March 15, 2012 Report Number 12-10

SBA Generally Meets IPERA Reporting 

Guidance but Immediate Attention Is

Needed to Prevent and Reduce 

Improper Payments
U.S. Small Business Administration

Office Of Inspector General

Washington, D.C. 20416

REPORT TRANSMITTAL

REPORT NUMBER 12-10

DATE: MARCH 15, 2012

TO: Jonathan I. Carver, Chief Financial Officer

Jeanne A. Hulit, Associate Administrator for Capital Access

James Rivera, Associate Administrator for Disaster Assistance

Sean Greene, Associate Administrator for Investments

SUBJECT: Review of SBA’s Improper Payments 

This report presents the results of our Review of SBA’s Compliance with the Improper Payments 

Elimination and Recovery Act (IPERA). Our objective was to determine the adequacy of SBA’s 

compliance with IPERA and OMB’s implementing guidance, M-11-16. We have also attached a 

copy of Advisory Memorandum 12-07, The SBA’s Improper Payment Review and Reporting for its 

Contracting Activities did not Comply with IPERA and IPIA Requirements During FY 2011, which 

details findings, recommendations and management’s response related to our review of the 

disbursements and contracting area.

We request that you provide your management decision for each recommendation on the 

attached SBA form 1824, Recommendation Action Sheet, by April 16 (30 days after final report 

date). Your decision should identify the specific actions taken or planned for each 

recommendation and the target dates for completion.

We appreciate the courtesies and cooperation of the Office of Chief Financial Officer, Office of 

Capital Access, Office of Investment, and Office of Disaster Assistance during this review. If you 

have any questions concerning this report, please call me at (202) 205-7390 or Jeffrey Brindle, 

Director, Information Technology and Financial Management at (202) 205-7490.

/S/ original signed.

John K. Needham

Assistant Inspector General for Auditing
EXECUTIVE SUMMARY 

SBA Generally Meets IPERA Reporting Guidance but Immediate Attention Is Needed to 

Prevent and Reduce Improper Payments

Report No. 12-10

March 15, 2012

What OIG Audited

This report represents the results of our review of SBA's

compliance with the Improper Payments Elimination and 

Recovery Act (IPERA) requirements. IPERA was enacted 

on July 22, 2010, and the OMB issued implementing 

guidance on April 14, 2011 through OMB Memorandum 

M-11-16, Issuance of Revised Parts I and II to Appendix C 

of OMB Circular A-123. Part II (A) of M-11-16 requires the 

OIG to annually review their agency’s improper payments 

reporting in the Performance and Accountability Report 

(PAR) or Agency Financial Report (AFR). 

Our objective was to determine the adequacy of SBA’s 

compliance with IPERA and OMB’s implementing 

guidance, M-11-16. To achieve our audit objective we 

determined whether SBA addressed required provisions, 

and we performed limited testing of compliance with 

these provisions. We also reviewed the completeness of 

improper payments disclosures in the AFR as specified in 

OMB guidance and assessed the Agency’s efforts to 

prevent and reduce improper payments. Finally, we 

developed recommendations for actions to further 

improve the agency’s or program’s performance in 

reducing improper payments.

OIG Recommendations 

We made 12 recommendations focused on improving the 

completeness and accuracy of reported information and 

improving corrective action plans. 

Furthermore, the OIG also issued Advisory Memorandum 

12-07, The SBA’s Improper Payment Review and Reporting 

for its Contracting Activities did not Comply with IPERA and 

IPIA Requirements During FY 2011 to provide timely 

feedback and detailed findings and recommendations. The 

OCFO did not concur with the implication of noncompliance for SBA’s contracting program contained in the 

OIG’s report. They do, however, intend to strengthen their 

business processes impacting their contracting program.

Actions Taken

Agency officials were generally responsive to our 

recommendations and have initiated corrective actions 

where appropriate. SBA advised us that they developed a 

comprehensive plan that requires the program offices to 

monitor their achievements in: robust risk assessment; 

complete and accurate reporting; comprehensive 

corrective action plan; and effective recapture activities.

What OIG Found

SBA was generally compliant in meeting the minimal 

reporting requirements for IPERA in its FY 2011 Agency 

Financial Report. However, our qualitative review of 

Agency efforts to prevent and reduce improper payments 

showed that immediate management attention is needed 

in four of the six programs or activities to improve the:

 accuracy and completeness of reporting,

 sufficiency of improper payments recapturing 

activities, and 

 quality of corrective action plans.

Moreover, the disbursements and contracting reporting

segment did not include in the Agency Financial Report:

 a corrective action plan;

 a payment recapture audit plan;

 an update to the Improper Payment reduction 

outlook table. 

Furthermore, we found significant internal control 

weaknesses in the 1) accuracy and completeness of 

reported information and 2) use and deployment of 

corrective action plans to ensure resources are focused on 

the appropriate root causes of improper payments.

Table 1. IPERA Evaluation by Program or Activity

Evaluation Area OIG Overall Assessment

7(a) Approvals

7(a) Purchases

504

SBIC

Disaster

Disbursements/ 

Contracting

Compliant Process

Partially met Guidance but Improvement Needed

Immediate Management Attention Needed
Table of Contents

0BIntroduction ..................................................................................................................................................1

2BObjective and Scope .................................................................................................................................1

Background ...............................................................................................................................................1

Summary Results...........................................................................................................................................3

Detailed Results ............................................................................................................................................4

Section I. 4B7(a) Approvals.........................................................................................................................5

Section II. 5B7(a) Purchases.........................................................................................................................9

Section III. 6B504 Loans ..............................................................................................................................13

Section IV. 7BSmall Business Investment Company Payments...................................................................17

Section V. 8BDisaster Loans .......................................................................................................................19

Section VI. 9BDisbursements/Contracting ..................................................................................................22

AGENCY COMMENTS AND OIG RESPONSE .................................................................................................26

Appendix I: Agency Comments...................................................................................................................27

Table 1. IPERA Evaluation by Program or Activity ....................................................................................... iii

Table 2. SBA IPERA Compliance with Reporting Requirements...................................................................3

Table 3. OIG’s Evaluation of Agency Efforts.................................................................................................3

Table 4. IPERA Compliance - 7(a) Approvals.................................................................................................5

Table 5. OIG Evaluation - 7(a) Approvals .....................................................................................................7

Table 6. IPERA Compliance - 7(a) Purchases................................................................................................9

Table 7. OIG Evaluation - 7(a) Purchases....................................................................................................10

Table 8. IPERA Compliance - 504 Loans.....................................................................................................13

Table 9. OIG Evaluation - 504 Loans ..........................................................................................................15

Table 10. IPERA Compliance - Small Business Investment Company Payments........................................17

Table 11. OIG Evaluation - Small Business Investment Company Payments.............................................18
Table 12. IPERA Compliance – Disaster Loans...........................................................................................19

Table 13. OIG Evaluation – Disaster Loans.................................................................................................20

Table 14. IPERA Compliance - Disbursements/Contracting.......................................................................22

Table 15. OIG Evaluation - Disbursements/Contracting ............................................................................24
1

0BIntroduction

This report presents the results of our review of the Small Business Administration’s (SBA)

compliance with the requirements of the Improper Payments Elimination and Recovery Act 

(IPERA). The Act was effective on July 22, 2010. On April 14, 2011, the Office of Management 

and Budget (OMB) issued implementing guidance Memorandum M-11-16, Issuance of Revised 

Parts I and II to Appendix C of OMB Circular A-123 (M-11-16). Part II (A) of M-11-16 requires 

each Office of Inspector General (OIG) to annually review its agency’s improper payments 

reporting in the Performance and Accountability Report (PAR) or Agency Financial Report (AFR).

2BObjective and Scope

Our objective was to determine the adequacy of the SBA’s compliance with the IPERA and the 

OMB’s implementing guidance M-11-16. To achieve our objective, we interviewed officials from 

the SBA, reviewed SBA (the Agency) plans, and performed limited testing of compliance1 with 

identified controls and IPERA provisions. We also reviewed the completeness of improper 

payments disclosures in the FY 2011 AFR as specified in OMB guidance and assessed the SBA’s 

efforts to prevent and reduce improper payments. Our assessment of the SBA’s performance in 

reducing or recapturing improper payments was limited to the Agency’s completion of payment 

recapture audits. Finally, we developed recommendations for actions to further improve the 

SBA’s or program office’s performance in reducing improper payments. Except for our review of 

the calculation of the 7(a) purchases improper payment rate, our review was too limited to 

opine on the accuracy of reported information.

We conducted this review between July 15, 2011 and February 10, 2012 in accordance with 

Generally Accepted Government Auditing Standards. Those standards require that we plan and 

perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions based on our audit 

objectives.

Background

The Improper Payments Information Act of 2002 (IPIA) requires agencies to review programs 

and identify those susceptible to significant improper payments; report on the amount and 

causes of improper payments; and develop plans for reducing improper payments. Provisions of 

IPERA amended the IPIA by providing alternative improper payments measures, expanding the 

requirements for corrective action plans, and increasing the scope of recapture audits for all 

payments and program activities in excess of $1 million. The IPERA guidance further requires 

that each OIG annually review its agency’s improper payments reporting within 120 days of AFR 

issuance. 

The SBA’s four major credit programsF

2

F are subject to improper payments reporting as required 

by the former Section 57 of OMB Circular A-11. In addition, the SBA identified contracting and 

disbursements as a risk-susceptible activity under the provisions of IPERA for FY2011.

 

1

The OIG performed a statistical validation of the 7(a) purchase improper payment program and will be issuing a 

draft report at a later date.

2

(7a) Business Loan program (Approvals and Purchases), the Section 504 Certified Development loan program, the 

Small Business Investment Company (SBIC) program and the Disaster Assistance loan program.
2

Prior OIG audits have identified high percentages of disaster and business loans that were made 

to borrowers who were ineligible, lacked repayment ability, or did not provide the required 

support for disbursement. Those audits further determined that the improper payments rates 

reported for these programs were significantly understated. The magnitude of those findings 

has resulted in the OIG identifying the improper payments area as an SBA Management 

Challenge.F

3

F

Summary Evaluation Criteria:

Per Part II of M-11-16, the OIG conducted an IPIA compliance review in the following areas:

Review reported results in the Agency’s AFR to include the following:

 Posted materials – Published a PAR or AFR for the most recent fiscal year and posted that 

report and any accompanying materials required by OMB on the agency website;

 Risk Assessment – Conducted a program specific risk assessment for each program or 

activity that conforms with Section 3321 of Title 31 U.S.C. (if required);

 Published estimates for susceptible programs – Published improper payments estimates 

for all programs and activities identified as susceptible to significant improper payments 

under its risk assessment(if required);

 Annual reduction target met – Published, and has met, annual reduction targets for each 

program assessed to be at risk and measured for improper payments; 

 Reported Rate of less than 10% – Reported a gross improper payments rate of less than 10 

percent for each program and activity for which an improper payments estimate was 

obtained and published in the PAR or AFR;

 Reported recapture information – Reported information on its efforts to recapture 

improper payments;

Evaluation of Agency efforts:

 Overall Assessment of Agency Efforts – OIG evaluation of agency efforts to prevent and 

reduce improper payments.

 Accuracy & Completeness of Agency Reporting – OIG assessment of internal controls 

related to reported information;

 Quality of corrective action plans – OIG evaluation whether corrective action plans are 

robust and focused on the appropriate root causes of improper payments 

 Performance in reducing or recapturing improper payments – Agency’s performance of 

recapture audit. 

 

3

Challenge 9: “SBA needs to accurately report, significantly reduce, and strengthen efforts to recover improper 

payments in the Disaster and 7(a) loan programs.”
3

Summary Results

We reviewed SBA’s compliance with the completeness of disclosures in its FY 2011 AFR as 

specified in OMB guidance. The OIG’s conclusion for reported results, by activity area, is shown 

in Table 2. Table 3, below, provides OIG’s conclusions on the accuracy and adequacy of SBA’s 

efforts.

Table 2. SBA IPERA Compliance with Reporting Requirements

7(a) 

Approvals

7(a) 

Purchases

504

Loans

SBIC

Payments

Disaster

Loans

Disbursements/

Contracting

Posted materials

Risk Assessment

Published estimates for 

susceptible programs

Annual reduction target 

met N/A

Reported Rate of less than 

10%

Reported recapture 

information

Met Guidance

Partially met guidance/Improvement Needed

Immediate Management Attention Needed

The OMB guidance further requested the that OIG evaluate the Agency’s overall efforts to 

prevent and reduce improper payments and provide recommendations for actions to further 

improve the agency’s or program’s performance in reducing improper payments. 

The results of the OIG’s evaluation of Agency efforts are summarized below:

Table 3. OIG’s Evaluation of Agency Efforts

7(a) 

Approvals

7(a) 

Purchases

504

Loans

SBIC

Payments

Disaster

Loans

Disbursements/

Contracting

Overall Assessment of 

Agency EffortsF

4

5

Accuracy & completeness 

of agency reporting

Performance in reducing

or recapturing improper 

payments

Quality of corrective 

action plans

Compliant process

 Improvement Needed

 Immediate Management Attention Needed 

 

4 We considered the Overall Assessment of Agency to be summary of our evaluation review.

5

SBA OIG Management Advisory Memorandum 12-07 further details findings and recommendations in the 

Disbursements/Contracting area.
4

Detailed Results

The following Sections I-VI summarize, by reporting segment, the OIG’s review of the FY 2011 

AFR results and Agency efforts to reduce improper payments per requirements of OMB 

Memorandum 11-16. Related recommendations are also outlined which focus on improvement 

of testing procedures and completion of corrective action plans. In addition, recommendations 

have been provided in the disbursements/ contracting area to improve the reporting of results. 

A summary of the major recommendations, by program area, includes the following:

 7(a) Approvals - Addressing the completeness of testing procedures, risk assessment 

methodology and quality of corrective action plans;

 7(a) Purchases – Addressing the completeness of testing procedures, accuracy of reported 

results, completeness of corrective action plans, and consideration of recapture audits;

 504 – Addressing the completeness of testing procedures, risk assessment methodology and 

quality of corrective action plans;

 SBIC – There were no recommendations;

 Disaster – Addressing the completeness of corrective action plans, and consideration of 

recapture audits;

 Disbursements/Contracting – These recommendations are contained in OIG Advisory 

Memorandum 12-07, The SBA’s Improper Payment Review and Reporting for its Contracting 

Activities did not Comply with IPERA and IPIA Requirements During FY 2011.
5

Section I. 4B7(a) Approvals

Table 4. IPERA Compliance - 7(a) Approvals

IPIA Requirement OIG Evaluation Discussion

Posted Materials

Criteria:

 OMB M-11-16 - PAR or 

AFR published for the 

most recent fiscal 

year.

Met Guidance

The SBA published improper payment disclosures for the program in the 

FY 2011 AFR. However, as noted in Table 5, we noted that management 

needs to improve the accuracy and completeness of posted materials.

Risk Assessment

Criteria:

 OMB M-11-16 - a 

program risk 

assessment conducted. Partially Met 

Guidance/ 

Improvement 

Needed

Finding: The SBA used an inappropriate risk assessment methodology 

for 7(a) loan approvals. Specifically, the SBA combined both 7(a) 

guaranty loan approvals and 7(a) default purchases into a single risk 

assessment. This methodology did not allow for an adequate risk 

assessment because the risk of "improper payments" is different for 

each process. For example, the SBA could make an “improper 

payments” by guaranteeing a loan that should not have been made due 

to eligibility or creditworthiness deficiencies, but the loan may not 

ultimately result in “improper purchase” if the loan does not default. 

Since the SBA already intended to conduct a statistically valid estimate 

of improper payments for both 7(a) approvals and purchases, the 

Agency did not place much focus on the risk assessments for these 

programs and overlooked the different risks affecting each program.

Recommendation 1: We recommend that the Associate Administrator 

for Capital Access adjust the risk assessment to separately assess the 

risk of improper 7(a) guaranty loan approvals and improper 7(a) 

guaranty default.

Agency Comment: Management agreed with our recommendation. 

The Office of Financial Program Operations (OFPO) will adjust the risk 

assessment for FY 2012 and provide a separate risk assessment for 7(a) 

approvals and 7(a) guaranty purchases.

OIG Response: Management comments were responsive to the 

recommendation.

Published Estimates for 

Susceptible Programs

Criteria: 

 OMB M-11-16 -

improper payments 

estimates identified 

for susceptible 

improper payments.

Met Guidance

The SBA published an improper payment estimate in the FY 2011 AFR. 

However, as noted in Table 5, management needs to improve the 

accuracy and completeness of posted materials.
Table 4. IPERA Compliance – 7(a) Approvals 

6

IPIA Requirement OIG Evaluation Discussion

Annual reduction target 

met

Criteria:

 OMB M-11-16 –

Annual reduction 

targets met for each 

program assessed to 

be at risk.

Met Guidance

The SBA published annual reduction targets in the FY 2011 AFR. 

However, as noted in Table 5, management needs to improve the 

accuracy and completeness of posted materials.

Reported Rate of Less Than 

10%

Criteria:

 Gross improper 

payments reported at 

rate of less than 10 

percent.

Met Guidance

The SBA reported an improper payment rate of less than 10% in the FY 

2011 AFR. However, as noted in Table 5, management needs to 

improve the accuracy and completeness of posted materials.

Reported Recapture 

Information

Criteria:

 OMB M-11-16 -

Reported efforts 

regarding recapture of 

improper payments.

Met Guidance

The SBA published payment recapture information in the FY 2011 AFR. 
7

Table 5. OIG Evaluation - 7(a) Approvals

IPIA Requirement OIG Evaluation Discussion

Overall Assessment of 

Agency Efforts

Criteria:

 OIG’s assessment of 

Agency efforts to 

prevent and reduce 

improper payments in 

program area.

Immediate 

Management

Attention 

Required

The SBA improper payments test procedures for the 7(a) loan approval 

program were limited and did not result in an accurate rate of improper 

payments for the program. Additionally, some 7(a) loans approved 

within the fiscal year were not considered for testing by the SBA. 

Finally, the SBA’s corrective action plan was based on an incomplete

testing process. 

Accuracy & Completeness 

of Agency Reporting 

Criteria:

 OMB M-11-16 - OIG 

assessment of internal 

controls related to 

reported information;

 13 CFR Part 120 

Business and Credit 

Assistance regulations; 

 SBA Standard 

Operating Procedures 

(SOP) 50 10 5 Lender 

and Development 

Company Loan 

Programs.

Immediate 

Management

Attention 

Required

Finding: The improper payments estimate for 7(a) loan approvals of 0 

percent is most likely inaccurate because the SBA’s limited test 

procedures were not adequate to allow the Agency to identify all 

improper loan approvals (improper payments) within the 7(a) program. 

The SBA’s testing process was limited to a review of SBA system data 

and a determination as to whether the loan application and SBA loan 

officer report (for SBA-approved loans only) were completed prior to 

loan approval. The testing process did not require the reviewer to 

assess compliance with eligibility, use of proceeds, creditworthiness, 

and repayment ability requirements. These are key areas where 

noncompliance could make a loan guaranty improper. For example, a 

recent OIG audit report6F determined a significant number of SBA 7(a) 

Loans were not originated in compliance with SBA policies and 

procedures. SBA management stated that there was confusion as to 

whether an improper loan approval constituted an improper payment 

and believed resources were more appropriately devoted to the 

purchase process where actual dollars are being disbursed.

Recommendation 2: We recommend that the Associate Administrator 

for Capital Access adjust the testing process for 7(a) loan approvals to 

ensure all necessary documentation is obtained and a determination is 

made as to whether the loans were approved in compliance with the 

relevant program regulations and requirements.

Agency Comment: Management agreed with our recommendation. 

Enhancements will be made to current testing processes to include a 

more comprehensive review of the 7(a) loan approvals. This will ensure 

that all necessary documentation is obtained and reviewed and a 

determination is made as to whether the loans were approved in

compliance with all SBA program regulations and requirements.

OIG Response: Management comments were responsive to the 

recommendation.

 

6

ROM 11-07 Origination and Closing Deficiencies Identified in 7(a) Recovery Act Loan Approvals, issued

September 30, 2011, estimated that at least 1,996 of the 6,467 loans approved and disbursed between June 1, 

2009 and January 31, 2010 were not originated and closed in compliance with SBA’s policies and procedures, 

resulting in at least $869.5 million in inappropriate or unsupported loan approvals. 
Table 5. OIG Evaluation – 7(a) Approvals 

8

IPIA Requirement OIG Evaluation Discussion

Performance in reducing or 

recapturing improper 

payments

Criteria:

 OMB M-11-16 -

Agency’s performance 

of recapture audit.

Compliant 

Process

We limited our review to the applicability of recapture audits. The SBA 

has determined that payment recapture audits for this program would 

not be cost effective because (1) only a small number of improper 

payment cases involve eligibility issues, (2) other documentation 

deficiencies could be corrected by the lender, and (3) in most cases, the 

SBA would have no recourse for recovery against the lender on nondelegated loan approvals.

Quality of corrective action 

plans

Criteria: 

 OMB M-11-16 - OIG 

evaluation whether 

corrective action plans 

are robust and focused 

on the appropriate 

root causes of 

improper payments.

Immediate 

Management 

Attention 

required

Finding: The SBA did not prepare a corrective action plan or identify 

root causes of improper payments for 7(a) guaranty approvals as it 

identified an improper payment estimate of $0 for the program. 

However, as prior audits have found errors in loan origination, the SBA 

may have a higher improper payment rate for 7(a) loan approvals than 

reported. Once an accurate rate is determined, SBA will need to 

develop a corrective action plan to reduce improper payments.

Recommendation 3: We recommend that the Associate Administrator 

for Capital Access, upon revising the improper payments test 

procedures and estimating an accurate rate of improper payments, 

develop a corrective action plan for 7(a) loan approvals that correctly 

addresses root causes and will reduce improper payments.

Agency Comment: Management partially agreed with our 

recommendation. When an improper payment is identified, OFPO will 

develop and implement an appropriate corrective action plan that will 

address the root cause and amount of the improper payment.

OIG Response: Management comments were responsive to the 

recommendation.
9

Section II. 5B7(a) Purchases

Table 6. IPERA Compliance - 7(a) Purchases

IPIA Requirement OIG Evaluation Discussion

Posted Materials

Criteria:

 OMB M-11-16 - PAR or 

AFR published for the 

most recent fiscal 

year.

Met Guidance

The SBA published improper payment disclosures for the program in the 

FY 2011 AFR. However, as noted in Table 7, management needs to 

improve the accuracy and completeness of posted materials.

Risk Assessment

Criteria:

 OMB M-11-16 - a

program risk 

assessment 

conducted.

Met Guidance

The SBA performed an adequate risk assessment for improper 

payments for the program.

Published Estimates for 

Susceptible Programs

Criteria: 

 OMB M-11-16 -

improper payments 

estimates identified 

for susceptible 

improper payments.

Met Guidance

The SBA published an improper payment estimate in the FY 2011 AFR. 

However, as noted in Table 7, management needs to improve the 

accuracy and completeness of posted materials.

Annual reduction target 

met

Criteria:

 OMB M-11-16 –

Annual reduction 

targets met for each 

program assessed to 

be at risk.

Met Guidance

The SBA published annual reduction targets in the FY 2011 AFR. 

However, as noted in Table 7, management needs to improve the 

accuracy and completeness of posted materials.

Reported Rate of Less Than 

10% 

Criteria:

 Gross improper 

payments reported at 

rate of less than 10 

percent.

Met Guidance

The SBA reported an improper payment rate of less than 10% in the FY 

2011 AFR. However, as noted in Table 7, management needs to 

improve the accuracy and completeness of posted materials.

Reported Recapture 

Information

Criteria:

 OMB M-11-16 -

Reported efforts 

regarding recapture of 

improper payments.

Met Guidance

The SBA published payment recapture information in the FY 2011 AFR. 

However, as noted in Table 7, management needs to support the 

accuracy and completeness of posted materials.
10

Table 7. OIG Evaluation - 7(a) Purchases

IPIA Requirement OIG Evaluation Discussion

Overall Assessment of 

Agency Efforts

Criteria:

 OIG’s assessment of 

Agency efforts to 

prevent and reduce 

improper payments in 

program area.

Immediate 

Management

Attention 

Required

The SBA improper payment test procedures for 7(a) purchases were 

incomplete and the SBA reported an understated rate of improper 

payments for the program. Additionally, the SBA did not conduct a 

cost/benefit analysis to adequately demonstrate whether conducting 

Payment Recovery Audits (PRAs) would be cost effective. Finally, SBA’s 

corrective action plan was incomplete and based on an understated 

estimate of improper payments. 

Accuracy & Completeness 

of Agency Reporting 

Criteria:

 OMB M-11-16 - OIG 

assessment of internal 

controls related to 

reported information;

 SBA SOP 50 10 5 and 50 

51 3 establish that SBA 

loans must have 

reasonable assurance of 

repayment and debt 

service coverage and 

that lender deficiencies 

regarding SBA 

underwriting 

requirements justify 

repair or denial of the 

guaranty on early 

default loans.

Immediate 

Management

Attention 

Required

Finding: The SBA’s test procedures for improper payments for 7(a) 

purchases were incomplete. Specifically, the OIG determined that both 

the SBA purchase and improper payment reviews do not include a 

detailed analysis of creditworthiness (including repayment ability) on 

early defaulted loans, as required by its own procedures.

Recommendation 4: We recommend that the Associate Administrator 

for Capital Access require loan officers to thoroughly evaluate 

creditworthiness (including repayment ability) on early default loans 

during both guaranty purchase and improper payment reviews.

Agency Comment: Management agreed with our recommendation. 

OFPO will reemphasize the requirement that loan officers thoroughly 

review repayment ability and creditworthiness on early default loans 

during guaranty purchase and improper payment reviews. We 

recognize that there are varying levels of credit analysis experience 

among center staff, and we will provide credit analysis training, as well 

as quality control feedback, to loan officers to strengthen the 

creditworthiness review.

OIG Response: Management comments are responsive to the 

recommendation. 
Table 7. OIG Evaluation – 7(a) Purchases 

11

IPIA Requirement OIG Evaluation Discussion

Criteria:

 OMB M-11-16 - OIG 

assessment of internal 

controls related to 

reported information;

 13 CFR Part 120 

Business and Credit 

Assistance;

 SOP 50 10 5 Lender and 

Development Company 

Loan Programs;

 SOP 50 51 Loan 

Liquidation and 

Acquired Property;

 SOP 50 51 3 Loan 

Liquidation.

Finding: The SBA reported an inaccurate and understated improper 

payment rate of 1.73% or $40.7 million. The SBA OIG conducted an 

independent audit of the SBA's improper payment review process for 

7(a) purchases. The audit examined 30 loans out of the sample of 303 

loans that SBA reviewed. The OIG identified 6 loans in the sample of 30 

that had improper payments, whereas the SBA only identified that 1 of 

the 30 loans as having an improper payment. Prior to reporting its 

improper payment rate, the SBA agreed that 6 of the 30 loans in the 

OIG’s sample had improper payments. Nevertheless, it did not 

adequately consider the impact of the OIG results when projecting its 

rate. The OIG’s statistician determined that had the other five loans 

been adequately considered, the SBA should have reported a rate of 

9.86%, or $232.2 million, rather than the 1.73% and $40.7 that was 

reported.

Recommendation 5: We recommend that the Associate Administrator 

for Capital Access determine and report an accurate and statistically 

valid estimate of improper 7(a) default purchases for FY 2012 in the 

next Agency Financial Report.

Agency Comment: Management partially agreed with our 

recommendation. The statistical methodology used by OCA resulted in 

an estimate of the improper payment rate for 7(a) guaranty purchases, 

which was reported in the Agency’s FY 2011 AFR. The OIG’s 

methodology, however, resulted in a higher rate due to the impact of 

five loans that the OIG identified as improper payments. Four of the 

five loans represented very small dollar amounts of improper payment, 

and had little impact on the overall improper payment rate. The fifth 

loan was very large and had a significant impact on the rate determined 

by the OIG due to the smaller sample size than that used by OCA. This 

projection methodology most likely represents the difference between 

the OCA improper payment rate of 1.73% and the OIG reported rate of 

9.86% for 7(a) guaranty purchases. The OCA recognizes that the true 

improper payment rate lies between OCA’s 1.73% and OIG’s 9.86%. 

The OCA is now working closely with the OIG to agree upon a consistent 

methodology for determining the estimated improper payment rate for 

the next reporting period.

OIG Response: Management comments were responsive to the 

recommendation.
Table 7. OIG Evaluation – 7(a) Purchases 

12

IPIA Requirement OIG Evaluation Discussion

Performance in reducing or 

recapturing improper 

payments

Criteria:

 OMB M-11-16 -

Agency’s performance 

of recapture audit.

Immediate 

Management

Attention 

Required

Finding: We limited our review to the applicability of recapture audits. 

The SBA did not develop a sound or systematic method for considering 

payment recapture audits (PRA) for the 7(a) purchases. Specifically, the 

SBA did not conduct a cost/benefit analysis to adequately demonstrate 

whether conducting PRAs would be cost effective. The SBA also did not 

provide a sound justification or basis for its conclusion that the low 

improper payment rate and the complexity of the program would affect 

the cost effectiveness of recapture audits. Previous OIG audits 

demonstrate a favorable Return on Investment (ROI) from its audits of 

purchased loans. 

Recommendation 6: We recommend that the Associate Administrator 

for Capital Access, upon completing the revised improper payment rate 

projection for 7(a) purchases, conduct a detailed and objective 

cost/benefit analysis for payment recapture audits of 7(a) purchases.

Agency Comment: Management partially agreed with our 

recommendation. As stated in number 5 above, OCA has reported an 

improper payment estimate that differs from the OIG estimate, and is 

working closely with OIG to agree upon a consistent methodology for 

the next reporting period. We will reevaluate the current cost/benefit 

analysis to determine if a recapture audit of 7(a) purchases is cost 

effective.

OIG Response: Management comments are responsive to the 

recommendation. 

Quality of corrective action 

plans

Criteria: 

 OMB M-11-16 - OIG 

evaluation whether 

corrective action plans 

are robust and focused 

on the appropriate 

root causes of 

improper payments.

Improvement 

Needed

Finding: SBA’s corrective action plan for the 7(a) purchase process is 

incomplete and based on an understated estimate of improper 

payments. As previously noted, the SBA should have reported a rate of 

9.86%, or $232.2 million, rather than 1.73% and $40.7 reported. 

Additionally, SBA’s corrective action plan does not identify all root 

causes of improper payments. Specifically, the OIG determined that 

SBA’s improper payment review processes did not adequately test 

whether early defaulted loans complied with the SBA’s creditworthiness 

(including repayment ability) requirements. This is another area where 

our prior work has demonstrated that improper payments can occur.

Recommendation 7: We recommend that the Associate Administrator 

for Capital Access, upon completing the revised improper payment rate 

projection for 7(a) purchases program, revise the corrective action plan 

to identify all root causes of improper payments and appropriate 

actions for reduction.

Agency Comment: Management partially agreed with our 

recommendation. A corrective action plan to address the improper 

payments for 7(a) guaranty purchases currently exists. The OFPO will 

enhance the corrective action plan so that it also addresses the root 

causes and amount of improper payments.

OIG Response: Management comments were responsive to the 

recommendation.
13

Section III. 6B504 Loans

Table 8. IPERA Compliance - 504 Loans

IPIA Requirement OIG Evaluation Discussion

Posted Materials 

Criteria:

 OMB M-11-16 - PAR or 

AFR published for the 

most recent fiscal 

year.

Met Guidance

The SBA published improper payment disclosures for the program in the 

FY 2011 AFR. However, as noted in Table 9, management needs to 

improve the accuracy and completeness of posted materials.

Risk Assessment

Criteria:

 OMB M-11-16 - a 

program risk 

assessment 

conducted.

Partially Met 

Guidance/ 

Improvement 

Needed

Finding: The risk assessment methodology performed by the SBA 

generally addressed the minimum risk factors likely to contribute to 

significant improper payments as provided within the OMB guidance. 

However, the risk assessment itself may not be fully complete or 

accurate as it did not sufficiently address the risk of approving ineligible 

loans within the 504 loan program. 

Recommendation 8: We recommend that the Associate Administrator 

for Capital Access assess the risk of approving ineligible loans within the 

504 loan program.

Agency Comment: Management agreed with our recommendation. 

The OFPO will adjust the risk assessment for FY 2012 and provide a 

separate risk assessment for 504 approvals. 

OIG Response: Management comments were responsive to the 

recommendation.

Published Estimates for 

Susceptible Programs

Criteria: 

 OMB M-11-16 -

improper payments 

estimates identified 

for susceptible 

improper payments.

Met Guidance

The SBA published an improper payment estimate in the FY 2011 AFR. 

However, as noted in Table 9, management needs to improve the 

accuracy and completeness of posted materials.

Annual reduction target 

met

Criteria:

 OMB M-11-16 –

Annual reduction 

targets met for each 

program assessed to 

be at risk.

Met Guidance

The SBA published annual reduction targets in the FY 2011 AFR. 

However, as noted in Table 9, management needs to improve the 

accuracy and completeness of posted materials.
Table 8. IPERA Compliance – 504 Loans

14

IPIA Requirement OIG Evaluation Discussion

Reported Rate of Less Than 

10% 

Criteria:

 Gross improper 

payments reported at 

rate of less than 10 

percent.

Met Guidance

The SBA reported an improper payment rate of less than 10% in the FY 

2011 AFR. However, as noted in Table 9, management needs to 

improve the accuracy and completeness of posted materials.

Reported Recapture 

Information 

Criteria:

 OMB M-11-16 -

Reported efforts 

regarding recapture of 

improper payments.

Met Guidance

The SBA published payment recapture information in the FY 2011 AFR. 
15

Table 9. OIG Evaluation - 504 Loans 

IPIA Requirement OIG Evaluation Discussion

Overall Assessment of 

Agency Efforts 

Criteria:

 OIG’s assessment of 

Agency efforts to 

prevent and reduce 

improper payments in 

program area.

Immediate 

Management

Attention 

Required

The SBA improper payments test procedures for the 504 loan approval 

program were limited and did not result in an accurate rate of improper 

payments for the program. Additionally, the SBA’s corrective action 

plan was based on an incomplete testing process. 

Accuracy & Completeness 

of Agency Reporting 

Criteria: 

 OMB M-11-16 - OIG 

assessment of internal 

controls related to 

reported information;

 13 CFR Part 120 

Business and Credit 

Assistance;

 SOP 50 10 5 Lender and 

Development Company 

Loan Programs.

Immediate 

Management

Attention 

Required

Finding: SBA’s improper payments evaluation process for 504 loan 

approvals was not sufficient to effectively determine whether a 

debenture guaranty was properly made by the SBA or by CDCs with 

delegated approval authority. Specifically, the testing process was 

limited to a review of SBA system data and a determination as to 

whether the loan application, eligibility checklist, and SBA loan officer 

report (for SBA-approved loans only) were completed prior to loan 

approval. The testing process did not require the reviewer to assess 

compliance with eligibility, use of proceeds, creditworthiness, and 

repayment ability requirements. These are key areas where our prior 

work has found that noncompliance could make a debenture guaranty 

improper.

An ongoing OIG audit of 504 loans approved between June 1, 2009 and 

January 31, 2010 has identified that 5 of the 60 sampled loans were not 

originated and closed in compliance with SBA’s policies and procedures. 

This resulted in inappropriate or unsupported loan approvals.

Recommendation 9: We recommend that the Associate Administrator 

for Capital Access adjust the testing process for 504 loan approvals to 

ensure all necessary documentation is obtained and reviewed and a 

determination is made as to whether the loans were approved in 

compliance with the relevant SBA program regulations and 

requirements.

Agency Comment: Management agreed with our recommendation. 

Enhancements will be made to the current testing process to include a 

more comprehensive review of the 504 loan approvals. This will ensure 

that all necessary documentation is obtained and reviewed and a 

determination is made as to whether the loans were approved in 

compliance with all SBA program regulations and requirements.

OIG Response: Management comments were responsive to the 

recommendation.

Performance in reducing 

/recapturing improper 

payments

Criteria:

 OMB M-11-16 -

Agency’s performance 

of recapture audit.

Compliant 

Process

We limited our review to the applicability of recapture audits. The SBA 

has determined that payment recapture audits for this program would 

not be cost effective because (1) only a small number of improper

payment cases involve eligibility issues, (2) other documentation 

deficiencies could be corrected by the lender, and (3) in most cases, the 

SBA would have no recourse for recovery against the lender on nondelegated loan approvals.
Table 9. OIG Evaluation - 504 Loans

16

IPIA Requirement OIG Evaluation Discussion

Quality of corrective action 

plans

Criteria: 

 OMB M-11-16 - OIG 

evaluation whether 

corrective action plans 

are robust and focused 

on the appropriate 

root causes of 

improper payments

Immediate 

Management

Attention 

Required

Finding: The SBA did not prepare a corrective action plan or identify 

root causes of improper payments for the 504 CDC loan approvals as it 

identified an improper payment estimate of $0 for the program. 

However, our ongoing and past audits indicate, that the SBA may have a 

higher improper payment rate in the 504 loan approvals program than 

reported. Once an accurate rate is determined, the SBA will need to 

develop a corrective action plan to reduce improper payments.

Recommendation 10: We recommend that the Associate Administrator 

for Capital Access, upon revising the improper payments test 

procedures and estimating an accurate rate of improper payments, 

develop a corrective action plan for 504 loan approvals that correctly 

addresses root causes and will reduce improper payments.

Agency Comment: Management partially agreed with our 

recommendation. When an improper payment is identified, OFPO will 

develop and implement an appropriate corrective action plan that will 

address the root cause and amount of the improper payment.

OIG Response: Management comments were responsive to the 

recommendation.
17

Section IV. 7BSmall Business Investment Company Payments

Table 10. IPERA Compliance - Small Business Investment Company Payments

IPIA Requirement OIG Evaluation Discussion

Posted Materials 

Criteria:

 OMB M-11-16 - PAR or 

AFR published for the 

most recent fiscal 

year.

Met Guidance

The SBA published improper payment disclosures for the program in the

FY 2011 AFR. 

Risk Assessment

Criteria:

 OMB M-11-16 - a

program risk 

assessment 

conducted.

Met Guidance

The SBA performed a risk assessment for improper payments for the 

program.

Published Estimates for 

Susceptible Programs

Criteria: 

 OMB M-11-16 -

improper payments 

estimates identified 

for susceptible 

improper payments.

Met Guidance

The SBA published an improper payment estimate in the FY 2011 AFR. 

Annual reduction target 

met

Criteria:

 OMB M-11-16 –

Annual reduction 

targets met for each 

program assessed to 

be at risk.

Met Guidance

The SBA published annual reduction targets in the FY 2011 AFR.

Reported Rate of Less Than 

10%

Criteria:

 Gross improper 

payments reported at 

rate of less than 10 

percent.

Met Guidance

The SBA reported an improper payment rate of less than 10% in the FY 

2011 AFR. 

Reported Recapture 

Information

Criteria:

 OMB M-11-16 -

Reported efforts 

regarding recapture of 

improper payments.

Met Guidance

The SBA published payment recapture information in the FY 2011 AFR. 
18

Table 11. OIG Evaluation - Small Business Investment Company Payments

IPIA Requirement OIG Evaluation Discussion

Overall Assessment of 

Agency Efforts

Criteria:

 OIG’s assessment of 

Agency efforts to 

prevent and reduce 

improper payments in 

program area.

Compliant 

Process

The Agency appears to be reporting accurate and complete improper 

payment information for the SBIC program based on our limited testing. 

Accuracy & Completeness 

of Agency Reporting 

Criteria:

 OMB M-11-16 - OIG 

assessment of internal 

controls related to 

reported information.

Compliant 

Process

The Agency’s reporting for improper payments in the SBIC program 

appears to be accurate and complete based on our limited testing of the 

program. 

Performance in reducing or 

recapturing improper 

payments

Criteria:

 OMB M-11-16 -

Agency’s performance 

of recapture audit.

Compliant 

Process

We limited our review to the applicability of recapture audits. The SBA's 

decision not to perform payment recapture audits for the SBIC program 

appears to be reasonable based on our limited testing of the program.

Quality of corrective action 

plans

Criteria: 

 OMB M-11-16 - OIG 

evaluation whether 

corrective action plans 

are robust and focused 

on the appropriate 

root causes of 

improper payments

Compliant 

Process

The Agency’s corrective action plan for the SBIC program appears to be 

adequate based on our limited testing of the program.
19

Section V. 8BDisaster Loans

Table 12. IPERA Compliance – Disaster Loans

IPIA Requirement OIG Evaluation Discussion

Posted Materials

Criteria:

 OMB M-11-16 - PAR or 

AFR published for the 

most recent fiscal 

year.

Met Guidance

We reviewed the FY 2011 AFR and determined that all materials 

required by OMB were appropriately included. 

Risk Assessment

Criteria:

 OMB M-11-16 - a

program risk 

assessment 

conducted.

Met Guidance

We determined that the SBA’s risk assessment appropriately identified 

disaster assistance as a high-risk program subject to an improper 

payments review.

Published Estimates for 

Susceptible Programs

Criteria: 

 OMB M-11-16 -

improper payments 

estimates identified 

for susceptible 

improper payments.

Met Guidance

The SBA reported estimates for FY 2012, 2013, and 2014 in its FY 2011 

AFR.

Annual reduction target 

met

Criteria:

 OMB M-11-16 –

Annual reduction 

targets met for each 

program assessed to 

be at risk.

Improvement 

Needed

The SBA’s improper payments rate goal for FY 2011 was 20 percent. 

The actual rate reported for FY 2011 was 28.4 percent. Although the 

target rate was not achieved, the Agency did reduce the improper 

payments rate from 34.2 percent in FY 2010. 

Reported Rate of Less Than 

10%

Criteria:

 Gross improper 

payments reported at 

rate of less than 10 

percent.

Immediate 

Management

Attention 

Required

Finding: The SBA reported an improper payments rate for FY 2011 of 

28.4 percent. The Agency noted that the improper payment rate due to 

ineligible loans or incorrect amounts is 12.1 percent. The remaining 

improper payments are due to documentation errors. The reported 

rate significantly exceeds the 10 percent required to be in compliance 

with IPERA requirements. Implementing recommendation 11 in Table 

13 should assist the Agency in reducing the rate below 10 percent. 

 

Reported Recapture 

Information

Criteria:

 OMB M-11-16 -

Reported efforts 

regarding recapture of 

improper payments.

Met Guidance

The SBA reported on its efforts to recapture improper payments. The 

SBA stated that improper payments are not recovered upon discovery 

but realized through the loan repayment process.
20

Table 13. OIG Evaluation – Disaster Loans

IPIA Requirement OIG Evaluation Discussion

Overall Assessment of 

Agency Efforts

Criteria:

 OIG’s assessment of 

Agency efforts to 

prevent and reduce 

improper payments in 

program area.

Improvement 

Needed

Finding: The SBA reported an improper payments rate of 28.4 percent, 

an amount greater than the 10 percent specified to be compliant with 

IPERA. Although this rate decreased from 34.2 percent the prior year,

the Office of Disaster Assistance’s (ODA) corrective action plan has not 

identified all root causes and a related methodology to further reduce 

errors. In addition, the ODA has not instituted a recapture audit 

program to recover improper payments as required by OMB guidance. 

Recommendation 11: We recommend that the Associate Administrator 

for Disaster Assistance develop a corrective plan that identifies all root 

causes and develop a methodology to reduce the errors associated with 

each root cause. 

Agency Comment: Management partially agreed with our 

recommendation. The ODA provided a corrective action plan that is 

contained in the FY 2011 AFR. The ODA will expand the plan to develop 

a more detailed description of the root causes for the exceptions that 

have been determined to be erroneous. The root cause identified in the 

plan shows training for both the documentation error and the eligibility 

errors. The plan lays out a course of action to be taken to address the 

erroneous exceptions.

OIG Response: Management comments were responsive to the 

recommendation.

Accuracy & Completeness 

of Agency Reporting 

Criteria:

 OMB M-11-16 - OIG 

assessment of internal 

controls related to 

reported information.

Compliant 

Process

We performed a limited review of the improper payments 

measurement process and did not identify non-compliance.
Table 13. OIG Evaluation – Disaster Loans

21

IPIA Requirement OIG Evaluation Discussion

Performance in reducing or 

recapturing improper 

payments

Criteria:

 OMB M-11-16 -

Agency’s performance 

of recapture audit.

Improvement 

Needed

Finding: Guidance under OMB M-11-16 requires agencies to conduct 

payment recapture audits for each program that expends $1 million or 

more annually if conducting such audits would be cost-effective. A costeffective payment recapture audit program is one in which the benefits 

exceed the costs (time and resources or payments for audit contractor) 

associated with implementing and overseeing the program. The ODA 

reported in the FY 2011 AFR that loans are repaid and if not repaid, the 

collateral will assure collection of loan funds. Therefore, the ODA 

makes no efforts to recapture improper payments since it believes that 

collateralizing the loans and requiring repayment is a built-in recovery 

system. Even if this assertion was true and the borrowers did return all 

loan funds, they would have the received the benefit of a low interest 

loan that they were not entitled to under SBA regulations. Although 

ODA management maintains that payment recapture audits would not 

be cost effective, it has not provided detailed analysis, which supports 

this claim. 

Recommendation 12: We recommend that the Associate Administrator 

for Disaster Assistance perform detailed analysis of the costeffectiveness of a payment recapture audit program. Such analysis 

should conclude whether the benefits of a recapture program would 

exceed the costs. If so, a payment recapture audit program should be 

implemented. 

Agency Comment: Management partially agreed with our 

recommendation. The ODA provided a Payment Recapture Audit CostEffective Analysis as part of the September 15, 2011 document. In FY 

2012, the agency will determine the most appropriate overall approach 

to a robust and cost-effective agency payment recapture program

OIG Response: Management comments were responsive to the 

recommendation.

Quality of corrective action 

plans

Criteria: 

 OMB M-11-16 - OIG 

evaluation whether 

corrective action plans 

are robust and focused 

on the appropriate 

root causes of 

improper payments.

Improvement 

Needed

Finding: The corrective action plan was insufficient because root causes 

are not adequately identified. The SBA stated that in the FY 2011 AFR 

the root cause for all identified improper payments for the Disaster 

program was administrative and documentation errors. However, this 

is inconsistent with other ODA reports that identify an improper 

payment rate for FY 2011 of 28.4 percent, 12.1 percent of which was 

due to eligibility issues, not documentation errors. In the FY 2011 AFR, 

ODA refers only to existing measures to reduce eligibility errors, not 

new measures designed to reduce the 12.1 percent improper payments

rate due to eligibility issues. Thus, SBA's efforts are not sufficient to 

meet reduction targets. 

Same as recommendation 11.
22

Section VI. 9BDisbursements/Contracting

Table 14. IPERA Compliance - Disbursements/Contracting 

IPIA Requirement OIG Evaluation Discussion

Posted Materials

Criteria:

 OMB M-11-16 - PAR or 

AFR published for the 

most recent fiscal 

year.

Immediate 

Management

Attention 

Required

Finding: The SBA’s FY 2011 AFR did not include a Corrective Action Plan, 

a Payment Recapture Audit Plan, and provided insufficient information 

within its Improper Payment Reduction Outlook table for its Acquisition 

Program, as required by the OMB. Specifically, the agency did not 

perform a root cause analysis and did not develop and publish a 

Corrective Action Plan. Similarly, the SBA did not develop and publish a 

Payment Recapture Audit Plan for the Acquisition Program. According 

to the SBA, payment recapture audits are not cost effective; however, 

the SBA did not provide analysis or any support for this claim. In 

addition, the SBA included an Improper Payment Reduction Outlook

table within its FY 2011 AFR but inaccurately reported that most of the 

Acquisition Program details were “not applicable.” 

Risk Assessment

Criteria:

 OMB M-11-16 - a

program risk 

assessment 

conducted.

Met Guidance

The SBA performed a risk assessment that met IPERA guidelines.

Published Estimates for 

Susceptible Programs

Criteria: 

 OMB M-11-16 -

improper payments 

estimates identified 

for susceptible 

improper payments;

 OMB Circular Number 

A-136, Revised –

Report the programs 

and activities 

susceptible significant 

improper payments.

Partially Met 

Guidance/ 

Improvement 

Needed

Finding: The SBA published its 89 percent improper payment rate within 

its FY 2011 AFR; however, the agency did not report its improper 

payments rate in accordance with OMB guidance. Instead, the SBA 

inappropriately claimed that FY 2011 provided a test measurement and 

SBA would refine its measurement and report an improper payment 

rate in FY 2012. However, the SBA did not obtain an OMB waiver 

excluding SBA’s improper payment reporting requirement. In addition, 

the SBA published within the Improper Payment Reduction Outlook

table that its 89 percent improper payment rate was “not applicable” 

because FY 2011 was a test year. 

Annual reduction target 

met

Criteria:

 OMB M-11-16 –

Annual reduction 

targets met for each 

program assessed to 

be at risk.

N/A FY 2012 was the first year for IPERA. Prior to FY 2012, the SBA did not 

establish improper payment annual reduction targets for its contracting 

activities.
Table 14. IPERA Compliance – Disbursements/Contracting

23

IPIA Requirement OIG Evaluation Discussion

Reported Rate of Less Than 

10%

Criteria:

 OMB M-11-16 - Gross 

improper payments 

reported at rate of less 

than 10 percent;

Immediate 

Management

Attention

Required

Finding: The SBA published an 89 percent improper payment rate for its 

Acquisition Program in the FY 2011 AFR. Despite the significance of this 

improper payment rate, the agency did not develop or publish a 

Corrective Action Plan and a Payment Recapture Audit Plan as required 

by OMB guidance. This does not comply with IPERA and IPIA 

requirements and leaves the SBA at high risk of future improper 

payments. 

Reported Recapture 

Information

Criteria:

 OMB M-11-16 -

Reported efforts 

regarding recapture of 

improper payments.

Immediate 

Management

Attention 

Required

Finding: The SBA did not develop a Payment Recapture Audit Plan for 

the Acquisition Program. According to the agency, payment recapture 

audits are not cost effective; however, they performed no analysis and 

had no support for this claim. 
24

Table 15. OIG Evaluation - Disbursements/Contracting

IPIA Requirement OIG Evaluation Discussion

Overall Assessment of 

Agency Efforts

Criteria:

 OIG’s assessment of 

Agency efforts to 

prevent and reduce 

improper payments in 

program area;

Immediate 

Management

Attention 

Required

Finding: The agency’s efforts did little to mitigate the risk of future 

improper payments within its Acquisition Program. Specifically: 

 The SBA’s test plan did not provide reasonable assurance of 

detecting improper payments;

 SBA personnel responsible for developing the test plan and 

performing the SBA’s improper payment review did not have 

contracting backgrounds and had limited contract training;

 The SBA did not report its improper payments in accordance 

with OMB requirements;

 The SBA identified an 89 percent improper payment rate;

 The SBA’s personnel did not determine the root cause(s) of its 

improper payments; and

 The SBA did not develop and publish a Corrective Action Plan

and a Payment Recapture Audit Plan. 

As a result, the SBA’s FY 2011 improper payment review and reporting 

for its Acquisition Program did not comply with IPERA, IPIA, and OMB 

requirements. Therefore, the SBA must prepare and submit a plan 

describing the actions that the agency will take to become compliant. 

Summary of recommendations: In OIG Advisory Memorandum 12-07, 

our recommendations address the need for written policies and 

procedures, and the drafting and implementation of (1) a corrective 

action plan that identifies root causes, and (2) a payment recapture 

audit plan, unless it can be demonstrated that payment recapture 

audits are not cost effective.

Agency Comments: The OCFO also did not agree with our assertion of 

non-compliance in the disbursements and contracting areas because it 

was the first year of evaluation and management believed they were 

not required to do anything more than they performed. 

OIG Response: The OIG was not provided a written waiver from OMB 

exempting the SBA from the IPERA process. For a more detailed 

explanation see OIG Advisory Memorandum 12-07.

Accuracy & Completeness 

of Agency Reporting 

Criteria:

 OMB M-11-16 - OIG 

assessment of internal 

controls related to 

reported information;

Immediate 

Management

Attention 

Required

Finding: The SBA’s test plan and review process were inadequate. 

While the SBA identified an 89 percent improper payment rate, it failed 

to identify multiple significant payment errors that we identified during 

our review. For example the SBA:

 did not identify underpayments to contractors;

 miscalculated interest penalties;

 paid for services not authorized by contracts;

 paid invoices that violated contract terms; and, 

 paid invoices with rates that were different than those 

established in the contract.

As such, the SBA may have understated the improper payment rate for 

its Acquisition Program during FY 2011. In addition, the SBA did not 

report its improper payments rate in accordance with OMB guidance 

and did not have an OMB waiver exempting the SBA from this 

requirement. Instead, the SBA claimed FY 2011 was a test year.
Table 15. OIG Evaluation - Disbursements/Contracting

25

IPIA Requirement OIG Evaluation Discussion

Performance in reducing or 

recapturing improper 

payments

Criteria:

 OMB M-11-16 -

Agency’s performance 

of recapture audit.

Immediate 

Management

Attention 

Required

Finding: We limited our review to the applicability of recapture audits. 

The SBA did not develop a Payment Recapture Audit Plan for the 

Acquisition Program. According to the SBA, payment recapture audits 

are not cost effective; however, they performed no analysis and had no 

support for this claim.

Quality of corrective action 

plans

Criteria: 

 OMB M-11-16 - OIG 

evaluation whether 

corrective action plans 

are robust and focused 

on the appropriate 

root causes of 

improper payments.

Immediate 

Management

Attention 

Required

Finding: The SBA did not develop a corrective action plan that identifies 

the root cause(s) of improper payments for the Acquisition Program. 

According to the FY 2011 AFR, SBA’s 89 percent improper payment rate 

was a test measure and the agency plans to wait until FY 2012 before 

reporting the improper payments of its Acquisition Program. 
26

AGENCY COMMENTS AND OIG RESPONSE

On February 27, 2012, we provided a draft of this report to the Chief Financial Officer, Associate 

Administrator for Capital Access, Associate Administrator for Disaster Assistance, and Associate 

Administrator for Investment and Innovation. On March 12, 2012, the Office of Inspector 

General received SBA’s final comments. A summary of management’s comments and our 

response follows.

Agency Comments

We included management comments and OIG’s evaluation in the detailed findings. The SBA

prepared a coordinated response and emphasized its commitment to the successful 

implementation of IPERA. Specifically, the SBA fully agreed with five recommendations and 

partially agreed with seven recommendations. The OCFO also did not agree with our assertion 

of non-compliance in the disbursements and contracting areas because it was the first year of 

evaluation and management believed they were not required to do anything more than they 

performed. 

A full copy of the SBA’s response is provided in Appendix I.

OIG Response

We found the SBA’s overall approach to IPERA compliance to be responsive but believe the SBA 

needs to further specify planned improvement activities with related milestones in the 

respective program areas. In regard to the OCFO response, the OIG was not provided a written 

waiver from OMB exempting the SBA from the IPERA process. For a more detailed explanation 

see OIG Advisory Memorandum 12-07.

Where appropriate, we will work with the SBA during the audit resolution cycle to further detail 

necessary corrective actions.

Actions Required

Please provide your management decision for each recommendation on the attached SBA 

Forms 1824, Recommendation Action Sheet, within 30 days from the date of this report. Your 

decision should identify the specific action(s) taken or planned for each recommendation and 

the target date(s) for completion.

We appreciate the courtesies and cooperation of the Small Business Administration during this 

audit. If you have any questions concerning this report, please call me at (202) 205-7390 or Jeff 

Brindle, Director, Information Technology and Financial Management Group at (202) 205-7490.
27

Appendix I: Agency Comments

To: John K. Needham

Assistant Inspector General for Auditing

From: Jonathan I. Carver

Chief Financial Officer

Jeanne A. Hulit

Associate Administrator for Capital Access

James Rivera

Associate Administrator for Disaster Assistance

Sean Greene

Associate Administrator for Investment and Innovation

Date: March 12, 2012

Re: Response to Review of SBA’s Improper Payments, Project 11010

The U.S. Small Business Administration (SBA) is committed to the successful 

implementation of the Improper Payments Elimination and Recovery Act (IPERA), and 

we fully support the tenets of the President’s Executive Order 13520 aimed at 

intensifying efforts to eliminate payment error, waste, fraud, and abuse in the major 

programs administered by the Federal Government. As stewards of taxpayer dollars we 

recognize the importance of:

 Transparency and public scrutiny of significant payment errors throughout the 

Federal Government; 

 Focus toward identifying and eliminating the highest improper payments; and

 Accountability for and coordination in reducing improper payments among 

executive branch agencies.

U.S. SMALL BUSINESS ADMINISTRATION

WASHINGTON, D.C. 20416
28

We place a high value upon our successful compliance in this first year of reporting 

under IPERA, as supported by your draft report. Per your report, all programs were 

compliant in FY 2011, with the exception of contracting/disbursements, which was 

assessed for the first time this year. 

Nevertheless, we realize that implementation does not end with compliance. The very 

spirit of the law necessitates reducing risk in all areas of the agency by strengthening our 

controls and improving our business processes. It is important we understand what 

makes a payment “improper” and the level of risk posed, something which varies across 

our programs.

Each program included in your draft compliance report serves a different role in 

achieving the agency’s mission of meeting the needs of today’s small businesses. For 

example, in the 7(a) and 504 programs, SBA is guaranteeing loans and debentures, and 

for Disaster Assistance, SBA is directly providing the loan. Although the appropriate 

measurements and assessments are conducted at the program level, SBA’s Executive 

leadership and senior management are committed to a collective agency-wide approach 

to reduce improper payments.

We have developed a comprehensive plan that requires the program offices to monitor 

their achievements in each of these four key components:

 Robust risk assessment

 Complete and accurate reporting

 Comprehensive corrective action plan

 Effective recapture activities

In this way we will continue to refine and improve our measures and the payment 

recapture activities already underway at the SBA. In FY 2012, we will re-evaluate the 

most appropriate overall approach to a robust and cost-effective agency payment 

recapture program.

The following response addresses the findings and recommendations contained in the 

Office of the Inspector General (OIG) Review of SBA’s Compliance with the Improper 

Payments Elimination and Recovery Act (IPERA). We thank you for the opportunity to 

comment upon your draft report on our compliance in FY 2011 IPERA reporting and 

look forward to continuing to work with you on this critical subject.

Office of Capital Access

The Office of Capital Access (OCA) has standardized procedures and process controls in 

all Office of Financial Program Operations (OFPO) loan processing centers that are 

designed to process transactions with minimal improper payments. OFPO interjects into 

these procedures and process controls audit findings from OIG and KPMG, as well as 
29

internal control review results by our OCFO, and quality control and improper payment 

reviews conducted within OFPO.

The OFPO quality program performs continual quality reviews independent of the 

processing centers. The quality program proactively targets high risk areas for quality 

review in order to minimize improper payments. The program also utilizes end-to-end 

implementation of corrective actions in all centers, and provides real-time feedback and 

training to employees, to address the root causes of improper payment. These findings 

and corrective actions also inform policy and processes, as identified in the preceding 

paragraph.

OFPO has an improper payment recapture plan in place that was developed in 

coordination with OIG that promptly records improper payments and tracks the recapture 

of these funds. OFPO attempts to recover all funds on a timely basis through invoicing 

the participating lenders. If the lender refuses or disputes the improper payment, OFPO 

will refer the matter to its Office of General Counsel for review for litigation. If OGC 

determines litigation is appropriate, the decision to pursue is presented to the OCA 

Associate Administrator for final approval.

OIG Recommendations and Agency Responses

7(a) Approvals

1. Adjust the risk assessment to separately assess the risk of improper 7(a) guaranty 

loan approvals and improper 7(a) guaranty defaults.

OCA Response: We agree with this recommendation. OFPO will adjust the risk 

assessment for FY 2012 and provide a separate risk assessment for 7(a) approvals 

and 7(a) guaranty purchases. 

2. Adjust the testing process for 7(a) loan approvals to ensure all necessary 

documentation is obtained and a determination is made as to whether the loans 

were approved in compliance with all program regulations and requirements.

OCA Response: We agree with this recommendation. Enhancements will be 

made to current testing processes to include a more comprehensive review of the 

7(a) loan approvals. This will ensure that all necessary documentation is obtained 

and reviewed and a determination is made as to whether the loans were approved 

in compliance with all SBA program regulations and requirements.

3. Upon revising the improper payments test procedures and estimating an accurate 

rate of improper payments, develop a corrective action plan that correctly 

addresses root causes and reduces improper payments.

OCA Response: We partially agree with this recommendation. When an 

improper payment is identified, OFPO will develop and implement an appropriate 

corrective action plan that will address the root cause and amount of the improper 

payment.
30

7(a) Guaranty Purchases

4. Require loan officers to thoroughly evaluate creditworthiness (including 

repayment ability) on early default loans during both guaranty purchase and 

improper payment reviews.

OCA Response: We agree with this recommendation. OFPO will reemphasize 

the requirement that loan officers thoroughly review of repayment ability and 

creditworthiness on early default loans during guaranty purchase and improper 

payment reviews. We recognize that there are varying levels of credit analysis 

experience among center staff, and we will provide credit analysis training, as 

well as quality control feedback, to loan officers to strengthen the 

creditworthiness review.

5. Determine and report an accurate statistically valid estimate of improper 7(a) 

default purchases for FY 2011 in the next Annual Financial Report (AFR).

OCA Response: We partially agree with this recommendation. The statistical 

methodology used by OCA resulted in an estimate of the improper payment rate 

for 7(a) guaranty purchases, which was reported in the Agency’s FY 2011 AFR. 

OIG’s methodology, however, resulted in a higher rate due to the impact of 5 

loans that the OIG identified as improper payments. Four of the 5 loans 

represented very small dollar amounts of improper payment, and had little impact 

on the overall improper payment rate. The fifth loan was very large and had a 

significant impact on the rate determined by the OIG due to the smaller sample 

size than that used by OCA. This projection methodology most likely 

represents the difference between the OCA improper payment rate of 1.73% and 

the OIG reported rate of 9.86% for 7(a) guaranty purchases. OCA recognizes 

that the true improper payment rate lies between OCA’s 1.73% and OIG’s 

9.86%. OCA is now working closely with the OIG to agree upon a consistent 

methodology for determining the estimated improper payment rate for the next 

reporting period.

6. Upon completing the revised improper payment rate projection for 7(a) purchases, 

conduct a detailed and objective cost/benefit analysis for payment recapture audits 

of 7(a) purchases.

OCA Response: We partially agree with this recommendation. As stated in 

number 5 above, OCA has reported an improper payment estimate that differs 

from the OIG estimate, and is working closely with OIG to agree upon a 

consistent methodology for the next reporting period. We will reevaluate the 

current cost/benefit analysis to determine if a recapture audit of 7(a) purchases is 

cost effective.
31

7. Upon completing the revised improper payment rate projection for 7(a) purchases 

program, revise the corrective action plan to identify all root causes of improper 

payments and appropriate actions for reduction.

OCA Response: We partially agree with this recommendation. A corrective 

action plan to address the improper payments for 7(a) guaranty purchases 

currently exists. OFPO will enhance the corrective action plan so that it also 

addresses the root causes and amount of improper payments.

504 Approvals

8. Assess the risk of approving ineligible loans within the 504 loan program.

OCA Response: We agree with this recommendation. OFPO will adjust the risk 

assessment for FY 2012 and provide a separate risk assessment for 504 approvals. 

9. Adjust the testing process for 504 loan approvals to ensure all necessary 

documentation is obtained and reviewed and a determination is made as to 

whether the loans were approved in compliance with all SBA program regulations 

and requirements.

OCA Response: We agree with this recommendation. Enhancements will be 

made to the current testing process to include a more comprehensive review of the 

504 loan approvals. This will ensure that all necessary documentation is obtained 

and reviewed and a determination is made as to whether the loans were approved 

in compliance with all SBA program regulations and requirements.

10. Upon revising the improper payments test procedures and estimating an accurate 

rate of improper payments, develop a corrective action plan that correctly 

addresses root causes and will reduce improper payments.

OCA Response: We partially agree with this recommendation. When an 

improper payment is identified, OFPO will develop and implement an appropriate 

corrective action plan that will address the root cause and amount of the improper 

payment.

Office of Disaster Assistance

The Office of Disaster Assistance (ODA) understands the importance of complying with 

the Improper Payments Elimination and Recovery Act (IPERA) of 2010. In FY 2009, 

ODA revised its methodology that resulted in an increase in the reported rate of improper 

payments. ODA is working on reducing the reported improper payment rate to be in 

compliance with IPERA. ODA has reported on Improper Payments as required since the 

inception of the Improper Payments Information Act (IPIA) of 2002. 

ODA has reviewed the Office of Inspector General’s draft Executive Summary regarding 

SBA’s Improper Payments. OIG identified ten IPERA Requirements for ODA. Of the 

ten requirements, five requirements were found to be compliant; four requirements 
32

partially met guidance but needed improvement; and one requirement needed immediate 

attention. These findings conclude that ODA has an accepted practice for compliance; 

however, the reported rate exceeded the ten percent compliance rate.

In order to meet or exceed the compliance rate, ODA is addressing/instituting the 

following:

 ODA has a corrective action plan that identifies all root causes and a methodology 

to reduce errors associated with each root cause. ODA will expand the corrective 

action plan to provide a more detailed explanation of the root causes. 

 ODA has provided a more detailed explanation of the training to the specific 

departments, as well as targeted training to the identified individuals associated 

with each root cause of the Improper Payment. Our 2012 explanation will further 

expand on the root cause(s) and the targeted training to reduce Improper 

Payments. This is in addition to continuing to provide general training to ODA’s 

Processing and Disbursement Center (PDC) employees, with special emphasis on 

Improper Payments and notations,

 Improper payments are a result of the functions associated with ODA’s PDC. In 

FY 2012 ODA has included Improper Payments in Personal Business 

Commitment Plans for employees in the PDC. 

 In FY 2012, the agency will determine the most appropriate overall approach to a 

robust and cost-effective agency payment recapture program.

 The business case we previously provided to OMB verbally will be updated for 

the IG and OMB. The business case eliminates documentation errors and defines 

Improper Payments as:

o Ineligible borrower

o Improper use of proceeds

o Incorrect loan amount

Documentation errors are currently considered Improper Payments. It should be pointed 

out that with documentation errors adjusted out of the FY 2011 Improper Payment rate, 

the rate would have been 12.1 percent which is much closer to the 10% required for 

IPERA compliance.

OIG Recommendations and Agency Responses

11. Develop a corrective plan that identifies all root causes and develop a 

methodology to reduce the errors associated with each root cause.

ODA Response: We partially agree with the recommendation. We have provided 

a corrective action plan that is contained in the AFR. We will expand the plan to 

develop a more detailed description of the root causes for the exceptions that have 

been determined to be erroneous. The root cause identified in the plan shows 
33

training for both the documentation error and the eligibility errors. The plan lays 

out a course of action to be taken to address the erroneous exceptions.

12. Perform detailed analysis of the cost-effectiveness of a payment recapture audit 

program. Such analysis should conclude whether the benefits of the recapture 

program would exceed the costs.

ODA Response: We partially agree with the recommendation. We provided a 

Payment Recapture Audit Cost-Effective Analysis as part of the September 15, 

2011 document. In FY 2012, the agency will determine the most appropriate 

overall approach to a robust and cost-effective agency payment recapture program

Office of the Chief Financial Officer

The Office of the Chief Financial Officer (OCFO) does not concur with the implication 

of non-compliance for SBA’s contracting program contained in the OIG’s draft report. 

We completed the requirements in accordance with the evaluation criteria expressly 

presented in the OIG’s draft report and in compliance with OMB guidance.7 

We appreciate the effort undertaken to provide the observations in your Draft Advisory 

Memorandum and the additional evaluation of our efforts contained in your draft report. 

We believe your report reemphasizes the opportunities for which we aim to continue to 

strengthen our business processes surrounding our contracting program. We look 

forward to continuing our collaboration with you as we implement IPERA.

Demonstrating Compliance

The SBA’s $130 million contracting program was excluded from improper payments 

reporting prior to FY 2011, when the threshold for reporting was decreased to $1 million 

upon IPERA’s enactment. Consistent with the OMB guidance8and as discussed in the 

AFR, we completed Step 1 of the OMB guidance in FY 2011 by conducting the risk 

assessment for our contracting office and subsequently determined the program to be 

risk-susceptible. The reporting requirements, as interpreted (and confirmed by OMB), do 

not require the agency to conduct both the risk assessment (Step 1) and establish the 

measurement and methodology (Step 2) within the same year. We plan to implement 

Step 2 in FY 2012 by determining the most appropriate, statistically valid methodology to 

measure our estimated improper payments rate, which allows us to complete Steps 3 and 

4, Implementing a plan to reduce improper payments and Reporting annual estimates and 

progress in reductions, respectively. Therefore, publishing FY 2011 estimated rates and 

future reduction targets in the AFR is not applicable to the contracting program. Contrary 

to findings in the OIG’s draft report, the SBA’s Improper Payments Reduction Outlook 

 

7

As defined in Part II of OMB Circular A-123, Appendix C: Compliance with the Improper Payments Requirements

8

Part I, Section A) Identification and Reporting of Susceptible Programs and Activities of OMB Circular A-123, 

Appendix C
34

table in the AFR was prepared in accordance with the OMB Circular A-136, Financial 

Reporting Requirements, which requires: (1) Including the contracting program whether 

or not a measure was reported; (2) The date we expect a measurement in footnote 4; and 

(3) Indication of “n/a” for FY 2011 as the Current Year (or baseline). Specifically, item 

(3) is permitted without necessity of OMB waiver on page 153 in the FY 2011 A-136.

Additionally, to ensure compliance in our preparation of the IPERA reporting for 

publication in the AFR, we used the checklist of requirements in Section II Compliance 

with the Improper Payments Requirements of the OMB guidance. The guidance states 

that an agency is not compliant if it fails to complete one or more of the seven items 

listed, of which three are not applicable for FY 2011 reporting upon contracting9. The 

guidance also provides for an evaluation of the accuracy, completeness, and performance 

of an agency’s reporting in addition to the listed requirements; however, compliance is 

not determined by an “effort” assessment.

Specifically, we completed the following reporting requirements in FY 2011:

1. Published the FY 2011 AFR and posted the report on the agency website 

These materials were prepared and reported in accordance with OMB Circulars 

A-123 and A-136. The AFR is available at (http://www.sba.gov/content/fy-2011-

agency-financial-report-afr). 

2. Conducted the risk assessment and determined Contracting as risksusceptible. 

3. Included planned corrective actions in the AFR

The AFR includes high-level Corrective Actions currently being implemented by 

the agency and appears on page 115. The past-tense verbiage, “has been taken” 

was a clerical error. A more comprehensive Corrective Action Plan will be 

developed in FY 2012 once the appropriate measurement and methodology is 

established.

4. Reported upon our efforts to recapture improper payments 

Conducting a payment recapture audit is not a determining element for 

compliance with IPERA. The agency is required by the OMB guidance to report 

upon its effort to recapture improper payments, not to perform a recapture audit. 

The OIG draft report indicates the performance of a recapture audit was its sole 

factor in evaluating the agency’s performance in reducing or recapturing improper 

payments. The determination that a payment recapture audit program is not costeffective for this program (eliminating the need to prepare a Recapture Audit 

Plan) was reported, as required, in September 15, 2011.This is supported by initial 

testing that suggested only 3% in erroneous payments. In FY 2012, the agency 

 

9

Estimates and reduction targets will be reporting in FY 2012 upon the determination of the appropriate 

methodology required in Step 2.
35

will determine the most appropriate overall approach to a robust and costeffective agency payment recapture program.

Given this evidence, we assert our compliance in IPERA reporting as defined in the 

OMB guidance and as reiterated in the OIG’s criteria for evaluation. We believe our 

compliance merits the designation of “Met Guidance.” As suggested by the evaluation of 

agency effort in the draft report, management attention is focused on the findings 

presented by the OIG, as indicated in its response to the draft Advisory Memorandum.

Office of Investment and Innovation

The Office of Investment and Innovation concurs with the comments of the OIG relative 

to the SBIC program. We have and will continue to review our processes to ensure such 

improper payments are minimized.