Service-Disabled Veteran-Owned Small Business Program: Vulnerability to Fraud and Abuse Remains

What GAO Found

In summary, VA’s SDVOSB program remains vulnerable to fraud and abuse. VA has made inconsistent statements about its progress in verifying firms listed in VetBiz using the new, more-thorough process the agency implemented in response to the 2010 Act. In one communication, VA stated that as of February 2011, all new verifications would use the 2010 Act process going forward. According to the most-recent information provided by VA, there are 6,079 SDVOSBs and veteran-owned small businesses (VOSB) listed in VetBiz. Of these, 3,724 were verified under the more-through process implemented under the 2010 Act, and 2,355—over 38 percent—were verified under the less-rigorous 2006 Act process. The presence of firms that have only been subjected to the less-stringent process that VA previously used represents a continuing vulnerability. In 2011, VA’s Office of Inspector General (OIG) issued a report finding that VA’s document review process under the 2006 Act “ in many cases was insufficient to establish control and ownership … [and] in effect allowed businesses to self-certify as a veteran-owned or service-disabled veteran-owned small business with little supporting documentation.”

VA has taken some positive action to enhance its fraud-prevention efforts. VA generally concurred with recommendations we issued in October 2011 and has established processes in response to 6 of the 13 recommendations. VA has also begun action on some remaining recommendations, such as providing fraud-awareness training and removing contracts from ineligible firms, though these procedures need to be finalized.

Why GAO Did This Study

This testimony discusses the Service-Disabled Veteran-Owned Small Business (SDVOSB) Program’s vulnerabilities to fraud and abuse. This testimony is based on our report, Service-Disabled Veteran-Owned Small Business Program: Vulnerability to Fraud and Abuse Remains which was recently issued. In fiscal year 2010, federal agencies awarded $10.8 billion in small-business obligations to firms participating in the SDVOSB program, according to the Small Business Administration (SBA). The program is intended to honor business-owning veterans who incurred or aggravated disabilities in the line of duty by providing their firms with sole-source and set-aside contracting opportunities. Firms must meet several requirements to be eligible to participate in the program, such as being majority-owned by one or more service-disabled veterans who manage and control daily business operations.

SBA administers the government-wide SDVOSB program but does not verify firms’ eligibility, stating that its only statutory obligation is to report other agencies’ success in meeting contracting goals. In addition to SBA’s statutory authority over the government-wide program, the Department of Veterans Affairs (VA) has separate authority over issues related to its own SDVOSB program. VA awarded $3.2 billion in SDVOSB contracts in fiscal year 2010—about 30 percent of government-wide SDVOSB awards. Unlike SBA, VA is bound by the Veterans Benefits, Health Care, and Information Technology Act of 2006 (2006 Act) to verify firms’ eligibility. Since 2009, we have issued 10 reports and testimonies detailing how the government-wide and VA SDVOSB programs are vulnerable to fraud and abuse, making numerous recommendations to strengthen fraud-prevention controls. In October 2010, Congress also passed the Veterans Small Business Verification Act (2010 Act), part of the Veterans’ Benefits Act of 2010, to require VA among other things to more-thoroughly validate firms’ eligibility before listing them in VetBiz, VA’s database of eligible firms. In July 2011, we reported that both SBA and VA had taken positive steps in response to our findings and recommendations, but that vulnerabilities remained.

Congress requested that we again update our prior work and report the status of our recommendations. Our report assesses (1) VA’s progress in addressing remaining vulnerabilities to fraud and abuse in its SDVOSB program and (2) actions taken by SBA or other federal agencies since our previous reports to improve government-wide SDVOSB fraud-prevention controls.

For more information, contact Richard J. Hillman at (202) 512-6722 or hillmanr@gao.gov.