As businesses who received a PPP loan begin to submit forgiveness applications, many will face additional scrutiny in the form of an audit conducted by the Small Business Administration (SBA). Although we do not know how in depth the audits will be, the content below provides a brief overview of the SBA audit scope and process as well as a checklist all borrower’s should follow to prepare for any potential audit.
Who will be audited?
PPP loans in excess of $2 million are automatically triggered for an audit by the SBA. The SBA has created a safe harbor for any PPP loan borrower that, together with its affiliates, received loans of less than $2 million. The safe harbor protects smaller borrowers from a potential PPP audit based on its good faith certification regarding the necessity of the PPP loan. However, the government in its sole discretion, may still decide to audit a PPP loan for other purposes, such as possible misuse of PPP funds.
According to the Interim Final Rule published in the Federal Register on June 1, 2020 (IFR), “SBA may review a loan if the loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.”
What is the scope of the audit?
According to the IFR, the SBA is authorized to audit:
- Borrower’s eligibility under the CARES Act, SBA rules or guidance in place at the time of the borrower’s application or the terms of the borrower’s application.
- Whether a borrower correctly calculated its loan amount and use the proceeds for allowable uses under the CARES Act (i.e. payment of payroll costs vs. non-payroll costs).
- A borrower’s forgiveness eligibility based on information provided n the forgiveness application.
How will the audit be completed?
The SBA has not yet released information on when they will begin audits, how they will be completed or what information will be requested. However, we do know if the SBA decides to conduct an audit it will notify the lender in writing and the lender will then have five business days to notify the borrower of the audit request. If audited, the borrower will respond to the SBA’s questions and provide additional information either directly through the SBA or indirectly through the lender. SBA audit decisions are appealable and we expect an additional interim final rule addressing the appeal process.
Preparing for your audit.
In order to properly prepare for a potential audit by the SBA, all businesses which received PPP funds (irrespective of loan size) should complied and maintain documentation relating to their PPP loan and forgiveness application, including those items listed below, if they haven’t already done so. We suggest beginning this process now instead of waiting for the SBA to notify them of an audit in order to eliminate potential delays on their loan forgiveness. Borrowers should work closely with their accountant and other advisors in preparing the documentation and maintaining copies. According to the SBA, borrowers must retain all records for six years after the date the loan is forgiven or repaid.
Audit Documentation and Action Checklist
Borrowers should prepare and retain the following documents in advance of a potential audit by the SBA:
o Copies of PPP loan applications including calculations and backup for employee headcount and employee compensation.
o Copies of PPP forgiveness application, including all worksheets, relevant calculations for potential forgiveness reduction and backup documents (e.g. payroll registers, cancelled rent checks etc.)
o All internal documentation and plans outlining the necessity of the loan and plans for use of the funds, including all emails and memos related thereto.
o Internal resolutions or written consents approving the loan, as applicable and use of the funds as well as any board or management presentations related thereto.
o Financial records showing the company’s access/lack of access to other forms of capital.
o Financial records demonstrating the companies need for access to capital through the PPP loan (per the above and because of the SBA safe harbor, this may be applicable only for loans in excess of $2 million).
o Copies of all mortgage statements, leases, utility or other non-payroll costs that were submitted for forgiveness.
o Documentation and receipts relating to all non-cash compensation payroll costs, including employer contributions for employee health insurance, employee retirement plans and total amounts paid for state and local taxes.
o All correspondence with the PPP lender.