Preparing for an Audit After PPP Loans

This post first appeared on Risk Management Magazine. Read the original article.

The
federal government created the Paycheck Protection Program (PPP) to help small companies stay
afloat and to incentivize them to keep employees on their payrolls despite
ongoing coronavirus-related declines in business. Since its inception, the
program has delivered (through the
Small Business Administration and its partner banks) more than five million guaranteed loans totaling in excess of
$525 billion to entities nationwide.

To the
extent borrowers have retained their employees at comparable pre-pandemic headcounts
and salary levels (among other things), their PPP loans are forgivable, and
loan payments, if not forgiven, can be deferred for up to a year. Yet
despite all good intentions, the PPP has been a source of real anxiety and
frustration, particularly given the mixed signals sent by the SBA and U.S. Department
of the Treasury about loan qualification, certification requirements, and
forgiveness criteria, and the specter of seemingly unavoidable loan audits.

Which PPP Loans Are Subject to Audit?

In an April press statement, U.S. Treasury Secretary Steven Mnuchin announced that the government would be performing full audits on any company taking more than $2 million from the PPP before any loan would be forgiven. Thereafter, in consultation with the Treasury Department, the SBA issued guidance explicitly stating that it would review all PPP loans in excess of $2 million following a lender’s submission of a borrower’s loan forgiveness application.

Those PPP borrowers who have received less than $2 million may
also be in line for audit, given the U.S. Treasury’s Interim Final Rule released
on June 1 stating, “[f]or a PPP loan of any size, SBA may undertake a review at
any time in [its] discretion.” As such, all PPP borrowers are subject to audit.

How to Prepare for a PPP Audit

Preparing for a PPP loan audit is no easy task given
the utter lack of information or guidance from either the SBA or
Treasury Department regarding the scope of the upcoming loan reviews. In fact,
at present, it is unclear what the specific focus of the PPP audits will be,
though informally the SBA has suggested that the process will include a full
review of a borrower’s payroll records.

Of course, it seems a safe bet that the SBA’s audits
will go beyond the issue of payroll. That being said, borrowers should consider
taking a number of steps to prepare for the inevitable PPP audit.

To begin, they would be wise to identify an individual through
whom all correspondence with SBA auditors will flow. This point of contact
might be a director of risk management, chief financial officer, or chief executive
officer, depending on the size of the business under audit. Once designated,
the contact’s identity should be communicated internally, with an instruction
to all employees to direct all PPP-related inquiries to that person.

Next, borrowers should coordinate with their professional
service providers—legal counsel, accountants, and the like—before and during the
audit process to ensure full strategic alignment. Such coordination will allow those
professionals to effectively advise businesses under audit, taking into account
their unique circumstances.

Even more tangibly, those preparing for audit ought to identify any and all evidence, documentary and otherwise, demonstrating that: 1) They qualified and were eligible for PPP loans in the first place, 2) the loan proceeds received were used properly, and 3) the extent to which the borrowers’ debts should be forgiven.

In addition, borrowers should bookmark documents supporting the proposition that the uncertainty of then-current economic conditions made their loan requests necessary to support ongoing operations. This would include financial analyses conducted by borrowers at or near the time they applied for PPP loans, as well as contemporaneous internal correspondence discussing their respective financial outlooks and need for PPP funds.

Finally, it would be helpful to uncover anything that could
be construed negatively during an SBA audit ahead of time. In so doing,
borrowers, in concert with their attorneys, can develop response strategies to
explain away potentially damaging documents or information.

Undoubtedly, preparation is of the
utmost importance so that borrowers can place themselves in the best possible
position to respond to and effectively defend against the inevitable PPP audits.
And because so much is on the line—especially loan forgiveness—it would be wise
for any business that has received more than $2 million in PPP proceeds to cover
all the bases as it awaits SBA review.

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