INDEPENDENT ACCOUNTANTS’
REPORT ON THE PERFORMANCE AUDIT OF
FARMINGTON CASUALTY COMPANY
Performed by:
Cotton & Company LLP
Certified Public Accountants
333 North Fairfax Street, Suite 401
Alexandria, Virginia 22314
U.S. SMALL BUSINESS ADMINISTRATION
OFFICE OF INSPECTOR GENERAL
WASHINGTON, D.C. 20416
AUDIT REPORT
Issue Date: September 21, 2001
Number: 1-18
To: Robert J. Moffitt
Associate Administrator, Office of Surety Guarantees
From: Robert G. Seabrooks
Assistant Inspector General for Auditing
Subject: Audit of Farmington Casualty Company
Attached is the audit report on Farmington Casualty Company issued by Cotton &
Company LLP. The report discusses the following issues: (1) claim payments were not
supported by invoices or other proof of claim for two bonds, (2) status reports were not requested
and maintained for one bond, and (3) SBA was not notified in a timely manner of the default of
the principal for one bond.
You may release this report to the duly authorized representative of Farmington Casualty
Company. The findings included in this report are based on the auditors’ conclusions. The
findings and recommendations are subject to review, management decision, and corrective action
by your office in accordance with existing Agency procedures for audit follow-up and resolution.
Please provide us your proposed management decision for each recommendation on the attached
forms 1824, Recommended Action Sheet, within 80 days.
This report may contain proprietary information subject to the provisions of 18 USC
1905. Therefore, you should not release this report to the public or another agency without
permission of the Office of Inspector General. Should you or your staff have any questions,
please contact Robert Hultberg, Business Development Programs Group at (202) 205-7577.
Attachments
We conducted fieldwork during March 2001 at Farmington’s offices in Philadelphia,
Pennsylvania. The audit was conducted in accordance with Government Auditing Standards, 1994
Revision, except as described below.
FOLLOW-UP ON PRIOR AUDITS
The scope of our audit did not include following up on findings and recommendations from
previous audit reports.
AUDIT RESULTS AND RECOMMENDATIONS
Farmington correctly calculated and remitted all sample bond fees to SBA in a timely manner.
Farmington did not always comply with SBA regulations for underwriting and servicing bonds and
processing claim payments. Specifically, Farmington did not maintain copies of invoices or other proof
of claim to support claim payments for two of five bonds tested. In addition, Farmington did not request
and maintain status reports in its files for one of five bonds tested or notify SBA of default for one bond
in a timely manner as required by SBA regulations.
We concluded that management and financial controls were adequate to protect assets and
prevent errors and fraud, except as follows. We concluded that Farmington did not comply in all
material aspects with SBA regulations for obtaining and maintaining documents to support claim
payments and status reports. We also concluded that Farmington did not have procedures in place to
ensure timely notification of default to SBA.
We conducted an exit conference with Farmington personnel on March 30, 2001. They generally
agreed with factual aspects of the findings.
Our findings and recommendations are discussed in detail below.
Unsupported Claims Payments
Farmington did not provide invoices or other proof of claim to support claim payments as
follows:
Contractor SBG Bond No. Item Amount
[ Ex. 4 ] Missing Invoices $68,179.69
Missing Invoices 3,129.61
Total Claims Paid $71,309.30
We questioned SBA’s 70-percent guaranteed portion of $71,309.30, or $49,916.51.
Sureties are required to maintain all documents for the term of each bond, plus any additional
time required to settle reimbursement claims from SBA and to attempt salvage or other recovery, plus an
additional 3 years [Code of Federal Regulations (CFR), Title 13, CFR 115.21, Audits and
Investigations].
FOIA Ex. 4
2
Recommendations: We recommend that the Associate Administrator, Office of Surety
Guarantees:
(1) Take appropriate actions to recover $49,916.51 for the unsupported claim payments.
(2) Advise Farmington to implement and enforce policies and procedures that would ensure
future compliance for the retention of required documents in accordance with SBA
regulations.
Progress Status Requests
Farmington did not request status reports from obligees and maintain such reports in its files for
one of the five bonds tested for underwriting. For [Ex. 4] we found no documented evidence that status
requests were obtained from the obligee. Farmington relied on its agent to comply with SBA
requirements for requesting status reports, and the agent could not confirm that status reports were
requested for the sample bond. If the viability and eligibility of guaranteed principals are not monitored,
SBA exposure could be increased by the issuance of additional bonding to an affected principal.
Title 13, CFR 115.15, Underwriting and Servicing Standards, (b) Servicing, states:
The Surety must ensure that the Principal remains viable and eligible for
SBA’s Surety Bond Guarantee Program, must monitor the Principal’s
progress on bonded Contracts guaranteed by SBA, and must request job
status requests from Obligees of Final Bonds guaranteed by SBA.
Documentation of the job status requests must be maintained by the
Surety.
Recommendation: We recommend that the Associate Administrator, Office of Surety
Guarantees advise Farmington to implement written policies and procedures to ensure that its agents
comply with SBA’s requirements for obtaining project status reports.
Timely Notification of Default
Farmington did not notify SBA in a timely manner of the default of the principal for one of the
four bonds reviewed with claims activity:
Contractor SBG No. Bond Default Date Date SBA Notified
[ Ex. 4 ]
Title 13 CFR 115.65, General PSB Procedures, (c)(2) Other Events Requiring Notification,
states:
The PSB Surety must notify SBA within 30 calendar days of the name and
address of any Principal against whom legal action on the bond has been
instituted; whenever an Obligee has declared a default; whenever the
surety has established or added to a claim reserve; of the recovery of any
amounts on the guaranteed bond; and of any decision by the Surety to
bond any such Principal again.
FOIA Ex. 4
3
4
APPENDIX
FARMINGTON CASUALTY COMPANY
RESPONSE TO THE DRAFT REPORT
REPORT DISTRIBUTION
Recipient No. of Copies
Associate Deputy Administrator for Capital Access .................................................1
General Counsel.........................................................................................................2
Office of the Chief Financial Officer
Attention: Jeff Brown ...............................................................................................1