Audit of the Massachusetts Growth Capital Corporation Objectives, Scope, and Methodology

An overview of the purpose and process of auditing the Massachusetts Growth Capital Corporation.

Overview

In accordance with Section 12 of Chapter 11 of the Massachusetts General Laws, the Office of the State Auditor has conducted a performance audit of certain activities of Massachusetts Growth Capital Corporation (MGCC) for the period July 1, 2016 through June 30, 2018.

We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Below is our audit objective, indicating each question we intended our audit to answer; the conclusion we reached regarding each question; and, if applicable, where each is discussed in the audit findings.

Objective	Conclusion
1. Did MGCC administer its small business financing and diversity program in accordance with its enabling legislation, Chapter 40W of the General Laws? Specifically, did MGCC do the following?
a. administer its small business loan program in accordance with Chapter 40W of the General Laws	Yes
b. administer its technical assistance grant program in accordance with Chapter 40W of the General Laws	Yes
c. accurately summarize performance and outcome data and prepare accurate reports of the services it provided	No; see Finding 1

 

To achieve our objective, we gained an understanding of the internal control environment by reviewing MGCC’s internal control plan and applicable laws, regulations, and agency policies and procedures, as well as conducting interviews with MGCC management. We tested the design and effectiveness of controls we determined to be relevant to our audit objective regarding the awarding of loans and grants (see Finding 2). We also performed the following procedures.

Loan Financing

To determine whether MGCC had complied with its loan policy and Chapter 40W of the General Laws, we inspected loan files for a judgmentally selected sample of 15 loans (8 loans for fiscal year 2017 and 7 for fiscal year 2018) from the population of 57. We determined the following:

• whether the borrowers’ expected use of funds was allowable
• whether the underwriting process included a review of the borrowers’ financial strength
• whether the loan terms (including loan amount, interest rate, and length) in the loan files matched the information in the executed loan agreements

Grant Awards

To determine whether MGCC administered the demographic and diversity aspects of the grant program in accordance with its policies and procedures, we selected a judgmental sample of 12 grants (6 from fiscal year 2017 and 6 from fiscal year 2018) from the population of 62 awarded by MGCC during the audit period. We reviewed each grant file and determined the following:

• whether the grant files contained a completed grant checklist submitted by the applicant
• whether the grant files included an evaluation and scoring sheet prepared by the grant review committee²
• whether the grant recipient reporting requirements were met (with the recipient submitting both a six-month interim report and a year-end activity report)

Performance and Outcome Reporting

To determine whether MGCC accurately measured and reported the achievement of its annual goals and objectives that are required to be reported to the Executive Office of Housing and Economic Development (EOHED), we verified the completeness and accuracy of MGCC’s performance and outcome reporting. To perform our audit tests, we compared MGCC’s Historical Loan Summary Spreadsheet³ (HLSS) as of the end of fiscal year 2018, its Grant Performance and Outcome Analysis⁴ (GPOA) for fiscal years 2017 and 2018, and the Office of Performance Management and Oversight⁵ (OPMO) annual reports filed with EOHED for fiscal years 2017 and 2018 to the supporting loan and grant files.

We tested whether MGCC had achieved its annual goals and had compiled, summarized, and reported the information completely and accurately. Specifically, we determined whether MGCC had done the following:

• increased the dollar amount of loans from the previous year
• sustained or increased the percentage of loans made to small businesses located in gateway cities⁶ and underserved communities
• sustained or increased the percentage of loans made to minority-owned small businesses
• sustained or increased the percentage of loans made to woman-owned small businesses
• tracked progress made in the small business technical assistance grant program, as follows:

• the number of businesses served by grant recipients
• the number of jobs created and saved by grant recipients
• the percentage of woman-owned businesses served by grant recipients
• the percentage of minority-owned businesses served by grant recipients

the percentage of businesses located in low-to-moderate-income communities served by grant recipients

Data Reliability

To determine the reliability of data on MGCC’s spreadsheets of annually awarded small business loans and technical assistance grants, we interviewed management personnel who were responsible for the source data. Regarding the awarded small business loans for our audit period, we verified the accuracy of the HLSS by tracing loan awardee names, loan amounts, interest rates, and terms from a nonstatistical random sample of 15 of the 57 executed loan agreements to the supporting loan files, and we reconciled the dollar value of these loans to the general ledger and audited financial statements. For the technical assistance grants awarded during our audit period, we verified the accuracy of the GPOA by tracing the grant awardee names and dollar amounts from a nonstatistical random sample of 12 of the 62 grant awards to the supporting grant files, and we reconciled the dollar amount of these grants to the general ledger and audited financial statements. We determined that the data were sufficiently reliable for the purposes of our audit report.

For our audit period, we verified MGCC’s performance and outcome spreadsheets by using the same sample selections used for our loan and grant substantive testing (a sample of 15 loans and 12 grants) to determine whether MGCC compiled, summarized, and reported the information completely and accurately. We verified that the loans tested were listed on the HLSS by comparing the data in the HLSS to the loan files. We determined whether the numbers of jobs created and saved, as well as demographic information such as borrower race, gender, and veteran status, were accurately reported by tracing the data from the annual GPOA to grant recipients’ year-end activity reports. We determined whether the statistical data on the HLSS agreed to the outcome data on the MGCC website and in the OPMO annual reports. Also, we verified that the grants tested were included on the GPOA with accurate dollar amounts and that the grant application process was completed within guidelines. Lastly, we tested whether the statistical data on the GPOA agreed to the outcome data on the MGCC website, in MGCC’s marketing materials, and in the OPMO annual reports. We determined that the data were sufficiently reliable for the purposes of our audit report.

We used nonstatistical sampling to help us achieve our audit objectives and therefore did not project our results to the various populations.

2.    This external review group, which comprises 14 members with community development expertise, is responsible for the independent review, evaluation, and scoring of grant applications.

3.    This is a cumulative list of loans approved since MGCC’s inception on October 1, 2010 that is maintained by management in an Excel spreadsheet.

4.    This is an annual summary of all funded grants that includes performance and outcome statistics provided to MGCC by the grant recipients in their year-end activity reports. It is maintained by management in an Excel spreadsheet.

5.    According to its website, “The Office of Performance Management and Oversight measures the performance of all public and quasi-public entities engaged in economic development.”

6.    According to Section 3A of Chapter 23A of the General Laws, a gateway city is “a municipality with a population greater than 35,000 and less than 250,000, a median household income below the commonwealth’s average and a rate of educational attainment of a bachelor’s degree or above that is below the commonwealth’s average.”

Date published:	June 26, 2019