Alaska Native Corporations: Oversight Weaknesses Continue to Limit SBA's Ability to Monitor Compliance with 8(a) Program Requirements
Published: 2016-03-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal obligations under SBA's 8(a) Business Development Program totaled about $4 billion for 344 ANC-owned firms in 2014. In 2011, SBA updated program regulations to address prior oversight challenges identified by GAO. GAO was asked to follow-up on past reports and examine SBA's current oversight processes. This report discusses, among other things, SBA's ability to (1) enforce regulations prohibiting the award of follow-on, sole-source 8(a) contracts to subsidiaries of the same ANC; (2) limit subsidiaries of the same 8(a) ANC from operating in the same primary line of business, and (3) address challenges, if any, to SBA's oversight of 8(a) ANC-owned firms. To do this work, GAO analyzed fiscal year 2011 through 2014 data from a federal contracting database using separate nongeneralizable samples for each objective, conducted site visits, reviewed 8(a) sole-source contracts, and ANC-owned firm annual updates, and interviewed relevant SBA officials.
section_title: What GAO Found
paragraphs: GAO has reported in the past that the Small Business Administration's (SBA) ability to enforce regulations prohibiting the award of follow-on, sole-source contracts to 8(a) subsidiary firms of the same Alaska Native Corporation (ANC) relies on contract information from other federal agencies that is sometimes incomplete. SBA's regulations prohibit program participants from receiving an 8(a) sole-source contract that immediately follows another 8(a) contract with the same requirements performed by another participant owned by the same ANC. Other federal agencies offering 8(a) contracts must generally submit offer letters to SBA that include information about a contract's procurement history and name of any prior small business contractors. SBA relies on this information to determine whether a firm is eligible to receive a particular 8(a), follow-on, sole-source contract. However, GAO's analysis of a selection of contracts for this review found that agencies are not required to directly identify whether a sole-source contract is also a follow-on contract in these letters. One SBA office has begun taking action to address this limitation by asking agencies to specifically report whether contracts are follow-on, sole-source awards in offer letters, but the change has not been broadly adopted. SBA would be better positioned to limit the award of follow-on, sole-source contracts by ANC-owned subsidiaries if it requested that other federal agencies specifically state whether contracts are follow-ons in offer letters.
GAO found in past reports and this review and in that SBA's ability to enforce its regulation prohibiting subsidiaries owned by the same ANC from operating in the same primary line of business as reported to SBA is hindered by limited tracking and sharing of information across SBA's 68 district offices. ANC-owned firms must register a primary line of business with SBA, but are allowed to pursue multiple other lines of business. In this review, GAO found 5 of 39 ANCs owned subsidiaries that generated a greater portion of revenues in secondary lines of business than their registered primary line of business. Additionally, those secondary lines of business were the same lines of business as the primary lines for other subsidiaries owned by the same ANC. Such activity could potentially conflict with the regulation's intent. SBA proposed a rule designed to limit and track this activity, but lacks plans and timelines associated with this effort. Regarding limited information-sharing, different district offices service different firms that are subsidiaries of the same ANC. Oversight staff in these offices cannot access or share relevant data from other district offices. Without better data sharing, SBA cannot monitor whether firms owned by the same ANC and serviced by different district offices are complying with program rules.
As GAO reported in the past, SBA's staffing for its data collection and program guidance activities contributed to weak program oversight and monitoring of 8(a) ANC-owned firms. SBA took some recent actions to enhance oversight, such as conducting an accountability review in October 2014 of the Alaska District Office. SBA has established an office to improve compliance with 8(a) rules by verifying self-reported information supplied by firms. However, SBA does not have plans that detail the office's roles and responsibilities for its activities. With the oversight weaknesses GAO identified in this review, SBA has an opportunity to enhance its oversight by finalizing plans for this office.
section_title: What GAO Recommends
paragraphs: GAO recommends that, among other things, SBA asks other federal agencies to specifically identify whether a contract is a follow-on in their letters to SBA; develop plans and timelines for tracking ANC-owned firms' revenues across lines of business; and enable its staff to access and share relevant revenue data. SBA agreed with two recommendations and reported actions taken to implement two others. SBA disagreed with the final two, stating they were unnecessary. Based on a review of actions taken, GAO believes all six recommendations are still warranted.

section_title: Letter
paragraphs: The 8(a) Business Development Program (8 program), administered by  the Small Business Administration (SBA), is one of the federal  government’s primary vehicles for developing socially and economically  disadvantaged small businesses, including those firms owned by Alaska  Native Corporations (ANC.) One of the key benefits of the program is the  ability of participants to receive federal contract awards set aside solely  for 8(a) firms. Government agencies obligated about $17 billion to just  under 5,600 firms participating in SBA’s 8(a) program in fiscal year 2014.  Obligations to ANC-owned firms participating in the 8(a) program  represent a sizeable share of total obligations made to all firms  participating in the program. For fiscal year 2014, federal obligations  under the program totaled about $4 billion for 344 8(a) ANC-owned firms  and represented almost a quarter of all 8(a) obligations made that year.
Congress has provided ANC-owned firms participating in the 8(a)  program with distinct advantages over most other participating firms,  including provisions exempting them from some of SBA’s standard 8(a)  program eligibility requirements and an authorization to receive sole- source 8(a) contracts for any amount. Generally, for a firm to participate  in the 8(a) program, SBA must certify that the firm meets several criteria,  including that it is a small business as defined by SBA and is  unconditionally owned and controlled by one or more socially and  economically disadvantaged individuals. However, program rules allow  firms that are majority owned by ANC parent entities to be considered  eligible for the 8(a) program as long as they can attest to being a small  business individually. Further, ANC-owned firms are also allowed  contract flexibilities not afforded to most other 8(a) participants. For  example, under the 8(a) program, contracts generally can be awarded to  participating small businesses without competition (known as sole-source  contracts) when valued below $4 million—including any options—or $6.5  million for manufacturing contracts. There is also typically a limit on the  total dollar value of sole-source contracts that 8(a) firms can receive while  in the program—$100 million or five times the size standard  corresponding to the firm’s primary line of business. 8(a) ANC-owned  firms are exempt from these limits. Federal procuring departments and  agencies are allowed to make sole-source awards of any size to 8(a)  ANC-owned firms and these firms may continue to receive awards once  the total dollar value threshold that applies to other 8(a) firms of $100  million has been exceeded.
In February 2011, SBA issued new and updated existing regulations that  were partly designed to prohibit certain behaviors by firms participating in  the 8(a) program. For example, the updated regulations preclude sister  firms from receiving (and, therefore, agencies from awarding) follow-on,  sole-source contracts—that is, the prohibited practice of awarding  subsequent contracts with essentially the same requirements to sister  subsidiary firms of the same parent ANC. The changes also included  technical changes to existing rules that dictate how the agency monitors  the participation of ANC-owned firms in the same lines of business, and  provided clarifying language to existing rules related to compensation. In  addition, SBA issued a new rule that requires ANC-owned firms to report  how the benefits from 8(a) program participation are distributed to Alaska  natives or their community.
However, in January 2012, we reported that, even with changes to its  regulations, SBA lacked critical data it needed to implement or enforce  compliance with some of the new or existing 8(a) program requirements,  including prohibitions against awarding follow-on, sole-source contracts to  subsidiary 8(a) firms owned by the same ANC, as well as tracking the  participation of firms in the same lines of business. In that report, we  stated that if SBA did not take steps to strengthen its program controls,  ANC 8(a) firms and others could remain in the program in perpetuity— they could shift the management of one subsidiary to another to receive  follow-on contracts or circumvent the prohibition against sister  subsidiaries operating in the same primary line of business. We  recommended, among other things, that SBA  1.  enhance its technological capacity by providing visibility to district  offices into all tribal 8(a) firms’ activity by tribal entity to ensure  compliance with the new prohibition on awarding follow-on, sole- source 8(a) contracts to sister subsidiaries;  2.  track revenue by ANC-owned firms’ industry codes to ensure that  subsidiaries participating in the program and under the same  parent company are not generating the majority of their revenue  from the same primary industry; and  3.  reinforce, to procuring agencies, the requirement to provide the  full acquisition history of the procurement in the offer letter, when  available, and direct district office business development  specialists to focus on this issue when reviewing contract offers  made to ANC-owned firms.
You asked us to examine SBA’s oversight of ANC 8(a) contracts. This  report discusses the extent to which: (1) SBA enforces its regulations  prohibiting the award of follow-on, sole-source 8(a) contracts to  subsidiaries of the same ANC; (2) SBA limits subsidiaries of the same  ANC from operating in the same primary line of business; (3) information  is known about compensation, revenues, and benefits distribution of  ANC-owned firms; and (4) SBA has addressed challenges, if any, to its  oversight and monitoring of ANC-owned firms participating in the 8(a)  program since 2011. This report exclusively discusses these issues in  the context of ANC-owned firms participating in the 8(a) program.
For the analyses performed in all objectives, we reviewed 8(a) program  information on ANC firms participating in the program from fiscal year  2011 through fiscal year 2014 to reflect the effective date of regulations  included in our scope. To perform our work we used the Federal  Procurement Database System–Next Generation (FPDS-NG) to select  three sets of cases of ANC-owned firms that met certain criteria specific  to our objectives, which we outline in detail below. To assess the  reliability of the FPDS-NG data, we interviewed officials who maintain the  database, reviewed related documentation, and tested the data for  missing or erroneous values. Where possible, we also tested these data  against other datasets maintained by SBA and the General Services  Administration (GSA). During the course of our review, we identified a  few data limitations with FPDS-NG, such as misclassified 8(a) firms and  incorrect obligations. To mitigate these limitations, we interviewed  knowledgeable individuals about the contracts in question and corrected  errors we identified. We found the data to be sufficiently reliable for the  purpose of selecting cases for review (see appendix I for additional  details on the data’s reliability). As described in the following sections, we  selected a subset of cases for each objective that met certain criteria for  follow-up review and illustrative examples, and therefore our findings are  not generalizable to the entire population of ANCs participating in the 8(a)  program.
To identify the extent to which SBA enforces its regulations prohibiting the  award of follow-on, sole-source 8(a) contracts to subsidiaries of the same  ANC, we assessed the agency’s policies and procedures related to these  processes, and interviewed cognizant staff. We analyzed FPDS-NG to  identify 8(a) sole-source contracts that were awarded during the fiscal  year period 2011 through 2014. Because there is no federal database  that specifically identifies follow-on, sole-source contracts, we looked for  certain contract characteristics in FPDS-NG that were an indication of a  potential follow-on to a sister-subsidiary. We identified contracts that had  the following characteristics: (1) ANC-owned firms that shared the same  parent ANC, location, and work performed by firms and sister  subsidiaries; and (2) contracts with sequential award dates. On the basis  of this analysis, we identified 155 contracts overall—about 4 percent of all  contracts awarded to ANC-owned 8(a) firms from fiscal year 2011 through  2014—that could have been potential follow-on, sole-source contracts  according to our FPDS-NG data. We randomly selected 53 of these  contracts for further review. The 53 contracts represented two groups: 23  small-value contracts (those contracts valued at $150,000 or less), and  30 large-value contracts (those contracts valued at more than $150,000).  Because, generally, agencies are not required to provide offer letters to  SBA prior to the award of contracts that are $150,000 or less, our  analysis ultimately focused on the 30 large-value contracts. For these  30 large-value contracts, we reviewed documents such as offer letters  and the actual contracts. Our review did not identify any contracts that  were also follow-on, sole-source contracts. Table 1 outlines our selection  of the sole-source contracts awarded from fiscal year 2011 through 2014.
Because of the imprecision in using these variables to identify the  population of follow-on, sole-source contracts—that is, we cannot be fully  assured that we have identified all possible cases—the results of our  analysis are not generalizable to the larger population of contracts we  identified. Further, it was not possible to determine from FPDS-NG data  alone whether the other remaining 102 contracts that we initially identified  in FPDS-NG as potential follow-on, sole-source contracts were actually  follow-on, sole-source contracts. Such a determination can only be made  by a detailed review of each of the cases.
To evaluate the extent to which SBA limits 8(a) subsidiaries of the same  ANC from operating in the same primary line of business—that is,  operating businesses primarily within the same North American Industry  Classification System (NAICS) code—we reviewed SBA policies,  guidance, and procedures in place at the time of our audit. We also  analyzed subsidiary data from three systems: FPDS-NG, the System for  Award Management (SAM), and SBA’s Dynamic Small Business Search  (DSBS). Using these systems, we selected a non-generalizable  selection of 39 unique parent ANCs that each owned multiple subsidiaries  that participated in the 8(a) program and generated at least $1 in 8(a)  contract obligations from fiscal year 2011 through 2014. We reviewed  detailed information on these 39 ANCs. To verify the accuracy of data  taken from these systems, we interviewed 6 ANC parent companies  about the accuracy of data elements relevant to our findings, including  NAICS codes, 8(a) program entrance and exit dates, obligations and  revenue amounts. Additionally, because there were a number of new  initiatives that SBA introduced related to this objective, we used our past  guidance to assess whether the plans that SBA had in place articulated a  results orientation, used intermediate steps to indicate progress made  toward achieving its goals, and addressed identified mission critical  goals. Our findings under this objective are not generalizable to the  entire population of ANC-owned firms participating in the 8(a) program.
To determine the extent to which information is known regarding  compensation, revenue, and benefit distribution of 8(a) ANC-owned firms,  we randomly selected 30 firms that FPDS-NG identified as ANC-owned  subsidiary firms active in the 8(a) program from fiscal year 2011 through  2014. We excluded four firms from our analysis because our review  revealed that they were other than ANC-owned firms. We reviewed files  (including applications and annual updates) for the 26 selected ANC- owned firms. Much of the data that we reviewed for this section were self- reported by ANC subsidiaries. We interviewed district office officials to  discuss preliminary results from our file review and reviewed related  documentation. Additionally, we spoke with officials from three  associations about their knowledge of compensation paid by ANC-owned  8(a) firms. These groups represent the interests of the chief executive  officers from the 12 Native Regional Corporations; that address issues  related to Native federal contracting; and another group that represents  the interests of indigenous people, generally. We also present information  collected on subsidiary firm ownership in appendix II. Our description of  firms under this objective is not generalizable to the entire population of  ANC-owned firms participating in the 8(a) program.
To assess the extent to which SBA has addressed challenges, if any, to  its oversight and monitoring of ANC-owned firms participating in the 8(a)  program since 2011, we reviewed SBA’s implementation of program  mechanisms designed to ensure the compliance of regulations related to  our scope of work. We reviewed relevant SBA controls, policies,  procedures, and guidance, and assessed the extent to which these  mechanisms effectively aligned with federal standards for internal  controls. We also interviewed key SBA officials and staff located at  headquarters and at 4 of the 68 SBA district offices including Anchorage,  Alaska; Richmond, Virginia; Washington, D.C.; and San Francisco,  California, regarding SBA’s implementation of management controls  relevant to the scope of our review. These offices were selected because  of the role they play in the 8(a) program (such as the San Francisco  office’s role in certifying the initial applications for ANC-owned firms  seeking to enter the program) or for the number of ANC 8(a) firms that  they service. For example, we selected a district office that served a large  number of ANC-owned firms (the Alaska District Office) and ones that  served a smaller number of firms (e.g. Washington, D.C., and Richmond,  Virginia district offices) to compare their practices. We conducted site  visits to both the Anchorage, Alaska, and Washington, D.C., district  offices. During these site visits, we interviewed staff and conducted file  reviews of selected ANC subsidiaries serviced by those district offices. As  a part of our site visit to SBA’s district office in Anchorage, Alaska, we  collected data related to SBA’s human capital planning for that office. Our  approach to this specific part of the engagement included reviewing  documents and interviewing cognizant officials with expertise in workforce  planning methods. During these interviews, we discussed workforce  plans, historical and current staffing numbers, and related challenges.  Specifically, we asked about the skills and competencies needed to  achieve program results, discussed the agency’s strategies to address  staffing gaps, and building necessary capacity. Additionally, we reviewed  our own past work on human capital issues for guidance. To inform  other aspects of this objective, we also attended an SBA tribal  consultation in Anchorage, Alaska, to obtain the overall perspectives of  ANCs and their subsidiary firms on the 2011 regulatory changes to the  program. The findings from these site visits and interviews are not  generalizable to the other SBA district offices. Additional details on our  scope and methodology for each objective can be found in appendix I.
We conducted this performance audit from May 2014 to March 2016 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.
subsections: section_title: Background
subsections: section_title: 8(a) Business Development Program
paragraphs: The 8(a) program was designed to assist small, disadvantaged  businesses in competing in the American economy through business  development. Over the course of the program, qualified small,  disadvantaged businesses can receive business development support  from SBA, such as mentoring, procurement assistance, business  counseling, training, financial assistance, surety bonding, and other  management and technical assistance. However, one of the key areas of  support is eligibility for set-aside competitive and sole-source federal  contracts for 8(a) businesses, which can be an important factor in the  financial development for ANC-owned firms.
section_title: Organizational Structure
paragraphs: Generally, ANCs as organizations can be either for-profit or not-for-profit  and can own a family of for-profit subsidiary firms, including but not  limited to, wholly-owned holding companies that often provide  administrative support to smaller sister subsidiaries. Additionally, ANCs  can wholly or partially own, with at least a majority share, the subsidiary  firms that participate in the 8(a) program, as illustrated in figure 1. But one  condition for participation in the 8(a) program is that subsidiary firms are  for-profit. Appendix II contains additional descriptive information about  ownership for the firms we selected for our review.
According to program rules, once a firm has been certified to participate  in the 8(a) program, any changes in ownership should be reported to the  local SBA district office. When a change in ownership is reported, SBA’s  certification and program eligibility office in San Francisco reevaluates  that firm’s eligibility. SBA relies on the firm to provide updates on changes  in ownership.
section_title: 8(a) Program Participation
paragraphs: Generally, firms, including ANC-owned firms, can remain in the 8(a)  program for up to 9 years, provided they maintain their eligibility. During  the first 4 years, known as the developmental stage of the program, firms  may be eligible for assistance including sole-source and competitive 8(a)  contract support, and training in business capacity development and  strategies to compete successfully for both 8(a) and non-8(a) contracts,  among other things. During the last 5 years of the program, also known  as a transitional period, firms are required to obtain a certain percentage  of non-8(a) revenue to demonstrate their progress in developing into a  viable business that is not solely reliant on the 8(a) program. SBA also  provides a variety of other types of assistance to firms during the  transitional phase of the program. In the later stage of the program, to  remain eligible for continued sole-source contracting opportunities,  participating 8(a) firms are expected to maintain a specific mix between  8(a) and non-8(a) contracts—assuming an increased number of non-8(a)  contracts as they matriculate through the program beginning in the fifth  year—and provide information to SBA on their achievement of  developmental progress through annual reviews. By the end of the  program’s term, firms are expected to attain a business mix from mostly  non-8(a) federal contracts. Figure 2 below outlines the expected  progression of a firm’s development in the program.
section_title: Roles and Responsibilities of SBA and Procuring- agency Staff
paragraphs: In general, SBA’s oversight and monitoring responsibilities for the 8(a)  program are delegated to its 68 district offices nationwide. The first point  of contact for an ANC-owned firm accepted into the program is the SBA  district office and the compliance staff—referred to as business  opportunity specialists—assigned to that firm. SBA’s district offices are  responsible for providing a combination of technical assistance/marketing  and monitoring activities. With regard to its monitoring activities, SBA’s  business opportunity specialists:  review annual updates provided by ANC firms as a key condition of  continuing in the program. review eligibility for contract offers, assess and update business name and ownership changes, assist firms in meeting their business acquisition targets; and process early graduations, withdrawals, or terminations.
As part of these monitoring steps, SBA’s business opportunity staff are  expected to coordinate contracting activities with procurement staff at  other federal departments and agencies. Agencies must indicate their  intent to award a procurement as an 8(a) contract by submitting a written  offer letter to SBA, unless the contract does not exceed the Simplified  Acquisition Procedures (SAP) threshold of $150,000 and SBA has  delegated its contract execution authority to the procuring agency. SBA’s  contracting staff are expected to review all awards over $150,000 and  may accept the award either as a competitive procurement—to be  competed among all eligible 8(a) firms—or as sole-source procurement in  support of a specific recipient. Internal coordinating responsibilities  include ensuring compliance with certain regulations related to sole  source contracts. Before SBA’s contracting staff accept an offered  procurement as an 8(a) sole-source contract, staff are expected to verify,  among other things, the proposed firm’s size status to ensure that it still  qualifies as small under the identified NAICS code.
Other federal agencies that would like to use SBA’s authority to offer  contracts to 8(a) ANC-owned firms also have an important role in the 8(a)  process. For sole-source awards, these agencies can identify ANC- owned firms to whom they want to offer contracts and submit those offers  to SBA for approval. In our prior work, agencies told us that the award of  these contracts to ANC-owned firms provides a streamlined contracting  process and assists agencies in meeting their disadvantaged small  business contracting goals.
section_title: 2011 Revisions and Updates to SBA’s 8(a) Regulations
paragraphs: In February 2011, SBA revised its regulations for the 8(a) Business  Development program by adding language that (1) restricted the award of  follow-on, sole-source 8(a) contracts to sister subsidiary firms owned by  the same ANC; (2) made minor technical updates to outdated terminology  regarding ANC ownership of multiple sister subsidiaries operating in the  same primary line of business; and (3) revised existing rules related to  ownership, compensation as a component of excessive withdrawals, and  ANC-owned firm benefits reporting, among other things.
The 2011 changes to the regulations include:
Follow-on, Sole-Source Contracts-Once an applicant is admitted to  the 8(a) program, it may not receive an 8(a) sole-source contract that  is a follow-on contract to an 8(a) contract that was performed  immediately previously by another participant (or former participant)  owned by the same ANC.
Sister Subsidiaries Sharing NAICS Codes-Sister-subsidiaries of an  ANC may not use the same NAICS codes for their primary lines of  business.
Other Reporting Requirements-A number of clarifications and  revisions were made to rules related to how compensation provided to  firm officials impacts SBA’s excessive withdrawal limits and the  provision of an annual benefits report for ANC-owned firms.  Specifically, SBA revised previous excessive withdrawal rules that, in  SBA’s opinion, unnecessarily hampered an 8(a) firm’s ability to recruit  and retain key employees or to pay fair wages to its officers. SBA, in  its new rule, clarified that officers’ salaries generally will not be  included within what constitutes a withdrawal unless, when looking at  the totality of the circumstances, SBA believes the compensation  represents an attempt to circumvent the excessive withdrawal limit.  When SBA determines withdrawals are excessive and detrimental to  the achievement of a firm’s business development goals, SBA may  initiate termination proceedings against a firm. Importantly, the  excessive withdrawal analysis does not apply to withdrawals made by  ANC-owned firms for the benefit of the ANC or the native or  shareholder community. SBA also updated the rules for excessive  withdrawals by increasing each maximum threshold amount by  $100,000. Therefore, withdrawals are deemed excessive if in the  aggregate during any fiscal year they exceed:  (i)  $250,000 for firms with sales up to $1,000,000;  (ii)  $300,000 for firms with sales between $1,000,000 and  (iii) $400,000 for firms with sales exceeding $2,000,000.
Finally, the rules also require ANC-owned firms to submit an annual  report on the benefits distributed to ANC or the community.
section_title: Weaknesses in SBA Oversight Limit its Ability to Enforce Prohibitions on Follow-On, Sole- Source Contracts to ANC Sister Subsidiaries
paragraphs: As we have reported previously, SBA’s ability to identify and enforce the  regulations that prohibit the award of follow-on, sole-source contracts to  subsidiaries of the same ANC is limited by a process that relies on the  information provided by federal contracting departments and agencies,  which we found in many cases to be incomplete. According to SBA  regulations, once an applicant is admitted to the 8(a) program, it may not  receive an 8(a) sole-source contract that is also a follow-on contract to an  8(a) contract that was performed “immediately previously” by another  participant (or former participant) firm owned by the same ANC. To  assess whether contract awards are in line with this prohibition, SBA  regulations require contracting agencies to provide an offer letter with  details on 17 items related to the contract, such as type of contract,  acquisition history (if any), contract value, and the names of any small  business contractors who have performed the requirement in the previous  24 months. Figure 3 below is an excerpt of the 8(a) program regulation  outlining the items that must be included in an agency offer to SBA.
Senior SBA officials in Anchorage, Alaska, who oversaw about 50 percent  of the active ANC firms in the program from fiscal year 2011 through  fiscal year 2014 (the period of our analysis) —informed us that they  enforce the regulation prohibiting the award of follow-on, sole-source  contracts to ANC sister-subsidiaries exclusively by reviewing information  provided in the procuring agency offer letters that agencies are required  by program rules to submit.
According to SBA officials we spoke with, and as we found in our review  of 30 large value sole-source contracts performed by 8(a) ANC-owned  firms, an acquisition history and information on previous small business  contractors was not always clearly provided by agencies in the offer  letters for the contracts. Two offer letters could not be located by SBA,  as a result we reviewed a total of 28 offer letters. Our analysis found that  3 of 28 offer letters lacked any information about the contract’s acquisition  history, and 13 did not provide information on the firms that performed the  work in the previous 2 years. However, if no acquisition history exists,  regulations do not require that fact to be included in the offer letter.  Likewise, regulations only require information on prior small business  contractors that performed the work in the previous 2 years, and other  types of firms need not be included in the offer letter. Table 2 outlines the  extent to which the offer letters addressed critical information necessary  for monitoring for follow-on, sole-source contracts.
Outlining the acquisition histories and information about the small  businesses that previously performed the work in the offer letters is  critical to enforcing the prohibition. However, as our analysis shows, SBA  did not regularly collect this information. SBA officials reported that they  can send correspondence to procuring departments and agencies  providing guidance on what information SBA needs to see when offer  letters fall short of the requirements. In our review of SBA files for the 30  selected cases, we did not find documentation that SBA conducted any  followed-up on nonresponses or instances where the responses provided  were unclear in offer letters by agencies prior to our request. As  highlighted in table 2, we found 8 cases in which the agency indicated the  previous acquisition history was not applicable; but then in the same offer  listed a prior small business contractor that performed the work in the  prior 2 years. In these cases, it is unclear whether the prior contractors  listed actually performed the same work. In all examples where it is  unclear, SBA cannot enforce its prohibition against sister-subsidiaries  receiving follow-on, sole source contracts without following up with the  agency to clarify its responses. When SBA does not have sufficient or  accurate information in offer letters, and does not follow-up to obtain this  information, the agency is not positioned to enforce its prohibition, as the  agencies do not know whether or not a firm is a sister subsidiary of the  prior small business contractor.
Additionally, we noted that SBA’s guidance on offer letters did not ask  specifically about whether the contract was a follow-on or not. Alaska  District Office officials—those officials responsible for reviewing sole- source offer letters for 50 percent of the active ANC-owned firms in the  program—agreed that it would be helpful if SBA required agencies to  specifically list whether a contract is a follow-on, sole-source contract in  their offer letter; as well as ensure that information about the incumbent  firm, or the small business that previously performed the contract, that  was awarded the previous contract, if there was one, is listed in their offer  letter. According to these officials, they have found that the omission of  this type of information in agency offer letters is sometimes due to the  inexperience of or lack of understanding of key 8(a) regulatory  requirements by procuring officials at other federal agencies, regarding  what they should provide to SBA, and noted that the lack of guidance and  training makes it difficult to fully meet program requirements. Senior  officials in SBA’s Office of Business Development, which has national  oversight of the 8(a) program, also agreed that obtaining additional  information in the procurement offer letters would be useful.
As a result of our site visit in October 2014, a senior Alaska District Office  official developed a template to send to agencies providing guidance that  specifically asks the agency to list whether a contract is a follow-on, sole- source contract in their procurement offer letters. The district office in  Alaska provided us with one example of an agency using their template  for an offer letter, which resulted in SBA obtaining the required  information on acquisition history and whether the contract was a follow  on. However, this positive change has not been adopted more broadly  across the agency.
We have previously reported that information about follow-on contracts is  not systematically collected or tracked by SBA or any other federal  database or system. We recommended in 2006 and again in January  2012 that SBA reinforce to procuring agencies the requirement to provide  the full acquisition history of the procurement in the offer letter, and direct  district office business opportunity specialists to focus on this issue when  they review offer letters for 8(a) firms. SBA neither agreed nor disagreed  with this recommendation but did state in August 2013 that additional  guidance regarding offer and acceptance will be fully delineated in the  revised 8(a) Business Development program Standard Operating  Procedures manual. As of October 2015, the guidance for SBA staff had  not been revised. Federal standards for internal control emphasize that  guidance is a necessary part of an effective internal control system and  should be periodically evaluated to ensure consistency and continued  applicability to existing controls, such as regulations.
We also found that SBA did not maintain all required documentation in its  files—such as offer letters, acceptance letters, and contracts—that would  have allowed the agency to examine its previous records to  independently determine whether contracts were follow-on, sole-source  contracts. In order to retain a delegation of SBA’s contract execution  and review functions, procuring agencies must report all 8(a) contract  awards, modifications, and options to SBA. According to SBA’s internal  guidance, district offices must maintain files for all contracts awarded  through the normal 8(a) review and approval process, to include all  necessary contract documents. For contracts awarded through an SBA  partnership agreement, the district office must maintain a copy of the offer  document and notice of award, or first page of the contract, in the firm’s  business development file. Additionally, federal internal control standards  require that agencies clearly document all transactions and other  significant events, and all documentation and records should be properly  managed and maintained. When SBA does not maintain such  documentation or take pro-active steps to collect this information when  not provided by the procuring agencies, it is impaired in its ability to  adequately monitor for follow-on, sole-source contracts. Table 3  summarizes the extent to which SBA was able to produce key documents  that can help monitor for follow-on, sole-source contracts for 30 selected  cases that exceeded the SAP.
As highlighted in table 3, SBA was unable to provide us with the offer  letters for 7 of the 30 contracts we reviewed, or 5 of 30 acceptance  letters. Additionally, SBA could not provide us with 22 of the 30 contracts.  For example, we found that SBA did not have any record of an offer letter  or an acceptance letter on file for one physical distribution/logistics  services contract valued at $337,000. Additionally, SBA officials reported  that they were not aware of this contract until we brought it to their  attention during the course of our review. When SBA checked with the  procuring agency, as a result of our inquiry, the agency supplied  information about the contract in lieu of an offer letter. SBA noted that key  documents were also missing for other selected contracts from this  agency. SBA officials stated that this could be an indication that the  agency procurement officer was not familiar with the terms of the  partnership agreement and the requirements of the 8(a) award process.
SBA officials in the Alaska District Office and the Headquarters Office of  Business Development stated that they face documentation challenges  such as those described above in enforcing regulations prohibiting follow- on, sole-source contracts to ANC sister subsidiaries, and that more can  be done by SBA to improve collecting data needed for this oversight.  They also noted additional ways to improve SBA’s enforcement of this  regulation, such as providing additional training on this requirement to  procurement agencies and additional guidance to SBA business  opportunity specialists on how to respond to this missing information  when determining whether to approve contracts.
While SBA offers training to agencies on how to award sole contracts  through the 8(a) program, the current training does not specifically  address how to monitor for the prohibited type of follow-on, sole-source  contracts. In 2006, we recommended that SBA improve its oversight  practices by providing more training to agencies on the 8(a) program to  specifically include segments that address ANC-owned participants. In  2012, we further recommended that SBA reinforce the requirement for  procuring agencies to provide the full acquisition history of the  procurement in the offer letter and to direct district office business  opportunity specialists to focus on this issue when they review offer  letters for ANC-owned 8(a) firms. SBA has taken some steps to address  these deficiencies such as offering training that addresses this  requirement.
In response to our draft report, SBA stated that—based in part on our  discussions with agency officials during this review—it provided training to  at least 19 different federal departments and agencies with over 1,070  contracting staff in attendance between fiscal year 2014 and 2015. SBA  also reported that some of these sessions were recorded so that the  information would be readily accessible for refresher courses as well as  new hire training. However SBA did not develop similar training efforts for  its own staff.
We continue to believe that there are opportunities to be more specific  about what information needs to be obtained from procuring agencies  because we found that the acquisition history and information on who  performed the work previously is still not always being provided or  sufficient enough for SBA to identify follow-on, sole-source contracts. In  order to help improve this information collection, SBA could enhance its  training to procuring agencies by specifically describing what the  agencies should include in their offer letters regarding sole source  contracts and the difficulty of enforcing the regulations without this  information. Similarly, SBA business opportunity specialists could benefit  from training that specifically addresses how to enforce this regulation,  including what follow-up steps need to be taken when agencies do not  provide adequate information and what to maintain in the files.
As we mention later in this report, SBA has yet to address problems with  the guidance in this area. The guidance that is used by business  opportunity specialists to administer 8(a) contracts is outdated—having  been last updated in 2008, 3 years before the change in the regulations— and also does not address how to monitor for the prohibited type of  follow-on, sole-source contracts. Ideally, when SBA updates its 8(a)  guidance, it will include information about how a business opportunity  specialist should collect information from agencies when offer letters do  not include adequate detail. Federal internal control standards suggest  that appropriate, policies and procedures exist with respect to an  agency’s activities. Without updated guidance in the form of policies and  procedures that specifically address specific monitoring issues for the  benefit of the business opportunity specialists, SBA will not be able to  enforce this regulation.
We provide more detail on the implications of SBA’s training efforts and  its guidance for implementing the 8(a) program later in this report.  Requesting that agencies specifically state whether a sole-source  contract is also a follow-on in offer letters, providing additional training on  this specific step to procuring agencies, as well as developing guidance to  SBA officials on rules for collecting this data—would better position SBA  to reduce potential violations of follow-on, sole-source contracting  regulations, and to prevent the improper award of contracts.
section_title: SBA Faces Oversight Challenges in Detecting 8(a) ANC Sister Subsidiaries Operating in the Same Primary Line of Business, and Steps to Address these Challenges Are Still Being Formulated
paragraphs: SBA faces oversight challenges to detect ANC-owned subsidiaries owned  by the same parent company from operating in the same primary line of  business because of limited: (1) data collection and tracking and (2)  information access and sharing across district offices, as we have  previously reported. SBA has recently initiated steps to address these  challenges, but these steps have not yet been completed.
subsections: section_title: Limited Data Collection and Tracking Poses Oversight Challenge for SBA, and the Agency’s Steps to Address this Challenge Are Incomplete
paragraphs: According to SBA officials, during enrollment and annual reviews, SBA  enforces its prohibition on sister 8(a) ANC-firms having the same primary  NAICS code. However, SBA’s current systems still do not collect and  track firms’ underlying revenue activity as we recommended in 2006 and  2012, including revenues generated from secondary lines of business that  would help SBA identify firms that are potentially circumventing the intent  of its prohibition. Specifically, SBA 8(a) regulations prohibit an ANC from  owning 51 percent or more of an 8(a) applicant that is the sister  subsidiary of another 8(a) participant, which either at the time of  application or within the previous 2 years, has been operating in the 8(a)  program under the same primary NAICS code as the applicant. The  prohibition’s goal is to assist ANC-owned firms with diversifying their  businesses in such a way that would enable them to survive in the market  after they leave the 8(a) program. Program rules permit 8(a) firms to  engage in secondary lines of work to promote their business growth.  Thus, SBA’s prohibition is intended to encourage 8(a) firms owned by the  same ANC to expand their business activities by having them primarily  engage in independent and viable businesses that perform separate and  distinct work.
In general, SBA enforces its prohibition when ANC-owned firms initially  enroll in the program and also during their annual reviews to ensure that  the same primary NAICS code that a firm provides is not also being used  by another sister firm owned by the same ANC. For example, according  to SBA officials, SBA’s Division of Program Certification and Eligibility  (DPCE) is required to verify that the primary NAICS code that an ANC- owned firm self-reports on its 8(a) application is not the same primary  code used by a sister ANC-owned firm who is also participating in the  8(a) program. This office is also tasked with verifying that the primary  NAICS code reported to SBA accurately represents the firm’s business  activities or intended business activities (in the case of newly organized  concerns). SBA officials also told us that the San Francisco district office  will also conduct this type of verification when a subsidiary submits a  formal request to change its primary NAICS code. After SBA reviews an  ANC-owned subsidiary’s primary NAICS code during enrollment, SBA  officials stated that district offices are to verify that the primary NAICS  code that a subsidiary submits to SBA during its annual review is the  same code that it reported during enrollment. However, beyond these  checks, SBA does not currently have a regular or ongoing monitoring  method or mechanisms in place for collecting and tracking firm activity,  including revenues, to help ensure that 8(a) ANC subsidiaries owned by  the same parent firm are not potentially circumventing the intent of SBA’s  prohibition as we have recommended in the past. Furthermore, under  SBA’s current regulations, after being certified to participate in the 8(a)  program, there is no requirement that an 8(a) participant actually perform  most, or any, work in the six digit NAICS code selected as its primary  business classification in its application, and SBA may, but has not yet,  revised its regulations to provide itself with the authority to unilaterally  change a firm’s primary NAICS code on its own. In fact, SBA permits 8(a)  firms to engage in secondary lines of work to promote their business  growth.
SBA’s ability to track which NAICS codes are generating revenues for  8(a) ANC firms is limited and represents a long-standing vulnerability that  we reported on before. For example, to help reduce this vulnerability, in  April 2006, we recommended that the agency collect and track the  revenues that subsidiaries generate under all their primary and secondary  NAICS codes. However, SBA did not indicate whether or not it planned to  implement this 2006 recommendation. In January 2012, we then  recommended that SBA develop a system to collect and track such  revenue to help ensure that sister subsidiaries under the same parent  company are not generating the majority of their revenue from the same  primary industry.
According to SBA officials, SBA attempted to design a database with the  purpose of tracking firm activity collected by existing systems, including  primary NAICS codes and revenues across the 8(a) program beginning in  December 2011. However, in March 2015, SBA officials told us that SBA  has decided to terminate this initiative because the database’s design  was not functional or compatible with existing SBA systems. SBA  officials told us that they were considering how their existing systems,  including the Business Development Management Information System  (BDMIS), can be improved to better support the agency’s oversight  efforts; however, they stated that they had no immediate plans or  timelines for when this new initiative would begin or be finalized. As a  result, SBA’s existing systems, including BDMIS, still do not currently  collect or track revenue amounts from primary or secondary NAICS code  sources, limiting SBA’s ability to help ensure that firms are complying with  both the letter and intent of its prohibition. Fully implementing our 2012  recommendation would help SBA to effectively monitor all subsidiary  activity and help ensure that such activity aligns with the goals of SBA’s  prohibition and 8(a) program.
SBA officials said that they are aware of some instances where ANC- owned 8(a) subsidiaries have potentially circumvented the intent of the  agency’s prohibition by entering the program under a primary NAICS  code, but perform little to no work under that code. SBA has found that  that these firms instead generate a greater portion of revenues in a  secondary line of work under a NAICS code that another existing sister  subsidiary uses as its primary NAICS code. According to SBA officials,  this activity does not violate the agency’s regulation because the  prohibition only applies to the sister subsidiary’s primary stated NAICS  code, and not to the underlying actual revenue that an ANC-owned  subsidiary generates in practice under other NAICS codes.
Because SBA does not require 8(a) firms to actually perform any work  under their stated primary NAICS codes, there are opportunities for ANC- owned subsidiaries to circumvent the intent of this prohibition by  generating a greater portion of revenues under a secondary NAICS code  that a sister subsidiary is using as its primary code. For example, out of a  non-generalizable selection of 39 parent ANCs we reviewed, we did not  detect instances where parent ANCs actually violated SBA’s prohibition  by owning multiple 8(a) sister subsidiaries sharing the same primary line  of business (expressed as a NAICS code). However, out of that same  selection, we found that from fiscal year 2011 through fiscal year 2014, at  least five ANCs owned multiple subsidiaries that generated less revenue  under their primary NAICS codes than what they generated under a  secondary NAICS code, which a sister subsidiary used as its primary  code. Further, two of these five parent ANCs owned subsidiaries that  generated no revenues under their primary NAICS codes from fiscal year  2011 through fiscal year 2014. If such activity is left untracked, a firm’s  secondary line of business could effectively become its primary revenue  source in the same line of business that its sister firm claims for its  primary line of business without actually violating the regulation. As  mentioned earlier, we reported on this vulnerability in 2006 and 2012.  Although this type of activity is not prohibited, as SBA has noted, it  potentially conflicts with the intent of SBA regulations aimed at  encouraging ANCs to ensure that their sister subsidiaries diversify their  lines of business and operate independently. This is to ensure that the  subsidiaries will be prepared to succeed as independent businesses in  the open market after they leave the 8(a) program.
In one of the five examples, a parent ANC (ANC-30) owned two sister  subsidiaries that concurrently participated in the 8(a) program from fiscal  year 2008 through 2013, and both generated revenue under NAICS code  561210, as shown in figure 4 below. However, Subsidiary 1 listed NAICS  code 561210 as its secondary NAICS code while Subsidiary 2 listed this  same NAICS code as its primary NAICS code. From fiscal year 2011  through 2014, Subsidiary 1 generated millions of dollars less in revenue  under its primary NAICS code 334511 than what it generated under its  secondary NAICS code 561210. (For illustrative purposes, see appendix  III for five examples of ANCs that owned subsidiaries that generated  millions of dollars in revenue in the same line of business as sister  subsidiaries, while generating millions of dollars less or no revenue under  their primary line of business. In this appendix, we do not illustrate all the  ANCs that owned firms that participated in this same activity during the  scope of our review.)
The firm activity we identified could be attributed to market conditions or  business opportunities as ANC and SBA officials have noted, but, as we  have previously reported, such activity warrants monitoring. According to  one ANC official at an ANC parent corporation, when a subsidiary  pursues work under multiple NAICS codes, the greatest portion of its  revenue may naturally fall from its primary NAICS code to a secondary  NAICS code from one year to the next due to market fluctuations or other  valid business reasons that are unrelated to an intention to circumvent  program rules. Likewise, SBA officials also told us that such behavior  could be attributed to market occurrences as ANC subsidiaries seek 8(a)  opportunities in diverse industries other than the industry for their primary  NAICS code. We believe that this is one possible explanation for such  behavior.
In February 2015, SBA proposed a rule that would effectively give it the  authority to change a subsidiary’s primary NAICS code when it finds that  the “greatest portion” of the subsidiary’s total revenues during a 3-year  period have evolved from its primary NAICS code to a secondary NAICS  code. According to SBA, this proposed rule will allow SBA to initiate a  change of the relevant firm’s primary NAICS code. If finalized as  proposed, the rule would require SBA to give an affected firm the  opportunity to provide any relevant information including revenues  generated in the commercial market, documentation of the pursuit of  contracting opportunities under the firm’s primary line of business to  establish that the firm’s primary NAICS code should not be changed. The  proposed rule was released for public comment in February 2015 and  had not been finalized as of October 2015. SBA officials indicate that  the proposed rule may be finalized by mid-March 2016.
During the course of this audit, in June 2015, SBA officials told us that the  agency had plans to take steps to further mitigate this potential  vulnerability by using a random surveillance method to track and monitor  the revenue generated under a subsidiary’s primary and secondary  NAICS codes. SBA planned to implement a random surveillance method  by incorporating this method with its continuing eligibility reviews.  Specifically, according to officials, this method would involve using FPDS- NG data to randomly select ANC-owned subsidiaries that generate less  or no revenue under their primary NAICS code while generating much  more revenue in another NAICS code that a sister subsidiary is using for  its primary NAICS code. This activity would have to occur over a period of  2 consecutive years. According to SBA officials, upon identifying such  activity, the subsidiaries would have been notified about SBA’s concern in  writing during their continuing eligibility review, and asked to take  precautions about engaging in this type of activity to avoid further action  by the SBA.
Officials reported that they planned to start using the surveillance reviews  by the end of September 2015. As of December 2015, SBA had not fully  documented and implemented its random surveillance method.  However, in February 2016, after reviewing a draft of this report, SBA  informed us that it had delayed plans for the random surveillance, and  had taken steps in the interim to begin monitoring the revenue generated  under a subsidiary's primary and secondary NAICS codes by tracking  award obligations for all entity-owned firms in a spreadsheet.
SBA stated that this spreadsheet will be updated annually and its  personnel will be provided instructions, consistent with a related proposed  regulation, on how SBA associates should review the tracking  mechanism. According to SBA, once the related regulations are finalized,  the tracking system will be posted to SBA's intranet, making it accessible  to all business opportunity specialists. However, in order to more  accurately reflect firm activity in an industry, SBA would need to track  revenues rather than just federal obligations, which may overstate or  understate the amount of income actually generated.
Internal control standards state that agency procedures, techniques, and  mechanisms to enforce management directives should be an integral part  of an agency’s planning and implementing efforts. As we have reported in  the past, developing and using specific milestones and timelines to guide  and gauge progress toward achieving an agency’s desired results is a  leading practice for effective strategic planning and management.  Documenting concrete timelines and milestones for implementing its  random surveillance monitoring method, will better position SBA to  effectively implement and operationalize its method for identifying firm  activity that may circumvent, intentionally or not.
section_title: Limited Information Access and Sharing Across District Offices Hinders SBA Oversight
paragraphs: Contributing to SBA’s challenges in tracking NAICS revenues are  limitations placed on SBA district office staff’s ability to access and share  important subsidiaries’ NAICS codes across district offices. For example,  SBA officials told us that their business opportunity specialists are  responsible for overseeing 8(a) ANC-owned firms serviced across SBA’s  68 district offices. At each of SBA’s 68 district offices, the business  opportunity specialists use the same internal database, including the  BDMIS, to access and share subsidiary data for the ANC-owned firms  that they are responsible for servicing—including the primary and  secondary NAICS codes approved for use by the 8(a) participant.  However, officials from SBA’s Headquarters and four district offices told  us that the agency’s system rules and strict access privileges within these  systems restrict business opportunity specialists from accessing and  sharing NAICS code data across district offices. This includes NAICS  code data for subsidiaries that their offices do not service, but are owned  by the same parent ANC that owns subsidiaries that they do service. SBA  officials told us that this access limitation can also occur within a district  office when different business opportunity specialists are responsible for  servicing different subsidiaries that are owned by the same parent ANC.  SBA officials in headquarters told us that these access limitations are  used to protect the privacy—the individual confidential business and  financial information—of ANC subsidiaries.
Although we recognize privacy concerns as a legitimate reason for  limiting access, federal internal control standards require that program  data should be recorded and shared with staff in a form that enables them  to carry out program controls and determine the extent to which  compliance with various laws and regulations is occurring. Our review  indicates that such limitations can hinder business opportunity specialists’  ability to systematically identify and examine relevant firm activity,  including NAICS codes, of ANC-owned sister subsidiaries who are  serviced by different district offices, and potentially circumventing the  intent of SBA’s prohibition.
In May 2015, SBA’s Associate Administrator for the 8(a) program  confirmed that limited information sharing across district offices creates  vulnerabilities in program oversight. As a result, the Associate  Administrator told us that the agency has plans to develop a more  centralized and comprehensive oversight strategy. The new approach  would give certain oversight staff the responsibility of accessing and  monitoring relevant information for ANC-owned subsidiaries being  serviced across different district offices, which would supplement the  monitoring efforts of SBA’s district offices. This strategy would include  monitoring for ANC compliance pertaining to all sister-subsidiaries being  serviced across different district offices or business opportunity  specialists. However, SBA officials told us that they do not have firm  dates or specific plans for fully implementing this proposed monitoring  strategy. Later in this report, we discuss what factors have affected the  progress of implementing this strategy.
As the Associate Administrator develops plans to create, document, and  implement the program’s new centralized and comprehensive oversight  strategy, officials have an opportunity to design an approach that upholds  the privacy of information captured in the BDMIS database, while  providing for the appropriate level of sharing and access to relevant  subsidiary data, including NAICS code information, for tracking and  monitoring purposes. However, it may be more effective and efficient for  SBA to implement this oversight strategy after it implements our 2012  recommendation that SBA collect and track the underlying revenue  activity generated under all NAICS codes.
As of October 2015, SBA does not have a database that collects and  tracks the underlying revenue activity that firms generate in their primary  and secondary NAICS codes, as we recommended SBA develop in 2012.  As stated earlier, internal control standards state that agency procedures,  and mechanisms to enforce management directives should be an integral  part of an agency’s planning and implementing efforts. The appropriate  level of access to and sharing of relevant NAICS code data, including  revenue data, will be an important control for SBA to include in its  planning and implementation of the database that we recommended it  develop in 2012, and its enforcement of its prohibition. Until SBA designs  and implements such a database, the comprehensiveness of its oversight  strategy, once implemented, will be limited to providing access to and  sharing of NAICS codes themselves. It will not address the underlying  revenue activity generated under those codes, which will give SBA limited  assurance that the activities of sister firms align with intent of SBA’s  prohibition while the firms are serviced across different district offices.
section_title: 8(a) ANC-owned Firms Report Data on Distributed Benefits, Compensation and Revenues, But Missing Compensation Data May Limit the Alaska District Office’s Oversight of the Firms It Services
paragraphs: 8(a) ANC-owned firms self-report information on their benefits and  compensation to SBA, but varying and missing information on  compensation—including data used to determine whether withdrawals of  funds from the company were appropriate—may limit SBA’s efforts to  assess compliance with related reporting requirements.
subsections: section_title: Most 8(a) ANC-owned Firms Selected Provided Information on Benefits and Revenues Distributed to the Community
paragraphs: Most of the 8(a) ANC-owned firms in our non-generalizable sample of 26  firms provided information on the benefits distributed to the ANC or the  Native community. In February 2011, SBA promulgated a rule requiring  ANC-owned firms participating in the 8(a) program to annually report  information on how they distributed benefits to their communities. Reports  are to include information showing how 8(a) program participation has  provided benefits to the native members or community, including  information about funding cultural programs, employment assistance,  jobs, scholarships, internships, subsistence activities, and other  services.
SBA’s OIG reported in July 2009 that the revenues generated from the  8(a) program by 8(a) ANC-owned firms may be shared by hundreds, and  sometimes even thousands of native shareholders unlike other 8(a)  businesses—whose revenues generally go to one or two disadvantaged  individuals. SBA officials told us that one intended use of the benefit  reports submitted by ANC-owned firms may be to respond to audits and  congressional inquiries about the benefits of the 8(a) program. According  to our analysis, 22 of the 26 ANC-owned firms in our non-generalizable  sample submitted some form of benefits report between calendar years  2011 and 2014. Of the remaining 4 firms, 2 did not file any reports, and 2  other firms were either new entrants or completers of the program and  were not required to submit any reports between 2011 and 2014. The  Alaska Deputy District Director told us that SBA has not taken action  against the 2 firms that did not submit any reports because the rules  related to how the reports should be structured have yet to be finalized.  What has been submitted to SBA varied in terms of the detail provided in  the report, ranging from a very general paragraph submitted by one ANC  firm about distributions made over a 3-year period to a longer 13-page  report submitted by another firm detailing specific benefits provided to the  community. Formalizing the approach for the benefits report will be a  good first step in collecting and utilizing these important data. See  appendix III for an abridged example of a benefit report.
SBA also collects annual updates on the revenues made by ANC-owned  firms participating in the program. As part of their submission, 8(a) ANC- owned firms provide information about the revenues associated with their  participation in the 8(a) program as well as the non-8(a) federal contracts  awarded over the program year. Two of the district offices we spoke  with indicated that they use this information to monitor the achievement of  business activity targets starting in the program’s fifth year. For the 4  years included in our review, these firms collectively accumulated slightly  over $1.4 billion in 8(a) and non-8(a) revenues. See app. IV for  additional information on the revenues generated under the program.
section_title: Missing Information on Compensation May Make it Difficult for SBA to Identify Violations of Program Rules
paragraphs: Our review found that 8(a) ANC-owned firms serviced by the Alaska  District Office—which represent 18 of the 26 8(a) ANC firms we  reviewed—were allowed by the Alaska District office to provide varying  levels of detail about compensation—including non-responses—in their  annual updates despite the rules, which may make it difficult for this office  to determine if firms have violated excessive withdrawal rules. SBA  regulations and the agency’s 2008 program guidance call for firms to  provide records of all payments, compensation, and distributions  (including loans, advances, salaries and dividends) made by the firm to  each of its owners, officers or directors or to any person or entity affiliated  with any of those entities each year to their assigned SBA district office.
We reviewed the compensation-related information for a non- generalizable sample of 26 8(a) ANC-owned firms required to submit this  information to SBA. Of these, 10 firms consistently answered all  questions in their annual updates related to compensation from calendar  year 2011 through 2014. By contrast, another 5 firms provided no  details on compensation at the subsidiary level, but indicated in the  reports submitted to SBA that the compensation was paid by the parent  corporation. Another 7 firms were missing at least one year of  compensation data. One firm that participated in the program between  2011 and 2013 did not provide any compensation data for those 3 years,  and withdrew from the program in 2014. One firm entered the program in  2014 and a final firm exited the program in 2011. Thus, there were no  reporting requirements for these two firms.
While we could not thoroughly examine whether all firms were complying  with compensation-related regulations because of some limitations in the  information that SBA collected, we were able to analyze a smaller number  of firms that provided compensation data for all years in which they were  program participants from our non-generalizable sample of 26 firms by  their average annual sales between calendar years 2011 through 2014.  Based on our review of the files provided, the overall compensation for  firms’ executives ranged from $0 to $820,793 annually as shown in table  4.
A key limitation of the data we reviewed was that not all firms provided  compensation for all review years; in other instances we also noted that  some firms did not provide any compensation to their executives, instead  their parent corporation did. Our review also identified other differences  that were reported about compensation to SBA from year to year for the  same firms. For example, one ANC-owned firm in the construction  industry provided compensation data for its president and chief executive  officer for calendar years 2011 and 2013; but did not provide the same  information in calendar years 2012 and 2014. Another ANC-owned  subsidiary reported that its parent corporation paid the compensation for  its officers for 2011 through 2013, but did not provide details on the  compensation paid in those years. However, in its 2014 annual review,  this same firm reported that its parent corporation compensated its  general manager nearly $240,000. Another firm sent an e-mail to SBA in  2011 indicating that its parent corporation paid an executive’s salary, and  reported “not applicable” for compensation paid in 2013 and 2014. In this  instance, SBA did not ask for an updated attestation from the firm each  year as to who paid the executive’s salary, and continued this firm’s  eligibility based on that 2011 e-mail.
The range in compensation is reflective of the complexity and diversity of  ANC-owned firms. For example, according to three ANC association  experts we interviewed, the compensation provided to officials and  managers of ANC-owned firms is based on what the market will bear and  similar to how compensation is set for other corporate firms. Additionally,  according to these officials, compensation will vary according to the  structure or development phase of the company and regardless of  whether a manager is a native member or not. Because the size and  structure of these subsidiary firms vary, we could not conduct  comparisons within the group or to other firms in the private sector.
Although SBA requires compensation data on a firm’s owners, officers,  and directors annually, the Alaska district office did not collect this  information consistently. For example, a senior official within the Alaska  District Office told us that they do not collect this information because,  based on their interpretation of the law, they believe 8(a) ANC-owned  firms are exempt from providing this information. However, officials at  district offices in Washington, D.C. and Richmond, Virginia—offices that  service relatively fewer 8(a) ANC-owned firms than the Alaska district  office—told us that non-responses are unacceptable under the rules of  the program because non-responses are not allowed for other types of  firms participating in the program. SBA has placed a statement on the  forms that collect this information that there are no exceptions when  reporting compensation data. SBA can build upon this initial step by  outlining these same rules in program guidance. When these offices  receive non-responses, officials at district offices in Washington, D.C. and  Richmond, Virginia told us that they reportedly follow-up with firms  regardless of whether a firm is owned by an ANC to obtain the missing  information. Further, according to one senior district official in the  Richmond District Office, the office takes additional steps to suspend any  firms from receiving new contract awards until the required information is  provided in line with their typical 8(a) practice.
As noted above, one 8(a) ANC-owned firm did not provide any  information about compensation; however, the business opportunity  specialist assigned to the firm took limited steps as part of the annual  review process to collect this information. For example, the business  opportunity specialist assigned to this review did not follow up with the  firm to get the omitted information or take any adverse actions, such as  recommending the initiation of termination proceedings for failure to  provide the required information. Instead, the business opportunity  specialist indicated in the review that the firm’s continued participation in  the program was deemed beneficial to the continued development of the  firm. Program rules developed by SBA’s headquarters indicate that all  firms are expected to provide these data annually as a condition of  continued program participation.  8(a) ANC-owned firms must also ensure that their officers’ compensation  does not circumvent SBA’s excessive withdrawal limitations. As we  discussed previously in this report, excessive withdrawals are defined  under the 8(a) program as any cash dividends; distributions in excess of  amounts needed to pay taxes; cash and property withdrawals; payments  to immediate family members not employed by the participating firm;  bonuses to officers; and investments on behalf of an owner. However,  the excessive withdrawal restrictions do not apply to ANC-owned firms  where a withdrawal is made for the benefit of the ANC or the native or  shareholder community. It does, however, apply to withdrawals from an  ANC-owned firm that do not benefit the relevant entity or community,  such as funds withdrawn for the benefit of a non-native manager or owner  that exceed certain thresholds. Although officers’ salaries are generally  not considered withdrawals, SBA does count those salaries as  withdrawals where it believes that a firm is attempting to circumvent the  excessive withdrawal limitations through the payment of officers’  salaries. There are strict regulations limiting how much can be  withdrawn from a firm for purposes other than benefiting the ANC or  native or shareholder community, as SBA believes excessive withdrawals  are contrary to the development of a fledgling business. According to  the guidance last issued by SBA in 2008, excessive withdrawals are to be  calculated by SBA business opportunity specialists during annual reviews  by reviewing 2 years of withdrawals, and the firm’s sales data.
We found that district offices vary in their practices of applying the  program’s excessive withdrawal rules and their subsequent determination  and calculation of such withdrawals. For example, according to one  official at the Richmond, Virginia District Office, compliance staff cannot  determine whether excessive withdrawals occurred without ANCs  providing individual compensation worksheets to SBA. However, when  determining whether excessive withdrawals took place, the Washington,  D.C. District Office considers all information from a firm’s consolidated  financial statement instead. Finally, and unlike the other two district  offices, as previously noted, the Alaska District Office accepts responses  of “not applicable” or blanks on compensation data provided by ANC- owned firms making it difficult to consistently assess compliance with  excessive withdrawal requirements.
According to senior officials in these offices, the variation in the practice  of calculating excessive withdrawals is due to the lack of specific updated  guidance on what financial information they are required to collect from  ANC-owned firms since SBA’s last guidance on this issue was issued in  2008 and there have been changes to the regulations since then. Without  a consistent approach and updated guidance, the agency may not be  aware when a firm has exceeded withdrawal limits or is using withdrawals  in ways that differ from what is allowed under the regulations. SBA  officials reported that they are currently developing program guidance,  which is subject to agency clearance at the end of September 2015 and  was scheduled to be finalized by December 31, 2015. Thus, as this  guidance was in draft at the time of our review, we were unable to assess  the extent to which the updated guidance will clarify what financial  information the district offices are required to collect from ANC-owned  firms.
section_title: Weak Management Controls Have Hindered SBA’s Program Oversight
paragraphs: Weaknesses in SBA’s data collection, supervisory review, staffing, and  program guidance has contributed to weak program oversight and  monitoring of ANC 8(a) firms. During the course of our review, SBA took a  temporary step to address some of the deficiencies identified in our  review and stated that it was planning longer-term actions to further  strengthen controls.
subsections: section_title: SBA’s Documentation of its Oversight of ANCs Was Incomplete and Inconsistent
paragraphs: As discussed throughout this report, we found that incomplete or  inconsistent documentation regarding ANC-owned firms limited SBA’s  oversight of the regulatory requirements we examined (i.e. the  prohibitions against awarding sister subsidiaries follow-on, sole-source  contracts; sharing of primary NAICS codes by sister subsidiaries; and  annual reporting requirements for ANC-owned firms). The information  SBA provided in response to our requests was sometimes incomplete  and the level and type of required documentation obtained varied  between district offices. For instance, SBA requires firms to submit  updated information for annual reviews of their continued eligibility for the  program. From the non-generalizable sample of 26 ANC-owned firms we  used to analyze compensation and revenues, our review found that five  firms did not submit at least one annual review during the time they  participated in the program. SBA guidance requires SBA business  opportunity specialist to enter this information electronically into the  system that maintains annual reviews and other documents. When these  documents are missing, SBA cannot be assured that the firm is  continuing to meet its program goals or remains eligible for the program.  Additionally, and as we noted previously in the report, SBA was only able  to provide 23 of 30 agency offer letters for 8(a) contracts that we  requested for our review of contracts that may have been follow-on, sole  source contracts. When SBA does not properly maintain these  documents, it is limited in its ability to enforce the prohibition against  follow-on, sole-source contracts.
SBA also faced significant challenges in providing us with basic  information on 8(a) ANC-owned firms, such as the total number of firms  serviced by the agency. For example, it took 3 months for SBA to provide  a list of ANC-owned firms in the 8(a) program, and on three separate  occasions SBA officials provided three separate numbers for the total  number of ANC 8(a) participants—ranging from 226 to 636. GAO’s  guidance on data reliability suggests that data should be accurate, valid,  and complete. Reliable data means that program data are reasonably  complete and accurate, can be used for their intended purposes, and  have not been subject to inappropriate alteration. Additionally, federal  internal control standards require that agencies maintain adequate  documentation that clearly records all transactions or significant events,  that these documents are readily available for inspection and review, and  that it is useful to managers in their daily operations.
Senior program officials we spoke with and a district office official in  Alaska agreed that this was a program weakness and they need to better  document 8(a) ANC-owned firm activities. Both a senior and district office  officials in Alaska cited various reasons for the state of the files we  requested for review, including frequent staff turnover. An Alaska district  official also stated that a departing staff member did not record or save  key contract and financial documents for an unknown number of ANC- owned firm files. SBA’s inability to account for and make available  principal information on all of the ANC-owned firms participating in the  program raises concerns about the integrity of the agency’s internal  controls and ability to provide effective and sustained oversight. Unless  SBA collects documents related to follow-on, sole-source contracts,  benefits distributions, compensation data, the excessive withdrawals that  do not benefit the ANC or the native or shareholder community, as well as  the submission of the annual reviews themselves, SBA’s ability to provide  effective oversight of key program areas will be limited.
In response to a draft of this report, SBA stated and provided  documentation that, in 2015, SBA staff in the Alaska District Office  received detailed training on what SBA officials described as 8(a) critical  procedures including file management, annual review processing, and  related documentation. SBA also reported that its next steps are to  continue ongoing training and mentoring in 2016 with monitoring of  performance metrics and regular check-ins with the Office of Field  Operations team by the Alaska District Office. SBA’s actions to address  the oversight staff’s knowledge gap and limitations we identified in our  review confirm that there was a need to improve the enforcement of  oversight activities. The new briefings, training, mentoring, and follow-up  monitoring are an important first step toward improving internal control in  the Alaska District Office. However, it will not be clear whether these  initial steps have resulted in more effective oversight of key program  areas, until SBA can demonstrate that the agency is appropriately  documenting ANC-owned firm files by providing documentation that is  complete and accurate.
section_title: Inconsistent Supervisory Review of ANC Transactions and Related Documentation from Alaska District Office Increases SBA’s Vulnerability to Potential Fraud
paragraphs: Our review of 26 ANC-owned firms’ annual reviews files from the Alaska  District Office showed that there was inadequate supervisory review for  several of the annual reviews conducted by the business opportunity  specialists overseeing these firms, and in some cases there was no  appropriate segregation of duties for these reviews. ANC-owned firms  must submit annual reviews to their district offices documenting their  progress over the program year. Business opportunity specialists review  the report and determine whether a firm has maintained its eligibility for  the program. In our review of a non-generalizable sample of 26 sets of  annual updates submitted to SBA by ANC-owned firms between 2011  and 2014, 10 annual reviews lacked appropriate supervisory review.
Although SBA has policies for supervisory review of its annual reviews,  which involve three levels of assessment before a determination of a  firm’s continued eligibility is finalized, it appears that the Alaska District  Office did not consistently follow these procedures. In 6 cases, the  business opportunity specialist who initiated the review of the annual  review also reviewed their own work. In these cases they also decided  whether a firm could remain in the program. Federal internal control  standards state that appropriate organizational structure and supervisory  responsibilities that establish a separation of duties are integral  components of effective oversight. Consistent with these standards, key  duties and responsibilities, such as reviewing annual reports submitted by  participating ANC-owned firms, need to be divided or segregated among  different people to reduce the risk of error or fraud. No one individual  should control all key aspects of a transaction or event. Without adhering  to the supervisory review and separation of duties outlined in SBA’s  internal guidance, the agency limits its oversight of ANC-owned firms, and  is more vulnerable to potential noncompliance of SBA regulations by the  firms or SBA staff. Unless SBA takes steps to strengthen its enforcement  of supervisory review practices at this particular district office and ensures  that its duties are properly segregated and supervised, the agency will  continue to be vulnerable to improperly executed annual review  processes and may unknowingly allow potentially ineligible ANC-owned  firms to stay in the program.
In response to a draft of report, SBA officials reported and provided  documentation that SBA staff in the Alaska District office received  detailed training on what SBA officials described as 8(a) critical  procedures including secondary reviews and approvals, in 2015. SBA  also reported that its next steps are to continue ongoing training and  mentoring in 2016 with monitoring of performance metrics and regular  check-ins with the Office of Field Operations team by the Alaska District  Office. SBA’s actions to address these limitations confirm that there was a  need to improve the enforcement of this oversight activity. The new  briefings, training, and mentoring are an important part of establishing the  right internal control environment. However, until SBA can provide  evidence over time that adequate separation of duties and supervisory  review are consistently being implemented, we will not be able to  determine whether these initial steps have resulted in more effective  implementation of these key internal control process.
section_title: SBA’s Alaska District Office Staffing Challenges Hinder Program Oversight
paragraphs: SBA officials reported that the frequent staff turnover has directly  contributed to the limited number of staff in the Alaska District Office with  ANC-owned firm expertise, limiting their ability to conduct effective  oversight of the ANC program. As previously noted, the limited number of  staff in the Alaska District Office has been a long-standing issue, and was  also identified as a challenge during our site visit to that office in October  2014. According to an SBA memo, and in line with our own site visit  observations, because of the current staff levels in the Alaska District  Office, supervisory review of contract monitoring activities and annual  reviews fell behind, resulting in a backlog of oversight duties.
From 2012 to 2014, according to officials, staff attrition in the Alaska  District office reduced the number of staff from five full-time business  opportunity specialists generally overseeing about 60 firms each to 1 full- time and 1 part-time staff overseeing all the ANC-owned firms. In  addition to reviewing annual updates, according to Alaska district office  officials, that district office can also expect to oversee hundreds of  separate contract actions submitted by departments and agencies to the  8(a) and other programs in any given fiscal year, and is one of SBA’s  busiest offices for the program. SBA officials, external stakeholders, and  both GAO and SBA’s OIG have previously reported that the number of  staff historically assigned to the Alaska District Office were not adequate  to address the demands for services needed from this office.
According to a senior official at SBA and another in the Alaska District  Office, in addition to the unusually high workloads assigned to each  business opportunity specialist, the attrition in the Alaska District Office in  recent years can be attributed to the agency undertaking Voluntary Early  Retirement Authority (VERA) and Voluntary Separation Incentive program  (VSIP) efforts. According to an SBA official, the agency did not fully  account for the impact of the VERA/VSIP on this district office, and  therefore did not take steps to retain staff in offices already struggling with  limited staff—such as the Alaska District Office. As a result, several  officials reported that institutional knowledge greatly diminished at all  levels of the 8(a) program and especially in the Alaska District Office,  which contributed to challenges in performing SBA’s oversight activities.  The Deputy Associate Administrator for Field Operations told us that  ideally the office would employ five staff based on the current caseload of  ANC-owned firms in that district office, and each of these staff would be  assigned no more than 100 or more firms. As of April 2015, the agency  increased its staffing by two business opportunity specialists. However,  two additional staff falls short of what a senior official at headquarters and  an official at the district office consider to be the optimal staffing level for  the Alaska District Office.
Officials note that there are a few complications to hiring additional staff  including the requirement for new business opportunity staff to have  federal contracting skills, which is one of six areas with critical skill gaps  that are in high demand government-wide; and the agency’s current  budget, which accommodates no more than three business opportunity  specialists at this district office. In its comments on our draft report, SBA  stated that it has plans to hire another staff person in 2016 who will serve  as an economic development specialist. However, based on our review of  the supporting documentation that SBA submitted to us for this position,  the economic development specialist’s roles and responsibilities involve  limited monitoring.
We have previously reported that to meet and address mission critical  needs, agencies must not only determine the critical skills and  competencies that will be needed to achieve current and future  programmatic goals, which SBA officials reportedly have done; but they  must also develop strategies that are tailored to address gaps in number,  deployment and alignment of human capital approach for enabling and  sustaining the contributions of all critical skills and competencies.  Taking these steps, especially when facing fiscal constraints, is essential  to agency’s ability to address its needs. SBA was unable to produce any  workforce planning report, even though SBA’s OIG recommended that  they perform a workforce analysis in 2008. Until SBA develops a  comprehensive approach to staffing its Alaska District Office, as  previously recommended by the OIG, to include better workforce  planning, such as managing attrition and retirements—it will likely  continue to struggle with meeting the demands of its monitoring  responsibilities.
section_title: SBA Actions to Enhance Program Controls and Oversight Not Guided by Documented Plans and Milestones
paragraphs: During the course of our review, SBA took some steps to address some  of the deficiencies identified in our review, including taking short-term  actions to immediately address short-comings in the Alaska District  Office’s oversight processes and longer-term steps to establish a  continuing eligibility review unit and develop updated 8(a) guidance—but  could not provide a firm plan or dates for the latter efforts.
subsections: section_title: Short-term Actions to Address Deficiencies in the Alaska District Office
paragraphs: During the course of our review, SBA initiated some short-term actions  that are intended to address some of the deficiencies identified in our  review. For example, as a result of concerns expressed by 12 parent  ANCs related to foregone contracting opportunities and delays in  processing applications for entry by their subsidiaries into the program,  one official told us that SBA conducted an accountability review of the  Alaska District Office’s oversight of ANC-owned firms in October 2014.  According to this senior official, SBA found similar deficiencies to those  we noted—including the lack of supervisory review, no appropriate  segregation of duties, and inadequate staffing. Senior officials began  taking several actions to address the problems identified, including  reassigning 150 8(a) files—including ANC-owned firms and others—to  other district offices in SBA’s Northwest Region for at least the next year  and a half, reallocating the approximately 70 remaining 8(a) firms  between the two business opportunity specialists in the Alaska District  Office; and taking personnel actions including reassigning, retraining, and  hiring new staff.
According to a senior SBA official, the reassignment of the files is a short- term solution intended only to redistribute some of the workload for a  period of time, and is not intended to last more than 18 months. Table 5  outlines the redistribution of 8(a) files to other offices. One senior official  indicated that the servicing of ANC-owned firms is best handled out of  Alaska where the contracts with these firms are likely to be awarded and  also originate. These efforts along with SBA’s recent efforts to hire  additional business opportunity specialists are a good first step towards  addressing its needs and may provide short-term improvements.  However, until SBA develops a longer term human capital strategy and  addresses the internal control issues we identified these efforts will likely  fall short of the sustained oversight that is needed.
SBA has initiated some long-term actions to address its oversight  challenges but lacks written plans and time frames for carrying them out.  According to senior SBA officials, SBA planned to create a new  continuing eligibility review unit in response to our previous  recommendations to carry out duties outlined in the Business Opportunity  Development Reform Act of 1988. According to officials, beginning in  2014, SBA took steps to realign continued eligibility reviews as a separate  and distinct function from the annual review process currently handled  through the district offices. Although program officials reported taking  some initial steps to establish a continuing eligibility review unit that will  carry out these functions, such as conducting a number of trial run  reviews in early fiscal year 2015, it lacks a final comprehensive written  plan for systematically guiding the launch of this undertaking. According  to the new Associate Administrator of Business Development, setting up  a new continuing eligibility review unit is one of six priority areas to be  addressed through recent changes in the office’s leadership. This  official and other senior officials from Business Development told us that  the continuing eligibility review unit will be designed to ensure better  compliance with 8(a) rules by taking a more detailed look at the financial  documents provided by ANC-owned firms and verifying the self-reported  information supplied, among other things. Also according to the new  Associate Administrator for Business Development, this office will be  designed to supplement the efforts of the district offices because the high- level annual reviews generally undertaken by the district offices have not  been an adequate monitoring tool. However, SBA officials lack a  comprehensive plan for managing the continuing eligibility review unit.  When we asked SBA officials about specific details of their plans, they  were not able to provide us with any firm dates or a written business plan.  These officials said they could not share any documentation related to the  practices they discussed because they are still under development.
According to the senior officials, the new continuing eligibility review unit  has been fully staffed. However, the office lacks formal policies and  procedures, and clearly defined roles and responsibilities to guide its  activities. According to the officials, part of the delay in addressing these  issues is due to change in leadership for the office and the appointment of  the new Associate Administrator for the program. The officials also told us  that while they continue to set up this office and begin its activities, they  have trained staff in some of the district offices to undertake reviews of  firm eligibility. According to officials, this office has conducted a number of  reviews in fiscal years 2015 and 2016. However, SBA did not share  detailed findings from these reviews. Federal internal control standards  state that a critical part of establishing an effective control environment is  to identify and define required tasks, and that the agency has written  documentation such as policy and procedure manuals that describes  these tasks. While SBA has taken some initial steps to establish a  continuing eligibility review unit structured to conduct more thorough  review of ANC’s continued eligibility in the program, until the agency  completely outlines and implements a plan for the functions and tasks the  continuing eligibility review unit will undertake, including clarifying the  associated time frames for establishing a fully-functioning office,  potentially ineligible firms may continue to be enrolled in the program.
section_title: Actions to Finalize Program Guidance
paragraphs: SBA has not finalized its guidance that would address the 2011 regulatory  changes related to ANC-owned sister-subsidiaries receiving follow-on,  sole-source contracts, sister subsidiaries sharing primary NAICS codes,  and excessive withdrawals. For example, SBA’s existing guidance, which  has been in effect since 2008, does not provide detail as to how business  opportunity specialists are to specifically address whether a sole-source  contract is a follow-on contract. Federal standards for internal control  suggest that information should be recorded and widely communicated to  management and others within agencies that need it, in a form and  timeframe that enables them to carry out program controls and other  responsibilities. These standards also emphasize that guidance is a  necessary part of an effective internal control system. Additionally,  guidance is to be periodically evaluated to ensure consistency and  continued applicability to existing controls, such as regulations. A senior  official told us that SBA continues to develop this guidance and process  the draft document through its internal clearances. However, the issuance  date for the document has slipped repeatedly because of internal  differences of opinion on what should be included and changes in  leadership over the process, according to one senior official. Finally, in  September 2015, an official reported that the document is scheduled for  agency clearance at the end of September 2015 and was to be finalized  by December 31, 2015. As our audit concluded, SBA did not make its  scheduled target to issue its updated guidance in December 2015.  Because of this, we cannot assess and discuss the extent to which it  includes changes that reflect the 2011 regulatory updates, or whether the  guidance is capable of providing a consistent approach to monitoring  firms.
section_title: Conclusions
paragraphs: Federal agency obligations to ANC-owned firms participating in the 8(a)  program represent a sizeable share of total obligations made to all firms  participating in the program, with SBA contracts to 8(a) ANC-owned firms  totaling about $4 billion and representing about a quarter of all 8(a)  obligations made in fiscal year 2014. Given the magnitude of these  obligations and because ANC-owned firms are exempt from some  regulatory requirements in the 8(a) program, heightened attention is  needed for firms participating in the program. Our prior reports on the  program have detailed several long-standing deficiencies and many of  these vulnerabilities and deficiencies still exist.
While SBA has taken some steps since 2011 to improve its oversight of  ANC-owned firms in the 8(a) program, the agency’s ability to enforce  regulations that prohibit the award of follow-on, sole-source contracts to  subsidiaries of the same ANC is limited by its reliance on incomplete  information from contracting agencies. Obtaining complete data on follow- on, sole-source contracts, in addition to providing specific training and  providing guidance to agencies on complying with the related policy,  would improve SBA’s internal controls related to this regulation and limit  the potential to award these set-aside contracts to firms that are ineligible  to receive them. SBA addressed some of the recommendations we  previously made to strengthen their oversight. However, because  limitations in SBA’s processes for overseeing compliance with sole- source contract rules persist, additional actions would be beneficial.
Further, the goal of SBA’s 8(a) program is to assist small businesses in  developing self-sustaining operations that can graduate from the program  and operate independently; therefore, SBA prohibits 8(a) ANC-owned  sister subsidiaries from sharing the same primary NAICS code. However,  limitations in SBA’s internal controls, including the lack of consistent,  ongoing reviews and tracking of NAICS codes and revenue data and  limited access to relevant data for affiliated ANC subsidiaries that share  the same NAICS code while being serviced across district offices, may be  allowing some sister firms to primarily operate in the same line of  business. The limitations could be mitigated by implementing  recommendations we made in our 2012 report to effectively track NAICS  revenue data, as well by taking additional steps to conduct regular  reviews of NAICS revenue data. However, SBA officials also need to  provide responsible staff with an appropriate level of access to the  relevant data needed to more effectively monitor ANC subsidiaries.  Although SBA has taken steps in the right direction by drafting a  proposed rule that would provide the agency with the ability to change  NAICS codes to industries where firms are actually receiving most of their  revenue, without the proper tracking and visibility that we describe above,  this rule will be difficult to implement effectively.
Overall, SBA has struggled to articulate and execute its oversight strategy  over 5 years after updating its regulations. For instance, we found that its  lack of updated program guidance on the 2011 regulations and limitations  in information systems affected the agency’s ability to execute proper  oversight of internal controls for implementing the 8(a) program for ANC- owned firms. Moreover, without additional actions to (1) develop an  effective and comprehensive internal control framework, such as ensuring  that its Alaska District Office has complete and consistent documentation  on firms in the program, (2) design policies to effectively enforce the  separation of duties and supervisory or administrator approval when  reviewing ANC-owned firms’ progress and related documentation at this  office, (3) approach staffing of its Alaska District Office in a  comprehensive way; and (4) launch the proposed continuing eligibility  review unit with the policies and procedures that include specific tasks  and milestones, there is limited assurance that SBA can achieve the  objectives of the program and at the same time maintain a high level of  oversight and accountability to help ensure overall program integrity.
section_title: Recommendations for Executive Action
paragraphs: To establish an effective compliance oversight process for ANC-owned  firms in the SBA 8(a) program as part of SBA’s efforts to develop a more  comprehensive oversight strategy, we recommend that the Administrator  of SBA direct District Office staff implementing the program to take the  following three actions:  Improve SBA’s ability to prohibit follow-on, sole-source contracts from  being awarded to ANC-owned sister subsidiaries participating in the  program by (1) requesting that procuring agencies specifically state  whether a contract is a follow-on in its offer letter, (2) providing  additional training to SBA staff that specifically address how to  monitor for follow-on, sole source contracts, and (3) providing  additional guidance to SBA officials on the enforcement of related  policies;
Enhance internal controls and oversight of ANC-owned firms in the  8(a) program serviced in the Alaska District Office by enforcing  policies regarding the separation of duties and supervisor or  Administrator approval in order to improve supervisory review of ANC- owned firm transactions and related documentation; and
Develop a comprehensive approach to staffing its Alaska District  Office to include succession planning and managing attrition and  retirements in order to improve the agency’s capacity to keep pace  with oversight activities.
We also recommend that the Administrator of SBA direct the Associate  Administrator of Business Development to take the following three  actions:
Document its planned method for tracking revenue generated under  subsidiaries’ primary and secondary lines of business, with milestones  and timelines for when and how the method will be implemented.
Provide the appropriate level of access to and sharing of relevant  subsidiary data across district offices, including primary and  secondary NAICS codes and revenue data, once SBA develops a  database with the capabilities of collecting and tracking this revenue  data as we recommended in 2012.
Enhance internal controls and oversight of ANC-owned firms in the  8(a) program by: ensuring that all ANC-owned firm files contain all relevant  documents in accordance with SBA program requirements to help  facilitate SBA’s review of compliance with applicable program  regulations and guidance, including the collection of documents  related to follow-on, sole-source contracts, benefits distributions  reports, compensation data, information about excessive  withdrawals that do not benefit the ANC or the native or  shareholder community, as well as the submission of the annual  reviews themselves; and finalizing the agency’s plans to fully launch a new continuing  eligibility review unit, including identifying policies and procedures  such as specific tasks, milestones, and timelines for the full launch  of the office.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to SBA for review and comment. Written  comments from SBA are reprinted in their entirety in appendix V. SBA  concurred with two of our draft recommendations, reported that it has  already taken action to implement two others, and did not concur two  other recommendations. SBA also provided technical comments, which  we incorporated in the report as appropriate.
In its written comments, SBA stated that its Office of Business  Development has made significant strides within the last 8 months to  close several of our recommendations from previous reports focused on  the 8(a) Business Development program. SBA further stated that specific  to this review of the 8(a) program, the agency has significant process  improvements underway to address some of the recommendations in the  report. SBA also reported that because of the audit's focus on data files  prior to 2015 and earlier open discussions with us, many of the  recommendations were anticipated and it believes are currently  remediated by recent actions.
SBA reported that it believes that the agency has already effectively  implemented changes to address our first recommendation that the  agency improve its ability to prohibit follow-on, sole-source contracts from  being awarded to ANC-owned sister subsidiaries participating in the  program by (1) requesting that procuring agencies specifically state  whether a contract is a follow-on in its offer letter, (2) providing additional  training to SBA staff that specifically addresses how to monitor for follow- on, sole source contracts, and (3) providing additional guidance to SBA  officials on the enforcement of related policies. SBA stated that it  continually emphasized the requirement to provide contract acquisition  history in its 8(a) Program partnership agreement training with the  Federal Acquisition Community. In response to our review, SBA  significantly increased training to other agencies in fiscal years 2014 and  2015 to specifically address this and other 8(a) program requirements.  However, it did not develop similar training efforts for its own staff.
Although SBA reported that it has already taken steps to address our  recommendation, the agency stated that it did not need to implement the  first part of our recommendation to request that procuring agencies  specifically state whether a contract is a follow-on in its offer letter  because the FAR already requires this documentation. While both FAR §  19.804-2 and 13 C.F.R. § 124.502 suggest that procuring agencies  should specifically state whether an 8(a) sole-source contract is a follow- on when the proposed contract recipient is the incumbent contractor,  these provisions do not apply to a sister-subsidiary of the incumbent  contractor. As we noted in our report, in order to monitor for violations to  the prohibition of awarding follow-on contracts to sister subsidiaries of the  same ANC, SBA officials instead rely on procurement histories that are,  at times, missing or incomplete. Therefore, we believe that similarly  requesting that a procuring agency offer letter always explicitly identify  whether an 8(a) sole-source contract is a follow-on would help to improve  SBA’s oversight.
In response to the second part of our first recommendation, SBA stated  that it did not need to increase training to its own staff because, according  to SBA, it provided training to procuring agencies, consider the risk of  follow-on, sole source contracts being awarded to 8(a) sister-subsidiaries  of the same ANC to be low, and have practices in place, such as their  random sampling surveillance reviews of contracts awarded through the  8(a) program, to address this risk. We believe that SBA’s efforts to  increase training to procuring agency officials is a positive step that  should help to address our finding that these agencies did not  consistently provide procurement history documentation. However, SBA’s  own staff reported that, not only was this information missing at times, but  that they sometimes had difficulty determining whether a contract was a  follow-on, sole-source contract when the acquisition history was provided.  Further, as we describe in our report, these staff did not consistently  follow-up with agencies when they could not make an informed  determination. SBA subsequently stated in its agency comments that it  provided training to its staff on all of the elements addressed in this  recommendation. In reviewing the training documents, we found that only  1 of one the 12 training sessions that SBA provided referenced the  prohibition against awarding follow-on, sole source contracts to sister  subsidiaries. This training document did not discuss how to monitor firms  for the prohibition, including: what documentation should be submitted,  what information in the document to review, and what follow-up steps  should be taken when the relevant information is not provided. In addition,  SBA’s current random sampling surveillance reviews of contracts  awarded through the 8(a) program occur after a contract has been  awarded and a potential violation has occurred. We do not believe that  this practice represents a proactive approach to monitoring for follow-on,  sole source contracts under the program. Lastly, we cannot conclude, as  SBA did, that the likelihood of follow-on, sole source contracts being  awarded under the program is low risk. While we did not find follow-on  contracts in the 30 large value contracts that we reviewed, we did identify  important weaknesses in SBA’s ability to monitor these contracts for sole- source follow-on violations. Moreover, our sample of 30 contracts was not  generalizable and represented less than 1 percent of all contracts.  Therefore, we continue to recommend that SBA provide additional  training to its own staff that specifically addresses how to monitor for  follow-on, sole source contracts.
In response to the third part of our first recommendation, suggesting that  SBA provide additional guidance to its staff, the agency reported that it  provided additional training to its field staff officials on enforcing its related  policies and is now holding back-to-back quarterly Field business  opportunity specialist training sessions relating to all of our  recommendation's elements. As we previously discussed, in our review of  the training sessions, we found that it did not identify specific guidance on  how to monitor for sole-source contracts. Moreover, as we note  throughout our report, updating the outdated 2008 SBA standard  operating procedure for the 8(a) program to provide official program  guidance on this 2011 rule is necessary to fully address our  recommendation on providing guidance.
In response to our recommendation that SBA enhance its internal  controls and oversight of ANC-owned firms in the 8(a) program serviced  in the Alaska District Office by enforcing policies regarding the separation  of duties and supervisory review of ANC-owned firm transactions and  related documentation, SBA stated that it did not concur because,  according to the agency, effective measures are in place. Specifically,  SBA stated that it arranged legal briefings, training, and mentoring for the  staff in that office through 2016, that included secondary  reviews/approvals, files management, and annual review processing.  SBA’s accountability review of that district office in 2014, which followed  our site visit to that same office, resulted in similar findings. Specifically,  the Alaska District Office did not always follow supervisory review  procedures, the office lacked segregation of duties, and the files were not  always properly maintained. SBA reported that its next steps are to  continue ongoing training and mentoring in 2016 with monitoring of  performance metrics and regular check-ins with the Office of Field  Operations team by the Alaska District Office. SBA’s actions to address  the staff’s oversight and implementation of internal controls are a positive  step. However until these actions can demonstrate the elimination of the  control weaknesses we identified, the recommendation remains valid.
SBA did not concur with our recommendation to develop a  comprehensive approach to staffing its Alaska District Office, to include  such actions as succession planning and attrition and retirement  management in order to improve the agency’s capacity to keep pace with  its oversight activities. SBA stated that the agency already addressed and  mitigated the potential for reoccurrence of staffing issues through recent  new hires and training. The agency acknowledged previous customer  service challenges and inadequate staffing due to attrition in the Alaska  District Office in recent years. The agency noted, however, that it recently  hired two business opportunity specialists in 2015, with another business  opportunity specialist and economic development specialist hire pending  by February 2016. Along with the increased staffing, to address the  knowledge gap regarding ANC 8(a) programs and procedures for all  Alaska District Office staff, the agency reported that it provided 10 legal  and ANC 8(a) training sessions to Alaska District Office staff. SBA also  referenced its response to GAO-15-347 as support for its succession  planning efforts. In that recent report we recommended that SBA improve  the agency’s human capital management by completing a workforce plan  that includes key principles such as a competency and skill gap  assessment and long-term strategies to address its skill imbalances. SBA  agreed with that recommendation and responded by stating that a  workforce plan was under development. However, SBA officials were not  able to provide this workforce plan to us for this review or demonstrate  how it related to the succession planning needs we identified in the  Alaska District Office. Given that we have reported on inadequate staffing  for overseeing ANCs in the 8(a) program in this particular district office  since 2006, we believe that our recommendation to develop a  comprehensive approach to staffing its Alaska District Office, to include  such actions as succession planning and attrition and retirement  management is still needed.
In response to our two recommendations that (1) SBA document its plans  for tracking revenues generated under subsidiaries’ primary and  secondary lines of business and (2) provide the appropriate level of  access to and sharing of subsidiary data across district offices, SBA  concurred with these recommendations and indicated it had recently  established a new tracking system that analyzed the obligations reflected  in FPDS-NG for all entity-owned firms. According to SBA, as an interim  step to developing a random surveillance method, it has begun  monitoring the revenue generated under a subsidiary's primary and  secondary NAICS codes by tracking award obligations for all entity- owned firms in a spreadsheet. SBA stated that this spreadsheet will be  updated annually and its personnel will be provided instructions,  consistent with a related proposed regulation, on how SBA associates  should review the tracking mechanism. Once the related regulations are  finalized, SBA plans to make it accessible to all business opportunity  specialists via the agency’s intranet. SBA’s effort to track the obligations  generated by firms in their primary and secondary NAICs codes is a good  first step. However, in order to more accurately reflect a firm’s activity in  an industry, SBA should track revenues, as we recommended, rather  than just federal obligations, since federal obligations may overstate or  understate the amount of income actually generated. Additionally, SBA  stated that it believes it has addressed our recommendations in terms of  milestones and timelines, given that the new spreadsheet will be updated  annually. However, given the level of effort involved in getting data from  all of these firms, any method used to report these data requires planning  and coordination that would be best achieved by developing written plans,  with timelines and milestones. SBA’s plans to share the spreadsheet  used to track firm’s obligations among all business opportunity specialists  will address our fifth recommendation, once this information includes data  about the firm’s primary and secondary revenue streams.
Finally, we recommended that SBA enhance its internal controls and  oversight of ANC-owned firms in the 8(a) program by ensuring that all  ANC-owned firm files contain all relevant documents in accordance with  SBA program requirements and finalizing the agency’s plans to launch its  new certification and ongoing eligibility office, including identifying policies  and procedures such as specific tasks, milestones, and timelines for the  full launch of the office. SBA reported that it has recently addressed this  recommendation through the briefing, training, mentoring, and follow-up  performance reviews that were previously mentioned and by setting up  the Office of Certification and Eligibility. While these efforts are positive  initial steps toward implementing our recommendation, it remains to be  seen whether SBA’s recent efforts will eliminate the control weaknesses  we identified. With regard to the management of its files, SBA needs to  ensure that its approach to briefings, training, and mentoring are  sustained beyond this initial roll out and it needs to demonstrate that the  procedures the mentoring team identified are implemented effectively.  SBA also indicated that the Office of Certification and Eligibility is fully  staffed and has conducted a number of eligibility reviews. However, SBA  was unable to provide documentation of this office’s policies, procedures,  and milestones for conducting such reviews, which are necessary to  provide a consistent and sustained approach to the reviews moving  forward. Therefore, until SBA has fully developed and documented these  internal controls, we continue to believe that our recommendation is  needed.
We are sending copies of this report to the appropriate congressional  committees, the Administrator of Small Business Administration and other  interested parties. In addition, the report will be available at no charge on  the GAO website at http://www.gao.gov.
If you have any questions concerning this report, please contact me at  (202) 512-6722 or bagdoyans@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix V.
section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: The objectives of this review were to examine the extent to which: (1)  SBA enforces its regulations prohibiting the award of follow-on, sole- source 8(a) contracts to subsidiaries of the same ANC; (2) SBA limits  subsidiaries of the same ANC from operating in the same primary line of  business; (3) information is known about compensation, revenues, and  benefits distribution of ANC-owned firms; and (4) SBA has addressed  challenges, if any, to its oversight and monitoring of ANC-owned firm  participating in the 8(a) program since 2011. This report exclusively  discusses these issues in the context of ANC-owned firms participating in  the 8(a) program.
For the data analyses completed for all four objectives, we reviewed 8(a)  program data on ANC-owned firms participating in the program from fiscal  year 2011 through fiscal year 2014 to reflect the effective date of  regulations included in our scope and to use the most recent data  available. To perform our work, we used the Federal Procurement  Database System–Next Generation (FPDS-NG) to select three sets of  non-generalizable case selections or samples with 8(a) ANC-owned firms  that met specific criteria for three of our four objectives. Table 6  summarizes characteristics for each of our case selections. For each of  these three objectives, we selected a subset of cases for follow-up review  and illustrative examples, and therefore our findings are not generalizable  to the entire population of ANC-owned firms participating in the 8(a)  program. These selections are described in more detail below.
subsections: section_title: Data Reliability
paragraphs: During the course of our review, we identified data limitations with our  primary data source—FPDS-NG, such as: miscoded 8(a) firms and  incorrect obligations. To mitigate these limitations, we interviewed  knowledgeable individuals about the data and corrected errors we  identified. To ensure that we only completed reviews for 8(a) firms within  the scope of our analysis, we interviewed agency officials who could  provide more detail about the firms we selected. For objective 2,  specifically, we held several interviews with ANC parent corporations and  some 8(a) ANC-owned firms to corroborate revenue data for fiscal years  2011 through 2014. With executives and staff from the ANC parent  corporations, we discussed data quality controls, validation techniques,  metrics reporting, and oversight. We also assessed the reliability of our  data by reviewing agency policies and internal controls, Office of  Inspector General reports, and related documentation. Additionally, we  took steps to verify the accuracy of the data, including performing  electronic testing to identify missing data, outliers, and errors.  Additionally, we traced randomized sample lists to the source data to  ensure the validity of internally created files. We tested the reliability of  the data we obtained from the other systems used to support this  objective—Dynamic Small Business Search (DSBS) system and System  for Award Management (SAM) by interviewing cognizant officials at SBA  and corroborating data with ANC-owned firms. We determined that the  data from all systems were sufficiently reliable for the purpose of  identifying contracts with characteristics that we wished to review for our  research objectives.
section_title: Follow-on, Sole- source Contracts
paragraphs: To identify the extent to which SBA enforces its regulations prohibiting the  award of follow-on, sole-source 8(a) contracts to subsidiaries of the same  ANC, we assessed the agency’s policies and procedures related to this  control, conducted analysis of offering letters, contracts and other  materials, reviewed a non-generalizable selection of contracts that met  certain criteria (described below), and interviewed cognizant staff.  Because there is no federal database that identifies follow-on, sole- source contracts, we used several variables contained within FPDS-NG  as proxies for identifying potential instances of 8(a) follow-on, sole-source  awards to ANC subsidiaries, such as company name, location, product or  service, and contract award dates to firms and sister subsidiaries. Using  these proxies as our criteria, we identified as many as 155 contract  actions that had the potential to be follow-on, sole-source contracts. We  randomly selected 53 contract files by identifying contract actions  between 2011 and 2014 that had the potential to be follow-on, sole- source contracts. Of these 53 contracts:
23 had values of $150,000 or less. We removed these 23 contracts  from any additional review because these agencies with small value  contracts were not required to provide SBA with offer letters. Because  SBA previously delegated contract execution authority to the  procuring agency, procuring agencies could award these contracts  without having to notify SBA first. Because no notification was needed  in these instances, SBA would not have been able to determine  whether offers were follow-on, sole source contracts until after the  award had been made. Further, SBA officials reported to us that such  contracts are less likely to be follow-ons because of their limited  scope and duration.
To review the remaining 30 large value contract actions, we asked  SBA to supply relevant documentation about all contract actions. We  took additional steps to corroborate what we learned from SBA or to  provide additional detail where needed. Specifically, we met with 10  federal departments and agencies that awarded these contracts  between 2011 and 2014. We interviewed procuring agency staff using  semi-structured interviews and asked staff at these agencies to  provide additional information (i.e. contract documentation including  missing agency offer letters, SBA acceptance letters, contracts, and  modifications for each possible incumbent and follow-on contract pair)  we were unable to obtain from SBA. The results of our analysis are  not generalizable to the entire population of ANCs participating in the  8(a) program, and we are unable to determine whether there could be  other follow-on, sole-source contracts that our methods did not  identify.
section_title: Monitoring NAICS Codes
paragraphs: To evaluate the extent to which SBA limits subsidiaries of the same ANC  from operating in the same primary line of business, we reviewed SBA  policies, guidance, and procedures in place at the time of our audit. We  also analyzed ANC subsidiary data from three publically-available data  systems: FPDS-NG, SAM, and DSBS system. We selected from FPDS- NG, all contracts where there was a unique parent ANC with each owning  multiple subsidiaries active in the 8(a) program from fiscal year 2011  through 2014, and where each subsidiary of that parent generated at  least $1 in 8(a) contract obligations over this time period. There were a  total of 39 ANCs that met these criteria. We selected this timeframe  because in February 2011 SBA made technical updates to regulatory  language in SBA’s regulation prohibiting ANC subsidiaries sharing the  same primary North American Industry Classification System (NAICS)  code. This timeframe was also consistent with the timeframe used in  other sections of this report. Our findings under this objective are not  generalizable to the entire population of ANCs participating in the 8(a)  program, although they do represent all contracts where these criteria  were met by analyzing the FPDS-NG data.
We used SAM and DSBS to identify and analyze the dates that our select  ANC subsidiaries entered and exited the 8(a) program. We also used  SAM and DSBS to identify and analyze the subsidiaries primary and  secondary NAICS codes used during the 8(a) program.
To corroborate the summary data we obtained from FPDS-NG, SAM, and  DSBS, we requested certain documentary evidence from SBA, including  subsidiaries’ 8(a) applications and annual reviews. The summary data  included subsidiaries’ federal obligation amounts, primary and secondary  NAICS codes used, and the 8(a) program entrance and exit dates.  However, SBA was unable to provide all the documents requested within  our audit timeframes. As a result, we contacted our selected ANCs to  verify the subsidiary data we obtained from these three data systems. We  used semi-structured questions to interview personnel from the ANCs and  subsidiaries. During these interviews, we asked specific questions about  the ANC subsidiaries’ experiences participating in the 8(a) program.  Additionally, we also requested the ANCs to verify summary data we  collected from SAM, DSBS, and FPDS-NG. We also requested that the  ANCs provide the total revenue amounts that the select ANC subsidiaries  earned from fiscal year 2011 through fiscal year 2014. One ANC chose  not to provide this revenue data.
Some of the summary data we collected from FPDS-NG, DSBS, and  SAM were not always consistent with data provided by SBA or the ANCs,  and we note these inconsistencies in our report. Nonetheless, we  determined that the summary data obtained from the three data systems  were sufficiently reliable for our purposes, except where noted in our  report.
section_title: Compensation, Revenues and Benefits Distribution
paragraphs: To determine what information is reported to SBA regarding the  compensation, revenues, and benefits distribution of ANC-owned firms,  we reviewed ANC-owned firm 8(a) applications and annual updates. We  also reviewed data on ANC subsidiaries active from fiscal year 2011  through fiscal year 2014 based on a non-generalizeable sample of 30  randomly selected ANC subsidiaries from FPDS-NG. Much of the data  that we reviewed was self-reported by ANC-owned subsidiaries and could  not be corroborated with other sources. To provide context the data we  analyzed, in addition to speaking with officials from SBA, we also  conducted interviews with officials from three associations that represent  the interests of the chief executive officers of the 12 Native Regional  Corporations, issues related to Native federal contracting, and indigenous  people generally about their knowledge of compensation paid by ANC- owned firms. From FPDS-NG, we selected a non-generalizable sample of  30 unique ANC-owned firms active in the program between 2011 and  2014. We removed 4 of these firms because we ultimately found that they  were not ANC-owned firms, and thus we reviewed data from 26  subsidiaries. Descriptive characteristics, including information about ANC  ownership of the 26 ANC-owned firms in our non-generalizable sample is  outlined in app. II and IV. Our findings under this objective are not  generalizable to the entire population of ANC-owned firms participating in  the 8(a) program.
section_title: Assessing Management Controls
paragraphs: To assess the extent to which SBA has addressed challenges, if any, to  its oversight and monitoring of ANC-owned firm participating in the 8(a)  program since 2011, we reviewed SBA’s implementation of program  mechanisms used to ensure the compliance of regulations related to our  scope of work. We reviewed relevant SBA controls, policies, procedures,  and guidance, and assessed the extent to which these mechanisms  effectively aligned with federal standards for internal controls.  Additionally, we selected four offices to interview officials about their  practices. Two of the three offices we visited in person. All four offices  were selected because of the role they play in the 8(a) program—such as  certifying initial applications for the program, which is the responsibility of  the San Francisco office; or, for the number of ANC 8(a) firms they  service. For example, we selected a District office that served a large  number of ANC firms (e.g. the Alaska District Office) and ones that  served a smaller number of firms (e.g. Washington, D.C., and Richmond,  Virginia district offices) to compare their practices. We conducted site  visits to both the Anchorage, Alaska, and Washington, D.C. district  offices. During these site visits, we interviewed staff and made attempts  to conduct file reviews of selected ANC subsidiaries serviced by those  district offices. We held a few semi-structured interviews designed to  document SBA’s practices and policies with regard to monitoring for  follow-on, sole-source contracts, and sharing of NAICS codes. We also  discussed with officials procedures for reviewing program application and  annual reviews submitted by ANC-owned firms. Specifically with regard to  the annual reviews, we discussed with officials what information is  collected for ownership, compensation, excessive withdrawals, benefits  reporting and revenues. As a part of our site visit to SBA’s district office in  Anchorage, Alaska, we collected data related to SBA’s human capital  planning for that office. Our methods for this specific part of the  engagement included reviewing documentary evidence and interviewing  cognizant officials with expertise in workforce planning methods. During  these interviews, we discussed workforce plans, historical and current  staffing numbers, and challenges. We asked about the skills and  competencies needed to achieve program results, discussed the  agency’s strategies to address staffing gaps, and building necessary  capacity. Additionally, we reviewed our own past work on human capital  issues for guidance. To inform other aspects of this objective, and to  learn about proposed changes to SBA’s existing regulations, especially  those affecting the use of NAICS codes, we attended an SBA tribal  consultation in Anchorage, Alaska. While we were in Anchorage, Alaska,  we also met and attempted to meet with officials from a number of ANC- owned firms and one ANC advocacy group to obtain the overall  perspectives of ANCs and their subsidiary firms on the 2011 regulatory  changes to the program.
We conducted this performance audit from May 2014 to January 2016 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.
section_title: Appendix II: Ownership Characteristics of 26 8(a) Alaska Native Corporation (ANC)-owned Firms
paragraphs: The 8(a) ANC-owned firms that we selected for review were primarily  wholly owned subsidiaries that reported few changes in ownership or  management control over our period of study, as illustrated in Table 6  below. Most subsidiaries were previous or current participants in the 8(a)  program. Of the 26 8(a) ANC-owned firms selected for our file review, 21  were wholly owned by an ANC parent corporation. Five firms were  partially owned by an ANC that held the majority of ownership in the  subsidiary and a few firms were partnerships with non-disadvantaged  individuals who controlled a minority interest in the firm.
The 26 ANC-owned firms we reviewed were almost always part of a  larger family of firms. In all, there were 243 subsidiary firms affiliated with  the 26 8(a) ANC-owned firms selected as part of our review. Of these 243  subsidiary firms, 149 of them participated at some point in the 8(a)  program. Table 7 provides additional detail about the ownership of ANC  subsidiary firms in our sample. These characteristics are not  generalizable to all ANC-owned firms.
section_title: Appendix III: 5 Illustrative Examples of Alaska Native Corporations (ANC)-owned Firms and their Use of NAICS Code in the 8(a) Program, Fiscal Years 2011-2014
paragraphs: In our review of 39 ANCs, we found 5 ANCs, from fiscal year 2011  through 2014, that fully owned 8(a) subsidiaries that concurrently  generated millions in a common NAICS code used by a sister subsidiary  as a primary NAICS code, while generating less or no revenue under their  own primary NAICS code. If such activity is left untracked, one firm’s  secondary line of business could effectively become its primary revenue  source in the same line of business that a sister firm claims for its primary  line of business without actually violating SBA’s prohibition. Such activity  could, intentionally or not, potentially circumvent the intent of SBA’s  prohibition on sister subsidiaries sharing the same primary NAICS code.  This is a long-standing risk that we reported on in 2006 and 2012.
section_title: Appendix IV: Example of an ANC-owned 8(a) Firm Benefits Reports Submission and 8(a) Revenues and Non-program Revenues Generated between 2011 and 2014
paragraphs: In order to remain eligible for the 8(a) program, participating ANC-owned  subsidiaries must submit information about their progress under the  program, including benefits distributed to the native members or native  community resulting from program participation as well as program and  non-program revenues. Table 7 illustrates an example of an ANC-owned  firm’s annual submission of benefits, derived in part as a result of the  firm’s participation in the 8(a) program. Figure 6 describes the reported  8(a) revenues and non-8(a) revenues earned by the 26 8(a) participating  ANC-owned firms between 2011 and 2014.
section_title: Appendix V: Comments from the Small Business Administration
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Latesha Love (Assistant  Director), Carla Craddock, April Van Cleef, Flavio Martinez, Gavin Ugale,  Holly Halifax, Barbara Lewis, Tatiana Winger, Jeffery Malcolm, Paul  Kinney, James Murphy, Colin Fallon, Linda Miller, Marcus Corbin, Maria  McMullen, Rayna Elias, Shelly Rao, Shana Wallace, and Julia Kennon  made key contributions to this report.