The SBIR program was initiated in 1982 and has four main purposes: (1) use small businesses to meet federal R&D needs, (2) stimulate technological innovation, (3) increase commercialization of innovations derived from federal R&D efforts, and (4) encourage participation in technological innovation by small businesses owned by women and disadvantaged individuals. The purpose of the STTR program—initiated in 1992—is to stimulate a partnership of ideas and technologies between innovative small businesses and research institutions through federally funded R&D. The National Defense Authorization Act for Fiscal Year 2012, enacted on December 31, 2011, reauthorized the SBIR and STTR programs through September 30, 2017. The SBIR and STTR programs each include the following three phases: In phase I, agencies make awards to small businesses to determine the scientific and technical merit and feasibility of ideas that appear to have commercial potential. Phase I awards normally do not exceed $150,000. For SBIR, phase I awards generally last 6 to 9 months and for STTR these awards generally last 1 year. In phase II, small businesses with phase I projects that demonstrate scientific and technical merit and feasibility, in addition to commercial potential, may compete for awards of up to $1 million to continue the R&D for an additional period, normally not to exceed 2 years. Phase III is for small businesses to pursue commercialization of technology developed in prior phases. Phase III work derives from, extends, or completes an effort made under prior phases, but it is funded by sources other than the SBIR or STTR programs. In this phase, small businesses are expected to raise additional funds from private investors, the capital markets, or from funding sources within the agency that made the initial award other than its SBIR or STTR program. While SBIR or STTR funding cannot be used for phase III, agencies can participate in phase III by, for example, purchasing the technology developed in prior phases. SBA’s Office of Investment and Innovation is responsible for overseeing and coordinating the participating agencies’ efforts for the SBIR and STTR programs by setting overarching policy and issuing policy directives, collecting program data, reviewing agency progress, and reporting annually to Congress, among other responsibilities. As part of its oversight and coordination role, SBA issued SBIR and STTR policy directives in September 2002 and December 2005, respectively, and updated them in August 2012, January 2014, and February 2014. These directives explain and outline additional requirements for agencies’ implementation of the SBIR and STTR programs. Among the topics discussed, the policy directives include a listing of the data that agencies are to submit to SBA annually—such as their extramural R&D budget amounts and the amounts obligated for awards for the programs—and call for agencies to submit reports describing their methodologies for calculating their extramural R&D budgets within 4 months of the enactment of appropriations. Each participating agency must manage its SBIR and STTR programs in accordance with program laws, regulations, and the policy directives issued by SBA. In general, the programs are similar across agencies. For those agencies that have both SBIR and STTR programs, agencies usually use the same process for both programs. Each participating agency has considerable flexibility to design and manage the specifics of these programs, such as determining research topics, selecting award recipients, and administering funding agreements. All of the agencies follow the same general process to obtain proposals from and make awards to small businesses for both the SBIR and STTR programs. At least annually, each participating agency issues a solicitation requesting proposals for projects in topic areas determined by the agency. Each agency uses its own process to review proposals and determine which proposals should receive awards. Also, each agency determines whether the funding for awards will be provided as grants or contracts. Agency data indicate that not all agencies complied with the SBIR and STTR spending requirements for fiscal year 2012. Program managers identified several reasons why agencies did not comply with the spending requirements. The data agencies submitted to SBA indicates that 8 of the 11 participating agencies met or exceeded their fiscal year 2012 spending requirements for the SBIR program, while 3 of the agencies did not meet the requirements (see fig. 1 and app. I for additional data). According to the agencies’ data, the 8 agencies that met or exceeded the requirements spent between 2.6 percent and 4.0 percent of their extramural R&D budgets on the program, and the remaining 3 agencies spent between 2.3 percent and 2.5 percent. In comparison, agency data indicated that 10 of the 11 agencies met or exceeded spending requirements in fiscal year 2011, and that 3 of the 11 agencies complied with spending requirements each fiscal year from 2006 through 2011, as we found in September 2013. Our analysis of the data agencies submitted to SBA indicates that two of the five agencies participating in the STTR program met or exceeded their fiscal year 2012 spending requirements, while the remaining three agencies did not meet the requirements (see fig. 2 and app. II for additional data). According to the agencies’ data, the two agencies that complied with the requirements spent between 0.35 percent and 0.38 percent of their extramural R&D budgets on their STTR programs, and the three agencies that did not comply spent between 0.30 percent and 0.32 percent. In comparison, the data that agencies submitted to SBA indicated that two of the five agencies, HHS and NASA, complied with spending requirements in fiscal year 2011, and one of the agencies— HHS—complied with spending requirements each fiscal year from 2006 to 2011, as we found in September 2013. Program managers at the agencies that did not comply with spending requirements for fiscal year 2012 identified reasons that the agencies did not comply: (1) some agencies reserved funds to spend in a subsequent fiscal year without spending the minimum required amount in fiscal year 2012; (2) the spending requirement increased part of the way through the year, after agencies made spending plans; (3) agencies did not submit data on all of their spending; and (4) the amount agencies spent on extramural R&D was higher than estimated at the beginning of the fiscal year. Some of these circumstances also applied to agencies that complied with spending requirements in fiscal year 2012. Two of the agencies that did not comply with spending requirements— DOD and USDA—reserved funds to spend in a subsequent fiscal year without spending the minimum required amount in fiscal year 2012. The Small Business Act requires participating agencies to “expend” the minimum percentages of their extramural R&D budgets with small businesses annually. Additionally, SBA officials said they expect agencies to spend at least the minimum required percentages on the programs each year. However, program officials at DOD and USDA told us that they believe their agencies comply with spending requirements if the agencies spend the total amount reserved or budgeted for the program, regardless of the year the funding is spent. We found that these two agencies did not implement the annual program spending requirements as written in the Small Business Act, in part because SBA’s SBIR and STTR policy directives inaccurately summarize the law. Specifically, the policy directives say that the relevant statutory provision requires participating agencies to “reserve” the minimum percentages for awards to small businesses each year. Some of the participating agencies receive multiyear appropriations and choose to carry over some funding from one fiscal year to the next, in part because of this misinterpretation of the spending requirements. For example, if the amount of funding remaining in the program account is less than the amount of a phase I or phase II award, program managers said they carry over the funding to the next year, rather than make a smaller award to a recipient. An agency can carry over funding from one year to the next and comply with spending requirements if the agency spends the minimum required amount during the fiscal year, regardless of the year the funding was appropriated. Carrying over funds to the next fiscal year without spending the minimum required amount contributed to two agencies—DOD and USDA—not complying with spending requirements in fiscal year 2012. Program managers from DOD and USDA said their agencies did not meet spending requirements using our method of calculating compliance, but DOD and USDA officials said they will spend all of the funding that was budgeted for the programs before the funding expires, which they believe meets the intent of the law. Program managers from both agencies explained that they receive multiyear appropriations for research and development funding, which would generally allow them to carry over funds from one year to the next. However, if an agency carries over funding from one year to the next without spending the minimum required amount on the program in each fiscal year, then the agency is not in compliance with the spending requirements. According to SBA officials, SBA agrees with our methodology for calculating compliance and interprets the Small Business Act as requiring agencies to spend, rather than reserve, the required percentages each year. Carrying over funds from one year to the next without spending the minimum required amount in fiscal year 2012 also contributed to at least one agency—DOD—not complying with spending requirements in prior years. To demonstrate the effect that carrying over funds can have, we made the following calculations for DOD for fiscal years 2006 to 2011 using two different methodologies for calculating program spending. First, we determined the amount spent in a specific year, regardless of the year the funding was appropriated, from DOD’s total program obligations data submitted to SBA; this is the method that we used to calculate compliance with spending requirements for this report and the method SBA uses. Second, we calculated the amount of the funding appropriated in a fiscal year that was spent in that year or the next year; this is how DOD believes it should determine its compliance. We found that DOD complied with SBIR spending requirements in 2 of the 6 years from fiscal years 2006 through 2011 and with STTR spending requirements in 4 of the 6 years using our method.