SBA Clarifies PPP Loan Certification Requirement; Mandatory Audits of Large PPP Loans
This article is part of our continuing coverage of
COVID-19-related legislation, rules, and orders.
United States Treasury
Secretary Steven Mnuchin announced April 28, 2020 that all loans of over $2
million issued to businesses as part of the CARES Act's Paycheck Protection
Program (PPP) will be audited to ensure compliance with CARES Act rules. (See,
e.g., articles in the
This announcement is made less than a week after the Small Business
Administration (SBA) provided information through responses to Frequently Asked
Questions (FAQs) issued
April 23, 2020 and
April 26, 2020.
Notably, FAQ 31
addresses the certification requirement set forth in §1102 of the CARES Act,
explaining that borrowers must "certify in good faith that their PPP loan
request is necessary" because "current economic uncertainty makes this loan
request necessary to support the ongoing operations of the" borrower. FAQ 31
further explains, in relevant part:
"Borrowers must make this certification ... taking 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."
The lone example the SBA gives through the FAQs of a borrower that cannot make
the certification in good faith is a "public company with substantial market
value and access to capital markets ..." FAQ 31 was written by the SBA after the
PPP loan program came under public scrutiny due to large organizations such as
Los Angeles Lakers,
Ruth's Chris Steakhouse, and
Shake Shack receiving
significant PPP allotments.
The SBA's Office of Inspector General will be responsible for conducting audits
related to this certification requirement and other compliance requirements
related to PPP loans. Secretary Mnuchin's announcement – viewed against the
backdrop of public scrutiny at the time the SBA issued the FAQs – likely means
that the audits will be focused on larger loans. Nonetheless, it is prudent for
any borrower receiving a PPP loan to consult with their attorneys and other
advisors to begin collecting information now in the event that an audit does
later occur. A knowing violation of the certification requirement – or other
requirements of the CARES Act – may result in civil and, in more serious cases,
A borrower who applied for the PPP loan before April 23 and repays the loan in
full before May 7, 2020 will avoid any potential liability.
In addition to documenting information necessary in the event of an audit,
borrowers should continue to maintain meticulous documentation regarding
expenditures of loan proceeds. This documentation will be necessary for
companies to achieve loan forgiveness at the end of the applicable eight-week
period. As a reminder, loan forgiveness may be achieved by:
complying with the forgivable and permissible use requirements requiring 75%
expenditure on qualified payroll expenses;
maintaining employee staffing levels; and
maintaining the required employee compensation levels during the applicable
eight-week period following loan origination.
Sacks Tierney has qualified attorneys to answer your questions about these
provisions and to help guide your business if you wish to apply for and obtain
any of the assistance available through the CARES Act.