WASHINGTON -- A Carnegie construction company fraudulently received $39.4 million in federal funds meant for firms owned and operated by disabled veterans, according to a government audit.

The unnamed business was cited as the most costly example of fraud in the Service-Disabled Veteran-Owned Small Business Program. According to the Government Accountability Office -- which studied 10 cases that totaled $100 million in misspent funds -- the Carnegie company was not run by a disabled veteran, as required by the program. And even once this was exposed, there was no mechanism in place to terminate the company's contracts -- so the funding continued.

Rep. Jason Altmire, D-McCandless, said the name of the company and further information will not be revealed until next week, after he and other members of the House Small Business Committee contact the firm to get its side of the story.

"It's a more complicated situation than some of the other cases," Mr. Altmire said.

On Thursday, Rep. Glenn Nye, D-Va., introduced legislation to beef up fraud prevention in the service-disabled veterans program and subject violators to fines of up to $500,000 and jail time of up to 10 years. Mr. Altmire and Rep. Kathy Dahlkemper, D-Erie, signed on as co-sponsors.

Mr. Altmire also said that as chairman of the subcommittee with oversight of the Small Business Administration, he would pursue further investigation of the program to root out fraud and abuse.

"This is a big problem," Mr. Altmire said. "We take it very seriously, and we'll make sure we're going to get to the bottom of these 10 case studies ... [But] I'm sure this is something that's a lot more widespread throughout the SBA."

GAO received more than 100 allegations of fraud, according to testimony this week by the report's author, Gregory Kutz, and fully investigated 10, resulting in the report's case studies.

The Carnegie company, according to the report, did not meet the program's requirement that one or more service-disabled veterans own a majority of the business and manage and control its daily operations. Instead, the company's disabled veteran managed a restaurant more than 80 miles away, GAO stated.

The bid was questioned, and the SBA determined that the company was ineligible for the funding. But there are no existing penalties for defrauding the system, so the company remains eligible to receive federal contracts in addition to the ones it is completing.

Government accountants concluded there is not a significant vetting process to make sure businesses qualify for the program, and that there should be a way to boot firms that misrepresent themselves.

The Service-Disabled Veteran-Owned Small Business Program was created in 2003 as part of the Veterans Benefits Act. The program gave out $6.5 billion in contracts in 2008, which was only halfway to the government's goal that 3 percent of contracts be awarded to businesses managed by disabled veterans.

Washington correspondent Daniel Malloy writes the "Pittsburgh On The Potomac" blog exclusively at PG+, a members-only web site of the Pittsburgh Post-Gazette. Our introduction to PG+ gives you all the details.