The Coronavirus Aid, Relief and Economic Security Act, including the Payroll Protection Program, is a federal stimulus to help support the U.S. economy while the country is in lockdown. It was appropriately rolled out very quickly due to the closure of countless non-essential businesses, resulting in the loss of millions of jobs.
Because the application process and the calculation to determine the loan amount was not too clear at first, many companies have turned to their accountants to help them apply for these loans.
This is not the first time that the federal government has had to provide stimulus funding or emergency funding very quickly. Two occasions come to mind: the American Recovery and Reinvestment Act of 2009 and the Hurricane Sandy Relief Bill. Both federal aid packages were determined from the beginning to be federal financial assistance using existing Catalog of Federal Domestic Assistance programs and/or created new CFDA numbers. Therefore, they were both subject to the single audit requirement.
For-profit businesses were not subject to any compliance requirements for the federal financial assistance they received. In addition, the funding received by individuals, families and businesses was not subject to any verification process.
Currently, there is no guidance whether the CARES Act funding, including PPP loans, are subject to any compliance requirements or verification procedures for all businesses and nonprofit organizations. Nonprofits have been concerned that PPP loans guaranteed by the U.S. Small Business Administration will be considered federal financial assistance and subject to a single audit under Uniform Guidance.
Because of these concerns, the AICPA Governmental Audit Quality Center recently issued a letter to the U.S. Office of Management and Budget requesting clarification whether the CARES Act funding, including PPP loans, will be subject to a single audit. It has not yet received a response.
The U.S. Treasury Department has advised that they will audit every PPP loan greater than $2 million, and companies that made false certifications to receive a loan will face stiff penalties and criminal liability. They also advised that the audits will be performed before these loans are forgiven by the U.S. Treasury. They did not indicate if loans under $2 million will be subject to any verification process.
Even though the SBA has already considered some of their loan and loan guarantee programs to be federal financial assistance, they did not state this in their PPP loan application and the loan agreement. Also, there are no requirements for any type of attestation or verification if the amount requested is calculated correctly and if the amount requested to be forgiven is correct.
If the U.S. Treasury and/or the SBA requires that these loans are to be considered federal financial assistance and, therefore, subject to a single audit and/or some type of attestation/verification, small businesses and nonprofits will have to turn to their accountants to provide that service. If the PPP loan is subject to single or program-specific audit, the following compliance requirements would be direct and material to the loan program.
Activities Allowed or Unallowed
The purpose of the CARES Act is to keep American workers paid and employed. The activities performed by a PPP borrower will be reviewed with this purpose in mind. The loan can be used only for a specific purpose in the eight-month period following the receipt of the loan as described in various sections below.
Allowable Cost and Cost Principles
There are restrictions on the use of the loan proceeds. In order to obtain forgiveness, the proceeds must be used for payroll costs and certain employee benefits as defined in the CARES Act and payment of interest on any mortgage obligation, rent and utilities prior to February 15, 2020. If the loan is utilized for any other purposes, it is an unallowable cost subject to repayment. An auditor would require organizations to produce documents to substantiate the expenses and ensure compliance with OMB Uniform Guidance.
It is advisable to maintain a separate cost center in the general ledger to record all the disbursements under the loan program and, if possible, a separate bank account for the PPP.
The organizations receiving funding are required to ensure that they are eligible for the funding. In order to be eligible, an organization’s number of full-time and part-time employees should be 500 or fewer. There are employee retention requirements to be eligible for forgiveness. The borrowers should also assess the economic need for a loan at the time of applying. An applicant must make a good-faith certification, considering their current business activity and their ability to access other sources of funds.
In addition, the organization must comply with the SBA affiliation rules. The computation of the maximum loan amount could be subject to audit. The number of employees can be easily verified with reference to the payroll reports. The economic need for a loan and the affiliation rules are subject to interpretation. Therefore, a borrower should document how it determined economic need and how it complied with the affiliation rules.
Period of Availability of Federal Funds/Period of Performance
Organizations should ensure that the funds are spent during the eight-week period following the funding of the loan, and expenses that are charged to the program are incurred and paid during this eight-week period.
Generally, program income is gross income earned by an organization that is directly generated by a supported activity. Although not specifically mentioned in the CARES Act or other guidance, Medicaid, government grants or other funding received during the eight-month period in which the loan money has been expended could be subject to deduction from forgiveness.
Special Test and Provisions
The borrower is required to comply with any specific compliance requirements mandated by the loan documents executed between the borrower and lender.
Timely and clear guidance is necessary for the borrowers to comply with the requirements. As of this writing, the U.S. Treasury, SBA or OMB have not issued guidance on whether the PPP loan would be a grant subject to single audit and what the compliance requirements are. Appropriate guidance must be issued without any delay to ensure a high compliance rate.
John D'Amico, CPA, is a partner within the Professional Standards Group at Marks Paneth LLP, which is responsible for monitoring quality control in the firm as mandated by professional standards. He specializes in pre-issuance reviews and inspections of nonprofit organizations, governments and single audits. Mr. D’Amico also provides consultation on accounting and attestation matters and tests and monitors the firm's quality review policies and procedures. He teaches continuing education classes for the firm and on behalf on the American Institute of Certified Public Accountants nationally.
As a sought-out thought leader in his areas of expertise, Mr. D'Amico has authored numerous articles pertaining to nonprofit accounting/auditing, governmental auditing standards and Uniform Guidance. He frequently leads training seminars for his clients and is an instructor for the American Institute of Certified Public Accountants (AICPA). He has presented at the annual Nonprofit Conferences of the New York State Society of CPAs; the New Jersey Society of CPAs; and the Connecticut Society of CPAs; as well as the annual Governmental Conferences of the Connecticut Society of CPAs and the Michigan Society of CPAs.
In addition to his professional activities, Mr. D’Amico is a dedicated volunteer who regularly donates his time to charitable organizations. He currently serves on several nonprofit boards of directors in a variety of capacities.
Joseph J. Kanjamala, CPA, CGMA, is a partner in the Nonprofit, Government & Healthcare Group at Marks Paneth LLP. His responsibilities in this role include designing audit strategies, supervising and training staff, liaising with clients, and providing oversight so that audits are conducted in a timely and cost-effective fashion. During his more than 20 years of public accounting experience, Mr. Kanjamala has developed deep skills in serving nonprofit organizations and has served numerous charitable organizations, private foundations and educational institutions. He advises his clients on all facets of accounting and tax issues.
Prior to joining Marks Paneth in 2004, Mr. Kanjamala worked in the assurance and advisory practice of Ernst & Young LLP, where he served both for-profit and not-for-profit clients. Mr. Kanjamala was also a previous assistant controller for a large non-profit organization that received New York City, New York State and Federal funding. In that role, he learned first-hand the positive impact that sound accounting and financial practices can have on a nonprofit entity and, in turn, upon the constituents it serves.