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27-287 PDF 2006

S. HRG. 109–431

NOMINATION OF ERIC THORSON TO BE

INSPECTOR GENERAL OF THE SMALL BUSINESS

ADMINISTRATION

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 1, 2006

Printed for the Committee on Small Business and Entrepreneurship

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Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED NINTH CONGRESS

OLYMPIA J. SNOWE, Maine, Chair

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

GEORGE ALLEN, Virginia

NORM COLEMAN, Minnesota

JOHN THUNE, South Dakota

JOHNNY ISAKSON, Georgia

DAVID VITTER, Louisiana

MICHAEL B. ENZI, Wyoming

JOHN CORNYN, Texas

JOHN F. KERRY, Massachusetts

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY L. LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK L. PRYOR, Arkansas

WESTON J. COULAM, Staff Director

NAOMI BAUM, Democratic Staff Director

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CONTENTS

OPENING STATEMENTS

Page

Snowe, The Honorable Olympia J., Chair, Committee on Small Business

and Entrepreneurship, and a United States Senator from Maine ................... 1

Prepared statement ..........................................................................................

Kerry, The Honorable John F., a United States Senator from Massachusetts .. 3

Grassley, The Honorable Charles, a United States Senator from Iowa .............. 5

Landrieu, The Honorable Mary L., a United States Senator from Louisiana .... 164

WITNESS TESTIMONY

Thorson, Eric, Nominee for Inspector General of the Small Business Administration ................................................................................................................... 9

Prepared statement .......................................................................................... 11

GAO report ........................................................................................................ 23

Letter from Donald Fulwider .......................................................................... 107

Responses to questions from Senator Kerry ................................................... 186

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Grassley, The Honorable Charles

Opening Statement ........................................................................................... 5

Kerry, The Honorable John F.

Opening statement ........................................................................................... 3

Markup

The Nomination of Eric Thorson to be Inspector General of the Small

Business Administration .............................................................................. 189

Landrieu, The Mary L.

Prepared statement .......................................................................................... 167

Snowe, The Honorable Olympia J. 1

Opening statement ........................................................................................... 1

Thorson, Eric

Testimony .......................................................................................................... 9

Prepared Statement ......................................................................................... 11

GAO report ........................................................................................................ 23

Letter from Donald Fulwider .......................................................................... 107

Responses to questions from Senator Kerry ................................................... 186

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NOMINATION OF ERIC THORSON TO BE

INSPECTOR GENERAL OF THE SMALL

BUSINESS ADMINISTRATION

WEDNESDAY, MARCH 1, 2006

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP,

Washington, D.C.

The Committee met, pursuant to notice, at 2:07 p.m., in room

SR–428, Russell Senate Office Building, the Honorable Olympia J.

Snowe (Chair of the Committee) presiding.

Present: Senators Snowe, Isakson, Vitter, Kerry, Landrieu, Bayh,

Pryor, and Grassley.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, CHAIR, SENATE COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MAINE

Chair SNOWE. The hearing will come to order. Good afternoon

and welcome to today’s hearing to consider the President’s nomination of Mr. Eric Thorson to be the next Inspector General for the

Small Business Administration. I also want to welcome the Ranking Member of this Committee, Senator Kerry, and thank him for

working with me on this nomination and this hearing as well.

I also appreciate my colleague, Senator Grassley, for his presence

here. Senator Grassley will be introducing Mr. Thorson, who previously served as Chief Investigator for the Senate Finance Committee.

We come to this hearing at a time when the Inspector General’s

role at the SBA will be all the more critical given the enormous

challenges the Agency has faced, and continues to confront, areas

such as the disaster loan program’s operation and the unacceptable

response to Katrina and Rita, enforcement of government-wide

small business contracting rules, and the oversight of SBA lending

problems.

Therefore, it is imperative that the new Inspector General be aggressive and tireless as the unprecedented challenges require unprecedented responses. So Mr. Thorson, I look forward to hearing

your testimony to further explore your qualifications to carry out

as the Inspector General at this pivotal juncture for America’s 25

million small businesses and their employees.

Mr. Thorson certainly brings a depth and breadth of experience

from having served, among other roles, as Director of Defense

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Issues for the Legislation and National Security Subcommittee of

the House Government Operations Subcommittee, Chief Investigator for the Permanent Subcommittee on Investigations of the

Senate Committee on Governmental Affairs, and for the Senate

Committee on Finance, and Special Assistant to Senate Republican

leader Trent Lott on corporate fraud investigations.

His past investigative subjects include such major issues as

Enron and WorldCom. And he worked in both the executive and

legislative branches under Republicans and Democrats, including

Representative John Dingle and Representative John Conyers, and

the late Senator Bill Roth as Chairman of the Finance Committee

at that time, and, as I mentioned, the then-Majority Leader Trent

Lott, during his many years of investigative experience. Moreover,

he has had firsthand knowledge of the trials, challenges, and gratification of being a small business owner who fulfilled his dream

with the help of an SBA veteran’s loan.

Indeed, we have an obligation to ensure that the person confirmed as the SBA Inspector General is not only a well-qualified investigator. They must also show passion in identifying barriers

that may limit the success and entrepreneurial spirit of our small

businesses, that form the very foundation of the Nation’s economic

growth and job creation potential, having created about three-quarters of all net new jobs annually.

In that light, the Inspector General’s office recently began an investigation of the SBA’s woeful response to Hurricanes Katrina and

Rita, an area that I and Senator Kerry and this Committee has investigated at length. As we have learned, the Agency’s Disaster

Credit Management System was incapable of handling the high

volume of disaster loan applications—nearly 350,000 have been received so far—and the SBA failed to accurately monitor its disaster

financial information and to implement its disaster transformation

workforce strategy. This tragic response to a tragic and devastating

disaster must not be repeated. The Inspector General will be key

in determining how we can ensure such bureaucratic lethargy

never reoccurs at the SBA.

Mr. Thorson, you will also bear the responsibility of determining,

whether SBA’s administrative procedures measure up to the expectations of America’s small business owners. We’ve seen what cannot happen under the Inspector General’s watch with the STAR

loan program, epitomized by the Inspector General’s December

2005 report finding that eligibility could still not be determined for

85 percent of the loans reviewed.

The series of ongoing investigations on the effectiveness of the

SBA’s Lender Monitoring System, which is used to provide oversight of lenders and of SBA’s handling of lending programs such as

the 7(a) and 504 business loans, further underscores the Inspector

General’s vital part in providing aggressive oversight and minimizing abuses of the system.

Similarly, given recent discoveries of small businesses losing

prime contracting opportunities to large businesses due to poor

oversight of contracting laws, it is fitting that you will bring to this

appointment 12 years of experience in successfully investigating

and reforming Federal contracting programs. Uncovering, monitoring, and correcting abuses, lax implementation of laws, or waste,

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fraud, and abuse of taxpayers’ funds, will require your urgent attention, Mr. Thorson. With your success, it will be America’s small

businesses that reap the greatest reward.

Finally, let me say that, obviously, this hearing has been delayed

to provide additional time to thoroughly examine documents pertaining to the 1997 and 1998 hearings on the Internal Revenue

Service abuses held by the Finance Committee under the leadership, at that time, of Chairman Roth, where Mr. Thorson was Chief

Investigator.

During this additional time period, we’ve had further opportunity

to analyze all of the issues, documents, and talk to people involved

in those investigations as well. As the record would ultimately

show, these hearings led to the enactment of the Internal Revenue

Service Restructuring and Reform Act that we passed, 96 to 2, by

the way, in 1998.

Mr. Thorson, I welcome you. I also want to welcome your family.

I know your wife Susan is here today. Would you like to introduce

other members of your family at this point in time, and then we’ll

move on to Senator Kerry.

Mr. THORSON. Thank you. My wife, Susan, and her father, Arthur White. My sister, Karen Miller, with her husband, Jim, and

my nephew, Chris Miller.

Chair SNOWE. Well, we welcome all of you here today. Thank you

for being here with us.

Now I’d like to recognize Senator Kerry.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

A UNITED STATES SENATOR FROM MASSACHUSETTS

Senator KERRY. Thank you very much, Madam Chairman. I personally appreciate your efforts. Thank you for allowing the Committee to conduct the necessary due diligence on this nomination.

Mr. Thorson, welcome, and welcome to the members of your family also. Of course, we welcome Senator Grassley, for whom both

you and I have enormous respect. I think his introduction is important to all of us here. Let me just say that I also want to thank

Senators Levin and Lieberman and their staffs for their work in reviewing this nomination, which they also requested to do.

You know, it’s not often that this Committee is charged with confirming administration nominees. But regardless of the infrequency

of the activity, and given the potential impact that these nominees

could have on an already fragile Small Business Administration,

this is a duty that we do take seriously.

The need for the SBA Inspector General to be impartial and free

of political influence from either side, to be someone who will act

in the best interest of the Agency, and most importantly, in the

best interest of small businesses and citizens across the country,

and the taxpayers whose dollars are being spent, that’s really an

importance that can’t be overstated here.

We rely heavily on the work of the SBA’s Inspector General for

unvarnished investigations and analysis. In 2005 alone, the SBA

Inspector General’s office released reports critical of the administration’s enforcement of anti-bundling rules, reductions in staff,

and enforcement of small business contracting laws.

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There’s much more oversight to be done, as we discussed Mr.

Thorson, work that will require an independent IG who’s willing to

conduct thorough investigations to address the serious management problems afflicting the Agency.

These issues include: Large businesses receiving contracts intended for small businesses, and being counted as small businesses

when they’re not; a review of the challenges facing the mentor/protege program; an audit of the contract bundling review process and

the inadequate staffing level of PCRs that led to 87 percent of bundled contracts not being reviewed; major staffing shortfalls in the

staffing at the Office of Technology that oversees the SBIR and

SDTR programs; inadequate staffing and shortfalls in oversight of

the 504 liquidation program; and most urgent, the continued inadequate response to victims of Hurricanes Katrina and Rita by the

SBA Disaster Loan Program, and the continued shortfalls in SBA

oversight of contracts being awarded to rebuild the hurricaneaffected region.

Now, Madam Chairwoman, I know you know, and I know you believe this as I do: The IG does not belong to a party. It’s appointed

by a party. It’s appointed by a President. But it really assumes a

very special trust. There are pressures. We all understand the

pressures of politics. But this trust is most important.

Now, unfortunately, this nomination comes at a time where

there’s a growing concern over the numbers of Inspectors General

who are put into that position with very specific political ties to an

administration that simply doesn’t have a strong record of nominating people who are going to really be free and independent.

In January of last year, Representative Waxman, who’s the

Ranking Member of the House Committee on Government Reform,

released a report stating that over 60 percent of the IGs appointed

by the Bush administration have had prior partisan political experience, while less than 20 percent have had audit experience, which

is what they’re really being nominated for.

Now, after reviewing Mr. Thorson’s background, it’s clear that

unlike many of the IG nominees discussed in the Waxman report,

he does have extensive investigative experience. I welcome that. I

mentioned that in our conversation.

The issue has really been one that has arisen about the willingness in the record to address serious management challenges within the agencies. Will you be an IG who can conduct investigations

in a nonpartisan manner and who will work diligently to identify

the larger programs within the agency?

Now, Madam Chair, as you know, in reviewing the record, questions were raised by outside entities that came to the Committee

with respect to the taxpayer abuse hearings of the Finance Committee that were held in 1997 and 1998, of which Mr. Thorson was

the lead investigator.

There were two GAO reports that concluded—it’s their conclusion, not mine, not this Committee’s, but their conclusion with

which we needed to obviously review the record—that almost all of

the claims made during the hearings were either unfounded or inaccurate, and from reports at the time and in subsequent interviews we have heard that they were, in fact, highly partisan hearings.

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Now, I know Mr. Thorson, in our conversation, you dispute that,

and you will have your chance on the record to make your statements about it. I have said that I don’t intend to oppose this nomination, and I don’t. I think it is important for the record to adequately reflect what happened in the course of that. Our muchrespected colleague, now deceased, on May 4, 1998 in the New

York Times, Senator Daniel Patrick Moynihan, who both served as

Chair and Ranking Member, I believe, said the hearings were ‘‘onesided and partisan.’’ That was his judgment as a senior Senator

and Member of that Committee.

You had complete authority over those investigations and were

the only staff person responsible for clearing the witnesses prior to

those hearings. The key here is not to go back and relitigate. The

key here is to have confidence that as we go forward, this Committee will have confidence, real confidence, that if we put you in

this position, that we can expect accountability within the Small

Business Administration, and accountability that’s based obviously

on fairness and on a completely nonpartisan record.

We need a strong IG who will conduct those kinds of investigations. It serves all of us—the Committee, the Congress, the Administration—to have that. I look forward to your testimony and to

some answers to questions as we proceed.

Thank you, Madam Chairman.

Chair SNOWE. Thank you, Senator Kerry.

Senator Vitter, do you care to make any comments?

Senator VITTER. No.

Chair SNOWE. Senator Pryor.

Senator PRYOR. No.

Chair SNOWE. Thank you.

Here today to introduce Eric Thorson is our colleague, Senator

Grassley. Senator Grassley is Chair of the Finance Committee. We

certainly welcome you to this Committee here today.

Chairman Grassley has had an extensive working relationship

with Mr. Thorson as far back as 1993, where he served as lead defense investigator for the House Committee on Government Operations, as well, of course, on the Senate Finance Committee.

Senator Grassley, thank you for joining us here today. Your full

written statement will be entered in the record, and we look forward to hearing your introduction of Mr. Thorson.

OPENING STATEMENT OF THE HONORABLE

CHARLES GRASSLEY, A UNITED STATES SENATOR FROM IOWA

Senator GRASSLEY. Madam Chairwoman and Senator Kerry, it’s

an honor for me to come before the Committee to introduce Mr.

Thorson. I would associate myself with the remarks of Senator

Kerry about the necessity for the independence of the Office of Inspector General, the importance of the office.

In addition to saying that I come to support Mr. Thorson and

agreeing with Senator Kerry about the independence of the office,

even in this administration, I’m going to take credit for, although

some people say maybe I shouldn’t take credit for, the removal of

at least three Inspectors General who I felt were not doing their

job. Maybe somebody would even add it up to more. I pay a great

deal of attention in both Republican and Democratic administraVerDate 11-MAY-2000 10:51 Jun 22, 2006 Jkt 027287 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\SBA\27287.TXT CarolB PsN: CarolB
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tions to make sure that Inspectors General are independent, as

Senator Kerry has said.

As both of you know, I’ve worked very hard to strengthen the

oversight role of Inspectors General throughout the Government.

The IGs are our first line of defense against fraud, waste, and

abuse in Government. We depend on them to ensure that every tax

dollar spent is spent according to law. When that doesn’t happen,

we in Congress need to know about it and take corrective action.

As you also know so well, being an IG is a tough job, and particularly when they’re independent, as Senator Kerry says. When

the IGs aren’t doing their job, we need to know that they’re not

doing their job. Congress also has a responsibility to watch the

watchdogs. We in Congress need to keep a sharp eye on the IGs

to make sure that they’re meeting their responsibilities under the

IG Act.

What I’m saying, Madam Chairwoman, is this: It takes a very

special person to be a good IG. Above all else, an IG must have integrity and courage. IGs must be independent. They must always

set an example of excellence in their personal conduct. IGs must

meet high standards indeed.

To the two leaders of this Committee, I say Mr. Thorson meets

those standards. Mr. Thorson has an outstanding reputation for

being a man of integrity and courage. He has the requisite knowledge, experience, and character to be an IG in the Small Business

Administration.

He has senior-level management experience in government, having served as Assistant and Deputy Assistant Secretary of the Air

Force 1985 to 1989. He has executive-level experience in the private sector as well, where he was president of his own company

that operated a fleet of corporate jet aircraft.

His investigative credentials I think are impressive. Some of

these were referred to already, but let me repeat: 1997 to 1998,

Chief Investigator, Senate Finance Committee. He led the investigation of the abuses of the Internal Revenue Service. His findings

and recommendations formed the foundation for an excellent set of

hearings. Those revelations that did surface at those hearings

helped to generate national support for the reform and companion

legislation that followed for the IRS.

1995 to 1997, Mr. Thorson was Chief Investigator of the Senate

Permanent Subcommittee on Investigations. Prior to that, in 1995,

he served as the Lead Defense Investigator for the House Committee on Governmental Operations.

During the timeframe, 1993 to 1997, I became directly involved

in at least three of Mr. Thorson’s investigations and testified at

hearings on those matters. At the time, I remember being so impressed with the very professional way Mr. Thorson conducted investigations, especially an investigation involving the Air Force

C–17 contract.

On the C–17 investigation, he worked in close concert with the

Defense Department IG. That kind of cooperation was in keeping

with the true spirit of the IG Act, and Mr. Thorson is the one who

made that happen. On March 17, 1993, the IG presented a devastating report to the House Committee on the back-door bailout

of the C–17 contract.

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I was there. I remember it well. I was a witness and testified at

that hearing. After complimenting the Chairman, Mr. Thorson, and

the IG for working together to produce a superb piece of work, the

record shows that I then said this: ‘‘This is oversight and investigation at its best.’’ These words were meant for you, Mr. Thorson.

Chairwoman Snowe, I know that Mr. Thorson is capable of doing,

and I feel confident that he can do, what IGs are supposed to do

and do it very well. In my book, he has passed the IG test with

flying colors. I’m confident of Mr. Thorson’s ability to be impartial

and independent, to be objective and thorough.

Above all, and in closing, I would mention things that have been

referred to here and simply say: ‘‘Take all of the work of Inspectors

General and people that are whistleblowers and everything else of

people trying to cut out things that are wrong in Government.’’ I

know that there have been some tough questions asked. On that

score, I would say that my own experience has taught me that the

hard-hitting investigations always generate friction and generate

criticism. Always. It goes with the territory. It’s a fact of life in that

line of work.

I came here this afternoon to stand before you with Mr. Thorson

because I believe he has what it takes to be that top-notch IG that

both of you have defined. If I could, just for another Senator, an

e-mail between Senator Kyl’s office and my office says something

like this—I don’t like to put e-mails in the record, but I’ll save it

for you so you can prove that I said it—Kyl’s office just asked—

CEG mentioned that Kyl also supports Mr. Thorson.

Thank you.

Chair SNOWE. That will be included without objection.

[The information follows:]

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Chair SNOWE. Thank you, Chairman Grassley, for being here

today. Thank you very much.

Senator GRASSLEY. Thank you.

Chair SNOWE. Appreciate it.

Senator Landrieu, do you care to make any comments before we

begin?

Senator LANDRIEU. No.

Chair SNOWE. Okay. Mr. Thorson, Rule 3 of the Committee requires that all witnesses at nomination hearings give their testimony under oath. If you would please stand and raise your right

hand so the oath can be administered. Do you swear that the testimony that you are about to give to this Committee will be the

truth, the whole truth, and nothing but the truth?

Mr. THORSON. I do.

Chair SNOWE. You may be seated. And you may begin.

STATEMENT OF ERIC THORSON, NOMINEE FOR INSPECTOR

GENERAL OF THE SMALL BUSINESS ADMINISTRATION

Mr. THORSON. Good afternoon, Senator Snowe and Senator

Kerry. It is a privilege to come before you for consideration to be

the next Inspector General of the Small Business Administration,

and I thank you for allowing me to make a brief opening statement.

I hope that in reviewing my qualifications for this nomination,

you will find that I bring a strong, varied background of related

Government experience to this position. I have served in the military as an Air Force pilot, in several executive branch agencies,

and as an investigator for a number of Committees in both the

House and Senate.

I began my Government service as a cadet at the U.S. Air Force

Academy. By that time in my life, I had lost both my parents and

I could not even pay the uniform deposit required upon entrance.

I have always looked upon this opportunity as a true gift that forever changed my life and set the foundation for a debt to this country that I will never be able to repay no matter how many years

of Government service I accumulate.

After spending 2 years flying in Southeast Asia, I left the Air

Force in 1973. I started a tiny flight school in southern California

with 3 single-engine airplanes. The capitalization of the company

came from my only credit card. I learned that there was a Government agency that had a unique program to assist Vietnam returnees with loans to develop a business. I applied.

One day, I received a call from the Small Business Administration that I had been approved for one of these special loans. I was

stunned. By 1985, I had paid back the SBA loan in full, and my

company was operating over 20 private jet aircraft, primarily for

the movie industry. My clients included Frank Sinatra, Clint

Eastwood, Merv Griffin, and Henry Fonda. This most interesting

time in my career would not have been possible except for the SBA.

1985 was also the year that I was offered a position by the

Reagan administration as Deputy Assistant Secretary of the Air

Force for Economic Analysis and Financial Controls. Given my

background with the Air Force, that was not something I could

turn down. It was time to start paying back.

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I mentioned earlier having been a congressional investigator. In

1995, I had the privilege of being named the Chief Investigator for

the Senate Permanent Subcommittee on Investigations, one of the

most incredible jobs I have ever had.

Part of that enjoyment came from working for a very fine man,

the late Senator William Roth. He believed in the importance of

nonpartisan oversight and demanded an exceptionally high degree

of accuracy and integrity in the investigations that he authorized.

Those lessons are particularly applicable to any Inspector General.

During that time, we conducted investigations involving defense

contractor fraud, Medicare fraud, and even the Russian Mafia.

Today, as the nominee to be an Inspector General for the SBA,

we are on the edge of what I believe will be a crucial test for the

Agency. As a result of Hurricanes Katrina and Rita, the SBA is at

the forefront for the disaster relief loans, which will involve unprecedented numbers, both in applications and dollars.

Also, history has proven that in this kind of situation, we can expect there to be an unprecedented number of attempts to defraud

the program. It is strongly stated that the first goal of the office

of the Inspector General is to ‘‘Prevent fraud and unnecessary

losses in SBA programs.’’ The word ‘‘prevent’’ clearly implies the

need to be proactive, to stop fraud before it can be accomplished,

and to create a deterrent to those who might be planning on taking

advantage of this Nation’s efforts to assist those who have lost so

much.

If confirmed as the Inspector General, I can assure you that the

entire office, both auditors and investigators, will use every means

to deter such efforts, and work with the administrator of the SBA

in finding ways to ensure these vital loans are distributed to only

those in true need.

I sincerely hope that you find my background and experience

worthy of this position, and I look forward to answering any questions you might have.

[The prepared statement of Mr. Thorson follows:]

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Chair SNOWE. Thank you, Mr. Thorson. We appreciate that.

I’d like to begin with your experiences as the Chief Investigator

of the Senate Finance Committee because obviously Senator Kerry

has raised some of those issues here today. I’d like to have you provide some insight into your experiences and how you approached

that investigation because I think it would be helpful as well to the

Committee. As I said earlier, we’ve talked to a number of people

who—in fact, many of whom spoke very highly of you throughout

the process in working with you and the number of positions that

you’ve held, both on the House and Senate Committees.

In response to the Committee, you highlight, obviously, your experience. As you’re aware, and what Senator Kerry raised about

the follow-up to the review of the Government Accountability Office’s report, that they were not able to substantiate many of the

claims that were made by witnesses during the course of the IRS

hearing.

I know that former Chairman Roth wrote in his book about the

hearings, ‘‘The Power to Destroy,’’ that, ‘‘Our investigators and professional staff members on the Finance Committee made certain

that the evidence being gathered was corroborated by two or three

witnesses and vetted against taxpayer files.’’

I’d like to have you lay out for the Committee: What were your

criteria for selecting and vetting witnesses?

Mr. THORSON. First of all, we used different criteria for different

types of witnesses. The first thing that Senator Roth originally

started to do here was to look at abuses, which means taxpayer

cases. We started receiving them, first a trickle, then hundreds,

and eventually thousands.

In that mail, we began to get letters from IRS employees who basically said, ‘‘If you’re serious about trying to help this agency, we’ll

help you.’’ I didn’t pay much attention to those. I admit that. That

wasn’t what we were doing. We were looking at taxpayer cases.

More and more, I began to look at some of these letters and realized eventually that if we were going to tell this story, it had to

be told by the people who really worked there and who lived in

those jobs.

For the taxpayer cases, specifically on the taxpayer abuses, I believe there was one panel. We’re going back a ways, but there were

some criminal division cases. But the regular taxpayer cases, what

we did there, we had 6103 authority granted by the chairman, and

we went back and we took their stories. We had many, many that

we could have chosen from. The stories really were heart-rending.

I mean, they were terrible.

We decided, first of all, these should be people that owed no tax,

in our best estimation. We knew that no matter how bad the story

were, when we put these hearings on, if these people—there would

be somebody on the panel who would say, ‘‘well, if they’d just paid

their taxes, they wouldn’t have had this problem.’’ We eliminated

that by picking only cases where we believed these people did not

owe anything.

Once we had that narrowed down, we then went back to the IRS

and pulled their files. By the way, this is also intending to show

that they knew who we were talking to. It wasn’t like they didn’t

know because we had to go to them to get the files.

15

We recovered their files, and went and looked to see that what

they were telling us matched what the IRS was telling us. Obviously, in the cases that we did put on, that was clearly the case.

We knew everything the IRS knew about them. That’s how we

chose those taxpayers.

Those cases were also to represent more than just a story. They

were supposed to represent things that we had heard numerous

times, not just a one-time situation. You can always find those. The

idea was that some of these stories would really resonate, and that

they—that we heard it here, here, and here, and we chose a witness to exemplify that.

I will tell you that one of the stories we heard involved a husband and wife having to divorce in order to protect her second husband’s paycheck. He had nothing to do with the tax year for which

he was—the woman here was being—the money was being taken

from them. They went after her second husband. They ended up

having to divorce.

What I found was, that wasn’t unusual, that that advice was

being given by tax counsel in order to protect income. Now, that

should never happen. That never, ever should—people should never

have to get a divorce because of their government. So we chose that

particular case.

By the way, I want to tell you, forgive me. I do get passionate

about this, so forgive me about this. I lived this for 2 years.

When we chose this particular woman and we asked her if she

would tell her story, she said that it was so important, given what

her family had been through, that her whole family would be at the

hearing. We said, ‘‘ma’am, we can’t do that. We have rules about

what we can pay, and we can pay your travel but we can’t do that.’’

And she said, ‘‘Oh, no, that’s okay. That’s not what I mean.’’ And

I said, ‘‘Well, what are you getting at?’’ Because logistics was a

huge part of these hearings. What it boils down to, and I don’t

mean to drag this out, but it’s something I’ll never forget, it was

so important that the United States Senate would deal with this

issue that affected her life, she and her husband, and her kids, got

in their car and they drove here from San Diego, California.

That’s the kind of thing that drove this. Senator Kerry, I appreciate very much the time you spent with me yesterday. We talked

about this kind of thing. I tried to assure you then, and I will assure you now, there were no politics to this. I have no idea what

party any of these people belonged to—I didn’t care who owned the

IRS at that time, or anything else. Those were the kinds of things

that we were dealing with.

To get back to the issue, not trying to drag this out too much,

but the idea was with taxpayers, A, they owed no tax. And B, their

story matched what was within the IRS files.

When it came to employees, we realized first of all that there

was one thing I’d never run into before, ever, and that was Federal

employees who feared their own agency. It was almost universal.

Even people who had never had a problem within their agency,

they knew the kind of things that could happen to them. I have a

number of quotes that I won’t read unless I’m asked specifically,

but with people of 25 and 30 years’ experience that went into this

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sort of thing. We knew we had to try and figure out how we were

going to present this.

What we decided was, among ourselves—so nobody set this for

us; we did this ourselves—first of all, we wanted every division

that we could get represented. That’s auditors, Examinations Division, and collections. We had heard about a group called inspections. That’s internal affairs, and they carry weapons. District

counsel. Maybe we could get their own lawyers. That’s what we

wanted to do. We wanted to spread it.

We also spread it geographically. We wanted to make sure that

we drew our witnesses from every part of the country so we

couldn’t be accused of finding only some small pocket of problems.

The third that we set for ourselves, was the most difficult: 20

years with the IRS before you could be one of those witnesses.

Now, this was the panel that we put on that was behind a screen.

These people were scared. They asked for anonymity, and they

asked that it not just be granted for the hearing but forever. They

gave us some pretty good reasons why.

There is one person behind that screen who has gone public

today because he’s left the IRS. He was an inspections officer. He’s

now with the IG at Customs, and has been willing to talk to you

all if you ever want to talk to him. He’s a very fine person. Ironically, I probably have more friends in the IRS than anybody you’ll

ever meet.

That’s kind of how we did that. How we verified some of the

things that these people were saying was, first of all, one of the

most difficult tasks of a congressional audit, because we don’t have

a badge, is to keep expanding your sources. One thing we were accused of was making cold calls to IRS people. We never, ever did

that. They had to call us.

We had to expand that circle of sources and to make sure it

spread out into different parts of the country. When a person would

tell us that one thing existed, we would call sources in another part

of the country and make sure, ‘‘Have you heard the same thing?

Does this sort of thing go on?’’

A perfect example of that was the fact that in auditors, for example, that audit taxpayers, not corporations, but small businesses

and taxpayers, was: ‘‘We target poor people.’’ I could never understand that because that doesn’t make any sense. There’s no money

there.

They said, ‘‘No, you don’t understand. This has nothing to do

with money. This has to do with statistics.’’ Open and close cases

as fast as you can. When people are represented by counsel or

they’re represented by CPAs, it slows us down. We go after people

who can’t afford to have help.

That was universal. We heard that in every part of the country.

We also heard the allegations of quotas. In one case, it was $1,000

an hour. In another case, it was $1,200 an hour. We asked for proof

of that. We got it, in writing, where it was actually specified,

$1,200 an hour. If I’m an auditor and I sit in your living room and

I audit you, I’m going to bump your taxes by $1,200 an hour

whether you deserve it or not. We heard that across the country.

We found people who would be saying that. They would have their

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own stories, but they would also corroborate them by saying the

same thing.

The GAO report, for instance, references the situation of large

corporations, where auditors of international, multi-national companies would zero out large tax debts. Now, first of all, they say

there was no corroboration. Yet within their own report, they say

four auditors from different parts of the country that didn’t know

each other, all testifying under oath, all said the same thing.

That is a form of corroboration. Maybe it doesn’t meet somebody’s standard. How could these four people—and remember,

these aren’t disgruntled taxpayers. These are people with 25 and

30 years with the IRS. These people know what goes on inside

their agency, and they testified and came forward. None of these

people were behind a screen. That’s what they said.

Each witness was chosen to tell their own story, but also have

an overlapping testimony where they testified as to something

some of the other people said as well.

Senator Kerry, you made a number of points in your opening

statement, and I appreciate them, and especially I will come back

to the nonpartisan part because that’s something we talked about

that’s very important to me.

The other part here is that when the GAO says, ‘‘we did not corroborate, we did not find, we did not verify, you’ve got to wonder,’’

what were they doing? First of all, if I’m the one who, as they state

here, that did the verification, how come nobody talked to me? How

come nobody called and asked for an appointment to just see what

I did? Nobody called my partner, either, who by the way is here

in this hearing room today.

Why didn’t that happen? I know of one witness they did interview, and she immediately filed a complaint with the Finance Committee and called me, even though I was out of Government at that

point, and registered a complaint of bias by the interviewer.

In the case where we’re talking about those kinds of things,

where they talk about lowering tax debt because of influence, because of influences by a corporate taxpayer or whatever, one of the

things the GAO did find was that, No. 1, if you read the reports—

and again, I’ve got it specified; we don’t need to go into it, but I

can—those reductions did happen. They were correct on that. What

the GAO says was they were within the discretion of the manager.

But that was never an issue. That wasn’t the point. The point was,

why did they do that? And the allegation was influence.

Well, for example, one of these women who was an auditor,

again, of multi-national companies—I can’t even imagine trying to

do audits of that kind—she made an allegation that one of her

bosses maintained a law office on the side from the company who

they were auditing, in Manhattan. I’m assuming the Manhattan

corporate real estate is about the most expensive in the world.

Now, the GAO said, ‘‘Yes, we found that was true, but that was

okay because we verified that their ethics person approved this.’’

That was all right. That had nothing to do with it. The point was,

they were operating a law office on the side in the facility belonging to the company that they were auditing.

Those are the kinds of things where I disagree strongly with the

findings of the GAO. I think there were better ways that they could

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have gone about this, and certainly by talking to me. I would have

been very willing to. I’m hoping I’ve addressed most of the issues

that may have come out of that.

Chair SNOWE. I appreciate that, Mr. Thorson. I think that’s helpful to the Committee in offering your insights, and being able to

personally do that here today. I noted in the late Chairman Roth’s

book on ‘‘The Power to Destroy’’ that he said that first and foremost, he wanted to ensure the investigation was fair, above and beyond everything else. I appreciate that. I appreciate your comments.

Let me move on to one of the small business issues, and then I’ll

move on to Senator Kerry. In this role of Inspector General that’s

so crucial and vital at this point, particularly in the history of

Small Business Administration as far as I’m concerned, is the ability to deliver these programs and services in an efficient and effective way. As you know, the hurricanes, both Katrina and Rita, the

Small Business Administration really had the opportunity to step

up to the plate and to offer these programs.

Unfortunately, we had some considerable difficulties across the

board—they were widespread from the outset—in administering

these programs efficiently and effectively and expeditiously. There

was virtually no anticipation in terms of the numbers of applications that would be filed and how to process them acquiring auditors and verifiers and so on and so forth.

How would you approach, for example, the particular problems

that certainly manifested itself as SBA was responding to these

hurricanes this last fall? They received more than 337,000 applications for disaster loans, they’ve approved 71,265, and they still

have 105,803 applications pending. Obviously, what we have seen,

what we have experienced, is the lack of urgency, the lack of speed

and efficiency to the response, and it has been very slow in disbursing the funds. In fact, out of the 5.1 billion in loans, it’s actually disbursed only 432 million to borrowers.

Obviously, without this money, as Senator Landrieu can attest,

it’s very difficult to rebuild and restructure the economy in New

Orleans and throughout the Gulf region that’s been hard-hit. How

would you approach this particular investigation so that we can

best learn from these mistakes and to prevent them, and anticipate

them in the future?

Once it’s obvious that a disaster is about to occur and it’s imminent, that certainly the Small Business Administration should

have positioned itself to begin to plan, as the Coast Guard anticipated, for example, in prepositioning its assets. Clearly, the Small

Business Administration had an opportunity to begin to plan for

how they were going to administer these disaster loans.

Mr. THORSON. Katrina and Rita I think created a situation that,

while it’s been said many times, nobody could anticipate. Maybe

that’s true to some degree. The truth is, once this started to happen, I think one of the things I was very surprised at was, to this

day, there is not an IG presence by the SBA in the Gulf area. To

be quite honest, I don’t understand that. I think that’s one of the

things that has to happen immediately. That means from me on

down. That is something I would intend to do immediately.

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I think another thing is that you’ve got to put together basically—and this has been tried by, I think, Homeland Security before—is teams of people, both investigators and auditors. You need

to go down and you need to see what systems are working and

what systems are broken. I think Senator Kerry used the term ‘‘unvarnished’’ at one point, and that’s exactly what it’s got to be. You

don’t care who’s offended by it, but you’ve got to figure out what

is going on and where are the weaknesses.

Now, the IG doesn’t set the policies, obviously, as to who gets a

loan or who doesn’t. You all do that with the Administrator. When

those policies are established, the IG does measure what is happening against those policies, and then it reports to you all and it

reports back to the Administrator as well. I don’t see that happening right now.

Maybe—I don’t mean to be unfair to the Agency. I’ve watched

this and had some time to look at this, and I think that’s one of

the first things that has to happen.

Fraud has got to be a huge problem, given the amount of money

that’s flowing down there right now.

The second problem, and I would probably rank this right up

there with it, is the small business set-aside issue that you’ve both

raised in your correspondence. I’ve read all your correspondence.

The contracting that’s going to take place, both of what is happening right now and in the future, is just staggering.

I mean, the kind of things that will be contracted out to major

corporations, we know that. You know that’s going to happen. Then

we have to take and set the policy, check the policies, and see what

it is that the small businesses are entitled to, and then make sure

that that’s adhered to. It doesn’t matter who you upset by doing

that.

That’s one thing—and again, Senator Kerry, I made you a promise. I made you a couple of promises. One was there would be no

politics to what I do in this office. I want to state that publicly here

on the record to repeat that because that’s the way I feel, and it’s

always the way I’ve felt, frankly, in all of this stuff.

We need to get down there. We need to put teams together and

we need to have a presence. There may be required a permanent

presence in that area. I’m not the expert in that, and I don’t pretend to be. I’m not an auditor and I’m not a criminal investigator.

My job will be to focus, to manage, to hopefully motivate, and even

lead—and lead is different than manage; a lot of people confuse

those, but they are different—those auditors and investigators. I

would like their input into how they would approach this as well.

I know that something has to happen quite quickly.

Chair SNOWE. Thank you.

Senator Kerry.

Senator KERRY. Thank you, Madam Chairman.

Mr. Thorson, thank you for your pledges with respect to the approach to the job. We certainly appreciate that very much.

I was a little disappointed in your opening statement that you

focused so significantly on the potential for fraud in the loans and

fraud among the small businesses themselves and the homeowners

in the Gulf region, but you didn’t focus on the management problem itself within the SBA with respect to getting people on the

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ground to do these things. I mean, part of avoiding fraud is having

sufficient staff.

Mr. THORSON. Absolutely.

Senator KERRY. The staff has been cut. As you’ve just said, you’re

surprised there aren’t auditors on the ground. Auditors? You’ve got

300,000 loans waiting to be processed.

It seems to me that before we start focusing on the fraud in the

issuance of a loan, we’d better start issuing some loans.

Mr. THORSON. Yes, sir.

Senator KERRY. That’s an oversight issue with respect to the

SBA itself. What can you tell us today—I mean, is this going to be

a priority when you get in there? It seems to me it’s priority No.

1.

Mr. THORSON. It is. The reason it really didn’t rise to that level

in my statement is simply because fraud is much easier to understand, and it’s much more easy to see in the press accounts and

that sort of thing.

The other thing is, too—and I’m not moving away from your

statement at all because I agree with it—but I haven’t spent a day

at SBA yet. I don’t pretend to know exactly what the policies are.

If I were going to start wading in with my opening statement, I

want to know exactly what I’m saying.

The issues that you’ve raised—and efficiency of resources is another one that I have discussed with your staff as well—these are

huge issues.

Senator KERRY. The question is—I misspoke. It’s not 300,000. It’s

130,000. There are 130,000 loans that are waiting to be processed.

We’ve had the Administrator up here, and the Chair and I and others on the Committee months ago, on two occasions, once when we

were assured that things were going to be put in place and a few

weeks later, when they weren’t, with more assurances.

I just want to call to your attention that the Members of this

Committee on a bipartisan basis are deeply concerned. I’m confident you’re going to hear from the Senator from Louisiana about

what is and isn’t happening down there.

Mr. THORSON. Yes, sir. As I said, I’ve read your correspondence,

from both you and Senator Snowe, to the Agency. I think you’ve

raised some excellent issues. You will not see me back away from

any of those issues.

Do I have the perfect answer to solve some of those things? No,

because I have heard the Agency give you one explanation, which

is reasonable to some degree. They’ve talked about the limitations

of computers systems. They’ve talked about being able to hire people. There are no people to hire that know the—I was in that hearing when you held that.

What we need to do is to be able to get the experts on the ground

in that area to see what’s happening, to see how the policies are

being adhered to, what steps are being taken. I think what you’re

getting at, sir, is that what they’re doing isn’t—doesn’t meet your

standards of what you’re expecting. If that’s the case, then we need

to be able to look at that as well and not only say, ‘‘is that true

or not true,’’ but ‘‘why, and what can be done to fix that.’’

I think, too, my effort would never be to work against the Administrator or SBA; but to work with him, but to be able to show why

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we feel, as the experts in this field—which, again, I’m not, but I

would be managing those people—and to come up with reasons as

to how to make it better, how to make it work better, and to be

able to stand before you and say, ‘‘this is what we found,’’ and to

see if you agree.

Senator KERRY. Sometimes, Mr. Thorson, the accountability job

of the Inspector General is to measure whether or not the achievements and/or approaches of the particular agency are accomplishing their goals.

Mr. THORSON. Correct.

Senator KERRY. Not necessarily to provide the remedy. It may be

that Congress has to provide the remedy, or the administration. If

your job is to go over there, and the SBA is supposed to get these

loans out, and they have said, ‘‘We’re putting a program in place

to do this and we pledge to you, Members of Congress, we’re going

to have these loans racing out,’’ et cetera, et cetera, it seems to me

your priority is to see if that’s happening. If it’s not, they’re not accomplishing their goals.

Would you agree?

Mr. THORSON. Yes, I do. I think I see my job as maybe a little—

one more step past that, but which certainly includes that part, but

also making—and again, as you say, it’s not my jump to make

those things happen. I do think it is part of our task to provide recommendations as to where we see the weaknesses and where

maybe you all can provide the fix.

Senator KERRY. I completely agree. No question that you are supposed to contribute to ways to provide effectiveness in management

and so forth. We hope you will do that.

I want a pledge from you today that you understand and see this

component that its not just the fraud and the homeowners that are

going to be the targets here. The Agency itself has to be measured

whether or not it is doing its job.

Mr. THORSON. I absolutely agree, sir. You have my pledge on

that.

Senator KERRY. It’s not a question of working with or against the

Administrator, but the willingness to hold the Administrator accountable that will require you to say, you’re not getting the job

done.

Mr. THORSON. I absolutely agree with that. I do give you such

a pledge.

Senator KERRY. I really don’t want to belabor it, but I do want

to just kind of get an extra question or two with respect to—if I

may, Madam Chairman—just two quick things.

No. 1, budget cuts really are critical. Every Member of this Committee, I think, is concerned about what’s happening to the budget.

Budget cuts lead to fraud and abuse.

Mr. THORSON. Yes, they do.

Senator KERRY. If you’re putting out $300 billion worth of Federal contracts but you don’t have sufficient people to guarantee

they’re being put out properly or watch what’s happening, boy, is

that an invitation to abuse and fraud, and taxpayer dollars get

wasted.

Can we count on you, should you be confirmed, to ensure that

the SBA makes its own oversight requirements a priority? There

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are requirements within the SBA for their oversight, and they’re

not doing it, necessarily, because they don’t have the people.

Mr. THORSON. I absolutely agree with that, Senator, and that

would be a priority, yes.

Senator KERRY. Finally, let me just—I’m trying to sort through

this because—and Madam Chairman, could I ask unanimous consent that the two reports of the GAO just be placed in the record,

as appropriate?

Chair SNOWE. Without, objection, so ordered.

[The GAO reports follow:]

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Senator KERRY. Could we also, because some Senators, I know,

wanted to pose a few questions who couldn’t be here, just leave the

record open for a week or something like that?

Chair SNOWE. Yes, we will, to about March 8th.

Senator KERRY. For written questions. Obviously, there’s a difference of opinion here, and we’re not going to sort it out today. I

want to try to see if we can just give a little more meat to it.

Finance Committee staff have been in touch with our staff. Those

Finance Committee staff have documented the notion that they had

a hard time, that they didn’t get the names of witnesses until the

day of the hearing or that there were documents that were even

withheld. Someone even said that apparently some documents were

kept in the trunk of your car. Is that true?

Mr. THORSON. We had a person in our office who was sending

things to the IRS before the hearings. We felt that was going on.

We knew that was going on. We knew it was going on after we left

the office. There were times when we would take things out with

us just simply to make sure that people in the office couldn’t have

access to them.

Senator KERRY. Did that keeping things from access take place

on a partisan basis, or was it——

Mr. THORSON. It had nothing to do with politics. In fact, the person I’m talking about was on our—the Republican staff.

Senator KERRY. Did it result in some people therefore not being

able to have access or something, or did it create an air of—I’m just

trying to——

Mr. THORSON. I don’t know. I mean, first of all, like I said—and

believe me, I’m not ducking your question; we’re talking about 8

and 9 years ago, and I don’t really remember—I do know that as

far as the staff having access, we weren’t operating in a vacuum,

obviously. This was a huge investigation for Senator Roth as well.

He watched—he was very proactive in this and knew everything

that we were doing.

He had counsel, Frank Polk, who I’m very proud of the fact is

here in the room today, representing Senator Roth very well.

And——

Senator KERRY. Well, I understand that. I’m just trying to understand—because later on, and I’m confident that there are always

two sides to these things. The GAO didn’t come to you, I understand, to try to ascertain some of these things because they went

to the actual facts of the cases.

Here’s what they themselves wrote. Let me just read you what

they said. This is their conclusion.

‘‘Based on our investigation, we did not find any evidence to support the allegation that IRS managers’ decisions to ‘no change’ or ‘zero out’ proposed tax assessments were improper. However, our investigation established that the allegations themselves had been based on an incomplete awareness of the total circumstances surrounding the matters.’’

They also found—I’m skipping down here a little bit—

‘‘Generally, we found no corroborating evidence that the criminal investigations described at the hearing were retaliatory against a specific taxpayer. Further, we found no evidence that IRS employees had acted improperly in obtaining and executing the search warrants.’’

105

Finally, I think they also—well, let me just—I mean, those are

sort of factual findings as a result of going—they also found that

the 8 specific cases were not substantiated by the facts.

Mr. THORSON. Well, I would——

Senator KERRY. That’s a pretty dramatic sort of contradictory

statement.

Mr. THORSON. Yes. I disagree with their—for instance, let’s talk

about the affidavit for search warrant. In one of the cases, in the

Colaprete case, which was the Jewish Mother Restaurant, they say,

‘‘Well, there were lawsuits here, so we couldn’t really interview and

therefore we don’t want to assume anything.’’ But there was no

real evidence.

Wait a second. There was an application—there was a bookkeeper who was accused by Colaprete days before of embezzlement.

She went to the FBI, to the ATF, and both of them rejected her,

and so she went to the IRS. Within 48 hours, they executed a

search warrant.

The facts that they very easily could have found, if they had

bothered—and I’m not trying to be critical here of GAO, but I am

having to defend myself here on this—she had a record. She had

a prior record of embezzlement. That would have been very easy

to determine. We knew that. In the case of an affidavit for search

warrant, they should have—they’re supposed to have two corroborating witnesses. They did not.

One of your own—or Senator Snowe’s own staff pointed out to me

that a Federal judge ruled that the IRS lied on that affidavit for

search warrant. Of course, the easiest one was, ‘‘Was this true? Did

she embezzle from this restaurant when at the same time she’s trying to get the IRS in?’’ Yes. She was convicted of stealing—I think

it was either $30,000 or $60,000. She was convicted for that, of that

same restaurant. When they say there were no facts to corroborate

this, I have a really hard time with that.

In another case—and I won’t drag this on, but I appreciate very

much the way you’ve been approaching this, and it’s very valid—

all charges were dismissed against a tax preparer. There were 23

counts. All counts were dismissed, and the Justice Department

ended up paying him $75,000 in settlement. Now, that doesn’t in

itself explain everything, but it’s sure a pretty good indication that

maybe this wasn’t right.

I’ve got one of those for almost every single example they’ve listed here. It’s simply by reading their own statement. What I think

you are reading from, and forgive me if I’m making an assumption

here, but in the summary up front where they give you the findings, it’s terribly negative. I think it’s pretty much what you just

read. If you go into the report, which I’ve now read many times,

and you read the lines, the actual statements—and I’ve got it by

page number—they verify this stuff. This happened.

What we don’t agree on is the motivation. Nobody questioned

that it was within the discretion of the manager to zero out those

tax bills. That’s what they’re saying. It was done properly. No question it was. Why did he do it? That was the problem. That gets to

the whole issue of oversight.

These are auditors and interviewers. We’re supposed to exercise

a different level of judgment in working for you all. I took that reVerDate 11-MAY-2000 10:51 Jun 22, 2006 Jkt 027287 PO 00000 Frm 00109 Fmt 6633 Sfmt 6601 C:\SBA\27287.TXT CarolB PsN: CarolB
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sponsibility very seriously. I interviewed these people. I talked to

them. I talked to other people in their offices.

Senator KERRY. Let me ask you this. Let me sort of shortcut this

a little bit because of the time. I’m not trying to cut you off at all.

Mr. THORSON. That’s all right.

Senator KERRY. I appreciate your answer enormously. Assuming

you’re confirmed for this job, is there a lesson you feel you take out

of those hearings, out of that process, that you would apply in this

job as Inspector General? I mean, is there something, sort of a message about different views and the contentiousness of that, that

leaves you saying, okay——

Mr. THORSON. Oh, I’ll never forget the contentiousness.

Senator KERRY. Therefore, does that affect how you might approach this job as IG?

Mr. THORSON. Yes, sir. To some degree, it does. Yet in another,

it doesn’t. What we do up here, and what I did as a congressional

investigator, is really different than what you would do as an IG

and working with the professionals who do the audits and do the

criminal investigations. I do think there’s a bit of a difference.

The thing I think you’re getting at and I agree with is you’ve got

to be really, really careful. One of the things, though, that I’m hoping that Senator Roth and his immediate staff and his counsel

would agree with is, we were really careful because we represented

him. He, above anyone else I’ve ever worked for, exemplified integrity and character.

I just—there are some similarities, yes, and there are some lessons learned, certainly. I never dreamed that we would run into

some of the kind of problems we ran into after doing those hearings. The American people loved them, and they thought the world

of the Senate, and certainly Senator Roth gained from them.

For me personally, yes, sir, I think I have to—when doing these

kinds of things, you have to be very, very careful in how you approach them. I also trusted these people that I had vetted, and I

listened to them, and I stand behind them today. If I have to lay

the GAO report next to the testimony, I’m going to stand behind

my witnesses. They were telling the truth. They were scared, and

they were under oath.

Yes, sir, there are some lessons there that I will obviously carry

with me the rest of my life. That was a huge event in my life.

Senator KERRY. Well, Mr. Thorson, I appreciate your comment.

There is a letter here that I just ask to be part of the record from

Donald Fulwider, who was the author. He responded to the specific

questions of Senators. I would ask that that be made part of the

record by the Chair.

Chair SNOWE. Without objection, so ordered.

Senator KERRY. Thank you.

[Letter from Mr. Fulwider follows:]

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Chair SNOWE. Senator Landrieu.

Senator LANDRIEU. Thank you.

Mr. Thorson, I appreciate the passion in which you’ve expressed

yourself today. I can hear that you bring a lot of emotion to what

you do. I’ve always admired people in that way, that you have a

purpose for what you want to do.

It does concern me about some of the past issues Senator Kerry

and others have raised. I am very focused from here on because of

Katrina and Rita. I’m very fortunate on this Committee to have

both leaders, both in the Chair and Ranking Member, who have

put this issue of helping the 20,000 businesses that were destroyed

by these unprecedented storms and multiple levee breaks.

These businesses would have in many instances survived the

hurricane. They couldn’t survive the unprecedented number of

levee failures that caused the catastrophic flooding of 10 to 12 to

15 feet of water. This is how most of these businesses went out of

business, because of a disastrous and somewhat unexpected flood.

Based on the questioning already about your mission to detect

and prevent waste and fraud and abuse, I would just add to what

both Senator Kerry and the Chairwoman said about also promoting

economy, efficiency, and effectiveness. Because the SBA, I mean, is

the only thing right now between these businesses being able to get

themselves back up and running or literally going out of business

and maybe never coming back.

This is about generations of families that have owned these businesses, people that have put all their life savings in these businesses. If this agency doesn’t work well, then there are just lots of

dreams that are crushed.

That’s part of what is the hard thing about us from this position,

watching an agency that’s on the front line and not able to deliver.

We would think that—I would think that the IG, while you want

to be focused on fraud and abuse—the real issue is the amount of

taxpayer dollars being wasted to no good end, and having businesses that need to generate jobs not able get a hand up.

My question is: Will you commit to give at least the same

amount of time, or even a little advantage to the area of inefficiency than on prosecuting the individual potential wrongdoer, as

opposed to turning a blind eye to an agency that is maybe falling

down on its job to help Americans who need help, if ever they need

it now?

Mr. THORSON. Absolutely. Senator Kerry made a good point. He

said, ‘‘this really isn’t mentioned in your statement.’’ And that’s

true.

Trying to comment on how you’re going to improve efficiency in

an agency that you’ve never been in is somewhat difficult. That

doesn’t mean you’re not committed to it, and that doesn’t mean

that you can’t do that, because we can. It does mean that I don’t

profess to be an expert in a lot of things. I want to—that is a goal.

That is something I want to do, and I will do. You framed it as a

commitment, and I will make such a commitment to you. I will figure out how to do this and what is lacking and how to best make

it better.

Senator LANDRIEU. Would you also commit that if your nomination goes through, within 30 days of your appointment, to go down

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to the Gulf Coast and visit not just the areas of New Orleans that

are more famous than others, but to actually walk through these

neighborhoods where these businesses are destroyed, all along from

Pascagoula to Beaumont, Texas, and places in between, to see the

destruction of what this unprecedented flooding brought forth?

Mr. THORSON. Earlier I mentioned that I had made a promise to

Senator Kerry in a meeting we had about politics. I will make exactly the same kind of promise to you about that. In fact, the truth

is, in the months that this nomination has been pending, my wife

and I have talked many times about what we would do, and one

of the very first things I intend to do is to do exactly as you said.

That’s an easy promise to make, and you can count on that.

Senator LANDRIEU. The reason I press that is because every Senator that has come down, every House member that I know of, has

come back and called my office and said to me—not everyone has

called, but everyone that has called has said this. They’ve said,

‘‘Senator, no matter how many times I’ve heard you and Senator

Vitter speak, I could not believe what I saw.’’

Again, it’s because it wasn’t just the hurricane. We’ve seen hurricanes. We’ve seen earthquakes. We’ve seen the disaster. What

we’ve never seen is a catastrophic flood, like Noah’s Ark. I mean,

that’s what people have to get in their mind. It was like Noah’s

Ark. I mean, and when the water goes away after 40 days in that

case, or in our case 2 weeks, it’s just unbelievable the devastation.

You can look at a map. That’s why when people say, ‘‘we don’t

have enough, we can’t verify if the business really went out of business,’’ you don’t need to do anything other than to look at a map.

If they were located anywhere around a certain neighborhood,

there is a 100-percent chance that they couldn’t survive.

It’s not like a regular hurricane, where some businesses survive

and some don’t. I mean, you have to be concerned somebody might

apply for a loan. They didn’t have a shingle removed from their

roof, and they got in anyway. In this case, if you were in this zip

code or in this neighborhood, there was no chance that you were

not flooded with 15 feet of water. Just go ahead and move the system a lot faster.

That’s what we’re trying to get these agencies in Washington to

understand: Not asking for special favor or more money, but just

understanding that the nature of the disaster was different. That

is what we’re having a hard time convincing people of.

Mr. THORSON. I was asked earlier about lessons that I had

learned doing this kind of work, and it fits right into what you

were just saying. One of the things that I really believed in when

I was doing hearings and Senate investigations was listening to the

real people. You had real people—and that meant we had real IRS

people testify. In one case, we had a real Mafia hood testify. Because nothing gets it across as much as talking to real people.

That’s true, whether it’s you all listening to them, or the cameras

or whatever. But it makes it real. When you’re talking about the

things that you want to do and passing legislation, these are who

it affects. These are the people who—what you’re talking about is

exactly the same thing.

The reason that I felt so strongly from day one when we were

talking about an IG of SBA and seeing—I did not understand, I’ll

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be honest with you. In the very beginning, I did not know that disaster relief loans went through SBA. I learned that pretty quick.

You’ve got to do that. You have to go down there and see it and

talk to people and understand the real people. That is one similarity that is exactly the same because you’ll never get a feel for

it. I think anybody who’s listened to me knows I pretty much get

into my job. It’s a very important part of my life. I will do that.

[The prepared statement of Senator Landrieu follows:]

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Chair SNOWE. Thank you, Senator Landrieu.

I just wanted to follow up on a couple of issues with respect to

some of the issues that Senator Kerry raised because it was important, as part of the Committee’s responsibilities, to examine a number of the issues regarding the IRS investigation that you led on

behalf of Chairman Roth and the Senate Finance Committee.

It’s our goal to obviously conduct these hearings in a transparent

fashion. We had a chance to review a number of the issues, including the GAO report. I just thought it would be important for the

record, based on my staff’s examination. I want to include this in

the record.

When the GAO issued two reports on the claims made with respect to the hearings that you helped to facilitate, it confirmed

facts alleged by the witnesses across 10 different categories of factual allegations, including: zeroing out of tax assessments in the

manager’s unlimited discretion to zero out taxes; the inability of

the IRS to oversee zero-out decisions; the perception of favoritism

for former IRS executives who now practice before their former IRS

colleagues; illegal use of enforcement statistics for performance

evaluation of IRS offices; the workplace practices which promoted

a climate of racial discrimination within the IRS; the closure of approximately 100,000 tax cases which lacked proper procedures and

fair treatment; the abuses of public office for private gain by IRS

officials; the substantial difference in the way IRS imposes discipline on its personnel and executives; the inability of the IRS to

track allegations of reprisals against employees and taxpayers; and

the property damage and fear of intimidation experienced by some

taxpayers or their associates during IRS enforcement operations.

In instances, obviously, it was a matter—not that anything was

improper, but there was a disagreement in terms of the interpretation of the laws. In some cases, witnesses were mistaken on some

points of fact concerning management misconduct and the application of laws and procedures. The GAO also found that two witnesses, who testified of being intimidated by the IRS in a Federal

court, found IRS employees misrepresented information in order to

search warrants.

I think that across the board on what you were attempting to do

as an investigator, your role was obviously to help the Congress in

examining how the Internal Revenue Service was administering its

responsibilities, and to obviously highlight for the public the problems in the administration of their obligations and responsibilities

to the taxpayer.

I thought it was very important to highlight that. We did a very

thorough examination, and what we found was nothing improper.

It was a disagreement on the law, a very difficult area. It was clear

from Chairman Roth’s book that he really insisted on being fair;

and the fact also that hands were tied, I gather, in terms of being

able to have the IRS come before the Committee with its own testimony, as I understand it.

Chairman Roth indicated that Section 6103 had not been used

before. Is that correct?

Mr. THORSON. I really can’t say. 6103 is the protection of taxpayer information as privileged, and only the Chairman of Finance

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and the Chairman of House Ways and Means have that authority.

I really don’t know when that might have been done before.

Chair SNOWE. Yes. He indicated that in his book, as a matter of

fact. In fact, he said—he mentions that in one of the pieces in his

book with respect to that.

I think the point is here that obviously these—I think when

we’re pursuing investigations, it becomes obviously very difficult.

We appreciate what you’ve done. Hopefully you’ll learn from some

of these issues as well as you go forward.

I think clearly the Small Business Administration—it becomes

equally evident that there are a number of issues that will require

your aggressive pursuit in examining. Another area is the STAR

loan program that was created in the aftermath of 9/11 that began

in 2002 and ended in 2003 to help businesses that were adversely

affected by the economic impact. We discovered recently, we had an

examination done by the Inspector General’s office: 85 percent of

those loans that were issued, they were unable to determine the

eligibility, verifying the eligibility for such loans.

How would you approach a program of this nature in the future

to prevent—the question here is, first, either to anticipate, in the

instance of disaster loans, when you see a disaster imminent,

knowing that the SBA is going to have to be positioned to respond

to that, so you prevent certain problems that ultimately developed,

as we learned in the last few months, with the administration of

these programs by the SBA, the disaster loan programs.

Then, secondly, how do you ensure that in the future, that you

also prevent these types of problems and abuses in the administration of a program like the STAR loan? What would you recommend?

Mr. THORSON. Well, in the first instance, these 9/11 loans or

STAR loans or whatever, one of the things that I believe should

have been anticipated was perception of what was happening here.

When you create—when you put together a program, one of the

things that you could anticipate, or I believe maybe should have

been anticipated, was the fact that when banks were—what is the

motivation, first of all? Well, banks had a reduced fee on that

where they were going to make more profit.

If you’ve created a situation where banks are going to make more

profit by using these types of loans, you can bet that’s what’s going

to happen. That’s exactly what did happen. I believe there was a

perfume store in St. Croix, et cetera.

One of the reports that I read was that this was all done and

it was perfectly proper, that these loans all fit whatever the policy

was. That’s a particular part of what an IG does, is measure

against those policies. And based on what I’ve seen, I can’t argue

that that may have been true.

What happens is when you see it show up on the CBS evening

news and it becomes sort of a joke or something, you need to be

able to realize that and anticipate that going forward. I guess

maybe one of the things, too, that I would say is that my experience up here would lend me to be able to do that because we dealt

a lot with those kind of issues.

You have to understand what the goal is first as to what you are

trying to do with those loans. Then did what happened meet that

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goal? I think what you’re saying is no, it did not, because we didn’t

intend to fund perfume stores in St. Croix.

One of the things that I would like to be able to do is to look

at those things while they’re either being done or immediately

afterwards, whichever is applicable, and to be able to point that

out, which in this case I truly believe I would have been able to,

and say, ‘‘you’ve got a huge hole here.’’ This is—you have created

a profit-making situation that’s going to get you in trouble. Then

work with the Administrator on how to close those loops so that

what you want is to get it to the people who need it and who were

entitled to it, and not have the disaster that it kind of resulted in.

Chair SNOWE. Well, with respect to the STAR loan program, it

was just a lack of guidance and instructions, vague directions that

made it all the more difficult, particularly for the lenders, that ultimately developed into this major problem.

I think that it would be important to review many of these programs and to see exactly what the eligibility guidelines are in

many of these programs. Because I think that that is clear; the

lack of communication between the Agency and the lenders involved, and what can be done to ensure that we issue the proper

guidelines and guidance and instructions with these programs so

that abuse or fraud doesn’t arise as a result.

That’s what happened in this instance, regrettably, because there

was no way to determine the eligibility, I gather, from the loan

files when they were reviewing them.

Mr. THORSON. Well, I think this comes back again to the idea of

being a little more proactive and to be able to get involved on the

front end of these things so that you can—because among other

things, it gives you the opportunity to work together with the

Agency and the Administrator to point out where you think, based

on the experience you have, that you’re heading for a problem here.

In this case, I think it would have been relatively easy to determine.

Chair SNOWE. Absolutely.

Mr. THORSON. The incentive here was pretty clear, and therefore

you knew what the banks were going to do. They were going to do

as many of these as they could possibly do because they made more

profit. That’s a pretty simple analysis of it, and that’s exactly what

happened.

Chair SNOWE. The 85 percent, I think that’s an indication of the

depth of the problem that obviously something was terribly wrong.

Mr. THORSON. Exactly.

Chair SNOWE. The SBA has also failed to accurately predict disaster loan volumes. That’s the other issue. We’ve had to get additional funding through a supplemental because they neglected to

anticipate, to identify, not necessarily precisely but within range of

what would be required with respect to these recent disasters.

Unfortunately, we’ve had to go forward and approve $712 in supplemental funds. The SBA could not even predict the situation in

December and early in the month of January. It’s only in the last

few weeks that they finally realized that they would need this additional funding, and so we’ve had to provide it. In the meantime,

those who depend on these programs had to wait in order to ensure

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that there were sufficient funds to go forward with additional

loans.

It’s the unevenness as well. What I’ve learned, I think, in the

last few months with respect to how the Small Business Administration operates, it’s not only the failure to predict, to anticipate,

or to prevent serious problems. It’s the lack of efficiency in the administration of these programs.

We’ve heard it’s an unprecedented crisis. That requires an unprecedented response. Therefore, I think that the SBA has to be positioned to meet the challenges irrespective of when they occur.

Mr. THORSON. Each of you, I believe, have discussed the idea and

used the word ‘‘efficiency.’’ That really is maybe one of the most difficult parts of doing the work of an IG, which is to be able to look

at an agency and tell an agency how they can make themselves

more efficient, how they can do things better. I think that’s a natural source of friction when you are telling the head of an agency

how he can better run his agency.

Where that’s necessary and where we have developed—and I say

‘‘we’’ as the IGs, the real pros that do this kind of thing—that is

not a problem in being able to do that. The real work there is to

be able to identify those things and to be able to make constructive

suggestions as to how to make it more efficient.

It’s easy to talk about fraud and stuff, which is why I had it in

my opening statement. It’s a lot more difficult to be able to assess

an agency and to be able to point to places where the efficiencies

can be improved, and make recommendations on how to fix it. To

say, ‘‘here’s how we suggest you can do it.’’

Chair SNOWE. Absolutely.

Mr. THORSON. It is absolutely important.

Chair SNOWE. It is critical, and I think all the more so given the

previous track record and experiences, unfortunate examples of

what we need to do to improve in the delivery of these programs,

not only for the present time but also in the future.

We still have a lot of work to be done in order to complete this

process in response to the hurricanes of last fall. We still have a

long ways to go.

Mr. THORSON. Yes, ma’am.

Chair SNOWE. Many people are depending on these programs to

rebuild the economies and rebuild their homes. I think that’s going

to be an important contribution in your role as Inspector General.

I think it’s an excellent idea about the fact of you going down there

and being on the ground and being able to do that.

Our staff went down there last fall because I insisted on it to see

exactly what was going on and what was going wrong. We quickly

realized many of the challenges that the SBA was facing, and it

was obviously additional personnel, additional resources, more computers, loan verifiers, and auditors.

Mr. THORSON. A physical presence is important for many reasons. It’s important to the people who are on the receiving end of

these loans and that have experienced the disaster. It’s also important from a leadership point of view for your own group.

That’s why I said early on as we talked about the need for the

IG to be there and to see that. You’re also sending a message to

the people that work for you, that this is important and this is how

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it’s got to be done. I truly believe that. That isn’t for any other reason than for that. But it is absolutely true.

The people in the IG office need to know that I will be there.

They are also going to be there. We’re going to be there a long

time. This isn’t something that’s going to get solved in the next 60

days or something. This is going to be a long time.

Hurricane season starts again in June. It’s not going to take

much to cause trouble in this area all over again. We need to be

there when this happens, and we need to be right there at the forefront, and for many reasons. The fraud is only one part of it.

Chair SNOWE. Well, I appreciate it, Mr. Thorson. I want to thank

you for testifying here today. I know that your investigative experience both within the executive and legislative branch will go a long

way in helping to make the SBA and our Government more accountable in spending the taxpayers’ dollars wisely and efficiently.

I appreciate your testimony this afternoon, and the record will

remain open for 2 days, until March 3rd. Additionally, any written

requests for Mr. Thorson will be submitted to the Committee by

noon on Friday, March 3rd. We also will forward them to Mr.

Thorson, and any time that you have a response to any of the questions that are submitted to the Committee, we hope that you could

include them for the record by March 9th.

Again, I want to thank you, Mr. Thorson. I’m looking forward to

working with you in the future.

Mr. THORSON. Thank you.

Chair SNOWE. This hearing will be adjourned.

[Whereupon, at 3:34 p.m., the Committee was adjourned.]

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(189)

MARKUP OF THE NOMINATION OF ERIC

THORSON TO BE INSPECTOR GENERAL OF

THE SMALL BUSINESS ADMINISTRATION

THURSDAY, MARCH 9, 2006

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP,

Washington, D.C.

The Committee met, pursuant to notice, at 2:13 p.m., in room

S–216, The Capitol, the Honorable Olympia J. Snowe (Chair of the

Committee) presiding.

Present: Senators Snowe, Bond, Burns, Allen, Coleman, Thune,

Isakson, Vitter, Enzi, Cornyn, Kerry, Harkin, Landrieu, Cantwell,

and Pryor.

The CLERK. Hello, Senator. You’re voting for Eric Thorson to be

Inspector General of the SBA.

Senator BURNS. Conrad Burns votes aye.

The CLERK. Hello, Senator Bond. We’re voting for Eric Thorson

to be Inspector General of the SBA.

Senator BOND. Exactly what I want to do.

The CLERK. Senator, you’re voting for Eric Thorson to be Inspector General of the SBA.

Senator CANTWELL. Aye.

Senator VITTER. Aye.

The CLERK. Senator, you’re voting——

Senator ISAKSON. Isakson votes aye.

The CLERK. Senator, you’re voting for Eric Thorson to be the Inspector General of the SBA.

Senator HARKIN. I assume it’s yes. Yes, yes, yes, I’m voting for

Eric. Good guy.

The CLERK. Senator, you’re voting for Eric Thorson to be the Inspector General of the Small Business Administration.

Senator ENZI. Aye.

The CLERK. Thank yoy very much.

Senator Allen, we’re voting for Eric Thorson to be Inspector General,

Senator ALLEN. He’s a good Virginian. I want him in there. Aye,

big aye.

The CLERK. Hello, Senator Landrieu. We’re voting for Eric

Thorson for the Inspector General of the SBA.

Senator LANDRIEU. Yes.

The CLERK. Thank you, ma’am.

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Senator Pryor, we’re voting for Eric Thorson to be the Inspector

General of the Small Business Administration.

Senator PRYOR. Aye. That was easy.

The CLERK. We’re voting for Eric Thorson to be Inspector General of the SBA.

Senator THUNE. Yes.

The CLERK. We’re voting for Eric Thorson to be Inspector General of the SBA.

Senator COLEMAN. Aye for Eric Thorson.

The CLERK. Thank you very much.

Senator KERRY. This is the vote?

The CLERK. For Eric Thorson to be Inspector General.

Senator KERRY. Aye.

The CLERK. And you need to cast Senator Bayh’s vote by proxy.

Senator KERRY. Aye by proxy. Any other proxies?

The CLERK. Everyone came and voted who’s planning to vote.

Thank you sir.

Senator Snowe, we’re voting for Eric Thorson to be Inspector

General of the Small Business Administration.

Chair SNOWE. Aye.

Senator CORNYN. Are we the last ones to vote? It doesn’t look

like it’s going to change the outcome, but I’ll vote aye.

Chair SNOWE. Thank you. Thank you all.

[Whereupon, at 2:29 p.m., the committee was adjourned.]

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