TABLE OF CONTENTS 

Page 

Message From The Administrator ............................................................................................................. i 

Executive Summary .................................................................................................................................. ii 

Agency Accomplishments ........................................................................................................................ ii 

Message From The Chief Financial Officer ............................................................................................ iv 

Agency Overview ..................................................................................................................................... 1 

Mission and Organization .................................................................................................................... 1 

Agency Funds ...................................................................................................................................... 2 

Agency Financial Position ................................................................................................................... 3 

Strategic Planning ................................................................................................................................ 3 

Office of the Chief Financial Officer ................................................................................................... 7 

Organization Chart .......................................................................................................................... 7 

Accomplishments ............................................................................................................................ 8 

Impact of Federal Credit Reform ....................................................................................................... 10 

Credit Management ............................................................................................................................ 11 

SBA’s Management Integrity Program .............................................................................................. 11 

Audit Resolution And Follow-Up ................................................................................................. 12 

FMFIA Report ............................................................................................................................... 13 

Prompt Payment Report ..................................................................................................................... 14 

Civil Monetary Penalties .................................................................................................................... 14 

SBA Program Description and Analysis ................................................................................................ 15 

Capital Access .................................................................................................................................... 15 

Business Loan Program ................................................................................................................. 15 

Development Company Assistance (Section 504) ........................................................................ 20 

Investment Company Assistance .................................................................................................. 23 

Surety Bond Assistance ................................................................................................................. 26 

International Trade ........................................................................................................................ 28 

Disaster Assistance ............................................................................................................................ 29 
Business Assistance ........................................................................................................................... 33 

Business Initiatives ........................................................................................................................ 34 

Veterans’ Affairs ........................................................................................................................... 34 

Women’s Business Ownership ...................................................................................................... 34 

Small Business Development Centers ........................................................................................... 35 

One Stop Capital Shop .................................................................................................................. 35 

Native American Affairs ............................................................................................................... 36 

Government Contracting & Minority Enterprise Development ........................................................ 38 

Government Contracting ............................................................................................................... 38 

Minority Enterprise Development ................................................................................................. 40 

Technology .................................................................................................................................... 41 

Size Standards ............................................................................................................................... 41 

Small Business Advocacy ............................................................................................................. 42 

Financial Statements ............................................................................................................................... 43 

Introduction ........................................................................................................................................ 44 

Principal Statements ........................................................................................................................... 45 

Footnotes To Principal Statements .................................................................................................... 48 

Supplementary Schedules .................................................................................................................. 60 

Independent Audit of Financial Statements ............................................................................................ 66 

Auditor’s Report ................................................................................................................................ 67 

Agency Response ............................................................................................................................... 79 
Page i 

A MESSAGE FROM

THE ADMINISTRATOR OF THE 

U.S. SMALL BUSINESS

ADMINISTRATION

AIDA ALVAREZ 

The SBA is pleased to present its Chief Financial Officer’s FY 1997

Annual Report which includes its audited financial statements with 

related program and financial information. This is the second straight 

year that the Agency’s financial statements have received an 

unqualified opinion from its independent auditors and we are very 

proud of this accomplishment. 

I became the 20th Administrator of the SBA just over a year ago, and it 

has been an exciting year. We are working hard to transform the SBA 

into a 21st century, leading-edge financial institution and have completed a number of important 

initiatives toward this goal. 

The SBA continues to improve its financial programs. Our private sector partners are assuming more 

responsibility for program delivery, and the SBA in turn is enhancing its oversight capacity to manage 

this change. About half of new 7(a) loan guarantees are being made through our Preferred Lenders 

Program with delegated loan-approval authority. SBA is testing new systems to allow on-line 

processing of loan applications, and improved reporting of our bank portfolio status is well underway. 

Shortly, the Agency will be implementing a pilot to privatize 30 percent of the servicing activity for 

disaster home loans, and we will begin to sell portions of our business and disaster loans this year. 

A number of other management improvements are underway. The SBA program regulations were 

rewritten in 1996 and new standard operating procedures were issued in 1997. I am upgrading our 

internal controls to improve the Agency’s credit risk management, lender oversight, field office 

reviews and subsidy rate management. I plan to implement the Committee of Sponsoring 

Organizations (COSO) of the Treadway Commission system of internal controls at the SBA over the 

next 3 years. Also, SBA is modernizing its financial systems to provide quality information for 

improved oversight of our portfolio and participating lenders. 

FY 1998 operating goals for SBA managers are based on the SBA’s five year strategic plan. The 

Agency will continue to reach out to the underserved segments of our economy. The 8(a) Program is 

being modernized and improved. Special programs for women, minorities and those in economically 

distressed areas continue to be emphasized. Our goal is to continue the SBA’s proud tradition of 

providing needed assistance to small businesses in an era of reduced Federal resources. 

Sincerely, 
Page ii 

EXECUTIVE 

SUMMARY 

The Small Business Administration (SBA) was established in 

1953 as an independent Agency of the Federal government to 

administer a range of Federal programs and policies focused on 

the Nation’s small business community. 

The mission of the U.S. Small Business Administration is to 

champion America’s entrepreneurs, ensuring that government 

works more effectively and more efficiently for our nation’s 

small business community. 

In large part, the strength of today’s economy is the result of the 

strength of our country’s small businesses. Small businesses 

employ 54 percent of the private workforce in the United States 

and are responsible for 51 percent of the private domestic 

product; small business incorporations are increasing, while 

small business failures and bankruptcies are decreasing. 

AGENCY 

ACCOMPLISHMENTS

The SBA’s fiscal year (FY) 1997 accomplishments reflect the 

SBA’s continued role in providing greater access to capital for 

the Nation’s entrepreneurs who in turn are creating the jobs that 

are the heart of today’s healthy economy. 

As the table below shows, SBA lending has increased for all of 

America’s small businesses over the last 5 years. 

 Number of Loans % 

 FY 92 FY 97 Increase 

Total Lending 26,381 49,419 87% 

Women 3,588 10,787 201% 

African American 739 1,902 157% 

Hispanic 1,356 3,371 149% 

Asian 1,583 4,529 186% 

Native American 129 405 214% 

Veterans 3,710 6,607 78% 

The following is an outline of some of the highlights of the 

SBA’s key programs from FY 1997. 

7(a) Loan Program. This program reached its highest ever 

historical level of $9.5 billion, exceeding the previous high level 

of FY 1995. The program has doubled its number of loans 

during the last 5 years. 
Page iii 

 504 Development Company Program. The program grew from 

$856.5 million five years ago to $2.45 billion in FY 1996, but 

recorded a decrease to $1.44 billion in FY 1997. Overall, the 

program has grown 68 percent during the last five years. 

 Small Business Investment Company Program. The SBIC 

program continues to attract record levels of private capital. In 

FY 1997, SBIC licensees made 2,731 financings to small 

businesses with a dollar amount of nearly $2.4 billion. 

Thirty-three new SBICs were licensed bringing $449 million into 

the program. During FY 1997, SBA provided $373 million of 

leverage to SBIC Program Licensees. 

 Government Contracting/Minority Enterprises Development.

Major achievements included instituting a pilot program for 

electronic filing and processing of 8(a) applications and 

implementing an automated management information system. 

 Disaster Assistance Program. The program provided 

$976.1 million in loans to rebuild after disasters struck 42 states, 

Guam and the Federated Republic of Micronesia. 

 Small Business Innovation and Research Program. Small 

businesses participating in Federal research and development 

efforts contributed to America’s national defense programs, 

safety and health projects, and helped build our highways and 

bridges through this program. Approximately 4500 awards were 

made, totaling almost $916 million. 

Counseling and Training. An estimated 1,080,000 small 

business entrepreneurs received management training and 

counseling from SBA’s national network of business education 

and assistance programs, including clients of the Service Corps 

of Retired Executives (SCORE), approximately 1,000 Small 

Business Development Centers (SBDCs), 41 Business 

Information Centers and 63 Women’s Demonstration Sites. 

 Internet Access. The SBA’s homepage, SBA OnLine, has 

recently achieved more than 2 million hits per week, and 

continues to grow. This service benefits the Agency’s customers 

by making useful information readily available. 

 Standard Operating Procedures. The SBA revised all its 

regulations in FY 1996. During FY 1997, these regulations were 

incorporated into the Agency’s Standard Operating Procedures 

(SOPs) and the SOPs were reissued. 
Page iv 

A MESSAGE FROM

THE SBA CHIEF FINANCIAL OFFICER

J. LARRY WILSON 

The SBA is submitting its FY 1997 Chief Financial Officer’s Annual

Report, including our FY 1997 financial statements and independent

auditor’s opinion. We are pleased that the SBA financial statements 

received an unqualified opinion for the second straight year. The SBA is 

principally a financial organization, with a loan portfolio of $45 billion,

and this unqualified opinion reflects the results of increased attention to 

financial integrity and accountability. 

The vision of our Administrator, Aida Alvarez, is for the SBA to become a “leading-edge” financial 

agency. She has backed up her vision with strong leadership and additional resources. The 

management of our credit subsidy rate process was strengthened by increasing the staff performing 

this process and by the use of outside experts to verify the reliability of our subsidy modeling and 

credit data. Also during FY 1997, we began a three-year project to implement the COSO system of 

internal controls that will match what is in place at the very best commercial financial institutions. 

The SBA is a leader in Federal financial management improvements. We use electronic commerce 

with our major suppliers and are initiating similar processes with our credit program partners; we 

collect approximately 30 percent of Agency collections using EFT; we are outsourcing our check 

collections processing to lockbox banks; and we are out in front on the electronic payment aspects of 

Federal Debt Collection Act implementation. As we seek a more permanent, long-term solution for 

our loan accounting and core financial systems, our current core financial system is being used to make 

general ledger accounting improvements for our loan program accounts. We are adding new tools to 

the SBA electronic office desktop, like a new travel system which is undergoing pilot testing. 

The future presents many challenges for Federal financial management, and the SBA stands ready to 

meet these challenges. Our financial systems will be modernized; our business processes will be 

re-engineered; our financial information will be timely, accurate and useful; and our staff will 

represent the highest degree of professionalism and expertise within the Federal financial sector. 

The Nation’s small businesses and the American taxpayer should expect world-class financial 

management from the SBA, and we pledge to deliver this level of performance. 
Page 1 

AGENCY 

OVERVIEW 

MISSION AND 

ORGANIZATION 

Mission Statement The mission of the Small Business Administration (SBA) is to 

maintain and strengthen the Nation’s economy by aiding, 

counseling, assisting, and protecting the interests of small 

businesses and by helping businesses and families recover from 

disasters. 

Strategic Goals To accomplish its mission, the SBA has adopted the following 

policy goals to guide its management and program decisions over 

the next five years: 

1. Increase opportunities for small business success. 

2. Transform SBA into a 21st century leading edge 

financial institution. 

3. Help businesses and families recover from disasters. 

4. Lead small business participation in welfare-to-work. 

5. Serve as the voice for America’s small businesses. 

Organization The SBA is a decentralized organization with more than 

100 locations nationwide, including field office locations in all 

50 states, the District of Columbia, Puerto Rico, the Virgin 

Islands, and Guam. There is a full service district office in almost 

every state. A number of smaller branch offices and central 

office duty stations (CODs) supplement the larger geographic 

areas. The SBA has 10 regional offices, 69 district offices and 

16 branch offices. The Agency also has a number of centers that 

approve Disaster and Preferred Lenders Program (PLP) loans, 

and provide servicing to its Disaster and Business loan portfolios. 

For FY 1997, the Agency employed 4,341 full time equivalent 

(FTE) personnel (including 1,282 disaster FTEs) and had an 

annual operating budget of $355 million, excluding the 

non-credit program initiatives. 
Page 2 

Agency Funds The SBA’s programs and operations are financed through the 

following accounts: 

 Business Loans Program Account 

 Business Direct Loan Financing Account 

 Business Guaranteed Loan Financing Account 

 Business Loan Fund Liquidating Account 

 Disaster Loans Program Account 

 Disaster Direct Loan Financing Account 

 Disaster Loan Fund Liquidating Account 

 Surety Bond Guarantees Revolving Fund 

 Pollution Control Equipment Fund Liquidating Account 

 Business Assistance Trust Fund 

 Salaries and Expenses Account 

 Office of Inspector General Salaries and Expenses Account 

The two Salaries and Expenses Accounts are annual 

appropriations. The other program accounts are either annual 

appropriations, indefinite appropriations, revolving fund or 

contribution accounts. Since FY 1992, the credit program 

activities of the SBA have been subject to the Federal Credit 

Reform Act (FCRA). New program and financing accounts were 

established in FY 1992 under FCRA to finance all credit 

activities occurring after September 30, 1991. The program 

accounts receive appropriations to the extent of anticipated credit 

program levels. The financing accounts include payments from 

credit program accounts and other cash flows resulting from 

direct loan obligations or loan guaranty commitments. 

The Business Assistance Trust Fund is a “gift authority” account 

and does not receive any appropriated funds. 
Page 3 

The following chart illustrates SBA’s operational costs over the 

past 10 years in both constant (using 1987 as a benchmark) and 

nominal dollars (actual expenditures). The Agency’s operating 

expenses in constant dollars have decreased during FY 1997 over 

FY 1996 due to government-wide budget constraints. 

PROGRAM & STAFFING TRENDS

Salaries & Expenses

Excluding Disaster & Non-Credit Initiatives

"

"

" " " " " " " "

!

!

! ! !

! !

!

! !

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

0

50

100

150

200

250

300

Millions

0

2

4

6

8

10

FTEs in Thousands

! Nominal Dollars Constant 87 Dollars Em " ployees (FTEs)

Agency Financial Position The financial position of the Agency at FY 1997 year-end is 

summarized as follows. 

 Total assets $17.3 billion 

 Total liabilities $16.8 billion 

 Total loan portfolio $45.0 billion 

 Total reserves for losses $4.7 billion

Strategic Planning The Agency has implemented a strategic planning process linked 

to the performance management process for all employees and 

managers. This process translates the Administrator’s goals and 

objectives into workable plans under the Mission Statement. 

These goals are listed on page 1. 

The SBA developed its strategic plan required under Government 

Performance and Results Act (GPRA) during FY 1997. The plan 

was issued on September 17, 1997. It was submitted to the 

Office of Management and Budget (OMB) with the FY 1999 

budget submission. 
Page 4 

Performance Measures An essential element of the GPRA strategic plan is performance 

measures which focuses on outcomes. The SBA has used a 

number of specific program performance measures since 1992 in 

this respect to measure its performance. Future issuances of this 

report will include and denote measures to evaluate the 

achievement of SBA’s goals in its performance plan required 

under the Government Performance and Results Act (GPRA) 

of 1993. Data related to these measures are still being collected. 

The description and analysis (D&A) section of this report 

presents the collected data through the use of asterisks on charts 

and shading on tables.

The following is a list of these performance measures identified 

so far: 

 Number and dollar value of loans made 

 Average loan size 

 Loans made by geographic region 

 Loans made to minorities, women and veterans 

 Value and type of collateral 

 Current loans as a percentage of total portfolio 

 Delinquent loans as a percentage of total portfolio 

 Dollars collected by each debt collection tool 

 Disaster dollars collected by each debt collection tool 

 Charge-offs as a percentage of loans disbursed 

 Charge-offs as a percentage of outstanding portfolio 

 Average subsidy cost per loan program 

 Liquidation loans as a percentage of total portfolio 

 Utilization of CLP and PLP programs for loan making 

 Collections on loans in liquidation 

Other measures of SBA program performance are also presented 

in the D&A section of this report. In total, this report provides a 

variety of useful information to evaluate trends in SBA program 

performance.

 As part of its performance objectives, the SBA places special 

emphasis on directing our assistance efforts to those small 

business groups who are most under-represented in the 

marketplace, particularly veterans, women and minorities. The 

chart on the next page indicates the results of this emphasis. 
Page 5 

 The following chart indicates the percent of approved loans for 

different types of businesses. 

0

20

40

60

80

Others Racial

Minorities

Veterans Women Corporations Individuals Partnerships

0

20

40

60

80

Percent of SBA Loans Percent of SBA Loans 

Service

Trade

0

10

20

30

40

50

22

13 15

75

20

5

36

26

17

11 9

74

26

Industries

Retail Mfg. Others Wholesale

Trade Existing

Businesses

New

Businesses

0

20

40

60

80

100

Percent of SBA Loans Percent of SBA Loans 

FY 1997 RECIPIENTS OF SBA

FINANCIAL ASSISTANCE

note: may not add to 100% due to rounding

Note: Percentages based on dollar value of loans approved in FY 1997.

 The geographic distribution of SBA’s loan guaranty programs is 

depicted on the following chart. 

SBA Financial Assistance By Region*

FY 1997 Total Lending - Business

* SBA Performance Measure

X $469

VIII $699

IX $3,397

VI $2,073

VII $505

IV $1,561

V $1,636

III $701

II $985

I $696

Total SBA Lending for Fiscal Year: $12,722

(Dollars in Millions)
Page 6 

Review of Agency Fees 

and Charges 

In accordance with the CFO Act, Sec. 902(a)(8), the SBA 

annually assesses its level of user fees and other charges as an 

integral part of the President’s budget process. As such, we 

assess and calculate the current and future revenues to the SBA 

and the current and future costs of programs and activities. We 

evaluate the level of current revenues in terms of their source and 

amount. Increasing or decreasing these revenues through 

adjustments to the level of user fees charged, interest rates 

charged, or other means are a part of this evaluation. 

As part of the President’s FY 1998 budget, submitted to the 

Congress in February 1997, the SBA proposed the following 

adjustments to current revenue sources: 

1. The Small Business Development Centers (SBDCs) would 

establish a counseling fee for small businesses to generate 

$16 million in revenues in FY 1998 to offset Federal funding. 

In P.L. 105-135, signed by the President on 

December 2, 1997, the Congress prohibited the SBDCs from 

charging these fees. 

2. The disaster loan borrowers would pay an increased interest 

rate on loans made by the SBA, equal to the Treasury cost of 

borrowing. This would generate sufficient revenues to the 

SBA to reduce the subsidy rate from 23.46% to 11.44%. The 

Congress did not make the statutory change necessary to 

increase the interest rate to these borrowers. 

3. Statutory authority for fees in the 504 Development Company 

program would be extended to allow the subsidy rate to be 

maintained at zero for FY 1998. In P.L. 105-135, signed by 

the President on December 2, 1997, the Congress extended 

the authority for these fees through the year 2000. 

4. Examination and license fees charged under the Small 

Business Investment Company program would be deposited 

into the Salaries and Expenses account to help offset 

increased administrative costs of that program. This would 

generate an additional $1 million in revenues to this account. 

The fees were previously credited to the loan financing 

account. In P.L. 105-135, signed by the President on 

December 2, 1997, the Congress provided the authority to 

deposit these fees as requested by SBA. 
Page 7 

OFFICE OF THE CHIEF 

FINANCIAL OFFICER 

Vision Statement The Small Business Administration’s Office of the Chief 

Financial Officer will be a recognized leader in the Federal 

financial management community. We will effectively support 

the Administrator in the accomplishment of the SBA mission. 

Our systems will be modern, user friendly and efficient. Our 

operations will be disciplined, accountable and responsive. The 

information we provide will be timely, understandable, accurate 

and complete. The staff will be recognized as the best in their 

fields. They will be good listeners, they will enjoy their jobs and 

will work as a team to serve customers. 

Organization Chart Since FY 1996 the CFO has reported directly to the SBA’s 

Administrator. The office includes the essential financial 

management functions shown in the following chart. 

Office of

Planning

and 

Budget

Chief Financial Officer

Denver

Finance

Center

Office of

Financial

Administration

Office of

Financial

Systems

SBA

Administrator

Chief

Financial

Officer
Page 8 

Accomplishments Recent financial management improvements made by the Office 

of the Chief Financial Officer follow. 

 Subsidy Rates - Dramatically improved SBA’s subsidy 

rates’ analytical capability and established a dialogue with 

interested parties. Took great strides in subsidy rates 

becoming more accurate, credible and stable. 

 CFO Report - Received an unqualified opinion for the 

first time on SBA’s financial statements. SBA is one of only 

six federal agencies, and the only credit agency, to receive 

an unqualified opinion. Revised the CFO report and 

received positive feedback from report users.

 SBA Internal Controls - Supported the SBA 

Administrator’s goal to implement the Committee of 

Sponsoring Organizations of the Treadway Commission 

(COSO) internal controls. Assisted the Office of Field 

Operations (OFO) in reviewing Quality Service Reviews 

(QSRs). Reviewed program monitoring as support for 

FMFIA certification. Conducted reviews of OCFO 

operations; began review of the SBG system; introduced 

more document types into the document control system; 

automated the daily quality assurance process for accounting 

update reports. 

 Core Accounting System - Reviewed an option for FFS as 

the current core accounting system; implemented SBG 

accounting within FFS; designed interface methodology 

between FFS and our Loan Accounting System.

 Cash Management - Increased the percent of electronic 

collections to 30.4 percent through continuing partnerships 

with the Treasury Department, Price Waterhouse, 

CheckFree Corporation, and Agency peer organizations.

 Electronic Data Interchange (EDI) and Electronic Fund 

Transfer (EFT) - Used EDI and EFT with 39 lenders 

(another 138 have agreed to participate) channeling 

21 percent of guarantee fee collections electronically – more 

than $1 million a month; implemented new electronic billing 

process utilizing a commercial vendor; increased the volume 

of fee collected through Colson.

 Prompt Payment Improvements - Better reject/hold 

tracking and resolution resulted in significantly fewer 

interest penalties paid in FY 1997, interest penalties were 

paid on eight percent of the invoices in FY 1997 compared 

to eleven percent in FY 1996.
Page 9 

 Debt Collection Improvement Act (DCIA) 

Implementation - Expanded the use of ACH for Disaster 

Assistance loan making. Also worked with OCIO to expand 

payment files to include Tax Identification Number (TIN) 

information. Continued to collect TIN information from 

vendors and all payees; reviewed the SBA loan portfolio to 

determine what debt was eligible for referral to Treasury; 

and analyzed Treasury’s method of calculating its debt 

improvement indicators to provide recommendations.

 Procurement Information System - Developed and 

implemented interfaces to enter SACONS procurement 

system data into the Dunn and Bradstreet financial 

information system and into the FFS general ledger system.

 Information Systems Improvements - Worked closely 

with OCIO on multiple projects that included Dunn and 

Bradstreet SMARTSTREAM for administrative system 

enhancements, electronic loan information processing 

system for field office collections, data base for oversight of 

loan performance with various indicators, a loan transaction 

database to support Treasury interest calculation and other 

projects, and creation of the CFO Web Page.

 Cash Reconciliation - Automated crosswalks for cash 

reconciliation between our general ledger and Treasury cash 

records.

 Loan Fund Recoveries - Developed a system to calculate 

and recover no-year fund balances available for FYs 1992-

1996.

 Payroll Reports - Developed an automated process to 

improve FTE reporting including ad hoc reporting and 

modified FFS payroll interface process to breakout the 

disaster program cost.

 Travel Management Software - Selected 

PerDiemAmazing for our automated travel system and 

began the software rollout.
Page 10 

Impact of Federal 

Credit Reform 

The passage of the Federal Credit Reform Act (FCRA) has 

significantly affected budgeting and accounting for the Agency’s 

credit programs since FY 1992. The FCRA provides a more 

accurate measure of the costs of the Agency’s financial 

assistance programs. 

Under the FCRA, a subsidy rate for each loan program is 

calculated. This rate estimates the net present value of all cash 

outflows and inflows. It takes into consideration such factors as 

the expected repayments on the loans and the interest rate 

differential between the rate charged the borrower on SBA held 

loans and the rate at which funds are borrowed by the Treasury. 

The final product is a rate that reflects the percentage of each 

dollar approved that is subsidized by the Federal government. 

This subsidy rate is the cost of these assistance efforts to the 

taxpayer. A summary table of SBA loan programs showing 

subsidy rates and other information follows: 

LOAN PROGRAM SUMMARY - FY 1997 BUDGET 

Dollars Rounded to Thousands

 Appropriated 

Program Level Subsidy Rate 1/ Subsidy Budget Appropriation 

Subsidy Cost Per 

Loan Made 2/ 

Average Loan 

Amount 3/ 

Business Direct Loans: 

 Microloans $73,691 8.86% $6,529 $41 $466

Business (Gty) 

7(a) Business $10,285,492 1.93% $198,510 $4 $208 

7(a) Delta $696,650 3.47% $24,174 $19 $555 

Microloans Gty. $41,206 8.21% $3,383 $41 $499 

Development Company (Gty) 

504 Dev. Co. $2,650,000 0.00% $0 $0 $355 

504 Delta $459,814 1.01% $4,644 $4 $400

Investment Company (Gty) 

 SBIC Debentures $257,053 3.19% $8,200 $108 $3,384 

 SBIC Participating Securities $410,334 3.29% $13,500 $220 $6,681 

 

Disaster Assistance (Dir.) $1,828,730 20.02% $366,112 $5 $25

Note: All appropriated program levels reflect “gross” value of loans to be made. SBA performance 

measures are in bold print. 

1/ This figure is calculated by dividing the subsidy budget appropriation by the appropriated 

program level rounded to the fourth decimal place. Source: OMB Standard Form 132, 

Apportionment Schedule. 

2/ This figure is calculated by multiplying the subsidy rate and the average loan amount. 

3/ This figure is calculated by dividing the dollar value of loans made for each program by the total 

number of loans made in FY 1997. 
Page 11 

Credit Management The SBA has been active in improving its credit management and 

debt collection practices to collect all delinquent debt in a costeffective manner. The debt collection tools utilized by SBA 

include: IRS tax refund offset, Federal salary offset, private 

collection agencies and the appointment of SBA attorneys as 

Special Assistant United States Attorneys to augment the 

Department of Justice. For FY 1997, these four tools were 

responsible for the collection of a total of $17.87 million in 

delinquent Federal debt as summarized by the following chart. 

FY 1997 Dollars Collected Per

Debt Collection Tool*

0

2

4

6

8

10

12

DOJ Collection 

12.0M 

IRS Offset 

4.6M

Collection Agencies 

1.0M

Federal Salary Offset

0.27M

* SBA performance measure

Millions

SBA'S 

MANAGEMENT 

INTEGRITY 

PROGRAM 

The SBA is constantly seeking ways to deliver its programs more 

efficiently while maintaining effectiveness and integrity. This 

goal is accomplished in large part through the formal 

implementation of the Federal Managers' Financial Integrity Act 

(FMFIA), the Chief Financial Officers (CFO) Act of 1990 and 

OMB circulars A-123, A-127, A-130, A-50 and A-76. 

 Strong internal control and accounting systems are effective 

tools to provide reasonable assurance that government assets and 

resources are safeguarded against fraud, waste, and 

mismanagement. SBA’s controls have provided reasonable 

assurance in the past that assets are protected, transactions are 

properly recorded and policies are followed. Recent 

developments, however, have led to an SBA effort to bolster 

internal controls to improve credit program risk management, 

lender oversight, credit subsidy model management and field 

office reviews. 
Page 12 

 The Agency is in the process of implementing the system of 

internal controls developed by the Committee of Sponsoring 

Organizations of the Treadway Commission (COSO). The 

COSO system represents the state of the art in internal controls to 

which financial institutions now aspire. COSO requires that the 

risks and controls of SBA program activities be documented in a 

standardized manner so that they can be reviewed by an outside 

auditor. The Agency plans to be COSO auditable in the year 

2000 and to eliminate material weaknesses by the year 2002. 

 In 1997, the Agency implemented the Quality Service Review 

(QSR) process. The QSR is a systematic and proactive costeffective management review of field activities. Its purpose is to 

ensure that critical program risk areas are reviewed, employees 

are motivated, informed and treated fairly, our customers are 

satisfied with the delivery of our programs, and that the 

relationships with our partners are healthy. It is designed to 

inform the Regional Administrator, the District Director and the 

District employees of any problems or issues related to the areas 

reviewed and to identify “best practices” of that district and share 

those of other districts that will result in a more efficient and 

effective work environment. In FY 1997, the Agency completed 

11 QSR pilots. The QSRs will continue during FY 1998 and 

beyond. 

Audit Resolution 

And Follow-Up

The SBA’s policy and procedures require management to resolve 

audit findings and recommendations promptly, ensure that timely 

corrective actions are taken, and maintain accurate records on 

audit recommendations. The Office of the Chief Financial 

Officer maintains an audit follow-up system to monitor the 

implementation of the audit recommendations. Data kept within 

the system is used to prepare semiannual reports on audit 

resolution for the President and the Congress. Other objectives 

of the system are to:

 Track final actions taken to implement audit management 

decisions. 

 Provide a complete record of actions taken on both monetary 

and non-monetary audit recommendations. 

 Prepare the semiannual reports on the status of management 

actions. 

During FY 1997, the Agency's program managers continued to 

demonstrate a commitment to timely resolution and 

implementation of OIG audit recommendations. A total of 

128 recommendations were implemented during the fiscal year 

and 68 recommendations remain open. 
Page 13 

GAO Liaison The Agency's GAO liaison function is carried out by the Office 

of the Chief Financial Officer. The OCFO facilitates all GAO 

information requests including entrance interviews with SBA 

management and other assistance. The OCFO also provides a 

monthly report to SBA management on the status of GAO 

reviews. 

FMFIA Report The SBA reported in its FY 1997 FMFIA report that its financial 

systems and administrative management processes provide 

assurance that the objectives of Section 2 (Material Weaknesses) 

and Section 4 (Financial System Non-Conformances) of the 

FMFIA are being achieved. Based on results of a variety of 

management reviews (e.g., Vulnerability Assessments, program 

reviews of field operations and Inspector General audits), the 

Agency has concluded that further improvements are needed in 

its internal controls; and SBA has decided to implement the 

COSO system of internal controls (see above) along with other 

improvements to strengthen credit program risk management, 

lender oversight, credit subsidy model management and field 

office reviews.

During FY 1997, seven items were resolved and one new 

material weakness was identified. We reported a total of eight 

unresolved items: i.e., six program material weaknesses and 

two financial system material non-conformances. 

The program material weaknesses pertained to the following 

program areas: 

 Minority Enterprise Development 

 Small Business Development Centers 

 Surety Bond Guarantees 

The financial system material non-conformance weaknesses 

pertained to the Office of the Chief Financial Officer. 

Appropriate corrective actions and milestones for improvement 

of the remaining weaknesses are scheduled for FY 1998 and 

beyond. The SBA is confident that the actions that it has begun 

to implement the COSO systems of internal controls and other 

improvements will further strengthen its internal controls. 
Page 14 

Prompt Payment Report The payment practices of the SBA are in full compliance with the 

requirements of the Prompt Payment Act and Circular A-125. In 

FY 1997 the percent of invoices paid with late payment penalties 

decreased to 8% of all invoices paid. This is compared to 11% in 

FY 1996. The amount of interest penalties paid also decreased in 

FY 1997 to $91,192 from $156,051 in FY 1996, a decrease of 

41.8%. We anticipate further significant declines in penalties 

during FY 1998 as the Agency moves more purchases to the 

IMPACard system. Discounts offered by vendors were routinely 

taken whenever possible and when economically beneficial to the 

Federal government. 

The Office of the CFO’s Denver Finance Center (DFC) continues 

to improve the automated tracking process for “rejects” 

implemented during FY 1996. This unit is responsible for 

maintaining the “reject” database and notifying the originating 

office via the Agency’s email system. Among the improvements 

this year were creating aging reports to identify bottlenecks, 

working closely with the program offices to avoid delays and 

working with vendors to identify invoices not received by the 

paying office. The tracking of rejects has improved the Agency’s 

ability to resolve problems promptly. 

The DFC maintains a quality control program based on statistical 

sampling. This Quality Control Review is conducted quarterly to 

identify issues and to resolve problems on a timely basis. The 

Review ensures that the Agency maintains compliance with the 

provisions of the Prompt Payment Act. 

Civil Monetary Penalties The SBA submitted a negative report of Civil Monetary Penalty 

(CMP) activity during FY 1997. The SBA’s only civil penalties 

come from the SBIC program for the late filing of annual reports 

by Small Business Investment Companies. Civil penalties are 

more applicable to enforcement or regulatory agencies. 
Page 15 

SBA PROGRAM 

DESCRIPTION 

AND ANALYSIS 

CAPITAL ACCESS The SBA provides financial assistance to underserved small 

businesses. The SBA’s programs are designed to complement 

the private sector in providing loans, guarantees, bonding, and 

other forms of financial assistance to this critical sector of our 

economy. 

For purposes of this report, Capital Access includes four program 

areas which are listed and discussed below. These program areas 

are: 

1. Business Loan program 

2. Development Company Assistance 

3. Investment Company Assistance 

4. Surety Bond Assistance 

 The following is a presentation of each of these four program 

areas. 

Business Loan 

Program 

Program Description The business loan program authorized by Section 7(a) of the 

Small Business Act, is the largest financial assistance program. 

Banks and certain non-bank lenders make loans which are 

guaranteed at percentages which vary from 50% to 90%. 

 The SBA is authorized to make direct and guaranteed loans under 

several specific loan programs. In FY 1996, direct loans under 

the General Business Loan program were eliminated, except for 

Microloan direct lending. Under the General Business Loan 

program, business loans are guaranteed by SBA for varying 

amounts (up to 90 percent of the total loan amount or a maximum 

of $750,000 for FY 1997). An initial guarantee fee ranging from 

2 percent to 3 7/8 percent is charged, depending on the size of the 

loan. The section 7(a) guaranteed loan program accounted for 

75 percent of business loan approval activity (in gross dollars) in 

FY 1997. 
Page 16 

 The SBA has three types of programs through which private 

lenders may make SBA-guaranteed business loans: the regular 

program, the certified lenders program (CLP), and the preferred 

lenders program (PLP). Under the regular program, the private 

lender accepts the loan application, but SBA performs the credit 

analysis and retains final loan-making authority. The CLP 

program operates like the regular program except that SBA 

promises a decision in three days. Under the PLP program the 

lender performs the credit analyses and makes the credit decision. 

The CLP and PLP programs are of great benefit to both lenders 

and loan applicants and SBA is able to leverage its resources 

more effectively to provide quicker assistance to more small 

businesses. 

In response to the President’s effort to make government more 

efficient, the SBA has taken great strides to streamline several of 

its lending programs. Implementation of the LowDoc program, 

which reduces the application process for guarantee assistance 

has significantly reduced the amount of time and resources 

required for this process. In 1995, the SBA centralized the 

processing of PLP loans. Loan packages are now given a 24 hour 

turnaround to the participating lender. This has reduced the 

number of SBA personnel necessary to process PLP loans and 

has resulted in a more uniform program. Efforts are underway to 

centralize processing of our LowDoc loans. In 1995, SBA began 

a pilot called FA$TRAK program. Lenders under this program 

use their own forms and procedures to process loans up to 

$100,000. In exchange for this flexibility, lenders accept a 

50 percent guaranty. 

 In addition to these guaranteed loans, the SBA Microloan 

program provides small scale financing ($25,000 maximum) on a 

short term basis for equipment, inventory, supplies and working 

capital through Microloan intermediaries. The SBA makes direct 

loans, and in certain instances loan guarantees, to intermediaries 

who in turn make direct loans to small businesses. 

Program Performance The following highlights significant trends or developments for 

this program. 

 Loan approvals have steadily increased since FY 1986, with a 

prominent rise from FY 1991 through 1997. 

 Purchases declined in the 7(a) program for FY 1997. 

 Charge-offs increased in the 7(a) program for FY 1997. 
Page 17 

 The PLP, CLP and FA$TRAK programs have been growing 

steadily in the past years. The following chart depicts each 

programs’ share as a percentage of total number of loans made in 

FY 1997. 

Regular 51%

PLP 31%

CLP 9%

FA$TRAK 9%

FY 1997 UTILIZATION OF CLP & PLP

FOR LOAN MAKING (# OF LOANS)

*SBA performance measure

Also, LowDoc loans represented 33 percent of these loan approvals and 

9 percent of gross dollar amount of approvals in FY 1997.
Page 18 

During FY 1997, 43,068 loans were guaranteed for $9 billion, 

(net of decreases and cancellations). Historical loan approval 

information is summarized in the following chart. 

BUSINESS LOANS

Annual Approvals in Dollars and Numbers *

Approval dollars represent gross as opposed to SBA share, but net of cancellatins and increases.

* SBA performance measure

#

#

# # #

#

#

#

#

#

88 89 90 91 92 93 94 95 96 97

0

2

4

6

8

10

$ in Billions

0

10

20

30

40

50

60

# of Loans in Thousands

 Direct Loans in $ Guarantee Loans in $ # Approvals in #

The following table shows a decrease in loan approvals in 

number and an increase in the dollar volume. The data shows 

that the portfolio currency rate (which includes SBA’s purchased 

and guaranteed loans) showed a decrease to 81.3% in FY 1997 

that resulted from the implementation of a new bank reporting 

system. This system now provides more timely and reliable data 

on banks’ guaranteed loan portfolios. The more timely reporting 

resulted in a drop in SBA’s currency rate. The amount of 

guaranteed loans purchased decreased in FY 1997 and we believe 

that the portfolio’s quality remained steady during the year. We 

expect that the portfolio currency rate will remain in the low 80% 

range, as it was in FY 1997, in the future. 
Page 19 

BUSINESS LOANS FY 

1996 

FY 

1997 CHANGE 

% 

CHANGE

Net Approvals ($) $7.3B $9.0B 1.7B 23.3% 

Net Approvals (#) 43,323 43,068 (255) (0.6%)

Portfolio Current (%) 92.0% 81.3% (10.7%) (11.6%)

Portfolio PastDue/Delinquent(%)3.0% 14.4% 11.4% 380% 

Portfolio Liquidation (%) 5.0% 4.3% (0.7%) (14%)

 Purchases ($) $457M $418.3M ($38.7M) (8.47%)

 Purchases (#) 3,277 4000 723 22% 

 Charge Offs ($) $248M $310.8M $62.8M 25.3% 

 Charge Offs (#) 2818 4152 1334 47.3% 

Charge-offs as a % of 

Disbursements 8.10%a 7.77% (0.33%) (4.07%)

Charge-offs as a % of 

Outstanding Portfolio 1.2% 1.42% 0.22% 18.3% 

Note: SBA performance measures are shaded in table. 

a. Restated FY 1996 figure 

BUSINESS LOANS

Currency Rate* and Charge-Offs Compared

# # #

# #

# #

# # #

88 89 90 91 92 93 94 95 96 97

0

100

200

300

400

500

600

60

70

80

90

100

Percent

 Charge-Offs in $ Purchases in $ Portfolio Currency

 Rate in %

#

Charge off and purchase dollars represent gross as opposed to SBA share.

* SBA performance measure
Page 20 

Development 

Company Assistance 

(Section 504)

Program Description The SBA’s Development Company program was created to give 

small business owners the means to expand, modernize, and 

compete in the economy by providing long-term, fixed asset 

financing. 

 The Development Company program, also known as the 

Section 504 program, permits loans to be made to small 

businesses by Certified Development Companies (CDCs). CDCs 

are non-profit organizations sponsored by private interests or by 

state or local governments. CDCs are certified by the SBA and 

are focused on economic development in their community or 

region. 

 Each loan package must be approved by the SBA and show that 

the assistance will have a significant economic impact on the 

community in which the project is located, primarily through job 

creation or retention. Each package includes at least a 10 percent 

equity injection by the small firm, a 50 percent bank loan with a 

lien position ahead of the SBA guaranteed debenture and the 

balance a debenture issued by the CDC and 100% guaranteed by 

the SBA. The average SBA exposure was $355,000 in FY 1997. 

Program Performance The following highlights significant trends or developments for 

this program. 

 Lending increased steadily from 1988 to 1996. However, a 

decline in 1997 was recorded due to decreased demand, 

possibly as result of increased fees, and other factors. 

 Purchases, both in dollars and numbers, remained steady in 

FY 1997 . 

 Charge-offs, both in dollars and numbers, increased in 

FY 1997 . 
Page 21 

 During FY 1997, 4,045 loans were approved through the 

504 Program for a total gross dollar amount of $1.44 billion. The 

following chart illustrates that, after steadily increasing since 

FY 1988, SBA’s number and dollar volume of development 

company approvals decreased in FY 1997. 

DEVELOPMENT COMPANY LOANS

Annual Approvals in Dollars and Numbers *

"

"

" " "

" "

"

"

"

88 89 90 91 92 93 94 95 96 97

0

500

1000

1500

2000

2500

3000

0

1

2

3

4

5

6

7

# of Loans (Thousands)

 Approvals in $ " Approvals in #

* SBA performance measure

$ in Millions

Since FY 1980, CDCs have funded more than $24 billion in 

combined fixed-asset financing to assist more than 32,000 small 

businesses. CDCs have reported that about 566,000 jobs have 

been created or saved as a result of these efforts. 
Page 22 

The following table also shows the decline in approval volume 

and dollar amount. The decline is attributable to the increase in 

the Sec. 504 fees and that the FY 1996 volume was particularly 

high. Purchase volume and dollar amount increased slightly for 

FY 1997. 

DEVELOPMENT 

COMPANY LOANS 

FY 

1996 

FY 

1997 CHANGE 

% 

CHANGE

Approvals ($) $2,453M 1,436M ($1,017M) (41.5%) 

Approvals (#) 6777 4045 (2732) (40.3%) 

 Purchases ($) $48.5M $49.7M $1.2M 2.48%

 Purchases (#) 196 203 7 3.6%

 Charge Offs ($) $23.9M $30.5M $6.6M 27.6%

 Charge Offs (#) 127 171 44 34.6%

Charge-offs as a % of 

Disbursement 4.09% 3.35% (0.74%) (18.1%)

Charge-offs as a % of 

Outstanding Portfolio 0.5% 0.47% (0.03%) (6%)

Note: SBA performance measures are shaded in table. 

The following chart shows that SBA’s development company 

purchase dollar amount remained steady over the last three years 

and charge-offs increased as a result of previous years’ purchases 

and the result of aggressive policies. 

DEVELOPMENT COMPANY LOANS

88 89 90 91 92 93 94 95 96 97

0

20

40

60

80

100

$ in Millions

 Charge-Offs in $ Purchases in $ 

* SBA performance measure
Page 23 

Investment Company 

Assistance

Program Description The Small Business Investment Company (SBIC) program was 

established to satisfy the need for venture capital by small, 

emerging enterprises and to improve their opportunities for 

growth, modernization, and expansion. The program provides 

financing through SBICs, which utilize their own capital, along 

with funds obtained through the sale of SBA-guaranteed 

debentures and participating securities. 

 SBICs provide equity capital, long-term loans, debt-equity 

investments and management assistance to qualifying small 

businesses in the manufacturing and service industries. The 

SBICs share in the success of the small business as it grows and 

prospers. 

As of September 1997, the SBA portfolio of active companies 

was composed of 220 SBICs with capital resources of 

$6.3 billion and 80 SSBICs with capital resources of 

$411 million. 

Program Performance The following highlights significant trends or developments for 

this program. 

 SBIC leverage approvals continued to increase as interest in 

the participating securities program remained high. 

 Licensing activity also remained high, especially among 

potential participating securities issuers. 

 Purchases as a percentage of outstanding leverage during 

FY 1997 totaled only 2.3%. 

 The amount of leverage in liquidation as a percentage of 

outstanding program leverage has continued to decline from 

39% in FY 1994 to 12% in FY 1997. 

 During FY 1997, SBICs made 2,731 investments for a total of 

approximately $2.4 billion. 
Page 24 

 The following chart displays the financing activity, approvals, for 

the SBIC program over the past 10 years. This financing is in the 

form of debentures, preferred stock and participating securities. 

The upward trend in leverage approvals that began in FY 1994 is 

the result of the new participating security program and this 

increase continued during FY 1997. This program, initially 

authorized in FY 1992 and implemented in FY 1994, defers the 

SBIC’s obligation for interest payments, and allows SBA to 

participate in the earnings of the SBIC’s portfolio attributable to 

the participating securities financings. This program alone 

accounted for $233.8 million of SBIC approval leverage for 

FY 1997 (63 percent of all guaranteed leverage). The SBIC 

program applications for licensure remained high in FY 1997, as 

did approvals (27 applications received and 33 licenses granted). 

The total initial private capital of SBICs licensed in FY 1997 was 

$449.3 million. 

INVESTMENT COMPANY LOANS

Annual Approvals in Dollars and Numbers *

#

#

#

# # #

#

#

#

#

88 89 90 91 92 93 94 95 96 97

0

100

200

300

400

0

20

40

60

80

100

120

# of Loans

 Direct Loans in $ Guarantee Loans in $ A # pprovals in #

Approval dollars represent gross as opposed to SBA share.

* SBA performance measure

$ in millions
Page 25 

 The following table shows an improvement in portfolio currency 

and liquidation percentages that reflects the completion of 

liquidation cases and the charge-off of completed cases. 

 INVESTMENT 

COMPANY LOANS 

FY 

1996 

FY 

1997 CHANGE 

% 

CHANGE

Approvals ($) 347.1M 372.6M 25.5M 7.4% 

Approvals (#) 76 75 (1) (1.3%)

Portfolio Current ($) 76.1% 85.4% 9.3% 12.2% 

Portfolio PastDue/Delinquent (%) 0.1% 0.1% ----- -----

Portfolio Liquidation ($) 23.8% 14.6% (9.2%) (38.7%)

 Purchases ($) 10.2M $37.5M $27.3M 268% 

 Purchases (#) 10 27 17 170% 

 Charge Offs ($) $70.9M $136.9M $66M 93.1% 

 Charge Offs (#) 25 159 134 536% 

Charge-offs as a % of 

Disbursement 5.43% 8.67% 3.24% 59.7% 

Charge-offs as a % of 

Outstanding Portfolio 4.56% 7.56% 3% 65.8% 

Note 1: SBA performance measures are shaded in the table. 

Note 2: Purchases show increase because debentures of active SBIC’s which 

were placed on demand pending refinancing are included in this amount. 

Note 3: Charge-offs include $87.4 million of losses which resulted from the 

legislatively mandated preferred stock buyback which were not included in 

prior year’s charge-off amounts and liquidation charge-offs which were 

completed in prior years but were not posted until FY 1997. 
Page 26 

 The following chart indicates investment company trends over 

the past 10 years. Charge-offs showed on this chart include losses 

which resulted from the legislatively mandated preferred stock 

buyback and liquidation charge-offs which were completed in 

prior years but were not posted until FY 1997. Purchases 

increased due to the inclusion of $8.5 million of debentures of 

active SBICs which were placed on demand pending refinancing. 

The portfolio currency rate includes SBA’s purchased and 

guaranteed loans, and it increased from 76.1% in FY 1996 to 

85.4% in FY 1997. 

INVESTMENT COMPANY LOANS

Currency Rate* and Charge-Offs Compared

#

#

# # # # # # #

#

88 89 90 91 92 93 94 95 96 97

0

20

40

60

80

100

120

140

160

$ in Millions

0

20

40

60

80

100

Percent

 Charge-Offs in $ Purchases in $ Portfolio Currency

 Rate in %

#

Charge off and purchase dollars represent gross as opposed to SBA share.

* SBA performance measure

Surety Bond 

Assistance

Program Description The Surety Bond Guarantee (SBG) program assists small 

business contractors having difficulty in obtaining the required 

bid, performance, and payment bonds for construction, service, 

and supply contracts. These bonds provide security for the 

project owner against loss resulting from the contractor’s failure 

to fulfill the obligations of the contract. 

The Surety Bond program is not considered a credit program 

under the guidelines of Federal Credit Reform because there is no 

guaranty of principal and/or interest payments. Therefore, no 

subsidy calculations are made for this program. 
Page 27 

Program Performance The following highlights trends or developments for this 

program. 

 Approvals have fluctuated over a 10-year period. FY 1997 

showed a decrease over the previous 2 years. 

 In FY 1997, 4,021 final bonds were guaranteed for 

$807 million in bond amount. 

 $13.8 million in claims were paid, and $4.5 million was 

recovered in FY 1997. 

 In FY 1997, SBA processed 12,292 bid bond applications 

representing potential contracts worth more than $2.9 billion. 

The Agency guaranteed 4,021 final bonds amounting to 

$807 million in contract value for which SBA’s share was 

$615 million. 

 The following chart shows that SBA’s dollar volume of surety 

bond approvals has fluctuated over much of the 10 year period. 

The SBG volume tracks with the construction industry and 

economy. The average contract amount of final bond approvals 

increased from $135,800 in FY 1988 to $203,593 in FY 1997. 

SURETY BOND GUARANTEES

Annual Approvals in Dollars and Numbers

"

"

"

"

" "

" " "

"

88 89 90 91 92 93 94 95 96 97

0

200

400

600

800

1000

1200

1400

1600

$ in Millions

0

2

4

6

8

10

12

# of Bonds in Thousands

 Dollar Amount # of Bonds "

Data obtained from Surety Bond Guarantee Report of Surety Bonds and Allotments.
Page 28 

 The following table compares FY 1997 program volume and 

claims with FY 1996 results. 

SURETY BOND 

GUARANTEE FY 1996 FY 1997 

$ 

CHANGE 

% 

CHANGE 

Approvals $ $923.1 M 806.7 M (116.4 M) (12.6%)

Approvals # 4684 4021 (663) (14.2%)

Claims $ $16.2 M 13.0 M (3.2 M) (19.8%)

Recoveries $ $3.0 M 4.6 M 1.6 M 53.3% 

Note: Reflects gross approvals. 

 As the following chart shows, recoveries increased in FY 1997 

over the two previous fiscal years resulting from intensified 

recovery efforts. 

SURETY BOND GUARANTEES

Annual Recoveries and Claims

88 89 90 91 92 93 94 95 96 97

0

5

10

15

20

25

30

35 $ in Millions

 Recoveries Claims

International Trade The Office of International Trade (OIT) oversees the Agency’s 

programs designed to help small businesses export their products. 

The Agency delivers both business development and financial 

assistance programs . 

 The SBA’s Export Working Capital Program (EWCP), the 

International Trade Loan and the 7(a) Loan program for export 

purposes are available to help small businesses transact export 

deals and finance facilities and equipment. 
Page 29 

 The OIT provides a wide array of trade finance and counseling 

services to small business exporters through its Headquarters 

staff and trade finance specialists located at 19 U.S. Export 

Assistance Centers (USEACs). These centers combine the 

resources of the SBA, the Department of Commerce, the ExportImport Bank and other public and private-sector partners. Expert 

assistance is also provided through the SBA’s business assistance 

resources (SCORE, SBDCs, SBA offices) and through online 

information services. The OIT also develops publications to 

assist small businesses in entering the international marketplace 

and to obtain trade financing for their exporting efforts. 

Disaster Assistance

Program Description The SBA assists victims of physical disasters such as 

earthquakes, floods, and hurricanes by extending direct loans to 

individuals and businesses. Loans are made at favorable terms 

and conditions for their uninsured losses of real and personal 

property, and economic injury caused by a disaster. The Disaster 

Loan program is the primary form of Federal assistance for nonfarm, private sector losses and is the only form of SBA assistance 

not limited to small businesses. 

 Three major types of disaster assistance are provided: 

Home Disaster Loans - Loans to homeowners or renters to 

repair or replace damage to homes or personal property owned by 

the applicant. Renters are eligible only for personal property 

loans. 

Business Physical Disaster Loans - Loans to businesses of all 

sizes to repair property owned by the business, including 

damaged inventory and supplies. 

Economic Injury Disaster Loans (EIDL) - Working capital 

loans to small businesses and small agricultural cooperatives to 

assist them through their recovery from the disaster. 
Page 30 

 The program is administered through four area offices. These 

areas and their share of Disaster Assistance are depicted on the 

chart below.

Area I

$141.0

Area II

$369.8 Area III

$226.2

Area IV

$223.8

* SBA performance measure

FY 1997 SBA Disaster Assistance By Area*

(Dollars in Millions)

Note: The above dollar amounts represent “net loan approvals” 

(after increases, decreases and cancellations). 

Program Performance The following highlights significant trends or developments for 

this program. 

 Loan approvals have fluctuated significantly from year to 

year, due to the nature of the program. For FY 1997, 

38,926 loans were approved for $976.1 million. 

 Portfolio currency rate declined slightly to 86.8 percent. 

 Charge-offs increased for FY 1997 reflecting past increases in 

program activity. 

 The following chart shows that SBA’s dollar volume of disaster 

loan approvals fluctuates from year to year. From FY 1990 

through FY 1993, approvals significantly increased in response to 

Hurricane Hugo, Hurricane Andrew, Hurricane Iniki, Typhoon 

Omar, the Los Angeles riots, the Great Midwest floods and 

severe coastal storms on the east coast. During FY 1994, in the 

aftermath of the Northridge earthquake, SBA approved more than 

115,000 loan applications at a value of more than $3.8 billion. 

The continuing activity from Northridge, together with floods 

and hurricanes, caused the high activity in FY 1995. Floods and 

hurricanes in FY 1996 and 1997 kept the level of activity at just 

around $1 billion for the year. Since the inception of the program 

in 1953, the Agency has approved more than 1,386,400 disaster 

loans for more than $25 billion. 
Page 31 

DISASTER LOANS

Annual Approvals in Dollars and Numbers *

"

"

"

"

"

"

"

"

"

"

88 89 90 91 92 93 94 95 96 97

0

1

2

3

4

$ in Billions

0

20

40

60

80

100

120

# of Loans in Thousands

 Dollar Amount Number of Loans " Approval dollars reflect gross as opposed to SBA share.

* SBA performance measure

 As can be seen from the following table, SBA approved 

38,926 disaster loans for $976.1 million in FY 1997. In response 

to the pressing need for Federal assistance, SBA continued to 

streamline the disaster loan process, achieving unprecedented 

response times. 

 DISASTER ASSISTANCE FY 

1996 

FY 

1997 CHANGE 

% 

CHANGE 

Net Approvals ($) $867.0 M 976.1M 109.1M 12.6% 

Net Approvals (#) 29,944 38,926 8982 30% 

Portfolio Current ($) 87.9% 86.8% (1.1%) (1.3%)

Portfolio PastDue/Delinquent ($) 6.3% 6.2% (0.1%) (1.6%)

Portfolio Liquidation ($) 5.8% 7.1% 1.3% 22.4% 

 Charge Offs ($) $77.3M $106.4M $29.1M 37.7% 

 Charge Offs (#) 5,062 5708 646 12.8% 

Charge-offs as a % of 

Disbursement 8.22% 8.27% 0.05% 0.6% 

Charge-offs as a % of 

Outstanding Portfolio 1.1% 1.51% 0.41% 37.3% 

Note: SBA performance measures are shaded in table.
Page 32 

 The following chart shows that SBA’s disaster portfolio currency 

rate remained relatively constant over most of the 10 year period. 

Charge-off volume peaked in the mid-eighties due to aggressive 

charge-off policies implemented to clean up the portfolio. Since 

FY 1988, these efforts have resulted in an improved portfolio and 

increased collections. However, the significant increase in new 

loans starting FY 1990 is causing increased charge-off activity in 

the following years. 

FY 1997 DISASTER LOANS

Currency Rate* and Charge-offs Compared

"

" " " " " " " " "

88 89 90 91 92 93 94 95 96 97

0

20

40

60

80

100

120

140

$ in Millions

0

20

40

60

80

100

Percent

 Charge-Offs in $ Currency Rate in % "

* SBA performance measure
Page 33 

 The SBA has been actively improving its credit management and 

debt collection practices. Four successful debt collection tools 

used for outstanding disaster loans include the IRS offset, the 

appointment of SBA attorneys as Special Assistant United States 

Attorneys to augment the Department of Justice, the use of 

private collection agencies and Federal salary offset. The 

following chart shows the disaster dollars collected by each debt 

collection tool for FY 1997. 

FY 1997 DISASTER DOLLARS COLLECTED PER

DEBT COLLECTION TOOL *

* SBA performance measure

3.6

3.9

0.7

0.3

DOJ IRS

Offset

Collection

Agencies

Fed. Salary

Offset

0.0

1.0

2.0

3.0

4.0

5.0

Millions

Business 

Assistance

SBA provides management assistance in the form of training and 

counseling programs. The primary management assistance 

programs are: 

 Business Initiatives 

 Veterans’ Affairs 

 Women’s Business Ownership 

 International Trade 

 Small Business Development Centers 

 One Stop Capital Shop 

 Native American Affairs 
Page 34 

Business Initiatives Business Initiatives encompass a diverse mix of information, 

education, training and counseling resources to the public. The 

program includes the operations of 41 Business Information 

Centers (BICs). It also includes the Service Corps of Retired 

Executives (SCORE) program; small business initiatives such as 

co-sponsorships with the private sector and the SBA’s for-sale 

publications program. 

Veterans’ Affairs The Office of Veterans Affairs (OVA) monitors the Agency’s 

assistance to veterans and works with SBA program offices to 

define special consideration to veterans. The Office designs 

procurement and management training programs specifically for 

veterans and coordinates veterans’ training and counseling with 

other Agencies or Departments. 

 The OVA coordinates national veterans’ programs such as the 

Veterans Business Training, Procurement and Technology 

Transfer Conferences, and the Transition Assistance program for 

military personnel. The OVA is also involved in base closings 

and military downsizing to assist affected small businesses and to 

promote entrepreneurship. 

Women’s 

Business 

Ownership 

The Office of Women’s Business Ownership (OWBO) provides 

assistance to the increasing number of women business owners 

and acts as their advocate in the public and private sector. It is 

the only office in the Federal government specifically focusing 

on the women business owner. The OWBO serves the Nation’s 

nearly 8 million women business owners through technical, 

financial and management information and training, business 

skills counseling and research. 

The main instrument of this office is the public-private 

partnership which supports a network of 63 Women’s Business 

Centers in 36 states, the District of Columbia and Puerto Rico. 

Of these Centers, 28 are currently funded. Also, SBA funds the 

Online Women’s Business Center which was under development 

during FY 1997. Of the 28 funded Centers, 18 were operational 

in FY 1997 and 10 new ones were awarded in September 1997, 

i.e., the end of FY 1997. The 18 Women’s Business Centers 

provided financial, managerial, marketing and procurement to 

approximately 8,000 women. 
Page 35 

 All Women’s Business Centers (WBC) are linked electronically 

on the WBC Intranet to provide a free flow of information. The 

OWBO has also established a Women’s Home Page - 

(http://www.sba/gov/womeninbusiness) that details the wide 

range of programs and services offered by SBA to women 

entrepreneurs. The Women’s Network for Entrepreneurial 

Training (WNET) is a mentoring program for women business 

owners. It has two components: one, a year-long peer mentoring 

program; and, the other, a program conducted as round tables 

with a peer group format. The WNET program links seasoned 

entrepreneurs with women whose businesses are poised for 

growth in over sixty (60) programs around the country. 

 The Women’s Prequalification Pilot Loan program currently 

located in fifty-five (55) sites nationwide enables women to 

prequalify for an SBA loan guaranty before going to the bank. 

Since June 1994, over $76 million in loans have been made to 

women under this program. 

 Women-owned businesses grew by 43 percent between 

1987-1992, almost double the rate of all firms. If the current 

trend continues, women’s business ownership is expected to 

climb to nearly 50 % of all businesses by the year 2000. In 

FY 1997, 15.0 percent of all SBA loans were made to women 

(an SBA performance measure). 

Small Business 

Development Centers 

The Small Business Development Center (SBDC) program plays 

a major role in delivering management and technical assistance, 

economic development and management training to existing and 

prospective small businesses. This is accomplished through 

cooperative agreements with universities, colleges and state 

agencies to conduct small business counseling and training. 

 The SBDC network consists of over 1,000 sites, including one in 

every state, the District of Columbia, Puerto Rico, the U.S. 

Virgin Islands and Guam. In FY 1997, SBDCs reported that they 

counseled 245,766 individuals and provided 19,977 training 

sessions to a total of 377,651 people. 

One Stop Capital Shop The One Stop Capital Shop (OSCS) is the SBA Empowerment 

Zone (EZ)/Enterprise Community (EC) signature contribution. It 

is an alternative delivery mechanism for the agency’s products in 

a cost effective, customer friendly manner to areas that have been 

underserved by SBA. It is a working model of the public/private 

partnership. 
Page 36 

 The OSCS brings SBA's business development and capital 

resources together in one location with other federal, state, local 

and private sector resources to leverage and complement those 

resources and provide customer convenience. The OSCS 

provides the economic tools for sustained economic development 

and growth. 

 Local communities are required to be stake holders in the process 

to determine goals, mission, partners and day to day operation. 

The SBA’s presence does not duplicate, rather it complements 

and leverages other available financial and technical assistance 

resources. The SBA provides the equipment and reference 

materials for a Business Information Center (BIC) and up to two 

SBA full-time employees. In general, the communities are 

required to house and maintain the BIC as well as the OSCS and 

bring together the other partners. 

 Fourteen OSCSs were open as of September 30, 1997. The first 

EZ/EC OSCS opened on November 6, 1995 in Boston. The 

latest one opened in Hugo, Oklahoma on September 10, 1997. 

During FY 1997, the OSCSs served over 28,000 clients; created 

or retained over 3,300 jobs; and made loans totaling over 

$57 million. 

Native 

American Affairs

The SBA Office of Native American Affairs (ONAA) is the only 

office in the Federal government which assists Native American 

small business clients, including those in Tribal organizations 

and Native American communities. 

 The ONAA formulates policy, develops legislative initiatives and 

coordinates the delivery of SBA services to Native Americans by 

partnering with other SBA program offices, SBA resource 

partners (SBDC & SCORE), Federal and State agencies, Tribal 

governments, National Native American organizations, and 

Tribal colleges to educate, develop and expand Native American 

owned businesses. 
Page 37 

 SBA’s accomplishments in the Native American community: 

 Established three additional reservation-based Tribal Business 

Information Centers in the states of North Carolina, 

Minnesota, and California. 

 In partnership with the Women’s Business Ownership office, 

the ONAA hosted the first National Native American Small 

Business Conference with 326 attendees. 

 Reservation-based Tribal Business Information Centers 

(TBIC) provided 26,400 hours of counseling and technical 

assistance, 31 small business workshops, provided assistance 

in starting 84 new businesses that created 157 new jobs. 

Program Budget and 

Performance

Program information on Business Assistance programs are shown in 

the table below. 

BUSINESS ASSISTANCE FY 

1996 

FY 

1997 CHANGE 

% 

CHANGE

SCORE: 

Training Events (#) 3,644 4,381 737 20.2%

Training Attendees (#) 85,667 109,303 23,636 27.6%

Counseling Cases (#) 144,314 163,705 19,391 13.4%

Counseling Hours (#) 304,768 342,676 37,908 12.4%

Veterans: 

Guaranty Loans (#) 7,155 6,607 (548) (7.7%)

Guaranty Loans ($) $1,362M $1,500M $138M 10.13%

Women’s Bus. Ownership: 

Demonstration Program Sites (#) 18 *28 10 55.6%

Demonstration Program Trained (#) 6,200 8,000 1,800 29.0%

Exporting: 

Guaranty Loans (#) 979 861 (118) (12.0%)

Guaranty Loans ($) $268M $278M $10M 3.7%

Counseling Cases (#) 297 401 104 35.0%

Counseling Hours (#) $97M $141M $44M 45.4%

SBDC: 

Training Events (#) 18,841 19,977 1,136 6.0%

Training Attendees (#) 333,513 377,651 44,138 13.2%

Training Hours (#) 1,565,644 1,729,244 163,600 10.4%

Counseling Cases(#) 237,107 245,766 8,659 3.7%

Counseling Hours(#) 1,231,360 1,254,857 23,497 1.9%

* The above numbers of trained and counseled clients only reflect activity from 

18 WBCs that were operational prior to the 10 new sites. 
Page 38 

GOVERNMENT 

CONTRACTING & 

MINORITY 

ENTERPRISE 

DEVELOPMENT

These programs provide Federal contracting opportunities and 

research and development assistance to small businesses. These 

programs include: 

 Government Contracting 

 Minority Enterprise Development 

 Technology 

 Size Standards 

Government 

Contracting

Program Description The Government Contracting program ensures that small 

businesses receive a fair share of government contracts and 

subcontracts. This objective is carried out through various 

component programs, including the Prime Contracts, 

Subcontracting Assistance, Natural Resources Sales Assistance, 

Certificate of Competency, and Procurement Policy and Liaison 

programs. SBA has also established an electronic gateway for 

procurement information called Pro-Net. 

 The Prime Contracts program is carried out primarily with the 

assistance of Procurement Center Representatives (PCR) who 

monitor requirements for and promote small business 

participation in Federal procurement. The Breakout Program 

provides small businesses procurement opportunities in Federal 

procurements. 

 Through the Subcontracting Assistance program, SBA ensures 

that small businesses receive maximum practicable opportunity to 

participate as subcontractors on Federal contracts. The SBA’s 

Commercial Market Representatives (CMRs) perform 

compliance reviews to ensure that prime contractors make a 

good-faith effort to subcontract to small businesses. 
Page 39 

 The Natural Resources Sales Assistance program aids and assists 

small businesses in obtaining their fair share of Federal property 

offered for sale or disposal in accordance with public law. 

Efforts have been concentrated on the sale of Federal timber, 

royalty oil, coal leases, and other mineral leases. 

PRO-Net is an internet accessible database of small businesses 

interested in doing business with the U.S. Government and also 

provides an electronic gateway to the Commerce Business Daily 

(CBD) agency home-pages and other sources of procurement 

opportunities. The system is also linked to key sources of 

information, assistance and training. 

 The Certificate of Competency (COC) program authorizes the 

Agency to certify a small company’s “capability, competency, 

credit, integrity, perseverance and tenacity” to perform a specific 

government contract. This provides contracting opportunities to 

small businesses. 

Program Budget 

and Performance Information for this program is shown in the table below. 

GOVERNMENT CONTRACTING FY 1996 FY 1997 CHANGE % 

CHANGE 

 Subcontracting Compliance Reviews (#) 831 1,718 887 106.7%

 Needs Assessments (#) 404 526 122 30.2%

 Bulk Referrals (#) 

Specific Referrals (#) 

41,671

3,728

56,951 

4,540 

15,280

812

36.7%

21.8%

 Firms Counseled (#)1 19,493 21,227 1,734 8.9%

PRO-Net - Firms Registered (#) N/A2

 171,000 N/A N/A 

PRO-Net - Demonstrations (#) N/A2

 43 N/A N/A 

 Small Business Set-Asides $10.4 B3 $11.0 B4 $0.6 B 5.8%

 Savings through BPCR program $125 M5 $75.9 M ($49.1M) (39.3%)6

1 Combined figures for PCRs and CMRs. 

2 PRO-Net was not begun until FY 1997. 

3 Billion. 

4 Estimate - actual data not available until third quarter, FY 1998. 

5 Million. 

6 Reduction in breakout saving resulted from significant staff reductions and 

realignment during the past 18 months.
Page 40 

Minority Enterprise 

Development

Program Description The mission of the Office of Minority Enterprise Development 

(MED) is to assist small disadvantaged businesses which, 

because of their demonstrated potential for success, have been 

certified for participation in the section 8(a) program. MED 

provides them with marketing support and other assistance 

through the provision of business development, and management 

and technical assistance. 

 MED provides business development support to program 

participants through: (1) annual reviews and development of 

business plans that establish targets for sustainable growth; 

(2) identification of procurement opportunities and marketing 

assistance; and (3) assistance in negotiating provisions and 

awards of sole source and limited competitive Federal contracts, 

pursuant to Section 8(a) of the Small Business Act. Through 

these tools, MED provides a logical, systematic approach to 

market access and enterprise growth to small business owned and 

controlled by socially and economically disadvantaged 

individuals. Section 8(a) firms participate in this program over a 

maximum 9 year period, during which their progress is planned 

and monitored. 

 Under Section 7(j) of the Small Business Act, MED provides 

specialized training, professional consultant assistance, and highlevel executive development to 8(a) program participants, other 

small disadvantaged businesses, low-income individuals, and 

small businesses in labor-surplus areas or areas with a high 

proportion of low-income individuals. 

Program Budget 

and Performance

Program information on MED programs is shown in the table 

below. 

MED FY 1996 FY 1997 CHANGE % 

CHANGE

 8(a) Contracts Awarded (#) 5,429 4,733* (696) (12.8%)

 8(a) Contracts & Mod Dollars 

Awarded ($) $6.0B $6.3B* $0.3B 5.0%

 8(a) Clientele 5,664 6,185* 521 9.2%

* This is based on preliminary data and is subject to change at the time the 

government-wide data is released by the Federal Procurement Data System. 

In FY 1997, 24.0 percent of all SBA loans were made to 

economically and socially disadvantaged individuals (an SBA 

performance measure). 
Page 41 

Technology

Program Description The SBA’s Technology program (formerly the Small Business 

Innovation and Research (SBIR) program) was created in 1982 to 

meet the research and development needs of the Federal 

government while providing small innovative companies with 

opportunities to compete for R&D awards and to commercialize 

the resulting new technology. The program was reauthorized by 

Congress in 1992 and also included approval for the Small 

Business Technology Transfer (STTR) program. The STTR 

program encourages small businesses and research institutions to 

cooperatively propose innovative solutions to agency high tech 

needs. 

Ten Federal agencies presently participate in the Technology 

program and five Federal agencies participate in the STTR 

program. Since 1982, these agencies have made more than 

42,000 awards through the SBIR program, totaling more than 

$6.4 billion to small business concerns. The STTR program, in 

its first 3 years of operation, made 984 awards worth 

$114.7 million. 

Size Standards

Program Description Small business status is required to be eligible for any of the 

assistance programs of the SBA (except physical disaster loans) 

and for receiving small business set-aside contracts from federal 

agencies. Size standards define what businesses are eligible for 

SBA assistance. They are usually stated in terms of number of 

employee or gross revenues, with small business eligibility 

limited to those firms at or below a size standard. The SBA’s 

size standards are also used by other federal agencies and state 

and local governments for various small business programs. 

There is a separate size standard for each industry in the economy 

as defined under the Standard Industrial Classification system. 

For several programs, a separate size standard has been 

established, such as the Surety Bond Guarantee Program and the 

Small Business Innovation and Research Program. 
Page 42 

Small Business 

Advocacy

Program Description Established by P.L. 94-305 of 1976, the general mission of the 

Office of Advocacy is to examine the role of small business in 

the economy and its contribution to competition; evaluate 

financial markets and the credit needs of small business; measure 

the costs and effects of government regulation on small business; 

develop programs/services that address market imperfections and 

make public policy recommendations that promote the 

development and growth of small business. The office has three 

sections. 

The Office of Interagency Affairs monitors the regulatory 

activity of all Federal regulatory agencies to assess the impact of 

regulatory proposals on small business and works within the 

regulatory process to minimize adverse effects. It also represents 

the views and interests of the small business community before 

Congress on legislative proposals. The 1996 Small Business 

Regulatory Enforcement Fairness Act (SBREFA) expands the 

authority of the Chief Counsel for Advocacy to file amicus briefs

in court proceedings relating to the Regulatory Flexibility Act. 

 The Office of Economic Research compiles and disseminates 

detailed studies and reports on small business trends and 

characteristics, using data provided by various Federal agencies 

and/or from the Small Business Database compiled by the Bureau 

of Census exclusively for the Office of Advocacy. This data is 

the only source of information on the contribution of small 

business to the economy. The office also generates reports and 

studies not available elsewhere in the marketplace as issues 

directly relevant to public policy. 

 The Office of Information works in collaboration with the other 

Advocacy offices to produce and publish information that 

addresses the concerns of the Nation’s small businesses. Two 

primary publications are the monthly Small Business Advocate 

and the annual State of Small Business: A Report of the 

President. 
Page 43 

FINANCIAL STATEMENTS
Page 44 

INTRODUCTION These financial statements have been prepared to report the 

financial position and results of operations pursuant to the CFO 

Act of 1990. While the financial statements have been prepared 

from the books and records of the Agency, they are different 

from the financial reports used to monitor and control budget 

execution. 

The responsibility for the accuracy and propriety of the 

information contained in the principal financial statements and 

the quality of internal controls rests with management. 

Liabilities not covered by budgetary resources cannot be 

liquidated without an enactment of an appropriation by the 

Congress. This subject is further described in footnote 9. 
Page 45 

U.S. SMALL BUSINESS ADMINISTRATION

STATEMENT OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 1997 and 1996

(Rounded to Thousands) 

ASSETS 1997 1996 

Intragovernmental Assets: 

Fund Balances with Treasury (Note 2) $8,677,901 $8,109,023 

Investments (Note 4) 215,435 160,160 

Accounts Receivable, Net (Note 5) 369,894 725 

Interest Receivable 397,222 372,527 

Advances and Prepayments 5,043 5,734 

Governmental Assets: 

Accounts Receivable, Net (Note 5) 96,370 64,208 

Credit Program Receivables and Related 

Foreclosed Property, Net (Note 6) 7,511,167 7,487,483 

Advances and Prepayments 60,728 31,298 

Cash (Note 3) 7,216 3,638 

Property and Equipment, Net (Note 7) 2,005 2,744 

Total Entity Assets $17,342,981 $16,237,540 

Total Non-Entity Assets $0 $0 

Total Assets $17,342,981 $16,237,540 

The accompanying notes are an integral part of this statement for current year data. Notes for the 

prior year data may be found on the prior year’s report. 
Page 46 

U.S. SMALL BUSINESS ADMINISTRATION

STATEMENT OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 1997 and 1996

(Rounded to Thousands) 

LIABILITIES 1997 1996 

Liabilities Covered by Budgetary Resources: 

Intragovernmental Liabilities: 

Accounts Payable $1,342,490 $51,809 

Interest Payable 628,868 589,938 

Debt (Note 8) 9,207,428 9,129,440 

Other Intragovernmental Liabilities (Note 9) 3,511,439 3,641,769 

Governmental Liabilities: 

Accounts Payable 60,142 47,232 

Liabilities for Loan Guarantees (Note 6) 1,770,380 2,026,326 

Other Governmental Liabilities (Note 9) 269,705 215,823 

Total Liabilities Covered by Budgetary 

Resources $16,790,452 $15,702,337 

Liabilities Not Covered by Budgetary Resources: 

Governmental Liabilities: 

Federal Employees’ Compensation Act Liability 17,125 21,510 

Other Governmental Liabilities (Note 9) 23,043 17,927 

Total Liabilities Not Covered by Budgetary 

Resources $40,168 $39,437 

Total Liabilities $16,830,620 $15,741,774 

NET POSITION 1997 1996 

Balances (Note 10) 

Unexpended Appropriations $549,821 $531,662 

Invested Capital 2,011 2,744 

Cumulative Results of Operations 430 (64)

Other 267 861 

Future Funding Requirements (40,168) (39,437)

Total Net Position $512,361 $495,766 

Total Liabilities and Net Position $17,342,981 $16,237,540 

The accompanying notes are an integral part of this statement for current year data. Notes for the 

prior year data may be found on the prior year’s report.
Page 47 

U.S. SMALL BUSINESS ADMINISTRATION

STATEMENT OF OPERATIONS AND CHANGES IN NET POSITION

FOR THE PERIOD ENDED SEPTEMBER 30, 1997 and 1996

(Rounded to Thousands) 

REVENUES AND FINANCING 

SOURCES 1997 1996 

Appropriated Capital Used $559,626 $755,518 

Revenues from Sales of Goods and Services 

To the Public 10,231 9,457 

Intragovernmental 215 143 

Interest and Penalties, Non-Federal 483,996 447,018 

Interest, Federal 326,805 394,959 

Other Revenues and Financing Sources (Note 11) 88,248 20,540 

Total Revenues and Other Financing Sources $1,469,121 $1,627,635 

EXPENSES 1997 1996 

Program or Operating Expenses (Note 12) $561,081 $509,867 

Depreciation and Amortization 1,524 2,265 

Bad Debts and Write-offs 0 0 

Interest: 

Federal Financing Bank/Treasury Borrowing 628,555 589,938 

Other (29,343) 5,909 

Other Expenses (Note 13) 257,793 220,872 

Total Expenses $1,419,610 $1,328,851

Excess (Shortage) of Revenues and Financing 

Sources Over Total Expenses 49,512 298,784 

Net Position, Beginning Balance 495,766 459,816 

Adjustments (Note 14) 0 (233)

Net Position, Beginning Balance as Restated 495,766 459,583 

Excess (Shortage) of Revenues and Financing 

Sources Over Total Expenses 49,512 298,784 

Plus (Minus) Non-Operating Changes (Note 15) (32,917) (262,601)

Net Position, Ending Balance $512,361 $495,766 

The accompanying notes are an integral part of this statement for current year data. Notes for the 

prior year data may be found on the prior year’s report.
Page 48 

FOOTNOTES TO PRINCIPAL STATEMENTS

September 30, 1997 

NOTE 1. Significant Accounting Policies: 

A. Basis of Presentation 

These financial statements have been prepared to report the financial position and results of operations of 

the Small Business Administration (SBA) as required by the Chief Financial Officers Act of 1990. They 

have been prepared from the books and records of SBA in accordance with the form and content for 

entity financial statements specified by the Office of Management and Budget (OMB) in OMB Bulletin 

No. 94-01, OMB Bulletin No. 97-01 (notes 4 and 6), and SBA’s accounting policies which are 

summarized in this note. These statements are therefore different from the financial reports, also 

prepared by SBA pursuant to OMB directives, that are used to monitor and control SBA’s use of 

budgetary resources. 

B. Reporting Entity 

SBA was created by the Small Business Act of 1953. Its mission is to aid, counsel, assist, and protect, 

insofar as is possible, the interests of small business concerns to preserve free competitive enterprise, and 

to help businesses and families recover from disasters. 

The accompanying consolidated financial statements of SBA include the accounts of all funds under SBA 

control: 

Fund Title Fund Number 

Salaries and Expenses (S&E) 0100 

Office of Inspector General (OIG) 0200 

Disaster Loans Program Account 1152 

Business Loans Program Account 1154 

Pollution Control Equipment Fund Liquidating Account (PCECGRF) 4147 

Business Direct Loan Financing Account 4148 

Business Guaranteed Loan Financing Account 4149 

Disaster Direct Loan Financing Account 4150 

Disaster Loan Liquidating Account (DLF) 4153 

Business Loan Liquidating Account (BLIF) 4154 

Surety Bond Guarantees Revolving Fund (SBGRF) 4156 

Business Assistance Trust Fund (BATF) 8466 

C. Budgets and Budgetary Accounting 

Each SBA loan disbursement is financed by a combination of two sources: one for the long-term cost of 

the loan and another for the remaining non-subsidized portion of the loan. Congress generally adopts a 

one year appropriation, available for obligation in the fiscal year for which it is provided, to cover the 

estimated long-term costs of SBA loans. The long term costs are defined as the net present value of the 

estimated cash outflows associated with the loans less the estimated cash inflows. The portion of each 

loan disbursement that does not represent long-term cost is financed under a permanent indefinite 

borrowing authority to borrow funds from the U.S. Department of the Treasury. Congress also annually 

adopts an appropriation bill limitation limiting the dollar amount of obligations that can be made for 

direct loans. 

A permanent indefinite appropriation is available to finance the costs of re-estimates that occur after the 

year in which the loan is disbursed. A modification requires that budget authority for the additional cost 

is appropriated, or is available out of existing appropriations or from other budgetary resources. 
Page 49 

D. Basis of Accounting 

Transactions are recorded on an accrual accounting basis and a budgetary basis. Under the accrual 

method, revenues are recognized when earned and expenses are recognized when a liability is incurred, 

without regard to receipt or payment of cash. Budgetary accounting facilitates compliance with legal 

constraints and controls over the use of federal funds. 

E. Revenues and Other Financing Sources 

The SBA receives the majority of the funding needed to support the accounts and funds through 

appropriations. The Agency receives both annual and multi-year appropriations that may be used, within 

statutory limits, for operating expenditures. Additional amounts are obtained from fees for guarantees 

provided. Also, SBA receives gifts from donors and interest on fund balances with Treasury. 

Appropriations are recognized as revenues at the time the related program or administrative expenses are 

incurred. Appropriations expended for property and equipment are recognized as expenses when the 

asset is consumed in operations. Other revenues are recognized when earned, i.e., goods have been 

delivered or services rendered. 

F. Fund Balances with Treasury and Cash 

The SBA does not maintain cash in commercial bank accounts. Cash receipts and disbursements are 

processed by the U.S. Department of the Treasury. Fund Balances with Treasury and Cash are comprised 

primarily of appropriated, revolving, and trust funds, which are available to pay current liabilities and 

finance authorized purchase commitments. Cash balances held outside the U.S. Treasury are not 

material. 

G. Loans Receivable 

Loans are accounted for as credit program receivables at the time funds have been disbursed. For loans 

obligated prior to October 1, 1991, loans receivable are reduced by an allowance for estimated 

uncollectible amounts. The allowance is estimated based on historical experience, present market 

conditions, and an analysis of outstanding balances. For loans obligated on or after October 1, 1991, the 

loans receivable are reduced by an allowance equal to the present value of the subsidy costs (due to the 

interest rate differential between the loans and Treasury borrowing, the estimated delinquencies and 

defaults net of recoveries, the offset from fees, and other estimated cash flows) associated with these 

loans. 

Interest receivable is comprised of accrued interest on accounts and loans receivable and purchased 

interest on loan guarantee purchases. Interest income is accrued at the contractual rate on the outstanding 

principal amount and is reduced by the amount of interest income accrued to non-performing loans (those 

in excess of 90 days delinquent). Purchased interest is carried at cost. A 100 percent allowance is 

established for all purchased interest on non-performing loans. 

H. Property and Equipment 

The buildings in which SBA operates are provided by the General Services Administration, which 

charges SBA rent that approximates the commercial rental rates for similar properties. Equipment is 

capitalized at cost if the initial unit acquisition cost is $5,000 or more and service life is two years or 

more. Equipment with an acquisition cost of less than $5,000 or less than two years of life is expensed 

when purchased. Equipment is depreciated using the straight line method over useful lives which, for 

most equipment, range from three to five years. 
Page 50 

I. Appropropriations Receivable 

The Agency maintains a receivable from Treasury for amounts resulting from upward adjustments on 

credit subsidy requirements. These adjustments result from reestimates of Agency subsidy costs required 

under the Federal Credit Reform Act of 1990. 

J. Prepaid and Deferred Charges 

Payments in advance of the receipt of goods and services are recorded as prepaid charges at the time of 

prepayment and recognized as expenses when the related goods and services are received. 

K. Investments in U.S. Government Securities 

The 7(a) secondary market program is administered by an agent of the Small Business Administration. 

The agent receives collections from banks on 7(a) loans guaranteed by the SBA, and makes payments to 

secondary holders who have investments in pools of 7(a) guaranteed loans. The trust fund used by the 

agent for the 7(a) cash flow accumulated interest in excess of $215 million since the inception of the 

program in 1986. This accumulated interest is the property of the SBA, but future payments required to 

holders of 7(a) secondary market securities could exceed the principal amount of the trust fund. The 

interest, as well as the principal in the trust fund, is invested in short term Treasury securities. The 

SBA’s policy is to carry the value of the interest in the 7(a) trust fund as “securities” on its financial 

statements, offset by an equal amount of “deferred credits.” This accounting treatment recognizes the 

nature of the investment, and the existence of a possible future claim on interest invested in the securities. 

L. Borrowings Payable to the Treasury 

Borrowings payable to the Treasury result from loans from the Treasury to fund the credit reform 

financing accounts. These funds are required to make periodic principal payments to Treasury based on 

the collections of loans receivable. 

M. Liability for Loan Guarantees 

There are two components to the Agency’s liability for guaranteed loans: liabilities for losses on pre1992 loans, and liabilities on post-1991 loans made under the Federal Credit Reform legislation. For pre1992 guarantees, the amount is an estimate of losses on guarantees outstanding based on historical 

experience. For post-1991 loans, the liability is based on the present value of cashflows on the loans. 

N. Interest Payable to Treasury 

The credit reform financing accounts have interest payable to Treasury. The SBA is required to make 

periodic interest payments to Treasury based on its debt to Treasury. The SBA is also required to make 

periodic interest payments to Treasury based on interest collections on loans in the BLIF (Liquidating) 

and the DLF (Liquidating). 

O. Contingencies 

The SBA is a party in various administrative proceedings, legal actions, environmental suits, and claims 

brought by or against it. In the opinion of SBA management and legal counsel, the ultimate resolution of 

these proceedings, actions, suits and claims will not materially affect the financial position or results of 

SBA operations. 

P. Annual, Sick, and Other Leave 

Annual leave is accrued as it is earned and the accrual is reduced as leave is taken. Each year, the 

balance in the accrued annual leave is adjusted to reflect current pay rates. To the extent current or prior 

year appropriations are not available to fund annual leave earned but not taken, funding will be obtained 

from future financing sources. 

Sick leave and other types of nonvested leave are expensed as taken. 
Page 51 

Q. Federal Employees’ Compensation Act Liability 

The future workers’ compensation estimates are generated from an application of actuarial procedures 

developed to estimate the liability for Federal Employees’ Compensation Act (FECA) benefits. The 

actuarial liability estimates for FECA benefits include the expected liability for death, disability, medical, 

and miscellaneous costs for approved compensation cases. The liability is determined using the paid 

losses extrapolation method calculated over the next 23 year period. This method utilizes historical 

benefit payment patterns related to a specific incurred period to predict the ultimate payments related to 

that period. These annual benefit payments have been discounted to present value. 

R. Retirement Plan 

The majority of SBA’s employees participate in the Civil Service Retirement System (CSRS), to which 

SBA makes matching contributions equal to seven percent of pay. On January 1, 1987, the Federal 

Employees Retirement System (FERS) went into effect pursuant to Public Law 99-335. Most employees 

hired after December 31, 1983, are automatically covered by FERS and Social Security. Employees 

hired prior to January 1, 1984, elected to either join FERS and Social Security or remain in CSRS. A 

primary feature of FERS is that it offers a savings plan to SBA employees which automatically 

contributes one percent of pay and matches any employee contribution up to an additional four percent of 

pay. 

For most employees hired since December 31, 1983, SBA also contributes the employer’s matching share 

for Social Security. The SBA does not report CSRS or FERS assets, accumulated plan benefits, or 

unfunded liabilities, if any, applicable to its employees. Reporting such amounts is the responsibility of 

the Office of Personnel Management and the FERS. 

NOTE 2. Fund Balances with Treasury: 

A. Fund Balances: 

 Obligated Unobligated Total 

 Available Restricted 

 (1) Trust Funds $95,368 $236,202 $0 $331,570 

 (2) Revolving Funds 7,481,912,475 968,597,229 0 8,450,509,704 

 (3) Appropriated Funds 208,312,166 18,747,913 0 227,060,079 

 Total $7,690,320,009 $987,581,344 $0 $8,677,901,353 

NOTE 3. Cash: 

The cash balance held outside the U.S. Treasury was $7,216,006. This balance was composed 

primarily of cash on hand. 

NOTE 4. Investments: 

Investments are comprised of marketable federal securities held by an agent of the U. S. Small Business 

Administration. These securities are valued on a cost basis and maintain a balance of $215,435,204 as of 

September 30, 1997. Cost basis and market value are the same. 
Page 52 

NOTE 5. Accounts Receivable: 

Entity Assets Account Balance 

Intragovernmental 

 Account Balance 

Governmental 

Business Loan and Investment Fund $306,939,843 $90,901,518 

Disaster Loan Fund 59,685,679 157,165 

Pollution Control 0 0 

Surety Bond Guaranty Program 0 4,935,947 

Business Assistance Trust Fund 0 0 

Salaries and Expenses 3,268,024 375,438 

Office of Inspector General 0 0 

Total $369,893,546 $96,370,068 

A. Other Information: 

Accounts Receivable - Intragovernmental represents reimbursements from other funds, including 

$366,625,522 of appropriations receivable from Treasury because of subsidy reestimates. 

Accounts Receivable - Governmental primarily represent amounts due from participating financial 

institutions for guarantee fees and their share of SBA-paid loan expenses. The balances represent 

receivables due from Agency employees or vendors. The balance includes an anticipated legal 

settlement. 

Based upon historical experience, an aggressive collection policy and the ability to offset against the 

participant’s share of loan collections, no allowance for unrecoverable accounts is provided. No 

allowance for unrecoverable accounts for administrative activity is necessary because employee 

accounts may be recovered through an offset process and vendor receivables are generally offset 

against disbursements made to the vendor. 

NOTE 6. Loans and Loan Guarantees, Non-Federal Borrowers: 

A. SBA operates the following loan and/or loan guarantee programs: 

(1) Business, Direct 

(2) Business, Guarantee 

(3) Disaster, Direct 

(4) Disaster, Guarantee 

(5) Pollution Control, Guarantee 

(6) Surety Bond, Guarantee 

Direct loan obligations or loan guarantee commitments made prior to FY 1992, and the resulting direct 

loans or loan guarantees, are reported net of an allowance for estimated uncollectible loans or estimated 

losses. Loss allowances represent estimates of what SBA does not expect to recover on its loans 

receivable obligated prior to FY 1992. These allowances are based upon historical experience, current 

market conditions and an analysis of individual assets. They are non-funded and merely attempt to 

reflect the anticipated unrecoverable loans receivable. 

Direct loan obligations or loan guarantee commitments made after FY 1991, and the resulting direct loans 

or loan guarantees, are governed by the Federal Credit Reform Act. The Act provides that the present 

value of the subsidy costs (i.e. interest rate differentials, interest subsidies, estimated delinquencies and 
Page 53 

defaults, fee offsets, and other cash flows) associated with direct loans and loan guarantees be recognized 

as a cost in the year the loan or loan guarantee is made. 

An analysis of loans receivable, loan guarantees, liability for loan guarantees, and the nature and amounts 

of the subsidy and administrative costs associated with the loans and loan guarantees is provided in the 

following sections. 

B. Direct Loans Obligated Prior To FY 1992: 

Liquidating 

Loan 

Programs 

Loans & Interest 

Receivable, Gross 

Allowance for 

Estimated 

Uncollectible 

Loans & Interest 

Loans & Interest 

Receivable, Net 

Foreclosed 

Property 

Value of Assets 

Related to Direct 

Loans 

(1) Business $551,159,207 ($152,515,721) $398,643,486 $13,780,295 $412,423,781 

(2) Disaster 1,540,144,908 (116,805,507) 1,423,339,401 4,185,231 1,427,524,632 

 Total $2,091,304,115 ($269,321,228) $1,821,982,887 $17,965,526 $1,839,948,413 

C. Direct Loans Obligated After FY 1991: 

Credit Reform 

Loan Programs 

Loans Receivable, 

Gross 

Interest 

Receivable 

Foreclosed 

Property 

Allowance for 

Subsidy Cost 

(Present Value) 

Net Present 

Value of Assets 

Related to 

Direct Loans 

(1) Business $147,712,633 $1,439,972 $67,058 ($51,625,241) $97,594,422 

(2) Disaster 5,634,406,940 32,480,107 2,235,763 (1,230,102,471) 4,439,020,339 

 Total $5,782,119,573 $33,920,079 $2,302,821 ($1,281,727,712) $4,536,614,761 

D. Defaults on Pre-1992 Guaranteed Loans: 

Liquidating 

Loan 

Guarantee 

Programs 

Defaulted 

Guaranteed Loans 

& Interest 

Receivable, Gross 

Allowance for 

Estimated 

Uncollectible Loans 

& Interest 

Loans & Interest 

Receivable, Net 

Foreclosed 

Property 

Value of Assets 

Related to Loan 

Guarantees 

(1) Business $1,284,885,405 ($621,970,277) $662,915,128 $33,069,839 $695,984,967 

(2) Disaster 370,095 (30,671) 339,424 0 339,424 

(3) Pollution 46,026,651 (31,370,905) 14,655,746 0 14,655,746 

 Total $1,331,282,151 ($653,371,853) $677,910,298 $33,069,839 $710,980,137 

E. Defaults on Post-1991 Guaranteed Loans: 

Credit Reform Loan 

Guarantee Programs 

Defaulted 

Guaranteed Loans 

Receivable, Gross

Interest 

Receivable 

Foreclosed 

Property 

Allowance for 

Subsidy Cost 

(Present Value) 

Net Present 

Value of Assets 

Related to 

Defaulted 

Guaranteed 

Loans Recvables.

(1) Business $646,161,071 $15,321,539 $32,220,470 ($270,079,674) $423,623,406 
Page 54 

F. Guaranteed Loans Outstanding: 

Loan Programs 

Outstanding Principal, 

Guaranteed Loans 

Receivable, Gross 

Amount of Outstanding 

Principal Guaranteed 

(1) Business $35,211,766,882 $28,877,079,865 

G. Liability for Loan Guarantees: 

Loan Programs 

Liabilities for Losses on 

Pre-1992 Guarantees 

Liquidating 

Liabilities for Loan 

Guarantees for 

Post-1991 Guarantees 

(Present Value) 

Total Liabilities for Loan 

Guarantees 

(1) Business $35,008,180 $1,725,359,463 $1,760,367,643 

(2) Pollution 10,012,234 0 10,012,234 

 Total $45,020,414 $1,725,359,463 $1,770,379,877 

H. Subsidy Expense for Post-1991 Loans: 

1. Current Year’s Direct Loans 

Loan Programs Interest 

Differential 

Defaults Fees Other Total 

(1) Business $608,198 ($251,837) ($150) ($2,843) $353,368 

(2) Disaster 85,121,348 55,671,227 1,647,883 (2,995,116) 139,445,342 

 Total $85,729,546 $55,419,390 $1,647,733 ($2,997,959) $139,798,710 

2. Direct Loan Modifications and Re-estimates 

Loan Programs Modifications Re-estimates Total 

(1) Business $0 $0 $0 

(2) Disaster 23,684 (139,331,377) (139,307,693)

 Total $23,684 ($139,331,377) ($139,307,693)

3. Total Direct Loan Subsidy Expenses 

Loan Programs 

(1) Business $353,368 

(2) Disaster 137,649 

 Total $491,017 

I. Subsidy Expense for Post-1991 Loan Guarantees: 

1. Current Year’s Loan Guarantees 

Loan Programs Interest 

Supplement Defaults Fees Other Total 

(1) Business $0 $569,284,020 ($376,297,192) ($15,565,076) $177,421,752 

2. Loan Guarantee Modifications and Re-estimates 

Loan Programs Modifications Re-estimates Total 

(1) Business $0 ($159,108,180) ($159,108,180)
Page 55 

3. Total Loan Guarantee Subsidy Expenses 

Loan Programs Total 

(1) Business $18,313,572 

J. Administrative Expense: 

Direct Loans 

Loan Programs Total Loan Guarantees 

Loan Programs Total 

(1) Business $18,800,000 (1) Business $81,619,209 

(2) Disaster 162,232,175 

Total $181,032,175 

K. Other Information: 

The liability in Part F, of this note for pre-1992 business loans, relates to outstanding gross amounts 

guaranteed of $5,005,186,556. Of this amount, the Agency’s share is $4,316,470,380. For Pollution 

Control Equipment Contract Guarantees, the outstanding guarantees total $75,828,889. This amount is 

both gross and Agency share. For post-1991 loans, the gross amount guaranteed for business loans is 

$30,206,580,326. The Agency’s share is $24,560,609,485. 

The Foreclosed Property referred to in Parts B through E is comprised of $79,614,596 of Real Estate 

outstanding on 1,452 loans and $5,944,060 of Other Property outstanding on 188 loans. 

NOTE 7. Property and Equipment, Net: 

Classes of Fixed Assets 

(1) 

Depreciation 

Method 

(2) 

Service 

Life 

(3) 

Acquisition 

Value 

(4) 

Accumulated 

Depreciation 

(5) 

Net Book 

Value 

A. ADP Software S/L 1-3 years $2,038,941 $1,932,463 $106,478 

B. Equipment S/L 2-5 years 3,874,913 1,976,756 1,898,157 

 Total $5,913,854 $3,909,219 $2,004,635 

NOTE 8. Debt: 

A. Liabilities Covered by Budgetary Resources: 

 Beginning 

Balance New Borrowings Repayments Ending Balance ReFinancing

A. Intragovernmental 

Debt: 

 

 (1) Borrowing 

from the 

Treasury 

$8,811,036,096 $842,967,827 ($721,511,246) $8,932,492,677 0 

 (2) Borrowing 

from Federal 

Financing Bank 318,403,823 0 (43,468,173) 274,935,650 0 

 (3) Total 

Intragovernmental Debt $9,129,439,919 $842,967,827 ($764,979,419) $9,207,428,327 $0 

NOTE 9. Other Liabilities: 
Page 56 

A. Other Liabilities Covered by Budgetary Resources: 

 Non-Current Liabilities Current Liabilities Total Liabilities 

1. Intragovernmental 

 (1) Business Loan and 

Investment Fund $1,692,608,726 $82,993,365 $1,775,602,091 

 (2) Disaster Loan Fund 1,718,201,072 0 1,718,201,072 

 (3) Salaries and Expenses 0 421 421 

 (4) Pollution Control 

Guarantee Fund 17,635,285 0 17,635,285 

 (5) Business Asst Trust Fund 0 0 0 

 Total $3,428,445,083 $82,993,786 $3,511,438,869 

2. Governmental 

 (1) Business Loan & 

Investment Fund $215,435,204 $5,033,718 $220,468,922 

 (2) Disaster Loan Fund 0 152,665 152,665 

 (3) Salaries and Expenses 0 11,521,493 11,521,493 

 (4) Office of Inspector 

General 0 414,236 414,236 

 (5) Business Asst Trust Fund 0 0 0 

(6) Surety Bond Gty. Fund 37,147,465 0 37,147,465 

 Total $252,582,669 $17,122,112 $269,704,781 

B. Other Liabilities not Covered by Budgetary Resources: 

 Non-Current Liabilities Current Liabilities Total Liabilities 

1. Intragovernmental $0 $0 $0 

2. Governmental 

 (1) Accrued Unfunded 

Annual Leave $0 $23,042,536 $23,042,536 
Page 57 

NOTE 10. Net Position: 

Revolving Funds Trust Funds Appropriated 

Funds Total 

A. Unexpended Appropriations: 

 (1) Unobligated: 

 a. Available $6,335,920 $0 $375,094,569 $381,430,489 

 b. Unavailable 0 0 13,679,635 13,679,635 

 (2) Undelivered Orders 0 0 154,710,884 154,710,884 

Subtotal $6,335,920 $0 $543,485,088 $549,821,008 

B. Invested Capital $0 $0 $1,978,282 $1,978,282 

C. Cumulative Results of 

Operations 0 88,833 374,065 462,898 

D. Other - Donations 0 266,445 0 266,445 

E. Future Funding Requirements 0 0 (40,167,536) (40,167,536)

F. Total Net Position $6,335,920 $355,278 $505,669,899 $512,361,097 

NOTE 11. Other Revenues and Financing Sources: 

1997 

A. Other Revenues and Financing Sources 

 (1) Gain on Assets Acquired $3,678,166 

 (2) Miscellaneous Revenues 16,716,667 

 (3) Miscellaneous Donations 61,980 

(4) Imputed Financing: FEGLI, FEHB, & Pension 67,791,174 

 Total $88,247,987 
Page 58 

NOTE 12. Program or Operating Expenses: 

1997 

A. Operating Expenses by Object Classification: 

 (1) Personal Services and Benefits $260,602,166 

 (2) Travel and Transportation 23,893,253 

 (3) Rental, Communication and Utilities 43,470,333 

 (4) Printing and Reproduction 2,384,642 

 (5) Contractual Services 40,089,040 

 (6) Supplies and Material 2,844,487 

 (7) Equipment not Capitalized 2,774,476 

 (8) Grants, Subsidies and Contributions 117,165,803 

 (9) Insurance Claims and Indemnities 312,135 

 (10) Other (describe): 

 (a) Administrative Expenses, net of Reimbursements 5,313,834 

 (b) Program Expenses 16,708,353 

 (c) Provision for Losses 45,522,516 

 (11) Total Expenses by Object Class $561,081,038 

NOTE 13. Other Expenses: 

1997 

A. Other Expenses: 

 (1) Interest Collections Payable to Treasury $150,928,622 

 (2) Loss on Disposition of Assets Acquired 20,813,562 

 (3) Unfunded Vendor Refunds (140,797)

 (4) Unfunded Annual Leave 201,525 

 (5) Unfunded Workers Comp (4,385,000)

 (6) Employer Pension - Funded 17,670,796 

 (7) Employer Pension - Unfunded 59,039,403 

 (8) Employer ORB - FEGLI 81,117 

 (9) Employer ORB - FEHB 8,670,654 

 (10) FECA Accrual 4,913,549 

 Total $257,793,431 

NOTE 14. Prior Period Adjustments: 

1997 

A. Prior Period Adjustments: 

 (1) Program Expenses $0 

 (2) Reduction In Resources Payable To Treasury 0 

 Total $0 
Page 59 

NOTE 15. Non-Operating Changes: 

1997 

A. Increases: 

 (1) Transfers-In: 

 (a) Appropriations, Net $31,726,882 

 (b) Reduction in Resources Payable to Treasury 0 

 (2) Total Increases $31,726,882 

B. Decreases: 

 (1) Transfers-Out: 

 (a) Increase in Resources Payable to Treasury ($50,784,570)

(b) Appropriations, Net 0 

 (2) Other Decreases (13,859,154)

 (3) Total Decreases ($64,643,724)

C. Net Non-Operating Changes ($32,916,842)
SUPPLEMENTARY SCHEDULES 

Legend: 

BLIF Business Loan and Investment Fund DLF Disaster Loan Fund SBGRF Surety Bond Guarantees Revolving Fund PCECGRF Pollution Control Equipment Contract Guarantees Revolving Fund S&E Salaries and Expenses OIG Office of Inspector General BATF Business Assistance Trust Fund 
SUPPLEMENTARY SCHEDULES 

U.S. SMALL BUSINESS ADMINISTRATION

STATEMENT OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 1997

ASSETS BLIF DLF SBGRF PCECGRF S&E OIG 

Intragovernmental Assets: Fund Balances with Treasury 

(Note 2) $2,875,777,521 $5,561,740,061 $41,746,867 $12,992,123 $183,119,395 $2,193,817 

Investments (Note 4) 215,435,204 Accounts Receivable, Net 

(Note 5) 306,939,843 59,685,679 3,268,024 

Interest Receivable 63,103,927 334,118,349 Advances and Prepayments 5,043,061 Governmental Assets: Accounts Receivable, Net 

(Note 5) 90,901,518 157,165 4,935,947 374,435 1,003 

Credit Program Receivables 

and Related Foreclosed Property, Net (Note 6) 1,629,626,577 5,866,884,394 14,655,746 

Advances and Prepayments 60,628,366 99,659 1 Cash (Note 3) 4,870,156 2,249,111 7,690 89,049 Property and Equipment, Net 

(Note 7) 1,978,282 

Total Entity Assets $5,252,326,173 $11,824,834,759 $46,690,504 $27,647,869 $188,928,844 $2,194,821 Total Non-Entity Assets $0 $0 $0 $0 $0 $0 Total Assets: $5,252,326,173 $11,824,834,759 $46,690,504 $27,647,869 $188,928,844 $2,194,821 

The accompanying notes are an integral part of this schedule.
SUPPLEMENTARY SCHEDULES 

U.S. SMALL BUSINESS ADMINISTRATION

STATEMENT OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 1997 

LIABILITIES BLIF DLF SBGRF PCECGRF S&E OIG 

Liabilities Covered by 

Budgetary Resources: 

Intragovernmental Liabilities: Accounts Payable $613,061,869 $725,935,281 $0 $0 $3,333,275 $159,984 Interest Payable 25,572,105 603,295,793 Debt (Note 8) 648,232,064 8,559,196,263 Other Intragovernmental 

Liabilities (Note 9) 1,775,602,091 1,718,201,072 17,635,285 421 

Governmental Liabilities: Accounts Payable 42,996,827 8,983,767 3,207,119 350 4,911,341 40,050 Liabilities for Loan 

Guarantees (Note 6) 1,760,367,643 10,012,234 

Other Governmental 

Liabilities (Note 9) 220,468,922 152,665 37,147,465 11,521,493 414,236 

Total Liabilities Covered by 

Budgetary Resources $5,086,301,521 $11,615,764,841 $40,354,584 $27,647,869 $19,766,530 $614,270 

Liabilities Not Covered by 

Budgetary Resources:

Governmental Liabilities: Federal Employees’ 

Compensation Act Liability $0 $0 $0 $0 $17,125,000 $0 

Other Governmental 

Liabilities (Note 9) 22,118,353 924,183 

Total Liabilities not 

Covered by Budgetary Resources $0 $0 $0 $0 $39,243,353 $924,183 

Total Liabilities $5,086,301,521 $11,615,764,841 $40,354,584 $27,647,869 $59,009,883 $1,538,453 

The accompanying notes are an integral part of this schedule.
SUPPLEMENTARY SCHEDULES 

U.S. SMALL BUSINESS ADMINISTRATION

STATEMENT OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 1997

NET POSITION BLIF DLF SBGRF PCECGRF S&E OIG 

Balances (Note 10) Unexpended Appropriations $166,024,652 $209,069,918 $6,335,920 $0 $166,810,971 $1,579,548 Invested Capital 1,978,282 Cumulative Results of 

Operations 373,061 1,003 

Other Future Funding 

Requirements 

 (39,243,353) (924,183) 

Total Net Position $166,024,652 $209,069,918 $6,335,920 $0 $129,918,961 $656,368 Total Liabilities and Net 

Position $5,252,326,173 $11,824,834,759 $46,690,504 $27,647,869 $188,928,844 $2,194,821 

The accompanying notes are an integral part of this schedule.
SUPPLEMENTARY SCHEDULES 

U.S. SMALL BUSINESS ADMINISTRATION

STATEMENT OF OPERATIONS AND CHANGES IN NET POSITION

FOR THE PERIOD ENDED SEPTEMBER 30, 1997

REVENUES AND 

FINANCING SOURCES BLIF DLF SBGRF PCECGRF S&E OIG 

Appropriated Capital Used $142,157,200 $170,712,443 $11,024,476 $0 $226,232,265 $9,499,310 Revenues from Sales of Goods 

and Services 

To the Public 10,231,087 Intragovernmental 

Interest and Penalties, NonFederal 206,279,409 277,584,881 132,034 Interest, Federal (70,598,806) 397,404,378 Other Revenues and Financing 

Sources (Note 11) 19,735,701 659,132 64,943,945 2,847,229 

Total Revenues and Other 

Financing Sources $297,573,504 $846,360,834 $21,255,563 $132,034 $291,176,210 $12,346,539 

The accompanying notes are an integral part of this schedule. 
SUPPLEMENTARY SCHEDULES 

U.S. SMALL BUSINESS ADMINISTRATION

STATEMENT OF OPERATIONS AND CHANGES IN NET POSITION

FOR THE PERIOD ENDED SEPTEMBER 30, 1997

EXPENSES BLIF DLF SBGRF PCECGRF S&E OIG 

Program or Operating 

Expenses (Note 12) $151,444,932 $170,882,537 $11,024,476 $10,336,115 $208,420,850 $8,756,686 

Depreciation and Amortization 1,517,102 Bad Debts and Write-offs Interest: 

Federal Financing 

Bank/Treasury Borrowing 25,258,470 603,296,793 

Other (37,817,768) 8,342,619 131,271 450 

Other Expenses (Note 13) 102,073,568 69,668,616 82,197,486 3,853,76Total Expenses $240,959,202 $852,190,565 $11,024,476 $10,336,115 $292,266,709 $12,610,897 Excess (Shortage) of Revenues 

and Financing Sources Over Total Expenses $56,614,302 ($5,829,731) $10,231,087 ($10,204,081) ($1,090,499) ($264,358

Net Position, Beginning 

Balance 180,154,633 183,839,119 3,399,309 126,407,027 1,450,352 

Adjustments (Note 14) Excess (Shortage) of Revenues 

and Financing Sources Over Total Expenses 56,614,302 (5,829,731) 10,231,087 (10,204,081) (1,090,499) (264,358

Plus (Minus) Non-Operating 

Changes (Note 15) (70,744,283) 31,060,530 (7,294,476) 10,204,081 4,602,433 (529,626

Net Position, Ending Balance $166,024,652 $209,069,918 $6,335,920 $0 $129,918,961 $656,368 The accompanying notes are an integral part of this schedule. 
To: 

From: 

Subject: 

lJ.S~ SMALL BUSINESS AD~11NlSTRATION 

OFFICE OF lNSPECTOR GENERAL 

Wasbingto:n,. D+C.. 2Q4J6 

J+ Larry Wilson 

Chiei !Financial Office·r 

Lawrence E. B~rren 

Chiei lnfcrmatJion Officer 'A 1. Uk(l.;),,j_ ~e er L. Me Clintoc k 

Assistant lnspecto r Genera' I fol' Audit lng 

AUDIT REPORT 

Issue Date: l\farcb 1, 1.998 

Number: 8-7-H-008-010 

Audit of SBA • s FY 19 9'7 Financial Statements 

Pursuant to th·e Clhie.f Financial Officers Act of 11990, .attaclled is the 

Independent Auditor' s Report ~Att.a ent 1 I issued by Cotton & Co., CPAs. They 

concluded thB1t t he financial statements present y~ in all material res.pects, the 

financ ia ~ posi1tion of SBA as of September 30,. 1997. and 1996, and the results of 

operationti and chang:es. in met position for the v·ears then ended in accordance with 

Federa.lly prescribed accounting pdnclp~ s .. 

The section on SBA' s internal comrol S1truC1ture discusses problems r·elated to 

(1 ~ subsidy modeling and re-estimating pr·Ocess, (2) financrial reporting process. and 

(3} informa1tion sy.stem controls.. l'tle :sectllorn on compliarnce' w ith laws and 

r·eguladons ir'ldlcatas SBA's f inancial management system was not in compliance 

witt! the requirements e~ e rr·ed to in the. Feder a I f;inand.a I Ma mtg·em ent Improvement 

Act of 1 '996. The re·port includes .. a dlsel.aimer o:n information i.n the CFO'$ anrn,.~;;;~l 

r·eport which w~s 11101. $Ubjact to audit procedures. The auditors also noted other 

management and internal contro1 issues that ll be communica1ed in a separate 

management I en·e r. 

SBA officials agreed with the findings and recommendations and, in some 

lns.tan-cesJ have initiated corrective action. The finding• and recommendlatioos -.er 

1ubject to reviaw, m•nage mer1t dec[slon. and action lhy y.aur office in accot'danc:a 

with Starld•rd Operating Procadure 90 16, Ruolutio:n and Follow-Up Procedures on 

Audit f,indings and Reeomrnendatians. Aease provide us your proposed 

rl'Hrtnagement decisions on SBA Form 1824. Recornmendlation Action Sneet • .a11so 

auac hed. within 30. days:. 

Should V'O'IJ or y"'ur staff have any questia ns. ease contact Victor R. Ruiz, 

Director; Headquarters Operations, on (':2.021 205-7 204. 

Attachments 
COTTON &COM PANY 

Gtn-> Pt.•~e Ateo;.r..u' n l lP 

Attachmont 1 

Page 1 of 12 

,.,,. \ 11 f\ d\ en , •'-"'+• ..... ,..,. , n ( 1 ,,..,..,u ~: (',uJ..-1 U.l C. I 

{ mc~t ' I' • tt.• \J'\ ru...-. (?.t. 

...:rT~• "- H v.-"' ~ 

I 

Inspector General 

Unitt.~ Sw.Lcs Small Busines-S Administration 

l.'lo'DEPE:l':DENT AUDITOR'S REPORT 

We luve audited the U.S. Small Business Adminisuation·s (SOA) statemei11S of 

financial position as of September 30. 1997. ond 1996. :1nd lilt rel.tuod consotid;uro swemans 

ol oper31100S ud cbanges in net pOSition nbc principal sutements) for lilt years ihcn enckd. 

• For Fiscal Years (FY) 1997 and 1996. the principal sta1emems are 

presented fairly. in all mar.e:nal respects. 

• For FY 1997. we found three reponable inu:rmtl control findings. wltich 

tre de~cribcd below in the sec.cjon titled SBA •s Internal Controls: 1wo are 

rnateri31 weaknesses. 

• For f 't' J 997. •Ne found no lt1:Uerinl noncompliance with the selected 

(lrnV <i:i.-.. ~ nf :tpplic:lhl.-: I:J w~ :uut l't"SUI:•IiOni I(!Sieti. 'I.Ve did. how ever, 

find that SBA 's financiaJ management systems did nut always 

substantiaJI · comply with Fcder3l fin.anciol mJnJgemem syslcm 

requirements. 

These matters and the scope of our work: ue discussed in more dcuil under che 

following :~p~ ions : 

• Audirors' Opinion on Princ1pal Sta~.mnts 

• SBA ·s Internal Controls 

• SBA·s Compliance wilb laws and Regulations 

• Sigrufieant Maners 

• SBA's Responsibilities 

• Auditors· Responsibilities 

• Audirnr~ · Methodology 

• Disclaimer on Other Infonnacion 

• Man:agemem Comments on Audit Results 

• Rep~rt Usage and Distribution 

-~ '"" ,.._. - r - -~ .. .- ,...., • " • ,.,. 
All>ITORS' 0 Pil\10 N ON PRINCIPAl STATEMEf\ITS 

Anachment 1 

Page 2 of 12 

We have audited the accompanying statements or financial position of SBA as of 

September 30. \997. and 1996, and the related statementS of operarions and changes in oct 

position for the years then ended. These financial Slatemcnts ue the responsibility of SBA's 

manqement. 'They were prepared in accordaoce with Office of Management and Budget 

!OMB) Bulletin No. 9~1. Form and Content of Agency Finaocial Statements. as amended by 

applicable ponions or OMB Bulletin No. 97.01, which is another comprehensive basis of 

aocouncina, as described in Note 1. Our responsibility is to express an opinion on chcse 

nnandol statemenu based on our audits. 

We conducted our audits in ao:cordan<:e with generally ao:cepced auditing standards; 

Gowmmtnl Audiling Slandards issued by the Comptroller Genenl of the United States; lUld 

OMB Bulletin No. 93 -06 (as amended), Audit !Wjuirements for f~al Financial Sta••meots. 

'!bose stalldatds require that we plan and pc:rfunn our audits 10 ot>aln reasonable assurance 

abou< whedter the fUWICial statements are fnx of material mlsswement. An audit includes 

eumininJ. on 1 ltSt basis. C\'ick:nc:c supporting the amounts and disclosures in the financi•J 

statements. ,,n audit also includes assessing lbe """"""'"'"' princ.iples used and significaru 

estimates made by management. as well as 0\'>.luating the overall financial statemeru 

presentation. We ~lie\•t that our audilS provide a reasonable basis for ou:r opinion. 

In our opinion. lhe financial statements referred to above present fairly. in all material 

respects, the financial position of SBA as or September 30. 1997. and 1996, •od the results of 

oper:ulons aod changes in net position for the years then ended In confonnity with the basis of 

accounting described abO\'e. 

We conducted our :~udiL~ to form our opinion on the principal swements taken 3S a 

whole. SBA 's Annual Rtporr also includes supplementary schedules that show the activity 

comprising SBA 's reporting entity. The supplementary schedules are not a requiredpart of the 

princip31 statements. 

The supplemenu.ry schedules are presented for purposes or additional analysis r.ubet 

t.ban to present tile fmanc:ial position and results or operations aod changes in net position oC 

lbe iodividual accounts aod funds. These scbedllles have been subjected to the auditing 

procedures applied in our audit of the principal swcmcnu OJK!. in our opiaion. >R fairly 5tlleCI 

iD aU material respecu in relation to the principal sta.tements lake:n as a whole. 

SBA'S INTERNAL CONTROLS 

In plaMing and perfOrming our audit of SBA ·s financial statements for the yeass ended 

September 30. 1997, lUld 1996. we considered SBA 's internal controls 10 determine our 

auditin& procedures for the purpose of expressins our opinion on the financial statements and 

not to provlde assurance on internal controls. \Ve obtained an understanding of the design of 

sicniticant Internal control policies and procedures; decennlned If they had been placed in 

operation: assessed control risk for signiftcam cycles. transaction cJasses. and account 

balances: and perfonned tests of internal conrrols. Pas• 69 

2 
Attachment 1 

Page 3 of 12 

SBA management Ls responsible for establishing and maintaining sysrems or internal 

concrols. In fulfilling this responsibility, estimates and judgments by management are required 

to assess llte expected benefits and related costs of internal concrol policies and procedures. 

The objecti\•es of internal comrols are to provide management with reasonable. but not 

absolure. 3Ssuranc-e that: 

1. Transactions are properly recorded and acoounred for to permit the preparation of 

reliable financial statements and to maincain accoumabiJicy over assets. 

2. Fund. property. and 01her assets are safeguarded against loss from unauthorized use or 

disposition. 

3. Transac1ions are e;<ecuted in complimcc with applicable laws and regulations. 

Bec-ause of inherent limitations in internal controls, errors or irregularities may occur 

;lnd no1 be detected. Also. projec-tion of any evaluation of internal controls co furure periods is 

subject co the risk that procedures may become inadequate as the result of chang~ in 

conditions or that lhe cffecti\•eness of the design and operation of policies and procedures may 

· deteriorate. 

\Ve noted certain matters involving internal controls and their operation that we: 

consider to be reportable condicions under standards established by the American Institute of 

Cerlified Public Accounmnts and OMB Bulletin No. 93-06. as amended. Reponable 

conditions involve matters coming to our attention relating 10 significant deficiencies in the 

design or operation of internal controls that. in our judgment. could adversely arrect SBA 's 

:lbility to record. process, summarize. and report financial data consistent with the as~ertions 

of management in the rinanc1al statements. 

The reportable ~.:onliitions :a.nd our recommendations appe::ar below. The )mp~ter 

security portion ot· reponable condition No. 3 was also cited in the independent :luditors · 

report on the internal control structure dated February 14. 1997. v.•hich is the report of Cotron 

& Company's audit of SBA ·, FY 1996 and 1995 principal Slatemems. 

A marerial weakness is a reportable condition in which the design or operation of one 

or more of the incernaJ control elements does not reduce to a relatively low Level the risk that 

errors or irregularities in amounts that would be material in relation to the principal stau:ments 

being audited may occur and not be detected within a timely period by employees during the 

normal course of performing their assigned functions. 

Our consideration or internal controls would not necessarily disclose all matters relating 

to internal controls that might be n:ponable conditions and, accordingly, would not necessarily 

disclose all reportable conditions that arc also considered material weaknesses as defined 

abo,•e. We consider reponablc: conditions No. l and No. 2 to be nw:eriaJ weaknesses. 

Poge 70 
Attachmem 1 

Page 4 of 12 

We also noted other matters invol\.•ing imernal controls and their operations that we 

consider nonreportablc conditions. We will communicate these matters to m.anagemem in a 

separate letter. 

I. Subsidy Modeling ond Re-Estlmatiog Processes 

SBA 's internal control functions governing the credit reform subsidy modeling and re· 

estimating pr~ need improvement. SBA personnel computed subJidy re-estimate$ in 

January 1998. As pan of our oudit. ~ revie~ tile re-estimm process ond nooed sub$raabal 

errors in tbe 7(a), 504. and disaster progf11111 re-estimate calculations to be included in tile FY 

1997 principal statements. For example: 

• lncorrect data were used in several re-estimate cash flow spreadsheets. 

iocluding incorrect discount rates. 

• Incorrect cell references aJ¥1 formulas occurred in several re.-cstima.te 

spre3dsheets. 

• Data were incorreclly carried forward to ~b flow models irom 

UDder lying sprcadsbtttS. 

These errors resullcd in :tdjusl.f1)en.IS to the principal statements in excess of S2SO 

million. 

Jo addition, we noted that few. if any, controls governed the FY 1997 ond FY 1998 

budget execution subsidy processes that took place in FY 199S and FY 1996. respectiyely. 

For instance, SBA did not r<tain t~c computerited cash flow models for the FYs 1992 through 

l997 budget execution rates.. The budget execution model$ are an intcgnl part of performmg 

rc: cstim ues and should ~ retained :as a matter of routine record keeping. 

1M conditions no<ed obove tesu lted from tile lack of adequate internal conu ols over the 

subsidy process. coupled by severe time oonsaauns imposed on relatively new staff "''ho had 

not previously completed a re-estimate cycle. Responsibility for accumulating and anol)'tiQ& 

dalo. designing credit subsidy models. and calculating budget estimates ond program ree$tlmates lies with t~e Office of the Chief Financial Officer (0Cf0). To date. OCFO does noc 

have documented policies and procedures co go,·ern its credit subsidy process as required by 

the General Accounting Office 's (OAOJ Srandard.sfor Internal Conrrols in rhe Federal 

Go.,trnmenr. Such documentation should identify: 

• Internal control objectives. 

• Techniques ror assurina that objectives will be achieved, including clear 

clesigaations or duties and responsibilities. reoord rc<enlion policies. and 

documtnralion requimumrs. 

• Eadl major transaction and event affecting tbe credit subsidy processes. 

Pa2e 71 ,- r 
Attachment 1 

Page 5 of 12 

• The transaction now from source document to final cla.ssifieation in 

financial rc:por1s. 

OCFO personnel ~ave expressed a positive auirude 10ward stren&lllening the internal 

controls over the subsidy process. OCfO personnel advised us of their efforts 10 improve 

inrernol conrrols on the subsidy ra1e process. SBA lw developed a process for peer. 

supervisory, md eoouactor reviews of estimates and better aw:lit uads. Because or the timing 

of the FY 1999 budget process. however. i1 was only partially implel!le1W:d frx FY 1999 

esdmares and no< im!Jiemented for re<Sr . . .. quality review process is essemial to ensure 

tbal the work of assogned staff is adequately rupervis<d. reviewed. and approved. as requiml 

by OAO's Standards for /tUtrnal C()fllrou In tht hdtral Gowmunmt. Sueh a proc.,s would 

include reviewing work produces at critical poims througbou1 the process as '•·•ell as a 

systemauc review of the final product to prevent or detect errors in a timely manner. Key 

duties and responsibilities s~ould be adequately separated to provide for indeptndent second 

reviews of all key work producu w enhance data accuracy. ·. 

Rtcommtodalioos 

We recommend that tile OCFO continue to develop internal oomrob over both its aedit 

subsidy and re-..mnat< processes. At a minimum, it sbould docwnem ics policies and 

procedures and develop • formalized quality review process. In addition. we recommend that 

OCFO ensure that adequate resources and time are :t\1'-allable ro effectively tmplement these 

controls. 

2. Financial Reporthtg Process 

lmprovec;l tinanci.al rcporcin.g proc.esses are needed at SBA 10 ensure complianc.e with 

t~e Guvernrnenr Management Reform Act oi 1994 1GMRA1. which requires Federal agencies 

to submit audited Depanmcnt·widc financial statements to OMB by ore~ I. SBA had 

established a limetable oudinmg critical financial infonnation and financial stat.erpem 

completion dares to allow ior the swemems to be audited. SBA did ..,. meet its'D=mber U. 

1997. deadlioe for submitting draft financial stateme<Jts. Furthermore. when the draft 

sutemencs were provided. they conaained numerou.s errors and omissions tt\at were identified 

by both SBA and the auditors. resulting in several iterations of the financial staoements and 

underlying financiallnfonnalion. 

The delay in the financial reponing was coused by several factors: 

• The agency la<:ks a comprehensive pla.n for prepa.rin& flnan<i>l 

statementS. includin& klendfication of aJI requircmcms. 

• Fllllll Balances witll Tteuury reconciliation adjiiStlllCnu we« not 

e>:>mple<cd undl January 1998. 

• Subsidy rate rc~Stimatcs were nor completed umil January 1998 . 

5 p·~· 72 G.C 
Attachment 1 

Pa~6o 2 

SBA posted the above adjuSiments directly to <he financilll statements. instead of the 

gener::illedger. to main1ain reponin& consistency with its FACTS da&.a submined 10 Treasury. 

Dy doing so. however, the reporcina process was complicated because the ad.justmenrs were 

extensive-seve<al hundred million dollars affecting each of the agency'> programs and up to 

26 different accounts in each program. Additionally. the adjustments were done hurriedly and 

not thoroughly reviewed by SBA before submission to us. 

Furlber. because oflbe above t'acrors. additional time wu needed for auditing and 

reviewing lht: ftnanciaJ statcmcnlS tO ensure that acc.ouru bal:anca were properly reponed on 

the linmcw swemems and footna<es. 

SBA faces a tremendous challenge in FY 1998. SBA 's plan to move its financial 

reponing to the Office of Financi.11 Operations (OFO) in Denver coupled with additional 

requ1rements brought on by several nt"' Federal accounting standards increase its need to 

conuol rhis funccion. Thus. SBA must implement conuols to plan and monitOr the reponing 

process and ensure llut staff is adequately trained. Without improvements in its financial 

reporung processes. SBA 's ability 10 submil its FY 1998 consolidated nnanc1aJ siatements by 

March I. 1999, is doubtful. 

Recommendations 

We rccommcnd that OCFO deva<e immediate attention to implemet!ting • 

comprehensive plan for financ•>l reporting. The plan should idenuf)l, in dc:t>tl: 

• Procedures required to acquire documentation and prepare financ1:1l 

statementS according to an tstablished timct:~blc . 

• (ndividuals who will pc:rtOrm critical functions. 

• Deadlines needed for e3Ch. cruic.:al phase of the plan (e., .• documentauon 

~UCSIS. Statement prt:p:arotton. quality control, and SO fonh). 

• A dtscription of how <1C.h o ( the programs will consoUclace into a 

consistent. Agency-wide financial Sla~emettt prese-ntation. 

We also recommend that all .nafr 3SSuming financial reponins responsibilities at OFO 

in Denver obtaln technic.al trainlng on Federal financial accounting and reporting. 

3. Information System Controls 

SBA needs 10 improve informadon system controls in the areas of ( l) emity-wide 

security: (2) access privileges: (3) appliution development and progrom changes: (4) service 

continuity; (S) data awhorization. complc:tene5.1, and accuracy; and (6) segrczotion of duties. 

6 
At11chment t 

Page 7 of 12 

• £DUty-Wide Security. SBA has not implemented an entity-wide 

security program for its key Information system. The OCIO has 

developed the framework, but has not performed necessary risk 

assessmenu. prepared detailed security plans. identified incompatible 

duties, and established compensating controls for key sysrems. OCIO 

stated thst. because of a lack of resources. it has been u~able to 1\dly 

implement its entity-wide- security plan. As a resulc. unautbori%ed 

akerat:ion and corrupcion of <1111 could OCCUI and be llnde1ected. OMB 

Circulars A-130, M.,.,..,...t of Federal lnformarioo R..autccs. ond 

A-123, IDtemal Conuol Systems, require agencies 10 implement 

oomprebensive entity-wide security progrm!S. 

• Access Prh'ileKes. Computer programmers had unncocssary privileges 

thl1 pennittcd remote access to Loan Accounting System (LAS) 

production data aod programs. This increased the ruk that unautborized 

activities and transactions could occur withour dekclion. (nformarion 

systems Sllln<llrds require that programmer access be beld to an abSolure 

minimum. During tbe audit. OCIO reviewed access needs and reduced 

tbe aocess privileges of 23 individuals. 

• Application o...Jop.- aacl .......,_ Cbaages. SBA implemented 

aod is iastalling software applicatiom without formal ceniflcation and ia 

tbe absence or agency-wide standards for non·maiaframe ~pplic>tion 

development. The Surety Bond sysrem was put into production prior to 

cenification, and field ofnces were developing microcomputer 

applications without stan<lards to ensure that tbe systems would (I) me<:t 

user needs: (2) provide usefUl, reliable, and accurate information: and 

(3) protecl agency interests. 

• Senice CootioLLity. SBA docs nol have service continuity plans in place 

for all of iu systems. OCIO is developing disaster recovery plans to 

address disruption of all •Jency s)'1lcms, but SBA 's conaaa for Federal 

F'JUDCial System dalll proocssifl& does 1101 address this wue. Sbould tbis 

flcil!ty incur a duastcr, SBA would suffer significant disruptions to key 

business activities. OMB Circulars A-130 aod A·l23 require acencies to 

tate sreps necessary to miaimize risks that impact tbeir ability to meet 

critical mission funccions. 

• Data Autborizotion, Complua.ess, aad A<<"""'Y. Quality 11.1surance 

coatrols for major opplicadons do not ensure data aocutacy. reliability, 

aad complereness. For example. loan disbursement amountS and 

t.WK:es differed amon1 tbe Da11 Commuolcalion SyS&em. Automated 

Lou Coatrol System. aod L<laD AOCOWI(in& Systan. Ia addition. dalll-

..uy edits did DO< pre<:lude a $26 ~ cilar&e off of acct1led latetCSt oa 

&D IJOCOUDl that did 1101 have acaued illtercst or a chaa&e ia loan swus to 

"Pald·iD-FWI" oa a IOID with ao approximare 538,000 outstanding 

1 Page 14 G;.C 
Attachment 1 

Page B of 12 

balance. [n other instances, nonfinancial borrower-related information 

was missing or inaccurate. Although our exceptions to chis nonfinancial 

information do not affect the financial sunements directly. this missing or 

inaccurate inf()rma£ion weakens SBA's ability to collect on loans and 

recover collateral. 

• Segegatio11 of Duties. Although OCIO has established a policy to 

prevent field office securrty officers from having conflicting and 

iRCOmpatible dutid tn 4 of 17 offtces surveyed, the securil)' officer is 

also a liquidation supervisor. This creates a segregation of d:uties issue. 

because the s:unc individual has access bolh to user passwords and 

tdentific3tions and has access and control over liquidation documents. 

OCIO alld SBA field offices share securil)' responsibility for the LAS. 

1be Chief Information Officer agreed that improvemc11ts are needed in the agency's 

information systems controls, but stated that his office does not have tbe necessar)' resources. 

Recommeadalioas 

We recommend thai: 

I. The Chief Jnfonnation Officer request that (a) priority attention be gi\'en to his requeSt 

for resources to develop and implement c.be agency-wide security program and 

application developnu:nt standard.. and (b) interagency agreements and contracts for 

data processing administered by other program offices be submitted for his review to 

ensure that security and business continuicy issues are addressed. 

2. As resources become available, tile Chief Informalion Officer implement the agencywide security program and application development standards in accordance with OMS 

Circulars A-123 and A-130. ' 

3. The Chief Information Officer and Chief Financial Officer periodically review 

programmer access pri,.:ilcges. maintain them at the lowest possible lev l.~ require 

supervisory review of aU emergency program fixes (actual program instructions) within 

48 hours. 

4. The Chief Information Officer develop guidance and requirement.s for SBA program 

offices to identify incompatible positions and ensure adequate segregation of duties. 

SBA'S COMPLIANCE WITH LAWS AND REGULATIONS 

Compliance with laws and regulations applicable to SBA is the responsibility of SBA 

management. As part of obtatning reasonable assurance abou1 whether SBA 's principal 

statemenu ""' fn:e of material miMtatem.ent, we perfonned tdt.s of SBA 's compliance wi1l1 

certain provisions of applicable Jaws and regulations. NoocC>mpli.ance with such provisiollS 

could have a dilocl and nwerial effect on the detennioatioa of financial statement amOUOt$. 

Page 75 
Attachment 1 

Page 9 of 12 

We also tesaed ccrt>in o<hef laws aad rqulations specified in OMB Bulletin 93.()6, as 

amended. ineludinS lhe requir=s referred 10 in lhe Federal ri!WICW Management 

Improvement Act of 1996 (FFMIA). 

The results of our rests of compliance wilh the laws and regulations described in lbe 

prccedin& paragraph disclosed no instances of noncompliance that would be reportable under 

Gowrnmlnt Audiring Srandards or OMB Bulletin 93.()6, as amended, except as described 

below. The objective of our tests was oot, however, to provide an opinion on overall 

compliance with such provisions. Accordingly, we do not express sw.::h an opinion. 

We noted certain irrunaterial instances of noncompliance that we will report to SBA 

ma.o.aacmcnt in a Jeparate letter. 

IInder FFMIA. we are required to report whet.her the aaency's fiiWICial management 

systems substantially comply with (I) F«kral fit>an<:ial manaaement system requirements, 

12) appli«ble occounting sandards. and (3) lbe United States Sandard ~I ledger at lbe 

mtruaction level. To 111<!!1 this requirement, we perform«! tellS of compliance using the 

implemenwion guidance for FFMIA is.sued by OMB on September 9, 1997. 

lbe results of our tests disclosed ins£aDCes, described below. in which SBA 's ftnarriaJ 

management systems did not substantially comply with requirements I snd 2 in the precediac 

J)ll'lgraph. 

Document.o.tloa of Processiag ln.RruttiDm 

OCFO does not ha"e documented policie< and procedures ro go1•ern its credit subsidy 

process. OMB Circular A-127 (revised), Financial Management Systems, requites agency 

tinancla.l ma.na.gement systems and processing instructions be clearly documented in hard copy 

or electronia.lly. The condition and re<:ornmcndcd ace ions are contained in this report under 

the section titled SBA 's lnternaJ ntrol ~ We recommend that management comPlete 

correctl\•e 11edons by Mar<:h l. 1999. 

Timdy flJlalldal lnronrunion 

OCFO did not provide financial i.tlform.uion &lid draft financial statementS to its 

auditors on a timtl)' basis. GMRA requittS &&meics to Sllbmit audited flllatiCial Statem<IJIS 10 

OMB by :-.lareb I. This condition and our reoommendcd &ctions are COntained in this report 

under the section titled SBA 's Internal Controls. We recommend that management complete 

conective actions by Marc:.h I. 1999. 

Eatlty-Wide Soeurity 

The OCIO h .. not implemented an entity·wide security proaram. OMB Circulars A· 

127 (revised) and A-130 require agenci~ 10 implement comprehensive entity-wide security 

programs. This condition and our recOIIUtlended aetlons are oontalned in this report under tbe 

P.-ge 76 

Q 
Attachment 1 

Page 10of 12 

section titled SBA 's Internal Controls. We recommend thal management complete corrective 

actions by March I, 2000. 

SJGNiflCANT MATTERS 

In this report undc:r the section tilled SBA's ln.emal Controls . . ._..,identified three 

repor<Oble conditions. We compared these conditions with SBA 's 1997 FMF!.~ report dated 

/an\Wy 13, 1998. and found that these three conditions were not preseuu:d in t1w report. 

Tbctefore, we arc reponing this connict bcro·ecn SBA's moSt receo< FMFIA repon and lbe 

tcsUIIS or oor evaluation or SBA ., internal controls, in accord wilh OMB Bulletin No. 93-{)6, 

u amended. 

SBA'S RESPONSIBLILTIES 

SBA 's managemen.l is responsible for: 

• Preparing the aiUlUo.l principal sta.ements in confonnity v.ith the tiasis of 

accounting described in No« I. 

o Esiablishing. maintaining, and :wessing the imemal cOQlrols 10 provide 

reasonable assurance that lbe broad oonuol objectives of FMFIA ue 

met. 

• Complying wilh applicable laws and regulations. 

AUDITORS' RESPONSIBLITIES 

Our responsibil ity s co express an opinion on the principal Statements based on our 

constder:llion of SBA ·s internal concrols and our audit procedures. We 3IC also ttsponsible for 

cesting compliance with selected provlsions of law-s and regulations and fot periormmg limited 

procedures with respect to other Information appc:uing in SBA 's Annual Rqxm. 

AUDITORS' METHODOLOGY 

To fulfill these responsibilities, we: 

• Examined, on a test basis. evidence suppor1ing the amounts in SBA ·s 

principal ta~emeniS and related disclosures. 

• Assessed the accouruln& principles used and significant estimates made 

by management in the preparation of the principal statements. 

• Evaluated !be overall presentation of the principo.l Stal<mCDIS. 

• ()hcaincd an underStand in& of the imema! conuols te'-led 10 

""""UArrlinet •~~c. cnmnli~nr..r. wirh lou.'* •-4 .......,,,.,,!'\ ;....,.h.,f;n• 
Attachment 1 

Page 11 of 12 

exccwion of tra.nsaccions in accordance with budget authority. and 

financial reporting. 

• Tested compl iance: with selected provi~ions of la w~ 11M N'igu ~tio ns chat, 

if not complied with. could directly and materially affect the principal 

smaemcnts. 

• T .. ted management processes for evaluatin& and reportins on internal 

CUM>ls and ac:countin& SystemS as required by FMAA by comparin& (in 

liiXOfd with OMB Bulletin Ho. ~. as amended, paragnpb 6.1(4)) 

SBA's most recent FMAA report wilh the results of out evaluation of 

SBA 's internal controls. 

• Assessed whether the otll£r information in SBA 's Annual Rt port and the 

manner nf ir.!l pre~r::ntat inn :.r~ nurerially conJistent with the infonnatlon 

in the principal statcment.s taken as a whole:. ·• 

DISCLAIMER ON OTIIER INFOR."IATION 

Our :wdits wen: made for the pu<JlOSC of forming an opinion on the pnncipal stMI'tDCIJIS 

taken as a whole. The principal statements are coa<ain<d in SBA 's Alllfual Repon. "'11ich abo 

contains sections titled Message From the AdministraJOr, Executive Summary, !\ gency 

Accomplishments. Me.sage From the Chief Financial Officer. Agency Overview. and SBA 

Program Descrlption and Analysis. These sections conuin a wide range ofinformarion 

prcsc:nted for purposes of additional analysis. Some of this information is also required by 

OMB Bulle<in No. 94 01. 

The information in these seccton$ is not pan of the principal statements and has not 

been subjected to the auditing procedure-~ applied in the audits of the principal stau:rru:ots. 

Accordingly. we express no opinion on lhe information in these sections. · 

MANAGL'd.ENT CO:\tMENTS ON AUDIT RESULTS 

Maoagement followed up wtth wrinen replies from both OCFO and OCIO dated 

February 17, 1998. These replies. reproduced as attachments, are responsive to our findings 

a.nd indicate lhaJ: management will provide a de&ailcd corrective action plan addressing each 

Item. 

Page 18 

II 
REPORT USAGE AND DISTRJBIJI10N 

Atta.:hment 1 

Page 12 of 12 

This repon is intended solely for the infonnation and use of SBA 's Inspe<tor General 

and managemen< and should not be used for any other purpose. Thl.! restric<ion is not in<eoded 

to limit the dis<ribu<ion of this rcpon which, upon acceptance by SBA, is a mauer of public 

record. 

Alexandria. Virginia 

February 27. 1998 

C01TON &: COMPANY. UP 

1? 

·. 

Page 79 r r I ~ 
U.S. SMALL BUSINESS ADMINISTRATION 

WAaHIHGTOH. D.C. 101tl 

TO: Peter L. McCiinlock 

Assiscanllnspee<or General 

for Auditing 

FROM: 1. l.aiT)' Wi !son 

Chief FiiWicial Officer 

SUBJECT: Audit ofSBA's FY 199 Financial StatemeniS 

Attachment 2 

Poge I of 2 

1 We reviewed the draft audit repon submitted by Cotton & Company (Cotton) for SBA's 

fiscal year 1997 financial statements. internal control stal\lS. and compliance with 

applicable laws and regulations. We are pleased to note the unqualified opinion ih the 

audit repon. 

We agree in principle with the findings and recommendations of Cotton & Company in 

its independent auditors repon. A detailed corrective action plan addressing each item 

will be forwarded to you "ilhin 30 days of issuance ofthe tina! audit repon. 

We differ with the auditor, hov.•cvert regarding the matcriaJity of an internal control 

weakness on the report preparation process. \Vhile we acknowledge minor inac:curacies 

and a delay in providing repons. we note that thls weakness was not previously reported~ 

and we belie ... •e that the financial reponing pra<:ess did not change materially during FV 

1997. In ad<lition, while we acknowledge a material weakness in our FY 1997 subsidy 

re-estimate process. ic was due primarily to a timetable for re-estimates that did not allow 

for ~.;ork verification and mistakes we:rc made as a result. 

We suggest that on page 5. tlte sentence "'Personnel stated that they recently developed a 

qualicy review process but did nol have time to fully implement it due to time constraints 

for computing the re-<:stimatos." be deleted and "OCFO persoMel advised us oftheir 

etfons to improve intemal controls on the subsidy rate process. SBA had developed a 

process for peer. supervisory and contractor reviews of estimates and better audit trails. 

Ho..,'Over, due to the timing of the FY 99 budget process, it was partially implemented for 

FY 1999 estimates and not implcmcnacd even in pan for re-estimates ... be insencd. This 

statement "'ill more fully recognize the aggressive steps we have lal<en to improve 

internal contrOls related to the subsidy rate process. 

We appreciate the opportunity to comment on the draft audit repon. Any questions may 

be addressed to John Kushman or Maria Moy on my staff. 

Page Al 
f 

U.S. SMAI.l BUSINESS ADMINISTIIATIDN 

w ...... QTOij. o.c. 20416 

February 27, 1998 

victor R. Ruiz 

om .. oflhc lnspectM General 

Dite«or, Headquanc-n Opaarioos 

Lawrence E. Bamon· .._v.-'1.<.,.-.. 5. Chief Information Ot!;C., 

Recommendations--Audit ofSBA's FY 1997 Financial Statements 

Attachment 2 

Page 2 of 2 

The Office of the Chief Information Officer concurs with che recornmcndatlons swed in the 

draft audit '")>OI't da~d. February 27, 1998. 

If you have questions I can be reached a.t 20S-6708. 

Page R2 
For More Information 

Infonnation is power. Make it your business to know what is available. w~re to get lt and. most 

impon3t1tly. how to use it. Sources of infonnation include: 

t.:.S. Small BuslntSS Administration 

• SBA District Offices 

• SBA OnLine (electronic bulletin board) 

• Bu•iness Information Centen (B!Cs)* 

• One-Stop Capital Shops (OSCSs) 

• Sel\•ice Corps of Retired Executives (SCORE) 

• Small Business Development Centm (SBDCs) 

• U.S. &port Assisrarv:e Center$ (USEAC.)• 

• Women's Bus;ncssCcnters (WBCs)* 

• SBA Oisa$ter Assistance Offices 

• Jnquire ot your local SBA office as to availability. 

,. ·n.e SBA has offices located throughout the United States. For the one nearest you, look unda- "U.S. 

Government" in your tclephont directory. or call the SBA Answer Desk at I-80CJ..U-ASK-SBA. To 

send a fa:< to the SBA. dial (202) 20S· 7064. For the hearing impai<ed. the TOO numb;£ is (704) 344-

6640. For information on your ri&bts co regulatory fairness, the telephone number is J-80Q..REO· 

FAIR. 

To access d\C agency's electronic public infonnation services. you may contact: 

SBA OnUne: electronic bulletin board (medem and computer re<juired) 

• 1 -800-697-4636 (limited aceus) 

• I-CJ00.463-4636 (full xccss) 

• (202) 401·9600 (D.C. metro nrea) 

Internet: using uniform resource locators (URLs) 

• SBA home Jl'lge; www.sba.gov 

• SBA gopher. gopher.<ba.gov 

• File transfer protocol: ftp.sb•.gov 

• Telnec tclnet.sba.gov 

• U.S. Busincs$ Advisor: www.business.gov 

•