Audits are part of a necessary SBA process, so don’t panic if your business gets selected for one.
In April 2020, then Secretary of Treasury Steve Mnuchin announced any business receiving more than 2 million in Paycheck Protection Program (PPP) funds would be audited by the Small Business Administration (SBA). But it’s not just these borrowers who should prepare for an audit. The SBA will conduct random PPP audits to keep a finger on the pulse of lenders and borrowers.
“Being selected for an audit does not mean you did anything wrong. It is part of the normal course of business and is a routine SBA process,” Natalie Falatek, Director of SBA/Guaranteed Lending at Pennsylvania-based community bank, Mid Penn Bank said. “One of the most important things is to have good, reliable, and complete documentation. In other words, it pays to ‘document, document, document,’” Falatek said. Although, she noted that proper documentation may look different for every borrower or business.
Justin Kelton, Esq., a partner at Abrams Fensterman Attorneys at Law who focuses on employment law and complex investigations, noted that the best offense is a good defense. “PPP Fraud is about to become an extremely hot area, and there will be significant pressure on the government to investigate and pursue cases aggressively,” Kelton said. “Wise businesses owners should prepare proactively for this eventuality.”
If you’ve received PPP funds, here’s what you need to know about preparing for an audit.
“Being selected for an audit does not mean you did anything wrong. It is part of the normal course of business and is a routine SBA process.”
You’ll find out about the audit from your lender
- If the SBA decides to audit your PPP loan, they will first notify the lender in writing.
- The lender then has 5 days to notify the borrower in writing.
- Borrowers will either provide the information requested for the audit directly through the SBA or through your lender.
Here’s what the SBA will be checking for during the audit
Understanding what the SBA is looking for during PPP audits will help you prepare accordingly. The auditor focus on 3 main categories:
- Loan amount: The SBA auditor will check to ensure that your original loan amount was correctly calculated.
- How borrowers used the funds: The SBA auditor will review financial statements to ensure the borrower used proceeds for admissible PPP purposes — payroll costs, mortgage interest, rent, utilities, and interest on any other debt obligations incurred before February 15, 2020.
- Loan forgiveness calculations: They’ll also review calculations for forgiveness eligibility based on the forgiveness application (the SBA Form 3508 or a lender’s equivalent form).
Preparing for the audit
Maintaining copies of particular FAQs and documents that were used to determine eligibility or to support your calculations is both helpful and important.”
First things first, relax. “Don’t panic,” said Falatek. “Stay calm and work with your lender and the SBA to prepare and supply the documentation they need.” Documentation will look different for every business. Some businesses might have more formalized documentation that includes system generated reports, while for other businesses — especially small businesses — the documentation may look less formal. That’s ok.
“What’s most important is that the documentation includes not only the relevant paperwork and records, but also copies of SBA policies, FAQs, and instructions,” she said. “It is not necessary to archive everything, but maintaining copies of particular FAQs and documents that were used to determine eligibility or to support your calculations is both helpful and important,” Falatek added.
Collect relevant documents
These include copies of:
- Your completed PPP application. Request this from your lender if you don’t already have it.
- Your PPP forgiveness application and all relevant calculations for potential forgiveness.
- All internal documents and communication discussing your need for the loan and plans for the funds (think emails, internal memos, or Slack conversations).
- Leases, utility bills, and mortgage statements, as well as any other non-payroll expenses that you submitted for forgiveness.
- All correspondence with your PPP lender.
- Income and employment tax returns.
Also make sure to have receipts for payroll costs, and financial records demonstrating the company’s access or lack thereof to other forms of capital.
Falatek said the last 2 pages of your PPP forgiveness application are especially important to include, as these pages provide a checklist for what is necessary to send to your lender. It also tells you what documents to retain for the future. “Use this checklist to ensure that you have a complete and adequate file in the event of an audit,” she said.
The prospect of an audit is daunting for any small business owner, but try to stay calm, cool, and collected. Audits are part of a necessary SBA process to ensure continued access to funds, and they’re critical to the future of other programs like PPP. By staying organized and working with your lender to provide all the necessary documentation, a PPP audit needn’t be an overwhelming experience.