Are Small Businesses Being Audited for Compliance With PPP Terms?

Many small business owners were confused and overwhelmed by the Paycheck Protection Program (PPP) loan application process, and those who qualified were often left unsure of the terms of the loan and how PPP funds could be used.

Now, some small business owners who received loans are wondering if they will be audited for compliance, and what could happen as a result of noncompliance, whether intentional or unintentional.

While the SBA has indicated that it is stepping up efforts to review and verify PPP loan compliance and loans of all sizes are subject to audit, small businesses are much less likely than larger businesses to be reviewed, though it's still possible.

What Is the Paycheck Protection Program?

After COVID-19 caused widespread disruption to businesses across the country, Congress attempted to provide some relief by passing the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes the Paycheck Protection Program.

The PPP is a federal short-term loan program through the Small Business Administration (SBA) aimed at encouraging employers to keep their employees on the payroll by allowing loans to be forgiven if employee retention requirements are met.

The loans can be used to help business owners cover payroll expenses, such as wages, salaries, paid time off, health benefits, as well as mortgage interest and rent. As of the end of June, nearly 5 million PPP loans had been approved by more than 5,000 lenders for over $500 billion.

The SBA Will Be Conducting PPP Loan Reviews

The PPP has come under a lot of fire after it was revealed that many big businesses, including private-equity backed chains, were given millions in forgivable loans while small business owners were largely left out. In response, the U.S. Department of the Treasury said they would be stepping up audits to make sure businesses had applied and participated in good faith.

Audits will likely be conducted by the SBA's Office of Inspector General (OIG), the agency's oversight office, which will be looking for issues such as:

• Was the business that received the loan meeting eligibility requirements and following guidance that was in place at the time the loan was approved?
• Did the business receive the correct loan amount?
• Did the business use the loan on the things they were supposed to use it on?
• Is the business eligible for loan forgiveness for the amount claimed?

Right now, there isn't a lot of information available about what businesses can expect if their PPP loans are under review. The OIG will likely look at a business' payroll records and expenses to ensure that compliance was in good faith and the information that was provided was accurate.

According to the Treasury Department and the SBA, all loans for more than $2 million will be carefully reviewed. Smaller loans face a lesser chance of being reviewed, but some small businesses will be spot-checked for compliance when they apply for loan forgiveness. However, the Treasury and SBA said loans under $2 million will be presumed to be made in good faith.

If You Think You Made a Mistake or Are Not in Compliance

Honest PPP mistakes have been common, especially considering that the rules have changed numerous times and the SBA has not provided clear direction on how different provisions should be interpreted. So, if you are worried that you made a mistake, you are not alone.

If it turns out that you did not qualify for a PPP loan you received, or you did not spend the loan on the appropriate expenses, you could be required to repay some of all of your loan. However, you don't need to worry about facing criminal or civil liability (except for in cases of actual fraud).

Many employers have also run into the issue of having employees quit or decide not to return to work, perhaps because they do not feel safe doing so. Generally, if employers make a good faith effort to bring back employees but the employees refuse (and the offer and refusal are documented), the employer will not be penalized.

If Your PPP Loan Is Under Review

Help is available if you find out that your PPP loan is under review by the SBA. This is not a process you need to go through by yourself. Your accountant or small business lawyer can advise you and help you gather the necessary information to comply with the review.