Nonprofit Resources

Treasury Dept. Says PPP Loan Amounts Over $2 Million Will Be Audited

In an interview on CNBC on April 28, 2020, U.S. Treasury Secretary Steven Mnuchin announced that the Small Business Administration (SBA) will audit Paycheck Protection Program (PPP) loan amounts over $2 million to verify economic need before the loans are forgiven.

While the PPP is intended to assist small businesses and organizations with fewer than 500 employees, news reports have highlighted several public corporations that have taken PPP loans.

Mnuchin is quoted as saying, “The certification was very clear in saying that if people had other sources of liquidity, they could not take this loan.”

The certification to which Mnuchin refers reads as follows:

While the clarity of the certification may be debatable, it’s clear the Treasury Department feels a need to react to the news reports. Therefore, in light of this announcement, it would be a good exercise for any organization — but in particular those called out in the announcement — to document the basis on which the organization believed it could, in good faith, sign the loan application given the required certification.

As further background on this topic, on April 24, 2020, the SBA released FAQ 31, which addresses the eligibility of “large companies with adequate sources of liquidity to support the business’s ongoing operations [to] qualify for a PPP loan.” In response, the SBA noted that “all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.”

While the SBA notes that “the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere…, borrowers still must certify in good faith that their PPP loan request is necessary.” In evaluating their ability to make a good faith certification, borrowers are instructed to “tak[e] into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

In our view, the standards articulated in the certification and expounded upon in the FAQ do not address the lack of clarity in interpreting the certification. For example:

• The impact uncertainty plays in evaluating necessity is not explained.
• The impact restricted net assets play in evaluating necessity is undefined.
• The nature of the ability to access other sources of liquidity is not explained. For example, access to an approved and untapped line of credit is markedly different than applying for a loan that may be granted but will take weeks to close.
• The degree of detriment to one’s business before the detriment is “significant” is undefined.

Later on April 28, the SBA released FAQ 37. This clarifies that the content of FAQ 31 applies equally to publicly traded companies and private companies (which would include tax-exempt organizations).

Organizations that are concerned about whether they can meet the standard in the certification will be deemed to have acted in good faith if they return their PPP loan funds by May 7, 2020. In addition, an organization with an application in process may choose to rescind that application prior to receiving PPP funds and be deemed to have acted in good faith.

We will provide further information if updates become available.

 

Additional Resources:

Preparing for Paycheck Protection Program Loan Forgiveness (article)

Accounting for Paycheck Protection Program Proceeds (article)

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