The CARES Act has been the largest economic relief program in the history of the United States, and as previously reported, there is potential to bring with it a high level of fraud or false representations, as we have previously discussed. Many borrowers analyzed the initial CARES Act and saw the opportunity for funding that could be beneficial to their business and followed the guidance in place at the time, which has since been updated several times.

To date, there have been two rounds of financing of paycheck protection program (PPP) loans, which has put (or intends to put) nearly $660 billion in the hands of small businesses. Last week, the SBA released frequently asked question 31, which provided clarification surrounding a company’s certification that they were impacted by the Coronavirus, and thus eligible to receive a PPP loan. This was in direct response to more than 220 public companies that applied for some $870 million from the government program. On April 28th, 2020, the SBA FAQ (Question 37) was updated again to reflect that private companies should also perform such analysis regarding their certification of economic need and uncertainty.

The participation in this program by both public companies (such as Shakeshack and Potbelly) and larger private companies (such as the Los Angeles Lakers) has created a public outcry, resulting in some of the companies returning the loans in light of the new guidelines. Today, Treasury Secretary Steven Mnuchin told CNBC that the government would perform a “full review” of any company accepting a loan of more than $2,000,000 before these loans are forgiven. He also warned borrowers might have a “criminal liability” if they provided a false certification. In the interview, he reinforced that banks are relying that borrowers made their certifications in good faith, stating that he places the blame on the borrowers.

Many are taking this warning to imply there will be a full audit on these funds for these borrowers by the SBA. Mnuchin has said a more formal statement will be coming on this, and we hope that regulations and details will follow. This warning and continued scrutiny for borrowers have only underscored the need for companies to maintain strong documentation in relation to their loan application and internal control system for monitoring and tracking the use of these funds, but especially now for borrowers whose loans are above $2,000,000. Failure to do so can result in loss of forgiveness, reputational risk, fines, and potential criminal liability.

For guidance on documenting your economic need & uncertainty, please see our article here.

For guidance on establishing an internal control system for use and reporting of your funds, please see our article here.

For more Coronavirus updates and resources, click here.

Edward McWilliams, CPA

Edward McWilliams, CPA

Partner

Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.