Small Business Administration to devise new loan accounting system

The Small Business Administration will finish designing a new system to calculate the costs and benefits of loan sales by the end of the fiscal year, an agency official told lawmakers on Tuesday.

Federal auditors withdrew clean opinions on SBA's fiscal 2000 and fiscal 2001 financial statements and gave the agency failing marks for its fiscal 2002 audit, largely because of flaws in the way it accounts for sales of outstanding debt to private sector loan servicing companies.

Since August 1999, SBA has sold off portions of its loan portfolio, divesting itself of $6.5 billion in outstanding disaster assistance and regular business loans. A January report from the General Accounting Office (03-87) revealed that the agency had improperly accounted for the loans sold over the first 18 months.

GAO noticed that SBA's books showed proceeds on subsidized disaster relief loan sales, a "very unlikely scenario," according to Rep. Todd Platts, R-Pa., chair of the House Subcommittee on Government Efficiency and Financial Management. SBA originally granted these loans to borrowers at below market interest rates and the loans bear high default risks, making it improbable that the agency would profit from selling the outstanding balances, GAO said.

SBA is pushing loan asset sales to transfer some loan servicing obligations to private creditors. But accounting discrepancies have caused some lawmakers to wonder if SBA has enough accurate information to determine that selling the loans is in the public's best interest.

"The situation at SBA raises serious questions about the quality of the financial management of their loan asset sales," said Platts, whose subcommittee held a Tuesday hearing on the issue. "It also demonstrates a point that is consistently raised by GAO and OMB: sound financial management requires more than clean audit opinions."

In response to the accounting problems GAO uncovered, SBA has hired outside experts to help develop a new system for calculating profits or losses on loan sales, said Thomas Dumaresq, the agency's chief financial officer, at the hearing. He emphasized that loan asset sales accounting is a relatively uncharted area and that little guidance is available on the topic.

Currently SBA uses two separate mathematical models for loan sales accounting. The models should produce consistent results. But one shows that SBA benefits from profitable loan sales, while the other shows that the loan sales result in increased costs to the agency.

A team of experts from IBM is helping agency officials merge these disparate accounting methods into a single, more accurate and reliable system, Dumaresq said. They expect to finish the consolidation and test it by the end of the fiscal year, he said.

GAO praised SBA for its progress, but has suggested that the agency put a hold on loan sales until accounting problems are completely worked out. Linda Calbom, GAO's director of financial management and assurance, told the lawmakers that, "These errors raise serious concerns about the information related to the results of loan sales included in the footnotes to the annual financial statements that SBA provided to the Office of Management and Budget and the Congress for decision-making purposes."

SBA was one of three agencies that did not receive a clean opinion on its fiscal 2002 financial audit and was the only agency to lose ground. The Defense Department also received a disclaimer, or failing mark, and the Agency for International Development received a qualified opinion, meaning portions of its financial statements were unreliable.

"We think it is important to note that the changed audit opinion does not reflect a decline in the quality of our financial statements, but rather a more in-depth assessment by the auditor of what has been in our financial statements for a number of years," Dumaresq told lawmakers.