SBA Office of General Counsel Audit of Participants in the 8(a) Program and Beyond

On December 5, 2025, the Small Business Administration (SBA) sent letters to 4,300 current and recent participants in the 8(a) Business Development Program requiring production by January 5, 2026, of financial records, contracting and subcontracting agreements, and employee records.  Below we discuss the genesis of the U.S. Government’s focus on fraud in small business programs, the new SBA request for documents, the coming Treasury audit of preference-based contracts, and more.

Development of U.S. Government Focus on Fraud in 8(a) Program with a Growing Focus on “Preference-Based Contracting”

Earlier this year, the Department of Justice (DOJ) entered into a settlement resolving allegations of fraud by former and current participants in SBA’s 8(a) business development program and a U.S. Agency for International Development (USAID) contracting officer.  As noted in the DOJ press release, $550 million in government contracts were fraudulently awarded through bribery of a USAID contracting officer.^[i] 

On June 27, 2025, SBA Administrator Kelly Loeffler announced an audit of the 8(a) program due to what SBA described as “rampant fraud—and increasingly egregious instances of abuse.”^[ii] The SBA Office of Inspector General (OIG) said it would launch “a full-scale audit of the program to stop bad actors from making the kind of backroom deals that have already cost taxpayers hundreds of millions of dollars.”^[iii]  Per SBA’s press release, SBA intends to collaborate with federal agencies that award contracts to 8(a) participants and began its investigation “with high-dollar and limited-competition contracts and going back over a period of fifteen years.”  The SBA Administrator has more recently described this as “an audit of the program to review every 8(a) contract for the last 15 years.”^[iv]

On October 21, 2025, SBA suspended ATI Government Solutions and three of its executives following allegations that ATI acted as a pass-through entity.^[v]  As a result, Treasury suspended and terminated all contracts and task orders with ATI Government Solutions, “following allegations of fraud involving more than $253 million in previously issued contract awards."^[vi] SBA subsequently announced that as part of its “ongoing investigation into ATI Government Solutions, SBA has uncovered and now suspended a network of SEVEN additional companies connected to its CEO Firmadge Crutchfield.”^[vii]

Treasury’s concerns with ATI prompted the agency to roll out plans on November 6, 2025 to conduct a “comprehensive audit of all contracts and task orders awarded under preference-based contracting, totaling approximately $9 billion in contract value across Treasury and its bureaus.”^[viii] Per the announcement, the audit “will examine potential misuse of the Small Business Administration’s 8(a) Business Development Program,” and also “other initiatives that provide federal contracting preferences to certain eligible businesses.”   

Treasury’s focus appears to be the “use of contracting preferences that fall outside normal procurement rules” that “may have enabled large companies to use pass-through arrangements where an eligible small business retains fees for minimal participation, while subcontracting nearly all work.”  Consistent with this focus, Treasury Secretary Scott Bessent’s statements reflect an emphasis on ensuring that only “legitimate small businesses” are winning awards and that “legitimate small business[es] . . . deliver measurable value to the government and the public.”  SBA welcomed Treasury’s announcement.^[ix]

On December 5, 2025, the SBA Office of General Counsel sent letters to 4,300 contractors requesting production of three years of financial records, contracting and subcontracting agreements, and employee records by January 5, 2026.  SBA’s news release describes the request as part of SBA’s ongoing effort to expose fraud, waste, and abuse.^[x] The release quotes SBA’s Administrator as describing the 8(a) Program as “a pass-through vehicle for rampant abuse and fraud.” 

On December 8, 2025, Senator Jodi Ernst, in her role as Chair of the U.S. Senate Committee on Small Business & Entrepreneurship, sent individual letters to 24 federal agencies calling on them to pause issuance of sole source awards to 8(a) participants.^[xi] In addition to halting 8(a) sole source awards, Senator Ernst is calling for examination of “all sole-source 8(a) contracts awarded” and all “all 8(a) set-aside contracts awarded” by each agency “since FY 20 for any violation of laws and regulations pertaining to 8(a) program eligibility, potential offenses as established in 15 U.S. Code § 645, and any other fraudulent or improper activity.”  Additionally, Senator Ernst appears to be calling out particular contractors by name as well as contracts awarded for examination by particular agencies.  (This follows Senator Ernst’s introduction of a bill on November 17, 2025, the “Stop 8(a) Contracting Fraud Act,” which would halt all new no-bid awards until a detailed audit of the entire program is conducted.^[xii])

SBA’s Office of General Counsel Request for Documents

Recipients have been given until January 5, 2026 to provide the following requested documents:

1. 1. General Ledger for the last three full fiscal years
   2. Trial Balance as of the last day for each of the last three fiscal year-ends
   3. IRS Form 4506 covering the last three full fiscal years
   4. Bank Statements as of the last day for each of the last three fiscal year-ends
   5. Bank Reconciliations as of the last day for each of the last three fiscal year-ends
   6. Payroll Register and Reconciliation (including any distributions to any owner) monthly for the last three full fiscal years
   7. List of All Employees, broken out by contracts those employees are servicing, for the last three full fiscal years
   8. List of all Vendors (as well as all joint ventures) for the last three full fiscal years
   9. Copy of all 8(a) Contracts on which the firm has worked for the last three full fiscal years
   10. Subcontracting Agreements related to the contracts in item 9 (for the last three full fiscal years)
   11. Financial Statements which include, at a minimum, the year-end Balance Sheet, YTD P&L, Cash Flow Statement, and the Statement of Equity for each of the last three fiscal years
   12. Financial Statement Reconciliation to the year-end Trial Balance for the last three fiscal years, and
   13. For each of the last three full fiscal years, a Sub-Ledger Schedule tying to the year-end trial balance accounts for: all Accounts Receivable accounts, all Accounts Payable accounts and all P&L accounts

The intent behind these letters is to obtain information to further the U.S. Government’s assertion that the 8(a) Program is rife with waste, fraud, and abuse.  The audits of this information could focus on a range of issues, including among others, whether:

• entities should have been admitted to the 8(a) Program in the first place (e.g., whether affiliates were admitted to the Program using the same NAICS);
• participants, once admitted, should have been allowed to remain in the 8(a) Program (including focus on restrictions around excessive withdrawals and salaries);
• participants should have received 8(a) set-aside and sole source awards (e.g., whether use of an ostensible subcontractor resulted in a violation of the size regulations);
• the 8(a) prime received unreasonably high profit (particularly on sole source awards);
• the limitations on subcontracting (LOS) were violated;
• there was employee sharing with other entities that could give rise to affiliation or other concerns; and
• there were kickbacks or bribery involved akin to what occurred with the USAID situation discussed above.

But recipients of the letter should understand that production of this kind of information could have implications that have nothing to do with 8(a) Program or other small business requirements.  For example, such documents could result in focus on whether the contractor used personnel who did not meet the experience and/or education requirements of a particular contract for the labor category under which their labor was billed.

Thus, while the letters look relatively benign, recipients should treat them as the initiation of an investigation with a specific objective—identifying bases for removing companies from the 8(a) Program, canceling 8(a) awards, and prosecutions for fraud—and therefore carrying more risk than a routine information request.  Recipients should review all documents closely before producing them to the SBA.  (Mentors to 8(a) Participants that have formed joint ventures with their 8(a) protégé, which have received 8(a) contracts, should be aware of this request for documents and engaged with their protégé on any response concerning such contracts.)  As information provided to the U.S. Government must be accurate, to the extent extensions are not granted, submissions should highlight any limitations to responses—in addition to marking them with appropriate protections against release under the Freedom of Information Act.

Crowell is standing by to assist recipients in responding to the SBA Office of General Counsel’s December 5^th letter.

Small Businesses that Have Received “Preference-Based” Contracts, including but not Limited to 8(a) Awards, Should Consider Their Risk Profile in Advance of Government Outreach

It is important to remember that the SBA Office of General Counsel’s December 5^th letter is only one of many potential investigations or audits of current and former 8(a) participants and the contracts awarded to them on an 8(a) sole source or set-aside basis.  As noted above, the SBA OIG has initiated an audit of fifteen years of 8(a) prime contract awards.  And, as of December 8^th the U.S. Senate Committee on Small Business & Entrepreneurship, is requiring 24 federal agencies to examine “all sole-source 8(a) contracts awarded” and all “all 8(a) set-aside contracts awarded” by each agency “since FY 20 for any violation of laws and regulations pertaining to 8(a) program eligibility, potential offenses as established in 15 U.S. Code § 645, and any other fraudulent or improper activity,” with reports due to the Committee by December 22, 2025. 

While today’s focus is on 8(a) prime contractors, no one should expect that investigations and audits will end there.  We expect these efforts to broaden to include other SBA programs.  Indeed, Treasury’s November 6^th audit announcement suggests focus on a broader set of contract actions than merely 8(a) set-asides and sole source awards.  Treasury has not yet confirmed what other SBA programs fall under the $9 billion of “contracts and task orders awarded under preference-based contracting,” but if it was just 8(a) Program contracts, presumably that would have been so indicated. 

As such, government contractors who are currently performing (or have recently performed) set-aside contracts should take steps to understand their contract profile and assess any potential risk of non-compliance. 

The first step is to develop a complete picture of your set-aside and sole source portfolio, including the awarding agency, contract value, period of performance, and small business/socio-economic requirements.  From there, in the context of the above requirements, contractors would be well-advised to assess where the company falls on the risk spectrum to inform the effort to undertake in advance of any affirmative government outreach on these issues.  For example, the likelihood of audit by SBA and Treasury is increased if you have performed or are currently performing prime 8(a) set-aside or sole source contracts awarded by Treasury.  In contrast, if you are a GSA schedule holder that has only performed small business set-aside orders under the simplified acquisition threshold, your risk of audit currently appears relatively low. 

Based on the obligations imposed by your set-aside or sole source contracts, contractors should conduct an assessment of compliance with not only the various obligations imposed by a “preference-based” set-aside or sole source award but also the threshold eligibility question.

Non-Small Businesses Should Consider the Risk Profile Arising from Their Involvement on “Preference-Based Contracts” in Advance of Government Outreach

Subcontractors on 8(a) prime awards—as well as other “preference-based contracts”—should understand that they are potentially next in line for audit.

From a subcontracting perspective, the key concerns appear to be broadly the same regardless of the SBA program at issue:

• Compliance with the Limitations on Subcontracting Requirement.  Given the circumstances of the ATI situation, one of the primary concerns appears to be whether the small business prime contractor is performing a minimum portion of the requirements.  Under the SBA’s current LOS rule, a small business prime contractor agrees not to subcontract greater than a certain threshold of the prime contract to non-similarly situated entities.^[xiii] The threshold for the amount of work that can be subcontracted to non-similarly situated entities depends on the nature of the prime contract—for services contracts and contracts for supplies or products, the threshold is 50%; for general construction contracts, the threshold is 85%; and for special trade construction contracts, the threshold is 75%.^[xiv] The policy behind this requirement is that the federal government’s promotion of set-aside and sole source awards is undermined when the entity eligible for the contracting preference passes on work in excess of the limitations to entities that would not be eligible for the prime contract.  This rule applies in all contracts awarded as small business set-asides (so long as the contract has a value greater than the simplified acquisition threshold) as well as in 8(a) contracts, SDVOSB or VOSB contracts, HUBZone contracts, or WOSB or EDWOSB contracts pursuant to the WOSB Program.^[xv]
• Eligibility for Preference-Based Contracts.  The other primary concern is whether the entity at issue is qualified as a small business and for any claimed status under the various SBA programs.  This often comes down to a question of control.  DOJ has prosecuted instances of “pass-through fraud” where a government contractor claims small business size or status to win set-aside work but is serving as a conduit for another entity that is ineligible for the contract.^[xvi] Indicia of such pass-through arrangements can include employees of other companies using email addresses of the prime, employees from the subcontractor communicating directly with the government, and re-badged employees or resources.  The theory behind pass-through fraud is that another entity is actually directing and controlling the purported small business prime.  There are other, less flagrant, ways in which lack of control could jeopardize a small business prime contractor’s eligibility for set-aside awards.  One example is SBA’s ostensible subcontractor rule.  There are two ways by which a subcontractor could be deemed an ostensible subcontractor: first, if the subcontractor was proposed to perform the primary and vital requirements of the contract; and, second, if the small business prime was unusually reliant on the subcontractor.^[xvii]   

Large government contractors who perform as subcontractors on “preference-based” contracts should perform a corollary review of their subcontract portfolios—in other words, take steps to understand what of their subcontracted work has been on set-aside or sole source contracts.  From there, contractors can determine their risk profile depending on whether the set-aside or sole source was on an 8(a) basis or used another contracting preference that is likely to be audited, the agency for which the work was performed, the contract and subcontract value, etc.  Contractors should consider assessing what obligations applied to that work and determine whether and how the parties complied with such requirements. 

Typically, subcontractors do not have full insight into the management by their prime contractors (for example, whether such small business primes are fully compliant with the status requirements governing relevant SBA programs) or insight into performance of prime contracts (for example, whether the prime team—as a whole—complied with the LOS).  That is entirely expected.  But large government contractors should consider assessing whether there are any red flags in how a “preference-based” contract was won and performed, including if—based on the subcontractor’s own level of performance on a contract—the LOS may have been exceeded.

Both members to a joint venture receiving preference-based contracts should perform similar analyses to understand the risk profile of the joint venture. SBA imposes performance requirements on such joint ventures and all members of such joint ventures should be able to validate compliance based on the source of labor detail required in joint venture agreements, as well as the annual performance of work statements required to be signed by all members.

To the Extent Any Concerns Arise, Steps Can Be Taken in Advance of Government Outreach

One of two types of disclosures to the government could be advisable or necessary related to these issues: (1) a voluntary disclosure; or (2) a mandatory disclosure.  A voluntary disclosure is a disclosure that is not required by statute or regulation.  However, voluntary disclosures can take some of the sting out of the ultimate results of a government audit by getting ahead of potential issues and potentially engendering government leniency related to any punitive measures.  Typically, a contractor will consider a voluntary disclosure when it finds a contractual noncompliance or concludes that it needs to make a refund of funds it was paid.

The second type of disclosure is one made under the Mandatory Disclosure Rule at FAR 52.203-13 and the suspension and debarment regulations at FAR 9.406-2.  The Mandatory Disclosure Rule requires a contractor to disclose in a “timely” fashion “credible evidence” of certain violations of criminal law, violations of the False Claims Act, and significant overpayments.^[xviii] If a contractor fails to make a mandatory disclosure, and a government auditor identifies the issue instead, the consequences can be serious, including receipt of False Claims Act civil investigative demands, False Claims Act lawsuits, and suspension and debarment.  There also can be serious criminal penalties, particularly when a contractor knows of criminal violations and fails to disclose.

In sum, contractors should be mindful of the increasing likelihood of enforcement and investigations into small business contracts and relationships.  Contractors would be well advised to take the proactive steps outlined above to detect any issues as early as possible and avoid the more significant potential consequences of issues first detected via a government audit.