A firm must meet several initial eligibility requirements to qualify for the 8(a) program (a process known as certification), and then meet other requirements to continue participation. In general, a concern meets the basic requirements for admission to the program if it is a small business that is unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and U.S. citizens, and which demonstrates the potential for success. Table 1 summarizes the key requirements. Participation in the 8(a) program lasts 9 years, and once it is completed, a firm and the individual cannot reapply. The 9-year program tenure is divided into two stages—a developmental stage covering years 1 through 4, and a transitional stage covering years 5 through 9. During the transitional years, firms are required to meet certain activity targets for non-8(a) contracts to ensure they do not develop an unreasonable reliance on the program. Additionally, firms in the 8(a) program are eligible to receive sole-source and competitively awarded set-aside federal contracts. As part of the 8(a) program, SBA developed the Mentor-Protégé Program, in which experienced firms mentor 8(a) firms to enhance the capabilities of the protégé, provide various forms of business developmental assistance, and improve the protégé’s ability to successfully compete for contracts. To qualify initially as a protégé, an 8(a) firm must meet one of three conditions: (1) be in the developmental stage of the 8(a) program, or (2) never have received an 8(a) contract, or (3) be of a size that is less than half the size standard corresponding to its primary standard industry code. The mentor and protégé enter into a written agreement that sets forth the protégé’s needs and details the assistance the mentor commits to provide to address those needs. SBA must review and approve the initial agreement and annually evaluate specific mentor-protégé requirements. SBA’s 8(a) program is delivered collaboratively by two departments of SBA. The Office of Business Development (OBD) is responsible for policy formation and the certifications of 8(a) applications, approval of mentor- protégé applications, as well as the approval of existing 8(a) firms that are exiting the program (early graduations, approval of changes of ownership, approval of voluntary withdrawals, approval of terminations, and suspensions). OBD is also responsible for the virtual training and relevant policy briefings provided to SBA staff across the country responsible for executing the 8(a) program on an ongoing basis throughout the year. The Office of Field Operations (OFO) is responsible for supporting the business development specialists, tasked with executing the 8(a) program, who are located in 68 district offices across the country. Selected BDSs will have 8(a) firms assigned to them. The BDSs work directly with 8(a) firms to help prepare business plans; provide technical assistance; review continuing eligibility; coordinate with resource partners that provide counseling, training, loans, and other assistance to small businesses; and coordinate additional assistance and training for firms through another SBA program. BDS staff also conduct annual reviews of the firms’ progress in implementing business plans and analyze firms’ year-end financial statements, income tax returns, and records of contracting activity for certain compliance requirements, including program eligibility. The purpose of the annual reviews is to determine if firms continue to meet eligibility requirements and to identify business development needs. SBA long has been required by statute to complete annual reviews of all firms. As of fiscal year 2008, SBA had 182.5 full-time-equivalent BDS staff. SBA relies primarily on its annual reviews of 8(a) firms to ensure the continued eligibility of firms enrolled in the program, but we observed inconsistencies and weaknesses in annual review procedures related to determining continued eligibility for the program. For example, we found that SBA did not consistently notify or graduate 8(a) firms that exceeded industry averages for economic success or graduate firms that exceeded the net worth threshold of $750,000. The lack of specific criteria in the current regulations and procedures may have contributed to the inconsistencies that we observed, and SBA has taken steps to clarify some, but not all, of these requirements in a recent proposed rule change. Although BDSs have been challenged to perform all their responsibilities—in particular the statutory requirement to perform annual reviews on 100 percent of 8(a) firms—SBA has not yet assessed its workload to ensure it could carry out its responsibilities as we recommended in our 2008 report. SBA recently has implemented new procedures intended to streamline terminations that may address some of these inconsistencies that we identified with the lack of termination actions taken against firms that did not submit annual review documents as required. Finally, we found that SBA did not maintain an accurate inventory of Mentor-Protégé Program participants and did not document some annual oversight activities of these firms. As a result of these inconsistencies and weaknesses, there is increased potential that firms that no longer meet SBA 8(a) continuing eligibility requirements could be allowed to continue in the program and receive 8(a) contracts. In a substantial number of cases we reviewed, SBA staff failed to complete required annual review procedures intended to assess fundamental eligibility conditions, such as the firm’s net worth, used to determine if participants continue to meet the criteria for being economically disadvantaged. SBA may terminate firms found to be ineligible based on several conditions, including failure to submit required documentation for the annual review process or failure to maintain ownership and control by a disadvantaged individual. SBA may also graduate firms that have successfully completed the program by substantially achieving the targets, objectives, and goals in their business plans prior to the expiration of their program terms, and demonstrated their ability to compete in the marketplace without assistance from the program, or where one or more of the disadvantaged owners no longer are economically disadvantaged (a process known as early graduation). Criteria used to determine continuing eligibility and associated conditions such as economic disadvantage include factors such as personal assets, income, and net worth, while criteria used to determine if a firm successfully met targets and objectives include exceeding industry averages for economic success and owners making excessive withdrawals of company funds or other assets. We selected a random sample of files from each of the five district offices we visited to determine if district offices’ practices for monitoring 8(a) firms were consistent with requirements in regulations, policies, and procedures. Specifically, we estimated that for the five district offices, SBA failed to complete one or more annual required review procedures 55 percent of the time. Our estimates were based on a statistical sample of 123 annual review files from a population of 672 files. Of the 123 files sampled, we identified 67 instances where SBA failed to complete one or more annual review procedures related to eligibility determinations (a 55 percent rate). We tested seven specific annual review requirements relating to continuing eligibility: (1) notifying 8(a) firms that they had exceeded industry averages for economic success, (2) reviewing or graduating 8(a) firms or providing an explanation for retention if they had exceeded industry averages for 2 consecutive years, (3) reviewing net worth or graduating firms in which individuals exceeded the net worth threshold of $750,000, (4) performing eligibility reviews when required for such cases as a change in the firm’s ownership, (5) completing the required annual reviews, (6) obtaining required supervisory reviews (and signatures), and (7) imposing remedial actions or obtaining waivers for firms not meeting business activity targets. Table 2 shows information on the extent to which SBA did not complete these annual review requirements. Taking action when a firm exceeded industry averages for economic success by notifying firms that exceeded four of seven industry averages for 1 year graduating or explaining retention of firms that exceeded four of seven industry averages for 2 consecutive years Reviewing net worth or graduating firms in which individuals exceeded adjusted net worth limitations Performing required eligibility reviews because of a change in the firms’ ownership Imposing remedial actions or obtaining waivers for firms not meeting business activity targets Exceeding industry averages: Officials from two of the five district offices told us that while the guidance requires notifying 8(a) firms when they have exceeded industry averages for economic success, in practice the districts have been using discretion in notifying the firm after the first year in which this condition occurs. SBA procedures identify exceeding industry averages as a criterion for considering that the firm has met its goals and therefore may no longer be economically disadvantaged. The notification is intended to make participants aware that they may be subject to early graduation proceedings if they exceed industry averages for 2 consecutive years. SBA procedures state that if the firm exceeds industry averages for 2 consecutive years, the participant no longer can be considered economically disadvantaged unless the BDS provides evidence that early graduation is not warranted because of compelling reasons. Officials from these district offices explained that they did not follow these procedures, even though they were required, because they did not think that exceeding industry averages always indicated that participants no longer were economically disadvantaged. The level of staff knowledge about calculations for industry averages and the way in which staff entered the calculations into information systems also may have contributed to failures to meet this requirement. One district office told us it was not clear how the ratios were calculated. We also found errors in the calculations of industry averages at another district office. As we discuss in more detail later in the report, the industry ratio calculations require the BDS to manually enter data into a template that will then calculate the ratio of the firm’s performance against that of industry. As shown in table 2, we estimate that staff failed to complete this requirement in about 26 percent of the cases in which a notification letter was required, and in about 4 percent of cases in which industry averages were exceeded for 2 consecutive years.