Audits of disbursements from public programs ensure that the funds have been used appropriately. Because the first round of funding in the Paycheck Protection Program (PPP) was depleted so quickly—and many large businesses were approved for loans that were not needed or that were provided outside of the required processing—the Small Business Administration (SBA) is stepping up efforts to determine if loans went to eligible businesses that used them for the right purposes.
Any business that received a PPP loan may be audited. As part of the loan conditions, a recipient agreed to allow the lender to share tax information with the SBA for loan compliance and loan reviews. The SBA’s Office of Inspector General (OIG), an independent and objective oversight office, is charged with overseeing the audits. The audits will verify the borrower’s eligibility and whether they followed proper loan guidance. The OIG will want to ensure that the certifications a firm made when applying for the PPP loan were accurate and made in good faith.
The audits will attempt to determine the following:
- if the borrower was actually eligible for the PPP loan based on the rules and guidance available at the time of application;
- that the borrower received the correct amount it was eligible for and used the loan funds for allowed expenses; and
- to confirm the borrower’s eligibility for forgiveness on the claimed amount if the borrower actually made the claimed expenses by examining payroll records and expense documentation.
There are many guidance publications and webinars available from accountants and law firms. Many of them emphasize that professional service firms must observe three PPP rules:
- independent contractor payments cannot be included in payroll costs;
- owner draws cannot be included in payroll costs; and
- individual employee compensation must be capped at $100,000.
Even though lenders are supposed to be verifying claimed amounts based on the documentation the borrower provides, the Treasury Department has indicated that the borrower will bear the consequences for inaccuracies, especially if a firm provided false information intentionally.
In general, as long as a firm is spending PPP funds on payroll, employee benefits, utilities, rent, and mortgage interest, it should survive an audit. For the funds to be forgiven, at least 60% of the funds must be spent on payroll and employee benefits, and the remaining 40% on utilities, rent, and mortgage interest. As the program made clear, if a firm spends the funds on anything other than the defined categories, it could be subject to additional liability or even charges of fraud.
Now is the time for firms to confirm that they have followed PPP loan rules and have the proper documentation for loan forgiveness. Attending a webinar, downloading guidance publications, and meeting with your financial advisors are prudent management activities.