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The Massachusetts Office of International Trade and Investment’s Process for Collecting and Recording Information About Small Businesses in Underserved Small Business Communities Applying to the State Trade Expansion Program Is Ineffective.

As a result, MOITI’s ability to evaluate the effectiveness of its efforts to promote STEP to USBCs is limited.

Table of Contents

Overview

The Massachusetts Office of International Trade and Investment (MOITI) does not collect information about the four underserved small business communities (USBCs) defined by the federal Small Business Administration (SBA) from businesses at the time they apply to the State Trade Expansion Program (STEP). Instead, MOITI attempts to collect this information from small businesses only after they have been awarded funds. In addition, MOITI does not collect complete information: it allows businesses to indicate that they are owned and controlled by women, but not whether they are part of any of the other three SBA-defined USBCs. Finally, MOITI does not ensure that when it does collect this information, it is accurately recorded.

As a result, MOITI’s ability to evaluate the effectiveness of its efforts to promote STEP to USBCs is limited. In addition, because MOITI only collects information after award recipients are chosen, it does not collect and record information about all applicants, only those that receive financial assistance awards. Further, according to SBA’s program manager for STEP in Massachusetts, SBA relies on this information to evaluate the overall success of STEP and reports the information to Congress annually. Therefore, we believe it is important that this information be as complete and accurate as possible. Finally, when awarding grants to state government organizations (such as MOITI) for STEP, SBA takes into consideration the organizations’ past performance in administering the program. Not effectively administering STEP could negatively affect MOITI’s ability to secure future STEP funding from SBA.

To determine the accuracy of the information MOITI recorded, we reviewed completed Requests for Counseling (RFCs) for all 48 small businesses that received STEP financial assistance awards from MOITI during the audit period. Although MOITI had a completed RFC from each of the 48 businesses, the information on a form did not always accurately indicate a small business’s status as part of a USBC. As currently designed, the RFC that MOITI uses to collect this information only captures information related to whether a small business is owned and controlled by women. There are no fields on the RFC that capture information related to the three other USBCs (whether small businesses are owned and controlled by socially and economically disadvantaged individuals, owned and controlled by veterans, or located in rural areas).

Via phone or email, we successfully contacted officials from 43 of the 48 small businesses to validate their USBC statuses. (We could not reach officials from the other 5 businesses.) In four instances, a small business told us in this correspondence that it was part of a USBC other than that of businesses owned and controlled by women. However, these businesses were not able to indicate that on the RFCs they provided to MOITI. As a result, all four of these small businesses were designated as not part of a USBC on MOITI’s Performance Progress Report (PPR).

In addition, MOITI inaccurately recorded the statuses of 5 (10%) of the 48 small businesses on the PPR sent to SBA. In three of these instances, MOITI recorded a small business as part of a USBC when it did not appear that the small business had reported such a status on its RFC. In the other two instances, MOITI did not record a small business as part of a USBC when it appeared that the small business had reported this status.

Authoritative Guidance

Section 1.4 of SBA’s STEP Funding Opportunity Announcement OIT-STEP-2018-01 states,

Applicants [such as MOITI] are encouraged to promote trade expansion to a broad range of small businesses, to include the following four [underserved] small business communities . . .

      1. Owned and controlled by socially and economically disadvantaged individuals;
      2. Owned and controlled by women;
      3. Owned and controlled by veterans and/or service-connected disabled veterans; and/or,
      4. Rural small businesses.

[State government organizations that] receive a STEP award must collect these small business attributes for required reporting during the performance period.

SBA provided guidance to entities such as MOITI through a document called “Questions and Answers (Q & A) in Response to OIT-STEP-2018-01.” The document gives the following answer to a question on collecting the aforementioned information about eligible small business concerns:7

The question regarding [eligible small business concerns, or ESBCs] being considered disadvantaged or not must be a part of your application process. The ESBC completes an application so self-declaration is acceptable.

Reasons for Issue

MOITI officials told us that they were unaware of the requirement to collect information on whether small businesses applying for financial assistance awards were part of any of the aforesaid USBCs as part of the STEP financial assistance award application process. They also told us that SBA reviews the STEP application MOITI uses for financial assistance awards each year and has never told MOITI it needs to include that information.

MOITI did not have monitoring controls to ensure that it accurately recorded applicants’ reported USBC statuses on its PPRs.

MOITI officials did not provide us with an explanation of why they used the RFC to capture information about the four USBCs.

Recommendations

  1. MOITI should review the information it has for businesses that have received STEP financial assistance awards regarding their statuses as part of USBCs and correct any inaccurate information.
  2. MOITI should ensure that its employees are aware of the requirements of STEP.
  3. MOITI should revise its Massachusetts STEP Program Readiness Assessment and Application to include SBA’s definitions of the four USBCs and an area where a small business should document any of the four USBCs to which it belongs.
  4. MOITI should implement monitoring controls to ensure that it accurately records applicants’ reported USBC statuses on its PPRs.

Auditee’s Response

MOITI provides quarterly reports to the SBA regarding USBC information. It has also undergone several SBA audits, receiving recognition for a perfect audit score for STEP 5, demonstrated in the documentation provided to you during the audit. The SBA has never raised any concern about MOITI’s USBC reporting. Accordingly, we do not necessarily agree with the characterization of MOITI’s reporting to the SBA as “ineffective.”

That said, MOITI does not dispute the audit’s recommendations will improve administration of the STEP program and result in increased effectiveness of MOITI’s internal controls including employee training/education and monitoring controls. MOITI will implement the recommendations accordingly.

Specifically, MOITI will (1) modify the STEP application to request USBC information from all applicants in advance of issuing awards; (2) ensure its personnel are STEP trained; and (3) conduct reviews with [the Executive Office of Housing and Economic Development’s] Finance Department to ensure financial and other records are accurate. In accordance with SBA guidance, MOITI will collect USBC information in the form of an attestation from the applicant.

Auditor’s Reply

MOITI states that it does not agree with our characterization of its USBC reporting process as ineffective. MOITI states that it has had several SBA audits; that SBA has never raised any concern about its USBC reporting; and that MOITI received recognition for a perfect audit score for the fifth year of STEP, the year of SBA’s most recent review.

The Office of the State Auditor acknowledges that SBA periodically reviews STEP and that MOITI may have received a perfect score during the most recent review. However, the fifth year of STEP covered the period September 30, 2016 through September 29, 2017. SBA did not begin requiring agencies like MOITI to collect and report information about the four USBCs until the sixth year of STEP, so its reviews from the fifth year and earlier would not have examined MOITI’s compliance with that requirement. Further, from the information provided to us during the audit, it appears that SBA’s reviews are strictly financial and do not include a review of MOITI’s process for collecting and reporting information about the four USBCs.

Based on its response, MOITI is taking measures to address our concerns in this area.

7.    “Eligible small business concern” is the term SBA uses to describe a business that meets the criteria to apply for a STEP financial award.

Date published: June 30, 2022

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