Disadvantaged Business Enterprise (DBE) Initial Certification Process
Internal Audit Practice Aid
Program Description
Participation of a State Transportation Agency (STA)in a Disadvantaged Business Enterprise Program(DBE) program is a requirement of receiving Federal-aid highway funds, Federal transit funds, Federal aid funds and Federal airport funds 49 CFR 26.3. This Practice Aid focuses on the process for the initial certification of a business as a DBE.The CFR defines a DBE as a for-profit business that is at least 51% owned by one or more individuals who are both socially and economically disadvantaged, or in the case of a corporation, at least 51% of the stock of the entity is owned by one or more socially and economically disadvantaged individuals. The management and daily business operations of the firm must also be controlled by one or more of the socially or economically disadvantaged owners of the firm.
The DBE Program provides an opportunity for firms that meet specific eligibility requirements to participate in contracts funded by the United States Department of Transportation (USDOT) under its various programs for assistance for highway, transit, rail and airport programs. The certification of a firm as a DBE involves a review of applications and supporting documentation submitted by that firm. This information is assessed by the STA in order to determine the firm’s eligibility under the program. The objectives of the program are stated in the CFR as the following:
A means to ensure nondiscrimination in the award and administration of USDOT assisted contracts;
Create a level playing field on which DBEs can compete fairly;
Ensure that the DBE program is narrowly tailored in accordance with applicable law;
Ensure only firms that fully meet eligibility standards participate in the program;
Help remove barriers to participation, assist the development of firms so they can compete successfully;
Provide appropriate flexibility to recipients of Federal financing assistance; and
Provide opportunities for DBEs.
In addition, 49 CFR part 26.81 requires that all recipients of Federal-aid within a State implement a “one-stop” certification process for DBEs. Therefore, if there is more than one entity in the State that certifies DBE participation, there must be a coordination of effort between all of those entities and an acceptance of the certification given by all of those entities regardless of which one performed the certification. A DBE must not be required to certify with each entity separately. As a result of this requirement, STAs create Unified Certification Programs, which governs and coordinates the DBE process for that State.
Statutes and Regulations
Code of Federal Regulations (CFR) 49, Part 26 contains the Federal regulations pertaining to DBE programs. Specifically, 49 CFR, Part 26, Subpart D pertains to certification standards and 49 CFR Part 26, Subpart E pertains to the certification procedures that must be followed. Subpart E also identifies the requirements that pertain specifically to Unified Certification Programs.
Catalogue of Federal Domestic Assistance (CFDA#)
There is no specific CFDA# for this program as it is not a direct assistance program. However, the DBE program pertains to all Federal USDOT programs and therefore all USDOT programs listed in the CFDA relate to this program.
Scope and Objectives
The scope of this engagement includes a review of the controls over the initial DBE certification process.
Audit Objectives
Specifically, the audit objectives are to determine whether internal controls were adequate to ensure:
Firms certified as DBE firms met required Federal certification standards concerning group membership or individual disadvantage, business size, ownership, and control.
General rules pertaining to the DBE certification process were met.
Required procedures for the certification process are followed.
Written procedures were in place to provide for maintaining confidentiality of information pertaining to DBE firms where applicable.
Proceduresfully incorporateUnified Certification Procedures (UCP).
Audit Program
Objective A:Determine whether internal controls were adequate to ensure firms certified as DBE firms met required Federal certification standards concerning group membership or individual disadvantage, business size, ownership, and control. 49 CFR 26.61For a sample of DBE firms determine whether:
Step 1
Internal controls were adequate to ensure firms certified as DBE firms met required Federal certification standards concerning group membership or individual disadvantage. Specifically:
a.DBE status was granted upon determination of both social and economic disadvantage at the time of certification 49 CFR 26.67 (b) (4).
(1) An assessment of economic disadvantage was determined first.
Note: A determination that an individual is not economically disadvantaged automatically precludes award of DBE status 49 CFR 26.67 (b) (4); (d); however, an individual that is not presumptively socially disadvantaged may still be determined to be socially disadvantaged based on criteria identified in 49 CFR Appendix E, 49 CFR 26.67 (d).
b.A signed notarized statement of membership in a presumptively disadvantaged group was included in the DBE file from one or more individuals who collectively own at least 51 percent of the firm and whose management and daily operations are controlled by one or more of those persons.
Note: According to 49 CFR 26.67 (a) (1) presumptively disadvantaged groups are women, Black Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, Subcontinent Asian Americans, or other minorities found to be disadvantaged by the Small Business Administration (SBA).
c.An assessment was included in the DBE file as to the acceptability of the notarized statement of membership in a presumptively disadvantaged group.
Note: 49 CFR 26.63 (a)(1); requires that if there is a well founded reason to question an individual’s membership in that group, the STA must require the individual to present additional evidence of membership.
d.For each individual owner listed in the STA summary report a statement of personal net worthfrom each individual who collectively owns at least 51 percent of the firm was included in the DBE files that:
(1)Was signed by the owner
(2)Was notarized
(3)Was mathematically correct
(4)Was supported with appropriate supporting documentation.
(5)Identified each owner’s personal net worth did not exceed $750,000 (49 CFR 26.67 (a) (2) (i); (ii))($1.32 million effective February 28, 2011.
Note: 49 CFR 26.67 (a) (2) (ii)states, “This statement and documentation must not be unduly lengthy, burdensome, or intrusive.”
In addition:
(6)Documentation was included in the DBE file that in assessing each individual’s net worth:
(a)The individual’s ownership in the applicant firm was excluded 49 CFR 26.67 (a) (2) (iii) (A).
(b)The individual’s equity in his or her primary residence was excluded (except any portion of such equity attributable to excessive withdrawal from the applicant firm) 49 CFR 26.67 (a) (2) (iii) (B).
(c)Any contingent liabilities were excluded 49 CFR 26.67 (a) (2) (iii) (C).
(d)Only the present value any assets held in vested pension plans, Individual Retirement Accounts, 401(k) accounts, or other retirement savings or investment programs less the tax and interest penalties that would accrue if the asset were distributed at the present time were included in the calculation of net worth 49 CFR 26.67 (2) (iii) (D).
Step 2
Internal controls were adequate to ensure firms certified as DBE firms met required Federal certification standards concerning business size. Specifically:
a.Tax returns were included in the DBE file to support that the firm was a for profit entity.
b.The DBE file includes documentation that the firm was a small business concern at the time of certification as follows:
(1)The firm's average annual gross receipts over the firm's three previous fiscal years was calculated.
(2)The firm's average annual gross receipts over the firm's three previous fiscal years did not exceed the overall small business gross receipts dollar limit during FY 2011. See 49 CFR 26.65 for requirements regarding this attribute.
(3)The firm's annual receipts did not exceed the 2011 small business size limit for the firm's North American Industry Classification System (NAICS) code classification and:
(i)The (NAICS) code provided was consistent with the type of work approved to be performed by the firm as a DBE.
(4)The number of persons employed at the firm did not exceed the FY 2011 small business size limit for the firm's NAICS classification and:
(i)The number of persons employed at the firm was compared to the 2011 small business size limit for the firm's NAICS classification.
Note: Whether a business is a “smallbusiness” is based upon its annual receipts, number of employees, and North American Industry Classification System (NAICS) code 13 CFR 121.201. For the DBE program, 49 CFR 26.65 (b)further restricts eligibility to those firms whose average annual gross receipts over the firm’s previous three fiscal years was 22.41 million or less. 49 CFR 26.65 (c)states the 22.41 million is to be adjusted by the United States Department of Transportation (USDOT) annually using Department of Commerce price deflators for purchases by State and local governments as the basis for this adjustment.
Step 3
Internal controls were adequate to ensure firms certified as DBE firms met required Federal certification standards concerning business ownership.
a.Documentation was included in the DBE file that eligibility was determined by identifying ownership of socially and economically disadvantaged individuals as being:
(1)In the case of a corporation, 51 percent of each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding49 CFR 26.69 (b) (1).
(2)In the case of a partnership, 51 percent of each class of partnership interest and that interest must be reflected in the partnership agreement 49 CFR 26.69 (b) (2).
(3)In the case of a limited liability company, at least 51 percent of each class of member interest 49 CFR 26.69 (b) (3).
(4)In the case of a parent or holding company established for tax, capitalization or other purposes consistent with industry practice, at least 51 percent cumulative ownership in the firm by the disadvantaged individuals through the parent or holding company 49 CFR 26.73 (e) (1); (2).
(5)More than the pro forma ownership of the firm as reflected in the ownership documents 49 CFR 26.69 (c).
Note: This would include documentation that the individual participated in board decisions in the case of a corporation or that the individual participated in strategic business planning including plan approval and in the development and approval of business policy decisions affecting the firm as a whole rather than only for a particular business unit.
b.In instances where marital assets (other than the assets of the business in question) held jointly or as community property by both spouses are used to acquire ownership interest asserted by one spouse, a copy of the document legally transferring and renouncing the other spouse’s rights (in the manner sanctioned by the laws of the state in which either spouse or the firm is domiciled) to the jointly owned or community assets used to acquire the ownership interest in the firm was included as part of the firm’s application for DBE certification 49 CFR 26.69 (i) (1).
c.All owners listed in the STA summary report were listed in the application for DBE certification.
d.Documentation was included in the DBE file that it was determined that contributions of capital or expertise by the socially and economically disadvantaged owners to acquire their ownership interests were real and substantial 49 CFR 26.69 (e).
Specifically:
(1)Capital contributed to acquire ownership interests was evidenced by:
(i.)Debt instruments from a financial organization that lends such funds in the normal course of business.
(ii.)Personal account cash withdrawal from a depository account in a financial organization that accepts deposits in the normal course of business.
(2)Owner's expertise used to acquire ownership interests in the firm met all of the following characteristics (i.e., the expertise was):
(i.)In a specialized field49 CFR 26.69 (f) (1) (i)and
(ii.)Of outstanding quality49 CFR 26.69 (f) (1) (ii) and
(iii.)In areas critical to the firm’s operations49 CFR 26.69 (f) (1) (iii) and
(iv.)Indispensible to the firm’s potential success49 CFR 26.69 (f) (1) (iv) and
(v.)Specific to the work the firm performs49 CFR 26.69 (f) (1) (v) and
(vi.)Clearly documented in the records of the firm as to the contribution of expertise and its value to the firm 49 CFR 26.69 (f) (1) (vi).
e.Documentation was included in the DBE file that it was determined that contribution of capital or expertise by the socially and economically disadvantaged owners to acquire their ownership interests did not include:
(1)A promise to contribute capital.
(2)An unsecured note payable to the firm or an owner who is not a disadvantaged individual.
(3)Participation in a firm’s activities as an employee rather than an owner. 49 CFR 26.69 (e).
f.Documentation was included in the DBE file that for the purposes of determining ownership by a socially and economically disadvantaged individual, all interests in the firm were not included that were obtained as the result of a gift or transfer without adequate compensation from any non-disadvantaged individual or non-DBE firm 49 CFR 26.69 (h).
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g.Documentation was included in the DBE file that for the purposes of determining ownership by a socially and economically disadvantaged individual, that all interests in the firm were included that were obtained:
(1)As a result of a final property settlement or court order in a divorce or legal separation, provided that no term or condition of the agreement or divorce decree is inconsistent with the requirements of 49 CFR 26.69 (49 CFR 26.69 (g) (1) or
(2)Through inheritance, or otherwise because of the death of the former owner 49 CFR 26.69 (g) (2).
h.Documentation included in the DBE file identified that there was direct ownership in all securities that constitute the ownership of each of the individual owners listed in the STA summary report.
Note:A direct ownership is not required if:
(1)A trustee that is the same individual as the beneficial owner or the trustee is another socially and economically disadvantaged individual 49 CFR 26.69 (d) (1).
(2)A trustee that does not exercise effective control over the management, policymaking, and daily operational activities of the firm but rather the beneficial owner of the trust performs those activities 49 CFR 26.69 (d) (2).
Note: Assets held in a revocable living trust may be counted only where the same disadvantaged individual is the sole grantor, beneficiary, and trustee 49 CFR 26.69 (d) (2).
Step 4
Internal controls were adequate to ensure firms certified as DBE firms met required Federal certification standards concerning business control.
a.Documentation was in included in the DBE file that the firm was determined to be an independent business (i.e., its viability does not depend on its relationship with another firm or firms) because:
(1)Personnel, facilities, equipment, financial and/or bonding support, and other resources were not shared with a non-DBE firm or firms 49 CFR 26.71 (b) (1).
(2)There were no present or recent employer/employee relationships between the disadvantaged owner(s) of the potential DBE and non-DBE firms or persons associated with non-DBE firms that compromised the independence of the potential DBE firm 49 CFR 26.71 (b) (2).
(3)There was a consistency of relationship between the potential DBE and non-DBE firms within normal industry practice (49 CFR 26.71 (b) (3).
(4)The firm was not subject to any formal or informal restrictions which limit the customary discretion of the socially and economically disadvantaged owners to prevent the socially and economically disadvantaged owners, without cooperation or vote of any non-disadvantaged individual (excluding spousal co-signature on documents as provided for in 49 CFR 26.69 (j) (2), from making any business decision of the firm such as through:
(i.)The corporate charter
(ii.)By-law provisions
(iii.)Contracts
(iv.)Cumulative voting rights
(v.)Voting powers attached to different classes of stock
(vi.)Employment contracts
(vii.)Requirements for concurrence by non-disadvantaged partners
(viii.)Conditions precedent or subsequent
(ix.)Executory agreements
(x.)Voting trusts
(xi.)Restrictions on assignment of voting rights 49 CFR 26.71 (c).
b.Documentation was in included in the DBE file that the socially and economically disadvantaged owners were determined to possess the power to direct or cause the direction of the management and policies of the firm and to make day-to-day as well as long term decisions on matters of management, policy, and operations because:
(1)A disadvantaged owner held the highest officer position in the firm (e.g., chief executive officer or president) 49 CFR 26.71 (d) (1) and
(2)For a corporation, disadvantaged owners controlled the board of directors49 CFR 26.71 (d) (2) or
(3)For a partnership, one or more disadvantaged owners served as general partners, with control over all partnership decisions 49 CFR 26.71 (d) (3)and
(4)Individuals involved in the firm as owners, managers, employees, stockholders, officers, and/or directors who were not socially and economically disadvantaged did not possess or exercise the power to control the firm, or be disproportionately responsible for the operation of the firm 49 CFR 26.71 (e) and
(5)Delegations of authority to various areas of the management, policymaking, or daily operations by socially and economically disadvantaged owners were revocable, and the owners retained the power to hire and fire any person to whom authority was delegated49 CFR 26.71 (f),.
(6)The expertise of socially and economically disadvantaged owners was not limited to office management, administration, or bookkeeping functions unrelated to the principle business activities of the firm 49 CFR 26.71 (g).
(7)The socially and economically disadvantaged owners have an overall understanding of, and managerial and technical competence and experience directly related to, the type of business in which the firm is engaged and the firms operations (i.e., have the ability to intelligently and critically evaluate information presented by other participants in the firm’s activities and to use this information to make independent decisions concerning the firms daily operations, management, and policymaking) 49 CFR 26.71 (g).
(8)In instances where State or local law requires a person to have a particular license or other credential to own and/or control a certain type of firm, the socially and economically disadvantaged owners possessed the required license or credential 49 CFR 26.71 (h).
. Note: Certification as a DBE firm cannot be denied if the socially and economically disadvantaged owners do not have a license or credential and State or local law does not require it; however, the condition can be used as a factor in assessing control of the firm 49 CFR 26.71 (h).
(9) Remuneration of the socially and economically disadvantaged owners was consistent with duties of persons involved, normal industry practices, the firm’s policy and practice concerning reinvestment of income, and any other explanations for the differences provided by the firm 49 CFR 26.71 (i) (1).