[Senate Hearing 109-431]
[From the U.S. Government Publishing Office]
S. Hrg. 109-431
NOMINATION OF ERIC THORSON TO BE
INSPECTOR GENERAL OF THE SMALL BUSINESS
ADMINISTRATION
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MARCH 1, 2006
__________
Printed for the Committee on Small Business and Entrepreneurship
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senate
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED NINTH CONGRESS
----------
OLYMPIA J. SNOWE, Maine, Chair
CHRISTOPHER S. BOND, Missouri JOHN F. KERRY, Massachusetts
CONRAD BURNS, Montana CARL LEVIN, Michigan
GEORGE ALLEN, Virginia TOM HARKIN, Iowa
NORM COLEMAN, Minnesota JOSEPH I. LIEBERMAN, Connecticut
JOHN THUNE, South Dakota MARY L. LANDRIEU, Louisiana
JOHNNY ISAKSON, Georgia MARIA CANTWELL, Washington
DAVID VITTER, Louisiana EVAN BAYH, Indiana
MICHAEL B. ENZI, Wyoming MARK L. PRYOR, Arkansas
JOHN CORNYN, Texas
Weston J. Coulam, Staff Director
Naomi Baum, Democratic Staff Director
C O N T E N T S
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Opening Statements
Page
Snowe, The Honorable Olympia J., Chair, Committee on Small
Business and Entrepreneurship, and a United States Senator from
Maine.......................................................... 1
Prepared statement...........................................
Kerry, The Honorable John F., a United States Senator from
Massachusetts.................................................. 3
Grassley, The Honorable Charles, a United States Senator from
Iowa........................................................... 5
Landrieu, The Honorable Mary L., a United States Senator from
Louisiana...................................................... 164
Witness Testimony
Thorson, Eric, Nominee for Inspector General of the Small
Business Administration........................................ 9
Prepared statement........................................... 11
GAO report................................................... 23
Letter from Donald Fulwider.................................. 107
Responses to questions from Senator Kerry.................... 186
Alphabetical Listing and Appendix Material Submitted
Grassley, The Honorable Charles
Opening Statement............................................ 5
Kerry, The Honorable John F.
Opening statement............................................ 3
Markup
The Nomination of Eric Thorson to be Inspector General of the
Small Business Administration.............................. 189
Landrieu, The Mary L.
Prepared statement........................................... 167
Snowe, The Honorable Olympia J. 1
Opening statement............................................ 1
Thorson, Eric
Testimony.................................................... 9
Prepared Statement........................................... 11
GAO report................................................... 23
Letter from Donald Fulwider.................................. 107
Responses to questions from Senator Kerry.................... 186
NOMINATION OF ERIC THORSON TO BE
INSPECTOR GENERAL OF THE SMALL
BUSINESS ADMINISTRATION
----------
WEDNESDAY, MARCH 1, 2006
United States Senate,
Committee on Small Business and Entrepreneurship,
Washington, D.C.
The Committee met, pursuant to notice, at 2:07 p.m., in
room SR-428, Russell Senate Office Building, the Honorable
Olympia J. Snowe (Chair of the Committee) presiding.
Present: Senators Snowe, Isakson, Vitter, Kerry, Landrieu,
Bayh, Pryor, and Grassley.
OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, CHAIR,
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A
UNITED STATES SENATOR FROM MAINE
Chair Snowe. The hearing will come to order. Good afternoon
and welcome to today's hearing to consider the President's
nomination of Mr. Eric Thorson to be the next Inspector General
for the Small Business Administration. I also want to welcome
the Ranking Member of this Committee, Senator Kerry, and thank
him for working with me on this nomination and this hearing as
well.
I also appreciate my colleague, Senator Grassley, for his
presence here. Senator Grassley will be introducing Mr.
Thorson, who previously served as Chief Investigator for the
Senate Finance Committee.
We come to this hearing at a time when the Inspector
General's role at the SBA will be all the more critical given
the enormous challenges the Agency has faced, and continues to
confront, areas such as the disaster loan program's operation
and the unacceptable response to Katrina and Rita, enforcement
of government-wide small business contracting rules, and the
oversight of SBA lending problems.
Therefore, it is imperative that the new Inspector General
be aggressive and tireless as the unprecedented challenges
require unprecedented responses. So Mr. Thorson, I look forward
to hearing your testimony to further explore your
qualifications to carry out as the Inspector General at this
pivotal juncture for America's 25 million small businesses and
their employees.
Mr. Thorson certainly brings a depth and breadth of
experience from having served, among other roles, as Director
of Defense Issues for the Legislation and National Security
Subcommittee of the House Government Operations Subcommittee,
Chief Investigator for the Permanent Subcommittee on
Investigations of the Senate Committee on Governmental Affairs,
and for the Senate Committee on Finance, and Special Assistant
to Senate Republican leader Trent Lott on corporate fraud
investigations.
His past investigative subjects include such major issues
as Enron and WorldCom. And he worked in both the executive and
legislative branches under Republicans and Democrats, including
Representative John Dingle and Representative John Conyers, and
the late Senator Bill Roth as Chairman of the Finance Committee
at that time, and, as I mentioned, the then-Majority Leader
Trent Lott, during his many years of investigative experience.
Moreover, he has had firsthand knowledge of the trials,
challenges, and gratification of being a small business owner
who fulfilled his dream with the help of an SBA veteran's loan.
Indeed, we have an obligation to ensure that the person
confirmed as the SBA Inspector General is not only a well-
qualified investigator. They must also show passion in
identifying barriers that may limit the success and
entrepreneurial spirit of our small businesses, that form the
very foundation of the Nation's economic growth and job
creation potential, having created about three-quarters of all
net new jobs annually.
In that light, the Inspector General's office recently
began an investigation of the SBA's woeful response to
Hurricanes Katrina and Rita, an area that I and Senator Kerry
and this Committee has investigated at length. As we have
learned, the Agency's Disaster Credit Management System was
incapable of handling the high volume of disaster loan
applications--nearly 350,000 have been received so far--and the
SBA failed to accurately monitor its disaster financial
information and to implement its disaster transformation
workforce strategy. This tragic response to a tragic and
devastating disaster must not be repeated. The Inspector
General will be key in determining how we can ensure such
bureaucratic lethargy never reoccurs at the SBA.
Mr. Thorson, you will also bear the responsibility of
determining, whether SBA's administrative procedures measure up
to the expectations of America's small business owners. We've
seen what cannot happen under the Inspector General's watch
with the STAR loan program, epitomized by the Inspector
General's December 2005 report finding that eligibility could
still not be determined for 85 percent of the loans reviewed.
The series of ongoing investigations on the effectiveness
of the SBA's Lender Monitoring System, which is used to provide
oversight of lenders and of SBA's handling of lending programs
such as the 7(a) and 504 business loans, further underscores
the Inspector General's vital part in providing aggressive
oversight and minimizing abuses of the system.
Similarly, given recent discoveries of small businesses
losing prime contracting opportunities to large businesses due
to poor oversight of contracting laws, it is fitting that you
will bring to this appointment 12 years of experience in
successfully investigating and reforming Federal contracting
programs. Uncovering, monitoring, and correcting abuses, lax
implementation of laws, or waste, fraud, and abuse of
taxpayers' funds, will require your urgent attention, Mr.
Thorson. With your success, it will be America's small
businesses that reap the greatest reward.
Finally, let me say that, obviously, this hearing has been
delayed to provide additional time to thoroughly examine
documents pertaining to the 1997 and 1998 hearings on the
Internal Revenue Service abuses held by the Finance Committee
under the leadership, at that time, of Chairman Roth, where Mr.
Thorson was Chief Investigator.
During this additional time period, we've had further
opportunity to analyze all of the issues, documents, and talk
to people involved in those investigations as well. As the
record would ultimately show, these hearings led to the
enactment of the Internal Revenue Service Restructuring and
Reform Act that we passed, 96 to 2, by the way, in 1998.
Mr. Thorson, I welcome you. I also want to welcome your
family. I know your wife Susan is here today. Would you like to
introduce other members of your family at this point in time,
and then we'll move on to Senator Kerry.
Mr. Thorson. Thank you. My wife, Susan, and her father,
Arthur White. My sister, Karen Miller, with her husband, Jim,
and my nephew, Chris Miller.
Chair Snowe. Well, we welcome all of you here today. Thank
you for being here with us.
Now I'd like to recognize Senator Kerry.
OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,
A UNITED STATES SENATOR FROM MASSACHUSETTS
Senator Kerry. Thank you very much, Madam Chairman. I
personally appreciate your efforts. Thank you for allowing the
Committee to conduct the necessary due diligence on this
nomination.
Mr. Thorson, welcome, and welcome to the members of your
family also. Of course, we welcome Senator Grassley, for whom
both you and I have enormous respect. I think his introduction
is important to all of us here. Let me just say that I also
want to thank Senators Levin and Lieberman and their staffs for
their work in reviewing this nomination, which they also
requested to do.
You know, it's not often that this Committee is charged
with confirming administration nominees. But regardless of the
infrequency of the activity, and given the potential impact
that these nominees could have on an already fragile Small
Business Administration, this is a duty that we do take
seriously.
The need for the SBA Inspector General to be impartial and
free of political influence from either side, to be someone who
will act in the best interest of the Agency, and most
importantly, in the best interest of small businesses and
citizens across the country, and the taxpayers whose dollars
are being spent, that's really an importance that can't be
overstated here.
We rely heavily on the work of the SBA's Inspector General
for unvarnished investigations and analysis. In 2005 alone, the
SBA Inspector General's office released reports critical of the
administration's enforcement of anti-bundling rules, reductions
in staff, and enforcement of small business contracting laws.
There's much more oversight to be done, as we discussed Mr.
Thorson, work that will require an independent IG who's willing
to conduct thorough investigations to address the serious
management problems afflicting the Agency.
These issues include: Large businesses receiving contracts
intended for small businesses, and being counted as small
businesses when they're not; a review of the challenges facing
the mentor/protege program; an audit of the contract bundling
review process and the inadequate staffing level of PCRs that
led to 87 percent of bundled contracts not being reviewed;
major staffing shortfalls in the staffing at the Office of
Technology that oversees the SBIR and SDTR programs; inadequate
staffing and shortfalls in oversight of the 504 liquidation
program; and most urgent, the continued inadequate response to
victims of Hurricanes Katrina and Rita by the SBA Disaster Loan
Program, and the continued shortfalls in SBA oversight of
contracts being awarded to rebuild the hurricane-
affected region.
Now, Madam Chairwoman, I know you know, and I know you
believe this as I do: The IG does not belong to a party. It's
appointed by a party. It's appointed by a President. But it
really assumes a very special trust. There are pressures. We
all understand the pressures of politics. But this trust is
most important.
Now, unfortunately, this nomination comes at a time where
there's a growing concern over the numbers of Inspectors
General who are put into that position with very specific
political ties to an administration that simply doesn't have a
strong record of nominating people who are going to really be
free and independent.
In January of last year, Representative Waxman, who's the
Ranking Member of the House Committee on Government Reform,
released a report stating that over 60 percent of the IGs
appointed by the Bush administration have had prior partisan
political experience, while less than 20 percent have had audit
experience, which is what they're really being nominated for.
Now, after reviewing Mr. Thorson's background, it's clear
that unlike many of the IG nominees discussed in the Waxman
report, he does have extensive investigative experience. I
welcome that. I mentioned that in our conversation.
The issue has really been one that has arisen about the
willingness in the record to address serious management
challenges within the agencies. Will you be an IG who can
conduct investigations in a nonpartisan manner and who will
work diligently to identify the larger programs within the
agency?
Now, Madam Chair, as you know, in reviewing the record,
questions were raised by outside entities that came to the
Committee with respect to the taxpayer abuse hearings of the
Finance Committee that were held in 1997 and 1998, of which Mr.
Thorson was the lead investigator.
There were two GAO reports that concluded--it's their
conclusion, not mine, not this Committee's, but their
conclusion with which we needed to obviously review the
record--that almost all of the claims made during the hearings
were either unfounded or inaccurate, and from reports at the
time and in subsequent interviews we have heard that they were,
in fact, highly partisan hearings.
Now, I know Mr. Thorson, in our conversation, you dispute
that, and you will have your chance on the record to make your
statements about it. I have said that I don't intend to oppose
this nomination, and I don't. I think it is important for the
record to adequately reflect what happened in the course of
that. Our much-
respected colleague, now deceased, on May 4, 1998 in the New
York Times, Senator Daniel Patrick Moynihan, who both served as
Chair and Ranking Member, I believe, said the hearings were
``one-sided and partisan.'' That was his judgment as a senior
Senator and Member of that Committee.
You had complete authority over those investigations and
were the only staff person responsible for clearing the
witnesses prior to those hearings. The key here is not to go
back and relitigate. The key here is to have confidence that as
we go forward, this Committee will have confidence, real
confidence, that if we put you in this position, that we can
expect accountability within the Small Business Administration,
and accountability that's based obviously on fairness and on a
completely nonpartisan record.
We need a strong IG who will conduct those kinds of
investigations. It serves all of us--the Committee, the
Congress, the Administration--to have that. I look forward to
your testimony and to some answers to questions as we proceed.
Thank you, Madam Chairman.
Chair Snowe. Thank you, Senator Kerry.
Senator Vitter, do you care to make any comments?
Senator Vitter. No.
Chair Snowe. Senator Pryor.
Senator Pryor. No.
Chair Snowe. Thank you.
Here today to introduce Eric Thorson is our colleague,
Senator Grassley. Senator Grassley is Chair of the Finance
Committee. We certainly welcome you to this Committee here
today.
Chairman Grassley has had an extensive working relationship
with Mr. Thorson as far back as 1993, where he served as lead
defense investigator for the House Committee on Government
Operations, as well, of course, on the Senate Finance
Committee.
Senator Grassley, thank you for joining us here today. Your
full written statement will be entered in the record, and we
look forward to hearing your introduction of Mr. Thorson.
OPENING STATEMENT OF THE HONORABLE
CHARLES GRASSLEY, A UNITED STATES SENATOR FROM IOWA
Senator Grassley. Madam Chairwoman and Senator Kerry, it's
an honor for me to come before the Committee to introduce Mr.
Thorson. I would associate myself with the remarks of Senator
Kerry about the necessity for the independence of the Office of
Inspector General, the importance of the office.
In addition to saying that I come to support Mr. Thorson
and agreeing with Senator Kerry about the independence of the
office, even in this administration, I'm going to take credit
for, although some people say maybe I shouldn't take credit
for, the removal of at least three Inspectors General who I
felt were not doing their job. Maybe somebody would even add it
up to more. I pay a great deal of attention in both Republican
and Democratic administrations to make sure that Inspectors
General are independent, as Senator Kerry has said.
As both of you know, I've worked very hard to strengthen
the oversight role of Inspectors General throughout the
Government. The IGs are our first line of defense against
fraud, waste, and abuse in Government. We depend on them to
ensure that every tax dollar spent is spent according to law.
When that doesn't happen, we in Congress need to know about it
and take corrective action.
As you also know so well, being an IG is a tough job, and
particularly when they're independent, as Senator Kerry says.
When the IGs aren't doing their job, we need to know that
they're not doing their job. Congress also has a responsibility
to watch the watchdogs. We in Congress need to keep a sharp eye
on the IGs to make sure that they're meeting their
responsibilities under the IG Act.
What I'm saying, Madam Chairwoman, is this: It takes a very
special person to be a good IG. Above all else, an IG must have
integrity and courage. IGs must be independent. They must
always set an example of excellence in their personal conduct.
IGs must meet high standards indeed.
To the two leaders of this Committee, I say Mr. Thorson
meets those standards. Mr. Thorson has an outstanding
reputation for being a man of integrity and courage. He has the
requisite knowledge, experience, and character to be an IG in
the Small Business Administration.
He has senior-level management experience in government,
having served as Assistant and Deputy Assistant Secretary of
the Air Force 1985 to 1989. He has executive-level experience
in the private sector as well, where he was president of his
own company that operated a fleet of corporate jet aircraft.
His investigative credentials I think are impressive. Some
of these were referred to already, but let me repeat: 1997 to
1998, Chief Investigator, Senate Finance Committee. He led the
investigation of the abuses of the Internal Revenue Service.
His findings and recommendations formed the foundation for an
excellent set of hearings. Those revelations that did surface
at those hearings helped to generate national support for the
reform and companion legislation that followed for the IRS.
1995 to 1997, Mr. Thorson was Chief Investigator of the
Senate Permanent Subcommittee on Investigations. Prior to that,
in 1995, he served as the Lead Defense Investigator for the
House Committee on Governmental Operations.
During the timeframe, 1993 to 1997, I became directly
involved in at least three of Mr. Thorson's investigations and
testified at hearings on those matters. At the time, I remember
being so impressed with the very professional way Mr. Thorson
conducted investigations, especially an investigation involving
the Air Force
C-17 contract.
On the C-17 investigation, he worked in close concert with
the Defense Department IG. That kind of cooperation was in
keeping with the true spirit of the IG Act, and Mr. Thorson is
the one who made that happen. On March 17, 1993, the IG
presented a devastating report to the House Committee on the
back-door bailout of the C-17 contract.
I was there. I remember it well. I was a witness and
testified at that hearing. After complimenting the Chairman,
Mr. Thorson, and the IG for working together to produce a
superb piece of work, the record shows that I then said this:
``This is oversight and investigation at its best.'' These
words were meant for you, Mr. Thorson.
Chairwoman Snowe, I know that Mr. Thorson is capable of
doing, and I feel confident that he can do, what IGs are
supposed to do and do it very well. In my book, he has passed
the IG test with flying colors. I'm confident of Mr. Thorson's
ability to be impartial and independent, to be objective and
thorough.
Above all, and in closing, I would mention things that have
been referred to here and simply say: ``Take all of the work of
Inspectors General and people that are whistleblowers and
everything else of people trying to cut out things that are
wrong in Government.'' I know that there have been some tough
questions asked. On that score, I would say that my own
experience has taught me that the hard-hitting investigations
always generate friction and generate criticism. Always. It
goes with the territory. It's a fact of life in that line of
work.
I came here this afternoon to stand before you with Mr.
Thorson because I believe he has what it takes to be that top-
notch IG that both of you have defined. If I could, just for
another Senator, an e-mail between Senator Kyl's office and my
office says something like this--I don't like to put e-mails in
the record, but I'll save it for you so you can prove that I
said it--Kyl's office just asked--CEG mentioned that Kyl also
supports Mr. Thorson.
Thank you.
Chair Snowe. That will be included without objection.
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T7287.001
Chair Snowe. Thank you, Chairman Grassley, for being here
today. Thank you very much.
Senator Grassley. Thank you.
Chair Snowe. Appreciate it.
Senator Landrieu, do you care to make any comments before
we begin?
Senator Landrieu. No.
Chair Snowe. Okay. Mr. Thorson, Rule 3 of the Committee
requires that all witnesses at nomination hearings give their
testimony under oath. If you would please stand and raise your
right hand so the oath can be administered. Do you swear that
the testimony that you are about to give to this Committee will
be the truth, the whole truth, and nothing but the truth?
Mr. Thorson. I do.
Chair Snowe. You may be seated. And you may begin.
STATEMENT OF ERIC THORSON, NOMINEE FOR INSPECTOR GENERAL OF THE
SMALL BUSINESS ADMINISTRATION
Mr. Thorson. Good afternoon, Senator Snowe and Senator
Kerry. It is a privilege to come before you for consideration
to be the next Inspector General of the Small Business
Administration, and I thank you for allowing me to make a brief
opening statement.
I hope that in reviewing my qualifications for this
nomination, you will find that I bring a strong, varied
background of related Government experience to this position. I
have served in the military as an Air Force pilot, in several
executive branch agencies, and as an investigator for a number
of Committees in both the House and Senate.
I began my Government service as a cadet at the U.S. Air
Force Academy. By that time in my life, I had lost both my
parents and I could not even pay the uniform deposit required
upon entrance. I have always looked upon this opportunity as a
true gift that forever changed my life and set the foundation
for a debt to this country that I will never be able to repay
no matter how many years of Government service I accumulate.
After spending 2 years flying in Southeast Asia, I left the
Air Force in 1973. I started a tiny flight school in southern
California with 3 single-engine airplanes. The capitalization
of the company came from my only credit card. I learned that
there was a Government agency that had a unique program to
assist Vietnam returnees with loans to develop a business. I
applied.
One day, I received a call from the Small Business
Administration that I had been approved for one of these
special loans. I was stunned. By 1985, I had paid back the SBA
loan in full, and my company was operating over 20 private jet
aircraft, primarily for the movie industry. My clients included
Frank Sinatra, Clint Eastwood, Merv Griffin, and Henry Fonda.
This most interesting time in my career would not have been
possible except for the SBA.
1985 was also the year that I was offered a position by the
Reagan administration as Deputy Assistant Secretary of the Air
Force for Economic Analysis and Financial Controls. Given my
background with the Air Force, that was not something I could
turn down. It was time to start paying back.
I mentioned earlier having been a congressional
investigator. In 1995, I had the privilege of being named the
Chief Investigator for the Senate Permanent Subcommittee on
Investigations, one of the most incredible jobs I have ever
had.
Part of that enjoyment came from working for a very fine
man, the late Senator William Roth. He believed in the
importance of nonpartisan oversight and demanded an
exceptionally high degree of accuracy and integrity in the
investigations that he authorized. Those lessons are
particularly applicable to any Inspector General. During that
time, we conducted investigations involving defense contractor
fraud, Medicare fraud, and even the Russian Mafia.
Today, as the nominee to be an Inspector General for the
SBA, we are on the edge of what I believe will be a crucial
test for the Agency. As a result of Hurricanes Katrina and
Rita, the SBA is at the forefront for the disaster relief
loans, which will involve unprecedented numbers, both in
applications and dollars.
Also, history has proven that in this kind of situation, we
can expect there to be an unprecedented number of attempts to
defraud the program. It is strongly stated that the first goal
of the office of the Inspector General is to ``Prevent fraud
and unnecessary losses in SBA programs.'' The word ``prevent''
clearly implies the need to be proactive, to stop fraud before
it can be accomplished, and to create a deterrent to those who
might be planning on taking advantage of this Nation's efforts
to assist those who have lost so much.
If confirmed as the Inspector General, I can assure you
that the entire office, both auditors and investigators, will
use every means to deter such efforts, and work with the
administrator of the SBA in finding ways to ensure these vital
loans are distributed to only those in true need.
I sincerely hope that you find my background and experience
worthy of this position, and I look forward to answering any
questions you might have.
[The prepared statement of Mr. Thorson follows:]
[GRAPHIC] [TIFF OMITTED] T7287.002
[GRAPHIC] [TIFF OMITTED] T7287.003
[GRAPHIC] [TIFF OMITTED] T7287.004
Chair Snowe. Thank you, Mr. Thorson. We appreciate that.
I'd like to begin with your experiences as the Chief
Investigator of the Senate Finance Committee because obviously
Senator Kerry has raised some of those issues here today. I'd
like to have you provide some insight into your experiences and
how you approached that investigation because I think it would
be helpful as well to the Committee. As I said earlier, we've
talked to a number of people who--in fact, many of whom spoke
very highly of you throughout the process in working with you
and the number of positions that you've held, both on the House
and Senate Committees.
In response to the Committee, you highlight, obviously,
your experience. As you're aware, and what Senator Kerry raised
about the follow-up to the review of the Government
Accountability Office's report, that they were not able to
substantiate many of the claims that were made by witnesses
during the course of the IRS hearing.
I know that former Chairman Roth wrote in his book about
the hearings, ``The Power to Destroy,'' that, ``Our
investigators and professional staff members on the Finance
Committee made certain that the evidence being gathered was
corroborated by two or three witnesses and vetted against
taxpayer files.''
I'd like to have you lay out for the Committee: What were
your criteria for selecting and vetting witnesses?
Mr. Thorson. First of all, we used different criteria for
different types of witnesses. The first thing that Senator Roth
originally started to do here was to look at abuses, which
means taxpayer cases. We started receiving them, first a
trickle, then hundreds, and eventually thousands.
In that mail, we began to get letters from IRS employees
who basically said, ``If you're serious about trying to help
this agency, we'll help you.'' I didn't pay much attention to
those. I admit that. That wasn't what we were doing. We were
looking at taxpayer cases. More and more, I began to look at
some of these letters and realized eventually that if we were
going to tell this story, it had to be told by the people who
really worked there and who lived in those jobs.
For the taxpayer cases, specifically on the taxpayer
abuses, I believe there was one panel. We're going back a ways,
but there were some criminal division cases. But the regular
taxpayer cases, what we did there, we had 6103 authority
granted by the chairman, and we went back and we took their
stories. We had many, many that we could have chosen from. The
stories really were heart-rending. I mean, they were terrible.
We decided, first of all, these should be people that owed
no tax, in our best estimation. We knew that no matter how bad
the story were, when we put these hearings on, if these
people--there would be somebody on the panel who would say,
``well, if they'd just paid their taxes, they wouldn't have had
this problem.'' We eliminated that by picking only cases where
we believed these people did not owe anything.
Once we had that narrowed down, we then went back to the
IRS and pulled their files. By the way, this is also intending
to show that they knew who we were talking to. It wasn't like
they didn't know because we had to go to them to get the files.
We recovered their files, and went and looked to see that
what they were telling us matched what the IRS was telling us.
Obviously, in the cases that we did put on, that was clearly
the case. We knew everything the IRS knew about them. That's
how we chose those taxpayers.
Those cases were also to represent more than just a story.
They were supposed to represent things that we had heard
numerous times, not just a one-time situation. You can always
find those. The idea was that some of these stories would
really resonate, and that they--that we heard it here, here,
and here, and we chose a witness to exemplify that.
I will tell you that one of the stories we heard involved a
husband and wife having to divorce in order to protect her
second husband's paycheck. He had nothing to do with the tax
year for which he was--the woman here was being--the money was
being taken from them. They went after her second husband. They
ended up having to divorce.
What I found was, that wasn't unusual, that that advice was
being given by tax counsel in order to protect income. Now,
that should never happen. That never, ever should--people
should never have to get a divorce because of their government.
So we chose that particular case.
By the way, I want to tell you, forgive me. I do get
passionate about this, so forgive me about this. I lived this
for 2 years.
When we chose this particular woman and we asked her if she
would tell her story, she said that it was so important, given
what her family had been through, that her whole family would
be at the hearing. We said, ``ma'am, we can't do that. We have
rules about what we can pay, and we can pay your travel but we
can't do that.''
And she said, ``Oh, no, that's okay. That's not what I
mean.'' And I said, ``Well, what are you getting at?'' Because
logistics was a huge part of these hearings. What it boils down
to, and I don't mean to drag this out, but it's something I'll
never forget, it was so important that the United States Senate
would deal with this issue that affected her life, she and her
husband, and her kids, got in their car and they drove here
from San Diego, California.
That's the kind of thing that drove this. Senator Kerry, I
appreciate very much the time you spent with me yesterday. We
talked about this kind of thing. I tried to assure you then,
and I will assure you now, there were no politics to this. I
have no idea what party any of these people belonged to--I
didn't care who owned the IRS at that time, or anything else.
Those were the kinds of things that we were dealing with.
To get back to the issue, not trying to drag this out too
much, but the idea was with taxpayers, A, they owed no tax. And
B, their story matched what was within the IRS files.
When it came to employees, we realized first of all that
there was one thing I'd never run into before, ever, and that
was Federal employees who feared their own agency. It was
almost universal. Even people who had never had a problem
within their agency, they knew the kind of things that could
happen to them. I have a number of quotes that I won't read
unless I'm asked specifically, but with people of 25 and 30
years' experience that went into this sort of thing. We knew we
had to try and figure out how we were going to present this.
What we decided was, among ourselves--so nobody set this
for us; we did this ourselves--first of all, we wanted every
division that we could get represented. That's auditors,
Examinations Division, and collections. We had heard about a
group called inspections. That's internal affairs, and they
carry weapons. District counsel. Maybe we could get their own
lawyers. That's what we wanted to do. We wanted to spread it.
We also spread it geographically. We wanted to make sure
that we drew our witnesses from every part of the country so we
couldn't be accused of finding only some small pocket of
problems.
The third that we set for ourselves, was the most
difficult: 20 years with the IRS before you could be one of
those witnesses. Now, this was the panel that we put on that
was behind a screen. These people were scared. They asked for
anonymity, and they asked that it not just be granted for the
hearing but forever. They gave us some pretty good reasons why.
There is one person behind that screen who has gone public
today because he's left the IRS. He was an inspections officer.
He's now with the IG at Customs, and has been willing to talk
to you all if you ever want to talk to him. He's a very fine
person. Ironically, I probably have more friends in the IRS
than anybody you'll ever meet.
That's kind of how we did that. How we verified some of the
things that these people were saying was, first of all, one of
the most difficult tasks of a congressional audit, because we
don't have a badge, is to keep expanding your sources. One
thing we were accused of was making cold calls to IRS people.
We never, ever did that. They had to call us.
We had to expand that circle of sources and to make sure it
spread out into different parts of the country. When a person
would tell us that one thing existed, we would call sources in
another part of the country and make sure, ``Have you heard the
same thing? Does this sort of thing go on?''
A perfect example of that was the fact that in auditors,
for example, that audit taxpayers, not corporations, but small
businesses and taxpayers, was: ``We target poor people.'' I
could never understand that because that doesn't make any
sense. There's no money there.
They said, ``No, you don't understand. This has nothing to
do with money. This has to do with statistics.'' Open and close
cases as fast as you can. When people are represented by
counsel or they're represented by CPAs, it slows us down. We go
after people who can't afford to have help.
That was universal. We heard that in every part of the
country. We also heard the allegations of quotas. In one case,
it was $1,000 an hour. In another case, it was $1,200 an hour.
We asked for proof of that. We got it, in writing, where it was
actually specified, $1,200 an hour. If I'm an auditor and I sit
in your living room and I audit you, I'm going to bump your
taxes by $1,200 an hour whether you deserve it or not. We heard
that across the country. We found people who would be saying
that. They would have their own stories, but they would also
corroborate them by saying the same thing.
The GAO report, for instance, references the situation of
large corporations, where auditors of international, multi-
national companies would zero out large tax debts. Now, first
of all, they say there was no corroboration. Yet within their
own report, they say four auditors from different parts of the
country that didn't know each other, all testifying under oath,
all said the same thing.
That is a form of corroboration. Maybe it doesn't meet
somebody's standard. How could these four people--and remember,
these aren't disgruntled taxpayers. These are people with 25
and 30 years with the IRS. These people know what goes on
inside their agency, and they testified and came forward. None
of these people were behind a screen. That's what they said.
Each witness was chosen to tell their own story, but also
have an overlapping testimony where they testified as to
something some of the other people said as well.
Senator Kerry, you made a number of points in your opening
statement, and I appreciate them, and especially I will come
back to the nonpartisan part because that's something we talked
about that's very important to me.
The other part here is that when the GAO says, ``we did not
corroborate, we did not find, we did not verify, you've got to
wonder,'' what were they doing? First of all, if I'm the one
who, as they state here, that did the verification, how come
nobody talked to me? How come nobody called and asked for an
appointment to just see what I did? Nobody called my partner,
either, who by the way is here in this hearing room today.
Why didn't that happen? I know of one witness they did
interview, and she immediately filed a complaint with the
Finance Committee and called me, even though I was out of
Government at that point, and registered a complaint of bias by
the interviewer.
In the case where we're talking about those kinds of
things, where they talk about lowering tax debt because of
influence, because of influences by a corporate taxpayer or
whatever, one of the things the GAO did find was that, No. 1,
if you read the reports--and again, I've got it specified; we
don't need to go into it, but I can--those reductions did
happen. They were correct on that. What the GAO says was they
were within the discretion of the manager. But that was never
an issue. That wasn't the point. The point was, why did they do
that? And the allegation was influence.
Well, for example, one of these women who was an auditor,
again, of multi-national companies--I can't even imagine trying
to do audits of that kind--she made an allegation that one of
her bosses maintained a law office on the side from the company
who they were auditing, in Manhattan. I'm assuming the
Manhattan corporate real estate is about the most expensive in
the world.
Now, the GAO said, ``Yes, we found that was true, but that
was okay because we verified that their ethics person approved
this.'' That was all right. That had nothing to do with it. The
point was, they were operating a law office on the side in the
facility belonging to the company that they were auditing.
Those are the kinds of things where I disagree strongly
with the findings of the GAO. I think there were better ways
that they could have gone about this, and certainly by talking
to me. I would have been very willing to. I'm hoping I've
addressed most of the issues that may have come out of that.
Chair Snowe. I appreciate that, Mr. Thorson. I think that's
helpful to the Committee in offering your insights, and being
able to personally do that here today. I noted in the late
Chairman Roth's book on ``The Power to Destroy'' that he said
that first and foremost, he wanted to ensure the investigation
was fair, above and beyond everything else. I appreciate that.
I appreciate your comments.
Let me move on to one of the small business issues, and
then I'll move on to Senator Kerry. In this role of Inspector
General that's so crucial and vital at this point, particularly
in the history of Small Business Administration as far as I'm
concerned, is the ability to deliver these programs and
services in an efficient and effective way. As you know, the
hurricanes, both Katrina and Rita, the Small Business
Administration really had the opportunity to step up to the
plate and to offer these programs.
Unfortunately, we had some considerable difficulties across
the board--they were widespread from the outset--in
administering these programs efficiently and effectively and
expeditiously. There was virtually no anticipation in terms of
the numbers of applications that would be filed and how to
process them acquiring auditors and verifiers and so on and so
forth.
How would you approach, for example, the particular
problems that certainly manifested itself as SBA was responding
to these hurricanes this last fall? They received more than
337,000 applications for disaster loans, they've approved
71,265, and they still have 105,803 applications pending.
Obviously, what we have seen, what we have experienced, is the
lack of urgency, the lack of speed and efficiency to the
response, and it has been very slow in disbursing the funds. In
fact, out of the 5.1 billion in loans, it's actually disbursed
only 432 million to borrowers.
Obviously, without this money, as Senator Landrieu can
attest, it's very difficult to rebuild and restructure the
economy in New Orleans and throughout the Gulf region that's
been hard-hit. How would you approach this particular
investigation so that we can best learn from these mistakes and
to prevent them, and anticipate them in the future?
Once it's obvious that a disaster is about to occur and
it's imminent, that certainly the Small Business Administration
should have positioned itself to begin to plan, as the Coast
Guard anticipated, for example, in prepositioning its assets.
Clearly, the Small Business Administration had an opportunity
to begin to plan for how they were going to administer these
disaster loans.
Mr. Thorson. Katrina and Rita I think created a situation
that, while it's been said many times, nobody could anticipate.
Maybe that's true to some degree. The truth is, once this
started to happen, I think one of the things I was very
surprised at was, to this day, there is not an IG presence by
the SBA in the Gulf area. To be quite honest, I don't
understand that. I think that's one of the things that has to
happen immediately. That means from me on down. That is
something I would intend to do immediately.
I think another thing is that you've got to put together
basically--and this has been tried by, I think, Homeland
Security before--is teams of people, both investigators and
auditors. You need to go down and you need to see what systems
are working and what systems are broken. I think Senator Kerry
used the term ``unvarnished'' at one point, and that's exactly
what it's got to be. You don't care who's offended by it, but
you've got to figure out what is going on and where are the
weaknesses.
Now, the IG doesn't set the policies, obviously, as to who
gets a loan or who doesn't. You all do that with the
Administrator. When those policies are established, the IG does
measure what is happening against those policies, and then it
reports to you all and it reports back to the Administrator as
well. I don't see that happening right now.
Maybe--I don't mean to be unfair to the Agency. I've
watched this and had some time to look at this, and I think
that's one of the first things that has to happen.
Fraud has got to be a huge problem, given the amount of
money that's flowing down there right now.
The second problem, and I would probably rank this right up
there with it, is the small business set-aside issue that
you've both raised in your correspondence. I've read all your
correspondence. The contracting that's going to take place,
both of what is happening right now and in the future, is just
staggering.
I mean, the kind of things that will be contracted out to
major corporations, we know that. You know that's going to
happen. Then we have to take and set the policy, check the
policies, and see what it is that the small businesses are
entitled to, and then make sure that that's adhered to. It
doesn't matter who you upset by doing that.
That's one thing--and again, Senator Kerry, I made you a
promise. I made you a couple of promises. One was there would
be no politics to what I do in this office. I want to state
that publicly here on the record to repeat that because that's
the way I feel, and it's always the way I've felt, frankly, in
all of this stuff.
We need to get down there. We need to put teams together
and we need to have a presence. There may be required a
permanent presence in that area. I'm not the expert in that,
and I don't pretend to be. I'm not an auditor and I'm not a
criminal investigator. My job will be to focus, to manage, to
hopefully motivate, and even lead--and lead is different than
manage; a lot of people confuse those, but they are different--
those auditors and investigators. I would like their input into
how they would approach this as well. I know that something has
to happen quite quickly.
Chair Snowe. Thank you.
Senator Kerry.
Senator Kerry. Thank you, Madam Chairman.
Mr. Thorson, thank you for your pledges with respect to the
approach to the job. We certainly appreciate that very much.
I was a little disappointed in your opening statement that
you focused so significantly on the potential for fraud in the
loans and fraud among the small businesses themselves and the
homeowners in the Gulf region, but you didn't focus on the
management problem itself within the SBA with respect to
getting people on the ground to do these things. I mean, part
of avoiding fraud is having sufficient staff.
Mr. Thorson. Absolutely.
Senator Kerry. The staff has been cut. As you've just said,
you're surprised there aren't auditors on the ground. Auditors?
You've got 300,000 loans waiting to be processed.
It seems to me that before we start focusing on the fraud
in the issuance of a loan, we'd better start issuing some
loans.
Mr. Thorson. Yes, sir.
Senator Kerry. That's an oversight issue with respect to
the SBA itself. What can you tell us today--I mean, is this
going to be a priority when you get in there? It seems to me
it's priority No. 1.
Mr. Thorson. It is. The reason it really didn't rise to
that level in my statement is simply because fraud is much
easier to understand, and it's much more easy to see in the
press accounts and that sort of thing.
The other thing is, too--and I'm not moving away from your
statement at all because I agree with it--but I haven't spent a
day at SBA yet. I don't pretend to know exactly what the
policies are. If I were going to start wading in with my
opening statement, I want to know exactly what I'm saying.
The issues that you've raised--and efficiency of resources
is another one that I have discussed with your staff as well--
these are huge issues.
Senator Kerry. The question is--I misspoke. It's not
300,000. It's 130,000. There are 130,000 loans that are waiting
to be processed. We've had the Administrator up here, and the
Chair and I and others on the Committee months ago, on two
occasions, once when we were assured that things were going to
be put in place and a few weeks later, when they weren't, with
more assurances.
I just want to call to your attention that the Members of
this Committee on a bipartisan basis are deeply concerned. I'm
confident you're going to hear from the Senator from Louisiana
about what is and isn't happening down there.
Mr. Thorson. Yes, sir. As I said, I've read your
correspondence, from both you and Senator Snowe, to the Agency.
I think you've raised some excellent issues. You will not see
me back away from any of those issues.
Do I have the perfect answer to solve some of those things?
No, because I have heard the Agency give you one explanation,
which is reasonable to some degree. They've talked about the
limitations of computers systems. They've talked about being
able to hire people. There are no people to hire that know
the--I was in that hearing when you held that.
What we need to do is to be able to get the experts on the
ground in that area to see what's happening, to see how the
policies are being adhered to, what steps are being taken. I
think what you're getting at, sir, is that what they're doing
isn't--doesn't meet your standards of what you're expecting. If
that's the case, then we need to be able to look at that as
well and not only say, ``is that true or not true,'' but ``why,
and what can be done to fix that.''
I think, too, my effort would never be to work against the
Administrator or SBA; but to work with him, but to be able to
show why we feel, as the experts in this field--which, again,
I'm not, but I would be managing those people--and to come up
with reasons as to how to make it better, how to make it work
better, and to be able to stand before you and say, ``this is
what we found,'' and to see if you agree.
Senator Kerry. Sometimes, Mr. Thorson, the accountability
job of the Inspector General is to measure whether or not the
achievements and/or approaches of the particular agency are
accomplishing their goals.
Mr. Thorson. Correct.
Senator Kerry. Not necessarily to provide the remedy. It
may be that Congress has to provide the remedy, or the
administration. If your job is to go over there, and the SBA is
supposed to get these loans out, and they have said, ``We're
putting a program in place to do this and we pledge to you,
Members of Congress, we're going to have these loans racing
out,'' et cetera, et cetera, it seems to me your priority is to
see if that's happening. If it's not, they're not accomplishing
their goals.
Would you agree?
Mr. Thorson. Yes, I do. I think I see my job as maybe a
little--one more step past that, but which certainly includes
that part, but also making--and again, as you say, it's not my
jump to make those things happen. I do think it is part of our
task to provide recommendations as to where we see the
weaknesses and where maybe you all can provide the fix.
Senator Kerry. I completely agree. No question that you are
supposed to contribute to ways to provide effectiveness in
management and so forth. We hope you will do that.
I want a pledge from you today that you understand and see
this component that its not just the fraud and the homeowners
that are going to be the targets here. The Agency itself has to
be measured whether or not it is doing its job.
Mr. Thorson. I absolutely agree, sir. You have my pledge on
that.
Senator Kerry. It's not a question of working with or
against the Administrator, but the willingness to hold the
Administrator accountable that will require you to say, you're
not getting the job done.
Mr. Thorson. I absolutely agree with that. I do give you
such a pledge.
Senator Kerry. I really don't want to belabor it, but I do
want to just kind of get an extra question or two with respect
to--if I may, Madam Chairman--just two quick things.
No. 1, budget cuts really are critical. Every Member of
this Committee, I think, is concerned about what's happening to
the budget. Budget cuts lead to fraud and abuse.
Mr. Thorson. Yes, they do.
Senator Kerry. If you're putting out $300 billion worth of
Federal contracts but you don't have sufficient people to
guarantee they're being put out properly or watch what's
happening, boy, is that an invitation to abuse and fraud, and
taxpayer dollars get wasted.
Can we count on you, should you be confirmed, to ensure
that the SBA makes its own oversight requirements a priority?
There are requirements within the SBA for their oversight, and
they're not doing it, necessarily, because they don't have the
people.
Mr. Thorson. I absolutely agree with that, Senator, and
that would be a priority, yes.
Senator Kerry. Finally, let me just--I'm trying to sort
through this because--and Madam Chairman, could I ask unanimous
consent that the two reports of the GAO just be placed in the
record, as appropriate?
Chair Snowe. Without, objection, so ordered.
[The GAO reports follow:]
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Senator Kerry. Could we also, because some Senators, I
know, wanted to pose a few questions who couldn't be here, just
leave the record open for a week or something like that?
Chair Snowe. Yes, we will, to about March 8th.
Senator Kerry. For written questions. Obviously, there's a
difference of opinion here, and we're not going to sort it out
today. I want to try to see if we can just give a little more
meat to it.
Finance Committee staff have been in touch with our staff.
Those Finance Committee staff have documented the notion that
they had a hard time, that they didn't get the names of
witnesses until the day of the hearing or that there were
documents that were even withheld. Someone even said that
apparently some documents were kept in the trunk of your car.
Is that true?
Mr. Thorson. We had a person in our office who was sending
things to the IRS before the hearings. We felt that was going
on. We knew that was going on. We knew it was going on after we
left the office. There were times when we would take things out
with us just simply to make sure that people in the office
couldn't have access to them.
Senator Kerry. Did that keeping things from access take
place on a partisan basis, or was it----
Mr. Thorson. It had nothing to do with politics. In fact,
the person I'm talking about was on our--the Republican staff.
Senator Kerry. Did it result in some people therefore not
being able to have access or something, or did it create an air
of--I'm just trying to----
Mr. Thorson. I don't know. I mean, first of all, like I
said--and believe me, I'm not ducking your question; we're
talking about 8 and 9 years ago, and I don't really remember--I
do know that as far as the staff having access, we weren't
operating in a vacuum, obviously. This was a huge investigation
for Senator Roth as well. He watched--he was very proactive in
this and knew everything that we were doing.
He had counsel, Frank Polk, who I'm very proud of the fact
is here in the room today, representing Senator Roth very well.
And----
Senator Kerry. Well, I understand that. I'm just trying to
understand--because later on, and I'm confident that there are
always two sides to these things. The GAO didn't come to you, I
understand, to try to ascertain some of these things because
they went to the actual facts of the cases.
Here's what they themselves wrote. Let me just read you
what they said. This is their conclusion.
``Based on our investigation, we did not find any evidence to
support the allegation that IRS managers' decisions to `no
change' or `zero out' proposed tax assessments were improper.
However, our investigation established that the allegations
themselves had been based on an incomplete awareness of the
total circumstances surrounding the matters.''
They also found--I'm skipping down here a little bit--
``Generally, we found no corroborating evidence that the
criminal investigations described at the hearing were
retaliatory against a specific taxpayer. Further, we found no
evidence that IRS employees had acted improperly in obtaining
and executing the search warrants.''
Finally, I think they also--well, let me just--I mean,
those are sort of factual findings as a result of going--they
also found that the 8 specific cases were not substantiated by
the facts.
Mr. Thorson. Well, I would----
Senator Kerry. That's a pretty dramatic sort of
contradictory statement.
Mr. Thorson. Yes. I disagree with their--for instance,
let's talk about the affidavit for search warrant. In one of
the cases, in the Colaprete case, which was the Jewish Mother
Restaurant, they say, ``Well, there were lawsuits here, so we
couldn't really interview and therefore we don't want to assume
anything.'' But there was no real evidence.
Wait a second. There was an application--there was a
bookkeeper who was accused by Colaprete days before of
embezzlement. She went to the FBI, to the ATF, and both of them
rejected her, and so she went to the IRS. Within 48 hours, they
executed a search warrant.
The facts that they very easily could have found, if they
had bothered--and I'm not trying to be critical here of GAO,
but I am having to defend myself here on this--she had a
record. She had a prior record of embezzlement. That would have
been very easy to determine. We knew that. In the case of an
affidavit for search warrant, they should have--they're
supposed to have two corroborating witnesses. They did not.
One of your own--or Senator Snowe's own staff pointed out
to me that a Federal judge ruled that the IRS lied on that
affidavit for search warrant. Of course, the easiest one was,
``Was this true? Did she embezzle from this restaurant when at
the same time she's trying to get the IRS in?'' Yes. She was
convicted of stealing--I think it was either $30,000 or
$60,000. She was convicted for that, of that same restaurant.
When they say there were no facts to corroborate this, I have a
really hard time with that.
In another case--and I won't drag this on, but I appreciate
very much the way you've been approaching this, and it's very
valid--all charges were dismissed against a tax preparer. There
were 23 counts. All counts were dismissed, and the Justice
Department ended up paying him $75,000 in settlement. Now, that
doesn't in itself explain everything, but it's sure a pretty
good indication that maybe this wasn't right.
I've got one of those for almost every single example
they've listed here. It's simply by reading their own
statement. What I think you are reading from, and forgive me if
I'm making an assumption here, but in the summary up front
where they give you the findings, it's terribly negative. I
think it's pretty much what you just read. If you go into the
report, which I've now read many times, and you read the lines,
the actual statements--and I've got it by page number--they
verify this stuff. This happened.
What we don't agree on is the motivation. Nobody questioned
that it was within the discretion of the manager to zero out
those tax bills. That's what they're saying. It was done
properly. No question it was. Why did he do it? That was the
problem. That gets to the whole issue of oversight.
These are auditors and interviewers. We're supposed to
exercise a different level of judgment in working for you all.
I took that responsibility very seriously. I interviewed these
people. I talked to them. I talked to other people in their
offices.
Senator Kerry. Let me ask you this. Let me sort of shortcut
this a little bit because of the time. I'm not trying to cut
you off at all.
Mr. Thorson. That's all right.
Senator Kerry. I appreciate your answer enormously.
Assuming you're confirmed for this job, is there a lesson you
feel you take out of those hearings, out of that process, that
you would apply in this job as Inspector General? I mean, is
there something, sort of a message about different views and
the contentiousness of that, that leaves you saying, okay----
Mr. Thorson. Oh, I'll never forget the contentiousness.
Senator Kerry. Therefore, does that affect how you might
approach this job as IG?
Mr. Thorson. Yes, sir. To some degree, it does. Yet in
another, it doesn't. What we do up here, and what I did as a
congressional investigator, is really different than what you
would do as an IG and working with the professionals who do the
audits and do the criminal investigations. I do think there's a
bit of a difference.
The thing I think you're getting at and I agree with is
you've got to be really, really careful. One of the things,
though, that I'm hoping that Senator Roth and his immediate
staff and his counsel would agree with is, we were really
careful because we represented him. He, above anyone else I've
ever worked for, exemplified integrity and character.
I just--there are some similarities, yes, and there are
some lessons learned, certainly. I never dreamed that we would
run into some of the kind of problems we ran into after doing
those hearings. The American people loved them, and they
thought the world of the Senate, and certainly Senator Roth
gained from them.
For me personally, yes, sir, I think I have to--when doing
these kinds of things, you have to be very, very careful in how
you approach them. I also trusted these people that I had
vetted, and I listened to them, and I stand behind them today.
If I have to lay the GAO report next to the testimony, I'm
going to stand behind my witnesses. They were telling the
truth. They were scared, and they were under oath.
Yes, sir, there are some lessons there that I will
obviously carry with me the rest of my life. That was a huge
event in my life.
Senator Kerry. Well, Mr. Thorson, I appreciate your
comment. There is a letter here that I just ask to be part of
the record from Donald Fulwider, who was the author. He
responded to the specific questions of Senators. I would ask
that that be made part of the record by the Chair.
Chair Snowe. Without objection, so ordered.
Senator Kerry. Thank you.
[Letter from Mr. Fulwider follows:]
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Chair Snowe. Senator Landrieu.
Senator Landrieu. Thank you.
Mr. Thorson, I appreciate the passion in which you've
expressed yourself today. I can hear that you bring a lot of
emotion to what you do. I've always admired people in that way,
that you have a purpose for what you want to do.
It does concern me about some of the past issues Senator
Kerry and others have raised. I am very focused from here on
because of Katrina and Rita. I'm very fortunate on this
Committee to have both leaders, both in the Chair and Ranking
Member, who have put this issue of helping the 20,000
businesses that were destroyed by these unprecedented storms
and multiple levee breaks.
These businesses would have in many instances survived the
hurricane. They couldn't survive the unprecedented number of
levee failures that caused the catastrophic flooding of 10 to
12 to 15 feet of water. This is how most of these businesses
went out of business, because of a disastrous and somewhat
unexpected flood.
Based on the questioning already about your mission to
detect and prevent waste and fraud and abuse, I would just add
to what both Senator Kerry and the Chairwoman said about also
promoting economy, efficiency, and effectiveness. Because the
SBA, I mean, is the only thing right now between these
businesses being able to get themselves back up and running or
literally going out of business and maybe never coming back.
This is about generations of families that have owned these
businesses, people that have put all their life savings in
these businesses. If this agency doesn't work well, then there
are just lots of dreams that are crushed.
That's part of what is the hard thing about us from this
position, watching an agency that's on the front line and not
able to deliver. We would think that--I would think that the
IG, while you want to be focused on fraud and abuse--the real
issue is the amount of taxpayer dollars being wasted to no good
end, and having businesses that need to generate jobs not able
get a hand up.
My question is: Will you commit to give at least the same
amount of time, or even a little advantage to the area of
inefficiency than on prosecuting the individual potential
wrongdoer, as opposed to turning a blind eye to an agency that
is maybe falling down on its job to help Americans who need
help, if ever they need it now?
Mr. Thorson. Absolutely. Senator Kerry made a good point.
He said, ``this really isn't mentioned in your statement.'' And
that's true.
Trying to comment on how you're going to improve efficiency
in an agency that you've never been in is somewhat difficult.
That doesn't mean you're not committed to it, and that doesn't
mean that you can't do that, because we can. It does mean that
I don't profess to be an expert in a lot of things. I want to--
that is a goal. That is something I want to do, and I will do.
You framed it as a commitment, and I will make such a
commitment to you. I will figure out how to do this and what is
lacking and how to best make it better.
Senator Landrieu. Would you also commit that if your
nomination goes through, within 30 days of your appointment, to
go down to the Gulf Coast and visit not just the areas of New
Orleans that are more famous than others, but to actually walk
through these neighborhoods where these businesses are
destroyed, all along from Pascagoula to Beaumont, Texas, and
places in between, to see the destruction of what this
unprecedented flooding brought forth?
Mr. Thorson. Earlier I mentioned that I had made a promise
to Senator Kerry in a meeting we had about politics. I will
make exactly the same kind of promise to you about that. In
fact, the truth is, in the months that this nomination has been
pending, my wife and I have talked many times about what we
would do, and one of the very first things I intend to do is to
do exactly as you said.
That's an easy promise to make, and you can count on that.
Senator Landrieu. The reason I press that is because every
Senator that has come down, every House member that I know of,
has come back and called my office and said to me--not everyone
has called, but everyone that has called has said this. They've
said, ``Senator, no matter how many times I've heard you and
Senator Vitter speak, I could not believe what I saw.''
Again, it's because it wasn't just the hurricane. We've
seen hurricanes. We've seen earthquakes. We've seen the
disaster. What we've never seen is a catastrophic flood, like
Noah's Ark. I mean, that's what people have to get in their
mind. It was like Noah's Ark. I mean, and when the water goes
away after 40 days in that case, or in our case 2 weeks, it's
just unbelievable the devastation.
You can look at a map. That's why when people say, ``we
don't have enough, we can't verify if the business really went
out of business,'' you don't need to do anything other than to
look at a map. If they were located anywhere around a certain
neighborhood, there is a 100-percent chance that they couldn't
survive.
It's not like a regular hurricane, where some businesses
survive and some don't. I mean, you have to be concerned
somebody might apply for a loan. They didn't have a shingle
removed from their roof, and they got in anyway. In this case,
if you were in this zip code or in this neighborhood, there was
no chance that you were not flooded with 15 feet of water. Just
go ahead and move the system a lot faster.
That's what we're trying to get these agencies in
Washington to understand: Not asking for special favor or more
money, but just understanding that the nature of the disaster
was different. That is what we're having a hard time convincing
people of.
Mr. Thorson. I was asked earlier about lessons that I had
learned doing this kind of work, and it fits right into what
you were just saying. One of the things that I really believed
in when I was doing hearings and Senate investigations was
listening to the real people. You had real people--and that
meant we had real IRS people testify. In one case, we had a
real Mafia hood testify. Because nothing gets it across as much
as talking to real people.
That's true, whether it's you all listening to them, or the
cameras or whatever. But it makes it real. When you're talking
about the things that you want to do and passing legislation,
these are who it affects. These are the people who--what you're
talking about is exactly the same thing.
The reason that I felt so strongly from day one when we
were talking about an IG of SBA and seeing--I did not
understand, I'll be honest with you. In the very beginning, I
did not know that disaster relief loans went through SBA. I
learned that pretty quick.
You've got to do that. You have to go down there and see it
and talk to people and understand the real people. That is one
similarity that is exactly the same because you'll never get a
feel for it. I think anybody who's listened to me knows I
pretty much get into my job. It's a very important part of my
life. I will do that.
[The prepared statement of Senator Landrieu follows:]
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Chair Snowe. Thank you, Senator Landrieu.
I just wanted to follow up on a couple of issues with
respect to some of the issues that Senator Kerry raised because
it was important, as part of the Committee's responsibilities,
to examine a number of the issues regarding the IRS
investigation that you led on behalf of Chairman Roth and the
Senate Finance Committee.
It's our goal to obviously conduct these hearings in a
transparent fashion. We had a chance to review a number of the
issues, including the GAO report. I just thought it would be
important for the record, based on my staff's examination. I
want to include this in the record.
When the GAO issued two reports on the claims made with
respect to the hearings that you helped to facilitate, it
confirmed facts alleged by the witnesses across 10 different
categories of factual allegations, including: zeroing out of
tax assessments in the manager's unlimited discretion to zero
out taxes; the inability of the IRS to oversee zero-out
decisions; the perception of favoritism for former IRS
executives who now practice before their former IRS colleagues;
illegal use of enforcement statistics for performance
evaluation of IRS offices; the workplace practices which
promoted a climate of racial discrimination within the IRS; the
closure of approximately 100,000 tax cases which lacked proper
procedures and fair treatment; the abuses of public office for
private gain by IRS officials; the substantial difference in
the way IRS imposes discipline on its personnel and executives;
the inability of the IRS to track allegations of reprisals
against employees and taxpayers; and the property damage and
fear of intimidation experienced by some taxpayers or their
associates during IRS enforcement operations.
In instances, obviously, it was a matter--not that anything
was improper, but there was a disagreement in terms of the
interpretation of the laws. In some cases, witnesses were
mistaken on some points of fact concerning management
misconduct and the application of laws and procedures. The GAO
also found that two witnesses, who testified of being
intimidated by the IRS in a Federal court, found IRS employees
misrepresented information in order to search warrants.
I think that across the board on what you were attempting
to do as an investigator, your role was obviously to help the
Congress in examining how the Internal Revenue Service was
administering its responsibilities, and to obviously highlight
for the public the problems in the administration of their
obligations and responsibilities to the taxpayer.
I thought it was very important to highlight that. We did a
very thorough examination, and what we found was nothing
improper. It was a disagreement on the law, a very difficult
area. It was clear from Chairman Roth's book that he really
insisted on being fair; and the fact also that hands were tied,
I gather, in terms of being able to have the IRS come before
the Committee with its own testimony, as I understand it.
Chairman Roth indicated that Section 6103 had not been used
before. Is that correct?
Mr. Thorson. I really can't say. 6103 is the protection of
taxpayer information as privileged, and only the Chairman of
Finance and the Chairman of House Ways and Means have that
authority. I really don't know when that might have been done
before.
Chair Snowe. Yes. He indicated that in his book, as a
matter of fact. In fact, he said--he mentions that in one of
the pieces in his book with respect to that.
I think the point is here that obviously these--I think
when we're pursuing investigations, it becomes obviously very
difficult. We appreciate what you've done. Hopefully you'll
learn from some of these issues as well as you go forward.
I think clearly the Small Business Administration--it
becomes equally evident that there are a number of issues that
will require your aggressive pursuit in examining. Another area
is the STAR loan program that was created in the aftermath of
9/11 that began in 2002 and ended in 2003 to help businesses
that were adversely affected by the economic impact. We
discovered recently, we had an examination done by the
Inspector General's office: 85 percent of those loans that were
issued, they were unable to determine the eligibility,
verifying the eligibility for such loans.
How would you approach a program of this nature in the
future to prevent--the question here is, first, either to
anticipate, in the instance of disaster loans, when you see a
disaster imminent, knowing that the SBA is going to have to be
positioned to respond to that, so you prevent certain problems
that ultimately developed, as we learned in the last few
months, with the administration of these programs by the SBA,
the disaster loan programs.
Then, secondly, how do you ensure that in the future, that
you also prevent these types of problems and abuses in the
administration of a program like the STAR loan? What would you
recommend?
Mr. Thorson. Well, in the first instance, these 9/11 loans
or STAR loans or whatever, one of the things that I believe
should have been anticipated was perception of what was
happening here. When you create--when you put together a
program, one of the things that you could anticipate, or I
believe maybe should have been anticipated, was the fact that
when banks were--what is the motivation, first of all? Well,
banks had a reduced fee on that where they were going to make
more profit.
If you've created a situation where banks are going to make
more profit by using these types of loans, you can bet that's
what's going to happen. That's exactly what did happen. I
believe there was a perfume store in St. Croix, et cetera.
One of the reports that I read was that this was all done
and it was perfectly proper, that these loans all fit whatever
the policy was. That's a particular part of what an IG does, is
measure against those policies. And based on what I've seen, I
can't argue that that may have been true.
What happens is when you see it show up on the CBS evening
news and it becomes sort of a joke or something, you need to be
able to realize that and anticipate that going forward. I guess
maybe one of the things, too, that I would say is that my
experience up here would lend me to be able to do that because
we dealt a lot with those kind of issues.
You have to understand what the goal is first as to what
you are trying to do with those loans. Then did what happened
meet that goal? I think what you're saying is no, it did not,
because we didn't intend to fund perfume stores in St. Croix.
One of the things that I would like to be able to do is to
look at those things while they're either being done or
immediately afterwards, whichever is applicable, and to be able
to point that out, which in this case I truly believe I would
have been able to, and say, ``you've got a huge hole here.''
This is--you have created a profit-making situation that's
going to get you in trouble. Then work with the Administrator
on how to close those loops so that what you want is to get it
to the people who need it and who were entitled to it, and not
have the disaster that it kind of resulted in.
Chair Snowe. Well, with respect to the STAR loan program,
it was just a lack of guidance and instructions, vague
directions that made it all the more difficult, particularly
for the lenders, that ultimately developed into this major
problem.
I think that it would be important to review many of these
programs and to see exactly what the eligibility guidelines are
in many of these programs. Because I think that that is clear;
the lack of communication between the Agency and the lenders
involved, and what can be done to ensure that we issue the
proper guidelines and guidance and instructions with these
programs so that abuse or fraud doesn't arise as a result.
That's what happened in this instance, regrettably, because
there was no way to determine the eligibility, I gather, from
the loan files when they were reviewing them.
Mr. Thorson. Well, I think this comes back again to the
idea of being a little more proactive and to be able to get
involved on the front end of these things so that you can--
because among other things, it gives you the opportunity to
work together with the Agency and the Administrator to point
out where you think, based on the experience you have, that
you're heading for a problem here. In this case, I think it
would have been relatively easy to determine.
Chair Snowe. Absolutely.
Mr. Thorson. The incentive here was pretty clear, and
therefore you knew what the banks were going to do. They were
going to do as many of these as they could possibly do because
they made more profit. That's a pretty simple analysis of it,
and that's exactly what happened.
Chair Snowe. The 85 percent, I think that's an indication
of the depth of the problem that obviously something was
terribly wrong.
Mr. Thorson. Exactly.
Chair Snowe. The SBA has also failed to accurately predict
disaster loan volumes. That's the other issue. We've had to get
additional funding through a supplemental because they
neglected to anticipate, to identify, not necessarily precisely
but within range of what would be required with respect to
these recent disasters.
Unfortunately, we've had to go forward and approve $712 in
supplemental funds. The SBA could not even predict the
situation in December and early in the month of January. It's
only in the last few weeks that they finally realized that they
would need this additional funding, and so we've had to provide
it. In the meantime, those who depend on these programs had to
wait in order to ensure that there were sufficient funds to go
forward with additional loans.
It's the unevenness as well. What I've learned, I think, in
the last few months with respect to how the Small Business
Administration operates, it's not only the failure to predict,
to anticipate, or to prevent serious problems. It's the lack of
efficiency in the administration of these programs.
We've heard it's an unprecedented crisis. That requires an
unprecedented response. Therefore, I think that the SBA has to
be positioned to meet the challenges irrespective of when they
occur.
Mr. Thorson. Each of you, I believe, have discussed the
idea and used the word ``efficiency.'' That really is maybe one
of the most difficult parts of doing the work of an IG, which
is to be able to look at an agency and tell an agency how they
can make themselves more efficient, how they can do things
better. I think that's a natural source of friction when you
are telling the head of an agency how he can better run his
agency.
Where that's necessary and where we have developed--and I
say ``we'' as the IGs, the real pros that do this kind of
thing--that is not a problem in being able to do that. The real
work there is to be able to identify those things and to be
able to make constructive suggestions as to how to make it more
efficient.
It's easy to talk about fraud and stuff, which is why I had
it in my opening statement. It's a lot more difficult to be
able to assess an agency and to be able to point to places
where the efficiencies can be improved, and make
recommendations on how to fix it. To say, ``here's how we
suggest you can do it.''
Chair Snowe. Absolutely.
Mr. Thorson. It is absolutely important.
Chair Snowe. It is critical, and I think all the more so
given the previous track record and experiences, unfortunate
examples of what we need to do to improve in the delivery of
these programs, not only for the present time but also in the
future.
We still have a lot of work to be done in order to complete
this process in response to the hurricanes of last fall. We
still have a long ways to go.
Mr. Thorson. Yes, ma'am.
Chair Snowe. Many people are depending on these programs to
rebuild the economies and rebuild their homes. I think that's
going to be an important contribution in your role as Inspector
General. I think it's an excellent idea about the fact of you
going down there and being on the ground and being able to do
that.
Our staff went down there last fall because I insisted on
it to see exactly what was going on and what was going wrong.
We quickly realized many of the challenges that the SBA was
facing, and it was obviously additional personnel, additional
resources, more computers, loan verifiers, and auditors.
Mr. Thorson. A physical presence is important for many
reasons. It's important to the people who are on the receiving
end of these loans and that have experienced the disaster. It's
also important from a leadership point of view for your own
group.
That's why I said early on as we talked about the need for
the IG to be there and to see that. You're also sending a
message to the people that work for you, that this is important
and this is how it's got to be done. I truly believe that. That
isn't for any other reason than for that. But it is absolutely
true.
The people in the IG office need to know that I will be
there. They are also going to be there. We're going to be there
a long time. This isn't something that's going to get solved in
the next 60 days or something. This is going to be a long time.
Hurricane season starts again in June. It's not going to
take much to cause trouble in this area all over again. We need
to be there when this happens, and we need to be right there at
the forefront, and for many reasons. The fraud is only one part
of it.
Chair Snowe. Well, I appreciate it, Mr. Thorson. I want to
thank you for testifying here today. I know that your
investigative experience both within the executive and
legislative branch will go a long way in helping to make the
SBA and our Government more accountable in spending the
taxpayers' dollars wisely and efficiently.
I appreciate your testimony this afternoon, and the record
will remain open for 2 days, until March 3rd. Additionally, any
written requests for Mr. Thorson will be submitted to the
Committee by noon on Friday, March 3rd. We also will forward
them to Mr. Thorson, and any time that you have a response to
any of the questions that are submitted to the Committee, we
hope that you could include them for the record by March 9th.
Again, I want to thank you, Mr. Thorson. I'm looking
forward to working with you in the future.
Mr. Thorson. Thank you.
Chair Snowe. This hearing will be adjourned.
[Whereupon, at 3:34 p.m., the Committee was adjourned.]
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MARKUP OF THE NOMINATION OF ERIC THORSON TO BE INSPECTOR GENERAL OF THE
SMALL BUSINESS ADMINISTRATION
----------
THURSDAY, MARCH 9, 2006
United States Senate,
Committee on Small Business and Entrepreneurship,
Washington, D.C.
The Committee met, pursuant to notice, at 2:13 p.m., in
room
S-216, The Capitol, the Honorable Olympia J. Snowe (Chair of
the Committee) presiding.
Present: Senators Snowe, Bond, Burns, Allen, Coleman,
Thune, Isakson, Vitter, Enzi, Cornyn, Kerry, Harkin, Landrieu,
Cantwell, and Pryor.
The Clerk. Hello, Senator. You're voting for Eric Thorson
to be Inspector General of the SBA.
Senator Burns. Conrad Burns votes aye.
The Clerk. Hello, Senator Bond. We're voting for Eric
Thorson to be Inspector General of the SBA.
Senator Bond. Exactly what I want to do.
The Clerk. Senator, you're voting for Eric Thorson to be
Inspector General of the SBA.
Senator Cantwell. Aye.
Senator Vitter. Aye.
The Clerk. Senator, you're voting----
Senator Isakson. Isakson votes aye.
The Clerk. Senator, you're voting for Eric Thorson to be
the Inspector General of the SBA.
Senator Harkin. I assume it's yes. Yes, yes, yes, I'm
voting for Eric. Good guy.
The Clerk. Senator, you're voting for Eric Thorson to be
the Inspector General of the Small Business Administration.
Senator Enzi. Aye.
The Clerk. Thank yoy very much.
Senator Allen, we're voting for Eric Thorson to be
Inspector General,
Senator Allen. He's a good Virginian. I want him in there.
Aye, big aye.
The Clerk. Hello, Senator Landrieu. We're voting for Eric
Thorson for the Inspector General of the SBA.
Senator Landrieu. Yes.
The Clerk. Thank you, ma'am.
Senator Pryor, we're voting for Eric Thorson to be the
Inspector General of the Small Business Administration.
Senator Pryor. Aye. That was easy.
The Clerk. We're voting for Eric Thorson to be Inspector
General of the SBA.
Senator Thune. Yes.
The Clerk. We're voting for Eric Thorson to be Inspector
General of the SBA.
Senator Coleman. Aye for Eric Thorson.
The Clerk. Thank you very much.
Senator Kerry. This is the vote?
The Clerk. For Eric Thorson to be Inspector General.
Senator Kerry. Aye.
The Clerk. And you need to cast Senator Bayh's vote by
proxy.
Senator Kerry. Aye by proxy. Any other proxies?
The Clerk. Everyone came and voted who's planning to vote.
Thank you sir.
Senator Snowe, we're voting for Eric Thorson to be
Inspector General of the Small Business Administration.
Chair Snowe. Aye.
Senator Cornyn. Are we the last ones to vote? It doesn't
look like it's going to change the outcome, but I'll vote aye.
Chair Snowe. Thank you. Thank you all.
[Whereupon, at 2:29 p.m., the committee was adjourned.]