One out of every five firms that have received federal aid under a special government program to aid minorities and the disadvantaged served as a front for white contractors, according to a special audit of the Small Business Administration released yesterday.
In addition, the audit accused the SBA of pumping millions of dollars worth of contracts into firms that either had no chance of succeeding or whose owners already were earning up to $1 million a year. The audit also revealed that some SBA contracts went to high ranking federal employes and convicted felons.
The highest concentration of fronts, the report said, was in the region including the District of Columbia, Maryland, Virginia, West Virginia and Pennsylvania.
The audit was conducted on SBA's entire portfolio of 8-(a) contractors as of April 30, 1978. The purpose of the program is to set aside government contracts for firms owned or controlled by socially and economically disadvantage persons, to give them experience and headway in the business world.
Since the audit began, however, Congress has passed legislation tightening up some of the loopholes in the program and the situation has improved somewhat, said SBA inspector General Paul R. Boucher, who conducted the audit.
"I can't say if that's the present state of the program," Boucher said, referring to the audit's finding that 20 percent were white fronts. "But many of those same firms are still there," in the SBA portfolio.
The audit began following criticism two years ago of the SBA's handling of the program. The review was intended to determine whether the program "is in furtherance of congressional intent and expectations under the law," the report said.
The audit is the last segment of a three-part, 16-month investigation of SBA 8-(a) programs. The first report issued in May said that of $160 million paid out under the SBA's program to give contractors advance payments on their projects, about $6.5 million already was uncollectable and another $12.5 million also will probably be written off.
The second report released in July cites similar problems with its business development expense program, which pays disadvantaged contractors expenses to help them perform specific contracts.
All three phases of the investigation blamed SBA's unclear regulations and SBA mismanagement for the problems.
According to the audit released yesterday on the 1,505 firms in the program, 526 probably shouldn't have been there.
Of those 526 firms, 323, or 21 percent of the firms in the project, were "headed by disadvantaged individuals who did not appear to control or manage the day-to-day operations of their firms or whose status as socially or economically disadvantaged individuals was doubtful under prevailing eligibility standards," the report said.
In addition, "except for character determinations, there were no eligibility standards for evaluating personal attributes" of the applicants "to assure that applicants had at least the potential to become competitive business persons."
Some improprieties included the disadvantaged owner holding less than 51 percent of the company's stock, the owner subcontracting work to nondisadvantaged firms and the apparent owner not managing the company.
Some so-called disadvantaged owners had high personal and business incomes and net worths, including one whose personal net worth exceeded $1 million. Twenty-five others receiving SBA assistance had net worths between $100,000 and $250,000 and 14 were worth between $250,000 and $500,000 the report said.
In other areas, the audit found that 38 firms were capable of operating without the 8 (a) program while 47 others were in such bad financial shape they should have been eliminated from the program.