Establishing Controls Surrounding Your PPP Loan

Billions of dollars of Paycheck Protection Program (PPP) loan applications have been submitted to banks in hopes that much-needed funding will be received to ensure continued employment of millions of American workers. We have heard that applications have begun to be signed and money is starting to be distributed to companies and organizations, which means that they are beginning the 8-week period of potential forgiveness. While the final regulations regarding how the forgiveness will work is not yet known, there is one thing we do know; it is imperative to implement proper controls to ensure that the funds received are properly tracked and utilized for their intended use.

There are many provisions of the $2 trillion CARES Act that have received a tremendous level of press, but there is a very important part of the Act that has gotten very little press but is expected to have a long-term impact on loan recipients for the next five years. The Act has a high potential for fraud, as it relies heavily on borrower self-certifications, such as for payroll cost calculations and eligibility. As a result, the Act provided a three-part oversight structure:

• The Pandemic Response Accountability Committee: The Committee oversees not only CARES Act funds, but also money for aid under the first two phases of COVID-19 relief. The Act earmarks $80 million for the Committee, which is authorized to conduct investigations and required to submit biannual reports to the President and Congress. The Committee will terminate on September 30, 2025.
• The Congressional Oversight Committee (the “Commission”): The commission is composed of five members chosen by the majority and minority leaders of both houses of Congress, is responsible for supervising the implementation of the CARES Act by the Department of the Treasury and the Federal Reserve Board, and assessing the effectiveness of Congressional efforts to provide economic stability in light of the COVID-19 pandemic. The Committee will terminate on September 30, 2025.
• Special Inspector General for Pandemic Recovery (“SIGPR”): The SIGPR is appointed by the President with the advice and consent of the Senate to conduct audits and investigations of loans, loan guarantees, and other investments made by the Treasury Secretary (the “Secretary”). Congress budgeted $25 million of the $500 billion allocated to the Secretary for the CARES Act to the SIGPR. The SIGPR will terminate on March 27, 2025.

This means that there will be a potential that someday there will be a knock on your door and your financial records will be under scrutiny to ensure that they were properly expended pursuant to the Act. Thus, the need to ensure proper controls are in place.

So, what best practices should you consider when you receive your PPP Loan?

• Consider opening up a separate bank account for the PPP loan funds so you can clearly document how the funds are being expended. Remember, these funds must be used for the purpose you outlined on your original loan application, and for most will include:
  • Payroll Costs
    • Cash Compensation less than $100,000
    • Group Health Benefits
    • Employer Retirement Costs
  • State employer taxes (NYSUI and MTA Tax)
  • Interest on debt or mortgages, rent and utilities (not to exceed 25% of the loan amount)
• Create an electronic file in which you place the back-up support for all expenditures attributable to the use of the loan proceeds. As part of the certification of the loan, you agreed that you would provide this documentation to the lenders. This may be required even if there is no application for forgiveness. This way its all in one place should you be selected for audit. This support should include:
  • Payroll registers
  • Health insurance bills
  • Retirement contribution calculations and related funding
  • Rent and utility bills
    • This may include copies of leases and cancelled checks or proof of payment
  • Interest on prior debt and mortgage instruments
    • This may include copies of leases and cancelled checks or proof of payment
• Set up a separate cost center within your general ledger to track all the expenses charged to the loan. The charges to this cost center should coincide with the back-up support in the electronic file. This can easily be done via “classes” in Quickbooks or other accounting software.
• Carefully review the forgiveness regulations to ensure that you only seek forgiveness for allowable costs. The final rules regarding forgiveness are not yet out, so the goal should be to make sure that the loan funds are only expended for the intended purpose, and when the forgiveness regulations are released to carefully link the expenditures incurred during the 8 week period back to these rules to develop appropriate documentation to support your forgiveness amount.
• Make sure you have support for the salary level for each staff member at both for the prior full quarter (we believe this to be 4th Q 2019 since 1st Q 2020 will have seen potential salary impacts) and during the 8-week loan forgiveness period to provide proof regarding salary levels. Forgiveness will be diminished if staff members received pay cuts in excess of 25%.
• You will need to make sure you track the number of staff FTE’s during the 8-week forgiveness period, as this will be compared to your base period (either January/February 2020 or February 15 – June 30, 2019) staff levels, with any decline in staff resulting in a corresponding decline in your forgiveness. The goal of the Act is to keep employees on payroll, so that should be your goal also.
• Consider designating an internal compliance person who may regularly be outside of your accounting and finance processes. This person can be an independent party to help provide oversight and leadership of these efforts.
• Once the package is together, consider having your accountant, internal compliance person, or lawyer review it to ensure that it properly substantiates the loan use and forgiveness calculation. It never hurts to have another set of eyes look things over.

If, upon audit, it is determined that you made a mistake or cannot support a position taken, either with respect to the loan or forgiveness, you may need to pay restitution. If it is determined that you committed a crime, in addition to restitution, there are potential Federal punishments:

False claims can include:

• Falsely claiming the company had fewer than 500 employees to qualify for the loan and did not meet alternative size standards or other exceptions
• Falsely claiming the coronavirus hurt business to qualify for the loan
• Inflating average monthly payroll cost to increase the loan amount
• Falsely claiming the loan money is going towards qualified expenses to get the loan forgiven
• Incorrectly disclosing employee counts for purposes of calculating loan forgiveness discounts
• Incorrectly reporting qualified expense amounts to increase loan forgiveness

Having seen some of the complete documents from banks, some of the promissory notes used to administer this loan include considering the loan in default if there is an omission of material facts or making a materially false or misleading representation, attestation, or certification. Under the terms of default, the note can become immediately due and allow the lender to seek judgment against the borrower.

This is the largest Federal stimulus package ever provided and it is being pushed out as quickly as possible without the same level of underwriting and verification that would normally be attributable to this type of support. As a result, there is plenty of opportunities for fraud or mistakes to occur. By making sure that you put in place proper controls, and by carefully complying with regulations, you have a much higher likelihood that, in the event of an audit, you will not be writing a check back to the Federal government.

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