By Marilou C. Vroman, CPA, CFE
As a small business, we certainly understand and appreciate the importance and the benefits of the Paycheck Protection Program (“PPP”) to protect businesses and employment during the economic downturn. The program was released so quickly that there were many areas of the program that were subject to interpretation – from the initial eligibility, to the loan amount and ultimately, the amount which might be forgiven.
The spirit of the program in response to Covid-19 was primarily to encourage small business to maintain their personnel and payroll plus support certain occupancy costs. If you visit the Small Business Administration (“SBA”) website one of the first sentences describing the program states “The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll” and continues to state “SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.” The language seems clear, however ongoing questions from lenders, borrowers, attorneys, and CPAs have revealed the need for additional guidance on program compliance. With hundreds of thousands upwards to millions of dollars at stake, compliance with this program should not be taken lightly.
The loan forgiveness calculations can be somewhat complex, and are still subject to change, but the following are key guidelines established by SBA and US Treasury in the simplest of terms:
· 75% of the forgivable loan amount must have been used for eligible payroll costs
· Forgiveness is reduced if headcount is reduced and/or salaries and wages decrease
With the great deal of uncertainty that surrounded the economic health of the automotive industry as Covid-19 progressed, many dealers were within the PPP eligibility guidelines and secured loans through the program. With a new PPP note payable on the balance sheet, the question shifts towards compliance with the program and how to potentially obtain forgiveness. According to US Treasury guidance as of 5/13/20, borrowers with PPP loans greater than $2 Million and other PPP loans as appropriate will be subject to a review by the SBA for compliance. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. With this in mind, what should dealers do now?
As I have read and listened to many interpretations of the existing guidance, my forensic instincts fire up as I put myself in the shoes of the government auditor who will determine if a business has fraudulently received funds or forgiveness under the PPP program. As I think of how we approach our internal audits, automotive dealerships have a unique but expected behavioral pace and rhythm in their underlying data and if the historical patterns deviate from the norm, these anomalies are often indicators of an underlying problem warranting further investigation. At best, deviations can be signs of performance improvement. At worst, deviations can be indicators of fraud.
As we enter the period of PPP forgiveness requests in the coming weeks, my recommendation to dealers is ensure the actions taken with personnel and operating expenditures follow patterns in the ordinary course. Most dealerships have well documented financial history, such as wage reports on file with the IRS and state, financial statements provided to manufacturers and lenders, lease agreements, cancelled checks and other documentation in support of pre-Covid-19 operational cash flows.
This is not the time to make significant changes to spending patterns in a way that might give rise to an anomaly in your dealership’s behavior in light of the PPP guidelines. A dealer may be tempted to increase benefits spending, advance pay one month’s rent, or temporarily add “ghosts” and/or related parties to the payroll and authorize an extra bonus during the PPP test period to maximize the potential loan forgiveness amount. The reality is these types of changes from historical patterns are detectable and could lead an auditor to question the dealership’s good faith certification of the need for the loan to support ongoing operations and ultimately put the loan forgiveness, and worse yet, the dealer, at risk.
When it comes to PPP, keep in mind the spirit of the program has been to sustain employment and support small businesses in a time of uncertainty. Take the time to gain a detailed understanding your dealership’s historical expense patterns, ensure historical supporting documentation is organized and available, and keep impeccable records of the dealership’s potentially forgivable expenditures, following the PPP loan origination date.
From an internal auditor’s perspective, where there is smoke, there is fire, and we will continue to investigate it until we find its source. The best approach is to prevent the fire from happening in the first place.