The US Department of Treasury announced on November 6, 2025 that the agency would audit all contract and task orders awarded under preference-based contracting. Although the audit is currently limited to Treasury, this action could encourage other agencies to conduct similar audits—especially in light of the US administration’s priorities of cost-cutting and terminating contracts that appear connected to diversity, equity, and inclusion (DEI).
The Department of Treasury’s audit is expected to address approximately $9 billion of contract value across the department and its bureaus. Treasury’s announcement comes on the heels of the Small Business Administration’s (SBA) investigation and suspension of ATI Government Solutions. The SBA alleged that the company, which was a Section 8(a) small business owned by a Native American tribe, acted as a pass-through to other contractors when it outsourced a majority of its work to other contractors. Treasury alleges that this company’s conduct related to over $253 million in previously issued contract awards. In other contexts, contracts awarded based on misclassifications have led to civil and criminal investigations by the US Department of Justice into violations of the False Claims Act, which have resulted in significant settlements.
The federal government offers several programs that provide small and disadvantaged businesses preferences in obtaining federal contracts, including contracts set aside for such businesses or evaluation preferences for these entities. Based on comments from Treasury Secretary Scott Bessent and SBA Administrator Kelly Loeffler, the audit is expected to focus on small business and Section 8(a) program misclassifications. However, this audit may also examine other classifications such as women-owned small businesses (WOSB), service-disabled veteran-owned small business (SDVOSB), and HUBZone businesses.
These classifications (and potential misclassifications) are relevant not only to the small and disadvantaged contractors themselves, but to competitors seeking to protest awards granted to misclassified businesses and buyers of small businesses who could inherent the liability of misclassification.
To qualify as a Section 8(a) small business, a company must be majority owned and controlled by socially and economically disadvantaged individuals and meet other factors. To qualify as a small business, a company must typically fall within certain employee counts or revenue thresholds tied to its North American Industry Classification System (NAICS) code(s). In general, small businesses generally must calculate their total number of employees and annual receipts over certain periods of time or demonstrate that the owner falls under certain net worth and income criteria. However, when applied in practice, companies that choose to certify as a small or disadvantaged concern face complicated rules.
For instance, often companies do not realize that when they certify to their number of employees or annual receipts, they must consider not only themselves but their affiliates. As a result, a company under common ownership with other entities or a subsidiary operating separately within a broader corporate structure must assess its small business size status within the context of shared ownership and control. Assessing this shared ownership and control can often be difficult, as it is based on a variety of factors, including overlapping management, identity of interest, shared resources, and other elements impacting the independence of a company.
Additionally, for those companies that outgrow their small business size status—either through organic growth or an acquisition, continuing to receive the benefits of this status can lead to potential issues. Companies must ensure that they update their certifications once they no longer qualify as a small business—and transition to competing for opportunities without this preference.
This challenge will be compounded by the changes to SBA regulations that as of January 17, 2026, will end the ability of companies to continue to pursue work under multiple award contracts reserved for small businesses after they undergo a transaction that renders them no longer a small business.
Although this audit currently remains limited to the Department of Treasury, it is part of a larger trend across the federal government to crack down on government contracting fraud. This issue is particularly salient for the US administration, considering their focus on DEI. The 8(a) program, which is designed for socially and economically disadvantaged businesses, is already under audit by the SBA which is examining contracts across every agency.
KEY TAKEAWAYS
- Companies that certify as small or disadvantaged should assess their ability to qualify for such status, including by confirming that the representations that they make on SAM.gov, in their contractors, and to higher-tier contractors remain accurate.
- Firms considering the acquisition of a small business should consider a deeper assessment of prior small businesses representation made by the target to ensure that the business has been properly certifying its status.
- Small and disadvantaged businesses who hold current or recent contracts with Treasury should prepare for the upcoming audit and ensure they can provide proper documentation to support prior certifications of their small or disadvantaged status. Businesses with potentially inaccurate small or disadvantaged business representations may consider a proactive approach to disclosure in light of the forthcoming audits.
[View source.]
