Audit of Management Controls over Monitoring and Closeout of Small Business Innovation Research Phase II Grants OAS-M-08-09 Results * The Small Business Innovation Development Act of 1982 (Public Law 97-219) established the Small Business Innovation Research (SBIR) Program to assist small businesses in developing new ideas and technology. An earlier audit of SBIR phase II grants (DOE/IG-0521, August 2001) found cost sharing and allowability of costs issues resulting in about $4.8 million of questioned and unsupported costs. The objective of our audit was to determine whether previously observed weaknesses with the administration of the SBIR II grant program had been corrected. * Our review disclosed that the Office of Science's Chicago Office (Chicago) had not corrected all previously reported weaknesses in monitoring and administering the SBIR II grants program. Action had not been completed to resolve about $1.2 million of the approximately $2.4 million of questioned costs identified in our previous audit of SBIR II grants; and Chicago was not reviewing grant costs or closing out completed awards in a timely manner. Testing revealed that Chicago had not completed action on or was unable to provide grant files for 87 percent, or 73 out of 84, of the SBIR II grants that had been completed for more than three years without being closed out. * Chicago did not give sufficient attention to verifying that costs incurred by SBIR grantees were allowable. Chicago officials told us that problems with insufficient staff and resources required them to focus the majority of their attention on active awards rather than SBIR grant close out. Chicago also indicated that it used a risk-based process to determine whether to conduct desk reviews or audits before closing out grants. While this risk-based process may be sufficient with higher dollar value grants, it effectively excludes most SBIR grants from review or audit because these grants seldom exceed $1 million – the threshold for automatic close out of grants without known problems. * Without improvement in the timeliness of the grant closeout and review processes, the Department may pay for unnecessary and unallowable costs. For example, we identified $27,610 in questionable costs and $749,749 in unsupported costs during our testing of closed grants. Further, because of extensive delays in the close out process, Chicago's ability to recover the $1.2 million in costs questioned in our previous SBIR II audit is uncertain. We also identified $7.4 million in SBIR II funding associated with grants where an audit or desk review may still be needed; however, the required document retention period has expired, thereby putting the ability to complete these assessments in jeopardy. Issues to Be Resolved * Additional improvements in the administration of SBIR II grants were needed. Accordingly, we made recommendations to determine the allowability of costs questioned; change policies and procedures to close grants more timely; and randomly sample grant costs before closeout. Management concurred with our recommendations and provided corrective actions to be implemented by December 31, 2008. The report can be found on the web at: http://www.ig.energy.gov