SERVICE-DISABLED 

VETERAN-OWNED SMALL 

BUSINESS PROGRAM

Governmentwide Fraud 

Prevention Control 

Weaknesses Leave Program 

Vulnerable to Fraud and 

Abuse, but VA Has Made 

Progress in Improving Its 

Verification Process

Statement of Richard J. Hillman, Managing Director 

Forensic Audits and Investigative Service

Testimony 

Before the Subcommittee on Technology, 

Information Policy, Intergovernmental Relations 

and Procurement Reform, Committee on 

Oversight and Government Reform, House of 

Representatives 

For Release on Delivery 

Expected at 10:00 a.m. EST

Tuesday, February 7, 2012

GAO-12-443T

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-443T, a testimony 

before the Subcommittee on Technology, 

Information Policy, Intergovernmental 

Relations and Procurement Reform, 

Committee on Oversight and Government 

Reform, House of Representatives

February 7, 2012

SERVICE-DISABLED VETERAN-OWNED SMALL 

BUSINESS PROGRAM

Governmentwide Fraud Prevention Control 

Weaknesses Leave Program Vulnerable to Fraud and 

Abuse, but VA Has Made Progress in Improving Its 

Verification Process

Why GAO Did This Study

In fiscal year 2010, federal agencies 

awarded $10.8 billion to ServiceDisabled Veteran-Owned Small 

Businesses (SDVOSB), according to 

the Small Business Administration 

(SBA). The Department of Veterans 

Affairs (VA) awarded $3.2 billion, or 

approximately 30 percent of 

governmentwide SDVOSB awards. 

The SDVOSB program, established by 

the Veterans Benefit Act of 2003, is 

designed to honor disabled veterans’ 

service by providing them with 

exclusive contracting opportunities. 

Since 2009, GAO has issued seven 

reports or testimonies on the SDVOSB 

program, focusing on its vulnerability to 

fraud and abuse and agencies’ actions 

to prevent contracts from going to firms 

that misrepresent themselves as 

SDVOSBs. 

For this testimony, GAO was asked to 

(1) summarize the status of 

governmentwide fraud prevention 

controls over the SDVOSB program 

and (2) discuss GAO’s recent 

assessment of fraud prevention control 

improvements instituted by VA over its 

verification program.

This testimony is based on prior GAO 

products on the SDVOSB program. 

GAO also reviewed applicable laws, 

regulations, and guidance including the 

Comptroller General’s Standards for 

Internal Controls in the Federal 

Government and related findings from 

VA’s and SBA’s Inspector General.

What GAO Found

Governmentwide fraud prevention control weaknesses over the SDVOSB 

program leave it vulnerable to fraud and abuse. In October 2009, GAO reported 

on 10 selected firms that misrepresented their status as SDVOSBs, which 

allowed them to win approximately $100 million in SDVOSB set-aside and solesource contracts. Cases like this happen because the SDVOSB program relies 

on firms to self-certify annually in the federal government’s contractor registry 

that they are owned and controlled by service-disabled veterans, but most 

agencies do not validate this information. In fact, GAO found that the program 

lacks key fraud prevention framework elements, which include preventing firms 

from fraudulently entering the program, detecting and monitoring for continuing 

compliance, and investigating firms that abuse the program. 

Figure 1: GAO’s Fraud Prevention Framework

For example, the only governmentwide fraud prevention control in place is SBA’s 

bid-protest process, in which interested parties can contest contract awards. In 

prior work, GAO found that the process lacked effective controls because firms 

could complete contracts even after SBA found them ineligible, rendering the 

process ineffective. In July 2011 GAO testified that the 10 firms cited in the 2009 

report had received another $100 million dollars in new federal contract 

obligations despite their fraudulent history. SBA and VA had taken some actions 

against firms by July 2011, including suspending 2 of the firms, and requesting 

that all firms change their status in federal contracting databases to show they 

were not eligible for SDVOSB contracts. However, as of July 2011, several of 

the firms continued to self-certify themselves as SDVOSBs. 

VA has made progress implementing a verification program for firms seeking 

SDVOSB contracts from VA. GAO testified in November 2011 that VA’s program 

includes an initial verification process involving document reviews, site visits to 

contractor offices, and a risk assessment for each applicant firm. In addition, VA 

has instituted a status protest process and a debarment committee designed to 

ensure only eligible firms receive contracts and that ineligible firms face 

consequences for misrepresenting their status. Those improvements may help 

VA reduce the risk that ineligible firms will gain access to VA SDVOSB contract 

dollars. Nonetheless, GAO also made 13 recommendations to VA for improving 

its verification program and further reducing the risk of fraud and abuse. VA 

concurred with the recommendations and outlined plans to improve the program. 

To improve governmentwide fraud prevention controls, GAO suggested that 

Congress consider expanding the VA verification program to all agencies.

View GAO-12-443T. For more information, 

contact Richard J. Hillman at (202) 512-6722 

or hillmanr@gao.gov.
 

Page 1 GAO-12-443T 

Chairman Lankford, Ranking Member Connolly, and Members of the 

Subcommittee:

Thank you for the opportunity to discuss fraud prevention controls within 

the Service-Disabled Veteran-Owned Small Business (SDVOSB) 

program. The SDVOSB program is intended to honor the service 

rendered by veterans with disabilities incurred or aggravated in the line of 

duty. To be eligible for a set-aside or sole-source SDVOSB contract, a 

firm must be majority-owned by one or more service-disabled veterans 

who manage and control its daily business operations.1 Firms self-certify 

annually that they meet these criteria in the Central Contractor 

Registration (CCR) before bidding on these contracts.2 The Small 

Business Administration (SBA) stated in a recent report that in fiscal year 

2010, $10.8 billion in federal contracts were awarded to self-certified 

SDVOSBs.3

The SDVOSB procurement program was initiated with the Veterans 

Benefits Act of 2003.

The Department of Veterans Affairs (VA) SDVOSB contracts 

accounted for $3.2 billion or approximately 30 percent of governmentwide 

SDVOSB contracts during fiscal year 2010.

4 Executive Order 13360 also requires heads of 

federal agencies to provide opportunities for these firms to increase their 

share of federal contracts and subcontracts. The statutorily mandated 

prime and subcontracting goal for SDVOSB participation governmentwide 

is not less than 3 percent of all federal contract dollars each fiscal year.5

 

1

If the business is publicly owned, at least 51 percent of the stock must be held by one or 

more service-disabled veterans. In the case of a veteran with a permanent and severe 

disability, the spouse or permanent caregiver of such veteran may control the business.

In addition, VA established an agency-specific goal for SDVOSB 

participation of 7 percent.

2

CCR is the primary registrant database for the U.S. federal government. CCR collects, 

validates, stores, and disseminates data in support of agency acquisition missions, 

including federal agency contract and assistance awards.

3

SBA calculates its SDVOSB total by including all small-business dollars awarded to 

SDVOSBs, not just those received through set-aside or sole-source contracts.

4

Pub. L. No. 108-183, § 308, 117 Stat. 2651, 2662 (2003).

5

Veteran Entrepreneur Act of 1999, Pub. L. No. 106-50, § 502, 113 Stat. 233, 247 (1999) 

codified at 15 U.S.C § 644 (g)(1).

 
 

Page 2 GAO-12-443T 

Subsequent to the program’s initiation, several other laws were enacted 

that required a separate verification process for VA contracts, provided 

additional specificity on program requirements, and established 

guidelines for responding to firms that violate program requirements.

Specifically, the Veterans Benefits, Health Care, and Information 

Technology Act of 2006 required VA to institute controls over its SDVOSB 

contracts.6 The Act required VA to verify firms’ eligibility and maintain a 

database, VetBiz, of the SDVOSBs and Veteran-Owned Small 

Businesses (VOSB) it verified starting in June 2007. The Act also 

required that VA only use its set-aside and sole-source award authority 

for SDVOSB firms listed in the database and to debar for a reasonable 

period of time, as determined by VA, firms that misrepresent SDVOSB 

and VOSB status. Veterans Small Business Verification Act and Small 

Business Jobs Act of 2010 provided further authorities and requirements 

for agencies when utilizing SDVOSB contracting authorities.7

,

8

Today’s testimony will (1) summarize the status of governmentwide fraud 

prevention controls over the SDVOSB program and (2) discuss our recent 

assessment of fraud prevention control improvements instituted by VA 

over its verification program. This statement is based on prior GAO 

products issued in 2011 and 2009.9 That work included review of 

guidance on internal control standards from GAO’s Standards for Internal 

Control in the Federal Government,10 the fraud prevention framework,

11

 

6

Pub. L. No. 109-461, § 502, 120 Stat. 3403, 3431 - 3435 (2006).

7

Veterans Small Business Verification Act, Pub. L. No. 111-275, § 104, 124 Stat. 2864, 

2867 – 2868 (2010).

8

Small Business Jobs Act of 2010, Pub. L. No. 111-240, § 1341, 124 Stat. 2504, 2543 - 

2544 (2010).

9

GAO, Service-Disabled Veteran-Owned Small Business Program: Additional 

Improvements to Fraud Prevention Controls Are Needed. GAO-12-205T (Washington, 

D.C.: November 30, 2011), GAO, Service-Disabled Veteran-Owned Small Business 

Program: Preliminary Information on Actions Taken by Agencies to Address Fraud and 

Abuse and Remaining Vulnerabilities. GAO-11-589T (Washington, D.C.: July 28, 2011) 

and GAO, Service-Disabled Veteran-Owned Small Business Program: Case Studies 

Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts. 

GAO-10-108 (Washington, D.C.: October 23, 2009).

10GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999). 

11GAO, Service-Disabled Veteran-Owned Small Business Program: Fraud Prevention 

Controls Needed to Improve Program Integrity, GAO-10-740T (Washington, D.C.: May 24, 

2010). 
 

Page 3 GAO-12-443T 

and findings from recent VA Office of Inspector General (IG) and SBA IG 

reports.12

We conducted the work related to this testimony from January 2012 to 

February 2012 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

Additional information on our scope and methodology is 

available in the prior issued products.

The governmentwide SDVOSB program has limited fraud prevention 

controls, allowing ineligible firms to receive millions of dollars in SDVOSB 

contracts. The program relies on firm self-certification, where agencies 

(with the exception of VA, as discussed below) have instituted limited 

fraud prevention controls. Our prior work has found that SBA does not 

verify the eligibility of firms claiming to be SDVOSBs in CCR, nor does it 

have a process for using the VA database of verified service-disabled 

veterans.13

In contrast, an effective fraud prevention framework includes controls at 

key stages in the contract process (see fig. 1). The most effective and 

efficient aspect of the framework involves rigorous preventive controls at 

the beginning of the process to provide assurance that only eligible firms 

are permitted to bid on SDVOSB contracts. Next, because the status of 

an SDVOSB firm can change over time, active and continual monitoring 

of contractors performing SDVOSB contracts is also essential. Finally, 

these controls are not fully effective unless identified fraud is aggressively 

prosecuted and/or companies are suspended, debarred, or otherwise 

held accountable.

The main process for detecting fraud involves formal bid 

protests, whereby interested parties to a contract award can protest a 

firm’s status with SBA if they believe that the firm misrepresented its 

small-business size or SDVOSB eligibility.

 

12VA OIG, Office of Audit and Evaluations, Department of Veteran Affairs: Audit of 

Veteran-Owned and Service-Disabled Veteran-Owned Small Business Programs, 10-

02436-234 (July 25, 2011). 

13 GAO-10-108.

The Governmentwide 

SDVOSB Program 

Lacks Fraud 

Prevention Controls
 

Page 4 GAO-12-443T 

Figure 1: GAO’s Fraud Prevention Framework

In October 2009, we exposed these weaknesses in governmentwide 

fraud prevention controls by reporting on 10 case study firms that 

misrepresented their eligibility for SDVOSB contracts. The firms 

fraudulently received about $100 million in sole-source and set-aside 

SDVOSB contracts despite being ineligible for the program, because their 

initial and ongoing eligibility was not verified and monitored by the 

contracting agencies. They exploited the lack of an effective 

governmentwide fraud prevention program using a variety of schemes, 

including setting up front companies to pass SDVOSB contracts on to 

large, sometimes multinational firms ineligible for the program. Other 

firms received contracts even though no service-disabled veteran was 

associated with the firm or, if one was employed, he or she did not 

manage or control the business.

The limited consequences of firms found to have abused the SDVOSB 

program were further highlighted when we testified in July 2011 on 

actions taken against these 10 firms. We reported that SBA and VA had 

taken some actions against firms, including suspending 2 of the firms and 

requesting that all firms change their status in CCR to show they were not 

eligible for SDVOSB contracts. However, in July 2011, several of the 

firms remained self-certified as SDVOSBs in CCR. Further, even after our

2009 report, the firms received more than $100 million in additional 
 

Page 5 GAO-12-443T 

obligations on federal contracts through March 2011.14 About $16 million 

in obligations were associated with SDVOSB set-aside contracts. In our 

2009 report, we recommended SBA and VA coordinate with the Office of 

Federal Procurement Policy in order to explore the feasibility of 

expanding VA’s verification process governmentwide. However, agency 

officials stated that legislative changes would be necessary in order for 

federal agencies to change the governmentwide SDVOSB program from 

a self-certification process into using VA’s VetBiz verification program.

We also suggested that Congress consider expanding the VA verification 

program to all agencies to help reduce the risk of fraud and abuse,

though no legislation to address this issue has become law.15

In contrast to the limited fraud prevention controls for the governmentwide 

SDVOSB program, VA has recently instituted its own fraud prevention 

controls. The primary focus of VA’s recent efforts has been preventive 

controls, but VA has also made progress in monitoring and investigations. 

First, VA has enhanced deterrents to ineligible firms becoming verified 

through its verification process. As of April 2011, VA had established 

verification guidelines, including a requirement to search the exact names 

of company principals in the Excluded Parties List System, and 

developed a risk assessment model to examine applications. VA also 

updated its data systems to limit manual data entries. Its process of 

verifying service-disabled veteran status allowed VA to prevent two 

fictitious, ineligible SDVOSB applications we submitted from being 

verified. VA’s fraud prevention controls appropriately identified that our 

company owners were not service-disabled veterans (according to their 

names and Social Security numbers) and rejected the applications. In 

addition, VA has hired more staff to conduct initial file reviews and site 

visits. VA has also conducted announced site visits at high-risk firms 

before they were deemed eligible for the program. According to VA, its 

enhanced deterrents under new guidelines denied over 1,800 ineligible 

firms.

 

14Dollar amounts relate to federal contract obligations made to the 10 case studies from 

November 13, 2009, to March 4, 2011.

15The Small Business Contracting Fraud Prevention Act of 2011, S. 633, 112th Cong. § 4 

(2011) did address the matter, but did not become law.

VA Has Instituted

Fraud Prevention 

Controls in Its 

Verification Program
 

Page 6 GAO-12-443T 

Second, in the area of monitoring and detection, VA has developed some 

fraud prevention controls that may help identify firms that were previously 

verified but no longer meet SDVOSB eligibility requirements, such as a 

reverification initiative designed to review previously verified SDVOSB 

firms using new fraud prevention control techniques. VA has also 

developed a process for interested parties to protest a firm’s status, and 

instituted random announced site visits of verified SDVOSB firms.

Finally, in the area of investigations, VA has taken some actions to debar 

firms violating SDVOSB program requirements. VA may debar an 

ineligible firm in accordance with the Veterans Benefits, Health Care, and 

Information Technology Act of 2006, which requires that any business 

determined to have misrepresented its status as an SDVOSB be 

debarred from contracting for a reasonable period of time, as determined 

by VA. VA instituted a debarment committee in September 2010 

specifically to debar firms violating SDVOSB regulations. As of October 

2011, the committee had debarred one SDVOSB firm and related 

individuals that had misrepresented their SDVOSB status. Several other 

debarment actions were currently pending or were being litigated. 

Additionally, VA officials had sent about 70 referrals to the VA IG for 

potential fraudulent actions by firms receiving SDVOSB contracts. VA IG 

was investigating these cases.

Even with these efforts to develop a more robust verification program for 

SDVOSB firms, weaknesses remain. For example, in July 2011, the VA 

IG reported that 32 of 42 (76 percent) firms receiving VA SDVOSB and 

VOSB contracts that the IG reviewed for eligibility were ineligible to 

participate in the programs or ineligible for the awarded contracts.16

 

16VA OIG, Office of Audit and Evaluations, Department of Veteran Affairs: Audit of 

Veteran-Owned and Service-Disabled Veteran-Owned Small Business Programs, 10-

02436-234 (July 25, 2011). 

The 

VA IG reviewed a statistical sample of contracts awarded during a 12-

month period ending May 2010. Some of the specific problems identified 

by the VA IG included the use of pass-through practices where firms pass 

SDVOSB work on to ineligible firms, and SDVOSB firms who exceeded 

allowable subcontracting thresholds. The IG projected that from $500 

million to $2.6 billion annually was awarded to ineligible firms, and that 

the VA overstated its percentage of contracts awarded to SDVOSBs by 3 

to 17 percent.
 

Page 7 GAO-12-443T 

Subsequent to the VA IG report, we reviewed more recent fraud 

prevention control improvements to VA’s verification process, which were 

discussed above. However, even with VA’s improved fraud prevention 

controls, we made 13 recommendations in November 2011 to further 

enhance aspects of VA’s fraud prevention framework. For example, in the 

area of preventive controls we recommended that VA provide fraud 

awareness training to its verification staff and contracting officials, 

validate applicant information with third-party data, and formalize a 

process for conducting unannounced site visits for high-risk firms. In the 

area of monitoring and detection, we recommended, among other issues, 

that VA develop procedures for periodic, risk-based reviews of firms 

receiving SDVOSB contracts to ensure continued compliance with 

program standards. Finally, in the area of investigations and 

prosecutions, we recommended that VA develop criteria for its debarment 

committee and program officials to ensure firms that violate program rules 

are referred to either VA’s debarment committee or its IG. We noted in 

our November 2011 testimony that there was room for improvement in 

the area of debarments since as of the date of our statement only one 

firm and related individuals had been debarred by VA out of the 1,800 

firms rejected by VA during its verification process and the 70 firms 

referred to VA IG for potentially fraudulent actions. VA generally 

concurred with our recommendations and stated they have taken 

numerous actions to address the identified issues.

The SDVOSB program has provided billions of dollars in contracting 

opportunities to many deserving service-disabled veterans since its 

inception in 2003. Unfortunately, the limited governmentwide fraud 

prevention controls have allowed unscrupulous individuals to gain access 

to those opportunities despite not being eligible for the program. While VA 

has taken steps to improve its verification program, our November 2011 

recommendations address additional improvements that should be made 

to further reduce its vulnerability. In response to our recommendations, 

VA has stated it has taken a number of actions which we plan to verify as 

part of ongoing work. In addition, the approximately 70 percent of 

contracts not awarded by VA are at a higher risk of being awarded to 

ineligible firms. We reiterate our suggestion that Congress consider 

expanding VA’s verification process governmentwide to employ more 

effective fraud prevention controls over the billions of dollars awarded to 

SDVOSBs outside of VA’s fraud prevention controls process.

Concluding 

Observations 
 

Page 8 GAO-12-443T 

Chairman Lankford, Ranking Member Connolly, and Members of the 

Subcommittee, this completes my prepared statement. I would be 

pleased to answer any questions that you may have at this time.

If you or your staff have any questions about this testimony, please 

contact Richard J. Hillman at (202) 512-6722 or hillmanr@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this statement.

GAO Contacts
Related GAO Products

Page 9 GAO-12-443T 

Service-Disabled Veteran-Owned Small Business Program: Additional 

Improvements to Fraud Prevention Controls Are Needed. GAO-12-205T. 

Washington, D.C.: November 30, 2011.

Service-Disabled Veteran-Owned Small Business Program: Additional 

Improvements to Fraud Prevention Controls Are Needed. GAO-12-152R. 

Washington, D.C.: October 26, 2011.

Service-Disabled Veteran-Owned Small Business Program: Preliminary 

Information on Actions Taken by Agencies to Address Fraud and Abuse 

and Remaining Vulnerabilities. GAO-11-589T. Washington, D.C.: July 28, 

2011.

Department of Veterans Affairs: Agency Has Exceeded Contracting Goals 

for Veteran-Owned Small Businesses, but It Faces Challenges with Its 

Verification Program. GAO-10-458. Washington, D.C.: May 28, 2010.

Service-Disabled Veteran-Owned Small Business Program: Fraud 

Prevention Controls Needed to Improve Program Integrity. GAO-10-740T. 

Washington, D.C.: May 24, 2010.

Service-Disabled Veteran-Owned Small Business Program: Case Studies 

Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of 

Dollars in Contracts. GAO-10-306T. Washington, D.C.: December 16, 

2009.

Service-Disabled Veteran-Owned Small Business Program: Case Studies 

Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of 

Dollars in Contracts. GAO-10-255T. Washington, D.C.: November 19, 

2009.

Service-Disabled Veteran-Owned Small Business Program: Case Studies 

Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of 

Dollars in Contracts. GAO-10-108. Washington, D.C.: October 23, 2009.

Related GAO Products

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