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Internal Audits and Investigations for PPP Compliance

Internal Audits
Dr. Nick Oberheiden is a nationally recognized expert on PPP loan laws
and has been seen on Forbes, CNBC and Fox Business.
Speak with Dr. Oberheiden today for a free consultation at 888-680-1745.

The federal government has announced plans to audit many PPP loan recipients. Is your company in compliance?

While the federal Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided a much-needed lifeline for many businesses, the loans issued under the program came with strings attached. Due to what is believed to be widespread fraud under the PPP, the U.S. Treasury Department has announced that the Small Business Administration (SBA) will audit many loan recipients, including all recipients of loans of $2 million or greater. With this in mind, companies that received PPP loans must be prepared to defend themselves in the event of an audit, and this means conducting their own internal compliance audits and investigations.

In addition to mitigating the risk of federal prosecution in the event of an SBA audit, companies need to ensure that they are complying with the requirements for loan forgiveness under the PPP as well. While Congress established the PPP quickly in response to the economic impacts of the novel coronavirus (COVID-19) pandemic, in doing so it left many questions unanswered. The SBA has issued guidance that companies can – and should – follow, but companies must take appropriate additional measures to ensure that they can account for the appropriate spending of all PPP funds.

What Issues Need to Be Examined in an Internal PPP Audit or Investigation?

In order for an internal audit or investigation to be effective, it must have a specific objective, and it must be conducted systematically according to clearly-established policies and procedures. With regard to internal PPP audits and investigations specifically, companies should focus their efforts on determining (i) whether they are at risk for facing fraud allegations related to their PPP applications, (ii) whether they have consistently complied with the terms of the PPP, and (iii) whether they will be able to certify for loan forgiveness.

The following are examples of the types of issues that need to be examined. However, this list is not exhaustive, and companies will need to determine the necessary and appropriate scope of their internal audits with the assistance of experienced federal compliance and defense attorneys:

1. PPP Loan Application Process and Documentation

First, companies should determine whether their PPP loan applications were fully compliant. This will involve various steps, and it will require an in-depth understanding of the eligibility criteria for securing federal funds under the PPP. Not only must companies have fully complied with the PPP’s application terms and conditions, but they must have the ability to affirmatively demonstrate this compliance as well. Mistakes, oversights, and inability to demonstrate compliance all have equal opportunity to be prosecuted as federal fraud under the Paycheck Protection Program.

2. Source(s) of PPP Funds

While there generally should not be an issue as to whether funds were received from a legitimate source (since all banks lending pursuant to the PPP received funds from the U.S. Treasury Department directly), some companies have already gotten into trouble for obtaining multiple PPP loans. This “loan stacking” is expressly prohibited under the terms of the PPP, and it, too, is considered a form of federal fraud.

For large companies in particular, it will be important to discern whether multiple PPP loan applications were submitted; and, if so, if multiple applications were approved. If multiple departments successfully submitted PPP loan applications, for example, then the company may have an obligation to return one or both loans voluntarily. However, the decision to voluntarily return federal funds is a decision that should only be made on the advice of legal counsel.

3. Appropriate Segregation of PPP Funds

The CARES Act establishes strict limitations on the use of PPP funds. Specifically, companies can use PPP funds for payroll costs, interest on mortgage obligations, rent, and utilities. Payroll costs include, “salary, wages, commissions, or similar compensation, cash tips or the equivalent (based on employer records of past tips, or, in the absence of such records, a reasonable, good-faith employee estimate of such tips), payment for vacation, parental, family, medical, or sick leave, allowances for separation or dismissal, payments for group healthcare coverage, including insurance premiums, and retirement, as well as payment of state and local taxes assessed on compensation of employees.”

In order to ensure that PPP funds are only used for permitted purposes – and to demonstrate that the restrictions on the use of PPP funds have been followed – companies should appropriately segregate the loan amount(s) they receive under the program. An internal audit should be used to confirm the appropriate and timely depositing of PPP funds as well as compliance with all of the various other terms and conditions for PPP eligibility.

4. Appropriate Disbursement of PPP Funds

In addition to confirming that PPP funds have been appropriately segregated, companies must also confirm that PPP funds have been appropriately disbursed. This means that the funds have been used for payroll costs, interest on mortgage obligations, rent, and utilities exclusively. All disbursements must fall into the permitted categories, and companies must be able to substantiate their compliance with the required documentation. For example, with regard to the use of payroll processors, the SBA’s Paycheck Protection Program Loans Frequently Asked Questions (FAQs) state:

“SBA recognizes that eligible borrowers that use . . . payroll providers are required under some state registration laws to report wage and other data on the Employer Identification Number (EIN) of the . . . payroll provider. In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation. Relevant information from a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the eligible borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes.”

5. Valid Certification for Loan Forgiveness

In order to have their PPP loans forgiven, companies must certify that they have complied with the program’s terms. Making a fraudulent certification can have severe ramifications, so companies must ensure that they can make a valid certification prior to seeking loan forgiveness. This requires a detailed and comprehensive review of all PPP-related activities, and an informed decision needs to be made based upon the realities at hand. If and to the extent that any issues prevent the company from making a valid certification, it should quickly be determined what remedial measures are necessary.

What is the Process for Conducting an Internal PPP Audit or Investigation?

Conducting an effective and efficient internal PPP audit or investigation requires a systematic approach, and the process should be managed by the company’s legal counsel to ensure that all information uncovered is protected by the attorney-client privilege. At Oberheiden P.C., our process for conducting internal corporate audits and investigations involves:

1. Assemble the Audit or Investigation Team

We will assemble an investigation team comprised of our firm’s attorneys and former federal agents as well as appropriate members of your company’s leadership and IT departments. Our attorneys will assign appropriate roles and responsibilities, and we will administer the entire process to ensure that it achieves its intended purpose in a timely manner.

2. Collect All Pertinent Documentation

We will tailor your company’s audit or investigation to your company’s operational structure, and we will collect all pertinent documentation with minimal or no disruption to your company’s daily business. To the extent necessary we will also interview personnel involved in the PPP loan application process or the management of PPP funds.

3. Evaluate all Documentation Collected

We will thoroughly evaluate all documentation collected in order to assess your company’s compliance with the terms and conditions of the PPP. Our attorneys are intimately familiar with the program’s requirements, and we will be able to efficiently determine whether your company has satisfied the conditions for loan forgiveness.

4. Assess Any Compliance Risks or Deficiencies

To the extent that the audit reveals any issues, we will assess your company’s compliance risks and deficiencies. We will provide an independent and unbiased assessment of your company’s compliance efforts, and we will ensure that you have a clear understanding of when, where, and why any mistakes were made.

5. Determine Next Steps for Compliance and/or Defense

Finally, we will determine your company’s next steps. If your company is fully in compliance with the PPP, we can assist you with seeking loan forgiveness at the appropriate time. If there are issues that need to be corrected, we can help you correct them and put appropriate policies and procedures in place; and, if necessary, we can prepare to defend your company in a federal PPP audit or investigation.

Speak with a Federal Compliance and Defense Lawyer at Oberheiden P.C.

If your company received funds under the PPP, it is imperative to ensure your company is in full compliance with the terms and conditions established by the CARES Act. To speak with one of our federal compliance and defense lawyers in confidence, call 888-680-1745 or inquire online now.

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