Participation in the Small Business Administration’s 8(a) program can obviously enhance a company’s business development efforts, but with that designation comes certain requirements that participants must meet regarding financial statement reporting and submission to the SBA. The rules for these are found in the Code of Federal Regulations, Title 13, paragraph §124.602.

Participants with gross annual receipts of over $10 million must submit to the SBA audited financial statements, prepared in accordance with generally-accepted accounting principles by a licensed independent accounting firm, within 120 days of the company’s fiscal year end.

Participants owned by a tribe, Alaskan Native Corporation (ANC), Native Hawaiian Organization (NHO), or Community Development Corporation (CDC) may submit unaudited statements within 120 days provided that (i) audited financials for the parent company owner of the Participant are submitted, and (ii) certification is obtained from the CEO and CFO (or equivalent positions) that each individual has read the unaudited financial statements, affirms that they do not contain any material misstatements, and certifies that they fairly represent the participant’s financial position and results of operations. Provision is made in the first year where gross receipts exceed $10 million to submit an audited balance sheet, with the income and cash flow statements being either reviewed or compiled, depending on the level of sales in the previous year.

Participants owned by tribes, ANCs, NHOs or CDCs may submit consolidated financial statements prepared by the parent entity, instead of separate financial statements for each 8(a) participant, as long as the consolidated statements include schedules for each 8(a) participant that gives the SBA clarity and insight into the financial information of each entity contained within the consolidated financial statements.

With the 8a designation comes certain requirements that participants must meet regarding financial statement reporting and submission to the SBA.

The requirement for audited financial statements may be waived by the SBA for good cause. This is not usually done but would include cases where a company has an unexpected large increase in sales at the end of the year, causing a need for audited financials; or is suffering severe financial difficulties, making the cost of an audit burdensome; or has been a participant for less than 12 months.

Participants with gross annual receipts over $2 million but less than $10 million must submit reviewed financials prepared in accordance with generally-accepted accounting principles by a licensed independent accounting firm to the SBA within 90 days of fiscal year end. The SBA can waive the requirements for a review for the same reasons noted above for an audit.

Participants with less than $2 million of gross annual receipts must submit an in-house annual statement or a compilation statement prepared by an outside accounting firm within 90 days of fiscal year end. The compilation may be either a balance sheet and income statement-only report, or may also include a statement of cash flows and financial statement footnotes. Either way, the compilation must be verified as to its accuracy by the partner, sole proprietor, or authorized officer, and must be signed and dated.

The SBA is authorized to require either audited or reviewed financial statements, despite a participant’s lower gross revenues, when in its opinion, an audit or review is necessary to gain a better understanding of the participant’s assets, liabilities, income and expenses (for example, to assess a company’s ability to perform under a specific 8(a) contract) or to determine continuing eligibility to participate in a set-aside program.

Participants seeking an award under an 8(a) contract, after year end but before the deadline for an audit (120 days) or review (90 days), must submit a final sales report to the SBA signed and certified by the company’s CEO or president, breaking out sales between 8(a) set-asides, and sales recorded under full and open competition. This information is used to determine eligibility under the 8(a) contract.

Notwithstanding the requirements noted above which are driven by the government, it makes sense for 8(a) participants to consider upgrading the level of reporting, even if not specifically required by the SBA. Companies that voluntarily obtain a review or audit from an outside independent accounting firm, inspire more confidence in larger prime contractors who may be looking to team with a smaller 8(a) contractor. Furthermore, outside accountants performing a review or audit are more likely to catch accounting errors and omissions that in-house accounting staff (who are sometimes not trained to the level of outside accountants) miss. This will result in more accurate financial statements that the government, other contractors, and lending institutions can rely upon.

Jeffrey S. Burr, CPA/CFF, CFE, MBA is a Director with Federal Strategies Group, LLC, a government contracting, management consulting, M&A advisory, and forensic accounting firm to the government contracting and high technology industries. He can be reached via email at JeffB@FedStrat.com.