2011 Revisions and Updates to SBA’s 8(a) Regulations

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sole-source 8(a) contracts to sister subsidiary firms owned by  the same ANC; (2) made minor technical updates to outdated terminology  regarding ANC ownership of multiple sister subsidiaries operating in the  same primary line of business; and (3) revised existing rules related to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. Weaknesses in SBA Oversight Limit its Ability to Enforce Prohibitions on Follow-On, Sole- Source Contracts to ANC Sister Subsidiaries

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. 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. 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. However, this positive change has not been adopted more broadly  across the agency. SBA noted that key  documents were also missing for other selected contracts from this  agency. 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

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 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. 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. Weak Management Controls Have Hindered SBA’s Program Oversight

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. 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. According to officials, this office has conducted a number of  reviews in fiscal years 2015 and 2016. Recommendations for Executive Action

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. 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’s accountability review of that district office in 2014, which followed  our site visit to that same office, resulted in similar findings. Key contributors to this report are listed in appendix V.

Appendix I: Objectives, Scope and Methodology

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. 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.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

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.