incorrectly

classified, line items that were not labeled consistently between funds,

unusual and abnormal balances that were undetected, and trial balances

and financial statements that were not prepared consistently between

funds.
B-284835

Page 16 GAO/AIMD-00-263 Financial Management at SBA

To address these issues, the Inspector General (IG) included the following

recommendations, with which we concur, in its audit report on the fiscal

year 1999 financial statements:

• Ensure that adequate resources are provided to implement an effective

internal control system over the financial reporting processes.

• Provide additional training to both staff and management responsible

for the financial reporting process.

• Develop detailed procedures for activities, such as preparing journal

vouchers, calculating loss allowances, preparing and updating trial

balances, and preparing financial statements and notes.

• Require each fund accountant to process and maintain trial balances

and reports in a consistent manner.

• Reduce the manual rekeying of data through automation. To the extent

possible, automate the roll-up of data from the off-line and on-line trial

balances to the combined and consolidated trial balances and the

resulting financial statements.

In addition to performing the audit of the fiscal year 1999 financial

statements, the IPA was engaged by SBA’s OIG to review the integrity of

SBA’s internal financial management systems. In conjunction with this

review, the auditors made the following recommendations, with which we

concur:

• Require preparation of quarterly consolidated agencywide financial

statements. With quarterly financial statements, SBA will be better

prepared for an accurate and timely year-end consolidation process.

• Implement an integrated standard general ledger to account for and

report on all SBA fund transactions.

According to the IPA’s report, SBA has undertaken a significant system

project that, if fully implemented, may overcome the identified weaknesses

in the financial reporting process. As of June 2000, SBA was working to

complete a redesign and implementation of a new automated financial

reporting consolidation system. This redesign was to include a

consolidated general ledger, crosswalks to activity in the SGL accounts,

and feeder systems that would eliminate most of the manual applications

and rekeying. In addition, SBA has hired a contractor to help assemble

documentation on reporting procedures into a comprehensive reporting

plan.
B-284835

Page 17 GAO/AIMD-00-263 Financial Management at SBA

While implementation of the recommendations should improve SBA’s yearend financial reporting process, the lack of an integrated financial

management system hinders SBA from generating complete, reliable,

consistent, timely, and useful financial management information on its dayto-day operations. Achieving this goal would require that SBA implement

an integrated financial management system designed to provide effective

and efficient interrelationships between software, hardware, personnel,

procedures, controls, and data contained within the system. SBA’s efforts

toward developing such a system are discussed later in this report.

Weaknesses in Information

Systems Controls

The other major internal control weakness identified in SBA’s fiscal year

1999 Independent Auditor’s Report on Internal Control is in SBA’s

information systems controls. While SBA took several steps during fiscal

year 1999 to improve its general computer controls, many of its initiatives

were in the initial stages of implementation and development. Weaknesses

were reported in all six categories of general computer controls (general

computer controls create the environment in which application systems

and controls operate).

During a financial statement audit, the auditor focuses on general controls

for the agency’s major computer facilities and systems supporting a

number of different computer applications, such as major data processing

installations or local area networks. If general computer controls are weak,

they severely diminish the reliability of controls associated with individual

applications. The IPA, under contract with SBA’s OIG, used GAO’s FISCAM

to guide the review of SBA’s computer information systems environment

for the financial statement audit. The following section discusses each of

the six categories of general computer controls, examples of the

weaknesses identified by SBA’s IPA in each category, and the impact those

weaknesses have on SBA’s general computer controls.

• Entitywide security program planning and management provide a

framework and continuing cycle of activity for managing risk,

developing security policies, assigning responsibilities, and monitoring

the adequacy of computer-related controls. These are the fundamental

activities that allow an organization to manage its information security

risks cost effectively, rather than react to individual problems only after

a violation has been detected or an audit finding has been reported.

SBA has established a senior management group responsible for

developing and implementing an ongoing agencywide information
B-284835

Page 18 GAO/AIMD-00-263 Financial Management at SBA

systems security program. However, the basic requirements related to

general computer controls were either not in place or not fully effective

at the time of the fiscal year 1999 audit. For example, formal agencywide

security policies and procedures had not been established. A draft

standard operating procedure for information system security was in

clearance but not yet established as official agency policy. Also, security

plans with acceptable risk levels and rules for each system had not been

developed and security awareness training had not been provided.

Without a well-designed program, security controls may be inadequate;

responsibilities may be unclear, misunderstood, and improperly

implemented; and controls may be inconsistently applied. Such

conditions may lead to insufficient protection of sensitive or critical

resources and disproportionately high expenditures for controls over

low-risk resources.

• Access controls limit or detect access to computer resources such as

data files, application programs, and computer-related facilities and

equipment. Access controls should provide reasonable assurance that

these computer resources are protected against unauthorized

modification, disclosure, loss, or impairment. Such controls include

physical controls, such as keeping computers in locked rooms to limit

physical access, and logical controls, such as security software

programs designed to prevent or detect unauthorized access to sensitive

files.

Audit testing conducted by the IPA revealed that 11 percent (199 out of

1,819) of active users’ accounts in SBA systems were for employees and

contractor personnel no longer employed by the agency. These user

accounts were not inactivated promptly upon the termination or

transfer of an employee. Also, a network server for the Office of General

Counsel was not physically secured. Both examples demonstrate SBA’s

lack of adequate access controls.

Without adequate access controls, unauthorized individuals, including

outside intruders or terminated employees, can read and copy sensitive

data and make undetected changes or deletions for malicious purposes

or personal gain. In addition, authorized users can unintentionally

modify or delete data or execute changes that are outside their

authority.
B-284835

Page 19 GAO/AIMD-00-263 Financial Management at SBA

• Application software development and program change controls

prevent implementation of unauthorized programs or modification to

existing programs. Key aspects of such controls are ensuring that

(1) software changes are properly authorized by the managers

responsible for the agency program or operations that the applications

support, (2) new and modified software programs are tested and

approved prior to their implementation, and (3) approved software

programs are maintained in carefully controlled libraries to protect

them from unauthorized changes and to ensure that different versions

are properly labeled.

Application control weaknesses were noted by the IPA in several of

SBA’s systems. For example, SBA’s Automated Loan Control System

(ALCS) 13 controls did not ensure that all program changes were

authorized, tested, and reviewed before being placed into production. In

addition, no procedures were developed to ensure that server-based

programs developed by and for various field and program offices

followed system development and program change control procedures.

This situation existed because SBA had not implemented controls to

restrict and monitor programmer access and had not developed the

criteria necessary to assess and justify access needs for application

software development and program change. Application software

development and program change control procedures are critical to

ensure that the applications and programs work as intended and provide

accurate and reliable information for decision-making and reporting

purposes. Consequently, SBA could not be assured that programmers

were performing only authorized activities.

Application software development and program change control focuses

on controlling the changes that are made to software systems in

operation. This is an important area because operational systems

produce the financial statements, and the majority of program changes

are made to maintain operational systems. Without proper controls,

there is a risk that security features could be inadvertently or

deliberately omitted or turned off or that processing irregularities or

malicious code could be introduced.

13ALCS is a minicomputer system maintained and operated at each of SBA’s four Disaster

Area Offices. ALCS is used to track and process disaster loan applications.
B-284835

Page 20 GAO/AIMD-00-263 Financial Management at SBA

• System software14 controls limit and monitor access to powerful

programs and sensitive files that (1) control computer hardware and

(2) secure applications supported by the system. Controls over access to

and modification of system software are essential in providing

reasonable assurance that operating system-based security controls are

not compromised or impaired. Control concerns for system software are

similar to the access control issues and the application software change

controls issues discussed earlier. However, because of the high level of

risk associated with system software activities, a separate set of control

procedures apply to them.

As part of the audit, the IPA reviewed and tested the highest-level

system software privileges for one of SBA’s systems. These privileges

provide access that allows programmers to shut down the system or run

unauthorized programs. Audit testing conducted by the IPA identified 12

user accounts that did not have documentation showing security officer

approval, 24 unnecessary accounts, 15 users that had multiple accounts,

6 accounts that belonged to unknown individuals, and 3 accounts that

belonged to a previous vendor. Procedures and criteria were not in place

to ensure on an ongoing basis that access to system software was

properly restricted. Because system software programmers are often

more technically qualified than other data processing personnel (thus,

having a greater ability to perform unauthorized actions if controls in

this area are weak), adequate system software controls are essential.

Inadequate controls in this area could lead to unauthorized individuals

using system software to circumvent security controls to read, modify,

or delete critical or sensitive information and programs. Inadequate

controls could also provide the opportunity for authorized users of the

system to gain unauthorized privileges to conduct unauthorized actions

and for systems software to be used to circumvent edits and other

controls built into application programs. Such weaknesses seriously

diminish the reliability of information produced by all of the

applications supported by the computer system and increase the risk of

fraud and sabotage.

14A set of programs designed to operate and control the processing activities of computer

equipment. These programs help control and coordinate the input, processing, output, and

data storage associated with all of the applications that run on a system.
B-284835

Page 21 GAO/AIMD-00-263 Financial Management at SBA

• Segregation-of-duty controls provide policies, procedures, and an

organizational structure to prevent a single individual from controlling

key aspects of computer-related operations and thereby conducting

unauthorized actions or gaining unauthorized access to assets or

records without being detected. Key areas of concern involve the

segregation of duties between major operating and programming

activities, including duties performed by users, application

programmers, and data center staff. Policies outlining the

responsibilities of these groups and related individuals should be

documented, communicated, and enforced.

To help reduce the potential for unauthorized activities, SBA has a Rule

of Two policy that requires two individuals to sign certain documents

and approve certain transactions or perform specific transactions

within a computer application. Although SBA has acted on a fiscal year

1998 audit recommendation that it enforce the Rule of Two, it is

important to note that SBA has assessed only one of the critical system

functions and access controls to identify incompatible duties. User

privileges in the other systems have not been reviewed and assessed.

For example, programmers at the Office of the CFO had access to both

financial data records and software that provide the ability to initiate

transactions. The primary reason that users were provided with these

system privileges was lack of training. Security administrators and

supervisory personnel at SBA lacked understanding of the activities

associated with certain privileges and were not provided systemspecific training.

Although segregation of duties, alone, will not ensure that only

authorized activities occur, inadequately segregated duties increase the

risk that erroneous or fraudulent transactions could be processed,

improper program changes could be implemented, and computer

resources could be damaged or destroyed.

• Service continuity controls ensure that when unexpected events

occur, critical operations continue without interruption or are promptly

resumed and critical and sensitive data are protected. SBA had a

disaster recovery plan in place for one of the accounting systems.

However, further work was needed. The IPA audit found that the Denver

Finance Center (among its responsibilities is processing and

maintaining disbursement and collection records for SBA) and each

SBA Disaster Area Office had only partial plans in place, and the plans

had not been tested. This reduced SBA’s assurance that it would be able
B-284835

Page 22 GAO/AIMD-00-263 Financial Management at SBA

to provide congressionally mandated services to disaster victims and

the small business community if a significant disruption occurred.

While SBA took several steps during fiscal year 1999 to improve its general

computer controls, many of its initiatives were in the initial stages of

implementation and development. SBA took the following actions:

• A senior management group, the Information System Control

Committee (ISCC), was established composed of the Chief Information

Officer (CIO), the CFO, and the Associate Administrator for Disaster

Assistance responsible for addressing the issue of information system

security. This committee will oversee the agency’s efforts to address the

OIG audit recommendations.

• A draft certification and accreditation (C&A) handbook15 and a schedule

for conducting C&A reviews were developed.

• Guidelines for software development and program change controls

were improved.

• Disaster recovery tests for the Loan Accounting System were

conducted.

• A risk assessment of the Federal Financial System (FFS) access

privileges was conducted to reduce exposure and strengthen

segregation-of-duty controls; system development and program change

control procedures and a security plan were drafted.

• New procedures for conducting inventories of existing systems and

applications were issued, system development controls were improved,

and a security plan was drafted.

• Funding to increase the security administration staff and obtain

contractor support was provided.

To address the remaining information systems control issues, the OIG

made the following recommendations, with which we concur, in its audit

report on the fiscal year 1999 financial statements: (1) that SBA continue its

efforts toward implementing an agencywide information systems security

program and (2) that SBA establish responsibilities and milestones for

developing and implementing policies and procedures to:

15The C&A handbook is an agencywide certification and accreditation effort that focuses on

a process for management review and approval to ensure that adequate controls are

provided for applications that process sensitive or classified data.
B-284835

Page 23 GAO/AIMD-00-263 Financial Management at SBA

• assign responsibility for the security of each major application to a

management official knowledgeable in the nature of the program

supported by the application;

• provide annual security training for all SBA employees and contractor

personnel on their information system security responsibilities;

• notify security administrators of changes in the employment status of all

personnel, promptly eliminate unnecessary user accounts, and notify

security administrators in advance when personnel are being discharged

under adverse conditions;

• develop a consolidated listing of all user accounts and privileges granted

for all SBA employees and contractor personnel;

• revise position descriptions for personnel with security administration

responsibilities to include specific responsibilities, technical

requirements, and appropriate performance measures in their annual

performance plans;

• ensure the use of Office of the CIO approved System Development Life

Cycle standards and techniques for all new systems, system

enhancements, and program changes;

• perform quality control for all test plans and results for new systems,

system enhancements, and program changes to ensure that results are

documented, the system operates as intended, and test-support

documentation is retained;

• limit and monitor programmer access to operating systems, system

utilities, application software, and production data;

• assess critical system functions and access controls to identify

incompatible duties and enforce SBA’s Rule of Two;

• complete the agency’s disaster recovery and business continuity plans

and perform annual testing of major portions of the plans;

• obtain approval by senior management and program officials of security

plans and risk assessments.

Implementation of these recommendations should improve SBA’s general

controls over its information systems by assuring that (1) data is

safeguarded, (2) computer application programs are protected,

(3) unauthorized access to system software is prevented, and (4) continued

computer operations are ensured in case of unexpected interruptions.
B-284835

Page 24 GAO/AIMD-00-263 Financial Management at SBA

Lack of Compliance

With FFMIA Further

Indicates

Accountability

Challenges

SBA’s financial management systems in fiscal year 1999 did not

substantially comply with (1) federal financial management systems

requirements, (2) federal accounting standards, or (3) the U.S. government

SGL at the transaction level as required by FFMIA. One of the purposes of

FFMIA is to ensure that agency financial management systems can

routinely provide reliable, useful, and timely financial information. As

noted previously, causes of FFMIA noncompliance at SBA were attributed

to its material weakness in information systems controls (federal financial

management systems requirement) and its material weakness in the

financial reporting process (federal accounting standards and the SGL

requirements).

Federal Financial

Management Systems

In conducting the fiscal year 1999 audit, the IPA found that for federal

management systems requirements, SBA did not provide security over

financial information in accordance with OMB Circular A-130, Management

of Federal Information Resources, appendix 3, “Security of Federal

Automated Information Resources.” As previously discussed, general

computer control weaknesses in SBA’s financial management systems were

reported in a variety of areas.

Federal Accounting

Standards

The IPA also concluded that SBA’s financial management systems did not

substantially comply with federal accounting standards. According to OMB

Bulletin 98-08, appendix D, “The Federal Financial Management

Improvement Act of 1996, OMB Implementation Guidance for CFOs and

IGs,” an indicator of substantial compliance with federal accounting

standards is that the audit disclosed no material weaknesses in internal

controls that affect the agency’s ability to prepare auditable financial

statements and disclosures. As previously discussed, SBA had a material

weakness in its financial reporting process since it did not ensure that

financial statements would be free of material misstatements.

Consequently, the IPA concluded that SBA was not in substantial

compliance with this element.

U.S. Government Standard

General Ledger at the

Transaction Level

Finally, the IPA discovered that SBA’s financial systems did not capture

information using the same description and posting rules as those

contained in the SGL. FFMIA requires agencies to comply with the SGL at
B-284835

Page 25 GAO/AIMD-00-263 Financial Management at SBA

the transaction level. 16 As previously mentioned, SBA does not have an

integrated general ledger system but instead uses three separate

accounting systems to record transactions. SBA’s chart of accounts was not

consistent across funds as a result of progress made toward the

implementation of SGL-based accounting. A number of SBA’s funds use the

SGL, and the remainder will do so as systems are revised.

SBA’s Plan for Resolving

FFMIA Noncompliance

FFMIA requires that in addition to auditors reporting on FFMIA

compliance in their financial statement audits, the head of each agency

must determine whether the agency’s financial management systems

comply with FFMIA based on a review of the audit results and any other

applicable information. If the agency agrees with the auditor’s findings of

noncompliance, a remediation plan must be developed in consultation with

OMB. The IG is required to report on agency progress in achieving

compliance.

According to OMB guidance, remediation plans should contain corrective

actions and target dates and the resources necessary to implement those

actions and achieve substantial compliance with FFMIA within 3 years of

the date noncompliance is determined. If, with the concurrence of the

Director of OMB, the agency head determines that substantial compliance

cannot be reached within 3 years, the remediation plan must specify the

most feasible date by which the agency will achieve compliance and

designate an official responsible for effecting the necessary corrective

actions. SBA agreed with the auditor’s findings of noncompliance for

FFMIA and developed a remediation plan that OMB has approved.

SBA’s overall strategy to resolve all FFMIA noncompliance hinges on its

Systems Modernization Initiative (SMI). This initiative is a three-phase,

long-range, comprehensive, overall systems modernization program that

will replace and modernize SBA’s current financial systems. SMI was

originally estimated to cost approximately $40 million, to begin in fiscal

year 1998, and to take 5 years to complete. Phase I focuses on the systems

16An agency’s core financial system general ledger management function should be in full

compliance with the SGL chart of accounts descriptions and posting rules. This means that

transactions from feeder systems are summarized and fed into the core financial system’s

general ledger following SGL requirements through an interface (automated or manual).

The detail supporting the interface transactions can be traced back to the source

transactions in the feeder systems, and the feeder systems process transactions that are

consistent with SGL account descriptions and posting.
B-284835

Page 26 GAO/AIMD-00-263 Financial Management at SBA

for lender monitoring and oversight, Phase II focuses on financial

management and accounting systems and paperless disaster loan

processing, and Phase III on information technology infrastructure

improvements and additional application support systems. While SBA’s

efforts during fiscal years 1998 and 1999 have been focused on Phase I,

preliminary planning for Phase II started in late fiscal year 1998.

Although SBA has begun to undertake another project to redesign and

implement a new automated consolidation system for their financial

reporting process, Phase II will be the primary project that addresses

FFMIA noncompliance. This phase of the project involves modernizing

SBA’s financial management and administrative activities, including

information technology; procurement and grants management; human

resources; and financial functions, especially accounting, budget reporting,

and financial operations.

The main purpose of Phase II is to migrate to a new Core Accounting

System (CAS) that will serve as the central repository for all of SBA’s

general ledger activity and consolidated reporting. SBA officials stated that

this system will be effective for fiscal year 2002. One of the primary goals of

SBA’s SMI is to replace its existing outdated systems. As previously

mentioned, SBA’s systems are not effectively integrated and thus provide

limited information sharing. SBA hopes to begin to rectify this problem by

implementing a new CAS. SBA envisions that this new CAS will be one of

the basic building blocks for a fully integrated financial management

system.

However, according to our recently completed evaluation of SBA’s

management of information technology (IT),17 many of SBA’s policies and

procedures for managing information technology are currently in the early

stages of development or not yet developed. To improve SBA’s IT

management, we made several recommendations in this report, with which

SBA concurred. Therefore, because SBA’s strategy to resolve FFMIA

noncompliance depends on the successful completion of the SMI, until the

recommendations are implemented it is too early to tell whether SBA’s

system modernization effort will resolve its noncompliance. We recognize

that it will take time, investment, and sustained emphasis on correcting

deficiencies to improve SBA’s financial management systems to the level

17Information Technology Management: SBA Needs to Establish Policies and Procedures for

Key IT Processes (GAO/AIMD-00-170, May 2000).
B-284835

Page 27 GAO/AIMD-00-263 Financial Management at SBA

required by FFMIA and necessary for effectively managing government

funds.

Conclusion SBA’s achievement of a clean audit opinion is an important milestone along

the road to financial accountability. However, until SBA improves financial

reporting and information system controls, it will not be in a position to

provide reliable, timely information on a day-to-day basis, an ultimate goal

of financial management initiatives in the federal government.

Implementation of a fully integrated financial management system is key to

these improvements. However, SBA needs to take several steps to be in a

position to effectively undertake such an effort.

Agency Comments We obtained oral comments on a draft of this report from SBA officials and

incorporated the comments where appropriate. We also received written

comments from SBA’s Chief Financial Officer which are reprinted in

appendix II. SBA generally agreed with the findings in our report, and the

comments provided further details on the progress that SBA has made in

improving its financial management. For example, SBA indicates that it has

now reassigned two personnel to the financial reporting team and staff, and

management responsible for the financial reporting process have

completed training in specific technical aspects of report preparation. In

addition, SBA has engaged a contractor to document its accounting and

reporting processes. However, these, as well as the other efforts discussed

by SBA in its comments, generally occurred after the end of our fieldwork

or are currently in process, and thus we have not evaluated these actions.

As agreed with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution until 30 days from the

date of this letter. At that time we will send copies to Senator John Kerry,

Ranking Minority Member of your Committee and the Honorable Aida

Alvarez, Administrator, Small Business Administration. Copies will also be

made available to others upon request.
B-284835

Page 28 GAO/AIMD-00-263 Financial Management at SBA

Please contact me at (202) 512-9508 if you or your staff have any questions

concerning this report. Key contributors to this assignment were Shirley

Abel, Julia Duquette, Doris Yanger, Carol Browder, and Maria Zacharias.

Sincerely yours,

Linda M. Calbom

Director, Resources, Community, and Economic Development

Accounting and Financial Management Issues
Page 29 GAO/AIMD-00-263 Financial Management at SBA
Page 30 GAO/AIMD-00-263 Financial Management at SBA

Appendix I

Analysis of SBA’s Financial Statement Apendxies

Components ApendxiI

This appendix provides an analysis of each component of the financial

statements with a general discussion of its purpose, followed by a

reproduction of the component taken from SBA’s fiscal year 1999

Accountability Report and an explanation of the information that can be

obtained about SBA’s operations from it.

Components of a

Federal Agency’s

Financial Statements

The first component of an agency’s financial statements is the balance

sheet. The balance sheet summarizes the assets and liabilities of a federal

agency as of a specific point in time, usually the end of the fiscal year.

Assets and liabilities shown on the balance sheet are classified as either

intragovernmental (transactions among federal entities) or governmental

(transactions of the federal government with nonfederal entities). Also, the

balance sheet separates those liabilities for which funds have been

appropriated (liabilities covered by budgetary resources) from those that

have not yet been funded (liabilities not covered by budgetary resources).

Figure 1 shows SBA’s balance sheet as of the end of fiscal year 1999.
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 31 GAO/AIMD-00-263 Financial Management at SBA

Figure 1: Balance Sheet

D

C

A

B

E

This same amount

appears in Note 7

The components of this

amount appear in Note 7

This same amount

appears on the Statement

of Changes in Net Position
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 32 GAO/AIMD-00-263 Financial Management at SBA

SBA provides guaranteed loans to small businesses unable to secure

financing in the commercial market without SBA’s guarantee and direct

loans to victims of federally declared disasters. Thus, the assets and

liabilities on SBA’s Balance Sheet are mostly the result of its credit

program activities.

Instead of maintaining cash in a commercial bank account, SBA, like most

federal agencies, uses the Department of Treasury to process its cash

receipts and disbursements. SBA’s fund balances with Treasury (see

item A in figure 1), which totaled $8.2 billion at the end of fiscal year 1999,

are obtained through appropriations as well as borrowings from Treasury

and receipts from SBA’s program and administrative activities. Fund

balances with Treasury are used to make disbursements of direct loans, to

purchase defaulted loan guarantees, to pay SBA’s expense of servicing and

liquidating loan receivables, and to administer credit and business

assistance programs.

Loans and defaulted guaranteed loans are accounted for as credit

program receivables (see item B in figure 1) at the time SBA disburses

the funds. As of September 30, 1999, SBA had $7.1 billion in credit program

receivables. This amount represents the ultimate amount of cash the

government expects to collect on SBA loans—primarily repayments of loan

principal and interest less an allowance for the estimated long-term cost to

the government of the outstanding loans. As discussed below, more

detailed information about SBA’s credit program receivables can be found

in note 7 (see figure 7) to SBA’s financial statements.

SBA is required to estimate the net cost of extending or guaranteeing

credit, called subsidy cost. The subsidy cost is measured as the present

value1 of estimated net cash flows, excluding administrative costs. In

estimating cash flows, SBA and other credit agencies are required to

predict borrower behavior—how many borrowers will pay early, pay late,

or default on their loans and at what point in time. The subsidy costs are

financed with appropriated funds. The portion of SBA’s disaster and other

direct loans that SBA predicts will ultimately be collected is financed by

borrowings from Treasury. For example, a hypothetical disaster loan of

$100 may have a subsidy cost of $20 (the amount SBA expects to lose),

1

Present value is the worth of the future stream of returns or costs in terms of money paid

immediately. In calculating present value, prevailing interest rates provide the basis for

converting future amounts into their “money now” equivalents.
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 33 GAO/AIMD-00-263 Financial Management at SBA

which is financed with appropriated funds, and the remaining $80 is

financed by Treasury borrowings (the amount SBA expects to be repaid).

These Treasury borrowings are labeled as debt on the balance sheet (see

item D in figure 1). At approximately $10 billion, this debt owed to Treasury

at the end of fiscal year 1999 is the largest liability on SBA’s balance sheet.

Accounts payable (see item C in figure 1) is primarily interest owed on

Treasury debt which is payable in the upcoming year.

Liabilities for loan guarantees (see item E in figure 1) represents the

amount estimated to be payable in the future to the holders of defaulted

SBA guaranteed loans. This primarily includes payments SBA estimates it

will make on defaulted guaranteed loans less estimated fees paid to SBA

for providing the guarantee. As with the credit program receivables, more

detailed information about SBA’s loan guarantees can be found in note 7

(see figure 7) to SBA’s financial statements.

The Statement of Net Cost (see figure 2) shows, by major program, how

much it cost SBA to provide its services for the fiscal year. Net cost is

calculated by subtracting any earned revenues, such as guarantee or user

fees, from gross cost, including program cost as well as administrative

costs such as payroll, health, and retirement benefits. The “bottom

line”(net cost of operations) discloses to the reader, at a summary level,

what it cost taxpayers to operate the agency’s programs for the fiscal year.
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 34 GAO/AIMD-00-263 Financial Management at SBA

The net costs shown on SBA’s statement include the gross cost of each of

the identified programs, including any subsidy costs and administrative

costs, less any earned revenues. SBA’s net cost of operations for fiscal year

1999 was $515 million. The largest portions of SBA’s net costs are related to

disaster and business loans. SBA’s net cost in fiscal year 1999 for the

Development Company Program (see item F in figure 2) reflects a

negative cost due to an update in program cost for previously disbursed

and committed loans. SBA is required to periodically update or

“reestimate” loan program costs for differences between (1) estimated loan

performance and related cost and (2) the actual program cost recorded in

the accounting records, as well as expected changes in future economic

performance. When the loan program cost for the Development Company

Program were updated, SBA’s revised estimate showed the programs

costing less than previously anticipated.2 The other costs associated with

this program were not enough to offset this downward reestimate.

Figure 2: Consolidated Statement of Net Cost

This same amount

appears on the

Statement of Financing

F

2

This is generally referred to as a downward reestimate.
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 35 GAO/AIMD-00-263 Financial Management at SBA

Additional information about the subsidy costs of SBA’s business and

disaster programs can be found in note 7 of the financial statements (see

figure 7). In addition, note 12 shows SBA’s net cost of operations by budget

functional classification3 and also shows the breakout of gross cost and

earned revenue for these budget classifications (see figure 8).

The Statement of Changes in Net Position (see figure 3) shows how the

agency’s net cost of operations was funded. It also shows the agency’s net

position at the beginning of the fiscal year, the major inflows and outflows

of funds that caused the net position to change during the year, and the

ending net position. The ending net position, the last line of the statement,

discloses to the reader, at a summary level, the current amount of funding

available4 to that agency at the end of the audited year for future

operations. This amount is the same as the “Total Net Position” on the

Balance Sheet.

3

The budget functional classification presents costs in terms of the national needs being

addressed, in much the same way as the President’s Budget, i.e., commerce and housing

credit, or community and regional development.

4

Funds available may include unobligated funds as well as unliquidated obligations (i.e.,

undelivered orders).
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 36 GAO/AIMD-00-263 Financial Management at SBA

As can be seen from SBA’s Statement of Changes in Net Position, SBA

receives the majority of the funding needed to support its programs

through appropriations. The $637 million transfers-out (see item G in

figure 3) is the return of money to Treasury as a result of a downward

reestimate of the cost of SBA’s loan programs during fiscal year 1999. When

the loan program costs were updated, SBA’s revised estimate showed the

programs costing less than previously anticipated. Therefore, the excess

was returned to Treasury. In addition, SBA’s Statement of Changes in Net

Position shows that SBA’s net position increased during fiscal year 1999

due to an increase in SBA’s unexpended appropriations (see item H in

figure 3).

The Statement of Budgetary Resources (SBR) (see figure 4) is a

relatively new addition to the federal financial statements, having been

required starting with fiscal year 1998. It provides a link between actual

amounts reported in the President’s Budget for SBA and the audited

financial statements, thus exposing the budgetary actuals to the rigors of a

financial audit. SBA’s SBR is presented on a consolidated basis, unlike the

Figure 3: Consolidated Statement of Changes in Net Position

This same amount appears

on the Balance Sheet

This same amount

appears on the

Statement of Financing G

H
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 37 GAO/AIMD-00-263 Financial Management at SBA

statements that appear in the President’s Budget which are presented by

account. Figure 4 shows SBA’s SBR for fiscal year 1999.5

The SBR provides detailed information on the status of budgetary

resources at the fiscal year-end and obligations and outlays during the year.

Preparation of the SBR requires agencies to reconcile obligations recorded

in budgetary records with their cash outlays.

Because the President’s Budget and the SBR are prepared using separate

reporting systems and the President’s Budget is required to be submitted

several months before the SBR, differences in the amounts reported often

occur. These differences may be because of timing or other justifiable

reasons. For example, adjustments made to amounts reflected on the SBR

may be based on information available only after the President’s Budget

has been submitted.

In the Statement of Budgetary Resources, the caption Status of

Budgetary Resources, Category A, Direct refers to funds that are

apportioned for each calendar quarter in the fiscal year and Category B,

Direct refers to funds that are apportioned on a basis other than calendar

quarters. In general, Category A includes funds related to Salaries and

Expenses and the Office of the Inspector General, and Category B includes

funds related to SBA programs such as the Business Loan and Investment

Fund and the Disaster Loan Fund.

5

In addition to this SBR, SBA’s financial statements also include a consolidating SBR that

provides a breakout of amounts by fund (e.g., the Business Loan and Investment Fund and

the Disaster Loan Fund).
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 38 GAO/AIMD-00-263 Financial Management at SBA

Figure 4: Combined Statement of Budgetary Resources

(The Combined Statement of Budgetary Resources continues on the next page)

The sum of these three

numbers, $4,221,655,

appears on the

Statement of Financing

Each amount appears

on the Statement of

Financing
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 39 GAO/AIMD-00-263 Financial Management at SBA

For fiscal year 1999, certain amounts reported in SBA’s SBR differed from

actual amounts for SBA reported in the President’s Budget. However,

because the identified differences are justifiable, as explained below, the

audit provides some level of assurance over the actual amounts presented

in the President’s Budget. Additionally, because of the timing of the

preparation and audit of credit program cost reestimates, SBA’s fiscal year

1999 reestimates were included in the financial statements but not in the

actual amounts in the President’s Budget. Thus, the financial statements

include additional information on the cost of credit programs that can be

used by decision makers to supplement credit cost information included in

the budget.

Differences in SBA’s actual amounts recorded in the President’s Budget and

the same items reflected in the SBR can be attributed to audit adjustments

and inconsistencies in account classifications between the financial and

Figure 4 (continued)
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 40 GAO/AIMD-00-263 Financial Management at SBA

budget offices. For example, actual figures related to budget authority,

obligations, and outlays for the preceding fiscal year are submitted to OMB

from November to January for inclusion in the President’s Budget for the

upcoming fiscal year. At the time that these figures are submitted, many

end-of-year audit adjustments that will be reflected in the SBR when the

financial statements are issued several months later are not available. In

other cases, differences between amounts reported in SBA’s SBR and the

President’s Budget exist because the instructions for preparing the SBR

require that balances for expired accounts6 are included, while the

President’s Budget includes only actual year information. Other differences

are attributable to credit subsidy reestimates and end-of-year loan sales

figures that were not available until after the budget submission.

Notwithstanding these types of differences, preparation and audit of the

SBR provides for the first time a mechanism for determining the

reasonableness of agency actual amounts presented in the President’s

Budget.

The primary purpose of the Statement of Financing (see figure 5) is to

explain the difference between obligations of budget authority, as reported

in the President’s Budget and the SBR, and the net cost of operations as

shown in the Statement of Net Cost. It clarifies the relationship between

budgetary accounting, where obligations are recorded when goods and

services are ordered, and financial accounting, where expenses are

recorded when goods and services are received. Various amounts in the

Statement of Financing can be linked to amounts reported in other

components of the financial statements. Since a number of the significant

amounts contained in the Statement of Financing can be obtained from

other statements, one of the real benefits of the statement is that it

demonstrates that the budgetary and financial accounting information in an

agency’s financial management systems are commensurate with each other.

6

Expired accounts are an appropriation or fund account in which the balance is no longer

available for incurring new obligations because the time available for incurring such

obligations has expired.
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 41 GAO/AIMD-00-263 Financial Management at SBA

Figure 5: Combined Statement of Financing

(The Combined Statement of Financing continues on the next page.)

The components of this

amount appear on the

Statement of Budgetary

Resources

This same amount

appears on the Statement

of Changes in Net Position

Each of these

amounts appears on

the Statement of

Each of these amounts

appears on the Statement

of Budgetary Resources
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 42 GAO/AIMD-00-263 Financial Management at SBA

The fact that SBA was able to prepare the Statement of Financing and

received an unqualified opinion gives the reader comfort that SBA was able

to reconcile its budgetary and financial accounting information. The reader

can also link amounts reported in the Statement of Financing back to other

components. For example, the $4.2 billion in budgetary resources

obligated for orders and services to be received or benefits to be

provided to others is the sum of the first three amounts in the SBR

“Status of Budgetary Resources” section. The last number on the Statement

of Financing is the net cost of operations which is the same as the net cost

of operations on the Statement of Net Costs.

Footnotes are used at the end of financial statements to offer a fuller

understanding of the information presented. Footnotes may be used to

identify accounting methods used for major expenses and other

transactions or to provide supplementary information and details about

significant assets and liabilities.

Figure 5 (continued)

This same amount

appears on the

Statement of Net Cost
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 43 GAO/AIMD-00-263 Financial Management at SBA

For example, note 1, Significant Accounting Policies (see figure 6),

describes SBA’s accounting methods and also discloses that SBA initiated a

pilot program in fiscal year 1999 to sell rather than service loans from its

portfolio. SBA also indicates that its fiscal year 2001 budget request for

subsidy allowance did not reflect any cash flow or gains or losses from the

pilot sale.

Further details on the loan sale, as well as an abundance of other

information, are disclosed in note 7, Loans and Loan Guarantees,

Non-Federal Borrowers, which is presented in figure 7 under part K.

Figure 6: Footnotes to Principal Financial Statements, Note 1

***

***
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 44 GAO/AIMD-00-263 Financial Management at SBA

Figure 7: Footnotes to Principal Financial Statements, Note 7

(Note 7 continues on the next page.)
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 45 GAO/AIMD-00-263 Financial Management at SBA

Figure 7 (continued)

(Note 7 continues on the next page.)

This same amount

appears on the

Balance Sheet
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 46 GAO/AIMD-00-263 Financial Management at SBA

Figure 7 (continued)
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 47 GAO/AIMD-00-263 Financial Management at SBA

Part A of note 7 (see figure 7) lists the loan and loan guarantee programs

operated by SBA and explains the basic method of accounting for them.

Parts B through E display the assets related to direct loans and defaulted

guaranteed loans.7 Although only the net amount of credit reform

receivables was reported in SBA’s balance sheet, a reader can calculate the

gross amount of loans receivable and the allowance by adding the numbers

in Parts B through E, as shown in figure 9. The gross amount of loans

receivable is useful to know because it shows the total amount of loans

outstanding, and the allowance shows the long-term cost to the

Figure 8: Footnotes to Principal Financial Statements, Note 12

Figure 9: Summary of Part B Through Part E in SBA’s Note 7

(In thousands of dollars)

Direct loans

Loans

receivable

Interest

receivable

Foreclosed

property

Gross total

assets

Subsidy

qllowance

Net direct

loan assets

Pre-1992 direct loans 1,448,947 19,558 10,902 1,479,407 (142,864) 1,336,543

Post-1991 direct loans 5,777,062 41,165 1,283 5,819,510 (960,517) 4,858,993

Acquired pre-1992 direct loans 719,303 44,400 11,181 774,884 (355,616) 419,268

Acquired post-1991 direct loans 592,350 20,774 19,159 632,283 (160,636) 471,647

Total 8,537,662 125,897 42,525 8,706,084 (1,619,633) 7,086,451

This same amount

appears on the Balance

Sheet

7

When a borrower defaults on a guaranteed loan, SBA purchases the loan from the lending

institution. At this point the loan is recorded on SBA’s financial statement as part of credit

program receivables.
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 48 GAO/AIMD-00-263 Financial Management at SBA

government of those outstanding loans. The gross amount of loans

receivable as of September 30, 1999, was approximately $8.7 billion and the

subsidy allowance was about $1.6 billion. By subtracting the subsidy

allowance from the gross amount of loans receivable of $8.7 billion, we

calculate the net amount of loan assets of approximately $7.1 billion, which

agrees with the amount reported on the balance sheet.

Parts F and G (see figure 7) of the footnote provide data on SBA’s

guaranteed loans outstanding and liability for loan guarantees. Part F

shows that the total amount or face value of guaranteed loans outstanding

as of September 30, 1999, was approximately $39.6 billion. Of that amount

almost $32 billion or approximately 80 percent is guaranteed by SBA, i.e.,

represents a risk to the government. Part G shows that the liability for loan

guarantees is $1.4 billion, which is the amount reported on SBA’s balance

sheet. It is based on estimated defaults on guaranteed loans and therefore

represents the estimated cost to the government of the guaranteed loans.

The subsidy expenses reported by SBA in parts H and I (see figure 7)

represent the estimated losses for the direct and guaranteed loans

disbursed during the current reporting year.8 The Federal Credit Reform

Act of 1990 requires that these estimates be based on the present value of

projected net cash flows over the life of the direct and guaranteed loans,

taking into account interest subsidies, projected defaults, fee receipts, and

all other factors that may affect the cash flows. The subsidy expenses are

subjected to reestimates on an annual basis.

For direct loans disbursed in fiscal year 1999, SBA incurred a subsidy

expense of $152 million, as shown in part H. Of that amount, $96 million

was due to interest subsidy costs and $64 million was due to the costs of

projected defaults. For guaranteed loans disbursed in fiscal year 1999, SBA

incurred a subsidy expense of $127 million, as shown in part I. The expense

equals the costs of the estimated defaults of $456 million, minus projected

fee receipts and other offsets of $329 million.

In fiscal year 1999, SBA made downward reestimates for the subsidy

allowance for direct loans and the liability for loan guarantees, as shown in

figure 10. For direct loans, the downward reestimate was $153 million. For

8

This differs from the subsidy estimate made for budgetary purposes, which includes the

estimated cost for loans and guarantees for a particular fiscal year, regardless of the year in

which they are disbursed.
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 49 GAO/AIMD-00-263 Financial Management at SBA

loan guarantees, the downward reestimate was $207 million. In total, the

downward reestimates, which relate to loans disbursed and committed in

prior years, more than offset the expenses recognized for the loans

disbursed and committed in the current year. As a result, SBA reported a

negative expense of $80 million for its direct loans and loan guarantees for

fiscal year 1999. In the Statement of Net Costs these amounts offset other

loan program costs, such as administrative expenses.

Part J (see figure 7) of the footnote provides data on administrative

expenses9 for direct loans and loan guarantees. The total administrative

expense was $263 million. Of that amount, $166 million was for direct loans

and $97 million was for loan guarantees.

Finally, SBA provides information on its loan sale in part K (see figure 7).

SBA held its first loan sale in fiscal year 1999, and the majority of the loans

sold were from the 7(a) program. SBA expects to sell the majority of its

loan portfolio within the next 3 or 4 years. Additional sales have been

planned for fiscal year 2000, and these sales will include disaster loans.

About $1.5 billion of loans is expected to be sold in each of the future sales.

As stated previously, note 1 (see figure 6) informed the reader that SBA’s

fiscal year 2001 budget request for subsidy allowance did not include the

results of the loan sale. In note 7 (see part K in figure 7), it is noted that the

effect of the small sale in fiscal year 1999 and the planned sales in fiscal

Figure 10: Subsidy Expense and Reestimates

(In thousands of dollars)

Expense for loans

disbursed in 1999 Reestimates Total

Direct loans 152,244 (152,691) (447)

Loan guarantees 127,242 (206,910) (79,668)

Total 279,486 (359,601) (80,115)

9

Costs for administering credit activities, such as salaries, legal fees, and office costs, that

are incurred for credit policy evaluation, loan and loan guarantee origination, closing,

servicing, monitoring, maintaining accounting and computer systems, and other credit

administrative purposes are administrative costs. Administrative costs are not included in

calculating subsidy costs.
Appendix I

Analysis of SBA’s Financial Statement

Components

Page 50 GAO/AIMD-00-263 Financial Management at SBA

year 2000 will be factored into the subsidy expense and allowance

calculations included in the fiscal year 2000 financial statements.10

These are just a few examples of the types of detailed information included

in the footnotes to the financial statements that provide insight into the

agency’s activities.

10According to agency officials, SBA’s asset sale schedule has changed and only one sale will

be held during fiscal year 2000. Due to the lateness of this sale in the fiscal year, and the

financial transactions related to it, SBA officials have indicated that fiscal year 2000

financial statements will only include the results of the pilot sale held in fiscal year 1999.
Page 51 GAO/AIMD-00-263 Financial Management at SBA

Appendix II

Comments From the Small Business

Administration ApendxiI
Appendix II

Comments From the Small Business

Administration

Page 52 GAO/AIMD-00-263 Financial Management at SBA

Now on p. 16.

See comment 1.

Now on p. 16.

See comment 1.
Appendix II

Comments From the Small Business

Administration

Page 53 GAO/AIMD-00-263 Financial Management at SBA

Now on p. 16.

See comment 1.
Appendix II

Comments From the Small Business

Administration

Page 54 GAO/AIMD-00-263 Financial Management at SBA

The following is GAO's comment on the Small Business Administration's

letter dated August 4, 2000.

GAO Comment 1. See “Agency Comments” section.

(913884) Letr
Ordering Information The first copy of each GAO report is free. Additional copies of

reports are $2 each. A check or money order should be made out to

the Superintendent of Documents. VISA and MasterCard credit

cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any list

from the past 30 days, please call (202) 512-6000 using a touchtone

phone. A recorded menu will provide information on how to obtain

these lists.

Orders by Internet:

For information on how to access GAO reports on the Internet,

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

To Report Fraud,

Waste, or Abuse in

Federal Programs

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• e-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. GI00