SmallBizResource Blog -- Government

Small Business Administration: Small-Biz Friend Or Foe?

Posted by Gayle Kesten Thursday, Mar 26, 2009, 04:05 PM ET

A fresh pot of fraud du jour received a mighty stir from the Government Accountability Office (GAO), which says federal contracts that should have gone to small businesses in low-income communities instead wound up in the laps of ineligible companies.

Of course, the only ones feeling the burn are the empty-handed small businesses that were entitled to the work. And so much for the sliver of mankind optimism I felt earlier this week when AIG execs returned $50 million worth of bonuses. Yes, I'm sure plenty of arm-twisting was involved, but that gave me a few moments of delight, too.

Now for the issue at hand. First a quick history: A dozen years ago, the Small Business Administration was given oversight for the newly created HUBZone Empowerment Contracting program, enacted into law under the Small Business Reauthorization Act of 1997. The HUBZone program was created to help qualified small businesses located in economically distressed areas -- or, historically underutilized business zones (HUBZones) -- better compete for government contracts.

At least that was the plan. According to the GAO, the SBA failed to verify paperwork and conduct audits to ensure companies going after HUBZone contracts were eligible, "raising questions about an agency seeking to take a greater role in helping business owners stave off job losses." All told, $30 million have gone to 19 ineligible businesses.

In testimony before the House Committee on Small Business (PDF) on Wednesday, the GAO outlined:

• Fraud and abuse in the HUBZone program extends beyond the Washington, D.C., area. We identified 19 firms in Texas, Alabama, and California participating in the HUBZone program that clearly do not meet program requirements (i.e., principal office location or percentage of employees in HUBZone and subcontracting limitations). In fiscal years 2006 and 2007, federal agencies obligated nearly $30 million to these 19 firms for performance as the prime contractor on HUBZone contracts and a total of $187 million on all federal contracts.

• Although SBA has initiated steps to strengthen its internal controls as a result of our 2008 testimonies and report, substantial work remains for incorporating a fraud prevention system that includes effective fraud controls consisting of (1) front-end controls at the application stage, (2) fraud detection and monitoring of firms already in the program, and (3) the aggressive pursuit and prosecution of individuals committing fraud.

• SBA has taken some enforcement steps on the 10 firms previously identified by GAO that knowingly did not meet HUBZone program requirements. However, as of February 2009, according to SBA’s Dynamic Small Business Web site, 7 of the 10 firms that we investigated were still HUBZone certified. SBA's failure to promptly remove firms from the HUBZone program and examine some of the most egregious cases from our testimony has resulted in an additional $7.2 million in HUBZone obligations and about $25 million in HUBZone contracts to these firms.

Nydia M. Velázquez, who chairs the House Committee on Small Business, doesn't think a program "so fatally flawed" shouldn't continue. "It's time for SBA to make a decision -- either overhaul the program, or scrap it completely. This committee is no longer going to tolerate the excuse 'we're working on it,' while hardworking small business who have played by the rules are being cheated out of opportunities," she said.

Keith Girard, who blogs for AllBusiness.com, takes it one step further and says the SBA needs to revamp all of its contracting programs. The agency, he adds, has continued to "stonewall" efforts made by the American Small Business League (ASBL) to shed light on the "widespread diversion of federal small business contracts to large corporations," he says, including some $16 billion worth awarded to Fortune 500 companies since Barack Obama became president.

Government