Ensuring Grant Compliance in the Wake of COVID-19By John D'Amico | Joseph J. Kanjamala | May 27, 2020
The CARES Act, currently a $2.8 trillion package, is a federal stimulus to help support the U.S. economy while the country is in lockdown. It was appropriately rolled out very quickly due to the closure of countless non-essential businesses, resulting in the loss of millions of jobs.
The following are the types of funding under the CARES Act:
- SBA Payroll Protection Program (PPP);
- SBA Economic Injury Disaster Loans (EIDL);
- Treasury Middle Market or Economic Stabilization Fund loans for eligible not-for-profit organizations (NFPs);
- Education Emergency Stabilization Fund Assistance;
- Employee Retention Credits for NFPs;
- Reimbursements to state and local governments and NFPs for unemployment work-sharing programs;
- Accelerated/advance payment program for Medicare providers; and
- Provider relief funding from the Public Health and Social Services Emergency Fund.
On May 15, 2020, the House of Representatives approved an additional $3 trillion stimulus plan, but the bill faces tough opposition in the Senate before it can be signed into law. The additional $3 trillion includes $1 trillion in aid to states, cities and Native American tribes; direct government payments to Americans; $100 billion for rental assistance; $75 billion in mortgage relief; and a $25 billion bailout of the U.S. Postal Service.
This is not the first time that the federal government has had to provide stimulus funding or emergency funding very quickly. Two occasions come to mind—The American Recovery and Reinvestment Act of 2009 (the “Recovery Act” or ARRA) and the Hurricane Sandy Relief Bill. Both federal aid packages were determined from the beginning to be federal financial assistance using existing Catalog of Federal Domestic Assistance (CFDA) programs and/or created new CFDA numbers. Therefore, they were both subject to the Single Audit requirement. For-profit businesses were not subject to any compliance requirements for the federal financial assistance they received. In addition, the funding received by individuals, families and businesses was not subject to any verification process.
If the additional $3 trillion package is signed into law, the $1 trillion aid to states, cities and Native American tribes would most likely be subject to a Single Audit like the ARRA funds when that legislation was passed in 2009. This aid to the states and cities will probably then be passed down to nonprofits and local governments, which will also be subject to a Single Audit if they expend more than $750,000 in federal financial assistance in their fiscal year.
The Payroll Protection Program (PPP) loans were established to help small businesses, including nonprofits, keep workers paid and employed during the pandemic. It was originally funded with $349 billion, and an additional $250 billion was added to this program. These loans are 100% federally guaranteed through the U.S. Small Business Administration (SBA) and can be fully or partially forgiven if the required criteria are met. Recently SBA has advised that PPP loans made to nonprofits will not be subject to a Single Audit.
The U.S. Treasury Department has advised that they will audit every PPP loan greater than $2 million, and companies that made false certifications to receive a loan will face stiff penalties and criminal liability. They also advised that the audits will be performed before these loans are forgiven by the U.S. Treasury. SBA has now provided that if borrowers or their affiliates received PPP loans with an original principal amount of less than $2 million, they will be deemed to have made the required certifications concerning the necessity of the loan in good faith.
The Economic Injury Disaster Loan (EIDL) program provided through SBA is designed to provide economic relief to businesses that are currently experiencing a temporary loss of income and were eligible for an advance up to $10,000 that will not have to be repaid. The SBA has recently advised that the EIDL program is federal financial assistance and will be subject to a Single Audit. At this time only agricultural businesses can apply for this program.
Currently there is limited guidance regarding the other CARES Act funding. SBA’s audit approach for PPP loans, whether it is a program-specific audit by CPA firms or an audit by SBA auditors, is yet to be determined. The following compliance requirements would most likely be considered as direct and material to the EIDL, PPP loans and other programs under the CARES Act.
Activities Allowed or Unallowed
The purpose of the CARES Act is to provide fast and direct economic assistance in the form of loans and grants for American workers and families, small businesses, and state and local governments to preserve jobs. The activities performed by a recipient of these funds will be reviewed with this purpose in mind. The federal financial assistance can be used only for these specific purposes.
Allowable Costs and Cost Principles
The allowable costs incurred by recipients will be subject to restrictions, and only necessary and reasonable costs will be allowed. In order to obtain forgiveness, the proceeds from the PPP loans must be used for payroll costs and certain employee benefits as defined in the Act and for payment of interest on any mortgage obligation, rent and utilities in force prior to February 15, 2020. If the loan is utilized for any other purposes, it is an unallowable cost subject to repayment. It is advisable to maintain a separate cost center in the general ledger to record all the disbursements under the loan program and if possible, a separate bank account for the PPP.
The organizations receiving funding are required to ensure that they are eligible. For the organization to be eligible for the PPP loans, the number of its full-time and part-time employees should be 500 or fewer. There are employee retention requirements to be eligible for forgiveness. The borrowers should also assess the economic need for a loan at the time of applying. Applicants must make a good-faith certification considering their current business activity and their ability to access other sources of funds. In addition, the organization must comply with the SBA affiliation rules. The computation of the maximum loan amount could be subject to audit. The number of employees can be easily verified with reference to the payroll reports, and the economic need for a loan and the affiliation rules are subject to interpretation. Therefore, a borrower should document how it determined economic need and how it complied with the affiliation rules.
Period of Availability of Federal Funds/Period of Performance
Organizations should ensure that the funds are spent during the stated period of performance. For the PPP loan program, the period of performance is the eight-week period following the funding of the loan regarding expenses that are charged to the program and incurred and paid during this eight-week period.
Generally, program income is gross income earned by an organization that is directly generated by the federal program in the form of fees earned. It is not anticipated that recipients will be generating any revenue subject to this requirement. For the PPP loans, Medicaid, government grants or other funding received during the eight-month period in which the loan money has been expended could be subject to deduction from forgiveness.
Special Test and Provisions
The recipient is required to comply with any specific compliance requirements mandated by the federal program documents.
Timely and clear guidance is necessary for recipients of federal financial assistance other than the PPP and EIDL programs to comply with the requirements. As of this writing, the U.S. Treasury, SBA and OMB have not issued guidance on whether these other types of CARES Act funding are subject to Single Audit and what are the compliance requirements. Appropriate guidance must be issued without delay to ensure a high compliance rate.
* * *
A version of this article was originally published in NonProfit PRO.
About John D'Amico
John D'Amico, CPA, is a Partner within the Professional Standards Group at Marks Paneth LLP, which is responsible for monitoring quality control in the firm as mandated by professional standards. He specializes in pre-issuance reviews and inspections of nonprofit organizations, governments and Single Audits. Mr. D’Amico also provides consultation on accounting and attestation matters and tests and monitors the firm's quality review policies and procedures. He teaches continuing education classes for the firm and on... READ MORE +
About Joseph J. Kanjamala
Joseph J. Kanjamala, CPA, CGMA, is a Partner in the Nonprofit, Government & Healthcare Group at Marks Paneth LLP. His responsibilities in this role include designing audit strategies, supervising and training staff, liaising with clients, and providing oversight so that audits are conducted in a timely and cost-effective fashion. During his more than 20 years of public accounting experience, Mr. Kanjamala has developed deep skills in serving nonprofit organizations and has served numerous charitable organizations,... READ MORE +